Sri Lanka - Second Agricultural Extension Project

c~~~~ - C' L J f Document of The World Bank FOR OMCAL USE ONLY MICROFICHE COPY Report No. P- 5703-CE Type: (PM) SEREJSKI, / X81278 / E9 015/ SA3AG MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 10.5 MILLION TO THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA FOR A SECOND AGRICULTURAL EXTENSION PROJECT MAY 12, 1992 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.  CURRENCY EOUIVALENTS (as of July 1991) Currency Unit - Sri Lanka Rupee (SL Rs) US$1.00 - SL Rs 42.20 1ASURES Hectare (ha) = 2.47 acres (ac) ABBREVIATIONS AND ACRONYMS AEARP Agricultural Extension and Adaptive Research Project ARP Agricultural Research Project NADR Ministry of Agricultural Development and Research T&V Training and Visit GOVERNENT FISCAL YEAR January 1 to December 31 .  FOR OMCUIL USE ONLY MGMON AGRIUL ZX-ErMSION PROJC Credit and Project Summary Borroweg: Democratic Skcialist Republic of Sri Lanka BeneficLarv: The Ministry of Agricultural Development and Research Amot: Credit: SDR 10.5 million (US$14.34 million equivalent) Credit: Standard, with 40 years maturity Ifnancinj Plan: Government US$ 3.79 IDA 14.34 Farmers Total US$18.32 geonomic Rate of Return: Not applicable Staff ADMraisal Report: 10236-CE IBRD 23349R 1407612 This document has a restricted distribution ari may be used by recipients only in the performance of their official duties. Its contents may not ot eiwksi be disclosed without World Bank authorization.  MEMORANDUM AND RECOIMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS 0N A PROPOSED CREDIT TO THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA FOR A SECOND AGRICULTURAL EXTENSION PROJECT 1. The following memorandum and recommendation on a proposed development credit to the Democratic Socialist Republic of Sri Lanka for SDR 10.5 million (US$l4.34 million equivalent) ls submitted for approval. The proposed credit would be on standard IDA terms with a maturity of 40 years to help finance a Second Agricultural Extension Project. 2. Sector ackgr d. Agriculture plays an important role in the economy, accounting for about 24X of gross domestic product, 361 of merchandise exports, and 45 of the active labor force (2.2 million persons). It is also an Important source of income for nearly 70X of the country's population who live in rural areas. 3. The agriccltural sector consists of three main subsectors: (a) tree crops (tea, rubber, and coconut production), accounting for about 51 of CDP, 34X of mercbandise exports, and 161 of employment; (b) paddy, accounting for 211 of GDP and 30X of employment; and (c) alternative crops, censisting mainly of subsidiary food crops (pulses, oilseeds, condiments, roots and tubers, and vegetables), and minor export crops (cinnamon, cardamom, cocoa, coffee, chirchona, citronella, cloves, ginger, and pepper), accounting for a negligible share of GDP, exports and employment. There is also a limited production of high-value crops for export, consisting largely of fresh fruits, vegetables, foliage plants, and flowers, which are in high demand in more affluent economies. About 731 of all cultivated land is under smallholdings, and average farm size is dilminishing. 4. Performance. In the 1980s, the growth record of the agricultural sector was mized: an average annual growth rate of agricultural GDP of 41 during 1978-86, and negative growth in 1987 and 1989. Civil disturbances, fluctuating weather conditions and levelling of yields were important contributing factors In the recent marked variation in performane. 5. Growth Potential. While opportunities for rapid growth in the tree crops and paddy subsectors are limited, Sri Lanka has the potential to expand production of subsidiary food crops for domestic consumption, as well as minor export crops and nontraditional high-value crops for export especially to Middle Eastern and Far Eastern markets. In these markets, the current Sri Lankan share is small (31 of the Middle Eastern market and 0.04X of the Far Eastern market), and the country is well positioned geographically to increase Its market share by three and tenfold in the Middle Eastern and Far Bastern markets, respectively. Yet, despite their high returns relative to paddy, growth of these crops has been mixed. There has been little development of nontraditional agricultural exports with the exception of cut flowers and folLage plants and the moderate success In growlng gherkins. 6. Constralts. 'The tecbnoXogy exists or is being developed under the IDA-supported Agricultural Research Project (ARP) (Cr. 1776-CE) for faraers to grow subsidiary food crops and minor export crops, as well as some of the newer high-value export crops. While local market prices for these crops are  -2- adequate and attractive relative to paddy at certain times, they are subject to wide fluctuations, reflecting the ease with which the local market is saturated. For traded goods, these fluctuatlons also reflect the often destabilizing effects of discretionary import and export interventions by the Government. There are also weaknesses in the financial sector and in land policy. These issues are being addressed in macroeconomic and sector dialogue. Overall exchange rate and international trade policy has been evolving in a favorable direction. However, the present state of the extension service severely constrains the access of farmers to the technology needed to respond to the signals of an increasingly free market. 