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Report and Recommendation of the President to the Board of Directors

Project Number: 42011 June 2010

Proposed Loan People’s Republic of China: Wuhan Urban Environmental Improvement Project

CURRENCY EQUIVALENTS (as of 8 June 2010)

Currency Unit – yuan (CNY)

CNY1.00 = $0.1464

$1.00 = CNY6.8306

ABBREVIATIONS ADB – Asian Development Bank EIA – environmental impact assessment LIBOR – London interbank offered rate PAM – project administration manual PMO – project management office PRC – People’s Republic of China WMG – Wuhan municipal government WUDDC – Wuhan Urban Drainage Development Company WWMP – Wuhan Wastewater Management Project WWSMP – Wuhan Wastewater and Stormwater Management Project WWTP – wastewater treatment plant

WEIGHTS AND MEASURES ha – hectare km2 – square kilometer m – meter m2 – square meter m3 – cubic meter m3/s – cubic meter per second t/d – tons per day

NOTES

(i) The fiscal year (FY) of the government ends on 31 December.

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

Vice-President C. Lawrence Greenwood, Jr., Operations 2 Director General K. Gerhaeusser, East Asia Department (EARD) Director A. Leung, Urban and Social Sectors Division, EARD Team leader A. Heckmann , Urban Development Specialist, EARD Team members M. Gupta, Senior Social Development Specialist (Resettlement), EARD

J. Huang, Urban Development Specialist, EARD Y. Jiang, Economist, ERD S. Kawazu, Counsel, Office of the General Counsel S. Popov, Principal Environment Specialist, EARD B. Reid, Senior Financial Analysis Specialist, EARD W. Walker, Senior Social Development Specialist, EARD J. Wang, Project Officer (Urban Development and Water Supply), EARD

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 MAPS

I. THE PROPOSAL 1 II. THE PROJECT 1

A. Rationale 1 B. Impact and Outcome 3 C. Outputs 4 D. Investment and Financing Plans 4 E. Implementation Arrangements 6

III. DUE DILIGENCE 7 A. Economic and Financial 7 B. Governance 8 C. Poverty and Social 8 D. Safeguards 9 E. Risks and Mitigating Measures 10

IV. ASSURANCES 10 V. RECOMMENDATION 10

APPENDIXES

1. Design and Monitoring Framework 11 2. List of Linked Documents 15

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Tuesday, 01 June, 2010 12:46:29 PM

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Tuesday, 01 June, 2010 1:00:05 PM

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 Wuhan Urban Environmental Improvement Project. 2. Wuhan, the capital of Hubei Province, ranks fifth among PRC cities for its size and its economic production. In 2008, the municipality had a population of about 8.7 million. Some 3.5 million people reside in its dense inner urban core. Wuhan’s urban area is divided into three parts (Hankou, Hanyang, and Wuchang areas) by the Yangtze and Han rivers. The proposed project is a key urban environmental initiative of Wuhan municipal government (WMG) with nationwide demonstration potential. The project will help WMG to (i) design and implement sustainable solutions for the management of wastewater treatment plant (WWTP) sludge, including its energy recovery and reuse of biosolids; (ii) improve water quality in urban lakes and water channels; (iii) reestablish water circulation and improve resilience to floods; (iv) improve the environment, living conditions, and public health standards; and (v) enhance public awareness of urban environmental and related public health issues.

II. THE PROJECT

A. Rationale

3. The project has a strong rationale both in terms of urban development and environmental improvement. It follows and complements two previous Asian Development Bank (ADB) loans, 1 which have the objective of building the necessary wastewater treatment infrastructure in Wuhan. The project supports the PRC’s country partnership strategy (2008–2010):2 promoting efficient infrastructure, strengthening environmental management, supporting inclusive growth, and balanced development. The project is part of Wuhan’s master plan priorities on sanitation, environment improvements, and urban development and will contribute to establishing Wuhan City as a model for sustainable development in the PRC. 4. The current sludge treatment and disposal arrangements are not sustainable in the PRC. The Government of the PRC is actively looking for potential solutions for the country’s rapidly increasing volume of sewage sludge. By the end of 2008, 80% of Wuhan Municipality’s wastewater was being treated. The initial success of the wastewater treatment investment, supported by two prior ADB loans, has created an associated environmental challenge of effectively managing 657 tons of sewage sludge generated daily by the existing WWTPs, creating a serious environmental threat. There is an urgent need for a comprehensive solution for sludge treatment and utilization; and to release the pressure on landfills, which are currently the primary means of disposal. 5. The project is the first ADB-assisted project to pursue comprehensive sludge management while fully attending to environmental concerns such as circular economy and climate change mitigation. The policy discussion between the executing agency and the project team introduced a decentralized and integrated approach for the sludge facilities—based on sludge digestion and drying for beneficial reuse through land application—fully complying with ADB policies and recognized by the PRC as the best practice to support the 3Rs policy of

1 ADB. 2003. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the

People’s Republic of China for the Wuhan Wastewater Management Project. Manila (Loan 1996-PRC); and ADB. 2006. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People’s Republic of China for the Wuhan Wastewater and Stormwater Management Project. Manila (Loan 2240-PRC).

