Sri Lanka - Water Supply Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 6228 PROJECT PERFORMANCE AUDIT REPORT SRI LANKA FIRST WATER SUPPLY PROJECT (CREDIT 709-CE) June 2, 1986 Operations Evaluation Department Thi* document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. FOR OFFICIAL USE ONLY THE WORLD BANK WashIngton, D.C. 20433 U.S.A. Offce of OrectorC.eneral Opeateo Ivahuat1n June 2, 1986 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Performance Audit Report - Sri Lanka First Water Supply Project (Credit 709-CE) Attached, for information, is a copy of a report entitled "Project Performance Audit Report on Sri Lanka First Water Supply Project" prepared by the Operations Evaluation Department. Attachment This document has a restricted distribution and may be used by recipients only in the performance FOR OFFICIAL USE ONLY ABBREVIATIONS AND ACRONYMS CIDA - Canadian International Development Agency CIF ~ Cost Insurance and Freight CMC - Colombo Municipal Council FEEC - Foreign Exchange Entit..ement Certificate NIM - National Institute of Mangement, Sri Lanka ODM - United Kingdom Ministry of Overseas Development TC - Town Council UC - Urban Council UNDP - United Nations Development Program UNICEF - United Nations International Children's Emergency Fund WDB - National Water Supply and Drainage Board, Sri Lanka WHO - World Health Organization GSL - Government of Sri Lanka MLGHC - Ministry of Local Government, Housing and Construction GLQSSARY RS - Sri Lanka Rupee SAR - Staff Appraisal Report Ganga - major river FISCAL YEAR January 1 to December 31 MEASURES AND EQUIVALENTS g - Imperial gallon (1 Ig - 1.2 US gallon - 4.546 liters) ag - Million Imperial gallons (1 Img - 4.546 cubic meters) mgd - Million Imperial gallons-per day (1 Imgd - 52.62 liters per sec.) gcd - Imperial gallons per capita per day (1 Igcd = 4.546 liters per capita per day) in - inch (1 in - 2.54 centimeters) ft - foot (1 ft - 30.5 centimpters) mile - statute mile (1 mile - 1,609.34 meters, approximately 1.6 kilometers) acre - acre (1 acre - 4,046 m; or 2.47 acres - 1 hectare) sq. mile - square mile (1 sq. mile - 259 hectares) This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. PROJECT PERFORMANCE AUDIT REPORT SRI LANKA FIRST WATER SUPPLY PROJECT (CREDIT 709-CE) TABLE OF CONTENTS Page No. Preface ........................... i Basic Data Sheet ................................................... 111 Evaluation Summary .............................................. vi PROJECT PERFORMANCE AUDIT MEMORANDUM 1. PROJECT SUMMARY ***I***************......................... 1 Background ............................................. 1 Objectives ......................... 3 Project Description .................................... 3 Project Revisions, Implementation and Financial Performance ..................................o.......... 4 Procurement o.....* **.*.*.............. o**......... 6 Project Costs *..............o......o................... 7 Performance of Consultants ................................ 8 Institutional Development ................................. 8 II. SUPPLEMENTARY COMMENTS *...** * ....******... .. **..** 11 Performance of the Bank Group ............................ 11 Institutional Development ................................ 12 Sustainability of Benefits .......***.**********..... 14 Economic Evaluation ..............................,*...... 16 III. CONCLUSIONS ... ........................................... 17 Annex: IDA Staff Memorandum on PCR prepared by WDB ................ 19 Attachments A & B Comments from the Ministry of Finance and Planning and National Water Supply & Drainage Board ...................... 27 PROJECT COMPLETION REPORT 1. Introduction **.**********.. **********************000000 00000 34 II. Project Origin, Objectives ................................... 36 III. Project Implementation, Operations and Cost .................. 38 IV. Operating Performance ................................. 45 V. Financial Performance ........................................ 46 VI. Institutional Performance ********o*********************** 52 VII. Project Justification ...........*************************** 54 TABLE OF CONTENTS (continued) Page No. Annexes 1. Project Elements .......................***************** 58 2. Completion Dates for Major Project Components ........... 62 3. Estimated and Actual Cost .......................* 63 4. Income Statement, 1975-1984 ............................. 66 5. Balance Sheet, 1975-1984 . 68 6. Statement of Sources and Application of Funds .........** 70 7. IDA Staff Comments on PCR prepared by WDB*******%.******* 72 Ital IBRD No. 12531 PROJECT PERFORMANCE AUDIT REPORT SRI LANKA FIRST WATER SUPPLY PROJECT (CREDIT 709-CE) PREFACE This report presents the results of a performance audit of the First Water Supply Project for which Credit 709-CE of US$9.2 million and IDA-administered Credit 709-5CE of US$4.8 million equivalent from the Canadian International Development Agency (CIDA) were approved in June 1977. Credit 709-CE for this project constituted the first lending operation of the Bank Group for the community water supply sector in Sri Lanka. It was made to the Government of Sri Lanka (GSL), with on-lending specified from GSL to the National Water Supply and Drainage Board (WDB). The Development Credit Agreement was signed in June 1977 and became effective in February 1978. The original Closing Date of March 31, 1982 was extended until December 1983, and the account was closed in January 1984, fully disbursed. To cover a substantial cost increase, agreement was reached between GSL and IDA in November 1979 on a Special Action Credit (Cr. 31-CE) in various currencies equivalent to US$7.0 million. This credit was provided through a Special Action Account with funds contributed by the member countries of the European Economic Community and IDA served as the administrator. The project Performance Audit Report (PPAR) consists of a Project Performance Audit Memorandum (PPAM) prepared by the Operations Evaluation Department (OED) and a Project Completion Report (PCR) prepared by WDB. Included as an annex are additional comments on the PCR prepared by IDA staff of the South Asia Regional Office. OED has reviewed the PCR, the Appraisal and President's Reports, and the transcripts of the meeting of the Executive Directors when the credit was approved. Documents in the Bank Group file have been reviewed, including some documents pertaining to the Second Sri Lanka Water Supply and Sanitation Project (Credit 1041-CE), and staff familiar with the project have been interviewed to the extent possible. Further, an OED mission visited Sri Lanka to discuss the project with officers and staff of WDB and MLGRC, and with other persons who had knowledge of the facts. The audit finds that in many respects the PCR accurately describes the pcoject experience. The PPAM supplements that description, particularly adding certain aspects of implementation history that were not fully covered in the PCR or the annex. Otherwise, the PPAH summarizes and attempts not to repeat the details provided in the PCR, and in addition, provides Supplementary Comments on the performance of the Bank Group, institutional development of WDB, sustainability of benefits, and economic evaluation of the project. - ii - Copies of the draft PPAR were sent to the Government, the Executing Agency and the co-financiers for comments. Comments received from the Ministry of Finance and Planning and National Water Supply and Drainage Board are reflected in the final report and reproduced as Attachments A and B to the report. - III - PROJECT PERFORMANCE AUDIT BASIC DATA SHEBT SRI LANKA WATER SUPPLY PROJECT CREDITS 709-CE, 709-5-CE, AND 31-CE KEY PROJECT DATA Appraisal Actual or Estimate Current Estimate Total Project Cost (US$ million) 42.5 35.10 Overrun (%) -18% /a Total Amout of Credits (US million) 21.00 Disbursed 18.95 /b Cancelled Completion of Physical Components 12/80 06/85 Time Overrun (%) 215% Financial Performance Poor Institutional Performance Fair Economic Rate of Return 4.8%, 2.9%, 2.7% /c 2% /d Cumulative Disbursements (US$ million) Appraisal Estimate Actuals Fiscal Year 709-CE 709-5-CE 31-CE 709-CE 709-5-CE SAC 31-CE FY 1977 .03 .02 -- -- -- FY 1978 5.81 3.04 -- 0.11 0.06 -- FY 1979 8.56 4.49 -- 3.63 1.92 -- FY 1980 8.98 4.67 - 8.28 4.16 0.57 FY 1981 9.10 4.75 -- 8.75 4.59 2.17 FY 1982 9.20 4.80 -- 8.84 4.67 3.98 FY 1983 -- -- - 9.09 4.78 4.35 FY 1984 -- -- -- 9.20 4.80 4.95 /a Apparent underrun of 18% Is due to variation in exchange rate during project implementation. Actual overruns of 91% in local currency and 38% in foreign currency costs occurred. /b The reduction expressed in US$ was because of the decline in the dollar equivalent of the currencies in which the Special Action 43redit was de,ominated. /c For Colombo, Ambalangoda and Kalutara respectively. /d PCR, Annex 7, para 22. However, see PPAM para. 57. /e Actual disbursements are in Canadian dollars. Conversion rate of 1 US$ - 0.96 C$ is used. - iv - OTHER PROJECT DATA Original Actual First Mention in Timetable 03/-/76 Appraisal 10//76 Negotiations 02/-/77 Board Approval 05/10/77 Loan Agreement Date 06/30/77 Effective Date 09/29/77 02/08/78 Closing Date 03/31/82 06/30/83 a/ Borrower and Guarantor Democratic Socialist Republic of Sri ianka National Water Supply S Drainage Bd., Sri Lan The Second Sri Lanka Water Supply & Sewerage Project (Credit 1041-CE dated 09/24/80) and the proposed Third Sri Lanka Water Supply and Sewerage project. MISSION DATA b/ Month/ No. of No. -.2 man- Date of Performance Year eeks Persons weeks Reot Rating Appraisal 09-10/76 2 2 4 ;j4/18/77 Supervision 1 08/77 1 1 1 09/08/77 Supervision 2 05/78 1 2 2 06/07/78 Supervision 3 09078 0.5 2 1 09/22/78 21 Supervision 4 03/79 2 2 4 04/18/79 22 Supervision 5 08/80 1 1 1 09/26/80 21 Supervision 6 11/81 3 3 9 12/11/81 31 Supervision 7 08/82 3 2 6 04/23/82 21 Supervision 8 10/83 1.5 2 3 02/29/84 31 Supervision 9 04/84 2 3 6 06/15/84 31 STAFF INPUT (Staff - Weeks) FY76 FY77 FY78 FY79 FY80 FY81 FY82 FY83 FY84 FY85 TOTAL Preparation 26.0 6.2 32ws p2 Appraisal 60.4 6024/4 Supervision 0.3 12.1 19.1 2.6 8.0 7.3 0 5 8 1 4.3 (2.3 Supervision2-05/78-1-22- 06/07/78 -- 26.0 66.9 12.1 19.1 2.6 8.0 723 /.5 8.1 4.3 154.9 a/ Final disbursement was on January 9, 1984. i/ After 1980, CR709-CE and CR1041-CE were generally supervised together. The files for CR1041-CE contain records of nine additional supervision missions (not listed here) that took place during the period February 1981 through July 1985. -v- EXCHANGE RATES Currency Unit - Sri Lanka Rupee (SL Rs.) Appraisal Year Average - US$ 1.0 - SL Rs. 7.28 Average Over Project Period - US$ 1.0 - SL Re. 17.59 Completion Year Average - US$ 1.0 - SL Re. 25.00 1976 1977 1978 1979 1980 1981 1982 1983 1984 S.L.Rs. 7.28 15.51 15.45 18.00 20.55 21.32 25.00 25.16 - vi - PROJECT PERFORMANCE AUDIT REPORT SRI LANKA FIRST WATER SUPPLY PROJECT (CREDIT 709-CE) EVALUATION SUMMARY Introduction i.- The Sri Lanka Water Supply Project, approved in 1977, was the first Bank Group project in the sector, and responded to the difficult water supply situation in the southwest coastal area, where urban water supplies were unreliable, intermittent, and in considerable disrepair. The project was intended to create an integrated Colombo metropolitan water system and to construct two new (and separate) piped supplies for the towns of Kalutara and Ambalangoda (PPAM, paras. 1-8 and 10). Technical assistance provided undei the project included design of sewerage improvements (PPAM, para. 13). Objectives ii. The overall objectives of the project as set forth in the credit and appraisal documents called for activities involving major engineering works for improvement of the urban water supply situation. The project was viewed at &ppraisal by the Government, the implementation agency and IDA as primarily an engIneering and construction effort. Although institutional development was mentioned as a major objective, it was vaguely envisaged, poorly defintd and given secondary importance. However, project success (and financial viability) was predicated upon not only proper engineering and construction but also upon successful programs for consumer metering, billing and collection, and financial management - programs that would require extensive institutional development within WDB if they were to be carried out properly (PPAM, paras. 9, 39, 45, 50, 59 and 61). Implementation Experience iii. Project implementation was hindered by outside factors beyond the control of the National Water Supply and Drainage Board (WDB), the implement- ing agency, including rapid inflation during the 1978-79 period, and occa- sional civil unrest (PPAM, paras. 15, 16 and 20). The project was delayed by at least 15 months beginning in 1981 because of a 25 percent shortfall in Government of Sri Lanka (GSL) counterpart funds for all foreign-assisted projects, making it necessary to slow the implementation schedule (PPAM, para. 17). An IBRD Sector Study carried out in 1982 and published in 1984 gave direction to future activities, by specifically pointing out the need for a focus on rehabilitation of facilities in near-term sector fundiLng - vil - (PPAM, para. 18). The need for massive GSL subsidies to WDB was unantici- pated at the appraisal stage, but became a necessity when programs were delayed due to political factors (PPAM, paras. 18-19). The finan"ial reco- very program implemented in 1983, finally served to increase WDB revenues and decrease annual deficits beginning in 1984. By late 1985, WDB collections were projected to be 82 percent of total expenses for the year, compared with 3 percent in 1981 (PPAM, para. 21). iv. WDB carried out most of the engineering design, procurement, and construction supervision for water supply facilities in-house or through turnkey contracts. The division of the civil works into a large number of small contracts limited the interebt of foreign bidders. In an attempt to procure materials at low prices, separate contracts were awarded for different pipes, valves, and fittings, and different project sub-areas. This resulted in a large number of supply contracts, with attendant delay in the approval process. The WDB procedure of selecting the lowest bid without, in some cases, adequate specifications to ensure quality and appropriateness resulted in the procurement of a hodgepodge of equipment and materials which will not make operation and maintenance tasks easy in the future. Consultants periormed adequately in the two instances in which they were used. However, the audit believes that it would have been appropriate to use consultants more extensively (PPAM, paras. 23-27 ind 29). v. Because there was little internal management within WDB during project implementation, the IDA supervision missions constitutued by default a "phantom management group". The IDA missions were rather insistent on the approach that they thought best, and after such visits, management often set forth ultimatums and strict time limits when construction activities and financial )erformance lagged. At the beginning of the project, the IDA envisaged WDB as a strong parastatal utility which would be responsible for all aspects of project implementation and future operation, but this viewpoint later gave way to one in which WDB would share operational responsibilitie* with local authorities (PPAM, paras. 39-43). vi. Considerable disagreement arose between WOB and the local authorities of Colombo and Towns South because their responsibilities were not clearly defined for operation and maintenance of the Colombo integrated system. There is an urgent need to work o4t a more satisfactory arrangement which is agreeable to both WDB and the local authorities, and which clearly defines separate (and workable) responsibilities for each (PPAM, paras. 30 and 34-36). vii. During the period of project implementation, WDB generally responded to outside stimuli (from IDA, bilaterals, and GSL) rather than showing internal leadership and a coordinated planning and management process. The decision making process within WDB proved to be a bottleneck, often clogged with day-to-day activities. Decision making was not decentralized to the level necessary to achieve rapid response to developing problems, and decisions were often made at a level higher than necessary. - viii - viii. The problems experienced and the lessons learned from the first IDA project have contributed positively to the formation of a long-term sector strategy, and have gradually transformed WDB (with stimuli from GSL and others) from its former design and construction orientation, to one in which operation, maintenance and commercial activities are of prime concern (PPAM, para. 38). Results ix. The major construction objectives of the project were acheived by June 1985 (a time overrun of 4.5 years), although some minor work in Kalutara and Ambalangoda remains to be carried out with counterpart funds (Basic Data and PCR, Annex 7, para. 7). Local costs exceeded estimates by about 90 percent, and foreign exchange costs, by about 40 percent (PPAM, para. 28). A significant disappointment was that bulk meters procured with project funds were of an inappropriate type and had to be written off as a total lose because they could not be installed or maintained within Sri Lanka. A program for installation of meters on domestic and commercial connections in the Colombo integrated system was carried out successfully, although about 10 percent of the installations proved to be substandard and have been under repair. Demand for connections in newly served areas proved to be less than anticipated, probably because of the high connection fees required from consumers. x. There was little anticipation on IDA's part of the severity of problems that would arise regarding WDS's entry into retail markets, disagreements over the division of responsibility between WDB and the local authorities of CMC and Towns South, continual political initiatives from GSL to defer sensitive activities, and the general decision making bottlenecks that would be a prime hindrance within WDB. The generally optimistic assumptions that were used during project appraisal and on which the financial performance and time schedule were based did not prove to be wel founded. xi. The question of management did not receive the priority that it deserved from the beginning, either by WDB or by IDA. WDB staff pressed on with construction activities, corresponding with their perception of what needed to be done. In the early critical stage of project implementation and procurement, IDA missions were not very active in pinpointing problems or proposing corrective action to solve them. The metering, billing, and collectioL program touched a sensitive area in the minds of politicians and consumers, where "free" water was considered to be the norm; delays in implementation resulted. Water quality monitoring has not been a prominent issue in WDB, and this apparent lack of concern was often reflected in inattention to water quality at the treatment plants. xii. It is the audit's opinion that the inclusion of new piped systems for the towns of Ambalangoda and Kalutara as part of the project was not adequately justified on financial or economic grounds, although improvements to the Colombo system certainly were. Financial covenants in the project agreement were not met by WDB, partly because they were over optimistic, but - ix- also because delays in the implementation of tariff increases, and metering, billing and collection programs guaranteed they would not be met. In addition, poor financial accounting practices within WDB delayed a full assessment of the magnitude of the problems. Sustainability xiii. For project benefits to be sustained, further improvements will be necessary in WDB's commercial operations. There is little doubt that there is a need within WDB for iLprovement of management and decision making. The project has forced a reassessment in these areas, and the lessons learned have been painful. xiv. There is a need to simplify the job of operation and maintenance by standardization of types of equipment that will be acquired in the future. It is also time to begin to implement programs for preventative maintenance and energy conservation. In the future, there is a need to ensure future flows in the Kelani Ganga at Ambatale, to consider a new site for WDB offices to consolidate existing staff at one site, and to assess the future demand-side consumer reaction to WDB initiatives. Findings and Lessons xv. In general, the project has been a useful learning experience for WDB. It was relatively successful in terms of construction activities, but had serious shortcomings in terms of institutional development. It seems that WDB is now recovering from its financial difficulties, but it will take leadership and enlightened management to chart a course for the future that will prove to be any better than those chosen in the past (PPAM, paras. 59-62; PCR, Annex 7, paras. 10, 14, 19, 23 and 24; PCR, para. 7.15). PROJECT PERFORMANCE AUDIT MEMORANDUM SRI LANKA FIRST WATER SUPPLY PROJECT (CREDIT 709-CE) I. PROJECT SUMMARY Background 1. The Sri Lanka Water Supply Project, approved in 1977, was the first Bank Group project in the sector, and responded to the difficult water supply situation in the southwest coastal area, where urban water supplies were unreliable, intermittent, and in considerable disrepair. The project was to create a Colombo metropolitan water system by integrating the use of three existing sources and improving transmission, storage, and distribution systems. In addition, the project would construct two new (and separate) piped supplies for the towns of Kalutara and Ambalangoda, approximately 40 km and 80 km south of Colombo, respectively. 2. Pipe-borne water was first introduced in Colombo in 1886, when the first source reservoir and transmission main were completed at Labugama in the hills, some 44 km east of the city. Prior to that time the city had used groundwater sources and canals, which were subject to contamination and were believed to be the source of epidemic outbreaks. An additional reservoir was completed in an adjacent watershed at Kalatuwawa in 1954. Two separate water treatment facilities are located adjacent to these sources, from where treated water is sent by gravity to distribution reservoirs in Colombo and Towns South (six small communities surrounding Colombo and situated south of the Kelani Ganga). Both of these treatment plants are currently being rehabilitated under Japanese aid, and are scheduled to be operational again in March 1986. These two gravity sources have been developed to their full potential, and can supply up to 136 mid (30 Imgd) of fully treated water per day. 3. In the 1960's and 1970's, the two gravity sources of supply were supplemented by pumping water from the Kelani Ganga, a major upland river which empties into the sea just north of Colombo. By 1979 the capacity of the three sources had reached 240 mid (53 Imgd). In addition, a treatment plant at Ambatale was completed during the same period, 14 miles upstream from the coast; the original capacity of this facility was 91 rAd (20 Imgd), and prior to the commencement of the project which is the subject of this audit (Credit 709-CE), it was being expanded to a nominal capacity of 182 mld (42 Imgd). Without additional funding, however, these facilities could not have been utilized fully because of a lack of foreign currency to purchase the essential treated-water pumps and transmission mains (PCR, 1.04, 1.05 and 2.01). - 2 - 4. The project area along the southwestern coast of Sri Lanka is entirely vithin the quarter of the country considered to be the wet zone, where rainfall averages 100-125 inches (2500-3200 mm) per year. Yet thirty years of neglect of the sector prior to 1978 had left the Colombo system in critical disrepair, and vulnerable to severe droughts. This was highlighted in July and August of 1976 when a failure of the southwest monsoon resulted in a severe water shortage in Colombo (SAR). The supply was reduced to 4-6 hours per day and the two source reservoirs were virtually empty. In addition, the intermittent supply situation (not uncommon in South Asia even in the absence of drought) subjected the water mains to repeated contamina- tion through leakage from polluted groundwater. 