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 balances economic growth, social advancement, and environmental recovery. Addressing these challenges will require integrated and coordinated policy and infrastructure interventions in various sectors.

Hebei’s Social and Economic Development 11th FYP 2006–2010 calls for developing a more balanced urban system through the growth of medium-sized cities that can serve as economic centers for surrounding towns. County-level cities and towns, in turn, are expected to enhance their economic integration with rural areas that depend primarily on agriculture. In this respect, town and county-level city development contributes directly to the provincial objective of promoting integrated rural and urban development. The main constraint on town development is inadequate urban infrastructure and services, according to the Hebei Urban iii

Construction 11th FYP 2006–2010. Towns need more reliable and sustainable water supply and energy services to attract private sector investments that can create jobs and attract migrants. At the same time, improved wastewater and solid waste disposal is necessary to mitigate the environmental impacts of rapid economic growth and improve living conditions for local residents. Hebei’s town development challenge therefore combines promoting economic growth with improving the urban environment and urban management and governance capacity.

To help small cities and towns fulfill their economic potential and enable a more harmonious form of development, the Project will facilitate the delivery of improved environmental infrastructure and municipal services to (i) attract investment, especially in labor- intensive industries and services; (ii) provide a decent urban environment to residents by substituting energy-efficient centralized heating for household coal burning, collecting and treating wastewater before discharge into the environment, and introducing sanitary practices and recovery of recyclables in solid waste management; (iii) strengthen urban management capacity in planning, implementation, and operation; and (iv) extend the benefits of growth to all residents by improving the coverage and quality of basic municipal services to households across the socioeconomic spectrum. The Project directly contributes to the continuing efforts of HPG to support socioeconomic development that balances economic growth, social advancement, and environmental recovery in the context of sustainable development.

Impact and Outcome The impact of the Project is an improved urban environment and improved public health and quality of life for residents of small cities and towns in Hebei Province. The outcome of the Project is improved urban infrastructure and municipal services in about 10 small cities and towns in Hebei Province.

Project Investment Plan The investment cost of the Project is estimated at $235.9 million, including taxes and duties of $22.2 million.

Financing Plan Amount % of Source ($ million equivalent) Total ADB 100.0 42.4 Multi-Donor Trust Fund under the Water 0.3 0.1 Financing Partnership Facilitya Bazhou County Government 17.2 7.3 Zhaoxian County Government 22.6 9.6 Zhengding County Government 10.0 4.2 Other County Governments 85.8 36.4 Total 235.9b 100.0 a Contributors: the governments of Australia, Austria, Norway, and Spain, and administered by ADB. The actual amount is $250,000. b Numbers may not sum precisely due to rounding. Source: Asian Development Bank estimates.

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A loan of $100,000,000 from the ordinary capital resources of ADB will be provided under ADB’s London interbank offered rate (LIBOR)-based lending facility. The loan will have a 26-year term including a grace period of 6 years, an interest rate determined in accordance with ADB’s LIBOR-based lending facility, a commitment charge of 0.15% per annum, and such other terms and conditions as set forth in the draft Loan Agreement. The loan will cover civil works, equipment, project management consulting services and capacity development, financial charges during construction, and taxes and duties. The Multi-Donor Trust Fund under the Water Financing Partnership Facility will provide a grant of $250,000 equivalent to be administered by ADB.

Allocation and Relending Under fund transfer arrangements, the Government of PRC will Terms make the loan proceeds available to HPG, and then from HPG to the concerned municipal or county governments. The municipal government will transfer or onlend the loan proceeds to the end- borrowers (project implementing agency). The terms and conditions of the Loan proceeds will be the same as those of the Loan with the end-borrowers bearing the foreign exchange and interest rate variation risks.

Period of Utilization Until 30 June 2016

Estimated Project 31 December 2015 Completion Date

Implementation HPG will be the Executing Agency for the Project. The project Arrangements leading group (PLG)—chaired by the vice secretary-general of HPG and comprising representatives of Hebei Finance Bureau, Development and Reform Commission, Construction Bureau, Environmental Protection Bureau, Land Resources Bureau, and Audit Bureau—was established to guide, supervise, and support the implementation of the Project. The Hebei project management office (PMO) was established in the Hebei Finance Bureau to undertake and manage day-to-day project activities, including the selection and appraisal of subsequent subprojects. In each subproject city and town, a PLG and PMO were set up to liaise with the Hebei PMO and the departments and bureaus concerned and to oversee, manage, and coordinate the infrastructure investments undertaken by project implementing agencies.

Executing Agency Hebei Provincial Government

Procurement Goods, works, and services will be procured in accordance with ADB's Procurement Guidelines (2007, as amended from time to time). International competitive bidding, national competitive bidding, or shopping procedures will be used for procurement depending on the circumstances of each contract package.

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Consulting Services The Project will provide funding for international and national consulting services to support the PMOs and implementing agencies in project implementation and management and for institutional capacity development. Consultants will be recruited according to ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time).

Project Benefits and The Project will contribute to poverty reduction, directly benefiting Beneficiaries 1.2 million people in Hebei Province, 9.6% of the residents of which are rural poor, compared with the national average of 5.9%. Poor communities will have access to safe and reliable water supply, better urban services, and improved living conditions. All residents in the 10 subproject small cities and towns will benefit indirectly, with living conditions improving as a result of (i) improved water quality and quantity; (ii) reduced use of polluted water sources; (iii) reduced incidence of waterborne diseases and the resulting reduction in medical costs; and (iv) reduced pollution loads on air, water, and land following improved wastewater treatment; wastewater reuse; energy-efficient centralized heating; and solid waste treatment, recycling, and composting. Water supply, wastewater, heating, solid waste, and river improvements will stimulate investments in industry, resource extraction, and the service sector, including tourism, directly and indirectly creating jobs for existing residents and new migrants to small cities and towns. During the construction and operation of the core subprojects alone, 1,585 new jobs will be created. Follow-on multiplier effects are expected to create indirectly an additional 2,536 jobs.

The Project will reduce the incidence of waterborne and respiratory diseases. Investments in improved water supply and wastewater facilities in Bazhou County, Zhaoxian County, and about 10 other counties in Hebei are anticipated to reduce household medical expenses related to waterborne diseases by CNY75.6 million in 2012–2020. In addition, the incidence of respiratory disease is expected to drop. Heating investments will replace small, inefficient boilers and highly polluting coal-burning stoves, thus reducing the emission of greenhouse gases and improving local air quality and respiratory health. The Project will have positive effects on climate change, supporting PRC and ADB climate change initiatives and ADB’s broader Clean Energy and Environment Program (2008) by enhancing water resource management, secondary wastewater treatment, district heating, and solid waste management and treatment.

The Project will contribute to climate change adaptation through measures to improve flood control and strengthen water resources management in the subproject cities and towns that are prone to increasing floods and droughts.

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Risks and Assumptions The Project does not have any unusual technical risks. Conventional engineering designs with proven records of reliable performance will be adopted for water supply, wastewater management, solid waste management, district heating, and river improvement. Mitigating measures will be put in place during detailed design to address any technical risks associated with improvement works. During implementation, the project implementation consultant will support the PMOs and implementing agencies to ensure that equipment and works comply with design requirements and quality assurances.

The following risks could affect timely implementation, economic viability, and the realization of project benefits: (i) failure to implement institutional strengthening for effective project implementation and management and corporate governance; (ii) lack of proper operation and maintenance of project facilities; (iii) major amendments and changes to the master plans in the subproject cities and towns; (iv) delay in the provision of counterpart funding; (v) failure to establish or increase water and wastewater tariffs to meet cost-recovery targets; and (vi) unforeseen land acquisition and resettlement issues that could constrain the efficient implementation of project works or the restoration of livelihoods of affected people.

Risks (i) and (ii) will be mitigated by providing institutional capacity development for subproject city and town PMOs and implementing agencies on project implementation and operations and the maintenance requirements of project facilities, with the support of the loan implementation consultant and related training. In addition, the PLG will provide oversight and timely guidance to mitigate project management risk. Risk (iii) will be mitigated by synchronizing project design and implementation with other prioritized projects. Risks (iv) and (v) will be mitigated through covenanted assurances from subproject city and town governments on the timely provision of counterpart funding and on regular tariff reviews and required increases. Risk (vi) will be mitigated by strengthening internal monitoring and the supervision by the Hebei PMO and subproject city and town PMOs of implementing agencies, as well as by engaging a qualified external agency to monitor and evaluate resettlement. 114o 00'E 119o 00'E HEBEI SMALL CITIES AND TOWNS DEVELOPMENT DEMONSTRATION SECTOR PROJECT IN THE PEOPLE'S REPUBLIC OF CHINA N

Weichang 42 o 00'N 42 o 00'N 0 20 40 60 80

Kilometers I N N E R Guyuan M O N G O L I A Longhua

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Pingguan Chengde

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Huailai

Shanhaiguan Sanhe Yutian Qinhuangdao BEIJING

Tangshan Zhuozhou S H A N X I Fengnan Laiyuan TIANJIN Bazhou

Baoding

Gaoyang B o h a i S e a Qingxian Hejian Zhengding Cangzhou SHIJIAZHUANG Wuqiang Botou Jingxing Shenzhou Zhaoxian Hengshui

Jizhou Dezhou

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o o Wu'an 114 00'E 122 00'E Siping Handan I N N E R M O N G O L I A J I L I N Shenyang Tieling L I A O N I N G Linghai Kazuo Liaoyang o Zhangijakou 41 00'N Jinxi 41 o 00'N Core Subproject City/Town Yingkou Shanhaiguan Donggang National Capital Datong BEIJING Qinhuangdao Youyu Tangshan Provincial Capital Tianjin Bazhou City/Town Yuanping H E B E I T I A N J I N Dalian H E N A N Zhengding Bohai Sea National Road S H A N X I Shijiazhuang Provincial Road Taiyuan Zhaoxian Railway Jinzhou Wutong Pingyao River S H A N D O N G

o Lucheng o Provincial Boundary 36 00'N Pingshun 36 00'N International Boundary Houma Jincheng Yellow Sea Boundaries are not necessarily authoritative. H E N A N

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09-3607 HR

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on (i) a proposed loan and (ii) the proposed administration of a grant to be provided by the Multi-Donor Trust Fund1 under the Water Financing Partnership Facility (WFPF), both to the People's Republic of China (PRC) for the Hebei Small Cities and Towns Development Demonstration Sector Project (the Project).

2. The Government of the PRC requested the Asian Development Bank (ADB) to help improve urban infrastructure delivery by implementing environmentally sustainable subprojects in 10 small cities and towns in Hebei Province and to improve the urban environment by providing basic urban infrastructure and municipal services for water supply, wastewater and solid waste management, heating, and river improvement. The design and monitoring framework of the Project is in Appendix 1. The problems and objectives tree analyses are in Supplementary Appendix A.

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

A. Performance Indicators and Analysis

3. The scale of urbanization in the PRC is unprecedented. About 12 million rural people will migrate annually to urban areas over 2000–2020. Since 1980 the urban population of the PRC has more than tripled, reaching 577 million in 2006. The urban population comprises 45% of the total population and is expected to exceed 50% by 2015. The PRC’s 660 cities cannot absorb all these migrants because rapid urban growth already strains their infrastructure. Small cities and towns must develop urban infrastructure facilities and services to facilitate the growth of secondary and tertiary employment and enable migration from rural areas. The PRC’s 11th Five-Year Plan (FYP) 2006–2010 posits small city and town development as a means to provide a higher standard of living to rural migrants without exacerbating the infrastructure and environmental problems afflicting large cities. Building on the conclusions of the ADB-financed Town-Based Urbanization Strategy Study,2 PRC town development policy calls for strengthening linkages between major cities and smaller cities and towns at their periphery. The Project is consistent with ADB’s water policy and will help the PRC achieve Millennium Development Goal 7, target 7.C, which establishes the 2015 target of halving the proportion of people without sustainable access to safe drinking water and improved sanitation. The Project is consistent with ADB’s strategic objectives in the PRC to make markets work more efficiently through infrastructure development and to promote environmental sustainability. By supporting sustainable development integrating urban and rural areas, the proposed Project supports ADB's long-term strategic framework 2008–2020 (Strategy 2020)3 and country partnership strategy for the PRC (2008–2010) 4 by promoting efficient infrastructure, strengthening environmental management, and supporting inclusive growth and balanced development to help the Government build a xiaokang (moderately well-off) society. The Project will develop markets and create jobs by supporting urbanization and improving investment potential in towns, while protecting the environment.

4. Many cities and towns have made significant investments in urban infrastructure, but few local governments have developed an integrated approach to urban development that combines infrastructure improvements with demand-driven, pro-poor development and appropriate urban design. Demand-side management, based on determining the preferences of end users and incorporating them into project design, is not widely practiced.

1 Contributors: the governments of Australia, Austria, Norway, and Spain. 2 ADB. 2004. Technical Assistance to the People’s Republic of China for the Town-Based Urbanization Strategy Study. Manila. 3 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank 2008–2020. Manila. 4 ADB. 2008. Country Partnership Strategy (2008–2010): People's Republic of China. Manila. 2

5. Improved environmental management in small cities and towns is an ongoing trend in government policy, which emphasizes environmental sustainability in urban development. Consistent with national policy, in January 2008 the Ministry of Environmental Protection (then the State Environmental Protection Administration) announced revised criteria for ecologically sound provinces, cities, and counties that balance environmental protection objectives with economic growth goals. The Chinese Public’s Environment and Inhabitant Livelihood Index 2007 reports that 26% of Chinese people are very concerned with air quality.5 Awareness is growing of the adverse effects of the PRC’s unprecedented industrialization, which contributes to the country’s ranking as the world’s biggest emitter of greenhouse gases. The Government intends to manage natural resources effectively and mitigate climate change in ways that will alleviate the adverse impacts of rapid economic growth on livelihoods and ecological diversity.

6. Located in northern PRC, Hebei Province has an area of 187,700 square kilometers and a population of 69.4 million, of which 38% lived in urban areas in 2006. Hebei’s economy is dynamic and diverse, spanning heavy industry (construction materials, pharmaceuticals, and steel production), light industry (textiles and agroprocessing), and resource extraction (coal). 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, and political linkages with Beijing and Tianjin, despite proximity to these major cities. Hebei suffers undeveloped urban–rural linkages, underinvestment, weak urban management, and significant deterioration in 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 balances economic growth, social advancement, and environmental improvement. Addressing these challenges will require integrated and coordinated policy and infrastructure interventions in various sectors.6

7. Hebei’s policy on the development of its small cities and towns mirrors the national policy. Hebei’s Social and Economic Development 11th FYP calls for a more balanced urban system through the growth of medium-sized cities that can serve as economic centers for surrounding towns. Through targeted urbanization, medium-sized cities will increase their economic weight and develop upstream economic linkages with smaller cities and towns in their hinterlands. 7 County- level cities and towns, in turn, are expected to enhance their economic relationship with rural areas that depend primarily on agriculture. In this respect, town and county-level city development contributes directly to the provincial objective of promoting integrated rural and urban development.

8. The Hebei Urbanization 11th FYP identified a major urban development axis linking the provincial capital of Shijiazhuang to the northeast with the Tangshan, Handan, and Baoding growth poles. To promote quality standards in urban services, the Hebei Urban Construction 11th FYP emphasizes the need for more efficient delivery of urban services. Ranked 11th among 31 provinces in gross domestic product per capita, Hebei faces a challenge to develop small cities and towns in a way that combines county-level city development with the promotion of economic development and environmental sustainability.

9. The Project will promote the economic, social, and environmental sustainability of small city and town development by improving urban infrastructure and municipal services. The improvements will (i) attract economic investment, especially in labor-intensive industries and

5 Released by the China Environmental Culture Promotion Association in January 2008. 6 ADB. 2004. Hebei Provincial Development Strategy: Strategic Considerations from an International Perspective. Consultant's report. Manila (TA 3970–PRC). 7 The average annual growth rate of the secondary and tertiary sectors combined in large and medium-sized cities was 14.2% in 2001–2005 but only 5.4% in small cities and towns. 3

services by providing reliable, adequate infrastructure such as water supply and sewerage; (ii) provide better living conditions and a decent urban environment to town residents by substituting centralized heating for household coal-burning, treating wastewater before discharging it into the environment, and introducing sanitary practices in solid waste collection and treatment; and (iii) extend the benefits of growth to all residents by improving the coverage and quality of basic municipal services to households across the socioeconomic spectrum.

10. The Project is prepared as one of three development projects for small cities and towns supported by the Government. The aim is to promote the development of selected small cities and towns in the provinces of Hebei, Liaoning, and Shanxi in a way that can be replicated in other towns in these provinces and elsewhere in the PRC. The three provinces were selected following the successful outcome of two ADB-financed technical assistance (TA) projects: the Town-Based Urbanization and Strategy Study (footnote 2) and the Hebei Provincial Development Strategy.8 While small cities and towns in these provinces face many similar problems and challenges, they are different in terms of their location and economy in ways that offer unique opportunities for promoting inclusive and sustainable development. Appendix 2 provides a sector and subsector analysis.

B. Analysis of Key Problems and Opportunities

11. Project Background. Hebei’s 69.4 million people are relatively poor, as the provincial rural poverty rate of 9.6% is higher than the national rate of 5.9%. Growth is uneven, with small cities and towns growing at an average annual rate of 2%, or just a tenth of the 20% growth rate of large and medium-sized cities. Income disparity is apparent, with rural income per capita at CNY3,482, or little more than a third of the urban per capita income of CNY9,107. Some small cities have been successful in promoting tourism and capturing multiplier effects in the service sector, and resource- endowed towns have taken advantage of the growth of the mining, metals, and energy sectors. On the supply side, town governments are effective in providing key inputs to investors, such as serviced land, regulatory support, and adequate supplies of labor. But population growth in most small cities and towns has not kept pace, largely because capital-intensive industries generate relatively little employment and the perception among rural residents that there are greater economic opportunities in large cities. The dispersal of businesses, with only 35% of enterprises in towns and townships in 2007 located in urban areas and the rest in villages,9 prevents towns from achieving the economies of scale necessary to generate mass employment.

12. Where growth is occurring, it has come at a high environmental cost. Industrial development has outstripped infrastructure provision and urban management capacity, causing the degradation of the natural environment and living conditions. Coverage rates for urban environmental services are inadequate, and pollution levels are high. Many areas of the province suffer high rates of air, water, and land pollution, creating a serious threat to human health and putting downward pressure on life expectancy. Hebei suffers a serious water supply shortage, with water supply per capita at 307 cubic meters, which is only 14% of the national average. Groundwater is pumped at unsustainable rates, lowering the water table, causing land subsidence, and increasing the fluoride and nitrate-nitrogen content of water.10 Land subsidence as water is extracted weakens flood protection and exacerbates water logging in urban areas because drainage is less effective. Water scarcity substantially restricts economic development and is an obstacle to enhancing people’s living standards. Monitoring by the Hebei provincial government (HPG) in 2007 found that 68.5% of 777 effluent outfalls discharging into the rivers of Hebei did not

8 ADB. 2002. Technical Assistance to the People’s Republic of China for the Hebei Provincial Development Strategy. Manila. 9 Ministry of Agriculture, January 2007. Web Page. 10 World Bank. 2008. China Urbanizes: Consequences, Strategies, and Policies. Washington, DC.

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meet their respective water quality standards. Over the years, the discharge of untreated wastewater into rivers has caused significant water quality deterioration, environmental pollution, odor, and public health problems. Heating coverage is very low at 14%, and the preponderance of small and inefficient boilers means a large number of scattered polluting sources in terms of bottom ash piles and emission chimneys. Solid waste management is rudimentary and environmental protection poor. Local governments lack the capital or expertise to provide infrastructure in a timely fashion that would mitigate the environmental impacts of their economic success.

13. The circumstances of the three core subprojects in Bazhou City, Zhaoxian County, and Zhengding County typify the key issues in Hebei Province: lack of drinking water, poor air quality, and underdeveloped solid waste management. The locations are unable to attract private sector investment or generate the jobs that would encourage rural–urban migration. The growth of these towns is constrained by the absence of economic linkages with larger urban centers and by poor infrastructure that cannot adequately support secondary and tertiary economic activity. The Project’s intervention specifically addresses these key issues with the following environmental objectives: (i) improve air quality by substituting centralized heating for small boilers and household coal burning, (ii) improve public health by supplying reliable supplies of potable water, (iii) collect and treat wastewater before discharging it into the environment, (iv) improve river quality and flood protection capacity, and (v) improve municipal solid waste collection and treatment.

14. The primary sector still accounts for 45% of Hebei’s workforce and 15% of its gross domestic product. To absorb rural labor, towns need to attract investment by improving municipal services to support labor-intensive service and industrial sectors. Public investment in infrastructure in Hebei towns lags province-wide investment rates and development needs. Total investment in city infrastructure was CNY298 billion in 2005, or 72% of Hebei’s total investment in fixed assets, while only CNY57.96 billion was spent on county-level infrastructure in Hebei’s towns, which are home to 32.4 million people, or 60% of the rural population. This resulted in anemic economic growth of 2% in small towns. National and provincial policies call for the physical and economic integration of towns into such larger urban agglomerations as metropolitan areas and development corridors to generate jobs and initiate a virtuous circle of economic investment, job creation, and rural–urban migration. These low-growth towns require reliable, high-quality environmental infrastructure to attract productive investments and improve living conditions for local residents.

15. The proposed ADB financing offers cities and towns in the poorer counties of Hebei to the north and west of Beijing the opportunity to develop their urban infrastructure in a more sustainable manner, which will enable investments in natural resource processing, manufacturing, and services and attract population from rural areas. Other towns that have already achieved high economic growth rates, such as those located along the Shijiazhuang–Tangshan development axis, can improve living conditions by investing in urban environmental infrastructure to be financed under the proposed Project and ensuring proper environmental management.

16. Project Rationale. The Government of the PRC is committed to developing small cities and towns as a way to foster economic growth, generate employment, narrow the rural–urban income gap, and increase national economic productivity and reduce poverty. Growth in small cities and towns creates potential economic opportunities for the rural poor, who are attracted to the alternative income sources available 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. Hebei implements this policy through targeted urbanization in medium-sized cities and strengthening physical and economic linkages between counties and their rural hinterlands.

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17. To date, Hebei Province has not exploited its geographic proximity to Beijing. Economic linkages are underdeveloped, as Hebei’s heavy industrial economy is ill-suited to provide the consumer goods and services that are most in demand in the capital. The backwardness of poor towns and rural areas around Beijing, particularly to the north and west, limits Hebei’s ability to build labor, information, and technology linkages with Beijing’s economy. Further, Beijing’s dependency on Hebei for water has caused significant deterioration of Hebei’s natural environment in terms of water scarcity, pollution, and subsidence.

