Report and Recommendation of the Presidentto the Board of DirectorsProject Number: 39431February 2007Proposed LoanDemocrat...
CURRENCY EQUIVALENTS                            (as of 01 February 2007)                         Currency Unit     –      ...
Vice President     L. Jin, Operations 1Director General   K. Senga, South Asia Department, SARDDirector           K. Higuc...
CONTENTS                                                                                    PageLOAN AND PROJECT SUMMARY  ...
LOAN AND PROJECT SUMMARYBorrower              Democratic Socialist Republic of Sri LankaClassification        Targeting cl...
iiImpact and Outcome         The Project will promote economic growth by improving Sri                           Lanka’s c...
iiiImplementation         SLPA will be the Implementing Agency. A project implementationArrangements           unit will b...
ivRisks and Assumptions   As the implementation of this Project will be on a public-private                        partner...
v
2060a RM           vi
I.      THE PROPOSAL1.      I submit for your approval the following report and recommendation on a proposed loanto the De...
2market grew at 8% annually. The loss in market share accounted for the stagnation of overallcontainer traffic volume at C...
3B.        Analysis of Key Problems and Opportunities          1.       Challenges8.      Colombo Port lost market share o...
4have the potential to make Sri Lanka a distribution center for the South Asian region, a rolenormally centered on transsh...
5competition, i.e., using the existence of SAGT to spur greater JCT efficiency. This approach hassucceeded and the relevan...
6within 3 months of loan effectiveness. Once the committee is operational, all existing terminaloperators will be informed...
7           6.       Government Port Sector Policy20.      The Government policy for the ports sector in line with the Gov...
8construction, and other ancillary works. The concession bid for the first terminal will be carriedout in the first half o...
9component is a prerequisite for development of the Project. It has high economic returns. Thecontainer terminal component...
10communication or advice from ADB. The private sector component will be financed by thesuccessful terminal concession bid...
11        2.      Implementation Period31.    The Project will be implemented over 48 months, including preconstruction ac...
12breakwater construction is critical to enable the private concessionaire to carry out terminalconstruction on schedule. ...
13       9.         Project Review39.     A project inception mission will be fielded soon after loan effectiveness. There...
14$49 million by 2015. In addition transshipment traffic will generate direct net annual income toterminal operators amoun...
15about 1,614 poor urban settlements with about 77,612 families. The urban poor of Colomboinclude those engaged in informa...
16implementation prior to the construction of the breakwater. Thus the Government will have toensure that any land acquisi...
17E.     Risks51.      As implementation of this Project will be on a PPP basis with the public sectorimplementing the har...
1855.    The Government will ensure that adequate counterpart funds are made available to theProject when and in the amoun...
19properly. In case of unanticipated negative environmental impacts, the Government will causeSLPA (i) to report such impa...
20audit and investigation, and extend necessary assistance, including access to all relevant booksand records, as well as ...
Appendix 1      21                                 DESIGN AND MONITORING FRAMEWORK Design                          Perform...
Colombo port expansion project (2)
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  1. 1. Report and Recommendation of the Presidentto the Board of DirectorsProject Number: 39431February 2007Proposed LoanDemocratic Socialist Republic of Sri Lanka: ColomboPort Expansion Project
  2. 2. 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
  3. 3. Vice President L. Jin, Operations 1Director General K. Senga, South Asia Department, SARDDirector K. Higuchi, Transport and Communications, SARDTeam leader P. Dutt, Senior Transport Specialist, SARDTeam 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
  4. 4. CONTENTS PageLOAN AND PROJECT SUMMARY iMAPS vI. THE PROPOSAL 1II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 3III. 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 10IV. 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 17V. ASSURANCES 17 A. Specific Assurances 17 B. Conditions for Loan Effectiveness 20 C. Conditions for Harbor Infrastructure Works Implementation 20VI. RECOMMENDATION 20APPENDIXES1. Design and Monitoring Framework 212. Organization Chart of Sri Lanka Ports Authority 223. Sector Analysis of Colombo Port 234. 2005 Summary Financial Statement for Sri Lanka Ports Authority 275. External Assistance to Sri Lanka Ports Authority 286 Proposed Terms of Reference of the Advisory Committee on Port Competition 297. Detailed Description of Harbor Infrastructure Works Component and Cost Estimates 308. Implementation Arrangements 329. Implementation Schedule 3310. Indicative Contract Packages and Procurement Plan 3411. Outline Terms of Reference for Consulting Services 3612. Economic and Financial Analysis 4113. Summary Poverty Reduction and Social Strategy 54SUPPLEMENTARY APPENDIX (available upon request)Financial Management Assessment for Sri Lanka Ports Authority
  5. 5. LOAN AND PROJECT SUMMARYBorrower Democratic Socialist Republic of Sri LankaClassification 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 partnershipsEnvironment Category A. The summary environmental impact assessmentAssessment 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.
  6. 6. iiImpact 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 $49.7 million.Financing Plan Total Source ($ 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 The Government will make all proceeds from this loan available toTerms Sri Lanka Ports Authority (SLPA) under the same terms and conditions as the ADB loan.Period of Utilization 30 April 2011Estimated Project 31 October 2010 for both the public and private sectorCompletion Date components.Executing Agency Ministry of Ports and Aviation
  7. 7. iiiImplementation SLPA will be the Implementing Agency. A project implementationArrangements 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 ADBs Guidelines on the Use of Consultants (2006, as amended from time to time).Project Benefits and The Project will benefit Sri Lankan exporters by enhancing theirBeneficiaries 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.
