Sri Lanka - Dairy Development Project

FILE COPY DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1475-CE REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF SRI LANKA FOR A DAIRY DEVELOPMENT PROJECT June 19, 1974 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS Currency Unit - Sri Lanka Rupee (R) A. Official rate as of December 31, 1973: US$1 E Rs 6.74 R 1 - US$0.15 Rs 1,000 e US$148.37 Rs 1,000,000 - US$148,368 B. FEEC rate used in Appraisal Report and this Report:* US$1 Rs 10 R 1 US$0.10 Rs 1,000 - US$100 Rs 1,000,000 US$100,000 FISCAL YEAR .January 1 - December 31 *The Foreign Exchange Entitlement Certificate (FEEC) rate, applicable to most non-food imports, is the official rate plus 65X. Since the major items to be imported under the proposed project are subject to the FEEC scheme, the exchange rate used in the Appraisal Report and this report is US$1 = Rs 10, which is the approximate average FEEC rate prevailing between June 1972 and the time of project appraisal.  INTERNATIONAL DEVELOPMENT ASSOCIATION' REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF SRI LANKA FOR A DAIRY DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Republic of Sri Lanka for the equivalent of US$9.0 million on standard IDA terms to help finance a project for dairy development. The major part of the proceeds of the credit ($5.5 million) would be relent to the Bank of Ceylon and People's Bank for 12 years including three years of grace with interest at 6% per annum, for subsequent relending to dairy farmers at 10% p.a. and cooperatives and the National Milk Board at 8% p.a. for 10-12 years including three years of grace. PART I - THE ECONOMY 2. The latest economic report entitled "Recent Economic Developments and Current Prospects for Sri Lanka" (Report No. 407-CE) was distributed to the Executive Directors on April 22, 1974. The principal findings and conclusions of that report are summarized below. Country data are provided in Annex I. 3. Development of the economy of Sri Lanka since the 1950s has been heavily influenced by two basic characteristics of the country's economic and social system. First, the specialization of production in three export crops - tea, rubber and coconuts - and, second, a political commitment to the welfare state - the supply of consumption goods at low prices and provision of public services free of charge or below cost - made possible by the earnings derived from the export sector. Even if the best of circumstances had prevailed, it would have been increasingly difficult for the export sector to generate the foreign exchange resources and government revenues required to extend the benefits of the government social policy to a population which nearly doubled in 25 years. As it was, Sri Lanka experienced a pronounced weakening in the market for two of its major exports: between the mid-1950s and 1972, the price of rubber declined by one-half and the price of tea declined by one-third. 4. The country has only begun to adjust its economic structure to this adverse movement. Alternative sources of export earnings have not been developed fast enough, nor has adequate domestic production been developed to replace imports, especially basic foodstuffs. As a result the economv suffered an increasingly serious shortage of foreign exchange, while public finances became more and more dominated by the weight of transfer expenditures, especially food subsidies.  - 2 - 5. These adverse trends led to a reconsideration of the policy of subsidizing Food consumption in October 1973. The -principle of public responsibilitv for a basic food supply for all was retained, but the balatnce of the system was shifted in favor of supplying foodstuffs ifn a manner which sharply reduced the element of subsidy: the free rice ration was halved and the wheat and sugar rations were also reduced and their prices substan- tially increased. The government also declared its intention to pass most of thn cost increases resulting mainly from new petrol&um prices to the con- sumer in the form of higher prices. This has already been translated into sharp inereases - ranging from 50% to 100% - in ous a-ad rain fare.i and freight rates. As a result of decreased food subsidies and current trans- fers to public corporations, the budgaet is expected to show a modest current account surplus (about 1% of GNP). At the same time, steps were taken to start a natiornal drive to increase domestic food supplies and the guaranteed procurement price for rice was raised significantly. l'Tese nieasures indicate a policy change in the right direction. They are achieving a painful but unavoidable cut in consumption, so that some public saving-4s can be generated and the balance of payments kept under control. 6. The Government must be given credit for its actions, both to cope with the current economic situation as well as to maKe a begInni-ng on the underlyinig problems of depressed levels of output and exports through the provision of price and other incentives. At the present tIme the expansion of output and ernployment is constrained by the severe foreign exchange shortage. There are idle resources which could be quickly put to work if additional foreign exchange were made available. Expansion of domestic agricultural output leading to a reduction in food imflPorts appears to be the most promising method of conserving foreign exchange resources. Every effort should therefore be made to ensure that export promotion and import substitution receive the highest priority. 