Sri Lanka - Tea and Rubber Projects

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 11517 PERFORMANCE AUDIT REPORT SRI LANKA SMALLHOLDER RUBBER REHABILITATION PROJECT (CREDIT 1017-CE) TEA REHABILITATION AND DIVERSIFICATION PROJECT (CREDIT 1240-CE) DECEMBER 30, 1992 Operations Evaluation Department 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 Year Rupees(Rs)/US$ 1980 15.5 1989 33.1 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS ASD Advisory Services Department ARTI Agrarian Research and Training Institute ERR Economic Rate of Return FAO/CP Food and Agriculture Organization Cooperative Program GOSL Government of Sri Lanka GPC Group Processing Center IDA International Development Agency JEDB Janatha Estates Development Board LCC Latex Collection Center NIPM National Institute of Plantation Management PAR Performance Audit Report PCR Project Completion Report RCD Rubber Control Department RPPU Rubber Policy and Planning Unit RPRC Rubber Policy Review Committee RRISL Rubber Research Institute of Sri Lanka SAR Staff Appraisal Report SPC State Plantation Corporation TSHDA Tea Smallholder Development Authority FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation December 30, 1992 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on Sri Lanka - Smallholder Rubber Rehabilitation Project (Credit 1017-CE) and Tea Rehabilitation and Diversification Project (Credit 1240-CE) Attached is a copy of the report entitled "Performance Audit Report on Sri Lanka - Smallholder Rubber Rehabilitation Project (Credit 1017-CE) and Tea Rehabilitation and Diversification Project (Credit 1240-CE)" prepared by the Operations Evaluation Department. Attachment 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.  FOR OFFICIAL USE ONLY PERFORMANCE AUDIT REPORT SRI LANKA SMALLHOLDER RUBBER REHABILITATION PROJECT (Credit 1017-CE) TEA REHABILITATION AND DIVERSIFICATION PROJECT (Credit 1240-CE) TABLE OF CONTENTS Page No. PR EFA CE ........................................................ i BASIC DATA SHEET ................................................ iii EVALUATION SUMMARY ............................................. vii I. Background ....................................................... 1 Context ...................................................... 1 Objectives .................................................... 2 Design ......................................................2 Project Costs and Financing Plans..................................3 II. Implementation Experience..........................................4 III. Project Outcomes..................................................9 IV. Findings and Issues................................................11 A. Cess versus Credit Approaches to Smallholder Tree Crops Replanting.............................................11 B. Implementing Tea Lending Restrictions.............................. 12 ATTACHMENT - Comments from the Borrower .............................. 15 MAPS - IBRD 14733R - Smallholder Rubber Rehabilitation Project Area IBRD 15659R - Tea Rehabilitation and Diversification Project Areas 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.  PERFORMANCE AUDIT REPORT SRI LANKA SMALLHOLDER RUBBER REHABILITATION PROJECT (Credit 1017-CE) TEA REHABILITATION AND DIVERSIFICATION PROJECT (Credit 1240-CE) PREFACE This is a Performance Audit Report (PAR) on two IDA-assisted agricultural sector projects in Sri Lanka. The projects were selected for audit because it was believed that an independent evaluation of their experiences would contribute usefully to an ongoing OED special study of Bank-supported plantation crops projects. The credits,Y to a total value of US$36.0 million equivalent were approved by the Board in May 1980 and May 1982, respectively. Credit 1017-CE was closed in December 1988 two years behind schedule and Credit 1240-CE was closed in September 1986 on schedule. A total of US$11.4 million equivalent in undisbursed balances was cancelled.y Dates of final disbursements were March 1, 1989 and April 17, 1987 respectively. The PAR is based upon a review of the Staff Appraisal Reports (SARs),' the corresponding President's Reports,' the Development Credit Agreements,Y the Project Completion Reports (PCRs),y and the transcripts of the Executive Directors' meetings at which the projects were considered. Bank files and other relevant documents were also studied, and discussions were held with Bank staff associated with the projects. An OED mission visited Sri Lanka in May 1992. The mission held discussions with officials in the ministries and other agencies responsible for the projects. Their kind cooperation and valuable assistance in the preparation of this report is gratefully acknowledged. Field trips to a representative selection of project sites were also undertaken for the purpose of familiarization and to interview staff responsible for implementation and project beneficiaries. Following standard OED procedures, copies of the draft PAR were sent to the Government of Sri Lanka (GOSL), and the parastatal borrowers for comments. The comments received from the Ministry of Plantation Industries through the Department of External Resources, Ministry of Finance are reproduced as an attachment to the PAR. Credit 1017 - US$16.0 million equivalent; Credit 1240 - US$20.0 million equivalent. Credit 1017 - US$4.9 million equivalent; Credit 1240 - US$6.5 million equivalent. Reports number 2827-CE dated April 15, 1980; and 3531a-CE dated April 9, 1992. Reports number P-2772-CE dated April 16, 1980; and P-3267 dated April 12, 1992. Dated June 24, 1980; and June 28, 1982. Reports number- 9261 and 9256, both dated December 28, 1990.  - ill - PERFORMANCE AUDIT REPORT SRI LANKA SMALLHOLDER RUBBER REHABLITATION PROJECT (Credit 1017-CE) BASIC DATA SHEET KEY PROJECT DATA Appraisal Actual or Actual as % of Item Estimate Current Estimate Appraisal Estimate Total Project Costs (US$ million equivalent) 28.0 19.6 70% Credit Amount (US$ million equivalent) 16.0 - -- Disbursed (US$ million equivalent) -- 11.1 69% Cancelled (US$ million equivalent) -- 4.9 31% Economic Rate of Return 23% 18% Institutional Development - Partial CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS FY80 FY81 FY82 FY83 FY84 FY85 FY86 FY87 FY88 FY89 Appraisal Estimate 0.2 1.3 3.0 5.2 8.3 13.0 16.0 -- -- -- (US$ million equivalent) Actual (US$ million equivalent) - 0.3 0.8 1.8 3.4 5.5 7.5 9.4 11.0 11.1 Actual as % of Appraisal (%) -- 23 27 35 41 42 47 59 69 69 Date of Final Disbursement: March 1, 1989 PROJECT DATES Original Actual Identification 8/78 9/78 Preparation -- 2/79 Appraisal 9/79 10/79 Negotiations --- 4/80 Board Approval 11179 5/80 Signing (Credit Agreement Date) --- 6/80 Effectiveness 8/80 9/80 Project Completion 12/85 3/89 Closing Date 6/86 6/88 STAFF INPUT'S (staff weeks) FY76-79 FY80 FY81 FY82 FY83 FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91 TOTAL Preappraisal 63.3 9.5 72.8 Appraisal 89.5 89.5 Negotiation 4.4 4.4 Supervision 0.4 11.8 7.0 10.2 5.6 7.6 4.8 9.3 11.7 0.9 12.6 1.0 82.8 Other 0.3 8.1 8.4 TOTAL 63.6 92.0 11.8 7.0 10.2 5.6 7.6 4.8 9.3 11.7 0.9 12.6 1.0 237.9 - iv - MISSION DATA Date No. of Staff Days SpecializationRe. Performance Type of (movr) Persons in Fleld sentd- Ratingy' ProblemV Identification 4/78 3 18 2E,A --- Preparation 9/78 4 20 2A,E,P --- Pre-appraisal 8179 3 10 A,2E --- Appraisal 10/79 4 23 E,R,T,AC --- --- Supervision I 7/80 1 6 E 1 Supervision II 3/81 1 7 E 1 Supervision 1II 2/82 1 6 E 1 --- Supervision IV 10/82 1 9 E 2 0 Supervision V 5/83 2 6 EA 2 0 Supervision VI 12/83 1 6 E 2 0 Supervision VII 7/84 1 8 E 2 --- Supervision VIII 3/85 1 10 E 2 --- Supervision IX 11/85 1 12 E 2 --- Supervision X 4/86 1 7 E 2 --- Supervision XI 10/86 2 9 E,T 2 --- Supervision XII 10/87 4 23 E,T,AC 2 --- Supervision XIII 6/88 1 6 T 2 --- OTHER PROJECT DATA Borrower. Government of Sri Lanka Executing Agencies: Rubber Control Department; Advisory Services Department; Rubber Research Institute of Sri Lanka Follow-On Prolects: Name: Second Smallholder Rubber Rehabilitation Credit Numbern Credit 1909-CE Amount (US$ million equivalent): 23.5 Approval: 1988 Specializations are: A = Agriculturalist; E = Economist; AC = Accounting Specialist; P - Processing Specialist; T = Treecrop Specialist. Performance ratings are: 1 = Problem-free or minor problem; 2 - Moderate problems; 3 = Major problems