Report and Recommendation of the President to the Board of Directors

Lanka Project Number: 42171 May 2011

Proposed Loan and Technical Assistance Grant People’s Republic of : Khulna Water Supply Project

CURRENCY EQUIVALENTS (as of 10 May 2011)

Currency Unit – taka (Tk)

Tk1.00 = $0.01367 $1.00 = Tk73.130

ABBREVIATIONS

ADB – Asian Development Bank CQS – Consultants’-qualifications selection EMP – environmental management plan ICB – international competitive bidding IEE – initial environmental examination JICA – Japan International Cooperation Agency KWASA – Khulna Water Supply and Sewerage Authority m3 – cubic meter MIS – management information system NCB – national competitive bidding PMU – project management unit QCBS – quality- and cost-based selection TA – technical assistance TASF – Technical Assistance Special Fund

NOTES

(i) The fiscal year of the Government of Bangladesh ends on 30 June. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2008 ends on 30 June 2008.

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

Vice-President X. Zhao, Operations 1 Director General S.H. Rahman, South Asia Department (SARD) Director M.T. Kho, Urban Development and Water Division, SARD

Team leader M. Tachiiri, Urban Development Economist, SARD Team members K.M. Emzita, Senior Counsel, Office of the General Counsel M. Fan, Urban Development Specialist, SARD M.R. , Senior Project Implementation Officer, Bangladesh Resident Mission, SARD R. Slangen, Urban Development Specialist, SARD F. Sultana, Social Development and Gender Officer, Bangladesh Resident Mission, SARD Peer reviewer J. Masic, Urban Development Specialist, East 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 PROPOSAL 1 II. THE PROJECT 1 A. Rationale 1 B. Impact and Outcome 3 C. Outputs 3 D. Investment and Financing Plans 5 E. Implementation Arrangements 6 III. TECHNICAL ASSISTANCE 7 IV. DUE DILIGENCE 7 A. Economic and Financial 7 B. Governance 8 C. Poverty and Social 8 D. Safeguards 9 E. Risks and Mitigating Measures 9 V. ASSURANCES AND CONDITIONS 10 VI. RECOMMENDATION 10 APPENDIXES 1. Design and Monitoring Framework 11 2. List of Linked Documents 13

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed loan to the People’s Republic of Bangladesh for the Khulna Water Supply Project. The report also describes proposed technical assistance (TA) for Supporting the Khulna Water Supply Project, and if the Board approves the proposed loan, I, acting under the authority delegated to me by the Board, will approve the TA.1

2. The project will develop a sustainable water supply system in Khulna , which relies entirely on groundwater.2 It will introduce surface water as the main water source for sustainable water resource management in Khulna city. The project adopts a climate-proof design, adapting to an expected increase in the salinity of the river water as a result of sea level rise. The project’s capacity building component will also strengthen the corporate management system of Khulna Water Supply and Sewerage Authority (KWASA), which has been established in February 2008.

II. THE PROJECT A. Rationale

3. Water supply in Khulna city. Citizens in Khulna city have been suffering from limited access to water supply services. Only 23% of the population of about 1 million has access to piped water supply, and the rest resorts to alternative sources, such as shared public taps and tube wells built privately. The existing system is old and poorly maintained, resulting in substantial leakage and low quality of water.3 A survey shows that even households connected to the piped network enjoy only intermittent water supply (5.3 hours per day), and 74% of households find the supplied quantity insufficient.4 As for water quality, 59% of the surveyed households perceived the supplied water to be dirty and 55% rated the service standards very poor or poor.5 Many unconnected households rely on shared public taps and spend a daily average of 90 minutes fetching water, imposing a particular burden on women who tend to manage water for the whole family. The project will expand the access to water supply services by building a surface water treatment plant and extending the distribution network to cover the whole city.

