Report and Recommendation of the President to the Board of Directors

Project Number: 49404-002 October 2018

Proposed Loan, Grant, and Administration of Grant Socialist Republic of Viet Nam: Water Efficiency Improvement in Drought-Affected Provinces Project Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB’s Public Communications Policy 2011.

CURRENCY EQUIVALENTS

(as of 23 October 2018)

Currency unit – dong (D) D1.00 = $0.0000429 $1.00 = D23,330

ABBREVIATIONS

ADB – Asian Development Bank ENSO – El Niño Southern Oscillation HVC – high-value crop MARD – Ministry of Agriculture and Rural Development O&M – operation and maintenance PAM – project administration manual PPC – provincial peoples’ committee REMDP – resettlement and ethnic minority development plan TA – technical assistance

NOTE In this report, “$” refers to United States dollars.

Vice-President Stephen Groff, Operations 2 Director General Ramesh Subramaniam, Southeast Asia Department (SERD) Directors Jiangfeng Zhang, Environment, Natural Resources and Agriculture

Division, SERD Eric Sidgwick, Viet Nam Resident Mission, SERD Team leader Sanath Ranawana, Senior Natural Resources Economist, SERD Team members Rexel Abrigo, Climate Change Officer (Climate Change Adaptation),

Sustainable Development and Climate Change Department (SDCC) Karen Chua, Operations Officer, SERD Alexander Fox, Principal Procurement Specialist, Procurement, Portfolio

and Financial Management Department Le Phong Ho, Senior Project Officer (Natural Resources and Agriculture),

SERD Baurzhan Konysbayev, Principal Counsel, Office of the General Counsel Leonard Leung, Natural Resources and Agriculture Economist, SERD Ngan Thi Than Luong, Associate Procurement Officer, SERD Giang Nguyen, Senior Social Development Officer (Gender), SERD Dinh Oanh, Social Development Officer (Safeguards), SERD Phuc Quang Pham, Senior Environment Officer, SERD Cecile Ramiro, Senior Operations Assistant, SERD Yasmin Siddiqi, Principal Water Resources Specialist, SDCC Takeshi Ueda, Principal Natural Resources and Agriculture Economist,

SERD Racel Verdillo, Associate Operations Analyst, SERD Peer reviewer Arnaud Cauchois, Principal Water Resources Specialist, SARD

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

CONTENTS

Page

PROJECT AT A GLANCE

MAP

I. THE PROPOSAL 1

II. THE PROJECT 1

A. Rationale 1 B. Impact and Outcome 4 C. Outputs 4 D. Summary Cost Estimates and Financing Plan 5 E. Implementation Arrangements 6

III. DUE DILIGENCE 7

A. Technical 7 B. Economic and Financial 7 C. Governance 8 D. Poverty, Social, and Gender 8 E. Safeguards 9 F. Summary of Risk Assessment and Risk Management Plan 9

IV. ASSURANCES AND CONDITIONS 10

V. RECOMMENDATION 10

APPENDIXES

1. Design and Monitoring Framework 11

2. List of Linked Documents 13

Project Classification Information Status: Complete

PROJECT AT A GLANCE

Source: Asian Development BankThis document must only be generated in eOps. 15102018163411559235 Generated Date: 05-Nov-2018 10:31:41 AM

1. Basic Data Project Number: 49404-002Project Name Water Efficiency Improvement in

Drought-Affected Provinces Project Department/Division

SERD/SEER

Country Viet Nam, Socialist Republic of Executing Agency Binh Thuan Provincial People's Committee, Dak Lak Provincial People's Committee, Dak Nong Provincial People's Committee, Khanh Hoa Provincial People's Committee, Ministry of Agriculture and Rural Development, Ninh Thuan Provincial People's Committee

Borrower Socialist Republic of Viet Nam

2. Sector Subsector(s) ADB Financing ($ million)Agriculture, natural resources and rural development

Irrigation 100.30

Total 100.30

3. Strategic Agenda Subcomponents Climate Change Information Inclusive economic growth (IEG)

Pillar 2: Access to economic opportunities, including jobs, made more inclusive

Environmentally sustainable growth (ESG)

Disaster risk managementGlobal and regional transboundary environmental concernsNatural resources conservation

Climate Change impact on the Project

Medium

ADB Financing

Adaptation ($ million) 100.30

Cofinancing

Adaptation ($ million) 0.75

4. Drivers of Change Components Gender Equity and MainstreamingGovernance and capacity development (GCD)

Institutional systems and political economy

Knowledge solutions (KNS) Application and use of new knowledge solutions in key operational areas

Partnerships (PAR) Bilateral institutions (not client government)Official cofinancing

Effective gender mainstreaming (EGM)

5. Poverty and SDG Targeting Location ImpactGeographic TargetingHousehold TargetingSDG Targeting

YesNoYes

Rural High

SDG Goals SDG1, SDG2, SDG6, SDG13

6. Risk Categorization: Low.

7. Safeguard Categorization Environment: B Involuntary Resettlement: B Indigenous Peoples: B.

8. Financing

Modality and Sources Amount ($ million)

ADB 100.30

Sovereign Project grant: Climate Change Fund 0.30

Sovereign Project (Concessional Loan): Ordinary capital resources 100.00

Cofinancing 0.75

Water Financing Partnership Facility-NET TF - Project grant (Full ADB Administration)

