Country Operations Business Plan November 2020 Sri Lanka 2021–2023 This document is being disclosed to the public in accordance with ADB’s Access to Information Policy. CURRENCY EQUIVALENTS (as of 2 November 2020) Currency unit – Sri Lanka rupee/s (SLRe/SLRs) SLRe1.00 = $0.00542 $1.00 = SLRs184.53 ABBREVIATIONS ADB – Asian Development Bank COBP – country operations business plan COVID-19 – coronavirus disease 2019 CPS – country partnership strategy NOTE In this report, “$” refers to United States dollars. Vice-President Shixin Chen, Operations 1 Director General Kenichi Yokoyama, South Asia Department (SARD) Country Director Chen Chen, Sri Lanka Resident Mission (SLRM), SARD Team leader Utsav Kumar, Senior Country Economist, SLRM, SARD Team members Navodhini Amarasekera, Associate Project Officer, SLRM, SARD Amer A. Chowdhury, Senior Public–Private Partnership Specialist, Advisory Division 1 (OPA1), Office of Public–Private Partnership (OPPP) Sheharyar Chughtai, Public–Private Partnership Specialist, OPA1, OPPP Savindi Jayakody, Associate Economics Officer, SLRM, SARD Anoukgrahadha Gowri Tyagarajah, Senior Operations Assistant, SLRM, SARD Private Sector Operations Department Team Sri Lanka Country Team 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 I. CONSISTENCY OF BUSINESS PLAN WITH COUNTRY PARTNERSHIP STRATEGY 1 II. INDICATIVE RESOURCE PARAMETERS 1 III. SUMMARY OF CHANGES TO LENDING AND NONLENDING PROGRAMS 2 APPENDIXES 1. Country Assistance Results Areas 3 2. List of Linked Documents 4 3. Indicative Assistance Pipeline 5 4. Assistance Program for Current Year 10 5. Indicative Knowledge Products and Events 12 I. CONSISTENCY OF BUSINESS PLAN WITH COUNTRY PARTNERSHIP STRATEGY 1. The country operations business plan (COBP), 2021–2023 is the fourth COBP under the Asian Development Bank (ADB) country partnership strategy (CPS), 2018–2022 for Sri Lanka and is aligned with the CPS pillars on (i) strengthening growth drivers by promoting diversification of economic activities and productivity enhancement, and (ii) improving the quality of growth by promoting inclusiveness.1 It is also in line with the operational priorities of ADB’s Strategy 2030.2 The new government has laid out its vision in the National Policy Framework announced in December 2019, and priority investment areas under the two CPS pillars support some of the new government’s priorities.3 2. Financing priorities under COBP, 2021–2023 have been adjusted in response to several factors, such as the (i) impact of the coronavirus disease 2019 (COVID-19) pandemic, (ii) need to balance support for critical development expenditure with the country’s fiscal and debt situation, and (iii) new government priorities under the National Policy Framework. To mitigate the prolonged effects of the COVID-19 pandemic and to build health system capacity and resilience, additional resources are directed toward the health sector. As of end-2019, Sri Lanka’s public debt stood at 94.3% of the gross domestic product, up from 85.3% in 2015.4 The government’s debt management strategy is centered on rejuvenating growth and reducing budget deficit. This is reflected in reprioritization of public investments, and some of the previously planned infrastructure projects in ADB pipeline have been dropped.5 II. INDICATIVE RESOURCE PARAMETERS 3. Sri Lanka, a group C developing member country, is eligible for regular ordinary capital resources lending only. The indicative resources available for commitment for 2021–2023 for sovereign operations total $2.07 billion. The cumulative lending program (Appendix 3, Table A3.1) comprising firm projects for the period is estimated at $1.78 billion (14% under-programming) or $2.00 billion if standby projects were included (3% under-programming). The final allocation will depend on sector portfolio performance, absorptive capacity, availability of resources, and project readiness. The COBP maintains flexibility to respond to government priorities and the evolving situation stemming from the global health crisis.6 Cofinancing and funding from other sources will also be explored. The lending pipeline for 2020 is in Appendix 4 (Table A4.1). 4. In terms of sector shares, the indicative assistance pipeline shows a continued focus on transport (30.5%), education (25.3%), energy (15.4%), health (12.4%), water and other urban infrastructure and services (11.2%), and agriculture (5.2%). Details on the country assistance results areas, resource allocation for each sector, and changes from the last COBP are in Appendix 1. 