Report and Recommendation of the President to the Board of

Report and Recommendation of the President to the Board of Directors

Sri Lanka Project Number: 43025 June 2011

Proposed Loan

People's Republic of China: Gansu Tianshui Urban

Infrastructure Development Project

CURRENCY EQUIVALENTS (as of 2 June 2011)

Currency Unit – yuan (CNY)

CNY1.00 = $0.15436 $1.00 = CNY6.4780

For the purpose of calculations in this report, an exchange rate of $1.00 = CNY6.60 has been used.

ABBREVIATIONS ADB – Asian Development Bank CHP – combined heat and power plant EIA – environmental impact assessment EMP – environmental management plan GAP – gender action plan GHG – greenhouse gas GTEZ – Guanzhong-Tianshui Economic Zone km – kilometer LIBOR – London interbank offered rate m2 – square meter NMT – nonmotorized transport PAM – project administration manual PRC – People’s Republic of China THC – Tianshui Heating Company TMG – Tianshui Municipal Government TPMO – Tianshui project management office

NOTES

(i) The fiscal year (FY) of the Government of the People's Republic of China ends on 31 December.

(ii) In this report, "$" refers to US dollars.

Vice-President B. N. Lohani, Vice-President-in-Charge, Operations 2 Director General K. Gerhaeusser, East Asia Department (EARD) Director/Officer-in-Charge

F. Yue, Officer-in-Charge, Urban and Social Sectors Division, EARD

Team leader B. Reid, Senior Finance Specialist, EARD Team members L. Apagalang, Project Analyst, EARD M. Gupta, Senior Safeguards Specialist (Resettlement), EARD M. Guzon, Operations Assistant, EARD S. Kawazu, Counsel, Office of the General Counsel A. Morel, Environment Specialist, EARD W. Walker, Senior Social Development Specialist, EARD Peer reviewer K. Julian, Lead Urban Development Specialist (PPP), Central and

West Asia Department

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

PROJECT AT A GLANCE

MAPS

I. THE PROPOSAL 1

II. THE PROJECT 1

A. Rationale 1 B. Impact and Outcome 3 C. Outputs 3 D. Investment and Financing Plans 4 E. Implementation Arrangements 5

III. DUE DILIGENCE 6

A. Technical 6 B. Economic and Financial 6 C. Governance 7 D. Poverty and Social 7 E. Safeguards 8 F. Risks and Mitigating Measures 9

IV. ASSURANCES AND CONDITION 10

V. RECOMMENDATION 10

APPENDIXES

1. Design and Monitoring Framework 11

2. List of Linked Documents 14

PROJECT AT A GLANCE

1. Project Name: Gansu Tianshui Urban Infrastructure Development 2. Project Number: 43025 3. Country: People's Republic of China

4. Department/Division: East Asia Department/Urban and Social Sectors Division

5. Sector Classification: Sectors Primary Subsectors Multisector Energy utility services

Other municipal services

Urban transport

6. Thematic Classification: Themes Primary Subthemes Economic growth √ Promoting economic efficiency and enabling

business environment Environmental sustainability Urban environmental improvement

Capacity development Institutional development

Organizational development

6a. Climate Change Impact Climate Change adaptation = low Climate Change mitigation = low (mainly district heating component)

6b. Gender Mainstreaming Effective gender mainstreaming (EGM) √ Gender equity theme (GEN) No gender elements (NGE) Some gender benefits (SGB)

7. Targeting Classification:

General Intervention

Targeted Intervention

Geographic dimensions of

inclusive growth

Millennium development

goals

Income poverty at household

level √

8. Location Impact: Urban High

9. Project Risk Categorization: Complex

10. Safeguards Categorization: Environment A Involuntary resettlement A Indigenous peoples C

11. ADB Financing: Sovereign/Nonsovereign Modality Source Amount ($ Million) Sovereign Project loan Ordinary capital resources 100.0

Total 100.0

12. Cofinancing: No Cofinancing required.

13. Counterpart Financing:

Source Amount ($ Million) Government 61.4 China Development Bank 68.2

Total 129.6

14. Aid Effectiveness: Parallel project implementation unit No Program-based approach No

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 Gansu Tianshui Urban Infrastructure Development Project.1 2. The project aims to promote balanced and environmentally sustainable urbanization, and to improve living conditions in Tianshui, a second-tier city in Gansu province, PRC. It will support the restructuring and expansion of the Qinzhou district heating network; construction of urban roads and bridges, and related services such as better flood control; and stronger urban management capacity.2