7. However, additional foreigri exchange will not, by itself allow for a sustainled increase in production without increased savings and invest- ment, both public and private, and without attention to the other problems faced bv the economy. These include a distorted price structure and the maintenance of highl real wages, leadnr,g to high consumption levels and low employment growth, The recent measures amount to a substantial effort to compress consumption, although it is not yet certain that thev will prove to be adequate. Moreover these measures will need to be supplemented by policies which would encourage long-term growth of production. 8. The provisional national income estimates show an increase in the real GDP oF about 3% in 1973, after having stagnated for two years. The first results of the food drive showed up in increases in the output of subsidiary crops, fruits, vegetables and livestock; there were also modest increases in manufacturing, construction and other serviJces. The biggest relative increase occurred in mining, largely as a result of the reorganization of the industry by the Gem Corporation, and special incentives to ensure that gems are exported legally. Present expectations are that output will also increase in 1974, and that the output increase will be concentrated in  - 3 - the agricultural sector. This assumes that the food drive will yield a marked increase in the output of subsidiary crops and that the improved framework for agricultural planning and support at the local level will begin to show results. 9. Shortages of fertilizer, and the higher costs of oil will certainly affect the plantation products - tea, coconut and rubber - and reduce the benefits of the various subsidies and other assistance given these indust-ries. The prospects for rubber are good, however, given buoyant world prices, which are expected to remain at current high levels for some time. Tea exports may also;increase slightly, although longer term prospects depend on world demand and rehabilitation of the industry. Coconut production has suffered badly from the combined effects of drought, disease and inappropriate pricing pol- icies, and will take time to recover. Rice production in 1973 suffered from drought conditions in the main producing areas of the country dependent upon water storage and irrigation so that rice production was 6% lower than the record 1970 crop. Production will remain unstable until the north central areas can be served by permanent water supplies and a rehabilitated irrigation system. However, the prospects for 1974 are for a larger crop than in 1973. 10. The experience of industry was mixed in 1973, with output and employment limited chiefly for lack of imported raw materials and inter- mediate products. Imports of this kind have been severely reduced and many industries now have large margins of underutilized capacity. An export promotion drive has now begun which, if coupled with a clearer definition of the role of the private sector and a more positive attitude towards foreign capital, could well lay the basis for a more export-oriented growth strategy. This would not be inconsistent with a continued drive to increase food output and reduce food imports. 11. rhe growth of the economy has been insufficient to absorb the growing Labor force and unemployment has become a serious problem. Over 10% of the labor force is unemployed and actively seeking work, and up to 90% of the unemployed are in the 15-24 age group and educated. The present lack of expansion of industrial employment means that the greater part of the labor force must be absorbed in agriculture. 12. Sri Lanka has been noted for its attention to social objectives. The distribution of income and wealth has been made more equal - the lowest 70% of the population is estimated to have received 41% of total income in 1973, against 33% in 1963. Past efforts to alleviate poverty by subsidizing consumption of commodities and public services are being reconsidered (para 5); but other initiatives are now beginning to receive increased attention. In agriculture, whiere the smallholder predominates, the pursuit of social ob- jectives through rural development is fully consistent with longer-run eco- nomic growth, provided that prices and other incentives promote the right allocation of resources. Similarly an expansion of industry on the basis on exports will help reduce unemployment, the most pressing social problem. 13. An increasing pragmatism is now evident in the application of egalitarian policies. The cut in the food subsidies necessarily involved a fall in the real incomes of the poorer groups, and could not be effective  - 4 - unless such a fall occurred. Tha Land Reform Law and maximum personal income legislation have been tempered to some exteat to mitigate the effects on incentives. These examples illustrate the manner in which a realistic approach to the combination of economic and social objectives is being sought. 