Sri Lanka - Fourth Mahaweli Ganga Development Project

Document of The World Bank T FOR OFFICIAL USE ONLY Report No. P-3821-CE REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT OF US$12.1 MILLION AND A PROPOSED CREDIT OF SDR 28.3 MILLION FOR A MAHAWELI GANGA DEVELOPMENT PROJECT IV May 18, 1984 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS US$1.00 SL Rs 25.00 SL Re 1.00 = US$0.04 UNITS AND EQUIVALENTS 1 kilometer (km) = 0.6214 miles (mi) 1 hectare (ha) = 2.4711 acres (ac) 1 kilogram (kg) = 2.2046 pounds (lb) 1 metric ton (tonne) = 1.0161 long tons (1 ton) I bushel of paddy = 20.8655 kg ABBREVIATIONS AND ACRONYMS AMDP - Accelerated Mahaweli Development Program FEEC - Foreign Exchange Entitlement Certificate MASL - Mahaweli Authority of Sri Lanka MEA - Mahaweli Economic Agency MECA - Mahaweli Engineering and Construction Agency NDK Dam - Nagolla Dee-ela Kadiunne-ela Dam O&M - Operation and Maintenance SLCC - Sri Lanka Cashew Corporation FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY SRI LANKA MAHAWELI GANGA DEVELOPMENT PROJECT IV Loan, Credit and Project Summary Borrower: The Democratic Socialist Republic of Sri Lanka Amount: Bank Loan: US$12.1 million (including capitalized front-end fee) IDA Credit: SDR 28.3 million (US$30.0 million equivalent) Terms: Bank Loan: Repayment in 20 years, including five years' grace, at the standard variable interest rate; front-end fee of 0.25 percent of the base loan amount. IDA Credit: Standard Project The proposed project would be the fourth irrigated Description agricultural development project assisted by the Bank Group under the Mahaweli Ganga Development Program. The project would provide facilities for new irrigation in about 14,000 ha and settlement of 18,200 families on the Right Bank of the Maduru Oya River, enhance irrigation to about 1,800 ha of existing cultivated area and estab- lish fuelwood and cashew plantations in non-irrigated project areas. It would also provide artisanal fisheries development, settlement assistance, social infrastructure, management facilities and vehicles, monitoring,training, and support Sri Lanka's ongoing environmental protection program. Project implementation is time sensitive and to minimize risk, the project includes a significant technical assistace component to ensure completion of all work as scheduled. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  (US$ Million Equivalent) Project Costs: /a Project Components Local Foreign Total A. Irrigation. Facilities NDK Dam 4.46 6.96 11.42 Main & Branch Canals 18.64 30.66 49.30 Tertiary System & Land Development 6.66 12.15 18.81 Subtotal 29.76 49.77 79.53 B. Social & Administrative Infrastructure Roads 5.57 4.74 10.31 Others (incl. health, education, and administrative facilities) 10.51 3.92 14.43 Subtotal 16.08 8.66 24.,74 C. Environmental Program 0.78 0.10 0.88 D. Cashew Plantations 0.36 0.22 0.58 E. Fisheries 0.11 0.01 0.12 F. Equipment & Vehicles 1.10 4.51 5.61 G. Training & Monitoring 0.48 0.01 0.49 H. Administration 2.23 0.01 2.24 I. Operations and Mainten- ance during Construction 3.79 0.06 3.85 Total Base Costs 54.69 63.35 118.04 Physical Contingiencies 4.68 5.30 9.98 Price Contingencies 15.08 16.37 32.08 Total Project Cost 75.08 85.02 160.10 Front-end Fee on Bank Loan - 0.03 0.03 Total Financing Required 75.08 85.05 160.13 Financing Plan: (US$ Million Equivalent) Local Foreign Total IDA/IBRD 12.60 29.43 42.03 Saudi Fund 9.20 40.90 50.10 CIDA 25.30 14.70 40.00 Government 28.00 28.00 Total 75.10 85.03 160.13 Rate of Return: 12 percent /a Includes taxes and duties of US$1.3 million equivalent.  Estimated Disbursement: (US$ Million Equivalent) FY 1985 1986 1987 1988 1989 1990 Annual 0.03 5.50 10.10 12.90 8.90 4.60 Cumulative 0.03 5.53 15.63 28.53 37.43 42.03 Staff Appraisal Report: No. 4885-CE of May 4, 1984 Maps: IBRD No. 17493, IBRD No. 18231   INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND A PROPOSED CREDIT TO THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA FOR A MAHAWELI GANGA DEVELOPMENT PROJECT IV 1. I submit the following report and recommendation for a proposed loan of US$12.1 million and a proposed credit of SDR 28.3 million (US$30.0 million equivalent) to the Democratic Socialist Republic of Sri Lanka to help finance a Mahaweli Ganga Development Project IV. The loan would have a term of twenty years including five years of grace at the standard variable interest rate. The credit would be on standard IDA terms. Cofinancing arrangements have been made with the Canadian International Development Association (CIDA) and the Saudi Fund for Development (Saudi Fund) for US$40.0 million and US$50.0 million equivalent, respectively. PART I - THE ECONOMY 2. A country economic memorandum "Sri Lanka: Recent Economic Developments, Prospects and Policies" (Report No. 5038-CE) dated May 4, 1984, was distributed to the Executive Directors on May 18, 1984. Country data are provided in Annex I. 3. After several years of relative stagnation, Sri Lanka's economy has experienced sustained growth. This growth has been the direct result of the economic liberalization of 1977 and a significant growth in foreign assistance. Until 1977, Sri Lanka's growth performance had been below both need and potential. Although the 4.4 percent annual GDP growth in the 1960s was above the average for low-income countries, it slackened sharply in the 1970-77 period to 2.9 percent per annum, just below the average for low- income countries. Through much of this period, the terms of trade deteriorated steadily, eroding even these modest gains. The slowdown in economic growth in the 1970-77 period was attributable to a combination of factors, including inadequate investment, poor management of the economy, and a policy environment not conducive to growth and investment; these difficul- ties were compounded by poor weather in some years and a sharp rise in the cost of imported food and petroleum. 4. In sharp contrast to this poor economic performance, Sri Lanka's social achievements in relation to per capita income have been outstanding. By virtually all social indicators--life expectancy, literacy, infant mortality, birth rate, nutrition levels--Sri Lanka ranks significantly better  -2- than other countries at its per capita income level. These improvements in the quality of life, in particular the rise in health standards, the spread of education and the availability of subsidized food, have been important factors in the decline in mortality. T'he increasing age of marriage, the spread of female education and employment, and a family planning program also have contributed to a sharp decline in fertility. As a consequence, popula- tion growth, net of migration, has dropped steadily, from 2.7 percent per annum in the 1953-63 period to 2.2 percent per annum in the 1963-71 period, and to 1.7 percent per annum during 1971-81. 5. However, the Government f-inanced both its investment and social expenditures largely through the extraction of the surpluses of the three maior tree crops (tea, rubber and coconut), which traditionally have fur- nished easy sources of revenue and foreign exchange. These surpluses began to decline in the late 1960s as government export tax policies discriminated against tree crops and export unit prices weakened. With the growth in other productive sectors declining in the 1970-77 period, the budgetary resources available for social programs were squeezed between inelastic revenues and rapid inflation. As a consequencei, expe-nditures for social services other than the food subsidy declined as a proportion of total current expenditures and of GDP, threatening the hard-won gains in health and education. In short, the economy could no longer generate t'he resources needed to sustain the large program of welfare expenditures. Moreover, the very size of those programs reduced the scope for policy makers to shift resources to development. 6. In 1977, a package of policy measures was introduced in order to break this vicious circle. In an attempt to Liberalize the economy and allow a greater role for the private sector, the new Government introduced, in close consultation with the IMF, policies designed to (a) reduce government intervention in commodity markets, (b) reduce government consumption sub- sidies to assist in restoring producer incent-'ves and public savings, and (c) create a favorable environment for private (foreign and domestic) invest- ment by tax concessions, the creation of an Investment Promotion Zone, and the unification and depreciation of the exchange rate. Two of the more important positive consequences of this policy reform package were that the burden of selected subsidies and transfers fell from around 10 percent of GDP in 1977 to around 3 percent by 1981, and that the periodic increase in the domestic support price for paddy in line with world price trends resulted in a highly positive producer response in rice. 7. In addition to these policy reforms, the Government also embarked on an ambitious public investment program. As the Government responded to the increased availability of resources (from domestic and foreign sources) to tackle long, overdue investments, the Government's capital expenditure jumped from 6 percent of GDP in 1977, to an average of 13 percent in 1978 and 1979, peaking at 19 percent in 1980, and subsequently declining to an average 14 percent over the period 1981 to 1983. At the center of the Government's investment plan were three major new undertakings: (a) the accelerated implementation of the Mahaweli Ganga Development Program, the largest multi- purpose river basin development program ever undertaken in Sri Lanka; (b) the establishment of a 200 square mile free trade zone north of Colombo near the international airport, aimed primarily at attracting foreign investors; and (c) a massive housing and urban renewal program with its main focus on the  -3-- Colombo metropolitan region, including the construction of a new capital complex at Kotte, a suburb of Colombo. 8. The initial result of both the policy reforms and increased level of investment was an impressive jump in the GDP growth rate to an average 6.8 percent per annum for the period 1977-80 declining to 5.3 percent between 1980-83. The major activities which accounted for most of this increased growth were paddy production, garment exports, tourism and the service sector. Paddy production has averaged an annual 5.7 percent real growth rate since 1977, resulting in a decline in rice imports from an average 33 percent of total rice consumption during 1970-77 to only 12 percent during 1978-83. Manufactured garment exports have increased from $12 million in 1977 to $197 million in 1983, raising their share of non-petroleum manufactured exports from 41 percent in 1977 to 76 percent in 1983, whereas tourist arrivals have increased from 153,665 in 1977 to 407,230 in 1982, with a setback to 337,342 in 1983 due to ethnic disturbances during July. 9. However, some of the basic structural weaknesses within the economy have not been addressed. With respect to directly productive activities, three subsectors have continued to perform poorly, i.e., the tree crop sector, public manufacturing enterprises and non-traditional exports. The volume of output from the centrally important export-oriented tree crop sector has continued to decline. The public manufacturing enterprises inherited by the present Government, which account for approximately 40 percent of the value added in the non-petroleum manufacturing sector, con- tinue to utilize resources inefficiently thereby reducing the overall growth rate in manufacturing. And, lastly, the real growth of non-traditional exports has been fairly low and erratic. Underlying the poor performance of these sectors are two principal factors: poor management of publicly owned activities and an overall incentive framework which offers high and uneven levels of effective protection with a general bias against export activities. Moreover, as the exchange rate has not been fully adiusted in a systematic way since 1977 so as to compensate for the high levels of domestic inflation, the incentive to invest in the production of traded commodities has been reduced in favor of non-traded activities. 