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Technical Assistance Consultant’s Report

This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed project’s design.

Project Number: 66501 August 2008

People’s Republic of China: Songhua River Basin Water pollution Control and Management Project

Prepared by NREM International Inc. (Canada) in association with Easen International Inc. (USA) and HydroQual Inc. (USA)

For Heilongjiang Provincial Development and Reform Commission and Jilin Provincial Development and Reform Commission

FINAL REPORT

Songhua River Basin Water Pollution Control and Management Project

ADB TA: 4971-PRC

VOLUME I: EXECUTIVE SUMMARY AND MAIN REPORT

Submitted to

Asian Development Bank

Submitted by

NREM International Inc. (Canada) Beijing Representative Office 607A Sky Plaza No. 46 Dongzhimenwai Dajie Beijing 100027, PR China

In association with: Easen International Inc. (USA) HydroQual Inc. (USA)

29 August 2008

© 2008 NREM International Inc.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission from NREM International Inc., Ottawa, Canada.

NREM International Inc.

29 August 2008

Dr. Sangay Penjor Principal Financial Specialist East Asia Department Asian Development Bank 8 ADB Avenue Mandaluyong City 0401 Metro Manila Philippines

Subject: Final Report for TA No. 4971-PRC, Songhua River Basin Water Pollution Control and Management Project

Dear Dr. Penjor:

I have the pleasure to submit to you three copies of the Final Report for the TA 4971-PRC: Songhua River Basin Water Pollution Control and Management Project.

Please be advised that an additional three copies will be sent to the Executing Agency, Heilongjiang Provincial Development and Reform Commission and Jilin Provincial Development and Reform Commission.

Yours faithfully, NREM INTERNATIONAL INC.

Zhizhong Si, PhD Project Director

Encl.: Final Report c.c.: Mr. Zhang Yanyu / Heilongjiang Development and Reform Commission Mr. Jin Zhiguang / Jilin Development and Reform Commission

607A – Sky Plaza No. 46 Donzhimenwai Dajie Dongcheng District, Beijing 100027 People’s Republic of China

Tel: (86)(10) 5129-2269 Fax: (86)(10) 8460-8515

[email protected]

Final Report, ADB TA 4971-PRC: Songhua River Basin Water Pollution Control and Management Project

ACKNOWLEDGEMENTS

The PPTA Consultants would like to thank the Heilongjiang Provincial Government and Heilongjiang Provincial Project Management Office; most notably Mr. Chi Xiufeng, Deputy Director General of Heilongjiang Provincial Development and Reform Commission (HPDRC); Mr. Zhang Yanyu, Deputy Director General of HPDRC, Director of HPMO; Mr. Yang An, Department Director of Foreign Capital Utilization Department of HPDRC, Deputy Director of HPMO; Mr. Zhang Yongping, Department Director of International Cooperation Department of Heilongjiang Provincial Finance Bureau (HPFB), Ms. Huo Erzhe, Former Department Director of International Cooperation Department of HPFB, Deputy Director of HPMO; Mr. Wang Xiquan, Deputy Director of Foreign Capital Utilization Department of HPDRC; Mr. Liu Yuxiang, Deputy Director of International Finance Department of HPFB; Mr. Chen Jiahou, Deputy Department Director of Heilongjiang Province Environmental Protection Bureau (HPEPB); Mr. Zhou Delong, Director of Foreign Capital Auditing Department of Heilongjiang Provincial Auditing Bureau; Mr. Wang Xijun, Officer of Foreign Capital Utilization Department of HPDRC; Mr. Wu Xufeng, Officer of International Finance Department of HPFB; Jilin Provincial Government and Jilin Provincial Project Management Office, most notably Mr. Chang Ming, Deputy Director General of Jilin Provincial Development and Reform Commission (JPDRC); Mr. Chu Minhua, Deputy Director General of Jilin Provincial Construction Bureau (JPCB); Mr. Yang Haiting, Counsel of Jilin Provincial Finance Bureau (JPFB); Mr. Tong Cai, Deputy Director General of Jilin Provincial Environmental Protection Bureau (JPEPB); Mr. Jin Zhiguang, Director of Regional Economy Department of JPDRC; Ms. Li Xin, Deputy Director of Regional Economy Department of JPDRC; Mr. Wu Di, Director of Foreign Investment Department of JPDRC; Mr. Yan Bo, Advisor of Foreign Investment Department of JPDRC; Ms. Liu Qun, Deputy Director of Foreign Debt and Finance Department of JPFB; Mr. Sun Ping’an, Officer of Regional Economy Department of JPDRC for their able assistance and coordination. The PPTA Consultants would also like to thank the Implementing Agencies and Design Institutes and other stakeholders for giving up so much of their time to provide the necessary information.

Last but not the least, the PPTA Consultants are indebted to Mr. Sangay Penjor, Mission Leader and Principal Financial Analysis Specialist, Mr. Sergei Popov, Environmental Specialist, Ms. Madhumita Gupta, Resettlement Specialist, Ms. Wendy Walker, Social Development Specialist, Ms. Carolina T. Navarro, Project Officer, and Ms. Flordeliza dR. Asistin, Senior Programs Officer for their guidance and support.


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Executive Summary

A. Purpose of the Report

1. The purpose of this report is to detail the major findings of the Project Preparatory Technical Assistance (PPTA) in relation to the Songhua River Basin Water Pollution Control and Management Project. The objective of the PPTA is to prepare an investment package based on an assessment of the various subprojects which will collectively improve the environmental quality in the Songhua River Basin (SRB) and enhance quality of life in the participating municipalities, counties and cities in Heilongjiang and Jilin Provinces, by improving the supply of potable water, increasing the coverage of wastewater services and enhancing solid waste management, and rehabilitating the river basin.

B. Conduct of the PPTA

2. Under the guidance and support of ADB specialists and in close partnership with the various stakeholders, the PPTA Consultants have: (i) reviewed the relevant sector strategies; (ii) conducted many rounds of public consultations in various forms; (iii) analyzed the feasibility study reports, environmental impact assessments and resettlement plans; (iv) performed technical, financial, economic, poverty and social, environmental and institutional analyses of the proposed interventions; and (v) developed the Design and Monitoring Framework (DMF), contract packages, implementation plan and capacity building plan.

3. During the analytical process, various alternatives, including the with-and-without-project scenarios, have been identified, screened and compared with technical, financial, economic, poverty and social as well as environmental criteria. The options with least cost, least adverse social and environmental impacts and maximum social and environmental benefits were selected.

4. The PPTA has been implemented with a participatory approach. Extensive consultations have been held with the key stakeholders, including the Heilongjiang and Jilin Provincial Governments as the Executing Agencies (EAs), the implementing agencies (IAs), municipal and county / city governments, relevant provincial and county / city agencies, domestic design institutes and local communities. Consultation activities included workshops, focus group discussions, interviews and household visits and surveys.

C. Rationale: Sector Performance, Problems and Opportunities

Performance Indicators and Analysis 5. Since the PRC initiated economic reforms in 1978, continuous economic growth has been accompanied by rapid urbanization. The urban population has grown from 160 million in 1975 to about 577.1 million in 2006. The urbanization rate increased from 17% to 43.9% in the same period, and is expected to reach 55% (or about 700 million) in 2030. This rapid urbanization over the past three decades of economic reform was largely fuelled by the transformation of suburban areas from farming to non-farming activities, and by the massive migration of surplus rural labor to urban areas. The number of cities in the PRC increased from 193 in 1978 to 661 in 2006. There are also 19,522 towns. Of the total urban population of 577.1 million in 2006, an estimated 115.5 million (20%) live in small cities and 239.1 million (41%) in towns. The Government


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highlighted sustainable urbanization as a key policy priority in the 11th Five-Year Plan (FYP) (2006–2010).

6. Rapid urbanization in the PRC has taken a severe toll on the environment, and has also challenged the capacity of local governments to promote good governance, effective planning and management, sustainable financing, and timely delivery of public services. While significant progress has been made in building urban infrastructure over the past two decades, it tends to be concentrated in the more highly developed eastern and southern coastal plains. The expansion and upgrading of public services has not kept pace with rapid industrial growth. The rural migration to urban centers currently taking place in the inland regions, in response to government policies to promote economic development and job creation in these areas, is putting further strain on urban infrastructure and services.

7. Cities in the north and west and around the SRB are experiencing widespread pollution due to the discharge of untreated wastewater and improper management of solid waste. Shortages of safe drinking water are also common, particularly in the northern part of the PRC. The Government has classified more than 108 cities as having serious water problems, and 60 as being critically short of water. The situation has been exacerbated by the pollution of raw water sources by the discharge of inadequately treated agricultural, municipal, and industrial wastewater.

