"Over extraction of groundwater, aquifers under threat from contamination, and the absence of effective water resources management present obstacles to development," the ADB statement said.
"The government recognizes the project as a key part of its reconstruction program for the Northern Province," said Ricardo Barba, Safeguards Specialist in ADB's South Asia Department.
"The impact will be improved health and human development in urban areas of the Jaffna Peninsula for both current residents and returning internally displaced people."
The project will rehabilitate and improve reservoir headworks, and construct a water treatment and distribution system serving the Jaffna and adjoining Kilinochchi districts.
The new water distribution system will provide access to household connections and metered community water facilities.
The funds will also be used to build a sewage collection and treatment system for the Jaffna Municipality and build low-cost household and communal latrines in poor communities.
The ADB will also give support to draw up a comprehensive, integrated water resources management plan for Jaffna.
"Assistance will also be given to other resource bodies and local authorities, to develop groundwater quality and quantity monitoring and management systems, and to conduct public conservation, environmental protection and hygiene awareness campaigns."
The loan finance includes 70 million dollars equivalent from ADB's concessional Asian Development Fund which has a 32-year term, including a grace period of 8-years with an annual interest charge of one percent, rising to 1.5 percent for the balance.
It also includes a 25-year, 20 million dollar loan from ADB's ordinary capital resources with a 6-year grace period, and an annual interest rate set in accordance with ADB's LIBOR-based lending facility.Agence Française de Développement is expected to provide 40 million dollars equivalent and the government of Sri Lanka will provide over 34 million dollars for a total investment cost of 164.04 million dollars, the ADB said.