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

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reduce, reuse, and recycle. By doing so, the project has also guided and reoriented the long-term original sludge master plan of the city based on centralized treatment and solo incineration,3 which is controversial in terms of compliance with ADB’s climate change agenda. 6. The project will provide facilities to treat sludge from five of Wuhan’s WWTPs and handle about half (or 350 tons/day [t/d]) of Wuhan’s total sludge production. Three of these WWTPs were built under the earlier ADB-funded loans (footnote 1). Each of the three proposed sludge treatment plants will be built on site and will take advantage of the urban master plan advocating for an integrated, practical, and sustainable concept of urban environmental development. The project promotes environmentally friendly sludge digestion by (i) capturing and using clean biogas of an existing sludge facility financed by ADB, and (ii) using the steam of an existing thermal power plant to dry sludge at the sludge treatment plant. Both approaches reduce reliance on external energy sources required for the drying process. Subject to proper analysis monitoring and environmental safeguards, treated sludge will be used as soil conditioner, as construction material, and for rehabilitating damaged urban land.4 7. While comprehensive sludge solutions have not been fully recognized and benchmarked by the PRC authorities, the project has a potential of setting national policy decision making on sludge management. The beneficiary use of sludge promoted by the project will provide a model of managing WWTP sludge, extend the operational life of landfills, reduce the sludge transportation cost, and achieve greenhouse gas reductions, among other environmental benefits.5 The project will contribute as a pilot project to the development of a nationwide framework for sludge management by the Ministry of Housing and Urban-Rural Development, supported by an ADB ongoing advisory technical assistance study—Urban Wastewater Reuse and Sludge Utilization Policy Study.6 8. The project will also pioneer the optimization of WWTPs’ performance. This task will be carried out for the whole of Wuhan. It will improve the performance of infrastructure financed by two previous ADB projects (Wuhan Wastewater Management Project and Wuhan Wastewater and Stormwater Management Project [WWSMP]) in Wuhan. The core task will be to ensure the steady performance of the WWTPs, to achieve design effluent parameters, as well as improve sludge quality for its beneficial disposal. 9. Lakes and rivers represent 25% of Wuhan’s urban area. They are part of a complex water system within the vast Jianghan flood plain, naturally connected to the Han and the Yangtze rivers. This water system and its natural water circulation sustain the healthy condition of lakes. In recent years, however, agricultural activity, urban construction boom, and environmental neglect altered the area. These caused the disappearance of many lakes, the blocking of connection channels, and restricting of hydraulic circulation. Of the nearly 100 lakes existing in Wuhan City in the middle of the 20th century, only 38 remain. The pollution impact of huge amounts of wastewater previously discharged on the aquatic environment was amplified

3 Incineration greatly reduces the volume of wastewater sludge and can take advantage of the calorific content in

these materials. However, it requires large capital investments in infrastructure and high operational costs, and requires additional fuel—usually fossil fuel—to create the burn. Incinerators in more developed countries are subject to increasingly strict air pollution control standards, which require increased complexity and costs.

4 See Tang Mountain rehabilitation subcomponent (para. 14). 5 The main benefits can be quantified as follows: (i) reduction of the annual landfill space capacity by 78,629 cubic

meters (m3) per year; (ii) prolongation of the existing landfill service life of 16 years for the Cangshankou landfill site; and (iii) saving the transportation cost of CNY2.15 million per year and the landfill disposal cost of CNY2.36 million per year.

6 ADB. 2008. Technical Assistance to the People’s Republic of China for the Urban Wastewater Reuse and Sludge Utilization Policy Study. Manila (TA 7083-PRC).

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because of water stagnation. The result is a degraded urban environment as well as reduced assimilative and hydraulic capacity of surface water to handle pollution and flood events. The pollution has reached 56% of the local rivers and 89% of the lakes. Wuhan lakes’ water quality is currently measured at classes IV–V or worse. 10. The project will address key ecological and social needs to restore the ecological capacity, the natural hydraulic circulation, and water quality in urban surface water systems. It will increase water system resilience and promote integrated surface water management to improve the urban environment and reduce the risk of flooding. The project will unblock the channels connecting the lakes, and support the construction of wetlands to increase water regeneration and flood retention capacities in the Hanyang and Wuchang areas. In parallel, it will promote point source and nonpoint source pollution control, raise community environmental awareness, and conduct institutional strengthening. The creation of healthy and well-managed water systems in Wuhan will allow urban expansion in flood-safe and environmentally clean areas to support the city’s sustainable development. The Yangtze flood plain area where Wuhan City is located is significantly vulnerable to climate change. The project will allow the restoration of the retention capacity of lake areas to mitigate climate change impacts and increase the resilience of the city to natural hazards, such as floods and drought, associated with climate change. 11. The project, which builds on experience of lake rehabilitation in the PRC,7 will be a model for lake rehabilitation and integrated surface water management in Wuhan and for the entire country. In addition, the project will support the development of a water quality model that will assist in long-term planning, water quality assurance and forecast, promoting water balance and emergency response.8 12. The project will enhance environmental awareness to ensure the sustainability of infrastructure investments and to maximize long-term social benefits. The environmental awareness program will focus on three stakeholders who generate and are affected by point and nonpoint source pollution: (i) small businesses operating adjacent to the lake system, (ii) communities living in the project area, and (iii) schoolchildren in the project area. This program will help ensure that regulatory practices are well understood and that necessary behavior changes regarding nonpoint source pollution are addressed. A capacity building subcomponent will support further tariff reforms and will conduct a willingness-to-pay survey for sludge tariff setting in selected focus group and communities. These initiatives will assist WMG to achieve full cost recovery of both wastewater and sludge management services over the medium term (2018). B. Impact and Outcome

13. The impact of the project is improved urban environment, public health, and living conditions in Wuhan Municipality. The outcome of the project is integrated urban water resource management, and wastewater sludge treatment and disposal in Wuhan Municipality.

