Sri Lanka - Poverty Alleviation Project

Docwint of The World Bank FOR OFFICiAL USE ONLY (1I,Z~ 2-2-3/- C3 Repot No. P-5472-CE MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 40.6 MILLION TO THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA FOR A POVERTY ALLEVIATION PROJECT APRIL 3, 1991 This document bas a restricted ditrbution and may be used by ripients oly in tw prformanMe of their offiia dutis. Its contents may not oterwse be diclosd widtu Word nk * autoiation.  CURRENCY EQUIVALENTS (as of November, 1990) Currency Unit - Sri Lanka Rupee (SL Rs) SL Rs I - USS0.0248 US$1.00 - SL Rs 40.30 FISCAL YEAR January I - December 31 ABBREVIATIONS AND ACRONYMS GDP - Gross Domestic Product GOSL - Government of Sri Lanka GRO - Grassroots Organization JSP - Janasaviya Program (Peoples' Power Program) NGO - Non-Governmental Organization PO - Partner Organization Trust - Janasaviya Trust Fund  FOR OMCIAL USE ONLt SRI LANKA POVERTY ALLEVIATION PROJECT Credit and Project Summarv Borrowers The Democratic Socialist Republic of Sri Lanka Beneficiary: The Janasaviya Trust Fund Amounts SDR 40.6 million (US$57.5 million equivalent) Termss Standard with 40 years maturity Onlen4ing Terms: The Government of Sri Lanka would onlend US$20 million to the Janasaviya Trust Fund, for its credit operations, at 3Z interest per annum with a 25-year repayment period, including five years' grace period for principal and interest. US$36.2 million would be passed on to the Janasaviya Trust Fund as a grant for the implementation of non-credit activities, including human resource development. rural works and nutrition interventions, and US$1.3 million to the Ministry of Policy Planning and Implementation for creating policy research and program formulation capacity on poverty and employment issues. Financing Plan: USS million Government 17.5 Federal Republic of Germany 10.0 International Development Association 57.5 Total AQ Economic Rate of Return: Not applicable Staff Appraisal Report: Report No. 9316-CE Maps IBRD No. 20879 This document has a restricted distributicn and may be used by recipients only in the perforiance of their official duties. Its contents may not otherwise be disclosed without World Bank authotization.  MEMORANDUM AND RECONMENDATION 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 A POVERTY ALLEVIATION PROJECT 1. The following report and recommendation on a proposed development credit to the Democratic Socialist Republic of Sri Lanka for SDR 40.6 million (US$57.5 million equivalent) on standard IDA. terms with a maturity of 40 years 46 to help finance a Poverty Alleviation project is submitted for approval. US$20 million from the proceeds of the Credit would be relent to the Janasaviya Trust Fund for 25 years, including five years of grace, with interest at 3Z per annum. US$36.2 million will be passed on to the Janasaviya Trust Fund as grant for implementation of the non-credit activities, and US$1.3 million to the Ministry of Policy Planning and Implementation for creating policy research and program formulation capacity on poverty and employment issues. The project will be cofinanced by the Federal Republic of Germany with a grant of DM 15 million (US$10 million equivalent). Although not an integrated part of this project, UNDP will provide technical assistance equivalent to US$2.5 million to the recently established Janasaviya Trust Fund which will implement the project. 2. Background. Sri Lanka is currently confronted by serious socio- political and economic problems with high rates of unemployment and politically unacceptable poverty levels. Despite commendable achievements in terms of social indicators, e.g., high rates of life expectancy and literacy and low rates of infant wortality and population growth, malnutrition, particularly among chila.s , is out of line with other social indicators. Economic growth has slowed down in the past few years against the backdrop of unprecedented civil strife, exacerbating the poverty problem. The country faces a difficult task of generating productive employment and income earning opportunities for a work force which will continue for some time to grow faster than the total population. Although the recently initiated adjustment process is expected to accelerate growth to an average of 5.22 p.a. over the next three years, the poor are unlikely to benefit quickly enough from the adjustment process. 3. The government's poverty alleviation policies and -rograms, which include food stamps, school mid-day meals, and most recently the Janasaviya program (JSP which provides recipients with a monthly grant of Rs 2,500), are essentially consumption-oriented welfare programs. They are financially and economically unsustainable and not well targeted. Production-oriented programs, such as micro-enterprise development and credit are fragmented and insignificant. Rural infrastructure is in a state of disrepair and is inadequate. Policy and program responses, therefore, need to be broadened and better targeted to enable the poor to participate in the productive process by providing them with access to resources for self-employment or to wage employment on productive rural infrastructure programs. 