FRAMEWORK FINANCING AGREEMENT (SRI: Colombo Water and Wastewater Management Improvement Investment Program)

Transcription

1 FRAMEWORK FINANCING AGREEMENT (SRI: Colombo Water and Wastewater Management Improvement Investment Program) Parties MFF Investment Program This Framework Financing Agreement (FFA) dated 12 September 2012 is between the Democratic Socialist Republic of Sri Lanka ( Sri Lanka ) and the Asian Development Bank (ADB). Sri Lanka is committed to, and will implement, its water and wastewater sector development plan (SDP), which is an integral part of the Greater Colombo Water and Wastewater Management Improvement Investment Program (Investment Program). Both the SDP and the Investment Program are described in Schedule 1 hereto. The total cost of the SDP for Greater Colombo over the period is expected to be around $1,500 million equivalent. The total cost of the Investment Program over the period is expected to be $400 million equivalent. Multitranche Financing Facility The Multitranche Financing Facility (the Facility) is intended to finance projects under the Investment Program, provided that such projects comply with the criteria set out in Schedule 4 hereto and that understandings set out in this FFA are complied with. These projects may include the following: (i) (ii) (iii) (iv) Rehabilitation and expansion of the water supply system and reduction of non-revenue water (NRW) in Greater Colombo; Improvement of wastewater management services in Greater Colombo; Strengthening of the institutional structure and capacity of water and wastewater service providers; and Support for the implementation and management of the investment Program. This FFA does not constitute a legal obligation on the part of ADB to commit any financing. ADB has the right to deny any financing request made by Sri Lanka, cancel the uncommitted portion of the Facility, and withdraw Sri Lanka s right to request any financing tranche under the Facility. Financing tranches may be made available by ADB provided matters continue to be in accordance with the general understandings and expectations on which the Facility is based and which are laid out in this FFA. This FFA does not constitute a legal obligation on the part of Sri Lanka to request any financing. Sri Lanka has the right not to request any financing under the Facility. Sri Lanka also has the right to cancel any uncommitted portion of the Facility at any time. Sri Lanka and ADB may exercise their respective rights to cancel the Facility or any uncommitted portion thereof, and ADB may exercise its right to refuse a financing request, by giving written notice to such effect to the other parties. The written notice will provide an explanation for the cancellation or refusal and, in the case of a cancellation, specify the date on which the cancellation takes effect.

2 2 Financing Plan The financing plan for the Investment Program is summarized below. Financing Source Total Share (%) ($ million) of Total Asian Development Bank Government of Sri Lanka Total Source: Asian Development Bank estimates. Financing Terms ADB will provide loans to finance projects under the Investment Program, as and when the projects are ready for financing, provided that Sri Lanka is in compliance with the understandings hereunder, and the projects are in line with those same understandings. Each loan will constitute a tranche. Each tranche may be financed under terms different from the financing terms of previous or subsequent tranches. The choice of financing terms will depend on the project, capital market conditions, and ADB s financing policies, all prevailing on the date of signing of the legal agreement for such tranche. Tranches may be provided in sequence or simultaneously, and some may overlap in time with each other. There is no maximum or minimum size for a tranche. Commitment charges or guarantee fees are not payable on the Facility. They are payable only on financing actually committed by ADB as a loan or guarantee. ADB rules on commitment charges and guarantee fees that are in effect when the legal agreements are signed for a tranche will apply with respect to such tranche. Amount The maximum financing amount available under the Facility is three hundred million dollars ($300,000,000). It will be provided in individual tranches as loans from ADB s ordinary capital resources 1 and Special Funds resources (i.e., Asian Development Funds (ADF)), 2 subject to the latter s availability and allocation under ADB s applicable policies and procedures as amended from time to time. Availability Period The last financing tranche is expected to be executed no later than 30 June The last date on which any disbursement under any tranche may be made will be 31 December Terms and Conditions Sri Lanka will cause the proceeds of each tranche to be applied to the financing of expenditures under the Investment Program, in accordance with conditions set forth 1 Provisions of the Ordinary Operations Loan Regulations Applicable to LIBOR-Based Loans Made from ADB's Ordinary Capital Resources, dated 1 July 2001, would apply to each such Loan, subject to modifications, if any, that may be included under relevant Loan Agreement. 2 Provisions of the Special Operations Loan Regulations Applicable to Loans Made by ADB from its Special Funds Resources, dated 1 January 2006, would apply to each such Loan, subject to modifications, if any, that may be included under relevant Loan Agreement.

3 3 in this FFA and the legal agreements for each tranche. Execution Periodic Financing Requests The executing agencies will be the Ministry of Water Supply and Drainage (MWSD) and the Ministry of Local Government and Provincial Councils (MLGPC). The implementing agencies will be the National Water Supply and Drainage Board (NWSDB) and the Colombo Municipal Council (CMC). The executing agencies and implementing agencies will implement the Investment Program in accordance with the principles set forth in Schedule 1 to this Agreement, as supplemented in the legal agreements for each tranche. Sri Lanka may request, and ADB may agree to provide, loans under the Facility to finance the Investment Program and its related projects upon the submission of a Periodic Financing Request (PFR). Each PFR should be submitted by Sri Lanka, through the Ministry of Finance and Planning (MOFP). Sri Lanka will make available to the NWSDB, through the MWSD, and to the CMC, through the MLGPC, the proceeds of the tranche in accordance with the related PFR, and the legal agreements for the tranche. ADB will review the PFR and, if it is found satisfactory, prepare the related legal agreements. The projects for which financing is requested under the PFR will be subject to the selection criteria set out in Schedule 4 hereto, satisfactory due diligence, and preparation of relevant safeguard and fiduciary frameworks and other documents. The Facility will be implemented in accordance with the general framework set out in Schedule 3 to this FFA, and the Facility Administration Manual (FAM) agreed between Sri Lanka and ADB. General Implementation Framework Procedures The Facility will be implemented in accordance with the general framework set out in Schedule 3 hereto. Tranches to be provided under the Facility will be subject to the following procedures and undertakings: (i) (ii) (iii) (iv) Sri Lanka will have notified ADB of a forthcoming PFR in advance of the submission of the PFR. Sri Lanka will have submitted a PFR in the format agreed with ADB. ADB may, in its sole discretion, decline to authorize the negotiation and execution of any legal agreement for a tranche. If ADB confirms acceptance of the PFR, the legal agreements will be negotiated and executed by the parties. PFR Information The PFR will substantially be in the form attached hereto, and will contain the following details: (i) (ii) (iii) Loan amount; Description of projects to be financed; Cost estimates and financing plan;

