Sri Lanka - Fourth Tree Crops Project

Document of The World Bank FOR OMCIAL USE ONL WRp No. 12045 PROJECT CON TION REPORT SRI LANKA FOURTH TREE CROPS PROJECT (CREDIT 1562-CE) JUNE 22, 1993 MICROGRAPHICS Report No: 12045 Type: PCR Agriculture Operations Division Country Department III South Asia Regional Office 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 Baik authorization.  0 ii II .t 4) & 21 iIai !II 04 - I!  WI it *1 tfr4e 4 U Ii'kbii r 4.. ii 0 4) jIi.viI ii if r IT iiii I Co 1j0 I. dill I Ii a I JiD .1II *1 If p 4I Ii 41 ji ii  FOR OMCIAL USE ONLY WEIGHTS AND MEASURES cubic meter (m3) 1 c308ucbic yards 1 kilomater (kn) = 0.62 miles 1 meter (m) = 1.09 yards 1 kloram (kg) = 2.2 pounds 1 hectare (ha) 2.47 acres 1 square meter (m2) = 10.76 square feet 1 metric ton (t) - 2205 pounds ACRONYMS ADB Asian Development Bank COP Cost of Production CrC Cut, Tear and Curl (tea) RR Economic Rate of Return FRR Fmanca Rate of Return FICP Fourth Tree Crops Project IDA International Develoment Assocatio IU Institutional Development Unit DMB Investment Moniting Board EIM International Monetary Fund JEDB Jatha Estates Development Board MTIP Medium Term Ivestment Program NSA Net Sales AverWe ODA Overses Development Administration of the UK Goverment PCR Project Completion Report SAR Staff Appraisal Report SCF Standard Conversion Factor SLSPC Sri lanka State Plantations Corporation FISCAL YEAR January 1 - December 31 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.  . * nnunnnnnn i nnunhunnnF 4SX r- I:ss  PROJECT COMPLETION REPORT SRI LANKA FOURTH TREE CROPS PROJECT (Credt 1S62-) Table of Coen_t Preface i Evluation Summary ii PAItT k PROJECT REVIEW FROM BANK}S PERSPECTIVE L Project Identity 1 2. Background 1 3. Project Objectives and Desciption 2 4. Project Design and Organization 3 5. Project Implemeon 4 6. Project 7 7. Projet Sustnabilit9 & Bank Performance 9 9. Borrower Performance 10 10. Project Robtiousbip 10 11. Consulting Services 11 12. Project Documentation and Data 11 PART 11 PROJECT REVIEW FROM BORROWVR.S PERSPECTIVE 12 PART I: STATISTICAL INFORMATION 1. Related Bank Loans and/or Credits 14 2. Project imetable 1 3. Credit Disbursement A. Estimated and Actual Di 16 (IDA Creit) B. AnnualDibursements 17 (AU Co4lnancers) 4. Major Indicators of Project Implementation 18 5. Project Costs and Fmancng A. Project Costs 19 B. Project Fmancing 20 6. Project Result A. Dire Benefits 21 B. Economic Impact 22 C. Financ ia Impact 22 D. Studies 23 7. Status of Covenants 24 & Use of Bank Resources A. Staff Inputs 27 B. Mission 28  A.NNEXS Annex 1 Re-Estimation of the Economic and Financial Rates of Retu 29 Annex 2 Fmancial Performance of JEDB and SLSPC 54 Annex 3 Area of Old Seeding and Vegetatively Prpagted Tea 55 Annex 4 Procurement of Vehides and Factory EquipmeDt 56  - 1 - POJECCOrIWFIP ON RlEPRT SRI IANK& FOWT TaEE CROPS PROD= (Cred L Pehee L Is is the ProjectCompletion Report (MCR) for the Fth Tree Cops Project i Sri L a, for whih Credit 1562-CE in the amount of SDR 565 minai (US5S.0 million eqvalet) was approved on March 21, 1985. The original losing dafte (June 30,19I0) was eufteded twice, first by one year and then by ski months, to Decmber 31,1991, and the ed accot was keptg open for for months beyond the findl osing date. With tih last paymen made on May 27, 1992, the Credt was fully dismired. 2. Parts I and MI of dth PCR w preprd by the Agriculture Operations Division, Country Departmen A South Asia Region, and Part l by the Borrowe. ITh PCR based, IMLA a, on the Staff Apprasa Repor the Deveopment Credit Agreement; peavisio rprts betwe thk Bank and the Borrower intemal Bank memowanda interisA review documet of the Bank and co-b_sande; and field work by a PCR miss_o which viited SrA La1k in JnJuly 1992. In June 1992, the Technical Asstac Team, acing on behalf of the Dutch and Nowegian Governments, undetook a reew of the Soa Wellue compo which was taken into account in prepuing this PCR The Asian Deveopmen Bank (ADD) itnds to prep is own PC  - ili - PROJECT COMPLETION REPORT SRI LANKA FOURTH TREE CROPS PROJECT (Cret 162-CE) Evaluation Summary 1. The Fourth Tree Crops Project was the last in a series of four Bank supported operations designed to incrmese tree crops production in a context of public sector management and a policy, institutional and regulatory enviroment ciaracterized by heavy taxation and contr'Js. objetives 2. ITe main objective of the Fourth Tree Crops Project was to reverse the decline of tea, rubber and coconut productin on the pubhc sector estates which were operated by tae Janatfa Estate Development Corporation (JEDB) and Sri Lanka State Plantation Corporation (SLSPC). The