Report and Recommendation of the President to the Board of Directors

Project Number: 53045-003 November 2020

Proposed Grant Kingdom of Tonga: Nuku’alofa Port Upgrade 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 (as of 9 October 2020)

Currency unit – pa'anga (T$)

T$1.00 = $0.434 $1.00 = T$2.306

ABBREVIATIONS ADB – Asian Development Bank AMP – asset management plan COVID-19 – coronavirus disease EMP – environmental management plan IEE – initial environmental examination ISPS – International Ship and Port Security LED – light emitting diode m – meter MOF – Ministry of Finance MOI – Ministry of Infrastructure MSL – mean sea level O&M – operation and maintenance PAM – project administration manual PAT – Ports Authority Tonga PMU – project management unit PRF – project readiness financing QSIW – Queen Salote International Wharf SLR – sea level rise SPC – Pacific Community (formerly South Pacific Commission) TEU – twenty-foot equivalent unit USCG – United States Coast Guard

NOTE

In this report, "$" refers to United States dollars, unless otherwise stated.

Vice-President Ahmed M. Saeed, Operations 2 Director General Leah Gutierrez, Pacific Department (PARD) Deputy Director General

Emma Veve, PARD

Director Dong-Kyu Lee, Transport and Communications Division (PATC), PARD Team leader Juan Gonzalez, Transport Specialist, PATC, PARD Team members Maila Conchita M. Abao, Associate Project Officer, PATC, PARD

Chandra Arora; Procurement Specialist; Procurement Division 2; Procurement, Portfolio, and Financial Management Department

Flordeliza Asistin; Financial Management Specialist; Portfolio, Results, and Quality Control Unit (PAOD-PRQ); PARD

Cindy Bryson, Safeguards Specialist, PAOD-PRQ, PARD Leah Ann Castro, Associate Project Analyst, PATC, PARD Taniela Faletau, Safeguards Specialist, PAOD-PRQ, PARD Anna M. Fink, Economist, Regional Cooperation and Integration Thematic

Group, Sustainable Development and Climate Change Department Noelle O’Brien, Principal Climate Change Specialist, Energy Division,

PARD Roshan Ouseph, Senior Counsel, Office of the General Counsel Cha-Sang Shim, Transport Specialist, PATC, PARD Ritu Verma, Principal Social Development Specialist, Social Sectors and

Public Sector Management Division, PARD Jean Williams, Principal Environment Specialist, PAOD-PRQ, PARDa

Peer reviewer Kuancheng Huang; Senior Transport Specialist; Transport Sector Group, Office of the Cluster Head; Sustainable Development and Climate Change Department

a Outposted to the Pacific Subregional Office.

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 3 C. Value Added by ADB 4 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 9 D. Governance 10 E. Poverty, Social, and Gender 10 F. Safeguards 11 G. Summary of Risk Assessment and Risk Management Plan 11

IV. ASSURANCES 12

V. RECOMMENDATION 12

APPENDIXES

1. Design and Monitoring Framework 13

2. List of Linked Documents 15

Project Classification Information Status: Complete

PROJECT AT A GLANCE

Source: Asian Development BankThis document must only be generated in eOps. 19062020112142293398 Generated Date: 12-Oct-2020 11:01:26 AM

1. Basic Data Project Number: 53045-003Project Name Nuku'alofa Port Upgrade Project Department/Division PARD/PATCCountry Tonga Executing Agency Ministry of FinanceRecipient Government of Tonga

Country Economic Indicators

https://www.adb.org/Documents/LinkedDocs/?id=53045-003-CEI

Portfolio at a Glance https://www.adb.org/Documents/LinkedDocs/?id=53045-003-PortAtaGlance

2. Sector Subsector(s) ADB Financing ($ million)Transport Transport policies and institutional development 2.00

Water transport (non-urban) 43.00

Total 45.00

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 sustainabilityStrengthening governance and institutional capacity

Fostering regional cooperation and integration

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

High

ADB Financing

Adaptation ($ million) 15.10

Mitigation ($ million) 6.10

Cofinancing

Adaptation ($ million) 0.00

Mitigation ($ million) 0.00

Sustainable Development Goals Gender Equity and MainstreamingSDG 1.5SDG 5.5SDG 9.1SDG 10.2SDG 12.5SDG 13.a

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 45.00

Sovereign Project grant: Asian Development Fund 45.00

Cofinancing 0.00

None 0.00

Counterpart 5.00

Government 5.00

Total 50.00

Currency of ADB Financing: US Dollar

Vuna Road

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Motutapu

Fafa Onevai

Ha'atafu

Ha'akili

Ha'avakatolo

Te'ekiuNukunuku

Ha'utu

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Navutoka Kolonga

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Fua'amotu

NUKU'ALOFA

TONGATAPU

NUKU’ALOFA PORTQueen Salote International Wharf

NUKU’ALOFA PORTQueen Salote International Wharf

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.

Meters

0 2500 5000

N0 200100

QUEEN SALOTE

INTERNATIONAL WHARF

Container Yard

International cargowharf number 1

Inte

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nal carg

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wharf

number 2

Po

rt access road

Project Area

Proposed Wharf Extension

Proposed Mooring and/or Berthing Dolphin

TONGA

NUKU'ALOFA PORT UPGRADE PROJECT

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I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed grant to the Kingdom of Tonga for the Nuku’alofa Port Upgrade Project. 2. The project will upgrade cargo wharves located in the Queen Salote International Wharf (QSIW) of Nuku’alofa Port. It will rehabilitate, renew, and expand the infrastructure; strengthen management and operations; and improve the port's capacity. The project is aligned with the impact of safer, more reliable, and more affordable transport infrastructure and services in Tonga. The project will also benefit other Pacific countries in the region with connecting shipping routes with the Nuku’alofa Port, such as the Cook Islands, Samoa.

