Sri Lanka - Agricultural Development Project

CIRCULATING COPY TO BE RETURNED TO REPORTS DESK DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1716-CE REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF SRI LANKA FOR AN AGRICULTURAL DEVELOPMENT PROJECT November 26, 1975 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS (as of June 1975) Parity Rate US$1 = Rs 6.87 Rs 1 US$0.146 Rs 1 million = US$145,560 FEEC Rate US$1 = Rs 11.34 Rs 1 = US$0.088 Rs 1 million = US$88,183 Sri Lanka has a two-tier exchange rate system. Its currency (Rupee) is linked to the Pound Sterling at a parity rate of f 1.00 = Es 15.60. Parity rates with all other currencies are determined from time to time by the Central Bank. Further, most import items, with the notable exception of rice and fertilizer, are subject to a surcharge of 65% in the form of Foreign Exchange Entitlement Certiffcate (FEEC). On the other hand, some exports, excluding tea, rubber and coconut, are entitled to receive FEECs, giving them a premium of 65% over the offi- cial exchange rate. In 1974, the FEEC rate was applied to about 60% of current foreign exchange payments and to about 32% of current receipts. The above June 1975 parity rate was used in the preparation of the Appraisal Report. In October, the latest date for which we have information, the parity rate, as set by the Central Bank, was US$1.00 Rs 7.45 and the FEEC rate was US$1.00 = Rs 12.20. FISCAL YEAR January 1 to December 31  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THiE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF SRI LANKA FOR AN AGRICULTURAL DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed Agricultural Development Project to the Republic of Sri Lanka for the equivalent of US$25 million on standard IDA terms to help meet capital and technical assistance requirements in the agricultural sector. The proceeds of the Credit would be allocated to various Government and quasi- Government agencies and the private sector to support on-going priority programs to increase output in the foodcrop sector and to maintain employ- ment and quality of end-product from existing production in the tree crop sector. PART I - THE ECONOMY 2. The latest economic report, "Recent Economic Developments and Current Prospects for Sri Lanka" (Report No. 622a-CE, February 20, 1975) was distributed to the Executive Directors on February 28, 1975. Country data are provided in Annex I. Also, the latest sector report, "Republic of Sri Lanka - Agricultural Policy and Program Reviewrl (Report No. 579a-CE, February 1975), was distributed to the Executive Directors on February 28, 1975. 3. The economic difficulties that presently beset Sri Lanka can be traced principally to two basic characteristics of the country's economic and social system: first, the dependence of the economy on three export crops -- tea, rubber and coconut -- and, second, a political commitment to the welfare state. This commitment found its expression in two policy tenets which, for the past quarter century, successive Governments have followed in varying degrees: the supply of mass consumption goods, prin- cipally food and textiles, at low prices, and the provision of public serv- ices -- mainly education, health and transport -- free of charge or substan- tially below cost. 4. Sri Lanka's progress in social fields has been noteworthy. Public services are widely available at little or no cost and a more equal distribu- tion of income has been achieved by promoting high wages, subsidizing serv- ices, and distributing food free or below cost. The welfare state is based mainly on the earnings of the export sector. Unfortunately, Sri Lanka has experienced a pronounced weakening in the market for tea and rubber begin- ning in the mid-fifties. The reduction in export earnings limited import of capital goods and was Dne of the main reasons for little economic growth in the past two decades. Between 1969-70 anrd 1973-74, GNP at constant prices increased at an annual rate of about 2.2%. With population grow- ing at a rate of about 1.8% p.a. between 1969-70 and 1973-74, there was  only a slight improvement in per capita gross income. This situation has led to high unemployment and under-employment. / 5. Against this background, Sri Lanka has had to face in the past two years, (i) the shocks of sharply escalating costs for imported food- stuffs, which are expected to absorb nearly two-thirds of the country's earnings from merchandise exports in 1975, (ii) a doubling of the oil import bi]l, and (iii) sharp increases in the prices of imported raw mate- rials, spares, and investment goods. Despite considerable rises in export prices for rubber (1973-74) and for tea (1974-75), Sri Lanka has emerged as one of the developiDg countries most seriously affected by the recent world- wide price inflation. 6. The Government of Sri Lanka (GOSL) responded in October 1973 by making adjustments in the amounts and prices of food supplied at subsidized rates, doubling the price of petroleum products, and raising transport tar- iffs by 50% or more. Additional measures were taken in July 1974, the most important of which were an increase in the price of flour and a virtual ban on the sale of off-ration sugar. Furthermore, in response to the unexpected cost increases of imported raw materials, GOSL allowed some of the public corporations and enterprises to pass on these increases to their customers. 7. Nevertheless, these constructive -- and politically difficult -- measures were inadequate to bring about a significant improvement in the budgetary situation in 1974. The net food subsidy was Rs 925 million (22% of total current expenditure), more than twice the original estimate, because of the increase in commodity prices. Other current expenditures also rose, mainly because of further wage increases in the public sector. However, as a result of the rising export and import prices and the once-and-for-all effects of the introduction of the "pay-as-you-earn" system into the in- come tax, current revenues were more buoyant than expected, and more than made up for the rise in current expenditures. 8. The 1975 budget is likely to show a small deficit on current account as compared with a modest surplus in 1974. As a further step to reduce the net food subsidy, in April 1975, the GOSL discontinued rationing and subsidizing of the distribution of wheat flour, and also made off-ration sugar available to all at a price of Rs 7.50 per pound against Rs 0.72 per pound of rationed sugar. 9. - Capital expenditures are now estimated to have risen in 1974 by about Rs. 204 million (17%) compared to 1973. Considering the likely rate of price increase, this implies a fall in real terms. Because of the meager Government savings, capital expenditures in 1974 were financed largely from borrowing, estimated to have risen to about Rs. 1.2 billion, 11% above the 1973 figure. About 61% was borrowed domestically, mainly from the state savings bank and pension and insurance funds, and the remainder abroad. In 1975, borrowing may increase to around Rs. 2.0 billion, of which the share to be borrowed externally may go up from 39% to 50%. A worrisome aspect of this  picture is the rapid rise in the external debt service burden, due to increas- ing short-term borrowing. 10. Sri Lanka was not able to take full advantage of rising world com- modity prices in 1973-75 because of the difficulties faced in increasing the volume of exports of its traditional commodities. Replanting of tree crops has been particularly inadequate, because of past depressed prices, and more recently because of increasing insecurity of tenure. The volume of tea ex- ports actually declined by 15% in 1974, but is expected to increase during 1975. Rubber exports have declined since 1970 (except in 1973 when "slaugh- ter tapping" was extensively used in response to a sudden price hike), mainly because of long periods of drought experienced in the rubber-growing areas, inadequate availability of fertilizer, and uncertainties created by the land reform. Rubber production and exports in 1975 are expected to increase as a result of more favorable weather conditions and increased producer margins following the reduction of export taxes on rubber in July 1975. The excep- tionally low volumes of exports of coconut products in 1973 and 1974, caused by severe drought, limited the benefit from the very high world prices, par- ticularly in 1974. No significant increase in coconut exports can be ex- pected during 1975. An encouraging development in 1973 was the increase in the share of non-traditional exports. In addition to measures taken in 1970 to promote minor export crops, the Government's policies towards exports in 1973 and 1974 were providing incentives to export-oriented industries to counter adverse effects of increasing input costs and to promote diversi- fication of exports. To this end, mostly fiscal and financial, rather than price, incentives were used. The 1975 Budget withdrew some incentives, but it was careful to keep the possible adverse effects on export-oriented in- dustries to a minimum. 