Sri Lanka - Second Water Supply and Sewerage Project

Documentof FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No. 2904b-CE STAFF APPRAISAL REPORT SRI LANKA THE SECOND SRI LANKA WATER SUPPLY AND SEWERAGE PROJECT May 15, 1980 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  SRI LANKA THE SECOND SRI LANKA WATER SUPPLY AND SEWERAGE PROJECT CURRENCY EQUIVALENTS US$1.00 = Rs 15.60 Rs 1.00 US$0.0641 MEASURES AND EQUIVALENTS mm - milimeter (0.04 inches) cm - centimeter (0.39 inches) m - meter (39.37 inches or 3.28 ft) km - kilometer (0.62 miles) ha - hectare (10,000 square meters or 2.47 acres) sq. k - square kilometer (0.386 square miles) 1 - liter (0.22 Imperial gallons or 0.264 US gallons) lcd - liters per capita per day CU. m - cubic meter (220 Imperial gallons or 264.2 US gallons) ml - million liters or 1,000 cubic meters mld - million liters per day (0.220 million Imperial gallons per day or 0.264 million US gallons per day) ABBREVIATIONS AND ACRONYMS AIC - Average Incremental Costs CIDA - Canadian International Development Agency GSL - Government of Sri Lanka MLG - Ministry of Local Government, Housing and Construction SFD - Saudi Fund for Development UNDP - United Nations Development Programme WDB - National Water Supply and Drainage Board, Sri Lanka WHO - World Health Organization FISCAL YEAR January 1 - December 31 This report is based on the findiftgs of an IDA mission consisting of Messrs. P. H. Ware, J. Sopher and F. Golladay who visited Sri Lanka in January 1980.  FOR OFFICIAL USE ONLY SRI LANKA THE SECOND SRI LANKA WATER SUPPLY AND SEWERAGE PROJECT STAFF APPRAISAL REPORT TABLE OF CONTENTS Page No. 1. THE WATER SUPPLY AND SEWERAGE SECTOR ..................... 1 National Sector Organization and Development . . I The Project Area. . . 2 The Existing Water System. . . 3 The Existing Sewerage System. . . 4 Population in the Project Area .... 5 Water Demand and Consumption ........... 6 Demand for Access to the Sewerage Service . . 8 II. THE IMPLEMENTING AGENCY. 9 Lending Arrangements . . ............................ . 9 Organization ............................... 9 Organizational Staffing . . .10 Management and Finance . ................................l 11 WDB's New Accounting System . . . 12 Organizational and Management Reforms. 13 Water Retailing by WDB.. . 13 Institutional Developments . . .13. Financial Staffing . ............................. ........ 14 Computerization of Accounts ...... ....................... 14 Audit .................................................... 14 Insurance ................................................ 15 III. THE PROJECT . .............................................. 15 The Water Supply and Sewerage Program ..... ............... 15 The Project Description ....... ........................... 17 Water Supply .......... .............................. 17 Sewerage ............ ................................ 17 Other Items ......... ................................ 17 Property Connections to the Sewerage System .... .......... 18 Metering . ................................................ 18 Distribution System Maintenance .......................... 19 Cost Estimates ........... ................................ 20 Financing . ................................................ 21 Project Design, Construction and Supervision .... ......... 21 Services of Engineering and Management Consultants .22 This document has a restricted distribution and may be used by recipients only in the performance of their ofcial duties. Its contents may not otherwise be disciosd without World Bank authorization.  - ii - TABLE OF CONTENTS (continued) Page No. Implementation Schedule ........ .......................... 23 Procurement ............................................... 23 Disbursements ............................................. 23 Land Acquisition ................ 24 Environmental and Health Impact .24 IV. FINANCE .24 Background .24 Past and Present Financial Performance .25 Fixed Assets .26 Retailing .27 Tariffs .28 Financing Plan .32 onlending Arrangement .33 Future Finances .34 V. ECONOMIC AND SOCIAL JUSTIFICATION .34 Population Served .35 Impact on Poverty Groups .35 Impact on Health .36 Marginal Costs and Tariffs .36 Economic Rate of Return .37 Affordability .37 VI. SUMMARY OF AGREEMENTS .39 ANNEXES 1 Project Description .41 2 Detailed Project Cost Estimates .43 3 Engineering Design and Construction Schedule .45 4 Schedule of Estimated Disbursements .46 5 Organization Chart of WDB .47 6 Project Area Revenue Statement .48 7 Project Area Statement of Income and Expenditure .49 8 Project Area Flow of F'unds Statement .50 9 Project Area Balance Sheet .51 10 Project Area Statement of Capital Expansion Requirements.. 52 11 Consolidated Statement of Income and Expenditure ......... 53 12 Consolidated Flow of Funds Statement ..... ................ 54 13 Consolidated Balance Sheet ....... ........................ 55 14 Consolidated Statement of Capital Expansion Requirements.. 56 15 Notes to Financial Projections ........................... 57 16 Tariff Approved for Colombo and Towns South .... .......... 63 17 Monitoring Indicators ........... ......................... 64 18 Related Documents and Data Available in the Project File.. 65  - iii - TABLE OF CONTENTS (continued) MAPS IBRD 14818 Water Resources, Treatment and Transmission Facilities IBRD 14819 Sewerage Facilities .,  - s lN j~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~  SRI LANKA STAFF APPRAISAL REPORT THE SECOND SRI LANKA WATER SUPPLY AND SEWERAGE PROJECT I. THE WATER SUPPLY AND SEWERAGE SECTOR National Sector Organization and Development 1.01 The Ministry of Local Government, Housing and Construction (MLG) has primary responsibility for development of water supply and sewerage facilities throughout Sri Lanka. The Ministry executes its responsibilities through the principal executing agency in the sector, the National Water Supply and Drain- age Board (WDB) and through Local Authorities. Other ministries which are connected with water supply and sanitation are the Ministry of Irrigation, Power and Highways, and the Ministry of Health. The Ministries of Finance and Planning, and of Plan Implementation are concerned with the allocation of funds for sector development and the Ministry of Plantation Industries is responsible for water supply and sanitation within its estates. 1.02 Since its formation in 1975, from the Department of Water Supply and Drainage, WDB has been responsible for planning, design and construction of water supply systems throughout Sri Lanka, although its activities have been largely confined to water supplies in urban and the larger rural communi- ties. In order to extend WDB's activities to rural areas, a hydrogeological section has recently been formed to drill wells for villages located in hard- rock areas. 1.03 WDB assists local authorities in planning and constructing water supply systems and frequently retains responsibility for operating the head- works of such systems. Most local authorities operate and maintain their own distribution systems and collect revenue, although in some cases this function has remained with, or has been transferred to WDB. In the Greater Colombo area, the water sources, transmission and treatment systems are operated by WDB, and water is supplied in bulk to Colombo Municipality and to five adjacent Municipalities located to the south of Colombo. WDB is in the process of assuming responsibility from Colombo Municipal Council, for the operation of the Colombo sewerage system, and will also assume responsibility for operation of the Colombo water distribution system in the near future. 1.04 Of the 1971 Sri Lanka census 1/ population of 12.7 million, 22% were urban and 78% rural. Some 42% of the urban population received piped water through house connections and a further 29% used public taps. The urban population was located in 135 communities, 66 of which had piped water and the remaining 69 relied on wells and surface water sources of doubtful quality and poor yield. Only 3 of the piped water systems provided water on a 24-hour basis, and the quality of water supplied was not always satisfactory. Of the 4 towns outside the project area with populations exceeding 50,000 (Kandy, Galle, Jaffna and Trincomalee) only Kandy and Galle had a 24-hour piped water 1/ The 1971 housing census provides the only relatively reliable and consistent data.  - 2 - service. In rural areas only 1% had house connections, 12% used public taps, and the remainder drew water from surface water sources or wells. 1.05 Regarding waste disposal, only Colombo has waterborne sewerage which currently serves only about 50% of its housing units. Of the total 1971 urban population of Sri Lanka, some 23% had flush toilets, 57% had some other form of latrine, and 20% had no service. In rural areas 2% had flush toilets, 56% had some other form of latrine, and 42% had no service. 1.06 Water Supply and sewerage/sanitation service levels were relatively low in 1971 and may have declined since that date. 1/ In Sri Lanka no water supply system consistently provides safe water because: supplies are inter- mittent; the standard of treatment plant operation is low; chlorine supplies are unreliable; and no authority or agency accepts responsibility for monitor- ing water quality. 1.07 The Government of Sri Lanka (GSL) has attempted to prepare a compre- hensive sector development plan for water supply and sewerage, but this work was abandoned in 1976 because of staff shortages. Although GSL supports the broad objectives set by the 1976 Habitat Conference, 2/ and reaffirmed by the 1977 United Nations (UN) Conference 3/ to supply all communities with piped water and sanitation by 1990, no specific service level goals have been agreed upon. However, GSL has linked the water supply and sanitation need to its urban programs, which include the aim of providing 100,000 housing units by 1984, more than half of which are in the Greater Colombo area, and 75% of which are intended for low income families. The Project Area 1.08 The City of Colombo, the national capital and the largest city in Sri Lanka (estimated 1979 population 0.64 million), forms the central urban core of the project area. Colombo is the principal commercial and indus- trial center of Sri Lanka and also the center of a large and rapidly growing tourist industry; it is well linked to the remainder of the country by a network of roads, has a large thriving port for international vessels and has an international airport. 