Sri Lanka - Water Supply Project

FILE COPY Report No 1424b-CE Sri Lanka: Appraisal of the Water Supply Project April 18, 1977 South Asia Projects Department Energy and Water Supply Division FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and mav be used bv recipients only in the perfomiance of their otficial duties Its contents rnaE not otherwise be disclosed without World Bank authorization  CURRENCY EQUIVALENTS On May 24, 1976, the Sri Lanka Rupee was officially linked to to a basket of currencies with the initial parity rate based on the Rupee/Pound rate at that date. Both the composition of the basket and the weights assigned to the currencies in it were revised on March 12, 1977. The current Rupee/US Dollar rate has been used throughout the report, except where stated to the contrary: I/ Currency Unit = Sri Lanka Rupee (Rs) US$1 = Rs 7.28 US$ 1 million Rs 7,280,000 Rs 1 US$0.137 Rs 1 million = US$137,363 MEASURES AND EQUIVALENTS Ig = Imperial gallon (1 Ig = 1.2 US gallon = 4.546 liters) Img = Million Imperial gallons (1 Img = 4,546 cubic meters) Imgd = Million Imperial gallons per day (1 Imgd = 52.62 liters per second) Igcd = 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 centimeters) mile = statute mile (1 mile = 1,609.34 meters, approxi- matel! 1.6 kilometers) acre = acre (1 acre = 4,046 m ; or 2.47 acres = I hectare) sq. mile = square mile (1 sq. mile 259 hectares) 1/ Sri Lanka is effectively operating a two-tier exchange rate system, originally introduced in 1968 after the devaluation of the rupee in 1967. An official exchange rate is prescribed by the Central Bank. In addition, most payments for foreign exchange include a surcharge to purchase Foreign Exchange Entitlement Certificates (FEECs) which raises the price of foreign exchange to 65% above the official rate. FEECs may be considered equivalent to a 65% ad valorem tax on imports. FEECs are not applied to imports of foodgrains, fertilizers and a number of smaller import items.  FOR OFFICIAL USE ONLY ABBREVIATIONS AND ACRONYMS CIF = Cost Insurance and Freight FEEC = Foreign Exchange Entitlement Certificate MC = Municipal Council NIM = National Institute of Management, 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 GLOSSARY Ganga = major river FISCAL YEAR January 1 to December 31 sThb document has a retricted distribution and may be used by recipients only in the perfofmance of their offcial duties. Its contents may not othefwise be discbcd without World Bank authorization.   APPRAISAL OF THE WATER SUPPLY PROJECT SRI LANKA ADDENDUM 1. During preparation of the appraisal report, discussions between the Association, the Canadian International Development Agency (CIDA) and the Government of Sri Lanka were taking place regarding a possible CIDA contribution to the project of five million Canadian Dollars. Although this arrangement appeared to be agreed in principle by concerned parties, formal agreement had not been reached at the time of completing the appraisal report. Such an arrangement is therefore not reflected in the report. The CIDA credit of Can$5.0 million has now been agreed on the same terms and conditions as the IDA credit, and would be administered by IDA; both credits would be subject to the same procurement pro- cedures. At current exchange rates 1/ the Canadian contribution would be approximately equivalent to US$4.8 million, and the IDA tredit would be reduced from US$14.0 million to US$9.2 million. Both credits will be disbursed together, in proportion to the tespective credit amounts. 2. Corresponding revisions to the financing plan (paragraph 6.26 of the appraisal report) and to the schedule of disbursements (Annex 9 of the appraisal report) are attached. 1/ The rate prevailing on April 1, 1977, US$1.0 = Can$1.0523   ADDENDUM ATTACHMENT Revised Financing Plan APPRAISAL OF THE WATER SUPPLY PROJECT SRI LANKA Water Supply and Drainage Board Period of IDA Project - 1977 - 1981 Requirements Rs Thousands US$ Thousands % Proposed project (including taxes and FEECs) 309,603 42,528 52 Other projects (including taxes and FEECs) 268,493 36,881 46 Working capital increase 13,490 1,853 2 Total requirements 591,586 81,262 100 Sour ces Internal cash generation 86,345 11,860 15 Less: Debt service 3.765 517 1 Net internal cash generation 82,580 11,343 14 Government equity and grants-/ 3]8,009 43,683 54 Borrowings: IDA Credit 66,976 9,200 11 IDA - Administered Credit 34,944 4,800 6 Government'/ 89,077 12,236 15 Total borrowings 190,997 26,236 32 Total sources 591,586 81,262 100 The proposed IDA Credit of US$9.2 million equivalent, reduced from US$14 million, would prov:ided 11% of the total financing required during the project period and the proposed IDA - Administered Credit of US$4.8 million equivalent would provide 6%; Government would provide 54% as equity and grants and 15% as loans; WDB would finance 14% of the total requirements from internal cash generation. a/ Government policy is to make loans for financing of distribution systems and make grants for headworks' capital investment.  ADDENDUM ATTACHMENT Revised Annex 9 APPRAISAL OF THE WATER SUPPLY PROJECT SRI LANKA Estimated Schedule of Disbursements Bank Fiscal Year Disbursements During Quarter Cumulative Disbursements (US$ '000 Equivalent) fif 000 -qii1xv7Pnt-' and Quarter IDA Credit IDA Administered IDA Credit IDA Administered Credit Credit 1977/78 September 30, 1977 0 0 0 0 December 31, 1977 30 20 30 20 March 31, 1978 850 450 880 470 June 30, 1978 1,300 700 2,180 1,170 1978/79 September 30, 1978 1,630 870 3,810 2,040 December 31, 1978 2,000 1,000 5,810 3,040 March 31, 1979 650 350 6,460 3,390 June 30, 1979 800 400 7,260 3,790 1979/80 September 30, 1979 650 350 7,910 4,140 December 31, 1979 650 350 8,560 4,490 March 31, 1980 60 40 8,620 4,530 June 30, 1980 60 40 8,680 4,570 1980/81 September 30, 1980 150 50 8,830 4,620 December 31, 1980 150 50 8,980 4,670 March 31, 1981 60 40 9,040 4,710 June 30, 1981 60 40 9,100 4,750 1981/82 September 30, 1981 0 0 9,100 4,750 December 31, 1981 0 0 9,100 4,750 March 31, 1982 100 50 9,200 4,800 April 1977.  APPRAISAL OF THE WATER SUPPLY PROJECT SRI LANKA TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ........ . . . ............................ . i - ii I. INTRODUCTION ................... .................... II. WATER SUPPLY AND SEWERAGE SECTOR ................... 2 A. Water Resources and Population ................ 2 B. Water Supply and Sewerage ................... .. 2 Sector Organization ..... .................... 2 Sector Investment Programs and Constraints .. 3 III. THE PROJECT AREA ...... .............................. 3 A. Background .................................... 3 B. Existing Water Supply Facilities ....* ......... 4 C. Organization of Operating Institutions .... .... 5 IV. THE PROJECT ....... ................ 6 A. Scope and Objectives ...... .................... 6 B. Project Description ...... .............. 6 C. Cost Estimates ....... ......................... 8 Proposed Amount of IDA Credit and Project Financing ................................ 10 D. Implementation ....... ......................... 10 The Executing Agency .............. o......... 10 The Project Schedule ..... ................... 10 Procurement ....... .......................... 10 Land Acquisition and Way Leaves ............. 11 E. Disbursements ................................. 11 F. Environmental and Health Impact .. ............ 12 This report was prepared by Peter H. Ware (Sanitary Engineer) and John M. Vance (Senior Financial Analyst).  -2- Page No. V. THE PROJECT ENTITY. ........................ 12 A. Establishment ....................................12 B. Organization and Management ................... 13 C. Operation and Maintenance Responsibilities .. 14 D. Accounting . 15 E Audit .. 16 F. Local Authorities. 17 Colombo Municipality .......................... 17 The Five Towns South . .17 VI. FINANCE .18 A. Background . .18 B. Past Operation and Present Financial Position . .18 C. Billing and Collection . .19 D. Tariffs . .20 Background . .20 Bulk Supply . .20 Retail Supply . .21 Tariff Study . .21 Tariff Covenant WDB . .22 Local Authorities . .23 Retail Tariff Estimates . .23 Subsidy for Poorer Group of Consumers . .24 E. Financing Plan . .24 F. Future Finances ................... 26 Debt Limitation Covenant . .27 Performance Indicators . .27 VII. JUSTIFICATION ................................ 27 VIII. AGREEMENTS REACHED AND RECOMMENDATION .30 ANNEXES 1. The Water Supply and Sewerage Sector 2. Description of the Existing Water Supply Arrangements 3. Description of the Project (Appendix 1) Project Description (Appendix 2) Local Authorities in Project Area 4. Sewerage - Background and Future Development 5. Projected Water Demand, Production and Population Growth 6. Detailed Cost Esimates 7. Construction Schedule 8. WDB Procurement Procedures A. Procurement of Goods B. Civil Engineering Contracts  - 3 - 9. Estimated Schedule of Disbursements 10. WDB Organization Chart 11. WDB Income Statements 1975-1983 (Total Operations) 12. WDB Balance Sheet 1975-1983 (Total Operations) 13. WDB Cash Flow Projections 1977-1983 (Total Operations) 14. WDB Income Statements 1977-1983 (Project Area) 15. Notes and Assumptions for Financial Projections 16. Performance Indicators, 1976-1983 17. Economic Analysis 18. Industry and Tourism MAP Sri Lanka Water Supply Project - IBRD 12531   APPRAISAL OF THE WATER SUPPLY PROJECT SRI LANKA SUMMARY AND CONCLUSIONS i. Water supply in Colombo, capital city of Sri Lanka, and five adjacent towns (Towns South) is inadequate for the community's requirements. Supply is intermittent, leakage from defective mains is high and water quality is questionable. In five towns adjacent to, and north of Colombo (Towns North) and in the towns of Ambalangoda and Kalutara there are no piped water supplies at all. These areas rely primarily on shallow wells which yield inadequate quantities of poor quality water. Water borne diseases including typhoid, infectious hepatitis, dysentery and cholera are evident. ii. To alleviate these deplorable conditions a project is proposed for IDA financing, the first Bank Group assistance to Sri Lanka in this sector. The project represents part of the first stage of works recommended under a Master Plan Report for the southwest coastal area of Sri Lanka, prepared by consultants employed by the World Health Organization (WHO) as executing agency for the United Nations Development Program (UNDP). The project would be implemented in a five-year period, 1977 through 1981; it would improve the reliability and quality of water supply to 1.2 million people and provide water supplies to 0.4 million people who at present rely on shallow wells. iii. Proposed works to improve existing water supply systems serving Colombo and Towns South include increasing the capacity of existing pumping facilities at Ambatale and improving transmission and distribution systems. The Ambatale works will also provide water to Towns North via new transmis- sion and distribution facilities. These works will increase the supply from about 54.5 Imgd available now to about 74.5 Imgd; they will improve water pressures and permit an uninterrupted supply to present consumers and to many new consumers -- some 60% of wnom will receive water from standpipes. iv. Two separate elements of the project provide new water systems for the towns of Ambalangoda, Kalutara and adjacent communities. The works, (which comprise river intakes, pumps, water treatment plants, transmission mains and distribution systems) will provide water to 160,000 people in 1981, as well as to commercial, industrial, tourist and institutional establish- ments. Consumer metering throughout the project area is proposed as a means of preventing excessive waste of water. v. A separate component of the project would provide the first step toward improving urban sanitation by inclusion of technical assistance for final design of sewerage facilities to improve the Colombo system and provide sewage collection in selected areas.  vi. The project would be executed by the National Water Supply and Drainage Board (WDB), a comparatively new agency under the Ministry of Local Government. WDB would also assume the role of a bulk water supplier to Colombo and Towns South under which it would operate Ambatale works and two sources presently controlled by Colombo Municipality; these local authorities would continue to operate distribution facilities. WDB would operate the whole of the water system for Towns North, Ambalangoda and Kalutara. vii. The total cost of the project which IDA would help finance is estimated at US$42.5 million including FEECs (US$9.0 million), a foreign exchange premium, and customs duty (US$3.1 million). The estimated project cost, excluding FEECs and customs duty is US$30.4 million, of which US$14.0 million is in foreign exchange and is the proposed IDA credit. viii. The proposed credit of US$14 million equivalent would be passed on to WDB as a Government loan at an annual interest rate of 9% and a term of 24 years, including a five-year grace period. The credit would cover all of the foreign exchange costs of the project and would provide 17% of WDB's total requirement of funds during the project period. ix. In accordance with IDA guidelines, procurement would be under international competitive bidding procedures with the exception of contracts under US$100,000 and totalling not more than US$0.5 million (for which the complex procedures of international bidding would not be justified). Domestic preference of 15% or the applicable customs duty (whichever is lower) would be granted for equipment, and 7 1/2% for civil works. x. WDB's bulk tariffs for the project area would be increased from a present low rate averaging Rs 0.60 (US$0.08)/1,000 Ig, which has not per- mitted WDB to cover its operating expenses, to an average rate of Rs 0.96 (US$0.13)/1,000 Ig in 1978, and to successively higher levels thereafter to enable WDB to cover its operating expenses and debt service and to begin financing a portion of the capital investment from internal cash generation. There would also be an interim tariff increase of about 45% in 1977. WDB would maintain tariffs in the project area at a level to produce a minimum rate of return on average net fixed assets of 5% in 1978, 6% in 1979, 1980 and 1981 and 7% thereafter. For operations outside the project area, WDB would be required to ensure sufficient revenue to completely sustain those operations so that they are not subsidized from the project area. Under these arrangements WDB would, commencing in 1981, be financing about 30% of its capital investment programs from internal sources. xi. The project would enable the water demands to be met throughout a major part of the urban area of the southwest coast. It would enable sections of the community who now depend on polluted water sources to abandon such sources. The poor would receive a free, 24-hour supply of wholesome water through standpipes. The health and welfare of the people would be im- proved and a real constraint on the growth of industry, commerce and tourism would be removed. xii. Agreement having been reached on the principal issues, the project is suitable for an IDA credit of US$14.0 million.  APPRAISAL OF THE WATER SUPPLY PROJECT SRI LANKA I. INTRODUCTION 1.01 The Government of Sri Lanka has requested an IDA credit to help finance a project to improve existing water services and provide new piped water supplies to Colombo and parts of the southwest coastal region of Sri Lanka. The project is estimated to cost US$42.5 million, including FEECs (US$9.0 million) a foreign exchange premium, and customs duty (US$3.1 mil- lion). US$14.0 million is required in foreign exchange. The project is also directed toward strengthening the newly formed National Water Supply and Drainage Board (WDB) which will be the beneficiary of the proposed credit (paragraph 5.01). 1.02 Master Plan studies to the year 2000 for water supply and sewerage services to the southwest coastal area were prepared in 1972 by Howard Humphreys & Sons, Consulting Engineers of the United Kingdom, sub-contractors to the World Health Organization (WHO) as executing agency for the United Nations Development Program (UNDP). As part of the same contract, the con- sulting engineers also completed preliminary engineering and feasibility studies of water supply and sewerage requirements in the first five years of the Master Plan period. 1.03 Sri Lanka has received bilateral assistance from France and the United Kingdom to implement parts of the works recommended in the Master Plan and feasibility report; however, there was not sufficient aid to com- plete the whole of the system and a situation will soon be reached whereby treated water from new facilities cannot be conveyed to consumers because of lack of foreign exchange to finance interdependent components. Government is therefore seeking IDA assistance to implement the remaining portions of the first water supply stage of the Master Plan, and thereby enable maximum benefits to be obtained from previous investments. The proposed IDA credit would be the first to this sector in Sri Lanka. 