8. The enormous volume of wastewater and solid waste generated by PRC’s urban areas poses a major environmental threat to the country’s rivers, lakes, and underground aquifers. In 2006, the PRC generated about 54.0 billion cubic meters (m3)of wastewater—about 55.0% from municipal sources and 45.0% from industrial sources. Currently, about 90% of industrial wastewater is treated before discharge to municipal sewers. Municipal wastewater is a major contributor to pollution of the PRC’s rivers and lakes. As of 2006, only about 57% (34% in 2000) of urban wastewater was treated; the rest was discharged untreated into rivers and lakes. The Ministry of Environmental Protection (MEP) maintains a network of 3,200 water quality monitoring stations nationwide. According to the 2005 State of the Environment Report, about 41% of the water in the seven major river basins does not meet the class III national water quality standard. Of the 50 lakes that are regularly monitored, 13 are partially polluted, 19 are seriously polluted, and only 18 meet the class III standard. Surface water sources serving municipal water supply systems are polluted to levels unacceptable under the current water quality standards.

9. The amount of solid waste generated by urban areas has also expanded rapidly. In 2006, the PRC generated 186 million tons of solid waste—representing an increase of 57% over the 2001 volume of 118 million tons. However, the increase in treatment capacity has not kept pace with the increased solid waste volume, and the treatment capacity that has been developed is mainly for large cities. Few small cities and towns have wastewater and solid waste facilities. In addition to direct adverse impacts on public health, the growing and uncontrolled disposal of solid waste contributes to increasing contamination of groundwater supplies through inadequate leachate collection systems.

10. In the PRC’s 11th FYP, the Government has prioritized addressing environmental issues, including water and air pollution, through policy reform, increased investment, and improved urban infrastructure management. Recognizing that adequate environmental protection and pollution controls are essential for sustainable economic growth, the Government has incorporated environmental protection as a national priority in its development strategy. In addition to enacting environmental protection laws and implementing regulations that emphasize preventive measures, the polluter pays


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principle, and decentralized environmental management, the Government has also undertaken numerous programs including those for wastewater management. Industries were ordered to treat wastewater to meet the national wastewater discharge standards by the end of 2000; municipalities have 5-year plans to address wastewater collection, treatment, and disposal; and pollution control plans have been developed and partially implemented for the key river basins. The Government has decreed that by 2010, the wastewater treatment rate in all cities of the PRC should not be lower than 60%, and not lower than 70% for the major cities with secondary treatment facilities. The treatment level required is dependent on the water environmental functions or quality class of the receiving water body. To achieve water quality Class I, II, or III, secondary wastewater treatment would normally be required.

11. The Government’s strategy focuses on: (i) developing water sources; (ii) protecting existing sources by controlling industrial and residential pollution; (iii) introducing water efficient technologies and operations; and (iv) using appropriate pricing mechanisms to encourage conservation and generate necessary funds for operation, maintenance, and investment. The Government’s ongoing economic and enterprise reform programs require that all water supply and wastewater projects be financially sustainable and capable of cost recovery.

Analysis of Key Problems and Opportunities 12. Key problems and opportunities include: (i) shortage of good quality drinking water, (ii) inadequate wastewater treatment capacity, (iii) inadequate SWM facilities and services, and (iv) making water supply and wastewater treatment self-financing through tariff reforms.

13. Songhua River Basin (SRB). The SRB is the third largest river basin in the PRC after the Yangtze and Yellow rivers. It has an area of 557,000 square kilometers (km2) and a population of 62 million. The SRB is home of major cities such as Changchun and Harbin, and PRC’s largest oil fields are located in the basin. Agriculture is well developed and there is a large industrial base. The Songhua River catchment covers portions of three provinces and one autonomous region–Heilongjiang, Jilin and Liaoning provinces and Inner Mongolia Autonomous Region (IMAR). About 48.4% of the catchment is located in Heilongjiang province (covering 59.4% of the provincial territory), 24.1% in Jilin province (71.6% of the provincial territory), 27.4% in IMAR (12.9% of the autonomous region’s territory) and 0.1% in Liaoning province (0.36% of the provincial territory). The Songhua River has two headwaters; in the west, the Nenjiang River originates from Yilehuli Mountain of the Greater Hinggan Mountain Range; and in the south, the Second Songhua River originates from the Heavenly Lake on top of the Changbaishan Mountain. The two rivers converge at Sanchakou (border of Heilongjiang and Jiin provinces) to form the Songhua River which joins the Heilongjiang River, enters the Russian Federation, and eventually discharges to the sea.

14. The SRB is seriously polluted and is acknowledged by the MEP as being one of the four most polluted river basins in the PRC. Water pollution issues in the SRB, especially in relation to the protection of drinking water resources for the municipality of Harbin, have received increased national and international attention due to a widely publicized pollution incident in the SRB in November—December 2005. The Songhua River is contaminated with a number of known and suspected trace organic chemicals, metals, and conventional pollutants. It is classified by the Government as Class IV (even falling below Class V during the 6-month low flow winter season), and is considered unsuitable for municipal domestic water use. In March 2003, the ADB approved the Harbin Water Supply Project ($100 million) to address the needs of Harbin City, with a population of 3 million, for clean and reliable drinking water from an alternative water source (Lalin River), since their existing source from the Songhua River was highly


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polluted. Because of the deteriorating water quality in the Songhua River, the Harbin Municipal Government expedited construction of the Harbin Water Supply Project, which was completed 1 year ahead of the original schedule.

15. The Government is focusing more attention to improving the SRB water quality over the current FYP and the next two successive FYPs. The PRC top leadership has expressed strong support to the pollution reduction and water quality improvement of the SRB, and the overall target is to improve the water quality in the SRB to meet the PRC Class III water quality standards by 2020. The upgrading of the State Environmental Protection Administration (SEPA), who led the preparation of the SRB Water Pollution Prevention and Control Master Plan (SRBPCMP), into the MEP will further strengthen the effort. With support from the National Development and Reform Commission (NDRC), the MEP will take the lead while each of the provinces will implement their respective shares of the SRBPCMP.

16. Project Rationale. During the processing of the Harbin Water Supply Project, extensive dialogue was conducted with the Government on addressing pollution control in the SRB. Consequently, in 2002 the ADB provided a TA for the Songhua River Basin Water Quality and Pollution Control Management.

17. The TA which was highly successful had the following impacts. First, it developed a long term vision for the SRB consisting of a strategic plan encompassing the identification of water quality objectives and targets and reforms and strengthening of the existing river basin and pollution control management practices, and proposed a long term physical investment program. Second, it strengthened the capacity of key organizations responsible for pollution control and management at both the river basin and regional level, and prepared a road map outlining the key milestones leading to the development of a river basin management framework within the PRC. Third, it identified knowledge gaps relating particularly to non-point sources of pollution, water quality assessment (notably micropollutants), and water quality inventories. Fourth, it developed an overall strategic plan for the SRB both refining and prioritizing existing strategic plans developed by different institutions at different levels (river basin and provincial level). The strategic plan includes the identification of an investment plan to be implemented over 15 years. Fifth, it (i) assisted the Government in developing a long-term water pollution control plan for the SRB beyond 2010, and (ii) provided strategic policy inputs to the 11th FYP and the SRBPCMP. The SRBPCMP (2006–2010) approved by the State Council on 29 March 2006, is an action program to set pollution control targets from 2006 to 2010, requiring that urban environmental pollution and ecological damage be controlled by 2010. Large and medium-sized cities’ wastewater treatment rate should not be less than 70% by 2010. The untreated wastewater is a major problem in the SRB. The significant increase in the wastewater treatment capacity under the proposed Project would contribute to the target of improving the water quality in the SRB, from the current class IV and V to class III by 2020.

18. The Jilin Water Supply and Sewerage Development (JWSSD) Project ($100 million), approved in 2005, was the first major ADB investment directly addressing pollution control in SRB. The Jilin Urban Environmental Improvement (JUEI) Project ($100 million), approved in 2007 was the second, and follows the priority list of SRBPCMP. The proposed Project, with an indicative ADB loan of $200 million, will be the third major ADB investment in the SRB, and follows the priority list of SRBPCMP. This comprehensive strategic approach to addressing pollution control in the SRB will serve as a model for demonstration and replication elsewhere in the PRC. The proposed Project will help the concerned counties and cities in Heilongjiang province to achieve a wastewater treatment rate of 70% by 2012. It will also help the project counties and cities in Jilin achieve a wastewater treatment rate of 90% by 2012. Key


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areas for replication include, (i) the approach in studying the complex issues of SRB water quality and pollution control management; (ii) assisting the Government to develop a suitable river basin approach for managing water quality; (iii) developing a strategic pollution control action plan that combines technical assessment, identifying investments on a prioritized basis, and institutional planning; and (iv) implementing the prioritized investments and related capacity building.