II. THE PROJECT

A. Rationale

3. Gansu province has the PRC's second-lowest gross domestic product per capita—Tianshui municipality’s 3.6 million inhabitants include 640,000 urban dwellers in Qinzhou and Maiji districts with an estimated urban poverty rate of 13.5% (2009).3 Development barriers include poor infrastructure and Gansu's remote inland location. Transport links are being improved through expressway and rail construction, and in July 2009 the State Council approved the establishment of the Guanzhong-Tianshui Economic Zone (GTEZ). By 2020, the GTEZ is intended to become the northwest PRC's economic backbone. Specific objectives are the promotion of economic reform, creation of an open economic zone, and transport improvements for all, thereby attracting investment and corporations. Tianshui’s urban population will increase as rural migrants seize economic opportunities in the GTEZ. The influx of industries and migrants will pressure Tianshui’s infrastructure. 4. Although positioned as an economically developed, environment-friendly, and livable city, Tianshui faces urban development challenges. These include poor district heating and air quality, seasonal flooding, and inadequate urban transportation. The rationale for the project is addressing these urban development challenges and so enabling Tianshui to meet urbanization pressures and maximize GTEZ-related benefits. 5. District heating. The many small-scale boilers of Tianshui’s Qinzhou district are energy-inefficient. During winter, pollutants from these coal-fired boilers and single-family heating stoves lessen air quality. Poor service quality and limited heating coverage especially affect women and the urban poor—for instance, women are more likely to have higher exposure to pollutants from heating stoves. Inefficiencies also undermine the financial sustainability of the Tianshui Heating Company (THC), Qinzhou district’s main heating provider. The China Huaneng Group intends to pipe recycled wastewater to a combined heat and power plant (CHP) to be constructed outside Tianshui.4 After cooling the CHP’s boilers, the recycled hot water will

1 The design and monitoring framework is in Appendix 1.

2 The project was prepared through ADB. 2009. Technical Assistance to the People’s Republic of China for the

Gansu Tianshui Urban Infrastructure Development Project. Manila (TA 7344-PRC). 3 Bulletin on 2009 Tianshui National Economic and Social Development Statistics provided by the Tianshui Municipal

Statistics Bureau. By comparison, 4.2% of the PRC's rural population was living below the national poverty line in 2008 (ADB. 2010. Basic Statistics 2010. Manila).

4 China Huaneng Group will finance and construct the CHP and transmission pipelines, which have been deemed

associated facilities for the purposes of ADB’s Safeguard Policy Statement (2009). The Tianshui Municipal Government is coordinating with the China Huaneng Group on construction timing and assurances have been agreed regarding these arrangements.

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be returned to Qinzhou district for winter heating. With the support of the proposed project, the Tianshui Municipal Government (TMG) will commission new distribution capacity, close 199 coal-fired boilers, and restructure the heating sector. This will improve energy efficiency, operational effectiveness, and quality of district heating services. The proposed reforms will substantially increase district heating coverage, reduce annual coal use by 252,000 tons, and lower annual greenhouse gas (GHG) emissions by 428,000 tons. 6. Flood control. Beyond air pollution challenges, the Xi and Wei rivers converge in Tianshui and flood seasonally. The project will promote climate change adaptation through flood control measures—the annual probability of seasonal flooding along the Chengji road flood embankment is expected to fall from 10% to 1%. 7. Urban transport. Further, Tianshui's urban population grows by over 4% annually. Inadequate facilities for public transport and nonmotorized transport (NMT), and poor traffic management and traffic safety worsen slow urban road development. The project will construct road and bridge infrastructure, and related services, to improve transportation for all. The proposed holistic road design and road safety audit, urban transport planning system, and management and maintenance will improve safety, traffic and parking control, and driving behavior. These measures will boost transport efficiencies and safety, improve Tianshui’s livability and ability to benefit from the GTEZ, while coping with more industry and a larger population. 8. Strategic fit and sector experience. The project will support the PRC’s Twelfth Five-Year Plan, 2011–2015, which targets energy conservation, carbon dioxide emission reductions, and regional development, particularly in the western region. The project components comprise part of the 2020 Tianshui City Master Plan, which the Gansu Provincial Government approved in July 2009, and TMG investment programs. The project also aligns with the PRC country partnership strategy of the Asian Development Bank (ADB). 5 It conforms to ADB’s Water Policy,6 which encourages water conservation, including wastewater reuse. It supports ADB’s urban sector strategy and the PRC's urbanization strategy, which promote rural–urban integration and infrastructure investments in dynamic settlements. It also supports ADB’s Climate Change Program7 through reduced GHG emissions from coal-fired heating boilers and lower vehicle emissions per trip. ADB’s Sustainable Transport Initiative8 will inform the design of urban road components and related institutional and capacity development assistance, for instance through support to improve facilities for NMT. ADB-financed urban development projects in the PRC generally perform well. This will be ADB's third urban development project in Gansu province, and the first foreign-financed urban development project in Tianshui. The project design reflects lessons from previous ADB-financed urban development projects in the PRC, including the need for early support on ADB policies and procedures—interventions have been particularly effective when they were part of well-conceived and broader urban development master plans and sector master plans, and were accompanied by capacity building to strengthen management and implementation capacity.