II. THE PROJECT A. Rationale 3. Tonga is an archipelago of more than 170 islands scattered across 700,000 square kilometers of the southern Pacific Ocean. About 70% of the nation’s 108,000 inhabitants live on the main island of Tongatapu, which is also home to the country’s capital, Nuku’alofa. The rest of the population is spread across 36 surrounding islands. Being a small island nation, Tonga must import most of the goods needed, and more than 98% of imports arrive by sea. Nuku’alofa Port is the country’s main international port and its lifeline, given its geographical isolation from international markets. 4. Deteriorating and insufficient port infrastructure. The cargo terminal of Nuku’alofa Port is the QSIW with two international container wharves.1 The QSIW is deteriorating because of lack of maintenance and investment. A structural assessment undertaken in March 2019 found that wharf no. 1 was in a very advanced state of deterioration requiring immediate upgrade. Operations at the wharf were suspended in April 2019 because of safety concerns, and remain suspended to date. The other wharves are in serviceable condition and their structural integrity remains sound. However, related facilities such as the container yard and the port’s access road are also deteriorating and pose safety risks. Rehabilitation is required within 5 years to extend the service life of the infrastructure and avoid the higher costs of renewal. 5. The Ministry of Infrastructure (MOI) is responsible for overall infrastructure planning and implementation, while Ports Authority Tonga (PAT), a government-owned enterprise reporting through the Ministry of Public Enterprises, is responsible for the operation and maintenance (O&M) of Nuku’alofa Port. While PAT has successfully operated the port since its creation in 1999, it has insufficient technical capacity to undertake maintenance works and insufficient funds to cover maintenance costs. 6. Tonga is highly reliant on imports, so the cost of importing goods has a significant impact on its economy and can undermine economic development. The water depth at the port is 11 meters (m), enough to accommodate container vessels up to 220 m long. However, the length of wharf no. 2 is only 110 m, which limits the vessel size to 180 m and prevents the deployment of larger vessels to lower transport costs. The short wharf and the lack of mooring points also pose the risk of mooring line failure and excessive vessel motions during the loading and unloading of container ships. In addition, cargo volumes (containers) have increased from an

1 The QSIW has four wharves, two of which were previously used for domestic trade and transport. The international

cargo wharves are wharf no. 1 built in 1967 and upgraded in 1997, and wharf no. 2 built in 1986.

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average of 12,071 twenty-foot equivalent units (TEU) per year between 2004 and 2010 to an average of 25,205 TEU per year between 2016 and 2018.2 Port demand forecasts reflect a global economic slowdown and trade disruptions due to the coronavirus disease (COVID-19) pandemic. 7. Port safety and operational challenges. The QSIW is compliant with the International Ship and Port Security Code (ISPS Code). 3 In addition, it is assessed yearly by the International Port Security liaison officers from the United States Coast Guard (USCG). However, the latest USCG assessment found problems to be addressed in the QSIW, although did not affect the compliance with the ISPS Code. These problems concern access control and the marking of restricted areas, and other safety and security risks.4 Following a fatal accident at the QSIW in 2018, a safety assessment conducted by the Pacific Community (SPC) revealed serious health and safety hazards, such as the poor condition of the container yard; unsafe handling of containers; poor lighting; and lack of fire hydrants, life buoys, and sufficient first aid kits.5 8. Tonga is a member state of the International Maritime Organization and has ratified the International Convention for the Prevention of Pollution from Ships, which obliges it to comply with the technical, environmental, and safety standards set forth in the convention. However, the current operating practices and conditions at the QSIW are poor and also harmful to the environment, such as uncontrolled dumping of rubbish and waste, with spillovers onto the foreshore; unbounded fuel storage areas; and pooling of water and other liquids. Moreover, energy-efficient practices have not been fully integrated into port operations. In June 2018, as part of its Green Pacific Port initiative, the SPC undertook an energy audit that identified measures to cut energy consumption and emissions, such as control of vehicle movements or replacement of lighting.6 PAT only implemented some of the measures because of lack of capacity and funding. 9. Minimal use of technology and infrequent updates to tariff regime. An assessment supported by Asian Development Bank (ADB) technical assistance found that the level of digitalization in the port is minimal.7 Port processes are mainly paper-based, security personnel do not employ proper systems to ensure controlled access and port security (such as cameras and remote gate control), and PAT does not have real-time data on wave conditions to inform vessel movements. In addition, port tariffs have not been revised or reviewed since 2014, although tariff adjustments are needed to optimize revenue and ensure alignment with neighboring countries. These issues affect productivity and could have a future impact in the compliance with the ISPS Code. 10. Port vulnerability to climate change and disasters. The port is in a region vulnerable to climate change impacts and disasters. Tonga as a whole is in a seismically active area, with large earthquakes regularly occurring every 10–20 years and resulting in significant damage. The port also suffers from the impacts of cyclones hitting Tonga regularly with strong waves, winds, rainfall, and floods. Tsunamis with waves of up to 1 m strike every 50–100 years. Climate change is worsening the effects of cyclones, and the rising sea level creates additional risks. Climate change impacts in the port are high, and it is therefore essential to enhance the resilience of the

2 TEU (commonly used in the singular) is a standard unit of measurement in maritime transport, equal to a container

20 feet long, 8 feet wide, and 8 feet tall. A 40-foot container is equivalent to two TEU. 3 The ISPS Code is an essential international maritime regulation for the safety and security of ships, ports, cargo, and

crews. It is an amendment to the Safety of Life at Sea Convention (1974/1988) that came into force in 2004. The USCG is one of the lead agencies implementing the ISPS Code and monitoring compliance with it.

4 USCG. 2018. Nuku’alofa Port Safety Review. Nuku’alofa. 5 The Pacific Community, founded in 1947 as the South Pacific Commission (hence the abbreviation SPC) but

renamed in 1997, is an international organization for the sustainable development of the Pacific. 6 The Green Pacific Port initiative aims to make port operations more sustainable at all the Pacific ports. 7 ADB. 2014. Technical Assistance for Trade and Facilitation in the Pacific. Manila.