14. The current account deficit in the balance of payments for 1973 was $38 miilli-iv, about the same as in 1972. While rne value oG- exports rose in 1973 by about 20%, total payment for imports i-ncreased by 13%. *csever, this was af,er -imports had been held down by strict controls, The sharply rising cost of imports is the immediate cause of the contin-ued deteriora- tion in Sri Lanka's terms of trade. In 1974 total foz2;eign exchange receipts may increase by 45% and import payments by 70%. Th-e currenat account deficit in 1974 could amount to around $185 millioni. Net foreign exchange reserves by end 1973, however, were estimated at less than $5 raillion. Thus, Sri Lanka must, in effect, rely on the Aid Group and other foreign sources to finance almost the entire deficit. 15. An Aid Group for Sri Lanka, for which the Bank acts as the Chair- man, was formed in 1965 and has held ten meetings. At the tenth meeting in Mav 1974, the participants recognized that the grave economic problems confronting Sri Lanka had been further aggravated by difficult balance of payments problems and very unfavorable movements in the terms of trade. The appropriateness of the measures whicn Government had recently taken was also recognized. From indications expressed at the meeting, it appears like::y that assistance by members of the Aid Group, incltuding IDA and the Asian Development Bank, over the coming year will amoufnt to about $i63 mil- lion. It is not yet possible to estimate, however, how imuch of these com- mitments will actually be disbursed in the next 12 months. 16. The total external public debt outstanding as of December 30, 1973, was $712 million, including an undisbursed balance or $228 million. The average terms and conditions of these loans have improved over the past five years and the grant element on all loans taken together is about 51%. Service payments on existing debt amounted to $71 million in 1973, or about 16% of export earnings. Assuming that debt will continue to be incurred on favorable terms and that prices for Sri. Lanka's major exports will increase as forecast, it is expected that the debt serv4ce ratio will decline to below 10% by 1978. These figures do not include short-term debt outstand- ing, which amounted to $121 million in 1973. 17. in the event that disbursements are insufficient or it is not possible to finance the wrhole deficit on reasonable terms, imports will have to be cut further. Cuts in imports of fertilizers and industrial raw materials would be the least desirable. The very difficult balance of payments situation points to the need for increased, quick disbursing external aid on highly concessional terms. Also, until the economy is capable of generating a level of domestic savings commaensurate with in- vestment needs, external financing will be required for a portion of local costs.  - 5 - PART II - BANK GROtP OPERATIONS IN SRI LANKA 18. Since the beginning of its operations in Sri Lanka in 1954, the Bank Group has made seven loans totalling $73.5 million and five credits totalling $.5.6 million (net of cancellations) in support of 11 projects. Over 90,% of Bank Group assistance has been for power and irrigation, and the remainder for DFC onerations, land reclamation and highways. Three early power projects and the first DFC project were satisfactorily com- pleted and the loans fully disbursed by 1970. A credit for highways was cancelled in 1970, after disbursement of $0.6 million, at the request of the Borrower following Government's decision to make major changes in the scope of the project. The remaining seven loans and credits have all been made since 1968. Implementation of ongoing projects has suffered delays, due in large part to the civil disturbances of 1971, but is proceeding satisfactorily at this time. IFC's only investment in Sri Lanka, $3.25 million in Pearl Textile Mills, Ltd. (Ceylon), was made in January 1970 but cancelled the same year at the request of the Company. Annex II con- tains a summary statement of Bank Group operations as of May 31, 1974 and notes on the execution of ongoing projects. 19. The Bank Group's strategy is designed to help alleviate the for- eign exchange constraint by supporting measures to increase agricultural output, both for import substitution and export expansion, and to help stimulate industrial production and investment. In the immediate future, program lending would be justified to finance imports of essential indus- trial and agricultural production inputs. A credit for this purpose is being prepared for consideration by the Executive Directors in the first quarter of FY75. On the assumption that satisfactory progress in economic management is made, a second program credit in the second half of FY75 is envisaged for similar purposes. A sector credit for agriculture is under consideration for FY76. Project lending will also continue. A third proj- ect for the Development Finance Corporation of Ceylon for the financing of industrial and tourism sub-projects is scheduled for presentation to the Executive Directors in the first half of FY75. A project for irrigation rehabilitation is being prepared with the assistance of the FAO/IBRD Cooper- ative Programme and is tentatively scheduled for presentation in early FY76. The Bank Group has also under consideration for FY76 an integrated coconut production and rehabilitation project. 