7 ADB. 2004. Technical Assistance to the People’s Republic of China for the Evaluation of Environmental Policy and

Investment for the Water Pollution Control in the Huai River and Tai Lake Basins. Manila; and ADB. 2008. Reviving Lakes and Wetlands: Lessons Learned from the People’s Republic of China. Manila.

8 The water quality model is based on the existing water quality model developed through the assistance of the ADB-financed Wuhan Wastewater Management Project and WWSMP in other city areas.

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C. Outputs

14. Component 1: Integrated sludge treatment and disposal component will provide facilities able to treat sludge produced by six of Wuhan’s WWTPs. The Sanjintan WWTP Biogas Utilization and Sludge Drying Plant will support biogas utilization from the Sanjintan WWTP sludge digestion to dry its own sludge and the sludge of other WWTPs. The dried sludge will be sent to the nearby fertilizer plant for reuse as soil conditioner. The existing WWTP9 units include the anaerobic digestion facility commissioned in August 2009. The sludge design treatment capacity is 100 t/d. The Tangxunhu WWTP Sludge Drying Plant will support the sludge drying facility of 200 t/d capacity for two WWTPs. After the extension of the nearby Baoxie WWTP, its raw sludge will also be treated by the sludge facility. The sludge will be disposed of as fill-in construction material, for soil remediation, and as soil conditioner. The steam for sludge drying will be supplied by the nearby Gaoxin Heat Power Plant. The Nantaizihu WWTP Sludge Lime Stabilization Plant will support the sludge lime stabilization facility with the treatment capacity of 50 t/d. The stabilized sludge will be utilized for the Tang Mountain soil remediation10 or as building material. The project will modify and improve existing sludge treatment in related WWTPs to meet project needs and the respective requirements of the drainage company. The project will also provide sludge transportation trucks and laboratory instruments to monitor and analyze the quality of dried sludge. 15. Component 2: Wuhan New Zone lakes and channels rehabilitation and pumping station component includes (i) Longyang Lake rehabilitation comprising sediment dredging, wetland park, artificial wetland, aquatic plant, and Tang Mountain rehabilitation; (ii) Moshui Lake rehabilitation comprising sediment dredging, artificial wetland ecological project, and aquatic plants; (iii) Nantaizi Lake rehabilitation comprising sediment dredging, artificial wetlands, aquatic plants, and biological buffer area; (iv) six water channels to be rehabilitated including dredging, slope protection, greening, and provision of gates to control flows; and (v) Sixin pumping station with initial capacity of 35 cubic meters per second (m3/s) controlling the water flood in Hanyang area. 16. Component 3: Yangchun Lake secondary urban center lake and channel rehabilitation component includes (i) Yangchun Lake rehabilitation component comprising the recovery of 64 hectares (ha) of lake surface, ecological treatment, greening, construction of a storm water treatment system, and 18 ha of artificial wetland; and (ii) Heping water channels to be rehabilitated including dredging, slope protection, greening, and provision of gates to control flows. 17. Component 4: Capacity building and institutional strengthening includes (i) package 1: project implementation management consulting services, including training and assistance with ADB procedures; (ii) package 2: wastewater operation and maintenance improvement, sludge treatment support and exploration of private sector participation for operating the sludge units; and (iii) package 3: surface water management and public awareness campaign. D. Investment and Financing Plans

18. The total project cost is estimated at $501.8 million equivalent, including taxes and duties of $26.4 million. Table 1 summarizes the project investment plan.11

9 Funded by ADB under the WWSMP. 10 Tang Mountain rehabilitation is included in the Wuhan New Zone lakes and channels rehabilitation. 11 Details are in the Project Administration Manual (Appendix 2).

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Table 1: Project Investment Plan ($ million)

Item Total Costa A. Base Costb

1. Sludge treatment and disposal 30.4 2. Wuhan New Zone lakes and channels rehabilitation and pumping station 249.6 3. Yangchun Lake secondary urban center lake and channel rehabilitation 121.7 4. Institutional strengthening and capacity building 3.0 Subtotal (A) 404.7 B. Contingenciesc 52.8 C. Financial Charges During Implementationd 44.2 Total (A+B+C) 501.8 a Includes taxes and duties of $26.4 million. The Asian Development Bank (ADB) loan will cover taxes and duties on

items financed by ADB. b In mid-2009 prices. The base cost reflected in this table and in the domestic feasibility study are the same. c Physical contingencies are computed at 10%. Price contingencies are computed by year and expenditure type

based on cumulative domestic and foreign price inflation. Exchange rate fluctuations are estimated using a purchasing power parity adjustment model. Domestic contingencies are computed using different ratios. This will affect the total cost of the project as it appears in the domestic feasibility study. Therefore, the total cost reflected in the ADB report and domestic report will differ.

d Includes interest charges during implementation and commitment charges. Interest on the ADB loan during construction has been computed at a 5-year forward London interbank offered rate plus a spread of 0.20%.