5. In reports written during appraisal, priority action in the south- west coastal area was justified on the basis that the project area was the seat of government, commerce, and industry, and the center for a rapidly growing tourist sector. The project was expected to improve the reliability and quality of water supply for 1.2 million people in the greater Colombo area and to provide water supplies to 0.4 million people who relied on shallow wells that had poor yields and were subject to contamination. It was believed that all sections of the population would benefit from these improvements, with maximum benefits going to the poor who were to be served by public standposts. The tourist industry was to benefit, since high water demands from hotels were not expected to be met from wells of low yield. 6. The foundation for the project was laid by a UNDP/WHO Master Plan completed in 1972, detailing critical needs in the sector for the southwest coastal area. Even though Sri Lanka's officials approached the IDA in the same year in search of support for the first stage works proposed in the Master Plan, an encouraging response was not received from the Bank Group until November 1975, when a mission visited the country. Very little infor- mation was found in the files about the reason for the unfavorable Bank Group response during the 1972-1975 period. 7. Sri Lanka has had an exemplary record in terms of measurable social welfare indicators - with about one and one-half times the life expectancy, three times the literacy, and one-quarter the infant mortality that would be typical for a country at its per capita income level (President's Report, Credit 1041-CE). Many of the social gains are attributed to early introduc- tion of compulsory primary school education (in 1901) and introduction of a food ration in 1942. Estimates of per capita water consumption are higher than those for other countries of South Asia, particularly water consumed at public taps. In Sri Lanka, people typically bathe and wash clothes and utensils at the taps, carrying back to dwellings only a small part of the water used. This procedure, coupled with an enthusiasm for cleanliness results in average consumption at public taps of 50-60 liters per capita per day (11-13 Igpd). 8. The Bank Group's current strategy in Sri Lanka is focused heavily on the agricultural sector in order to support Government of Sri Lanka (GSL) efforts to increase food production and improve productivity in the tree crop sector. The weakness of the Sri Lankan economy has been attributed princi- pally to two basic characteristics of its economic and social system: first, - 3 - dependence of the country's economy on three export crops--tea, rubber, and coconut. The second factor has been a political commitment to the welfare state, in which successive governments have supplied mass consumption goods at low prices, and have provided public services free of charge or substan- tially below cost (President's Report). Objectives 9. At appraisal in 1976, the project was slated as an ambitious effort to bring continuous water supply to Colombo, Towns South (Dehiwal-Lavinia, Kolonnawa, Kotte, Moratuwa, and Panadura), Towns North (Peliyadoda, Wattala- Mabole, Mahara [in part], Kelaniya, Dalugama, and Hendala), as well as a new supply of piped water to Ambalangoda and Kalutara (towns without piped supply). The overall objectives of the project, which were set forth in the credit and appraisal documents, couched activities in terms of major engi- neering works for improvement of the water supply situation. Although insti- tutional development was mentioned as a "major objective," no budget line items specified such activities, except for training which was lumped with other miscellaneous components (SAR and President's Report). Other than these indications, the project objectives were not explicitly stated, partic- ularly on the institutional development side. It is clear that the project was viewed at appraisal by WDB, GSL and IDA as primarily an engineering and construction effort for urban water supply. Institutional development appeared to be given secondary importance. However, the achievement of project success was predicated upon not only proper engineering design and construction, but also upon successful programs for consumer metering, billing and collection, and financial management--programs which would require extensive institutional develogment. Project Description 10. The principal elements of the project as appraised are listed in the PCR (para. 2.05). As an element of the project, the greater Colombo area was to become an integrated system in which water from the three existing sources (paras. 2 and 3, above) was to be distributed according to require- ments throughout the metropolitan area. The project planners envisaged a five-year disbursement period, and a total cost of US$42.5 million, including Foreign Exchange Entitlement Certificates (FEECs) of US$9.0 million, and custom duty of US$3.0 million. An IDA credit of US$9.2 million, together with the IDA-administered credit of Canadian $5 million (US$4.8 million) from the Canadian International Development Agency (CIDA), were signed with GSL to supply the foreign exchange requirements, which amounted to about 46 percent of the total project costs excluding FEEC's and custom duties (SAR). 11. The project was designed to be executed by the National Water Supply and Drainage Board (WDB), formed from its predecessor agency--the Department of Water Supply and Drainage--in January 1975. WDB is responsible for planning and development of urban and rural water supplies and sanitation in the sector. These powers are delegated to it by the Ministry of Local Government, Housing, and Construction (MLGHC), to which it is responsible. In its commercial operations, WDB may act as a water utility by retailing supplies directly to consumers or as a bulk supplier to local authorities, It may also act as a construction agency for water and sanitation facilities, the prominent role of its predecessor agency. 12. The project design provided for metering of all connections in areas of new piped supplies, such as Towns North, Kalutara, and Ambalangoda. Provision was also made for the installation of rieters in Colombo municipa- lity and Towns South, where domestic connections were unmetered, but where the larger industrial and commercial connections had been metered years earlier (though many meters were in disrepair). The entire programme required the installation of some 70,000 meters, at rates of installation varying from 12,000 to 17,000 meters per year. 13. It was recognized that sewerage improvements in Colombo were neces- sary in the near-term, and technical assistance was included within the project for design of these works by consultants-essentially detailed refinement of works proposed as part of the UNDP/WHO Master Plan studies. These sewerage improvements were subsequently financed under IDA's Second Sri Lanka Water Supply and Sanitation Project (Credit 1041-CE) in 1980. 14. The credits for the first IDA project were approved in May 1977 and the agreements--the credit agreement, the project agreement, and the agreement with CIDA--were dated June 30, 1977. The original closing date was March 31, 1982. The credits were available to GSL on standard IDA terms, with on-lending specified to WDB at 9 percent interest over 24 years, and a five year grace period. The project was expected to be completed by March 31, 1981 (Credit Agreement). Project Revisions, Implementation and Financial Performance 15. A change in Goverament and subsequent civil unrest and riots delayed credit effectiveness until February 8, 1978 (file search). The beginning of the project saw slow start-up, rapid inflation in Sri Lanka during the period 1978-79 and rapid escalation in the exchange rate followed the flotation of the Sri Lanka Rupee against world currencies. Contractors found their bid estimates inadequate to meet the changed conditions. While annual average inflation was held to 9 percent in 1978, it rose to 18 percent in 1979. Sharp increases in construction sector costs and shortages of construction materials and skilled labor were notable difficulties during this period. 16. At appraisal, IDA, GSL, and WDB all recognized the likelihood that WDB's operations outside the Project Area could siphon away so much revenue from the Project Area as to threaten the viability of the project itself. This was one justification for setting up a separate project unit within WDB, and for establishing separate accounts for project activities. However, financial management was virtually nonexistent during much of the implementation period, while WDB's accounting system was mired in outmoded procedures and handicapped by inexperienced staff. WDB's lack of up-to-date financial accounting information and general cash flow problems resulted in the use of the project's capital funds in 1981 to meet operating expenses as WDB deficits mounted. - 5 - 17. In 1981, when it became apparent that GSL had over-committed itself and had not ensured that local currency resources would be available to match all foreign aided projects, a massive 25 percent across-the-board cut was mandated by GSL for local counterpart funds in all ministries, resulting in a slow down of most WDB activities. An IDA supervision mission formulated, at GSL's request, a Minimum Works Programme (MWP) to cut counterpart expenses in the sector for the period 1981-82. This reduction was accomplished by eliminating many projects from WDB's construction schedule, and by stretching the coastruction period for all other projects. This rescheduling effectively delayed the execution and completion of the IDA project by 15 months (file search). 18. In August 1982, the Bank conducted a water supply and sanitation sector survey which identified, among other factors, the urgent need for improved cost recovery measures. During 1982 and 1983, largely because of political considerations (including a national election in late 1982) there was little incentive for GSL to implement necessary cost recovery measures and institute financial discipline in the sector. For example, during a major part of 1982 and all of 1983, GSL instructed WDB not to introduce flat monthly rates for unmetered consumers, not to increase metered tariff rates, and to suspend all metering activities. Subsequent to the elections, GSL agreed to continue with the metering program but with the condition that no domestic consumer be billed until all consumers in the project area were metered. Consequently the financial position of WDB deteriorated rapidly during this period (file search). 19. At the time of appraisal the local authorities were about Rs 20 million in arrears to WDB (SAR), yet GSL covenanted with IDA that it would ensure that bills rendered by WDB to the local authorities after that time would be duly paid (Credit Agreement). Within the project area, the local authorities often lacked the liquidity to meet their bills for bulk water on time, and WDB frequently relied on GSL's agreement under the project to guarantee the prompt payment of such bills. From about 1978-80 this process involved GSL advancing money to the local authorities so that they could remit the required payment, or, alternatively, involved remitting payments directly to WDB while making compensating adjustments to GSL's current accounts with the local authorities (SAR, Credit 1041-CE). Projected favorable financial performance of WDB hinged largely on the project area's potential for revenue generation based on tariffs which GSL had accepted in principle, but had not yet implemented. When significant delays occurred in the metering program, thereby delaying implementation of billing and collection of revenues, serious adverse effects on WDB's financial performance resulted. It was the approval by Parliament of GSL subsidies in 1981 and 1982 that averted major embarrassment. GSL subsidies have subsequently been required in 1983, 1984, and 1985. 20. Serious civil disturbances in July 1983 virtually halted WOB activities and caused the flight of many professional staff members (file search). This adversely affected the day-to-day operations of WDB for at least six months, since a large portion of the WDB office staff were unable, or afraid, to attend work. This problem was particularly acute in the areas - 6 - of finance and accounting; regular financial information necessary for management continued to lag, and billing and collection activities were at least 6-9 months behind schedule (file search). 21. In December 1983, MLGHC agreeded to institute the recommendations of the Financial Recovery Program (FRP), which had been drawn up by an IDA supervision mission. The FRP was designed to improve the critical financial position that WDB found itself in because of the failure to contain operating deficits. The FRP included increases in tariffs for metered and non-metered customers and bulk consumers (effective January 1, 1984), as well as renewed efforts to improve consumer billing and collection, meter installation programs, and internal accounting and financial data. As a result of FRP, WDB deficits have begun to decrease from a high of Rs 200 million in 1983, to Rs 130 million in 1984, and a prajected Rs 110 million in 1985. Revenue generation showed considerable improvement in 1984-1985, and late 1985 collections were projected to be 82 percent of total expenses for the year (file search). 22. Eight years were required to disburse the original credits, compared with the five years estimated at appraisal. In addition, a Special Action Credit (Credit 31-CE, amounting to US$7 million equivalent) was established with a basket of European currencies contributed by the member countries of the European Economic Community (EEC), and signed on November 6, 1979 between GSL and IDA, the administrator. The original credits (709-CE and 709-5CE) and the Special Action Credit had a total value of US$18.95 million equivalent at the time of final disbursement in FY84. Procurement 23. WDB carried out many of the engineering design and contract management activities in-house with their own staff, or through turnkey contracts. During appraisal, WDB had already substantially completed the detailed engineering design (SAR). All contracts financed under the credits were to be awarded through international competitive bidding procedures in accordance with the Association's guidelines (with the exception of contracts less than US$ 0.1 million and totaling not more that US$ 0.5 million, which would not have justified the complex procedures of international bidding). A local preference of 7.5 percent was allocated for civil works contractors, along with a 15 percent margin of preference for locally manufactured items. However, the division of the civil works into a large number of small contracts (PCR, 3.09) did not attract foreign contractors to bid for these works. Only one of the 21 civil engineering contracts was awarded to a foreign contractor--that for a specialized activity which involved relining of transmission mains. Separate tenders were invited for project sub-areas (Colombo, Towns North, Towns South, Ambalangoda, and Kalutara). In an attempt to procure materials at a low price, separate contracts were awarded for different pipes, valves, and fittings. A total of 55 supply contracts resulted, with consequent administrative delays and problems with interfacing different types of pipe in the field. 24. Fourteen separate contracts were awarded for the installation of water meters in the greater Colombo area, many carried out in a hurried - 7 - fashion with poor supervision, resulting in faulty installations. Many local contractors experienced cash flow problems as a result of the massive escala- tion in the price of construction materials such as steel, concrete, and fuel (up to 500 percent), At times WDB attempted to help the contractors to expe- dite the work by granting special advanced payments. Some contractors defaulted and left the site during the period of implementation, and this resulted in delays (Kalutara). 25. The performance of local civil works contractors varied considerab- ly. Some of the work was impressive (such as the Ambalangoda treatment plant), although some was not (Kalutara treatment plant and intake station). In several cases, the concrete construction was rather poor in appearance because of the crude forming techniques and small pours that were used. Water tanks and clarifiers generally leaked when first filled, requiring sub- sequent patching and attendant delay. The competency of the prime contractor seemed to affect the overall success of associated sub-projects, at least in the case of the Ambalangoda and Kalutara treatment plants. Local contractors were often very slow in completing facilities. 26. The WDB procedure of selecting the lowest bid, without in some cases adequate specifications to ensure quality and appropriateness, resulted in the procurement of a hodgepodge of equipment and material, which will not make operation and maintenance tasks easy in the future. A few examples pro- vide insight to the problem. Electric pumping sets were selected for low price without consideration of pump efficiency, while electricity costs have mounted to approximately 70 percent of WDB's recurrent cash outlays (Sector Study). Asbestos concrete pipe was selected for Kalutara transmission mains, but suffered considerable breakage enroute to the site; hairline cracks proved to be difficult to detect, and replacement of cracked sections after pressure testing was difficult and time consuming in the field. Urgently needed bulk meters which arrived in late 1982 were of the electromagnetic variety, and the local supplier determined (after several unsuccessful trys) that they could not be properly installed and maintained in Sri Lanka. These meters were subsequently written off as a complete loss. At present, no bulk meter is believed to be working properly in the Colombo integrated system, so that local authorities cannot be properly billed for the bulk water they are using. 27. During the audit's visit in December 1985, essentially all works under the first IDA project had been completed, except for minor work in Kalutara and Ambalangoda to be carried out with counterpart funds. The remaining work involved completion of distribution mains in both towns, and the completion and testing of the Kalutara treatment plant. The bulk meters which were ordered earlier for the Colombo integrated system (but could not be installed or maintained) will have to be reordered using local counterpart funds (a possible reason for the delay, since foreign exchange will be required). Project Costs 28. At appraisal the total project costs were estimated at US$42.5 million. The IDA credit of US$9.2 million, together with the IDA-administer- ed credit of Canadian $5 million (US$4.8 million) financed the foreign - 8 - exchange requirements. The Special Action Credit extension due to devaluation of the Sri Lanka Rupee against the US Dollar (approximately 260 percent during the implementation period) (PCR, Annex 7, para. 8) amounted to US$7 million equivalent. Total actual project costs to completion are estimated to be US$35.1 million equivalent, with a few items remaining to be completed using counterpart funds (para. 27, above). The apparent overall project cost reduction was due to devaluation of the local currency; actually there were cost over-runs of 91 percent for local costs expressed in local currency and 38 percent for foreign costs expressed in dollars (PCR, 3.15). Performance of Consultants 29. Consultants were used in only two instances: technical assistance for sewerage design (150 man-months) -- with construction to be financed under the second project; and for a tariff study undertaken for the greater Colombo project area (12 man-months) to explore water tariff structures. The Performance of the consultants was rated as satisfactory by WDB, and the audit has no reason to disagree with their assessment (PCR, 3.19). However, the audit believes that it would have been appropriate to use consultants in other instances, particularly for the review of water supply designs and construction management procedures, in this relatively new agency. In addition, consultant sociologists could have usefully reviewed demand Projections and interviewed potential end-users in the field prior to the development of a tariff structure and connection policy for domestic connections. Institutional Development 30. Institutional responsibilities in the sector grew up in a typically fragmented manner. Since the first IDA project was one of the first major efforts executed in the sector, it considerably enhanced the role of WDB. Legislation for the creation of WDB was enacted in 1974, as an outgrowth of recommendations which emerged from the Master Plan for the southwest coastal area. The legislation provided for the WDB to operate water supply and sewerage facilities throughout Sri Lanka, with a parallel provision for local authorities to operate their own facilities subject to MLGHC and WDB approval. 31. At inception in January 1975, WDB's responsibilities included planning, design, and construction of water supply systems throughout Sri Lanka, although thus far its activities have been largely confined to providing supplies in urban areas and the larger rural communities. At the time of its formation, WDB was set up as a parastatal utility with many characteristics of a commercial enterprise, and was expected to become self supporting through collection of revenues from the sale of water. However, in addition to the goal of achieving financial viability and providing service to its customers, the WDB also was expected to improve health and welfare, to facilitate urban and rural development, to provide employment, and to perform a host of related governmental functions. - 9 - 32. The headquarters of WDB Is located in Ratmalana, a suburb ol Colombo. Three "Range" offices are maintained at the Ratmalana headquarters; they oversee eight regional offices at locations throughout the country. During appraisal, IDA staff visited WDB to assess the agency's ability to carryout the project. WDB was judged to have a capable and experienced engineering staff competent to design and construct water supply works. To Implement the project, WDB formed a separate project unit in 1977 under the supervision or an Assistant General Manager (SAR). As the work load in this unit increased, the post was upgraded to Deputy General Manager (DGM) (PCR, 6.02). 33. WDB has an operating body (the Board) consisting of eight members appointed to oversee WDB activities; four members are government officers from four separate ministries, and the remaining four are appointed by MLGHC from interested citizens having experience in engineering, finance, public health, administration, or law. The Board itself has thus far had a minor role in determining the direction in which WDB should proceed. The Board was revitalized in 1985, with the appointment of several new members. 34. The ground work for future disagreements between WDB and the local authorities in and near-Colombo was laid in September 1976, when the National Planning Council under the chairmanship of the Prime Minister decided that a Colombo metropolitan integrated system would be implemented and that the system would be operated by WDB. Based upon this decision, LGHC proposed and instituted the following arrangement within the project area: 1) WDB to operate the integrated facilities to supply water in bulk to Colombo Municipal Corporation and Towns South; 11) CMC and Towns South municipalities to operate and maintain their respective distribution systems, and to render bills and collect all water revenue; 111) the proposed project for Towns North, Kalutara, and Ambalangoda to be operated and maintained by WDB, which would render all bills and collect revenue in respect to these areas (SAR). 35. WDB, as bulk supplier to the integrated system would obtain title to the reservoirs, treatment plants, transmission mains, ground storage reservoirs, and all bulk water production facilities as a result of this agreement. Although IDA considered it preferable for WDB to assume the entire authority for the Colombo integrated system, it bowed to pressure from GSL and the local authorities to split the responsibilities as described above (SAR, Credit 1041-CE). A proposed institutional arrangement suggested by ILO in 1976--which would have created a new and independent agency (the Colombo Metropolitan Water Authority) to operate the integrated system--was rejected by the Bank Group (file search). 