0.75

Counterpart 23.21

Government 23.21

Total 124.26

Currency of ADB Financing: USD

Ea Sup

Buon Don

Ea Hleo

Krong Nang

Krong Buk

Cu Mgar

Krong Pak

Ea KarM Drak

Van Ninh

Ninh Hoa

Krong Bong

Lak

Krong Ana

Krong No

Dak Mil

Tuy Duc

Dak RlapDak Glong

Khang Vinh

Dien Khanh

Cam Lam

Cam Ranh

Cu Jut

Bac Ai

Ninh HaiNinh Son

Ninh Phuoc

Tuy PhongBac Binh

Duc Linh

Tanh Linh

Ham Thuan Nam

Ham Tan

Phu Quy

Ham Thuan Bac

Phan Thiet

Nha Trang

Buon Ma Thuot

Gia Nghia

Phan Rang-Thap Cham

Ho Chi Minh City

Dak Lak

Dak Nong

Khanh Hoa

Binh Thuan

Ninh Thuan

Ho Chi Minh

Lam Dong

Gia Lai

Phu Yen

Ba Ria - Vung Tau

Binh Phuoc

Dong Nai

Dak Lak

Dak Nong

Khanh Hoa

Binh Thuan

Ninh Thuan

N

0 50

Kilometers

5 25

This map was produced by the cartography unit of the Asian Development Bank. The boundaries, colors, denominations, and any other information shown on this map do not imply, on the part of the Asian Development Bank, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries, colors, denominations, or information.

MAIN MAP

Hai Phong

Ho Chi Minh City

Hue

Hanoi

17-2216 17 VIE ABV

WATER EFFICIENCY IMPROVEMENT IN DROUGHT-AFFECTED PROVINCES PROJECT

VIET NAM

Boundaries are not necessarily authoritative.

National Capital

Provincial Capital

National Road

District Boundary

Provincial Boundary

International Boundary

I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on (i) a proposed loan and (ii) a proposed grant, both to the Socialist Republic of Viet Nam for the Water Efficiency Improvement in Drought-Affected Provinces Project. The report also describes the proposed administration of a grant to be provided by the Netherlands Trust Fund under the Water Financing Partnership Facility for the Water Efficiency Improvement in Drought-Affected Provinces Project, and if the Board approves the proposed loan and grant, I, acting under the authority delegated to me by the Board, approve the administration of the grant. 2. The project integrates climate-resilient agricultural practices through a transformational shift in irrigation modernization, including (i) strengthening irrigation management to improve climate resilience, (ii) modernizing irrigation infrastructure, and (iii) supporting efficient on-farm water management practices. Specifically, the project will modernize eight irrigation systems in five drought-affected provinces: Binh Thuan, Dak Lak, Dak Nong, Khanh Hoa, and Ninh Thuan.1 The modernized systems will enhance the provinces’ ability to manage climate variability, improve the water productivity of agriculture, and increase incomes by supporting farmers in growing high-value crops (HVCs) such as coffee, peppers, grapes, apples, dragon fruits, and mangoes.2 The project was predicated by the El Niño Southern Oscillation (ENSO)-induced drought in 2014−2016, which affected Viet Nam’s south-central coastal and central highlands regions.

II. THE PROJECT A. Rationale 3. Viet Nam’s agriculture sector experienced a rapid transformation with the introduction of Doi Moi economic reforms in the mid-1980s. Production tripled between 1990 and 2013, propelling the country to the rank of leading exporter of agriculture commodities including cashew, pepper, coffee and rice. This in turn has contributed substantially towards reducing poverty and addressing food security especially among rural communities, where 90% of the poor reside. The sector contributed about 18.3% of gross domestic product and 44% of its labor force from 2008−2016. A key factor contributing to this remarkable transformation was a substantial investment in developing the country’s irrigation and drainage infrastructure. As a result, Viet Nam has one of the highest levels of irrigation coverage in Southeast Asia, accounting for about 50% of its arable land area.3 However, more than half of the irrigation systems operate below their potential capacity mainly because of the poor condition of the asset base.4 Inadequate and deferred maintenance is a leading cause of premature deterioration of irrigation infrastructure. 4. The southern central coastal and central highlands regions of Viet Nam are particularly vulnerable to climate change. A climate vulnerability assessment carried out for the project indicated that changes in precipitation will result in hotter and wetter wet seasons and hotter and

1 Modernization involves the upgrading of irrigation systems to deliver a level of services farmers require to optimize

both agricultural production and water productivity. Asian Development Bank. 2017. Irrigation Subsector Guidance Note: Building Blocks for Sustainable Investment. Manila.

2 Water productivity (commonly referred to as crop per drop) involves increasing crop yields or reducing crop water use. It is a relative indicator measured in terms of crop yield (kilogram) or value ($) per unit of water consumed (cubic meter).

3 Food and Agriculture Organization of the United Nations. AQUASTAT Global Water Information System. Irrigation Areas Sheet: Viet Nam.

4 Sector Assessment (Summary): Agriculture, Natural Resources, and Rural Development (accessible from the list of linked documents in Appendix 2).

