People s Republic of China: Henan Wastewater Management and Water Supply Sector Project

Transcription

1 Project Administration Memorandum Project Number: Loan Number: 2207 March 2005 People s Republic of China: Henan Wastewater Management and Water Supply Sector Project

2 PROJECT ADMINISTRATION MEMORANDUM The Project Administration Memorandum (PAM) is a working document and should be read along with the RRP and Loan Agreement. It describes the details of major activities, implementation arrangements, procedures to be applied, inputs and cost estimates. The PAM was prepared based on the agreements reached between ECSS and Executing Agency during the Inception Mission. In case of discrepancies between the PAM, RRP, and loan agreement, the loan agreement will prevail. This PAM expressed in English Language, is the definitive text embodying the understanding of the parties. The parties, for the convenience of the Government and EA are also executing a Mongolian language version of the PAM. The Government and ADB have agreed that the English language version of the PAM shall be controlling for all purposes and that ADB assumes no responsibility for the accuracy of the Chinese language version.

3 CURRENCY EQUIVALENTS (as of 1 November 2005) Currency Unit yuan (CNY) CNY1.00 = $0.124 $1.00 = CNY8.08 ABBREVIATIONS ADB Asian Development Bank DSCR debt-service coverage ratio EIA environmental impact assessment EMP environmental management plan EPB environmental protection bureau FIRR financial internal rate of return GDP gross domestic product HDRC Henan Development Reform Commission HECC Henan Engineering Consulting Company HHRP Henan Hai River Plan HPG Henan provincial government HPMO Henan project management office HRB Hai River Basin HRP Hai River Plan IA implementing agency LCB local competitive bidding LIBOR London interbank offered rate MDG Millennium Development Goals MIS management information system MLG minimum living guarantee O&M operation and maintenance PMO project management office PPMS project performance monitoring system PRC People s Republic of China RP resettlement plan SAR subproject appraisal report SEIA summary environmental impact assessment SNWTP South-North Water Transfer Project TA technical assistance WACC weighted average cost of capital WTP water treatment plant WWTP wastewater treatment plant NOTES (i) (ii) The fiscal year of the Government ends on 31 December. In this report, "$" refers to US dollars.

4 TABLE OF CONTENTS LOAN PROCESSING HISTORY i DESIGN AND MONITORING FRAMEWORK ii I. PROJECT DESCRIPTION 1 A. Project Area and Location 1 B. Objectives 1 C. Components and Outputs 1 D. Special Features 2 II. COST ESTIMATES AND FINANCING PLAN 5 A. Cost Estimates 5 B. Financing Plan 6 C. Allocation of Loan Proceeds 7 III. IMPLEMENTATION ARRANGEMENTS 7 A. Executing, Implementing Agencies and Project Management 7 B. Subproject Preparation and Appraisal 8 IV. IMPLEMENTATION SCHEDULE 9 V. CONSULTANT RECRUITMENT 9 VI. PROCUREMENT 10 A. Advance Procurement Action and Retroactive Financing 11 VII. DISBURSEMENT PROCEDURES 11 VIII. PROJECT MONITORING AND EVALUATION 12 IX. REPORTING REQUIREMENTS 12 X. AUDITING REQUIREMENTS 12 XI. MAJOR LOAN COVENANTS 13 XII. KEY PERSONS INVOLVED IN THE PROJECT 13 XIII. ANTI-CORRUPTION 13 APPENDIXES 1. Candidate Subprojects 2. Policy Framework 3. Institutional Capacity Building 4. Detailed Cost Estimates 5. Flow of Funds and Onlending Arrangements 6. Organization Chart of Project Management Arrangements 7. Process for Subproject Identification, Selection, Preparation, and Appraisal 8. Implementation Schedule 9. Outline Terms of Reference for Consulting Services during Implementation Phase 10. Summary of Consultant Procurement Procedure.

5 11. Contract Packages 12. Procurement Modalities and Procedures 13. Outline Project Performance Management System

6 LOAN PROCESSING HISTORY a. Approval of PPTA December 2003 c. Fact Finding January February 2005 d. Management Review Meeting (MRM) 13 April 2005 e. Appraisal Mission April 2005 f. SRC/LTACC 14 June 2005 g. Loan Negotiations October 2005 h. Board Circulation 18 November 2005 i. Board Consideration and Approval 9 December 2005 j. Loan Agreement Signing 23 February 2006 k. Loan Effectiveness including conditions