4. Rationale for IDA Involvement. This project is an important component of IDA's four-pronged country assistance strategy which includest (i) promotion of long-term efficient growth through adjustment lending by  -2- addressing internal and external imbalances, reducing the size of the public sector while improving its efficiency and increasing the role of the private sector; (i1) support to agriculture, industry, energy and infrastructure; (iii) rehabilitation and improvement of social services; and (iv) targeted poverty alleviation initiatives to facilitate the poor's participation in the productive process. Under IDA's Economic Restructuring Credit (Cr. 2128-CE) approved on April 6, 1990, the Government of Sri Lanka (GOSL) agreed to reduce the number of families in the food stamp program by better targeting, and to restructure the JSP to make it more production-oriented, thereby containing total welfare expenditures to within 3Z of GDP. In this connection IDA has provided GOSL with assistance in designing and financing this proposed production-oriented poverty alleviation project. IDA's continuing dialogue with GOSL has led to a realization that welfare expenditures must be contained and streamlined. The project will further help demonstrate the feasibility and sustainability of an alternative approach to poverty alleviation through productive employment generation, which is a high priority in Sri Lanka's development plans. The proposed project is consistent with IDA's areas of special emphasis and complementary to other IDA-supported projects which do not reach the very poor directly. This project would also support the Government's long-term growth policies by creating additional productive employment. 5. Project Oblectives. The major objectives of the project are to increase income earning opportunities among the poor and to improve the nutrition status of children under three years of age and pregnant and lactating mothers. To achieve these goals, the project has the following specific objectivess (a) reorient and expand the existing institutional capacity to serve the poor, and to create additional capacity; (b) provide credit and other services for promoting self-employment and micro-enterprise development through group-based financing and entrepreneurial development; (c) expand productive wage employment for the poor through technically, economically and socially viable rural works projects; (d) develop programs for nutritional interventions for malnourished children and pregnant and nursing mothers; and (e) create policy research and program formulation capacity to take greater account of issues of poverty and unemployment in overall growth policies and public investment projects. 6. Project Description. The project will assist the newly created Janasaviya Trust Fund (the Trust), in financing credit operations, human resource and infrastructure development, and nutrition intervention activities of NGOs and government agencies. The Trust will manage four funds: (a) a Credit Fund to lend to partner organizations (POs), which will onlend to the poor in a manner prescribed by the Trust at interest rates which will make the  - 3 - Credit Fund operations self-supporting; (b) a Human Resources Development Fund for promoting the productive use of credit and for developing the lending capacity of POs: (c) a Rural Works Fund for building economically viable infrastructure and creating wage employment; and (d) a Nutrition Fund for reducing the proportion of wasting and stunting in children and for reducing the incidence of low birth weight and the prevalence of maternal malnutrition. In addition, the project will support an Employment and Poverty Policy Planning Unit in the Ministry of Policy Planning and Implementation. 7. The project cost is estimated at US$85 million equivalent, with a foreign exchange component of US$5.4 million equivalent (6.4Z); estimated taxes and duties are negligible. IDA would finance 1001 of the foreign exchange cost and 681 of the total. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in Sri Lanka are given in Schedules C and D, respectively. The Staff Appraisal Report No. 9316-CE dated March 28, 1991, is being distributed separately. 8. GOSL has established the Trust as the apex organization which will implement the project through P0. The President of Sri Lanka is the Patron of the Trust, and the Secretary of the Ministry of Finance is the Chairman. The Trust has a 16-member Board of Directors appointed by the President, half from within the Government and half from non-government organizations, the private sector and academia. The execu*ive arm of the Trust operates Independently of civil service procedures and regulations. The day-to-day management rests with the Managing Director. 9. Borrowers from the Credit Fund and recipients of the grant funds will be government agencies, NGOs, grassroots organizations (GROs), cooperatives and financial intermediaries which lend to the poor. These organizations would become eligible for project support provided they haves (a) socio-economic objectives consistent with the overall objectives of the project; (b) a proven track record in organizing and assisting community groups; and (c) managerial capacity to identify and supervise small borrowers and community rural works teams. Likely POs for use of the Rural Works Fund will be the government agencies involved in rural infrastructure development, selected NGOs and Rural Development Societies. Nutrition interventions will be primarily implemented through NGOs and GROs. 10. The ultimate beneficiaries from the project would be JSP families whose income falls below about Rs 700 per month. They would be identified through a community-based screening process from among the current food stamp recipients. They would then be organized by the POs for production-oriented work, which includes civil works, land development, and skills and entrepreneurial training for self-employment and micro-enterprise development. The beneficiaries of the Nutrition Fund will be malnourished children under the age of three, as well as pregnant and lactating mothers.  -4- 11. Agreed Actions. The Government has already established the Trust and nominated its Board of Directors and the Managing Director, who has recruited the five department heads. A UNDP-financed technical assistance team is in Colombo for a period of six months to assist in starting up the Trust activities. Agreements have been reached ons (a) GOSL's contribution of an amount equivalent to US$5 million to the Trust's Credit Fund as a provision for credit risk; (b) the onlending terms of the IDA Credit to the Credit Fund and the minimum interest rate to be charged to the ultimate beneficiaries which would not be less than the weighted average lending rate (both short- and long-term) of formal sector credit institutions; (c) GOS8's responsibility for bearing the foreign exchange risk; (d) the criteria for evaluation of participating organizations for receiving loan and grant funds from the Trust; te) GOSL's allocation of sufficient quantities of food supplements to meet project requirements; and (f) the requirement for IDA approval before amending the Trust's Charter during the project implementation period. Conditions of Effectiveness would be: (a) transfer of US$3 million from GOSL to the Trust's Credit Risk Fund; (b) signing of a subsidiary loan agreement, satisfactory to IDA, between GOSL and the Trust; and (c) signing of UNDP project documents, providing technical assistance to the Trust. 12. Environmental Aspects. No specific environmental dimensions are included in project activities, which will be small-scale and primarily rural. However, GOSL programs and NGOs that would in principle be eligible for project support, attempt to assist the poor in several ways simultaneously, such as group formation and skills acquisition. Experience shows that when the poor become empowered through organization they are quick to address environmental issues, especially as they relate to public health and nutrition. 13. Proiect Benefits. Benefits under the proposed project are expected from: (a) enhancing the capacity of participating NGOs and government agencies to enable them to increase their human resource development efforts and to provide access to credit for productive activities to the poor, about half of whom would be women; (b) creating some 10 million workdays of wage employment for the poor; (c) improving the targeting and containing the cost of welfare programs; (d) improving nutrition among children and women; and (e) creating capacity to analyze employment and poverty impact of macro-economic and sectoral policies. 14. Risks. Possible risks include political interference in the working of the Trust, and poor decision-making and sub-loan supervision by the POs. To minimize these risks the project will: (a) ensure that the Trust's professionalism is maintained by using transparent eligibility criteria, high calibre staff and Board members and an NGO advisory committee to the Board; (b) assist participating organizations in observing strict credit discipline by helping build their credit mechanisms and capacity of ultimate borrowers to make effective use of credit; and (c) deny project resources to POs which do not meet performance criteria.  - 5 - 15. Recommendation. I am satisfied that the proposed credit 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 Washington, D.C. April 3, 1991  -6- &&Afti A SRI LANKA POVERTY ALLEVIATION PROJEBCT Estimated Costs and Financing Plan (In Millios) Esdumdd Prioct Coo: Rupeo USS % %of Compona Local Forei Toa Local Forign To Foreig Total A. CreditFund 1,410.5 - 1,410.5 35.0 35.0 0.0% 41.2% D. Human Reour Doopment Fund 528.4 56.4 S84.8 13.1 1.4 14.5 9.6% 17.1% C. Rural Wadks Fund 589.3 64.5 653.8 14.7 1.6 16.3 9.8% 19.2% D. Nutrition Fund 523.3 48.4 571.7 13.0 1.2 14.2 8.S% 16.7% E. E, p|oyment&PoertyPoiy Unkit 10.1 48.4 58.5 0.2 1.2 1.4 85.7% 1.6% F. Project Maagunent 145.9 . 146.0 3.6 - 3.6 0.0% 4.2% Totd Prqjt Cost 3,207.5 217.7 3,425.2 79.6 5.4 85.0 6.3% 100.0% at Calclated at a buyng rate of Rs.40.3/USS as of November 1990. Fincing P1w FEDERAL REPUBLIC GOSL IDA OF GERMANY TOTAL Components Rs. US$ Rs. US$ Rs. US$ Rs. USS A. Credit Fund 200.7 5.0 806.0 20.0 403.0 10.0 1,409.7 35.0 B. Humn Resource Davelopent Fund 100.8 2.5 483.6 12.0 - - 584.4 14.5 C. Rurl Wodks Fund 64.5 1.6 592A 14.7 - - 656.9 16.3 D. Nutition Fund 189.9 4.7 382.9 9.5 - 572.8 14.2 E. Employmait& Povety Policy Unit 4.0 0.1 52.4 1.3 - - 56A IA F. Projet Managmen 145.1 3.6 - - 145.1 3.6 ToWa 705.0 17.5 2,317.3 57.5 403.0 10.0 3,425.2 85.0  -7- Schedule B Page 1 of 2 SRI LANRA PCOIVRTY ALLEVIATION PROJECT Procurement Method and Disbursements Procurement Method CIC LCB Other N/A Total Cost Prolect Elements ------------ (USS million) ----------- Credit 35.0 35.0 (20.0) (20.0) Tools. Equipment. Materials & Works* - 8.0 8.3 - 16.3 - (7.2) (7.5) (14.7) Computers. Equipment. Furmit-re and Supplies - 3.2 2.6 - 5.8 (3.2) (2.6) (5.8) vehicles & Motorcycles* - 0.6 0.5 - 1.1 (0.6) (0.5) (1.1) Technical Assistance Policy Formulation - - 1.4 - 1.4 (1.3) (1.3) Training 14.6 14.6 (14.6) (14.6) Recurrent Cost - - - 10.8 10.8 TOTAL - 11.8 12.8 60.4 85.0 (11.0) (11.9) (34.6) (57.5) Note: Figures In parenthesis are the respective amounts financed by IDA. * As most items would be purchased in batches over a five-year period, it is unlike!/ that they would be large enough for ICB.  Schedule a Page 2 of 2 SRI LANKA POVERTY ALLEVIATION PROJECT Disbursements Category of Expenditures Amount (USS million) I 1. Line of Credit 20.0 100 2. Civil Works 13.2 90 3. Computers, Equipment, Furniture and Supplies 5.2