18. While Hebei towns have the potential to drive economic growth at the county level, growth rates today are uneven across the province, with many small cities unable to generate sufficient jobs or attract rural migrants. One of the main constraints, as emphasized by the Hebei Urban Construction 11th FYP, is the substandard quality of urban infrastructure. To fulfill their potential with respect to increasing economic efficiency and enabling a more harmonious form of development, small cities and towns need better infrastructure and municipal services to

(i) attract investment, especially in labor-intensive industries and services, by building reliable, high-quality infrastructure such as water supply, sewerage, and district heating; (ii) provide a decent urban environment to their residents by substituting centralized heating for household coal burning to improve the air quality, collecting and treating wastewater before discharging it into the environment, and introducing sanitary practices in solid waste collection and treatment; and (iii) extend the benefits of growth to all residents through improved coverage and quality of basic municipal services to households across the socioeconomic spectrum.

19. In line with Hebei’s key urbanization strategy, the ADB-financed sector loan will provide support to small cities and towns toward ensuring effective urban infrastructure services and improved administrative and management capacity in infrastructure planning, implementation, and operation to successfully manage urban growth in the future. Greater integration and networking across small cities and towns in Hebei will be promoted to the extent possible under the Project, and best practices and lessons from similar county-level environment improvement projects in the PRC will be disseminated. 11 The Project is part of the increased efforts of HPG to support socioeconomic development that balances economic growth, social advancement, and environmental improvement in the context of sustainable development (footnote 6). The overarching objective of the subprojects for water supply, wastewater management, solid waste management, river improvement, and district heating improvement will be to improve the urban environment through the provision of basic urban infrastructure and municipal services and enable these towns to establish an investment climate that will attract the private sector, sustain enterprise reform, and ensure that existing industries and enterprises become more sustainable. Different towns will promote different economic sectors, depending on their base and their potential. Some Hebei towns will invest to promote industry, including agroprocessing and pharmaceuticals, while others will improve the environment and extend basic services to residents. Still other towns will provide infrastructure to support the growth of tourism and services.

20. The Project aligns with ADB’s country partnership strategy for the PRC, which is concerned with managing the environment, catalyzing investment, and improving governance (footnote 4). It conforms to ADB’s water policy and water financing program, both of which seek to improve urban water investments through TA and investments in water supply, sanitation and wastewater

11 Including ADB. 2006. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the People's Republic of China for the Shandong Hai River Basin Pollution Control Project. Manila (Loan 2237–PRC). The project includes county-level interventions in wastewater treatment, solid waste management with clean development mechanisms, and industrial pollution control.

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management, and environmental improvement. It is consistent with ADB’s urban sector strategy, which supports infrastructure investment in settlements that are dynamic engines of economic growth and employment creation, innovation, and entrepreneurship, as well as being sources of social services. The Project will improve the living environment of urban residents, including the poor, through improved water supply, wastewater treatment, solid waste management, district heating, and river rehabilitation. It indirectly supports PRC and ADB climate change initiatives and ADB’s broader Clean Energy and Environment Program (2008) by enhancing water resource management and introducing secondary wastewater treatment, district heating, and solid waste management and treatment. The sector policy framework is in Supplementary Appendix B.

21. Sector Lending Approach. The Project was formulated in line with Hebei's Social and Economic Development 11th FYP and the Hebei Urbanization 11th FYP, which highlight promoting the development of small cities and towns to support urbanization that is economically, socially, and environmentally sustainable. In view of the number of subprojects, variability in subproject preparedness, and possibility that some of them may change during project implementation, the Government agreed on the appropriateness of the ADB sector loan modality, which allows for flexible implementation.

22. The Project will support physical investments in priority small cities and towns with urgent need for infrastructure improvement and environmental management and with local governments that demonstrate interest and commitment. The sector loan approach is based on the following:

(i) The Government's sector policies, development objectives, and approach to urban infrastructure development and environmental management are well formulated. The Government continually updates its sector policies with ADB support.12 (ii) Sector institutions are well developed and, with additional strengthening and support provided under the Project, will have the capacity to implement the sector investment plan, particularly for county and town governments. HPG, the Executing Agency (EA), has successfully implemented similar environmental improvement projects, and the implementing agencies (IAs) have experience in capital improvements to basic urban infrastructure. (iii) The sector investment plan and the planned subprojects are well conceived and formulated to meet the priority needs of the Hebei Urbanization 11th FYP.

23. HPG has met these conditions. It has developed subproject identification, selection, preparation and appraisal criteria and procedures to ensure that the Project will facilitate achieving the objectives of sector policies and plans. Appendix 3 shows the process for subproject identification, selection, preparation, and appraisal. Supplementary Appendix C presents the subproject appraisal criteria.

24. Comprehensive assessment of three core subprojects has been carried out. The subprojects have developed approaches that can be replicated in urban centers throughout Hebei Province and may be used to demonstrate to other provinces across the PRC how to formulate planning strategies and implement programs to support the structured development of small cities and towns. Each of the three core subprojects in Bazhou City, Zhaoxian County, and Zhengding County has features that make it representative of other towns in Hebei Province and capable of

12 ADB has provided TA to the PRC in updating urbanization policies and strategies to meet the challenges of urbanization and town development. Recent studies include the Town-Based Urbanization Strategy Study (footnote 2), Hebei Provincial Development Strategy (footnote 8) and ADB. 2005. Technical Assistance to the People's Republic of China for the Study on Sustainable Urbanization in Metropolitan Regions. Manila (TA 4702–PRC). The Project will provide support through the capacity development component and the WFPF grant support to water and wastewater implementing agencies. 7

achieving a demonstration effect for subsequent subproject cities and towns. Through such feedback mechanisms as knowledge hubs and information-sharing forums, the core subproject city and county governments will share their experiences and tools, first with subsequent subproject towns and later with other towns.13 The Hebei Provincial Construction Bureau, a member of the project leading group (PLG), will participate in performance monitoring and replication activities to maximize the sector-wide impact of the Project. The lead entities in Hebei for town planning, the Construction Bureau and the Development and Reform Commission, will help operationalize and roll out the Project’s integrated approach to town development planning by using it as a criterion for approval of the master plans of subsequent subproject small cities and towns, as they are prepared during project implementation, and of other towns.14 As part of project performance management system (PPMS) activities, the Construction Bureau will help the Hebei project management office (PMO) monitor urban environmental infrastructure improvement at the provincial level. The proposed UN-HABITAT and Water Fund Pilot Demonstration Activity grants will develop community-based sustainability and replicability mechanisms with HPG that ensure that lessons and best practices are disseminated province-wide through public information campaigns.

25. Policy Dialogue. The Project will build on and further ADB’s policy dialogue on (i) the integrated development of cities, towns, and rural areas to generate employment and reduce poverty; (ii) sustainable urban environmental management; (iii) the economic sustainability of urban infrastructure services; (iv) a participatory approach to project design and implementation; and (v) governance and anticorruption policy.

26. Integrated Development of Cities, Towns, and Rural Areas to Generate Employment and Reduce Poverty. HPG will use the subproject selection criteria to target small cities and towns that can maximize investments for generating employment and improving the environment. HPG will refine its poverty reduction policy to encourage small cities and towns to promote job creation, especially in labor-intensive service industries, through (i) urban infrastructure delivery; (ii) the effective self-promotion of towns as good locations for business investment; and (iii) community-based approaches to environmentally sustainable infrastructure management.

27. Sustainable Urban Environmental Management. HPG will help local governments to adopt a more integrated approach to urban infrastructure planning and delivery, combining subsectoral interventions to achieve greater impact. Improved project preparation guidelines will require that city and county governments, when planning river improvement projects, simultaneously improve solid waste and wastewater management services to effectively reduce discharges of waste into the river. Similarly, to maximize how improvements to energy services reduce greenhouse gas emissions and improve air quality, city and county governments will be advised to plan and coordinate district heating and natural gas system extensions at the same time. Wastewater collection, treatment, and disposal should also be operated as one integrated system managed by a single agency to ensure closer coordination, more comprehensive demand management, and higher cost recovery for improved services.

28. Economic Sustainability of Urban Infrastructure Services. HPG intends to improve the enforcement of national Government circular no. 1192 of 1999 so that providers of urban services can generate sufficient revenues to cover their costs. In many towns, this will require that user tariffs be increased gradually to the point where tariff revenues cover the costs of operation and maintenance and debt service. To improve affordability for low-income groups, it is advisable to

13 Knowledge sharing and networking will be promoted and include the province-wide dissemination of certified emission- reduction and clean carbon technology for sludge treatment, landfills, and heating. 14 Town planning in the PRC is based on the socioeconomic plan, land utilization plan, and master plan. The most influential of the three—the master plan—defines permitted land uses and identifies priority trunk infrastructure investments to be prepared during the following 10 to 20 years.

8 rationalize the pricing of urban services, ensuring that the poor have access to basic services and that those consuming more should pay more, with a view to promoting resource conservation and effective demand management. HPG will endeavor to work with local governments to formulate and implement policy and guidelines for using progressive tariffs for water supply, wastewater and solid waste management, and district heating in small cities and towns. Through the proposed $250,000 grant from the WFPF to HPG, ADB will support strengthening water sector governance and the financial management of water and wastewater service providers involved in the Project.

29. Governance and Anticorruption. Bidders, suppliers, and contractors must observe the highest ethical standards in procurement and the execution of contracts. Sanctions will apply if fraud or corruption in procurement are discovered. The EA and the subproject local governments were advised to undertake a number of actions identified under the implementation arrangements.

30. External Assistance. Since 1992, ADB has provided $3.8 billion in loans to the PRC for urban development projects. Hebei has borrowed $1.3 billion from the World Bank and ADB during 1981–2005 in all sectors. Appendix 4 provides details of the external assistance.

31. Lessons. ADB’s experience in urban development projects indicates the following: (i) strategic master plans can provide the general framework for urban development and environmental management but need to incorporate sustainability mechanisms; (ii) as increased public awareness and education are important ways to improve the urban environment, community consultation and involvement, and training on environmental health and protection should be provided to beneficiaries; (iii) the establishment of an effective internal and external monitoring mechanism for resettlement implementation is important to ensure the effective coordination and timely implementation of land approval, compensation, and rehabilitation measures; and (iv) upfront training on ADB’s guidelines and procedures have to be provided to county agencies to ensure compliance and strict adherence to these requirements. These issues have been reviewed during project processing, and the relevant lessons have been incorporated in the project design.

32. Experience in environmental infrastructure improvement, wastewater management, and water supply in the PRC indicates that projects are well planned, demand parameters are well defined and implemented in a timely manner, and tariffs are raised as required. Consumers willingly pay higher fees for improved infrastructure and services in water, wastewater, solid waste, and heating. Issues related to utility tariffs, cost recovery, and the commercialization of basic urban services for water, heating, and wastewater and solid waste management were carefully addressed during project preparation. Lessons from previous environmental infrastructure improvement projects in cities and counties were reflected in the project design. These lessons include (i) greater focus on institutional strengthening to improve sector corporate governance, compliance with ADB requirements, and urban infrastructure management; (ii) improved provincial, municipal, and county coordination; (iii) financial, operational, and institutional arrangements for operation and maintenance (O&M) in the sectors in small cities and towns; (iv) scaling up demonstration impact of core subprojects across small cities and towns in Hebei Province; and (v) ensuring community support for the sustainability of improved infrastructure and services.

33. Lessons from ADB’s experience in urban development projects highlight the importance of (i) a comprehensive and participatory approach to project preparation; (ii) a well planned and coordinated, participatory, and integrated approach to the design and implementation of subprojects; and (iii) a realistic approach to supply-and-demand assessment of design facilities. These lessons have been considered in the project design. The following recommendations of the Town-Based Urbanization Strategy Study TA (footnote 2) have been incorporated into the design of the Project, especially in subproject selection:

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(i) Town development should be carried out as part of the development of larger subregions. (ii) Towns should be targeted based on their potential to grow economically and provide jobs to migrants from rural areas. (iii) Government should introduce to poverty alleviation programs a town-based component.

III. THE PROPOSED PROJECT

A. Impact and Outcome

34. The impact of the Project will be an improved urban environment and improved public health and quality of life for the residents of small cities and towns in Hebei Province. The outcome of the Project will be improved urban infrastructure and municipal services in about 10 small cities and towns in Hebei Province.

35. Developed in close collaboration with subproject cities and towns, the project design and monitoring framework defines performance parameters for the five eligible infrastructure subsectors. Water supply components include the development or expansion of groundwater resources, construction or upgrading of water treatment facilities, and/or expansion of distribution networks. Wastewater management components include the installation of wastewater collection systems and interceptors and/or the construction or upgrading of wastewater treatment plants (WWTPs) with sludge treatment. Solid waste management components include the collection, transfer, and/or treatment of municipal solid waste, including sorting, recycling, composting facilities, and sanitary landfills. River improvement entails dredging riverbeds; constructing embankments, rubber dams, and flood control works; and/or installing sewers. District heating components include the construction of primary and secondary heating stations, installation of heat transmission and distribution networks, and/or installation of building and individual user meters.

B. Outputs

36. The Project includes about 10 subproject small cities and towns. Detailed assessment and analysis have been undertaken for the three core subprojects. The technical analysis of core subprojects is in Supplementary Appendix D. Each subproject has been prepared as a viable investment subproject and includes one or more components in environmental infrastructure. The Bazhou City subproject includes two components: (i) Shengfang Town water supply system rehabilitation and expansion and (ii) Mangniu River improvement and sewer network rehabilitation. Zhaoxian County has three components: (i) rehabilitation and expansion of the district heating network, (ii) construction of a solid waste processing and recycling plant, and (iii) expansion of the existing WWTP. Zhengding County’s component is to improve the solid waste management system, including the construction of a waste processing and recycling plant. Each of the three core subprojects has features that make it representative of other towns in Hebei Province and capable of achieving a demonstration effect for subsequent subproject cities and towns. Candidate subsequent subprojects, including those shown in Supplementary Appendix E, will be prepared and appraised during project implementation.

37. The Project includes institutional capacity development measures to ensure effective implementation and the sustainable operation and maintenance of the project facilities. Capacity development includes consulting services on project management and training the EA and IAs during implementation. Implementation consultants will help the EA to manage the project and help the IAs to (i) implement the subprojects in accordance with ADB and Government requirements, particularly on safeguard policies; (ii) become operationally efficient and financially sustainable

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entities; (iii) comply with relevant national policies for cost recovery and tariff and enterprise reform; and (iv) prepare and implement sound plans for the O&M of current and future infrastructure works.

38. The Multi-Donor Trust Fund under the WFPF will provide grant cofinancing equivalent to $250,000, to be administered by ADB, to strengthen the management capacity of water and wastewater service providers involved in the Project. The grant will help participating subproject IAs in water and wastewater to (i) develop a more corporate approach to water and wastewater service provision, (ii) adopt a more demand-driven approach to service delivery, and (iii) strengthen their financial management and cost recovery.

39. Partnership with UN-HABITAT will further strengthen institutional capacity through the proposed $650,000 community-based urban environmental program, which will strengthen the capacity of local governments and nongovernment organizations in environmental planning and management and in the delivery of community-based water and sanitation services with a focus on improving hygiene to reduce the incidence of waterborne diseases.

C. Special Features

40. Sector and Subsector Policy and Strategy Dialogue. The development of the Project was directly supported by ADB-financed advisory policy and strategy studies. The underlying technical approach for the Project is based on relevant government policies and the findings of successfully completed advisory TA on town-based urbanization strategy and Hebei provincial development strategy. The studies highlighted that environmental protection and sustainability need to be addressed specifically relating to resource management; reducing the pollution of air, water, and land; water scarcity; and effective governance.

41. Comprehensive Basic Urban Services for Small Cities and Towns. The Project will achieve a demonstration effect for other small cities and towns. The core subproject towns, which are representative of other towns in Hebei, will demonstrate how small cities and towns can effectively develop and manage urban infrastructure services that are necessary for them to achieve economically, socially, and environmentally sustainable urban sector development and promote greater economic integration with rural and metropolitan areas.

42. Clean and Energy-Efficient Technologies. The Project will support ADB’s climate change initiatives such as encouraging the use of energy-efficient technologies to improve economic efficiency and environmental quality and enable sustainable development. Steps include reducing coal usage in small and inefficient boilers for heating and enabling the composting of organic wastes and sludge treatment.

43. Financial Management and Corporate Governance. The Multi-Donor Trust Fund under the WFPF will provide a $250,000 grant for the Project to strengthen financial management and corporate governance in water and wastewater companies in participating small cities and towns in Hebei Province. Appendix 5 is a summary of the support for water and wastewater facilities, and Supplementary Appendix F provides details about the scope of work under the grant.

44. Community-Based Urban Environmental Program. UN-HABITAT has signified support for a grant to establish pilot sustainability mechanisms in communities focusing on effective water demand management, sanitation, and community organizing to ensure community support to the management and sustainability of project facilities. A draft proposal for the UN-HABITAT grant for an indicative amount of $650,000 over a 3-year implementation period, in Supplementary Appendix G, was prepared by ADB and will be subject to further discussion between UN-HABITAT and the Hebei PMO. Further, a draft proposal to the Water Fund for Pilot Demonstration Activity was 11 prepared amounting to $50,000, which focuses on a school- and community-based information and education program for water and sanitation in Zhengding County (Supplementary Appendix H).

D. Project Investment Plan

45. The project investment cost is estimated at $235.9 million, including taxes and duties of $22.2 million. The cost includes physical and price contingencies, as well as interest and other charges during implementation. The ADB loan will finance 42% of the project cost. Table 1 provides a summary of the project investment plan. Further details are in Appendix 6 and Supplementary Appendix I.

Table 1: Project Investment Plan ($ million) Item Amount a A. Base Cost b 1. Bazhou Subproject 23.8 2. Zhaoxian Subproject 30.3 3. Zhengding Subproject 12.9 4. Subsequent Subprojects 127.5 5. Institutional Strengthening 2.8 Subtotal (A) 197.3 B. Contingencies c 34.4 C. Financing Charges During Implementation d 4.2 Total (A+B+C) 235.9 a Includes taxes and duties of $22.2 million. b In mid-2008 prices. c Physical contingencies computed at 10% for civil works. Price contingencies are computed by year and expenditure type based on cumulative domestic and foreign price inflation. d Includes interest and commitment charges, assumed at LIBOR rate and spread of 0.20% and 0.15% respectively.

E. Financing Plan

46. The Government of the PRC has requested a loan of $100 million from ADB’s ordinary capital resources to finance 42% of the project cost. The loan will cover civil works, equipment, project management consulting services and capacity development, and financing charges during construction. The loan will cover taxes and duties. The Government will finance contingencies, land acquisition, and resettlement costs. The Multi-Donor Trust Fund under the WFPF will provide grant cofinancing equivalent to $250,000, to be administered by ADB, for strengthening the financial management capacity of IAs in water supply and wastewater management in subproject towns.

Table 2: Financing Plan ($ million) Source Total % ADB Loan 100.0 42.4 Multi-Donor Trust Fund under the Water Financing Partnership Facilitya 0.3 0.1 Bazhou County Government (Bazhou Subproject) 17.2 7.3 Zhaoxian County Government (Zhaoxian Subproject) 22.6 9.6 Zhengding County Government (Zhengding Subproject) 10.0 4.2 Other County Governments (subsequent subprojects) 85.8 36.4

Total 235.9 100.0 a Contributors: the governments of Australia, Austria, Norway, and Spain, and administered by ADB. The actual amount is $250,000. Source: Asian Development Bank estimates.

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47. The governments of Bazhou City, Zhaoxian County, and Zhengding County will provide through tax and other revenues counterpart funding, for which they have provided commitment letters. The loan proceeds will be made available to the municipal governments concerned and then to the IAs. The terms and conditions of the loan proceeds transferred within the government will be the same as those of the ADB loan, with municipal governments bearing the interest and exchange rate variation risk. The loan will have a 26-year term, including a grace period of 6 years; an interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)- based lending facility plus a standard spread of 0.20%; a commitment charge of 0.15% per annum; and such other terms and conditions as set forth in the negotiated Loan and Project Agreements.

48. The Government provided ADB with (i) reasons for its decision to borrow from ADB’s LIBOR-based lending facility under these terms and conditions, and (ii) an undertaking that this was its own independent decision not relying on any communication or advice from ADB. Appendix 7 presents the onlending arrangements and indicative funds flow. The Hebei PMO and the IAs have confirmed and signed the cost estimates and financing plan for each subcomponent and for the Project as a whole. The financing plan for the Project proposed by the Hebei Provincial Finance Bureau and commitment letters from county governments to confirm the sources of counterpart funds to finance the project were submitted to ADB in July 2008.

49. Under fund transfer arrangements, the Government of PRC will make the Loan proceeds available to HPG, and then from HPG to the concerned municipal or county governments. The municipal government will transfer or onlend the loan proceeds to the end-borrowers (project implementing agency). The terms and conditions of the Loan proceeds will be the same as those of the Loan with the end-borrowers bearing the foreign exchange and interest rate variation risks.

F. Implementation Arrangements

1. Project Management

50. HPG will be the EA of the Project. The PLG, made up of representatives of five provincial agencies, was established in 2007 to coordinate infrastructure investments across the province. The PLG is chaired by the vice secretary-general of HPG.

51. The PMO was established by decree in 2007 in the Hebei Finance Department to undertake and manage the Project’s day-to-day activities. In each subproject location, a PLG and a PMO has been or will be set up to liaise with the provincial PMO and to oversee and manage the work undertaken by the IA. PLG and PMO arrangements have been finalized in core subproject locations. The IAs for the core subproject components are Bazhou Urban Construction and Development Company Limited; Zhaoxian County Urban Investment and Development Company Limited; and Zhengding County Solid Waste Treatment Plant. Project organization is in Appendix 8, and the institutional arrangements and assessment are in Supplementary Appendix J.

2. Subproject Preparation and Appraisal

52. In addition to the three core subprojects, additional subprojects will be selected, prepared, and appraised during sector project implementation using the following three-stage process.

53. Subproject Identification and Selection. The subprojects will be selected in accordance with the following criteria: (i) confirmation by the local government of its ability and willingness to arrange counterpart financing and comply with ADB safeguard policies and other requirements; (ii) confirmation by the concerned local government on its willingness to comply with ADB safeguard policies and other requirements; (iii) the implementation period of the subproject is within 2009– 13

2015; (iv) eligibility of the components (water supply, wastewater management, river improvement, solid waste management, district heating,); and (v) anticipated positive impact on the urban environment, employment generation, economic growth, and service levels and coverage.