project was designed to provide funds totallig US$211.8 million over a five-year period with an IDA contribution of SDR 565 million (US$55.0 million) and co-financing (Part M/5B) by the Asian Development Bank (loan equivalent to US$45.0 million), the Netherlands, Norway and the Unked Kndom (grants equivalent to US$8.0 million, US$55 milion and US$55 million, respective), and the Government of Sri Lanka (counterpart funds equivalent to US$9.8 million). The funds were provided to: improve estate productivy, manly through mvestments i field deveopment and factory rehabiitafion; strengthen the management and financal control capabilties of the two corporais; and raise the qualiy of life of estate workers through improvements in housing, as wel as healt and social welfare facilities. ImpemtatonExperie 3. Disuption from civil unest in 1988/89 contributed to extensmn of the five-year project period, initially by a year to June 1991, and therafter to December 199L The IDA credit was fully disbursed, and the credit account was closed on Apri 30, 109Q The Development Credit Agreement (DCA) and the Staff Appraisal Report (SAR) provided an apoprpate frame Aork for implementation. Comprehensive implementaton data was colcted at estate level, but the eportg formats itsed for agegtio of information by the corporations and the Investment Monitoring Board (PMB) did not full) meet requirements for monitoring progress in relation to stated project objectives (par 12.2). Project accounting and audng procedures were generally satisfactory, although submiion of required reports was frequentl,- delayed (Part 111/7). 4. Technically, the field program was stifactory, reflectig the generally good operating standards achievd by estate staff often during dicult, or dangu>cus, circumstances. However, substial larger areas of tea and rubber were replanted tan envisaged at appraisal (para 5.5), causing an escalation in counterpart funding requirements as the workers involved were part of a fisxd labor force whose employment was mandatory and for whom no other productive use was available. The original IDA disbursement percentage for field develaopment was ineased to reduce the drain on counterpart funds, and two credit reallocation; were made to support field development activities. While inadequate attention was paid by JEDB and SLSPC to insttuuoal strenghening the main problems were more fundamentaL JEDB and SlSPC were two of the largest plantation cor in the world but several factors combined to erode their corpate efficiency and financial positon. These were: (a) absence of the financial direion and corporate management sills required for enterprises of such size and complext, (b) iapropriate accounting policies and financial reportn  - iv - (c) persstent polical and buaucratic interference in management at all levels (d) inappropriate lbor and wage policies imposed on the corporadons resulting in low labor effedenc and crased operating costs; (e) ufoeseen mojor decies in mmodity prices from the exceptionally high levels used in project appraisal; and (f) excessive product taoD, ;dg a highly detrient*l ad valorem sales tax which acted as a disincentive to quality i Results 5. The project has ceed the opportunity to improe estate petfomance fom s nay creased assets. Re-estimated economic benefits from the project are consderably below apprisal estnates, mainy because of the decine in projected commodity prices and an increase in the econoc cost of productio Tea and rubber production has so far delned with the project, due to the higher than expected proportion of immature stands, which in the case of rubber w lasrely due to the need to uproot newly planted ares that were susceptible to disease, and the low tha expected emphas on yield stiulatin md slaughter tapping. Main ecoomic benefits ae expected to be raied when tees planted under the project come into beang (Annex 1). 6. Some 400,000 estate work benefited from improved housing and ;ealth care faciit Advantage was taken of exch rate mvement to expand construction of key socal welfare facilities on estates. As a result, the disparity in lving conditions and health indicators between resident estate famie and the populo at lge has contiued to be reduced (par 6.5 and Part m/4 and 6A). Sustanablty 7. The need for the istional osa af .JEDB and SISPC has been largely ovtaken by the recent (June 1992) transfer of plantation from the coporti to twey-two Govnment owned companies run under contact by pdvamte companies. Since most of the new companes are invilved in downsteam (procesing and/or marketig) actidves in tree crops industry, they have a vested interest in