20. The Bank Group presently accounts for about 10% (and the Bank alone for about 7%) of Sri Lanka's total external debt outstanding and about 8% (with IDA negligible) of debt service. In three years the Bank Group's share in total external debt is projected to rise to about 12% (and the Bank's share alone to fall to less than 6%), while the Bank and IDA shares in the debt service will remain at their current levels.  - 6 - PART IMI - AGRICULTURE IN SRI TLAYKA 21. Agriculture is the dominant sector in the economy and accounts for one-third of GDP, almost 80% of export earnings and 50% of total employment. Sri Lanka's patterns of agr'cultural production are extremely diverse, re- flecting varied climatic and topographic conditions. The Wet ZonIe (i.e., the highlands and southwestern region) receive both monsoons 'The annual rainfall varies from 75 to 200 inaches. This Zone covers 25% of the island and contains two-th'.rds of the area under 7ermanent agriculture. 'The Dry Zone, the northern and eastern 75% of the :Island, receives 35-75 inchles of rainfall mostly during the four-month Novet.ber-February period. Rainfed crop growth is severely limited during most of the other months. 22. Of a total land area of 16 million acres, only one-fourth is under permanent agriculture; most of the remainder is forest or bush, natural grassland and scrub. Tree crops, mostly tea, rubber and coconut, are grown on both estates and smallholdings and cover nearly 60% of the permanent: cul- tivated area. Rice accounts for 30% of the cultivated area and, along with a great diversity of other crops as well as livestock, is produced mainly on peasant smallholdings. Farm sizes are generally small: of nearly ?.2 million total land holdings at the 1962 Census, only about 6,000 were larger than the 50 acre maximum subsequently imposed by 1972 land reform legisla- tion and 85% were smaller than 5 acres. 23. One of the major development problems facing Sri Lanka is the slow growth of the agricultural sector. Over the past five years, growth of the sector was only about 1% per annum, less than half the rate of growth of population. Export earnings from the three major crops - tea, rubber and coconuts - have declined sharply from $376 million in 1965 to $295 million in 1973. Food imports have, in the last few years, soared from about $160 million to $215 million in 1973, absorbing over 50% of all foreign exchange earnings. In 1973 the country imported over a fourth of its rice and close to half of its dairy requirements and nearly all of its requiremeuts in sugar and cotton. Chief causes of the poor growth of the agricultural sector have been inadequate pricing, taxation and subsidy policies, aiid lack of public investments in required infrastructure develop- ment, compounded by droughts and worsening terms of trade for Sri Lanka's traditional exports. 24. Faced with a sharp decline in agricultural export earnings and increasing outlays for food imports, the Government is focusing more atten- tion on the agricultural sector in its current five-year plan and also launched an intensive food drive in mid-1973. The efforts are aimed at both export expansion and import substitution programs and particularly at increasing domestic production of rice and other vital food crops. The Government is reviewing its pricing policies with a view to removing re- straints on oroduction. Other positive steps already taken include the introduction of land reform and productivity acts, expansion of farmer credit facilities, improved extension services, and incentives to diversify production. The Bank Group is alreadv assisting Government efforts in rice  - 7 - production through irrigation projects and with the proposed project would now provide assistance for the development of the lagging dairy sector. 25. Livestock accounts for only about 7% of the gross value of agri- cultural output. Cattle and buffaloes, numbering 1.6 and 0.7 million re- spectively, are the most important farm animals. Most herds are very small and kept primarily for draught and milk on smallholdings throughout the island. In 1972 the livestock sector produced about 90 million lbs of beef, 20 million lbs of other meat (mutton, pork and poultry), and 225 million pints of milk. Consumption of livestock products is low, averaging about 7 lbs of beef, 1.5 lbs of other meat and about 29 pints of milk per capita in 1972. Including eggs, all livestock products combined account for only 6% of all food protein consumed. 