4 4 (iv) (v) (vi) (vii) Implementation arrangements specific to the projects; Confirmation of the continuing validity of, and adherence to, the understanding in this Agreement; Confirmation of compliance with the provisions under previous Loan Agreement(s) and Project Agreement(s) under the Facility, as appropriate; and Other information as may be required under the FAM, or reasonably requested by ADB. Safeguards Attached as Schedule 5 are references to the Safeguard Frameworks that will be complied with during the implementation of the Facility. ADB s Safeguard Policies in effect as of the date of signing of legal agreements for a tranche will be applied with respect to the projects financed under such financing tranche. Procurement Consulting Services Advance Contracting; Retroactive Financing Disbursements Monitoring, Evaluation, and Reporting Arrangements All goods and services to be financed under the Facility will be procured in accordance with ADB s Procurement Guidelines (2010, as amended from time to time). All consulting services to be financed under the Facility will be procured in accordance with ADB s Guidelines on the Use of Consultants (2010, as amended from time to time). Under each tranche, ADB may, subject to its policies and procedures, allow on request (i) advance contracting of (a) civil works, (b) equipment and materials, and (c) recruitment of consultants; and (ii) retroactive financing of eligible expenditures for (a) civil works, (b) equipment and materials, and (c) recruitment of consultants up to 20% of a proposed individual loan, incurred prior to loan effectiveness but not earlier than 12 months before the date of signing of the related legal agreement. Sri Lanka acknowledges that any approval of advance contracting or retroactive financing will not constitute a commitment by ADB to finance the related project. Disbursements will be made in accordance with ADB s Loan Disbursement Handbook (2012, as amended from time to time). NWSDB will be responsible for establishing Project Management Unit acceptable to ADB prior to approval of the first tranche under the Facility for NWSDB, and prior to approval of the third tranche under the Facility for CMC, including: (i) procedures for data collection and reporting; (ii) performance indicators relating to physical infrastructure, NRW reduction, and capacity development and program management support, including those in the design and monitoring framework (for individual loans and the overall Investment Program); and (iii) corresponding target dates, including those for institutional and financial reforms and capacity building. NWSDB and CMC will provide ADB with quarterly progress reports informing ADB on the progress of the overall Investment Program (i.e., project or tranche preparation or approval) and the implementation progress of ongoing individual loans applicable to the Investment Program. The reports will also provide a summary of the financial accounts, including (i) Fund Source and Use Statement applicable to the PMUs for each of the loans under the Facility, (ii) expenditures to date, (iii) a report on benefit monitoring, and (iv) a report on safeguard compliance.

5 5 Schedule 2 hereto sets the Design and Monitoring Framework for the Facility, against which the implementation effectiveness will be evaluated. Undertakings Agreement Take Action to Attached as Schedule 6 are the undertakings provided by Sri Lanka. Sri Lanka agrees that it will undertake the actions specified in Schedule 1, Schedule 3, Schedule 4, and Schedule 5 to this FFA, and any specific representation or warranty that may be agreed between the Government and ADB, and the legal agreements entered into for each loan. SRI LANKA ASIAN DEVELOPMENT BANK By M P D U K Mapa Pathirana Department of External Resources Ministry of Finance and Planning By Rita O Sullivan, Country Director Sri Lanka Resident Mission

6 6 A. Background 1. Rationale SCHEDULE 1 MULTITRANCHE FINANCING FACILITY CONSTITUENTS 1. Colombo, 1 Sri Lanka s capital city and main economic and administrative hub, has benefited from piped water supply for more than a century. Many parts of the distribution network, however, have now exceeded their economic life, 2 yet rehabilitation of the network has been neglected. As a result, the non-revenue water (NRW) rate for Colombo has reached the highest level in the country, at around 49%. 3 The revenue losses of the National Water Supply and Drainage Board (NWSDB) due to NRW are estimated to be 1.7 billion SLRs ($13 million) annually. The NWSDB, under the Ministry of Water Supply and Drainage (MWSD), supplies piped water to 127,000 service connections in Colombo city (95% coverage). In addition, there are around 3,200 unmetered stand posts in the city that supply water to low-income settlements (tenement gardens), where NWSDB has initiated community programs to meter and recover fees at concessional levels. 4 Although the present water production capacity is adequate to meet current demand, only 50% of the population connected to piped water systems receives 24-hour supply, while others suffer from fluctuating or low pressure and limited hours of supply. As a result, consumers are forced to collect and store water during off-peak hours, if they can afford it. 2 According to government records, 66% of population of Greater Colombo is served by on-site sanitation facilities, 25% is connected to sewerage systems (mostly in Colombo city), 5 and 9% has no facilities. Estimates suggest that various sewerage systems operating within Greater Colombo serve a total of 140,000 households. 6 The existing sewer network, built largely between 1906 and 2007, comprises around 320 kilometers of sewers, 18 pumping stations in two catchments (north and south), and two sea outfalls. The sewer lines have frequent collapses and blockages, and one-third of the pumping facilities are not operational, causing frequent overflow to watercourses. The Colombo Municipal Council (CMC) owns and operates wastewater infrastructure services in Colombo city. Wastewater facilities outside the CMC area are managed by the NWSDB. NWSDB introduced a sewerage tariff within its operational jurisdiction in and has a dedicated account for sewerage services. However, the sewerage operation in CMC is not delineated from other operations and there is no independent accounting for it. Expenditures are met out of allocations from CMC s general budget. 1 Greater Colombo comprises 15 local authorities: 5 municipal councils (Colombo, Dehiwela Mount Lavinia, and Sri Jayawardenepura Kotte, Kaduwela and Moratuwa), 5 urban councils, and 5 pradeshiya sabhas (smallest political unit in peri-urban or rural areas). It has a population of more than 838,000 and a floating population of more than 500, About 700 km, out of a total 927 km, of Colombo s water supply distribution network is more than 50 years old. 3 The 49% NRW for Colombo, which is twice the average NRW for the rest of the country, comprises- 33% physical losses, 5% commercial losses, and 11% free water supplied to low-income informal settlements. 4 NWSDB has managed to form about 500 consumer societies, out of some 4,000 standpipes in Colombo city, on a community participation basis, and charges minimum tariffs (SLRs 3/m 3 ). 5 While 80% of Colombo city is estimated to be covered by sewers, only 25% is connected to them. 6 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. Of these, 80% are domestic and 20% are non-domestic. 7 The introduction of a sewerage charge was approved by the Cabinet in September Notification of a new sewerage tariff was gazetted in October 2007 and charging of sewerage tariff started in March As part of system computerization at NWSDB, the water bill was modified to incorporate a sewerage charge.