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port. Disaster management processes need to be put in place to minimize disruptions and resume services promptly after a disaster. 11. Limited role of women. Tonga ranks 100th (out of 187) in the Gender Inequality Index of the United Nations Development Programme (UNDP).8 According to the Government of Tonga, 40.5% of women are employed in relatively low-paid craft and related trades; 16% are professionals, 16% are service and sales workers, and 10.7% are clerical support workers. 9 All five PAT board members are men and, of the eight individuals on the management team, only one is a woman (the manager of corporate services) (12.5%). The low representation of women in the highest levels of decision-making reflects a strong gender bias in Tonga, which sees men as the key decision makers in society. Women represent 14% (22) of PAT staff overall, and are employed largely in support roles in corporate services and QSIW operations (PAT Annual Report, 2019). In addition, PAT does not have a gender policy to achieve gender equality at the workplace and in the organization. 12. Communicable diseases. Tonga is highly vulnerable to communicable diseases and their impacts because it relies heavily on imported goods and international tourism, and the capacity of the health system is weak. The 2019 measles outbreak in the Pacific region was followed by COVID-19. While Tonga has no reported COVID-19 cases to date, the pandemic-induced global border closures are significantly disrupting the country’s service industry, especially tourism, which is a major source of income. Ensuring that Nuku’alofa Port remains operational while shielding the country from communicable diseases is vital. Tonga needs to strengthen its procedures with a plan to mitigate the transmission risk of communicable diseases. 13. Alignment with strategic priorities. Tonga’s development goals include safer, more reliable, and more affordable transport infrastructure and services, as defined in the Tonga Strategic Development Framework, 2015–2025.10 The National Infrastructure Investment Plan, 2013–2023 prioritizes the improvement of maritime infrastructure to cope with increased demand and the impact of climate change and disasters.11 The project is aligned with the Pacific Approach, 2016–2020 in reducing costs by improving regional connectivity through transport infrastructure, managing risks, and enabling value creation.12 The project is also associated with other regional initiatives, such as the SPC’s Green Pacific Port (para. 8). ADB’s Strategy 2030 expands the focus on small island developing states to strengthen connectivity, access, and institutional capacity, while tackling climate change impacts and disaster risks, fostering regional cooperation and integration and addressing poverty and reducing gender inequalities.13 The project is listed in ADB’s country operations business plan for 11 Small Pacific Island Countries, 2020–2022.14 B. Project Description 14. The project is aligned with the following impact: safer, more reliable, and more affordable transport infrastructure and services provided in Tonga.15 The project will have the following outcome: capacity and operations of Nuku’alofa Port improved.16

8 http://hdr.undp.org/en/content/gender-inequality-index (accessed 8 June 2020). 9 Government of Tonga. 2018. Tonga Labour Force Survey 2018 Analytical Report. Nuku’alofa. 10 Government of Tonga. 2015. Tonga Strategic Development Framework, 2015–2025. Nuku’alofa. 11 Government of Tonga. 2013. Tonga National Infrastructure Investment Plan, 2013–2023. Nuku’alofa. 12 ADB. 2016. Pacific Approach, 2016–2020. Manila. 13 ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific.

Manila. 14 ADB. 2019. Country Operations Business Plan: 11 Small Pacific Island Countries, 2020–2022. Manila. 15 Government of Tonga. 2015. Tonga Strategic Development Framework, 2015–2025. Nuku’alofa. 16 The design and monitoring framework is in Appendix 1.

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15. Output 1: Port infrastructure rehabilitated. Output 1 includes (i) rehabilitating all cargo wharves and restoring the top surface (deck) of wharf no. 1, (ii) building a concrete seawall and strengthening the rock revetment, (iii) reconstructing and reorganizing the container yard; (iv) upgrading the port access road; and (v) repairing auxiliary port facilities. These interventions will extend the life of the infrastructure, increase port capacity and safety, and lower O&M costs. 16. Output 2: International cargo wharves and supporting infrastructure extended. Output 2 consists of (i) a 50 m extension of wharf no. 2; (ii) the construction of four mooring or berthing dolphins for the safer docking of vessels during loading and unloading; and (iii) the relocation of a channel navigation marker. These interventions will allow the deployment of larger vessels, which will reduce shipping costs and ultimately the cost of importing and exporting goods. It will also encourage regional trade to neighboring states with connecting shipping routes, such as the Cook Islands, Samoa, and the main trading partners (Australia, New Zealand, and the United States). 17. Output 3: Port operations and management improved. Output 3 consists of improving the capacity of PAT to operate and manage the port. It covers (i) the formulation of a gender equality policy and related training—such as raising awareness of sexual exploitation, abuse, and harassment at the workplace, and of sexually transmitted diseases—as well as support for the recruitment (and retention) of women into more responsible functions; (ii) implementation of an asset management plan (AMP) to ensure the financial sustainability of the port; (iii) a review of the tariff regime and the development of reform options; (iv) business skills training for women to develop and manage their own microbusinesses; and (v) training programs on port operations, environmentally sustainable work practices, equipment handling, health and safety aspects, and port security, including a COVID-19 response plan for port operations. 18. COVID-19. The project scope was broadened to include a COVID-19 response plan to mitigate the risk of virus transmission and ensure that the port remains operational during the pandemic. The plan includes reviewing the port's operational procedures, creating an isolation facility within the port boundaries, providing essential medical equipment, and implementing a training program for employees in coordination with local health authorities. Port demand forecasts were revised in light of a global economic slowdown and trade disruptions. Despite the COVID-19 situation, the project remains feasible and relevant because infrastructure needs still have to be met and the investment will also aid the post-COVID-19 economic recovery. C. Value Added by ADB 19. ADB has extensive experience in helping meet the needs and reduce the challenges faced by Pacific developing member countries in maritime transport. It supported past and ongoing improvements to maritime infrastructure and services in Fiji, Papua New Guinea, Samoa, Solomon Islands, Tuvalu, and Vanuatu. The proposed project will benefit from the lessons of this earlier assistance, such as the need to (i) allocate sufficient contingencies given the nature of civil works in complex marine environments, (ii) ensure a high level of readiness, (iii) allow for third-party reviews of the detailed engineering design, and (iv) schedule civil works wisely to avoid cyclone seasons. ADB also supported the preparation of an AMP, to be implemented as part of output 3 (para. 17) and defined in the project administration manual (PAM), to ensure the sustainability of the investment for Tonga.17 The AMP, which includes various technical and

