Evaluation Working Paper

Sri Lanka Country Assistance Program Evaluation: Water Supply and Sanitation Sector Assistance Evaluation

August 2007

Supplementary Appendix E

Operations Evaluation Department

CURRENCY EQUIVALENTS (as of 27 April 2007)

Currency Unit — Sri Lanka rupee (SLR)

SLR1.00 = $0.0092 $1.00 = SLR109.27

ABBREVIATIONS

ADB — Asian Development Bank EIRR — economic internal rate of return m3 — cubic meter MDG — Millennium Development Goal NWSDB — National Water Supply and Drainage Board TA — technical assistance UNDP — United Nations Development Programme USAID — United States Agency for International Development

NOTE

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

Director General Bruce Murray, Operations Evaluation Department (OED) Director R. Keith Leonard, Operations Evaluation Division 1, OED

Evaluation Team Leader Njoman Bestari, Principal Evaluation Specialist Operations Evaluation Division 1, OED

Operations Evaluation Department

CONTENTS

Page

Map ii

A. Scope and Purpose 1

B. Sector Context 1

C. The Country Sector Strategy and Program of ADB 8 1. ADB’s Sector Strategies in the Country 8 2. ADB’s Sector Assistance Program 12

D. Assessment of ADB’s Sector Strategy and Assistance Program 16

E. ADB’s Performance in the Sector 20

F. Identified Lessons 21

G. Future Challenges and Opportunities 23

Appendix Positioning/Coherence of Asian Development Bank’s Water Supply and Sanitation Sector Strategies in Sri Lanka 24

Njoman Bestari (team leader, principal evaluation specialist) and Jennifer Simon (consultant, evaluation research associate) prepared this evaluation working paper. Caren Joy Mongcopa (senior operations evaluation assistant) provided administrative and research assistance to the evaluation team.

The guidelines formally adopted by the Operations Evaluation Department (OED) on avoiding conflict of interest in its independent evaluations were observed in the preparation of this report. To the knowledge of the management of OED, there were no conflicts of interest of the persons preparing, reviewing, or approving this report. 80 o 00'E 81o 30'E

SRI LANKA WATER SUPPLY AND SANITATION SECTOR

t i Rural Water Supply Schemes a Kankasanturai r t S Covered under Loan 1575-SRI Third Water Supply and Sanitation Project k l Kodikamam a P Jaffna Covered under Loan 1993-SRI Secondary Towns and Rural Community-Based Water Supply and Sanitation Project Covered under Loan 1575-SRI and Kilinochchi Loan 1993-SRI

P a l k B a y Urban Water Supply Schemes

Mullaittivu Loan 0817-SRI Water Supply Project Loan 1235-SRI Second Water Supply and Sanitation Project Tanniyuttu Loan 1575-SRI Third Water Supply and Sanitation Project Mankulam Talaimannar Loan 1993-SRI Secondary Towns and Rural Community-Based 9 o 00'N NORTHERN Water Supply and Sanitation Project 9 o 00'N Puliyankulam Mannar

National Capital Vavuniya Provincial Capital Gulf of Mannar City/Town Trincomalee National Road Horowupotana Railway River

Anuradhapura District Boundary Provincial Boundary NORTH CENTRAL Boundaries are not necessarily authoritative. Tambuttegama

Kekirawa B a y o f B e n g a l Puttalam Welikanda Valaichchenai Dambulla Polonnaruwa EASTERN Batticaloa

NORTH Chilaw WESTERN

Kurunegala Matale Madampe CENTRAL Polgahawela Kandy Mawanella Ampara Negombo Warakapola Minuwangoda Kegalle Gampola

Gampaha o Nuwara Eliya Badulla o 7 00'N Talawakele 7 00'N Colombo Avissawella Welimada U V A SRI JAYAWARDENEPURA KOTTE Hatton Monaragala Bandarawela Moratuwa Ratnapura Wellawaya WESTERN Pelmadulla Kalutara Balangoda SABARAGAMUWA

Alutgama

Elpitiya N Ambalangoda SOUTHERN Hikkaduwa Akuressa Hambantota 0 10 20 30 40 50 Galle Tangalle Kilometers Matara

I N D I A N O C E A N 80 o 00'E 81o 30'E

06-3742 HR A. Scope and Purpose

1. This evaluation is part of the Country Assistance Program Evaluation for Sri Lanka. It takes sector context into account and evaluates the strategies and assistance of the Asian Development Bank (ADB) in the water supply and sanitation sector.1 The positioning and performance of ADB’s sector strategies and assistance were analyzed. This evaluation assesses the contribution of ADB to development results in Sri Lanka and identifies development issues and lessons in the sector pertinent to the preparation of the next country partnership strategy. Situations discussed herein were updated in March 2007.

B. Sector Context

2. Political, Economic, and Social Settings. Water is a vital resource, indispensable to life, and essential for overall economic and social development of a country. In Sri Lanka, access to safe water is considered an inalienable right of its people, thus making its provision a top priority of the Government. The World Water Supply and Sanitation Decade (1980–1990) had been an important turning point in planning and programming investments for the water supply and sanitation sector in the country. The Strategic Macro-Investment Plan (1986–1995) adopted in 1985 called for sustained allocation of funds amounting to 4%–5% of total public investments to meet national development targets for the sector. Before 1980, only 50% of the urban population and 56% of those in the rural areas had access to safe drinking water.2 In 1986, about 26% of the urban population had access to piped water supply. In comparison, only 2% of the rural population had access to piped-water services, 4% relied on standpipes, and a vast majority obtained water from wells and other surface sources.3 Piped water supply, where available, was characterized by irregular and less than 24-hour/day supply, substandard water quality, poor service coverage, and high incidence of unaccounted water (loss of water to leaks, theft, and other undetermined causes).

3. Sri Lanka is still home to millions of people without access to adequate water supply. According to the United Nations Development Programme (UNDP) in 2004, the country achieved 79% coverage of improved water supply4 (Table 1). Comparisons among countries should be cautiously interpreted due to issues related to definitions of indicators (Table 2). There are differences in reported data and interpretations of access and coverage of water supply. According to the National Water Supply and Drainage Board (NWSDB), water supply coverage in the country reached 72% in 2004 and 74% by the end of 2005. A majority of the people without access to improved water supply live in rural areas. Among urban population in 2002, about 75% benefit from piped water supply services, compared to only 14% of the rural population. Disparities with respect to access are evident across districts (Table 3). By 2001, access to safe drinking water, including through protected wells, had become available to 82% of the total population, excluding those who reside in conflict-affected areas in the North and East (Table 4). About 91% of the population in the Western Province had access to safe drinking water, with Colombo district recording the highest access at 96%. Conditions in the North and East, particularly in areas affected by protracted conflict, are not fully reflected in aggregate statistics. According to UNDP (2005), the proportion of households in northern

1 ADB. 2006. Guidelines for the Preparation of Country Assistance Program Evaluation Reports. Manila. Available: http://www.adb.org/Documents/Guidelines/Country-Assistance-Program/default.asp 2 UNDP. 2005. Millennium Development Goals Country Report: Sri Lanka. Colombo. 3 ADB. 1986. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Democratic Socialist Republic of Sri Lanka for Water Supply Sector Project. Manila. 4 Improved water supply means piped water supply, borehole, protected dug well, protected spring water, rainwater collection, and other technological means for improving water supply to consumers. 2 districts having access to improved water supply in 2001 was reported to be at only 21.2% in Mannar, 67.8% in Vavuniya, and unknown in Mullaitivu. The World Bank reported that only 46% of the population in North and East has access to safe drinking water.5

Table 1: Status and Trends of Selected MDG Indicators in Sri Lanka

Latest Year MDG Target Indicator 1990 Available 2015 Status Proportion of Population Below National Poverty Line, Total 26.1 22.7 (2002) 13.1 Not on track Urban 15.0 Rural 22.0

Poverty Gap Ratio (Incidence and 5.6 5.1 (2002) — Not on track Depth Of Poverty)

Children Under Five Mortality Rate 32 14 (2004) 12 On track (Per 1,000 Live Births)

Infant (0–1 Year) Mortality Rate 26 12 (2004) 12.8 On track (Per 1,000 Live Births)

Population With Access to Improved Water Sources, Total 68 79 (2004) 86 On track Urban 91 98 Rural 62 74

Population With Access to Improved Sanitation, Total 69 91 (2004) 93 On track Urban 89 98 Rural 64 89 — = not available, MDG = Millennium Development Goal. Source: UNDP. 2005. Millennium Development Goals Country Report: Sri Lanka. Colombo.

4. With respect to sanitation services, considerable improvements have been achieved over the years. In the 1980s, sewerage services were available in only some parts of Colombo and most people relied on septic tanks and pour-flush latrines for waste disposal. In the early 1990s, 50% of the people in the rural areas had sanitation facilities.6 According to UNDP, Sri Lanka’s access to improved sanitation reached 91% in 2004 (Table 1), higher than that of all developing nations (51%) and South Asian countries (37%).7 Comparing access to improved sanitation across districts in Sri Lanka, the highest access was recorded in Colombo (96.2%) and Gampaha (96.5%), and the lowest was reported to be in Batticaloa (57%) in the East. There are other reported data of different sources with conflicting reports on access to water supply and sanitation. In general, data on conflict-affected areas in the North and East are incomplete and less reliable than those of other parts of Sri Lanka.

5 World Bank. 2007. Sri Lanka Poverty Assessment: Engendering Growth with Equity: Opportunities and Challenges. Washington, DC. 6 ADB. 1993. Report and Recommendation of the President to the Board of Directors on Proposed Loan and Technical Assistance to the Democratic Socialist Republic of Sri Lanka for the Second Water Supply and Sanitation Project. Manila. 7 UNDP. 2005. Millennium Development Goals Country Report: Sri Lanka. Colombo. 3

Table 2: Comparative Selected MDG Indicators (As of Latest Year Available)

Indicator Sri Lanka India Pakistan Bangladesh Viet Nam Proportion of Population Below National Poverty Line, Total 22.7 (2002) 28.6 (1999) 32.6 (1999) 49.8 (2000) 28.9 (2002) Urban n.a. 24.7 24.2 36.6 6.6 Rural n.a. 30.2 35.9 53.0 35.6

Poverty Gap Ratio (Incidence and 5.1 (2002) 8.6 (1999) 3.1 (2002) 8.1 (2000) 0.5 (2002) Depth of Poverty)

Children Under Five Mortality Rate 14 (2004) 85 (2004) 101 (2004) 77 (2004) 23 (2004) Per 1,000 Live Births

Infant Mortality Rate (0–1 Year) Per 12 (2004) 62 (2004) 80 (2004) 56 (2004) 17 (2004) 1,000 Live Births

Population With Access to Improved Water Sources, Total 79 (2004) 86 (2004) 91 (2004) 74 (2004) 85 (2004) Urban 98 95 96 82 99 Rural 74 83 89 72 80

Population With Access to Improved Sanitation, Total 91 (2004) 33 (2004) 59 (2004) 39 (2004) 61 (2004) Urban 98 59 92 51 92 Rural 89 22 41 35 50 MDG = Millennium Development Goal, n.a. = not available. Source: UNDP. 2005. Millennium Development Goals Country Report: Sri Lanka. Colombo.