5 ADB. 2008. Country Partnership Strategy: People’s Republic of China, 2008–2010. Manila. ADB’s existing strategy

identifies urban infrastructure development as a priority investment sector. Sustainable and low environmental impact urban development is expected to continue to be a focal area in the new country partnership strategy (2011–2015) that is under preparation.

6 ADB. 2001. Water for All: The Water Policy of the Asian Development Bank. Manila.

7 ADB. 2008. ADB’s Climate Change Program. Manila.

8 ADB. 2010. Sustainable Transport Initiative: Operational Plan. Manila.

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9. Innovative features. The project has the following demonstration features: (i) Multiple wastewater reuse—in an innovative application of circular economy (reduce, reuse, recycle) principles, Tianshui’s wastewater will be recycled and piped to a CHP, where it will be used for cooling purposes. The resultant hot water will be piped back to Qinzhou district, where it will be used during the winter season for district heating. (ii) Increased affordability of heating—reusing wastewater for district heating will reduce the need for municipal subsidies, enable tariff levels to be held constant in the medium term, and improve affordability for the poor. (iii) Holistic urban road design and road safety audit—a holistic approach to urban road design will improve access to NMT facilities. An audit of selected project roads and bridges will ensure infrastructures are designed and constructed to best-practice road safety requirements. (iv) People-centric urban transport planning—an urban road network planning system based on a geographic information system will improve TMG’s ability to plan and manage the urban road network to meet rapidly evolving urban development and traffic demands. Planning and management systems will be established for NMT and parking, including prioritizing integrated facilities for pedestrians and bicycles and as feeders to public transport, and regularizing street-parking policies and enforcement. (v) Urban infrastructure management and maintenance system—this will significantly enhance road maintenance planning, prioritization, funding, and monitoring. (vi) Grievance-redress mechanism—mandated by ADB’s Safeguard Policy Statement (2009), the environment-related project grievance-redress mechanism was designed through intensive consultation with the authorities and the public. The resultant structures and procedures have been embraced and are already used as a model for other ADB-financed projects in the PRC. B. Impact and Outcome

10. The project’s impact will be better living conditions in Tianshui municipality. The intended project outcome is improved heating, transport, and flood control services in Tianshui municipality. C. Outputs

11. The project has four outputs:

(i) Qinzhou district heating network—upgrading Qinzhou district's central heating network by decommissioning 199 outdated coal-fired boilers, building a 33.7-kilometer (km) primary heat transmission network, constructing 78 heat-exchange stations, and increasing district heating coverage by 11 million square meters (m2);

(ii) Chengji road and flood control facilities—constructing the 12 km Chengji road and 10.6 km flood control embankment along the Xi river’s north bank, including two large bridges, with related facilities;

(iii) Tianshui urban transport improvements—improving urban roads and related facilities by constructing four new roads for a total of 4.9 km, rehabilitating one road (2.0 km), constructing three bridges, and developing related services such as drainage pipelines and sewers, energy-saving lighting, public green areas, and road-safety features;9 and

(iv) Capacity development and institutional strengthening—providing support in two main areas (a) to the Tianshui project management office (TPMO) and implementing agencies to ensure efficient and effective project implementation in compliance with ADB requirements; and (b) an urban transport capacity

9 The installation of other infrastructure, such as water supply pipes, will be coordinated with agencies concerned.

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development program, including holistic urban road design and road safety audit, people-centric urban transport planning, road network management and maintenance, and related training. Comprehensive training will also be provided on financial management, emergency management, asbestos management, and soil erosion protection.

D. Investment and Financing Plans 12. The project is estimated to cost $229.6 million (Table 1).10

Table 1: Project Investment Plan ($ million)

Item Amounta

A. Base Costb

1. Qinzhou district heating network 52.70 2. Chengji road and flood control facilities 86.30 3. Tianshui urban transport improvements 39.70 4. Institutional strengthening and capacity building 1.40 Subtotal (A) 180.10 B. Contingencies

c 30.80

C. Financing Charges During Implementationd 18.60

Total (A+B+C) 229.60

a Includes taxes and duties of about $6.2 million to be financed by government and Asian Development Bank

(ADB) resources. The ADB loan will cover taxes and duties on items financed by ADB.

b In 2010 prices.

c Physical contingencies computed at 7%. Price contingencies computed by year and expenditure based on

cumulative domestic and foreign price inflation, including provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate.

d Includes interest and commitment charges. Interest during implementation for the ADB loan has been computed

at the 5-year forward London interbank offered rate plus a spread of 0.30%. Interest during implementation for the China Development Bank loan has been computed at 6.19%. Commitment charges for the ADB loan are 0.15% per year to be charged on the undisbursed loan amount.

Note: Numbers may not sum precisely because of rounding. Source: Asian Development Bank estimates.