1.04 An appraisal mission comprising Messrs. Ware and Vance, assisted by Mr. Van Nimmen, visited Sri Lanka in September/October 1976. This report is based on the mission's findings and on information obtained from Government officials and WDB staff.  - 2 - II. THE WATER SUPPLY AND SEWERAGE SECTOR A. Water Resources and Population 2.01 The average annual rainfall in the southwest quarter of Sri Lanka is about 100 inches per year compared with 35 inches in the drier zone which covers the remainder of the island. There is a shortage of wholesome piped water in the southwest region because of the lack of facilities with which to pump, treat and distribute the abundant, although polluted, river waters. Yields from groundwater sources in this area cannot support urban communities although wells are used successfully for rural areas in other parts of the island. Annex 1 contains additional water resource information. 2.02 Based on the 1971 census, the estimated mid-1976 population of Sri Lanka is 13.8 million. 1/ The current, annual national population growth rate is 1.8% and the population density, based on a land area of 25,330 square miles (about one quarter of the land area of the United Kingdom) is 546 per- sons per square mile. B. Water Supply and Sewerage 2.03 Levels of water and sanitation services (Annex 1, Table 1), which have been estimated from data collected during the 1971 census, indicate that about 2.0 million people (77%) of the 2.6 million urban population have access to piped water but that the quality and quantity of a large proportion of these supplies -- possibly as much as 80% -- are unsatisfactory. Of the 8.8 million rural population only some 0.4 million (5%) have access to piped water. 2.04 The level of sanitation has been improved over the years by Govern- ment subsidy schemes to encourage construction of latrines in urban and rural areas. However, further improvements are required in these areas, since only 40 to 50% of the population have acceptable levels of sanitation, and in rural areas some 40% of the people -- almost 4 million -- have no sanitation facilities at all. Levels of water and sanitation services are described more fully in Annex 1. Sector Organization 2.05 WDB and local authorities are responsible for provision and main- tenance of water supplies and sanitation, and are controlled by the Ministry of Local Government. WDB is the principal implementing agency in the sector, 1/ Population and growth rate reported by the Department of Census and Statistics, Sri Lanka, October 1976.  - 3 - and provides assistance for the establishment of piped water supplies, sewerage and drainage to local authorities, state agencies and st Fe indus- trial establishments. Its primary functions are planning, design, construc- tion and supplying water in bulk. After construction, water supply systems are usually transferred to local authorities to operate and maintain, al- though in a number of cases WDB operates and maintains headworks or entire systems. The Government has yet to devise a national policy designating responsibilities for water supply operation and maintenance. The Department of Health is responsible for Health Education and for the implementation of a latrine installation program. The Commissioner of Local Government is the principal officer of a Local Loans and Development Fund through which the Government channels loans and grants for water supplies and sewerage develop- ment works (Annex 1, paragraph 13). Sector Investment Programs and Constraints 2.06 This project is the largest item in a sector investment program which is presently being prepared. The program is also expected to include: a continuation of rural water supply schemes, for which additional aid from the United Nations International Children's Emergency Fund (UNICEF) has been requested; sewerage works, to be designed under this project (paragraph 4.10) and a continuation of rural sanitation works sponsored by the Government. 2.07 The major constraint on development works in the sector is the lack of foreign exchange for essential items of plant and equipment. The limited capacity of WDB is a constraint which may become more severe if the loss of engineering staff continues. These two factors also influence the standards of operations and maintenance which WDB is able to achieve; however, Govern- ment has recognized these deficiencies and is endeavoring to correct them (paragraph 5.05). Sector organization, investments and constraints are dis- cussed more fully in Annex 1. III. THE PROJECT AREA A. Background 3.01 The project includes part of the first stage works recommended in the UNDP Master Plan report (paragraph 1.02); the project area comprises that part of the Master Plan area in which the urban communities of Colombo, Towns South, Towns North, Kalutara and Ambalangoda are located. The project communities are listed in Appendix 2 of Annex 3 and are shown in Map IBRD 12531. 3.02 None of the 50 or so communities within the Master Plan area have satisfactory water services, with the exception of Galle, where a new system has recently been completed.  -4- 3.03 Colombo has a population of 608,000 people, and is the capital city, seat of Government and center of commercial trade and industry. Its water supply system is intermittent and pressures are frequently reduced in an effort to conserve water. In 1976 the supply was limited to some 4 to 6 hours per day. The situation is similar in Towns South where a population of 440,000 people receive an intermittent low pressure water service. 3.04 There are no piped supplies at all in Towns North, Ambalangoda or Kalutara. These areas rely on privately constructed shallow well supplies which provide poor yields of water of unsatisfactory quality. Although wells may provide water in adequate quantities -- albeit, doubtful quality -- for isolated dwellings, groundwater sources in the coastal area cannot meet the needs of more densely populated urban areas or the needs of larger commercial and industrial institutions. 3.05 Deficiencies of water supplies are evident in many of the tourist hotels which endeavor to support a rapidly growing tourist industry in Colombo and along the southwest coast. The unreliability, or complete lack, of piped water supplies have caused most hotels to resort to well supplies. Some hotels are required to supply water to 200 to 300 guests at a rate of 200 Imperial gallons per capita per day (Igcd); however, quantities of water of this magnitude (40,000 to 60,000 Ig/day) can rarely be obtained from wells in this region; transporting water by tanker at disproportionately high costs is sometimes necessary in order to continue operations. 3.06 With the exception of Colombo, no other community has suitable facilities for the collection or disposal of sewage on a municipal basis. Although Colombo has a sewerage system it does not cover the entire city and its capacity is inadequate. Typhoid, infectious hepatitis, dysentery and cholera are endemic because of these low standards of sanitation and water supply. B. Existing Water Supply Facilities 3.07 The existing Water Supply systems are described in Annex 2, illus- trated in outline on Map IBRD 12531, and summarized as follows. 3.08 The first piped water supply to the city of Colombo, which utilized groundwater sources and canals, was replaced in 1886 by a gravity supply from an impounding reservoir at Labugama, some 28 miles from the city. This source was supplemented by a similar supply from Kalatuwawa, an adjacent catchment, in 1954. Conventional water treatment facilities incorporating sedimentation, filtration and chlorination are located near the sources of supply, from which treated water gravitates to distribution reservoirs in Colombo and Towns South and thence to consumers. These works have a life expectancy of more than 20 years, provided they are adequately maintained. 3.09 In the early 1960s a supplementary source of water was developed at Ambatale by abstraction of river water from the Kelani Ganga. The water  is fully treated and pumped to distribution reservoirs serving Colombo and Towns South. The present capacity of the Ambatale facilites and the two impounding reservoirs is 54.5 Imgd. This is insufficient to meet the pre- sent needs of Colombo and Towns South primarily because of the limited capacity of the facilities at Ambatale; the Kelani Ganga is one of the country's largest rivers and is adequate to to meet projected water demands of Colombo, Towns South and Towns North to the year 2000. C. Organization of Operating Institutions 3.10 Two of the three water sources serving Colombo Municipality, (Labugama and Kalatuwawa) as well as the associated treatment, transmission and distribution facilities are operated and maintained by the Waterworks Department of Colombo Municipality. The third source of water (the Ambatale treatment and pumping plant) serving Colombo also serves Towns South, and is operated and maintained by WDB. Distribution facilities in Towns South are operated by the respective local authorities. 3.11 The Waterworks Department of Colombo Municipality is the responsi- bility of a waterworks engineer, under the direction of the Municipal Commis- sioner. About 530 persons are employed in the Waterworks Department including five qualified engineers and one qualified accountant. There are some 350 laborers and the remaining 175 or so employees are in supervisory, clerical and artisan grades. 3.12 A loss of experienced professional staff in recent years, and a lack of adequate funds particularly foreign exchange, are the main factors which have compounded the operational difficulties of a system unable to meet demands greater than its resources. While the standards of maintenance of treatment facilities remain at a reasonably high level, the distribution system tends to have been neglected and water leakage and wastage have reached unacceptable levels, almost certainly exceeding 30% of the daily supply. 3.13 Under a proposed "integrated system" of operating existing water sources, and associated facilities -- as recommended in the Master Plan and to be implemented under the project -- a reorganization of the responsibil- ities of various authorities for operation of water facilities will be nec- essary; this is described in Chapter V, Section C of this report. Under the organization proposed, Colombo and Towns South will each operate their own distribution system, but all other facilities will be operated and main- tained by WDB. This revised organizational structure may resolve some of the staffing difficulties of Colombo Municipality's Waterworks Department since it will be able to focus its resources on maintenance of the distri- bution system.  - 6 - IV. THE PROJECT A. Scope and Objectives 4.01 The project would provide improvements in the existing water supply system serving Colombo Municipality and Towns South. It would also provide for extension of this system to Towns North, which at present have no piped water. New water supply systems would be provided for the more remote towns of Kalutara, Ambalangoda and adjacent communities which at present also have no piped water (Annex 3). 4.02 The project would improve the reliability and quality of water supply to 1.2 million people and would provide water supplies to 0.4 million people who at present rely on shallow wells which have poor yields and are liable to contamination. All sections of the community would benefit from these improvements; the maximum benefit could well be realized by the poor who cannot afford to have private water facilities constructed to augment inadequate piped water. The tourist industry, which is centered in this area, would benefit since high water demands from hotels cannot be met from wells of low yield. E. Project Description 4.03 The proposed project includes the following items: (a) Colombo and Adjacent Towns Expansion of the treated water pumping station at Ambatale to deliver water to Colombo, Towns South and, ultimately, Towns North. 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 (see Appendix 2, Annex 3).  -7- (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. 4.04 Some important aspects of the project are briefly described below and further information is given in Annex 3. 4.05 Parts of the Ambatale works expansion are under construction and will be completed by May 1977. Only a restricted benefit from these facili- ties will be obtained until works under this project are also brought into operation, thus increasing the total effective yield of the three existing water sources (the Kelani Ganga at Ambatale and the two impounding reservoirs, Kalatuwawa and Labugama) from the present 54.5 Imgd to 74.5 Imgd. Completion of transmission and distribution facilities under the project will enable this increased yield to be distributed to consumers in Colombo, Towns North and Towns South. The works are designed to permit further, staged expansion to provide for the projected water needs of Colombo and its environs to the year 2000. 4.06 The project will complete the priority works proposed by the consul- tants under the WHO/UNDP Master Plan and will resolve the most urgent water supply problems as well as providing an integrated water supply system for the Greater Colombo area. The works will in general meet water demands in Colombo until 1982/83 (Annex 5), when further extensions of the distribution systems to new areas of Towns South and Towns North are planned, and further expansion of the Ambatale treatment plant will be necessary; however, water shortages will continue to be felt when daily water demands approach the proj- ected maximum day demand (Annex 5, Chart 2), until after the 1983 plant expan- sion. The Ambalangoda and Kalutara systems are designed to meet maximum day water demands to the years 1993 and 1990 respectively. Transmission lines are  - 8- expected to have sufficient capacity for 10 to 15 years after their completion; treatment plants and intakes are designed so that their capacities may be in- creased by the addition of elements to the basic structures. The capacities of all the sources selected are sufficient for the foreseeable future. 4.07 WDB proposes to extend consumer metering to reduce the present high levels of waste of water. It is estimated that connections to all consumers (excluding standpipes), throughout the project area will be metered by 1986. The program requires the installation of some 70,000 meters, and will be sup- ported by assistance from the United Kingdom in providing meter testing and repair facilities; part of the metering program is included in the project. The Government has agreed to ensure that the metering program is completed by the responsible agencies. 4.08 At present the responsibility for monitoring water quality does not rest with a particular agency, although the Colombo Municipality and WDB have the capability and facilities to carry out water examination procedures. To improve water quality monitoring, the Government agreed to make appropriate arrangements to establish a system of routine water examination by an agency independent of WDB and distribution authorities. 4.09 The supply of spare parts under the project will permit the repair or replacement of essential equipment required for the accurate measurement of water supplied in bulk to local authorities; WDB has undertaken to install and maintain reliable equipment for this purpose. 4.10 Recognizing the urgent need to provide improved sewerage services, Government has requested 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 pro- vision of sewage collection and disposal facilities in areas which have piped water supplies, including Towns South, Negombo and GalLe (Annex 4). Consulting engineers would be required to update the Master Plan proposals and complete detailed engineering designs and tender documents for sewerage and drainage improvements in the selected areas; this would enable WDB to implement the construction work under a subsequent program beginning in 1981. WDB has undertaken to employ consultants acceptable to IDA for these engineering services. The estimated duration and cost of technical assistance for the sewerage and drainage work, and for a water tariff study in the project area (paragraph 6.17), is 162 man-months at US$5,000 to US$8,000 per man-month. Training for WDB personnel under the project would include financial and accounting staff as well as engineering staff. C. Cost Estimates 4.11 The total estimated cost of the project is US$42.5 million. The estimated cost excluding FEECs (US$9.0 million) and customs duty (US$3.1 million), but including allowances for physical and price contingencies, is US$30.4 million. Project costs are summarized below and detailed in Annex 6.  