Table 3: Percentage of Population with Access to Improved Water Sources and Sanitation District Percentage Access to Improved Percentage Access to Water Sources (2001) Improved Sanitation (2002) Colombo 95.8 96.2 Gampaha 90.9 96.5 Kalutara 84.1 95.3 Kandy 82.6 95.7 Matale 79.2 95.4 Nuwara Eliya 68.8 79.9 Galle 81.8 94.5 Matara 78.2 96.6 Hambantota 85.8 95.1 Kurunegala 85.9 90.3 Puttalam 92.5 80.8 Anuradhapura 83.5 83.2 Pollonnaruwa 76.7 92.4 Badulla 68.6 92.2 Monaragala 64.6 88.6 Ratnapura 58.6 94.7 Kegalle 69.8 94.7 Jaffna 94.1 81.0 Killinochchi n.a. n.a. Mullaitivu n.a. n.a. Mannar 21.2 71.0 Vavuniya 67.8 74.0 Ampara 85.5 75.1 Batticaloa 96.6 57.0 Trincomalee 74.1 72.0 n.a. = not available. Source: UNDP. 2005. Millennium Development Goals Country Report: Sri Lanka. Colombo. 4

Table 4: Access to Safe Drinking Water by Province–Households (Percent)

Province 1993 1994 2001 Western 85.7 84.1 91.5 Central 70.5 62.5 78.3 Southern 66.9 62.1 80.5 Northern n.a. n.a. n.a. Eastern n.a. n.a. n.a. North Western 81.7 74.9 87.9 North Central 67.1 69.1 80.5 Uva 62.7 47.3 67.9 Sabaragamuwa 50.2 47.5 63.8 Sri Lanka 74.1 68.4 82.0 n.a. = not available. Source: UNDP. 2005. Millennium Development Goals Country Report: Sri Lanka. Colombo.

5. Prior to 1975, the responsibility for the provision and management of water supply and sanitation services was divided among several agencies, and two key agencies were the Water Supply Division of the then Ministry of Irrigation, Power and Energy for the water supply sector and the Ministry of Health for the sanitation sector. The provision of piped water and public wells was mainly the responsibility of local authorities. In 1974, through an Act of Parliament, NWSDB was established under the then Ministry of Irrigation, Power and Highways, to become the primary agency responsible for water supply and sanitation in the country. Consequently, based on the NWSDB Act (1974), institutional arrangements for the provision and management of water supply and sanitation services changed. Several major urban water supply schemes operated by local authorities were taken over by NWSDB to improve coverage and service.8 Until 2006, NWSDB was functioning under the Ministry of Urban Development and Water Supply. The Ministry has been the lead policy making body for the development of the water supply and sanitation sector. It has also been the lead executing agency for all publicly-financed development projects in the sector, including foreign-funded projects. While NWSDB is the chief implementing agency for water supply and sanitation projects, the Ministry of Urban Development and Water Supply has been involved in the development of the sector in the rural areas. Recent changes and expansion of the number of government ministries in Sri Lanka (January 2007) will have implications on portfolio and subject responsibilities of the respective ministries (cabinet, non-cabinet, and deputy ministers). With this change in January 2007, NWSDB now reports to the Ministry of Water Supply and Drainage.

6. NWSDB operates a total of 287 water supply schemes which service 38.6% of the population: 28.6% with piped water supply and 10% with hand-pumped tubewells.9 The rest of the population relies on water systems operated by communities, local authorities, and individual households, including wells and rain harvesting systems. NWSDB promotes the transfer of responsibility for operation and maintenance of small urban and rural water supply schemes to local authorities and community-based organizations. From 1995 to 2004, NWSDB increased its annual water production capacity from 275 million cubic meters (m3) to 367 million m3. Of this total production, the Greater Colombo Water Supply Scheme accounts for 60% through three production centers (Ambatale, Labugama, and Kalatuwawa). The remaining 40% is produced in various regional centers: North Central and North Western (4.8%), Central and Sabaragamuwa (12%), Western (6.3%), Southern and Uva (12.7%), and North and East (4.2%). Water consumption is dominated by the Greater Colombo area with annual consumption of

8 Stated under Part III of Law No. 2 of 1974, which is also known as the Board Act. 9 NWSDB. 2004. Overview of the National Water Supply and Drainage Board. Colombo. 5

137.7 million m3, while each of the remaining five regional centers recorded annual consumptions ranging from 10 to 28 million m3.

7. Evolving Sector Challenges. A persistent challenge facing the water supply and sanitation sector has been the large rural-urban disparity in the level and quality of services provided to urban and rural populations. Although major progress has been achieved in improving access to safe water in urban areas, coverage in rural areas remains far behind. Actual water supply and sanitation coverage in conflict-affected areas in the North and East is not accurately known and available data are often unreliable. While NWSDB has a mandate to implement water development projects in urban and rural areas, it has primarily concentrated its interventions in densely populated areas. However, NWSDB is also moderately active in rural areas, attempting to strengthen water supply services by establishing rural water units in all regional support centers. As a line ministry for water supply, the Ministry of Urban Development and Water Supply implements rural water projects.

8. Although there are provisions10 in the NWSDB Act (1974) for levying charges for the supply of water and sewerage services, water tariff was not introduced in the country until 1982.11 Since 1982, several tariff revisions had been effected. The first tariff revision was effected in April 1990, followed by major tariff revision in January 1994. Subsequently, two tariff revisions followed in 1997, and one revision each in 1998, 1999, 2001 and 2002. This reflected an increasing consciousness of the need for cost recovery and necessary tariff adjustments. The most recent revision to the water tariff was made in March 2005. The water tariff structure in Sri Lanka is applied uniformly nationwide. It was largely based on recovery of recurrent costs (primarily for operation and maintenance), plus either debt service or depreciation, whichever is higher. NWSDB plans to introduce a tariff policy that aims for full recovery of recurrent costs plus debt service and depreciation costs. Nevertheless, tariff adjustment cannot be easily effected, as it involves processes which are highly politicized. In order to make water supply affordable to poor households, a lifeline tariff is defined for a minimum quantity of water for domestic consumers. This lifeline tariff is applied to all households for their first 15 m3 of monthly water consumption.12 About 75% of domestic consumers belong to the lowest consumption slab of less than 15 m3 per month. For non-domestic users, average tariffs amount to SLR50 per m3. In effect, non-domestic users subsidize household consumers of water.13

9. As part of government policy, the Government uses NWSDB as a development agent to provide water supply to the public. In the context of this role, NWSDB depends on the Government for capital investments through concessionary loans. The administration and management of NWSDB has undergone progressive transformation aimed at achieving greater operational efficiency of regional support centers. Operational functions (including planning and design of development works) have been gradually delegated to regional support centers. While overall revenue collections are managed at the NWSDB head office (Colombo), financial administration and management are gradually devolved to the regional support centers. Regional support centers independently administer their operation and maintenance budgets,

10 This is stated under Section 84, Part IV of the NWSDB Act. 11 The Act under Section 25 has a provision for the free use of water, although this only refers to standpipe sources and only for domestic purposes. With regard to tariff setting, the Act states that the Board from time to time with the approval of the Minister may fix the rates and charges to be levied. 12 Based on the water tariff of 1 March 2005, consumption of the first 10 m3 of water is charged at a rate of SLR1.25 per m3, and the next 5 m3 at SLR2.50 per m3. Consumption of more than 15 m3 is charged at varying rates: SLR8.50/m3 (range 16-20 m3), SLR30.00/m3 (range 16-25 m3), SLR50/m3 (range 16-30 m3), SLR60 (range 16-40 m3), SLR70/m3 (range 16-50 m3), and SLR75 (range 16-more than 50 m3). 13 For non-domestic water consumers, the unit rate ranges from SLR4 to SLR250 per m3 depending on the category of users. 6 while billing and metering are decentralized to the district offices. NWSDB has plans to promote greater accountability and efficiency at regional support center level, with a management and information system capable of accounting expenditures and revenues for each of the water supply system.

10. In accordance with the decentralization policy initiated by the Government in the early 1990s, NWSDB undertook a major initiative to devolve decision-making in investment and operations and maintenance to local governments to encourage their participation, and to increase accountability and sustainability in the provision of water supply and sanitation services. To date, only a few local authorities have accepted this responsibility. Major reasons for the reluctance to accept the transfer of such responsibilities include the (i) limited capacity of local authorities to manage and operate water supply schemes, (ii) limited financial capacity to invest, and (iii) the likely politicization of the administration of such schemes. Local authorities have many administrative functions, and they are not specialized agencies for water supply and sanitation services. NWSDB encouraged the transfer of management of water supply schemes with less than 1,000 connections to community-based organizations to minimize operations and maintenance costs, while the ownership of assets would remain with NWSDB.

11. There has been modest progress with policy reform since the commencement of reform discussions in the early 1990s. This progress has been influenced by government changes and the concomitant changes in their policy stance. Major policy areas that have been discussed include (i) rationalization of water tariffs and the establishment of an independent regulatory authority; (ii) strengthening of local authorities’ capacity to perform their devolved mandates, particularly for the delivery of water supply and sanitation services; (iii) establishment of policies and procedures for the allocation of water rights; and (iv) participation of the private sector in the provision and management of water supply and sanitation services.

