Report and Recommendation of the President to the Board of Directors

Sri Lanka Project Number: 36173 September 2009

Proposed Loans Democratic Socialist Republic of Sri Lanka: Greater Colombo Wastewater Management Project

CURRENCY EQUIVALENTS (as of 14 August 2009)

Currency Unit – Sri Lankan rupees (SLRe/SLRs)

SLRe 1.00 = $0.0087 $1.00 = SLRs114.8

ABBREVIATIONS

ADB – Asian Development Bank ADF – Asian Development Fund CDTA – capacity development technical assistance CEA – Central Environmental Authority CMC – Colombo Municipal Council DSC – design, supervision, and management consultant EIRR – economic internal rate of return EMP – environmental management plan FIRR – financial internal rate of return IDC – institutional development consultant ICB – international competitive biding IEE – Initial environmental examination LIBOR – London interbank offered rate MLGPC – Ministry of Local Government and Provincial Councils NGO – nongovernment organization NWSDB – National Water Supply and Drainage Board OCR – ordinary capital resources O&M – operation and maintenance PCR – project completion report PIU – project implementation unit PMU – project management unit PSC – project steering committee PPMS – project performance management system QCBS – quality- and cost-based selection

NOTES

(i) The fiscal year (FY) of the Government of Sri Lanka and its agencies ends on 31 December.

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

Vice-President X. Zhao, Operations 1 Director General K. Senga, South Asia Department (SARD) Director H. Kim, Urban Development Division, SARD

Team leader G. An, Urban Development Specialist, SARD Team members H. Austria, Assistant Project Analyst, SARD R. C. Barba, Safeguards Specialist, SARD R. Diamat, Administrative Assistant, SARD T. Gallego-Lizon, Senior Planning and Policy Specialist, Strategy and Policy Department A. Gamaathige, Resettlement Officer, Sri Lanka Resident Mission (SLRM), SARD J. Ghimire, Counsel, Office of the General Counsel H. Ikemoto, Urban Economist, SARD K. Tamaki, Senior Urban Development Specialist, SARD M. Thiruchelvam, Project Implementation Officer, SLRM, SARD F. Tornieri, Social Development Specialist, SARD

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

Page

LOANS AND PROJECT SUMMARY i MAP I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 2 III. THE PROPOSED PROJECT 5 A. Impact and Outcome 5 B. Outputs 5 C. Special Features 8 D. Project Investment Plan 8 E. Financing Plan 9 F. Implementation Arrangements 10 IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 14 A. Project Benefits 14 B. Social and Environmental Safeguards 15 C. Risks 16 V. ASSURANCES 17 VI. RECOMMENDATION 19

APPENDIXES 1. Design and Monitoring Framework 20 2. Problem and Constraints Analysis 23 3. Sector and Institutional Analysis 26 4. External Assistance to the Water and Sanitation Sector 32 5. Outline Structure of Combined Contract 33 6. Detailed Cost Estimates by Financier and by Implementing Agency 35 7. Project Implementation Arrangements 37 8. Implementation Schedule 38 9. Procurement Plan 39 10. Summary Poverty Reduction and Social Strategy 45 11. Summary Short Resettlement Plan 49 12. Summary Initial Environmental Examination (Short) 54

SUPPLEMENTARY APPENDIXES (available upon request) A. Chronology B. Draft Memorandum of Understanding for Inter-agency Sewer Discharge C. Key Features of Combined Contract D. Implementation Responsibilities of Project Management Unit and Other Agencies E. Outline Terms of Reference for Design, Supervision, and Management Consultant F. Outline Terms of Reference for Institutional Development Consultant G. Economic Analysis H. Financial Analysis I. Short Resettlement Plan J. Summary Initial Environmental Examination K. Initial Environmental Examination and Environmental Management Plan

LOANS AND PROJECT SUMMARY

Borrower Democratic Socialist Republic of Sri Lanka

Classification Targeting classification: Target intervention (non-income Millennium Development Goal [TI-M]) Sector (subsector): Water supply and other municipal infrastructure and services (water supply and sanitation) Themes (subthemes): Social development (human development), environmental sustainability (urban environmental improvement), capacity development (institutional development) Location impact: Urban (high), national (medium)

Environment and Social The Project is classified as category B for environment. An initial Safeguards Assessment environmental examination and an environmental management plan were prepared and are summarized in Appendix 12.

The Project is classified as category B for involuntary resettlement. Appendix 11 contains a summary resettlement plan.

Project Description The Project is designed to improve the urban environment and public health for the urban and suburban residents in Colombo through improvements to wastewater management services. The Project will support (i) upgrading the sewerage infrastructure, including pumping stations, sewer pipes, and discharge outfalls; (ii) strengthening institutional and operational capacity in asset management, financial management, operational performance monitoring, environmental regulatory compliance, customer services, and pro-poor sanitation services; and (iii) project management and implementation.

Rationale Colombo is Sri Lanka’s economic and administrative center. The Government, in its Ten-Year Development Framework, 2006– 2016, targets high and steady economic growth and modernization of the capital region as the national growth engine. The Western Region Structure Plan, adopted by the Government as the development plan for the country’s capital region, emphasizes the critical role of basic infrastructure and services, including wastewater management, in sustaining the national economy and improving the quality of life in the Greater Colombo area.

While the Colombo urban area is rapidly expanding, the coverage of the existing public sewerage infrastructure is limited. Most of the system has been run exceeding its technical life and is therefore inefficient and unreliable. Emergency repairs rather than planned maintenance are normal practices. Assets are not inventoried and there is no accurate database on the condition of assets. The customer database is inaccurate and is not regularly updated. Frequent blockages in the system cause flooding in low- lying areas and the uncontrolled overflow has serious environment and public health implications. There is no institutionalized mechanism to monitor operational performance or environmental compliance. ii

Impact and Outcome The expected impact of the Project is improved urban environment and public health for 1.5 million urban and suburban residents in Greater Colombo. The expected outcome of the Project is improved wastewater management services to approximately 645,000 residents within the project area.

Project Investment Plan The investment cost of the Project is estimated at $116.6 million, including taxes and duties of $16.5 million.

Financing Plan The Asian Development Bank (ADB) will provide a loan of $80 million from its ordinary capital resources (OCR) and a loan of $20 million equivalent from its Special Funds resources (ADF). The OCR loan will be provided under ADB’s London interbank offered rate (LIBOR)-based lending facility and will have a 25-year term, including a grace period of 5 years, and financing charges determined in accordance with ADB’s LIBOR-based lending facility. The ADF loan will have a 32-year term, including a grace period of 8 years, an interest rate of 1% per annum during the grace period, and 1.5% during the amortization period. The Government will finance the full amount of taxes and duties and the temporary resettlement cost.

Total Source ($ million) Percent Asian Development Bank 100.00 OCR Loan 80.00 68.6 ADF Loan 20.00 17.1 Government 16.63 14.3 Total 116.63 100.0 Source: Asian Development Bank estimates.

Allocation and Relending The Government will pass on the ADB loan proceeds to the Terms Colombo Municipal Council (CMC) and the National Water Supply and Drainage Board (NWSDB) as a blend of grant (82.5%) and loan (17.5%). The relending terms for the loan portion will be at the rate of 10% per annum, with a repayment period of 25 years, including a grace period of 5 years.

Period of Utilization Until 30 June 2015

Estimated Project 31 December 2014 Completion Date

Executing Agency Ministry of Local Government and Provincial Councils (MLGPC)

Implementation MLGPC will be the Project’s Executing Agency. CMC will be the Arrangements implementing agency responsible for most of the activities, except for the pumping station rehabilitation works within the NWSDB service area, for which NWSDB will be the implementing agency. A project management unit (PMU) will be established within CMC, directly under the municipal commissioner, led by a CMC officer at senior management level for the duration of the Project. A project iii

implementation unit (PIU) will be established under NWSDB for implementing the works within NWSDB service area. A national project steering committee will be chaired by the secretary of MLGPC to provide policy guidance and coordination to the government agencies involved in the administrative process of the Project.

Procurement A draft procurement plan has been prepared based on discussions with the proposed executing and implementing agencies. Procurements to be financed by the Project will be carried out in accordance with ADB’s Procurement Guidelines (2007, as amended from time to time). International competitive bidding procedures will be used for civil works contracts estimated to cost $3 million or more, and supply contracts valued at $500,000 or higher.

The size of the procurement packages will depend on the nature of the works involved, on the need to enable reasonable competition in the bidding, and on minimizing the PMU's contract administration and management burden. The Project proposes a design–build–operate contract for the main sewerage system rehabilitation works to ensure an integrated system design and sustained operation of the rehabilitated system. The draft procurement plan is in Appendix 9.

Consulting Services An estimated 1,007 person-months (77 international, 930 national) of consulting services are required to facilitate project management and implementation, and to strengthen the institutional and operational capacity of CMC. The PMU will recruit two consulting firms for (i) design, supervision, and project management support to PMU and PIU; and (ii) institutional development, financial and operational improvement support to the PMU and CMC. The consulting firms will be recruited using the quality- and cost-based selection (QCBS) method in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time).

Project Benefits and The Project will directly benefit about 645,000 residents in Greater Beneficiaries Colombo by providing them with better wastewater management services, with a resulting improvement in the urban environment, health, living conditions, and productivity of the residents. A total of 1.5 million residents in Greater Colombo will benefit indirectly from a better urban environment. The Project will have significant net positive environmental impacts, including better marine and inland water quality and consequently improved public hygiene and sanitary conditions. The Project will involve no significant involuntary resettlement or impacts on indigenous peoples. The Project will improve the governance, finance, and service delivery of the municipal service provider by supporting institutional strengthening and capacity development.

iv

Risks and Assumptions The Project’s main risks are (i) a start-up delay and slow project implementation because of the limited experience of CMC in implementing an ADB project of this scale, and (ii) a possible lack of sustainability in recovering the cost of operation and maintenance and debt services.

The risk of a start-up delay and slow project implementation will be mitigated by the early establishment of the PMU and the recruitment of qualified staff. A capacity development technical assistance project will provide support to prepare for project implementation, and this will be followed up by the design, supervision, and management consultants during the Project implementation period.

The sustainability risk will be mitigated by a combination of measures. The Project introduces a design–build–operate contract that will increase the predictability of the technical and budgetary requirements, helping CMC to put in place the necessary O&M budget in a planned manner. The Project also supports CMC to strengthen its institutional, operational, and financial capacity, including (i) building up and implementing a cost-recovery mechanism; (ii) introducing an asset management system; (iii) implementing a performance budgeting system; (iv) creating a dedicated accounting code and an exclusive budget line for sewerage operations; and (v) institutionalizing a customer database and services, all of which will contribute to enhancing the sustainability of wastewater services delivery.

As the financial sustainability of the Project assumes a fundamental increase in revenue from property tax or other revenue sources, an assurance is given by the Government and the implementing agencies that they will increase their revenues to achieve cost recovery.

o o o 80 00'E 80 00'E 81 30'E Kankasanturai i t a r t S Kodikamam

k l a Jaffna National Capital P Bay o f Bengal Provincial Capital Kilinochchi P a l k B a y District Mullaittivu City/Town Tanniyuttu National Highway Talaimannar Mankulam o o National Road 7 00'N NORTHERN 7 00'N Road Mannar Puliyankulam Railway Vavuniya Gulf of River Mannar District Boundary Horowupotana Trincomalee City/Municipal Boundary Anuradhapura Provincial Boundary Boundaries are not necessarily authoritative. NORTH CENTRAL Tambuttegama Puttalam Hingurakgoda Kekirawa Welikanda Polonnaruwa Valaichchenai Dambulla EASTERN Batticaloa

NORTH Chilaw WESTERN CENTRAL Kurunegala Matale Madampe Polgahawela Kandy

Negombo Warakapola Ampara Pamunugama Kegalle Gampola Minuwangoda o o Gampaha 9 00'N 9 00'N o Badulla o Ja-Ela 9 00'N Nuwara Eliya 9 00'N Avissawella Colombo Hatton Talawakele U V A Kadana SRI JAYAWARDENEPURA KOTTE Monaragala Moratuwa Bandarawela Ratnapura Ragama PROJECT LOCATION Wellawaya Pelmadulla Kalutara Halangoda WESTERN SABARAGAMUWA Alutgama Dalugama Elpitiya Ambalangoda Hikkaduwa Akuressa SOUTHERN Kolonnawa Kelaniya Hambantota Galle Tangalle Kelani River Biyagama I N D I A N O C E A N Agoda Matara o o 80 00'E 81 30'E Colombo Kottikawatta Kaduwella SRI JAYAWARDENEPURA KOTTE

Battaramulla Atturugiriya Wellawatta Habarakada SRI LANKA

Dehiwala GREATER COLOMBO Maharagama Homagama Pitipana WASTEWATER MANAGEMENT PROJECT

Diyagama Kesbewa Mategoda

Moratuwa Madapatha N

Bolgoda Lake 0 5 10 20 30

Panadura Kilometers

80 o 00'E

09-2637 HR

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on proposed loans to the Democratic Socialist Republic of Sri Lanka for the Greater Colombo Wastewater Management Project.1 The design and monitoring framework is in Appendix 1.

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

A. Performance Indicators and Analysis

2. Sri Lanka’s economy has grown at an average of 5% per annum over the past 30 years.2 Per capita income has increased more than four times from $431 in 1990 to $2,016 in 2008. Alongside this economic growth, the country has experienced continuing urbanization, reflected in the size of the urban population and the extent of the urban areas.3 The urban population was estimated to be about 6 million in 2006, 30% of the national total, and it is growing at 3% per year, compared with a national growth rate of 1.1%. Urban migration caused by the prolonged conflict and low productivity in rural areas has contributed to this trend. Despite this process, the urban infrastructure and services are limited, fail to meet demands, and do not support economic or social needs.4

3. Sector Performance. In its commitment to the Millennium Development Goals (MDGs), the Government of Sri Lanka (Government) identified access to safe drinking water and adequate sanitation as priority objectives. The Government has set targets for 2015 of (i) increasing the proportion of households with sustainable access to safe drinking water to 86%, and (ii) increasing the proportion of the population with access to improved sanitation to 93%. While a recent government report5 indicated that Sri Lanka will meet the MDG targets for water supply and sanitation services, the condition of water supply and sanitation services is still a concern. The coverage of piped water is still very low (30%). Even in the capital region, only about 60% of the population is connected to piped water and only 50% has a continuous supply of piped water. In provincial urban areas, coverage is in the range of 5-20%, with an intermittent supply of water for about 16 hours a day.

4. Although the country is reported to have made substantial progress in increasing the population with access to sanitation from 69% in 1990 to 91% in 2004,6 only 3% of the total population is connected to the public sewerage system. The vast majority of urban residents rely on septic tanks or have no private sanitation facilities. The existing infrastructure is grossly inadequate and malfunctioning. The Government acknowledges that sanitation has been neglected; of the total investment in the water and sanitation sector during last two decades, less than 5% was spent on sanitation.

1 Greater Colombo encompasses seven local authorities: three municipal councils (Colombo, Dehiwela/Mt Lavinia, Sri Jayawardhenapura-Kotte), two urban councils, and two pradeshiya sabhas (smallest political unit in periurban or rural areas). 2 While Sri Lanka’s economy remained relatively resilient in 2008, growing at 6%, its growth is forecast to fall to about 4.5% in 2009 due to the weakening economic and financial outlook affected by the deepening global recession. The International Monetary Fund approved a $2.6 billion loan in 2009 to support the economic reform program, strengthen the country’s fiscal position, and support its post-conflict reconstruction and relief efforts. 3 Sri Lanka had a relatively high population density of 308 people per square kilometer in 2008, one of the highest after India among ADB’s developing member countries. 4 Sri Lanka’s public investment in infrastructure has been low for two reasons: first, the Government lacked the fiscal headroom to increase investments; second, Sri Lanka's increasingly complex political economy makes formulating and implementing decisions difficult. 5 Department of Census and Statistics. 2008. MDG Indicators of Sri Lanka – Mid Term Review. Colombo. 6 United Nations Development Programme (UNDP), 2007 and 2008. Human Development Reports. New York. The indicators and figures differ depending on sources. 2

5. Sector Institutions. Water supply and sanitation services in Sri Lanka are provided by both central and local governments. In 1974, a central government agency, the National Water Supply and Drainage Board (NWSDB), was established and several urban water supply and sanitation schemes operated by local authorities were transferred to it. The NWSDB became the primary implementing agency for publicly-financed development projects in the sector. However, the Government’s decentralization policy, supported by the thirteenth amendment to the Constitution in 1987, drove NWSDB to return municipal services to local authorities and devolve its role in investment and operation of water supply and sanitation services to local authorities. Most local authorities have been reluctant to take over these responsibilities because of their limited institutional and financial capacity. Colombo Municipal Council (CMC) is the only municipal council to provide comprehensive sewerage and sanitation services within its jurisdiction.

B. Analysis of Key Problems and Opportunities7

1. Challenges in Wastewater Management in Greater Colombo 6. Greater Colombo. Colombo is Sri Lanka’s economic and administrative center. The Government, in its Ten-Year Development Framework, 2006-2016,8 targets high and steady economic growth and modernization of the capital city and its environs as the national growth engine. The Western Region Physical Structure Plan, 9 adopted by the Government as the development plan for the country’s capital region, emphasizes the critical role of basic infrastructure and services, including wastewater management, in supporting economic development and improving the quality of life in the Greater Colombo area.

7. Inadequate Sewerage Infrastructure and Services. While Colombo is rapidly expanding, coverage of the public sewerage network is limited. The wastewater master plan10 estimated that 66% of the Greater Colombo population was served by on-site facilities, 19% by the public sewerage system, 11 and 15% was not served by any facilities. People without facilities disposed of their wastewater on the seashore, in canals, and waterways, and on available open ground.

8. The existing public sewerage network in Greater Colombo covers the area in CMC, Dehiwela/Mount Lavinia, and Kolonnawa, which have a resident population of more than 838,000 and a floating population of more than 500,000. The sewerage system comprises (i) about 320 kilometers (km) of sewers,12 (ii) 18 pumping stations within two catchments—north and south, and (iii) two sea outfalls.13 Built between 1906 and 1920, and substantially rebuilt and expanded in the 1980s,14 the system needs urgent repair, upgrading and expansion. The sewer pipes suffer from blockages and collapses. One third of pumping facilities are broken, causing

7 A problem and constraint analysis is in Appendix 2. An analysis of the sector is in Appendix 3. 8 Department of National Planning. 2006. Mahinda Chintana: Vision for a New Sri Lanka, A Ten Year Horizon Development Framework 2006–2016. Colombo. 9 CESMA. 2004. Regional Structure Plan of the Western Region Megapolis. Colombo. 10 Engineering Science. 1993. Wastewater Master Plan for Greater Colombo. Colombo. 11 It is estimated that in 2007 coverage of public sewerage system had expanded to about 25% of Greater Colombo. 12 About 80% are small diameter (less than 300 mm) in clay and, more recently, polyvinyl chloride (PVC). Sewers up to 375 mm are glazed stoneware and those 450-600 mm are concrete. Force mains are often cast iron with lead joints. 13 One is in the northern part of Colombo at Mutwal: a 1,500-mm diameter and 2,053-m long outfall capturing the sewers from the northern catchment through the junction box in Madampityia pumping station. The other is in the southern part of Colombo at Wellawatta: a 1,500-mm diameter and 1,394-m long outfall capturing the sewers from CMC's southern catchment and the NWSDB's Dehiwala/Mt Lavinia systems through the junction box at Wellawatta pumping station. 14 The World Bank and the Saudi Fund financed the rehabilitation and expansion works. 3 frequent overflow to other water courses. One of the sea outfalls is breached in the middle and its diffusers are not functional.15

9. Operation and Maintenance. Most of the system is old, exceeding its technical life, inefficient and unreliable, incurring high power cost. Frequent blockages by silt and other obstructions damage de-gritting equipment and pumps. There is no preventive maintenance or planned replacement; instead, emergency repairs have become the normal practice and these can only take place if emergency funds are available. Assets are not usually inventoried and there is no accurate database on the condition of assets. Operational and maintenance works are not systematically recorded. The customer database is inaccurate and not regularly updated. A strategy for system management needs to address these operational and managerial problems, along with the introduction of a planned maintenance system, an energy audit, and other operational efficiency enhancement mechanisms.

10. Institutional Framework and Capacity. The poor infrastructure and service delivery in the Greater Colombo sewerage system also stems from an inadequate institutional framework and the weak capacity of service providers. There has been lack of clarity concerning the role of the two key institutions involved in the wastewater management services, NWSDB and CMC, and ambiguity about their ownership of assets.16 An ambiguous institutional framework led to over a decade of ineffective management and low accountability. After a legal opinion by the attorney general on asset ownership in 2007, CMC is confirmed as the owner as well as operator of the sewerage system within the Colombo municipality. NWSDB remains the asset owner and service provider outside Colombo municipality. CMC has moderate organizational capacity, skills, and management tools and these need to be substantially improved.