13. The government has requested a loan of $100,000,000 from ADB’s ordinary capital resources to help finance the project. The loan will have a 25-year term including a 5-year grace period, an interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility, a commitment charge of 0.15% per year, and such other terms and conditions as set forth in the draft loan and project agreements. The loan will finance 43.6% of the project cost, including civil works, equipment and supplies, institutional strengthening and training, and interest and commitment charges on the ADB loan. The loan will also finance taxes and duties for ADB-financed eligible expenditures, bank charges, and transportation and insurance costs. 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. TMG will provide counterpart funding equivalent to $61.4 million or 26.7%. The balance of $68.2 million, or 29.7%, will be provided by a domestic loan from the China Development Bank. The loan will have a 12-year term including a 2-year grace period, and an interest rate of 6.19% per annum. TMG and the China Development Bank have provided commitment letters confirming the availability of counterpart

10

Project Administration Manual (accessible from the list of linked documents in Appendix 2).

5

funding and domestic loans. The project financing plan is summarized in Table 2 and detailed in the project administration manual (PAM). 14. The PRC is the borrower of the loan. The PRC will relend the entire loan to Gansu provincial government, which will onlend the loan proceeds to TMG on the same terms and conditions as those of the ADB loan. TMG will assume, as the end-borrower, the foreign exchange and interest rate variation risks for the ADB loan. The PAM shows the relending and onlending arrangements and indicative flow of funds.

Table 2: Financing Plan

Source Amount ($ million)

Share of Total (%)

Asian Development Bank 100.0 43.6 Tianshui Municipal Government 61.4 26.7 China Development Bank 68.2 29.7

Total 229.6 100.0 Source: Asian Development Bank estimates.

E. Implementation Arrangements

15. The implementation arrangements are summarized in Table 3 and detailed in the PAM.

Table 3: Implementation Arrangements

Aspects Arrangements

Implementation period June 2011–June 2016

Estimated completion date 31 December 2016 (loan closing date)

Management

(i) Oversight body TPLG. Headed by a TMG vice mayor, it includes the TMG Secretary-General, and other senior officials from the Tianshui Development and Reform Commission, Tianshui Financial Bureau, Tianshui Land and Resources Bureau, Tianshui Housing and Urban-Rural Development Bureau, Tianshui Environment Protection Bureau, Qinzhou District Government, Maiji District Government, and TUCIC. Provides policy guidance, implementation oversight, and overall project coordination, including with the China Huaneng Group.

(ii) Executing agency TMG. Primarily responsible for project implementation, including finance and administration, technical and procurement matters, monitoring and evaluation, and safeguard compliance.

(iii) Key implementing agencies

Tianshui Heating Company. Responsible for implementing the Qinzhou district heating component. TUCIC: Responsible for implementing the other components.

(iv) Implementation unit Tianshui project management office, 13 staff proposed.

Procurement International competitive bidding

4 contracts $23.7 million

National competitive bidding

15 contracts $98.8 million

Shopping 10 contracts $0.600 million

Consulting services QCBS 97 person-months $1.299 million

ICS 6 person-months $0.135 million

Retroactive financing and/or advance contracting

Advance contracting will include 8 contracts: 5 civil works and 3 consulting services. Retroactive financing will finance eligible expenditures up to $20 million (not exceeding 20% of the ADB loan) incurred before loan effectiveness but not earlier than 12 months before the loan agreement is

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Aspects Arrangements

signed.

Disbursement The loan proceeds will be disbursed in accordance with ADB's Loan Disbursement Handbook (2007, as amended from time to time) and detailed arrangements agreed upon between the government and ADB.

ADB = Asian Development Bank, ICS = individual consultant selection, QCBS = quality- and cost-based selection, TMG = Tianshui Municipal Government, TPLG = Tianshui project leading group, TUCIC = Tianshui Urban Construction & Investment Group. Source: Asian Development Bank.

III. DUE DILIGENCE

16. The project will directly benefit about 670,000 people in Tianshui municipality by improving living conditions, reducing airborne pollution, improving protection from flooding and associated hazards, and improving urban transport connectivity.11 A. Technical

17. The project’s heating, flood control, and road components will be designed to accommodate seismic events. Mitigation measures will be designed into cut and fill slopes, building foundations and structures, road pavements, and other infrastructure. Holistic road design and safety design considerations will be incorporated into road components, including enhanced traffic markings and signage, pedestrian lanes, bus stops, protection barriers, and stronger safety education and traffic safety management. The flood control component will also support climate change adaptation—the Chengji road and flood control embankment was realigned to minimize potential landslide risk. A detailed description of components is in the PAM. B. Economic and Financial

