Report and Recommendation of the President to the Board of Directors

Transcription

1 Report and Recommendation of the President to the Board of Directors Sri Lanka Project Number: June 2006 Proposed Loan People s Republic of China: Guangxi Nanning Urban Environmental Upgrading Project

2 CURRENCY EQUIVALENTS (as of 15 May 2006) Currency Unit yuan (CNY) CNY1.00 = $0.12 $1.00 = CNY8.00 ABBREVIATIONS ADB Asian Development Bank AIEC average incremental economic cost BOD biological oxygen demand COD chemical oxygen demand DCF discounted cash flow EIA environmental impact assessment EIRR economic internal rate of return EMP environmental management plan EPB environmental protection bureau FIRR financial internal rate of return GZAR Guangxi Zhuang Autonomous Region IA implementing agency ICB international competitive bidding LIBOR London interbank offered rate MDG Millennium Development Goal MIS management information system MLSS minimum living standard scheme NMG Nanning municipal government O&M operation and maintenance PIA project impact area PMO project management office PPMS project performance monitoring system PRC People s Republic of China PSC project steering committee RP resettlement plan SDAP social development action plan SEIA summary environmental impact assessment TA technical assistance WACC weighted average cost of capital WWTP wastewater treatment plant WEIGHTS AND MEASURES km 2 square kilometer m 2 square meter m 3 cubic meter t/yr ton per year (i) (ii) NOTES The fiscal year of the Government and its agencies ends on 31 December. In this report, $ refers to US dollars.

3 Vice President C. L. Greenwood, Jr., Operations Group 2 Director General H. S. Rao, East Asia Department (EARD) Director R. Wihtol, Social Sectors Division, EARD Team leader Team members E. Honda, Urban Development Specialist, EARD D. Dole, Senior Economist, Economics and Research Department S. Ferguson, Resettlement Specialist, EARD S. Handayani, Poverty Reduction Specialist, EARD A. Leung, Principal Urban Development Specialist, EARD X. Peng, Principal Counsel, Office of the General Counsel S. Popov, Project Specialist, EARD T. Villareal, Project Specialist, EARD

4 CONTENTS Page LOAN AND PROJECT SUMMARY iii 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 7 D. Project Investment Plan 8 E. Financing Plan 8 F. Implementation Arrangements 9 IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 13 A. Environmental Impacts and Benefits 13 B. Social Dimensions 14 C. Financial Aspects 15 D. Financial Management Assessment 16 E. Economic Aspects 17 F. Project Risks and Mitigation Measures 17 V. ASSURANCES 18 VI. RECOMMENDATION 20 APPENDIXES Design and Monitoring Framework Assistance Funded by ADB for Urban Development and Environment Detailed Cost Estimates by Expenditure Category Financing Plan Flow of Funds and Onlending Arrangements Implementation Schedule Procurement Plan Outline Terms of Reference for Consulting Services Highlights of the Summary Environmental Impact Assessment Summary Resettlement Plan Summary Poverty Reduction and Social Strategy Financial Analysis Economic Analysis 52

5 SUPPLEMENTARY APPENDIXES (available on request) A. Policy Dialogue B. Detailed Cost Estimates and Financing Plan C. Technical Description of Project Components D. Organization Chart of Project Management Arrangements E. Sector Institution Assessment F. Resettlement Plans G. Detailed Health Impact Assessment H. Social Development Action Plan I. Detailed Financial Analysis and Financial Projections J. Financial Management Assessment K. Detailed Economic Analysis and Least Cost Analysis

6 LOAN AND PROJECT SUMMARY Borrower Classification Environment Assessment Project Description Rationale People s Republic of China (PRC) Targeting Classification: Targeted intervention Sector: Water supply, sanitation, and waste management Subsector: Waste management Themes: Environmental sustainability, sustainable economic growth Subthemes: Urban environmental improvement, fostering physical infrastructure development Category A. An environmental impact assessment (EIA) was undertaken. The summary EIA was circulated to the Asian Development Bank s (ADB s) Board of Directors on 6 January 2006 and uploaded on the ADB web site on 10 January The Guangxi Nanning Urban Environmental Upgrading Project (the Project) is a key urban environmental improvement initiative of the Nanning municipal government (NMG) which aims to enhance the urban environment and public health in Nanning City. The incidence of waterborne and vector-borne diseases is expected to be reduced by 10% from the 2004 level. The Project comprises four subprojects: (i) Xinxujiang River environmental upgrading, which will reduce flood risk, improve wastewater management, and expand the green environment in the area along Xinxujiang River; (ii) Kelijiang River environmental upgrading, which will reduce flood risk, improve wastewater management, and expand the green environment in the area along Kelijiang River within Xiangsihu New District; (iii) solid waste management, which will strengthen the domestic solid waste management capacity and improve cleanliness of the streets; and (iv) Qingxiushan Park ecological upgrading, which will improve the environmental conditions and facilities of the park, a major tourism and recreational amenity in Nanning City, and thereby contribute to improvement of the city s air quality, promote tourism, and increase people s awareness of environmental protection. The Project will provide institutional capacity building and training on project management, operation and maintenance (O&M) of project facilities, and sustainable financial management of the implementing agencies (IAs). Nanning is the capital of the Guangxi Zhuang Autonomous Region (GZAR). Nanning s economic growth has lagged behind other coastal regions in the PRC but it has experienced rapid economic growth during the last two decades. The annual growth rate of 12% for was higher than the national average of 9.8%. The urban population has increased from 1.0 million in 1995 to 1.5 million in 2004, and is expected to grow further to 2.1 million in 2010 and 3.0 million in 2020.

