Report and Recommendation of the President to the Board of Directors

Project Number: 39431 February 2007

Proposed Loan Democratic Socialist Republic of Sri Lanka: Colombo Port Expansion Project

CURRENCY EQUIVALENTS (as of 01 February 2007)

Currency Unit – Sri Lanka rupee/s (SLRe/SLRs)

SLRe1.00 = $0.0092

$1.00 = SLRs108.58

ABBREVIATIONS

ADB – Asian Development Bank BOT – build-operate-transfer CCD – Coast Conservation Department CMR – Colombo Metropolitan Region EIA – environmental impact assessment EMP – environmental management plan FIRR – financial internal rate of return GDP – gross domestic product ISC – Indian subcontinent JBIC – Japan Bank for International Cooperation JCT – Jaya Container Terminal LIBOR – London interbank offered rate MPA – Ministry of Ports and Aviation PIU – project implementation unit PPP – public-private partnership RTG – rubber-tired gantry crane SAGT – South Asia Gateway Terminal SEIA – summary environmental impact assessment SLPA – Sri Lanka Ports Authority SRE – superintending resident engineer TEU – twenty-foot equivalent unit UCT – Unity Container Terminal WACC – weighted average cost of capital

NOTES

(i) The fiscal year (FY) of the Government and its agencies ends on 31 December.

(ii) In this report, "$" refers to US dollars

Vice President L. Jin, Operations 1 Director General K. Senga, South Asia Department, SARD Director K. Higuchi, Transport and Communications, SARD Team leader P. Dutt, Senior Transport Specialist, SARD Team members D. Utami, Senior Environmental Specialist, SARD H. Iwasaki, Project Specialist, SARD T. Nishimura, Transport Specialist, SARD M. Gupta, Social Development Specialist, SARD S. Miah, Counsel, Office of the General Counsel J. Boestel, Economist, SARD M. Raz, Structured Finance Officer, Private Sector Department J. Peththawadu, Project Implementation Officer, SARD

CONTENTS Page

LOAN AND PROJECT SUMMARY i

MAPS v

I. THE PROPOSAL 1

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 3

III. THE PROPOSED PROJECT 7 A. Impact and Outcome 7 B. Outputs 7 C. Special Features 8 D. Project Investment Plan 9 E. Financing Plan 9 F. Implementation Arrangements 10

IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 13 A. Benefits 13 B. Economic and Financial Analysis 13 C. Social Impact 14 D. Environmental Impact 16 E. Risks 17

V. ASSURANCES 17 A. Specific Assurances 17 B. Conditions for Loan Effectiveness 20 C. Conditions for Harbor Infrastructure Works Implementation 20

VI. RECOMMENDATION 20

APPENDIXES 1. Design and Monitoring Framework 21 2. Organization Chart of Sri Lanka Ports Authority 22 3. Sector Analysis of Colombo Port 23 4. 2005 Summary Financial Statement for Sri Lanka Ports Authority 27 5. External Assistance to Sri Lanka Ports Authority 28 6 Proposed Terms of Reference of the Advisory Committee on Port Competition 29 7. Detailed Description of Harbor Infrastructure Works Component and Cost Estimates 30 8. Implementation Arrangements 32 9. Implementation Schedule 33 10. Indicative Contract Packages and Procurement Plan 34 11. Outline Terms of Reference for Consulting Services 36 12. Economic and Financial Analysis 41 13. Summary Poverty Reduction and Social Strategy 54

SUPPLEMENTARY APPENDIX (available upon request)

Financial Management Assessment for Sri Lanka Ports Authority

LOAN AND PROJECT SUMMARY

Borrower Democratic Socialist Republic of Sri Lanka Classification Targeting classification: General intervention

Sector: Transport and communications Subsector: Ports, waterways, and shipping Themes: Sustainable economic growth, private sector development Subthemes: Fostering physical infrastructure development, public-private partnerships

Environment Assessment

Category A. The summary environmental impact assessment report was circulated to the Asian Development Bank (ADB) Board of Directors on 12 July 2006.

Project Description The Colombo Port Expansion Project provides for dredging and

breakwater construction sufficient to accommodate three terminals, which will be constructed sequentially. The Project includes the establishment of a new marine operations center, relocation of a submarine oil pipeline, provision of navigational aids, and construction of shore utilities. The Project will be developed on a public-private partnership basis. The harbor infrastructure works, i.e., dredging, breakwater construction, and other works, will be implemented by the Sri Lanka Ports Authority (SLPA). The first two terminals will be operational in 2010 and 2015 respectively and constructed by operators chosen through open competitive bidding under a build-operate-transfer concession agreement. The first concession bid will be for one terminal.

Rationale Colombo Port is the natural transshipment hub port for the South

Asian region. However, in recent years Colombo Port lost market share of the regional transshipment market because the fundamentals of the market changed and Colombo Port did not adapt. Colombo Port cannot offer the additional operating capacity required to compete for the Indian subcontinent transshipment market or the depth required to berth the latest generation container ships. Colombo Port will have to develop additional container berths with the required depth to address these capacity and depth infrastructure constraints if it is to remain a transshipment hub port.

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Impact and Outcome The Project will promote economic growth by improving Sri Lanka’s competitiveness in the ports sector by expanding Colombo Port using public-private partnerships; and facilitate economic growth by enhancing national competitiveness in international trade via lower transport costs and faster delivery times. Container-handling capacity will be increased from 3.3 million twenty-foot equivalent units (TEU) in 2006, to 5.7 million TEU by 2010, 8.1 million TEU by 2015 and 10.5 million TEU by 2024. The additional capacity will enable Colombo Port to increase its Indian subcontinent transshipment market share from 23% in 2002 to 30% by 2011. Sri Lanka will thus be able to generate additional income from transshipment. Foreign direct investment in the ports sector will increase by approximately $800 million by 2024.

Project Investment Plan The investment cost of the Project is estimated at $781 million.

The public sector component is estimated at $480 million, including taxes and duties of $49.7 million.

Financing Plan

Source Total

($ million) Percent Public Sector Component Asian Development Bank 300.0 38.5 Government 180.0 23.0 Subtotal 480.0 61.5 Private Sector Component 301.0 38.5 Total 781.0 100.0

Sources: Feasibility study and Asian Development Bank estimates. A loan of $300,000,000 from the ordinary capital resources of the

Asian Development Bank (ADB) will be provided under ADB’s London interbank offered rate (LIBOR)-based lending facility. The loan will have a 25-year term including a grace period of 5 years, an interest rate determined in accordance with ADB’s LIBOR-based lending facility, a commitment charge of 0.35% per annum, and such other terms and conditions set forth in the draft loan and project agreements.

Allocation and Relending Terms

The Government will make all proceeds from this loan available to Sri Lanka Ports Authority (SLPA) under the same terms and conditions as the ADB loan.

Period of Utilization 30 April 2011 Estimated Project Completion Date

31 October 2010 for both the public and private sector components.

Executing Agency Ministry of Ports and Aviation

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Implementation Arrangements

SLPA will be the Implementing Agency. A project implementation unit will be established with a full-time project director, and staffed with qualified staff with expertise in contract management, environmental monitoring, planning, and accounting. The project director will report to the Chairman, SLPA. The project director will have overall responsibility for project management and be responsible for the preparation of quarterly and annual project monitoring and progress reports. An interministerial project steering committee chaired by the Secretary, Ministry of Ports and Aviation and comprising representatives from concerned government agencies, will be established to oversee the Project and coordinate issues related to project implementation. The Chairman, SLPA will report to the project steering committee on a regular basis.

Procurement Goods, works, and related services to be financed by the loan will

be procured according to ADB’s Procurement Guidelines (2006, as amended from time to time). All contracts will be procured through international competitive bidding.

Consulting Services International and national consultants will be required for

construction supervision. The consultants financed under the loan will be engaged using ADB’s single-source selection procedures in accordance with ADB's Guidelines on the Use of Consultants (2006, as amended from time to time).

Project Benefits and Beneficiaries

The Project will benefit Sri Lankan exporters by enhancing their competitiveness in international markets through lower freight costs and faster delivery times for time-sensitive exports e.g., textiles, which account for 52% of Sri Lanka’s exports. Lower freight costs are expected to result in annual savings of $82 million by 2015, and faster delivery times will create annual savings of $49 million by 2015. In addition transshipment traffic will generate direct net annual income to terminal operators amounting to $77 million by 2015.

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Risks and Assumptions As the implementation of this Project will be on a public-private partnership basis with the public sector implementing the harbor infrastructure works component and the private sector implementing the terminal component, the full benefits of the Project are dependent on both components being implemented on a coordinated basis. Therefore, the major risk is if no private sector party is willing to take up the terminal component concession. This risk has been mitigated by linking implementation of the harbor infrastructure works component to the progress of selecting a successful bidder for the terminal concession. A delay in the consolidation of the ceasefire in the country may also have some impact on private sector interest. However, the private sector has been interested in Colombo Port as indicated by the implementation of the South Asia Gateway Terminal project even before the ceasefire. The Government has declared Colombo Port a high-security zone and appointed the Sri Lankan Navy as the designated authority for port security. The navy has drawn up comprehensive security plans in accordance with the requirements of the International Ship and Port Security Convention of the International Maritime Organization for port security and the special security considerations necessary for Sri Lanka. Colombo Port is the first port in the South Asian region to have implemented both the container security initiative and the mega port initiative.

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I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed loan to the Democratic Socialist Republic of Sri Lanka for the Colombo Port Expansion Project. The design and monitoring framework is in Appendix 1.

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

A. Performance Indicators and Analysis

2. Sri Lanka’s real gross domestic product (GDP) growth in the 1980s and 1990s averaged about 5%, and increased to 6.1% in 2005. However poverty continues to be a major concern of the Government as 22% of the population is living below the poverty line. The Government’s objective is to increase the rate of economic growth to around 8% per annum to generate the resources needed for sustained poverty reduction, achieve its social and economic goals, and reduce regional disparities. Medium-term prospects hinge on Government plans to foster economic growth by significantly raising foreign direct investment as well as domestic public and private investment. No large infrastructure improvements have been made in the last 20 years, resulting in bottlenecks that are a heavy drag on the economy.1 An efficient port system is a key factor in improving the country’s competitiveness and attracting investment. It can also be a factor in encouraging the establishment of other value-added industries since Colombo Port is ideally situated to be the transshipment center for South Asia. The ports sector in Sri Lanka is dominated by Colombo Port. It is the only port equipped to handle container traffic and handles 95% of Sri Lanka’s total international trade. It also serves as a transshipment hub port for South Asia; 70% of Colombo’s container volume consists of transshipment traffic to and from the Indian subcontinent (ISC). The volume of containers handled increased from 200,000 twenty-foot equivalent units (TEU) in 1985 to 1 million TEU in 1995, but the growth rate then tapered off and stagnated between 1997 and 2000 with an annual average of 1.7 million TEU. Growth then increased, and in 2006 Colombo Port handled 3.08 million TEU. One of the main reasons for the stagnation and slow increase in growth is Colombo Port’s lack of competitiveness with other major transshipment ports established to cater for ISC traffic. 3. Colombo Port is owned by the Sri Lanka Ports Authority (SLPA), a statutory body under the Ministry of Ports and Aviation (MPA). The current SLPA organization structure is in Appendix 2. SLPA operates the three container facilities at the port. Jaya Container Terminal (JCT), the main container terminal, has a capacity of 2 million TEU. The two other container facilities are Unity Container Terminal with a capacity of 300,000 TEU and Bandaranaike Quay with a potential capacity of 200,000 TEU. In addition, a private sector company, South Asia Gateway Terminal (SAGT) Private Limited upgraded and now operates Queen Elizabeth Quay, which has a capacity of 1 million TEU. A sector analysis of Colombo Port is in Appendix 3.

1. Container Traffic Volume

4. In 2005, container traffic volume at JCT accounted for 64% of the total Colombo Port container volume, and SAGT for 36%. JCT accounted for more than 90% of the SLPA revenues and profits, making container traffic the major revenue earner for SLPA. About 70% of containers handled in Colombo Port are transshipment containers of which 75% are for the ISC market and 25% for the West African market. Between 1998 and 2002, the transshipment share of Colombo Port for total ISC cargoes declined from 52% to 45% even as the ISC transshipment

1 ADB. 2006. Asian Development Outlook 2006. Manila.

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market grew at 8% annually. The loss in market share accounted for the stagnation of overall container traffic volume at Colombo Port during this period. This loss resulted from a combination of factors, some beyond the control of Colombo Port, while others are internal factors including lack of sufficient capacity. Enhancement of operational efficiency at all its container terminals and investment in port infrastructure is urgently needed to increase Colombo Port’s container-handling capacity and alleviate its depth infrastructure constraints to reverse this trend. Remaining a transshipment hub port will not only bring more foreign exchange to the country, but will also develop supporting industries such as ship chandlery, ship repair, and bunkering activities. 5. Direct calls at Indian ports started around 1997, when traffic volume reached the threshold at which it became economic at Nhava Sheva port in India (until then India had been served by feeders). The trend of increased direct calls has since accelerated as a result of improvements in port efficiency, which followed the construction of a private terminal at Nhava Sheva in 1999. New ports started to compete for Colombo’s transshipment traffic. Before 2000 the competition came from two major ports: Dubai and Singapore; subsequently three additional competitors emerged i.e. Salalah in Oman, and Port Klang and Tanjung Pelepas both in Malaysia. Internal factors affecting container traffic volume include the delay of construction of new capacity until 2001, resulting in congestion during 1996–2000. JCT operation had no intraport competition until 2001 and productivity remained below that of the main competitors. Colombo Port provided no flexibility in pricing and had limited ability to negotiate prices with shipping lines. This was a major disadvantage, as the competing ports such as Singapore and Port Klang were cutting prices to unusually low levels. In 2002, the period of stagnation ended, after the introduction of new capacity in 2001 by the private operator—SAGT. The introduction of competition between the terminals promoted an overall increase in efficiency.at Colombo Port.

2. Operational Performance

6. The overall container growth in Colombo Port increased by 13.3% in 2004 and 10.5% in 2005. In the first 6 months of 2006, it increased by 18% compared with the same period in 2005. Crane productivity for mainline container vessels at JCT increased from 15.1 moves per crane per hour in 2001 to 23.4 in 2005. JCT and SAGT now have similar levels of crane productivity. Average service time for container ships at JCT decreased from 17.8 hours in 2001 to 13.8 hours in 2005; and average turnaround time for container ships decreased from 23.1 hours in 2001 to 16.0 hours in 2005. JCT has about 1,500 employees handling a total of 1.7 million TEU. SAGT has about 500 employees handling 930,000 TEU. As a comparison to world best practice, Singapore Port handles 17 million TEU with only 5,700 employees. 3. Financial Performance 7. SLPA consistently made operating profits during 2001–2005: SLRs5.26 billion in 2001 and SLRs7.4 billion in 2005. Earnings after tax in 2005 were SLRs10.1 billion. Colombo Port accounts for approximately 97% of SLPA’s income. SLPA accounting is done using accrual-based accounting in accordance with Sri Lankan accounting standards, which are identical to international accounting standards. SLPA accounts are audited by the Auditor General of Sri Lanka and then presented in Parliament. The 2005 summary financial statement for SLPA is shown in Appendix 4.

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B. Analysis of Key Problems and Opportunities

1. Challenges

8. Colombo Port lost market share of the ISC transshipment market because the fundamentals of the market changed and Colombo Port did not adapt to the change. Colombo Port faces increased competition from other transshipment ports. The dynamics of the size of container ships means that the trend is toward larger container ships. Use of larger ships in turn means that established transshipment ports now have a wider hinterland that they can effectively serve. Hence the use of larger containerships means that Colombo Port now has to compete with established ports such as Singapore and new ports such as, Dubai, Port Klang, Salalah and Tanjung Pelepas, (para. 5) for the ISC transshipment market. These ports are owned in whole or in part by established port operators and shipping lines, and are able to provide higher productivity and faster ship turnaround times. Thus they have a built-in advantage when competing for the ISC market.2 Colombo Port’s efficiency and locational edge in the ISC transshipment market has therefore eroded as new players in South-East Asia and the Gulf region have used more modern institutional structures and equipment to reduce ship waiting and turnaround times. 9. Colombo Port is not able to offer the additional operating capacity required to compete for the ISC transshipment market. The total current transshipment market is 6 million TEU and is forecast to grow at 8% annually. The combined potential container capacity of all the facilities at Colombo Port is 4 million TEU. As 3.08 million TEU were handled in 2006, and as Sri Lanka’s own exports and imports grow, Colombo Port is expected to reach its full current capacity by 2010. It will thus reach its limit in the volume of transshipment traffic it can handle. This will make the port unattractive to shipping lines that require guaranteed capacity before they decide to make a port a transshipment hub. 10. Colombo Port has a depth of 15 meters (m). This means that it cannot berth the latest generation containerships, i.e., 9,000 TEU vessels; its competitors in Dubai, Singapore, Salalah, and Tanjung Pelepas can all berth 9,000 TEU vessels. Shipping economics mean that the trend is toward larger container vessels. Major shipping lines have already launched 11,000 TEU vessels for the Asia–Europe route, and in the next 10 years major container lines could possibly deploy vessels with 13,000 TEU carrying capacity. All hub ports therefore need to upgrade their infrastructure to handle these larger vessels or see their competitive position eroded. 11. The future performance of Colombo Port depends on how it addresses the institutional and infrastructure constraints that it faces to complement its excellent geographic location and to ensure that it remains a major transshipment hub port for the ISC region. This means that it has to put into place measures to enhance its operational efficiency at all its container terminals, set up an operating environment that ensures fair competition for all terminal operators, and address its capacity and depth infrastructure constraints. International experience in the ports sector shows that the most appropriate institutional structure for port efficiency is the landlord port model, whereby the port authority is responsible for the common facilities while terminal operations are carried out by a terminal operating company. By increasing its capacity and efficiency, Colombo Port will remain a hub port, bring more foreign exchange to the country, and develop supporting industries such as ship chandlery, ship repair, and bunkering. It will also

2 PSA Corp, the Singapore container terminal operator operates Singapore Port.. Dubai is operated by Dubai Ports

World, one of the largest port operators in the world. Hutchinson Port Holdings of Hong Kong, China, has an equity share in Port Klang. Maersk, a large container shipping line has equity shares in Salalah and Tanjung Pelepas.