54. Subproject Preparation. The participating city or county government and implementing agency, with the guidance of the Hebei PMO, will prepare project design documents including a project proposal, feasibility study, and preliminary engineering design for the components of the proposed subproject in accordance with the national project investment specifications. The project design documents will cover subproject rationale; scope; components; technical analysis; cost estimates; financing plan; implementation arrangements; financial management assessment; and financial, economic, social, and institutional analyses. These documents will be submitted to the Hebei Development and Reform Commission for approval. The participating city or county government will also prepare an environmental impact assessment (EIA) and a resettlement plan to be submitted to the concerned provincial departments and bureaus for approval.

55. Subproject Appraisal and Approval. The Hebei PMO and other concerned bureaus will be responsible for appraising the subprojects in accordance with criteria agreed upon by the PRC Government and ADB. The subproject PMO will prepare a subproject appraisal report, which will follow the template in the project preparatory TA final report, and submit the appraisal report to the municipal finance bureau for review and then to the Hebei PMO for further review. The Hebei PMO will submit the subproject appraisal report to the Hebei Finance Bureau and Hebei Development and Reform Commission for endorsement before submitting it to ADB for review and approval.

56. Subsequent subprojects will receive the same extent of environmental safeguard scrutiny, modeled on the EIAs for the three core subprojects and the summary EIA (SEIA). The Hebei PMO will submit the EIAs for the subsequent subprojects for ADB’s review and comment, and having incorporated ADB’s comments, the Hebei PMO will submit the revised EIAs for ADB for posting on the ADB website to meet the 120-day disclosure requirement. For other safeguard concerns, a resettlement framework and an ethnic minority development framework were prepared for subsequent subprojects. Draft resettlement plans will be prepared using core subproject resettlement plans as models.

3. Implementation Period

57. As this is the first sector project for HPG, the selection and appraisal of the first one or two subsequent subprojects will likely take time to meet ADB and domestic requirements. To allow flexibility for HPG to select subsequent subprojects to meet the different pace of development in small cities and towns in Hebei, the Project will be implemented over 6 years, from 2009 to the end of 2015 (Appendix 9). The implementation period is estimated based on project scope and construction technology requirements. This schedule is considered realistic and feasible because the project implementation arrangements have been established and preparatory works are under way. ADB has successful experience with similar projects in the PRC, and HPG has experience in environment improvement projects financed by ADB and the World Bank.

4. Procurement and Consulting Services

58. All procurement to be financed under the ADB loan will be carried out in accordance with ADB’s Procurement Guidelines (2007, as amended from time to time). Contract packages have been formulated in consultation with the EA and IAs, and an assessment of the procurement capacity of the EA, PMOs, and IAs has been undertaken (Supplementary Appendix K). It is recommended that prior review be applied for all international competitive bidding contracts and for the first national competitive bidding contract for works and goods, and that post review be applied

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for other procurement modes. The indicative procurement plan for consulting services and civil works packages is in Appendix 10, and the detailed procurement plan is in Supplementary Appendix L. The Project includes provision for funding for 154 person-months of international and national consulting services to support the Hebei PMO, city and town PMOs, and IAs in project implementation and management and institutional capacity development. A consulting firm will be engaged in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time) using the standard quality- and cost-based selection method (80% quality and 20% cost) and simplified technical proposal. The consulting services will cover project management, implementation support, and institutional strengthening of the Hebei PMO, city and county PMOs, and IAs. Capacity development for the PMOs and IAs will be achieved through consultant inputs; training courses by specialized institutes and firms; in-country and/or overseas study visits; and the acquisition of training equipment financed from the loan (Supplementary Appendix M).

5. Advance Contracting and Retroactive Financing

59. HPG has indicated to the mission its intention to use advance contracting and retroactive financing to finance the recruitment of consultants, training, and the procurement of goods and civil works for the Bazhou subproject contract packages and retroactive financing of eligible expenditures of up to $20 million, or about 20% of the ADB loan. The mission informed the Hebei PMO that retroactive financing is permitted only if (i) it is specifically agreed between ADB and the Borrower; (ii) the goods, works, services, and consultants for which it is requested are procured in accordance with ADB’s Procurement Guidelines and Guidelines on the Use of Consultants; and (iii) the amount to be retroactively financed does not exceed 20% of the loan amount. The expenditures must have been incurred before effectiveness of the relevant loan but generally no earlier than 12 months before the signing date of the Loan Agreement. In either instance, detailed assessments and due diligence on each retroactive financing proposal must demonstrate that (i) the expenditures incurred are genuine, reasonable, and material to getting the Project off the ground and (ii) they were incurred for proper reasons and in a transparent manner over a reasonable period of time. The Government, HPG, and IAs were advised that approval of advance contracting and retroactive financing does not commit ADB to finance the Project.

6. Governance and Anticorruption Policy

60. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with HPG, the PMOs, and the implementing agencies. Consistent with its commitment to good governance, accountability, and transparency, ADB reserves the right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the Project. To support these efforts, relevant provisions of ADB’s Anticorruption Policy are included in the loan regulations and the bidding documents for the Project. In particular, all contracts financed by ADB in connection with the Project shall include provisions specifying the right of ADB to audit and examine the records and accounts of the EA and all contractors, suppliers, consultants, and other service providers as they relate to the Project. This is in line with ADB’s PRC country partnership strategy (2008–2010), which includes the promotion of good governance by supporting reform and capacity development in corporate governance (footnote 4). HPG has indicated its commitment to fight corruption and a number of anticorruption actions are included as covenants in the Loan and Project Agreements. Under these covenants, HPG will (i) involve the agencies responsible for oversight of each IA in bidding and construction to enhance construction quality control and supervise effective work; (ii) introduce a dual signing system in which the civil works contract winner also signs an anticorruption agreement with the IA; (iii) periodically inspect the contractors’ activities related to fund withdrawals and settlements; and (iv) engage the loan implementation consultant to support the Hebei PMO, city and town PMOs, and IAs to ensure good governance, accountability, and transparency in project operations. 15

7. Disbursement Arrangements

61. ADB loan funds will be disbursed in accordance with the procedures in ADB’s Loan Disbursement Handbook (2007, as amended from time to time). To expedite project implementation with the timely release of loan proceeds, HPG will establish an imprest account promptly after loan effectiveness at a commercial bank acceptable to ADB.15 Only one imprest account will be established at the provincial finance bureau, which will be responsible for municipal and county withdrawal applications. Disbursements from the imprest account to the IAs will be based on actual expenditures with full supporting documents, which is in line with Ministry of Finance internal regulations. Withdrawal applications will demonstrate that the goods and/or services derive from ADB’s members and are eligible for ADB financing. The maximum amount to be deposited to the imprest account shall not exceed the estimated ADB share of eligible project expenditures to be financed through the imprest account for the next 6 months or 10% of the loan amount, whichever is less. The statement of expenditure procedure will be used for the liquidation and replenishment of the imprest account, with reimbursement of eligible expenditures not exceeding $200,000 per individual payment. Statement of expenditure will be used only by HPG to request withdrawals from ADB. The HPG will set up a separate bank account for the $250,000 grant from the WFPF, which will be used for engaging consultants and conducting trainings.

8. Accounting, Auditing, and Reporting

62. The Hebei PMO will coordinate with city and town PMOs to prepare semiannual progress reports indicating physical progress vis-à-vis fund utilization, problems encountered during the period under review, measures taken or proposed to remedy the problems, a proposed program of activities. The IAs will keep records to allow the identification of goods and services financed from the loan proceeds, following accounting principles and practices prescribed by the Accounting Law of the PRC. This law requires that the financial statements generally follow recognized accounting standards. The IAs will set up and maintain separate project accounts. The financial statements of the project accounts and the annual corporate financial statements for IAs will be subject to external audit by the audit bureau of the cities and the HPG Audit Bureau. Audits will be carried out in accordance with PRC audit regulations and must meet ADB requirements. A separate auditor’s opinion on the use of the imprest account and statement of expenditure will be part of the audit reports. The IAs’ annual audited financial statements and audited project accounts will be submitted to ADB no later than 6 months after the end of the fiscal year throughout the implementation period. HPG and the IAs will submit reports and information to ADB concerning the use of the loan proceeds, project implementation, and IA performance. These reports will include (i) semiannual progress reports on project implementation, (ii) annual reports, and (iii) a project completion report submitted not later than 3 months after the completion of project facilities.

9. Project Performance Monitoring and Evaluation

63. The PPMS indicators, their relevance, and monitoring requirements were discussed with the PMOs and IAs during project preparation. The indicators are based on the monitoring indicators in the design and monitoring framework, consistent with sectoral indicators in the ADB Results Framework 2008, and are related to the core subprojects.16 Similar indicators will be formulated for subsequent subprojects. At the start of project implementation, the provincial and city PMOs and IAs will, with the assistance of the loan implementation consultant, develop comprehensive PPMS procedures to generate data systematically on the inputs and outputs of the subcomponents, as well as the indicators to be used to measure the project impact, taking into

15 Bank charges on the imprest account will be financed from the ADB loan. 16 ADB. 2008. ADB Results Framework. Manila.

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account the subsequent subprojects’ scope and components. The Hebei PMO will (i) refine the PPMS; (ii) confirm achievable targets; (iii) finalize monitoring, recording, and reporting arrangements; and (iv) establish systems and procedures no later than 6 months after loan effectiveness. The Hebei PMO will be responsible for monitoring and reporting on the performance of the Project based on the design and monitoring framework. The PMO will collect data, calculate the indicators, analyze the results, and prepare a report to illustrate that the Project is generating the intended outputs and outcomes in the subproject cities and towns in Hebei.

10. Project Review

64. Besides regular ADB review missions, ADB and the Government will undertake a comprehensive midterm review 2 years after the start of project implementation. This review will include a detailed evaluation of project scope, implementation arrangements, resettlement, achievement of scheduled targets, and progress on the agenda for policy reform and capacity development measures. Feedback from the PPMS and grant activities will be analyzed.

IV. PROJECT BENEFITS, IMPACTS, AND RISKS

65. The Project will directly benefit 1.2 million people in Hebei Province, 9.6% of whose population is rural poor. All residents in the 10 subproject small cities and towns will benefit indirectly, as their living conditions will improve from (i) improved water quality and quantity; (ii) reduced use of polluted water sources; (iii) reduced incidence of waterborne diseases and the resulting reduction in medical costs; and (iv) reduced pollution loads on air, water, and land from improved wastewater treatment; wastewater reuse; energy-efficient centralized heating; and solid waste treatment, recycling, and composting. During the construction and operation stages of the core subprojects alone, the Project will create 1,585 jobs directly and 2,536 jobs indirectly. About 45% of the construction jobs are unskilled, many of which are likely to be filled by people currently unemployed. In total, CNY1.02 billion in benefits will be generated in small cities and towns of Hebei. Twenty percent of poor people in the project area will be given priority access to new employment opportunities. Health benefits are expected to accrue disproportionately to women and children. The Project indirectly supports ADB’s broader Clean Energy and Environment Program (2008) by enhancing water resource management and introducing facilities for secondary wastewater treatment, centralized heating, and solid waste management.

66. Social Aspects. The Project will contribute to poverty reduction by ensuring that poor communities have access to safe and reliable water supply and better urban services and enjoy improved living conditions. It will mean more jobs for existing residents and new migrants in small cities and towns in Hebei Province. The water supply, wastewater, heating, solid waste, and river improvements will stimulate investment in industry, resource extraction, and the service sector, including tourism. The reduction in medical costs related to waterborne diseases is projected at CNY75.6 million. The summary poverty reduction and social strategy is in Appendix 11, and the full poverty and social assessment and the social action plan are in Supplementary Appendix N. Anticipated labor displacements caused by heating subprojects will be mitigated with a labor reemployment framework (Supplementary Appendix O). Health impacts are shown in Supplementary Appendix P, and the ethnic minority development framework is presented in Supplementary Appendix Q.

67. Resettlement Aspects. Project land acquisition and resettlement impacts are significant. The three core subprojects will affect 37 households or 196 people with permanent land acquisition, 30 households or 137 people with the loss of residential structures, and four small shops with 13 employees. In total, 173 mu, or 11.5 hectares (ha), of land will be acquired permanently, including 162 mu, or 10.8 ha, of cultivated land. Along with land acquisition, 582 17 square meters (m2) of housing and 624 m2 of other structures will be demolished, affecting 30 households or 137 people and relocating four small shops with 13 employees. A portion of the land compensation fee will be used by the village collective for the construction of village facilities. The remaining portion of the land compensation fee, resettlement subsidy, and compensation for crops will be paid directly to the affected people. Affected people will receive cash compensation for loss of housing, and vulnerable households will receive official assistance. The core subprojects’ resettlement plans have been endorsed by the EA and IAs and disclosed to affected people. The subsequent subprojects’ resettlement plans will be prepared in accordance with the resettlement framework and ADB’s Involuntary Resettlement Policy (1995). The summary resettlement plan is in Appendix 12, and the resettlement framework is in Supplementary Appendix R.

68. Financial Aspects. The financial internal rates of return (FIRRs) and financial net present values (FNPVs) were computed for all revenue-generating components—water supply, wastewater treatment, solid waste management, and district heating—at November 2008 prices. The Bazhou Shengfang water supply component’s FIRR is 5.3%, and its FNPV is CNY41.7 million. The Zhaoxian district heating component’s FIRR is 9.7%, and its FNPV is CNY185.6 million. The WWTP FIRR is 8.7%, and its FNPV is CNY97.9 million. The solid waste processing facility’s FIRR is 8.8%, and its FNPV is CNY57.0 million. All of these components are financially viable with FIRRs greater than the weighted average cost of capital of about 1%. The Zhengding solid waste processing component is viable with FIRR of 8.7% and an FNPV of CNY135.3 million. This component demonstrates that solid waste management income increase with the sale of recycled materials and compost for fertilizer. Current solid waste management fees are low and need to be rationalized to meet O&M cost recovery for integrated collection, treatment, and disposal. Heating tariffs can cover the cost of O&M, depreciation, and/or debt service. Affordability analysis shows that utility costs as a percentage of household income are reasonable, ranging from <1% for solid waste management to 3% for water and wastewater and 4% for heating. HPG and the county governments have provided assurances that the current subsidies through the minimum living standard scheme will continue in the future to ensure that the most vulnerable groups are protected from tariff increases. For the nonrevenue-generating component of river improvement, Bazhou City has the financial capacity to provide the counterpart funding during implementation and the funds required for O&M and debt service. For the revenue-generating components, all county governments have the financial capacity to provide the funding required during implementation. The summary financial analysis is in Appendix 13. The detailed financial analysis is in Supplementary Appendix S.

69. Financial management assessments of the EA, IAs, and operating companies are in Supplementary Appendix T. The IAs are all government departments. Three of the operating companies are state-owned enterprises, and one is a county government department. The accounting and financial management systems for financial reporting are adequate for loan implementation requirements, though internal control needs strengthening to improve accountability regarding the custody of assets, accounting procedures, and segregation of duties. Since many, if not all, of the IAs and operating companies have not implemented an ADB project, a capacity development component to strengthen financial management systems and provide training is included in the Project.

70. Economic Aspects. The three core subprojects were selected based on socioeconomic indicators and the level of preparedness of subproject cities and towns to undertake investments in municipal infrastructure which directly support approved development master plans and programs and the potential to serve as models for preparing subsequent components during loan implementation. The targeting and selection of subsequent subproject cities and towns will be based on their potential to attract economically productive investments that will provide jobs to migrants from rural areas and on the urgency of environmental improvements. Employment growth

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is recognized to contribute more than output growth toward HPG’s goal of closing the rural–urban income gap. Key urbanization issues in Hebei are (i) inadequate resources to provide public services to growing populations; (ii) severe air, river, and groundwater pollution arising from rapid industrialization and resource extraction; (iii) a significant share of the urban population living under the poverty line; and (iv) the lack of holistic and integrated management of urban development. The Project aims to address these issues in the participating cities to help promote balanced and environmentally sustainable urbanization; narrow the rural–urban income gap; and improve production, employment, and living conditions. The economic analysis indicates that the core components are economically viable and stand up to sensitivity tests even in the worst-case scenario with increased costs and lower benefits. Economic internal rates of return for subproject components are 19.0% for Shengfang water supply, 20.5% for Zhaoxian district heating, 48.6% for Zhaoxian wastewater treatment, 23.1% for Zhaoxian solid waste composting, and 21.3% for Zhengding solid waste management. A summary economic analysis is in Appendix 14. Details are in Supplementary Appendix U.

71. Environmental Aspects. The Project is classified as environmental category A. Extensive public consultations involving surveys, meetings with stakeholders, and focus group discussions were undertaken during project preparation. An EIA of the Project was conducted based on the EIAs prepared for the three core subprojects. An SEIA has been prepared and circulated to the ADB Board of Directors and was posted on the ADB website on 2 December 2008. An environmental assessment and management framework (Supplementary Appendix V) was prepared as an instruction manual to assist the Hebei PMO, subproject PMOs, IAs, and local design institutes in the preparation and review of EIA reports and environmental management plans for subsequent subprojects according to ADB requirements. The Project is expected to generate substantial environmental benefits. Wastewater treatment will reduce pollutant discharges to rivers and groundwater. River improvement will strengthen flood protection, reducing economic loss and public health hazards from flooding. Centralized heating will improve energy efficiency, eliminate a considerable number of small and inefficient boilers, and reduce the quantity of coal used, reducing greenhouse gas emissions. This Project will have positive effects on climate change, thereby supporting PRC and ADB climate change initiatives.

72. The Project is expected to have no adverse impacts during construction or operation, as mitigation and monitoring plans are in place and the environmental management and institutional capacities of the PMOs and IAs are strengthened by establishing environmental management offices and undertaking a training program on environmental management planning. To manage risk, the Hebei PMO will ensure (i) extensive training in environmental management; (ii) the engagement of qualified project implementation consultants; and (iii) appropriate arrangements for project implementation, monitoring, and mitigation, with ADB conducting project reviews.

73. The Project supports climate change adaptation including (i) incorporation of climate change issues, such as energy efficient measures, in urban master plans; (ii) comprehensive water management, such as long-term water availability forecasting for new development areas and adopting comprehensive water balance measures during project implementation; (iii) sustainable wastewater and solid waste management including sludge digestion and biogas extraction; and (iv) promotion of clean energy for more efficient central heating.

74. Project Risks and Mitigation Measures. Using conventional engineering designs with proven performance records, the Project does not have any unusual technical risks. The following risks could affect timely implementation, economic viability, and the realization of benefits: (i) failure to implement institutional strengthening for effective project implementation and management and governance; (ii) lack of proper O&M of project facilities; (iii) major changes to master plans in subproject cities and towns; (iv) delay in providing counterpart funding; (v) failure to increase water 19 and wastewater tariffs to meet cost recovery targets; and (vi) unforeseen land acquisition and resettlement issues, which could constrain the efficient implementation of the project works and the restoration of livelihoods to affected people. Risks (i) and (ii) will be mitigated by the provision of institutional capacity development for subproject city and town PMOs and IAs with the support of the loan implementation consultant. In addition, the PLG will provide oversight to mitigate project management risk. Risk (iii) will be mitigated by synchronizing the project design and implementation schedules with other planned projects. Risks (iv) and (v) will be mitigated through covenanted assurances from subproject city and town governments on the provision of counterpart funding and on regular tariff reviews and increases. Risk (vi) will be mitigated by strengthening internal monitoring and supervision by the Hebei PMO and subproject city and town PMOs of the IAs, as well as by engaging a qualified external agency to monitor and evaluate resettlement.

V. ASSURANCES

75. In addition to the standard assurances, the Government, HPG, subproject governments, and IAs have given specific assurances as summarized below, which were incorporated in the Loan and Project Agreements. Supplementary Appendix W provides details of the specific assurances.

(i) The IAs will ensure (a) the timely provision of counterpart financing for the Project and the provision of additional counterpart funding for any shortfall of funds, and (b) adequate and timely funding for O&M of the project facilities. (ii) HPG will ensure that the IAs will provide monthly environmental monitoring reports during construction period to the Hebei PMO, who will submit to ADB semiannual environmental reports in a format acceptable to ADB until project completion. (iii) HPG shall cause the subproject governments and IAs to ensure that, prior to construction, (a) all land and rights-of-way will be made available in a timely manner; (b) resettlement plans will be implemented promptly and efficiently; and (c) adequate staff and resources will be committed to the supervision and internal monitoring of resettlement plan implementation. (iv) HPG and participating subproject county and city governments shall ensure that (a) urban services tariffs will be progressively set at the levels required to achieve full cost recovery, (b) annual reviews of tariffs and fees are undertaken by the local price bureau or subproject IAs, (c) the regular review of the impact of the increased urban services tariffs on the poor by the local government agency concerned, and (d) providing lifeline tariffs to the poor. (v) HPG and the governments of the participating subproject counties, cities, and towns shall ensure that wastewater is treated before being discharged into the rivers that are to be improved as a part of the river improvement and flood control subprojects. (vi) The governments of the subproject locations at all levels in Hebei Province shall ensure that the water supply and wastewater treatment works and the wastewater collection networks are of adequate capacity, that the associated works of the subprojects are constructed on time according to urban master plans and adequate funding support for implementation, and O&M. (vii) The governments of the subproject locations at all levels in Hebei Province shall ensure that the solid waste management subprojects to be implemented comply with the overall planning, implementation, management, operations, and maintenance requirements of the respective cities and towns and that urban infrastructure and services are properly managed with adequate funding support. (viii) The governments of the subproject locations at all levels in Hebei Province shall ensure that the heat supply works comply with the master urban plan and the specific planning guidelines and the heating improvements include equipment and

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networks of adequate capacity to meet the needs of the project during implementation, and that proper and adequate O&M is ensured for completed project facilities. (ix) HPG and the governments of the subproject locations shall cause the IAs to establish and maintain a sound financial management system in accordance with ADB’s Financial Management and Analysis of Projects, 17 including the establishment of a separate bank account for the subproject and the maintenance of minimum balances to ensure sufficient cash flow and timely settlement of project construction liabilities and debt servicing. (x) HPG shall cause the IAs to ensure that all works under the Project are designed and constructed in accordance with national standards and specifications, and that the construction supervision, quality control, contract management, and completion inspection and acceptance follow applicable national laws and regulations.

VI. RECOMMENDATION

76. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and, acting in the absence of the President, under the provisions of Article 35.1 of the Articles of Agreement of ADB, I recommend that the Board approve

(i) the loan of $100,000,000 to the People’s Republic of China for the Hebei Small Cities and Towns Development Demonstration Sector Project from ADB’s ordinary capital resources, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; a term of 26 years, including a grace period of 6 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft Loan and Project Agreements presented to the Board; and (ii) the administration by ADB of the grant not exceeding the equivalent of $250,000 to the People’s Republic of China for the Hebei Small Cities and Towns Development Demonstration Sector Project to be provided by the Multi-Donor Trust Fund under the Water Financing Partnership Facility.

