Documet of The World Bank FOR OMCUAL USE ONLY Rqmzt No. P-4085CE REPORT AND RECOMHENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THEE EXECUTIVE DIRECTORS ON A PRCPOSED LOAN IN AN AMOUNT OF US$38.0 MLLION TO THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA FOR A SECOND DAIRY DEVELOPMET PROJECT . May 22, 1985 This d0cma ba a ieddud ilium amd ma be wed by hepiems iy In the pwiferu of their .d_ ditks la.tmt may me etbewe be dldoud wfitout WoU Ba.k autbodua CURRENCY EQUIVALENTS Currency Unit = Sri Lanka Rupee US$1.00 = SL Rs 25.00 SL Re 1.00 = US$0.04 ABBREVIATIONS AND ACRONYMS AMUL - Anand Milk Union Ltd. CWE - Cooperative Wholesale Establishment DAPH - Department of Animal Production and Health DDF - Dairy Development Foundation MILCO - Milk Industries of Lanka Company MPC - Milkshed Producers' Companies MRID - Ministry of Rural Industrial Development NLDB - National Livestock Development Board NMB - National Milk Board VMPA - Village Milk Producers' Associations VMPC - Village Milk Producers' Companies FISCAL YEAR - January 1 - December 31 , '~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ FOR OmCIAL USE ONLY SRI LANKA SECOND DAIRY DEVELOPMENT PROJECT Loan-and Project Summary Borrower: The Democratic Socialist Republic of Sri Lanka Beneficiary: Dairy Development Foundation Amount: US$38.0 million (including loan interest during construction) Terms: Repayment in 20 years, including 5 years grace at the standard variable interest rate Relending Terms: The Government would relend the loan.proceeds to the Dairy Development Foundation for 15 years including years grace at a variable interest rate coinciding w.th the Bank's lending rate, plus a fee of 2 percentage _ points to cover the foreign exchange risk. Project Description: The project seeks to provide support for the long-term development of dairying in Sri Lanka by assisting in the generation of an organizational structure for the dairy industry; increasing rural employment and incomes; improving efficiency in production, collecting, chilling, processing, and marketing milk; increasing the supplies of domestically produced and hygienically processed fluid milk; providing technical assistance and training; and strengthening the monitoring and evalua- tion of development projects in the livestock sub- sector. About 180,000 farm families are expected to benefit from increased on-farm employment, mnd more evenly distributed incremental income derived from increased milk production. Risks arise from the sub- stantial institutional changes to be effected by the project, and farmer acceptance of the new village milk companies. This document has a resticted distribution and may be used by recipients only in the performance of their officud duties. Its contents may not otherwse be disckoed without Word Bank authorzation. Estimated Costs: la Local Foreign Total -- -US$ MiLlion- Land 0.8 - 0.8 Civil Works 8.6 1.9 10.5 Machinery and Equipment 4.4 15.6 20.0 Vehicles 0.6 1.0 1.6 Technical Assistance 0.8 2.7 3.5 Training - 0.9 0.9 Technical Services 1.9 5.3 7.2 Organization and Management 3.6 - 3.6 Support to VMPC/VHPA 8.8 0.2 9.0 Recurrent Costs /b 7.8 - 7.8 Working Capital 7c 4.0 - 4.0 Total Base Costs .41.3 27.5 68.8 Physical Contingencies 1.7 1.3 3.0 Price Contingencies 19.7 9.7 29.4 Total Proj' -t Costs 62.7 38.5 101.2 Interest During Construction - 10.0 10.0 Total Financing Required 62.7 48.5 111.2 Financing Plan: Local Foreign Total US$ Million Donated Comodities 39.5 17.4 56.9 IBRD Loan 11.1 26.9 38.0 Netherlands 3.3 4.2 7.5 Short-Term Loan (Government) 0.4 - 0.4 Funds from KILCO and Other Project Entities 5.8 - 5.8 Equity Investments 2.6 - 2.6 Total 62.7 48.5 111.2 /a Including taxes and duties of US$4.2 million equivalent. 7T Incremental costs relating to DDF's operations and support to MILCO and the MPCs. /c Incremental working capital for MILCO, MPCs and initial working capital requirement for DDF. -lll- Estimated Disbursements: IBRD FY FY86 FY87 FY88 FY89 FY90 - - US$ Viflions---- Annual 0.6 14.5 13.7 5.6 3.6 Cumulative 0.6 15.1 28.8 34.4 38.0 Rate of Return: 23 percent Staff Appraisal Report: No. 5089-CE, dated May 13, 1985 Map: IBRD 18398 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO TRE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LADKA FOR A SECOND DAIRY DEVELOPMENT PROJECT 1. I submit the following report and recommendation for a proposed loan of US$38.0 million (including interest during construction) to the Democratic Socialist Republic of Sri Lanka to help finance a Second Dairy Development Project. The loan would have a term of 20 years including 5 years grace at the standard variable interest rate. The Covernment would relend the loan proceeds to the Dairy Development Foundation for 15 years, including 5 years grace, at a variable interest rate coinciding with the Bank's lending rate, plus a fee of 2 percentage points to cover the foreign exchange risk. Cofinancing has been arranged with the European Economic Coumnity (EEC) for a grant in commodity aid valued at US$36.5 million equivalent, the Netherlands for a grant of US$7.5 million equivalent, and the World Food Program (WFP) for a grant in commodity aid valued at US$20.4 million equivalent. PART I - TEE ECONOMY 1/ 2. A country economic memorandum, "Sri Lanka: Recent Economic Developments, Prospects and Policies" (Report No. 5038-CE dated May 4, 1984), was distributed to the Executive Directors on May 18, 1984. Country data are provided in Annex I. 3. After several years of relative stagnation, Sri Lanka's economy has experienced sustained growth as a result of the economic liberalization of 1977 and a significant increase in foreign assistance. Before 1977, Sri Lanka's growth performance had been below the country's needs and potential. Although in the 1960s the annual GDP growth of 4.4 percent was above the average for low-income countries, between 1970 and 1977 it slack- ened to 2.9 percent annually, which was just below the average for low-income countries. Through much of this period, the terms of trade deteriorated steadily, eroding even these modest gains. The slowdown in economic growth in 1970-77 was the result of a combination of factors, including inadequate investment, poor management of the economy, and a policy environment not 1/ This part is substantially the same as Part I of the President's Report for the Second Roads Project for Sri Lanka (Report No. P-3999-CE), which was approved by the Executive Directors on April 16, 1985. -2- conducive to growth and investment. These difficulties were compounded by poor weather in some years and by a sharp rise in the cost of imported food and petroleum over the period. 4. In contrast to this poor economic performance, Sri Lanka's social achievements in relation to per capita income have been outstanding. With respect to the most important social indicators-life expectancy, literacy, infant mortality, birth rate, nutrition levels-Sri Lanka ranks significantly higher than other countries at the same per capita income level. Improvements in the quality of life, particularly the rise in heaLth standards, the spread of education, and the availability of subsidized food, have been important factors in the decline in mortality. Also. the increas- ing age at marriage, the spread of female education and employment, and a family planning program contributed to a sharp decline in fertility. As a consequence, population growth, net of migration, dropped steadily, from 2.7 percent annually in 1953-63 to 2.2 percent annually in 1963-71, and to 1.7 percent annually in 1971-81. 5. However, the Government largely financed both its investment and social expenditures by extracting the surpluses yielded by the three major tree crops (tea, rubber, and coconuts), which traditionally have furnished easy sources of revenue and foreign exchange. However, these surpluses began to decline in the late 1960s, as government export tax policies discriminated against tree crops and export unit prices weakened. With growth in other productive sectors declining during 1970-77, budgetary resources available for social programs were squeezed between inelastic revenues and rapid inflation. As a consequence, expenditures for social services other than the food subsidy declined as a proportion of total current expenditures and of GDP, thus threatening the gains in health and education. In short, the economy could no longer generate the resources needed to sustain a large program of welfare expenditures. Moreover, the size of that program reduced the scope for policy-makers to shift resources to other development activities. 6. In 1977, the Government, in consultation with the IMF, introduced a package of policy measures to liberalize the economy and allow a greater role for the private sector. These policies were designed to (a) reduce govern- ment intervention in commodity markets, (b) reduce government consumption subsidies to assist in restoring producer incentives and public savings, and (c) create a favorable environment for private (foreign and domestic) invest- ment through tax concessions, the creation of an Investment Promotion Zone, and the unification and depreciation of the exchange rate. Two important consequences of this policy reform package were: (a) a decline in the cost of selected subsidies and transfers from about 10 percent of GDP in 1977 to about 3 percent by 1981; and (b) a periodic increase in the domestic support price for paddy (which brought it into line with world prices) that spurred a highly positive response from paddy producers. 7. These policy reforms were introducei! along with an ambitious public investment program that was made possible by the increased availability of domestic and foreign resources. As the Government began to tackle long overdue investments, its capital expenditure as a share of GDP jumped from 6 percent in 1977 to an average of 13 percent in 1978 and 1979 and a peak of 19 percent in 1980, but subsequently declined to an average of 14 percent -3- during 1981-83. The Government's investment plan centered on three major initiatives: (a) accelerated implementation of the Mahaweli Ganga Development Program, the largest multipurpose river basin development program ever undertaken in Sri Lanka; (b) establishment of a 200-square mile free trade zone to attract foreign investors located north of Colombo near the international airport; and (c) institution of a massive housing and urban renewal program focusing mainly on the Colombo metropolitan region, including the construction of a new capital complex at Kotte, a suburb of Colombo. 