4. Water resource management. Khulna city relies entirely on groundwater for its water source.6 KWASA’s deep tube wells yield 30,100 cubic meters (m3) per day, supplying water to the piped network. In addition, there are many privately built tube wells and KWASA’s hand- pumped tube wells; the total abstraction of groundwater is estimated at 113,000 m3/day. An assessment of the groundwater showed that abstraction should be limited to ensure the sustainability of the groundwater resource. The project will develop a surface water treatment plant with 110,000 m3/day capacity to meet the growing demand without increasing the groundwater abstraction and undermining its sustainability.7 The groundwater will be monitored and managed in a sustainable manner. In addition to KWASA’s wells, private wells will be

1 The design and monitoring framework is in Appendix 1. 2 The Asian Development Bank (ADB) provided project preparatory TA: ADB. 2009. Technical Assistance to the People's Republic of Bangladesh for Preparing the Khulna Water Supply Project. Manila. 3 Physical loss is estimated at 36% of the produced water. 4 The survey was conducted under ADB. 2008. Small Scale Technical Assistance to the People's Republic of Bangladesh for Supporting the Establishment of Khulna Water and Sewerage Authority. Manila. The survey covers 3,000 households randomly selected in Khulna city. 5 Service standards were rated fair by 33% of the surveyed households and good by 11%. 6 Arsenic contamination is not found in Khulna city. 7 The groundwater table is declining by 2–3 meters annually in some areas in because of overextraction.

2

registered to monitor and regulate the abstraction of groundwater. Groundwater and surface water will be used conjunctively to ensure environmentally sustainable and economically efficient water resource management.

5. Climate change impacts. Khulna city is located in the coastal belt of Bangladesh—one of the most vulnerable areas to climate change impacts. Rivers near Khulna city are already affected by salinity intrusion, and the sea level rise caused by climate change is expected to exacerbate the problem of salinity intrusion. The Asian Development Bank (ADB) conducted a study to simulate climate change impacts in Khulna city and develop adaptation strategies.8 The results of the study are incorporated in the project design to make the project climate-proof. In particular, the intake facilities will be located upriver to avoid salinity, and an impounding reservoir will be built to store fresh water so that water quality will be ensured even with the expected increase of salinity in the river water.

6. Establishing and strengthening the Khulna Water Supply and Sewerage Authority. The Government of Bangladesh established KWASA in February 2008.9 KWASA is the third water supply and sewerage authority established in the country, following the Dhaka and water supply and sewerage authorities. was directly responsible for water supply service in Khulna city before the establishment of KWASA. Although KWASA has been legally established, further efforts are required to develop it into a capable water utility with a proper management system, competent human resources, and a sound financial management system. As KWASA is a recently established organization with new personnel and systems, it is opportune to provide adequate support to develop it into a financially viable water utility that can serve as a model in Bangladesh.

7. Development coordination. The project was developed through dialogue among development partners at the local consultative group for the water and sanitation sector, and under the partnership framework for urban water supply and sanitation.10 The project will be cofinanced by ADB and the Japan International Cooperation Agency (JICA) under a harmonized and unified framework. One project management unit (PMU) will be responsible for implementing the entire project, regardless of the funding source. ADB and JICA will jointly review the project implementation as well as KWASA’s corporate management against common performance indicators.

8. Lessons. The project reflects lessons and recommendations from previous interventions. For example, a recent sector program assistance evaluation concluded that cofinancing is a good option to scale up investment in urban water supply projects in Bangladesh; this is proposed in the project.11 Other lessons from past water supply projects in Bangladesh identified careful tariff setting and financial management as vital for project sustainability.12 KWASA’s financial condition was thoroughly assessed and a financial plan was prepared to ensure long-term sustainability.

9. Context in country programming. The project is in line with ADB’s country strategy and program for Bangladesh, 2006–2010.13 Urban water supply is a focus area of the country

8 ADB. 2010. Technical Assistance to Bangladesh for Strengthening Resilience of the Water Sector in Khulna to Climate Change. Manila. 9 Through SRO No-43-law/2008-law/division pass-2/K 1/2007. 10 The partnership framework was signed on 10 November 2007 by the government and major development partners of the sector, focusing support for water and sewerage authorities in a few large . 11 ADB. 2009. Evaluation Study on the Urban Sector and Water Supply and Sanitation in Bangladesh. Manila. 12 Lessons drawn from ADB’s evaluation information system. 13 ADB. 2005. Country Strategy and Program: Bangladesh, 2006–2010. Manila.

3 strategy and program, and the sector outcome is increased coverage of access to safe water and other improvement of urban services. The project will directly contribute to the sector outcome by expanding access to clean drinking water in Khulna city. The project will also contribute to Millennium Development Goal 7 through the expansion of access to safe water. The project will complement the planned improvement of drainage under the City Region Development Project 14 and of solid waste management under the Urban Public and Environmental Health Sector Development Program 15 for a better urban environment. The project is also in line with the government’s draft Sector Development Plan, 2011–2025, which has identified significant financing gap in the water supply sector, and has identified this sector as a priority for investments.