19. Underdevelopment of wastewater collection and wastewater treatment in the project counties and cities in Heilongjiang province and Jilin province leads to the discharge of untreated wastewater into local rivers, and eventually to the pollution of the SRB. Water quality in some sections of the Songhua River and its tributaries does not meet Class V of the PRC Surface Water Quality Standard. The lack of adequate wastewater management degrades local rivers, poses a threat to public health, and adversely affects the quality of life in the project counties and cities. There is an urgent need to expand the sewer network and wastewater treatment capacity in project counties and cities to improve the water quality in the SRB. Heilongjiang has identified 13 subprojects, focusing on water supply and wastewater treatment. Jilin has identified 20 subprojects, focusing on wastewater treatment, solid waste management, and river improvement. Sector and project lending were thoroughly discussed and considered as alternative approaches. The Government expressed its strong preference for the project lending approach because all subprojects have been identified and the feasibility study reports have been completed, and there was an urgent need to implement the subprojects in accordance with the SRBPCMP. All subprojects of the proposed Project have one common impact, which is to improve the urban environment and enhance the quality of life in project counties and cities, and will contribute significantly to pollution control in the SRB.

20. The project counties and cities in Heilongjiang Province rely primarily on surface water for their water supply. Under normal conditions, water demand is expected to exhaust developed capacity in the project counties and cities by 2010. These counties and cities experienced supply problems during a severe episode of drought in 2004 leading to dangerously low water levels in the reservoirs and a resulting loss of effective treatment plant capacity. They also experienced low pressure and supply interruptions.

21. The project counties and cities in Jilin province have domestic SWM featuring domestic waste pick-up, extensive informal recovery of recyclables, and disposal in a managed landfill. Given that their existing landfill sites will be fully utilized within 2 years, timely construction of new domestic solid waste treatment facilities is urgently needed. The inadequate solid waste management capacity causes non-point source pollution which contaminates the ground drinking water supplies.

22. Policy Dialogue. The Project builds on and furthers ADB policy dialogue with the Government on several key areas including: (i) cost recovery and tariff reform, (ii) wastewater management, (iii) upstream and basin-wide pollution prevention and control, (iv) water conservation, (v) corporate governance and enterprise reform, and (vi) private sector participation. ADB has supported the water tariff reform process through two water tariff TA projects with the Ministry of Construction under which the market-oriented National Guidelines on Water Tariffs were developed, promulgated, and implemented. The water tariff TAs (i) strengthened the financial sustainability of municipal water supply companies; (ii) piloted implementation of the national guidelines in the selected case study cities of Chengdu, Fuzhou, and Zhangjiakou; and (iii) recommended financial regulations for water supply companies and designed nationwide training programs. The guidelines are being implemented nationwide. Further, an ADB wastewater tariff TA


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developed and recommended national guidelines for wastewater tariffs, including tariff calculation methodologies that allow for full cost recovery taking into consideration affordability and social constraints. All the project local governments have plans to increase water tariffs on an average basis from CNY 2.50/m3 to CNY 2.80/m3 and wastewater tariffs from CNY 0.50/m3 to CNY 0.80/m3 by 2009, respectively. This indicates the project counties and cities progressiveness in adopting tariff reforms.

23. The water and wastewater tariff increases under the Project are important towards achieving full cost recovery which is needed to attract private sector participation (PSP) in the project counties and cities. An assurance will be included requiring the project counties and cities to ensure that water and wastewater tariffs charged be set at a level that ensures full cost recovery of operation and maintenance (O&M), depreciation and financial costs including debt service obligations and a reasonable profit margin for water and wastewater treatment. This would ensure full cost recovery at the start of project operations, and financial sustainability of the Project. ADB has also provided TA support to the Government on the use of market-based instruments to enhance private sector partnership in public utilities, mainly for water supply, wastewater treatment, and solid waste management. This TA provided an analysis of the issues in the context of international best practices and how these could be adopted in the PRC. During project processing, the main features of the ADB-supported Chengdu build-operate-transfer project were discussed with the EA. HPG, JPG, and the implementing agencies (IAs), indicated interest in this modality of private sector involvement for future investments. Further, PRC Resident Mission (PRCM) and Private Sector Operations Department (PSOD) conducted a seminar in Beijing on 25 July 2007 on ADB’s non-sovereign lending modality for the provinces of Heilongjiang and Jilin. The proposed Project will create the environment necessary for eventual PSP by pursuing tariff reform, full cost recovery, enterprise reform, and improved governance; all are prerequisites for private sector involvement. Other modalities of PSP, including leasing contracts and joint ventures, were also reviewed. As a result of tariff reforms and increases, the IAs would become financially sustainable, and be able to generate funds for future water and wastewater expansion projects. Consequently, the tariff reforms and capacity building under the Project would contribute to improved governance.

24. External Assistance. Since 1992, ADB has provided 26 loans totalling $2,904 million to the PRC for urban development and environment projects. ADB also has provided about $51.6 million for more than 72 TA studies to prepare these projects, and to review and study key issues in water resources, urban water supply, wastewater treatment, and pollution control and heating. External assistance to Heilongjiang province and Jilin province has principally been provided by ADB and the World Bank.

25. Lessons Learned. ADB’s water supply loan projects in the PRC have generally been implemented well. The lessons identified from post-evaluation of water supply and sanitation projects highlight the importance of integrating both supply and demand concerns into project design. Encouraging broad reforms, such as commercial management, and introducing competition will promote efficient and responsive delivery of water supply and wastewater services. Appropriate pricing policies for water and sanitation services are also required. Other lessons include the need to (i) review technical designs thoroughly; (ii) consider local conditions and constraints; (iii) support financial reform, particularly in establishing autonomous wastewater entities and tariff increases to ensure sustainability; (iv) strengthen institutions, particularly by giving them managerial autonomy; (v) educate the public in environmental improvement; (vi) consult the public and involve the community; (vii) address resettlement issues early; and (viii) support public-private partnerships in water supply and wastewater treatment. For example, the PPTA Consultants worked closely with the local design institutes to review the demand and supply side analysis for each subproject, through the use of historical


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and national baseline data and technical design standards. This has resulted in adjustments in the selection of technologies and equipment, optimization of the engineering designs which has lead to reduction in land acquisition and resettlement costs. Full cost recovery through a phased approach was assessed in detail and this was discussed and agreed with the EAs and IAs. Training and institutional strengthening measures have been incorporated into the Project design including among others public education activities on environmental health and sanitation.

26. A recently completed performance portfolio review of the water supply, sanitation, and waste management sector identified successes and deficiencies, and lessons from portfolio performance, and the PRC Country Assistance Program Evaluation. Among the major issues identified were (i) delays in the start-up of projects and in procurement, (ii) weak institutional arrangements for project implementation and sustainable operations, and (iii) a low proportion of civil works financing resulting in loan savings and cancellation of surplus loan amounts. During project processing, lessons of experience were taken into consideration by (i) thoroughly evaluating the technical designs and technologies; (ii) ensuring an adequate debt-equity ratio for the project IAs; (iii) undertaking rigorous sensitivity analysis of cash flows, and financial and economic analysis; and (iv) incorporating institutional strengthening measures to improve the level of corporate governance to complement the capacity development components included in the Harbin Water Supply, JWSSD and JUEI projects. The proposed Project addresses three issues indicated in the 2007 PRC Country Assistance Program Evaluation including (i) avoiding one-off project interventions, (ii) the need for a more integrated approach to addressing pollution, and (iii) the use of multiple lending instruments.

D. Project Impact, Outcome and Outputs

27. The impact of the Project is enhanced and improved public health and quality of life for urban residents in the project counties, and cities in the provinces of Heilongjiang and Jilin along the SRB, by increasing wastewater treatment coverage, enhancing SWM, and improving the supply of potable water. The outcome of the Project will be reduced pollution and improved water supply, wastewater management, and SWM in the SRB.

