Sri Lanka - Agricultural Research Project

Docume of The World Bank FOR oFFIcL4L USE ONLY Report No. P-4486-CE REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 15.4 MILLION TO THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA FOR AN AGRICULTURAL RESEARCH PROJECT March 18, 1987 This document has a restricted distribution and mav be used oy recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Sri Lankan Rupee US$l.OO = SL Rs 27.4 SL Re = US$0.0365 ABBREVIATIONS AND ACRONYMS CARP - Council of Agricultural Research Policy DOA - Department of Agriculture FRC - Federal Republic of Germany ISNAR - International Service for National Aggricultural Research MADR - Ministry of Agricultural Development and Research HOFP - Ministry Gf Finance and Planning NAFNS - National Agriculture, Food and Nutrition Strategy NARP - NationaL Agricultural Research Plan NARESA - Natural Resources, Energy & Science Authority PCC - Project Coordination Committee PMU - Project Management Unit RRC - Regional Research Center RTWG - Regional Technical Working Group T&V - Training and Visit System FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY SRI LANKA AGRICULTURAL RESEARCH PROJECT Credit and Project Summary Borrower: The Democratic Socialist Republic of Sri Lanka Amount: SDR 15.4 Million (US$18.6 million equivalent) Tenms: Standard Project The proposed project seeks to raise farmers' incomes by Description: increasing agriculturaL production through development of better varieties, and improving husbandry practices and farming systems. The principal elements of the project would comprise: (a) establishment of a Council oE Agricultural Research Policy (CARP) with appropriate authority to formulate, through a National Agricultural Research Plan, an overalL strategy for research and to set national research policy and priorities for allocation of resources, and recommend allocation of funds for phased implementation of research programs; (b) provision of infrastructure, equipment, machinery and vehicles at research institutions; (c) introduction of a contract research program; (d) staff development and technical assistance; (e) estabLishment of a research planning ceLl and project management unit; (f) strengthening of research-extension linkages; and (g) provision of incremental staff and operating costs. The National Agricultural Research Plan prepared under the project would be updated from time to time. Annual budget allocations would be reviewed in relation to annual research programs consistent with this plan. Benefits: The major benefit would be the contribution to government's agricuLtural developmenc goals through better quality solutions to farmers problems. The institution building would improve the cost effectiveness of the research system. Risks: A major risk is that the vested interests of the research institutions working under different ministries may come in the way of efficient implementation of the proposed organizational changes. This would be Largely overcome by the fact these changes have been initiated and strongly supported by the Government, research community, and administrators. 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.  l-ii Estimated Cost: /1 US$ Million Equivalent Local Foreign Total Civil Works 3.4 1.8 5.2 Vehicles and Equipment 0.4 2.4 2.8 Fellowships and Training 0.2 3.6 3.8 Technical Assistance 0.1 0.6 0.7 Contract Research 3.0 1.4 4.4 Incremental Staff 1.5 - 1.5 Incremental Operating 0.5 0.2 0.7 Base Cost 9.1 10.0 19.1 Physical Contingencies 0.4 0.5 0.9 Price Contingencies 3.6 2.9 6.5 Total Cost 13.1 13.4 26.5 Financing Plan: US$ Million Equivalent Local Foreign Total IDA 5.9 12.7 18.6 FRG 0.1 0.7 0.8 GOSL 7.1 - 7.1 Total 13.1 13.4 26.5 Estimated Disbursement: US$ Million Equivalent FY87 FY88 FY89 FY90 FY91 FY92 FY93 FY94 FY96 FY97 Annual 0.1 0.9 1.0 2.0 3.0 3.0 3.0 3.0 1.6 1.0 Cumulative 0.1 1.0 2.0 4.0 7.0 10.0 13.0 16.0 17.6 18.6 Rate of Return: Not applicable Appraisal Report: 6217-CE dated March 4, 1987 map: IBRD-19616 /1 Including taxes and duties of about US$0.8 million equivalent.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA FOR AN AGRICULTURAL RESEARCH PROJECT i. I submit the following report and recommendation on a proposed development credit to the Democratic SociaList Republic of Sri Lanka for SDR 15.4 million (US$18.6 million equivalent) on standard IDA terms to help finance an agricultural research project. The Federal Republic of Germany (FRG) would provide about US$0.8 million equivalent on a grant basis for technical assistance. PART I - THE ECONOMY 1/ 2. A country economic memorandum, "Sri Lanka: Current Economic Situation and Outlookt' (Report No. 6176-CE, dated May 13, 1986) was dis- tributed to the Executive Directors on May 16, 1986. Country data are provided in Annex I. 3. At independence in 1948, Sri Lanka was one of the most affluent developing countries in Asia. Its per capita GDP was equivalent to that of Korea while the school enrollment ratio, adult literacy ratio, and life expectancy at birth, were comparable to those of the most-developed Asian countries. At the root of Sri Lanka's relatively high income levels and high standards of living was a highly productive export sector (tea, rubber and coconut); food distribution programs; and social services designed to reach even the poorest segments of society. 4. Shortly after independence, the Government took the lead in the development process. Industrialization based on import substitution was seen as the country's major priority and dictated the course of policies until 1977. To accelerate the process of industrialization, the Government set up enterprises to produce a wide range of basic inputs and consumer goods. Investments in industry were financed through taxation of agriculture, both explicitly, through export taxes and, implicitly, through a chtonic over- valuation of the exchange rate, price controls on agricultural products, and preferential allocations of foreign exchange to industry. The more general 1/ Part I is substantially unchanged from the Ninth Power Project President's Report (No. P-4389-CE, dated September 24, 1986).  -2- preferential allocations of foreign exchange to industry. The more general objective of allocating resources according to Covernment-established priorities led to numerous economic regulations and direct state interven- tions. Economic regulations were particularly restrictive in the foreign sector where recurrent shortages of foreign exchange led over time to the development of a complex system of quota restrictions, import prohibitions, multiple exchange rates, and foreign exchange controls. Direct state inter- ventions took place through the creation of several public enterprises in a wide range of sectors. In addition to industry, the state became a major producer and employer in such fields as transport, banking and insurance, internal and externaL trade. The large private estates producing over half of the tea crop and a substantial portion of the rubber and coconut were nationalized. Gradually, the role of market forces in the economy became negligible and the roLe of the state aLl-pervasive. 5. By the mid 1970s, the cost of these policies became evident, as Sri Lanka's economic performance lagged behind that of other Asian countries and the country began to lose the gains it had made in terms of living stand- ards. First, the taxation of agriculture led to a stagnation of agricultural exports and to a decline in per capita food production (of 15% between 1960 and 1976) while the newly created industrial sector, then responsible for 201 of CDP, was heavily dependent on imported equipment, spare parts and inputs. Shortages of foreign exchange became a chronic problem. Second, the welfare and social services designed when the economy was thriving, became an enor- mous burden in the context of a sluggish economy. In 1976, direct food subsidies accounted for 3% of GDP and 17% of government expenditures. Finally, the private sector was crowded out by the public sector enterprises. These enterprises benefited from protection from imports, along with fiscal and credit advantages that diverted resources awcy from the private sector and retarded its development. 6. A drastic reversal in policies took place in 1977 when the new Covernment changed the philosophy of economic management that for two decades had dominated decision making. The new Government's policy was to Limit the role of the state in the economy and increase that of the private sector, and, more generally, to increase the role of market forces in the allocation of resources. Sweeping deregulations affected all sectors of the economy. Price controls were eliminated, barriers to entry in industry were removed, foreign investment was encouraged; domestic trade was opened to the private sector and financial markets were liberalized. Deregulation was particularly noteworthy in the foreign sector. Quota restrictions were replaced by tariffs, the multiple exchange rate system was replaced by a managed float, the new exchange rate was set at a realistic level, and controls on foreign exchange transactions were eased considerably. 7. The new policies brought about a remarkable improvement in economic performance. The GDP growth rate, at only 3% per annum during 1970-77, increased to close to 7Z in 1978-80 and remained at 5% ir. 1981-86. The  -3- liberalization of prices in agriculture and the removal of barriers restrict- ing che entry of private traders is one of the main factors explaining Sri Lankat. success in reducing imports of rice by increasing domestic production. Rice production grew at over 5% per annum during 1978-86. Rice imports, which were over 30% of rice consumption during 1970-77, declined gradually to less than 5% in 1985-86. The liberalization of the external sector led to a diversification of the sources of Sri Lanka foreign exchange earnings. Tourism, also encouraged by generous tax incentives, boomed. Tourist arrivals increased from 150,000 in 1977 to 400,000 in 1982; a 20% annual growth rate in real terms. However, due to the ethnic disturbances that began in 1983, arrivals have declined to 320,000 in 1983/84 and 240,000 in 1985/86. A second new source of foreign exchange earnings were exports of garments which increased from a negligible amount prior to liberalization in 1977, to US$300 million in 1986, out of total exports of US$1.4 billion. 8. The international aid community strongly supported the 1977 economic liberalization. Aid commitments doubled after 1977 and were, on the average, at about 12% of CDP in 1978-86. Moreover, the reestablishment of Sri Lanka's credit standing in international capital markets after 1977 allowed the country to borrow on commercial terms in the early 1980s. This increased access to foreign savings made possible the major expansion in investment levels which took place since 1977. Total domestic investment as a share of CDP increased from 142 in 1977 to 22% in 1978/79, 34% in 1980, and 28% during 1981-86. The share of public investment in GDP jumped from 6% in 1977 to an average of 14% in 1978/79 and a peak of 21% in 1980. The public investment program centered on three major initiatives: (a) accelerated implementation of the Mahaweli Canga Development Program, the largest multipurpose river basin development program ever undertaken in Sri Lanka; (b) establishment of a free trade zone to attract foreign investors; and (c) institution of a massive housing and urban renewal program focusing mainly in the Colombo metropolitan region, including the construction of a new capital complex at Kotte, a suburb of Colombo. Private investment concentrated in agriculture in response to the improved incentive framework; in the financial sector, where the new more liberal economic regime attracted numerous foreign banks; in the transport sector, which had for long been a state monopoly; and in the establishment of industries in the free trade zone. 9. Macroeconomic stability, however, suffered during this process. With foreign savings easily available, the domestic resource mobilization effort slackened. The overall public sector deficit accounted for some 15% of GDP, on the average, during 1978-85, and the exchange rate tended to appreciate, leading to recurrent large current account deficits in the balance of pay- ments (11%, on the average during 1978-86) and to an increase in the foreign debt (including short-term debt, private non-guaranteed debt, and the IMF), from US$1.4 billion in 1978, to US$3.7 billion in 1986. The debt service ratio increased from 13% in 1978 to 30X by the mid-19BOs. Additional pres- sures have been put on the economy by the ethnic conflict which has been escalating since 1983. The increased military expenditures that the conflict  -4- has required have put new claims on the budget and made it more difficult to increase the level of domestic savings. 