7 7 2. Issues and Constraints 3. The core issues for Colombo s water supply and sanitation are that infrastructure and services are inadequate. Both water supply and wastewater facilities have exceeded their technical life, and are therefore inefficient and unreliable. NWSDB continues to face difficult challenges in Greater Colombo with respect to continuously increasing water demand and very high NRW. On sanitation, the government acknowledges that the subsector has been neglected: of the total investment in the water and sanitation sector during last 2 decades, less than 5% was spent on sanitation. The inadequate sewerage infrastructure and service delivery in Colombo also stems from an inadequate institutional framework and weak capacity of service providers. Although now resolved, for a long time, there was lack of clarity concerning the role of the two key institutions involved in wastewater management, NWSDB and CMC, and ambiguity about their ownership of assets. 8 Assets are in the process of being inventoried and accurate database on their condition is being established. Customer databases are not regularly updated. There is no institutionalized mechanism for monitoring operational performance or environmental compliance. The CMC lacks adequate capacity to efficiently manage the wastewater services. Similarly, NWSDB s Western Central Regional Support Center (RSC-WC), in charge of Greater Colombo, needs more autonomy and capacity development to improve its operational, capital planning, commercial, and financial functions. 4. In summary, the key sector constraints for Greater Colombo are: (i) lack of institutional efficiency and reliability in infrastructure performance; (ii) existing organizational arrangements do not promote accountability; (iii) low cost recovery (for sewerage); and (iv) inadequate operational and monitoring capacity of service providers. B. Road Map 1. Policy Framework: Vision and Objectives 5. The objective of the Multitranche Financing Facility (the Facility) is to support the Government of Sri Lanka (the Government) in achieving its water supply and wastewater sector targets under its development policy framework (DPF). 9 Under the DPF, the vision for the sector is improved water and wastewater service delivery for the residents, which in turn is expected to lead to improved urban environment and quality of life, increased urban productivity, and a stronger economy. The DPF provides clear guidance and specific targets for the period covered ( ) for the water and wastewater sector. It aspires to increase the piped water supply in Sri Lanka from 37% to 60% and sewerage coverage from 2.5% to 7% by As highlighted in the DPF, improvement in municipal services, specifically in the water supply and wastewater sector, is a key Government priority. The Government further recognizes that focused efforts, including citywide NRW reduction in Colombo and institutional reforms, are necessary to improve service and increase water availability in Colombo to meet the increasing demand. 8 Assets are believed to be owned by NWSDB, in accordance with the voluntary transfer order in 1996 under Section 64(1) of the NWSDB Law. However, the transfer turned out to be invalid in the absence of the Parliamentary approval. The Attorney General issued a legal opinion in September 2007 declaring CMC the legal owner of the sewerage assets within the CMC area, a determination that was acknowledged by CMC and NWSDB. NWSDB remains the asset owner and service provider outside CMC. 9 Department of National Planning, Ministry of Finance and Planning Sri Lanka, The Emerging Wonder of Asia: Mahinda Chintana Vision for the Future. Colombo.

8 8 The DPF, the National Drinking Water Policy for the water sector, the National Policy on Sanitation for the wastewater sector, 10 NWSDB s Corporate Plan ( ), and the investment plans of the NWSDB and CMC (the Investment Plan) 11 collectively form the Government s Sector Development Plan (SDP) for the water and wastewater sector. 2. Strategic Directions 6. The Investment Plan comprises physical and nonphysical investments, and a policy and institutional reform framework to ensure the sustainability of these investments. Physical investments will help address shortfalls in infrastructure financing for water supply and sewerage and will address the technical sustainability and environmental objectives. Nonphysical investments will provide capacity development and institutional support and address institutional and financial sustainability, thus enabling the Government to meet its legislative and regulatory framework objectives. By prioritizing public expenditures for these investments, the Government will strive to improve water supply and wastewater services in Greater Colombo and provide adequate policy guidance of these services in the water and wastewater sector to ensure that the desired level of delivery standards is met. 3. Investment Plan 7. In accordance with the DPF, the long-term sector needs and priorities have been identified by NWSDB and CMC. The Government s Investment Plan, adopted by the NWSDB and CMC in order to achieve the DPF targets for water supply and wastewater sector in Greater Colombo by 2020, estimates the overall needs at around $1,500 million. Table 1 presents the summary of the Investment Plan. Service Table 1: The Investment Plan and Financing Availability Estimates ($ million) Investment Cost Ongoing projects a Funds Committed b Funds Expected c Gap Water Supply Sanitation Sewerage and treatment capacity improvement in CMC area Sewerage and treatment capacity improvement outside Colombo city (NWSDB areas) On-site sanitation, low cost sewers, septage collection and treatment Total 1, CMC= Colombo Municipal Council; NWSDB = National Water Supply and Drainage Board. a Includes both externally and internally funded projects. b Includes funds for which the Government has already signed a memorandum of understanding, such as the one for the Investment Program, or has committed from its internal budget. c Includes funds expected from internal sources or external financing sources (such as Japan International Cooperation Agency), and expected to be included in future budgets (for internal funds) or currently under discussion (for external funds). 10 Both the National Drinking Water Policy and the National Policy on Sanitation were adopted by the MWSD in The investment plans were adopted by the NWSDB and CMC in 2012.

