RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING LK WATER SUPPLY AND SANITATION IMPROVEMENT PROJECT APPROVED ON JUNE 24, 2015

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1 Public Disclosure Authorized The World Bank REPORT NO.: RES33110 Public Disclosure Authorized RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF Public Disclosure Authorized LK WATER SUPPLY AND SANITATION IMPROVEMENT PROJECT APPROVED ON JUNE 24, 2015 TO DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA Public Disclosure Authorized WATER GLOBAL PRACTICE SOUTH ASIA REGION Regional Vice President: Country Director: Senior Global Practice Director: Practice Manager/Manager: Task Team Leader: Ethel Sennhauser Idah Z. Pswarayi-Riddihough Guang Zhe Chen Takuya Kamata Pratibha Mistry

2 ABBREVIATIONS AND ACRONYMS CBOs ERD ERR NPV PDO Community Based Organizations External Resources Department Economic Rate of Return Net Present Value Project Development Objective

3 BASIC DATA Product Information Project ID P Original EA Category Partial Assessment (B) Approval Date 24-Jun-2015 Financing Instrument Investment Project Financing Current EA Category Partial Assessment (B) Current Closing Date 31-Dec-2020 Organizations Borrower ERD, Ministry of Policy Planning, Economic Affairs, Child, Youth and Cultural Affairs,Ministry of City Planning and Water Supply Responsible Agency National Water Supply and Drainage Board Project Development Objective (PDO) Original PDO The development objectives of the project are to increase access to piped water services and improved sanitation in selected Districts; and to strengthen the capacity of associated institutions. Summary Status of Financing Ln/Cr/Tf Approval Signing Effectiveness Closing Net Commitment Disbursed Undisbursed IDA Jun Nov Dec Dec Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No

4 I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING 1. Project status: Three years of implementation of the project have been completed, and 40% of funds disbursed. Despite early delays, implementation progress has been substantial. The recently completed Mid-Term Review found that for water supply: (i) four out of six urban water supply systems are under construction; (ii) out of 211 rural sub-projects three are completed and 48 are under construction; (iii) out of 30 identified estate water sub-projects, 9 are under construction. For sanitation: 4,799 toilets have been built and two out of the seven planned septage treatment plants are under construction. Progress on preparation and procurement of remining systems is on track. Institutional development and capacity building strategies have been developed and the collection of baseline data and development of a monitoring and evaluation system is progressing. Further technical assistance activities are being procured. The achievement of beneficiary targets is lagging, and is expected to improve substantially as the construction of infrastructure is completed and assets become operational. 2. Rationale for Restructuring. The Mid-Term Review found that the results framework is unlikely to be achieved by project closing. This is due to project cost overruns in water supply systems because of (i) higher than estimated bid prices; (ii) additional taxes; (iii) selection of a greater number of sub-projects where provision of water supply is more challenging and expensive than is typical for rural areas in the country. Sanitation targets have been reduced since there has been a lower than estimated demand for sanitation in the project at the current level of subsidy provided by the project. There is also an overall lag in achieving results due to the one-year delay in the start of the project and the subsequent lag in implementation progress. The PDO is still relevant and the Results Framework represents an appropriate means to assess project performance. The Government of Sri Lanka has requested immediate restructuring to reduce the project targets in line with the current project status. In addition, subsequent restructuring of the project is proposed to: (i) include additional indicators for institutional sanitation, and; (ii) increase the amount of the sanitation subsidy; (iii) reallocate funds from Category 2 to Category 1. II. DESCRIPTION OF PROPOSED CHANGES 3. The PDO indicator targets in the Results Framework are proposed to be changed as shown in Table 1 below. The table shows the original targets at approval and the changes proposed for this restructuring. The urban water supply systems were delayed and four of the six planned systems are currently under construction. It is expected that some water connections to the beneficiaries are likely to be completed after the end of the project period, resulting in a 7% reduction in urban beneficiaries during the life of the project. The number of rural beneficiaries has increased slightly due to the increase in the number of rural systems covered, and an increase in the number of schools and hospitals covered. The demand for household sanitation has been lower than anticipated due to increased levels of subsidies being provided by other projects. During preparation the number of Community Based Organizations (CBOs) to be targeted was not defined. Recent data collection by the project identified 121 CBOs that are not functioning or partially functioning, and these have been targeted for project support. The Project Operations Manual will be revised to reflect the changes in the Results Framework.