11. Financial Constraints. The financial resources obtained through local tax and Government subsidies are insufficient for CMC and NWSDB to make new investments, or even to meet operation and maintenance (O&M) costs. The sewerage operations of both have incurred deficits in recent years, which has prevented them from sustaining regular asset replacements, leading to poor service delivery. While NWSDB has recently introduced a sewerage tariff within its operational jurisdiction,17 thereby securing a dedicated account for wastewater services, the sewerage operation in CMC is not delineated from the drainage operation. Expenditures are met out of allocations from the general budget of the institution and there is no independent accounting of revenue and expenditure for sewerage operations.

12. Service Regulation and Monitoring. Current sewerage operational practices 18 and uncontrolled industrial effluent discharges into public sewers raise serious environmental concerns and there is no mechanism in place to monitor water quality or to make service providers comply with regulatory standards. Environmental regulations prescribed by the Central Environmental Authority are not properly monitored or complied with. Service providers

15 It is based on comprehensive assessment made in 1999, and confirmed by visual inspection undertaken in 2007 as part of ADB. 2004. Technical Assistance to the Democratic Socialist Republic of Sri Lanka for Preparing the Greater Colombo Wastewater Project. Manila (TA 4531-SRI). 16 Asset ownership has long been believed to belong to NWSDB, in accordance with the voluntary transfer order in 1996 under the Section 64(1) of the NWSDB Law. However, this turned out to be invalid because of the absence of Parliamentary approval. The attorney general issued a legal opinion in September 2007 that CMC was the legal owner of the sewerage assets within the CMC area, a determination that was acknowledged by the concerned agencies. 17 The introduction of a sewerage charge was approved by the cabinet in September 2002. Subsequently the NWSDB board approved a sewerage tariff policy and a specific tariff structure which the minister of water supply and drainage also approved. Notification of a new sewerage tariff was gazetted in October 2007 and charging of sewerage tariff started in March 2008. As part of the system computerization at NWSDB, the form of the water bill was modified and the sewerage charge has been incorporated into the water bill. 18 Because of malfunctioning of sewerage pumping stations and frequent collapses of the sewer pipes, the system operator often resorts to emergency bypass arrangements for discharging to the surface water.

4 have little accountability for the quality, quantity, timeliness, and reliability of the services provided. There is no institutionalized system to check the performance of wastewater service providers regularly or to benchmark their performance against predetermined standards.

2. External Assistance and Lessons

13. External Assistance. Appendix 4 contains a summary of past and ongoing external assistance to the water supply and sanitation sector in Sri Lanka. In recent years, ADB and the government of Japan have been the major development partners in water supply and sanitation in the urban sector. In rural areas, the World Bank and ADB have supported community participation in water and sanitation for over a decade. In Greater Colombo, the World Bank and Saudi Fund supported rehabilitation of the sewerage system in 1980s and 1990s and the governments of Austria, Denmark, Germany, and Sweden are currently providing financial and technical support. While the past and ongoing development supports by other development partners have improved parts of the sewerage system in Greater Colombo, rehabilitation of major works, including 17 pumping stations and the two outfalls, remains a major necessity.

14. Lessons. Lessons drawn from ADB’s and other development partners’ operations in Sri Lanka in the water and sanitation sector19 include: (i) outcomes of physical investments can only be sustained if they are accompanied by well-programmed capacity building and institutional strengthening; (ii) handover of management of water schemes to local authorities requires continued support during the transition and follow-up period; (iii) capacity development efforts need to include not only technical aspects of O&M but also planning and financial management; (iv) continued efforts are needed to improve self-financing performance through implementation of sector reforms, covering cost recovery and commercial discipline of service agencies; and (v) institutional arrangements should lead to broader participation, such as through public awareness programs and capacity building activities for end-users. These lessons have been incorporated into the design of the Project.20

3. Rationale: Sector Strategy and Opportunities

15. Government’s Sector Strategy. Safe water supply and adequate sanitation are priorities in the Government’s poverty reduction and national development strategies. The specific goals of the Government include: (i) access to adequate sanitation provided to 93% of the population of Sri Lanka by 2015, (ii) piped sewerage systems provided in major urban areas and selected growth centers, and (iii) standard on-site sanitation made available to all not currently connected to a sewerage system or sanitation scheme. In addition, the Government’s strategy highlights the importance of strengthening the financial sustainability and institutional capacity of key sector agencies, including NWSDB and local authorities, in order to achieve sector goals.

16. Decentralized Municipal Services. The Government’s decentralization policy promotes devolution of responsibility for municipal services in order to enhance accountability and build sustainability in service delivery. Local authorities will require substantial capacity building support if they are to perform their devolved mandates, including (i) enhancing skills for planning and asset management, (ii) making service delivery more accountable and improving customer relations, (iii) improving revenue and financial management to recover the cost of service

19 The lessons are extracted from various sources: ADB. 2008. Sri Lanka Country Partnership Strategy. Manila; ADB. 2007. Sri Lanka Country Assistance Program Evaluation. Manila; and Department of National Planning, Government of Sri Lanka. 2006. Mahinda Chintana: Vision for a New Sri Lanka, A Ten Year Horizon Development Framework 2006–2016. Colombo. 20 The Project scope and components, implementation arrangements, procurement modality, consultants’ terms of reference were designed, reflecting these lessons. 5 provision, (iv) introducing performance monitoring and management systems, and (v) improving compliance with the existing legal and regulatory framework.

17. Colombo is the only municipal council in Sri Lanka providing integrated sewerage services within its jurisdiction. As it has recently been determined to be the owner of assets of the sewerage system within Colombo (para. 10), CMC is now responsible for fulfilling its mandates to manage the assets and execute capital investment, as well as to operate and maintain the system and deliver sewerage services to its customers. The Project will help CMC to do this by improving wastewater management services in Colombo and its suburban area, upgrading the sewerage infrastructure, and providing institutional strengthening and capacity development support.21

III. THE PROPOSED PROJECT

A. Impact and Outcome

18. The expected impact of the Project is an improved urban environment and better public health for 1.5 million urban and suburban residents in Greater Colombo through improved marine and inland water quality and a resulting improvement in hygiene and sanitary conditions. The expected outcome of the Project is improved wastewater management services provided to about 645,000 residents within the Project area through upgraded sewerage infrastructure and enhanced institutional and operational capacity of the service provider.

B. Outputs

19. The Project has three components. Component 1 will upgrade sewerage infrastructure, including rehabilitating the main sewerage system in Greater Colombo. Component 2 will strengthen the institutional and operational capacity for (i) asset management planning and operations, (ii) financial management, (iii) operational performance monitoring, (iv) environmental compliance, (v) customer services and public awareness, and (vi) pro-poor and gender-inclusive sanitation services. Component 3 will improve project management and implementation as part of a comprehensive program of capacity building at wastewater service providers.

1. Component 1: Upgrading Sewerage Infrastructure

20. Rehabilitation of Main Sewerage System. This subcomponent will (i) rehabilitate 17 pumping stations in the area covered by CMC, Kolonnawa and Dehiwela/Mt. Lavinia,22 including the provision of new coarse screens and grit removal facilities, flow meters and emergency generators; (ii) lay four new pumping mains connecting the pumping stations;23 and (iii) install pre-treatment equipment in the form of fine screens and associated screens, washing facilities,

21 The Project has been in preparation since 2004. A chronology is in Supplementary Appendix A . 22This includes: (i) new construction of 4 pumping stations in Bambalapitiya, Borella, Maligawatta, and New Fort; (ii) full refurbishment of 4 pumping stations in St. Jones Market (CS-3), Harbour, Thimbirigasyaya, and Wanathamulla; (iii) partial refurbishment of 3 pumping stations in Slave Islands, Polwatta, and Vyswyke; and (iv) partial refurbishment of 6 pumping stations in Dehiwala, Mt. Lavinia, Kolonnawa (KSP 1), Wellampitiya (KSP 2), Meethotamulla (KSP 3), and KSP 4. Pumping stations listed in (i) through (iii) are in CMC service area, and those listed in (iv) are in NWSDB service area. 23 This includes (i) Bambalapitiya/Wellawatta (Marine drive), (ii) New Fort/CS-3, (iii) Harbour/Madampititya, and (iv) Vyswyke/Madampitiya.

6 and sludge disposal facilities at two downstream pumping stations, immediately prior to discharge through the sea outfalls.24

21. Rehabilitation of Gravity Sewers. This subcomponent will (i) relay 10 km of critical sewers; and (ii) refurbish existing sewers by replacing control valves and supplying equipment, construction, testing, commissioning, providing as-built drawings and operational manuals, and training. This subcomponent will be implemented after a comprehensive sewer condition assessment is completed and critical sewer networks are identified and reconfirmed through a hydraulic survey by the design, supervision, and management consultants.

22. Rehabilitation of Marine Outfalls. This subcomponent will repair the two marine outfalls discharging the sewage collected from each northern and southern catchment, including (i) major repairs to the northern outfall, which is currently breached in the middle, (ii) installation of new diffusers and fitting of access covers at the northern outfall, (iii) provision of access points to the maintenance hole and unblocking of 14 outlet ports at the southern outfall, and (iv) cleaning of grit at both outfalls.

23. Supply of Operational Equipment. This subcomponent will provide operational equipment to assist CMC to carry out key O&M tasks, including (i) clearing blockages; 25 (ii) sewer inspection to check structural conditions, causes of blockages, infiltration, illegal connections, and interconnection of sewer and storm water;26 and (iii) routine maintenance, such as the removal of deposited sediments as a result of shallow gradients and low flows.

2. Component 2: Strengthening Institutional and Operational Capacity27

24. Asset Management Planning and Operations. To enhance the sustainability of the capital investments, the Project proposes to introduce (i) a new sewerage management information system that will store all data relating to sewerage service provision centrally; (ii) an associated asset management and stock inventory system, including a database with regular updates on the condition of the assets;28 and (iii) a work planning system that enables the planned maintenance of the sewerage assets using the recorded asset database. These changes will be best effected if the management and the operation functions are separated, with appropriate checks and balances. The Project will support the introduction and implementation of these changes in CMC’s wastewater management system and will assist CMC to establish a separate management unit apart from the existing operational unit.29

25. To support asset management planning and establish a well-prioritized capital investment program in the project area, the Project will also support the preparation of a strategic sewer network model30 and an update of the wastewater master plan.31 This plan will

24 Fine screens, washing facilities and digesters will be installed in the Madampitiya and Wellawatta pumping stations to ensure removal of all suspended particulate matter of size 3 mm and above, subject to verification of their design by the design, supervision, and management consultants and endorsement by CMC and ADB. 25 A mobile jetting and vacuum lorry, a jetting trailer, and a bowser lorry will be provided to clear blockages. 26 A mobile CCTV sewer inspection unit will be provided. 27 Component 2 targets strengthening CMC’s institutional and operational capacity, as asset owner and service provider for main sewerage system in Colombo. The subcomponents are designed to address the identified institutional and operational constraints based on the findings from the problem analysis in Appendix 2. 28 The asset condition will be regularly updated by the operational team by encoding routine maintenance records and CCTV survey results of underground pipes. 29 The existing organizational structure of CMC for sewerage management is focused on operations. Now that CMC is mandated to discharge its mandate as asset owner of the sewerage system, a separate unit dedicated to managing the assets will be established with the assistance of an institutional development consultant. 30 Sewer network modeling includes (i) completion of Greater Colombo's sewers map digitization to expedite operational and maintenance activities; (ii) development of a strategic hydraulic model that will enable identification 7 incorporate updated demand forecasts, based on urbanization trends and the Colombo development plan. It will propose the required capacities in the sewerage system and the investment required to improve the system. The plan will also cover a progressive expansion of the public sewerage system to underserved areas and proposals for secondary wastewater treatment in Greater Colombo.32

26. Financial Management. The Project will support CMC to improve the financial management of sewerage operations with a view to sustaining the operations of the upgraded sewerage system. This will include (i) building up and implementing a cost-recovery mechanism following a time-bound implementation plan; (ii) creating a dedicated budget line and accounting code for sewerage operations to ring-fence the fund flow and accounting related to sewerage services; (iii) incorporating financial planning into the corporate plan; and (iv) introducing a performance budgeting system where the operational and financial performance is monitored and reported, and eventually costs and inputs are determined by the target outputs on the basis of technical and financial performance indicators.

27. Operational and Monitoring Capacity. As part of measures to strengthen operational capacity, the Project will support the drafting and implementation of standard operational practices, a preventive maintenance plan, a health and safety manual, and an emergency plan. The Project will also develop procedures for managing and monitoring (i) illegal connections, (ii) flooding of properties, (iii) sewer blockages and collapses, (iv) stores replenishment, and (v) energy and environmental auditing.

28. Environmental Compliance. The Project will support CMC in monitoring and complying with environmental regulatory standards. This will include (i) establishing a quality monitoring mechanism for discharge to inland, coastal, and marine waters; (ii) providing water quality monitoring equipment and consumables; (iii) building a mechanism for pollution source control, monitoring, and enforcement of pretreatment before discharging to sewer network; (iv) legal arrangements for interagency sewer discharge;33 (v) preparation of a septage management plan for underserved areas and pumping stations; and (vi) establishing arrangements for processing and disposing of sludge and screenings at the pumping stations.

29. Customer Services and Public Awareness. The Project will support CMC to build a customer database and a customer services manual. To complement active customer relations, a framework will be developed to assess the performance of services delivery by CMC. A wastewater services outreach program will be conducted to improve understanding among customers and the public. In addition to information on the Project’s components, benefits and implementation schedule, the campaign will aim to improve public awareness on (i) the environment and public health in relation to sanitation; (ii) the operational costs needed to provide a service and associated service charges; (iii) links between water consumption and wastewater generation; and (iv) the consequences of solid waste disposal into open canals or maintenance holes. The campaign will also provide an opportunity to disseminate information relating to customer inquiries and customer support.

of critical sewers, optimization of the operational regime of the pumps, and an assessment of the risk of silting; and (iii) procurement of hardware and software to run a model. 31 A sewerage master plan was first prepared in 1981 and last updated in 1993. 32 At present, a sewage treatment plant is being considered for possible construction by 2020. Land for future treatment works will be reserved near the Mutwal and Wellawatta outfalls. The Project will conduct feasibility studies on the preferred treatment process and on the preliminary design of the sewage treatment works at the proposed locations. 33 The Greater Colombo sewerage system has cross-boundary flows of wastewater at the boundaries between the CMC and NWSDB service areas, which require an agreement between two parties. A draft memorandum of understanding on interagency sewer discharge is attached in Supplementary Appendix B.

8

30. Pro-poor and Gender-inclusive Sanitation Services. Building on the draft poverty reduction strategy developed by CMC, the Project complements and institutionalizes CMC's on- going efforts in its pro-poor and gender-inclusive sanitation services. It will support (i) comprehensive research on previous and ongoing pilot sanitation schemes in low-income areas, and lessons to be drawn from such schemes; (ii) providing inputs to the Greater Colombo wastewater master planning from the pro-poor sanitation services perspectives; (iii) setting up a strategy of pro-poor sanitation services to form part of CMC's poverty reduction strategy and institutionalizing the implementation of such strategy; (iv) preparing a proposal on future investment requirements in accordance with the strategy; (v) recording underserved settlements data into the current geographic information system database; and (vi) piloting alternative and unconventional on-site sanitation in selected low-income areas.34

3. Component 3: Project Management and Implementation Support

31. This component will support project management and implementation, including incremental administration and operations associated with the project management unit (PMU) and project implementation unit (PIU), and implementation of the capacity development program. Consulting services will be provided to the PMU for the design and supervision of sewerage infrastructure works, including a preliminary design for future treatment plants and an expansion of the sewerage system to underserved areas. Support will also be provided in project management and implementation on technical, environmental and social aspects and planning and monitoring in accordance with ADB policy and guidelines.

C. Special Features

32. Sustainability Embedded in the Contract. The Project provides a large capital investment and it is essential to ensure the sustainability of this investment. In parallel with institutional and operational support for CMC, the Project proposes a consolidated contract combining design, construction and O&M. The merits of this consolidated contract are to (i) provide incentives to the contractor to take an integrated approach in the system’s design, including consideration of O&M; (ii) indirectly enhance the quality of construction by extending the contractor's responsibility beyond the commissioning stage; (iii) provide continuity in system operation while the construction is ongoing; (iv) increase the predictability of the system in terms of technical and budgetary requirements; (v) involve CMC staff for a sufficient transition period before they take full responsibility; and (vi) secure an adequate O&M budget based on contractual requirements. The key features of the contract are described in Supplementary Appendix C and the outline structure is summarized in Appendix 5.

D. Project Investment Plan

33. The project investment cost is estimated at $116.6 million, including taxes and duties of $16.5 million. Detailed cost estimates by expenditure category and financier are in Appendix 6.

34 It is envisaged that this activity will be financed by the Poverty and Environment Fund. 9

Table 1: Project Investment Plan ($ million) Item Amountsa A. Base Costb 1. Upgrading Sewerage Infrastructure 81.0 2. Strengthening Institutional and Operational Capacity 4.2 3. Project Management and Implementation Supportc 11.7 Subtotal (A) 96.9 B. Contingenciesd 14.0 C. Financing Charges During Implementatione 5.7 Total (A+B+C) 116.6 a Includes taxes and duties of $16.5 million. b In mid-2009 prices. c Includes bank charges for imprest accounts. d Physical contingencies computed at 10% for civil works and 8.5% mechanical and equipment. Price contingencies computed at 1.6% on foreign exchange costs and 7.1% on local currency costs, includes provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate. e Includes interest and commitment charges. Interest during construction has been computed at the six-month London interbank offered rate plus a spread of 0.2%. Source: Asian Development Bank estimates.

E. Financing Plan

34. The Government has requested loans of $100 million equivalent—$80 million from ADB’s ordinary capital resources (OCR) and $20 million equivalent from the Asian Development Fund (ADF) to help finance the Project. The OCR loan will have a 25-year term, including a grace period of 5 years, an interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility, a commitment charge of 0.15% per annum, (the interest and fee during the grace period will be capitalized in the loan), and such other terms and conditions set forth in the draft loan and project agreements. The ADF loan will have a 32- year term, including a grace period of 8 years, an interest rate of 1% per annum during the grace period and 1.5% during the amortization period. The ADF loan will finance part of sewerage infrastructure upgrading, sewerage master planning including an investment plan for an expansion of sewerage to underserved areas, institutional capacity strengthening support for service delivery and project management support, and CMC’s institutionalization of its pro-poor sanitation services in its poverty reduction strategy and pilot schemes. 35 The Government counterpart funds will finance the full amount of taxes and duties and the temporary resettlement cost.

Table 2: Financing Plan ($ million) Source Total % Asian Development Bank Ordinary Capital Resources 80.0 68.6 Asian Development Fund 20.0 17.1 Government 16.6 14.3a Total 116.6 100.0 a The Government's share of the cost is in line with the country cost sharing ceiling. Source: Asian Development Bank estimates.

35 While the Project is entitled to larger amount of ADF loan considering its non-revenue generating aspects and its impact on the environment and public health, the proportion of the ADF loan is set relatively low because of the financial constraints facing ADF resources. The Government agreed to borrow the balance from the OCR loan during the country programming for the Sri Lanka country partnership strategy in 2008.

10

35. The Government will pass on the ADB loan proceeds to each of CMC and NWSDB as a blend of grant (82.5%) and loan (17.5%). The relending terms for the loan portion will be at the rate of 10% per annum with a repayment period of 25 years including a grace period of 5 years. The Government will bear the foreign exchange risk.

F. Implementation Arrangements

1. Project Management

36. The Ministry of Local Government and Provincial Councils (MLGPC) will be the executing agency. CMC will be the implementing agency for most activities, except for the pumping station rehabilitation works within the NWSDB service area,36 for which NWSDB will be the implementing agency. The PMU will be established within CMC directly under the municipal commissioner, led by a CMC officer at senior management level for the duration of the Project. A small PIU will be established under NWSDB to implement the works for the NWSDB service area. The PMU will be staffed by members of CMC, together with staff to be recruited on a contract basis. The staffing requirements for the PMU will consider both incremental staff for the implementation and construction phases and the long-term O&M function of CMC. The Government, CMC, and NWSDB have agreed to provide adequate staff for the PMU and PIU, which should be acceptable to ADB. In order to help CMC to set up the PMU structure and manage the preparatory works for Project implementation, a project management support team will be engaged, funded by ADB capacity development technical assistance (CDTA). 37 The CDTA will support project preparatory activities and initial training and capacity building of CMC to improve Project readiness and kick-start project implementation immediately after the Project becomes effective.

37. A project steering committee (PSC) will be established to oversee the Project and provide policy guidance and coordination among the Government agencies involved in the administrative process of the Project. 38 The PSC, chaired by the secretary of MLGPC, will hold quarterly meetings, or as often as necessary.

