Report and Recommendation of the President to the Board of Directors Project Number: 26522 February 2008 Proposed Supplementary Loan and Technical Assistance Grant Democratic Socialist Republic of Sri Lanka: Southern Transport Development Project CURRENCY EQUIVALENTS (as of 13 February 2008) Currency Unit – Sri Lanka rupee/s (SLRe/SLRs) SLRe1.00 = $0.0093 $1.00 = SLRs108.05 ABBREVIATIONS ADB – Asian Development Bank CEA – Central Environment Authority CRP – Compliance Review Panel CSC – construction supervision consultant EIA – environmental impact assessment EIRR – economic internal rate of return EMP – environment management plan ESD – Environment and Social Division GDP – gross domestic product ICB – international competitive bidding IRP – income restoration program JBIC – Japan Bank for International Cooperation km – kilometer LAR – land acquisition and resettlement LARC – land acquisition and resettlement committee LIBOR – London interbank offered rate MOHRD – Ministry of Highways and Road Development NDF – Nordic Development Fund OCR – ordinary capital resources PMU – project management unit RDA – Road Development Authority RIP – resettlement implementation plan ROW – right of way SDR – special drawing rights SL – supplementary loan Sida – Swedish International Development Cooperation TA – technical assistance UDA – Urban Development Authority VOC – vehicle operating cost NOTES (i) The fiscal year of the Government and its agencies ends on 31 December. (ii) In this report, “$” refers to US dollars Vice President L. Jin, Operations Group 1 Director General K. Senga, South Asia Department (SARD) Director K. Higuchi, Transport and Communications Division, SARD Team leader D. N. Utami, Senior Environment Specialist, SARD Team members M. Alam, Senior Infrastructure Specialist, SARD N. M. Amerasinghe, Project Implementation Officer (Agriculture and Environment), SARD A. Gamaathige, Social Sector/Resettlement Officer, SARD R. Nagpal, Counsel, Office of the General Counsel J. Perera, Senior Safeguards Specialist, SARD K. M. Tilakaratne, Implementation/Program Officer, SARD C. Valbuena, Senior Procurement Specialist, Central Operations Services Office S. Widowati, Head, Project Administration Unit, SARD H. Yamaguchi, Senior Transport Specialist, SARD CONTENTS Page LOAN AND PROJECT SUMMARY i MAP I. THE PROPOSAL 1 II. THE APPROVED PROJECT 1 A. Rationale 1 B. Objectives and Scope 2 C. Cost Estimates and Financing Plan 3 D. Status and Progress of Project Implementation 4 III. THE PROPOSED SUPPLEMENTARY LOAN 9 A. Cost Overrun and Proposed Change of Scope 9 B. Impact and Outcome 10 C. Rationale 11 D. Policy Safeguard Due Diligence 12 E. Revised Cost Estimates 14 F. Investment Plan 15 G. Financing Plan 15 H. Remedial Actions 16 I. Implementation Arrangements 16 IV. TECHNICAL ASSISTANCE 20 V. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 20 A. Economic Aspects 20 B. Financial Sustainability 21 C. Environmental and Social Aspects 21 D. Risks 22 VI. ASSURANCES 22 VII. RECOMMENDATION 24 APPENDIXES 1. Revised Design and Monitoring Framework 25 2. Recommendations of the Compliance Review Panel: Implementation Status 28 3. Cost Overrun 33 4. Detailed Cost Estimates and Financing Plan 35 5. Indicative Project Implementation Schedule 37 6. Procurement Plan 38 7. Technical Assistance: Land Use Planning of the Southern Highway Corridor 41 8. Economic Analysis 44 9. Summary Poverty Reduction and Social Strategy 52 SUPPLEMENTARY APPENDIXES (available upon request) A. Status of Project Readiness B. Loan Covenants: Status of Compliance C. Social and Environmental Safeguards: Due Diligence D. Terms of Reference for the Management Consultant E. Terms of Reference for the Construction Supervision Consultant LOAN AND PROJECT SUMMARY Borrower Democratic Socialist Republic of Sri Lanka Classification Targeting classification: General intervention Sector: Transport and communications Subsector: Roads and highways Theme: Sustainable economic growth Subtheme: Fostering physical infrastructure development Environment Category A Assessment The summary environmental impact assessment was disclosed through the Asian Development Bank (ADB) website and submitted to the ADB Board of Directors on 19 April 2007. Project Description The supplementary loan for the Southern Transport Development Project supports the objective of the original loan to facilitate and act as a catalyst for the development of the southern region of the country by completing the construction of Colombo (Kottawa)– Matara (Godagama) highway and Galle access road. The supplementary loan finances (i) cost overruns for the construction of a two-lane highway from Kurundugahahetekma to Pinnaduwa interchange and the Galle access road; (ii) expansion of the highway between