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have the potential to make Sri Lanka a distribution center for the South Asian region, a role normally centered on transshipment hubs. Being a transshipment hub will reduce shipping costs for Sri Lanka’s own exports and imports, and thus make the country a more competitive location for foreign and domestic investment. 2. External Assistance to the Sector 12. Modern development of Colombo Port started in 1980 with the construction of the first phase of JCT using funding from the Overseas Economic Cooperation Fund, now the Japan Bank for International Cooperation (JBIC). A series of JBIC loans through the 1980s and 1990s funded enlargement of JCT to its present four berths. In 2000, JBIC provided a loan to upgrade JCT’s computer systems. JBIC is currently providing a $124 million loan to finance the expansion of Galle Port. The World Bank provided assistance to the ports sector under its Port Efficiency Project, which commenced in 1997. This funded studies into the legal, regulatory, and management aspects of both the ports sector as a whole and Colombo Port in particular. This project failed in 1999 due to lack of agreement between the World Bank and the Government on sector restructuring. ADB’s assistance to the Sri Lanka ports sector includes loan and equity investment in SAGT for private sector development and operation of the Queen Elizabeth Quay in Colombo Port.3 ADB also provided technical assistance in 1999 to assist the Government in examining the feasibility of expanding Colombo Port.4 13. Subsequently, ADB provided a loan in 2001 to (i) address sector policy, and institutional and regulatory issues; and implement measures to improve the efficiency of the existing port, in particular JCT; and (ii) carry out the preparatory work for the Colombo Port Expansion Project.5 The main services consultant engaged for this project produced an action plan to increase JCT efficiency, a business plan analyzing the demand forecasts and economic and financial viability of expanding Colombo Port, and a detailed engineering report on the technical options available. These were reviewed and accepted by a panel of experts recruited separately as individual consultants under this same loan to assess the commercial, operational, and technical viability of the main services consultants’ proposals. The terms of reference for the main services consultants require them to prepare detailed construction tender documents and bid concession documents, and provide technical and bid advisory services to the Government for the Project. A summary of past and ongoing external assistance to the ports sector in Sri Lanka is given in Appendix 5. 3. Lessons Learned 14. The 2001 ADB loan included two significant policy covenants. The first covenant was for JCT to be transformed into a corporate entity wholly owned by the Government. The objective of this covenant was to increase overall port efficiency through increasing JCT efficiency by making the landlord port model the dominant model in Colombo Port. However the Government has not been able to corporatize JCT and thus has been unable to implement the landlord port model in Colombo Port. The Government instead decided to increase JCT efficiency through

3 ADB. 1999. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the

Democratic Socialist Republic of Sri Lanka for the Colombo Port Project. Manila (Loan 1689/7153-SRI, for $35.0 million [loan] and $7.4 million [equity investment], approved on 11 May).

4 ADB. 1999. Technical Assistance to the Democratic Socialist Republic of Sri Lanka for the Port of Colombo South Harbor Development. Manila (TA 3276-SRI, approved on 13 October for $1.46 million).

5 ADB. 2001. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Democratic Socialist Republic of Sri Lanka for the Colombo Port Efficiency and Expansion Project. Manila (Loan 1841-SRI, for $10 million).

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competition, i.e., using the existence of SAGT to spur greater JCT efficiency. This approach has succeeded and the relevant efficiency indicators for JCT have improved since 2001. Average turnaround time for container ships improved by 30% from 23.1 hours in 2001 to 16 hours in 2005; average waiting time per ship improved by 77% from 3.6 hours in 2001 to 0.8 hours in 2005. The introduction of a private sector competitor—SAGT—has therefore helped to increase operational efficiency of the SLPA-run JCT until both JCT and SAGT now have similar levels of operational crane productivity at 23 moves per crane per hour. Although efficiency increase is a necessary condition it is not a sufficient condition to result in an increase in ISC transshipment market share. Instead increases in efficiency need to be supplemented by an increase in the available capacity to cater for changing market needs. This is shown by the fact that although JCT efficiency increased and the absolute volumes handled by Colombo Port increased since 2003, it did not help to increase the overall market share of Colombo Port in the transshipment market. Colombo Port faces depth and capacity constraints that place it at a disadvantage in the market. Hence both efficiency levels and infrastructure capacity at the required depths at Colombo Port need to be further increased. As the capacity of JCT and SAGT cannot be increased, a greenfield site needs to be developed as part of the Project so that Colombo Port can continue to offer major shipping lines guaranteed capacity and be able to take the large container ships that will be introduced by major shipping lines in the near future. Constructing additional terminals will also help to increase overall port efficiency through additional competition only if the landlord port model becomes the dominant model in Colombo Port. 15. As the original approach to make the landlord port model the dominant model through corporatization of JCT did not succeed, ADB carried out intensive policy dialogue with the Government to use the public-private partnership (PPP) approach as an alternative method allowing the landlord port model to become the dominant model in Colombo Port. The Government agreed to use the PPP approach for future container terminals in Colombo Port. Common facilities such as capital dredging and breakwater construction will remain a public sector responsibility, while terminal operations will be carried out by terminal concessionaires. The Project will allow for three new container terminals to be developed, i.e., south, west, and east terminals. In the first phase only the south terminal will be developed. The prospective terminal operator will be a corporate entity selected through open competitive bidding to ensure that intraport competition between the different terminals is enhanced and thus improve the overall efficiency of Colombo Port. Open competitive bidding will also be used for the second terminal to be built as part of the Project, tentatively in 2015. The third terminal to be developed in 2024 will also follow the PPP modality. This Project will therefore make the landlord port model the dominant model in Colombo Port through using a PPP approach. 16. The second significant policy covenant of the 2001 ADB loan (footnote 5) was to reform the regulatory structure for the ports sector through legislation, especially to curb any anticompetitive behavior on the part of established operators. The Government’s long-term objective in this regard is to enact a Port Competition Act. Prior experience with both the World Bank and the ADB assistance indicate that changing the regulatory structure by legislation needs to be done in incremental steps with the agreement of all parties. Hence, in the interim, using a regulation by contract approach, the Government through a Cabinet decision on 11 October 2006 approved the establishment of an advisory committee to consider any grievances or complaints that current and future container terminal operators may have regarding fair competition issues. The committee will be chaired by the Secretary, MPA and membership will include the person holding the post of Director General of the Public Utilities Commission. The Government has agreed that the committee will be operational within 3 months of loan effectiveness. The proposed terms of reference, composition, and draft procedures for the committee are given in Appendix 6. Rules and procedures of the committee will be finalized

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within 3 months of loan effectiveness. Once the committee is operational, all existing terminal operators will be informed of its role and reference to the advisory committee will be included in concession agreements to be signed with future terminal operators. 4. Opportunities 17. Even though the market share of Colombo Port for the ISC transshipment market has declined, in absolute terms the volume has increased and Colombo Port has the potential to further increase both its volume and its market share of transshipment traffic. Colombo Port has several natural advantages: It has a well-protected deepwater harbor and is located near the east–west trunk routes between the Asia-Pacific, Europe, and the United States East Coast regions. It is thus the closest transshipment port to the huge, rapidly expanding markets of the ISC. For Europe-bound cargo for the east and south segments of the ISC, using Colombo Port as a hub port is more advantageous than using Southeast Asian ports because of the shorter distance to Colombo Port. Extensive market studies were conducted as part of the business plan for the Project taking into account port development plans in competing ports. These studies, which were validated by the independent panel of experts advising the Government on the Project, show that if terminal operators at Colombo Port are able to offer high productivity, sufficiently large additional capacity, ability to take larger vessels, and ability to negotiate tariffs without external control, a revival of Colombo Port’s share of regional transshipment traffic is expected—from a 23% share of the ISC transshipment market in 2002 to 30% by 2011. 18. The growth of the Sri Lankan domestic economy presents another business opportunity for Colombo Port. Domestic container volume handled by Colombo Port has been a few percentage points higher than the GDP growth rate. Domestic container traffic is projected to rise by 9.5% annually to 2010 and account for approximately 30% of the total container traffic with transshipment providing the balance. 5. ADB Strategy 19. ADB’s strategy for the ports sector is based on the fact that an efficient port system is a key factor in improving a country’s competitiveness and attracting investment. As Sri Lanka will not be able to generate sufficient domestic cargo to attract mainline vessels, becoming a transshipment hub port would allow Colombo Port to attract such vessels. As they are more economical they allow Sri Lanka’s own imports and exports to obtain lower freight charges than would otherwise be possible by avoiding the need to use feeder vessels. Enabling Colombo Port to maintain its transshipment port status will also bring additional foreign exchange to the country. The larger volume of ships calling at Colombo Port because of its transshipment hub status will encourage the growth of ancillary industries, e.g., ship chandlery and bunkering, which will increase economic activities and generate employment opportunities that otherwise would not exist. Maintaining Colombo Port’s transshipment hub port status will allow Sri Lanka to act as a distribution and logistics hub for the South Asian region, which if realized will again generate economic activities and employment opportunities. ADB’s strategy is also to encourage PPP in the ports sector as part of efforts to implement the landlord port model to increase efficiency.

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6. Government Port Sector Policy 20. The Government policy for the ports sector in line with the Government’s Mahinda Chintana national policy6, sets out the country’s vision for the ports sector as follows: (i) develop the main ports of the country to facilitate increasing export and import trade associated with rapid economic development of the country as well as the region by taking advantage of the liberalization and globalization process, (ii) decongest Colombo Port by constructing South Port in Colombo, Galle and Hambantota Ports, (iii) develop medium-scale ports in identified provinces such as South, East, and North to divert increasing volumes of domestic bulk freight transport from road to sea transport; (iv) encourage alternative source of funding for new investment in port related infrastructure development, (vi) operate ports as commercial entity without Exchequer support, and (vii) encourage public-private partnership investment for new investment in the port sector. While continuing the state ownership of existing ports, the Government’s strategy is to increase efficiency of existing ports, operate ports as commercial entity and establish container terminals as public private partnership projects. This Project will be the first transport PPP in Sri Lanka. ADB’s proposed loan is in line with Government policy.

III. THE PROPOSED PROJECT

A. Impact and Outcome

21. The Project will promote economic growth by improving Sri Lanka’s competitiveness in the ports sector by expanding Colombo Port’s capacity using PPP to maintain its status as a regional transshipment hub port. Container-handling capacity will be increased from 3.3 million TEU in 2006 to 5.7 million TEU by 2010, 8.1 million TEU by 2015 and 10.5 million TEU by 2024. The Project will facilitate economic growth by enhancing national competitiveness in international trade via lower costs and faster delivery times. Export container traffic handled by Colombo Port is expected to increase by 9.5% per annum starting in 2011. The additional capacity will enable Colombo Port to increase its ISC transshipment market share from 23% in 2002 to 30% by 2011. Transshipment volumes handled by Colombo Port are expected to increase by 8% per annum starting in 2011. Sri Lanka will thus be able to generate additional income from transshipment. The direct payments generated by transshipment traffic alone are expected to increase the contribution of the ports sector to GDP by an additional 0.1% by 2015, and attract foreign direct investment of approximately $800 million to the ports sector by 2024. B. Outputs

22. The Project will expand the container-handling capacity of Colombo Port by 7.2 million TEU in three increments of 2.4 million TEU each. The major project elements are dredging an approach channel and inner harbor basin west of the existing harbor, and constructing a breakwater to the west of the existing harbor sufficient to accommodate three new terminals, which will be constructed sequentially. In addition the Project includes the establishment of a new marine operations center, relocation of an existing submarine oil pipeline near the entrance to the new terminal, provision of navigational aids, and construction of shore utilities including an electrical power plant, water mains and storage tanks and a sewage treatment plant. The Project will be developed on a PPP basis. The terminals will be constructed by operators chosen through open competitive bidding under a build-operate-transfer (BOT) concession agreement; SLPA will carry out the harbor infrastructure works, i.e., dredging, breakwater

6 Ministry of Finance and Planning. 2006. Mahinda Chintana: Vision for a New Sri Lanka. Colombo.

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construction, and other ancillary works. The concession bid for the first terminal will be carried out in the first half of 2007. 1. Harbor Infrastructure Works Component 23. The harbor infrastructure works component is designed to accommodate vessels with an overall length of 400 m, beam of 55 m, and draft of 16 m. It will be created by constructing a major new breakwater to the west of the existing harbor and a smaller secondary breakwater. The harbor will be served by a new two-way channel with a depth of 20 m and width of 570 m. The new breakwaters in the initial phase will enclose a basin area of 285 hectares (ha), which will support three new terminals each with a quay length of 1,200 m and land area of 62 ha. The basin will be dredged to 18 m with provision to deepen it to 23 m should a new generation of deep-drafted vessels come online. The depth of 18m is sufficient to cater for 11,000 TEU vessels. The existing submarine pipeline to the main crude oil single-point mooring will be lowered where it crosses the new dredged areas. 24. Preliminary studies in accordance with the recommendations of the International Navigation Association (PIANC) were carried out to size the channels. The outer approach channel has been sized for two-way traffic as it is common to both the existing harbor and the Project. The short approach to the existing harbor is and will remain for one-way traffic only. Modern aids to navigation will be installed along the new channels. To ensure that all vessel operations in the Project and the existing port are safely and efficiently carried out, a new marine operations center is proposed near the entrance to the new terminals. This will include facilities for berthing tugs and other harbor craft, a lookout station, and a control room for a new vessel traffic management system serving the whole port. In addition this component will include construction of utilities such as an electrical power plant, water main and storage tanks, and sewage treatment plant. ADB’s loan will finance the construction of this component. A detailed description of the harbor infrastructure works component and cost estimates is given in Appendix 7. 2. Container Terminal Component 25. The first container terminal will have a planned capacity of 2.4 million TEU per annum. The ship–shore transfers are assumed to be handled by 12 rail-mounted gantry cranes and the yard operated by 40 rubber-tired gantry cranes. The area behind the berths will have a width of 476 m comprising a quay apron of 71 m, a yard-stacking area of 325 m, a rear yard of 45 m, and common access road and utility corridor of 35 m. Although planned around the rubber-tired gantry cranes, the land area is sufficient to accommodate any yard handling method preferred by the concessionaire. The container terminal will be developed by the private sector under BOT concession agreement. The winning concessionaire will be selected using open competitive bidding. Open competitive bidding will also be used to select the operator for the next terminal. SLPA itself will not be allowed to bid but a corporate entity registered by the SLPA and/or the Government under the Companies Act No. 72 of 1982 of Sri Lanka, as amended, may bid. SLPA equity in non-Sri Lankan Government or SLPA-owned winning concession companies will not exceed 15%. C. Special Features

26. The Project is developed as a PPP with the public sector implementing the harbor infrastructure works component, while the private sector implements the container terminal component in line with the provisions of the SLPA Act. The harbor infrastructure works

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component is a prerequisite for development of the Project. It has high economic returns. The container terminal component however will generate high financial returns and thus is being left to the private sector to develop and operate under a BOT concession. Operational and managerial control will rest with the operator. The Project will generate opportunities for ADB’s Private Sector Operations Department as an equity partner and/or as a lender for the terminal concession company. D. Project Investment Plan

27. Phase I of the Project involves the construction of the harbor infrastructure works and one container terminal. The project investment cost for Phase I is $781 million, with the public investment component estimated at $480 million, including taxes and duties of $49.7 million and a base cost of $331.2 million. The private investment component is estimated at $301 million. Table 1 provides a summary of the cost estimates and Appendix 7 detailed cost estimates.

Table 1: Project Investment Plan ($ million)

Item Amounta A. Public Sector Component 1. Base Costb a. Harbor Infrastructure Works 366.2 b. Consulting Services 14.7 2. Contingenciesc 43.9 3. Financing Charges during Implementationd 55.2 Subtotal (A) 480.0 B. Private Sector Component 1. Terminal Construction Works 154.0 2. Equipment 147.0 Subtotal (B) 301.0 Total (A+B) 781.0 a Includes taxes and duties of $49.7 million. b In mid 2006 prices. c Physical contingencies computed at 5% for harbor infrastructure works and consulting services, and

price contingencies at 1.2%–2.8% per annum for foreign exchange cost, and 7%–8% per annum for local currency cost.

d Includes interest and commitment charges. Interest during construction was computed at the 5-year forward London interbank offered rate plus a spread of 0.6%.

Sources: Feasibility study and Asian Development Bank estimates. E. Financing Plan

28. The Government has requested a loan of $300,000,000 from ADB’s ordinary capital resources to help finance the public sector component of the Project. The loan will have a 25-year term, including a grace period of 5 years, an interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility, a commitment charge of 0.35% per annum, and such other terms and conditions set forth in the draft loan agreement. The Government has provided ADB with (i) the reasons for its decision to borrow under ADB’s LIBOR-based lending facility on the basis of these terms and conditions, and (ii) an undertaking that these choices were its own independent decision and not made in reliance on any

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communication or advice from ADB. The private sector component will be financed by the successful terminal concession bidder. Table 2 shows the financing plan. 29. The Government will onlend the proceeds of the ADB loan to SLPA on the same terms and conditions as the ADB loan. For this purpose the Government will enter into a subsidiary loan agreement with SLPA. The Government has also given assurance that the necessary counterpart financing for the Project will be available.