38. The PMU will have four different units: (i) engineering, (ii) monitoring and evaluation, (iii) institutional development, and (iv) finance and administration.39 The key functions of the PMU will be (i) preparing the overall project implementation plan and consolidated annual work plan; (ii) recruiting consultants and procuring goods and works, in compliance with ADB guidelines; (iii) implementing the proposed institutional strengthening and capacity development program under the Project; (iv) carrying out project performance and compliance monitoring, including loan covenants and safeguards compliance; (v) administering the ADB loan in accordance with ADB disbursement guidelines; (vi) maintaining project documents and submitting timely reports to ADB and the Government, including audit reports; (vii) obtaining necessary environmental and developmental clearances; and (viii) disclosing project-related information and documents in accordance with ADB guidelines. A structural diagram of the

36 This covers the rehabilitation works for six pumping stations in Kolonawa and Dehiwela/ Mt. Lavinia, which is separately packaged. 37 ADB. 2009. Technical Assistance to the Democratic Socialist Republic of Sri Lanka for Supporting Capacity Development for Wastewater Management Services in Colombo. Manila. 38 The National Planning Department, External Resources Department, Budget Department, Ministry of Plan Implementation, Ministry of Environment and Natural Resources, Ministry of Local Government and Provincial Councils, Western Provincial Council, Colombo Municipal Council, National Water Supply and Drainage Board, Urban Development Authority, Central Environmental Authority, Ministry of Defence, Road Development Authority, Coast Conservation Department, and Sri Lanka Ports Authority will be members of the PSC. Other relevant authorities and ADB will participate in meetings on an invitation basis. 39 Indicative staffing details are provided in the Supplementary Appendix D. 11 project implementation arrangements is in Appendix 7 and the implementation responsibilities of each institution as well as the structure and terms of reference for PMU are detailed in Supplementary Appendix D.

2. Implementation Period

39. The Project will be implemented over 5 years. Implementation is expected to begin in the first quarter of 2010 and end in December 2014. To prepare for project implementation, the PMU has been formed with a core staff. In addition, following start-up activities have been completed: (i) forming the PSC, and (ii) placing an advertisement inviting expressions of interest from the consultants. Other activities such as (i) establishing a fully functional PMU in the form of legalized independent project office; (ii) applying for permits, clearances, and approvals from various competent authorities; (iii) carrying out technical and socioeconomic surveys for wastewater services; and (iv) developing the capacity of the PMU staff will be undertaken before loan effectiveness. Recruitment of consultants will be completed before the third quarter of 2010. Tendering of major civil works will begin 3 months after the consultants’ mobilization and physical works will start approximately 15 months after loan effectiveness. The Project implementation schedule is in Appendix 8.

3. Procurement

40. Civil Works and Goods. Procurements to be financed by the Project will be carried out in accordance with ADB’s Procurement Guidelines (2007 as amended from time to time). International competitive bidding procedures will be used for civil works contracts estimated to cost $3 million or more, and supply contracts valued at $500,000 or higher. Shopping will be used for contracts for procurement of works and equipment worth less than $100,000. An indicative procurement plan, indicating contract packages and procurement program, is in Appendix 9.

41. The size of procurement packages will depend on the nature of the works involved, on enabling reasonable competition in the bidding, and on minimizing the PMU's contract administration and management burden. The Project proposes a design–build–operate contract for the main sewerage system rehabilitation works in order to ensure an integrated system design and sustained operation of the rehabilitated system. The procurement plan will be updated annually by the PMU for approval by ADB.

42. Advance Contracting and Retroactive Financing. Advance contracting of equipment, works and recruitment of consultants is requested. The expenditures incurred for equipment, works, and consulting services during the 12 months prior to signing of the loan agreements will be eligible for retroactive financing of up to 20% of the proposed amount for the loans under the Project. In order to expedite project implementation, it is proposed that advance action be taken for (i) recruitment of consultants; (ii) preparation of bidding documents for procurement of the design–build–operate contract package, the technical specifications of which will be upgraded by the consultants once they are mobilized; (iii) conduct of preliminary surveys and investigations; (iv) procurement of operational equipment; and (v) establishment and operation of the PMU and PIU offices and capacity building of newly recruited staff. The Government has been advised that ADB’s approval of advance contracting and retroactive financing does not commit ADB to finance the Project.

4. Consulting Services

43. An estimated 1,007 person-months (77 international, 930 national) of consulting services are required to (i) facilitate project management and implementation, and (ii) strengthen the

12 institutional and operational capacity of CMC. The PMU will recruit two consulting firms: a design, supervision, and management consultant (DSC) and an institutional development consultant (IDC). The consulting firms will be engaged using the quality- and cost-based selection (QCBS) method with a standard quality:cost ratio of 80:20 in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time). The DSC will include 53 person-months of international expertise and 736 person-months of national expertise.40 The IDC will include 24 person-months of international expertise and 194 person- months of national expertise.41 The proposed outline terms of reference for the DSC are in Supplementary Appendix E and the outline terms of reference for the IDC are in Supplementary Appendix F. Nongovernment organizations will also be recruited under the Project to support the implementation of public awareness and community mobilization activities.

5. Anticorruption Policy

44. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the Government, and the executing and implementing agencies. Consistent with its commitment to good governance, accountability, and transparency, ADB reserves the right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the Project. To support these efforts, relevant provisions of ADB’s Anticorruption Policy will be included in the bidding documents for the Project. In particular, all contracts financed by ADB in connection with the Project shall include provisions specifying the right of ADB to audit and examine the records and accounts of the executing and implementing agencies and all contractors, suppliers, consultants, and other service providers as they relate to the Project.

45. The Project will introduce additional specific measures to enhance governance and transparency in relation to the Project implementation. These include (i) provision of consultant support to project implementation staff on procurement and financial management; (ii) support for information technology to increase transparency, accountability, and efficiency; (iii) implementation of procurement and performance audits; (iv) computerization of a financial reporting system and its networking among cost centers; (v) adherence to a code of conduct by management and employees; (vi) random and independent spot checks by review missions on procurement and project accounts; (vii) public disclosure of information on procurement procedures and contract awards for the Project through the website of implementing agencies; (viii) institutionalization of a mechanism to redress grievances; and (ix) beneficiary involvement in project monitoring and evaluation.

6. Disbursement Arrangements

46. The PMU and PIU will be responsible for preparing disbursement projections, requesting budgetary allocations for counterpart funds, collecting supporting documents, and preparing withdrawal applications and sending them to ADB in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time). To facilitate the timely release of loan proceeds and to expedite project implementation, the Government will, immediately after the loans are made effective, open and maintain three first-generation imprest accounts, one for the OCR loan and two for the ADF loan, with the Central Bank of Sri Lanka and the three second- generation imprest accounts, two for the PMU (one for the OCR loan and one for the ADF loan) and one for the PIU from ADF loan. The maximum ceiling of each first-generation imprest account will not at any time exceed the estimated ADB-financed expenditures to be paid from the imprest account for the next 6 months or 10% of the respective loan amount from OCR and

40 In addition, about 1,088 person-months of technical and support staff will also be engaged under the DSC. 41 In addition, about 100 person-months of technical and support staff will also be engaged under the IDC. 13

ADF, whichever is lower. The maximum ceiling of each second-generation imprest account will be equivalent to 6 months estimated expenditures to be funded from each second-generation imprest account or $1,000,000, whichever is lower. The PMU and PIU will be responsible for ensuring that all imprest accounts are established, managed, replenished, and liquidated in accordance with ADB’s Loan Disbursement Handbook, and with the detailed arrangements agreed by the Government and ADB. ADB’s statement of expenditures (SOE) procedures will be used to liquidate advances from the imprest accounts. The maximum payment permitted under the SOE for both second-generation imprest accounts is $100,000 per payment.

7. Accounting, Auditing, and Reporting

47. The Government will provide ADB with detailed quarterly progress reports on project implementation, which will follow ADB's standard template and procedures. The PMU and PIU will maintain separate project accounts for all expenditures incurred on the Project, whether funded out of loan proceeds or counterpart funds. They will establish and maintain separate records for works, goods, and services financed out of loan proceeds.

48. The Government and the MLGPC will cause the detailed consolidated project accounts, as maintained by the PMU and PIU, to be audited in accordance with sound accounting standards by the auditor general or independent auditors appointed by the auditor general acceptable to ADB. The audited accounts will be submitted to ADB within 6 months of the end of the fiscal year by the PMU and PIU. The annual audit report will include a separate audit opinion on the use of the first-generation and second-generation imprest accounts and the SOE procedure. The Government and the MLGPC have been made aware of ADB’s policy on delayed submission, and the requirements for satisfactory and acceptable quality of the audited accounts.

8. Project Performance Monitoring and Evaluation

49. To ensure that project components are managed efficiently and project benefits are maximized, the PMU, with support and coordination by PIU, will establish a project performance management system (PPMS) within 3 months of loan effectiveness. The PPMS, established in accordance with ADB's Project Performance Management System Handbook, will provide a cause-and-effect relationship between the Project and its impact and will be updated and reported quarterly. Project performance monitoring and evaluation will be based on the design and monitoring framework and the baseline surveys specified in it. Beneficiaries will be involved in project monitoring evaluation, through direct reporting to the PMU and PIU and through the PSC. The indicators to be monitored will be formulated by the PMU and PIU, including indicators pertaining to physical progress and institutional development activities. A separate set of performance indicators will be established for the design–build–operate contract for contract monitoring. The PMU and PIU will gather baseline physical and socioeconomic data and submit a detailed implementation plan for monitoring performance and preparing benchmark information for ADB’s review and concurrence within 6 months of loan effectiveness. Thereafter, the PMU and PIU will submit semiannual monitoring and evaluation reports to ADB throughout project implementation.

9. Project Review

50. The Government and ADB will jointly assess project implementation semiannually. The Government, MLGPC, PMU, PIU, and ADB will conduct a comprehensive midterm review 3 years after the Project starts or after construction of the main package for sewerage rehabilitation has been initiated, whichever is sooner. The reviews will (i) examine the appropriateness of scope, design, implementation arrangements and schedule of activities;

14

(ii) identify changes needed since project appraisal; (iii) assess implementation performance against project indicators; (iv) review compliance with loan covenants; (v) identify problems, constraints, and, if necessary, recommend changes in the design or implementation arrangements; and (vi) monitor the effectiveness of safeguard procedures. Within 3 months of physical completion of the Project, the PMU will make publicly available a project completion report (PCR) in the standard ADB format. ADB will prepare its own PCR within 1 year of receiving the Government’s PCR.

IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS

A. Project Benefits

51. Economic. Sri Lanka’s economic growth is largely dependent on Colombo and its ability to attract investment and increase productivity. Adequate provision of urban services in Colombo is one of the important elements for ensuring further investment and productivity. Despite rapid urbanization, the existing sewerage network in Greater Colombo is limited, and needs to be expanded. However, no system expansion works can be undertaken unless critical defects are repaired and higher operational efficiency is attained within the existing system. Therefore, the Project is focused on rehabilitating the existing sewerage system in preparation for the future expansion of the public sewerage system to areas in Greater Colombo not yet served. Alternative designs for rehabilitation were assessed during the feasibility study stage.42 The technologies that were selected meet geographical restrictions, will be easy to maintain and operate, and will have low construction and maintenance costs.

52. The Project is the first phase of large scheme that ultimately aims to expand sewerage coverage in Greater Colombo. The Project's economic viability considered the future expansion of the sewerage system. The cost–benefit analysis covers a 25-year period and uses 2009 domestic prices. The result of the cost–benefit analysis indicates that the economic internal rate of return (EIRR) is 13.6%, higher than the economic opportunity cost of capital, indicating the reasonable economic viability of the Project. A sensitivity analysis was also undertaken under various adverse circumstances. The result indicates that the EIRR is most sensitive to the number of connections achieved. CMC and NWSDB will therefore need to ensure the subsequent expansion of the Project to achieve the target number of connections. The economic analysis is detailed in Supplementary Appendix G.

53. Financial. The financial management assessment43 reveals that there is potential for both CMC and NWSDB to strengthen their financial management. Both organizations suffer from vacancies in finance staff positions, which have affected timely completion of the accounts. Their corporate planning is separate from financial planning. There are challenges specific to each organization. As the Project is the first large-scale project for CMC, its existing accounting practices may require modification,44 such as the introduction of depreciation to prepare for the replacement of large capital assets, treatment of uncollectable payments, and a new accounts code to capture the fund flow related exclusively to sewerage services. NWSDB needs to increase efficiency in various areas. For example, financial reports from various regions are

42 Alternative materials and excavation techniques were considered, such as use of ductile iron pipes or polyethylene pipes, laid by open trench or using trenchless technology. Various sewer network configurations and locations of the screening facilities were evaluated to achieve higher efficiency in light of practicalities for the required process. The detailed analysis of alternative designs is in Supplementary Appendix G. 43 Financial management assessment was conducted as part of financial analysis, as detailed in Supplementary Appendix H. 44 This will be subject to further assessment of capacity and required procedures for implementation. The institutional development consultant will support the implementation of suggestions to the extent that the current accounting standards can accommodate them. 15 manually consolidated because there is no networked financial reporting system, and accounts receivables are higher than the three-month sales because of low tariff collection.

54. The financial sustainability of the Project was assessed in accordance with ADB's Financial Management and Analysis of Projects.45 As the Project is a nonrevenue generating project, it is not appropriate to assess financial rate of return; instead the financial sustainability of the Project was assessed. With no incremental revenue from the Project, CMC and NWSDB will have to finance their debt service and higher O&M costs from their existing revenues. CMC's revenue needs to be increased by SLRs370 million in real terms by 2014 to finance O&M and debt servicing costs.46 Revenue increases will be able to finance both the debt service and the O&M cost from 2015. NWSDB will have to increase the service charges by not less than 3.5% per year in real terms. The financial analysis is detailed in Supplementary Appendix H.

55. Poverty Impact. The Project aims to improve the sewerage infrastructure and management services, which will contribute to achieving MDG target 7. The public health impacts from the reduction of overflows, leaks and blockages will benefit the poor who often live in low-lying areas and near polluted inland waterways in Colombo. The Project also includes a subcomponent to institutionalize pro-poor and gender-inclusive sanitation services in underserved settlements in the CMC service area, and to pilot alternative and unconventional on-site sanitation in underserved areas. This will involve: (i) carrying out a participatory consultative process with beneficiaries to identify the most appropriate alternative sanitation technology; (ii) identifying the potential for community participation in implementation, operation, and maintenance of the sanitation facility; and (iii) assessing the possibility of extending the piloted approach to other municipal areas. The summary poverty reduction and social strategy is in Appendix 10.

B. Social and Environmental Safeguards

56. Involuntary Resettlement. The Project is classified as category B in accordance with ADB's Involuntary Resettlement Policy (1995). Infrastructure works under the Project are limited to upgrading existing sewerage infrastructure within existing physical facilities. For rehabilitating gravity sewers, the construction will be undertaken through trenchless technology or open-cut.47 In road alignments with four or more lanes, traffic can be managed to ensure that works will not result in temporary loss of access. For two-lane roads, there may be potential temporary impacts related to access disruptions.48 The potential temporary impacts of open cuts would be access disruption for: (i) residents, (ii) businesses and clients, (iii) vehicles, and (iv) institutions and clients. This disruption can be mitigated through good construction practices, which will be the responsibility of the construction contractors. In road alignments with no proper access, there is a likelihood of temporary income loss for businesses and their employees.

57. The Project will not require permanent or temporary land acquisition. Based on transect walks and confirmation from project preparation civil engineers, there will be no impacts on permanent structures or other assets. While it is estimated that there would be potential impacts for an estimated 156 residential households in terms of access inconvenience, interviews show

45 ADB. 2005. Financial Management and Analysis of Projects. Manila. 46 This can be a combined way of revising the annual rental value and increasing the property tax rate. 47 The choice of technology will depend on a conditions survey, which will be undertaken as part of the Project. Trenchless technology will not have resettlement impacts, thus, as a conservative approach, the resettlement plan assumes that most sections will use open cut. 48 Transect walks were conducted on two road sections totaling 1.25 km. During the transect walks, interview were carried out with residents, businesses, employees, and institutions, supplemented by focus group discussions to estimate potential temporary impacts.

16 that residents' livelihood will not be affected except when their businesses or employment are affected by access. Residents may temporarily lose secure parking for an estimated 515 vehicles and businesses for 480 vehicles. An estimated 428 businesses and 1,340 employees may experience partial income loss because of reduced client access.49 There is much potential to minimize impacts, through proper planning and implementation of mitigation measures, to a level that will not affect income. A summary short resettlement plan is attached in Appendix 11 and the short resettlement plan is in Supplementary Appendix I.

58. Indigenous Peoples. Screening during project preparation showed no impacts on indigenous peoples. The preparation of the resettlement plan also shows that there are no indigenous peoples among the affected people. The Project is classified as category C in accordance with ADB’s Policy on Indigenous Peoples (1998).

59. Environment. The Project is classified as category B in accordance with ADB’s Environment Policy (2002) and Environmental Assessment Guidelines (2003). An initial environmental examination (IEE) was carried out for the project subcomponents in the project area. The examination showed that none of the components would have any significant adverse environmental impacts and all impacts could be suitably mitigated. The only subcomponent requiring greater attention is the continuous discharge of domestic wastewater to the marine environment. However, numerous modeling studies have indicated good mixing, dispersion, and coliform die-off under most weather and tide conditions for both rehabilitated outfalls. The rehabilitation of the outfalls to, at least, their design specifications would be a considerable improvement on the existing situation. Anticipated minor environmental impacts include some excess soil generation due to excavation activities50 and greater noise, dust, and traffic during construction. 51 The short summary IEE is in Appendix 12 and the summary IEE is in Supplementary Appendix J. An environmental management plan (EMP) was prepared as part of the IEE (Supplementary Appendix K) for the construction and operation phases, with adequate mitigation measures proposed to minimize impacts resulting from inadequate maintenance of sewerage network. Significant environmental benefits resulting from the Project include (i) improved hygiene and sanitary conditions, (ii) better sewage disposal, and (iii) a healthier ecosystem as a result of the reduction in the discharge of domestic wastes into surface water bodies.

C. Risks

60. The Project’s main risks are (i) a start-up delay and slow Project implementation because of the limited experience of CMC in implementing an ADB project of this scale, and (ii) a possible lack of sustainability in recovering the cost of O&M and debt services.

61. The risk of a start-up delay and slow Project implementation will be mitigated by the early establishment of the PMU and the recruitment of qualified staff supported by the consultants. The CDTA will provide upfront support to prepare for project implementation,

49 One pipe section is 20 m long requiring a trench 1.5 m wide. By opening the trench one section at a time, the disruption is estimated to be 5 days per 20 m section. 50 Appropriate controls include clauses on the contractor’s contract for criteria on predetermining areas prior to excavation works, approving, and monitoring users of the excess spoil. The use should be limited for reclamation purposes, and should not be used in areas near wetlands or protected bodies of water. The IEE identifies measures to reduce potential negative impact in relation to the excavation works and transportation of soils. 51 Measures are identified in the IEE and include: (i) avoiding conducting noise-generating activities at night; (ii) consulting with the local community to inform them of the nature, duration, and likely effects of the construction work, and to identify any local concerns so that these can be addressed; (iii) reducing dust by spraying soil and covering with tarpaulins; and (iv) utilizing modern vehicles and machinery with the requisite adaptations to limit noise and exhaust emissions, and ensuring that these are maintained to manufacturers’ specifications at all times. 17 provide the executing and implementing agencies with exposure to ADB procedures, and support the recruitment of the consultants.

62. The sustainability risk will be mitigated by a combination of measures. The Project introduces a design–build–operate contract that will increase the predictability of the technical and budgetary requirements, helping CMC to put in place the necessary O&M budget in a planned manner. The Project also supports CMC to strengthen its institutional, operational, and financial capacity, including (i) building up and implementing a cost-recovery mechanism; (ii) introducing an asset management system; (iii) implementing a performance budgeting system; (iv) creating a dedicated accounting code and an exclusive budget line for sewerage operations; and (v) institutionalizing a customer database and services, all of which will contribute to enhancing the sustainability of wastewater services delivery. However, as the financial sustainability of the Project assumes a fundamental increase in revenue from property tax or other revenue sources, an assurance is given by the Government and the implementing agencies that they will target a revenue increase to achieve the cost recovery. This will need to be backed by sustained political will.

V. ASSURANCES

63. In addition to the standard assurances, the following assurances have been given by the Government, the Ministry of Local Government and Provincial Councils, Colombo Municipal Council, and National Water Supply and Drainage Board. These assurances will be incorporated in the loan agreements and project agreements:

(i) The Government will ensure that each year during Project implementation, adequate budgetary allocations of the required counterpart funds will be made to the Project by the relevant authorities on a timely and regular basis. (ii) The Government will ensure that: (a) all land and right-of-way required for the Project are made available in a timely manner; (b) if any land acquisition or resettlement becomes necessary, appropriate resettlement plan is prepared in consultation with the affected people and in accordance with the Government's National Involuntary Resettlement Policy and ADB's Involuntary Resettlement Policy (1995); (c) the resettlement activities will be carried out according to the resettlement plan agreed between the Government and the ADB which the Government will disclose to the public; (d) an updated resettlement plan, to be disclosed to the public, will be provided to ADB for review, approval and ADB website disclosure following detailed designs and detailed measurement survey and prior to the award of any civil works contract; (e) any civil works will be commenced only after the required land has been acquired and affected households have been relocated and compensated at full replacement cost; (f) external monitoring reports are submitted to ADB to be uploaded on the ADB website; (g) adequate budgetary support is made available to cover the costs of land acquisition and resettlement; and (h) resettlement activities will be carried out in line with the Government's laws and ADB's policy and in case of discrepancy ADB's policy will be applied. (iii) The Government will ensure that (a) the Project is carried out in compliance with ADB’s Environment Policy (2002), relevant national environmental laws and regulations; (b) the relevant environmental mitigation measures specified in the ADB- approved final EMP updated during detailed engineering design are incorporated in bidding documents and civil works contracts; (c) all mitigation measures and monitoring requirements set out in the EMP will be implemented and complied with, respectively, and closely supervised throughout Project implementation; and (d) project environmental performance will be monitored, and the monitoring report will be submitted to ADB semiannually.