9 9 Source: NWSDB and CMC, July Policy and Institutional Reform Plan 8. To achieve the objectives of institutional reform and ensure the sustainability of the service improvements, as reflected in the SDP, the Government has adopted a policy and institutional reform plan (Policy and Institutional Reform Plan) that clearly defines the actions required of the relevant institutions to ensure that the sector policy and development objectives are met. The Policy and Institutional Reform Plan also provides targets, indicators, and time frame that will help the Government measure its performance and plan for future actions. The Policy and Institutional Reform Plan is presented in Table 2. Sector Policy and Development Objectives A. Asset Management 1. Asset Creation. Provide infrastructure to progressively achieve full service coverage with continuous, reliable, and environmentally safe services. 2. Asset Planning and Management. Ensure better operation and maintenance of water supply and sanitation (WSS) infrastructure to provide efficient services. B. Institutional and Financial Sustainability 1. Institutional Effectiveness. Implement an enterprise resource management plan in utilities to improve institutional effectiveness. Table 1: Policy and Institutional Reform Plan Actions and Description a. Capital investment plan prepared for short (2013), medium (2017), and longterm (2020) for Colombo s water and sewerage sector to address current backlog and future demand a. Created and populated a GIS-based asset management systems capturing water and sewerage systems asset information and condition in Colombo b. Active leak control teams established and operational; work programs established on a performance-based framework basis a. Established autonomous business center for RSC-WC to handle all the services, from water distribution to human resources management and development, financial and commercial systems, financial planning and budgeting, and other relevant functions under the water utility operations; reorganized head office as the development arm of the NWSDB, performing the combined role of providing financial and technical assistance to the revenue centers and local offices and carrying out internal regulation of these offices; senior management roles aligned with functional and corporate responsibilities Institutional Responsibility NWSDB and CMC NWSDB (RSC based) and CMC RSC-WC NWSDB and MWSD Target or Indicator and Time Frame Final investment plan based on detailed engineering designs progressively completed by 2015 Asset management systems established in 2014 and 2016 for water supply and wastewater, respectively. Databases fully populated by 2020 Established by 2014, and fully completed by 2016 b. Sewerage and drainage departments segregated within CMC with clear and separate responsibilities and business mandates and targets CMC By 2015

10 10 Sector Policy and Development Objectives 2. Improved Governance. Ensure improved financial management, and operational and commercial efficiency of utilities C. Effective Contracting 1. Public Private Partnership. Introduction of publicprivate partnerships in the sewerage sector 2. Efficient Billing and Collection Actions and Description a. RSC-WC to prepare -Operational Action Plan and Business Plan with annual operations plan focusing on measures to reduce nonrevenue water, optimize energy use, improve human resource management, and enhance revenues through improved billing and collection - Install appropriate financial and commercial systems and procedures, set up separate books of accounts, and transfer all commercial records. b. CMC to: - Obtain necessary council resolutions for a sewerage volumetric tariff and begin charging - Establish separate accounts for sewerage ring fencing expenditure, revenues, debt, etc. a. CMC to evaluate various modes of public-private partnership for the 2 wastewater treatment plants and select most appropriate model in consultation with ADB a. For the purpose of the efficient introduction of the sewerage tariff in CMC areas, CMC to consider most effective option that minimizes costs, maximizes efficiency, and requires Institutional Responsibility Target or Indicator and Time Frame NWSDB First 3-year Operational Action Plan and Business Plan developed by 2014 Improved accounting, auditing, and procurement systems at RSC level established by 2015 CMC Tariff rollout by 2014; tariff methodology and first revision by 2016 Account established by 2013 CMC, MLGPC Study completed by 2014 Selection completed by 2016 CMC in consultation with NWSDB and ADB Method agreed by 2015 minimum investment ADB= Asian Development Bank, CMC= Colombo Municipal Council, MLGPC= Ministry of Local Government and Provincial Councils, MWSD= Ministry of Water Supply and Drainage, NWSDB= National Water Supply and Drainage Board, RSC-WC= Western Central Regional Support Center, WSS= water supply and sanitation. C. Strategic Context 9. The Government s DPF aims to accelerate economic growth, improve social indicators, eradicate hard-core poverty, and improve the environment. The DPF thus aims for socially inclusive and environmentally sustainable economic growth. It identifies inadequate and poorquality infrastructure as a major constraint on sustaining rapid economic growth. Large infrastructure projects are therefore planned in transport, energy, water, sanitation, and irrigation. The sector objectives of the DPF are: (i) increasing the population s access to improved water supply, and achieving national standards for service and quality; and (ii) improving sanitation facilities, increasing the population s access to those facilities, and setting high national standards for service and quality of (discharge) waters. The DPF plans to make a concerted effort to improve sanitation in the country to significantly change this situation. The DPF also envisages the adoption of a rational pricing mechanism, better financial and managerial discipline, and reforms to reduce transmission losses and grant greater financial and managerial autonomy to public sector utilities.