B. Impact and Outcome

10. The impact of the project will be improved urban services in Khulna city. The outcome will be expanded and reliable access to potable water in Khulna city.

C. Outputs

11. The outputs of the project will be (i) augmented and sustainably managed water sources in Khulna city, (ii) an extended and efficiently managed distribution network in Khulna city, and (iii) professional and sustainable corporate management of KWASA. The activities under (i) will be mostly financed by JICA, and those under (ii) and (iii) will be financed by ADB.

1. Output 1: Augmented and Sustainably Managed Water Sources

12. The water sources in Khulna city will be augmented and managed sustainably under the project. The project will develop a surface water treatment plant to meet the growing demand and avoid excessive abstraction of groundwater. Groundwater and surface water will be used conjunctively to ensure environmentally sustainable and economically efficient water resource management. Groundwater will be monitored and assessed regularly, and abstraction will be limited to a sustainable level.

13. Rivers near Khulna city are already affected by salinity intrusion, which is expected to worsen as a result of climate change. Locating the intake upriver will reduce the salinity level of raw water, though it will increase the cost of water transmission to Khulna city. The intake point has been identified by considering the future salinity level and the costs of water transmission. At the selected intake point, it is expected that the chloride concentration level will exceed the government standard in the dry season only for a limited period. 16 Water with low chloride concentration will be collected during the rainy season and stored in an impounding reservoir. Water with high chloride concentration collected during the dry season will be diluted, with the water stored in the impounding reservoir to meet the government standard.17

14 ADB. 2010. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People’s Republic of Bangladesh for the City Region Development Project. Manila. 15 ADB. 2009. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People’s Republic of Bangladesh for the Urban Public and Environmental Health Sector Development Program. Manila. 16 The government standard is 1,000 milligrams/liter (mg/l) based on the government’s Environment Conservation Rules, 1997. Khulna is classified a coastal area, where 1,000 mg/l is the threshold. The threshold for other areas is 600 mg/l. 17 The size of the impounding reservoir depends on the period of dry season when the raw water exceeds the government’s standard on chloride concentration. Uncertainties exist about future water quality because of climate change impacts and a dredging project in upriver from the intake. KWASA will keep monitoring water quality and 4

14. The groundwater will be used as a supplementary source of water. It will be monitored and assessed regularly, and abstraction from KWASA’s tube wells will be limited to a certain level. Private wells will be registered to monitor and regulate the abstraction.18 The total amount of groundwater abstraction will be contained to a sustainable level, taking into consideration the limited increase of abstraction from KWASA’s tube wells and switching of private well users to KWASA’s piped network. Treated water from the surface treatment plant will be mixed with groundwater at distribution reservoirs in the city. Since the groundwater is not affected by salinity, it will provide a further buffer during unexpectedly long dry seasons and a high salinity level in raw water. Activities under output 1 will include the construction of intake facilities, a surface water treatment plant, an impounding reservoir, and a raw water transmission main, which will be financed by JICA; and rehabilitation of deep tube wells and monitoring of groundwater, which will be financed by ADB.

2. Output 2: Extended and Efficiently Managed Distribution Network

15. The water distribution system will be extended and water will be delivered efficiently in Khulna city. The project will improve the access to the piped network from 23% in 2010 to 62% by 2018, benefiting about 710,000 persons in Khulna city. An additional 490,000 persons will have a new connection to the piped network, and 220,000 persons who already have a connection will benefit from the improved services. Those using hand pumps consume on average 45 liters per capita per day, which will increase to 120 liters per capita per day. The poor, in particular, will benefit since their residences tend to be outside the current coverage areas and they spend a substantial amount of time each day fetching water.

16. The distribution network will be divided into five zones, and KWASA’s zonal offices will be established to manage the network and all customer-related services. The distribution network in each zone will be divided into district metering areas. KWASA will rigorously monitor the amount of inflow, outflow, and consumption in each area and control the pressure and minimize leaks. Revenue collection will be assessed in each zonal office to benchmark the performance. Water quality will be regularly monitored at sources and through the distribution network to ensure the delivery of potable water.