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

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financial requirements to improve PAT’s capacity to undertake maintenance, can be replicated across different projects in Tonga and the wider Pacific region. 20. Green and smart ports promoting gender equality. The recent experience gained by ADB in promoting green and smart ports in the port of Apia (Samoa) is a key value addition.18 The project is designed with green and smart components that promote the port’s environmental sustainability. These include new drainage systems and bounded container leaking areas to control and eliminate spills into the sea, or new lighting towers with light emitting diode (LED) lamps and dimmable control. Supporting gender equality and women’s empowerment, the project includes gender aspects to promote the participation of women in port operations, which is critical to the equitable development of countries with low levels of women’s participation. 21. Lessons from previous project. The most recent ADB transport project in Tonga prior to this one was the Transport Infrastructure Project, which upgraded wharf no. 1 in 1997, the same wharf that will be rehabilitated under the project.19 The project closed in November 2000, and the completion report concluded that it had been implemented satisfactorily and that the derived benefits exceeded expectations.20 The key lessons are that (i) regular (semiannual) review missions are imperative; (ii) construction supervision and project management should be carried out by people full-time based in the country; (iii) local materials (aggregates) cannot be used in marine concrete structures, since wharf no. 1 was upgraded using local materials but deteriorated prematurely; and (iv) monitoring and maintenance mechanisms need to be in place to prevent the premature degradation of the infrastructure. 22. Project preparation and readiness. ADB’s technical assistance for Strengthening Domestic Transport Connectivity in the Pacific supported the preparation and due diligence of the project.21 To ensure high project readiness, ADB in July 2019 also approved project readiness financing (PRF) to prepare the detailed designs and provide procurement support.22 The designs are due for completion within November 2020. Procurement (prequalification) started in July 2020. D. Summary Cost Estimates and Financing Plan 23. The project is estimated to cost $50.0 million (Table 1). Detailed cost estimates by expenditure category and by financier are included in the PAM (footnote 17). The civil works for the port upgrade represent the major expenditure under the project.

Table 1: Summary Cost Estimates ($ million)

Item Amounta A. Base Costb 1. Output 1: Port infrastructure rehabilitated 22.7 2. Output 2: International cargo wharves and supporting infrastructure extended 17.0 3. Output 3: Port operations and management improved 0.3 Subtotal (A) 40.0 B. Contingenciesc 10.0 Total (A+B) 50.0 a Includes taxes and duties of $4.9 million. Such amount does not represent an excessive share of the project cost.

The government is expected to finance all taxes and duties through exemption.

18 ADB. 2019. Enhancing Safety, Security, and Sustainability of Apia Port Project. Manila. 19 ADB. 1994. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Kingdom

of Tonga for the Transport Infrastructure Project. Manila. 20 ADB. 2001. Project Completion Report: Transport Infrastructure Project in Tonga. Manila. 21 ADB. 2017. Technical Assistance for Strengthening Domestic Transport Connectivity in the Pacific. Manila. 22 ADB. 2019. Project Readiness Financing to Kingdom of Tonga for Transport Project Development Facility. Manila.

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b In mid-2020 prices as of October 2020. c Physical contingencies computed at 16% and price contingencies computed at 4%, and a provision for exchange

rate fluctuation are included. Source: Asian Development Bank estimates.

24. The government has requested a grant not exceeding $45.0 million from ADB’s Special Funds resources (Asian Development Fund) to help finance the project. The requested financing comprises resources from the concessional resources regional pool, as well as the country’s grant allocation. The summary financing plan is in Table 2. ADB will finance the expenditures in relation to civil works; equipment; consulting services for construction supervision, capacity building, and training; and individual consultants of the project management unit (PMU). The government will finance taxes and duties, office space, and small expenditures for the operation of the PMU office.

Table 2: Summary Financing Plan

Source Amount

($ million) Share of Total

(%) Asian Development Bank

Special Funds resources (Asian Development Fund grant) 15.0 30.0 Special Funds resources (Asian Development Fund grant – Concessional Resources Regional Pool) 30.0 60.0

Government of Tonga 5.0 10.0 Total 50.0 100.0

Source: Asian Development Bank estimates.

25. Climate change mitigation is estimated to cost $6.1 million and climate change adaptation is estimated to cost $15.1 million. ADB will finance 100% of the mitigation and adaptation costs. Mitigation activities include installing LED lighting in the port with dimmable control, building an electrical substation and a fuel tank with a fuel monitoring system, and extending one wharf. Adaptation activities include raising the level of the container yard, building a seawall, and installing new drainage systems.23 The costs of disaster risk reduction measures to boost the port’s disaster resilience total $4.8 million and include designing the structures to the latest earthquake codes and suitably elevating critical infrastructure (electrical substation). E. Implementation Arrangements 26. Project management arrangements. The Ministry of Finance (MOF) will be the executing agency and the Ministry of Infrastructure (MOI) will be the implementing agency for the project. Both will be responsible for administering ADB financing, undertaking procurement, and implementing the project. PAT as the current port operator will provide advisory support and technical inputs but will not administer funds, award or administer the contracts for consulting services and works, or otherwise implement project activities. Following project completion, PAT will be responsible for the O&M of Nuku’alofa Port. The existing Sector-Based Steering Committee will oversee project implementation and provide guidance on the alignment of project outcomes with the government’s priorities and objectives. The government’s Project, Aid and Development Coordination Committee will guide coordination with other development partners. Both committees are formed by Government agencies and ministries. The PMU was established under the PRF (para. 22) and will continue throughout the project. 27. Consulting recruitment and procurement. The procurement of goods, works and consulting services will follow the ADB Procurement Policy (2017, as amended from time to time), the Procurement Regulations for ADB Borrowers (2017, as amended from time to time), and