26. Marketed domestic milk production amounted to about 225 million pints in 1972 and was supplemented by imports of dried milk equivalent to 160 million pints at a foreign exchange cost of almost $8 million. About 75% of the domestically produced milk is marketed locally either directly by the predominantly smallholder producers or more commonly through middle- men. The remaining 25% and all of the imported milk products are sold through the Government-owned National Milk Board (NMB). NMB, which processes and markets mostly in the larger population areas, purchases milk almost ex- clusively from cooperatives which collect milk from farmers and deliver it to NMB collection centers. Until May 1973, when the procurement price paid to farmers was increased by 50%, NMB had great difficulty in obtaining regu- lar supplies. Today more farmers are selling regularly to NMB, but many potential suppliers are unable to do so because of inadequate collection facilities. However, 20 new collection centers are scheduled to open in 1974 which should further improve NMB's supply position. Processing capacity of NMB's five plants is seriously underutilized at this time; they could handle nearly six times the quantity of milk collected in 1972. NMB's prices are rigidly controlled by the Government. When NMB's price to farmers was increased in 1973, consumer prices on NIMB milk products were also in- creased but prices of major products were rolled back shortly thereafter, due to public protests, to levels below NMB's costs. Therefore, while NMB is a key organization to the development of the dairy industry, it is oper- ating at substantial losses and is in need of remedial measures (para. 38). 27. In its current five-year plan the Government is giving high prior- ity to development of the country's livestock potential, particularly to year-round dairy production in the Wet Zone. Emphasis is being placed on the introduction of improved pastures, provision of input subsidies, use of higher productivity dairy cattle and improved farmer credit and technical services, together with product prices aimed at stimulating dairy production. This program would increase domestic milk production and save foreign ex- change now being expended on milk imports, as well as help diversify production out of uneconomic tea and rubber production. The program was endorsed by the Bank's last agricultural sector survey mission, whose report No. PA-134a was distributed to the Executive Directors on February 8, 1973, and the proposed project would assist the Government in its implementation.  - 8 - PART IV - THIE PROJECT 28. The main components of the project were identified by the Bank's agricultural sector mission in October 1971 and the protect was subsequently prepared by the Government, with assistance from an FAO/IBPD Cooperative Programme mission in January/February 1973. The project was appraised in June/July 1973. Consultation with the Government regarding dairy pricing and other policy matters were undertaken follow-ing the field appraisal. A report entitled "Appraisal of the Sri Lanka Dairy Development Project" (No. 427-CE) is being circulated separately to the Executive Di- rectors. A credit and project summary is attached as Annex III. 29. At negotiations, held in Washington in May 1974, the Government of Sri Lanka was represented by a delegation led by Mr. S. Veiayurtham, Deputy Director for External Resources, Ministry of Planning and Economiic Affairs. Project Description 30. The purpose of the proposed project, the Bank Group's first in Sri Lanka's dairy sector, is to expand domestic milk production as well as to improve the institutional, technical and financial. basis for dairy devel- opment. The project components are: (a) credit and technical services for on-farm development in the Wet Zone, including purchase of livestock; (b) credit to NMB for expansion and improvement of milk collection and transport services; (c) credit to cooperatives for facilitles to house milk collection equipment; (d) establishment of pilot units for demonstration of communal calf-rearing and for improving dairy productivity in the Dry Zone; and (e) establishment of a Project Technical Unit, including provision of technical assistance for management support and training. 31. Credit and technical services would be provided to selected farmers in the Coconut Triangle and Mid-Country for development of about 1,800 small (5-10 acres) and 600 larger (40-50 acres) dairy farms, totalling about 42,000 acres of which about 14,000 acres are presently under marginal tea and rubber production. An essential feature of the project would be the use of improved dairy cattle to increase herd sizes and production. Credit would therefore be provided for the purchase of about 10,400 local and 3,200 imported high- producing heifers. Credit would also be provided for land clearing, pasture establishment, buildings, fences, water supply and smnall dairy equipment. Technical services would be provided by the Project Technical Unit to farmers to assist them in drawing up and implementing their development programs. 32. Milk collection and transport services of the National Milk Board (NMB) need expansion and improvement to adequately serve the project areas. Credit would therefore be provided for NNB to purchase storage tanks and chilling equipment for about 70 new collection centers, as well as for two mobile testing units and about 15 bulk tank trucks. The collection centers would be located at existing or planned Multipurpose Cooperative Societies (MPCS) and Dairy Cooperative Societies (DCS), to whom credit would be pro- vided for construction or improvement of buildings to house the milk collection  equipment. Specifications for the centers and transport routes would be based on a comprehensive collection/transport study to be undertaken by consultants to NMB (Section 3.04 of the Development Credit Agreement (DCA)), expected to be financed by the Commonwealth Fund for Technical Cooperation. 