11. The composition of imports has undergone significant changes in recent years. Because of increases in prices of food, petroleum and fer- tilizer, their share of the import bill increased to 65% in 1974, compared to 47% in 1972. The 1975 imports program envisaged substantial increases in imports of food, investment goods, and intermediate goods other than fertilizer and petroleum products. However, in view of the foreign ex- change shortage, the Government was expected to cut the 1975 import program, particularly items other than food, fertilizer and petroleum products. 12. The composition of capital movements showed significant changes in 1974, compared to the early 1970's. The share of the current account deficit financed by grants and long-term loans has declined sharply. Sup- pliers' credits and short-term loans, which were negligible in 1971 and 1972, rose to $83 million in 1974. One important consequence of these developments is the increasingly unfavorable maturity structure of Sri Lanka's external debt. Debts with one to five years maturity increased from 2% of total debt at the end of 1973 to over 10% by end-June 1974. For 1974, owing to the relatively sharp increase in foreign exchange earnings mainly as a result of price increases, the debt service ratio remained just below 13%, almost the same as in 1973. In 1975, however, the debt service ratio is projected to rise to 19%.  13. The Government's latest bal.a.ce of pl,yments projection for 1975 indicated a further deteriorationi, as compared witlh 1974. It was estimated that Sri Lanka would need a net capital inflow of nearly US$190 million in order to finance the current: account deficit. 14. An Aid Group for Sri Lanka, for which the Bank acts as the Chairman, was formed in 1965 and has held eleven meetings. At the eleventh meeting, held in Paris in April 1975, the members recognized Sri Lanka's need for increased assistance, particularly in agriculture, and gave indications of assistance over US$200 million for 1975, compared with aid indications of US$163 million made at the meeting in 1974. Out of US$200 million assis- tance indicated, US$50 to 60 million are expected to be disbursed during 1975. However, this would still leave a substantial uncovered gap in the balance of payments. 15. Given its substantial financing gaps, Sri Lanka has recently had to cut its finance requirement by reducing the current account deficit to a significant extent, thus disrupting the economy. The net external reserve position has been so weak that no part of thie additional financing could come from it. Since servicing of short-term indebtedness is now imposing a large burden on the payments position, it is important that, in the coming years, external finance required should be obtained, as far as possible, in the form of fast-disbursing assistance and on concessional terms. PART II - BANK GROUP OPERATIONS IN SRI LANKA 16. Since the beginning of its operation in Sri Lanka in 1954, the Bank Group has made seven loans totalling US$73.5 million and eight credits tqtal- ling US$54.1 million (net of cancellations) in support of fourteen projects. About 47% of Bank Group assistance has been for power, 33% for agriculture (irrigation and dairy development), and the remainder for DFC operations, highways and a program credit (mainly involving the import of raw materials for industry). Three early power projects, the first DFC project, and the program credit were satisfactorily completed and the loans fully disbursed. At the request of the Borrower, a credit for highways was cancelled in 1970, after disbursement of US$0.6 million, following the Government's decision to make major changes in the scope of the project. The remaining nine loans and credits have all been made since 1968. The implementation of ongoing projects has suffered delays, due, in large part, to the civil disturbances of 1971, but is proceeding satisfactorily at this time. The IFC's only investment in Sri Lanka, US$3.25 million to the Pearl Textile Mills, Ltd. (Ceylon), was made in January 1970, but cancelled the same year at the request of the Company. Annex II contains a summary statement of Bank Group operations as of October 31, 1975, and notes on the execution of ongoing projects. 17. The Bank Group's strategy is focused on the agricultural sector. It is designed to help alleviate the foreign exchange constraint by support- ing measures to increase agricultural output. Projects for modernization of  - 5 - the existing irrigation networks and the expansion of the Mahaweli Ganga irrigation network (in part a follow-on to the Mahaweli Ganga Development Project), have been prepared, with the assistance of the IBRD/FAO Coopera- tive Programme, and appraised in April/May 1975. A project for diversifi- cation of crops on marginal lands under tea and rubber, presently being prepared by GOSL and UNDP, with the assistance of IBRD/FAO Cooperative Programme, is under active preparation. A second Drainage and Land Reclama- tion project, a fourth operation for the Development Finance Corporation of Ceylon, and a Water Supply and Sewerage project are being identified for possible IDA financing. 18. The Bank Group presently accounts for about 14% (and the Bank alone for about 7%) of Sri Lanka's total external debt outstanding, and about 8% (with IDA negligible) of debt service. It is projected that the Bank Group's share in total external debt will decline slightly over the next three years (and the Bank's share alone to fall to less than 4%), while the Bank and IDA shares in the debt service will show a slight increase. PART III - THE AGRICULTURAL SECTOR 19. Agriculture is dominant in Sri Lanka's economy, accounting for 80 to 90% of export earnings, employment of about 2 million people or half of the total labor force, one third of GDP, and a large share of public revenue. Rural people account for 80% of Sri Lanka's population. Over 16% of the labor force in rural areas is unemployed. In addition, there is considerable under-employment. Food crop production increased at an annual rate of 3.2% during the 1960s, but has been stagnant since 1970. Tree crop production increased 1% annually in the 1960s due to growth in rubber production, but total output of tree crop products has also been stagnant since 1970. An exception to this generally poor record in agri- cultural performance has been the success in promoting the production of several subsidiary food crops and minor export crops, e.g. coconut products and spices. 20. The major objectives of Sri Lanka's agriculture policies include: increased self-sufficiency in food production; diversification of crop production to reduce dependence upon tea and rubber for foreign exchange earnings; expansion of employment opportunities in agriculture; and the improvement of rural living conditions and social services. In order to achieve these objectives Sri Lanka's agricultural development strategy should concentrate on achieving balanced growth. This, in turn, would call for realizing the potential for increasing foodgrain production, which is particularly high in the Dry Zone (70% of the Island in the north and east), parallel with increasing the benefits from existing out- put of the tree crop sector. This policy would also entail reassessment of incentive systems, and greater emphasis on management considerations in schemes aimed at improved income distribution such as land reform and settlement.  - 6 - 21. Past Government policy lhas not been successful in achieving suffi- cient sustained agricultural output. However, it is hoped that the past poor investment climate in the tree crop sub-sector will be improved as a result of the October 197'5 nationalization of all Sterling and Rupee estates. Among the problems impeding progress are inadequate attention to extension, marketing and credit services, excessive reliance on Government controls and subsidies, diffused institutional responsibilities and consequent lack of a coordinated approach to the problems of the sector, depressed profits and returns on investment, and insufficient foreign exchange for necessary imports. Moreover, the Government has shown a marked preoccupation with new development, giving insufficient attention to maintenance and utiliza- tion of existing assets. This has inter alia led to severe deterioration of irrigation construction and maintenance capacity, farm tractor availa- bility, and on-estate transport. With this in mind, the proposed Project is designed to encourage policy improvements and to support on-going prior- ity agricultural rehabilitation and development programs. PART IV - THE PROJECT 22. The proposed Project was appraised in April/May 1975, based upon discussions with the Government in connection with the Bank's Agricultural Development Policy and Program Review in June/July 1974 and its subsequent request for IDA support in early April 1975. A report entitled "Sri Lanka - Appraisal of an Agricultural Development Project" (No. 911-CE) is being dis- tributed separately to the Executive Directors. Negotiations were held in Washington during October 20-24, 1975. The Government was represented by Mr. S. Velayutham, Director, External Resources Division, Ministry of Plan- ning and Economic Affairs. A. Project Description 23. The proposed Project, the first of its type in Sri Lanka, is aimed at supporting both the food and tree crop sub-sectors. It is designed to sup- port on-going priority Government agricultural rehabilitation and development programs through the provision of imported capital equipment and technical assistance. Support provided would increase agricultural production in the short-term and would lay the foundation for longer-term, more comprehensive development. IDA funds would provide finance for the c.i.f. costs of im- ported farm tractors, machinery, equipment and transport vehicles (US$18.0 million), and spare parts for farm tractors, earth-moving equipment and the coconut processing industry (US$6.5 million). Technical assistance would be provided for pre-investment studies and for improvements in machinery repair facilities (US$0.5 million). Programs selected for support were chosen because of their favorable impact upon early and sustained food production and on employnent and quality improvements of tree crop prod- ucts. No IDA funds would be used to import consumiables such as fertilizer and farm chemicals. In order to secure lasting benefits from the Project,  -7- the Government agreed during negotiations to provide continued allocation, after the completion of the Project, of necessary foreign exchange for importation of replacement and spare parts for the new and the rehabili- tated transport, tractor and equipment fleets. The Government further agreed to provide increased funds to the Territorial Civil Engineering Organization (TCEO), Ministry of Irrigation, Power and Highways to allow proper and lasting operation and maintenance of the country's irrigation system. 24. The Project components and costs are as follows: Project Cost /1 (US$ million) - 1. FOOD CROP & SUGAR PRODUCTION (a) Agricultural Research, Training and Extension 6.42 (b) Seed Multiplication and Processing 1.58 (c) Farm Tractor Availability in Dry Zone 4.09 (d) Operation and Maintenance of Irrigation Networks 15.63 (e) Rehabilitation of Machinery 3.04 (f) Completion of Two Irrigation Projects 0.63 (g) Sugar Production 1.70 Sub-total 33.09 2. TREE CROP SECTOR (a) On-Estate Transport 5.06 (b) Tree Crop Research and Extension 1.13 Sub-total 6.19 3. STUDIES (a) Small Holder Development in the Coconut Area 0.03 (b) Land Development & Settlement in the Lower Uva 0.83 (c) Incentives in Tree Crop Sector 0.08 Sub-total 0.94 TOTAL 40.22 /1 Net of taxes, and including price contingencies. Detailed Project cost estimates are in Annex III (p. 3).  B Detailed Features Agricultural Research, Training and Extension 25. The Department of Agriculture, within the Ministry of Agriculture and Lands (MAL), responsible for research, training and extension, has pre- pared a comprehensive and well-conceived plan for the reorganization of these services. This plan, approved by Cabinet, has as its main objectives increasing crop yields and diversification of production on the basis of a more effective use of rainfall and storage water, and introducing cropping systems and farm practices better adapted to local ecological conditions. The Department's extended activity will be based upon six to eight regional research, extension and training centers. The Project would support four centers and their 11 satellite stations, as well as the School of Agricul- ture and Regional and District Training Centers, by providing foreign ex- change for the importation of spares for the repair of tractors and farm machinery, equipment and transport vehicles already in the possession of the Department, but not operative due to lack of replacement parts, and specified new farm machinery, equipment and transport. In addition, the Project would provide transport for extension officers and their super- visors. 26. IDA support would be closely linked to a parallel UNDP project under which technical assistance, as well as laboratory equipment, audio- visual aids, and technical literature, would be provided. Agreement in principle on the implementation of this project has been reached with GOSL and UNDP. FA0 would be the executing agency working in consultation with IDA. Signature of a UNDP project agreement would be a condition of dis- bursement for this component (see 2(d) of Schedule 1 of the Development Credit Agreement). Seed Multiplication and Processing 27. Certified seed production is insufficient to meet requirements, low in quantity and quality resulting in nearly half of the total produc- tion being rejected for certification. The Department of Agriculture's new Division of Seed and Planting Material has developed a program under which 42 GOSL seed farms would be fully developed for expanded registered seed production with certified seed multiplication mnainly on private farms. Seed drying, processing, and seed storage facilities would also be expanded and improved. The Department's program calls for an increase by 1980 in certified seed for paddy from the present 5,250 tons/year to 20,000 tons/ year and for other cereals and pulses from 1,400 tons/year to 2,200 tons/ year. This production would be sufficient for the projected 2.7 million ac of paddy and 0.6 million ac of cereals and pulses. Local staff is adequate in number and experience to implement the program. The Project would assist in the development of GovernLment farms through the provision of finance for the importation of farm machinery, equipment and transport.  -9- Farm Tractor Availability in the Dry Zone 28. Cultivation in Sri Lanka, particularly in the Dry Zone, is highly mechanized because (i) soils are subject to extreme baking, and (ii) of the need for timely cultivation. Shortages of foreign exchange reduced the number of operating four-wheel tractors from some 11,000 units in 1969 to an estimated 5,750 units in 1975. It is now estimated that some 3,200 units work in the Dry Zone, with probably not more than 1,600 units being fully operative for the lack of spares. 29. The Project would provide foreign exchange for importation of about 400 new tractors for farmers. Assurances have been obtained that necessary credit facilities will be available to farmers to purchase the tractors. The Project would also provide foreign exchange for importation of spare parts for the rehabilitation of the inactive tractor fleet and the mainte- nance of operative units, and new tractor implements for demonstration on GOSL farms. Repair facilities and experienced mechanics are available in Sri Lanka. 30. The Project is not aimed at the importation of two-wheel tractors and their spares as GOSL has a program in hand for their local manufacture. This program, however, appears overambitious and the type of tractor to be manufactured is not suitable to most of Sri Lanka's conditions. To assist in planning, two experts to be recruited under the Project would advise GOSL on tractor production. These consultants would also assist in the re-organization of private and public repair facilities, in the planning of importation and distribution of tractor spare parts through the Sri Lanka Tractor Corporation (SLTC), and the production of tractor implements and farm tools. Operation and Maintenance of Irrigation Networks 31. Food crop production in the Dry Zone is largely dependent upon controlled water supply. Approximately 1 million ac out of a total agricul- tural area of 1.8 million ac are in some way irrigated. Responsibility for operation and maintenance of 177 existing major tanks, providing water for 477,000 ac, and minor irrigation schemes covering around 470,000 ac, rests with the Territorial Civil Engineering Organization (TCEO), within the Ministry of Irrigation, Power and Highways (MIPH). The Organization is well-staffed, but lacks transport and equipment essential for supervision of irrigation networks and for proper water management. 