receiving adequate attention; and 4 w Major problems not receiving attention. Where sequence of four figures is shown (from June 1985), the ratings refer to availability of funds, project management, development impact and overall status, respectively. Type of problem: 0 = Organizational. PERFORMANCE AUDIT REPORT SRILAK TEA REHABILITATION AND DIVERSIFICATION PROJECT (Credit 1240-CE) BASIC DATA SHEET KEY PROJECT DATA Appraisal Actual or Actual as % of Item Estimate Current Estimate Appraisal Estimate Total Project Costs (US$ million equivalent) 33.1 20.9 63% Credit Amount (USS million equivalent) 20.0 -- Disbursed (US$ million equivalent) --- 13.5 67% Cancelled (US$ million equivalent) --- 6.5 33% Economic Rate of Return 29% 40% Institutional Development --- Partial CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS FY83 FY84 FY85 FY86 FY87 Appraisal Estimate (US$ million equivalent) 1.0 3.1 8.1 18.1 20.0 Actual (US$ million equivalent) 0.2 2.4 6.2 11.3 13.5 Actual as % of Appraisal (%) 20 77 76 62 67 Date of Final Disbursement: April 22, 1987 PROJECT DATES Original Actual Identification -- 11/179 Preparation --- 7/80 Appraisal 2/81 1/81 Post-appraisal --- 9/81 Negotiations 7/81 3/82 Board Approval 9/81 5/82 Signing (Credit Agreement Date) --- 6/82 Effectiveness 9/82 11/82 Project Completion 9/85 9/85 Closing Date 9/86 9/86 STAFF INPUTS (staff weeks) FY80 FY81 FY82 FY83 FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91 TOTAL Preappraisal 1.6 17.1 18.7 Appraisal 85.5 43.5 128.9 Negotiation 5.7 5.7 Supervision 1.6 13.9 8.6 5.7 2.5 3.6 0.0 0.0 0.9 0.4 37.2 Other 1.7 5.5 0.2 7.4 TOTAL 1.6 104.2 56.3 13.9 8.6 5.7 2.7 3.6 0.0 0.0 0.9 0.4 197.9 - Vi- MISSION DATA Date No. of Staff Days SpecializationRepre Performance Type of (mor.) Persons in Field RatingY Problem9f Identification 11/179 1 10 A --- --- Pre-appraisal 7/80 2 20 A,E --- Appraisal 281 4 30 FA,A,2E -- Post-appraisal 10/81 4 27 2A,E --- --- SupervisionI 8/82 1 2 FA 1 F,M Supervision I1 4/83 2 4 FAA 1 F,M Supervision III 12183 1 2 E 1 T Supervision IV 8/84 1 -- A 1 M Supervision V 3/85 2 3 A,AC 1 M Supervision VI 7/86 3 3 E,TC,FA -- M Supervision VII 1/87 3 --- A,E,AC -- OTHER PROJECT DATA Borrower. Government of Sri Lanka Executing Agencies: Janatha Estates Development Board; State Plantation Cooperation Follow-On Projects: Name: Fourth Tree Crops Credit Number- Credit 1562-CE Amount (US$ million equivalent): 55.0 Approval: 1985 Specializations are: A - Agriculturalist; E = Economist; TC - Tree Crops Specialist; FA = Financial Analyst; T = Training Specialist; AC = Accounting Specialist. Performance ratings are: 1 = Problem-free or minor problem; 2 - Moderate problems; 3 = Major problems receiving adequate attention; and 4 = Major problems not receiving attention. Where sequence of four figures is shown (from June 1985), the ratings refer to availability of funds, project management, development impact and overall status, respectively. Types of problems: T = Technical; F = Financial; and M = Managerial. -vii - PERFORMAN&AUDIT REPORT SRI LANKA SMALLHOLDER RUBBER REHABILITATION PROJECT (Credit 1017-CE) TEA REHABILITATION AND DIVERSIFICATION PROJECT (Credit 1240-CE) EVALUATION SUMMARY Introduction Results 1. The two perennial crop projects 4. Both projects had satisfactory overall covered by this PAR were the thirteenth and outcomes. The replanting component of the fourteenth agriculture sector projects in Sri rubber project, which absorbed at least 95 Lanka supported by the Bank/IDA. The percent of the project cost, was particularly rubber project aimed at assisting private small successful in increasing the capacity and farmers and the tea project at public sector capability of the implementing agencies for estate corporations. They have been com- delivering an improved level of replanting bined in one report for convenience and ease services to smallholders and boosting the of comparison. annual replanting rate. In contrast, the much smaller group processing component was a Objectives disappointment. 2. Both projects aimed to improve pro- 5. The two principal components of the duction and enhance earnings from their re- tea project, for estate replanting and factory spective crop sectors. These objectives were rehabilitation, had satisfactory outcomes as to be achieved through replanting or infilling evidenced by increased yields from the of overaged or degraded stands of the two improved clonal material plantings, and crops, and through rehabilitation or expansion increased throughput of green leaf and quality of the respective crop processing facilities, as of black tea output from the factories. How- well as through institutional strengthening of ever, the smaller diversification component the responsible public sector agencies. had a disappointing outcome. Only the fuel- wood plantings were successful and are Implementation Experience providing a steady supply of firewood, while the diversification into spice crops was a 3. Each project got off to a good start failure. and the tea project progressed in close conformity to appraisal expectations, apart from a diversification component which en- Sustainability countered problems and fell short of physical expectations. The project was completed on 6. The outlook for sustainability is time. The rubber project, on the other hand, promising for both projects, provided that fell behind appraisal expectations in its third international rubber and tea prices continue at year, and the credit closing date had to be or close to current levels and that producer extended by two years to permit eventual incentives are not blunted by prohibitive local attainment of the appraisal replanting target. taxes or other governmental constraints. - viii - Findings and Lessons Learned proved to be beyond the ability of the implementing agency to handle competently 7. The projects were introduced and (paras. 2.18 and 3.7 - 3.8). implemented at a particularly favorable juncture in the recent history of Sri Lanka, 10. The Bank's prior involvement in similar when a new government was boldly liberalizing replanting projects in other rubber producing the economy and encouraging the private countries gave the Bank a comparative sector to assume a more active role. This advantage in introducing several technological followed almost two decades of economic improvements. These were successfully decline during which far reaching welfare and transferred during the implementation years redistributory policies had not been matched (paras. 3.4). by growth of output (paras. 2.1 and 2.14). 11. Guidance to staff on appropriate 8. The rubber project was thoroughly and circumstances for promoting cess funded or realistically prepared in terms of scope and credit financed export-oriented tree crop size, but at appraisal the five years replanting replanting programs is recommended, as a target was raised to a level which proved to be result of these project experiences (paras. 4.3 - impractical, and could not, in the event, be 4.4). reached until the eighth year (paras. 2.11). 12. A redefinition of the role of the Bank, 9. Similarly, the main components of the and policy to be adopted, in the case of tea project, which were modelled on an earlier, lending for tea (and other export crops facing also satisfactory project were thoroughly and in-elastic demand) is suggested, based on the realistically prepared, but a diversification experience of the tea project (paras. 4.5 - component, hastily prepared and appraised, 4.12). -1- PERFORMANCE AUDIT REPORT SRI LANKA SMALLHOLDER RUBBER REHABILITATION PROJECT (Credit 1017-CE) TEA REHABILITATION AND DIVERSIFICATION PROJECT (Credit 1240-CE) I. BACKGROUND Context 1.1 Tea and rubber are the two most important foreign exchange earning tree crops in Sri Lanka. Both crops were introduced in the later part of the 19th century. Rubber occupies 199,000 ha, employs about 200,000 people and provides 3.9% of total export earnings, while about 200,000 ha of tea provides 25% of export earnings. A record 159,000 metric ton of rubber was produced in 1970 while tea production peaked in the late 1960s, when an annual average 232 million kg was reached during 1965-69. Successive Sri Lankan Governments in the nineteen sixties through to the late nineteen seventies had consistently followed welfare and redistributive objectives which had the unfortunate consequence of seriously constraining growth in productivity. Declines in production of both crops occurred in the 1970s and rubber production continued its decline through the 1980s, while tea production bottomed out in the early 1980s but was back to the 1965-67 average by 1990. 