10. In addition to the macroeconomic imbalances, the process of liberalization has had two other shortcomings. First, liberalization did not reach the public sector enterprises. While, since 1977, some few chronicaLly loss-making public enterprises have been closed down, the bulk of pubLic sector enterprises has remained untouched and continues to be a burden on the economy. Second, the development of an export industry has been limited to garmencs while, because of relatively high levels of protection, the rest of the industrial sector has been encouraged to produce for the domestic market rather than for exports. 11. Achieving a better balance between investment and savings and increasing public sector enterprise efficiency and the competitiveness of the industrial sector are the prime policy objectives for Sri Lanka. To improve the balance between investment and savings, the Government will need to reduce the public sector deficit through a combination of increased revenues, and reduced current and capital expenditures. Improving the com- petitiveness of public sector enterprises is a complex and important task which will require a profound reform of existing institutions. Public sector enterprises account for some 30X of CDP, and are a heavy burden on the economy because of high protection from external competition, administered prices for their products, and their monopolistic or quasi-monopolistic position. Increasing the competitiveness of the industrial sector will require a further restructuring of the economy towards exports rather than producing for the very limited domestic market and the adoption of a more flexible foreign exchange poLicy. 12. The Government has recently taken, or ahnounced its intention to take, some of the actions indicated above. First, the 1987 budget aims at reducing the fiscal deficit from the chronically high levels that have been experienced since 1977 to around 10% of GDP. Measures to achieve this objec- tive include higher levels of taxation and a reduction of transfers to inef- ficient public sector enterprises. Public investment has already been reduced in relation to the high levels it had reached in the early 1980s and the current public investment program is being reviewed in order to scale it down further. Moreover, the fiscal situation is benefiting from the recent decline in oil prices as these declines are not being passed an to the con- sumers. Second, an extensive study of the public sector enterprises has recently begun, with a view to identifying measures leading to an increase in their efficiency. Finally, a first revision of the tariff system took place in late 1984, where disparities in effective protection were substantially reduced and a new Presidential Tariff Commission is now in charge of review- ing the existing tariff system and making recommendations for further improvements. Furthermore, foreign exchange policy has become more flexible and the domestic currency was devalued in the recent past by some 15X in real terms.  -5- 13. At the end of 1986, the external public debt outstanding and dis- bursed stood at an estimated US$3.7 billion (para 9), over 70% of which is on concessional terms. The debt service ratio has been increasing in the 1980s and was at 30% in 1986 (including IMF charges and repurchases). Assuming that the Government's efforts to contain the budget deficit and imports in the forthcoming years are successful, the current account deficit should decline to approximately 5 towards the end of the decade, and the debt service ratio, after temporarily rising to 32% in 1987 because of existing debt repayment commitments, should begin to decline from 1988 onwards. None- theLess, the Government will need to monitor carefully the level and terms of external borrowing to ensure that the country maintains a satisfactory exter- nal payments position. PART II - WORLD BANK GROUP OPERATIONS 14. Since the beginning of its operations in Sri Lanka in 1954, and up to September 30, 1986, the WorLd Bank had approved 12 loans totalling US$181.2 milLion (net of cancellations) and 41 credits totalling US$830.9 milLion (net of cancellations) in support of 50 projects. About 53X of World Bank assistance has been for agriculture (irrigation, tree crops, and rural and dairy development), 17Z for power, 10% for transportation, and the remaining 20% among development finance company operations, a program credit (involving the import of raw materiaLs for industry), water supply, construction industry training, and telecommunications. Eight loans and 16 credits have been fully disbursed. Annex II contains a summary statement of World Bank Group operations as of Septenber 30, 1986. 15. In Sri Lanka, the IFC had a total investment of US$2.88 million equivalent in equity and US$35.84 million equivalent in loans as of September 30, 1986. Investments have been made so far in two textiles industries, one polypropylene bag industry, one equipment-leasing company, one hotel, and two IFC lines of credit, one of which has been extended to the government-owned Bank of Sri Lanka for term loans to medium-sized industries. 16. A central element of the World Bank Group's current strategy in Sri Lanka is the achievement of a more sustainable balance-of-payments posi- tion in the medium term through export promotion and import substitution in viable economic activities. The Bank Group's macroeconomic and sectoral analyses of the Sri Lankan economy indicate that achieving and maintaining external equilibrium in the context of a growing economy require major policy changes in several areas: investment priorities should be assessed more carefully than in the past; the system of economic incentives should become more consistent; the role of the public sector in manufacturing activities sbould be limited to clearly established priority areas; and cost recovery  -6- should be seen as complementary to, rather than conflicting with, greater equity in distribution. 17. Within the above framework, the Bank's lending program has been concentrating resources on directLy productive sectors, such as agriculture and industry, and in support of energy and transport infrastructure. In agriculture, Bank Group strategy had given until recently the highest priority to the expansion of paddy production and to rehabiLitation of the vital tree crops subsector, activities in which Sri Lanka has a comparative advantage. While these activities will retain their importance, the probable attainment of self-sufficiency in rice in the near future and the uncertain prospects of tree crops in international markets suggest that the lending program shouLd extend its support in the future also to new programs aimed at expanding the production of other important agricultural products for local consumption and, possibly, local processing for exports. 