Note: Numbers may not sum precisely because of rounding. Source: Asian Development Bank estimates. 19. 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 annum, and such other terms and conditions as 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. The loan will finance 19.9% of the project cost, including civil works; equipment and supplies; capacity development and project management; as well as taxes, duties, and bank charges. WMG will provide counterpart funding equivalent to $125.4 million or 25.0%. The balance of $276.3 million, or 55.1%, will be provided by a domestic loan from the Agricultural Bank of China. The loan will have a 10-year term including a 3-year grace period, and an interest rate of 5.94%. WMG and the Agricultural Bank of China have provided commitment letters confirming the availability of counterpart funding and domestic loans. The project financing plan is summarized in Table 2 and detailed in the project administration manual (PAM).

Table 2: Financing Plan Source Amount ($ million) Share of Total (%) Asian Development Bank 100.0 19.9 Wuhan municipal government 125.4 25.0 Agricultural Bank of China 276.3 55.1

Total 501.8 100.0 Note: Numbers may not sum precisely because of rounding. Source: Asian Development Bank estimates. 20. The PRC is the borrower of the loan. The PRC will relend the entire loan to Hubei provincial government, which will onlend the loan proceeds to WMG on the same terms and conditions as those of the ADB loan. WMG will bear the foreign exchange and interest rate

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variation risks for the ADB loan. The PAM shows the relending and onlending arrangements and indicative flow of funds. E. Implementation Arrangements

21. Implementation arrangements are summarized in Table 3 and described in detail in section III of the PAM.

Table 3: Implementation Arrangements Aspects Arrangements Implementation period July 2010–December 2014 Estimated project completion date 31 December 2014 Loan closing date is 30 June 2015 Project management

(i) Oversight body Project Leading Group Headed by the vice major; comprises representatives of Wuhan Financial Bureau, Wuhan Development Reform Commission, Wuhan Water Authorities, Wuhan Environment Protection Bureau, Wuhan Affair Bureau, the Price Bureau, and related district governments.a Provides policy guidance during implementation; oversees implementation of the project.

(ii) Executing agency Wuhan Municipal Government Primarily responsible for implementation of the project, including finance and administration, technical and procurement matters, monitoring and evaluation, and safeguards compliance.

(iii) Key implementing agencies

Wuhan Urban Construction Funds Management Office Primarily responsible for disbursement of loan and counterpart funds; responsible for arranging the necessary counterpart financing, debt servicing, and loan repayment.

(iv) Project implementation unit Wuhan PMO 44 staff proposed ICB 6 contracts $26.58 million NCB 36 contracts $135.78 million

Procurement

Shopping 2 contracts $0.14 million QCBS 10 international

85 national person-months $1.01 million

QBS 24 international 79 national person-months

$1.78 million

Consulting services

Individual Consultant 8 person-months $0.21 million Retroactive financing and/or advance contracting

Retroactive financing of eligible expenditures up to $10 million (equivalent to 10% of the ADB loan)b

Advance contracting will include 11 contracts:—2 civil works, 4 goods and equipment, and 5 consulting services. The retroactive financing will finance the project expenditures incurred before loan effectiveness, but not earlier than 12 months before the loan agreement is 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 between the government and ADB

ADB = Asian Development Bank, ICB = international competitive bidding, NCB = national competitive bidding, PMO = project management office, QBS = quality based selection, QCBS = quality- and cost-based selection. a The same project leading group that has directed the implementation of ADB. 2003. Report and Recommendation

of the President to the Board of Directors: Proposed Loan to the People’s Republic of China for the Wuhan Wastewater Management Project. Manila (Loan 1996-PRC); and ADB. 2006. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People’s Republic of China for the Wuhan Wastewater and Stormwater Management Project. Manila (Loan 2240-PRC) will be retained for the Wuhan Urban Environmental Improvement Project. The full composition of the project leading group is provided in the Project Administration Manual (Appendix 2).

b To be incurred prior to loan effectiveness but not earlier than a maximum of 12 months before signing of the loan agreement.

Source: Asian Development Bank.

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22. The proposed implementing agency is already responsible for implementation of the WWSMP. Upon completion, project facilities will be handed over to the relevant government department or public utility that will act as operational unit for facilities responsible for operation and maintenance.12 Both Wuhan Project Management Office and Wuhan Urban Construction Funds Management Office are involved in implementation of the ongoing WWSMP; financial assessments have previously been performed on both organizations and they have been found to be satisfactory.