Local Foreign Total Local Foreign Total ----- Rs Millions ------ ----- US$ Millions ------- 1. Works at Ambatale 5.4 11.2 16.6 0.7 1.5 2.2 2. Towns North 27.2 19.3 46.5 3.8 2.6 6.4 3. Towns South 7.3 7.1 14.4 1.0 1.0 2.0 4. Colombo 8.9 6.6 15.5 1.2 1.0 2.2 5. Kalutara 22.4 20.5 42.9 3.1 2.8 5.9 6. Ambalangoda 5.3 6.4 11.7 0.7 0.9 1.6 7. Spare Parts and Appliances 1.7 3.7 5.4 0.2 0.5 0.7 8. Other Costs Technical Assistance & Training 3.6 10.8 14.4 0.5 1.4 1.9 Engineering Services 6.8 - 6.8 1.0 - 1.0 Land Acquisition 0.5 - 0.5 0.1 - 0.1 Sub-total Other Costs 10.9 10.8 21.7 1.6 1.4 3.0 Base Cost Estimate 89.1 85.6 174.7 12.3 11.7 24.0 Physical Contingencies 14.6 8.1 22.7 2.0 1.2 3.2 Price Contingencies 15.7 7.9 23.6 2.1 1.1 3.2 Total Project Cost (Excluding FEECs and Customs Duty) 119.4 101.6 221.0 16.4 14.0 30.4 FEECs and Customs Duty 88.6 - 88.6 12.1 - 12.1 Total Project Cost 208.0 101.6 309.6 28.5 14.0 42.5 4.12 The project cost includes: (i) physical contingencies at 7.5%, 10% and 20% of base costs, depending on the nature of the work and whether esti- mates are based on final or preliminary engineering design; (ii) price con- tingencies for materials and equipment at 7% to 8% per annum in accordance with  - 10 - the current guidelines, (iii) price contingencies for civil works are 7% to 10% per annum for local and foreign civil works contracts. The estimates for civil works are based on current local contracts or on updated unit rates from the Master Plan study. Estimates for foreign materials and equipment are based on recent quotations by manufacturers. Proposed Amount of IDA Credit and Project Financing 4.13 The foreign exchange component of the project to be financed by IDA is estimated to be US$14 million. The remaining project cost of US$16.4 million and FEECs and customs duty of US$12.1 million would be met by the Government and internal resources of WDB and the municipalities concerned. D. Implementation The Executing Agency 4.14 The executing agency, WDB, has substantially completed the detailed engineering design of the project and will also supervise construction. WDB has an adequate engineering staff for this purpose, and would form a separate group of engineers under the supervision of an Assistant General Manager to implement the project. The Government has recognized the possible loss of a number of experienced engineers to overseas markets during the course of the project, and proposes to make available additional competent engineers from other Government agencies to supervise the project if the need should arise. Alternatively, the Government has agreed to engage local consulting engineers to carry out the work. The Project Schedule 4.15 Tenders for pumps, pipes and equipment will be called during 1977 immediately followed by tenders for civil works. WDB has prepared procurement documents for urgently needed foreign equipment and may place orders for some items prior to the credit becoming effective. Some civil works contracts may be in progress by the last quarter of 1977 and the bulk of construction work will take place during 1978 and 1979. The project is expected to be substan- tially completed by December 1980, as shown graphically in the construction schedule in Annex 7. Procurement 4.16 All contracts would be awarded under international competitive bidding procedures in accordance with the Association's Guidelines, with the exception of contracts under US$100,000 and totalling not more than US$0.5 million, which would not justify the more complex procedures of international competitive bidding, and would not attract foreign bidders. Such contracts would be awarded under local bidding procedures acceptable to the Association and described in Annex 8. Foreign bidders are expected to win all contracts  - 11 - for treatment plant equipment, pumping equipment, specialized work of mains renovation and for a large portion of the pipes. Sri Lankan contractors are expected to win all other contracts. It is probable that PVC or cast-iron pipes that are manufactured in Sri Lanka will be appropriate for some dis- tribution mains; a 15% margin of preference (or applicable tariffs, whichever is less) would be allowed for these, and any other locally manufactured items, in evaluating bids. Similarly a margin of preference of 7.5% is proposed for local civil works contractors. Land Acquisition and Way Leaves 4.17 The majority of the areas of privately owned land required for the project have been purchased. No difficulty is anticipated in acquiring the small areas of land still required. Negotiated easements for pipelines will be arranged in accordance with established practice whereby actual costs of damage to crops or property caused by construction are reimbursed. No delays in this connection are anticipated. E. Disbursements 4.18 The proceeds of the credit would be disbursed over a five-year period. An estimated disbursement schedule is shown in Annex 9. Disburse- ments would be made against: (i) Equipment 100% of foreign expenditures for directly imported goods, or 100% of local expenditures (ex-factory costs) for locally manufactured goods, or 60% of local expenditures for imported goods procured locally. (ii) Civil Works 100% of foreign expenditure for foreign contractors and 36% of expenditures for local contractors for the con- struction of headworks 1/ and transmission mains. (iii) Consultants Services and Training 100% of foreign expenditures. Any savings on the completion of the project would be cancelled. 1/ Headworks comprise intakes, pumping and treatment facilities.  - 12 - F. Environmental and Health Impact 4.19 The expansion and improvement of water supply facilities will increase the volumes of sewage both in urban areas where there is no piped collection system, and in the Colombo area, where the capacity of the sewerage system is not adequate to meet present flows. The disposal of sewage from the areas in question, which has been thoroughly studied by experts under the Master Plan, will not pose a problem since distant offshore outfalls will be constructed as recommended. However, further studies are necessary in connection with improvement and extension of the collection system. The Government proposes to undertake these improvements and has requested technical assistance, under the project, to update the MIaster Plan proposals and prepare final designs for Colombo, Towns South, Negombo and Galle (Annex 4). 4.20 In the less densely populated urban areas the shallow wells, which in some districts are the only water source, are often contaminated by the household or community sanitation systems such as septic tanks, pit latrines or soakage pits. With the advent of piped water systems under this project the use of many of the existing shallow wells will be discontinued thus con- tributing to the improvement of environmental health in urban area. Continued use of some of the individual sanitation systems will then be acceptable and will defer the need for extension of the more costly piped sewage collection systems. V. THE PROJECT ENTITY A. Establishment 5.01 The recipient of the credit, the Government of Sri Lanka would re- lend the credit amount to the executing agency WDB. Legislation for the crea- tion of WDB was enacted in 1974 and is the statutory framework governing the sector; it provides for WDB to operate water and sewerage facilities with a parallel provision for local authorities to operate their own facilities, subject to WDB and Ministry approval. The 1974 Law also deals with general operational matters, including rates for water supply and sewerage, and pres- cribes penalties for pollution of water sources used for water supply. 5.02 WDB is a corporate body consisting of 8 members appointed by the Minister of Local Government; 4 members are government officers from the Ministries of Local Government, Health and Planning and Economic Affairs. The remaining four members are appointed from among interested citizens having experience in engineering, finance, public health, administration or law.  - 13 - B. Organization and Management 5.03 The headquarters of WDB is located in Ratmalana, a suburb of Colombo, but several regional offices are maintained in locations throughout the country depending on the development works being implemented in the various regions. Annex 10, a diagram of the organizational structure of WDB, shows the principal officers and executive grades. The General Manager is the chief executive, the Deputy General Manager is responsible for technical functions, and finance is the responsibility of an assistant general manager. Prior to November 1976, assistant general managers were also responsible for planning, construction, operations, maintenance, training and personnel functions. However, the Board recently decided that organization on a geographical rather than a functional basis would be preferable, and the existing 8 regions, into which the WDB area is presently divided, became subdivisions of three "ranges" each of which is administered by an assist- ant general manager--under the Deputy General Manager--assisted by a chief engineer. The three ranges broadly divide the country into southern, central and northern areas. The headquarters functions of planning, design and training will continue to be responsibilities of the Deputy General Manager, but will be controlled by senior officers rather than assistant general managers, as was formerly the case. 5.04 Because the project forms a large part of the total water supply program, WDB propose to form a special unit, under an additional assistant general manager, to be responsible for project implementation (Annex 10). WDB has undertaken to form such a unit, with staffing functions and respon- sibilities satisfactory to IDA, prior to commencement of the project. 5.05 WDB has capable and experienced engineering staff who are competent to design and construct works to a satisfactory standard. The approved establishment for engineers is 70 of which about 20 posts were vacant at the time of appraisal. During the past 2 to 3 years there has been difficulty in re-taining experienced engineers in the face of more attractive terms of service being offered in some foreign countries. There appears to be no immediate means of reversing this trend, and since suitably experienced engineers are not available for local recruitment--there are insufficient incentives to attract foreign engineers--the standard of WDB engineering expertise may continue to decline, ultimately requiring assistance of consultants to imple- ment a major portion of the development works; if necessary, engineers for the project may be diverted from other Government departments (paragraph 4.14). The Government regards the situation more optimistically, since there is a surplus of new (although inexperienced) graduate engineers to fill the gap. Deficiencies in organization and management are less severe and can be over- come by recruitment and suitable training programs. 5.06 WDB recognizes the need to improve its financial and management capabilities, and a project training program (Annex 3) includes financial management, and public utility accounting. It would also be desirable to delegate the responsibility of investment planning to a financial executive  - 14 - at senior management level. At present investment planning is not carried out satisfactorily; however, WDB proposes that this duty will be made the responsibility of a senior officer reporting to the Board. C. Operation and Maintenance Responsibilities 5.07 In addition to its national role as the principal agency in the sector concerned with planning, design and construction, WDB also operates and maintains water supply facilities in some areas. 5.08 Under the present arrangement in the project area, the Colombo Municipal Council operates two major sources of water, (Labugama and Kalatuwawa) and their associated treatment and transmission systems. WDB supplements this supply by providing water in bulk from its Ambatale source to Colombo and Towns South, each of which operates its own distribution system. Towns North, Kalutara and Ambalangoda have no piped water systems. 5.09 The Master Plan report recommended that water demands of the Greater Colombo area, to the year 2000, should be met from the existing sources of supply, with suitable staged extension of the facilities at Ambatale as required. The report also recommended that, as a least cost solution, the sources and transmission systems should be operated as an integrated system, by one authority. 5.10 The Government has taken several major steps toward implementing the Master Plan institutional recommendations. These steps have included the formation of WDB (January 1975) and the completion of a study and report by the National Institute of Management (NIM) to identify the most acceptable institutional reform that would enable one agency to operate the integrated system of water supply facilities serving Colombo Municipality and adjacent towns. In September 1976 the National Planning Council, under the chairman- ship of the Prime Minister, decided that the integrated system should be implemented and that the system would be operated by WDB. Based upon this decision, the institutional organization within the project area, proposed by the Ministry of Local Government, is as follows: (i) WDB will operate the integrated facilities to supply water in bulk to Colombo Municipality, Towns South and Towns North. (ii) Colombo Municipality and Towns South Municipalities will operate and maintain their respective distri- bution systems. These authorities will also render bills and collect water revenue. (iii) The whole of the proposed water systems for Towns North, Kalutara and Ambalangoda will be operated  - 15 - and maintained by WDB which will also render bills and collect revenue in respect of these areas. The Government has agreed to establish this institutional organization for the greater Colombo area by January 1, 1978. Agreed institutional arrange- ments for Towns North, Ambalangoda and Kalutara will be established as water supply systems for these areas are completed. 5.11 Although Colombo Municipality and local authorities in Towns South are responsible for operation and maintenance of their own distribution systems, it is envisaged that WDB will assist the small authorities with any major dis- tribution works and also periodically examine all distribution systems in the project area to ensure that there is no undue leakage. For this purpose, WDB proposes to establish a leakage detection unit, with the assistance of a training component under this project. WDB has undertaken to carry out dis- tribution inspections, provide assistance as required and assume responsibility for systems in which the Ministry of Local Government considers that the standards of operation and maintenance are below a satisfactory level. D. Accounting 5.12 As a recent successor to a Government Department, WDB inherited an accounting system designed for government departments financed out of a con- solidated pool of government revenue. The accounts were primarily a record of cash receipts and payments and neither a balance sheet nor income state- ment was prepared. The accounting records consisted mainly of appropriation ledgers with the primary purpose of ensuring that no money was spent con- trary to the intention of the legislature, which placed the emphasis on the control of cash with little regard for operating results. 5.13 A legacy of this system has been neglect of financial control as a management tool. At this stage of WDB's development the major deficien- cies bearing on the financial operations that need to be corrected are: (i) management's lack of understanding and acceptance of the role of finance in WDB's operation; (ii) senior financial posts that have not been filled; (iii) the absence of an accounting system and procedures suitable for WDB's operation; (iv) lack of coordination between the engineering and financial functions, both of which are now operating in isolation; (v) the absence of any Financial Regulations defining financial policy and proce- dures for WDB. 5.14 It is understandable that these deficiencies would exist at this stage of WDB's development, and while action has already commenced to correct some of them, understanding and acceptance by management of the role of finance will take time; correction will only evolve as WDB's officers gain experience with a commercial type of operation.  - 16 - 5.15 Two of the four senior finance posts, including that of the Chief Financial Officer, have been filled and WDB is actively seeking to fill two other presently vacant senior finance posts as well as other vacancies in the accounting department. An Office of Internal-Audit has been created which will report directly to the Chairman and a search is underway to fill the post of Internal Auditor and to staff the audit office. WDB through the Government has made application to the United Kingdom Ministry of Overseas Development (ODM) for the services of an accounting and financial advisor for two years to assist in implementing suitable accounting methods and procedures as recommended by earlier consultants (Howard Humphreys). WDB agreed that the advisor's work should be supplemented with expert assistance from a local accounting/management firm of which there are several with demonstrated competency. Details would be finalized after reviewing the situation with the advisor when appointed. 