18

(iv) The Government will ensure that (a) bidding documents include specific provisions to ensure that civil works contractors will comply with core labor standards and labor laws and gender equal pay for equal work, and (b) civil works contractors will disseminate information on sexually transmitted diseases including HIV/AIDS to their employees and local communities surrounding the Project sites. (v) The Government confirms that the sewerage asset within Colombo municipal area is owned by the CMC and the Government undertakes not to change the ownership of the asset throughout the Project period by executive or administrative decree, decision, resolution or such other or similar means either under the NWSDB Law or such other similar, or succeeding legislation. (vi) The Government will ensure that by 2014 CMC will have effected the revenue increase to the level to cover the O&M cost and debt service owed to the Government under the Project and allocated such increased revenue for the O&M budget for sewerage operations in CMC service area. Similarly the Government will ensure that the sewerage tariff for the NWSDB will have been increased to cover the O&M cost and debt service owed to the Government under the Project by the end of 2014. (vii) The Government and CMC will ensure that adequate land has been allocated and retained for secondary wastewater treatment facilities with total capacity of 420 million liters per day throughout Project implementation. (viii) Within 1 year from the loan effectiveness, the following actions will have been completed by CMC: (a) establishment of a separate cost center exclusively for sewerage operation and maintenance, (b) assigning new account code for an independent sewerage program, and (c) creation of a new budget line exclusively for sewerage as part of CMC's budget. (ix) Within 1 year of loan effectiveness, the CMC will have introduced financial and operational performance indicators and based on those indicators introduced a performance-based budgetary system. (x) Within 1 year of loan effectiveness, CMC, with the objective of complying with CEA environmental regulations, will have established an environmental monitoring unit with such experts as may be reasonably necessary with the responsibility to implement the water quality monitoring system for CMC service area. (xi) Within 2 year of loan effectiveness, CMC and CEA will have installed and operationalized a discharge-into-sewers pollution source control program, acceptable to ADB, for tracking non-compliant parties as defined in the CEA regulation; and within 1 year of such operationalization, CMC and CEA will enforce a penalty mechanism, acceptable to ADB, for the non-compliant parties. (xii) Within 2 year of loan effectiveness, CMC will have prepared a septage management plan dealing with the disposal of residual solids and sludge from septic tanks, screens, and grits. (xiii) Within 3 year of loan effectiveness, the Government and CMC provides investment plans and implementation programs for (a) storm water drainage system, and (b) solid waste management. (xiv) Before award of any contract, clearance of permits, approvals and authorizations will have been obtained from relevant authorities, including CEA and Coast Conservation Department. (xv) Before award of the contract for the rehabilitation of Muttwal and Wellawata outfalls, CMC and the Government will ensure that (a) an authorization from the Sri Lanka Ports Authority has been granted for sea outfalls works, and (b) clearance from the Coast Conservation Department has been obtained for the temporary use of available lands in the vicinity of the sea outfalls. (xvi) Before award of the contract for refurbishment of pumping stations by CMC, the Government and CMC will ensure that security clearance has been provided to the contractor to conduct Pollwatta pumping station rehabilitation works. 19

VI. RECOMMENDATION

64. I am satisfied that the proposed loans would comply with the Articles of Agreement of the Asian Development Bank (ADB) and, acting in the absence of the President, under the provisions of Article 35.1 of the Articles of Agreement of ADB, I recommend that the Board approve

(i) the loan of $80,000,000 to the Democratic Socialist Republic of Sri Lanka for the Greater Colombo Wastewater Management Project from ADB’s ordinary capital resources, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; a term of 25 years, including a grace period of 5 years; (ii) the loan in various currencies equivalent to Special Drawing Rights 12,760,000 to the Democratic Socialist Republic of Sri Lanka for the Greater Colombo Wastewater Management Project from ADB’s Special Funds resources with an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; a term of 32 years, including a grace period of 8 years; and (iii) such other terms and conditions as are substantially in accordance with those set forth in the draft Loan and Project Agreements presented to the Board.

C. Lawrence Greenwood Jr. Vice-President

7 September 2009

20 Appendix 1

DESIGN AND MONITORING FRAMEWORK

Design Performance Data Sources/Reporting Assumptions Summary Targets/Indicators Mechanisms and Risks Impact By 2017: Assumptions Urban environment and Inland and marine water Project baseline,a midterm Macroeconomic and public health are improved quality within Colombo and final surveys political stability for urban residents in complies with CEA quality Greater Colombo standards Regular quality monitoring CMC secures funds and results implements solid waste Incidence of the water management program by borne diseases is reduced Ministry of Health Annual 2013 by 20% from 2009 figures Bulletin

Number of underserved Central Environment low-income settlements Authority (CEA) reports reduced by 30% from 1,640 in 2009 CMC health bureau data on incidence of infectious diseases

UNEP State of the Environment Report Outcome By 2014: Assumptions Urban population in Incidence of flooding due Project baseline, a midterm CMC adopts increase in Greater Colombo enjoys to blockages of pipes and final surveys revenue sources (property better wastewater reduced by half from 2009 tax), and secures O&M management services figures CMC's financial statements budget to cover the cost, produced for statutory as required by the Project Incidence of overflow and reporting purposes collapses in the sewerage Trained technical staff system is reduced by half Western Province statistics retained in CMC from 2009 figures. CEA reports CMC adopts enforcement Operational performance of discharge quality starts measured in 2012 Quality monitoring results compliance by CEA and and improved by 20% in CCD 2014 Record of operational performance monitoring scheme Outputs 17 pumping stations and 4 CMC and NWSDB Assumptions connection pumping mains financial statements PMU adequately staffed 1. Sewerage are fully refurbished and produced for statutory with qualified personnel infrastructure is upgraded functional by 2014 reporting purposes Upgrading works financed 10 km of gravity sewers PPMS reports by other development are newly constructed by agencies completed on 2014 Site surveys, contract time supervision reports, and 2 sea outfalls are fully scheme completion Continued political support rehabilitated and functional reports for and commitment to by 2014 Project implementation Project baseline, midterm 15 km of sewers have and final surveys Risk been cleaned and the Unexpected price increase number of blockages Procurement documents in construction material reduced by half by 2014 submitted to ADB

Essential mobile plant for CMC has been procured by 2011

Sewerage and drainage system has been disconnected by 2014

Appendix 1 21

Design Performance Data Sources/Reporting Assumptions Summary Targets/Indicators Mechanisms and Risks 2. Institutional and Asset management and PPMS of implemented Assumptions operational capacity of Business support systems subcomponents CMC actively embraces CMC is strengthened established within CMC by proposed institutional 2011 MIS system records strengthening measures and capacity building Management and Procurement documents program operational plans and submitted to ADB procedures adopted by Intergovernmental CMC by 2011 Training records coordination is strong and committed to Operational, technical, and Workshop records environmental protection financial trainings delivered to over 500 staff by 2014 Multimedia material for awareness and education Sewer mapping and program network modeling completed by 2011 CEA reports

Environmental monitoring Customer relations log mechanism built and book operationalized by 2010

Customer charter adopted by 2011

Pro-poor and gender- inclusive sanitation strategy and its implementation plan institutionalized by 2012 3. Project management Fully fledged PMU set up Consultancy contracts Assumption and implementation by October 2009 Approval process for capacity of CMC Procurement documents procurement and is improved Tendering process is submitted to ADB consultant recruitment not completed and all delayed in CMC contracts are awarded by March 2012

All construction works have been completed and commissioned by 2014

Activities with Milestones Inputs ADB ($100,000,000) Output 1: Upgrading sewerage infrastructure Government ($16,630,000) 1.1 Advance action requested, consultant recruitment process initiated by August 1,007 person-months (77 2009 international, 930 national) 1.2 Design–build–operate bidding documents (except technical specifications) of consulting services completed by May 2010 1.3 Design and supervision consultant and institutional development consultant mobilized by August 2010 1.4 Necessary environmental clearances from CEA obtained by December 2010 1.5 Topographical, field surveys and investigations undertaken by December 2010 1.6 Bidding documents for main works (technical proposal) evaluated by March 2011 1.7 Main contracts awarded by March 2012 1.8 Short resettlement plan updated reflecting detailed design by June 2012 1.9 Detailed engineering design for main rehabilitation works completed by September 2012 1.10 Sewer cleaning, isolated repairs and replacement of valves and removal of cross connections completed by December 2013 1.11 Gravity sewer construction completed by June 2014 1.12 Rehabilitation of sea outfalls completed by September 2014 1.13 Rehabilitation of pumping station completed and commissioned by December 2014

22 Appendix 1

Activities with Milestones

Output 2: Strengthening Institutional and Operational Capacity 2.1 Advance action requested, consultant recruitment process initiated by August 2009 2.2 Asset registrar and inventory investigation completed by June 2010 2.3 Customer database completed by June 2010 (by CDTA) 2.4 Plan for performance budgeting and accounting system adopted by CMC by June 2010 (by CDTA) 2.5 Baseline survey for operational and financial condition completed by June 2010 (by CDTA) 2.6 Institutional development consultants are mobilized by August 2010 2.7 Asset management program completed by December 2010 2.8 Environmental compliance monitoring program completed by December 2010 2.9 Organizational performance monitoring and reporting system developed by December 2010 2.10 CMC pro-poor sanitation stocktaking exercise completed by December 2010 2.11 Business support system equipment and software purchased by March 2011 2.12 Operational efficiency and performance indicators adopted by CMC by March 2011 2.13 Customer charter and customer services manual developed by March 2011 2.14 Detailed 4-year training program for PMU and CMC developed by March 2011 2.15 Annual training programs prepared and submitted by April 2011 and every year thereafter 2.16 Sewer network modeling completed by April 2011 2.17 Environmental monitoring and compliance reports (discharge to sewers, discharge to outfall and inland waters quality), by April 2011 and every year thereafter 2.18 Trade effluent register developed by June 2011 2.19 Energy and environmental audits reported by June 2011 and every year thereafter 2.20 Business plan and operational procedures and manuals completed by August 2011 2.21 Pro-poor sanitation practice sharing training completed by June 2011 2.22 Asset register, inventory, operational performance database encoded into business support system and operational by September 2011 2.23 Operational management plan, preventive maintenance plan and emergency plan adopted by CMC by November 2011 (to be verified later by O&M contractor) 2.24 Health and safety manual introduced by November 2011 2.25 CMC poverty reduction strategy finalized incorporating pro-poor and gender- inclusive sanitation services lessons by December 2012

Output 3: Project Management and Implementation Support 3.1 PMU formed and key technical staff deputed/ recruited by July 2009 3.2 Fully fledged PMU set up by October 2009 3.3 Loan consultants are mobilized by the time of loan effectiveness. 3.4 Design and Supervision consultants mobilized by August 2010 3.5 Technical specification for all components completed within 6 months of loan effectiveness 3.6 Contractor for design–build–operate works mobilized by April 2012 3.7 All construction works completed and commissioned by 2014. ADB = Asian Development Bank, CDTA = capacity development technical assistance, CCD = Coast Conservation Department, CEA = Central Environmental Authority, CMC = Colombo Municipal Council, DMMC = Dehiwela/Mt Lavinia, NWSDB = National Water Supply and Drainage Board, O&M = operation and maintenance, PIU = project implementation unit, PMU = project management unit, PPMS = project performance management system, UNEP = United Nations Environment Programme. a The indicators will be updated reflecting the result of baseline survey envisaged and financed by the capacity development technical assistance.

Appendix 2 23

PROBLEM AND CONSTRAINTS ANALYSIS

Ongoing Government Proposed Project Proposed Problems Causes Actions Support Project Inputs 1. Poor Lack of planned DFID supported Rehabilitation of existing Civil works condition of capital investment rehabilitation program network, including sewerage for Beira Lake and (i) pumping stations (4 Equipment infrastructure Ambiguous surrounding areas new, full refurbishment provision institutional framework of 4 and partial between asset owner DANIDA funded refurbishment of 10 Design and and operator improvement to pumping stations); construction Madampitiya pumping (ii) construction of supervision Partial undercapacity station and main sewer pumping mains consultancy of the system and in northern catchment. connecting pumping ageing of existing stations; Sewerage master critical elements Project funded by the (iii) relaying of critical planning and (many of which are Austrian Government gravity sewers of under preparation of over 80 years old). for a new pumping capacity; and conceptual study station at Wellawatta (iv) provision of for long term Inadequate quality of and rehabilitation of operational equipment treatment options design and some sewers in for sewer cleaning and construction of capital southern catchment. removing cross re-investment works connections with surface water drains Operational shortcomings (see Rehabilitation and below) improvements at outfalls, including introduction of (i) grit removal and (ii) fine screening (pretreatment), and (iii) new diffuser.

Phasing in wastewater treatment: (i) pre- treatment through fine screening, (ii) preparation of a conceptual study to review treatment options and (iii) allocation of land for future sewage treatment plant. 2. Inadequate Inadequate Draft sector strategy Action plan for building Institutional operation and operational budget stipulating cost and implementing cost development and maintenance available to operate recovery principle recovery mechanism project of existing the system management assets Procurement of Introduction of design- consultancy Suboptimal essential equipment, build-operate contract operational practices with support from JICA modality Training and expert without asset advice for management Establishing business operators and planning, preventive support systems on management staff maintenance, management efficiency or energy information system, Provision of audits, records of asset management and inventory operational data operational recording management systems Inadequate capacity Procuring essential non- to operate the system. fixed operational equipment

24 Appendix 2

Ongoing Government Proposed Project Proposed Problems Causes Actions Support Project Inputs

Training staff

Sewer condition survey, sewer mapping and network modeling 3. Inadequate No institutionalized CEA gazetted Introduction of Service Institutional performance systems to regularly discharge quality Performance Indicators development and monitoring and benchmark standards in 2008 such as service area project management performance of coverage, quality of management sewerage service effluent, revenue ratios, consultancy delivery energy efficiency, frequency of Limited breakdowns, timeliness implementation of of repairs, timeliness of performance handling of citizens’ improvement complaints, staff per measures thousand connections, salary costs, collection efficiencies

Establishing business support system

Establishing sewerage asset management unit 4. Ambiguous Ambiguous asset Legal opinion from the Support CMC in Institutional institutional ownership till Sep. Attorney General’s executing roles as asset development and framework and 2007 office obtained owner as well as project policy operator of sewerage management objectives Absence of sector Government’s Ten- system consultancy strategy and Year-Plan defines implementation plan principles and Support in establishing objectives asset management unit in CMC Draft sanitation policy Preparation of business planning and establishment of business support system 5. Poor Legal framework Effluent quality Support in Institutionalizing compliance (urban planning and standards gazetted in institutionalizing systems for with existing effluent discharge) in 2008 monitoring mechanism regulatory legal and place for sewerage for discharge to sewers compliance regulatory system NWSDB Law is under and discharge to sea. framework review to amend to Institutional It is estimated that enable PUCSL Provision of laboratory, development and there are many regulation of the sector quality monitoring project connections diverting equipment and management wastewater into consumables consultancy canals Support in building Infrastructure Pollution of water source control and works source and ground monitoring water due to inappropriate Support in introducing operation of overflows procedures and program caused by mal- of identification and functioning of dealing with illegal Appendix 2 25

Ongoing Government Proposed Project Proposed Problems Causes Actions Support Project Inputs sewerage pumping connections and cross- stations, poor connection between operation, sewerage and storm connections between water drainage system sewerage and storm water networks or Rehabilitation of mal- collapse of sewers functioning sewerage system 6. Poor Insufficient Pilot schemes for on- Preparation of a Institutional customer stakeholders' site facilities in Customer Service Development and relations and involvement and underserved area Manual Project public participation in Management awareness sewerage services Preparation and Consultancy implementation of a Absence of public Public Awareness NGOs awareness activities in Campaign urban sewerage and sanitation Institutionalizing system for pro-poor sanitation service delivery to urban poor CEA = Central Environmental Authority, CMC = Colombo Municipal Council, DANIDA = Danish Development Agency, DFID = Department for International Development, JICA = Japan International Cooperation Agency, NGO = nongovernment organization, NWSDB = national water supply and drainage board, PAC = public awareness campaign. Source: Asian Development Bank Assessment.

26 Appendix 3

SECTOR AND INSTITUTIONAL ANALYSIS

A. Government’s Targets 1. In support of its poverty reduction efforts and its commitments to achieve the Millennium Development Goals, the Government of Sri Lanka has identified improving access to safe drinking water and adequate sanitation as priorities. Specific goals1 include (i) provision of sufficient and safe drinking water to 90% of the population by 2016; (ii) achievement of national standards for service levels and quality of water in urban and rural areas; (iii) provision of access to safe, adequate and improved sanitation facilities to 88% of the population by 2016; (iv) provision of piped sewerage systems in major urban areas and selected growth centers; and (v) availability of standard on-site sanitation for all not currently connected to a sewerage system or sanitation scheme. The existing scheme in Colombo has several deficiencies in service provision, due partly to physical constraints, but more importantly to financial shortcomings, problematic operations, poor asset management, and policy and institutional issues.

B. Access to Sewerage and Sanitation 2. Provision of sewerage services in Sri Lanka is limited to some areas of Greater Colombo and Hikkaduwa and covers about 3% of the total population. The Government has proposed that services be expanded in Colombo, Kandy and Jaffna. The 1993 master plan2 estimated that 66% of the Greater Colombo population was served by on-site sanitation facilities,3 19% by sewerage systems,4 and 15% had no facilities. The population without facilities, the urban poor, disposes of their waste on the seashore, in canals and waterways and on available open ground. In addition to the 15% without facilities there are substantial low-income settlements that have access to limited facilities.

C. Policy and Institutions 3. Responsibility for policy making, regulation and development of the water and sewerage sector lies with the central government (Ministry of Water Supply and Drainage and the Ministry of Urban Development and Sacred Areas), while provincial councils and local authorities are responsible for ensuring equitable resource allocation, quality, and standards of service under the National Policy on Rural Water Supply and Sanitation Sector. Before 1975, the provision of piped water and public wells was mainly the responsibility of local authorities. In 1974, through an act of Parliament, the National Water Supply and Drainage Board (NWSDB) was established as the primary national agency responsible for water supply and sanitation. Subsequently several major urban water supply schemes were transferred from local authorities to NWSDB in order to improve coverage and service. NWSDB, provincial councils, urban and municipal councils, and pradeshiya sabhas have a mandate to provide water and sanitation services. The Colombo Municipal Council (CMC) is the only municipal council in Sri Lanka to provide comprehensive sewerage and sanitation services within its jurisdiction. It is envisaged that Kandy Municipal Council will offer sewerage services in the near future. Private sector participation in the water and sanitation sector is limited and is mostly in the form of (i) small-

1 Department of National Planning. 2006. Mahinda Chintana: Vision for a New Sri Lanka, A Ten Year Horizon Development Framework 2006–2016. Colombo. Target indicators differ depending on sources. 2 Engineering Science. 1993. Wastewater Master Plan for Greater Colombo. Colombo. 3 These have previously defined to include (i) apparently self contained (within the premises that it serves) systems, (ii) holding tanks, and (iii) facilities which fall between the former. 4 It is estimated that the coverage of public sewerage system had expanded to around 25% of total population in Greater Colombo by 2007. Appendix 3 27 scale providers supplying drinking water to households, and (ii) civil work providers where selected functions have been outsourced.

4. Policies. A draft Water Supply and Sanitation Policy was formulated in 2002 to provide guidance to NWSDB, provincial councils, local authorities, lending institutions, community- based organizations (CBOs), and nongovernment organizations (NGOs) involved in delivering water supply and sanitation services. It included investment strategies to achieve coverage, service quality and cost recovery objectives. A cabinet paper has been under revision since April 2004, when NWSDB was asked to bring it into line with new Government investment strategies. Separate water and sanitation policies have since been prepared. NWSBD’s Board has approved the draft sanitation policy, but approval by cabinet is still pending.

5. Regulation. Regulators are generally responsible for monitoring and enforcing discharge licenses and fees and service quality and for setting affordable and efficient tariffs. In the case of Sri Lanka, two main bodies have been given responsibilities. The Public Utilities Commission (PUC) was created by Parliament in late 2002 to regulate water, electricity, and ports. Although commissioners were appointed soon after its establishment, it is not carrying out its functions fully, partly because of delays in the formulation and approval of the Water Industry Act. The Government is currently reviewing how NWSDB’s operations can be brought into line with the PUC Act to enable the PUC to undertake technical and economic regulation.5

6. The Central Environmental Authority (CEA) has powers to enact laws and regulations associated with wastewater pollution control and discharge standards. For all Board of Investment (BOI) registered industries, the CEA has delegated its powers to enforce the regulations to the BOI. The pre-treatment standards currently applied to the industries within the BOI-owned processing zones are not national standards but BOI’s own requirements. The implementation of the CEA regulations for certain industrial sectors can be delegated to the local authorities. For industries such as hotels and restaurants in Colombo, discharge compliance monitoring and enforcement has been delegated to CMC and is linked to business license renewals. The Urban Development Authority (UDA) is responsible for regulation and guidelines for on-site sanitation.