36. The decision for '.olombo municipality and Towns South to operate and maintain their respective distribution systems and to render bills and collect all water revenue within their jurisdiction remains a source of continued disagreement between the local authorities and WDB. The portion of - 10 - the system operated by these municipalities has not been isolated from that operated by WDB, and it is not known how much bulk water is being supplied to Colombo and Towns South, because bulk meters have not been installed in these systems. There is no clear responsibility for operation and maintenance of the system in each of these towns, resulting in overlap and confusion between the separate entities. In addition, payments are not being made by CMC to WDB for bulk water. WDB, on the other hand, is not making payments to Colombo Municipal Council (OMC) for the operation and maintenance that they perform. WDB claims that CMC owes about Rs 12 million in arrears of bulk water supplied, while CMC claims that WDB owes Rs 40 million as payment for work carried out. In short, the responsibilities of local authorities and those of WDB are intertwined in the Colombo integrated system. 37. During project Implementation, WDB experienced a "brain drain" of its talented staff to overseas assignments (most in the Eastern Mediterranean area) as oil revenues were being turned into major projects in Arab countries. Based upon the 1974 legislation which set forth its authority, WDB has considerable latitude in designing incentives to retain key staff, Including terms of remuneration, which can be set by the Board (National Water Supply and Drainage Board Law, No. 2 of 1974). However, significant increases in WDB salaries beyond typical government levels would create pressures for increases elsewhere in the government, something MLGHC would prefer to avoid. In general, WDB has not been able to select, train, and retain sufficient staff in key positions, particularly in finance and accounting, and in high level management. Recently some of these positions have been filled temporarily through contract with outside private firms. Such arrangements do not affect the existing seniority structure and thus do not create dissatisfaction from the in-house "engineers' union". The brain drain may not be as severe in coming years, since many Sri Lankans have returned from Eastern Mediterranean jobs and the recession in the oil- producing countries may be protracted. 38. During project Implementation, WDB generally responded to outside stimuli (from IDA, bilaterals, GSL) rather than showing internal leadership and a coordinated planning and management process. The decision making process within WDB was frequently clogged with memos, contract approvals, staff hirings, and other day-to-day activities. Decision making was not decentralized to the level necessary to achieve rapid response to developing problems. High level staff often spent a great deal of time traveling back and forth to MLGHC to develop consensus on important (and some unimportant) matters. The problems WDB experienced in, and the lessons WDB learned from, the first project have positively contributed to formulation of a long term sector development strategy (PCR, Annex 7, para. 23). The problems that have arisen have forced a gradual metamorphosis upon WDB, from its former construction orientation to one of concern with operation and maintenance and commercial activities. This metamorphosis has not been fully completed, however the 1977-1985 period may be remembered as a painful one in WDB's history. - 11 - II, SUPPLMENTARY COMENTS Performance of the Bank Group 39. The Bank Group's perception of the project at appraisal reflects concerns primarily with WDB's ability to carryout the construction of water supply works in a ti-aly fashion. There seems to have been little anticipation on the IDA's part of the severity of problems that would arise regarding WDB's entry into retail markets, disagreements over the division of responsibility between WDB and local authorities (particularly Colombo Municipal Council), continual political initiatives from GSL to defer sensitive activities, and the general decision-making bottlenecks that would be a prime hindrance within WDB. The generally optimistic assumptions that were used during project appraisal, and on which the project's financial performance and time schedule were based (early implementation of tariffs. metering, billing and collection; minimal inflation; and no delays due to. civil disturbances, political factors, or poor management), did not prove to be well founded. During most of the procurement process, the IDA was not very active in pinpointing problems or in taking constructive action to assist WDB to overcome them. 40. The Bank Group staff performance was rated by WDB staff as competent and helpful to WDB and MLGHC during the implementation period. Mission visits often assisted WDB to obtain decisions from GSL by focusing attention on important issues and encouraging communication between the various parties. In 1981, when GSL requested a 25 percent across-the-board cut and requested IDA to assist in rescheduling project activities to make this possible, IDA staff designed the Minimum Works Program (MWP), which could be carried out with lower levels of counterpart funds on an annual basis by stretching the implementation period. 41. Because there was little internal management within WDB during project implementation, the IDA supervision missions constituted (by default) a "phantom management group". The missions generally visited Sri Lanka once every three to six months (average was once in five months) to survey the progress achieved up to that time (after 1980, both the first and second IDA projects were supervised together) and to detail short-term actions that should receive priority before the next visit. In 1982-83, however, presumably because of civil disturbances at the time, no IDA supervision mission (responsible for the project) visited the country for 12 months. 42. IDA missions were rather insistent on the ap,roach that they thought best, and often set forth ultimatums and strict time limits when it was seen that construction activities were behind schedule and financial performance of WDB was inadequate (file search). There was a continual push by IDA missions for the elevation of a senior financial position within WDB to the Deputy General Manager (DGK) level, but such action occurred only in 1984, at which time a DGN for Finance was appointed (PCR, 5.02). The WDB was slow in responding to IDA initiatives to improve management, and seemed unable to overcome its lethargy. Finally, in 1985, while an IDA mission stressed the need for improved leadership and management, the Chairman of WDB - 12 - was transferred by GSL to MLGHC with the idea of finding more commercially oriented management for WDB (file search). A replacement had not been found at the time of the audit's visit, and the General Manager was acting as Chairman. More recently, the WDB General Manager also was changed by MLGHC. It is too early to tell whether or not these changes will result in improved leadership and/or management within WDB. 43. At the beginning of the project, the IDA envisaged a strong parastatal utility (WDB) which would take over many of the responsibilities of the local authorities and operate a large number of facilities all over the country (for both prcject and non-project activities). This was not achieved in Colombo at t.e beginning of the project, however, because of effective resistance from Colombo Municipal Council and Towns South (which had long operated their own systems). After a reorganization within IBRD in 1982, responsibility for project supervision was shifted from the South Asia Power and Water Supply Division to the South Asia Urban and Water Division, where the concept of strong parastatals did not find as much favor. Instead the trend was toward sharing sector responsibilities between parastatal and local authorities. From 1982, a trend emerged within the Bank in favor of divesting some of WDB's operation and maintenance responsibilities, returning them to the local authorities. This shift has implications regarding the continuing debate about the division of responsibilities between WDB and CMC. It is also in light of this recent focus on assisting local authorities, that we find the development of the Sri Lanka Municipal Management Project, which would undertake such efforts under IDA funding (proposed for 1986). 44. The Bank Group was generally responsive to the need for overall planning within the sector and carried out a Sector Study, published in 1984, giving general direction to future activities. As a result of the Sector Study it was seen that the financial health of the local authorities was linked to the financial stability of WDB, since the local authorities had very limited sources of revenue and were having difficulty in paying WDB for the bulk water supplied. The Sector Study also pointed out the need for a major focus upon rehabilitation and preventive maintenance in existing facilities as part of future development assistance in the sector. Following the completion of the Sector Study, USAID formulated and funded a US$20 million project to provide technical assistance for institutional development and rehabilitation of existing facitities, beginning in 1985. A Macro-Investment Plan was also completed in 1985 at the Bank's urging prior to the next round of sector financing (the proposed water supply and sanitation rehabilitation project, or the third IDA project in the sector, which is now under preparation). Institutional Development 45. A number of important institutional development issues emerged during the implementation of the project, and eventually forced this subject to be one of overriding concern. The whole question of management did not receive the priority that was required from the beginning, either by WDB or IDA. WDB staff pressed on with the construction activities, corresponding with their perception of what needed to be done. Given WDB's view of the - 13 - project at appraisal as a construction effort, they proceeded in a rather logical and predictable manner. It was only after construction was well under way, and after persistent IDA pressure, that WDB began to place more emphasis on the domestic metering program. It was even later before WDB con- centrated efforts upon increasing the efficiency of billing and collection (and revenue generation) in order to bring about financial recovery. 46. The decision-making process within WDB proved to be a major bottle- neck. Early in project implementation it was clogged by the large number of small contracts involving procurement, and which kept the decision makers occupied to the exclusion of other issues of concern. Whereas the staff of WDB were competent at small construction works, they had no experience with metering, billing and collection, and financial management, three important activities that would have to be carried out well for the project to suc- ceed. The decision-making bottleneck resulted partially from the fact that WDB is not effectively independent of other entities within the government when running its commercial activities. The WDB is directly responsible to the MLGHC; although WDB appears on paper to have broad powers of its own for commercial activities, these powers have not been exercised in an independent fashion, and WDB continually defers to the MLGHC for direction regarding many issues. 47. A major policy shift in Sri Lanka over the last ten years has been the shift from the policy of so-called "free water" to enforcement of tariffs for metered supply. A 1979 study carried out by consultants under the proj- ect endorsed marginal cost pricing for urban water supply. Implementation of the tariffs was delayed because they were politically sensitive, yet large tariff increases were finally instituted during the period 1984-1985 for all categories of users, including bulk supply. Many complaints have arisen from consumers because of this policy shift, since the perceptions of the people regarding the need for water tariffs have laggedbehind that of the policy makers. To consumers, water had been "free" for a long time. Property taxes collected by the local authorities had been used to pay for local water sup- plies, and the myth of "free" water flourished. At that time revenues for all city services were garnered from a single revenue source, and the pro- perty tax did not depend upon how much of the service was used. As WDB defi- cits mounted and delays in metering and receipt of payments for bulk supplies continued, the WDB was forced (largely by IDA) to develop tougher billing and collection policies, and to enforce disconnection orders for nonpayment of bills. 48. Although 'ater quality monitoring has been stressed from time to time by the IDA ad bilaterals, this issue has never been a prominent one among WDB management, and this apparent lack of concern is reflected in the operation and maintenance staff. Frequently, because of poor planning or other factors (one of which has been terrorism in Jaffna province, from which chlorine supplies were previously obtained), chlorine has not been available and shipments have been ordered from India. Occasionally, during periodic shortages, treatment has not included chlorination, with pumpage of water directly into the mains. Although GSL had promised to set up an independent water quality agency during the appraisal and the credit agreement reflected - 14 - this in the form of a covenant, such an agency has never been formed, and WDB eventually arranged for the work to be done by CMC on a temporary basis (file search). However, supervision of this activity is lax and the water quality reports are seldom utilized by WDB or the local authorities to pinpoint problem areas. In general, water quality cannot be assured in any water system in Sri Lanka because of inattention to water quality parameters. The fnct that WDB and CMC continue to disagree over the transfer of funds and division of responsibilities in the Colombo "integrated system," would seem to make the present arrangement unworkable.1/ 49. Project scheduling as carried out at WDB has been little short of guesswork, and almost all sub-projects have fallen considerably behind schedule. To some extent this could be attributed to clogging of the decision making process, and particularly to insufficient decentralization of decision making authority to enable timely reaction to emerging problems. Some scheduling difficulties also result from incomplete enumeration of all of the activities that need to be accomplished in each sub-project (and the respective uncertainties involved), as well as absence of the use of modern scheduling techniques on a routine basis. 50. A training component was included in the project budget in order to train some of WDB's financial and accounting personnel and engineers in water treatment plant management and distribution system waste prevention (SAR). However, the training component was not utilized under the project, the reason being given by WDB that bilateral training activities were carried out during the period of implementation, thus it was not required (PCR, 6.09). This is one indication that the institutional development component of the project was only vaguely envisaged at appraisal and was not actively pursued by WDB or the IDA during implementation. Sustainability of Benefits 51. For project benefits to be sustained, further improvements will be necessary in WDB's commercial operations. Of course, a single, relatively small project cannot totally solve the water problems of a project area which includes a growing urban center such as Colombo. A good beginning has been made, although the lessons learned have been painful. There is little doubt that there is a need within WDB for improvement of management and decision making. For effective management, however, it must also have leadership at the highest levels, and freedom from political pressure. 52. In the future the WDB will find itself moving more into rural water supplies, as the current round of urban systems is completed. This will require a further metamorphosis in thinking, because success in rural areas 1/ It has been decided by GSL that starting from 1990, WDB will gradually hand down responsibility for operations and maintenance of local water supply distribution systems to respective urban local authorities, including CMC. The audit believes that this decision does not respond to the urgency of the situation, and will in fact be "too little, too late". - 15 - will require a different approach. An effective approach must include the use of appropriate technology and a participatory design process that effec- tively involves the local communities. Based on experience with similar agencies in other countries, WDB will not be able to economically decentra- lize itself to allow it to operate and maintain local rural systems itself. It will likely be forced to train and support local communities to carry out their own operation and maintenance through local institutions. A standard engineering design and construction mentality will not be effective in rural areas because communities are not willing to maintain supplies which they do not feel are appropriate for their needs--hence the need for participatory planning. 53. In order to simplify the job of operation and maintenance in the future, there should be consideration of the types of equipment that can be easily maintained, and a standardization of types of pumps, meters and other equipment that will be acquired in the future. A reduction in the number of spare parts that need to be stocked will simplify, in the long-term, the important job of operation and maintenance. Preventitive maintenance is also expected to be an important consideration in the future, as many of the existing treatment facilities are expected to he rehabilitated in the coming years. There is also a need to institute a program for electric power con- servation at pump stations and treatment plants, since power costs now amount to approximately 70 percent of WDB's recurrent cash outlays. Grossly ineffi- cient pumps could be replaced in a coordinated effort to minimize power costs and maintenance costs at the same time. 54. The sociological aspects of the demand side of water sales were generally ignored by WDB in project planning, as evidenced by the unexpected- ly high demand in the existing service area when additional water was made available, but unexpectedly low demand for new connections in Towns North, Ambalangoda, and Kalutara (PCR, 4.03-4.04). The high demand in existing ser- vices areas probably can be explained by the fact that earlier forecasts were made assuming metering to have been instituted, but water service was improv- ed (higher pressure and hours of availability) before water metering had been extensively carried out. The fact that water service connection charges are high in newly served areas (approximately Ra 2700, including street repair charges) no doubt contributes to lack of demand for service connections. WDB may need to periodically contract for local or international technical assis- tance for the assessment of future demand side consumer reaction to its initiatives. 55. The audit believes that there will be a need in the next five years to move the site of WDB from Ratmalana to a larger facility where all WDB staff can be accommodated. Under the current situation WDB is obtaining new buildings a mile away from the main Ratmalana office to house overflow staff (water testing lab, training facilities, meter repairs, etc.), since the main office is completely filled. If the new site could be close to the MLGHC in Kotte, it would simplify communication between MLGRC and WDB officials. Con- sideration should be given to reserving land for this purpose in the near future. - 16 - 56. There is a need to ensure future flows in the Kelani Ganga at Ambatale, since currently it is assumed that releases from two hydropower reservoirs (Castlereagh and Mousakelle reservoirs) will continue be available for water supply downstream under critical drought conditions. However, these reservoirs are not under the control of WDB ani are not operated to maximize yield for downstream water supply uses. The UNDP/WRO Master Plan noted that under the conditions created by the once in fifty year drought, the natural river flow at Ambatale is estimated to be 105 cubic feet per second (cfs). Yet the risk of saline water intrusion from the sea is appreciable at Ambatale when river flows remain below 279 efs for some weeks. The two hydropower reservoirs are assumed to provide continuous discharges of 340 cfs (183 Imgd) allowing for normal maintenance procedures. Thus without the discharges from the upstream hydropower reservoirs, a critical situation could develop. The maximum daily demand for the Colombo integrated system in the year 2000 is estimated to be 132 Imgd, of which 100 Imgd (186 efs) must come from the Kelani Ganga. If there is a need to build an additional reservoir in the Kelani Ganga basin, it could easily take 10 years to come on-line. Thus the audit believes that planning to ensure a future source of supply for Colombo should begin now. Economic Evaluation 57. At appraisal it was estimated that financial rates of return would be 7.0 percent for Colombo (and Towns South & Towns North), 4.6 percent for Ambalangoda, and 4.3 percent for Kalutara. Project costs used in computing these rates of return were based on the official exchange rate in effect at the time (Rs 7.28 = US$ 1.00). There were difficulties in estimating a meaningful shadow exchange rate for Sri Lanka - because of the absence of economic data and the presence of a complicated system of import restrictions, taxes and duties. However, forecast economic rates of return for Colombo, Ambalangoda, and Kalutara (based on costs, including Foreign Exchange Entitlement Certificates, FEEC's) were estimated to be 4.8, 2.9 and 2.7 percent, respectively (SAR). IDA staff currently estimate an economic rate of return of 2 percent, using revenues as surrogate benefits (PCR, Annex 7, para. 22). The audit believes that the inclusion of Ambalangoda and Kalutara in the project was not adequately justified on financial or economic grounds during the appraisal process, and probably resulted from political pressure. It is doubtful that the Ambalangoda or Kalutara systems will be able to generate enough revenue in the foreseeable future to make them financially viable. 58. As part of the project atreement, the IDA instituted a covenant requiring WDB to enact tariffs sufficient to generate an annual rate of return on the average value of WDB's net fixed assets in operation in the project area of at least 5 percent in fiscal year 1978, 6 percent in fiscal years 1979-81, and 7 percent in fiscal year 1982, and thereafter. It was assumed in the appraisal documents that WDB would increase tariffs sufficient to achieve these rates of return by October 1, 1977, and covenants to that effect are found in the Project and Credit Agreements. Due to various political factors, however, tariff increases were not instituted until January 1, 1984 (PCR, 5.02). Thus the ability of WDB to achieve an adequate rate of return on its net fixed assets was severely delayed. In addition, - 17 - other assumptions associated with the rate of return estimates proved to be optimistic, evidenced by problems that were experienced on both sides of the ledger. On the revenue side, experience revealed that it was too optimistic to expect rapid commercial success in the implementing agency, and on the expense side, rapidly increasing energy prices had a negative impact, since 60-70 percent of the agency's operating expences can be attributed to energy costs. In addition, because of poor accounting practices within WDB, capital funds and project revenues were occasionally diverted to support non-project activities (file search). It is not known to what extent this occurred, because of inadequate account ledgers. Rence the audit is not able at this stage to make a reestimate of the possible rates of return from the project. III. CONCLUSIONS 59. It is clear that the project was viewed at appraisal by WDB, GSL, and IDA as primarily an engineering and construction effort for urban water supply. Institutional development objectives were vaguely envisaged, poorly defined and given secondary importance. The fact that institutional objectives were not clearly linked to the Implementation of successful programs for metering, billing and collection, and financial management at an early stage resulted in several years delay in focusing on this critical area. The project was hindered by outside factors, such as rapid inflation and civil unrest, making it politically inexpedient to introduce the required tariffs and metering programs that were required for WDB to achieve financial stability. With the benefit of hindsight, the appraisal process would have been a good time to carry out a tariff study, so that enactment of staged tariff increases (over, say, 5 years) could have been made a prerequisite for credit approval. It is the audit's opinion that the inclusion of new piped systems for the towns of Ambalangoda and Kalutara as part of the project was not adequately justified on financial or economic grounds, although improvements to the Colombo system certainly were. 60. During the early stages of the project, the implementing agency concentrated almost exclusively on engineering design, procurement, and construction supervision, to the exclusion of any attempt at institutional development. This was consistent with their view that the project was primarily a construction effort. The major construction objectives of the project were largely achieved, although some minor work remains to be carried out in Ambalangoda and Kalutara with counterpart funds. 