7 ii DESIGN AND MONITORING FRAMEWORK Design Summary Impact Improved urban environment and public health in the southern part of the Hai River Basin Performance Targets/Indicators Public satisfaction with the urban environment increased (to be quantified when baseline is established through a social survey at project inception). Incidence of waterborne disease reduced from 26,600 in 2004 to 16,000 in 2015 Average number of sick days per person per month attributable to waterborne disease reduced from 15 in 2004 to 9 in 2015 Data Sources/Reporting Mechanisms Annual socioeconomic surveys undertaken as part of a performance management system Public health department statistics Socioeconomic surveys Asian Development Bank (ADB) Project performance audit reports Assumptions and Risks Assumptions Improved water and wastewater services by utility companies are effective and will be sustained. The project city governments remain committed to implementing the Henan Hai River Plan. Risk Initiatives to curb upstream pollution are ineffective. Average amount spent per person per month attributable to waterborne disease reduced from CNY3.0 in 2004 to CNY1.8 in 2015 Outcome Strengthened water and wastewater utility companies in 19 project cities providing sustainable water supply and wastewater services managed on commercial principles, and environmentally sound practices Commercial-oriented operations and financial autonomy, and full costrecovery water tariff revenues, as well as satisfactory level of capital utilization by 2012 Urban residents of 0.5 million in the project cities provided with uninterrupted potable water supplies that meet People Republic of China s (PRC) quality standards by Operating and financial reports of wastewater and water supply companies Reports by external auditors and municipal regulators Water supply companies information systems Public health department audits on water quality Assumptions Political will exists to reform water utility management and financing managements. Sound financing plans limit debt to prudent levels. Existing unsatisfactory water sources are closed down. Sewer networks are built and residences/ businesses connected.

8 iii Design Summary Performance Targets/Indicators 2010 Total pollution load reduced by 33,500 tons of chemical oxygen demand per year by 2010 Technical, financial, and managerial capacity of water supply and wastewater utility companies developed by 2015 Data Sources/Reporting Mechanisms Annual environment reports and operational reports by wastewater companies ADB project completion report Assumptions and Risks Risks Water demand exceeds forecast estimates. Wastewater treatment plants (WWTPs) are built or expanded in the project cities. Required training and staff exchanges/ secondment programs are provided on a timely basis. Project Outputs 1. Increased collection and treatment of urban wastewater in the project cities 80% of urban wastewater in municipal cities and 70% in country cities treated by 2008 All sludge used or disposed of in compliance with PRC regulations by 2010 Wastewater company management information system (MIS) Environnemental protection bureau (EPB) compliance audits Wastewater company MIS EPB compliance audits EPB monitoring Assumptions Water sources prove reliable. Water quality standards do not change. Political support for reform process continues. Political support for tariff increases is present. Governments and agencies concerned provide support. 2. Adequate urban water supplies (in terms of quantity and quality) for project cities 3. Reformed and integrated water and wastewater utilities Total new water treatment capacity of about 150,000 cubic meters (m 3 )/day available by 2008 All new water treatment plants meet PRC water quality standards by 2008 Utilities all managerially autonomous by 2008 Water and wastewater services fully selffinanced by Water supply company MIS Water supply company MIS Public health department audits ADB supervision mission reviews Review of wastewater company and water supply company financial statements Risks Increase in wastewater flow exceeds estimates. Disposal regulations are changed. No suitable disposal sites are made available. Industries do not implement adequate pretreatment. Wastewater is too weak for effective treatment.

9 iv Design Summary 4. An effective WWTP operating regime introduced 5. Improved public awareness of health and environment Performance Targets/Indicators All project WWTPs meet discharge standards from 2008 WWTPs exceed PRC efficiency norms from 2008 Increased public awareness (to be quantified when baseline established) Data Sources/Reporting Mechanisms EPB monitoring Wastewater company MIS Comparative unit costs and trends Socioeconomic surveys Assumptions and Risks Activities with Milestones 1.1 Engineering design completed by June Land acquisitions and resettlement completed by June Construction of WWTPs with a total capacity of 590,000 m 3 /day complete by Associated intercepting/trunk sewers with a total length of 670 kilometers (km) completed by % of properties connected to public sewers by Engineering design completed by June Land acquisitions and resettlement completed by June Total water treatment capacity of 150,000 m 3 /day added by About 230 km of water pipelines completed by About 95% of capacity-building milestones related to managerial financial, and operations training achieved by Development of operational procedures for the WWTPs and 80% of staff achieved necessary skill level by Development of operational procedures for the water treatment plants and 80% of staff achieved necessary skills level by Publicity initiatives for public awareness campaigns carried out by 2010 Inputs ADB ADB project loan of $100 million Procurement review and approval Regular review missions Government Counterpart financing of $100 million Project management offices established and maintained at all levels Capacity building and training budget of $2.7million Operation and maintenance budget and staffing (to be quantified during implementation) Cofinancing Domestic borrowing of $31.1 million.