10. In addition to these distortions in the incentive framework and the inefficient management of publicly-owned assets, the Government's budgetary policy has been a major source of macro-financial instability, particularly over the past few years. As a share of GDP, budgetary spending increased sharply from 23 percent in 1977 to a record 43 percent in 1980, subsequently declining but still remaining at 32 percent in 1983, in spite of an unex- pected shortfall from original spending plans in 1983 due to the July disturbances. Although initially much of this increased expenditure resulted from a corresponding inflow of foreign concessionary capital which was linked to the public investment program, the need to resort to domestic or commer- cial foreign financing increased. In addition, the Government's efforts to mobilize additional domestic resources fell short of what was required. Due to falling volumes and prices in the tree crop sector and an insufficient effort to widen the tax base away from traditional sources, the Government became increasingly reliant on ad hoc taxation measures to maintain existing revenue levels. The large growth in spending coupled with large inflows of foreign savings and a weak domestic revenue effort has resulted in large budget deficits which peaked at the equivalent of 23 percent of GDP in 1980  -4- and still amounted to 15 percent of GDP in 1983. In response to the increas- ing domestic deficits, current spending has been squeezed. Although the reductions in subsidies is welcome, the limits placed on both public sector salaries and operation and maintenance expenditure are beginning to impose significant costs on the economy in terms of recruitment/performance in the public sector and the efficient use of the existing publicly-owned capital stock. Even so, savings on the budgetary current account have remained negative from 1979 to 1983. In summary, despite impressive donor support for the country's development programs, equivalent to 7.3 percent of GDP during 1981-83, the high level of public expenditure has meant that only 45 percent of the overall deficit was financed by zoncessionary flows during these three years with about 10 percent being covered by foreign commercial borrowing and the remaining 45 percent through domestic borrowing. 11. The rapid expansion in investmenit and general economic activity has been reflected vividly in the balance of payments. Import volumes grew at an average annual rate of 18.8 percent between 1977 and 1980, with investment goods increasing from $83 million to $493 million and intermediate goods and petroleum imports tripling in current prices over the same period. This fairly broad-based expansion in irmports resulted in the share of merchandise imports as a percent of GDP increasing from 23 percent in 1977 to 51 percent in 1980. Export volumes, however, expanded at a much lower rate (an average annual growth rate of 4.7 percent between 1977 and 1980) with the decline in tree crop export volumes offsetting the strong growth in garment exports from new firms established in the Investment Promotion Zone. As a consequence, merchandise exports increased as a share of GDP from 21 percent in 1977 to only 26 percent in 1980. These adverse trade volume trends were accompanied by a 26 percent terms of trade deterioration over the same period. The rapid growth in tourism receipts and private remittances from abroad in this period failed to offset the deterioration in the trade account, and the current account deficit deteriorated from a positive 2.4 percent of GDP in 1977 to a record 19.8 percent deficit in 1980. Although the deficits in 1978 and 1979 were more than offset by increased net aid disbursements, even to the extent that Sri Lanika could continue to add to net international reserves, by 1980 the situation had changed. In the latter year net international reserves fell by $220 million and the public sector began to make increased use of commercial financing. 12. Since 1980, the external deficit has mirrored the erratic movements of the budget deficit. Realizing in 1981 that: a continuation of the 1980 trends would result in serious financial instability, the government began to take corrective measures, mainly in the form c,f tighter overall monetary expansion, a substantial reduction in government spending and a gradual realignment of the exchange rate as part of a new IMF program. Although these measures were beginning to show results by the end of 1981 (the current account deficit in the balance of payments had declined to 13.7 percent of GDP and the budgetary deficit to 15.6 percent), the political resolve to continue to apply the needed policy mix weakened in 1982 due in large part to the Presidential elections and the subsequent referendum to extend the life of Parliament. As a result, both the external and internal deficits increased in 1982 (to 15.3 percent and 17.3 percent, respectively) and the overall growth rate declined to 5.1 percent (the lowest since 1977). Unfortunately, due partly to a continuation of this election process in response to post-referendum criticism and partly to the widespread civil  -5- disturbances in July 1983, the Government has continued to accord priority to the pressing political/social issues above economic matters. Although policy measures did contribute to the decline in the current account deficit in the balance of payments to 12.4 percent of GDP in 1983, the estimated 14 percent improvement in the terms of trade was the primary factor. By the end of 1983, net international reserves were slightly negative, gross official reserves equal to about two months of imports, and the debt service ratio continued to increase (para. 16). In addition, as a result of the budgetary deficit and some movement in the exchange rate, inflation accelerated to an average 14 percent during 1983 and the GDP growth rate fell to 4.9 percent. 13. While the 1983-84 terms of trade improvement is giving the economy some breathing space, there is not only a need for stabilization measures in the short term, but also basic structural change is required, above all in the tree crop and manufacturing sectors, to regain the growth momentum in the medium term. Therefore, to avoid the consequences of an abrupt downward adjustment in aggregate demand which is likely to follow from a continuation of past policies, one of the priority objectives of government policy should be to restructure the economy away from producing for the very limited domes- tic market towards exports. The basic thrust of the required policy package would be to move towards a more neutral incentive framework which would permit the full diversity of Sri Lanka's particular comparative advantage to develop. However, in the short run, the implementation of such a policy package may not be sufficient because, firstly, the capacity of the economy to respond to a changed set of incentives may be limited and, secondly, the non-policy-related constraints to economic growth (such as the basic infrastructure and imperfect credit markets) will continue to require the careful attention of Government. 14. Although the uncertain political situation continues to constrain the Government's ability to adopt a comprehensive economic policy package, recent measures demonstrate that the Government is both aware of the medium- term problems and capable of implementing some of the required reforms, To illustrate, an overdue program of management and incentive reforms in the tree crops sector has been initiated, and the Presidential Tariff Commission should present recommendations designed to reduce the overall anti-export bias of the incentive structure to Parliament in early July. Furthermore, the revised 1984 budget does imply a further reduction in the budgetary deficit and the Government is pledged to continue to reform its tax base so as to increase domestic resource mobilization. Also, there have been several encouraging institutional developments affecting the budgetary management in recent weeks. A new committee on economic policy has been created, compris- ing the President, the Prime Minister and the Minister of Finance and Planning, empowered to enforce financial discipline and ensure that Cabinet decisions on economic policy are implemented. In addition, a comprehensive inter-ministerial exercise is ongoing, designed to ensure adequate expendi- tures on O&M which, starting in 1985, will appear explicitly as a separate category of spending in the budget. Finally, the Cabinet has laid down criteria for project selection for inclusion in future public capital budgets which should remedy a maior weakness. Actual implementation of these measures would improve coordination among the multitude of ministries, and represent a major breakthrough in budgetary management. Nevertheless, con- tinued strong measures will be required in order to curtail the size of the budget deficit and redirect public investment into those areas where it is  -6- most efficiently used. Given the rapid build up of the country's capital stock since 1977, the highest return probably centers around complementary investments to the existing infrastructure plus a few selected new projects in those long-gestating activities (e.g., power) which at this time are appropriate for public sector investment. Ii- these actions are taken in unison with measures designed to remove the policy-related distortions which constrain efficient production decisions, the economy could stabilize and continue to grow at the level attained in the recent past. 15. The aid community has responded enthusiastically to the Government's development efforts in recent years. Most of the growth has come in project aid, reflecting the Government's efforts to increase investment, particularly in the Accelerated Mahaweli Program. The overall level of aid commitments increased from $250 million in 1977 to a record $814 million in 1981, equiv- alent to $55 per capita. Disbursements grew much more slowly and there was a rapid build up of the aid pipeline to around $1,630 million by the end of 1981. With the need to curtail public capital spending during 1982-83, both because of implementation and domestic financial constraints, commitments declined to $550 million in 1982 and $370 million in 1983, halting further increases in the pipeline. Aid disbursements have grown steadily, from $200 million in 1977 to $450 million in 1983, or close to $30 per capita. The slow growth of disbursements relative to commitments through 1981 can be explained largely by two factors: the rapid acceleration in aid commitments themselves which proved beyond the country's absorptive capacity, and the relative shift over time from food and commodity aid towards slower disburs- ing project aid. Continued high levels of aid will depend upon donors' abilities to finance a sizeable portion of local costs, to provide supplemen- tary financing for ongoing projects where needed and to increase non-project aid. The Government will need to maintain donor confidence in its economic policies and management through a continued vigorous domestic resource mobi- lization program and continued restraint on government expenditures as the budgetary situation remains tight. Local cost financing, in support of Sri Lanka's own resource mobilization efforts will not only provide valuable relief to these budgetary pressures but also supplement foreign exchange resources needed in support of the balance of payments. 