7 iv Nanning is currently addressing three major development opportunities: (i) its role as a gateway to the landlocked provinces of the southwestern region of the PRC, (ii) its designation as a target city under the Government s Western Region Development Strategy, and (iii) its role as a gateway to the Association of Southeast Asian Nations (ASEAN). To accelerate social and economic development, improve the quality of life for urban residents, and upgrade the urban environment, the provision of basic infrastructure and services needs to be expanded and upgraded in Nanning City. The Project will reduce water and soil pollution through flood control and wastewater and solid waste management (brown issues), and improve the quality of life of urban residents by increasing green space (green issues). Impact and Outcome Project Investment Plan Financing Plan The impact of the Project is to enhance the urban environment and public health in Nanning City through (i) improved flood control, (ii) improved wastewater and solid waste management, and (iii) expanded green environment. The outcome of the Project will be improved urban environmental management in Nanning by 2010 through (i) reducing the flood risk to no more than 5% annual probability in Xinxujiang and Kelijiang rivers within Xiangsihu New District; (ii) upgrading the water quality from worse than class V to class IV in Xinxujiang River and class III in Kelijiang River; (iii) improving efficiency in solid waste management; (iv) reducing solid wastes and general dirt in city streets; (v) expanding green space by 0.5 square meters (m 2 ) per capita per year; and (vi) increasing public awareness of environmental protection. The investment cost of the Project is estimated at the equivalent of $262.6 million, including taxes and duties of $8.2 million. ($ million equivalent) Source Total Cost % Asian Development Bank Nanning Municipal Government Local Bank Loans Total Note: Columns may not add up because of rounding. Source: Asian Development Bank estimates. ADB will provide a loan of the equivalent of $100.0 million, covering about 38.1% of the total project cost, including financial charges during construction on the loan. The Government will provide about 61.9% of the total project cost. Counterpart funding will be financed by the NMG s wastewater tariff, solid waste tariff, city construction and maintenance tax, and special fiscal funds. Commercial financing from domestic banks will provide additional funding.

8 v Loan Amount and Terms Allocation and Relending Terms A loan of $100.0 million 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, including a grace period of 5 years, an interest rate determined in accordance with ADB s LIBOR-based lending facility, a commitment charge of 0.75% per annum, and such other terms and conditions set forth in the draft loan and project agreements. The PRC will make proceeds of the loan available to the government of the GZAR. The government of the GZAR will make proceeds of the loan available to NMG, which will onlend to the respective IAs. All subloans and onlending will be on the same terms and conditions as the ADB loan. The IAs will assume the foreign exchange and interest rate variation risks for ADB s loan. Period of Utilization Until 30 June 2011 Estimated Project Completion Date Executing Agency Implementation Arrangements Procurement Consulting Services 31 December 2010 Nanning Municipal Government NMG has established a project steering committee (PSC) headed by the vice mayor. The PSC will be responsible for project coordination and policy guidance during implementation. The project management office (PMO) for the project preparatory technical assistance established within the Nanning Financial Bureau will continue as the PMO for the Project. The PMO will serve as the secretariat of the PSC and will be responsible for coordinating implementation of project activities. ADB-financed equipment, materials and goods, and services will be procured in accordance with ADB s Procurement Guidelines. Procurement will be coursed through international competitive bidding, national competitive bidding, or shopping procedures as determined by the particular circumstances of each contract package. In accordance with ADB s Procurement Guidelines, foreign contractors may participate in bidding for national competitive bidding contracts. The loan will finance about 32 person-months of international and 94 person-months of domestic consulting services to support the PMO and IAs in project implementation and management, and institutional capacity building. The consultants will cover (i) project management and implementation support; (ii) efficient operating procedures; (iii) preventive maintenance; (iv) financial management; (v) social, resettlement, and environmental impacts monitoring; (vi) business planning and management information system development; (vii) human resources development; and (viii) corporate governance. The consultants will assist the PMO in