C. Lawrence Greenwood, Jr. Vice-President 15 October 2009

17 ADB. 2005. Financial Management and Analysis of Projects. Manila. Appendix 1 21

Sri DESIGN AND MONITORING FRAMEWORK

Design Summary Performance Targets/ Data Sources/ Assumptions and Risks Indicatorsa Reporting Mechanisms Impact By 2015 (baseline year Provincial and municipal Assumptions Improved urban 2005), in core subproject environmental protection environment and cities and towns in Hebei bureau reports Timely implementation of improved public health Province; similar 11th FYP and small city and quality of life for the performance targets will be Provincial, city, and and town master plans residents of small cities formulated for subsequent county statistical and towns in Hebei subprojects yearbooks Strong provincial economic development Province Municipal government Quality of drinking water trends continue after the sources improved from class health bureau data on 11th FYP IV to class II drinking water quality and incidence of infectious Applicable environmental Total chemical oxygen diseases laws are effectively demand of discharge reduced enforced. by 15% Provincial and municipal labor affairs bureaus SO2 in the air decreased by Risks 15% Provincial Poverty Relief IAs do not use suitable Office external monitoring Reduced incidence rate of Annual socioeconomic agencies; performance waterborne diseases in direct data are not collected. project beneficiary areas by surveys undertaken as 30% in 2020 compared to that part of PPMS Urban development in 2007 Semiannual reports by pressures outpace the PMOs and IAs planned infrastructure Registered city or town development. unemployment rate lower than Baseline perception 5% surveys conducted in Weak enforcement of subproject cities and environmental laws and Higher public satisfaction with regulations improved services in water, towns wastewater, solid waste Lack of effective management, and heating environmental quality monitoring Outcome By 2015 (baseline year Operating and financial Assumptions Improved urban 2005), in the core subproject reports of water supply, Project financing is infrastructure and cities and towns in Hebei wastewater, district provided on time. municipal services in province; similar heating, and solid waste about 10 small cities and performance targets will be management companies Relevant authorities offer towns in Hebei Province formulated for subsequent strong support to the city subprojects Provincial, municipal, and and town PMOs and IAs county statistics bureaus on capacity development All components for project implementation Provincial, municipal, and and operation. Public satisfaction with county environmental environmental conditions protection bureaus Effective stakeholder b increased: participation and • Bazhou from 20% to 80% Provincial, municipal, and ownership is developed. • Zhaoxian from 50% to 80% county construction bureaus Different specialist • Zhengding from 60% to 90% disciplines are well • Other subproject cities and Flood records coordinated. towns: TBDc Annual socioeconomic Land acquisition and River improvement surveys undertaken as resettlement policies are components part of PPMS effectively implemented; Percentage of improved river Public health department stakeholders accept and course length or lake audits on water quality cooperate with perimeter in urban areas implementation. increased City and county records • Bazhou from 20% to 100% and statistics Project design and construction are • Others cities and towns: County water affairs implemented effectively. TBD

22 Appendix 1

Design Summary Performance Targets/ Data Sources/ Assumptions and Risks Indicatorsa Reporting Mechanisms • lower flood incidence bureaus frequency Risks County labor bureaus Exceptional weather Water supply components County poverty relief affects the annual Percentage change in urban offices effective construction population with access to period. piped water increased: Annual environmental Costs are much higher • Shengfang: from 20% to statistics than anticipated. 80% Municipal records and • Others: TBD statistics

Ratio of unaccounted-for Statistical records and water decreased: data of small cities and • Shengfang: from 40% to towns below 20% District heating • Others: TBD companies

Service hours increased: ADB project completion • Shengfang: from 6 hours to report 24 hours • Others: TBD

District heating components Percentage of urban population with access to centralized heating increased: • Zhaoxian: from 14% to 80% • Others: TBD

Solid waste management components Percentage of urban population served by solid waste collection system increased: • Zhaoxian: from 60% to 100% • Zhengding: from 70% to100% • Other cities and towns: TBD

Percentage of solid wastes recycled and used to produce natural fertilizer • Zhaoxian: from 50% to 90% • Zhengding: from 50% to 90% • Other cities and towns: TBD

Wastewater management components Percentage of urban population served by sewer increased: • Zhaoxian: from 70% to 100% • Other cities and towns: TBD Percentage of urban wastewater treated increased: • Zhaoxian: from 70% to Appendix 1 23

Design Summary Performance Targets/ Data Sources/ Assumptions and Risks Indicatorsa Reporting Mechanisms 100% • Other cities and towns: TBD

Revenue-generating components (water, wastewater, heating, solid waste management) Tariffs are progressively set to achieve full cost recovery.

Outputs By 2015 From All: Assumptions For Core Subprojects: Project financing is Bazhou County Construction or rehabilitation Regular IA reports on provided on time. Component 1: Mangniu of 66 km of sewers; contract expenditure and River Improvement improvement of 6.7 km of river works progress Relevant authorities offer Riverbed is dredged and course strong support to the city embankments are Monitoring of project and town PMOs and IAs constructed. Wastewater collection rate implementation and for capacity development increased from 60% in 2007 to progress by ADB review in project implementation Sewer networks are 80% in 2015 missions and operation. constructed; rubber dams Effective stakeholder are installed. Sewer network coverage in Works supervision, participation and urban area increased by 33%; construction, and ownership is developed. Flooding of the urban total sewer coverage in urban completion and area becomes less area increased from 30% in acceptance records Different specialist frequent. 2005 to 63% disciplines are well Information from final coordinated. % of urban riverbed that is accounts of works Land acquisition and improved increases from 10% resettlement policies are to 100% in 2015 Monitoring reports on effectively implemented; institutional development stakeholders accept and Major flood incidence including number of staff cooperate with decreases from once every 20 trained, areas of training, implementation. years to once every 50 years and strengthened organizations and Project design and Length of river in urban areas procedures construction are that is improved increases implemented effectively. from 20% to 100% in 2015. County public affairs

management bureau (all Risks Component 2: Construction of 14 wells, components) Local geological Shengfang Water pump stations, water conditions affect Supply Project treatment plant with capacity County water affairs construction activities. New water supply system 20,000 m3/d, and distribution bureau and associated facilities pipeline network (47 km) Exceptional weather operational County district heating affects the annual Water supply coverage rate company effective construction increased from 55% in 2007 to period. 90% in 2010 County wastewater company Costs are much higher Population with access to than foreseen. centralized drinking water County development and supply increased by 99,000, reform commission (all and service area increased by components) 17.5 km2 County construction Zhaoxian County Phase II extension bureau (all components) Component 1: (50,000 m3/d) of the existing Wastewater Treatment WWTP by constructing County records and primary and secondary documents (biological) treatment works Wastewater treatment rate

24 Appendix 1

Design Summary Performance Targets/ Data Sources/ Assumptions and Risks Indicatorsa Reporting Mechanisms increases from 75% in 2007 to 100% in 2015; population with access to centralized wastewater treatment services increased by 33,000; service area increased by 6.4 km2

Component 2: District Rehabilitation and expansion Heating of urban heating system, Heating substations and including construction of two distribution network are primary heat substations (total constructed. capacity 372 MW), 21 km of transmission and distribution Residents receive pipelines, and 63 secondary adequate heating heat substations services. Centralized municipal heating Reduction in the use of coverage rate increased from coal for residential 14% in 2007 to 80% in 2015 heating. Centralized heating service area increased by 1,658,000 m2

Component 3: Solid Additional (phase II), 100 t/d Waste Management solid waste processing and Solid waste processing recycling plant and recycling plant and composting facility Nonhazardous solid waste constructed treatment rate increases from 0% in 2007 to 100% in 2015

Population receiving solid waste treatment services increased by 200,000

Zhengding County New solid waste processing Component 1: Solid and recycling plant (600 t/d) Waste Management and collection and transfer Solid waste processing works: transfer stations, and recycling plant and compression trucks, and skips composting facility constructed Nonhazardous solid waste treatment rate increases from Improved solid waste 70% in 2007 to 90% in 2015 management collection and treatment Population receiving solid waste treatment services increased by approximately 150,000

For all subprojects: In Hebei PMO and subproject Institutional capacity for city and town PMOs and IAs: project management is • PPMS established in 2010 is improved; infrastructure refined; and service providers • project implementation is have increased capacity undertaken in timely to plan, construct, manner; operate, and maintain • adequate provision of facilities. counterpart staff and resources to implement the Appendix 1 25

Design Summary Performance Targets/ Data Sources/ Assumptions and Risks Indicatorsa Reporting Mechanisms Project; • review and improvement of cost control measures are undertaken every 2 years; • tariffs are reviewed annually and local residents are aware of the results of the annual tariff review process and required tariff increases; public consultation process established; • a 5-year (2010–2014) training plan for project management, O&M, financial management, and institutional development is implemented; and • organization structure and financial management systems are enhanced.

Activities with Milestones Inputs

Subproject 1: Bazhou City ADB 1.1 River Improvement and Sewerage Network Rehabilitation $100 million loan with Activity (1) Design facilities, acquire land, and procure works by 2009. timely disbursement Activity (2) Rehabilitate 2.7 km of Mangniu River. based on the construction Activity (3) Construct and rehabilitate 66 km of city sewer networks by 2011. schedule of the works: 1.2 Water Supply - Civil works: Activity (4) Design facilities, acquire land, and procure works by 2009. $25.50 million Activity (5) Construct 14 wells, pump stations, and WTP by 2011. - Capital goods: Activity (6) Construct water supply distribution pipeline by 2011. $65.9 million - Materials Subproject 2: Zhaoxian County $1.9 million 2.1 District Heating - Consulting services: Activity (7) Design facilities, acquire land, and procure works by 2009. $2.50 million Activity (8) Construct two central heating stations with capacity of 382 MW. - Financial charges Activity (9) Construct district heating stations with heat exchangers. during implementation: Activity (10) Construct 20 km of transmission and distribution pipelines. $4.2 million 2.2 Solid Waste Treatment Activity (11) Design facilities, acquire land, and procure works by 2009. $0.25 million grant from Activity (12) Construct a 100 t/d solid waste processing and recycling plant by 2011. the Multi-Donor Trust 2.3 Wastewater Treatment Fund under the Water Activity (13) Design facilities, acquire land and procure works by 2009. Financing Partnership Activity (14) Construct WWTP extension with 100,000 m3/d capacity by 2011. Facility for strengthening operational and financial Subproject 3: Zhengding County sustainability of service 3.1 Solid Waste Management utilities Activity (15) Design the facilities, acquire land and procure the works by 2009. Activity (16) Construct new solid waste processing and recycling plant by 2011. Government and IAs Activity (17) Construct new solid waste collection and transfer works, including transfer $135.6 million equivalent stations. in counterpart funds with Activity (18) Procure and install new solid waste collection equipment, including timely disbursement compression trucks and skips, by 2011. based on the construction schedule of the works Institutional Capacity Development for Project Management Activity (19) Strengthen financial management and corporate governance in water and wastewater agencies and companies, district heating, and solid waste management in any subproject city or town with water supply, wastewater, district heating, or solid waste management component by 2015.

26 Appendix 1

Activities with Milestones Inputs

Activity (20) Complete organizational arrangements for Hebei PMO to be able to implement the Project by 2009. Activity (21) Complete necessary organizational arrangements for IAs (hiring staff; setting up accounting systems; and improving financial, administrative, and human resource policies and procedures) by 2009. Activity (22) Develop plans, budgets, and procedures for loan implementation and project control in Hebei PMO by 2010. Activity (23) Complete Hebei PMO and IA staff training (training in ADB procedures, procurement, water supply, pollution control, district heating, solid waste management, environmental monitoring, and financial management) by 2015. Activity (24) Hebei PMO and IAs refine the PPMS and establish targets and procedures no later than 6 months after loan effectiveness.

ADB = Asian Development Bank, FYP = five-year plan, IA = implementing agency, km = kilometer, km2 = square kilometer, m2 = square meter, m3/d = cubic meter per day, MW = megawatt, O&M = operation and maintenance, PMO = project management office, PPMS = project performance management system, PPTA = project preparatory technical assistance, SO2 = sulfur dioxide, t/d = ton per day, TBD = to be determined, WTP = water treatment plant, WWTP = wastewater treatment plant. a The target of impact should be 3–5 years after project completion. b Public satisfaction in base year 2008 from PPTA survey. Percent improvement from PMOs. c To be determined during subproject appraisal and monitored as part of PPMS.

Appendix 2 27

SECTOR AND SUBSECTOR ANALYSIS

A. Small City and Town Development

1. Small City and Town Development in the People’s Republic of China

1. The Government of the People’s Republic of China (PRC) has long promoted the development of towns as a way to achieve a more balanced urban system. The pro-town development policy catalyzed waves of migration into towns and small cities 1 throughout the 1980s, contributing directly to the steep rise of urbanization in the PRC over the past 30 years. Today more than 40% of the national population lives in urban areas, up from 18% in 1978. As of 2002, there were almost 20,000 towns in the country, with an average population of 32,300 and a total population of 640 million.

2. The 11th Five-Year Plan (FYP) takes advantage of the potential of small cities and towns to increase national economic productivity while narrowing the rural–urban income gap, thereby contributing to social stability. The plan calls for strengthening linkages between major cities and smaller settlements at their periphery and calls for the equitable distribution of the benefits of urban development projects.

2. Small City and Town Development in Hebei Province

3. Hebei’s policy on the development of its small cities and towns mirrors the national policy. Hebei’s Social and Economic Development 11th FYP calls for the development of a more balanced urban system through the growth of medium-sized cities that can serve as economic centers for surrounding towns. The 11th FYP aims to remove “institutional obstacles to urbanization,” and county-level cities and towns are expected to enhance their economic relationship with rural areas that depend primarily on agriculture.

4. Building on the successful implementation of environmental improvement projects in Hebei Province financed by the Asian Development Bank (ADB), the Government of the PRC (the Government) recognizes ADB’s strong contribution to undertaking sector policy reforms to ensure long-term sustainability and effective sector performance. The proposed ADB financing will strengthen support to improving the urban environment in small cities and towns, particularly in the poorer counties of Hebei to the north and west of Beijing. This will provide the opportunity to develop their infrastructure that will enable investments in secondary (manufacturing) and tertiary (service) industries. Provincially, capacity development in project planning, implementation, and operation and maintenance (O&M) will be provided to the key entities involved in town development and management on how to carry out effective town development and measure success.

5. As this is the first sector loan project undertaken by ADB in Hebei, lessons from previous projects and existing institutional arrangements were carefully examined to ensure that the design of sector subprojects and institutional arrangements will be able to effectively respond to future urban development challenges. The Hebei Small Cities and Towns Development Demonstration Sector Project (the Project) has taken into account the relevant experience of ADB in similar environment-improvement project in Shandong Province. These are small, county-based landfills with a clean development mechanism and wastewater facilities to reduce domestic and industrial pollution, which suffered weak institutional capacity in project management and O&M.2 Further,

1 Small cities in the PRC are generally considered to have populations of 100,000–250,000. 2 ADB. 2006. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the People’s Republic of China for the Shandong Hai River Basin Pollution Control Project. Manila (Loan 2237–PRC).

28 Appendix 2 training needs, which vary by county according to capacity, were assessed during project preparation, and measures were formulated to address the following key issues:

(i) County experience in ADB-financed projects is limited. (ii) There is potential for the Hebei project management office to have difficulty coordinating and overseeing county subprojects because the projects are dispersed and have specific requirements. (iii) Counties lack technical, financial, and managerial capacities and need training and other interventions for effective project implementation.

6. For the additional subprojects, detailed institutional arrangements, training, and staffing needs will be considered, and existing arrangements modified as necessary, during project implementation, with the assistance of the loan implementation consultant. As the Project covers several subsectors, the design of technical training interventions will be tailored to county-specific requirements. Small cities and towns lack basic urban infrastructure necessary to attract employment-generating industries and services or private sector initiatives to sustain future economic development. Poor environmental conditions pose constraints to enlisting private sector support and ensuring a critical population mass in small cities and towns able to support investments. The Project will address specific environmental concerns by (i) reducing sulfur dioxide and respirable suspended particulates through centralized heating systems; (ii) reducing untreated domestic and industrial wastewater to improve river water quality to meet class II standards through wastewater and river improvement subprojects; (iii) improving groundwater quality and reducing fluoride and nitrate nitrogen levels through water improvement subprojects; and (iv) reducing nonpoint pollution sources such as solid wastes through better collection, disposal, treatment, and recycling facilities.

7. The proposed interventions in county-level cities and towns will directly contribute to the provincial objective of promoting integrated development of urban and rural areas. To promote quality standards in urban services, the Hebei Urbanization 11th FYP emphasizes the need for more efficient delivery of urban services. Hebei’s development strategy for small cities and towns combines urban growth management with the promotion of economic development. A key objective of the ADB-financed Project is to develop the capacity of the Hebei provincial government, local governments, and implementing agencies. The Project includes institutional and capacity development to support project implementation and sustainable O&M of project components over the long term.

8. The Project’s institutional and capacity development activities will include (i) strengthening the organizational capacity of the Executing Agency, implementing agencies, and O&M organizations to improve municipal infrastructure and environmental management measures; (ii) implementing the Project in compliance with national and ADB standards pertaining to technical requirements, environmental management, social safeguards, procurement, and financial management; (iii) building the implementing agencies’ and O&M organizations’ capacity and resources to implement, operate, and maintain project facilities to achieve the expected benefits and long-term sustainability; (iv) strengthening the environmental management capacity of subproject cities and towns in the areas of water supply, wastewater treatment, and solid waste management; and (v) building awareness of innovations for future requirements such as carbon emission reduction and a clean development mechanism in solid waste, wastewater, and heating subprojects, which Hebei provincial government can disseminate across the province to elicit strong support for PRC and ADB climate change initiatives.

Appendix 2 29

B. Subsectors

1. Water Supply and Wastewater Management

9. The national Government sets policies, standards, and guidelines for drinking water quality; wastewater discharge; and planning and constructing water, wastewater, and drainage infrastructure. Provincial agencies set policies, approve selected actions of municipal agencies such as tariff revisions and increases and large investment projects, and oversee compliance with water supply and wastewater standards. Local government is responsible for providing water and wastewater services. Typically there is a municipally owned water supply company and a government bureau for drainage. Wastewater companies have been established only since 2000 and often focus only on treatment, leaving the collection system to the government bureau. National Government circular no. 1192 of 1999 requires urban infrastructure services to be provided on a cost-recovery basis, which would require at minimum recovering operation, maintenance, and debt service costs through tariffs and other user fees. In most cases, small cities and towns set tariffs that are below cost recovery. Towns have water supply cost recovery rates of 75%–90% and wastewater cost recovery rates of 60%–80%. Urban water supply coverage rates are relatively high at 90% for prefectures (cities) and 80% for counties.3 However, most towns have poor water quality with old networks and inadequate treatment. Sector specialists have observed unaccounted-for water at high rates of 25%–40% in most towns. Field visits to small cities and towns indicate that wastewater collection coverage rates are 45%–65%. Secondary treatment of wastewater is a minimum requirement for all cities. It is expected that providing wastewater treatment to counties will substantially reduce pollutant loads entering rivers.

2. River Improvement

10. The Ministry of Water Resources is responsible for managing water resources in the PRC, which includes river improvement and flood control. The flood-control system includes structural measures to reduce flood hazards—dikes levees, dams, and improved channel conveyance capacity by widening, deepening, realignment, and bank protection—as well as other flood measures such as land-use controls, early warning systems, and flood response plans. The Hebei Province 11th FYP (2006–2010) upgrades the standard for flood control from a 20-year return period to a 50-year period. Municipal bureaus of water affairs are responsible for rivers and river channels in their jurisdiction, including urban flood control. Rivers are often seasonal, as 70% of annual rainfall occurs from June to September in most areas, and channel beds are often littered with solid waste, filled with sediment, and polluted by untreated wastewater. River improvement projects undertaken by local governments in this province aim to reshape the river channel, install embankments, and install riverbank landscaping that includes walkways, trees, shrubs, and vegetation. A more integrated approach to river improvement, wastewater treatment, and solid waste management has been incorporated in the project design to address the long-term sustainability of project facilities. Further, community involvement in river cleanup and maintenance and solid waste management improvement will be institutionalized to assist county governments in ensuring that flood-protection measures and facilities are sustained.

3. Solid Waste Management

11. The Chinese Environmental Science Institute estimates solid waste generation in small cities at 1.0–1.3 kilograms per capita per day. About 48% of all solid waste collected in prefecture- level cities in Hebei is deposited in sanitary landfills and/or treated in composting and recycling

3 Hebei Province, Urbanization 11th FYP. Site visits found water supply coverage fairly limited and unreliable, with most households and industries extracting groundwater.

30 Appendix 2

facilities (footnote 2). As provincial agencies do not regularly monitor the performance of the sector, no detailed technical or financial information is available regarding investment, collection, treatment, use of recycling, etc. Nationally the State Council, Ministry of Construction, and Ministry of the Environment set policies and provide guidelines. Provincially, province construction departments, development and reform commissions, and environmental protection bureaus set plans and guidelines for municipal solid waste (MSW) activities, with construction bureaus undertaking the design, construction, and commissioning of such MSW facilities as landfills. Municipal governments fund solid waste management with capital funding and operating budgets. Many small cities and towns have not established a user-pays tariff system but finance solid waste collection and treatment through general revenues. Some counties offset costs by selling recycled materials such as plastic and glass and by making fertilizer from composted MSW.4 The main municipal solid waste and sanitation problems are (i) incomplete coverage of solid waste collection services and public toilets; (ii) unclear standards and routes for waste collection and transfer; (iii) insufficient waste storage facilities; (iv) absence of water-flush public toilets; (v) waste transportation characterized by low mechanization, efficiency, and safety; (vi) unsanitary disposal of collected waste; (vii) no processing or treatment of collected waste; and (viii) no reuse or recycling of waste. To improve living conditions, improved solid waste management services will be provided through better collection and transfer of solid waste and the introduction of recycling and composting to dispose of wastes. This intervention will enable cleaner counties to promote economic development and employment generation through tourism and services.

4. District Heating

12. In many parts of northern PRC, district heating systems that exploit surplus heat generated from power stations are replacing local coal-fired boilers. This reduces coal consumption, emissions of greenhouse gases, and air pollution from particulates and coal dust. Although existing systems are fixed flow (neither adjustable nor metered in dwelling units), PRC requires individual measuring equipment to be installed in existing systems by 2010 and all new buildings to have metered heating. Heat customers currently pay on the basis of how many square meters are heated. The benefits of centralized heating improvements for greenhouse gas emissions is greater when new heating services are combined with new natural gas services. This allows residents to switch from coal-burning stoves to less polluting technology for home heating and cooking. An integrated approach to energy improvements should be adopted as part of municipal infrastructure planning. District heating will improve energy efficiency by eliminating small and inefficient boilers and reducing coal use, which will improve air quality indoors and out, to the benefit of human health. Centralizing coal use will also centralize the storage of bottom ash to facilitate its reuse in building and paving materials.