16. External public debt outstanding and disbursed stood at an estimated US$2,393 at the end of 1983, amounting to about 46 percent of GDP. Although a greater part of this debt is on long-term concessional terms, the increased resort to commercial finance during 1981 and 1982 has contributed to the debt service ratio increasing from 10.1 percent in 1982 to 11.9 percent in 1983 excluding IME charges and repurchases. Even though record tea prices in recent months continue to maintain Sri Lanka's export earnings at a high enough level to enable it to reduce its dependence on commercial finance in the near term, any deterioration in the terms of trade would rapidly reverse the situation. However, the Government has taLken measures to reduce the budget deficit and is actively considering policy measures designed to stimu- late exports and efficient import substitution activities. If the Government continues to make progress along t]hese lines, the current account deficit in the balance of payments should decline to approximately 7 percent towards the end of the decade with the debt service ratio declining to below 15 percent in 1990 after temporarily rising to almost 17 percent due to existing debt repayment commitments.  -7- PART II - BANK GROUP OPERATIONS 17. Since the beginning of its operations in Sri Lanka in 1954, the Bank Group has approved nine loans totalling US$115.6 million (net of cancellations) and 35 credits totalling US$666.4 million (net of cancel- lations) in support of 42 projects. About 46 percent of Bank Group assis- tance has been for agriculture (irrigation, agricultural, and dairy development), 24 percent for power, 10 percent for transport, and the remainder for development finance company operations, a program credit (mainly involving the import of raw materials for industry), water supply, construction industry, telecommunications, and small and medium industries. Eight loans and twelve credits have been fully disbursed so far. In this fiscal year, the Executive Directors approved one IDA credit for US$25 mil- lion equivalent for an Industrial Development Project, and a second for US$23 million equivalent for a.Third Rural Development Project. Annex II contains a summary statement of Bank Group operations as of March 31, 1984. 18. IFC has a total investment of US$2.04 million equivalent in equity and US$17.09 million equivalent in loans. The investments have so far been made in two textiles industries, one polypropelene bag industry, one equip- ment leasing company, one hotel and for two IFC lines of credit made to the government-owned Bank of Ceylon (US$7.0 million) for term loans to medium- sized industries. 19. The Bank Group's current strategy focuses on the agricultural sector. It aims to support government efforts to increase food production, reduce dependence on food imports, and raise productivity, employment, incomes and living standards of the rural population in Sri Lanka. This strategy includes projects to support basic infrastructure. Projects currently under preparation include a tank rehabilitation project, a second road maintenance project, a second dairy development project and a fourth tree crop develop- ment project. 20. The Bank Group, as of end-1983, accounted for 10.7 percent (IBRD, 1.6 percent; IDA, 9.1 percent) of Sri Lanka's total debt outstanding and disbursed, and 5.0 percent of debt service on medium- and long-term debt. The pro4ected Bank Group's share in total existing external debt outstanding and disbursed will increase to 17 percent by 1985 (with IBRD's share declin- ing to 1.3 percent). The Bank and IDA portions of this debt service are expected to decline to about 4 percent by 1985. PART III - THE AGRICULTURAL SECTOR 21. Agriculture plays a manor role in Sri Lanka's economy, accounting for about 25 percent of GDP, over 50 percent of the labor force, and about 60 percent of export earnings. About 95 percent of the rural population is involved directly in agriculture-related activities. In addition, much of the activity in manufacturing, transport, and services sectors relates to either agricultural input supply or processing agricultural produce.  -8- 22. Agricultural development has traditionally been concentrated in the wet and intermediate climate zones in t:he southwest portion of the island. These zones, accounting for only one-third of Sri Lanka's surface area, contain about two-thirds of the population and 50 percent of its paddyland. Agricultural growth in these zones depends primarily on increasing produc- tivity of already developed land. In contrast, the dry zone to the north is sparsely populated and underdeveloped clespite continuing migration and settlement. Permanent agriculture there accounts for less than 30 percent of the 2.24 million ha which are consiclered potentially arable nationwide, with an additional 1.0 million ha under subsistence-type slash and burn (chena) agriculture. Cultivation in the southwest monsoon season (yala) is confined to irrigated area, but even in these, water and other constraints limit average land use intensities to about 100-120 percent. Considerable potential exists in Sri Lanka for both increasing cropping intensities on already developed land and expanding cultivated area, particularly in the dry zone. Obiectives and Strategy for the Future 23. The present Government recognizes the pivotal role of agriculture in stimulating economic growth and rural development in Sri Lanka. Its medium- term strategy for agriculture emphasizes bett:er utilization of existing potential through institutional and policy reform, as well as strategically selected investments to increase the production base. Among programs given high priority are: (a) appropriate price incentives for producers; (b) agricultural support services such as research and extension, credit, farm power supply, and fertilizer distributicn; and (c) stronger irrigation water management. Following adopt-ion o- measures in 1977 designed to imple- ment the above and due partly to favorable weather, the sector responded well the following year. Agricultural performance over the 1978-82 period improved substantially with growth averaging 4.0 percent per annum and increase in paddy production averaging 5.2 percent per annum. This was depressed, however, by poorer growth in the tree crops sector averaging only 1.6 percent per annum. As a consequence, imports of rice have declined dramatically. Climatic vagaries, however, continue to plague Sri Lankan agriculture. To mitigate the impacts of such rainfall variations on production, the Government is emphasizinig for the long term further expansion of irrigated agriculture into the dry zone through accelerated development of its ma4or river basins, including the Mahaweli Ganga and Maduru Oya Basins. The Mahaweli Ganga Development Pr,gram 24. The Program is based on a Master Plan prepared iointly by a UNDP/FAO team and Sri Lankan engineers in 1965-68. The Plan envisaged development of about 365,000 ha of irrigable land in the dry zone, as well as about 500 MW of hydropower. It was divided into three phases, each including several pro lects for stepwise implementation over a 30-year period. Implementation of the Plan began in 1970. Late in 1977, however, Government realized that, at the current rates of construction and population growth, the Program would not have much near-term impact on unemployment and serious food and power shortages, and that it, therefore, should be accelerated. An Implementation Strategy Study was carried out with financing from the Netherlands to: (a) review and reevaluate the UNDP/FAO Master Plan and each of its separate proiects; (b) examine the implications of various alternative phasings of the  -9-- feasible projects; and (c) recommend a specific action plan taking into account technical, financial and economic constraints. 25. The Government accepted most of the conclusions of the Study revising the Accelerated Mahaweli Development Program (AMDP) accordingly, with the exception of including the Randenigala Dam Project. Initial work of AMDP was confined to 4 headworks projects having a total installed capacity of about 500 MW and downstream development was to be limited to about 60,000 ha in Systems B and C. Development of System H was already ongoing with IDA assistance. The US is currently providing assistance for downstream develop- ment of the Maduru Oya Project System B Left Bank (US$90.0 million); it also has financed an in-depth study of the environmental impact of the AMDP and is financing a Mahaweli Environmental Project (US$5.0 million) to implement the Study's recommendations. Canada and the UK financed feasibility studies of Systems B and C, respectively. The EEC is supporting development of Zone 2 in System C; and IDA, Japan, and the Kuwait Fund are assisting in the development of Zones 3-6 in System C. The Asian Development Bank is provid- ing assistance to plan and construct roads in the AMDP area. The proposed project in System B Right Bank would mark the Bank Group's second area development effort in the AMDP area. 26. AMDP and Sri Lanka's Public Investment Program. The overall costs of the AMDP have risen substantially during the past years due to rapid domestic and international inflation and to increased costs associated with more difficult site conditions for Kotmale Dam than were originally anticipated. The share of total public capital expenditures devoted to AMDP rose from about 7 percent in 1977 to about 35 percent over 1980-82, with a high of 46 percent in 1982, contributing substantially to large unfinanced budget deficits, heavy dependence on external financing, and creating