5.16 During negotiations agreement was reached on the following items, together with a timetable for their implementation: (i) Senior finance posts will be filled and the accounting department will be adequately staffed. (ii) Appropriate measures will be taken to ensure close coordination between the Engineering and Finance Departments. (iii) Action will be taken to implement recommendations made by former consultants for establishing (a) a commercial accounting system, (b) a financial control system, (c) a purchasing and stores system and (d) an internal auditing system. (iv) A set of Financial Rules/Regulations will be established for WDB. E. Audit 5.17 The Sri Lanka Finance Act, No. 38, of 1971, which governs the audit of WDB, stipulates that the Auditor General shall be its auditor, and that for the purpose of assisting in the audit, he may employ the services of any qualified auditor who shall act under his direction and control. 5.18 IDA would wish to receive what is known as a long-form audit report which, in addition to certifying that the accounts fairly represent the financial position and operating results, contains supplementary information, including comments on the individual account items and the scope of the exam- ination. In addition, the auditor should advise WDB of any material deficien- cies or weaknesses in the accounting system or in the overall system of in- ternal control, and recommend improvements.  - 17 - 5.19 During negotiations assurances were obtained that the Association's standard audit covenant will be adopted so as to provide for (i) an audit, each fiscal year, of WDB's accounts and financial statements in accordance with sound auditing principles, consistently applied; and (ii) sending to the Association, no later than six months after the end of the fiscal year, certified copies of the year's financial statements and an audit report of appropriate scope and detail. The Auditor General, who has performed ade- quate audits and submitted satisfactory reports in other Bank projects in Sri Lanka, would perform WDB's annual audit. F. Local Authorities 5.20 Colombo Municipality, with a population of 608,000, is by far the largest municipal council in Sri Lanka. Colombo consumed some 60% of WDB's 1976 water production, in addition to what it used from its own sources of supply. Its Water Works Department handles all technical and administra- tive functions related to the provision of water supply in the Municipality, except for the billing and collection of property valuation rates and arrange- ments for the raising and repayment of capital. 5.21 Under Colombo's Water Works Ordinance, no specific charges are made for water except for some metered commercial consumers and the supply to shipping; thus, water supply revenue in Colombo bears no relationship to the 30% general property valuation rate. No appropriation to water service is made from this levy which is charged irrespective of whether a particular property is privately connected, the only financial effect of connection being a revision of the property valuation. 5.22 The Waterworks Department maintains separate water supply accounts, and while the accounting system is reasonably well run, it contains some anomalies, such as having no provision for depreciation or renewals of water works assets, nor is an asset register maintained; the revenue account re- flects only a small amount of what normally would be water supply revenue which distorts the operating results by showing the Department operating at a loss when even a modest allocation of the 30% property tax would show it as having positive operating results. 5.23 The five Towns South, with a combined population of 444,000, con- sumed about 27% of WDB's 1976 water production. The water supply function in each of the authorities is headed by a water works superintendent whose staff may number anywhere from 20 to 50, depending upon the size of the authority and its distribution system. The staff provides consumer con- nections and carries out minor mains extension, as required. None of the staff has any professional engineering competence, and no capability exists for the design of system reinforcements nor for analysis of the hydraulic performance of the existing systems; however, WDB will assist local author- ities in works of this type (paragraph 5.11).  - 18 - 5.24 Each of the five Towns' water supply services is conducted as part of a council's general administration with no separation of accounts and no attempt to allocate a specific portion of total annual revenue for water supply, even though in the past when piped water supply was brought to an area, the property valuation rate was raised by 6%. Under the pro- posed project, separate accounts for water supply are to be established (see paragraph 6.23). VI. FINANCE A. Background 6.01 WDB was recently transformed from the government Department of Water Supply, where it functioned as a mainly technical entity, into a Board with broad autonomy and characteristics of a public utility enterprise. It is now in the process of changing an inherited government-type accounting system into a commercial accounting system appropriate to a public utility. At the same time it is having to recruit and train staff for its accounting department. This situation has severely hampered the availability and preparation of meaningful financial data, requiring the financial projections in this report to be based on a number of assumptions, which are reasonable but which will need to be reviewed in the course of executing the works program. B. Past Operation and Present Financial Position 6.02 The 1975 and 1976 financial results (Annex 11) discussed below are based on WDB's provisional unaudited accounts. 6.03 WDB appears to have incurred deficits in its first two years of operation with operating revenues in 1975 and 1976 of Rs 5.7 million and Rs 10.5 million and operating expenses of Rs 10.9 million and Rs 13.0 mil- lion, respectively. The substantial difference between the two years' operating revenues is partly due to a Government payment of Rs 3.2 million to WDB in 1976 for water supplied to holy places and in lieu of a tariff increase. These operating results reflect the Board's very low average charge for bulk water of about Rs 0.60 (US$0.08)/1,000 Ig, whereas average cost is about Rs 1.00. 6.04 In constructing the first balance sheet (Annex 12), WDB has recorded as fixed assets those assets formerly managed by the Department of Water Supply, using a valuation based on historical cost and taking into account estimated depreciation. Accotnts receivable (see paragraph 6.05) are very high amount- ing to over three years' annual billings. WDB shows no long-term debt for fiscal year 1976 and shows an accumulated deficit on revenue account. Thus,  - 19 - the foregoing indicates that WDB has commenced its operations with a relatively small amount of fixed assets in relation to future expansion, a heavy backlog of accounts receivable, and a deficit, all shown as financed by Government equity contributions. These accounts are being audited by the Auditor General of Sri Lanka and will be formally established after any adjustments or changes. C. Billing and Collection 6.05 The high level of arrears, totalling Rs 22.2 million and amounting to three years' billings for both private and municipal consumers, is related to two main factors: (i) the unsystematic and casual way in which billing was done by the Department of Water Supply; and (ii) the reluctance of local authorities to pay for water. Instead of being handled by the Finance Division, billing and collection was supervised by an engineer in the Operations and Maintenance Division, where the work was considered to be a chore. Meters were read late and bills were not only issued late but were erroneously dispatched and did not indicate arrears; little action was ever taken against defaulters. 6.06 WDB is taking remedial measures to begin to correct these deficien- cies, and has engaged the NIM of Sri Lanka to review the billing and collec- tion system and to make recommendations for ensuring that the procedures are put on a sound basis. Water bills now indicate arrears and are being rendered in much less time; WDB has decided to cut off water supply to defaulting pri- vate customers; and the Ministry of Local Government is holding meetings with heads of local authorities for reviewing arrears. There have been instances where a local authority, which has continued in default, has been (for this and other reasons) dissolved by the Ministry of Local Government and brought under a Special Commissioner. 6.07 Of the Rs 22.2 million arrears, some of which date back to 1968, it is understood that Rs 10 million are to be written off as directed by a Cabinet decision. About Rs 20 million are in respect of the local authori- ties, all of which, with the exception of Colombo Municipality, are heavily in arrears. During negotiations assurances were obtained that Government will take the necessary measures to ensure that future bills rendered by WDB for water supplied to the local authorities are duly paid and further, that Government will cause the local authorities to ensure the prompt payment of all consumers' water bills.  - 20 - D. Tariffs Background 6.08 In the past, Government's financing policy for the sector has tended toward providing "free'7 water by indirectly charging for it through property tax levied on households which, even on the notional allocations as published, has not covered costs, nor provided an incentive to conserve water. There are however indications that the policy is changing in favor of direct consumer charges based on usage as evidenced from the recent meter- ing of the Kandy and Galle systems and the intention to meter the Kalutara and Ambalangoda systems. 6.09 Under the National Water Supply and Drainage Board Law of 1974, WDB with the approval of the Minister is empowered to levy charges for the supply of water; however, no rules or regulations formally establishing tariff policy have been issued. (Agreement, including a timetable, was reached during negotiations for WDB to establish regulations for its operations, see paragraph 5.16.) Bulk Supply 6.10 WDB operates most of the water production (sources, transmission and treatment) works in the country, and as a bulk supplier, supplies most of its treated water to local authorities for distribution to consumers; it also directly supplies water to a relatively few commercial users. Charges to the local authorities range from Rs 0.40 (US$0.055) to Rs 0.60 (US$0.08), and to the commercial consumers from Rs 0.75 (US$0.10) to Rs 3.00 (US$0.41)/1,000 Ig, depending upon the type of consumer. The average charge is about Rs 0.60/1,000 Ig. Tariffs for bulk supply are the same as those that were levied by the Department of Water Supply and have not been changed in the last seven years. WDB's provisional operating results for 1975 and estimated results for 1976 show that these charges are insufficient to cover operating expense or even cash outgoings. 6.11 While WDB's present charges for bulk water have not covered operat- ing expense and an early tariff increase is required, it may be politically difficult and take a number of years for WDB, as the bulk supplier, and for the water retailing authorities to achieve acceptable rates of return, be- cause: (i) in most areas in Sri Lanka realistic rates have rarely been charged; (ii) consumers in many areas including Colombo and its environs are not aware of the costs associated with piped water and continue to regard it as a free commodity; (iii) the Colombo Municipality has objected to the inte- grated scheme under which it would lose some of the cheaper water from its long established gravity supply systems; and (iv) revenues from a large part of the investment in the project will not be realized until capacities of certain components are more fully utilized during the period 1982-1990.  - 21 - 6.12 WDB's management, while realizing the need for higher tariffs to eventually provide an acceptable rate of return, therefore feels that the increases should be spread over a period of years. This is a realistic approach and is the basis underlying the proposed tariff covenant discussed in paragraph 6.18. Retail Supply 6.13 The cost of providing water supply in the local authorities' areas, along with the cost of all other local government services, is primarily borne out of the yield of the general rates levied on the annual value of assessed property; water supply thus must compete with these other services for its share of a limited income. Supplies other than for domestic purposes are generally metered, but metering has not been applied to domestic supplies in the project area. 6.14 For those authorities in the project area with piped water, the total rates on property value, which are established every five years to meet estimated revenue requirements of the authorities, are 30% for Colombo Muni- cipality and 18% or 21% for authorities, of the five Towns South. It is the practice of Colombo Municipality not to identify that portion applicable to water; in the five Towns South it varies from 6% to 9%. Charges for metered supply, primarily commercial consumers, vary among the local authorities and range from Rs 1.00 to Rs 5.00/1,000 Ig. 6.15 On the basis of figures provided by Colombo Municipality at the request of the mission, these charges and rates are more than sufficient to cover operating expense as well as debt service, making Colombo the only authority in the project area with positive results for water supply opera- tions. Two main factors influencing these results are that (i) the property value is high in Colombo, and (ii) the cost of water to Colombo is low because of gravity fed supply from its own impounding reservoirs and also because WDB is selling its water below cost. 6.16 In the five Towns South, no attempt is made to segregate water supply accounts from other services. The appraisal mission endeavored to calculate water supply revenues and expenses for each of the Towns South; these estimates suggest that the present rates and charges do not cover operating costs. All of the Towns South have defaulted in meeting current billings for bulk supply and are also in default for debt service on Govern- ment loans. Tariff Study 6.17 A properly structured and adequate tariff system cannot be intro- duced in the short term; and in order to begin to evolve a rational system for Sri Lanka, it will be necessary to undertake a tariff study taking into account such factors as: (i) differing costs of providing water supply; (ii) the different categories of consumers, i.e. domestic, commercial,  - 22 - industrial, and their ability to pay; (iii) the need to provide minimum quantities of water to low income groups (iv) the alternatives to full sub- sidization of standpipe supplies; (v) reduction of waste; and (vi) the extent to which it would be feasible to self-finance capital investment and to imple- ment marginal cost pricing. Assurances were obtained that the Government will commission a tariff study for the project area by competent experts, and under terms of reference acceptable to IDA to be completed by March 31, 1978 and will promptly thereafter cause their recommendations as agreed with IDA to be implemented. Tariff Covenant WDB 6.18 It is estimated that WDB's operations in the project area now pro- duce about 80% of its total revenue. No detailed projections are available for WDB's operations outside the project area. In view of the foregoing, a rate of return covenant is proposed only for WDB's operations in the project area. WDB, in establishing a tariff for the project area, needs to ensure that the level is such as to generate sufficient revenues to cover operating expenses and debt service, and to begin financing a portion of the capital investment from internal cash generation. This should be done however with- out losing sight of the effect on its customers, the distribution authorities and their consumers. In view of the foregoing, a rate of return of 5% in 1978, rising to 7% in 1982 would be a realistic target for WDB for the project area. It would meet WDB's financial requirements (see paragraph 6.26) while holding the average charge for bulk water to within reasonable limits: fore- casts show an average charge of Rs 0.96 (US$0.13)/1,000 Ig in 1978, rising to Rs 2.20 (US$0.30) in 1983. The tariffs would again be reviewed after the study. 6.19 During negotiations, assurances were obtained that WDB would, beginning with fiscal year 1978 in respect of its operations in the project area, maintain tariffs at least at a level to produce revenues sufficient to earn a minimum rate of return of 5% on reasonably valued average net fixed assets in service, and on the same basis earn a minimum rate of return of 6% in 1979, 1980 and 1981 and 7% in 1982, and thereafter. Considering the immediate need for higher tariffs to permit WDB sufficient revenues to begin covering operating expenses, assurances were also obtained that an interim increase acceptable to IDA would be implemented not later than October 1, 1977. It is anticipated that this increase would be about 45%, initially raising the average charge per 1,000 Ig from Rs 0.60 to Rs 0.88. 