Table 2: Financing Plan ($ million)

Source Total Percent A. Public Sector Component Asian Development Bank 300.0 38.5 Government 180.0 23.0 Subtotal (A) 480.0 61.5 B. Private Sector Component 301.0 38.5

Total (A+B) 781.0 100.0 Sources: Feasibility study and Asian Development Bank estimates.

F. Implementation Arrangements

1. Project Management

30. MPA will be the Executing Agency for the Project, and SLPA the Implementing Agency. A project implementation unit (PIU) will be established headed by a full-time project director with qualified staff having expertise in contract management, environmental monitoring, planning, and accounting. The PIU’s responsibilities will include (i) planning and scheduling of project activities; (ii) supervision and monitoring of the project work program and project performance; (iii) administration of procurement activities; (iv) bookkeeping and maintenance of project accounts, and preparation of liquidation/claim reports; (v) preparation and submission of various reports to ADB including quarterly and annual project monitoring and progress report; and (vi) coordination of field activities. The project director and key PIU officers will be appointed in accordance with the relevant Government procedures within 1 month of loan effectiveness. The project director will report to the Chairman, SLPA. An interministerial project steering committee, chaired by the MPA secretary and consisting of representatives from concerned government agencies, including Ministry of Finance and Planning, External Resources Department and National Planning Department will be established to oversee, monitor, coordinate, and provide the necessary policy guidance related to project implementation. This committee will meet whenever necessary but not less than once every six months. The Chairman, SLPA will report to the interministerial steering committee on a regular basis. The implementation arrangements are shown in Appendix 8. SLPA as an institution has the necessary systems, personnel, accounting policies and procedures, reporting and monitoring mechanisms, and auditing procedures to efficiently carry out financial management for the Project. A financial management assessment of SLPA is provided in the Supplementary Appendix. SLPA has implemented major foreign-aided capital projects and is observed to have the capacity to efficiently administer loans and implement projects. It has also implemented one ADB loan and therefore is familiar with ADB procedures.

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2. Implementation Period

31. The Project will be implemented over 48 months, including preconstruction activities. The scheduled completion date for the Project is October 2010. The harbor infrastructure works component will be completed by 31 October 2010. This takes into account advance procurement action for harbor infrastructure works construction. The proposed implementation schedule is in Appendix 9.

3. Procurement

32. The project director will be responsible for all procurement activities. All contracts will be procured in accordance with ADB's Procurement Guidelines (2006, as amended from time to time). One works contract will cover all harbor infrastructure works, i.e., dredging and reclamation works, breakwater construction, construction of all other ancillary civil works, and supply and installation of navigational aids, which will be procured through international competitive bidding procedures with postqualification. Bidders will be given 90 days to prepare and submit bids. Indicative contract packages for the Project including consulting services are shown in the procurement plan (Appendix 10). On 30 October 2006, ADB approved advance contracting for the harbor infrastructure works. The Government was informed that ADB’s approval of advance contracting does not commit ADB to subsequently approve the Project or to finance the procurement costs.

4. Consulting Services

33. International and national consulting services will assist SLPA in implementing the Project. The detailed design of the works is being prepared by the consultants with the Colombo Port Efficiency and Expansion Project (footnote 5). Under the proposed Project, consultants will be required for construction supervision including monitoring of the environmental impacts of the works. The consultants financed under the loan will be recruited in accordance with ADB’s Guidelines on the Use of Consultants (2006, as amended from time to time). The single contract package will include about 150 person-months of international and 1,250 person-months of national consulting inputs. Outline terms of reference for the consulting services are in Appendix 11. The consultants will be recruited using single-source selection procedures in accordance with ADB’s Guidelines on the Use of Consultants (2006, as amended from time to time). 34. Consultant selection is especially critical for the Project’s engineering and implementation requirements as breakwater design is a highly specialized technical aspect. The appointment of the detailed design consultants to undertake construction supervision was reviewed by the Maritime Structures and Port Engineering member of the panel of experts, and found to be the most preferred option to minimize liability risks and disclaimers of responsibility, and to ensure that the construction is executed in accordance with the design factors established during the detailed design phase. The detailed design is the result of extensive engineering work, underwater geotechnical investigations and studies, numerical wave modeling, physical wave modeling, current modeling, three-dimensional physical modeling, and two-dimensional flume testing with model testing of the breakwater design. Given the PPP nature of the Project, the issue of liability is particularly critical. Sufficient progress in the partial construction of the breakwater is necessary before the selected private sector concessionaire can start constructing the terminal. Hence if delays or defects in the breakwater construction cause delays in the private sector’s terminal construction schedule, the private sector party will hold SLPA liable and claim damages for the delay. Moreover, since the construction season for the breakwater construction is limited to the months of October–May, timely progress of the

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breakwater construction is critical to enable the private concessionaire to carry out terminal construction on schedule.

5. Anticorruption Policy

35. ADB’s policy on Anticorruption (1998, as amended to date), was explained to and discussed with the Government, MPA, and SLPA. Consistent with its commitment to good governance, accountability, and transparency, ADB reserves the right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the Project. To support these efforts, relevant provisions of ADB’s policy on Anticorruption are included in the loan agreements and the bidding documents for the Project. In particular, all contracts financed by ADB in connection with the Project will include provisions specifying the right of ADB to audit and examine the records and accounts of MPA; SLPA; and all contractors, suppliers, consultants, and other service providers as they relate to the Project. As a project-specific anticorruption measure, all bid awards will be disclosed on SLPA’s website. Anticorruption assurances will be incorporated in the loan agreements.

6. Disbursement Arrangements

36. Loan disbursements will be in accordance with ADB’s Loan Disbursement Handbook (2001, as amended from time to time), and detailed arrangements agreed to by the Government and ADB. For works and consulting services, loan funds will be disbursed using ADB’s direct payment procedures from ADB to the consultants and contractors against withdrawal applications submitted by SLPA to ADB.

7. Accounting, Auditing, and Reporting

37. SLPA will submit detailed progress reports on a quarterly basis. SLPA will maintain separate records and accounts adequate to identify the goods and services financed from loan proceeds, financing resources received, expenditures incurred for the Project, and local funds. The accounts will be set up in accordance with sound accounting principles. Consolidated project accounts and related financial statements will be audited annually by recognized auditors acceptable to ADB. The audited reports and related financial statements will be submitted to ADB not later than 6 months after the end of the fiscal year to which they relate. The project director will coordinate all accounts and ensure compliance with ADB’s audit and accounting requirements, which will be followed up in regular reviews by ADB.

8. Project Performance Monitoring and Evaluation

38. Within 6 months of loan effectiveness, the Government, through SLPA, will develop a project performance management system, including baseline performance monitoring and systematic project performance monitoring. SLPA will carry out surveys (i) at the start of project implementation to establish baseline data, (ii) at midterm review, (iii) at the time of project completion, and (iv) not later than 6 months after project completion to evaluate the project benefits. Data to be compiled for project performance monitoring and evaluation will be in a format developed in consultation with ADB. Key indicators will be proposed by SLPA and developed in consultation with ADB. A project completion report will be submitted within 3 months of physical completion of the Project, providing detailed evaluation of the progress of implementation, costs, consultant performance, social and economic impact, and other details as requested by ADB.

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9. Project Review

39. A project inception mission will be fielded soon after loan effectiveness. Thereafter, ADB and the Government will conduct regular reviews annually or more frequently as required for effective project implementation. In 2009, a midterm review by the Government and ADB will consider the Project’s progress and agree on any changes in scope or implementation required to achieve the Project’s objectives. SLPA will monitor project implementation and keep ADB informed of any significant deviations that may result in the schedule not being met. The project completion report should be prepared within 3 months after the physical completion of the Project civil works component.

IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS

A. Benefits 40. The Project will help consolidate the position of Colombo Port as a transshipment hub port for the South Asian region by providing sufficient container-handling capacity and sufficient depth for the latest generation of mainline vessels to call at Colombo Port. The container-handling capacity of each terminal to be developed is 2.4 million TEU/year. When three terminals are fully developed they will provide an additional capacity of 7.2 million TEU/year. Maintaining its status as a transshipment hub port will help enhance national competitiveness in international trade via lower costs and faster delivery, in addition to generating additional income from transshipment. Taking into account SLPA’s strategy to provide infrastructure (breakwaters, channels, etc.) that can accommodate three terminals, the economic and financial analyses are based on the scenario that three terminals will be sequentially developed as necessary to meet forecasted demand. B. Economic and Financial Analyses

1. Economic Internal Rate of Return 41. The economic evaluation compares the economic benefits and costs of the Project from the viewpoint of the national economy. The main consequence for the economy if the Project is not implemented would be the loss of the frequent, fast, direct shipping services used by exporters and importers. Without investment in the Project, Colombo Port would lose its transshipment traffic; and if the port no longer operates as a transshipment hub port, it would soon lose its direct calls on trunk-line routes. Local traffic is not high enough to attract direct calls by trunk-line ships. Colombo Port would eventually become a feeder port, served by a combination of feeder ships and mainline services with relatively long transit times for the ports with lower traffic volumes. The consequences for Sri Lanka’s current and future exports would be serious. The Project will benefit Sri Lankan exporters by enhancing their competitiveness in international markets through lower freight costs and faster delivery times for time-sensitive exports e.g., textiles, which account for 52% of Sri Lanka’s exports. 42. The main costs to the Sri Lankan economy of the reversion to a feeder port would be (i) additional costs of feeder services to regional hub ports such as Singapore, to connect with trunk route services (at least 20% are estimated to switch to feeders); (ii) longer transit times and delays, which are injurious to export markets, especially for textiles, but also for new exports that will emerge; (iii) loss of revenues to Sri Lankan terminals from transshipment; and (iv) loss of dues paid to SLPA by container vessels. Lower freight costs are expected to result in annual savings of $82 million by 2015, and faster delivery times will create annual savings of

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$49 million by 2015. In addition transshipment traffic will generate direct net annual income to terminal operators amounting to $77 million by 2015. The benefits of the Project are the avoidance of these costs to the economy. The values assigned to the benefits are compared with the total investment cost of $1.3 billion for the Project to 2034. The economic internal rate of return is estimated at 17.8%. These assumptions do not include the value to be placed on fast, direct shipping services by investors considering alternative countries as locations for setting up new manufacturing or distribution centers. It also does not include loss of international investors, who will include frequent, direct shipping services on their checklist of preconditions for locating in a country. Thus the economic analysis is conservative. Sensitivity and risk analyses indicate that the economic internal rate of return is robust under most conditions. The full economic and financial analyses are given in Appendix 12.

2. Financial Internal Rate of Return

43. The financial analysis assesses the financial sustainability of the harbor infrastructure works component. SLPA incurs the capital investment, and maintenance and repair costs of this component. SLPA’s income stream arising from royalties, lease cost, port entry dues, harbor tonnage dues, etc. was calculated using the forecasted demand for the Project at rates currently being paid by SAGT, the existing privately operated terminal in Colombo Port. The financial internal rate of return is approximately 11.5%, which exceeds the weighted average cost of capital of 4.4%. The details are given in Appendix 12. 44. Financial analysis for the first terminal operator was also conducted to assess the viability of private sector development under a BOT concession (Appendix 12). A terminal operator incurs the capital investment cost of terminal construction and equipment and terminal operation cost, and pays concession fees to SLPA, while earning revenue from container handling. The financial internal rate of return is approximately 16.3%, which is in line with comparable new terminal developments internationally. C. Social Impact

1. Poverty and Social Dimensions 45. The primary area of influence of the Project includes Colombo City and the Colombo Metropolitan Region (CMR), comprising Colombo, Gampaha and Kalutara districts. CMR has an estimated population of 5.4 million; unemployment rates are lower than the rest of the country, even though it has a relatively large unskilled youth labor force. In Sri Lanka, poverty is observed to be greatest in the rural sector (20.8%), followed by the urban sector (6.2%), and the estate sector at 4.3%. Across the industry subsectors, the highest poverty is reported in mining and quarrying industries; employment in quarrying is characterized by low pay as well as its temporary and irregular nature, making this one of the most impoverished industry groups in Sri Lanka. As per 1996 data, the incidence of poverty among those engaged in mining and quarrying was 41.5%. The next highest incidence of poverty was in agriculture at 28.4%. As per Department of Census and Statistics (2004), the percentage of poor households living below the official poverty line7 was 5% for Colombo District, 9.2% for Gampaha, and 17.7% for Kalutara, compared with 19.2% for Sri Lanka as a whole. Although the Western Province in which CMR is located records the lowest incidence of poverty in absolute numbers, it accounts for the largest proportion of the total poor. A closer look at the poverty profile of the city of Colombo reveals

7 People living in households with real per capita monthly total consumption expenditure below SLRs1,423 are

considered poor (the official poverty line).

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about 1,614 poor urban settlements with about 77,612 families. The urban poor of Colombo include those engaged in informal sector activities and blue collar workers of the ports, industries, railways, etc. They are mostly concentrated in the slums, shanties, and low-cost housing in the northern and central parts of the city. Lack of land ownership, poor access to drinking water, poor sanitation facilities, and lack of a regular source of income are a few of the main factors causing poverty. 46. Major positive social impacts of the Project are anticipated through the creation of direct and indirect employment opportunities during project construction and operation. Jobs during construction are projected to total 1,950, including 300 for construction of the breakwater and 550 for staged construction of each of the three terminals. During the operation phase, a total of 3,870 permanent jobs are estimated to be created after the breakwater is complete and the three terminals are commissioned. Thus the additional jobs created are expected to be significant. Those who have the advantage of living in proximity to the Project will benefit most, as they will access the majority of the temporary employment related to construction of the breakwater and three terminals. People who live close to the quarry sites, land-based transport routes, and barge load-out points will also experience some of the direct impacts of the Project. The income impact of quarrying will be largely attributed to contractors, providers of related services (such as transport), and workers. Workers engaged in quarrying-related activities have traditionally come from unskilled and poor sectors of the community. According to the projected estimates for quarrying activities, the predicted opportunities of employment will vary from 4,000 to 12,000 per year depending on the contractor’s method of production, i.e., mechanized or traditional. Benefits will also result from increased vessel traffic and other related initiatives outside the immediate scope of the Project, such as the development of a free trade zone. Benefits to import and export industries are likely to accrue in areas outside the project-affected area, due to overall improvements in the national economy from the growth in shipping operations facilitated by the Project. Therefore the Project will provide a source of income and new employment opportunities in a wide range of job categories including unskilled labor, particularly in terminal operations, construction work at the project and quarrying sites for the unemployed, low-income earners, and the impoverished. This will lead to poverty reduction. A summary poverty reduction and social strategy is presented in Appendix 13. 2. Resettlement 47. The Project comprises construction of a new outer basin enclosed by a breakwater and served by a new navigation channel. Material dredged from the channel will be used in reclamation to provide new container berths with associated infrastructure, buildings, and operation facilities. No land acquisition or negative resettlement impacts are associated with the Project. Construction and operation activities will extend seaward from the south end of the existing Colombo Port. Therefore, no additional land will be required by either the Government or the private sector. To link the existing port access road to the new harbor, three buildings will be demolished: two government warehouses and one SLPA office. The warehouses are presently not used and will not be rebuilt. The SLPA office building will be partially affected and thus will be partially demolished. The work space of employees will be accommodated in other office buildings within the port area, and thus not involve construction of a new building. The existing port access road will be used for transportation of containers and other imported goods. None of the port access roads will be widened or improved and thus no resettlement will be required. Furthermore, even after the development and operation of the Project, the transport of containers and other imported goods within the port-related activity zone will not displace any business establishments close to the port. With regard to specific effects associated with quarries, the quarry location will be identified by the contractor only during project

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implementation prior to the construction of the breakwater. Thus the Government will have to ensure that any land acquisition and resettlement impact associated with quarrying of rocks will require the formulation and implementation of appropriate mitigation measures in compliance with ADB’s policy on Involuntary Resettlement (1995) and Policy on Indigenous Peoples (1998). D. Environmental Impact

48. The Project involves the dredging, reclamation, and construction of breakwaters, terminals, and channels. All of these facilities are located within the SLPA area. The Project is categorized as category A according to ADB’s Environmental Assessment Guidelines (2003), and the Project is listed as a “prescribed project” according to the National Environmental Act No. 47 (1980) as amended. Therefore an environmental impact assessment (EIA) was prepared. Since the Project is located within the jurisdiction of the Coast Conservation Department (CCD) and according to the Sri Lanka’s Coast Conservation Act 57 (1981), environmental approval and the permit for development activity were obtained from CCD. The EIA was approved by CCD on 12 December 2005. The EIA and environmental management plan (EMP), in principle, cover all the requirements set out in ADB’s Environmental Assessment Guidelines. The EIA was carried out from January 2003 to April 2005. After receiving CCD approval of the EIA, the EMP and environmental monitoring plan were prepared in March 2006. The summary EIA (SEIA) was circulated to ADB’s Board of Directors and disclosed to the public through ADB’s website on 12 July 2006. 49. The EIA examined potential environmental impacts associated with the construction and operation of the Project. The EIA shows that environmental impacts will mostly relate to dredging and reclamation works. The impacts include (i) increased turbidity; (ii) geotechnical stability; (iii) siltation; (iv) change in current pattern; (v) sediment transport; (vi) change in adjacent beach; (vii) wave disturbance; (viii) impacts to water, noise, and air quality; and (x) impacts to marine ecology and fisheries. The mitigation measures have been set by following “mitigation through design” and therefore the degree of impact could be minimized. Although the impacts are predicted to be insignificant, continuous monitoring especially during construction will be carried out to avoid unexpected impacts and provide remedial measures if necessary. Public consultation was carried out with fisher communities living near the Modera fishing harbor, adjoining SLPA port limits. The EIA does not predict any impacts to the livelihood of fisherfolk; the modeling studies for physical impacts indicate that the construction works will not affect the livelihood of the fisherfolk living near the Modera fish harbor. However, monitoring is needed to ensure that any unexpected impacts are redressed in a timely manner. The EMP and environmental monitoring plan will provide guidance to minimize potential adverse environmental impacts related to the Project and to enhance the positive impacts of the Project. The EMP and monitoring plan must be submitted to and approved by CCD prior to commencement of the construction work. Adequate funding has been allocated to implement these plans. The EMP and monitoring plan emphasize the need to establish a sustainable institutional mechanism to ensure that these plans are properly implemented. The PIU’s environmental engineering and coastal engineering sections, as well as the environmental monitoring committee will be responsible for implementing these plans. 50. On the basis of the analysis, no major insurmountable environmental impacts are associated with the construction and operation of the Project with the assumption that the recommendations for the mitigation measures are implemented. Therefore, environmental monitoring should be carried out to ensure that the EMP is implemented and any unforeseen impacts are managed and mitigated appropriately.

