China Development Bank provides $54.8 million loan for Katana Water Supply Project

In September 2014, China Development Bank (CDB) agreed in principle to provide a $400 million loan to Sri Lanka’s National Water Supply and Drainage Board for the implementation of the following water supply projects: Katana Water Supply Project; Thambuttegama Water Supply Project; and Kandy North Water Supply Project. A proposal made by Dinesh Gunawardena, Minister of Water Supply and Drainage, to proceed with the relevant activities pertaining to the loan arrangements, was approved by Sri Lanka’s Cabinet in September 2014. Then, on August 21, 2017, China Development Bank and Sri Lanka’s National Water Supply & Drainage Board signed a $54.8 million loan agreement [ID#4510201701100001265] for the Katana Water Supply Project (WSP). The precise borrowing terms of the loan are unknown. However, it is known that the loan’s final maturity date is March 6, 2033, and the Government of Sri Lanka issued a sovereign guarantee in support of the loan. The loan’s outstanding amount was $13.7 million as of December 31, 2019 and $42.1 million as of December 31, 2021. The borrower was to use the proceeds of the China Development Bank loan to finance approximately 85% of the cost of a $64.5 million commercial contract between Sri Lanka’s National Water Supply and Drainage Board and China National Aero-Technology Import & Export Corporation (AVIC), which was signed in July 2015. The remaining $9.7 million was to be provided by the Bank of Ceylon, a state-owned commercial bank in Sri Lanka. The purpose of the project was to provide safe drinking water via pipes to all 45 Grama Niladdhari divisions in Katana Divisional Secretariat, which covers 50% of the population in that area. It involved the construction of three towers at Bambukuliya, Ewariwatta and Thibirigaskatuwa, and the laying of transmission and distribution mains and supplying and supplying and installation of pumps. CATIC China Geo Eng JV — a joint venture of China Geo-Engineering Corporation (CGC) and China National Aero-Technology Import & Export Corporation (AVIC) — was the EPC contractor responsible for implementation. The National Water Supply & Drainage Board oversaw its work on the project. The official project commencement date was August 21, 2017. However, project implementation did not actually begin until April 16, 2018. The project was originally expected to reach completion within two years (April 16, 2020). As of December 31, 2018, the had achieved a ‘physical progress’ rate of 26.2%. As of March 30, 2019, it had achieved a ‘physical progress’ rate of 43.7%. Then, in July 2019, the main structure of the Southern water tower was successfully topped. The Easter bombings in 2019 and the Covid-19 pandemic in 2020 led to major project implementation delays. The project was ultimately completed on March 22, 2021. It reportedly created 1,000 jobs, delivered safe drinking water to 20,000 people in Katana, and provide water to an industrial park affiliated with Bandaranaike International Airport (BIA). However, there are some indications that the CDB loan for the Katana Water Supply Project may have financially underperformed vis-a-vis the original expectations of the lender. On April 12, 2022, the Government of Sri Lanka announced a ‘pre-emptive’ sovereign debt default, noting that it would suspend debt repayments to all external creditors other than multilateral institutions. Its decision to suspend external debt service reportedly affected all China Development Bank loans with amounts outstanding at the time of the announcement. As of March 2023, the Government of Sri Lanka had accumulated $338 million in arrears to China Development Bank.

Additional details

1. The Chinese project title is 阿塔纳水厂项目目 or 斯里兰卡卡塔纳供水项目. 2. This project is one of the four water supply projects under implementation in Sri Lanka funded by the China Development Bank. The other three projects are: Project ID#54435 (Gampaha, Attanagalla and Minuwangoda Integrated Water Supply Scheme), Project ID#53567 (Thambuttegama Water Supply Project), and Project ID#53568 (Valachchenai Water Supply Project and Banadarawela, Diyathalawa and Haputhale Water Supply Project). 3. National Water Supply & Drainage Board is a statutory board enacted by the Parliament under the National Water Supply & Drainage Board Law No. 2 of 1974. 4. The loan agreement [ID#4510201701100001265] between China Development Bank and Sri Lanka’s National Water Supply & Drainage Board for the Katana Water Supply Project and the Thambuttegama Water Supply Project was amended and extended on August 26, 2020. However, the substantive changes that were made through this contract revision are unknown. This issue requires further investigation. 5. According to a March 2018 news report, Sudath Ratnayake, the Assistant General Manager for the North Central Province from Sri Lanka’s National Water Supply and Drainage Board indicated that the CDB debt financing for the Thambuttegama Water Supply Project carries an interest rate of LIBOR plus a 1-1.5% margin and a maturity length of 15 years. AidData has estimated the all-in interest rate to be 2.954% by adding the average 6-month rate LIBOR rate (1.454%) in August 2017 to 1.5%. Given that the Katana Water Supply Project and the Thambuttegama Water Supply Project were financed through the same CDB loan agreement [ID#4510201701100001265], AidData assumes that the same all-in interest rate (2.954%) applies to CDB’s debt financing for the Katana Water Supply Project.

Number of official sources

29

Number of total sources

37