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drier dry seasons. A reduction in flows can be expected in hotter years because of higher evapotranspiration and the delayed onset of the southwest monsoon.5 The ENSO-induced drought in 2014−2016 was the most severe in 40 years, and rainfall during the 2015 monsoon period was 40%−70% below the long-term average. About 60,000 hectares of agricultural land in the central highlands was affected to varying degrees, including permanent loss of perennial crops such as coffee and pepper. The impact is most severe on smallholder farmers who rely on rainfed surface water sources for irrigation. 5. Water scarcity and economic factors have prompted farmers in the south central coastal and central highlands regions to grow HVCs that can withstand longer dry spells and are more suited to the changing agroecological environment. Notably, an increasing number of farmers are also adopting on-farm micro-irrigation practices such as drip or sprinkler systems. They do so primarily to reduce input costs, including labor, electricity (mainly for pumping of water), and fertilizer.6 Irrigation systems supporting HVCs and micro irrigation must be sufficiently robust to support the desired level of service, and flexible (able to irrigate only when required), reliable (able to deliver water at a specified flow rate and duration), and accessible (with a point of delivery within 1 kilometer of the farm gate). However, many irrigation existing systems were originally designed for rice and are inappropriate for HVCs because they: (i) lack flexibility to provide water on demand, since the conveyance and control structures are designed for flood irrigation; (ii) are less reliable and efficient, in part because of poor maintenance; and (iii) present challenges for water management, due to difficulties related to access control and enforcement of water allocation rules. 6. To address the issue, the project will combine an innovative solution of pressurized piped irrigation systems with high level technology that meets the level of service required by farmers growing HVCs. These will function like domestic water supply systems and provide water on demand through a system of hydrants and control valves, thereby giving farmers greater flexibility to control the amount and duration of irrigation. Piped distribution systems also allow operators to control and measure water more effectively and apply volumetric water charges. These are necessary conditions to improve efficiency and sustainability, particularly in the operation and maintenance (O&M) of systems, including through third-party service contracts. Finally, piped systems are more resilient to extreme weather conditions and require less maintenance, making them more efficient and cost-effective in the long-term. 7. The uptake of on-farm micro-irrigation practices by farmers in the project areas is supporting a local micro-irrigation solutions industry. However, farmers lack awareness of and extension services to help them optimize micro-irrigation options and adopt good practices, including fertigation methods.7 The project will also strengthen the capacity of farmers to use and operate micro-irrigation techniques aimed at improving on-farm water productivity. Once the irrigation systems are fully operational, incremental production of HVCs such as dragon fruit, coffee, black pepper and mangoes are expected to boost incomes in the targeted provinces.8 8. Strategic fit. The project aligns with key government policies, strategies, and laws, including (i) the government’s agriculture restructuring plan, which focuses on sustained growth, improved efficiency, and competitiveness of the sector through increased productivity, quality,

5 Climate Risk and Vulnerability Assessment (accessible from the list of linked documents in Appendix 2). 6 The return on investment in a micro-irrigation system is significantly robust with respect to overall energy cost

savings, and more specifically savings of indirect energy costs (i.e., fertilizer). Asian Development Bank. 2017. Quantifying Water and Energy Linkages in Irrigation: Experiences from Viet Nam. Manila.

7 Fertigation is the injection of fertilizer and other water-soluble inputs into irrigation systems. 8 Economic Analysis (accessible from the list of linked documents in Appendix 2).

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and value addition;9 (ii) the Ministry of Agriculture and Rural Development (MARD) strategy that calls for adopting advanced and water-saving irrigation techniques and technologies on 500,000 ha of upland crops by 2020 to improve productivity, decrease irrigation water use, and increase household incomes;10 (iii) the national climate change strategy, which aims to guarantee food security and water resource security;11 and (iv) the Law on Hydraulic Works (2017), which allows for water pricing for irrigation services.12 9. The project is in line with Asian Development Bank’s (ADB) country partnership strategy, 2016–2020 for Viet Nam, and specifically its focus on increasing the inclusiveness of infrastructure and service delivery and improving environmental sustainability and climate change response.13 It also aligns with ADB’s Water Operational Plan, 2011–2020; Operational Plan for Agriculture and Natural Resources, 2015–2020; and Climate Change Operational Framework, 2017–2030.14 The project directly supports three of the seven operational priorities of ADB Strategy 2030 (Table 1).15

Table 1: Alignment with Strategy 2030 Strategy 2030 Priority Project Interventions

1. Addressing remaining poverty and reducing inequalities

• Improved access to irrigation water and agriculture support services will enhance production of high value crops. This will increase incomes of farmers and create new employment opportunities for poor households.

2. Tackling climate change and disaster resilience, and enhancing environmental sustainability

• Farmers in drought prone areas will receive flexible and reliable irrigation water to improve their adaptation measures;

• Improved irrigation water management through surface and groundwater assessments and water allocation planning will increase disaster resilience; and

• Support to improve operation and maintenance of irrigation systems through asset management and irrigation water charging framework.

3. Promoting rural development and food security

• Advisory services to promote micro irrigation and climate smart agriculture practices will improve agriculture productivity and food safety; and

• High level technology-based solutions to measure water productivity and provide real-time information to irrigation managers and farmers on irrigation scheduling to improve sustainable water use.

10. Development coordination. The project complements initiatives by other development partners supporting agriculture production and processing, water resource management, and irrigation modernization.16 Two initiatives closely complement the project: (i) a Green Climate Fund grant to provide vulnerable smallholder farmers in the project area with improved access to water and capacity to adopt on-farm water management practices;17 and (ii) a transaction

9 Government of Viet Nam. 2013. Prime Minister Decision No. 899/QD-TTg: Approval of Agricultural Restructuring

Towards Greater Added Value and Sustainable Development. Hanoi. 10 Government of Viet Nam, MARD. 2015. Decision No. 1788/QD-BNN-TCTL of 19 May 2015 on “Promulgating the

Action Plan for the Development of Advanced and Water Saving Irrigation for Upland Crops to Assist Water Resources Sector Restructuring.” Hanoi.

11 Government of Viet Nam. 2011. Prime Minister Decision 2139/QD-TTG of December 5, 2011: Approving the National Strategy for Climate Change. Hanoi.