23 Details are in Climate Change Assessment (accessible from the list of linked documents in Appendix 2).

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associated staff instructions. Advance contracting will be used. The government requested ADB support in the recruitment of the construction supervision consultant. A delegation matrix outlining the responsibilities of the government and ADB in selecting the consultant was agreed between the two parties and set out in the PAM (footnote 17). ADB will support the recruitment process, including the tender and evaluation. The government will remain responsible for negotiating, signing, and managing the consulting contract. 28. ADB used strategic procurement planning to choose the best possible procurement arrangements. The project will achieve the best value for money by (i) using e-procurement technology to lower the transaction cost and enhance transparency; (ii) attracting well-qualified international contracting firms to deliver quality civil works using the prequalification process, followed by open competitive bidding with merit-point-based evaluation criteria; (iii) directly contracting the construction supervision consulting firm (Royal HaskoningDHV) because of its satisfactory performance in providing feasibility study and detailed design services—this “one project–one consultant” strategy will ensure continuity and technical consistency.

Table 3: Implementation Arrangements Aspects Arrangements Implementation period November 2020–June 2026 Estimated completion date 30 June 2026 Estimated grant closing date 31 December 2026 Management (i) Oversight bodies Project, Aid, and Development Coordination Committee

Sector-Based Steering Committee (ii) Executing agency Ministry of Finance (iii) Key implementing agency Ministry of Infrastructure (iv) Implementation unit Project management unit, 3 staff Procurement Open competitive bidding with

prequalification (internationally advertised)

1 contract $34.00 million

Request for quotations (vehicle) 1 contract $35,000 Consulting services Direct contractinga (firm) 1 contract (60 PM) $1.65 million

Direct contracting (individual consultants) 3 contracts (90 PM) $0.46 million Advance contracting Main civil works and consulting services packages 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, PM = person-months. a The firm Royal HaskoningDHV will be contracted directly as construction supervision consultant because of its

satisfactory performance in providing feasibility study and detailed design services, which will ensure continuity and technical consistency.

Source: Asian Development Bank estimates.

III. DUE DILIGENCE A. Technical 29. The project feasibility study covered a full assessment of the operation and capacity of the port over the next 20 years up to 2040, covering demand analysis and forecast, benchmarking with other ports in the region, condition assessment of infrastructure and operations, and vulnerability to climate change and disasters. The feasibility study also identified several options for the upgrade of the port that were assessed and prioritized using a multicriteria analysis. The criteria of the analysis were (i) safety of operation, (ii) infrastructure capacity, (iii) social and environmental impacts, (iv) O&M, (v) constructability, (vi) climate and disaster resilience, and (vii) future proofing. The multicriteria analysis concluded with the proposed upgrade option.

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30. The selected option is the most cost-effective solution of the analyzed options and consists of extending wharf no. 2 and refurbishing wharf no. 1. Wharf no. 1 is to be used as a secondary wharf to minimize potential delays associated with several vessels arriving at once (10%–15% occurrence). This wharf is also key to maintaining the vital service provided by the port during construction works to extend wharf no. 2, which will be temporarily closed. The reorganization of the container yard ensures optimal efficiency during offloading operations; safer road and pedestrian access; and new lighting, firefighting, and electrical substation facilities positioned at strategic locations. The design of the port access road will ensure better access by removing the risk of flooding under heavy rain events. 31. The estimation of sea level rise (SLR) was based on a 25-year dataset of water levels recorded at the QSIW’s tide gauge and on the very high emissions scenario RCP8.5 to define a 0.57 m SLR by 2070. A storm surge level of 2.3 m mean sea level (MSL) was defined as design criterion, which corresponds to 50-year annual recurrence intervals without SLR and 20-year annual recurrence intervals with SLR by 2050. The existing deck level of the wharves is adequate for the 2070 SLR under normal port operations. The container yard will be raised to at least 2.3 MSL, while the perimeter of the site will be raised to 2.6 MSL matching the current level of the wharves. 32. Given the high seismicity of the area, standards by the American Society of Civil Engineers and the Permanent International Association of Navigation Congresses were used to provide suitable specifications for marine structures in high seismic locations. Australian standards were adopted for works without seismic considerations. The project also finances the implementation of smart port components such as LED lighting with “smart features” to reduce energy consumption, installation of closed-circuit television (CCTV) with motion detectors to increase security, installation of a self-contained fuel system that captures fuel usage to implement eco-driving and prevent oil spill risks, and installation of a wave-measuring device that aids in operations and vessel routing. 33. The main lessons from the earlier Transport Infrastructure Project (para. 21) are incorporated in this project: (i) allowance for a longer construction schedule so marine work can be done outside the cyclone season, and (ii) use of imported precast concrete elements (avoiding highly porous local aggregates) to prevent premature degradation and reduce maintenance costs. The design life target for the exposed marine work was raised to 50 years in response to the observed deterioration of such work in wharf no. 1. 34. The detailed design consultant prepared cost estimates with cost information from its own databank using specialized cost estimators from consultations with potential suppliers of major inputs and using as a reference similar marine works conducted in Tonga to build the cruise terminal, Vuna Wharf (completed in 2011), and the domestic passenger terminal (completed in 2017). An independent consulting firm with international experience in similar maritime projects undertook a third-party review of the detailed engineering designs to ensure their quality. B. Economic and Financial Viability 35. The project will allow the safe and efficient operation of Nuku’alofa Port, a lifeline asset for Tonga, and will increase the resilience of the port to climate and disasters. The project has a basic-needs aspect and one of basic public goods and services, since a without-project scenario would have serious negative impacts on the country if the population were no longer able to import basic goods. The feasibility study assessed several investment options and selected the most