5. ADB’s nonsovereign operations in Sri Lanka will explore prospective transactions in infrastructure, agribusiness, and financial markets with a view to providing inclusive access to 1 ADB. 2017. Country Partnership Strategy: Sri Lanka, 2018–2022—Transition to Upper Middle-Income Country Status. Manila 2 ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific. Manila. 3 Government of Sri Lanka. 2019. National Policy Framework: Vistas of Prosperity and Splendour. Colombo. 4 Central Bank of Sri Lanka. 2020. Economic and Social Statistics of Sri Lanka 2020. Colombo. 5 Ministry of Finance, Economic and Policy Development. 2020. Pre-Election Budgetary Position Report. Colombo. 6 Policy-based lending operations for 2021–2023 will be subject to resource availability and available headroom under ADB’s policy-based lending ceiling. 2 finance. Opportunities to support public–private partnerships will be explored. The “One ADB” approach will be promoted to support project processing and ensure strong collaboration with sovereign operations.7 Support for Sri Lanka under ADB’s Trade and Supply Chain Finance Program, of which the country is one of the largest beneficiaries, will continue including provision of technical assistance to local banks.8 Options will be explored to support operations in local currency. 6. The nonlending program for 2021–2023, including cofinancing, is $11.5 million and is in Appendix 3 (Table A3.2). The 2020 nonlending program is in Appendix 4 (Table A4.2), and the indicative list of knowledge products and events for 2020 is in Appendix 5. III. SUMMARY OF CHANGES TO LENDING AND NONLENDING PROGRAMS 7. Transport. Tranche 5 of the Integrated Road Investment Program has been deferred to 2022 and tranche 6 to 2023. Tranche 3 of the Second Integrated Road Investment Program has been deferred to 2021, tranche 4 to 2022, and tranche 5 beyond 2023. Kelani Valley Railway Improvement Program Phase 1 and the Second Transport Project Preparatory Facility have been dropped. 8. Water and urban. Water Supply Improvement Project has been added in the 2022 firm pipeline. The Integrated Water Supply Investment Project, the Secondary Towns Sustainable Development Project, and the Strategic Cities Sustainable Urban Development Project have been dropped. 9. Agriculture and natural resources. The Integrated Water Productivity Improvement Project has been deferred to 2022 standby. Tranche 3 of the Mahaweli Water Security Investment Program has been deferred to 2023 and resized to $93 million. The project readiness financing for preparing Integrated Water Productivity Improvement Project has been dropped. 10. Energy. The Power System Reliability Strengthening Project in the 2021 firm pipeline has been resized to $200 million and Power System Reliability Strengthening Project - Phase 2 of $75 million has been added in 2023. The project readiness financing for the Preparing Power Development and Interconnection Project has been dropped. 11. Education. The Second Skills Sector Enhancement Program has been added to 2022 and the Tertiary Education Sector Development Project has been added to 2023. 12. Health. Additional financing of $20 million for the Health System Enhancement Project has been added to 2021, and the Health Sector Development Project has been added to 2023. 13. Finance. The Small and Medium-Sized Enterprises Credit Guarantee Institution Project has been deferred to 2021 standby, while the COVID-19 Active Response Expenditure Support Program under ADB’s COVID-19 Pandemic Response Option has been added as 2020 standby. 14. To ensure adequate resources for project preparation and implementation, changes to the nonlending pipeline are made in line with adjustments in the lending pipeline. 7 The “One ADB” approach encourages collaboration between ADB’s sovereign and nonsovereign operations, synergy in knowledge activities between operations and nonoperations departments, and integrated solutions through collaboration across sector and thematic groups. 8 ADB. Trade and Supply Chain Finance Program. Appendix 1 3 COUNTRY ASSISTANCE RESULTS AREAS ADB Key Country Development Outcomes Indicative Resources Available for that ADB Contributes to Key Areas of Assistance Commitment in 2021–2023a Changes from Last COBPb 1. Energy (CPS priority area: expand provision of growth-oriented infrastructure) Improved provision of electricity Renewable energy (solar, wind, and Amount: $275.0 million (regular OCR) Energy efficiency and conservation services through sustainable hydro) added as new assistance area development and the efficient use of Share of COBP envelope: 15.4% energy resources Conventional energy generation Energy efficiency and conservation