III. DUE DILIGENCE

23. The project will directly benefit over 3 million urban residents by improving living conditions, public health standards, and the urban environment of Wuhan municipality resulting from (i) proper treatment and disposal of sludge from WWTPs, (ii) reduced pollution and improved management of surface water bodies in two newly developed areas, and (iii) improved protection from flooding and associated hazards. The project will have a high impact on climate change adaptation and mitigation. A. Economic and Financial

24. A financial cost–benefit analysis of the revenue-generating sludge treatment and disposal component confirmed financial viability by concluding that the component’s financial internal rate of return (7.4%) exceeded the weighted average cost of capital (3.3%). A sensitivity and risk analysis revealed that the component’s financial internal rate of return is most sensitive to revenue variations—hence, timely tariff adjustments and/or the availability of government subsidies, as proposed, will be crucial. A financial analysis of Wuhan Urban Drainage Development Company (WUDDC) evaluated existing tariff and cost-recovery arrangements, and concluded that the proposed WMG subsidies to WUDDC will be required in the short- to medium-term as full cost recovery is unrealistic in the short term. WMG will contribute counterpart funding, service loans, and shoulder operation and maintenance costs for the nonrevenue-generating components. A fiscal analysis indicated that WMG’s annual contribution through its Wuhan Urban Development Fund will not exceed 7.6% of annual revenues, over the projection period (2010-2019). Therefore, the nonrevenue-generating components are considered both financially sustainable and affordable. A financial management assessment concluded that Wuhan Project Management Office and the implementing agency are experienced in managing ADB projects and are prepared for project implementation. The financial management assessment identified several issues that will be addressed, including the need for financial management training for new staff.13 25. The economic analysis evaluated technical options and confirmed that project components are the least-cost options in support of Wuhan’s long-term development plans. The project economic internal rate of return is computed at 20.48%, which exceeds the economic opportunity cost of capital of 12%. The result is robust relative to the normal range of sensitivity analyses. Quantifiable economic benefits identified for the sludge component are (i) land savings from prolonged landfill life, (ii) incremental landfill operation cost savings, (iii) fertilizer savings from applying sludge as a soil conditioner, and (iv) fuel savings from using biogas. Quantifiable economic benefits of the lakes and channels rehabilitation components include

12 There are three operating units: (i) Wuhan Urban Drainage Development Company (WUDDC) for the sludge

treatment and disposal component, (ii) Hanyang District Water Bureau for the Wuhan New Zone lakes/channels rehabilitation and pumping stations, and (iii) Yangchun Lake New District Water Bureau for the Yangchun lake secondary urban center lakes/channels rehabilitation.

13 A summary financial analysis and financial management assessment is in Appendix 2 (Financial Analysis and Financial Management Assessment).

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(i) increased land and real estate values, (ii) health benefits, (iii) recreation and pedagogical value of wetland parks, and (iv) flood risk reductions.14 B. Governance

26. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government and WMG. The specific policy requirements and supplementary measures are described in the PAM. C. Poverty and Social

27. The project area of Hanyang, Hongshan, and Wuchang districts covers 698.5 square kilometers (km2). In 2007, 701,300 households and a population of 2,618,000—including 27,483 poor households (3.92%)—inhabited the area. The average income per capita per month was CNY1,196.5 and the unemployment rate was 4.2%.15 28. Health impacts. Potential health hazards from improper disposal of WWTP sludge will be greatly reduced. A health impact assessment was conducted during project preparation. Benefits from a reduction of morbidity and mortality from waterborne carcinogenic and noncarcinogenic diseases for local residents will also accrue under the lakes and channels rehabilitation components. Public health indicators will be monitored during implementation. 29. Employment impacts. The project will directly generate about 3,245 full-time positions16 (38,935 person-months) during construction (3 years) and 144 full-time positions17 during the operations phase. It will indirectly generate about 1,841 positions 18 per year. Employment targets for local unskilled workers, women, and vulnerable groups and core labor standards have been included in the social action plan and gender action plan (Appendix 2) and will be monitored. HIV, AIDS and sexually transmitted infection awareness training will be included in contractor bidding documents and monitored during implementation. 30. Gender impacts. The project has been designed as effective gender mainstreaming. Women focus group discussions found that environmental improvements are anticipated to have a significant gender impact, with reduced time burdens and costs for healthcare and environmental cleanup. Women are usually in charge of household budgets for utilities and expressed greater knowledge about fees. A total of 94.8% expressed willingness to participate in environmental and health awareness projects in addition to tariff programs planned by the project.19 31. Public awareness impacts. Two public awareness programs—environmental and health awareness and public consultation for tariff increases—will be supported under the capacity building component. These will help sustain the positive impacts of infrastructure and rehabilitation. The environmental and health awareness program will focus on three stakeholders that generate and are affected by point and nonpoint source pollution: (i) small businesses adjacent to the lake system, (ii) communities living in the project area, and

14 A summary economic analysis is in Appendix 2 (Economic Analysis). 15 The summary poverty reduction and social strategy is in Appendix 2. 16 Providing total gross income of CNY143 million. 17 Providing total gross annual income of CNY7.722 million. 18 Totaling CNY77.335 million gross annual income. 19 The gender action plan ensures (i) women’s employment in the project; (ii) participation and gender-sensitive

training in environmental awareness and public health programs, and outreach for public participation in the tariff reform program; and (iii) appropriate gender targets, indicators, and sex-disaggregated data for project monitoring and evaluation.