9 vi questions related to ADB procedures and reporting, procurement, quality control, start-up testing, commissioning, O&M, and implementation of the project performance monitoring system. The consultants will be recruited in accordance with ADB s Guidelines on the Use of Consultants by Asian Development Bank and its Borrowers. Project Benefits and Beneficiaries The Project will significantly improve water quality in Xinxujiang River and Kelijiang River, enhance the safety of drinking water sources in downstream Yongjiang River, and protect the quality of groundwater, especially in shallow aquifers. The Project will convert current environmental hot spots affected by uncontrolled wastewater and solid waste discharges in the Xinxujiang and Kelijiang rivers into model green areas, improving the city s environmental conditions and aesthetics. The Project will also enhance the quality of the urban environment by increasing carbon dioxide absorption and oxygen release, through ecological upgrading of Qingxiushan Park. The Project will improve the environmental potential of Qingxiushan Park by (i) increasing the total biomass and forest coverage rate, (ii) protecting and diversifying forest species and promoting research to ensure forest sustainability, (iii) enhancing soil conservation, and (iv) promoting public awareness programs for park visitors. The Project will benefit about 3.03 million residents, of which about 217,000 (7.2%) are poor. The improved urban environment will provide an enabling environment for poverty reduction through (i) reduction of the incidence of infectious and waterborne and vector-borne diseases, (ii) improvement of investment conditions to attract more outside investment for local development, (iii) creation of new job opportunities, and (iv) development of the tourism industry. As a result, the population exposed to waterborne and vector-borne diseases will be reduced, and the associated medical costs and number of workdays and school days lost due to sickness will be cut. Savings in medical costs will be greater for the poor, families with children, and the elderly, as they are most vulnerable to such diseases. Risks and Assumptions Potential risks include (i) inadequate wastewater treatment and solid waste disposal capacities at the required time because of delays in the second phase of the Jiangnan wastewater treatment plant upgrading and the Chengnan landfill site improvement by NMG, and the Nanning city sewerage upgrading by the World Bank; (ii) possible delays in increasing the solid waste tariff and tariff collection rate; (iii) lack of customers willingness to pay increased tariffs; (iv) lack of proper O&M of the project facilities; (v) lack of IAs capacity to carry out their responsibilities; (vi) discontinuation of enforcement of environmental standards; (vii) change in existing pollution control measures; (viii) lack of support from all levels of government agencies concerned; (ix) delays in land acquisition and resettlement; and (x) unforeseen

10 difficult construction conditions. Risk (i) is being mitigated by synchronizing the project design and implementation schedules. Risks (ii) and (iii) are being mitigated by ensuring financial and managerial autonomy for the solid waste management company, and conducting public consultations to obtain public support for the tariff increase. Risks (iv) and (v) will be mitigated through provision of institutional capacity building for the IAs. Risks (vi), (vii), and (viii) will be mitigated through regular project reviews. Risks (ix) and (x) will be mitigated through support from the project management consultants and regular project monitoring. vii

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13 I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed loan to the People s Republic of China (PRC) for the Guangxi Nanning Urban Environmental Upgrading Project (the Project). 2. The Government requested the Asian Development Bank (ADB) to help improve the urban environment in Nanning City, the capital of the Guangxi Zhuang Autonomous Region (GZAR) by reducing flood risks, improving wastewater and solid waste management, and expanding the green environment. The Project is consistent with ADB s water policy 1 and will help the PRC achieve the Millennium Development Goals (MDGs) of environmental sustainability and increased access to safe drinking water and basic sanitation. This report is based on the findings of the Loan Appraisal Mission and discussions with the central and local governments, relevant agencies, and community organizations. The design and monitoring framework is in Appendix 1. II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES A. Performance Indicators and Analysis 3. The urban population in the PRC grew from about 190 million in 1980 to almost 524 million, about 40% of the total population, in This urbanization trend is expected to continue and about 700 million people, equivalent to 50% of the population, will live in cities by Rapid economic growth over the last two decades has created tremendous pressure on natural resources including land, water, and forests. Increasing demand for basic urban infrastructure has exceeded the financial and physical capacity of most cities to provide adequate sanitation services. In 2004, about 32.6 billion cubic meters (m 3 ) of wastewater was generated and discharged in the PRC, of which only about 45.7% was treated. Much of the solid waste is disposed in natural depressions or open dumps without adequate environmental safeguards. This has accelerated the pollution of rivers, lakes, and underground aquifers; and has degraded the urban environment. 4. The Government has prioritized environmental protection and pollution control in its development strategy. 3 It has enacted several environmental laws, including those on the prevention or control of pollution of air and water. These laws and ancillary regulations emphasize initial prevention and then the polluter pays principle during environmental management. Two key legal requirements are well established: (i) prior evaluation of the environmental impact of projects; and (ii) the principle that the design, construction, and operation of a project should be carried out simultaneously with the design, construction, and operation of the associated environmental protection measures. The Government has issued a series of laws on the use of natural resources and has instituted a system of monitoring, recording, and reporting the discharge of pollutants. The laws stipulate administrative, civil, and criminal responsibilities for environmental violations. 5. Nanning has been the capital of the GZAR, located in the southwestern region of the PRC, since The economic development of Nanning started from a relatively low level with 1 ADB Water for All: The Water Policy of the Asian Development Bank. Manila. 2 The Government s long-term vision for development was set out during the 16 th Party Congress and reiterated during the 10 th National People s Congress. 3 State Environmental Protection Administration The National Tenth Five-Year Plan for Environmental Protection. Beijing.