D. Institutional Framework: On-Site Sanitation

7. Institutional Arrangements. In general, capital investment associated with on-site facilities is borne by the developer or owner. There are several programs that provide financial help to the poor to provide their own facilities. Every facility has to be approved by local authorities before construction.

8. Key Legal and Environmental Requirements. Legal provisions relating to on-site sanitation facilities are comprehensive and are contained in several acts, ordinances and regulations.6 Under the current regulations, if on-site facilities are installed distant from other buildings, formal approval is not necessary and construction can proceed. Under the new regulations, the proposed siting of all on-site facilities would require formal approval.

5 With ADB technical assistance (ADB. 2002. Technical Assistance to the Democratic Socialist Republic of Sri Lanka for Strengthening the Regulatory Framework for Water Supply and Sanitation. Manila), the Government is also in the process of developing (i) an adequate tariff-setting methodology, (ii) a customer code, and (iii) technical standards for water and sewerage services. 6 They include Nuisance Ordinance, Quarantine and Prevention of Diseases Ordinance, Town and Country Planning Ordinance, Housing and Town Improvement Ordinance, Local Authority Regulations, the UDA Act and the National Environment Act and Environmental Protection License Regulations.

28 Appendix 3

9. Financial Requirements. Free septage removal7 is provided by municipalities. Local authorities need to consider operation and maintenance (O&M) cost recovery through collection of a reasonable and affordable fee by a private company or the local authority. Both Colombo and Dehiwela/Mt. Lavinia municipalities include areas without sewerage services that rely on septic tanks.

E. Areas of Greater Colombo Covered by the Sewerage System 10. The sewerage system in Greater Colombo comprises about 320 kilometers of sewers, 18 pumping stations, and two sea outfalls. Although the initial sewerage schemes in Greater Colombo were built between 1906 and 1920, they have been substantially rebuilt and extended under the World Bank and Saudi Fund projects in the 1980s and 1990s. Significant parts of the existing systems, including the ocean outfalls, are less than 30 years old. There are two independent systems, each serving a catchment area, originally draining to a treatment plant. These treatment plants were both abandoned in 1950s: the northern plant because of operational problems and the southern plant because of residents’ complaints over nuisance and odor. Both are beyond recovery. The northern system discharges through a sea outfall at Mutwal (1,500 mm in diameter and 2,053 m long). The Kolonnawa sewerage system in the NWSDB service area is pumped into this northern system and is pumped onward, so it needs to be operationally integrated. The southern system discharges into the outfall at Wellawatta (1,500 mm in diameter but 1,394 m long). The Dehiwala/Mt Lavinia (DMMC) systems are pumped into the southern system but discharge into the Wellawatta junction box and are thus largely independent of the upstream operation of the southern system.

11. Service Provision. It is estimated that at present the system serves an area with about 140,000 households.8 Within Greater Colombo, there are a number of areas with sewerage systems, including: (i) systems operated by CMC, (ii) systems operated by NWSDB (Kolonnawa and DMMC), (iii) systems in industrial processing zones, (iv) housing scheme systems, and (v) individual hospital self-contained systems. There is no formal agreement in place between the two organizations with regard to the cross-boundary flows, or between private owners and NWSDB and CMC. In addition, new industrial sewage treatment plants and associated local sewerage systems are currently being developed by NWSDB in Ja-Ela/Ekala and Ratmalana. While CMC and NWSDB own most of the 320 kilometers of sewers, several smaller schemes, which ultimately feed into the main system, are owned by government institutions (National Housing Development Authority, Urban Development Authority, Greater Colombo Economic Division, Board of Investment) or private companies (e.g., Ceylinco, Finco, Apollo Hospital).

12. Asset Ownership. Despite earlier moves to transfer assets9 in Colombo municipality to NWSDB,10 the attorney general's legal opinion of 25 September 2007 established that in the absence of Parliamentary approval, the assets remained under CMC's ownership. However,

7 These services generally include septic tank emptying using vacuum tankers with discharge into the sewerage system (one of the pumping stations). 8 While 64,000 households are currently registered in the CMC areas as connected, it is extremely common to find two or more households per connection. Out of these, 80% are domestic and 20% are non-domestic. 9 This refers to the compulsory transfer of the Colombo Municipal sewerage system by Order published in Gazette No. 71/4 of 16 January 2006 and the voluntary transfer of the sewerage system by Order published on 9 May 1996. 10 At the time when the transfer agreement was reached, an understanding was also concluded whereby NWSDB would pay SLRs20 million a year and CMC SLRs70 million a year for the O&M costs of the system. This understanding was recorded in NWSDB Paper No S/40/96-496. However, this agreement was never formalized with an official document signed by both parties. In 2004, following a letter from the mayor of Colombo to the minister of housing and plantation infrastructure drawing his attention to the agreement on O&M costs, NWSDB was instructed to reimburse CMC the annual amount of SLRs20 million unpaid over the years. Appendix 3 29 sewerage assets covering parts of Kolonnawa and DMMC11 are both owned and operated by NWSDB. New schemes being developed in Ja-Ela/Ekala and Ratmalana are also to be owned and operated by NWSDB upon completion of the works.

13. Cost Recovery. In the CMC area, sewerage and sanitation services are provided as part of municipal services for which a property tax is charged to the residents. Revenues for sewerage consist of government grants and reimbursements, 12 registration fees paid by contractors and suppliers, administration charges and other miscellaneous income. CMC is on the process of preparing cost recovery plan, including its time-bound action plan to increase the revenue to recover the O&M cost and debt service by 2014.

14. The introduction of a sewerage charge by NWSDB to recover operation and maintenance costs was approved by cabinet in 2002. Subsequently, NWSDB's Board and the MWSD minister approved a tariff policy and structure. The notification of the new sewerage tariff was gazetted in October 2007 and billing started in March 2008 for properties connected to the sewerage network in DMMC and Kollonawa. The sewerage charge is part of the water bill.

15. Planning and Asset Management. NWSDB has a corporate plan for 2007–2011, although it does not have a business plan with supporting financial projections, targets or indicators that can be monitored. The annual budget is prepared over a period of 5 months using performance-based budgeting where costs and inputs are designed to match performance and outputs. System operation and maintenance consists of crisis management rather than strategic decisions based on risk analysis and the long-term sustainability of the network, or a holistic approach that considers legal, technical, financial, regulatory, operational, and customer service aspects.13 NWSDB has acknowledged that revisions to its operational approach are needed and is currently reviewing decentralization of responsibilities to regional offices. It is anticipated that this will lead to more rapid and responsive decision making. CMC is yet to introduce asset management into its operations.

F. Financial and Operational Performance of Colombo Municipal Council

16. CMC's overall financial performance and that of its sewerage operations is described in Table A3.1. CMC's capital expenditure was in excess of capital receipts in 2004 and 2007. These deficits were adequately covered by its accumulated surplus. CMC's property rate collection efficiency has ranged from 94.7% in 2003 to 84.1% in 2006. However, in terms of number of months for accounts receivables, CMC's performance was poor over the 2001–2008 period, but it is improving (from 17.2 months in 2001 to 14 months in 2008). With no incremental revenue from the Project, CMC will have to finance debt service and increased O&M costs from its own revenue. It will have to increase its revenue by SLRs370 million in real term by 2014 to adequately finance O&M cost and debt service.14

11 NWSDB also owns and operates a small scheme in Kataragama and various housing schemes in Koggala. 12 For 2003–2007, government grants and reimbursements were the biggest source of revenue (about 81%). In 2007, CMC did not receive any grants for sewerage operations, resulting in a marginal revenue of SLRs8million. 13 Asset management considers the process of establishing on operating regime under which the sustainability of capital investment for assets is ensured through effective management of risk, performance, condition and cost. 14 For example, by revising annual rental values (13% increase) and increasing the property tax rate (5 percentage points increase for both residential and commercial areas).

30 Appendix 3

Table A3.1: Colombo Municipal Council Financial Performance, 2004–2007 (SLRs million) Item 2004 2005 2006 2007 Capital Receipt and Expenditure Capital Receipt 366 605 1,085 251 Capital Expenditure 431 535 448 496 Surplus (Deficit) (65) 71 637 (245) Revenue and Recurrent Expenditure Revenue 2,554 2,984 3,365 3,701 Recurrent Expenditure 2,500 2,964 3,641 4,069 Surplus (Deficit) 54 20 (277) (369) Sewerage Operations Revenue 54 98 26 8 Recurrent Expenditure 183 242 282 303 Surplus (Deficit) (129) (144) (256) (295) Source: Colombo Municipal Council.

17. Historically, the incentives for improving services have been political, arising from the involvement of the elected council members, or have been instigated by the CMC officers through their desire to serve the public. With no effective customer service regulation there has been no corporate incentive for CMC to set objectives for improvements in the levels of service provided. Such objectives need to be set and monitored and a timetable for targets and defining efficiency indicators needs to be established.

G. Financial and Operational Performance of National Water Supply and Drainage Board

18. The financial performance of NWSDB improved in 2006 compared with previous years but it subsequently declined. Table A3.2 contains a summary of the income statement for 2005– 2008. Because of the recently approved water tariff increase, NWSDB has projected a profit for 2009 of about $4 million. However, with no incremental revenue from the Project, NWSDB will need to increase the service charges by not less than 3.5% per year in real terms to recover the cost of services.

Table A3.2: National Water Supply and Drainage Board Net Profit Summary, 2005–2008 (SLRs million) Item 2005 2006 2007 2008 Water Sales 5,446 5,869 6,482 6,743 Operating Profit on Sale of Water 1,842 1,789 1,579 654 Profit or (Loss) before Depreciation 1,480 1,525 806 266 Net Profit or (Loss) from Operating Activities 437 425 (575) (1,664) Profit or (Loss) before Income Tax (22) 20 (1,224) (2,797) Net Profit or (Loss) for the Year (92) (44) (1,278) (2,863) Source: National Water Supply and Drainage Board.

19. Although NWSDB conducted a benchmarking exercise for its operations in 2002 and its corporate strategies15 have set targets for improved operational and financial performance, it is yet to set separate specific operational targets for its sewerage operations.

15 National Water Supply and Drainage Board. 2002. NWSDB Corporate Strategy. Colombo; and National Water Supply and Drainage Board. 2008. NWSDB Corporate Strategy. Colombo. Appendix 3 31

Table A3.3: National Water Supply and Drainage Board Operational Performance Summary, 2002–2008 December 2002 Results Provided by NWSDB Baseline 2005 2006 2007 2008 1. Increased m3 Water Billed (%) 66 67 66 67 67 2. Targeted Collection Rate (%) 97 96 97 98 100 3. Accounts Receivables a. Private (days) 60 60 60 60 b. Government (days) 65 60 65 65 4. Reduction in Staff to Connection Ratio 7.94 6.6 6.6 8.1 8.2 5. Reduction in kWh Electricity Use (%) 28.0 24 23.8 23.1 22.7 6. Increased Maintenance Expense (%) 5 5.6 6.34 4.85 5.11 7. Reduction in Establishment Expense (%) 9 -22 10.7 NA 9.5 8. Increased Rehabilitation Expense (%) 17.1 4.0 1.2 NA NA kWh = kilowatt-hour, m3 = cubic meter, NA = not available, NWSDB = National Water Supply and Drainage Board, O&M = operation and maintenance. Source: National Water Supply and Drainage Board.

20. NWSDB has created a new sewerage division responsible for the planning and operation of all sewerage schemes in Sri Lanka. While this is an appropriate interim measure, it may need to be integrated into NWSDB's decentralization process once activities are expanded. Available preliminary annualized revenue and expenses data for sewerage activities16 show overall losses, with operating expenses exceeding income by about a third. Nonetheless, this represents a substantial improvement in performance from previous years when there was no sewerage tariff. NWSDB is preparing a revision of its sewerage tariff in 2010.

21. Salary and personnel costs are 65% of all sewerage-related costs, while utility costs (essentially electricity costs) are 12%. Repairs and maintenance costs remained low (5% of the total) during 2008. Although some schemes (such as that in Hikaduwa) are relatively new, and no major repairs are expected, the maintenance allocation will need to increase progressively.

H. Policy Gaps and Weaknesses 22. Private sector participation in water and sanitation remains generally low, partly because of the inherent difficulty of delinking initiatives and reforms from the political process, which would allow tariff setting to be regulated by a fully functional public utility commission entirely reflecting capital and operational costs, including an adequate return on invested capital, and the pending status of the water and sanitation policies to clearly outline the role and responsibilities of the private sector and other partners.

16 This corresponds to the 8-month period from January 2008 to August 2008. The loss incurred up to August 2008 amounted to SLRs66.6 million.

32 Appendix 4

EXTERNAL ASSISTANCE TO THE WATER AND SANITATION SECTOR

Year Amount Project Name Approved Source (million) A. Loan-Financed Investment Projects Dry Zone Urban Water and Sanitation Project 2008 ADB $83.00 Rehabilitation and Upgrading of Southern Catchment of the Greater Colombo Sewerage System 2007 Austria €10.70 Water Sector Development Project 2007 Japan ¥13,231.00 Central Wastewater Treatment Plants for Ratmalana, Moratuwa 2007 Sweden $70.00 Coastal Towns Areas affected by Tsunami 2006 IFRC $30.00 UNIHA Project 2005 Austria $12.74 Greater Colombo Sewerage Project 2005 Denmark $33.00 Matara Integrated Water Supply System 2004 Japan $135.60 Secondary Towns and Rural Community Based Water Supply and Sanitation Project 2003, 2006 ADB $120.06 Non-Revenue Water Reduction Project 2003 Japan $45.61 Kelani Conservation Barrage Project 2002 ADB $13.19 Greater Galle Augmentation Water Supply and Sanitation Project 2001 Germany $25.60 Nawalatipiya, Ampara, and Koggala Projects 2001 Germany $27.00 Greater Kandy Water Supply and Sanitation Project 2001 Japan $115.2 Community Water Supply and Sanitation Sector (Phase II) 2001 World Bank $20.00 Third Water Supply and Sanitation Project 1999 ADB $75.00 Anuradhapura Water Supply and Sanitation 1999 France $5.60 Kegala Water Supply Project 1999 Germany $5.82 Water Treatment Plant at Anuradhapura 1998 France $7.34 Water Supply Nawalapitiya 1998 Germany $6.16 Water Supply Ampara 1998 Germany $3.52 Towns North of Colombo, Stage 1 1998 Japan $43.19 Mahaweli Restructuring and Rehabilitation Project 1998 World Bank $56.22 Towns South of Colombo 1997 Japan $30.31 Mahaweli System C Upgrading 1997 Japan $32.06 Kalu Ganga Water Supply Project 1997 Japan $96.72 Towns North of Colombo Water Supply and Sanitation Project 1997 Japan $47.10 Kalmunai Water Supply Project 1997 Denmark $3.15

B. Grant-Financed Investment Projects Sewer Cleaning Equipment 2005 Japan ¥146.00 Greater Colombo Wastewater Management 2004 ADB $0.85 Participatory Improvement of Underserved Settlements in Colombo 2003 Germany €5.00 Greater Colombo Wastewater Management Sector Review 2003 ADB $0.15 Hiccaduwa Coastal Zone Management 2000 United States $3.70 Water Augmentation of Nuwara Eliya Project 2002 Japan $1.00 Accounting Review of NWSDB 2001 ADB $0.09 Groundwater Investigation–Hambantota and Monaragala Districts 2000 Japan $17.00 Polonnaruwa District Rural Water Supply and Sanitation Pre-Investment 2000 New Zealand $0.12 Rehabilitation Water Supply Mannar 1999 Germany $0.53 Pre-Investment Study and Pilot Project 1999 New Zealand $0.13 Third Rural Water Supply and Sanitation Sector 1998 Norway $7.42 Western River Basins Sector Project 1998 ADB $1.50 Rural Water Supply and Sanitation–Vavuniya 1997 Germany $24.68 Greater Colombo Sewerage Project 1997 United Kingdom $3.20 National Framework for Development of Rural Water Supply and Sanitation Framework 1997 UNDP $0.50 Improvement of Drinking Water Supplies 1996 Japan $7.70 Walawe Left Bank Irrigation and Extension Project (II) 1996 Japan $83.32 Rural Water Supply and Sanitation Sector 1996 ADB $0.60 ADB = Asian Development Bank, IFRC = International Federation of the Red Cross, NWSDB = National Water Supply and Drainage Board, UNDP = United Nations Development Programme. Source: Asian Development Bank estimates. Appendix 5 33

OUTLINE STRUCTURE OF COMBINED CONTRACT

1. The Colombo sewerage operation has long been neglected. This is partly due to the ambiguous institutional arrangements for asset ownership, which has deterred an adequate level of budgeting and management of the system. Operational inefficiency has created an extra financial burden by causing emergency repair works and earlier than necessary asset replacement.

2. In 2007, the attorney general issued a legal opinion that all wastewater assets within Colombo municipality administrative area were owned by the Colombo municipality. Colombo Municipal Council (CMC) is now a legal owner of the wastewater systems and at the same time is responsible for their operation and maintenance (O&M). CMC, as a municipal council constituted and administered by the Municipal Council Ordinance,1 does not charge a separate tariff for municipal services but runs municipal services using the budget allocated from the pool of revenue collected from the property tax. However, this budget has been inadequate to enable it to carry out proper O&M.

3. Now that the Project provides a large capital investment to rehabilitate the critical elements of the sewerage system, it is essential to ensure the sustainability of this investment. In parallel with various activities to support institutional and operational strengthening, the Project proposes a consolidated contract combining design, construction, and O&M. Under this contract, the budget for O&M is secured through the contract, and the staff of the municipal service provider will receive on-the-job training throughout the contract period, in particular during the commissioning period, before they take over the full responsibility for the O&M of the rehabilitated sewerage assets.

4. Under this contract, CMC, as the asset owner, retains responsibilities for asset management and capital investment works contemplated under the Project, through the project management unit of the Project (PMU). The contractor will design, build and operate and maintain the pumping stations at a pre-agreed cost. The key merits of this combined contract are (i) to incentivize the contractor to take an integrated approach to system design, considering O&M aspects; (ii) to indirectly enhance the quality of construction by extending the contractor's responsibility beyond the commissioning and maintenance stage; (iii) to provide continuity of system operation while the construction is ongoing; (iv) to increase the predictability of the system in terms of technical and budgetary requirements; (v) to involve CMC staff for a transition period before they take full responsibility; and (vi) to secure an adequate O&M budget based on contractual requirements. The design–build–operate contract will clearly define the terms and conditions for each stage.

5. The term of the contract will be 6 years—detailed design for 0.5 years, construction for 2.5 years, and O&M for 3 years—with a possible extension for another 3 years.

6. The scope of the O&M element of the contract is limited to responsibility for the O&M of the pumping station facilities constructed and equipment provided by the contractor, with possible expansion to the remaining three pumping stations that have not been included in the scope of the Project but were recently rehabilitated by other external development agencies' financial support.

1 Municipal Council Ordinance No. 17 of 1865, later amended and called the Colombo Municipal (Constitution) Ordinance No. 6 of 1935.

34 Appendix 5

7. The contractor's key responsibilities in relation to the O&M will include:

(i) training and direct management of CMC staff, improving their technical and operational skills through knowledge transfer on the newly constructed system; (ii) applying a system of work planning and planned preventive maintenance for the pumping facilities included in the contract; (iii) preparing a work plan and maintaining asset history details within an asset management and work planning business system that will be procured by CMC under the Project; (iv) managing the stores within a stores management system that will be procured by CMC under the Project and maintaining adequate levels of spare parts, taking into consideration their frequency of use and delivery periods; (v) optimizing the pump schedules for each station and revising them in light of operational experience and seasonal variations; (vi) issuing to the operators, through the CMC management, a list of daily, weekly and monthly tasks that they will be required to perform; (vii) improving the occupational safety and health conditions for CMC employees through the introduction of good practices; and (viii) improving environmental compliance by ensuring that the facilities and equipment are operated proficiently to reduce discharges through the sea outfalls that do not comply with environmental regulations and to reduce the occurrence of storm water overflows.

8. The contractor will be required to provide a team of supervisory and ancillary staff, including trainers. CMC will provide the operators, maintenance staff, work planners, engineers, and administrative and other staff. The contractor will specify in the bid the list of staff required, with various disciplines and skills categories. CMC staff will remain CMC employees and be subject to their current CMC conditions of employment. The contractor will have the right to give instructions to CMC staff on day-to-day operational and maintenance works.

9. The contractor will be paid a base fee to cover its fixed costs for the O&M of the facilities. Any power penalty payment will be deducted from the base fee and any power bonus will be added to it, in accordance with a calculation method—the comparison between the bid power consumption and the actual power consumption measured by an energy audit—to be agreed in the contract.