1.2 The declines were due for the most part to government's tax and foreign exchange policies, which discriminated against these crops, and to uncertainties associated with land reform, which in 1972 restricted individually owned agricultural holdings to a maximum of 20 ha and culminated in widespread nationalization of all private agricultural companies in 1975. The long term future of the industry was also threatened by a decline in the rate of replanting, resulting in an increase in the proportion of over-aged stands and a reduction in average yields. 1.3 Growth of the tree crops sector remained poor following nationalization. The grouping of the former private estates into two large, managerially weak, public plantation corporations did not reverse the general decline of the industry. In fact, lack of autonomy for making business decisions, and stifling of initiative at the managerial levels contributed to a further decline. Concerned at the deteriorating situation within the sector, the Bank sought to assist GOSL in improving the economic efficiency of the two industries, with accent on crop replanting, rehabilitation and diversification, and on processing improvements. In 1977 a new government inherited the run down economy and introduced policy initiatives aimed at fostering an export led growth strategy, in which the tree crop sector was expected to play a major role. Replanting and rehabilitation of rubber smallholdings and of the public sector tea corporations were proclaimed as important elements of this new development strategy. 1.4 The projects which are the subject of this audit were preceded by two tea projects with similar objectives which were approved by the Board in 1978. The first- (Tea I) was concerned with replanting and infilling in public sector estates, and rehabilitation in public and private tea F Tree Crop Rehabilitation (Tea) Project (Credit 818-CE), Project Performance Audit Report Number 7339 dated June 30,1988. -2- factories and smallholder tea properties in parts of the high country tea areas of the Central Highlands. The estates component had a satisfactory outcome but the private factories and smallholder components, which were designed as credit operations, failed because target beneficiaries lacked acceptable collateral. The second projectv (Tea II) dealt with diversification away from tea and smallholder settlement in a number of mid country tea areas considered to be uneconomic for tea production. The project was beset by serious social and political problems which had not been foreseen at the design stage, and which led to an unsatisfactory outcome. The credit was closed prematurely in 1982 by agreement between IDA and GOSL. 1.5 This audit deals with the third and fourth (Tea III) Bank-assisted tree crop projects, both of which were approved by the Board during the implementation phases of the earlier pair. Objectives 1.6 The Smallholder Rubber Rehabilitation project aimed to accelerate replanting of 18,800 ha of over-aged, low-yielding smallholder rubber by reorganizing and strengthening the agencies responsible for the replanting program, and, through financing of adequate replanting inputs, to supplement funds already available through an on-going GOSL cess-financed replanting program. The cess program, which had started in 1953 was financed through a cess on rubber exports, and funds collected in this manner were expended to approved replanters to cover the cost of replanting inputs, including partial labor costs, as progress payments through the replanting and immature growth period of the young rubberY 1.7 The objective of the Tea Rehabilitation and Diversification project (Tea III) was to reduce tea production costs while improving quality in the public sector tea estates. This was to be achieved by increasing productivity of existing tea lands in high potential areas of the low and high country through replanting and infilling, and by rehabilitating factories and improving leaf transport, and also by diversifying out of tea into minor crops and fuelwood in unprofitable tea lands in the mid country. Design 1.8 The rubber project was designed as a five and a quarter year project to assist smallholder replanting under the on going replanting program (see para. 1.6 above) in the three most important rubber growing administrative districts, and containing about 68% of the country's total rubber. It was to be implemented by the Rubber Control Department (RCD), assisted by the Advisory Services Department (ASD). A small component for the Rubber Research Institute of Sri Lanka (RRISL) in support of research directed towards smallholders was included, along with support for the Agrarian Research and Training Institute (ARTI) to conduct surveys and case studies aimed at evaluating the project's impact on smallholders. 1.9 The tea project was designed on lines similar to the earlier tree crop rehabilitation (tea) project (Tea I). Implementation of the estates replanting and factories rehabilitation components was to be the responsibility of the publicly owned Janatha Estates Development Board Tree Crop Diversification (Tea) Project (Credit 819-CE), Project Performance Audit Report Number 5041 dated April 13,1984. The alternative of assisting smallholders to replant through a conventional rural credit program was apparently not seriously considered, presumably for the reason that the cess-financed program was already functioning reasonably well, and introducing a different system could have been highly disruptive at a time when the need for extensive replanting was considered urgent. -3- (JEDB) through three of its four regional boards (I, II and IV) and the State Plantation Corporation (SPC) through two of its four regional boards (I and IV), while a small, pilot, smallholder tea replanting component based on a conventional rural credit approach, and a private tea factory rehabilitation component were made the responsibility of the Tea Smallholders Development Authority (TSHDA). Project Costs and Financing Plans 1.10 Projects costs were as follows: Replanting and Field Factory Institutional Project Rehabilitation Rehabilitation Support Contingencies Total ----------------------------------------------US$ million equivalent -------------- Appraisal 12.5 -- 4.5 11.0 28.0 Rubber Actual 11.9 --- 7.7 --- 19.6 Appraisal 10.0y 7.6 4.5 11.0 33.1 Tea Actual 10.111 7.0 3.8 --- 20.9 Appraisal 22.5 7.6 9.0 22.0 61.1 TOTAL Actual 22.0 7.0 11.5 -- 40.5 1.11 The lower actual expenditures in US dollar terms as compared with appraisal expectations were due to progressive devaluation of the Sri Lankan Rupee during implementation, and to reductions in project scope and lower target attainment than estimated at appraisal in the case of the tea project. 1.12 The appraisal financing plans and actual financial contributions to the projects were as follows: Actual IDA IDA Pro*ect Credit GOSL Total Credit GOSL Total ----- ---------------------------US$ million equivalent ------------ Rubber 16.0 12.0 28.0 11.1 8.5 19.6 Tea 20.0 13.1y 33.1 13.5 7.4- 20.9 TOTAL 36.0 25.1 61.1 24.6 15.9 40.5 Including US$3.0 equivalent for diversification. Including US$1.3 equivalent for diversification. Including public corporations in the case of the tea project. -4- 1.13 IDA funds were disbursed principally to smallholders for replanting in the case of the rubber project, and about equally for tea rehabilitation and diversification, and for factory equipment, under the tea project. II. IMPLEMENTATION EXPERIENCE A. Smallholder Rubber Rehabilitation Project 2.1 Identification and Preparation A Bank reconnaissance mission in mid 1977 recognized a need for a rubber project featuring group processing centers (GPCs) and production of crumb rubber instead of sheet as major components, but this initial identification was displaced by a GOSL request for assistance in accelerating the Government's cess-financed rubber replanting program. A follow-up joint Bank-FAO/CP mission in mid 1978 identified the three main rubber producing districts as an appropriate project area for smallholder replanting support, and also for improved rubber processing at both smallholder and estate levels. Support for accelerating replanting on the public sector estates was also proposed by the mission, but was later dropped from consideration at the request of GOSL. 2.2 An FAO/CP preparation mission later prepared a five-year project in support of 24,000 ac (10,000 ha) for approximately 12,000 smallholders in two districts, at a total cost of US$6.5 million. But this was considered by the Bank to be too modest in relation to the need for replanting and the capacity of the existing institutions to implement. 