10 I. PROJECT DESCRIPTION A. Project Area and Location 1. The Project is in Henan province. Henan Province includes 18 municipalities and 117 counties and county-level cities with a total population of 96.7 million in 2003, growing at around 0.7% annually. The current proportion of urban dwellers is 27%, but the urban population has been growing at over 6% annually over the past decade. Henan covers the upper part of the Hai River Basin (HRB), one of the three most polluted river systems 1 in the PRC. The northern part of Henan within the HRB includes five municipalities: Anyang, Hebi, Jiazhou, Puya1.ng, and Xingxiang. The main rivers in this part of the basin flow into Wei River and Zhangweinan Canal, and then eventually into Bohai Bay. Like other parts of the HRB, this subbasin is heavily polluted by domestic and industrial wastewater. The polluted surface water contaminates shallow groundwater sources, on which a significant proportion of urban and rural residents depend for drinking water. 2. The Government has proposed 19 subprojects 2 (15 for wastewater management and 4 for water supply) in four municipalities and 15 counties in the HRB. Appendix 1 lists the candidate subprojects. The Fact-Finding Mission reviewed 8 of the 19 candidate subprojects, representing the four municipalities in the HRB. The review was to demonstrate the approaches and procedures of subproject selection and appraisal. The appraisal indicates that all 8 subprojects are ready for implementation and viable in terms of technical, institutional, social, financial, economic, and environmental aspects. B. Objectives 3. The overall objective of the Project is to improve the urban environment and public health through improved wastewater management and water supply. The Project will support (i) creating municipal wastewater companies and making them efficient and commercially managed, (ii) improving cost recovery from users through improved tariffs with gradual increases to full cost recovery, and (iii) using a comprehensive approach to river basin pollution prevention and control. The outcome is that water and wastewater utility companies in the project cities provide sustainable water supply and wastewater services managed on commercial principles and environmentally sound practices by (i) increasing collection and treatment of domestic and industrial wastewater, (ii) providing adequate public water supplies, and (iii) improving the quality of surface and groundwater in and downstream of the project cities. C. Components and Outputs 4. The Project comprises physical components covering construction of wastewater management and water supply facilities, and an associated capacity-building component to support project management and implementation by building capacity of the project management offices (PMOs) and implementing agencies (IAs). Policy dialogue under the Project supports these components and contributes to ongoing dialogue with the Government. Appendix 2 provides the policy framework addressing issues and actions required. The 8 representative subprojects are provided in the Supplementary Appendix D of the RRP. 1 The others are the Huai and Liao river systems. 2 A subproject is defined as a package of infrastructure investment for wastewater management or water supply in one municipal city or county city.

11 2 1. Wastewater Management Component 5. The wastewater management component addresses the infrastructure deficiencies for domestic and industrial wastewater collection and treatment. The wastewater subprojects will serve urban areas of a municipal city or a city proper of a county. Facilities include sewers, pump stations, WWTPs, and treatment facilities for effluent reuse. Most existing collection systems were developed piecemeal and have many deficiencies related to inadequate ground cover, adverse slope, and inappropriate routing of sewers. Most are combined and collect storm-water run-off during wet weather, as well as wastewater. Major portions of the collection systems will be rebuilt under the individual subprojects. Wastewater treatment will improve surface and groundwater quality in and downstream of the project cities and contribute to reduced transboundary pollution between Henan, Hebei, and Shandong provinces. 2. Water Supply Component 6. The water supply component addresses the immediate need to resolve the pollution problem with drinking water sources by reducing reliance on abstraction of groundwater from shallow wells. Raw water sources for urban water supplies are becoming severely affected by wastewater pollution of both surface and shallow groundwater. In addition, shallow groundwater sources are being severely drawn down, causing consolidation of soils and consequent subsidence of urban areas. Typical facilities under the water supply subproject include distribution pipelines and water treatment plants. The improved quality and availability of treated water will bring health, environmental, and social benefits to the communities. 3. Institutional Capacity-Building Component 7. The institutional capacity-building component addresses the weak capacity of implementing and operating agencies and will help ensure the financial and institutional sustainability of the Project. The component comprises a combination of consulting services and various training programs, and will predominantly target local IAs and PMOs. Specifically, this component will help the project companies (i) establish themselves as autonomous and financially sustainable utility companies that can effectively and efficiently meet the service obligations set out; and (ii) prepare a common operating manual and financial reporting manual, as well as improve public awareness of key project-related issues such as benefits accruing from sanitation investments. In addition it will help the project companies and their parent municipal and county governments (i) comply with relevant national policies for cost recovery, tariff, and enterprise reform of the water and wastewater management sector; and (ii) develop plans and programs for private sector participation in the water and wastewater management sector that support government policies for improving efficiency and service standards. Appendix 3 provides details of the capacity-building measures/activities. D. Special Features 8. Focus of Capacity Building on Counties. The Project is one of the first ADB projects in the PRC wastewater and water supply sectors to involve mostly fourth-tier governments. This characteristic has several implications. First, the physical size and cost of the possible subprojects are much smaller than previously ADB-financed wastewater or water projects. Second, the majority of participating cities and counties will have limited or no previous involvement with foreign-financed infrastructure projects, and certainly no substantive experience with ADB requirements.

