Additional Cofinancing

Sri Lanka Project Number: 45148 Loan Number: 3029/3030-SRI May 2014

Proposed Administration of Loan Democratic Socialist Republic of Sri Lanka: Greater Water and Wastewater Management Improvement Investment Program: Project 2

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 1 May 2014)

Currency Unit – Sri Lanka rupee/s (SLRe/SLRs) SLRe1.00 = $ 0.007655 $1.00 = SLRs 130.64

ABBREVIATIONS

ADB – Asian Development Bank AFD – Agence Française de Développement MFF – multitranche financing facility NRW – nonrevenue water TEC – towns east of Colombo

NOTES

(i) The fiscal year (FY) of the Government of Sri Lanka ends on December 31. FY before a calendar year denotes the year in which the fiscal year ends, e.g. FY2008 ends on 31 December 2008.

(ii) In this report, "$" refers to US dollars. Vice-President W. Zhang, Operations 1 Director General J. Miranda, South Asia Department (SARD) Director Y. Fei, Urban Development and Water Division, SARD

Team leader M. Fan, Senior Urban Development Specialist, SARD Team members P. Cawrse, Urban Development Specialist, SARD K. Dahanayake, Project Officer, SARD M. de Mesa David, Operations Assistant, SARD K. Emzita, Principal Counsel, Office of the General Counsel N. Gunasekera, Social Development and Gender Specialist, SARD N. Pokhrel, Urban Development Specialist, SARD I. Setyawati, Safeguards Specialist , SARD J. Zheng, Urban Development Specialist, SARD

Peer reviewer H. Jenny, Principal Urban Development Specialist, Southeast Asia Department

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

CONTENTS

Page PROJECT AT A GLANCE

I. THE ONGOING PROJECT 1

II. THE ADDITIONAL FINANCING 1

A. Rationale 1 B. Impact, Outcome, and Outputs 2 C. Cofinancing 2

III. THE PRESIDENT'S RECOMMENDATION 4

APPENDIX

1. Revised Design and Monitoring Framework 5

SUPPLEMENTARY APPENDIXES (available upon request)

1. Contribution to the ADB Results Framework

2. Financial Analysis

3. Economic Analysis

PROJECT AT A GLANCE Project Name Greater Colombo Water and Wastewater Management Tranche No. 2 Improvement Investment Program Project No 45148-007 Country Sri Lanka Department SARD Date of Receipt by ADB of PFR 3 June 2013 Division SAUW Project Data Sheet http://www.adb.org/projects/45148-007/main Tranche Sector Classification Sector: Water and Other Municipal Infrastructure and Services Subsectors: Water supply and sanitation

Tranche Thematic Classification Theme: Social development, Environmental sustainability, Governance, Capacity development Subthemes: Human development, Urban environmental improvement, Public administration (national, decentralized, and regional), Institutional development

Climate Change Impact Adaptation low Mitigation low

Gender Mainstreaming Gender equity theme Effective gender mainstreaming  Some gender benefits No gender elements

Targeting Classification General Intervention Targeted Intervention (i) Geographic dimensions of inclusive growth (ii) Millennium Development Goals MDG7 (iii) Income poverty at household level

Location Impact Rural Low National Medium Urban High Regional

Tranche Risk Categorization Low Risk  Complex

Safeguard Categorization Category Required Document Disclosure Date (i) Environment B Initial Environmental Examinations 2 Jul 2013 Weblink: http://www.adb.org/projects/documents/greater-colombo-water-and-wastewater- management-improvement-tranche-2-iee (ii) Involuntary resettlement B Resettlement Plans 3 Jul 2013 Weblink: http://www.adb.org/projects/documents/greater-colombo-water-wastewater- management-improvement-investment-tranche-2-rp (iii) Indigenous peoples C Not required Weblink:

Financing Requested Modality Source Amount ($ million) from ADB MFF-Tranche OCR 70.0 MFF-Tranche ADF 18.0 Total: 88.0