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E. Risks

51. As implementation of this Project will be on a PPP basis with the public sector implementing the harbor infrastructure works component and the private sector implementing the terminal component, the full benefits of the Project are dependent on both components being implemented on a coordinated basis. The major risk is the lack of a private sector party willing to take up the terminal component concession. This risk has been mitigated by linking implementation of the harbor infrastructure works component to the progress of selecting a successful bidder for the terminal concession. The loan will only be effective upon completion of the evaluation of the terminal concession bid and the Government issuing an invitation for negotiations to the successful bidder(s). 52. Another risk arises from possible delays to the harbor infrastructure works construction program. Since completion of part of the breakwater will be necessary before the terminal concession company can start terminal construction, any delay in the construction of the breakwater may give rise to a situation where the terminal concession holder could claim compensation from SLPA. This risk is mitigated by the fact that the construction schedule for the breakwater will be agreed with the prospective contractor before the terminal concession agreement is signed. Hence a realistic time frame for the breakwater construction can be included in the concession agreement. Delays during construction will be mitigated given that the Government has agreed that the International Federation of Consulting Engineers (FIDIC) conditions will be used and that the construction supervision consultant will be designated as the “Engineer” in the contract to ensure that the consultant has sufficient authority to direct the contractors. Selection of the detailed design consultant as the construction supervision consultant through single-source selection is an additional measure to mitigate these risks because the consultant will be familiar with the design and also avoid the issue of split liability between the detailed design and construction supervision consultants. 53. Aside from project risks, delay in the consolidation of the ceasefire in the country may also have a significant impact. This situation is beyond the scope of the Project to take mitigation measures. However the private sector has been interested in Colombo Port as shown by implementation of the SAGT project even before the ceasefire. The Government has declared Colombo Port a high-security zone and appointed the Sri Lankan Navy as the designated authority for port security. The navy has drawn up comprehensive security plans in accordance with the requirements of the International Ship and Port Security Convention of the International Maritime Organization for port security and the special security considerations necessary for Sri Lanka. An assessment of the Colombo Port security system found that port access control is well-planned, coordinated and implemented. Colombo Port is the first port in the South Asian region to implement both the container security initiative and mega port initiative. There is also excellent military protection against air, land and sea intrusions into Colombo Port. The security cover will be extended to cover the new facilities as well.

V. ASSURANCES

A. Specific Assurances

54. The Government will ensure that the advisory committee chaired by the Secretary, MPA, and including the person holding the post of Director General of the Public Utilities Commission as a member, is established and operational within 3 months of loan effectiveness.

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55. The Government will ensure that adequate counterpart funds are made available to the Project when and in the amounts required to enable project agencies to discharge their responsibilities under the Project; and that counterpart funds will be increased if needed to cover any shortfall of funds for the completion of the Project. 56. The Government will ensure that concessionaires for at least the first two new terminals under the Project will be chosen by open competitive bidding processes. 57. The Government will ensure that SLPA’s equity share in the terminal concession companies will not exceed 15% of the entire issued capital of such concession company. This limit will not apply in the case of a corporate entity registered by the SLPA and/or the Government under the Companies Act No. 17 of 1982 of Sri Lanka, as amended, for the purposes of carrying out container terminal operations. 58. The Government will ensure that the concession agreements with all terminal concession companies operating under the Project include the provision that each concession company will follow the National Environmental Act No. 47 of 1980 as amended, ADB’s Environment Policy (2002), ADB’s policy on Involuntary Resettlement (1995), and ADB’s Policy on Indigenous People (1998) in constructing the terminal. 59. Within 1 month of loan effectiveness, the Government will ensure that the (i) project director is appointed in accordance with the Government’s relevant procedures; (ii) PIU is fully staffed and operational; and (iii) staff necessary for the environmental monitoring in the PIU as specified in the SEIA, are recruited. 60. Land and Resettlement. To the extent possible, the Government will ensure that the Project does not require any land acquisition or involuntary resettlement. The Government will cause SLPA to ensure that in case of change in project scope or any unanticipated resettlement impacts (due to quarrying of rocks, widening of access roads, or any other activity) during project implementation, land acquisition and resettlement activities will be implemented in accordance with all applicable laws and regulations of the Government to the extent not inconsistent with ADB’s policies and procedures and in accordance with ADB’s policy on Involuntary Resettlement (1995) and Policy on Indigenous Peoples (1998). In case of unanticipated resettlement impacts during project implementation, the Government will cause SLPA to submit a satisfactory Resettlement Plan to ADB for review prior to the award of harbor infrastructure works contracts. Before any affected person is dispossessed or displaced from its assets, the Government will cause SLPA to ensure that they are consulted and compensated at replacement values such that their living standards are not adversely affected, in accordance with the Resettlement Plan. 61. Environment. The Government will cause SLPA to ensure that the Project and all project facilities are developed, conducted, implemented, and maintained in accordance with the Government’s National Environmental Act No. 47 of 1980, as amended, and ADB’s Environment Policy (2002). In case of any discrepancies between the Government’s laws, regulations, and/or procedures, and ADB’s requirements, ADB’s Environment Policy (2002) will prevail. 62. The Government will cause SLPA to apply the environmental mitigation measures included in the EIA and SEIA report for the implementation of the Project, as necessary. The Government will cause SLPA to monitor, review, and if necessary update the EMP prior to any works to ensure that all negative environmental impacts related to the works are mitigated

19

properly. In case of unanticipated negative environmental impacts, the Government will cause SLPA (i) to report such impacts to CCD and ADB, and (ii) to provide remedial mitigation measures to affected people in consultation with CCD and EMC. 63. The Government will cause SLPA to conduct regular environmental monitoring. The monitoring report should be submitted to ADB, environmental monitoring committee, and other relevant agencies such as CCD and Central Environmental Authority every 6 months. 64. The Government will cause SLPA to provide the contractors and concessionaires with the EIA report and the SEIA including the EMP, and ensure that contractors and concessionaires implement the required mitigation measures as described in the EMP in a satisfactory manner. In addition, the Government will cause SLPA to ensure that the contractors and concessionaires report implementation of the EMP on a regular basis, along with any deviation from the EIA report. 65. Social Development and Gender Issues. The Government will cause SLPA to ensure that all works comply with all applicable labor laws; do not employ child labor for construction and maintenance activities; encourage employment of the poor, particularly women; provide appropriate facilities for women in construction sites; and do not differentiate wages between men and women particularly for work of equal value. The Government will cause SLPA to ensure that works contracts include a requirement on the part of the contractors to conduct an information and education campaign on communicable diseases, including but not limited to sexually transmitted diseases and HIV/AIDS, for construction workers as a part of the health and safety program at campsites during the construction period. The works contracts will include specific clauses on these undertakings, and compliance will be strictly monitored by SLPA during project implementation. 66. Within 6 months of loan effectiveness, the Government, through SLPA, will develop a project performance management system, including baseline performance monitoring and systematic project performance monitoring. The Government will cause SLPA to carry out surveys (i) at the start of project implementation to establish baseline data, (ii) at project midterm review, (iii) at the time of project completion, and (iv) not later than 6 months after project completion, to evaluate the project benefits. Data to be compiled for the purpose of project performance and evaluation will be in a format developed in consultation with ADB. Key indicators will be proposed by SLPA and developed in consultation with ADB. 67. Consistent with the Government’s and ADB’s commitment to good governance, accountability, and transparency, the Government will ensure and will cause SLPA to ensure that the project funds are utilized effectively and efficiently to implement the Project and to achieve the Project’s objectives. The Government will cause SLPA to (i) disclose the bid awards on SLPA’s website; (ii) undertake necessary measures to create and sustain a corruption-free environment; (iii) ensure that the Government’s Anticorruption Law and ADB’s policy on Anticorruption (1998, as amended to date), are strictly enforced and are complied with during project implementation, and that relevant provisions of ADB’s policy on Anticorruption are included in all bidding documents for the Project; (iv) facilitate ADB’s exercise of its right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the Project; (v) conduct periodic inspections on the project contractor’s activities related to fund withdrawals and settlements; and (vi) ensure that contracts financed by ADB in connection with the Project include provisions specifying the right of ADB to audit and examine the records and accounts of SLPA and all contractors, suppliers, consultants, and other service providers as they relate to the Project. The Government will cooperate with any

20

audit and investigation, and extend necessary assistance, including access to all relevant books and records, as well as engagement of independent auditors and experts that may be needed for satisfactory completion of such audits and investigations. B. Conditions for Loan Effectiveness

68. The Government will ensure that

(i) following an open competitive bidding process, SLPA has issued an invitation to the selected terminal operator(s) prior to commencing the negotiations for the terminal BOT concession agreement; and

(ii) a subsidiary loan agreement is signed between the Government and SLPA, and

submission of legal opinion on the subsidiary loan agreement, the Loan Agreement, and the Project Agreement in a form and substance satisfactory to ADB is submitted by the Government and SLPA, respectively, to ADB.

C. Conditions for Harbor Infrastructure Works Implementation 69. Prior to the commencement of harbor infrastructure works, the Government will cause SLPA to ensure that an updated environmental approval from CCD is obtained.

VI. RECOMMENDATION

70. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the loan of $300,000,000 to the Democratic Socialist Republic of Sri Lanka for the Colombo Port Expansion Project from ADB’s ordinary capital resources, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; a commitment charge of 0.35% per annum; a term of 25 years, including a grace period of 5 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft Loan and Project Agreements presented to the Board.

Haruhiko Kuroda President

02 February 2007

Appendix 1 21

DESIGN AND MONITORING FRAMEWORK

Design Summary

Performance Targets/Indicators

Data Sources/Reporting Mechanisms

Assumptions and Risks

Impact Improve Sri Lanka’s competitiveness in the ports sector using public-private partnership

Direct contribution by ports sector to GDP increases by 0.1% by 2015 Foreign direct investment in ports sector increases by approximately $800 million by 2024

National economic data and statistics

Assumptions Economic growth in India remains strong to generate the cargo base for transshipment. Risks Investors and shipping lines are deterred by security factors.

Outcome (i) Reduce transport costs for exports (ii) Increase transshipment container volume handled by Colombo Port (iii) Increase container-handling capacity of Colombo Port

Export container traffic handled by Colombo Port increases by 9.5% per annum starting in 2011 Transshipment volumes handled by Colombo Port increases by 8% per annum starting 2011 Container-handling capacity increased from 3.3 million TEU in 2006 to 5.7 million by 2010 and 8.1 million TEU by 2015

SLPA reports and international shipping statistics reports

Assumptions Other factors affecting investment and economic development are in place. Terminal development is implemented on schedule. Present terminals increase their capacity by improving efficiency. Risk Security situation causes risk insurance premiums to increase and thus reduces transshipment volumes Colombo Port.

Outputs (i) Dredging, reclamation, and breakwater construction completed (ii) South terminal construction completed

Breakwater construction completed by June 2010 Navigational aids installed by June 2010 South terminal construction completed by October 2010

SLPA reports and consultant reports

Assumptions Contract award for dredging and breakwater development is done on schedule. Terminal development is implemented on schedule. Risk Delays in construction due to weather conditions affects construction schedule.

Activities with Milestones 1. Contract award for civil works component is awarded by July 2007. 2. Letter of invitation for negotiations to successful bidder for terminal concession is awarded by July 2007. 3. First terminal is operational by October 2010.

Inputs • ADB: $300 million • Government: $180 million • Private sector: $301 million

ADB = Asian Development Bank, GDP = gross domestic product, SLPA = Sri Lanka Ports Authority, TEU = twenty-foot equivalent units.

22

Appendix 2

ORGANIZATION CHART OF SRI LANKA PORTS AUTHORITY

Chairman and Board of Directors

Vice Chairman

Managing DirectorExec. Dir. Establishment, Technical and Human Resources

Exec. Dir. Port Operations and Business Development

Addl. Managing Director

Ch/Eng. C

ivil

Director TechnicalDirector HR Director Establishment Director Southern Reg. Port Dept.

Director Port Operations

Director Finance and IT

Director Business

Department

Ch/Eng. M

ech. W

ork

Ch/Eng. M

ech. Plan

Ch/Eng. M

arine

Ch/Eng. Electrical

Ch/Eng. Planning

and Developm

ent

Ch/Eng. C

ont. and D

isn.

Ch/Eng. Supplies

Ch. Training M

anager

Ch. M

anager W

elfare and Indl. R

el

Ch. H

uman R

es. M

anager

Ch. M

edical O

fficer

Director Technical

Ch. A

dmin.

Manager

Ch. Security M

anager

Ch. M

anager Com

m.

and Pub. Rel.

Ch. Law

Officer

Harbour M

aster

Additional

Harbour M

aster

Ch. M

anager Logistics

Ch. M

anager Conven.

Cargo O

per.

Ch. M

anager Cont-

ainer Oper.

Ch. M

anager Market-

ing and Research

Ch. Finance M

anager

Ch. M

anager Inform

ation System

Advisors and

Consultants

Res. Manager Trinco

Res. Manager Galle

Project Manager

Chief Internal Auditor

Appendix 3 23

SECTOR ANALYSIS OF COLOMBO PORT

A. The Current Port and its Terminals

1. Colombo Port is located in an artificial harbor formed by three breakwaters constructed more than a century ago. The port basin covers 200 hectares and is dredged to depths of up to 15 meters (m). Access to the harbor is provided on the western and northern sides. The entire perimeter of the harbor is occupied with berths, terminals, and vessel-related activities. The port is connected to the national rail network; however, virtually all cargo movements in and out of the port are by road transport. Because of the physical constraints, any growth in the capacity of the existing port is severely limited. 2. The majority of container traffic is handled at three container terminals:

(i) Jaya Container Terminal (JCT) on the eastern side comprises four berths totaling 1,292 m, the latest completed in 1996. Depths alongside range from 12 m to 15 m. The terminal area covers 45.5 hectares, has 6 super-post panamax and 8 panamax gantry cranes, with capacities of 35.5 tons (t) to 41 t service weight limit to serve the berths. The backup area varies in width from 330 m to 380 m forming the container yard with capacity of 9,800 ground slots, served by 39 rubber-tired gantry cranes (RTGs) and 4 rail-mounted gantry cranes (RMGs). In addition, two feeder berths total 352 m with depths of 8 and 9 m. The terminal, which is owned and operated by the Sri Lanka Ports Authority (SLPA), is fully self-contained with its own reefer stacks, offices, workshops, amenities, and substations.

(ii) Unity Container Terminal (UCT) is located at the northern end of the harbor.

Opened in 2004, it comprises two berths for feeder vessels of 340 m with depths alongside of 9 and 11 m, and is served by three panamax gantry cranes of 41 t service weight limit. Eight RTGs serve two stacking areas with 1,020 ground slots. SLPA owns and operates the terminal as a satellite terminal for JCT.

(iii) South Asia Gateway Terminal (SAGT) located inside the western breakwater

became fully operational in 2003. The terminal comprises three berths totaling 940 m, all dredged to a depth of 15 m and served by 9 gantry cranes of 40 t service weight limit. The backup area is 200 m wide and the terminal area covers 22.2 hectares. The container yard is served by 28 RTGs and comprises 5,430 ground slots. The terminal, which is owned by a private consortium of local and foreign parties, is fully self-contained. SLPA has 15% equity in SAGT.

3. Currently the majority of container operations are organized through the three terminals. Present container throughput for the port as a whole exceeds 2.5 million twenty-foot equivalent units (TEU) per annum and the maximum capacity that could be developed within the confines of the existing harbor after taking account of improvement in all forms of productivity is assessed at 3.7 million TEU per annum. Other cargo-handling facilities operated by SLPA within the harbor include a tanker berth, cement and bulk grain-handling facilities, quays used for vehicle imports, general cargo and military goods, and a passenger/cruise berth at the southern end of SAGT.

24 Appendix 3

B. Institutional Environment and Regulatory Framework

4. The Ministry of Ports and Aviation is responsible for the ports sector. SLPA is a statutory corporation established under the Sri Lanka Ports Authority Act (1979) as the owner, operator, and sole supplier of marine and cargo-handling services at the country’s ports. The SLPA Act endows the Minister of Ports and Aviation and SLPA with wide powers over the sector. The Act allows SLPA to concession out terminal operations. SLPA is managed by a board comprising eight appointees; the minister appoints the chairperson and five of the members.

