Report and Recommendation of the President to the Board of Directors Lanka Project Number: 42171 May 2011 Proposed Loan and Technical Assistance Grant People’s Republic of Bangladesh: Khulna Water Supply Project CURRENCY EQUIVALENTS (as of 10 May 2011) Currency Unit – taka (Tk) Tk1.00 = $0.01367 $1.00 = Tk73.130 ABBREVIATIONS ADB – Asian Development Bank CQS – Consultants’-qualifications selection EMP – environmental management plan ICB – international competitive bidding IEE – initial environmental examination JICA – Japan International Cooperation Agency KWASA – Khulna Water Supply and Sewerage Authority m3 – cubic meter MIS – management information system NCB – national competitive bidding PMU – project management unit QCBS – quality- and cost-based selection TA – technical assistance TASF – Technical Assistance Special Fund NOTES (i) The fiscal year of the Government of Bangladesh ends on 30 June. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2008 ends on 30 June 2008. (ii) In this report, “$” refers to US dollars. Vice-President X. Zhao, Operations 1 Director General S.H. Rahman, South Asia Department (SARD) Director M.T. Kho, Urban Development and Water Division, SARD Team leader M. Tachiiri, Urban Development Economist, SARD Team members K.M. Emzita, Senior Counsel, Office of the General Counsel M. Fan, Urban Development Specialist, SARD M.R. Islam, Senior Project Implementation Officer, Bangladesh Resident Mission, SARD R. Slangen, Urban Development Specialist, SARD F. Sultana, Social Development and Gender Officer, Bangladesh Resident Mission, SARD Peer reviewer J. Masic, Urban Development Specialist, East Asia Department In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area. CONTENTS Page PROJECT AT A GLANCE I. THE PROPOSAL 1 II. THE PROJECT 1 A. Rationale 1 B. Impact and Outcome 3 C. Outputs 3 D. Investment and Financing Plans 5 E. Implementation Arrangements 6 III. TECHNICAL ASSISTANCE 7 IV. DUE DILIGENCE 7 A. Economic and Financial 7 B. Governance 8 C. Poverty and Social 8 D. Safeguards 9 E. Risks and Mitigating Measures 9 V. ASSURANCES AND CONDITIONS 10 VI. RECOMMENDATION 10 APPENDIXES 1. Design and Monitoring Framework 11 2. List of Linked Documents 13 I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed loan to the People’s Republic of Bangladesh for the Khulna Water Supply Project. The report also describes proposed technical assistance (TA) for Supporting the Khulna Water Supply Project, and if the Board approves the proposed loan, I, acting under the authority delegated to me by the Board, will approve the TA.1 2. The project will develop a sustainable water supply system in Khulna city, which relies entirely on groundwater.2 It will introduce surface water as the main water source for sustainable water resource management in Khulna city. The project adopts a climate-proof design, adapting to an expected increase in the salinity of the river water as a result of sea level rise. The project’s capacity building component will also strengthen the corporate management system of Khulna Water Supply and Sewerage Authority (KWASA), which has been established in February 2008. II. THE PROJECT A. Rationale 3. Water supply in Khulna city. Citizens in Khulna city have been suffering from limited access to water supply services. Only 23% of the population of about 1 million has access to piped water supply, and the rest resorts to alternative sources, such as shared public taps and tube wells built privately. The existing system is old and poorly maintained, resulting in substantial leakage and low quality of water.3 A survey shows that even households connected to the piped network enjoy only intermittent water supply (5.3 hours per day), and 74% of households find the supplied quantity insufficient.4 As for water quality, 59% of the surveyed households perceived the supplied water to be dirty and 55% rated the service standards very poor or poor.5 Many unconnected households rely on shared public taps and spend a daily average of 90 minutes fetching water, imposing a particular burden on women who tend to manage water for the whole family. The project will expand the access to water supply services by building a surface water treatment plant and extending the distribution network to cover the whole city. 4. Water resource management. Khulna city relies entirely on groundwater for its water source.6 KWASA’s deep tube wells yield 30,100 cubic meters (m3) per day, supplying water to the piped network. In addition, there are many privately built tube wells and KWASA’s hand- pumped tube wells; the total abstraction of groundwater is estimated at 113,000 m3/day. An assessment of the groundwater showed that abstraction should be limited to ensure the sustainability of the groundwater resource. The project will develop a surface water treatment plant with 110,000 m3/day capacity to meet the growing demand without increasing the groundwater abstraction and undermining its sustainability.7 The groundwater will be monitored and managed in a sustainable manner. In addition to KWASA’s wells, private wells will be 1 The design and monitoring framework is in Appendix 1. 