Study on Economic Partnership Projects. in Developing Countries in FY2009. Da Nang City in Socialist Republic of Viet Nam SUMMARY.

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1 Study on Economic Partnership Projects in Developing Countries in FY2009 Study on the Water Environment Improvement Project for Da Nang City in Socialist Republic of Viet Nam SUMMARY March 2010 NIHON SUIDO CONSULTANTS CO.,LTD.

2 (1) Project Background and Necessity Da Nang City is the fourth largest city in Viet Nam with a total population of 822,500 in the year 2008 and the population in 2020 is predicted as 1,070,000 in Adjustment of Da Nang General Master Plan to 2020 (General Master Plan) promulgated by the Prime Minister on June 17th, 2002 (Decision No. 465/QD-TTg). Recent increase of wastewater generation and storm water runoff according to rapid urbanization including industrial growth and tourism development causes serious deterioration of water environment of the city. There are four existing wastewater treatment plants and combined collection system in Hai Chau, Thanh Khe, Son Tra, and Ngu Hanh Son districts covering approximately 47% of the existing urban population of Da Nang City. The system was rehabilitated and strengthened by 2006 with World Bank fund and has been operated from the year However, wastewater collection and treatment system is still insufficient for urbanized and urbanizing area of Da Nang City and contamination of water resources causes sanitary adverse effects. The Drainage and Environmental Sanitation Project -Water supply Problem reported hospitalized cases in water born diseases; 1,255 persons of diarrhea and 402 persons of dysentery in Long-term sedimentation in drainage canals in urbanized area generates unpleasant odorous gas and combined sewerage overflow is responsible for the pollution of adjacent Da Nang Bay where tourist attractive marine sports zone is planned to be developed. Drainage capacity is also insufficient to meet the needs as a whole in Da Nang City. Frequent inundation and flooding occurs during heavy rain causing traffic jam, disruption of economic activities, and damage to properties. To overcome the above problems, People s Committee of Da Nang City (PC) requested Japanese entities, such as Japan International Cooperation Agency (JICA) and Nihon Suido Consultants Co., Ltd.(NSC), to formulate Japanese ODA project for improvement of Da Nang City water environment situation. Upon the request, NSC applied to conduct STUDY ON ECONOMIC PARTNERSHIP PROJECTS IN DEVELOPING COUNTRIES IN FY2009 (METI Study), which is a program of The Ministry of Economy, Trade and Industry of Japan (METI) and was accepted to carry out the study. METI Study on Economic Partnership Projects aims to discover and/or formulate the Japan funded project in which Japanese superior technology and know- how is expected to be used.

3 (2) Basic Policy for Project Formation The project is formulated based on intimate discussion with relevant authorities of Da Nang City concerned and Japanese Government agencies of JICA and Japan External Trade Organization (JETRO). The following basic policy is applied for determination of project components taking the results obtained through the discussions above and purpose of the study into account. - The project complies with national policies on environmental and sanitation developments of Viet Nam and Da Nang City. - Plan and design of the project are followed the line designated in approved General Master Plan and harmonious with the other development plans of land use, water supply, transportation etc. - Project components dose not conflict with the existing and planned projects funded by other international donors. - The project is effective and efficient to produce expected benefits of water environment improvement and sustainable, and feasible in technical, economical, environmental, and social aspects. - The project is expected to obtain great deal of contribution from Japanese superior technologies and know-how for its implementation. (3) Outline of the Project 1. Project Area Based on the delineation suggested and land use plan in General Master Plan, Overall planned Area is delineated and Priority Area is identified taking the present conditions of the area into account. The two areas are confirmed by the discussion between responsible authorities of Da Nang City and METI Study Team. The two areas are further defined as METI Phase I and METI Phase II areas as indicated in Figure S - 1. METI Phase I is formulated for the matured area of immediate implementation of sewerage and drainage development, and METI Phase II is supposed to follow the METI Phase I project to implement because of the nature of areas where some time is required to develop, re-develop and construct internal road networks.