2.3 Appraisal A pre-appraisal mission in August 1979 expanded the project area to include a third district, in line with the earlier identification mission's proposal (para. 2.2 above), and increased the replanting target to 15,000 ha. Appraisal took place the following month, at which time the replanting target was again raised, to 18,800 ha belonging to about 27,000 smallholders to be completed within the same five-year time frame. Other components included: institutional support for RCD and ASD, including construction of a new training center; establishment of a Processing Advisory Division within ASD to service private processors and existing GPCs and to establish an additional 50 GPCs; provision of vehicles and equipment to be used in support of smallholder research at RRISL; support for ARTI to conduct surveys and case studies aimed at evaluating the project's impact on smallholders; and technical assistance for training, impact evaluation, and improving procedures for administration of the replanting scheme. 2.4 The appraisal attached considerable importance to organization changes in the public sector agencies responsible for implementation. Particular stress was laid on transferring the ASD from RRISL and establishing it as a separate department in its own right, for reasons of greater efficiency, and on the setting up of a Rubber Policy Review Committee (RPRC) and a Rubber Policy and Planning Unit (RPPU) within the Ministry of Plantation Industry to advise the Minister on policy issues concerning the rubber sector, including such matters as cess levels, duties and replanting grant payments. 2.5 Negotiations took place in March 1980 and the Board approved the project, under special procedures, on May 6. -5- 2.6 Start-up The credit became effective on September 10, 1980. Supervision missions in the first implementation year reported satisfactory progress in recruiting additional extension staff. Replanting applications had been approved for 2,200 ha before the beginning of the 1981 planting season, and a sufficient supply of good quality planting material was in hand from the public sector plantation corporations to meet that season's replanting target of 1,600 ha. The replanting grant, at Rs. 16,050/ha was judged adequate, as was the producer profit margin of Rs. 4.00/kg. The RPRC and RPPU were in place, but delays were being encountered in establishing ASD as a separate entity, while ARTI was experiencing difficulty in finalizing an appropriate baseline survey questionnaire acceptable to the Bank. 2.7 Sequence and Design Changes The third supervision, in February 1982, reported that the first year's replanting target had been exceeded by 50%, with a total of 2,418 ha. The standard of replanting was high and intercropping, mostly with banana and passion fruit was proving popular and had been adopted by 20% of the replanters. Applications for replanting grant far exceeded the 1982 target. Civil works were proceeding satisfactorily except for a few staff quarters where land acquisition problems were being encountered. The training center was completed and was awaiting the provision of a water supply. Consultants were in place and procurement was going well, but disbursements at only 23% of appraisal estimates, were well behind schedule. A shortfall in supply of planting material from the public sector estate corporations had been made good by contracting for supplies from the private sector and from RCD's own nurseries. The GPC component was encountering problems, as the response from smallholders to set up new GPCs was limited in comparison with appraisal expectations, and only 25 had been registered. Encouragement of latex collection centers (LCCs) was being considered as a desirable alternative to the traditional ribbed smoked sheet processing at GPCs, in view of a wider market for latex from an increasing number of crumb rubber factories. 2.8 The fourth and fifth supervisions, in October 1982 and April 1983, both reported good progress with the replanting program, with the annual target again exceeded, by 7% in 1982, but some concern was expressed at the levelling off in replanting applications, and at the quality of some of the replantings due to improper fertilization and the use of sub-standard planting material. The ARTI base line survey report had been finished in mid 1982 and showed that the frequency of tapping was generally very high, giving rise to concern about the maintenance of yield levels as the stands matured, while the percentage of overaged rubber was proving to be higher than assumed at appraisal. The Bank urged early action on certain of the consultant's administrative recommendations, including computerization, in view of delays in project accounting and the processing of replanting applications. More rubber extension officers and accountancy staff were urgently needed to meet the accelerating needs of the project, which called for a further increase of 42% to 4,000 ha in the appraisal replanting target for 1983. The slow progress of the GPC component was of concern to the Bank, as only 35 of the original 67 GPCs had been rehabilitated, and only 40 new ones had been registered compared with an appraisal target of 50. A study of the economic viability of these centers was proposed, and consideration of the LCC option recommended. 2.9 A serious drought interfered with the replanting program in 1983, when the replanting figure fell back to 2,429 ha, or only 61% of the 4,000 ha appraisal target. The replanting total for 1984, at 2,900 ha, remained stuck at 60% of the 4,800 ha appraisal target. By 1984 it was also becoming apparent that the GPCs had limited appeal to the majority of rubber smallholders, and that latex collection centers offered better returns. -6- 2.10 In 1985 the replanting total was higher again, reaching 3,472 ha, but was still only 62% of the 5,600 ha appraisal target for that year. As the aggregate five-year replanting total had reach only 76% of the 18,800 ha overall appraisal target set for completion at the end of 1985, the project closing date was twice extended for a total of two years to permit IDA to continue financing the balance of 4,590 ha, which was finally attained in 1988. 2.11 In the event, it took eight years to reach the 18,800 ha target, and the attainment was only 14,210 ha at the end of the fifth year, indicating that the earlier more modest targets set prior to appraisal more truly reflected the existing capacity. Evidence in the Bank files reveals a strong difference of opinion between the leaders of the FAO/CP preparation team and the Bank's appraisal mission as to the appropriate size and quantification of the overall project replanting target, arising from their different judgements of the condition of the Sri Lankan rubber industry, GOSL commitment to maintaining attractive levels of rubber producer margins and replanting payments which strongly influence the receptivity of rubber smallholders to the program, and the prospect for expanding the capacities of the supporting institutions. The fact that the appraisal target of 18,800 ha could only be reached in the eighth year rather than five, and that actual attainments in the third, fourth and fifth years never exceeded 62% of the appraisal expectations for those years indicates that the more modest assessment of institutional capacities, smallholder acceptance and other risk assessments, including possible drought incidence, made during the preparation phase were the more realistic. Unrealistically high targets, such as were eventually set in the case of the rubber project imposed undue strains on the institutions responsible for implementation, and deprived the staff of the satisfaction which could otherwise have come from performing according to plan rather than repeatedly falling short on the annual replanting targets. 