18. The WorLd Bank has also provided financing for a broad range of large-, medium- and small-scale industrial enterprises, primarily in the private sector, through support of industrial development finance institu- tions. Future leL.ding in the sector would continue this support, focusing on firms with export potential. It wouLd also capitalize on the conclusions of technical assistance financed through past operations to provide support for improvement in trade and incentive policies, and for increasing the efficiency of public enterprises, in the context of one or more sectoral operations. 19. The Government's priority to rehabilitate rundown infrastructure and expand the capacity of existing capital stock by high priority new invest- ments is well placed and necessary in order to support expanded economic activity, particularly in the private sector. Major elements of the lending program would be directed at heLping to meet the energy needs of the economy and at easing transport bottlenecks. The World Bank has provided financing to a number of power projects for generation, transmission and distribution. The thrust of future operations would be decided on the basis of a comprehen- sive assessment of investment needs in alL three areas. However, given that the majority of high yielding sources of energy in Sri Lanka have been util- ized already, it is envisaged that the future program would accord relative priority to energy conservation rather than generation, through both required investments and policy measures. The old and inefficient power distribution system wouLd be rehabilitated to reduce system losses; small but significant improvements in energy conservation would be undertaken in large energy consuming industrial/commercial units; and a study is underway to recommend measures to improve energy efficiency in the transport sector, a large con- sumer of commercial energy in Sri Lanka. Support to the transport sector would continue with rehabilitation and upgrading of the road network, institutionalizing proper maintenance methods and .mproving sectoral planning of policies and programs.  -7- 20. Institutional capabilities, at both the planning and implementation levels, have been strained by the recent rapid expansion of public invest- ment. Continuing emphasis would be placed on project components supporting institution building, human resources development, business and industrial management, and public administration. 21. The World Bank's development of a coherent lending program for Sri Lanka, and its continuous dialogue regarding the specific elements of the program and policies necessary for increasing the program's effectiveness, have been accompanied by firm support for a substantial transfer of resources to Sri Lanka. The main grounds for this support have been the need to offset the deterioration in the world trade environment; the achievement of a high and sustained growth rate; and the tightness of the Government's budgetary situation as increased operational and maintenance requirements make demands on domestic resources. 22. The World Bank Group, as of the end of 1986, accounted Ear an estimated 14% (IBRD, 1.22; IDA, 12.8%) of Sri Lanka's total debt (including private non-guaranteed and short-term debt, and IMF) outstanding and dis- bursed and 3.5% of the total debt service (including interest on short-term debt and IMF charges). PART III - AGRICULTURE AND AGRICULTURAL RESEARCH IN SRI LANKA General 23. Real agricultural growth averaged 2.8% per annum between 1960 and 1982, and the contribution of agriculture, forestry and fisheries to total CDP declined from 38% in 1960 to 28% in 1984. Still, agriculture remains by far the single most important source of income and employment (2.2 million farmers, or 461 of the labor force). The sector also contributes greatly to both export earnings and government revenue. 24. Although consistentiy positive, agricultural growth has fluctuated over time, thus accounting in considerable measure for fluctuations in over- aLl GDP growth. To a significant extent, these fluctuations were due to unequaL growth performance of the sector's main components since the 1960s. Paddy production accelerated from an average annual rate of 1.51 during the first half of the decade to 9.7% during the second half. Performance in the tree crop subsector, on the other hand, deteriorated sharply in the late 19709. Following new economic policies in 1977, agricultural growth accelerated to about 4.4Z per annum during 1977-82, despite continuing slug- gishness in the tree crop subsector. Growth was particularly pronounced in paddy production, which rose from about 1.7 million tons in 1977 to nearly 2.5 million tons in 1983, before suffering a weather induced setback to 2.4 million tons in 1984. There has been little diversification away from the four main crops (paddy, tea, rubber, and coconut), leaving the economy  -8- vulnerable to changes in their international prices. The need for such diversification for making more efficient and productive use of the country's agriculturaL resources is increasingly more evident. The principal reasons impeding faster growth of products other than paddy and traditional tree crops have been the concentration of production incentives on paddy and the absence of technical packages tested for their economic feasibility. Agricultural Research 25. Research activities in Sri Lanka have developed over time in a very uncoordinated manner. As a result; research is fragmented with inadequate linkages within ministries and between ministries and research institutions. A major constraint in the research system is the absence of a mechanism for coordinating and consolidating research efforts, identifying national research needs, and establishing priorities consistent with needs. Research information is not colLated, analyzed, and interpreted in a manner that enables it to reach the levels where decisions are made on priorities and on appropriation of funds. In many institutions, research is not farmer oriented and there are no micro-economic studies to show the impact of improved technologies on farmers' fields. Interaction between departmental secretaries and directors of research institutes or departments is mainly concerned with financial and administrative matters, and little time is spent on review of research progress and priorities. Similarly, decisions on programs and budget are not effectively transmitted to scientists. Until recently, research programs have been concentrated on rice, tea, rubber, and coconuts. In the case of rice, the research efforts have produced tangible results, contributing to Sri Lanka achieving near self-sufficiency. The impact of research on tea, rubber and coconut has been mixed and only a few technical recommendations have been developed to resolve field problems of smallhoLders. Little effort has been made to consider commodities as com- ponents of farming systems or to address Livestock management as an integral part of farming activities. In addition to the above, research infrastruc- ture is weak, the available manpower is not well trained, and research operating funds are inadequate. 