8. The initial result of both the policy reforms and increased level of investment was an impressive jump in the GDP growth rate during 1977-80 to an annual average of 6.8 percent, which then declined to 5.3 percent in 1980-83. The activities responsible for most of this increased growth were production of paddy, export of garments, and services. The real growth rate of paddy production since 1977, for example, has averaged 5.7 percent a year with the result that rice imports declined from an average 33 percent of total rice consumption in 1970-77 to only 12 percent in 1978-83. Manufactured garment exports, which have increased from US$12 million in 1977 to US$197 million in 1983, raised their share of non-petroleum manufactured exports from 41 percent in 1977 to 76 percent in 1983. Tourist arrivals increased from 153,665 in 1977 to 407,230 in 1982, with a setback to 337,342 in 1983 due to ethnic disturbances during July. 9. Despite these advances, some of the basic structural weaknesses within the economy-have not been addressed. Among the directly productive activities, three subsectors have continued to perform poorly, namely tree crops, public manufacturing enterprises, and non-traditional exports. The volume of output from the centrally important exporZ-oriented tree crops subsector has continued to decline or stagnate. Public manufacturing enterprises, which account for approximately 40 percent of the value added in the non-petroleum manufacturing sector, utilize resources inefficiently, thereby reducing the overall growth rate in manufacturing. In addition, the real growth of non-traditional exports, other than garments, has been fairly low and erratic. Underlying the poor performance of these subsectors are two principal factors: poor management of publicly-owned enterprises, and an overall incentive framework characterized by high and uneven levels of effec- tive protection with a general bias against export activities. Moreover, the incentive to invest in the production of traded commodities has been reduced in favor of non-traded goods, as the exchange rate has not been fully adjusted in a systematic way since 1977 so as to compensate for the high levels of domestic inflation. 10. Another principal source of macro-financial instability, particularly in recent years, has been the Government's budgetary policy. As a share of GDP, budgetary spending increased from 23 percent in 1977 to a record 43 percent in 1980, subsequently declining to a still high 32 percent in 1983. Although much of this increased expenditure was accompanied initially by a corresponding inflow of foreign concessionary capital linked to the public investment program, the need to resort to domestic or commercial foreign financing increased. In addition, the Government's efforts to mobilize additional domestic resources fell short of requirements. Due to falling volumes and prices in the tree crops subsector and an insufficient effort to widen the tax base beyond traditional sources, the Government increasingly relied on ad hoc taxation measures to maintain existing revenue levels. The -4- rapid growth in spending coupled with increased inflows of foreign savings and a weak domestic revenue effort resulted in large budget deficits, which peaked at the equivalent of 23 percent of GDP in 1980 and still amounted to 15 percent of GDP in 1983. In response to increasing domestic deficits, the Government has squeezed current spending with negative and positive repercussions. On the positive side, the reduction in subsidies is welcome, but on the negative side, the limits placed on both public sector salaries and operation and maintenance expenditure are beginning to impose significant costs on the economy in terms of recruitmentlperformance in the public sector and the efficient use of the existing publicly-owned capital stock. Even so, savings on the budgetary current account have remained negative since 1979. In summary, despite considerable donor support for the country's development programs during 1981-83 (equivalent to 7.3 percent of CDP), the high level of public expenditure has meant that only 45 percent of the overall deficit was financed by concessionary flows, with about 10 percent being covered by foreign commercial borrowing and the remaining 45 percent through domestic borrowing. 11. The rapid expansion in investment and general economic activity has been reflected vividly in the balance of payments. Between 1977 and 1980, import volumes grew at an average anmual rate of 18.8 percent-imported investment goods increased from US$83 million to US$493 million, while inter- mediate goods and petroleum imports tripled in current prices. As a result of this fairly broad-based expansion, merchandise imports as a share of GDP increased from 23 percent in 1977 to 51 percent in 1980. Export volumes, however, expanded at a much lower rate (an average annual growth rate of 4.7 percent between 1977 and 1980) and the decline in tree crop export volumes offset the strong growth in garment exports from firms established in the Investment Prvmotion Zone. Consequently, merchandise exports as a share of GDP increased frcm 21 percent in 1977 to only 26 percent in 1980. These diverse trends in the volume of trade were accompanied by a 26 percent deterioration in the terms of trace over the same period. Rapid growth in tourism receipts and private remittances from abroad failed to offset this deterioration in the trade account, and the current account balance deteriorated from a positiva 2.4 percent of GDP in 1977 to a record 19.8 percent deficit in 1980. Deficits in 1978 and 1979 were more than offset by increased net aid disbursements, even to the extent that Sri Lanka could continue to add to net international reserves. Yet, in 1980 the situation changed, international reserves fell by US$220 million, and the public sector began to increase its use of commercial financing. 12. Since 1980, the external deficit has mirrored the erratic movements of the budget deficit. Realizing that a continuation of the 1980 trends would result in serious financial instability, the Government began in 1981, to take corrective measures. The measures agreed upon, in consultation with the IMF, included tighter overall monetary policy, a substantial reduction in government spending, and a gradual realignment of the exchange rate. The economy began to respond positively by the end of 1981 (the current account deficit in the balance of payments had declined to 13.7 percent of GDP and the budgetary deficit to 15.6 percent), but in 1982 the political resolve to continue to apply the needed policy mix weakened, largely because of the presidential elections and a subsequent referendum to extend the life of Parliament. As a result, both the external and internal deficits increased in 1982 (to 15.3 percent and 17.3 percent, respectively) and the GDP growth -5- rate declined to 5.1 percent (the lowest since 1977). Although policy measures did contribute to the decline (to 12.4 percent of GDP) in the cur- rent account deficit in the balance of payments in 1983, the primary factor was the estimated 14 percent improvement in the terms of trade. By the end of 1983, net international reserves were slightly negative, gross official reserves were equal to about two months of imports, and the debt service ratio continued to increase (para. 16). In addition, as a result of the budgetary deficit and some movement in the exchange rate, inflation during that year accelerated to an average 14 percent and the CDP growth rate fell to 4.9 percent. 13. Although the 1983-84 terms-of-trade improvement is bringing the economy some relief, the need for basic structural change has not diminished, particularly in the tree crops and manufacturing subsectors. One of the foremost objectives of government policy should be to restructure the economy toward exports rather than producing for the very limited domestic market. Basically what is needed is a more neutral incentive framework that would permit the full diversity of Sri Lanka's particular comparative advantage to develop. In the short run, however, such a policy package would have to be supplemented by other measures because, first, the capacity of the economy to respond to a changed set of incentives may be limited and, second, the non-policy-related constraints on economic growth (such as the basic infrastructure and imperfect credit markets) will continue to require the -careful attention of Government. 14. Although an uncertain sociopolitical situation constrains the Government from adopting a comprehensive economic policy package, recent measures demonstrate Government's awareness of medium-term problems and its willingness to implement some required reforms. For example, in the November 1984 budget the Government moderately reduced the overall tax burden on tree crops. This reduction, in combination with the management/incentive reform package for state-owned plantations implemented in early 1984, has improved incentives for producers throughout the subsector. The budget also introduced tariff changes based on recommendations made in the final report of the Presidential Tariff Commission on trade taxes. Although important activities were omitted from these reforms, the general thrust of the _nanges is towards a more neutral framework. The Cabinet has also laid down criteria for selecting projects in future public capital budgets--a measure that, if implemented, should redirect public investment into those areas where it could be most efficiently used. In light of the rapid build-up of the country's capital stock since 1977, the highest return to public investment probably would come from complementary investments in existing infrastructure, and in a few new projects that are appropriate in long- gestating activities (such as, power). However, on the negative side, the 1984 budget also provided a wide range of tax concessions that will not serve to reduce either the budget deficit or level of inflation. The currently high tea price has enabled the Government to implement a basically expansion- ary budget while containing its budget deficit below 10 percent of CDP. Thus in the medium term, difficult issues related to changing the tax base and the overall incentive framework stil' need to be addressed if the economy is to undergo the type of structural change necessary for sustained growth. 15. The international aid community has responded enthusiastically to the Government's recent development efforts by stepping up project aid, in -6- recognition of the Government's'efforts to increase such investment, particularly in the Accelerated Mahaweli Program. The overall level of aid commitments iacreased from US$250 million in 1977 to a record US$814 million in 1981, equivalent to US$55 per capita. Disbursements grew much more slowly so that the aid pipeline rapidly expanded to around US$1.63 billion by the end of 1981. In 1982-83 public capital spending had to be curtailed, both because of implementation and domestic financial constraints, with the result that commitments declined to US$550 million in 1982 and US$370 million in 1983, halting further increases in the pipeline. Aid disbursements have increased steadily, from US$200 million in 1977 to US$450 million in 1983, or nearly US$30 per capita. The slow growth of disbursements relative to com- mitments through 1981 can be explained largely by two factors: the rapid acceleration in aid commitments and the relative shift over time from food and commodity aid to slower-disbursing project aid. Continued high levels of aid will depend upon donors' willingness to finance a sizeable portion of local costs, provide supplementary financing for ongoing p-ojects, where needed, and to increase non-project aid. To maintain donor confidence in its economic policies and management, the Government will have to strengthen its domestic resource mobilization effort and continue to restrain government expenditures as long as the budgetary situation remains tight. Local cost financing in support of Sri Lanka's resource mobilization efforts will not only provide valuable relief from budgetary pressures, but will also supple- ment foreign exchange resources needed to support the balance of pavments. 