5 TABLE 1 ORIGINAL AND PROPOSED PDO TARGETS Indicator Indicator 1: Direct project beneficiaries of which female (percentage) Indicator 2: People provided with access to Improved Water Sources (Urban), of which female Indicator 3: People provided with access to Improved Water Sources (Rural + Estates), of which female Indicator 4: People provided with access to Improved Sanitation (Rural + Estates) of which female Indicator 5: Rural M&E system established, populated and used in decision making Units Number Current Achievement May ,200 (52%) PAD Target 740,600 (50%) Number 0 105,200 Number Number % of schemes in database 7,200 (3,700) 14,600 (7,300) Indicator 6: Fully functioning CBOs Number , ,000 Proposed Revised Target 693,800 (50%) 98,100 (51,000) 427,600 (222,300) 146,400 (73,200) No target defined 121 % change The economic analysis for the project with the restructuring is expected to yield a positive Net Present Value (NPV) and Economic Rate of Return (ERR) that is higher than the opportunity cost of capital at 10 percent. One of the main assumptions in the analysis undertaken at appraisal was the number of beneficiaries affected, which is used in the monetization of benefits (time savings due to improved services, savings due to avoided cost of healthcare, and increase in productivity due to reduced illness). The original analysis calculated the economic benefits and costs with a conservative estimate of approximately 530,000 people, and even with a 10 percent escalation in costs and 10 percent reduction in benefits, resulted in an ERR of almost 19 percent over a 30-year economic life of the project. Thus, while the restructuring reduces the number of beneficiaries to 693,803 it remains greater than the original assumption. Secondly, the calculation of benefits in the original analysis was also an underestimate since local economic development due to project investments and increased system efficiencies due to technical assistance were not included because they are difficult to quantify. Intangible benefits like increased convenience due to improved services, improved safety for women due to presence of toilets within household and positive gender impacts due to easing of the responsibility for water collection were also excluded from the calculations. Hence, despite the restructuring, the ERR and NPV are expected to be at least the same if not greater. III. SUMMARY OF CHANGES Changed Change in Results Framework Not Changed Change in Implementing Agency Change in DDO Status

6 PDO_IND_TABLE The World Bank Change in Project's Development Objectives Change in Components and Cost Change in Loan Closing Date(s) Cancellations Proposed Reallocation between Disbursement Categories Change in Disbursements Arrangements Change in Disbursement Estimates Change in Overall Risk Rating Change in Safeguard Policies Triggered Change of EA category Change in Legal Covenants Change in Institutional Arrangements Change in Financial Management Change in Procurement Change in Implementation Schedule Other Change(s) Change in Economic and Financial Analysis Change in Technical Analysis Change in Social Analysis Change in Environmental Analysis IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_RESULTS_TABLE RESULTS FRAMEWORK Project Development Objective Indicators Direct project beneficiaries Value Revised

7 Female beneficiaries Unit of Measure: Percentage Supplement Value No Change Number of people in urban areas provided with access to Improved Water Sources under the project Value Revised People in urban areas provided with access to improved water source - Female Breakdown Value Revised Number of people in rural areas provided with access to Improved Water Sources under the project Value Revised People in rural areas provided with access to improved water sources - Female Breakdown Value Revised

8 People provided with access to improved sanitation services Indicator Type: Corporate Value Revised Date 24-Jun Nov Jun-2021 People in rural and estates areas provided with access to improved sanitation facilities - Female Breakdown Value Revised Rural M&E system established, populated and used in decision making Unit of Measure: Percentage Value No Change Fully functioning CBOs Value Revised Intermediate Indicators IO_IND_TABLE New piped household water connections that are resulting from the project intervention (Urban)

9 Value No Change New piped household water connections that are resulting from the project intervention (Rural) Value No Change New piped household water connections resulting from project intervention (Estates) Value No Change Piped household water connections that are benefiting from rehabilitation works undertaken by the project Value No Change People provided with access to Improved Sanitation (Rural) Value No Change People provided with access to Improved Sanitation - Rural Female Breakdown

10 Value No Change People provided with access to Improved Sanitation - Estates Value No Change People provided with access to Improved Sanitation - Estates Female Breakdown Value No Change People trained to improve hygiene behavior/sanitation practices under the proj Value No Change People trained to improve hygiene behavior/sanitation practices - female Breakdown Value No Change People trained in improved hygiene behavior or sanitation practices (Estates)

11 Value No Change Date 24-Jun Nov Jun-2020 People in Estates trained in improved hygiene behavior - Female Breakdown Value No Change Households gaining access to safe disposal of fecal sludge in urban areas Value No Change Number of CBOs visited and evaluated by DNCWS Value No Change Number of other water service providers that the project is supporting Value No Change DNCWS organizational structure designed and approved by Ministry

12 Value No Change Comprehensive sector program prepared and approved by Ministry Value No Change WSS CKD Mitigation program prepared and approved by Ministry Value No Change Proportion of grievances registered related to project delivery that have been redressed Unit of Measure: Percentage Value No Change