12 Government of Viet Nam. 2017. Law on Hydraulic Works. Hanoi. 13 ADB. 2016. Country Partnership Strategy: Viet Nam, 2016–2020—Fostering More Inclusive and Environmentally

Sustainable Growth. Manila. 14 ADB. 2011. Water Operational Plan, 2011–2020. Manila; ADB. 2015. Operational Plan for Agriculture and Natural

Resources: Promoting Sustainable Food Security in Asia and the Pacific in 2015–2020. Manila; and ADB. 2017. Climate Change Operational Framework 2017–2030: Enhanced Actions for Low Greenhouse Gas Emissions and Climate-Resilient Development. Manila.

15 ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacitic. Manila.

16 Development Coordination (accessible from the list of linked documents in Appendix 2). 17 Planned for approval by the board of the Green Climate Fund in 2018 and to be administered by the United Nations

Development Programme.

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technical assistance (TA) from the Government of Australia for improving water resource planning and management.18 These initiatives were developed in coordination with ADB and share the project’s expected outcomes. 11. Value added by ADB assistance. ADB has added value and introduced innovation through the project and a TA.19 The project’s piped irrigation systems constitute an approach to modernizing irrigation in Viet Nam that is responsive to the needs of farmers who are adapting to climate change in drought-prone areas. The project will also support the adoption of high-level technology to (i) use remote-sensing technology to measure water productivity and provide real-time information to farmers to improve on-farm irrigation scheduling; and (ii) remotely operate flow control measurements and monitoring systems (i.e., supervisory control and data acquisition systems). 12. Lessons. The project incorporates key lessons from past irrigation projects, including the need to (i) engage stakeholders from the early stages of system design; (ii) promote flexibility, accessibility, and reliability in the level of service to farmers as a central feature of modernized systems; (iii) acknowledge and incorporate codependence on surface and groundwater as an adaptation strategy when designing systems; (iv) adopt simple and straightforward institutional arrangements between government and water user groups for irrigation water management; (v) address cost-recovery for O&M of systems at the outset; and (vi) adopt technology options appropriate to local conditions. B. Impact and Outcome 13. The project is aligned with the following impact: climate resilience and water productivity in agriculture improved (footnotes 9, 11, and 12). The project will have the following outcome: climate-resilient and modernized irrigation systems in five provinces established.20 C. Outputs 14. Output 1: Irrigation management services strengthened. This output will support policy and institutional development measures to improve climate resilience of agriculture by strengthening irrigation management while taking social and gender dimensions in all relevant activities into consideration (footnote 18). Specifically, the project will (i) install irrigation water allocation and delivery services, including (a) surface and groundwater assessments, (b) an irrigation water-sharing and allocation framework, and (c) a real-time decision support system for farmers to optimize crop water application; and (ii) improve maintenance of irrigation systems, including (a) developing an asset inventory and management database for each irrigation system supported by the project, (b) developing a systematic asset maintenance schedule with a rigorous approach to funding based on asset condition assessments, (c) developing a water charge pricing framework, and (d) assessing options for engaging third parties in irrigation systems O&M. 15. Output 2: Modern irrigation infrastructure developed. This output will modernize eight irrigation subprojects in the five provinces to provide water on-demand to farmers cultivating

18 Parallel technical support from the Government of Australia will complement output 1 activities. Assistance will be in

the form of bilateral cooperation as well as through the Australian Water Partnership. 19 ADB provided project preparatory TA for the Water Efficiency Improvement in Drought-Affected Provinces Project

(TA 9147), which was complemented by technical support from ADB’s water partnerships with Australia and the Netherlands.

20 The design and monitoring framework is in Appendix 1.

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HVCs, reducing their vulnerability to climate change.21 The underlying principle of all systems is to provide a higher level of service—more flexible, reliable, and accessible supply of water—to farmers than they currently receive. The infrastructure works include three broad categories: (i) pressurized pipe systems that connect canals or reservoirs with supply hydrants located in reasonable proximity to farmers’ fields (enabling direct connection with a hose), with basic supervisory control and data acquisition systems to facilitate operations and monitoring of system flows (consultations with male and female farmers will inform the design and implementation of activities); (ii) main system modernization, including canal lining, control structures, storage, and installation of flow control and measurement devices with remote monitoring; and (iii) new and improved weirs to replace temporary weirs constructed by farmers to provide storage from which farmers can pump to irrigate HVCs. Other works include upgrading culverts and farm roads to improve management of irrigation systems. 16. Output 3: Efficient on-farm water management practices adopted. This output will focus on improving on-farm water productivity in the subproject command areas to improve climate change resilience. Water productivity assessments conducted under output 1 will help determine suitable norms for different crops under different agroecological conditions. Based on this information, farmers will receive training and advisory services to improve on-farm water management to cope with climate variability. The service providers will consult with and provide technical advice to male and female farmers to identify and develop appropriate micro-irrigation systems that meet their individual requirements. Farmers will also be linked with private sector suppliers and provided O&M training on micro-irrigation systems. D. Summary Cost Estimates and Financing Plan 17. The project is estimated to cost $124.26 million (Table 2). Detailed cost estimates by expenditure category and by financier are included in the project administration manual (PAM).22

Table 2: Summary Cost Estimates ($ million)

Item Amounta A. Base Costb 1. Irrigation management services strengthened 2.08 2. Modern irrigation infrastructure developed 103.03 3. Efficient on-farm water management practices adopted 0.41 Subtotal (A) 105.52 B. Contingenciesc 16.24 C. Financial Charges During Implementation 2.50 Total (A+B+C) 124.26 a Includes taxes and duties estimated at $11.8 million, which will be financed by the government. b In third quarter of 2018 prices. c Physical contingencies are computed at 7% for civil works and 10% for all items of expenditure except for consulting

services and recurrent expenses, where physical contingencies are estimated at 0%. Price contingencies computed at average of 1.5% on foreign exchange costs and 5% on local currency costs; includes provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate.