26. ResponsibiLity for agricultural research lies with 15 research institutions, under 7 ministries and the Office of the President. There are two main groups: first, there are the long-established research institutes for tea, rubber, and coconuts, with a certain degree of financial autonomy, governed by boards and with costs mainly financed by export cesses (tea and rubber); second, within various ministries there are numerous research institutes and units concerned with a variety of crops, livestock, fisheries and forests. The Ministry of Agricultural Development and Research (MADR) is the focal point of agricultural research--with two of its departments, the Department of Agriculture (DOA) and the Department of Minor Export Crops (DMEC), and two insticutes, the Agrarian Research Training Institute (ARTI) and the Sugarcane Research Institute (SRI) engaged in research. Research in DOA has been organized on a regional basis. The country has been divided  -9- into nine agroecological regions. In each region, a regionaL research center (RRC) has been established. In addition, there are 14 satellite research stations and 24 adaptive research units. The Deputy Director (Research) is in charge of research programs of DOA. Tea Research Institute and Rubber Research Institute (Ministry of Plantation Industries), the Coconut Research Institute (Ministry of Coconut Ine.stries), the National Aquatic Resources Agency (Ministry of Fisheries), the Veterinary Research Institute (Ministry of Rural Industrial Development), and the Forestry Research (Ministry of Lands and Lands Development) are headed by directors. 27. The role of universities in agricultural research is limited at present. Although there are qualified agriculturaL scientists in the Universities of Peradeniya, Ruhuna, and Batticaloa, they lack both the mandate and funds to support substantial research. 28. The Natural Resources, Energy and Science Authority (NARESA), estab- lished in 1981 and reporting directly to the President, has broad powers to plan, implement, coordinate, support, and evaluate scientific activities in the country. So far, however, it has not contributed to planning and coor- dinating agricultural research in the absence of a viable research strategy. 29. Sri Lanka has about 500 agricultural research personnel (78 Ph.D., 153 K.Sc., and 269 B.Sc. degree holders). Initial recruitment of scientists is at the level of B.Sc. Agriculture/B.Sc. Allied Sciences. Post-graduate qualifications are required for the promotion of research scientists. A good stic' has been made at developing local post-graduate training capacity at the Postgraduate Institute of Agriculture of the University of Peradeniya: one-year M.Sc. degree (without thesis): two-year M.Sc. degree; and a three-year Ph.D. degree. 30. Besides the lack of coordination and inadequate linkages within ministries and research institutions, other factors which limit the efficiency of research are: (a) infrastructure facilities for laboratory, office, and staff housing are inadequate; (b) library facilities are below the required standards needed to support viable research; (c) economic and social aspects of research are not addressed; (d) available scientific man- power is not adequately trained; and (e) the efficiency of the research system is impeded by inadequate number of technical support staff and inade- quate operational funds per scientist (about US$1,600 per year against the minimum requirement of US$2,600) to meet the cost of laboratory supplies, agricultural inputs, labor, and other requirements. IDA Assistance to Agricultura. Research 31. Under the recently completed IDA-assisted Agricultural Extension and Adaptive Research Project (Cr. 931-CE), the training and visit (T&V) exten- sion system for all crops (except tea and rubber) has been introduced in  -10- Sri Lanka. A significant achievement of this project has been the estab- lishment of adaptive research facilities in each district and the increased collaboration among research and extension staff through the organization of Regional Technical Working Groups (RTWC) in each of the nine agroecological regions. Each RTWG meets twice a year, before the two main cropping seasons, to discuss field problems and research results, plan future research programs, and decide on extension recommendations. Adaptive research in each agroecological region is focused on local problems. The program for research at the regional research centers and adaptive research on farmers' fields are determined for the most part by research staff in consultation with the extension scaff. In addition, monthly research extension dialogues with scientists, subject matter officers, and senior district agricultural staff are organized at regional research centers to discuss field problems and prepare lesson plans for fortnightly training. The combination of T&V exten- sion and the regional research program has resulted in the establishment of a well-built institutional base in DOA for extension work and research-extension collaboration. Rationale for Association Involvement 32. Sri Lanka has a substantial agricultural research capability that has evolved over the last three decades. Significant progress has been made in improving production of some commodities, especially rice. However, with responsibility for agricultural research scattered, there is no forum in which national needs can be translated into a regional research program and no mechanism by which limited availabLe resources can be allocated to programs with highest priority. As a result, Sri Lanka does not have an organizational base for planning agricultural research to: (a) define national or regional goals; (b) stace such goals in terms that can be used to identify and define problems needing research; (c) establish priorities among defined problems; and td) design