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cost-effective one. Notwithstanding the above, ADB carried out a cost–benefit analysis of the proposed investment. 24 36. The port rehabilitation and extension will allow maintaining the operational capacity of the QSIW; reduce the risk arising during loading and unloading of container ships because of the current wharf length; and increase the vessel size that can be serviced by the port, which will lower the unit cost of shipping. Since Nuku’alofa Port at present prevents the deployment of larger ships serving this route in the Pacific region, the removal of this constraint will also benefit other islands in the region. A smaller number of larger vessels will also result in a substantial reduction in greenhouse gas emissions and cost savings for ship operators that could be transferred to the users. Other improvements (container yard, smart port) will provide additional benefits thanks to an increase in yard storage capacity, stronger operational efficiency, less electricity consumption, reduced cargo loss and theft, and lower maintenance costs. 37. The economic analysis includes the potential effects of the COVID-19 pandemic on global trade, which are mainly lower growth projections, forecast by the International Monetary Fund in April 2020, and the deferment of the deployment of larger container vessels in line with the expected slack in demand growth in the South Pacific region. The analysis suggests that the proposed improvements are economically viable with an economic internal rate of return of 9.9%. A sensitivity analysis testing the effects of possible unfavorable changes in the key parameters that determine the project’s costs and benefits indicates that economic viability remains satisfactory with an economic internal rate of return of 8.5% or above. 38. The financial evaluation of the project indicates that the net incremental benefits are positive. The project is an essential public infrastructure investment, and primary considerations are its economic viability and financial sustainability, so a financial sustainability analysis was carried out. Based on historic financial performance, the financial analysis of the Nuku’alofa Port operations indicates that the financial standing of PAT is strong with consistent net profit. Financial projections of PAT's operations with the project were made based on projected demand and operational needs over a 20-year period to assess whether PAT will be able to allocate sufficient funds for the annual maintenance and periodical repairs. An analysis of net operating cash flow before maintenance and repair indicates a coverage ratio of more than 3 for the maintenance and repair needs throughout the analysis period. C. Sustainability 39. The project, along with the planned capital investment by the port, will rehabilitate and upgrade the port facility to serve the port traffic for the next 20 years up to 2040. ADB conducted a review of PAT’s asset management practices and concluded that the sustainability risk is substantial. While the financial analysis indicates that the port generates sufficient cash flow to cover the maintenance needs, PAT has no technical capacity to undertake routine and periodic maintenance of its assets nor does it set aside adequate funds for maintenance. The project includes the implementation of an AMP set out in the PAM (para. 19, footnote 17), to ensure sustainable maintenance of the port assets. To meet the maintenance needs of the port facilities during the life of the project and ensure their sustainability, the AMP calls for the (i) creation of a major maintenance reserve account by PAT; (ii) establishment of an asset management unit; and (iii) forecast of costs associated with the maintenance of the project, as well as identification of the sources of funding to meet those costs.

24 Financial Analysis and Economic Analysis (accessible from the list of linked documents in Appendix 2).

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D. Governance 40. Financial management. The financial management assessment was conducted in December 2018 for the PRF and updated in February 2020 for the project, in accordance with ADB’s Guidelines for the Financial Management and Analysis of Projects and the Financial Due Diligence: A Methodology Note. The financial management assessment considered the capacity of MOF and MOI, including funds-flow arrangements, staffing, accounting and financial reporting systems, financial information systems, asset management, and internal and external auditing arrangements. The financial management capacity of MOF as executing agency and of MOI as implementing agency is considered adequate. The agencies also have proven capacity to manage the advance account. It is concluded that the overall pre-mitigation financial management risk of MOF and MOI is moderate. Weaknesses were found in the internal audit function, which MOF needs to extend to its line agencies. Also, the PMU needs strengthening to deepen its knowledge of ADB’s disbursement procedures and reporting requirements. Finally, the assets register must be updated to correctly define the budgetary allocation for maintenance. 41. Procurement. The overall (post-mitigation) project procurement risk is rated medium. Strategic procurement planning (para. 28) led to the conclusion that MOF and MOI have limited procurement experience when it comes to major projects financed by development partners, and little or no resources for the preparation of the technical aspects of bidding documents or the supervision of contracts. The planning report recommends the following mitigation measures: (i) provision of a construction supervision consultant with international expertise to help the PMU oversee the civil works and project implementation; (ii) ADB’s prior review of draft prequalification and bidding documents, and of prequalification and bid evaluation reports; (iii) provision of a detailed design consultant to support all procurement activities; and (iv) continued individual consulting support to the PMU on contract management and project implementation. 42. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government, MOF, and MOI. The specific policy requirements and supplementary measures are described in the PAM (footnote 17). E. Poverty, Social and Gender 43. Poverty and social. The construction works to upgrade the port will create jobs for the community, and a more effective international seaport will also enable more local economic activity. The improved facilities will ensure better health and safety conditions for workers, reduce delays in cargo operations, and increase the turnaround of ships. The benefits of an optimized container terminal and port precinct will help reduce the cost of cargo, and may also translate into a lower cost of goods in the domestic market. 44. Gender equality and women’s empowerment. The project is categorized effective gender mainstreaming, and the project includes a gender action plan. The project promotes employment, training, and microbusiness opportunities for women, including technical work positions; and helps rectify the issue of women’s low participation in the labor force. It aims to ensure a gender-sensitive workplace environment through the provision of equal pay for equal work; gender-sensitive infrastructure (e.g., women’s facilities, night lighting, security features); the formulation of a gender policy; and training for staff on how to prevent or deal with sexual exploitation, abuse, and harassment at the workplace, and on gender transformative change in general. The project will also have indirect benefits for women, who are often in charge of household budgeting, such as lower-cost goods and better flow of goods from improved trade.

