The World Bank and Sri Lanka : a review of a relationship

Repot No. 6074 The World Bank and Sri Lanka A Review of a Relationship rebruary 24,1966 Operations Evaluation Department FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be-used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of oirector-oCunra1 Operation Evaluaten February 24, 1986 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: The World Bank and Sri Lanka - A Review of a Relationship Attached, for information, is a copy of a report entitled "The World Bank and' Sri Lanka - A Review of a Relationship" prepared by the Operations Evaluation Department (OED). This study represents the second in a series of reviews by OED, which seek to evaluate the interactions between the World Bank and selected borrowing countries at different levels and over extended periods of time. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. POR OFICIAL USE ONLY TIM WORLD BANK AND SKI LANKA Å REVIEW OF Å RELAÅIONSHIP TABLE OF CONTENTS Pae No. Preface ....... ...................... PART ONE: THE RELATIONSHIP BETWEEN THE BANK AND SRI LANK INTRODUCTION . 1 1. SRI LANKA'S SOCIO-POLITICAL ENVIRONMENT .................... 3 II. AN OVERVIEW OF THE RELATIONSHIP ............................ 5 A. The Objectives of Sri Lanka and the Bank ............... 5 B. Major Trends in the Sri Lankan Economy and in Bank Lending . 6 C. Growth and Self-Reliance Under Different Strategies: The Role of the Bank ................................ 10 (a) Growth ....................... 10 (b) The "Liberalization" of 1977-iow Far-Reaching and Effective? ...................... 11 (c) Self-Reliance ................... 13 (d) The Role of the Bank *........... ...... ......... 14 D. Equity Under Different Strategies: The Role of the Bank. 16 E. Important Issues in Bank - Sri Lanka Interaction ....... 19 (a) Composition of Bank Lending ....................... 19 (b) Quick-Disbursing Program Loans .................... 21 (c) Lending Dialogue and Conditionality ............... 23 (d) Economic and Sector Work (ESW) .................... 26 (e) Aid Coordination ... .... ..... ........ 27 (f) The Mahaweli - A Controversial Decision ........... 28 F. The Unfinished Agenda ...é.............................. 31 (a) Resource Mobilization ............................. 31 (b) Tree Crope .................... 33 (c) Industry . .... 33 (d) Diversification and Land Settlement ......,.... ... 34 -(e) The Government Machinery .............. 34 (f) Low-End Poverty ................. ,.. 35 (g) Å Cæveat ..............J............... ...... 6 This danø~an has a eoicted distribuion &ad may be used by recpents only in the performmae of their of~cl dtis. Its ontents may nt otherise be db~closd wthout World Bank autborizadon TABLE OF CONTENTS (Continued) Page No. G. Desirable Changes in Bank Approach - The Lessons of Sri Lanka .......................................... 36 (a) Improving the Cost-Effectiveness of Policy Reform.. 37 (b) Increasing the Effectiveness of Interaction ....... 38 III. INSTRUMENTS OF INTERACTION .... ............. .......... ...... 41 4. Size and Composition of Bank Lending ................... 41 Size of the Lending Program ....................... 41 Composition of Bank Lending .......................... 46 B. Policy Dialogue - Economic and Sector Work ............. 49 C. The Ald Group and Ald Coordination ..................... 54 Introduction ..................... 54 Resource Transfer .................................... 54 Dialogue on Policy .............................. 56 Coordination Nechanisms .............................. 58 PART TWO: THE BANK'S ROLE IN SELECTED SECTORS 1. AGRICULTURE AND RURAL DEVELOPMENT .......................... 63 A. The Setting ........................ .......... 63 B. Government Objectives and Sector Development ........... 65 (a) Evolution Over Time ............................... 65 (b) Institutional Development ......................... 69 C. Bank Objectives and Activities ......................... 70 (a) Strategy for the Sector 9......................... 70 (b) Bank Lending for Agriculture . 71 Irrigation ...................................... 71 Tree Cropa .....,............. 73 Rural Development . .................... 74 Dairy ...................... 77 Förestry .......................... 78 D. Evaluation of the Bank's Activities .................... 79 Irrigation .................... 79 Tree Crop Development ........................... 80 Rural Development ............................... 82 Institutional Development ....................... 84 Sector Work ..................................... 85 Internal Organization of the Bank ............... 86 Diversity of Activities ........~..... 87 TABLE OF CONTENTS (Continued) Page No. II. TRE NAAELI DEVELOPENT PROGRM ........................... 89 Perspeci:ive ................ 89 . Critical Bank Decisions*.................................. 90 Bank Group Operations .................................... 92 Outstanding Issues ....................................... 94 III. INDUSTRY ...................... 97 Evolution of Governmuent Objectiven ....................... 97 The Bank's Objectives and Activities ..................... 101 Evaluation of the Bank's Activities ...................... 104 IV. ENERGY .g........ *..**....,........................... 107 Government Objectives .................................... 107 Bank Involvement .................................... 110 Evaluation of the Bank's Activities ...................... 113 V. TRE URBAN SECTOR ........................................... 117 Government Objectives .................................... 117 Tha Bank's Role ................................... 118 ANNEX I: STATUS OF BANK PROJECTS PREFACE This study is the second of a new series initiated in 1985. The first was "World Bank in Pakistan; Review of a Relationship - 1960-1984" (Report No. 6048), issued to the Executive Directors and the President on January 27, 1986. If these first two studies are found to have been worth- while, ve plan to evaluate the interaction between the World Bank and -in four more borrowing countries. As was mentioned in the preface to the Pakistan study, the purpose of this series of reviews is to look at the interactions between the Bank and selected borrowing countries, and their instrumentation and results in a dynamic context over an extended period of time. The reviews will address questions on how the interaction between the Bank and its borrowing countries has fared when there were political changes, periods of -stress, and shifting economic circumstances and priorities; and whether the Bank, in reacting to the countries' changing circumstances, has shown wisdom and flexibility. Once the set of six studies has been completed, it should allow us to point to ways of making the development assistance the Bank provides more effec- tive. Taken singly, each study should help identify for the Bank and the borrowing country the strengths and weaknesses of the interaction and con- tribute to making the relationship more fruitful in the future. The study of the relationship between the Bank and Sri Lanka covers a period of about 30 years. The outline of the report is somewhat different from that of the Pakistan report -in that it includes a separate chapter on the instruments of interaction, in which the effectiveness of the Bank's main instruments--lending, policy dialogue, and aid coordination--is examined in some depth. The study was carried out by a team of consultants and ORD staff members, led by Professor Gustav Papanek. Other members of the team included Willem Maane and Robert van der Lugt (OED staff members) and Harold Pilvin (consultant). The following were principally responsible for the indicated chapters: Part One, Chapter 1, Maane; Chapter II, Papanek, Maane and Pilvin; Chapter III, Maane; Part Two, Chapters I and II (Agriculture and Mahaveli) van der Lugt; Chapters III, IV and V (Industry, Energy and the Urban Sector), Maane. Willem Maane also served as coordinating author of the report. The team studied the economic and sector reports on Sri Lanka pre- pared by the Bank, as well as working files, internal strategy papers and documentation related to the Sri Lanka Aid Group. The national development plans of Sri Lanka were studied, and use has also been made of relevant external literature. Extensive discussions were held by the review mission in Sri Lanka, the Bank, and at the headquarters of the most important other aid agencies active in Sri Lanka. In Sri Lanka interviews were conducted with officials and ex-officials of the Government, government agencies and public entities, and also with the ultimate beneficiaries of Bank assistance, mostly industrialists and farmers. The Operations Evaluation Department and the study team are partic- ularly grateful -to Dr. W. - M. Tilakaratna, Secretary to -the Treasury and the Ministry of Finance and Planning in Sri Lanka, and to hi. colleagues and associates without whose warm cooperation this study would not have been possible. In the Bank, the study received the strong support of Mr. W. David Hopper, Vice President of the South Asia Region. However, none of the fore- going is necessarily in agreement with the conclusions of the study, wholly or in part. They remain entirely the responsibility of the Operations Evalu- ation Department and the study team. The report has benefitted from rigorous reviews of earlier drafts by the Bank's operating staff in the South Asia Region and by the Operations Policy Staff. A draft of this review was sent to the Government of Sri Lanka and a mission visited the country for discussions in January 1986. All com- ments received from the Bank staff and the Sri Lankan authorities have been taken into account in preparing this final version. The report contains two parts. Part One deals with the overall nature and results of the Bank's relationship with Sri Lanka, with specific development priorities and desirable changes in the Bank's approach, aad with three important instruments of interaction: Bank lending, policy dialogue and aid coordination. Part Two contains evaluations of the Bank's role in the development of key sectors. THE WORLD BANK AND SRI LANKA A REVIEW OF A RELATIONSHIP PART ONE THE RELATIONSHIP BETWEEN THE BANK AND SRI LANKA Introduction Nearly 40 years of Sri Lanka's post-Independence history have demonstrated the profound effect of government economic policy on the rate of economic growth and on equity, and therefore on the alleviation of poverty, the central concern of governments and aid donors. Aid hes had a significant role in supporting, and in some cases making possible, the policy initiatives of the Sri Lankan Government. The Bank, in turn, has played an important role in providing this support. The purpose of this report is to evaluate the effectiveness and impact of relations between the Bank and Sri Lanka, and to provide guidance in determining how the shared objectives of Bank and Government may be achieved more efficiently in the future. We cover the entire 30 years of Bank-Sri Lanka interaction, but concentrate on the period since 1977, when the Bank has been most heavily involved in Sri Lanka and when the Government has achieved remarkable success in stepping up the rate of growth, reducing poverty and laying a foundation for future growth. A substantial agenda of unfinished business remains, however, which needs to be addressed if progress is to continue. Much of this agenda involves structural changes and the Bank could play a more effective role in helping to bring them about. This will require some changes in Bank procedures and approach. レー2ー ノイノー・rzにタ分多Pぜぐ 3 I. SRI LANKA'S SOCIO-POLITICAL ENVIRONMENT 1.01 The range of services the Bank provides appears to be fairly homo- geneous and uniform among countries, but the socio-political conditions in the Bank's member countries are certainly not*, Different form of admini- stration and varying.social and political conditions have a bearing on policy formulation and circumscribe the freedom of action-of governments. They also shape the interaction between the Bank and its member countries. Sri Tauka. differs significantly from other, countries in the South Asian region in several socio-political aspects. 1.02 Sri Lanka gained-full Independence-from Britain in 1947. Butwell before Independence, in 1931, a freely elected legislature and a State Coun- cil with considerable executive powers had come into existence. Universal franchise was established in 1931. The entire Sri Lankan population, there- fore, has participated in the political processes for more than fifty years. There is great political awareness. Political issues are widely discussed, and voter turnout has been consistently high. Sri Lanka is unique in Asia in the alternation of governing parties put into office through free elections. 1.03 Ever since Independence, social and economic conditions have played an important role in national elections and changes in governments. In 1956, incressing food prices and rising unemployment contributed to the fall of the United National Party (UNP) and brought the Sri Lanka Freedom Party (SLFP) into office. The SLFP-led Government attempted to reform the economy through increased state control and nationalization. In 1965, another economic crisis, marked by rising prices, unemployment and an acute shortage - of consumer goods, helped to bring the UNP back into power. The second UNP Government, while attempting to restore growth by encouraging private enterprise, was unable to solve the country's inflation and unemployment problems, and lost the 1970 elections. But the economic policies of the second SLFP-led Government contributed to stagnation, high unemployment and severe shortages. In 1977 the electorate returned the UNP to power. By introducing more liberal economic policies, reducing controls, and once again promoting private initiative, the third UNP Government succeeded in restoring growth. Shortages disappeared and unemployment declined drastically. In the 1982 elections and referendum the population gave the incumbent Government a mandate for another six years. 1.04 The official name of Sri Lanka--the Democratic Socialist Republic of Sri Lanka--ref lects the continued adherence of a succession of elected governments to socialist principles In various gradations, although the -pri- orities given to different objectives and the means adopted to achieve them- have dif fered. All governments, however, have been committed to welf are transfers to the poor and have been concerned with equity. In balancing growth and social welfare objectives, Sri Lankan governments have had to give great weight to the wishes of a people who have come to consider substantial government expenditures for social purposes as an acquired right. -4- 1.05 One consequence and cause of effective popular participation in the political process, and of extensive welfare expenditures, is a level -of literacy and advanced education unusual for low income Asian countries. This has contributed to an informed and demanding electorate on the one hand and a highly responsive and flexible labor force on the other. The latter characteristics are reinforced by a well developed infrastructure. Roads, postal services and telephones reach most villages. Technology spreads rapidly, as does word of new economic opportunity. As a consequence, economic incentives are potentially very effective in Sri Lanka. 1.06 Sri Lanka is a multi-ethnic society, with a major distinction be- tween the roughly 75 percent of the population who are Singhalese by origin and Buddhist by religion, and the almost 20 percent who are of Tamil origin and Hindu by religion. Singhalese dominate rice agriculture, Tamils planta- tion labor and, at least until Independence, the professions and, to a lesser extent, trade. Cooperation and co-existence have been the ethos of most of the leadership of both communities, at least until recently. Although generally good relations have characterized most periods, ethnic competition has to be taken into account in government policies at all times and open ethnic conflict has erupted sporadically. Conflict has been widespread and severe since July 1983. In the last two years it has indeed become a major factor in all decisions. 1.07 Any elected government in Sri Lanka, including the present one, represents therefore a multifaceted society with a large variety of interest groups, which is reflected in the composition of parliament and cabinet. The Sri Lankan Government is definitely not monolithic. As a result, it is time-consuming and difficult to reach the necessary concensus within Govern- ment about priorities and ways of achieving objectives. 1.08 In short, the Bank has provided its development services in an environment of a highly politically conscious society, with a pluralistic government, latent or open ethnic conflict, and a well educated population accustomed to a high level of social services. While the basic environment has remained relatively stable over the years, the Bank's role and approach have changed substantially -with changes in the world economy, in its own policies and, most important, in those of the Sri Lankan Government. -5 11. AN OVERVIEW OF THE RELATIONSRIP A. The Objectives of Sri Lanka and the Bank 2.01 Like most countries Sri Lanka has had three main objectives since Independence: economic growth, equity and self-reliance or national control. But it has clearly placed greater weight on equity than most coun- tries. Indeed Sri Lanka may be unique among mixed economies in achieving a massive transfer of resources from the elite to the poor. Sri Lanka was able to achieve such transfers, and placed great weight on equity, for historical reasons. One factor was its functioning democracy. As in any democratic system, both parties had to appeal to a majority of the electorate, and tried to provide economic improvement for most of the population. The land tenure system, with practically no -large landlords and relatively few landless, except for the plantations, was another factor in commitment to equality and welfare. 2.02 Both the SLFP and the UNP have been committed to welfare, equality and the alleviation of poverty. Both parties also saw economic growth as an important objective, but their strategies to achieve growth differed. The periods of SLFP control (1956-65 and 1970-77) were characterized by a less open economy, emphasis on import substitution, a diminished role for foreign aid and advice, nationalization, public enterprises and an expansion of the government control apparatus. In short, it was a system of state control and domination of the economy that can be characterised as "dirigiste". The UNP (1951-55, 1965-70, 1977 to the present) relied more on private enterprise and price incentives, and opened up the economy. It stressed exports, and tried to attract foreign resources--aid, foreign private investment and foreign loans--and gave more emphasis to agriculture. In short, its strategy can be characterized as more "market oriented". 2.03 The Bank's approach was naturally affected by Sri Lankan reality and objectives, and by an evolving view of its own role. Until the early 1970s, the Bank, like other aid agencies, national planners and the develop- ment profession generally, was primarily concerned with growth, and secondarily with "self-reliance," i.e., the ability to sustain growth without transfer of concessional resoarces. Its main concern was that projects be implemented efficiently. Little attention was given in its lending opera- tions to sector policies and even less to macro-economic magnitudes and policies. The focus was on the specific projects executed with Bank support. Equity and aspects of self-reliance, other than the need for aid, were not significant objectives. 2.04 In the 1970's there was a shift in some parts of the Bank. They tended to stress the importance of equity, defined as the alleviation of poverty, and especially the provision of basic needs for all. Sri Lanka began to be cited as the outstanding example of a country that came close to meeting its people's basic needs. Its achievement of high levels of welfare was contrasted favorably with that of countries at five times Sri Lanka's -6- per capita income. In the Bank's operations there was also a gradual shift from primary emphasis on financing productive investment to greater concern with the appropriate policy and institutional framework. Shifts in the Bank reflected, and in turn affected, similar shifts in the development fraternity as a whole: from primary concern with growth as the objective and investment as the principal instrument, to a greater emphasis on poverty alleviation as the objective and a combination of policies, institutional change and invest- ment as the strategy. 2.05 Despite these changes in world view, the Bank's policy recommenda- tions and its lending pattern with respect to Sri Lanka continued to empha- size growth and to question the effectiveness of welfare transfers in achiev- ing the objective of reducing poverty. It was argued that while welfare transfers might meet basic needs in the short term, their financing in Sri Lankan practice were slowing growth. Over the longer term inadequate growth would endanger welfare measures, since a stagnant economy could not afford to finance them. The Bank's implicit strategy corresponded therefore much more closely to the market-oriented strategy than to the dirigiste approach with its emphasis on welfare transfers. As a result of its consistent emphasis on growth, the Bank has lent heavily during the market-oriented periods while providing much less support to the dirigiste strategy. B. Major Trends in the Sri Lankan Economy and in Bank Lending 2.06 Bank involvement in Sri Lanka began in 1954 under a UNP government, with a loan for power production. Within two years an SLFP government was inaugurated which remained in power from 1956 to 1965. Policies during this period reflected a commitment to social welfare and equality, and the prior- ity given to national interests over a foreign-dominated plantation sector. It inaugurated a broad program of socio-economic reforms which sought to reduce income inequalities through the taxation of plantation exports and upper income groups, and subsidizing the consumption of the entire popula- tion. The Government also altered drastically the relative scope of private and public sectors in favor of the latter. As budget deficits swelled under the weight of the expanded social welfare programs, the economy experienced increasing strains. The domestic economy grew slowly, as the public sector exhibited a limited capacity for efficient use of resources and incentives for domestic production were reduced. Moreover, exchange earnings declined as a result of falling prices of export crops. Continued consumer goods imports weighed on the balance of payments. By the mid-1960s, exchange reserves had fallen sharply, and severe curbs on imports were required. 2.07 At first the Bank continued lending to the power sector, under the SLFP, but with petroleum nationalization in 1961-62 lending was suspended. The suspension of active Bank involvement continued through the remaining life of the first SLFP Government because its policies were considered detri- mental to growth. 2.08 The UNP government which won the general election of 1965 recog- nized the need for a fundamental restructuring of the economy, but its first -7- priority was to deal with the acute foreign exchange crisis which it inher- ited. It soubht the help of the World Bank in organizing the Ceylon Aid Group for the purpose of obtaining exterhal assistance. Key elements in the reform program were reducing consumer demand, compressing consumer goods im- ports and expanding investment. Among the major policy actions taken were the halving of the rice ration, devaluing the rupee, liberalizing imports and restoring incentives for.private investment. While several of the hoped-i r results were achieved--for example, the rate of GDP growth increased sharply--the anticipated improvement in the balance of payments failed to materialize. This was due in part to the persistent deterioration in terms of trade--tea prices continued to fall while the price of imported rice soared. In addition, the Government had only limited success in restraining the growth of expenditures on politically sensitive social welfare programs, and increases in consumer goods imports, combined with substantial investment goods imports, led to an unsustainable balance of payments situation. 2.09 The reforms of the 1965-70 JNP Government were very much in line with Bank policy recommendations and with the views of the newly organized Aid Group. At the time the Bank's arsenal did not include commodity aid or other quick-disbursing foreign exchange support, so the initial flow of in- creased resources came from other donors. The Bank's contribution was the organization of the Aid Group. But from 1968 to 1970 seven loans were made, concretely expressing the Bank's support for the reforms, although the Bank was increasingly critical of the Government's limited success in restraining consumption. 2.10 The SLFP again came to power in 1970 and once again a new government was faced with acute fiscal and balance of payments crises. Tree crop prices continued to be weak, while the terms of trade were dealt an additional severe blow with the sharp rise in prices of petroleum and food imports be- ginning in 1973. Foreign donors provided considerable balance of payments support after the 1973 world oil crisis; this, along with IMF assistance and commercial borrowing, enabled the economy to function. But the economy stagnated, with little investment in efficient export promoting and import substitution activities, and considerable efforts devoted to. a major land reform.- The latter primarily transferred plantations to the Government, and was ineffective in transferring land to the landless or the smallholders. 2.11 New Bank leading was again halted in 1970. The Bank questioned the new Government's economic policies. Later the operationally responsible part of the Bank became concerned about the specific arrangements for compensation for nationalized foreign plantations. Initially the new Government looked to aid from the Centrally Planned Economies and did not press hard for Bank loans, The Bank's decision in 1970 however, was not to stop lending in Sri Lanka altogether, but to maintain a low key presence in the country. This decision, combined with the increasing financial needs of Sri Lanka after the first oil shock, led to a resumption of lending in 1973. In the mid-1970s the Government contemplated several policy changes consistent with Bank recommendations, including lower subsidies, cuts in current government expenditures, and a more favorable exchange rate for non-traditional exports. To support this stabilization program, worked out In conjunction with the IMF, and perhaps also because there was a change in relevant personalities in the Bank, lending increased somewhat in 1974-77, reaching about the same level as in the late 1960s. 2.12 , In 1977 the political pendulum swung again to the side of the UNP who made radical changes in the country's economic objectives, programs and policies. The new Government inherited a very difficult economic situation: general stagnation, low savings, acute shortages of essential goods, and high unemployment. It recognized that the prevailing system of pervasive state controls and state-run enterprises had not led to the desired results, and that the Government lacked the administrative and managerial capacity to make it work. The new Government laid stress on rapid growth, a major increase in employment and the pursuit of a new vision of the country's economic poten- tial. Its programs included a sweeping liberalization of the economy through greater reliance on market forces; a major increase in incentives to the private sector and foreign investment; reform of the exchange and payments system; a more liberal approach to migration of Sri Lankans; incentives to export development; and a vast public investment program, including three "lead projects": (i) the accelerated development of the Mahaweli basin, (ii) a large housing construction program, and (iii) new export processing zones. 2.13 The Sri Lankan Aid Group and the IMF responded with unprecedented amounts of financial assistance. Aid donors undertook to support the large expansion in imports that was expected to follow the exchange reform, the dismantling of import controls, and the launching of the government's large investment program. The response of the economy was rapid. The ratio of investment-to GDP rose sharply. Except for the tree crop sector, virtually the entire economy participated in the expansion as production, exports, employment and real incomes advanced. In a remarkably short time, the major capital components of the Accelerated Mahaweli Program were largely completed. The export processing zone was established and substantial progress was made with the housing program and establishing a new government complex not far from Colombo. 2.14 These major investments were not without controversy, however, as some observers, including the World Bank and other donors, voiced misgivings at a perceived imbalance in the investment program. They were concerned about the excessive emphasis on the "lead projects" at the expense of more immediately productive investments, such as those in the tree crop sector, and about the evident neglect of the country's economic infrastructure, in- cluding the road and telecommunications network and the irrigation system. 2.15 By 1980 the economy showed serious signs of overheating. The over- all budget deficit, about 7 to 8 percent of GDP in 1976-77, reached almost 25 percent in 1980, and the balance of payments current account deficit was well in excess of expectations, amounting to some US$800 million in 1980. The large payments deficits reflected several factors. Imports grew rapidly in response to liberalization following nearly a decade of suppressed demand and also in response to the greatly accelerated public investment program. The -9- difficulties were exacerbated by the rise in the oil price in 1978, the ensu- ing worldwide inflation, and, in due course, higher external borrowing costs. 2.16 On the export earnings side, the country benefitted from growth of migrants remittances, manufactured exports and revenues from tourism. The latter two entailed large import payments, resulting in only a modest net addition to foreign exchange receipts. The critical tree crop exports con- tinued to stagnate or fall in real terms, following a pattern of nearly three decades in which successive governments viewed the sector as a source of cur- rent revenue, while ignoring the need for institutional reform, new invest- ment, and adequate incentives. Exports in general were still hampered by the policy environment. The tariff structure in place in 1977 left protection at high levels, with large disparities in effective protection among manufac- tures. As a result, inefficient import substitution was favored at the expense of export promoting investments. .2.17 Along with its limited success in stimulating exports, the Govern- ment has found it difficult to generate higher levels of domestic savings. With public savings averaging a negative 2.2 percent of GDP since 1979, and other sources of domestic saving showing only modest growth, foreign savings amounted to 13 percent of GDP in 1978-83, financing about half of total investment. The public investment program launched in 1977 was largely financed with concessional assistance. However, owing to higher import costs associated with world inflation, the Government, in 1980-82, was compelled to take on considerable commercial credits, with the result that the country's external.debt service increased sharply. 2.18 As these problems became evident in the early 1980s, the Government and the Aid Group began to respond. The emphasis in Bank and IMF reports, a.id in discussions at the Aid Group meetings, shifted to what were essen- tially stabilization issues. But there was little concrete the donors could do. The Government had to make several difficult and painful decisions. Tighter discipline was imposed on government expenditures and commercial borrowing, and fewer new projects were started. Other steps taken included a concerted program to decrease the country's dependence on imported energy, through both conservation measures and investments to increase the supply of energy. The country also benefitted from earlier success in expanding rice production. A program for the rehabilitation of the tree crop plantations was launched recently, supported by a number of donors including the Bank. Recently, the Government also introduced tariff reforms to reduce the exten- sive disparities in protection for different commodities. 2.19 Severe ethnic conflict erupted in 1983, just as these stabilization efforts were becoming effective, with far-reaching consequences for the econ- omy. These include loss of foreign earnings from tourism; a slowing-down of foreign investment; a more broadly negative effect on the climate for private investment in general; the departure from the country of large numbers of skilled workers; the need for senior officials to devote much time and energy to the domestic conflict; some destruction of assets and setbacks to produc- tion, most notably in fishing; and a large increase in security expenditures. - 10 - 2.20 In short, the post-1977 Government registered a number of major accomplishments, most notably higher rates of growth, investment. and employment, and great progress in achieving rice self-sufficiency and increasing energy supplies. A number of problems remain, however, which are discussed later. C. Growth and Self-Reliance Under Different Strategies: The Role of the Bank 2.21 It is clear from this 30-year history that some themes recur; stagnation in tree crop exports and domestic savings, for instance. But growth rates differed substantially under the different strategies. Since the role of the Bank under the two different strategies was not the same, it is important to evaluate the success of the those strategies in reaching Sri Lanka's objectives, before turning to a discussion of the Bank's role. (a) Growth 2.22 To evaluate the success of any pilicy or policy package, a standard of comparison becomes crucial. Appropriate standards appear to be the performance of the same country with different sets of policies, and the performance of other South Asian countries. 2.23 In terms of their success in achieving growth, Sri Lanka's two sets of policy regimes differed significantly. The market-oriented strategy has achieved a rate of growth of 5.4 percent, nearly 70 percent higher thA_ the 3.2 percent of the dirigiste periods (see table 2.1). It was comparable to the 6 percent achieved by Pakistan since 1960, and considerably faster than the 2.5 percent to 3.8 percent achieved by other countries of South Asia (Bangladesh, India, Nepal). This performance is especially noteworthy because Sri Lanka was hit much harder than other South Asian countries by the deterioration in its relative export prices. Its growth rate would have been higher by 0.6 percent a year but for this deterioration in its terms of trade. 2.24 The higher rates of growth under the market-oriented strategies were achieved in part by higher rates of investment. These, in turn, were made possible both by greater domestic savings and by more foreign capital, mostly aid. In addition, the economy seems to have functioned more effi- ciently under the market-oriented regimes. This is difficult to document, however, because economic efficiency is inherently difficult to measure. One simple and very crude measure is the incremental capital output ratio (ICOR) shown in Table 2.1. It implies that the market-oriented regimes achieved an efficiency of resource use 50 percent higher than the dirigiste regimes; that is, during the former it took Rs 3 of investment to increase output by one rupee, while during the latter Rs 5 were required. The greater efficiency of resource use, possibly also stimulated by higher capacity utilization resulting from more liberal imports, was a significant factor in differences in growth rates. - 11 - Table 2.1: SELECTED ECONOMIC INDICATORS Average for M-O /a Dir. /b M-0 Dir. M-0 Dir* M-0 1951/3 1956165 1965/70 1970/77 1978/83 periods Growth 4.1 3.2 5.2 3.3 5.6 3.2 5.0 (Rice) 6.4 1.6 9.7 1.5 6.5 1.6 7.6 (Tea) 4.4 2.8 -1.4 -0.1 -1.2 1.8 0.2 (Manufacturing) 0.7 3.6 7.5 3.5 4.7 3.0 4.3 Domestic Savings 14.4 10.6 14.3 13,1 12.8 11.4 14.0 Foreign Savings -2.8 3.7 1.8 1.0 13.2 3.1 5.0 Investment 11.6 14.3 16.1 14.1 26.0 14.5 19.0 ICOR /c 3.0 4.8 2.7 5.8 3.8 5.1 3.2 Loss from Terms of Trade /d N.A. 3 9 10 12 7 11 Notes: All as percent of GDP except ICOR. /a Market-oriented strategy. NI Dirigiste strategy. 7- ICOR - Incremental Capital Output Ratio. That is, investment rate/GDP growth rate, lagged by 3 years. /d Loss due to more rapid rise of import, than export prices, compared to 1959. Source: P. B. Jayasundra, "Economic Growth, Income Distribution and Welfare Expenditures-The Case of Sri Lanka," unpublished Ph.D. disserta- tion, Boston University, 1985. (b) The "Liberalization" of 1977 - How Far-Reaching and Effective? 2.25 The change in strategy was especially pronounced after 1977. The policy changes then implemented were massive and effective when compared to changes made, or not made, in Sri Lanka in the previous 25 years and in other low income Asian countries. They covered a large part of the economy and continued, albeit at a slower pace, well into the 1980's. While they did not go as far as the Bank and most Aid Group members later believed was desirable, what was done was broadly consistent with Bank recommendations over the previous decade, and went further than the changes made anywhere else in South Asia. (I) The first, and possibly the most important step, was a radical shift in the management of foreign trade and exchange. In the past the exchange rate had remained unchanged for as much as 17 years, becoming increasingly unrealistic. Foreign accounts were kept in reasonable balance by rigid quantitative controls over imports, with government officials determining in minute detail how much could be Imported of each good, by whom and for what ostensible - 12 - purpose. The rigor of quantitative controls would have had to increase further after March 1977 because the Government, in anticipation of the election, had revalued the Rupee by 20 per- cent. Instead the new Government managed the balance of payments by a 43 percent devaluation, with import controls essentially abolished. In the next 6 years the currency was devalued several more times, by another 34 percent in total. (ii) Another crucial step was the termination of a program, more than 30 years old, of providing subsidized rice for everyone, supplemented for a decade by a universal ration of free rice. Instead, food stamps provided a subsidy limited to the needier parts of the popu- lation. (III) Private trade was allowed, instead of restricting a substantial proportion of trade to government agencies, as was previously the case for most imports and exports, rice purchase and wholesaling, fertilizer distribution and others. Compulsory procurement of all surplus rice by the official marketing board, coupled with a ban on its private transport, had operated for several years under the previous government. (iv) Private investment in passenger bus transport and in local shipping were permitted. Previously each had been a government monopoly. (v) Prices of electricity and petroleum products were substantially increased, limiting subsidies to the poorest consumers, instead of universal subsidies for all users. Recent electricity price increases occurred in 1983 and 1985. (vi) The -amount of food subsidy was steadily reduced from 5.3 percent of GDP in 1979 to 1.1 percent in 1983. (vii) Foreign private investment, severely restricted earlier, was encouraged, also in activities that were previously government monopolies. (viii) Some small plantations were returned to their private owners and textile mills were given to private management, both in the 1980s. Private investment was permitted in cement and the government monopoly in that sector was ended. (ix) An export processing zone, without restrictions or import duties, was established. (x) After an adjustment to compensate in part for the devaluations after 1977, export duties were substantially reduced, until a sharp rise in prices in 1983 justified.increasing the duty for tea. -13- (xi) The government housing program shifted in the early 1980s from building complete houses to preparing the infrastructure for private housing investment. (xii) In 1984 the first steps were taken to rationalize the tariff system. (xiii) Interest rates were raised and allowed to approach free market rates. (xiv) In 1984/85 the first steps were taken towards an incentive system for managers of government-owned plantations. Combined with the beginnings of a performance evaluation system, this was a necessary step towards efficiency. 2.26 These changes were clearly far-reaching. They were concentrated in 1977-79, but they continued beyond those years. The concentration of radical change into a brief period is interesting and important, among other reasons for aid donor/recipient relationships. The new leadership in Sri Lanka de- cided on radical reforms quickly, rather than on a more protracted process of change. The reasons were political as much as economic. The economic ra- tionale is straightforward. Incremental steps can create new distortions and problems. The political argument was more compelling. By the time oppo- sition mobilizes, the new policies will have generated their own constituency of supporters. There is no doubt that "liberalization" involved a number of far-reaching steps to approach market-determined prices for factors of pro- duction goods and services, as well as greater use of economic incentives to influence decisions. It was comparable to similar steps in Indonesia after 1966, and went further than in any other country in South Asia. But Sri Lanka still relies more on controls than some countries in Southeast and Bast Asia. Although the change in strategy was a Sri Lankan initiative, based on the new Sri Lankan government's own perception of a desirable strategy, and designed by Sri Lankan officials, it went far in the direction of adopting policies which the Bank, and most other donors, had long advocated. (c) Self-Reliance 2.27 In moving towards the second objective, self-reliance, the differ- ence between the two strategies was not nearly as great. Domestic savings rates were essentially equal. But dependence on foreign resources has in- creased radically since the second shift to a market-oriented strategy in 1977, as a result of a near-doubling of the share of investment in GDP and of import liberalization, -without a commensurate increase in exports. Liberalization under the market-oriented strategy also opened the country to foreign private investment. But so far the role of foreign investors has remained very small, so the effective difference between the strategies has not been great. However, if self-reliance is defined primarily as building a foundation for continued growth without future inflows of concessionary aid, then greater progress was made in the market-oriented periods, especially since 1977. Rice self-sufficiency was almost achieved. Dependence on imported energy was reduced, and a wide range of capital assets have been accumulated. Reduced dependence on imported food and fuel meant substantial progress in self-relian -e. -14- (d) The Role of the Bank 2.28 The Bank had a significant and positive role -in Sri Lanka's success in increasing growth and the efficiency of the economy during the market- oriented periods, especially in 1965-70 and from 1977 onwards. It used a full array of instruments,. with the most important one being changing aid magnitudes and different degrees of support in the Aid Group. The Bank was relatively effective because it, and most Aid Group donors, operated in support of policies espoused by an Important group within the Sri Lankan Government. These officials had come to their view of desirable policies largely from their analysis of the Sri Lankan experience and reality. But several of them had previously interacted with Bank staff. The Bank there- fore contributed in an indirect and not quantifiable way to the analysis of the economy by Sri Lankan political leaders and officials which was fundamen- tal to changed Sri Lankan government policies, in addition to its direct con- tribution through aid magnitudes and support. 2.29 However, it should be noted that in 1977 the Bank's role was quite limited. Its ties with Sri Lanka had been weakened during 1970-77. Moreover it could not offer large amounts of readily available an- quick-disbursing balance of payments support to underwrite the planned liberalization. The Government therefore initially turned to the IMF for help and advice. The Bank's role became more significant later, in helping to ease the costs inherent in the liberalization strategy. 2.30 The effective policies required for a market-oriented strategy, sometimes called "liberalization" emphasizing growth as objective, were adopted primarily by the UNP governments of 1965-70 and 1977 onwards, but even within these governments they were not universally accepted. There was always strong opposition to some of them from some elements in the governing party who emphasized their cost. A principal perceived cost of liberaliza- tion was the rise in prices for articles of mass consumption, which resulted from devaluation and reduced subsidies. That major policy changes were adopted despite strong opposition was in the first instance due to the funda- mental political decision and commitment by the President and several impor- tant ministers and the determined advocacy of these changes by a group of political leaders and senior civil servants, centered in the Mini3try of Finance and Planning (MFP) who provided the detailed analysis and staff work underpinning the political commitment. 2.31 The Inportance of Policy Dialogue. The Bank and other aid donors could play an effeclive role because the changes they were prepared to sup- port did not hava to be forced on a reluctant Sri Lankan government. Rather, the Government had become convinced of their desirability. Some officials had participated over the years in a dialogue with various outside agencies, particularly the Bank, in which some of the policies later adopted were dis- cussed and the experience of other countries was analysed. - In examining the Bank's relationship with Sri Lanka one must not overlook the effect, however difficult to document and impossible to quantify, of 30 years of interaction between Sri Lankan officials and Bank staff. Influence was atual and not - 15 - unidirectional, but it clearly was significant in the view of Sri Lankan officials. The effect of this interaction on both institutions is a powerful reason for maintaining a relationship, however strained it may be at times, and an argument against the suspension of all lending. It is also a major reason to avoid a confrontational relationship, where Bank influence is essentially dependent on conditionality. This is not an argument against conditionality, far from it, but one against avoidable confrontation. more on this later. 2.32 The Role of Aid Magnitudes. The second major contribution of the Bank was directly to the availability of resources in support of the policy changes. The costs associated with such changes can be reduced, or even wholly compensated for, by additional outside resources. When the direction of policy changed after 1965 and 1977 to a market-oriented approach consi- dered more favorable for efficiency and growth, the Bank's commitment of resources increased dramatically, albeit with a lag. While there was no new Bank lending from 1961/62 to 1966/67, it reached US$61.6 million in 1969/70, in support of a reduction in food subsidies, a devaluation and import liberalization. Bank lending again was minimal during the first half of the 1970s, because the Government failed to make a shift of resources from consumption to investment which the Bank considered crucial to development. It also nationalized the foreign-owned plantations and adopted other policies which the Bank considered undesirable for growth. 2.33 With the more fundamental reforms of 1977, Bank commitment of resources again increased sharply in support, doubling in 1978-79 and more than doubling again in the next two years. Potentially even more important could have been its influence on other aid donors. Most bilateral donors rely substantially on the Bank for an analysis of policy changes, Through economic reports, leadership of the Aid Group, and informal contacts with other aid donors the Bank can potentially influence the total resources available to Sri Lanka from the Aid Group. In fact, the Bank's influence on the rest of the Aid Group appears to have been negligible when it decided to decrease its commitments in 1971-73, but of some significance when it strongly recommended increased support after 1977 (see paras. 3.03 and 3.08). That the Government in 1977 strongly pushed for Bank expression of support for its program, especially for the Mahaweli, is evidence of the importance it attached to the Bank's role. 2.34 In the 1970s the Bank did not try to dissuade other donors from increasing aid, so this period is not a good test of potential influence with other donors when the Bank believes government policies do not warrant sup- port. But other donors confirmed that they were more likely to follow the Bank's lead in increasing, than in decreasing, their aid. The reasons are- understandable. Aid increases to a specific country are readily acceptable to the aid bureaucracy, commercial interests and those with emotional ties to that country. But a sharp reduction in aid is a strong political statement by a bilateral donor, taken only for major cause. For these and other reasons--most notably the approval of Sri Lanka's social policies, and the conviction that poor financial performance was mostly not of the Government's - 16 - making-the halving of Bank commitments in the 1971-77 period was accompanied by an increase in commitments by other Aid Group donors. In 1978 several major donors were eager to support the new government. What they needed was a persuasive economic analysis which justified doing so. This the Bank helped to provide. 2.35 The expectation of massive aid increases from the Bank, the IMF and the Aid Group more generally, was important to the liberalization and change in policy after 1977. Reduced controls over imports and a shift of resources from food subsidies to the Mahaweli multi-purpose project were central to the new strategy. Both required a massive increase in aid. One consequence of both steps was a sharp rise in imports which had to be financed. Equally important, subsidized rice for all had become a near-sacrosant policy, which no government had dared change for more than 30 years. If there was to be a change in this policy there had to be an alternative vision; it was provided by the Mahaveli program, with its echo of the irrigation works of the ancient Singhalese kings, its promise of rice self-sufficiency and the generation of employment. But to implement that vision required money. The Bank played a role in providing it. The Bank's endorsement of the new direction, and of Mahave i specifically, helped assuage doubts within some donor agencies and governments, and facilitated the provision of unprecedented sums of aid for Sri Lanka. What was crucial was not conditionality narrowly defined--speci- fic policy changes agreed to in connection with a particular loan-but condi- tionality in its broadest sense: a substantial increase in aid, directed to support new initiatives crucial in the Government's political and economic strategy, and forthcoming in support of, and implicitly because of, a new direction in strategy. D. Equity Under Different Strategies: The Role of the Bank 2.36 There is a good deal of controversy, both in Sri Lanka and in the donor community, about the effect of the different strategies on income distribution. Especially controversial is how the poor have fared since 1977 and whether their interests have been neglected by various actors, most notably the Bank, in their preoccupation with rapid growth. 