12 3 9. At this level, project management and professional skills capacity are significantly less than that found in municipal and provincial cities. A partial counterbalance is that the subprojects are generally smaller and use well-proven approaches and technologies. However, the need for significant capacity building during project implementation is evident. The Project will provide consulting services and training with a focus on human resource development. 10. The project implementation consultants to be recruited under the Project will work with the provincial PMO, local IAs, and relevant officials from municipal and county governments. They will provide assistance and advice in the following areas: (i) project management and implementation support; (ii) institutional and managerial improvements; (iii) financial management; (iv) utility tariff setting, billing, and income collection; and (v) operational management. Other capacity-building activities include training in project implementation and utility operations, staff exchanges and secondments, and exposure to best practices in the PRC and internationally. 11. Integrated Water Resource Management. ADB has assisted the Government in formulating policy and designing investment programs based on an integrated approach to water and environmental management. The ADB assistance has drawn upon its growing experience in addressing basin environmental issues through ongoing projects in the HRB and in other environmental improvement projects in the PRC. The Project will complement these efforts by assisting the project municipal and county governments in formulating a practical approach to provide urban environmental services and introduce the principles of integrated water resource management and pollution control. 12. Environmental Impacts and Benefits. The Project provides the most sustainable prospect for reducing waterborne pollution, improving the quality of surface water and groundwater, reducing transboundary pollution disputes, and protecting drinking water sources. The wastewater collection systems will improve the urban environment by reducing exposure of the community to untreated wastewater with its associated impacts on public health and nuisance. The provision of centralized wastewater treatment facilities allows cost-effective treatment of industrial wastewater through pretreatment at individual enterprises prior to discharge to a wastewater collection system for subsequent treatment at a municipal WWTP. This provides greater assurance of protecting receiving waters through the efficient operation of centralized wastewater treatment facilities that can be more easily monitored than treatment facilities at individual enterprises. Treated effluent can potentially be reused beneficially either for industry or for irrigation: this forms a component of some subprojects. 13. The proposed use of new sources of water of improved quality and reliable yield for municipal water supply from either deep groundwater or from protected upland reservoirs will ensure improvements in the availability of water of an acceptable quality to the urban population served by each water supply subproject. The proposed extension, replacement, and refurbishment of water distribution systems will increase the size of the population provided with access to piped water supplies. These improvements in the distribution system will reduce water losses and the risk of contamination of treated water within the distribution system. 14. The SEIA for the eight representative subprojects and the SEIA for the remaining subprojects, including the EMP, cover all phases from project design to construction and operation. They conclude that the adverse impacts generated by the Project could be successfully mitigated to acceptable levels through the mitigation and monitoring measures specified in the EMP. The EMP proposes institutional strengthening and training to address the

13 4 weak capacity of county governments and IAs. Supplementary Appendix J in the RRP summarizes the environmental impacts, mitigation measures, and monitoring plans. 15. The Poverty Reduction and Social Benefits. The poverty and social assessment for the 8 representative subprojects and the 11 candidate subprojects indicates that the Project will benefit a total urban population of about 1.5 million people through the provision of clean water and improvement of wastewater services. Of the total beneficiary population, about 170,000 or 11% are categorized as living below the poverty line of CNY1,348 per capita per year. The Project will support poverty reduction by (i) reducing the incidence of waterborne disease, cost of medical care, and sick days taken, thus reducing household health expenditures; (ii) providing safer and more reliable urban water supplies; (iii) improving the quality of life of the urban poor by eliminating uncollected sewage in poor neighborhoods and improving water quality in urban drainage channels; and (iv) providing employment opportunities for the poor. 16. The Project will improve public health by reducing waterborne disease through improved water supply and wastewater management services. Annual economic losses due to waterborne disease, which currently stand at CNY30 million are expected to be reduced by 40%. The Project will also create job opportunities for both skilled and unskilled labor during implementation. The Project will utilize about 6,000 person-years of labor during construction; about 30% of the job opportunities can be filled by the poor and women. The Project will stimulate local economic development, particularly in construction and tourism, and consequently will continue to provide a source of employment for local communities. 17. In the project area, three major social measures are designed to protect urban residents from falling into poverty. These include (i) a living allowance for laid-off employees, (ii) unemployment insurance, and (iii) a social support program under the minimum living guarantee scheme. All project cities have, through various social support programs, implemented a water tariff waiver or reduction for households with incomes below the poverty line. 18. The Project will promote public awareness and education programs about project benefits, social acceptance of user fees and tariffs for wastewater, public hygiene, and behavior of consumers on water saving and managing wastewater disposal. The Project will also provide gender-awareness training to project management staff to promote women s participation in key areas such as employment opportunities, and set up gender-specific indicators to monitor and evaluate project impacts on men and women. Appendix 13 of the RRP provides a summary poverty reduction and social strategy for the Project. 19. Land Acquisition and Resettlement. Resettlement impacts were identified for the eight representative subprojects and 11 candidate subprojects. ADB reviewed and approved RPs for the eight representative subprojects and the resettlement framework for subsequent subprojects; these were uploaded on the ADB website on 9 July and 6 June 2005, respectively. Resettlement under the Project includes permanent and temporary land acquisition, and building demolition; but the resettlement impacts are relatively small. Considering the good experiences with other urban projects and the strong commitment of local authorities to the safeguard policies, significant problems are unlikely to be encountered. The IAs will fund the resettlement costs according to the standards set out in the RPs. Entitlements will be provided to those affected before demolition and ground-leveling commence, and before any loss of land. A resettlement information booklet was distributed to those affected through village offices, and the full RPs for the eight representative subprojects were made available at the village offices. Appendix 14 of the RRP provides a summary RP.