specific responsibilities and recommend allocation of resources to organizations responsible for doing research. Therefore, the rationale for Association involvement is to overcome the problems arising out of the fragmentation of research among several minis- tries and move towards an integration of research efforts and develop a research strategy, so as to remove the present imbalances in the overall research program and the relative neglect of research in priority areas. PART IV - THE PROJECT 33. The poLicy framework of the proposed project derives from the Government's document, "National Agricultural, Food rnd Nutrition Strategy" which recommended the establishment of a Council of Agricultural Research Policy (CARP) in order to strengthen agricultural research, ensure coordination among research institutions, and advise Government on research strategy, planning, priorities, and funding. The ?roposed project was  -11- prepared in October 1985 by a team of government experts, assisted by a consultant from the International Service for National Agricultural Research (ISNAR), under the supervision of the Agricultural Research Group consisting of eminent Sri Lankan scientists and senior administrators. Appraisal of the project was completed in February 1986. Negotiations were held in Washington, D.C. in December 1986; the Sri Lankan delegation was led by Mrs. S. Kuruppu. A Staff Appraisal Report (No. 6211-CE, dated March 4, 1987) is being distributed separately. A supplementary data sheet is attached as Annex III. Project Objectives 34. The proposed project seeks to raise farmers' incomes by increasing agricultural production through the development of better varieties, and improving husbandry practices and farming systems. This would be accomplished through the establishment of a Council of Agricultural Research Policy (CARP) with appropriate authority to formulate and set out in a national agricultural research plan, an overall strategy and priorities for research; recommend allocation of funds for planned implementation of research programs; and strengthening of critical linkages between research activities which are currently dispersed among many institutions. The project would also focus on developing the human resource base and institu- tional framework needed to carry out relevant agricultural research. Systems of annual planning and review to be established under the project would ensure that research allocations are made according to relative priorities of contending programs. Project Description 35. The principal components of the project comprise: (a) establishing CARP to recommend to Government actions concerning research strategy, policies, priorities, and funding; (b) strengthening research station facilities by way of civil works and equipment, and library development; (c) improving technical capacity of researchers through manpower development and technical assistance; (d) introducing a contract research program to finance research activities; (e) establishing a Headquarter Research Planning Cell in DOA and a Project Management Unit (PMU) in MADR; (f) introducing research planning and evaluation procedures; and (g) improving research-extension linkages. Detailed Features 36. A basic feature of the proposed project would be the establishment of a Council of Agricultural Research Policy (CARP) within the Ministry of Agricultural Development and Research (HADR). However, CARP would have the authority independently of MADR to submit to the Ministry of Finance and Planning (MOFP) its recommendations on research programs and priorities. This independent role of CARP was clarified and agreed with the Government  -12- during negotiations. The Minister of Agriculture would appoint the members of CARP, representing the various agencies involved in agricultural research and related policy formulation and funding, plus an ex-officio Executive Secretary. The members of CARP would comprise: one secretary of a ministry concerned with agriculture; one representative of the Ministry of Finance and Planning; one representative from NARESA; three directors of research institutions (one each for perennial crops, annual crops, and livestock production, forestry and fisheries); three representatives of producers and processors (one elected from the Chamber of Commerce, one nominated by the ministries in charge of the Janatha Estates Development Board and State Plantations Corporation, and one nominated by the President to represent smallholders producing food crops); one representative from the universities; and one senior scientist of distinction. The Chairman of CARP would be appointed by the Minister of Agriculture on the recommendation of the coun- cil, to be elected from among its members. The Minister of Agriculture, after advertisement of the post and on the recommendation of CARP, would appoint the Executive Secretary to head the CARP Secretariat. As a condition of Board presentation, an act for establishing CARP has been approved by the Sri Lankan Cabinet of Ministers. As a condition of Credit Effectiveness, the Act establishing CARP would have been approved by the Sri Lanka Parliament and the Government would have appointed the CARP members, Executive Secretary, and core staff comprising two senior scientists, and support staff. 37. The establishment of CARP would be a first step in integrating and streamlining agricultural research and associated activities. It would be responsible to formulate through a National Agricultural Research Plan (NARP), research policies, strategies, and priorities; define the aims and scope of overall research effort in agriculture and allied services to sup- port national goals of agricultural development; and make recommendations on the financial, manpower, and physical resources required by different institutions to carry out research programs. 38. CARP would prepare the National Agricultural Research Plan (for a period of seven years) jointly with the research institutions, eminent scien- tists within the country, extension services, and farmers. A draft NARP had been prepared before credit negotiations. CARP would coordinate the prepara- tion of a Status Review Report for each agroecological region to identify farmers problems and constraints in adopting technical recommendations. CARP would need time to prepare detailed Status Review Reports for the agroecological regions and based on these reports complete the preparation of the final NARP. Agreement was reached during negotiations that the final NARP document would be sent to IDA not later than December 31, 1988 and updated from time to time. CARP would introduce a task oriented program and budgeting system and annual research program planning procedures that would enable it to review and approve research programs of each institution and making recommendations to the Ministry of Finance and Planning, independently of MADR, for provision of funds. MOFP, in making budget provision for  -13- research, would take into account the views of CARP. Research activities not included under NARP would not be financed under the project. CARP would also be responsible for preparation of a consolidated annual research report for the country and frequent evaluation of research programs. 