2.37 Even the facts are in dispute and they permit no unequivocal conclusions, but the following seem the most reasonable in our present state of knowledge: (i) Welfare indicators were high and rising under both strategies. Even in the 1950's Sri Lanka had achieved a level of welfare indi- cators--death rates, education levels--which other South Asian countries did not achieve until 30 years later, if then. The reasons included such factors as a comparatively egalitarian dis- tribution of land, widespread education, a good public health sys- tem, a good infrastructure and resulting mobility, and an effective food rationing system. These welfare indicators improved further throughout Sri Lanka's history as an independent country as a result of rising per capita incomes and a rapid increase in free and subsidized food in the 1960s. - 17 - Table 2.2: SELECTED WELFARE INDICATORS 1981 Average for Low-Income 1946 1963 1973 1977 1982 Asia Per capita income - 144 240 270 300 277 Adult literacy (%) 58 79 81 86 86 53 Secondary school enrollment (%) - 31 48 52 51 30 Life expectancy (years) 43 63 66 69 69 60 Infant mortality (per 000) 141 56 46 42 32 97 Welfare expenditures (% of GDP) - 10.1 8.1 8.1 6.0 - 1953 1963 1973 1978/79 1981/82 Unemployment (% of labor force) - 13.8 24 14 11.7 Real income La - poorest 10% 156 130 297 269 300 - poorest 20% 214 194 384 362 392 - second 20% 383 397 645 655 660 - richest 20% 2,214 2,259 2,292 3,171 3,571 Below poverty level (M) - - 27.6 22.7 21.9 Share of income /b - poorest 20% 5.2 4.5 5.2 5.7 5.7 - richest 20% 53.8 52.3 43.0 49.9 51.9 /a In (real) Rs. per capita per year at constant prices. 7 By spending units. (ii) Income distribution probably became more equal during the dirigiste strategy of the 1970s, as the share in income of the wealthy was sharply reduced by nationalization and taxation. Distribution may have become somewhat less equal after 1977, when the shift to greater reliance on the market permitted a substantial expansion in income and wealth for the rich. (iii) In absolute terms the very poorest may have lost somewhat, while the richest gained after 1977. In the 1960s-1970s the poorest 10 or 20 percent benefitted from price control, rationing and free food. After 1977 they lost from the shift from free food to food stamps of declining value. Real income data (Table 2.2) show a decline in income from 1973 to 1978/79 for the poorest, followed by a rise to 1981/82. Income In 1981/82 equalled that of 1973* But nutrition surveys apparently suggest some deterioration for the poorest even in the 1980s. Conversely, luxury consumption was severely restricted in the 1970s largely by the scarcity of foreign exchange. Imports of durable consumer goods expanded rapidly after the liberalization of imports in 1977. (iv) Absolute poverty probably declined after 1977. The great majority of the population probably lost in the mid-1970s, despite the Government's emphasis on equality. Slow growth, compounded by bad harvests, resulted in growing unemployment, shortages and inadequate resources, which forced cuts in food subsidies. Conversely, it is very likely that all income groups, emcept the very poorest, were absolutely better off in the early 1980s than in the mid-1970s. They gained more from liberalization through rising employment, wages and economic activity in general than they lost from declining food subsidies. As a result the number in poverty declined. 2.38 The Bank's implicit, and occasionally explicit, position with respect to Sri Lanka has generally been that only a growing economy could support substantial welfare transfers. In its economic and sector work the Bank tended to assess welfare policies in terms of their effect on growth, and paid less attention to their benefits in terms of equity. It was there- fore supportive of the Government's economic reforms in 1977, which stimu- lated output, efficiency and employment. Less attention was given to the possible adverse consequence on the poorest of the sharp reduction in food subsidies. At the insistence of some donor countries, the Bank, jointly with the Central Bank of Ceylon, carried out a study of trends in poverty and wel- fare which will be helpful for future analyses. But on the whole, the Bank played a minor role in supporting, or even analyzing, welfare and equity policies. 2.39 In summary, if self-reliance is defined in terms of dependence on foreign resources and equity is defined in terms of income distribution, then the shift in policies after 1977 was favorable for growth, but unfavor- able for equity and self-reliance. But if self-reliance is defined in terms of developing an efficient economy, less dependent on food and energy imports, and equity is defined as the reduction of absolute poverty, then performance since 1977 represents a substantial success, with a remarkable increase in growth; an expansion of domestic rice and power production; an accumulation of assets and improvement in economic efficiency and therefore in future self-reliance; and a significant advance in equity. The "shared poverty" which economic stagnation implies appears to be unacceptable to most Sri Lankans. Therefore it is reasonable to conclude that the market-oriented policies, especially since 1977, have been successful in moving Sri Lanka towards all three of its goals, although unequivocally only with respect to growth. The Bank provided significant support for the implementation of the changed strategy after 1977, just as it had supported the more market- oriented strategy in 1965-70. - 19 - E. Important Issues in Bank - Sri Lanka Interaction 2.40 Several aspects of the interaction between the Bank and Sri Lanka have already been discussed in connection with the Bank's support for changes in economic strategy. These include: (i) aid magnitudes, with respect to the Bank's own program and its influence on the Aid Group; (ii) implicit conditionality in its broadest sense; that is, implicitly tying aid magnitudes to broad changes in macro-economic policy; (iii) the subtle, long-term effect of Bank-Sri Lanka interaction over 30 years. 2.41 In Section III below "Instruments of Interaction", the Bank's three main instruments-lending, policy dialogue and aid coordination-are dis- cussed in more detail. That section also highlights the views of Sri Lankan officials and donor representatives. In the following a brief commentary is provided with respect to some important issues in the relationship. But first, it is worth reiterating that the Bank's role, as that of other donors, was and had to be supportive. The changes in direction in 1960, 1965, 1970 and 1977 were made by Sri Lankans themselves, and determined by their beliefs, and by the political and economic reality faced by the Government. It is inherently impossible to identify clearly the role of any outsider, except in the crudest terms. Some useful lessons can nevertheless be distilled from the experience. (a) Composition of Bank Lending 2.42 Composition of Bank lending has been affected, at least recently, by three considerations (for details and data, see paras. 3.12-3.20): (i) Overall Bank policy and practice, determined substantially by the sectors where the Bank had strong competence and where it thought its comparative advantage lay. This appears to have been the pre- dominant criterion in the early period, with its emphasis on power projects. (ii) The executing ability of Sri Lankan institutions and their willing- ness to meet Bank requirements and conditions, again reflected in the emphasis on the relatively well-managed power sector. (iii) The perceived needs of the Sri Lankan economy, as expressed by the Government and seen by the Bank. 2.43 Five questions can be raised about the use of lending patterns as a Bank tool. The first, the small role of non-project lending, is discussed separately below. The other four issues are the lack of interest in educa- tion; the continued emphasis on relatively well-functioning infrastructure -20- sectors; the rationale for some new activities in forestry, dairy and tele- communications, which duplicated those of other donors; and the neglect of some crucial activities, most notably large-scale industries. 2.44 The Bank essentially ignored education, because in quantitative terms-literacy rates, enrollment ratios--Sri Lanka was considered to be doing well. But the education system was not always well adapted to serve the needs of rapid growth. The Bank could have helped to improve the relevance of the education system (see para. 3.16). 2.45 Power and transport accounted for about one quarter of Bank lending after 1977, while before that power alone had been nearly half. No doubt more power was needed, but the institutional, organizational and policy framework was in relatively good shape compared to other sectors, and several other donors were eager to provide resources to the sector. One can therefore ask whether continued lending to power was the most effective use of Bank resources. On the other hand, the Bank's leading complemented that of other donors and the Bank had developed an unusually close and effective relationship with the Power Authority, played a major role in helping to introduce better tariff policies, and is currently assisting in reducing power losses and improving the distribution. aystem. A continued relation- ship, which implies some lending, could therefore be justified, but unduly heavy emphasis on power loans would nevertheless be debatable. 2.46 More difficult to explain was the Bank's new involvement in tele- communications (1980), forestry (1983), and renewed iuvolvement in dairying (1985, following nn unsuccessful 1974 loan). Telecommunications is a favorite field of some other donors. In forestry the Bank has had problems with implementation. Other donors are actively involved, severely taxing absorptive capacity. Other donors also support dairying, using a fundamentally different approach from the Bank, further complicating the situation (see paras. 3.54-3.55). Although the Government requested help and the Bank has successfully carried out projects in these fields in other countries, it has limited resources, not only of money but also of staff and analytical capacity. Presumably the Bank should therefore do what it advises its member countries to do-concentrate on activities of greatest comparative advantage. There appear to be good reasons for leaving the above-mentioned sectors to others. 2.47 This argument is especially persuasive because the Bank has essen- tially not helped the large-scale, largely publicly owned, industrial enter- prises. The lending for industry has been quite small (only 10 percent of the total), concentrated on the private sector and designed for small and medium-sized industries. Despite moves towards privatization, the large publicly owned firms remain important, especially in manufacturing, and are a major problem for Sri Lankan policy makers. There were good arguments for the Bank to avoid this sector, most notably a substantial disagreement for much of the time between the Bank's approach and that of the relevant minis- try, which meant that the Government did not ask for Bank help in this sector. Therefore, it is uncertain how helpful the Bank could have been in improving the functioning of public enterprises. Given their importance, a major effort to help could nevertheless have been worthwhile in the early 1980s, but no such effort was mounted until very recently. The Bank has not shied away from other difficult, but Important sectors. For instance, loans to the tree crops sector resulted initially in quite limited change with respect to several of the central problems, which were quite similar to those for industry: the effect of public ownership on incentives, excessive centralization of decision making, -and pricing. Yet the Bank persisted with its effort and lending for - tree crops, providing four loans between 1978 and 1985. These were useful to the Government in its 1984 reform. Bank neglect of large, public industrial enterprises was especially unfortunate because most other donors also shied away from this sector, largely for reasons of policy. The neglect of industry is discussed further below. 2.48 In contrast, t --re is a clear and persuasive rationale for Bank neglect of some major aspects of rice agriculture, or more generally crop production for the domestic market. The Bank has long been involved in irri- gation development, especially the Mahaveli multi-purpose project, and it has participated actively in the Rural Development Program. It has paid less attention to technical inputs--fertilizer, pesticides, machinery--and such important services as research and credit. But other donors, especially the US, were effective and active in these fields, so this represents a sensible division of labor. (b) Quick-Disbursing Program Loans 2.49 Quick-disbursing program loans, including Structural Adjustment Loans (SALs), once they entered the Bank's arsenal, would have been a logical instrument in Sri Lanka. The issues central to the Bank's decisions on over- all loan magnitudes were changes of policy, at least since the early 1960s, not decisions on individual projects. Program loans were precisely designed to support such policy changes. 2.50 Moreover, there were lags of 4 to 6 years between the decision to increase lending and the actual peak of disbursement on a particular loan. Given the regular alternation of governments every 5 to 9 years in Sri Lanka, such delays often meant that disbursements came at a time, and benefitted a government, when there had already occurred a reversal of policies which pro- vided the impetus for the increased lending. For instance, commitments made in 1967-70 to support policy changes led to peaks in disbursements in 1972-75, two years after the government that had introduced those policy changes left office (see Graph 1 on page 42). Indeed, during its 1965-70 term in office it had actually repaid the Bank more than twice what it had received in disbursements. The problem of lags was particularly serious in Sri Lanka, because the Bank twice halted most -activities under a dirigiste regime. There was therefore additional delay in starting up again when a new government came into power. Elimination of lags is one of the important arguments for the use of program loans; they could have been especially important to support the radical policy changes after 1977. -22- 2.51 Another advantage of program loans, and especially of SALs, is that the connection between policy change and aid support is clearer and more direct. Finally, program loans can be more effective in supporting policy changes because they are not encumbered by specific conditions and negotia- tions on particular projects, but can emphasize policy conditionality. These advantages could have been especially useful in Sri Lanka, given the Bank's increasing emphasis on major policy changes since 1965. Yet this instrument was used very little in Sri Lanka. Policy-based program lending was not a major instrument for the Bank in 1965-70, a period when significant policy changes could have warranted support through this device. 2.52 In 1981 the Government and the Bank agreed on the importance of further structural adjustment and the desirability of tangible donor support for it. But the discussions on a Bank SAL proved fruitless, for a variety of reasons: - the initial support involved was not large (of the order of US$60 million, although a sequence of SAL's was envisaged which might have provided as much as US$250 million over a 5-year period); - the conditions attached were major, spanning the whole economy and including several issues that were among the politically most contentious, raising strong opposition even within the Cabinet; - Sri Lankan officials felt that conditions kept being added, and worried when and where the process would end; - prior agreement with the IMF was another condition, further expand- ing the scope of change required; - at the same time other Aid Group members were prepared to provide substantial sums in non-project assistance with fewer conditions (on the average US$160 million a year in 1978-84); - in 1983 and 1984 a short, but sharp, rise in tea prices eased the foreign exchange situation; - the conditions attached to the proposed SAL were highly visible and far-reaching. The political costs, especially to the Ministry of Finance and Planning, of publicly accepting them would therefore be considerable, and obtaining parliamentary approval was seen to be difficult. 2.53 The Government felt that far-reaching structural adjustment had been carried out on its own initiative, as indeed it had; that the political costs of the adjustment had increased because of adverse terms of trade; that it had reacted courageously in 1982/83 when the economic situation deterior- ated; and that it was faced, after the ethnic riots of 1983, with a difficult political situation. The extensive policy changes already made since 1977 would have sufficed in other countries for an initial SAL. For Sri Lanka, -23 - such a loan should recognize and support past actions, not just take them for granted and require substantial further change, as though little had been done. 2.54 While it is dangerous to base firm conclusions on the experience of one country, some useful preliminary lessons may be gleaned from this dis- cussion. As the SAL was widely discussed within Sri Lanka, it became more difficult to accept its conditions. Therefore, in highly vocal democracies, such as Sri Lanka, policy reforms may be attainable better through less viei- ble sector loans. The structural reform a SAL can carry obviously depends on its perceived political and economic costs and benefits. As conditions were piled on, sometimes because different parts of the Bank were eager for policy changes in their field, the political costs became great. This was compound- ed when IMF conditions were added to Bank conditions. If the Bank wants to use SAL to achieve significant structural adjustment it may have to rethink conditioning SALs on IMF agreement, particularly in a situation such as Sri Lanka's in 1983 and 1984, when the need for further structural adjustment was large, but the need to approach the IMF for short-term assistance was small because of the comfortable balance of payments position. Also, the benefits of a SAL depend in large part on its size and, to a lesser extent, on the expected speed of disbursement, in comparison to need. "Front-loading" a SAL, as the IMF did its 1977 standby, can help. Major policy changes may be accepted if the initial support is large. These changes will over time generate benefits, so that subsequent SAL tranches can be smaller. In 1981, the Bank seems to have followed the opposite tactics, with the initial tranche offered quite small. 2.55 Governments like Sri Lanka's mst naturally balance costs and bene- fits of a SAL and it might have been well for the Bank to also analyze the political, as well as the economic, costs to the recipient before serious discussions began. If the benefits of a SAL did not clearly outweigh the costs, then it might have been better to concentrate from the beginning on more narrowly targeted sector loans, where costs (and often benefits) are more limited. Sector loans would also have had the additional benefit of support from the ministries directly concerned with the sectors whose program is expected to benefit. SAL benefits are less clear-cut to operating minis- tries. Therefore, the coordinating ministry, the Ministry of Finance and Planning (MFP), found it difficult and costly to convince other ministries of its desirability. Sector loans are not always successful, as witness the two loans to Sri Lanka in the mid-1970s (see paras. 3.17-3.18), and they are probably less appropriate when economy-wide reforms are planned, as in 1977-79. But they carry less of a burden when change is sought in specific and disparate fields. (c) Lending Dialogue and Conditionality 2.56 Lending dialogue and conditionality were the most extensively used Bank instruments and the only ones effectively used in the first decade of the Bank's relationship with Sri Lanka. Discussions, negotiations and condi- tions imposed with respect to specific loans continue to be central to the - 24 - Bank's relationship with the Government. In analyzing the effectiveness of this facet of the relationship one finds a wide range in the relative impor- tance of conditionality and dialogue, from the largely adversary relationship of pure conditionality through a combination of conditions and dialogue, to a fully cooperative relationship, Naturally the last approach is the most desirable and would be preferred, but is not always feasible. Even a more adversary relationship can sometimes be effective. These general points can be illustrated by several Sri Lankan projects. 2.57 The negotiations on tree crop sector loans illustrate nicely the effectiveness and limits of conditionality. As is obvious from the earlier discussion, the stagnation of the tree crop sector has been one of the most serious brakes on the Sri Lankan economy. Earlier Bank loans achieved ittle major change. True enough, some very specific actions required by the loans. were taken, but the structure and the incentive system of the government- owned plantations were not touched. Needed reforms were strongly resisted because they offended powerful interests. They required differential rewards for effective and ineffective managers, technicians and workers, and differ- ences in labor productivity. Some might involve reductions in the labor force and shifts in control, power and perquisites from ministries and corp- orations to plantations managers. Moreover, some of the reforms would also affect the local and national political leadership, since the plantations had been a major source of patronage and power for a decade. 2.58 Despite opposition, significant first steps towards reforms were taken in connection with the most recent (1985) loan as a result of which three developments had taken place: (i) the Bank had made it clear that it was no longer prepared to continue lending to the sector without policy change; (ii) a large package of assistance was assembled ($120 million) by cooperation between the Bank, the ADB and three bilateral donors, so that there was the prospect of a large inflow of resources in support of change; (iii) major actors in the Government, including the MFP, became convinced that action was essential and that the administrative structure developed since 1977 could support it. In part, as a result of the large resources potentially available and the clear message that Bank support would otherwise not be forthcoming, there was a change in the cost-benefit calculus of reform. Equally important was the fact that donor resources would be deployed in support of strong pressures for change from within the Government. 2.59 But some changes proposed by the Bank, and originally designed as part of its conditions, were not in the final agreement and were not made (see paras. 4.56-4.58). That was not necessarily bad, since their wisdom was in doubt. Furthermore, they were not acceptable to the government forces who were supporting change, including the MFP, but they were pushed by a Bank mission not fully familiar with all aspects of Sri Lankan reality. The failure illustrates themes we will return to: the risks of heavy reliance on short-term missions not adequately informed -on the country; the danger if Bank staff do not take full account of the views of well-informed Sri Lankan officials who are fundamentally pushing for the same reforms but differ with - 25 - the Bank on important details; and the limits of conditionality if change is not supported strongly within the government itself. 2.60 These same points, plus others, are also illustrated by the failure to achieve any significant reform with respect to the public enterprises, discussed in connection with the. SAL. Some government officials directly involved saw the Bank as hostile to the publicly owned industrial sector, rather than trying to help improve its functioning. An adversary relation- ship developed with the ministry concerned, aggravated by the insensitivity of some Bank missions to the political conflict within the Government. Naturally, if the Bank is seen as negative to a particular activity of the Government, then those in charge of that activity will resist Bank involve- ment. A feasible approach would have been to offer to help improve the fune- tioning of all Industrial enterprises, irrespective of their form of owner- ship. 2.61 A near-ideal combination of dialogue and conditionality is exempli- fied by the power sector. The resources made available by the Bank were large, and the political opposition was less than in the industrial sector. A positive factor was the presence of a Bank-seconded advisor to the President of the country, who worked within the Governmnt, was well regarded, and was not answerable to the Bank. But even before the advisor arrived, the dialogue had been close and effective. There was a minimm of confrontation. Loan conditions were agreed beforehand, and their expression in loan documents represented a formalization of a joint program. The sector represents a Government and Bank success story, in which policy reform and investment reinforced each other, as did the Sri Lankan institutions and the Bank. While the success is undoubted and significant, it must be emphasized that the costs of reform in this sector were far less than in others. Raising electricity prices to large consumers is, of course, resisted and is therefore not done in many countries. Sri Lanka should get full credit, especially since 1977, for raising and rationalizing prices by subsidizing only poor consumers. But the resistance is not the same as to price increases for rice or cloth, or the dismissal of excess workers. 2.62 At the far end of the spectrum was the recent effective dialogue on urban development, despite little history of past lending in that field and no commitment of large resources at present (see paras. 8.10-8.16). This demonstrates the useful role sensitive and sensible foreign experts can play when they are seen as helpful, rather than hostile to Sri Lankan concerns. Surely the knowledge that Bank resources and Bank advice go together provided them with access to officials and increased the willingness to listen. Also the political costs of following the advice were manageable. Still the example shows that a non-confrontational dialogue, without heavy use of explicit and rigorous conditionality can be quite useful and effective if circumstances are appropriate and the Bank staff involved are highly com- petent and sensitive to specific circumstances, and work with competent Sri Lankan officials, rather than issuing obiter dicta backed by threat of sanctions. - 26 - (d) Economic and Sector Work (ESW) 2.63 ESW dealt with broader issues than dialogue in connection with the Bank's lending program, but it demonstrates some of the same lessons. (See parse. 3.22-3.34 for a more extensive discussion.) It differed in two impor- tant respects: it addressed more general issues and it served other donors and Bank internal needs, but it appears to have been less useful to the Government. The reaction of Sri Lankan officials to ESW was striking: only three sector reports were singled out as having been very useful. They see general economic reports as serving a limited purpose: to inform the Aid Group of major developments in the Sri Lankan economy, to serve as a basis for long-term dialogue, and occasionaly to strengthen positions taken by some parts of the Government. The economic reports have generally supported the Government's position at the Aid Group meetings and are therefore seen as helpful in that respect. Their recommendations are, however, too general to be of mach use to Sri Lanka officials. But for most other donors they serve as the principal reports on the Sri Lankan economy, and donors would not favor the suggestion that they be prepared only every other year. 2.64 It should be recognized that this government reaction reflects in part the high level of competence at the senior levels of the MFP and the small number of first-rate officials. Other countries may differ in this respect. But in Sri Lanka some government officials know economics and economic analysis just as well as most Bank staff and they know Sri Lankan reality a good deal better. Therefore it is not likely that Bank staff will be able to provide them with major new insights or recommendations on general economic issues. At the same time, they are stretched woefully thin, and servicing Bank economic missions is a considerable drain on very scarce time and energy. The problem is compounded by the fact that each year some Bank participants in the economic work are new and not well informed on the country, increasing the burden on a handful of Sri Lankan officials. That is an important argument against frequent Bank staff rotations. 2.65 The Government's reaction to sector reports was less benevolently neutral than for economic reports. They also call for considerable work on the part of overworked Sri Lankan officials. And the Bank expects, and given its role is seen to deserve, the cooperation of some of the most competent officials in the Government, one of the country's scarcest resources. At the same time Bank staff on sector missions vary even more in knowledge of Sri Lanka and in general competence. With respect to particular sectors, the central economic staffs of the Government simply do not have the extensive knowledge and technical competence which they possess with respect to macro- economic issues. As a result sector reports can be, and are seen, as considerably more helpful or considerably more irritating and damaging than general economic reports (see paras. 3.30-3.32). Some reports were clearly resented and were counterproductive. The cost is not just the friction and ill will created, undoubtedly on both sides, but the diversion of the time and energy of Sri Lankan officials, first to work with the visiting sector team, then in persuading their seniors in Washington that the mission's views should not become Bank conditions for loans. These costs of poor sector work can be significant. 2.66 At the same time, the scarcity of well-trained and experienced staff in the Government means that the Bank could potentially play a very useful role on technical and sector issues which the Sri Lankans simply do not have time to study. The three sector studies singled out as useful were of this kind: the 1984 Urban. Sector report; the 1982 UNDP/World Bank Energy Assessment Report; and the 1981 Report on Effective Protection. More work of this kind would be clearly welcome. 2.67 Above all, the Sri Lankan experience provides a strong argument for an active program of quality control. Quality needs to be defined in terms of reports that are useful to Sri Lanka, and at least broadly acceptable to those in the Government whose cooperation the Bank seeks. Most of the time ESW will be found useful if it helps Sri Lankan officials to carry out policy changes which they believe are desirable. Often the Bank's most construc- tive contribution would be to help with the practical problems of implement- ing policy changes, rather than providing theoretical textbook solutions. (e) Aid Coordination 2.68 Aid coordination was another Bank activity, especially since the 1963 establishment of the Aid Group (For a more extensive discussion of the Aid Group and aid coordination, see paras. 3.34-3.57). In the abstract there are obvious advantages to closer coordination and the Bank, as the largest multilateral participant, could logically take the lead in this, But both Sri Lankan officials and some major bilateral donors also see real disadvantages. 2.69 The arguments in favor include the avoidance of duplication and overlap, both in analysis and lending; more crucially, reduction in con- flicting advice and conditions on projects; increased cooperation on project financing; and an exchange of information. That increased coordination and donor cooperation can bring significant benefits can be seen from two examples. First, relatively effective coordination and cooperation has taken place through the Aid Group, for much of the time it has been in existence, on the provision of support to the balance of payments. The-Aid Group, with the Bank in the Chair, provided a venue for exchanging views on the magnitude of the problem and on contributions to deal with it. Second, the Bank played a very active role in coordinating donor support for the Mahaweli program (para. 3.50). According to several donors this was probably the most effective effort by the Aid Group on a specific problem and the Bank was instrumental in bringing it about. Some examples of the costs of failure to coordinate are discussed in Section III (paras. 3.53-3.55). 2.70 In general, the Government appears to prefer minimal coordination among donors, and abstains from active participation with the donors as a collective, appearing to prefer one-to-one dealings. One view is that this approach enhances its negotiating position. In addition, donors differ in the extent of their interest in enhanced coordination, and in some cases view other donors as competitors. Several bilateral donors specifically mentioned their interest in financing projects that are likely to be successful, not - 28 - sensitive politically at home or in Sri Lanka, visible, relatively easy to implement and attractive to their commercial interests. Coordination and division -of labor, therefore,- may be more attractive in theory than in practice. The Bank too is regarded by some donors as just another, and occasionally competing, player. 2.71 Donors also have mixed views about the effectiveness of the annual Aid Group meeting. Many believe it is useful as a means of airing issues and pursuing a policy dialogue. The Government sees it as an inevitable, but quite useful, part of the aid relationship. Most participants recognize that it cannot serve as a forum for negntiations or decision making on aid levels, or policy changes for the next year. Both have been largely decided before the meeting through the separate processes of the institutions involved and bilateral discussions and negotiations between them and the Government. But most participants, including Sri Lankan officials, believe that the discus- sions at the meeting enter the policy process of most participants in subse- quent periods, Government representatives bring back to the Cabinet their impressions of collective donor concerns, and sometimes use them to reinforce arguments within the Government. Donor representatives are exposed to each others views and to peer group pressures, which can affect their decisions in the future years. The Aid Group meeting, like Bank reports, are especially useful for donors without a large staff in Sri Lanka. Suggestions to improve the coordination process are discussed in Section III. (f) The Mahaweli - A Controversial Decision 2,72 The Bank's role in support of the Mahaweli multi-purpose project has already been referred to. Since it was central to the Bank's involvement in Sri Lanka, remains controversial and sheds important light on the rela- tionship between the Government and the Bank, it warrants separate treat- ment (see also Section II of Part Two). There is near unanimity in Sri Lanka and isong knowledgeable outsiders that controlling the Mahaweli river for power and irrigation should be a major element of Sri Lankan development. The controversy arose from the Government's decision in 1977 to greatly accelerate the speed of implementation, and the Bank's decision to support the accelerated program before the full engineering and economic studies usually required by the Bank were available. 2.73 There were some powerful arguments in favor of the Bank's decision- at the time: (I) There were good reasons for quick implementation of the project: - Unemployment was a crucial problem that had sparked unrest and its rise had been the principal symbol of the failure of econ- omic policy under the previous regime. The project would pro- vide substantial employment in construction and later on the newly irrigated land. - 29 - - Rice self-sufficiency had been a consistent goal of all governments and could make a major contribution to solving the foreign exchange problem. The project's irrigation potential was important in achieving that goal. - Power was short. Energy imports were a major drain on foreign exchange and greater power demand was expected to result from the economic growth to be generated by liberalization. The Mahaweli would double the electricity supply. (ii) A more important argument was the importance of Mahaveli to the fundamental shift in strategy which the Government was planning. We have already referred to the need seen by the Government, and recognized by the Bank, for an alternative vision of the future of the Sri Lankan economy. If there were to be some tampering with a central aspect of the welfare state (subsidized rice), there had to be an alternative program which caught the imagination of the people. The accelerated Nahaweli was the centerpiece of that alternative vision. In the Government's political judgement, if the Bank wanted to provide effective support to the radical policy change, it needed to support the Mahaweli. (iii) Bank support for the accelerated Mahaweli was a touchstone of Government-Bank relations. Without such support relations would certainly have suffered greatly. Nor was it clear that other Aid Group donors would have followed the Bank's lead if the Bank had -insisted on delay in the decision on the Mahawell. Major bilateral donors were eager to support the new Government and its changed policies; the Government was in direct touch with donors and urging their support; several bilateral donors liked the highly visible, large and relatively easy-to-implement dam projects involved; and donor governments were under pressure from their commercial interests to participate in order not to miss out on the large, attractive construction projects involved. 2.74 For all these reasons the Bank decided to support the acceleration in principal, agreed to the start-up of some components and advocated Aid Group support, all before detailed engineering and economic work had been completed, although it did successfully press for a simultaneous consultants study. Some questions were raised by critics about the original departure from normal standards of review. More important, in the view of these critics, when the results of the study began to be available in late 1978 and 1979, the Bank did not provide adequate support to the consultants in presenting some of the questions, doubts and recommendations for deferral of some works that early findings seemed to justify. Second thoughts began to be expressed by the Bank only later when some of the problems and costs became all too visible. 2.75 One needs to distinguish between problems that simply could not have been foreseen in 1977 and those that might have been. Unforeseeable ~-30 - problems included: (i) the substantial deterioration in the terms of trade for Sri Lanka, which forced severe cuts in other urgent expenditures in order to support the Mahaweli; (11) the world recession and other factors which made it more difficult to expand aid as the costs increased; and (iii) the acceleratiou of world inflation which meant that already committed aid lost substantial value in real terms. 2.76 Some of the problems that might have been foreseen are the following: (1) Costs escalate in the great majority of large projects, but In- creases are especially likely when a program is carried out on a crash basis. The 1977 estimates of Ra 11-12 billion for a full program, by 1985 became estimates of Ra 40 billion for a reduced program. Rapid inflation explains over half the increase, but even in real terms costs increased about two-thirds above original estimates, despite cuts in the program. The results were serious inflation, balance of payments problems and a severe reduction in other expenditures, such as for maintenance of infrastructure. (ii) Equally serious were the physical strains on the economy. Trans- port facilities were especially affected, resulting in increased cost, physical deterioration and bottlenecks for other projects. Acceleration was only possible by heavy use of foreign personnel, machinery and other inputs, with predictable effects on the foreign exchange costs. (iii) Not all aspects of the project had the same rate of return and deserved equal priority. One of the dams will produce high-cost power. On the basis of surveys done between 1975 and 1978, sever- al of the areas to be irrigated were known to have soils less suit- able for irrigated rice production. (iv) The agricultural returns from such an ambitious project were bound to accrue with a long delay. Other projects were likely to give quicker returns, at lower costs, with less foreign contractor involvement. Rehabilitation of existing irrigation tanks was one major alternative advocated by critics. The delay was was not nearly as long on the power benefits, and most of the critics did not advocate a thermal power alternative. 2.77 Under these circumstances one's judgement on Bank support of the Mahaveli, probably the most important decision affecting the Bank's relations with Sri Lanka since 1977, hinges on the following three issues. First, how much of the aid available for Mahaweli would have been available for other, quicker-yielding, projects? Second, to what extent would the appeal of these projects have equalled the enthusiasm for the Mahaweli and the support it generated for a change in strategy? Third, what would have been the reaction of both Government and other donors to more cautious support from the Bank for Mahaweli? Would it have been to slow down lower priority aspects of Mahaveli, or to ignore the Bank's views altogether? - 31 - 2.78 There are strong differences of view among competent observers on all of these questions and no clear answers. There is widespread agreement that the best course would have been to defer at least one of the major dams under the Mahaveli program, because its cost-benefit ratio was not very favorable, and it- diverts resources from other activities that would have yielded returns more quickly. There is also little disagreement that a more conservative scheduling of the program from the beginning would have been better than the scaling down which had to occur as shortages of resources made themselves felt. But it is doubtful that the objective conditions existed for the Bank to have made an even more positive contribution by advo- cating scaling down and slowing down some elements, while supporting the pro- gram as a whole. It appears to us, even with the benefit of hindsight, that the fundamental decision to support the Mahaveli should not be faulted. 2.79 but there are two useful lessons in this experience. First, the Bank was again handicapped in reaching a quick and reasonably well informed decision on its position vis-a-vis Mahaweli because it had essentially lost touch with the Mahaveli program during much of the previous decade of strained relations with the Government, Second, there are severe limits imposed on the Bank's freedom of action and influence when the governments it deals with, both recipient and bilateral donors, are making fundamental political judgements and decisions. In analyzing the effectiveness of the Bank in retrospect one must be conscious of these limits, and not assume that if only the Bank had acted differently it would have significantly affected the outcome. It is quite possible that a different posture by the Bank would have primarily reduced the Bank's role. F. The Unfinished Agenda 2.80 The discussion so far has recorded considerable progress in the Sri Lankan economy. Further progress, however, is held back by some important unresolved problems. These are generally issues where the Bank and the Aid Group have recommended reform, but the Government has so far not found it possible to make the necessary policy changes. Some involve serious struc- tural issues which the Government has just begun to address. (a) Resource Mobilization 2.81 For years, Ministry of Finance, Aid Group and World Bank statements have emphasized the importance of increasing savings and export earnings. If anything, this has become even more urgent in the last few years, as the rate of investment, and with it the rate of growth, has become highly dependent on foreign resource inflows, primarily aid. Any significant decline would sharply slow growth, would affect the ability of the economy to function efficiently and might well jeopardize liberalization. It is equally clear that no country of the size of Sri Lanka can run a deficit on its current (foreign) account of 13 percent of GDP for a long time. Indeed, in the early 1980s Sri Lanka had to borrow heavily in the commercial market, as aid was inadequate to meet the resource gap. That only aggravated the longer-term problem, of course, as the debt has to be serviced. -32 2.82 There is a breathing spell for the near term, if aid continues at a high rate. The expenditures on Mahaveli are declining sharply, and this should free resources for other uses. Growth in rice production has made a major contribution to relieving the pressure on the balance of payments. Agricultural production should increase further as the Mahaweli expands the irrigated area. There is therefore a period ahead when the closely related issues of inadequate domestic savings, and inadequate exports can be tackled more readily. 2.83 The Bank, and other donors, have long advocated that Sri Lanka attract more foreign private investment to deal with the interrelated savings and foreign exchange gap. Under present circumstances this is not a realis- tic prescription. It is well known that foreign investors are highly risk averse. Even before the 1983 ethnic riots their contribution was small (never more than 1.3 percent of GDP) but it was rising rapidly. It will take years before their confidence is restored, after the situation has calmed down. 2.84 Another obvious step for dealing with both resource gaps is to increase total resources available in the economy, prtmarily by increasing tree crop production and tree crop sector efficiency, expanding industrial output and industrial sector efficiency, and by more rapid growth of field crops other than rice. The structural issues involved are discussed below. This is only one of the public finance issues which it may be worth pursuing further. It is possible that the Bank could be of help by participating in joint concrete and professional work. 2.85 Diverting resources to savings should also be feasible to some degree. The Sri Lankan savings rate is low in comparison to other countries with similar economic structures, and especially in comparison with other rapidly growing economies. Some of the reasons are not subject to correction by short-term policy changes, for instance perceived risk and uncertainty about the political situation. But the Government could address the public savings rate, which has been negative since 1977 despite rapid growth. Since 1983, rising security costs is one major factor. The deficits of publicly- owned enterprises have also been a factor, although their financial perfor- mance has improved in recent years. They should be significant net contributors to the budget, not a drain on public funds. 2.86 Another element in the public deficit of considerable concern to the Bank, has been the failure to collect significant revenues from charges for irrigation water. Some of the increased income produced by the massive investment in irrigation, especially under the Nahaweli, should return to the Governmert. The Bank has urged this from its first irrigation loan and con-- ditionality on this point has become increasingly strict. Water charges have now been instituted, but on a limited scale. This is an area of long- standing Bank involvement and concern and some progress can be expected, but given the resistance a major increase in public savings is not likely to result. -33- 2.87 The key problem in negative public savings appears to be stagnation in the production of tree crops, and declining prices, which reduced the rev- enues that could be obtained from export taxes, one of the principal revenue sources. Expanding tree crop production is dealt with below and is one way in which the Bank can help on the resources problem. (b) Tree Crops 2.88 Like the witches in Macbeth, stagnant tree crop production has appeared regularly in this discussion of Sri Lanka, as it has in Bank reports for almost three decades. It is clearly one of the major problems. -Stagnat- ion, according to various analyses, most notably by the Bank, has several causes (see Part Two, Section 1). Among these, the question of adequate price incentives has been at the forefront of Government-Bank discussions for some time. In the early 1980s export duties were reduced and together with the establishment of a prices commission is seen as a first important step to a solution. Another issue is the incentive system for public sector managers. Drawing on studies financed by the Bank, one useful first step was taken in 1985 to improve management incentives, primarily through the introduction of simple performance indicators. While these already have had some favorable effects, they are clearly only first steps, The Bank has been heavily involved in this sector and can continue to make a major contribution to it in the future. (c) Industry 2.89 Several major steps were taken with respect to the manufacturing sector after 1977 and these have been discussed earlier. But three key prob- lems remain* Private investment in producing for export is not sufficiently profitable in most industries to stimulate a rapid expansion of manufactured exports; the public sector enterprises have not benefitted from any major reforms; and the whole sector suffers from a number of continuing distor- tions. 2.90 The inadequate profitability of exports has been addressed by the Bank primarily in terms of the exchange rate. But exchange rate adjustment for the economy as a whole has far-reaching implications and costs, and mobi- 11ses strong resistance. Certainly something needs to be done to increase the returns from non-traditional exports, primarily of manufactured goods. This is an issue on which Bank support is important, where the standard pre- scriptions are not always the only, or even the best, solution and where further effort is required. The only point one can urge is that this is one of the most complex issues that economists have dealt with. Those advising on the Bank side need to be highly sophi-ticated and experienced, as well as flexible, because the best solution is .,at clear, and even the best solution may not be very good. 2.91 Improving the efficiency of public enterprises is also difficult, but what needs to be done is more clearcut. As in the case of the tree crop sector the crucial ingredients are: a performance evaluation system, which -34 - provides information on the functioning of the different enterprises and their managers; an incentive system that induces managers to improve their performance in terms of these performance indicators; sufficient decentral- ization so that the relevant decision makers have the opportunity to respond to these Incentives. The Bank can be helpful in two ways. First, by providing advice on technical problems. In some countries (e.g. Pakistan) the Bank has helped the government concerned by providing information on the experience of other countries with the same problems. Second, it can provide resources to reduce the costs of change. For instance, it is a good deal easier to carry out rationalization in a particular enterprise, including a reduction in labor, if there is rapid expansion of the sector as a whole, so workers readily find employment elsewhere. For the Bank to help bring about a rapid expansion of manufacturing, however, will again require flexibility, imagination and some risk taking. 