4 Figure S - 1 METI Phase I and II Areas Lien Chieu WWTP Site METI Phase I Area (764 ha) Da Nang Bay Hoa Xuan WWTP Site METI Phase II Area (5,369 ha) Legend METI Phase I Area METI Phase II Area 2. Proposed Scope of METI Phase I The proposed scope of the METI Phase I consists of sanitary sewer network, pumping stations, wastewater treatment plant (WWTP), and drainage sewers in Lien Chieu district as summarized in Table S - 1 and Figure S - 2. Separate collection system, in which wastewater and storm water are collected in deferent sewer networks, is employed taking the suggestion of General Master Plan and the technical evaluation results into account. WWTP site of METI Phase I with area of 10 ha was officially designated by PC on May 13 th of 2009 at Hoa Hiep Nam in Lien Chieu district. Activated sludge process for wastewater treatment is selected by the evaluation on Vietnamese practice, easiness of O&M, future possibility of nitrogen removal, and cost comparison.

5 Table S-1 Scope of the METI Phase I Project (Priority Area) Sanitary sewer Tertiary km mm in diameter Branch & Trunk km mm in diameter Force Main km mm in diameter Drainage sewer km mm in Dia. Pumping Station (PS) Manhole Type PS No m 3 /min PS on ground No m 3 /min WWTP No. 1 16,400 m 3 /day Figure S - 2 Main Facilities of METI Phase I Sewerage Facilities Drainage Facilities In addition to the above construction works following activities should be included in the scope of the project for effective completion and sustainable operation of the project. - Engineering services for detailed design, tender assistance and construction supervision - Capacity building for detailed design, tendering, construction supervision and operation and maintenance. - Procurement of operation and maintenance equipment - Assistance for public awareness raising and educational campaign for community cooperation to the project - Assistance for tariff setting, promotion of house connection, and environmental and social arrangement

6 3. Project Cost of METI Phase I The project cost consists of costs for materials and equipment, construction and installation works, and engineering services as well as physical and price contingencies. The price is estimated as of October 2009 and price escalations are included. Materials to be imported were priced at the Japanese market price and were estimated based on the CIF price. The prices included custom duty on imported materials. The materials to be sourced locally and construction works were estimated based on Vietnamese Dong (VND). Costs are also indicated in US$ for explanatory purpose. The Base Cost is presented in Table S - 2 and the project cost is estimated as Japanese Yen 29,335 million as shown in Table S - 3. Costs of detailed design, tender assistance, construction supervision, capacity building, assistance for public awareness raising and educational campaign, tariff setting, promotion of house connection, and environmental and social arrangement for METI Phase I are also included in the engineering services cost. The following exchange rates (effective as of the second half of 2009) are used in cost estimates VND 1.0 = Japanese Yen ( ) US$ 1.0 = Japanese Yen ( ) 94.8 = VND 16,989 Table S 2 Estimated Base Cost of METI Phase I Base Cost Description Foreign portion Local portion Total Million Yen Million VND Million Yen Million USD 1 Sewer 1) Storm Sewer ,824 1, ) Sanitary Sewer 1, ,422 5, Sub- Total 2, ,246 6, Pumping Station 1) Civil & Architecture 22 9, ) Mechanical & Electrical 257 2, Sub- Total , Manhole Type Pumping Station 1) Civil & Architecture 9 3, ) Mechanical & Electrical Sub- Total 76 4, WWTP 1) Civil & Architecture ,716 1, ) Mechanical & Electrical 2,280 21,505 2, Sub- Total 2, ,221 4, Sewer Maintenance Equipment Land Reclamation , Total Cost 5,537 1,182,560 12,