1.09 The project area includes urban development extending to the south and north of Colombo, designated as Towns South and North, and comprising ten municipalities as follows: Towns South: Dehiwala/Mt. Lavinia, Kolonnawa, Kotte, Moratuwa, Panadura. Towns North: Peliyagoda, Wattala/Mabole, Kelaniya, Dalugama, Hendala. 1/ Source: Water Supply and Sanitation Sector Study, Sri Lanka; WHO/IBRD Cooperative Program, New Delhi, June 1978. 2/ World Health Organization, Community Water Supply and Waste Water Disposal, Mid-Decade Progress Report, May 1976. 3/ Report on Communty Water Supplies, United Nations Water Conference, Mar del Plata, Argentina, 14-25 March, 1977.  -3- 1.10 The estimated 1979 population of the eleven municipal areas, in which the project is located, was 1.5 million; the estimated 1979 population of the project area was 1.1 million. The existing piped water supply system is designed to serve the whole of the project area (Map IBRD 14818); the existing and proposed water-borne sewerage system will serve Colombo, part of Kolonnawa and part of the Dehiwala/Mt. Lavinia municipal areas (Map IBRD 14819). 1.11 GSL and WDB identified the project area from Master Plan and Feas- ibility Studies of Water Supply and Sewerage Services for the Southwest Coastal Area. These studies, (subsequently referred to as the UNDP Master Plan Studies) and the resulting reports, were prepared in 1972 by consulting engineers 1/ under contract to the World Health Organization (WHO), as exe- cuting agency for the United Nations Development Program (UNDP). Parts of the Master Plan and Feasibility Reports were revised in 1979 by engineering consultants 2/ under contract to WDB, to reflect current population levels and conditions. Since financial resources, and the implementation capacity of the government agencies, are insufficient to permit immediate development of piped water and sewerage services for the whole of the Colombo, Towns South and Towns North urban areas, these services will be implemented in stages, with priority given to areas of high population density and greater need. 1.12 At the time of appraisal of the first Sri Lanka Water Supply Project (Credit 709-CE), WDB planned to extend the water distribution system to four additional Towns South (Kehelwatta, Kotikawatta, Kotte-Galkissa and Maharagama) and four additional Towns North (Ja-ela, Kandana, Ragama and Kanuwana) in 1983-84. These extension of the area of supply have now been deferred because of the unexpected and rapid increase in demand for water in the existing area of supply. It is probable that the Towns North exten- sion will be completed in 1987 and the Towns South extension thereafter. These extensions are not included in the proposed project. 1.13 The portion of the water supply plan which is to be implemented under this project will increase the supply of piped water to the existing service area, which includes the more densely developed parts of the urban area (Map IBRD 14818) comprising about 150 square kilometers(sq. k). The existing sewerage system serves a much smaller area, about 33 sq. k, within the Colombo municipality. Under the project the capacity of the existing sewerage system would be increased and the system would be extended to parts of Kolonnawa and Dehiwala/Mt. Lavinia to serve about 0.65 million people located in an area of about 40 sq. k. The Existing Water System 1.14 Colombo and Towns South are the only parts of the project area currently receiving piped water. Under the first Sri Lanka Water Supply Project (Credit 709-CE) the level of supply to this area will be improved and the area of supply will be increased to include-Towns North. 1/ Howard Humphreys & Sons, Consulting Engineers, United Kingdom. 2/ Engineering Science Inc, USA.  -4- 1.15 Except for small amounts of groundwater from privately constructed shallow wells, there are three sources of water serving the project area. Two of the sources are impounding, reservoirs, located in upland catchments areas (Map IBRD 14818) at Labugama and Kalatuwawa, some 44 kilometers (km) from Colombo. These sources have been developed to their full potential to supply about 136 million liters per day (mld) which is equivalent to about 30 million imperial gallons per day (Imgd), of fully treated water. 1.16 Water from these sources flows by gravity through four parallel mains to distribution reservoirs in the project area. The third source of supply is the Kelani Ganga, a large river which has an extensive upland catch- ment area to the northeast of Colombo and which discharges to the Indian Ocean, close to Colombo. The works which withdraw water from the Kelani Ganga, treat the water and pump it to the distribution system are located at Ambatale, some 14 km upstream from the coast, and 11 km from Colombo. The first Sri Lanka Water Supply Project (Credit 709-CE) and the proposed project provide oppor- tunities to coordinate development of the river water intake, river water pumping station, components of the water treatment facility and the filtered water pumping station, parts of which have been funded by various bilateral aid projects and part by the Canadian International Development Agency (CIDA) and IDA under Credit 709-CE. 1.17 In 1979 the safe long-term yield of the three water sources was 245 mld (54 Imgd); however, in July 1980 the completion of pumping installa- tions at Ambatale (under Credit 709-CE) will provide a capacity of 183 mld (40 Imgd) at the Ambatale works and a total yield of 318 mld (70 Imgd) of fully treated water from all sources. 1.18 In recent years it has become increasingly difficult to maintain a 24-hour water supply to Colombo and Towns South and there is a tendency to draw down the two impounding reservoirs (Labugama and Kalatuwawa) to levels at which the reliability of these sources is severely reduced. This practice, and failure of the southwest monsoon in 1976, resulted in a severe water short- age and a reduction in the hours of supply to 4 to 6 hours per day. An even more severe water shortage was averted by the temporary installation of pumps to increase the quantity of water obtained from the Kelani Ganga, at Ambatale, by about 30 mld (6 Imgd). This water is chlorinated but is not fully treated, a procedure which does not produce a consistently safe water and one which is therefore most unsatisfactory. The Existing Sewerage System 1.19 The present Colombo sewerage system is the only waterborne sewer- age system in operation in Sri Lanka. It is a separate 1/ sanitary system, most of which was constructed between 1906 and 1913. Although there have been limited extensions and renewals in recent years, the system is old and of inadequate capacity. Small sewage treatment plants, which were part of the original system and served the northern and southern drainage areas of Colombo, became partially inoperative by 1918 and were finally taken out of service in 1/ Conveys sewage only and excludes most surface water.  -5- 1956. Since this date untreated sewage has been continuously discharged to the lower reaches of the Kelani Ganga and to the sea. By 1951 the sewage collection and conveyance systems were heavily overloaded as the population of the service area reached almost 0.4 million resulting in flows of about twice the design capacity. 1.20 The existing sewerage system comprises about 240 km of sewers, 11 pumping stations and two abandoned treatment plants. The pumping equipment and sewers are poorly maintained; although most of the sewers are structurally sound their capacity is severely reduced by accumulations of sand, silt and miscellaneous debris. Some of the poorer areas of the city are not served by the system because of the relatively high cost of connecting properties to the system. This deficiency would be corrected under the proposed project (paragraph 3.10). Population in the Project Area 1.21 Population data in the project area are based on the 1971 census adjusted by rates of increase similar to those used in the Master Plan Studies. Water consumption data are conjectural since bulk meters for the measurement of water from sources, headworks and distribution reservoirs are only now being repaired or replaced, and it is therefore not yet possible to formulate a precise account of water drawn from each source or transmitted to each area of demand. The consumer metering program under the first project has only recently reached the stage where meters are actually being installed. 1.22 Three separate population projections are available for the project area. These were prepared under the UNDP Master Plan Studies, the Statistical Abstract by the Government Department of Census and Statistics (1978) and the Water Supply and Sanitation Sector Study by the WHO/IBRD Coop- erative Programme, New Delhi (1978). These studies forecast a marked decline in the rate of population increase over the period 1963 to 1990. It is pos- sible that population growth and water demands forecast by WDB may be excessive. However, this would delay by only a few years the time when additional works will be required or, alternatively, would enable WDB to bring forward the date by which the distribution system would be extended to urban areas adjacent to Colombo, which require piped water. 1.23 WDB's forecasts of the population of the water supply project area (Table 1.1) include that portion of Towns North which will receive piped water in 1982 on completion of works under the first Sri Lanka Water Supply Project (Credit 709-CE), and the area of Towns North to which an extension of the distribution system is planned to be completed in 1988. The 1988 extension does not form part of this project because construction work is not scheduled to begin until 1985 or 1986. Previously proposed distribution system exten- sions in Towns South have been deferred until after 1988 and are therefore not included in the project area or in the population projections in Table 1.1.  - 6 - Table 1.1: POPULATION FORECASTS IN THE PROJECT AREA (Population in Millions) 1979 1983 1987 1991 /a Total Population in Service Area 1.1 1.4 1.5 1.9 Population Served by Connections 0.7 0.8 0.9 1.0 Population Served by Public Taps 0.4 0.6 0.6 0.9 /a Service area to be extended in 1988 (paragraph 1.23). Water Demand and Consumption 1.24 WDB estimates that about 0.4 million people in the project area obtain water from public taps. These taps are located in public streets or within the property boundaries of groups of buildings which house multiple single room tenements. 1/ The taps are provided by local authorities and supply water which is free to the consumer; the cost of the water is met by the Central Government, based upon the estimated or metered quantity consumed. 1.25 In the absence of reliable metering, water consumption data is based on field measurements obtained during the UNDP Master Plan Studies, subse- quently modified by WDB and supported by work carried out as part of a recent tariff study. 2/ 1.26 Estimates of per capita water consumption are higher than those for other countries of South Asia, particularly the consumption of water at public taps. In Sri Lanka people who use public taps bathe and wash clothes and utensils at the taps, and carry back to dwellings only a small part of the water used. This procedure, coupled with an obvious enthusiasm throughout the community for thorough cleanliness, results in daily per capita water con- sumption, at public taps, of 50 to 60 liters per capita per day (lcd) or 11 to 13 Imperial gallons per capita per day (Igcd). 1.27 Estimates of current water consumption by connected domestic con- sumers is also higher than in similar areas of South Asia. In the absence of metering it is assumed that waste forms a large portion of the 1979 per capita consumption of 225 lcd (50 Igcd). Per capita consumption is projected to decline to about 145 lcd as meters are installed and metered tariffs are applied, followed by a slight increase in later years (1991) as demands increase with higher incomes and living standards (Table 1.2). 1/ Termed "tenement gardens". 2/ Water Tariff Study for the Southwest Coastal Area of Sri Lanka; Camp Dresser and McKee Inc, USA, 1979.  - 7 - Table 1.2: DOMESTIC WATER DEMAND /a 1979 1983 1987 1991 Number of Domestic Connection (Millions) 0.09 0.11 0.12 0.15 Number of Public Taps (Number) 2,220 3,250 3,350 4,600 Average Number of People Per Tap (Number) 190 200 200 200 Per Capita Demand (lcd): Connected 225 160 145 165 Public Taps 60 50 50 50 Water Demand (mld) Domestic Connections 160 130 130 165 Public Taps 25 30 35 45 Total Domestic Water Demand 185 160 160 210 /a Demand figures rounded to nearest 5 mld. 1.28 The figures derived by WDB (Table 1.3) are based on pumping outputs, field measurement of representative user categories and estimates. The mis- sion estimates that the figures relating to water available at headworks and total demand are reasonably accurate but that the estimate of losses and water consumed by the various categories of consumers are approximate. It is unlikely that distribution system losses will be reduced below 25% of the estimated flow to the system; water saved by an effective leakage detection and control program may be offset by higher losses resulting from improved pressures and a continuous supply. Losses from distribution systems are rarely below 20% and, in older systems, frequently exceed 25%.  - 8 - Table 1.3: COMPOSITION OF WATER DEMAND 1979 to 1991 Quantities of Water (mld)/' Yield/Losses/User Category 1979 1983 1987 1991 Available at Headworks 245 /b 320 /c 445 /d 445 Losses and Treatment Plant Use /e 70 90 130 130 Demand: Domestic 185 160 160 210 Commerce and Industry 60 80 90 115 Total Average Day Demand Project Area 315 330 380 455 Demand from Towns South Extension, 1987/88 - - 30 30 Total Average Day Demand 315 330 410 485 Surplus (Deficit) (70) (10) 35 (40) /a Numbers rounded to nearest 5 mld. /b Excludes about 30 mld of partly treated water pumped from Kelani Ganga, and some unmeasured quantity by which impounding reservoir sources were overdrawn during the year. /c Increased to 320 mid in July 1980 on completion of works under the first Sri Lanka Water Supply Project (Credit 709-CE). /d Increased to 445 mld on completion of the proposed project in 1984. /e Includes transmission and distribution system losses as a percentage of flow, and use of water at the three treatment plants as a percentage of water treated. 1.29 The project would enable water demands to be met to about 1990 when further development of works at Ambatale would be required. The additional water made available by the project would permit discontinuation of the emergency supply of partially treated river water and would also allow the impounding sources to be operated within their design capacity, thus restoring the reliability of the system. By these means the project would improve the quantity and quality of piped water to a population of almost 1.5 million (1984) rising to 2.2 million in 1991. The system would provide water to the entire community, including the poor (paragraph 5.04), within the project area. Demand for Access to the Sewerage Service 1.30 An area of about 33 sq. k, comprising 80% of the Colombo municipal area, is served by the existing sewerage system. About 50% of the housing units in Colombo are connected to the system. Under the Municipal Council Ordinance, owners of premises located within one hundred feet (30 meters) of a public drain (or sewer) may be required to connect to the drain or sewer and to convert any existing facilities within the premises to a form suitable for use with the public system. Colombo Municipality has been reluctant to enforce the ordinance since the system is grossly overloaded. Moreover, poorer property owners have failed to connect to the system because of the relatively high cost of doing so and the absence of any mechanism for financing the costs.  -9- 1.31 Renovation and extension of the sewerage system under the project would provide sufficient capacity for all properties in the sewered area to be connected. Furthermore, a proposed program of assistance to property owners would enable them to afford connections (paragraph 3.10). 1.32 Under the Municipal Ordinance, Councils are required to provide and maintain adequate public latrines for the use of the general public and for residents of temporary housing or slums. Although the construction of latrines does not form part of the project, local authorities propose to implement a program to improve access to the sewerage system by providing more public latrines and improving their maintenance standards. Local author- ities expressed the view that severe difficulties in maintaining public latrines will persist and that efforts should be made to provide private latrines for each dwelling unit. 1.33 Local authorities will continue to provide or administer alter- native services for the disposal of wastes from areas not served by the water- borne sewerage systems; such services include conservancy services (bucket, latrines), septic tanks, soakage pits, pit latrines, etc. II. THE IMPLEMENTING AGENCY Lending Arrangements 2.01 The recipient of the credit, GSL, will onlend the proceeds of the credit to WDB, the beneficiary and the implementing agency, under terms accept- able to the Association (paragraph 4.27). organization 2.02 Legislation for the creation of WDB was enacted in 1974; it pro- vides for WDB to operate water and sewerage facilities with a parallel pro- vision for local authorities to operate their facilities, subject to WDB and Ministry approval. The 1974 Law also deals with general operational matters, including rates for water supply and sewerage, and prescribes penalties for pollution of water sources used for water supply. WDB is a corporate body consisting of 8 members appointed by MLG; four members are Government officers and the remaining four members are appointed from among interested citizens having experience in engineering, finance, public health, administration or law. 2.03 The headquarters of WDB is located in Ratmalana, a suburb of Colombo. Several regional offices are maintained in locations throughout the country depending on the development works being implemented in the various regions. Although the general manager is nominally the chief executive officer, this duty is also currently being performed by the chairman. Under the organiza- tional structure of WDB (Annex 5), four functional deputy general managers report to the general manager, who in turn reports to the chairman. At the  - 10 - next level are six assistant general managers, two of whom are responsible for finance and design, and four of whom are responsible for the geographical areas. All assistant general managers are located at WDB's headquarters. 