a serious imbalance between current and capital spending. The Government has responded to macro-management difficulties by making various adjustments, including adiustments to the Accelerated Program (e.g., reducing the height of Kotmale Dam and deferring some downstream development). In addition, it imposed a moratorium during 1983-84 on new projects not already in its investment program. The extent to which Mahaweli can be rephased to reduce pressure on the public investment program is limited by past aid commitments, expendi- tures on which are expected to peak over 1982-84. Thereafter, declines are projected, and Mahaweli's share is currently expected to fall to 23 percent of total public investment by 1985-87. The proposed project for System B Right Bank development would basically be implemented after the current peak. It is also intended to complement major headwork investments (sunk costs) already made in the Maduru Oya Reservoir and Right Bank Transbasin Canal and to utilize other external assistance provided by donors for downstream development. The Bank Group's Role in Mahaweli Ganga Development 27. With Bank Group assistance, initial construction under the Mahaweli program began in 1970 under the Mahaweli Ganga Development Project I (Cr. 653-CE) with diversion headworks at Polgolla on the Mahaweli Ganga and at Bowatenna on the Amban Ganga, including a 40 MW hydropower plant at Polgolla. This first project was completed in 1978 and provided an improved water supply to about 52,650 ha of existing irrigated land and a full supply for about 29,000 ha of unirrigated land in System H to be developed under  -10- subsequent proiects. The project was well designed and fulfilled its obiectives. Under Mahaweli Ganga Development Project II (Cr. 701-CE), with cofinancing from Canada, the Netherlands, UK, US and EEC, construction work is nearing completion on irrigation and social infrastructure for about 60 percent of this 29,000 ha of newly irrigated area. 1/ The project has aided settlement of nearly 15,300 families in the pro4ect area providing them with a viable means of livelihood in irrigated farming. It has contributed sig-- nificantly to national rice production with an average rice yield of 104 bushels per acre against a national average of 67 bushels per acre in 1982/183 season. The project is expected to be essentially completed by mid-1984, about one year behind schedule. Mahaweli Ganga Development Project III (Cr. 1166-CE), with cofinancing from Japan and the Kuwait Fund, provides a full irrigation supply for about 24,100 ha ofi newly irrigated land and a supplemental supply for about 3,600 ha in System C. It includes irrigation and social infrastructure, settlement assistance, and agricultural develop- ment assistance. The construction of irrigation infrastructure began in 1982. Under a technical assistance credit (Cr. 979-CE), IDA, with EEC cofinancing, is providing technical assistance for a study to determine optimal use of available water from the MahaweLi Ganga. PART IV - THE PROJECT 28. The project area is located in the Right Bank of the Maduru Oya River in System B, and comprises a gross area of 58,000 ha, and a net irrigable area of 14,000 ha (Map IBRD 17493). System B, the downstream command area of the recently completed dam on the Maduru Oya, itself encompasses a gross area of 136,000 ha and a net irrigable area of 39,000 ha (one-third of the land to be irrigated under AMDP). A feasibility report for System B was prepared by Acres International, Ltd. in 1980 with financing and supervision from the Government. A revised report for the Right Bank project, updating technical and cost data, was prepared by Acres in 1982 with CIDA financing. Detailed design of the Right Bank Main and Branch canals was carried out in late-1981 and 1982 by the Berger/IECO consulting consortium, with USAID financing, as part of their Left Bank irrigation system design studies. These reports formed the basis for appraisal by a joint Bank/CIDA mission which visited Sri Lanka in June-July 1983. A staff appraisal rep,ort entitled "Sri Lanka - Mahaweli Ganga Development Project IV" (No. 4885-CE) dated May 4, 1984, is being circulated separately to the Executive Directors. Negotiations were held in Washington, D.C. from March 29 to April 3, 1984. The Borrower's delegation was led by Mr. Ivan Samarawickrama, Secretary, Ministry of Mahaweli Development. Supplementary project data and special conditions of the proposed loan and credit are given in Annex III. Project Objectives 29. The manor obiectives of the profect are to provide a viable income base in irrigated farming for about 14,000 new settler families, most of whom 1/ Government independently carried out development of the remaining 40 percent.  -11- would come from low-income groups, and ensure adequate water supply to about 900 existing farm families. It will increase further opportunities for economic growth and employment for another 4,200 families as secondary and tertiary industries would develop with the expansion of settlement and agriculture. The project conforms to the Government's development objectives of reducing imports of agricultural goods, increasing exports, and generating employment and settlement opportunities. Project Description 30. The proposed project would cover zones 6-8 of System B involving a newly irrigated area of 14,000 ha (net) and expand irrigation potential on 1,800 ha (net) of currently irrigated area. The project would be implemented in five years (1985-89) 1/ and would include the following works, facilities, and programs: (a) construction of NDK Dam and Feeder Canal; (b) construction of Right Bank Main and Branch Canals; (c) construction of an irrigation distribution and drainage system; (d) construction and upgrading of main and secondary roads; (e) land clearing of 20,000 ha for agricultural and plantation development and construction of on-farm facilities for 14,000 ha (net); (f) construction of social infrastructure and facilities for new settlement communities; (g) construction of operation and management offices and quarters; (h) settler assistance of house grants, tools, seed, and temporary shelters; (i) establishment of cashew and fuelwood plantations; (j) provision of agricultural extension and supporting services and research facilities; (k) a monitoring and evaluation program; (1) an environmental enhancement and monitoring program;. (m) provision of technical assistance and training; 1/ Construction of NDK Dam and Feeder Canal, however, was started in 1983 (with CIDA financing), and work is scheduled to start on the Main and Branch Canals in mid-1984 (with Saudi Fund financing).  -12- (n) equipment and vehicles for construction supervision and operation and maintenance (O&M); and (o) annual stocking of area waterbodies for artisanal fisheries development. Project Organization and Management 3i. The Mahaweli Authority oif Sri Lanka (MASL) has overall responsibility for implementing the Mahaweii Ganga Development Program and its subsequent management. It has been entrusted by the Government with wide-ranging powers to implement the Program, including coordination of all government institu- tions involved with carrying out the Program. The Program is being imple- mented principally by the two operational agencies of MASL, namely the Mahaweli Engineering and Construction Agency (MECA) and the Mahaweli Economic Agency (MEA). MECA would be responsible for all physical works under the project and would function principally as th;e design and construction agency for downstream development (irrigation and social infrastructure and on-farm development). MEA would be responsible for post-construction implementation of the pro4ject. Other government agencies would also provide essential facilities and services to ensure project success. The Sri Lanka Cashew Corporation (SLCC) and the Forest Department would collaborate with MEA in establishing and maintaining cashew and fuelwood plantations. Commercial banking institutions would provide required rural banking services to project beneficiaries. The Ministry of Health would run health units provided under the project; the Ministry of Education would staff and equip the schools; and the Department of Highways would operate and maintain area roads. Major Project Works 32. Irrigation Infrastructure. A small regulatory reservoir would be provided in the Right Bank Main Canal tD partially regulate the natural stream inflows and releases for the Right Bank area from the Maduru Oya Dam. This reservoir would also act as after-'bay storage from power facilities, when they are developed at Madura Oya Dam. Final designs have been completed for both NDK Dam and Canals, and a contract has been awarded for construction of NDK Dam and Feeder Canal with CIDA assistance. Tender documents for the Main and Branch Canals to be financed by the Saudi Fund have been prepared and bids for constructing these canals are expected to be called in mid-1984. Final layout and preparation of detailed designs, cost estimates, and tender documents for distribution facilities, drains, roads, and social infrastruc- ture would be carried out with technical assistance provided under the project. 33. Land Clearing and On-farm Development. Land clearing would be required for agricultural plot development and for cashew, fuelwood and conservation forest plantations. Rough leveling, land shaping and bund layouts would be carried out under the project. Construction of bunds, on-farm ditches and drains, and final farm leveling or grading would be done by settlers on a labor cointract basis. 34. Social and Community Infrastructure. The proiect would provide new settlers with adequate health, educational and other support facilities to attain living standards comparable to developed areas elsewhere in Sri Lanka.  -13- About 18,200 new families (approximately 100,000 persons) would settle in the project area at full development, including 14,000 farm-families and about 4,200 families for support services. 35. Agricultural Training and Research. Farmer-settlers, some with no practical irrigation experience, would require training in water management techniques, particularly for diversified cropping, and operation and main- tenance of tertiary irrigation. Such training would be provided through the Aralaganwila Training Center and Farm in the System B Left Bank area, cur- rently being developed and equipped with CIDA assistance. Settlement and Agricultural Development 36. The settlement program in System B Right Bank would proceed simul- taneously with that in other Mahaweli schemes at rates considered achievable and realistic. Settlement is expected to peak in 1987 and 1988 with 4,500 families established in System B Right Bank in each year and to average about 3,500 families per annum over the implementation period. In total, 14,000 new farmer-settler families would be established in System B Right Bank by 1989. 