11 The National Drinking Water Policy and the National Policy on Sanitation, adopted by the MWSD in 2010, provide guidance to NWSDB, provincial councils, local authorities, lending institutions, and organizations involved in delivering water supply and sanitation services. 11. NWSDB s Corporate Plan ( ) is aimed at making NWSDB the most prestigious utility organization in Sri Lanka with technological and service excellence by: (i) increasing water supply and sanitation coverage, (ii) improving business efficiency, (iii) improving services to customers and promptly attending to public complaints, (iv) promoting information and communication technology solutions as a catalyst for business growth, (v) ensuring greater accountability and transparency, (vi) promoting human resource development, and (vii) facilitating safe drinking water supply and sanitation services to rural and underserved communities. The Corporate Plan emphasizes the importance of establishing and maintaining an asset management system to optimize the rehabilitation and replacement of infrastructure. Business efficiency objectives specifically target a 9.4% NRW reduction in Colombo city by 2016 and a 26% NRW national average. 12. As part of its objective of improving business efficiency, NWSDB s NRW medium-term strategy, as articulated in the Corporate Plan, explicitly incorporates sub-strategies for (i) financing essential infrastructure; (ii) reducing commercial losses (including converting of unmetered connections, replacing defective meters, using new technology for meter readings, and continuing to analyzing zero bills and estimated bills); (iii) increasing cost-effective operations by increasing labor productivity, energy efficiency, and treatment process efficiency; (iv) improving financial performance and collection efficiency; (v) responding to customer complaints; and (vi) increasing service levels and water pressure. D. Investment Program 13. The Investment Program will assist the Government in achieving its goals under the SDP by supporting the Government in achieving its sector targets for the Greater Colombo area. The Investment Program is aimed at providing the residents of Greater Colombo with universal access to water supply (100% coverage of 24-hour piped water supply in Colombo city) and universal access to sanitation, and 100% sewerage coverage in Colombo city, by The Investment Program will assist the Government in: (i) simultaneously providing much-needed infrastructure investments and advisory services to improve water supply and wastewater management; (ii) promoting a performance-oriented institutional culture in NWSDB and CMC, where performance is evaluated against tangible output indicators; and (iii) linking investments to institutional reforms and organizational productivity. The Investment Program will deliver a comprehensive program to attain the Government s development targets and vision for Greater Colombo. The ultimate impact will be improved urban environment and quality of life for the residents of Greater Colombo. The outcome will be improved water supply and wastewater service and management in Greater Colombo. 15. The Investment Program will also pave the way for the pilot-testing of: (i) the transfer of functions to the smaller capable unit within NWSDB and (ii) the reorganization and restructuring of responsibilities within the NWSDB and its Regional Support Centers (RSCs). For wastewater management, the Investment Program will assist CMC in: (i) setting up a separate ring-fenced department within CMC for wastewater management and introducing wastewater tariffs; and (ii) introducing, monitoring and managing public private partnership (PPP) contracts for the wastewater treatment plants. The actions are expected to lead to improved accountability, transparency, and customer response in these smaller ring-fenced units within NWSDB and

12 12 CMC for managing water supply and wastewater services in Greater Colombo. The Investment Program will also support the development of overall water and wastewater management capacity, with specific emphasis on NRW reduction, and wastewater coverage and treatment improvement. The proposed approach to NRW reduction follows International Water Association best practice and other experience, tackling simultaneously (i) financial losses (unbilled authorized consumption), (ii) commercial or apparent losses (unauthorized consumption, customer meter inaccuracies and data handling errors), and (iii) physical losses. Table 2 above contains the Investment Program-specific policy and institutional reform plan agreed to by Sri Lanka and ADB. 16. Supplementing the ongoing projects and expected funds from other development partners, such as the Japan International Cooperation Agency (JICA), the Investment Program will fund 100% of the remaining investment needs to achieve the piped water supply targets ($164 million) for Colombo city and 85% of the remaining investments need to achieve the wastewater targets ($136 million) for Colombo city by The Investment Program is expected to be phased as follows: (i) $84 million for Project 1 in 2012; (ii) $80 million for Project 2 in 2013; (iii) $100 million for Project 3 in 2015; and (iv) $36 million for Project 4 in Projects 1 and 2 will focus on reducing NRW and improving water service efficiency in Colombo city. Projects 1 and 2 have been phased to first tackle NRW reduction in areas with greatest physical and commercial losses, and therefore requiring more urgent and critical investment for infrastructure replacement. Projects 3 and 4 will provide for improvements in wastewater services, including treatment, and expansion of service coverage in Greater Colombo. 17. The Investment Program is expected to have the following outputs: (i) Output 1: Rehabilitated and expanded water supply system and reduced NRW in Colombo City. (ii) Output 2: Improved wastewater services in Greater Colombo. (iii) Output 3: Strengthened institutional structure and capacity of service providers. (iv) Output 4: Investment Program managed and implemented. 18. The Investment Program is estimated to cost $400 million and will finance a portion of the Government s Investment Plan. The Investment Program will be implemented over a period of 8 years, from 2012 to Summary cost estimates are provided in Table 3 below.

13 13 Item A. Base Cost Output 1 Table 3: Investment Program ($ million) Amount a Rehabilitated and Expanded Water Supply System Output 2 Improved Wastewater Services Output 3 Institutional Reform and Capacity Building 20.0 Output 4 Implementation Support 14.0 Subtotal (A) B. Contingencies b 44.0 C. Financing Charges During Implementation c 17.0 Total (A+B+C) a In mid-2012 prices. Exchange rate of $1 = SLRs132 is used. Includes taxes and duties of $38 million. b Physical contingencies computed at 12.5% for civil works and 10% for equipment. Price contingency computed at 7% for domestic goods and 2% for imported goods. c Includes interest and commitment charges. Interest during construction for the ADB loan(s) is computed at 1.5% per annum for ADB loan from ordinary capital resources and 1.0% per year for the ADB loan from Special Funds resources. Commitment charges for the ADB loan from ordinary capital resources are computed at 0.15% per year. Source: Asian Development Bank estimates. E. Financing Plan 19. The Facility will finance the Investment Program and will account for 21% of the Government Investment Plan. Cofinancing under the Investment Plan is expected from other donors. A number of financing sources have already been engaged. Table 4 provides a breakdown of the Investment Plan and Investment Program Financing Plan. Table 4: Investment Plan and Investment Program and Financing Plan ($ million) Investment Plan % Share Investment Program % Share ADB % % Co-financier % - 0% Government % % Total 1, % % ADB=Asian Development Bank.