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(iii) schoolchildren in the project area. This program will help to ensure that regulatory practices are well understood and that necessary behaviour changes regarding nonpoint source pollution are addressed. The program will be coordinated with existing environmental awareness programs run by the Environmental Protection Bureau, local nongovernmental organizations, and community-based associations and schools. 32. Stakeholder consultation. During project preparation, local government and line agencies, villagers, enterprises, local groups, and other people likely to be directly affected by the project were consulted. A total of 504 households and 100 businesses were surveyed during project preparation. Consultations indicate that the project has a high level of public support. A consultation and participation plan for the project has been prepared. D. Safeguards

33. Land acquisition and resettlement and indigenous peoples impact. The land acquisition and resettlement impact for the project will be significant. Only components 2 and 3 of the project will entail land acquisition and resettlement impacts. Hongshan and Hanyang districts will be directly affected by the project, involving three street committees and 16 administrative villages. In total, about 3,423.55 mu20 of land will be permanently acquired and 555.60 mu will be occupied temporarily. There will be demolition of 126,536 square meters (m2) of residential houses and 31,957 m2 of nonresidential houses. In total, 376 households with 1,365 persons will be affected directly by land acquisition and house demolition. Another 22 affected enterprises, institutions involving 33 employees, and 14 shops will also suffer demolition impacts. The current resettlement budget for the project is CNY1.5 billion, including land acquisition, relocation compensation, and all other associated costs. The resettlement plans were disclosed in local language to affected districts and villages, and resettlement information booklets were distributed to the affected persons. 21 The land acquisition and resettlement costs will be financed by WMG and the loan from the Agricultural Bank of China. On the impact on indigenous peoples, the project is classified as category C. 34. Environmental aspects. The project is classified category A in ADB’s environmental categorization. Four environmental impact assessments (EIAs) were prepared, one for each of the three main structural components, together with the EIA for Sixin pumping station. Extensive public consultation involving surveys, meetings with stakeholders, and focus group discussions was undertaken during the preparation of each EIA. The EIAs are based on national laws, regulations, and standards applicable in the PRC. 35. The summary EIA is based on four PRC EIA reports prepared by an accredited local environmental research institute, and complies with the PRC’s environmental policy, and ADB’s Environment Policy (2002), Environmental Assessment Guidelines (2003), and Safeguard Policy Statement (2009). It concludes that the project will have substantial positive environmental and socioeconomic benefits resulting from (i) proper treatment and disposal technologies and facilities for sludge from the existing WWTPs and effectively prevented secondary pollution from the sludge; (ii) unblocked silted lakes and channels, enhanced water circulation and self-purification, restored ecosystems, and the biological diversity of the water bodies; (iii) increased real estate values; and (iv) reduced greenhouse gases emission by sludge anaerobic digestion and biogas generation and use. By facilitating economic development, the project will provide lasting benefits to assist in poverty reduction. The specific environmental concerns of the project include odor and secondary pollution from the WWTP 20 A mu is a Chinese unit of measurement (1 mu = 666.67 m2). 21 Two full resettlement plans have been prepared and the involuntary resettlement assessment and measures is in

Appendix 2.

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sludge and dredged sediments, and water quality deterioration of the Yangtze River and project lakes and channels. Such concerns have been fully addressed in the tables of potential impacts and mitigation measures and the environmental monitoring program. A detailed training program for capacity building has been developed in the environmental management plan to ensure the borrower’s institutional capacity in managing environmental impacts and risks. E. Risks and Mitigating Measures

36. The project has no unusual technical risks. The river and channel rehabilitation components will be implemented using well-established technologies and methods. Sludge drying technology is relatively new in the PRC but well proven internationally, with several international equipment providers active in the PRC. The sludge component equipment will be procured through international competitive bidding and consultants will support the implementing agency and the design institute in equipment specification, commissioning, and operational capacity building. Major risks and mitigating measures are summarized in Table 4.

Table 4: Summary Risks and Mitigating Measures Risks Mitigating Measures Resistance by some stakeholders to resettlement Adherence to ADB’s Involuntary Resettlement Policy (1995) and

Safeguards Policy Statement (2009), which provides for full and early consultation with affected persons

Improved lake water circulation leads to additional pollution entering the Yangtze river Continued dumping of waste by local residents and failure to enforce all applicable environmental laws

Capacity building initiatives funded from the loan to (i) improve surface water management systems by utilizing water quality modeling; and (ii) enhance public awareness, environmental monitoring, and the development of strategies for pollution source control

Failure of WMG to increase tariffs to meet cost recovery targets for wastewater services

Assurances from WMG in conducting regular tariff reviews and adjustments

ADB = Asian Development Bank, WMG = Wuhan municipal government. Source: Asian Development Bank.

IV. ASSURANCES

37. The government and WMG 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. 38. The government and WMG have agreed with ADB on certain covenants for the project, which are set forth in the loan agreement and project agreement.