C. Container Traffic Trends 5. Colombo Port established its position as the dominant transshipment port for the Indian subcontinent by the mid 1990s; its success was attributable to several natural advantages: (i) located near the east–west trunk routes between Asia-Pacific, Europe, and the United States East Coast; (ii) the closest transshipment port to the huge, rapidly expanding markets of the Indian subcontinent; and (iii) a well-protected deepwater harbor. With these advantages, Colombo’s container traffic rose from 0.6 million TEU in 1990 to 1.7 million TEU in 1997. After 1997, traffic stagnated, remaining at 1.7 million TEU per annum until 2002. 6. The reasons for this, were: (i) Direct calls at Indian ports started around 1997, when traffic volume reached the threshold at which they became economic at Nhava Sheva (previous to this India was served by feeders.) The trend to direct calls has since accelerated as a result of improvements in port efficiency that followed the construction of a private terminal at Nhava Sheva in 1999. (ii) New ports started to compete for Colombo’s transshipment traffic. Before 2000, Dubai and Singapore were the primary competitors; now Port Klang Salalah, Tanjung Pelepas compete for this business. (iii) Delay of the construction of new capacity until 2001 resulted in congestion during 1996–2000. (iv) The operation at JCT had no intraport competition until 2001 and productivity remained below that of its main competitors. (v) No flexibility in pricing was provided. The port’s limited ability to negotiate prices with shipping lines was a major disadvantage as competing ports such as Singapore and Port Klang cut prices to unusually low levels. (vi) The 2001 terrorist attack on the airport affected insurance rates. 7. The period of stagnation came to an end in 2002. In 2001 new capacity was introduced at the privately operated SAGT. The introduction of competition between the terminals promoted an increase in port efficiency; and the peace process was revived and the surcharge on insurance rates lifted.

Table A3.1: Traffic Figures for Colombo Port

Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Total (TEU million )

1.36 1.69 1.71 1.70 1.73 1.72 1.76 1.96 2.24 2.46 3.08

Average Growth (%)

29.2 24.5 1.5 (0.5) 1.6 (0.6) 2.3 11.1 14.3 9.8 25.2

TEU = twenty-foot equivalent units. Source: Sri Lanka Ports Authority (Note restows account for the balance of the traffic).

Appendix 3 25

8. The overall container growth in Colombo Port increased by 13.3% in 2004 and 10.5% in 2005. In the first 6 months of 2006, it increased by 18% compared with the same period in 2005.

D. Capacity Analysis 9. Additional capacity could be obtained by converting the Bandaranaike Quay (BQ) from general cargo to a container feeder berth. Examination of operations at the existing terminals indicates that capacity could be enhanced by measures such as the introduction of new equipment, expansion of yard areas, denser stacking, and reduced dwell time. The existing and maximum enhanced capacity of these terminals is shown in Table A3.2.

Table A3.2 Existing and Potential Enhanced Capacity of Existing Terminals (in twenty-foot equivalent units [TEU])

Terminal Present Capacity Potential Enhanced Capacity Jaya Container Terminal 2,000,000 2,400,000 South Asia Gateway Terminal 1,000,000 1,200,000 Unity Container Terminal 300,000 300,000 Bandaranaike Quay 0 200,000 Total 3,300,000 4,100,000

Source: Sri Lanka Ports Authority.

10. While operational enhancements can be made to the existing terminals, they offer diminishing returns. The area of water in the existing harbor is limited and maneuvering more than one ship at a time in the basin is difficult and dangerous. The capacity of the existing harbor is governed by marine operations that limit movements by cargo vessels to 1 per hour, rather than the quay cranes or yard capacity. As a result, the practical capacity of the existing harbor is estimated to be 3.3 million TEU/year. This capacity is expected to be reached by 2010 and additional facilities in a new outer harbor will be required before this figure is reached if congestion and delays are to be avoided. E. Operational Efficiency 11. Crane productivity for mainline container vessels at JCT increased from 15.1 moves per crane per hour in 2001 to 23.4 in 2005. JCT and SAGT now have similar crane productivity. Average service time for containerships at JCT decreased from 17.8 hours in 2001 to 13.8 hours in 2005, and average turnaround time for containerships decreased from 23.1 hours in 2001 to 16.0 hours in 2005. JCT has about 1,500 employees handling a total of 1.7 million TEU. SAGT has about 500 employees handling 930,000 TEU. JCT has taken several measures to improve its efficiency and labor productivity. In 2002, an incentive scheme was introduced to motivate workers. This was followed by the introduction of a target bonus to ensure higher efficiency. The measures were successful in improving efficiency (Table A3.3).

26 Appendix 3

Table A3.3: Efficiency Indicators for Jaya Container Terminal

Indicators 2001 2002 2003 2004 2005 1. Average turnaround time of containerships (hours/ship) 2. Average service time of containerships (hours/ship) 3. Average waiting time of containerships (hours/ship) 4. Container productivity per crane (moves/hour) 5. Container productivity per ship (moves/hour) 6. Container productivity per berth (moves/hour)

23.1 17.8

3.6 15.1 34.8 31.4

17.7 12.9

2.5 19.8 45.2 39.1

15.4 11.9

2.0 23.1 49.9 43.5

16.5 13.1

1.5 21.8 46.6 41.1

16.0 13.8

0.8 23.4 49.3 41.2

Source: Sri Lanka Ports Authority. F. Challenges 12. Effective market research and business development is fundamental to the success of Colombo Port. Initiatives to improve and develop capability within the port for focused aggressive marketing are important and require action as soon as possible. All levels of management and operations have a role in developing traffic and enabling the port to compete internationally. SLPA should increasingly accept the role as landlord and focus on promoting the port as a whole. Detailed analysis of transshipment potential is required. A significant amount of data has been obtained and databases developed during the preparation of long-term traffic forecasts. This data provides information for analysis, which is essential for preparing marketing plans. Development in competing ports must be closely monitored and market niches identified. 13. The development of strategy is critical to business planning. It requires a continuous and iterative analysis of relevant issues. These include clear identification of services that can be competitively offered, tariff and pricing strategies to win trade, promotion of selected strategies through strong marketing activity, direct engagement of target clients, and finally the measurement and response to marketing initiatives. Significant volumes of Bay of Bengal container cargo are transshipped through Singapore or Port Klang for Europe and the East Coast of North America. .This is probably more expensive than transshipment at Colombo, and will take longer. Colombo should investigate ways of supporting and encouraging more frequent and more regular feeder services, notably to Chittagong. To do this it should consider offering other special deals for this specific cargo. Such actions could initiate a swing back to Colombo. Trade lanes and Indian subcontinent coasts offer opportunities, however they are not sales targets. Target customers are shipping lines, who need not restrict themselves to particular locations. Colombo must therefore offer price and service packages designed to meet the needs of particular shipping lines in the context of the full range of container shipping services they wish to offer their customers. Colombo offers a real alternative for European and Far Eastern cargoes. The port is a national asset, which should promote contacts with local exporters, importers, and development agencies by demonstrating to them how the port is able to assist them. The growth of a national cargo base is an important objective and direct foreign investment in local industrial export-oriented business is to be encouraged.

Appendix 4 27

2005 SUMMARY FINANCIAL STATEMENT FOR SRI LANKA PORTS AUTHORITY

SRI LANKA PORTS AUTHORITY

COMBINED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005

SLPA 2005 2004 Description Note SLRs SLRs

Operations Revenue from Port Activities 1.1.2 18,246,333,789 15,805,541,899 Other Revenue from Port Activities 1.3 2,303,093,940 2,055,349,142 Total Revenue 20,549,427,729 17,860,891,041 Operations Expenses 2.1 (6,670,347,616) (5,054,347,809) Repair and Maintenance Expenses 2.2 (2,109,995,895) (1,384,200,444) Administration Expenses 2.3 (4,403,022,377) (4,672,414,643) (13,183,365,888) (11,110,962,896) Operating Profit 7,366,061,841 6,749,928,145 Interest on Government Loans 2.4 (1,186,010,675) (1,356,211,293) Voluntary Retirement Scheme Expenses 2.5 (848,873) Profit before Foreign Exchange Gain/(Loss) 6,180,051,166 5,392,867,979 Foreign Exchange Gain/(Loss) 7,059,437,549 (5,665,517,002) Profit before Tax and after Foreign Exchange Gain/(Loss) 13,239,488,715 (272,649,022) Special Levy (115,000,000) (95,000,000) Less: Income Tax, Deemed Dividend Tax, and Social Responsibility Levy 2.6 (3,050,742,665) (2,700,517,736) Net Profit (Loss) before Extraordinary Items and after Tax 10,073,746,050 (3,068,166,758) Less: Extraordinary Items: Tsunami Provision 2.7 (1,820,521) (162,146,782) Net Profit (Loss) after Extraordinary Items and after Tax 10,071,925,530 (3,230,313,541) Cumulative Profit (Loss) B/F 2.8 (6,646,423,206) (3,416,109,665) Retained Profit and Loss 3,425,502,323 (6,646,423,206) Amount Transferred to Loan Redemption Reserve (3,425,502,323) Balance Profit/Loss C/F (0) (6,646,423,206)

( ) = negative. SLPA = Sri Lanka Ports Authority. Source: Sri Lanka Ports Authority

28 Appendix 5

EXTERNAL ASSISTANCE TO SRI LANKA PORTS AUTHORITY 1974–2006

Source

Project

Amount ($ million

equivalent)

Year of

Approval ADB

Colombo Port Efficiency and Expansion Project 10.00 2001

Japan (JBIC)

SL-P4: Port of Colombo Expansion SL-P7: Port of Colombo Expansion (II) SL-P8: Port of Colombo Expansion (III) SL-P12: Port of Colombo Expansion (IV) SL-P23: Port of Colombo Extension (I) SL-P27: Port of Colombo Extension (II) SL-P30: Port of Colombo Extension (III) SL-P33: Port of Colombo Extension (IV) SL-P41: Port of Colombo North Pier Development SL-P46: Port of Colombo North Pier Development (II) SL-P67: Urgent Upgrading of Colombo Port SL-P85: Galle Port Development

35.90 28.30 10.24 14.11 40.15 78.41

158.25 74.18 56.72 58.92

18.59

130.00

1980 1984 1985 1987 1990 1991 1992 1993 1994 1995

1999 2006

Denmark Norway Netherlands

Oluvil Port Development Automation of Port of Galle Refloating of Dredger at Port of Galle

35.00

0.10

1.00

2003

2004

2005

ADB = Asian Development Bank, JBIC = Japan Bank for International Cooperation, SL = Sri Lanka. Note: Applied exchange rate: $1 = SLRs = 100, monthly rates published by Bank of Japan. Source: Sri Lanka Ports Authority

Appendix 6 29

PROPOSED TERMS OF REFERENCE FOR THE ADVISORY COMMITTEE ON PORT COMPETITION

1. As a prelude to the enactment of a full-fledged Port Competition Act, the Government has agreed to establish an advisory committee1 to enhance the operating environment for the ports sector and to ensure a competitive environment for terminal operators. The committee will have an advisory role to redress grievances of port operators related to unfair competition to ensure a healthy competitive environment for terminal operators and promote intra-port competition when two or more different terminal operators within the same port compete for the same markets. The committee will advise the Minister of Ports and Aviation on actions to be taken in case of anticompetitive behavior in port-related activities. 2. Composition. The committee will be established under the Ministry of Ports and Aviation (MPA), and be chaired by the Secretary, MPA. It will comprise (i) the Secretary, Ministry of Trade and Commerce; (ii) a representative from the shipping and maritime transport community that does not have any equity interest in any terminal operator; and (iii) the person holding the post of Director General of the Public Utilities Commission of Sri Lanka. The committee will be assisted by at least one administrative staff to provide logistical assistance. 3. Functions. The committee will function with fairness, impartiality, and independence in a timely and transparent manner. Its functions will include the following:

(i) Investigate complaints made by any port operator on alleged or suspected offenses related to port business.

(ii) Prevent anticompetitive practices in all aspects of port business including abuse of dominant position to prevent or lessen competition, cross-subsidization of monopoly services to competitive services in a manner that threatens competitors, price-fixing among competitors, and setting of prices in a noncompetitive area of port business in a manner that threatens the relevant port’s ability to compete against other transshipment ports within the region.

(iii) Investigate any planned merger between (a) a marine service provider and a port service provider; (b) a marine service provider with another marine service provider; and (c) a port service provider with another port service provider.

(iv) Investigate any complaint by any port operator prior to or upon a merger to decide whether the merger is compatible with the promotion of fair competition.

4. Procedure for Investigating Complaints. Any affected port operator may lodge a complaint in writing to the committee, which will acknowledge receipt of the complaint within 3 working days. Depending on the nature of the complaint, the committee will have from 2 to 8 weeks to receive details, investigate facts, and reach a decision. It may conduct a hearing or consult with technical experts to determine the nature of the offence and appropriate redress mechanism. 5. Once investigated, the committee will advise the minister responsible for ports on the course of action to be taken to address the issue. The MPA will advise the complainant of the outcome of the complaint. The presence of this committee will not preclude the right of any aggrieved party to seek legal remedy that may be available under the existing laws of Sri Lanka. 6. Details of committee composition and procedures will be strengthened by the advisory committee itself within 3 months of loan effectiveness. Once established, the committee will provide port operators with its detailed rules and procedures by letter. 1 Approved by Cabinet decision PF/05/v/1/250 on 11 October 2006.

30 Appendix 7

DETAILED DESCRIPTION OF HARBOR INFRASTRUCTURE WORKS COMPONENT AND COST ESTIMATES

1. Harbor. The Colombo Port Expansion Project involves the development of a greenfield site south of the existing port facilities. The Project is designed to accommodate vessels with an overall length of 400 meters (m), beam of 55 m and draft of 16 m. The Project will be created by constructing a major new breakwater to the west of the existing harbor and a smaller secondary breakwater. The harbor will be laid out with three lengths of quay forming a U-shaped basin open to the north, each providing a 1,200 m long container terminal giving a nominal three berths of 400 m length and a depth alongside of 18 m. A main breakwater from Galbokka Point at the southwestern corner of the existing harbor runs westward to a water depth of about 18 m and then turns northward following the 18 m contour. A secondary breakwater combined with a small boat harbor extends from near the entrance to the existing harbor. Together they protect the basin and quays from waves. 2. Channel and Navigation. The Project has been planned so that it can be safely accessed by all sizes of container vessels. In addition, improvements in the navigation approach channel to the existing harbor are proposed. The phase 1 harbor basin will be dredged to a depth of 18 m, and will include sufficient space for vessels to come to a halt and to turn. Vessels will approach via a new two-way channel with a depth of 20 m and a minimum width of 570 m. The approach to the existing main harbor entrance will be realigned to suit the new layout and to provide a better approach for an improved one-way transit of vessels. Preliminary studies in accordance with the recommendations of the International Navigation Association (PIANC) were conducted to size the channels. The outer approach channel has been sized for two-way traffic to accommodate the existing harbor and proposed changes. The short approach to the existing harbor is and will remain for one-way traffic only. The existing submarine pipeline to the main crude oil single point mooring will be lowered where it crosses the new dredged areas. 3. The principal dimensions of the channels, basins and turning areas are

(i) Main channel: width: 570 m with additional width on the inside of bends; depth: 20 m below local datum;

(ii) Secondary channel: width: 340 m (reducing to 250 m near the harbor entrance); depth: 16 m below local datum; and

(iii) South Harbor Basin; depth: 18 m below local datum with provision to deepen to 23 m; turning circle: 600 m (1.5 times the length of the design ship).

4. Modern navigation aids will be installed along the new channels. To ensure that all vessel operations in the project area and the existing port are safely and efficiently carried out, a new marine operations center is proposed near the entrance to the Project. This includes facilities for berthing tugs and other harbor craft, a look-out station, and a control room for a new vessel traffic management system serving the whole port. 5. Ancillary Facilities. The harbor will include common user areas for each terminal, located outside the container yard for increased safety and security. These may include lorry gates and waiting areas; X-ray and scanning facilities; parking for equipment and cars; and buildings for terminal offices, equipment maintenance and staff amenities, empty container storage, container repairs, and bonded areas. In addition, a number of facilities are required to provide basic infrastructure to all terminals. Operated by or on behalf of Sri Lanka Ports Authority (SLPA), these may include (i) an electrical power plant, water main and storage tanks,

Appendix 7 31

and sewage treatment plant, all located at the southern end of the new development; (ii) a container lorry access road to the Project, approached via an upgraded port perimeter road that will serve all the terminals; and (iii) an access road for personnel and other noncontainer traffic to the south of existing port gate No 1. SLPA is expected to benefit from a new office building near the entrance to the project facilities and a new marine operations center at the northern end of the eastern quay that will include sheltered berthing facilities for the flotilla serving South Harbor. Port users and Customs will also be accommodated in new facilities near the SLPA office. 6. Cost Estimates. The total cost at 2006 prices (including value-added taxes and duties) for the civil works component is estimated to be $480 million (Table A7).