28. The components include improved water supply and wastewater services in Heilongjiang province; improved wastewater facilities, SWM, and river improvement in Jilin province; and institutional capacity building for efficient project implementation and management for both provinces. The Project has three components broken down into five subcomponents (outputs) and 20 activities. These will contribute to and support HPG’s and JPG’s 11th FYP and the SRBPCP by (i) reducing pollutant loading to the SRB through direct collection and treatment of wastewater (point sources) and municipal solid wastes (non-point sources) in the project counties and cities; (ii) addressing the water shortage problem through effluent reuse; (iii) providing a supply of reliable and high-quality potable water in four counties and cities of Heilongjiang province; (iv) reducing both point and non-point sources of pollution in the Changbaishan Administrative District; (v) reducing the incidence of waterborne diseases; (vi) increasing the efficiency and management capacity of the IAs; (vii) integrating approaches for basin-wide pollution prevention and control; and (viii) improving cost recovery through a better tariff structure, with gradual increases to achieve full cost recovery.


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E. Project Components and Subprojects

29. The Project has two components by province, broken down into five subcomponents and 28 subprojects, and a related capacity development component, as indicated in the Design and Monitoring Framework (DMF). The three components include: (i) improved water supply and wastewater services in Heilongjiang Province; (ii) improved and expanded wastewater facilities, solid waste management, and river improvement in Jilin Province; and (iii) institutional capacity development for effective and efficient project implementation and management.

30. Component I. The Heilongjiang component has two subcomponents: (i) water supply and (ii) wastewater treatment. The first subcomponent includes the construction of four water treatment plants (WTPs) with a cumulative capacity of 49,500 m3/day and 120 kilometers (km) of water transmission pipelines. The second subcomponent includes the construction of nine WWTPs with a cumulative treatment capacity of 381,000 m3/day and 199 km of sewer pipelines.

31. Component II. The Jilin Component has three subcomponents: (i) wastewater treatment, (ii) SWM, and (iii) river improvement. The first subcomponent includes the construction of nine WWTPs with a cumulative capacity of 178,000 m3/day and 367.6 km of sewer pipelines. The second subcomponent includes the construction of 10 sanitary landfill facilities with a cumulative capacity of 2,400 tons per day with service life ranging from 13 to 22 years. The third subcomponent includes river improvement at the source of the Songhua River including (i) two WWTPs with capacity of 3,100 m3/day, (ii) three solid waste transfer stations with a total capacity of 40 tons per day, and (iii) 3.8 km of sewer pipelines.

32. Component III. This Component provides for institutional capacity development for effective project management including (i) providing training to strengthen organizational structures and staff resources to implement, operate, and maintain the project components; (ii) strengthening management practices in human resources, finance, and corporate planning; and (iii) providing support for the Government’s public awareness program to ensure sustainability of project benefits.

33. Brief descriptions of the 13 subprojects in Heilongjiang Province are as follows: Subproject Description

Water Supply 1 Fujin City

Water Supply Expansion (Fujin City Zhongfu Water Supply Co.)

- Capacity: 20,000 m3/day- 36.828 km of water distribution networks - 5 Deep pumped wells - Service population: 137,000 (2012), 165,000 (2020) - Start of construction: 2009/04 - End of construction: 2010/09

2 Tangyuan County Water Supply (Tangyuan County Water Supply Co.)

- Capacity: 10,000 m3/day- 5 pumped wells - 1 km of water supply pipelines from wells - 15.48 km of water distribution networks - Service population: 80,000 (2010), 100,000 (2020) - Start of construction: 2009/04 - End of construction: 2010/12

3 Tonghe County Water Supply Expansion (Tonghe County Water Supply and Drainage Co.)

- Capacity: 9,500 m3/day- 6 deep pumped wells with 6 pump stations - 26.758 km of distribution networks - Service population: 90,000 (2015), 120,000 (2020)


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Subproject Description - Start of construction: 2009/04 - End of construction: 2011/12

4 Yanshou County Water Supply Expansion (Yanshou County Water Supply Co.)

- Capacity: 10,000 m3/day- 39.727 km of distribution networks with pipelines - Service population: 95,000 (2010), 100,000 (2020) - Start of construction: 2008/07- End of construction: 2010/12

Wastewater Management 5 Fangzheng County

WWTP + Sewerage Network (Fangzheng County Water Supply and Drainage Co.)

- 6,000 m3/day of waste water treatment plant with high-density sedimentation tanks and biological aerated filter technology

- 24.995 km of sewer networks - Service population: 60,000 (2010), 85,000 (2020) - Start of construction: 2008/09- End of construction: 2010/11

6 Fujin City WWTP(Fujin City Zhongfu Water Supply Co.)

- 20,000 m3/d of wastewater treatment plant with high-density sedimentation tanks and biological aerated filter technology

- Service population: 137,000 (2012), 165,000 (2020) - Start of construction: 2009/04- End of construction: 2011/09

7 Harbin City Xinyigou District WWTP (Harbin City Inland River Comprehensive Development Co.)

- 100,000 m3/day of wastewater treatment plant with Modified A2/O technology

- 34.35 km of sewer networks; - Service population: 3,940,000 (2010), 4,600,000(2020).- Start of construction: 2008/09- End of construction: 2010/09

8 Jiamusi City East District WWTP + Effluent Reuse (New Era Urban Infrastructure Construction Investment Jiamusi Co., Ltd.)

- 40,000 m3/d of effluent reuse plant with air filtration technology - 18.67 km of reuse water supply pipeline - Used as supplementary supply of cooling water for a power plant - Start of construction: 2008/08 - End of construction: 2010/09

9 Nenjiang County WWTP + Sewerage Network (Nengjiang County Water Supply Co.)

- 15,000 m3/day of wastewater treatment plant with Modified A2/Otechnology


10 Qiqihar City WWTP (Phase II) (Qiqihar City Hecheng Wastewater Treatment Co., Ltd)

- 100,000 m3/day of wastewater treatment plant with CASS technology - 2.5 km of sewer network - Service population: 1,344,000 (2010), 1,564,000 (2020) - Start of construction: 2008/10- End of construction: 2010/12

11 Qitaihe City Effluent Reuse (Qitaihe City Qingyuan Drainage Co., Ltd.)

- 40,000 m3/day of effluent reuse plant with CASS technology - 8.5 km of reuse water supply pipeline - Used as supplementary supply of cooling water for Qitaihe Datang

Power Generation Co. Ltd. - Start of construction: 2008/09- End of construction: 2009/12

12 Shuangyashan City WWTP

- 50,000 m3/day of wastewater treatment plant with Modified A2/Otechnology


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Subproject Description (Shuangyashan City Changyuan Drainage Co., Ltd.)

- 21.8 km of sewer networks - Service population: 342,500 (2010), 425,000 (2020). - Start of construction: 2008/07- End of construction: 2010/06

13 Tangyuan County WWTP(Tangyuan County Xingyuan Urban Construction Investment Co., Ltd.)

- 10,000 m3/day of wastewater treatment plant with high-density sedimentation tanks and biological aerated filter technology


34. Brief descriptions of the 20 subprojects in Jilin Province are as follows: Subproject Description

Wastewater Management 1 Dehui City

WWTP(Dehui City Tianyi Water Co., Ltd.)

- 30,000 m3/day of domestic sewage with A2/O technology - 12.65 km wastewater interception main pipelines, 16.395 km sewer

main pipelines and upgrade 6.702 km sewer pipelines - Service population: 210,000 (2010), 280,000 (2020) - Start of construction: 2008/09 - End of construction: 2010/12

2 Gongzhuling City Fanjiatun Town WWTP (Gongzhuling City Urban State-Owned Assets Operations Co., Ltd.)

- 20,000 m3/day of wastewater treatment plant with BIOLAK technology - 48 km of sewer pipelines - Service population: 100,000 (2010), 130,000 (2020) - Start of construction: 2008/09 - End of construction: 2012/12

3 Gongzhuling City Sewage Network Upgrade (Gongzhuling City Urban State-Owned Assets Operations Co., Ltd.)

- 59 km of sewer pipelines for urban sewage networks upgrade - 1 booster pumping station - Service population: 166,600 (2010), 342,400 (2020) - Start of construction: 2008/09 - End of construction: 2012/12

4 Fusong County WWTP (Fusong County Lantianbishui Infrastructure Development Co., Ltd.)

- 20,000 m3/day of wastewater treatment plant with CAST technology - 32 km of sewer pipelines - Service population: 85,000 (2010), 149,000 (2020) - Start of construction: 2008/09 - End of construction: 2010/12

5 Fuyu County WWTP(Fuyu County Wastewater Treatment Co., Ltd.)

- 30,000 m3/day of wastewater treatment plant with BIOLAK technology - 51.792 km of combined sewage and stormwater sewers - Service population: 168,000 (2010), 249,000 (2020) - Start of construction: 2008/09 - End of construction: 2010/02

