Report and Recommendation of the President to the Board of Directors Sri Lanka Project Number: 36437 June 2008 Proposed Loan People’s Republic of China: Integrated Ecosystem and Water Resources Management in the Baiyangdian Basin Project CURRENCY EQUIVALENTS (as of 15 May 2008) Currency Unit – yuan (CNY) CNY1.00 = $0.14285 $1.00 = CNY7.00 ABBREVIATIONS ADB – Asian Development Bank AP – affected person APCF – Asia Pacific Carbon Fund BDRC – Baoding Development and Reform Commission BMG – Baoding municipal government CED – clean energy development CO2 – carbon dioxide COD – chemical oxygen demand EIA – environmental impact assessment EIRR – economic internal rate of return EMP – environmental management plan FIRR – financial internal rate of return FYP – five-year plan FYEPP – Five-Year Environmental Protection Plan GEF – Global Environment Facility GIS – geographic information system IA – implementing agency ICB – international competitive bidding IWM – integrated water management LIBOR – London interbank offered rate m3 – cubic meter MDG – Millennium Development Goal PIU – project implementation unit PMO – project management office PNR – Provincial Nature Reserve PPMS – project performance management system PPTA – project preparatory technical assistance PRC – People’s Republic of China RP – resettlement plan SEIA – summary environmental impact assessment SO2 – sulphur dioxide SWM – solid waste management TSP – total suspended particles UFM – urban flood management UNDP – United Nations Development Programme WACC – weighted average cost of capital WSS – water supply system WTP – wastewater treatment plant NOTES (i) The fiscal year (FY) of the Government and its agencies ends on 31 December. (ii) In this report, "$" refers to US dollars. Vice President C. Lawrence Greenwood, Jr., Operations 2 Director General K. Gerhaeusser, Officer-in-Charge, East Asia Department (EARD) Director K. Kannan, Agriculture, Environment, and Natural Resources Division, EARD Team leader A. Siddiq, Principal Natural Resources Economist, EARD Team members A. Djusupbekova, Senior Counsel, Office of the General Counsel S. Ferguson, Senior Social Development Specialist (Resettlement), EARD T. Kadono, Young Professional, Central and West Asia Department T. Kubo, Clean Energy and Climate Change Specialist, Regional and Sustainable Development Department (RSDD) F. Tornieri, Social Development Specialist, RSDD Q. Zhang, Senior Water Resources Engineer, EARD Y. Zhou, Water Resources Management Specialist, EARD CONTENTS Page LOAN AND PROJECT SUMMARY i MAPS 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 2 III. THE PROPOSED PROJECT 6 A. Impact and Outcome 6 B. Outputs 6 C. Special Features 10 D. Project Investment Plan 11 E. Financing Plan 12 F. Implementation Arrangements 13 IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 17 A. Benefits and Impacts 17 B. Social Dimensions 20 V. ASSURANCES AND CONDITION 21 A. Funding from Global Environment Facility 22 B. Land Acquisition and Involuntary Resettlement 22 C. Environment 22 D. Capacity Building 23 E. Condition for Loan Disbursement 23 VI. RECOMMENDATION 23 APPENDIXES 1. Design and Monitoring Framework 24 2. Problem Tree Analysis 27 3. Sector Analysis 28 4. External Assistance 32 5. List of Subprojects 33 6. Biodiversity Conservation Activities 34 7. Terms of Reference for Consulting Services 36 8. Detailed Cost Estimates by Financiers 44 9. Project Organization Chart and Fund Flow 45 10. Project Implementation Schedule 46 11. Procurement Plan 47 12. Financial and Economic Analyses of the Project 49 13. Summary Poverty Reduction and Social Strategy 56 14. Gender and Social Action Plan 60 15. Summary Resettlement Plan 61 SUPPLEMENTARY APPENDIXES (available on request) A. Clean Development Mechanism: Project Design Document B. Biodiversity and Ecosystem Management: Global Environment Facility Proposal C. Institutional Assessment and Training Program D. Detailed Project Cost and Financing Plan E. Project Management Structure and Terms of Reference F. Institutional Assessment G. Resettlement Implementation Plan H. Summary Environmental Impact Assessment I. Detailed Financial and Economic Analyses J. Participation and Social Action Plans LOAN AND PROJECT SUMMARY Borrower People’s Republic of China Classification Targeting classification: General intervention Sectors: Water supply, sanitation, and waste management; agriculture and natural resources; energy Subsectors: Environment and biodiversity; water supply and sanitation; waste management Themes: Environmental sustainability; inclusive social development; capacity development Subthemes: Natural resources conservation; human