17. To promote quick expansion, house connections will be provided under the project. The connection charges during the project implementation period will be set low to encourage house connections. The low connection charge will help expand the coverage of piped network—even for poor households—bringing down one of the most significant barriers to obtain a piped connection. For In low-income communities where individual connection is not a practical solution, water user groups will be formulated to manage the communal tap. Activities under output 2 will be financed by ADB and include expansion of the distribution network, construction of a clear water transmission main, and establishment of zonal offices.

3. Output 3: Professional and Sustainable Corporate Management

18. The project will provide a range of assistance to help develop a professional and sustainable corporate management system at KWASA, which has been recently established with limited financial and human resources. KWASA has developed its first 5-year business

adjust the size of the impounding reservoir in the future as and when required. The government will acquire lands larger than required for the proposed facilities, if necessary. 18 An annual charge will be introduced for the use of private wells, as in Dhaka city.

5 plan, including a capital investment plan, financial plan, and human resource development plan.19

19. The capital investments under the project will be the core components of the capital works plan to augment water production and extend service coverage. The capital works plan also includes smaller projects funded by the government, such as rehabilitation of deep tube wells and extension of the distribution network, which can be implemented quickly and complement the project.

20. Current KWASA financial conditions are weak because of the small customer base20 and low tariff levels.21 The financial plan covers a series of revenue enhancement measures, in addition to the natural revenue increase caused by the expansion of service coverage. KWASA currently charges flat monthly rates for each connection, which will be converted to a monthly charge to each household. KWASA has identified the existing illegal connections and started registering them as legal connections. Domestic meters will be gradually installed and a volumetric tariff will be introduced for each category of customers.22

21. Since KWASA’s operation will be far larger than the current one, the project will provide comprehensive support for human resource development, including gradual expansion and adjustment of the organizational structure, and training of recruited staff and management. The training program will include financial management, customer services, procurement, and safeguard compliance. KWASA’s human resources will expand in accordance with the expansion of operation, and will be decentralized through the establishment of zonal offices to focus on customer service. Activities under output 3 will be financed by ADB and will include capacity development programs and consulting services for KWASA’s corporate management system.

D. Investment and Financing Plans

22. The project is estimated to cost $363.5 million, including land acquisition, incremental recurrent costs, and taxes and duties. Land acquisition and taxes and duties will be financed entirely by the government. Resettlement costs, other than land acquisition and asset compensation cost, are eligible for ADB financing. The investment plan is summarized in Table 1 and described in detail in the project administration manual.23

19 Summary of KWASA Business Plan (accessible from the list of linked documents in Appendix 2). 20 Currently only 23% of the city population is connected to KWASA’s piped network. 21 Most customers pay Tk45–Tk70 per connection per month, depending on the connection pipe diameter. 22 Meter coverage will increase from 0% (FY2010) to 20% (FY2013) and 40% (FY2016). The coverage will reach 100% in FY2017, and then the volumetric tariff will be introduced. The volumetric tariff will be differentiated for commercial and industrial customers. Increasing block tariff is not planned since it may not bring the anticipated pro-poor effects in Khulna. Multiple households under one connection, which are common in low-income areas, may end up in a high-consumption block with a higher rate. 23 Project Administration Manual (accessible from the list of linked documents in Appendix 2). 6

Table 1: Project Investment Plan Item Amount (million) A. Base Costa 1. Civil works and equipment 238.9 2. Consultants 18.2 3. Land acquisition and resettlement 5.9 4. Administration costs 1.6 b B. Contingencies 37.9 C. Interest Charges During Implementationc 2.7 D. Taxes and Duties 58.4 Totald 363.5 a In mid-2010 prices. b Physical contingencies computed at 4.9%. Price contingencies computed with cost escalation factors at –3.7% to 0.5% on foreign exchange costs and 7.2%–7.3% on local currency costs. c Interest during construction has been computed at 1.0% for the Asian Development Bank loan, and at 0.01% for the Japan International Cooperation Agency loan. d Numbers may not sum precisely because of rounding. Source: Asian Development Bank estimates.

23. The government has requested a loan in various currencies equivalent to SDR46,927,000 from ADB’s Special Funds resources to help finance the project. The loan will have a 32-year term, including a grace period of 8 years, an interest charge of 1.0% per annum during the grace period and 1.5% per annum thereafter, and such other terms and conditions set forth in the draft loan and project agreements. ADB will finance most of the activities under outputs 2 and 3 and a minor part of the activities under output 1.