37. Farmer-settlers would each be allocated a 1.0 ha irrigated plot and a 0.2 ha houseplot as well as temporary shelter, basic materials for house construction, basic tools and initial seed. Non-farmer settlers would be allocated 0.1 ha house plots. Farmer-settlers would receive their houseplots and farms about six months before irrigation water becomes available. Settlers would also be eligible for food aid for a period of 12 months after arrival under a separate agreement between the Government and the World Food Programme. 38. About 88 percent of the newly irrigated area in System B Right Bank would be developed to double-cropped paddy cultivation. An average cropping intensity of 180 percent is expected at full development. On the remaining lands, diversified upland annual or perennial crops would be produced. Houseplots would be developed to provide diverse agricultural commodities for both home consumption and off-farm sales. The agricultural extension system to be introduced in System B Right Bank under MASL would be consistent with the training and visit system planned under the IDA-assisted Agricultural Extension and Adaptive Research Prolect (Cr. 931-CE) (Section 3.06, draft DCA). MASL would employ extension workers seconded by the Department of Agriculture and rely on it for the technical support of extension work. Adequate credit to project area residents would be provided; such credit would be supported by adequate supervisory staff and facilities and would be reviewed periodically and adjusted as required (Section 3.07, draft DCA). The Government would allocate sufficient amounts of water (about 350 million cubic meters) for the project from the Mahaweli Ganga (Section 3.08, draft DCA) Fuelwood and Cashew Plantation 39. To provide a long-term and adequate supply of fuelwood to the settlers, the project would establish fuelwood plantations in about 2,000 ha of upland non-irrigable areas. MASL would demarcate the locations and the Forest Department would establish seedling nurseries and coordinate and  -14- maintain the plantations. MASL would also demarcate another 2,000 ha of non-irrigable land for planting and management of cashew by the Sri Lanka Cashew Corporation (SLCC). The Governmnent wrould submit to the Association by December 31, 1984 for approval a detailed work program for implementation of the cashew plantation in the project area (Section 3.10, draft DCA). Monitoring and Evaluation 40. The monitoring and evaluation system developed under the ongoing Mahaweli Ganga Development Project III by MASL would be expanded under the proiect to report progress in project implementation. In addition to the physical construction program, the monitoring would focus on (a) input delivery and use, and (b) output achievement in terms of increased production, improved services andl living standards, water management and use efficiency, and environmental impact. Technical Assistance 41. Consultants for supervision of construction of the Main and Branch Canals would be financed by the Saudi Fund. Consultants required for final design, layout and construction supervision of tertiary irrigation and drainage facilities, on-farm development, roads, and social infrastructure would be financed by CIDA. Additional technical assistance provided under the project would include 2 manmonths for establishment of a water quality monitoring program and 12 manmonths to assisi: in cashew seed material selec- tion and breeding. In total, the project would require an estimated 58 manyears of technical assistance. Cost and Financing 42. Total project cost is estimated at about US$160.1 million, with a foreign exchange cost of US$85.0 million (53 percent). Cost estimates are based on end-1983 price levels. lJnit prices for the Main and Branch Canals are based on recent bids for similar work escalated to end-1983. The cost for NDK Dam is based on its actua:L bid price. Cost estimates for the ter- tiary irrigation distribution and drainage system are based on costs of similar facilities being constructed in Systems I and C and detailed layouts for sample areas. Physical contingencies were estimated at 10 percent for the Main and Branch Canals and 15 percent for other civil works. Price contingencies were calculated on the following basis: 12.5 percent in 1984; 11 percent, 1985; 10 percent, 1986; 9 percent, 1987; 8 percent, 1988; and 7 percent in 1989 for local costs; and, 5.6 percent in 1984; 8.5 percent, 1985; 9 percent, 1986-87; 8 percernt, 1988; and 6.75 percent in 1989 for foreign costs. 43. Pro4ect cofinaiicing arrangements are being finalized by the Government. The Saudi Fund has agreed to provide US$50.1 million equivalent (about 31 percent of project cost net of taxes and duties). CIDA has indi- cated its intent to contribute about US$40.0 million equivalent (about 25 percent of project cost) as a grant (about US$16.5 million equivalent) and a loan (about US$23.5 million equivalent). The above bilateral assistance, combined with the proposed IDA/Bank contribut:Lon of about US$42.1 million equivalent, would finance about 83 percent of total project costs (net of taxes and duties), including 100 percent of foreign and 64 percent of local  -15- costs. The Bank loan (US$12.1 million), would include a front-end fee of US$30,175, which would be capitalized into the loan. Effectiveness of the Saudi Fund loan and CIDA loan and grant would be a condition of effectiveness of proposed Bank/IDA assistance (Section 6.01(a), draft DCA). Procurement 44. Proposed procurement arrangements are summarized below: Procurement Method (US$ millions) Total Project Component ICB LCB Other N.A. Cost NDK Dam 14.6 /a 14.6 Main & Branch Canals 62.0 /b 62.0 Distribution & Drainage Channels 11.3 11.3 (11.2) (11.2) On-Farm Development 2.0 2.0 (1.9) (1.9) Land Clearing 6.8 6.8 (6.7) (6.7) Primary & Market Roads 8.6 3.7 12.3 (8.5) (3.6) (12.1) Village Roads 2.8 2.8 (2.7) (2.7) Infrastructure (Bldg. & Facilities) 17.5 /a 0.1 17.6 Settlement Assistance 3.5 3.5 (3.5) (3.5) Plantations, Environment & Fisheries 1.7 /d 1.7 (0.5) (0.5) Equipment & Vehicles 0.5 4.9 /a 1.3 /e 6.7 (0.5) - (0.5) TA, Training & Monitoring 10.4 /c 10.4 Admin. & Operational Expenses 3.2 3.2 (3.0) (3.0) O&M During Construction _5.2 5.2 TOTAL 9.1 26.6 114.6 9.8 160.1 (9.0) (26.1) (4.0) (3.0) (42.1) Note: Amounts in parentheses are those financed by the IDA credit/Bank loan. /a Portion to be financed by CIDA totals US$9.8 million. Lb Saudi Fund to finance US$46.3 million under Saudi procurement procedures. /c To be financed by CIDA (US$6.6 million) and Saudi Fund (US$3.8 million). /d To be financed by CIDA (US$1.2 million) and IDA (US$0.5 million). /e Taxes and duties. 45. Components to be financed by CIDA and the Saudi Fund would be procured in accordance with their respective procedures. Components involv- ing Bank Group financing would be procured by methods acceptable to the Bank  -16- Group. Distribution and field caLnals and the drainage facilities (US$11.3 million equivalent) are unsuited for ICB, because of their small size and scattered locations. However, they would be combined into packages large enough (about US$4.0 million equivalent) to attract competition from foreign contractors in Sri Lanka, who may have interest in such work, and would be contracted through LCB. Primary and market roads, exclusive of final asphalt surfacing, would be included in one contract (US$8.6 million equivalent) to be awarded following ICB in accordance with 3ank guidelines. Local firms are expected to be competitive for the irrigation facilities and road contracts. Upgrading of O&M roads to market-road standards, asphalt surfacing of the primary and market roads (US$3.7 million equivalent), and construction of smaller village roads (US$2.8 million equivalent) would be contracted follow- ing LCB procedures acceptable to the Bank. Land clearing and on-farm development would be done by both mechanized and manual methods. Clearing to be done mechanically would be grouped into contracts of at least US$1.0 million each to be awarded following LCB procedures acceptable to the Bank. Work to be done manually would be divided int:o small contracts and awarded in fixed rate contracts to small local contractors and settlers. Settlement assistance, including transportation, temporary shelter, housing materials, seeds, seedlings, and tools would be prDvided by MEA. Small off-the-shelf items costing less than US$20,000 per contract that cannot be bulked into packages suitable for international tendering or which are required urgently for project implementation may be procured after solicitation of quotations from at least three independent suppliers in accordance with procedures satisfactory to the Bank. Such purchases would be limited to an aggregate of US$0.5 million equivalent. All work contracts over US$100,000 and equipment contracts over US$50,000 would be subject to Bank review prior to award. Other contracts would be subject to selective post-award review. A preference margin of 7.5 percent on civil works contracts and 15 percent on equipment and vehicles would be extended to qualified local manufacturers in bid evaluation. Disbursement 46. Disbursements from the proposed loan/credit blend would cover (a) 100 percent of the front-end fee on the Bank loan; (b) 90 percent of expenditures for civil works and materials for irrigation distributary canals, drainage works, land clearing, on-farm development, and roads; (c) 100 percent of foreign expenditures for directly imported, 100 percent of local expenditures (ex-factory) for locally manufactured, and 75 percent for locally procured equipment, vehicles, and spares; (d) 10CI percent of expenditures for cashew plantation development; (e) 100 percent of expenditures for settlement assistance, and a declining percenLtage of incremental cost of project administration and engineering (for a weighted average of about 50 percent of the total of such cost). Disbursements for civil works under contracts less than SL Rs 500,000 and for settlement assistance, cashew plantation development, and costs of project administration and engineering, would be made against certified statements of expenditure. Submission of the work program for cashew plantation development by the Government (para. 39) by December 31, 1984, would be a condition of disbursement for this component (Schedule I, para. 4(b), draft DCA). All other disbursements should be fully documented in accordance with the Bankr's standard requirements.  -17- Project Special Account 47. In order to facilitate prefinancing of project expenditures under categories 1,3 and 4 of Schedule 1 to the draft Development Credit Agreement, a project special account would be opened in the Bank of Ceylon by MASL. An initial deposit to the account of US$1.0 million equivalent would be made in Sri Lankan Rupees upon receipt of a direct payment application supported by appropriate evidence. Establishment of the special account would be a condi- tion of effectiveness of the IDA credit/IBRD loan (Section 6.01(b), draft DCA). Environmental Impact 48. On the basis of a study financed by USAID, the Government has adopted an action plan for environmental protection under AMDP. The Plan comprises a series of components, each of which identifies both recently implemented and proposed plans or activities to address specific environmental issues. Principal negative environmental impacts anticipated with the proposed project would be (a) reduction of natural vegetation, (b) concomitant loss of wildlife, (c) changes in water quality and quantity with regard to agro- chemical runoff, nutrient cycling patterns, and salinity intrusion in the downstream estuary, and (d) potential spread of communicable water-borne and vector diseases. To mitigate these, a number of interventions such as fuel- wood plantations, a water quality monitoring program and adequate health facilities for the settlers would be included under the project to complement those being carried out through similar programs. The Mahaweli Environmental Prolect assisted by USAID is sufficiently comprehensive to minimize and mitigate adverse impacts on wildlife. Operation and Maintenance 49. A Water Management Panel set up under the Director General of MASL will allocate water resources for irrigation, power, and other uses and apportion irrigation water among the various Mahaweli irrigation projects. A water management secretariat set up under MASL and attached to MECA would operate and maintain major canals and irrigation structures. MEA would be responsible for O&M of the irrigation and drainage system down to farm turnouts, social and administrative infrastructure, and village roads. The Government would annually provide funds necessary for O&M of the irrigation systems until such time as the full O&M costs are recovered (para. 54) through water charge collection (Section 4.02(d), draft DCA). It would serve as an enforcement as well as advisory agency to ensure that irrigation water is used efficiently by farmers and that unauthorized water diversions do not occur. MECA would be called upon to make any major repairs or modifications required to major structures. Water Management Supervisors and Agricultural Officers at block level would review block water requirements at least weekly to permit system-wide adTustments to water issues according to need. Cost Recovery/Impact on Government Budget 50. Investment costs of proiect works would amount to about SL Rs 2,204 million in present value (PV) terms. Irrigation infrastructure and land development would represent about 69 percent of this total. Recurrent expen- ses for O&M of project works would amount to about SL Rs 227 million (PV).  -18- Thus, the PV of investment and recurrent costs over a 25-year period would total about SL Rs 2,431 million. 51. Recoveries and budgetary savings as indicated in the following paragraphs (52-54) would total about SI. Rs 313 million in PV terms, implying that about 13 percent of total costs would be recovered through the project. This level of recovery is considered reasonable in view of (a) the low-income base of most beneficiaries without the project, (b) the erosive impact of relatively high projected domestic inflation on the real value of land installment payments and the historical diffrculties in implementing cost recovery schemes in Sri Lanka. 52. A fundamental obiective of the Mahaweli program is establishment of a viable and sustainable socioeconomnic environment for a large portion of the poor within Sri Lankan society. Settlers selec:ted for project areas would mostly come from those experiencing overpopulation and high levels of unemployment and underemployment. Without the Mahaweli program, therefore, the bulk of applicants would likely be burdens to the government budget since they would qualify for food and/or other assistance payments. The project would save about SL Rs 129 million (PV) in public assistance (at a rate of about SL Rs 120/family/month). Wood andL cashew sales from the plantation established under the project are estimated to generate SL Rs 32 million and SL Rs 45 million (PV), respectively, in gross revenues. 53. Water Charges: Inspite of attempts made since 1977 to reactivate earlier laws and promulgate suitable legislation to tax irrigation beneficiaries, cost recovery in irrigation prolects has not been generally successful to date. Under the Irrigation Ordinance the Government was empowered to impose water charges towards recovery of capital and O&M costs of irrigation-systems. In 1978, charges were set at SL Rs 75/ha in schemes of 80 ha or more with over 150 percent cropping intensity, and SL Rs 50/ha for schemes with cropping intensity of 1.50 percent or less. There were some collections in certain schemes during 1978-80; but these stopped altogether from 1981 due mostly to lack of an effecl:ive enforcing mechanism. Under the Mahaweli Ganga Development Project III, the Government agreed with IDA to introduce water charges in the Mahaweli area starting September 1982 at a rate of 22 percent of O&M costs rising to 100 percent by 1991. However, no action was taken to collect water charges in 1982 due to the political sen- sitivity of the issue during an election year and prevailing drought conditions. Additionally, certain deficiencies of the Ordinance itself also created problems for collection. 54. To remedy these deficiencies, the Government has made amendments to the Ordinance reintroducing jurisdiction of magistrate courts to take legal action against defaulters and empowering government agents to repair damaged irrigation works and recover cost from the defaulters. Additionally, the Government approved in July 1983 the following rates: SL Rs 2,000/ha for major lift irrigation projects, SL Rs 688/ha for drainage, and SL Rs 500/ha for gravity irrigation to cover current annual O&M costs. Half of such rates are proposed to be collected initially (1984) with progressive increase of 20 percent of the balance per year until full rates are collected in five years. The Government has completed all the interim steps, such as publicity, preparation of registers, and documentation. It has already started collect- ing from the major irrigation schemes, which will last through the harvesting  -19- season, ending in May 1984. The Government would carry out a mid-term review by July 31, 1986, to assess the progress of the collection program and to determine the needed adiustments to water rates required to cover full cost of O&M by September 30, 1991 (Section 4.02, draft DCA). The pro ect would recover about SL Rs 44 million (PV) in water charges at the currently proposed rate and with enhancements to Rs 500/ha in real terms by 1991. 55. Land Transfer. Although land transfer payments have yet to begin in the Mahaweli area, the Government has reemphasized its desire to implement the transfer program and recover land improvement costs from the settlers. Such recovery would meet the costs of settlement assistance, land clearing, on-farm development, field canals and drains. The Government proposes to start collection of land transfer payments in System H (Mahaweli Ganga Development Project II) from April 1985. It is also making arrangements to collect similar land transfer payments in System C (Mahaweli Ganga Development Project III). The Government would carry out a similar program for land transfer and collection of land payment thereof in System B Right Bank under the proposed project. Land transfer payments would total about SL Rs 62 million (PV) in real terms. Pro-ect Benefits and Justification 56. The project would enable development of currently unexploited and underutilized land resources in the Mahaweli Ganga Basin for intensive agricultural development, create a viable financial base in irrigated farming for about 14,000 settler families, and assure water supply to about 900 existing farm families. As agricultural production expands, secondary and tertiary industries would also develop thereby increasing further oppor- tunities for economic growth and employment for another 4,200 non-farming families. By expanding production of import substituting and exportable commodities (rice, soybeans, cashews, chillies), the project would have a beneficial impact on the country's balance of payments. In total, the project at full development would generate annually an estimated 70,700 tons of incremental rice, about 770 tons of vegetables, 2,000 tons of pulses, 2,500 tons of citrus, 1.9 million coconuts, 48,000 cubic meters of fuelwood, and 200 tons of cashew kernels. In addition, about 400 tons of fish would be produced annually in project area waterbodies as a result of fingerling seeding activities. Lastly, the project's water monitoring and forest con- servation interventions would be consistent with the Government's Environmental Action Program and its goals of development compatible with environmental protection. 57. Average effective income of the new settler families would increase about 2.8 times as compared to without-project levels. Average income of the farm families currently engaged in moderately intensive irrigation farming in Punanai system would increase about 2.4 times through greater cropping inten- sities and yields permitted by the project. Incremental employment oppor- tunities would total about 3.2 million mandays per annum with the project's agriculture-based settlement program and higher land use intensities on existing irrigated area. 58. The Sri Lankan economy is expected to realize net benefits from pro'ect investments of about SL Rs 422 million (US$16.9 million) in present worth (PW) terms, which when annualized over the 40-year expected project  -20- life would yield about SL Rs 43 million per annum (US$1.7 million). The economy of Sri Lanka would realize an economic rate of return (ERR) from total project investments, inclusive oE physical contingencies, of about 12 percent. Project Risks 59. The project has no major technical risk. Barring any increase in real costs, the project can withstand Up to a one and one-half year delay in project benefits and remain economically viable. The capabilities of MECA and MEA to carry out project works would be strained because of these and other ongoing commitments, particularly in Systems C and B. To alleviate this problem, the project includes significant technical assistance input to ensure completion of work as scheduled. 60. Sensitivity analyses indicate that the project can bear a moderate amount of shock and still retain its economic viability. If total incremen- tal costs rise above 13 percent, or if incremental benefits fall more than 12 percent, or if the project is delayed by more than one and one-half years, the pro4ect's economic viability would be in jeopardy. The project would remain economically attractive with up to a 13.5 percent shortfall in incremental rice production, the project's chief crop. Therefore, economical and expeditious implementation would be required to avoid real cost increases. PART V - LEGAL INSTRUIIENTS AND AUTHORITY 61. The draft Loan Agreement betweeni the Democratic Socialist Republic of Sri Lanka and the Bank, the draft Development Credit Agreement between the Democratic Socialist Republic of Sri Lanka and the Association, the report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank, and the recommendation of the Committee provided for in Article V, Section 1(d) of the Articles of Agreement of the Association are being distributed to the Executive Directors separately. 