61. There seems to have been little anticipation on IDA's part of the severity of problems that would arise regarding delays in WDB's entry into retail markets, overlapping of responsibility between WDB and the local authorities of 04C and Towns South, political initiatives by GSL to postpone sensitive activities, and the general decision making bottlenecks that would be a prime hindrance within WDR. In the early critical stage of project implementation (including procurement), IDA missions were not very active. The question of proper management did not receive the priority that it deserved from the beginning, either by WDB or IDA. Financial covenants in - 18 - the project agreement were not met by IWDB, partly because they were over- optimistic, but delays in the implementation of metering, billing and collec- tion programs guaranteed they would not be met. In addition, poor financial accounting practices within WDB delayed a full assessment of the magnitude of the problems. The generally optimistic assumptions that were used during project appraisal and on which the financial performance and time schedule were based, did not prove to be well founded. 62. In general, the project has been a useful learning experience for WDB. It was relatively successful in terms of construction activities, and the problems experienced have gradually transformed WDB (with stimuli from GSL and others) from its former design and construction orientation, to one in which operation, maintenance and commercial activities are of prime concern. It seems that WDB is now recovering from its financial difficul- ties, but it will take leadership and enlightened management to chart a course for the future that will prove to be better than those chosen in the past. THE WORLD BANK/INTERNATIONAL FINANCE CORPORATION OFFICE MEMORANDUM A EX Page 1 of8 DATE: July 19, 1985 TO: Mr. Y. Watanabe, Director, OEDOD THROUGH: Mr. Paul Gei, Assistant Director, ASP PROMt Sven Sandstrom, Chief, ASPUM EKT: 32790 SUBJECTt SRI-LANKA - Project Completion Report First Sri Lanka Water Supply Project (Cr.709-CE) 1. Attached please find the Project Completion Report (PCR) for the above project. This PCR was prepared by the National Water Supply and Drainage Board (WDB), the key executing agency, under the overall guidance of our divisional staff. The attached report is being presented as prepared by the WDB. This memorandum summarizes the major issues arising out of, and lessons learned from, the project, and provides comments and clarifications where necessary. 2. In addition to the IDA credit (Cr. 709-CE) for US$9.2 million, the project also included co-financing of US$ equivalent 4.8 million (Cr. 709-5CE) from the Canadian International Development Agency (CIDA). The CIDA credit became effective together with the IDA credit in February, 1978 and was administered by IDA. Both credits were disbursed together in proportion to respective credit amounts. However, due to initial delays in project start up and high inflation rates in Sri Lanka during that period, there were substantial cost over-runs, particularly in the foreign cost components of the project. To accomodate this cost increase, in November 1979, agreement was reached between the Government of Sri Lauka and IDA on a Special Action Credit (Cr. 31-CE) for a sum equivalent to US$7.0 million. This credit was funded by a Special Action Account with funds contributed by the member countries of the European Economic Community, and IDA served as the administrator of the Special Action Credit. 3. This memorandum is organized as follows: A. Background and Context. (paras. 4-8) B. Project Design, Implementation and Costs. (paras 9-13) C. Operating Performance. (paras 14-17) D. Financial performance. (paras 18-22) E. Institutional Performance. (paras 23-24) F. Economic Analysis. (para 25) G. Conclusions. (paras 26-27). - 20 - ANNEX Page 2 of 8 A. Background and Context 4. The Sri Lanka Water Supply Project (Cr. 709-CE) was the Bank Group's first involvement in the sector in Sri Lanka beginning in 1977. The project was an effort to respond to the urgent water supply needs of the Greater Colombo area, as identified by the 1972 UNDP/WHO Master Plan Studies. The project also sought to help build and strengthen the institutional, manage- ment, financial and technical capabilities of WDB, a newly created executing agency (created in 1975) in order to strengthen its long term sector develop- ment efforts. 5. This project was followed by the second Sri Lanka Water Supply and Sewerage Project (Cr. 1041-CE) in late 1980 to complement sector development efforts initiated under the first project. Problems experienced under the first project in the areas of technical, operational, financial and institu- tional aspects of WDB's operations and in the development of the sector in general as indicated in this PCR, continued to be predominant and in instan- ces exacerbated during the implementation of the second project. 6. In view of continued institutional and sector development problems, a comprehensive study of the sector was initiated by the Bank in 1982 and completed in 1984. It identified the underlying causes of the problems in the sector, indicated priority areas of improvements and provided a broad strategy for long term sector developments. The findings of this study were published in the Bank's Sri Lanka Water Supply and Sanitation Sector Study Report No. 4190-CE, June 1984. 7. A significant finding of this Study was that the financial and institutional health cf the water supply and sanitation sector was critically dependent on that of the local government and other government agencies in Sri Lanka. The local governments and agencies are major customers of water from WDB, and bills for water consumption remain largely unpaid to WDB due to their poor and deteriorating financial position, thereby adversely affecting the financial position of WDB. Institutionally WDB also continues to be burdened with the responsibility for operating and maintaining local dis- tribution systems, in particular rural water supply systems, due to the lack of financial and institutional capacity of the local governments. This additional operations and maintenance responsibility, (which would otherwise be the responsibility of local governments) without the commensurate revenue resources, continues to place financial burden on WDB and stretch its institutional capacity. In order to assist the Government of Sri Lanka in developing and implementing a long-term strategy to improve the financial and institutional capacity of local governments, the Bank Group, in close col- laboration with the Government, completed an Urban Sector Report (No. 4640-CE) in June 1984. A consistent set of sector development objectives have been emerging through the Water Supply and Sanitation Sector Study (para. 6) and the Urban Sector Report. These include the need to (a) emphasize - 21 - ANNEX Page 3 of 8 rehabilitation of existing investments, (b) improve operations and main- tenance of infrastructures, (c) pay particular attention to adequate resource mobilization for proper operation and maintenance and (d) strengthen management capacity of sector agencies. To help implement these objectives, the Government has requested Bank support for a Municipal Management and Resource Mobilization Project and a Water Supply and Sanitation Rehabilita- tion Project. 8. The first Sri Lanka Water Supply Project needs to be viewed as the first step in an evolutionary sector development process. It is important to recognize that the WDB's performance under the first project is a reflection of the inherent nature of the institutional development process, in which success cannot be achieved through a single project, but rather through a long term perspective and commitment. The issues highlighted below clearly demonstrate that the lessons learned from the first water supply project are not unique or limited to the project itself; but rather reflect the intrinsic difficulties in long term sector development efforts. It is in this context that the attached PCR, the problems and issues encountered in the first water supply project, need to be considered. B. Project Design, Implementation and Costs 9. The project was launched with a relatively new implementation agency (WDB), which embarked upon an investment program on a scale larger than it had experienced before. One of the early problems encountered by the WDB was the need to change the design of one of the major project components due to technical reasons. In addition, problems of land acquisition, delayed the tendering process and poor contract administration caused substantial initial delays in physical project implementation, which continued satisfactorily, however, once these difficulties were overcome (paras 3.02-3.03 of PCR). 10. At appraisal the project was expected to be implemented over 5 years (1977 - 1982). Due to the above implementation delays, approximately 80% of the project components were completed by mid-1984 and the remaining 20% is expected to be completed by mid-1985, bringing total implementation period to about 7 1/2 years. 11. As a result of implementation delays, design changes and rapidly increasing inflation (average of about 15% - 20%) during project implementa- tion period, total project cost to completion increased from appraisal estimate of Rs 310 million to about Rs 725 million. However, due to rapid devaluation of the Sri Lankan rupee against the US$ (approximately 260% devaluation during the implementation period), total project costs to comple- tion of equivalent US$35.10 million would be less than the appraisal estimate of US$42.5 million. The total credit of US$18.95 million was fully disbursed by June 1984 (paras 3.15-3.17 of PCR). - 22 - ANNEX Page 4 of 8 12. Following the full commissioning of most of the major project com- ponents by mid 1984, WDB began to experience difficulty in selling all of the water produced due to less than anticipated demand. This reduced demand is attributed by WDB to (a) consumers traditionally having access to free well water on their premises, (b) reluctance on part of consumers to bear initial costs of connection, and (c) long delays in commissioning which forced consumers to develop their own water supply from groundwater sources. While all or some of the above reasons may be correct, it is important to recognize that (a) the design parameters were based on expected demand which was less than actual demand, (b) the absence of control over free ground water exploitation by consumers, decreased the prospects for selling potable water, and (c) proper design and timely implementation are essential to the marketing success and consequently, financial viability of the project (paras 4.02-4.04 of PCR). 13. Although, the project served to introduce and gradually strengthen 'IDB's ability to design, implement and manage large scale water supply investments and ultimately market its product, the project provides the following key lessons: (a) for technically complex project components, more attention needs to be given to detailed design during project prepara- tion to avoid implementation delays and cost overruns; (b) inplementation timetable should be more realistic, especially under a start up situation with a new agency; (c) more effort will need to be given in strengthening "software" aspects of project management (project planning/coordination, tendering, contract management, marketing considerations, etc), especially for newly established agencies - technical capabilities of these agencies by themselves will not guarantee success in achieving project objectives; (d) potential water demand must be more accurately and realistically established in order to select appropriate design parameters; (e) appropriate incentive (house connection loans, etc) and control (control of groundwater use) mechanisms should be incor- porated in project design to aid water sales. - 13 -ANNEX - 23 - Page 5 of 8 C. Operating Performance 14. The project envisioned a number of key operating improvements includ- ing, but not limited to, (a) introduction of a comprehensive metering and meter repair program, (b) improved staffing in the areas of project manage- ment and finance, and (c) improved accounting and financial management sys- tems. 15. Although the underlying objectives in improving operating performance were to assist the overall institutional strengthening process, these attempts failed largely due to the following reasons. The government and senior WDB management perceived WDB's role largely as a "construction" agency rather than a sector development and management agency. This perception failed to recognize the importance, or even the relevance, of the need for operational improvements in WDB. Consequently, little priority was attached to the necessary actions required to implement operational improvements and WDB's institutional resources were largely directed towards construction activities. Furthermore, during project implementation there was little or no political support for such "sensitive" activities as metering and consumer billing and collection, particularly in a society where water has been tradi- tionally considered a "free good". It was only in late 1983, as a part of the follow-on second Water Supply project and after 6 years from commencement of the first project, that the government and WDB seriously began implement- ing consumer metering and billing and collection.prqgrams (paras 4.05 of PCR). 16. There were two major effects of the above problems. First, as WDB's scope of responsibility rapidly increased (total assets of Rs 83 million in 1977 increased to Rs 3.6 billion in 1983) during the project period, the lack of corresponding adequate and effective operating, management, and financial control systems equally rapidly deteriorated its institutional and financial health. WDB found itself ill-prepared to take on the management and finan- cial responsibility to operate and maintain the assets it so enthusiastically created. Second, the occupation with its new construction activities, diverted attention away from the less glamourous tasks of routine and preven- tive operations and maintenance. Eventually, beginning January 1984, when WDB started a crash program of consumer metering and billing/collection for water charges, it found itealf institutionally and procedurally unable to cope effectively with this increased volume of activity. Consequently, in a large number of cases the meter installations were sub-standard; these quickly became defective. Inaccurate bills were sent out. Both the above factors raised queries and objections from customers and further aggrevated cash flow problems of WDB (para 4.05 of PCR). 17. The following key lessons can be learned from the above experience. - 24 -ANE Page 6 of 8 (a) any attempt to improve routine operations must be accompanied by a clear institutional recognition of its importance by the implementing agency; (b) operational improvement programs need to be explicitly defined by a detailed and timebound action program against which progress can be regularly measured; (c) rapid increase in scale of routine activities must be supported by commensurate manpower resources and effective systems and procedures, absence of which would prevent the achievement of intended objectives. D. Financial Performance 18. Although WDB complied with financial covenants of a largely proce- dural nature (establishing adequate records, regular audits, project account- ing/costing systems, purchasing and inventory systems, etc.), it has been in violation of the two substantive financial covenants. It was unable to achieve the covenanted financial rate of return of 5% in 1978, 6% during 1979-1981 and 7% from 1982 and thereafter. Due to operating deficits during 1978-1982, WDB had negative rates of return during this period. Although unaudited 1983 data suggests that in that year WDB had a positive rate of return of about 2.3% (on an accrual basis), the underlying data is ques- tionable and the above rate of return is suspect, particularly in view of the fact that about 64% of its revenues are accounted for by central government subsidies (paras 5.02-5.04 of PCR). 19. WDB's poor financial performance during the first project continued through the initial years of the second project. The basic causes of this are (a) inadequate tariffs and inability to revise tariffs when needed and (b) absence of an effective billing and collection program. As a result of rapidly increasing operating costs due to increase in scale of WDB's activities, by 1983 WDB's financial position deteriora , to a point where its cash collection from consumers covered only about 10% of its cash operat- ing expenses; the shortfall being covered by central government subsidies. 20. One of the more serious problems arising out of the above cash flow shortage has been that often WDB had to use capital funds, intended for construction, to meet its operating expenses. Although it is difficult to exactly determine how much capital funds were used for this purpose at any given point in time, it is likely that by 1983, WDB had to utilize about Rs 40-50 million annually (about 20% of its operating expenses) of capital funds to meet operating shortfalls. 21. One of the key objectives of the first project was to develop and strengthen the financial management function of WDB. In support of this objective, the position of the senior financial manager was to be "elevated". - 25 - ANNEX Page 7 of 8 WDB, traditionally an engineering organization, has and continues to find difficulty in establishing the necessary credibility of its finance staff within the overall organization. Although, about 7 years from the initiation of the first project, WDB now has a Deputy General Manager of Finance, the impact of this position on the overall decision making process is still marginal (para 5.02 (iv) of PCR). 22. The financial objectives of the first project remain valid, although the exact magnitude of targeted rates of return may have been ambitious within the original timeframe and in parallel to developing a new agency. However, it is important to recognize that (a) achievement of financial performance targets is closely linked with the broader institutional and operational development process and therefore the time frame for achieving their targets will need to be more realistic, and (b) in addition to detailed engineering design, project design should include detailed action programs including financial performance targets and these actions should be closely monitored. E. Institutional Performance 23. In order to ensure effective and timely project design and implemen- tation, the project included creation of a separate "Project Area" unit within WDB. In principle this concept was justified on the basis that WDB needed to exercise a concerted effort to implement successfully a substan- tially larger investment program than it had undertaken before. However, the special emphasis on WDB's activities in.the "Project Area" inadvertently created certain institutional imbalances on the overall program. The more qualified and capable staff became associated with the "Project" and improved systems and procedures were applied largely to "Projec'" related activities. These factors contributed to less attention to "Non-Project " (a term created by WDB to emphasize the difference) operations of WDB, resulting in even weaker management and operations in areas other than Greater Colombo (para 6.05 of PCR). 24. The impact of this distinction between "Project" and "Non-Project" operations of WDB on its overall performance has been quite marked. Institu- tionally, financially and operationally WDB's operations outside the scope of the Bank supported project remained weak and performed even poorer, thus defeating the broad objective of institutional development of WDB as a total organization. This phenomenon is gradually being addressed through the follow-on second project, and more attention is now being paid to overall operations and finances. Thus, it is important to recognize thatt - 26 - ANNE Page 8 of 8 institutional development efforts should be tarletted to the institution as a whole, rather than to a specific sub-area of its functions. F. Economic Analysis 25. At appraisal, the economic rate of return was estimated to be between 7% and .7%. However, given that (a) parts of the project are yet to be commissioned and (b) more importantly, experience indicates that rate of connections has been less than that anticipated at appraisal and yet to be determined, it is not possible at this stage to determine the actual economic rate of return. However, under the assumptions that (a) effective demand for water from systems to be commissioned will follow the same pattern as systems already commissioned and (b) effective demand will gradually increase over time, thereby more fully utilising installed capacity, an estimated economic rate of return of 2%, using revenues as surrogate of benefits, can be expected. Due to non-quantifiable factors such as health benefits, the actual rate of return may be higher. C. Conclusions 26. The problems experienced in, and the lessons learned from, the first project have positively contributed to formulation of a long term sector development strategy. The follow-on second project is also building on these experiences. The first project provided the initial opportunity to begin to understand the issues and constraints in long term sector development and served as a vehicle for policy dialogue with the government. The repeater project has been designed to implement many key policy reforms developed through this first project. These factors are perhaps more important than whether specific project related objectives were achieved during the implementation period. 27. WDB has taken several positive steps recently to address and rectify the problems experienced in the first project. Beginning January 1984, NDB commenced a Financial Recovery Program which included (a) increase in water tariffs for both "Project" and "Non Project" areas, (b) improved billing, collection and disconnection program, (c) accelerated consumer metering and (d) improved operations and maintenance functions. In February 1985, on the basis of the broad recommendations of the Sector Study (see Para 6), WDB adopted a Macro Investment Plan for the period 1985-1990, clearly indicating the long-term strategy, investment priorities and financial and operational policies it intends to follow. Furthermore, a comprehensive 5 year Technical Assistance project financed by USAID commenced in April 1985. This project would strengthen the operational, financial and management practices by WDB. It is evident that many of the problems encountered in the first project are now receiving careful attention and these recent initiatives will significantly contribute towards the long-term institutional and sector development efforts. - 27 - ATTACHMENT A .,--ZCZC'91ST0948 JWS0779 COMMENTS FROM THE GOVERNMENT OEDD2~ REF TCO FCA JWS0779 JI0196 IN 30/06:23 OUT 30/06t26 21409 FINMIN CE 21409 FINMIN CE 30/4/86 OED Note MR OTTO MAISS ACTING DIRECTORt OPERATIONS EVALUATION DEPT. RE PROJECT PERFORMANCE AUDIT REPORT - SRI LANKA - FIRST WATER SUPP1Y PROJECT. NO SPECIFIC COMMENTS ON FINDING. HOWEVER I Data now WOULD APPRECIATE IF COMPARABLE INFORMATION ON FINANCIAL AND included in ECONOMIC RATES OF RETURN AT APPRAISAL AND COMPLETION ARE GIVEN Basic IN TABLE FORM WITH DUE REMARKS ANO REASONS FOR SHORT FALLSo Data Sheet REGARDSP LIONFL PREMARATNEP DEPUTY DIRECTOR NATIONAL PLANNINGr MINITRY OF FINANCE AND PLANNINOP COLOMBO TLX 21409 FINMIN CE "04.400850 ALT RTO FROMtOE2M NNNN - - ATTACiMENT B Page of 5 G90 d 0sp4eou of c.rlwåq* rau Nationa~ Water Supply & Draag Board COMMENTS FROM VDB Telegrams: "WATERSOARD' RATMALANA Cha lemanIgna na. x 4e 0 u a e 5281 91. 