V. RECOMMENDATION

39. 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 Wuhan Urban Environmental Improvement 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

8 June 2010

Appendix 1 11

DESIGN AND MONITORING FRAMEWORK

Design Summary Performance Targets and Indicators with Baselines

Data Sources and Reporting Mechanisms Assumptions and Risks

Impact Improved urban environment, public health, and living conditions in Wuhan Municipality

Water quality of project lakes and channels is improved to at least class IV, and the biological diversity within the project lakes, including the aquatic vegetation, is rehabilitated by 2020 Incidence of waterborne infectious diseases reduced 30% from 2009 level by 2020 Increased investment and business opportunities with increased gross domestic product rising annually by 15% from 2015 in the project area

Environmental monitoring data of Wuhan EPB Environmental monitoring data of Wuhan EPB and public health organizations Wuhan Health Bureau and Wuhan Center for Disease Control Monitoring from public awareness program on tariff reform Wuhan Statistical Yearbook

Assumptions Wuhan master plan and sector master plans for infrastructure are effectively implemented All applicable local and national environmental laws in the PRC are effectively enforced. Risks River water quality monitoring data does not provide sufficient information to detect trends. Weak enforcement of the relevant national and local environmental laws and regulations

Outcome Integrated wastewater sludge treatment and disposal, and urban water resource management in Wuhan Municipality

More than 50% of urban WWTP sludge will be treated and disposed of in an economically and environmentally sustainable way by 2015, extending landfill life. Reduction of the annual landfill space capacity by 78,629 m3 per year, and prolonging the existing landfill service life of 16 years for the Changshankou landfill site Improvement of operation and maintenance performance of WWTPs will decrease inorganic matter in the sludge by 25% by 2015. The overall wastewater service, inclusive of sludge treatment, achieves full cost recovery by 2018 The frequency of disruption and damage caused by local storm water flooding is reduced by more than 50% in Wuhan New Zone by 2015.

Sludge quality and quantity monitoring data, and sludge reduction and reuse data Environmental monitoring reports and periodic review of sludge disposal Statistical data from Wuhan Municipal Management Bureau and Wuhan Sanitation Bureau Day-to-day operation and maintenance report Periodic tariff reviews Wuhan EPB monitoring WWB statistics WWB statistics on flood frequency and damage Environment monitoring reports

Assumptions Infrastructure assets are properly maintained. Adequate enforcement of nonresidential connection and pretreatment requirements Proper control of nonpoint and point source pollution Government support for tariff increase WWB acquires the resources and responsibility to monitor local flooding. EPB enforces environmental monitoring standards. Customers are willing to pay increased tariffs. Risks Lack of effective coordination and monitoring mechanisms of relevant agencies on environmental protection and management

12 Appendix 1



Improved lake water circulation leads to additional pollution entering the Yangtze.

Outputs 1. Integrated Sludge Treatment and Disposal 1.1 Wuchangnan Sludge Treatment Plant 1.2 Hankou Sludge Treatment Plant 1.3 Nantaizihu Sludge Treatment Plant 1.4 Improvement of existing sludge treatment and transportation 2. Wuhan New Zone Lakes and Channels Rehabilitation and Pumping Station 2.1 Longyang Lake rehabilitation 2.2 Moshui Lake rehabilitation 2.3 Nantaizi Lake rehabilitation 2.4 Longkou Channel rehabilitation 2.5 Longxin Channel rehabilitation 2.6 Zhujiaxin Channel rehabilitation 2.7 Zong Channel rehabilitation 2.8 Liantong Channel rehabilitation

Sludge collected and treated with capacity of 40 t/d dried sludge in Tangxunhu WWTP by 2012 Biogas utilization for sludge drying with capacity of 20 t/d dried sludge in Sanjintan WWTP by 2013 A sludge lime stabilization plant with capacity of 10 t/d dried sludge in Nantaizihu WWTP by 2012 Improvement and upgrade of sludge handling units, transport vehicles, and other items at existing WWTPs by 2012 Dredging of 250,000 m3, 31,800 m3/d of wetland park developed, 110,000 m2 of Tang Mountain greening completed by 2013 Dredging of 272,800 m3, 43,000 m3/d of artificial wetland, completed by 2013 Dredging of 225,000 m3, artificial wetland of 3,000 m3/d, completed by 2014 1,337 m channel of dredging, slope protection, greening, and water remediation completed by 2013 664 m channel of dredging, slope protection, and greening completed by 2013 3,583 m channel of dredging, slope protection, and greening completed by 2014 3,100 m channel of dredging slope protection, and greening completed by 2014 5,072 m channel of dredging, slope protection, and greening completed

Site inspection and project implementation reports WWTP operational records ADB review mission Construction supervision and monitoring reports

Assumptions Effective stakeholder participation and ownership development Strong support from local governments Upgrading of existing WWTP sludge treatment and new centralized facility properly synchronized Enforcement of environmental standards, including point source and nonpoint source pollution control Timely approval of land acquisition at the national level and implementation of resettlement activities Suitable arrangements can be found for the environmentally safe disposal of dredged material. Risks Resistance by some stakeholders on resettlement and tariff increases Local geological and meteorological conditions affect construction activities Some dredged material is found to be toxic requiring special disposal arrangements Poor performance of consultants Failure of WMG to increase tariffs to meet cost recovery targets for wastewater services