Financier Category Amount ($million) Administration Type Agence Française de Official-Loan 101.0 Partial Développement Counterpart Financing Government 30.0

Aid Effectiveness Parallel project implementation unit  Program-based approach  CPS/COBP http://www.adb.org/documents/sri-lanka-country-operations-business-plan-2013- 2015

I. THE ONGOING PROJECT

1. The Board of Directors of the Asian Development Bank (ADB) approved the multitranche financing facility (MFF) for the Colombo Water and Wastewater Management Improvement Investment Program on 25 October 2012. 1 The investment program will finance a portion of government initiatives to improve water and wastewater management services in Greater Colombo.2 It will rehabilitate and expand water supply and wastewater management infrastructure. In order for investments in physical infrastructure to be effective and sustainable, the investment program will assist the government in introducing institutional reforms in the water and wastewater subsectors, particularly in Greater Colombo.3

2. The Investment program is estimated to cost $400 million. Up to $300 million equivalent, or 75% of the total cost, will be provided through the MFF from ADB’s Special Funds resources and ordinary capital resources. The MFF is sequenced as follows: (i) tranche 1: $84 million for project 1 in 2012; (ii) tranche 2: $88 million for project 2 in 2013; (iii) tranche 3: $90 million for project 3 in 2015; and (iv) tranche 4: $38 million for project 4 in 2016. Projects 1 and 2 will focus on reducing nonrevenue water (NRW) and improving water service efficiency in Colombo city. 4 Project 1 was approved by the President on 22 November 2012, and the loan for project 1 became effective on 25 September 2013. Project 2 was approved by the President on 26 September 2013. The implementation of project 1 is on track. The loan agreement for project 2 will be signed soon.

II. THE ADDITIONAL FINANCING

A. Rationale

3. The government has requested the scope of work under project 2 be expanded from rehabilitation of the water distribution system in Colombo city to include expanding the water supply to TEC and rehabilitating the pumping station in Ambathale. Agence Française de Développement (AFD) cofinancing will be used for this expansion. The MFF modality was selected to allow phased implementation and funding of individual projects when they are ready, subject to eligibility and readiness of subprojects included in the investment program. The MFF will offer the opportunity for cofinancing and private sector participation. The proposed additional cofinancing from AFD is mobilized in accordance with the approved MFF. The AFD cofinancing is proposed to finance two subprojects: (i) expansion of water supply coverage in towns east of Colombo (TEC), using water saved from NRW reductions under projects 1 and 2 in Colombo city; and (ii) reorganization of the current pumping and transmission arrangements of Colombo city to save energy in the

1 ADB. 2012. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing Facility to the Democratic Socialist Republic of Sri Lanka for the Greater Colombo Water and Wastewater Management Improvement Investment Program. Manila. 2 Greater Colombo comprises 15 local authorities: five municipal councils (Colombo, Dehiwela–Mount Lavinia, and Sri Jayawardenepura–Kotte, Kaduwela, and ), five urban councils, and five pradeshiya sabhas (smallest political units in peri-urban or rural areas). It has a population of more than 838,000 and a “floating” (transient) population of more than 500,000. 3 ADB. 2011. Technical Assistance to Sri Lanka for Colombo Water Supply Servie Improvement Project. Manila. Supplementary TA was provided in 2012. 4 Nonrevenue water (NRW) is the gap between the amount of water put into the distribution system and the amount of water for which customers are actually billed. 2 water supply system. AFD cofinancing will further strengthen the impact and outcome of proved project 2 under the MFF.

4. The proposed AFD-cofinanced subprojects are part of the government’s investment plan that envisions investments of $1,500 million for water and sanitation sector in Greater Colombo in 2010–2020.