Table A7: Cost Estimate and Financing Plan ($ million)

Item

Total

Foreign Exchange

Local Currency

ADB

Borrower

ADB Share

Base Costs 1. Works a. General Items 42.0 33.6 8.4 34.5 7.5 82.2% b. Dredging and Reclamation 76.6 76.6 0.0 63.0 13.6 82.2% c. Main Breakwater 137.0 95.9 41.1 112.7 24.3 82.2% d. Secondary Breakwater and Small

Boat Harbor 19.7 13.8 5.9 16.2

3.5 82.2% e. Submarine Pipeline 18.7 18.7 0.0 15.4 3.3 82.2% f. Navigation Aids 2.0 2.0 0.0 2.0 0.0 100.0% g. Roads and Paving 10.5 6.3 4.2 8.6 1.9 82.2% h. Utility Services 9.5 6.6 2.9 7.8 1.7 82.2% i. Buildings and Miscellaneous 2.5 1.5 1.0 2.1 0.4 82.2% Subtotal (1) 318.5 255.0 63.5 262.3 56.2 82.4% 2. Construction Supervision Consultant 12.7 6.4 6.3 12.7 0.0 100.0% Base Cost Subtotala 331.2 261.4 69.8 275.0 56.2 83.0%Taxes and Duties 49.7 0.0 49.7 0.0 49.7 0.0%Contingenciesb 43.9 25.5 18.4 25.0 18.9 56.9% a. Physical Contingencies 16.6 13.1 3.5 13.1 3.5 78.9% b. Price 27.3 12.4 14.9 12.4 14.9 45.4%Interest and Commitment Chargesc,d 55.2 55.2 0.0 0.0 55.2 0.0% a Interest during Construction 53.0 53.0 0.0 0.0 53.0 0.0% b Commitment Charges 2.2 2.2 0.0 0.0 2.2 0.0%Total 480.0 342.1 137.9 300.0 180.0 62.5%ADB = Asian Development Bank. a In 2006 prices, exclusive of local tax and duties estimated at $49.7 million. b Five percent of the base cost for physical contingency and 1.2%-2.8% p.a. for foreign exchange cost and 7%-8% p.a. for local currency cost for price contingency c Interest at 5.43 % for $LIBOR plus a 0.6% spread d Commitment charges at 0.35%

Source: Consultant and ADB estimates.

32 Appendix 8

IMPLEMENTATION ARRANGEMENTS

Organization Chart for the Project Implementation Unit (Colombo Port Expansion Project)

Appendix 9 33

IMPLEMENTATION SCHEDULE

Appendix 10 34

INDICATIVE CONTRACT PACKAGES AND PROCUREMENT PLAN

Procurement Plan 1. Program Information Country Sri Lanka Name of Borrower Democratic Socialist Republic of Sri Lanka Project Name Colombo Port Expansion Project Loan Reference ----- Date of Effectiveness Targeted for June 2007 ADB Financing Amount $ 300,000,000 Executing Agency Ministry of Ports and Aviation Implementing Agency Sri Lanka Ports Authority Approval Date of Original Procurement Plan

17 January 2007

Approval of Most Recent Procurement Plan

Publication for Local Advertisement 31 December 2006

Period Covered by this Plan January 2007 to June 2008 2. Procurement Thresholds for Goods and Related Services, Works and Supply, and Installation Procurement Method Threshold International Competitive Bidding (ICT) Works Equal or above $3 million ICB Goods National Competitive Bidding (NCB) Works NCB Goods Shopping Works Shopping Goods Exceptional Methods . 3. Procurement Thresholds for Consultant Services Procurement Method Thresholds Single-Source Selection Above $200,000 Alternative Methods Quality-Based Selection Quality- and Cost-Based Selection

Appendix 10 35

4. Contract Packages in Excess of $100,000 Goods, Work, and Consulting Services Contract Description

Estimated

Cost

Procurement

Method

Expected Date of

Advertisement

Prior Review

Consulting services for construction supervision and environmental monitoring

$12,700,000 Single-source selection

Not applicable Yes

Civil works covering all publicly financed infrastructure development, i.e., dredging and reclamation works, breakwater construction, construction of all other ancillary civil works, and supply and installation of navigational aids

$318,500,000 International competitive bidding

31 December 2006

Yes

36 Appendix 11

OUTLINE TERMS OF REFERENCE FOR CONSTRUCTION SUPERVISION CONSULTING SERVICES

1. The Colombo Port Expansion Project will construct a new deepwater outer harbor seaward of the existing Colombo Port, and up to three container terminals within the harbor on a build-operate-transfer basis with public-private partnership. The principal elements of the public sector infrastructure works are

(i) two breakwaters—5 and 1 kilometer (km) in length—in a water depth of up to 18 meters (m), enclosing a basin of 275 hectares; the core of the breakwaters is to be formed using the sand dredged from the navigation channels and this is to be protected by rock and concrete armour units;

(ii) a two-way navigation channel of approximately 7 km length with a width of 570 m and depth of 20 m plus ancillary dredging works together with navigation aids;

(iii) a new 0.915 meter (i.e. 36-inch) subsea oil pipeline of approximately 5.9 km length laid in a trench with underwater and onshore connections to the existing pipeline as a diversion to the existing line; and

(iv) onshore roads, paving, services, buildings, and miscellaneous works.

2. The tender for these works is to be called in January 2007 and the contract is to be awarded by July 2007. The contract period is 39 months followed by a 12 month defects notification period.

A. Objectives 3. The engineer will undertake the following:

(i) Review and become fully conversant with the completed studies, reports, detail design, and tender documents prepared by the design consultants.

(ii) Prepare and conduct initial implementation of a project performance monitoring and evaluation system.

(iii) Prepare any additional construction details necessary for successful execution and completion of the Project.

(iv) Supervise and administer the construction contract including monitoring of the cost, quality, and progress of the works; measurement of the works; certification of payments to the contractor; assistance with variations and claims; commissioning; certification on handover; and completion and reporting.

4. The engineer will provide the specified site staff and such other staff as necessary to undertake the services under the direction of a chief resident engineer to whom the engineer will delegate all authority. Head office participation is expected to be limited to overall direction, specialist technical advice, and overall monitoring through regular periodic visits by senior personnel as needed. The majority of personnel to be provided will be sourced from within Sri Lanka and foreign personnel will be limited to the Chief Resident Engineer, deputy Chief Resident Engineer and such specialist posts for which local expertise is not available.

Appendix 11 37

B. Scope of Services

5. Review Design and Tender Documents. Take over responsibility for the design from the design consultant, and review and become fully conversant with the studies, reports, designs, and tender documents prepared by the design consultant. 6. Prepare Project Monitoring and Evaluation System. Within 3 months of commencement of services (i) develop a systematic project performance monitoring system, indicators, and analysis for use throughout the life of the Project; and (ii) develop and conduct a quick and easy rapid sample survey to establish a baseline for subsequent performance monitoring. The monitoring should be gender-disaggregated, where appropriate. Thereafter, evaluation surveys will be conducted annually. The scope of the survey, quantity and quality of data, and frequency for collection will be guided primarily by the project management’s need for progressive rapid feedback on implementation status, as well as early warning of impending situations that might jeopardize attainment of the development objectives. The Government and SLPA will agree upon the key indicators and assumptions that determine the required data for rapid assessment.

7. Prepare Construction Details and Provide Technical Advice. Prepare additional construction details as requested by the contractor and necessary for the execution and completion of the works, excluding working and shop drawings and bar bending schedules (which the contractor is required to prepare). Provide specialist experts to provide advice on design, in particular issues relating to dredging, reclamation, and construction of breakwaters.

8. Supervise and Administer Contracts The principal duties of the engineer from award of the construction contract will include the following:

(i) Manage supervision of construction works on behalf of the Employer. (ii) Review contractor’s method statements and materials orders. (iii) Review contractor’s document submissions and provide specialist technical

advice. (iv) Review contractor’s quality assurance procedures. (v) Monitor construction quality, progress, safety, and cost. (vi) Monitor setting out, testing arrangements, and test results of all construction

materials. (vii) Witness all surveys and agree to measurements based on surveys. (viii) Advise the employer on the need for additional investigations or tests, and

arrange for these to be carried out on the employer’s behalf. (ix) Issue variations and day work orders (subject to agreed cost limits and

employer’s agreement). (x) Review interim payment applications and issue interim certificates. (xi) If applicable, manage the interfaces between different contractors, and monitor

subcontract interfaces. (xii) Hold regular progress meetings with the contractor and employer. (xiii) Prepare regular progress reports for the employer; to include financial with

estimated outturn cost, and schedule reporting, with estimated completion and handover dates.

(xiv) Prepare any reports as required by the Asian Development Bank. (xv) Liaise with Sri Lanka Ports Authority on operational matters. (xvi) Undertake periodic site visits by specialists as considered necessary by the

engineer, with prior approval of the employer.

38 Appendix 11

(xvii) Prepare and regularly update the overall project schedule showing all relevant activities and interfaces including contract design and construction, handover and takeover dates, and built-in plant and operational requirements.

(xviii) Review and monitor the contractor’s Environmental Management Plan (xix) Maintain a daily site diary with a detailed record of all significant events and

discussions including summaries of progress, disruptions, weather, sea state, accidents, breakdowns, labor movements, etc.

(xx) Verify as-built drawings and manuals. (xxi) Offer advice in settling disputes or differences that may arise between the

employer and contractor, with the exception of time in preparing for dispute resolution or litigation.

(xxii) Issue handover certificate. (xxiii) Prepare a defects list and instruct remedial work. (xxiv) Prepare final account. (xxv) Prepare project report.

C. Staff 9. An estimate of the staff required, their qualifications, experience, and inputs is given in Table A11. The consultant will assess staff requirements together with a detailed resources chart showing the duties and responsibilities of each member of the team and the time required for each member to match the expected sequence of works. Posts 1 to 6 and 11 to 14 are expected to be filled by international staff and all other posts will be taken by national staff.

Table A11: Staffing Requirements Designation

Qualifications

Experience (years)

Time (months)

A. Overall Direction 1.a Project Director (home country-based with

periodic visits) Specialist ports experience: senior manager on permanent staff

>20.0

10.0

Subtotal (A) 10.0 B. Technical Support 2.a Breakwater Design Expert >15.0 1.0 3.a Dredging and Reclamation Expert >15.0 1.0 4.a Submarine Pipeline Expert >15.0 1.0 5.a Geotechnical Expert >15.0 1.0 6.a Coastal Engineering Expert >15.0 1.0 7. Environmental Expert >15.0 1.0 8. Design Engineer (2) >10.0 54.0 9. Junior Engineer >7.0 30.0 10. Computer-Assisted Design Technician (2) 50.0 Subtotal (B) 140.0 C. Supervision 11.a Chief Resident Engineer Experience in port >15.0 40.0

Appendix 11 39

Designation

Qualifications

Experience (years)

Time (months)

and coastal engineering construction

12.a Deputy Chief Resident Engineer: Breakwaters Experience in concrete armour breakwater construction

>10.0 30.0

13.a Superintending Resident Engineer (SRE): Dredging, Reclamation, Pipeline

Experience in dredging / reclamation

>7.0 30.0

14.a SRE: Secondary Breakwater (Small Boat Harbor)

Experience in port construction

>7.0 18.0

15. SRE: Onshore Works Experience in civil engineering construction

>7.0 24.0

16. Senior Environmentalist: Environmental Management

>10.0 39.0

17. Cost Engineer: Measurement and Cost Control >10.0 40.0 18. Material and Geotechnical Engineer Experience in marine

geology >7.0 39.0

19. Assistant Resident Engineer: Roads and Paving

>5.0 18.0

20. Assistant Resident Engineer : Buildings >5.0 18.0 21. Assistant Resident Engineer : Utilities >5.0 18.0 22. Hydrographic Surveyor Experience in

dredging surveys >5.0 32.0

23. Assistant Resident Engineer : Breakwaters (3) >5.0 50.0 24. Assistant Environmentalist >5.0 18.0 25. Quantity Surveyors (2) 57.0 26. Surveyors (3) 86.0 27. Inspectors (18) 420.0 28. Laboratory Technician 39.0 29. Diver 33.0 Subtotal 1,049.0 D. Administration 30. Office Manager 52.0 31. Secretary 52.0 32. Accountant 52.0 33. Filing Clerk 52.0 34. Office Aide 52.0 Subtotal 260.0 Total 1,459.0 a International consultant. Source: Sri Lanka Ports Authority estimates.

40 Appendix 11

D. Project Reports 10. The following reports will be submitted in an agreed format to the employer for their own use and onward transmission to the Asian Development Bank: monthly progress reports, project performance monitoring and evaluation report, and final completion report. The monthly progress reports will provide a review and commentary on the work completed during the previous month and any issues encountered; and a cumulative summary of the progress and expenditure to date highlighting variances with the contract program, contract price, and planned cash flow. Other issues to be covered in the monthly progress reports include design matters and value engineering reviews, unforeseen circumstances, variations and claims, quality control, health and safety, and environmental management.

11. Additional reports will be produced, as necessary, covering aspects relevant to the Project. These may include specific claims and problems encountered. The additional reports will be annexed to the final completion report.

E. Data, Local Services, Personnel, and Facilities to be provided by the Employer 12. The employer will be represented by a project implementation unit (PIU) set up within Sri Lanka Ports Authority. Through the PIU the employer will provide liaison and coordination with other Government authorities and port users, and assistance with application for residence visas, port permits, etc. In addition the harbour master’s office will work closely with the engineer to coordinate the works and port operations so that minimum interference is caused to the ongoing operations. The employer will make available to the consultant the following facilities free of charge throughout the period of the services:

(i) copies of all reports prepared by the design consultant and all other relevant project data;

(ii) all other relevant data and information required, legislation, regulations, notifications and orders for the completion of the assignment;

(iii) fully equipped, furnished, and serviced site offices provided through the construction contract; and

(iv) four site vehicles, two saloon cars, and two minibuses for the exclusive use of the site staff provided through the construction contract.

The employer will reimburse all reasonable costs associated with the provision of services on the Project including

(i) personal taxes: all approved travel and accommodation costs including a per diem for visiting foreign staff and a housing allowance for resident foreign staff; and

(ii) all office running costs.

Appendix 12 41

ECONOMIC AND FINANCIAL ANALYSIS A. Traffic Forecasts 1. The forecast presented is based on analysis of the domestic and transshipment market, which is subdivided into Indian subcontinent (ISC) transshipment and others. The forecast model calculates a transshipment share of the ISC market and assesses Colombo’s share. Because Jawaharlal Nehru Port, Nhava Sheva, accounts for half of the ISC market and has moved from 40% to 70% direct calls in 5 years, the transshipment share available has fallen rapidly to 45% of the total container traffic. The forecast anticipates the share of the ISC transshipment market to continue to decrease. To date, no carrier has been limited in its choice of vessel size at an Indian port. However, quite soon as volumes increase and justify direct calls with bigger ships, size will become a factor. Despite dredging programs and port building, carriers will be constrained by size at Indian ports and Colombo’s advantage is that it will be able to handle the largest vessels. The demand estimates for the Project take account of the port expansion plans of neighboring countries such as India, as well as the opinion of the international shipping industry regarding the potential of Colombo Port to be a transshipment hub port in light of these plans. Shipping industry representatives state that while western Indian cargo most likely would be lost to Colombo, nevertheless Colombo is in a good position to capture eastern and southern Indian transshipment cargo provided that it expands its capacity. The demand forecast in the project viability analysis therefore assumes that Colombo Port will have a 30% market share of ISC cargo. Direct, not diverted, services are most important; in the future larger vessels will have greater difficulty diverting because of the traffic volume involved. The container traffic forecast for national imports and exports is shown in Table A12.1.

Table A12.1: Forecast of Domestic Container Traffic at Colombo Port (‘000 twenty-foot equivalent units)

2002 2003 2004 2005 2010 2015 2020 2030 2040

Actual Forecast

546a 601 661 727 1,118 1,643 2,414 4,975 9,786

Note: 2002–2040: unconstrained by port capacity limitations. a Used as base for projection. Source: Consultant estimates

2. Tables A12.2 through A12.4 provide a forecast of container traffic volume for the ISC. Table A12.2 provides a forecast of the total container traffic to be generated in the ISC. Table A12.3 provides an assessment of the transshipment share of the ISC container market. The potential transshipment share of the ISC market is expected to decline in the short term as a result of increased direct calls. The decline rate is expected to fall in the medium term as larger ships are introduced and then it will increase again.

42 Appendix 12

Table A12.2: Forecast of Indian Subcontinent Container Traffic

(‘000 twenty-foot equivalent units)

2002 2003 2004 2005 2010 2015 2020 2030 2040

Actual Forecast

4,739 5,274 5,871 6,536 10,643 15,790 21,652 40,902 77,707

Note: Total including direct and transshipped containers. Source: Consultant estimates

Table A12.3: Share Adjustment Indian Subcontinent Transshipment

Period % Share Adjustment Indian Subcontinent Transshipment Share (%) 2003–2008 2 annual reduction 33 by 2008 2009–2011 1 annual rise (by advent of Suez max ships) 36 by 2011 2012–2040 1 annual reduction 17 by 2040

Source: Consultant estimates

Table A12.4: Forecast of Transshipment Indian Subcontinent Container Traffic (‘000 twenty-foot equivalent units)

Year 2002 Actual 2003 2004 2005 2006 2007 2008 2009 2010

India, Bangladesh, Pakistan container traffic 4,739 5,274 5,871 6,536 7,203 7,940 8,754 9,652 10,643 Percentage transhipped via Colombo, Singapore, Salalah, etc (%) 45 43 41 39 37 35 33 34 35 Total 2,133 2,268 2,407 2,549 2,665 2,779 2,889 3,282 3,725

Year 2011 2012 2013 2014 2015 2020 2030 2040 India, Bangladesh, Pakistan container traffic 11,513 12,457 13,479 14,588 15,790 21,652 40,902 77,707 Percentage transhipped via Colombo, Singapore, Salalah, etc (%) 36 35 34 33 32 27 22 17 Total 4,145 4,360 4,583 4,814 5,053 5,846 8,988 13,210

Source: Consultant estimates

Appendix 12 43

3. Colombo’s transshipment forecast is built on the following basis: (i) the forecast transshipment volumes from the ISC set out in Table A12.4; and (ii) Colombo’s share of the ISC transshipment market, taking into account the market dynamics that Colombo is able to increase its share from 23% in 2002 to about 29% by 2010, providing it is able to achieve high productivity. Table A12.5 indicates Colombo’s forecast transshipment traffic up to 2040. Table A12.6 summarizes the assumed growth rate of the total container traffic and its constituents. The main conclusions for 2002–2010 are (i) the annual average growth rate for Sri Lankan imports and exports is 9.5%; (ii) the annual average growth rate for transshipment is 10.1%.; and (iii) the annual average growth rate for total traffic is 9.7%.