39. Strengthening Physical Facilities. The project would provide for rehabilitation and construction of research station buildings and housing; scientific and other equipment, accessories and spares, and vehicles; and library facilities. These investments would cover 18 research stations, CARP Secretariat, the Headquarter Research Planning Cell of DOA, and the Project Management Unit (PMU) oE MADR. A firm of architects/engineers would be contracted for refining designs and estimates of buildings, preparation of bidding documents and supervision of the construction program. 40. Manpower DeveLopment. Career development would be fostered under the project to meet the following objectives: (a) research staff should obtain a masters degree early in their career for further advancement; (b) greater specialization should be provided in specific disciplines by increasing the number of scientists with Ph.D. degrees; (c) established senior scientists should participate in short-term courses at international and other overseas institutions on research administration and other matters; and (d) technical support staff should receive short-term training in the operation, maintenance, and repair of equipment. The project would include about 212 fellowships--26 for Ph.D. degree, 76 for M.Sc. degree (50 foreign a-.l 26 local), and 110 short-term courses (77 foreign and 33 local). In addition, funds would be provided for study tours, organization of seminars, workshops, and conferences at RRCs, other research institutions, and at the national level. The manpower development program would be carried out by CARP in accordance with a manpower development plan satisfactory to IDA. A program for the first project year has been prepared and is satisfactory. 41. Technical Assistance. Technical Assistance would be essential for planning and implementation of parts of the project. Considerable special- ized expertise is available in Sri Lanka--in universities, in some government departments, and among retired scientists. Expatriate assistance would be provided in areas where local expertise is not available. The Covernment of the Federal Republic of Germany (FRC) has agreed to cofinance (on a grant basis) the technical assistance component. About 124 staff-months of techni- cal assistance would be provided under the project, of which 70 staff-months are for local consultants and 54 for expatriate consultants. Expatriate assistance would be allocated as follows: 12 staff-months for a researcb planning and budgeting consultant; 21 staff-months for research management; 6 staff-months for research evaluation; and 6 staff-months for CARP administration and management; 3 staff-months for pasture and fodder crops; and 6 staff-months for farming systems. Consultants would be employed with qualifications and experience, and under terms of reference acceptable to IDA. The agreement to be entered between GOSL and FRO would specify that if German specialists in specific areas are not available, FRC grant funds would  -14- be released for hiring specialists of other nationalities. Signing of this agreement would be a condition of Credit Effectiveness. 42. Contract Research. Research activities under the project would be funded through a contract research program. Funds would be made available to research institutions, universities, and eminent scientists to conduct research on problems/activities needed to support national agricultural development goals. Four broad types of research would be included: (a) applied research to expand the ongoing work on comnodities and production factors and initiation of new research programs; (b) interministerial and collaborative research on coconut intercropping, crop-livestock integration in the rainfed Dry Zone, and other cropping and Earming systems research; (c) special research programs not covered by (a) and (b) above, such as basic research and agricultural economics research relevant to national agricul- tural research priorities and carried out by the university research system, distinguished and proven scientists, the Agrarian Research Training Institute, and other organizations in Sri Lanka; and (d) adaptive research to be carried out on farmers' fields to evaluate and refine technologies. CARP would play a key role in providing guidelines for preparing research proposals, examining and approving individual proposals, and monitoring implementation. 43. Headquarter Research Planning Cell of DOA. Under the project, a Headquarter Research Planning Cell would be established in DOA to assist the Deputy Director (Research) in introducing efficient research planning and management measures in all DOA research institutions and supervising other project activities. The project would provide for incremental staff such as an Additional Deputy Director (Research), an economist and support staff, and incremental operating costs. Agreement was reached during negotiations that the Seadquarter Research Planning Cell would be established and fully staffed by June 30, 1987. 44. Project Management Unit (MADR). A Project Management Unit (PHU) would be established in MADR headed by a Project Manager. The project would provide funds for a PMU consisting of a Project Manager, Project Coordinators, Procurement Officer, Civil Engineer, Accounts Officer, and support staff, and incremental operating costs. PMU would be assisted by a firm of architects/engineers in the implementation of the civil works program. PMU would be a temporary feature and will function for the duration of the project. Establishment of PMU, appointment of Project Manager, Project Coordinators, Civil Engineer, Training Coordinator, and Accounts Officer, and employment of a firm of architects/engineers would be a condi- tion of Credit Effectiveness. 