14 5 20. For subsequent candidate subprojects, the RP will be finalized based on the detailed engineering designs. HPMO, assisted by the IAs, will be responsible for monitoring RP implementation and submitting reports to ADB. A regular reporting system was established to ensure that key resettlement activities are implemented on schedule. HPMO has engaged a domestic institute to carry out independent monitoring of resettlement implementation. Surveys will be conducted for annual evaluations for 2 years upon completion of resettlement, and the findings reported to HPMO and ADB. 21. Institutional Benefits. The capacity-building component under the Project and continued policy dialogue with the municipal governments will support institutional and financial reforms that will provide a more viable, commercially oriented basis for managing and operating water and wastewater systems, particularly by counties. The maturity of county institutional arrangements vary considerably between cities. Of the 15 project cities, 8 have established water utility companies and the remaining 7 will establish water utility companies no later than when their onlending agreements are signed. Of the 8 cities, 5 have established or will establish water group companies that have responsibility for both water supply and wastewater. HPG considers this water group company arrangement to be the preferred institutional arrangement for subproject implementation. The integrated approach supported by the Project may also serve as a model in similar cities in the PRC. 22. During the Fact-Finding Mission, broad financial management assessment was conducted, covering the areas of implementation arrangements, sustainability, and fiduciary risks and mitigation strategy. A detailed financial management assessment will be conducted at project inception. Based on the detailed financial management assessment, each wastewater or water utility will be assisted to establish a sound and solid financial management system at the beginning of project implementation. The financial management system will be in line with ADB's Guidelines for Governance and Financial Management of an ADB Investment Project (November 2003). Each utility will keep accounts in accordance with commercial accounting principles and be subject to independent external audit by a suitably qualified firm of commercial auditors. Accounting will be in accordance with relevant PRC accounting standards, which are largely in accordance with international norms. II. COST ESTIMATES AND FINANCING PLAN A. Cost Estimates 23. The total project cost is estimated at $200.0 million equivalent, comprising $100.0 million in foreign exchange costs and $100.0 million equivalent in local currency costs, including taxes and duties of approximately $16.3 million. Table 1 provides a summary of the cost estimates, and Appendix 4 gives detailed cost estimates and the assumptions behind them. The cost estimates are based on the 8 representative subprojects and the remaining candidate subprojects at mid-2005 prices.

15 6 Table 1: Cost Estimates ($ million) Component Foreign Exchange Local Currency Total A. Base Cost 1. Representative Subprojects a. Wastewater Management b. Water Supply Subtotal (1) Provision for Remaining Subprojects Capacity Building Subtotal (A) B. Contingencies 1. Physical Price Subtotal (B) C. Financing Charges during Implementation Total Source: Asian Development Bank estimates. B. Financing Plan 24. The Government has requested a loan of $100 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 to 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 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. 25. The ADB loan will cover the foreign exchange cost of the Project, including interest during construction. The PRC Government will relend to HPG. HPG will onlend to municipal governments, which will onlend to city and county governments, which will onlend to the IAs. HPG will retain $1,595,000 of the loan proceeds for implementation of the capacity building and training programs under the Project. All relending 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 ADB loan. Appendix 5 illustrates the flow of funds and relending and onlending arrangements. 26. Local costs will be financed by contributions from (i) the central Government (state bonds), HPG (grants and the newly created Provincial County Economic Development Special Fund), and municipal/county governments as well as water companies, and (ii) domestic borrowing (local cofinancing). All loans, including the ADB loan, will be repaid from user charges. The financing plan is summarized in Table 2. The availability of counterpart financing was confirmed for the 8 representative subprojects during the ADB Fact-Finding Mission.

16 7 Table 2: Financing Plan ($ million) Source Foreign Local Currency Total Percent Exchange A. Asian Development Bank B. Local Banks Cofinancing C. Counterpart Funds 1. Central Government Provincial Government Municipal/County Governments and water companies Subtotal (C) Total Source: Asian Development Bank estimates. C. Allocation of Loan Proceeds 27. The loan will finance 100% of the foreign exchange costs ($100 million), which is 50% of the total project cost. ADB financing is allocated as follows: civil works 56% of total expenditures, materials and equipment 100% of foreign costs; and capacity building and training 100% of foreign costs. III. IMPLEMENTATION ARRANGEMENTS A. Executing, Implementing Agencies and Project Management 28. HPG will be the Executing Agency responsible for overall project implementation. A project leading provincial group has been established to oversee preparation and implementation of the Project. This group comprising staff from the Financial Bureau, Development and Reform Commission, Construction Bureau, Water Resources Bureau, and Environmental Protection Bureau is led by the executive vice governor of Henan province. 29. HPG has set up the Henan PMO (HPMO) to coordinate implementation of externally funded projects. HPMO will play a vital coordination role during both project preparation and project implementation, and ensure smooth communications with the local PMOs and IAs. HPMO will recruit the consultants to be engaged under the Project. It has considerable capacity for project implementation, and is experienced and has performed well in implementing major foreign-funded projects, including the ongoing ADB-funded agriculture project Each municipality involved in the Project has or will set up a local project leading group and a municipal PMO to coordinate aspects of project preparation and implementation falling within their respective jurisdictions. Each county city planning to participate has set up a local project leading group and a county PMO to coordinate aspects of project preparation and implementation falling within their respective jurisdictions. These municipalities and county cities have experience managing domestic projects but not foreign-funded wastewater management and water supply projects. As the capacity of the institutions is considered weak, appropriate capacity-building measures were identified and institutional capacity will be strengthened through the Project. Supplementary Appendix E of the RRP presents a detailed assessment of 3 ADB Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the People s Republic of China for the West Henan Agriculture Development Project. Manila

