Sri Lanka - Third Industrial Development Project

 Third industrial development project Report No: ; Type: Report/Evaluation Memorandum ; Country: Sri Lanka; Region: South Asia; Sector: Other Finance; Major Sector: Finance; ProjectID: P010322 Sri Lanka: Third Industrial Development Project (IDP III) (Credit 1948-CE) The Implementation Completion Report (ICR) for the Sri Lanka Third Industrial Development Project (IDP III) (Credit 1948-CE, for US $43.8 million equivalent, approved in FY89 and closed in FY95), was prepared by the South Asia Regional Office, with Appendix B contributed by the Borrower. There was parallel financing of US$40.5 million equivalent from the Asian Development Bank. The main objectives of the project were to provide credit through the banking system to private industrial enterprises, and to provide technical assistance (TA) to support the Government's financial policy reforms and institutional strengthening. The TA focused on administration and reform of tariffs, and on strengthening the two state-owned development finance institutions (DFIs). It was the sixth financial intermediation operation approved in an eight- year period, and was an integral part of an ongoing dialogue that helped liberalize the financial system and set the stage for two adjustment credits approved in FY90-91. Most of the credit, US$35.4 million, was used to finance subloans by participating credit institutions (PCIs) (the two DFIs plus, for the first time, the commercial banks); US$3 million was canceled. The project achieved most of its objectives. Despite delays in implemention of some TA, and support for other TA that was not very productive, both the financing and TA objectives were achieved. The project did not succeed in generating as much commercial bank involvement in onlending as was hoped, but the performance of the DFIs was highly satisfactory. Over 90 percent of the subprojects they financed were performing well with respect to profitability and debt servicing. At the same time, the DFIs successfully implemented TA for private entrepreneurs, and more than fulfilled all their covenanted financial indicators. Finally, the recommendations of a study of the tariff structure, which was included in the project, became a tranche release condition of an adjustment loan approved during IDP III's disbursement. An interesting development, which was not attributable to the project, was the Government's privatization of the two DFI's referred to earlier. The ICR rates the project outcome as satisfactory, sustainability as likely, and institutional development as modest. OED agrees with these ratings. OED also rates Bank performance as satisfactory. On lessons learned, the ICR emphasizes the importance of the TA programs. Considerable attention is given to the need for: greater clarity in terms of reference, more precision and reasonableness in goals and tasks, and the development of the right incentive systems required to ensure that the TA is effectively provided and used throughout the project. The ICR is of satisfactory quality. No audit is planned.