Table A12.5: Forecast of Transshipment Container Traffic at Colombo Port (‘000 twenty-foot equivalent units)

2002 2003 2004 2005 2010 2015 2020 2030 2040

Actual Forecast

1,147a 1,287 1,398 1,535 2,469 3,385 4,065 6,689 10,860

2002–2040: unconstrained by port capacity limitations. a Used as base for projection. Source: Consultant estimates

Table A12.6: Colombo’s Container Traffic Growth Rates (% per annum)

TEU = twenty-foot equivalent units Source: Consultant estimates

B. Costs

4. On the basis of the economic and financial assessments, the basic infrastructure works and one terminal are assumed to be initially constructed, and two terminals will be subsequently constructed to meet the forecasted demand of the Colombo Port Expansion Project. 5. Capital Investment Costs. Infrastructure costs are based on detailed design currently under preparation. Alternative designs were considered for each project component, and least-cost technical solutions were identified by comparing benefits and costs of mutually exclusive design options. The breakwater costs are based on a rubble mound structure, which minimizes the use of rock by using concrete amour units and maximizes the use of dredged sand in the core of the structure. This structure is less costly than an alternative caisson structure by 27% per meter for this Project. Sand for reclamation will be taken from the access channels and harbor basin. The actual equipment to be used in the terminal will depend on the preference of the terminal operator. However, for costing purposes, each terminal is assumed to have a quay

Item 2002–2010 2010–2020 2020–2030 2030–2040

Sri Lankan Imports and Exports 9.5 8.0 7.5 7.0 Transshipment at Colombo (TEU moves)

10.1 6.6 5.9 3.2

Restows 5.0 5.0 5.0 5.0 Total Colombo Container Traffic 9.7 6.9 6.4 4.7

44 Appendix 12

length of 1,200 m and to be operated by 12 quayside cranes and 40 rubber-tired gantry cranes. The quay walls are costed as low reflective structures consisting of a reinforced concrete deck supported on tubular steel piles. The total cost of the Project is estimated to be $1.3 billion. The details of the cost estimates are given in Table A12.7. 6. Operating Costs. Operating costs are divided into variable costs, costs that would vary with the utilization of the terminal, and fixed costs that are independent of terminal throughput. Tables A12.8 and A12.9 set out the variable and fixed costs.

Table A12.7: Estimated Project Capital Costs

Cost Category Cost ($ million)

A. Infrastructure 1. Breakwater, dredging and reclamation 214 Small boat harbor, submarine pipeline, navigation aids, roads and paving, utility services, building and miscellaneous, and construction supervision consultant

76

2. General items 42 3. Taxes and duties 50 Subtotal (A) 381a B. Terminals 1. South Terminal: Civil Works Construction 154 Equipment 147 Subtotal (1) 301 2. East Terminal: Civil Works Construction 154 Equipment 147 Subtotal (2)l 301 3. West Terminal: Civil Works Construction 177 Equipment 147 Subtotal (3) 324 Subtotal (B) 926 Total 1,307

a Contingencies and interest are not included. Source: Consultant estimates

Appendix 12 45

Table A12.8: Variable Costs and Projected Increases

2003 2004–2034 Variable Costs ($/TEU) (Projected increases in real

terms %) Energy 2.5 2 Personnel (858 staff) 1.9 2 Repairs and Maintenance (40% of total)

0.8 2

Others 3.0 1 TEU = twenty-foot equivalent units Source: Sri Lanka Ports Authority, consultant estimates.

Table A12.9: Fixed Costs and Projected Increases

Item 2003 2004–2006 (%)

2007–2034 (%)

Administration (182 staff) 1,782.0 3 2 Repairs and Maintenance (60% of total)

2,816.4 2

Insurance 3,266.4 1 Source: Sri Lanka Ports Authority, consultant estimates.

C. Economic Evaluation 1. Justification for Public Sector Role 7. Colombo Port is ideally situated to be the transshipment center for South Asia, and maintaining its status as a hub port is vital for the Sri Lankan economy. This would require building additional container terminals since the existing container terminals are quickly reaching capacity. Container terminals are a revenue-generating infrastructure project and can attract private sector investment. However the new container terminals can only be built outside the area protected by the existing breakwater. A new breakwater is therefore a prerequisite for building the new terminals. Breakwaters are a “lumpy” investment and the site conditions are such that the minimum size of the breakwater that can be built would be sufficient to protect three container terminals. However demand considerations mean that the container terminals would be needed only in phases. Thus no single prospective bidder for a terminal would be willing to shoulder the cost of building a breakwater sufficient to protect three terminals. The project breakwater is therefore a public good that will not by itself attract private sector investment and thus has to be provided by the public sector. 2. Economic Benefits and Costs 8. The economic evaluation compares the economic costs and economic benefits of the Project from the viewpoint of the national economy. Economic analysis is based on the scenario that three terminals will be sequentially developed to meet forecasted demands by taking into account the strategy of the Sri Lanka Ports Authority (SLPA) to provide basic infrastructure to

46 Appendix 12

accommodate three terminals. The main consequence for the economy if the Project is not built would be the loss of the frequent, fast, direct shipping services used by exporters and importers. Without investment in the South Harbor, Colombo would lose its transshipment traffic; and if the port no longer operates as a transshipment hub port, it would soon lose its direct calls on trunk line routes. Local traffic is not high enough to attract direct calls by trunk line ships. Colombo would eventually become a feeder port, served by a combination of feeder ships and multiport services with relatively long transit times for the ports with lower traffic volumes. 9. The Sri Lankan economy will experiences several costs if Colombo Port were to lose its transshipment hub status. The benefits to the Sri Lankan economy are thus the avoidance of these costs. The first economic benefit of the Project would be the avoidance of the cost of having to use feeders. The average cost of feeding to/from Singapore and other regional transshipment hubs would be around $250 in balanced international shipping markets. With surplus capacity this price will decline; in period of shortages it will increase. Furthermore, the feeder cost will be absorbed by the shipping lines where they have to compete with fast, direct services. But when the fast, direct services are phased out, the feeder cost will normally be passed on in full. The feeder cost would be incurred by most but not all containers on long distance routes. Freight costs are an important factor in key Sri Lankan exports, e.g., textiles, which make up more than 50% of Sri Lankan exports. SLPA records show that about one third of Colombo’s imports and exports are on long distance routes, excluding some of the longer intra-Asian routes. A study by the Organisation for Economic Co-operation and Development1 finds that freight costs from Asian countries already account for a higher percentage of American market textile import costs at about 6% compared with about 3% for textile imports from Latin America and the Caribbean. Some of these long distance routes are assumed to be served by ships on multiport itineraries calling at Indian subcontinent ports; but that the majority, 20% of exports and imports conservatively estimated, would use feeders to a regional hub if the Project is not implemented. If the Project is implemented and Colombo Port retains its direct services, conservative estimates are that an average feeder cost of $250 per TEU on 20% of exports and imports would be saved. This benefit is estimated at $82 million in 2015, which would otherwise have to be absorbed by exporters to maintain their market competitiveness. 10. The value to shippers of direct, fast, frequent services can be measured by willingness to pay. A good example is the express service currently provided by one of the major shipping lines, giving fast transit on the route from the People’s Republic of China via Singapore to Europe. This service is particularly effective in getting garments to retail outlets faster than competing services in minimal time. The shipping lines are in practice able to obtain a large premium of approximately $500/TEU for the fast transit time. Longer transit times and delays are injurious to export markets, especially for textiles. Textiles accounted for 52% of Sri Lankan exports in 2002, and exporters confirm that a substantial proportion of these products have to get to retail outlets fast. The importance of the time factor in future textile trade has also been confirmed. The study (footnote 1) found that lead time will play a crucial role in determining international competitiveness because of trade-offs between low wage costs and time factors. The study found that closeness to a large consumer market, e.g., United States or Western Europe provides a competitive edge in the highly competitive, time-sensitive, and fashion-oriented clothing market, and also for new exports that will emerge. The cost to the economy is estimated conservatively on the basis that 10% of the total traffic would be willing to pay $300 per TEU for fast, direct, reliable service (in practice, premiums of $500 per TEU are being paid at present). On this basis the benefit of retaining direct services is estimated at $49 million in

1 Organisation for Economic Co-operation and Development. 2004. A New World Map in Textile and Clothing:

Adjusting to Change. Paris.

Appendix 12 47

2015. Textile manufacturers confirm that this is a good illustration of willingness to pay for the more time-sensitive national containers. 11. Container terminals obtain additional revenue from transshipment. Without the Project, transshipment traffic would almost certainly decline rapidly before 2010, rather than being squeezed out gradually by imports and exports. However, for the purpose of economic analysis, the most conservative scenario in which existing facilities still handle the considerable transshipment traffic is applied. The tariff for transshipment is assumed as $29 per TEU by taking into account the international hub port competition to attract transshipment. With the Project, this transshipment revenue, $35 million in 2015, would be retained. In addition to the terminal operator, SLPA itself earns revenue from handling transshipment cargo. The revenues to SLPA come from harbor entering dues and harbor tonnage dues. They average $3 per TEU. Additional revenue to SLPA would result from providing marine services, but this would be offset by costs and are not included here. These two revenues items are gains to the country as they come from providing transshipment services to cargo originating outside Sri Lanka and destined for places outside Sri Lanka as well. 12. The costs of other items, e.g., freight costs, feeder shipping costs, and terminal and port charges, are determined in the international competitive market. Thus, they are assumed to be free of distortions and so shadow pricing is not necessary for measuring their economic costs. Accordingly, the avoidance of these costs reflects true economic benefits. (The development of Galle Port mainly aims to accommodate bulk cargoes and does not decrease the project benefits discussed here.) The values assigned to the benefits are compared with economic costs of the project investment up to 2034. The economic internal rate of return is estimated at 17.5% (Table A12.10).

Table A12.10: Annual Benefit and Cost Streams for the Project ($ ’000)

Cost Benefit

Year Capital

Cost O&M Cost

Total Cost

Avoidance of Feeder Cost

Additional Revenue from

Transship Total

Benefit

Benefit-Cost

Stream

2007 79,000 0 79,000 0 0 0 (79,000)2008 210,667 0 210,667 0 0 0 (210,667)2009 210,667 0 210,667 0 0 0 (210,667)2010 131,667 12,446 144,112 89,453 9,425 98,878 -45,2352011 0 16,031 16,031 96,609 17,988 114,596 98,5652012 0 18,703 18,703 104,338 22,843 127,181 108,4782013 0 21,602 21,602 112,685 27,920 140,604 119,0022014 37,625 24,746 62,371 121,699 33,220 154,920 92,5482015 100,333 28,153 128,486 131,435 38,747 170,182 41,6962016 100,333 31,340 131,673 141,950 42,920 184,870 53,1972017 62,708 44,659 107,368 153,306 47,188 200,494 93,1262018 0 48,505 48,505 165,571 51,544 217,115 168,6102019 0 52,630 52,630 178,816 55,983 234,800 182,1692020 0 57,054 57,054 193,122 60,497 253,619 196,565

48 Appendix 12

Cost Benefit

Year Capital

Cost O&M Cost

Total Cost

Avoidance of Feeder Cost

Additional Revenue from

Transship Total

Benefit

Benefit-Cost

Stream

2021 40,500 62,528 103,028 208,571 67,202 275,774 172,7462022 108,000 68,465 176,465 225,257 74,240 299,497 123,0322023 108,000 74,904 182,904 243,278 81,626 324,904 142,0002024 67,500 92,963 160,463 262,740 89,376 352,116 191,6532025 0 100,717 100,717 283,759 97,506 381,265 280,5482026 0 108,690 108,690 303,622 106,034 409,656 300,9662027 0 117,281 117,281 324,876 114,975 439,851 322,5702028 0 124,584 124,584 347,617 119,298 466,915 342,3312029 0 126,673 126,673 371,950 109,161 481,111 354,4382030 0 128,800 128,800 397,987 98,322 496,309 367,5092031 0 130,965 130,965 425,846 86,733 512,579 381,6142032 0 133,170 133,170 455,655 74,342 529,997 396,8272033 0 135,414 135,414 487,551 61,093 548,644 413,2292034 0 137,699 137,699 521,679 46,926 568,605 430,906

Economic Internal Rate Of Return 17.76%O&M = operations and maintenance Sources: Consultant estimates, ADB staff estimates.

13. Sensitivity analysis is conducted for the changes in traffic forecasts, capital investment costs, and ratio of switch to feeders. Table A12.11 summarizes the results of the sensitivity analysis and indicates the economic viability of Project is robust.

Table A12.11: Results of Sensitivity Analysis

Change In Case EIRR (%)

10% increase 19.8 Traffic Forecasts 10% decrease 16.0 10% increase 16.3 Capital Costs 10% decrease 19.4

10% of domestic containers are switched to feeders of foreign ports without the Project 12.5

Ratio of Switch to Feeders (Base Case: 20% of Domestic containers are switched to feeders of foreign ports without the Project

30% of domestic containers are switched to feeders of foreign ports without the Project

22.2

EIRR = economic internal rate of return Sources: Consultant estimates , ADB staff estimates.

D. Income Structure of SLPA and Terminal Operator 14. SLPA’s income stream arises from royalties, lease cost, port entry dues, harbor tonnage dues, light dues, and handling charges. This income is calculated using the forecasted demands of the Project and the rates applicable to South Asia Gate Terminal (SAGT), a privately operated terminal in Colombo Port. Although the income structure of the Project for SLPA depends on concession conditions, they are not yet clear because SLPA is preparing a

Appendix 12 49

competitive bid for the first terminal concession. Therefore, the income structure of SLPA from SAGT is applied for the purpose of the financial analysis of the Project for SLPA. The details of the assumptions applied to SLPA’s income stream are given in Table A12.12.

Table A12.12: Income Structure of Sri Lanka Ports Authority Based on 2005 Revenues from South Asia Gate Terminal

Item

Rate

Unit

Price Escalation per annum (%)

Royalties 3.00 $ per TEU 0 Lease/Rental Cost 5.313a $ million

per terminal 0

Port Entry Dues 1.32 $ per TEU (3) Harbor Tonnage Dues 2.19 $ per TEU 1 Light Dues 0.98 $ per TEU (3) Landing and Delivery Charges 4.81 $ per TEU 1 Shipping Charges 2.43 $ per TEU 1 Others 0.62 $ per TEU 1

a Calculated assuming lease cost will be proportional to the area of terminal. TEU = twenty-foot equivalent units Source: Consultant estimates

15. A terminal operator earns revenues from container handlings. Up to 2009, the tariffs are based on the existing tariffs of $140/TEU for imports and exports and $37/TEU for transshipment with rebates of 15% and 25% respectively. From 2010 to 2014 the rebate for transshipment is assumed to increase to 35%. Longer term tariff projections are based on the market and economic analysis undertaken. The tariffs used for the analysis are presented in Table A12.13. The tariff structure presented is in real terms.

Table A12.13: Projected Tariffs for Imports, Exports, and Transshipment Traffic ($/TEU)

Item 2004–2009 2010–2014 2015–2019 2020–2042 Imports and Exports 119.0 119.0 120.0 100.0 Transshipment 27.8 24.1 35.0 40.0

Source: Sri Lanka Ports Authority, consultant estimates. E. Financial Evaluation 16. The financial analysis of the Project for SLPA was conducted in accordance with Asian Development Bank (ADB) guidelines.2 The financial evaluation compares the incomes and expenditures of SLPA through project implementation. This analysis is based on the scenario that three terminals will be sequentially developed by the private sector to meet forecasted demand. Incremental benefits and costs were computed on the basis of with- and without-project scenarios for each of the components. All financial benefits and costs are expressed in 2 ADB. 2005. Financial Management and Analysis of Projects. Manila.

50 Appendix 12

real terms. Taxes and duties are included, and contingencies and interest during construction are excluded. Royalties, lease cost, port entry dues, harbor tonnage dues, light dues, and handling charges are used for the incomes of SLPA, and capital investment cost and maintenance and repair cost of the basic infrastructures are used for the expenditures of SLPA. Maintenance cost of the breakwater could be considered to be negligible; however, for this analysis 0.5% of the investment cost incurring from 2011 and 1% per annum escalation are assumed. The values assigned to the incomes are compared with the basic infrastructure expenditures for the Project up to 2034. The financial internal rate of return (FIRR) is approximately 11.5% (Table A12.14).