24. The government has also sought a loan from JICA of ¥15,729 million (about $184.0 million equivalent) to help finance the project. JICA and the government negotiated the bilateral loan agreement in February 2011 to set conditions and arrangements, and JICA approved the loan in March 2011. JICA will administer its loan, and the coordination arrangements of this collaborative cofinancing will be detailed in a procedural arrangement between ADB and JICA. JICA will finance most of the activities under output 1.

25. The government will provide $104.6 million to cover land acquisition costs, taxes and duties, and part of the costs for civil works, equipment, and administration. The financing plan is in Table 2 and is described in detail in the project administration manual (footnote 23).

Table 2: Financing Plan Amount Share of Total Source ($ million) (%) Asian Development Bank 75.0 20.6 Japan International Cooperation Agency 184.0 50.6 Government of Bangladesh 104.6 28.8 Totala 363.5 100.0 a Numbers may not sum precisely because of rounding. Source: Asian Development Bank estimates.

E. Implementation Arrangements

26. The implementation arrangements are summarized in Table 3 and described in detail in the project administration manual (footnote 23). KWASA will be the executing and implementing agency and will establish a PMU.

27. The loan proceeds and the government’s counterpart funds will be provided to KWASA in accordance with terms and conditions described in a subsidiary loan agreement. The loan to

7

KWASA will have a 2% interest rate and 30-year repayment term, including a grace period of 8 years.

Table 3: Implementation Arrangements Aspects Arrangements Implementation period June 2011–December 2017 Estimated completion date 31 December 2017 Management (i) Oversight body National level: Interministerial steering committee Chair: Secretary of the Local Government Division Members: Economic Relations Division, Finance Division, Planning Commission, Implementation, Monitoring and Evaluation Division, KWASA, Khulna City Corporation, and Department of Environment (ii) Executing agency KWASA (iii) Key implementing agencies KWASA (iv) Implementation unit 43 staff Procurement ICB 3 contracts $87,504,000 NCB Multiple contracts $3,919,000 Shopping Multiple contracts $1,495,000 Direct contracting 1 contract $100,000 Consulting services Firm (QCBS) 681 person-months (2 packages) $7,163,000 Firm (CQS) 24 person-months $182,000 Retroactive financing and/or Advance contracting is applicable to all consulting services and some civil works advance contracting packages. Disbursement The loan proceeds will be disbursed in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time) and arrangements agreed upon between the government and ADB. ADB = Asian Development Bank, CQS = consultants’ qualifications selection, ICB = international competitive bidding, KWASA = Khulna Water Supply and Sewerage Authority, NCB = national competitive bidding, QCBS = quality- and cost-based selection. Note: Procurement and consulting service packages do not include those to be funded by JICA. One package to be financed by ADB for deep exploratory well development will be procured through direct contracting to Geological Survey Bangladesh, since it is the sole entity capable of conducting the very deep drillings required. Source: Asian Development Bank.

III. TECHNICAL ASSISTANCE

28. The capacity development TA will strengthen KWASA’s capacity to manage the project effectively. The TA is estimated to cost $800,000 equivalent, of which $700,000 will be financed on a grant basis by ADB’s Technical Assistance Special Fund (TASF-IV) and $100,000 will be provided by the government through in-kind contribution. The TA will focus on priority areas of planning and technical support, such as metering of house connections, public communication, information technology, and procurement capacity. The outline terms of reference are included in the project administration manual (footnote 23). KWASA will be the executing agency for the TA and will provide counterpart staff and office space. Individual consultants will be engaged to implement the TA.

