Sri Lanka - Emergency Reconstruction and Rehabilitation Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-4705-CE MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 55 MILLION TO THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA FOR AN EMERGENCY RECONSTRUCTION AND REHABILITATION PROJECT February 24, 1988 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.  SRI LANKA EMERGENCY RECONSTRUCTION AND REHABILITATION PROJECT CURRENCY AND EQUIVALENT UNITS Sri Lanka Rupee (Rs) = 100 cents US$1 = Rs 29.7 MEASURES AND EQUIVALENTS 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 mile (mi) I hectare (ha) = 2.48 acres (ac) ABBREVIATIONS BOC - Bank of Ceylon DRCC - District Reconstruction Coordinating Committee GA - Government Agent GDP - Cross Domestic Product COSL - Government of Sri Lanka HDFC - Housing Development Finance Corporation of Sri Lanka Ltd. LC - Lanka Cement Ltd. MHP - Million Houses Program MOFP - Ministry of Finance and Planning NDB - National Development Bank. NGO - Non-Government Organization NHDA - National Housing Development Authority NRSC - National Reconstruction Steering Committee PPF - Project Preparation Facility RDA - Road Development Authority REPPIA - Rehabilitation of Persons, Properties & Industries Authority SLCC - Sri Lanka Cement Corporation SMI - Small and Medium Industries SMIB - State Mortgage and Investment Bank SOE - Statement of Expenditures TCCS - Thrift and Credit - operative Societies UNHCR - United Nations Higti Commissioner for Refugees UNDP - United Nations Development Programme FISCAL YEAR January I - Derember 31  "Olt OVlWIAL VUS ONLY SRI LANKA EMERGENCY RECONSTRUCTION AND REHABILITATION PROJECT Credit and Project Sumnary Borrower: Democratic Socialist Republic of Sri Lanka Beneficiaries: Bank of Ceylon Housing Development Finance Corporation of Sri Lanka Ltd. Lanka Cement Ltd. National Development Bank National Housing Development Authority Non-Government Organizations Sri Lanka Cement Corporation State Mortgage and Investment Bank Amount: SDR 55 million (US$78 million) Terms: Standard, with 40 years maturity Onlending Terms: Consistent with Project objectives, terms and conditions would be as follows: Shelter: interest rates between 2-10% p.a. for up to 20 years Industry: (i) cement: equity contribution pending restructuring of industry; (ii) other affected industry: interest rate of 8% p.a. for up to 20 years; (iii) SMI Loan: same as Credit 1860-CE; (iv) loans throughi NGOs: interest rate of 4% p.a. for up to 5 years Financing Plan: COSL US$ 33.4 million IDA US$ 78.0 million TOTAL US$ 111.4 million Economic Rate of Return: N.A. Staff Appraisal Report: None. Technical Annex attached in lieu. Map: No. 19995 This document has a restricted distribution and mas be used bs recipients onlv in the performance of their official duties. Its contents mas not otherwise be disclosed without "orld Bank authorizatihn.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA FOR AN EMERGENCY RECONSTRUCTION AND REHABILITATION PROJECT 1. The following memorandum and recommenoation on a proposed development credit to the Democratic Socialist Republic of Sri Lanka for SDR 55 million (US$78 million equivalent) is submitted for approval. The proposed credit would be on standard IDA terms with 40 years maturity, and would help finance an emergency reconstruction and rehabilitation project. 2. Background: The ethnic conflict that flared up in July 1983 has slowed down economic growth and the impressive advances that were being made under the liberalization measures introduced since 1977. The hostilities have claimed over 7,000 lives, caused considerable damage to movable and immovable property, and resulted in the displacement of over 500,000 persons, inside and outside the country. The strife exerted serious strains on the economy of the country and slowed down developmental activities. 3. Following the Peace Agreement signed in July 1987, major hostilities have subsided except that during October and November 1987 there was an increase in fighting in the Jaffna a d Batticaloa areas. Refugees have started to return from abroad and the Government of Sri Lanka (GOSL) has commenced relief activities to help refugees and persons displaced by the conflict make a new start in life. At the request of GOSL, an IDA mission visited Sri Lanka in September 1987 to assess the damage, prepare a Recon- struction and Rehabilitation Program report for a Special Aid Group meeting and to identify an Emergency keconstruztion and Rehabilitation Project within the Program to be financed by IDA. The project was appraised in October/November 1987. A major economic policy concern was to ensure that the Reconstruction Program could be arcommodated within the public investment program without creating unmanageable fiscal pressures. In its November 1987 Budget Statement for FY 1988, GOSL has announced a macro-economic policy framework which includes the gradual decline in the central government fiscal deficit from around 12% of GDP in FY87 to about 9% of GDP in FY90. The necessary decline in deficits would be achieved mainly through cuts in public expenditure (particularly defense expenditures) and would allow for the financing of the Reconstruction and Rehabilitation Program. Joint Bank/IMF discussions on a Policy Framework Paper to be supported by an IMF Structural Adjustment Facility are at an advanced stage. Discussions between the Bank, IMF and the Government have been finalized. A Policy