33. A pilot unit wcould be established to demonstrate systems of com- munal calf rearing to help reduce the present high rate of calf mortality in Sri Lanka. The unit wrould have a capacity of 500 heifer calves per year, to be purchased soon after birth from dairy farmers and re-sold prior to first calving. Finance would be provided for buildings, equipment and ini- tial operating expenses. The unit would be financially self-sustaining after the second year. Detailed planning would be a first responsibility of the calf rearing specialist to be employed (Section 3.06(d) of the DCA). 34. The pilot operation in the Dry Zone would test the feasibility of increasing the low cattle carrying capacity under traditional Dry Zone land use by developing a ley farming system in which feed grains and pulses would be rotated with grass and legume pasture for the production of draught animals and milk. The unit, under the direction of the tropical crops and pasture specialist to be employed (Section 3.06(d) of the DCA), would utilize Government land and cattle for experimentation. Finance would be provided for buildings, land clearing and levelling, and establishment costs. Administration and Execution 35. Responsibility for overall coordination of project implementation would be vested in a Project Committee under the chairmanship of the Ministry of Planning and Economic Affairs and with representatives of the Ministries of Agriculture and Finance, NMB and the participating banks and cooperatives (Section 3.05 of the DCA). Day-to-day execution of the on-farm development, livestock procurement and technical services components, including pilot operations, would be the responsibility of a Project Technical Unit (PTU), to be established in the Animal Production and Health Division (APHD) of the Ministry of Agriculture. The PTU would be headed by a full-time Proj- ect Director and staffed Largely from members of APHD with experience in dairy development. The Project Director would be supported by three inter- nationally recruited experts in dairy farm development, crops and pastures and calf rearing. (Section 3.06 of the DCA.) In addition to providing technical support and directing the pilot operations, these experts would also conduct in-service training of PTU staff. Responsibility for execution of the milk collection and transport component of the project would lie with NMB and be coordinated wit:h on-farm development through the Project Committee. The project would be executed over a period of 5 years. Financin and RelenS!LA 36. Total project cost is estimated at $12.7 million equivalent, con- sisting of foreign costs of $5.5 million and local costs of $7.2 million. The proposed IDA credit of $9.0 million would finance the full foreign ex- change component and $3.5 million of local currency costs, or 70% of total project cost. Local currency financing would be justified in view of  - 10 - Government's limited resources (para.17). Government would contribute about $1.4 million equivalent tcward local costs, the participating banks about $1.5 million and the participating farmers the remaining $0.9 aillion. 1/ 37. Government would establish a project account with the Central Bank through which the proceeds of the credit would be channeled (Section 3002(a) (i) of the DCA). The major part of the credit ($5.5 million) would be for on-farm development and milk collection and transport investments and would be relent by Government to two participating banks -- Bank of Ceylon and People's Bank -- at 6% for 12 years including a 3-year grace period. Both banks would relend to farmers at 10% for 12 years including a 3-year grace period (Bank of Ceylon directly to farmers, People's Bank to its affiliated Cooperative Rural Banks (CRBs) at 7-1/2% for 12 years, including a 3-year grace period, for relending to farmers). In addition, Bank of Ceylon would relend to NMB at 8% for 10 years and People's Bank would relend to MPCS and DCS at 8% for 12 years, both including a 3-year grace period (Section 3.02(a) (ii) of the DCA). Government has agreed to ensure the establishment of suf- ficient Bank of Ceylon branches and CRBs in the project area (Section 4.06 of the DCA). The relending terms are consistent with prevailing rates for similar loans in Sri Lanka and appear adequate at present in light of the fact that inflation in most recent years has been held to moderate levels. However, to ensure that lending rates remain adequate it has been agreed with Government that the interest rates may be increased to reflect future increases in the rates charged by banking institutions in Sri Lanka on loans for agricultural purposes (Para. II.B of Schedule 4 to the DCA). The remain- der of the IDA credit ($3.5 million) would be for importad livestock, tech- nical assistance, pilot operations and expenditures of the PTU for imple- menting the project and would be disbursed through the Ministry of Agricul- ture. Financial Position of NMB and Milk Pr,icing 38. Strengthening of NMB's financial position and provision of adequate incentives to dairy farmers are essential to effective project implementation and development of the dairy sector. Government has agreed to take all meas- ures necessary to ensure the financial viability of NMR and to enable NMB to realize, by the end of its fiscal year 1977 onwards, a rate of return of 8% on total capital employed (Section 4.01(b) of the DCA). To assist in this regard, NMB will employ a finance manager whose appointment is a condition of credit effectiveness (Sections 4.07 and 6.01(f) of the DCA). Government has also agreed to keep milk procurement prices continually under review and adjust prices whenever necessary to ensure that production incentives for dairy farmers are maintained, and to consult regularly with IDA on the suit- ability of these incentives (Section 4.01(a) of the DCA). 