5. Conclusion

13. National and provincial policy frameworks clearly posit towns as engines of urban growth and embrace a number of best practices for urban infrastructure delivery: demand management, cost recovery pricing, and treatment of solid waste and wastewater. However, these policies have yet to be put in practice provincially by implementing regulations or performance management systems. The proposed Project, under the Hebei project management office, can become the stimulus for operationalizing town development policy by (i) formulating specific approaches to promoting town development and testing them through subprojects, (ii) rolling out those approaches to other towns, and (iii) setting specific benchmarks and monitoring systems for the further development of the sector in Hebei Province.

4 An assessment of the solid waste composition shows a high percentage of organic matter (46%), followed by inert matter (44%), and recyclables (about 10%). The carbon and nitrogen ratio ranges from 20 to 30, indicating suitability for composting. Appendix 3 31

PROCESS FOR SUBPROJECT IDENTIFICATION, SELECTION, PREPARATION, AND APPRAISAL

A. Background

1. Under the sector loan approach, the Hebei provincial government (HPG) has, as the Executing Agency, established a three-stage approach for (i) identifying and selecting, (ii) preparing, and (iii) appraising subprojects for inclusion in the Hebei Small Cities and Towns Development Demonstration Sector Project (the Project). These procedures are currently used to select and prepare subsequent subprojects. HPG has delegated various actions and decisions with respect to subproject processing to the Hebei project management office (PMO), located in the Hebei Finance Bureau.

B. Stage 1: Subproject Identification and Selection

2. HPG has invited county-level city and county governments in Hebei Province to express their interest in participating in the Project, which will be partly financed by an Asian Development Bank (ADB) loan. The following criteria will be used to identify and select subprojects:

(i) The subproject must be urban development, i.e., for the physical development of small cities and towns, with particular emphasis on infrastructure development. The eligible subsectors for subproject investment are water supply, wastewater management, river improvement, solid waste management, and district heating. (ii) The proposed subproject city or town must be a county-level city or county or town. (iii) The subproject must improve living conditions and/or enable the promotion of investment that will generate employment, as follows: (a) improving living conditions by accomplishing at least one of the following: (1) cleaning up polluted urban areas, (2) reducing or slowing the rate of increase of water, land, and/or air pollution in urban areas, (3) treating solid waste or wastewater prior to discharge into the environment, and/or (4) improving the environmental sustainability of town development through more ecologically sensitive infrastructure services; and/or (b) generating employment by accomplishing at least one of the following: (1) facilitating investment in labor-intensive economic sectors, including services; (2) removing a specific infrastructure-related barrier to further growth of an economic sector in the city or town, or enabling economic growth through infrastructure service provision; (3) enabling the development of residential or mixed-use areas for staff of new or expanding businesses by providing water supply and urban environmental services for new expansion areas; (4) strengthening linkages of the city or town economy with a metropolitan or subregional economy, including growth corridors and clusters; and/or (5) improving access for the urban poor to economic opportunities. (iv) The local government must confirm its ability and willingness to arrange counterpart finance. (v) The local government must confirm its willingness for the subproject to comply with ADB safeguard policies and other requirements. (vi) The preferred implementation period must be during 2009–2015.

32 Appendix 3

C. Stage 2: Subproject Preparation

3. Preparation by local governments involves designating an implementing agency (or initially an office of the government) to prepare project design documents including a project proposal and feasibility study report under the guidance of the Hebei Development and Reform Commission (HDRC); with the help of the Hebei PMO, an environmental impact assessment, and (if required) a resettlement plan to standards necessary to meet both domestic and ADB requirements. Governments must determine suitable institutional arrangements for project implementation and prepare a detailed financing plan.

4. Local governments can contract local design and other specialist institutes to carry out selected tasks involved in subproject preparation, including report production.

5. To facilitate an orderly and consistent appraisal of the subprojects, the Hebei PMO requires an integrated feasibility study in a common format to be prepared to ADB standards for each proposed subproject, including technical, social, financial, economic, and institutional analyses.

D. Stage 3: Subproject Appraisal and Approval

6. The ADB project team developed a detailed set of evaluation criteria, which was discussed and agreed with HPG. This is to ensure that appraisal of individual subprojects is conducted in accordance with ADB standards. The appraisal of the three core subprojects will also serve as guidance for the appraisal of subsequent subprojects.

7. Each subsequent subproject PMO will prepare a subproject appraisal report, which will follow the template provided in Supplementary Appendix C (which also shows the summary appraisal criteria), and submit it to the municipal finance bureau for review and then to the Hebei PMO for review. The Hebei PMO will submit the appraisal report to the Hebei Finance Bureau and HDRC for endorsement.

8. Rejected subprojects are to be referred to the relevant local governments with indications of where the preparations and proposals are deficient, and for additional preparation work (assuming the subprojects have a realistic chance of meeting the agreed evaluation criteria).

9. Subprojects approved by HDRC will be forwarded to ADB for approval.

10. All subproject approvals by ADB or HPG will only be made if:

(i) the subproject includes an environmental impact assessment which has incorporated ADB’s comments, and has been subject to relevant public consultation and disclosure; and (ii) a resettlement plan, meeting ADB requirements, has been prepared and approved by the relevant local government, and endorsed as satisfactory by ADB.

Appendix 4 33

EXTERNAL ASSISTANCE

Table A4.1: ADB Assistance for Infrastructure and Environmental Improvement in the PRC Date of Amount No. Name Approval ($ million) A. Loans 1205 Qingdao Environmental Improvement 10 Dec 92 103.00 1270 Tangshan and Chengde Environmental Improvement 25 Nov 93 140.00 1313 Dalian Water Supply 20 Sep 94 160.00 1336 Beijing Environment Improvement 29 Nov 94 157.00 1490 Anhui Environmental Improvement 26 Nov 96 28.00 1491 Anhui Environmental Improvement (Industrial Component) 26 Nov 96 112.00 1543 Xian–Xianyang–Tongchuan Environmental Improvement 24 Sep 97 156.00 1544 Zhejiang–Shanxi Water Supply (Phase I) 24 Sep 97 100.00 1636 Fuzhou Water Supply and Wastewater Treatment 30 Sep 98 102.00 1692 Suzhou Creek Rehabilitation 29 Jun 99 300.00 1715 Shanxi Environmental Improvement 27 Nov 00 102.00 1797 Tianjin Wastewater Treatment and Water Resources Protection 11 Dec 00 130.00 1985 Hebei Province Wastewater Management 19 Dec 02 82.36 1995 Harbin Water Supply 11 Mar 03 100.00 1996 Wuhan Wastewater Management 25 Apr 03 83.00 1967 Shanxi Road Project II 03 Dec 03 124.00 2175 Jilin Water Supply and Sewerage Development 27 Jun 05 100.00 2176 Fuzhou Environmental Improvement 08 Jul 05 55.80 2207 Henan Wastewater Management and Water Supply 18 Nov 05 100.00 2237 Shandong Hai River Basin Pollution Control 21 Jun 06 80.00 2239 Guangxi Nanning Urban Environmental Upgrading 26 Jun 06 100.00 2240 Wuhan Wastewater and Stormwater Management 26 Jun 06 100.00 2297 Nanjing Qinhuai River Environmental Improvement 18 Dec 06 100.00 2328 Anhui Hefei Urban Environment Improvement 24 Apr 07 150.00 2360 Jilin Urban Environmental Improvement 29 Oct 07 100.00 2388 Kunming Qingshuihai Water Supply 12 Dec 07 80.00 2393 Xinjiang Regional Road Improvement (Korla–Kuqa Section) 13 Dec 07 150.00 2407 Gansu Baiyin Urban Development 23 Jan 08 80.00 2420 Xinjiang Municipal Infrastructure and Environmental Improvement 23 Apr 08 105.00 2487 Songhua River Basin Water Pollution Control and Management 11 Dec 08 200.00 2491 Guangxi Wuzhou Urban Development 15 Dec 08 100.00 2526 Xinjiang Urban Transport and Environmental Improvement 29 Jun 09 100.00 2550 Liaoning Small Cities and Towns Development Demonstration Sector Project 18 Sep 09 100.00 Subtotal (A) 3,780.16 B. Advisory Technical Assistance 987 Institutional Strengthening of National Environmental Protection Agency 10 Jun 88 0.34 1436 Environmental Impact Assessment and Training 10 Dec 90 0.60 1464 Management of Environment and Natural Resources in Hainan 11 Jan 91 0.60 1701 Shanxi Road Project 01 Aug 01 0.25 1772 Institutional Strengthening of the Qingdao Environmental Protection 30 Oct 92 0.60 1835 Haihe Basin Environmental Management and Planning Study 31 Dec 92 1.24 1916 Institutional Strengthening of the Environmental Protection Bureau 28 Jul 93 0.45 1988 Environmental Impact Assessment and Training Phase II 18 Nov 93 0.90 2015 Urban Environmental Improvement Planning 14 Dec 93 0.48 2090 Legislative Reform for Protecting the Environment and Natural Resources 18 May 94 0.50 2210 Capacity Building of Beijing Municipal Environmental Protection Bureau 29 Nov 94 0.60 2398 Improving Environmental Monitoring and Enforcement in Henan 15 Sep 95 0.09 2456 Pilot Environmental Plans for Selected Medium-Size Cities 4 Dec 95 0.60

34 Appendix 4

Date of Amount No. Name Approval ($ million) 2504 Seminar on BOT in Water Supply Sector 22 Dec 95 0.10 2505 Strengthening the Environmental Standards and Enforcement 22 Dec 95 0.60 2693 Formulation Integrated EMPs Chao Lake Basin 26 Nov 96 0.80 2726 Water Quality Management for Suzhou Creek 23 Dec 96 0.60 2726 Water Quality Management for Suzhou Creek (Supplementary) 13 Feb 98 0.40 2751 Capacity Building of Wastewater Treatment Operations in Anhui 27 Jan 97 0.20 2773 Water Supply Tariff Study 24 Mar 97 0.60 2804 BOT Chengdu Water Supply Project 2 Jun 97 0.60 2817 Strategic Operations for the Water Sector 26 Jun 97 1.18 2873 Improvement of Environmental Management in Shanxi Province 24 Sep 97 0.94 2906 Leadership Training on Urban Environmental Management in Key Cities 3 Nov 97 0.60 2951 Promotion of Market-Based Instruments for Environmental Management 16 Dec 97 0.70 2975 Environmental Impact Assessment Training and Curriculum Development 31 Dec 97 0.60 3079 TA Cluster to the PRC for the Promotion of Clean Technology 29 Sep 98 3.50 3095 Hai River Basin Wastewater Management and Pollution Control 10 Nov 98 0.57 3211 Improving Environmental Management in Suzhou Creek 29 Jun 99 0.84 3250 Water Tariff Study II 3 Sep 99 0.95 3377 Urban Poverty Study 27 Dec 99 0.41 3447 Strengthening Urban Solid Waste Management 25 May 00 0.60 3588 Trans-Jurisdiction Environment Management (TA Cluster) 11 Dec 00 2.10 3749 National Guidelines for Urban Wastewater Tariffs and Management Study 25 Oct 01 0.90 4061 Songhua River Water Quality and Pollution Control 10 Jan 03 1.00 4095 Policy Reform Support 11 April 03 0.15 4215 Safe Drinking Water and Sanitation for the Rural Poor 12 Nov 03 0.40 4335 Town-Based Urbanization Strategy Study 06 May 04 0.75 4694 Urban Poverty Strategy Study II 23 Nov 05 0.30 4702 Study on Sustainable Urbanization in Metropolitan Regions 28 Nov 05 0.50 Pilot Study on Market-Based Allocation of Wastewater Discharge Permit and 4967 11 Sept 07 0.50 Related Trading System 7002 Urban Wastewater and Solid Waste Management for Small Cities and Towns 10 Dec 07 1.00 7083 Urban Wastewater Reuse and Sludge Utilization Policy Study 26 May 08 1.00 7163 Improvement of Public Employment Service in the Western Region 4 Nov 08 0.40 Subtotal (B) 31.04 C. Project Preparatory Technical Assistance 1549 Qingdao Environmental Improvement 18 Jun 91 0.10 1831 Tangshan and Chengde Environmental Improvement 31 Dec 92 0.10 1852 Dalian Water Supply 10 Mar 93 0.10 917 Beijing Environment Improvement 28 Jul 93 0.60 2187 Anhui Environmental Improvement Project for Wastewater Component 19 Oct 94 0.28 2445 Xian–Xianyang–Tongchuan Environmental Improvement 16 Nov 95 0.50 2770 Fuzhou Water Supply and Wastewater Treatment 14 Mar 97 0.60 2901 Shanxi Environment Improvement 21 Oct 97 0.59 3049 Zhejiang–Shanxi Water Supply (Phase II) 21 Jul 98 0.54 3095 Hai River Basin Wastewater Management and Pollution Control 10 Nov 98 0.57 3215 Heilongjiang Water Supply 1 Jul 99 1.00 3216 Tianjin Wastewater Treatment and Water Resources Protection 2 Jul 99 0.80 3488 Hebei Province Wastewater Management 30 Aug 00 0.85 3571 Harbin Water Supply 12 Dec 00 0.72 3638 Wuhan Wastewater Treatment 19 Mar 01 0.50 4014 Fuzhou Environmental Improvement 5 Dec 02 0.60 4223 Shandong Hai River Basin Pollution Control 21 Nov 03 0.60 4227 Jilin Water Supply and Sewerage Development 26 Nov 03 0.65 4233 Henan Wastewater Treatment 3 Dec 03 0.80 Appendix 4 35

Date of Amount No. Name Approval ($ million) 4385 Guangxi Nanning Urban Infrastructure Development 3 Sep 04 0.56 4436 Wuhan Wastewater and Storm-Water Management 18 Nov 04 0.70 4617 Nanjing Qinhuai River Environmental Improvement 27 Jul 05 0.60 4628 Hefei Urban Environment Improvement 15 Aug 05 0.75 4804 Jilin Urban Infrastructure 22 Jun 06 0.50 4805 Xinjiang Municipal Infrastructure and Environmental Improvement 23 Jun 06 0.80 4808 Kunming Qingshuihai Water Supply 29 Jun 06 0.60 4818 Gansu Baiyin Urban Development 19 Jul 06 0.50 4867 Preparing the Qingdao Water Resources Management Project 16 Nov 06 0.60 4930 Xinjiang Urban Transport and Environmental Improvement 11 May 07 0.70 4959 Small Cities and Towns Development Demonstration Sector Projects 6 Aug 07 1.70 4960 Guangxi Wuzhou Urban Development 9 Aug 07 0.50 4971 Songhua River Basin Water Pollution Treatment 28 Sep 07 1.30 4987 National Strategies for Environmental Management and Energy Conservation 13 Nov 07 0.90 4995 Lanzhou Sustainable Urban Transport 23 Nov 07 0.80 7036 Provincial Development Strategies for Selected Provinces in the Central Region 12 Dec 07 1.00 7108 Chongqing Urban–Rural Infrastructure Development Demonstration 29 Jul 08 0.90 7160 Guangxi Border City Development 4 Nov 08 0.80 7177 Wuhan Urban Environmental Improvement 21 Nov 08 0.70 7323 Xinjiang Altay Urban Infrastructure and Environmental Improvement 3 Aug 09 0.80 Subtotal (C) 26.21 Total (B + C) 57.25 BOT = build–operate–transfer, PRC = People’s Republic of China, TA = technical assistance. Source: Asian Development Bank.

Table A4.2: Externally Financed Projects in Hebei Province 2004–2008 Project Amount Project Name Donor Sector ($ million) Period Integrated Ecosystem and Water Resources Management in the ADB Water Resources 100.0 2008–2012 Baiyangdian Basin Project Tangshan and Chengde ADB Environment 140.0 1993–2000 Environmental Improvement Project Hebei Zhanghewan Pumped Storage ADB Energy, Water 144.0 2004–2009 Power Generation Project Resources Hebei Wastewater Management ADB Municipal, 82.4 2004–2008 Project Environment Hebei Urban Environment World Environment Water 150.0 2001–2006 Improvement Project Bank Supply Shijiazhuang Urban Transportation World Transport 100.0 2002–2008 Project Bank ADB = Asian Development Bank. Source: Hebei project management office, March 2008.

36 Appendix 5

SUMMARY OF SUPPORT FOR WATER AND WASTEWATER UTILITIES

A. Objectives

1. To enhance the sustainability of water supply and wastewater infrastructure financed by the Asian Development Bank, the Multi-Donor Trust Fund under the Water Financing Partnership Facility will provide a grant to be used to strengthen the institutional and financial management capacity of the entities involved in planning, financing, implementing, managing, operating, and maintaining water and wastewater systems in the subproject small cities and towns. This includes water supply and wastewater service providers participating in core and subsequent subprojects. The assistance, to be executed by the Hebei provincial government, will focus on improving the provincial policy and regulatory framework for these providers and, where appropriate, the national framework. The capacity development assistance will improve the ability of water and wastewater service providers to respond to ongoing urbanization challenges by enhancing their ability to deliver sustainable services. Specifically it will

(i) help participating entities develop a comprehensive corporate strategy for water and wastewater service provision in which organization structures, personnel, and systems and procedures are aligned with corporate goals and objectives; (ii) adopt a demand-driven approach for service delivery, in which service levels and coverage for water and wastewater are set and interventions designed in response to the expressed priorities and preferences of end users; and (iii) strengthen financial management and cost recovery so that revenues cover costs to the extent possible, and the service provider is able to meet its substantial financial obligations in an environment of rapidly expanding service provision. (iv) develop service and operational guidelines for financial and organizational reform that can be applied by the water and wastewater treatment service providers in Hebei province, including those not participating in the Project.

B. Scope of Work

2. The team implementing the capacity development assistance will assess the institutional and financial capacity of the designated service providers; formulate a program to strengthen institutional capacity including training, assistance with corporate reform, improvement of administrative systems and procedures, and design of pilot interventions; and assist in implementing the program. The team will coordinate closely with the provincial project management office and work closely with subproject management offices and implementing agencies. The Hebei provincial government will, as the Executing Agency, be responsible for executing the grant and recruiting consultants.

C. Period of Performance

3. The work will be carried out over 12 months commencing in mid-2010.

D. Staffing

4. International consultants will be (i) an operation and institutional specialist and (ii) a financial management specialist. National consultants will be a (i) team leader and financial specialist, (ii) utility accountant, (iii) water and wastewater pricing specialist, (iv) training specialist, and (v) customer outreach specialist.

SUMMARY COST ESTIMATES AND FINANCING PLAN

Table A6.1: Summary Cost Estimates CNY million $ million Foreign Local Foreign Local Percentage Exchange Currency Total Exchange Currency Total of Total Item Costs Costs Costs Costs Costs Costs Costs A. Base costs a I. Construction Civil Works 173.5 260.1 433.6 25.5 38.2 63.7 27 Preparatory Works 0.0 81.4 81.4 0.0 12.0 12.0 5 Capital Goods 448.0 0.0 448.0 65.9 0.0 65.9 28 Associated Equipment 0.0 162.4 162.4 0.0 23.9 23.9 10 Materials 13.0 0.0 13.0 1.9 0.0 1.9 0 Equipment and Furniture 0.0 2.1 2.1 0.0 0.3 0.3 0 Land Acquisition and Resettlement 0.0 42.5 42.5 0.0 6.3 6.3 3 Survey, Research, Design, and Consulting Services 0.0 10.3 10.3 0.0 1.5 1.5 1 Environment Management 0.0 104.4 104.4 0.0 15.3 15.3 7 Subtotal (I) 634.5 663.2 1,297.7 93.3 97.5 190.8 81 II. Institutional Strengthening Consulting Services and Training 17.0 0.0 17.0 2.5 0.0 2.5 1 Capacity Development (grant) b 1.7 0.0 1.7 0.3 0.0 0.3 0 Subtotal (II) 18.7 0.0 18.7 2.8 0.0 2.8 1 III. Recurring Costs Implementing Agency Management 0.0 25.2 25.2 0.0 3.7 3.7 2 Subtotal (III) 0.0 25.2 25.2 0.0 3.7 3.7 2 Total Base Costs (A) 653.2 688.4 1,341.6 96.1 101.2 197.3 84 B. Contingencies Physical Contingency c 0.0 134.0 134.0 0.0 19.7 19.7 8 Price Contingency d 0.0 100.2 100.2 0.0 14.7 14.7 6 Subtotal (B) 0.0 234.2 234.2 0.0 34.4 34.4 14 C. Financing Charges during Implementation e Interest during Implementation – ADB Loan 28.0 0.0 28.0 4.1 0.0 4.1 2 Commitment Charges – ADB Loan 0.5 0.0 0.5 0.1 0.0 0.1 0 Total – Financing Charges during Implementation 28.5 0.0 28.5 4.2 0.0 4.2 2 Total Project Costs (A+B+C) 681.7 922.6 1,604.3 100.3 135.6 235.9 100 Notes: Appendix 6 Appendix 1. Exchange rate used: CNY6.83 = $1.0 as of 9 September 2009. 2. Numbers may not sum precisely because of rounding. a In November 2008 prices. b Actual grant amount is $250,000. c Physical contingencies computed at 10%. 37 d Price contingencies computed by year and expenditure type based on cumulative domestic and foreign price inflation. e Interest during construction computed at 2.7% based on the London interbank offered rate and spread of 0.20%. Source: Asian Development Bank estimates.