62. Special conditions of the proposed loan and credit are listed in Section III of Annex III. Effectiveness conditions include effectiveness of the CIDA grant and loan and the Saudi Fund loan, and establishment of the project special account. As a corndition of disbursement, the Borrower would subrait a work program for the cashew plaLntation. 63. I am satisfied that the proposed. loan and the credit would comply with the Articles of Agreement of the Bank and of the Association.  -21- PART VI - RECOMMENDATION 64. I recommend that the Executive Directors approve the proposed loan and credit. A.W. Clausen President Attachments Washington, D. C. May 18, 1984  -22- ANNEX I Page 1 r A B L E 3A SRI LANKA - SOCIAL INDICATORS DATA SHFET SRI LANKA REFERENCE GROUPS (WEIGHTED ATERAIES) 7W MOST (MOST RECENT ESTIMATT) /b RFCENT /b LOW INCOME. MIDDLE -Nco 1 96G6- 1973- ESTIMATE-- ASIA & PACIFIC ASIA 5 PACIFIC AREA (THOUSAND SQ. KM) TOTAL 65.6 65.6 65.6 AGRICLLThL'RAL 19.5 24.2 2 5 .9 CSN PER CAPITA (US$) 60.0 1DO.0 300.0 276.7 1028.6 EIIERGY CONSULM7rTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 177.0 235.0 201.0 398.4 792.8 POPULATION AID VITAL STATISTICS POPULATION,MID-YEAR (THOUSANDS) 9889.0 12516.0 14988.0 URBAN POPULATION (% OF TOTAL) 17.9 21.9 2 7.2 21. 5 32.9 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MO`L.) 21.3 STATIONARY POPULATION (MILL) 32.3 YEAR STATIONARY POP. REACHED 2090 POPULATION DENSIT`Y PER SQ. KM. 150.7 190.8 224.6 1 61.7 2 60.7 PER SQ. K05. AGRC. LAND 507.1 517.6 569.9 363.1 1696.5 POPULATION AGE STRUCTURE (X) 0-14 YRS 42.1 41.9 35.7 36.6 39.4 15-64 YRS 54.3 54.5 60.1 59.2 57.2 65 ANT ABOVE 3.6 3.6 4 .2 4.2 3.3 POPULATION GR040H RATE (2) TOTAL 2.5 2.4 1.6 1.9 2.3 UR3AN 4.7 4.3 3.6 4.0 3.9 CRBDE BIRTH RATE (PER THOU7 ) 35.7 29.4 27.0 29.3 3:.3 CRUDE DEATH RATE (PER THOUSO) 9.2 7.5 6.0 10.9 9.6 GROSS REPRODUCTION RATE 2.6 2 .2 1.7 2.0 2 . 0 FAMrLY FPANhING ACCEPTORS, ANN`AL (THOUS) . . 55.3 100.5 USERS (0. OF MARRIED WOSEN) .8. .2 41.0!c 49.1 46.6 FOOD AND KIIITION INODEX OF FOOD PROD. PER CAPITA (1969-71-100) 93.0 103.0 152.0 111.4 125.2 PER CAPITA SUPPLY OF CALORIES (2 OF REQUIREIMENTS) 102.0 108.0 102.0 98.1 114.2 PROTEINS (SEAMS PER DAY) 46.0 47.0 43.0 56.7 57.9 OF IIHICH ANLMAL AND PULSE 13.0 12.0 8.0/c 13.9 14.1 CH0LD (AGES 1-4) DEATH RATE 7.1 5.1 3.0 12.2 7.6 EIGTH LIFE EXPECT. AT BIRTH (YEARS) 62.0 63.6 69.4 59.6 60.2 INFANT MORT. RATE (PER THOTS) 70.6 58.5 42.7 96.6 68.1 ACCESS TO SAFE WATER (%POP) TOTAL 21.0 20.0/d 32.9 37.1 URBAN .. 46.0 45.0Ad 70.8 54.8 RURAL '' 14.0 13. 07d 22.2 26.4 ACCESS TO EXCRETA DISPOSAL (2 OF POPULATION) TOTAL .. 64.0 59.0/e 18.1 41.4 DRBAN .. 76.0 68.0/e 72.7 47.5 RlRAL .. 61.0 55.O7;? 4.7 33.4 POPULATION PER PHYSICIAN 4490.0 5950.0 7170.0 3506.0 7771.9 POP. PER NURSING PERSON 4!70.0/f 22:60.0 1340.0 4797.9 2462.6 POP. PER HOSPITAL BED TOTAL 320.0 330.0 340.0 1100.6 1047.2 URBAN 120.0/f 220.0 240.0/d 298.4 651.1 RURAL 1060.o7? 560.0 580. 07 5941.6 2591.9 ADMISSIONS PER HOSPITAL BEN .. 54.4 .. .. 27.0 HOlSING AVERAGE SIZE OF HOUSEHOLD TOTAL 5.4/ j 5.8 . URBAN 6.3ji 6.3 RURAL 5-2/ 5.5 AVERAGE NO. OP PERSONS/ROOM TOTAL 2.01 2.5 URBAN 2.1/g 2.7 RURAL 2. OIT 2.5 .. . ACCESS TO ELECT. (S OF DWELLINGS) TOTAL 7. 5_/S 9.0 URBAN 35.9/g 34.5 .. . RURAL 2.a 3.0 _- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - --_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ -_ - -_ - -_ - -_ - -_ - -_ - -_ - -_ - -_ _ _ ._- _ _ _ _- _ _- _ _- _ _- _ _- _ _- _ _- _ _- _ _- _ - -_ - -_ - -_ - -_ - -_ - -_ - -_ - -_ - -_ - -_ - -_ -  -23- ANNEX I Page 2 T A B L E 3A SRI LANKA - SOCIAL INDICATORS DATA SHEET SRI LANKA REFERENCE GROUPS (WEIGHTED AVERAGES) /a MOST (MOST RECENT ESTIMATE) /b ,lb RECENT /b LOW INCOME MIDDLE INCOME 1 9 6 0-1b 1970- ESTIMATS- ASIA & PACIFIC ASIA 6 PACIFIC EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL q5.0 99.0 100.0 96.1 101.2 MALE 100.0 104.0 103.0 107.8 106.0 FEMALE 90.0 94.0 97.0 82.9 97.5 SECONDARY: TOTAL 27.0 47.0 51.0 30.2 44.9 MALE 38.0 46.0 50.0 37.3 50.0 FEMALE 16.0 48.0 52.0 22.2 44.6 VOCATIONAL (t OF SECONDARY) .. 0.4 0.4/d 2.3 18.5 PUPIL-TEACHER RATIO PRIMARY 31.0 16.0/h 32.0/i 34.4 32.7 SECONDARY .. .. .. 18.4 23.4 ADIULT LITERACY RATE (1) 75.0/f 77.6 85.0 53.5 72.9 CONSUINP ION PASSENGER CARS/THOUSAND POP 8.4 7.0 7.3/i 1.6 9.7 RADIO RECEIVERS/THOUSAND POP 35.8 39.9 98.7 96.8 113.7 TV RECEIVERS/THOUSAND POP .. ,. 2.4 9.9 50.1 NEWSPAPER ("DAILY GENERAL INTEREST-) CIRCULATION PER THOUSAND POPULATION 36.0 48.9 .. 16.4 54.0 CINEMA ANNUAL ATTENDANCE/CAPITA 2.9/1 7.8 4.9 3.6 3.4 LABOR FORCE TOTAL LABOR FORCE (THOUS) 3391.0 4188.0 5229.0 FEMALE (PERCENT) 22.6 23.7 24.8 33.3 33.6 AGRICULTURE (PERCENT) 56.0 55.0 54.0 69.0 50.9 INDUSTRY (PERCENT) 14.0 14.0 14.0 15.8 19.2 PARTICIPATION RATE (PERCENT) TOTAL 34.3 33.5 34.9 42.5 38.6 MALE 50.8 49.1 51.4 54.4 50.7 FEMALE 16.2 16.5 17.7 29.8 26.6 ECONOMIC DEPENDENCY RATIO 1.3 1.4 1.1 1.0 1.1 INCQ(IE DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5% OF HOUSEHOLDS 26.4/g 18.2 .. 16.5 22.2 HIGHEST 207 OF HOUSEHOLDS 52.1 g 43.4 .. 43.5 48.0 LOWEST 20% OF HOUSEHOLDS 4.5/R 7.5 .. 6.9 6.4 LOWEST 40% OP HOUSEHOLDS 13.7 19.2 .. 17.5 15.5 POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN .. .. .. 133.9 194.5 RURAL .. .. .. 111.6 155.0 ESTIMATED RELATIVE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN .. .. .. .. 178.0 RL'RAL .. .. .. .. 164. 8 ESTIMATED POP. BELOW ABSOLUTE POVERTY INCOME LEVEL (7) URBAN .. .. .. 43.8 24.4 RURAL ,, ,, ,, 51.7 41.1 NOT AVAILABLE NOT APPLICABLE N O T E S /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, -Data for 1960" refer to any year between 1959 and 1961; "Data for 1970" between 1969 and 1971; and data for "Most Recent Estiaate' between 1979 and 1981. /c 1977; /d 1976; /e 1975; /f 1962; /g 1963; /h 1972; /i 1978; /. 1958. May 1993  * -24- ~~~~ANNEX I Page 3 oopral b-.ate. of the lank of etatdardteddfotoono orpene ddIfeetInoto.ool oinro at.gOedata are, -onhttlea. oafo yt 4eeorlbe ordara of set a,todloan. orendo, an taetrt etl oo dfoen.htenootta r-. rfraatoEr.- ar 1) the -es onootry Iroar of tIe . eojao -ooroy an 121 * ooooty Erlop .1tt -mht highe enenag too-e that the -noor troop of the aebet otety lsoptFor 'High Inotse ml1 Enportere' Sroop doer 'Iiddle 1oos Nttrth Afbe an MIiddl ttl* hoehraeoftngn e tolt_re gre a an o htttiott t ththe-,d. oneaa fooo e saoog hed -itloatr epnd o h -h leOlo Odo oi o oottort. Ifn ioconh aoerhiaad n faete I nr l oroe1dbaAtoante.Tea nrge r ny eftI iMomptn log the to.lneofoebnl oa nte eo he onnn en mu. (th-tes .4-.1.) 70 a10n ln-P0lto loied hby nboaher of pr iant "o --t1-tota e-ertac ara ooarntelng lan . rod lo,ed seat;900, phdFiihTfiTanmdlolehonl In noroy lenel. 0971 and 1998 Ceo.. Moonlodn-lolynI ..J oar.1 Sfd-ta td. ..tta. ur.n. otrro. p tolattol Itona.l, 1960, I.-Iorhan e..od ioe y hi epotrnabno rtlbd tatlae y oeaae eehda Oo I ak Ati.a (1979-81 bcetal; rahltoonotes aptaaesthoeenapsr-atty a-ffad 1960, 1970, an 1981 dnra. hy n lns ore plylo E-shliah.-n pro.oidtng rrniral1ynetda too.-.. Iood. _1re hoeri_cle,henr,Inood h tlh an Maye cmteeto i CAPITA - ktlapssnnoeaoooo omene ora .ater....paaannoo a-ffad hy * ptoyaonla lOon b .r .ndiI.l prisay anrjf real nd lnont. reoolas natrol ne an hydo-,h nnlea eenensnt... re.,I idotte. ,Ilo.) oion oter0. pa lateodatnad en gottnoai aeoliy rtoor of no Iaonaet e opita; .r.d....d.ag.. eoalfolO s.Mteenaie rren 1960, 1970, and 1990 dato. orben hoPonal Iolde OfO.... pon f enrlhoapntle.anroa ~~~ e) - do aO~~~~~~~~~~~I Jnly 1; 19601, 1970, co 1091 OdnoaorHo-pinol nod -Itlnne feesln ondo re Aiio. tnt,~~~~~~~~~~~~~f. h-octlnel dioided by tho Iuho f Sods. diffrentdaftioltea f aran rate ep tffert roaps..ebolioy ofldee W0ISING o -nntrtae; 1960, 1970 . ted 1981 deoc. onn i-jn of tnaehold 1 erop ..... h,oneod)nnl,ohn o u NWNIOzpMtlp.! AIhododnoin frtoo ofAndaono nt Inn Ao oanr II7- W corrnopo...io prj ..noar heetond t end9hinoieele ohoardor or lod-g It .y IoIIyno htOold,i -o7lpIpin[tfoWby age anM a n htsotio odftilirpon houaohol for ...eiolpnpce rae. -jato ...ceaoer fore- a yrt.osna Otoa nrenae frroey osoe.ohn n ue -terg noben laal ca f. b eoetnya hinth nonre-acg ottO ...n' or nsosprnonh i orhe. no ruaZruhdNnnsniono taItte io-o leI .. so easlf netoyathlilt . ollno, nod0.00 Onoly. Onai inn -1rids o-annnnarnnren Feara. The ran- -er forfartilnty ette al.o h..a ohree loei __orpirId P."... ae-ts., deoitn to fn-tilnaIori..o.ore Ioa and-pctfa.y..0ccn lernon oneto o)Lna no,ohn o ua ttsbinetlooe nf =otnitt ehe fernyility nrsnde for pro-lirto nnreaIf nu-oi than, end`rurlI deo11lot recret-ly. ocateor oeelalo-icetn onryponitin here in 0 gro-h teiao VhepplOonO h sa 00bndtt . n sln n sn o sdjoeo to ittro legh If pniaory edrn o; n ponate ao _u h eehd.heoAeor-o - oa- -h n mai-oeoe Ion..hone; ocone M92iria;10,lOl nd90 aa2prOenosi tI no -17ya. oMf a. go; oonnrpnndenoeroraras y Per,l.i- . .w. tnioe lln optde Lhoot-for-agioulourol-lnd-gerr"al..p.etoPudeY 007P 96- 17 and"- 106-0-. i--(00 I dn.nreoel~ oId olneo Irn .a. of _rodao _ - .....n inei Foit I0aoinM tatr (eon hlrn(00 eri okn-t 15- Onpodoerh Ora.l, Ifenet2isi or oteyrnoc io eso oeo rerbate; t%t0, 1970, co o; aa frdnrn 10sO..'Il .o-olen.ad e .derfo ..s..d... enrolled In 64nenn grat lat IereI l-6 oal- sonl-roe rt. O oo ed yifoy ndeondao eeloiOrdyIfen o --hee non-hn yarroslnOt;tn,Illl ad 00 'do. lIOIttiIn f Crd' ahRt ernneel- ooidah a hnodn In-fe fesno es o huad onaon fettror Ieostn 90 007, en` 0001 de,a. retnenn lc han NlOlperen;enbo eolnr or ah h.,eo-IsIepredao-lr peIod IFsheetna I_ reen etaael_ btdi triee rnoouodopualo - cli n oo nO one-oro for nodi fernItilyrae onoaliftosyao.n... aogec ening in 1000, 1070, enb,Tdhoeeongerl rot .no r..h..eto of rplnIn tb. n 1901. innornloo nn oti-tohnyer hertienni-nnorIf feahlnlanoto-enncnora.oonoollhoonene)-Oooslnoaerotsoeptor ernero Inotern;Idhefo,erenf oaronenoofhroI_enhlb atnr eno of birth-nentro-1 dent e node onepi-e of neo1 tonal foOIpy pl-Iino bonoiehIoohed IInol-og. rIfosra. Tornnnerrhn....ndron- sIon-nrrtorcfrh -drcoro 7-etlrPia... i- Icr orato arI dnsl eonaof .sn.e rnrlrIfpenododpyhelnenlotullted orr ....... eoaagfrhtl-heannnno '15n Y""r)nhnerhnt-nnnIdII on nontlrn onunoontl"nninfolte VOANil eoriedL orenI aenroou.Sonnru.ulnlotonn odlrnr)-nr o ono tomotf -drd-oonlol 110070 -'h l.ofoo- -- onrl Oord nuoy; nnoo n___4ro ooonioo -ononelrrd-nti-oofI lIfndndiiee I. ... .rdooonnn setda -oh 'doliy'If ilaorr-e- Irot- f-nnlle-onIto teederdleornIan-1d-sI-esrhais. noaod)osorooI rloYpg tfgIin. Iulhtodnenrolrnnanotd rloce f hea 0 ainlforg roduor .n..n ghe I 9I-0 I 91,cd108 Mar C..tt. -1oot nf olnre teon ofroor.eti oputod Itin Toe hrFonr- luaoe nnerln 010oooe.lnuior exponta , not nhaonea to stool, hen enoplira soniode aniesi~. feed, ..In., r-a-e, ti; 1960, 1970 an 1001 dano. qenlOsne nfd I pron ISn, so in.tees in diatiotin.PnoeIe-ori-fnl aorfroo nnooeeo ot a for-. Raqotrwanneoars eoloand hr P0 hesd on hynogoindefrool Agrlicol-ortIpo--or) - Lohbr fonri faon,tror,hnigsn OrInf n helnrnidaro eo` rreol epror *Id eg.e foehiga I on I9 nnnn t.