6.20 While no rules or regulations formally establishing a tariff policy have been issued (paragraph 6.09), WDB has the objective of making water sup- ply financially self-supporting. But in view of the lack of detailed data for operations outside the project area, it would not be appropriate at this  - 23 - stage to require agreement on a tariff covenant in the form of a rate of return for these operations. However, during negotiations, assuranices were obtained that revenues will be sufficient so that operations outside the project area are not subsidized by revenues from the project area. 6.21 For purposes of cost control, formulating and applying tariffs, and overall financial planning, WDB will need to establish costing systems in respect of each of the schemes to which it furnishes water, and also establish and maintain separate accounts for the project area. During negotiations assurances were obtained that these systems and accounts will be established to take effect from January 1, 1978. Local Authorities 6.22 The following factors must be taken into account in considering tariff criteria for the local authorities: (i) Other than for Colombo Municipality, there are no separate water supply accounts at present. (ii) Capital accounting is not practiced so that the value of fixed assets on which a rate of return is calculated is unknown; similarly no charge for depreciation is ascertainable. 6.23 While it is Government's policy that the local authorities become financially self-sufficient in the long-term, the foregoing factors and the lack of information available for framing a suitable tariff structure (see paragraph 6.17) preclude a rate of return covenant at this time. However, during negotiations assurances were obtained that revenues will be suffi- cient to cover at least cash operating expenses and debt service. Agreement was also reached that Government will cause each local authority to estab- lish separate accounts for its water supply operations to take effect from January 1, 1978, and further, that revenue derived from these operations will not be diverted to other purposes. Retail Tariff Estimates 6.24 While it is not possible to be more precise as to retail tariffs at this time, the tariff study together with the separate water supply accounts will illuminate many of the presently unquantified factors that need to be considered in setting tariffs. In the meantime, due to the lack of detailed information, only a rough estimate can be made as to what the retail tariff level might be. In making the estimate, certain assumptions are made, namely: (i) a metering program, as planned, will commence in Towns South and Colombo; (ii) Towns North, Kalatura and Ambalangoda will be metered from the out-set, as provided in the project; (iii) a higher bulk rate as pro- posed in this report will be in effect; and (iv) the assessed valuation of property will increase by 20% between 1976 and 1981 (WDB's estimate based  - 24 - on past increases). On the basis of these assumptions, an indication of retail tariff levels that would have been needed in 1976 to cover estimated cash operating expenses and debt service and of those which would be needed in 1981 is as follows: 1976 1981 Charge per Charge per /a Local Authority Water Rate or 1,000 Ig (Rs) Water Rate or 1,000 Ig (Rs) Colombo 3% .33 /b 21% 2.70 (2.60) Towns South 6% to 9% 1.02 24% 3.00 (2.40) Ambalangoda - - - 6.25 (3.65) Kalatura - 6,50 (4.40) Towns North - 3.20 (1.95) /a The figures in parentheses are the estimated charges were Government to subsidize standpipe supply (see paragraph 6.25). Charges of Rs 3.00 and Rs 5.00, as appropriate, are used in economic rates of return (paragraph 7.10). /b This charge is extremely low because of Colombo's present access to cheap water from its own sources. Subsidy for Poorer Group of Consumers 6.25 Water supplied to the poorest consumers through standpipes is nor- mally provided free of charge in cities where the tariff is based on metered consumption; where the tariff is based on property values, however, such con- sumers would no doubt be contributing nominal amounts as taxpayers toward the cost of their supply. In either case, there would be cross-subsidization from other wealthier consumers, but it is possible that Government may wish to relieve the other consumers of part of this burden by an operating subsidy to the retail distribution authorities, especially in these local authorities where, except for Colombo, a substantial part of the supply (from 20% to 40%) will be by standpipe. During negotiations, assurances were obtained that, in keeping with Government's present policy, any subsidy will not exceed the estimated cost of standpipe supplies, except in the case of extreme drought or other emergencies. E. Financing Plan 6.26 A forecast of sources and applications of funds for WDB for the seven-year period 1977-1983 is at Annex 13. The assumptions used are those contained in Annex 15, upward adjustments in tariffs and execution of the construction program as planned. A financing plan for all WDB operations during the five-years 1977-1981 covering the construction period of the proposed project is summarized below:  - 25 - Water Supply and Drainage Board Period of IDA Project - 1977-1981 Requirements Rs Thousands US$ Thousands % Proposed project (including taxes and FEECs) 309,603 42,528 52 Other projects (including taxes and FEECs) 268,493 36,881 46 Working capital increase 13,490 1,853 2 Total requirements 591,586 81,262 100 Sources Internal cash generation 86,345 11,860 15 Less: Debt Service 3,765 517 1 Net internal cash generation 82,580 11,343 14 Government equity and grants /a 318,009 43,683 54 Borrowings: IDA credit 101,920 14,000 17 Government /a 89,077 12,236 15 Total borrowings 190,997 26,236 32 Total sources 591,586 81,262 100 /a Government policy is to make loans for financing of distribution systems and make grants for headworks' capital investment. 6.27 While the financing plan shows the Government providing funds to WDB amounting to Rs 407 million over the five-year period 1977-81, the net flow of funds from Government by virtue of WDB's operations would in fact be much less. When taking into account those funds accruing to Government in respect of FEECs, customs duties and debt service, the net flow of funds from Government to WDB reduces from Rs 407 million to about Rs 235 million. 6.28 The foregoing financing plan indicates that WDB would provide 14% of its requirements from internal sources, which is only a moderate con- tribution, but is acceptable at this early stage of WDB's operation since: (i) revenues from presently low tariffs do not cover cash outgoings; (ii) re- venues from a large part of the investment in the project will not be realized until capacities of certain components are more fully utilized during the period 1982 to 1990; (iii) the size of the total planned construction program, though modest in relation to the needs of the sector, is large in comparison to past capital expansion; and (iv) the program is inflated by costs for FEECs amounting to an estimated Rs 123 million, about 21% of WDB's total program costs, which will be partly a Government equity contribution, and partly a Government loan.  - 26 - 6.29 The proposed IDA credit of US$14 million equivalent, which would cover the foreign exchange requirement, would provide 17% of the total financ- ing required during the project period; Government would provide 54% as equity and grants and 15% as loans. In view of the points cited in para- graph 6.28 and considering that WDB is a new entity, the financing plan as shown is reasonable. 6.30 The on-lending terms for the IDA credit would be at 9% for 24 years, including a five-year grace period; interest would be waived during the grace period in order to relieve WDB of some debt service during this critical period of its early operations. The terms for the Government loans are at 5% interest and 30 years including five years of grace; there is also a waiver of interest payments for these borrowings during the grace period. The debt associated with those assets constructed by WDB and to be handed over to the local authorities (paragraph 2.05) would be serviced in the first instance by WDB and recovered from the local authorities; this has been the procedure under the Department of Water Supply. During negotiations the foregoing financial arrangements were confirmed. Also, assurances were obtained that the Govern- ment will make available all necessary funds as required to carry out the proposed project, and that arrangements satisfactory to IDA will be made for ensuring WDB's recovery of debt service from the local authorities in respect of the assets transferred to these authorities. An acceptable on- lending agreement is a condition of effectiveness for the proposed Credit. F. Future Finances 6.31 WDB's forecast income statements covering 1977-1983 are shown separately for total operations and for operations in the project area at Annexes 11 and 14 respectively; forecast balance sheets and cash flow state- ments for the same period for total operations are at Annexes 12 and 13. These statements are based on assumptions contained in Annex 15. In respect of the project area, net operating income is forecast to increase from Rs 4.3 million in 1978 to Rs 23.9 million in 1983, reflecting tariff increases and the larger volume of water handled, by reason of the transfer of Colombo Municipal- ity's two reservoirs to WDB and the increase in water processed at the Ambatale treatment plant. During the 1977-1983 period total operating revenues are ex- pected to more than double initially in 1978 over 1977, reflecting higher tariffs and the doubling of the volume of water sold, due to the Board's taking over the two reservoirs; revenues would then increase at ar. average annual rate of 24% over the next five years. Operating expenses are projected to approximately double in 1978 with the expanded installations and then to increase at an average annual rate of 17%. 6.32 These illustrative forecasts for the project area indicate that a rate of return would begin to be achieved, amounting to 5% on average net plant in service in 1978, rising to 7% in 1982. The operating ratio is satisfactory, showing substantial improvement during the period under  - 27 - review. These forecast operating results for the project area would be satis- factory, permitting WDB to finance some 30% of its total capital requirements over the three years, FY1981 through FY1983, compared with only about 11% during the preceding four years. 6.33 The rates of return achieved on total operations are shown to be lower than those achieved on operations in the project area, since under tb- tariff covenant, WDB would, in respect of its operations outside the project area, move from a deficit operating position to one of merely covering operat- ing expense plus any debt service. On this basis, following a substantial deficit in 1976, WDB is shown to earn a rate of return of 1.9% in 1977 on total operations, rising to about 4% by 1982/83. 6.34 Forecast balance sheets reflecting WDB's total operations indicate that during the five years 1977-1981 the value of net fixed assets in service is expected to increase sixfold, because the expansion program is large in relation to the present small amount of fixed assets. The debt/equity ratio would rise from zero in 1976 to 26/74 in 1981. A satisfactory margin for further borrowing would still remain, and WDB's overall financial position would be satisfactory. Debt Limitation Covenant 6.35 Though forecasts show that WDB would maintain a conservative debt/equity ratio and would have no problem in meeting its debt service, it is prudent to require a debt limitation covenant. During negotiations assurances were obtained that WDB will not incur any debt unless historic 12 months' net revenues (before charging depreciation) would cover maximum future debt service at least 1.5 times. Performance Indicators 6.36 Performance indicators listed in Annex 16 will help monitor WDB's performance. VII. JUSTIFICATION 7.01 In Colombo, and adjacent towns, water shortages have prompted the Government to proceed with improvements of headworks at Ambatale. However, the additional treated water from these headworks cannot be conveyed to consumers unless foreign exchange is made available for improvement of pumping and transmission facilities, permitting full benefit to be obtained from pre- vious investments in Ambatale works. 7.02 In addition to optimizing benefits from recent investments, the improved Ambatale works together with associated transmission and distribu- tion improvements would bring water to 0.25 million new consumers in Towns  - 28 - North, in addition to providing a 24-hour daily service to 1.2 million con- sumers in Colombo and Towns South in 1981. Without these works, the standard of service would decline further as the populatior. grows. 7.03 The present water service to southwest coast urban and tourist centers supplies only part of the population, for part of the time; some areas have no service at all, and the quality of piped water is sometimes doubtful. 7.04 Because the supply is intermittent, there is an increased risk of polluted groundwater being drawn into mains during periods of shut-down. Both the interruption of supply, and the absence of a piped suDply in some areas, encourage the use of water sources of unsatisfactory quality, includ- ing shallow well sources frequently polluted by nearby inadequate sanitation facilities. Health statistics show that water borne diseases are present in the area and their transmission among the resident population and foreign tourists is much more likely in the absence of a safe water service. 7.05 The new systems proposed for Kalutara, Ambalangoda and adjacent communities would provide adequate, safe water to 160,000 new consumers in 1981. Without these works the growth of commerce, industry and tourism in the area will decline. Continued use of existing shallow well sources, and their proximity to inadequate sanitation facilities, constitutes a danger to public health and a consequent risk to the potential growth of the tourist industry in this area. 7.06 In addition to providing a safe and continuous supply of water to all sections of the community, the project will extend consumer metering and will justify a tariff designed to provide sufficient water to meet the essential daily requirements of the poor at affordable cost, but at the same time discourage waste and excessive consumption. 7.07 Consultants who carried out the Master Plan and feasibility studies strongly recommended metering the consumption of individual consumers. Th1e costs and benefits of metering in Colombo and Towns South -- in the light of the marginal cost of water (Rs 4.31/1,000 Ig, see paragraph 7.12) and estimated metering costs -- show that the value of water saved far exceeds the cost of metering. Metering would be justified if it reduced consumption of connected consumers by as little as seven gallons per capita per day. 7.08 The project will provide an opportunity for important institutional improvements in the water sector, particularly in the Colombo area. It will also assist the newly formed WDB to strengthen its organization. 7.09 In order to achieve the benefits described above at least cost, project components have been designed for construction in stages, thus pro- viding reasonable increments in system capacity and avoiding provision of facilities much larger than those required for projected incremental water demands shown in Annex 5.  - 29 - 7.10 If economic benefits are measured only by the value of incre- mental water sales made possible by the project, economic rates of return based on assumed initial tariffs which are believed to be within consumers' ability to pay, are as follows: Colombo Towns South and Towns North Ambalangoda Kalutara Estimated % of Total Project 64 8 28 Assumed Initial Tariff Rs/1,000 Ig 3.00 5.00 5.00 US$/1,000 Ig 0.34 0.57 0.57 Economic Rate of Return, Assuming: (i) Estimates Shown 7.0 4.6 4.3 (ii) Revenues Overestimated by 20% 4.0 2.6 2.4 (iii) Project Cost Underestimated by 20% 3.2 1.9 1.7 7.11 Economic rates of return based on estimated project costs which include FEECs (see Annex 17) are: Colombo 4.8, Ambalangoda 2.9 and Kal- utara 2.7. 7.12 In the Colombo area, the average incremental cost of water is Rs 3.6/1,000 Ig (Rs 4.3/1,000 Ig if FEECs are included). This is based on the development of the Ambatale plant where two stages of pumping and rela- tively expensive water treatment are required. Initial tariffs will reflect a mixture of this water with substantially cheaper water supplied by gravity from existing impounding reservoirs. Using these tariffs to compute benefits understandably gives a low rate of return, and the tariff study will examine the feasibility of moving to a rate structure based on marginal costs. 