Appendix 1 13



2.9 Huoyan Channel rehabilitation 2.10 Sixin Pumping Station 3. Yangchun Lake Secondary Urban Center Lake and Channel Rehabilitation 3.1 Yangchun Lake rehabilitation 3.2 Heping Channel rehabilitation 4. Capacity Building and Institutional Strengthening 4.1 Strengthening implementation capacity 4.2 Improving WUDDC operational management 4.3 Enhanced pollution source control 4.4 Improvements in public awareness

by 2014 1,600 m channel newly built by 2014 Construction of water pumping station providing for a capacity of 105 m3/s, with phase 1 installation of 35 m3/s completed by 2012 Recovery of about 60 ha of lake surface, 232,900 m2 of greening, and 105,400 m2 of artificial wetland completed by 2013 1,400 m channel of dredging, slope protection, and greening completed by 2013 At least 30% of the jobs created under components 2 and 3, including after project construction, to be provided for vulnerable group including women and ethnic minorities Implementation plan is successfully adhered to in full compliance with ADB loan covenants and conditions. Onsite sludge thickening achieves 20% dry solids content. Sludge treatment operations produce sludge in accordance with design specifications. Reduction in pollution incidents Over 50% of residents can recall awareness program content and claim to have been positively influenced by it (sex disaggregated), 2015. Number of knowledge-sharing sessions on “green curriculum” with targeted schools (disaggregated by school levels), 2015 Over 50% of targeted small businesses recall awareness program content and claim to have been positively influenced by it, 2015 Increased awareness on how tariffs are restructured and existence of pro-

Quarterly monitoring and documentation of the public awareness program Monitoring reports on public awareness for tariff reform program

14 Appendix 1



4.5 Implementation of advanced water management systems

poor measures By 2012, a water quality model is used for intended purposes in Hanyang area. Training study on point and nonpoint source pollution by 2012

Activities with Milestones Inputs Component 1: Integrated Sludge Treatment and Disposal 1.1 Wuchangnan centralized sludge drying plant by 2011 1.2 Hankou biogas utilization sludge drying plant in Sanjintan WWTP by 2012 1.3 Nantaizihu sludge lime stabilization plant in Nantaizihu WWTP by 2010 1.4 Improvement of sludge treatment processes at existing WWTPs and complete the

procurement of transport vehicles and other sludge treatment equipment by 2012 Component 2: Wuhan New Zone Lakes and Channels Rehabilitation and Pumping Station 2.1 Longyang Lake dredging, wetland construction, aquatic planting and Tang Mountain

rehabilitation by 2013 2.2 Moshui Lake dredging, wetland construction, aquatic planting by 2013 2.3 Nantaizi Lake dredging, wetland construction, aquatic planting by 2014 2.4 Longkou and Longxin channels dredging, widening, bank reinforcement and

landscaping, and water remediation by 2013 2.5 Zhujiaxin, Zong, Liantong, and Huoyan channels dredging, widening, bank

reinforcement and landscaping by 2014 2.6 Sixin Pumping Station of 105 m3/s water pumping station constructed by 2011

and installation and commissioning of 35 m3/s treatment capacity by 2012 Component 3: Yangchun Lake Secondary Urban Center Lake and Channel Rehabilitation 3.1 Yangchun Lake recovery of surface water, lake dredging, aquatic planting, and

wetland construction by 2013 3.2 Heping Channel dredging, widening, bank reinforcement, and landscaping by 2013 Component 4: Capacity Building and Institutional Strengthening 4.1 Complete organizational arrangements for PMO and implementing agency, and

implementation arrangement for the project by end of 2010 4.2 Complete WMG, PMO, and implementing agency staff training by 2010 4.3 WWTP operation and management improvement, technical review, and assistance

for sludge management by end of 2010 4.4 Develop surface water quality modeling system; develop a study for point source

and nonpoint source pollution control; conduct water balance study by 2012 4.5 Establish a sludge test center and develop wastewater and sludge monitoring

program by 2013 4.6 Conduct willingness-to-pay survey and promote public awareness on tariff reform by

2013 4.7 Promote public awareness education on environmental protection and community

health by 2014 4.8 Complete PMO and implementing agency staff training, capacity building, tariff

reform, sludge operation and management, surface water management study, and public awareness program by 2015

ADB - $100.0 million loan - Undertake review

missions - Provide training in ADB

procedures WMG and implementing agencies

- About $401.8 million equivalent in counterpart funds

- Undertake onlending arrangements and loan management

- Hire design institutes and secure other consulting services

- Contract tendering, select contractors, contract management

- Initiate and support institutional reforms and capacity building

- Provide planning and resources for public information and consultation activities

ADB = Asian Development Bank, EPB = environmental protection bureau, ha = hectare, m = meter, m2 = square meter, m3 = cubic meter, m3/d = cubic meter per day, m3/s = cubic meter per second, PMO = project management office, PRC = People’s Republic of China, WMG = Wuhan municipal government, WUDDC = Wuhan Urban Drainage Development Company, WWB = Wuhan Water Bureau, WWTP = wastewater treatment plant. Source: Asian Development Bank.

Appendix 2 15

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=42011-01-3

1. Agreements

Loan Agreement Project Agreement

2. Sector Analysis 3. Project Administration Manual 4. Project Classification Summary 5. Contribution to the ADB Results Framework 6. Development Coordination 7. Financial Analysis and Financial Management Assessment 8. Economic Analysis 9. Country Economic Indicators 10. Summary Poverty Reduction and Social Strategy 11. Gender Action Plan 12. Environmental Assessment and Measures 13. Involuntary Resettlement Assessment and Measures 14. Risk Assessment and Risk Management Plan