Ceylon - Review of the economic situation and foreign exchange problem (Vol. 2 of 2)

RESTRICTED VIWt t\' Report No. AS- 118a This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION REVIEW OF THE ECONOMIC SITUATION AND FOREIGN EXCHANGE PROBLEM OF CEYLON (in two volumes) VOLUME II SUMMARY DESCRIPTION OF PROJECTS December 1, 1966 Asia Department  CURRENCY EQUIVALENTS Currency Unit - Ceylon Rupee US $1 = 4.76 Rupees 1 Rupee = US $0. 21 1 Million Rupees = US $210, 000  TABLE OF CONTENTS Introduction 1 Lift Irrigation 4 Drainage and Reclamation 8 Tamarkaduwa Pasture Development 12 Temperate Pastures Project 17 Coconut Pastures Project 21 Food Storage 24 Omnibus-cum-Truck Chassis Plant 28 Ceramics Corp. - Negombo Plant 32 - Insulator Plant 36 Fertilizer Plant 38 Port of Colombo 41 Railways - Dieselization Program 45 - Improvements 50 Ceylon Transport Board - Buses 58 Tea Machinery 63 Mechanization of Paddy Cultivation 69  SUMMARY DESCRIPTION OF PROJECT Introduction 1. This Annex presents summary descriptions of individual projects which, as far as can be judged at their current state of preparation, seem suitable for financing by official lending agencies abroad. These de- scriptions have been prepared by the Government of Ceylon. They were re- viewed by the Bank. Several proposals were subsequently omitted from the present list of projects, in most cases because it seemed that the invest- ment could be deferred or because preparation had not yet advanced far enough to permit any judgment on the merits of the project. Included in the list were only those projects which appear to be economically justified and for which preparation is sufficiently advanced to expect that they can be made ready for presentation to lending agencies abroad in 1967 or early 1968. The Bank's comments on these projects were added at the end of each project statement. 2. No individual descriptions are given of projects which seemed suit- able for financing through suppliers' credits, with the exception of the proposed fertilizer plant which might also attract financing from official sources. However, such projects were included in the summary table, which follows, in order to indicate the composition of all projects for which external financing is being sought and the total amount of foreign exchange involved. Project List41/ (in Rs. million) Total Foreign Exchange Cost Official Sourceag/ Suppliers' Credits 1. Public Sector Agriculture Irrigation3/ 5.0 (est.) Lift Irrigation* 6.8 Drainage and Reclamation 16.0 1/ Excludes National Textile Corporation plant and Government Press to be financed out of East German line of credit. Also excludes possible IBRD loan to DFCC. 2/ Includes IBRD/IDA 3/ The irrigation program is now under review. If Government decides, as recommended, to defer construction of new major works and instead con- centrate on continuing schemes and on rehabilitation of existing irri- gation facilities, some imported equipment will be needed. The amount of Rs. 5 million included in the project list is purely notional, but once the basic decision has been taken, it should be possible to work out quickly what equipment is required.  -2- Total Foreign Exchange Cost Official Sources2/Supplierst Credits Fisheries4/* 25.7 Tamankaduwa Pastures (Buffalo Herds)* 11.7 - Temperate Pastures* 2.2 - Coconut Pastures 8.3 - Food Storage* 5.0 - Subtotal 80.7 - Manufacturing Hardware Corp. - Foundry5/* 10.2 Plywood Corp. - New Plant* 7.5 Chipboard Plant* 3.8 Cement Corp. - Puttalam II* 37*2 Colombo Packing 5.7 Bus and Truck Assembly - New Plant* 7.5 Ceramics Corp. - Insulator Plant* o.8 Negombo Plant* 0.9 Eastern Paper Mills - Paperboard PlantV/* 13.5 Fertilizer Corp. - New Plant* (124.0 124.0 Mixing Plant 1.5 State Engineering Corp. - Equipment6/* 6.o Subtotal 38.9 179.7 Infrastructure Public Works Dept. - Roads7/ 25.0 (est.) Port Commission - Port Development* 12.3 Railways - Diesel Locomotives* 53.0 Improvements* 19.0 i/ Project has been appraised by IERD/IDA mission; no project summary is given. 5/ Project being considered for financing under German aid; no project summary is, therefore, given. 6/ No project summary has yet been prepared, but should be available shortly. The State Engineering Corp. does not appear to have now equipment ade- quate for coping expeditiously with the construction projects underway and likely to be handed to it. Unless relieved, this shortage of equip- ment could lead to a serious bottleneck. 7/ No road project is yet in sight. An IBRD/IDA transport mission, which visited Ceylon in November 1965, saw the need for considerable outlays on road maintenance and improvement, but recommended that the first step should be the engagement of consultants to prepare a highway master plan and a highway maintenance study and possibly help work out an initial project. The Government of Ceylon has agreed to this procedure and applied to IERD for financing the consultant services recommended.  