6 Jingyu County WWTP(Jingyu County Yutong Municipal Engineering Co., Ltd.)

- 20,000 m3/day of wastewater treatment plant with BIOLAK technology - 55.01 km of sewer pipelines - Service population: 89,200 (2010), 118,000 (2020) - Start of construction: 2009/04 - End of construction: 2012/12

7 Liuhe County WWTP(Liuhe County Bishui Wastewater Treatment Co., Ltd.)

- 10,000 m3/day of wastewater treatment plant with Hydrolysis-AICS technology

- 19.44 km of sewer pipelines - Service population: 125,000 (2010), 150,000 (2020) - Start of construction: 2008/09


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Subproject Description - End of construction: 2010/12

8 Tonghua County WWTP (Tonghua County Water Supply Co.)

- 15,000 m3/day of wastewater treatment plant with CAST technology - 39 km of sewer pipelines - Service population: 55,000 (2010), 70,000 (2020) - Start of construction: 2009/04 - End of construction: 2012/12

9 Yushu City WWTP (Fanhua Water (Yushu) Co., Ltd.)

- 30,000 m3/day of wastewater treatment plant with CASS technology - 18.56 km of sewer pipelines - Service population: 263,000 (2010), 352,000 (2020) - Start of construction: 2008/10 - End of construction: 2010/12

Solid Waste Management 10 Da’an City SWM

(Da’an City Xingcheng Urban Infrastructure Development and Construction Co., Ltd.)

- Sanitary landfill with a total capacity of 3.0945 million m3 and daily processing capacity of 260 t/day of domestic solid wastes

- 22 years of service life - Service population: 160,000 (2010), 210,000 (2020) - Start of construction: 2009/04 - End of construction: 2013/12

11 Fusong County SWM (Fusong County Lantianbishui Infrastructure Development Co., Ltd.)

- Sanitary landfill with a total capacity of 657,000 m3 and daily processing capacity of 150 t/day of domestic solid wastes


12 Huadian City SWM (Huandian City Solid Waste Treatment Co., Ltd.)



13 Huinan County SWM (Huinan County Chaoyang Township Huashu Domestic Solid Waste Treatment Service Co., Ltd.)



14 Jiaohe City SWM (Jiaohe City Jiemei Solid Waste Co.)

- Sanitary landfill with a total capacity of 1.78 million m3 and daily processing capacity of 250 t/d of domestic solid wastes

- 16.8 years of service life - Service population: 160,000 (2010), 200,000 (2020) - Start of construction: 2009/04 - End of construction: 2013/12

15 Jingyu County SWM (Jingyu County Huanyu Domestic Solid Waste Management Co., Ltd.)

- Sanitary landfill with a total capacity of 893,200 m3 and daily processing capacity of 91 t/d of domestic solid wastes


16 Liuhe County SWM (Liuhe County Luyuan Domestic



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Subproject Description Solid Waste Management and Service Co., Ltd.)


17 Meihekou City SWM (Meihekou City Jiecheng Domestic Solid Waste Collection, Transportation and Treatment Co., Ltd.)



18 Tongyu County SWM (Tongyu County Hecheng Domestic Solid Waste Sanitary Landfill)



19 Yushu City SWM (Fanhua Water (Yushu) Co., Ltd.)



Integrated River Improvement 20 Changbaishan Integrated River

Improvement(Changbaishan Development and Construction Group Co., Ltd.)

- 2 wastewater treatment stations with total capacity of 3,100 m3/d in Baixi Town (2,000 m3/d) and Manjiang Town (1,100 m3/d), effluent will be fully used as landscaping and car washing, etc. in summer and snow-making in winter

- Sewers + effluent reuse pipelines: 17.39 km, including 3.83 km sewer pipelines and 4.8 km effluent reuse pipelines in Baixi Town, and 8.63 km sewer pipelines in Manjiang Town

- 3 solid waste transfer stations with total capacity of 40 t/d in Baixi Town (15 t/d), Manjiang Town (5 t/d), and Donggang Town (20 t/d)

- Service population: 42,500 present permanent residents in Baixi Resort, Donggang Town and Manjiang Town, 55,000 (2010), 73,000 (2020)

- Tourists: 15,000/day at peak season, average 8,000-10,000/day - Start of construction: 2009/04 - End of construction: 2013/12

F. Special Features

35. The Project is a multi-sector urban environmental improvement project which aims to integrate urban development and environmental management to ensure long-term sustainable growth and contributing to integrated water resource management and river basin management in the SRB.

36. The proposed Project is an integral part of the basin-wide Songhua water resources management initiative, and the SRBPCMP. The proposed Project will complement the ongoing JWSSD Project and the JUEI Project to collectively address pollution control in the SRB. The water quality improvements in the SRB will also contribute to integrated water resource management and pollution control, basin-wide management program, and trans-boundary pollution prevention and control. The proposed Project reflects a continuation of ADB’s effort for the environmental


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improvement of SRB following the JWSSD Project and the JUEI Project. Lessons learned from the JWSDD Project and the JUEI Project regarding the integration of wastewater treatment, water reuse, and water resource protection are continued and improved under the proposed Project. The Project focuses on strengthening the environmental management institutions and the policy dialogue on integrated river basin management and pollution control in the SRB, resulting in improved environmental performance.

37. Public-Private Participation. The proposed Project is catalyzing both additional public sector government investments, and private sector investments aimed at reducing pollution in the SRB. EARD and the PSOD are adopting a public private partnership approach to address the large wastewater treatment funding needs for Heilongjiang province. PSOD is preparing a project for the Tsinghua Tongfang Company (TTC), a private firm, which is currently managing the largest WTP in Harbin. The PSOD project would provide equity injection and credit lines to the TTC to undertake the management of WTPs in other cities in Heilongjiang. TTC is focusing on the water and wastewater sector business and is exploring private-public-participation (PPP) opportunities with the local governments. TTC with an equity investment of $3.4 million is a minority shareholder in the Qitaihe City Central WWTP and effluent reuse subproject included in the proposed Project. For this subproject, ADB loan will be utilized along with the local government counterpart funds and private sector funds. The TTC investment would (i) solve the funds shortage problem at Qitaihe, and (ii) improve the management and operational efficiency at Qitaihe through training provided by TTC. This pilot demonstration subproject could be replicated in other subprojects in Heilongjiang, and then in Jilin province. TTC has firm plans to invest in six other cities in Heilongjiang province. Further, two other foreign companies are actively involved in joint venture investments in wastewater treatment in Heilongjiang province.

38. Tariff Reform. Some of the project counties and cities have committed to generate funds to finance the water and wastewater subcomponent of the Project from water and wastewater tariff increases amounting to $3.5 million.

39. Catalytic Impact. The policy dialogue on pollution control in the SRB that started with the preparation of the Harbin Water Supply Project and the cumulative efforts up to the proposed Project have had a large catalytic impact on mobilizing resources aimed at reducing pollution in the SRB. The proposed Project is catalyzing both additional public sector government investments, and private sector investments aimed at reducing pollution in SRB.

G. Technical Analysis

40. The purpose of the technical analysis is to ensure the contents completeness and depth of the FSRs for the subprojects are technically appropriate as well as compliance with PRC domestic requirements, ADB guidelines and international best practices.

Water Supply 41. Most of the surface water of the counties/cities has poor water quality of Class V or even worse, especially in winter with low flow conditions. The groundwater is selected as the raw water source for the Fujin city, the Tangyuan County and the Tonghe County. Based on the long-term water quality monitoring, the groundwater quality from these groundwater sources complies with the conventional Domestic Drinking Water Standards (GB5749-2006), except for the elevated concentrations of Fe2+ and Mn2+. The water treatment process for these facilities adopts Aeration and


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Filtration for the removal of Fe2+ and Mn2+. Reservoir water is used as the raw water source for the Yanshou County. For Yanshou, the main water treatment process employs Coagulation and Sedimentation for the removal of the suspended solids. The main material of distribution pipeline is DIP. As summarized below, most of these small capacity water treatment plant (WTP) share a lot of similarities in terms of treatment process and distribution pipeline material selections. Efficiency can be greatly enhanced if optimization on treatment process and detailed design can be shared among them.