14 14 SCHEDULE 2 DESIGN AND MONITORING FRAMEWORK FOR THE INVESTMENT PROGRAM Design Summary Impact Improved urban environment and quality of life for the residents of Greater Colombo Performance Targets and Indicators Residents, particularly women, especially the poor, in Colombo have better living conditions and more time for productive activities because of 24- hour continuous water supply (baseline: 50% in 2012; target: 100% by 2024) Quality of discharge of wastewater secondary treatment (BOD5 150 mg/l in 2012 baseline to 100mg/l target by 2024) Data Sources and Reporting Mechanisms Census data from social department Annual reports from CMC Assumptions and Risks Assumption Government continues to implement institutional and financial reforms it previously committed itself to implementing. Outcome Improved water supply and wastewater service and management in Greater Colombo Output 1. Rehabilitated and expanded water supply system and reduced NRW in Colombo Waterborne diseases drop below 1 per 1,000 persons in Greater Colombo by 2024 (baseline: 2.2 per 1,000 persons in 2012) Daily water supply increased in low-pressure area a (baseline: 5 hours in 2012; target: 24 hours by 2020) in Colombo Citywide NRW in Colombo reduced (baseline: 49% citywide and 60% in critical area in 2012; target: 20% in Colombo and 18% in critical area by 2020) Coverage of sewer network increased, including all BPL households (FHHs among them) (baseline: 80% in 2012; target: 100% in Colombo by 2020) Degraded water supply pipes replaced in Colombo (target: 400 km by 2018) Increased percentage of households, including BPL households and FHHs, with access to piped water supply (baseline: 95% in 2012; target: 100% by 2018) in Greater Colombo. All free water outlets in tenement gardens metered and consumer associations formed (target: 3,200 by 2020) (50% women members in executive committees) Census data from predefined hospitals in CMC NWSDB reports NWSDB water balance audit CMC annual reports NWSDB annual reports Surveys conducted by the loan consultants and NWSDB reports NWSDB annual reports Assumption NWSDB and CMC follow the recommended strategy and plan of action for NRW reduction and for wastewater service improvement. Risk Ongoing and planned water supply projects, financed by JICA and NWSDB, are not successfully implemented. Assumption Key officials who receive the necessary capacity-building training remain in their positions. Risk Prices of steel and pipes increase beyond projections. DMA mechanism for NRW reduction established for Colombo (target: by the end of 2016) NWSDB annual reports

15 15 Design Summary Performance Targets and Indicators Data Sources and Reporting Mechanisms Assumptions and Risks 2. Improved wastewater services in Greater Colombo Pumps and 12 km water supply transmission pipes replaced by 2017 Sewer network expanded (target: 445 km by 2020) in Colombo Access to sanitation for all in Greater Colombo, including all BPL households (FHHs among them) (baseline: 91% in 2012; target: 100% by 2020) NWSDB project progress reports CMC project progress reports Consultant s surveys and NWSDB and CMC project progress reports Rehabilitation of existing sewers (target: 30 km by 2020) Wastewater treatment capacity increased (baseline: 0 in 2012; target: 175,000 m 3 /d by 2020) CMC project progress reports CMC project progress reports 3. Strengthened institutional structure and capacity of service providers Cost recovery mechanism, through separate wastewater charges, introduced for wastewater services in CMC by 2016 Operations performance audit cell established by 2013 CMC annual reports and project progress reports NWSDB annual reports RSC-WC reorganized, and all positions filled (at least 15% women), and operational as an autonomous business center under NWSDB by 2017 NWSDB annual reports and business plans Fully functioning and equipped NRW unit in RSC-WC by 2017 NWSDB staff trained for NRW by the end of 2020 (target: 1,000, at least 25% women by 2017) GIS-based asset management system established for both water and wastewater assets by 2020 Sewerage and drainage departments segregated within CMC; wastewater department established as a separate unit with ring-fencing of accounts, expenditure, revenues, debt, etc, by 2020 NWSDB annual reports NWSDB project progress reports CMC and NWSDB annual reports CMC annual reports Awareness and acceptance of wastewater tariff among citizens increased by 20% according to surveys conducted before and after the program Survey results 4. Project management system in place Project implemented on time and within budget, and rated successful by ADB project rating system MOFP report

