Narrative
Full Description
Project narrative
On August 30, 2017, China Development Bank and the National Water Supply & Drainage Board — a Sri Lankan state-owned enterprise — signed a $242.66 million loan agreement (ID#4510201701100001265) for the Valachchenai Water Supply Project and the Bandarawela, Diyathalawa, and Haputhale Water Supply Project. The Government of Sri Lanka issued a sovereign guarantee in support of the loan. The loan agreement was subsequently amended on August 26, 2020. However, the nature of the amendment is unknown. According to the Sri Lanka Department of External Resources Performance Report 2017, the borrower expected to use the proceeds of the loan to cover 100% of the project (commercial contract) cost. The goal of the project is to provide safe drinking water to Bandarawela, Diyathalawa, Haputhale and Valachchenai. China National Aero–Technology International Engineering Corporation (CATIC) and China Geo Engineering Corporation (CHINA GEO ENG) are the contractors responsible for project implementation. Their work is being supervised by the Sri Lanka National Water Supply and Drainage Board. The project officially entered implementation on August 30, 2017, and it was originally expected to reach completion within 3 years (August 30, 2020). However, there are some indications that the CDB loan for the Valachchenai Water Supply Project and Banadarawela, Diyathalawa and Haputhale 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.
Staff comments
1. 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: Record ID#54435 (Gampaha, Attanagalla and Minuwangoda Integrated Water Supply Scheme), Record ID#53566 (Katana Water supply Project), and Record ID#53567 (Thambuttegama Water Supply Project). 2. In Sri Lanka government documents, the Valachchenai Water Supply Project and Bandarawela, Diyathalawa and Haputhale Water Supply Project are sometimes referred to as 'Balance of 400 million facilities for priority Water Supply Projects', because they account for the final allocation of a $400 million CDB loan facility for water supply projects. 3. A list of sovereign guarantees issued by the Government of Sri Lanka is identified in Table 2.20 of the Sri Lankan Treasury's Mid-Year Fiscal Position Report - 2021 (https://www.treasury.gov.lk/api/file/70d070ac-53be-474b-bad4-d3437991176d). It includes the sovereign guarantee that was issued in support of the CDB loan to the National Water Supply & Drainage Board. 4. On March 26, 2019, the National Water Supply & Drainage Board, China National Aero–Technology International Engineering Corporation (CATIC), and China Geo Engineering Corporation (CHINA GEO ENG) signed a commercial contract (ID# RSC(E)/D&B/VALACHCHENAI/2017/01) for the Plant and Design-Build Contract for Civil M&E Works Valachchenai Water Supply Project. It is unclear whether/how this contract is related to the amended CDB loan agreement (on August 26, 2020). This issue warrants further investigation.