development; institutional development Environmental Category A. An environmental impact assessment (EIA) was Assessment undertaken. The summary environmental impact assessment was circulated to the Board of Directors of the Asian Development Bank (ADB) and uploaded on the ADB website on 1 June 2007. Project Description The Project will demonstrate an innovative integrated ecosystem and water resources management approach to improve the environmental conditions in Baiyangdian Basin. It will focus on the critical needs to conserve Baiyangdian Lake—one of the most important and vulnerable ecosystems in the People’s Republic of China (PRC). The Project also fits well with an umbrella program for biodiversity conservation currently being formulated by the PRC. The infrastructure interventions of the Project are designed primarily to improve waste management, reduce water and air pollution, provide clean energy, and improve the reliability of water supplies for communities in the basin, while the Global Environment Facility (GEF) component will complement these improvements by raising awareness and promoting the involvement of local communities in management of natural resources. Project activities are aimed at promoting sustainable ecosystem and water resources management with emphasis on biodiversity conservation, urban development, and rural livelihood programs. The Project comprises four components: (i) subproject investments— 22 subprojects of seven different categories (13 wastewater treatment plants (WTPs); 3 water supply systems (WSSs); 2 reforestation; and one each for urban flood management [UFM], integrated water management [IWM], solid waste management [SWM]), and clean energy development [CED]; (ii) biodiversity conservation to support the proposed GEF-financed activities; (iii) institutional strengthening through a range of activities; and (iv) project management support. The Project will also promote integrated mechanisms to strengthen coordination among line agencies that have management responsibilities in the basin. ii Rationale The Project complements the initiatives of the Baiyangdian Ecosystem Rehabilitation Master Plan (2005–2015), which calls for an integrated effort to reduce pollution loads into Baiyangdian Lake and rehabilitate the ecosystem of the basin. As part of the first phase of the Plan, the Project will have a demonstration effect for future undertakings and will enable Baoding municipal government (BMG) achieve, in part, its wastewater management objectives set for 2010, which include attaining class III water quality in Baiyangdian Lake and class IV water quality in urban inland rivers. The Project will also support the 11th Five-Year Plan (FYP), 2006–2010, which includes building a “resource-efficient and environment-friendly society.” As part of the 11th FYP, the IWM (Wangkuai-Xidayang Reservoir link-canal) subproject will ensure adequate water supply to maintain the desired water level in the lake and replenish the aquifer at Yimuquan, a major groundwater supply source for Baoding City. The Project will also contribute to the achievement of Baoding’s 11th Five-Year Environmental Protection Plan, which involves a series of pollution control and ecological rehabilitation programs and includes comprehensive rehabilitation of Baiyangdian Lake Wetland Provincial Nature Reserve; and the comprehensive cleanup of Huanghuagou River dumps that contain solid waste, fly ash, and industrial waste. The Project will also further the objective of the China Biodiversity Partnership Framework, currently being formulated by the United Nations Development Programme with support from GEF. The Framework calls for containing biodiversity loss in nature reserves and mainstreaming biodiversity conservation while pursuing socioeconomic development. The proposed Project also supports ADB’s strategic priorities that also call for promoting sustainable ecosystem and water resources management, with emphasis on biodiversity conservation. Impact and Outcome The impact of the proposed Project is improved quality of life, a sustainable ecosystem, and biodiversity conservation in Baiyangdian Basin. The outcome is integrated ecosystem and water management, and improved environmental conditions in Baiyangdian Basin. Project Investment The investment cost of the Project is estimated at about $273.4 million Plan equivalent, including taxes and duties of $12.6 million and provisions for physical and price contingencies, interest during construction, commitment fee, and spread over an implementation period of 5 years. Financing Plan 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 25-year term