  8. 8. ivRisks 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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  10. 10. 2060a RM vi
  11. 11. I. THE PROPOSAL1. I submit for your approval the following report and recommendation on a proposed loanto the Democratic Socialist Republic of Sri Lanka for the Colombo Port Expansion Project. Thedesign and monitoring framework is in Appendix 1. II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIESA. Performance Indicators and Analysis2. Sri Lanka’s real gross domestic product (GDP) growth in the 1980s and 1990s averagedabout 5%, and increased to 6.1% in 2005. However poverty continues to be a major concern ofthe Government as 22% of the population is living below the poverty line. The Government’sobjective is to increase the rate of economic growth to around 8% per annum to generate theresources needed for sustained poverty reduction, achieve its social and economic goals, andreduce regional disparities. Medium-term prospects hinge on Government plans to fostereconomic growth by significantly raising foreign direct investment as well as domestic public andprivate 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 keyfactor in improving the country’s competitiveness and attracting investment. It can also be afactor in encouraging the establishment of other value-added industries since Colombo Port isideally situated to be the transshipment center for South Asia. The ports sector in Sri Lanka isdominated by Colombo Port. It is the only port equipped to handle container traffic and handles95% of Sri Lanka’s total international trade. It also serves as a transshipment hub port for SouthAsia; 70% of Colombo’s container volume consists of transshipment traffic to and from theIndian 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 offand stagnated between 1997 and 2000 with an annual average of 1.7 million TEU. Growth thenincreased, and in 2006 Colombo Port handled 3.08 million TEU. One of the main reasons forthe stagnation and slow increase in growth is Colombo Port’s lack of competitiveness with othermajor transshipment ports established to cater for ISC traffic.3. Colombo Port is owned by the Sri Lanka Ports Authority (SLPA), a statutory body underthe Ministry of Ports and Aviation (MPA). The current SLPA organization structure is inAppendix 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 containerfacilities are Unity Container Terminal with a capacity of 300,000 TEU and Bandaranaike Quaywith a potential capacity of 200,000 TEU. In addition, a private sector company, South AsiaGateway 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 Volume4. In 2005, container traffic volume at JCT accounted for 64% of the total Colombo Portcontainer volume, and SAGT for 36%. JCT accounted for more than 90% of the SLPA revenuesand profits, making container traffic the major revenue earner for SLPA. About 70% ofcontainers handled in Colombo Port are transshipment containers of which 75% are for the ISCmarket and 25% for the West African market. Between 1998 and 2002, the transshipment shareof Colombo Port for total ISC cargoes declined from 52% to 45% even as the ISC transshipment1 ADB. 2006. Asian Development Outlook 2006. Manila.
  12. 12. 2market grew at 8% annually. The loss in market share accounted for the stagnation of overallcontainer traffic volume at Colombo Port during this period. This loss resulted from acombination of factors, some beyond the control of Colombo Port, while others are internalfactors including lack of sufficient capacity. Enhancement of operational efficiency at all itscontainer terminals and investment in port infrastructure is urgently needed to increaseColombo Port’s container-handling capacity and alleviate its depth infrastructure constraints toreverse this trend. Remaining a transshipment hub port will not only bring more foreignexchange to the country, but will also develop supporting industries such as ship chandlery, shiprepair, and bunkering activities.5. Direct calls at Indian ports started around 1997, when traffic volume reached thethreshold at which it became economic at Nhava Sheva port in India (until then India had beenserved by feeders). The trend of increased direct calls has since accelerated as a result ofimprovements in port efficiency, which followed the construction of a private terminal at NhavaSheva in 1999. New ports started to compete for Colombo’s transshipment traffic. Before 2000the competition came from two major ports: Dubai and Singapore; subsequently three additionalcompetitors emerged i.e. Salalah in Oman, and Port Klang and Tanjung Pelepas both inMalaysia. Internal factors affecting container traffic volume include the delay of construction ofnew capacity until 2001, resulting in congestion during 1996–2000. JCT operation had nointraport 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 withshipping lines. This was a major disadvantage, as the competing ports such as Singapore andPort 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 introductionof competition between the terminals promoted an overall increase in efficiency.at ColomboPort. 2. Operational Performance6. The overall container growth in Colombo Port increased by 13.3% in 2004 and 10.5% in2005. 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 craneper 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 13.8hours in 2005; and average turnaround time for container ships decreased from 23.1 hours in2001 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 bestpractice, Singapore Port handles 17 million TEU with only 5,700 employees. 3. Financial Performance7. SLPA consistently made operating profits during 2001–2005: SLRs5.26 billion in 2001and SLRs7.4 billion in 2005. Earnings after tax in 2005 were SLRs10.1 billion. Colombo Portaccounts 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 tointernational accounting standards. SLPA accounts are audited by the Auditor General of SriLanka and then presented in Parliament. The 2005 summary financial statement for SLPA isshown in Appendix 4.
  13. 13. 3B. Analysis of Key Problems and Opportunities 1. Challenges8. Colombo Port lost market share of the ISC transshipment market because thefundamentals of the market changed and Colombo Port did not adapt to the change. ColomboPort faces increased competition from other transshipment ports. The dynamics of the size ofcontainer ships means that the trend is toward larger container ships. Use of larger ships in turnmeans that established transshipment ports now have a wider hinterland that they caneffectively serve. Hence the use of larger containerships means that Colombo Port now has tocompete 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 areowned in whole or in part by established port operators and shipping lines, and are able toprovide higher productivity and faster ship turnaround times. Thus they have a built-inadvantage when competing for the ISC market.2 Colombo Port’s efficiency and locational edgein the ISC transshipment market has therefore eroded as new players in South-East Asia andthe Gulf region have used more modern institutional structures and equipment to reduce shipwaiting and turnaround times.9. Colombo Port is not able to offer the additional operating capacity required to competefor the ISC transshipment market. The total current transshipment market is 6 million TEU andis forecast to grow at 8% annually. The combined potential container capacity of all the facilitiesat Colombo Port is 4 million TEU. As 3.08 million TEU were handled in 2006, and as Sri Lanka’sown exports and imports grow, Colombo Port is expected to reach its full current capacity by2010. It will thus reach its limit in the volume of transshipment traffic it can handle. This willmake the port unattractive to shipping lines that require guaranteed capacity before they decideto make a port a transshipment hub.10. Colombo Port has a depth of 15 meters (m). This means that it cannot berth the latestgeneration 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 trendis toward larger container vessels. Major shipping lines have already launched 11,000 TEUvessels for the Asia–Europe route, and in the next 10 years major container lines could possiblydeploy vessels with 13,000 TEU carrying capacity. All hub ports therefore need to upgrade theirinfrastructure to handle these larger vessels or see their competitive position eroded.11. The future performance of Colombo Port depends on how it addresses the institutionaland infrastructure constraints that it faces to complement its excellent geographic location andto ensure that it remains a major transshipment hub port for the ISC region. This means that ithas 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, andaddress its capacity and depth infrastructure constraints. International experience in the portssector shows that the most appropriate institutional structure for port efficiency is the landlordport model, whereby the port authority is responsible for the common facilities while terminaloperations are carried out by a terminal operating company. By increasing its capacity andefficiency, Colombo Port will remain a hub port, bring more foreign exchange to the country, anddevelop supporting industries such as ship chandlery, ship repair, and bunkering. It will also2 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.