2.12 An evaluation of the GPC component carried out towards the end of the project showed that of 111 GPCs established, 24 were closed and a further 21 were unsatisfactory, while another 13 were functioning as LCCs and were being well used. It was concluded that future GOSL assistance for smallholder processing should emphasize LCCs. 2.13 Finally, in the last year a serious leaf spot disease outbreak affected one of the local clones widely planted under the program. This required the uprooting of about 1,700 ha planted to the affected clone. The subsequent removal of this RRISL 103 clone reduced the effective replanting total under the project to 17,100 ha or only 91% of the original target. B. Tea Rehabilitation and Diversification Project (Tea III) 2.14 Identification and Preparation This third IDA project in support of the Sri Lankan tea industry was identified in mid 1979 by the Ministry of Plantation Industry (MPI) as an additional input which would expand on, and overlap with, activities already being supported under the earlier projects, both of which had been approved by the Board in June 1978 (see para. 1.3 above). At the time of identification the earlier rehabilitation (Tea I) project, then in its first year of implementation, was proceeding smoothly. However, the diversification (Tea II) project was already experiencing socio-political problems arising from the smallholder settler selection criteria being applied by GOSL under the project, which favored Sri Lankan citizens and required the transfer of non-citizens to other non-project public sector tea estates. 2.15 A Bank identification missions toward the end of 1979 supported the rehabilitation element of the proposed project aimed at rehabilitating tea estates and factories belonging to the -7- nationalized tea corporations (JEDB and SPC) serving about 25,000 ha in the high and low country ares, but expressed reservations about the mid country diversification and smallholder settlement component which was still strongly favored by GOSL. 2.16 In mid 1980 an FAO/CP preparation mission which had been assisting GOSL with preparation of the diversification/smallholder settlement component presented an outline for a project which was very much a replication of the earlier (Tea H) diversification project (para. 1.4). It aimed to settle 6,750 smallholder families on 9,674 ha of marginal tea lands in the mid country area belonging to JEDB and SPC. But the Bank, now increasingly concerned over the socio-political problems of smallholder settlement and estate labor displacement in the Sri Lankan context, remained skeptical of this component and requested a detailed survey of the proposed project area estates to determine the number of families likely to be displaced from the mid country localities, and the extent of the estates labor shortage in the high country localities which would have to absorb the displaced labor. 2.17 Appraisal took place in January 1981. The mission accepted, but with many modifications, the component of the project as prepared for rehabilitation on about 34 high and 40 low country public-sector tea estates. The targets included 1,662 ha of replanting; 3,896 ha of infilling; 5,345 ha of rehabilitation through soil conservation practices; expansion or re-equipping of some 62 tea factories; and about 300 vehicles for green leaf transport. The diversification/smallholder settlement component as prepared was dropped and replaced by a small pilot component for financing replanting on 100 ha of existing tea smallholdings in the low country through a Bank of Ceylon credit program. 2.18 Concerned that the increased tea production accruing under the project from the high and low areas should be offset by a reduction in tea output from the lower productivity mid country areas, the Bank with GOSL agreement, mounted a follow-up appraisal of a revised diversification component in September 1981 shortly after requesting the Government to initiate its preparation, which was carried out with some haste. The Bank files covering this period indicate a degree of concern that the project could still be presented to the Board for approval in FY82, as previously scheduled. By including this diversification component the Bank was able to meet the requirements of a 1973 Bank policy memorandum requiring that Bank or IDA financed projects for tea rehabilitation in any borrower country should not involve an increase in national output. The new diversification component as finally appraised aimed to replace 5,007 ha of low yielding tea in mid country areas with 1,071 ha of pepper, 350 ha of clove, 1,105 ha of cardamom and 2,481 ha of fuelwood, plus planting of a further 2,585 ha of fuelwood and windbreak on abandoned tea lands in the same areas. The project finally appraised, with an estimated total cost of US$31.3 million equivalent and an IDA credit of US$20.0 million equivalent, included about US$0.9 million equivalent for technical assistance and training with accent on management improvement and cost control at the public sector estate corporations level. A component to finance new premises for the National Institute for Plantation Management (NIPM) was also included. 2.19 At negotiation agreement was reached on the hiring of management consultants to study and make recommendations for more efficient management of the two corporations. In addition, assurances were sought that all project estates would be transferred from the Land Reform Commission, which had assumed ownership at the time of nationalization in 1975, to the two corporations, and that GOSL would ensure that the corporations' proportion of long term debt to equity would stay below 70 to 50 and their current ratios above 1.3, while the impact of high export taxes on tea margins would be reviewed once a year to ensure reasonable financial returns to -8- producers. US$0.5 million equivalent in retroactive financing was provided under the credit to facilitate an early start-up. 2.20 The Board approved the project under special procedures on May 4, 1982. 2.21 Start-up A first supervision, which took place in July 1982, two months before the credit agreement date of effectiveness, reported that good initial progress was being made, with 95% of the estate lands transferred to the corporations, and a contract with the selected management consultants being negotiated. Problems of a financial and managerial nature were noted, but the situation was expected to improve through the activities of the consultants. 2.22 Sequence and Design Changes A second supervision in February 1983 again reported good progress, especially with the field rehabilitation and estate housing construction components. By the time of the third supervision in November project progress was considered generally satisfactory. The management consultancy had made good progress and its recommendations were being considered and in some cases had already been adopted. At about the same time a separate supervision by a Bank training specialist had provided advice to the National Institute of Plantation Management (NIPM) on the conduct of a skills gap analysis as a guide to course planning at the newly acquired institute site. The only area of concern was with the diversification component, which was making slow progress. 2.23 Subsequent supervision missions, four in number, carried out between mid 1984 and early 1987 reported continuing satisfactory progress, apart from some problems associated with obtaining sufficient planting material for the diversification component and many complaints about the quality of factory equipment supplied through the project by local manufacturers. The complaints concerned defective design, late delivery, imperfect installation, frequent breakdowns and inadequate after-sales service. Construction of the new NIPM buildings took considerable longer than expected at appraisal, and recruiting of experienced instructional staff was a continual problem. Field replanting, infilling, conservation and maintenance standards on the project estates was of a high quality. The credit was formally closed at the agreed date in September 1986. 