3 Total Foreign Exchange Cost Official Sources2/Suppliers' Credits Post & Telecoms - Improvement Project8/ 25.0 (est.) Ceylon Transport Board - Buses* 21.8 Subtotal 103.1 53.0 Total Public Sector 222.7 232.7 2. Private Sector Agriculture Tea Machinery* 40.0 - Paddy Mechanization* 40.0_ Total Private Sector 80.0 - 3. Grand Total 302.7 232.7 of which could be made ready for financing (items marked by aeteriak)% 223.4 225.5 already being negotiated: 53.2 53.0 remaining to be financed: 170.2 172.5 8/ Plans exist for improving telephone services in the provinces, following an improvement and expansion program for the Colombo area which is nearing completion. An ITU report on provincial requirements exists, but no phased program, based on an analysis of economic priorities, has yet been worked out. The Government is considering the engagement of a panel of foreign experts to advise them on the best way to proceed.  - 4 - PROJECT PREPARATION - STATUS SUMMARY 1. (a) Title: Lift Irrigation. (b) Description: It is proposed to provide water from surface water sources to lands above the command area. The equipment necessary comprises pump sets and pipes to lift the water to the required altitude. The structure consists of pump houses for the pump units, a sti;1ing basin and channels to direct the water to the lots to be cultivated. The location of the projects is in six different regions of the Island, namely: Region Acreage (i) Muthu Ayyan Kaddu 3,500 (ii) Vavunikulam 1,500 (iii)Mahakanadarawa 1,000 (iv) Rajangana 2,500 (v) Polonnaruwa 1,500 (vi) Gal Oya 3,500 13,500 The suggested crops are chillies on 13,500 acres from January to June, and onions on 4,500 acres from July to September. (c) Onions and chillies are presently imported. There is sufficient water to irrigate the new lands without adversely affecting the present crops. There is a fair amount of spare labor-time available in these settlements. Hence, the return from the investment is expected to be very high. On completion, the net saving in foreign exchange is estimated to be Rs. 19 million per year. (d) Included in the Development Program?: Yes. This is a part of the plan for the development of agriculture in the Five-Year Plan. 2. (a) Name of Borrower: Government of Ceylon (b) Guarantor: (c) Fxecuting Authority: Ministry of Land, Irrigation and Power.  3. External Agencies Interested: 4. Technical Assistance: 5. Feasibility Studies: Both engineering and economic feasibility studies have been completed. The project is ready for implementation and a sum of Rs. 3 million has been provided in the government budget 1966/67. 6. Estimated Cost: Rs. Million Foreign Currency 6.782 Local Currency 14.0335 Total 20.815 7. Basis of Estimate: The entire area to be irrigated was divided into 83 blocks for purposes of costing. Estimates have been prepared for 15 such blocks and the cost per acre was determined from them. A breakdown is shown below: Rs. Million Foreign Local Total Irrigation Works 5.062 4.387 9.450 Land Development 0.610 3.355 3.965 Settlement of Colonists 1.110 6.290 7.4oo Total 6.782 14.032 20.815 Detailed breakdown of irrigation costs is available with the Irrigation Department. 8. How Financed?: Local currency component is a grant from the Central Government. The foreign exchange cost has to be financed with external assistance. 9. Planning and Construction Period: The final designs are complete. The entire acreage will come into production over a period of five years beginning 1966/67.  - 6 - The phasing is as follows: Acreage Year of Irrigation 1966/67 1,500 1967/68 2,200 1968/69 2,500 1969/70 3,600 1970/71 3,700 Total 13,500 10. Is Legislation Required?: No. 11. Staff Increases or Organizational Changes: The Irrigation Department has a unit working on Lift Irrigation. The Agricultural Department has personnel on its extension staff engaged in this work. No further major additions are expected. 12. Comments of the Mission: This project is in an advanced stage of preparation and is highly desirable on grounds of (i) the needed diversification of agricultural production, and (ii) more efficient use of irrigation water, as envisaged in the recommended rehabilitation and package program, (see paragraphs 68-72 of the Report). The FAO/IBRD mission of July 1966 examined this project and suggested a revised phased program of lift irrigation facilities in the following five areas for 15,000 acres under existing irrigation schemes, as shown below: Acreage Padawiya 2,500 Rajangana 4L,500 Vavunikulam 1,000 Parakrama Samudra 3,500 Gal Oya 3,500 Total 15,000  - 7 - They also estimated the internal rate of return on irvestment to be about 40 percent for the project. The present mission thinks that the project should receive high priority in execution, but needs further preparation to be ready for appraisal on the following lines: (a) Completion of the semi-detailed soil survey of five selected areas for the determination of crop pattern. (b) Detailed engineering designs, layouts and cost estimates for several representative block-unit pump installations in the selected areas. (c) Detailed layouts on contour maps for all units to be included in the programs of at least the first two years. (d) Decision on the level of water charges and on the effective mechanism for collection of water charges.  - 8 - PROJECT PREPARATION - STATUS SUIOIARY 1. (a) Title: Drainage and reclamation of lands along the WIest and Southwest Coastal Belt. (b) Description: Low-lying lands along the western and southwestern littoral suffer from floods, bad drainage and salinity. It is now proposed to allow the regular discharge of streams into the sea by preventing the formation of sandbars at the mouths of these streams. For this purpose, a series of outfalls are planned. Wherever the physical conditions do not permit the drainage of low-lying lands by the clearing of outlets or the construction of new ones, it is necessary to pump out the water. It is proposed to keep out salt water by constructing barrages across the streams which allow the inflow. (c) Justification: The benefits are principally two. First, it would reclaim and make approximately 50,000 acres of land available for cultiva- tion. Second, it would improve the health and sanitary con- ditions in the area surrounding these waterways. The drainage of low-lying lands will protect some of the highways, presently subject to inundation and disintegration. (d) Included in the Development Program? Yes, this is included in the Five-Year Program of the Ministry of Land, Irrigation and Power. 2. Borrower: Government of Ceylon. Guarantor: Executing Authority: The Ministry of Lands, Irrigation and Power. 3. External Agencies Interested: 4. Technical Assistance Arranged or Required:  5. Feasibility Study: The engineering aspects of the project have been studied and there is a detailed breakdown of costs. To complete a feasibility report, a more firm estimate of benefits from the project has to be made. This will be prepared by the Irrigation Department in consultation with the Department of Agriculture and the Ministry of Planning and Economic Affairs. The report will be completed by December 31, 1966. 6. Estimated Costss Rs. Million Foreign 16.0 Local 17.0 33.0 7. Basis of Cost Estimates: The entire project area was divided into 7 units on the basis of streams that flow through the area. In each area, the cost of structures, drainage facilities and pump sets was made separately. An example is Hikkaduwa and Telwatte South (2,750 acres) in Unit C-4. Rs. (i) Groynes and outlets 3,500,000 (ii) Drains and canal system and structures 1,100,000 (iii) Pumping units, dykes, etc. 550,000 5,150,000 The breakdown of foreign costs is as follows: Item I Rs. Rs. Suction dredges 8" 6 @ 300,000 1,800,000 Grab dredgers 6 @ 150,000 900,000 Floating cranes 2 @ 200,000 400,000 Crawling cranes 2 @ 100,000 200,000 Steel barges 6 @ 50,000 300,000 Jeeps, Trucks, etc. 400,000 Air Compressors, Drills and other Mechanical Equipment, etc. 2.000,000 6,000,000  - 10 - Item II Fuels, lubricants and spares, etc. for the construction machinery 6,ooo,ooo Item III Construction material requirements, such as steel, cement, tools, etc. 1,500,000 50 Pumping Units 50 cuses. @ Rs. 50,000 2,500,000 16,ooo,ooo 8. How to be Financed: The local currency costs will be voted by Parliament. The foreign currency component is to be financed with external assistance. 9. Planning and Construction Period: The designs have been completed by the Irrigation Department. These, however, have not been analyzed in relation to the benefits from the project. The period of construction is 10 years. In the first five years, work will start on three units. 10. Is Legislation Required?: No.. 11. Are Major Staff Increases or Organizational Changes Required?: The Irrigation Department has a unit working on this project and it is not ex- pected that any major in- creases are necessary. 12. There are two issues which have not been finally settled. These are: (i) The cropping pattern to be promoted. (ii) The means of recovery of the value of improvements to land from the owners of the lands to benefit. The decisions will have to be taken by the Ministry of Land, Irrigation and Power and they have been so informed. 13. Comments of the Mission: In addition to the issues mentioned under para. 12, determination of  - n - ownership of reclaimed land may be an intricate problem. The re- claimable land may possibly be suited for paddy cultivation, but soil experts also advise cultivation of vegetables which will yield better returns. Further, the scope of development of fishing in the inland lakes covered in the project areas needs also proper examination. This mission thinks that in addition to resolving the issues above the project needs further preparation for the purpose of appraisal, mainly on the following lines: a) Contour survey of new areas to be reclaimed, in sufficient detail to enable assessment of drainage requirements. b) Reconnaissance soil survey of the new areas and land use classification to enable determination of the cropping pattern for reclaimed areas of land. c) Design of construction and cost estimates for each area to be reclaimed. d) List of equipment needed (allowing for the equipment obtained and/or under negotiation for bilateral aid).  - 12 - PROJECT PREPARATION - STATUS SUMMARY 1. Project: (a) Title: The Tamankaduwa Pasture Development. (b) Brief Description: The Tamankaduwa Project aims at providing enough cattle to meet the milk requirements for a condensed milk factory to be situated at Polonnaruwa. The capacity of the factory has been placed at 22 million lbs. of condensed milk per year which corresponds to the volume of condensed milk imported into the Island in the 1960's. It has been estimated that a total of 8,500 buffaloes should'be imported over a five-year period in order to supply by 1971 the entire fat and half the solid non-fat requirements for 22 million pounds of condensed milk production. Five hundred of these animals are already on a government farm in Tamankaduwa and it is proposed to import a further 2,000 this year - 1,000 of these coming out of the country's free foreign exchange resources and a thousand as a gift from the Indian Government. Loan finance is, therefore, being requested for the import of the balance of 6,000 animals and associated foreign exchange costs. It is contemplated that the 6,000 animals will be taken up by private sector allottees who have already received land in the Tamankaduwa area. (c) Short Justification: (i) Costs and Benefits: Costs and returns data on a typical government farm are as set in annexure (c) to the Government Agricultural Plan (Agricultural Development Proposals, 1966/70, page 292). The data would seem to imply an internal rate of return of over 20 percent in the case of a typical farm. (ii) Foreign Exchange Savings: The value of 22 million lbs. of condensed milk at the average price of imports in 1965 amounts to Rs. 19.8 million. The project, as it stands, does not aim at import savings to this entire amount, since half the solid non-fat component will have to be imported together with sugar and can requirements. When these are taken into account, the annual net saving in foreign exchange is still of the order of Rs. 11.5 million. Since this  - 13 - saving is to be attributed to a herd strength of 8,000 imported or a total foreign exchange outlay of Rs. 15.6 million, according to the figures given in the Agri- cultural Plan, it is clear that the foreign exchange cost of the entire Tamankaduwa Project can be recovered out of just more than a year's foreign exchange saving, resulting from that project. (d) Included in Development Plan?: The project has been included in the Development Plan. 2. Borrower: Government of Ceylon Guarantor: Government of Ceylon Executing Authority: The Department of Agriculture, Animal Husbandry Division, will execute govern- ment component of the project and will provide all ancillary facilities necessary for private sector development. 3. External Agencies Interested: The FAO Project Identification Mission to Ceylon of December 1965 identified the project as suitable for external financing and gave it high priority among agricultural projects. 4. Technical Assistance Arranged or Required: (a) Preinvestment Assistance: None (b) Implementation Assistance: 5. Feasibility Study: (a) By Whom: To be prepared jointly by the Ministry of Planning and Economic Affairs and the Xepartment of Agriculture. (b) When Available: January 1967 (c) Brief Summary of Conclusions: See Section l(c) above. 6. Estimated Costs: The only available basis for making cost estimates of the project are the costs of a typical farm as given in annexure (c) of the Agri- cultural Plan. The total cost of each farm comes to Ra. 2.5 million  - 1h - and the foreign exchange component Rs. 2.0 million, leaving the local currency costs, therefore, at Rs. 527,000. The total cost for six farms is thus: Foreign currency cost Rs. 11.7 million Local currency cost Rs. 3.2 million Total Rs. 14.9 million 7. Basis of Estimates: Based on the experience of government farms as supplied by the Department of Agriculture. 8. How to be Financed: Foreign exchange cost is to be financed from external assistance. 9. Planning and Construction Period: This is as envisaged in the Agricultural Plan and is expected to extend over a period of five years. 