Technical Assistance Report Project Number: 50343-001 Transaction Technical Assistance Facility (F-TRTA) April 2017 People’s Republic of China: Preparing Yangtze River Economic Belt Projects Cofinanced by the Climate Change Fund and the Multi-Donor Trust Fund under the Water Financing Partnership Facility ThisThe viewsdocument expressed is hereinbeing are disclosedthose of the toconsultant the public and do innot necessarilyaccordance represent with ADB’sthose of ADB’sPublic Communicationsmembers, Board of Policy Directors, 2011. Management, or staff, and may be preliminary in nature. CURRENCY EQUIVALENTS (as of 11 April 2017) Currency unit – Yuan (CNY) CNY1.00 = $0.1448 $1.00 = CNY6.9056 ABBREVIATIONS ADB – Asian Development Bank PRC – People’s Republic of China TA – technical assistance YREB – Yangtze River Economic Belt NOTE In this report, "$" refers to US dollars. Vice-President S. Groff, Operations 2 Director General A. Konishi, East Asia Department (EARD) Director Q. Zhang, Environment, Natural Resources and Agriculture Division, EARD Team leader S. Robertson, Natural Resources and Agriculture Specialist, EARD Team members M. Ancora, Climate Change Specialist, EARD E. Arcillas, Senior Operations Assistant, EARD F. Connell, Principal Counsel, Office of the General Counsel M. de Lijster, Senior Water Resources Specialist, Sustainable Development and Climate Change H. Ikemoto, Principal Planning and Policy Economist, Strategy, Policy and Review Department A. Lopez, Senior Natural Resources and Agriculture Specialist, EARD R. Osti, Water Resources Specialist, EARD F. Radstake, Principal Environment Specialist, EARD T. Ueda, Senior Natural Resources Economist, EARD Y. Zhou, Senior Water Resources Specialist, 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 TRANSACTION TECHNICAL ASSISTANCE FACILITY AT A GLANCE I. THE TECHNICAL ASSISTANCE FACILITY 1 A. Analysis on Key Issues 1 B. Program of Ensuing Projects 2 C. Transaction Technical Assistance Facility’s Roles and Justifications 3 D. Overall Outcome and Outputs 4 E. Overall Cost and Financing 5 F. Overall Implementation Arrangements 5 II. THE PRESIDENT'S DECISION 6 APPENDIXES 1. Cost Estimates and Financing Plan 7 2. Projects under Technical Assistance Facility 8 3. Outline of Consulting Service Requirements 9 I. THE TRANSACTION TECHNICAL ASSISTANCE FACILITY A. Analysis on Key Issues 1. Background. The Yangtze River is the People’s Republic of China’s (PRC's) longest river. The region covers more than 2 million square kilometers, one-fifth of the country geographically, and accounts for over 40% of PRC's total population and about 45% of the gross domestic product. The Yangtze River, one of the busiest inland rivers for freight traffic worldwide, is home to the largest hydropower plant in the world and is the source of water for the South–North water transfer project. Nine provinces and two specially-administered cities make up the Yangtze River Economic Belt (YREB) subregion, which includes three major urban agglomeration areas: (i) the Yangtze River Delta Global Mega Agglomeration focused on Shanghai, (ii) the Middle Yangtze City cluster focused on Wuhan, and (iii) the Yangtze Upper Reaches focused on Chongqing. Due to its geographical and demographical advantages, the PRC Government has identified the YREB as one of the three key ‘growth engines’ to ensure PRC’s future economic development. 2. However, environmental concerns are increasing. Pollution of the Yangtze River has reached its highest levels which has severely reduced drinking water quality, posed health risks, caused loss of biodiversity, hazardous chemical accumulation in organisms in the food chain, and increased eutrophication. Pollutants range from suspended substances, oxidizing organic and inorganic compounds, and ammonia nitrogen which result from discharge from industrial solid and chemical waste, domestic solid waste and sewage, shipping discharges, and agricultural runoff. The impact of this pollution is exacerbated in smaller lakes and tributaries off the main Yangtze River stem where shallow and slower flowing water leads to worse eutrophication and high concentrations of the pollutants. In addition, possible riverbank collapses and landslides as a result of damming, flooding, changes in land use, and deforestation add even more stress to the water quality of the Yangtze River.1 3. Climate projections show an increase in flooding hazards in most humid-affected Asian monsoon regions, including the Yangtze River Basin due to increase in high intensity precipitation.2 Asian Development Bank (ADB) identified the upper region of the Yangtze River as one of