0m. B•t:2 gdad&5 71.440. 71e6u 52U ;.ode> My No.' J You r i- J Rufmalf4, 30th April, 1986 Er. Yukinori Watamabe, Dirootor, Oporations Ialuation Dept., The World ank, 1818 a Street .W., Wanhinton D.C. 20433, U.S.A. Doear SIr, Re. Projeot Perforano Ådit Roport * gri Isnka pret ater Supply Projeot (Ln 709-0) Reterono your draft report datod Maroh, 5, 1986, 1 am forwarding herith WI399 vif i me oodante. Wo groatly approolato the offort pat in by the Oporations Evalua- tIon team iå the. preparation af this roport whioh ha* coverad almost all aspoots of the projoot, &aM at the sam time highlghtod pointa for consideration in ubequoent projoots. Yours sinoerely, NATIONAL WATER SUPPLY & DRAAGE BOARD T.. Madgallo Chalra. Copy to Boorotary, M/L.G. & C. Wipged to: MAY 8- 8 Minlstry of Local Goveriment. HIusg Constrc ton Water Evry 6rop - pre touS" - 29 - ATTACHMENT B Page 2 of 5 1 2endgE Proeodhen (Page vii, para. iv) WIB does not agree fully with the contents in this para. The conttacts have boon divided into contracts of substaitial quantum of work. The basic inadequacy in Tender Procedure was calline Tenders on open bidding basis. This could be proved frum thc performaico of the contractors under Project II (Credit 1041 Ch) on Greater Colombo Water Supply improvements, and sewerage desienod by a particular consultant and satisfactory progross has boor. achicved*by the contractors for sowerage scheme since they have boon prequlified as compared with the contractors for water supply project, where contracts were awarded on open bidding basis. Therefore, it clearly shows that it is very essential for a detailed study to be done on the various categories of contractors available locally and prequalifioation lists be prepar.d for various sises of jobs. This factor should be taken into account for all future large scale p'ojects. In addition, a detailed study of hidden overheada should be made for accurate estimating. In the case of supplies con- tracts too, presently installed plant and equipment and pipes and fittings are now sufficient to assess and prequalify manufacturers. It also should be mentioned that according to the technical spocifica- tions prepared by WDB and approved by IA had a rango so that some of the lowest bids for particularly supplies from India could not be rejocted duo to conformity to these specifications. At the time of propLration of this report the Ambalargoda Scheme had just boon commissioned and the Kalutara Scheme had not yet been commissioned to justify the performance of their equipment. 2. Porfoconcq g! aogItants (Page viii, para. iv) Consultants were appointed to provide engineering services for the design of Greater Colombo Sewerage and improvements to Greater Colombo Water Supply. The PCR states that the consultants performed satisfac- torily. A more up to date review is now possiblo as a substantial part of the works has now boon implomanted under the second stage (Colombo Water Supply and Sewerage). In som instanoes. it is evident 30- ATTACHMENT B Page 3 of 5 that inadequate preaimiay 1a3 tigations and proseot planat have ceased a large nuabor of variation orders at considerable value (Upto 100% over the original contract value in some con- tracts) and further setbacks to project completion, With regard to assessment oi plant and equipment installed to date, it is still too early to comment on their suitability. Howavor, there are indications that some of the plant are too shphisticated for operation by stoff who are used to more simple processes. This too cloarly shows that if more detailed investi. gatiow were carried out, some of the equipment could have boon siaplified. WIB is not averse to the extensive use of consultants, but, it consultants are to be used extensively, selection should be done after a detailed study of past perforanoes, experience in coun- tries like Sri Lanka and other such factors. Another observation is the lack of guarantee for designs carried out by consultants. In the present system of appointing consul- tants, there is no way of assessing the success of their designs until the works are iaplosented. Some kind of guArantoo has to be included in their scope of work by way of a bond or retention. It should also be stated that WZB's expericoa and capacity for carrying out such studies has grown over the years and there is now a substantial availability of qualified personnel within the Board itself. 3. Justification for Inalusion of NaialaM ad_ AMbalanoda Aras (Page x, pars. xii) 0 WDBrf the opinion that it is still too early to asseas whether the inclusion of now piped systems for the towns of Ambalangoda and Kalutara as part of the project was justifiable. The initial phase in the demand growth is naturally slow as it has to overeoe -31.- ATTACHMENT B Page 4 of 5 nY traditioml and econoaie factors. With the increase In population awareness of the need for sate drinking water, the demnd will be expected to rise fairly sharply in the aidtorm design period. In addition, the oomaissionin6 of those two schomos has coma at a time when tourism has dropped sharply duo to civil disturbanoos so roducing wato demand. This industry is now showing signs of picking up in the South Weat cosstal area and witi the many hotels already constructed in this aroa, the water demand is expected to increase. Another observation is that the introduction of a piped water supply system gives a sharp boost to the infrastacture of a town resulting in social and financial upliftment. Increased standards of living will result in increased water demand and this will griduzally spread to even the sattolito towns coming undox the sub-areas. In addition, possibilities are there of extending the Kalatara Sohema towards the Greater Colombo arca to supply the towns of Panadura and Moratawa thereby reducing the load on the coastal bolt, it is expected that salinity levels in individual water sources will rise. In addition, individual schemes for each of the townships would not have boon possible duo to lack of suitable sources. Hence the introduction of those schemes ay in effect, be considered as timely as well as having added to the achievement of the national decade plan for water supply. All in all, it is not possible to definitely work out whether a scheme is justifiable or not due to the presence of"unquantifiable" factors like health benefits, upliftmont of living standards. 4. Pixamoal Performance (Pago x -xi, parao xii) The vacancies in senior management positions Ln Pinance and Comaor- cial sections have boon filled with the personnel from two consultancy f irms. Inadequacies and bottlenecks in those sections are being studied by them and they are in the process of finding solutions for same. WEB is hopeful that those short comings will be oliminated in the near fuature with this arrangement* - 32 - ATTACHMENT B 5. Insthit ioAA Deve1o284nt Page 5 of 5 In para. 37 of the PPAM, reference is made to positions being filled temporarily through contracts which " do not affot the existing seniority structure and thus do not croato dissatisfaction from the in-house engineers union". The information on which this statoment is based has boon misguiding. In actual fact, the only positions which have boon filled temporarily through contracts to in the department of Finance and Accounting. Those appointants have no connection with the engineerin_ department and tha the question of whether those have created "dissatisfaction from the inhouse engineers union" does not arise. In the Engineering Department, WDB presently has adoquato senior level personnel to handle all enginooring aspects. The priority area prsa6ntly in the WEB is the Comrcial Department which is being managed at senior level by accountants. This depart- ment has boon recently act up in the WDB and has boon given high priority in sorting out short comings in all commercial activities. Reference is made to "insufficient decentralization of decision - making authority" (para. 49 of the PPAN). This kind of statement is too genoralised and requires more specific directions. This is one area in which IDA does not seem to have given adequate guidance. It would be helpful it the audit report gives some specific recommen- dations on tis matter which could be passed on to tho consultants who are prosomly carrying out the Institutional Development Project. The position of Chairman has now been filled in the WDB. - 33 - SRI LANKA CREDIT 709-CE, 709-SCE AND 31-CS SRI LANKA WATER SUPPLY PROJECT PROJECT COMPLETION REPORT JUNE 28, 1985 PREPARED BY THE VATIONAL WATER SUPPLY & DRAINAGE BOARD - 34 - SRI LANKA: VIRST WATER SUPPLY PROJECT (CREDIT 709-CE) PROJECT COMPLETION REPORT I. INTRODUCTION Background 1.01 Colombo is the capital city, principal seaport and center of commerce and industry in Sri Lanka. 1.02 The piped water supply system in Colombo dates back to the early 19th century when the town obtained its water supply from wells and canals. The first impounding reservoir and treatment facility was built in 1886 at Labugama and an additional similar facility was completed in 1954 at Kalatuwawa. These sources are located about 44 kilometers (Km) from Colombo and have been fully developed to provide a supply of about 135 million litres per day (mld) which is equivalent to about 30 million gallons per day (Imgd). 1.03 These sources of supply were subsequently supplemented by abstraction of water from the river Kelani Ganga which discharges in the Indian Ocean just north of Colombo. Water from the river Kelani Canga is abstracted at Ambatale, about 14 km upstream from the coast. The original capacity of the facility at Ambatale was 91 midd203lgn) and .prior to the commencement of the project this capacity was beizeRAnded o .nomingL capacity of about It mid (40 Imgd) although these facilities could not be utilized because of the lack of foreign currency to purchase the essential treated water pumps and transmission mains. 1.04 The overall development of water supply and sewerage facilities in Creater Colombo area through year 2000 was the subject of a Master Plan and Feasibility Study of Water Supply and Sewerage Services for the South West Coastal Area (referred as UNDP Master Plan Studies) prepared in 1972 by consulting engineers under contract to the World Health Organization (WHO) as executing agency for the United Nations Development Program (UNDP). As a part of the same study, the consultants also prepared preliminary engineering and feasibility studies of water supply and sewerage requirement for the first five years of the Master Plan period. Bilaterial assistance was received by Sri Lanka from France and the United Kingdom to implement part of the works recommended in the Master Plan. This was insufficient to complete the system to enable treated water to be conveyed to the consumers. 1.05 The Government of Sri Lanka (CSL) therefore requested an IDA Credit to help finance a project to improve existing water service and provide new piped supplies to parts of Colombo and the south west coastal region of Sri Lanka. The IDA Credit 709-CE was the first Bank participation in this sector in Sri Lanka in an effort to respond to the urgent water supply needs of - 35 - Greater Colombo and its environs and to support GLS goals within the Water Supply and Sanitation Decade Plan which were confirmed in the 1977 United Nations (UN) Conference 1/ to provide adequate water supplies to 100% of urban and estate populations and 50% of rural population by 1990. The iden- tified project set out to expand water supply facilities in Greater Colombo, provide services in those areas of Colombo where none existed, provide new supplies in Towns North and Towns South, strengthen the institutional, management and operational capability of the executing agency, the National Water Supply and Drainage Board (WDB) which was newly formed at that time, and provide technical assistance to undertake design studies for sewerage and drainage work and tariff studies. 1.06 For various reasons culminating in civil disturbances in July 1983, the project has suffered considerable cost and time overruns and the execut- ing agency was unable to meet major financial covenants. 1.07 This document reports the project history and discussed achievements and shortfalls in relation to the project appraisal objectives. Special attention is directed to the project performance with respect to: - sector objectives - operating performance - financial performance - institutional performance The report is based on information in the Staff Appraisal Report (Crl424b-CE), the project files, ane the Sri Lanka Water Supply and Sanita- tion Sector Study dated May, 1984 (Report 4190-CE), and has been prepared by WDB, assited by IDA Supervision missions. 1.08 Although GSL supports the 'Decade Plan' objectives, the major con- straints affecting the degree of achievement of the Decade goals are: - implementation capability of WDB - construction capacity of local industry - participation by foreign contractors - available foreign and local capital resources - available recurrent revenues to properly operate and maintain existing and new facilities. 1.09 More modest water supply service levels in urban areas related to consumer affordability and extensive use of hand pumps in rural areas together with the implementation of appropriate technology and low cost 1/ Report on Community Water Supplies, United Nations Water Conference, Mar del Plata, Argentina, 14-25 March 1977. - 36 - sanitation systems as developed by the UN Global project have been adopted to meet the requirements of the Decade Plan. This approach minimizes capital investment and also reduces recurrent operation and maintenance costs. Since 1978 GSL has received a total of US$224 million from 19 foreign donors to assist in improving sector service levels and further aid is currently proposed. As a result, there are indications that GSL has embarked on for- eign aided projects without due regard to consideration of priorities, availability of local counterpart funding and resulting operational and maintenance recurrent costs. The Bank initiated a Water Supply and Sanita- tion Sector Study which highlighted the urgent need for a much improved management capability within the WDB (the major implementing agency in the sector) with the establishment of a property staffed operation and main- tenance organization to implement a thorough program of preventative main- tenance since many of the existing piped water systems are providing inade- quate service because of a lack of proper maintenance. The Sector Study was discussed and agreed with GSL and issued in final form in June, 1984 to provide GSL and WDB with a sector policy document to determine future sector strategy. To complement the Sector Study and in order to reflect man power and financial constraints in the national economy, GSL further undertook a study to formulate a Strategic Investment Plan for the sector during October/November, 1984. The purpose of this Study was to (a) formulate a national investment program for the period 1985-1990 (b) to articulate neces- sary iector policies with respect to capital financing plan and pricing options (c) to identify priority areas of investment (rehabilitaton, exten- sions, new construction, etc.) and (d) to identify further areas of required institutional and financial strengthening of WDB. These efforts culminated in a round-table conference of all external donors during March, 1985, where, based on the findings of the Sector Study and Strategic Investment Plan, GSL and WDB presented its future sector policies and priorities to the donor community and, in general, received their concensus to support GSL's sector development efforts within the above framework of policies and priorities. II. PROJECT ORIGIN, OBJECTIVES Origin 2.01 The overall development of water supplies and sewerage facilities in the South West Coastal Area of Sri Lanka is defined in the Master Plan (referred above). The area extends to 430 square miles with a population estimated in 1977 at 3.5 million, about 25% of the population of Sri Lanka. The area contains some 50 communities and municipal authorities in addition to the urban centers of Colombo, Negomb, Galle, Kalutara and Ambalangoda. The project comprised works for the first stage of the Master Plan water supply recommendatons, and the project area therefore included the urban centers of Colombo, Towns South, Towns North, Kalutara and Ambalangoda. - 37 - 2.02 Colombo, the capital city, seat of Government and center of commer- cial trade and industry had a population of 608,000 in 1977. Its water supply system was intermittent and pressures were frequently reduced in an effort to conserve water. In 1976, the supply was limited to 4 to 6 hours per day. The situation was similar in Towns South where a population of 440,000 people received an intermittent low pressure water service. There were no piped water supplies at all in Towns North, Ambalangoda or Kalutara. These areas relied on privately constructed shallow well supplies which provided poor yields of water of unsatisfactory quality. 2.03 With exception of Colombo, no other community had suitable facilities for the collection or disposal of sewage on a municipal basis. At that time the sewerage system in Colombo did not cover the entire city and its capacity was inadequate, although facilities are now being expanded under the on-going Sri Lanka Water Supply and Sewerage Project (Credit 1041-CE). Typhoid, infectious hepatitis, dysentry and cholera were endemic due to the low stand- ards of sanitaton and water supply. This situation gave rise to the origin of the project and the urgent need to provide improved sewerage services led to the inclusion of a technical assistance component in the project to provide engineering services for a further package of works comprising the improvement of existing sewerage facilities in Colombo and provision of sewage collection and disposal facilities in areas which have piped water supplies, including Towns South, Negombo and Galle. Objectives 2.04 The project was appraised in October 1976 with the following main objectives, namely (a) to provide a 24 hour service to Colombo and Towns South, (b) provide safe water to Kalutara and Ambalangoda, (c) extend con- sumer metering, (d) strengthen the institutional organization of WDB and (e) prepare water supply and sewerage component designs for future implementa- tion. 2.05 The physical components of the project were designed to improve the reliability and quality of water supply to 1.2 million people and provide water supplies to 0.4 million people relying on shallow wells with poor yields and liable to contamination thus benefitting all sections of the community. The project included the following items: (a) Colombo and Adjacent Towns Expension of the treated water pumping station at Ambatale to deliver water to Colombo, Towns South and, ultimately, Towns Noth. - 38 - Improvement of the water transmission system between Ambatale and existing distribution reservoirs in Colombo and Towns South, and improvement of distribu- tion in these towns. Construction of new transmission and distribution systems for Towns North. (b) Ambalangoda, Kalutara and Adjacent Communities Construction of a complete water supply system (river intake, treatment and pumping plants, transmission and distribution systems) for each of the two towns and adjacent communities). (c) Other Items Installation of meters on all consumers' connections in new water supply areas (Towns North, Ambalangoda and Kalutara). Installation of meters on consumers' connections in Colombo and Towns South as part of a program designed to meter all connections by 1986. Provision of spare parts and equipment, of foreign origin, required for repair/replacement of defective items mainly associated with pumping, treatment or bulk measurement of water. Provision of consulting services for a water tariff study and for the design of a further package of works comprising the improvement of urban sewerage facilities. Training of WDB personnel in water treatment plant opera- tion and management and in techniques to reduce leakage in distribution systems; training in accounting and financial management. A comparison of the scope of the originally appraised project and the project as finally executed is shown in Annex 1. III. PROJECT IMPLEMENTATION, OPERATIONS AND COST Credit Effectiveness 3.01 A condition of credit effectiveness was the execution of a subsidiary agreement on terms and conditions acceptable to IDA between GSL and WDB for - 39 - on-lending the proceeds of the IDA credit to WDB. The above condition was met on February 8, 1978 and the credit was declared effective on that date after the Canadian Credit Agreement (709-SCE) betveen the Canadian Interna- tional Development Agency (CIDA) and GSL was ratified. The IDA Credit (709-CE) was established in the sum of US$9.2 million and CIDA Credit (709-5CE) was valued at Canadian dollars 5.0 million (equivalent to US$4.8 million at that time). Project Start Up 3.02 The project started slowly and delays occurred for the following reasons: (1) The initial delay resulted from a change of government in Sri Lanka shortly after the signing of the credit agreement as the new government reviewed all project agreements signed by its predecessor. (ii) All tender documents were prepared by WDB staff and were approved by the Cabinet appointed Tender Board and IDA before tendering. The first tender was advertised in June, 1978; nine months after credit effectiveness, and the first contract was awarded in November, 1978. (iii) After the credit agreements were signed it was found necessary to change the design of the Ambalangoda scheme for the following reasons: - the original intake site was found to be unsuitable due to periodic flooding resulting from a flood protection scheme carried out in another reach of the Gin Ganga River. - the new intake location was unsuitable for a Rany type river bed intake originally proposed. - water analyses revealed the presence of iron and turbidity necessitating conventional water treatment instead of treatment only by chlorination which was originally proposed. Revisions 3.03 The delays in the start up of the project resulted in slippage of the implementation schedule by one and a half year at the end of 1978. For the above reason and due to abnormally high inflation which occurred during the period 1977-79, tendered prices were found to be much higher than anticipated in the budget prices which were used to prepare the appraisal estimate and a - 40 - substantial cost over-run particularly in the foreign cost component of the project was identified by WDB. It was therefore decided to introduce a Special Action Credit (31-CE) and an agreement was signed on November 6, 1979 between the GSL and IDA, as administrator of the Special Action Account, which was established with funds contributed by the member countries of the European Economic Community (EEC) for a sum equivalent to US$7.0 million in various European currencies. Implementation 3.04 The design change mentioned above delayed the invitation of tenders for Ambalangoda intake, treatment plant and pumping equipment until Septem- ber, 1980. The treatment plant and pumping equipment tenders were awarded in April, 1981. However in the case of the construction of the intake for Ambalangoda, only one tender was received and this delayed the award of the contract until August, 1981. (Two years after the original completion date for Ambalangoda sub-project). 