10. Is Legislation Required?: (a) To borrow; if so, outline action proposed: No (b) To implement project; if so, outline action proposed: No 11. Are Major Staff Increases or Organizational Changes Involved?: An increase in the veterinary staff situated on the government farm in the project area has been provided for. 12. Supplementary Information (where appropriate): It will be seen from the foregoing summary that a great deal remains to be done before the project report can be said to be complete. The following observations are relevant: (a) Land in the project area has been allotted to 15 allottees drawn from the private sector in sizes ranging from 250 to 3,000 acres. It will be necessary, therefore, to obtain a clear idea of the phasing of investment envisaged by the private sector allottees before any request can be formulated as regards loan disbursements. It will also be necessary to have an indication of how far the local currency financing of each farm can be provided out of the allottees' own funds and out of credit. Once this is known, it will be possible for expenditure to be phased out in a manner approved by whatever financing agency provides the necessary local currency credit.  - 15 - This would involve the preparation of approved farm development programs for each private farmer which will serve as a basis for any loan granted. (b) The cost structure available to date relates entirely to the government sector and it will be necessary to draw up dairy development programs for the private sector which may show different returns. When the soils map is superimposed on the map showing the pattern of land allotments and when account is taken of the section on soils in the body of the draft report, it becomes clear that land in varying degrees of fertility has been allotted to the private sector. These differences are likely to affect the total cost and return structure of the project. (c) The Tamankaduwa Scheme as formulated in the Agricultural Plan envisages the combined use of villu and highland pasture. This pattern, it is now clear from the lands allotted to the private sector, is applicable only to the Government's share of the project, and the private sector allottees have received no villu land. (d) The question of the demarcation of individual private sector allotments is a matter that needs to be taken into consideration, especially if fencing costs are involved. The project area happens to contain herds of elephants which make any kind of fencing a risky operation. The patterns of cattle management that can be devised under these conditions will have to be examined in considerable detail. 13. Comments of the Mission: In addition to the observations made by the Ministry of Planning, as shown in para. 12, this mission feels that there are several other issues to be resolved. These are: (a) Source of supply of buffaloes and their adaptability to the pastures available in the villu land and cultivated on highland in the area needs technical examination. (b) Willingness of private allottees to buy buffaloes at the prices envisaged has to be ascertained, especially because it is now not intended to give private buffaloes access to the natural grass of the low land villus. (c) Scope of partial use of highland allotted to private lease- holders for growing subsidiary food crops (chillies and onions) and vegetables needs examination, for, if there is some scope, the economics of the project will changeV/. 1/ One allottee nearest to the government farm told the mission that he would use part of his land under lease for growing chillies and onions.  - 16 - On the whole, there appears to be a good basis for encouraging buffalo/cattle farming in the region. With further technical examina- tion and preparation, the project can probably be brought to a stage where it can be considered for external financing.  - 17 - PROJECT PREPARATION - STATUS SUMMARY 1. Project (a) Title: The Temperate Pastures Project (b) Brief Description: The Project is designed to introduce a thousand head of cattle into the Temperate Pasture Area in an attempt to provide the additional milk required for a spray-drying plant to be set up in Ambawela. 1000 cattle are expected to yield 16,000 pints daily while the balance of milk required for the spray-drying plant with a daily intake of 50,000 pints a day will come from the existing Government Farms at Bopatawala and Ambawela, and from the private dairies that have already grown up on the tea plantations surrounding the Government Farms. Arrangements have already been made to import half the herd required (i.e. 500 cattle) out of Ceylon's own foreign exchange resources. Loan finance is therefore being sought for the import of the remaining 500. It is envisaged that the thousand cattle imported under this Project will be absorbed by Government Farms and that a corresponding number will be released to neighboring private farms. (c) Short Justification: (a) Costs and Benefits: The data on costs and returns of the Project are as set out in the Government Agricultural Plan (annex D, page 294) subject to the modification indicated in paragraph 6 below. When account is taken of the sale of cattle from existing herds to the private sector the internal rate of return on the Project over a 7-year period comes to 30%. (b) Foreign Exchange Savings: The spray drying plant with a milk intake of 50,000 pints a day is expected to produce 8,025 lbs. of dried milk per day or approximately 2