Source: Asian Development Bank estimates. 18. The government has requested (i) a concessional loan of $100,000,000 from ADB’s ordinary capital resources, and (ii) a grant of $300,000 from the Climate Change Fund to help finance the project.23 The loan will have a 25-year term, including a grace period of 5 years; an

21 Two subprojects each in Binh Thuan, Dak Nong, and Ninh Thuan; and one each in Dak Lak and Khanh Hoa. 22 Project Administration Manual (accessible from the list of linked documents in Appendix 2). 23 Established by ADB.

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interest rate of 2% per year during the grace period and thereafter; and such other terms and conditions set forth in the draft loan agreement. The grant will finance the development of a framework to apply water charges for irrigation services and establish the conditions for engaging third parties for sustainable O&M of irrigation systems. 19. The summary financing plan is in Table 3. ADB will finance expenditures in relation to the modernization of eight irrigation systems (civil works), engineering consultants, construction supervision and monitoring, technical service provider for the application of micro irrigation, external safeguards monitoring (including gender), and an external auditor. The government will fund $23.21 million for project implementation, including land acquisition and resettlement costs, development of systems for subproject maintenance, and all taxes and duties. 24 20. The Netherlands Trust Fund under the Water Financing Partnership Facility will provide grant cofinancing equivalent to $750,000, to be administered by ADB. The grant will support the development of water resource assessments and a water allocation framework, water productivity assessments, and a crop water monitoring platform (output 1).

Table 3: Summary Financing Plan

Source Amount

($ million) Share of Total

(%) Asian Development Bank Ordinary capital resources (concessional loan) 100.00 80.5 Climate Change Fund (grant)a 0.30 0.2 Netherlands Trust Fund under the Water Financing Partnership Facility (grant)b 0.75 0.6 Government 23.21 18.7

Total 124.26 100.0 a Established by the Asian Development Bank. b Administered by the Asian Development Bank. Source: Asian Development Bank estimates. 21. Climate adaptation is estimated to cost $101.05 million, of which $100.30 will be financed by ADB. No cost is accounted for climate mitigation. Details are in the PAM (footnote 22), climate risk and vulnerability assessment (footnote 5), and climate change assessment.25 E. Implementation Arrangements 22. The implementation arrangements are summarized in Table 4 and described in detail in the PAM. 26 MARD and the Provincial People’s Committees (PPCs) of the five provinces are the executing agencies. MARD will delegate project implementation responsibility to a project management unit established under the Central Project Office. The PPCs will delegate responsibility to their respective agriculture and rural development departments, as implementing agencies.

Table 4: Implementation Arrangements Aspects Arrangements Implementation period March 2019−December 2025 Estimated completion date 31 December 2025 Estimated loan and grant closing date

30 June 2026

24 The PAM provides breaks down financing by province. 25 Climate Change Assessment (accessible from the list of linked documents in Appendix 2). 26 The project is cofinanced by the Netherlands Trust Fund under the Water Financing Partnership Facility, which allows

for universal procurement, and a blanket waiver of member country procurement eligibility restrictions will therefore apply, as approved by the Board in 2013.

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Management (i) Executing agency Ministry of Agriculture and Rural Development and the Provincial People’s

Committees of Binh Thuan, Dak Lang, Dak Nong, Khanh Hoa and Ninh Thuan (ii) Key implementing agencies Department of Agriculture and Rural Development from the project provinces. (iii) Implementation unit 11 staff in Central Project Office’s PMU and 10 staff in each of five PPMUs Procurement International competitive bidding 3 contracts $38.95 million

National competitive bidding 9 contracts $64.55 million Consulting services Quality- and cost-based selection 3 contracts $2.63 million

Consultants qualifications selection 7 contracts $1.58 million Fixed budget selection 6 contracts $4.50 million Single source selection 1 contract $0.50 million

Advance contracting Recruitment of technical services for (i) detailed engineering design; and (ii) construction engineering support.

Disbursement The loan and grant proceeds will be disbursed following ADB's Loan Disbursement Handbook (2017, as amended from time to time) and detailed arrangements agreed between the government and ADB.

ADB = Asian Development Bank, PMU = project management unit, PPMU = provincial project management unit. Source: Asian Development Bank.