17 8 the project institutions and the capacity-building measures included under the Project. Appendix 6 shows the project management arrangements. 31. For each subproject, a wastewater or water supply utility company will be the IA. The IA either is or will be established and will (i) be a properly constituted enterprise company established under the provisions of PRC law, and become largely managerially and financially autonomous; (ii) act as IA for the relevant subproject, working and liaising closely with the relevant local PMO, and various departments and agencies of local government; (iii) carry out procurement of civil works and equipment under its subproject; (iv) carry out O&M of project facilities; and (v) will be responsible for debt servicing. The Project s capacity-building component is designed to take into account weaknesses identified by the financial management assessment of the 8 representative subprojects. With this provision, the Project s financial management arrangements are considered satisfactory. B. Subproject Preparation and Appraisal 32. In addition to the 8 feasibility studies reviewed by ADB, the identification, selection, preparation and appraisal of the remaining 11 subprojects for inclusion in the Project will follow the three stage approach below. 33. Subproject Identification and Selection. The subprojects have been or will be selected in accordance with the following basic criteria: (i) inclusion of the subproject in the HHRP; (ii) confirmation by the participating local government on its ability and willingness to arrange counterpart financing; (iii) confirmation by the participating local government on its willingness to comply with ADB safeguard policies and other requirements; and (iv) the implementation period of the subproject being in Subproject Preparations. The participating city government and IA will, with the assistance of HPMO, prepare a feasibility study for each of the remaining 11 subprojects. The feasibility study report will include EIA; resettlement plan (RP) (if required); rationale; scope and components; technical description and analysis; cost estimates and financing plan; implementation arrangements; and financial, economic, and institutional analysis, including financial management assessment and social dimensions. The consultants to be engaged under the Project and responsible staff of the county/municipal PMO will review the report, before submitting it to HPMO for appraisal. 35. Subproject Appraisal and Approval. HPMO will be responsible for the appraisal of the subprojects and has commissioned the Henan Engineering Consulting Company, a subsidiary organization of Henan Development Reform Commission (HDRC), to undertake detailed appraisals on its behalf. HDRC will prepare a subproject appraisal report (SAR) for consideration by HPG. The SAR will follow the format of the SARs for the 8 representative subprojects. HPG will appraise the subprojects in accordance with the criteria agreed upon by the Government and ADB. The SARs for the first subproject and for any subproject exceeding $10 million equivalent will be sent to ADB for approval. The remaining SARs will be sent to ADB for information. Supplementary Appendix F provides details on the subproject appraisal criteria. 36. For the environmental safeguard requirements, an SEIA covering the 8 representative subprojects was prepared in accordance with the PRC s EIA Technical Guidelines and ADB s Environmental Assessment Guidelines (May 2003). The EIA reports for individual subprojects used methodologies and standards consistent with relevant guidelines established by the State