  14. 14. 4have the potential to make Sri Lanka a distribution center for the South Asian region, a rolenormally centered on transshipment hubs. Being a transshipment hub will reduce shipping costsfor Sri Lanka’s own exports and imports, and thus make the country a more competitive locationfor foreign and domestic investment. 2. External Assistance to the Sector12. Modern development of Colombo Port started in 1980 with the construction of the firstphase of JCT using funding from the Overseas Economic Cooperation Fund, now the JapanBank for International Cooperation (JBIC). A series of JBIC loans through the 1980s and 1990sfunded enlargement of JCT to its present four berths. In 2000, JBIC provided a loan to upgradeJCT’s computer systems. JBIC is currently providing a $124 million loan to finance theexpansion of Galle Port. The World Bank provided assistance to the ports sector under its PortEfficiency Project, which commenced in 1997. This funded studies into the legal, regulatory, andmanagement aspects of both the ports sector as a whole and Colombo Port in particular. Thisproject failed in 1999 due to lack of agreement between the World Bank and the Government onsector restructuring. ADB’s assistance to the Sri Lanka ports sector includes loan and equityinvestment in SAGT for private sector development and operation of the Queen Elizabeth Quayin Colombo Port.3 ADB also provided technical assistance in 1999 to assist the Government inexamining the feasibility of expanding Colombo Port.413. Subsequently, ADB provided a loan in 2001 to (i) address sector policy, and institutionaland regulatory issues; and implement measures to improve the efficiency of the existing port, inparticular JCT; and (ii) carry out the preparatory work for the Colombo Port Expansion Project.5The main services consultant engaged for this project produced an action plan to increase JCTefficiency, a business plan analyzing the demand forecasts and economic and financial viabilityof expanding Colombo Port, and a detailed engineering report on the technical optionsavailable. These were reviewed and accepted by a panel of experts recruited separately asindividual consultants under this same loan to assess the commercial, operational, andtechnical viability of the main services consultants’ proposals. The terms of reference for themain services consultants require them to prepare detailed construction tender documents andbid concession documents, and provide technical and bid advisory services to the Governmentfor the Project. A summary of past and ongoing external assistance to the ports sector in SriLanka is given in Appendix 5. 3. Lessons Learned14. The 2001 ADB loan included two significant policy covenants. The first covenant was forJCT to be transformed into a corporate entity wholly owned by the Government. The objective ofthis covenant was to increase overall port efficiency through increasing JCT efficiency bymaking the landlord port model the dominant model in Colombo Port. However the Governmenthas not been able to corporatize JCT and thus has been unable to implement the landlord portmodel in Colombo Port. The Government instead decided to increase JCT efficiency through3 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).
  15. 15. 5competition, i.e., using the existence of SAGT to spur greater JCT efficiency. This approach hassucceeded and the relevant efficiency indicators for JCT have improved since 2001. Averageturnaround time for container ships improved by 30% from 23.1 hours in 2001 to 16 hours in2005; average waiting time per ship improved by 77% from 3.6 hours in 2001 to 0.8 hours in2005. The introduction of a private sector competitor—SAGT—has therefore helped to increaseoperational efficiency of the SLPA-run JCT until both JCT and SAGT now have similar levels ofoperational crane productivity at 23 moves per crane per hour. Although efficiency increase is anecessary condition it is not a sufficient condition to result in an increase in ISC transshipmentmarket share. Instead increases in efficiency need to be supplemented by an increase in theavailable capacity to cater for changing market needs. This is shown by the fact that althoughJCT efficiency increased and the absolute volumes handled by Colombo Port increased since2003, it did not help to increase the overall market share of Colombo Port in the transshipmentmarket. Colombo Port faces depth and capacity constraints that place it at a disadvantage in themarket. Hence both efficiency levels and infrastructure capacity at the required depths atColombo Port need to be further increased. As the capacity of JCT and SAGT cannot beincreased, a greenfield site needs to be developed as part of the Project so that Colombo Portcan continue to offer major shipping lines guaranteed capacity and be able to take the largecontainer ships that will be introduced by major shipping lines in the near future. Constructingadditional terminals will also help to increase overall port efficiency through additionalcompetition 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 throughcorporatization of JCT did not succeed, ADB carried out intensive policy dialogue with theGovernment to use the public-private partnership (PPP) approach as an alternative methodallowing the landlord port model to become the dominant model in Colombo Port. TheGovernment 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 publicsector 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, andeast terminals. In the first phase only the south terminal will be developed. The prospectiveterminal operator will be a corporate entity selected through open competitive bidding to ensurethat intraport competition between the different terminals is enhanced and thus improve theoverall efficiency of Colombo Port. Open competitive bidding will also be used for the secondterminal to be built as part of the Project, tentatively in 2015. The third terminal to be developedin 2024 will also follow the PPP modality. This Project will therefore make the landlord portmodel 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 reformthe regulatory structure for the ports sector through legislation, especially to curb anyanticompetitive behavior on the part of established operators. The Government’s long-termobjective in this regard is to enact a Port Competition Act. Prior experience with both the WorldBank and the ADB assistance indicate that changing the regulatory structure by legislationneeds 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 11October 2006 approved the establishment of an advisory committee to consider any grievancesor complaints that current and future container terminal operators may have regarding faircompetition issues. The committee will be chaired by the Secretary, MPA and membership willinclude the person holding the post of Director General of the Public Utilities Commission. TheGovernment has agreed that the committee will be operational within 3 months of loaneffectiveness. The proposed terms of reference, composition, and draft procedures for thecommittee are given in Appendix 6. Rules and procedures of the committee will be finalized
  16. 16. 6within 3 months of loan effectiveness. Once the committee is operational, all existing terminaloperators will be informed of its role and reference to the advisory committee will be included inconcession agreements to be signed with future terminal operators. 4. Opportunities17. Even though the market share of Colombo Port for the ISC transshipment market hasdeclined, in absolute terms the volume has increased and Colombo Port has the potential tofurther increase both its volume and its market share of transshipment traffic. Colombo Port hasseveral natural advantages: It has a well-protected deepwater harbor and is located near theeast–west trunk routes between the Asia-Pacific, Europe, and the United States East Coastregions. It is thus the closest transshipment port to the huge, rapidly expanding markets of theISC. For Europe-bound cargo for the east and south segments of the ISC, using Colombo Portas a hub port is more advantageous than using Southeast Asian ports because of the shorterdistance to Colombo Port. Extensive market studies were conducted as part of the businessplan for the Project taking into account port development plans in competing ports. Thesestudies, which were validated by the independent panel of experts advising the Government onthe 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 tariffswithout external control, a revival of Colombo Port’s share of regional transshipment traffic isexpected—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 opportunityfor Colombo Port. Domestic container volume handled by Colombo Port has been a fewpercentage points higher than the GDP growth rate. Domestic container traffic is projected torise by 9.5% annually to 2010 and account for approximately 30% of the total container trafficwith transshipment providing the balance. 5. ADB Strategy19. ADB’s strategy for the ports sector is based on the fact that an efficient port system is akey factor in improving a country’s competitiveness and attracting investment. As Sri Lanka willnot be able to generate sufficient domestic cargo to attract mainline vessels, becoming atransshipment hub port would allow Colombo Port to attract such vessels. As they are moreeconomical they allow Sri Lanka’s own imports and exports to obtain lower freight charges thanwould otherwise be possible by avoiding the need to use feeder vessels. Enabling ColomboPort to maintain its transshipment port status will also bring additional foreign exchange to thecountry. The larger volume of ships calling at Colombo Port because of its transshipment hubstatus will encourage the growth of ancillary industries, e.g., ship chandlery and bunkering,which will increase economic activities and generate employment opportunities that otherwisewould not exist. Maintaining Colombo Port’s transshipment hub port status will allow Sri Lankato act as a distribution and logistics hub for the South Asian region, which if realized will againgenerate economic activities and employment opportunities. ADB’s strategy is also toencourage PPP in the ports sector as part of efforts to implement the landlord port model toincrease efficiency.
