1. 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

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. 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

4. 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

5. 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 Category A. The summary environmental impact assessment
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.

6. ii
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 $49.7 million.
Financing Plan Total
Source ($ 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 to
Terms Sri Lanka Ports Authority (SLPA) under the same terms and
conditions as the ADB loan.
Period of Utilization 30 April 2011
Estimated Project 31 October 2010 for both the public and private sector
Completion Date components.
Executing Agency Ministry of Ports and Aviation

7. iii
Implementation SLPA will be the Implementing Agency. A project implementation
Arrangements 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 The Project will benefit Sri Lankan exporters by enhancing their
Beneficiaries 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. iv
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.

9. v

10. 2060a RM
vi

11. 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.

12. 2
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.

13. 3
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.

14. 4
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).

15. 5
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

16. 6
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.

17. 7
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.

18. 8
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

19. 9
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

20. 10
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.

21. 11
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

22. 12
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.

23. 13
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

24. 14
$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).

25. 15
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

26. 16
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.

27. 17
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.

28. 18
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

29. 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

30. 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

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-foot
equivalent units.