18 9 Environmental Protection Administration, in compliance with applicable laws and regulations. The individual EIA reports were approved by municipal or provincial environmental protection bureaus following domestic procedures. ADB reviewed the SEIA and posted it on the ADB website in March 2005 to meet the 120-day disclosure requirement. Processing procedures is in Appendix The remaining 11 subprojects have received the same extent of environmental safeguard scrutiny, modeled on the EIAs for the 8 representative subprojects and the SEIA. The EIAs for the remaining subprojects were approved by the municipal or provincial environmental protection bureaus. HPMO completed the SEIA for the remaining subprojects following the format of the first SEIA, reviewed by the Appraisal Mission, and submitted for confirmation to the provincial environmental protection bureau. Upon confirmation by the bureau, the SEIA was posted on the ADB website to meet the 120-day disclosure requirement. 38. RPs for the 8 representative subprojects were prepared in accordance with the PRC Land Law and the ADB involuntary resettlement policy. 4 In April 2005, ADB reviewed and approved the draft RPs. The RPs were subsequently finalized based on ADB comments, approved by local government, and disclosed to relevant offices, villages, and people affected. (Supplementary Appendix G in the RRP). For the remaining subprojects, a resettlement framework was prepared and approved by ADB (Supplementary Appendix H in the RRP). Draft RPs have been prepared for other candidate subprojects and will be upgraded using the representative subproject RPs as models. A poverty and social assessment conducted for the 19 subprojects indicates no ethnic minorities will be affected by the Project. IV. IMPLEMENTATION SCHEDULE 39. The Project will be implemented over 5 years from 2005 to 2010 (Appendix 8). This schedule is considered realistic 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 basic level of technology and modest scale of the individual subprojects indicate that this schedule is realistic and achievable. V. CONSULTANT RECRUITMENT 40. Provision is made for 28 person-months of international and 300 person-months of domestic consulting services to support HPMO, local PMOs, and IAs in project implementation and capacity building to be funded under the Project. The staff of IAs need to strengthen their expertise in (i) project management and implementation support, (ii) efficient operating procedures, (iii) preventive maintenance, (iv) financial management, (v) social impact and environmental monitoring, (vi) business planning and management information system development, (vii) human resource development, and (viii) corporate governance. Capacity building for IAs will be achieved through consultant inputs, hands-on training on project facilities, training in the PRC, and international training financed by the loan. The majority of the consulting services will be provided by domestic, not international, consultants. Because this type of capacity building is generally not new to the PRC, domestic experts have this knowledge and can provide more cost-effective support. However, the overall capacity-building program is large and diverse, and international consultants will provide general direction to capacitybuilding content. An international consulting firm will be recruited in accordance with ADB s Guidelines on the Use of Consultants using the quality- and cost-based selection method with 4 ADB The Bank s Policy on Involuntary Resettlement. In Handbook on Resettlement. Appendix 1. Manila.

19 10 simplified technical proposals and other arrangements satisfactory to ADB on the engagement of domestic consultants. Domestic consultants will also be recruited for social impact and environmental monitoring in accordance with arrangements satisfactory to ADB on the engagement of domestic consultants. Appendix 9 presents outline terms of reference for consulting services. Summary of consultant recruitment procedures is in Appendix 10. VI. PROCUREMENT 41. ADB-financed goods and services will be procured in accordance with ADB s Guidelines for Procurement, and the PRC s Tendering and Bidding Law and procurement regulations. Appendix 11 provides indicative procurement packages. All civil works contracts are estimated at below $10 million will be procured through local competitive bidding (LCB) procedures as local contractors have the expertise and capacity to undertake these works, in accordance with the standard procurement procedures as provided for in the Tendering and Bidding Law of the Borrower and acceptable to ADB,. Since these works involve mainly labor costs, international contractors are not likely to be interested in the work. However, in accordance with ADB requirements, foreign contractors may participate in bidding for LCB bidding contracts. The first draft English version of bidding documents for the first civil works contract will be submitted to ADB for prior review and approval. The ADB approved bidding documents for the first civil works contract shall be used as a model for the other civil works contract on the basis of LCB. Prior ADB review of bidding documents shall not be required for subsequent civil works contracts where the contract value is estimated to cost the equivalent of $10 million or less. Promptly after each civil work as contract is awarded, ADB shall be furnished with three copies of (1) minutes of public opening of bids; (ii) summary and evaluation of the bids; and (iii) signed contract. ADB reserves the right to refuse to finance a contract where the civil works has not been procured under procedures substantially in accordance with those agreed between the Borrower and ADB, the Guidelines for Procurement or the provisions of the loan agreement. Salient features of procurement modalities and procedures are in Appendix Civil works contract estimated to cost the equivalent of more than $10 million will be awarded through international competitive bidding (ICB) and will be prequalified before the bidding. 43. Major contracts for equipment and materials estimated at more than $1 million will be undertaken through ADB ICB procedures, while lower value contracts will be procured by international shopping (IS) or direct purchase (DP) if below $100,000. The internationally tendered equipment packages for the main process equipment will include the technical support necessary for ensuring proper system coordination and integration, as well as installation, testing, commissioning, and training. This approach will ensure quality control in equipment installation and operator training, utilizing the manufacturers and suppliers specialist technical experts for successful execution of the total process system. 44. For contracts to be awarded on the basis of ICB, a General Procurement Notice [(GPN) (which ADB will arrange to publish separately)] in such form and detail and containing information as ADB shall reasonably request shall be submitted to ADB as soon as possible not later than 90 days before the issuance of either the first prequalification invitation to bid or the first invitation to bid. ADB will be provided the necessary information to update such GPN annually as long as any goods and works remain to be procured on the basis of ICB. Procurement actions will be subject to ADB review in accordance with the procedures set forth in Chapter IV of the guidelines for Procurement. Each draft prequalification bidding documents