2.24 After an interval of three years from credit closing, during which little effort was made by Bank or GOSL staff to prepare a project completion report, the Bank in September 1989 requested FAO/CP assistance for the task. An FAO/CP mission visited Sri Lanka the following April and the final PCR, including a short Part II containing the borrower's comments, was presented to the Board in December 1990, more than four years after credit closing. Unsettled social conditions in the high and mid country tea areas at the time of the FAO/CP mission prevented its members from visiting those areas. III. PROJECT OUTCOMES 3.1 The rubber and tea projects, with PCR re-estimated economic rates of return of 18 percent and 40 percent, have experienced satisfactory overall outcomes, due in both cases to the generally satisfactory implementation records of their principal components. 3.2 While endorsing the generally favorable outcomes of these two projects as presented in the PCRs, and notwithstanding the higher international price of tea at completion as compared -9- with appraisal projections, the audit would inject a note of caution in regard to the validity of the above ERRs. As is the case with most tree crop projects financed by the Bank, reestimated ERRs at project completion usually cannot be based on actual production data covering the peak yield periods of the replanted crops, because in most cases the peaks are not reached until several years after project completion. The task is made more difficult when reliable yield data for the early production years are also either unavailable or not well collated, as was the case in these instances.2' 3.3 The replanting component of the rubber project which absorbed at least 95 percent of the project cost, was particularly successful in increasing the capacity and capability of the RCD and ASD for delivering an improved level of replanting services to smallholders, and in boosting the annual replanting targets though the eight implementation years. Institutional strengthening through re-organization; expansion of field level staff; administrative reforms; technology transfers (gained through high quality technical assistance and foreign tours to other rubber producing countries); and training (including training of smallholder replanters) are especially noteworthy achievements. In contrast, the much smaller GPC component was a disappointment. It appealed to relatively small numbers of rubber smallholders, and many centers floundered due to poor management or because of fluctuating farm gate price differentials between ribbed smoked sheet and latex. Many of the GPC's were abandoned at times of high latex price. 3.4 The rubber project was notable for the extent to which technological changes were introduced which improved the efficiency of the replanting program and the quality and profitability of the replantings. These innovations were introduced at the initiative of the Bank, commencing at appraisal when the implementing agencies were encouraged more actively to promote intercropping amongst replanters as a means for generating income in the immature period. The use of new clones, such as GTI, a well tested Indonesian clone popular with smallholder in other rubber producing countries, was strongly recommended to supplement the three RRISL - recommended clones being used in the replanting program in the late 1970s. The introduction of green budding was also advocated as a means for reducing nursery costs and shortening the period of field non-productivity. Several months of consultant time and a generous financial allocation for overseas study were included in the credit for the purpose of promoting these technology transfers through training, tours of other rubber producing countries and hands-on example. 3.5 Staff of the three implementing agencies gained much valuable experience from the study tours, fellowships, and technical assistance advice, and this is reflected in the quality of the replanting program as observed at the time of audit. While quality of replanting varies enormously from place to place, depending to a large degree on the efforts of the individual replanters and their receptivity to ASD extension messages, the overall improvement now evident in the smallholder rubber sub-sector can be largely attributed to the impact of the project. Notwithstanding these undoubted improvements, opportunities for further improvements remain, as noted in the PCR, including, for example, reorientation of the work of the RRISL more towards smallholder problems, and introducing a greater degree of ASD field level staff concentration on extension work as compared with administrative or regulatory functions. The on-going successor Second Smallholder Rubber Development Project (Credit 1909-CE) is understood to be supporting such approaches. More accurate estimates of project yields and production than were available at completion and audit could be invaluable to GOSL in understanding better the impact of the projects in economic and financial terms, and would be possible in the case of the tea project if a systematic analysis was made of estate production records, and in the case of the rubber project through a well designed survey of smallholdings. Such data could also afford an excellent basis for an impact evaluation by the Bank, if desired, at a later date. - 10 - 3.6 This experience in technological transfer taken at the initiative of the Bank affords a particularly good example of the Bank's comparative advantage as an agent of change, arising from knowledge gained through support by the Bank of similar smallholder rubber improvement projects in several other rubber producing countries. 3.7 Similarly, the two principal components of the jeaproject, for field and factory rehabilitation, have had satisfactory outcomes reflected in increased yields from the improved clonal material plantings, and increased throughput of green leaf and quality of black tea output from the factories. However, the smaller diversification component (about 16% of actual project cost) was much less satisfactory. Only the fuelwood plantings were successful and are now providing a steady supply of firewood for the tea factories, thereby effecting a considerable saving in imported oil fuel costs. The diversification into spice crops (cardamom, pepper and clove) on the other hand was a failure. The audit was able to visit several such plantings and without exception the condition of the spice crops observed can be described as sub-standard. In some cases the spice crops have been abandoned by the estate managements, although pre-existing tea bushes which were not uprooted at the time of spice crop planting often remain in plucking. In other cases yields are so limited that the income from the diversification crops in bearing barely meets the cost of maintenance and harvesting. It is the judgement of the audit that the rate of return on this component will be considerably less than 10% and the outcome can only be described as unsatisfactory. 3.8 On reflection, it would appear that the diversification component would have been better confined to reforestation, with spice crop development limited to one or two small pilot areas at carefully chosen sites. This unhappy experience with the diversification component illustrates some of the practical difficulties which Bank staff have encountered in preparing and appraising projects in conformity with the Bank's 1973 policy papers that imposed lending restrictions for certain commoditiesy. Implementation of the policy has presented similar problems in agricultural projects in other developing countries, and these problems will be examined in detail in a forthcoming OED study. The failure is in this instance attributable to inexperience in dealing with large monostands of these traditional smallholder crops on the part of estate management and labor. 3.9 The outcome of the TSHDA - operated 100 ha pilot smallholder tea replanting credit component, which relied on commercial loans was also disappointing. Only 13 ha were planted. TSHDA had difficulty in persuading smallholders to participate because an existing tea cess replanting grant program had much stronger appeal. Interestingly, a similar component included in the earlier Tea I project also failed because of inadequate preparation and lack of firm commitment, according to the audit2' There were two policy papers, entitled: Development Policy for Countries Highly Dependent on Exports of Primary Products, which was discussed at the Board on January 30, 1973; and Bank Group Financing of Tea, which was discussed at the Board on September 11, 1973. Tree Crop Rehabilitation (Tea) Project (Credit 818-CE), Project Performance Audit Report No. 7339, dated June 30, 1988. - 11 - IV. FINDINGS AND ISSUES Overview 4.1 The following findings appear worth emphasizing: (a) the significance of project timing and content in relation to a government's commitment to its investment objectives' (paras. 