DETAILED COST ESTIMATES BY FINANCIER AND BY IMPLEMENTING AGENCY

Table A6.1 : Detailed Cost Estimates By Financier ($ million) ADB ADB Government OCR Financing ADF Financing Financing % of Cost % of Cost Tax and % of Cost Item Costa $b Categoryc $b Categoryc $ Duties Category A. Investment Costs 1. Civil Works 50.60 42.82 85 0.00 0 0.00 7.78 15 2. Mechanical and Equipment 31.96 20.05 63 5.35 17 0.00 6.56 21 a. Equipment for Institutional Support 1.66 0.00 0 1.31 79 0.00 0.35 21 b. Infrastructure in CMC areas 25.57 20.05 78 0.00 0 0.00 5.52 22 c. Infrastructure in NWSDB area 4.73 0.00 0 4.04 85 0.00 0.69 15 3. Training and Workshop 2.94 0.00 0 2.51 85 0.00 0.43 15 4. Social Mitigation 0.08 0.00 0 0.00 0 0.07 0.01 100 5. Consultants 8.59 0.00 0 7.20 84 0.00 1.39 16 a. Project Management 6.06 0.00 0 5.08 84 0.00 0.98 16 b. Capacity Development 2.52 0.00 0 2.11 84 0.00 0.41 16 Subtotal (A) 94.16 62.87 67 15.05 16 0.07 16.17 17 B. Recurrent Costs 1. Incremental Recurrent Cost 2.73 0.00 0 2.34 86 0.00 0.39 14 a. Salaries 1.16 0.00 0 1.16 100 0.00 0.00 0 b. Accommodation 0.20 0.00 0 0.20 100 0.00 0.00 0 c. Office Equipment and Operationd 1.37 0.00 0 0.98 72 0.00 0.39 28 Subtotal (B) 2.73 0.00 0 2.34 86 0.00 0.39 14 Total Base Cost 96.89 62.87 65 17.40 18 0.07 16.56 17 C. Contingenciese 14.04 11.97 85 2.07 15 0.00 0.00 0 D. Financing Charges During Implementation 5.69 5.16f 91 0.53 9 0.00 0.00 0 Total Project Costs 116.63 80.00 69 20.00 17 0.07 16.56 14 % Total Project Costs 100 69 17 1 13 ADB = Asian Development Bank, ADF = Asian Development Fund, CMC = Colombo Municipal Council, NWSDB = National Water and Sewerage Development Board, OCR = ordinary capital resources. a In mid-2009 prices. b Amount of ADB loan proceeds allocated to the cost category. c

The amounts disbursed by ADB for eligible expenditures under a cost category will be subject to the ceiling set by the allocation of loan proceeds for such a Appendix 6 cost category. d The amount includes bank charges incurred from the operation of imprest accounts. e Physical contingencies are computed at 10% for civil works; and 8.5% for mechanical and equipment. Price contingencies are computed at 1.6% on foreign exchange costs and 7.1% on local currency costs (including provision for potential fluctuations under the assumption of a purchasing power parity exchange rate). f OM Section D1/BP Issued on 23 January 2008 states that a waiver mechanism has been discontinued for loans negotiated on or after 1 October 2007. Instead,OM Section D1/BP has provisions for interest and commitment charges, but no provision for a front-end fee. A commitment charge of 0.15% per annum levied on undisbursed balances of all project and program loans, beginning 60 days after signing of the applicable loan agreement and accruing when 35 the loan becomes effective. Based on this, financial charges during construction have been computed at the 6-month London interbank offered rate plus a fixed spread of 60 basis points net of a permanent credit of 40 basis points. Although the indicative London interbank offered rate is obtained or compiled from sources we believe to be reliable, ADB cannot and does not guarantee the accuracy, validity, timeliness, or completeness of any information or data made available for any particular purpose. Transaction figures in respect of a borrower's particular loan will be advised by ADB as and when required. Source: Asian Development Bank estimates.

Table A6.2: Detailed Cost Estimates By Implementing Agency

($ million) 36 Cost ADB ADB Government

OCR Financing ADF Financing Financing Appendix 6 Relending Relending Relending to Relending to Item Subtotal to CMC NWSDB Subtotal to CMC NWSDB Amount A. Investment Costs 1. Civil Works 50.60 42.82 42.82 0.00 0.00 0.00 0.00 7.78

2. Mechanical and Equipment 31.96 20.05 20.05 0.00 5.35 1.31 4.04 6.56 a. Equipment for Institutional Support 1.66 0.00 0.00 0.00 1.31 1.31 0.00 0.35 b. Infrastructure in CMC Area 25.57 20.05 20.05 0.00 0.00 0.00 0.00 5.52 c. Infrastructure in NWSDB area 4.73 0.00 0.00 0.00 4.04 0.00 4.04 0.69 3. Training and Workshop 2.94 0.00 0.00 0.00 2.51 2.51 0.00 0.43 4. Social Mitigation 0.08 0.00 0.00 0.00 0.00 0.00 0.00 0.08 5. Consultants 8.59 0.00 0.00 0.00 7.20 6.80 0.40 1.39 a. Project Management 6.06 0.00 0.00 0.00 5.08 4.68 0.40 0.98 b. Capacity Development 2.52 0.00 0.00 0.00 2.11 2.11 0.00 0.41 Subtotal (A) 94.16 62.87 62.87 0.00 15.05 10.62 4.44 16.24 B. Recurrent Costs 1. Incremental Recurrent Cost 2.73 0.00 0.00 0.00 2.34 1.95 0.39 0.39 a. Salaries 1.16 0.00 0.00 0.00 1.16 0.98 0.18 0.00 b. Accommodation 0.20 0.00 0.00 0.00 0.20 0.20 0.01 0.00 c. Office Equipment and Operation 1.37 0.00 0.00 0.00 0.98 0.77 0.21 0.39 Subtotal (B) 2.73 0.00 0.00 0.00 2.34 1.95 0.39 0.39 Total Base Cost 96.89 62.87 62.87 0.00 17.40 12.56 4.83 16.63 C. Contingencies 14.04 11.97 11.97 0.00 2.07 1.44 0.64 0.00 D. Financing Charges During Implementation 5.69 5.16 5.16 0.00 0.53 0.37 0.16 0.00 Total Project Costs 116.63 80.00 80.00 0.00 20.00 14.37 5.63 16.63 % Total Project Costs 100 69 17 14 ADB = Asian Development Bank, ADF = Asian Development Fund, CMC = Colombo Municipal Council, NWSDB = National Water and Sewerage Development Board, OCR = ordinary capital resources. Source: Asian Development Bank estimates.

PROJECT IMPLEMENTATION ARRANGEMENTS

National Level MOF MLGPC (EA) MWSD (Chair/PSC)

ADB FGIAs NWSDB

Provincial Level WPC

CMC Local Level

Sewerage Division Drainage Division Legal Division PMU SGIAs Treasury Assessment Division SGIA PIU

Appendix 7 Policy Communication

Implementation Technical Budget Support Fund Fund

37 CMC = Colombo Municipal Council, EA = executing agency, FGIA = first generation imprest account, IA = implementing agency, MOF = Ministry of Finance, MLGPC = Ministry of Local Government and Provincial Councils, MWSD = Ministry of Water Supply and Drainage, NWSDB = National Water Supply and Drainage Board, PIU = project implementation unit, PMU = project management unit, PSC = project steering committee, SGIA = Second Generation Imprest Account, WPC = Western Provincial Council. Source: Asian Development Bank.

IMPLEMENTATION SCHEDULE 38

2009 2010 2011 2012 2013 2014 Description Responsibility Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Appendix 8 Appendix Loan Approval and Effectiveness ADB Board Approval ADB ♦ Loan Signing ADB-Government ♦ Loan Effectiveness Government ♦ Project Management Preparation Fully-fledged PMU Set-up PMU ♦ Recruitment of DSC and IDC PMU with support by CDTA

Component 1: Upgrading Sewerage Infrastructure 1.a. Rehabilitation of main sewerage system iCMC Area Investigation, Survey and Engineering Design DSC Tendering of Design-Build-Operate Contract PMU with support by DSC Detailed Engineering Design Contractor Construction Contractor ii NWSDB Area Investigation, Survey and Engineering Design DSC Tendering of Design-Build Contract PIU with support by DSC Detailed Engineering Design Contractor Construction Contractor 1.b. Rehabilitation of Gravity Sewers Investigation, Survey and Detailed Engineering Design DSC Tendering of Works Contract PMU with support by DSC Construction Contractor 1.c. Rehabilitation of Sea Outfalls Investigation, Survey and Engineering Design DSC Tendering of Design-Build Contract PMU with support by DSC Detailed Engineering Design Contractor Construction Contractor 1.d. Supply of Non-fixed Operational Equipment PMU ♦ Component 2: Strengthening Institutional and Operational Capacity 2.a. Asset Management Planning and Operationalization PMU with support by IDC/DSC 2.b. Sewer Network Modeling and Planning DSC 2.c. Financial Improvement 2.d. Improving Operational and Monitoring Capacity PMU with support by IDC 2.e. Improving Environmental Compliance PMU with support by IDC 2.f. Improving Customer Relations and Public Awareness PMU with support by IDC and NGOs 2.g. Institutionalizing Pro-poor sanitation Services PMU with support by consultants 2.h. Institutional Development Consultant IDC Component 3: Project Management and Implementation Support 3.a. Design, Supervision and Management Consultant DSC 3.b. Project Adminstration PMU, PIU

ADB = Asian Development Bank; CDTA = capacity development technical assistance; CMC = Colombo Municipal Council; DSC = design, supervision and management consultant; IDC = institutional development consultant; NGO = nongovernment organization; NWSDB = National Water Supply and Drainage Board; PIU = project implementation unit; PMU = project management unit. Source: Asian Development Bank estimates.

Appendix 9 39

PROCUREMENT PLAN

Basic Data Project Name: Greater Colombo Wastewater Management Project Country: Sri Lanka Executing Agency: Ministry of Local Government and Provincial Councils Loan Amount: $100 million Loan (Grant) Number: TBD Date of First Procurement Plan: TBD Date of this Procurement Plan: August 2009

A. Process Thresholds, Review and 18-Month Procurement Plan

1. Project Procurement Thresholds

Except as the Asian Development Bank (ADB) may otherwise agree, the following process thresholds shall apply to procurement of goods and works.

Procurement of Goods and Works Method Threshold

International Competitive Bidding (ICB) for Works Equal or Above $3,000,000 International Competitive Bidding for Goods Equal or Above $500,000 National Competitive Bidding (NCB) for Works Below $3,000,000 National Competitive Bidding for Goods Below $500,000 Shopping for Works Below $100,000 Shopping for Goods Below $100,000

2. ADB Prior or Post Review

Except as ADB may otherwise agree, the following prior or post review requirements apply to the various procurement and consultant recruitment methods used for the project.

Procurement Method Prior or Post Comments Procurement of Goods and Works ICB Works Prior ICB Goods Prior NCB Works Prior NCB Goods Prior Shopping for Works Prior Shopping for Goods Prior

Recruitment of Consulting Firms Quality- and Cost-Based Selection (QCBS) Prior Quality-Based Selection (QBS) Prior Consultants Qualifications Selection (CQS) Prior

Recruitment of Individual Consultants Individual Consultants Prior

40 Appendix 8

40

Appendix 9 Appendix 3. Goods and Works Contracts Estimated to Cost More Than $1 Million

The following table lists goods and works contracts for which procurement activity is either ongoing or expected to commence within the next 18 months.

Contract Prequalification Advertisement Contract Value Procurement of Bidders Date No Code General Description ($ million) Method (y/n) (quarter/year) Comments 1.a. Rehabilitation of Main Sewerage System – Pumping Stations, Pumping Mains, Fine Screens 1 PS/01/ ICB Design, supply of equipment, construction, and operation & 48.22 ICB N Q4 2010 Design- maintenance for 3 years (extendible): Build- (i) civil, mechanical & electrical works associated with Operate installation of new pumping sets at 3 existing and 1 new PS, in CMC service area, including new electrical control panels and equipment; (ii) civil works for new pumping mains in 4 locations; (iii) civil, mechanical & electrical works associated with refurbishment of 7 existing PSs in CMC service area; (iv) installation of coarse screens and grit removal equipment, together with necessary civil, M&E works at 10 existing and 1 new pumping stations; (v) civil and M&E works associated with the installation of fine screens, grit removal, screenings & grit washing facility and waste disposal facility (subject to detailed design) at head of 2 No sea outfalls; (vi) supply and installation of 11 standby generators including bundled fuel storage tanks and electrical control equipment; (vii) 3 years O&M after final commissioning of all works (extendable, cost not included); (viii) provision of training to selected CMC O&M employees and managers and the completion of specific O&M related tasks

2 PS/02/ ICB Design, supply of equipment, construction for civil, mechanical & 4.84 ICB N Q4 2010 Design- electrical works associated with refurbishment of 6 existing Build pumping stations in NWSDB service area.

1.b. Rehabilitation of Gravity Sewers 3 GS/01/ICB Supply of equipment and construction of gravity sewers: 7.88 ICB N Q4 2010 Build (i) replacement of 10 km of critical sewers of under capacity, (Item-rate) subject to findings of comprehensive condition assessment (by design, supervision and management consultant); (ii) refurbishment of existing gravity sewers by replacement of non-operational control (sluice) valves 1.c. Rehabilitation of Sea Outfalls 4 OF/01/ ICB Design, supply of equipment, construction, training for sea 13.32 ICB N Q4 2010 Design- outfalls: Build (i) refurbishment of 2 sea outfalls in Mutwal and Wellawatta; (ii) installation of new diffuser at Mutwal outfall; (iii) unblocking of outlet points at Wellawatta outfall; (iv) removal of grit deposits within the 2 outfalls and improvement of means of access into outfalls 1.d. Supply of Non-fixed Operational Equipment 5 OP/01/ICB Supply of operational non-fixed plant and equipment for CMC, 2.21 ICB N Q1 2010 Goods together with the on-site training of appropriate staff in the (Item-rate) operation and maintenance of the equipment supplied. 2. Strengthening Institutional and Operational Capacity 6 BSS/01/ICB Design, supply, installation, on-site testing, commissioning and 1.00 ICB N Q4 2010 Goods training of staff of business support systems for CMC asset (Item-rate) management and operational department: asset management system, work planning system, inventory management system BSS = Business Support System; GS = Gravity Sewers; ICB = international competitive bidding; OF = outfalls; OP =Operational non-fixed Plant and Equipment; PS = Pumping Station. Appendix 9 Appendix 41 41

42 Appendix 8

42

4. Consulting Services Contracts Estimated to Cost More Than $100,000 Appendix 9 Appendix

The following table lists consulting services contracts for which procurement activity is either ongoing or expected to commence within the next 18 months.

Contract Advertisement Contract Value Recruitment Date International or No Code General Description ($ million) Method (quarter/year) National Assignment Comments 1 IDC/01/QCBS Provision of institutional development and management support 1.90 QCBS 3Q 2009 International Service services: (80:20) (i) to implement activities related to institutional development and change management; (ii) to operationalize asset management approach; (iii) to improve service delivery to its customers; (iv) assist CMC in establishing performance budgeting and accounting systems and other operational and financial improvement in CMC; (v) support CMC in implementing environmental compliance; (vi) provide associated training for the staff of the PMU and CMC; (viii) to execute community participation and public education activities. 2 DSC/01/QCBS Investigation, technical specification of works contracts, detailed 6.04 QCBS 3Q 2009 International Service engineering design, site supervision and project management of (80:20) the capital investment works to be provided within the construction contracts: (i) condition survey assessment of sewer network, network modeling, including prioritized replacement sewer program; (ii) sewer survey to locate cross-connections between sewerage and storm-water networks; (iii) location of storm water overflows from pumping stations with proposals for ensuring compliance with international environmental standards (iv) detailed engineering design for all physical works components; (v) construction supervision of all physical works components; (vi) update of wastewater master plan and preliminary design for underserved area and secondary treatment facility; (vii) project management consultancy; (viii) project management training to PMU and CMC staff 3 PR/01/CQS Institutionalization of pro-poor sanitation strategy to urban poor and 0.30 CQS 4Q 2009 National Service building poverty reduction policy roadmap based on lessons learnt from previous and ongoing pilot schemes in low income area sanitation projects DSC = design, supervision, and management consultant; IDC = institutional development consultant; PR = poverty reduction; QCBS = quality-and cost-based selection.

5. Goods and Works Contracts Estimated to Cost Less than $1 Million and Consulting Services Contracts Less than $100,000

The following table groups smaller-value goods, works and consulting services contracts for which procurement activity is either ongoing or expected to commence within the next 18 months.

Value of Contracts Procurement / General (cumulative) Number of Recruitment Item Description ($ million) Contracts Method1 Comments 1 ENV/01/S Provision of quality monitoring equipment and consumables 0.31 2-3 Shopping Goods (multiple) (Item-rate) 2 PMU/01/S Office Equipment, software, hardware, and office supplies for 0.2 4 Shopping Goods (multiple) PMU (Item-rate) 3 PIU/01/S Office Equipment, software, hardware, and office supplies for 0.08 2 Shopping Goods (multiple) PIU (Item-rate) 4 PA/01/CQS Public awareness campaign (NGOs) 0.17 2 CQS National assignment CQS = consultants’ qualifications selection, ENV = environment, NGO = non-governmental organization, PA= public awareness, PIU = project implementation unit, PMU = project management unit.

Appendix 9 Appendix 43 43

44 Appendix 8

44

Appendix 9 Appendix

B. Indicative List of Packages Required Under the Project

The following table provides an indicative list of all procurement (goods, works and consulting services) over the life of the Project. Contracts financed by the Borrower and others should also be indicated, with an appropriate notation in the comments section.

Estimated Value Estimated Domestic (cumulative) Number of Procurement Preference General Description ($ million) Contracts Method Applicable Comments Goods Operational non-fixed plant and equipment for the CMC 2.21 3–4 ICB No Goods (Item-rate) Business support systems: asset management system, work 1.00 1 ICB No Goods planning system, inventory management system (Item-rate) Quality monitoring equipment and consumables 0.31 2–3 Shopping No Goods (Item-rate) Office Equipment for PMU 0.2 4 Shopping No Goods (Item-rate) Office Equipment for PIU 0.08 2 Shopping No Goods (Item-rate) Works Rehabilitation of main sewerage system in CMC service area – 48.22 1 ICB No Design-Build- pumping stations, pumping mains, fine screens Operate Rehabilitation of Pumping Stations in NWSDB service area 4.84 1 ICB No Design-Build Rehabilitation of gravity sewers 7.88 1 ICB No Build (Item-rate) Rehabilitation of sea outfalls 13.32 1 ICB No Design-Build Estimated Value Estimated (cumulative) Number of Recruitment Type of General Description ($ million) Contracts Method Proposal Comments Consulting Services Institutional Development Consultant 1.90 1 QCBS Full technical International Design, Supervision, and Management Consultant 6.04 1 QCBS Full technical International Pro-poor sanitation Consultant 0.30 1 CQS Biodata National Public awareness campaign (NGOs) 0.17 2 CQS Biodata National CMC = Colombo Municipal Council, CQS = consultants' qualifications selection, ICB = international competitive bidding, NGO = nongovernment organization, NWSDB = National Water Supply and Drainage Board. Source: Asian Development Bank estimates.

Appendix 10 45

SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY

Country/Project Title: Sri Lanka: Greater Colombo Wastewater Management Project

Lending/Financing Department/ Project South Asia Department/Urban Development Division Modality: Division:

I. POVERTY ANALYSIS AND STRATEGY A. Linkages to the National Poverty Reduction Strategy and Country Partnership Strategy

The Project will contribute to rehabilitating sewerage infrastructure in the Colombo Municipal Council (CMC) area and surrounding areas and will improve environmental and public health through improved urban services. This is line with the Government's Ten-Year Development Framework, 2006–2016, which includes increasing access to improved sanitation facilities as part of its focus on urban development. The Project will have a positive impact on the poor. The public health impact from reduced overflows and leakages will benefit the poor who often live near polluted inland water ways. B. Poverty Analysis Targeting Classification: Targeted Intervention (TI-M) 1. Key Issues

A survey conducted during project preparation gathered baseline socio-economic information and willingness to pay data. The survey sample was drawn from 20 locations across the Project area and involved 1,000 household interviews, supplemented by 100 interviews with public and private sector organizations. The poverty analysis used primary data from the survey and primary information gathered from case studies in three on-site areas, transect walks, and focus group discussions with various stakeholders. Secondary data from government agencies and international organizations were also used.

The survey recorded that 5% of respondents had household incomes below the poverty line, which is fairly consistent with official district data. The survey covered the Colombo Municipality, Thimbirigasyaya, Dehiwela/Mount Lavinia, and Kolonnawa divisional secretariats. It identified that, for high-income households, 80% used the central sewerage system. By contrast, only 58% of poor households were covered by the system. The poorest households not connected to the central sewerage system used latrines. The poverty analysis reflected that the undercapacity of the sewer mains did not allow users to connect to the central sewerage system. Leaks cause health risks and odor nuisance; and blockages caused by sedimentation due to poor operation and maintenance and the lack of rehabilitation undertaken over the past 20 years.