2 The Asian Development Bank (ADB) provided project preparatory TA: ADB. 2009. Technical Assistance to the People's Republic of Bangladesh for Preparing the Khulna Water Supply Project. Manila. 3 Physical loss is estimated at 36% of the produced water. 4 The survey was conducted under ADB. 2008. Small Scale Technical Assistance to the People's Republic of Bangladesh for Supporting the Establishment of Khulna Water and Sewerage Authority. Manila. The survey covers 3,000 households randomly selected in Khulna city. 5 Service standards were rated fair by 33% of the surveyed households and good by 11%. 6 Arsenic contamination is not found in Khulna city. 7 The groundwater table is declining by 2–3 meters annually in some areas in Dhaka because of overextraction. 2 registered to monitor and regulate the abstraction of groundwater. Groundwater and surface water will be used conjunctively to ensure environmentally sustainable and economically efficient water resource management. 5. Climate change impacts. Khulna city is located in the coastal belt of Bangladesh—one of the most vulnerable areas to climate change impacts. Rivers near Khulna city are already affected by salinity intrusion, and the sea level rise caused by climate change is expected to exacerbate the problem of salinity intrusion. The Asian Development Bank (ADB) conducted a study to simulate climate change impacts in Khulna city and develop adaptation strategies.8 The results of the study are incorporated in the project design to make the project climate-proof. In particular, the intake facilities will be located upriver to avoid salinity, and an impounding reservoir will be built to store fresh water so that water quality will be ensured even with the expected increase of salinity in the river water. 6. Establishing and strengthening the Khulna Water Supply and Sewerage Authority. The Government of Bangladesh established KWASA in February 2008.9 KWASA is the third water supply and sewerage authority established in the country, following the Dhaka and Chittagong water supply and sewerage authorities. Khulna City Corporation was directly responsible for water supply service in Khulna city before the establishment of KWASA. Although KWASA has been legally established, further efforts are required to develop it into a capable water utility with a proper management system, competent human resources, and a sound financial management system. As KWASA is a recently established organization with new personnel and systems, it is opportune to provide adequate support to develop it into a financially viable water utility that can serve as a model in Bangladesh. 7. Development coordination. The project was developed through dialogue among development partners at the local consultative group for the water and sanitation sector, and under the partnership framework for urban water supply and sanitation.10 The project will be cofinanced by ADB and the Japan International Cooperation Agency (JICA) under a harmonized and unified framework. One project management unit (PMU) will be responsible for implementing the entire project, regardless of the funding source. ADB and JICA will jointly review the project implementation as well as KWASA’s corporate management against common performance indicators. 8. Lessons. The project reflects lessons and recommendations from previous interventions. For example, a recent sector program assistance evaluation concluded that cofinancing is a good option to scale up investment in urban water supply projects in Bangladesh; this is proposed in the project.11 Other lessons from past water supply projects in Bangladesh identified careful tariff setting and financial management as vital for project sustainability.12 KWASA’s financial condition was thoroughly assessed and a financial plan was prepared to ensure long-term sustainability. 9. Context in country programming. The project is in line with ADB’s country strategy and program for Bangladesh, 2006–2010.13 Urban water supply is a focus area of the country 8 ADB. 2010. Technical Assistance to Bangladesh for Strengthening Resilience of the Water Sector in Khulna to Climate Change. Manila. 9 Through SRO No-43-law/2008-law/division pass-2/K 1/2007. 10 The partnership framework was signed on 10 November 2007 by the government and major development partners of the sector, focusing support for water and sewerage authorities in a few large cities. 11 ADB. 2009. Evaluation Study on the Urban Sector and Water Supply and Sanitation in Bangladesh. Manila. 12 Lessons drawn from ADB’s evaluation information system. 13 ADB. 2005. Country Strategy and Program: Bangladesh, 2006–2010.