5. AFD is a key development partner in the country and in the water sector in 2010– 2012. The AFD cofinancing is consistent with the priority assigned by ADB and the government to the water supply and other municipal infrastructure and services sector, as identified in the country partnership strategy.5

B. Impact, Outcome, and Outputs

6. The impact of the investment program will be an improved urban environment and quality of life for the residents of Greater Colombo. The outcome of the investment program will be improved water supply and wastewater service and management in Greater Colombo.

7. The impact of project 2 will be improved water supply and wastewater service and management in Greater Colombo.6 The expected outcome of project 2 will be improved system efficiency and financial sustainability of water supply and wastewater services in Greater Colombo. With AFD cofinancing, the impact and outcome of the project 2 remains the same with approved project 2, but two additional indicators will be used to measure the outcome of the intervention and monitor project outcome: (i) the number of households that receive a continuous water supply in TEC, and (ii) energy saving and cost reductions in water production through Ambathale pumping station refurbishments.

8. With AFD cofinancing, there are two additional outputs under physical aspects: (i) expansion of water supply coverage in TEC, and (ii) reorganization of the current pumping and transmission arrangements in Ambathale. Therefore, two indicators are added under output 1. The AFD cofinancing is to be implemented with an additional design and supervision consultant to strengthen the project implementation. The other output indicators remain the same.

C. Cofinancing

9. AFD cofinancing in an amount equivalent to $101 million will be provided as a loan and will be partially administered by ADB (ADB will administer procurement and safeguards). Due to the complexity involved in currency swap management at AFD for loans dominated in US dollars, ADB will not administer AFD loan disbursement. All procurement, social, environmental, and gender safeguards will follow ADB requirements.

10. The loan agreement for the AFD loan will be between AFD and the government. The AFD loan in an amount equivalent to $101 million; it will have a 25-year term, including a grace period of 7 years, an annual interest rate equivalent to the London interbank offered rate to Euro interbank offered 6-month rate plus 1.26%, an engagement fee of 0.5% per annum to be paid on the engaged but undisbursed balance, a onetime appraisal fee of

5 ADB. 2011. Country Partnership Strategy: Sri Lanka, 2012–2015. Manila. 6 The project 2 design and monitoring framework is in Appendix 1.

3

0.25% on the full loan amount, and such other terms and conditions set forth in the loan agreement between AFD and the government. The coordination and cofinancing arrangements between ADB and AFD will be detailed in a cofinancing agreement. The revised investment and financing plans for project 2 are in Tables 1 and 2.

Table 1: Revised Proposed Project 2 Investment Plan ($ million)

Current Additional Item Amount a, b Financing Total A. Base Cost 1. Water supply and NRW rehabilitation 65.69 85.42 151.11 2. Wastewater investments preparation 2.61 0.00 2.61 3. Institutional reform and capacity building 4.39 3.61 8.00 4. Project implementation support 8.67 2.91 11.58 Subtotal (A) 81.36 91.94 173.30 B. Taxes and Duties c 19.76 25.62 45.38 C. Contingencies d 13.39 11.64 25.03 D. Financing Charges During Implementation e 3.50 7.80 11.30 Total (A+B+C+D) 118.00 137.00 255.00 NRW = nonrevenue water a Exchange rate of $1.00 = SLRs130.00 is used. b In March 2013 prices. c Taxes and duties computed at 32% for imported goods and at 12% for domestic goods and services. Taxes and duties are the responsibility of the government. d Physical contingencies computed at 10% for civil works and equipment; price contingency computed at 6% for domestic goods and 2% for imported goods, assuming US dollar–Sri Lanka rupee purchasing power parity for foreign exchange forecasting. e The Asian Development Bank (ADB) share includes interest and commitment charges. Interest during construction for ADB loan(s) is computed at 1.6% per year based on the London interbank-offered rate 5- year fixed swap rate plus ADB’s contractual spread and a maturity premium for loans from ordinary capital resources, and 2.0% per year for loans from Special Funds resources. Commitment charges for ADB loans from ordinary capital resources are computed at 0.15% per year. Source: Asian Development Bank estimates.