16 16 Data Sources and Reporting Design Summary Performance Targets and Indicators Mechanisms Women engineers and engineering assistants recruited for the PMU for project implementation (15% of PMU NWSDB annual reports staff are women) Activities with Milestones 1. Water distribution network rehabilitation and replacement and Colombo citywide NRW reduction Critical Area 1.1 Complete procurement of civil works contract by Q Complete civil works in critical area by Q Outside Critical Area 1.3 Complete selection and design of pipes to be replaced and rehabilitated by Q Complete procurement of civil works by Q Complete civil works outside critical area by Q NRW Reduction 1.6. Appoint core counterpart staff required for water project implementation by Q Provide the NRW teams with vehicles, tools, equipment, and training, and mobilize the teams for active leakage control by Q Install system input meters and establish water balance by mid Establish DMAs by Replace pumps and transmission lines by Q Replace all service connections and meters by Install flow and pressure monitoring equipment by mid Introduce meter-testing equipment and facilities, and train staff by the end of Construct a dedicated Colombo NRW office facility (in Maligakanda) and an operational center in the critical area by the end of Establish water user groups in low-income areas (members at least 50% women) by Wastewater network expansion and construction of wastewater treatment plants in Greater Colombo 2.1 Procure civil works contract for expansion of sewer network by Q Complete civil works for sewer network expansion by Q Procure civil works contract for wastewater treatment plants by Q Complete construction of treatment plants by Q Strengthened institutional structure and capacity of service providers 3.1 Establish operations performance audit cell by Q Issue tender documents for contract of MASCs by Q Procure contract of MASCs; complete and mobilize consultants by Q Develop and begin implementation of NRW management training and certification program by Q Institutionalize reforms in RSC-WC and appoint all key staff by the end of Complete comprehensive staff training program in NWSDB by the end of Establish a staff performance incentive scheme by Implement campaign to increase public awareness of water conservation and NRW reduction by the end of Recruit NGO for community mobilization by Q Recruit media consultants for community consultations and awareness raising in program implementation, community participation, employment opportunities, and program benefits by Q Train water user groups in meter reading and O&M by Complete separation of wastewater department within CMC and complete separate accounting and other systems by Q Introduce wastewater tariff by Q Procure DSIC contract; complete and mobilize consultants by Q Management and implementation of Investment Program 4.1 Establish PMU in NWSDB by Q Strengthen PMU in CMC by Q Assumptions and Risks Input ADB: $ 300 million Government: $100 million ADB= Asian Development Bank, BOD = biochemical oxygen demand, BPL = below poverty line, CEA = Central Environmental Authority, CMC = Colombo Municipal Council, DMA = district metered area, DSIC = Design Supervision and Institutional Consultant, FHH = female headed household, GIS = geographic information system, km = kilometer,

17 17 MASCs = management advisory and supervision consultants, MOFP = Ministry of Finance and Planning, NWSDB = National Water Supply and Drainage Board, NGO = non-governmental organization, NRW = non-revenue water, O&M = operation and maintenance, PMU = project management unit, Q= quarter, RSC-WC= Western Central Regional Support Center, TA = technical assistance. a Low-pressure area is about 12 km 2 and refers to Kotahena, Slave Island, Pamankada, Havelock Town, Mattakkuliya, Bovella, and Hulfsdrop. Source: Asian Development Bank.

18 18 SCHEDULE 3 IMPLEMENTATION FRAMEWORK 1. Unless modified and amended in loan or project agreements under the Multitranche Financing Facility (Facility), the Greater Colombo Water and Wastewater Management Improvement Investment Program (the Investment Program) will be implemented as follows: A. Implementation Arrangements 1. Organizational Setup and Functions 2. At the central level, a program steering committee (PSC) will be established in the Ministry of Finance and Planning (MOFP), with the Secretary to Treasury as the chairperson, the Secretary of the Ministry of Water Supply and Drainage (MWSD), the Secretary of Ministry of Local Government and Provincial Councils (MLGPC), and senior officials from the Department of External Resources (DER), Department of National Planning (DNP), the Ministry of Defense and Urban Development (MOD&UD), the National Water Supply and Drainage Board (NWSDB) and Colombo Municipal Council (CMC), as members. The PSC will provide policy guidance and coordination to the government agencies involved in the administrative matters of the Investment Program. 3. The MWSD will be the executing agency for water supply investments, and NWSDB will be the implementing agency. The implementing unit will be within the Western Regional Support Center (RSC-WC) of NWSDB. A Project Management Unit (PMU) in NWSDB, headed by a fulltime project director, will be established, and the PMU will be responsible for all aspects of project management and implementation relating to improvements in water supply in Greater Colombo and sanitation outside the Colombo city. 4. The MLGPC will be the executing agency for wastewater investments. The CMC will be the implementing agency responsible for implementing most of the wastewater components, except for any components that may be located outside Colombo city. The PMU will be established directly under the Municipal Commissioner, and will be led by a CMC officer at a senior management level, for the duration of the Program and will be responsible for all aspects of project management and implementation relating to improvements in sanitation within the CMC areas. 5. A Management Advisory and Supervision Consultant (MASC) will be engaged by NWSDB to (i) (ii) (iii) (iv) advise and support the non-revenue water (NRW) team of NWSDB in implementing the NRW reduction program in an efficient, timely and cost effective manner and achieve the objectives of the NRW reduction program and NRW targets of Investment Program and NWSDB; provide technical assistance and support to NWSDB managers and staff in reorganizing RSC-WC and improving technical and managerial capacity; prepare PFRs for future tranches related to water supply and NWSDB; and provide design review and construction supervision assistance for water supply infrastructure under the Investment Program.

19 19 6. An international firm as MASC will be recruited in accordance with ADB s Guidelines on the Use of Consultants (2010), as amended from time to time. Additionally, the services of a non-governmental organization (NGO) and a consulting firm will be required to support civic awareness raising, the formation of community-level water associations and sanitation improvement, hygiene awareness and improvement and resettlement monitoring. 7. Another international firm will be recruited as Design Supervision and Institutional Consultant (DSIC) to assist the CMC in managing and implementing the sanitation-related project component in CMC areas and institutional reforms in CMC s wastewater department. The DSIC will be responsible for the following: (i) (ii) (iii) (iv) Preparing technical, financial, safeguards and other documentation required for the submission of relevant PFRs compliant with ADB s safeguards; Designing and providing procurement assistance and construction supervision for the rehabilitation and expansion of the sewer network and wastewater treatment plants; Assisting CMC in managing and monitoring PPP contracts for wastewater treatment plants; and Advising CMC and MLGPC on institutional reforms and measures for improving operational performance. 2. Implementation Procedures and Arrangements 8. Individual projects will be selected in accordance with the criteria stipulated in Schedule 4 of this Framework Financing Agreement (FFA), and will be implemented through the following procedures: (i) (ii) Feasibility Studies. For each proposed scheme, the PMUs will (a) form a planning team comprising specialized staff (both technical and associated departments involved in provision of clearances, etc.), and (b) conduct consultations with stakeholder groups. With the support of the MASC on water supply projects and the DSIC for sewerage projects, the planning teams will review and update or undertake feasibility studies, and prepare (a) project appraisal reports, including project scope, cost, financing, and implementation arrangements; (b) an initial environmental examination or environmental impact assessment; (c) a resettlement plan; (d) an indigenous peoples development plan, as applicable; and (e) economic, financial, and institutional analyses. The PMUs will have those projects approved by the PSC and forwarded to MWSD or MLGPC as appropriate. The appraisal report will be reviewed by MWSD or MLGPC, ERD, and the Asian Development Bank (ADB). On the basis of the report, preparations for a new periodic financing request (PFR) to finance the project will be initiated by the Government of Sri Lanka (the Government) and ADB, in parallel to the preparation of detailed designs and tender documents. Project approval. Upon receipt of documentation from the PMUs as described in (i), the executing agencies will review the project proposals, confirm compliance with project selection criteria, and then forward those eligible projects to ADB for prior review and endorsement. NWSDB and CMC will coordinate the preparation of detailed engineering designs, as applicable, and devise a timetable including advance contracting. ADB s Appraisal Mission for the specific PFR will be