2.1 and 2.14); (b) the importance of realistic targeting to ensure that the scope and size of a project are commensurate with the capacities and capabilities of the implementing agencies (paras. 2.2 - 2.3 and 2.11); (c) the problems which can arise when an additional, hastily prepared component is included in a project after completion of the main appraisal, but without allowing for an appropriate adjustment to the project timetable (paras. 2.18 and 3.7 - 3.8), and (d) the Bank's comparative advantage in introducing technological change, derived through its international project experience (para. 3.4). 4.2 Two important issues arise from these project experiences: A. Cess versus Credit Approaches to Smallholder Tree Crops Replanting 4.3 The projects exhibit two contrasting approaches commonly used to finance replanting of export-oriented tree crops namely, provision of grants to eligible farmers using funds generated from cesses imposed on commodity exports, as in the case of the rubber project (paras. 1.6); and the alternative of financing replanting through a credit program, as was attempted on a pilot scale under the tea project (paras. 1.9 and 3.9) 4.4 Both approaches have been supported by the Bank from time to time in various borrower countries. In situations where pre-existing cess funded programs are already in place, Bank support has been directed to strengthening the cess administration authorities and enabling them to increase their capacity for replanting through the injection of additional funding.LY In other cases, the Bank has promoted conventional credit programs directed toward target groups, such as disadvantaged small farmers in poverty areas. Both approaches have their advocates within the Bank, and the record shows that Bank staff often have contrary views on the relative merits of the two approaches. The attempt to introduce a credit approach to replanting was clearly unsuccessful in the case of the tea project, largely for reasons of poor design. In the absence of guidelines to staff on appropriate circumstances for supporting one or other of these approaches, and the likelihood that at least one approach may preclude the use of the other in a particular borrower situation, an assessment of past Bank experience with these two options is recommended with a view to developing appropriate guidance for staff. B. Implementing Tea Lending Restrictions 4.5 In 1973, the Bank adopted a policy of lending restrictions for projects involving tea (para. 3.8). Its essential features were: A full account of the Bank's significant and positive role in support of Sri Lanka's move towards increasing growth and efficiency of the economy following the 1977 change of government is given in OED's Country Review, The World Bank and Sri Lanka: A Review of a Relationship, Report No. 6074 dated February 24, 1986. Most notably in Thailand, where a succession of three such rubber replanting projects have been supported. - 12 - (a) as a general rule, the Bank should undertake no further financing of projects involving production of tea; (b) any exceptions to this general policy should be strictly limited to: (i) financing for increases in output in countries with no investment alternatives yielding an acceptable rate of return; (ii) financing for rehabilitation involving no increase in output (this implies a reduction in acreage and encouragement to diversification) and maintenance of tea quality; (c) projects for diversification out of tea production will be encouraged where economically feasible, particularly in countries with large shares of the market. 4.6 As a result, the two earlier tea projects in Sri Lanka had to comply with these guidelines. They were approved in June 1978 because they involved rehabilitation (the second exemption in b(ii) noted above) and diversification out of tea. The tea project currently under audit (Tea III) involved both rehabilitation and diversification. In retrospect, the Bank's interpretation of the lending restrictions and their "exemptions" has presented several difficulties. 4.7 Between introducing its lending restrictions policy in 1973 and reviewing this in February 1979,1V the Bank Group approved three other tea projects besides the two Sri Lanka ones!-": Kenya Tea Factory, in May 1974; Rwanda Tea Processing in June 1976; and Papua New Guinea Rural Development in September 1978. According to the 1979 Paper that reviewed the experience, the Bank had been flexible in granting exemptions from the 1973 restrictions. It reckoned that only the Sri Lanka Tea I Project could be said to have fulfilled either of the two exemptions permitted in the 1973 Tea Policy Paper. Subsequently, in 1982, Bank Management ruled that tea processing projects -- processing was the basis for the Kenya and Rwanda lending operations -- were equivalent to tea production projects and should be treated accordingly. This closed one apparent lending loophole identified in the 1979 Review. 4.8 But the staff's view even of Sri Lanka's Tea I Project raises questions about their interpretation of exemptions. 4.9 Citing Sri Lanka as the only country that had invoked the second exemption of "rehabilitation involving no increase in output," the Bank's 1979 policy review Paper reckoned nonetheless that Sri Lanka would regain fully its previous production capacity of 1968 as a result of the Tea I Project. At the time, when no third project was in the lending pipeline, this Paper opined that a third Sri Lanka project would, therefore, contravene the second exemption. 4.10 As noted in para. 2.18, the Bank seems to have justified its third tea operation in Sri Lanka by offsetting a rehabilitation component that involved increase in output with a diversification component that involved decrease in output. It had observed, properly, that it could no longer risk 21 Economic Analysis and Projections Department, "Bank Financing of Tea - A Reappraisal", February 1979. 3/ Actually, the 1979 paper does not mention the existence of Tea II presumably because it did not attempt to support, nor did it lead to, any tea project. - 13 - a project that would increase output overall. Yet the preparation and other efforts devoted to decreasing output were not equal to those devoted to increasing it. That the novelty of the diversification component overstretched both staff and country abilities is one of the findings of this audit (para. 3.7). 4.11 Finally, a peculiar feature of the zero-sum game that policy staff thought the policy required was the idea that it permitted them to justify a project (Tea I) in terms of its reinstating an historical output capacity that Sri Lanka enjoyed ten years previously in 1968. If that is what "no increase in output" meant, it was surely an accommodating interpretation. Sectoral Outlook and the Future Role of the Bank 4.12 The Bank is currently supporting the Sri Lanka rubber sector through a second smallholder rubber replanting project, approved by the Board in May 1988. It is a repeater project the design of which has benefitted from the experience of the earlier project, the credit for which closed in June the same year. Improvements derived from the earlier experience include a more realistic replanting target of 35,550 ha over an eight year implementation period, equivalent to an average of around 4,500 ha/year, and appreciably below the 5,600 ha targeted but not attained in the fifth replanting year of the audited project. It also supports conversion of 80 of the GPCs financed under the earlier project to LCCs, to conform with the improved marketing prospects for latex in the rapidly modernizing local rubber products industry. Further institutional strengthening of the public sector agencies involved in the replanting program is also entirely appropriate. 