7 I II Table S 3 Estimated Project Costs of METI Phase I Description Foreign portion Local portion Total Million Yen Million VND Million Yen Million USD Construction Base Cost of Construction 5,537 1,182,563 12, Physical Contingency ,586 1, Price Contingency 1,510 1,209,158 8, Engineering Services 0.0 Base Cost of Engineering Services 1, ,018 2, Physical Contingency 75 13, Price Contingency , Total (I+II) 8,985 2,791,576 24, III Interest during construction Eligible Portion (I+II+III) 9,731 2,791,576 25, Land Acquisition IV Base Cost 0 68, Physical Contingency 0 18, Price Contingency 0 23, V Administration Cost 0 132, VI Vat for construction 0 383,734 2, VII Vat for engineering services 0 56, VIII Import Tax 0 39, Non Eligible Portion (IV+V+VI+VII+VIII+IX) 0 721,751 4, Total Project Cost 9,731 3,513,327 29, A price contingency is provided in the project cost estimate to cover the increasing costs of labor and materials over the duration of the project. The rates are applied in accordance with Japanese ODA loan in the second half of 2009 for Viet Nam. Local currency portion 10.3% of price escalation Foreign currency portion 3.1% of price escalation Annual operation and maintenance cost on facilities built in METI Phase I is summarized in Table S - 4 based on the other projects in Viet Nam and cost model on sewerage in Japan. Replacement cost is also required mainly for electrical and mechanical equipment in approximately 15-year interval. The replacement cost is estimated as shown in Table S - 5. Table S - 4 Annual Operation and Maintenance Cost Item O&M Cost Million VND/year Million USD/year Sewer 2, Pumping Station Manhole Type Pumping Station WWTP 11, Total 15,

8 Table S 5 Replacement Cost Item Replacement Cost Million VND Million USD Sewer and Sewer Cleaning 29, Pumping Station 48, Manhole Type Pumping Station 12, WWTP 430, Total 520, Preliminary Financial and Economic Evaluation The construction cost of this Project will be financed by the budget of central and city government. In case of loan, Government of Viet Nam will repay the loan amount with the interests. Executing agency of this Project has no obligation to pay back the loan by utilizing the sewerage tariff revenue. Under this circumstance, there is no reason to calculate financial internal rate of return (FIRR), since the FIRR is the indicator to check whether the executing agency is able to obtain enough revenue or not from the project to cover annual capital cost (loan with interest), operation and maintenance costs, and replacement cost for the project period, in order to keep generating the project effect without budget input from the government. In this Study, FIRR of the project is not calculated from the reason mentioned above and also it is impossible for present tariff, or affordable tariff by customers in METI Phase I area, to cover both of O&M costs and capital cost to obtain FIRR. The Government of Viet Nam announced the Decree 88/2007/ND-CP, concerning On Drainage and Sewerage for Urban Areas and Industrial Zones, at 28 May, In the Decree 88, the Article 49 Principles of determination of wastewater tariffs mentioned that it is necessary to consider step-wise tariff increase aiming that the wastewater tariff will cover all expenses engaged in operation and maintenance (O&M) and to partly contribute to capital investment cost of drainage/sewerage works. The Article 49 in the Decree 88 also mentioned that drainage tariffs shall be determined based on the principle of full cost recovery to ensure the maintenance of drainage / sewerage services. In this Study, the sewerage tariff raise plan was prepared enough to cover all the O&M costs (Table S-6). Regarding the full cost recovery principle described in the Decree 88, required tariff raise plan must be considered and planned after realizing O&M cost recovery at first, as current tariff is far from full cost recovery.

9 Table S -6 Unit Sewerage Tariff for All Customers (Unit VND/m 3 ) 2009 (existing) Households Governmental Commercial Service ,025 1,089 1,152 1,216 Notes The above tariff excludes price escalation. Above unit rate is only to cover the O&M costs of facilities of METI Phase I, therefore, the actual tariff must be calculated by summing up all the necessary tariff raises to cover all the necessary costs for existing and future sewerage / drainage facilities. Unit prices in the final year are the total of necessary tariff raise and existing tariff. The economic internal rate of return (EIRR) of METI Phase I has been calculated and shows %, a net present value (NPV) at discount rate of 12% is JPY 1,634 million, and present value of Benefit is 1.21 times of the present value of cost. EIRR is higher than the opportunity cost of capital in Viet Nam and NPV is sufficiently large, and therefore, the Project is economically feasible. 5. Environmental Considerations According to the JICA Guidelines for Environmental and Social Considerations (2004), the study on Environmental and Social Aspects is defined as a study including analysis of alternative plans, prediction and assessment of environmental impacts, and preparation of mitigation measures and monitoring plans on the basis of secondary data and simple field surveys. During the study on Environmental and Social Aspects on the METI Phase I project, following methods are used - Collection and analysis of existing information - Field survey - Interview, and - Field analysis for water quality. In the study on Environmental and Social Aspects, the environmental and social impacts without and with the project are analyzed. The results of scoping and examination indicate that the implementation of the project will to contribute in improving living environment of the area and water quality of groundwater, rivers, lakes and Da Nang Bay. However, based on the scoping of the study on Environmental and Social Aspects, some negative environmental impacts may be caused by the implementation of the project. In order to mitigate these negative impacts, some countermeasures and recommendations from an environmental viewpoint are given in Table S - 7.