2.04 Because the first project (Credit 709-CE) formed a large part of its total water supply program, WDB formed a special unit, under an assistant general manager, to implement the project (Annex 5). At negotiations, WDB's assurances were obtained that it will retain and strengthen this unit, with staffing functions and responsibilities satisfactory to the Association. Organizational Staffing 2.05 WDB has capable and experienced engineering staff competent to design and construct works. The approved establishment for engineers is 160 of which about 50 posts were vacant at the time of appraisal. During the past 4 to 5 years there has been difficulty in retaining experienced engineers in the face of more attractive terms of service being offered in some foreign countries. Suitably experienced engineers are not available for local recruitment and there are insufficient incentives to attract foreign engineers. Thus the standard of WDB engineering expertise has declined. This is particularly noticeable in the higher levels where only 5 of the 22 chief engineer posts are filled. There appears to be no means of reversing this trend. The Gov- ernment is concerned over this situation and, in response to a recent request, has now received three experienced public health engineers from WHO. WDB is also using the services of engineering consultants to implement part of its development works program. WDB's staffing position is as follows:  - 11 - Table 2.1: STAFF OF WDB Established Posts Vacant Engineering/Technical Qualified Engineers 160 50 Engineering and Technical Assistants 320 90 Draftsmen 57 8 Experienced but Non-qualified Personnel 32 25 Laboratory Staff 12 4 Surveyors 12 4 Stores/Supplies Officers 18 3 Finance Finance Officers (Qualified) 4 - Accounts Officers 17 - Bookkeepers, Clerks and Cashiers 44 3 Administration Administration Officers (Qualified) 8 - Others (Clerks, typists, drivers, timekeepers) 225 25 Labor Skilled 650 110 Semi-skilled 290 20 Unskilled 470 120- Management and Finance 2.06 Measures to correct deficiencies in WDB's management and finance functions were introduced under the first project (Credit 709-CE). Agreements were reached with GSL and WDB to: - adequately staff the accounting department and to fill senior finance posts; - establish financial regulations and identify financial policies and procedures; - improve coordination of the engineering and finance sections of WDB; - establish systems for commercial accounting, financial control, and purchasing and stores.  - 12 - Although these steps now appear to be quite modest, they were regarded as major in the situation which existed in 1976 during appraisal of the first project. At the time WDB had recently been formed from a Government depart- ment, from which it inherited an accounting system designed for government departments financed from consolidated government revenue. The accounts were primarily a record of cash receipts and payments; neither a balance sheet nor income statement was prepared. The accounting records consisted mainly of appropriation ledgers with the pr:imary purpose of ensuring that no money was spent contrary to the intention of the legislature, which placed the emphasis on the control of cash rather than operating results. 2.07 Because of the inadequacy of accounting information,management neglected financial control as a management tool in WDB's operation; WDB was reluctant, or even unable to begin to operate as a commercially oriented public utility rather than a government department. It was recognized that correction of these serious management, financial and institutional deficien- cies, which existed at the early stage of WDB's development, would take time, and would only be possible with the gradual appreciation and acceptance by management of a commercial type of operation. 2.08 Although there has been progress in improving WDB's management and finance functions, it has been slower than anticipated because of unforeseen difficulties, primarily associated with the increasing exodus of experienced professional officers to foreign countries. In addition, WDB is experiencing increasing pressures from MLG to assume greater responsibilities, and to implement a very sharply increasing development program. These factors have tended to prevent WDB from achieving internal reforms, since its entire efforts have been directed toward satisfying external demands. 2.09 In the light of these difficulties much remains to be accomplished in the program of needed organizational, management and financial reforms in WDB. It is now clear that the task is greater and more difficult than-was originally envisaged. Means of accelerating and intensifying the program of reforms have been devised and are being implemented; others are included under the proposed project. WDB's New Accounting System 2.10 In September 1979, WDB retained a local firm of organization, man- agement and finance (OMF), consultants 1/ to design and place into operation a commercial accounting system. The system was brought into operation in January 1980 and a team of consultants is now training WDB personnel in its use. The system is suitable for public utility accounting, is designed to provide financial information to management, and is satisfactory. 1/ Turquand Youngs and Co. Ltd., of Sri Lanka in association with Ferguson Associates of Pakistan.  - 13 - Organizational and Management Reforms 2.11 To obtain maximum benefit from the new accounting system, WDB proposes to review its organizational structure and management procedures to ensure that the organization can respond to the information generated. To this end, the project provides for a study of the existing organization by consultants. 2.12 Despite efforts by WDB's management, there has been no significant progress towards managing the organization as a public utility. Furthermore, financial planning remains a serious deficiency and development plans for water supply, sewerage and sanitation for the entire country have not yet been developed. Specific management and staff responsibilities are not clearly identified and procedures to achieve coordination of the efforts of individuals and of departments have not been established. Water Retailing by WDB 2.13 In addition to its present role as the principal national agency in the water supply sector (concerned with planning, engineering design, con- struction and operation of bulk water supply facilities), WDB will assume responsibility for retail water supply and sewerage services in the Greater Colombo area, in the near future (paragraph 4.14). This additional task will require the establishment of a new unit within WDB's organization, especially trained in meter reading, retail billing and revenue collection. These func- tions are currently the responsibility of local authorities. Staffing and staff training will form major parts of the task of establishing WDB's revenue collection unit, and should be substantially completed prior to the assumption of responsibilities from local authorities. Institutional Developments 2.14 To achieve these organizational and management reforms, GSL and WDB propose an extensive program of assistance from consultants specializing in organization, management and finance. This program would include not only a study of organization and management procedures, leading to recommended improvements, but also extensive training of staff by consultants to bring the revised procedures into operation. In addition GSL and WDB have agreed to the Association's proposal that, under the project, a management adviser be appointed to WDB for a period of two to three years. The adviser would be assigned at the same level as the Chairman of WDB and would report to both the Chairman and the Secretary, MLG. 2.15 Assurances were obtained at negotiations, that WDB will retain consultants specializing in organization, management and finance to: - study WDB's organizational structure and recommend reforms; - design, and bring into operation, new management procedures, including associated training of WDB personnel; and  - 14 - identify the structure of a revenue unit to be formed within WDB, for billing and collecting revenues from metered water sales in the project area; assist WDB to staff this unit and to train its personnel. The selection and appointment of consultants, acceptable to the Association, as an initial step in this program would be a condition of credit effective- ness. 2.16 Assurances were obtained at negotiations that GSL would appoint, for a period of 2 to 3 years, a management adviser to WDB, acceptable to the Association and to be in position by January 1, 1981. The adviser would operate at the same level as, and would report to the Chairman, WDB; the adviser would also report to the Secretary, MLG. Financial Staffing 2.17 The significant exodus of experienced technical, managerial and financial professionals from Sri Lanka during the past five years has par- ticularly affected WDB. Its saLaries and benefits are slightly below those in some other Government departments, and substantially below those offered by the private sector. The difficulties in staffing WDB's senior financial posts have therefore continued. Staff tend to leave WDB after a brief tenure, primarily to obtain better terms of service in the private sector, but some- times to take positions which do not appear to offer significant advantages; this suggests that job satisfaction also may be a factor influencing staff decisions. GSL has not yet been able to resolve this problem since offering incentives to Government staff merely provokes a similar offer in the private sector. 2.18 WDB's agreement under the first project (Credit 709-CE), to fill senior finance posts and to adequately staff the accounting department of WDB will be continued under the proposed project. Assurances were also obtained at negotiations that WDB will supplement its staff by retaining a suitably qualified and experienced firm of accountants, if WDB's finance and accounting staff is unable to adequately carry out its duties in a manner satisfactory to the Association. Computerization of Accounts 2.19 Computerized accounting, billing, stores management and control functions, as well as the training of WDB's staff in appropriate accounting have been included under the project. It is estimated that computerized systems would be in operation by the end of 1983. Audit 2.20 Under the first project (Credit 709-CE) WDB agreed to provide audited financial statements to the Association within six months of the end of each financial year. Because of the inadequacy of its accounts, WDB could not comply with this requirement. With improved accounting, audited statements  - 15 - have significant value to both WDB and the Association. At negotiations, assurances were obtained that WDB will furnish to the Association audited financial statements together with the accompanying auditor's report within six months of the close of each financial year beginning with the audit report for 1980. 