Sri Lanka - Community Water Supply and Sanitation Project

Docmen of The World Bank FOR OMCIAL USE ONLY MICROFICHE COPY Report No. :P- 5777 CE lype: (PM) Title: COMMUNITY WATER SUPPLY AND Author: PLANT. GEORGE Repo No 1 P-5777-CE Ext. :02573 Room:D3 025 Dept. :SA3EI MEIMORMAUDKI AND IRECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVLOPM ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 16.9 MILLION TO THE DEMOCRATIC SOCIALIST REPllLIC OF SRI LAIKA FOR A COEMITy WATER SUPPLY AND SANITATION PROJECT NOVEMBER 16, 1992 This docunent has a restricted distibution and may be used by recipients only in the performance of thdr offical duties. its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EOUIVALENTS (As of July 1992) Sri Lanka Rupee (SLR) - 100 paisa US$1.00 - SLRs 44.0 SLRs - US$0.023 SDR - US$1.44618 MEASURES AND EOUIVALENTS mm X millimeter (1 millimeter - 0.039 inches) m - meter (1 meter - 3.28 feet) km - kilometer (1 Kilometer 0.62 miles) km2 - square kilometer (1 km2 0.368 square miles) ha - hectare (1 hectare - 10,000 square meters - 2.47 acres) 1 8 liter (0.22 Imperial Gallons or 0.264 US Gallons) lcd - liters per capita per day m3 - cubic meters (220 Imperial Gallons or 264.2 US Gallons) ABBREVIATIONS BOT - Build-Own-Transfer CBO - Community-Based Organizations CIR - Country Implementation Review CWSPU - Community Water and Sanitation Program Unit DDP - District Development Plan ERC - Economic Restructuring Credit ESAF - Enhance Structural Adjustment Facility ESW - Economic Sector Work GCEC - Greater Colombo Economic Commission GOSL - Government of Sri Lanka MEPA M Ministry of Environmental and Parliamentary Affairs NGO - Non-Governmental Organization NWSDB m National Water Supply and Drainage Board PFP - Policy Framework Paper PMEAC - Public Manufacturing Enterprises Adjustment Credit PO 8 Partner Organization UNDP - United Nations Development Programme FISCAL YEAR January 1 - December 31  FOR OMCIL USE ONLY SRI LANKA COMMUNITY WATER SUPPLY AND SANITATION PROJECT Credit and Project Summary Borrowers The Democratic Socialist Republic of Sri Lanka Beneficiaries: Community-Based Organizations (CBO) Non-Governmental Organizations (NGO) National Water Supply and Drainage Board (NWSDB) and Pradeshiya Sabhas (local governments) Amount: SDR 16.9 million (US$24.3 million equivalent) Terms: Standard, with 40 years maturity Pinancing Plan: Local Foreign Total ----US$ Million------ Government of Sri Lanka 5.5 0.0 5.5 Communities 2.5 0.0 2.5 IDA 16.1 8.2 24.3 Total Project Cost 24.1 8.2 32.3 Economic Rate of Return: 21.2% (for water schemes) Staff Anpraisal Report: Report No. 10571-CE Map: IBRD No. 23635 - Community Water Supply and Sanitation Project: Districts of Badulla, Matara and Ratnapura This document has a restricted distribution and may be used by recipients only in the performau ce of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. I  MEMORANDUM AND RECOMNENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA FOR A COMMUNITY WATER SUPPLY AND SANITATION PROJECT I submit for your approval the following memorandum and recommendation on a proposed development credit to the Democratic Socialist Republic of Sri Lanka for SDR 16.9 million (US$24.3 equivalent) to help finance a Community Water Supply and Sanitation Project. The proposed credit would be on standard IDA terms, with a maturity of 40 years. The Government of Sri Lanka (GOSL) will bear the foreign exchange risk. PART I COUNTRY POLICIES AND BANK GROUP ASSISTANCE STRATEGY A. Economic Policies and Performance 1. Sri Lanka's economic record has been mixed with relatively poor growth from Independence to 1977, fiscal expansion with modest growth through the mid- 1980s, large macroeconomic imbalances and virtual stagnation through 1989, and robust growth since. Mirroring this record, the country's adjustment performance has been mixed since the late 1970s, especially following the beginning of the civil war in the early 1980s. At the end of the particularly turbulent 1988-89 period, adjustment efforts resumed and an adjustment program was adopted. 2. The 1989-92 program, reflected in the second-year Policy Framework Paper (PFP), focussed on the needs to restore macroeconomic stability and revived the agenda contained in an aborted first PFP. Many of the reforms identified under the second-year PFP were translated into specific action programs under an Economic Restructuring Credit (ERC) approved by IDA's Board in May 1990. It was followed with the Public Manufacturing Enterprises Adjustment Credit (PNEAC) approved by the Board in November 1990, designed to support the first phase of Government disengagement from commercial activities. 