32. The Project would provide foreign exchange for the importation of inspection vehicles and surveying and drafting equipment for TCEO. The Proj- ect would also finance limited construction equipment for the Department of Machinery and Equipment (DME), within MIPH, for assignment to TCEO on a rental basis for specific jobs. However, since poor water management on most irrigation schemes is due to lack of operation and maintenance funds and lack of water discipline amongst farmers, in the absence of remedial  _ 10 _ action, support to TCEO, and indeed to the food crop sector, would be ill- advised. During negotiations, assurances were obtained from GOSL that all irrigation works unde- the responsibility of the TCEO would be operated and maintained at 11 times in accordance with sound agricultural and engineer- ing pracLices. The Government intends to gradually increase operation and mainteuaoce fui Is to TCEO from the present Rs 25/ac/year, and that, not later !h-n FY 1179, these funds would reach Rs 50 in ciurrent terms/ac/!jear (Sectioin 4.03 oy the Development Credit Agreement). In the absence of water charge., the additional required Rs 30 million/year would have to be provided from tLT b1udget. The subject of water charges will be thoroughly discussed with tC.u Government in connection with the proposed two irrigation schemes under appraisal by IDA, the Mahlaweli Ganga Development Project II (Phase I) and the Irrigation Iodernization Project. Rehabilitation of Machinery 33. The bulk of the earth-moving and construction machinery in Sri Lanka is under the operational supervision of DME. DME also operates 3 major and 11 regional iepair and maintenance shops. Much of DME's mach- inery and equipment is non-operational for want of spares and replacement parts and the Department, with its machinery park operating at about 25% of its potential, is no longer able to assure equipment availability to construction organizations when requested. 34. The Project would provide for the recruitment, within six months of signature of the Development Credit Agreement, of one consultant respon- sible for: (a) proposals for the introduction of a meaningful policy of spare part procurement and disbursement; and (b) the improvement of DME,'s repair facilities. The Project would further provide funds for the importation of spare and replacement parts to rehabilitate about 150 major pieces of equipment, and workshop equipment for DME's repair facilities. The DME would assess spare and replacement part requirements. IDA's approval of this assessment would be a condition of disbursement for this component (see 2(e) of Schedule 1 of the Development Credit Agreement). Completion of Two Irrigation Projects 35. The 1975 work program of thie Department of Irrigation (DI), within MIPH, includes the construction or reconstruction of 12 irrigation projects. Two nearly-completed, projects could shortly be brought into production through the provision of some earth-moving and construction equipment. The Department has the teclnical competence and manpower to undertake the completion of these projects.  36. The Wahalkade irrigation scheme consists of the reconstruction of an ancient tank with a storage capacity of 30,000 ac feet to serve an area of 2,000 ac. The work remaining calls for the construction of four miles of main canals, the construction of distributaries, and jungle clearing on 1,750 ac. After completion, settlement would be undertaken by the Department of Land Settlement, plans for which have already been formulated. The major crop to be grown would be paddy. 37. The Muthuaiyankaddu scheme involves drainage on 6,000 ac. Remaining work consists of earth-moving, construction of drainage structures, internal roads and field channels, as well as jungle clearing on 200 ac. The area is already settled and improved drainage would result in immediate increases in yields of crops, mainly chillies and vegetables. 38. The Project would provide finance for the importation of machinery and equipment for the completion of the two schemes. This equipment would be initially entrusted to DI, but after completion of the two schemes would revert to DME for reassignment to other irrigation construction jobs. Sugar Production 39. The country is heavily dependent upon imports to meet domestic sugar demand. Until 1972, annual imports exceeded 250,000 tons. In 1973, due to foreign exchange constraints, sugar imports were reduced by about 30%, but still accounted for about 10% of the value of total imports. Imports were further cut to about 40,000 tons in 1974. Nevertheless, second only to food grains, including wheat flour, sugar remains the single most important food item imported. 40. Domestic production of refined sugar is based upon two schemes: factories and associated plantations at Hingurana and Kantalai, operated by Sri Lanka Sugar Corporation (SLSC). Through the introduction of better planting material and improved management, production of both schemes in- creased from 12,000 tons in 1973 to 19,000 tons in 1974. Production, how- ever, is still only around 50% of the factory capacity largely due to lack of land development equipment. SLSC has plans for improvements of these two on-going schemes of which ADB is already assisting the one at Hingu- rana. 41. The Kantalai sugar project covers an area of 9,600 ac to be irri- gated from a reservoir of 110,000 ac feet storage. To date, 5,000 ac have been developed, an additional 3,100 ac have been cleared, and 1,500 ac are still under jungle. Land development was delayed due to water shortages which will be overcome with the completion of the Mahaweli Ganga Develop- ment Project I in early 1976. Lack of machinery has prevented SLSC from preparing the land in time for the arrival of the irrigation water. Proc- essing capacity of the factory is sufficient to handle potential produc- tion from the total 9,600 ac.  42. The Pro'ect would p ride r he i!-vorl:ation of equipment to de_1op 4,cJ0 ac, and for trar )virt, cor'runication cquipment, and workshop machinery atnd tools. Tie -' Oak. aent fias zhe n .essary skills to imple- ment the expansion progrn.M. Tree Crops On-Estate Ti.-;sport 43. The support c tile tree crop se:-or: under the Project is consistent with the Government's -. --termn policy to diversify about one-third of the tree crop lands to oti, Uses. It is', O *irected at production increases, but at maintaining eml, .yment and iualil y of end-product. It will not have any significant: effect -)a world prices. 44. Government's pol:Lcy alirs at maitltai lag its markets for existing tree crop production by decrea-:ing production cost and maintaining product quality, while reducing total acreage through crop diversification. Accord- ingly, the Government plans to diversify about 200,000 ac of marginal tea land and 180,000 ac of marginal rubber land, amounting to one-third of the total area under these crops. A first phase of the alversification program, covering about 75,000 ac of largely marginal tea land, is under preparation with the assistance of UUDP/FAO and the IBRD/FAO Go-operative Program. Bank Group support for the implementation of this project has been sougJht by GOSL and is under active preparation. In addition, GOSL iX: operating a pilot scheme to diversify an area of about 16,000 ac. In the meantime, tree crop products, tea in particular, will continue to be the major foreign exchange earner and a dominant employer. 45. Transport vehicles on tea and rubber est:ates and transport for smallholder bought-leaf factories are inadequate and for the most part obsolete. Insufficient availability and frequent breakdown of transport result in undue delays in processing and in deterioration in qualitv of green-leaf or in coagulation of latex, detrimental, to quality of ttle end- product. Transport constraints also lead to postponements in plucking, affecting employment as well as quality of end-product. Antiquated trans- port is expensive to operate. Moreover, the shortage of transport has forced numerous tea factories to switch from local solid fuel (wood) to expensive liquid fuel for firing driers. This switch has resulted in increascs in the cost of production and requires scarce foreign exchange. Furthetmore, lack of transport in the coconut sector limits the implemen- tation of GOSL's policy of extended undercropping. 