14 2 gross domestic product (GDP) less than CNY100 million in Compared with other coastal regions in the PRC, Nanning s economic growth has lagged behind. However, during the last two decades, Nanning has experienced rapid economic growth. Its GDP reached CNY59 billion in 2004 compared with only CNY3 billion in The annual growth rate of 12% for was higher than the national average of 9.8%. The urban population has increased from 1.0 million in 1995 to 1.5 million in 2004, and is expected to grow further to 2.1 million in 2010 and 3.0 million in Nanning is currently addressing three major development opportunities: (i) its role as a gateway to the landlocked provinces of the southwestern region of the PRC, (ii) its designation as a target city under the Government s Western Region Development Strategy, and (iii) its role as a gateway to the Association of Southeast Asian Nations (ASEAN) countries The provision of basic infrastructure and services has not kept pace with increased demand. This has led to deterioration in the quality of life for urban residents, degradation of the urban environment, and inefficient economic development. The Nanning municipal government (NMG) aims to relieve pressure on the city s existing central commercial areas by further development, aimed at high-tech research and manufacturing outputs together with the associated residential accommodation. The areas identified to benefit from this urban expansion are those (i) presently at risk of seasonal flooding, (ii) in need of basic infrastructure services to remove existing point sources of pollution and provide for future wastewater discharges, and (iii) requiring an increase in solid waste collection points for transfer of waste to disposal. The development of Xiangsihu New District falls into three areas of activity: (i) public infrastructure, (ii) institutional buildings, and (iii) commercial and domestic accommodation. The Project will support the first area. The second area will be developed by NMG. The third area will be predominantly developed through private sector initiatives that NMG will actively pursue and encourage. B. Analysis of Key Problems and Opportunities 7. The major urban environmental issues in Nanning are (i) inadequate flood protection measures for the newly urbanized areas, (ii) lack of wastewater and solid waste management facilities and inefficiency in its management, and (iii) degradation of the green environment throughout the city and in Qingxiushan Park. The Government needs assistance to achieve the MDGs for environmental sustainability (Goal 7) and to halve the proportion of people without sustainable access to safe drinking water and basic sanitation by 2015 (Target 10). 1. Nanning City Master Plan 8. The Nanning Urban Master Plan for indicates that the city s urban development will follow the one axis and two strips model one axis along Yongjiang River including Xiangsihu New District; 5 one strip of north and west ecological protection; and one strip of south ecological protection that will form the multi-center urban space system of one center, two subcenters, and multi-cores. The urban area of Nanning City will expand both west and east. 9. To the east, newly urbanized areas are either under construction or already well developed. In the short term, the eastern development outwards to the ring expressway will be 4 Nanning City has been nominated as the permanent host city of the annual China-ASEAN Exposition. It has recently become a member of the Greater Mekong Subregion. 5 Xiangsihu New District is a new development zone identified by the NMG, which covers more than one administrative district rather than an administrative district.

15 3 delayed because of the shortage of capital for infrastructure upgrading. Further development to the east will put huge fiscal pressure on NMG. However, to the west, Xiangsihu New District is an ideal new area for future urban development of Nanning City because of (i) high-value land reserve; (ii) convenient transportation to the city center; and (iii) highly developed education, science, and technology establishments. In addition, to meet the time schedule of integrated and balanced development of Nanning City, urban development priority is to accelerate the construction of Xiangsihu New District. 10. The total area of 120 square kilometers (km 2 ) of the whole Xiangsihu New District is equivalent to the current size of Nanning City. From an economic development perspective, this new district has a concentration of a number of economic entities including a high-tech development zone, and most of the higher education colleges and universities in the city. From the social development perspective, the new district will soften the competition for land use in the existing central areas of the city. The planned development of Xiangsihu New District will turn this district into a subcenter of the city with science and technology companies, education institutions, and residential accommodation. 2. Project Rationale 11. Xinxujiang and Kelijiang rivers are located in the western part of the city, and flow into Yongjiang River. Both rivers are characterized by shallow channels and wide terracing. Flood control measures undertaken by NMG in respect of Yongjiang River have prevented surcharge flooding into the Xinxujiang and Kelijiang catchments to a certain extent, but existing flood protection facilities are not sufficient to protect Xiangsihu New District from 5% annual probability of flooding. 12. Xinxujiang and Kelijiang river basins overlap with part of Xiangsihu New District, which is currently a peri-urban area, and infrastructure development is lagging behind. Wastewater is discharged into the nearest watercourses in the Xinxujiang and Kelijiang catchments through a combined sewerage system and is not treated. This creates gross pollution in Xinxujiang River and Kelijiang River. The current pollution level is worse than class V of the national water quality standard. 6 NMG has a target to increase the collection and treatment of domestic wastewater in the city to 70% by 2010 and 90% by 2020, 7 and thus achieve class III or IV water quality in city s rivers, including Xinxujiang River and Kelijiang River. Water quality improvement in Xinxujiang and Kelijiang rivers will contribute to protection of water quality around raw water intakes located downstream along Yongjiang River. While wastewater treatment plants and trunk mains are being developed, sewer networks need to be expanded in Xiangsihu New District. 13. Currently, domestic solid waste is collected from households manually using bicycles with carts, offloaded to containers at the transfer stations, and transported by road to the landfill site. The efficiency of the solid waste management system would be significantly increased by upgrading the transfer stations to include effective compaction, increasing the number of transfer stations, and introducing an operational management control system to improve the efficiency of waste transfer. Street sweeping is undertaken manually. The increase in the urban 6 The PRC environmental quality standards have five classes for surface water quality based on their use. Class I is the best in quality and class V is the worst. Class I is for water resources and nationally protected water bodies. Class II is for high-value fish protection areas, class A protection areas, and spawning habitats for fish. Class III is for potable water resources, class B protection areas, general fish protection areas, and swimming areas. Class IV is for general industrial water sources and noncontact recreational areas. Class V is suitable only for industrial use. 7 In accordance with the national directives.