2.92 Finally, significant distortions still plague the industrial sector as a whole. The most serious are the result of the system of tariffs and taxes. Again, some steps have recently been taken to rationalize the system. The effective protection study and other work sponsored by the Bank were useful to the Presidential Tariff Commission, and led to the first major overhaul for some years in the -tariff system. But there is still far to go. The Bank can help by standing ready to provide personnel for any further staff work that may be needed. Potentially its most important contribution is to provide resources for an expansion of industrial investment, because all the needed reforms are more acceptable in a expanding than in a stagnant sector. (d) Diversification and Land Settlement 2.93 When the accelerated Mahaweli was launched, rice self-sufficiency was a major objective that seemed difficult to achieve even with that pro- ject. But now, even before most of the Mahaweli water is available, rice self-sufficiency is at hand as a result of previous investment in irrigation, a tremendous expansion of fertilizer use in response to stronger incentives, better seeds, liberalizaton of distribution and improved support services. With more Mahaweli water becoming available, the possiblity of a significant surplus above domestic demand exists. But Sri Lankan rice varieties are not in demand outside the country. Moreover, some of the soils to be irrigated by the Mahaweli, and some other areas already under rice, are not very suitable for rice cultivation. Thus, diversification away from rice is clearly necessary. But it is as yet unclear what pattern of crop diversifi- cation is desirable, although the authorities are well aware of the problem and are working on it. Given the size of the Mahaweli project, land settle- ment is another major task on which the Bank may be able to be of -help. (e) The Government Machinery 2.94 We have already mentioned that the machinery for policy and project formulation and implementation is characterized by some unusually able pro- fessionals, but that they are few in number. It is hampered by the absence -35 of a strong, systematic staff development program for the civil service. Some senior Sri Lankans mentioned another problem. While in many other coun- tries, the head of the planning and coordination agency is the President or the Prime Minister, in Sri Lanka the central planning and coordinating ministry is headed by a regular minister. He is nominally charged with coordinating the programs of departments headed by the President and by the Prime Minister, as well as those of other ministers who are- his colleagues in the Cabinet. This is at times difficult. But these are no obviously superior arrangements, especially because the joining tf Planning and Finance has strengthened considerably the effectiveness of the former, and has brought about coordination between planning and budgeting. Finally, a salary schedule has evolved for the civil service which provides strong incentives to skilled professionals, technicians and administrators to leave govern- ment. This has gravely weakened all aspects of public administration. 2.95 While steps to strengthen the Government as an institution are important, it is also an area where the role of outsiders, including the Bank, must necessarily be a limited one. But the Bank is better placed than bilateral donors to be of help, since fts staff would not be suspected as readily of pushing the interests of a particular country. If the Bank also can respond flexibly and sensitively to the Govenment's needs it may be able to assist in several ways: - providing quite specific technical assistance for staff work, especially on the implementation of economic recommendations, through sharply focussed missions on such issues as pricing and cost/benefit analysis of non-rice field crops; the experience else- where in privatising publicly owned enterprises (such as done re- cently for telecommunications) and effective performance evaluation of those remaining in the public sector; and programs and policies for industrial export promotion. - offering to help with a systematic staff development program for the civil service. - offering to make available the experience of other countries in dealing with inadequate government salaries without a massive increase in government operating costs. - helping with instituting effective aid coordination mechanisms. Strengthening government institutions is a key issue for most or all Bank projects. It is unsatisfactory to deal with it on a project by project basis, so a general technical assistance project would be worth trying. (f) Low-End Poverty 2.96 As discussed earlier, to the best of our current knowledge, the growth-oriented strategy followed since 1977 has actually benefitted the great majority of Sri Lankans, including most of the poor, more than the pre- ceding dirigiste strategy. What is sometimes referred to as "trickle down - 36 - economics' appears to work. But the poorest received a smaller share, probably lost in absolute terms and certainly saw no significant improvement in their living standards despite rapid growth. The food stamp program, targeted on the poor, was designed to deal with this problem. But as half the population received stamps, the Government allowed their true value to decline to reduce the burden on the budget. - Revisions to remedy this are under discussion. The resulting problems for the poorest appear to be the reasons for survey evidence of deteriorating nutrition. This is of concern to the Government and to at least some donors* It is, however, another issue on which outside donors can only be of limited help. The Bank might assist in identifying more clearly the groups that have not benefitted from rapid growth. Present knowledge of the facts is murky and uncertain at best. 2.97 The issue of low-end poverty has been neglected by the Bank, per- haps in large part because it is not clear how it can be of assistance in dealing with it. But since it is a key problem, the Bank could take a more active interest in what can be done, and offer to help in developing a speci- fic program (something the Bank has helped with in Malaysia, for instance). (g) A Caveat 2.98 The preceding sections have identified an "unfinished agenda" that may read suspiciously like an outline of a program for Sri Lanka for the next five years, recommending clear priority areas for action. But that is not our intention, nor do we feel able to present such a program. We simply have not sufficiently analyzed all the issues to be in a position to make clear recommendations. For instance, we have not studied the social sectors or transport aid communications. Nor have we discussed the ethnic conflict, a crucial problem for the Sri Lankan economy, which has put a strain on the budget, the balance of payments and the economy more generally, and has especially affected private investment. And even our work on other fields was concerned with the Bank's role and relationship with the Government, and was not an economic analysis of development priorities. 2.99 Instead, this section has a more limited purpose: to argue that despite the undoubted success of development strategy in the last 8 years, that success has not been unqualified because there remains an unfinished agenda with significant issues; to outline some of the problems that the Bank may want to pay attention to in designing its programs; and above all, to provide a foundation for our contention in the next section that some changes are desirable in Bank approach and procedures to increase its effectiveness in helping Sri Lanka tackle these issues. G. Desirable Changes in Bank Approach - The Lessons of Sri Lanka 2.100 The experience of Sri Lanka suggests that some adjustments in Bank procedure are desirable for the Bank to play a fully effective role in deal- ing with the unfinished agenda. The major reason these important problems remain is not that government officials and others do not understand the need for changed policies and programs. Rather it is that the costs attached to - 37 - those needed changes are large. They loom even larger now because the Government faces severe other problems. The Bank's major contribution can be to help improve the cost-effectiveness of these reforms. (a) Improving the Cost-Effectiveness of Policy Reform 2.101 There are various steps that can be taken to improve effectiveness: - Focussing the Bank's program more clearly on the major current and future problems of Sri Lanka (e.g. tree crops, manufacturing). That would imply reducing loans to other activities, such as power, transportation, communications, and dairying. - Relating the total size of lending more explicitly to policy changes in the targeted sectors. That would imply that carrying out reforms will generate substantial additional foreign transfers, while failure to do so would sharply reduce total Bank resources available to Sri Lanka. - Reducing macro-economic conditions attached to Bank lending. This could mean, for instance, abandoning the condition that an IMF standby be signed, that there be general exchange rate reform and so on. Only the 1974 Program Credit and the aborted SAL have been conditional on IMF agreement, so that if future Bank lending is sector focussed, this requirement would not apply. - Strengthening Bank work in areas of concentration. One of the costs of borrowing from the Bank is the difficulty of dealing with poorly focussed Bank missions. These costs can be reduced if Bank recommendations are limited to essential changes. - Mobilizing additional resources from other donors in support of the policy changes. The Bank has already done this with respect to the most recent tree crop loan and that fact contributed to its effec- tiveness. A systematic effort to mobilize Aid Group resources to tackle key problems would require greater coordination with these donors. - Allocating additional Bank resources to Sri Lanka if major policy changes are made could be a very effective step. Indeed, overall aid magnitudes appear to have been the principal instrument used by the Bank in Sri Lanka in support of reform. Our recommendations imply reduction in the size of the Sri Lankan program if policy changes are not made. It is then logical to recommend expanding resources if policy changes are made. 2.102 We realize that some of these steps would be difficult. Reducing Bank involvement in some sectors where the Government-Bank relationship has been particularly successful would have costs for both. The macro-economic conditions imposed by the IMF, and endorsed by the Bank, are often desirable - 38 - in improving the functioning of all sectors. While more clearly demarcating the separate but complementary focus of Bank and Fund, decreasing Bank in- volvement in achieving them can also complicate reforms in the areas of Bank concentration. Strengthening Bank work in these areas involves costs to the Bank as well. So does any effort to coordinate more closely with other donors to help in mobilizing their resources. Thus, there would be costs and problems in the recommended approach of increased targeting of Bank resources and conditionality. But there would also be obvious benefits to a concentra- tion of Bank resources on a few key problems of the Sri Lankan economy. If the crucial bottlenecks to faster growth can be identified--and we do not pretend that we have done so in any definitive way, since that was not our task-then one can make a reasonable argument that the Bank should concen- trate its efforts on dealing with them, even if there are other important activities which it could well pursue. During periods when major policy changes are unlikely, the Bank could keep its hand in by working on a low-key basis with the sectors and activities which are less crucial and controver- sial, such as power or transportation. But in periods when major changes with far-reaching benefits are possible, it might be well to concentrate all efforts on providing resources to support such crucial policy changes. To a considerable extent that would be consistent with recent Bank policy declara- tions. (b) Increasing the Effectiveness of Interaction 2.103 As discussed before, during the three decades of Bank relations with Sri Lanka, there have been periods during which Government-Bank coopera- tion has been very fruitful, and other periods, particularly those of dir- giste regimes, when relations were poor. But even during periods of inten- sive cooperation, such as after 1977, there have been less fruitful episodes characterized by misunderstanding and antagonism which were not without cost to the Bank. In order to increase the effectiveness of the Bank's relations with the country, it would appear desirable to: - Continue low-key, but reduced involvement during periods when con- ditions are not favorable for major Bank initiatives. Make more efforts to work with dirigiste regimes when they are in office. Bank staff would then be more familiar with the situation in Sri Lanka, and with key actors in the Government, when a new upsurge of Bank activity occurs. - Strengthen the Bank office in Colombo, which needs to play a key role in keeping the Bank in touch with developments in Sri Lanka. The present small Bank office is forced to devote much of its lim- ited capacity to the important task of administrative backstopping. As a result of its limited programmatic capacity, the field office may be the weakest link in Bank interaction with Sri Lanka. True, a field staff is relatively expensive, but if well selected it can help the Bank avoid giving recommendations and posing conditions that are not founded in Sri Lankan reality or that are counterpro- ductive in particular circumstances. It can therefore be cost- effective. This point was stressed by a number of Sri Lankan officials. -39- - Expand and strengthen Bank interaction at the highest political level of the Sri Lankan Government. At present Bank discussions with the Government on major policy issues are overwhelaingly with the Ministry of Finance and Planning (MFP). When the Bank is pressing for particular policy changes, when it represents the views of the donor community, when it discusses particular problems, it generally is that Ministry that is pressed, urged, informed. When the MFP then transmits the pressure, it finds itself in an uncomfortable position especially if the issues con- cern the President or Prime Minister or embroil the MFP in friction with another ministry. It was stressed by very senior government officials that it would be desirable if periodically Bank repre- sentations on major issues were made directly to the President, the Prime Minister and at times, a particular substantive minister, Presumably this requires involvement of the relevant Bank Vice President, Senior Vice President or President and such involvement cannot be too frequent. But occasional dialogue at that level could be very effective in advancing joint Government-Bank objectives. - Reduce the number of missions, in particular general sector missions, but concentrate on a few key fields, and give more attention to specific applied work of direct use to the Government, such as the good past work on energy assessment, effective protection, tariffs, urban problems, with less emphasis on broad policy recommendations which relevant Sri Lankan officials already support. - Shift the focus of Bank staff evaluations from performance in pre- paring and processing documents and loans, to the professional qua- lity of the work, the relevance of recommendations and their usefulness to key Sri Lankans, and the effectiveness of Bank staff in making the work useful and usable. - Reduce the frequency of rotation of Bank staff. It is difficult, if not impossible, for Bank staff to participate effectively in policy dialogue until they are familiar with the Sri Lankan economy and the constraints under which the Government operates. By that time they may face rotation to another assignment. Valuable energy of senior Sri Lanka officials is consumed in educatiug successive generations of Bank staff. 2.104 The aim of these and other recommendations would be to assure that Bank staff dealing with the Government on key issues be as well informed on Sri Lanka as possible, be experienced in policy analysis and advice, be sen- sitive to Sri Lankan objectives and reality, and enlist Sri Laukan coopera- tion to the maximum extent possible. Of course, the Bank has its own objec- tives and criteria, and these are not recommendations that the Bank forego -40- them and accept whatever the Government wishes. Sometimes conditions have to be clearly stated and insisted on. But if the Bank is to emphasize policy changes, and the policy dialogue wuich is to precede it, then it obviously should participate in that dialogue with highly competent staff, who are experienced in dealing with broad and complex issues of political economy, and are not narrow economic technicians. Government officials will inevitably be better informed on Sri Lanka then Bank officials. It would therefore be desirable for Bank staff to be stronger in other areas. Many Bank officials are highly regarded in Sri Lanka, but those who are not Impose considerable cost on the relationship. This will be aggravated if the Bank concentrates on more difficult and sensitive policy changes in crucial sectors, as suggested. 2.105 The recent relationship between Sri Lanka and the Bank has been on the whole an effective and successful one. Some difficult steps have been taken. Change required in the future may be even more difficult, because some of the more widely supported changes were made first and because the aid program which helped make them possible was expanding dramatically in the past, while it threatens to contract in the future. That is why we believe the past experience suggests concentrating effort on a limited number of key issues and strengthening the Bank staff who deal with them. -41- III. INSTRUMENTS OF INTERACTION A. Size and Composition of Bank Lending Size of the Lending Program 3.01 Sri Lanka has been a major recipient of World Bank support. From 1954 through June 1985, the Bank made 11 IBRD loans, totaling US$211 mil- lion1I, and 39 IDA credits, totaling US$783 million. The 50 loans and credits financed a total of 47 projects, as three projects were financed by a combination of an IBRD loan and an IDA credit. In addition, IFC made 8 in- vestments in Sri Lanka, totaling US$43 million. (A detailed list of loans and credits given.in Annex 1). Table 3.1: WORLD BANK ACTIVITY IN SRI LANKA, FY1954-85 No. of US$ of which Operations Million Undisbursed Cancelled IBRD Loans 12 211 80 20 IDA Credits 38 783 365 16 .Sub-total 50 994 445 36 IFC Investments 8 43 .. 3 Total 58 1037 445 39 3.02 As shown by the graph on page 42, the Bank's lending activities have been very unevenly distributed over the years. Only since FY1975 has there been sustained lending. Long lapses in Bank activity occurred in the period before FY1975. Periods of activity and inactivity appear to be closely related to the type of government in power in Sri Lanka. Since the first Bank loan in 1954, SLFP Governments who favored a state-controlled economy have ruled a total of 17 years; more market-oriented UNP Governments, 15 years. Yet, only US$115 million, or 12 percent of total Bank leading was committed when SLFP Governments were in office. The remainder, US$879 mil- lion, or 88 percent, was made to UNP Governments. All of IFC's investment's were made when UNP Governments were in office. 3.03 This pattern of Bank lending was in sharp contrast to that of the Bank's partners in the Sri Lanka Aid Group, established in 1965. While the Bank's average annual commitments during the rule of the second SLFP Govern- ment (1971-1977) were much lower in real terms than those under the preceding UNP Government, commitments by most other Aid Group members increased under the SLFP Government. This provides one indication of the limits of Bank influence on other members of the Aid Group (para. 3.46). I1 Amounts in paras. I and 2 are rounded to the nearest US$1 million. - 42 - Graph 1: Sri Lanka: Bank Lending By Fiscal Year. 170 160- 15~0 - 2~ 140- 130 - 4 Commitments 120- 10 o Disbursements 110- c 100 - 90- so - * 80- U) 70- 600- 50- 40- 1 30- 20- 10 0* 55 O 5 7 75 8s Fiscal Year Table 3.2: SRI LANKA AID GROUP AVERAGE ANNUAL AID COMMITMENTS (US$ million; in constant 1971 US$ Ia) World Other Total Period Bank Aid Group Aid Group 1965-1970 (UNP) 14.6 59.8 74.4 1971-1977 (SLFP) 7.9 78.6 86.5 1978-1984 (UNP) 33.8 152.3 186.1 /a Manufacturing Unit Value Index used as deflator. Source: Department of External Resources, Ministry of Finance and Planning. -43- 3.04 The main reason given in Bank documents for the low lending activ- ity during SLFP Governments was dissatisfaction with the Government's econom- Ic performance: domestic savings were affected adversely by the high cost of social programs, and balance of payments and budget difficulties were in the Bank's judgment not addressed sufficiently. Poor relations with the Government led to periods of diminished Bank lending and mission activity, during which no serious attempt was made by the Bank to work within the economic system espoused by SLFP Governments. The discontinuity in Bank activities was not without cost to the country and the Bank itself. 3.05 The Bank's first loan to Sri Lanka in 1954, for power generation, was followed by two more power loans in 1958 and 1961, both under SLFP Governments. But then a long lull in lending activity occurred. The Bank's economic report in 1961 was still moderately optimistic about government policies: "The action taken by the Government.....encourages confidence that it will take additional measures if necessary to prevent a further deteriora- tion in the immediate financial situation." However, although the Government submitted several requests for project financing, no further Bank loans were made until 1967. At the first Aid Group meeting in 1965, organized by the Bank at the request of the then newly elected UNP Government, the chairman stated: "As you are no doubt aware, the Bank has not made a loan to Ceylon during the last four years because we were not satisfied that the Govern- ment's economic and financial policies were conducive to economic growth and proper use of resources."2/ The Bank was more sympathetic to the policies of the UNP Government, and seven projects were financed between 1967 and 1970. 3.06 The SLFP, however, remained suspicious of the Bank's motives, and accused it of neo-colonialism. The dealings between the Bank and the UNP Government became an issue in SLFP's election campaign before the 1970 elec- tions. When the SLFP won the elections, the new Government first announced that it wished to cancel three Bank financed projects approved by the previous Government, but later established a Committee of Enquiry to review the conditions to those projects: the 1968 Highways project, the 1969 Power IV project, and the 1970 Mahaweli Ganga Development project. In the Government's view the loan agreements contained clauses which undermined the country's sovereignty, particularly those related to prior Bank approval of organizational changes and appointments of top personnel and consultants. Following the review the Highway loan/credit was cancelled after less than 8 percent was disbursed. The Mahaweli project was renegotiated. Clauses relating to prior Bank approval for the appointment of top managers and changes in legislation were deleted, and conditions on cost recovery were softened. Although reduced in scope, the Power project went ahead, but the Ceylon Electricity Board did not receive the degree of autonomy the Bank expected and loan conditions relating to the financial return on CEB's assets were ignored (paras. 7.13, 7.24). Also, a 1970 IFC investment was cancelled after the Government withheld investment approval for the company concerned. 21 Chairman's Report of Proceedings of the Meeting on Ceylon's Foreign Exchange Situation, No. CEY65-4, August 31, 1965. -44- 3.07 This episode signaled the beginning of a second period of strained relations between the Government and the Bank. The undisbursed amounts of the 1967 and 1969 DFC loans were cancelled (para. 6.17), partly because of lack of private sector interest, but partly also because the Government con- tinued to withhold investment licenses from potential loan recipients. In 1971, the Bank's management declared Sri Lanka no longer eligible for IBRD loans because of high debt service obligations and uncertain export pros- pects. In 1971 and 1972, IDA allocations to Sri Lanka were cut drastically. The reasons given were poor government responsiveness to Bank recommendations and lack of progress on financial stabilization, even though the financial difficulties were largely the result of the expansionary policies of the previous UNP Government. Between 1966/67 and 1970/71, the budgetary cash deficit had increased from Rs 600 million to more than Ra 1,100 million, and the Government's short-term external debt had increased from US$21 million in 1968 to US$113 million in 1970. By contrast, during the first four years of its rule, the SLFP Government, although hampered by a sharp deterioration in terms of trade, avoided further increases in budgetary deficits and did not engage in new short-term external borrowing. 3.08 As mentioned before, most other members of the Aid Group did not follow the Bank's example. While noting the lack of growth-oriented poli- cies, they considered the financial difficulties to have been caused largely by factors beyond the control of the incumbent Government, and they expressed support for the Government's social policies. Aid commitments by members of the Aid Group other than the Bank increased from US$38 million in 1970 to US$220 million in 1975. 3.09 The Bank joined the other donors in 1974, recognizing that in determining the Bank's posture too much weight had been given to short-term economic indicators, and not enough to the Government's social achievements and to the fact that with respect to a long-term growth strategy, the poli- cies of the previous UNP Government had not been clearly more appropriate than those of the incumbent SLFP Government. Bank lending was resumed, but the great upsurge in lending activity occurred after 1977, when the new UNP Government announced its liberalization policies, and the Bank had agreed to support the Accelerated Mahaweli Development Program. In response to the Government's economic reforms, IDA allocations were increased to make Sri Lanka, on a per capita basis, one of the top recipients of IDA funds. Also, since 1982, the country is again considered eligible for limited amounts of IBRD loans. 3.10 There has been a high cost to the long interruptions in Bank activ- ity in Sri Lanka. Because of the discontinuity in preparatory field work, it took several years after resuming normal relations in 1965 before a project pipeline was built up again. Similarly, in 1974, when the Bank re-started operations, the country program paper in that year stated: "Our insufficient knowledge of sectors--except agriculture where, however, our knowledge needs to be considerably updated-prevents us from formulating project proposals in any detail". Several project proposals in lending programs fell through, as a result of which Sri Lanka was able to make use of only about 70 percent of -45 its already lowered IDA allocations in the period 1971-1977. Also, in its eagerness to build up a project pipeline after restoring relations with the country, the Bank tended to pay less than desirable attention to project pre- paration. For example, four out of seven agricultural projects financed in the first three years following resumed lending were not successful.3/ According to OED Project Performance Audit Reports, a common theme in all four failed projects was inadequate preparation before appraisal. The cost of the Bank's temporary withdrawal from the power sector was that intended institution building was not accomplished, and that the Bank lost influence over selecting least cost solutions for power investments (paras. 7.24- 7.25). Finally, because of the lack of sufficient in-depth analysis of the Sri Lankan economy during 1971-77, the Bank was not in a position to contribute to the shaping of the Government's program of economic reforms in 1977, and it left the Bank ill-prepared when major decisions were required on whether or not to support the Government's huge Accelerated Mahaveli Program. 3.11 Although it is difficult to establish whether the interruptions in relations with Sri Lanka could have been avoided, a few observations can nevertheless be made. In 1970, the key occurrence seems to have been the Government's investigation, and subsequent re-negotiation of three Bank loans made to the previous Government. In their book about the World Bank,/ Edward S. Mason and Robert E. Asher devote some attention to that event. They suggest that lack of familiarity with Bank practice on the part of the opposition might have been one reason for their objection to the Bank loans, but they also conclude that the Bank itself was not altogether free of blame. Bank staff involved in negotiating those loans with the previous Government seem to have been aware of existing opposition. But as one senior Bank officer interviewed by Mason and Asher put it: "The IBRD had very little contact with the opposition. We (Bank staff) foolishly isolated ourselves." This would seem to indicate that the at times poor relations with the country could have been less confrontational if the Bank had con- sidered the existing opposing views more carefully. This still holds true today. Although in general the Bank's relations with Sri Lanka are very good, in some instances policy dialogue continues to be hampered because the political opposition to some of the Bank's recoamendations is not well under- stood (paras. 3.30-3.32). 3/ The 1968 Lift Irrigation Project, the 1974 Dairy Development Project, the 1975 Agricultural Development Project, and the 1978 Tree Crop Diversification Project. 4/ Edward S. Mason and Robert E. Asher, "The World Bank Since Bretton Woods, " The Brookings Institute, Washington, D.C., 1973. - 46 - Composition of Bank Lending Table 3.3: BANK LENDING BY SECTOR /a Through FY77 FY78-85 Total m1n $ S% m1n )Mn ) Agriculture /b 64.0 36.6 437.6 56.0 501.6 52.4 of which Mahaweli /b (30.5) (17.5) (135.1) (17.3) (165.6) (17.3) Power /c 76.8 44.1 98.2 12.6 175.0 18.3 Industry, DFC 8.8 5.0 92.5 11.8 101.3 10.6 Transport 0.7 0.4 93.5 12,0 94.2 9.9 Water Supply 9.2 5.3 30.0 3.8 39.2 4.1 Telecommunications - - 30.0 3.8 30.0 3.1 Program Credit 15.0 8.6 - - 15,0 1.6 Total 174.5 100.0 781.8 100.0 956.3 100.0 la Excluding cancelled amounts. 7b Excluding power component of 1970 Mahaweli project (US$17.0). 7 Including power component of 1970 Mahaweli project (US$17.0). 3.12 It is difficult to discern a coherent country-oriented lending strategy before the Bank was reorganized, in 1972, to combine programming and project functions into Regions. The Bank's economic analysis in the earlier years addressed the macro economic issues of the day, usually balance of pay- ments and budget difficulties, but not the priorities for public investment and the possible role for Bank assistance. Conversely, projects were not conceived as instruments of an economic policy dialogue. This is not to say that the projects the Bank financed before 1972 were inappropriate. There was clearly a need for expanding electricity supply, and the Bank played a vital role. Also, the Bank's entry into the agricultural and industrial sectors after 1967 was in line with government priorities. 3.13 The Bank's first attempts to devise a lending strategy for Sri Lanka were made in Country Program Papers (CPPs) prepared in 1970, 1971 and 1972. Those attempts, however, were hampered by the poor Bank-Government relations in those years. Not only were the lending programs proposed in the first three CPPs very different from year to year, they also bore no resem- blance to the lending that actually materialized. Although the need for quick-disbursing program-type lending was stressed, the only lending in the early 1970s was a US$6 million IDA credit for power distribution, the major justification of which was to keep a minimum presence in the country. -47- 3.14 However difficult it still was in 1974 to draw up an appropriate lending program (para. 3.10), the CPP of that year marks the -beginning of a consistent and sustained lending strategy. Apart from recognixing the need for program-type assistance, the main focus since 1974 has been on directly productive projects, mainly in agriculture, and on immediately supporting infrastructure. After the Government in 1977 embarked on the Accelerated Mahaweli Development Program and other costly "lead" projects (housing, new capital and export processing zones), an added Bank objective has been to balance the Government's investment program by supporting other high priority activities which were in danger of being neglected because of lack of funds. This included projects for rural development, rehabilitation and mainte- nance. 3.15 The Bank's actual lending since 1977 clearly reflects the emphasis on productive sectors, infrastructure and rehabilitation. Fifty-six percent of the Bank's lending in FY1978-85 was for agriculture, almost 12 percent for industrial development, and the remaining 32 percent for infrastructure. Of the 28 projects approved in FY1978-85, 13 were for rehabilitation of existing assets, or contained major maintenance and rehabilitation components. Such projects were for tree crops, irrigation, the transport sector, and telecom- munications. Although the Bank has continuously recognized the need for quick-disbursing assistance, after two small credits of this type in 1974 and 19755/, non-project lending was not repeated. Since 1981 the possibility of structural adjustment lending (SAL) has been discussed with the Government, but no SAL has materialised so far. 3.16 Thus, except for quick-disbursing non-project lending, the Bank's lending activities since 1977 have reflected the objectives the Bank has set for the country. Government officials told the Mission that the composition of the Bank's lending also largely reflected government objectives, with one exception: they would have liked to have seen greater Bank involvement in the education sector. In that sector the only Bank lending was for voca- tional training through the 1981 Construction Industry credit (para. 6.26). Requests for financing general education projects were already made in the late 1960s, but because of the country's tigh literacy rates and school enrollment ratios education projects were given low priority by the Bank. In the Government's opinion, however, overly academic curricula have led to an increasing gap between knowledge and skills generated by the school system and those required for rapid social and economic development. Shortages have occurred in some skilled and professional occupations, exacerbated by migra- tion abroad. Bank projects addressing the effectiveness of the general edu- cation system might have had a considerable impact in the Government's view. 3.17 Although after 1977 the Government would have liked to have received a larger proportion of the Bank's financial assistance in the form of quick-disbursing program loans, the policy conditions attached to such 5/ A US$15 million Program Credit in 1974, and a US$25 million Agricultural Development Credit in 1975. - 48 - loans have been a serious obstacle. The Bank's two earlier program-type credits were not successful in achieving policy reform. Although the 1974 Program Credit was disbursed quickly, and achieved its financial objective of providing much-needed foreign exchange for industrial inputs and spare parts, the expected policy actions remained insufficient in the Bank's view. No policy conditions were attached to the program credit itself. It was made on the strength of measures taken in conjunction with an IMF standby agreement, but it was hoped that it would lead to policy dialogue and additional measures which could be supported by further program lending. This, however, did not materialize. 3.18 The 1975 Agricultural Development Credit was also meant to be dis- bursed quickly (in 30 months). However, because of inadequate preparation, cumbersome procurement procedures and ineffective coordination among govern- ment agencies, serious disbursements delays occurred. Also, after the Government liberalized imports, in 1977, government agencies found it easier to order equipment directly, without using project funds. In April 1980, some 50 months after project start-up, disbursements were halted. About US$4.4 million of the credit remained unused and was cancelled. The main policy condition attached to the agricultural credit was that the Government carry out a tree crops incentive study. Although consultant funds were pro- vided for that purpose, the study was never completed, mainly because of lack of government interest at the time. 3.19 This lack of success with non-project lending may be ascribed partly to the availability of relatively large amounts of quick-disbursing non-project assistance from other sources, to which no policy conditions were attached. In 1974-1977, Aid Group members other than the Bank made on the average US$90 million a year available in the form of non-project assis- tance. This amount was increased to an average of US$160 million a year in 1978-1984, which helps to explain the lack of progress with Bank structural adjustment lending. Also, in 1983 and 1984, one of the justifications of non-project lending--increasing the utilization of productive capacity by making imported inputs available--became less compelling when high tea prices caused a sharp increase in external reserves. But the decline in tea prices in 1985 suggests that this may have been a temporary phenomenon. 3.20 It is not that the Government does not recognize that even after the reforms in 1977 further structural adjustment is still necessary. In fact some policy reforms which it carried out subsequently, such as those with respect to food distribution and pricing, industry, energy and tree crops, involve important structural changes. But the conditions attached to the proposed SAL dealt with several issues that were among the politically most contentious in Sri Lanka, involving strong opposition from powerful groups and individuals, sometimes even Cabinet members. Moreover, the high visibility of Bank conditionality attached to SALs made the Ministry of Finance and Planning (MFP) hesitant to pursue a Bank SAL. The MFP felt that in its delicate deliberations on economic policies with other ministries and agencies, it could not afford to be perceived as subservient to the Bank. Also, it felt that obtaining parliamentary approval for a SAL would be a very difficult procedure. - 49 - B. Policy Dialogue - Economic and Sector Work 3.21 Conducting a policy dialogue and providing advice on development issues are relatively new activities for the Bank. To some eitent, of course, Bank economic and sector reports have always contained commentary on development policies, but in the early years it was mostly general in nature, and the implementation of recommendations-particularly the design of prac- tical solutions to development problems--was usually not pursued systemati- cally. In the last six years or so more deliberate attempts were made to carry out economic and sector work (ESW) for Sri Lanka with the specific purpose of encouraging policy dialogue, giving advice and technical assistance on economic policies and institutional matters, and bringing about reforms. 3.22 This change of the scope of the Bank's ESW followed from the in- creasing awareness that the traditional investments in projects were often not leading to the expected results because of shortcomings in the institu- tional and policy environment in several of the Bank's member countries, and from the Bank's subsequent greater emphasis on policy-based non-project lend- ing. Thus, in recent years the provision of advice and technical assistance to remove institutional and policy constraints is more and more seen in the Bank as an important development service in its own right. Discussions on the future of the Bank in the Board and the Development Committee suggest that this function is likely to become even more important in the future. Country economic and sector work would provide the analytical underpinning for policy dialogue. 3.23 This section is not intended to provide a comprehensive overview of all recommendations contained in Bank economic and sector reports on Sri Lanka, or an evaluation of their possible impact. The main thrust of the Bank's ESW is discussed in the previous chapter and in the various sector chapters in Part Two. Instead, we will deal mainly with the Government's reactions to the Bank's attempts at policy dialogue and its ESW. In particular, the question will be addressed whether the Government has found the Bank's new activities a useful service or not. We will reflect on the reasons for success or lack thereof, and suggest ways in which the -effectiveness of ESW and policy dialogue may be improved. 3.24 But discussing Bank ESW in Sri Lanka solely in the context of policy dialogue would provide a lopsided view of the usefulness of ESW in general. Apart from providing the underpinning for policy dialogue, the Bank's economic and sector reports have over the years served several other important purposes, such as: (i) informing the Bank's Board and higher management about broad economic developments, the effectiveness of development policies, and the country's creditworthiness; (Ii) providing background material for the annual Aid Group discussions; -50- (iii) serving as a basis for project and program identification, and designing a general assistance strategy for the country. 3.25 Over the years, the analysis in economic reports has contributed to management decisions on the level, composition and terms of Bank lending to Sri Lanka. Cases in point are the Bank's decisions to lower IDA allocations in the early 1970s and to increase them again after 1977 on grounds of economic performance, and the decisions to stop IBRD lending in 1971 and to restore IBRD eligibility again in the early 1980s on creditworthiness grounds. 3.26 The members of the Aid Group for Sri Lanka expressed without exception their appreciation for the Bank's reports. Most members do not have the capacity themselves to analyze Sri Lanka's development constraints and resource requirements to the same depth, and for them the analysis con- tained in Bank reports is very helpful in determining levels and direction of assistance. The analysis in Bank reports also helped in guiding the discus- sions on economic policies in Aid Group meetings. By common agreement among donors and the Government, Bank reports and Aid Group discussions have had a significant influence on shaping economic policy in Sri Lanka (see paras, 3.40-3.47). However, certain shortcomings of Bank reports were also pointed out. Most donors (and the Government) would have liked more analysis of so- cial developments, and of the impact of economic recommandations on the at- tainment of social objectives. Some donors went even as far as expressing the opinion that, judged by the content of economic reports, the Bank does not seem to be interested in social issues. 3.27 Bank sector reports in particular have always served the purpose of identifying lending opportunities. Bgut only after the Bank's reorganization in 1972, when a beginning was made with making Bank activities more country- specific, has ESW served more and more as a means to design an appropriate lending program for the country, and to define the objectives of individual projects more precisely. In the 1970-77 period this proved difficult for Sri Lanka because of the poor relations with the country and the limited amount of ESW carried out. Nevertheless some attempts were made. The agricultural annex to the 1975 economic report helped to define the Bank's strategy for the agricultural sector as it exists today, with its emphasis on water management, tree crops rehabilitation, rural development, and supporting research and extension. In more recent years, the 1979 Industrial Sector Report enabled project staff to address institutional and policy issues in the Bank's projects for the industrial sector. Also, the comprehensive 1980 economic report highlighted the dangers of concentrating investment too much on the large lead projects, especially the Accelerated Mahaweli Program, and helped to focus the Bank's lending program on other high-priority activities that were in danger of being neglected by the Government because of lack of funds. 3.28 Although economic and sector reports will continue to serve the three purposes mentioned above--informing Bank Board and management, back- ground documents for Aid Group meetings, and providing the underpinning for -51- lending decisions--more and more ESW is being carried out to stimulate policy dialogue and to provide advice and technical assistance. For two reasons evaluating this function is a difficult task. First, "policy dialogue" is an elusive concept. The activities surrounding policy dialogue are not well defined or organized in the Bank. For different people in the Bank the phrase "conducting a policy dialogue" has a different meaning. For some it means a discussion, genuinely open on both sides, to get the Government in- terested in pursuing mutually agreed desirable reforms, but for others it means arm-twisting to get conditions accepted. Yet, in recent years almost every Bank staff member in contact with the country has felt obliged to en- gage in policy dialogue in one form or another. Second, measuring and evalu- ating impact of ESW is virtually impossible. There is a natural tendency within the Bank to attribute successful government action to Bank advice. Similarly, Sri Lankan officials will want to claim the credit themselves, admitting at best that Bank recommendations have strengthened their hands. The truth is likely to be somewhere in between. 3.29 In the 1984 CPP for Sri Lanka the South Asia Region expressed some misgivings about the impact of ESW, particularly that of sector work: "Although the impact of these reports varies considerably.....the overall conclusion is that we need to step back from additional studies, concentrat- ing instead on translating existing sector knowledge into practical policy advice and well-designed projects so as to focus Government attention on the priority issues." The multitude of sector reports was cited as a reason for the often inadequate review by the Government. 3.30 In the Mission's discussions with Government officials it was indeed confirmed that the Bank's ESW (particularly sector work) has had mixed results. But it was not so much the multitude as the content or scope of it that was seen to have contributed to this. Only three sector studies were singled out as having been very useful: the 1981 Report on Effective Protection; the 1982 UNDP/World Bank Energy Assessment Report; and the 1984 Urban Sector Report. In many other cases the Government's attitude was one of indifference or benign neglect, but there have also been instances when missions or reports were resented or found counterproductive. Reasons for negative government reactions include the following: (i) unclear or suspect purposes of missions, particularly when the purpose of the mission is perceived to be the preparation of conditionality for lending operations; (it) reports that provide textbook recommendations without offering practical implementation advice applicable to Sri Lankan circum- stances, or without analyzing possible.negative implications; (iii) poorly prepared missions without sufficient knowledge of the country, or ill-informed about decision-making processes and insen- sitive to the process of consensus building within the Government that has to take place -before major policy decisions are taken. - 52 - 3.31 The above comments apply mostly to the Bank's formal ESW, i.e. that which results in published, formal reports. Apart from formal ESW, the Bank carries out a substantial amount of informal ESW, usually in connection with project preparation, appraisal and supervision. Government officials gener- ally expressed great appreciation for this type of informal ESW and would welcome an increase of such activities. It provides for a low-key dialogue between technical staff on both sides. Its strong points are that advice and technical assistance are delivered promptly, and it usually addresses immedi- ately relevant issues which are recognized to exist by Sel Lankan staff. Examples given of useful Informal ESW inelude the interaction over the years between Bank and Sri Lankan staff in the power sector and irrigation, and, more recently, for industry and tree crops. But one limitation of such in- formal ESW was mentioned: project staff tend to pursue solutions for matters relevant to "their projects," whereas the problems they face are in fact much wider. Examples are: (i) insisting on better pay for local staff in speci- fic project entities, although the remuneration of staff in the public sector is a national concern; and (ii) insisting on better staffing of specific pro- ject entities, which will usually be at the expense of the staffing situation in other, equally important entities. 3.32 However useful this informal ESW has been to the Government, the Bank sees its formal economic and sector reports as the main building blocks for- a successful policy dialogue, and for providing advice and technical assistance to bring about the institutional and policy reforms considered desirable. But with a few laudable exceptions, most ESW does not appear to be deliberately designed or executed with that purpose in mind. Discussions with government officials and Bank staff involved in ESW for Sri Lanka led to a number of suggestions that would improve the impact and usefulness of policy dialogue and ESW: (i) One of the most significant observations made by one high govern- ment official in connection with policy dialogue was that there is, for the sake of good relations, too much of a tendency on the side of the Government to agree with the Bank on policy advice which is not well thought through, and which the Government has no intention of implementing. The other side of the coin is that "agreement" cannot be taken for granted, and that Bank staff will have to learn to distinguish situations in which the Government is not likely to follow the Bank's recommendations. The reasons for the Govern- ment's negative attitude would then need to be analyzed carefully. They usually include an amalgam of socio-political factors, vested interests, and the intricate workings of policy formulation that are genuine constraints, but which too often are passed off in back-to-office reports as "lack of political courage". (ii) Much better identification and preparation of ESW is needed. Discuss with the Government the proposed program of ESW just as carefully as proposed lending operations, and spend sufficient time on gauging what it takes to make the exercise most useful to the country. Reach mutual understanding that reform or Bank advice is - 53 - desired, and concentrate on those issues where the Government feels it needs help. (iii) The "learning process" was mentioned as extremely important by government officials. That requires that Sri Lankan officials be fully involved in the actual work, and play a meaningful role. Carefully prepared workshops at the preparation stage can be useful in which local staff are encouraged to diagnose problems. Later they would need to develop their own solutions. This would help ensure that the elusive socio-political constraints are taken into account, and that the ultimate goal of policy advice and technical assistance-to improve the capacity for policy analysis and policy formulation within the country-is attained more quickly. An example of such an approach is the Government-Bank cooperation in preparing the 1984 Urban Sector Report. (iv) If local staff involvement is not feasible, don't provide just textbook solutions. They are known in Sri Lanka too. The practi- cal problems of implementing recommendations are often ignored in ESW, and the applicability of textbook solutions to specific Sri Lankan circumstances is often not tested. Above all, Bank staff need to analyze and be honest about the economic and social costs of the recommendations, and be prepared to offer second-best solutions., (v) To the extent possible, Bank staff should participate in the process of consensus building in the country. Seminars would be a good vehicle if the Government wishes to organize them. But this would require participation of highly experienced and mature Bank staff, with an ability to listen and learn. (vi) Train Bank staff in the art of giving advice. In conversations with government officials one point came across very strongly. The Government does not see the Bank as a faceless institution but as a collection of individuals, and the quality and attitude of indivi- dual Bank staff are an overriding factor in the success or failure of ESW. Contact with Bank staff at all levels has at times been very fruitful, but at other times puzzling and exasperating. At the lower and of the spectrum government officials Eave had to deal with senior staff who after years of delivering advice have lost the ability to learn and listen, or junior staff who have never been involved in the difficult process of policy formulation and have not much to offer in that respect. At the higher end they have met staff who do not pretend to know all solutions beforehand, are willing to listen, and offer their experience and expertise to work with the Government to find appropriate solutions. These are the qualities that successful commercial companies are trying to develop in their staff. But development of this kind of enlightened "salesmanship," and the communication skills it requires, appears to be neglected in the Bank. -55- Government has always been very active in contacting the members bilater- ally'. But by common agreement among the donors and the Government, the Bank has been an objective source of analysis of the country's financial position and development constraints, and has thus played at important role in indicating levels and type of assistance required. 3,37 Over the 20 years of the group's existence the resources committed amounted to about US$5 billion or US$250 million per year. The growth in Aid Group commitments is remarkable: from US$72 million per year in 1965-69, or US$6 per capita, to US$507 million per year in 1978-84, or US$34 per capita. Few developing countries of similar size have received a comparable level of external assistance. Moreover, during periods when Sri Lanka's terms of trade deteriorated, substantial amounts of quick-disbursing program-type aid, such as food and commodity assistance, were secured through the Aid Group, mostly from bilateral donors. Table 3,4: AID COMMITMENTS TO SRI LANKA, 1965-84 (US$ million) 1965-69 1970-77 1978-84 1965-84 Total all sources 396 /a 1,425 3,807 5,628 Sri Lanka Aid Group 358 1,059 3,550 4,967 (of which IBRD/IDA) 48 135 632 815 Mahaweli (Aid Group) ... 46 1,133 1,179 /a Disbursements for non-Aid Group countries. Source: Ministry of Finance and Planning, External Resources Department. 3.38 In the period since 1978, when the Government placed special empha- sis on the Accelerated Mahaweli Program, and was particularly active in seeking donor support for it, the response from the Aid Group members was extraordinary: a total of US$1.1 billion was committed for this program. Moreover, donors agreed to make assistance for the Accelerated Mahaveli Program additional to their "normal" assistance. During 1978-84, non- Mahaweli commitments were US$2.4 billion. 3.39 A secondary objective of the Government was the transfer of foreign technical assistance and advice. This took several forms: policy discus- sions at the Aid Group meetings, much of it based on the technical analysis by Bank staff; the technical advice associated with donors' project activi- ties along with a wide range of studies undertaken by donors, often at the request of the Government. Still another form of assistance was the training of Sri Lankans funded by external donors. - 56 - Dialogue on Policy 3.40 An important objective of the Bank and the Aid Group has been to assist the Government in improving the effectiveness of the external resources provided by suggesting changes in economic policies. From the beginning, issues of development policy have been a major concern for many donors, although the importance attached to government policy actions has varied among them. Some have been interested in a broad range of issues. Others were more concerned with selected topics, or were not interested in policy dialogue at all. While opinions differ on the impact of the dialogue on the behavior of either the Government or the donors, few would deny that there has been a continuous and serious exchange of views on key policy issues. 3.41 Both present and former government officials agree that the Aid Group discussions have had a considerable influence on shaping economic policy across a wide range of development issues, and that the contribution of the Bank to the policy dialogue has been substantial. Important vehicles for conducting this dialogue were the Bank's economic reports which generally contain an examination of special topics, such as resource utilization, resource mobilization and external developments and, frequently, reviews of major sector issues. The Aid Group discussions have provided the Ministry of Finance and Planning with considerable support in its internal dialogue with other branches of the Government. Conversely, the Aid Group offered a means of conveying to donors a clearer perception of the Government's objectives and the socio-political constraints in the country than might have been possible otherwise. 3.42 Although it is difficult to establish a causal connection between recommendations and policy changes, the Government did take action on a large number of issues raised at the Aid Group meetings. Examples of government actions in line with Bank/Aid Group recommendations include the following: (a) incentives to encourage increased paddy production (late 1970s); (b) restraint in capital expenditures (beginning 1979); (c) reforms to encourage increased tree crop exports (1984); (d) energy resource planning (1982-84); (e) dismantling administrative controls over the private sector and reducing price distortions (1965-66, late 1970s); (f) improvements in capacity for planning, and implementing economic policy and investment in the public sector (1965-66 and late 1970s); (g) greater resource mobilization through reduction of food subsidies (mid-1960s and late 1970s); - 57 - (h) exchange reforms and trade liberalization (1967 and 1977-78); (i) increased incentives to private enterprise and private investment (1968, 1977). 3.43 There were also instances, however, where the Bank and other donors repeatedly urged economic policy reforms and where, over a prolonged period, the Government did not make significant policy changes. Examples include recommendations with regard to a comprehensive strategy for stimulating non-traditional exports; reforms in state enterprises; reforms in the tree crop sector; and the formulation of a comprehensive medium-term investment program. In many of these remaining problem areas the Government has recently begun to take action. It was not so much that the Sri Lankan repre- sentatives at the Aid Group meetings did not agree in principle that the recommended reforms were necessary as that internal resistance to them in Sri Lanka had first to be overcome. 3.44 It is true, however, that the receptivity of the Government to donor recommendations has varied considerably over time, reflecting in part the coincidence, or lack thereof, of government objectives and the objectives and views on economic policy of the Bank and other donors. On the whole, there has been considerable conformity between the approach of most Aid Group members and government objectives and policies during the tenure of more outward looking, market-oriented governments, and much less so when a more inward looking government was in office that favored a centrally controlled economy. This was reflected in the generally limited responsiveness of the Government to Aid Group recommendations during 1970-77, and the far greater receptivity since 1977. The potential for influencing policy was also more substantial after 1977, because development assistance to Sri Lanka relative to overall resource requirements was very large. 3.45 Conditionality has been employed by donors at two levels. In pro- ject operations donors have routinely applied various conditions in negotiat- ing project agreements. A second use of conditionality is tying the level of aid to policy changes desired by donors. In several instances the level of aid was used as a bargaining lever to achieve policy changes. For example, at the time of the formation of the Aid Group in the 1965, a condition for providing assistance was action on a number of issues, such as changes in fiscal and balance of payments policies, including exchange reform. Similar- ly in 1972-73, 1974-76 and in 1984 several Aid Group donors pressed the Government to implement policy changes either as a basis for continuing past levels of assistance or as a condition for higher levels of future assistance. 3.46 However, the application of this type of conditionality-the expli- cit relating of aid levels to policy reform--has been controversial, and was at times a source of -tension between donors and the Government, and among donors themselves. This was clearly the case in the first half of the 1970s. At that time, the Bank was probably most consistently concerned about - 58 - the Government's economic policies. But concerted Aid Group action was comp- licated by the lack of unanimity among donors on the need for, or importance attached to, policy reform. When the Bank in the early 1970s drastically reduced its assistance to Sri Lanka, only a few donors followed suit, partly for reasons other than-inadequate economic policy. Most Aid Group members did not reduce their assistance, while some even increased it, attracted as they were to the Government's social policies and persuaded by the Govern- ment's arguments that the causes of poor economic performance were mainly external or inherited from the previous Government. Donors made it clear to the Mission that the motives for providing aid include a variety of reasons other than "good policies," and that a deliberate reduction in aid is an unequivocal political statement taken only for a major cause, and likely to affect the whole relationship between two countries. 3.47 Nevertheless, it appears clear that the massive increase in Aid Group assistance in 1978 was linked to policies favoring Investment over con- sumption and increasing the role of market forces and private initiative, and the availability of a well-defined investment program with many projects attractive to bilateral donors. But even now some donors remain little interested in economic policy performance and are not prepared to stress the need for further policy reform. In contrast, others not only support the emphasis on policy reform, but believe that the Bank does not make enough use of its unique role to secure needed policy adjustments. Within Government the position is equally ambivalent: some officials are of the view that the Bank and some Aid Group members are excessively rigid in applying macro conditionality, while others regret it that the Bank has not been more insistent on needed reforms. While a clear consensus among participants will perhaps never be reached, many donors nonetheless view the role of the Aid Group in conducting a policy dialogue as highly significant, and consider the Bank's role in it as essential. Coordination Mechanisms 3.48 The desire to increase the efficiency of the aid process through a coordinated donor approach was one of the motives behind the creation of the Aid Group. Coordination would improve aid programming and avoid overlap and duplication, and lessons learned from project implementation would be dissem- inated to all. Over the years two forms of coordination mechanisms have evolved. First, there is the formal annual Aid Group meeting, chaired by the Bank, and the preparatory processes associated with it by which general agreement is reached between the Government and the Bank (and sometimes other donors) on the issues to be discussed. The annual meeting is generally attended by aid policy makers. Second, there are the numerous informal cor- munications among donor officials, many of which occur in Colombo and involve technical and other operational staff. The Government of Sri Lanka generally does not participate in those local level meetings. 3.49 Before 1978 the degree of coordination achieved at the annual Aid Group meetings remained limited. The main achievement was to reach agreement among participants that, given the persistently precarious external payments - 59 - situation, the bulk of financial assistance to Sri Lanka should be in the form of non-project, balance of payments assistance. Indeed, 65 percent of all financial assistance provided by the Aid Group in the period 1965-1977 was for that purpose. The desirability of coordinating project assistance was discussed continually at the annual meetings, but mainly for three reasons little progress was made. First, to protect its negotiating posi- tion, the Government preferred to deal with various agencies on a one-on-one basis. Second, there was limited interest among some donors -who at times- regarded one another as competitors. Third, the lack of an adequately pre- pared investment program fitting within overall resource availability made the choice of investment projects, and therefore coordination, very diffi- cult. In these circumstances, coordination among donors was limited to in- forming one another of planned project activities. It should be noted, how- ever, that about 1974 the Government began to guide donor decisions by stressing the need for rehabilitation and maintenance projects, rather than new projects. 3.50 In 1978, however, after the Bank had agreed to support the new Accelerated Mahaweli Program, the Government requested the Bank to coordinate financial assistance for it. The Bank accepted hesitantly. As the Chairman put it at the 1978 Aid Group meeting, the Bank found itself in a curious situation in which it was "outrun by the pack". When the government request was made, bilateral donors were already engaged in serious negotiations with the Government, and the scope of the program was substantially decided. The Bank accepted the role as coordinator only after it was understood and agreed among all participants that the Bank would not interfere with individual bilateral discussions, but would only attempt to ensure that in those discus- sions no elements of the program were left uncovered. The Bank would also act as a source of information so that individual donors could base their decisions on knowledge of what others were doing. On that basis the Bank assumed a very active role. Special sessions of the.Aid Group were held in which the complex financial and logistical arrangements of the Accelerated Mahaweli Program were discussed. Both donors concerned and the Government participated actively in the meetings, and there is a general consensus that they were very fruitful. 3.51 But apart from the Mahaweli sessions, the coordinating function of the annual Aid Group meetings has remained very limited until today. As pro- ject financing gradually became a more significant part of total assistance, more and more donors expressed the need for better coordination. There were instances of duplication and conflicting project objectives. Also, many donors experienced similar implementation difficulties, and they would have benefitted from a concerted effort to analyze and address Sri Lanka's absorp- tive capacity constraints. There was a consensus at the annual meetings of the last several years that much more guidance is needed to donors on the phasing and interaction of planned investments, and on how competing demands for resources--financial, material and human--will be reconciled. The donors look to local and working level staff, both from the Government and the donor agencies, to provide this input. Coordinating this effort was clearly seen - 60 - as a government function. In order to improve the situation, the Bank sug- gested at the 1984 annual meeting that the Government - reactivate the local aid coordination efforts. The Bank offered its services as a secretariat to the group, but the Government has not yet taken up this offer. 3.52 Thus, cooperation at the operational level has remained the least satisfactory element of aid coordination. This is not to say that local or operational coordination does not work at all. In cases when projects are cofinanced coordination is usually good. Pew are the cases where this is limited to the formalities of arranging financing. Often cofinanciers participate in preparation and appraisal, and later in supervision. But in other instances there is a serious lack of exchange of information and views among donors, which diminishes the effectiveness of project assistance. 3.53 Two recent examples, brought to the attention of the mission, may serve to illustrate this point. One concerns the forestry sector, the other the dairy sector. At the moment three major forestry projects are in execu- tion, financed by USAID, the Asian Development Bank (ADB) and the World Bank. In addition, numerous other projects, such as those for rural develop- ment and tree crops, have forestry components. The three free-standing pro- jects have many elements in common: new firewood plantations and woodlots, upgrading existing plantations, and above all training. In total, however, so much training is provided that the staff and students to be trained simply are not there. With many staff away to be trained implementation poses a problem. Observers believe that absorptive capacity in the forestry sector is now so seriously overtaxed that satisfactory implementation of one project can only happen at the expense of the others. Moreover, according to those observers, execution is hampered by some incongruence in procurement and institutional arrangements for the projects. 3.54 There are also several external agencies involved in the dairy sector. The Bank made its first credit in 1974, but the project was not suc- cessful. It was terminated in 1982 and more than half of the outstanding credit amount was cancelled (para. 4.40). Some degree of success, however, was achieved with improving the operations of dairy cooperative societies. Later the Dutch and Swiss aid agencies and the ADB became involved in the dairy sector, the latter two of which also concentrated on dairy cooperative societies. So far, donor activities covered distinct geographical areas. In 1985, the Bank, with cofinancing from the Netherlands, the European Community and the World Food Program, made a loan for a second dairy project. Unlike the previous activities, this project is conceived to be nationwide, with an organizational and institutional structure which differs substantially from that of the ongoing Swiss and the ADB projects. The main difference is the degree of privatization. Among other things, the new project structure would be based on a large number of private milk producer companies rather than on the government controlled cooperative societies supported by the Swiss and the ADB. 3.55 The Swiss and the ADB, with whom there had reportedly been minimal consultation during project preparation, expressed their concern. The ADB - 61 - even commissioned a study of the institutional and organizational setup of the dairy sector, which, not surprisingly, does not support many of the Bank's proposals.6/ Originally there was no place for the dairy cooperatives in the proposed national design under the Bank supported project, but at negotiations a compromise was found by which the cooperatives could participate provided they, meet certain *riteria to be worked out between the Government and the Bank. The project was eventually agreed, but with full knowledge not only that several donors in the dairy sector remained dissatisfied, but also that there is still considerable controversy about the project in Sri Lanka. There is therefore a high risk of friction and disillusionment that could have been lower had there been genuine coordination. 3.56 There is another example, however, where coordination has worked very well, and it may well provide an answer to the question of how to improve local aid coordination at the operational level. This concerns the various rural development projects which are being financed by a multitude of donors, including the Bank (paras. 4.33-4.39). The Sri Lankan rural develop- ment program is a consequence of the Government's decision to decentralize development efforts. The program builds on well-established administrative and political structures at district and village levels. Although the individual projects are not identical, geared as they are to the specific needs of the districts (and to an extent to the wishes of the donors), the program is being implemented successfully under the overall supervision of the Ministry of Plan Implementation. That ministry has also brought about coordination of donor activities. All rural development activities are dis- cussed in quarterly project implementation review meetings in which the donors concerned participate. In those meetings experience is exchanged and problems are solved. 3.57 Several suggestions have been made to improve donor coordination in the other areas of common interest, but they are bound to be not very suc- cessful if the Government does not take on an active role. If the Bank were to assume a leading role, many donors would be afraid that coordination by the Bank would mean subordination for them. The answer would be for the Government to institute regular implementation reviews for the major sectors along the lines of the reviews carried out by the Ministry of Plan Implement- ation for the rural development program. The Bank could usefully contribute to this by addressing, in its planned study of Sri Lanka's development administration, the strengthening of coordinating mechanisms within govern- ment. In particular it would appear necessary to review the functions of the Ministry of Plan Implementation, which was specifically created to monitor and coordinate project implementation, but which so far has assumed too limited a role. At present, that ministry is inadequately staffed to assume those functions. Also, several executing ministries and agencies appear 6/ Sri Lanka/ADB Livestock Development Project - Institutional and Organizational Review; Ministry of Rural Industrial Development and Asian Development Bank, October 1984. -62- reluctant to cooperate fully with the Ministry of Plan Implementation. An alternative solution would then be to strengthen coordination mechanisms in the other ministries and agencies themselves. A recent, apparently successful attempt in that direction has been made by the National Water Supply and Drainage Board. - 63 - PART TWO: THE SANK'S ROLE IN SELECTED SECTORS 1. AGRICULTURE AND RURAL DEVELOPMENT A. The Setting 4.01 About 75 percent of Sri Lanka's almost 16 million inhabitants live in rural areas and are directly or indirectly dependent on agriculture. The country is endowed with generally favorable and diverse agro-climatic condi- tions. Variations in rainfall, topography, and soils permit cultivation of a wide range of tropical crops. The island can be divided into two major zones: the wet zone and the dry sone. The latter covers about two thirds of the island. 4.02 Because of its difficult physical environment and the prevalence of malaria, the dry zone has developed slowly in modern times. Yet, it was there, rather than in the more inviting wet zone, that the ancient Singhalese king. developed a highly advanced civilization, which flourished by means of ingenious and extensive irrigation works* But invasions, wars and neglect took their toll on the irrigation system. Extensive production for export began only in the last century under colonial rule. Coconut production from Ceylonese smallholdings increased substantially. Other export crops, such as tea and rubber, were developed principally by British capital and enter- prise. As a result of this historical process, Sri Lankan agriculture is substantially dualistic: large-scale tree crop estates and small-scale food- crop cultivation, mainly paddy (rice). This dualism is also found among agricultural families. Most rural households are directly or indirectly involved with paddy production, milling, rice marketing and distribution. Estate households are mostly landless estate workers, who are descendants from South Indian, Tamil migrants, brought to Sri Lanka by the British to work on the estates. The economic and social differences between these two groups is great. Estate households are on the average poorer than other rural households and there is a greater incidence of malnutrition and illiteracy. 4.03 Over the last 25 years, agricultural sector performance has been uneven. In real termas, agricultural output grew by 2.8% per annum between 1960-1982 (see Table 4.1). Much of the growth has come from increased paddy production, especially since 1977. The recent increases in paddy production have made Sri Lanka nearly self-sufficient in rice. Output of major export crops (tea, rubber and coconuts) has declined or stagnated. In the 1960s, tree crops accounted for about 90% of merchandise exports. Subsequently the decline in tree crop production, coupled with falling prices, reduced export earnings from tree crops (Table 4.,2).7 7/ More details about agricultural performance may be found in recent Bank economic reports: Sri Lanka: Recent Economic Developments, Prospects and Policies, Report No. 5038-CE dated May 4, 1984; Sri Lanka: Recent Economic Developments and Policies for Growth, Report No. 5628-CB dated May 14, 1985; and in the Bank's Agricultural Sector Survey (Report No. 5800-CE under preparation). -64- Table 4.1: ANNUAL GROWTH RATES OF GDP, AGRICULTURAL GDP, PADDY PRODUCTION AND TREE CROPS DURING FOUR POLICY REGIMES (1) (2) (3) (4) Agricultural Tree Policy Regime GDP GDP Paddy CEMS I. 1959-61 av-1964-66 av 3.91 2.43 1.5 3.32 II. 1964-66 av-1969-71 av 5.17 3.82 9.7 0.00 III. 1969-71 av-1976-78 av 3.08 1.85 1.4 -1.12 IV. 1976-78 av-1980-82 av- 6.12 4.36 7.9 -0.67 1959-61 av-1980-82 av 4.59 2.83 4.6 0.24 Source: Effects of Macroeconomic policies on agricultural performance in Sri Lanka, 1960-82, by Erik Thorbecke and Jan Svejnar. Table 4.2: SHARE OF AGRICULTURAL EXPORTS IN TOTAL EXPORTS (percent of total) Total Year Tea Rubber Coconut Tree Crops Other Crops 1960 59.8 20.6 10.0 90.4 n.a. 1965 62.1 15.6 14.1 91.8 n.a. 1970 55.0 21.6 14.3 90.9 3.0 1975 49.1 16.7 12.6 78.4 2.9 1980 35.1 14.8 7.0 56.9 5.0 1981 30.6 13.7 6.8 51.1 6.0 1982 29.6 10.9 7.0 47.5 7.0 1983 33.1 11.4 7.7 52.2 5.9 Source: Tree Crop Sector Review and Central Bank of Ceylon (taken from the Bank's Agricultural Sector Survey Report 5800-CE under preparation). 4.04 Although the main subsectors in agriculture are tree crops and rice, a number of other crops are produced and exported.8/ Their share in total agricultural production has fluctuated at around 10 percent. Until recently limited attention has been given to those other crops. Neverthe- less, they offer potential for diversification, employment generation and 8/ Coffee, cocoa, pepper, cloves, nutmeg and mace, cardamon, cinnamon, papain, sesame seed, cashews and tobacco. exports9/. Other subsectors, such as forestry, livestock and fisheries have some importance as well. 4.05 The contribution of forestry to GDP is estimated at 1.5 percent. It provides raw materials for construction and wood processing industries, and firewood accounts for an estimated 60 percent of total national energy consumption. However, a relatively rapid rate of deforestation has taken place in Sri Lanka over the last two decades, and the Government is concerned about the impact of this on the environment, and the implications for domes- tic wood supply. The livestock sector (about 2 percent of GDP) contributes significantly to employment generation, and utilizes land for which there are few alternative uses. Although the dairy industry is small, it is important for many smallholders and landless estate laborers. Imports of dairy pro- ducts are estimated to cover between 30 to 50 percent of domestic consump- tion. The fisheries sector (about 2 percent of GDP) is also important in terms of employment, income and nutrition. About 75,000 people find direct employment in the sector and an estimated 60 percent of all animal protein consumed in the country is accounted for by fish. With more than 10 percent annual growth over 1977-82, fishery has been one of the fastest growing agri- cultural subsectors. However, the recent ethnic disturbances have severely affected fishing. Reportedly, large numbers of fishermen were displaced, which could result in shortfalls in production, with serious nutritional con- sequences for part of the population. B. Government Objectives and Sector Development (a) Evolution Over Time 4.06 Sri Lanka's first six-year plan, for the period 1947-53, had as its main agricultural objective the development of the under-utilized dry zone. The largest development project, Gal Oya, was designed, much like Mahaweli today, to provide power and irrigated land for settlers, and to lessen dependence on imported food. The results under the first plan were disappointing. Domestic rice production did little more than keep pace with the increase in population. A second six-year plan (1954-60) was formulated, but was ignored by the new SLFP Government which came into office after the elections in 1956. 4.07 The new Government, in its Ten-Year Plan, published in 1959, placed major emphasis on the creation of employment. The plan concluded that "whatever possibilities remain in the field of agriculture it will not afford a permanent outlet for the growing population and therefore the answer lies mainly in the field of industrialization". The share of agriculture in planned investment was reduced from 27 percent in 1957 to 22 percent in 1968, and that for industry and power was increased from 15 to 27 percent. The major objectives for the agricultural sector were replanting and rehabilitat- ing tree crops, more than doubling rice production, and increasing the 9/ See Bank paper (unpublished), Sri Lanka Minor Export Crops, Sector Review, July 16, 1981. -66- production of a large number of other crops. Over the ten years, 400,000 acres of new land were to be brought into production in a number of -inte- grated river basin development schemes, the most important of which were tha Mahaweli and Walawe. Severe financial difficulties, however, prevented the Government from making much progress with its plans for the agricultural sector. 4.08 After the 1965 elections, the new Government lowered subsidies for food items and largely restored price incentives in agriculture. Agricul- tural development policy was redirected towards more immediately productive ends. The agricultural strategy, as spelled out in the Agricultural Develop- ment Proposals (1966-70) and the Irrigation Proposals (1966-70), emphasized import substitution through: (i) expansion of the irrigated area and land development; (ii) increasing output on existing paddy land; (iii) diversifi- cation of agricultural production through development of subsidiary foodcrops (chillies, onions, and vegetables), industrial cash crops (cotton and sugar) and milk and dairy products; and (iv) maintenance and, if possible some expansion, of export earnings through consolidation and improvement of the plantation crops (tea, rubber and coconut). 4.09 The new policies brought some results. In particular, production for the domestic market (rice and other food crops) grew rapidly, as produc- tion incentives were mostly for crops for domestic consumption. Such incen- tives included increased guaranteed producer prices, and subsidized inputs, irrigation water and tractor services. Rowever, tree crops generally con- tinued to stagnate. Low tea prices and high export taxes were important factors. Also, - the uncertainty about the future of the private estate sector, caused by the policies of the previous government, had led to low levels of private investment. The Government became concerned about the situation, and established a commission to study the prospects of the tea industry. 4.10 But agricultural policies changed again after the elections in 1970. The new Government, stating that the previous government had emphasized growth at the expense of distributive justice, again placed major emphasis on social welfare and on attaining its socialist goals. In 1972, the Government enacted a Land Reform Law which required that individual private ownership of land be reduced to 10 ha for paddy land and 20 ha for all other agricultural land. The stated objective of the law was to increase productivity and employment opportunities. As a result, 225,000 ha of land and associated infrastructure were released to the Land Reform Commission, of which an estimated 135,000 ha were under tree crops. Attempts at cooperative management of these lands were not successful, and were eventually abandoned. Subsequently, 40 of the largest estates were handed over to the State Plantations Corporation (SPC). Company estates were not affected by the 1972 law, but a second stage of land reform took place in 1975. At that time all land owned by companies, both Sri Lankan and foreign, was nationalized. Among them were the country's major tea and rubber estates. The Government handed about 65,000 ha of these estates over to SPC and nearly 95,000 ha to the Janatha Estates Development Board (JEDB). -67- 4.11 The Government increased state intervention in pricing and market- ing. For rice a system of compulsory procurement was introduced, and trans- port of -rice between districts and trade by private individuals was prohi- bited. The Government attempted to stimulate agricultural production through public investment, mainly in new irrigation works, agro-industries and fishing. In the event, however, the country's continuing desperate financial position did not permit many of the planned public investments to be carried out. Because of the Government's land reform and nationalization policies, private investment also remained low. In addition, the acute shortage of foreign exchange caused shortages of vital inputs. In these circumstances, there was a general stagnation in the agricultural sector in the period 1970-77. 4.12 The Government changed again in July 1977. In addition to wide- ranging economic reforms, discussed before, which indirectly benefitted agriculture, and the decision to accelerate implementation of the Mahaweli program (see Part Two, Section II), the Government saw itself confronted with two main issues of agricultural policy: (a) how to increase efficiency and output in the export-oriented plantation sector; and (b) how to introduce a dynamism that would lead to self-sustained growth in the domestic agricul- tural sector dominated by small farmers. The Government's strategy included the following: intensification of the "Training and Visit" (T&V) extension system; adequate producer incentives; rehabilitation/improvement of village tanks and other minor irrigation schemes; improved water management; broad- based integrated rural development programs; improving the profitability of traditional agricultural exports; increased support for coconut growers; and pasture development. 4.13 The new strategy had remarkable success with respect to food crop production. As a result of the substantial increase in paddy production, Sri Lanka is now almost self-sufficient in rice. One important factor in this is, of course, the expansion and rehabilitation of irrigated lands. Over the last 30 years, the total irrigated area has increased from about 260,000 ha to almost 460,000 ha. But equally important factors in the rapid increase of paddy production after 1977 were the freeing of the marketing system, abolishing price controls and the availability of inputs, particularly fertilizer. In 1977, the compulsory procurement of paddy at a fixed price by the Paddy Marketing Board (PMB) was abolished. Private trade was encouraged, and PMB now serves as a buyer of last resort at a guaranteed purchase price. Farmgatr prices paid by private traders have been consistently higher than PMB's guaranteed price since 1977. The use of fertilizer was encouraged by an increase in fertilizer subsidies in 1979, and after the de-control of imports in 1977 fertilizer is now widely available. 4.14 In contrast to food production, however, the performance of the tree crop sector has remained disappointing after 1977. An important factor has been the excessive indirect taxes on exports, which reduced profitabil- ity. In the period 1978-83 realized tax rates have averaged 38 percent of the f.o.b. value of tea; 46 percent for rubber; and 29 percent for coconut products. Other factors which affected the publicly-owned plantations were -68- ineffective management and corporate inefficiency. These were mainly due to the constrained and centrally controlled operating environment, and to the lack of management performance inceni.11ves. The Government, concerned about the performance of the tree crop sector, has formulated a Medium-Term Invest- ment Plan (MTIP; published in 1983) for the state-owned plantations, which contains proposals for increasing corporate efficiency and instituting per- formance incentives. The Government has recently begun to implement those proposals. Also, in 1984, the Governent has lowered the export taxes for tree crops. 4.15 In order to counterbalance to some extent the large, centrally con- trolled investments in urban and industrial development and in the Mahaweli development scheme, the Government initiated in 1979 an extensive rural development program. In contrast to the large investment programs, the rural development program is designed as a smaller, low-cost and quick-maturing program that would benefit large numbers of middle and low income rural dwellers, and would reduce income disparities within and among districts. Since 1979, nine successful rural development projects have been launched covering 11 of Sri Lanka's 25 districts. 4.16 In summary it can be said that with respect to agriculture, the alternating "dirigiste" and market-oriented regimes had several objectives in common, most notably the expansion of irrigation and the achievement of self-sufficiency in rice. But their approach to agricultural development differed markedly. The dirigiste governments favored state intervention, nationalization, and controlled prices and marketing arrangements. The market-oriented governments limited state intervention, promoted private initiative, and, particularly after 1977, abolished price controls and encouraged private sector participation in marketing. Those differences in approach had a profound impact on food production. Under the more market- oriented regimes growth rates of agricultural GDP were on the average 60 percent higher than those achieved under the dirigiste regimes, largely because of differences in the paddy subsector. The performance of the tree crops subsector remained disappointing throughout the period. For a long time the Government has been unable to reverse a situation of neglect in a sector which is of utmost importance for Sri Lanka's economy. The share of Sri Lanka's tree crop products in world exports has declined continuously. For tea, Sri Lanka's share declined from 33 percent in 1961 to 21 percent in 1979. Over the same period the share of Sri Lankan rubber declined from 6 to 4 percent, and that of coconut oil from 27 to 3 percent. The land reform and nationalization policies in the early and mid-1970s have contributed most to the decline of the tree crop sector. Before the land reform act was promulgated, in 1972, the threat of land reform already existed since the early 1960s, and private owners had started a process of disinvestment. Organizational and managerial problems in the government corporations that took over the private estates hampered development of the sector after the land reform. The above problems were exacerbated by excessive taxation, which reduced the profitability of the tree crop sector. -69 (b) Institutional Development -4.17 Institutional arrangements in the agricultural sector have become very complex over time as the number of agencies and ministries involved in agricultural development has increased substantially. Ten ministries now share responsibility for the sector. In irrigation both the Irrigation Department of the Ministry of Lands and Land Development and the institutions under the Ministry of Mahaweli Development are involved, with some overlap in responsibilities. In the treecrop sector four ministries share responsi- bility, with two separate ministries each responsible for part of the state- owned plantations. Many agencies are responsible for integrated rural development projects, but District Ministers have taken a strong lead in project implementation, thereby ensuring effective coordination at the district level, while the Ministry of Plan Implementation has instituted a similar coordination mechanism at the central level (para. 4.20). 4.18 This complex institutional framework has evolved over time largely for political reasons. But with so many institutions there are many overlap- ping functions, and effective sector planning has become difficult. Recogni- zing historical and political realities, however, the planners did not attempt to streamline institutional structures as a precondition for sector planning. Rather, a major effort was made at sector planning through coordination, discussion and review, under the leadership of the planning division of the Ministry of Finance and Planning.10/ It resulted in the publication in 1984, of the National Agriculture, Food and Nutrition Strategy.11/ The strategy does not cover the tree crop estate sector for which Government prepared a medium-term investment program separately (para. 4.14). The planners recognize that self-sufficiency in rice is about to be achieved and that diversification should now be pursued. Detailed strategies were developed for seven sub-sectors: crop agriculture; smallholder tea and rubber; coconut; fisheries; livestock; land and water resources development; and nutrition. The report gives a tentative program of new major sectoral investments. 4.19 Because of the large number of ministries and agencies involved, it has taken more than two years before consensus on sector development could be reached. This may seem a very slow process, but the resulting National Strategy document, although important by itself, is probably not the most significant outcome. More important is that the process itself brought together all the major actors in agricultural development, and the participants are now more likely to be committed to their joint effort. Such 10/ Technical assistance was provided by the Netherlands and USAID. 1 National Agriculture, Food and Nutrition Strategy, A Change in Perspec- tive, National Planning Division, Ministry of Finance and Planning, Colombo, Sri Lanka, June 1984. In addition, seven subsector strategy papers and seven special reports were published in October and November 1984. - 70 - complicated coordination efforts, however, require an extraordinary amount of time. With the prevailing scarcity of experienced personnel this is a luxury which Sri Lanka can ill afford. Institutional rationalization, therefore, remains an important issue. 4.20 In the meantime, some interesting "grass roots" institutional developments have taken place with respect to rural devElopment. The rural development program, initiated in 1979, is a logical consequence of the Government's decision to decentralize development efforts. It builds on a well established administrative and political structure at district, division and village level. Decentralization has been reinforced by the appointment of District Ministers (1979), and the establishment of District Development Councils (1982). Earlier, a decentralized capital budget was established within the national budget. Each electorate-of which there are 168-is allocated Rs 2.5 million. This is supplemented with block grants from the Ministry of Local Government (under the control of the District Development Councils), and allocations from the rural development project funds (adminis- tered through the Ministry of Plan Implementation). In 1984, total funds available for the rural development program amounted to about Rs 1.3 billion (US$50 milion), or about 6% of the 1984 public investment program. 4.21 The program is being implemented successfully under the overall supervision of the Regional Development Division (RDD) of the Ministry of Plan Implementation (MPI). An elaborate administrative and political structure now exists, linking villages through divisions and districts to the center. Especially at lower administrative levels substantial institutional development took place, which to a large extent explains the success of the rural development program to date. At the district level, small project offices were established, staffed with highly motivated and capable officials from the MPI. Those project offices were the real catalyst in the rural development effort and the major force motivating all parties concerned. They also enjoy relative financial autonomy, which subatantially facilitates the implementation of the program. Overall coordination mechanisms have been strengthened under rural development projects. In some districts, the coordination and supervision mechanisms created to implement the projects have even been used for activities in other sectors. C. Bank Objectives and Activities (a) Strategy for the Sector 4.22 Bank lending for agriculture started in 1968. But before that, the agricultural sector was reviewed regularly in Bank economic reports in the context of macro-economic developments. Recommendations were offered for im- proving sector performance, but no instrument existed in the early years for following up those recommendations. Economic and sector work did not yet serve as a means of devising a lending strategy. Although three irrigation projects were approved in 1968-70, which fitted the Government's objective of increasing food production, they were presented to the Board without a clearly defined Bank strategy for the agricultural sector as a whole. - 71 - 4.23 In 1970, the Bank considered earmarking most agricultural lending for irrigation. However, after- a new government had come to power in 1970, Bank relations with the country deteriorated. Pending clarification of econ- omic policies and investment priorities, work on the project pipeline was halted. After the Government, in 1973, took measures to improve the coun- try's financial position, the Bank resumed lending. Sector knowledge, how- ever, was considered to be out-of-date, and an agricultural policy and pro- grams review mission visited the country in 1974 to identify lending oppor- tunities. From 1974 onwards agricultural lending has accelerated. 4.24 As expressed in various strategy documents, the main element of the Bank's strategy since 1974 has been to help alleviate the country's foreign exchange constraints by supporting measures to increase agricultural output and exports. Furthermore, the Bank saw its agricultural program as a vehicle to obtain policy change in the agricultural sector, especially to improve management of the tree crop estates, establish diversification programs on lands acquired through the land reform, and bring about cost recovery in irrigation. The Bank has also supported the Government's rural development program to raise productivity, employment and living standards of the rural population. More recently, the Bank has attached high priority to the re- habilitation of the tree crop sector and, more generally, to the maintenance and rehabilitation of the existing capital stock in all productive activi- ties. (b) Bank Lending for Agriculture 4.25 Lending for agriculture by the Bank has generally been in line with its formulated strategy. The first credit for agriculture was made in 1968 for an irrigation project. Until 1970, two more irrigation projects were fi- nanced. Lending for agriculture accelerated in the second half of the 1970s, and also became more diversified. Apart from more irrigation projects, it included treecrop rehabilitation, rural development, dairy, forestry and agricultural support services. As of June 30, 1985, gross lending for agri- culture amounted to US$530.4 million, or 53 percent of total lending to Sri Lanka. Irrigation 4.26 The largest share of agricultural lending was for irrigation, US$222 million or 44 percent of total lending for agriculture; about 75 per- cent of it in support of the Mahaweli program, mainly downstream develop- ment. Five Mahaveli projects were financed by the Bank (see Section B). Another five projects covered other types of irrigation in Sri Lanka. 4.27 The Bank's earliest irrigation projects primarily provided the physical infrastructure necessary to distribute irrigation water, or to pro- tect and reclaim irrigated areas. Increased food production in support of the Government's self-sufficiency policies were the main project objectives. The Lift Irrigation and the Drainage and Land Reclamation projects encoun- tered substantial implementation delays, owing to civil unrest, the change in - 72 - Table 4.4: BANK LENDING FOR AGRICULTURE BY SUB-SECTOR /a No. of Lending /b Projects Amount % of Total (US$ mi) Mahaweli /c 5 166.57 33% Other Irriation 5 55.98 11% Tree Crops 5 116.22 23% Rural Development 3 76.50 15% Dairy 2 42.13 9% Forestry 1 9.00 2% Other /4 2 36.16 7% 23 502.56 100% /a For details of individual projects see Annex 1. T Net of cancellations. 7 Net of US$17.0 million power component of the first Mahaweli project. 