maintining and improvig upon the advanc gned under the project Reduco in expert taxation (which have also assited tea and rubber outside the prject) have graduall improved producer incentives and should subsantassist the new mc companies to benefit fiom project investment Labor and wage polcies and practices rem3in to be reformed. Findigs and Lesons Lernd 8. Despite the poor financal management of JEDB and SLSPC and the corporations' vuneabiliy to politaly detemined wage increases and other fators wh resulted in their eventual insolvency, the project provided a major injectoln of funds whi will help to sustai the planation industry for the medium and longer term Continued IDA associati with JEDB and SLSPC has maintained the dialogue with Government on key policy ies and facitated the eveal move towards the ivwolvement of pnvate sector management. Several major lessons may be drawn from this projee (a) As businsses tree crops plati should be managed by independent, autoanmous priate sector agen who have either ful ownership rights or long-term leases;  (b) To permi such agnt to opere efficenty, the policy, istitutiona and regWaty envonment govning the tree cops ssector should be as free as possile of export taes, polta Interference, restrictive labor pohcies and practices and marketing regulations; (C) With a complex proect involng seveal co-financiers and exeutig agncies, thee is a need to ensure a fim commitment by donos to financing specfic components and estabhlish apprvpriate implementation and monitng procedures. More frequent donor supervisian in the early stags of the pr4ject could assist this procus. (d) In dealing with commodity-based enterprises of the size and complky of JEDB/SLSPC, there is a need to apply iteratioa sandards of accointing, reportn and control over corporate finances to permit approprie management responses to be made to cbanges in financial conditions, coast of production, fiscal policy and internation market opportuniies Improved financial direction would have stengthened the corpoations ability to resist unwarranted interrence by demonstraig the consequences. (e) Investment in social welfare developmen is valuable ven in tbe contxt of a commercially based program, partiuarly in view of its contibuton towards improvements in labor attendan and fitness for work. (f) There is etive, if not quite up-to-date, tehnical knowledg avalable locally in the plantatio industry. This, togther with the qualy of tcnical support which coud have been proided by dons during supervion, should have ensured adoption of optmal field production and ploesing procedur in relation to changes in oprtg circumstances. Howver, this was not fuly achieved in pacce. (g) To maintain its comparative advantage in the tree crop sector, Sri Ianka needs to ensure that research programs reflect the existing know base and adequately address the evolving commercial requements of the intational industy and do not remain confined to investigtions of acadmic or insular interest. (g) Ipexpnse monitorin& by use of local resourcs, of the qualiy of work performed under a project, as distinct from the more readiy available physical and fisnncial data, couWd provide a valuable indicadto of stin .  PROJECT COMPLETION REORT SRI LANKA FOURTH T.XE CROPS PROJECT (CREDIT 1562-CE) PART L PROJECT REVIEW FROM BANK'S PERSPECTIVE 1. Projec IdUtty Name : Fourth Tre Cmp Pec Credit No. : L5624C RVP IJnit : South Asia Region Country : Sri anka Setor : Agri Subsector : Te Crops 2. Background 2.1 In the decade prior to appraisa in 1984, the conibution of tree crops to export eanins fell fram 87% to 47% and to GDP from 15% to 11%. The re-vitalization of the plantation sement of the tree crop industry (responsible for some 57% of Sri Lankas tea-culiated area, and 35% of rubber-culivate area) was tWeor a major goverment objective Declie was to be reversed through insttutional and polcy improvments, and the rehabilitation of the productive base in the public sector under the Janatha Estates Development Board (JEDB) and the Sri Lanka State Plantations Corporation (SLSPC)/, which had assnued respnsbit for estate operations folowing natiliza in the mid-1970s. A con&uing World Bank objectie has been to chnel resources into a sector in whic Sri lanka has a comparativ advantae in order to sabiit In the short tem, and promote sustinable export growth in the medium term. The approach has led to a sei of ivestmnt in agictre, indudig sessive projects in support of tree crops (Part M/1). T sratW has epasid: (a) rehabiitation of the exing capial base; and (b) improvd opeation and maintenance of estate asseK 2.2 The threat of atintion prior to the land reforms of 1972 had causd of estates As a result JEDB and SISPC inheaited estates i wbich ifrastructure had become ru down, tree plant and plnation manteance neglected, and sol erosion widespread. Under the oporatons, upkeep of the esttes gradually improved, albeit at a sower rate than expected mainly due to goenents adequa sctral plannig policies, oapzationa probloms in the corpatioiis themelve and imposition of excesv export taxes (especialy on tea) which acted as disincentiv to production and specificaly discowaged qual improvements. 