III. DUE DILIGENCE

A. Technical 23. Rigorous technical due diligence conducted during project preparation addressed system design features, including water balance assessments based on catchment run-off, groundwater abstractions, crop water demands, and environmental flows; the viability of hydraulic structures; and design parameters of buried pressurized pipe systems. The due diligence (i) confirmed that sufficient water would be available for the specified crops in the designated command areas, with 85% reliability; (ii) checked the designs against anticipated climate variations to ensure that system design capacities were adequate to address climate variability; (iii) confirmed the use of buried pressurized piped distribution systems to be a low regrets solution in terms of water efficiency, flexibility in conveyance, and reduction of system O&M costs; and (iv) performed additional remote-sensed crop water productivity assessments to establish performance benchmarks. B. Economic and Financial 24. The economic and financial analysis estimated the incremental benefits and costs for the eight subprojects under with- and without-project scenarios to assess economic viability. Benefits included improved yield and quality of production in areas with existing HVCs, diversification of crops as a result of enhanced water availability, and reversal in the deterioration in the quality and quantity of groundwater resources. Overall, the economic internal rate of return for the project is about 23.7%, which is higher than the economic cost of capital of 9.0%, confirming the project’s economic viability. Subproject economic internal rates of return are 18.4%–31.2%, even with conservative assumptions regarding incremental yields and diversifying to HVCs (perennial crops offer high profits to farmers). The financial incremental income in subprojects is $500–$4,400 per hectare. Sensitivity testing confirmed that the investment is robust with regard to increased investment costs, reduced product prices, and delays in subproject completion. The incremental recurrent cost of regular operations is negligible in relation to the fiscal expenditure and fiscal surplus of each province. However, periodic maintenance, which occurs every 10 years, will have a significant fiscal impact on most provinces. Because the concerned provinces are considered deficit provinces, the State Budget Law dictates that they receive budgetary transfers from the central government to balance their fiscal accounts, and therefore each province will have an

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adequate O&M budget for the irrigation systems modernized by the project. To further minimize the risk that budgetary provisions for O&M will be inadequate, the project will support the government in developing and implementing a pricing framework for water charges in connection with irrigation services provided under the project. C. Governance 25. The financial management risk is moderate, mainly because of the limited familiarity of the provincial project management unit with financial management requirements. At the national level, the Central Project Office has extensive experience with projects financed by international financial institutions, including ADB. Risks will be mitigated through recruitment of experienced staff for the provincial project management units, participation in training offered by ADB, and close supervision by the central project management unit. The central and each provincial project management unit will (i) maintain separate project accounts and records by funding source for all expenditures incurred under the project, (ii) cause the detailed project accounts to be audited following international auditing standards and ADB requirements by an independent auditor acceptable to ADB, and (iii) involve local communities in monitoring subproject implementation. 26. Procurement risks are moderate because the executing and implementing agencies have experience conducting procurement using national competitive procedures applied within the context of projects financed by ADB and the World Bank. However, the implementing agencies have minimal experience applying international competitive bidding procedures and recruiting consultants following ADB procedures, and have raised concerns regarding the complexity of these procedures. ADB and MARD will provide capacity building prior to loan effectiveness to standardize the level of performance throughout the implementing agencies. The number of procurement packages under the project have also been rationalized and kept to a minimum. 27. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government, MARD, and the five participating PPCs. The specific policy requirements and supplementary measures are described in the PAM. D. Poverty, Social, and Gender 28. The project will directly benefit about 39,140 households, including 7,050 ethnic minority households. The average poverty rate in project communes is 14.8%, which is higher than the national average of 9.9% in 2016. Ethnic minorities represent a relatively larger share of the poor population. Poverty is attributed to a lack of land and labor; low employment opportunities; lack of access to credit; limited knowledge on agricultural production, especially among poor ethnic women; and limited access to irrigation, which hampers their ability to grow HVCs even on relatively small areas. The investment in irrigation systems will increase water supply reliability, allowing farms to expand production and hire more labor. Construction of irrigation systems and service roads will also provide additional employment opportunities and improve poor farmers’ access to markets. 29. Effective gender mainstreaming. A gender analysis revealed that women have fewer opportunities than men to participate in public decision-making in irrigation-related matters, and less access to information, training, and employment. Women bear a disproportionate share of the burden of irrigating crops, especially during the dry season, when water is not easily available for agricultural production. The project will have significant positive impacts on women by improving their level of access to irrigation services and decision-making in irrigation-related matters. The gender action plan specifies (i) equitable project benefits and opportunity-sharing

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between men and women; (ii) reduction in gender inequalities and social risks (HIV/AIDS transmission prevention, human trafficking prevention during construction of works); (iii) training of women, including those from ethnic minorities, on micro irrigation and in overall system management and operations; (iv) increased representation of women in decision-making bodies; and (v) collection of sex-disaggregated data for benefit monitoring and evaluation. E. Safeguards 30. In compliance with ADB’s Safeguard Policy Statement (2009), the project’s safeguard categories are as follows. 31. Environment (category B). The government prepared initial environmental examinations for each of the eight irrigation modernization subprojects, which were disclosed on the ADB website in May 2018. A few potential adverse impacts were identified and will be addressed through the environmental management plans. All works would involve temporary impacts associated with canal construction and pipe installation, while road upgrading will be carried out within existing rights-of-way. No civil works will be carried out in sensitive protected areas. The government will update the environmental management plans following ADB endorsement of the detailed engineering designs of the irrigation subprojects. ADB prepared a climate risk and vulnerability assessment based on climate projections downscaled to the project area (footnote 5). 32. Involuntary resettlement (category B). Irrigation modernization under the subprojects involves buried pipes and requires only temporary income loss compensation during installation. Road improvements are unlikely to trigger major resettlement impacts because alignments will be upgraded within existing rights-of-way. The project will require minor land acquisition for pumping stations and compensation for trees, crops, or small structures that may be affected. The government and ADB have agreed on a combined resettlement and ethnic minority development plan (REMDP) for subprojects entailing involuntary resettlement impacts based on detailed engineering design. The REMDP was disclosed on the ADB website in May 2018 and will be implemented by the government prior to commencement of any civil works. The government will finance land acquisition, compensation, allowances, operation and administration, surveys, monitoring, and reporting. 33. Indigenous peoples (category B). Impacts on ethnic minorities are positive, because the subprojects aim to improve overall economic and social conditions of the command area population. The project will not cause physical displacement from traditional or customary lands or negatively impact the identity, culture, or customary livelihood system of ethnic minorities. The government prepared five combined REMDPs for the five project provinces, which were disclosed on the ADB website in May 2018. The government will use the REMDPs to ensure the inclusion of ethnic minorities and their access to project benefits. The REMDPs also include (i) mitigation measures to avoid land acquisition and minimize negative impacts on ethnic minorities, and (ii) a grievance redress mechanism. F. Summary of Risk Assessment and Risk Management Plan 34. Significant risks and mitigating measures are summarized in Table 5 and described in detail in the risk assessment and risk management plan.27

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

10

Table 5: Summary of Risks and Mitigation Measures Risks Mitigation Measures Modernized irrigation systems fail to meet the desired level of service because of climate variability beyond anticipated levels.

