Ceylon - Drainage and Reclamation Project

RESTRICTED Report No. P-746 FILE COPY This report was prepored 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 The report may not be published nor may it be quoted as representing their views.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 DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF CEYLON FOR A DRAINAGE AND RECLAMATION PROJECT October 9, 1969  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECONMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPIENT CREDIT TO THE GOVERNMEN T OF CEYLON FOR A DRAINAGE ANJD RECLAMATION PROJECT 1. I submit the followTing Report and Recommendation on a proposed development credit in an amount in various currencies equivalent to US$2.5 million to the Government of Ceylon to assist in financing a drainage and reclamation project. PART I - HISTORICAL 2. like the lift irrigation project for which the Association made a credit in May 1968, the present project was one of several identified by the FAO/IBRD Cooperative Program in 1966. Negotiations for the proposed credit took place in Washington between September 2 and September 6, 1969. The Government delegation was led by Mr. T. Sivagnarram, Senior Assistant Secretary of the Ministry of Lands, Irrigation and Power. 3. The following is a summary statement of Bank loans and IDA credits to Ceylon as of August 31, 1969: Amount (US$ million) Year No.N Borrower Purpose Bank IDA Undisbursed 1954 101--CE Government of Ceylon Powier 15.9 - - 1958 209-CE Government of Ceylon Power 7.3 - - 1961 283-CE Government of Ceylon Power 1)4.1 - - 1967 520-CE Development Finance Industrial Corporation of Ceylon Finance 4.o - 3.1 1968 121-CE Government of Ceylon Irrigation - 2.0 2.0 1968 569-CE Government of Ceylon Highways 4.9 - 4.9 1968 133-CE Government of Ceylon Highways - 4.9 4.9 1969 634-CE Development Finance Industrial Corporation of Ceylon Finance 8.o - 8.0 1969 636-CE Government of Ceylon Power 21.0 - 21.0 Total (less cancellations) 75.2 6.9 of which has been repaid to Bank and others 11.4 Total now outstanding 63.8 Amount sold 3.3 Of which has been repaid 2.6 0.7 - Total now held by Bank and IDA 63.1 6.9 Total Undisbursed 37.0 6.9 43.9  - 2 - 4. The irrigation and highway projects approved last year are progressing satisfactorily. There have been no disbursements on these projects to date since tenders could not be issued until after the loan and credit documents were negotiated, and because of the time required to complete the bidding, evaluation and ordering procedures. 5. The only other lending operation in Ceylon likely to be presented to you in this fiscal year is the first stage of the Mahaweli Ganga multi-purpose irrigation and power project. 6. IFC has not invested in Ceylon but is considering both a loan and equity investment in a textile project, which it would finance jointly with the Development Finance Corporation of Ceylon and the Bank of Ceylon. The uncommitted balance of $1.2 million under the first DFCC loan (Loan 520-CE) is earmarked for this project. 7. PART II - DESCRIPTION OF PROPOSED CREDIT Borrower: Government of Ceylon Amount: Various currencies equivalent to US$2.5 million. Purpose: T, assist in financing a project to benefit about 13,200 acres of paddy lands, by drainage and flood control, in six non- contiguous areas along the southwest coast of Ceylon. Amortization: In 50 years, including a 10-year period of grace, through semi-annual installments of _s of 1% from November 1, 1979 through May 1, 1989, and of 14 from November 1, 1989 through May 1, 2019. Service Charges: 3A/ of 1% per annum. PART III - THE PROJECT 8. An appraisal report entitled "Drainage and Reclamation Project - Ceylon" (PA-22a) dated September 17, 1969, on the proposed project is attached. 9. Agriculture is the largest single sector in the economy of Ceylon. Recognizing that the scope for expansion of the major export crops is severely circumsbribed by market couditiono,. the Government's agricultural policy has emphasized increasing domestic agricultural production with the twin objectives of accelerating overall economic growth and strengthening the balance of payments by reducing food imports, particularly rice.  10. Climatically, Ceylon is divided into Wet and Dry Zones - two distinct areas based on differences in the amount and pattern of rainfall. The Wet Zone covers 30% of the land area of Ceylon and is the country's major agricultural area, accounting for 82% of the land under cultivation. The proposed project would benefit a total of about 13,200 acres located in six non-contiguous land areas of the Wet Zone along the southwestern coastal belt of Ceylon. Production in these areas is limited and hazardous due to poor drainage and frequent flooding. The project would be part of the ongoing program conducted by the Government to increase paddy production by drainage and flood control of a number of low-lying lands along stream courses and adjacent to coastal lagoons. Project works involve improvement of existing drainage system by deepening, enlargement, and extension of the system, improvement of the drainage outlets to the sea, and construction of levees with control structures. These works would be completed in five years. The project would improve drainage, reduce flood hazards, and minimize salt water intrusion, thereby enabling some 10,000 farmers to engage in dependable double cropping of paddy. 11. The estimated cost of the project is US$4.1 million equivalent, of which US$1.7 million represents the foreign exchange component. The proposed credit of US$2.5 million equivalent iwould cover approximately 60% of the total cost and be used to finance imports of construction equipment and materials, the services of an equipment specialist, and a portion of the civil works expenditure which is largely local. The remaining costs would be met by Government budget allocations. Due to the small scale of the project, construction would be done on force account. All tendering for procurement of equipment and imported materials would be on the basis of international competitive bidding. The inclusion of some $0.8 million of local expenditure is justified by the present acute shortage of development capital in Ceylon. 