IV. DUE DILIGENCE

A. Economic and Financial

29. Economic analysis. The estimated economic internal rate of return is 13.6%, indicating a sufficiently high economic return. The result is robust against downside risks, including higher costs and decreased benefits. Quantified project benefits include incremental consumption of water (valued at the willingness to pay) and non-incremental consumption of water (valued at resource cost savings). The result most likely underestimates the project benefits, since the 8

project has other benefits (such as improvement of health) that are not easily quantifiable and are not accounted for in the analysis. Details are provided in the economic analysis.24

30. Financial analysis. The estimated financial internal rate of return is –2.7% (below the weighted average cost of capital estimated at 0.4%). The results reflect the low level of planned tariff, which is determined based on the assessment of willingness to pay and affordability. The projected cash flow of KWASA shows that adequate funds will be available for operation and maintenance expenditures and debt service, even with the low tariff level, because of concessional terms of relending by the government to KWASA.25 KWASA will fully recover the operation and maintenance costs and partly recover the capital costs in line with government policy.26 Details are provided in the financial analysis.27

B. Governance

31. KWASA does not have extensive experience in managing large externally funded projects. Based on assessments of KWASA’s current capacity, the project will provide adequate training and support through consulting services for financial management, procurement, and safeguard measures. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government. The specific policy requirements and supplementary measures are described in the project administration manual (footnote 23) and are included in the loan agreement of ADB.

C. Poverty and Social

32. Services for the poor. Low-income households are mostly excluded from the existing piped water supply. The major impediment to improved water services for the poor will be affordability of the connection costs. The project will provide household connections with low connection charges to promote individual connections even for the poor. 28 In low-income communities where individual connection is not a practical solution, water user groups will be formulated to manage the communal tap. The taps will be metered and KWASA will collect the bill through a caretaker of the tap chosen by the respective user groups. To enhance awareness on public hygiene and acceptability of the tariff adjustment, a series of public awareness campaign activities will be implemented with the support of consultants.

33. Gender. Expanding coverage of piped water supply will benefit women, since the burden to fetch water for the family usually falls on women. A gender action plan has been developed. Awareness-raising campaigns will particularly target women, since they are the primary caretakers of household health. Women will be encouraged to play a major role in water user groups in low-income communities. Women will have equal opportunity to participate in

24 Economic Analysis (accessible from the list of linked documents in Appendix 2). 25 Except during the initial years of establishment, KWASA will not obtain explicit subsidies. The concessional relending will help KWASA to maintain a positive cash flow. 26 The government policy emphasizes operation and maintenance cost recovery, and full recovery of capital was set as the eventual goal. Government of Bangladesh.1988. National Policy for Safe Water Supply and Sanitation (8.3.2) states: “In the near future water tariff shall be determined on the basis of the cost of water production, operation and maintenance, administration and depreciation.” Government of Bangladesh. 2006. Sector Development Programme: Water and Sanitation Sector (page 34) states “… stresses the need for increasing water tariff in urban areas to at least cover the operation and maintenance costs” and “However, water being a social good, the transition to full cost-recovery should be gradual” 27 Financial Analysis (accessible from the list of linked documents in Appendix 2). 28 The connections will be provided as part of the project with a charge lower than the actual cost during project implementation. KWASA plans to charge the actual cost after project completion, which will be further assessed based on the progress of coverage expansion and financial conditions.

9 project-supported training programs and recruitment. Efforts to reduce wage inequality between men and women and to ensure core labor standards will be in place.

D. Safeguards

34. Environmental safeguards. The project is classified category B in accordance with ADB’s Safeguard Policy Statement (2009). KWASA prepared an initial environmental examination (IEE) 29 as part of the feasibility study, including an environmental management plan (EMP). The IEE concluded that no significant adverse environmental impacts are anticipated and that the project will have only small, localized impacts to be mitigated through measures outlined in the EMP. The IEE and EMP will be updated during detailed design as necessary. The EMP will be incorporated into bidding and contract documents and implemented by contractors and consultants; the PMU will monitor the EMP. The PMU will be provided with consultancy and capacity building in managing the environmental impacts. KWASA will be responsible for implementing the EMP and will report the progress to ADB. The IEE represents a single, unified document to ensure compliance with the rules and guidelines of ADB, JICA, and the government; and will be implemented as a single process regardless of the funding source. KWASA plans to develop wastewater treatment facilities in the medium term to meet expected increase in water usage.