16. At the end of 1983, external public debt outstanding and disbursed stood at an estimated US$2.2 billion, which was about 46 percent of GDP. Although a greater part of this debt is on concessional terms, the increased financing resorted to in 1981 and 1982 helped to push the debt service ratio (excluding IMF charges and repurchases) up from 10.1 percent in 1982 to 11.9 percent in 1983. Even though the record tea prices in recent mnnths have enabled Sri Lanka to reduce its dependence on commercial financing in the near term, any deterioration in the terms of trade would rapidly reverse the situation. This threat to the economy is partly offset, however, by the Governsient's recent efforts to contain the budget deficit and to implement policy measures designed to stimulate exports and efficient import substitu- tion activities. If progress along these lines continues, the current account deficit in the balance of payments should decline to approximately 7 percent of CDP toward the end of the decade, and the debt service ratio, after temporarily rising to almost 17 percent because of existing debt repay- ment commitments, should drop below 15 percent in 1990. PART II - WORLD BANK GROUP OPERATIONS 17. Since the beginning of its operations in Sri Lanka in 1954, the World Bank has approved 11 loans totaling US$151.7 million (net of cancellations) and 38 credits totaling US$769.1 million (net of cancellations) in support of 49 projects. About 52 percent of World Bank assistance has been for agricul- ture (irrigation, tree crops, and rural and dairy development), 23 percent for power, 10 percent for transportation, and the remainder of 15 percent among development finance company operations, a program credit (involving the import of raw materials for industry), water supply, construction industry, telecommunications, and small and medium industries. Eight loans and 13 -7- credits have been fully disbursed. Annex II contains a summary statement of World Bank Group operations as of March 31, 1985. 18. In Sri Lanka, the IFC has a total investment of US$2.13 million equivalent in equity and US$16.39 million equivalent in loans as of March 31, 1985. Investments have been made so far in two textiles industries, one polypropylene bag industry, one equipment-leasing company, one hotel, and two IFC lines of credit, one of which has been extended to the government-owned Bank of Ceylon for term loans to medium-sized industries. 19. The World Bank Group's current strategy is primarily to assist Sri Lanka in reaching a more sustainable balance-of-payments position in the medium term through export promotion and import substitution in viable economic activities. In order to achieve this, the lending strategy includes support to policy changes in a number of areas: investment priorities, incentive framework, coordination of economic policies and programs, opera- tion and maintenance expenditures, and cost recovery. 20. Within the above framework, the World Bank Group lending program would concentrate resources on productive sectors and in support of energy and transport infrastructure. Within agriculture, the strategy gives the highest priority in the vital tree crops subsector. The objective is to channel resources into an activity in which Sri Lanka has a comparative advantage so as to stabilize the sector in the short term and to promote sustainable export growth in the medium term; Whether in the irrigation, rural development or tree crops subsector, the strategy focusses on rehabilitating the existing capital base, increasing its utilization capacity and ensuring better operation and maintenance in the future. 21. The Government's priority to rehabilitate rundown infrastructure is well placed and needed to support expanded economic activity, particularly in the private sector. Major elements of the lending program would be directed at helping the energy needs of the economy and easing transport bottlenecks. The World Bank has provided financing to a number of power projects for generation, transmission and distribution. The future program would focus on energy conservation through both required investments and policy measures. The old and inefficient power distribution system would be rehabilitated to reduce system losses; small but significant improvements in energy conserva- tion would be undertaken in large energy consuming industrial/commercial units; and a study is underway to recommend measures to improve energy efficiency in the transport sector, a large consumer of commercial energy in Sri Lanka. All of these activities would be supported through policy measures and institutional development. Support to the transport sector would continue with rehabilitation of the road network, institutionalizing proper maintenance methods-and improving sectoral planning of policies and programs. 22. The World Bank has provided financing for a broad range of large-, medium- and small-scale industrial enterprises, primarily in the private sector, through support of development finance companies. Export development would focus on this assistance which has also included support to improving the performance of private enterprises. Future lending in the sector would continue to have this focus. -8- 23. Institutional capabilities, at both the planning and implementation levels, have been constrained with the recent rapid expansion of public investment. While continuing the emphasis on institution building project components, future projects would also focus on such areas as human resource development, business and industrial management, and public administration. 24. The need for a substantial transfer of resources to Sri Lanka has been a recurrent theme of World Bank economic reporting, both to offset the deterioration in the world trade environment and to support a high and sus- tained growth rate. Despite Government's increased domestic resource mobi- lization effort in the recent past, World Bank projects in Sri Lanka have included financing of local expenditures. The World Bank's strategic focus on agriculture, rehabilitation rather than new infrastructure, and institu- tional development means that the foreign exchange component of projects tends to be small. Also, the Government's budgetary situation continues to be tight as increased operational and maintenance requirements make-demands on domestic resources. 25. The World Bank Group, as of the end of 1983, accounted for 10.7 percent (IBRD, 1.6 percent; IDA, 9.1 percent) of Sri Lanka's total debt outstanding and disbursed, and 5.0 percent of debt service on medium- and long-term debt. The projected World Bank Group's share in total existing external debt outstanding and disbursed will increase to 17 percent by the end of 1985 (with IBRD's share deslining to 1.3 percent). The IBRD and IDA.. portions of debt service are expected to decline to about 4 percent by the end of 1985. PART III - THE LIVESTOCK AND DAIRY SUBSECTOR 26. Agriculture plays an important role in the economy of Sri Lanka: it accounts for about 25 percent of GDP, about 50 percent of the labor force, and 60 percent of export earnings. The contribution of livestock to the gross value of agricultural production is estimated to be 8 percent. This figure may be considerably lower than the actual contribution because it does not take into account the value of manure, hides and skins, and draft power. Furthermore, the subsector generates employment and contributes significantly to the economy by utilizing much land that would have little alternative use. Milk Production and Processing 27. Estimates of domestic milk production range from about 0.4 million liters per day (lpd) (according to consumption surveys) to 0.7 million lpd (according to numbers of livestock). Some 70 percent of the milk produced is consumed at home or is marketed locally, and only about one-third is procured by the organized dairy subsector. Most of the milk processed by the National Milk Board (NMB) is collected by middlemen directly from producers or through cooperatives. The country's processing capacity is about 0.6 million lpd. Current throughput (locally produced milk plus imported commodities) is about 0.3 lpd. -9- Milk Imports, Consumption, and Demand 28. In 1983, Sri Lanka imported about 27,000 tons of dairy products, which provided the liquid milk equivalent of a further 0.4-0.5 million lpd. The total value of milk imports has increased from SL Rs 55 million in 1970 to SL Rs 380 million in 1978, and SL Rs 870 million in 1983. Average urban per capita consumption of milk and milk products is estimated at 76 grams per day compared with an average rural per capita consumption of 48 grams per day. Consumption varies considerably between income classes, the poorer urban classes consuming an average of about 40 grams per day and the upper income classes up to 130 grams per day. The income elasticity of the demand for milk and milk products is about_0.6-0.8 at mean consumption levels, indicating that a 10 percent growth in per capita income would result in an estimated 6 to 8 percent rise in per capita milk consumption. Milk Prices, Subsidies, and Tariffs 29. Prices. The Government controls both producer and consumer prices of milk bought and sold by NMB, which, in turn, controls all sales of liquid milk except small quantities traded in rural markets. Up-to March 1983, producer milk prices generally ranged from SL Rs 2.00 to 2.80 per liter, depending mainly on fat content. In March 1983, the Government increased the producer milk price to about SL Rs 3.20 per liter and consumer prices to SL Rs 6.07 per liter. In September 1984, the producer milk price was further increased to SL Rs 3.70 per liter'and consumer price to SL Rs 8.00 per liter.- While the consumer price remains at SL Rs 8.00 per liter for pasteurized fluid milk, the current producer price is SL Rs 4.30 per liter of 4 percent fat milk as a result of a recent (post-September 1984) government decision. Bulk imported whole milk powder (the main substitute for pasteurized fluid mi't), repackaged in Sri Lanka, is currently retailed on average at SL Rs 8.90 per liter equivalent after payment of a 15 percent import duty. The current retail price set by the largest processor of domestically produced whole milk powder is SL Rs 8.40 per liter equivalent. 30. Subsidies. NMB operates at a financial loss and has a negative cash flow which is financed by government subsidies. These losses occur in large measure because of insufficient margins between government-controlled prices of raw milk and finished products, low plant throughput combined with a high proportion of fixed costs, and overstaffing. The size of the subsidy has been reduced in recent years as a result of the above-mentioned consumer price increases and increased efficiency in NMB's operations. In 1983-84, the average annual subsidy payments to UMB for liquid milk amounted to SL Rs 23 million compared with SL Rs 45.9 million in 1982. The Government had expected that continued improvements in the efficiency of NMB operations would permit the elimination of the subsidy by the end of 1984. The neces- sary improvements in NMB were not forthcoming and ir. the November 1984 budget the subsidy was raised from SL Rs 0.375 to SL Rs 0.50 per liter of raw milk processed as fluid milk. The Government, however, remains committed to the elimination of this subsidy and specific action to accomplish this objective is included under the project (Section 4.05(a), draft Loan Agreement). There is at present a need to ensure that some local fluid milk is incorporated into locally produced whole milk powder (which also incorporates bulk recon- stituted imported powder). Without this outlet, some rural producers would lack an effective market for their milk. Also, markets distant from milk -10-* processing plants would be mainly dependent upon imported milk products. To make local fluid milk an attractive ingredient for local milk powder processors, the Government presently pays a subsidy of SL Re 1.00 per liter on fluid milk absorbed by these processors. The total subsidy to NMB budgeted for 1985 is SL Rs 33 million. The Government, however, has agreed to progressively abolish, but in any event not later than December 31, 1987, the existing SL Re 1.00 subsidy (Section 4.05(b), draft Loan Agreement). 