18. The economic analysis evaluated technical options and confirmed that the project components are the least-cost options in support of Tianshui’s long-term development plans. The economic internal rates of return were computed at 15.2% for the district heating component, 16.2% for the Chengji road and flood control component, and 18.2% for the urban transport improvement component, all of which exceed the economic opportunity cost of capital of 12%. The results are robust relative to the normal range of sensitivity analyses. Economic costs include (i) capital costs such as land acquisition and resettlement, and environmental mitigation and monitoring costs; (ii) project management and institutional strengthening; (iii) physical contingencies; and (iv) operation and maintenance costs. Economic benefits identified for the district heating component include (i) savings from greater energy efficiency through reduced coal consumption, (ii) environmental improvement resulting from lower environmental costs due to reduced pollutant emissions, and (iii) incremental economic benefits computed as the difference between the centralized district heating system proposed for the project and the existing small-community heating boilers. Economic benefits identified for the Chengji road and flood control component and urban transport improvement component include (i) flood risk reductions, (ii) savings in vehicle operating costs, (iii) time savings, (iv) accident cost reductions, and (v) emission reductions. Not readily quantifiable benefits such as better health and increased employment were not included.12

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The project beneficiaries include 640,000 urban residents of whom about 87,000 or 13.5% are poor. District heating will benefit 345,000 people, and urban roads and flood control will benefit 671,200 people. There will be 345,300 common beneficiaries.

12 Economic Analysis (accessible from the list of linked documents in Appendix 2).

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19. A financial cost–benefit analysis of the revenue-generating district heating component confirmed financial viability by concluding that the component’s financial internal rate of return (9.1%) exceeded the weighted average cost of capital (1.85%). Heating tariffs currently account for about 2.2%–3.8% of an average household’s income and for about 1.7%–3.9% of a poor household’s income (post-subsidy),13 which is considered acceptable in view of better services and related health benefits. 14 Moreover, affordability is expected to improve as household incomes increase while medium-term heating tariff levels are held constant. A sensitivity and risk analysis revealed that the component’s financial internal rate of return is most sensitive to changes in revenues (mainly tariffs) and operating costs (predominantly hot water offtake charges, which will comprise about 76% of operating costs). Hence, maintaining tariff levels and controlling offtake costs will be crucial in ensuring the component’s financial viability. A financial analysis of THC evaluated existing tariff and cost-recovery arrangements and concluded that full-cost recovery is unrealistic in the short term, without ongoing TMG subsidies. However, the project will help transform THC’s cost structure, enabling the company to achieve financial self-sustainability in the medium term. The Tianshui Urban Construction & Investment Group will contribute counterpart funding, service loans, and shoulder operation and maintenance costs for the nonrevenue-generating components. A fiscal analysis revealed that, although TMG’s debt level has increased in the past 5 years in line with economic development, it remains relatively low at less than 20% of total annual fiscal expenditures. The analysis also indicated that TMG’s contributions to the project will not exceed 4.0% of annual expenditures, with total estimated contribution of 1.6% of total fiscal expenditures over the project construction period (2011–2015). Therefore, the nonrevenue-generating components are considered financially sustainable and affordable. A financial management assessment concluded that, while TPMO, Tianshui Urban Construction & Investment Group, and THC have strong financial management capacity and large project management experience, they are relatively inexperienced in managing ADB projects. Hence, the capacity development component will provide ongoing support and training on ADB policies and procedures during project implementation. C. Governance

20. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the TMG, TPMO, implementing agencies, and their project implementing units. The specific policy requirements and supplementary measures are described in the PAM, including providing support and training on ADB policies and procedures, engaging a tendering agent to strengthen procurement, and involving the Tianshui Discipline Investigation Bureau in procurement. D. Poverty and Social

21. Poverty and social benefits. A poverty and social assessment that included a household survey, community and focus group discussions, and key informant interviews was conducted during project preparation. Gansu is one of the PRC’s poorest and least-developed western provinces and has been prioritized in national development plans. The project will directly benefit over 640,000 urban residents, of whom approximately 13.5% are poor, and about 30,000 rural residents in three towns surrounding the city’s urban areas by improving living conditions, public health standards, and Tianshui’s urban environment. The project will create 1,466 full-time jobs during the construction stage and 658 follow-on, multiplier-effect jobs.

13

Minimum living guarantee system recipients (low-income households) are eligible for a CNY250 annual heating subsidy, which is paid by the Tianshui municipal and Qinzhou district governments. Presubsidy heating tariffs account for about 3.2%–5.4% of a poor household’s income.

14 Financial Analysis (accessible from the list of linked documents in Appendix 2).

8

Employment targets for vulnerable groups and women are included in the design and monitoring framework and loan assurances. Air quality and traffic improvements through provision of district heating services, development of the urban road network and improvements in NMT, and road safety and transport planning will enhance public health and safety. Improving the urban road and bridge network will boost public access and mobility and reduce time burdens. A social development action plan and a gender action plan (GAP) have been prepared and will be implemented by TPMO and implementing agencies during project construction. The heating component will improve air quality and district heating access, but the closure of 199 small heating boilers will also result in 323 formal workers losing their positions and 439 seasonal positions being lost. A labor reemployment plan for these workers has been prepared through extensive consultation. It is supported by a loan assurance and will be implemented by TPMO and the implementing agencies.15 22. Gender benefits. The project has been designed for classification as effective gender mainstreaming, and a GAP has been prepared and agreed. Analysis of the survey and focus group discussion data reveal that women are disproportionately affected by air pollution from inefficient boilers and use of home-heating stoves, and the time burden of caring for family members suffering from respiratory illnesses. Women are also largely responsible for paying utility bills and managing the impact of increased costs on household budgets. Improvements to the urban transport network and attention to the needs of women in the planning of public transport, pedestrian, NMT access, and road safety programs will also provide positive benefits by reducing time burdens and increasing access, mobility, and safety. The GAP includes specific targets for women in employment, participation, and capacity-building opportunities, and is supported by a loan assurance and consultant support for implementation and monitoring. E. Safeguards