16 4 road area and the introduction of higher-speed dual carriageways have created a safety hazard, and advanced mechanized techniques are needed. 14. Qingxiushan Park is located in the immediate southeast of Nanning. The total area of the park is 21.7 km 2, of which the forest cover is currently 2.9 km 2. Qingxiushan Park is a major tourism and recreational amenity in Nanning, attracting 70% of its visitors from outside the city. Visitors enjoy walking and hiking in the forest and pray at the temple inside the park. The forest in Qingxiushan Park contributes to air quality improvement by increasing the carbon holding and releasing more oxygen. Nanning City has been declared the garden city by the state government. 8 NMG endeavors to increase the current 8.1 square meters (m 2 ) of green space per capita by 0.5 m 2 each year. Qingxiushan Park has been and will continue to be the major contributor to achieve this target. The problems facing Qingxiushan Park have natural causes: (i) frequent and periodic fires damage trees and wildlife habitat, (ii) monsoon rains result in erosion and loss of soils, and (iii) wastewater generated in the park and discharged through septic tanks to open water ditches within the park contaminates groundwater. Visitors pay an entrance fee, and trees and flowers produced in the park are sold mainly for greening of Nanning City. These revenues are used for management of the park and will fund part of the Project. The Nanning Qingxiu Mountain Scenic and Resort Development Company has legal power to enforce adequate protection of the park within its charter. 3. Policy Dialogue 15. Policy dialogue on key reforms is a significant aspect of ADB s operations in the PRC in water supply, sanitation, and waste management. Significant progress has been made in (i) introducing tariff and enterprise reforms, (ii) strengthening the local and regulatory framework, and (iii) promoting private sector participation. ADB has supported the tariff reform process through two technical assistance (TA) projects 9 which have contributed significantly to water tariff reforms and resources conservation. These were followed by ADB s urban wastewater tariff study TA, 10 under which the national guidelines for wastewater tariffs were developed. The guidelines include tariff calculation methodologies that will allow full cost recovery, taking into consideration affordability and social constraints. The TA also recommended options for encouraging multichannel investment, including private sector participation in urban wastewater management. In addition, ADB supported the Government through a TA that strengthened policy reform on the use of market-based instruments to enhance private sector partnership in public utilities, mainly for water supply, and wastewater and solid waste management The Project will build on and continue policy dialogue with the Government on (i) sustainable flood control and river basin management, (ii) reduction of flood risk maintaining water quality, (iii) wastewater management and reduction of open watercourse pollution, (iv) comprehensive solid waste management, (v) cost recovery and tariff reform, and (vi) poverty reduction. 17. Strengthening of the legal framework for sound environmental management has been a key element of ADB s policy dialogue and operational activities. To help build the necessary 8 The criteria for the garden city include green space of (i) more than 6.5 square meters (m 2 ) per capita, and (ii) more than 30% of the total city area. 9 ADB Technical Assistance to the People s Republic of China for Water Tariff Study. Manila; and ADB Technical Assistance to the People s Republic of China for Water Tariff Study II. Manila. 10 ADB Technical Assistance to the People s Republic of China for National Guidelines on Urban Wastewater Tariff and Management Study. Manila. 11 ADB Technical Assistance to the People s Republic of China for Policy Reform Support. Manila.

17 5 capacity, ADB provided training for staff of the Environmental Protection Commission of the National People s Congress, and developed a legal information system to support drafting the environmental laws. In the area of legislation, assistance was provided to help amend the (i) water pollution prevention and control law which was passed in 1996, (ii) antidesertification law passed in 2001, and (iii) a clean production law which is under consideration by the National People s Congress. 12 In addition, ADB helped upgrade the knowledge and skills of provincial legislative drafters in reviewing, amending, and formulating local legislation on protection and conservation of the environment and natural resources. ADB helped improve the institutional capacity of the State Environmental Protection Administration and its provincial bureaus to strengthen environmental standards and to enforce environmental laws and policies. 18. Flood events in rapidly growing cities damage high-value urban property; disrupt key industrial, commercial, and government centers; and have high recovery costs. The current flood control system in the PRC emphasizes the use of structural measures to reduce flood hazards, which are essential to improve security for those living and working in flood-prone areas. Nonstructural approaches are also increasingly used to mitigate flood risks including data acquisition, flood forecasting, flood warning, and response procedures to reduce exposure and vulnerability to floods. The development of flood protection measures for flood affected cities is a local government responsibility. Plans have been prepared for a range of structural and nonstructural works within the city s jurisdiction. However, plans need to be assessed within the overall framework of the river basin development and in line with the national policy on integrated flood management. Specifically, monitoring in the project area should be integrated in the real-time modeling of river flows and flood routing for the Pearl River system which covers the project area (Assurance ii a); and the rehabilitation of the reservoir, located at the upper stream of the project area, should be completed by the time of the completion of the physical works under the Project (Assurance ii b). 19. Currently, urban district governments are responsible for collection and transfer of solid waste to the landfill site while the Nanning Sanitation and Administration Department is responsible for operation and management of the landfill site. Lack of coordination between district governments causes inefficiency in transferring solid waste from the transfer stations to the landfill site. Establishment of a transfer system covering six urban districts will be considered for future improvement. NMG will introduce an operational management control system under the Project to improve the efficiency of waste transfer to maximize the efficiency of solid waste management [paragraph 28 (vi)]. 4. Lessons Learned 20. ADB has financed 57 TA grants and provided 16 loans totaling about $1,977 million to address issues relating to the urban development and environment sector in the PRC (Appendix 2). ADB s assistance in these sectors has resulted in more rational pricing of water, major increases in water tariffs, introduction of wastewater tariffs, implementation of commercial principles, and introduction of private sector participation. These improvements are fundamental for making the wastewater management and water supply sector financially and operationally sustainable. 21. Lessons learned from ADB s experience in the urban development and environment sector were considered in policy dialogue with the Government, engineering design of the 12 ADB Technical Assistance to the People s Republic of China for Legislative Reform for Protecting Environment and Natural Resources. Manila.