3.05 Due to the various objections raised by the tenderers, the tender for Kalutara pumping equipment was recalled and the tender for Kalutara treatment plant (supply and installation) was delayed. These two tenders were awarded in September, 1980 and July, 1979 respectively. The civil engineering con- tracts for the construction of the intake, treatment plant and pump houses for Kalutara were invited only in July, 1980 and awarded in Septemer, 1981. As a result a slippage of two years in the Kalutara sub project had occurred by December, 1981. 3.06 For various political reasons, the metering program in the Greater Colombo area did not get underway until August, 1979. This program was again suspended from time to time for the same reason and eventually completed by the end of 1984. 3.07 Due to the poor performance of the Kalutara distribution system contractor, this contract was terminated in mid-1984. After unsuccessfully attempting to negotiate a contract for the balance of the distribution sys- tem, WDB have invited competitive bids from selected tenderers and the Kalutara distribution system should be completed by June, 1985. However, WDB expect to commission the Kalutara scheme with the existing partial distribu- tion system by February, 1985. 3.08 The award of a large number of supply contracts caused delays in the opening of the letters of credit and obtaining Qualified Agreements to Reim- burse (QAR). Most of the suppliers attributed their delay in the supply of goods to the delay in opening a valid letter of credit. The purchase of different types of materials from more than one country caused problems in the execution of civil works contracts, due to incompatible interfaces. - 41 - 3.09 The division of the civil works into a large number of small con- tracts, did not attrazt foreign contractors to bid for these works. Only one of the 21 civil engineering conracts was awarded to a foreign contractor. Prior to 1977 the local construction industry experienced a lull and the local contractors did not develop their resorces (men and machinery). Sud- denly after 1977, the construction industry flourished, and the local con- tractors were awarded more jobs than they could effectively handle with their resources. This attributed to the poor performance of the local contractors in this project and may also be a reason for the poor response to the tender mentioned in para 3.04. The sudden massive escalation in the price of con- struction material such as cement, steel and fuel (up to 500%) caused cash flow problem to the local contractors which in turn affected their perfor- mance in executing the contracts. At times WDB endeavoured to help the contractors to expedite the work by granting special advance payments. 3.10 During project appraisal it was estimated that the project would be substantially completed by the end of 1980 whereas actual construction has continued through December 1984, with the Kalutara and Ambalangoda schemes scheduled to be commissioned in early 1985. Recurring delays in implementation occurred for a variety of reasons including: - problems of land acquisition - lack of access roads to work sites - inadequate bearing capacity of foundation material - delayed start up by contractors after contract awards - delay by contractors in the preparation of working drawings for Kalutara and Ambalangoda treatment plants - occurrence of hard rock in many excavations in Colombo area - high water table in Kalutara area - delayed approval by Highway Authority for laying transmission mains at bridge crossings. 3.11 The original completion dates estimated at appraisal and the actuals for major project components are given in Annex 2. - 42 - Procurement 3.12 The contracts awarded under this project can be broadly classified under three categories namely: (1) Supply of materials such as pipes, valves etc. (2) Supply and installation of machinery and equipment such as treatment plant, pumps, transformers etc. (3) Civil engineering contracts for the construction of structures such as intakes, towers, reservoirs, pump houses, laying of pipes, etc. 3.13 Separate tenders were invited for the sub project areas of Colombo and Towns South, Towns North, Ambalangoda and Kalutara. For the supply of pipes, tenderers were invited to offer for the alternative of PVC, AC, CI, DI, Steel or prestressed concrete pipe materials. The type of pipe material was then selected based on the lowest evaluated offers. In an attempt to procure material at the cheapest price, separate contracts were awarded for the supply of different types of pipes, valves and fitting. This resulted in a total of 55 supply contracts with consequent administration delays and interface problems. Eight supply and installation contracts for mechanical and electrical equipment and 21 civil engineering contracts were also awarded. Fourteen contracts were awarded for the installation of water meters in the Greater Colombo area. Details of the contracts awarded are given in Annex 3. 3.14 Tender documents for procurement were prepared by the WDB, approved by the Cabinet Appointed Tender Board and reviewed by IDA, before tenders were invited. Tenders were evaluated by a committee consisting of WDB officers and representatives of MLGHC. The tender committee evaluation reports were submitted to the Cabinet Appointed Tender Board for approval and subsequently reviewed by IDA prior to contract awards. The elapsed time between tender invitation and contract award varied between 4 and 14 months. Pipes and valves for this project were supplied from Germany, India, Indonesia, Japan, Singapore and the United Kingdom. Due to the award of 55 supply contracts, delays occurred in the opening of letters of credit, QAR and consequently in the supply of materials. Invitation of tenders for pipelaying contracts were somewhat affected for this reason. Project Costs and Disbursements 3.15 The project cost was estimated at appraisal at Rs 208.04 million plus US$13.95 million (equivalent to a total of US$42.53 million at an exchange rate of Rs 7.28 to US$1.0 at that time, March, 1977). The project originally scheduled to be completed in 1980 has continued through 1984 with consequent cost over-runs. The final cost has risen to Rs 397.65 million plus US$19.30 - 43 - million which is equivalent to a total of US$35.10 million at the exchange rate of Re 25.161 to US$1.0 in December, 1984. Expressed in US dollar equiv- alent the costs indicate an apparent overall project cost reduction of about 18% due to exchange rate variations (from Re 7.28 to 25.16) whereas actual cost over-runs are 91 and 38% for the local and foreign cost components respectively. 3.16 The SAR estimated a foreign base cost of US$11.76 million for equip- ment, technical assistance, training and specialized civil works. Physical contingencies varying between 7.5 and 20% depending on the nature of the work and degree of completeness of the engineering were included and cost contin- gencies of 7-8% per annum for equipment and 8-10% per annum for civil works were allowed in the estimates. The project costs estimated at the time of appraisal and actual costs on a component basis are presented in Annex 3, from which it is seen that civil works costs for all components increased in some instances by up to six times the appraisal estimates with an average increase of about 3501. The actual costs for the supply of materials and equipment amount to Rs 18.14 million and US$13.91 million showing increases of 180 and 76% respectively when compared with the appraisal figures. These large cost over-runs may be attributed mainly to underestimation at the appraisal stage, design changes, fluctuations in exchange rates, abnormal inflation and delayed implementation resulting from the administrative dif- ficulties encountered by WDB in managing a large number of procurement and civil works contracts. 3.17 Because of the implementation delays noted above, actual disburse- ments initially lagged considerably behind the appraisal estimates. However this situation changed dramatically as the project accelerated, due to rapid cost escalation which occurred during 1979-80 and necessitated the estab- Lishment of the Special Action Credit 31-CE amounting to US$5.0 million. Details are presented in the basic data sheets from which it is seen that whereas the credit should have been fully disbursed by the end of FY82, some 941 had been expended from the original credits 709-CE and 709-5CE and 80% from the Special Action Credit although project implementation continued through December, 1984. It is also seen that it took eight years to disburse the original credits (in line with the Bank-Wide Sectoral Profile) compared with six years estimated at appraisal. Operations 3.18 WDB generally adhered to IDA requirement of submitting quarterly progress reports sometimes with delay. The progress on this project was closely monitored by IDA supervision missions. Aide Memoires prepared by the missions highlighted activities which needed to be addressed by WDB and MLGHC providing important guidelines for the implementation of the project. At times due to extreme pressure applied by IDA missions very ambitious targets are set for the completion of major project elements which NDB were not always able to achieve. - 44 - Performance of Consultants, Contractors, Suppliers, Borrower Consultants 3.19 Two consulting firms, one for engineering services and another for a tariff study were employed by the WDB on this project. Both consultants performed their work to the satisfaction of WDB. Engineering services were provided for the design of sewerage systems for Colombo, Dehiwela-Mount Lavinia, Kotte, Kolonnawa, Negombo and Galle areas and the design of head- works at Ambatale and the transmission system to improve the water supply to Greater Colombo area. This work provided basic data for the second Sri Lanka Water Supply and Sewerage Project (Credit 1041-CE). The tariff study was undertaken in the Greater Colombo project area. Contractors 3.20 Only one civil works contract was awarded to a foreign contractor, Messrs. Raymond International Inc., for the specialized work of rehabilitat- ing existing water mains. This work was completed satisfactorily and within the contract period. 3.21 The local civil contractors did not perform very well, were often slow to mobilize and unable to meet implementation schedules. Reasons for unsatisfactory contractors' performance are set out in paras 3.09 and 3.10. At times WDB gave special advance payments to improve contractors' cashflow and to expedite the work. The quality and workmanship are satisfactory. Supplies 3.22 Material and equipment suppliers generally performed satisfactorily after the establishment of letters of credit. Some delayed contract comple- tions are reported, notably for the supply of pumping plant manufactured in the Indian sub-continent but many suppliers furnished materials ahead of their delivery schedules. The Borrower 3.23 The project not only demonstrated WDB's ability to handle the design and construction supervision of major water supply components but also served to highlight certain shortfalls in WDB's operational and management capability and in the way the project was implemented, including: - inability to deal simultaneously with the administration of a large number of procurement contracts. This stems directly from the fact that the procurement of materials was split up into - 45 - far too many very small packages without due regard to the implications. - lack of appreciation of operation and maintenance implications of the project such as staffing levels, office and living accommodation, transportation. - need for overall project planning and coordination by WDB. IV. OPERATING PERFORMANCE Introduction 4.01 At the time of preparation the project was planned to be completed in 1980. Due to various reasons mentioned earlier, the implementation and completion of the project was delayed, and is likely to be fully completed by July 1985. Water Demand and Market Potential 4.02 When the project was planned, it was anticipated that per capita water demand would reduce following the installation of consumer metering and the 1983 water demand for Colombo and Towns South was forecast at 64 mgd compared with a production capacity (Ambatale, Kalatuwawa and Labugama) of 74.5 mgd. Towns North demand was forecast at 5 mgd. 4.03 In 1977 there was a change in government coupled with a massive development in and around Colombo. Water demand increased much quicker than forecast earlier. In addition, due to delays in consumer metering the anticipated reduction in consumption of water in Greater Colombo area did not take place. Consequently the 1983 water demand for Colombo and Towns South rose to about 80 mgd, approximately 5.5 mgd more than the existing production capacity. The existing headworks are operating beyond their normal capacity to meet this demand. For this reason, WDB initially moved slowly in market- ing its product in the Towns North project area which was completed in June, 1984. However, from September, 1984 WDB has given adequate publicity to attract the potential consumers but the response was much slower than expected. This may be due to (a) the fact that consumers have become used to well water and (b) potential consumers are reluctant to meet the initial cost for plumbing and subsequently for the water consumed. The response may increase during the dry season when the wells go dry. 4.04 Due to the four year delay in implementing the Ambalangoda and Kalutara schemes, it is too early to comment on the market for water in these - 46 - areas. To attract potential consumers, WDB is giving publicity that these schemes will be commissioned in mid-1985. However, it is already apparent that due to the delay in implementing these projects some potential commer- cial consumers such as tourist hotels have made their own arrangement for water and domestic consumers continue to rely on their private shallow unreliable wells. Initially it is anticipated that the water demand at Ambalangoda and Kalutara may be substantially less than planned during project appraisal. Metering in Greater Colombo Area 4.05 The decision to commence billing all consumers in Greater Colombo area simultaneously upon completion of metering was taken in late 1983 and GSL exerted considerable pressure on WDB to accelerate the metering program. As a result, WDB adopted a liberal attitude to the metering contractors in order to achieve satisfactory progress. Subsequently a large number of sub-standard installations was either reported by the consumers or detected by the WDB staff after the commencement of billing, resulting in many con- sumer querying billing totals and delayed receipt by WDB of monies due. An urgent repair program has now been undertaken by WDB to rectify this situaton. V. FINANCIAL PERFORMANCE Financial Covenants 5.01 Article (iv) of the Development Credit Agreement sets out a number of Financial Covenants which are to be adhered to in performing the operations of the WDB. The main points in these covenants are summarized below: (i) WDB is to maintain records adequate to reflect, in accordance with consistently maintained appropriate accounting practices, its operations and financial condition. (ii) WDB is to have its accounts audited annually by independent auditors and to submit such accounts and other information as requested to the Association. (iii) WDB is to introduce a Costing System and to maintain separate accounts for the Project Area. (iv) WDB is to ensure that - (a) Senior financial positions be filled and the Finance Department adequately staffed. - 47 - (b) There is close cooperation between the Engineering and Finance Departments. (c) Appropriate measures have been taken to establish - (1) a commercial accounting system, (2) a financial control system, (3) a purchasing and stores system and (4) an internal auditing system (d) A set of financial rules have been established (v) WDB to adjust water tariffs so that sufficient revenue from its operations in the Project Area are generated to produce an annual rate of return on net fixed assets of 5% in FY 1978, 6% during FY 1979-1981 and 7% from FY 1982 and thereafter. (vi) WDB to ensure that taking into account GSL subsidies to WDB, operations outside the Project Area are not subsi- dized by revenues from the Project Area. (vii) WDB do not incur any debts unless otherwise agreed by the Association. 5.02 The financial covenants enumerated above have been achieved in the manner detailed in the following paragraphs. (i) WDB has maintained records to reflect, in accordance with consistently maintained appropriate accounting practice, its operations and financial condition. Continuing efforts are being made to improve the quality of the information derived from these records and also to increase the frequency of such information generated. (ii) In keeping with the financial covenant concerned and also with the Governmental requirements, the financial state- mento of WDB are audited annually by an independent audit firm of Chartered Accountants. At present M/s Joe Nuthupulle & Co. has been entrusted with this job. (iii) WDB has introduced a Costing System for each of the distribution schemes for which it has supplied water. The Project Area under review has separate final accounts prepared by its own Finance Department. The Project Finance Section is headed by a Chief Accountant who in turn is assisted by two Accountants. - 48 - (iv) (a) As required in the relevant financial covenant the WDB has taken steps to fill the senior financial positions. These include the appointment of a Deputy General Manager (Finance) on recommendations contained in the World Bank Aide Memoire dated February 4, 1984, and the appointment of two senior Accountants for Finance and Management. The situation is expected to improve further with the implementation of the proposed USAID institutional reorganization. (b) Cooperation between the Engineering and Finance Departments remains at a high level since these two Departments are in contact with each other on day to day affairs as well as on other long term but regular work. These include the participation of both Departments in the preparation of the Annual Budget, Monthly Progress Control Reports and the operationi of SORT (Scheme Operation Review Team created to look into schemes which incur losses with a view to making recommendations to increase profits and to reduce losses). The Friday Weekly Staff Meetings which are chaired by the Chairman of the Board bring together divisional heads from all sections inclusive of the Engineering and Finance Departments. These meetings enhance further the existing cooperation between the two Departments. (c) (1) A commercial accounting system has been in force at WDB since its inception in 1975 developing from Governmental accounting system. However, in view of the magnitude of the operations undertaken by the Board at present and the future growth anticipated, it has become imperative that a computerized accounting system be introduced as soon as it is practicable. It may well be stated here that unless this is done, the achievement of the desired level of financial control will not become a reality. In an attempt to overcome these problem areas, the D.G.M. (Finance) has a monthly meeting with all the Accountants. These meetings provide a way to formulate possible remedial action under the existing financial control system. - 49 - (2) The Management Consultants have introduced a Stores Manual and this is expected to be implemen- ted following future review under USAID reorgani- zation. (3) The Internal Audit Section is now headed by a Chief Internal Auditor who could now follow up the internal audit work in a systematic manner to prove the effectiveness of the section. Further strengthening of the staff in the section, however, is required to achieve the desired level of effectiveness. (4) The Management Consultants have introduced an Accounting Manual which has been prepared with a view of a computerized accounting system in operation within a reasonable period of time. The manual needs to be studied in conjunction with the USAID reorganization envisaged. (v) WDB introduced a new tariff for the Project Area since January 1, 1984. Accounts for the years 1977-83 have not indicated that there is a net operating income nor is it expected that in 1984, the position will change very much except that there is an improvement to the better. The surcharge increase in eLectricity tariffs caused a consider- able burden of added operating costs in all schemes to cause any reasonable rate of return within the Project Area. It is envisaged to obtain a better return if the surcharge is removed in the future. There is no danger of operations outside the Prrject Area being subsidized by the revenue derived from within the Project Area, since the tariffs in the Non-Project Area have been equated as far as possible to the Project Area and its application is in force that may ease the situation in 1985. (vi) WDB has not incurred any debts in keeping to the conditions laid down by the World Bank. 5.03 Looking back it cannot be said that the financial covenants laid down were unrealistic. The only qualification one may make is the degree to which these covenants were achieved. However, this situation should be acceptable when one considers the magnitude of responsibilities entrusted to the WDB and the growth in operations it had to experience during the past few years. - 50 - Operating Results and Rate of Return 5.04 The income and expenditure statements from 1975 to 1983 is given in Annex. The information contained therin is summarized below. Operating Operating Average Net Rate Operating Year Revenue Expenses Fixed Assets of Ratio Remarks In Ra.'000 In Ra.1000 In Ra.*000 Return 1975 5,639 9,411 4,563 - - 1976 9,764 9,950 4,506 - - 1977 11,868 11,967 4,800 - - 1978 28,804 28,998 49,242 - - 1979 32,206 40,189 105,997 - - 1980 40,610 63,744 199,864 - - 1981 42,650 112,456 326,181 - - 1982 119,488 166,278 473,672 - - 1983 220,122 205,234 637,452 2.3% 93% Subject o Audit Financing Plan 5.05 The Balance Sheets and Funds Flow Statements from 1975 to 1983 is given in Annex. The information contained therin is summarized below. TotalEquity Long-Term Debt/Equity Year Assets Debt - Remarks In Rs.'000 In Rs.a000 1975 69,569 33,641 - - 1976 90,140 55,524 - - 1977 83,083 58,224 - - 1978 233,757 221,186 2,571 1/99 1979 406,241 317,269 82,420 20/80 1980 1,063,956 809,475 208,235 20/80 1981 2,OC.O,665 1, 173,062 626,506 35/65 1982 2,612,743 1, 630,285 811,083 33/67 1983 3,581,002 2, 427,228 957,979 28/72 - 51 - Year Total Internal Porelgn lebt Internal REARKS Sources Cash Debt- Service Pinanoe of Generatio 3ervice Covered of Punds by Total Internal Require- Cash ftents Generation (ps.000) (19.*000) (h.*000) (No. of (M) Times) 1977 179533 543 - - 3 1978 170,895 5,654 - - 3 1979 185,325 2,621 - - 1 1980 636,081 (13,865) - - - 1981 802,606 (51,424) - - - 1982 673,678 (15,447) - - - 1983 1,005,597 47,895 30,663 1.5 5 However, given time and the immediate improvements required, achievement of the financial covenants stipulated will not be a difficult task. - 52 - VI. INSTITUTIONAL PERFORMANCE Organization and Management 6.01 WDB the implementing agency of this project, was created in 1975. It replaced the Department of Water Supply and Drainage that was responsible for the planning, design, construction and maintenance of some of the water supply and sewerage schemes in the Island. 6.02 The headquarters of WDB is located in Ratmalana, Colombo with eight regional offices covering the whole of Sri Lanka. In 1977, at the commence- ment of the project, the organization of the Board was on a geographical basis. A special unit under en Assistant General Manager (AGM) was created in 1977 to implement this project. As the work load in this unit increased, the post was upgraded to Deputy General Manager (DGM). 6.03 In the last few years, WDB had undertaken large construction programs outside the project area on works directly connected with the capital vote of WDB and also works for Local Governments, and other governmental and state organizations. In addition to the increased construction program, a number of schemes have been taken over from local authorities and WDB is operating and maintaining these schemes. Due to this increased responsibility, it has been necessary to reorganize WDB to cope with the increased work load. WDB has therefore reverted partly to an organization on a functional basis in addition to strengthening the regional offices. The planning and design, groundwater and construction functions are now headed up by AGM's in the headquarters with the administration, finance and operaton/maintenance were appointed to deal with construction and operation/maintenance; and the finance sections were strengthened by the appointment of regional account- ants. 6.04 WDB are now in the process of setting up regional laboratories and workshops. A preventative maintenance program has also been implemented in the Galle region and is now being extended to the Central and North Central regions. 