46. The Project would provide for the importation of about 615 trac- tors or loiries for transport on tea, rubber and coconut estates, as well as for green-leaf transport: to bought-leaf factories. In addition, the Project would provide for t:he importation of about 150 motorcycles for es;tate supervision. Funds would also be made available for the provision o spare parts to rehabilitate the existing transport fleet.  - 13 - 47. Smallholder tea production is characterized by low quality, result- ing from poor agronomic practices and irregular plucking, smallholder rubber production by low quality processing. The extension services of the Tea and Rubber Controller's Departments are responsible for improving produc- tion performance on smallholdings and also for the administration and super- vision of a large number of production and processing subsidy schemes. The inspection of the subsidy program takes priority. Increased mobility would mean that extension staff would be able to devote more time for extension services to smallholders. The Project funds would provide for the importa- tion of about 145 motorcycles and about 10 supervision vehicles for alloca- tion among the Tea and Rubber Controller's Department and the Coconut Devel- opment Authority. The motorcycles would be sold to extension officers on commercial credit as it is felt that this is the best means of ensuring optimum care and maintenance. 48. Improvement in tea and rubber processing is sponsored by GOSL subsidy programs, partially financed, in the case of tea, through ADB credits. However, no such support is available for the coconut process- ing industry. This industry, primarily in private ownership, is charac- terized by numerous small, generally poorly equipped units. Lack of spare parts adversely affects production performance and quality of the end-prod- uct. The Project would provide funds for the importation of the most crit- ical spare parts for mills. Tree Crops Research 49. Tree crop research is the responsibility of three research insti- tutes under the control of the Ministry of Plantation Industries. All three institutes (i.e. tea, rubber and coconut), but in particular the Tea and-Rub- ber Research Institutes, lack basic laboratory and research equipment and transport. 50. The purchase of much needed transport vehicles under the Project would be closely linked to a parallel UNDP project. The UNDP project would provide technical assistance in the field of economics, research, and lab- oratory equipment. During negotiations it was agreed that, in order to assure that the transport vehicles to be provided by IDA would be effi- ciently used, it would be a condition of disbursement against this compo- nent that the aforementioned UNDP project be signed (see 2(g) of Schedule 1 of the Development Credit Agreement). Studies 51. Because past agricultural planning has been concentrated on global targets and emergency or crash programs, preparation of specific investment projects has been lacking. The Project would make provision for importation of necessary equipment and technical assistance to help develop two invest- ment projects namely:  - 14 - (a) A smallholder development project in the coconut production area, arising out of UNDP technical assistance to the Coconut Research Institute; (b) The rehabilitation of the Lower Uva region in the southeast. 52. The traditional export sector remains very important to the country's economic development. The sector is subject to numerous supports, subsidies, controls and taxation, which, as is common in long-established industries, have grown from year to year over the last decades. Their impact, cross influences, and cost to GOSL have never been fully analyzed. The Project would provide assistance for a comprehensive study of economic factors affecting the tree crop industry, with the aim of providing GOSL with a policy framework giving clear indications of various alternatives, such as the trade-off between using the sector as a major source of taxation, or as a means for enhancing exports and employment. The appointment of a consultant for this study would be a condition of disbursement for this component (see 2(f) of Schedule 1 of the Development Credit Agreement). C. Project Cost and Financing 53. The total Project cost is estimated at US$60.5 million equivalent, or US$40.2 million equivalent net of taxes. The foreign exchange component is US$27.1 million. The Project cost includes an estimated US$2.1 M from UNDP for technical assistance and provision of research and extension facil- ities to the Department of Agriculture and to the three tree crop research institutes. The proposed IDA credit of US$25 M would finance 100% of the c.i.f. costs of imported equipment and 11 man-years of technical assis- tance. IDA contribution net of all taxes would be 622%, with the Govern- ment contributing 33% and UNDP 5%. 54. Cost estimates are based on findings during appraisal (April/May 1975). No physical contingencies have been applied. Price contingencies were applied on the basis of projected inflation rates affecting prices of imported equipment, machinery, spare parts and cost of civil works over the two-year project period. Since the Project provides assistance to on-going programs for which GOSL support is assured, only incremental costs have been included. In estimating equipment requirements, ongoing or planned bilateral and multilateral aid schemes have been taken into account, as has been the absorptive capacity of the agencies concerned.  - 15 - D. Procurement and Disbursement 55. The main items to be financed under the Project would be spare parts for tractors, trucks and machinery, new vehicles and new tractors. Spare parts for, existing vehicles and tractors (US$1.6 million), equip- ment owned by DME (US$2.9 million) and the coconut processing industry (US$0.5 million) would be purchased directly from original manufacturers and would be sold to the end-user. Farm tractors (US$2.2 million) and vehicles for the estate sector (US$4.4 million), including spares, would be imported on the basis of international competitive bidding (ICB) in accordance with IDA guidelines, bearing in mind the need for standardiza- tion of the tractor fleet, in particular, of individual estate fleets. Considerations would also be given to the availability of repair and main- tenance facilities. Imports would be handled by either the SLTC or the resident supplier agents. Transport and equipment for TCEO (US$5.6 mil- lion), motorcycles for extension officers, and transport for all other governmental organizations (US$7.3 million) would be grouped and pur- chased by the appropriate agency under ICB in accordance with IDA guide- lines. Minor equipment items valued at less than US$100,000 would be purchased through normal trade channels. For all contracts for the im- portation of new machinery and equipment in excess of US$100,000, tech- nical specifications and draft tender documents would be submitted to IDA before bidding documents are issued and bid evaluations would be submitted to IDA before making awards. Importation orders for spare parts for the rehabilitation of the existing tractor and equipment fleet would be placed in bulk, but spares would be released by GOSL on the basis of the capacity of existing facilities to undertake repair work. It is expected that equip- ment would arrive over a period of 24 months. 56. Technical assistance specialists provided for SLTC (US$200,000), DME (US$100,000), the Lower Uva Development Program (US$200,000) and the Tree Crop Incentive Study (US$50,000) would be recruited by the Ministry concerned in accordance with IDA guidelines for the selection of consult- ants. 57. Disbursement from the proposed Credit would be against 100% of cif costs of imported equipment, machinery and spare parts, and 100% of foreign exchange costs for consultants' services. Any savings arising from one project component would be reallocated to others as mutually agreed between GOSL and IDA. It is estimated that disbursement would be over a 30-month period.  - 16 - E. Organization and Management 58. Overall responsibility for Project implementation would be with the Ministry of Planning and Economic Affairs (MPEA), with execution of individual Project components through participating Ministries. Inter- ministerial coordination, supervision and monitoring would be ensured through a Project Coordinating Committee (PCC) to be established under the chairmanship of the Director, External Resources Division in MPEA. PCC would be assisted in its task by a team of Government staff assigned to work as a secretariat on a full-time basis. Members of the Committee would be representatives of the Ministries directly concerned with Project components namely: The Ministry of Agriculture and Lands, the Ministry of Plantation Industries, and the Ministry of Irrigation, Power and Highways, as well as the Central Bank of Ceylon (CB). During negotiations, it was agreed that the establishment of the PCC would be a condition of effec- tiveness (see Section 5.01 of the Development Credit Agreement). 59. GOSL and the participating government agencies would maintain separate records to reflect operations, resources and expenditures in respect of the Project. For this purpose, special accounts would be established and PCC would be responsible to submit to IDA quarterly statements and an annual statement for each of the individual accounts, including GOSL's contributions to the Project (i.e. buildings and seed storage on Government farms, incre- mental operational and maintenance costs for TCECI), local support for tech- nical assistance which would be financed through the GOSL budget and UNDP inputs. The PCC would also submit quarterly progress reports to IDA, based on reports of technical subcommittees to be established within the three concerned Ministries. F. Benefits and Justification 60. The support to the food crop subsector, costed at US$31 million (excluding technical assistance), would result in an estimated production increase from about year Six after Credit effectiveness of 155,000 tons of rice, 15,000 tons of cereals and pulses, and 11,500 tons of sugar. The approximate value of these commodities at projected world market prices in constant dollars would be about US$41 million per annum. Quantitatively, this incremental production would be equivalent to over 40% of total current rice imports and to 20% of recent, sharply-reduced sugar imports. Additional production increases could be expected through the improved activities of the Department of Agriculture, particularly extension services. 61. Measuring the incremental benefits which would arise out of the support to the tree crop subsector (US$4.8 million) is difficult. The Proj- ect support would primarily help maintain quality of the end-products through reduction in deterioration of raw material during transport from field to  - 1 7 - factory. This is necessary to help Sri Lanka retain its existing markets. The support to the estate sector would also result in greater assurance of employment for tea pluckers and rubber tappers. Transport for the bought- leaf factories would be essential to smallholder tea producers and comple- ment the proposed improvement in extension activities. 62. On-estate transport would also help reduce foreign exchange ex- penditure through reduction of liquid fuel (imported) requirements of tea factories in favor of solid fuel (local wood supply). Savings to the factories themselves would be around Rs 17/100 lb of made tea or 7% of the cost of production. 63. Due to the nature of the Project, no rate of return has been calculated. The existence of high sunk costs in relation to incremental investment would lead to an unusually high rate of return. For example, assuming all other necessary farm inputs are provided, the rehabilitation of one farm tractor at an average total cost of US$600 would result, within one year, in incremental paddy production of 40 tons of rice, equivalent to gross foreign exchange savings of US$9,750 for the remaining life of the tractor. 64. The Project would assist in one form or another the vast majority of smallholder paddy producers in the Dry Zone. The number of beneficiaries would be around 320,000 farm families or about 13% of the total population of Sri Lanka. In addition, support to the tree crop sector would help assure employment of tea pluckers and rubber tappers, the poorest segment of Sri Lanka's rural population. Provision of transport to bought-leaf factories would assist the majority of the approximately 115,000 smallholder tea pro- ducers. PART V - LEGAL INSTRUMENTS AND AUTHORITY 65. The Development Credit Agreement between the Republic of Sri Lanka and the Association, the Recommendation of the Committee provided for in Article V, Section 1(d) of the Articles of Agreement, and the text of a draft resolution approving the proposed Credit are being distributed to the Executive Directors separately. 66. Features of the Development Credit Agreement of special interest are referred to in paragraphs 26, 32, 34, 50 and 52 of this Report. 67. Establishment of the PCC would be a condition of effectiveness (see paragraph 58 of this Report). 68. I am satisfied that the proposed Development Credit would comply with the Articles of Agreement of the Association.  - 18 - PART VI - RECOMMENDATION 69. I recommend that the Executive Directors approve the proposed Credit. Robert S. McNamara President Attachments November 26, 1975  I -CT-L~~~~~~~~~~~~~~~~700 7 ,704 7(074774770007777 700177 7000 70,7 1077 777071 77 bob 701 7077 74077T .7 77*0 77.7 77.7 120---. --- 7--------- 707'L77' 7~774. ~14L7 . 0 ---- --- -- 777 1.0 7 ....................727 7.0 7207 3. '70 7770 o. 4047147 (77' 3~~~~.O4 .. 3030.2 777,7 . 7.0' 070 707770 777707 777 .7.7 777*7 727.7 117.7 777*7 777*337 70 77 077' 077 '47777007 77,7 09.0 777 3,7 145743/305. 77707 7707 ....... 07 .7,0.7 , 77 *, 77 7 .7 4 4 . -'It 7. 7. 7, 777F7 7 7, C.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1i 07777 00007777707407~~~~~~~~~~~~~~~~~~~~ 177 0 0.4/0 77.7/7 7 77/4~~~~~~~~~~~~~~~~~~~~,4 - 7777007i4n 4 -770077 t m 2247* 77774147070 007742737 777I70 777014 2.7 2.4 2.0 * 2.3 7.0~~~~~~D 70707 D G.. 10. , . J04027777o77170.7t/47 . 27702.7 7.76 7. 407 77I-(77070077 7777477_007 r; 47,L 9 0I '.0. 327 7. o5.7 74777 7 4712 77I.. 20 1. d 3.I 0,7 ~ . 07077707 77..7,74770, 71~77 . . 777, 47, 0.. 2710I 47270.7I 7 774L 14401. 077077 77,7777,777 7777~~~~.7/ ...0.74I 77d 410.0I I0 27.0 20. 7,077 7700 7040(1 7 77 7./,40 4.77. 47 0.4 740700177 7 .... L..7 ... 47// ./ 7./ . 7 ~ 70-0-777 -71 l 07700 7,7 7,77E742. 2.4l2. 0 -7473 10 00770 777 7277 77,0 40.7 271.7 102.74. ~093J144770 777 007707 00770 777.7/4 277.7/4 277.7 77707 0930. 05.77 074 .7771701 007 207 070.7/4 72n.n~ 4 7727.7 77,7 297 I., 7077777770770-77 0. 7, 707,- 0777If0./ 7770' 77(71 7 I77 4 . 7, ,,/ I.777 7 .77 47407 474 .. 2.I7 .. p. SE 77 71177077777747 ?.~~~~~~~~~~~~~~~ to. .. 7.,7......0 ... . ..74 .30.7 707 E077 4 70777777707-477 0 074 4 -0 07004073770400077074 77777 777 730 7077 770774404100.7. 7777~~~~~~~~~~1111 1 OIL ~OFI 074777 40 070 I'l47 570700 770L 17_7701O 30(777 72700707074774 77 ~077 47.. ..07 007777,L IIISl E 04777, 0407400 077 - 73704 1707 774E 707 0 0 (0 1.1 -I-CF -11al IrIC70777770100074 002000730707L 70777014777 I0III _,70 04 00 D7747 17770704740L7777047.0007 707774- -------70 -07 --------------0--------77----7.--- -07 .-70-77 7 -----00 07 70 7 - 477(070777-- 0077.-- 0777A7 77777477.G M17717070774077770777770POO0T 0777077707, 77064, L -1i - L 71963 077 7 4 47700777777 f ._1~~~~~~~~~,004770770 77700777. R7 770014477370777777417770077470 70W 0077077770707 770777777547,770~;a nt.f p ' -,14477 70 77577147707.777077 77 00714707.7777777 774774707 0704777777477737770744. id. 450 -4007070 006 0051 096 pp1 i-0 f-0-k 74f019600774y740 4 09604 /b 1965-70; 4 7g70.74 968oloo4 /4 0 19o77o 000f Nf-oooold;1 4 ta o 70070071 doooob 196570; 77 Roooooooo0 d70407 - f(0 olo. -07 04 OLoyo O4-odow Loy 19Lg6 If. 196- 0000 oloOoooOLabdOo. 1td. -- - -- - - -- - - -- - - -- - - -- - - -- - -- - - -- - - -- --7- - - ---0- - - - -- - -- - - -- - - -- - - -- - - -- - - -- - - T,, ..-JI .