18 6 project facilities, and institutional capacity building programs. One of the lessons learned is the need for strategic master plans. Since the Project covers various subsector components, extensive policy dialogue was held with the Government on the related master plans, including the (i) overall city master plan, (ii) river basin management and flood control master plan, (iii) wastewater management plan, and (iv) solid waste management master plan. It was confirmed that each project component is in line with the respective master plan. A second major issue is the importance of cost recovery and tariff reform. These were discussed as part of the policy dialogue and it was agreed that the wastewater and solid waste tariff would be reviewed during project implementation to improve cost recovery. A third lesson learned is that increased public awareness is one of the most effective measures to improve the urban environment. In view of this, provision of public awareness training on environmental protection has been included under the Project. A lesson related to resettlement is the need for the establishment of an effective internal and external monitoring mechanism of resettlement implementation. Arrangements for monitoring and evaluation have been fully incorporated in the resettlement plans. III. THE PROPOSED PROJECT A. Impact and Outcome 22. The impact of the Project is to enhance the urban environment and public health in Nanning City through (i) improved flood control, (ii) improved solid waste and wastewater management, and (iii) expanded green environment. The incidence of waterborne and vectorborne diseases is expected to be reduced by 10% from the 2004 level. The outcome of the Project will be improved urban environmental management in Nanning by 2010 by (i) reducing the flood risk to no more than 5% annual probability in Xinxujiang and Kelijiang rivers within Xiangsihu New District; (ii) upgrading the water quality from worse than class V to class IV in Xinxujiang River and class III in Kelijiang River; (iii) improving efficiency in solid waste management; (iv) reducing solid wastes and general dirt in city streets; (v) expanding green space by 0.5 m 2 per capita per annum; and (vi) increasing public awareness of environmental protection. B. Outputs 23. The Project comprises four subprojects: (i) Xinxujiang River environmental upgrading, (ii) Kelijiang River environmental upgrading, (iii) solid waste management, and (iv) Qingxiushan Park ecological upgrading. The Project will also undertake institutional capacity building. 24. The Xinxujiang River environmental upgrading subproject will reduce flood risk, improve wastewater management, and expand the green environment in the area along Xinxujiang River of 0.83 km 2. This subproject will (i) construct and rehabilitate km of embankment; (ii) create a permanent lake (Xinxujiang Lake) by dredging and embankment with a normal retaining capacity of 2.92 million m 3 and additional wet season flood storage capacity of 5.65 million m 3 ; (iii) construct 3.00 km of interceptor sewers along the banks of Xinxujiang Lake to transfer about 14,000 m 3 per day of wastewater to the Jiangnan wastewater drainage system; and (iv) provide a pumping station and delivery main for the transfer of water from Yongjiang River to flush through Xinxujiang Lake during the dry season for maintaining water flow and water quality. 25. The Kelijiang River environmental upgrading subproject will reduce flood risk, improve wastewater management, and expand the green environment in the area along Kelijiang River