31. Until 1983 the Cooperative Wholesale Establishment (CWE), which is the agency responsible for most imports of dairy products, was also receiving a subsidy to cover its operating losses. Prior to March 1983, the subsidy amounted to about SL Rs 5.00 per kilogram of powdered milk. The annual cost to the Government was about SL Rs 100 million. In March 1983, the consumer price of milk powder imported and repackaged by CWE was raised sufficiently to eliminate this subsidy. 32. Tariffs. Until January 1985, import duties on whole milk powder, skim milk powder, and butter oil were 5 percent, 7.5 percent, and 12.5 percent, respectively. Effective January 1, 1985, the duty on all these products was raised to 15 percent. A Steering Committee to be established under the project would periodically review cost data for domestic milk production and international prices of dairy products and recommend any necessary changes in tariffs on imported dairy products (Section 4.01, draft Loan Agreement). The Government would seek the concurrence of the Bank before raising the tariff above 25 percent. Dairy Cooperatives 33. Dairy cooperatives in Sri Lanka date back to about 1930; however, the major force in the cooperative movement, the Cooperative Union in Colombo, was organized during the 1940s and continued to work efficiently until the inception in 1954 of the state-owned NMB. The NMB started selling milk in Colombo at prices lower than those of the Cooperative Union, which was run on sound financial principles, and eventually drove the Union out of business in 1958. The dairy cooperative movement resurged in 1979 under the IDA-assisted dairy project (Credit 504-CE). 34. At present, there are 100 milk cooperatives in Sri Lanka, 90 of which are classified as small primary societies and 10 as large primary societies. Cooperatives of the former type cover a relatively small area (generally one village) and their by-laws do not provide for elected branches. Some 50 of these societies, known as Dairy Producers' Associations (DPAs), were organized by the National Livestock Development Board (NLDB) under the first dairy project and are members of the Coconut Triangle Milk Producers' Cooperative Union. The large primary societies, organized by both the NLDB and the Department of Animal Production and Health, have adopted by-laws similar to the existing multipurpose cooperatives and consist of central units with varying numbers of branches which are supervised by elected branch committees. The central units of these societies are frequently located at the headquarters of the assistant government agent, and their executive committees generally consist of four government nominees and five members seLected from among the producers by an electoral college. Four of the ten large primary societies each cover an administrative district. Because of its more centralized nature, distance of the Central Unit from the villages, -ll- and the presence of government nominees on its board, producer influence and cooperative autonomy are limited, and the Large primary society is often viewed as another agency of the Government. The dairy cooperative societies to be formed under the ADB-assisted livestock development project would be of the large primary type. 35. The total membership of the primary milk societies is about 23,000, and since 1979 these societies have averaged about 31 million liters of milk collected annually (about 54 percent of the total milk collected by NMB). Although many of these societies have operated with considerable degree of autonomy and with producer-based participatory management, they have had little or no involvement beyond the village level, that is in milk processing and marketing. Furthermore, while both types of cooperatives offer advantages in terms of economies of scale in milk collection and transport compared to the private collector, both place the producer in a disadvan- tageous position in terms of bargaining for price increases and for the provision of production inputs. As a consequence, producer milk prices are only about 54 percent of retail prices with margins between collection, chilling, transport, and processing being extensive. Likewise, retail price increases have a significant likelihood of not being fully reflected in producer prices but may result instead in increased margins and losses between producer, cooperative, chilling center, processing plant, and consumer. Thus, a reorganization of the existing cooperative system, which would allow producers wider participation and greater control, is needed. The ADB Livestock Development Project 36. The ADB is financing an ongoing livestock development project which proposes, inter alia, to undertake dairy development in six districts of Sri Lanka. Under the project, assistance would be given in the establishment and operation of dairy producer cooperatives. The structure and operation of the cooperatives are expected to be similar to the structure and operation of the Village Milk Producers' Companies (VMPCs) to be established under the proposed project, and would therefore provide a consistent approach to dairy farmer involvement at the village level. Bank Involvement in the Subsector and Project Rationale 37. The Bank's involvement in Sri Lanka's dairy industry began with an Agricultural Sector Mission in 1971. In early 1973, a project was prepared by a Government interagency team with the assistance of the FAOIIBRD Cooperative Program. This multicomponent project--which included credit and technical services for dairy farm development, credit to cooperatives, supply of equipment for expansion of milk collection, and the establishment of demonstration units for calf rearing and for forage production and management-was appraised in mid-1973. Because of slow progress, the project was reformulated in 1978 and emphasis was shifted from providing commercial dairy farms with credit to forming dairy producer associaticn . Subsequently, project progress still remained slow, and in December 1981, after a one year extension, the project closed. Although the project con- tained no provision for monitoring and evaluation, as pointed out in the Pro ect Completion Report, the results obtained indicated that the formation of producer associations, and milk collection through them, had been suffi- ciently successful to demonstrate the validity of this approach to dairy -12- development. Furthermore, it was clear from the outcome of the project that issues pertaining to institutional structure, pricing, and project perfor- mance could not be separated. Consequently, it was agreed that, before further livestock investments were considered, a joint Government-IDA review mission would study the sector. A review mission, which was carried out in November-December 1982, confirmed the potential of the Sri Lankan dairy industry and recommended that substantial institutional changes leading to the privatization of the industry be initiated. PART IV - THE PROJECT 38. The proposed project wab prepared/appraised in October 1983 after the Government had reviewed the sector mission's report. Negotiations were held in Washington, April 22-26, 1985. The Government of Sri Lanka was repre- sented by a delegation led by Mrs. S.L. Kuruppu, Additional Director, External Resources Department, Ministry of Finance and Planning. A staff appraisal report (Report No. 5089-CE) is being distributed separately to the Executive Directors. Special conditions of the loan are listed in Annex III. Project Design 39. If both producers and consumers are to gaijn from a program of dairy development, major institutional and organizational changes must be intro- duced that would increase milk production and promote efficient processing and marketing. The proposed project would therefore put the greatest emphasis on these goals. The proposed project would be nationwide in coverage and the country would be divided into five milksheds for operational convenience. Each milkshed would consist of three to seven districts. 40. To improve the efficiency of milk collection, processing, and marketing, the Government has agreed that it would divest itself of the management of investments in milk processing and marketing. These commercial activities would be carried out by the private sector. If producers are to receive the benefits of higher milk prices, they should be granted greater control over milk processing and marketing and be permitted to enter into partnership with entrepreneurs in building the dairy industry. The project design draws heavily on the experience gained during the last ten years in cooperative dairy development in the region. The proposed project would establish an organizationaL infrastructure patterned after the Indian AMUL (Anand Milk Union Ltd.) model. The various entities created under the project, except for the Village Milk Producers' Associations (VMPAs), would be registered under the Companies Act rather than the Cooperatives Act, which would minimize some of the limitations in the cooperative structure. This arrangement would have the advantage of embodying the most desirable features of smallholder dairy cooperatives while minimizing public sector influence, and it would place each project entity under the same requirements of accountability and operating procedures as any other private sector firm. The proposed institutional changes would ensure that the technical inputs and advisory services necessary for increasing milk output and improving the efficiency of production are provided to producers. They would also allow producers to participate in the profits obtainable in milk processing and marketing and would provide a mechanism by which incentive prices could reach -13- the farmer. Given the substantial institutional and infrastructural development, the project would be implemented over seven years. Project Objectives 41. The primary objectives of the project would be to: (a) create an institutional structure to provide technical support and financing for the long-term development of dairying in Sri Lanka; (b) increase rural employment and incomes; tc) improve efficiency in producing, collecting, chilling, processing, and marketing of milk; td) increase the supplies of domestically produced and hygienically processed fluid milk; (e) provide technical assis- tance and training to support the development of the industry; and (f) strengthen and support the monitoring and evaluation of projects in the livestock subsector. Project Components A. Organization and Management 42. The project would support the establishment of an institutional structure for the dairy industry consisting of The Dairy Development Foundation (DDF), The Milk Industries of Lanka Company (MILCO), five Milkshed Producers' Companies (MPCs), and about 1,950 Village Milk Producers' Companies (VMPCs). Dairy cooperatives, (referred to as Village Milk Producers' Associations CYMPAs)), meeting specific criteria, especially those relating to management practices and financial status, and abiding by the same rules and procedures as the VMPCs, would participate under the project (Schedule 2, draft Loan Agreement). As part of the privatization of the dairy industry in Sri Lanka, the Government would lease NMB's chilling cen- ters and milk plants to MILCO (Sections 4.03(a) and 6.01(f), draft Loan Agreement), and would abolish NiMB by September 30, 1986 (Section 4.03(b), draft Loan Agreement). 