2.3 Goverment repo for the aricul sector has been dipere among miistries without functonal aison, often pemtting co ditory decisions to be made, and polcies to be eablsd or coodnted which detracted fiom the stated dojective of reving the tree crop indusry. In I977 in collboraton with the IMP, govement intrdud a series of polcy reforms designed to liberalize the economy and allow a greater role for the private setor. Howv, investments in the tree crop sub-ector cninued to focus on the opeations of JEDB and SISPC. Until 1983, JEDB/SLSPC corporate planning had been rericted to the annu budgeig process rather than being linked to a longer-term ivestment strategy, and the tree crop sub-stor had contnued to decline or at best stgnae. With IDA asitance, the govn ment therefore formulated the / Refered to below as the corporations.  -2 - Medium Term Investment Progam (MTIP) to group five-year investment proposals for the corporations' 530 estates into regional plans for implementation by their Regional Boards, wvich were then amalgamated into JEDB and SLSPC corporate plans as the basis of a single inxestment program for plantations. The establishment of MTEP was viewed as a major, positive step in promoting improved collaboration for corporate and sub-sector policy formulatiot between t0te corporations and the Ministry of I nance and Planning 2.4 The Fourth Tree Crops Project (FTCP) was designed to provide funds during the period 1985-1990 for MTIP. FTCP 4"iding permitted estate-level and institution building investments to be substantialy increased. The equivalent o0 JS$211.8 million was to be provided through cofinancing arrangements (Part M/SB) involving IDA (SDR 56.5 million), the Asian Development Bank [ADB] (SDR 45.17 million), Government of the Netherlands (Dfl 27 million), Government of Norway (US$5.5 million), Overseas Development Administration (ODA) of the UK Government (f 5 million), Bank of Ceylo. (local funds equivalent to US$10 mEion) and the Government of Sri Lanka (local costs equivalent to US$82.8 million). 2.5 Despite MTIP and the activities of the project, athc introduction of economic policies continued to occur. The authority of both Central and Regional Management Boards of the corporato was undermned by poitical interference in day-to-day affairs, adding to difficulties ready beig experienced due to major inadequacies in corporate planing and financial direction. In addition, unanticipated increases in production costs (para 5.9) coincided with substan decreases in commodity prices, especially of tea As a result; by 1988 the corporations had become insolvent requiring major policy shifts to be considered for austaining the sub- sector, and financil support mechanisms to be installed for both corporations. 2.6 As a result of supervon mission recommendations, government has examined all aspects of the sub- sector to ident options for increasing estate productivity. Under the modified political Apeci of the present government (reflectng global di ent with the concept of a centrally planned economy) there has been a growing recognon of the need to reintroduce private sector involvemet in the plantation indusry to increase opratil efciency, inject greater dynamism and re into the sub-sector, and balt the continuous, hea drain on public resources by JEDB and SLSPC. This has led to the contracting of estate management to private companies. Wie, at this junctwe, estate ownersip remains vested in the state, twenty- two management companies have been established to run the 450 estates which are condered viable, with government overseeing the operations of these companies through its contol of the twenty-two newly establshed Boards. Initially the oporatis will only retain responsibility for about 50 -caled non-vable estates. 3. Project Objecdves and Dscption 3.1 Proj Ob The project was designed to reverse the decline of tea, rubber and coconut production through improvements in the productivity of all public aector estates, rehabilition of factories, adoption of soil conservation measures, provision of field and nursery equipmeot and procurement of v