20 20 organized on the basis of the quality of feasibility documentation and the timetable set for meeting readiness criteria. The consolidated PFR to be formally submitted by executing agencies to ADB through the ERD should specify: (i) the required loan amount; (ii) a list of subprojects to be financed under the loan; (iii) cost estimates and financing plan; (iv) implementation arrangements; (v) confirmation of the continuing validity of, and adherence to, the provisions of the FFA; (vi) confirmation of compliance with the provisions under previous loan agreements and project agreements as appropriate; (vii) due diligence on safeguards; (viii) economic and financial assessments, and (ix) other information as may be required under the Facility Administration Manual to be prepared and agreed between ADB and Sri Lanka, to facilitate the implementation and processing of the Facility. (iii) (iv) (v) Tendering and implementation of Civil Works. Upon (a) approval of the detailed design by the NWSDB or CMC, (b) the granting of statutory clearances, and (c) full completion of the land acquisition and resettlement process where applicable, the PMUs will commence the tendering process of the civil works and supply of goods. The PMUs will be responsible for complying with ADB s procurement processes, including (a) submission of bidding documents, and (b) submission of bid evaluation reports for review and approval, as may be relevant to the different modes of procurement agreed in the PFR s procurement plans. Executing agencies will monitor the procurement process and the timely award of contracts, and will provide expert support and advice wherever necessary in dealing with matters pertaining to contract administration, arbitration, etc. Disbursements. Immediately upon loan effectiveness of the first Ordinary Capital Resources and Asian Development Fund loans, the Government will open and maintain an imprest account for the respective loans at the Central Bank of Sri Lanka to ensure the timely release of loan proceeds and expedite implementation. Imprest accounts will be opened separately for each PFR, depending on the fund sources. The initial advance or replenishment by ADB into the imprest account(s) will be converted into equivalent Sri Lanka rupees by commercial bank(s) acceptable to the Government, and transferred in Sri Lanka rupees to NWSDB or CMC through the sub-accounts for each loan as appropriate and applicable. Capacity Development, Policy and Institutional Reform Plan. The executing agencies with support from the PMUs, will be responsible for the implementation of the Policy and Institutional Reform Plan and capacity development activities agreed under the Investment Program. RSC-WC and CMC, with support from the PMUs, should present progress reports to the PSC at least quarterly. Information and associated documentation, as well as a summary of actions agreed during the meeting, should be included in the quarterly reports forwarded to ADB. B. Monitoring and Review 9. On the basis of a review of quarterly progress reports prepared by the PMUs following the format pre-agreed with ADB, ADB, NWSDB and CMC, for applicable tranches, will meet every 6 months, or more often if required, to review and discuss the progress of the Facility and each loan. In addition to regular reviews, including a midterm review for each loan, a detailed midterm review of the Facility will be undertaken in 2016, or within 3 years of the effective date

21 21 of the first loan agreement. The midterm review will include a detailed evaluation of the scope and implementation arrangements of the Facility, safeguards, issues, progress with achievements versus set targets, contract management progress, and any other outstanding issues, and develop remedial measures to enable the overall objectives of the Investment Program to be achieved in a timely manner. 10. NWSDB and CMC will provide ADB with quarterly progress reports informing the ADB of the progress of the overall Facility (i.e., project or tranche preparation or approval) for their applicable loans and the implementation progress of ongoing individual loans. The reports will also provide summary financial accounts for the Investment Program. NWSDB and CMC will also submit to ADB, within 3 months of physical completion of each applicable project or tranche, a completion report that will cover the details of project implementation, costs, monitoring and evaluation activities, and other information requested by ADB. C. Counterpart Funds 11. Sri Lanka will ensure that sufficient counterpart funds are made available from its budget for each fiscal year, in a timely manner, for the smooth implementation of the Investment Program, particularly in relation to securing PMUs staffing and activities. D. Accounts 12. Sri Lanka will ensure that accounts and records are maintained and audited in a timely manner for the expenditure (including each project) under each loan to adequately identify use of the loan proceeds in such manner and detail as may be specified under each loan agreement or project agreement.

22 22 Figure 1: Investment Program Organization Chart Government of Sri Lanka ADB Program Steering Committee MWSD-Executing Agency MLGPC -Executing Agency CDTA NRW Specialist and Team NWSDB-Implementing Agency CMC-Implementing Agency MASC PMU PMU DSIC ADB= Asian Development Bank, CDTA= capacity development technical assistance, CMC= Colombo Municipal Council, DSIC= Design Supervision Institutional Consultant, MASC= Management Advisory and Supervision Consultant, MLGPC= Ministry of Local Government and Provincial Councils, MWSD= Ministry of Water Supply and Drainage, NWSDB= National Water Supply and Drainage Board, PMU= project management unit.

23 Figure 2: Fund Flow of ADB Loans to NWSDB 23