45. Incremental Staff and Operating Costs. Based on a review of exist- ing staff at different institutions and the specific areas that need strengthening, and the capacity of the Government to meet the long-term financial commitment on such staff, the project would incLude a modest  -15- increase in the number of scientists (34). The increase in technical support staff (82) would help raise the ratio of scientists to support staff from 1:1.3 to 1:2 and enable each scientist to carry out more experiments. The project would also include incremental administrative staff (53) for research institutions. Strengthening Research-Extension Linkages 46. Existing research-extension linkages would be further strengthened by: (a) preparation of area-specific status review reports, jointly by scientists and extension workers; (b) economic studies on viability of tech- nology, input use, constraint analysis, and research program design; and Cc) systematic development of adaptive research funded under the project. In addition, a diagnostic team of 2-3 scientists (including an economist) would be formed at each research station, with responsibility for periodic visits, accompanied by local extension staff, to farmers' fields in each season in order to obtain information on their problems in the adoption of new technol- ogy and also organize adaptive research trials. Agreement was reached during negotiations that diagnostic teams would be formed at all research institu- tions by May 31, 1987. The Government is planning a review of the present extension system in Sri Lanka with the intention of bringing about improve- ments and strengthening linkages with research. Agreement was reached during negotiations that this review would be completed by June 30, [988 and IDA's comments invited on the results and action proposed. Project Coordination 47. A Project Coordination Committee (PCC) would be formed in MADR to ensure coordinated implementation of project activities dispersed among seven ministries. PCC would be chaired by the Secretary, MADR and would include as members, Secretaries of concerned ministries (or their representatives), the Executive Secretary of CARP, and representatives of the National PLanning and Budget divisions of MOFP. The Project Manager of PMU would act as member- Secretary of PCC. This committee would meet once every quarter to review project progress and resolve delays in project implementation. A Project Coordination Committee was formed prior to negotiations. Project Implementation 48. Overall responsibility for project implementation would lie with the Secretary, HADR who would be assisted by a Project Management Unit to: (a) handle project funds and make allocations to concerned institutions on the basis of the approved plan and budget provisions; (b) finalize designs, cost estimates, and bidding documents for civil works, evaluate bids and award contracts, and supervise construction; (c) procure equipment and vehicles; (d) help CARP in awarding fellowships and implementing the techni- cal assistance program; (e) maintain project accounts, review statements of expenditure of different institutions, claim reimbursement from IDA, and  -16- review annual status of accounts, and (f) monitor and evaluate project progress. 49. Key factors in project implementation are the establishment of CARP, preparation of the NPAP document, introduction of research planning proce- dures, and timely completion of civil works construction and procurement of vehicles, machinery, and equipment. A list of laboratory equipment required for each research institution was finalized at appraisal. Most of the vehicles, machinery and other equipment required have been identified. All land for civil works construction is available, except for CARP headquarters building, which would be located in Colombo. Standard designs and estimates are available for civil works. Land for CARP headquarters would be made available by December 31, 1987. Details of training requirements have been worked out and training institutions are being identified. The training program for the 4irst project year has been prepared and is satisfactory. Civil works construction is expected to start in December 1987. Monitoring and Evaluation 50. The Project Management Unit will carry out periodic monitoring of physical activities in the field according to a reguLar action program and send quarterly progress reports to the Association. Evaluation of research programs would be the responsibility of CARP through the annual research review exercise and periodic field reviews. CARP would prepare and forward to the Association a consolidated Annual Research Report by December 31 of each year. CARP would commission a joint review (COSH/CARP/IDA) of all research activities: (i) first, in January 1989, soon after the preparation of the Iational Agricultural Research Plan, to enable mid-course corrections; and (ii) again in January 1991, to determine if project objectives are being achieved and to identify future strategies. Agreement on the above was reached during negotiations. Project Costs 51. The total cost of the project, over a nine-year implementation period, is estimated at US$26.5 million, including taxes and duties estimated at about US$830,000. The foreign exchange component is estimated at about US$13.4 million, or 51% of total project costs. Physical contingencies have been calculated at the rate of 10Z on civil works, and 15% on equipment, books and publications, resulting in an overall average amountint to 5% of base costs. Price contingencies (34% of base costs) have been applied in accordance with estimates of expected inflation rates in Sri Lanka (local prices at 10% during 1987; 9% during 1988; 8% during 1989; 7.6% during 1990; and 4.5% during 1991 and onwards; and foreign prices at 7% during 1987; 7.5Z during 1988; 7.7% during 1989; 7.6% during 1990; and 4.5% during 1991 and onwards). Project costs are updated to October 1986.  -17- Project Financing 52. The proposed IDA credit of US$18.6 million wouLd finance 70% of project costs. The Government of the FederaL Republic of Germany (FRG), through its technical assistance organizacion, intends co cofinance on a grant basis the technical assistance component, which amounts to US$0.8 million. The IDA credit and FRC grant would cover 100% of foreign exchange costs (US$13.4 million), 46% of local costs (US$6.0 million), and 73% of total project costs, net of taxes and duties. The Government con- tribution to the project would be about US$7.1 million including US$0.8 million of taxes and duties. Procurement 53. Proposed procurement arrangements are: