Report and Recommendation of the President to the Board of Directors

Project Number: 46346-003 October 2020

Proposed Grant for Additional FinancingRepublic of the Marshall Islands: Ebeye Water Supply and Sanitation Project

Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB's Access to Information Policy.

CURRENCY EQUIVALENTS

The currency of the Marshall Islands is the United States dollar.

ABBREVIATIONS

ADB – Asian Development Bank COVID-19 – coronavirus disease DBM – design–build–manage KAJUR – Kwajalein Atoll Joint Utilities Resources, Inc. km – kilometer m3/day – cubic meter(s) per day O&M – operation and maintenance PAM – project administration manual TA – technical assistance

NOTES

(i) The fiscal year (FY) of the Government of the Marshall Islands and its agencies ends on 30 September. “FY” before a calendar year denotes the year in which the fiscal year ends, e.g., FY2020 ends on 30 September 2020.

(ii) In this report, "$" refers to United States dollars.

Vice-President Ahmed M. Saeed, Operations 2 Director General Leah C. Gutierrez, Pacific Department (PARD) Deputy Director General Emma Veve, PARD Director Jingmin Huang, Urban Development, Water Supply and Sanitation

Division (PAUW), PARD Team leader Stephen Blaik, Principal Urban Development Specialist, PAUW, PARD Team members Cindy Bryson; Safeguards Specialist; Portfolio, Results, and Quality

Control Unit (PAOD-PRQ); PARD Taniela Faletau, Safeguards Specialist, PAOD-PRQ, PARD Ellen E. Paul, Senior Country Officer, Office of the Director General,

PARD Cara Tinio, Economics and Statistics Analyst, Social Sectors and

Public Sector Management Division (PASP), PARD Ritu Verma, Principal Social Development Specialist, PASP, PARD Peer reviewer Jaemin Nam, Urban Development Specialist, Urban Development and

Water Division, South Asia Department In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

PROJECT AT A GLANCE

MAP

I. THE PROPOSAL 1

II. THE PROJECT 1

A. Rationale 1 B. Project Description 4 C. Value Added by ADB 5 D. Summary Cost Estimates and Financing Plan 5 E. Implementation Arrangements 6

III. DUE DILIGENCE 7

A. Technical 7 B. Economic and Financial Viability 8 C. Sustainability 8 D. Governance 8 E. Poverty, Social, and Gender 8 F. Safeguards 9 G. Summary of Risk Assessment and Risk Management Plan 9

IV. ASSURANCES 10

V. RECOMMENDATION 10

APPENDIXES 1. Revised Design and Monitoring Framework 11

2. List of Linked Documents 16

Project Classification Information Status: Complete

PROJECT AT A GLANCE

Source: Asian Development BankThis document must only be generated in eOps. 04082020103008765952 Generated Date: 09-Oct-2020 9:27:50 AM

1. Basic Data Project Number: 46346-003Project Name Ebeye Water Supply and Sanitation Project

(Additional Financing) Department/Division PARD/PAUW

Country Marshall Islands, Republic of Executing Agency Office of the Chief SecretaryRecipient Republic of Marshall Islands

Country Economic Indicators

https://www.adb.org/Documents/LinkedDocs/?id=46346-003-CEI

Portfolio at a Glance https://www.adb.org/Documents/LinkedDocs/?id=46346-003-PortAtaGlance

2. Sector Subsector(s) ADB Financing ($ million)Water and other urban infrastructure and services

Urban policy, institutional and capacity development 1.20

Urban water supply 1.80

Total 3.00

3. Operational Priorities Climate Change InformationAddressing remaining poverty and reducing inequalities

Accelerating progress in gender equality

Tackling climate change, building climate and disaster resilience, and enhancing environmental sustainabilityMaking cities more livable

Strengthening governance and institutional capacity

GHG reductions (tons per annum) 0Climate Change impact on the Project

Low

ADB Financing

Adaptation ($ million) 0.00

Mitigation ($ million) 0.00

Cofinancing

Adaptation ($ million) 0.00

Mitigation ($ million) 0.00

Sustainable Development Goals Gender Equity and MainstreamingSDG 1.3SDG 5.bSDG 6.1SDG 10.1SDG 11.1SDG 12.2

Effective gender mainstreaming (EGM)

Poverty TargetingGeneral Intervention on Poverty

4. Risk Categorization: Low.

5. Safeguard Categorization Environment: B Involuntary Resettlement: C Indigenous Peoples: C

.

6. Financing

Modality and Sources Amount ($ million)

ADB 3.00

Sovereign Project grant: Asian Development Fund 3.00

Cofinancing 0.00

None 0.00

Counterpart 0.38

Government 0.38

Total 3.38

Currency of ADB Financing: US Dollar

N O R T H P A C I F I C O C E A N

Ebon

Arno

Erikub

Jaluit

MAJURO

Mili

Aur

Maloelap

Namorik

Namu

Ailinglaplap

Wotje

Ujae

Wotho

Lae

Kwajalein

Ailinginae

Ujelang

Rongerik

Taka

Likiep

Ailuk

Utirik

Bikar

Taongi

Rongelap

Bikini

Enewetak

Majuro

LIB JABAT

MEJIT

KILI Knox

Urban Center

National Capital

Reef/Atoll

International Boundary

Boundaries are not necessarily authoritative.

EBEYE WATER SUPPLY AND SANITATION PROJECT

MARSHALL ISLANDS

(additional financing)

100 200 3000 50

Kilometers

N

13 00'No

5 00'No

160 00'Eo

170 00'Eo

5 00'No

13 00'No

160 00'Eo 170 00'Eo

20

07

11

20

RM

I AB

V

This map was produced by the cartography unit of the Asian Development Bank. The boundaries, colors, denominations, and any other information shown on this map do not imply, on the part of the Asian Development Bank, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries, colors, denominations, or information.

S O U T H P A C I F I C O C E A N

N O R T H P A C I F I C O C E A N

NEWCALEDONIA

FRENCH POLYNESIA

GUAM

A U S T R A L I A

N E W Z E A L A N D

HAWAIINORTHERN

MARIANA ISLANDS

REPUBLIC OF

PALAU

FEDERATED STATES

OF MICRONESIA

K I R I B A T IPAPUA

NEW GUINEA

NAURU

VANUATU

FIJI

TUVALU

COOK

ISLANDS

SOLOMON

ISLANDS

TONGA

NIUE

SAMOA

MARSHALL ISLANDS

ADB'S DEVELOPING MEMBER COUNTRIES IN THE PACIFIC

Ebeye Island

160 52'Eo

160 52'Eo

09 46'No

09 46'No

09 50'No

09 50'No

160 54'Eo

160 54'Eo

Ujelang

Enewetak

I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed grant to the Republic of the Marshall Islands for the additional financing of the Ebeye Water Supply and Sanitation Project. 2. The current project will improve access to safe water and sanitation, and reduce the incidence of waterborne disease in Ebeye.1 The additional financing will support the operation and maintenance (O&M) of the current project to ensure the water supply sustainability and expand the sanitation service which will help to contain the transmission of coronavirus disease (COVID-19).

II. THE PROJECT A. Rationale 3. Ebeye is the second-largest urban center of the Marshall Islands. About 9,200 people live on 31 hectares, which makes it one of the most densely populated areas in the Pacific. Ebeye is also very vulnerable to many waterborne diseases and other transmissible diseases, including COVID-19. The high incidence of waterborne diseases results from (i) limited access to safe water; (ii) inadequate hygiene, particularly among children; and (iii) a rundown sanitation system.2 4. Current project. On 28 September 2015, the Asian Development Bank (ADB) approved a grant of $5.00 million from its Special Funds resources (Asian Development Fund), and the administration of a grant of $4.00 million from the Government of Australia, for the current project. The executing agency is the Office of the Chief Secretary, and the implementing agency is Kwajalein Atoll Joint Utilities Resources, Inc. (KAJUR). The estimated cost of the project is $19.02 million, to which the government is contributing $10.02 million. The current project was declared effective on 3 December 2015, and the closing date is 30 June 2022. As of 18 July 2020, cumulative contract awards stood at $9.00 million (100%), and the disbursements of ADB and Australian grant proceeds at $8.54 million (94.9%). The physical progress is 85%. The current project performance rating is on track.3 5. The current project has made solid progress. Output 1: effective and efficient sewerage services was largely achieved. The new saltwater desalination plant was completed and started operating in September 2017 with full capacity of 1,600 cubic meters per day (m3/day), in line with the design–build–manage (DBM) contract. The old desalination plant was decommissioned because of the outdated technology, lack of spare parts, higher energy consumption, and unsafe operation. The freshwater supply network was expanded by 4.6 kilometers (km), and all 1,465 households in Ebeye now have access to adequate and continuous supply of fresh water using prepayment water meters.4 The average daily production is about 520 m3/day, but up to 50% is lost to leakage in the distribution network (mainly from household water tanks). A separate saltwater supply network was upgraded to enable toilet flushing in all households. This included

1 Asian Development Bank (ADB). 2015. Report and Recommendation of the President to the Board of Directors:

Proposed Grant and Administration of Grant to the Republic of the Marshall Islands for the Ebeye Water Supply and Sanitation Project. Manila.

2 A 2017 survey of every household on Ebeye recorded 1,465 households and a resident population of 9,242. 3 More details are in Summary of Project Performance (accessible from the list of linked documents in Appendix 2).

Further information is in Sector Assessment (Summary): Water and Other Urban Infrastructure and Services (accessible from the list of linked documents in Appendix 2).

4 Prepayment water meters were installed for 827 households, the rest will be installed by 31 October 2020.

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expanding the pipe system by 5.5 km and improving four pump stations (output 2). KAJUR also built two new saltwater wells with a total capacity of 5,700 m3/day to provide 4,000 m3/day of salt water for its desalination plant and 1,200 m3/day for the household toilets. However, a large part of the saltwater supply is wasted because many toilet tanks lack float valves. The continuous flow of salt water through toilets is estimated to increase the sewage discharged. This issue is dealt with under output 5. 6. Output 2: effective and efficient sewerage services has been delivered. Improvements to Ebeye’s sewerage system include (i) a new centralized sewage treatment facility with capacity of 1,400 m3/day;5 (ii) a new marine outfall, with a length of 350 meters; (iii) construction of a new sewage pumping station and rehabilitation of four existing ones; (iv) construction of 4.1 km of new sewers; and (v) installation of an additional 275 sewer connections to households. More than 90% of sewage discharged through the system is collected and treated. 7. Output 3: enhanced hygiene awareness and improved hygiene behaviors has been achieved. Hygiene awareness campaigns were conducted for Ebeye's households, including 4,999 women and 4,365 schoolchildren, to reduce the incidence of waterborne disease. The average monthly cases of diarrhea reported by Ebeye Hospital has declined by 20% since 2018. Output 3 also provided new sanitation facilities, including gender-segregated toilets, to two schools and upgraded existing ones in four other schools. Instilling good hygiene behaviors will reduce the incidence of many other waterborne diseases that can afflict people, particularly children. Further hygiene education will be delivered through ADB regional technical assistance (TA) for Strengthening Water, Sanitation, and Hygiene Practices and Hygiene Behavioral Change in the Pacific, which will enhance the project’s impact.6 8. For output 4: secure electricity supply for water and sewerage operations, a current contract to upgrade Ebeye’s electricity distribution system will improve the reliability of power supply to households, the desalination plant, and KAJUR’s other water and sanitation facilities. The original contract completion date was August 2020, but travel bans and disruptions of the supply chains because of the COVID-19 pandemic caused delays. The contract is now expected to be completed in May 2021. 9. Output 5: financial and technical sustainability of Kwajalein Atoll Joint Utility Resource Inc. is not fully achieved, and KAJUR continues to rely on government subsidies. As regards the revenue from its electricity distribution service, KAJUR has improved the collection ratio to more than 95% due to the use of prepayment meters. However, KAJUR continues to deliver water and sewerage services at no cost. In accordance with the State-Owned Enterprises Act (2015), KAJUR has now developed a volumetric tariff system, scheduled to start on 1 October 2020, to help it recover the O&M costs of all its water and sanitation services. The government will meet any shortfalls through annual community service obligation subsidies.7 Prepayment water meters were installed under the current project. While KAJUR conducted a campaign to ensure Ebeye residents' willingness to pay universal water tariffs, the tariff collection may take longer than anticipated because COVID-19 has reduced household incomes. KAJUR has begun a household fixture program aimed at encouraging water conservation and reducing energy consumption, which involves installing missing toilet valves and water-efficient fixtures.

5 Wastewater reuse is not proposed, given the relatively small size of the sewerage system and sewage loads, and

the costs of treating wastewater to make it reusable as a non-potable water source. 6 ADB. 2020. Technical Assistance for Strengthening Water, Sanitation, and Hygiene Practices and Hygiene

Behavioral Change in the Pacific. Manila (TA 6551-REG). 7 KAJUR is eligible for annual payments for the delivery of services to meet community service obligations under the

State-Owned Enterprises Act (2015).

3

10. Further assistance required. The current DBM contract for the desalination plant expired in September 2020, and the plan was that KAJUR operators trained under the DBM contract would then take over the plant's O&M. The DBM contract is based on performance, which among other things obliges the contractor to provide the plant consumables (excluding electricity) and to train and manage the KAJUR plant operators that were seconded to the contractor. Theoretically, these KAJUR employees would now have the capacity to run the plant under normal operating conditions. However, recent events such as rolling electricity outages caused by power station breakdowns showed that the plant operators require additional training to manage emergency and other unusual situations.8 KAJUR's capacity to handle emergency situations at the desalination plant is essential for the sustainability of both the plant and Ebeye’s freshwater supply. More investment is required to extend the current DBM contract so that the knowledge and skill transfer can be deepened and KAJUR staff will be fully able to operate the desalination plant once the contract ends, thus ensuring sustainable water supply. Minor physical investment is needed to provide the plant with corrosion protection, a standby generator, and additional electrical switchgear, to ensure safe and reliable electricity supply to the desalination plant and to KAJUR's other water and sanitation assets. 11. With the new desalination plant and the upgraded water supply system in place, it is necessary to better manage nonrevenue water and improve operational efficiency. KAJUR needs to build the technical capacity for asset management to optimize the operation of the freshwater and saltwater supply systems, which will also help it achieve financial sustainability. Financing support is also required to extend the household fixture program. As part of its response to the COVID-19 pandemic, the government requested ADB support to help it improve the onsite sanitation systems in the small islet communities north of Ebeye. The proposed additional financing would help review and recommend options to achieve this, while the regional TA (footnote 7) would deliver an additional hygiene awareness and handwashing campaign to prevent transmissible diseases such as COVID-19. 12. Additional financing. The additional financing sought by the government will strengthen the sustainability of the current project and increase the project benefits. The overall project is technically feasible, economically viable, and financially sound, and remains a high priority of the government. It is aligned with the Marshall Islands’ water and sanitation policy objectives, as articulated in its draft National Strategic Plan 2020–2030.9 The overall project will contribute to Sustainable Development Goal 6—ensure access to water and sanitation for all—and aligns with the operational priorities of ADB’s Strategy 2030: (i) reducing remaining poverty and inequalities; (ii) accelerating progress in gender equality; (iii) tackling climate change, building climate and disaster resilience, and enhancing environmental sustainability; (iv) making cities more livable; and (v) strengthening governance and institutional capacity. 13. Eligibility criteria. ADB’s due diligence confirmed that the project meets the additional financing eligibility criteria and standards. The overall project (i) remains technically feasible, economically viable, and financially sound; (ii) is accorded high priority by the government; and (iii) is consistent with the current project’s development objectives. So far, the project has been effective, but further work is required to ensure its sustainability. The government is complying with the grant covenants and assurances, and the project’s environmental and involuntary resettlement safeguard requirements are being met. The additional financing modality is suitable because of (i) the close links to the current project’s scope, which means that it can be efficiently

8 A disaster and emergency response plan was prepared for the desalination plant. 9 Government of the Marshall Islands. 2020. National Strategic Plan, 2020–2030. Majuro.

4

implemented under the same implementation arrangements; (ii) the natural continuity of the current project; and (iii) the opportunity to sustain the benefits of the current project. Project preparatory activities include (i) environmental and social assessments carried out under the current project; (ii) review and possible extension of the ongoing DBM contract; and (iii) terms of reference of the capacity-building consultants. 14. COVID-19. The project remains highly relevant in the COVID-19 pandemic context. Sustainable water supply and sanitation, and good hygienic conditions are essential in stopping the spread of the virus and helping restore an environment of economic safety. Strengthening healthy hygienic behaviors will reduce the incidence of many other waterborne diseases that can afflict people, particularly children.

B. Project Description

15. The overall project is aligned with the following impact: incidence of waterborne disease on Ebeye reduced, which includes achieving the Marshall Islands’ national development policy objectives of (i) improved sanitation for better health and well-being; and (ii) constant access to drinking water that meets World Health Organization standards, as articulated in the country’s National Strategic Plan, 2020–2030 (footnote 9). The overall project will have the following outcome: access to safe water and sanitation improved.10 The overall project outputs will be more robust since the additional financing supports the following: 16. Output 1: Secure and safe supplies of fresh water ensured. The sustainability of KAJUR’s water supply operations will be strengthened by

(i) extending the DBM contract for the desalination plant by 2 years with provisions for remote monitoring and O&M support, to strengthen the O&M capacity of KAJUR plant personnel; and

(ii) upgrading the desalination plant with corrosion protection treatment of pipes and equipment, minor structural improvements, and the provision of a standby 440 kilovolt-ampere generator for the desalination plant.

17. Output 2: Effective and efficient sewerage services provided. The additional scope of output 2 will include a gender-responsive survey and review of onsite sanitation systems in the islet communities of Ebwaj, Loi, and Guegeegue (about 50 households or 320 people) linked by the Ebeye–Guegeegue causeway. The survey and review will include a gender analysis and recommend approaches to improve sanitation, which plays an important role in stopping transmissible diseases such as COVID-19. 18. Output 4: Secure electricity supply for water supply and sewerage operations ensured. Output 4 will be expanded to install additional high-voltage electrical switchgear for KAJUR’s solar energy plant and the recently installed diesel generators at the power station. 19. Output 5: Financial and technical sustainability of KAJUR improved. Additional activities to be delivered under output 5:

(i) Further strengthening of KAJUR’s financial management capacity by extending the services of KAJUR’s financial management advisor through intermittent inputs (8 months) over 2 years. The advisor will help KAJUR implement the water and sewerage tariff framework during the initial implementation stage. After 2 years, the tariff collection will cover the O&M costs of KAJUR.

10 The revised design and monitoring framework is in Appendix 1.

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(ii) Strengthening of KAJUR’s capacity to manage its water supply assets, which will optimize freshwater and saltwater network operations and reduce nonrevenue water. A water distribution specialist will be recruited to provide intermittent on-the-job training (6 months over 2 years).

(iii) Recruitment of a technical advisor to assist KAJUR’s planning of capital works and to further strengthen its project management capacity (4 months of intermittent inputs over 2 years).

(iv) Extension of the current project’s household fixture program by 12 months, and stronger management of water demand through proper maintenance of plumbing fixtures and prepayment meters. This will also ensure that Ebeye's poor households, including 120 households headed by women, can access safe water and improved sanitation.

C. Value Added by ADB 20. ADB’s engagement in the Marshall Islands’ water supply and sanitation operations adds value in several areas, including (i) building on the benefits already delivered by the current project, (ii) bringing in extensive Pacific developing member country experience in water and sanitation infrastructure investments and associated TA, (iii) providing best practices for water utilities through institutional strengthening and capacity building, (iv) expanding services in low-income and informal areas, and (v) helping the government and KAJUR manage the project's environmental and social safeguard issues. The project design reflects lessons from the current project and from previous ADB and development partner operations in water supply and sanitation in Pacific developing member countries. Key lessons include that (i) building adequate financial and technical capacity is essential for the sustainable delivery of water supply and sewerage services, and (ii) urban service demand and willingness to pay must be ensured. D. Summary Cost Estimates and Financing Plan 21. The overall project is estimated to cost $22.40 million (Table 1). Detailed cost estimates by expenditure category and by financier are included in the project administration manual (PAM).11 22. The government requested a grant not exceeding $3.00 million from ADB’s Special Funds resources (Asian Development Fund) to help finance the project. The summary financing plan is in Table 2. ADB will finance the expenditures relating to the extension of the operations component of the DBM contract, minor works and equipment to upgrade the desalination plant building and power supply, procurement of a new freshwater booster pump, strengthening of the operational capacity of water supply, and expansion of the household fixture program.

11 Project Administration Manual (accessible from the list of linked documents in Appendix 2).

6

Table 1: Summary Cost Estimates ($ million)

Item

Current Amounta

Additional Financingb

Total

A. Base Costc

1: Secure and safe supplies of fresh water ensured 8.61 2.30 10.91 2: Effective and efficient sewerage services provided 4.55 0.06 4.61 3: Hygiene awareness enhanced and hygiene behaviors improved 0.67 0.00 0.67 4: Secure electricity supply for water supply and sewerage operations

ensured 1.39 0.34 1.73

5: Financial and technical sustainability of KAJUR improved 1.11 0.60 1.71 Subtotal (A) 16.33 3.30 19.63 B. Contingenciesd 2.49 0.08 2.57 C. External Grant Administration Fee 0.20 0.00 0.20 Total (A+B+C) 19.02 3.38 22.40 KAJUR = Kwajalein Atoll Joint Utilities Resources, Inc. a Refers to the original amount. b The additional financing includes taxes and duties of $0.38 million. Such amount does not represent an excessive share

of the project cost. The government will finance all taxes and duties applicable in the Marshall Islands through exemptions. c In mid-2020 prices as of 21 June 2020. d Physical and price contingencies, and a provision for exchange rate fluctuation are included. Source: Asian Development Bank estimates.

Table 2: Summary Financing Plan

Source Currentb Additional Financing

Total

Amounta ($ million)

Share of Total (%)

Amount ($ million)

Share of Total

(%)

Amount ($ million)

Share of Total

(%) Asian Development Bank Special Funds resources (Asian Development Fund)

5.00 26.3 3.00 88.8 8.00 35.7

Government of Australiac 4.00 21.0 0.00 0.0 4.00 17.9 Government of the Marshall Islands

10.02 52.7 0.38 11.2 10.40 46.4

Total 19.02 100.0 3.38 100.0 22.40 100.0 a Refers to the original amount. b As of 8 September 2020, 94.9% of the ADB and Government of Australia grant funds have been disbursed.

The ongoing ADB and Government of Australia grants will be closed as currently scheduled on 30 June 2022. c Includes a grant administration fee of $200,000. Source: Asian Development Bank estimates.

E. Implementation Arrangements 23. The Office of the Chief Secretary will remain the executing agency, and KAJUR will remain the implementing agency. The project management unit, established in KAJUR with KAJUR staff, will remain responsible for the day-to-day project implementation, including all procurement (with ADB oversight), and individual consultants will continue to support the unit. The closing date for the additional financing grant is 30 June 2024. The implementation arrangements are summarized in Table 3 and described in detail in the PAM (footnote 11).

Table 3: Implementation Arrangements Aspects Arrangements Implementation period 1 November 2020–31 December 2023 Estimated completion date 31 December 2023

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Aspects Arrangements Estimated grant closing date 30 June 2024 Management

(i) Oversight body Project steering committee: (i) chief secretary (chair), (ii) deputy chief secretary, (iii) a senator representing Kwajalein, (iv) mayor of Kwajalein, (v) 2 representatives from Kwajalein Atoll Local Government; (vi) assistant secretary of health, (vii) assistant secretary of finance, (viii) assistant secretary of education, (ix) 1 representative from the Environment Protection Agency, (x) KAJUR general manager, and (xi) 2 representatives from Ebeye-based nongovernment or civil society organizations

(ii) Executing agency Office of the Chief Secretary (iii) Implementing agency KAJUR (iv) Implementation unit Project management unit, 5 KAJUR staff:

(i) project manager, (ii) accountant/finance officer, (iii) water supply and sewerage manager, (iv) electricity supply manager, and (v) community liaison officer

Procurement Direct contracting 2 contracts $2.0 million Request for quotations 2 contracts $0.3 million

Consulting services Single-source selection 22 person-months $0.3 million Individual consultant selection

22 person-months $0.4 million

Advance contracting Extension of desalination design–build–manage contract (Osmoflo Water Management Pty Limited); procurement of additional electrical switchgear (CCB Envico Pty Limited)

Disbursement The grant proceeds will be disbursed following ADB's Loan Disbursement Handbook (2017, as amended from time to time) and detailed arrangements agreed between the government and ADB.

ADB = Asian Development Bank, KAJUR = Kwajalein Atoll Joint Utilities Resources, Inc. Source: Asian Development Bank.

24. Since the current project includes cofinancing from the Government of Australia, universal procurement is applied. Universal procurement is also proposed under the additional financing because that financing will be used to expand the current outputs.12 All procurement of goods and works will be undertaken in accordance with the ADB Procurement Policy (2017, as amended from time to time) and Procurement Regulations for ADB Borrowers (2017, as amended from time to time). The procurement of goods and works will follow shopping procedures, except for the extension of the DBM contract for the desalination plant (output 1) and for the procurement of additional switchgear (output 4), which will follow direct procurement methods.

III. DUE DILIGENCE A. Technical 25. Water supply and sewerage infrastructure financed under the current project are delivering the services as envisaged at the project appraisal. But further investments are required to strengthen KAJUR’s capacity to operate the desalination plant in emergency situations and run the water distribution systems effectively, and to improve the security of electricity supply (through minor investments) to KAJUR's water and sanitation assets.

12 ADB. 2013. Blanket Waiver of Member Country Procurement Eligibility Restrictions in Cases of Cofinancing for

Operations Financed from Asian Development Fund Resources. Manila.