19 7 of 1.64 km 2. This subproject will (i) construct and rehabilitate 14.9 km of embankment; (ii) create a permanent lake (Xiangsihu Lake) by dredging and embankment with a normal retaining capacity of 4.38 million m 3 and additional wet season flood storage capacity of 5.42 million m 3 ; (iii) install km of sewerage pipelines, 2 pumping stations, and a buried pipe crossing under Yongjiang River to transfer about 60,000 m 3 per day of wastewater from Xiangsihu New District to the Jiangnan wastewater drainage system; (iv) provide a pumping station and delivery main for the transfer of water from Yongjiang River to flush through Xiangsihu Lake during the dry season for maintaining water flow and water quality; and (v) construct a storm water drainage pipe network to serve the proposed km 2 Xiangsihu New District. 26. The solid waste management subproject will strengthen the domestic solid waste management capacity of NMG and improve the cleanliness of the streets. This subproject will (i) construct or upgrade 22 small transfer stations throughout the urban districts, (ii) provide loading and compacting equipment at all the transfer stations, (iii) determine an operational management control system to improve the efficiency of waste transfer, and (iv) provide 30 street sweeping vehicles and 20 street washing tankers. The compacted waste will be transported to a new engineering landfill site at Chengnan. 27. The Qingxiushan Park ecological upgrading subproject will improve the environmental conditions and facilities of the park, a major tourism and recreational amenity in Nanning City, and thereby contribute to improvement of the city s air quality, promote tourism, and increase people s awareness of the environment. This subproject will include (i) 71 hectares (ha) of reforestation; (ii)198 ha of improved arboreal mix; (iii) a seedling base comprising greenhouses, plant shelters, and spray irrigation system; (iv) forest protection facilities comprising two fire appliances and facilities for prevention and cure of plant diseases and control of insect pests; (v) auxiliary support facilities comprising 2.5 km of access road to the seedling base, electric power supply, telecommunication, and a science and technology service center; (vi) gravity sewers and 11 pumping stations for the southern area of Qingxiushan Park; (vii) two separate trunk sewer routes to transfer wastewater flows to the Langdong wastewater treatment plant from Qingxiushan Park; and (viii) provision of public awareness training on environmental protection to the visitors. 28. The institutional capacity building will support increased efficiency and management capacity of the implementing agencies (IAs). Capacity building will be achieved through domestic and overseas training and the provision of consulting services. Institutional capacity building will assist the IAs to (i) become autonomous and financially sustainable operating companies that can effectively and efficiently meet the service obligations set out for them; (ii) comply with all relevant national policies for the cost recovery, tariff, and enterprise reform of the wastewater and solid waste management sector; (iii) develop soundly based operation and maintenance (O&M) plans for future service provision and commercial growth; (iv) develop a public awareness training program on environmental protection; (v) establish technical and administrative policies and procedures on the hydraulic and water quality balance in Xinxujiang and Xiangsihu lakes; and (vi) improve the efficiency in solid waste transportation at the new and upgraded transfer stations. C. Special Features 29. The Project will adopt a comprehensive, coordinated approach involving several interrelated components to addressing the complex and interrelated problems of improving the urban environment. The Project will prevent water and soil pollution through flood control and wastewater and solid waste management (brown issues), and improve the quality of life of

20 8 urban residents by increasing green space (green issues). Areas around Xinxujiang Lake and Xiangsihu Lake, which will be created to increase the flood retaining capacity of Xinxujiang River and Kelijiang River, will be developed concurrently as parks and serve as public amenity areas. These areas are currently environmental hot spots affected by uncontrolled wastewater and solid waste discharge. Provision of urban infrastructure in the proposed newly urbanized area will enable NMG to relieve the pressure of rapid urbanization in the existing city center. The urban environmental scope of this Project is broader than that of past ADB-financed urban environmental improvement projects which have focused mainly on wastewater management. D. Project Investment Plan 30. The total project cost is estimated at the equivalent of $ million, including foreign exchange costs of $ million (43.2%) and local currency costs of the equivalent of $ million (56.8%). Table 1 provides a summary of the project investment plan. The cost estimates are detailed in Appendix 3. Table 1: Cost Estimates ($ million) Total Item Cost A. Base Cost a 1. Xinxujiang River Environmental Upgrading Kelijiang River Environmental Upgrading Solid Waste Management Qingxiushan Park Ecological Upgrading Institutional Capacity Building 1.29 Subtotal (A) B. Contingencies 1. Physical b Price c Subtotal (B) C. Financial Charges during Implementation d Total (A+B+C) a In 2005 year-end prices. b Computed at 10% for all civil works, land acquisition and resettlement, equipment, training, and consulting. c Computed based on (i) foreign exchange inflation rate of 2.8% in 2006, and 1.9% in 2007 and onwards; and (ii) local currency inflation rate at 3.3% in 2006, 3.2% in 2007, and 3.0% in 2008 and onwards; and includes provision for potential exchange rate fluctuation under assumption of a purchasing power parity exchange rate. d Includes interest and commitment charges. Interest during construction has been computed at the 5-year forward London interbank offered rate plus a spread of 0.6%. e Includes tax and duties of $8.22 million. Note: Columns may not add up because of rounding. Source: Asian Development Bank estimates. E. Financing Plan 31. The Government has requested a loan of the equivalent of $100.0 million from ADB s ordinary capital resources to help finance the Project. The loan will have a 25-year term, including a grace period of 5 years, an interest rate determined in accordance with ADB s London interbank offered rate (LIBOR)-based lending facility, a commitment charge of 0.75% per annum, and such other terms and conditions set forth in the draft loan and project agreements. The Government has provided ADB with (i) the reasons for its decision to borrow