7 The Agricultural Extension Project and the Agricultural Development Project. Table 4.5: BANK-FINANCED IRRIGATION PROJECTS /a Approval Credit Project Name Year (FY) Number Amount (Us$ mil) Lift Irrigation 1968 121 2.00 Drainage and Reclamation 1970 168 2.50 Tank Irrig. Modernization 1977 666 5.00 Village Irrig. Rehabilitation 1981 1,160 30.00 Major Irrig. Rehabilitation 1985 1,537 17.00 56.50 /a Excluding Mahaweli projects. Government, and procurement problems. Overall, the Lift Irrigation scheme was a failure.12/, while the Drainage and Land Reclamation Project13/ was judged to have fared much better. 12/ Project Performance Audit Report, OED Report No, 2801 dated December 28, 1979, and Impact Evaluation Report, OED Report No. 5634, dated May 8, 1985. 13/ Project Performance Audit Report, OED Report No. 2798 dated December 28, 1978. - 73 - 4.28 The later irrigation projects focussed on the rehabilitation of existing irrigation infrastructure, and addressed water management Issues and irrigation practices in order to achieve a more efficient use of water. The Tank Irrigation Modernisation Project aimed at improving water distribution systems, infrastructure and services in five major tank schemes in the north- ern part of Sri Lanka. Implementation took three years longer than expected owing to management and funding problems, but at completionl4/ project per- formance was judged to be satisfactory. The Village Irrigation Rehabilita- tion Project supports the rehabilitation of 1200 village irrigation schemes and modernisation of about 500 other small schemes. Progress has fallen behind appraisal targets, but the quality of works is generally satisfac- tory. The water management program is proceeding well and is beginning to have an impact on farmer activities and production. The Major Irrigation Rehabilitation Project was approved in December 1984, and the credit has only recently become effective. Tree Crops 4.29 The Bank has supported five projects for tr5e crop development. In addition, smallholder coconut development has been a component in the Bank supported rural development projects. Except for the Smallholder Rubber Development Project, Bank lending so far has been in support of the publicly owned plantation sector. Despite the Government's emphasis on private sector development, even the 1985 Tree Crop IV Project supports substantial invest- ments (US$212 million)15/ almost exclusively in the two publicly owned estate corporations: Sri Lanka State Plantations Corporation (SPC) and Janatha Estate Development Board (JEDB). 4.30 Apart from the Smallholder Rubber Rehabilitation Project, which was in support of an ongoing government scheme to replace overaged, low-yielding rubber trees, the other tree crop projects aimed at improving the efficiency of the tea industry. Project components typically included field programs for replanting and infilling of tea, diversifying unproductive lands into other tree crops, minor export crops or fuelwood, rehabilitating processing and storage facilities, field and nursery equipment, vehicles, housing and estate social infrastructure, and institutional development to strengthen managerial and financial control systems in the two public estate corpora- tions. All projects also included small components to support smallholder tea development. 14/ See Project Completion Report submitted to OED (September 6, 1985). The PCR has been passed through by OED but ODA, who cofinanced the project, has announced its intention to undertake a full evaluation of this project. 15/ Besides IDA (US$55.0 million), the Asian Development Bank (US$45.0 million), the UK Overseas Development Administration (US$5.5 million), the Netherlands (US$8 million), and Norway (US$5.5 million) also participate in the financing of this project. Local sources of funding include the Bank of Ceylon (US$10 million) and the two plantation corporations (US$82.8 million). - 74 - Table 4.6: BANK LENDING FOR TREE CROP DEVELOPMENT Approval Credit Project Name Year (FY) Number Amount (US$ ai) Tree Crop Rehabilitation 1978 818 21.0 Tree Crop Diversification 1978 819 4.5 Smallholder Rubber 1980 1,017 16.0 Tea Rehab. and Diversification 1982 1,240 20.0 Tree Crops IV 1985 1,562 55.0 Total 116.5 4.31 Except for the first tree crop diversification project, which was a failure,16/ implementation of the tea estate rehabilitation projects has generally been satisfactory. After a learning period under the first pro- ject, the two corporations have now become familiar with Bank procedures. Management of these projects is generally good, and substantial progress has been made with field and factory development on the estates. All projects suffered, however, from high local cost inflation and bottlenecks in the lo- cal construction industry, which necessitated modification of civil work pro- grams. But, while physical implementation has been successful, project im- pact has been far less satisfactory because of the prevailing deficiencies within the sector (para 4.14), which the projects themselves were not able to correct despite expectations to the contrary at appraisal. 4.32 The Fourth Tree Crop Project was approved only recently (March 1985). This project is much larger in scope and scale than the Bank's pre- vious projects, and largely covers the agreed medium-term investment plans (1985-1989) of the two plantations corporations.17/ But there is now serious concern throughout the industry over the current low tea prices which have fallen sharply since 1984. Also, the Government has increased minimum wages and guaranteed a paid six-day working week, which increases costs. The financial viability of the companies has now become uncertain, and there is doubt about their ability to contribute to the project financing. Rural Development 4.33 The third major area of lending in the agricultural sector has been rural development. To date the Bank has financed three rural development projects in Szi. Lanka, it is supervising a fourth and has appraised a fifth on behalf of IFAD. 16/ PPAR, OED Report No. 5041, dated April 13, 1984. 17/ Prepared with project assistance under the (third) tea rehabilitation and diversification project. - 75 - Table 4.7 BANK LENDING FOR RURAL D&VELOPMENT Approval Credit Project Name Year (FY) Number Amount (US$ mil) Kurunegala 1979 891 20.0 Rural Development II 1981 1079 33.5 Rural Development III 1983 1363 23.0 76.5 4.34 With its three projects, the Bank plays a major role in supporting the Government's rural development programs in five districts. But other donors are also very active. Two district programs each are supported by Norway and the Netherlands, and one each by Sweden and IFAD. 4.35 The Bank projects aim at improving the standard of living of the small farmers in the districts concerned by supporting directly productive activities, such as tree crop planting, and the creation of economic infra- structure, such as rehabilitating irrigation tanks and systems, and roads. Improved agricultural services and credit, social infrastructure (education and health), water supply and rural electrification are also components in most district programs. The mix of components in the individual projects varies somewhat with the resource endowment and individual needs of the dis- tricts. The Bank's projects are implemented at the district level by Sri Lankan staff, without support of expatriate technical assistance. 4.36 The 1979 Kurunegala Rural Development Project was the first project of its kind in Sri Lanka. Most project components have now been completed, and the Government is in the process of transferring responsibility for dis- trict rural development from the project office to more permanent district administrative structures, and making adequate provision for operation and maintenance of the assets created under the project. In the meantime, the project office is preparing proposals for a possible phase II project. Most project components of the Second Rural Development Project (covering the dis- tricts of Matale and Puttalam) are progressing according to schedule. Under the Third Rural Development Project (covering Vavuniya and Mannar districts) good progress is being made with some components, such as irrigation, but others are behind schedule, due to heavy rains in 1983 and 1984, and. to security problems created by the recent ethnic disturbances. Under this project funds are also provided for a Monitoring and Evaluation Unit in the Ministry of Plan Implementation (MPI). This unit has commenced supervision of all rural development projects and coordinates evaluation studies carried out by independent local institutions.18/ 18/ For example ARTI (Agrarian Research and Training Institute) for the Kurunegala project and the Marga Institute for the Second Rural -Development Project. - 76 - 4.37 Thus, project implementation of the Bank financed rural development projects has generally been satisfactory. In discussions with representa- tives of the other donors involved with rural development in Sri Lanka, it was confirmed that they generally have had the same experience. 4.38 Although the various projects supported by the Bank and the other donors show variations in response to different local conditions in the districts, and to donor requirements-and preferences, they share a number of common characteristics: 19/ Objectives. All projects aim at increasing incomes and improving living standards of large numbers of people in the rural areas. Coponents. Common activities in all projects include small irrigation works, rural roads, tree crops (especially coconut and minor export crops), village water supply, primary health care, and education. Institutional Development. All projects aim at transforming the district offices from administrative to more development-oriented institutions. 4.39 Despite the overall similarity of the various projects, differences have also been observed. They are particularly striking between the Bank-supported projects (in Sri Lanka referred to as the "blue book" or "bible" approach to rural development), and the projects supported by other donors (referred to as the "flexible" approach). Some of the more important differences are: Composition. The Bank projects put major emphasis on productive activites and economic infrastructure, while the other projects are relatively more oriented towards social infrastructure. Innovation, Bank projects have generally supported technically proven and socially acceptable improvements, while the others tend to experiment more with innovations.20/ Beneficiaries. Direct beneficiaries under the Bank projects are mostly farmers with small holdings, while other projects, such as those financed by Norway and IFAD, attempt to help the most disadvantaged groups, such as landless households. But this highly selective geographical and socio-economic approach has entailed -high costs per beneficiary. 19/ See also Sri Lanka - Review of Rural Development Programs, Bank draft report dated May 1985. 20/ The Hambantota project, supported by Norway, has tested a number of pilot activities, including improved upland farming and biogas generation. -77- Management. Bank projects have relied -on -local institutions and local staff to implement these projects. By contrast, the other donors employ several expatriates in each district. Workprogram. The Bank spends considerable time appraising these projects and largely determines the projects' detailed five-year implementation plans at that stage. Changes in project composition thereafter are not encouraged. By contrast the bilaterally financed projects operate in a more generally agreed framework. Implementation planning is done on an annual basis, which allows greater flexibility. Dairl 4.40 The Bank made its first credit for dairy development in 1974 (US$9 million). Initial farmers' response was encouraging, but implementation was severely constrained by poor pricing and subsidization policies. In 1978, the project was reformulated, and the emphasis was shifted from dairy farm development to the establishment of dairy producer associations based on the successful Anand pattern of cooperatives in India. However, project progress remained slow and pricing policies were not improved satisfactorily in the Bank's view. Eventually, the remaining balance of US$4.9 million was can- celled. While the project failed in its production and marketing objectives, its primary achievement was .recognized to be institutional in nature: some success was achieved with improving the dairy cooperatives.21/ 4.41 Despite the problems with the first project, the Bank and the Government agreed that further Bank assistance in the dairy sector would be desirable. A sector mission took place late 1982, and a second dairy project was approved in 1985 (US$38 million). The project includes the establishment of a new four-tiered organizational - structure for the dairy industry; improvements, modernization and expansion of milk chilling, transport, processing and marketing facilities; technical and extension services; training; technical assistance; and monitoring and evaluation. The project shows some interesting features: - it is nationwide in coverage and its scope is substantially more ambitious than any other dairy project undertaken so far in Sri Lanka (project costs have been estimated at US$110 million); - it requires almost no government contribution.22/ In addition to the Bank loan (US$38 million), the project would be financed by a 21/ For further details see PPAR, Sri Lanka - Dairy Development Project (Credit 504-CE),-OED Report No. 5045 dated April 16, 1984. 22/ The Government's contribution is a small short-term loan (US$4.0 mil- lion) to provide cash during the start-up period. - 78 - grant from the-Netherlands, (US$7.5 million) and commodity aid.23/ More than two-thirds of the financing would be on a grant basis; - its new organizational structure calls for about two thousand private village milk producer companies, five regional milkshed companies, one national milk processing company, and a project unit type company. This structure has given rise to substantial debate both within Sri Lanka, as well as between the Government and the Bank, and the Bank and other donors, especially ADB (see paras. 3.54-3.55). Forestry 4.42 The main objectives of the Bank's Forestry Resources Development Project (US$9 million, in 1983) are to formulate a forestry master plan and a five-year investment program; to strengthen the training of forestry staff; to rehabilitate existing forest plantations and establish of some new plantations. Progress with the preparation of a master plan by consultants and with the training component is satisfactory, but the plantation component is progressing slowly because of local staff constraints. 4.43 The Agricultural Development Project (US$25 million in 1975) was a program-type credit. As recorded in the PPAR,24,/ implementation suffered from poor project execution, mainly because coordination mechanisms set up to facilitate project implementation were ineffective. Moreover, misunderstand- ing of procurement procedures, government indecision on the use of credit proceeds, and delays in appointing consultants all contributed to delays. Also, when the Government liberalized its import regime, in 1977, some government agencies found it more efficient to import directly, rather than use the complex administrative arrangements under the project.25/ The credit was closed with a cancellation of about US$4.4 million, after a time overrun of 15 months. 4.44 The Agricultural Extension and Adaptive Research Project Credit (US$ 15.5 million in 1979) was designed to establish a unified Training and Visit (T&V) extension system for all crops (except tea and rubber) throughout the country, and to establish an adaptive research network on the basis of agro-ecological regions. While the basic components of the T&V system are in place, implementation is constrained by staff shortages, inadequate monitor- ing and insufficient budgetary support. 23/ Monetized donated commodities (by EEC and WFP) are estimated at US$56.9 million. 24/ Project Performance Audit Report, Agricultural Development Project (Credit 595-CE) ORD Report No. 3272 dated December 31, 1980. 25/ At the time of approval the major benefit of the project for these agencies was that it permitted them to import. - 79 - D. Evaluation of the Bank's Activities Irrigation 4.45 The Bank's involvement in irrigation in Sri Lanka has been substan- tial. Not only has Irrigation been the object of Bank funding from the earliest Bank projects in the agricultural sector, but the Bank has played an important role in shaping the Mahaweli program (see Part Two, Section II). It has been able to mobilize substantial cofinancing, and cooperation with other donors in project preparation, appraisal and supervision has generally been good. Although project implementation generally has been satisfactory, serious challenges remain with respect to cost recovery, water management, and the rehabilitation of existing irrigation infrastructure. Also, with self-sufficiency in rice approaching, crop diversification in irrigated areas presents a formidable challenge. 4.46 From the beginning the Bank has attempted to introduce satisfactory cost recovery mechanisms, but without much success. Cost recovery condition- ality was included in the earlier irrigation projects, but the covenants were renegotiated in 1970, when the newly elected SLFP Government objected to them (see also para. 3.06). One of its election promises had been the free delivery of irrigation water. The renegotiated compromise included further studies and the promise of future cost recovery measures, but no water charges were levied in the 1970-77 period. 4.47 The present government, which came into office in 1977, made an attempt to promulgate suitable legislation to tax beneficiaries of irrigation water. Unfortunately, this legislation could not be passed because of technical and procedural problems. The Government then attempted to reintroduce provisions for cost recovery through water charges under the Irrigation Ordinance, and by charging settlers for the costs of land improve- ments under the Land Development Ordinance. In 1978, charges were introduced for major schemes, which would cover between 15 and 25 percent of operation and maintenance costs. Some collections were made, but lack of an effective enforcement mechanism and the failure of many farmers to pay led in 1981 to the cessation of collections. 4.48 In 1981, extensive discussions took place between the Bank and the Government on cost recovery during negotiations for the Mahaweli III Project. Water charges were to be collected in Mahaweli areas starting in September 1982 at a level equivalent to 22 percent of the expected operation and maintenance costs, rising to 100 percent of those costs by 1991, No action was taken in 1982 because water charges were considered to be a politically sensitive issue in the 1982 elections. Also, the Irrigation Ordinance caused problems for the implementation of water charges because of an unsatisfactory legal basis for enforcement. The Government then amended the Irrigation Qrdinance to make legal action against defaulters possible, and to empower government agents to repair damaged irrigation works and recover costs from offenders. - 80 - 4.49 Government action was stimulated by the Bank's position that in the absence of adequate measures further Bank involvement in irrigation projects would be highly unlikely. In July 1983, the Cabinet approved the introduc- tion of a nationwide program of water charges. Rates were initially set to cover 50 percent of operation and maintenance cost, and would be gradually increased over a five-year period to reach full cost recovery. Thereafter rates would be reviewed periodically to accommodate increased costs. Collec- tions have begun in 1984. They have reached reasonable levels within the Mahaweli system, but have remained insignificant elsewhere. 4.50 Water management has not been very effective. This is clear from predominance of paddy on highly permeable soils, the use of water for other purposes (mud ploughing, weed control), and unauthorized tapping. The stage has not yet been reached where utilizing water with maximum efficiency is the predominant objective of the irrigation operators (both farmers and officials). A number of studies on water management26/ have been under- taken, and major efforts have been made in the Mahaweli projects to improve the situation. However, much remains to be done to improve water management in Sri Lanka. 4.51 The Government has within the framework of the National Agricul- ture, Food and Nutrition Strategy provided a new perspective for irrigation development, which calls for a redirection of investments towards rehabilita- tion and the launching of major efforts in water management. In addition, now that the objective of self-sufficiency in rice is within reach, substan- tial research and attention is -needed for crop diversification in irrigated agriculture. The Bank should continue to remain closely involved with sector work and project funding to assist the Government in its efforts to make the irrigation sector more efficient. Tree Crop Development 4.52 While, with the exception of the first, the Bank's tree crop projects have generally been implemented satisfactorily, the Bank has until recently not been able to assist in improving the poor performance of the tree crop sector as a whole. Earlier attempts through project conditionality were not successful. Covenants to maintain adequate tea producer margins and to establish and maintain a Rubber Policy and Planning Unit were not met, and the Bank did not actively pursue compliance. 4.53 However, substantial progress has been made recently. In 1983 the Bank undertook a major review of the tree crop sector from which a number of recommendations resulted: (a) regrouping tree crop activities under one ministry; (b) returning parts of public estates to the private sector; 26/ See for example: Sri Lanka, Issues in Irrigation Management dated July 8, 1983 (unpublished Bank draft working document). - 81 - (c) changing the tax structure to provide adequate producer margins; (d) ceasing tree crop cesses; (e) limiting replanting subsidies to smallholders; (f) streamlining the system of coconut subsidies; (g) transferring responsibility for extension to the general extension service; and (h) reviewing of marketing issues. 4.54 It was made clear to the Government that further Bank leading for tree crop development would be contingent on satisfactory progress with policy reform. While the discussions on the Bank's recommendations were going on, the Government prepared its Medium-Term Investment Plan (MTIP) for the state-owned plantations. The Bank considered the technical aspects of the investment proposals satisfactory, but processing of the 1985 Tree Crops Project was made dependent on progress with sector policy reforms. The Bank pursued conditionality under three headings: - Tax reform and profit margins. - Institutional efficiency. - Corporate efficiency. 4.55 Under the 1982 Tea Rehabilitation and Diversification Project, con- sultants had made a review of the financial and management procedures of the two estate corporations and had made recommendations on improving corporate performance (such as incentive pay, improved accounting procedures, estab- lishing management information systems, and a new board structure). The findings of the consultants were endorsed by the Government and the Bank. As a result, conditions related to the issue of corporate efficiency were easily accepted. 4.56 As to institutional efficiency, the Bank's aim was for all tree crop activities to be placed under the responsiblity of one ministry. But this proposal was rejected at the highest political levels. Another propos- al, to establish one central policy board for the two corporations, was also not accepted. The political ramifications of the Bank's proposals were clearly not well understood by the Bank. Rather than creating one ministry and a policy board, the objective of the Bank's proposals should have been to improve institutional performance in general. In this respect, it should be noted that substantial achievements had already been made with policy coordi- nation. The best proof of that is the preparation of the MTIP, which could not have been prepared without good coordination between the agencies in- volved. - 82 - 4.57 The major emphasis of Bank conditionality for the 1985 Tree Crops - roject, however, was-on tax reform. The Bank had made far-reaching propos- als for a complete overhaul of the tree crop sector tax system. The proposal was to institute a land rent for public estates, combined with low indirect taxes f or the whole sector. The land rent proposal was not accepted by the Government. Various reservations about the practicality of such a land rent system were made, but the Government also argued that ADB (a cofinancier of the project) did not share the Bank's position, and also that the Bank's pro- posals were not in line with tax recommendations made in IMF studies. This illustrates the importance of coordination among the donors. It also under- scores the point that proposals based on abstract economic theory are not always practical. 4.58 In the meantime, the Government had set up a task force to study taxes and incentives in the tree crop sector and as a result, in late 1984, substantial changes were made. The Government decided to reduce the overall tax burden, remove plantation and factory subsidies from the publicly owned plantations, and set up a stabilization fund. The Bank accepted this as meeting its intended conditionality, provided that-as agreed during the negotiations--the institutional capacity to review profit margins and taxes be maintained and that studies be undertaken to: (a) review the tax struc- ture to make it less discriminatory; and (b) establish appropriate procedures for the stabilization fund. Thus, while not all Bank recommendations were accepted, the stage was set for improved sector performance. 4.59 A reservation about the Bank's involvement in the tree crop sector, however, is that so far too little was done for the smallholders, despite emphasis both by the Government and the Bank on private sector development. Smallholders account for one-third of tea production, two-thirds of rubber production and almost all coconut production. The smallholder tea components in the Bank's projects have not worked well, and targets of the Smallholder Rubber Rehabilitation Project are not being met. On the basis of experience to date it is not clear that either the Bank or the Government knows how to de I effectively with smallholders in the tree crop sector. Rural Development 4.60 - Together with other donors, the Bank has made a significant contri- bution to the Government's rural development program. The differences in approach between the Bank financed projects and those supported by the other donors have been discussed in para. 4.39. The question can be raised whether those differences are a reflection of different conditions in the various districts, or a reflection of different rural development philosophies of the supporting donors. Probably a little of each explains the differences. Con- siderable experience has now been gained, and time has come to evaluate the achievements and to harmonize (not unify) the different approaches within a clear national strategy. - 83 - 4.61 Late 1984 the Bank made an extensive review of Sri Lanka's rural development program.27/ Perhaps not surprisingly, it basically supports the Bank's philosophy on rural development, as expressed in the projects it has financed in Sri Lanka. It considers that the district-based investments should aim at increasing incomes, directly involve and benefit smallholders, have a broad impact on production and social services in rural areas, and build local level institutions. It concludes that these rural development programs should mainly allocate resources to directly productive activities, and economic infrastructure. It suggests that several social components so far included in the programs be deleted in the future, and be financed through national sub-sectoral projects. This is feasible in theory, but aside from the fact that it is unlikely that the Government and the other donors will support this approach, there is a dilemma. There has always been creative tension between a national and a regional approach. The Bank itself supports small irrigation through its national Village Irrigation project and through its regional rural development projects. A major feature of the rural development program is furthering regional decentralization of development efforts, and limiting the type of components to be financed under rural development programs seems to run counter to this objective. 4.62 There is also some debate about the extent of poverty alleviation achieved under the projects supported by the Bank. Many smallholders benefit directly, and undoubtedly they are poor. But, relatively they are less poor than some other categories of the rural population which have such marginal holdings (or are landless) that they are unable to benefit from the produc- tive investments in the Bank supported projects. In the projects supported by other donors these groups are targeted more directly. Clear evidence about the advantages and disadvantages of the various approaches is not available and the debate is far from over. Most observers agree, however* that reaching the poorest segments of the rural population (landless laborers, unemployed youths, marginal farmers) has so far proven to be difficult and often elusive. This subject has not received much attention in the Bank's review, which is somewhat paradoxical, as the Bank- through the IFAD projects has experience with rural projects that target benefits much more specifically to certain groups than is the case in the Bank's own projects. 4.63 As mentioned in para. 4.39, the Government considers other donors to be more flexible in their approach to rural development than the Bank. The Bank's projects are designed on the basis of a five-year program defined at appraisal. This program then becomes the target for project implementa- tion. Despite the fact that projects of this kind have to be adapted to ex- perience, there have been many instances where desirable changes were dis- couraged by the Bank. The argument was that the legal project descriptions could not easily be changed, which seems to be a curious interpretation of the status of the legal project description. Obviously, there should be 27/ Report not yet published; the observations in the following paragraphs are based on an internal draft. -84- valid reasons for changes, but other parts of the Bank show greater flexibility in interpreting project descriptions, and are less reluctant to change the legal project description if circumstances warrant. There is an important reason why more flexibility should be allowed. The program is relatively new and planners are still experimenting. The Bank should encourage adjustments to take account of experience. Annual targets and individual components will have to be adjusted from time to time, and project design should allow for that. When district planning has become more perfected, future rural development projects could be more of a rural development fund type under which the individual components would be implemented in accordance with agreed procedures under the responsibility of the district executing agencies. The experience with rural development funds in Burkina might be a useful reference.28/ 4.64 It is recommended that the Bank's review of the rural development program be disseminated widely among government officials concerned and the donors involved in the program. It would be useful to request the Government to organize a rural development seminar in Sri Lanka to elicit the views of all the participants. The other donors could then be invited to review their experience with rural development from their own perspective. If alternative ways of funding rural development are gradualy developed, the various donor approaches could probably easily be accommodated in an agreed overall framework. Institutional Development 4.65 The Bank has made various attempts to help improve institutional efficiency, albeit without much success. Most of these attempts were in fact recommendations to simplify institutional arrangements. Thus, in the tree crop sector the Bank suggested that all tree crop activities be brought under the control of one ministry rather than four. Although these proposals were unacceptable to the Government (para. 4.56), the same reorganization proposal was included among the recommendations of a recent Bank agricultural sector review mission (para. 4.70), although in that case it was part of a much larger package of suggested institutional simplifications (in fact that mission suggested a basic and complete overhaul of institutional arrangements for agricultural development). It is difficult to see why the Bank, so soon after rejection by the highest authorities -.a the country of the Bank's proposals in the tree crop sector, should suggest even more wide-ranging institutional changes. By concentrating its advice on institutional simplification, the Bank showed that it was insufficiently aware of the politically sensitive nature of the existing institutional arrangements. 28/ OED Report No. 2651 dated September 4, 1979 (PPAR - Upper Volta Rural Development Fund Project - Credit 317-UV) and OED Report No. 4541 dated June 15, 1983 (PPAR - Upper Volta Second Rural Development Fund Project - Credit 640-UV). - 85 - 4.66 The Bank has been more successful in helping with institution building at the. individual project level. In the tree crop sector corporate efficiency of the estate corporations was improved considerably. The extensive management review by consultants financed under the third tea project (para. 4.55) provided the technical underpinning for these changes. In the Bank's rural development projects, the project units established under the District Ministers have proven to be efficient coordinators of the rural development projects. The forestry project is being implemented by a project unit specifically established for that purpose, which has resulted in effective project administration so far. The Mahaweli group of organizations are well managed and are efficient implementers. The Bank has been closely involved with these institutions for more than a decade. 4.67 In short, while the assistance of the Bank in institution building at the project level has had satisfactory results, it has had negligible impact at sector levels. The Bank did not participate in the Government's own efforts to improve planning and coordination in the sector. Its recommendations on institutional reorganization were seen as ignoring those efforts. They were resented as politically unrealistic and futile, and some goodwill was lost in the process. Sector Work 4.68 Major Bank sector work for agriculture includes the following: (a) an annex to the economic report on agricultural problems and prospects in 1969; (b) an agricultural sector survey in 1973; (c) an agricultural policy and program review in 1975; (d) an annex to the economic report on agricultural producer incen- tives in 1980; (e) a special review mission of rural development projects in October 1984, (report being prepared); and (f) a major agricultural sector mission in November 1984, (report being prepared). 4.69 The 1973 agricultural sector report was a largely descriptive re- view of the sector and the agricultural components of the then five-year de- velopment plan. It was useful as a source of information, but did not serve as a means of policy dialogue as relations with the Government at the time were poor. The 1975 Agricultural Program and Policy Review identified prior- ity areas for Bank investment and it has contributed greatly to the shaping of the Bank's lending program in future years. Since the late 1970s, the Bank has spent considerable effort analyzing agricultural incentives. Much of this work was discussed in Sri Lanka, but officials found it generally too -86- theoretical, especially with respect to the suggested overhaul of taxes in the tree crop sector. Furthermore, the continued over-emphasis and warnings on incentives, especially in relation to paddy, were insensitive to a govern- ment which had just instituted major policy reforms in the agricultural sector, such as abolishing the monopoly of the Paddy Marketing Board, making it a buyer of last resort at guaranteed floor prices, and encouraging private trade. 4.70 Much of the Bank's agricultural sector work created the impression with the Government that it was done in isolation, rather than in relation to specific government initiatives and activities. The preparation by the Government of the National Agricultural Strategy could have provided ideal opportunities for the Bank to explore with the Government the extent to which the Bank was ready to support its initiatives, but they were not taken. Instead, an agricultural sector mission went out in November 1984, after the Government's strategy paper was completed and accepted by the Cabinet. As reported by officials in Sri Lanka, the mission apparently took little notice of the strategy paper, and placed emphasis on shortcomings rather than achievements. As a result, communications between the Government and the mission were reduced to bare essentials. Another factor contributing to the Government's negative attitude was that the mission's purpose was perceived to be designing conditionality to be applied to possible future sector or structural adjustment loans. 4.71 Substantial subsector work has been carried out by the Bank in connection with its lending activities. Detailed analysis was undertaken for the forestry, dairy and tree crop sectors in preparation of further Bank lending in these sub-sectors. However, none of these activities resulted in published reports, which is regrettable because their findings are now not easily accessible both within the Bank and to other donors active in the agricultural sector, and valuable information threatens to disappear from the Bank's institutional memory. The marginal costs of finalizing such reports after they have been discussed with the Government are small, certainly in relation to the benefits of higher accessibility and dissemination. Internal Organization of the Bank 4.72 Until recently, three divisions shared responsiblity for the Bank's agricultural activities in Sri Lanka. One division was responsible for irrigation and rural development projects; a second, for agro-industries, fisheries and credit; and a third, for agriculture in general. As a result a number of anomalies have arisen in the past. For example, the agro-industry, credit and fisheries division has for years tried to identify projects it could execute in Sri Lanka. It did not succeed, but manpower was spent on activities which were probably not a priority from an overall strategy perspective. Another example is the recent agricultural sector mission. General agricultural sector work for the countries of the South Asia Region was divided among the three divisions. For Sri Lanka it rested with the general agricultural division. But the staffing of large sector missions then became then a problem as specialists were required from the other divi- sions who were not always available. This led to the regrettable situation - 87 - that outsiders had to be engaged to cover the important irrigation sector in the agricultural survey, while so much in-house experience and expertise was available in the irrigation division. This caused a good deal of irritation on the part of government officials. Also, the failure so far to develop a coherent Bank strategy for future rural development could be ascribed to lack of coordination among the three divisions. 4.73 Recently, steps have been taken to improve the Bank's own institu- tional arrangements. First the number of divisions has been reduced to two, with one remaining responsible for irrigation and rural development and the other responsible for all other agricultural activities. Also, a second as- sistant director was appointed in the South Asia projects department to shar- pen country focus. Diversity of Activities 4.74 Through its lending, the Bank has generally addressed priority areas. Tree crops have always been important for the economy, and the Bank has increasingly focussed on this sector. In irrigation the Bank has placed great emphasis on maintenance and rehabilitation, although a substantial part of its actual lending was for investments in new irrigation infrastructure. Given its potential impact on the landless and the rural poor, dairy is another important sector where the Bank has been active, although its involvement there has been subject to criticism, both from within the Government and from other donors active in this subsector (paras. 3.54-3.55). 4.75 Agricultural lending has covered seven subsectors so far. However, given the inherently limited resources the Bank has available for Sri Lanka, and the limited number of operations it can process each year, the question can be raised if the Bank is not attempting to cover too many subsectors, with the result that it might not be able to sustain its impact in some sec- tors or subsectors. Sustainability of lending impact should be a serious concern. The Bank is likely to process about 20 projects for Sri Lanka over the next five years and these are expected to cover not only agriculture but other important priority sectors as well. If historical ratios are valid, about 10 future projects would be for agricultural development. It seems doubtful that the Bank, with 10 projects over five years, could maintain its impact in tree crops, irrigation, rural development, dairy, forestry and agricultural supporting services. In this context, it should especially be noted that the Bank's three rural development projects all can be expected to be completed in the next five years, and the Bank might not be able to ensure continuity and sustain its involvement in this important endeavor. It would therefore appear desirable to concentrate future Bank activities in agricul- ture on those subsectors where the Bank's impact on policy formulation can be -88 largeFIc. The extent to which other donors are active in a particular sub- sector is obviously one important factor in determining Bank priorities.29/ 29/ In this context the Bank's failure, despite repeated attempts, to finance fishery projects in Sri Lanka is a good thing. Many other donors, foremost ADB, are active in the sector and the Bank might not have a comparative advantage. - 89 - LI. THE MAHAWELI DEVELOPMENT PROGRAM Perspective 5.01 The Mahaweli Development Master Plan, prepared jointly by a UNDP/FAO team and Sri Lankan engineers in 1965-68, envisaged the development of about 365,000 ha of irrigable land in the.dry zone, of which about 100,000 ha were already cultivated and the remainder mostly uncultivated.LO/ Under the plan 15 reservoirs located on the Mahaweli Ganga, its tributaries and the Maduru Oya were to be constructed. Eleven of these reservoirs would have power stations and another power station would be in a trans-basin canal. The total installed capacity of the power stations was to be 500 MW. The original plan was divided in three phases to be implemented over a 30-year period. Implementation began in 1970. 5.02 Late in 1977, the new UNP Government decided to accelerate imple- mentation. At that time work on the first phase of the Master Plan was in progress, with part of the funds provided by the Bank. The projects of the Accelerated Mahaveli Development Program (AMDP) included five majar reser- voirs and hydroplants with a total potential power capacity of 500-600 MW, and downstream development of about 112,000 ha. After consultation with the Bank, in late 1977, the Government agreed to undertake an implementation strategy study (funded by the Netherlands). While that study was going on, the Government approached bilateral donors for finanacing. They responded favorably, and funding for the construction of four dams and reservoirs was obtained. 5.03 The main objectives of the Mahaweli program are to help solve three of the major problems facing Sri Lanka: (a) reducing unemployment by creating short and long-term job oppor- tunities; (b) increasing agricultural production, particularly rice, to achieve food self-sufficiency; and (c) alleviating power shortages. 5.04 In reviewing the Mahaweli program, it is important to place it in its historical context. The historical dimension of harnessing the waters of the Mahawell river is very much alive in Sri Lanka. Every Sri Lankan knows of the philosophy of the ancient monarchs, most clearly expressed by the 12th 30/ The irrigation areas included in the Master Plan were divided into 14 irrigation systems. Eight of these, with a total irrigated area of 190,000 ha, were located in the basins of the Mahaveli Ganga and Maduru Oya. The remaining six systems were in the North Central area (see map in the back of the report). -90- century King Parakramabahu I who said "Let not one drop of water teach the sea without first serving man". Large-scale irrigation works were built as early as the let century A.D. High standards of irrigation technology enabled the monarchs to extend waterworks throughout the dry zone by the 6th century A.D. So thorough was their work that many of those systems are still in use today. In this historical light, the Mahaweli program pays tribute to the ancient civilizations with their magnificent irrigation works. 5.05 Political considerations were also important in the decision to accelerate the Mahaweli program. In 1977, the new Government introduced a substantial program of economic reform. The decision to accelerate the program should be viewed as part of a larger quid pro quo, by which the political and economic benefits of the accelerated program (food self-sufficiency and more employment) compensated for the economic and political costs of some of the economic measures, such as reducing subsidies and devaluing the currency. 5.06 Although the historical and the political dimensions are not sub- stitutes for sound economic and technical analysis, they are important aspects, and to a certain extent the Bank's decision to support the acceler- ated program can only be understood if the political dimension is taken into account. Critical Bank Decisions 5.07 From its inception, the Bank has been closely involved with the Mahaweli program. Over the last 15 years, rhere was substantial interaction at the technical level, mainly through supervision of Bank projects. A close relationship developed between the Bank and the Mahaweli Authority, and at the technical level the Bank's advice has always carried substantial weight. In addition to supervision, the Bank played a role in designing the overall development program, and in coordinating foreign assistance. In two instances in particular, Bank decisions have been important to the progress of the Mahaweli development program: at the time of the initial involvement, and, in 1977, when the Government decided to accelerate the program. 5.08 The Initial Involvement. In 1961, a Bank mission reviewed Sri Lanka's river basin development potential, and recommended that first prior- ity be given to the continuation of detailed engineering and other prepara- tory studies of the Mahaweli diversion project. In 1962, the Government requested Bank financial assistance.for the studies. At that time, however, the Bank, although supporting the conclusions of the mission, did not want to proceed because it considered the Government's general economic management inadequate. The Bank argued that more information was needed before detailed engineering studies could proceed and it recruited consultants to undertake additional studies. However, before the arrangements were finalized, relations between the Bank and the Government had deteriorated so much that all dealings with the Government regarding future lending were suspended. The UNDP subsequently financed the studies, which were carried out in 1965-68 and resulted in the Master Plan for Mahaweli Development. - 91 - 5.09 In November 1968, the Government requested Bank assistance for'the implementation of the first phase of the Master Plan. An appraisal mission found preparation to be inadequate, which precluded the first phase to be implemented in one go. To avoid delays, the mission redesigned the first phase into three stages, the first of which was financed by the Bank in 1970; the second, in 1977. 5.10 Thus, in the early years of its involvement, the Bank was very cautious in proceeding and insisted that exhaustive studies be completed first. This was the Bank's usual approach towards large-scale engineering projects, and it was in marked contrast to the Bank's subsequent approach to the acceleration of the program In 1977. 5.11 The Decision to Accelerate. When the present Government, in 1977, decided to accelerate the Mahaweli program, the Prime Minister himself made an urgent request for support in a letter to the President of the Bank. High government officials visited the Bank in late 1977, and general agreement was reached. An approach was agreed by which an Implementation Strategy Study would be carried out to examine the implications of alternative phasings of sub-projects, and to recommend a plan of implementation. It was also specifically agreed, however, that this study would not hold up progress of physical work on the on-going program. In fact, the study was to proceed simultaneously with the execution of readily implementable sub-projects for which the technical and economic viability had been established. These understandings were recorded in an aide-memoire signed by the Bank and the Government. Undoubtedly, this was the single most important Bank decision with regard to the acceleration of the Mahaweli program. In retrospect, however, the Bank might at the time have had too hiyh expectations of the influence of the implementation study on shaping the program, as well as of its own role as a coordinator of the program. 5.12 Subsequently, the Dutch Government agreed to finance the Implemen- tation Strategy Study. The terms of reference were agreed between the Government, the Bank, and the Dutch in January 1978. The consultants undertook their studies in 1978 and 1979 and submitted their final report in September 1979. 5.13 The Bank's decision in 1977 was unusually risk-taking in style. Bank management basically decided to support the Government's bold program before the results of the study were available. However, some observers believe that the Bank as a partner in development simply could not have risked turning the Government down. Prima facie the objectives of the accelerated program (self-sufficiency in rice, power, employment) made sense. Also, the newly elected Government, wtich had introduced many of the policy reforms the Bank and other donors had been pressing for unsuccessfully for years, clearly needed international support. A further consideration was that at the time many donors were prepared to fund large capital projects, and Mahaveli provided opportunities for attractive contracts that were too good to miss. They were eager to go ahead, and the Bank considered it could play a useful role coordinating the program, as it subsequently indeed did (para. 3.50). - 92 - 5.14 In a very short time substantial progress was made with preparing projects and mobilizing finance. Even before -the Implementation Strategy Study was completed three major projects were in an advanced stage of prepa- ration. Some observers argue that the results of the Implementation Strategy Study should have been awaited, but as mentioned before, that was not the strategy agreed between the- Bank and the Government. In fact, the Bank en- couraged the Government to commence start-up work for some of the projects. It recommended that works such as access roads to dam sites, construction sites, and diversion tunnels be undertaken, without awaiting the results of feasibility studies and detailed designs (Aid Group meeting 1978). 5.15 Some observers also argue that the Bank should have put on the brakes when it became clear that the program was going to cost much more than initially expected. With the benefit of hindsight, it is easy to criticize. It is probably true, as was noted at the 1984 Aid Group meeting, that if it had been known beforehand that the terms of trade would move against Sri Lanka, that world inflation would cause substantial increases in costs, and that budget constraints in industrial countries would affect aid commitments, the accelerated program would never have come off the ground. These circumstances, however, were impossible to predict in 1977. Also, it is unrealistic to assume that the Bank could have had substantial leverage over bilaterally agreed commitments. By 1980, substantial political and financial commitments had been made, and the program could not really be rephased or altered to any significant degree. 5.16 But some changes were indeed made. Originally, the AMDP included the construction of five major reservoirs, to which the Government later added Kotamale, and development of about 340,000 acres of irrigated land. The Dutch consultants' study, however, found that the Victoria, Kotmale and Maduru Oya reservoirs would be sufficient for irritation needs. As a result, the program was adjusted by deleting one reservoir and postponing some downstream development, although the Government later added the Randenigala project for power generation. Bank Group Operations 5.17 The Bank has made five loans/credits in support of the Mahaveli Ganga program for a total of US$183.1 million, or almost 20 percent of total Bank lending to Sri Lanka. The projects were for discrete alements of the Mahaweli program. Except for the first project, which included a power station, the Bank has only supported the downstream development of the Mahaweli program: irrigation and related supportiug services, as well as technical assistance. Although the Bank is no longer involved in financing the large investments in Mahaweli Gangs hydropower generation, it is closely involved in the development of the power sector as a whole (see Part Two, Section IV). -93- Table 5.1: BANK FINANCED MANAWELI PROJECTS la Approval Loan Credit Project Name Year amount amount (US$mil) (USTMil) 1. Mahaweli Gangs 1970 14.50 14.50 2. "Mahaveli Gangs II 1977 - 19.00 3. Nahaweli Ganga TA /6 1980 - 3.00 4. Mahaweli Gangs II 1981 - 90.00 5. Mahaweli Gangs IV /c 1984 12.60 30.00 26.60 156.50 /a For details of individual projects see Annex 1. /b Technical Assistence Project. 7Z7 Not yet effective. 5.18 With bilateral assistance, the Mahaveli Authority of Sri Lanka (MASL) is at present constructing, or has completed constructing, dams and power statione at Victoria (UK), Kotmale (Sweden), and Randenigala (Federal Republic of Germany), as well as an irrigation dam at Maduru Oya (CIDA) (see map in the back of the report). In addition, several other donors are involved in financing other elements of the program. 5.19 The Bank's first project (1970) is completed and was audited by OED in 1981.31/ Despite implementation delays of about two years, the project was regarded as economically and socially successful, The main reasons for success were considered to be sound project design, continued support from government agencies, and the ability of farmers to adapt to the rigorous time frame imposed by double cropping. However, certain problems remained, such as cost recovery, monitoring and evaluation, effective water management, and illegal occupation of land. Although these problems were addressed in follow-up projects, they have remained critical issues until today. 5.20 Construction of infrastructure and settlement under the second pro- ject (1977) are almost ready. Despite delays, project implementation was satisfactory, and agricultural benefits are expected to be greater than esti- mated at appraisal. The major studies envisaged under the Mahaweli Technical Assistance Project (1980) have been completed, and the credit balance is being used to finance final engineering for the 1984 Mahaweli IV Project. Implementation of the Third Mahaveli Project (1981), was delayed by a late award of the construction contracts and heavy rains in 1984, but the situa- tion has now improved. In spite of the delays, the project shows good pros- pects. 31/ See PPAR, ORD Report No. 3730 dated December 28, 1982. -94 5.21 - The Fourth Mahaveli Ganga Project was approved in July 1984. Loan and Credit agreements have been signed, but have not yet become effective because cofinancing arrangements have not yet been completed. Timely imple- mentation of this project is essential as the project's economic rate of return is sensitive to delays. But political considerations have made the intended cofinanciers (the Saudi Fund and CIDA) hesitant to go ahead. In the meantime, Sri Lanka has almost reached self-sufficiency in rice, which would make another rice producing project less attractive. Also, the Bank's farm- gate price projections are now much lower than when the project was appraised. Thus, what was a marginal project to start with, threatens to become a project with an unacceptably low rate of return. Nevertheless, partly because the country would lose a financial package on fairly conces- sionary terms (the IDA allocation of SDR 30 million would certainly be lost), and partly because the already existing headworks would lose some of their justification if no downstream development takes place, the Bank and the Government continue intensive discussions to save the cofinancing package or find other partners, but so far without results. Outstanding Issues 5.22 A full assessment of the Mahaveli program is not yet possible. Nevertheless, a few points can be made and a few questions raised. From the point of view of implementation, the accelerated program should be regarded a success. Most of the construction works have been on schedule. Avoiding delays in such a large program shows excellent program management. The Government has been very successful in the timely mobilization of resources and in the preparation, start-up and physical implementation of the program. It should be recognized that the Bank's role in this process has been limited. 5.23 The costs of the program, however, have been high, and have increased substantially over the years. The current cost estimate is about Rs 40 billion, compared to an estimate in 1977 of Rs 11 to 12 billion. This led to substantial budget deficits in the early 1980s, which fueled domestic inflation, and necessitated costly foreign commercial borrowing. The Mahaweli activities caused severe strains on the construction capacity elsewhere in the- econony, which affected implementation of other projects. Also, the tight budgetary situation led to a neglect of maintenance of economic infrastructure. 5.24 About two-thirds of the estimated costs of the program have now been incurred. But most of the benefits have yet to be realized. They are, however, likely to be substantial. The first significant generation of hydropower took place in 1985, and eventually the country's generating capa- city will be doubled. Paddy production from Mahaweli is currently about 200,000 tons a year, and it io lAkely to quadruple with the completion of the irrigation schemes. While production at present is still modest, as was to be expected, yields are good and somewhat higher than expected. Ultimately, about 100,000 farm families are expected to be settled. Job creation has been substantial, including about 20,000 temporary jobs in the construction of the headworks. -95 5.25 Nevertheless, with respect to downstream development, many chal- lenges remain and only continued efforts will ensure that benefits from these schemes can be sustained. The Government itself has recognized this in its new strategy for irrigation development.32/ The first large downstream development area (system H, see map) is now largely completed. There is much visible evidence that welfare of the settlers has increased, especially for those who manage to double crop and as part of the double cropping include chillies in their rotation. But other observers believe that living stan- dards of some settlers have not increased beyond earlier levels.33[ Obviously, the dynamics of socio-economic development in system H are still evolving and much can be learned from that system that would be highly relevant for development elsewhere in the Mahaweli system and for irrigation in general. It is essential, therefore, that the experience with system H be fully documented. A full impact evaluation by OED, jointly with cofinan- ciers, should be undertaken at a suitable time in the future. 5.26 Furthermore, for the irrigation subsector as a whole the issues of cost recovery, water management and crop diversification still require substantial attention. They are discussed in paras. 4.47-4.51 of the report. 5.27 Other issues requiring attention are the institutional arrangements for ongoing schemes and the respective roles of the Irrigation Department and the Mahaweli Authority. Now that the first irrigation schemes of the Mahaweli program are nearing completion, the institutional and financial sustainability of these schemes needs to be looked into. One thing seems certain: these schemes cannot continue to be supported financially at the high levels the Mahaweli Authority was able to provide during construction and start-up. 5.28 Many of the above issues are recognized to be important for future irrigation development in Sri Lanka. The Government has within the framework of the National Agriculture, Food and Nutrition Strategy provided a new perspective for irrigation development, which calls for a redirection of investments towards rehabilitation and major efforts in water management. In addition, now that the objective of self-sufficiency in rice is within reach, substantial research and attention is needed for crop diversification in irrigated agriculture. The Bank should continue to remain closely involved in the irrigation sector to assist the Government in carrying out its new strategy. 32/ See: National Agriculture, Food and Nutrition Strategy, A Change in Perspective, National Planning Division, Ministry ,* Finance and Planning, Colombo June 1984. 33/ For example, see reports by Thayer Scudder and Kapila F Wmaladharma on settlement aspects of the Mahaweli program. _.� � � д - - 7�� ���� � �4 � '��'• � " ' Е \ 97 III* INDUSTRY Evolution of Government 2jbectives 6.01 At Independence, the level of industrialization was very-low. The most significant activity was the Initial processing of the country's tree crops: tea, rubber and coconuts. During World War II, nine public enterprises had been set up to produce previously imported essential goods that had become scarce because of the war. Many of those failed, however, when after the war cheaper imports became available again. Soon af ter Independence a few more government-owned industrial enterprises were set up, but they found it di ficult to compete with cheap imports. Although the Government leaned towards further industrialization through new state ventures, there was no clear industrial strategy until 1959. 6.02 An industrial strategy was spelled out for the first time in the Ten-Year Plan, issued in 1959 by the then SUP Government. As the Government saw no great possibilities for creating employment in agriculture, industrialization was regarded as the main engine of growth, and as a possibility to absorb the increase in the labor force.- Because of the perceived lack of export possibilities, the Government made a conscious decision to concentrate on import substitution. Recognizing that new industries would find it difficult to compete with imports, the Government declared in the Plan that it had no alternative but to initiate a Policy of heavy protection "that would have to go beyond that envisaged in the familiar infant industry argument." High tariff walls were erected, which were reinforced by quantitative restrictions as foreign exchange became scarcer, 6.03 In the Ten-Year Plan, the Government made it clear that industralization was to take place in the framework of the broader objective of achieving a socialist -pattern of society. The State became active in identifying lines of products to be produced, and establishing, with strong budgetary support, new public enterprises and expanding existing ones. Plans for the expansion of industrial production were drawn up in physical terms, without much concern for considerations of comparative advantage. The Government put in place a system of rigid institutional controls over the industrial sector by establishing ministries and other public sector agencies who -were made responsible for decisions with respect - to individual enterprises. At the same time, price and wage controls were instituted, and other instruments such as subsidies, -tax- concessions and preferential access to foreign exchange were used to support.public enterprises. 6.04 In the Ten-Year Plan, the -existence of a mixed,- public-private economy was recognized, and a certain role for private enterprise was spelled out. But-the private sector was warned "that the pattern of ownership cannot be foreseen in advance." Indeed, the Government had already started a program of nationalization of mostly foreign enterprises in order -to bring about a more equal distfibution of wealth and income. In these circumstances the interest of the private sector in industrial investment remained -98- extremely low. On the whole, the program of state-led industrialization did not turn out to be successful. In the early 1960s management difficulties made themselves felt, and scarcity o,f foreign exchange and budgetary resources led to serious supply shortages and a deterioration in capital stock. Growth stagnated and unemployment remained very high. 6.05 When the UNP Government came into office in 1965, it attempted to stimui.te the industrial sector by providing tax incentives and increases in foreign exchange allocations to the private sector, and it announced a program of assistance to small-scale industries, industrial research and establishment of industrial estates. A large part of its capital expenditure program, however, was for new public enterprises for import substitution behind high tariff barriers. The need to increase industrial exports was recognized, but the instruments chosen for export promotion were bilateral barter agreements and special payments arrangements. In various planning documents, the need to develop a comprehensive industrial policy was recognized, but because of the Government's continuous preoccupation with balance of payments crises this never materialized. Nevertheless, the growth rate of manufacturing accelerated during the period 1965-70 to some 8 percent a year. 6.06 In 1970, the second SLFP Government came into office. In its "Five-Year Plan, 1972-76" it labeled the economic policies of the previous Government "misguided and short-sighted." The new SLFP Government continued and reinforced the socialization process it had set in motion during its previous tenure (1956-65). It announced that "measures for the social ownership or the social control of industry and commerce form an essential part of the socio-economic framework in the Plan." The Government limited private ownership of land, which mainly affected the plantation sector, and enacted the Businesh Acquisition Act, which made further nationalization of industries possible. The Government continued to invest in new import substitution industries in the public sector, and the policy of high protection was reinforced. 6.07 Although it was stated in the Plan that the private sector would be given "every encouragement to contribute to national development, subject to social controls," local and foreign private investment in industry remained very low. Because of the shortage of foreign exchange, the desirability of increasing non-traditional exports was recognized. Export targets for indus- trial products were set in the Plan, but no coherent export policy was developed to support the export drive. Only in 1974, forced by the persis- tent scarcity of foreign exchange, did the Government try to stimulate indus- trial exports by such inducements as a foreign exchange retention scheme for exporters and a more favorable dual exchange rate for non-traditional exports. The private sector responded by beginning to establish an indus- trial export base. 6.08 On the whole, however, industrial policies under the second SLFP- Government did not lead to the desired results. Industrial growth in 1970-77 period was negligible, and unemployment had by 1977 reached a level of more -99- than 20 percent of the labor force. Management and control problems in the public sector had mounted, and many industrial public enterprises had become a persistent drain on the budget. 6.09 When the third UNP Government came into office in 1977, it inher- ited a tituation in which for more than two decades investment decisions had been insulated from market. forces. Government policies had created an environment in which competition was limited and industry developed as an import substituting activity behind high protective barriers. Choice of investments and an overvalued exchange rate had created a highly capital and import-intensive structure. Because of high import requirements, the iet effect of import substitution on foreign exchange savings had remained very limited. The high degree of protection and lack of competition, reinforced by declining capacity utilization resulting from scarcities of imported inputs, had led to decreasing efficiency and increasing costs. In the public sector this was reinforced by weak management and conflicting objectives of profitability on the one hand, and employment creation and low consumer prices on the other. 6.10 The newly installed Government was determined to solve the coun- try's financial and economic problems through restoring growth and diversify- ing exports. It realized that past reliance on public enterprises and perva- sive direct controls had overstretched the Government's management capacity, and that it had failed to provide proper incentives for export-oriented industrial growth. The Government, therefore, shifted towards greater use of broad, indirect instruments of economic policy, and it recognized the impor- tance of market forces, price signals, and private sector initiative. 6.11 With respect to the industrial sector, the most important steps taken in 1977 were the following. The exchange rate was unified and the currency devalued. The external trade and payments system was liberalized. With the exception of a few products, public sector import monopolies were terminated and import licensing was abolished for most goods. A beginning was made with revising and simplifying the tariff structure, and a Presiden- tial Tariff Commission (PTC) was installed to prepare further reforms. Price controls for most commodities were removed. Company taxes were lowered to provide incentives for local and foreign investors, and it was decided to establish a free trade zone (Investment Promotion Zone - IPZ)for new export industries. No new public enterprises in the industrial sector were to be established, and subsidies and other budgetary support for public enterprises would be withdrawn gradually. 6.12 Available indicators suggest that, in spite of the slump in the world economy, power shortages in the early 1980s, and the ethnic distur- bances since the middle of 1983, Government policies have been reasonably successful. According to national account estimates, value added in manufac- turing grew at an annual rate of 4 to 5 percent in real terms between 1977 and 1984. This relatively low figure, however, appears to be unduly heavily weighted by the public sector where growth has been slow. Performance of the 100 - private sector is reported to have been much better than the average figure suggests. Also, published production figures are considered to be defective in that they do not capture the sharp increase in activities of Informal and small-scale industries that is clearly visible to observers. Exports of man- ufactured goods (excluding re-exports of petroleum products) have increased rapidly from US$29 million in -1977 to US$366 million in 1984. Assisted by the availability of export quotas, exports of garments have increased fast- est, from US$12 million in 1977 to US$289 million in 1984. But also other industrial exports have grown rapidly, from US$17 million to US$77 million over the same period. In terms of volume, garment exports are estimated to have grown at an annual rate of about 50 percent; other industrial exports, 20 percent. 6.13 Although the performance of non-traditional exports so far appears to have been satisfactory (the share of manufactured goods in total exports increased from 4 to 25 percent between 1977 and 1984), private sector invest- ment and more rapid export growth is still constrained by a number of factors. The most significant of those are the following: (i) The lack of a comprehensive framework of industrial and trade policies that would ensure that various policy instruments, such as exchange rate, tariffs, investment and export incentives, are used in a consistent manner. The Government's exchange rate policy was quoted as an example by private industrialists. After initial beneficial devaluations, the Government had, in the last two or three years, allowed the currency to appreciate by some 20 percent against currencies of Sri Lanka's major trade partners, which has eroded the competitiveness of .ocal manufacturing. (ii) The fact that the Business Acquisition Act of 1970 is still not repealed causes some doubt about the Government's attitude towards private enterprise. The Ministry of Finance and Planning is generally regarded as the protagonist of private enterprise and of broad industrial and trade policy instruments. But other ministries, particularly those which cintrol public enterprises, are still considered to bc suspicious of private enterprise. Those ministries are generally hesitant to expose public enterprises too quickly to market forces and free competition, afraid as they are that the social and employment objectives of public enterprises may then no longer be attainable. (iii) The Government has been slow in changing control functions of ministries and agencies concerned with commerce and industry into service functions. Financial intermediation, export promotion and other services to industrialists and exporters need to be improved. At present, most special incentives are still granted in a discretionary manner, and applicants have to cope with cumbersome procedures. -101- (iv) The prevailing high interest rates are universally quoted as a deterrent to industrial investment. The basic cause of high interest rates, however, appears to be the Government's budget deficit. 6.14 Nevertheless, the Government is making progress with developing a comprehensive industrial and export policy framework. An Export Development Council was set up in 1978, chaired by the President and composed of cabinet ministers most concerned with industrial and export issues. Its competently staffed executive arm, the Export Development Board (EDB) has in 1983, in cooperation with the Central Bank and private industrial and financial. interests, published a comprehensive policy-oriented National Export Develop- ment Plan 1983-1987, which was accepted in principle by the Cabinet. Since then, EDB has prepared a number of policy papers on specific subjects for considerations by a newly established high-level Industrial Policy Committee. 6.15 Some progress is also being made with respect to the public enter- prises sector. The Government has established a parliamentary Committee on Public Enterprises (COPE). The Public Enterprises Division of the Ministry of Finance and Planning, which functions as COPE's secretariat, considers and puts forward proposals for improving the efficiency of public enterprises. As a rule, public enterprises can no longer count on budgetary support, unless a request for it is accompanied by an acceptable action plan for improving operations. Solutions being pursued so far include return to the private sector, the formation of joint stock companies, foreign management contracts, and, in a few instances, closure of unprofitable operations. The Bank's Objectives and Activities 6.16 Although the Bank made its first (US$4 million) loan to the Development Finance Corporation of Ceylon (DFCC) in 1967, no clear Bank strategy for Sri Lanka's industrial sector emerges from Bank documents until about 1978, a year after the present Government came into office. If in the earlier years the Bank had an objective with respect to the industrial sector at all, it appeared to have been to support the private sector with foreign exchange whenever feasible and opportune, and to ignore the growing public sector. 6.17 The first loan to DFCC in 1967 was followed in 1969 by a second (US$8 million), also to support private investment. Both loans were made under the then UNP Government. In- 1971, however, after the second SLFP Government had come into office and private sector demand for credit had declined, the still uncommitted amounts of both loans, in total US$6.8 million, were cancelled at DFCC's request. 6.18 In the early 1970s, Bank involvement in the industrial sector was strongly determined by factors which limited the size of Bank lending to Sri Lanka as a whole. In 1971, the Bank's managemeit decided that because of high debt service obligations and uncertain export prospects Sri Lanka was no longer creditworthy for IBRD loans. At the same time, IDA allocations were - 102 - cut drastically because the Government's economic performance was judged to be poor. The industrial sector received low priority in the Bank's reduced lending program. Only in 1975 and 1977, after zhe Government had started stimulating private export industries and demand for credit from the private sector had picked up, two more credits, totalling US$12.5 million, were made to DFCC. 6.19 In those years, the Bank did not seriously attempt to influence industrial policy through its lending operations. Whatever conditions were attached to the loans and credits to DFCC related to on-lending interest races, and to strengthening and training DFCC's management and increasing its capacity for project appraisal. Also, no industrial sector work was under- taken to provide the underpinninh for policy advice. The Bank's economic reports in those years were generally concerned wich overall economic condi- tions and foreign and domestic resource mobilization. Discussion of the industrial sector in economic reports was generally descriptive. Issues such as lack of a comprehensive industrial policy, the Government's ambivalent attitude towards the private sector, the inefficiency of the public sector, and the distortions caused by controls and high protection were noted, but few practical solutions were offered. 6.20 In the early years one more IDA credit was made to Sri Lanka that benefitted the industrial sector. By 1974, the foreign exchange shortage had become so severe that many industries operated at levels of less than 50 per- cent of capacity for lack of imported inputs. On the strength of measures taken by the Government in 1973 and 1974 to improve domestic resource mobili- zation, the Bank approved in 1974 a program credit of US$15 million to finance essential imports, both for the private and the public sector. No specific policy conditions were attached to the credit, but it was hoped that it would give the Bank an opportunity to pursue further policy reform that could be supported by additional program lending. In the Bank's judgment, however, sufficient policy actions were not taken, and no further program assistance was considered. 6.21 By 1978, following the Government's economic reforms, the Bank had become concerned about its lack of knowledge of the industrial sector, and hence its inability to devise an appropriate assistance strategy. A first comprehensive industrial sector mission was fielded in 1978. Its report, issued in 1979, reviewed the Government's new industrial strategy, identified shortcomings in the country's institutional and policy framework, analyzed the performance of public industrial enterprises, and discussed the potential -of small and medium-scale industries. The report did not attempt to provide much advice or technical assistance to the Government, but it served a useful purpose within the Bank in that it led to much more focused lending operations, and enabled Bank staff to address institutional and policy issues in the course of project preparation and execution. 6.22 After the 1978 sector mission, three IDA credits to the industrial sector were made in quick succession. Two credits were for small and medium industries (US$16 million in 1978 and US$30 million in 1981), and one for - 103 - general industrial development (US$25 million in 1983). Another industrial development credit is being prepared. 6.23 The first SMI credit was designed mainly to enable the Government to tap the potential of small and medium industries. Inveatment funds were channeled through the old DFCC, a newly established National Development Bank (NDB)34/ and four commercial banks. The credit provided additional funds for advice and technical assistance to improve services to small and medium industries, as well as for technical assiRtance to NDB to improve its opera- tional systems and the quality of its staff. Another component of the credit was for consultant services to carry out studies on fiscal incentives and effective rates of protection. The second SMI credit supported the intia- tives started under the first credit, and made funds available to the Export Development Board for export incentives studies and sales promotion. 6.24 Apart from making lines of credit available to DFCC and NDB, the 1983 Industrial Development Credit had the important objective of helping the Government to improve the performance of public sector enterprises. Techni- cal assistance funds were made available to ministries overseeing public enterprises, as well as to corporations themselves, to develop corporate plans, incentive systems, performance criteria, and improved accounting, financial management and marketing practices. Additional technical assis- tance was provided for further incentive studies,- and to assist the Govern- ment in implementing a phased program of tariff reform. 6.25 In 1983, the Bank sent a second industrial sector mission to Sri Lanka, whose draft report was made available to the Government in early 1984. Although the report provided more elaborate analyses of trade and in- dustrial policies, the public enterprises sector, and financial intermedia- tion than were given in the 1979 report, it has not yet led to a more pro- found dialogue with the Government on industrial policies. The reasons for that will be discussed in paras. 6.34-6.36. 6.26 Apart from the aforementioned seven loans and credits for the manufacturing sector, the Bank has made, in 1981, an IDA credit of US$13.5 million for a Construction Industry Project. The project is basically a manpower development project for the construction industry. The construction industry had long remained a relatively small, stagnant sector. But as a result of the general upsurge in economic activity, and of the sharp increase in public capital investment, the construction industry has ixperienced a sharp increase in demand after 1977. The lack of skilled workers, however, posed a severe constraint. The 1981 Construction Industry Project aims at increasing the supply of trained manpower, improving management expertise in the construction sector, and strengthening institutional arrangements for training. 34/ In contrast to DFCC, which finances only private investment, NDB finances both private and public sector investment. - 104 - Evaluation of the Bank's Activities 6.27 In reviewing the Bank's activities in Sri Lanka's industrial sector, the striking difference in approach before and after 1978 is immedi- ately apparent. The four loans and credits to DFCC in the period before 1978 benefitted an ailing and not strongly government-supported private sector. At that time, DFCC was the only source of foreign exchange for private investors. In that period the Bank appeared to have felt uncomfortable with pervasive state controls and with the large public enterprises sector. No serious attempt was made through lending, sector work or otherwise, to address industrial policy issues within the prevailing centrally controlled economic system, or to improve the functioning of the public enterprises sector. 6.28 Given the often strained relations between the Government and the Bank in that period this might not have been an easy task. However, an important reason for the Bank's failure to address fundamental institutional and policy issues in those years appears to be that the Bank simply lacked the capacity to provide meaningful assistance. It was not before late 1976 that within the Bank's South Asia Projects Department the Industrial Develop- ment and Finance Division was established with a mandate not only to provide investment funds, but also to undertake industrial policy analysis and to provide advice and technical assistance. Before that, lending to DFCC was handled by the then non-regional Development Finance Companies Department, whose main task it was to channel investment funds, mainly to the private sector, through financially sound development banks, without much concern for broader policy issues. Also, the old DFC Department lacked sufficient country-specific knowledge. 6.29 The lack of thorough knowledge of the industrial sector at that time prevented the Bank from playing any significant advisory role in 1977 at a critical juncture in economic policy formulation in Sri Lanka. In devising the new economic measures, which strongly affected the industrial sector, the Government was assisted by the IMF and not the Bank. Although the initial measures provided an immediate impulse to industrial activity, the Government was conscious of the fact that a more comprehensive industrial policy frame- work needed to be devised. Had the Bank in 1977 been ready to help with advice and technical assistance, progress with industrial policy formulation might have been faster, and existing policy and institutional constraints to industrial growth and export diversification might have been removed earlier. 6.30 It should be,kept in wind however, that in addition to the lack of sufficient policy analysis, it was a combination of political and social fac- tors, which prevented the Government from progressing more-rapidly with a comprehensive industrial and trade policy framework. The role of several ministries with their vested interests in public enterprises and in preserv- ing their control functions has already been mentioned (para. 6.13). Other important issues include labor legislation which encourages over-staffing of public enterprises, the fear of price increases caused by exchange rate adjustments, and even the ownership of local private enterprises, which is - 105 - typically not in the hands of the majority population group. Only the Government itself can appreciate these constraints, and it is attempting to remove them at its own pace. 6.31 Such a situation, where economic decisions have important political and social ramifications, obviously calls for a careful and understanding Bank approach. In such a situation, any allegation of the Bank forcing deci- sions upon the Government against its will, may be counterproductive. Since 1978, - the Bank has generally followed a low-key, but apparently effective approach in assisting the protagonists of market-oriented industrial policies within Government with initiating and implementing institutional and policy reform. As mentioned before, the Bank's 1979 industrial sector report was not designed to provide advice or technical assistance--indeed, very few Government officials remember it-but it enabled the Bank, through the composition and design of its lending operations, to focus more precisely on what the Government is attempting to achieve: (I) devising a policy and incentive framework conducive to growth and diversification of production and exports, (ii) supporting private investment, and in particular building on the potential of small and medium-scale industries, and (iii) reforming public enterprises, so that they can compete in a free market environment without undue government support. 6,32 With respect to policy formulation, the Bank's most significant contribution was the financing (under SMI-I) of a study of effective rates of protection. This study, which was completed in 1981, provided the Presiden- tial Tariff Committee with the tools to initiate a phased program of tariff reform. Sri Lankan officials are now fully familiar with the methodology, and tariff reforms introduced in recent budgets represent important steps in the direction of a tariff regime that provides equal effective protection to industries producing for the domestic market and those producing for exports. Most provisions for other policy and incentives studies in the three industrial credits of 1981 and 1983 have yet to be fully used by the Government, but they provide Bank staff involved with the projects to sustain a dialogue on sector policy on a continuing basis. Recently, agreement has been reached about studies to be carried out by the Export Development Board on export and industrial incentives and on- financial intermediation with special emphasis on interest rates. 6.33 The last three industrial credits were, in line with Government priorities, specifically directed at emerging local industries, and, for the first time in the Bank's activities in Sri Lanka, to the public enterprises sector. The Bank's efforts to support small industries by making credit available are supplemented by finandial and technical assistance from USAID, which has helped in establishing the Sri Lanka Business Development Centre whose main task it is to provide services and training to small entrepre- neurs. The Bank's credits also helped create an institutional framework for lending to small enterprises, and helped to establish procedures for the new, partly government-owned National Development Bank, through which most loans to public enterprises are made. Although technical assistance funds to improve public enterprise efficiency, made available through the 1983 - 106 - industrial credit, have been used only to a small extent, the Government is very appreciative of this component and intends to make full use of it once the relationship between ministries concerned has been clarified. 6.34 In 1983, the Bank fielded another industrial sector mission to Sri Lanka, and its draft report "Selected Issues of Industrial and Trade Po:icies in Sri Lanka" was made available to the Government in the beginning of 1'.4. Although its analysis, particularly of trade and industrial policies and the public enterprises sector, was deeper than that of the 1979 sector report, its impact on further institutional and policy reform has remained very limited. The Government did not feel the need for a new Bank industrial report. But the Ministry of Finance and Planning felt obliged to accept the mission because it thought that it would develop conditions pertaining to the industrial sector for a structural adjustment credit which was being consi- dered by the Bank at the time. In the event, the structural adjustment cre- dit never materialized. The Bank's draft industrial report was not circulated outside the Ministry of Finance and Planning. 6.35 Although officials in the Ministry of Finance and Planning stated that they appreciate the analysis in the report, they have difficulties with many of the recommendations which are considered to be mostly textbook solutions without sufficient regard for political and social sensitivities, and without offering enough guidance on actual implementation. From the point of view of the Ministry of Finance and Planning, the mission was not timely. It was at the time in the process of clarifying its delicate relations with the other ministries concerned with industries, and it felt that any perception of being pressured by the Bank would have upset its relations with other ministries. 6.36 Nevertheless, the inclusion of funds in the Bank's recent credits to the industrial sector for institutional and policy studies indicates that the Government would have welcomed additional Bank advice and guidance in developing its industrial policy framework. However, if the mission's main function had been to provide technical assistance in that respect, organization, preparation and execution of the mission should have been different. The mission was staffed mainly with experts who were not intimately familiar with political sensitivities in Sri Lanka, and the status of the dialogue on industrial policy between the Government and the Bank's project division concerned, In order to maximize the impact of the report, local cooperation and participation should have been sought beforehand to identify and define the issues to be covered, and in cooperation with local officials more specific guidance to the implementation of the recommendations should have been provided. A good example of such a cooperative approach is the Bank's 1984 Sri'Lanka Urban Sector Report (see paras. 8.11-8.13). The Government considers that report to be the Bank's most useful sector work in Sri Lanka, carried out successfully in an environment of equally great political sensitivity. - 107 - IV. ENERGY Government Objectives 7,01 Before the second oil shock in 1979, the Government's objectives with respect to the energy sector were relatively simple. The Government's principal concern was to increase the supply of electric power, mainly to support industrialization. However, the.sharp increase in the energy Import bill after 1979. resulting both from higher oil prices and an unprecedented upsurge in domestic energy demand, prompted the Government to start devising a comprehensive energy policy, in which energy demand management and con- servation have become important elements. 7.02 According to various national development plans and investment programs, the supply of electricity was to be increased by tapping the coun- try's hydro potential, to be supplemented with thermal power, if necessary. In the 1959 Ten-Year Plan, the possibility of building nuclear power plants was discussed, but this was never pursued. In the 1959 Plan a target was set to increase electricity generating capacity from 82 MW in 1959 to 382 MW in 1968, and an investment program to achieve that target was presented. In the period up to 1977, however, original targets were lowered frequently, and investment programs adjusted accordingly, because slow economic growth caused electricity demand to increase less rapidly than expected. By 1976, the generating capacity of the country had reached 383 MW, at which level it remained through 1980. 7.03 In 1977, the Government embarked on the Accelerated Mahaweli Development Program (AMDP), in which power development is an important ele- ment. The AMDP, as currently being executed, will, through three hydropower plants, add an additional capacity of about 500 MW to the system by 1987. The first plant, the 210 MW Victoria Power Station, was commissioned in 1984. Two factors, however, contributed to serious power shortages in the four years before the first power from the Victoria plant became available. First, as a result of the economic recovery demand for electricity increased much more rapidly than anticipated; second, severe droughts in the early. 1980s caused hydro generation to decline by almost 20 percent between 1980 and 1983. The Government reacted quickly by installing an additional 200 MW thermal and diesel generating capacity, but in spite of that serious power cuts could not be avoided. The shortages affected industrial production and are reported to have deterred new private investment. 7.04 Until 1969, the responsibility for power development and distribu- tion was vested in the Government Department of Electrical Undertakings (GDEU) under the Ministry of Land, Irrigation and Power. In the 1959 Plan the creation of an autonomous statutory corporation was envisaged, but only in 1969, at the Bank's insistence, was the Ceylon Electricity Board (CEB) established, which took over the responsibilities and assets from GDEU. CEB is responsible for electric power development outside the Mahaweli Develop- ment Program. With respect to Mahaweli power, the arrangement is that the -108- Mahawel -Development Authority is responsible for preparation and execution of the projects; after completion the assets will be turned over to CEB. 7.05 Until recently the Government's objective with respect to electric- ity pricing was that the power company act as a commercial enterprise, and that in setting tariffs a balance is achieved between current receipts and current revenue, and a surplus is provided towards meeting the cost of expan- sion and replacement of assets. In 1959, the Government and the Bank agreed that rates would be set in such a manner that the return on assets would be no less than 8 percent. In the event, however, the Government failed to adjust electricity tariffs as needed, and the rate of return on CEB's assets had declined to 2 percent by 1977. CEB's financial position deteriorated, and maintenance of capital equipment suffered because of the lack of internally generated funds. Also, the artificially low tariffs led to an increasingly wasteful use of electricity by CEB's main consumers, mostly industries. 7.06 Until the late 1970s the Government had given little attention to developing a comprehensive energy planning and policy framework. The first oil price hike in 1973 had been cushioned by the sluggish growth in the economy coupled wits. a declining demand for petroleum products, and a rise in the export price of tea. But energy policy became a major national concern after the second oil shock in 1979 when the oil import bill tripled. At the same tima demand for energy picked up, tea prices declined, and it had become apparent that because of lack of forward planning serious power shortages would occur in the early 1980s. In 1980, a separate Ministry o. Power and Energy was created, with the President himself holding the portfolio. '.07 The Government's first concern was to rationalize electricity prices. In December 1978 and October 1980 basic tariffs were increased by averages of about 80 percent and 90 percent, respectively. In addition, fuel adjustment surcharges were introduced to help CEB to recover fuel costs associated with thermal generation. Assisted by ADB and Bank staff, CEB, in 1980 and 1981, made a thorough analysis of the cost of electricity supply. On the basis of this study, the Government introduced in June 1982 a new tariff structure based on the long-run marginal cost of electricity supply. The new tariffs, while protecting the interests of low-income consumers, brought relative delivery charges more in line with costs, and should help to promote efficient energy use. Important features of the new tariff structure are, first, a sharp increase in the capacity charge for non-domestic users which should encourage installing energy saving equipment, and second, a restructuring of the domestic tariffs with low rates for users of less than 150 kWh per month and sharply progressive rates above that level. 7.08 As a result of the tariff increases, the return on CEBts assets improved to about 11-percent in 1981. It subsequently declined again, but tariff increases in 1983 and 1985 are likely to lead to an improvement. The significance of the tariff restructuring, however, is far greater than restoring CEB's financial position. The electricity price, and prices of energy in general, have now been accepted by the Government as powerful tools -109- to promote efficient allocation of resources, both within the energy sector and the rest of the economy, and to manage energy demand, 7.09 The Government has also made good progress with other aspects of energy planning. At the recommendation of a UNDP/World Bank Energy Assess- ment Mission, an Energy coordinating Team (ECT) was established, in 1982, in the Ministry of Power and Energy. ECT coordinates energy-related activities among relevant ministries and agencies. It consists of three coordinating task forces: (i) Energy Planning and Policy Analysis (EPPAN), whose task it is to identify the overall objectives of a national energy policy, and to define .an energy strategy that meets those objectives. Good progress is being made with establishing a comprehensive data base which is to feed into policy analysis. (ii) Energy Efficiency, Demand Management and Conservation (EDMAC), which covers energy conservation activities in industry, agricul- ture, transport and households, and is also engaged in reviewing energy pricing policies. (iii) New, Renewable and Rural Sources of Energy (NERSE), which coordi- nates activities in the renewable energy subsector. 7.10 As a result of the activities of the task forces, several im?ortant steps have already been taken. Among those are the following: (i) EDMAC has initiated a vigorous national energy conservation program. It organizes (seminars for senior managers of major energy-using corporations, and provides training in energy audits. A number of industries have already implemented the easier and low-cost efficiency improvements. Feasibility studies for further conservation investments are being carried out. (ii) Prices of petroleum products were increased to reflect higher world oil prices. Also, the differential between the price of light fuel oil and that of heavy-diesel-oil has been widened to encourage a shift toward the use of heavier fuel of which Sri Lanka's refinery produces an oversupply. Politically the most difficult measure was to increase the price of kerosene to the border cost of supply. To protect the poor, the value of kerosene stamps was raised. (iii) NERSE has started identifying economically viable applications of renewable energy technologies. The Renewables Energy Unit in CEB has developed a low-cost stove which would cut household fuelwood consumption by at least a third. Production and sale of-the stove is actively promoted. - 110 - (iv) Based on the findings of a follow-up joint UNDP/World Bank mission, in 1983, CB is preparing a project to reduce power losses in the electricity distribution system. Bank Involvement 7.11 Up to 1970, the Bank was the main provider of foreign financial assistance for electric power development to Sri Lanka.35/ The first Bank loan to Sri Lanka (US$19.11 million in 1954) was for a 25 MW hydropower station. This was followed in 1958 by a US$7.4 million loan for a 25 MW thermal project; in 1961, a US$15 million loan for hydro and thermal projects with a total capacity of 75 MW, as well as transmission and distribution facilities; in 1969, a US$21 million loan for a 90 MW hydro station and a 25 MW gas turbine, including transmission facilities. The gas turbine was later deleted, because electricity demand grew slower than expected, and US$4.5 million of the 1969 loan was cancelled. In 1970, the Bank made a first US$29 million loan (half IBRD, half IDA) for the multi-ptirpcse Mahaweli Development Project, of which a 38 MW hydro station was one of the compo- nents. 