8

B. Economic and Financial Viability 26. The economic and financial viability of the project was reassessed with the additional financing. The overall project’s economic internal rate of return is estimated at 13.4%. Sensitivity analysis was carried out with respect to the key parameters of incremental costs such as investment, O&M, and incremental benefits, including the following scenarios: (i) a 20% increase in investment costs, (ii) a 20% increase in O&M costs, (iii) a 20% decrease in the incremental supply benefits, and (iv) a 2-year delay. Under the most adverse scenario of a 20% decrease in benefits and a 20% increase in total costs, the economic internal rate of return falls to 6.9% but is still higher than the economic opportunity cost of capital estimated at of 6.0% for countries in fragile and conflict-affected situations, such as the Marshall Islands.13 27. The project’s financial internal rate of return is estimated at 1.3%. This result is deemed acceptable because revenues are expected to be sufficient to cover routine O&M costs (though not all major maintenance or replacement costs, or depreciation). ADB will provide continuous support under the project to enhance KAJUR’s financial capacity.14 C. Sustainability 28. The additional financing will strengthen KAJUR’s financial management and its capacity to effectively operate and maintain its water supply and sewerage assets. KAJUR has developed a framework to enable the recovery of water and sewerage O&M costs, applicable from 1 October 2020. A household survey conducted in June 2020 indicates that 78% of households are willing to pay for KAJUR water services, with 62% of households willing to pay more than $8 per month. D. Governance 29. The financial management risk of KAJUR is rated high. Since 2008, KAJUR has recorded operating losses of $2.0 million or more, mostly because of inadequate tariffs and high fuel costs for its electricity production. In 2018–2019, KAJUR recorded a spike in operating losses of about $3.5 million. Limited financial reporting, poor record management, and recent changes in senior management also contributed to the poor financial performance. The project incorporates mitigating measures. KAJUR will be responsible for maintaining project accounts and preparing grant withdrawal applications. A financial management advisor will be recruited under the project to assist KAJUR and to continue building its capacity. Procurement risks are considered low. 30. Integrity due diligence was conducted and revealed no significant integrity risks.15 ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government and the Office of the Chief Secretary. The specific policy requirements and supplementary measures are described in the PAM (footnote 11). E. Poverty, Social, and Gender 31. Ebeye residents suffer a very high incidence of gastroenteritis and other waterborne diseases. The project impact will be fewer waterborne diseases. A 20% reduction in the incidence of such diseases since 2017 can be attributed to better access to safe water and sanitation, and

13 Economic Analysis (accessible from the list of linked documents in Appendix 2). 14 Financial Analysis (accessible from the list of linked documents in Appendix 2). 15 ADB. 2003. Enhancing the Asian Development Bank’s Role in Combating Money Laundering and the Financing of

Terrorism. Manila.

9

more public awareness of hygiene and water issues. The additional financing will strengthen the sustainability of KAJUR's water and sanitation services and ensure that all households on Ebeye have access to safe water and improved sanitation. The project is classified as effective gender mainstreaming. It includes gender design features to ensure women’s participation in the project and their access to project benefits including: (i) ensuring 120 households headed by women have access to safe water and improved sanitation, and (ii) establishing links with vocational training centers to recruit qualified women for employment opportunities in KAJUR.

F. Safeguards

32. The safeguard categorizations for the additional financing are environment (B), involuntaryresettlement (C), and indigenous peoples (C). KAJUR has built up its capacity to effectively meetthe project safeguard requirements. The additional financing components are assessed as havingminimal and only site-specific impacts, and the updated initial environmental examination and theaccompanying environmental management plan are deemed sufficient to meet the environmentalsafeguard requirements of ADB and the Marshall Islands. Also, the additional activities will neitherrequire additional land acquisition nor generate any involuntary resettlement impacts.Most activities under the additional financing serve to strengthen KAJUR's operational andfinancial capacity and performance. A grievance redress mechanism was established to upholdthe social and environmental safeguard performance by addressing concerns and complaintspromptly and transparently, with no cost or discrimination impacts on the reporting persons.

G. Summary of Risk Assessment and Risk Management Plan

33. Significant risks and mitigating measures are summarized in Table 4 and described indetail in the risk assessment and risk management plan.16

Table 4: Summary of Risks and Mitigating Measures Risks Mitigation Measures

KAJUR does not earn sufficient revenue from its electricity, water supply, and sewerage operations to recover its operating costs, excluding depreciation, from operating revenues by the end of fiscal year 2023.

The project grant agreements contain assurances and covenants requiring KAJUR to operate along business lines and become as profitable and efficient as comparable private businesses, and to adhere to the community service obligation and tariff-setting processes set out in the Marshall Islands’ State-Owned Enterprise Act.

KAJUR’s financial record management and financial reporting do not improve, and its financial planning capability remains low.

A financial management advisor to be recruited under the project will assist KAJUR in strengthening its financial management systems and preparing project-related financial documentation.

The skills base required to effectively manage and operate KAJUR’s water supply system is limited.

To strengthen KAJUR’s capacity to operate and maintain the reverse osmosis desalination plant, the contract for operation and maintenance support will be extended until September 2023 and will provide intensive on-the-job training for KAJUR's plant operators. A water supply network operations specialist will be recruited in the first quarter of 2021 to strengthen KAJUR’s capacity to manage its water supply assets, optimize freshwater and saltwater network operations, and reduce nonrevenue water. A water distribution specialist will be recruited to provide intermittent on-the-job training.

KAJUR = Kwajalein Atoll Joint Utility Resources, Inc. Source: Asian Development Bank.

16 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

10

IV. ASSURANCES

34. The government and the Office of the Chief Secretary have assured ADB that project implementation shall conform to all applicable ADB requirements, including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, financial management, and disbursement as described in detail in the PAM (footnote 11) and grant documents. The government and the Office of the Chief Secretary have agreed with ADB on certain covenants for the project, which are set forth in the grant and project agreements.

V. RECOMMENDATION

35. I am satisfied that the proposed grant would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the grant not

exceeding $3,000,000 to the Republic of the Marshall Islands from ADB’s Special Funds resources (Asian Development Fund) for the additional financing of the Ebeye Water Supply and Sanitation Project, on terms and conditions that are substantially in accordance with those set forth in the draft grant and project agreements presented to the Board.