~~-i i b92.75, ito. bilo /4 -oiOo of 707.000 - 707 (5 - -0 69 oh o'h t- Ooo.,0-0 70-7. /4 00f 7-bI.obj- 0df 7 S400o 'iodo LlIk o.ool.; / 734770 .77 0017.0 5/4 7001 4000700 0 099 2309717470000 402370019751  ANNEX I Page 2 of 3Jpages COUNTRY DATA - SRI LANKA 1/ GNP PER CAPITA in 1973 US $110 GROSS NATIONAL PRODUCT IN 1974 ANNUAL RATE OF GROWTH (%. constant 1959 prices) US $ Mln. % 1960-65 1965-70 19X4 GNP at Market Prices 3,375 100X0 3.9 5.0 3.4 Gross Domestic Investment h69 13.9 -2.0 14.1 -3.2 Gross National Saving 316 9.3 -1.2 13.2 Current Account Balance 153 14 < Exports of Goods, NFS 565 16.7 2.3 0.8 -7.0 Imports of Goods, NFS 718 21.3 -4.3 -2.0 -29.0 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1973 (Current Factor Cost) 2/ Value Added Labor Forced V. A. Per Worker US Mln. % Mln. % US $ % 785 32.9 2,098 55.8 374 60 Agriculture 365 15.3 419 11.0 869 120 Industry 1,234 51.8 1,307 34.2 945 150 Unallocated --- -% Total/Average 38 100.0 3,8274 100.0 612 100*0 GOVERNMENT FINANCE Central Government (Rs. Mln.) %. of GDP 19743/ 1970-72 197h Current Receipts L,3bl 24.9 21.9 Current Expenditure 4,176 25.8 21-1 Current Surplus 165 -0.9 0.8 Capital Expenditures 1,379 7.5 7.0 External Assistance (net) 47(, 2.3 2.4 MONEY. CREDIT and PRICES 1969 19j9 1971 1972 1973 1974 (Million Rs. outstanding end period) Money and Quasi Money 2,301 3,061 3,379 3,917 4,093 4,505 Bank Credit to Public Sector 2,334 2,571 2,724 2,900 2,679 2,532 Bank Credit to Private Sector 1,470 1,617 1,760 2,187 2,165 3,239 (Percentages or Index Numbers) Money and Quasi Money as % of GDP 21.4 26.0 28.3 30.5 27.1 22.o General Price Index (1963 = 100) 119.9 127.0 130.4 138.6 152.0 170.7 Annual percentage changes in: 12.3 General Price Index 5.1 5.9 2.6 6.3 9.6 -5.5 Bank credit to Public Sector 10.1 9.6 6.0 6.5 7.6 ._9.6 Bank credit to Private Sector 19.0 10.0 8.8 24.3 -1.0 1/ The Per Capita GNP estimate is at 1972 market prices, calculated by the same conversion technique as the 1974 World Atlas. All other conversions to dollars in this table are at the average exchange rate prevailing during the period covered. 2/ Does not include unemployed who are estimated to number about 800,000 in 1974. 3/ Provisional not available not applicable  ANNEX I Page 3 of 3 pages BAIANCE OF PAYMENTS MERCHAIDISE EXPORTS (AVERAGE 1969-73) 1/ 1969 1973 1974 US $ Mln % (Millions US $) Exports of Goods, NFS 345 434 565 Tea 163.3 3 0 Imports of Goods, NFS 456 455 718 Rubber 72 0 0.1 Resource Gao (deficit = -) TI ---Z -1 Coconut Products 40.2 9.2 Interest Payments (net) - 18 - 17 - 17 All other commodities 64 0 5.- Workers' Remittances - 1 - - Total 1o0.0 Other Factor Payments (net) - 12 - - 2/ Net Transfers EXTERNAL DEBT, SEPTEMBER 30, 1974 Balance on Current Account -142 -38 -17 US $ Mln Direct Foreign Investment - 3 4 1 Net MLT Borrowing 48 30 38 Total Outstanding 770 Disbursements (61) (52) (68t) Amortization (13) (22) (26) Total outstanding & Disbursed 5145 Subtotal 45 34 39 3/ Capital Grants 8 13 38 DEBT SERVICE RATIO for1974- 15% Other Capital (net) 31 40 7- Other items n.e.i 1 - 3 2 Increase in Reserves (+) - 54 42 -1 (including errors & omissions) Gross Reserves (end year) 63.3 86.2 77-0 Net Reserves (end year) -122.0 -11.0 -66.5 1970 1972 1973 1978 (US $ Mln.) Foreign Trade In Fuel and Related Materials Imports 10 29 46 136 of which:Petroleum 9 28 45 ilK Exports 7 14 21 52 of which:Petroleum 7 11 17 40 RATE OF EXCHANGE IBRD/IDA LENDING, August 31, 1975 (Million US $): 1968 - 1971 Foreign Exchange Entitlement IBRD IDA US $ 1.00 = Rs 5.95 Certificate (FEEC) Rates - Rs 1.00 = US $0.17 Outstanding & Disbursed 35 5 36.1 1968 US$1.00 = Rs.8.57 (44% FEEC) Undisbursed 13.0 18.0 End 1972 1969 to Outstanding incl. Undisbursed 5 1971 US$1.00 = Rs.9.22 (55% FEEC) O US $1.00 = Rs 6.40 1972(end)US$1.00 = Rs.9.92 (55% FEEC) Rs 1.00 = US$0.16 1973(end)US$l.O0 = Rs.11.12(65% FEEC) End 1973 1974(end)US$1.00 = Rs.1l.03(65% FEEC) 1)75 (June) US $1.03 = Rs 11 38 (68,$ FEEC) US $1.00 = Rs 6.74 Rs l.00 = rTssn.15 End 1974 US $1.00 = Rs 6.69 Rs 1.00 = US$0.15 June 1975 US $1.00 = Rs 6.87 Ps 1.00 = US$0.15 t/ Provisional Estimates. 2/ Repayable in foreign currencies and with a maturity over one year, excluding some of the Food Commissioner's borrowings. 3/ Ratio of Debt Service to Exports of Goods and Non-Factor Services. South Asia Department Sentember 22, 197$  ANNEX II Page 1 THE STATUS OF BANK GROUP OPERATIONS IN SRI LANKA A. STATEMENT OF BANK LOANS AND IDA CREDITS (as at October 31, 1975) Loan or US$ Million Credit Amount (less cancellations) Number Year Borrower Purpose Bank IDA Undisbursed Four loans and three credits fully disbursed 39.5 30.1 - 121 1968 Sri Lanka Irrigation 3.0 2.0 0.4 634 1969 Development Industrial 3.0 0.2 Finance Corp Finance of Ceylon 636 1969 Ceylon Power 16.5 2.8 Electricity Board 168 1969 Sri Lanka Land 2.5 0.5 Reclamation 653 1970 Sri Lanka Irrigation/ 14.5 8.9 Power 372 1973 Sri Lanka Power Transm. 6.0 2.9 504 1974 Sri Lanka Dairy 9.0 9.0 Development 566 1975 Development Industrial 4.5 4.5 Finance Corp Finance of Ceylon Total, 73.5 54.1 29.2 of which has been repaid 25.0 - Total now outstanding 48.5 54.1 Amount sold, 3.6 of which has been repaid 3.6 Total now held by Bank and IDA /1 48.5 54.1 Total undisbursed 11.9 17.3 29.2 /1 Prior to exchange adjustnent B. STATEMENT OF IFC INVESTMENTS (as of October 31, 1975) NONE  ANNEX II Page 2 C. PROJECTS IN EXECUTION-/ Cr. No. 121 - Lift Irrigation Project; US$2 million of June 19. 1968; Effective Date: August 5. 1968: Original Closing Date: June 30. 1973. Revised Closing Date: December 31, 1975 Construction is about two-and-a-half years behind the appraisal schedule, but most problems causing the delay - government change, reorgani- zation, insurrection in 1971, strikes in 1972 and inadequate repair facili- ties - have been solved since 1973 and little further slippage is expected. Total costs have risen due to inflation by US$1 million over the appraisal's estimate of US$3.3 million; the additional cost is being met from local sources. The project remains viable because prices of main outputs (onions and chillies) have risen three to four times the values used for appraisal. The credit is now expected to be fully disbursed and the area fully irrigated by the revised Closing Date of December 31, 1975. Ln. No. 634 - Second Development Finance Corporation Project: US$3 million of July 18. 1969; Effective Date: October 15, 1969; Original Closing Date: December 31, 1973. Revised Closing Date: December 31. 1975 Because of the slowdown in economic activities, there were delays in committing funds and the original Closing Date of December 31, 1973 has been postponed for a second time from December 31, 1974 to December 31, 1975, to allow sufficient time for presentation of new sub-projects to the Bank and the completion of disbursement. Helped by Government's policy to encourage tourism and non-traditional exports, commitments under the loan picked up in 1973 and were completed by last December. Loan disbursements are expected to be completed by the revised Closing Date. Ln. No. 636 - Maskeliya Ova Power Project: US$16.5 million of July 28, 1969: Effective Date: January 19. 1970: Original Closing Date: September 30, 1973, Revised Closing Date: December 31. 1976 The project is virtually completed. The first unit of 50 MW was commissioned in February 1974, about 1-1/2 years later than originally esti- mated. The second unit was commissioned in July 1974. The gas turbine unit was cancelled upon the request of the Ceylon Electricity Board (CEB). Delays were caused mainly by problems associated with the appointment of acceptable 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the under- standing that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.  ANNEX II Page 3 consultants, landslides in the penstock area and various strikes in manu- facturers' factories. Site work has in general been carried out satisfac- torily. The extension of the Polpitiya switching station, for which bids have been received, will be finished by mid-1976. Foreign exchange savings of about $1.9 million are used to cover the cost overrun on the Power Trans- mission and Distribution Project (Credit 372), discussed below. Cr. No. 168 - Land Reclamation and Drainage Project; US$2.5 million of November 13, 1969: Effective Date: February 12, 1970; Original Closing Date: December 31. 