12. The Irrigation Department of the Ministry of Land, Irrigation and Power, would be responsible for the planning, design, and construction of the project. The Department, with the help it expects from the employment of an equipment specialist, is capable of executing the project satisfactorily. The project is technically sound and well-balanced. The estimated costs are reasonable. Upon completion, the project is expected to enable rice production to be increased by about 10,900 metric tons a year. Assuming a price of imported rice of $100 per metric ton, this would help to improve Ceylon's balance of payments through annual import savings of the order of US$1.1 million. The rate of return on the project is estimated to be about 12% if family labor is costed at existing wqage rates, and about 17% if such labor is excluded from production costs.  -14- PART IV - LEGAL INSTRUMENTS AND AUTHORITY 13. The draft Development Credit Agreement between the Government of Ceylon and the Association the Rccoinmendation of the Comnittee provided for in Article V, Section l(dS of the Articles of Agreement, anc the text of a Resolution approving the proposed development credit, are being distributed to the Executive Directors separately. 14. The draft Development Credit Agreement conforms generally to the pattern of agreement for agriculture projects. The following provisions of the draft Development Credit Agreement are of special interest: (a) Section 4.10 requires the Borrower to levy and collect a service charge to cover at least operation and maintenance costs and to make a study of benefits and of payment capacity of farmers in the project areas to determine the extent to which charges should also cover capital costs. (b) Section 4.11 provides that the Borrower shall implement a special agricultural development program for the purpose of increasing productivity in the project areas. PART V - THE ECONOMY 15. An economic report entitled "Current Economic Position and Prospects of Ceylon" (SA-2a) was distributed to the Executive Directors on February 7, 1969. Paragraphs 18-22 of my report of July 2, 1969 on the second loan to the Development Finance Corporation of Ceylon (Loan No. 636-CE) contained a summary of developments up to that date. 16. Ceylon will continue to have difficult balance of payments problems in the coming years, owing primarily to the poor prospects of major exports, namely tea, rubber, and coconut products. In an effort to prevent further declines in tea prices and to stabilize them somewhat above the level prevailing in 296O, representatives of major tea exporting countries, meeting in Mauritius during the week of July 23, agreed to propose to their Governments that total exports of tea in 1970 be limited to about 1300 million pounds, or about 90 million pounds less than estimated exports in the absence of such agreement. It was also agreed that after 1970 the annual increase in export supply would be held to about 13-15 million pounds, which corresponds to the estimated increment in demand. Export quotas for the thirteen largest producers were proposed, with Ceylon and India sharing a quota of 928 million pounds, or about 70 percent of the total.  -5- 17. On August 11 the Executive Directors of the International Monetary Fund approved a new stand-by arrangement for Ceylon in an amount equivalent to US$19.5 million, and agreed to reschedule payments to the Fund over the 12-month stand-by period. As a part of the stand-by agreement Ceylon has agreed to increase the price of imports under the Foreign Exchange Entitlement Certificate scheme from Rs. 8.57 to Rs. 9.23 to the U.S. dollar, and expand the certificate market from 33 percent to about b5 percent of total external transactions. The agreement also includes limitations on short and medium term external borrowing as well as on domestic borrowing by the Government, provides for the inclusion of commercial bank credit to Government corporations (which has been increasing rapidly) in the credit ceiling administered by the Central Bank, and contains undertakings by the Government to increase the mobilization of domestic resources. On this latter point the proposed budget for 1969/70 includes about Rs. 100 million of new revenues primarily from new sources and revision or extension of existing sources. 18. Ceylon has a well-conceived development program and is making determined and generally effective efforts to carry it out, despite unfavorable export price trends. There is considerable scope for achieving fairly rapid economic growth and improving the balance of payments by increasing production of foodstuffs and manufactured goods for the domestic market and possibly for export as well. However, to accomplish this Ceylon will continue to require substantial amounts of foreign assistance over the next several years. 19. The Aid Group recognizes that the magnitude and urgency of Ceylonts foreign exchange requirements are such that it would not be possible to channel the required assistance through project loans only. Therefore Aid Group assistance has largely taken the form of quick- disbursing commodity aid. In the next few years it will continue to be impossible to achieve the capital inflows needed unless members of the Aid Group continue to provide a significant portion of their assistance in this form. As far as the Bank Group is concerned, it can also help by having its loans and credits cover, in appropriate cases such as the present one, part of the local currency expenditures on high priority development projects. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 20. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association. PART VII - RECO1I,ENDATION 21. I recommend that the Executive Directors approve the proposed development Credit. Attachment Robert S. McNamara President October 9, 1969