3. Macroeconomic management and performance improved and GDP growth accelerated from 2.3 percent in 1989 to 6.2 percent in 1990. To reduce financial imbalances, given a credible revenue effort (slightly over 21 percent in 1989- 90), the Government emphasized reduction in expenditures particularly in the public investment program and in transfers to households. Tightened expenditures led to a reduction in the overall deficit from 15.7 percent of GDP in 1988 to 11.2 percent in 1989 and to slightly below the 10 percent PFP target in 1990. 4. The external sector showed improvement in 1990, reflecting the adjustment of the rupee during 1989, high world prices for tea and increased non- traditional exports. The current account deficit fell to 5.4 percent of GDP, substantially below PFP targets, while gross official reserves increased three- fold to the equivalent of almost two months' imports in early 1991. 5. Although the program focussed on stabilization, some initial progress was made on the adjustment front. Most notably the size of the civil service was reduced by about 40,000 employees (10 percent of civil servants) in 1990-91  -2- principally through incentives offered to early retirement. Progress was also made in privatizing some smaller public manufacturing enterprises and in restructuring the state-owned bus company. Private company entry into ocean freight was also liberalized. Trade reforms included elimination of almost all quantitative restrictions, a reduction in the maximum import tariff and steps towards implementing the 1990 Taxation Commission recommendations. In an effort to attract foreign equity investment, a prohibitive (100 percent) transfer tax on equity acquisition by foreigners was eliminated for up to 40 percent of total shares, boosting activity in the Colombo Stock Exchange. 6. To consolidate and sustain progress, the Government reached agreement with the Bank and the IMF on a third-year PFP (reviewed by the Committee of the Whole in October 1990) and a fourth-year PFP (raviewed in September 1991). The main medium-term objectives of the extended program were to: (a) sustain growth at 5-6 percent per year; (b) reduce inflation to 6 percent by 1994; and (c) limit the external current account deficit to about 6 percent of GDP. Fiscal restraint was to result in a decline in the budget deficit from about 10 percent in 1990 to about 7 percent in 1994. 7. Developments in 1991 confirmed that despite the ethnic conflict which escalated to civil war in the north, economic recovery was well underway, but progress in restoring macroeconomic balances proved more difficult. Expenditure slippages re-occurred (due to the cost of security-related operations, the civil service retrenchment and consumption based poverty programs) resulting in an overall fiscal deficit of 11.5 percent of GDP. Despite slippages, inflation was reduced from about 22 percent in 1990 to 12.2 percent in 1991. Growth in real GDP was almost 5 percent with strong growth in the manufacturing and trade sectors continuing to outpace the more modest growth in agricultural production. The share of investment in GDP increased to 23 percent (in line with the medium- term program) as a result of higher private investment. 8. Mirroring increased fiscal imbalances the current account deficit widened from 5.4 percent of GDP in 1990 to 7.6 percent of GDP in 1991. However, higher disbursements of concessional aid and private capital flows contributed to an overall balance of payments surplus and a buildup in gross official reserves to the equivalent of 2.7 months of imports at end-1991, well in excess of the Government's target. 9. There were also increased difficulties in the implementation of structural reforms. Most importantly, the Government continued to move in the privatization of small firms but was unable to tackle major loss-making enterprises, in particular the state-owned banks and plantations. Tax holidays proliferated haphazardly and the efforts to improve the efficiency of welfare programs weakened. 10. The developments in 1991 should be viewed against a backdrop of renewed political uncertainty linked to an unsuccessful attempt to impeach the president in August 1991 and a stepped-up level of military activity in the North. Increased concern about human rights violations also affected financial assistance from bilateral donors.  -3- Table 1 - SRI LANKA:KEY INDICATORS, 1988-