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F. Safeguards 45. In compliance with ADB’s Safeguard Policy Statement (2009), the project’s safeguard categories are as follows.25 46. Environment (category B). The initial environmental examination (IEE) shows that impacts on the physical, biological, and socioeconomic environment will be minor, few, and reversible, if any; and most can be managed during both construction and operation through good practice and the implementation of the project’s environmental management plan (EMP). Short-term impacts are anticipated during construction, such as dust, noise, and waste generated by landside and marine civil works, as well as minor community and occupational health and safety risks. A sediment plume analysis showed that any impacts from turbidity will be localized and insignificant. ADB will ensure that its Safeguard Policy Statement and country safeguards are complied with. In line with ADB’s Access to Information Policy, the IEE and subsequent monitoring reports will be disclosed on ADB’s website. The contractors will prepare a construction EMP based on an updated IEE and project EMP. The PMU, supplemented by the construction supervision consultant, will include safeguard staff who will review and clear the construction EMP; MOI will monitor its effectiveness and compliance with it. 47. Involuntary resettlement (category C). Due diligence activities confirm that no involuntary resettlement impacts will result from the project. The project will be implemented within the existing port area. The land is state-owned and leased to PAT. The improvements to the yard and access road take place within the existing leased area. There will be no impacts on non-land assets or improvements to land beyond that owned by PAT, and no impacts on land use that would result in physical or economic displacement impacts. The wharf extension to the south-west will require a permit and the submission of a lease application to the Crown, in line with Tongan law. The permit and lease will be obtained before construction starts. Fishing and other non-port activities are already prohibited within the jurisdiction of the port, and the project will not have an adverse effect on fishing or tourism-related livelihoods. The due diligence found no legacy issues concerning land that would require corrective actions. Key stakeholders were consulted and will continue to be consulted during implementation. The Social Safeguards Due Diligence Report, as well as the IEE, provide details on the project-specific grievance redress mechanism. The PMU and the construction supervision consultant will monitor compliance with the social safeguards. 48. Indigenous peoples (category C). The project will not impact any distinct and vulnerable groups of indigenous people. The project is limited to civil works within the existing port facilities, in Tonga's capital, and to some capacity-building activities for employees of PAT. The project beneficiaries are part of the mainstream Tongan society. Nearly the entire population of Tonga is considered to be of Polynesian ancestry. G. Summary of Risk Assessment and Risk Management Plan 49. Significant and high risks and mitigating measures are summarized in Table 4 and described in detail in the risk assessment and risk management plan.26

25 ADB. 2009. Safeguard Policy Statement. Manila; ADB Safeguard Categories. 26 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

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Table 4: Summary of Risks and Mitigating Measures Risks Mitigation Measures Implementation delays in critical decision-making on the part of the government (contract signing, issuance of notices to proceed, contract variations, payments)

The project management unit housed in the Ministry of Infrastructure will oversee overall project implementation. Any potential delays are to be reported in a timely manner with recommended remedial actions.

Delays in procurement and contract implementation because of insufficient capability and/or capacity (e.g., resources, technology, skills) of government entities.

The detailed design consultant will provide support for all procurement activities. The construction supervision consultant will support the executing agency in contract administration and overall project administration.

Abnormally low bids pose risk to the quality and timely delivery of the project.

Evaluation criteria and provisions regarding abnormally low bids and value for money will be included in the tender documents.

The outbreak of the coronavirus disease (COVID-19) may delay project implementation (mobilization, default of potential contractors).

Such risk is uncertain and outside the project’s control but, when possible, videoconference meetings will be arranged. In addition, the proposed COVID-19 mitigation plan will help manage the risk.

Cyclones create disruptions and delays during project implementation and construction.

Such risk is uncertain and outside the project’s control but will be mitigated, allowing marine works only during the dry seasons.

Slow implementation of plans and training because of unexpected demands on maritime human resources

The project management unit will play an active role in engaging with relevant stakeholders and participating staff.

The executing and implementing agencies lack capacity and experienced staff to oversee and implement large and complex civil works.

A CSC with international expertise will provide support and supervise civil works and project implementation. The PMU will provide additional support to the executing and implementing agencies and oversee the project throughout its implementation. ADB will field at least 2 review missions per year and will hold conference calls with the PMU and CSC every 2 weeks.

Inadequate maintenance leads to the degradation of assets.

As per the grant agreement, PAT will create a separate reserve fund in its balance sheet with annual provisions from its profits and inform ADB annually of the manner in which these reserves have been expended.

ADB = Asian Development Bank, COVID-19 = coronavirus disease, CSC = Construction Supervision Consultant, PAT = Ports Authority Tonga, PMU = Project Management Unit. Source: Asian Development Bank.

IV. ASSURANCES

50. The government and MOF have assured ADB that the implementation of the project 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 and grant documents. 51. The government and MOF have agreed with ADB on certain covenants for the project, which are set forth in the draft grant agreement.

V. RECOMMENDATION 52. 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 $45,000,000 to the Kingdom of Tonga from ADB’s Special Funds resources (Asian Development Fund) for the Nuku’alofa Port Upgrade Project, on terms and conditions that are substantially in accordance with those set forth in the draft grant agreement presented to the Board.

Masatsugu Asakawa President

9 November 2020

Appendix 1 13

DESIGN AND MONITORING FRAMEWORK Impact the Project is Aligned with Safer, more reliable, and more affordable transport infrastructure and services provided in Tonga (Tonga Strategic Development Framework, 2015–2025) a

A.