12. With respect to the establishment of a regulatory body, the Public Utilities Commission, a multisector regulator for electricity, petroleum, and water was enacted by Parliament in 2003. However, regulations for the water sector within the framework of the Public Utilities Commission are yet to be put in place. The Water Services Reform Bill was an initial attempt at instituting a coherent policy for the regulation of water service provision, tariff setting, consumer protection, water quality standards, and facilitation of private sector participation in water services. The Water Services Reform Bill was approved by the Cabinet of ministers in mid- 2003, and was subsequently submitted to Parliament in October 2003. However, the Bill was challenged by a public activist on the ground that it did not adequately reflect the mandates and roles of local authorities. The Supreme Court ruled that the Bill should be discussed further with provincial councils and local authorities. Although the Bill was redrafted in December 2003, its approval had been further delayed, and it was subsequently abandoned because of political reasons.14 Further deliberations led to a decision in December 2005, to explore an option to amend the NWSDB Act instead of pursuing a more comprehensive water services reform.

13. In 2003, a draft amendment to the NWSDB Act was prepared and submitted to Parliament. Several clauses were included in the amendments to legally enable NWSDB to (i) facilitate and promote joint venture partnerships subject to the approval of the Minister of Urban Development and Water Supply; (ii) enter into approved water services agreements with operators for the supply of water and sewerage services or with any local authority, operator, and community-based organization; (iii) recover damages caused to the property of NWSDB

14 ADB. 2006. Aide Memoire of the Technical Assistance Review Mission on TA 4049-SRI: Strengthening of the Regulatory Framework for Water Supply and Sanitation (10–16 July 2006). Manila. 7 and costs of water wasted, misused or unduly consumed; and (iv) make acts of pollution of any stream, reservoir, or waterworks an offense. Other changes as specified in the proposed amendment would enable NWSDB to establish and fix rates and other charges for the supply of water and sewerage services with the approval of the Public Utilities Commission. However, the proposed amendment to the NWSDB Act was not signed by the Speaker of the House (Parliament) and consequently not registered in the Official Gazette. With the decision made in 2005 in favor of amending the NWSDB Act, a plan to introduce an amendment to the NWSDB Act is currently being considered.

14. In the context of the management of water resources, there are serious challenges facing the availability and sustainability of water sources for household, commercial, and other competing uses in the future. Scarcity of water for drinking is becoming a serious concern in many parts of the country, particularly in the dry zones and during drought periods. Water contamination and inadequate water quality testing have increased the difficulty for securing safe water sources. Contaminated water sources and poor sanitation in rural areas have contributed to infectious and parasitic diseases among people, particularly young children. Irrigation water is frequently a source of drinking water, and it helps in recharging ground water. In some areas, NWSDB has been tapping water from irrigation canals, and this in some cases has led to conflicts with farmers and other water users. Adequate management of irrigation systems is critically essential to minimize degradation of water resources on which people’s livelihoods depend. The effects of irrigation and the issues related to water logging, salinity, land degradation, ground water depletion, ecosystems, and biodiversity are interrelated. Thus, it has become imperative for the water sector to have a comprehensive policy that can govern the integrated allocation and management of water resources in the country. In 2003, a draft National Water Resources Act and Policy was prepared in response to this pressing issue. However, it has remained under discussion. Given the evolving social and political contexts, there is no clear indication that an agreement can be reached on this subject in the near future.

15. Evolving Government’s Sector Strategies and Priorities. Since Sri Lanka’s independence in 1948, the Government has carried out many programs to develop water resources, and provided part of the population with basic utilities including water supply and sanitation. During the World Water Supply and Sanitation Decade (1980–1990), the Government embarked on an ambitious plan, targeting 100% water supply coverage of urban populations and 50% coverage of rural populations by 1990. However due to financial, physical, and other constraints, these targets were only partially achieved.

16. Subsequently in 2000, in response to the United Nations’ Millennium Development Goals (MDGs),15 the Government renewed its commitment to making water supply and sanitation accessible to all in its poverty reduction strategy. Specific goals of this strategy include (i) provision of safe drinking water to 85% of the population by 2015 and 100% by 2025; (ii) provision of piped water supply to 40% of total population by 2011; (iii) service levels and quality of water to achieve national standards in both urban and rural contexts; (iv) access to adequate sanitation to 93% of the population by 2015 and 100% by 2025; (v) piped sewerage systems to be provided in major urban areas and selected centers; and (vi) standard on-site sanitation to be available to those who are connected to a sewerage system or sanitation scheme. In order to achieve these targets, the Government has placed heavy emphasis on

15 The MDGs were introduced as a yardstick of development achievements, and indexed to benchmark levels in 1990. They include halving income-poverty and hunger; achieving universal primary education and gender equality; reducing infant and child mortality by two-thirds and maternal mortality by three-quarters; reversing the spread of HIV/AIDS; and halving the proportion of people without access to safe water. These targets were set to be achieved by 2015, from their levels in 1990. Available: http://www.un.org/millenniumgoals/ 8 institutional viability and capacity of key sector agencies, including through various institutional programs for NWSDB and local authorities.

17. In 2002 and with the issuance of the Government’s new development policy document,16 the Government renewed its commitment to the sector, emphasizing three key mandates: (i) promotion of full-cost recovery through an appropriate tariff policy, which would be accompanied by reduction and eventual elimination of cross-subsidies among users; (ii) transference of schemes under 1,000 connections to community-based organizations; and (iii) creation of an investment climate conducive to attract private sector participation. These issues were intended to be addressed by policy and sector reforms. The reduction of cross-subsidization of domestic consumers by industrial consumers would make more money available for increasing direct connections to the under-served urban poor.

18. In 2002, the Ministry of Urban Development and Water Supply prepared a draft water supply and sanitation policy to provide guidance to sector agencies (including NWSDB, provincial councils and local authorities), lending agencies, external donors, and community- based organizations involved in the provision of water supply and sanitation services, for the formulation and implementation of strategies and development programs to achieve coverage targets, service quality, and cost recovery objectives of the Government.17 This draft policy document was revised in August 2006 and renamed as national policy on drinking water supply. NWSDB also prepared parallel policies for sanitation and rural sanitation in 2006. The revised policy proposal highlights future direction of developments including the operation and administration of NWSDB. Major points include (i) gradual decentralization of operational functions to regions; (ii) development of a transparent costing system at the regional level; (iii) handing over of operations and maintenance and management of small urban schemes and rural water supply schemes to local authorities and community-based organizations; (iv) setting of a national tariff system to recover recurrent costs, depreciation, and debt service through periodic tariff review; (v) gradual reduction of cross subsidization among domestic and non- domestic users; (vi) effective demand management through the tariff system; (vii) efforts to conserve water and protect water sources; and (viii) sustained research and development program to ensure the quality of water supply and sanitation services.

C. The Country Sector Strategy and Program of ADB

1. ADB’s Sector Strategies in the Country

19. Evolution of ADB’s Sector Strategies. ADB assistance to the water supply and sanitation sector began in the second half of the 1980s, almost two decades since it started its operation (1968) in Sri Lanka. ADB stepped into the sector at the time when the Government’s public investment policy was characterized by heavy capital outlays well beyond the level that domestic resources could meet. Prolonged neglect of operations and maintenance had resulted in the deterioration of physical assets including water supply and sanitation infrastructures. Funding constraints, inadequate operations and maintenance capability, and insufficient cost recovery had contributed to physical deterioration of existing assets.

20. In 1984, the Government realigned its priorities in favor of previously neglected sectors. ADB’s operational strategy in the 1980s responded to this shift in the Government’s approach to development. In light of the inadequacies and weaknesses in the water supply and sanitation

16 Government of Sri Lanka. 2002. Regaining Sri Lanka: Vision and Strategy for Accelerated Development. Colombo. 17 NWSDB. 2006. Draft National Policy on Drinking Water Supply. Colombo. 9 sector, ADB emphasized institutional and financial capacity improvement of sector agencies as part of its development interventions. Specifically for NWSDB, focus was given to improving its institutional and management capacity through consolidation and gradual decentralization of control and decision-making, and the restructuring of the organization from one which was oriented toward design and construction to one which would be strongly oriented toward operation and maintenance.18

21. In the early 1990s, while ADB’s water supply and sanitation sector strategy continued to be guided by the priorities of the Government, the strategy also paid attention to external developments, including the International Conference on Water and the Environment (January 1992), the World Bank/UNDP International Conference on Water Utilities (May 1992), and the evaluation results of 20 years of World Bank-funded water supply projects (June 1992). In formulating ADB’s strategic development objectives in the sector, ADB also referred to the Water Utilities Data Book for the Asia-Pacific region (1993) and took into account identified lessons from ADB-financed water supply projects. The key elements of ADB’s water supply and sanitation sector strategy included (i) promotion of comprehensive water resource management; (ii) conservation of water through the introduction of demand management and reduction of unaccounted water; (iii) integration of water supply and sanitation; (iv) improving the financial viability, operational efficiency, and sustainability of water utilities; (v) promoting more equitable access to water, especially among the poor; and (vi) recognizing water as an economic and social good.19

22. During 1998–2003, with increased experience and continued engagement, ADB’s approach to water supply and sanitation development upheld the thrusts of its previous strategies for Sri Lanka, although during this time the strategy placed more emphasis on secondary towns and geographical areas outside Colombo to improve access of poor people to water supply and sanitation facilities. Accordingly, the strategy underscored the need to ensure the viability of water supply and sanitation facilities in urban centers through the strengthening of their planning, management, and fiscal capacity. To sustain optimum impact of ADB’s assistance and to promote efficiency in the use of resources, ADB’s sector strategy reemphasized the need to introduce policy reforms to complement investments in the sector. Meanwhile, ADB recognized the role of bilateral aid agencies in the sector, and hence it was envisaged that additional analysis would have to be undertaken to determine whether further ADB support for the sector would be warranted. Nevertheless, the strategy ensured continued ADB involvement in the sector.20

23. In 2000, in response to the MDG declaration and the growing demand for improved water supply and sanitation in Sri Lanka, ADB reconsidered its strategy for the sector. ADB’s involvement in the sector has been predominantly in water supply for secondary towns and rural areas. In the 2004–2008 country strategy and program, more focus was placed on improving the operational and financial capacity of existing services and expanding water supply services to new areas. Regarding wastewater, there has been modest ADB involvement in the provision of sanitation in rural areas and drainage in secondary towns.21 Sanitation services are generally

18 ADB. 1986. Report and Recommendation of the President to the Board of Directors on Proposed Loan to the Democratic Socialist Republic of Sri Lanka for Water Supply Sector Project. Manila. 19 ADB. 1993. Report and Recommendation of the President to the Board of Directors on Proposed Loan and Technical Assistance to the Democratic Socialist Republic of Sri Lanka Second Water Supply and Sanitation Project. Manila. 20 ADB. 1998. Country Operational Strategy for Sri Lanka. Manila. 21 ADB’s support for development of sewerage and sanitation services is expected to increase through (i) a plan for ADB to provide a loan in 2007 for Greater Colombo Wastewater; (ii) project preparatory TA 4853-SRI: Small Towns 10 still underdeveloped in Sri Lanka. There is only one urban center, Greater Colombo, which is partly equipped with a sewerage system.