The government will incorporate climate resilience measures identified in the climate risk vulnerability assessment during detailed designs with technical assistance from ADB. Continuous water resource assessments under output 1 will support robust planning and adoption of low regret activities along alternative climate resilience pathways.

Irrigation management companies are unfamiliar with the technical aspects of MOM of pressurized pipe irrigation systems.

Construction contractors will manage, operate and maintain the systems for one year after construction. Irrigation management companies will receive technical support from Australia’s Department of Foreign Affairs and Trade on MOM of pressurized pipe systems. Third-party service contracts will be awarded to private service providers for MOM after the first year of operations.

Uptake of micro irrigation in the farms is limited because of market volatility and climate variability.

The government will hire a technical service provider to advise on the appropriate micro irrigation options and on risk mitigation strategies, including financial risks.

Weak procurement practices and capacity

The project will have some works to be procured through international competitive bidding, and qualified staff with overseas development assistance experience will be assigned in the project management units. ADB will provide no-objection to key selected staff. The Central Project Office, with assistance from the construction engineering support consultants and ADB, will provide customized procurement training.

ADB = Asian Development Bank; MOM = management, operation and maintenance. Source: Asian Development Bank.

IV. ASSURANCES AND CONDITIONS 35. The government, MARD, and the PPCs have assured ADB that implementation of the project shall conform to all applicable ADB policies, including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the PAM and loan documents. The government, MARD, and the PPCs have agreed with ADB on certain covenants for the project, which are set forth in the draft loan and grant agreements. No withdrawal will be made from the loan account until the subsidiary loan agreements between the government and the PPCs have been duly executed.

V. RECOMMENDATION 36. I am satisfied that the proposed loan and grant would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve

(i) the loan of $100,000,000 to the Socialist Republic of Viet Nam for the Water Efficiency Improvement in Drought-Affected Provinces Project, from ADB’s ordinary capital resources, in concessional terms, with an interest charge at the rate of 2% per year during the grace period and thereafter; 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; and

(ii) the grant not exceeding $300,000 to the Socialist Republic of Viet Nam from ADB’s ADB’s Special Funds resources (Climate Change Fund) for the Water Efficiency Improvement in Drought-Affected Provinces Project, on terms and conditions that are substantially in accordance with those set forth in the draft grant agreement presented to the Board.

Takehiko Nakao President

31 October 2018

Appendix 1 11

DESIGN AND MONITORING FRAMEWORK Impact of the Project is Aligned with Climate resilience and water productivity in agriculture improved (government’s national climate change strategy, agricultural restructuring plan, and Law on Hydraulic Works)a

Results Chain Performance Indicators with

Targets and Baselines Data Sources and

Reporting Mechanisms Risks Outcome By 2026: Climate-resilient and modernized irrigation systems in five provinces establishedb

a. Agricultural water productivity increased by 20% (2017 baseline: D5,000 per cubic meter for coffee, D44,000 per cubic meter for peppers, D11,000 per cubic meter for dragon fruits, and D110,000 per cubic meter for mangoes) b. At least 65% of farmers connected to climate-resilient and modernized project irrigation systems, of whom at least 5% are from households headed by women, and 15% from ethnic minority households (2017 baseline: 0)c

a. Project monitoring reports b. IMC, irrigation operators, and water user association records

Modernized irrigation systems fail to meet the desired level of service because of climate variability beyond anticipated levels.

Outputs 1. Irrigation management services strengthened

By 2025: 1a. Water resource assessment and allocation planning operationalized, with gender and social dimensions integrated in design and implementation (2017 baseline: 0) 1b. A system for asset management and operational control of irrigation schemes adopted by five PPCs (2017 baseline: 0) 1c. 4,000 farmers linked to an information system with irrigation scheduling, of whom 35% are female, and at least 20% from ethnic minority households (2017 baseline: 0) 1d. At least one piped irrigation system operated by a third party (2017 baseline: 0)

1a. IMC reports, government decrees, and irrigation operation manual 1b–c. IMC annual reports and project-generated reports; budget requests submitted by IMCs. 1d. Project monitoring reports

Irrigation management companies are unfamiliar with the technical aspects of management, operation and maintenance of pressurized pipe irrigation systems.

2. Modern irrigation infrastructure developed

2a. At least 19,200 ha served by modernized irrigation systems wherein all households headed by women and ethnic minority households with land have access to irrigation services (2017 baseline: 0) 2b. 185 kilometers of piped irrigation systems installed (2017 baseline: 0)

2a–b. Project-generated reports

3. Efficient on-farm water management practices adopted

3a. On-farm micro irrigation adopted on at least 10,000 ha, 5% of which are farms owned by women, and 20% farms owned by ethnic minorities (2017 baseline: 0)

3a–b. Project-generated reports

Uptake of micro irrigation in the farms is limited because of market volatility and climate variability.