10 Table S - 7 Recommendations for Mitigation Measures No. Impact Items Recommendations for Mitigation Measures on Negative Impacts 2 Local economy/land To acquire the land for pump stations following Viet Nam land acquisition ownership procedures and make consultation with land owners. 3 1) To confirm existing land use plan. Land use and utilization 2) If necessary to modify the existing land use plan and to acquire the land of local resources for proposed pump stations in advance. 5 Traffic To prepare proper Environmental Management Plan (EMP) during EIA study, construction plan of sewers and WWTP, and traffic control plan during construction period. 11 Cultural heritage Detailed survey for cultural heritage should be carried out during EIA study, and mitigation measures also should be proposed in EIA report. 21 Air pollution 1) To prepare air quality monitoring plan and carry out it during construction. 2) To prepare EMP plan for mitigating air pollution. 22 Water pollution 1) To carry out water quality survey on Cu De River. 2) To assess the impacts of the WWTP effluent on Cu De River. 3) To adjust and modify the design of the wastewater treatment process accordingly. 24 Solid wastes 1) To prepare proper plan for solid waste disposal, especially for excavated soil. 2) To carry out alternatives examination for sludge disposal (landfill or agricultural use or reuse as construction materials etc.) 1) To make noise survey around the WWTP site and along sewers in order 25 Noise and vibration to estimate the impacts of noise on surrounding area. 2) To prepare proper EMP during EIA study. 3) To follow the EMP during construction of the project. 1) To cover some facilities from which offensive odor will be generated, and to install deodorization facilities. 26 Offensive odor 2) To keep a buffer zone and to plant green belt around the WWTP site. 3) To establish a monitoring system to check odor level around the WWTP, if necessary to take additional odor control measures. (4) Implementation Schedule The schedule for implementation of METI Phase I is presented in Figure S - 3. Da Nang side (or Viet Nam side) conducts the following activities before the JICA Study for fixing loan amount starts. Generally it takes 10 months to 15 months to get an approval for local feasibility study (F/S) including EIA approval. In this schedule the period of F/S Study and approval is estimated to be 12 months. - Establishment of PMU - F/S conducted by Da Nang City - Approval of F/S - Approval of EIA After the preparation works conducted by Da Nang side (or Viet Nam side), the following time frame until construction are estimated.

11 JICA STUDY for fixing Loan amount Selection of consulting firm Detailed Design Preparation of tender document and JICA concurrence Tender period Evaluation of bids JICA concurrence of bid evaluation Contract negotiation JICA concurrence of contract Opening of credit and issuance of letter of commitment Construction 6 Months 10 Months 15 Months 3 Months 2 Months 2 Months 2 Months 4 Months 2 Months 1 Month 48 Months Figure S 3 Project Implementation Schedule Period Description H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 (Months) Establishment of PMU - F/S conducted by Da Nang F/S Approval EIA Approval Land Acquisition for WWTP and Pumping Stations Tariff Revision - JICA STUDY 5 Signing of Loan Agreement - Engineering Services Selection of Consultant 10 Detailed Design 15 Tendering Assistance 14 Construction Supervision 48 Selection of Contractor 14 Land Reclamation 10 Construction 48 Capacity Building Management, DD&SV - Construction and O&M - O&M on the job Training - Public Awareness Raising and Educational Campaign - - To shorten the project time, land reclamation for WWTP is scheduled to be conducted by Da Nang side (or Viet Nam side) just after starting of detailed design and is completed one year before the WWTP construction because it takes at least one year to settle the filled land. When the land reclamation starts after detailed design of WWTP, METI Phase I project will