43. DDF has been established as a non-profit guarantee-limited company to provide financing for investments in dairying, as well as training, technical assistance, research and development, and management support in organizing and developing the dairy industry. DDF would be the focal point for implementation, and all project funding would flow through it. It would use funds derived from donated commodities, the Netherlands and the Bank to finance investments in dairy production, processing and marketing, and it would also provide or obtain training, technical assistance, management, and research to support the organization and development of the dairy industry. As a non-profit organization, DDF would be exempt from income tax. 44. MILCO would be owned by producers (49 percent) and private investors (51 percent) and its functions would be to: (a) purchase, process and market fluid milk and milk products (it would set the pricing from producer to retail level); (b) reconstitute donated and commercially procured milk products; (c) expand the capacity and continue the modernization of the miLk processing industry; (d) operate existing processing facilities now owned by NMB; and Ce) provide professional management under contract with concerned organizations to undertake the management of dairy processing facilities and any other entities in the dairy industry. -14- 45. Five MPCs have been established to cover all districts of Sri Lanka. These companies would be owned by producers and would: (a) lease from MILCO and manage NMB chilling centers as well as new chilling centers; (b) tran- sport milk from VMPCs and VMPAs to chilling centers or dairy plants; (c) provide technical and extension services to VMPCs and VMPAs; td) train VMPC and VMPA staff and farmers; and (e) invest in MILCO on behalf of their member VMPCs and VMPAs and pass on to them MILCO dividends earned. 46. About 1,950 VMPCs would be established. They would be owned by producers and would: (a) collect, test, and arrange payment for milk from individual producers; (b) provide technical services (artificial insemination and animal first aid care) to their members; (c) disseminate to their members extension information on fodder and dairy production; and (d) invest in MPCs on behalf of their members. The VMPAs would perform the same functions for their members as the VMPCs. B. Technical and Extension Services 47. To increase the productivity of the national herd, the project would provide dairy producers with: (a) artificial insemination services using imported frozen semen; (b) routine and emergency veter-inary services; (c) paraveterinary first aid services; (d) production inputs, such as plant- ing materials, compound cattle feed and minerals; and (e) advisory services on fodder and dairy production. The VMPC and VMPA members would pay for artificial insemination and emergency veterinary services. Individual farmers would expect to benefit from these activities in two important ways. First, more effective services would be available to them at the village level, and second, farmers would have opportunities for training provided through extension services. C. Dairy Processing Plants and Chilling Centers 48. To modernize, expand, and improve the efficiency of milk chilling, processing, and marketing, the project would refurbish the existing Colombo milk plant; construct three new dairy plants at Colombo, Kilinochchi/ Vavuniva, and Ampari; and construct about 10 new chilling centers. Refurbishing of the existing Colombo plant for the reconstitution of donated commodities would be carried out as a part of the Netherlands assistance. To ensure that the designs and layouts of the new pLants and chilling centers are completed in a timely manner, the Government would appoint by December 31, 1985 a dairy plant engineer to work with local staff (Part II, para 2 of the Schedule to the draft Project Agreement). Further, the Government would ensure that acquisition of building sites and the Einal designs for the processing and chilling facilities scheduled for construction in the first two years would be completed by September 30, 1986 (Section 2.07, draft Project Agreement). D. Training and Technical Assistance 49. About 700 staff-months of overseas training and study tours would be provided in addition to the training of local staff at the MPC training centers. The training program would cover Spearhead Teams who would be responsible for organizing VMPCs, trainers for the MPC training centers, study tours of selected milk producers, and fellowships for selected -15- personnel of DDF, MILCO, and MPCs. VMPC and VMPA staff would be trained in artificial insemination, animal first aid, fodder production, milk testing, basic record keeping and accounting at the MPC centers. The centers would also be responsible for the training of project farmers. About 400 staff- months of technical assistance provided under the proposed project would cover management and human resource development, dairy engineering, process- ing and marketing, planning, monitoring and evaluation, farmer organization, livestock and fodder production. The terms of reference for all the techni- cal assistance have been drawn up. E. Monitoring and Evaluation 50. A project monitoring unit would be established within DDF to monitor physical and financial progress of the project. Also, an existing technical monitoring unit within the Ministry of Rural Industrial Development (MRID) would be strengthened to enable it to organize and carry out studies assess- ing the impact of the project on a number of variables, including the impact on small farmers. The MRID unit would prepare annual project evaluation reports as well as the Project Completion Report. Cost Estimates and Financing 51. The total project costs are estimated to be US$111.2 million, includ- ing taxes and duties of about US$4.2 million. The foreign exchange component amounts-to US$48.5 million, which represents 44 per.cent of total project cost. Physical contingencies have been estimated at 5 percent of of base costs, except for vehicles for which no physical contingencies have been provided. Price contingencies have been applied at 8 percent in 1985; 9 in 1986-1988; 7.5 in 1989; and 6 in 1990-1992 for foreign costs. For local costs, rates have been applied at 12 percent in 1985; 11 in 1986; 10 in 1981; 9 in 1988; 7.5 in 1989; and 6 in 1990-1992. 52. Ihe proposed Bank loan of US$38.0 million would finance about 34 percent of total costs, including foreign exchange costs of US$26.9 million (55 percent) and local costs of US$11.1 million (18 percent). The EEC and the WFP would donate cozmuodities the value of which would amount to a total of about US$56.9 million (51 percent of total costs) (Section 6.01(a). draft Loan Agreement). The EEC has indicated that it would be prepared to &onate about 13,000 metric tonnes of skim milk powder and about 6,500 metric tonnes of butter oil over the life of the project, subject to year-to-year reviews of project requirements. The WFP has also indicated that it would be prepared to donate about 13,000 metric tonnes of skim milk powder. Assistance from the Netherlands of about US$7.5 million (7 percent of total costs) would be provided (Section 6.01(b), draft Loan Agreement). Local sources of financing would include a short-term loan from the Government to DDF for about US$0.4 million, on terms and conditions comparable to those extended by DDF to MILCO and related project entities (para. 53); funds from the operations of MILCO and related project entities amounting to about US$5.8 million; and equity investments of about US$2.6 million. 53. The Government would be the Borrower of the Bank loan and would execute a Subsidiary Loan Agreement with DDF under which it would onlend Bank funds to DDF at a variable interest rate coinciding with the Bank's rate, to be repaid over 15 years, including 5 years of grace. The Borrower would bear -16- the foreign exchange risk and charge the DDF a guarantee fee of 2 percentage points. Execution of a Subsidiary Loan Agreement between the Government and DDF on terms and conditions satisfactory to the Bank would be a condition of effectiveness (Section 6.01(c), draft Loan Agreement). 'aDF would enter into Participation Agreements with MILCO, MPCs, and VMPCs and VMPAs providing for relending part cf the funds onlent to DDF by the Government, along with other arrangements for project execution. Execution of the Participation Agreements between DDF and MILCO, and between DDF and the MPCs would be a condition of effectiveness of the proposed loan (Section 6.01(d), draft Loan Agreement). Sale proceeds of the commodity aid would also be lent by DDF to the other project entities on the same terms as the onlending terms of the Bank loan. DDF would extend both long-term and short-term loans to MILCO, MPCs, and VMPCs and VMPAs at interest rates ranging from 14 percent per annum (long-term loans) to 16 percent per annum (short-term loans). Onlending rates of DDF would be reviewed semiannually by the Government and DDF to ensure that they remain positive in real terms (Schedule 5, Part II(b), draft Loan Agreement). Procurement 54. Proposed procurement arrangements are: Procurement Method Total Project Component ICB LCB Other N.A. Cost - ---(Us$ Million)-- Land 1.0 1.0 Civil Works 14.7 14.7 (10.3) (10.3) Machinery, Equipment, 16.8 23.1 3.0 42.9 Vehicles and Materials (13.4) (0.5) (13.9) Consultant Services, Training, 9.5 9.5 Fellowships and Study Tours (2.5) (2.5) Organization and Management 27.5 27.5 and Recurrent Cost (1.3) (1.3) Working Capital 5.6 5.6 Financing Charges 10.0 10.0 _____ _____ ___ (10.0) (10.0) Total Project Costs 16.8 37.8 13.5 43.1 111.2 (IBRD Financing) (13.4) (10.8) (2.5) (11.3) (38.0) Note: Figures in parentheses are amounts to be financed from the IBRD loan. -17- 55. Goods and services financed by the Bank would be procured by DDF. The land for the construction of the dairy plants and chilling centers would be procured in accordance with established government procedures acceptable to the Bank. Civil works contracts (US$14.7 million) would be small and dispersed in time and place. Thus, they would be unsuitable for ICB and would be contracted through local competitive bidding under procedures acceptable to the Bank. Machinery, equipment, vehicles and materials (US$16.8 million) would be