Results Chain Performance Indicators with Targets and

Baselines

Data Sources and Reporting Mechanisms Risks

Outcome Capacity and operations of Nuku’alofa Port improved

By 2027: a. Container throughput capacity increased to 45,000 TEUs (2018 baseline: 30,000) b. Maximum length of vessels calling at the port increased to 220 m (2020 baseline: 180 m)

a–b. PAT’s annual reports

International safety regulations limit vessel and container operations.

Outputs 1. Port infrastructure rehabilitated

By 2026: 1a. Four cargo wharves of the Queen Salote International Wharf rehabilitated (2020 baseline: 0) 1b. New concrete seawall built and existing rock revetment on the eastern side of Queen Salote International Wharf strengthened to increase climate change and disaster resilience; women making up 10% of the construction workforce, with equal pay and gender-sensitive work practices in place (2020 baseline: not applicable) 1c. Container yard reorganized and upgraded (2020 baseline: not applicable) 1d. Port access road to be upgraded with solar-powered night lighting; a pedestrian crossing at the port entrance; and appropriate gender-sensitive signage for safe pedestrian access and the safety of women, children, and other vulnerable groups (2020 baseline: not applicable) 1e. Port services rehabilitated (electrical upgrades, cameras, stormwater drainage, firefighting hydrants, tanks and equipment, foul water management, fuel tank with consumption monitoring, and CCTV) (2020 baseline: not applicable) 1f. Provision of gender-sensitive sanitation facilities for yard workers, with separate facilities for men (2 urinals and 2 toilets), women (3 toilets), and disabled persons (2), inclusive of locks and good lighting for safety; alongside a break room and emergency room with lockers and panic buttons, and external CCTV (2020 baseline: 0)

1a.–f. MOI’s quarterly project progress reports

Cyclones create disruptions and delays during project implementation and construction.

2. International cargo wharves and supporting infrastructure extended

2a. Wharf 2 of the Queen Salote International Wharf extended by about 45 m (2020 baseline: total length of 110 m) 2b. Four mooring or berthing dolphins constructed (2020 baseline: 0)

2a.–c. MOI’s quarterly project progress reports

Cyclones create disruptions and delays during project implementation and construction.

14 Appendix 1

Results Chain Performance Indicators with Targets and

Baselines

Data Sources and Reporting Mechanisms Risks

2c. Channel navigation marker relocated and wave measuring device installed (2020 baseline: not applicable)

3. Port operations and management improved

3a. A gender equality policy implemented at PAT (2020 baseline: not applicable) 3b. Asset maintenance plan developed, and at least 5 trained PAT staff (20% of whom are women) demonstrate increased knowledge of asset maintenance (2020 baseline: 0) 3c. Tariff review undertaken, with regional benchmarking and recommendations for tariff reforms (2020 baseline: not applicable) 3d. At least 15 trained PAT staff (20% of whom are women) demonstrate increased knowledge of port terminal operations, health and safety measures, and security concerns and measures (2020 baseline: 0) 3e. All PAT staff demonstrate increased knowledge about the avoidance of sexual exploitation, abuse, and harassment; sexually transmitted infections; and gender equity issues thanks to semiannual training (2020 baseline: 0) 3f. Port security plan, including a COVID-19 response plan to mitigate the transmission risk of communicable diseases, prepared and implemented (2020 baseline: not applicable) 3g. At least 20 women trained in business skills to enable them to develop and manage their own microbusinesses (2020 baseline: 0)

3a.–g. MOI’s quarterly project progress reports and PAT’s annual reports

Implementation of plans and training slowed because of unexpected demands on maritime human resources.

B.

Key Activities with Milestones 1. Port infrastructure rehabilitated 1.1. Bidding documents for civil works (November 2020) 1.2. Tender documents for construction supervision consultant and project management unit staff (November 2020) 1.3. Procurement of goods and works and recruitment of consultants (May 2021) 1.4. Civil works on site, avoiding cyclone season (April 2022–June 2026) 2. International cargo wharves and supporting infrastructure extended 2.1. Bidding documents for civil works (November 2020) 2.2. Tender documents for construction supervision consultant and project management unit staff (November 2020) 2.3. Procurement of goods and works, and recruitment of consultants (May 2021) 2.4. Civil works on site, avoiding cyclone season (April 2022–June 2026) 3. Port operations and management improved 3.1. Tariff review and recommendations (May 2021) 3.2. Training to improve port operations and management (April 2022–June 2026) Inputs Asian Development Bank: $45.0 million (grant) Government of Tonga: $5.0 million Assumptions for Partner Financing Not applicable CCTV = closed-circuit television, COVID-19 = coronavirus disease, m = meter, MOI = Ministry of Infrastructure, PAT = Ports Authority Tonga, TEU = twenty-foot equivalent unit. a Government of Tonga. 2015. Tonga Strategic Development Framework, 2015–2025. Nuku’alofa. Source: Asian Development Bank.

Appendix 2 15

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=53045-003-2

1. Grant Agreement

2. Sector Assessment (Summary): Transport (Water Transport [Nonurban])

3. Project Administration Manual

4. Contribution to Strategy 2030 Operational Priorities

5. Economic Analysis

6. Financial Analysis

7. Country Economic Indicators

8. Summary Poverty Reduction and Social Strategy

9. Risk Assessment and Risk Management Plan

10. Climate Change Assessment

11. Gender Action Plan

12. Initial Environmental Examination

Supplementary Documents

13. Poverty, Social and Gender Assessment

14. Social Safeguards Due Diligence Report

15. Stakeholder Communications Strategy

16. Strategic Procurement Planning and Procurement Risk Assessment

17. Disaster Risk Assessment

18. Financial Management Assessment

19. Regional Cooperation and Integration