Report and Recommendation of the President to the Board of Directors Sri Lanka Project Number: 40665 November 2008 Proposed Loan People’s Republic of China: Songhua River Basin Water Pollution Control and Management Project CURRENCY EQUIVALENTS (as of 5 November 2008) Currency Unit – yuan (CNY) CNY1.00 = $0.1463 $1.00 = CNY6.836 ABBREVIATIONS ADB – Asian Development Bank BOD – biological oxygen demand EIA – environmental impact assessment EMP – environmental management plan FIRR – financial internal rate of return FYP – five year plan IA – implementing agency HPG – Heilongjiang provincial government HPMO - Heilongjiang project management office JPG – Jilin provincial government JPMO – Jilin project management office JWSSD – Jilin water supply and sewerage development JUEI - Jilin urban environmental improvement LIBOR – London interbank offered rate MEP – Ministry of Environmental Protection O&M – operation and maintenance PLG – project leading group PMO – project management office PPMS – project performance monitoring system PRC – People’s Republic of China SEIA – summary environmental impact assessment SOE – statement of expenditures SRB – Songhua River Basin SRBPCMP – Songhua River Basin Water Pollution Protection and Control Master Plan SWM – solid waste management TA – technical assistance WWTP – wastewater treatment plant WEIGHTS AND MEASURES km – kilometer km2 – square kilometer m2 – square meter m3 – cubic meter m3/day – cubic meter per day NOTES (i) The fiscal year (FY) of the Government ends on 31 December. (ii) In this report, “$” refers to US dollars. Vice-President C. Lawrence Greenwood, Jr., Operations 2 Director General K. Gerhaeusser, East Asia Department (EARD) Director A. Leung, Social Sectors Division, EARD Team leader S. Penjor, Principal Financial Analysis Specialist, EARD Team members F. Asistin, Senior Programs Officer, EARD M. Gupta, Social Development Specialist, EARD C. Navarro, Project Officer, EARD X. Peng, Principal Counsel, Office of the General Counsel S. Popov, Senior Environment Specialist, EARD S. Pu, Investment Specialist, Private Sector Operations Department W. Walker, Social Development Specialist, EARD L. Wang, Programs and Regional Cooperation Officer, 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 3 III. THE PROPOSED PROJECT 8 A Impact and Outcome 8 B. Outputs 8 C. Special Features 9 D. Project Investment Plan 10 E. Financing Plan 10 F. Implementation Arrangements 11 IV. PROJECT BENEFITS, IMPACTS, AND RISKS 16 A. Project Impacts and Benefits 16 B. Social Dimensions 16 C. Financial Aspects 19 D. Economic Aspects 20 E. Environmental Aspects 20 F. Project Risks and Mitigation Measures 21 V. ASSURANCES 21 A. Specific Assurances 21 VI. RECOMMENDATION 22 APPENDIXES 1. Design and Monitoring Framework 23 2. Urban Sector Analysis 27 3. External Assistance 30 4. Detailed Description of Project Components 32 5. Cost Estimates and Financing Plan 36 6. Flow of Funds and Onlending Arrangements 38 7. Implementation Schedule 40 8. Procurement Plan 43 9. Summary Resettlement Plan 53 10. Summary Poverty Reduction and Social Strategy 57 11. Financial Analysis 61 12. Economic Analysis 63 SUPPLEMENTARY APPENDIXES A. Description of Each Project County and City B. Policy Dialogue C. Detailed Cost Estimates and Financing Plan D. Financial Management Assessment E. Institutional and Capacity Building Needs Assessment of Project Management Offices and Implementing Agencies F. Detailed Procurement Plans for Heilongjiang and Jilin G. Retroactive Financing H. Outline Terms of Reference for Consultants I. Social and Poverty Impact Assessment J. Health Impact Analysis K. Detailed Financial Analysis L. Detailed Economic Analysis M. Full List of Loan Assurances LOAN AND PROJECT SUMMARY Borrower People’s Republic of China (PRC) Classification Targeting Classification: Targeted intervention Sector: Water supply, sanitation, and waste management Subsector: Integrated Themes: Inclusive social development, environmental sustainability, sustainable economic growth Subthemes: Human development, urban environmental improvement, fostering physical infrastructure development Environment Category A. A summary of the environmental impact assessment was Assessment circulated to the Board of Directors of the Asian Development Bank (ADB) along with two environmental management plans on 11 July 2008, and uploaded to the ADB website on 11 July 2008. Project The Project is a key urban environmental improvement initiative of the Jilin Description provincial government (JPG), and the Heilongjiang provincial government (HPG) to control pollution in the Songhua River Basin (SRB). It is classified as a targeted intervention because it