Framework Paper was discussed by the Board on February 18, 1988. In addition, the Bank (a) organized the Special Aid Group meeting; and will coordinate mobilization of resources for the Program; (b) agreed to consider restarting suspended projects when conditions permit and to reallocate savings from on-going projects; and (c) processed a Project Preparation Facility (PPF) in the  -2- amount of US$ 750,000 to help meet immediate expenditures of project prepara- tion, as requested by GOSL. 4. Damage: Losses and destruction have been caused due to the direct effects of explosions, arson, rioting and looting, and the indirect effects of neglected maintenance and the slowdown of economic activities. The rehabilitation and reconstruction needs have been estimated at about US$490 million (including the additional damages incurred during the post Peace Agreement fighting) and cover the following sectors: housing, roads and bridges, public transport, public buildings, railways, ports, agriculture, fisheries, telecommunications, education, health, irrigation, water supply and public and private commercial activities and industry. 5. Government Response: GOSL, assisted by a number of bilateral agen- cies, non-governmental organizations (NGOs) and the United Nations High Commissioner for Refugees (UNHCR), has commenced relief operations for retur- nees and has taken action to reestablish basic services. Returning refugee households are provided transport and a relief package totalling about Rs 25,000 equivalent which includes Rs 15,000 for shelter, Rs 6,000 for dry rations for six months, Rs 2,000 in resettlement allowance, and Rs 2,000 to restart economic activities. Funds have also been provided for temporary school buildings and clinics. On a para'lel front, GOSL has approved the creation of provincial councils involving a substantial devolution of power. 6. Response from Donors: At the Special Aid G-vup meeting on December 4, 1987, donors indicated they were prepared to cc-asi-er assistance amounting to about US$490 million to finance the Program. 7. Program Implementation: A National Re,:onstruction Steering Committee (NRSC) and District Reconstruction Coordinating Committees (DRCCs) have been set up. The NRSC, set up in the Ministry of Finance and Planning (MOFP), will provide overall coordination, evaluation, monitoring, and financial and administrative approval for projects. It will be conmplemented by a full-time secretariat comprising management and technical experts and support-staff. DRCCs have been set up in the worst affected districts to propose and prioritize projects, arrange project preparation through line ministries and coordinate implementation. In the most affected districts, the DRCCs will have full-time secretariats comprising technical and support staff as required. Detailed preparation and design of specific components are being carried out with the help of consultants. Government Agents (Central Govern- ment representatives in the districts) will head the DRCCs and will be mem- bers of the NRSC. These arrangements are satisfactory to IDA. 8. Rationale for IDA Involvement: Given IDA's long-standing development role in Sri Lanka, it is well placed to take the lead in coordinating resource mobilization activities to assist rebuilding economic, social and physical systems under the Program. GOSL has requested IDA's help in coor- dinating the reconstruction effort among donors, as well as in financing part  -3- of the Program. GOSL recognizes the need to act quickly and positively to consolidate the somewha: fragile peace and political situation that resulted from the peace accord. IDA's involvement would support this important Government objective and help promote stability and resumption of economic activity. 9. Project Objectives. The proposed project aims to deliver immediate assistance to GOSL to assist returnees, revive economic activities and restore essential services that would facilitate the reconstruction and rehabilitation process in areas throughout Sri Lanka affected by the strife. 10. Proposed Project and Description: The project, to be implemented over a three-year period, would provide funds for: (a) civil works; (b) equipment and materials; (c) credit (for shelter, industry and small scale enterprises); and (d) consulting services and technical assistance. Summary cost estimates are given in the table below, while more detailed estimates and the financing plan are given in Schedule A. Component US$ Millions : Site Preparation 1.0 Shelter 29.0 Industry 17.0 Telecommunications 11.0 Infrastructure 34.0 Technical Assistance 3.0 Project Administration 4.0 Total Base Costs 99.0 Contingencies 12.0 111.0 i Rounded to nearest million. 11. Through its regular project lending, IDA is active in all of the above sectors except industry (cement) and shelter, and has, in general, a satisfactory policy dialogue in them. The investment in equipment proposed for the cement plants will result in lower unit costs and a more competi- tively priced product than at present. This investment forms part of a larger program of restructuring and management improvement to ensure economic viability of the szctor, which is being addressed as part of the Bank's  -4- on-going dialogue in Sri Lanka. IDA has not been involved to date in housing largely because of earlier disagreements on policy, notably public sector construction of subsidized apartments, interest rate policy and cost recovery. GOSL no longer builds public housing and is now providing lines of credit only for housing construction by the private sector. Since about 1980, US AID has financed part of GOSL's revamped housing program through its Housing Guarantee Loan facility, and is successfully addressing the above issues, with emphasis on policies designed to improve recovery performance. The greatest loss and destruction in the conflict has been to housing, and the IDA-financed housing component will support GOSL in its reconstruction efforts in this sector as a complement to US AID and other potential donors. 