Table 2: Revised Financing Plan for Project 2

Current Additional Financing Total Amount Share of Amount Share of Amount Share of Source ($ million) Total (%) ($ million) Total (%) ($ million) Total (%) A. Asian Development Bank 88.00 74.58 88.00 34.51 1. Ordinary Capital 70.00 59.32 Resources (loan) 70.00 27.45 2. Asia Development 18.00 15.26 Fund (loan) 18.00 7.06 B. Agence Française de Développement (loan) 101.00 73.72 101.00 39.61 C. Government of Sri Lanka 30.00 25.42 36.00 26.28 66.00 25.88 Total 118.00 100.00 137.00 100.00 255.00 100.00 Source: Asian Development Bank estimates.

11. During the preparation of project 2, the project preparation technical assistance consultant prepared two feasibility studies for the TEC and Ambathale subprojects to be

4 cofinanced by AFD. Technical, financial and economic aspects are sound. The consultant also conducted safeguard due diligence. The resettlement plans and initial environmental examinations for the TEC and Ambathale subprojects for AFD cofinancing were prepared in accordance with ADB Safeguard Policy Statement (2009) requirements; both the resettlement plans and initial environmental examinations submitted by the government were disclosed in accordance with ADB Safeguard Policy Statement requirements.

12. The proposed AFD cofinancing is classified as effective gender mainstreaming. The gender action plan for project 2 has included the activities for the proposed AFD cofinancing. The consultation and participation plan outlines specific outreach activities to raise awareness and ensure the meaningful participation of communities and stakeholders in the AFD cofinancing (TEC) area. A nongovernment organization will be recruited and will provide the guidance to (i) form water user groups; (ii) assist in implementing the gender action and consultation and participation plans; and (iii) implement a water, sanitation, and hygiene awareness campaign in the AFD cofinancing TEC area. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government and the implementing agencies. The specific policy requirements and supplementary measures are described in the revised project administration manual.

13. The implementation arrangements for the proposed AFD cofinancing will follow the implementation arrangements under projects 1 and 2, as set out in the MFF facility administration manual. Investments in water supply under the proposed project 2, including monitoring and evaluation, will be implemented by the National Water Supply and Drainage Board. The existing Project Management Unit and project director will be responsible to implement the AFD cofinancing. Two additional Project Implementation Units will be formed under the Project Management Unit, with two deputy project directors to implement the two AFD cofinancing subprojects. The services of an additional design and supervision consultant, selected under project 2, will be used for the proposed AFD cofinancing. The implementation period runs concurrently with project 2.

III. THE PRESIDENT'S RECOMMENDATION

14. The President recommends that the Board approve ADB administering a loan not exceeding the equivalent of $101,000,000 to the Democratic Socialist Republic of Sri Lanka for the additional financing of the Greater Colombo Water and Wastewater Management Improvement Investment Program–Project 2, to be provided by the Agence Française de Développement.

Appendix 1 5

REVISED DESIGN AND MONITORING FRAMEWORK

Data Sources and Reporting Assumptions Performance Targets and Mechanisms and Risks Design Summary Indicators with Baselines (Overall Project) (Overall Project) Impact Assumption Current project Improved water supply and Daily water supply increased in NWSDB annual reports Ongoing and planned wastewater service and low-pressure areaa in Colombo water supply projects, management in Greater (baseline: 5 hours in 2012; target: financed by JICA and Colombo 24 hours by 2020) NWSDB successfully implemented Citywide NRW in Colombo reduced NWSDB water balance (baseline: 49% citywide and 60% in audit critical area in 2012; target: 20% in Colombo and 18% in critical area by 2020)

Coverage of sewer network CMC annual reports increased including all BPL households (FHH among them) (baseline: 80% in 2012; target: 100% in Colombo in 2020) Overall project Unchanged Unchanged