  17. 17. 7 6. Government Port Sector Policy20. The Government policy for the ports sector in line with the Government’s MahindaChintana national policy6, sets out the country’s vision for the ports sector as follows: (i) developthe main ports of the country to facilitate increasing export and import trade associated withrapid economic development of the country as well as the region by taking advantage of theliberalization and globalization process, (ii) decongest Colombo Port by constructing South Portin Colombo, Galle and Hambantota Ports, (iii) develop medium-scale ports in identifiedprovinces such as South, East, and North to divert increasing volumes of domestic bulk freighttransport from road to sea transport; (iv) encourage alternative source of funding for newinvestment in port related infrastructure development, (vi) operate ports as commercial entitywithout Exchequer support, and (vii) encourage public-private partnership investment for newinvestment in the port sector. While continuing the state ownership of existing ports, theGovernment’s strategy is to increase efficiency of existing ports, operate ports as commercialentity and establish container terminals as public private partnership projects. This Project willbe the first transport PPP in Sri Lanka. ADB’s proposed loan is in line with Government policy. III. THE PROPOSED PROJECTA. Impact and Outcome21. The Project will promote economic growth by improving Sri Lanka’s competitiveness inthe ports sector by expanding Colombo Port’s capacity using PPP to maintain its status as aregional transshipment hub port. Container-handling capacity will be increased from 3.3 millionTEU 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 ininternational trade via lower costs and faster delivery times. Export container traffic handled byColombo Port is expected to increase by 9.5% per annum starting in 2011. The additionalcapacity will enable Colombo Port to increase its ISC transshipment market share from 23% in2002 to 30% by 2011. Transshipment volumes handled by Colombo Port are expected toincrease by 8% per annum starting in 2011. Sri Lanka will thus be able to generate additionalincome from transshipment. The direct payments generated by transshipment traffic alone areexpected 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. Outputs22. The Project will expand the container-handling capacity of Colombo Port by 7.2 millionTEU in three increments of 2.4 million TEU each. The major project elements are dredging anapproach channel and inner harbor basin west of the existing harbor, and constructing abreakwater 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 anew marine operations center, relocation of an existing submarine oil pipeline near the entranceto the new terminal, provision of navigational aids, and construction of shore utilities includingan electrical power plant, water mains and storage tanks and a sewage treatment plant. TheProject will be developed on a PPP basis. The terminals will be constructed by operatorschosen through open competitive bidding under a build-operate-transfer (BOT) concessionagreement; SLPA will carry out the harbor infrastructure works, i.e., dredging, breakwater6 Ministry of Finance and Planning. 2006. Mahinda Chintana: Vision for a New Sri Lanka. Colombo.
  18. 18. 8construction, and other ancillary works. The concession bid for the first terminal will be carriedout in the first half of 2007. 1. Harbor Infrastructure Works Component23. The harbor infrastructure works component is designed to accommodate vessels with anoverall length of 400 m, beam of 55 m, and draft of 16 m. It will be created by constructing amajor 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), whichwill support three new terminals each with a quay length of 1,200 m and land area of 62 ha. Thebasin will be dredged to 18 m with provision to deepen it to 23 m should a new generation ofdeep-drafted vessels come online. The depth of 18m is sufficient to cater for 11,000 TEUvessels. The existing submarine pipeline to the main crude oil single-point mooring will belowered where it crosses the new dredged areas.24. Preliminary studies in accordance with the recommendations of the InternationalNavigation Association (PIANC) were carried out to size the channels. The outer approachchannel has been sized for two-way traffic as it is common to both the existing harbor and theProject. 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 vesseloperations in the Project and the existing port are safely and efficiently carried out, a newmarine operations center is proposed near the entrance to the new terminals. This will includefacilities for berthing tugs and other harbor craft, a lookout station, and a control room for a newvessel traffic management system serving the whole port. In addition this component will includeconstruction of utilities such as an electrical power plant, water main and storage tanks, andsewage treatment plant. ADB’s loan will finance the construction of this component. A detaileddescription of the harbor infrastructure works component and cost estimates is given inAppendix 7. 2. Container Terminal Component25. 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 theyard operated by 40 rubber-tired gantry cranes. The area behind the berths will have a width of476 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-tiredgantry cranes, the land area is sufficient to accommodate any yard handling method preferredby the concessionaire. The container terminal will be developed by the private sector underBOT concession agreement. The winning concessionaire will be selected using opencompetitive bidding. Open competitive bidding will also be used to select the operator for thenext terminal. SLPA itself will not be allowed to bid but a corporate entity registered by the SLPAand/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 concessioncompanies will not exceed 15%.C. Special Features26. The Project is developed as a PPP with the public sector implementing the harborinfrastructure works component, while the private sector implements the container terminalcomponent in line with the provisions of the SLPA Act. The harbor infrastructure works
  19. 19. 9component is a prerequisite for development of the Project. It has high economic returns. Thecontainer terminal component however will generate high financial returns and thus is being leftto the private sector to develop and operate under a BOT concession. Operational andmanagerial control will rest with the operator. The Project will generate opportunities for ADB’sPrivate Sector Operations Department as an equity partner and/or as a lender for the terminalconcession company.D. Project Investment Plan27. Phase I of the Project involves the construction of the harbor infrastructure works andone container terminal. The project investment cost for Phase I is $781 million, with the publicinvestment component estimated at $480 million, including taxes and duties of $49.7 million anda 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 Plan28. The Government has requested a loan of $300,000,000 from ADB’s ordinary capitalresources to help finance the public sector component of the Project. The loan will have a 25-year term, including a grace period of 5 years, an interest rate determined in accordance withADB’s London interbank offered rate (LIBOR)-based lending facility, a commitment charge of0.35% per annum, and such other terms and conditions set forth in the draft loan agreement.The Government has provided ADB with (i) the reasons for its decision to borrow under ADB’sLIBOR-based lending facility on the basis of these terms and conditions, and (ii) an undertakingthat these choices were its own independent decision and not made in reliance on any
  20. 20. 10communication or advice from ADB. The private sector component will be financed by thesuccessful terminal concession bidder. Table 2 shows the financing plan.29. The Government will onlend the proceeds of the ADB loan to SLPA on the same termsand conditions as the ADB loan. For this purpose the Government will enter into a subsidiaryloan agreement with SLPA. The Government has also given assurance that the necessarycounterpart financing for the Project will be available. Table 2: Financing Plan ($ 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 Management30. 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 withqualified staff having expertise in contract management, environmental monitoring, planning,and accounting. The PIU’s responsibilities will include (i) planning and scheduling of projectactivities; (ii) supervision and monitoring of the project work program and project performance;(iii) administration of procurement activities; (iv) bookkeeping and maintenance of projectaccounts, and preparation of liquidation/claim reports; (v) preparation and submission of variousreports 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 inaccordance with the relevant Government procedures within 1 month of loan effectiveness. Theproject director will report to the Chairman, SLPA. An interministerial project steering committee,chaired by the MPA secretary and consisting of representatives from concerned governmentagencies, including Ministry of Finance and Planning, External Resources Department andNational Planning Department will be established to oversee, monitor, coordinate, and providethe necessary policy guidance related to project implementation. This committee will meetwhenever necessary but not less than once every six months. The Chairman, SLPA will reportto the interministerial steering committee on a regular basis. The implementation arrangementsare shown in Appendix 8. SLPA as an institution has the necessary systems, personnel,accounting policies and procedures, reporting and monitoring mechanisms, and auditingprocedures to efficiently carry out financial management for the Project. A financialmanagement assessment of SLPA is provided in the Supplementary Appendix. SLPA hasimplemented major foreign-aided capital projects and is observed to have the capacity toefficiently administer loans and implement projects. It has also implemented one ADB loan andtherefore is familiar with ADB procedures.
