Sri Lanka - Private Finance Development Project (PFDP)

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 11572-CE STAFF APPRAISAL REPORT SRI LANKA PRIVATE FINANCE DEVELOPHENT PROJECT (PFOP) MARCH 19, 1993 H-~~~~~~~~~~~~~~~~~~~~7 , , ._. }i , .\,l 7 2' I >; :/ \;1 . E; vi. ;it .;;, j Cotutry Operations and Industry & Finance Division Coutry Department III South Asia Region | Th document has a "retited disibti"on d may be used by recipet only in the performance of their offcici dues. Its cons may not otherwise be dislosed without Wodd Bank authzation.  CURRENCY EOUIVALENTS (As of December 1992) Sri Lanka Rupee (Rs) - 100 pai.a US$1.00 - Rs 46.0 Rs 1.00 - US$0.022 FISCAL YEAR Government of Sri Lanka January 1 to December 31 Commercial Banks January 1 to December 31 DFCC April 1 to March 31 National Development Bank January 1 to December 31  FOR OMCLFAL USE ONLY ABBREVIATIONS AND PRINCIPAL ACRONYMS ADB Asian Development Bank AWn Average Weighted Prime Rate AWDR Average Weighted Depoeit Rate BDD Banking Development Department BIS Bank for International Settlements BOC Bank of Ceylon BSD Bank Supervision Department CBOC Comercial Bank of Ceylon CBSL Central Bank of Sri Lanka CeA Central Environmental Authority CIBSL Credit Information Bureau of Sri Lanka DFCC Development Finance Corporation of Ceylon DPI Development Finance lIstitution ElA Environmental IMpact Assessment EMS Environmental ement Strategy UPF Employees' Provident Fund EPL Envirormental Protection License EPZ Export Processing Zone ETF Employees' Trust Fund FCBr Foreign Currency Banking Unit FD' Poreign Direct Investment P^L"s Foreign Investment Adviaery Service GC&C Greater Coolambo Economic Commission G9 Governrent of The Netherlands aOSL Government of Sri Lank. mNB Hatton National Bank ICASL Institute of Chartered Accountnt. of Sri Lanka ICSL Insurance Corporation of Sri Lanka IDA International Development Association MB Monetary Board HEIP Metropolitan Environmental Improvement Program MPA Ministry of Environment and Parliamentary Affairs MOF Ministry of Finance UBFISD Non-Bank Financial Institutions Supervision Department NDB National Development Bank of Sri Lanka UESC National Environmental Steering Coamittee NGO Non-Covernment Organizations NIC Newly Industrialized Country JSs National Savings Bank PB People's Bank PCAP Pollution Control and Abatement Fund PCT Participating Credit Institution PnlE Public Manufacturing Enterprlses This documant has a restricted distribution and may be used by recipients only in the perform 0nce of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  MEMAC Public Manufacturing Intevpites Adjustment Credit RRDB Regional Rural Development Banks $CB State-owned Commercial Bank SCOPE Sheme for Control of Pollution frcom Xisting Industries gMI Small and Medium Industry 5HIB State Mortgage and lawvetment Bsak SO Statement of Expe.se TA Technical Assistance TAP Technical Assistance Fund TOR Tenm of Reference UDA Urban Development Act UNDP United Natiane Development Program USAID United States Agency for International Development J ,t  STTF cm Credit and Project Sumary . . . . . . . . . . . . . . . . . . . . . . 1-1it I- TBRIOLISR * o*ooooo ... * ** l a .1 A. Recent lconDOic Performance * . . .0.6.6. 1 Grloth P.rforIaNc *...... . .I. .0. .. . 1 iscal Deficit 0 . 000.01 Inflation 0 0 0**0** *** * * 0 2 Ezternal Sctor Developamet. . . . . . . . . . . . . . 2 Export . 0 * 0 . 0 . . 2 Izteral Aid 00000 00 D.velopmet of Infretructure . . . . . . . . . . . . . . . 3 Efforts for Poverty Reduction *. . a * * . . * . . . . * 3 S. Towards Macroeconomic Stabity . .0 0 0 0 0 0 . 0. 0. 0. 4 C. Tatrd. a Private Sector-Led Opn Economy . . . . . . . . . . S D. IDAStrategy nd Ratioale for Ivolv.met . . . . . . 6 Thaed PropaedPmect . Role of IC andG 0 00 0 0 08 it. 9Z INDUSTAL SECTOR 9 II . F A 0 0 0 0 1 0 0 A. Overviw and Policy lraem ork . . . . . . . . . . .1 S. Pinancial sector luoas 13o o oo oo .13 Dometic Rleource )hbilizatio for Tesm Lending 13 Contractual Svwing. Institutions * . * . . . . . . 14 Goveriment'. Role In the inancial Sector . . . . . . . . . 