23. Environment. The project is classified as environment category A. The project environmental impact assessment (EIA) has been circulated to ADB’s Board of Directors and was posted on the ADB website on 20 December 2010. It concludes that the project has substantial environmental and socioeconomic benefits, and that its potential environmental impacts can be mitigated through the implementation of the environmental management plan (EMP) for the project. The completed domestic EIAs (in Chinese), based on extensive public consultations, comply with ADB’s policies and requirements, including ADB's Safeguard Policy Statement (2009). The methods and standards applied in the preparation of domestic EIAs for the project components are in accordance with the guidelines of the Ministry of Environmental Protection, and also meet national and provincial laws and regulations. Although adverse environmental impacts are anticipated during the construction and operation of the project—potential soil erosion, geological hazards, health and safety concerns caused by asbestos if no proper protection measures are taken, and increased traffic noise—mitigation measures and the project EMP are expected to lessen these potential impacts. During construction, special attention will be paid to soil erosion protection, protection of surface water quality, occupational and community health and safety, and adequate disposal of de-construction waste. During operation, special attention will be paid to traffic noise, geological hazards such as mud- and landslides, and risks of spills during transportation of hazardous and toxic goods on project roads and bridges. The project’s district heating component will significantly contribute to energy saving and GHG emission reductions, as well as improving residents’ living conditions and the local environment; the urban transport component will help the city establish an efficient, safe, and sustainable urban transport system that includes facilities for public transport, pedestrian

15

The resettlement plan for the Qinzhou district heating network component includes the labor reemployment plan.

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crossings, traffic management, and landscaping, which will benefit the local economy and local residents, and will contribute to vehicle emission reduction; and the flood control component will promote the river embankment to the 100-year flood protection standard so that the entire urban area will be adequately protected from flooding. The Tianshui Environmental Protection Bureau will support the executing agency and the implementing agencies in implementing the project EMP. Capacity building in environmental management will be provided for the executing agency and the implementing agencies. The executing agency disclosed relevant environment information to the affected people through consultations during April–October 2010, and the results and findings were used to modify the domestic EIAs and the project design. 24. Resettlement. The project is classified as resettlement category A, since construction of the project’s subcomponents will necessitate significant land acquisition and resettlement. In total, the project will affect 17 village committees or community committees, 2 towns, 2 street offices, and 2 districts of Tianshui City.16 A total of 1,041.32 mu17 of land will be permanently acquired and 170 mu of land will be temporarily occupied during project implementation. The main land loss relates to construction of the Chengji road and flood control facilities. Land acquisition will affect 1,225 households and 5,593 persons. A total of 66,249 m2 of houses and buildings will be demolished, adversely impacting 416 households, 1,567 persons, and 70 small enterprises or institutions. These affected persons will benefit from the project through, for instance, improved air quality and transport access. The TPMO and the two implementing agencies will assume the overall responsibility of planning, implementation, financing, and reporting on land acquisition and resettlement activities. Two resettlement plans have been prepared for the project, have been endorsed by the executing agency and implementing agencies, and have been disclosed to affected people in local languages. The resettlement plans will be updated based on the final design and detailed measurement survey, disclosed to affected persons in local language and submitted to ADB for review and approval before awarding civil works contracts. A grievance procedure has been established for the affected persons. The TPMO will submit an internal monitoring report semiannually to ADB on the progress of resettlement implementation. The TPMO will also employ an external monitoring institute or firm that will submit semiannual monitoring reports to ADB during resettlement implementation, and annually for 2 years after resettlement completion. 25. Indigenous peoples. The project is classified as indigenous peoples category C, as the project areas have low numbers of ethnic minority residents (1.58% of the population) who are integrated economically and socially into the broader society. No adverse impacts from actions such as resettlement or land acquisition, particularly on ethnic minorities, were identified. F. Risks and Mitigating Measures

26. Major risks and mitigating measures are summarized in Table 4 and described in detail in the risk assessment and risk management plan.18 The project has no unusual technical risks. The project’s integrated benefits and impacts are expected to outweigh costs and risks.

16

ADB’s Safeguard Policy Statement (2009) trigger for involuntary resettlement changed the terminology of "affected persons" to "displaced persons", which is defined as persons who are physically and/or economically displaced as a result of involuntary acquisition of land or involuntary restrictions on land use or on access to legally designated parks and protected areas. In the PRC, although the resettlement plans maintain the original terminology of "affected persons”, the definition is equivalent to ADB's definition of "displaced persons”.