24. Positioning and Coherence of the ADB’s Sector Strategies. The evolution of the country strategy for the water supply and sanitation sector has principally been guided by the evolving development priorities of the country, taking into account key focus areas of donor assistance to the sector. In 1986, when ADB first intervened in the sector, ADB did not have a clear-cut strategy for the sector, although the development approach was based on country- driven initiatives. Fundamentally, the formulation of the sector strategy at that time benefited from aid coordination with development partners. The initial impetus for ADB intervention in the sector transpired from its interaction and coordination with leading development partners in the sector such as the Danish International Development Agency, United States Agency for International Development (USAID), Japan Bank for International Cooperation, Japan International Cooperation Agency, and the World Bank. The initial focus of ADB’s sector strategy complemented the strategic development objectives of Sri Lanka and development partners, including capacity development of NWSDB, rehabilitation and augmentation of water supply and sanitation systems in major urban centers (such as Colombo, Ampara, and Anuradhapura), and the strengthening of service delivery in urban centers and rural areas. Pertinent issues were identified, although the sector strategy could have benefited from more in- depth sector work, risk assessment, monitoring mechanisms, and analysis of the Government’s absorptive capacity.

25. During 1993–1997, the sector strategy continued with the strategic thrust of the previous strategy. With the increasing reliance of the Government on external assistance to finance the growing investment requirements for the sector, ADB recognized the potential major role it could play in the sector. While ADB initially positioned itself in secondary towns and rural areas, leaving Greater Colombo and NWSDB to the World Bank and USAID respectively, and later to Japan Bank for International Cooperation, the introduction of national water tariffs and the withdrawal of USAID from the water supply and sanitation sector in 1991 presented new opportunities for ADB to deepen its presence in the sector.

26. Although ADB’s water supply and sanitation sector strategy (1993–1997) lacked depth to some extent, its formulation was reinforced with lessons from project experiences and recommendations derived from sector studies.22 Coordination with development partners continued through ADB’s participation in aid coordination meetings. Consequently, ADB assistance broadened to include issues related to capacity development of major sector institutions, particularly NWSDB.23 This, in some way, provided ADB with increased leverage to engage the Government in policy dialogues. However, this positioning was not sufficiently supported with analysis of socio-political challenges facing institutional and policy reforms in the sector. The 1993–1997 sector strategy did not have risk assessment and a monitoring mechanism to track the outcomes of planned interventions. Nonetheless, the positioning of the sector strategy (1993–1997) was “partly satisfactory”, and it responded to the sector challenges

and Rural Arid Areas Water Supply and Sanitation Project (for $870,000 approved on 23 October 2006), which focuses on both water and sewerage; (iii) the ongoing Loan 1993-SRI: Secondary Towns and Community-based Water Supply and Sanitation Project, which is intended to provide sewerage and sewage treatment for Batticaloa hospital; and (iv) the proposed Jaffna Water Supply and Sanitation Project, which includes sewerage and sewage treatment for the whole of Jaffna town. 22 These included ADB’s Sector Synthesis of Post Evaluation Findings in Water Supply and Sanitation Sector released in 1994, experiences from the implementation of Loan 817-SRI: Water Supply Project and World Bank- financed Community-based Water Supply and Sanitation Project. 23 ADB. 1997. Report and Recommendation of the President to the Board of Directors on Proposed Loan to the Democratic Socialist Republic of Sri Lanka for the Third Water Supply and Sanitation Project. Manila. 11 at that time. Without a monitorable results-based framework, the strategy was less coherent in its development approach and choices to tackle the sector challenges and issues.

27. Subsequently, ADB’s 1998–2003 water supply and sanitation sector strategy aimed to improve service coverage, enhance cost recovery, and promote self-financing capacity of sector agencies. ADB maintained its focus on secondary urban centers and the concomitant strengthening needed at the local level. The sector strategy stressed the need for additional sector analysis to determine whether additional ADB support would be warranted. Performance monitoring was established for the first time for the sector. Key performance criteria included (i) progress of reforms, (ii) implementation performance of sector investments, and (iii) progress of institutional capacity development. Overall, the 1998–2003 sector strategy was much more reasoned than the preceding strategies, with its cautious stance on sector development. The 1998–2003 strategy was coherent, balanced, and well-positioned. Overall, the positioning of the 1998–2003 sector strategy was “satisfactory”, recognizing the paucity of sound sector analysis upon which the direction of ADB intervention could be based.

28. The MDG declaration in 2000 and the government strategy (2002) provided much of the rationale and justification for ADB’s 2004–2008 water supply and sanitation sector strategy. The renewed commitment of the Government to the sector in light of the progress then with the peace process, as well as with the modest progress with reform processes, had prompted ADB to reconsider its role in the development of the water supply and sanitation sector. On the basis of cumulative experience from past water supply and sanitation projects, economic and sector assessments, policy dialogues with the Government, stocktaking of donor assistance, and donor coordination, ADB consolidated and sharpened its sector strategy. ADB’s uninterrupted support to the sector contributed to a significant buildup of sector knowledge and strong partnership between ADB and the Government. The sector strategy was coherent, responding to growing demand for sanitation and sewerage services in large urban areas as well as water supply and sanitation investment and rehabilitation in conflict-affected areas in the North and East. In anticipation of peace dividends following the ceasefire agreement (2002), ADB responded to reduce disparities in the country by supporting the preparation of Jaffna Peninsula Water Supply and Sanitation Project. However, with the escalation of armed conflict in 2006, this proposed project has been deferred. Given the development contexts and priorities of the country, the positioning of the 2004–2008 water supply and sanitation sector strategy was “satisfactory”.

29. Overall, the positioning of the ADB’s water supply and sanitation sector strategies over the last decade was assessed “satisfactory” (Table 5). This is described in detail in the Appendix of this paper.

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Table 5: Evaluation Rating of the Positioning of Sector Strategies

Criteria for Positioninga Constraints/ ADB’s Comparative Risks and Sufficient Government’s Advantage and Focus/ Adjustment/ Basis for Absorptive Partnership with Selectivity Monitoring Weighted Sector the Capacity and Other Development and Long-Term Mechanisms to Average of Strategy Strategy Ownership Partners Synergies Continuity Achieve Targets All Criteria 1993–1997 1 (PS) 1 (PS) 2 (S) 2 (S) 1 (PS) 0 (US) 1.17 (PS) 1998–2003 2 (S) 2 (S) 3 (HS) 2 (S) 2 (S) 1 (PS) 2.00 (S) 2004–2008 3 (HS) 2 (S) 3 (HS) 2 (S) 2 (S) 2 (S) 2.33 (S) Overall 1.83 (S) ADB = Asian Development Bank, HS = highly satisfactory, PS = partly satisfactory, S = satisfactory, US = unsatisfactory. a Note: HS = 3 points, S = 2 points, and US = 0. An equal weight is applied to each of the six criteria for positioning and coherence. The ratings are as follows: (i) HS > 2.5, (ii) 2.5 ≥ S ≥ 1.6, (iii) 1.6 > PS ≥ 0.6, and (iv) 0.6 > US.

2. ADB’s Sector Assistance Program

30. ADB’s Sector Assistance Program. Loans and technical assistance (TA) approved by ADB are listed in Table 6. In general, programming for the water supply and sanitation sector assistance had adhered to its corresponding sector strategies. The 1988–1992 sector assistance emphasized support for administrative and institutional development, and promotion of sustainable operation and maintenance. This was pursued through policy dialogues on cost recovery and decentralization of responsibilities to local governments. Subsequently, the 1993– 1997 sector assistance included provisions for water supply and sanitation physical infrastructure development in the Southern region, especially in areas where poverty was still pervasive. Coupled with infrastructure development, policy dialogues promoted domestic resource mobilization, cost recovery, water pricing, improved operation and maintenance, institutional strengthening, and maintenance of financial viability of water supply and sanitation schemes and their operating entities. ADB also promoted private sector participation in investment and operation and maintenance of infrastructure. The dialogue eventually led to the adoption by the Government of a water and sanitation sector policy statement in 1997, which provided an impetus for the 1998–2003 programming of ADB assistance. Consequently, ADB targeted its assistance at (i) promotion of private sector participation in the management of the Colombo water system; (ii) capacity development for intersectoral planning and coordination of water use; and (iii) service expansion through infrastructure development in poor and underserved areas, including unmet needs for improved sanitation. Subsequently, the 2004– 2008 sector assistance continued with the strategic thrust of the preceding water supply and sanitation sector operations to improve sector performance: (i) promotion of an independent regulatory body, (ii) effective decentralization of service delivery to local governments and community-based organizations, (iii) financial sustainability of water supply and sanitation schemes and operating entities, (iv) integration of environmental and social aspects into sector development planning, and (v) introduction of water saving management strategies. These became key distinguishing features of ADB assistance, which combine water supply and sanitation investments with policy dialogues on key areas requiring reforms. Support for demand-driven provision of water supply in rural areas, and increased attention to sanitation and wastewater management were reflected in the 2004–2008 sector assistance program.

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Table 6: Loans and Advisory TAs Approved, 1986–2005

Item 1986–1992 1993–1997 1998–2003 2004–2005 Loans • Loan 817-SRI: • Loan 1235-SRI: • Loan 1993-SRI: • Loan 2201- Water Supply Second Water Secondary Towns and SRI: Local Sector Project Supply and Rural Community- Government (approved 1986) Sanitation Project based Water Supply Infrastructure (approved 1993) and Sanitation Project Improvement • Loan 1575-SRI: (approved 2003) (approved Third Water Supply 2005) and Sanitation Project (approved 1997)

Technical • TA 1150-SRI: • TA 1900-SRI: • TA 3434-SRI: Assistance Rural Water Management Accounting Review of Supply and Strengthening of NWSDB (approved Sanitation Sector NWSDB 2000) Development (approved 1993) • TA 4049-SRI: Planning Strengthening the (approved 1989) Regulatory • TA 1486-SRI: Framework for Water Financial Supply and Sanitation Accounting and (approved 2002) Reporting • TA 4184-SRI: Greater Assistance to Colombo Wastewater NWSDB Management Sector (approved 1991) Review (approved 2003) NWSDB = National Water Supply and Drainage Board; SRI = Sri Lanka; TA = technical assistance.