17 Developmeat Fla nce Coepant . . . . . . . . . . . . . . . . 17 State-Owned Commercial Sauk*. . * . . . . . . . . . . i .s Debt Recovery Legielation . . . . . . . . . . . . . . . . 20 Accounting nd Audit Standard. ad Euore m nt . 20 Bankig Supervi.ion * 0 0 0 0 0 * * ... *21 This report vas prepared by Messre. V. Rohil Nefees end Rakesh Engia (SLSCI) following an appral,al isieion to Sri Laka to December 1992. This report ba. be w *ndorsed by Kosoer. Isenuan (Director, SA3DR), Pefalver (Chbif, SAUCI) and Wormser (Unit Chlef, Industry and Finance Unit, SA3C) * Per Reviaw guidance ba. been provided by Mr. David Grove (S&1DR) and Kb. Mar1l1u Uy (CaWR)  -2'- IV. IHE PROJECT. . . . . . . . . . . . . . . . . . . . . . * . . . .23 A. ObjectiveT . . . . . . . . . . . . . . . . . . . . . . . . . . 23 D.roecDescr..t........................3 A. Tems and Condition. , . . . . . . . . . . . . . . . . . . . . 26 Aumont and Maturity ..... . . . . . . . . . . . . . . 26 Interest Rate . . . . . . . . . . . . . . . . . . . . . .26 Subproject Financing Criteria . . . . . . . . . . . . . .27 Subloan Sie, Free Lmits nd UDReview ...... . 27 Terms for On-lending by the GSL to the PCIs . . . . . . .27 Terms of Repayment by the PCIs to the GOSL . . . . . . . .28 B. Adm istration of the Credit ............. . . . .28 Administrative Unit and its Structure . . . . . . . . . . . 28 Functions . . . . . . . . . .. . . . . . . . . . . . . . . 28 Existing Arrangements . . . . . . . . . . . . . . . . . . 29 C. Participating Credit Institutions (PCI.) . . . . . . . . . . . 29 P=oteutial PCIs ...................................29 Eligibility Criteria for the PCIs . . . . . . . . . . . . . 29 Evaluation of the PCIs . ......... . . . . . . . .30 Commercial Bank of Ceylon . . . . . . . . .. . . . .. . . . 30 Hatton National Bank .. . ..... . .. .. .. . 31 Sampath Bank Limited . .................. 3 2 Seylan Bank Limited . . . . . . . . . . . ........ . 32 D. Environmental Considerations . . . . . . . . . .. . . . . . . .34 Environeatal Factors and Compliance Requirements . . . . . 34 Administration of the Pollutiori Control and Abatemnt Fund. 34 3* Teebhical Assistance Component . . . . . . . . . . . . . . . .34 Institutional and Policy Developm t . . . . . . . . . . . 35 Domestic Resource Mobilization for Term Lending. . . . 35 Financial Sector Reform sad Restructuring of State-Owned Commercial Banks . . . . . . . . . . .35 Accounting and Auditing . .............. . 35 Financial Intermediation . . . . . . . . . . . . . . . . . 35 Assistane to the PCTa . . . ........... . 35 F * Procurement .. .. .a . .o. . .... . 36 G. Disbursements .. .. . . ... . .. . . . . . . . . . . . .36 R. Project Monltoring, Reporting and Audlting . . . . . . . . . . 37 VI.* PRWJECT B34TS AND RISM . . . . . . . . . . . . . . . . . . . 38 VII. AGREEMENTS REACHED AND OECOMMENDATION . . . . . . . . . . . . . . 39  -3- 1. Disbursement Schedule . 42 2. The Government of Sri Lanka'o Statement of Financial Sector Policy . . . 43 3. Interest Rate Structure (December 1986-December 1992) . . .49 4. Bligibilitv Criteria for PCIos . . . a . . . . . . . . . . .50 5. Administrative Unit - Structure and Terms of Reference . . . 52 6. Kvaluation of the PCIs . . . . . . * . . . . . . . . . . . .56 7. Reostructuring of State-Owned Commercial Banks . . . . . . .66 8. Composition of the Financial and Banking Institutions . . .72 9. Envirommental Concerns . . . . . . . . . . . . . . . . . 73 10. Technical Assistance . ................... 85 11. Terms of Reference for the Formation of Investment Policy and Operating Guidelines for the Management of Investment Portfolio for Contractual Savings Institutions . . . * . .91 12. The Bank Group's Intermediary Operations . . . . . . . . . . 94 13. Terms of Reference for the Modernization of Sri Lanka's Treasury Securities Market . .. * .. . .. . . . . . .. . .97 14. Supervision Plan ..................... . 103 15. Selected Documents and Data Available: Project File . . .105  Credi and Projet Sir DbgTC"-Xt Democratic Socialist Republic of Sri Lanka. 2en*giahagLg:s Development finance institutions (DIs.) and domestic