6.05 The special unit originally created for the implementation nf this project was known as the Project Division. In addition to the implementation of the Project, in 1978, this unit took over the operation and maintenance of the Kalatuwawa and Labugama headworks and in 1981 assumed responsibility for operation and maintenance of the water distribution systems in the five local authorities in the Towns South area. From 1981 this division also took over the operation and maintenance of the water distribution and sewer collection systems in Colombo Municipal Council area utilizing the existing municipal organization. The same unit also handles the implementation of the Second Sri Lanka Water Supply and Sewerage Project financed under IDA/Credit 1041-CE - 53 - and the Saudi Fund for Development. It also deals with improvements and urgent development needs within the Colombo municipal area under a special unit headed by an AGM. Staff Recruitment and Training 6.06 Staff recruitment is handled directly by WDB by calling for applica- tions which are appointed after Board approval. WDB has experienced dif- ficulty in recruiting professionally qualified accountants to fill key posi- tions due to completing demands in the private sector and were unable to recruit experienced staff for the supplies/wharf section of the project unit. 6.07 This impacted on the project implementation since the project unit had to rely on assistance from the main supplies division of WDB to deal with customs and import formalities for imported materials. As mentioned pre- viously this problem was compounded by the multiplicity of small supply contracts adopted on the project and resulted in delays in submitting claims for reimbursement. 6.08 WDB operates a training school headed by a chief engineer who is responsible for the training of all categories of staff in WDB and in the sector. Training is carried out not only for the new recruits but also for all categories of staff aleady employed. The training programs cover all grades of staff from engineers to skilled labor. The training school deals with WDB staff and others in the water supply and sanitation sector, espe- cially those who are involved in the operation and maintenance of local authority schemes. This includes the large on-going program in the Ground Water Section of the training of hand pump caretakers so that communities in remote areas could maintain and do running repairs to the hand pump installa- tions. These programs are linked with the health and sociological aspects of the rural water supply schemes for which purpose six sociologists have been recruited by WDB. In collaboration with the Health Department, WDB are also undetaking a demonstration latrine construction program. 6.09 During the implementation of this project there were many training programs funded by various foreign donor agencies in which WDB staff par- ticipated and benefitted. Consequently, the training component of the credit was not utilized as such and in view of the cost over-run experienced on the project it was decided that the credit should be reallocated. So that although the training component under this credit was apparently not achieved the WDB were able to derive important intitutional and training benefits from other parallel programs on-going at that time. It may be noted that this situation has been fully rectified during the on-going Second Sri Lanka Water and Sewerage Project (Credit 1041-CE). - 54 - VII. PROJECT JUSTIFICATION Project Objectives 7.01 The main project objectives were (a) to provide a 24 hour service to Colombo and Towns South, (b) to provide safe water to Ambalangoda and Kalutara, (c) to extend consumer metering, (d) strengthen the institutional organization of WDB and (e) prepare water supply and sewerage component designs for future implementation. Project Achievemen;s 7.02 The project achievements in relation to the above objectives are discussed under the following headings. Service Levels in Colombo and Towns South 7.03 Service level improvements in Colombo and Towns South have been achieved generally in line with the project objectives although demand exceeds production capacity (see para 4.03). Ambalangoda and Kalutara Water Supply 7.04 Ambalangoda and Kalutara water supply schemes were substantially complete by the end of 1984 and schedule to be commissioned in early 1985 with installed capacities of 2 and 5.6 mgd at Ambalangoda and Kalutara respectively. The population of Kalutara is estimated to reach about 130,000 in 1985 and that at Ambalangoda about 41,000 with corresponding anticipated water demands of 3.0 and 0.75 mgd. 7.05 WDB have recently begun soliciting applications for water service at these towns. Therefore, at this time it is not yet possible to indicate any achievement of this project objective. Consumer Metering 7.06 After experiencing several delays caused by political obstructions, WDB have completed a metering program throughout the Greater Colombo municipal area covering around 75,000 connections. However, as a-result of a high incidence of consumer complaints, due to estimated water consumption rate demands, many meter installations (up to 25% in some areas) were found to be defective. This was attributed mainly to inadequate supervision of the meter installation contractors caused by a very ambitious installation schedule during 1984 and has since been rectified. - 55 - 7.07 Applications for metered connections in the Towns North area of Colombo have proved to be much lover than anticipated consequently in this area of the project the metering objective has not been achieved. This may be attributed to (a) initial reluctance on the part of WDS to solicit invita- tions for water connections as they are unable to meet overall city demand in any event, (b) reluctance of consumers to pay connection fees which average around Rs 500 for a domestic connection and subsequent water charges and (c) consumer reliance on existing free sources such as shallow wells and stand- posts. 7.08 It is not possible at this time to identify any changes in water consumption and demand patterns as a result of the metering program. Institutional Development 7.09 One of the major objectives of the project was directed towards the strengthening and improvement of WDB's institutional and managerial capability. Since 1978 WDB has taken part in a very large capital investment sector program not only in the area covered by this project but throughout the island, supported by foreign donors, to upgrade service levels nation- wide. At the onset WDB had not developed the financial planning expertise to fully evaluate the impact of these large capital investment programs on recurrent operation and maintenance costs. In order to demonstrate Sri Lanka's support for the objectives of the International Water Supply Decade, WDB's capital development program was increased without full appreciation of the recurrent financial commitment involved. 7.10 About the same time (June 1980) IDA approved a credit of US$30 mil- lion to finance the Second Sri Lanka Water Supply and Sewerage Project (Credit 1041-CE) which required WDB to meet its recurrent costs in the project area by a combination of increased consumer charges and subsidies from GSL. This coincide with rapid inflation and severe budget constraints. 7.11 As a result GSL reduced the water supply and sanitation sector budget to more manageable proportions but WDB's recurring costs continued to rise with operating deficits reaching over Rs 200 million in 1983. A financial recovery plan was initiated in January, 1984 in order to contain and reduce this deficit. Preliminary figures indicate a 1984 deficit around Rs 120 million. WDB has relied heavily on foreign technical assistance and support services in the implementation of its major foreign aided projects with the objective of strengthening WDB's institutional capability. In general WDB has benefitted from training and technical assistance provided under this and other externally financed projects particularly in the areas of project appraisal, design and implementation. However the project has demonstrated the need to establish clearly defined design criteria, proper appraisal standards, appropriate technology and sound constructon management practices. - 56 - 7.12 WDB's manpower constraints were aggravated through the loss of key professional staff following civil disturbances in July, 1983 resulting in constraints in its execution and management capability. This, combined with a shift in emphasis from major construction activity to rehabilitation of existing facilities and operation/maintenance activities has meant that the senior management of WDB needs to spread itself much more thinly to address operation and maintenance, financial and commercial activities in addition to the management of capital investment programs. 7.13 Recognizing the need for further strengthening of WDB's capability in these areas of activity, a technical assistance program supported by USAID is being formulated. In this connection a macro-investment plan for WDB has recently been completed by consultants to provide alternative financial planning strategies to be adopted by GSL and WDB to balance the need for continued expansion and improvement of service facilities combined with financial soundness. Water Supply and Sewerage Component Designs 7.14 The water supply and sewerage component designs undertaken by con- sultants within the project provided the basis for the implementation of the IDA supported Second Sri Lanka Water Supply and Sewerage Project which is still on-going. This objective of the project was fully achieved. Conclusions and Lessons Learned 7.15 While it may be concluded that the project was broadly successful, the following conclusions and lessons may be drawn from the project. (1) Cost overruns and design changes in the project emphasize the importance of ade4uate detailed preparation and cost estimates before project appraisal. The need for socio- economic surveys to determine water demand patterns is demonstrated by the apparent lack of demand for the service provided in the Towns North area of Colombo and may be further illustrated when the consumer response ir Ambalangoda and Kalutara is known. (2) Project implementation has extended through 8 years consistent with the Bankwide sector profile demonstrating the overly ambitious schedule and disbursement profile adopted at appraisal. (3) While the adopted technology has proved generally consistent with the Colombo scenario, the design of bulk meters for the project proved unsuitable for Sri Lankan technology. As a result these meters could not be commissioned and vital system operational data cannot - 57 - be obtained, and reliable water production/supply statistics are not available. This has impacted on on-going waste detection studies. (4) The project demonstrated the need for greater selec- tivity in determining contractors' capability to under- take contracts. (5) WDB's administrative workload on the project was aggravated by splitting the work into a large number of small supply contracts. This resulted in delays which could otherwise have been avoided. (6) More attention to the size of civil works packages could have attracted wider international response which would have improved project implementation since the local contracting market was over-extended at that time. (7) The large number of supply contracts resulted in many interfaces with similar materials being obtained from several sources to differing standards. This created operation/maintenance problems not appreciated during project implementation. This is further illustrated in connection with the rehabilitation program of existing systems under current review by WDB. (8) The need for project coordination and planning was not fully appreciated by WDB at the outset resulting in delays due to lack of access facilities, land acquisition problems, delayed approvals for bridge crossings and related problems. - 58 - FIRST SRI LANKA WATER SUPPLY PROJECT ANNEX 1 PROJECT ELEMENTS Page 1 of 4 AT APPRAISAL ACTUAL Component/Work Item Location Size/Capacity Size/Capacity 1. AMBATALE PUMPS Purchase and installation Ambatale existing 3 - 3.5 Imgd 3 - 3.8 Imgd of 9 pumping units pumping stations 3 - 8.0 Imgd 3 - 9.131 Imgd 3 - 6.8 Imgd 3 - 6.8 Imgd 2. AMBATALE TRANSMISSION (a) Construction of short Ambatale to existing 20,30 and 32- 20 inch diameter link mains transmission mains inch diameter, 1860 ft. 32 in. total length diameter 500 ft. 3,000 ft. (b) Rehabilitation of Ambatale to Colombo 2 mains each 2 mains transmission mains 20 inch dia. 20 in. dia. total length total length 68,000 ft. 68,326 ft. 3. TOWNS NORTH (a) Construction of a Ambatale to Towns 28 and 24 in. 24,28,32,36 & 44 transmission and North via (proposed) dia., length inch dia. total trunk mains Church Hill Reservoir 13,000 ft. length of 31000 ft. (b) Construction of Church Hill 4 Img 4 Img distribution reservoir (c) Construction of Towns North 32-in.,length 32-in.,length distribution mains 1400 ft.; 24 1400 ft. 24-inch including meters inch length length 24000 ft, 24000 ft., 3-inch, 20-inch 3-in. 20-in, total length total length 58 miles 68 miles 4. TOWNS SOUTH (a) Rehabilitation of Moratuwa, Dehiwala 18 & 20-inch 18 & 20 inch dia. transmission mains & Kotte diameter total length total length 26,000 ft. 26,000 ft. (b) Construction of Dehivala South 3 to 10 in. 3 to 10 inch. distribution mains Zone total length total length 24000 ft. 27,000 ft. - 59 - FIRST SRI LANKA WATER SUPPLY PROJECT ANNEX 1 PROJECT ELEMENTS Page 2 of 4 AT APPRAISAL ACTUAL Component/Work Item Location Size/Capacity Size/Capacity (c) Extension of Moratuwa Moratuwa From existing Extended by 1 mg distribution reservoir 0.9 Img to 1.9 Img. (d) Construction of Kotte (Jubilee 1 1mg 1 1mg distribution reservoir Reservoir) and booster (e) Metering Program Towns South Installation 31,000 meters approximately 30,000 meters over a five-year period 5. COLOMBO MUNICIPALITY (a) Construction of Elie House 36-inch dia. 36 in. & 28 in. distribution Reservoir reservoir dia. mains of Walls Lane outlet & 28- total length inch diameter 2120 ft. main, length 1,250 ft. (b) Construction of Bluemendhal/ 18-inch dia. 18 inch main distribution mains Stace Road main, length total length 2000 ft. 2130 ft. (c) Construction of Stace/Ingram 10-inch dia. 10 inch dia. main distribution mains Road main, length length 1328 ft. 1300 ft. (d) Construction of Thimbirigasyaya 18-inch dia. 18 in. & 8 in. distribution mains Road main, length mains, length 2500 ft. 3400 ft. (e) Rehabilitation of Throughout Colombo Miscellaneous 10 to 30 in. dia. distribution mains Municipality mains from mains total 10 inch length of 40,700 ft. 73,032 ft. - 60 - FIRST SRI LANKA WATER SUPPLY PROJECT ANNEX 1 PROJECT ELEMENTS Page 3 of 4 AT APPRAISAL ACTUAL Component/Work Item Location size/Capacity Size/Capacity (f) Water Tower and Kirillapone An 0.2 Img An 0.21 Img water Booster Station Water Tower tower & an 0.792 0.8 Imgd Imgd Booster Booster Station Station (g) Distribution reservoirs Colombo Maligakanda Extension Extension to extension and renovation Reservoir to increase increase capacity capacity from from 8 Img to 8 Img to 11 Img 11 Iag (h) Metering Program Colombo Municipality Installation 36,000 meters of approxi- mately 34,000 meters over a 5-year period 6. KALUTARA A new water supply Intake at Kalu First stage First stage 5.6 system including a Ganga; treatment (1980) capa- Imgd. capacity river intake, treat- at Clyde; distri- city 5.3 Imgd. transmission ment stations, trans- bution at Kalutara (Second stage 9-20 in. dia. mission and distribution and adjacent 1990, increase length 24 miles facilities including communities capacity to distribution meters 7,0 Imgd.) 2-14 in.dia. length 92 miles 7. AMBALANCODA A new water supply system Intake and treatment Capacity 1.5 Capacity 2 Imgd including a river intake, plant at Gin Ganga, Imgd. (Second transmission treatment plant, pumping distribution at stage 1993, 14 in. dia. length stations, transmission Ambalangoda and increase 10.6 miles and distribution environs capacity to distribution facilities including 2.0 Imgd) 2.14 in. dia. meters length 17.5 miles - 61 - FIRST SRI LANKA WATER SUPPLY PROJECT ANNEX I PROJECT ELEMENTS Page 4 of 4 AT APPRAISAL ACTUAL Component/Work Item Location Size/Capacity Size/Capacity 8. SPARE PARTS & FqUIPMENT Spare parts and minor Existing works in equipment of foreign project area origin 9. TECNHNICAL ASSISTANCE & TRAINING (a) Engineering consulting Primarily in Sri Design of Design for water services Lanka sewerage and & sewerage works drainage works for WDB (b) Financial consulting In Sri Lanka Water and Water and services severage sewerage tariff tariff study study for WDB for WDB (c) Training In Sri Lanka WDB financial --- and engineering staff ,.. 62 - ANNEX 2 SRI LANKA CREDIT 709CE, 709-5CE AND 31CE FIRST SRI LANKA WATER SUPPLY PROJECT PROJECT COMPLETION REPORT COMPLETION DATES FOR MAJOR PROJECT COMPONENTS Project Components Appraisal Actual Ambatale Pumps September, 1978 December, 1980 Ambatale Transmission May, 1978 May, 1982 Towns North Pumps September, 1978 May, 1984 Towns North Transmission February, 1979 May, 1984 Towns North Distribution February, 1980 February, 1982 Towns South Distribution August, 1978 June, 1984 Towns South Transmission November, 1978 September, 1982 Colombo Municipality Distribution November, 1979 December, 1984 Kalutara Headworks December, 1980 December, 1984 Kalutara Transmission and Distribution June, 1980 June, 1985 Ambalangoda Headvorks December, 1978 December, 1984 Ambalangoda Transmission and Distribution December, 1978 December, 1984 - 63 - SRI LANKA ANNEX 3 CREDIT 709-CE, 709-5CE AND 31 CE Page I of 3 FIRST SRI LANKA #ATER SUPPLY PROJECT PROJECT COMPLETION REPORT ESTIMATED AND ACTUAL COST ITEM Appraisal Estimate Actual Costs' Increase/Decrease A. CIVIL IORKS Local Forgein Local Forgrin Local Forgein 92(2Rs9 C US$) (R) USS) (R ) s US$) Aabetele Pumps Purchase and Installation of Pumps and Power Supply Equipment 92.0 11.5 1500.0 16.0 171.0 4.5 792.0 11.5 1500.0 16.0 771.0 4.5 Aebetele Transmission System Short Link Mains 245.0 1328.0 1083.0 Ichabilitation of Existing Mains 4435.0 489.5 5712.0 1469.0 1277.0 979.5 4680.0 489.5 7040.0 1469.0 2360.0 979.5 Towns North Purchase and Installation of Pumps 100.0 669.0 48.0 569.0 48.0 Transmission and Trunk Mains 8106.0 164.4 41646.0 33540.0 69.4 Distribution System 14789.0 300.0 39072.0 24283.0 300.0 22995.0 464.4 81387.0 48.0 58392.0 416.4 Tons South Transmission Rehabilitation 405.0 151.8 2387.0 595.0 1982.0 443.0 Distribution Rehabilitation 357.0 132.2 2369.0 455.0 2012.0 322.0 Reservoirs and Connected pipe Mark 2170.0 62.4 10797.0 8627.0 (60.4) Distribution System 637.0 13.0 2809.0 2172.0 (13.0) Metering Program 3696.0 57.9 9069.0 5373.0 (57.0) 7265.0 417.3 27431.0 1050.0 20166.0 634.6 Colombo Municipality Distribution System Mains Construction 440.0 9.2 1722.0 1282.0 (0.7) Rains Rehabilitation 654.0 243.2 3901.0 979.0 3247.0 735.0 Reservoir and Booster Station 3356.0 96.4 12232.0 8976.0 (86.1) Metering Program 4543.0 71.3 14271.0 9728.0 (71.3) - - - -- - - - - - - - 8993.0 420.1 32126.0 979.0 23133.0 576.9 Kalutara River Intake 928.0 11.8 2810.0 18.0 1882.0 6.2 Treatment Plant and Pumping 4648.0 133.5 16297.0 82.0 11649.0 (51.5) Transmission and Reservoirs 10218.0 207.2 33238.0 35.0 23020.0 (172.2) Distribution 6162.0 124.9 24000.0 17838.0 (124.9) 21956.0 477.4 76345.0 135.0 54389.0 (342.4) Asbalangoda River Intake and Treatment 550.0 7.0 16848.0 20.0 16298.0 13.0 Transmission and Reservoirs 3078.0 62.4 8511.0 5433.0 (62.4) Distribution 1501.0 30.5 6666.0 5165.0 (30.5) 5129.0 99.9 32025.0 20.0 26896.0 (9.9) TOTAL CIVIL WORKS 71810.0 2380.1 257854.0 3717.0 186107.C 2189.6 ANNEI 3 - 64 "Page 2 of 3 ITEM Appraisal Estimate Actual Costs Increase/Decrease 8. E9UIPHENT AND MATERIALS SUPPLY Local Forgein Local Forgein Local Forgein R====X s ) ( US) Rs CUS$) Rs) (0$) Ambetele Pumps Purchase and Installation of Pumps 740.7 792.0 768.0 792.0 27.3 and Power Supply Equipment 0.0 740.7 0.0 0.0 782.0 27.3 Asbetele Transmission System Short Link Mains 161.0 803.0 642.0 Ichabilitation of Existing Mains 133.2 17.0 36.0 17.0 (97.2) 0.0 294.2 17.0 839.0 17.0 544.8 Towns North Purchase and Installation of Pumps 333.5 315.0 (18.5) Transmission and Trunk Mains 924.1 1516.0 591.9 Distribution System 4100.0 944.4 4381.0 1718.0 281.0 773.6 4100.0 2202.0 4381.0 3549.0 281.0 1347.0 Towns South Transmission Rehabilitation 34.5 11.0 12.0 11.0 (2.5) Distribution Rehabilitation 32.2 11.0 12.0 11.0 (20.2) Reservoirs and Connected pipe Mark 218.7 271.0 (52.3) Distribution System 50.0 69.0 210.0 352.0 160.0 283.0 Metering Program 209.3 513.0 303.7 50.0 563.7 232.0 1160.0 182.0 511.7 Colombo Municipality Distribution System Mains Construction 124.4 234.0 109.6 Mains Rehabilitation 57.5 11.0 12.0 11.0 (45.6) Reservoir and Booster Station 46.7 35.0 128.0 35.0 81.3 Metering Program 241.3 553.0 311.7 0.0 469.9 46.0 927.0 46.0 457.0 Kalutara River Intake 181.0 78.0 (103.0) Treatment Plant and Pumping 582.5 301.0 (281.5) Transmission and Reservoirs 926.2 2419.0 1492.8 Distribution 400.0 648.3 8489.0 1468.0 8089.0 819.7 400.0 2338.0 8489.0 4266.0 8089.0 1928.0 Asbalangoda River Intake and Treatment 270.0 668.0 398.0 Transmission and Reservoirs 351.8 804.0 452.2 Distribution 200.0 156.8 4188.0 655.0 3988.0 408.2 200.0 778.6 4188.0 2127.0 3988.0 1258.4 SPARL PARTS & APPLIANCES 1744.0 510.0 270.0 (1,744.0) (240.0) TOTAL EOUIPKENT t MATERIAL SUPPLY 6494.0 7897.1 17353.0 13138.0 11641.0 5834.2 - 65 - ANNEX 3 Page 3 of 3 ITEM Appraisal Estimate Actual Costs Increase/Decrease C. OTHER Local Forgein Local Forgein Local Forgain Z = ( Rs (US$) ( Rs) (US$ ) ( Rs) (US$ ) Technical Assistance & Training 3562.0 1479.3 1678.0 (3,562.0) 198.7 Engineering Services 6897.0 17000.0 10113.0 Land Acquisition 500.0 9657.0 9157.0 Total Other 10949.0 1479.3 26657.0 1678.0 15708.0 198.7 SUMMARY Total Civil Works 71747.0 2380.1 257854.0 ;,717.0 186107.0 1336.9 Total Equipment & Materials Supply 6494.0 7897.1 18135.0 13906.0 11641.0 6008.9 Total other 10949.0 1479.3 26657.0 1679.0 15708.0 198.7 Sub-Total 89190.0 11756.5 302646.0 19301.0 213456.0 7544.5 Physical Contingencies 14571.0 1106.9 (14,571.0) (1,106.9) Price Contingencies 15740.0 1087.4 (15,740.0) (1,087.4) FEECs 66016.0 (66,016.0) Custom Duty 22523.0 95000.0 72477.0 TOTAL PROJECT COST 196626.0 15590.1 329463.0 21139.0 132997.0 5708.9 1/ Physical contingencies, 7.5 to 202 of base cost, depending on nature of vork or ite and degree of completeness of engineering design. 21 Price contingencies for materials and equipment, 7 to 8% per annum; for civil works, 8 to 10% per annue. -66 - i4 l 4 .2, kI .ks- a 1 - - a-- -- oz or J ¥z 0: i s G:3 sna 0 l j i - - f fll*llf - . - . 3 lAt 1,l VA~R MUPLY AD DRAAGI OARD - PrO~ECT AIA C~m STAT120T 190- 1984 (in '000) Year ending 31 December 9 1981 lg8 1983 1986 Quantity sold in million litres 6,306 9,141 12,161 34,9 OPEATING JUEVNUE CuRtomer Dilling 33,590 35.117 61,020 61,431 118,185 PFes and other Revenu 580 88 Govt. Grant aginst revenue expenditure - 26,t09 92,665 10,387 TOTAL -PATING R-E- 33,598 ),312 67,70,9 1,4,184 28,57 ~PRATING EXPNSS Material* 6,111 7,928 9,061 5,803 5,346 Utilities 11,915 30,778 62,867 55,170 62,55 Depreciation 12,3964 16,112 21,227 26,716 27,018 Repairs and Naintenance 267 1,066 1,136 1,756 2,437 Personnel Coste - Permanent E4ployees 4,221 7,052 9,908 12,611 16,836 Cafual Employee 762 1~09g 1,992 2,880 4,108 stablimnt EspensX~ 1,469 l,m 2,00 8,716 11,867 Rent*, Rates, other fees 70 79 233 659 1,071 Pinancial ch~arge 3 22& Head Office overhead apportional - 1,696 2,883 2,955 4,086 37,209 66,890 91,810 117,288 117,367 Lese Exponse transferred to contruction work in progresa 1,00 2,119 1,4~ 1,978 6,937 TOTAL OPRATING XPENSES 36,179 62,771 87,370 115,310 110,430 Not operating rno~. / (Lese) (2,581) (27,659) (19,661) 18,874 18,162 Other income 272 886 222 232 237 2,309 26,573 19,439 19,106 18,379 Less Interest 19,206 18,379 <et incame / (Ls) (2,309) (26,573) (19,439> Nil Nil Proit - Los9 I Accumulated Dalene. B/F (149) (18.791) (38,933) (53,650) Prior year Adjustments 2,160 7,931 (703) (14,717) 6;537 Profit - Loss Aca,mmuated Dalance C/V (149) (18,791) (38,933) (,650) (49,113) \verage Net Fixed Assets in service 254,502 i11,4%R 353,987, 356,433 Ite f Rettrni 13% 5.09% 0 轟．