31. Positioning and Coherence. The sector assistance during the last decade (1996– 2005) had been relevant and responsive to (i) the Government’s development objectives and priorities, (ii) ADB’s water supply and sanitation sector strategies, and (iii) aid coordination with major development partners. The assistance programs have followed a progressive trajectory. Although the 1993–1997 sector assistance had conformed to the sector strategy, the strategy itself was less coherent in its development approach and choices to tackle the sector challenges and issues. Subsequently, the 1998–2003 sector assistance took into account lessons from sector/thematic reviews, and assessment of sector performance. Past project experience, particularly with the preparation of the Third Water Supply and Sanitation Project in 1997, provided valuable inputs to programming of assistance for 1998–2003. The sector assistance program supported the thrusts of the 1998 sector strategy: (i) sector reform, (ii) institutional development, and (iii) service expansion. The sector assistance was also strengthened with increased ADB involvement in policy dialogues. Subsequently, the 2004–2005 sector assistance was further strengthened, taking into account policy issues and experience gained from the Third Water Supply and Sanitation Project.

32. Overall, the positioning of the sector assistance programs over the last decade was assessed “satisfactory” (Table 7).

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Table 7: Evaluation Rating of the Positioning of Sector Assistance Programs

Criteria for Positioninga ADB’s Constraints/ Comparative Risks and Advantage and Adjustment/ Sufficient Government’s Partnership with Focus/ Monitoring Basis for Absorptive Other Selectivity Mechanisms Weighted Sector the Capacity and Development and Long-Term to Achieve Average of program Program Ownership Partners Synergies Continuity Targets All Criteria 1993–1997 1 (PS) 2 (S) 2 (S) 2 (S) 1 (PS) 0 (US) 1.33 (PS) 1998–2003 2 (S) 2 (S) 3 (HS) 2 (S) 2 (S) 2 (S) 2.17 (S) 2004–2008 3 (HS) 2 (S) 3 (HS) 2 (S) 2 (S) 2 (S) 2.33 (S) Overall 1.94 (S) ADB = Asian Development Bank, HS = highly satisfactory, PS = partly satisfactory, S = satisfactory, US = unsatisfactory a Note: HS = 3 points, S = 2 points, PS = 1 point, US = 0 point. An equal weight is applied to each of the six criteria for positioning and coherence. The ratings are as follows: (i) HS > 2.5, (ii) 2.5 ≥ S ≥ 1.6, (iii) 1.6 > PS ≥ 0.6, and (iv) 0.6 > US.

33. Trends and Lending Program. The approved loans and TA grants for the water supply and sanitation sector had closely followed what had been programmed over the last two decades. By 30 September 2006, total approved lending to the sector amounted to $255.3 million for a total of five projects. Subsequently, on 29 November 2006, ADB approved two supplementary loans for a total of $60 million for the Secondary Towns and Rural Community- based Water Supply and Sanitation Project. Loan 817-SRI: Water Supply Project (approved in 1986) was the first ADB-financed project in the sector. This was subsequently followed in 1993 by Loan 1235-SRI: Second Water Supply and Sanitation Project. These two projects are the only completed projects thus far (2006) and both were rated successful at completion. By 31 December 2006, there were three ongoing ADB-financed projects in the sector, the most recent of which is an integrated project (Local Government Infrastructure Improvement Project).24 All five projects have been targeted to areas and populations outside Colombo, including urban and secondary towns in the Central, South and West of Sri Lanka. In 2003, with expansion of services to other regions, two major subprojects (Muttur and Batticaloa) in the East were included under the Secondary Towns and Rural Community-based Water Supply and Sanitation Project. By September 2006, preparation was still underway for a proposed Jaffna Peninsula Water Supply and Sanitation Project. However, the sharp escalation of armed conflict in the North (including Jaffna Peninsula) and East during 2006 has deferred processing and appraisal of this project.

34. ADB-financed water supply and sanitation projects have been subjected to loan covenants to ensure cost recovery. The first (Loan 817-SRI) and second (Loan 1235-SRI) projects emphasized tariff collection efficiency, reduction of unaccounted water and non- revenue water, and revisions of water tariffs to ensure recovery of operations and maintenance costs. With the third project (Loan 1575-SRI: Third Water Supply and Sanitation Project), loan covenants began to have strong orientation towards policy reforms. Compliance with loan

24 ADB. 2005. Report and Recommendation of the President to the Board of Directors on Proposed Loan and to the Democratic Socialist Republic of Sri Lanka for Local Government Infrastructure Improvement Project. Manila. The project involves improving, upgrading, and expanding urban infrastructure facilities and basic urban services including community water supply, urban roads, urban drainage and sewerage, solid waste management, and small-scale community infrastructure in at least 68 local authorities. The main technical options for water supply under the project are (i) groundwater wells with hand pumps, (ii) rainwater harvesting, (iii) piped systems with overhead tank, and (iv) gravity pipe system. Typically, 20–50% of the local town population do not have water supply services. Extension and rehabilitation of the existing piped supply and construction of new schemes to serve the remaining 20–50% of the population through spring and tubewell sources will be part of this project. 15 covenants had been satisfactory for the first two completed projects, except for the devolution of responsibilities to local authorities. However, with increased emphasis on policy reforms, compliance with loan covenants has become more problematic due to changes in government policy stance and priorities. A covenant that has not been complied with pertains to the adoption of a policy for water resources management.25

35. Trends in Technical Assistance. By 30 November 2006, a total of six advisory TA grants amounting to $1.8 million had been approved. Out of these six TA grants, five had been completed. However, only one TA has a completion report (TA 1900-SRI: Management Strengthening of NWSDB), which was piggybacked to Loan 1235-SRI: Second Water Supply and Sanitation Project. One advisory TA is still outstanding (TA 4049-SRI: Strengthening the Regulatory Framework for Water Supply and Sanitation), which was aimed to develop regulations for the water sector within the framework of the Public Utilities Commission.26 However, this TA has been delayed for more than 2 years due to prolonged deliberations on the Water Services Reform Bill, which was drafted under the TA. By December 2006, this TA had been reactivated with revised terms of reference for fielding consultants.

36. In the context of the policy dialogues in the late 1990s, the Government formulated a national policy for rural water supply and sanitation sector (approved in 2001), which covers the decentralization of water supply and sanitation service delivery to local authorities through participatory approaches. It also delineated the roles of public and private sectors in water supply and sanitation delivery, stressing the role of the Government, provincial councils, and local government authorities as regulators and facilitators of the implementation of sector activities, and the role of community-based organizations and private sector as service providers.27 Meanwhile, policy dialogues relating to regulatory issues are still underway. The Ministry of Urban Development and Water Supply recently drafted a national policy on drinking water supply and a national policy on sanitation, the latter emphasizing the procedures, guidelines and mechanisms for planning and implementing sanitation services for both urban and rural areas. The draft national policy on sanitation highlights the need for consensus building in the development of an institutional framework for implementation of sanitation programs. ADB, supported with advisory TA grants, has been active in pursuing policy dialogues which are complementary to the pursuit of sustainable investments.

37. Factors Affecting Implementation. A key enabling factor in implementing the sector assistance program is the performance and responsiveness of executing agencies, including NWSDB. Since the first ADB-financed water supply project, NWSDB has progressively gained technical and project implementation capacity. Another enabling factor is the sustained and uninterrupted engagement of ADB in the sector. The close coordination between ADB and executing agencies, and major development partners had sharpened ADB’s responsiveness to the evolving needs of the sector within the sociopolitical contexts of the country. Through experience and country knowledge, ADB’s responsiveness contributed to generally satisfactory designs of interventions.28 The continuing commitment of major stakeholders in the sector has facilitated the implementation of the sector assistance. Meanwhile, major hindrances to implementation include (i) weak institutional capacity at the local level, which has constrained

25 Stated in Loan Agreement Schedule 6, para. 16 for Loan 1575-SRI: Third Water Supply and Sanitation Project and Loan Agreement Schedule 6, para. 15 for Loan 1235-SRI: Second Water Supply and Sanitation Project. 26 The TA was approved in September 2003 and initially expected to be completed in February 2004. 27 ADB. 2002. Report and Recommendation of the President to the Board of Directors on A Proposed Loan to the Democratic Socialist Republic of Sri Lanka for Secondary Towns and Rural Community-Based Water Supply and Sanitation Project. Manila. 28 ADB. 2006. Lessons in Capacity Development: Sectoral Studies in Sri Lanka. Manila. 16 the decentralization process; (ii) procedural bottlenecks, due to bureaucratic processes; (iii) overly politicized reforms processes; and (iv) escalation of armed conflict in the North and East which has delayed and interrupted project preparation and implementation since June 2006. The continuing conflict, if unabated, can pose serious development constraints and challenges to the implementation of programmed development in the affected areas. The continuing armed conflict can derail plans to reduce development disparities in the country. Development approaches under the assumption of post-conflict conditions for rehabilitation and expansion of water supply and sanitation services may not be suitable for in-conflict situations that have affected parts of the North and East. Should conflict conditions persist without a credible peace process to reach more stable situations, implementation of ongoing projects and programming for further assistance in the North and East will become increasingly difficult.

D. Assessment of ADB’s Sector Strategy and Assistance Program

38. Relevance. ADB’s strategy and assistance for the sector have been “highly relevant” to the needs and priorities of the country, and aligned with the sector assistance provided by development partners. ADB’s assistance initially focused on urban centers, but later shifted to include smaller towns and rural areas in late 1990s. This shift was relevant to the proclaimed priority of the Government to meet its MDG targets in order to bridge the rural-urban gap in water supply and sanitation services. The Third Water Supply and Sanitation Project (approved in 1997) piloted the development of water supply and sanitation systems by local authorities through the mobilization of community-based organizations. This model has been subsequently expanded under the Secondary Towns and Rural Community-based Water Supply and Sanitation Project. The shift toward a broader development approach under the Third Water Supply and Sanitation Project was responsive to the sector requirements as evidenced by the integration of (i) reform initiatives and innovations, (ii) community level awareness campaigns, and (iii) local level participatory development in the design of the project.