Masatsugu Asakawa President

8 October 2020

Appendix 1 11

REVISED DESIGN AND MONITORING FRAMEWORK

Impact the project is aligned with: Current project Incidence of waterborne disease on Ebeye reduced (National Strategic Plan 2015–2017)a

Overall project Incidence of waterborne disease on Ebeye reduced (National Strategic Plan, 2020–2030)b Results Chain

Performance Indicators with

Targets and Baselines

Data Sources and Reporting Mechanisms

Risks Outcome Current project: Improved access to safe water and improved sanitation

By 2022: Population growth on Ebeye exceeds projections.

a. All households on Ebeye are connected to the freshwater supply and sewerage systems (2014 baseline: water supply 71%, sewerage 64%)

a. KAJUR records

Overall project: Access to safe water and sanitation improved

By 2024: a. Revised indicator. 1,500 households (100%) in Ebeye have access to continuous piped water and to the sewerage system (2014 baseline: water supply 71%, sewerage 64%) (RFI A) c

a. Unchanged

KAJUR does not earn sufficient revenue from its electricity, water supply, and sewerage operations to recover its operating costs, excluding depreciation, from operating revenues by the end of FY2023.

b. New indicator. More than 90% of sewage discharged in Ebeye is collected and treated to meet at least primary treatment standards (2014 baseline: 0)

b. KAJUR records; EPA reports

Outputs Current project 1. Secure and safe freshwater supplies

By 2019: 1a. The minimum quantity of fresh water produced increases to 105 liters per person per day (benefiting about 5,150 women and girls) (2014 baseline: 26 liters per person per day)

1a. KAJUR water production records

Overall project 1. Secure and safe supplies of fresh water ensured

By July 2023: 1a. Revised indicator. The production of fresh water at the desalination plant runs and is maintained at a capacity of 1,600 m3/day (2014 baseline: 465 m3/day)

1a. Unchanged

The skills base required to manage and operate KAJUR’s water supply system effectively is limited. The project is delayed by COVID-19 impacts.

1b. New indicator Standby 440KVA generator installed at the desalination plant

1b. Project progress reports

12 Appendix 1

Results Chain

Performance Indicators with

Targets and Baselines

Data Sources and Reporting Mechanisms

Risks 1c. New Indicator 120 households

headed by women, have access to safe water and improved sanitation

1c. KAJUR annual reports, project gender quarterly monitoring reports

Current project 2. Effective and efficient sewerage services

By 2019: 2a. The frequency of overflows from the sewer network is reduced to less than 25 events per year (2014 baseline: more than 360)

2a. Annual EPA reports and observations

2b. All sewage on Ebeye is treated to at least primary treatment standards (2014 baseline: 0%)

2b. EPA surveillance records (usually quarterly)

Overall project Effective and efficient sewerage services provided

By July 2023: 2a. Unchanged

2a. Unchanged

2b. Unchanged 2b.Unchanged

2c. New indicator. One new sewage pump station built, four existing sewage pump stations upgraded, and the sewerage system expanded by 2.6 kilometers (2014 baseline: 0) d

2b. Project progress reports

2d. New indicator. A new wastewater treatment plant (to primary treatment standards) with capacity of 1,400 m3/day constructed and commissioned (2014 baseline: 0) d

2d. Quarterly project progress reports

2e. New indicator. A gender-responsive sanitation survey and review for Guegeegue and the causeway communities completed (2020 baseline: 0)

2e. Sanitation survey and review report (2021)

Current project 3. Enhanced hygiene awareness and improved hygiene behaviors

By 2021: 3a. 90% of women (5,000) on Ebeye are aware of the benefits of improved sanitation and hygiene (2014 baseline: 50%)

3a. Household health survey reports

Improved hygiene behaviors are not sustained. Living conditions on Ebeye deteriorate.

Appendix 1 13

Results Chain

Performance Indicators with

Targets and Baselines

Data Sources and Reporting Mechanisms

Risks Overall project 3. Hygiene awareness enhanced and hygiene behaviors improved

3a. Unchanged 3b. Unchanged

3a. Unchanged 3b. Quarterly hygiene-awareness and education program reports

Current project 4. Secure electricity supply for water and sewerage operations

By 2019: 4a. The system average interruption duration index is reduced to less than 90 minutes, and the system average interruption frequency index for the KAJUR electricity distribution system is reduced to less than 3 interruptions/customer/year (2012 baseline: 127 minutes and 5.54 interruptions/customer/year)

4a. Pacific Power Association annual benchmarking reports, and KAJUR monthly and annual reports

Overall project By July 2023: 4. Secure electricity supply for water supply and sewerage operations ensured

4a. Unchanged 4a.–4c. Unchanged

4b. New indicator. 60 power poles replaced and monitoring system of power station installed (2014 baseline: 0)

4c. New indicator. Additional high-voltage electrical switchgear installed (2014 baseline: 0)

Current project 5. KAJUR is financially and technically sustainable

By 2022: 5a. KAJUR fully recovers O&M costs with power, water, and sewerage revenue (FY2011 baseline: loss of $1,864,778).