three PRC regions particularly prone to climate-induced migration, due to loss of livelihoods and livelihood opportunities caused by a loss of and degraded natural resources.3 4. Development constraints. Economic development in the YREB is considered below its potential capacity. This is due to (i) limited overall institutional coordination for strategic planning for the YREB; (ii) significant regional disparity between the highly-developed global agglomeration region of the Yangtze River Delta and the subregions of the middle and upper reaches of the YREB with the latter two lagging behind in economic diversification and industrial modernization; (iii) limited integration of waterways, ports, and intermodal logistics; and (iv) increasing environmental pollution and pressure on natural resources. 1 ADB. 2016. Yangtze River Economic Belt (YREB) Environmental Protection and Rehabilitation Project—A Preliminary Study. Consultant’s report. Manila (TA 9044-PRC). 2 ADB. (forthcoming). Avoiding the Unmanageable and Managing the Unavoidable—Climate Change in the Asia- Pacific Region. Manila 3 Climate induced migration is the migration as people who are obliged or choose to leave home due to sudden or progressive environmental changes that adversely affect their lives. ADB. 2012. Addressing Climate Change and Mitigation in Asia and the Pacific. Manila. 2 5. Government’s strategy. In line with the circular economy approach to reduce resource inputs, waste outputs, and pollution control, in April 2014, the State Council issued guidelines to stimulate economic development of the Yangtze River Basin, while at the same time promote sustainable natural resource use and protection and apply stricter control over pollution along the river. Key features of the guidelines included the enhancement of the services industry, green energy, and modern agriculture, with coordinated urbanization within the region, including in the Yangtze middle-reach city cluster, Chengdu-Chongqing city cluster and in Guizhou and Yunnan provinces. In addition, the government also noted the need to better coordinate, integrate, and implement development approaches among the provinces, including a need for improved coordination, cooperation, and connectivity from the upper to lower reaches.4 6. The National Development and Reform Commission subsequently prepared the YREB Development Plan 2016–2030, which focuses on green development to transform economic activities involving the Yangtze River subregion to protect and rehabilitate the environment.5 The YREB Development Plan aims to strengthen access to regions along the upper and middle reaches of the Yangtze to boost growth by promoting green development in inland regions to reduce the regional development gap between the eastern, central, and western YREB subregion. The plan sets an ambitious target that the country will significantly improve the environmental quality of Yangtze River by 2020, with over 75% of the region's water meeting Grade III standard or above and forest coverage to reach 43%. 6 The plan has three key initiatives: (i) promote environmental protection, rehabilitation, and management of water resources; (ii) strengthen green and inclusive industrial transformation; and (iii) improve multimodal transport corridor and logistics. 7. Lessons learned. ADB’s past assistance to the YREB has been multisectoral investing over $10 billion from 2000 to 2015. In addition to lending support, ADB has been supporting high-level forums and policy dialogues to support watershed management, poverty alleviation, and ecological and environmental protection of the Yangtze River, to help guide potential investment in green development and environmental protection for the YREB. Lessons learned from previous support in the YREB indicate that many projects are still seen as stand-alone interventions, with still limited linkages to other similar interventions. Also, the PRC country assistance program evaluation for 2006–2013 stated that the lack of continuity made it difficult for loan project clients to internalize good international practices. 7 It recommended that, in consultation with the government, ADB could identify certain well-defined areas where it can make visible contributions to the government’s programs. Moreover, it suggested to vastly increase support for addressing climate change and protection of the environment. B. Program of Ensuing Projects 8. Programmatic approach to green development. In line with these lessons, the government emphasized the need for ADB support through a strategic framework approach that would coordinate and create synergy between investment