- n O iul Oo for-; 1000, 1706000 1901 dcoo. .S. end es ibnoorIn foyneno,ad lnon 10 p-r-ltnneoIosty0ono - Lah.r fooroIneng.noorotn enfrurn at heosaheld lenel; 100t-n, 1070 ed.10.0 ab. t -o olcolnoy d ot o e .o-nelo fooliao or;1O) re atasol f. orotn.r brac no I-lhdsy - notnU onA o nrOi .ron-onlh7 n-d 901 Oe seunaeo fo llouore eeohllndh. 10ooio.1 enetanllyeteortod _I.s onto"I, ooe,nd fsl o ono Meleellf prt InoF atoO1 rtesoldh oalfnr Thoo ISh, S190, onO 1901 Oono. Sheo or er o iernolo boo etootrd ae ee ohnona O7 gaeofme rosn 203rc elrlg g-n ouor of . nOhppuonor o Id.lo,tn rtd Thnrd World rood toroey; 1010,'7 t 90An.foom srdeo ot u nryioo no 5ed I5 en -1e no d-rtod Eros aoeIeand Moples no. trees. dc o; 1961-65, 1910 eo 0070 oontoie dns anled onslot i haa; OG,190en 10 Oche. ho -so20lla orlld th 1900 1070h cod 090On.onldO nepte cI_hrn rhl amin year o ane. ron tooeat iton ho blha; Sri, 1970 an 19;doos dhnoeroroonn IoOl hr ootioo oooOr li HEALTH snnrosrnnnoononn) bne. oaTedrol-nnTnnnlyarreeOfnT Geenosno-nOroureeobto noeharof eope Iloo,oher on rural) .sl - reaoal Iinea nos-frafondhl Ietereoptylonlueenea(L eootcoeete. nonoretthooheoinnooeieiroooorn OrnolooollSooraiOol -rtoondnnIf ntoonneiotedaaon erhestel tts pnoenodhnfennls.eprlnt.aI IIoOesontonIf-nonloeieoo-Onffarug yrepl aeoOarr rni) neenooncoo nOOnon otrsninr nyM shidn. Ino oorlOrhto-1 oonf re enlO oit blo.ts hru nrheereo p,hll fonnet orenoipoo nte noncor ohe l.10 netoIolelheOnon frhtoocto ilnO ....sntsnsee frmaoae- oeorIfrdn eig inhoeonalonIoooa ....dtrlooneo InutotroTreeoo ronol heae Itaaareoeoelaoe o1leloenrhoeeisnsdoo Pnenorp.sno(naodoaleoteenin -ahree o0 hoeeol . no eo:opeddenprlonIaoe pot. 00 hetameto tanreoc Obeaneal (renren of o- Ifatlon--- toled urhen. en roal :blrfrole (tonieO....rbhan-,nIfdrorel)eenohUsd-hyetrreoo I dinpoosis peoneosnao of halr or petoLooinlne onnadtnt say....d. th ooii. otYtoo. an .....e.. , 000 Ord oihout releeo, fononened .OoM 00 hono If oa treoan h aosneI O s-e-onI petAIfo O e fpoOooi ospialfoeroelprcn r dity ond f-etlar tooliooa . Yp10  -25- Annex I Page 4 SRI LANKA - ECONOMIC INDICATORS OUTPUT IN 1983 BY SECTOR ANNUAL RATE OF GROWTH (% constant prices) Value Added $ Million % 1970-77 1977-83 1970-83 Agriculture 1,304 27.5 2.0 4.2 3.0 Industry a/ 1,257 26.6 2.1 5.8 3.8 Services 2 171 45.9 3.7 7.0 5.2 Total b/ 4,732 100.0 2.9 6.0 4.3 GROSS DOMESTIC PRODUCT IN 1983 US$ Million % GDP at Market Prices 5,199 100.0 Investment 1,488 28.6 Gross National Savings 843 16.2 Current Account Deficit 645 12.4 Exports of Goods and NFS 1,354 26.0 Imports of Goods and NFS 2,136 41.1 GOVERNMENT FINANCE Central Government (Rs million) % of GDP at Market Prices 1983 1975 1982 1983 Current Receipts c| 21,088 17.2 16.6 17.2 Current Expenditures d/ 23,822 18.3 18.0 19.5 Current Surplus -2,734 -1.1 -1.4 -2.3 Capital Expenditures e/ 15,578 7.3 15.9 12.7 External Assistance 10,974 3.2 8.1 9.0 a/ Manufacturing, mining, construction, and utilities. h/ GDP at factor cost. c/ Includes capital revenue. dI Includes advance accounts. e/ Includes net lending.  * -26- Annex I Page 5 SRI LAINKA - ECONOM1IC INDICATORS MONEY, CREDIT, AND PRICES 1970 1977 1978 1979 1980 1981 1982 1983 a/ (end of period) (Rs Million) Money and Quasi Money 3,115 8,717 10,892 15,058 19,860 24,447 30,51C 35,324 Bank Credit to Public Sector 2,856 4,659 4,226 6,267 13,095 17,277 21,828 20,850 Bank Credit to Private Sector 1,320 4,116 6,449 8,705 12,709 16,690 20,570 26,873 (Percentages or Index Numbers) Money and Quasi Money as % of GDP 22.8 23.9 25.5 28.7 29.9 28.8 30.4 28.9 General Price Index (1970=100) 100.0 147.0 164.8 182.6 230.2 271.6 301.1 343.3 Annual Percentage Changes in: General Price Index +5.9 +1.2 +12.1 +10.8 +26.1 +18.0 +10.9 +14.0 Bank Credit to Public Sector +10.4 +7.7 -9.3 +48.3 +109.0 +31.9 +26.3 --6.1 a/ Bank Credit to Private Sector +8.6 +40.5 +56.7 +35.0 +46.0 +31.3 +23.2 +33.0 a/ BALANCE OF PAYMENTS MERCHANDISE EXPORTS (1983) 1981 1982 1983 S Million _ (US$ Million) Tea 353 33.3 Exports of Goods, NFS 1,346 1,305 1,354 Rubber 121 11.4 imports of Goods, NYS 2,055 2,205 2,136 Coconut Products 60 5.7 Resource Gap (deficit - -) -709 -900 -782 All Other Commodities 525 49.6 Interest Payments (net) -82 -80 -117 Workers' Remittances - - - TOTAL 1,059 100.0 Other Factor Payments (net) -15 -1S -18 Net Transfers 203 264 272 Balance on Current Account -603 -734 -645 EXTERNAL DEBT (S Million) bi Direct Foreign Investment 49 63 38 December December c/ Net M&LT Loans 337 416 360 1982 1983 Disbursements 380 484 445 Amortization 43 68 85 Total Outstanding 3,554 3,736 Capital Grants 161 162 171 Other Capital (net) 23 66 77 Total Outstanding Change in Reserves (t = increase) -33 -27 +1 and Disbursed 1,969 2,393 Gross Reserves (end-year) 451 52C 514 Net Reserves (end-year) 5 -22 -21 DEBT SERVICE RATIO d/ (b) 10.1 :,.9 Cr-ude Oil and Petroleum Products Imports 448 590 4669 Exports 175 158 114 IBRD/IDA LENDING, March 31, 1984 (USS Miljj_in IBRD IDA RATE OF EXCHANGE Dutstanding and Disbursed 45.0 287.8 End 1978 End 1981 Undisbursed 22.4 374.6 USS1.00 = Rs 15.51 L'SS1.00 = Rs 20.55 Rs 1.00 = US$ 0.06 Rs 1.00 = USS 0.05 Outstanding, including Undisbursed 67.4 662.4 End 1979 End 1982 US$1.00 = Rs 15.45 LSS1.00 - Rs 21.32 Rs 1.00 = US$ 0.06 Rs 1.00 = USS 0.05 End 1980 End 1983 US$S.C0 = Rs 18.00 US$1.00 = Rs 25.00 Rs 1.00 = USS 0.06 Rs 1.00 = us$ 0.04 a! End-November data; changes are from November 1982 to November 19S3. b/ Repayable in foreign currencies and vith a maturity over one year. c/ Preliminary estimate. d/ Ratio of debt service on public and publicly guaranteed M&LT debt 'excluding IMF charges and repurchases) to exports of goods and services. South Asia Programs Department Hay 4, 1984  -27- ANNEX II Page 1 of 2 THE STATUS OF BANK GROUP OPERATIONS IN SRI LANKA A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of March 31, 1984) US$ Million Loan or Amount Credit (net of cancellations) No. Year Borrower Purpose Bank IDA Undisbursed Eight loans and twelve credits fully disbursed 72.9 91.9 666 1976 Sri Lanka Tank Irrigation Modernization 5.0 0.8 701 1977 Sri lanka Mahaweli Ganga Development II 19.0 9.7 818 1978 Sri Lanka Tree Crop Rehabilitation (Tea) 21.0 10.7 891 1979 Sri Lanka Kurunegala Rural Development 20.0 10.5 900 1979 Sri Lanka Road Maintenance 16.5 9.5 931 1979 Sri Lanka Agricultural Extension and Adaptive Research 15.5 11.9 942 1979 Sri Lanka Small and Medium Industries 16.0 4.0 979 1980 Sri Lanka Mahaweli Ganga Technical Assistance 3.0 1.4 994 1980 Sri Lanka Road Passenger Transport 53.0 25.6 1017 1980 Sri Lanka Rubber Rehabilitation 16.0 14.0 1020 1980 Sri Lanka Telecommunications 30.0 17.8 1041 1980 Sri Lanka Second Water Supply 30.0 23.2 1048 1980 Sri Lanka Sixth Power 19.5 11.3 1079 /a 1981 Sri Lanka Second Rural Development 33.5 18.6 1130 /a 1981 Sri Lanka Construction Industry 13.5 7.0 1160 Ia 1981 Sri Lanka Village Irrigation Rehabilitation 30.0 22.7 1166 /a 1981 Sri Lanka Mahaweli Ganga Development III 90.0 52.8 1182 7/a 1982 Sri Lanka SMI II 30.0 27.7 1210 /a 1982 Sri Lanka Seventh Power 36.0 22.8 1240 7a 1982 Sri Lanka Tea Rehabilitation and Diversification 20.0 16.9 2187 1982 Sri Lanka Eighth Power 42.7 - 22.4 1317 /a 1982 Sri Lanka Forestry I 9.0 9.0 1401 Ia 1983 Sri Lanka Industrial Development Project 25.0 24.0 1363 /a 1983 Sri Lanka Third Rural Development 23.0 22.7 TOTAL 115.6 666.4 397.0 of which has been repaid 48.2 4.0 - Total now outstanding 67.4 662.4 Amount sold 3.6 of which has been repaid 3.6 Total now held by Bank and IDA /b 67.4 662.4 Total Undisbursed 22.4 374.6 397.0 /a IDA 6th Replenish Credits, principal amounts shown in US dollars equivalent at date of negotiations, as shown in the President's Reports and undisbursed amounts shown in US dollars equivalent at the rate of exchange for the SDR at March 31, 1984. /b The original principle of credits under replenishments 1, 2 and 3 has been increased by the amount of the translation adTustment as a result of the devaluation of the US dollar in 1972 and 1973.  -28- ANNEX II Page 2 of 2 B. STATEMENT OF IFC INVESTMENTS (as of March 31, 1984) Year Obligor Type of Business Amount (US$ Milliona) Loan Equity Total 1970 Pearl Textile Textiles 2.50 0.75 3.25 1977/80 The Development Finance Corporation of Ceylon Development Banking - 0.45 0.45 1978/81 Bank of Ceylon Development Banking 7.00 - 7.00 1979 Cyntex 'Cextiles 3.15 0.54 3.69 1979 Mikechris Industries Polypropylene Bag 0.89 0.10 .99 1980 LOLC Leasing - 0.25 0.25 1981 Tal Lanka Hotels Hotel 19.30 .70 20.00 Total Gross Commitments 32.84 2.79 35.63 Less: Cancellations, Terminations, Repayments, and Sales 15.75 .75 16.50 Total Commitments now Held by IFC 17.09 2.04 19.13  - 29- ANNEX III Page 1 of 2 SRI LANKA MAHAWELI GANGA DEVELOPMENT PROJECT IV Supplementary Project Data Sheet Section I: Timetable of Key Events (a) Time Taken to Prepare the Project: Two Years (b) Proiect Prepared By: Acres International under supervision from the Government (c) First Presentation to the Bank Group: Early 1983 (d) Departure of Appraisal Mission: June, 1983 (e) Completion of Negotiations: April 3, 1984 (f) Planned Date of Effectiveness: September 28, 1984 Section II: Special Bank/IDA Implementation Action None Section III: Special Conditions (a) Additional Condition of Effectiveness (i) Effectiveness of the Saudi Fund loan and CIDA grant and loan (para. 43); and (ii) Establishment of the project special account (para. 47). (b) Other Conditions (i) Allocation of a sufficient amount of water for the project area from the Mahaweli Ganga and provision of adequate credit to the project area residents (para. 38);  -30- ANNEX III Page 2 of 2 (ii) Recovery of full O&M costs through water charges by September 30, 1991 (para. 54); and (iii) By July 31, 1986, review oi- the progress of water cbarge collection and its adequacy to cover O&M costs (para. 54). (c) Condition of Disbursement Submission of work program for cashew plantation by the Government by December 31, 1984 (para. 46).  80' ~ $ lo-Trikonamadu (3 .- Is 95 i NORTHERN_ Kandkoldu x NORTH / CENTRA\ \' .... ~,.,EASTERN WESTERN' U. V tA Welikonda ' ' -= 8W/o/ GAMUWA, A SOUTHERN 7?' 80' 82e'_ <4 rTh map W.te enS PtroePard by- The W.and a-k's staff -xcin-of for the non enenne O the/ -dr an S ehs,ey fur the re rafnao The We;fd B,,k and the nmt,enata Fnancef Corporafmnn The denomdb,ho.. used and the bo-d.ar-es sho-i. nthis -tP do -ntin-ply. o- thin Tart of The Word Banh and the Otent-atonaf Finan- Corpora-ton . . any judgrUrntbnken the e- sI:ts' of any tensfoh yr rany ;> =s-- - X t/. endorsemnent nr acceptance of , -, f/ '/ fJ ouch baondar,eS , v . g ; '( IEilustewa . aav / SRI LANKA MAHAWELI GANGA DEVELOPMENT PROJ ECT Systems B and C System B ; uerontdw- |v a.- Scot> !?3e- -U .......... , /XXAreo .- -J$, R '.t e -,, ' ; :--- Selected Scheme Areas Zone Boundaries and Numbers System C - Area Aluifotroma ' 2 Zone Boundaries and Numbers A,.s, fX / -T tef VD- 'S 'tO,O Mahaweli Gonga Development Project Ongotng Development Area Mahaweli Ganga Development Project IV Proposed Development Area (Right Bank) Proposed Canal Mohiyonganae - N : Proposed Dam ond Reservoir \j~7 t >n J .'-c'cc * cci -v Sf. - - Existing Canals =l\11=77 Tanks and Reservoirs c\