Wastewater Treatment 42. Most the counties and cities have no wastewater treatment plant (WWTP) at present. The wastewater is discharged into the rivers or nearby surface water without any treatment. The design capacity of the WWTPs should be able to meet the requirement of these counties and cities. The primary and secondary treatment processes are selected for the WWTPs with final effluent discharge that is either required to meet the Class I (B) or Class I (A) of the Urban Wastewater Treatment Pollutants Discharge Standards (GB18918-2002). PPTA Consultant’s review show that for those WWTPs required to meet the Class I (A) discharge standards, the investment cost as well as operation & maintenance (O&M) cost seem on the high side, and would need further confirmation during the preliminary or detailed design stage. In general, the sites selected for most of these WWTPS are acceptable since they are usually reasonably distant from urban area and yet near downstream of rivers. The design of the sewerage collection pipeline and WWTP locations are also reasonable since most of the wastewater can be collected and delivered to the WWTP by gravity, achieving the lowest delivering cost for treatment. The main material of the pipes for the sewer system is PCP. Alternatives for the water treatment and pipeline materials have been considered and the proposed ones are based on least cost solution approach.

Solid Waste Management 43. All SWM FSRs are checked against PRC design guidelines and US reference design guideline and found appropriate in general with minor adjustment in the design may be needed after collecting more information in the next implementation stage. Based on the experience, the PPTA consultants had also carried out the waste generation projections to check against those found in the FSRs to ensure appropriate projection were made. The more appropriate leachate treatment technologies were also recommended for some of the SWM subprojects.

H. Analysis of Alternatives

44. During the project development, alternatives to the Project and Project alternatives have been proposed, screened and compared with technical, economic, as well as environmental criteria.

Without Songhua Pollution Control Master Plan 45. By the end of 2004, there were only 14 wastewater treatment plants for the SRB as a whole, with a daily capacity of 1.57 million m3/d and actual treatment volume of 0.70 million m3/d. The wastewater treatment rate was only 15% for the entire basin. For large cities with a population greater than 500,000, including Harbin, Changchun, Daqing and Mudanjiang, the treatment rate was lower than 40%. In 2005, Heilongjiang Province generated 13.92 million tons of municipal solid wastes, of which only 17.5% received sanitary treatment. By the end of 2005, there are 20 sanitary landfills in the province, with a daily processing capacity of 9,380 t/d. The target for 2010 (end year of the SRBWPCMP) is to reach a sanitary processing rate of 60%. For Jilin Province, the volume of municipal solid wastes surpassed 7.1 million tons for 2005, of which only


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32.2% received sanitary disposal. The target for 2010 is to build 33 sanitary landfills, with the sanitary processing rate for large and medium-sized cities reaching 90% and other cities 60%. Assuming that the provinces would not take action without the SRBWPCMP, the volumes of wastewater and solid wastes would continue to grow, resulting in a continuous degradation of the water quality in the SRB.

With-Without Water Supply Subprojects 46. Compared with the with-project scenario, the without-project scenario would result in continued water supply shortage on quantity or lack of reliable good quality water supply in the 4 subproject areas of Fujin City, Tangyuan County, Tonghe County and Yanshou County in Heilongjiang Province. The situation would gradually be worsened along with the pressure ascribed by growing population, economic development and the standard of living, weakened competitiveness of the city and its attractions for outside investment, impeded further development of the city and its economy as well as further improvement of the standard of living for its citizens. Without the new water supply pipe network, continued leaking in the old and in some cases obsolete water distribution pipes and network would result in wastage of valuable resources, and compromised drinking water safety, reliability and sufficiency in general. Although the with-project scenario has some adverse impacts during the construction phases, but these impacts are temporal and localized and can be minimized if the mitigation measures are implemented properly.

With-Without Wastewater Management Subprojects 47. The Project improves wastewater treatment and provides effluent reuse by industries. As a result, the amount of pollutants (COD, BOD, SS, NH3-N and total phosphor) entering the Songhua River system will be reduced, benefiting the people living in the SRB. Without the Project, large volumes of wastewater would be continuously discharged into the Songhua River system at directly or indirectly, resulting in continued severe pollution of the SRB.

With-Without Solid Waste Management Subprojects 48. Without the project, the solid wastes would be dumped in the project areas. Environmental issues related to the existing solid waste dump site are (i) strong odour around the dump site, especially in the summer months, resulting in large populations of flies and mosquitoes; (ii) biogas generated from the anaerobic degradation of organic waste that poses a potential threat of fire blast and a health / life risk to scavengers living on the dump site; (iii) serious water pollution to surface water and groundwater by leachate from the dump site; (iv) serious air pollution around the sites due to dust and flying ash from the dump site and ash storage. These adverse environmental effects can be mitigated or eliminated by the proposed subproject.

Alternatives for Water Supply Subprojects 49. Several alternatives have been examined for the water supply subprojects in Heilongjiang Province. The options of withdrawing water from the river, from lakes / reservoirs, from riverside wells and from ground water were compared for, among other things, quality and quantity of supply, costing and technological requirements. The most appropriate alternative was selected for a particular site. Groundwater is selected for the Fujin, Tangyuan and Tonghe Water Supply Subprojects, and reservoir is selected for the Yanshou Water Supply Subproject. The selected alternatives have also incorporated increased industrial water demand from industries.

Alternatives for Wastewater Sewer Networks 50. Sewer alignments were selected based on the topography and geography (mainly based on needs for collecting sewage) of the service area; construction methods and cost; minimized resettlement impacts; and other features, such as major roads,


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railways, other underground utilities, river crossings, environmental and construction impacts, operation and management, and connection to the proposed WWTP. Most selected alignments are along major roads to minimize environmental impacts, demolition and resettlement, river crossing, and costs. Alternatives for effluent outfalls were assessed for all the WWTPs. The selected sites are based on distance from the WWTP to the river, resettlement and land requirements, cost, and quality standards of receiving water bodies. Combined sewers are adopted for old urban quarters, and separate sewers for new urban districts, because connections with existing networks.

Alternatives for Wastewater Treatment Processes 51. The proposed WWTPs will adopt secondary biological treatment technologies. Two or three alternative treatment processes were considered in each feasibility study, which include (i) the conventional activated sludge process; (ii) the anaerobic, anoxic, and anaerobic process for effective removal of nitrogen and phosphorus; (iii) the oxidation ditch process, which has a higher nitrogen and phosphorous removal efficiency than conventional process; and (iv) the newly developed anaerobic and oxidation process, with high phosphorous removal efficiency. Factors considered included treatment efficiency in relation to raw wastewater characteristics, environmental aspects, cost, and sludge handling. Based on the varying conditions and requirements, A2/O will be used for 4 WWTPs, BAF for 4 WWTPs, CAST for 4 WWTPs, and BIOLAK for 4 WWTPs.

Alternative for Solid Waste Management Process 52. Three technological options – landfill, incineration, and compost – were evaluated based on the evaluation criteria such as treatment scope, investment and operating costs, environmental impacts, past experience, required land, and waste content. Due to low organic content, low thermal value and unstable ingredients, and the existing economic situations, the analysis concluded that the sanitary landfill is the best option for all of the SWM subprojects.

Alternatives for Effluent Disposal and Reuse 53. For all the WWTPs, effluent will be conveyed by an outfall to a river from which the water will be available for irrigation and other uses downstream. Preliminary consideration was given to industrial reuse of the effluent from all of the WWTPs. However, under existing conditions there is no economic incentive for industry to reuse effluent or no industrial users. Effluent of three WWTPs will be reused for industrial cooling purpose.

Alternatives for Sludge Disposal 54. Incineration, landfill, and production of fertilizer pellets were options considered for sludge disposal. Factors compared included potential adverse impacts, cost, and management. Sanitary landfill was selected as the sludge disposal method for most of the WWTPs. Agreements are in place to allow disposal of sludge to a controlled sanitary landfill when plants are in operation. For all the WWTPs, arrangements or agreements will be in place to allow disposal of sludge to a controlled sanitary landfill by the time the plants are placed into operation.

I. Project Cost and Investment Plan

55. The project investment is estimated at $396.3 million equivalent, including taxes and duties. The cost estimates are summarized in Table ES.1.


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Table ES.1: Project Investment Plan ($ million)Component Total Coste

A. Base Costs a I. Heilongjiang Component a. Water Supply 19.4 b. Wastewater Treatment 132.5 II. Jilin Component a. Wastewater Treatment 74.7 b. Solid Waste Management 73.9 c. Integrated River Improvement 7.8 III. Project Management/Training/Consulting Services 2.7

Subtotal 311.0B. Contingencies Physical b 24.5 Price c 35.9

Subtotal 60.4C. Financial Charges during Implementation and Commitment Fee d 25.0

Total 396.3a In May 2008 prices, including taxes and duties. b Computed at 8% for all civil works, equipment, training, and consulting services. c Computed, based on foreign exchange inflation rate of 6.8% in 2008, 0.7% in 2009, 1.4% in 2010, 0.4% in

2011, 0.5% in 2012 and onwards; and local currency inflation rate at 5.5% in 2008, 5.0% in 2009 and onwards; and includes provision for exchange rate fluctuation under assumption of a purchasing power parity exchange rate.

d Includes interest and commitment charges for both the ADB loans and domestic bank loans. Interest during construction for the ADB loan has been computed at the 5-year forward London-interbank offered rate (LIBOR) of 3.68% plus a spread of 0.2%.

e Includes taxes and duties of $11.06 million. Source: ADB estimates.