38 Table A6.2: Costs and Financing by Expenditure Account

Appendix 6 Appendix Total Cost Financing by Expenditure Account ($ million) % of ADB Multi-Donor Bazhou Zhaoxian Zhengding Other ADB Item (CNY million) ($ million) Loana Trust Fundb City County County Counties loan A. Base Costs I. Construction Civil Works 433.6 63.6 25.5 8.0 3.7 1.6 24.8 40 Preparatory Works 81.4 12.0 0.0 2.6 1.6 0.9 6.9 Capital Goods 448.0 65.9 65.9 0.0 0.0 0.0 0.0 100 Associated Equipment 162.4 23.9 0.0 0.3 7.8 2.4 13.4 Materials 13.0 1.9 1.9 0.0 0.0 0.0 0.0 Equipment and Furniture 2.1 0.3 0.0 0.0 0.0 0.0 0.3 Land Acquisition and Resettlement 42.5 6.3 0.0 0.2 1.3 1.5 3.3 Survey, Research, Design, and 10.3 1.5 0.0 0.2 0.3 0.1 0.9 Consulting Services Environment Management 104.4 15.4 0.0 1.6 2.1 1.1 10.6 Subtotal (I) 1,297.7 190.8 93.3 12.9 16.8 7.6 60.2 II. Institutional Strengthening Consulting Services and Training 17.0 2.5 2.5 100 Capacity Development (grant) 1.7 0.3 0.0 0.3 Subtotal (II) 18.7 2.8 2.5 0.3 89 III. Recurring Costs Implementing Agency Management 25.2 3.7 0.0 0.1 0.4 0.2 3.0 Subtotal Base Costs (A) 1,341.6 197.3 95.8 0.3 13.0 17.2 7.8 63.2 49 B. Contingencies Physical Contingency 134.0 19.6 0.0 2.4 3.1 1.2 12.9 Price Contingency 100.2 14.8 0.0 1.8 2.3 1.0 9.7 Subtotal (B) 234.2 34.4 0.0 4.2 5.4 2.2 22.6 C. Financing Charges during Implementation Interest and Commitment Charges during 28.5 4.2 4.2 100 Implementation – ADB loan Subtotal (C) 28.5 4.2 4.2 100 Total Project Costs (A+B+C) 1,604.3 235.9 100.0 0.3 17.2 22.6 10.0 85.8 42 Notes: 1. Exchange rate: CNY6.83 = $1.0 as of 9 September 2009. 2. Numbers may not sum precisely because of rounding. a The ADB loan will cover bank charges and taxes and duties of works, supplies, equipment and services financed by ADB. b Under the Water Financing Partnership Facility. Contributors: the governments of Australia, Austria, Norway, and Spain, and administered by ADB. The actual amount is $250,000. c Includes project implementation and training-related equipment. Source: Asian Development Bank estimates.

Appendix 7 39

ONLENDING ARRANGEMENTS AND INDICATIVE FUNDS FLOW

Direct Payments to ADB Suppliers and Consultants Loan

People’s Republic of China

Ministry of Finance

Relending a

Hebei Provincial Government (ADB Loan Imprest Account)

Relending a

Langfang Municipal Shijiazhuang Shijiazhuang Other Municipal Hebei PMO

Government Municipal Gov’t Municipal Gov’t Governments (General Government (General Government (General Government Account) Account) Account)

a Relending

Bazhou City Zhaoxian County Zhengding Other county-level Government Government County city or county (Shengfang Town) Government governments

Onlendinga PMO

Bazhou Urban Zhaoxian County Zhengding Other IAs Construction and Urban Investment County Solid Development and Development WasteIA Company Limited Company Limited Treatment Plant

ADB = Asian Development Bank, PMO = project management office, IA = implementing agency. a ADB loan will be onlent/relent on the same terms and conditions as those received by the Ministry of Finance. Lending and onlending Repayment Source: Asian Development Bank.

PROJECT ORGANIZATION 40

Hebei Province Small Cities and Towns Development and 8 Appendix

Demonstration Sector Project Leading Group (PLG)

Executing Hebei Project Management Office (PMO) Agency Hebei Province Government Foreign Debt Management Center: Lead

Zhengding County Zhaoxian County Bazhou City Other Counties/Cities Subproject PMOs PLG PLG PLG PLG PMO PMO PMO PMO

Zhengding County Solid Zhaoxian County Urban Bazhou City Urban To be determined Implementing Waste Treatment Plant Investment and Construction and Agencies Development Company Development Company Limited Limited

- Solid Waste Management - To be determined - District Heating - River Upgrading Components

- Solid Waste - Water Supply Management - Wastewater

Source: Asian Development Bank.

IMPLEMENTATION SCHEDULE Task Name Period Start Finish 2009 2010 2011 2012 2013 2014 2015 (Month) 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 Bazhou 01/01/09 12/31/11 Land Acquisition and 9 01/01/09 09/30/09 Resettlement Design and Tender 8 04/01/09 12/31/09 Documentation Tendering 6 07/01/09 12/31/09 Water Supply Civil Works 16 01/01/10 12/31/11 Water Supply Equipment 16 01/01/10 12/31/11 River Improvement and Flood 14 08/01/09 09/31/10 Control Civil Works Zhaoxian 01/01/09 12/31/11 Land Acquisition and 9 01/01/09 09/30/09 Resettlement Design and Tender 8 04/01/09 12/31/09 Documentation Tendering 6 07/01/09 12/31/09 Wastewater Treatment Civil 10 01/01/10 12/31/11 Works Wastewater Treatment 11 01/01/10 12/31/11 Equipment Solid Waste Treatment Civil 10 01/01/10 12/31/11 Works Solid Waste Treatment 14 01/01/10 12/31/11 Equipment Heating Civil Works 15 10/01/09 12/31/11 Heat Station and Pipeline 14 01/01/10 12/31/11 Equipment Zhengding 01/01/09 12/31/11 Land Acquisition and 9 01/01/09 09/30/09 Resettlement Design and Tender 8 04/01/09 12/31/09 Documentation Tendering 6 07/01/09 12/31/09 Civil Works 15 01/01/10 12/31/11 Equipment Installation 10 01/01/10 12/31/11 Test and Acceptance 6 10/01/10 02/31/11 Other Subprojects 01/01/09 03/31/14 Land Acquisition and 9 07/01/09 03/31/10 Resettlement Appendix 9 Appendix Design and Tender 7 09/01/09 10/31/10 Documentation Tendering 6 10/01/09 12/31/12 Construction Works 42 01/01/10 03/31/14

Institutional Development -- 07/1/09 3/31/15 41 Training -- 07/1/09 3/30/14 Source: Asian Development Bank.

42 Appendix 10

PROCUREMENT PLAN

Project Name: Hebei Small Cities and Towns Loan Number: P40641 Development Project Executing Agency: Hebei provincial Loan Amount: $100 million government

Date of first Procurement Plan (loan approval Date of this Procurement Plan: 9 September date): ______2009

C. Process Thresholds, Review and 18-Month Procurement Plan

1. Project Procurement Thresholds

1. Except as Asian Development Bank (ADB) may otherwise agree, the following process thresholds shall apply to procurement of goods and works.

Table A10.1: Procurement of Goods and Works Method Threshold ICB for Works $10,000,000 or more ICB for Goods $1,000,000 or more NCB for Works More than $100,000 but less than $10 million NCB for Goods More than $100,000 but less than $1 million Shopping for Works Below $100,000 Shopping for Goods Below $100,000 ICB = international competitive bidding, NCB = national competitive bidding.

2. ADB Prior or Post Review

2. Except as ADB may otherwise agree, the following prior or post review requirements apply to the various procurement and consultant recruitment methods used for the project.

Table A10.2: Review Requirements Procurement Method Prior or Post ICB Works Prior ICB Goods Prior NCB Works the first NCB procurement documents should be submitted for ADB review and NCB Goods approval; subsequent NCB will be reviewed Post Project Shopping for Works Post Shopping for Goods Post ADB = Asian Development Bank, ICB = international competitive bidding, NCB = national competitive bidding.

Table A10.3: Review Requirements Procurement Method Prior or Post QCBS Prior QBS Prior Other selection methods: CQS, LCS, FBS, and SSS Prior Individual Consultants Prior CQS = consultant qualification selection, FBS = fixed budget selection, LCS = least cost selection, QBS = quality-based selection, QCBS = quality- and cost-based selection, SSS = single source selection.

3. Goods and Works Contracts Estimated to Cost More Than $1 Million

3. The following table lists goods and works contracts for which procurement activity is either ongoing or expected to commence within the next 18 months.

Appendix 10 43

Table A10.4: Goods and Works Contracts Estimated to Cost More than $1 Million Ref. No General Description Procurement Pre- Expected Date of Method Qualification Advertisement of Bidders Goods HB-BZWSM3 Pipeline of Bazhou city (material) ICB No 2nd quarter 2010 HB-BZGSM1 Shengfang Water Source and ICB No 2nd quarter 2010 Treatment Plant Equipment HB-BZGSM2 Pipeline of Shengfang (material) ICB No 1st quarter 2010 HB-ZDLJM1 Composting Equipment ICB No 2nd quarter 2010 HB-ZDLJM3 Solid Waste Transfer Equipment ICB No 2nd quarter 2010 HB-ZXGRM1 Equipment and Installation for 2 ICB No 2nd quarter 2010 Primary Heating Station; 63 Secondary Heating Stations; Electrical and Monitoring System HB-ZXGRM2 21 km of Heating Pipeline ICB No 1st quarter 2010 (Material) HB-ZXGRM3 Installation of 21 km of Heating ICB No 2nd quarter 2010 Pipeline HB-ZXWSM1 WWTP Technics Equipment ICB No 2nd quarter 2010 HB-ZXLJM1 MSW Facility Equipment ICB No 2nd quarter 2010 Installation Works HB-BZWSC1 Mangniu River Improvement NCB No 1st quarter 2010 HB-BZWSC2 Wastewater and Drainage NCB No 2nd quarter 2010 Pipelines along Mangniu River HB-BZGSC1 Shengfang Water Source and NCB No 1st quarter 2010 Water Treatment Plant HB-BZGSC2 Shengfang Water Transmission NCB No 2nd quarter 2010 and Distribution Pipelines HB-ZDLJC2 Solid Waste Treatment Facility NCB No 1st quarter 2010 HB-ZXWSC1 Wastewater Treatment Plant NCB No 1st quarter 2010 HB-ZXLJC1 Solid Waste Treatment Facility 1 NCB No 2nd quarter 2010 ICB = international competitive bidding, km = kilometer, MSW = municipal solid waste, NCB = national competitive bidding, WTP = water treatment plant, WWTP = wastewater treatment plant.

4. Consulting Services Contracts Estimated to Cost More than $100,000

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

Table A10.5: Consulting Services Contracts Estimated to Cost More than $100,000 General Description Recruitment Advertisement Date International or Comments Method (quarter/year) National Assignment Project Implementation QCBS (80:20) 1st quarter 2010 Both (about 154 One Contract Management and Capacity person-months) Development QCBS = quality- and cost-based selection.

44 Appendix 10

5. Goods and Works Contracts Estimated to Cost Less than $1 Million and Consulting Services Contracts Less than $100,000

5. This table groups smaller-value goods, works and consulting services contracts for which procurement activity is either ongoing or expected to commence within the next 18 months.

Table A10.6: Goods and Works Contracts Estimated to Cost Less than $1 Million and Consulting Services Contracts Less than $100,000 Number of Procurement/ Recruitment Type General Description Contracts Method Works Solid Waste Transfer Stations 1 NCB Works Outside the WWTP (influent and effluent 1 NCB pipelines) Works 2 Primary Heating Stations; 63 Secondary 1 NCB Heating Stations Works Heating Pipeline of Zhaoxian 1 NCB

Works Solid Waste Treatment Facility 2 1 NCB

Goods Mangniu River Rubber Dam, Gates, and 1 NCB Other River Control Goods Equipment Installation on Mangniu River 1 NCB

Goods Equipment installation for Bazhou 1 NCB Component Goods Brick-making Equipment 1 NCB Goods Equipment installation for Shengfang 1 NCB Component Goods Electrical and Automated Control 1 NCB Equipment for Solid Waste Goods Equipment Installation for Zhengding 1 NCB Component Goods WWTP Electrical Equipment 1 NCB Goods WWTP Controlling Equipment 1 NCB Goods MSW Facility Installation/ Adjustment of 1 NCB Electrical and Controlling Equipment MSW = municipal solid waste, NCB = national competitive bidding, WWTP = wastewater treatment plant.

D. Indicative List of Packages Required Under the Project

6. The following table provides an indicative list of all procurement (goods, works and consulting services) over the life of the project. Contracts financed by the Borrower and others should also be indicated, with an appropriate notation in the comments section.

Table A10.7: Indicative List of All Procurement General Estimated Number of Procurement Domestic Preference Comments Description Contracts Method Applicable Goods 9 NCB 10 ICB Works 12 NCB

Appendix 10 45

Estimated Number of Recruitment Type of Proposal Comments Contracts Method Consulting 1 QCBS Simplified and Bio-Data Includes consulting Services and services (about 154 Capacity person-months), training, Development study tours, and project implementation and equipment ICB = international competitive bidding, LCS = least cost selection, NCB = national competitive bidding, QCBS = quality- and cost-based selection. See PAI 2.02G: full, simplified or bio-data proposal.

E. National Competitive Bidding

7. 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, are subject to the following clarifications required for compliance with the guidelines:

(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 thirty (30) days shall be given. The preparation period shall count (a) from 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 pre-qualified bidders. (iv) All bidders shall be required to provide a performance security in an amount sufficient to protect the Borrower and/or Project 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 terns 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/or Project 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.

46 Appendix 10

(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 Project Executing Agency. (xii) Re-bidding shall not be allowed solely because the number of bids is less than three (3).

F. Details of Contract Packages and Procurement Methods

Table A10.8: Contract Packages and Procurement Methods Contract Package Type and Procurement Expected Date of Prior Ref. No. Description Method Advertisement Review A. Civil Works Bazhou HB-BZWSC1 Mangniu River Improvement NCB 1st quarter 2010 B HB-BZWSC2 Wastewater and Drainage NCB 2nd quarter 2010 B Pipelines along Mangniu River HB-BZGSC1 Shengfang Water Source and NCB 1st quarter 2010 B Water Treatment Plant HB-BZGSC2 Shengfang Water Transmission NCB 2nd quarter 2010 B and Distribution Pipelines Zhengding HB-ZDLJC1 Solid Waste Transfer Stations NCB 1st quarter 2010 B HB-ZDLJC2 Solid Waste Treatment Facility NCB 1st quarter 2010 B Zhaoxian HB-ZXGRC1 2 Primary Heating Stations; 63 NCB 1st quarter 2010 B Secondary Heating Stations HB-ZXGRC1 Heating Pipeline of Zhaoxian NCB 4th quarter 2009 B

HB-ZXWSC1 Wastewater Treatment Plant NCB 1st quarter 2010 B HB-ZXWSC2 Outside the WWTP (influent and NCB 4th quarter 2009 B effluent pipelines) HB-ZXLJC1 Solid Waste Treatment Facility 1 NCB 2nd quarter 2010 B HB-ZXLJC2 Solid Waste Treatment Facility 2 NCB 2nd quarter 2010 B B. Equipment Bazhou HB-BZWSM1 Mangniu River Rubber Dam, NCB 2nd quarter 2010 B Gates, and Other River Control HB-BZWSM2 Equipment Installation on Mangniu NCB 2nd quarter 2010 B River HB-BZWSM3 Pipeline of Bazhou city (material) ICB 2nd quarter 2010 A

HB-BZGSM1 Shengfang Water Source and ICB 2nd quarter 2010 A Treatment Plant Equipment HB-BZGSM2 Pipeline of Shengfang (material) ICB 1st quarter 2010 A

HB-BZGSM3 Equipment installation NCB 2nd quarter 2010 B

Appendix 10 47

Contract Package Type and Procurement Expected Date of Prior Ref. No. Description Method Advertisement Review Zhengding HB-ZDLJM1 Composting Equipment ICB 2nd quarter 2010 A HB-ZDLJM2 Brickmaking Equipment NCB 2nd quarter 2010 B HB-ZDLJM3 Solid Waste Transfer Equipment ICB 2nd quarter 2010 A HB-ZDLJM4 Electrical and Automated Control NCB 2nd quarter 2010 B Equipment for Solid Waste HB-ZDLJM4 Equipment Installation NCB 2nd quarter 2010 B

Zhaoxian HB-ZXGRM1 Equipment and Installation for 2 ICB 2nd quarter 2010 A Primary Heating Station; 63 Secondary Heating Stations; Electrical and Monitoring System HB-ZXGRM2 21 km of Heating ICB 1st quarter 2010 A Pipeline(Material) HB-ZXGRM3 Installation of 21 km of Heating ICB 2nd quarter 2010 A Pipeline HB-ZXWSM1 WWTP Technical Equipment ICB 2nd quarter 2010 B HB-ZXWSM2 WWTP Electrical & Technical NCB 2nd quarter 2010 B Equipment HB-ZXWSM3 WWTP Controlling & & Technical NCB 2nd quarter 2010 A Equipment HB-ZXLJM1 MSW Facility Equipment ICB 2nd quarter 2010 A Installation HB-ZXLJM2 MSW Facility Installation/ NCB 2nd quarter 2010 B Adjustment of electrical and controlling equipment C. Consultancy Services Hebei PMCS- Project Implementation, Project QCBS A 01 Management, Capacity Building, Training, and Institutional Development ICB = international competitive bidding, km = kilometer, MSW = municipal solid waste, NCB = national competitive bidding, QCBS = quality- and cost-based selection, WTP = water treatment plant, WWTP = wastewater treatment plant.

48 Appendix 11

SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY

Country/Project Title: PRC: Hebei Small Cities and Towns Development Demonstration Sector Project

Lending/Financing Department/ East Asia Department Sector loan Modality: Division: Urban and Social Sectors Division

I. POVERTY ANALYSIS AND STRATEGY A. Linkages to the National Poverty Reduction Strategy and Country Partnership Strategy Contribution of the sector or subsector to reduce poverty in the People’s Republic of China (PRC):

Small cities and towns in Hebei Province have made substantial progress in recent years in facilitating economic growth. In high- growth towns, industrial development has outstripped infrastructure provision and urban management capacity. Coverage rates for urban environmental services are inadequate, and pollution levels are high. Many areas of the province suffer bad air and water pollution, creating serious threats to human health. The objectives of the Hebei Small Cities and Towns Development Demonstration Sector Project (the Project) are to promote balanced and environmentally sustainable urbanization; narrow the urban-rural income gap; and improve production, employment, and living conditions in small cities and towns in Hebei Province. Although the Project will not reduce poverty directly, it will contribute in the short and long term to poverty reduction. The Project is in line with the PRC national poverty reduction strategy for developing the region, which aims to narrow the urban–rural income gap, and supports Hebei’s 11th Five-Year Plan (FYP) 2006–2010 to promote sustainable economic development with water supply and environmental improvement. It is consistent with the Asian Development Bank (ADB) water policy that people must have access to safe and reliable water supplies, and it will help the PRC achieve the Millennium Development Goal of environmental sustainability (MDG 7) and specifically address MDG target 7.C: halve the proportion of people without sustainable access to safe drinking water and basic sanitation by 2015. The Project adheres to ADB’s country partnership strategya in the PRC to make markets work more efficiently through (i) urban infrastructure development; (ii) the promotion of environmental sustainability; and (iii) pro-poor, equitable, and inclusive growth.

The Project will improve water supply, wastewater collection and treatment, heating, and river control, which will reduce surface and groundwater pollution, safeguard the environment and public health, and improve the quality of life of local residents in 10 small cities and towns of Hebei Province. The Project will benefit 623,000 residents, including the 3% of people living below the local poverty line, in the three core subproject cities and towns of Bazhou, Zhaoxian, and Zhengding and about 600,000 residents in seven subsequent subproject cities and towns. The Project will contribute to poverty reduction by reducing the incidence of waterborne and airborne diseases and flood risks in small cities and towns, providing employment opportunities during the construction and operation of project facilities, with anticipated flow-on benefits to social and economic development. Specific anticipated benefits include the following: a. Create jobs and employment opportunities. The Project will generate 1,585 person-years of work, including 1,325 jobs during construction and 260 jobs during operation. Follow-on multiplier effects are expected to indirectly create an additional 2,536 jobs. Sixty percent of the construction jobs are assumed to be unskilled. The loan assurances specifically address employing the poor, women, and ethnic minorities, which will contribute to narrowing income gaps and to poverty reduction. b. Improvement of residents’ quality of life. After the Project is completed, the infrastructure in project areas will be improved greatly, and so will local residents’ living environment and quality of life. Water and sanitation improvements will improve health and significantly reduce time burdens, particularly for women. Heating improvements will improve the quality of life and mitigate health issues related to home heating fuels. The Project will improve the treatment of wastewater before discharging it into the environment and introduce sanitary practices in solid waste collection and treatment. c. Improve health conditions. The components are expected to provide clean drinking water and better environmental conditions. As a result, exposure of the population to waterborne and airborne diseases and related medical costs will decrease, along with the number of schooldays and workdays lost to sickness. The health impact analysis shows that the Project will bring reductions in medical costs incurred from contracting waterborne diseases in small cities and towns amounting to CNY9.17 million in 2012–2020. Health benefits are expected to accrue disproportionately to women since they are more vulnerable to waterborne diseases because of their greater contact with water when doing household chores, especially cooking and washing, and with sick children and old people. Total savings to households over 2012– 2020 are estimated at CNY2.75 million. Detailed analysis of health impacts is provided in Supplementary Appendix P. The poor will benefit more than most people from improved environmental quality and health benefits as a result of their higher vulnerability to poor environmental conditions.

This poverty reduction and social strategy will be applied in the subsequent subproject cities and towns, where social conditions are anticipated to be similar to those in the core subproject towns. Details of the social aspects of subsequent subprojects will be presented in the subproject appraisal reports to be prepared and submitted to ADB during implementation. The subproject appraisal criteria and report template is in Supplementary Appendix C.

Appendix 11 49

B. Poverty Analysis Targeting Classification: TI – MDG 7 Target 7.C 1. Key Issues Hebei Province is in northeastern PRC and has a land area of 187,693 square kilometers (km2), with the Bohai Sea to the east. Its population is 69.4 million, with an average household size of 3.3 in 2006. Han Chinese account for 96%, and the remaining 4% belong to the Man, Hui, Mongol, and other minorities. Hebei’s economy is dynamic and diverse, spanning heavy industry (construction materials, steel, and pharmaceuticals), light industry (textiles and agroprocessing), and resource extraction (coal). Urbanization in Hebei has been rapid. The urban population of Hebei is 38% and expected to rise to 50% by 2010. Small cities and towns are rapidly absorbing rural migrants, driving up urbanization across the province.

Unlike the rural poverty definition, the urban poverty line in the PRC is not defined to a uniform standard. In general, urban residents that live under the minimum living standard scheme (MLSS)b are defined as urban poor. MLSS eligibility varies from city to city and county to county. In 2007 the poor population of Hebei—those living under the MLSS—was 0.89 million. The urban poverty incidence is 3.4%. There are 11,104 people, or 2.8% of the urban population, who benefit from this subsidy. The urban poverty incidence in Bazhou is 2.3%, in Zhaoxian 6.1%, and in Zhengding 1.4%. The socioeconomic survey and focus group discussions indicate that most of the poor in the subproject areas are unemployed workers, disabled people, and the chronically ill. Details are available in Supplementary Appendix N. Hebei Province has a relatively high rate of rural poverty. Fifty-two poor counties have been officially identified, of which 40 are nationally designated and 12 provincially designated.c There are two types of rural poor in Hebei. One is those officially identified by the central Poverty Reduction Office and the other is the rural poor living under the rural MLSSd defined by the Hebei government, which started its rural MLSS in 2005. The people whose income is below the rural MLSS can receive the subsidy from CNY700–CNY1,200.