7. During the mid-1980s, the costs of operating the extension service became prohibitively high for the Government. Operating expenditures were drastically reduced followed three years later by a cut of staff, further reducing the effectiveness of the extension service. In 1987, the extension service was disrupted again, this time by the devolution of authority to the provinces. Also during this period, as paddy yields leveled off, the extension service failed to adapt to the need to address other crops, by switching from its "single crop" (paddy) focus to a "whole farm" approach. Thus, as presently constituted, the extension service is unable to promote the development of alternative crops at a cost that can be sustained by the Government budget. There is also no enabling seed policy for greater participation of the private sector in seed production and marketing activities, and plant protection and pesticide management are weak. 8. Sectoral Development Strategy. The centerpiece of the Government's agricultural development strategy is the efficient diversification of agriculture through the promotion of subsidiary food crops, minor export crops, and high-value export crops. But to provide farmers with useful advice about these crops requires a leaner, more efficient and less costly extension service, with fewer, but better qualified and trained extension agents, backed up by subject matter specialists and the use of mass media communication, and a more responsive research system. With the assistance of the IDA-supported Agricultural Extension and Adaptive Research Project (AEARP) (Cr. 931-CE), implemented during 1979-86, the Government of Sri Lanka has worked to improve extension services by introduciug a modifled training and visit (T&V)VJ approach to extension. There is now a need for a further change to a multi- crop extension system that responds to Sri Lanka's highly educated rural population and the need to develop alternative crops. 9. Two other important elements of the sectoral development strategy are the restructuring of the tree crops subsector and continued efforts to establish a "more level playing field" for all subsectors of the agricultural economy, mainly by reducing the support given to paddy production. 10. The Bank supports this strategy and is providing assistance in restructuring the tree crops subsector, irrigation rehabilitation, 1/ T&V is a hierarchically organized and time-bound method of managing extension, designed to deliver selected and timely technology to farmers with strict regularity. The system encourages links with agricultural research institutions, emphasizes a professional approach to extension, and requires exclusive devotion to extension work.  - 3 - agricultural research, and forestry. The Bank is also supporting reform of the overall macroeconomic and sectoral policy environment with a view to relieve the constraints to private-sector led, export-oriented development. 11. Lessons Learned from Previous IDA Operations. The proposed project incorporates lessons from the AEARP and similar work in other countries, and from Bank involvement in the seed sector. These lessons are as follows: (a) a coherent institutional framework is crucial for defining, coordinating, and implementing a sustainable extension strategy and for strengthening research- extension-farmer linkages at the national level; (b) an extension system should be cost-effective and sustainable under projected budgetary allocations to the agricultural sector; (c) an extension system that relies on relatively fewer, better qualified staff is likely to be more cost-effective than the one that relies on large numbers of staff; (d) a whole-farm approach to extension is required, especially one that works to identify groups of farmers with similar values and concerns (a reference group) and to use the group as the extension target; (e)-appropriate deployment of subject matter specialists is required to provide the desired research-extension linkages; and (f) the science-based seed industry needs enabling seed policy to make the best use of Innovations and new technologies. 12. Rationale for IDA Involvement. The proposed project is an important component of IDA's three-pronged agricultural sector assistance strategy. At its centerpiece, the strategy calls for promotion of agricultural diversification for import substitution and export. Improved performance of the public irrigation services and improved efficiency and International competitiveness of the tree crops sector are the other elements. The project focuses on agricultural extension, plant protection and pesticide management, and seed policy, which are pivotal in promoting agricultural diversification and increasing farmer income and export earnings. The project also has strong linkages with ARP as a means of enhancing the output of relevant research, and with the IDA-financed Poverty Alleviation Project as a means of encouraging farm households to participate in activities and decision-making. 