Kurundugahahetekma and Pinnaduwa interchange from two lanes to four lanes; (iii) provision of consulting services for construction supervision and project management; and (iv) provision of road safety equipment. Rationale The Project is one of the Government’s priority projects. Traffic volume between the southern areas of the country and Colombo has increased significantly; travel time between Matara and Colombo is about 4–5 hours. The completion of Southern Highway will significantly reduce travel time and lead to effective movement to and from the southern areas to Colombo. This improved connectivity will contribute to increased economic activities. The Project has experienced cost overruns, especially due to increases in civil work costs. Contributing factors include (i) price escalation due to delay in completing land acquisition and associated litigations, (ii) undetermined geotechnical and soil conditions, and (iii) increase in value-added tax. Implementation delays due to safeguard compliance issues resulted in delayed handover of the site to the contractor and increased the cost of consulting services, mainly because of the additional time required to supervise construction works. ii The original Project covers construction of the first two-lanes of an ultimate four-lane highway. However, a six-lane right-of-way was prepared and acquired. The design study indicates that to maintain the service of an intercity highway, the Project will need to be upgraded to four lanes after 2010. This means that upgrading needs to start now. The expansion to a four-lane highway is justifiable based on the following grounds: (i) traffic demand; (ii) resource savings when the four-lane construction is undertaken simultaneously with finalizing the two-lane construction; (iii) continuity of the four-lane highway from Kottawa to Matara; and (iv) improved road safety. The proposed activities and components under the supplementary loan are consistent with Government and ADB priorities. Physical changes have been assessed along with their impacts in the context of current ADB policies. A review of safeguards compliance and all steps in the matrix of due diligence have been observed. The Project is technically feasible, economically viable, and financially sustainable. Impact and Outcome The impact and outcomes of the supplementary loan are in line with those of the Project approved in 1999. It aims to integrate the southern region into the country’s economic mainstream by improving access. The Project will promote economic growth of the southern region by improving access to the more developed Western Province, especially with Colombo and other important facilities such as the international port and airport. By 2010, travel time between Kottawa and Matara will be reduced from 4 to 2 hours. By expanding the Southern Highway to four-lane standard, significant accidents will be avoided. Project Investment Plan The investment cost of the supplementary loan is estimated at $179.10 million, including taxes and duties. Financing Plan Total Source ($ million) Percent Asian Development Bank 90.00 50.30 Government 89.10 49.70 Total 179.10 100.00 A loan of $90 million from the ordinary capital resources of ADB will be provided under ADB’s London interbank offered rate (LIBOR)-based lending facility. The loan will have a 25-year term including a grace period of 5 years, an interest rate determined in accordance with ADB’s LIBOR-based lending facility, and such other terms and conditions set forth in the draft loan and project agreements. iii Period of Utilization 30 December 2010 Estimated Project 31 December 2009 Completion Date Executing Agency Ministry of Highways and Road Development Implementation The Road Development Authority will continue to implement the Arrangements Project, and the existing project management unit will continue its functions for day-to-day project management. Procurement The existing civil works contract was restructured to include four- lane construction with reduced road length of 29.2 km, which is the Kurundugahahetekma–Pinnaduwa interchange section, and approximately 5.6 km of Galle access road. The balance of works for the Pinnaduwa interchange–Matara section, including four- lane construction, will be procured by following the Government procurement laws and procedures. Consulting Services Services of the construction supervision consultant funded by the original 1999 loan will continue until February 2008. Thereafter, additional inputs of about 140 person-months of international consulting and 1,040 of national consulting will be required under the supplementary loan to supervise civil works in Kurundugahahetekma–Pinnaduwa interchange section and Galle access road. The current management consultant, financed by the