The percentage of the provincial population in absolute poverty, with annual per capita annual income of

2. Design Features The project design addresses the social dimensions of poverty, participation, gender, ethic minority, etc. Project assurances call for employing local labor, with 30% of the labor opportunities to be provided to the poor and women. Participation strategies and programs use a community-based public education and awareness program (PEAP), community monitoring teams during implementation, and community management committees during the operation of the new infrastructure.

II. SOCIAL ANALYSIS AND STRATEGY A. Findings of Social Analysis

Stakeholder analysis was conducted during the poverty and social assessment. Various methods and approaches were employed, including participatory rural assessment, a socioeconomic sample survey of 400 households, four stakeholder consultation meetings and workshops, 15 focus group discussions, and 14 key informant interviews. The poverty and social assessment identified vulnerable groups and opportunities for pro-poor interventions and recommended social action measures and participation and mitigation plans to achieve social benefits. The poverty and social assessment indicates that rapid urbanization confronts Hebei Province with such development issues as the inadequate availability of public services for growing populations and severe air, river, groundwater, and solid waste pollution. The Project aims to address these issues and meet the demands of the residents by improving water supply, wastewater and solid waste collection and treatment, heating systems, and river management. The main findings of the social analysis for three core subprojects are as follows:

Bazhou is located on the north of the Hebei Plain with a geographic spread of nearly 784 km2 and a population of 577,000 in 2006. Shengfang County, under the jurisdiction of Bazhou City, consists of 39 villages. It is the largest producer of steel and wood furniture in the country. The area of the urban center is expected to increase from the current 15 km2 with the development of new residential and industrial areas, to 29 km2 in the short term and 54 km2 in the long term. Accordingly, the urban population is expected to increase from the current 88,000 to 196,000 in 2010. Rapid urbanization and industrialization in Bazhou City and Shengfang County, however, have damaged the environment. Investments in urban environmental infrastructure have not kept pace with the growth of urban population and industries. In Shengfang, inadequate water supply is a main concern of the residents and local government. Bazhou City has a combined drainage system that directly discharges into the Mangniu River, causing groundwater pollution.

Zhengding County has a land area of 469 km2 and a population 442,788. It is located at the eastern foot of Taihang Mountain, in southwest Hebei Province, north of the city of Shijiazhuang. In the 11th FYP and social development plan of Shijiazhuang City, Zhengding County is designated as the base for the textile and garment industry. As existing sanitation facilities such as public

50 Appendix 11 toilets and waste storage are inadequate, the solid waste component will promote safe and hygienic disposal of solid waste, reducing the risk of disease associated with an unhygienic environment as well as waterborne disease.

Zhaoxian County, under the jurisdiction of Shijiazhuang City, is in south-central Hebei. It has a land area of 675 km2 and a population of 568,107. It is basically an agricultural town, with 525 km2, or 78% of its area, devoted to agriculture. Its main agricultural products are wheat, pears, apples, peaches, and grapes. As Zhaoxian continues to urbanize, living standards rise and improving environmental conditions becomes a priority. Heating supply, wastewater treatment, and solid waste collection pose major development constraints. The proposed subproject aims to improve the water resource situation, living conditions of residents, and physical environment of the urban area of Zhaoxian County, as well as the surrounding areas of Shijiazhuang.

B. Consultation and Participation

1. The major stakeholders included were (i) groups directly affected by the project in a positive or negative way, including men, women, elderly, poor, minority people, and related schools, businesses, and organizations; and (ii) government organizations such as the Executing Agency, implementing agencies, Planning and Reform Commission, Civil Affairs Bureau, Poverty Alleviation Office, Women’s Federation, Minority Affairs Office, Finance Bureau, Health Bureau, Labor and Social Security Bureau, and Environmental Protection Bureau. Several meetings with a number of stakeholders, especially vulnerable groups including women, poor and ethnic minorities in the project areas, have been organized in the subproject cities. In addition, a number of key informant interviews were held with various bureaus, nongovernment organizations, women’s federations, and participants in past and ongoing projects in complementary areas.

2. What level of consultation and participation (C&P) is envisaged during the project implementation and monitoring? Information sharing Consultation Collaborative decision making Empowerment

3. Was a C&P plan prepared? Yes No

PEAP will be conducted to promote hygiene education, recycling programs, and social acceptance of tariff increases. The following results are expected to be achieved through the PEAP: (i) increased participation of the local population in project implementation and monitoring, (ii) increased awareness of project benefits and acceptance of the project, (iii) improved hygiene knowledge and reduced incidence of waterborne disease, and (iv) increased participation of beneficiaries in garbage recycling as part of solid waste management program. Public disclosure of all subproject documents will be made at the project management office (PMO) and on the ADB website, including the project information document, design and monitoring framework, resettlement plans, summary environmental impact assessment, environmental management plan, and social and environmental monitoring reports. A project information document has been prepared. Booklets outlining the resettlement plans were distributed to affected households, and disclosure meetings were held. Copies of the booklet are available at PMOs and each affected village office. C. Gender and Development 1. Key Issues In subproject areas, women made up 49.8% of the population in 2006. Employed women made up 46% of the employed population. Most project benefits accruing to the three towns will benefit men and women equally, including economic development, improved housing conditions and living environment, health benefits, and job creation. The Project will have some added benefits for women, as they are primarily responsible for collecting drinking water, disposing of wastewater, cleaning houses, nursing children, and caring for the sick and the elderly.

2. Key Actions A target has been set of about 30% of jobs for the poor and women in the operation and maintenance of infrastructure, and an assurance from the PMOs to encourage contractors to hire as much female construction labor as possible has been approved. Construction projects usually provide opportunities for vendors to carry out informal trading like selling drinks and snacks to construction workers. This is likely to be an additional temporary source of income that women can tap during construction. Women in the community will be actively engaged by the PEAP to promote hygiene education, garbage recycling programs, and social acceptance of tariff increases. For the PEAP, the Project will work closely with local women’s organizations such as the All Chinese Women Association and women’s street committees. The project performance management system, resettlement plan, and environmental management plan will include gender-disaggregated data where relevant.

III. SOCIAL SAFEGUARD ISSUES AND OTHER SOCIAL RISKS Issue Significant/Limited/ Strategy to Address Issue Plan or Other No Impact Measures Included in Design Involuntary Significant Three short resettlement plans have been prepared and Full plane Resettlement endorsed by local governments and must be approved Short Plan

Appendix 11 51

Not significant by ADB prior to loan appraisal. A resettlement Resettlement framework is prepared for additional subprojects Framework None (Supplementary Appendix R). No Action Indigenous Significant Of the total beneficiary population of the Project, 0.4% Peoples are ethnic minority peoples in the three core subproject Plan Not significant towns. To meet the requirement of the sector loan Other Action modality, and according to ADB’s Operations Manual F3 Indigenous None on Indigenous Peoples, an ethnic minority development Peoples framework has been prepared for the noncore Framework subprojects (Supplementary Appendix Q). No Action Labor Significant The Project will provide employment opportunities for the Employment poor. Project assurances will prioritize local labor, Plan opportunities Not significant especially vulnerable groups, for job opportunities and Other Action Labor ensure that employment complies with national labor No Action retrenchment None laws and regulations. The Zhaoxian subproject for Core labor central heating supply construction will result in the standards closure of 16 small boilers, affecting 39 part-time workers who have other jobs opportunities as guards, cleaners, and gardeners. The labor reemployment framework and labor reemployment plan is in Supplementary Appendix O. Affordability Significant The affordability analysis of public service charges for Action water supply, wastewater treatment, solid waste No Action Not significant management, and heating supply has been assessed, and there is no affordability issue for households that are None not poor. Preferential policies or subsidies will be provided to poor groups to ensure that they benefit from public services. For subsequent subprojects, affordability analysis will be conducted as a part of the appraisal report. Other Risks and/or Significant Health and safety training will be provided to Vulnerabilities construction workers. PMOs will ensure that contractors Plan HIV/AIDS Not significant involved in project implementation disseminate Other Action Human trafficking information on the risk of socially transmitted infections No Action Others (conflict, None including HIV/AIDS to the workers they employ under political instability, the Project. etc), please specify IV. MONITORING AND EVALUATION Are social indicators included in the design and monitoring framework to facilitate monitoring of social development activities and/or social impacts during project implementation? Yes No

If yes, please indicate the social indicators. (i) Employment opportunities for women and the poor in the project area. (ii) Reduction of waterborne diseases among households in the project counties and towns. a ADB. 2008. Country Partnership Strategy (2008-2010): People's Republic of China. Manila. b In 2006, the MLSS ceiling was CNY155 per capita per month in Zhengding and Zhaoxian and CNY255 in Bazhou. c In 2002, nationally and provincially identified impoverished counties were determined by the results of three indexes: per capita annual net income (weight 6), per capita gross domestic product (weight 3), and per capita fiscal income (weight 1). The 40 lowest-scoring counties are categorized as national poverty counties and following 12 counties are provincial poverty counties. d MLSS is designated on the basis of the counties’ socioeconomic condition, ranging from CNY700–CNY1,200. e Three full resettlement plans and one short resettlement plan have been prepared for the three core subprojects. There are one full resettlement plan and one short resettlement plan prepared for the Bazhou subproject and full resettlement plans for the Mangniu River improvement and sewer network rehabilitation component and Zhengding solid waste component.

52 Appendix 12

SUMMARY RESETTLEMENT PLAN

1. The Hebei Small Cities and Towns Development Demonstration Sector Project (the Project) is composed of three core subprojects and about seven subsequent subprojects to be determined. All 10 proposed subprojects are currently under preparation and require some land acquisition and resettlement. Resettlement planning and implementation is designed to ensure that the affected people will be better off or at least not worse off as a result of the Project. The land acquisition and resettlement impacts of the Project will be significant. Three full resettlement plans and one short resettlement plan have been prepared for the three core subprojects. There are one full resettlement plan and one short resettlement plan for the Bazhou subproject and full resettlement plans for the Mangniu River improvement and sewer network rehabilitation component and Zhengding solid waste component.

2. The scope of the Project impact is determined mainly by the results of the measurement surveys as part of the feasibility study reports. The physical and economic displacements identified show that the construction of the three core subprojects will affect 37 households or 196 people with permanent land acquisition, 30 households or 137 people with the demolition of residential structures, and four small shops with 13 employees. In total, 173 mu, or 11.5 hectares (ha), of land will be acquired permanently, 162 mu, or 10.8 ha, of which is cultivated land. Along with land acquisition, 582 square meters (m2) of residences and 624 m2 of other buildings will be demolished, affecting 30 households and 137 people and relocating four small shops with 13 employees. In addition, associated productive assets, ground attachments, and basic infrastructure and facilities will also be affected. Tables A12.1 and A12.2 summarize the land acquisition and resettlement impacts identified.

3. The resettlement plan and compensation for permanent land loss is based on Document 28: State Council Decision to Deepen Reform and Strictly Enforce Land Administration of October 2004, the Land Administration Law of the People’s Republic of China of 1998 (updated in 2004), and the Hebei Provincial Implementation Regulation of Land Administration Law of 1999. The resettlement plan and compensation for demolished buildings is based on national, provincial, and municipal urban housing administration regulations. Consultations with local governments and affected people and general practice in Zhengding, Zhaoxian, and Bazhou guided the adoption of a set of compensation standards by city project management offices (PMOs) and implementing agencies (IAs).

Table A12.1: Summary of Land Acquisition Permanent Land Acquisition Subproject Total Area (mu) Of which Farmland (mu) Affected Households Affected People Bazhou City 0.00 0.00 0.00 0.00 Zhaoxian 104.41 93.81 26.00 139.00 County Zhengding 68.48 68.48 11.00 57.00 County Total 172.89 162.29 37.00 196.00 Note: 15 mu is equivalent to 1 hectare. Garden lands are included under farmland. Source: Resettlement Plans. 2008.

Table A12.2: Summary of Resettlement Impacts Subproject Total Area (m2) Nonresidential (m2) Affected Households Affected People Bazhou City 1,224 624 34 150 Zhaoxian County 0 0 0 0 Zhengding County 0 0 0 0 Total 1,224 624 34 150 m2 = square meter. Source: Resettlement Plans. 2008.

Appendix 12 53

4. Affected people have been notified about the key elements of the resettlement plan after Asian Development Bank (ADB) loan fact-finding. On various occasions during meetings, interviews, focus group discussions, public consultation workshops, and community consultation meetings, local representatives have participated in planning, and their concerns have been integrated into the resettlement plans. The resettlement information booklet for each subproject was distributed to affected villages and households in August 2008. The resettlement plans has been provided to village offices and resident committees and posted on the ADB website. Project IAs will establish project resettlement units to supervise implementation, continue public consultation, monitor progress, and respond to grievances. Procedures to address grievances are well established, and explanations are included in the resettlement information booklets.

5. For land acquisition, a portion of the land compensation fee will be used for creating village infrastructure. Resettlement subsidies will be paid to affected people. Compensation for residences and other buildings to be demolished will be paid to owners, including those without building title. The payment will be made in cash according to the appraised value of the property. Households that have to relocate will receive a relocation allowance. Compensation for standing crops, auxiliaries, and other assets will be paid directly to affected people. Income losses resulting from reduced production, sales, or wages caused by the Project will be compensated in cash.

6. The resettlement strategy encompasses the replacement of housing and the restoration of livelihoods and income. For people losing housing in rural areas, there are two compensation options: cash compensation alone or cash compensation plus the provision of a plot on which the affected people can construct a house themselves. Assistance will be provided for constructing new houses or finding available housing close to the original homes, when preferred by the affected people. Municipal PMOs, IAs, and local governments will provide necessary assistance for house construction and relocation during resettlement implementation.

7. Municipal PMOs and IAs will establish a special fund for vulnerable people. Vulnerable households will receive additional assistance from municipal or county civil affairs bureaus. PMOs and IAs will supervise implementation to ensure that vulnerable people receive adequate compensation, housing arrangements, and special funds special assistance to restore their living conditions and incomes.

8. Each PMO and IA will have at least one full-time staffer responsible for land acquisition and at least one other staffer responsible for resettlement. Staff from each subproject resettlement unit will take lead responsibility for coordinating the planning, implementation, financing, and monitoring of land acquisition and resettlement. The cost estimate for land acquisition and resettlement is $6.3 million, equivalent to CNY36.21 million, in 2008 prices, including contingencies. Resettlement implementation will be completed prior to subproject construction. Following detailed measurement surveys, the resettlement plans will be updated and submitted to ADB for review and approval. Internal and external monitoring of resettlement plan implementation will be conducted. Monitoring methodologies are specified in the resettlement plans. Internal supervision and monitoring will be done by each IA to ensure compliance with the provisions of the resettlement plan. The Hebei PMO and IAs have agreed to a set of supervision milestones with ADB to ensure the timely and effective implementation of resettlement. External monitoring and evaluation will be carried out by an independent agency under contract to the Hebei PMO and IAs. External monitoring reports will be forwarded directly to both the Hebei PMO and ADB.

54 Appendix 13

FINANCIAL ANALYSIS

A. Financial Analysis of Revenue-Generating Components

1. The financial analysis of the Hebei Small Cities and Towns Development Demonstration Sector Project (the Project) has been carried out in accordance with Asian Development Bank (ADB) procedures for the financial management and analysis of projects.1 The revenue-generating components included in the core subprojects are water supply, wastewater management, district heating, and solid waste management (SWM).

2. Methodology. The financial analysis assessed the ability of the subprojects to generate sufficient revenues from operations to meet all costs, including operation and maintenance (O&M), depreciation and/or debt servicing, and a reasonable rate of return on investment. The analysis incorporated the required tariff increases and compared them with household affordability. The base case financial internal rate of return (FIRR) was compared with the weighted average cost of capital (WACC). Sensitivity analysis was conducted to assess the impact of changes on costs and revenues. Financial projections (balance sheet, income, and cash flow statements) have been developed for the proposed water supply, wastewater, heating, and solid waste components based on their projected operational performance. The financial analysis is based on existing operations and the incremental cash flow impacts of the proposed subprojects.

3. Assumptions. All analysis was conducted in constant November 2008 prices. The FIRR was calculated using incremental annual cash flows over 25 years with no residual value. Project capital expenditures are estimated based on the proposed implementation schedule and include physical contingencies. O&M costs include only incremental costs incurred under the Project. Revenues are calculated based on projected production and consumption volumes for water supply and wastewater, proposed tariffs, and collection efficiency.

4. Tariffs. It is anticipated that the tariffs2 will be increased gradually to full cost recovery levels to cover O&M, depreciation, and/or debt service with the Project improving service delivery. The Government agrees to gradual tariff increase (Table A13.1). During implementation, the weighted average tariff for solid waste treatment in Zhengding is CNY1.10/household/month and the level of cost recovery3 is around 98%. Full cost recovery will be achieved after 1 year of operation. The weighted average tariff for solid waste in Zhaoxian is CNY1.44/household/month, and cost recovery is about 92% during project implementation. Full cost recovery will be achieved after 5 years of operation. The weighted average tariff for heating in Zhaoxian is CNY9.88/square meter (m2)/month. Full cost recovery will be achieved within 3 years of operations. The weighted average tariff for wastewater in Zhaoxian is CNY0.35/cubic meter (m3). Full cost recovery will be achieved after 3 years of operation. The weighted average tariff for Bazhou water supply is CNY2.57/m3 during project implementation, and full cost recovery is achieved once it is operational.

5. Affordability Analysis. The calculated full cost recovery tariffs are calibrated against the affordability of the urban poor, with tariff estimates based on the proposals to introduce full cost recovery charging by 2012. Proposed average tariffs are calculated using the principle of full O&M,

1 ADB. 2006. Handbook for Borrowers on the Financial Management and Analysis of Projects. Manila. 2 Current weighted average tariffs in Zhaoxian are as follows: solid waste CNY1/person/month; heating CNY4.4/square meter/month; wastewater CNY0.34/cubic meter. In Zhengding, solid waste is CNY3/household/month for local residents and Bazhou water is CNY2.57/cubic meter. 3 Cost recovery refers to tariffs being able to cover operating costs and debt service costs. Full cost recovery (100% and above) occurs when all costs, including operating costs, debt service, and depreciation, are recovered.

Appendix 13 55 depreciation, and financing cost recovery.4 The household charge for combined water, solid waste, wastewater, and heating services satisfies ADB criteria of a maximum of about 5% of average household income. Affordability of SWM services is assumed to be 1% of the monthly household income. Current SWM fees are low at CNY1–CNY1.4/household/month, which is not adequate to cover SWM costs and to increase revenues, recycling and compost fertilizer production will be undertaken. Households with incomes below the poverty line and the unemployed are provided with basic services based on minimum living standard scheme.

Table A13.1: Projected Tariffs and Cost Recovery Level Item 2012 2013 2014 2015 2016 2017 2018 2019 2020 Zhengding : Average SWM tariff CNY/household/month 1.10 1.21 1.33 1.46 1.61 1.77 1.95 2.14 2.36 Cost recovery (%) 98.00 104.00 107.00 110.00 113.00 116.00 118.00 120.00 121.00 Zhaoxian: Average SWM tariff CNY/household/month 1.44 1.49 1.53 1.58 1.62 1.67 1.72 1.77 1.83 Cost recovery (%) 92.00 93.00 94.00 95.00 96.00 101.00 106.00 111.00 116.00 Average heating tariff 9.88 9.88 9.88 9.88 9.88 9.88 9.88 9.88 9.88 CNY/m2/month Cost recovery (%) 91.00 97.00 97.00 109.00 114.00 114.00 117.00 120.00 122.00 Average wastewater tariff CNY/m3 0.50 0.50 0.50 0.52 0.52 0.52 0.52 0.55 0.55 Cost recovery (%) 76.00 97.00 104.00 124.00 124.00 133.00 134.00 141.00 141.00 Bazhou : Average water tariff CNY/m3/month 2.57 2.70 2.70 2.70 2.70 2.70 2.83 2.83 2.83 Cost recovery (%) 118.00 132.00 133.00 134.00 135.00 135.00 152.00 153.00 154.00 m2 = square meter, m3 = cubic meter. Source: Asian Development Bank estimates.

Table A13.2: Affordability of Projected Tariffs Item 2012 2013 2014 2015 2016 2017 2018 2019 2020 Zhengding Average monthly 3,699.00 3,884.00 4,078.00 4,282.00 4,496.00 4,721.00 4,957.00 5,205.00 5,465.00 household income Average monthly poor 628.00 659.00 692.00 727.00 763.00 802.00 842.00 884.00 928.00 household income Monthly household expenditure on solid 1.10 1.20 1.30 1.50 1.60 1.80 1.90 2.10 2.40 waste Monthly household expenditure on solid 0.03 0.03 0.03 0.03 0.04 0.04 0.04 0.04 0.04 waste (% of average income) Monthly household expenditure on solid 0.18 0.18 0.19 0.20 0.21 0.22 0.23 0.24 0.25 waste (% of poor household income) Zhaoxian Heating component Average monthly 3,699.00 3,884.00 4,078.00 4,282.00 4,496.00 4,721.00 4,957.00 5,205.00 5,465.00 household income

4 The ADB loan, which covers capital works, will be paid by public enterprises and local governments that will assume liability related thereto and will be responsible for ensuring that the capital assets of the Project are given proper and adequate maintenance.

56 Appendix 13

Item 2012 2013 2014 2015 2016 2017 2018 2019 2020 Average monthly poor 628.00 659.00 692.00 727.00 763.00 802.00 842.00 884.00 928.00 household income Monthly household 117.00 117.00 117.00 117.00 117.00 117.00 117.00 117.00 117.00 expenditure on heating Monthly household expenditure on heating 3.20 3.00 2.90 2.70 2.60 2.50 2.40 2.20 2.10 (% of average monthly income) Total household expenditure on heating 44.00 44.00 44.00 44.00 44.00 44.00 44.00 44.00 44.00 of poor household Total household expenditure on heating 7.00 6.60 6.35 6.00 5.70 5.50 5.20 5.00 4.70 (% of poor household monthly income) Solid waste and wastewater components Total monthly household expenditure on solid 6.30 6.30 6.60 6.70 6.70 6.80 7.10 7.10 7.20 waste and wastewater Total monthly household expenditure on solid 0.20 0.20 0.20 0.20 0.10 0.10 0.10 0.10 0.10 waste and wastewater (% of average income) Total monthly expenditure on solid 1.00 1.00 1.00 0.90 0.90 0.80 0.80 0.80 0.80 waste and wastewater of poor household Bazhou Average monthly 2,022.00 2,123.00 2,230.00 2,341.00 2,458.00 2,581.00 2,710.00 2,846.00 2,988.00 household income Average monthly poor 528.00 554.00 582.00 611.00 642.00 674.00 707.00 743.00 780.00 household income Monthly household 16.00 20.00 20.00 21.00 21.00 21.00 21.00 21.00 22.00 expenditure on water Monthly household expenditure on water 0.80 0.90 0.90 0.90 0.80 0.80 0.80 0.70 0.70 (% of average income) Monthly household expenditure on water 3.00 4.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 (% of poor household income) Source: Asian Development Bank estimates.