The survey showed that for high-income households not covered by the central sewerage system, most have septic tanks and soakaways. For the poorest households, none have septic tanks or soakaways, because they lack land and their habitations are close to each other. If low-income households own septic tanks, they are often poorly maintained, since the roads where they live are too narrow for maintenance equipment. The problem is further compounded by high water tables which fill septic tanks almost immediately, and improper septic tank construction. About 66% of respondents dispose of grey-water in street drains. Local government cites a lack of manpower, equipment (such as gully suckers), improper urban planning, and dilapidated systems as the main barriers to satisfactory sewerage and wastewater treatment. Poor sanitary conditions contribute to diseases such as filariasis, skin diseases, diarrhea, dengue, and malaria. Respondents attribute increases in mosquito-borne diseases to maintenance holes that spill water most of the year—requiring them to burn mosquito coils throughout the day. Improvements to sanitation will reduce diseases and consequent morbidity and mortality.

The provision of high-quality and sustainable services to support economic development and poverty reduction will rely on the Project’s support to build the capacity of CMC to plan and manage urban infrastructure more effectively. The Project will improve CMC's capacity to plan, develop and operate pro-poor urban infrastructure and services, based on an improved understanding of poverty and on processes of participatory planning and development. Poverty and social analysis using a combination of qualitative and quantitative techniques is required to gauge post-Project benefits in terms of improved access to basic services by the poor. The baseline survey, which will be carried out at the start of the Project, will serve as the benchmark against which post-Project impacts on the poor may be measured. Benefits to poor households, benefits to women, increased participation and capacity building of poor including women are some of the issues that will be monitored during and after implementation.

2. Design Features

The Project will include a component to institutionalize pro-poor and gender-inclusive practices at CMC, in line with the commitments set out in its (draft) poverty reduction strategy. Overall, it is anticipated that the Project will reduce the burden of diseases, treatment costs, and productivity losses. Women, especially poor women, will benefit from a reduction in the time and energy spent in disposing of sewage and the reduced work burden associated with cleaning and family health care. The spin-offs are expected to be economic growth and direct employment in unskilled/construction work under the Project.

46 Appendix 10

The Project will include a pro-poor and gender subcomponent, under the institutional strengthening component of the loan, to institutionalize good practices in sanitation in underserved settlements in CMC, together with grant-financed pilot initiatives for community-based and gender-responsive on-site sanitation facilities in selected underserved settlements in the CMC area.

II. SOCIAL ANALYSIS AND STRATEGY Findings of Social Analysis

Human development indicators show marked improvement in Sri Lanka’s per capita income, life expectancy, adult literacy, and education in the last four decades. In 2003, life expectancy at birth was 74, the adult literacy rate was 90.3%, and the per capita gross domestic product at purchasing power parity was $3,778 (UNDP, 2006, Human Development Report). Based on the 2002 census, poverty incidence was 23%. Poverty incidence among Sri Lanka’s districts ranges from 6% to 34%. It is lowest in Colombo (6%) but over 143,000 people in Colombo have per capita incomes less than SLRs1,537. Population growth is faster in Colombo than the other districts (1.35% in comparison with the national average of 1.14%). Further, there is a high degree of variation in poverty incidence within Colombo’s divisions. It ranges from 2.7% in Sri Jayewardenepura to 14.2% in Hanwella. While only 6% had incomes below the poverty line in Colombo, 26% are in the next income group, so there are many vulnerable people who are at risk of experiencing poverty. Poverty in urban Colombo is characterized by limited access to basic services, including sanitation.

In general, data on access to basic services are improving. For example, UNDP records that the population with access to improved sanitation increased from 68% in 1990 to 79% in 2002. However, sustaining these improvements will require proper operation and maintenance of existing systems. The Colombo sewerage system serves only 20% of population in Greater Colombo. The system, built between 1906 and 1920, and substantially rebuilt and extended in the 1980s has sections which require urgent repair. For the remaining 80%, the majority (65%) are served by on-site facilities; the rest (15%) have no access to any facilities. Most of the urban poor have no access to the sewage network or on-site facilities dispose of their waste on the seashore, in canals and waterways, and in available open ground. With limited infrastructure and services, old and new urban centers risk not being capable of adequately supporting the increasing economic productivity of households.

In areas served by the sewerage system, the poor are often not connected. The system has not kept pace with population growth and has deteriorated in many instances. The increase in the number of poor households is making their access as a group worse off. Further, in areas served by a malfunctioning sewerage system, the poor who are not connected are subjected to pollution caused by overflows and leaks from the system into waterways, which are already polluted by direct discharge from households without access to the system. In areas with no services, the poor do not have household systems because they lack of funds for the capital investments required and do not have enough space for an individual septic tank. B. Consultation and Participation 1. Provide a summary of the consultation and participation process during the project preparation.

A diversity analysis has been undertaken before the stakeholder analysis covering physical, socioeconomic, and usage diversity. Stakeholder mapping identified direct and indirect beneficiaries, pressure groups, and other interest groups at the national, divisional, project, and community levels. The stakeholders were grouped into seven categories comprising: (i) users of the main sewerage system, (ii) users of septic tanks in areas not served by the sewerage system, (iii) managers of sewerage systems, (iv) other service providers, (v) regulators and administrators, (vi) policy makers, and (vii) other interest groups. The expectations and likely benefits, and issues and concerns, of these stakeholders were analyzed in the stakeholder analysis and considered in the project design, particularly in developing participation strategies. Information dissemination and consultations have been undertaken to ensure stakeholder participation in project design.

2. What level of consultation and participation (C&P) is envisaged during the project implementation and monitoring? Information sharing Consultation Collaborative decision making Empowerment

3. Was a C&P plan prepared? Yes No If a C&P plan was prepared, describe key features and resources provided to implement the plan (including budget, consultant input, etc.). If no, explain why.

The Project will ensure participation during preplanning, planning, implementation, and monitoring and evaluation. Pre- planning focuses on building awareness of the Project, including disseminating information and awareness campaigns. A separate framework for public awareness will be developed. The awareness campaigns will primarily ensure that the public in the project area understands and appreciates (i) the link between good sanitation, hygiene, and health; (ii) the hidden costs of not having good sanitation in terms of incurred medical costs, lost time, and burden on public medical services, and (iii) the true costs of the operation and maintenance of a wastewater collection, and disposal system and, therefore, the need for a realistic wastewater service charge. During planning, participatory activities to be undertaken by the project include community and resource mapping, identification of affected people, gathering baseline information, consultations and discussions. At the planning stage assistance and mitigation plans will be finalized through consultations and disclosed to stakeholders. During implementation, participation will be ensured in carrying out implementation and monitoring and

Appendix 10 47 evaluation. Women's representation and their effective involvement in all consultative and participatory processes supported under the Project will be ensured.

C. Gender and Development 1. Key Issues

National gender indicators show a balance between men and women in Sri Lanka. The 2001 census survey (covering limited areas in the north and east) indicated a sex ratio of 97.9 men to 100 women. Women had a higher life expectancy at birth and literacy rates just 3% less than those of men. Despite women's higher levels of participation in education at secondary and tertiary levels, their political participation and representation is minimal. Life expectancy at 72 years for men and 77 years for women masks the high morbidity rate for women caused by illnesses such as diarrhea, dysentery and malaria. Safe drinking water was available to 75.4% of the overall population and satisfactory sanitation to 79% in 2002, but solid waste management in urban areas remains a critical issue. In terms of water and sanitation, the burden of improper design, construction, and operation of water and sanitation is borne largely by women. When piped water systems do not function, it is women who have to ensure its availability for use of other household members. If toilets are not useable, it is women who negotiate with neighbors to share toilets. They are also responsible for disposing of wastewater from the kitchen and for ensuring that potential problems with neighbors are minimized. Nonfunctioning public toilets are seen as a bigger issue for women than for men. Infants and children are particularly prone to waterborne diseases caused by insufficient sanitation, and care of the sick is the responsibility of women. The Project will respond to these issues by ensuring women's representation and their participation in all consultation and participation processes and their equal access to employment opportunities provided under the loan. More specifically, CMC's commitment to assess and institutionalize pro-poor and gender-inclusive approaches for on-site solid waste management (see below) may open up greater opportunities for beneficial impacts on women.

2. Key Actions. Measures included in the design to promote gender equality and women’s empowerment—access to and use of relevant services, resources, assets, or opportunities and participation in decision-making process: Gender plan Other actions/measures No action/measure

The pro-poor and gender subcomponent under the institutional strengthening component of the loan will support: (i) Taking stock of lessons learnt at CMC. This will aim to take stock of lessons learnt from pilot projects within CMC funded between 1998 and 2009 by development partners: Department for International Development of the United Kingdom (DFID), UN-Habitat, German Technical Cooperation (GTZ) and the International Development Research Center (IDRC), The pilot projects targeted the provision of basic services to underserved settlements (USS) in Colombo. The stocktaking will identify pilot schemes carried out in underserved areas in partnership with CMC. It will: (a) assess the design, implementation arrangements, consultative processes and socioeconomic and gender- related results; (b) document and draw lessons from the schemes; and (c) review the existing legal, regulatory and administrative frameworks for the provision of urban basic services in the CMC area. (ii) Reviewing promising practices in South and Southeast Asia. The findings and recommendations of the stocktaking exercise will presented, discussed and further assessed at an international workshop n Colombo. This will: (a) promote lateral learning between CMC and other selected municipal councils in South and Southeast Asia; (b) share information on socially-inclusive and gender-related policies, strategies, and operational approaches (including the effective use of pro-poor funding allocations) for greater outreach to the urban poor; and (c) inform the development of the Greater Colombo Wastewater Master Plan through the incorporation of pro-poor and gender- inclusive perspectives. (iii) Identifying the way forward. This will include: (a) finalizing the CMC's poverty reduction strategy, drawing on documented lessons learnt; (b) assisting CMC to update policy guidelines to institutionalize good practices; (c) assessing future investment requirements in accordance with the Strategy; and (d) identifying technical requirements to continue recording the USS data into the current geographic information system (GIS) database. (iv) Piloting alternative and unconventional on-site sanitation in underserved areas. These activities, financed by the Poverty and Environment Fund, will consist of carrying out one pilot intervention (18 months) in two selected USS which are not served by the existing public sewerage system. This will involve: (a) carrying out a participatory consultative process with the beneficiaries to identify the most appropriate alternative sanitation technology; (b) identifying the potential for community participation in the implementation, operation and maintenance of the most appropriate alternative technique; and (c) assessing the possibility of extending the piloted approach to other municipal areas.

48 Appendix 10

III. SOCIAL SAFEGUARD ISSUES AND OTHER SOCIAL RISKS

Issue Significant/Limited/ Strategy to Address Plan or Other Measures No Impact Issue Included in Design Limited Impact The Project minimizes land Involuntary acquisition and Full Plan Resettlement resettlement impacts. Short Plan Rehabilitation of the Resettlement Framework sewerage system will not No Action require permanent land acquisition nor will it have permanent resettlement impacts. All impacts will be temporary and can largely be addressed through mitigation measures. A short resettlement plan was prepared. No Impact Screening during project Indigenous Peoples preparation show no Plan impacts on indigenous Other Action peoples. The preparation Indigenous Peoples of resettlement plans also Framework shows that there are no No Action indigenous peoples among the affected people. No Impact There are no job losses Labor associated with the Employment Project. Construction will Plan opportunities generate temporary Other Action (CLS is ensured Labor retrenchment employment opportunities under the government’s Core labor standards for local male and female assurance) community members. No Action No Impact The potential negative Affordability impact of an increase in Action property tax (CMC) and No Action sewerage tariff (NWSDB) on the poor is considered to be acceptable at less than 5% of household income, and therefore deemed affordable. Other Risks and/or No Impact No other risks or Vulnerabilities vulnerabilities have been Plan HIV/AIDS identified. Other Action Human trafficking No Action Others(conflict, political instability, etc), please specify IV. MONITORING AND EVALUATION

Are social indicators included in the design and monitoring framework to facilitate monitoring of social development activities and/or social impacts during project implementation? X Yes □ No

Appendix 11 49

SUMMARY SHORT RESETTLEMENT PLAN

A. Scope of Land Acquisition and Resettlement

1. The Project has three components: (i) upgrading sewerage infrastructure, (ii) strengthening institutional and operational capacity, and (iii) project management and implementation support. By design, the Project will not require land acquisition. For rehabilitating gravity sewers, sections totaling 2.61 kilometers (km) will use trenchless technology and will have no resettlement impacts. The remaining sections (8.99 km) will use either trenchless technology or an open-cut approach. The choice of technology will depend on a conditions survey that will be undertaken as part of the Project. Trenchless technology will not have resettlement impacts, so, as a conservative approach, the short resettlement plan in Supplementary Appendix I assumes that the remaining sections will use an open-cut approach. Open-cut rehabilitation will not require land acquisition. Where there is sufficient road width (i.e., four or more lanes, estimated at 2.83 km), traffic can be managed to ensure that works will not result in temporary access loss. For two-lane roads, there may be potential temporary impacts related to access disruptions. Transect walks were conducted on two road sections totaling 1.25 km.1

2. The potential temporary impacts of an open-cut approach would be access disruption for: (i) residents, (ii) businesses and clients, (iii) vehicles, and (iv) institutions and patrons. This can be mitigated through good construction practices, which will be the responsibility of construction contractors.2 Where access cannot be assured, businesses and their employees may lose income. The transect walks were used as a basis to conservatively estimate possible income losses.3 There will be no permanent or temporary land acquisition. Based on transect walks and confirmation from the project preparation civil engineers, there will be no impacts on permanent structures or other assets. While it is estimated that there would be potential impacts for an estimated 156 residential households in terms of access inconvenience, interviews show that residents' livelihoods will not be affected except when their businesses or employment are affected by access. Five institutions were recorded in the transect walks, including cooperatives, a post office, dispensary, and a temple. The transect walk shows that the institutions' operations need not be affected, but additional mitigation measures such as not conducting work during special days for a temple should be undertaken during construction. Residents and business may temporarily lose secure parking for their vehicles. Businesses and their employees may experience partial income loss because of reduced client access. One pipe section is 20 m long, requiring a trench 1.5 m wide. By opening the trench one section at a time, the disruption is estimated to be 5 days per 20 meter (m) section. There is great potential to minimize impacts, through proper planning and implementation of mitigation measures, to a level that will not affect income. This will be undertaken during detailed design and project implementation.

1 During the transect walks, interview schedules for residents, businesses, employees, and institutions were implemented and this was supplemented with focus group discussions to estimate potential temporary impacts. 2 Measures are identified in the initial environmental examination (IEE) and include: (i) leaving spaces for access between mounds of soil, (ii) providing walkways and metal sheets to maintain access across trenches for people and vehicles where required, (iii) increasing the workforce in front of critical areas such as institutions, (iv) consulting business and institutions about operating hours and factoring this in work schedules, (v) providing advance information on works to be undertaken, including appropriate signs, and (vi) coordination with the Colombo Municipal Council (CMC) Traffic and Roads Safety Division for rerouting of traffic and traffic management, and ensuring appropriate signs and policing of traffic. 3 The assumptions are: (i) on two-lane sections, there would be a need for temporary road closure, and (ii) entire roads (as opposed to sections which are being worked on) will be closed.

50 Appendix 11

Table A11.1: Summary of Potential Resettlement Impacts Categories of Impacts Temporary Impacts

Land Acquisition (permanent or temporary) 0 Affected Structures 0 Parking Disruption (total number of residential vehicle owners) 515 Parking Disruption (total number of commercial operators) 480 Affected Mobile Hawkers 65 Affected Immovable Businesses 428 Affected Employees of Businesses 1,340 Affected Institutions 22 Source: Asian Development Bank estimates.

3. During the transect walks surveys were undertaken, covering 61 residents, 15 hawkers, 99 business owners or operators, 306 employees, 5 heads of institutions, 111 three-wheel drivers, and 4 nightwatchers. These were supplemented by focus group discussions to provide a comprehensive view of the socioeconomic characteristics of persons in the project area. Approximately 20% of households were headed by women. However, none of households headed by women had incomes below the poverty line. Average per capita income was SLRs20,400 per month for those surveyed in New Kettarama, and SLRs16,094 in Bodhiraja Mawatha. Of those who will have potential income loss during project construction, nightwatchers of parking lots were identified as vulnerable. The average incomes of this group were only SLRs7,700 per month. To mitigate impacts on this vulnerable group, the Project will ensure employment for these people.

B. Objectives, Policy Framework, and Entitlements

4. The Land Acquisition Act, 1950 (LAA, amended from time to time) governs acquisition of land for public purposes in Sri Lanka. The act provides compensation for land, structures, and crops. To address involuntary resettlement impacts due to development projects not covered by the act, the Government adopted the National Involuntary Resettlement Policy, 2001 (NIRP). The NIRP identifies as one of its policy principles drafting amendments to the act to bring it into line with the NIRP for government approval and to prepare the necessary implementation guidelines. Nine core involuntary resettlement principles for the Project were taken directly from the NIRP.4 An additional two principles from ADB’s principles not clearly covered by NIRP were added: (i) affected people are to be identified and recorded as soon as possible in order to establish their eligibility through a population record or census that serves as an eligibility cutoff date, preferably at the project identification stage, to prevent a subsequent influx of encroachers or others who wish to take advantage of such benefits; and (ii) the full resettlement costs are to be included in the presentation of project costs and benefits. The entitlement matrix for the

4 (i) Involuntary resettlement should be avoided or reduced as much as possible by reviewing alternatives to the project as well as alternatives within the project; (ii) where involuntary resettlement is unavoidable, affected people should be assisted to re-establish themselves and improve their quality of life; (iii) compensation for loss of land, structures, other assets and income should be based on full replacement cost and should be paid promptly (this should include transaction costs and replacement land should be an option for compensation in the case of loss of land—in the absence of replacement land cash compensation should be an option for all affected people); (iv) resettlement should be planned as a development activity for the affected people; (v) affected people should be fully involved in the selection of relocation sites, livelihood compensation and development options at the earliest opportunity (resettlement should be planned and implemented with full participation of the provincial and local authorities); (vi) common property resources and community and public services should be provided to affected people (to assist those affected to be economically and socially integrated into the host communities, participatory measures should be designed and implemented); (vii) affected people who do not have documented title to land should receive fair and just treatment; (viii) vulnerable groups should be identified and given appropriate assistance to substantially improve their living standards, gender equality and equity should be ensured and adhered to throughout the policy; and (ix) project executing agencies should bear the full costs of compensation and resettlement.

Appendix 11 51

Project, based on the above principles and the potential impacts, is in Table A10.2. All impacts will be addressed at the project level.

Table A11.2: Entitlement Matrix

Type of Loss Definition of Implementation Issues and Compensation Policy (Application) Entitled Person Responsible Agency Temporary loss of Residents and • 30 days advance notice regarding Identification of sufficient space for an secure parking space business owners construction activities, including alternative parking facility. losing access to duration and type of disruption. (Loss of private private parking • Where the contractor's actions Affected people will be determined by the parking space or space, and cannot address the loss, affected PMU through a survey and will be access secure to vehicle owners people will be provided secure provided with identification cards, which parking lots) losing access to parking space (sufficiently cordoned will allow access to the temporary parking secure parking off and provided with security facility. The temporary parking facility will lots. guards) in sections of the road that clearly identify ID numbers eligible to park will be closed during construction. based on the section where construction is being undertaken. Temporary disruption Legal • 30 days' advance notice regarding Identification of alternative temporary sites of livelihood titleholders, non- construction activities, including to continue economic activity. titled mobile duration and type of disruption. hawkers • Where contractor’s actions cannot The PMU will determine hawkers entitled ensure there is no income or to assistance through survey and will be access loss,a affected people will be provided with identification cards. assisted to temporarily shift for continued economic activity.b Temporary disruption Legal • 30 days' advance notice regarding Affected people will be determined by the of livelihood titleholders, non- construction activities, including PMU through a survey and will be titled immovable duration and type of disruption. provided with identification cards. The business owners • Where contractor’s actions cannot survey will determine income loss. and operators ensure there is no income or access loss, affected people will be provided compensation for lost income or a transitional allowance for the period of disruption, whichever is greater. Temporary impacts Communities • Replacement or restoration of the The PMU and contractor on common affected community facilities – resources including public water stand posts, public utility posts, shrines, etc.

Impacts on vulnerable Vulnerable • Vulnerable households will be The PMU will determine vulnerable affected people affected people informed of all project construction affected people and provide information employment opportunities. on all project construction employment • Nightwatchers will be ensured opportunities. temporary project employment in the Project's provision of secure parking spaces. Any other loss not - • Unanticipated involuntary impacts The PMU will ascertain the nature and identified will be documented and mitigated extent of such loss. It will finalize the based on ADB’s Involuntary entitlements in line with ADB’s Involuntary Resettlement Policy (1995). Resettlement Policy (1995). ADB = Asian Development Bank, PMU = project management unit. a Measures are identified in the initial environmental examination (IEE) and include: (i) leaving spaces for access between mounds of soil, (ii) providing walkways and metal sheets to maintain access across trenches for people and vehicles where required, (iii) increasing the workforce in front of critical areas such as institutions, (iv) consulting business and institutions about operating hours and factoring this in work schedules, (v) providing advance information on works to be undertaken, including appropriate signs, and (vi) coordination with the Colombo Municipal Council (CMC) Traffic and Roads Safety Division for rerouting of traffic and traffic management, and ensuring appropriate signs and policing of traffic. b For example, assistance to shift to a side of the road where there is no construction or to the location where traffic will be diverted. Source: Asian Development Bank assessment.