Outcome By the end of 2018: Risk Current project Tariff increase as agreed by the Improved system a. NRW in the southern part of NWSDB water balance government is efficiency and financial Colombo city reduced to 20% audit delayed sustainability of water (baseline: 49% in 2013) supply and wastewater services in Greater b. 44,500households (including all NWSDB annual reports Colombo BPL households and FHH) benefitted with 24/7 water supply in the southern part of Colombo city (baseline 5 hours in 2013) Overall project By end 2018: Unchanged a. Unchanged

b. Unchanged

c. 33,000 households benefitted NWSDB annual reports with 24/7 water supply in TECb (baseline water supply 5–6 hours in CBO areas in 2013)

d. 25% energy saving and cost reductions in water production NWSDB annual reports through Ambathale pumping station refurbishments b (baseline: annual energy costs $7.05 million in 2013)

6 Appendix 1

Data Sources and Reporting Assumptions Performance Targets and Mechanisms and Risks Design Summary Indicators with Baselines (Overall Project) (Overall Project) Outputs By the end of 2018: For all outputs: Output 1 Current project Assumption Rehabilitated and a. 242 km of water supply pipelines PPMS expanded water supply and 15,000 water meters replaced Key project officials system, and reduced in the southern part of Colombo city remain in office NRW in Greater Colombo during the project b. Minimum of 15 DMAs PPMS period established in the southern part Colombo city (baseline zero DMAs Risk in 2013) Prices of pipes and c. Additional 150 water outlets NWSDB and NGO construction materials provided in unserved settlements, annual reports increase beyond metered and WUSGs formed projections. (target: 50% of representatives in executive committees are women)

Overall project By the end of 2018: Unchanged a. Unchanged

b. Unchanged

c. Unchanged

d. 360 km of distribution network, 8 AFD Project progress km of transmission mains and reports 18,000 m3 capacity storage reservoir constructed for TEC water supply system improvement b

e. Four new pumps installed, 24 AFD Project progress existing pumps replaced and/or reports refurbished, facilities automated and improved at Ambathale b Output 2 Current project Completed designs and Detailed design and bid documents DSIDC and CMC improved preparedness for investments in wastewater reports for wastewater management under projects 3 and investments 4 approved

Overall project Unchanged Unchanged

Output 3 Current project Strengthened institutional Colombo city water supply NWSDB annual reports structure and capacity of operations decentralized to RSC- service providers WC of NWSDB

GIS-based asset management PPMS system for Colombo city established and operated by RSC- WC

Appendix 1 7

Data Sources and Reporting Assumptions Performance Targets and Mechanisms and Risks Design Summary Indicators with Baselines (Overall Project) (Overall Project) Two NRW management offices NWSDB annual reports established and functional, and 6 active-leakage-control (ALC) teams fully equipped and operational

Training and capability building NWSDB annual reports provided to 1000 NWSDB and CMC staff (target: at least 25% of staff are female professionals)

Awareness of water tariff among Survey conducted by citizens increased by 20% before the project consultants and after project 2 emphasizing shared responsibility of men and women in water management (target: 50% of participants in FGDs are women)

WASH program implemented in NGO progress reports 229 underserved settlements with 16,372 households(target: 50% of participants are women)

Volumetric sewerage tariff CMC annual reports approved for CMC

Overall project Unchanged Unchanged

Output 4 Current project Project 2 successfully Project 2 completed on time and ADB PPR managed and within budget, and rated successful implemented in ADB project success ratings;