35. Social safeguards. The project is classified category A for involuntary resettlement and category C for indigenous people in accordance with ADB’s Safeguard Policy Statement (2009). A total of 29.6 hectares of private land will be acquired under the project. Properties to be acquired are primarily agricultural lands or lowland fishing ponds without residential structures. The resettlement impacts are therefore limited to economic displacement and no physical displacement from housing will occur. Involuntary resettlement impacts are considered significant as more than 200 persons are expected to experience major impacts. 30 KWASA prepared a resettlement plan 31 that specifies entitlements for affected persons including compensation at replacement cost, livelihood restoration measures, and special assistance measures for vulnerable groups. The resettlement plan represents a single, unified document to ensure compliance with the rules and guidelines of ADB, JICA, and the government; and will be implemented as a single process regardless of the funding sources. The government is strongly committed to implementing the resettlement plan. At present, the capacity on safeguards planning and implementation at KWASA is not strong. Consultants recruited under the associated capacity development TA will provide capacity building and other support to ensure effective implementation of safeguard measures.

E. Risks and Mitigating Measures

36. Major risks and mitigating measures are summarized below. Risks are mitigated to a manageable level. The benefits and impacts of the project are expected to outweigh the costs and risks.

29 Initial Environmental Examination (accessible from the list of linked documents in Appendix 2). 30 Major impacts are defined as losing 10% or more of their productive assets (income generating). It is estimated that the economically displaced persons include 110 legal title holders (490 persons) and 15 non-titled holders (69 economically displaced persons), among which 309 persons are expected to have major impacts. 31 Resettlement Plan (accessible from the list of linked documents in Appendix 2). 10

Table 4: Summary of Risks and Mitigating Measures Risks Mitigating Measures Inadequate capacity of KWASA recently recruited a group of managers and engineers. KWASA prepared the KWASA to manage the human resource development plan and the project will support KWASA in recruitment and project training. Financial sustainability KWASA prepared a financial plan, confirming positive cash flow after operation and of KWASA maintenance cost and debt service. Measures to enhance revenues will be introduced, including volumetric tariff and charge on private wells. Land acquisition and The resettlement plan has been carefully prepared and adequate resources are resettlement provisioned, including consultants and compensation. Consultation started with local leaders and communities, which will continue with consultants’ support during implementation. Increased salinity level The impounding reservoir will store the water during rainy season when the salinity level is of the river water low, and dilute the saline raw water in dry season. Groundwater, which contains much less salinity even in the dry season, will remain as a secondary water source and will be used to dilute the saline water. KWASA = Khulna Water Supply and Sewerage Authority. Source: Asian Development Bank.

V. ASSURANCES AND CONDITIONS

37. The government and KWASA 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 the project administration manual (footnote 23) and loan documents. The government and KWASA have agreed with ADB on certain covenants for the project, which are set forth in the loan agreement. As conditions for the disbursement, the government will (i) establish the interministerial steering committee and the PMU, (ii) appoint the project director and the project managers for the PMU, and (iii) have signed subsidiary loan agreement, in the form and substance acceptable to ADB.

VI. RECOMMENDATION

38. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the loan in various currencies equivalent to SDR46,927,000 to the People’s Republic of Bangladesh for the Khulna Water Supply Project from ADB’s Special Funds resources with an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; for a term of 32 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan and project agreements presented to the Board.

Haruhiko Kuroda President

20 May 2011

Appendix 1 11

DESIGN AND MONITORING FRAMEWORK

Performance Targets and Data Sources and Design Summary Indicators with Baselines Reporting Mechanisms Assumptions and Risks Impact Assumption Improved urban Average time to fetch water per Annual consumer survey Khulna city does not expand services in Khulna day per household (Total to include fringe areas. city households: from 90 minutes in 2009 to 15 minutes in 2020; Risk households headed by women: A large number of migrants from 110 minutes in 2009 to settle in fringe areas. 20 minutes in 2020)ab Outcome Assumption Expanded and Household coverage with access to KWASA’s MIS reports Population of Khulna city reliable access to piped water (Total households: does not grow too rapidly as potable water in from 22.6% in 2010 to 62.3% in a result of large migration. Khulna city 2018; households headed by women: from 22.8% in 2010 to Risk b 62.3% in 2017) Pollution of water sources Average hours of supply (from Annual consumer survey by new industries upriver from the intake. 5.3 hours/day in 2009 to 24 hours/day in 2017) Laboratory test results Share of water samples meeting the government’s water quality standard (100% in 2017) Outputs Assumption 1. Water sources Additional production capacity KWASA’s quarterly Abstraction of groundwater in Khulna city using surface water (110 million progress report by private wells does not are augmented liters/day in 2016) increase substantially. and managed KWASA’s groundwater abstraction Risks sustainably in Khulna city (from 30 million KWASA’s MIS report Implementation delays liters/day in 2009 to maximum 50 million liters/day throughout the resulting from slow land implementation period) acquisition Groundwater level (maximum 6 KWASA’s MIS report Change of river flow caused meters drawdown throughout the by development in upper implementation period) stream of the river 2. Distribution Length of new pipe network KWASA’s quarterly Assumption system is (758 kilometers in 2016) progress report extended and Households are willing to delivers water Number of household connections KWASA’s quarterly connect to the KWASA efficiently in (Total households: from progress report network. Khulna city 15,032 connections in 2010 to 50,019 connections in 2018; households headed by women: from 2,876 in 2010 connections to 14,187 connections in 2017) b Physical loss (36% in 2009 to 20% KWASA’s MIS report c in 2017) Number of water user groups KWASA’s MIS report (1,500 groups in 2017 with 30% target for women’s representation and 30% target for women in leadership position) 12 Appendix 1