17 A mu is a Chinese unit of measurement (1 mu = 666.67 m

2).

18 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

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Table 4: Summary of Risks and Mitigating Measures

Risks Mitigating Measures

Hot water is not available to the newly developed district heating network because CHP construction is either not approved or is delayed.

(i) ADB will closely monitor CHP preparations through regular communications and review missions. (ii) Funds for the district heating component will not be disbursed until the CHP and transmission pipelines have been approved. (iii) ADB will require assurance that CHP is commissioned at least 3 months prior to the heating network.

Lack of project coordination and synchronization between agencies

(i) Coordination support from the project implementation consultants. (ii) Close project monitoring, frequent site inspections, and regular coordination meetings.

Delays in land acquisition approvals and implementation

(i) Expeditious implementation of detailed measurement surveys. (ii) Early availability of compensation funding for affected persons. (iii) Strict operational compliance with resettlement plans.

Lack of sustainable O&M of infrastructure components

(i) Long-term capacity building at the heating company and implementation of road maintenance improvements. (ii) Assurances regarding budget provisions for O&M.

Difficulties in complying with ADB procedures

Early mobilization of tendering agent and implementation consultants to provide technical support, combined with ongoing training.

ADB = Asian Development Bank, CHP = combined heat and power plant, O&M = operation and maintenance, Source: Asian Development Bank.

IV. ASSURANCES AND CONDITION

27. The government and TMG have assured ADB that implementation of the project shall conform to all applicable ADB policies, including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the PAM and loan documents. The government has agreed with ADB on certain covenants for the project, which are set forth in the loan agreement and project agreement. 28. Disbursement of loan proceeds for output 1 will be conditional on (i) approval of the CHP preapproval application, (ii) provision to ADB of the approved feasibility study reports and EIAs for the CHP and transmission pipelines, and (iii) TMG engaging a licensed institute to conduct an asbestos risk assessment for all small boilers affected by the project.

V. RECOMMENDATION

29. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the loan of $100,000,000 to the People’s Republic of China for the Gansu Tianshui Urban Infrastructure Development Project from ADB’s ordinary capital resources, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; for a term of 25 years, including a grace period of 5 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan and project agreements presented to the Board.

Haruhiko Kuroda President

7 June 2011

Appendix 1 11

DESIGN AND MONITORING FRAMEWORK

Design Summary

Performance Targets and Indicators with Baselines

Data Sources and Reporting Mechanisms

Assumptions and Risks

Impact Better living conditions in Tianshui municipality

By 2020 (baseline year 2009) in Tianshui municipality Average annual per capita disposable income of urban households increases by 6% per annum from CNY9,932.

Average of 20% reduction in air pollutants SO2, NOx, and PM10 from 0.068, 0.039 and 0.082 mg/m

3 during heating seasons

Statistics published annually by the Tianshui Statistics Office

Annual environmental monitoring report of the Tianshui EPB

Assumption GTEZ develops effectively and accelerates Gansu province's socioeconomic gains under the Twelfth Five-Year Plan.

Risk Development pressures exceed planned infrastructure developments.

Outcome Improved heating, transport, and flood control services in Tianshui municipality

By 2016 (baseline year 2009) in Tianshui municipality Heating-related carbon dioxide emissions reduced from 1,082,200 to 654,400 tons per annum

Annual probability of seasonal flooding along Chengji flood embankment reduced from 10% to 1%

Defined point-to-point traveling distances are reduced by 82% from 17.8 km to 3.2 km.

a

1,466 jobs during project implementation and 658 jobs during operation are created, with 30% targeted for women, and 15% for the poor.

Annual environmental monitoring report of the Tianshui EPB

PCC issued by the Tianshui HURCC



Assumptions Government commitment and support for infrastructure development continues.

Project facilities are properly operated and maintained.

Risks Actual economic growth and population increases are far from estimates.

Actual heating demands are far from estimates.

Costs are much higher than foreseen.

Outputs

1. Qinzhou district's upgraded heating network is operating.

By 2016 (baseline year 2009) in Tianshui municipality 33.7 km of main heating transmission pipe and 78 heat exchange stations are constructed.

199 outdated coal-fired boilers are closed.

District heating coverage increased from 8.79 million m

2 to

20.00 million m2

Percentage of households using single-family heating stoves reduced from 28.5% to 13.0% (sex disaggregated for head of household)

Coal inputs for Qinzhou district heating reduced by 252,000 tons per annum






Assumptions

CHP and transmission lines are commissioned as planned.

Project financing is provided on time. Risks Lack of project coordination and synchronization between agencies Delays in land acquisition approvals and implementation Difficulties in complying with ADB procedures

12 Appendix 1

Design Summary




2. Chengji road and flood control facilities are operating.

100% of workers redeployed or reemployed under implementation of the labor reemployment plan (sex disaggregated)

The new Chengji road (12 km) and flood control embankment (10.6 km), Sunjiaping Xi river bridge (320 m), Xiakou Wei river bridge (380 m), and related services are operating.