4.13 In February 1985 the Board approved a fourth tree crop project (Tea IV), designed as a follow-on project to Tea III, the credit for which closed in September 1986. The follow-on project was more broad-based than Tea III in that it covered replanting, infilling and small areas of new planting and factory rehabilitation for rubber and coconut as well as tea on the two public sector estate corporation's properties. It also included further areas of diversification cropping, 60% of which was to be into fuelwood, and a smaller area into coffee. The credit was closed on December 31, 1991. A PCR is currently being prepared. Supervision reports indicate that physical progress during the implementation phase was good, and that high standards of work realized under Tea III were maintained, but that the financial status of the corporations, particularly JEDB, worsened and was described as catastrophic at the time of the final supervision mission. 4.14 Partly as a response to this deteriorating financial situation, GOSL in 1990 constituted a high- level task force to decide what to do not only with the JEDB and SPC, but also how to reform the entire sectoral policy, institutional and regulatory framework governing the entire plantation subsector, including the private sector. This, in turn, led to a request to the Bank to study how not only to restructure the JEDB and SPC, including dealing separately with the so-called "non-viable estates", but also how to reduce export taxes which have acted as a severe disincentive to quality improvement, to reform labor laws and practices which have stymied productivity increases and reduced competitiveness, to withdraw the Ministry of Plantation Industries from day-to-day management of the plantation companies and to do away with restrictive marketing regulations. 4.15 Later, in mid-1992 GOSL implemented a restructuring program under which the more viable estates were split into 22 plantation units, and has taken an important step toward privatization by appointing private companies to be responsible for operating the units under management contracts. The role of the Bank, if any, under these changed conditions is currently under review.  Attachment (Page 1 of 3) - 15- Comments from the Borrower 24103 w0ee QC kf CA96/4/321N My No. PORA ** FORA1 SoodaO ew3ftXtdO3 (3 0r6 ft0) . 5.?w e co moed "O& (304 . wal.) reom 2123 The k*cretarlst. (3rd Floor) ue 4473 1O 2 o I Fo I P, . *o 27. Colombol1. DIPAITMINT OF EXTIRNAL RASOUNCIS 24. 11.. 2 Minisry of Finane .....*** ..** ...******* * .* * ..*... iAX NO: (202) 676 - 0555 Mr. Graft= Dorwldson Chiof, Agricultu'ro & Ituman Dovolopmont Divi., Qporttibna Evaluation Dopartmont, World Bank, Washington DC, U.S.A. poar Mr. Donaldson, SI LANKA SUAIZHOLDER RUBBER RERABILITATION PROJ.(Cr. 1017-CE) T=A FEMWBILITAION AND DIMERSIFICATION PROJ. (Cr. 1240-CE) DRAFT PERFORM ACE AUDIT REPORT with roforonco to your lottor of 1st Octobor 1992, I am ploaeod to submit horowith tho commonts of Ministry of Plantation Industrios on tho abovo Draft rorformanco Audit Roport. yours sincoroly, J,t.J. Jayamahc., Doputy Diroctor, for Dirootor Genoral. Attachment (Page 2 of 3) -16- 0ne41/r11A oewAffVTelephone. sod q.e1 Sede 41539 My ,o. IGPO6 Minier * = Oro 4483 9 a#WN. Isoretry I . ... v./ P. D. SoX IS5) loaSeretary 1. 1 Yauxhill Lane "NOAi }20901.4 U( 51L rf5)JlIo c eh a 1u g 0p'.4 Jpg s ....no..... I MINISTRY OF PLANTATION INDUSRIES oI. 18th November, 1998. Direotor 0eneral of Externa. Resources, Departxeet of $xternal Resources, The Secr4tariat, Colombo 01 Attentioh: Mr. J.H.J. Fayambtha, Deputy Director. Re: Smallholder Rubber Rehabilitation Proj. (Cr. 1017-CE), ', Tea Rehabilitation ond Diversification Proj. (Cr. 1240-CR). Draft Performance Audit Report I refer to your letter dated 18.10.02 on the above. Our comments on the Draft Performance Audit Report are given below separately for the two projects. 1. Smal1holder Rubber Pehabilitation Project (Cr. 1017-CE) We are in agreement in general with the conolusions of the project performance audit that this project has registered satia- factory overall'outcomes. W4 also agree with the comment that the original replanting targeto for the project were set at an un- realistically high level although the project eventually achieved these targets by the eighth year of implementation. The Rubber Controller has observed that the delay in achieving the replanting target of t$e project was the result of the fol- lowing: 1.The task of raising plating materials for the project was entrusted to the JEDB and the SLSPC. These two corporations had their own programmes of repllanting and therefore the provision of planting materials for the project received a lower priority compared to their own programmes. This may be identified as a design fault of the project. The Advisory Services D,:partknent of the Rubber Research Board has observed that the project b6nefits would have been even greater if sufficient quantities of igh yielding RRIC olones were avail- able as against the poor yielding PB. 86 clone. 2. Although project targets were exceeded in the first two years of the project, the unprecedented drought of the year 1983 af- fected' tho tarXeta set fnr thm years 1983 and 1984. Targss of agricultural projects rut pake allowance for such vagaries of nature. Adcordingly, the statement that project targets were set to. high is.a.fair. coMnt. *Deadd* q .~ 0soede* ees II 274 jb*. CA feWW Qubfax: 94 * .436531I Attachment (Page 3 of 3) -17- S ae/Oeouliffephonesp **d q*ee MInInar *** q*ou ) jasr 4 4 39 Your N. Secrttry a.*u.1. Q,./ P. 0. ox 55 Prlv, Secrettry J Q Vauxhall Lane 9C**4 3090*4 MINISTRY O PLANTATION INDUSTRISS Cam'' ""'.""".."""." Tea Rehabilitation and Diyersifioation Project (Cr.1240-CE) We agree with the position of the Auditors' that the estate replanting and factory r6habilitation components of the project had satisfactory outcome; We also agree that the smaller diver- sification component of the project was a failure. The main reasons were firstly, the inadequate time spent on project prepa- ration; secondly, the la k of experience of JEDB and SLSPC with crops other than ten, ru ber and coconut; and finally, the ab- sence of appropriate me sures to counter the first and second short Oomings. Diversification of non-vi ble plantations remains a top priority in spite of the fai.Lure f this component in the TRDP. The les- sons learned from th:L$ pr Ject, if taken into careful considera- tion, a viable projoct cn be developed and successfully imple- mented. General We are pleased to note that two major projects undertaken by several key agenoies under the Ministry have been mutually ac- cepted as being succiesful, i.e. the donor as well as the benefi- ciaries. The ex0erienoe of both pro cts suggest that a project implemen- tation period of around ; years may be more realistic for tree crop d6velo ent projects than a five year period. Dr. fAn ra Ek4n e Direotor - Planning for Secretary **O1d-eQ.v**-Telexi 2127d JEDB. fewrd/QuddfPax: 94.1*S8938  MAP SECTION  IBRD 1473U MARCH 1986 SRI LANKA l N DIlA SMALLHOLDER RUBBER REHABILITATION PROJECT z Proposed Group Processing Centers SpeWe n * ×'stng * Group Processing Centers A Commodity Purchase Depots * Planting Material Nurseries SLAA Kegalle District (16) OF Kolutora District (10) Ratnapura District (7) ® District Offices 730 - District Boundaries 7 30 -- Division Boundaries N Main Roads Rodways Rivers KEGALLE KILOMETERS 0 5 I0 05 20 25 MILESá A L Avs~ . ..16as KANDY COLOMBOCOLOMBO Pbrdokum 7 -~ ~ ~ AL 8 0 Ag T KMrUduR - otokrmdö\ TNAPUPA 6-30panok 30 -~~(' 6L 30 - -0 -3..0'kon 0  IBRD 15659 8.N0VEMBER 19111 SRI LANKA TEA REHABILITATION AND DIVERSIFICATION PROJECT PROJECT LOCATIONS Proposed tea rehobilitation oaos (High country and low country) d t iv ificaton areo PoM!d- emay Amr s of ongoing too rehabilitation projects Area of angoing tea diversification projects J A F N A Elevolions ifest) O-99 100-499 Tolannannar VAV Monku)om 3000-5000 VVUNIAOvr 5000 ManMar Major roads 0 Towns MA N NAR Rlway Airporl - - - Districl boundariøs River Vavumyc C TRINCOMALE E l Trincomile Medowachchiya / A N U R A D H A p R A Anurodhopuro POLONNARtiWA rut Puna a Nalbar\ i BATTCALOA icoloo L~-- Ch-I KURUNE AA A L E KuruneGao BA ULA Negombp WI A MPA l Katunn~k K -G A LA COLO~ ON"0L ponke) p U-~ k .4 1 Ka itara RA PUtiA A CHINA,ý AL T PAKISTAN- N . H A M, Aý T OT A l N DIlA ÅAR A rnmbantoto M' SRI LANKA I 'r