，』＿:.,＿。，，、＿,.，、＿_,,,，一、＿_＿二、以．：二， /’封飛 《個勻•”馴颼》勺戶．一編絲•名寫閱•寫讓綢鬧闖 個買圈臘寫開1響抽口個開甲名他曲廳螂總寫名彎調個啊卹1名奮調 RATIO" WATER StWPLY AND DRAINAGE BOARD - PROJECT AREA BALANCE SHWr 1979 - 1%4 (an. tOOO) Year Ending 31 December 1979 1900 19el 2982 19" 1984 ASSETS s n.XHD ASSETS s Fixed Assets at vritten down value 74.7s2 221,760 297.245 339,672 368*301 344,566 Construction work In progress ate. 83050 310,147 481,ogg "1,377 M,253 1152815n Treasury deposit 1,90 TOTAL NET FIXED ASSETS 20,071 531,907 ?68,343 U001,049 160095% 1.873,088 CURRENT ASSETS Stocks 2.s%6 .2,222 28,566 18,287 28,2" 25."6 Debtors 28,117 " 0460 22,"? 3,520 24,473 167,357 Advances, Deposits . Pro-psyments a*-. 11,243 21,852 16M3 38,365 190,472 142,006 cash 3.926 286 5*4 0 28,351 7075 15,288 1 Treasury 10,388 0% TOTAL CURRENT ASSETS 45*512 57,820 63,6a6 88,51) a4o,5i5 362,005 %0 TOTAL ASSETS 205,583 589,727 831.969 *1.089,562 t,45i,o6q 2,234,093 WITY AND LIABILITIES s Goft. contribution - EQuivaleat to Assets taken over 58,685 57.685 57,685 57,685 57,685 57.685 Gort. contribution and Revenue Grant 03,950 343,930 575.580 766,490 767,859 1,236*359 Accumulated Surplus / (Deficit) 116"1 (149) (28,7911) (38,933) (",650) (49,113) Read Office Current A/C (82,242) (33,077) (76,842) (220,908) 90,317 150,694 TOTAL HQUITr 122,054 368,409 "7,632 674,334 $62,211 1.2",625 Long term liabilities - Foreign Loans - Received 82.348 201'"3 249,374 321,692 464.976 656,775 Receivable 6,242 2,485 2,485 Local loans 9,470 9,400 9.470 Customer Advances for construction 13,000 32sO37 37.67o 59,351 82,348 208*235 264,658 365.684. 522,115 725,596 Total Long-tem Debit and Equity 2W*,4oD2 576,6" 802,490 1,040,018 1,374,326 2,021,221 Current Liabilities 1,181 13,083 29,479 4995V* 76,743 212.872 - --- 0 Total Mquity and Liabilities 205,593 589,727 831,969 1,089,562 1.451.069 2,234,093 t) 0 Vebit / Vqtttty Ratio 40)60 35A5 WiA 34/66 15/65 32/68 NA2XU WA ØR WML7 åa Ia~EA4 ~0I U9A|E9 0P a00RlBB AND AML20A2ZW 01PDNNDS <mm ggisgm 1976 1977 198 1979 1980 1981 1982 1983 1984 A. æu001 OP UlND Iatera Gmeratica - Pofit/(Loøq) - - - (7) (19) (68) <46) - - Prior Year adustoeste - - - - (13) ( 4) (02) (14) 41) A#t: Dp~eoatin - 1 5 9 18 21 32 43 75 - ¶ 5 2 (14) (51) (16) 29 74 Gover~uent costibuton and PAveue Gr~nt 22. 3 49 91- 477 372 469 701 588 ro~S10 G~ta - - 2 14 47 64 20 49 133 Ooveet otributLan - A~oetSmakOve - - 112 (2) - - 16 60 - Lo~alLoeas (1) - - - - - 9 - 6 1orejgaL~ane - - 2 80 126 418 115 147 206 21 3 165 183 650 854 689 957 933 20AL YUND AVAM 21 4 170 185 636 80ø 673 906 1007 3. AMN.0AL2im 0? »UND8 ddtiont to ex4 Aata - ¶ 93 34 180 111 23 166 160 Zaorlsa O støtaft .I.P. 11 (14) 10 105 410 614 370 416 938 Trea~y apote - - - - - - - 46 - 11 (13) 103 139.. 590 '85 606 68 1098 Znorease/(Deerease) in Wor,king Capita 10 17 67 46 46 18 67 358 (91) TOTAL P1DS UE 21 4 170 185 636 803 673 986 100§ orkin Capital at - eg~nna of Year 4 14 31 98 144 190 208 275 633 ihd at Year 14 31 98 144 190 20 275 633 542 OPt ! OP 000038 AYD. A38U0f1 01.Ip ____ ____ ____ ___( <l. aMili> 1980 1981 1982 1983 1984 A. 10UR10 0P PUND8 lat*mal omnerat - Profit/(Loss) (2) (27) <19) . Prior Year AJueata 2 8 (1) <14) ,Dproatlon 12 14 21 26 27 201A1 0P INTEA 803R018 12 ( 5> 1 12 32 Gov mmnt gantribution aftl venu frant 210 232 191 1 368 Got.ontrIbUtiM-Pix~ A890t8 ?&ken Over (1) . . ~oal &oas - . 9 cant~er A*vances for Constration - 13 19 6 21 Road Office 0~rrent Ao~ut 37; (44) (34) 201. 61 Prin oana 126 44 72 141 192 TtAL P M AL 8000 8 372 245 257 349 642 20tAL PUlD AYANLAN 384 240 258 361 674 5. PLZCATION OP PUm~s Additlons to Pixed sumeta 159 80 74 55 3 Trea~nr Depoita (2) - - - Il@~ea in C tructic Work in Pogrpa . 227 171 180 181 666 pUNDS E0D P0R PIMED ASBTS 384 251 254 236 (8s Increna / (Deorna in workng Capital - (11) 4 125 (15) TOTAL PUNDS USED 384 240 258 361 674 Working Capital at eginning of Yer 45 45 34 38 163 &ad of Imr 45 34 38 163 148 - 72 - ANNEX 7 Page 1 of 7 IDA COMMENTS ON PROJECT COMPLETION REPORT PREPARED BY WDB A. Background and Context 1. The Sri Lanka Water Supply Project (Cr. 709-CE) was the Bank Group's first involvement in the sector in Sri Lanka beginning in 1977. The project was an effort to respond to the urgent water supply needs of the Greater Colombo area, as identified by the 1972 UNDP/WHO Master Plan Studies. The project also sought to help build and strengthen the institutional, manage- ment, financial and technical capabilities of WDB, a newly created executing agency (created in 1975) in order to strengthen its long term sector develop- ment efforts. 2, This project was followed by the second Sri Lanka Water Supply and Sewerage Project (Cr. 1041-CE) in late 1980 to complement sector development efforts initiated under the first project. Problems experienced under the first project in the areas of technical, operational, financial and institu- tional aspects of WDB's operations and in the development of the sector in general as indicated in this PCR, continued to be predominant and in instan- ces exacerbated during the implementation of the second project. 3. In view of continued institutional and sector development problems, a comprehensive study of the sector was initiated by the Bank in 1982 and completed in 1984. It identified the underlying causes of the problems in the sector, indicated priority areas of improvements and provided a broad strategy for long term sector developments. The findings of this study were published in the Bank's Sri Lanka Water Supply and Sanitation Sector Study Report No. 4190-CE, June 1984. 4. A significant finding of this Study was that the financial and institutional health of the water supply and sanitation sector was critically dependent on that of the local government and other government agencies in Sri Lanka. The local governments and agencies are major customers of water from WDB, and bills for water consumption remain largely unpaid to WDB due to their poor and deteriorating financial position, thereby adversely affecting the financial position of WDB. Institutionally WDB also continues to be burdened with the responsibility for operating and maintaining local dis- tribution systems, in particular rural water supply systems, due to the lack of financial and institutional capacity of the local governments. This additional operations and maintenance responsibility, (which would otherwise be the responsibility of local governments) without the commensurate revenue resources, continues to place financial burden on WDB and stretch its institutional capacity. In order to assist the Government of Sri Lanka in developing and implementing a long-term strategy to improve the financial and institutional capacity of local governments, the Bank Group, in close col- laboration with the Government, completed an Urban Sector Report (No. 4640-CE) in June 1984. A consistent set of sector development objectives have been emerging through the Water Supply and Sanitation Sector Study (para. 6) and the Urban Sector Report. These include the need to (a) emphasize - 73 - ANNEX 7 Page 2 of 7 rehabilitation of existing investments, (b) improve operations and main- tenance of infrastructures, (c) pay particular attention to adequate resource mobilization for proper operation and maintenance and (d) strengthen management capacity of sector agencies. To help implement these objectives, the Government has requested Bank support for a Municipal Management and Resource Mob;lization Project and a Water Supply and Sanitation Rehabilita- tion Project. 5. The first Sri Lanka Water Supply Project needs to be viewed as the first step in an evolutionary sector development process. It is important to recognize that the WDB's performance under the first project is a reflection of the inherent nature of the institutional development process, in which success cannot be achieved through a single project, but rather through a long term perspective and commitment. The issues highlighted below clearly demonstrate that the lessons learned from the first water supply project are not unique or limited to the project itself; but rather reflect the intrinsic difficulties in Long term sector development efforts. It is in this context that the attached PCR, the problems and issues encountered in the first water supply project, need to be considered. B. Project Design, Implementation and Costs 6, The project was launched with a relatively new implementation agency (WDB), which embarked upon an investment program on a scale larger than it had experienced before. One of the early problems encountered by the WDB was the need to change the design of one of the major project components due to technical reasons. In addition, problems of land acquisition, delayed the tendering process and poor contract administration caused substantial initial delays in physical project implementation, which continued satisfactorily, however, once these difficulties were overcome (paras 3.02-3.03 of PCR). 7, At appraisal the project was expected to be implemented over 5 years (1977 - 1982). Due to the above implementation delays, approximately 802 of the project components were completed by mid-1984 and the remaining 20% is expected to be completed by mid-1985, bringing total implementation period to about 7 1/2 years. 8. As a result of implementation delays, design changes and rapidly increasing inflation (average of about 15% - 202) during project implementa- tion period, total project cost to completion increased from appraisal estimate of Rs 310 million to about Rs 725 million. However, due to rapid devaluation of the Sri Lankan rupee against the US$ (approximately 260% devaluation during the implementation period), total project costs to comple- tion of equivalent US$35.10 million would be less than the appraisal estimate of US$42.5 million. The total credit of US$18.95 million was fully disbursed by June 1984 (paras 3.15-3.17 of PCR). - 74 - ANNEX 7 Page 3 of 7 9. Following the full commissioning of most of the major project com- ponents by mid 1984, WDB began to experience difficulty in selling all of the water produced due to less than anticipated demand. This reduced demand is attributed by WDB to (a) consumers traditionally having access to free well water on their premises, (b) reluctance on part of consumers to bear initial costs of connection, and (c) long delays in commissioning which forced consumers to develop their own water supply from groundwater sources. Whil all or some of the above reasons may be correct, it is important to recognize that (a) the design parameters were based on expected demand which was less than actual demand, (b) the absence of control over free ground water exploitation by consumers, decreased the prospects for selling potable water, and (c) proper design and timely implementation are essential to the marketing success and consequently, financial viability of the project (paras 4.02-4.04 of PCR). 10. Although, the project served to introduce and gradually strengthen WDB's ability to design, implement and manage large scale water supply investments and ultimately market its product, the project provides the following key lessons: (a) for technically complex project components, more attention needs to be given to detailed design during project prepara- tion to avoid implementation delays and cost overruns; . (b) implementation timetable should be more realistic, especially under a start up situation with a new agency; (c) more effort will need to be given in strengthening "software" aspects of project management (project planning/coordination, tendering, contract management, marketing considerations, etc), especially for newly established agencies - technical capabilities of these agencies by themselves will not guarantee success in achieving project objectives; (W) potential water demand must be more accurately and realistically established in order to select appropriate design parameters; (e) appropriate incentive (house connection loans, etc) and control (control of groundwater use) mechanisms should be incor- porated in project design to aid water sales. - 75 - ANNEX 7 Page 2 of 7 C. Operating Performance 11. The project envisioned a number of key operating improvements includ- ing, but not limited to, (a) introduction of a comprehensive metering and meter repair program, (b) improved staffing in the areas of project manage- ment and finance, and (c) improved accounting and financial management sys- tems. 12. Although the underlying objectives in improving operating performance were to assist the overall institutional strengthening process, these attempts failed largely due to the following reasons. The government and senior WDB management perceived WDB's role largely as a "construction" agency rather than a sector development and management agency. This perception failed to recognize the importance, or even the relevance, of the need for operational improvements in WDB. Consequently, little priority was attached to the necessary actions required to implement operational improvements and WDB's institutional resources were largely directed towards construction activities. Furthermore, during project implementation there was little or no political support for such ",ensitive" activities as metering and consumer billing and collection, particularly in a society where water has been tradi- tionally considered a "free good". It was only in late 1983, as a part of the follow-on second Water Supply project and after 6 years from commencement of the first project, that the government and WDB seriously began implement- ing cnnsumer metering and billing and collection programs (paras 4.05 of PCR). 13. There were two major effects of the above problems. First, as WDB's scope of responsibility rapidly increased (total assets of Ra 83 million in 1977 increased to Rs 3.6 billion in 1983) during the project period, the lack of corresponding adequate and effective operating, management, and financial control systems equally rapidly deteriorated its institutional and financial health. WDB found itself ill-prepared to take on the management and finan- cial responsibility to operate and maintain the assets it so enthusiastically created. Second, the occupation with its new construction activities, diverted attention away from the less glamourous tasks of routine and preven- tive operations and maintenance. Eventually, beginning January 1984, when WDB started a crash program of consumer metering and billing/collection for water charges, it found itself institutionally and procedurally unable to cope effectively with this increased volume of activity. Consequently, in a large number of cases the meter installations were sub-standard; these quickly became defective. Inaccurate bills were sent out. Both the above factors raised queries and objections from customers and further aggrevated cash flow problems of WDB (para 4.05 of PCR). 14. The following key lessons can be learned from the above experience. - 76 - ANNEX 7 Page 5 of 7 (a) any attempt to improve routine operations must be accompanied by a clear institutional recognition of its importance by the implementing agency; (b) operational improvement programs need to be explicitly defined by a detailed and timebound action program .gainst which progress can be regularly measured; (c) rapid increase in scale of routine activities must be supported by commensurate manpower resources and effective systems and procedures, absence of which would prevent the achievement of intended objectives. D. Financial Performance 15. Although WDB complied with financial covenants of a largely proce- dural nature (establishing adequate records, regular audits, project account- ing/costing systems, purchasing and inventory systems, etc.), it has been in violation of the two substantive financial covenants. It was unable to achieve the covenanted financial rate of return of 5% in 1978, 6% during 1979-1981 and 7% from 1982 and thereafter. Due to operating deficits during 1978-1982, WDB had negative rates of return during this period. Although unaudited 1983 data suggests that in that year WDB had a positive rate of return of about 2.3% (on an accrual basis), the underlying data is ques- tionable and the above rate of return is suspect, particularly in view of the fact that about 64% of its revenues are accounted for by central government subsidies (paras 5.02-5.04 of PCR). 16. WD8's poor financial performance during the first project continued through the initial years of the second project. The basic causes of this are (a) inadequate tariffs and inability to revise tariffs when needed and (b) absence of an effective billing and collection program. As a result of rapidly increasing operating costs due to increase in scale of UDB's activities, by 1983 WDB's financial position deteriorated to a point where its cash collection from consumers covered only about 10% of its cash operat- ing expenses; the shortfall being covered by central government subsidies. 17. One of the more serious problems arising out of the above cash flow shortage has been that often WDB had to use capital funds, intended for construction, to meet its operating expenses. Although it is difficult to exactly determine how much capital funds were used for this purpose at any given point in time, it is likely that by 1983, WDB had to utilize about Rs 40-50 million annually (about 20% of its operating expenses) of capital funds to meet operating shortfalls. 18. One of the key objectives of the first project was to develop and strengthen the financial management function of WDB. In support of this objective, the position of the senior financial manager was to be "elevated". - 77 - ANNEX 7 Page 6 of 7 WDB, traditionally an engineering organization, has and continues to find difficulty in establishing the necessary credibility of its finance staff within the overall organization. Although, about 7 years from the initiation of the first project, WDB now has a Deputy General Manager of Finance, the impact of this position on the overall decision making process is still marginal (para 5.02 (iv) of PCR). 19. The financial objectives of the first project remain valid, although the exact magnitude of targeted rates of return may have been ambitious %ithin the original timeframe and in parallel to developing a new agen . However, it is important to recognize that (a) achievement of financial performance targets is closely linked with the broader institutional and operational development process and therefore the time frame for achieving their targets will need to be more realistic, and (b) in addition to detailed engineering design, project design should include detailed action programs including financial performance targets and these actions should be closely monitored. E. Institutional Performance 20. In order to ensure effective and timely project design and implemen- tation, the project included creation of a separate "Project Area" unit within WD3. In principle this concept was justified on the basis that WDB needed to exercise a concerted effort to implement successfully a substan- tially larger investment program than it had undertaken before. However, the special emphasis on WDB's activities in the "Project Area" inadvertently created certain institutional imbalances on the overall program. The more qualified and capable staff became associated with the "Project" and improved systems and procedures were applied largely to "Project" related activities. These factors contributed to less attention to "Non-Project " (a term created by WDB to emphasize the difference) operations of WDB, resulting in even weaker management and operations in areas other than Greater Colombo (para 6.05 of PCR). 21. The impact of this distinction between "Ptoject" and "Non-Project" operations of WDB on its overall performance has been quite marked. Institu- tionally, financially and operationally WDB's operations outside the scope of the Bank supported project remained weak and performed even poorer, thus defeating the broad objective of institutional development of WDB as a total organization. This phenomenon is gradually being addressed through the follow-on second project, and more attention is now being paid to overall operations and finances. Thus, it is important to recognize that: - 78 - ANNEX 7 Page 7 of 7 institutional development efforts should be targetted to the institution as a whole, rather than to a specific sub-area of its functions. F. Economic Analysis 22. At appraisal, the economic rate of return was estimated to be between 7% and .7%. However, given that (a) parts of the project are yet to be commissioned and (b) more importantly, experience indicates that rate of connections has been less than that anticipated at appraisal and yet to be determined, it is not possible at this stage to determine the actual economic rate of return. However, under the assumptions that (a) effective demand for water from systems to be commissioned will follow the same pattern as systems already commissioned and (b) eftective demand will gradually increase over time, thereby more fully utilizing installed capacity, an estimated economic rate of return of 2%, using revenues as surrogate of benefits, can be expected. Due to non-quantifiable factors such as health benefits, the actual rate of return may be higher. G. Conclusions 23. The problems experienced in, and the lessons learned from, the first project have positively contributed to formulation of a long term sector development strategy. The follow-on second project is also building on these experiences. The first project provided the initial opportunity to begin to understand the issues and constraints in long term sector development and served as a vehicle for policy dialogue with the government. The repeater project has been designed to implement many key policy reforms developed through this first project. These factors are perhaps more important than whether specific project related objectives were achieved during the implementation period. 24. WDB has taken several positive steps recently to address and rectify the problems experienced in the first project. Beginning January 1984, WDB commenced a Financial Recovery Program which included (a) increase in water tariffs for both "Project" and "Non Project" areas, (b) improved billing, collection and disconnection program, (c) accelerated consumer metering and (d) improved operations and maintenance functions. In February 1985, on the basis of the broad recommendations of the Sector Study (see Para 6), WDB adopted a Macro Investment Plan for the period 1985-1990, clearly indicating the long-term strategy, investment priorities and financial and operational policies it intends to follow. Furthermore, a comprehensive 5 year Technical Assistance project financed by USAID commenced in April 1985. This project would strengthen the operational, financial and management practices hy WDB. It is evident that many of the problems encountered in the first project are now receiving careful attention and these recent initiatives will significantly contribute towards the long-term institutional and sector development efforts. 80,00, The boundares shown on this map do not 8 82 nply endc-sement or acceptance by the 10 World ank and ts afftltates. INDIA --x Negombo )Trineomalee P-uttalm Kurunegola R ak a Kandy Kandana \ i Konua'h COLOM Potuvi ndalata M aho ~ eroject area Peliyagada ama 0G) HO: Hombontoto CHRC y RESERVOIR ~8 ' amatt * y AMBATALV PUMPING STATION- - ~8 G t18030' CO Kolonnawa ( wa4 KoteGolkissa Dehiwala SRI LANKA Mount Lovinia -- ,ý, tti iya ABUGA44 WATER SUPPLY PROJECT Expansion or Mortuwa renovation New under Existing under project project Kehelwaxtta Mains ao a Headworks 1 treatment plants Pndr0 Pumping stations .. Reservoirs W water towers Wodduwa Woddu t\Improved undre New under Waskodu Existing unde project project Water supply areas alutt\ -- li-|(- | Water supply areas alutao \ 4y Badda \ Kalutaro ------------ Township boundaries ---UNDP boundaries Paiyagata Maggona 6*30 6*30'- e eruwa aAlutgom a Dharga Twn AtUtgama. I:~~ ni Oce on salapitiya Ambaangod 0 5 10 15 20 25 KILOMETERS 0 S 10 1 MILES GALLE 8000. 80*30*