7.13 In Ambalangoda and Kalutara calculating a rate of return is conjec- tural. The project costs are unavoidably high and the assumed tariffs are no more than sufficient to cover expense without any return on capital. Even so, tariffs are relatively high and their impact on consumers is unknown since there is no service at present. By definition, therefore, their use as a measure of the project benefits yields a low rate of return. 7.14 The somewhat modest rates of return result in part from attributing no value to the "free" water supplied through standpipes. Furthermore, the rate of return does not reflect the several intangible benefits to the health and well-being of the people or the continuing increase in productivity, indus- try and tourism (Annex 18) which are made possible by a safe and adequate sup- ply of water; it should therefore be regarded as an indicator of only part of the benefits which the project provides.  - 30 - 7.15 The ability of various income groups to pay for water will be thoroughly investigated as part of the proposed tariff study. In the mean- time however, existing data provides an indication of the probable impact of realistic tariffs on consumers in Colombo and smaller urban areas. 7.16 The average monthly incomes per household in 1973 in Sri Lanka as a whole and in urban areas were Rs 310.8 and Rs 397.3 respectively (Annex 17, Table 2); based on an estimated inflation factor of 1.75, the average in- comes in 1977 in these categories are Rs 544 and Rs 695. The poverty level income, received by 25 to 30% of the urban population, is estimated to be about Rs 454 per household per month (Rs 72 per person per month). Thus, two or three of the lower income groups will obtain free water from standpipes; and the lowest income group that will pay for water would have a present average income of about Rs 500 per month. If an average household has 6 family members, each consuming about 30 Igcd, then the cost per household in Ambalangoda and Kalutara, where a tariff of Rs 5/1,000 gallons has been assumed (paragraph 7.10), is Rs 27.0 per month. This is about 5% of the monthly income of that group, but less than 3% of the income of the next higher group and 4% of the average income. Similarly, in Colombo, where per capita consumption is expected to be about 40 Igcd, and the tariff Rs 3.00/ 1,000 Ig (paragraph 7.10) expendi- ture on water is 4% of the income of this group, 2% of the next higher group and 3% of the average. 7.17 Thus, the lowest income group which would be required to pay for water may experience some hardship in meeting these tariffs whereas the next higher group would experience no difficulty. It would appear from this rather approximate analysis, that a small portion of the cost of water may have to be absorbed by the higher income categories and larger consumers, through suitably structured tariffs. VIII. AGREEMENTS REACHED AND RECOMMENDATION 8.01 During negotiations agreement was reached on the following principal issues: (a) execution of a program of consumer metering and other appropriate measures to reduce waste of water includ- ing establishment of facilities for testing and re- pairing meters (paragraph 4.07); (b) establishment of a system for routine examination of water quality by an agency independent of WDB and water distribution authorities (paragraph 4.08); (c) installation and maintenance of equipment for the bulk measurement of water supplied by WDB (paragraph 4.09);  - 31 - (d) employment of consultants for a sewerage system design and for a water tariff study (paragraphs 4.10 and 6.17); (e) assignment of adequate, qualified staff to the project (paragraph 4.14); (f) establishment of a specific institutional organization for the Greater Colombo area by January 1, 1978 and establish- ment of specific organizations for other areas as required by the progress of the work (paragraph 5.10); (g) execution of specific measures to strengthen WDB financial operations (paragraph 5.16); (h) audit of WDB accounts (paragraph 5.19); (i) prompt payment of bills rendered by WDB to local author- ities and rendered by local authorities to consumers (paragraph 6.07); (j) maintenance of tariffs by WDB at levels to earn in the project area, a minimum rate of return on average net fixed assets of 5% in 1978, 6% in 1979 through 1981 and 7% thereafter; and for operations outside the project area at a level to avoid subsidy from within the project area (paragraphs 6.19 and 6.20); (k) maintenance of retail tariffs by local authorities at levels to provide revenues sufficient to cover cash operating expenses and debt service (paragraph 6.23); (1) continuation of Government policy to limit water opera- tion subsidies to the cost of water supplied through standpipes (paragraph 6.25); (m) provision of funds for project completion including satis- factory terms for onlending of the Credit and for Govern- ment loans (paragraph 6.30); 8.03 Subject to the condition of effectiveness described in paragraph 6.30 the project is suitable for an IDA credit of US$14 million.   ANNEX 1 Page 1 APPRAISAL OF THE WATER SUPPLY PROJECT SRI LANKA The Water Supply and Sewerage Sector Climate and Water Resources 1. The Republic of Sri Lanka is a tropical island, located within latitudes 6 and 10 degrees north and within longitudes 80 and 81 degrees east. The mean temperatures range from 80 to 82 degrees Fahrenheit in the low-lands with a seasonal variation of less than 5 degrees. The major part of the annual rainfall comes from two monsoons, the southwest, which occurs from May to September, and the northeast from December to February. The distribution of population in Sri Lanka has been influenced to a large extent by the distribution of rainfall. There are two distinct rainfall zones, the wetter zone which covers the southwest quarter of the island and the drier zone which covers most of the remainder of the island. The average annual rainfall in each of these zones is 100 inches and 35 inches respectively, although figures as high as 200 inches per year are recorded at individual stations in the wet zone. 2. Large rivers flowing westward from the highlands of the interior provide abundant water sources for the relatively densely populated western coastal plain. In contrast, the more sparsely populated drier areas rely more heavily on groundwater from individual family wells or small community wells. The small groundwater sources are less costly to develop than the large complex works required for abstraction and treatment of river water. Shortages of wholesome, piped water in the southwest urban areas therefore result from a lack of financial resources for pumping, treatment and distri- bution of the abundant although polluted river waters. Population 3. The first decennial census of 1871 gave the population as 2.4 million which rose to 12.7 in the 1971 census, a 440% increase in 100 years. The mid-1976 census is estimated by the Department of Census and Statistics Sri Lanka, as 13.8 million with a current annual national population growth rate of 1.8%. The population density based on a land area of 25,300 square miles is 546 persons per square mile. Levels of Water and Sanitation Services 4. A summary of water services data from the 1971 census (Table 1) shows that of 2.6 million people (21% of the total population of 12.7 million)  ANNEX 1 Page 2 living in 135 urban communities, almost 2.0 million people (77% of the urban population) in 66 communities have piped water supplies, but about four-fifths of these supplies (serving about 1.6 million people) are judged to be inade- quate in quantity and are of questionable quality. 5. The rural community of 9.9 million people (79%) is very poorly provided for; only 0.4 million (5%) of the 8.8 million rural people (exclud- ing agricultural estates) have access to piped water. Communities centered on agricultural estates have a relatively high level of service since almost 0.9 million (75%) estate dwellers have piped water. 6. From the aspects of the number of people served and the adequacy and safety of the supplies, it may be concluded that the nation-wide standard of water supply service is generally very low. There appears, however, to be an equitable distribution of the water available, a large part of which is supplied through public standpipes. 7. In the sanitation subsector a comparatively high percentage of housing units have acceptable means of excreta disposal, evidence of the special attention which the Government has customarily paid to developing public health services. The Department of Health has for some years oper- ated two subsidy schemes to encourage the construction of latrines in urban and rural areas. Government policy has traditionally required that sanita- tion programs are coordinated with water supply programs and are supported by health education, although this ideal has not always been achieved. Much still needs to be done to improve and extend the water-borne sewerage systems in urban areas where about 42% of the urban population have a satis- factory level of service, 18% have pit latrines and 40% have unsatisfactory facilities or no service at all. Thus there is a need to provide services for some I million urban dwellers. The City of Colombo is the only area served by an urban, water borne sewage collection system, and this system urgently requires substantial improvement and expansion. The system should also be extended to include the more densely populated parts of Colombo's peripheral towns. The Government has requested that engineering studies and design of these works are included in the project (paragraph 4.10). 8. In the rural sector about 57% of the population have sanitation facilities ranging from satisfactory to those reaching the lowest acceptable standards. Provision of sanitation facilities for the remaining 43% of the rural population, some 3.7 million people, is within the reach of a Govern- ment sponsored project since only the simplest form of sanitation, the pit- latrine, is required in most cases. 9. The present level of water supplies to both urban and rural areas is rather lower than that of sanitation, but commendable progress has been made in both subsectors. Achievements in the sector, although aided by external agencies have largely resulted from the Government's own efforts and its own technological and fiscal resources.  ANNEX 1 Page 3 Government Objectives 10. In 1970 the Government resolved to study and make planned provision for the country's total rural community water supply needs. Subsequently, the scope of the plan was extended to encompass the provision of safe water and sanitation for the entire population by the year 2001. This National Plan, as it was termed, was to have been prepared by WDB with technical assistance from WHO; however, WDB was unable to continue work on the plan because of day-to-day demands in the sector, the need to begin to implement the first stage of the UNDP Master Plan for Colombo and the southwest coastal area and construction of a program of rural water supply improvements, partly financed by UNICEF. 11. The first stage of the National Plan aims to implement a program of both urban and rural water supply improvements by 1980. This would only marginally increase the percentage of urban population receiving piped water but would substantially improve the quality and reliability of urban water supplies. In the rural regions the aim is to provide 15% of the rural popu- lation with adequate safe water and to provide 70% of the population with access to acceptable sanitation facilities. Most of the rural water supply improvement could be achieved through the construction of family wells and small community wells. Sanitation improvements would be through programs and grants for family latrine construction. Sector Organization 12. The ministries and agencies connected with water supply and sanita- tion are: - National Water Supply and Drainage Board (WDB) under the Ministry of Local Government. - Territorial Civil Engineering Organization, under the Ministry of Irrigation, Power and Highways. - Local Authorities whose interests are looked after by the Ministry of Local Government. - Department of Health under the Ministry of Health. - Division of Public Health Engineering in the Department of Buildings under the Ministry of Housing and Construction. Since its formation in 1975, WDB has been the agency primarily reponsible for planning, design and construction of water supply systems throughout Sri Lanka. Most local authorities operate and maintain their own distribution systems although in some cases this responsibility has remained with WDB. Colombo Municipality operates its own systems, including sources of supply and transmission, although these facilities are expected to pass to WDB in the immediate future.  ANNEX 1 Page 4 The Local Loans and Development Fund 13. The Commissioner of Local Government is the principal officer of the Local Loans and Development Fund through which the Government channels loans for water supplies and a variety of other public works and utilities. Loans to the Fund presently carry an interest rate of 9-3/4%. For water supply schemes, the following financing pattern is usually adopted. For Headworks, Transmission and Reservoirs For Distribution A. For New Projects Municipal, urban and town councils 100% grant 100% loan Village councils 50% grant 50% grant B. For Augmentation Projects Municipal, urban and town councils 50% grant 100% loan Village councils 50% grant 100% loan Thus, depending on whether a project is new or augments an existing system, the portion of the project and the type of local authority, financing by the Government may range from a 100% grant to a 100% loan, channeled through the Local Loans and Development Fund. Sector Investment Programs and Constraints 14. Future goals set by the government for both urban and rural areas appear to be realistic, in that they require investments within budgetary constraints associated with the economy of the country, but supplemented by foreign exchange grants or loans. The Government and WDB are presently pre- paring a formal investment plan for the sector which includes: urban water supply projects for the southwest region, for which the Government has re- quested IDA participation; a rural water supply program, for which UNICEF financial assistance has been requested and which is a continuation of the first UNICEF program now being implemented; water supply and sewerage works in further urban areas, possibly assisted by IDA; continuation of present small rural sanitation programs. WDB's present tentative plan for urban water supplies includes new and improved water supplies to 43 communities in addition to proposals included in this project. The major constraint on development in the sector arises from the lack of foreign exchange alloca- tions for some of the vital elements of the water supply and sewerage systems.  ANNEX 1 Page 5 15. Sri Lanka is desperately short of capital and current inputs of foreign exchange needed to maintain production in all industries in which imported plant and machinery, or parts for such items, are necessary. While it is impossible to develop water supply and sewerage facilities which are completely independent of foreign equipment, such dependency should be mini- mized by selection and design of systems incorporating simple local materials rather than sophisticated imported equipment. The development of industry for local manufacture of plant, machinery, equipment, etc. -- related to the water supply and sewerage industry -- would not provide an economic solution to the problem since these industries tend to be capital intensive and are frequently based on the use of imported raw materials and foreign technology. Development of such industries to satisfy only the comparatively small local demands would not be economic. Alternatively, goods manufactured for the domestic and export market may not be competitive with those of the more highly industrialized countries which have advantages in the availability of technology and raw materials. 16. The lack of foreign exchange and the potential technical deficiency of the WDB contribute to a further problem, that of achieving an acceptable level of operation and maintenance of existing and proposed facilities. Historically, the responsibility for water supply and sewerage systems rested with local councils; more recently WDB assumed responsibility for a number of these systems, either at the request of local authorities or through their reluctance or inability to efficiently operate their systems. Almost all of the systems are dilapidated because of the lack of replacement machinery and parts and because of low standards of maintenace. Thus, WDB is faced with the tasks of: improving national standards of operation and maintenance; renovating a number of systems; and planning and developing new systems. The situation may be improved by: Government providing incentives to retain the services of WDB engineers; training programs for newly recruited, less experienced engineers; and the provision of foreign exchange for purchasing spare parts. 