Overall project Unchanged Unchanged

Activities with Milestones (Overall Project) Inputs 1. Rehabilitated and expanded water supply system, and reduced NRW, in Colombo city ADB 1.1. Obtain all environmental, statutory, and utilities clearances by Q2 2013 $88.00 million (current) (unchanged) Co-financier 1.2. Issue tender documents for priority rehabilitation works by Q4 2013 AFD (unchanged) $101.00 million (additional) 1.3. Provide advisory services on managing NRW reduction, construction management and supervision under the project by Q3 2014 by MASC Government (changed) $30.00 million (current) 1.4. Complete procurement of civil works contract by Q3 2015 (changed) $36.00 million (additional) 1.5. Provide the NRW teams with vehicles, tools, equipment, and training, and $66.00 million (overall) mobilize the teams for active leakage control by Q2 2015 (unchanged) 1.6. Establish district metered areas by Q4 2017 (unchanged) 1.7. Replace or upgrade all service connections and meters by 2017 (unchanged) 1.8. Rehabilitate plumbing systems in condominium housing schemes by Q2 2017 (unchanged) 1.9. Provide consultant service for design and supervision consultant by Q1 2015

8 Appendix 1

Activities with Milestones (Overall Project) Inputs (added) 1.10. Complete procurement of civil works contract for TEC by Q2 2015 (added) 1.11. Complete procurement of pump station contract for Ambathale by Q4 2015 (added)

2. Completed designs and improved preparedness for wastewater investments 2.1. Issue tender documents for DSIDC by Q2 2014 (changed) 2.2. Sign contract for DSIDC with consultant by Q2 2015 (changed) 2.3. Conduct condition assessment survey and sewer cleaning of 125 km of the sewer network in Colombo City by Q2 2015 ((unchanged))

3. Strengthened institutional structure and capacity of service providers 3.1. Provide training equipment by Q2 2015 (unchanged) 3.2. Renovate and modernize the training facilities by Q3 2017 (unchanged) 3.3. Institutionalize reforms in RSC-WC by Q4 2014 (unchanged) 3.4. Complete training of NWSDB staff in NRW reduction by Q2 2016 (unchanged) 3.5. Complete training of water user groups in meter reading and O&M by 2018 (unchanged) 3.6. Establish and calibrate network model for Colombo sewerage by Q2 2015 (unchanged) 3.7. Establish separate wastewater cost center in CMC by Q4 2014 (unchanged) 3.8. Approve sustainable tariff system for CMC, together with formulation of implementation strategy/mechanism to include legal and institutional provisions, by Q2 2015 (unchanged) 3.9. Approve and start the awareness and media campaign, including TV and radio program, focus group discussion designs by Q2 2014 (unchanged) 3.10. Update GIS network maps for Colombo city by Q4 2014 (unchanged)

4. Project 2 successfully managed and implemented 4.1. Appoint PMU and core counterpart staff for project 2 by Q4, 2013 (25 women) (unchanged) 4.2. Mobilize core counterpart staff required for project 2 by Q1 2014 (unchanged) ADB = Asian Development Bank, AFD = Agence Française de Développement, BPL= below poverty line, CEA = Central Environmental Authority, CMC = Colombo Municipal Council, DMA = district meter area, DSIDC = design, supervision and institutional development consultants, FGD = focus group discussion, GIS = geographic information system, HHW = households headed by women, km = kilometer, JICA= Japan International Cooperation Agency, m3 = cubic meter, MASC = management advisory and supervision consultant, MOFP = Ministry of Finance and Planning, NGO = nongovernment organization, NRW = nonrevenue water, NWSDB = National Water Supply and Drainage Board, O&M = operation and maintenance, PMU = project management unit, PPMS = project performance management system, PPR = Project Performance Report, Q = quarter, RSC-WC = Western Central Regional Support Center, TEC = towns east of Colombo, WASH = water and sanitation and hygiene, WUSG = water use and sanitation group. a Low-pressure area is about 12 square kilometers and refers to , , , , Mattakuliya, , and Hulfsdorf. b In parallel with Periodic Financing Report PFR 2, the government is seeking contractual cofinancing from Agence Francaise de Developpement in the amount equivalent to $101 million to assist the government in achieving these outcomes. Source: Asian Development Bank.