12 finish in 2020 which is one year longer than final year of present plan. On capacity buildings including managements of detailed design and supervision of construction, and O&M of facilities, it starts in 2012 in which detailed design also starts and finishes in (5) Feasibility of the project The project will make a significant contribution to improve sanitary and environmental conditions, and further prosperity of Da Nang City and its surrounding area by increasing tourist attraction of improved scenery and water quality in the City. The Project also satisfies the National and water sector policies in priority order, and is feasible in technical, economical, and social aspects as mentioned in the previous section (3). World bank has been contributing to water environment sector of Da Nang City and Da Nang City launched Da Nang Priority Infrastructure Investment Project (PIIP) in February 2009 funded by World Bank, which includes study on sewerage and drainage development in whole Da Nang City and detailed design and implementation of some facilities. The overall scope of PIIP has not decided at the moment and PIIP will be increased its scope in some extent. As Da Nang City strongly requests to implement METI Phase I project by Japanese ODA fund, it is required to differentiate the scope of METI Phase I from that of PIIP funded by World Bank. It is also noted that counter measures to solve the present problems on wastewater treatments in Industrial Parks in Da Nang City are being discussed between JICA and Da Nang City. The measures are also expected to contribute to water environmental improvement of Da Nang City and would be a possible component of this Japanese loan project. (6) Technical Advantages of Japanese Companies 1. Japanese Technologies in Sewerage and Drainage Sector Sewerage and drainage system in Japan has been rapidly constructed during the past 30 years. As of the end of March in 2008, 2,099 WWTPs have been operated. The percentage of sewerage served population was approximately 72%, and approximately 91.4 million populations in approximately total127 million population enjoyed sewerage service. During these periods, many technologies including hardware and software in sewerage and drainage system has been developed, improved and accumulated.

13 Most of these technologies and technical knowledge are applicable in the water environment improvement project in Da Nang City. 2. Application of Japanese Technologies to the Project Conventional activated sludge process proposed for WWTP in the project is the best used for plants with 10,000 m 3 /d or more capacity in Japan. Therefore, in Japan a lot of technologies on this process has been developed and accumulated for many years. In this process, energy saving and nitrogen removal technologies have also been developed. Especially an advanced treatment of nitrogen removal with the modification of the process has been applied in many plants in Japan, which would be most useful to cope with future demand on improvement of effluent water quality from WWTP in Da Nang City. As for sludge treatment, separate thickening process proposed in this project can thicken the sludge efficiently by thickening different sludge produced in different places respectively and can reduce return sludge loading and downsize the downstream facilities. Gravity-belt thickener modified in Japan has outstanding performances in energy consumption, easiness of operation, environmental impact of noise and odor, and thickening efficiency. These beneficial characteristics of the equipment developed in Japan would be appreciated. Jacking method will be required to be introduced for construction of deep sewers especially in main or traffic congested roads, Japanese superior technique of various type of jacking methods and space saving construction technology for shaft construction would be useful to minimize construction period and traffic obstructions causing time and energy losses. In increasing demand of worldwide energy saving and conservation of water environment, it is expected and convinced that excellent Japanese techniques and products would be appreciated in construction of sewerage and drainage system in Viet Nam. (7) Schedule and Risks of Project Implementation The next step of METI Phase I Project is to establish Project Implementation Unit (PMU) and to prepare local feasibility study for obtaining approval. Upon the approval of local feasibility study, the project is applied to the Ministry of Planning and Investment (MPI) through Department of Planning and Investment of Da Nang City (DPI) to pillow on short-list of Japanese loan projects. Explanatory effort of Da Nang City to MPI is required for short-listing of the project. The

14 predicted schedule is indicated in Figure S - 3 with all the necessary activities for successful implementation of the project in sustainable manner. As the most serious risk is cost overrun caused by delay of project implementation, various efforts to shorten the schedule for required procedure is essential. For instance, arrangement for simultaneous progress of local feasibility and JICA preparatory studies with intimate relation between Governments of Japan and Viet Nam, advance preparation of land for pumping stations and WWTP, and minimizing the procurement periods of consultancy services and construction would help to minimize the risks.