Performance Targets and Data Sources and Design Summary Indicators with Baselines Reporting Mechanisms Assumptions and Risks 3. KWASA Average response time to Annual consumer survey Assumption manages the customers’ complaints (30 minutes water supply in 2017; no standards currently in Competent managers and engineers apply for posts system place) professionally and are recruited. Revenue collected according to the KWASA’s MIS report and Risk sustainably financial plan (minimum 90% of target throughout the Households are unwilling to implementation period) pay the charge. Posts filled according to the human KWASA’s quarterly resource development plan (90% progress report of the plan); recruitment of female staff promoted under equal opportunity

Training conducted according to KWASA’s quarterly the human resource development progress report plan (90% of the plan and 100% of targeted women participated)

Activities and Milestones Inputs 1. Augmented and sustainably managed water sources Total $364 million, of 1.1 Consultants recruited and mobilized by December 2011 which: 1.2 Bidding documents prepared by November 2012 1.3 Contracts awarded by July 2013 ADB: $75 million 1.4 Works completed and the water treatment plant commissioned by June 2016 JICA: $184 million 1.5 Monitoring of water resources conducted throughout the implementation period 1.6 Private wells registered and charged by June 2017 Government of Bangladesh: 2. Extended and efficiently managed distribution network $105 million 2.1 Consultants recruited and mobilized by January 2012 Cost categories: 2.2 Bidding documents prepared by October 2012 2.3 Contracts awarded by July 2013 Works and equipment: 2.4 Works completed and the distribution network extended by September 2017 $239 million 2.5 Zone offices established to manage district metering areas to reduce leaks by Consultants: $18 million September 2016 3. Professional and sustainable corporate management Land acquisition and 3.1 Consultants recruited and mobilized by November 2011 resettlement: $6 million 3.2 Annual performance monitoring conducted every August from 2012 to 2016 3.3 Volumetric tariff introduced by June 2017 Administration costs: 3.4 Phase1 of organizational change completed by June 2014 $2 million 3.5 Phase 2 of organizational change completed by June 2017 Contingencies: $38 million 3.6 Annual consumer surveys conducted every June Interest charges during implementation $3 million Tax and duties: $58 million TA grant: $0.7 million ADB = Asian Development Bank, JICA = Japan International Cooperation Agency, KWASA = Khulna Water Supply and Sewerage Authority, MIS = management information system, TA = technical assistance. a 90 minutes per day to fetch water can be valued at Tk562 per month, by estimating the lost income opportunity assuming a minimum wage, discounted by 70%. b Households headed by women are a subset of the total households. c Physical loss = water produced – billed water consumption. Source: Asian Development Bank. Benchmark indicators are mostly based on a consumer survey conducted in 2009.

Attachment 2 13

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=42171-01-3

1. Loan Agreement 2. Project Agreement 3. Sector Assessment (Summary): Water Supply and Other Municipal Infrastructure Services 4. Project Administration Manual 5. Contribution to the ADB Results Framework 6. Development Coordination 7. Financial Analysis 8. Economic Analysis 9. Country Economic Indicators 10. Summary Poverty Reduction and Social Strategy 11. Gender Action Plan 12. Initial Environmental Examination 13. Resettlement Plan 14. Risk Assessment and Risk Management Plan

Supplementary Documents 15. Financial Management Assessment 16. Procurement Capacity Assessment 17. Summary of Khulna Water Supply and Sewerage Authority Business Plan