21 9 under ADB s LIBOR-based lending facility on the basis of these terms and conditions, and (ii) an undertaking that these choices were its own independent decision and not made in reliance on any communication or advice from ADB. 32. ADB will provide a loan of $100.0 million, covering about 38.1% of the total project cost. The Government will provide about 61.9% of the total project costs. The ADB loan will cover financial charges during construction on the loan, while contingencies will be financed by the Government. Counterpart funding will be financed by the NMG s wastewater tariff, solid waste tariff, city construction and maintenance tax, and special fiscal funds. Commercial cofinancing from domestic banks will provide additional funding for the Project. The financing plan for the Project is summarized in Table 2 and detailed in Appendix 4, including specific ADB financing plans for each IA. Table 2: Financing Plan ($ million) Total Source Costs % A. ADB Loan % B. Nanning Municipal Government % C. Local Bank Loans % Total % ADB = Asian Development Bank. Note: Columns may not add up because of rounding. Source: Asian Development Bank estimates. 33. The Borrower of the loan will be the PRC, which will make proceeds of the loan available to the government of the GZAR. The government of the GZAR will make the proceeds of the loan available to NMG, which will onlend to the IAs. All subloans and onlending will be on the same terms and conditions as the ADB loan. The IAs will assume the foreign exchange and interest rate variation risks for the proceeds of the ADB loan onlent to them. The flow of funds and onlending arrangements are described in Appendix 5. F. Implementation Arrangements 1. Project Management 34. NMG will be the Executing Agency for the Project. The project steering committee (PSC), headed by the vice mayor and comprising representatives of the Nanning Financial Bureau, Nanning Development and Reform Commission, Nanning Planning Administration Bureau, Nanning Construction Commission, Nanning Land and Resources Bureau, Nanning Environment Protection Bureau, Nanning Water Resource Bureau, Nanning Municipal Administration Bureau, Nanning Audit Bureau, Qingxiushan Mountain Administration Commission, and Xiangsihu New District Administration Commission, will be responsible for project coordination and providing policy guidance during implementation. 35. The Nanning Investment and Development Company will be the IA for the Xinxujiang River environmental upgrading subproject; the Nanning Xiangsihu Investment, Construction, and Development Company Limited for the Kelijiang River environmental upgrading subproject; the Nanning Shixi Solid Waste Treatment Company Limited for the solid waste management subproject; and the Nanning Qingxiu Mountain Scenic and Tourist Resort Development Company Limited for the Qingxiushan Park ecological upgrading subproject. These companies are 100% state-owned.

22 The project management office (PMO) has been established within the Nanning Financial Bureau. The PMO will serve as the secretariat of the PSC and will be responsible for coordinating the implementation of project activities. The PMO will (i) ensure adequate interdepartmental cooperation and interagency coordination, (ii) monitor the progress of project implementation, and (iii) coordinate communication with ADB and agencies concerned. A project implementation unit will be established in each subproject IA and will be responsible to the respective IA for coordinating detailed implementation activities. 2. Implementation Period 37. The Project will be implemented over a period of 5 years from 2006 until the end of 2010 (Appendix 6). The implementation period is estimated based on the project scope and construction technology requirements. This schedule is considered realistic and achievable because the project implementation structure is already in place and preparatory works are under way. ADB s successful experience with similar projects in the PRC and the EA s and IAs in-depth knowledge and experience in urban environmental improvement projects using international financing from the World Bank and the Japan Bank for International Cooperation also indicate that the schedule is realistic and achievable. 3. Procurement 38. Equipment, materials and goods, and services financed under the loan will be procured in accordance with ADB s Procurement Guidelines and follow ADB procedures for international competitive bidding (ICB) for packages each with a value greater than $1 million. Packages valued at $1 million or less will be procured following national competitive bidding or shopping procedures as determined by the particular circumstances of the contract package. Civil works contracts costing more than $10 million will be procured using ICB. Civil works contracts valued at the equivalent of $10 million or less can be procured using national competitive bidding procedures in accordance with the PRC Tendering and Bidding Law and the respective procurement regulations acceptable to ADB. 13 The selection and engagement of contractors will be subject to ADB approval. 14 Procurement packages are provided in the procurement plan (Appendix 7). Major equipment will be purchased through ICB procedures and financed by the ADB loan. The internationally tendered equipment packages will include the necessary technical support for ensuring proper installation, testing, commissioning, and training of operational staff as part of the related contracts. In accordance with ADB requirements, foreign contractors may participate in bid for national competitive bidding contracts. 39. ADB approved NMG s request for advance procurement action to expedite project implementation. Advance action will include (i) prequalification of contractors, tendering, and bid evaluation for civil works packages; and (ii) preparation of tender documents to procure materials and equipment. The issuance of invitations to bid or to prequalify under the advance procurement action will be subject to ADB approval. All advance procurement actions will be undertaken in conformity with ADB s Procurement Guidelines. The Government, NMG, and IAs were advised that approval of advance procurement action does not commit ADB to finance the Project. 13 ADB Technical Assistance to the People s Republic of China for Establishment of National Procurement Regulations for the Public Sector. Manila; and ADB Technical Assistance to the People s Republic of China for Implementation of the Tendering and Bidding Law and Related Regulations. Manila. 14 ADB will require the EA to use ADB-approved standard bidding documents (to be developed as necessary) to ensure high quality and consistency of the documents; this will facilitate ADB review.