39. ADB sector assistance has also addressed long-standing institutional shortcomings, which had been at the heart of ADB’s 1993–1997 and 1998–2003 sector strategies. Projects have been generally well-designed, with policy conditions covenanted through the respective loan agreements to ensure sustainability of the investments. In response to generally slow progress at the reform front, projects have pragmatically focused on modest and progressive measures to ensure operational efficiency and financial viability of water supply and sanitation schemes. This was addressed through ongoing assistance to NWSDB to enhance its corporate planning, and institutional strengthening of local authorities to improve operation and management of the schemes which have been devolved to them.

40. Effectiveness. The sector assistance has been “effective” in terms of attaining outcomes against the objectives to provide greater access to improved water supply and sanitation services. Reasonably reliable water supply services have been provided to populations in urban and rural areas outside the Greater Colombo area. The two completed projects have benefited 600,000 people through the rehabilitation and expansion of 27 water supply schemes. About 30,000 people have benefited from improved sanitation under the Second Water Supply and Sanitation Project. While the project designs for the two completed projects have assumed a 2% population growth in the project areas, they did not adequately allow for potential expansion of services beyond the boundaries for which the schemes were originally planned. Population increases due to urbanization added to the burden, while planning and design of water supply schemes did not fully take into account rapid population growth due to in-migration and changes in boundary demarcations. Consequently, the water supply 17 schemes faced significant stress on their distribution capacities which necessitated further rehabilitation and upgrading.29

41. According to NWSDB, about 1 million people in the rural areas and 0.4 million people in urban centers gained access to water supply under the Third Water Supply and Sanitation Project. The ongoing Secondary Towns and Rural Community-based Water Supply and Sanitation Project has targeted 969,000 people for water supply services, and 171,500 people in urban areas for improved sanitation. Modest gains have been achieved in institutional strengthening and capacity development since the first ADB-financed project. For example, NWSDB has improved its capacity to implement projects, benefiting from grant-financed assistance to develop financial reporting and management systems. However, operation and maintenance capacity of schemes and sector development planning still face challenges. Water resource management is generally deficient, despite a grant-financed assistance and a project component to develop comprehensive water resource management under the Water Resources Management Project (Loan 1757-SRI). Nevertheless, ADB assistance has contributed to significant achievements in several areas. NWSDB has commenced to outsource metering, billing, and tariff collection in partnership with the private sector in Greater Colombo as part of its cost reduction and staff rationalization program. NWSDB has introduced more commercialized practices through its 2006 corporate plan. Institutional strengthening at the local level meanwhile has initially progressed at a slow pace, but this has gained momentum under the Third Water Supply and Sanitation Project and Secondary Towns and Rural Community-based Water Supply and Sanitation Project. Table 8 shows NWSDB performance for the last 5 years.

Table 8: National Water Supply and Drainage Board Performance Indicators

Indicator Definition 2002 2003 2004 2005 Q1 2006 1. Cubic Meter Billed (%) Consumption/Production 66 65 66 66 65

2. Collection Rate (%) Collection/Billing 97 109 110 99 91

3. Accounts Receivables a. Private (days) 60 days 60 days 60 days 60 days b. Government (days) 65 days 65 days 65 days 65 days

4. O&M Staff to Connection Number of O&M 7.94 7.40 6.90 6.61 6.49 Ratio Employees/1,000 Connection

5. Electricity Used (%) Total Electricity Cost/Total 28 29.5 26 24.05 24.05 O&M Expenditure

6. Maintenance Expense Total Maintenance Cost/Total 5 5.1 6.3 5.65 4.7 (%) O&M Expenditure

7. Establishment Expense Total Establishment Cost/Total 9 9.5 10.6 11.13 10.21 (%) O&M Expenditure

8. Rehabilitation Expense Total Rehabilitation Cost/Total 17.1 11 4.4 3.96 1.63 (%) O&M Expenditure

9. Debt-Service Coverage Profit (loss) Before Debt 0.46 0.52 (0.33) n.a. n.a. Service/Debt Service (interest payment + capital repayment)

29 NWSDB. 2002. Working Paper 4.1: Review of 27 ADB-Assisted Water Supply Schemes (1986–2000). Colombo. 18

Indicator Definition 2002 2003 2004 2005 Q1 2006 10. Net Profit (loss) n.a. (134.3) (836.5) (91.9) n.a. (in SLR million)

11. Accumulated Loss n.a. (1,387.7) (2,363.1) (2,635.0) n.a. (in SLR million)

12. Operating Ratio (%) n.a. 79 92 76 n.a. n.a. = not available, O&M = operation and maintenance. Sources: (i) Corporate Planning Division, National Water Supply and Drainage Board. (ii) ADB. 2002. Report and Recommendation of the President to the Board of Directors on A Proposed Loan to the Democratic Socialist Republic of Sri Lanka for Secondary Towns and Rural Community-Based Water Supply and Sanitation Project. Manila (Financial Management and Institutional Assessment [Supplementary Appendix M]).

42. Efficiency. ADB has contributed to modest progress in sector policy development through loan covenants and institutional capacity development. The Third Water Supply and Sanitation Project provided support for policy development. Recently, ADB assistance gave more prominence to institutional development through the Secondary Towns and Rural Community-based Water Supply and Sanitation Project. In terms of economic returns, all completed projects proved to be viable, and rehabilitated systems have been maintained and further enhanced. For the first (Loan 817-SR1) and second (Loan 1235-SRI) projects, least-cost options contributed to affordable water services. For the Third Water Supply and Sanitation Project and the Secondary Towns and Rural Community-based Water Supply and Sanitation Project, the economic internal rates of return (EIRRs) on investments were estimated at appraisal to range from 12% to 17% for the subprojects. This range of EIRRs could be achieved, assuming no major cost overruns and on time completion of projects within the expected benefits. However, there are significant risks facing project implementation due to escalation of armed conflict (North and East), risks to doing business in the country and their effects on project costs, and political interference. Projects had incurred cost overruns as a result of underestimation of project costs at appraisal. For example, with the first project (Loan 817-SRI), actual project costs were 18% higher than appraised costs, a situation that led to the reduction in the number of subprojects. The remaining subprojects were implemented under the second project (Loan 1235-SRI). The project completion report of the Second Water Supply and Sanitation Project (Loan 1235-SRI) emphasized that funds for physical contingencies should have been provided with more realistic recognition of cost estimation risks. Subsequently, the Third Water Supply and Sanitation Project and the Secondary Towns and Rural Community- based Water Supply and Sanitation Project also experienced substantial cost overruns. In 2006, transfer of surplus loan proceeds from another project was effected to cover cost overruns of the Third Water Supply and Sanitation Project.30 Two supplementary loans (total $60 million) were approved in November 2006 to cover the cost overruns of the Secondary Towns and Rural Community-based Water Supply and Sanitation Project. Reestimated EIRR for the Third Water Supply and Sanitation Project remained above 12% while the average EIRR for the Secondary Towns and Rural Community-based Water Supply and Sanitation Project was reestimated at 10%. Implementation delays due to procedural bottlenecks have impacted negatively on the delivery of project outputs. Physical activities in some cases were delayed because of encumbrances during preconstruction processes such as in the preparation of detailed designs, tendering and bid evaluation, and awarding of contracts. These delays resulted from a number of factors including unforeseen events such as the tsunami of December 2004, the resurgence

30 On 11 October 2006, ADB approved the transfer of surplus funds from Loan 1632-SRI: Urban Development and Low-Income Housing Project to Loan 1575-SRI: Third Water Supply and Sanitation Project, amounting to $5.1 million (equivalent of SDR3,448,278 million). 19 of armed conflict in the North and East, inadequate feasibility assessments, and delayed approvals of contract awards. Overall, ADB’s sector assistance was assessed “less efficient”.

43. Sustainability. Overall, the sustainability of the outcomes derived from ADB’s sector assistance was assessed “likely”. Sustainability of completed and ongoing interventions to some extent depends on the commitment of stakeholders to the overall development of the sector. The financial viability of NWSDB and local authorities is a key measure of financial sustainability. Since the issuance of the national policy for rural water supply and sanitation sector in 2001 mandating the decentralization of water supply and sanitation services, capacity development has broadened beyond the strengthening of NWSDB. The two ongoing projects (Third Water Supply and Sanitation Project and Secondary Towns and Rural Community-based Water Supply and Sanitation Project) include actions aimed at (i) strengthening the ownership of beneficiaries and end-users of water supply systems; (ii) strengthening the capacity of local authorities to develop and manage such systems; and (iii) assisting beneficiaries in their operation and maintenance. Considerable progress has been attained at this front under the Third Water Supply and Sanitation Project and a similar design has been adopted for the Secondary Towns and Rural Community-based Water Supply and Sanitation Project. With respect to NWSDB, complementary measures have been introduced to improve its operational and financial viability, albeit with moderate achievements to date. Under the Second Water Supply and Sanitation Project, a TA ($552,000) was attached to strengthen the management of NWSDB. This was followed by further assistance to strengthen the regulatory framework for water supply and sanitation services to rationalize the determination of water and sewerage tariffs and to encourage greater participation from the private sector in the operation, maintenance, and management of water supply and sanitation schemes. However, due to changes in policy priorities of the Government and the current policy stance against privatization of public utilities, reforms toward increasing the participation of the private sector have stagnated. In many quarters, privatization has been confused with public-private partnerships, and thus, the policy stance against privatization has slowed efforts to explore options for public- private partnerships.

44. The highly politicized operating environment affecting public utility services in Sri Lanka inevitably influences the water supply and sanitation operations. External interference in the management of water supply services at the system level is pervasive. There are cases where water systems are expanded beyond their technical capacities to the detriment of the systems, apparently in response to demand made by local authorities and political figures. In the meantime, there have been progress and renewed efforts to (i) improve the operational and financial efficiencies of NWSDB, and (ii) promote the involvement of community-based organizations in the management and operation of small urban and rural water supply schemes. The Secondary Towns and Rural Community-based Water Supply and Sanitation Project supported the implementation of the NWSDB’s corporate-strategy. ADB reviews biannual performance indicators and discusses with NWSDB various means to achieve its objectives by spelling out feasible mid-term targets of NWSDB in terms of key performance parameters: (i) water supply and sanitation coverage; (ii) operational efficiency measures including targeted reductions in non-revenue water and improved service levels; (iii) reduced staff-to-connection ratios, energy efficiency initiatives, and treatment process efficiency; (iv) improved collection efficiency and simultaneous reduction in accounts receivables; and (v) increased frequency of training and public awareness campaigns. These efforts are necessary for improving the operational efficiency and financial sustainability of the water supply and sanitation systems.