2.21 WDB has cited that its inability to provide audited statements on a timely basis resulted from the Auditor General's lateness in performing the audit. At negotiations, assurances were obtained that WDB will appoint a suitably qualified, independent auditing firm prior to September 30, 1980 (for the 1980 audit report) and thereafter prior to the beginning of each financial year to assure that audited statements for such financial year are prepared and available on time. Insurance 2.22 WDB agreed that materials and equipment for the project will be insured as under the first project. All other public utility risks will be adequately insured in a manner consistent with standard practice in Sri Lanka and similar to that used in the first project. III. THE PROJECT The Water Supply and Sewerage Program 3.01 In 1972, Master Plan Studies to the Year 2000 for Water Supply and Sewerage for the South West Coastal Area were completed by Howard Humphreys and Sons, Consulting Engineers of the United Kingdom, under contract to the WHO as executing agency for UNDP. As part of this contract, the consulting engineers also completed Preliminary Engineering and Feasibility Studies of water supply and sewerage requirements for the first five years of the Master Plan period. 3.02 Parts of the program recommended under these Master Plan and Feasi- bility Reports were implemented under bilateral assistance from France and the United Kingdom. Part of the program is being implemented under the first IDA assisted Sri Lanka Water Supply Project (Credit 709-CE), and part of the pro- gram is proposed for inclusion in the second Sri Lanka Water Supply and Sewerage Project. 3.03 The first project was planned for completion by December 1980, but has now been extended by a period of two years. Credit 709-CE, which became effective in February 1978, included IDA assistance of US$9.2 million and a CIDA contribution of US$4.8 million both of which were provided to meet foreign exchange costs. An additional credit of US$7.0 million in the form of an EEC Special Action Credit has been approved to meet projected cost over runs under Credit 709-CE arising from the high inflation of prices, and to finance part of the civil works costs which were not financed under the IDA credit.  - 16 - 3.04 The objectives of thie first Sri Lanka Water Supply Project (Credit 709-CE) were to relieve water shortages in the Colombo Municipal area and Towns South and to extend the piped water system to Towns North. The project also provided for new water supply systems to be constructed to serve the towns of Kalutara, Ambalangoda and adjacent urban areas. 3.05 The first project also provided an opportunity to establish important institutional improvements, particularly the integration of water sources, treatment and transmission facilities serving the Greater Colombo area under the control of one agency, WDB. The project was also intended to assist the then, newly formed WDB to strengthen its organization and capacity as a national water and sewerage agency. In addition to the further aim of providing a safe and continuous supply of water to all sections of the community in the project: area, the project was designed to extend consumer metering to the entire connected population in the project area, thus discouraging waste and excessive water consumption. 3.06 Many unforeseen difficulties were encountered from the beginning of the first project. Project delays resulted from political unrest and civil riots which occured between June 1977, when the credit was signed, and February 1978 when the credit became effective. The new Government was fully occupied with major national issues during 1978, its first year in office, and very little was therefore achieved in the first year of the project implemen- tation period. However, following this period, WDB made remarkable progress in preparing procurement documents for both the purchase of materials and for civil works contracts. Despite the continuing loss of professional staff, very substantial progress in project implementation has been made, as well as progress in preparing a further program of works, completing a tariff study and meeting the financial targets identified in the first project (paragraph 4.05). 3.07 Disbursements under Credit 709-CE at March 31, 1980 had reached US$7.7 million and WDB estimates that disbursements will reach US$10 million by September 1, 1980. Fourteen of the total of 18 civil works contracts under the first project (Credit 709-CE) had been awarded at the time of negotiations of the proposed credit; the remaining 4 contracts are expected to be awarded by January 31, 1981. 3.08 The augmentation of the water supply to the Greater Colombo area will be completed by July 1980 and it is estimated that most of the remaining works under the first project will be completed by December 1982. Although the implementation of a consumer metering program has not achieved the required level, sound preparations for an accelerated program have been made (paragraph 3.12). New targets have been agreed upon by GSL and WDB for the implementation of works and institutional reforms proposed under the first project. Thus the first project will achieve much of its original purpose, albeit some two years after the originally scheduled date.  - 17 - The Project Description 3.09 The principal project elements are illustrated in Maps IBRD 14818 and 14819, described in Annex I and summarized as follows: Water Supply (a) Construction of a river water intake on the Kelani Ganga; the capacity of structure is 305 mld (67 Imdg) and the initial pumping capacity is 130 mld (28.5 Imgd); (b) Construction of a transmission main from the intake at (a) to Ambatale treatment plant, with a capacity 130 mid (28.5 Lmgd); (c) Construction of two sedimentation tanks, with a combined capacity of 122 mid (27 Imgd), at Ambatale treatment plant; (d) Modification of 12 of the existing 18 filters at Amabatale treatment plant to increase their capacity to 205 mld (45 lmgd) and the plant capacity to 305 mld (67 Imgd); (e) Provision and installation of additional chemical feed equip- ment at Ambatale treatment plant; (f) Construction of a pumping station and transmission main with a capacity of 30 mld (6.7 Imgd), to convey water to Kolonnawa; (g) Construction of: a distribution reservoir, capacity 11 ml (2.4 Img); pumping station, capacity 23.6 mld (5.2 Imgd) and a 2.5 km long transmission main at Kolonnawa. Sewerage (h) Construction of sewage collection and conveyance facilities in Colombo including: renovation of 4.5 km of sewers, modification and improvement of 10 sewerage pumping stations, and the con- struction of 16 km of force mains; (i) Construction of sewage disposal facilities including two ocean outfalls; (j) Construction of sewage collection and conveyance systems in Kolonnawa and Mount Lavinia including 25.5 km of sewers, 5 sewage pumping stations and 4.3 km of force mains. Other Items (k) Provision of replacement and spare parts for existing plant and equipment, provision of vehicles for construction and maintenance works, and of miscellaneous items of equipment, including computerized billing equipment and sewer cleaning equipment.  - 18 - (1) Engineering, management and finance consultants' services for: detailed design of a further group of water supply and sewerage works; a distribution study for the Colombo Municipal area and Towns South; a solid waste collection and disposal study for the Colombo Municipal area; an organization management and finance study for WDB including the implementation of recommended management procedures and policies, establishment of systems and procedures for computerized billing, and for stores management, financial accounting and control. (m) Training for WDB's finance and management staff, engineers plant chemists, plant superintendents and operators. Property Connections to the Sewerage System 3.10 Despite the requirement under the Municipal Councils Ordinance, that properties within 100 feet (30 m) of a public sewer be connected to the sewerage system, the requirement is rarely enforced. Connection costs, which are sometimes as much as Rs 2,000 (US$130), have discouraged lower-income consumers from connecting to the system. Under new arrangements which GSL proposes to introduce prior to completion of the new sewerage system, GSL will provide grants, and/or loans to owners of properties who are required to connect to the system. At negotiations GSL gave assurances that by January 1, 1982 it will implement a program acceptable to the Association, under which it will provide assistance to lower income property owners, within the project area, to meet the cost of sewer connections; such assistance will be in the form of grants equivalent to 100% of the cost of connections for owners of properties of lower rateable values but with grants declining as property values increase. In areas in which WDB has assumed responsibility for sewerage operations, owners of properties within 100 meters of a public sewer system are required to connect to that system under Law No. 2 of 1974, the law which established WDB. Metering 3.11 A program included in the first Sri Lanka Water Supply Project (Credit 709-CE), under which water meters were to be installed on all con- nections to domestic premises, has fallen far behind schedule. Factors contributing to this delay include: a long delay in the provision of meters by the United Kingdom Overseas Development Administration (ODA); 1/ a reluc- tance on the part of local authorities to accept the concept of metering and associated tariffs and; technical difficulties in installing the meters associated primarily with the inadequacy of maps and records of connections and the poor condition of many connections. 1/ At the time of appraisal, some 10,000 meters had been received out of 40,000; the remaining 30,000 are firmly scheduled for delivery in Sri Lanka in two shipments arriving by April 30 and May 31, 1980.  - 19 - 3.12 These initial difficulties are gradually being overcome. The concept of metering is strongly supported by GSL. Local authorities have begun to accept the need the conserve water and to regard it as a valuable resource. WDB has obtained technical assistance (paragraph 3.15) to begin the task of revising distribution plans and consumers' connection records. As a result of these measures, some 2,400 meters were installed by January 31, 1980. WDB has proposed a revised realistic metering program which will ensure that, in addition to the 2,400 meters which have been installed, not less than 1,000 additional meters will be installed each month. Under this program, metering in Kolonnawa, Kotte and Panadura would be completed by December 1981, Moratuwa by June 1982, Dehiwala/Mt. Lavinia by December 1983 and Colombo by December 1988. In addition, meters will be installed on all new connections as the connections are provided. WDB would also continue its on-going program to establish an effective meter testing and repair facility. At negotiations WDB's assurances were obtained that: (a) consumer meters will be installed on existing connections in the project area at a rate of not less than 1,000 meters per month; and (b) in addition in metered areas, meters will be installed on all new connections when the connections are provided. 3.13 WDB's assurances were obtained that an ongoing program to install and thereafter effectively maintain bulk meters, to accurately measure flows from all treatment plants, major pumping installations, distribution reservoirs and to accurately measure bulk supplies to local authorities in the project area will be completed by June 30, 1981. Distribution System Maintenance 3.14 Under the present conditions of low pressure and intermittent supply, distribution system losses are estimated to be about 25% of the flow reaching the distribution system. The losses would be very much higher under normal system pressures and with a continuous supply. WDB therefore proposes to intensify its distribution system leakage detection and repair program to ensure that leakage is controlled as the water supply system is improved under the project. 3.15 A team of engineers from the Danish Hydraulic Institute, Copenhagen, has recently completed a study of the required improvements of distribution system plans, consumers connection records and of the present leakage control program in the project area, to assist WDB to formulate suitable programs by which improvements may be implemented. At negotiations, WDB undertook that it will (a) improve the detection of distribution system losses and improve the implementation of mains repairs; (b) prepare adequate plans of the dis- tribution system; (c) prepare accurate registers of water consumers and consumers' connections; (d) establish system and procedures for keeping these plans and registers up-to-date, all in accordance with a program to be reviewed by June 30, 1980 and to be acceptable to the Association.  - 20 - Cost Estimates 3.16 The estimated cost of the project is Rs 1,469 million (US$94.0 million) including contingencies, customs duties and taxes, and excluding interest during construction. The estimated costs of the principal features of the project are shown in Annex 2 and summarized in Table 3.1. Table 3.1 SUMMARY OF ESTIMATED PROJECT COST Local Foreign Total Local Foreign Total - Rs million ------ -----US$ million----- WATER SUPPLY Civil Works 74 7 81 4.7 0.5 5.2 Equipment 24 97 121 1.5 6.2 7.7 98 104 202 6.2 6.7 12.9 SEWERAGE Civil 219 27 246 14.0 1.7 15.7 Equipment 159 337 496 10.1 21.6 31.7 378 364 742 24.1 23.3 47.4 OTHER ITEMS Spare Parts, Vehicles and Equipment - 31 31 - 2.0 2.0 Engineering Consultants 4 24 28 0.3 1.5 1.8 WDB 23 - 23 1.5 - 1.5 Technical Assistance 22 37 59 1.4 2.4- 3.8 Training - 16 16 - 1.0 1.0 Land Acquisition 15 - 15 1.0 - 1.0 Harbor Charges 29 - 29 1.9 - 1.9 Sub Total 93 108 201 6.1 6.9 13.0 Total Before Contingencies 569 576 1,145 36.4 36.9 73.3 CONTINGENCIES Physical 44 24 68 2.8 1.5 4.3 Price 146 110 256 9.4 7.0 16.4 190 134 324 12.2 8.5 20.7 Total Project Cost 759 710 1,469 48.6 45.4 94.0 3.17 Civil works costs are based on consultants' estimates of works for which detailed engineering designs have been completed. Costs of specialized civil works, such as ocean outfalls, are based on costs of similar works  - 21 - recently completed in East Asia, suitably adjusted for inflation and local conditions. Materials and equipment costs are based on quotations obtained specifically for this project from manufacturers and suppliers. Physical contingencies of 4 to 15% (depending on the type of work) have been calculated on estimated basic costs as at July 1, 1980. Price contingencies for both local and foreign costs have been included at the following rates: Table 3.2 PRICE CONTINGENCIES Item Price Contingency % 1980 1981 1982 1983 to 84 Local Civil Works 21 15 12 10 and Local Materials Foreign Civil Works, Foreign Materials and Equipment 10.5 9 8 7 Financing 3.18 A credit of US$30 million from the Saudi Fund for Development (SFD) is likely to be available on a parallel financing basis, and an IDA credit of US$30 million is proposed. The total of the proposed credits, US$60 million, is about 73% of the project cost of US$82 million, excluding customs duty and taxes, which amount to US$12 million. During negotiations GSL undertook that if funds are not made available from SFD, then GSL would arrange alternative financing from another donor or from its own resources. The following table summarized the project financing plan: Table 3.3 SUMMARIZED PROJECT FINANCING PLAN /a Project Cost Financed (US$ Million) Percentage IDA 30 32 SFD 30 32 GSL 22 23 Total Before Duty and Taxes 82 87 GSL (Duty and Taxes) 12 13 Total 94 100 /a Excludes interest during construction and working capital. Project Design, Construction and Supervision 3.19 WDB has overall responsibility for project design and construction. Project designs and procurement documents have been completed with the aid of  - 22 - engineering consultants, 1/ financed under the first project (Credit 709-CE). WDB engineering staff will plan and control project development and supervise parts of the project construction, particularly the water supply components. At present, WDB has few engineers with experience in the construction of large sewerage works and will, therefore, appoint consulting engineers to supervise the construction of these works (paragraph 3.20). This is a critical item in the project schedule and the appointment of suitable consulting engineers, who are acceptable to the Association will, therefore, be a condition of credit effectiveness. Services of Engineering and Management Consultants 3.20 Engineering consultants' charges for supervision of construction of the sewerage components of the project have been estimated as 4% of the base costs (excluding contingencies, duty and taxes) of construction of these components. 3.21 It is estimated that the study and report in connection with the collection and disposal of solid wastes in the Colombo Municipal area will be completed by two specialists in this field, in a period of 6 months at a total estimated cost of US$140,000. This includes man-month costs at US$10,000 per man-month, with additional charges of US$20,000 for printing, local transportation and miscellaneous minor items. 3.22 The estimated cost of engineering consultants' services for a feasi- bility report and the detailed en,gineering design of works to be included in a possible future project is US$1.5 million. This estimate is based on 6% of the construction cost of US$25 million, which has been updated from the Master Plan Report. 3.23 The estimated cost of engineering consultants' services for a detailed study and report on the water distribution system in the Greater Colombo area, including complete mapping of the system, is US$1.0 million. A joint venture contract is envisaged (between one local and one foreign firm) providing for 210 man-months of consultants' services, and the cost of vehicles, survey, survey equipment, mains flow testing equipment, and minor items. The average man-month cost (including salary, costs, fees, interna- tional travel and subsistence) is US$3,640; the average local man-month cost is US$1,100 (150 man-months) and the average expatriate man-month cost is US$10,000 (60 man-months). The expatriate personnel input comprises senior level, high caliber expertise in distribution system analysis. 3.24 The estimated cost of an organization study for WDB, which includes the design and implementation of management procedures and data processing, is US$0.7 million. The duration of this study and implementation program is 3 years. The average man-month cost (including salary, costs, fees, international travel and subsistence) is expected to be US$1,040; the average local man-month cost is US$800 (500 man-months) and the average foreign man-month cost is US$7,000 (20 man-months). The total estimated cost also includes provision for local transportation, local office expenses and minor items. 1/ Engineering Science Inc., USA.  - 23 - Implementation Schedule 3.25 WDB plans to implement the project over a four-year period, begin- ning with the award of contracts in the last quarter of 1980 and the first quarter of 1981, and concluding the work on the project completion date of September 30, 1984. Project preparation procedures are well advanced; all of the engineering designs have been completed and are scheduled to be reviewed by WDB by May 31, 1980. Bids will then be invited for most of the project equipment, and almost all contracts are expected to be awarded by the first quarter of 1982. Procurement 3.26 All contracts for equipment and materials and all civil works contracts financed by the IDA credit will be awarded under international competitive bidding procedures in accordance with the Association's guide- lines, with the exception of items costing less than US$100,000 with an aggregate value of not more than US$1.0 million. Such items, and civil works contracts for sewers which are not financed by the IDA credit, would be purchased under local procurement procedures which are acceptable to the Association. It is recommended that IDA should review all documents and proposed awards for all items financed by the IDA credit. 