12. At the request of GOSL, a US$0.75 million PPF was processed for recruitment of consultants to accelerate preparation of final designs and bidding documents of major components, on the basis of agreed terms of reference. UNDP Technical Assistance funds provide for additional project preparation and implementation, and for staffing of the secretariats of the NRSC and DRCCs. 13. Financing: An IDA Credit of SDR 55 million (US$78 million equivalent) is proposed to finance about 80% of total project cost, net of taxes and duties. GOSL (through MOFP) will pass on the proceeds of the Credit, on terms appropriate to the objectives of the project and satisfactory to IDA, to the line ministries and agencies responsible for project execution. Retroac.ive financing of an amount not exceeding SDR 5.5 million is proposed for expenditures incurred from completion of appraisal, for consultants services, equipment and civil works. 14. Procurement: The Guidelines for Procurement under IBRD Loans and IDA Credits would be followed for procuremenc of goods and works. The Guidelines for Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency would be followed for retaining consultants. 0 Schedule B gives details of the specific procurement procedures to be fol- lowed for each component of the project. 15. Agreed Actions: The Government of Sri Lanka agreed to: (a) arrange for clearance of rubble and defusing of explosive devices, a priority aLtion to be implemented prior to commencement of works; (b) implement the project over three years; (c) strengthen, where necessary, the capacity of agencies to implement the Program; and (d) arrange for adequate funds to be made available to operate and maintain assets reconstructed/rehabilitated under the Program. 16. Benefits: In the wake of the July Peace Agreement, citizens have started to return to the Northern and Eastern Provinces. The project will help them re-establish their roots, return to active employment, start economic activities and accelerate the process of returning the region to a state of niormalcy. Economic returns are likely to be substantial. The  -5- cleanup operations proposed for the most affected towns would assist general improvement of the environment. The next stage improvements that would follow the _nputs proposed for the two cement plants in Jaffna would address issues of land restoration, air pollution and restructuring. 17. Risks: Major risks are that the peace process may falter and that implementation capacity would be inadequate to deliver the outputs in the agreed timeEraae. Technical assistance would be made available to help ensure that the timetable for implementation is adhered to as far as pos- sible. An additional risk is that there might not be effective local level involvement in reconstruction activities which would result in frustration and accusations of inequity or preferential treatment. GOSL is cognizant of this and has arranged for special coordination arrangements between the center and the districts, and among districts. 18. Recommendation: I am satisfied that the proposed credit of SDh 55 million would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Barber B. Conable President Attachments: 1. Schedule A: Estimated Costs and Financing Plan 2. Schedule B: Procurement Methods and Disbursements 3. Schedule C: Timetable of Key Project Processing Events 4. Schedule D: Statement of Bank Loans and IDA Credits (as of Sept. 30, 1987) 5. Technical Annex 6. Map Washington, D.C. February 24, 1988  -6- SCIED R SRI LRNKR ElfERGENCY RECONTRUCIION I REHi ILITRTION PRECT ... ... .. - - - - - - - - - - - [StI.Sted Costs and finming Plan Estimated Costs US (filluons) I I Project CEpo t foreign total Local Foreig Total exchnge base cost SITE PREPRRRTIO Civil Uorlks 0.51 0.41 0.92 44.6 0.9 SHELTER Loans 15.83 12.95 28.78 45.0 89.0 RSSISTANCE TO INOUSWiRY Civil Uorks 0.09 0.17 0.26 6S. 0.3 Equipment a Materials 1.75 3.'5 5,00 65.0 S.0 l.oans 4.03 ?.48 11.51 66.0 11.6 TELErOWIUNICRIOHS Equipment & Materials 2.7( 8.36 11.15 76.0 I1., 1FhRRS!RUC1URE Civil Uorks 13.47 11.02 24.t9 4S.0 24.7 Equipment O Material. 3.31 o.14 9.4' 65.0 9.S Operations 6 Maiintenance 0.iS 0.12 0,27 44t4 0.3 TEC'NICPL RSSISTRNCE 2.53 0.8; 3.37 24. 3.4 PROJECT ROhlNISTRATION 2.28 1.83 4.11 4K.S 4.1 TOIRL BRSE COSIS 46.74 62.67 99.31 52.9 io0.0 PHYS6CRL CONT:fINC[EiS .02 1.63 3.65 '4.7 PRICE CONiINGENCIES 4.70 3.78 8.48 44.6 .. . .. -- - ,GIRL PROJECT COSiS 53.46 57.98 111.44 52.0 Mote: 1. Includes the IDR Project Preparation racuiity(PPr) advance of USS75, GOO. 2. Uhere applicable, total physical contingencies are about 4t of base costs: design, supervision and management about 4t: and price contingencies(foreign and local about 91. 3. Identifcable taxes and duties are 0SS13.7n, and the total project cost, net of taxes and duties is USS97.6n eqiuualent. Financing Plan F liancitr ! o01 Forenigr !ti!