56. The Government has requested a loan of $200 million from ADB’s ordinary capital resources to help finance the Project, out of which $100 million is for Heilongjiang province and $100 million for Jilin province. The loan will have a 25-year term, including a grace period of 5 years, an interest rate to be determined in accordance with ADB’s London interbank offered rate (LIBOR)–based lending facility for US dollar loans, commitment charge, and such other terms and conditions set forth in the draft Loan Agreement. 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.

57. The ADB loan will finance 50.5% of the project cost including the base cost and the financial charges during implementation and taxes and duties. Local costs will be financed from water and wastewater tariffs, domestic loans from the PRC banks,1 capital infusion from the local government, and State Bonds. HPG and JPG have confirmed the allocation of the State Bonds funds to the project counties and cities. The local governments have provided commitment letters confirming their respective counterpart fund contributions to the Project. The financing plan is summarized in Table ES.2.

1 Industrial and Commercial Bank of China, and China Construction Bank.


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Table ES.2: Financing Plan ($ million)Sources Amount %

A. Asian Development Bank Loan 200.0 50.5 B. State Bonds, Heilongjiang 46.4 11.6 C. Local government equity, Heilongjiang 44.6 11.3 D. State Bonds, Jilin 19.7 5.0 E. Local government equity, Jilin 78.4 19.7 F. Tariffs 3.5 0.9 G. Private sector equity (Tsinghua Tongfang Company Ltd.) 3.4 0.9 H. Cofinancing: Domestic commercial banks 0.3 0.1

Total 396.3 100.0Source: Asian Development Bank estimates.

58. The Borrower is the PRC. The Government of the PRC will make the loan proceeds available to the HPG and JPG on the same terms and conditions as those of the ADB loan. HPG and JPG will make the loan proceeds available to the concerned county and city governments on the same terms and conditions as those of the ADB loan; the loan proceeds will then be onlent to the IAs on the same terms and conditions. The IAs will bear the risks of foreign exchange and interest rate variation for their portion of the loan proceeds, and undertake to perform the obligations as provided in the Project Agreement applicable to the IAs.

J. Financial Aspects

59. The financial evaluation of the Project was undertaken in real terms using constant 2008 prices. The project cost estimates and financial projections in nominal terms were converted to real terms by adjusting for the projected effects of foreign and domestic inflation and currency fluctuation. Incremental benefits and costs were derived by evaluating the financial position of the IAs under with-project and without-project scenarios. The financial internal rate of return (FIRR) for the Project was computed on an after-tax basis of 7.6% for the water supply subprojects, and 6.7% for the wastewater subprojects, which compares favorably with the weighted average cost of capital in real terms of 2.8%. The sensitivity analysis includes examination of the risk that (i) project costs will increase by 10%, (ii) O&M costs will increase by 10%, and (iii) project implementation and subsequent realization of benefits will be delayed by a year. An affordability analysis has been undertaken based on proposed tariffs and household income data from the social survey. Detailed verification of the local financing plan indicates that the equity contributions are on average about 5% of annual revenues from the concerned county and city governments, indicating minimal risk. The county and city governments have sufficient financial resources to take on responsibility for guaranteeing the loan repayments, and have provided assurances that they accept this risk. Tariffs under the Project are considered affordable if the combined average water and wastewater charges are less than 5% of monthly household income. The estimated tariffs on this basis are affordable to the average household (3.0% of monthly income), and also affordable to the poorest 10% of households (less than 4% of monthly income before accounting for poverty reduction measures that exist now or that have been committed to).

60. The IAs agreed to minimum levels of financial performance, and these will be included as loan covenants covering capital structure (debt-equity), debt service cover, and liquidity. Financial projections estimate the tariffs required for an appropriate level of financial performance. Periodic tariff reviews will be required to overcome the risk of poor financial performance or of unexpected changes in tariff income. The financial


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sustainability of the Project was verified through the financial analysis of the IAs. Generally, the current levels of tariffs for water supply and wastewater treatment in the provinces are sufficient to cover costs of basic operation and maintenance. Tariffs will need to be increased to allow for full cost recovery when the ADB-financed facilities come into operation. Towards this end, the Government has assured the Mission that (i) tariffs will be increased in phases, taking into account affordability factors; and (ii) subsidies will be provided to ensure sustainable O&M of the project facilities. The Project will provide capacity building support on tariff reforms and tariff setting, and on financial management to ensure that sufficient funds are allocated for sustainable O&M of the project facilities. Financial sustainability of the subprojects was determined. Annual funds required for capital expenditures during project implementation, and O&M and debt services during operation were forecast and relevant debt coverage ratios were estimated. The Project is considered both financially viable and sustainable.

61. The results of the FMA indicate that the EAs have sound financial management system and adequate experience in managing projects funded by foreign financial institutions. The IAs operate as state-owned enterprises. Accounting and financial management systems for financial reporting and accounting were adequate for the purpose of loan implementation although internal control procedures may be improved. As some of the IAs do not have experience working with externally funded projects, training for the IAs on ADB procedures and requirements related to procurement, disbursement, financial reporting, monitoring, internal control, financial management, and anticorruption safeguards will therefore need to be provided under the training component of the Project.

K. Economic Analysis

62. The Project is an integral part of the ongoing provincial, municipal, and river basin environmental programs, contributing significantly to pollution control in the SRB. Public perceptions and preferences were also evaluated using household and business surveys. The analysis demonstrates that water supply, wastewater management, and SWM rank highest in priority when compared with a range of other public services. A quantitative economic analysis also demonstrates the value of the Project. The economic analysis was conducted for 25 years including project construction, in accordance with ADB’s Guidelines for the Economic Analysis of Projects. Project benefits and costs were estimated on a with-project and without-project basis. Costs were divided into tradable and non-tradable costs, and benefits were adjusted to account for non-incremental and incremental benefits. Incremental economic benefits were valued on the basis of willingness to pay. For the Heilongjiang subprojects the estimated economic internal rate of return (EIRR) ranges from 13.6% to 34.7%, with an average EIRR of 19.5%. For the Jilin subprojects the EIRRs range from 17.2% to 20%, with an average EIRR of 18.4%. The EIRRs for the Heilongjiang and Jilin components exceeds the economic opportunity cost of capital, assumed at 12%. The economic internal rates of return for the subprojects are summarized in Table ES.3 for Heilongjiang Component and Table ES.4 for Jilin Component.


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Table ES.3: Summary of EIRRs for Heilongjiang Component No. Subprojects EIRR (%)Water Supply 1 Fujin City Water Supply Expansion 28.0% 2 Tangyuan County Water Supply 14.5% 3 Tonghe County Water Supply Expansion 17.4% 4 Yanshou County Water Supply Expansion 15.6% Wastewater Management 5 Fangzheng County WWTP + Sewerage Network 15.2% 6 Fujin City WWTP 19.2% 7 Harbin City Xinyigou District WWTP 14.1% 8 Jiamusi City East District WWTP + Effluent Reuse 34.7% 9 Nenjiang County WWTP + Sewerage Network 25.7% 10 Qiqihar City WWTP (Phase II) 36.9% 11 Qitaihe City Effluent Reuse 15.7% 12 Shuangyashan City WWTP 14.2% 13 Tangyuan County WWTP 13.6%

The Whole Project 19.6%

Table ES.4: Summary of EIRRs for Jilin Component No. Subprojects EIRR (%)Wastewater Management 1 Dehui City WWTP 19.1% 2 Fusong County WWTP 19.8% 3 Fuyu County WWTP 18.3% 4 Gongzhuling City Fanjiatun Town WWTP 17.9% 5 Gongzhuling City Sewage Network Upgrade 18.0% 6 Jingyu County WWTP 18.2% 7 Liuhe County WWTP 18.7% 8 Tonghua County WWTP 18.8% 9 Yushu City WWTP 19.5% Solid Waste Management 10 Da’an City SWM 16.4% 11 Fusong County SWM 19.9% 12 Huadian City SWM 18.0% 13 Huinan County SWM 19.1% 14 Jiaohe City SWM 19.3% 15 Jingyu County SMW 17.2% 16 Liuhe County SWM 19.2% 17 Meihekou City SWM 19.0% 18 Tongyu County SWM 19.3% 19 Yushu City SWM 18.6% Integrated River Improvement 20 Changbaishan Integrated River Improvement 20.0%

The Whole Project 18.4%

L. Poverty and Social Impact Assessment

63. Poverty and social analysis was undertaken in line with ADB guidelines to collect detailed social information to inform project design and implementation; and identify poverty reduction and social development objectives, outcomes, and indicators. In addition to the socioeconomic survey, public consultations were conducted with different groups of stakeholders including consumer groups, business communities, government agencies, people affected by the Project, and civil society organizations. A participatory approach was adopted for project design and will continue during project


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implementation. The poverty and social analysis identified vulnerable groups and opportunities for pro-poor interventions and social action measures, and outlined the participation and mitigation plans to help achieve positive social benefits.