7.12 Apart from expanding generating capacity and tranamission facili- ties, an important objective of the Bank's early involvement in the power sector was to help the Government establish an autonomous statutory corpora- tion that would be in charge of development and distribution of electric power. In 1958, when the second power loan was being prepared, the Govern- ment informed the Bank that it had decided to establish the Ceylon Electric- ity Board (CEB) as a statutory authority. But it was not until 1969, after the Bank had made the transfer of assets and liabilities from DGEU to CEB a condition of effectiveness for the 1969 power loan, that CEB was finally established. The Bank loan included funds for management consultants to CEB to devise an organizational structure, introduce new accounting systems, improve billing and collection procedures, and introduce management informa7- tion systems. 7.13 But CEB has remained subject to considerable government regulation which prevents it from operating as an autonomous and efficient commercial organization. The Government still takes most investment and pricing deci- sions, and determines the conditions of service for the staff. Remuneration, which is in line with civil service salaries, is auch below salary levels in the private sector. As a result, CEB finds it difficult to retain qualified staff, which is the main reason why the introduction of information systems and accounting and financial procedures have met with considerable delays and difficulties. The Bank expected to address these issues under future power loans. But action was delayed substantially -because of the Bank's virtual withdrawal from the power sector between 1970 and 1979. 35/ For details of Bank loans to the power sector see Annex 1. - 111 - 7.14 In 1970, the Bank's lending program still contained five power pro- jects, totalling US$46 million, for the period 1971-1975. A power transmis- sion project was in an advanced stage of preparation. In 1971, however, the Bank considered Sri Lanka no longer creditworthy for IBRD loans and IDA funds were cut because economic performance was considered to be poor. In the period 1971-79, only one small IDA credit (US$6 million in-1973 for transmis- sion facilities) was made "to maintain a minimum presence in the sector and to avoid a practical break in relations." In that period of difficult rela- tions between the Bank and Sri Lanka supervision of ongoing power projects took place irregularly and infrequently, and preparation of new projects was suspended. 7.15 Although the Government initially continued to request Bank assis- tance for new power projects, it gradually turned to other donors and agen- cies. The Asian Development Bank became the main provider of funds for the Government's rural electrification program and two additional hydro pro- jects. The U.S.S.R. agreed to finance another hydro project, but plans were abandoned after the UNP Government returned to office in 1977. 7.16 By 1977, the Bank had virtually lost contact with the power sector in Sri Lanka and was therefore in a poor position to judge the huge power in- vestment contained in the Accelerated Mahaweli Development Program (AMDP) for which the new Government had requested Bank,.support. When the Bank, in 1978, decided to support AMDP in principle (pending the outcome of a consultant's feasibility study), the Government was already negotiating bilateral financ- ing with the U.K., Sweden and Germany for the three large hydropower schemes contained in AMDP. With respect to power development under AMDP, the Bank confined itself to financing transmission and distribution facilities associ- ated with the hydro stations under construction. Two IDA credits for that purpose followed in quick succession: one in 1980 (US$19.5 million, plus US$20 million cofinancing from the Saudi Fund), and another in 1982 (US$36 million, plus US$11 million from the OPEC Fund). The Bank also reacted expeditiously to the power emergency which occurred in the early 1980s (para. 7.03) by making a US$42.7 million loan (the first IBRD loan since 1970) for a 80 MW diesel station to help CEB overcome power shortages. 7.17 The resumed lending operations in the power sector also provided the means to strengthen CEB whose performance had deteriorated over the years. Although management and accounting systems were introduced by CEB in 1974, staffing difficulties led to delays in preparing financial reports, which reduced management effectiveness and control. Other difficulties encountered by CEB included increased system losses, a low rate of return on assets, arrears in billing and collection, particularly from local authori- ties, and a weak long-term planning capability. 7.18 These issues, as well as some unresolved issues related to condi- tions to earlier Bank loans to the power sector, were addressed in the 1980 and 1982 credits and - loan. Conditions attached to the 1980 credit with respect to unresolved old issues included the terms of transfer to CIB of hydro projects completed under the Mahaweli program, and transfer to Govern- ment of the foreign exchange risk of CEB's long-term foreign borrowing. - 112 - Other conditions under the 1980 credit concerned improving inventory control and reducing excessive inventory levels; the implementation of a study of long-term marginal cost pricing,6/ and tariff revisions to increase the rate of return on CEB's assets; the preparation of a firm four-year invest- ment program by CEB; a program to clear arrears of payments to CEB; and appointment of consultants to prepare management development and staff training programs and the submission of an agreed training program. The conditions were reinforced under the loan and :redit in 1982, 7.19 Before 1981 the Bank had not carried out sector work in the energy sector, other than that related to the preparation and execution of projects. In 1981, the Bank fielded an Energy Assessment mission to Sri Lanka under the aegis of the Joint UNDP/World Bank Energy Sector Management Program. Its report "Sri Lanka: Issues and Options in the Energy Sector" was issued in May 1982. The report was followed by an "Activity Completion Report" in January 1984, and several preparatory studies for energy invest- ments identified by the 1982 report, all financed by the Joint UNDP/World Bank Program. 7.20 Given the immediate energy problems facing the country, the 1981 mission focussed first of all on those options that would yield quick results. The most significant option was to improve the efficiency of energy use in the main energy-consuming sectors. The mission found that a concerted energy efficiency program for the largest industrial and commercial energy users could result in substantial savings on imported oil and improve the electricity demand/supply balance at relatively low cost. The mission recommended an institutional framework, technical support and preinvestment work to carry out this task, as well as changes in the structure and level of energy prices to complement the demand management effort. Other short-term recommendations concerned the timely completion of the Victoria hydro station under AMDP and cost-reducing changes in the supply of petroleum products. 7.21 For the longer term, the report stressed the need to start prepara- tory work for introducting coal-fired power generation by about 1990, to expand the inadequate level of afforestation to ensure a sustainable supply of fuel wood, and to establish an institutional framework to coordinate renewable energy activities. Finally, the report stressed the importance of strengthening the overall institutional framework for energy policy formula- tion and investment planning and implementation. The report concluded that weaknesses in this regard had been an important cause of Sri Lanka's energy problems in the early 1980s. Without major improvements, the institutional structure was likely to remain a serious impediment to implementing an appro- priate energy.development strategy. 36/ The study was financed by a 1980 ADB loan to the power sector. - 113 - Evaluation of the Bank's Activities 7.22 Bank loans made to the power sector prior to 1971 helped finance a major proportion of Sri Lanka's electric power generation capacity. Of the country's total installtd capacity of about 380 MW in 1976, about 65 percent was from Bank-financed-projects. Although there were at times delays in pro- ject execution, none of them had serious consequences because the increase in power demand in those years was generally slower than forecast. Project costs expressed in foreign exchange remained within the original appraisal estimates. Involvement of Bank staff ensured a least cost solution to the sequence of power investments in the country. 7.23 The Bank's attempts at institution building were less successful in those early years. Since its first involvement in the power sector in 1954, the Bank had pressed for the establishment of CEB as an autonomous statutory corporation. But only in 1969, after the Bank had made the establishment of CEB a condition of effectiveness to its fourth power loan, was CEB establish- ed. Consideration was given to postponing negotiations for the second and third power projects in 1958 and 1961 until the Government had taken the re- quired legislative action, but this was not pursued at the time. The Govern- ment, which cited political difficulties as the cause of delay, convinced the Bank that satisfactory progress was made with the necessary legislation, and the Bank decided to proceed with the projects before the CEB bill was actual- ly enacted, because delays in project execution were considered to lead to serious power shortages. 7.24 As mentioned before, soon after the establishment of CEB the Bank lost much of its effectiveness in the power sector because of its decision to curtail its operations in Sri Lanka. In the power sector only one token credit was made between 1971 and 1979, mainly to keep a dialogue on sector policies going. But even this was not successful. Between November 1974 and March 1977, at a critical time when three Bank power projects were in execu- tion, the Bank did not send any supervision missions. As a result, much of what the Bank in 1969 had set out to achieve with respect to CEB was not ac- complished. Until its problems were again addressed in Bank projects in the early 1980s, CEB remained a weak institution without any planning capability. 7.25 The Bank's loss of involvement in forward planning in energy investment is perhaps the most serious aspect of its temporary withdrawal from the power sector. Prior to 1971, the Bank had guided the Government in selecting least cost solutions to power investments, but between 1971 and 1980 this influence was lost. The phasing and sequencing of future power investments was an important issue when the Bank, in 1977, was requested to support the Accelerated Mahaweli Development Program. The Bank was in a poor position to offer advice. Moreover, to a large extent the Bank was presented with a fait accompli. Bilateral financial support for the power investment under AMDP was already being arranged by the Government, and bilateral donors were keen to go ahead. The consultants' feasibility study, which was under- taken in 1979 at the Bank's request (para. 7.16), had only limited impact on the selection of a least cost solution, as the consultants were bound by -114 power investments already decided at the time of their work. The consultants concluded that the power investments under ANDP would provide for Sri Lanka's electricity needs until the late 1980s, but they did not pronounce themselves on the least cost solution. Until today a good deal of controversy remains, both within the Bank and outside, as to whether the power investments under AMDP indeed represent the least cost solution to Sri Lanka's power develop- ment. 7.26 Nevertheless, the Bank's decision to support ANDP has been largely instrumental in restoring Government-Bank relations, and in ensuring a renewed entry in the power sector. The Bank's 1980 and 1982 credits for transmission and distribution facilities complemented ongoing investments in hydro projects, and contributed to strengthening CEB's managerial capacity and its long-term planning capability. The Sri Lankan authorities concerned expressed their appreciation to the OED mission for the active advisory role played by Bank missions which led to mutually agreed and understood condi- tions to the credits. The authorities also appreciate the quick way the Bank reacted to the request to finance additional generating capacity at the time of serious power shortages, which led to the 1982 loan for the Diesel Power Project. 7.27 With the 1981 UNDP/World Bank Energy Assessment Mission, the Bank has also made a large contribution towards establishing a comprehensive energy policy framework. The Government has acted on most of the report's recommendations. The institutional structure for energy policy analysis and sector management has been greatly strengthened by the establishment of specific task forces in the Ministry of Power and Energy, under direction of a Bank seconded (EEC-financed) senior energy advisor to the President. Several of the important initiatives and actions taken by the task forces have already been mentioned (paras. 7.07-7.10): a national energy conser- vation program is being implemented; energy prices have been raised to reflect the cost of supply, and the relative price structure has been changed to ensure cost-effective investment decisions; a beginning is made with applying renewable energy technologies; and a program is being developed to reduce losses in the power transmission and distribution system. Further steps include the following: developing a long-term investment strategy to ensure that future energy requirements are met at least cost; a prefeasibil- ity study was completed for a coal-fired power station to be commissioned about 1990; and the crude oil mix of the petroleum refinery was changed to take advantage of relative price movements. 7.28 The findings of the UNDP/World Bank Energy Assessment Mission have also led to energy-related components in Bank projects other than for power, and to an increase in assistance from abroad for technical assistance and feasiblity studies. The 1982 Bank-assisted forestry project includes technical assistance funds to draw up a Forestry Master Plan, The Bank's 1982 Tea Rehabilitation Credit included finance for feasibility studies for the rehabilitation of mini-hydro plants on tea estates. That project, as well as the Bank's 1985 Tree Crops Project, have components for the actual rehabilitation of the mini schemes. Multilateral and bilateral assistance is - 115 - being provided for, among other- things, the implementation of energy conservation measures; hardware, sftware and training for a computerized energy data base and financial analysis models; the feasibility study and project preparation for the proposed coal-fired thermal power station; studies for the development of fuel wood and peat resources; and studies on reactivating additional mini-hydro sites and a survey of all potential hydro sites on the island. 7.29 In summary, after- 1979 the Bank has made an impressive come-back in the energy sector in Sri Lanka, in spite of the fact that the Bank's finan- cial contribution has remained relatively modest in relation to that of other agencies. The Bank-financed projects complemented major investments financed by others, and through its projects CEB's management and its long-term plan- ning capability is being reinforced. However, most credit for assisting the Government in formulating and implementing its long-term comprehensive energy policy framework should go to the 1981 Energy Assessment Mission. When asked by the OED mission why the energy mission had been so successful, one entirely unexpected reason was given by government officials. Apart from its timeliness and the professional competence of staff involved, they mentioned that they did not see the mission's many recommendations as posing a threat. The recommendations were not immediately related to loan conditions, and the Government could set out implementing them at its own pace without feeling pressured. 7.30 Another reason for the success is, of course, the Government's own strong commitment to the cause. Before the energy mission took place, the Government had already recognized the inadequacy of past energy policies. It had just established a new Ministry for Power and Energy, and the first steps were being taken to devise a rational energy strategy. The energy mission was therefore very timely. It was able to build on ideas that were already being formulated by the Government. Its report was also found very useful in that many practical and immediately implementable solutions were offered to the problems and issues discussed. A further fortunate coincidence was that immediately before the energy mission significant preparatory work had been undertaken by Sri Lankan officials in connection with a regional energy survey carried out by the Asian Development Bank. ーノノご一 メ孝3，戸りグ・多りかが 117 Ve THE URBAN SECTOR Government 04jectives 8.01 Sri Lanka's urban population to estimated at about 3.4 million at present, or about 22 percent of the total population. The average urban population growth rate was 2.4 percent a year between 1963 and 1971, but -dropped to an estimated 1.2 percent a year between 1971 and 1982, This Is a remarkably low rate by Asian standards, where rates-of 4 to 5 percent are far more typical. Slow urban growth during the 19709 can be partly attributed to the sta'" gnation of industrial production and employment In those years. other factors that explain the relatively slow urbanization include the wide availability of social services in rural areas, cheap and abundant road transport which allows easy commuting, and government-promoted rural settlement through schemes such as the Mahaveli program and several rural development projects. 8.02 Before 1977, urban development received little attention in nation- al development plans, In line with the Government's welfare policies, sub- sidized housing is provided for lower income groups. other urban services, such as transportation, water supply and sewerage, are also subsidized, Apart from some finance for drinking water, urban development attracted little external assistance. The extreme scarcity of financial resources dur- Ing the 1971-77 period of economic stagnation caused urban services to fall far behind needs. While the urban population grew by well over 200,000 per- sons between 1971 and 1977, only 4,800 dwellings were constructed in the public sector in that period, and private sector construction had cow to a virtual standstill. The water supply threatened to become a public health hazard and posed a serious constraint to the tourism industry which the Government was attempting to develop. 8.0 In contrast to previous governments, great political significance was attached to housing and urban development by the present Government when it--came into,office in 1977. The first rolling public Investment program for 1979-83 included plans for building more than'100,000 dwellings, developing a new capital complex in Kotte near Colombo, establishing a free-trade export processing zone in the Colombo area, and accelerating Investment In water supply and sewerage facilities. The objectives of the Government's urban program were to make up for the serious backlog in residential building, to provide sufficient houses for the increase in the urban population that was expected to result from the new industrialization policies, and to raise employment through increased construction activity. 8.04 The Government's housing and urban development program was started with great energy, but serious i constraints soon became , apparent. - The construction industry was unable to cope with the increase in demand from the urban program and the Accelerated Mahaweli Development Program, which were started at the same time. Building materials and skilled construction workers became scarce, and building costs soared. All construction projects - 118 - in progress had cost overruns with serious implications for the Government's budget. At the same time, government revenues were affected by the fall in export prices. The budget deficit increased from less than 6 percent of GDP in 1977 to 23 percent in 1980; clearly an untenable situation. Other constraints to the urban program were organizational and institutional weaknesses, and the huge recurrent cost implications for the budget resulting from the increase in subsidized housing of too high a standard, and the virtually free provision of other urban services. In the light of these difficulties, the Government, in the early 1980s, drastically cut its urban programs, shifted from constructing houses to developing housing sites and services, and made a beginning with introducing cost-recovery measures for urban services. The Bank's Role 8.05 In financial terms the Bank's contribution to urban development has been very modest. Only two credits, totalling US$39.2 million, were made for water supply and sewerage projects. It is through its economic and sector work that the Bank has had its greatest impact. Urban issues were first addressed in the Bank's 1980 economic report "Sri Lanka: Key Development Issues in the 1980s," and later-in two sector reports: the 1984 "Sri Lanka Water Supply -and Sanitation Sector Study" and the 1984 "Sri Lanka Urban Sector Report." According to government officials, it was particularly the close cooperation with Bank staff during the preparation of the latter report that has led to a complete restructuring of urban policy. 8.06 The Government first requested Bank assistance for a water supply project in the early 1970s. Initially the Bank was reluctant to respond. Although in 1975 a US$5 million credit for a water supply project was pro- posed in the lending program for fiscal 1977, the Bank's management decided to continue to focus on directly productive projects and immediately support- ing infrastructure, such as power and transport. The water supply project was dropped, Nevertheless, a project identification mission went ahead in December 1975, and the project was babsequently reinstated in the lending program. In 1977, a US$9.2 million credit was made for the First Sri Lanka Water Supply Project, followed in 1980 by a US$30 million credit for the Second Sri Lanka Water Supply and Sewerage Project. The 1980 IDA credit was supplemented by US$30 million parallel financing from the Saudi Fund for Development. The IDA credits financed water supply. and distribution and sewerage facilities in Colombo and coastal towns south of Colombo. In ad- dition, through the provision.of funds for technical assistance and training, and relevant conditions and covenants, the credits aimed at building up the institutional capability of the National Water Supply and Drainage - Board (WDB), which is the executing agency, and strengthening WDB's operating efficiency and financial management practices. 8.07 Although factors such as budgetary constraints, lack of construc- tion capacity and civil disturbances have led to delays of 12 to 18 months, physical works have generally been implemented satisfactorily. Also, WDB has successfully used technical assistance to strengthen its operational and 119 - financial capabilities. However, because of several factors, mostly beyond WDB's control, the project objectives of Improving WDB's financial situation and operating efficiency have not been achieved entirely. After the civil disturbances in 1983, a number of professionals left the country, leaving WDB's senior staff cadre much depleted. Also, the Government continued to adhere to the concept that water and sewerage services are a public good which should be provided free. Only in the beginning of 1984, when the financial position of WDB had become serious, were measures introduced to increase rates and to improve billing and collection. 8.08 It also had become clear that there is a close linkage between the financial and technical operations of local (mostly municipal) governments and those of 14DB. Local governments are important bulk users of water who, because of their own- poor financial po3ition, have been constantly in default to WDB. Also, the investment and operating and maintenance activities of local governments and WDB have to be carefully meshed. It became evident to the Government that for the proper functioning of urban services the financial and technical responsibilities of central government, local governments and executing agencies, such as WDB, had to be defined much more clearly. 8.09 The Government's urban development programs were first reviewed in the Bank's 1980 economic report in a macroeconomic context. At that time, the Goverment had already started cutting back on investment. However, the economic report concluded that the remaining total investment program for 1980-84 was still too large in relation to financial and material resources, which contributed to untenable budget deficits and an overheated economy. In order to preserve resources for directly productive investment and the upkeep of existing capital stock, the report recommended further cuts in the housing program by limiting government involvement in direct construction, adopting lower building standards, increasing slum upgrading programs, and expanding government-aided self-help programs. 8.10 The Government recognized that its plans were too ambitious, and reduced its public sector housing program from about Ra 1,000 million in 1980 to just over Rs 400 million in 1984. In 1980 the entire program was for direct construction while it was only 42 percent in the reduced 1984 program. Sluu upgrading and sites and services development accounted for 43 percent; allocations to the National Housing Bank, 15 percent. Although the Government was in agreement with the recommendations in the economic report, its thinking about urban development had already evolved significantly in the early 1980s. In that it was influenced by the joint Government-Bank sector work that led to the 1984 Sri Lanka Urban Sector Report. 8.11 In the early 1980s Bank staff visited Sri Lanka to familiarise themselves with the urban sector, and, if possible, to identify an urban development project. During discussions the Government and Bank staff agreed that urban development was hampered by serious managerial and institutional shortcomings, as well as by financial constraints resulting from the central government's weak budgetary situation. Out of the dialogue between - 120 - Government and Bank staff grew a request for a joint sector study in which a number of issues would be addressed, such as the relationships between central government, local authorities and agencies providing urban services; financial responsibility and autonomy of local authorities; and possible cost recovery measures. 8.12 The Government appointed a Sri Lankan counterpart team, represent- ing central government, local authorities and urban development agencies, which in close cooperation with Bank staff and other interested donor agencies, particularly USAID, developed a plan of action, the most important elements of which are. (i) reducing direct central government urban investment, and encourag- ing investmw by local authorities while strengthening their financial, m-aagerial and planning capabilities; (ii) increasing the reliance on local resource mobilization, both by new cost recovery measures and by improving assessment, billing and collection techniques; (iii) introducing an incentive-based system of revenue and capital grants from the central government to local authorities. Incentives would be related to the local authorities' fiscal performance and their ability to produce adequate investment plans with supporting financial plans. (iv) training local government staff to enable them to plan, manage, operate and maintain urban development programs. A formal Steering Group, composed of officials of relevant government ministries and key municipal officials has been created to guide and oversee the implementation of the report's recommendations. 8.13 Even more than the content of the report itself, it was the process followed during its preparation that made the 1984 Urban Sector Report so valuable to the Sri Lankan authorities. Active Sri Lankan participation was not only useful as a learning experience, it also ensured that all relevant issues were identified and addressed. Government officials informed the OED mission that they.never had the feeling that recommendations were forced upon them. In fact, Bank staff mainly provided technical and professional assistance, and recommendations were largely developed by the Sri Lankan officials themselves. They therefore identify with the report and consider it just as much theirs as the Bank's. Conversely, Bank staff involved stated that the exercise had also been a useful learning experience for them. In particular, it enhanced their appreciation of the sensitive political issues involved in the devolution of responsibility and authority from the central government to local authorities. 8.14 High level government commitment to resolving the institutional and financial difficulties with urban development also contributed to the success - 121 - of the report. During and after its preparation the Government organized with Bank participation a number of workshops and seminars to disseminate its findings among parties concerned, including politicians, and solicit their input. As a result, there is now general acceptance, also at political levels, of the report's recommendations. 8.15 A Bank Technical Assistance Project to support the implementation of the recommendations of the sector report is in an advanced state of preparation. The main objectives cf that project are to strengthen financial management of urban local authorities; to increase reliance on local resource mobilization and rationalize the system of central government contributions; and to improve the efficiency and effectiveness of delivering urban services. The latter would be achieved through pilot municipal schemes that would demonstrate cost-effective approaches to the design, execution, and operation and maintenance of urban and municipal services. 8.16 The cooperation between the Government and the Bank in urban development is also of wider, more macro-economic significance. Through it a beginning was made with reforms in public administration to make it more development-oriented. It has pointed to ways of improving resource mobiliza- tion, particularly by introducing cost-recovery measures. And it has contributed to a restructuring of central government investment expenditures to bring them more in line with available resources. ·，Z才斗一 分奇州〞介＇斤＇·食 123 ANNEX 1: SRI LANKA STATUS OF BANK PROJECTS TABLE OF CONTENTS Laa No. Agriculture 1. Lift Irrigation, Cr. 121-CE, _1968_ 1 2. Drainage and Land Reclamation-, Cr. 168-CIE, 1969 1 3. Dairy Development, Cr. 504-CE, 1974 ..... 2 4. Agricultural Development, Cr. 595, 1975 2 5. Tank Irrigation Modernization, Cr. 666-CE, 1976 3 6. Tree Crop Diversification, Cr. 819--CE, 1978 3 T. Tree Crop Rehabilitation, Cr. 818-CE, 1978 4 8. Kurunegala Rural Development, Cr. 891-CE, 1979 4 9. Agricultural Extension and Adaptive Research, Cr. 931-CE. 1979 5 10. Smallholder Rubber Rehabilitation, Cr. 1017-CE, 1980 ......... 5 11. Second Rural Development, Cr. 1079-CE, 1980 ..... 6*00*00000600 6 12. Village Irrigation Rehabilitation, Cr. 1160-CE, 1981 ......... 6 13. Tea Rehabilitation and Diversification, Cr. 1240-CE, 1982 .... 7 14. Forest Resources Development, Cr. 1317-CE, 1983 7 15. Third Rural Development, Cr. 1363-CE, 1983 8 16. Major Irrigation Rehabilitation, Cr. 1537-CE, 1984 ............ 8 17. Fourth Tree Crops, Cr. 1562-CE, 1985 9 18, Dairy Development 11, In. 2776-CE, 1985 9 Mahaveli Gangs, Program 19. Mahaweli Gangs, Development 1, In, 653-CE, Cr. 174-CE, 1970 10 20. Mahaveli Ganga Development II, Cr. 701-CE, 1977 10 21. Mahaweli Gangs, Technical Assistance, Cr. 979-CE, 1980 *0600000 11 22. Mahaveli Ganga Development 111, Cr. 1166-CE, 1981 11 23. Mahaweli Gangs. Development IV, In. 2437-CE, Cr. 1494-CE, 1984. 12 Power 24. Aberdeen-Laksapana Powar, In. 101-CE, 1954 12 25. Grandpass'Thermal Power, La. 209-CE, 1958 ..... 13 26. Norton Bridge Thermal,1n. 283-CE, 1961 13 27. Power IV, La. 637-CE, 1969 13 28. Power V, Cr. 372-CE, 1973 14 29. Power VI, Cr. 1048-CE, 1980 14 30. Power VII, Cr. 1210-CE, 1982 15 31. Power VIII, Cr. 2187-CE, 1982 ......... -15 *124 - Table of Contents (coat 'd) Page No. Transportation 32. Highway, La. 569-CR, Cr. 133-CS, 1968 ........................ 16 33. Road Maintenance, Cr. 900-Cl, 1979 ,......................... 16 34. Road Passenger Transport, Cr. 994-CS, 1980 ................... 16 35. Road Maintenance II, La. 2517-CS, 1985 ....................... 17 DFC 36. Development Finance Corporation I La. 520-CE, 1967 .......... 17 37. Development Finance Corporation II, La. 634-CE, 1969 ........ 17 38. Development Finance Corporation 111, Cr. 566-CE, 1975 ........ 18 39. Development Finance Corporation IV, Cr. 742-CE, 1977 ......... 18 Industry 40. Small and Medium ladustry, Cr. 942-Cl, 1979 .................. 18 41. Construction Industry, Cr. 1130-Cl, 1981 ..................... 19 42. Small and Medium Industry II, Cr. 1182-CE, 1981 .............. 19 43. Industrial Development, Cr. 1401-Cl, 1983 .................... 19 Other Projects 44. Water Supply, Cr. 709-CB, 1977 .............................. 20 45. Water Supply and Sewerage II, Cr. 1041-CE, 1980 .............. 20 46. Telecommunications, Cr. 1020-CB, 1980 ........................ 20 47. Program Cre it, Crv 512-Cl, 1974 ............................. 21 - 125 - ANNEX I Page I THE WORLD ANK AND SRI LANKA A REVIEW OF A RELATIONSHIP STATUS OF BANK PROJECTS a - AGRICULTURE 1. Lift Irrigation Credit 121-CE : US$2.20 a. A - June 04, 1968 lb Appraisal Report: TO-635a (05/09/68) Disbursed : US$2.14 a. S - June 19, 1968 President's Report: P-598 (05/15168) Cancelled : US$0.06 a. E - Aug. 05, 1968 PPAR: DED Report No. 2801 (12/28/79) CL * June 30., 1977 1R: 09D Report No. 5634 (05/08/79) This project supported the Government's policy to attain self-sufficiency in food crops. The main objective was to Increase production of onions and chillies, and to improve the incomes of small farmers in the project area. This was to be achieved by investments in lift irrigation and development of 6,500 acres of land; 6.100 acres of which under existing settlement projects and 400 acres to be settled by unemployed youths. At audit the project had failed to achieve its main objectives. Implementation of the project was four years late, owing to delays In procurement, civil unrest, mie-specification of equipment and lack of interest by the settlers. Although irrigated land development had almost reached that envisaged at appraisal, much of the water available for Irrigation was not utilized because of other crop priorities and interests of farmers. In 1973-76, droughts reduced water supplies, hindering development and production under irrigation. The actual rate of return may have ranged from negative to 16%, compared - with 25% estimated at appraisal. The Impact Evaluation Report noted that overall, this project was a failure. It was conceived as a crash program, prepared without an adequate data base about farmers, conditions or institutions involved. It was rushed into implementation without reference to the Sri Lanka experience of lift irrigation schemes already in existence, and without a proper appreciation for the role of lift irrigation within the context of settlement schemes. Most importantly, it was only partially implemented. Most critically, the project failed to provide Irrigation water adequately, dependably or equitably. Systems were underdesigned; canal deliveries ware not synchronised with the requirements of lift systems; pumps broke down and took too long to repair; and water distribution was poor. These shortcomings were due to design and implementation deficiencies, some of which were overcome in time, but not until many farmers had lost confidence in the schemes. 2. Drainage and Land Reclamation Credit 168-Ce US$2.64-m. A * Oct. 28, 1969 Appraisal Report: PA-22a (09/17/69) Disbursed US$2.62 m. S - Nov. 13, 1969 President's Report: P-746 (10/09/69) Cancelled US$0.02 i. 9 - Feb. 05, 1970 PPA9: 050 Report No. 2798 (12/28/79) CL * June 30, 1977 The project was designed to increase rice production on 13,200 acres of land in six areas along the southwest coast. Ten thousand fare families were expected to benefit. At full development, rice production was to have been increased by about 23 thousands tos, primarily by controlling river flooding and prevention of seawater intrusion. Project works included installation of sea groynes, construction of levees, dredging of internal waterways, water regulating structures and stabilizing embankments and levees. There was no provision for raising yields through improved technology; crop production was to be increased mainly through double cropping, and reduced crop losses from flooding and sea water instrusion. However, the Governmeant was expected to provide research support on how to best till the peat soils in the project areas. Project works were completed by December 1977, three years late. The delay was caused by a change of Government and civil unrest early in the project period and, later on, by lack of government counterpart financing. The Increase in rice production has been about 531 less than expected at appraisal mainly due to less double cropping and lower yields. Peat soils proved more difficult to -manage than envisaged, and supporting research was not provided. Because of inflation, a 51% cost overrun occurred. Despite this cost increase and the short-fall in production the re-estimated economic rate of return was 19% compared to 25% estimated at appraisal, because of a higher than expected relative price for rice. Footnotes on last page. - 126 * ANNEX I Page 2 THE WORLD BANK AND SRI LANKA A REVIRW OF A RELATIONSHIP STATUS OF BANK PROJECTS /a - AGRICULTURE 3. Dairy Development Credit 504-CE US$9.00 m. A * July 11, 1974 Appraisal Report: NO 427-CE (06/05/74) Disbursed US$4.13 m. S Aug. 09, 1974 President's Report: P-1475-CE (06/19/74) Cancelled US$4.87 m. E - Feb. 10, 1975 PPAR: OED Report No. 5045 (04/16/84) CL - Dec.-31, 1981 The project was to benefit some 10,000 small farmers and landless livestock owners through the establishment of dairy producer cooperatives whi-h would supply inputs and services and provide improved milk marketing. Pilot units for calf rearing anc forage production were to be established; milk transport by the National Milk Board was to be stxngthened; and a study to determine the technical, financial and economic feasibility of constructing a milk plant to replace an existing plant near Kandy was to be carried out. Although initial farmer response to the project was encouraging, implementation of on-farm development was seriously constrained by the poor supply of local cattle. Subsequently, as a result of pricing and subsidization policies, relative input-output prices changed to such an extent that there was little incentive for farmers to purchase additional cattle or undertake farm improvements. In fact, many slaughtered their cattle, In 1978, three years after start, Government and IDA agreed to shift emphasis from providing credit for dairy farm development to the formation of Anand-type dairy producer cooperatives. Government also, as agreed, stabilized feed prices and increased the milk price. After 1978, further discussions between IDA and Government on milk pricing and subsidies did not result in any further changes and project progress remaffed slow, although the formation of cooperatives and milk collection from them were quite successful. Although a feasibility study of a milk processing plant was completed, it was not constructed because of the high costs involved, and the unutilized balance of US$4.9 m. was cancelled. Thus, while the project failed in its production and marketing objectives, its primary achievement was recognized to be institutional in nature (cooperative development). 4. Agricultural Development Credit 595-CE : US$25.00 m. A - Dec. 11, 1975 Appraisal Report: 911-CE (11/05/75) Disbursed : US$20.66 m. S - Dec. 24, 1975 President's Report: P-1716-CE (11/26/75) Cancelled : US$ 4.34 m. E - Mar. 01, 19,76 PPAR: OED Report No. 3272 (12/31/80) CL = June 30, 1979 The project aimed at increasing agricultural production in the short run and laying the foundation for comprehensive long-term agricultural development. The credit was meant to be quick-disbursing and to provide foreign exchange for imports of critical capital equipment for the agricultural sector; it supported the financing of imports of trucks, tractors, other farm equipment and spare parts, and expenditures for studies of tree crop price incentives, and machinery repair facilities. Though the credit was expected to be fully disbursed 30 months after project Initiation, implementation suffered from a change in government followed by a change in import policy, insufficient borrower commitment, and poor project execution. The project was never fully completed and the credit was closed with a cancellation of about 17% after a time overrun of 15 months. Despite the problems that beset the project, benefits, though difficult to measure, were reassessed as likely to have been significant and close to appraisal estimates, based on the fact that harvested acreage and production of paddy (rice) was steadily rising. - 127 - ANNEX 1 THE WORLD BANK AND SRI LANKA A REVIEW OF A RELATIONSHIP STATUS OF BANK PROJECTS /a - AGRICULTURE 5. Tank Irrigation Modernization Credit 666-CE : US$5.00 a. A - Nov. 30, 1976 Appraisal Report 951a-C, (11/15176) Disbursed : US$4.22 m. S - Jan. 12, 1977 President's Report: P-1940-CK (11/15/76) Cancelled : US$0.78 m. 9 - April 12, 1977 PCR: /c CL - June 30, 1983 Project objectives were to: improve irrigation water distribution systems; line canals and water courses in stretches with heavy seepage losses, provide drainage and improved roads; provide construction and O& equipment; provide tractors for sale to project farmers; strengthen agricultural extension services; and provide technical assistance for developing an improved irrigation water management regime in each of the five major tank schemes. The first two years of the project were mainly spent on strengthening the implementing agencies and finalizing the field investigations, designs and construction plans. However, from 1979 onwards project implementation was satisfactory and construction was completed by end 1983. Most farmers have responded favorably to the new cultivation techniques. However, adverse weather affected water availability. Despite this, yield and cropping intensities increased in three out of five schemes and the overall reestimated rate of return is still acceptable, provided that project achievements can be sustained and improved water management and better drainage practiced. 6. Tree Crop Diversification (Tea) Credit 819-CE : US$4.50 m. A - June 01, 1978 Appraisal Report: 1936a-CE (04/03/78) Disbursed : US$4.22 m. /d S - July 12, 1978 President's Report. P-2330-C4 (05/19/78) Cancelled : US$0.28 m. E - Dec. 15, 1978 PPAR: OED Report No. 5041 (04/13/84) CL - June 30, 1983 The project objectives were to diversify, rehabilitate and resettle over a 4-year period about 11,500 ha of marginal tea land and other wasteland. About 4,500 farms were to be developed as Mix tree, tea or cardamom farms. Plantations for timber and fuelwood production and conservation forests were to be established. The project also provided for the construction of simple settler houses, domestic water supplies, and access roads. The National Agricultural Diversification and Settlement Authority (NADSA) was the implementing agency. Designed as a pilot operation, the project war expected to be followed by a series of diversification projects. The project started well after some delay in credit effectiveness. Procurement picked up quickly, physical works progressed impressively, and disbursements were well up to appraisal targets. Although considered only minor impediments at first, settler selection and land allocation problems remained unresolved and ultimately resulted in unanticipated financial burdens on the implementing agency (NADSA), and intense social and political opposition. Once the political opposition to the project- reached its peak, GOSL ordered the retransfer of parts of project lands from NADSA to the Land Reform Commission (LRC), so that the land could be returned to tea cultivation. This action violated basic covenants contained in the Credit Agreement. Thus, the credit was closed in August 1982 after cancellation of the undisbursed portion of about US$0.28 million, and GOSL repayed the full credit in three installments during the period 1982-84. - 128 - ANNEX 1 Page 4 THE WORLD BANK AND SRI LANKA A HRVINM OF A MBLATIONS!* STATUS OF BANK PROJECTS a - AGRICULTURE 7. Tree Crop Rehabilitation (Tea) Credit 818-Ck US$21.00 m. A * June 01. 1978 Appraisal Report: 1892a-CE (05/12/78) Disbursed USS13.22 M. e S * July 12, 1978 President's Refort: P-2331-CE (05/19/78) Undiabursed : US$ 7.78 a. Te S - Dec. 28, 1978 CL - Dec. 31, 1985 The project almas to increase the quality. quantity and efficiency of tea production through rehabilitation of tea estates and tea factories In an 18,000 ha block. Iftty-nie estates will be involved as well as a limited number of smaltholders. The project will also Improve housing conditions and health services for estate labor and provide funds for training of industry personnel. Field development is complete and estate standards are high. Estate factory rehabilitation is almost complete but there have been some problems with quality and timeliness of factory equipment supply; this requires careful monitoring. The overseas training visits have brought back new ideas for testing with encouraging results. Performance on the housing component has improved but completion of physical targets will not be possible by the closing date. Private factory owners, unlike those in the low country participating under Cr. 1240-CE, have shown little initiative in arranging security to enable them to participate in the credit program; this component is unlikely to be completed. 8. Kurunegala Rural Development Credit 891-CE : US$20.00 m. A - March 29, 1979 Appraisal Report: 2292a-CH (03/08/79) Disbursed : US$12.09 a. e S - April 26, 1979 President's Report: P-2492-CE (05/19/79) Undisbursed : US$ 7.91 m. To E - Aug. 27, 1979 CL - June 30, 1986 The project finances a package of critical Investments and institutional improvements to exploit district potential in a more coherent manner. Main components of the project are: rehabilitation of major and minor irrigation schemes; strengthening of agricultural extension services; development and rehabilitation of coconut lands; and provision of short- and medium-term credit. It also includes financial support on a selective basis for social infrastructure such as roads, health, education, water supply and rural electrification. IDA has granted two extensions of the project to June 30 1986, to enable project objectives to be achieved in the still ongoing components. irrigation, coconut development and farm credit. Other components including agricultural extension, input supply, livestock, rural roads, water supplies, electrificaton, health and education, have been completed or are nearing completion. The Government is also using the second extension to finalize institutional arrangements in the district for continued planning, coordination, and monitoring of rural development after formal project completion. - 129- *161 page 5 THE WORLD BM AM 8N1 LANKA A REVIWM oF A ABlttgs8P STATUS OP BANK FwCTS A G RMICULTU3R 9. Agricultural Extension and Adantive Research Credit 931-CE : US$15.50 a. A * June it, 1979 Appraisal Report: 2396a-CE (05/17179) Diebursed US$ 5.41 a. le S - July 24, MS9 Presidenta Report: P-2569-E (05/31/79) Undisbursed : US$10.06 a. L e 9 - Oct. 04, 1979 CL - June 30, 1966 The project objectives are: establishment of a unified 1MY extession systes for all crops (except tea and rubber) throughout the country; establishment of an adaptive research network on the basis of agro-ecological regions; Improvement and expansion of traing Institations for extension agents; and strengthening of the Economic Unit and Civil Engineering Unit of the Department of Agriculture. The credit closing date has been extended by one year to June 30, 1986. The reorganized extension system is well in place and the field training program are better structured. The long- and short-tern foreign training program is proceeding well. Major Iaplematation constraints continue to be shortage of experienced and qualified middle- and lower-level staff, particularly of Subject Matter Officers, inadequate monitoring and supervision by the DOA heequarters staff, Insufficient budgetary support. and staff shortages at the research stations. The civil vorkA program Is rather slow as only about 45% of work had been completed by end-March 1985. The quality of some civil vorks has been poor. Owing to slow progress of the project, about US$7.0 million of the credit amount to expected to be cancelled. 10. Smallholder Rubber Rehabilitation Credit 1017-CE : US$16.00 a. A - May 06, 1980 Appraisal Report: 2827-CE (04/15/80) Disbursed : US$ 4.44 a. /e S - June 24, 1980 President's Report: P-2777-CE (04/16/80) Undisbursed : US$11.56 m. 7* *Sept 10, 1960 CL * June 30, 1986 The project aims at Increasing production and improving quality of rubber by providing smallholders with adequate replanting inputs and incentives, and by reorgasistag and strengthening the agencies concerned. It would mainly consist of replanting 18,000 ha of over-aged smallbolder rubber, and of Institutional support for the Department of Rubber Control and the Advisory Services Department, Including provision of office and housing facilities, equipment training, and technical assistance. Project implementation is about 802 of target with regard to Its replanting program because of unfavorable weather conditions, land ownership disputes and absentee owerehip. Civil works programs are almost complete. Training, institutional development and procurement of vehicles and equipment are proceeding satisfactorily. The credit closing date will require a per'* extension to complete the planting program and to carry out adequate training of staff In Government and private nurseries, prior to start-up of the proposed Tree Crops V project. Cancellation of about US$5.0 million, due to depreciation of local currency is likely. - 130 - ANNEX I Page & THE WORLD BANK AND SRI LANKA A REVIEW OF A RELATIONSIP STATUS OF SANK PROJKCTS /a - AGRICULTURE 11. Second Rural Development Credit 1079-CE /f : US$33.50 m. A - Dec. 09, 1980 Appraisal Report: 2942-CE (10/31/80) Disbursed Z US$12.60 m. /e S a Feb. 02, 1981 President's Report: P-2902-CE (11118/80)_ Undisbursed US$14.27 m. Te E - June 02, 1981 cL _rJune 30, 1986 The -Project finances a package of critical investments and institutional improvements set up to exploit the potential of Matale and Puttalam in a coherent manner. It would improve the productivity, income and living standards in the districts by: improving the provision of inputs and services required by the agricultural sector including expanding the volume of agricultural credit through refinancing short and medium term loans; stimulating increased planting of coconuts and minor export crops; rehabilitating and improving the economic infrastructure (minor tanks, roads, wells); and improving the social infrastructure (schools and health facilities). Most project components (irrigation, roads, coconut development) are progressing according to schedule, as revised after the 1980 and 1981 budget cuts. Construction of buildings and procurement were essentially completed by end 1983. Rehabilitation of irrigation systems is being implemented satisfactorily, with improved water management practices introduced in rehabilitated schemes. The forestry development program in Puttalam has substantially achieved its targets, but the Matale program is still behind schedule. Minor export crops development in Matale has improved significantly, Agricultural credit remains below appraisal targets, even though lending for small tractors and paddy cultivation have expanded in 1984-85. 