6. Results. The FIRR and financial net present value (FNPV) were computed for all revenue- generating components at November 2008 prices. The FIRR is compared with the WACC to ascertain financial viability. The post-tax WACC in real terms is 1.0%–1.2%. Current tariffs are sufficient to recover operating and capital costs. There is limited risk of downward revision since proposed tariffs have already been approved through public hearings held by subproject counties. The Project is most sensitive to implementation delays associated with corresponding cost increases.

7. Water Supply. The current domestic water tariff in Shengfang Town is CNY1.80/m3 for domestic users, with industries charged CNY3.70/m3 and other users charged CNY2.80/m3. The weighted average tariff in 2008 is CNY2.6/m3. The component is expected to reach 100% cost recovery in 2012 and is financially viable with an FIRR of 5.3% and FNPV of CNY41.7 million.

Appendix 13 57

8. Wastewater. The current wastewater tariff for domestic users in Zhaoxian is CNY0.25/m3 and, for industries, CNY0.42/m3. The Zhaoxian wastewater treatment component has an average tariff of CNY0.4/m3 and 69% cost recovery at the start of operations in 2012. The FIRR is 8.7% and FNPV is CNY97.9 million, both below the WACC of 1.0%.

9. Heating. The current heating tariff in Zhaoxian is CNY9.88/m2 of built area per month in winter, which results in 91% cost recovery in 2012 and is expected to achieve full cost recovery with higher capacity utilization. The FIRR is 9.7%, which compares favorably with the WACC of 1.0%, and the FNPV is CNY185.6 million, substantiating the financial viability of the Project.

10. Solid Waste Management. In Zhaoxian, the SWM tariff is CNY1.44/household/month. The tariffs collected at present are not sufficient to cover the cost of collection, transfer, treatment, and disposal of waste. Additional revenues will come from recycling and processing compost fertilizer. The Zhaoxian SWM component has, with 100,000 m3 capacity, an FIRR of 8.8% and a FNPV of CNY57 million and is financially viable because of sales of compost fertilizer. In Zhengding, the SWM tariff is CNY1.1/household/month. Recycling and processing compost fertilizer will generate income that will cover the cost of operations and investment requirements. The Zhengding comprehensive SWM processing facility has an FIRR of 8.7%, which compares favorably with the WACC of 1.1% and a FNPV of CNY135.3 million.

Table A13.3: Financial Internal Rate of Return and Sensitivity Analyses Case 1: Costs Case 2: Revenues Base Case Plus 10% Less 10% Case 3: Cases 1 and 2 FIRR NPV FIRR NPV FIRR NPV FIRR NPV Component (%) (CNY million) (%) (CNY million) (%) (CNY million) (%) (CNY million) Zhengding Solid Waste 8.7 135.3 7.8 126.4 4.0 51.5 2.9 31.1 Zhaoxian Solid waste 8.8 57.0 7.9 53.2 4.1 24.1 3.5 20.3 Wastewater 8.7 97.9 7.7 91.3 5.8 75.5 5.0 68.6 Heating 9.7 185.6 8.6 163.4 4.9 79.2 3.7 53.6 Bazhou Shengfang Water Supply 5.3 41.7 4.4 35.2 3.1 19.2 2.4 12.8 FIRR = financial internal rate of return, NPV = net present value. Source: Asian Development Bank estimates.

11. Financial Projections, Entity Level. Financial projections were carried out to ensure that the entities entrusted with operating revenue-generating components are financially viable. In Bazhou, the Shengfang water supply company will operate the water supply component, and the Bazhou City Urban Construction and Development Company Limited will operate the river improvement and sewerage component. The Zhaoxian Urban Investment and Development Company will operate the wastewater treatment plant phase II, district heating component, and solid waste processing facility. The Zhengding County Solid Waste Treatment Company will operate the solid waste recycling and composting facility. Table A13.4 summarizes the financial ratios of the subprojects.

Table A13.4: Key Financial Indicators Component Item 2012 2015 2017 2020 2025 Zhengding Solid Waste Operating ratio (%) 26.0 21.0 19.0 17.0 16.0 DSR 2.7 2.4 3.5 4.8 7.6 Current ratio 3.5 4.6 6.3 10.1 17.1 Zhaoxian Solid Waste Operating ratio (%) 21.0 21.0 20.0 19.0 19.0 DSR 1.1 1.2 1.2 2.7 6.5

58 Appendix 13

Component Item 2012 2015 2017 2020 2025 Current ratio 16.9 7.1 6.9 9.1 19.6 Wastewater Operating ratio (%) 65.0 33.0 31.0 31.0 31.0 DSR 2.1 2.1 2.2 2.6 3.2 Current ratio 11.7 3.8 6.1 10.6 19.3 Heating Operating ratio (%) 22.0 23.0 17.0 17.0 15.0 DSR 1.5 1.8 2.5 4.8 7.2 Current ratio 13.8 8.1 9.8 12.1 20.6 Bazhou Shengfang Water Supply Operating ratio (%) 39.0 39.0 35.0 35.0 32.0 DSR 3.0 3.0 1.8 1.9 2.5 Current ratio 3.1 15.0 6.6 10.3 16.7 DSR = debt service coverage ratio. Notes: 1. Operating ratio = total operating expenses including depreciation, over operating revenues. 2. Debt service coverage ratio = estimated cash revenues less cash expenses over debt service requirements. 3. Current ratio = current assets over current liabilities. Source: Asian Development Bank estimates.

B. Financial Analysis of Nonrevenue Component

12. Financial analysis of river improvement was carried out to ensure its fiscal sustainability by analyzing county government finances. The county governments receive taxes, nontax income, shared revenues with the central Government, and transfers and subsidies from the central Government. In recent years, county governments have become more reliant on the central Government as the internally generated share of their total revenues has decreased. County expenditures increased on average by 25%–30% annually, financed by internal sources and transfers from the central Government for major infrastructure investments. The counterpart fund requirement for project implementation comprises about 10% of income in the subproject cities, and the county and city governments have earmarked funds for each subproject. The county governments will ultimately be responsible for debt service. Debt service and O&M amounted to about 2% of total expenditures in each subproject city or county.

C. Financial Management Assessment

13. The financial management assessment was carried out in accordance with Guidelines for the Financial Governance and Management of Investment Projects Financed by ADB5 using the financial management assessment questionnaire for the Executing Agency and all the implementing agencies (IAs) and operating companies. Financial statements need to be improved by including explanatory notes, and in the case of companies a cash flow statement should be included. Budgets need to be used as a tool to regularly monitor progress and highlight variances to management so that timely corrective action can be taken. Auditing needs substantial improvement in most organizations and external audit needs to be carried out by the Audit Bureau on a regular basis. Further, the audit is in the form of compliance with local regulations rather than assessing the accounting system, which is essential to ensure the quality of the financial statements produced. Internal audit needs to be undertaken to highlight any systemic weaknesses and ensure that transactions audit will be undertaken by an independent auditor firm. It was observed that many operating companies still use manual accounting systems. Computerization should be actively pursued, and off-the-shelf accounting packages should be installed in the agencies concerned. Since many, if not all, of the IAs and operating companies have not implemented an ADB project, training in ADB financial management and disbursement procedures will be provided to all finance staff.

5 ADB. 2001. Guidelines for the Financial Governance and Management of Investment Projects Financed by the Asian Development Bank. Manila.

Appendix 14 59

ECONOMIC ANALYSIS

A. Introduction

1. The economic analysis of the Hebei Small Cities and Towns Development Demonstration Sector Project (the Project) covers three core subprojects, which have a total of six subproject components. For the overall Project, including subsequent subprojects yet to be selected, the analysis covers the (i) economic rationale for public intervention, (ii) basis for selecting subprojects and components, and (iii) goals and design of the Project. The economic analysis also evaluates the components through least-cost analysis and benefit–cost analysis. Economic analysis was conducted in accordance with the Asian Development Bank (ADB) Guidelines for the Economic Analysis of Projects1 and Economic Analysis Retrospective 2005: Strengthening Quality-at-Entry of ADB Operations.2

B. Economic Rationale

2. Rationale for Public Intervention. The development of Hebei Province is anchored on the 11th Five-Year Plan (FYP) of the Government of the People’s Republic of China (PRC), which emphasizes the potential of small cities and towns to provide a higher standard of living to rural migrants without exacerbating infrastructure fatigue and other problems afflicting large cities. Small cities and towns in Hebei Province face challenges similar to those of other northern PRC provinces. In some towns, industrial development has outstripped infrastructure provision, causing environmental degradation and suboptimal conditions for business development. In other towns, the challenge remains to attract substantial investment that will provide employment opportunities to current residents and future migrants.

3. Hebei’s policy for developing its small cities and towns mirrors the national policy. Hebei’s Social and Economic Development 11th FYP calls for the development of a more balanced urban system through the growth of medium-sized cities that can serve as economic centers for surrounding towns. The Hebei Urbanization 11th FYP identifies a major urban development axis linking Shijiazhuang to the northeast with Tangshan. Handan and Baoding are also identified as growth poles. The growth of each of these medium-sized cities is designed to increase their economic weight and enable them to develop beneficial upstream economic linkages with smaller cities and towns in their hinterlands. County-level cities and towns, in turn, are expected to enhance their economic relationship with rural areas that depend primarily on agriculture. In this respect, town and county-level city development contributes directly to the provincial objective of promoting integrated development of rural and urban areas. To promote quality standards in urban services, the Hebei Urban Construction 11th FYP emphasizes the need for more efficient delivery of urban services. Ranked 11th among 31 provinces in gross domestic product per capita, Hebei faces a challenge to develop small cities and towns in a way that combines urban growth management with the promotion of economic development.

4. The proposed ADB financing offers cities and towns in the poorer counties of Hebei to the north and west of Beijing the opportunity to develop their infrastructure to enable investments in natural resource processing, manufacturing, and services. Other towns that have already achieved high economic growth rates, such as those located along the Shijiazhuang–Tangshan development axis, can improve living conditions by investing in urban environmental infrastructure to be financed under the proposed Project.

1 ADB. 1997. Guidelines for the Economic Analysis of Projects. Manila. 2 ADB. 2006. Economic Analysis Retrospective 2005: Strengthening Quality-at-Entry of ADB Operations. Manila.

60 Appendix 14

5. The Project involves government intervention at several levels. The Hebei provincial government (HPG) promotes development in cities and towns in a more coordinated and cost- effective manner by bringing about more sustainable investments in physical and environmental protection infrastructure that aims to improve the quality of life. The involvement of HPG is justified since the development program spans several small cities and towns. Municipal governments coordinate and implement the elements of the master plans and make individual investments in water supply, wastewater and solid waste management, and district heating works, and they will be involved in owning and managing some of the completed facilities. The economic rationale is sound, based on managing such natural monopolies as water supply, wastewater and waste management, and heating exchange. Limited opportunities to generate revenues in the case of solid waste management and urban environmental improvement make it difficult for the private sector to invest in the proposed urban improvements. Also, existing tariffs provide a low base from which to adjust tariffs to levels that could cover costs and make them attractive to the private sector. Negative externalities associated with the unplanned disposal of solid waste and wastewater provides additional justification for public sector investments.

C. Selection of Subprojects and Core Components

6. The selection of the three core subprojects was based on socioeconomic indicators and their level of preparedness to undertake investments in municipal infrastructure. The core subprojects are in Bazhou City, Zhaoxian County, and Zhengding County. These areas are currently urbanized below the Hebei average, which is 30%. Among the considerations in the selection of subprojects is the availability of viable investment projects that directly support approved development master plans and programs and have the potential to serve as models in the preparation of subsequent components during Project implementation. Targeting and selecting subsequent key subproject cities and towns will be based on, among other factors, their potential to grow economically and provide jobs to migrants from rural areas. Employment growth is deemed to contribute more toward the Government’s goal of closing the rural–urban income gap than does the growth of economic production. The core subprojects focus on the development of citywide primary and secondary infrastructure, with emphasis on environmental infrastructure. Five of the six components identified (water supply, wastewater collection and treatment, solid waste management, and river improvement) involve urban environmental infrastructure.

7. Key urbanization issues are (i) the inadequate availability of water supply, heat supply, and wastewater and solid waste treatment; (ii) severe air, river, and groundwater pollution; (iii) a significant share of the urban population living under the poverty line; and (iv) the lack of holistic and integrated management of urban development. The Project aims to address these issues in the participating cities to help promote balanced and environmentally sustainable urbanization; narrow the rural-urban income gap; and improve production, employment, and living conditions.

8. Goals and Design of the Project. The Project is a direct response to HPG’s 11th FYP to promote sustainable economic development, particularly in its small cities and towns, by constructing and upgrading infrastructure while protecting the environment. The 11th FYP recognizes that achieving these goals will require improved basic municipal services and environmental quality in these areas. All subproject components in the proposed Project are an integral component in the 11th FYP. Small city and town governments are required to make investments in water supply, wastewater management, district heating, river improvement, and solid waste management. The city and county government master plans are reasonably sound and integrated with the overall planning process.

Appendix 14 61

D. Demand Analysis

9. Demand forecasts were reviewed for the water supply, wastewater, solid waste, and heating subcomponents. For the river improvement component, least-cost analysis was undertaken.

10. For the Shengfang water supply component, water demand in 2015 was estimated at 40,000 cubic meters per day (m3/d) and would service residents in the existing town and those in the expansion area in the northeast of the town. The Project is designed for a capacity of 20,000 m3/d to supplement the existing plant capacity of 20,000 m3/d, bringing total capacity to 40,000 m3/d. This component is estimated to serve a population of about 214,000, or 61,000 households.

11. For the Zhaoxian heating component, the total heating area is projected at 4,130,000 square meters (m2) in 2010 and 9,060,000 m2 in 2020. Zhaoxian County has a population of 117,2003 and is projected to increase to 145,000 in 2010 and 190,000 in 2020. The Project will increase centralized heating coverage from 14% to 80% by rehabilitating and expanding the existing heating system. It is expected that, after the completion of the project, heating supply capacity will reach 387 MW, providing heating to 3.0 million m2 in 2010 and 7.3 million m2 in 2020.

12. For Zhaoxian solid waste management, total waste generation is projected to increase from 195 tons per day (t/d) in 2010 to 258 t/d in 2020. The subproject is expected to increase waste collection coverage to 100% in 2015 from 60% at present. The population of Zhaoxian County is growing quickly at 5% annually, and growth was assumed at 5% for 2006–2010 and 3% for 2011– 2020. Waste generated per capita was based on a study of garbage output of 500 small cities in the PRC.

13. For the Zhaoxian wastewater component, the total volume of wastewater generated is estimated to be 100,000 m3/d in 2015, with industrial wastewater accounting for 12% of the total. This is based on a projected population of 150,000, with 160 liters per capita per day consumption and a return rate of 80% for domestic wastewater, and 3.18 square kilometers of industrial land with demand of 3.5 m3 per kilometer per day. The proposed plant would have a design capacity of 50,000 m3/d to supplement the existing plant capacity of 50,000 m3/d, bringing total capacity to 100,000 m3/d.

14. For the Zhengding solid waste component, the current population growth rate of Zhengding County of 6% was assumed to continue in 2006–2010 and then decrease to 3% in 2011–2020. The estimated waste generated per capita was based on a study of garbage output of 500 small cities in the PRC starting at 1.3 tons per capita per day. Total waste generation in Zhengding is projected to increase from 378 t/d in 2010 to 512 t/d in 2020. The proposed solid waste treatment plant capacity is 600 t/d. Households are projected to generate 500 tons, while industries will generate 100 tons. The waste characterization study indicates that 54% of total weight is made up of organic wastes and another 10% is recyclable. Thus, it is projected that in 2010 about 242 t/d, and in 2020 about 328 t/d, of household waste will be processed, and residual waste will be disposed of in the sanitary landfill. The proposed plant will have an annual production of 39,900 tons of compost fertilizer, 5,050 tons of recycled plastics, 860 tons of recycled glass, and 560 tons of recycled metals.

3 Heat Supply Project Plan for Urban Districts of Zhao County (2007–2020).

62 Appendix 14

E. Evaluation of Individual Components

15. The methods of economic analysis adopted are benefit–cost analysis (BCA) and least-cost analysis (LCA). BCA was applied mainly to the revenue-generating components of the Project such as water supply, wastewater management, solid waste management, and heating, while LCA was applied to the river upgrading component, which generates no revenues. For BCA, estimates of economic benefits were based on regression outputs from the contingent valuation survey results conducted in selected pilot areas, and for similar components the regression results were applied using area-specific socioeconomic data such as income, education, age, and gender. The contingent valuation survey aimed to elicit beneficiaries’ willingness to pay for improved services resulting from the Project. The survey was conducted in Zhaoxian County covering both wastewater and solid waste components.

16. The economic analysis of each component was conducted over 25 years including the construction period. Economic benefits and costs are denominated in local currency and expressed in November 2008 prices. In estimating the economic investment cost, the tradable components were adjusted using a shadow exchange rate factor of 1.08, and non-tradable components were valued at domestic market prices. A shadow wage rate of 0.50 was applied on unskilled labor to reflect underemployment.4

17. Major economic benefits that were quantified for each component include (i) resource cost savings; (ii) environmental benefits for district heating; and (iii) willingness to pay for the wastewater, water supply, and solid waste components. The economic costs include (i) capital cost, including land acquisition and resettlement, and environmental mitigation and monitoring costs and (ii) the costs of operation and maintenance. Land acquisition and resettlement costs were estimated based on their opportunity costs—that is, the agricultural output foregone and the re-siting of displaced activities when necessary.5 Physical contingencies and initial working capital were included. Transfer payments such as taxes and import duties were excluded in estimating the economic costs.

18. For the BCA, a discounted cash flow analysis was applied with the feasibility indicators expressed in the following measures of viability: net present value (NPV) and economic internal rate of return (EIRR) assuming a discount rate of 12%. The EIRRs were estimated by comparing scenarios with and without the component. A core subproject component is considered economically viable if the calculated EIRR is higher than 12%, the social discount rate prescribed by ADB. The EIRR for each component was tested for responsiveness to changes in the values of key project variables using sensitivity analysis calculating the sensitivity indicator and switching value.

F. Summary of Results of the Economic Analysis

19. The economic analysis shows that the components subjected to BCA are economically viable and stand up to sensitivity tests. The EIRRs and NPVs of the core subprojects, shown in Tables A14.1 and A14.2, are 31% for the Shengfang component, 22% for the Zhaoxian component, and 21% for the Zhengding component.

20. The Shengfang and Zhengding subprojects’ EIRRs are higher than 12%, indicating that the subprojects are economically justified. Sensitivity analysis shows that the EIRR for the Shengfang

4 These assumptions are based on the Guidelines for the Preparation of Feasibility Study of Investment Projects issued by National Development and Reform Commission in 2002. 5 The economic opportunity cost of land will be assumed to be equal to the replacement value of farmland calculated for land compensation.

Appendix 14 63 water supply component is most sensitive to a change in willingness to pay, as estimated in the contingent valuation survey. The Zhengding subproject is most sensitive to both an decrease in benefits and an increase in costs.

Table A14.1: Results of Shengfang and Zhengding Subprojects Shengfang Water Supply Zhengding Solid Waste

EIRR NPV SI SV EIRR NPV SI SV Item (%) (CNY million) (%) (%) (%) (CNY million) (%) (%) Base case 30.9 96.7 20.8 38.9 Case 1: 10% increase in costs 28.3 89.2 0.8 130.1 15.2 14.8 6.2 16.1 Case 2: 10% decrease in benefits 28.1 79.6 1.8 56.5 14.6 10.9 7.2 13.9 Case 3: Case 1 and 2 25.7 72.1 1.0 100.0 13.2 5.2 8.7 11.5 Case 4: 1 year delay in implementation 28.6 89.8 0.6 165.2 17.6 27.8 2.2 45.5 EIRR = economic internal rate of return, NPV = net present value, SI = sensitivity indicator, SV = switching value. Source: Asian Development Bank.

21. The Zhaoxian components' EIRRs are higher than 12%, indicating that the Zhaoxian subproject is economically justified. Table A14.2 shows the results of the base case and sensitivity tests. The Zhaoxian components are more sensitive to a decline in benefits than to an increase in costs; the wastewater and solid waste components are most sensitive to reduced willingness to pay, based on the contingent valuation survey. Under a scenario of a 50% decrease in willingness to pay, the sensitivity indicator for NPV for wastewater is approximately 2% and the switching value is 38%. For the solid waste management component, on the other hand, a 50% decrease in willingness to pay will render the component economically unviable.

Table A14.2: Results of Zhaoxian Subprojects District Heating Solid Waste Management Wastewater Treatment Plant Item NPV NPV NPV EIRR (CNY EIRR (CNY EIRR (CNY (%) million) SI SV (%) million) SI SV (%) million) SI SV Base case 20.2 38.9 19.8 23.4 26.9 57.4 Case 1: 10% increase in costs 18.4 32.6 1.6 61.1 18.0 19.5 1.7 60.3 23.6 47.8 1.7 59.9 Case 2: 10% decrease in benefits 15.0 12.5 6.8 14.7 13.9 5.3 7.7 12.9 23.3 42.0 2.7 37.5 Case 3: Case 1 and 2 13.4 6.2 8.4 11.9 12.5 1.4 9.4 10.6 20.2 32.5 1.0 100.0 Case 4: 1-year delay in implementation 17.1 26.8 2.4 42.0 16.9 16.2 2.4 42.3 22.6 45.8 1.7 57.7 EIRR = economic internal rate of return, NPV = net present value, SI = sensitivity indicator, SV = switching value. Note: Contingent valuation survey (to measure willingness-to-pay) was not conducted for district heating component. Source: Asian Development Bank.

22. The results of the economic analysis demonstrate the economic viability of the three components and their respective subcomponents. Economic sustainability is nonetheless subject to the implementation of required assurances, where identified as necessary, and managing the risks attendant to the variables to which economic viability is found to be most sensitive.