13. Project Objectives. The proposed project would increase farmers' income and agricultural production by improving farm productivity through, inter alia, promotion of innovative technology. To achieve this objective, the project wc-ld: (a) strengthen agricultural extension services (except for tree crops), and (b) develop a national seed policy. 14. Project Description. Over a six-year implementation period, the proposed nationwide project would consist of: (a) a multifaceted program to improve agrzicultural extension services, including closer integration of existing extension services, improved use of mass media, strengthened plant protection, quarantine and pest control, safer and more effective use of pesticides, training, and a private sector pilot extension projram; (b) preparation and implementation of a national seed policy; and (c) establishment of a project management unit. The project would be implemented by the Ministry of Agricultural Research and Development (MADR) with overall responsibility for project management and implementation resting with the Secretary. It would be completed by December 31, 1998. The closing date would be June 30, 1999. The total project cost is estimated at US$18.3 million equivalent, with a foreign exchange component of US$9.5 million (51.9%). A breakdown of costs and the financing plan are shown in Schedule A.  - 4 - In order to ensure an early start of the project, retroactive financing of SDR 185,000 (about US$250,000) would be made available for expenditures incurred between Nay 1, 1992 and credit signirg for establishing the project management unit, hiring an architectural firm, recruiting technical assistance, and to meet the cost of few foreign fellowships. Amounts and methods of procurement and disbursements, and the disbursement schedule, are shown in Schedule B. A timetable of key project processing events is in Schedule C, and the status of Bank Group operations in Sri Lanka is in Schedule D. The attached maps show the province and district boundaries and the agro-ecological regions, while the Staff Appraisal Report, No. 10236-CE, dated May 12, 1992 is being distributed separately. 15. Iroject Sustainabilitv. The project would help develop a more streamlined, less costly client-oriented extension service. The project would also help the central government explore the possibilities of gradually divesting itself of extension activities through a private sector pilot extension program. This, coupled with the active participation of farm households and farmer groups in activities and decision that affect their future, would enhance project sustainability. 16. Agreed Actions. Agreements reached at negotiations include: (a) formulation of a national seed policy satisfactory to IDA by June 30, 1993, and implementation of such policy satisfactory to IDA by June 30, 1994; (b) establishment and maintenance of a project coordination committee with membership, responsibilities and resources satisfactory to IDA by December 31, 1992; (c) establishment and maintenance of an agricultural extension committee satisfactory to IDA; (d) establishment and maintenance of a project management unit with staff, responsibilities and resources satisfactory to IDA; (e) maintenance of the working group on national agricultural extension with membership, responsibilties and resources satisfactory to IDA; (f) use of private contract services for about 65% of the aggregate cost of contracts for project mass media requirements; (g) submission to IDA for review of a human resources development plan for agricultural extension by March 31, 1993; (h) submission of a plan of action satisfactory to IDA for the introduction of the private sector pilot extension program by June 30, 1993, and implementation of such plan with arrangements satisfactory to IDA, including provision relating to contribution by beneficiaries gradually rising to at least 20X of the cost of such program over three years; (i) formulation of a plan of action including a timetable satisfactory to IDA for improving agricultural extension services, and implementation of such plan in accordance with such timetable; (j) submission to IDA for comments of a program of activities related to the project for the following year by June 30, 1993, and by each June 30, thereafter; (k) employment of specialists in extension and in organizational development by December 31, 1992; and (1) conduct with IDA of a comprehensive mid-term review by June 30, 1995. Conditions of effectiveness for the IDA credit are: (a) the agricultural extension committee has been established; (b) a division of responsibilities satisfactory to IDA is in effect with regard to the agriculture sector between the center and the Provincial Councils, and with regard to agricultural extension between the Provincial Ministries of Agriculture and Provincial Administration; and (c) the project management unit satisfactory to IDA has been established; the manager, civil engineer, account officer satisfactory to IDA have been appointed; and the architects have been employed. A condition of disbursement against expenditures in the Northern and Eastern Provinces would be the completion of on-site appraisal and a review of implementation arrangements to the satisfaction of IDA.  17. g=Lromental 2gnta. No slgnificant adverse environmental impact is anticLpated. The definition of problems as they are perceived by the