  21. 21. 11 2. Implementation Period31. The Project will be implemented over 48 months, including preconstruction activities.The scheduled completion date for the Project is October 2010. The harbor infrastructure workscomponent will be completed by 31 October 2010. This takes into account advanceprocurement action for harbor infrastructure works construction. The proposed implementationschedule is in Appendix 9. 3. Procurement32. The project director will be responsible for all procurement activities. All contracts will beprocured in accordance with ADBs Procurement Guidelines (2006, as amended from time totime). One works contract will cover all harbor infrastructure works, i.e., dredging andreclamation works, breakwater construction, construction of all other ancillary civil works, andsupply and installation of navigational aids, which will be procured through internationalcompetitive bidding procedures with postqualification. Bidders will be given 90 days to prepareand submit bids. Indicative contract packages for the Project including consulting services areshown in the procurement plan (Appendix 10). On 30 October 2006, ADB approved advancecontracting for the harbor infrastructure works. The Government was informed that ADB’sapproval of advance contracting does not commit ADB to subsequently approve the Project orto finance the procurement costs. 4. Consulting Services33. International and national consulting services will assist SLPA in implementing theProject. The detailed design of the works is being prepared by the consultants with the ColomboPort Efficiency and Expansion Project (footnote 5). Under the proposed Project, consultants willbe required for construction supervision including monitoring of the environmental impacts of theworks. The consultants financed under the loan will be recruited in accordance with ADB’sGuidelines on the Use of Consultants (2006, as amended from time to time). The single contractpackage will include about 150 person-months of international and 1,250 person-months ofnational consulting inputs. Outline terms of reference for the consulting services are in Appendix11. The consultants will be recruited using single-source selection procedures in accordancewith 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 andimplementation requirements as breakwater design is a highly specialized technical aspect. Theappointment of the detailed design consultants to undertake construction supervision wasreviewed by the Maritime Structures and Port Engineering member of the panel of experts, andfound 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 factorsestablished during the detailed design phase. The detailed design is the result of extensiveengineering work, underwater geotechnical investigations and studies, numerical wavemodeling, physical wave modeling, current modeling, three-dimensional physical modeling, andtwo-dimensional flume testing with model testing of the breakwater design. Given the PPPnature of the Project, the issue of liability is particularly critical. Sufficient progress in the partialconstruction of the breakwater is necessary before the selected private sector concessionairecan start constructing the terminal. Hence if delays or defects in the breakwater constructioncause delays in the private sector’s terminal construction schedule, the private sector party willhold SLPA liable and claim damages for the delay. Moreover, since the construction season forthe breakwater construction is limited to the months of October–May, timely progress of the
  22. 22. 12breakwater construction is critical to enable the private concessionaire to carry out terminalconstruction on schedule. 5. Anticorruption Policy35. ADB’s policy on Anticorruption (1998, as amended to date), was explained to anddiscussed with the Government, MPA, and SLPA. Consistent with its commitment to goodgovernance, accountability, and transparency, ADB reserves the right to investigate, directly orthrough its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to theProject. To support these efforts, relevant provisions of ADB’s policy on Anticorruption areincluded in the loan agreements and the bidding documents for the Project. In particular, allcontracts financed by ADB in connection with the Project will include provisions specifying theright 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 Arrangements36. 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 Governmentand ADB. For works and consulting services, loan funds will be disbursed using ADB’s directpayment procedures from ADB to the consultants and contractors against withdrawalapplications submitted by SLPA to ADB. 7. Accounting, Auditing, and Reporting37. SLPA will submit detailed progress reports on a quarterly basis. SLPA will maintainseparate records and accounts adequate to identify the goods and services financed from loanproceeds, financing resources received, expenditures incurred for the Project, and local funds.The accounts will be set up in accordance with sound accounting principles. Consolidatedproject accounts and related financial statements will be audited annually by recognizedauditors acceptable to ADB. The audited reports and related financial statements will besubmitted 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 andaccounting requirements, which will be followed up in regular reviews by ADB. 8. Project Performance Monitoring and Evaluation38. Within 6 months of loan effectiveness, the Government, through SLPA, will develop aproject performance management system, including baseline performance monitoring andsystematic project performance monitoring. SLPA will carry out surveys (i) at the start of projectimplementation to establish baseline data, (ii) at midterm review, (iii) at the time of projectcompletion, and (iv) not later than 6 months after project completion to evaluate the projectbenefits. Data to be compiled for project performance monitoring and evaluation will be in aformat developed in consultation with ADB. Key indicators will be proposed by SLPA anddeveloped in consultation with ADB. A project completion report will be submitted within 3months of physical completion of the Project, providing detailed evaluation of the progress ofimplementation, costs, consultant performance, social and economic impact, and other detailsas requested by ADB.