64. The Project will directly benefit an urban population of 9.94 million including 7.04 million in Heilongjiang province and 2.9 million in Jilin province. Of the total direct beneficiary population, about 6.85% (4.62% of the beneficiaries in Heilongjiang Province, and 12.24% of the beneficiaries in Jilin Province) are classified as poor based on the weighted average local urban poverty line of CNY 2,196. A small percentage of ethnic minorities (4.1%) are scattered in the project counties and cities. The social analysis determined that they are socially and economically integrated with the majority population and will not be subject to any adverse impacts of the project.

65. The poverty and social impacts of the Project include several dimensions (i) improved urban environmental conditions and enhanced sanitation through pollution control in the SRB with the provision of clean water supply and reduced wastewater and solid waste management pollution in the project counties and cities; (ii) increased employment and income generation opportunities from temporary job creation during the construction phase and permanent job creation during the operational phase; (iii) reduction in the incidence of water- and vector-related diseases, with associated reduction in medical costs, and in the number of workdays and school days lost; (iv) increased environmental awareness; (v) reduced risks of pollution to downstream water users; (vi) value-added benefits from local procurement; and (vii) improved investment conditions to stimulate the development of local economy to create new jobs and income generating opportunities and accelerate the rehabilitation of the ecological system of the project counties and cities.

66. The project counties and cities will enjoy a better quality of life, increased employment, investment and business opportunities, and improved public health. The poor, who tend to reside in areas with poor service levels, are less able to cope with the disruption and illness due to lack of financial resources, experience higher vulnerability to adverse environmental conditions and thus will particularly benefit from improved living conditions, environmental quality, and health benefits. Moreover, the improved services will reduce women’s burden of work. As such, the Project will supplement the poverty reduction efforts in the project area and PRC.

67. The Project will create 6,620 person-years of direct short-term employment with earnings totalling CNY 89.1 million per year during the project construction phase, and 1,380 person-years of direct long-term employment with wages totalling CNY 18.4 million per year during the project operation phase. About 30% of the short-term employment opportunities, including the jobs of manual labourers for excavation, material handling, vehicle operation, food provision, will be filled by the poor, women and minorities, earning CNY 26.7 million during the project construction phase.

68. To ensure the vulnerable groups will gain maximum benefits from the Project, pro-active employment programs have been proposed (i) priority will be given to the vulnerable group for the employment and training opportunities generated from the project construction and operation phases; (ii) the selected contractors will be sensitized to the issue of providing maximum benefits for the vulnerable; and (iii) the contractors will be required to adopt pro-active measures, such as quota systems and training programs for the vulnerable group, including 15% of the total employment and training opportunities will be provided to women and 15% to the poor and minorities, will be specified in the contract of the contractors.


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69. Based on the reported health data provided by the respective local health bureaus and the results of the health impact analysis, it is estimated that the annual health cost savings in 2007 directly from the urban environmental improvement in the project area of SRB totals CNY509.3 million, and the net present value (NPV) of health benefit during the period 2011 and 2032 is about CNY908.1 million. The result is consistent with WHO reports that there is sufficient evidence to support the conclusion that improving water supply and sanitation can have a significant impact on human health. However, for the full health benefits to be realized, close coordination will be carried out by each IA with the existing public environmental awareness and hygiene education program of the environmental protection bureaus and health bureaus. During project implementation, a social development specialist will be recruited and tasked, among others, to document and monitor the intensity of activities under the public awareness programs.

70. The affordability of the poor has been assessed based on the proposed tariffs and household income statistical data. It indicates that the average households and households in the lower income class will not have a problem with affordability of a tariff increase since the share of income expended for the services is considered to be minimal given that the total percent paid by each household is currently a small percentage of their total income. Impact on households in the lowest income bracket can be potentially significant but will be mitigated through the existing tariff reduction and subsidy program. These subsidies are in addition to the MLG.

71. A participatory process has been used throughout the project preparation and will continue during project implementation, monitoring and evaluation. A number of key indicators are proposed for monitoring the poverty and social aspects of the Project. Most of these have been incorporated into the project design and monitoring framework.

M. Resettlement

72. Resettlement impacts have been identified and resettlement plans (RPs) have been prepared in accordance with PRC laws and regulations of land acquisition and resettlement and ADB’s Involuntary Resettlement Policy. The land acquisition and resettlement program is designed to ensure that affected persons (APs) will be better off (or at least no worse off) as a result of the Project. Overall, the land acquisition and resettlement impact for the Project will be significant. A total of three full RP and 18 short RPs with three due-diligence reports, and six statements of land acquisition and resettlement have been prepared by the IAs with assistance of the local design institute. The 33 subprojects in Heilongjiang and Jilin province will require the permanent acquisition of 272.6 hectares (ha) of land, temporary acquisition of 125.5 ha, and dismantling of 11,180.64 m2 of residential and non-residential structures. In total, 287 households with 1,523 persons will be permanently affected by land acquisition, 331 households with 1,067 persons by temporary land occupation, and 68 households with 238 persons by residential and non-residential house demolishment.

73. The total costs for land acquisition and resettlement is estimated to be CNY238.1 million or $34.0 million. Of the total resettlement costs, CNY46.0 million or $6.6 million is for Heilongjiang province and CNY192.1 million or $27.4 million for Jilin province. The measures for economic rehabilitation include (i) provision of employment opportunities to the APs during the project construction and operational phases, (ii) provision of basic social insurance to the APs whose land is newly acquired, (iii) development of crops with higher economic value, (iv) promotion and development of new enterprises and self-employed secondary and tertiary businesses, and (v) provision of technical training to the APs to increase their skills. The PMOs and IA will supervise


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implementation to ensure that the vulnerable persons receive adequate compensation, housing arrangement, special fund and the Minimum Living Guarantee (MLG), and assistance to restore their living conditions and incomes.

74. HPG, JPG, the project county and city governments, and the IAs have implemented ADB’s Public Communication Policy (2005). Full disclosure for the resettlement activities was completed before the end of July 2008 by (i) distributing copies of the resettlement information booklet to affected households and village offices on 10 July 2008, (ii) posting the RPs in village offices or resident committees on 15 July 2008, and (iii) posting English versions of the RPs on the ADB website following their endorsement by the project county and city governments, HPG, JPG and ADB Environment and Social Safeguard Division on 28 July 2008.

75. ADB requires both internal and external resettlement monitoring and evaluation of the APs during implementation. The IAs will report progress regularly to PMO, who in turn will summarize the land acquisition and resettlement progress in the quarterly progress reports to ADB. The PMO will also engage an independent monitor who will visit the subprojects every 6 months to (i) review resettlement progress and the general welfare of those affected, (ii) make recommendations to resolve any issues or problems, and (iii) provide advice to IAs and local officials. The monitor will pay special attention to vulnerable groups, including women and the poor, to assess whether they have fully regained their standard of living. Monitoring and evaluation reports will be prepared every 6 months during implementation and annually for 2 years after the completion of resettlement. These reports will be submitted simultaneously to ADB, PMOs, and the IAs, and will be uploaded onto the ADB website.

N. Environmental Analysis

76. The Government has met the requirements of ADB’s Environment Policy (2002). Extensive public consultations involving meetings with stakeholders, focus-group discussions, and surveys were undertaken twice during preparation of the domestic environmental impact assessments (EIAs). The EIAs summarize the environmental impacts, mitigation measures, and monitoring plans. The environmental management plan (EMP), prepared as part of the EIA, will guide environmental mitigation and monitoring under the Project. All the EIAs have been approved by the Heilongjiang Provincial Environmental Protection Department (HEPD) and Jilin Provincial Environmental Protection Department (JEPD). The summary environmental impact assessment (SEIA) and the EMP have been confirmed by the Government. The SEIA concludes that the Project will have substantial positive environmental and socioeconomic benefits. The SEIA was circulated to the ADB Board and p

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