45. Impact. The impact of the sector assistance over the last decade is “substantial”. Based on an impact evaluation study conducted in 2003, which included Sri Lanka as a case study, 20 water supply and sanitation projects have achieved considerable success in physical terms and their functions.31 This case study serves as a proxy assessment of the effects of completed projects. Findings from field surveys in three towns in Sri Lanka (Awissawella, Weligama, and Diyatalawa) showed that service coverage had expanded significantly under the Second Water Supply and Sanitation Project. Household connections in piped-schemes had increased significantly while standposts in these areas were gradually phased out, which meant that people had increasingly gained access to improved water sources. Quality of water was found to be satisfactory as a result of improved water treatment capacity. However, in some areas, people expressed displeasure because of the limited hours of water supply. This situation was reported to be particularly difficult for poor households because they could not afford to purchase and install tanks with which they could store water. This had gender implications because unreliable water service hours prevented girls and women from engaging in other productive activities as they were required to spend time fetching water for their households. Consistent with findings presented in other documented case studies, sanitation was given lower priority than water supply services, partly because of unwillingness of many households, particularly the poor to pay for sanitation and sewerage services. Visits to selected sites of completed projects (Loan 817-SRI and Loan 1235-SRI) by the Operations Evaluation Mission (August–September 2006) indicated that water supply systems were generally well-maintained, and had been further upgraded following the rehabilitation under the ADB-financed projects. Household consumers were found to be generally satisfied with the water supply services, although the water supply was not generally available for 24 hours a day. In some cases, household connections were expanded beyond the design capacities of the individual water supply systems, and such expansions had reduced the reliability of water supply. Political interference has often been cited as a major reason for the expansion of water systems beyond their capacity.

46. Overall Rating. Based on the evaluation criteria of relevance, effectiveness, efficiency, sustainability and impact, the overall performance of ADB’s sector strategy and assistance to the water supply and sanitation sector is rated “successful” (Table 9).

Table 9: Performance Ratinga of ADB’s Strategy and Assistance Program to the Water Supply and Sanitation Sector

Rating Relevance Effectiveness Efficiency Sustainability Impact Overall Rating Score 3 4 1 4 4 16 Rating Highly Relevant Effective Less Efficient Likely Substantial Successful a The rating categories for the five evaluation criteria are as follows: (i) Relevance: highly relevant (3 points), relevant (2 points), partly relevant (1 point), and irrelevant (0 point). (ii) Effectiveness: highly effective (6 points), effective (4 points), less effective (2 points), and ineffective (0 point). (iii) Efficiency: highly efficient (3), efficient (2 points), less efficient (1 point), and inefficient (0 point). (iv) Sustainability: most likely (6 points), likely (4 points), less likely (2 points), and unlikely (0 point). (v) Impact: high (6 points), substantial (4 points), modest (2 points), and negligible (0 point). (vi) Overall rating: highly successful (20 points and above), successful (16–19 points), partly successful (11–15 points), and unsuccessful (10 points or less). Source: ADB. 2006. Guidelines for the Preparation of Country Assistance Program Evaluation Reports. Manila.

E. ADB’s Performance in the Sector

47. For the two completed projects, the project completion reports noted satisfactory performance of ADB as a development partner in the sector.32 Regular review missions were

31 ADB. 2003. Impact Evaluation Study on Water Supply and Sanitation Projects in Selected Developing Member Countries. Manila. 32 (i) 1995. ADB. Project Completion Report of the Water Supply Sector Project. Manila. 21 fielded for monitoring and administrative purposes. Review missions have been generally responsive to emergent implementation issues that arose.

48. Interviews with government and project personnel indicated the following:

(i) ADB personnel were often unable to devote adequate time for extensive discussions during a single review mission. Repeated missions and sustained efforts provided continuity and strong ADB presence in the water supply and sanitation sector. (ii) The Sri Lanka Resident Mission of ADB frequently could not directly provide timely guidance and assistance to the implementing agencies primarily because approvals were required from ADB Headquarters. Such situations often arose in administrative and procedural matters related to procurement and contract awards, which had caused delays in project implementation. (iii) The time taken for mail correspondence and decision making has been cited by government officials as an area for ADB to improve. Delegation of greater responsibilities to the resident mission was cited by government officials as a potential way to improve ADB’s responsiveness and client orientation. (iv) Overall, executing agency staff and government project personnel have found ADB to be an effective partner because of its approach in providing assistance to the sector, which combines physical development and policy interventions aimed at aid effectiveness and sustainability of outcomes.

F. Identified Lessons

49. Several identified lessons from ADB’s operations in Sri Lanka in the water supply and sanitation sector include the following. While these lessons are well-known, and some of these have been incorporated into ongoing and proposed projects, continued attention to these is required for improving ADB operations in the future.

(i) While the two completed projects (which involved mainly the rehabilitation and extension of existing water supply schemes in urban centers) provided significant benefits to the project areas through increased connections and improved production capacity, they have been less focused in bridging the rural-urban gap in access to water supply. (ii) Issues arising from competing water uses have not been addressed to date through an effective integrated water resource management, thus requiring a mechanism for an effective coordination and policy discussion among users in the future. (iii) Extensive and thorough investigations of potential project sites need to be carried out during project preparation and design to the extent possible to ensure appropriateness of designs. Experience shows that design shortcomings had led to significant implementation delays. (iv) Inadequate information and poor cost estimates (partly due to unforeseen circumstances) have led to underestimation of project costs. Equally important is adequate consideration of macroeconomic conditions to anticipate the likely effects on project costs of general price increases and exchange rate fluctuations. Under adverse conditions such as the lingering conflict conditions and associated risks to project implementation, higher provision for contingencies

(ii) 1999. ADB. Project Completion Report of the Second Water Supply and Sanitation Project. Manila. 22

should be budgeted because of the associated price premiums attached to riskier operating environment. (v) Handover of management of water schemes to local authorities and community- based organizations require continued support during transition and follow-up period to ensure the sustainability of such schemes. Capacity development efforts need to include not only technical aspects of operations and maintenance but also financial management, water demand management through public awareness campaigns, and protection of water sources including water conservation. (vi) While tariff adjustments have been effective to some extent in recovering a large portion of operations and maintenance costs, they are generally insufficient for reinvestment and replacement of assets. (vii) Water tariff, as it is presently structured, is unlikely to be an effective way for lifeline support and curbing water demand among household consumers. A lifeline tariff for consumption of water of less than 15 m3 is universally applied to all consumers. There is still a high subsidization among domestic and non- domestic water users. (viii) Traditional approach to least-cost options for planning of water supply and sanitation projects should take into account a more integrated approach, including supply and demand considerations so as to achieve a more sustainable resource use. Water demand-side management needs to be improved especially in water scarce areas. (ix) The problem of high incidence of non-revenue water can be resolved by a combination of technical remedies (i.e., pipe replacement and meter installation) and improvements in the broader managerial and organizational aspects of water service delivery. Benchmarking through the setting of operational performance targets should be encouraged. (x) Better linkage between health outcomes and water supply and sanitation should be promoted in water project development through inclusion of sanitation, hygiene and health promotion programs in project design (this is already part of the Secondary Towns and Rural Community-based Water Supply and Sanitation Project and the proposed Jaffna Peninsula Water Supply and Sanitation Project). Greater links and coordination with civil society organizations and government health services are needed to attain health outcomes more effectively. At the household consumer level, these key dimensions to promote health outcomes are not always evident. (xi) Community-based approach in rural water supply systems can be an effective tool to enhance customer roles in planning and implementation of projects, and to promote greater ownership, which is an important aspect to ensure sustainability. Participation of women in decision-making can also be better encouraged through this approach. (xii) Adequate attention should be given to capacity development at the community level to ensure greater sustainability of water facilities. (xiii) Public awareness campaigns to educate consumers regarding their rights and responsibilities, emphasizing that water is scarce and is an economic good, should be promoted to address the widely held perceptions of the people that the Government provides water to the people at no cost. This awareness campaign can complement an effective use of tariffs for cost recovery. (xiv) ADB’s uninterrupted support to the sector contributed to a significant buildup of sector knowledge, trust, and strong partnership between ADB and the Government. 23

G. Future Challenges and Opportunities

50. Although significant improvements have been achieved over the years in the sector, substantial amount of resources is still needed to bridge the rural-urban gap in terms of access to safe water and adequate sanitation. For ADB as a development partner in the sector, areas to consider for future assistance may include the following. Some of these have been incorporated into the ongoing projects.

(i) Expansion of water supply and sanitation services to underserved areas, particularly rural and conflict-affected regions through investments in physical infrastructures and promotion of sustainable operations and maintenance, once more stable post-conflict situations are secured. In the meantime, small-scale and low technology improvement measures may be considered for conflict- affected areas to increase self-reliance where large infrastructure investments may not be feasible.

(ii) Continued efforts to improve self-financing performance of operating entities through the implementation of sector reforms covering issues related to regulations, cost recovery, commercial discipline of service agencies, and domestic resource mobilization.

(iii) Continuing policy dialogue on integrated water resource management to address issues related to competing uses of water, conflict management, and sustainable water resources management.

(iv) Continuing support for capacity development for rural communities to enhance technical, managerial, and operational skills, which are required for the sustainable maintenance of small rural water supply schemes.

(v) Continuing support for awareness campaigns among users and beneficiaries to build confidence in the communities on the viability of water supply and sanitation schemes, and also to increase their awareness on the merits of water conservation, and the important linkage between water supply and sanitation and health outcomes.

(vi) Enhancement of capacity for monitoring and evaluation of development results in the water supply and sanitation sector.

24 POSITIONING/COHERENCE OF ASIAN DEVELOPMENT BANK’S WATER SUPPLY AND SANITATION SECTOR STRATEGIES IN SRI LANKA

CAPE PERIOD Appendix Criteria for 1988–1992 1993–1997 1998–2003 2004–2008 Positioning/Coherence Country Strategy Country Strategy Country Strategy Country Strategy Basis for the sector strategy • The Special Aid Meeting • While there was still no • The primary basis for the • The sector strategy was for Sri Lanka in 1987, clear-cut strategy for the sector strategy was based on policy dialogues, which gave emphasis to sector, the basis for identified lessons from aid coordination meetings, the Government’s sector intervention was previous project selected ETSW, and reconstruction and reinforced by identified experiences. consultations with rehabilitation program, lessons and • The strategy recognized stakeholders. provided the impetus for recommendations the need for further sector assistance to the sector. derived from project work to determine the role experience and existing that ADB would play in the studies, including ADB’s sector. Sector Synthesis of Post Evaluation Findings in Water Supply and Sanitation Sector (1994).