  23. 23. 13 9. Project Review39. A project inception mission will be fielded soon after loan effectiveness. Thereafter, ADBand the Government will conduct regular reviews annually or more frequently as required foreffective project implementation. In 2009, a midterm review by the Government and ADB willconsider the Project’s progress and agree on any changes in scope or implementation requiredto achieve the Project’s objectives. SLPA will monitor project implementation and keep ADBinformed of any significant deviations that may result in the schedule not being met. The projectcompletion report should be prepared within 3 months after the physical completion of theProject civil works component. IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKSA. Benefits40. The Project will help consolidate the position of Colombo Port as a transshipment hubport for the South Asian region by providing sufficient container-handling capacity and sufficientdepth 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 threeterminals 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 ininternational trade via lower costs and faster delivery, in addition to generating additionalincome from transshipment. Taking into account SLPA’s strategy to provide infrastructure(breakwaters, channels, etc.) that can accommodate three terminals, the economic and financialanalyses are based on the scenario that three terminals will be sequentially developed asnecessary to meet forecasted demand.B. Economic and Financial Analyses 1. Economic Internal Rate of Return41. The economic evaluation compares the economic benefits and costs of the Project fromthe viewpoint of the national economy. The main consequence for the economy if the Project isnot implemented would be the loss of the frequent, fast, direct shipping services used byexporters and importers. Without investment in the Project, Colombo Port would lose itstransshipment traffic; and if the port no longer operates as a transshipment hub port, it wouldsoon lose its direct calls on trunk-line routes. Local traffic is not high enough to attract directcalls by trunk-line ships. Colombo Port would eventually become a feeder port, served by acombination of feeder ships and mainline services with relatively long transit times for the portswith lower traffic volumes. The consequences for Sri Lanka’s current and future exports wouldbe serious. The Project will benefit Sri Lankan exporters by enhancing their competitiveness ininternational markets through lower freight costs and faster delivery times for time-sensitiveexports 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 withtrunk route services (at least 20% are estimated to switch to feeders); (ii) longer transit timesand delays, which are injurious to export markets, especially for textiles, but also for newexports 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 inannual savings of $82 million by 2015, and faster delivery times will create annual savings of
  24. 24. 14$49 million by 2015. In addition transshipment traffic will generate direct net annual income toterminal operators amounting to $77 million by 2015. The benefits of the Project are theavoidance of these costs to the economy. The values assigned to the benefits are comparedwith the total investment cost of $1.3 billion for the Project to 2034. The economic internal rateof return is estimated at 17.8%. These assumptions do not include the value to be placed onfast, direct shipping services by investors considering alternative countries as locations forsetting up new manufacturing or distribution centers. It also does not include loss ofinternational investors, who will include frequent, direct shipping services on their checklist ofpreconditions for locating in a country. Thus the economic analysis is conservative. Sensitivityand risk analyses indicate that the economic internal rate of return is robust under mostconditions. The full economic and financial analyses are given in Appendix 12. 2. Financial Internal Rate of Return43. The financial analysis assesses the financial sustainability of the harbor infrastructureworks component. SLPA incurs the capital investment, and maintenance and repair costs of thiscomponent. SLPA’s income stream arising from royalties, lease cost, port entry dues, harbortonnage dues, etc. was calculated using the forecasted demand for the Project at rates currentlybeing paid by SAGT, the existing privately operated terminal in Colombo Port. The financialinternal rate of return is approximately 11.5%, which exceeds the weighted average cost ofcapital of 4.4%. The details are given in Appendix 12.44. Financial analysis for the first terminal operator was also conducted to assess theviability of private sector development under a BOT concession (Appendix 12). A terminaloperator incurs the capital investment cost of terminal construction and equipment and terminaloperation cost, and pays concession fees to SLPA, while earning revenue from containerhandling. The financial internal rate of return is approximately 16.3%, which is in line withcomparable new terminal developments internationally.C. Social Impact 1. Poverty and Social Dimensions45. The primary area of influence of the Project includes Colombo City and the ColomboMetropolitan Region (CMR), comprising Colombo, Gampaha and Kalutara districts. CMR has anestimated 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 isobserved to be greatest in the rural sector (20.8%), followed by the urban sector (6.2%), and theestate sector at 4.3%. Across the industry subsectors, the highest poverty is reported in miningand quarrying industries; employment in quarrying is characterized by low pay as well as itstemporary and irregular nature, making this one of the most impoverished industry groups in SriLanka. As per 1996 data, the incidence of poverty among those engaged in mining andquarrying was 41.5%. The next highest incidence of poverty was in agriculture at 28.4%. As perDepartment of Census and Statistics (2004), the percentage of poor households living below theofficial 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 islocated records the lowest incidence of poverty in absolute numbers, it accounts for the largestproportion of the total poor. A closer look at the poverty profile of the city of Colombo reveals7 People living in households with real per capita monthly total consumption expenditure below SLRs1,423 are considered poor (the official poverty line).
  25. 25. 15about 1,614 poor urban settlements with about 77,612 families. The urban poor of Colomboinclude 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-costhousing in the northern and central parts of the city. Lack of land ownership, poor access todrinking water, poor sanitation facilities, and lack of a regular source of income are a few of themain factors causing poverty.46. Major positive social impacts of the Project are anticipated through the creation of directand indirect employment opportunities during project construction and operation. Jobs duringconstruction are projected to total 1,950, including 300 for construction of the breakwater and550 for staged construction of each of the three terminals. During the operation phase, a total of3,870 permanent jobs are estimated to be created after the breakwater is complete and thethree terminals are commissioned. Thus the additional jobs created are expected to besignificant. 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 thebreakwater and three terminals. People who live close to the quarry sites, land-based transportroutes, 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 relatedservices (such as transport), and workers. Workers engaged in quarrying-related activities havetraditionally come from unskilled and poor sectors of the community. According to the projectedestimates for quarrying activities, the predicted opportunities of employment will vary from 4,000to 12,000 per year depending on the contractor’s method of production, i.e., mechanized ortraditional. Benefits will also result from increased vessel traffic and other related initiativesoutside 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-affectedarea, due to overall improvements in the national economy from the growth in shippingoperations facilitated by the Project. Therefore the Project will provide a source of income andnew 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 theunemployed, low-income earners, and the impoverished. This will lead to poverty reduction. Asummary poverty reduction and social strategy is presented in Appendix 13. 