17. The Government financing policy for the sector is presently chang- ing from one in which water was regarded as a free good to one in which a system of specific charges will be levied for both water and sanitation. Although the eventual structure must await a tariff study, it is envisaged that the rating system will provide protection for the poor in that quanti- ties of water essential for the health and welfare of the people will be provided free or at a very low charge; it is anticipated that considerably higher charges will be made for water in quantities exceeding this essential level.  ANNEX 1 Table 1 APPRAISAL OF THE WATER SUPPLY PROJECT SRI LANKA Estimated Access to Piped Water and Sanitation-/ A. Population Distribution Population % of Total Number of Communities (millions) Population Communities Urban 2.6 21 135 Rural 8.8 70 18,800 Estate 1.1 9 5,000 B. Population with Services Stated % of Urban/ Population Rural/Estate Number of (millions) Population Communities Piped Water Urban 2.0o2 77 66 Rural 0.4 5 Estate 0.8 75 Sanitation Ulrban 1.1 42 3/ Rural 5.1 57 Estate 0.75 68 1/ Based on 1971 Census Figures. 2/ Four-fifths of these supplies serving about 1.6 million people are judged to be inadequate. 3/ Colombo has the only water-borne sewage collection system.  ANNEX 2 Page 1 APPRAISAL OF THE WATER SUPPLY PROJECT SRI LANKA Description of the Existing Water Supply Arrangements 1. Colombo and Towns South are the only parts of the project area which have a piped water service. The remainder of the project area com- prising Towns North, Ambalangoda and Kalutara, depends on ground water from privately constructed, shallow well sources. 2. Colombo is the capital city, principal sea port and center of com- merce and industry in Sri Lanka. Its piped water supply dates back to the early 19th century when Colombo obtained water from wells and canals. The first impounding reservoir and treatment facility at Labugama was completed in 1886 and an additional, similar facility was constructed on an adjacent catchment area at Kalatuwawa in 1954. These sources of supply are now supple- mented by water from the Kelani Ganga, a large river which discharges to the Indian Ocean, immediately to the north of Colombo city. 3. The existing water treatment plants at Labugama and Kalatuwawa are conventional water treatment systems comprising aeration, pre-chlorination, chemically assisted coagulation, sedimentation, filtration, post-chlorination and pH adjustment. The plants are operated and maintained by Colombo Munici- pality and are generally in good condition with the exception of deficiencies of spare and replacement parts requiring foreign exchange. The capacities of the plants and the gravity flow transmission system are adequate for reservoir yields. The works which abstract and treat water from the Kelani Ganga are located at Ambatale some 9 miles upstream of the river mouth. 4. The works comprise: a river water intake, river water pumping station, a water treatment plant, and a filtered water pumping station. These facilities are in various stages of expansion at present; their devel- opment has not been coordinated because of the lack of foreign exchange required to purchase some of the essential items of plant. The present position is that expansion of the major part of the Ambatale works from nominal capacities of 20 Imgd to 40 Imgd will be completed by May 1977. However, these facilities cannot be fully utilized until expansion of two vital components -- the filtered water pumps and transmission mains -- are also completed. These two items require foreign exchange expenditure and are included in the proposed project. 5. The yields of the three sources of supply are to some extent depen- dent on their operation as an integrated system. The long-term safe yield of  ANNEX 2 Page 2 the two reservoirs is 30.5 Imgd, of which 0.5 Imgd is used outside the project area. The Master Plan studies showed that the safe yield of these sources may be increased to 32.5 Imgd, if they are operated in conjunction with a third independent source such as the Kelani Ganga/Ambatale facility. 6. Under normal operating conditions the total quantity of water available from the three water sources serving Colombo and Towns South is 54.5 Imgd, of which 30.5 Imgd is drawn from the two impounding reservoirs and 24.0 Imgd from the Kelani Ganga at Ambatale. Colombo receives a total of about 35.5 Imgd, 7 Imgd from Ambatale and 28.5 Imgd from the two reser- voirs; 2 Imgd of the reservoirs' yield is supplied to Towns South from one of the city's distribution reservoirs. Towns South receives an estimated total of 19 Imgd made up from the balance of the Amabatale yield (17 Imgd) and 2 Imgd from Colombo's sources. 7. In recent years it has become increasingly difficult to maintain a 24-hour water supply to Colombo without severe depletion of water stored in the two impounding reservoirs, Kalatuwawa and Labugama. The reduction of mains pressure in an effort to reduce leakage and waste and to conserve water has become a frequent necessity. Most of the bulk meters for the measurement of water from the sources and from distribution reservoirs are unserviceable because of the lack of replacement parts; it is therefore impossible to formu- late a precise account of the water drawn from each source or transmitted to each area of demand. Furthermore, it is not clear when the safe yields of the impounding reservoirs are being exceeded. 8. These operating deficiencies and a failure of the southwest monsoon resulted in a severe water shortage in Colombo in July and August of 1976. During this period, the supply was reduced to 4 to 6 hours per day, and the two impounding reservoirs were, for practical purposes, empty. An even more severe water shortage was averted by obtaining several electrically operated pumping sets by air-freight from the United Kingdom and completing their temporary installation at Ambatale by mid-August 1976. The quantity of water drawn from the Kelani Ganga was thus increased from 24.5 Imgd to 30 Imgd, and some 8 Imgd was drawn from the two impounding reservoirs. The temporary additional quantity of water obtained from the Kelani Ganga was put into supply after partial treatment, and it is presumed that this opera- ting procedure will continue until completion of further works under the project. Water from the two impounding reservoirs gravitates through bat- teries of transmission mains to distribution reservoirs in Colombo. Water from Ambatale is pumped, via part of this transmission system, to the Colombo reservoirs. Some of the transmission mains and part of the distri- bution mains network (comprising some 350 miles of pipes) are severely en- crusted internally, resulting in a reduction in hydraulic capacity. Three large distribution reservoirs, Elie House, Maligakande and Dehiwala, total capacity 21.4 Img and eleven small reservoirs and towers, total capacity 4.3 Img serve the Colombo and Towns South areas.  ANNEX 2 Page 3 9. Consumers in Colombo Municipality are supplied through 45,000 ser- vice connections and some 750 standpipes. Domestic supplies are unmetered, but the larger commercial and industrial consumers are metered. Although metering is claimed to be effective, there are no facilities for meter test- ing and repair. In Towns South there are 27,000 unmetered domestic connec- tions, and some 60% of the population is served by standpipes. Throughout these areas, the piped supply is supplemented by private wells, although the extent to which this occurs has not been quantified.  ANNEX 3 Page 1 APPRAISAL OF THE WATER SUPPLY PROJECT SRI LANKA Description of the Project The Project Area 1. The Master Plan area includes a southwest, coastal strip of the island stretching some 100 miles from the area immediately to the North of Negombo to just south of Galle, and having a total area of 430 square miles. The population of this area is estimated to be 3.5 million , about 25% of the population of Sri Lanka as a whole. The area contains some 50 communi- ties and municipal authorities in addition to urban centers of Colombo, Negombo, Galle, Kalutara and Ambalangoda. A new piped water supply system for Galle has recently been completed. The project comprises works which would complete the first stage of the Master Plan water supply recommenda- tions, and the project area therefore forms that part of the Master Plan area which includes the urban centers of Colombo, Towns South, Towns North, Kalutara and Ambalangoda. The communities included in these areas are listed in Appendix 2 of Annex 2 and are shown in Map IBRD 12531. 2. Piped water supply systems for Colombo, Towns South and Negombo are inadequate and are supplemented by dug wells. All other communities in the area (except Galle) depend entirely on dug wells. However, the coastal plain alluvial deposits and residual soils in this area provide poor aquifers, and wells are liable to contamination from surface waters and from latrines, soak- age pits and cesspools which are widely used as an inexpensive substitute for water-borne sewerage systems. Colombo and Its Environs 3. The Master Plan study projected that water demands in the Greater Colombo area would reach 132 Imgd by the year 2000 and that this quantity could be obtained most economically by direct abstraction from the Kelani Ganga in conjunction with the continued use of the two existing impounding reservoirs. Five primary alternative arrangements were studied in detail to determine the most economic production and transmission arrangements. These studies identified the staged expansion of the Ambatale works as being the preferred economic means of increasing production, and identified a transmission system in which the use of existing, but rehabilitated, trans- mission mains would meet all of the first stage requirements. Under this alternative, construction of new transmission mains is deferred until 1990, other than the construction of short link mains from Ambatale to the existing transmission main battery and the transmission main serving Towns North.  ANNEX 3 Page 2 4. In the studies of alternative transmission systems, detailed esti- mates of capital and operating costs were prepared and the system selected was that which represented the least present-value at a discount rate of 10%. The selected system requires that existing and new sources, treatment and transmission facilities be operated as an integrated system by a single entity. Although the present value analysis indicated that this integrated system has only a fairly small margin of preference over some of the other alternatives studied, it clearly has technical and administrative advantages which were not quantified in the analysis. 5. The Master Plan accorded high priority to water supply extension to Towns North where alternative transmission arrangements were examined and a system comprising a 3-mile long transmission main from Ambatale to a 4 Img service reservoir at Church Hill was recommended. Improvement of the exist- ing supply to Towns South was also given high priority. This work primarily involves strengthening existing transmission and distribution systems and extension of the distribution system to Attidya. Kalutara and Ambalangoda 6. Kalutara and Ambalangoda have no piped water supplies at present, and complete water supply systems are proposed under the project. The Master Plan studies selected the development of nearby surface water sources as being the most economic solutions, but at the same time directed attention to the need for further data in connection with probable high salinity of the Aimbalangoda source. Investigation by WDB proved the source to be unsuitable and an alternative, more distant surface water source was, therefore, selected for development. 7. Construction phasing and the sizing of individual components and work elements of these sub-projects are determined on the basis of least costs of alternative systems and programs. Least cost analyses have shown that the optimum capacity of each component of the treatment facilities for Ambalangoda and Kalutara is that which provides for projected water demands over an 8 to 10-year period, and that the optimum capacity for transmission mains is that which provides for a 15-year period. Metering Programs 8. The project provides for consumer metering of all connections in areas of new piped supplies, that is in Towns North, Kalutara and Ambal- angoda. Provision has also been made for installing consumer meters in Colombo Municipality and Towns South. The entire program requires the installation of some 70,000 meters at rates of installation varying from 12,000 to 17,000 meters per year. The Government is obtaining assistance from the United Kingdom, separately from the project, to establish and staff meter testing and repair facilities.  ANNEX 3 Page 3 Replacement Parts and Appliances 9. Spare parts for the repair of existing equipment, or actual re- placement itetns, have been included in the project All of these parts and appliances are of foreign origin and most are associated with pumping, treatment or bulk measurement of water. Technical Assistance 10. Technical asistance has been requested by WDB primarily to update the Master Plan report and prepare final engineering designs for sewerage and drainage facilities for Colombo, Towns South, Negombo and Galle. It is estimated that consultants will be required for approximately 150 man-months at US$6,000 to US$8,000 per month for this task. A further techncial assist- ance item is included in the project for a water tariff study; the estimated duration of this work is 12 man-months at US$5,000 to US$6,000 per man month. Training 11. A training program includes training of some of WDB's finan- cial and accounting personnel and training WDB engineers in water treatment plant management and distribution system waste prevention. Although the Government is in agreement with the scope of the program, final details of these items of training, their location and means of implementation, selec- tion of personnel require further discussion with WDB officials. 12. A brief description of each component of the project is given in Appendix 1 of this annex and locations of major project items are shown in Map IBRD 12531.  ANNEX 3 APPENDIX Page 1 of 2 APPRAISAL OF THE WATER SUPPLY PROJECT SRI LANKA Project Description Component/Work Item Location Size/Capacity- Function/Area Served 1. AMBATALE PUMPS Purchase and installation Ambatale existing 3 - 3.5 Imgd Pump treated water to Colombo of 9 pumping units pumping stations 3 - 8.0 Imgd and Towns North via Eli House, 3 - 6.8 Imgd Maligakande and (proposed) Church Hill reservoirs. 2. AMBATALE TRANSMISSION (a) Construction of short link Ambatale to exist- 20, 30, and 32- Transmission of treated water mains ing transmission inch diameter, from Ambatale pumps to Maliga- mains total length kande and Elie House reservoirs, 3,000 ft. Colombo. (b) Rehabilitation of trans- Ambatale to Colombo 2 mains each 20- Optimize transmission system mission mains inch diameter, capacity; supply water to total length Colombo. 68,000 ft. 3. TOWNS NORTH (a) Construction of a trans- Ambatale to Towns 28 and 24-inch Convey water from Ambatale to mission and trunk mains North via (pro- diameter, Towns North. (Includes excess posed) Church Hill length 13,000 ft. transmission capacity). reservoir (b) Construction of a dis- Church Hill 4 Imgd Distribution storage for Towns tribution reservoir North. (c) Construction of distri- Towns North 32-inch, length Distribution of piped water bution mains including 1,400 ft.; 24- to consumers in Towns North. meters inch, length 24,000 ft.; 3-inch to 20-inch total length 68 miles. 4. TOWNS SOUTH (a) Rehabilitation of trans- Moratuwa, Dehiwala 18 and 20-inch Improvement of water transmission missions mains and Kotte diameter, total mains to Towns South. length 26,000 ft. (b) Construction of distribu- Dehiwala south 3 to 10-inch, Extension of water supply to tion mains zone total length Attidya area. 24,000 ft. (c) Extension of Moratuwa Moratuwa From existing Provide storage required to distribution reservoir 0.9 Img to 1.9 Img improve the supply. (d) Construction of a dis- Kotte (Jubilee 1 Img Provide improved pressures in tribution reservoir and Reservoir) Kotte south zone. booster (e) Metering Program Towns South Installation of Preferred method of charging approximately for water 30,000 meters over a 5-year period 5. COLOMBO MUNICIPALITY (a) Construction of dis- Elie House reser- 36-inch diameter Improve supply to northern part tribution mains voir Walls Lane reservoir outlet of Colombo Municipality. and 28-inch dia- meter main, length 1,250 ft. (b) Construction of dis- Bloemendhal/ 18-inch diameter Improve supply to north - tribution mains Stace Roads main,length eastern part of Colombo Muni- 2,000 ft. cipality.  