Semiannual progress reports, and semiannual resettlement and external labor reports


Recruitment of the loan implementation consultant is delayed.

3. Urban roads and bridges are opened to traffic and related services are operating.

Maiji district's new road network, including four new secondary roads (4.9 km) and related services and urban infrastructures, is operating.

Shetang Wei river bridge (320 m), including approach roads and related services, is operating, which reduces traveling distances from National Route G310 to the town of Shetang from 15.3 km to 2.4 km.

Shuangqiao Xi river bridge (800 m) and related services are operating, which reduces traveling distances from the south end of the bridge to the north end of the bridge from 2.5 km to 0.8 km.

The rehabilitated Qinzhou Chiyu road (2.0 km) and new Nanhegou creek bridge are operating.

At least three public consultations with at least 40% women on road safety design, pedestrian, and NMT access






4. Capacity developed and institutions strengthened

A 4-year (2011–2014) training plan is developed and implemented, with a target for 30% female participation, which along with project implementation support, enables outputs 1–3 to be delivered on time, within budget, in a sustainable manner, and to prescribed quality standards and policies.

Road safety audit, emergency management, asbestos



Appendix 1 13

Design Summary




management, and soil erosion training programs implemented; urban transport planning system operating, municipal parking management system operating, and urban pedestrian and bicycle traffic planning and management system operating

Activities with Milestones Inputs

1. Qinzhou district heating network 1.1. Design the facilities, acquire land, and procure the works by 2012 1.2. Construct and commission the network by 2016

2. Chengji road and flood control facilities 2.1. Design the facilities, acquire land, and procure the works by Q4 2011 2.2. Construct and build the Chengji road embankment by 2016

3. Tianshui urban transport improvements 3.1. Design the facilities, acquire land, and procure the works by 2012 3.2. Construct and build the Maiji district roads, Chiyu road, Shetang Wei

river bridge, Shuangqiao Xi river bridge, and related services by 2016 4. Capacity development and institutional strengthening

4.1. Recruit and mobilize implementation support consultants by Q4 2011 4.2. Develop 4-year training plan by 2011 4.3. Complete necessary organizational arrangements for implementing

agencies (hiring staff; establishing financial management systems; and improving financial, administrative, and human resource policies and procedures) by Q4 2011

4.4. Undertake training and provide project implementation support in the following areas to Tianshui Heating Company, Tianshui Urban Construction & Investment Group, and other involved agencies by 2016: ADB procedures, disbursements, operation and maintenance arrangements for district heating, cost recovery and financial sustainability, procurement, traffic management, road maintenance, pollution control, environmental monitoring, and financial management

4.5. Implement the road safety audit training program, urban road network planning system, municipal parking management system, and urban pedestrian and bicycle traffic planning and management system by 2013

4.6. Implement environmental monitoring plan and resettlement plans, and conduct internal and external safeguard monitoring until 2016

4.7. Implement the gender action plan, social development action plan, and labor reemployment plan by 2016

4.8. Conduct project-specific surveys to measure results for the midterm review (2013) and project completion (2016)

($ million) ADB $100.0 million loan from ordinary capital resources: Civil works 81.6 Equipment 11.7 Institutional strengthening and capacity building 1.4 Financial charges during implementation 5.3 Tianshui Municipal Government $61.4 million equivalent: Civil works 18.3 Land acquisition and resettlement 8.3 Survey, research, design, and project management 11.6 Contingencies 23.1 China Development Bank $68.2 million equivalent loan: Civil works 13.8 Land acquisition and resettlement 33.3 Contingencies 7.7 Financial charges during implementation 13.4 Numbers may not sum precisely because of rounding.

ADB = Asian Development Bank, CHP = combined heat and power plant, EPB = environment protection bureau, GTEZ = Guanzhong-Tianshui economic zone, HURCC = housing and urban–rural construction commission, km = kilometer, NOx = nitrogen oxides, PCC = project completion certificate, PM10 = particulate matter, Q = quarter, SO2 = sulphur dioxide. a

The aggregation of the point-to-point traveling distances identified in output 3. Source: Asian Development Bank.

14 Appendix 2

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=43025-01-3

1. Loan Agreement

2. Project Agreement

3. Sector Assessment (Summary): Multisector (Energy Utility Services, Other Municipal Services, Urban Transport)

4. Project Administration Manual

5. Contribution to the ADB Results Framework

6. Development Coordination

7. Financial Analysis

8. Economic Analysis

9. Country Economic Indicators

10. Summary Poverty Reduction and Social Strategy

11. Gender Action Plan

12. Environmental Impact Assessment

13. Resettlement Plan: Summary

14. Risk Assessment and Risk Management Plan

Supplementary Documents

15. Procurement Capacity Assessment