1974; Revised Closing Date: June 30, 1977 Construction is about two-and-a-half years behind schedule (for the same reasons as under Credit 121 above), but all necessary equipment is now on order and no further delays are anticipated. Overall project costs have increased due to inflation by 30% above the appraisal estimate; the cost overruns are being met by Government. The project remains viable be- cause the price of the main output (paddy) has increased by over 100% since appraisal. The project is expected to be completed by December 1976 and the Closing Date was recently extended to June 30, 1977. Ln. No. 653 - Mahaweli Ganga Development Project (Irrigation/Power); and US$14.5 million each, both of January 30, 1970; Effective Cr. No. 174 Date: April 30, 1971; Closing Date: June 30, 1976: Revised Closing Date: June 30, 1977 The expected date of first water delivery is now two years behind the appraisal schedule and overall completion of the project is expected to be March 1976 nearly a year and a half behind appraisal target. Delays were due mainly to foundation problems (now overcome) at Polgolla power house and a slow start at Bowatenna diversion dam. Construction is now progressing satisfactorily. Good progress has been recorded to date on agricultural extension and research in the project area. Total project costs have increased by about 10% largely as a result of rising costs for electro-mechanical equipment. The economic viabilLty of the project has not been adversely affected by the cost overruns since produce prices have increased by 100% since appraisal. The Credit has been fully disbursed and the Loan is expected to be fully disbursed by the Revised Closing Date. Cr. No. 372 - Power Transmission and Distribution Project; US$6.0 million of April 18. 1973: Effective Date: July 25, 1973; Closing Date: December 31, 1976 Preparation for construction is proceeding satisfactorily and contracts totaling about $7.3 million for sub-stations, towers, insulators and certain other equipment have been awarded. Only miscellaneous line materials remain to be procured. However, inflation since signing has increased foreign exchange costs by some 30%. We have agreed to cover the cost overruns from savinigs under Loan 636-CE above.  AN1INEX II Page 4 Cr. No. 504 - Dairy Development Project; US$9.0 million of August 9, 1974; Effective Date: February 10, 1975; Closing Date: December 31, 1980 The Credit supports an integrated project for dairy development involving the on-farm development of some 2,400 small to medium sized dairy farms, the importation of dairy cattle, the construction-operation of extended milk collecting systems and the provision of extension, training and central- ized calf rearing services. Progress of implementation is satisfactory. The Project Technical Unit has been established, with key staff (with the excep- tion of Financial Advisor presently being selected) has been appointed. Gov- ernment is understood to have taken steps to appoint such a person. Training of field staff is under way. Construction of the calf rearing unit and the study of milk collection routes are also well under way. Initial farmer response to the project has been encouraging; 2,100 loan applications have been received, far larger than anticipated, and participating banks are now making loans under the project. Although disbursements are behind schedule, largely due to delay in credit effectiveness, the project is making good progress and is likely to be committed by late 1977. Cr. No. 566 - Third Development Finance Corporation of Ceylon Project; US$4.5 million of June 27, 1975; Effective Date: August 22, 1975; Closing Date: September 30, 1979 The Credit will help meet the estimated foreign exchange require- ments of DFCC over the next two years for lending mainly to export industries and tourism.  ANNEX III Page 1 SRI LANKA - AGRICULTURAL DEVELOPMENT CREDIT CREDIT & PROJECT SUMMARY Borrower: Republic of Sri Lanka. Beneficiaries: Selected agencies in the Government (GOSL) and private sector. Amount: $25 million. Terms: Standard. Project: The Project will finance imports of farm tractors, equipment, machinery and spares and provision of technical assistance for increasing agricultural products on a sustained basis and supporting tree crop sector to maintain the benefit from present production. The details of the Project are given below. Description of Project Component IDA Contribution - (US $ Thousands) I. Food Crop and Sugar Production (a) Agricultural Research, Training and Extension: 2,325 Improvement in services of the Department of Agriculture (b) Seed Multiplication and Processing: Expansion 1,427 of certified seed production on 42 GOSL seed farms (c) Farm Tractor Availability in Dry Zone: Expansion 4,090 of farm power through provision of new farm tractors, rehabilitation of 1600 privately- owned tractors, provision of new tractor implements, and technical assistance to the Sri Lanka Tractor Corporation. (d) Operation and Maintenance of Irrigation Networks: 5,590 Improvements to networks serving about 950,000 ac through the Territorial Civil Engineering Organi- zation. 1/ Including financing for contingencies.  ANNEX III Page 2 IDA Contribution (US $ Thousands) (e) Rehabilitation of Machinery: Expansion of 3,045 construction capacity through rehabilitation of heavy construction equipment of the Department of Machinery and Equipment (DME), as well as technical assistance for the improvement of DME's repair and maintenance facilities. (f) Completion of Two Irrigation Projects: Provision 625 of new equipment to the Department of Irrigation for the completion of two irrigation schemes covering 8,000 ac. (g) Sugar Production: Expansion of production 1,705 through land development and irrigation on 4,600 ac. II. Tree Crop Sector (a) On-Estate Transport: Maintenance of returns 5,055 from tree crop products by maintaining employment and quality of the end-product through rehabilitation of on-estate transport, provision of new vehicles to estates and bought-leaf factories, and provision of spare parts for the coconut processing industry. (b) Tree Crop Research and Extension: Improvement 260 of research and extension for tree crops III. Studies (a) Land Development and Settlement in the Lower Uva. 828 (b) Incentives in the Tree Crop Sector. 50 25,000  ANNEX III Page 3 Estimated Project Costs: - US$ Thousands Foreign Cost Items Local Foreign Total Exchange Dept. of Agriculture (a) Research, Training, and Extension 4,430 2,310 6,740 34 (b) Certified Seed Production 1,320 1,255 2,575 49 Farm Tractor Availability 2,545 3,420 5,965 57 Ministry of Irrigation, Power and Highways (a) Territorial Civil Engineer- ing Organization 12,330 4,915 17,245 28 (b) Department of Machinery & Equipment 2,590 2,590 5,180 50 (c) Department of Irrigation 570 550 1,120 49 Ministry of Plantation Industries (a) On-Estate Transport and Processing 4,060 4,270 8,330 51 (b) Extension 80 175 225 69 (c) Research 1,820 795 2,615 30 Sri Lanka Sugar Corporation 1,710 1,500 3,210 47 Lower Uva Project 600 555 1,155 48 Studies 680 1,795 2,475 72 Subtotal 32,735 24,130 56,865 43 Price Contingencies 705 2,950 3,655 81 GRAND TOTAL 33,440 27,080 60,520 45 1/ Including taxes.  ANNEX III Page 4 Financing Plan US$ Thousands Local Foreign Total (a) Components Net of Taxes IDA Credit - 25,000 25,000 UNDP Grant - 2,080 2,080 Government of Sri Lanka 13,140 - 13,140 Subtotal 13,140 27,080 40,220 (b) Taxes 20,300 - 20.300 Total 33,440 27,080 60,520 Estimated Disbursements: IDA Fiscal Year US$ Thousands 1976 2,000 1977 20,800 1978 2,200 Procurement Arrangements: International competitive bidding (ICB) on IDA guidelines for new tractors and vehicles including spares, bearing in mind the need for standardization of the tractor fleet and, in particular, individual estate fleets; ICB on IDA guidelines for transport and equipment for TCEO, motor cycles for extension officers, and transport for all other government organizations; direct purchase from suppliers for spare parts for tractors, vehicles, DME owned equipment, coconut processing industry; normal trade channels for minor equipment valued less than US$100,000. Technical Assistance: Three specialists to assist DME and SLTC in improvement of repair and maintenance facilities, local production of farm equipment, and planning for storage and import of spare parts; two experts to assist the Government in designing development plans for Lower Uva region; one specialist to assist the Government in execution of tree crop incentive study.  ANNEX III Page 5 Economic Rate of Return: Rate not calculated due to nature of the Project (e.g. existence of high sunk costs in relation to incremental investment). Appraisal Report: No. 911-CE of November 5, 1975.  ao-0, SRI LANKA 11 i? t ~~~~~~~~~~LAND UTILIZATION C >9 ~~~~~~~~~~~~~~~~~~~~~~~Coconuts <1 0 , < < ~~~~~~~~~~~~~~~~~~~~Rubber j , J 1 A:'' . t \ | ,4:; ~~~~~~~~~~Forest reserves lffif-t /,.,; * .;>. '. S ,,g, % D~~~~~C-iisrict boundaries y - > / .<<,, . . ,f i 2 , o 20 4.0 6.0 8 0 ~~ ( X>;Nf AlJt_vgeddt/, ,; ....................... '; f '\ ~~~Kilomreters W;~~~~~~~~~~~~~~~~~, 2p >O 4pgXWW 50