3.27 In evaluating bids for equipment and materials, domestic manu- facturers would be given a preferential margin equal to 15% of the c.i.f. costs of the competing imports or the existing rate of customs duty, whichever is lower. A preferential margin of 7-1/2% would be allowed for local contractors in evaluating civil works bids. Most, if not all, of the contracts for equipment and materials supply and most of the major civil works contracts, for which there is little local expertise, are likely to be won by foreign contractors. Disbursements 3.28 The proceeds of the IDA credit would be disbursed over a four-year period in accordance with an estimated disbursement schedule (Annex 4). Disbursements would be made as follows: (a) Equipment and Materials (US$20.0 million) For equipment and materials procured after international competitive bidding, 100% of foreign expenditures for directly imported goods, or 100% of local expenditures (ex-factory costs) for locally manufactured goods. For goods procured under local procurement procedures 60% of local expenditures. (b) Civil Works, Excluding Sewers and Force Mains (US$1.5 million) For contracts awarded as a result of international competitive bidding, 100% of expenditures.  - 24 - (c) Consultants' Services and Training (US$8.5 million) 100% of expenditures for training, and 100% of expendi- tures for consultants' services. Land Acquisition 3.29 A very small area of land, about 2 hectares (ha), is required for the project. About 60% of this area is Government land; the remainder will be acquired under existing legislation. The land requirements would have no impact on the Government's agricultural program and no significant resettlement is necessary. During negotiations, assurances were obtained from GSL and WDB that land for the project will be acquired in accordance with a program acceptable to the Association. Environmental and Health Impact 3.30 The sewerage component of the project will improve sanitation and public health in the area by eliminating overflows of raw sewage to the storm water drainage systems and streets. Construction of ocean outfalls will eliminate the present practice of dumping raw sewage into the Kelani river within the municipal boundary of Colombo and hence also will reduce health hazards in the project area. Oceanographic studies of the outfall designs have shown that adequate dispersicon will be achieved and that the likelihood of surface contamination or shore pollution will be minimized. The water supply component will ensure present average levels of supply to be maintained through about 1992. Enlarged treatment and storage facilities will improve water quality significantly. Introduction of metered charges may improve the distribution of available water among households and thus the distribution of health benefits. IV. FINANCE Background 4.01 In 1975, WDB was transformed from the government Department of Water Supply, where it functioned mainly as a technical entity, into a Board with characteristics of a public utility enterprise. Upon its formation, WDB assumed title as well as responsibility for the operation and maintenance of certain water production assets belonging to its predecessor government organization, including the water treatment plant at Ambatale. Since then, WDB has assumed responsibility, together with all related assets, for water production and transmission and sewerage services within the project area; therefore, WDB's present project area revenue derives from the bulk sale of treated water to local authorities who have the responsibility for its distri- bution to the ultimate consumer. 4.02 Outside the project areas WDB has acted primarily as an engineer- contractor in the development of water supply and distribution projects for the benefit of local authorities. More recently, as a result of shifts in government policy, WDB has assumed ownership and operating control over many  - 25 - of the water supply projects with the result that it now also acts as the seller of bulk water to many village, town and rural authorities nationwide. 4.03 At the time the first project (Credit 709-CE) was appraised, WDB was in the early stages of changing from a government type accounting system, which emphasized the control of cash with little regard for operating results, into a commercial accounting system appropriate to a public utility. This changeover was complicated by WDB's lack of suitably qualified and trained accounting staff, particularly at senior and management levels. The rapid expansion of WDB's activities, well beyond the scope that had been conter- plated when the first project was appraised, has further compounded the accounting difficulties; WDB's limited accounting staff could barely keep pace with the escalating number of transactions and could neither develop nor institutionalize the systems needed to provide timely and reliable information regarding WDB's increasingly complex and geographically diverse operations. 4.04 Because of these continuing difficulties, WDB's accounts provide an unreliable chronicle of financial events for the years 1976-1979 and are of limited value as bases for projecting WDB's future. A program to improve the reliability and timeliness of financial information in the future was developed in consultation between WDB, GSL and the Association and is currently in varying stages of implementation (paragraph 2.10). Past and Present Financial Performance 4.05 Estimates of WDB's financial performance for 1979 in the project area are provided in Annexes 7-9. Estimates of WDB's consolidated financial performance for 1978 and 1979 are displayed in Annexes 11-13. These esti- mates indicate that WDB has complied with the revenue targets for 1978 and 1979 established under the first project (Credit 709-CE). Further, these estimates reveal several potentially troubling financial trends. 4.06 Whereas WDB has attempted to comply with the first project's require- ment that accounts for the project area be kept separate from WDB's other activities, no effort has been made to monitor the financial performance of those other activities. Thus, while there is evidence that WDB is generating surplus revenues within the project area as was intended under the first project, evidence also exists that WDB is realizing substantial losses in those other activities. It is impossible to identify the extent and nature of these losses; however, it is clear that WDB has had to divert the surplus revenue generated within the project area to cover those deficits, a situation which the first project sought to discourage. GSL and WDB affirm that this situation has existed because available accounting information was inadequate to permit the timely identification of both the problems and appropriate remedial actionls. The new accounting system and the related program of management reforms (para- graphs 2.10 and 2.11), effectively implemented, are expected to resolve this deficiency in the future. 4.07 WDB's past accounts do identify some operating losses as attribut- able to the sale of bulk water outside the project area; however, they have  - 26 - not provided information about WDB's performance as an engineer-contractor. 1/ Since most of these activities have been funded by GSL based on budgeted cost estimates increased by a modest (12%) overhead allowance, and since no past attempt was made to reconcile costs actually incurred with those estimates, WDB has never realized any recovery of cost overruns, estimated by WDB's finance department at 30% per project. The new acounting system will consider each of WDB's regions and its engineer-contractor activity as cost centers. WDB and GSL can then scrutinize the pricing mechanism prevailing in each cost center on a regular basis. GSL has indicated its willingness to adjust these pricing mechanisms to assure each activity's financial viability. At negotiations, WDB renewed its agreement to take all steps required to ensure that revenues will be at a level so that operations outside the project area are not subsidized by revenues from the project area. 4.08 Within the project area, the local authorities have frequently lacked the liquidity to meet their water bills on time and WDB has frequently relied on GSL's agreement under the first project to guarantee the prompt payment of such bills. This has either involved GSL advancing money to the local authorities so that they may remit the required payment or remitting payments directly to WDB while making compensating adjustments to GSL's current accounts with the local authorities. This guarantee remains critical for assuring WDB of sufficient operating liquidity for its activities within the project area; therefore, at negotiations, GSL renewed its agreement to ensure that bills rendered by WDB to local authorities in the project area are duly and promptly paid. 4.09 In both 1977 and 1978, WDB's finance department allocated 67.5% of overhead incurred to Construction Work in Progress. The accounting staff has never clearly articulated its reasons for capitalizing overhead at such a seemingly excessive rate. The finance department has suggested that this rate will be reduced to 50% in 1979. During 1980, from information derived by using the new accounting system, WDB will more precisely identify the appropriate allocation of overhead to the construction of its new fixed assets. WDB will capitalize this percentage of overhead and expense the remainder. WDB will continue to check the validity of this percentage period- ically to maintain the credibility of its year-end statements. Fixed Assets 4.10 During the past several years, GSL has ordered the transfer of title to substantial amounts of aging fixed assets to WDB. Within the project area, these transfers include the impounding reservoirs at Labugama and Kalatuwawa together with related treatment and transmission facilities and, more recently, the Colombo sewerage system. These assets were not catalogued in detail at the time of construction and WDB and its predecessors were lax about their maintenance of asset registers. For accounting purposes, WDB proposed the use of best estimates of the gross value and accumulated depre- ciation of these assets; this appears acceptable. At the same time, for 1/ A government agency providing an engineering service to local authorities on a fixed price or fee basis.  - 27 - engineering and maintenance puposes, WDB will catalogue those assets. At negotiations, WDB has undertaken to complete the detailed cataloging of all its fixed assets not later than December 31, 1982 and maintains accurate asset registers thereafter. 4.11 Since, at the time of appraisal of the first project, WDB was expected to remain a service organization and asset revaluation was not accepted practice in Sri Lanka, WDB's financial targets were based on his- torically valued net fixed assets. Now, however, WDB has fixed assets valued at more than Rs 330 million (US$21 million) either in operation or under construction, and plans to increase that value to about Rs 1,200 million (US$77 million) by the end of 1980. It is therefore increasingly important that WDB maintain an awareness of the impact of inflation on the replacement value of its plant and equipment. Accordingly, at negotiations, WDB's agree- ment was obtained to annual revaluation of its fixed assets in operation in accordance with a procedure acceptable to the Association. Retailing 1/ 4.12 At the time of appraisal of the first project, numerous discussions were held between representatives of WDB, GSL, the Association, and officials of the Colombo Municipal Corporation and Towns South regarding the respon- sibility for water distribution within the project area. Although it was considered preferable for WDB to assume this reponsibility, the local authori-- ties strongly resisted an encroachment on their control over municipal services; accordingly, they retained control over water distribution and the tax revenue allocated thereto. Since that time, local authority revenues, which have remained relatively static, are proving increasingly inadequate to meet the rising costs for water as well as all other municipal services. Prior to the appraisal of the proposed project, the possibility of a property tax surcharge within the project area was explored; however, it was rejected by GSL as politically untimely. 4.13 Under the first project, a tariff study was conducted to develop a system of retail charges based on consumption aimed at encouraging conserva- tion and making maximum use of a limited base for cross-subsidization while falling within reasonable limits of affordability for each consumer category (paragraphs 4.20, 5.13 and 5.14). With the completion of this study, the emergence of a tariff acceptable to GSL, and the need for an aggressive billing and collection activity, the question has recurred as to which authority is best suited to undertake the responsibility for retailing. The successful implementation of appropriate tariffs is essential to assure viability of all organizations participating within the sector. 4.14 During appraisal, GSL provided strong indications that WDB would soon become the water retailer within Colombo; however, GSL did not give similar indications regarding retailing in Towns South. For WDB to serve as retailer in Colombo while local authorities retain that responsibility in the remainder of the project area has serious drawbacks. Such an arrangement increases the risk that the establishment of billing and collection procedures 1/ Including distribution of water to consumers and billing and collection of related revenues.  - 28 - will become haphazard. Agencies failing to take this responsibility seriously are likely to affect adversely the parallel efforts of other agencies within the project areas. At negotiations, GSL gave assurances that WDB will become the retailer of water and sewerage services for Colombo and Towns South with the transfer of all responsibilities and related assets being completed not later than December 31, 1981. Additionally, at negotiations, GSL has under- taken to obtain the formal acceptance of the project area's local authorities to this expansion of WDB's responsibilities not later than December 31, 1980. 4.15 WDB brought to negotiations an acceptable program defining the procedures for realizing revenues to be followed during the interim period, when some connections are metere(d and others are not. This program will serve as the basis for establishing consumer billing and collections. At negotia- tions, GSL undertook to implement this program promptly. 4.16 As soon as WDB assumes responsibility for retailing within the project area, it must rapidly become effective at billing and collecting consumer revenues. This is particularly true in view of WDB's substantial cash requirement resulting from its highly ambitious capital expansion program. Steps are already in process to organize and systematize WDB's revenue depart- ment (paragraph 2.13). At negotiations, WDB undertook that in each year after 1983 it will realize collections of consumer, governmental and local authority accounts receivable at a rate exceeding 90% of that year's billed revenues. Tariffs 4.17 The majority of Sri Lanka's urban development has taken place within the project area. This area contains much of the nation's industry, a higher level of per capita income and, as a result, an identifiable base for cross-subsidization of poor consumers. Outside the project area, the larger urban centers operate their own water supply systems while WDB sells water primarily to towns, villages and rural communities. Because the nature of these activities is so different from those within the project area and because the Association is not involved in those activities outside the project area, the discussion of tariffs and of agreements relating thereto will focus on the project area. 4.18 Since appraisal of the first project, WDB has realized its project area revenues by billing each local authority for the estimated volume of water supplied thereto priced at a bulk rate. This bulk rate, which was set at Rs 0.60 per thousand Imperial gallons (unit) 1/ at about the time of appraisal of the first project, has undergone annual increases since 1978 to Rs 0.88 per unit, effective January 1, 1978; Rs 1.13 per unit, effective January 1, 1979; and Rs 1.35 per unit, effective January 1, 1980. 1/ Although Sri Lanka officially uses the metric system, all past tariffs have been based on thousand Imperial gallon units. For future tariffs, GSL has approved a rate structure based on the same unit. This rate structure is not strictly convertible to metric and GSL as not specified a metric analogue; therefore, in this discussion, rates are expressed in thousand Imperial gallon units.  - 29 - 4.19 Within the project area, the local authorities have sought to cover their costs for distribution, debt service and bulk water charges from the property tax. Each year, property owners within Colombo are required to pay a tax equal to 30% of rateable property values; the property tax in Towns South is set at 20% of rateable values. In the past, 30% of the total property tax has been allocated to water supply. By late 1978, several among the Towns South were unable to meet their water costs from these allocations; subse- quently, it was decided that Towns South would double their allocation to water supply and GSL would assist those local authorities in meeting the cost of other municipal services. While this adjustment proved reasonably satis- factory in 1978 and 1979, GSL's own projections for 1980 and beyond indicate that the local authorities will require additional revenues to cover their costs for water. GSL decided to increase local authority revenues by setting charges for water distributed to commercial and industrial consumers (most of whom are already metered) at Rs 12.44 per unit and raising the GSL payment for estimated consumption of water supplied through public taps to Rs 12.44 per unit. The Association agreed during supervision of the first project that this approach is acceptable until a consumption-based domestic tariff replaces the property tax allocation. 4.20 Under the first project (Credit 709-CE), GSL agreed to implement the recommendations of the tariff study (paragraph 4.13) and has indicated its intention to implement the recommended tariff (Annex 16), with some modifications acceptable to the Association, in tandem with implementation of the metering program. The study computed an average incremental cost of water at Rs 12.44 per unit which serves as the basis for setting rates applicable to each category of consumer. In effect, by implementing the tariff described below, GSL is accepting the principle of marginal cost pricing: (a) Most commercial and industrial consumers are metered and will pay Rs 12.44 per unit of water. This rate has been introduced for collection by the project area's local authorities. The authorities shall continue accruing these revenues until they revert to WDB (paragraph 4.15). (b) Water supplied through public taps will be metered and GSL will reimburse local authorities at a price of Rs 12.44 per unit. Until the metering of public taps is completed, GSL intends to accept and pay bills based on estimated con- sumption. This rate has been introduced for collection by the project area's local authorities. The authorities shall continue accruing these revenues until GSL remits them directly to WDB (paragraph 4.15). (c) Domestic consumers will pay for water according to a three block rate structure. The lowest block is designed to provide households with their most basic needs at nominal cost. The second block is intended to provide households with an additional equivalent amount at a rate somewhat above the effective rate being estimated under the property tax. All addi- tional water consumption is to be priced at marginal cost. In order to minimize consumer resistance to  - 30 - the principles of metering and direct tariffs, GSL will increase the charges per block to full rate over a five-year period in accordance with the fol- lowing table: Table 4:1 STAGING OF THE DOMESTIC METERED RATE 1981-1987 1981 1982 1983 1984 1985 1986 1987 Quantity/Month -