Table A12.14 Annual Income and Expenditure Streams for Sri Lanka Ports Authority ($ ’000)

Expenditure

Year Capital Cost O&M Cost Total Expenditure

Income Income-Expenditure Stream

2007 47,625 0 47,625 0 (47,625)2008 127,000 0 127,000 0 (127,000)2009 127,000 0 127,000 0 (127,000)2010 79,375 0 79,375 11,400 (67,975)2011 0 1,905 1,905 17,063 15,1582012 0 1,924 1,924 21,068 19,1442013 0 1,943 1,943 25,335 23,3912014 0 1,963 1,963 29,879 27,9172015 0 1,982 1,982 34,719 32,7372016 0 2,002 2,002 39,088 37,0862017 0 2,022 2,022 49,028 47,0062018 0 2,042 2,042 53,929 51,8862019 0 2,063 2,063 59,120 57,0572020 0 2,083 2,083 64,619 62,5362021 0 2,104 2,104 71,521 69,4172022 0 2,125 2,125 78,921 76,7952023 0 2,147 2,147 86,855 84,7092024 0 2,168 2,168 100,678 98,5102025 0 2,190 2,190 109,806 107,6162026 0 2,212 2,212 119,011 116,7992027 0 2,234 2,234 128,836 126,6022028 0 2,256 2,256 136,676 134,4202029 0 2,279 2,279 137,338 135,0592030 0 2,301 2,301 138,016 135,7152031 0 2,324 2,324 138,711 136,3862032 0 2,348 2,348 139,422 137,0742033 0 2,371 2,371 140,148 137,7772034 0 2,395 2,395 140,891 138,497

FIRR 11.49%O&M = operations and maintenance; FIRR = financial internal rate of return Sources: Consultant estimates, ADB staff estimates.

Appendix 12 51

17. The weighted average cost of capital (WACC) was calculated and compared with the FIRR to ascertain the financial viability of the Project for SLPA. To estimate the WACC, ADB is assumed to finance 68% of the Project and the Government of Sri Lanka 32%. Nominal costs of financing are assumed at 6.0% for ADB and 11.4% for the Government. Incorporating the other assumptions, i.e., a domestic inflation rate of 7.0%, and SLPA’s effective tax rate of 24%, the estimated WACC is 4.4%. The FIRR of 11.5% exceeds this WACC, demonstrating the financial validity of the Project for SLPA. 18. A sensitivity analysis was conducted for the changes in traffic forecasts, capital investment costs, and rates of revenue (Table A12.15). The analysis indicates that the financial sustainability of the Project for SLPA is robust.

Table A12.14: Results of the Sensitivity Analysis

Change In Case FIRR (%)

10% increase 13.1 Traffic Forecasts 10% decrease 10.0 10% increase 10.7 Capital Costs 10% decrease 12.4 10% increase 12.3 Rates of Revenue

10% decrease 10.6 FIRR = financial internal rate of return Source: ADB staff estimates.

19. A financial analysis for the first terminal operator was also conducted to assess the viability of private sector development under a build-operate-transfer concession. A terminal operator incurs the capital investment cost of south terminal development, terminal operation cost, and concession fees (royalties and lease/rental fees to SLPA presented in Table A12.12) while earning revenues from tariffs presented in Table A12.13. The values assigned to the incomes are compared with the values assigned to expenditures for the operator up to 2034. The FIRR is approximately 16.3%, which is in line with comparable new terminal developments internationally. The detailed spreadsheet calculations for FIRR are shown in Table A12.16.

Table A12.16: Annual Income and Expenditure Streams for South Terminal Operator ($ ’000)

Expenditure

Year Capital

Cost O&M Cost Royalties/Lease Total

Income Income-

Expenditure Stream

2007 37,625 0 0 37,625 0 (37,625)2008 100,333 0 0 100,333 0 (100,333)2009 100,333 0 0 100,333 0 (100,333)2010 62,708 12,446 6,489 81,643 18,085 (63,558)2011 0 16,031 7,575 23,607 35,178 11,5722012 0 18,703 8,337 27,040 50,332 23,292

52 Appendix 12

Expenditure

Year Capital

Cost O&M Cost Royalties/Lease Total

Income Income-

Expenditure Stream

2013 0 21,602 9,143 30,745 66,571 35,8262014 0 24,746 9,996 34,743 83,973 49,2302015 0 28,153 10,899 39,052 116,433 77,3812016 0 31,340 11,704 43,044 136,769 93,725

2017 0 22,330 8,932 31,262 105,647 74,3852018 0 24,253 9,377 33,630 121,088 87,4582019 0 26,315 9,846 36,161 137,571 101,4102020 0 28,527 10,338 38,864 142,960 104,0962021 0 31,264 10,954 42,218 154,517 112,2992022 0 34,233 11,611 45,843 155,368 109,5252023 0 37,452 12,309 49,761 156,204 106,4432024 0 30,988 10,472 41,460 112,521 71,0612025 0 33,572 10,999 44,572 124,666 80,0942026 0 36,230 11,525 47,755 136,495 88,7402027 0 39,094 12,082 51,175 149,077 97,9012028 0 41,528 12,513 54,041 160,354 106,3122029 0 42,224 12,513 54,737 166,269 111,5312030 0 42,933 12,513 55,446 172,601 117,1552031 0 43,655 12,513 56,168 179,380 123,2122032 0 44,390 12,513 56,903 186,638 129,7352033 0 45,138 12,513 57,651 194,407 136,7562034 0 45,900 12,513 58,413 202,724 144,312

FIRR 16.31%O&M = operations and maintenance, FIRR = financial internal rate of return. Source: ADB staff estimates. 20. A sensitivity analysis conducted for changes in traffic forecasts, capital investment costs, and tariffs (Table A12.17) indicates the financial sustainability of the south terminal operator is robust.

Table A12.17: Results of Sensitivity Analysis

Change In Case FIRR (%)

10% increase 17.8 Traffic Forecasts 10% decrease 13.8 10% increase 15.3 Capital Costs 10% decrease 17.5 10% increase 18.0 Tariffs

10% decrease 14.5 FIRR = financial internal rate of return Source: ADB Staff estimates

Appendix 12 53

F. Basis of Economic and Financial Analysis 21. The economic and financial analyses are based on demand forecasts made in the business plan prepared by the ADB consultants for the Colombo Port Efficiency and Expansion Project. 3 The business plan was completed in April 2004 based on data up to 2002. Comparative analysis of the demand forecasts in the business plan for 2003–2005 and the first half of 2006 show that the actual traffic volumes achieved exceeded the forecasts for these years in the business plan. Nevertheless the business plan forecasts are used to ensure that the demand forecasts are conservative. Cost figures used in the analysis are based on estimates prepared by the same consultants as part of the detailed design and tender documentation preparation.

3 ADB. 2001. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the

Democratic Socialist Republic of Sri Lanka for the Colombo Port Efficiency and Expansion Project. Manila (Loan 1841-SRI, for $10 million).

54 Appendix 13

SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY A. Linkages to the Country Poverty Analysis Is the sector identified as a national priority in country poverty analysis?

Yes

No

Is the sector identified as a national priority in country poverty partnership agreement?

Yes

No

Contribution of the sector or subsector to reduce poverty in Sri Lanka: The Colombo Port Expansion Project is to promote economic growth by improving Sri Lanka’s competitiveness in the ports sector through expanding Colombo Port using public-private partnership. The Project will facilitate economic growth by enhancing national competitiveness in international trade via lower costs and faster delivery, generate additional income from transshipment, and provide incomes from construction. In addition it will enhance export and import intensity of the national economy and provide economywide efficiency benefits. The Project will contribute significantly to poverty reduction, primarily by creating income and employment opportunities for low income earners linked with the export-import trade sector of the economy and lead to poverty reduction in the quarrying industry.

B. Poverty Analysis Targeting Classification: General intervention

What type of poverty analysis is needed? The Project comprises construction of a new outer basin enclosed by a breakwater and served by a new navigation channel. Material dredged from the channel will be used in reclamation to provide new container berths with associated infrastructure, buildings, and operation facilities. The project-affected area includes (i) Colombo City, considered to be the main activity zone of the Project; (ii) Colombo Metropolitan Region (CMR) comprising Colombo, Gampaha and Kalutara districts; and (iii) quarry sites, including immediate neighborhoods, road corridors, and loading points. CMR has an estimated population of 5.4 million and accounts for over 70% of the country's industrial activities, 53% of industrial employment, and 31% of total employment. The three CMR districts have relatively high population densities.1 Between districts, the highest urban population density of 54.7% is concentrated in Colombo district due to the increased opportunities of employment in the garment industry, banking, services, and informal sectors. The CMR economy has undergone substantial change over the past three decades. In terms of job formation, it has grown much faster than the nation as a whole. Unemployment rates in CMR are lower than the rest of the country, although the area has a relatively large unskilled youth labor force. Of those employed, the average monthly income in Sri Lanka was estimated at SLRs3,056 for 2002, while the corresponding figure for CMR was SLRs4,993. Each of the districts in CMR also had average incomes above the national average: Colombo SLRs4,923, Gampaha SLRs4,013, and Kalutara SLRs3,046. Modera and Mattakkuliya, major fishing areas in Colombo District, are located next to the Project. The coastal stretch south of the Project (Agulana, Dehiwala, Egoda Uyana,Lunawa, Mount Levinia, Moratuwa, Rathmalana, etc.) also includes traditional fishing areas. Of these, Moratuwa, Dehiwala Modera, and Mattakkuliya were affected to varying extents by the Asian tsunami, but generally these areas were less affected than communities further south and east. Fishery communities largely live in dwelling units constructed on beaches. The number of households engaged in fishing in these areas appears to be declining not only because of the preference for alternative employment, but also declining fish resources. Just over 2,000 households are now engaged in fishing. The majority of fishing crafts have outboard motors that are used mainly in inshore areas. The existing port and its approaches have a security zone within which fishing is not allowed. While the nation as a whole will experience the economic impacts of the Project, the existing concentration of economic activity in CMR is likely to function as an important factor in mediating the social impacts of the Project in the surrounding areas. Thus, CMR residents will experience most of its social impacts emanating from economic, employment, trade, and transportation growth. In Sri Lanka, poverty is greatest in the rural sector (20.8%), followed by the urban sector (6.2%), and the estate sector (4.3%). Across the industry subsectors, the highest poverty is reported in mining and quarrying industries as employment in quarrying is characterized by its low pay as well as its temporary and irregular nature,. As per 1996 data, the incidence of poverty among those engaged in mining and quarrying was 41.5%. The next highest incidence

1 Data from 2001 shows a density of 299 people per square kilometer for the country as a whole and 3,303 for

Colombo, 1,539 for Gampaha, and 1,539 for Kaluthara districts.

Appendix 13 55

of poverty was in agriculture at 28.4%. As per Department of Census and Statistics 2004, the percentage of poor households living below the official poverty line2 is 5% for Colombo District, 9.2% for Gampaha, and 17.7% for Kalutara compared with 19.2% for Sri Lanka. Although the Western province in which the CMR is located, records the lowest incidence of poverty, it accounts for the largest proportion of the total poor. The poverty profile of the city of Colombo reveals about 1,614 poor urban settlements with about 77,612 families. The urban poor of Colombo include those engaged in informal sector activities and blue collar workers of the ports, industries, railways, etc. They are mostly concentrated in the slums, shanties, and low cost housing in the northern and central parts of the city. Lack of land ownership, poor access to drinking water, poor sanitation facilities, and lack of a regular source of income are a few of the main factors causing poverty. Impacts of the Project will be distributed differently in different geographic areas and over time. Communities living adjacent to the Project will experience the most impacts. The major positive social impacts are anticipated to arise through the creation of direct and indirect employment opportunities during project construction and operation. Employment opportunities are likely to occur due to (i) construction and operation related work; (ii) quarrying, and (iii) potential additional employment from benefits arising from increased vessel traffic and other development initiatives. Thus the additional jobs are expected to be significant. The majority of the temporary employment related to construction of the breakwater and three terminals will be accrued by those living in CMR. About half of the population in Colombo live in slums and the poor who are underemployed or unemployed will have access to temporary employment opportunities created by the Project. Similarly, those residing in the surrounding areas will compete for more regular employment opportunities arising out of the Project. During project operation only a fraction of the new jobs are expected to be executive positions, the largest proportion of workers employed will be in administration (clerks, supervisors, storekeeper, typist, etc), followed by technical (crane operator, vehicle drivers etc) and nontechnical positions (dockers, cleaners, etc.). Areas where rock will be sourced for the construction of the breakwater will be determined by the appointed contractor. However, people who live close to the quarry sites, land-based transport routes, and barge load-out points will experience some of the direct impacts of the Project. The income impact of quarrying will be largely attributed to contractors, providers of related services (such as transport), and workers. Those working in the quarrying industry are recognized as belonging to one of the most impoverished employment sectors in the country, due to low wages and discontinuous work. As such, this group will benefit substantially from any employment opportunities. As per the projected estimates for quarrying activities, the predicted opportunities of employment would vary from 4,000 to 12,000 per year depending on the contractor’s method of production either mechanized or traditional. Increased vessel traffic and other related initiatives outside the immediate scope of the Project, such as the development of a free trade zone will also create benefits. Benefits to import and export industries are likely to accrue in areas outside the project-affected area, due to overall improvements in the national economy from the growth in shipping operations facilitated by the Project. The potential efficiency gains of the Project will have an impact on export/import trade sectors and thereby will also offer significant benefits to low income earners of the economy. The Project will also increase export-oriented growth activities, which will in turn result in greater capital investment, greater employment, and increased employment of those living below the poverty line. C. Participation Process

Is there a stakeholder analysis? Yes No Is there a participation strategy? Yes No As part of the project preparation, consultations were held with primary and secondary stakeholders including people in the project-affected area (men and women), fisherfolk cooperatives, Ministry of Ports and Aviation, and other local administration departments. Issues related to the proposed port development and various activities involved in the construction and operation of the Project were discussed. The main objective was to ascertain community response to the Project and any negative impacts that the Project needs to mitigate. All those consulted had positive reactions to the Project and welcomed the benefits that development of the port would lead to, such as increased employment opportunities for the people living in the project area. D. Gender Development Strategy to maximize impacts on women:

2 People living in households with real per capita monthly total consumption expenditure below SLRs1,423 are

considered poor (the official poverty line).

56 Appendix 13

In Sri Lanka, according to the demographic survey of 1994, by the Department of Census and Statistics, about 97% of males and 87% of females are literate. The female labor force participation rate has been increasing, although unemployment among women is still higher than for men. In 2002, the labor force participation rate was 50.3%; about 50% of the labor force belonged to the 20–39 years age group. Among the employed, males in the 30–39 years age group and females in the 20–24 years age group reported the highest participation in the labor force. The Project will provide educated youth (men and women) equal opportunities to seek short- and long-term employment opportunities created under the Project. Those men and women supplying labor for quarrying-related activities would typically be those with low literacy rates and low incomes, with a higher proportion being women. Assuming the degree of mechanization does not affect the proportion of employees by gender, the Project is expected to provide additional employment opportunities for women. In general, the Project will provide employment opportunities for both men and women during project construction and operation, and in the quarrying sites. The Project will ensure that employment opportunities and rates of remuneration are determined without gender-based discrimination, according to the principles of equal remuneration for work of equal value. Has an output been prepared? Yes No E. Social Safeguards and other Social Risks

Item

Significant/

Not Significant/ None

Strategy to Address Issues

Plan Required

Resettlement

Significant

Not significant

None

The Project will not involve any land acquisition or resettlement. Project construction and operation activities will extend seaward from the south end of the existing Colombo Port and not require any additional land—either government or private. To link the existing port access road to the new harbor, three government/SLPA buildings will have to be demolished: two warehouses and an SLPA office. The warehouses are presently not used and will not be rebuilt. The SLPA office building will be partially affected and will be partially demolished. The work space of employees will be accommodated in other office buildings within the port area, and thus will not involve construction of a new building. The existing port access road will be used for transport of containers and other imported goods. None of the port access roads will be widened or improved, and thus will not lead to any resettlement impacts. Even after project construction and operation, the transport of containers and other imported goods will take place within the port-related activity zone and hence, will not displace any business establishments close to the port. With regard to specific effects associated with quarries, the quarry location will be identified by the contractor only during project implementation prior to the construction of the breakwater. Thus the Government will have to ensure that if any land acquisition and resettlement impacts are associated with quarrying of rocks appropriate mitigation measures will be formulated and implemented in compliance with ADB’s policy on Involuntary Resettlement (1995) and Policy on Indigenous Peoples (1998).

Full

Short

None

Affordability

Significant

Not significant

None

No affordability issues are foreseen Yes

No

Significant

No job losses will occur. The Project is expected to generate employment opportunities for people in the

Yes

Appendix 13 57

Labor Not significant

None

project-affected area during construction and operation. Men and women will be paid equally for equal work.

No

Indigenous Peoples

Significant

Not significant

None

The population of Sri Lanka comprises different population/ethnic groups. Based on Statistical Abstract 2003, Department of Census and Statistics, in the three CMR districts 77%–92% of the population are Singhalese, 1–10% Sri Lankan Tamils, 1–4% Indian Tamils, 2–8% Muslims, and the rest are either Burghers or Malays. The Project will not have any differential impact on the different population/ethnic groups. The communities of indigenous people known as Veddha are found mainly in the districts of Badulla, Anuradhapura, and Polonnaruwa, with smaller numbers in other provinces mainly in the east and north. No indigenous people are present in the project-affected area.

Yes

No

Other Risks and/or Vulnerabilities

Significant

Not significant

None

Based on the detailed engineering study and the environmental impact assessment report, the Project will be constructed entirely within the “no fishing” security zone so fish catch or extent of the fishing area available to fisherfolk will not be affected and thus livelihoods of the fishing community in the surrounding area will not be affected. If the existing security zone is increased to accommodate the Project and dredging activities affect the livelihood of the community during project implementation, the Ministry of Ports and Aviation will ensure that prior to construction the environmental monitoring plan addresses these concerns and develops appropriate measures to mitigate the risks.

Yes

No