ANNEX 3 APPENDIX 1 Page 2 of 2 Component/Work Item Location Size/CapacitY1/ Function/Area Served 5. COLOMBO MUNICIPALITY (continued) (c) Construction of dis- Stace/Ingram 10-inch diameter Improve supply to north - tribution mains Roads main, length eastern part of Colombo Muni- 1,300 ft. cipality. (d) Construction of dis- Timbirigasyaya 18-inch diameter Improve supply to central/south tribution mains Road main, length part of Colombo Municipality. 2,500 ft. (e) Rehabilitation of dis- Throughout Miscellaneous Improve the capacity of existing tribution mains Colombo mains from 10- mains and thus improve distri- Municipality inch to 30-inch, bution system pressures. 40,700 ft. (f) Water Tower and Booster Kirillapone An 0.2 Img water Improve distribution pressures - Station tower and an 0.8 in the Kirillapone district of Imgd booster Colombo Municipality. station (g) Distribution reservoirs, Colombo, Extension to Provide storage for larger area extension and renovation Maligakande increase capa- to be served by this reservoir. Reservoir city from 8 Img to 11 Img. (h) Metering Program Colombo Installation Preferred method of charging Municipality of approximately for water 34,000 meters over a 5-year period. 6. KALUTARA A new water supply Intake at Kalu First stage To provide piped water to Kalutara system including a Ganga; treatment (1980) capacity and adjacent communities. river intake, treatment at Clyde; distri- 5.3 Imgd. (Second plant, pumping stations bution at Kalutara stage 1990, transmission and distri- and adjacent com- increase capacity bution facilities inclu- munities to 7.0 Imgd) ding meters 7. AMBATAN(.lfA A new water supply system Intake and treat- Capacity 1.5 Imgd. To provide piped water to including a river intake, ment plant at Gin (Second stage 1993, Ambalangoda. treatment plant, pumping Ganga, distribution increase capacity stations, transmission at Ambalangoda to 2.0 Imgd). and distribution faci- and environs lities including meters 8. SPARE PARTS & EQUIPMENT Spare parts and minor Existing works in - Primarily for operation and equipment of foreign project area maintenance purposes. origin 9. TECHNICAL ASSISTANCE & TRAINING (a) Engineering consulting Primarily in Sri Design of sewerage Colombo, Towns South, Negombo services Lanka and drainage works and Galle for WDB (b) Financial consulting In Sri Lanka Water and sewerage Establishment of equitable services tariff study for tariff structures in the WDB project area. (c) Training In Sri Lanka WDB financial and Improvement of WDB's accounting and overseas engineering staff and financial management; development of expertise in waste control and plant opera- tion. 1/ Pipeline lengths are approximate, dependitig on routes finally selected.  ANNEX 3 APPENDIX 2 APPRAISAL OF THE WATER SUPPLY PROJECT SRI LANKA Local Authorities In the Project Area 1/ Geographical Area Name of Local Authority Type of Local Authority Colombo Colombo MC Towns South of Colombo Dehiwala-Mt. Lavinia MC Kolonnawa UC Kotte UC Moratuwa UC Panadura UC Towns North of Colombo Peliyagoda UC Wattala-Mabole UC Mahara (in part) UC Kelaniya TC Dalugama TC Hendala TC Regiona of Kalutara Kalutara UC Beruwala UC Wadduwa TC Alutgama TC Dharga Town TC Bentota TC Waddu Waskadu TC Region of Ambalangoda Ambalangoda UC Balapitiya TC > 1/ MC, UC and TC are acronyms for municipal, urban and town councils, respectively.  ANNEX 4 Page 1 APPRAISAL OF THE WATER SUPPLY PROJECT SRI LANKA Sewerage - Background and Future Development 1. The Colombo Municipality is the only area in Sri Lanka served by an urban sewage collection system, most of which was installed some 60 years ago. Although there have been extensions and renewals in more recent years they are limited in extent, and the major part of the system therefore remains old and of inadequate capacity. 2. The Municipality is divided into two drainage areas; flows from the northern area discharge to the Kelani Ganga after minimal treatment for removal of a small proportion of the solids; flows from the southern area are discharged to the sea by means of a short outfall. The system is oper- ated and maintained by the Colombo Municipal Council, which reports that some trunk and subsidiary sewers are overloaded, pumping station capacities are generally inadequate and some sewers continuously overflow to surface water drains. Only parts of Colombo are served by the collection system; some areas continue to rely on other methods including bucket latrines. 3. In 1972 WHO/UNDP consultants, Howard Humphreys and Sons completed a feasibility study, report and preliminary engineering designs for sewerage facilities for Greater Colombo. The consultants recommended that discharge of sewage to the sea without treatment should continue but that a new sea outfall should be provided. Recommendations also included major improvements of the collection and pumping systems. Although these works have not been implemented, primarily because of a lack of foreign exchange, the Government is concerned over the inadequacies of the existing system and has requested that studies be implemented to update the previous report recommendations and designs in the light of developments which have taken place since 1972. Such studies, and similar work for other urban areas described below, have therefore been included under the technical assistance item of this project. 4. Urban areas adjacent to Colombo which have no sewerage facilites, and yet have piped water supplies and relatively high population densities, include Kolonnawa, Kotte and Dehiwala-Mt. Lavinia. In these areas it is estimated that at least 100,000 pople should immediately be served under the first stage of a sewage collection system and that the system could be extended in subsequent stages to serve a major part of the area presently receiving piped water. Disposal of sewage from this area would be by the new southern outfall which is proposed for Colombo; treatment would not be required in the foreseeable future.  ANNEX 4 Page 2 5. A piped water system for Negombo Municipality was constructed in 1963, however the town does not have a sewerage system. This township and that of Galle, in which a new piped water supply system was constructed in 1975, would receive high priority in a proposed program of sewerage services. 6. Drainage of surface water from specific urban areas in which flooding is severe, is also proposed for inclusion in the studies to be undertaken in this project. Frequent flooding is reported to occur in Colombo, in the areas of Torrington (1,250 acres) and Unity Place (500 acres). Surface water drainage improvements are also required in parts of Negombo and Galle. 7. Responsibility for the selection, appointment and supervision of consulting engineers for this work would rest with WDB, in its role as the principal national agency for water and sewerage planning and develop- ment. At present WDB has only two engineers with experience in sewerage aspects of sanitary engineering, both of whom are attending foreign training courses. WDB will therefore rely heavily on the advice and assistance of consulting engineers for study and design functions in this field, and may subsequently require consulting engineers to assist with construction super- vision.  ANNEX 5 APPRAISAL OF THE WATER SUPPLY PROJECT SRI LANKA Projected Water Demand, Production and Population Growth 1. Projections of population and water demand for Colombo and adjacent towns are shown in Charts 1 and 2. Similar data for Kalutara and Ambalangoda are shown in Chart 3. 2. The basis for population statistics is the 1971 census, updated by the Government Department of Census and Statistics. All water consump- tion data should be regarded as somewhat conjectural since most bulk meters are unserviceable and individual consumers' meters are used only for commer- cial and industrial establishments. 3. In Colombo and Towns South a program to meter all connections will begin in 1977 and will be completed in 1985. As metering progresses, the per capita consumption will decline. It has been assumed that the percentage of unaccounted-for water in existing areas of supply will decline as metering becomes more widely used and as older distribution systems are improved. Per capita consumption for people supplied through standpipes is estimated at 7.0 to 10.0 Igcd depending on the locality of the supply; consumption through metered private connections is estimated at 33 Igcd initially, gradually rising to 40 in outlying areas and 40 gradually rising to 48 in the well established urban areas. It has been estimated that water consump- tion through unmetered private connections varies from 50 to 56 Igcd. These criteria are based on the Master Plan studies, with minor variations to reflect WDB's more recent observations.  ANNEX 5 Chart 1 of 3 APPRAISAL OF THE WATER SUPPLY PROJECT SRI LANKA PROJECTED POPULATIONS IN COLOMBO, TOWNS SOUTH AND TOWNS NORTH 3 1 _ Colombo, Towns South and Twns North 2 M. 0.9 = Extension of area served Towns South to include: Kehelwatta _ _ _ _ , c 0.8 OKotikawatta, Kotte-Galkissa _,M _o _,wn ~ Z Maharagama \ _ 6 , _ _ _ Colombo Z Towns North 0.51 ----MM _M ___- _______' _ _______ S____________ 20 0.4 Includes: Kotte - Kolonnawa, Dehiwala Extension of area Mount Lavinia served to include Moratuwa, Panadura Ja-ela, Kandana, 0.3 Ragama, Kanuwana 1978 |- First stage serves: Daiugama, Kelaniya Wattala-Mabole | Peliyagoda, Hendala 0.1 . 1976 1978 1980 1982 1984 1986 1988 1990 World Bank - 16644  ANNEX 5 APPRAISAL OF Chart 2 of 3 THE WATER SUPPLY PROJECT SRI LANKA PROJECTED WATER DEMAND AND PRODUCTION IN COLOMBO, TOWNS SOUTH AND TOWNS NORTH 100 74.5 Mgd 5 90 -Total Maximum DayT A Day Water Demand Dmn 70 , ~~~~~~~ := _ \ ~~~~~~Total Avrg Dmayn 60 54.5 Mgd Total Capacity of Existing 50 ~ ~and Proposed Plants 40\._ Colombo Average Day Water Demand! ~3 a Towns Soth P Averagen Day Souter Demand *-Extension of area served to Average Day Water Demand /i include: Kehelwatte, Kotikawatte, 20 - - --- Kotte - Galkissa, Maharagama z 0 Includes: Kotte Kolonnawa, Dehiwala- 0 Mount Lavinia, Moratuwa, Panadura a z Towns North - _ _ - Orr 10 Average - Day Water Demand- , ,_ B~~~~-. _ __ _ ___ 8 Extension of area served to include: 7 / / ~~~~~~~~~~~~~~~~~~~~~~Ja-ela Kandana _ Ragama I Kanuwana ~00 4 I|- First stage serves: Daiugama 3 g Kelaniya Wattala - Mabole Pel iyagoda I Hendala 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 World Bank - 16646  ANNEX 5 Chart 3 of 3 APPRAISAL OF THE WATER SUPPLY PROJECT SRI LANKA PROJECTED WATER DEMAND AND PRODUCTION IN KALUTARA AND AMBALANGODA KALUTARA 800 -' 700 ~ ~ ~ ~ __________7 0 Mgd7 870 Co _ _ _ _ lE Capacity of Proposed Plant 600 -(right scale)\ 6 500 -ip _.- 5 Z Maximum Day Water Demand Z<_ (right scale) > 400 _ 4. 2 - .00 ~~~~~~~~m o~~~~~~~~~~~~~~~~~~ 300 . _______Average Day Water Demand 3 > Z (right scale) z 0~~~~~~~~~~~~~~~~~ a._ _ 1.5 .AMBALANGODA 200 - 1 . 20 Capacity of P oposed Plant en 1\ l~~~aximum Da y Water Demand __~ Z (right scale) |~~~~~lef scle) ~ * D 1500 l |- - - -| | 10 o n I- 90 |._ im5- ------- |_og 1280 _2-. 4 0 Mg- 8 2. Z _ - | l a Average Damy Water Demand DmD 0 70 F | | (right scale) | | 0.7 : D 60 S ~~~ | | - | l l 1~- 0.6 c< z~~~~~~~~~~~~~~~~~ 40-c - - w- 0-4 30 . ! l } l ! 1 1sl .. 1 X I 1 l 0,. 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 World Bank - 16647  ANNEX 6 Page 1 of 3 APPRAISAL OF THE WATER SUPPLY PROJECT SRI LANKA Detailed Cost Estimates % of Total Project Item Local Foreign Total Local Foreign Total Coat - - - - Rs. Thousands - - - - - - - -US$ Thousands - - - - A. CIVIL WORKS Ambatale Pumps Purchase and Installation of Pumps and Power Supply Equipment 729 84 813 100.1 11.5 111.6 0.3 Ambatale Transmission Systems Short Link Mains 245 - 245 33.7 - 33.7 Rehabilitation of Existing Mains 4,435 3,564 7,999 609.2 489.5 1,098.7 4,680 3,564 8,244 642.9 489.5 1,132.4 2.7 Towns North Purchase and Installation of Pumps 100 - 100 13.7 - 13.7 Transmission and Trunk Mains 8,106 1,197 9,303 1,113.5 164.4 1,277.9 Distribution System 14,789 2,184 16,973 2,031.5 300.0 2,331.5 22,995 3,381 26,376 3,158.7 464.4 3,623.1 8.5 Towns South Transmission Rehabilitation 405 1,105 1,510 55.6 151.8 207.4 Distribution Rehabilitation 357 962 1,319 49.0 132.2 181.2 Reservoirs and Connected Pipe Work 2,170 454 2,624 298.1 62.4 360.5 Distribution System 637 95 732 87.5 13.0 100.5 Metering Program 3,696 422 4,118 507.7 57.9 565.6 7,265 3,038 10,303 997.9 417.3 1,415.2 3.3 Colombo Municipality Distribution System Mains Construction 440 67 507 60.4 9.2 69.6 Mains Rehabilitation 654 1,770 2,424 89.8 243.2 333.0 Reservoir and Booster Station 3,356 702 4,058 461.0 p6.4 557.4 Metering Program 4,543 519 5,062 624.0 71.3 695.3 8,993 3,058 12,051 1,235.2 420.1 1,655.3 3.9 Kalutara River Intake 928 86 1,014 127.5 11.8 139.3 Treatment Plant and Pumping 4,648 972 5,620 638.5 133.5 772.0 Transmission and Reservoirs 10,218 1,508 11,726 1,403.6 207.2 1,610.8 Distribution System 6,162 909 7,071 846.4 124.9 971.3 21,956 3,475 25,431 3,016.0. 477.4 3,493.4 8.2 Ambalangoda River Intake 550 51 601 75.6 7.0 82.6 Transmission and Reservoirs 3,078 454 3,532 422.8 62.4 485.2 Distribution 1,501 222 1,723 206.2 30.5 236.7 5,129 727 5,856 704.6 99.9 804.5 1.9 Total Civil Works 71,747 17,327 89,074 9,855.4 2,380.1 12,235.5 28.8  ANNEX 6 Page 2 of 3 Detailed Cost Estimates z of Total Project Item Local Foreign Total Local Foreizn Totl Cot - - -- Rs Thousands - - - - - - - - US$ Thousands - - - - B. EQUIPMENT AND MATERIALS SUPPLY Ambatale Pumps Purchase and Installation of Pumps and Power Supply Equipment - 5,392 5,392 - 740.7 740.7 1.7 Asbatale Transmission System Short Link Mains - 1,172 1,172 - 161.0 161.0 Rehabilitation of Existing Mains - 970 970 - 133.2 133.2 2,142 2,142 - 294.2 294.2 0.7 Towns North Purchase and Installation of Pumps - 2,428 2,428 - 333.5 333.5 Transmission and Trunk Mains - 6,728 6,728 - 924.1 924.1 Distribution System 4,100 6,875 10,975 563.2 944.4 1,507.6 4,100 16,031 20,131 563.2 2,202.0 2,765.2 6.5 Towns South Transmission Rehabilitation - 251 251 - 34.5 34.5 Distribution Rehabilitation - 234 234 - 32.2 32.2 Reservoirs and Connected Pipe Work - 1,592 1,592 - 218.7 218.7 Distribution System 50 502 552 6.9 69.0 75.9 Metering Program - 1,524 1,524 - 209.3 209.3 50 4,103 4,153 6.9 563.7 570.6 1. 3 Colombo Municipality Distribution System Mains Construction - 905 905 - 124,4 124.4 Mains Rehabilitation - 419 419 - 57.5 57.5 Reservoir and Booster Station - 340 340 - 46.7 46.7 Metering Program - 1,757 1,757 - 241.3 241.3 3,421 3,421 - 469.9 469.9 1.1 Kalutara River Intake - 1,318 1,318 - 181.0 181.0 Treatment Plant and Pumping - 4,241 4,241 - 582.5 582.5 Transmission and Reservoirs - 6,743 6,743 - 926.2 926.2 Distribution 400 4,720 5,120 55.0 648.3 703.3 400 17,022 17,422 55.0 2,338.0 2,393.0 5.6 Ambalandoga River Intake - 1,966 1,966 - 270.0 270.0 Transmission and Reservoirs - 2,561 2,561 - 351.8 351.8 Distribution 200 1,142 1,342 27.5 156.8 184.3 200 5,669 5,869 27.5 778.6 806.1 1.9 Spare Parts and Appliances 1.744 3.713 5,457 239.6 510.0 749.6 1.8 Total Equipment and Materials 6,494 57,493 63,987 892.2 7,897.1 8,789.3 20.6 Supply  ANNEX 6 Page 3 of 3 Detailed Cost Estimates % of Total Project Item Local Foreign Total Local Foreign Total Cost - - - - Rs Thousands - - - - - - - - US$ Thousands - - - - C. OTHER Technical Assistance & Training 3,562 10,769 14,331 489.3 1,479.3 1,968.6 4.6 Engineering Services 6,887 _ 6,887 946.0 - 946.0 2.2 Land Acquisition 500 - 500 68.7 - 68.7 0.2 Total Other 10,949 10,769 21,718 1,504.0 1,479.3 2,983.3 7.0 SUMMARY Total Civil Works 71,747 17,327 89,074 9,855.4 2,380.1 12,235.5 28.8 Total Equipment & Materials Supply 6,494 57,493 63,987 892.2 7,897.1 8,789.3 20.6 Total Other 10,949 10,769 21,718 1,504.0 1,479.3 2,983.3 7.0 Sub-Total 89,190 85,589 174,779 12,251.6 11,756.5 24,008.1 56.4 Physical Contingencie/l/ 14,571 8,058 22,629 2,001.5 1,106.9 3,108.4 7.3 Price Contingencies2/ 15,740 7,916 23,656 2,162.1 1,087.4 3,249.5 7.7 FEECs 66,016 - 66,016 9,068.1 - 9,068.1 21.3 Customs Duty 22,523 - 22,523 3,093.8 - 3,093.8 7.3 TOTAL PROJECT COST 208,040 101,563 309,603 28,577.1 13,950.8 42,527.9 100.0 1/ Physical contingencies, 7.5 to 20% of base cost, depending on nature of work or item and degree of completeness of engineering design. 2/ Price contingencies for materials and equipment, 7 to 8% per annum; for civil works, 8 to 10% per annum.  APPRAISAL OF THE WATER SUPPIY PROJECT SRI LANKA CONSTRUCTION SCHEDULE PHOJECT COMPONEN jS 1976 1977 1978 1979 1980 1981 Ambatale Pumps ON IN lt i l5B_I . Ambdtaile Transmnissioni te _lium _isi,s sss l-owns Notth Pumps *mil I_ss I Towns North Transmissioni * Bails mIm Towns North Distribution lot Iii m1 - Towris South Distribution ii _ - - 1 ii vital. Towns South Transmission m _ -** smile seil ___ Colomho MliUnicipality . _ 1 m Distribution Kalutara Headworks * * a ass 1mm s _ Kalutara Transmission and t| _ Distributioni Ambdlangoda Headworks m - _1113 slin Ambalangoda Tra-nsmissioln and Distributior* I