12 Appendix 1

Results Chain Performance Indicators with

Targets and Baselines Data Sources and

Reporting Mechanisms Risks 3b. At least 1,500 farmers received training on improving on-farm water productivity, of whom 40% are females, and 20% from ethnic minority households (2017 baseline: 0)

Key Activities with Milestones 1. Irrigation management services strengthened 1.1 Develop subproject asset management and operational control systems (Q4 2019) 1.2 Develop framework for improved operation and maintenance and third-party management of irrigation systems

(Q2 2021) 1.3 Implement water resource assessment and allocation planning at subproject level (Q4 2021) 1.4 Develop and launch an online portal for on-farm irrigation scheduling (Q2 2023) 2. Modern irrigation infrastructures developed 2.1 Initiate procurement of civil works contracts (Q4 2019) 2.2. Respective PPC to endorse the detailed engineering designs (Q4 2019–Q1 2020) 2.3. Sign contracts with construction supervision consulting firms for five provinces (Q2 2020) 2.4. Implement the first round of cost recovery (Q2 2024) 2.5. Turn irrigation systems over to IMCs (Q3 2022–Q3 2024) 3. Efficient on-farm water management practices adopted 3.1 Recruit and mobilize technical advisor for micro irrigation technical advisory services (Q2 2021) 3.2 Disseminate information to farmers on crop water requirements (Q3 2021) 3.3 Identify appropriate micro-irrigation options and link farmers with suppliers (Q3 2021) 3.4 Provide technical guidance on micro-irrigation applications (Q1 2024) Project Management Activities Mobilize construction engineering support consultant (Q1 2019) Review and update the resettlement and ethnic minority development plans and environmental management plans (Q4 2019–Q1 2020) Mobilize monitoring and evaluation consultants (Q2 2020) Recruit and mobilize external auditors (Q4 2019) Implement the gender action plan (Q3 2019–Q4 2024) Inputs Asian Development Bank: $100.00 million (concessional loan) Netherlands Trust Fund under the Water Financing Partnership Facility: $0.75 million (grant) Climate Change Fund: $0.30 million (grant) Government: $23.21 million Assumptions for Partner Financing Output 1: Australian Water Partnership D = dong, ha = hectare, IMC = irrigation management company, PPC = provincial peoples’ committee, Q = quarter. a Government of Viet Nam. 2011. Prime Minister Decision 2139/QD-TTG of December 5, 2011: Approving the National

Strategy for Climate Change. Hanoi; Government of Viet Nam. 2013. Prime Minister Decision No. 899/QD-TTg: Approval of Agricultural Restructuring Towards Greater Added Value and Sustainable Development. Hanoi; and Government of Viet Nam. 2017. Law on Hydraulic Works. Hanoi.

b The participating provinces are Binh Thuan, Dak Lak, Dak Nong, Khanh Hoa, and Ninh Thuan. c Asian Development Bank. 2017. Water Efficiency Improvement in Drought Affected Provinces. Consultant’s Report.

Manila (TA 9147-VIE). According to the project preparatory technical assistance’s poverty and social assessment report, about 14% of households in the project areas are households headed by women, but their farms lands are scattered. Similarly, ethnic minority households account for 18% of the households in the project areas.

Source: Asian Development Bank.

Appendix 2 13

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=49404-002-3

1. Loan Agreement 2. Grant Agreement: Netherlands Trust Fund under the Water Financing Partnership Facility 3. Grant Agreement: Climate Change Fund 4. Project Agreement 5. Sector Assessment (Summary): Agriculture, Natural Resources, and Rural Development 6. Project Administration Manual 7. Contribution to the ADB Results Framework 8. Development Coordination 9. Financial Analysis 10. Economic Analysis 11. Country Economic Indicators 12. Summary Poverty Reduction and Social Strategy 13. Risk Assessment and Risk Management Plan 14. Climate Change Assessment 15. Gender Action Plan 16. Initial Environmental Examination: Binh Thuan Subprojects 17. Initial Environmental Examination: Dak Lak Subproject 18. Initial Environmental Examination: Dak Nong Subprojects 19. Initial Environmental Examination: Khanh Hoa Subproject 20. Initial Environmental Examination: Ninh Thuan Subprojects 21. Resettlement Plan: Resettlement and Ethnic Minority Development Plan (Binh Thuan

Subprojects) 22. Resettlement Plan: Resettlement and Ethnic Minority Development Plan (Dak Lak

Subproject) 23. Resettlement Plan: Resettlement and Ethnic Minority Development Plan (Dak Nong

Subprojects) 24. Resettlement Plan: Resettlement and Ethnic Minority Development Plan (Khanh Hoa

Subproject) 25. Resettlement Plan: Resettlement and Ethnic Minority Development Plan (Ninh Thuan

Subprojects) Supplementary Documents 26. Design Principles for Subprojects 27. Subproject Report: Du Du-Tan Tanh Subproject 28. Subproject Report: Tra Tan Subproject 29. Subproject Report: Dak Lak Subproject 30. Subproject Report: Cu Jut Subproject 31. Subproject Report: Dak Mil Subproject 32. Subproject Report: Cam Ranh–Suoi Dau Subproject 33. Subproject Report: Nhon Hai–Thanh Hai Subproject 34. Subproject Report: Thanh Son–Phuoc Nhon Subproject 35. Financial Management Assessment 36. Procurement Capacity Assessment 37. Climate Risk and Vulnerability Assessment 38. Groundwater Survey Report 39. Institutional Arrangement