2. Resettlement47. The Project comprises construction of a new outer basin enclosed by a breakwater andserved by a new navigation channel. Material dredged from the channel will be used inreclamation to provide new container berths with associated infrastructure, buildings, andoperation facilities. No land acquisition or negative resettlement impacts are associated with theProject. Construction and operation activities will extend seaward from the south end of theexisting Colombo Port. Therefore, no additional land will be required by either the Governmentor the private sector. To link the existing port access road to the new harbor, three buildings willbe demolished: two government warehouses and one SLPA office. The warehouses arepresently not used and will not be rebuilt. The SLPA office building will be partially affected andthus will be partially demolished. The work space of employees will be accommodated in otheroffice buildings within the port area, and thus not involve construction of a new building. Theexisting 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 berequired. Furthermore, even after the development and operation of the Project, the transport ofcontainers and other imported goods within the port-related activity zone will not displace anybusiness establishments close to the port. With regard to specific effects associated withquarries, the quarry location will be identified by the contractor only during project
  26. 26. 16implementation prior to the construction of the breakwater. Thus the Government will have toensure that any land acquisition and resettlement impact associated with quarrying of rocks willrequire the formulation and implementation of appropriate mitigation measures in compliancewith ADB’s policy on Involuntary Resettlement (1995) and Policy on Indigenous Peoples (1998).D. Environmental Impact48. 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 iscategorized 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 ActNo. 47 (1980) as amended. Therefore an environmental impact assessment (EIA) wasprepared. Since the Project is located within the jurisdiction of the Coast ConservationDepartment (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. TheEIA was approved by CCD on 12 December 2005. The EIA and environmental managementplan (EMP), in principle, cover all the requirements set out in ADB’s Environmental AssessmentGuidelines. The EIA was carried out from January 2003 to April 2005. After receiving CCDapproval 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 publicthrough ADB’s website on 12 July 2006.49. The EIA examined potential environmental impacts associated with the construction andoperation of the Project. The EIA shows that environmental impacts will mostly relate todredging and reclamation works. The impacts include (i) increased turbidity; (ii) geotechnicalstability; (iii) siltation; (iv) change in current pattern; (v) sediment transport; (vi) change inadjacent 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 theimpacts are predicted to be insignificant, continuous monitoring especially during constructionwill 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 fishingharbor, adjoining SLPA port limits. The EIA does not predict any impacts to the livelihood offisherfolk; the modeling studies for physical impacts indicate that the construction works will notaffect the livelihood of the fisherfolk living near the Modera fish harbor. However, monitoring isneeded to ensure that any unexpected impacts are redressed in a timely manner. The EMP andenvironmental monitoring plan will provide guidance to minimize potential adverseenvironmental 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 tocommencement of the construction work. Adequate funding has been allocated to implementthese plans. The EMP and monitoring plan emphasize the need to establish a sustainableinstitutional mechanism to ensure that these plans are properly implemented. The PIU’senvironmental engineering and coastal engineering sections, as well as the environmentalmonitoring committee will be responsible for implementing these plans.50. On the basis of the analysis, no major insurmountable environmental impacts areassociated with the construction and operation of the Project with the assumption that therecommendations for the mitigation measures are implemented. Therefore, environmentalmonitoring should be carried out to ensure that the EMP is implemented and any unforeseenimpacts are managed and mitigated appropriately.
  27. 27. 17E. Risks51. As implementation of this Project will be on a PPP basis with the public sectorimplementing the harbor infrastructure works component and the private sector implementingthe terminal component, the full benefits of the Project are dependent on both componentsbeing implemented on a coordinated basis. The major risk is the lack of a private sector partywilling to take up the terminal component concession. This risk has been mitigated by linkingimplementation of the harbor infrastructure works component to the progress of selecting asuccessful bidder for the terminal concession. The loan will only be effective upon completion ofthe evaluation of the terminal concession bid and the Government issuing an invitation fornegotiations to the successful bidder(s).52. Another risk arises from possible delays to the harbor infrastructure works constructionprogram. Since completion of part of the breakwater will be necessary before the terminalconcession company can start terminal construction, any delay in the construction of thebreakwater may give rise to a situation where the terminal concession holder could claimcompensation from SLPA. This risk is mitigated by the fact that the construction schedule for thebreakwater will be agreed with the prospective contractor before the terminal concessionagreement is signed. Hence a realistic time frame for the breakwater construction can beincluded in the concession agreement. Delays during construction will be mitigated given thatthe Government has agreed that the International Federation of Consulting Engineers (FIDIC)conditions will be used and that the construction supervision consultant will be designated asthe “Engineer” in the contract to ensure that the consultant has sufficient authority to direct thecontractors. Selection of the detailed design consultant as the construction supervisionconsultant through single-source selection is an additional measure to mitigate these risksbecause the consultant will be familiar with the design and also avoid the issue of split liabilitybetween the detailed design and construction supervision consultants.53. Aside from project risks, delay in the consolidation of the ceasefire in the country mayalso have a significant impact. This situation is beyond the scope of the Project to takemitigation measures. However the private sector has been interested in Colombo Port as shownby implementation of the SAGT project even before the ceasefire. The Government hasdeclared Colombo Port a high-security zone and appointed the Sri Lankan Navy as thedesignated authority for port security. The navy has drawn up comprehensive security plans inaccordance with the requirements of the International Ship and Port Security Convention of theInternational Maritime Organization for port security and the special security considerationsnecessary for Sri Lanka. An assessment of the Colombo Port security system found that portaccess control is well-planned, coordinated and implemented. Colombo Port is the first port inthe South Asian region to implement both the container security initiative and mega portinitiative. There is also excellent military protection against air, land and sea intrusions intoColombo Port. The security cover will be extended to cover the new facilities as well. V. ASSURANCESA. Specific Assurances54. 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 Commissionas a member, is established and operational within 3 months of loan effectiveness.