12. Village Irrigation Rehabilitation Credit 1160-CE /f : US$30.00 m. A a June 16, 1981 Appraisal Report: 3363-CE (04/30/81) Disbursed : US$ 6.44 a. /a S - July 15, 1981 President's Report; P-3072-CE (05/22/81) Undisbursed : US$19.05 m. Te K - Sept. 24, 1981 CL - Dec. 31, 1986 The project supports development of the agriculture and irrigation sectors through rehabilitation of about 1,200 village Irrigation schemes; modernization of about 500 working schemes; introduction of water management program; staff training and strengthening support services for the 06M of village irrigation; data collection and studies on the hydrology, soils, land use and socio-economic aspects of village irrigation. The rate of project implementation is steadily increasing after a slow initial start, but is still substantially below projections in the SAR. The quality of construction work is generally satisfactory. Phasing of downstream development has also much improved, and problems encountered in land alienation and in the Department of Agrarian Services (DAS) taking over completed schemes from the Irrigation Department (ID) are being resolved. The DAS water management program is proceeding well in most districts and is beginning to have an impact on farmer activities and agricultural production. While the program is still well behind the SAR targets, due to initial build-up problems, exclusion of certain districts, political disturbances, and-budgetary constraints, good implementation progress is expected during the coming year due to improved budget allocations and the incorporation of four additional districts under the rehabilitation program. -131* ANNEX I Page 7 THE WORLD BANK AND SRI LANKA A REVIEW OF A RELATIONS 11P STATUS OF BANK PROJECTS /a - AGRICULTURE 13. Tea Rehabilitation and Diversification Credit 1240-CE /f : US$20.00 m. A - May 04, 1982 Appraisal Report: 3531a-CE (04/09/82) Disbursed : US$ 6.38 m. /e S - June 28, 1982 President's Report: P-3267-CE (04/12/82) Undisbursed : US$11.96 mi. le E - Nov. 12, 1982 CL - Sept. 30, 1986 The project would improve financial and personnel management in two Government owned corporations - SPC and JEDB. In addition, the project would replant and infill tea on 5,600 he, rehabilitate soil conservation structures on 5,300 ha, diversify into spices and fuelwood on 8,200 ha, rehabilitate 84 tea factories and improve social and administrative infrastructure on the estates. Overall the performance of project management is good and the status of the project satisfactory. Rehabilitation of tea is almost complete and targets have been met or exceeded. Diversification Is somewhat slower and will not be completed until 1986. The performance of suppliers of factory equipment will need careful watching, with regard to both quality and timing. Progress on housing has improved and substantial completion of this component should be possible by the closing date. Procurement of vehicles is complete, social welfare and medical programs are satisfactory 14. Forest Resources Development (Forestry I) Credit 1317-CE /f : US$9.00 a. A - Jan. 28, 1983 Appraisal Report: 4089a-CE (12/15/82) Disbursed : US0.57 m. /e S - Feb. 18, 1983 President's Report: P-3434-CE (12/29/82) Undisbursed : US$8.22 m. 7e E - Sept. 02, 1983 CL - Dec. 31, 1989 The project would aim to: (i) provide a Forestry Master Plan and a detailed five year investment program for the sector; (ii) upgrade and extend forestry training and education; (III) establish 8,000 ha of industrial plantations and improve management of 25,000 ha of existing plantations; and (iv)) introduce plantation research and trials for future development. Overall progress of Master Plan preparation and University component is satisfactory. However, the plantation programs are behind schedule due to: (t) low survival rate of plantations; (ii) ditficult working conditions in Batticaloa and Amparai plantation sites because of insurgency activity; and (iii) delay in procurement of seed, fertilizer and planting materials. Disbursements are somewhat behind appraisal estimates due to slow document processing. The Forestry Department has agreed to take steps for the timely procurement of plantation inputs and to improve nursery and plantation techniques to obtain better survival rates and to reduce staff vacancies both in the field and at headquarters. 132- ANNaX I Pages THE WORLD BANK AND SRI LANKA A REVIEW OF A RELATIONSHIP STATUS OF BANK PROJECTS /a - AGRICULTURE 15. Third Rural Development Credit 1363-CE /f : US$23.00 m. A * May 12, 1983 Appraisal Report: 4377-Ce (04/18/83) Disbursed : US$ 1.69 a. /e S - June 20, 1983 President's Report: F-3 31-CF (04/28/83) Undisbursed- : US$20.51-m. 7- E - Nov.. 03, 1983 CL-- Sept. 30, 1989 The project Aims to Increase productivity, employment, income and living standards in the districts of Mannar and Vavuniya. It includes: (a) rehabilitation of irrigation tanks, (b) forestry and horticultural development, (c) provision of inputs and services for directly productive sectors; and (d) development of economic and social Infrastructure. Good progress was made in most components during FY84, but implementation is now falling behind schedule because of deteriorating security in Mannar and Vavuniya districts. Procurement and building construction proceeded well until November 1984, but have subsequently been distupted by the security sicuation. 16. Major Irrigation Rehabilitation Credit 1537-CE /f : US$17.00 m. A - Dec. 20, 1984 Appraisal Report: 5231-CE (11/06/84) S * Feb. 07, 1985 President's Report; P-3903-CE (11/29/84) E - Aug. 02, 1985 CL - June 30, 1991 The project seeks to increase agricultural production on land in seven major irrigation systems by: (a) rehabilitating existing irrigation systems servicing a total area of about 46,000 hectares; (b) introducing an integrated management program to ensure proper operation and maintenance of the system and distribution of irrigation supplies; (c) strengthening support services provided by various government agencies; and (d) making provision for monitoring and evaluation. The project is being cofinanced by CIDA and Switzerland. Processing for IC4 procurement has mostly been completed and contracts awarded. The four consultants envisaged under the Project Technical Assistance respectively for: (i) systems management; (ii) pilot program; (iti) hydrological models; and (iv) management information and cost accounting have been contracted. Construction work has commenced on three systems but could not start on the other four due to unsettled conditions in the area. - 133 ANNE I THE WORLD BANK AND SRI LANKA- A REVIEW OF A RELATIONSHIP STATUS OF BANK PROJECTS /a - AGRICULTURE 17. Fourth Tree Crops Credit 1562.LE /f : US$55.0 m. A - March. 21, 1985 Appraisal Report: 5265-CE (02/15/85) S * May 09, 1985 President's Report: P-3972-CE (03/04/85) E a Sept. 23, 1985 CL - June 30, 1990 The project aims at increasing the production of tea, rubber, and coconuts by improving the productivity of all publicly held estates, rehabilitating factories, providing field and nursery equipment, and improving transportation. The project will strengthen management, provide soil conservation, and improve the health and social welfare of estate workers and their families. The project will also improve institutional capacity by providing training, technical assistance, and facilities for planning and monitoring operations. The projects is being cofinanced by the Asian Development Bank, $45 million; Bank of Ceylon, $10 million; Government of the Netherlands, $8 million; Government of Norway, $5.5 million; and the UK Overseas Development Administration, $5.5 million. The project implementing agencies have already carried out a great deal of planning, preparation and implementation of the project. Both Janatha Estate Development Board (JEDB) and State Plantation Corporation (SPC) are conducing their Investment progras in accordance with SAR. Although the Corporations' cash situation is good at the moment due to recent high tea price levels, prices have fallen sharply in 1985 and there is serious concern with regard to the future. 18. Dairy Development II Loan 2776-CE : US$38.0 m. A - June 11, 1985 Appraisal Report. 5089-CE (05/13/85) S - Oct. 101 1985 President's Report: P-4085-CE (05/22/85) CL * Dec. 31, 1985 The project seeks to provide support for the long-tera development of dairying in Sri Lanka by assisting in the formation of a new 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 milk; providing technical assistance and training; and strengthening the monitoring and evaluation of development projects in the livestock subsector. About 180,000 farm families are expected to benefit from on-fare employment. ),isks arise from the substantial institutional changes to be effected by the project, and farmer acceptance of the new village milk companies. The project was envisaged to be cofinanced by the Netherlands, the EEC and the WFP. The loan has not yet become effective, because difficulties are being experienced with the cofinancing arrangements. - 134 - ANNER I Page IU THE WORLD BANK AND SRI LANKA A REVIEW OF A RELATIONSHIP STATUS OF BANK PROJECTS /a - MAHAWELI GANGA PROGRAM 19. Mahawell Ganga Development Project, Stage I Loan 653-CE : US$14.50 a. A - Jan. 20, 1970 Appraisal Report: PA-29a (12/30/69) Credit 174-CE : US$15.46 a. /h S * Aug. 30, 1970 President's Report: P-770 (01/07/70) - US$29.46 a. E * April 30, 1971 PPMR; O.tD Report No. 3730 (12/28/81) Disbursed : US$28.97 a. CL * June 30, 1976 (Loan) Cancelled : US$ 0.49 a. CL - July 31, 1979 (Credit) The project was the first of a series of projects planned under the Mahavell Gangs Water Master Plan saiming at the development over 30 years of about 900,000 acres of irrigable land in central and northern Sri-Lanka and at the installation of about 500 MW of hydropower. The main objectives of the project were to provide supplemental irrigation water to 126,000 acres of existing irrigated land, to establish Irrigation infrastrcture to allow full irrigation of 105,000 acres of new land to be developed in subsequent stages, and 40 KW hydropower generating capacity. Although project implementation was delayed by about two years, at audit the project was termed economically and socially successful. All facilities have operated satisfactorily since completion. The agriculture and power benefits of the project turned out to be higher than expected at appraisal. Despite a 66% cost overrun, the project's economic rate of return was reestimated at 20X, as against an appraisal estimate of 12%, mostly due to higher value of power, rise of sugar and rice prices and increased cropped area. About 53,000 families or a total population of about 320,000 have benefitted from the project. 20. Mahaveli Gangs Development Project II Credit 701-CE : US$19.00 a. A - April 21, 1977 Appraisal Report: 1487a-CE (03/31/77) Disbursed : US$10.41 a. e S - June 27, 1977 President's Report: P-2031-CE (04/07/77) Undisbursed : US$ 8.59 m. le E w Dec. 29, 1977 PPAR: /i CL * June 30, 1985 The project provided for completing the Kalawewa Right Bank main canal and improving four major tanks along the canal; construction of Irrigation and drainage systems and land clearing and preparation on 40,300 acres; improving 50 miles of existing and constructing 25 miles of new roads; providing storage, marketing and processing facilities; providing schools, medical and other community facilities; constructing wells and roads in settlements; settling 15,300. families; providing vehicles, equipment and consultants' services. Construction of irrigation infrastructure, social infrastructure and settlement are completed or are nearing completion in all parts of the project area. System H has become an important contributor to- national rice production, and output of other field crops is steadily increasing. Attention will need to be given to the future development of settler communities to ensure that improvement of incomes and living standards will be sustained and shared equally by all. Canal lining needs to be continued and on-farm water management given increased attention for the project to reach its full potential. The project is espected to exceed SAR projected production targets. -135- ANNEX I Page 11 THE WORLD BANK AND SRI LANKA A REVIEW OF A RELATIONSHIP STATUS OF BANK PROJECTS /a - MAHAWSLI GANGA PROGRAM 21. Hahavell Ganga Technical Assistance Credit 979-CE : US$ 3.00 m. A - Jan. 29, 1980 Appraisal Report: none Disbursed ; US$ 1.65 a. /e S * April 16, 1980 President's Report: P-2686-CE (01/10/80) Undisbursed : US 1.35 i. 7 E - July 7, 1980 L - Sept. 30, 1985 The project provides for consultanter studies of the transbasin diversion and use of the surplus water of the Mahaweli Ganga and support for other studies and designs required for the Mahaweli Ganga Development Program. A parallel EEC Special Action credit (US$2.0 million) provides consultants for review of designs of the Right Bank Trausbasin Canal and for preparation of final designs for System C, as well as vehicles and equipment for the entire project. The IDA Credit and the EEC Special Action Credit were extended to September 30, 1985 to finance consultants to review designs and tender documents for the Mahaweli IV Project (System B Right Bank). The consultants selected for this work initiated this work in early May 1985 and are scheduled to otomplete it before September 30. All other studies and procurement actions financed under the two credits have been completed. It is expected that the credits will be left open for several months to enable final disbursement to be completed for work performed under the credits prior to the credit closure date. There will be savings of about US$1.0 m in the IDA Credit and about US$0.3 m in the EEC Special Action Credit after all disbursements have been made. 22.. Mahaweli Gangs Development Project III Credit 1166-CE/f : US$90.00 a. A - June 23, 1981 Appraisal Report: 3128-CCE, 05/26/81 Disbursed : US$39.30 a. /e S = Nov. 5, 1981 sident's Report: P-3082-CE, 06/01/81 Undisbursed : US$50.70 m. /e E - Feb. 8, 1982 CL a Dec. 31, 1987 The project provides for construction of 5 km of Minipe Right Bank Transbasin Canal; in Zones 3-6 of system C for the construction of camps and workshops, irrigation and drainage systems, land clearing, on-farm development, social infrastructure buildings and stores, market and hamlet roads, offices and staff quarters, fuelwood and cashew plantations, and settler assistance; in the whole system C, provision of maintenance equipment and workshops, monitoring and evaluation program, water management, settler assistance, training center assistance and engineering. The Kinipe Right Trausbasin Canal was completed in 1984 and is now in operation. Construction of the main and branch canals for zones 3 to 6 is progressing well, although this work was delayed by about six months due to severe and unprecedented monsoon rains during December 1983 - March 1984. The construction camp and service facilities (for the main and branch canal work) have been completed by the contractor. On-farm development work for zone 3 has been completed and is progressing well in zone 4. Zone 3 is receiving irrigation water. Procurement of equipment is proceeding satisfactorily and there are no major problems. It is expected that the project. will be delayed by about-one year. - 136 - ANNEX I Page IT THE WORLD BANK AND SRI LANKA A REVIEW OF A RELATIONSHIP STATUS OF BANK PROJECTS /a - MAHAWELI GANGA PROGRAM 23. Mahaveli Ganga Development Project IV Loan 2437-CE : US$12.10 a. A - June 07, 1984 Appraisal Report: 4885-CM, 05/04/84 Credit 1494-CE /f : US$30.00 a. S - July 11, 1984 President's Report: P-3821-CE, 05/18/8 US$42.10.a. -E*--/ L - Mar. 31, 1990 The Rahawell Gange Development Project IV would (a) provide facilities for new irrigation in about 14,000 ha and settlement of 18,200 families on the Right Bank of the Haduru Oya River and (b) enhance irrigation to about 1,800 ha of existing cultivated area and establish fuel wood and cashew plantations in non-irrigated project areas. It will also provide artisanal fisheries development, settlement assistance, social Infrastructure, management facilities vehicles, monitoring, training, and support Sri Lanka's ongoing environmental protection program. The Loan and Credit are not yet effective. Due to delays in resolving questions concerning cofinancing, the effectiveness date was extended from May 7 to November 6, 1985. In an attempt to keep project implementation on schedule, funds under Cr. 979-CE have been used to finance consultants for the main and branch canals. STATUS OF BANK PROJECTS/a - POWER 24. Aberdeen - Laksapana Power Loan 101-C ; US$19.11 a. /k A - June 17, 1954 Appraisal Report: T.O. 43-c (06/10/54) Disbursed : US$15.90 a. S - July 09, 1954 President's Report: P-69 (06/09/54) Cancelled : US$ 3.21 m. E = July 31. 1954 PPAR:L1 CL - Dec. 31, 1964 The Project was the second stage of a larger project to meet the power requirements of SE Ceylon. The project included the construction of the Costlereagh storage dam to regulate the flow of water to an existing dam, additional penastocks, the extension of the Laksapana power plant to increase installed capacity by another 25,000 kW and additional transmission lines and distribution facilities in Colombo. The Departeent of Government Electrical Undertaking (DGEU) was responsible for the execution of the project. It took DGEU a long time to complete the tendering procedures and place the orders for equipment. Thus the project was completed after long delays. -137- ANNER 1 Page 13 THE VORLD BANK AND SRI LANKA A REVIEW 0 A RELATIONSHIP STATUS OF BANK PROJECTS /a - POWER 25. Gradpass Thermal Power Loan 209-CR : US$ 7.40 m. /k A - July 9, 1958 Appraisal Report: TU-174a (06/30/58) Disbursed : US$ 7.31 us. S - Sept. 17, 1958 President's Report: P-165 (07/03/58) Cancelled : US$ 0.09 m. E - Nov. 21, 1958 PPAR:J CL - June 30, 1967 The project consisted of the construction of the 25 KW Grandpass thermal plant in Northern Colombo, and additional tranasmiston lines and distribution system extensions. The Grandpass plant cane into operation in September, 1962 about one year later than scheduled, mainly because of delays in evaluation of tenders and award of orders. The other parts of the project were completed with much longer delays. 26. Norton Bridge Thermal Loan 283-CE : US$15.00 M. A - April 27, 1961 Appraisal Report: TO-268b (04/17/61) Disbursed : US$14.11 m. S - June 6, 1961 President's Report: P-247 (04/18/61) Cancelled : US$ 0.89 m. 9 - Sept. 29, 1961 PPAR:/1 CL - Dec. 31, 1966 The project financed the construction of a 50 MW hydro-electric power station at Norton Bridge, the expansion of the Grandpass thermal plant with a second 25 4W unit, and additional transmission lines and distribution facilities. The Norton plant and the additional unit because operational in Karch, 1964. The transmission and distribution extensions were completed somewhat later. 27. Power IV Loan 637-CE : US$21.00 m. A - July 22, 1969 Appraisal Report: PU-17a (07/09/69) Disbursed : US$16.50 a. S - July 28, 1969 President's Report: P-732 (07/10/69) Cancelled : US$ 4.50 m. E - Jan. 19, 1970 PPAR: OED report No. 3710 (12/23/81) CL = Dec. 31, 1978 The project consisted of a diversion dam on the Naskeltya Oyo, a pressure tunnel and penstocks, a surface power station for two 45 MW hydro-electric units and a 132 KV switch yard. Also included was a 25 KW gas turbine-extension to the existing Grandpass thermal station in Colombo and additional transmission and switching facilities. Services of accounting and management consultants were also included. During detailed design some changes well made in the project which reduced costs. Even though the hydroelectric station was commissioned about two years behind schedule, this did not have adverse effects on supply since growth In energy demand proved less than expected. Since it was commissioned, the project has provided valuable fuel cost savings by substituting hydro for thermal generation. The recalculated incremental financial rate of return on the project is about 30% compared to 24X estimated at the time of appraisal. The gas turbine extension to the Grandpass station was deleted, because demand for electricity had grown slower than expected at appraisal. -138- ANINEX1 Page 14 THE WORLD BANK AND SRI LANKA A REVIEW OF A RELATIONSHIP STATUS OF BANK PROJECTS /a - POWER 28. Power V Credit 372-CE : US$6.00 m. A - April 3, 1973 Appraisal Report: 21-CE (03/14/73) Disbursed : US$6.00 m. S - April 18, 1973 President's Report: P-1211-CE (07/22/73) K July 25, 1973 PPAR: O9D report No. 3711 (12/07/81) CL = Dec. 31, 1978 The project consisted of: construction of 97 miles of 132 kV transmission lines and associated 132/33 kV substations - part of which would strengthen power supply to Trincomalee; construction of 400 miles of single circuit 33 kV distribution lines and associated substations; and rehabilitation of the 11 kV Colombo distribution system, with low tension switching gear, distribution transformer and ancillary equipment. Delays in the implementation of the project did not adversely affect the utilization of new generating capacity. Growth in energy demand was much lower than forecasted throughout the project period (1973-79). The rural electrification program, to which the project was expected zo provide support, progressed slowly in the earlier years but improved considerably thereafter. Largely due to the shortfall in energy sales and to inadequate tariffs, CEB's rate of return on assets during the project period remained generally well below the 8% stipulated in the credit agreement. The expected institutional improvements under the project did not take place. 29. Power VI Credit 1048-CE : US$19.50 m. A - June 19, 1980 Appraisal Report: No. 2905b-CE (06/03/80) Disbursed : US$ 9.86 m. /e S - Sept. 24, 1980 President's Report: P-2837-CE (06/03/80) Undisbursed : US 0.64 m. Fe E = March 30. 1981 CL - March 31, 1986 The project provided for the extension of the existing 132-kV lines and associated substations and facilities; the extension and reinforcement of Colombo's power distribution system, including 132-iV supply facilities and the 11 kV underground system; other distribution works, vehicles and construction of quarters and offices; technical assistance and training. The project is cofinanced by the Saudi Development Fund. The project started very slowly because of delays in arranging cofinancing with Saudi Fund and Ceylon Electricity Board's (CEB) very slow procurement procedures. The project progress continues to be unsatisfactory. The original project is expected to be completed by September 1986, while the three additional substations subsequently approved for inclusion in the project are likely to be completed by February 1987. The Government requested an extension of the closing date to December 31, 1986, and IDA agreed to an extension to March 31, 1986. The main sector problem is weak CEB management, principally due to its inability to retain experienced staff as a result of Government's imposed conditions of service which force CEB to pay uncompetitive salaries. This is a public sector issue. -139 ANNEX I Page 15 THE WORLD BANK AND SRI LANKA A REVIEW OF A RELATIONSHIP STATUS OF BANK PROJECTS /a - POSR 30. Power VII Credit 1210-CE/f : US$36.00 a. A - Feb. 23, 1982 Appraisal Report: 3599b-CE (01/21/82) Disbursed : US$20.14 a. /e S * April 8, 1982 President's Report: P-3195-CE (02/03/82) Cancelled : US$12.33 a. 7e 8 E - July 23, 1982 CL - May 31, 1986 The project is designed to deliver efficiently, reliably, and at a minimum cost, the output from the hydro-electric pdwer stations in the Mahaveli basin to the principal load centers in the Colombo area. It also builds on the Institutional capabilities developed under the earlier projects and provid .s for better coordination within the power sector. Components of the project are: (a) 126 km of 220 kV double circuit and 38 km of 132 kv single circuit transmission lines; (b) one new 220/132 kV substation, extensions to 3 existing 132 kV substations, one new 132 kV switching station and extension to an existing 66 kV substation; (c) replacement of circuit breakers; (d) vehicles, tools and buildings; (e) equipment for power factor correction, power line carrier, and. for loss reduction cell; and (f) engineering consulting services, technical assistance and training. The project started slowly because of poor performance of the contractor for the transmission lines, and was further delayed when the contractor's forces left the country during civil disturbances in mid-1983. The project is now progressing satisfactorily, but commissioning will be late. The main sector problem Is weak CEB management, principally due to its inability to retain experienced staff as a result of GOSL imposed conditions of service. 31. Power VIII Loan 2187-CE : US$42.70 a. A - June 24, 1982 Appraisal Report: 3891 b-CE (05/20/82) Disbursed : US$34.02 a. /e S - Aug. 18, 1982 President's Report: P-3351-CE (06/07/82) Undisbursed : US$ 8.68 a. Te E - Nov. 11, 1982 CL - March 31, 1986 The project finances the construction of an 80 MW diesel station as a least cost solution to help CE8 meet both the short-term power shortage through sid-1984 and the long-term need for thermal generation through 1990. Main components of the project are: (1) engines and generators; (2) electrical plant and equipment; (3) civil works; and (4) technical services including engineering consultancy. All four generators have now been commissioned, about seven months behind original schedule. The delay was due to slow procurement procedures and challenges to contract award by-unsuccessful bidders. Except for supply of spares, all other project work has been completed. The main sector problem is weak CEB management, principally due to its inability to retain staff as a result of GOSL imposed conditions of service which force GEB to pay uncompetitive salaries. -140 ANNSXI Page 16 THE WORLD BANK AND SRI LANKA A REVIEW OF A RELATIONSHIP STATUS OF SANK PROJECTS /a - INFRASTRUCTURE 32. HighWay Loan 569-CE : US$4.90 m. /k /1 A - Oct. 15, 1968 Appraisal Report: TO-680a (10/01/68) Credit 133-CE : US$5.03 m. S - Nov. 12, 1968 President's Report: P-643 (10/01/68) US$9.93 m. E - Feb. 12, 1969 PPAR:j Disbursed : Us40.75- m. CL - June 30, 1973 Cancelled : US$9.18 m. The project consisted of: a pilot program for road rehabilitation and maintenance; the provision of workshop and urgently needed road maintenance equipment; bridge replacement; feasibility and engineering studies for road improvements; and management and advisory services to assist in transport coordination, in implementing the- project and in reorganizing the highway administration. The project was cancelled in 1970 when a new government objected to loan/credit conditions agreed to by the previous government. 33. Road Maintenance Credit 900-CE : US$16.50 a. A = May 1, 1979 Appraisal Report: 2334-CE (04/11/79) Disbursed : US$10.91 m. /e S June 22, 1979 President's Report: P-2512-CE (03/18/79) Undisbursed : US$ 5.59 m. 7e E Dec. 19, 1979 CL June 30,1985 The project aimed to improve the highway system of Sri Lanka by a program of enhanced routine and periodic maintenance. The project provided for rehabilitation and limited improvement of 112 miles of road; resealing for resurfacing of about 150 additional miles; strengthening, repair or replacement of 30 bridges and procurement of road maintenance and vorkshop equipment. The project would also strengthen the road maintenance services of the Department of Highways and lay the foundation for improved routine and periodic maintenance. After years of slow progress, project execution is now substantially complete, and disbursements are being finalized. A major setback has been the failure of local contractors to tender for road rehabilitation. This forced the job on the Department of Highways for which it was ill prepared. Reduced budget allocations in the early 1980s also affected project implementation as major rehabilitation works had to be deferred towards the end of the project period. 34. Road Passenger Transport Credit 994-CE : US$53.00 m A - March 18, 1980 Appraisal Report: 2716-CE (02/22/80) Disbursed : US$35.84 m. /e S - April 16, 1980 President's Report: P-2721-CE (02/27/80) Undisbursed : US17.16 m. /e E - Oct. 27, 1980 CL * Sept. 30, 1985 The Project would: (i) improve the availability and reliability of the public road passenger transportation services; (ii) introduce improved maintenance standards; (iii) improve the financial condition of SLCTB and the Regional Transport Boards (RTBs); and (iv) progressively reduce and by 1983 eliminate government subsidies for public bus operations. The Project includes the following components: (a) restoration and improvement of SLCTh.unit and parts exchange and overhaul facilities; (b) purchase of bus chassis, materials and assembly of buses; (c) improvement of bus maintenance facilities in RTBs; (d) low cost traffic engineering measures designed to improve bus flows on roads; and (e) technical assistance and training for the execution of the project and institution building. The project has been completed over tvo years behind the original schedule due to lack of management continuity in the implementing agency and slow progress in procurement procedures. Management ability has now been restored and project execution reorganized. The credit is closed and disbursements are being finalized. -141 - ANNEX I Pag* 17 THE WORLD BANK AND SRI LANKA A REVIEW OF A RELATIONSHIP STATUS OF BANK PROJECTS ba - INFRASTRUCTURE 35. Road Maintenance 11 Loan 2517-CE : US$24.00 a. A - April 1, 1985 Appraisal Report: 5345-CE (03/13/85) Disbursed US$ 2.00 m. /e S - May 09, 1985 President's Report: P-3999-CE (03/28/85) Undiabursed : US$22.00 i. /e - July- 18, 1985 CL - Dec. 31, 1992 The project seeks to improve periodic maintenance of the trunk road network, including bridges, and to strengthen the institutions concerned with transport infrastructure by providing for rehabilitation of about 570 kilometers of roads and for repair, replacement, or widening of about 30 bridges. The project also provides for equipment to workshops and quality-control laboratories, training in bitumen emulsion technology and equipment fleet management, assistance with project execution, and technical assistance to the Transport Coordinating Committee, within the Ministry of Transport. The executing agency made a good start with the award of the first two contracts for civil works within a month of effectiveness, and consultants have been appointed for the Transport Study. STATUS OF BANK PROJECTS /a - DFC 36. Development Finance Corporation I Loan 520-CE : US$4.0 m. /k A = Nov. 16, 1967 Appraisal Report: DB-31b (11/01/67) Disbursed Us$2.2 m. S - Nov. 22, 1967 President's Report: P-570 (11/01/67) Cancelled : US$1.8 m. E = Feb. 26, 1968 PPAR:/1 CL - June 30, 1972 The loan provided the Development Finance Corporation of Ceylon (DFCC) with foreign exchange for investments in projects undertaken by private industrial, agricultural and commercial enterprises. Only part of the loan was disbursed. DFCC encountered serious management problems and did not provide the dynamic leadership role expected at appraisal. Furthermore, during most of the project period and beyond, Government encouraged Rupee investments rather than Foreign Currency investments. 37. Development Finance Corporation II Loan 634-CE : US$8.00 n. A - July 15, 1969 Appraisal Report: DB-31a (6/30/69) Disbursed : US$2.91 m. S a July 18, 1969 President's Report: P-731 (07/02/69) Cancelled : US5.09 m. E a Oct. 09, 1969 PPAR: OED report No. 1833 (12/22/77) CL - April 30, 1976 The Loan's objective were: (i) to enable DFCC to finance the foreign exchange costs of investment projects undertaken by private industrial, agricultural and commercial enterprises; and (ii) to continue the institution building efforts started under the first project. The focus of the Bank's efforts under this loan was to promote the institutional development of DFGC. Only modest progress was made towards improving DFCC's appraisal procedures, a goal in line with the Government's desire to see private investment allocated to economically viable projects with special emphasis on export generation. Follow-up practices, on the other hand, improved notably. The loan was marked by a substantial shortfall in its objective of financing investments, because of a poor climate for private investment. -142 ANNEX I - page IF THE VORLD) RANW AN) SRI LOUK A REVIEW OF A RELATIONSHIP STATUS OF BANK PROJECTS a - DFC 38. Development Finance Corporation III Credit 566-CE : US$4.50 e. A - June 26, 1975 Appraisal Report: No. 731a-CE (06/11/75) Disbursed : US$4.15 m. S * June 27, 1975 President's Report: P-1657-CE (06/12/75) Cancelled : US$0.35 m. E - Aug. 22, 1975 PPAR:/m CL - Sept. 30, 1979 Against the changing economic and political background of the mid-1970s, IDA made available to VFCC Credits 566-CE and 742-CE (see below). The objectives of the credits were similar: to provide foreign exchange for private investments in industry, tourism, and related activities; and to continue the efforts to improve DFCC as an institution through appropriate staff expansion, improved appraisal and supervision standards, and Increased promotional activities. The credits were to meet the direct coast of capital goods imported for projects financed by DFCC and support the private sector's increased interest in industrial investment. Cr. 566-CE was fully committed by December 1977, 27 montha after effectiveness, and was fully disbursed in November 1979. Although 60 subprojects were approved originally, by the closing date only 48 were actually committed resulting in an unutilized balance to be cancelled of US$0.35 million. Cancellations were due to sponsors' lack of sustained interest or difficulties in adjusting to new policies. Disbursements for some projects were delayed due to difficulties in mobilizing adequate equity or problems in obtaining infrastructural facilities. 39. Development Finance Corporation IV Credit 742-CE : US$8.00 M. A * Sept. 13, 1977 Appraisal Report: No. 1388a-CE (08/24/77) Disbursed : US$7.54 m. S - Sept. 30, 1977 President's Report: P-2137-CE (08/26/77) Cancelled : US$0.46 m. E - Dec. 16, 1977 PPAR--e CL - Dec. 31, 1981 Credit 742-CE became effective in December 1977 and was fully committed by February 1980. By the last date of disbursement (September 1982) US$7.54 million had been disbursed for 46 subprojects. In general the quality of DFCC't portfolio is satisfactory, although arrears have increased considerably in recent years. STATUS OF BANK PROJECTS /a - INDUSTRY 40. Small & Medium Industry Credit 942-CE : US$16.00 m. A - June 26, 1979 Appraisal Report : 2485-CK (6/8/79) Disbursed : US413.40 m. Ie S - July 24, 1979 President's Report: P-2594-CE (6/14/79) Undisbursed : US$ 2.60 a, 7e- E * Oct. 23, 1979 CL - June 30, 1985 The project would provide improved access to credit for a wide range of small and medium-secale manufacturing and service industries through the National Development Bank. Technical assistance was also included to: improve promotion and extension services of IDB (Industrial Development Board); support export and product development by ED8 (Export Development Board); and continue building SMI lending capabilities of NDB and participating banks. The subloan component of US$12 million has been fully committed. Collection has increased to 70% but portfolio arrears are increasing. Banks have increased staff at branch level to arrest increasing arrears. The technical assistance components have been streamlined and their completion is expected by the end of the winding-up period. * 143 * ANNEX I age 19 THE WORLD BANK AND SRI LANKA A REVIEW OF A RELATIONSHIP STATUS OF BANK PROJECTS /a - INDUSTRY 41. Construction Industry Credit 130-CE/f US$13.50 a. - * April 07, 1981 Appraisal Report 3219-CE (3/3/01) Disbursed US$ 7.25 m. I - June 01, 1981 President's Report; P-2996-CE (3/17/81) Undisbursed : US$ 4.26 m. E = Aug. 19, 1981 CL - Dec. 31, 1985 The project aims to increase the supply of trained manpower and improve management in the construction industry. The project will establish a unified modular training system for construction-related trades and improve the use and maintenance of plant and equipment. The project components are: (I) training of about 45,000 unskilled workers; (i) upgrading of skills of about 9.600 skilled workers; (III) training of about 1,800 mechanical equipment operators and mechanics; (iv) training of about 900 junior work supervisors; (v) training of about 80 senior work managers; (vi) provision of equipment and training materials; and (vii) technical assistance . Although the project continues to show steady progress, the Government has requested an extension to December 1986. The total output from all training courses would meet revised appraisal targets by June 1986 when the project would be completed. Program have expanded to include new priority areas of construction and maintenance, building maintenance. An instructor training program has been instituted and this has partially alleviated the problems with the teaching quality and the loss of instructors. 42. Small & Medium Industry II Credit 1182-CE/f US30.00 m.. A - Oct. 13, 1941 Appraisal Report 3480 (9/14/81) Disbursed : US$ 3.08 m./e S = Feb. 05, 1982 President's Report: P-3124-CE (9/23/81) Undisbursed : US24.55 a./e E - May 05, 1982 CL - Dec. 31, 1985 The project aims at increasing ouput, employment, efficiency and exports of viable small and Medium industries. It builds on the institutional capabilities developed under the Small and Medium Industries Project (Credit No. 942-CE). The principal components of the project are: (a) term loans to SKIs from participating credit institutions with subproject review and partial refinance by the SMI fund of NDS; (b) training and consultancy for the SMI Fund; (c) improvements in the Industrial Development Board promotion and extension services, through an SMI consultancy fund to tap the expertise of the local private sector, and an expansion of engineering service facilities; and (d) financing the Export Development Board program for promotion and supply development of light industrial exports, including consultancy and training, sAles trips, policy studies, and pilot projects involving exporters and manufacturers to key light industrial groups. Progress has been considerably slower than that estimated at the time of appraisal, but recently the implementation rate has improved, with commitments reaching 51% and disbursements about 11%. This is expected to improve to about 65% and 80% by the current closing date. The technical assistance components of the project are proceeding satisfactorily. 43. Industrial Development Credit 1401-CE/f : US$25.00 m. A - July 12, 1983 Appraisal Report : 3847-CE (6/6/83) Disbursed : US$ 6.41 m./e S - Oct. 12, 1983 President's Report: P 3619-CE (6/22/83) Undisbursed : US$17.32 m.e a * Jan. 5, 1984 CL * Sept. 30, 1988 The project is designed to increase output, efficiency and employment of viable private and public industrial enterprises. Project components are: (a) a line of credit for NDB and DFCC to finance imported machinery and equipment components of their subloans; (b) technical assistance and training to NON and DPCC for project promotion, operations, and establishing an equity fund; (c) advisory services and consultancies to improve efficiency of public enterprises; (d) technical assistance and training to commercial banks participating in a consortium financing arrangement; and (e) technical assistance for tariff reforms and analysis of industrial incentives. The subloan component project is fully committed. Use of the technical assistance component is progressing satisfactorily, but the component for improving the efficiency of publie enterprisees is behind schedule. A revised action program has been prepared reflecting changes in the structure of the Ministry of Industry and Scientific Affairs. 144 -.ANNEX I Page 20 THK WORLD BANK AND SRI LANKA - A REVIEW OF A RELATIONSHIP STATUS.OF BANK PROJECTS /a - OTHER PROJECTS 44. Water Supply Credit 709-CE : US$9.20 m. A - May 10, 1977 Appraisal Report :1424b-C. (4/18/77) Fully Disbursed : US09.20 m. S - June 30, 1977 President's Report: P-2051-CE (4/21/77) E - Feb. 08, 1978 PPAK: /n . CL - June 30, 1983 The project aimed at improving pumping, transmission and distribution tacilities for the water supply system it Colombo and suburban towns. New water supply systems were provided for the more remote towns of Kalutara and Ambalangola and adjacent communities which had no piped water. The project was launched with a relatively new implementation agency (WDB). One of the early problems encountered by the WDb was the need to change the design of one of the major project components due to technical reasons. In addition, problems of land acquisition and poor contract administration caused substantial initial delays. At appraisal the project was expected to be completed in five years, but it took more than 7 years. Following full commissioning of most of the major project components by mid 1984, WDB began to experience difficulties in selling all of the water, due to less than anticipated demand. 45. Water Supply & Sewerage II Credit 1041-CE : US$30.00 m. A - June 24, 1980 Appraisal Report : No. 2904b-CE (5/15/80) Disbursed : US$14.89 m. S - Sept. 10, 1980 President's Report: P-2820-CE (5/21/80) Undisbursed : US$15.11 m. E = Feb. 26, 1981 CL - Sept. 30, 1986 The project would improve the existing water supply system serving greater Colombo by expansion of the Ambatale intake, treatment and transmission works, and by construction of new transmission and treatment works in Kolonnawa. The project would also improve the sewage collection system servicing Colombo and extend the system to adjacent urban areas by refurbishing existing collection and conveyance systems, construction of new force mains and two ocean outfalls in Colombo and construction of new collection conveyance systems in Kolonnawa and Mt. Lavinia. Institutional and financial strengthening of Water Supply and Drainage Board (WDB) was also included. With the exception of two civil works contracts which had to be cancelled and re-bid, physical progress has been satisfactory. On account of strikes and civil disturbances, project implementation was generally delayed and the Closing Date was extended by one year. A financial recovery program, started in late 1983, is progressing well and recovery of operating costs has risen from 11% in 1982 to 30% in 1984 and a projected 85% in 1985. 46. Telecommunications Credit 1020-CE : US$30.00 m. A = May 15, 1980 Appraisal Report : 2835-CE (4/18/80) Disbursed : USe25.89 m. S - June 24, 1980 President's Report: P-2698-CE (4/24/80) Undisbursed .: US$ 4.11 m. E * Sept. 10, 1980 CL - June 30, 1986 The project aims at improving the telecommunications services by: replacing antiquated switching equipment and manual exchanges by electronic switching equipment; replacing openwire lines by radio systems; extending local services; providing high capacity and stable transmission network; and providing basic telecommunications to rural areas currently poorly served. Major components of the project-are: (a) installation of about 17,000 lines of local automatic switching, associated cables and subscribers plant, and a total of about 16,000 new telephone connections, and about 250 local call offices; (b) installation of three trunk automatic exchanges and expansion of eight existing exchanges; (c) the upgrading of two microwage systems, about 150 UHF/VHF systems; and (d) about 500 long distance public call offices in rural areas. All major works under the project have been completed, although some minor works will extend into 198b. Sri Lanka Telephone Department's (SLTD) financial performance is satisfactory but the entity is suffering from major institutional and management weaknesses. These are expected to be addressed through a substantial restructuring of the sector which is currently being considered by the government. - 145 - ANNEX 1 Page 21 THE WORLD BANK AND SRI LANKA A REVIEW OF A RELATIONSHIP STATUS OF BANK PROJECTS /a - OTHER PROJECTS 47. Program Credit Credit 512-CE : US$15.00 m. A - Sept. 17, 1974 Appraisal Report None Fully Disbursed : US$15.0 m. S - Sept. 24, 1974 President's Report: P-1494-CE (8/26/74) E = Nov. 05, 1974 PPAR; OD Report No. 1522 (3/15/77) CL - Dec. 30, 1975 The Program CTedit was made--in support of a program of economic measures to restore the balance of payments position. It financed imports of (a) raw materials, components and spare parts for eleven group of manufacturing enterprises and (b) spare parts for agriculture and service sectors. The Program Credit was disbursed quickly, and attained its financial objective of providing much-needed foreign exchange to the manufacturing sector. However, the broader objective of opening a policy dialogue on macro-economic issues was not achieved. /a Information obtained from Statements of Loans and Credits (07/31/85), audit reports, Status of IBRD/IDA Projects in Execution (October 1985). /b A - Date of Approval, S - Date of Signing, E - Date of Effectiveness, CL - Closing Date. 7c PCR being passed through by OED. 7d As of Feburary 28, 1985 this credit had been fully repaid. /e Status as of July 31, 1985. 77 SDK denominated Credits. T Not yet effective (as of October 15, 1985). /h Due to exchange rate adjustmenti the original principal of US$14.50 million was increased to US$15.46 million. /i A Borrower prepared PCR is being reviewed and updated in the region and is expected to be completed by the spring of 1986. I. Loan closed before project performance audit function existed. /K Loan has been fully repaid. 71 Loan cancelled in full. 7m OED Report under preparation. 7i- The PC& was completed in 1985 and submitted to OED in July 1985. -J戸－-- $R! U AGRO & ㅌCOLoC 차 1 i.ANKA 10GtCAL REG1t�N� ,��� �Д��� I�ISTING�115Fi1NG CHARAtTERiST1CS OECEMBER 198 --•- -------г,.�--- MO1�TfilУ H1STQvRAMS 1 75•!. EXFECTANCY Э 4 7j ; EXP�CiANtvY С{tt QF 75'/. ' VALUE Of (Q1 RA1NfA1.1 PR�6QB1LЭ7Y ! 4РlNUA! � OF ORVt�{Е$5 - 1-- MAJQR $Qf1, GROUPS FERRAlM11 ! �ов Ед<tт}сиЕак м4гиrнs s 1 �FбR RESPKTIVE R�G10N5 = RAlNFA�t 1,пs} ? _ ; � � 1 � 2а � .�,1.4Ч fEB MAR МАУ JUN JiJL AUгi 8ЕР : � � � � Afo,.nuwoui цsec.r д�гяееге� � � 1p . � . а . . . . l= 12 > У 25 t-. в Rго vaiцгw Родтl.с юдз aw ми�пvч^. Rqyr.eи � : ; � h.yy апд.оl:тg � i ' ч а Э }� ,'fM0.M7'A$Ok� ' .^__t � � Э 1 � ЬWипа=�юиг яехРh d�mtdc } � . а . . . ��-г�^J-^� > ��j !'t F .:м I RМУа;шаа РадN1к Ю�п апг! �Юипгл^ ReQosols : hi�tYafЮrдll�ng а � ' е} ' � 4}-Г'=� > 5S � !•, � i t,41 • . . . • ; Red Уе'1ow vodtohc гогlг и�гм dark 8 honzon апе j Rопиg www���,,,���......JJT j1 Э� i Red УеЭЮыг Родго}к So!15 wПh рг0[ппrcпг р1 ПonZOrt _�_.,..__-__.�� � �_�__. 1 �' __' , _ -- 1у га�-.�г�-f ^.� 1 > 1 ZS '; 1�: � � •. • . . . р Яед Уе1Юw Родzаьс w�h апд Rед Уегзои Родпги ' цкоM1' д'nsecnd м ty впс � в д} � � 5oi1s wiм »т�.дготтгпг А} nоптоп гоатд о ! ` r > 55 г t с �..м 1 кеддггм 8гоа+п Wюю1к юПS. lпта[иге 8 ин� цеаv}у д,ггагсед, nгW агк �7�'i:i, . _ • • • - ' �oamswdRadYrlЮwPUdzofnю�б - � rohng. е �а.1�...-,-�.1 ' � а � � . 4 1 > 50 1,ьУ F .•м р�,, ггеддtгм Brawn Larowlч гаlс гптаtигг егоил цгаоlr дчиепм. мч 1и. го1г Q г lяarns впд Retl Усliои Родlаlк юiР; чпд ам ипдьlвtiлд ^'�'�' j � +��� . � � . " . . . Э Э i i + Г �у �-. -�---t ' i � Э 12 "; .� , . . • . R.aYetlow Родкоhс wds апд RedYe.loa Род•air � Rt1Чr andunduWn е > 100 t: а д ^s i в юдд,кпм remipromuкnt 0.г horzu•+ 1 12 Э � � ; б , 1 • • ` - • . , Red�Yellwv РоддоlК юls. Red Ye1bw Роегсliсючп Q � > 75 � � F wпн sьw+grr погнвд auбror епд 1оя k_=чс Gкv ' Ro!ч=^gа�+дипдчlадпу � а�� 1 i тдг . у i , -- �"- -� - � п ! � . . . , W�-Nan Уепаж Рддтмс ю.ц нiМ юН гпд hard ' . tYL �i�F°�; а,• �лд_:,тчу. -_уУ- -=��_�-_- е � > 60 � F •,м Aus глгег'>гG з ; д г W1..a-Red Уа1&tw РоддоГс юд5 пrtм sof[ а�' Иагд i WLd . ,.�. Игi�.д ,ид f}аг � " i,stariп апд8оgагqнцг�Ваур;: 1 1е' Э � : � в о в Т2 i Э . . . • � МоипТамоиг. вlевРгУ дпгКгвд евпвв°i � � ! > 8S 'г,м Jurн Aug 1чSеп ; Rм�YN1ow Родюliс юils апд миипьт Rдрю(z � hi�Иапдгоl!ing А � а ' 4 ь Э ,2 , ? , , � � 8�� f i . � � Моипаlпоиг. steavN д"Кжгад. > 55 F•ч s;м МУ`н �ип h1 Аид SeP Raa vиlои Родюlгс som ам мои•w�-, кероюls. Q i t � hч�1у апд гопiпд. � а : i l � а�� � > 45 г ' • f ! 5гееогr дтесиа. hilу апе о} 4 с ч,м Jun Ju1 Аир 'лSеР 1 Нед УНЮw Родтlчюilг ; ru4ng. � � � 12�� (`�� � �. . . � ' � _ S �^�`_ � rr ' j > S5 ; М МУ� 1ип А.1 Aug tiSeP � Reгk}пh 8гопп Евггhг апд гптаlцге Bmwn Wami � Rolhng.hilYaпdih�p 1 а-�+-.-+-R-�az.+-'+-1 � Э r i � � 11 � . . I 8 > 4S � 1'�. F ,}ил 7и1 Агg 5еР � Redd.Sn 8rown ЕtМп впд }гппаtип 9гопп Lnams. ; Rothng hi'lrandsЖeV а �'��� I а � � s i а�`,'_',-У-�^-.--' > Э5 • F м мих тп ги} Аие saP !тпиимв вгоип иам. кадепn erown гаиюlК sгaaaw дчsжгед. мпм впд а , � юiп цм! Reddiй Brown Farthe. � roп•пу г � � QЭ ' " • • Rad YNFOw Радвом<mils юrth гцопqГУ mOttled wb-� -� в1 i > 40 ' � J F 4м ,}и! Аид &SeP ч юе} Low Нитк G4v юi1г. Rвд"YO11ow РодтГк юоls ! Romпg. undubting апд Пвг. О i� � vпИ гоh агМ hard Lагегпе агМ. Ragoюh оп оЮ ! 12{j ' ' . " � Red агд УЧIоw гмдг . . 1 "���';}'• д jF��-(� , > Qj 1 � F5 М МУ*а -!ип Jut Aug чгSвР � RWdisn $rOwn Earms. }mmature Brown Loams апд I tto4ing. nч11У. гпд und�ktinq. а,11 i } i �ow Чипк G1ey гаlг � 1 t �� •�п^� > 35 Э д- f КМ му'ч.. Jип Ju1 Aug ч,5ер � Reddчsn 8rown Earths. Иапаlдс Brovm so+1s antl . � Uпдиlаппд - 0 г " - loes Чимк бlет ючh. � 6 � 1 � j � -т е �_Т ! � i �� > ЗО ; 3� F цМ Му'i. �ип .Ч.F диg н5ер fleddnh вго+ип Евмh: апд t.ow нитос Gky юiп 1 хмдииг;пg а ? � 1 �� �� i • Тlопеаlас $гоюп soils. Raddish Bmwn Eartns. ю�1ч j � х � > з$ £'ы М Му дип ,1ие Aug 5ер оп ok} р гиrчwп Sоlодчтсд 5uio+кtz. 1дw Нит•с иМиlаппд апtl ftat а 4 j Gky юпквпд Reposols е � � в�� � > 23 ; rн с м мУ ,n,n .1и1 аио чиеР ОЕЗ-аеаrн}аг iвгоюгг впа гге�1: осз F1at гогlryмдvипдиlмпg, а 04-Soloditad Sokикtz aпd Sdoгкnaks i bLa f Wг '" в iIIIA � 4}� > 40 i. с м" мч .wn .wr ди4 нтгР R«юiкм Нгоит EaUu вггtч hiph атwпг ог wва} т ипдуlагьпд апд nas j�jj� z # } аbтп. 1.ои нчтtе G}еу во1}в впд Saodued - ° 1Емрм� 1а5оиn sоагки. Jц - penotes вгегдд half of Jвпивгу е{7Mptp WetПfцYOr the тОг11м у�} -�notes Тв:г Ьв1f об магсh цгпilвгlУ for o1INr тОМИг pepartmeM Oi AgrIcU1[usa 「，떼．.j..,,,. AUGUST 1985 IBRO 16518 JULY 1982 Kom#~ SR[ LANKA FOREST RESOURCES DEVELOPMENT PROJECT (FORESTRY - 1) PROJECT PLANTATION SITES AND fOREST COVER P~- Silo femt AG,*-c[,.OtK 20001 B-dorm To~ ~ vilkraft rmtk.01 c~ol Rö,~ 1t~ o~mrs U-da.. Ck- ocy M~ch., ~to Kord, KILOMETERS N.ya.b. MILES 5 6.d A'7-, 44 41 --- A oY.10 xk~' G..tayo C-dig Tono, ko Motwe SRI LANKA t BRQ t3477R2 . та•ю еаar - - - а�•ао ема SR! LAfV К�а NiAHAWECt GANGA TECHN1CAl A55tSTANCE PROIECT � Eкisting ппс3 Propased trrigation 5chemes . Projgcr Ьоопдагиаs ЭоFfпо Ехгтггпg coaals . Ргоротвд canats - 1гг�gагВд areas Ргоротад irrгgot�on агеат � Ехргпгg dams апд reservoгn �� (( Ргороsвд doms апд reservovs °7" � �Ехцkмр werrs апд resвrroпs � � Proposed wв�п амk гвsвгиогп + ��� � Exisrиg power sгаггоо О Ргароsед power тгаtiовт _. � �� _� . � Fraposвd ригпргп$ тгамоп Rтвгт . _ К j ' Roods - - ?ч•�.S ��� -. �,� э. t -�----г- Radwqys Матрг ,..,,, .. � р . А tпгgаGгоа fвгrкд areos �ц - °'� '- f! Q Nлtwot гвsегтвт опд югкtиаnет г � ,; р"t �� � � NCRB Сомрlал „ _ � . . ' р♦ 5у;гет С . �' F', !'f. 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