52 Appendix 11

C. Consultation, Disclosure, and Grievance Redress

5. The resettlement plan was prepared in consultation with stakeholders. During consultations, information was disseminated to affected people. Local language versions of the summary resettlement plan have been made available in relevant government agencies and the project management unit (PMU) office. The resettlement plan will be disclosed on ADB’s website and the MLGPC website. Finalized resettlement plans will also be disclosed on the ADB’s and the MLGPC websites and posted in local government offices; and information dissemination and consultation will continue throughout project implementation.

6. Grievances of affected people will first be brought to the attention of the PMU resettlement specialist. Grievances not redressed by the specialist will be brought to the project director. Grievances not redressed will be brought to the safeguards committee in each district. There is a long history of grievance redress for CMC services through the district engineer. This practice will be formalized for resettlement purposes through the safeguards committee. The safeguards committee will comprise the district engineer as chair, a representative from MLGPC, the PMU social safeguards officer, a female affected person or resident from the district, and the PMU resettlement specialist who will observe and take minutes. The safeguards committee will meet when grievances are put forward by the project director to determine the merit of each grievance, and to resolve grievances within a month of receiving the complaint. Further grievances will be referred by affected people to the project steering committee. The grievance redress mechanisms will continue to function throughout the project duration.

D. Compensation, Relocation, and Income Restoration

7. Based on the preliminary design there are no permanent impacts. Temporary impacts are restricted to impacts on access. Affected people will be provided with advance notice of construction activities including duration and type of disruption. Construction contractors will ensure income and access losses are avoided through actions identified in the initial environmental examination. The PMU will provide secure alternative parking locations, and assistance to mobile hawkers to move temporarily so they can continue their economic activity. Should construction activities result in unavoidable livelihood disruption, compensation for lost income or a transitional allowance for the period of disruption will be provided. Any temporarily affected community infrastructure and property will be restored to pre-project conditions as part of the contractor’s contract. The PMU will assess whether there are vulnerable affected people. Vulnerable households will be provided information on all potential construction employment as a result of the Project. Transect walks identified nightwatchers as vulnerable persons. Nightwatchers will be ensured temporary project employment in the Project's provision of secure parking spaces. All compensation and assistance to affected people will be completed prior to award of civil works contracts.

8. A detailed measurement survey will be undertaken to identify eligible affected people after detailed design has been completed. At the time of the survey, individuals who are living or working in areas that are likely to be affected by construction or operation of the infrastructure works, regardless of whether they have legal title to the affected land or assets, will be provided with cards to identify them as eligible for compensation and assistance.5

5 Eligible affected people will fall under the following general categories: (i) persons who lose income while construction is carried out in the vicinity of their business (owner/operators of businesses and their employees including nightwatchers in parking areas, and hawkers) (ii) persons whose normal activities are disturbed by the presence of trenches, excavated soil and machinery (residents and those under category i); (iii) affected people who belong to socially and economically vulnerable groups.

Appendix 11 53

9. The estimated budget required to implement the resettlement plan is SLRs26 million. The resettlement budget will include a contingency amount of 10% to cover unanticipated resettlement impacts and additional amounts that may be needed to resolve disputes. A budget line will be allocated for the contingency, but funds will only be released on approval of the PMU project director accompanied by a proper justification for the additional expenditure. Any other departures from the budgets and allocations indicated in the resettlement plan will require the same process of application and approval.

E. Institutional Arrangements

10. The Ministry of Local Government and Provincial Councils will be the Project’s executing agency. CMC will be the implementing agency responsible for implementing most of the activities, except for the pumping station rehabilitation works within the NWSDB service area, for which NWSDB will be the implementing agency. A project management unit (PMU) will be established within CMC directly under the municipal commissioner, led by a CMC officer at senior management level for the duration of the Project. A small project implementation unit will be established for implementing the works within NWSDB service area. A national project steering committee will provide policy guidance to the Project.

11. CMC resettlement planning and implementation capacity will be strengthened through provision of expertise, and training and support for CMC staff, particularly at the district level. Within the PMU, the monitoring and evaluation unit will deal with safeguards functions. Resettlement issues across the Project will be managed and coordinated by a social safeguards officer of the PMU. The social safeguards officer will be supported by a domestic resettlement specialist who will be part of the design, construction supervision, and management consultants.

F. Resettlement Financing

12. Compensation for lost income and PMU costs associated with resettlement will be funded by the Government. Survey costs and other implementation costs not covered by the PMU will be funded by the Project. Any land acquisition, compensation, relocation and rehabilitation of income and livelihood will be considered as an integral component of Project costs.

G. Monitoring and Evaluation

13. The PMU social safeguards officer will monitor whether resettlement is effective, make recommendations for change where necessary, and report to the project director. The design, construction supervision, and management consultants -resettlement specialist will provide the PMU with training in resettlement issues, social survey methods and data analysis and recording. Monitoring data will be collected from PMU, DSC, contractors, and individual affected people, and will be compared with entitlements and disbursement schedules established in the resettlement plans. The PMU will also engage a consultant as an independent external monitor to conduct monitoring of the resettlement process. The consultant will conduct compliance monitoring to check that entitlements have been provided as specified in the resettlement plan, and social impact evaluations to determine whether the compensation measures have mitigated the effects of the project and delivered the intended social improvements. The external monitor will report to MLGPC and ADB throughout project implementation, and will produce annual reports that will identify any outstanding issues that need to be addressed, and any departures from Government or ADB policy, together with recommended remedial action. The reports will also identify any strategic lessons that need to be learned, so that these can be incorporated into future resettlement activities of the implementing agencies, executing agency, the Government, or ADB.

54 Appendix 12

SUMMARY INITIAL ENVIRONMENTAL EXAMINATION (SHORT)

1. The Greater Colombo Wastewater Management Project will improve the urban environment by securing improved sanitation services for Colombo by upgrading sewerage infrastructure, and strengthening the institutional, operational, and project management capacity of the wastewater service provider. The objectives of the Project are in line with those under the ADB Country Partnership Strategy, 2009-2011 and the Government's Ten-Year Development Plan.1

2. ADB classifies the Project as environmental assessment category B2 according to ADB’s Environment Policy (2002) and Environmental Assessment Guidelines (2003). The Colombo Municipal Council (CMC) will submit project information to the Central Environmental Authority (CEA) and the Coastal Conservation Department (CCD) to obtain necessary environmental clearances required by Government legislation.

A. Description of the Project

3. The Greater Colombo Sewerage System includes sewer infrastructure for the north catchment area and the south catchment area. All the wastewater is discharged to the Indian Ocean through two long sea outfalls at Mutwal (north catchment) and Wellawatte (south catchment). Built between 1906 and 1920, and substantially rebuilt and extended in the 1980s, some parts of Greater Colombo’s sewerage system are in need of urgent repair. Due to its poor condition and long neglected operation and maintenance (O&M), the system is not performing well.

4. Table A12.1 lists the rehabilitation and upgrade of the sewage infrastructure considered for implementation under the Project.

Table A12.1: Details of Proposed Rehabilitation and Sewerage System Upgrade 1. Rehabilitation of Main Sewerage System (Pumping Stations, Pumping Mains, Fine Screens) (i) Civil, mechanical and electrical works associated with installation or refurbishment of 17 pumping stations and four new pumping mains; (ii) installation of coarse screens and grit removal equipment at 10 existing and one new pumping stations; (iii) installation of fine screens, grit removal and washing equipment at headworks of the two outfalls; and (iv) supply of 10 standby generators including bundled fuel storage tanks and electrical control equipment 2. Rehabilitation of Gravity Sewers (i) Replacement of 10 km critical sewers that are operating at below capacity, and (ii) refurbishment of existing gravity sewers by replacement of non-operational control (sluice) valves 3. Rehabilitation of Sea Outfalls (i) Refurbishment of two sea outfalls in Mutwal and Wellawatte; (ii) installation of new diffuser at Mutwal outfall; (iii) unblocking of outlet points at Wellawatte outfall; and (iv) removal and safe disposal of grit deposits within the outfalls and improvement of means of access into outfalls Source: Asian Development Bank assessment.

B. Forecasting Environmental Impacts and Mitigation Measures

5. The significant positive environmental impacts are: (i) improvement in surface water and groundwater quality due to reduction in overflows; (ii) elimination of future road collapses; (iii) reduction in local flooding; (iv) elimination of cross-contamination in water supply; 3

1 The Mahinda Chintana (Vision for a New Sri Lanka: 2006-2016) is the Government’s 10-Year Development Framework. 2 This category includes projects judged likely to have some adverse environmental impacts, but of less significance than Category A projects. 3 There are many cross-connections installed to provide local relief in times of heavy rainfall or power cuts, to avoid sewage flooding to properties and highways. These cause overloading of the sewers during heavy rain, increased

Appendix 12 55

(v) reduction in health risks related to sanitation, contaminated water, and wastes; (vi) increase in effluent dispersion for the two outfalls; (vii) improvement in aesthetics, and (viii) protection of marine ecology. The Project will be complemented by a comprehensive capacity development program ranging from strategic planning and management to technical and operational training by (i) preparing standard operational practices, health and safety manual, emergency plan and preventive maintenance plan; (ii) training operating staff on preventive maintenance practices; (iii) supporting CMC in building a mechanism to monitor and comply with environmental regulatory standards; and (iv) providing equipment for cleaning the sewers, removing blockages, and hygienically transporting collected wastes (grit and screening).

6. Most of the potential negative environmental impacts are during the construction phase, associated with the activities of the construction contractor(s). By including environmental management clauses in the individual contract documents, the potential for adverse impacts can be significantly reduced. The Project is not expected to have major environmental impacts during construction because (i) proposed works will be within flat, urban, and existing fenced land owned by CMC or National Water Supply and Drainage Board (NWSDB), within the right- of-way of existing roads, and/or underground, (ii) inevitable disturbance to relatively sensitive receptors such as schools, housing, or places of worship will be mitigated through controls on the activities of the contractors; (iii) use of generated spoils4 will be limited to predetermined and non-productive areas; (iv) existing sewers will be relined, or replaced using, wherever possible, trenchless technologies; (v) other utilities (specifically water pipes above sewer lines) will be predetermined to prevent interference; (vi) potential access disruption for residents, businesses and clients, and vehicles will be mitigated through consultation, and provision of advanced information, walkways, and metal sheets; (vii) assembly on land of inert materials for the outfalls will not disturb the sea bed and the limited marine environment; and (viii) temporary risks to workers, specifically in underwater work and confined spaces, will be mitigated by using the services of experienced and certified marine contractors and specific contract provisions on occupational health and safety practices.

7. During operations, potential environmental impacts will be public health effects, aesthetic effects,5 and effects on the marine ecology due to outfall discharges. The two long outfalls were initially designed with diffusers to achieve high levels of dilution and dispersion which will be achieved after rehabilitation. Modeling studies6 indicate good mixing, dispersion, and bacteria die-off under most weather and tide conditions during operations of the rehabilitated outfalls. However, pollution sources not within the scope of the Project (Kelani River, existing harbor, Beira Lake, the canals, and industries, institutions, and establishments that produce low levels of pollution) will still deposit high-concentration loadings in the coastal environment. Regular monitoring will be carried out on both outfalls, surface waters, and along coastlines. Repetitive measurements in the surface and vertical profile of sampling points situated in and around the outfall's end will be done for the correct evaluation of the discharge and for the evaluation of the outfall performance and effects.

pumping costs, introduction of grit and other debris, and overflows. The Project will implement a program to identify and remove such cross-connections. 4 Approximately 6,400 m3 of spoils will be generated from ground excavation. 5 Aesthetic concerns relates to the possible presence of sewage-associated materials such as floatable solids, grease, and oil which result in visual or olfactory pollution and to discoloration of the marine waters when dilution is insufficient. 6 Three studies have been carried out to investigate effluent plume dispersion from the sea outfalls, first under the Greater Colombo Sewerage Project in 2000, second under the Colombo Port Efficiency and Expansion Project in 2003–2004, and the most recent by the Lanka Hydraulic Institute in 2009.

56 Appendix 12

C. Institutional Requirements and Environmental Management Plan

8. The Ministry of Local Government Provincial Councils (MLGPC) will be the executing agency. A national-level project steering committee (PSC) will be established to oversee the Project and provide policy guidance and coordination among the government agencies involved in the administrative process of the Project. CMC will be the implementing agency responsible for supervising infrastructure construction (except for pumping stations within the NWSDB area for which NWSDB will be the implementing agency), conducting the noninfrastructure elements, and will establish a project management unit (PMU). The PMU will have a monitoring and evaluation (M&E) unit and will be supported by design and management consultants, who will design the infrastructure, manage tendering of contractors, and supervise construction. Their contract will require the consultants to include mitigation measures in designs where appropriate, and to specify other measures in construction contracts. Environmental issues will be coordinated by an environmental specialist within the M&E unit, who will ensure that the Project complies with environmental safeguards.

9. Table A12.2 lists the potential adverse impacts and mitigation measures proposed to reduce these impacts to acceptable levels. It identifies who will be responsible for the monitoring, evaluation, and reporting. The table shows that most mitigation activities are the responsibility of the construction contractors (employed to build the infrastructure during the construction stage, or the O&M contractors employed to conduct maintenance or repair work when the system is operating. Responsibility for the relevant measures will be assigned to the contractors via the contracts through which they are appointed so they will be legally required to take the necessary action.

Table A12.2: Summary of Impacts, Mitigation Measures, and Institutional Responsibilities Potential Adverse Institutional Environmental Impacts Proposed Mitigation Measures Responsibilities Pre-Construction Stage (Location and Design) Land requirements Consultation on detailed alignment of sewers prior to installation PMU (M,R,E) Interference with existing utilities Detailed consultation on existing utilities prior to installation PMU (M,R,E) Impacts on heritage features Consultation on cultural heritage features; develop protocol in PMU (M,R,E) conducting excavation work to ensure that any chance finds are recognized Noncompliant discharges despite CMC, CEA and CCD to liaise concerning practical aspects of PMU-CMC rehabilitation existing and proposed discharge standards to coastal waters (M,R,E), CEA (E), CCD (E) Strengthening institutional capacity and operational capacity of PMU (M, R, E) CMC High energy demands and poor Continuous discharge of effluent; reduce entry of materials; PMU (M,R,E) dilution due to partial blockage, increase dilution performance during low-flow regimes, and high head loss, uneven flow reduced headloss at peak flow; develop outfall operations manual distribution, and intrusion of saltwater and sediments (blocking of ports) Damage from ship anchors and Mark outfall locations; in shallower areas, outfall pipelines must be PMU (M, R, E) fishing vessels buried; use of fail-safe joints and/or rubber risers Unacceptable industrial Establish institutional prerequisites for source control PMU (M,R, E) discharges to sewers Enforcement of pre-treatment; legal arrangement for inter-agency PMU (M, R, E) sewer discharge; procedures and program of identification and dealing with illegal connections Corrosion from salt and acid Use corrosion-resistant materials PMU (M,R,E) attack Use of substandard materials Ban use of asbestos and CFCs, and promote use of pumps from PMU (M, R, E) and/or materials with asbestos, manufacturers with a accredited EMS or EMAS, or FSC certified CFC, etc wood Construction Stage Disturbance to residents and Limit and control working hours, noise, dust, vibration, PMU (E),

Appendix 12 57

Potential Adverse Institutional Environmental Impacts Proposed Mitigation Measures Responsibilities public due to noise, dust, construction traffic through contract provisions contractor (M,R) vibration, construction traffic Use of unapproved materials, e.g. Environmentally Responsible Procurement; Control of construction PMU (E), sand mining in rivers, materials and sources through contract provisions contractor (M,R) unsustainable timber, CFC, asbestos Improper disposal of construction Reuse or recycle wastes wherever possible; Coordinate with CMC PMU (E), wastes for pre-determined areas for disposal of spoils. Control through contractor (M,R) contract provisions Accidents, injuries and Hazard prediction training, pointing and calling, control of PMU (E), occupational diseases hazardous materials, first-aid training, and regular health contractor (M,R) examination, Developing a H&S plan; training and regular emergency drills; PMU (E), close supervision contractor (M,R) Flooding of trenches in rainy Schedule pipe relaying in areas prone to flooding for dry season PMU (E), season contractor (M,R) Loss of income due to restrictions Provide compensation for loss of income to commercial PMU (M,E,R) on access enterprises affected by loss of access during construction Disruption/interference to public Inventorying of public utilities existing in construction sites or along PMU (E), utilities the right of way contractor (M,R) Marine pollution from Control contractor’s potentially polluting marine activities through PMU (E), rehabilitation activities contract provisions contractor (M,R) Operational Stage Improper disposal of screenings Dewater and dry screenings; Coordinate with CMC Solid Waste PMU (E), (estimated per day generation: Management Division for timely collection and disposal; Provide CMC (M,R) 340 kg from coarse screens and trainings to workers on proper handling, storage and disposal of 4 m3 from fine screens screenings Accidents, injuries and diseases Safe working practices for system operation, provide and use PMU (E), safety equipment, develop emergency response procedures CMC (M,R) Use of unapproved pesticides Prioritize non-lethal pest and vermin control PMU (E), CMC (M,R) Noncompliance Monitoring program for marine outfalls and water quality PMU-CMC (M,E,R), CCD (E), CEA (E) Higher fecal coliform immediate reporting of any irregularity in the operations, PMU-CMC concentrations affecting performing overhaul/repair of the system in the shortest possible (M,E,R), recreational/scenic and fishing time, requiring temporary closure of bathing beaches, and CEA (E) areas prohibiting fishing activities near the outfalls. Outfalls suffer from reduced Continuous operation of the system and outfall operational manual PMU-CMC hydraulic capacity and lower to include maintaining long-term hydraulic and dilution efficiency (M,E,R), dilution efficiency, development of by preventing saline and sediment intrusion into the outfall through marine growth in outfalls, and saltwater and sediment purging increase flocculation of effluent particles developing larger aggregates that have higher settling velocities CCD = Coast Conservation Department, CEA = Central Environmental Authority, CFC = chloroflurocarbon, CMC = Colombo Municipal Council, E = evaluation, EMS = environmental management system, EMAS = eco-management and audit system, FSC = Forest Stewardship Council, H&S = health and safety, M = monitoring, PMU = project management unit, R = reporting. Source: Asian Development Bank assessment.

E. Public Consultation and Information Disclosure

10. Primary stakeholders (residents, shopkeepers, and business people who live and work near the construction sites; NWSDB; and CMC) and secondary stakeholders (other relevant government institutions, nongovernment organizations, and community-based organizations working in the affected communities; other community representatives) were consulted in developing the IEE through face-to-face discussions on-site and workshops in September 2007.

58 Appendix 12

Views and concerns were incorporated into the IEE, and the planning and development of the Project.

11. The environmental management plan (EMP) will be disclosed in Colombo as part of the public consultation process to complete the Project’s main IEE. Comments received will form an input to EMP finalization following Project start-up. Further public consultation may be undertaken if required by the CEA as part of its project approval conditions.

F. Findings and Recommendations

12. The screening process carried out in the IEE has not identified any significant negative environmental impacts likely to be caused by the Project. Potential negative impacts associated with construction activities can be mitigated by the application of standard health, safety, and environmental clauses in contract documents, close supervision, and close attention to transparency in tendering, and to quality control and supervision on site. Mitigation measures for other impacts are provided in detail in the IEE. Once the schemes are rehabilitated, it should operate without major environmental impacts, providing CMC and the contractors follow the O&M procedures prepared during the design stage. The Project will provide CMC and NWSDB with training, and budgets to enable them to fulfill these responsibilities.

13. The Project is likely to have significant positive impacts on inland surface waters, public health, and institutional development. The citizens of Greater Colombo will be the major beneficiaries of the rehabilitated sewerage system, as human waste from the areas served by the network would be removed rapidly and disposed off in an acceptable manner. This should improve the environment of these areas, and in conjunction with the development of other infrastructure (in particular water supply), should deliver major improvements in individual and community health and well-being. The project will improve CMC’s environmental compliance by building a mechanism to monitor and comply with environmental regulatory standards. The Project will improve the sanitation service; the quality of life should therefore improve significantly. The Project will conduct a program to raise public awareness of sanitation, hygiene, and solid wastes issues so the health of the community should also improve.

G. Conclusions

14. The Project is not expected to give rise to any significant negative environmental impacts, and therefore does not require an ADB environmental impact assessment. The Project will significantly improve inland surface water quality, lower risks to public health from waterborne diseases, and restore sea outfalls functionality. Therefore it will have significant positive environmental impacts.

15. Mitigation of minor adverse impacts can be carried out as an integral part of the Project, during both the detailed design and implementation stages. Appropriate measures will be included in the tender documents for the civil works.