procured in bulk by ICB in accordance with Bank guidelines. Minor equipment (US$0.5 million) costing less than US$15,000 per contract that could not be suitably packaged for ICB, or that would be required urgently for project implementation, would be procured after solicitation of quotations from at least three independent suppliers in accordance with procedures satisfactory to the Bank. Bids for imported frozen semen (US$6.0 million) would be sought from at least three suppliers (to be selected in agreement with the Bank). Consultants (US$4.2 million) would be hired in accordance with Bank guidelines. Machinery, equipment and materials supported by aid from the Netherlands would be procured according to their procedures. Bids for civil works contracts costing more than US$185,000 equivalent and equipment contracts exceeding US$50,000 would be subject to prior Bank review. Other contracts would be subject to selective post-award review. Disbursements 56. Disbursement: under the loan would cover: Ca) civil works-90 percent; (b) equipsent, vehicles and materials (including frozen semen)-100 percent of foreip-. expenditures, 100 percent of local expenditures (ex- factory), and 6', percent of local expenditures for other items procured locally; (c) cinsultant services, training, and fellowships and study tours- 100 percent; and (d) incremental staff salaries and operating costs on a declining basis: 95 percent in FY1986 and FY1987, 80 percent in FY88. Disbursements for small civil works contracts (that is, less than SL Rs 500,000) and for items under (d) above would be made against statements of expenditure certified by the chief executive of the executing entity concerned. Documentation supporting the statements would be retained in the reler.vat project office and made available for review by Bank staff on requsest. All documents supporting statements of expenditure would be audited annually by independent auditors acceptable to the Bank. Disbursements for civil works contracts for SL Rs 500,000 or more and for items under (b) and (c) above would be documented in accordance with the Bank's standard requirements. Approximately 80 percent of total project expenditures are expected to be incurred by year 1990. In the later years, after Bank funds have been utilized, the Government would permit DDF to purchase foreign exchange for the purpose of financing project activities. Disbursements of the Bank loan are expected to be completed by December 31, 1991. Project Preparation Facility 57. The Bank and the Government have agreed upon an advance of US$600,000 through the Project Preparation Facility (PPF) for recruiting and training key staff, establishing pilot milk producer companies, obtaining technical assistance, and undertaking key organizational activities. Disbursements From the advance would cover: (a) 100 percent of expenditures for technical a3sistance and training; (b) 100 percent of foreign expenditures for directly -18- imported equipment, chemicals, and vehicles, 100 percent of local expendi- tures (ex-factory) for locally manufactured items, and 65 percent of local expenditures for locally procured items; and (c) 95 percent of expenditures for DDF and MILCO staff salaries and other operating costs. Advances drawn from the PPF, with the service charges accrued thereon, would be repaid out of the proceeds of the loan as soon as it is declared effective (Section 2.02(d), draft Loan Agreement). Project Special Account ,-_ To ensure that adequate funds are available for the prefinancing of small contracts and other project expenditures and to facilitate the project's timely implementation, a Project Special Account in US dollars would be established in the Central Bank of Ceylon and operated under proce- dures acceptable to the Bank. Only the Bank's share of project costs would be deposited into and disbursed out of the account. The account would be operated by the Chief Executive of DDF, or his designate. The initial deposit made by the Bank into the Project Special Account would be US$1.0 million, equivalent to about four months expenditure (Section 2.02(b), draft Loan Agreement). Preinvestment Activities 59. To ensure more rapid implementation of the project, the Government has initiated a number of activities. Some activities have already been completed. These are: (a) establishment of an Interministry Action Committee chaired by the Minister of Rural Industrial Development and includ- ing representatives of the Ministries of Trade and Shipping, and Finance and Planning; (b) registration, under the Companies Act, of DDF, MILCO, and the MPCs, and the appointment, by Government, of the initial chairmen and boards of directors of DDF, MILCO and MPCs; and (c) plans for initial staffing of DDF, MILCO and MPCSs. Activities underway include: (a) recruitment of the first 50 Spearhead Team members and about 15 trainers; (b) market survey to assist in detailing the product mix of the milk processing plants; and (c) initiation of work on the refurbishment of the Colombo Milk Plant. Interministerial Coordination 60. A Steering Committee, with terms of reference and composition satisfactory to the Bank (Section 4.01(a), draft Loan Agreement), would be established to coordinate interministerial activities and policies and serve as a decision-making body on policy matters affecting the dairy industry. The Committee, chaired by the Minister of Rural Industrial Development, would formulate and recommend to the Cabinet, through the appropriate Ministry, policies and directives for Sri Lanka's dairy development. Marketing, Prices, Subsidies, and Tariffs 61. Domestic milk production would not be sufficient to meet demand. Although milk production under the proposed project would increase by about 100,000 lpd by 1991 and 200,000 lpd by 1994, imports of dairy products are not expected to decrease during the project period and may, in fact, increase somewhat. The main marketing strategy of the proposed project would be to increase consumption of fluid milk in both urban and rural markets. -19- Pasteurized milk would be distributed in the larger urban markets closer to the dairy processing plants, while long-life milk would be supplied to more distant markets. The existing private distribution system would be used to retail project milk and milk products. 62. Under the project, MILCO would be granted autonomy to set prices of its milk products from the producer to the retail level (Section 4.04, draft Loan Agreement). 63. The proposed project would promote the development of a more efficient dairy industry through the introduction of major institutional and organizational changes. However, improved efficiency in the production, collection, processing and marketing of milk would not be apparent until these changes are in place and the industry is adequately staffed with trained personnel. The dairy industry in Sri Lanka would, therefore, con- tinue to need some protection from imports during the life of the project. The price of dairy imports would determine the upper limits within which MILCO would be able to set retail prices of milk and milk products. Producer prices would be determined by deducting from the retail price the marginal costs of marketing, processing, collecting and transporting. 64. The level of tariffs on imported dairy products would need to be set in the light of actual trends in international prices. At the present time, world prices of milk products (US$650, US$950 and US$1,475 per metric ton for skim milk powderr whole milk powder and butteroil respectively) are at or near the GATT minimum prices, below which dumping is deemed to occur. The Steering Committee would conduct periodic reviews of costs and prices related to domestically produced and imported milk and make recommendations to Government on tariff policy (Section 4.01(b), draft Loan Agreement). 65. The Government is committed to removing the existing subsidy to NMB. It has therefore agreed that as a condition of loan effectiveness the exist- ing subsidy of SL Re 0.50 per liter on fluid milk would be removed (Sections 4.05(a) and 6.01(g), draft Loan Agreement). Furthermore, it has agreed that the present subsidy of SL Re 1.00 per liter on milk used for the local manufacture of whole milk powder would be phased out by December 31, 1987 (Section 4.05(b), draft Loan Agreement). At this stage, it is not possible to say whether elimination of these subsidies can be eventually absorbed by the processing industry through improved efficiency and reduced costs, or whether there would have to be some combination of higher consumer prices and lower producer prices. It is expected, however, that the SL Re 0.50 subsidy would be passed entirely to the consumer initially, raising the retail price of fluid milk to SL Rs 8.50 per liter. Under the proposed project, MILCO would take over the operation of NNB's existing milk powder factory and, through diversification into more profitable products, eliminate the basis of the subsidy on fluid milk processed locally into powder. Financial Viability of Project Entities 66. DDF's main operational concern would be to ensure that sufficient funds were available to provide the necessary inputs to project operating units during implementation. Detailed financial projections indicate that net fund flows for DDF would be adequate. From 1989 on, DDF would generate sufficient internal cash flow to cover operational requirements and could -20- begin retiring its debt. While DDF's cumulative profits are not positive, its cumulative cash flow is and it would have sufficient assets to retire its remaining debt. 67. Detailed financial projections indicate that MILCO would be a viabie and profitable operation from its incorporation at existing levels of protection. Sales revenues are projected to increase from a level of about SL Rs 800 million in 1986 to upwards of SL Rs 4,400 million by 1995. Profitability is relatively consistent over the period, with gross profit averaging 11 percent of sales and net profit after tax about 3 percent. Net cash flows are positive for all years, and after dividend payments and including allowances for working capital would accumulate to about SL Rs 900 million by 1995. The financial rate of return is estimated at 26 percent. Over this period, MILCO's total assets would increase to SL Rs 1,326 million and owner's equity to SL Rs 902 million in current terms. 68. A consolidated income statement for the five MPCs indicates that estimated revenue would provide sufficient funds to cover operating costs. Consolidated revenue is expected to increase from SL Rs 96 million in 1986 to about SL Rs 600 million in 1995. Cash flow from operations is expected to accumulate to SL Rs 150 million over the first ten years. 69. Significant growth of the VMPCs is projected, with sales revenue in current prices increasing-from about S. Rs 89 million in 1986 to SL-Rs 1,518 million in 1992. Net cash flow is expected to be positive for all VMPCs from 1986 onward. Total net cash flow is expected to total SL Rs 1.6 million in 1986 and to reach SL Rs 28.5 million by 1992. Benefits and Risks 70. Benefits. The main institutional and organizational changes brought about by the project would (a) help ensure that the technical inputs neces- sary for increasing milk output and improving the efficiency of production are provided; (b) allow producers to participate in the profits obtainable in milk processing and marketing through shareholdings in MILCO; (c) provide a mechanism by which incentive prices can reach the farmer; and (d) help ensure that consumers have increasei access to high-quality milk and milk products at fair prices. 