  28. 28. 1855. The Government will ensure that adequate counterpart funds are made available to theProject when and in the amounts required to enable project agencies to discharge theirresponsibilities under the Project; and that counterpart funds will be increased if needed tocover any shortfall of funds for the completion of the Project.56. The Government will ensure that concessionaires for at least the first two new terminalsunder the Project will be chosen by open competitive bidding processes.57. The Government will ensure that SLPA’s equity share in the terminal concessioncompanies will not exceed 15% of the entire issued capital of such concession company. Thislimit will not apply in the case of a corporate entity registered by the SLPA and/or theGovernment under the Companies Act No. 17 of 1982 of Sri Lanka, as amended, for thepurposes of carrying out container terminal operations.58. The Government will ensure that the concession agreements with all terminalconcession companies operating under the Project include the provision that each concessioncompany will follow the National Environmental Act No. 47 of 1980 as amended, ADB’sEnvironment Policy (2002), ADB’s policy on Involuntary Resettlement (1995), and ADB’s Policyon Indigenous People (1998) in constructing the terminal.59. Within 1 month of loan effectiveness, the Government will ensure that the (i) projectdirector is appointed in accordance with the Government’s relevant procedures; (ii) PIU is fullystaffed and operational; and (iii) staff necessary for the environmental monitoring in the PIU asspecified in the SEIA, are recruited.60. Land and Resettlement. To the extent possible, the Government will ensure that theProject does not require any land acquisition or involuntary resettlement. The Government willcause SLPA to ensure that in case of change in project scope or any unanticipated resettlementimpacts (due to quarrying of rocks, widening of access roads, or any other activity) duringproject implementation, land acquisition and resettlement activities will be implemented inaccordance with all applicable laws and regulations of the Government to the extent notinconsistent with ADB’s policies and procedures and in accordance with ADB’s policy onInvoluntary Resettlement (1995) and Policy on Indigenous Peoples (1998). In case ofunanticipated resettlement impacts during project implementation, the Government will causeSLPA to submit a satisfactory Resettlement Plan to ADB for review prior to the award of harborinfrastructure works contracts. Before any affected person is dispossessed or displaced from itsassets, the Government will cause SLPA to ensure that they are consulted and compensated atreplacement values such that their living standards are not adversely affected, in accordancewith the Resettlement Plan.61. Environment. The Government will cause SLPA to ensure that the Project and allproject facilities are developed, conducted, implemented, and maintained in accordance with theGovernment’s National Environmental Act No. 47 of 1980, as amended, and ADB’sEnvironment 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) willprevail.62. The Government will cause SLPA to apply the environmental mitigation measuresincluded in the EIA and SEIA report for the implementation of the Project, as necessary. TheGovernment will cause SLPA to monitor, review, and if necessary update the EMP prior to anyworks to ensure that all negative environmental impacts related to the works are mitigated
  29. 29. 19properly. In case of unanticipated negative environmental impacts, the Government will causeSLPA (i) to report such impacts to CCD and ADB, and (ii) to provide remedial mitigationmeasures to affected people in consultation with CCD and EMC.63. The Government will cause SLPA to conduct regular environmental monitoring. Themonitoring report should be submitted to ADB, environmental monitoring committee, and otherrelevant agencies such as CCD and Central Environmental Authority every 6 months.64. The Government will cause SLPA to provide the contractors and concessionaires withthe EIA report and the SEIA including the EMP, and ensure that contractors andconcessionaires implement the required mitigation measures as described in the EMP in asatisfactory manner. In addition, the Government will cause SLPA to ensure that the contractorsand concessionaires report implementation of the EMP on a regular basis, along with anydeviation from the EIA report.65. Social Development and Gender Issues. The Government will cause SLPA to ensurethat all works comply with all applicable labor laws; do not employ child labor for constructionand maintenance activities; encourage employment of the poor, particularly women; provideappropriate facilities for women in construction sites; and do not differentiate wages betweenmen and women particularly for work of equal value. The Government will cause SLPA toensure that works contracts include a requirement on the part of the contractors to conduct aninformation and education campaign on communicable diseases, including but not limited tosexually transmitted diseases and HIV/AIDS, for construction workers as a part of the healthand safety program at campsites during the construction period. The works contracts willinclude specific clauses on these undertakings, and compliance will be strictly monitored bySLPA during project implementation.66. Within 6 months of loan effectiveness, the Government, through SLPA, will develop aproject performance management system, including baseline performance monitoring andsystematic project performance monitoring. The Government will cause SLPA to carry outsurveys (i) at the start of project implementation to establish baseline data, (ii) at projectmidterm review, (iii) at the time of project completion, and (iv) not later than 6 months afterproject completion, to evaluate the project benefits. Data to be compiled for the purpose ofproject performance and evaluation will be in a format developed in consultation with ADB. Keyindicators 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 ensurethat the project funds are utilized effectively and efficiently to implement the Project and toachieve the Project’s objectives. The Government will cause SLPA to (i) disclose the bid awardson SLPA’s website; (ii) undertake necessary measures to create and sustain a corruption-freeenvironment; (iii) ensure that the Government’s Anticorruption Law and ADB’s policy onAnticorruption (1998, as amended to date), are strictly enforced and are complied with duringproject implementation, and that relevant provisions of ADB’s policy on Anticorruption areincluded in all bidding documents for the Project; (iv) facilitate ADB’s exercise of its right toinvestigate, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercivepractices relating to the Project; (v) conduct periodic inspections on the project contractor’sactivities related to fund withdrawals and settlements; and (vi) ensure that contracts financed byADB in connection with the Project include provisions specifying the right of ADB to audit andexamine the records and accounts of SLPA and all contractors, suppliers, consultants, andother service providers as they relate to the Project. The Government will cooperate with any
  30. 30. 20audit and investigation, and extend necessary assistance, including access to all relevant booksand records, as well as engagement of independent auditors and experts that may be neededfor satisfactory completion of such audits and investigations.B. Conditions for Loan Effectiveness68. 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 Implementation69. Prior to the commencement of harbor infrastructure works, the Government will causeSLPA to ensure that an updated environmental approval from CCD is obtained. VI. RECOMMENDATION70. I am satisfied that the proposed loan would comply with the Articles of Agreement of theAsian 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 ExpansionProject from ADB’s ordinary capital resources, with interest to be determined in accordance withADB’s London interbank offered rate (LIBOR)-based lending facility; a commitment charge of0.35% per annum; a term of 25 years, including a grace period of 5 years; and such other termsand conditions as are substantially in accordance with those set forth in the draft Loan andProject Agreements presented to the Board. Haruhiko Kuroda President02 February 2007
  31. 31. Appendix 1 21 DESIGN AND MONITORING FRAMEWORK Design Performance Data Sources/Reporting Assumptions Summary Targets/Indicators Mechanisms and Risks Impact Assumptions Improve Sri Lanka’s Direct contribution by National economic data Economic growth in India competitiveness in the ports sector to GDP and statistics remains strong to generate ports sector using increases by 0.1% by the cargo base for public-private 2015 transshipment. partnership Foreign direct investment in ports Risks sector increases by Investors and shipping lines approximately $800 are deterred by security million by 2024 factors. Outcome Assumptions (i) Reduce transport Export container traffic SLPA reports and Other factors affecting costs for exports handled by Colombo international shipping investment and economic Port increases by 9.5% statistics reports development are in place. per annum starting in Terminal development is 2011 implemented on schedule. (ii) Increase Transshipment volumes Present terminals increase transshipment handled by Colombo their capacity by improving container volume Port increases by 8% efficiency. handled by Colombo per annum starting Port 2011 Risk Container-handling Security situation causes risk (iii) Increase container- capacity increased from insurance premiums to handling capacity of 3.3 million TEU in 2006 increase and thus reduces Colombo Port to 5.7 million by 2010 transshipment volumes and 8.1 million TEU by Colombo Port. 2015 Outputs Assumptions (i) Dredging, Breakwater SLPA reports and Contract award for dredging reclamation, and construction completed consultant reports and breakwater development breakwater construction by June 2010 is done on schedule. completed Navigational aids Terminal development is installed by June 2010 implemented on schedule. (ii) South terminal South terminal construction completed Risk construction completed by October 2010 Delays in construction due to weather conditions affects construction schedule. Activities with Milestones Inputs 1. Contract award for civil works component is awarded by July 2007. • ADB: $300 million 2. Letter of invitation for negotiations to successful bidder for terminal • Government: $180 million concession is awarded by July 2007. • Private sector: $301 million 3. First terminal is operational by October 2010.ADB = Asian Development Bank, GDP = gross domestic product, SLPA = Sri Lanka Ports Authority, TEU = twenty-footequivalent units.

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