Government absorptive • Absorptive capacity was • Absorptive capacity was • The strategy recognized • The 2004 sector strategy capacity and ownership broadly discussed, considered for the the limited absorptive recognized the reliance of although it was overall strategy but was capacity of the country the Government on recognized that cutbacks not referred to directly at given the continuing fiscal external sources of funds in public expenditure the sector level. discipline that the for the financing of could potentially affect • Ownership of the sector Government would have to projects in the public spending for social agenda was not directly exercise to arrest the sector. infrastructures and addressed in the severe external debt. • Ownership of the overall services. strategy. • Ownership of sector development plan was • There were no specific strategy was recognized in demonstrated in the discussions on absorptive the 1998 country strategy process of country capacity or project given the extensive strategy and program ownership. participation of the preparation. Accountability Government and other and ownership was stakeholders during its established through formulation. consultations, dialogues, fora, and agreements leading to the formulation of the country strategy and program.

ADB’s comparative • There was no direct • Overall the 1993 • The sector strategy • Comparative advantage advantage in the sector and reference to ADB’s strategy emphasized acknowledged the was not highlighted.

CAPE PERIOD Criteria for 1988–1992 1993–1997 1998–2003 2004–2008 Positioning/Coherence Country Strategy Country Strategy Country Strategy Country Strategy harmonization of sector comparative advantage in ADB’s comparative extensive involvement of • Strategy emphasized the strategies with other the sector. advantage in physical other donors in the sector, need to spread assistance development partners • The strategy benefited infrastructure. particularly in the Colombo to areas and subsectors from aid harmonization • In terms of area thereby leaving not previously covered by with other development harmonization with the secondary towns and ADB or other donors.

partners in the sector goals and focus of other other urban centers for • Aid harmonization Appendix such as the World Bank, donor agencies, the ADB intervention. remained an important USAID, and others. strategy remained • Aid coordination still feature of the 2004 sector consistent with the featured strongly in ADB’s strategy both for the thrusts of sector positioning. Overall, ADB’s identification of interventions of intervention complementarities and development partners in complemented both the areas for potential the sector. policy thrusts and the intervention. • The withdrawal of geographic concentration USAID from the sector of sector assistance of in 1991 opened other donors. opportunities for ADB to enter into more policy dialogues in the sector with the Government.

Focus/selectivity and synergies: (i) Issues/challenges • The overall strategy was • The cornerstone of the • The strategy for the water Water Supply addressed designed to support the 1993 Country supply and sanitation • The strategy identified immediate requirements Operational Strategy sector maintained the critical needs in the water of the reconstruction and was the improvement of major thrusts of previous supply subsector including rehabilitation program, an physical infrastructures strategies which were to (i) (i) improving the delivery important aspect of which and rationalization of support the improvement of service by increasing was the restoration of public sector enterprises in service coverage and (ii) the efficiency of NWSDB, major social to allow for more private enhance cost recovery introducing private sector infrastructures. sector participation. and self-financing participation, and • In the water supply and • In the water supply and performance of sector decentralizing sanitation sector, the sanitation sector, efforts agencies through policy management of small- and main challenge identified were targeted at reforms. medium water supply was the inadequate improving sector schemes to local operation and performance by authorities, (ii) improving financial sustainability by

maintenance capability of subjecting public 25 state organizations that enterprises to stricter introducing clear tariff led to the deterioration of commercial discipline, policy, and (iii) developing water supply and removing bureaucratic and implementing a set of sanitation infrastructures. regulatory controls and policies for the allocation

26 CAPE PERIOD Criteria for 1988–1992 1993–1997 1998–2003 2004–2008 Positioning/Coherence Country Strategy Country Strategy Country Strategy Country Strategy Appendix Appendix • The sector strategy also improving the climate of water rights. highlighted the potential for private investments. Sanitation participation of the private • Inadequacy of water • The strategy recognized sector in water supply supply at areas outside the underdeveloped state and sanitation and the Colombo was of the sanitation sector. need to improve recognized as well as • There is a huge gap in the

management of public poor management and provision of sanitation utility enterprises. inappropriate pricing services between urban • One aspect of the policies. and rural areas. approach adopted by the • The strategy called for Government and ADB increasing institutional that had an impact on the capacity and investment water supply and in sanitation and sanitation sector was the wastewater management, curtailment of public especially in dense urban expenditures through areas. rationalization of subsidies and public enterprise recourse to budget support. (ii) Sector focus • The strategy was • In the area of social • ADB maintained its focus • In the water supply unclear on the direction physical infrastructure, on viable secondary urban subsector, the geographic of intervention in the the major strategic centers and the focus of assistance was water supply and choice was not much concomitant strengthening directed at underserved sanitation sector, concerned about the needed at the local level, areas particularly in the although the strategy choice of the subsector as well as the policy conflict-affected areas. emphasized the need to support, but on which reforms initiated under the • Emphasis was also given to strengthen the areas of the country to previous country to sanitation which had institutional capability focus. operational strategy. remained secondary to of publicly-owned • The strategy recognized • The sector strategy also water supply development enterprises to achieve that since Colombo was emphasized support for to date. financial sustainability better served than other integrated water resource in their operations and parts of the country, management. maintenance activities. assistance and interventions would be focused on regions outside Colombo. • To support the project interventions of ADB in the water supply and sanitation sector, policy

CAPE PERIOD Criteria for 1988–1992 1993–1997 1998–2003 2004–2008 Positioning/Coherence Country Strategy Country Strategy Country Strategy Country Strategy dialogues on appropriate pricing policy was considered an important element of the sector strategy for

the medium term. Appendix Emphasis was made on the need for frequent and systematic adjustments in tariffs to ensure the financial viability of key sector institutions, particularly NWSDB.

(iii) Instruments used to • The country • In terms of operational • ETSW was recognized as • The strategy identified address challenges operational strategy did instruments, the lacking for the sector. policy dialogue, lending, not mention specific strategy enumerated • Continuing policy dialogue ETSW, and advisory instruments to address lending program with was also identified as a assistance as the the needs in the water policy-oriented key instrument to bring operational modalities. supply and sanitation covenants, advisory about much-needed sector. There was no technical assistance reforms in the sector, apart reference to any and economic/sector from the continuation of economic and sector work with particular lending and advisory work for the sector. emphasis on water assistance, if warranted. resource management.

Coherence of issues, focus, • At the sector level, the • To promote the poverty • The choice of issues and • The 2004 sector strategy and instruments country operational reduction objective of challenges to address and can be considered strategy was less the Government, the the choice of instruments coherent and well- coherent in terms of strategy accorded to be employed to address positioned, with evidence the direction that would importance to the them lent coherence to the of sufficient analysis of the be pursued. The issues continuance of sector strategy. sector needs and were not clearly development and challenges, and the timely identified without a investments in social identification of areas in clear focus. physical infrastructure, which ADB could especially in potentially play a major 27 underserved rural role. areas. • At the sector level, the analysis of key issues

28 CAPE PERIOD Criteria for 1988–1992 1993–1997 1998–2003 2004–2008 Positioning/Coherence Country Strategy Country Strategy Country Strategy Country Strategy Appendix Appendix and challenges in the water supply and sanitation sector tended to converge at the issue of public enterprise rationalization and strengthening, and the

formulation of appropriate frameworks for tariff setting, which was considered an endemic problem that needed to be resolved.

Long-term continuity of the • Continuity of sector • Continuity of sector • The sector strategy • The 2004 sector strategy sector strategy strategy was not agenda was not explicitly stressed the identified new areas for addressed in the 1988 discussed in the 1993 reconsideration of future potential intervention country operational country operational ADB development although continuity was strategy. strategy. assistance to the sector on not explicitly mentioned. account of the involvement of other donors in the sector as well as the progress of the water supply and sanitation projects at that time, although the strategy still emphasized the continuance of ADB support to the sector, albeit indirectly by focusing on integrated water resource management.

Risk assessments and • Risks were identified at • Risks were identified at • The strategy identified risk • Several risks were monitoring mechanisms to the macro-level but there a broader level, but not factors for the country as a identified for the country achieve the sector strategy’s was not sufficient analysis specifically for the water whole. It did not address as a whole including (i) envisaged results of risks at the sector level. supply and sanitation risks that were specific to continued politicization of • Monitoring mechanisms sector. the sector. reform agenda, (ii) were not identified and • Monitoring systems • Performance monitoring resurgence of civil conflict, addressed in the strategy. were also not was established for the (iii) occurrence of external addressed. first time for the sector. shocks that could lead to

CAPE PERIOD Criteria for 1988–1992 1993–1997 1998–2003 2004–2008 Positioning/Coherence Country Strategy Country Strategy Country Strategy Country Strategy Key assessment criteria dampened domestic included (i) progress of economic conditions, (iv) reforms implementation, possibility of failings (ii) implementation internal to ADB which may performance of sector reduce the impact and

investments, and (iii) efficacy of the strategy, Appendix progress of institution and (v) risk that are building process. associated with the impact of proposed reforms on the poor, which is considered unsettling. • At the sector level, the strategy stated that several benchmarks would be used to monitor sector performance including the accomplishments at the reform front, the extent of private sector participation and the success of ongoing projects, particularly in the rural areas.

Overall Rating Partly Satisfactory Satisfactory Satisfactory ADB = Asian Development Bank; CAPE = country assistance program evaluation; ETSW = economic, thematic and sector work; HS = highly satisfactory; IDA = International Development Agency; NWSDB = National Water Supply and Drainage Board, OEM = Operations Evaluation Mission; PS = partly satisfactory; S = satisfactory; US = unsatisfactory, USAID = United States Agency for International Development. Note: HS = 3 points, PS = 2 points, S = 1 point, and U = 0 point. An equal weight is applied to each of the six criteria for positioning and coherence. The ratings are as follows: (i) HS > 2.5, (ii) 2.5 ≥ S ≥ 1.6, (iii) 1.6 > PS ≥ 0.6, and (iv) 0.6 > US.

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