71. Milk production is projected to increase by 4 percent annually by 1992. Incremental milk production would result from increases in milk yield as a result of improved feeding and management and the partial conversion of the herd from low-yielding indigenous animals to higher yielding crossbreds, and modest growth of the national herd due to increased calving rates and reduced mortalities. The technical and extension services (para. 47) provided to VYPCs and VI4PAs under the project would contribute to increased milk production. 72. Incremental on-farm employment generated during the first seven years of the project is estimated at 25,000 person years distributed among about 180,000 households. The producers' share of consumer payments for processed milk (now about 54 percent) is expected to reach 60 percent under the project thr3ugh more efficient collecting, processing, and marketing of milk. The shiEt to a vertically integrated organizational structure with producer -21- ownership in the collecting, processing, and marketing entities would ensure that benefits from increased efficiency in milk processing and ma:keting are passed on to the farmers. In terms of gross income, project participants in 1992 would receive an estimated SL Rs 750 million (US$30 million) from the sale of milk. This is expected to yield an increase in net income of about SL Rs 265 million, or SL Rs :.470 per household. The overall economic rate of return is about 23 percent. 73. As cattle are more evenly distributed than land, the incremental income from milk production among rural households would tend to be more evenly distributed than in land-based development projects. Furthermore, since dairying is expected to expand into the Dry Zone (where incomes and opportunities for alternative productive activities are particularly low), regional distribution of income should also improve. 74. Risks. The proposed project would require substantial institutional changes and, like all such projects, would have inherent risks. Change, while welcomed by many, is resisted by those with vested interests in the status quo, despite the inefficiencies and costs this imposes. The Government realizes that such inefficiencies must be alleviated through rather drastic change. Further, registration of DDF, MILCO and the MPCs within a relatively short time also reflects Government's commitment to privatization of the dairy industry and the interest of the private sector in dairy development. The success of-the project would also depend on ensuring- - that tha project entities are managed by qualified personnel. The institu- tions established in the private sector under the project should be able to attract and hold highly qualified management staff available in Sri Lanka. 75. The project carries a financial risk. Monetized donated commodities are expected to finance about 50 percent of total project costs. Both the EEC and WFP have indicated an interest in supporting the project through the provisiin of dairy commodities, and it is expected that such support would be provided throughout the project implementation period. 76. There is a risk in the degree of farmers' response to the project, since they may be reluctant to accept the new village companies. The MPCs' Spearhead Teams will be formed and trained under the project to minimize this risk. PART V - LEGAr. INSTRUHE.7rS AND AUTHORITY 77. The draft Loan Agreement between the Democratic Socialist Republic of Sri Lanka and the Bank, and the report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank are being distributed to the Executive Directors separately. 78. Special conditions of the proposed loan are listed in Section III of Annex III. Additional conditions of effectiveness include arrangements for commodity aid from the EEC and the WFP; effectiveness of cofinancing agreement with the Netherlands; execution of the Subsidiary Loan and Participation Agreements; signed lease agreement between NMB and NILCO and abolition of SL Re 0.50 subsidy. Other conditions include appointment of dairy engineering consultant by December 31, 1985; and completion of the -22- final designs and the acquisition of land for four chilling centers and the new Colombo plant by September 30, 1986. 79. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 80. I recommend that the Executive Directors approve the proposed loan. A.W. Clausen President Attachments Washington, D.C. May 22, 1985 -23- wANN I TABtE S3 Page 1 of 5 QRI LANKA - SOUCK IIDICATOM RIA SEK SRl LANlKA WKRUU GROUPS IMECCD YUfBJ Hst D URST E-Z uma) A MM CHbI UWC DE"A Z MaLb 1970L tSjj~ ASA & PAUP ASI & PACIC _ ~ ~ ~ ~ ~ 90k i,o nL ai.aNWa tmf AMUN Ci00SNDa So a) TOTAL 65.6 45.6 5.6. AGRICULTURAL 17.2 24.2 26.0 Cy PM CAPU Co") 60.0 I10. 320.0 278.6 1091.2 Rom OMartONs sKcan CRILOQAs or o. OIL vquuval) 122.0 152.0 123.0 272.0 567.3 VOAOfA nL S _IZC POPULATION.MID-MR, CYNOUSAJUS) 9359.0 12314.0 15149.0 UNmAm POPULATIN (2 Or TOAL) 17.9 21.9 24.4 21.7 34.7 POPUIATION PRDJXCIOIS TOPUAIONI IN US 200 CMILL) 21.1 -STAOA POIWLI (Nu) 32.5 POPULATION NU tEi I.6 PER SQ. 1D. 1507 190;8 2Z8.0 166.6 261.9 PU SQ. L AU;Il LAW 573.9 517.6 57646 345.5 1735.1 POPMLATION ACE SXUCtUE (Z) 0-14 US 42.1 41.9 35.2 35.0 39.0 15-4 YES 54.3 54.5 60.8 59.8 57.6 65 AM AROE 3.6 3.6 4.3 4.3 3.3 POPMJTIO1 RM RAtE CZ) TOTAL 2.5 2.4 1.6 1.9 2.3 UnM 4.7 4.3 2.5 4.1 4.3 CRME SI RATE (PU TMMS) 35.7 29.4 26.5 27.7 30.1 CIURD DEATH RATE (t TBDS) 9.2 7.5 6.0 10.1 9.5 GROSS WRISClTION RATE 1.6 LZ 1.7 1.8 2.0 FARMIY PLANNIN -- ACCErORS. AUNUI (THOU) . 55.3 100.5 -i-rH (2 or RIED waS) . 55.0 57 INDX OF FOOD PRD. PUR CAPITA (1969-71-100) 93.0 103.0 154.0 112.8 t23.0 PU CAPTA SUPLX oF CALORIES CZ or REgITCNTS) 102.0 108.0 lWO 97.7 114.4 PRUIEDS (CRcS PU DMY) 46.0 47.0 43.0 54.6 17.0 OF WHICH ANIMAL AN E 1P0 12.9 t.0 14.9 14.1 ClM.D (ACAS 1-4) DEM AE 7.1 5.1 2.9 9.8 7.2 LIF rXECr. AT DIXIR (TEARS) 62.0 63.6 56.9 60.0 60.4 INFANrT PKIT. RATZ (C OS) 70.6 56.5 32.0 8J 66.3 ACCESS TO SAFE WAMt (flOP) TOaL *- 21.0 20.0 /d 32.9 37.0 on" .. 46.0 45.0 7i 70.9 54.6 RURAL .. 14.0 13.0r7d 22.1 26.4 ACCESS TO !flEZA DISPOSAL Z OP POPULATINm) TOAL .. S4.0 59.0 /. 1.1 41.3 son 7640 U.O7 7L8 47.4 LR .. 61.0 55.0 4.G 33.3 POPULATION PU IMSICIA 4490.0 950.0 7170.0 3U4 .2 7749.4 OP. P SICN PERSON 4170.0 /f 2260.0 130.0 4793.1 2460.4 POP. PU IOSPIAL BID TOZIAL 320.0 33L0 310.0 A 1066.5 1014.2 URBAN 120.0 f 210.0 240 id 2960 651.2 RAL z1060.o 7 570.0 550.0 593.4 2594.6 A 1WM PUR HOSPTAL HO . 54.4 ,, ,, 27.0 LYRRUS SZE or HOUSEHOLD TOTAL 5.4 5.8. 6.37i 6.3 RUAL 5.2A 5.- ALISa NO OF PRSOUS/ROON TOTAL 2.0 A 2.5 DaN 2.1 A 2.7 LUNA. 12.0 f 2.5 ACCESS TO EXLCT. (X aF OWELl3S) TOTL 7.5 1 9.0 D~lREAD 35.9 A 34.. -aL 2.3 3.0 -24- ADJUSTED ZNI.OUNENT BATIOB~~~ANEX HAIR 100.0 104.0 104.0TAZ 110.5105. 90.0 94.0 100.0 83.7 93.2~~~Pae 0 *sx~~~~~~~~~~a li lm PC SEMAKTIT TOTML 17.0 99.0 103.0 97.9 102.0 ILUZ 100.0 104.0 106.0 ILO.5 105.9 rnmLA 9O.0 94.0 100.0 83.7 98.2 SEOD:OYS TOTAL 27.0 47.0 51.0 33.9 46.0 HALE 38.0 46.0 49.0 ".6 4. 7 pUZw 16.0 48.0 54.0 26.8 43.1 VOCAT1OAL (0 orCOUDAYT) O- 0.4 0.4 jd 2.2 17.5 PUPIL-ThWC BATEC PIRIA 31.0 .. 32.0 3L5 31.8 SECOA .. .. .. 15.7 23.5 ADUL LITfLCT BZA (2) 75.0 /f 77.6 86.0 53.4 72.9 PASSCE CARS/u1oSAD POP 8.4 7.0 7.3 /I 0.9 10.1 RADID pEEIopSIUSUD POP - 35.8 * 39.9 98.7 112.1 113.6 TV RECE SITUSAD POP .. .. L4 15.7 50.1 UN.APYZ ("DAY GEEMAL MIERBES`) CICUATIO m PERTHUSAJ POPULATION 36.0 48.9 .. 16.2 53.9 CINiA ANNUAL ATXENDANCE/CPFA 2.9 LI 7.8 4.9 LI 3.6 - 3.4 TOL LABOR FORC (TWOUS) 3391.0 4188.0 5771.0 FrEALe (PERET) 22.6 23.7 24.9 33.3 33.5 AGRICULTRE (PERCENT) 56.0 55.0 54.0 69.6 52.2 XNDUSrY CPEJITp) 14.0 14.0 14.0 15.8 17.9 PARTXCIPATXON RATE (PECENT) TOTAL 34.3 33.5 3B.0 42.6 38.7 NALR 50.8 49.1 53.0 54.7 50.9 FEAL 16.2 16.5 21.0 29.8 26.6 cnuaKIC DEPENDECY RjxM 1.3 1.4 1.0 LO 1.1 IXNCOK osmxutxm P_n,CENr OF PRIVAZ XNC! RECEIVED BY HIGHEST 52 OF HOUSEHOLDS 26.4 /b 18.2 .. .. 22.2 HICHEr 20S OF HONSEHOLDS 52.1 7Th 43.4 .. .. 48.O LOVEST 2S OF HOUSEHOLDS 4.5 Z 7.5 .. ..4 LOVES 402 OF HOUISEHOLDS ! 7 19.2 . . _.5 ESYIMAZED ABSOLUIE PriVERTT INCC-'. LEL (USS PER CAPITA) URBAN .. .. .. 133.9 188.6 RURAL .. .. .. 111.6 152.0 ESTIBAMED EULfrg= POVERTT INCOME LEVE (US$ PMR CAPIMA) URBAN .. .. .. .. ~~~~~~~~~~~~177.9 DURAL .. .. .. .. 164.6 ESTUATED POP. Ui AL POVERTY INcOI lEVEL (Z) uAN .. .. .. 43. 23.4 RUAL .. .. .. 51.7 37.7 NOT AVALARZ NOT APPLICABLE nur c ~ ~ ~ ~ NOE /b&gre Sup averaes for eah 1nd1"tor are papulaet1ou-uShtbd aritmetic _mm. C.veage of countrtes amog the indiators depends an avlablity of data and la not unhfam. /b Utl_ otbeahrd noted, "hta for 1960" refer to ay year between 1959 and 1961 "Do for 1970" between 1969 and 1971; a data for 'Mat Scat Eatlace" between 1980 and 1982. /e 1977; /d 1976; f 1975; /f 1962; 1 1979; A 1963; /. 1978; /j 1958. lE. 1984 - ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ -5 -s25ess MANEX I mttE|enot umeePage 3 of 5 bass St ela asm em tvr teeU swim ineeclt jeip P t MO IV dcUeleteeK it alah OIt hlt sAs he. wee aleS Slav aO M.as Nhe ISe SII VsWih , s.. i e ra., _aa RAW&. en jesa I Wtesar it hes. _s*s_W le. 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Ross patas " e s. swe tlle pe n,cFser nr H _ d 5 rle r _r uAs t a n. _al me7s iAgeud _- tlstw a pesiatp. ketl l Dedw _st_* a Va.. VNIeale rele reta hi erectly iM Aemewlm 51 5km Peeetd,ele tamie --wete tIre -- - a harsh teeea ish weLse,' pegAiistctliyse,lttise eeLst,eEwn pets. I I- perias tel iel.lisy ass eta he... ie e ci _instlree as awl iaL e gmpse . 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I- m eis "Al Pol x,IFr sM_ t7 Iil l. ttl; __ L.- state Uw t sat_s_ telst ke mesa slay. To. emsaily t._i_. e. n 5 etali Be a y- * t sc gate ii an eesit-semO S s eAl t an-.uta setlt es cm aetest_ Ic ._ pse1- t_ ' e C _ ls... meet t _a at. ___ _ ______ ___ ___ = _n * __ _- tact smt _sats 55 _ _ =jenei. 1-Stee, a W _a by r a 5 a_1 . _. a ". - edgpt s ttre - nt-Ud - i .asr eepdils tcsste. 'tU , t'taetnc s e.t ins. e . (this at seal st es - Mo C99 -e I_} d- U_- _l.1 A t.M., M t-l _4 ,w_ _fgd tre stlse la._s_s sEt_i_i_S st_ e_se - _ipet a . n ob . ts t _ ie rallet ie_te _ _ css cl _ t. Lo_ _-6., _ .76-fi s w ,|. n _-== *~~~~~~!M _ - fte_r S- -_o ef SU b- P. . f _ ' We"_B f Xd _f _ ___ __t __- t sti ti - _ga (c-l LeLtp aewis'It.' ___ _ a_ r _a vseetaslse ieee. Stwig, a s tse.L M. seesSe tm te e r ft pseyt: s."les 5. _ba. "W - - Ae-t Cu - e ac -t t ases l i t f resins.. ESs h.& (pems - wes - es e rmlb-- gal sfsi se-eme atsssi pstl peg si.aeas 5psTV i- - Mllee pse se Iss-aC the-v . ita a. _t- e at_sme t igelm _c eawi - a _ e_ t isl gnt eeeejgsie4 - _Ws lis bleas pe _e dli _ m sese mz Re cttei in-. in a ps . msh ssl _,c a i_eebs wee sateS .1 i-~eee asseaesi tes- g eseshi h-_is -lc.C -- P-_ I tb 7- t-I - t'_ 1- &"D ._t. _t .-Lessm -Y iey I_ = _ . 'X sn..flSaha-*~.ec ame teat.... cttt her s is nets. d.tejee.-. Wh qAseefi s 9Sw sew em Beets kg -ee _ps_trl pst i f t_ n sh e qeiA - wr wrst s C._b.e tr U- _Iss ans 1yees _ t _eatc _ e s_ti _ s-i wesee tales: as_ ass7.. _twa, a aeaiai as t-. ml taem i.its w al vent FIetsta - asies asst _-ig.es*s s- nes at cD sgee ad h-tf'It II ca aIe tin .:e tt _ 1-I ci Slsksee J_etis ae empe. tir ess. 15517 ,ter _ Im _su ssee me beee 5w_ Ye _ se pite. _sac_ bits _5k pinlt. _g.ts tie.. * *e =. - s Peels' .ttse _ tees i_ss a?