5a. Annual independent audit reports. KAJUR annual reports

5b. KAJUR has strengthened water and sewerage O&M (with 30% employment for women)

5b. KAJUR annual reports

5c. At least 80% of KAJUR staff successfully complete gender-awareness, hygiene, and sanitation training

5c. KAJUR annual reports

14 Appendix 1

Results Chain

Performance Indicators with

Targets and Baselines

Data Sources and Reporting Mechanisms

Risks 5d. The project is fully

implemented and within budget

5d. KAJUR annual reports

Overall project 5. Financial and technical sustainability of KAJUR improved

By July 2023: 5a. Revised indicator. KAJUR recovers 100% of its

KAJUR’s financial record management and financial reporting does not improve, and KAJUR’s financial planning capability remains low.

annual O&M cost of water and saltwater supply and sewage systems through water tariff collection e

(FY2011 baseline: 5% recovery).

5b. Unchanged 5c. unchanged 5d. New indicator. At least 1,200 households have functioning flow valves for saltwater systems (2020 baseline: 600 households) 5e. New indicator. KAJUR staff, including at least one woman, receive asset management training by the consultants and reduce nonrevenue water to no more than 30% in freshwater and saltwater systems (2020 baseline: more than 50% in freshwater system) 5f. New indicator. KAJUR personnel, including at least one woman, obtain full on-job-training and take over the O&M of the desalination plant

5a.–5f. KAJUR annual reports, project gender quarterly monitoring reports

Key Activities with Milestones 1. Secure and safe supplies of fresh water ensured 1.1 Two new saltwater wells with a total capacity to supply 5,700 m3/day constructed and commissioned

in September 2017 (completed) 1.2 SWRO plant with capacity of 1,600 m3/day commissioned in September 2017 (completed) 1.3 SWRO plant O&M contract extended from September 2020 to September 2022 (added) 1.4 Water supply system rehabilitated by October 2019 (completed) 1.5 Water supply network expanded to cover all households by October 2019 (completed) 1.6 Saltwater supply system upgraded by October 2019 (completed) 2. Effective and efficient sewerage services provided 2.1 Sewage pumping system rehabilitated by February 2020 (completed) 2.2 Sewerage system expanded to cover all households by October 2019 (completed) 2.3 New sewage treatment plant and effluent outfall constructed and commissioned by September 2019

(completed)

Appendix 1 15

Key Activities with Milestones 2.4 Survey and review of onsite sanitation for the causeway communities between Ebeye and

Guegeegue (including Guegeegue) (added) 3. Hygiene awareness enhanced and hygiene behaviors improved 3.1 Hygiene-awareness program, delivered to schools and community groups since June 2016,

completed by February 2020 (completed) 3.2 Sanitation facilities at 6 Ebeye schools totaling 2,200 pupils upgraded, including 2 new toilet facilities

at 2 schools installed and connected to the sewer network by March 2019 (completed) 4. Secure electricity supply for water supply and sewerage operations ensured 4.1 Busbars and protection system, switchgear, and wooden power poles replaced by March 2021

(ongoing) 4.2 Power station monitoring system upgraded by March 2021 (ongoing) 4.3 An additional switchgear for the solar photovoltaic array and new diesel generators (provided under

other donor assistance) installed by July 2023 (added) 5. Financial and technical sustainability of KAJUR improved 5.1 KAJUR staff positions and job descriptions reviewed by December 2016 (completed) 5.2 Training on financial management system by consultants completed by December 2022 (added) 5.3 Training on KAJUR’s water and sewerage operations by consultants and contractor by December

2022 (added) 5.4 KAJUR’s household fixture program started by August 2019, completed by July 2023 (ongoing) 5.5 The extended household fixture program completed in 2023 (ongoing)

Inputs Overall project Asian Development Bank: $8.00 million (grant) Government of Australia: $4.00 million (grant) Government of the Marshall Islands: $10.40 million Assumptions for Partner Financing Current project: Not applicable Overall project: Not applicable

COVID-19 = coronavirus disease, EPA = Environmental Protection Authority, FY = fiscal year, KAJUR = Kwajalein Atoll Joint Utilities Resources, Inc., KVA = kilovolt-ampere, m3/day = cubic meters per day, O&M = operation and maintenance, RFI = results framework indicator, SWRO = saltwater reverse osmosis.

Note: In 2011, the estimated population growth in Ebeye was 0.4% per year. a Government of the Marshall Islands. 2014. National Strategic Plan, 2015–2017. Majuro. b Government of the Marshall Islands. 2020. National Strategic Plan, 2020–2030. Majuro. c Contributions to the Asian Development Bank’s Strategy 2030 Operational Priorities:

RFI A: Households with new or improved water supply (1,465) Urban RFI B: Households with new or improved sanitation (1,465) Urban

d New indicators to better capture outputs from the original project e The baseline value has been updated to (i) focus on revenue and O&M costs for water supply and sewerage only, as

this is the main focus of this project; and (ii) present these revenues as a fraction of O&M costs Source: Asian Development Bank.

16 Appendix 2

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=46346-003-2

1. Grant Agreement 2. Project Agreement 3. Approved Report and Recommendation of the President for the Original Project 4. Sector Assessment (Summary): Water and Other Urban Infrastructure and Services 5. Project Administration Manual 6. Economic Analysis 7. Financial Analysis 8. Summary Poverty Reduction and Social Strategy 9. Risk Assessment and Risk Management Plan 10. Gender Action Plan 11. Initial Environmental Examination 12. Resettlement Plan Due Diligence Report Supplementary Documents 13. Summary of Project Performance 14. Contribution to ADB’s Strategy 2030 Operational Priorities