contributes to achieving Millennium Development Goal 7, Target 10, which calls for the halving of the proportion of people without access to safe drinking water and improved sanitation by 2015. The Project will help to (i) reduce water pollution, (ii) protect water resources, (iii) address water shortages (by recycling effluent) and meet the demand for high-quality treated water through 2015, (iv) control nonpoint source pollution through effective solid waste management (SWM), (v) promote sustainable economic development, and (vi) improve the environment and living conditions in the project counties and cities (see footnotes 9 and 10 in the main text) in Jilin and Heilongjiang provinces. The Project has three components, five subcomponents, and 20 activities. The components are (i) an improved and expanded water supply and wastewater services in 11 counties and cities in Heilongjiang province; (ii) improved and expanded wastewater facilities and SWM in 15 counties and cities in Jilin province; and (iii) capacity development and training on project management, institutional and SWM and wastewater management, and tariff reform for all the project implementing agencies (IAs). The Project supports the Government’s 11th Five Year Plan (FYP) which includes the goals of improving living conditions and health in cities and promoting sustainable economic development. It also supports the Songhua River Basin Water Pollution Prevention and Control Master Plan (SRBPCMP), which calls for improving water quality in the SRB from the current class IV, V and below V to class III by 2020. The proposed Project catalyzes both government and private investments aimed at reducing pollution in the SRB. The ADB East Asia Department (EARD) and the Private Sector Operations Department (PSOD) are adopting a public–private partnership approach to address the large wastewater treatment funding needs of Heilongjiang Province. PSOD is preparing a project for the Tsinghua Tongfang Water Engineering Company Limited (TTWE) which is currently managing the largest wastewater ii treatment plant in Harbin. The PSOD project would support TTWE through the provision of equity of $12 million, or 20% of equity capital, whichever is lower, and loans for the management of wastewater treatment plants in other cities in Heilongjiang. TTWE is focusing on the water and wastewater sector business and is exploring private–public participation (PPP) opportunities with the local governments. Through an equity investment of $3.4 million, TTWE is a minority shareholder in the Qitaihe City Central wastewater treatment plant (WWTP) and effluent reuse subproject included in the proposed Project. This subproject will be financed by the ADB loan, local government counterpart funds, and private sector funds. The TTWE investment would (i) solve the funding shortage at Qitaihe, and (ii) improve the management and operational efficiency at Qitaihe through training provided by TTWE. This pilot demonstration subproject could be replicated in other subprojects in Heilongjiang, and then in Jilin province. The proposed Project would significantly increase the wastewater treatment capacity in medium-sized and small cities and counties in Heilongjiang and Jilin provinces. ADB is also conducting a study on nonsovereign lending in urban infrastructure development in the PRC. The public–private sector approach to the wastewater treatment sector could be replicated in Jilin province and elsewhere in the PRC. HPG and JPG plan to invest $1.655 billion to increase wastewater treatment capacity and reduce pollution in the Songhua River in the 11th FYP. The proposed Project accounts for 23% of this effort, demonstrating its strong catalytic impact in mobilizing resources aimed at SRB pollution control. Rationale The project counties and cities of Heilongjiang province (with an urban population of 7.04 million) and Jilin province (an urban population of 2.90 million) are located along the SRB. The SRB is the third largest river basin in the PRC, and it covers sections of Jilin and Heilongjiang provinces and the autonomous region of Inner Mongolia. The Songhua River is severely polluted with organic chemicals, heavy metals, and conventional pollutants, and this constrains sustainable economic development in the region. Underdevelopment of wastewater collection and treatment in the project counties and cities in Heilongjiang province and Jilin province leads to untreated wastewater being discharged into local rivers, and eventually to the pollution of the SRB. Water quality in some sections of the Songhua River and its tributaries does not meet class V of the PRC Surface Water Quality Standard. The lack of adequate