_ s_t mit - _gsaee sut0sbi act. . _ _ahf N ' t _d- s _ s. em psttsts- eae Wsehe ,as piseisrlee _ meesslis os sit _et ass. _*5st 55tE _1 _-.e _ _-e --_*.I Ae. II t4e 18 Aeer -Likta Acemesai amb c a- ae . elshsfl tee tessssel ilspecs ses tagpse rt isr _e s "- ete_ c tines lS I ............s... sn. as.. s ailsr_ ermuser leec-ovel- -W L. -a- e. c t te. fs Bet iane estarR_ e_t es - 45ce- Leabice VAN, tea as ins _s _. iatl pals as s tesi _ tt elt eTwt . -h e-e 6 es. i i t-est t*t _t Be _ e_s *_a heels. _d e igg ptsvy ie .(eg._ U es wie - islt lake ffe.. B. t l- na 15 sees- lem eDge!, sta as- siUtbt s-s - sacte mit (e..S. JSf.fryffP--.. - taete Is sleas cIsIgaa. - inir t st we emlt s tt-.In ss. Pitat e as e BAY. _ed ses 5 psimef teat laWe fleai ta es _gul. ag gin pets ete_tel telst-i. h _e. aes a 1 i*s. __lt. 1e .Sl s em en-wetr eta. Vts n__ S ga aceat fsel sea 5 seabg)-cees ema yil mtaet-ta. i,aemeahstr.a musete 51 as t_r sw s -_tB a_ n sep1r pe Ir ste" a-c_ tR-t p wt _ .1_ a rr_Ptlel-pT i.w es_alt antIs anets a. e pedltls, ma le sne. tei. - 5ise. *1a l s a we Ras pen1tePals gw- qasetta IaiB tea oee UKet i. asi A ses _te tit_g li -. D r _ 1tr- i _t ies ee f m g.I as si reSd by f-i PSI kest " 1- m i Asesseteat matect- sta lete _ t- kits ata i e - - austeRe, as leAsh metteras .eigmesiti ansaita. heip elatet. iheatbseMpseitsls (_see ci - 354. e seE - ilsltas cipswelseia aS sileeg 50 --5 inE- i a tboeebi teats f9it-i. 0s tE t_ ef a ; eree kg .1 _iet -. se-tCtle by am W-Lt ce s e ! arm t e_ra . t. a " we sm t 2s 0 1 sl- -a p ete _rese. e iat t g- aat h. _ase pitis-. _he - 3- ab- := .9 71 ~~~ .9 -I. "-" -4 2 a- s---F ppian.- as .a etP--t le-2..a Msdss eieas _1m s ekes 51 Plasm. _ s t stE t tip I lu. re V- _u_t _Wy gm-". IVD &no.- _ Ir n~ R ._1j _1't 12M=WY191 2.L ieb _M M= met nt et ys ectfl.tar astes b.. [m IV es ue-as 1 ,hesteroetesr ises taes lstz me-I-ds -"set a- neal gg bates aee r is g so . e t t sS icelet ii. tase aswItsBeAce) A.eg l tilt-iV.,sr e swielyaeneEs vies nact a-ta ftegee- Be as OMr(te_ i-A teoestese C- aLtesst-1 iesa. teels peS srtma W-rtae" la t.. .. . on e.- temJt (selet-4 ft- as. ee5- c s.t us.a etseB bee eigteAt veal4 te-tegie hetmcleperyieta B e e ealsise sgs igs tlft-d -rebic ess tenet sesC e ssetim tanne.at Igil nes g sd "O DMOM ION. 91 dbs c-a S ts Be Bt l..FP2bnbr st - t1 ta. l (e_e. - s" ,ts I ydet -,a -gM is) - Cltasre sAle" Oeteeaslies e"KW e. - sgs swessi eb evet se ia toobl,elie)ts ni a te-intier pse. e.2-- ' Z fat- kerel . bee (see Iheec ,t.-.... icehe .1 se te m ,, c I S Ma h te ipee I_B cm ,id e. tei C hft bittd n si :aet7 a -:asse tsm.drt sas?wIlse) C ddpsfeesetes S that-3 t dit evett" lss ie Is %Fn kqeee isg-e sO- sets ts,st. e at reset-1 -26- Annex I Page 4 of 5 SRI LANKA - ECONOMIC INDICATORS OUTPUT IN 1984 BY SECTOR ANNUAL RATE OF GRO1WTH {Z, constant prices) Value Added $ million z 1970-77 1977-84 1970-84 Agriculture 1,519 28.0 2.0 4.0 3.0 Industry a/ 1,347 24.8 2.1 5.3 3.9 Services 2.566 47.2 3.7 7.1 5.4 Total b 5,432 100.0 2.9 5.7 4.4 GROSS DOMESTIC PRODUCT IN 1984 US$ Million Z GDP at Market Prices 6,012 100.0 Investment 1,567 26.1 Gross National Savings 1,347 22.4 Current Alccount Deficit' 220 3.7 Exports of Goods and NFS 1,755 29.2 Imports of Goods and NFS 2,121 35.3 GOVERINENT FINAFCE Central Government (Rs million) Z of GDP at Market Prices 1984 1975 1983 1984 Current Receipts &/ 33,342 17.2 18.9 21.8 Current Expenditures / 27,795 18.3 18.6 18.2 Current Surplus 5,547 -1.1 0.3 3.6 Capital Expenditures e/ 21,105 7.3 13.7 13.8 External Assistance 12,934 3.2 8.0 8.5 a/ Manufacturing, mining, and construction. bl GDP at factor cost. cj Includes capital revenue. A/ Includes advance accounts. e/ Includes net lending. South Asia Programs Department May 14, 1985 -27- Pala of 5 MOUnT. ClUD!?. hUD lUCXE 1970 1972 1111 1111 m5aS JULA 19U2 JIl JIM. (eDd of period) (Rs million) Money and Quasi Money 3,115 .8,717 10,892 15,055 19,60 24,447 30,510 37,257. 43.427 Bank Credit to Public Sector 2,B56 4,659 4,226 6,267 13,0f5 17,277 21,S28 21,91S 18,703 Bank Credit to Privaet Sector 1.320 4,116 6,449 8,705 12,709 16.690 20,570 27,375 31,224 CI'ercntages or Index Numbers) kmony atA Quasi Money am 2 of CDP 22.8 23.9 25.5 28.7 29.9 2S.8 30.5 30.6 28.4 C-enral Yrice Index (1970-100) 100.0 147.0 164.5 18.6 230.2 271.6 301.1 343.3 400.5 Annual Percentage Cbaeg.. In: General Prie Index +5.9 +1.2 +12.1 .10.8 +26.1 418.0 .10.8 +14.0 +16.7 Bank Credit to Public Sector +10.4 +7.7 -9.3 448.3 +109.0 431.9 +26.3 40.4 -14.7 lank Credit to Private Sector +8.6 440.5 +56.7 +35.0 446.0 +31.3 +23.2 +33.1 14.1 RALARC 07 ?PADUTE MUCUUDISI ZPORT8 (1984) 1982 1983 J2IM JSlNiWn CUSS M{illion) Tea 620 42.0 Exports of Goods, Ws 1.305 1,360 1,755 Rubber 130 8.8 Deort. of Goods, Ws 2,205 2,138 2,121 Coconut Pr)ducta 60 4.1 Resource Cap (deficit - -) -900 -778 -366 All Other Commdities 665 45.1 Not rector Income -98 -138 -131 TOTAL 1,475 100.0 Not Transfers & Ramittanee 264 274 277 Balance on Current Account > -734 -64Z -220 - XX~~~~~~~EIDRi. DOI (S Million) jI Direct Foreign Inyentsent 63 37 36 Not MALT lono 403 292 311 December December Disbursements 472 373 410 _983 .9.. Auortizatiou 69 1 99 Capital Grants 162 171 154 Total Out.tandiag 3,678 3.738 Other capital (net) 79 143 24 Chang- in Aee .:e_ : eace; -27 *1 305 Total Outstanding and Disbursed 2.214 2,420 Groca I.j t, ten. -_*.: .*e .--, Up. ,:^ -. :; *rcde EL .u ndn.tx u* - . :. DZIT SUVICIU ATiCO II (S) 17.7 14.2 npaor:. 590 60 Txcoor- .1 ITh/DU LlIDIN. Marcb 31. 1985 (USS Million) .'at OF amaCII P- End 1979 ZALd 1982 US$1.00 - Rs 15.45 USS1.00 - Rs 21.32 Ogtstcndiug and Diabtreed 53.9 329.2 Ra 1.00 - 1S$ 0.06 PA 1.00 JS 0.05 UOdiubursed 14 287.0 t1940 ad 1943 Outetandiung including US$l.OO - Rs 18.00 US$1.00 - Rs 25.00 Undisbured 64.3 616.2 Rs 1.I0 - 19$ 0.06 3. 1.00 - 1SS 0.04 flId 1941 d 1981 US$1.00 - Rs 20.55 USS1.00 - 11a 26.28 Rs 1.00 - 'S$ 0.05 R 1.00 - uS9 0.04 x/ Rayable in foreign currencies end with a aturity over one year. i Ratio of debt service on public end publicly guarnated KLT debt (including fw charges and repurchsee) to exports of goode ad services. South Asia Programe Department May 14, 1985 -28- A II Page 1 of 2 THE STATUS OF BANK GROUP OPERATIONS IN SRI LANKA A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of March 31, 1985) US$ Million Loan or Amount Credit (net of cancellations) No. Year Borrower Purpose Bank IDA Undisbursed Eight loans and thirteen credits fully disbursed 72.9 96.1 701 1977 Sri lanka Mahaweli Ganga Development II 19.0 9.2 818 1978 Sri Lanka Tree Crop Rehabilitation (Tea) 21.0 9.3 891 1979 Sri Lanka Kurunegala Rural Development 20.0 8.9 900 1979 Sri Lanka Road Maintenance 16.5 6.3 931 1979 Sri Lanka Agricultural'Extension and Adaptive Research 15.5 10.6 942 1979 Sri Lanka Small and Medium Industries 16.0 2.9 979 1980 Sri Lanka Mahaweli Ganga Technical Assistance 3.0 1.4 994 1980 Sri Lanka Road Passenger Transport 53.0 17.4 1017 1980 Sri Lanka Smallholder Rubber Rehabilitation 16.0 12.1 1020 1980 Sri Lanka Telecommunications 30.0 4.9 1041 1980 Sri Lanka Second Vater Supply 30.0 17.2 1048 1980 Sri Lanka Sixth Power 19.5 10.0 1079-/a 1981 Sri Lanka SecoudRural Development 33.5 15.4 1130 /a 1981 Sri Lanka Construction Industry 13.5 4.8 1160 /a 1981 Sri Lanka Village Irrigation Rehabilitation 30.0 19.2 1166 /a 1981 Sri Lanka Nahaweli Gauga Development III 90.0 36.4 1182 La 1982 Sri Lanka SKI II 30.0 24.4 1210 /a 1982 Sri Lanka Seventh Power 36.0 14.0 1240 /a 1982 Sri Lanka Tea Rehabilitation and Diversification 20.0 12.7 2187 1982 Sri Lanka Eighth Power 42.7 - 10.4 1317 /a 1982 Sri Lanka Forestry I 9.0 8.0 1363 /a 1983 Sri Lanka Third Rural Development 23.0 20.0 1401 /a 1983 Sri Lanka Industrial Developmernt Project 25.0 18.0 1494 /a 1984 Sri Lanka Nabaweli Ganga Development IV 30.0 30.0 2437 /b 1984 Sri Lanka Mahaveli Ganga Development IV 12.1 12.1 1537 la 1985 Sri Lanka Major Irrigation Rehabilition 17.0 17.0 TOTAL 127.7 712.6 352.6 of which has been repaid 49.7 5.6 -- Total now outstanding 78.0 707.0 Amount sold 3.6 of which has been repaid 3.6 Total now held by Bank and IDA /c 78.0 707.0 Total Undisbursed 10.4 342.2 352.6 /a IDA 6th Replenishment Credits, principal amounts shown in US dollars equivalent at date of negotiations, as shown in the President's Reports and undisbursed amonts shown in US dollars equivalent at the rate of exchange for the SDR at March 31, 1985. lb Not yet effective. Lc The original principal of credits under replenishments 1, 2 and 3 has been increased by the amount of the translation adjustment as a result of the devaluation of th US dollar in 1972 and 1973. -29- ANNE II Page 2 of 2 B. STATEMENT OF IFC INVESTMNTS (as of March 31. 1985) Year Obligor Tvye of Business Ahount (US$ Million) Loan Equity Total 1970 Pearl Textile Textiles 2.50 0.75 3.25 1978/80J83 The Development Finance Corporation of Ceylon Development Banking - 0.45 0.45 1978/81 Bank of Ceylon Development Barking. 7.00 - 7.00 1979/81 Cyntex Textiles 3.15 0.54 3.69 1979 Mikechris Industries Polypropylene Bag 0.89 0.10 .99 1980184 LOLC Leasing - 0.34 0.34 1981 Taj Lanka Hotels Hotel 19.30 .70 20.00 Total Gross Comitments 32.84 2.88 35.72 Less: Cancellations, Terminrations, Repayments, and Sales 16.45 .75 17.20 Total Commitments now Held by IFC 16.39 2.13 18.52 . , A, -30- ANNEX III Page1 of 2 SRI LANKA SECOND DAIRY DEVELOPMENT PROJECT Supplementary Project Data Sheet Section I: Timetable and Key Events (a) Time taken by the Government to 24 months prepare the project (b) The agency which has prepared Government with Bank the project assistance (c) Date of first Bank mission to November 1982 consider the project (d) Date of departure of appraisal October 1983 mission (e) Date of completion of negotiations April 1985 Cf) Planned date of effectiveness September 1985 Section II: Special Bank IDplementation Actions None SECTION III: Special Conditions Conditions of Effectiveness (a) Lease agreement between NMB and MILCO has been entered into (para. 42). (b) Execution of a Subsidiary Loan Agreement between the Government and DDF on terms and conditions satisfactory to the Bank (para. 53). (c) Execution of Participation Agreements between DDF and NILCO, and DDF and MPCs (para. 53). (d) Effectiveness of cofinancing agreement and arrangements for commodity aid (para. 52). -31- ANN III Page 2 of 2 (e) Abolition of SL Rs 0.50 subsidy (para. 65). Other Conditions (f) Government would abolish NMB by September 30, 1986 (para. 42). Appointment of dairy engineering consultant by December 31, 1985 (para. 48). (h) Final designs and land acquisition for four chilling centers and Colombo plant by September 30, 1986 (para. 48). (i) Establish a steering committee to recomuend policies and directives for Sri Lanka's dairy development (para. 60). (j) MILCO would be granted autonomy in milk pricing (para. 62). S.~~~~~~~~~~~~~~~~~~~~~. IBRD 18398 =---~~~s a, : l
Groupe de la Banque mondiale · Memorandum & Recommendation of the President
Sri Lanka - Second Dairy Development Project
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Memorandum & Recommendation of the President
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Sri Lanka
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Banque mondiale