20 11 and each draft bidding documents to bid will be submitted to ADB for approval before it is issued. 45. In comparing bids under ICB, a margin of preference may be provided, at the option of the Borrower and in accordance with the provisions of the loan agreement. 46. Each supply contract estimated to cost the equivalent of $1 million or less will be awarded through IS as described in Chapter III of the Guidelines for Procurement. Each draft invitation to bid and related bid document need not be submitted to ADB for approval before they are issued. The invitation to bid and related bidding documents shall be issued to a reasonable number of suppliers, which shall not be less than three and from more than one eligible source country and shall whenever practicable, be advertised in an English language newspaper of general circulation in the borrower s country. The bids or quotation received shall be opened publicly and compared and evaluated as in ICB. After each contract is awarded, ADB shall be furnished with three copies of (i) summary and evaluation of the bids or quotations received; and (ii) signed contract. 47. Equipment or material estimated to cost less than the equivalent of $100,000 may be procured directly from the manufacturer of the original equipment or from suppliers or agents in accordance with para of the Guidelines for Procurement. After the award, three copies of each contract for such items shall be submitted to ADB. A. Advance Procurement Action and Retroactive Financing 48. The Government requested, and ADB approved, advance procurement action for civil works, and recruitment of project implementation consultants up to contract signing. To meet the target of construction of wastewater collection and water supply systems by 2007, the six project counties for the nine subprojects have to initiate early rehabilitation of pumping stations, sewer networks, and water distribution systems; and construction of wastewater treatment plants and water treatment plants (Appendix 11). Advance procurement action is necessary to support these works. ADB has also in principle approved retroactive financing up to $8 million equivalent for expenditures incurred on the nine subprojects from 30 April 2005 to the date of loan effectiveness. 5 The Government was advised that ADB approval of advance procurement action and retroactive financing will not in any way commit ADB to approve the proposed loan, and ADB financing will be dependent upon compliance with all aspects of ADB procedural requirements, including compliance of the Government and HPG with relevant provisions of the loan and project agreements and ADB guidelines. VII. DISBURSEMENT PROCEDURES 49. HPMO will establish an imprest account after loan effectiveness in accordance with ADB s Loan Disbursement Handbook (January 2001). Disbursements from the imprest account will be supported by an appropriate withdrawal application and related documentation. Such documentation will demonstrate, among other things, that the goods/services (i) were produced in and procured from ADB members, and (ii) are eligible for ADB financing. The initial amount to be deposited into the imprest account will not exceed the estimated capital expenditure for the next 6 months, or 10% of the loan amount, whichever is lower. The statement of expenditures procedure may be used for reimbursement of eligible expenditures; any individual payment to be reimbursed or liquidated under the procedure will not exceed $200,000. Summary 5 These actions were reported in ADB Business Opportunities (internet edition) in May 2005.

21 12 disbursement procedures and modalities are in the Disbursement letter (Appendix 14) to be sent by our Controller s Department. VIII. PROJECT MONITORING AND EVALUATION 50. Project performance monitoring system (PPMS) indicators include service levels, treated wastewater quality and other measures of operational performance, percentage of wastewater collected and treated, user satisfaction with the urban environment, and relevant economic and health data to monitor project impacts. The relevance and practicability of data collection for the indicators were confirmed with HPMO. Appendix 13 outlines the contents of the PPMS. Supplementary Appendix I in the RRP presents methodologies for health benefit estimation and monitoring health benefits to be achieved. 51. At the beginning of project implementation, HPMO and the municipal PMOs, with the assistance of consultants, will develop comprehensive PPMS procedures to systematically generate data on inputs and outputs of the project components; and the socioeconomic, health, and environmental indicators to measure project impacts. HPMO and the municipal PMOs will refine the PPMS framework, confirm achievable targets, firm up monitoring and recording arrangements, and establish systems and procedures no later than 6 months after project inception. 52. Under the PPMS framework, baseline and progress data will be reported at the requisite time intervals by the local PMOs to HPMO, including semiannual reporting on the environmental management plan (EMP). HPMO will be responsible for analyzing and consolidating the data through its management information system. The PPMS will be designed to permit adequate flexibility to adopt remedial action regarding project design, schedules, activities, and development impacts. HPMO, with assistance from the consultants, will monitor and assess activities, and report to ADB quarterly on the physical implementation and financial aspects of the Project to ensure that impacts are monitored and reported in line with ADB requirements. IX. REPORTING REQUIREMENTS 53. HPMO will prepare quarterly progress reports (sample format in Appendix 15) indicating progress made, use of loan proceeds, problems encountered during the review period, steps taken or proposed to remedy the problems, proposed program of activities, and progress expected for the following quarter. HPMO will ensure that reports are consolidated and submitted to ADB in a timely manner (10 days after the end of the quarter). The quarterly progress report will be used by ADB in updating ADB Project Performance Report (PPR), Appendix 16. Within 6 months of physical completion of the Project, HPMO, with support from the municipal and county PMOs and IAs, will submit to ADB a completion report that describes institutional strengthening and water sector policy reform; implementation of the wastewater management and water supply systems; other project implementation matters; actual costs incurred in relation to cost estimates, benefits, and beneficiary consultations; and other information requested by ADB. X. AUDITING REQUIREMENTS 54. HPG and each IA will maintain records and accounts that identify the goods and services financed from the loan proceeds, financing resources received, expenditures incurred for the Project, and use of local funds. The accounts will be established and maintained in accordance with sound accounting principles and appropriate accounting standards. The annual