1/ The exchange rate used in the Appraisal Report and this report is US$1 = Rs 10, the approximate Foreign Exchange Entitlement Certifi- cates (FEEC) rate prevailing at the time of appraisal last year (see inside cover). Calculated at the present FEEC rate, US$1 - Rs 11.5, the local costs expressed in dollars are about 15% lower.  Procurement and Disbursemnent 39. International competitive bidding in accordance with IDA guide- lines would be used for procurement of milk storage and transport equipment and mobile testing units to be imported by NMB, valued at about $0.6 million c.i.f. Heifers valued al: about $1.4 million c.i.f. would be imported from selected countries free lrom foot and mouth disease in accordance with pro- cedures acceptable to IDA. Since orders for vehicles would be small and piecemeal and as most ma-lor vehicle manufacturers are represented in Sri Lanka, contracts for the purchase of vehicles required by PTU and valued at about $0.1 million c.i.f. would be let on the basis of competitive bidding advertised locally. Local suppliers and contractors would be used for purchasing seeds and material for pasture planting, and for construction of collection center buildings and buildings, water supply facilities and other smiall and scatterecl works required for on-farm development. Local cattle would be procured from Government herds and also from private herds through local auctions organized by PTU. 40. The credit would be disbursed against: the c.i.f. cost of imported heifers, milk storage, collection and transport equipment and PTU vehicles; 90% of sub-loan disbursements to farmers for on-farm development investments exclusive of imported cattle; 90% of sub-loan disbursements to cooperatives for collection center buildings; 100% of the foreign exchange costs of tech- nical specialists and pilot operations; and 80% of all other PTU expenditures exclusive of vehicles. The disbursement period would be five years. Benefits and Justification 41. At full development in 1981, the project would increase annual domestic milk production by about 43 million pints (about 20% of present production), thereby reducing import requirements corresponding to annual foreign exchange savings of about $2.0 million (at current prices). Non- quantified but significartt benefits would also accrue as a result of proj- ect technical services and pilot programs encouraging sound animal husbandry and pasture development not only on project farms but also in the surrounding areas. Experience gained in financing development of small farmers under the project is expected to contribute significantly to improved and expanded credit operations throughout the dairy sector. The project would also assist the Government's efforts at diversification of marginally productive tea and rubber operations. The project would increase utilization of family labor and create employment for about 1,500 workers. The economic rate of return on the project is estimated at 15%. 42. Participating farmers are expected to benefit from substantially higher net income at full development in 1981. The 5-10 acre farmers would more than double their income to about Rs 2,400 and the larger farmers' in- come from dairying, currently marginal, would increase to a range of Rs 5,000 to Rs 9,500. The estimated financial rate of return to farmers' investment would range from 157 to 19% depending on farm size.  - i2 - PART V - LEGAL INSTRUMFENTS AND AUTHORITY 43. The draft Development Credit Agreement between the Republic of Sri Lanka and the Association, the Recommendations of the Committee provided for in Article V, Section 1(d) of the Articles of Agreement of the Associa- tion, and the text oL a draft resolution approving the proposed credit are being distributed to the Executive Directors separately. 44. Features of the draft Development Credit Agreemnent of special in- terest are referred to in paragraphs 32-38 of this Report. 45. Section 6.01 of the draft Development Credit Agreement sets out the following as additional conditions of effectiveness: (a) execution and delivery of a subsidiary loan agreement between the Borrower and the People's Bank and the Bank of Ceylon; (b) preparation of satisfactory model lending agreements between People's Bank and Bank of Ceylon and their re- spective sub-borrowers; (c) establishment of the Project Committee and the PTU and the appointment of a Project Director and Technical Director; and (d) appointment of a finance manager by NMB. 46. 1 am satisfied that the proposed .redit would comply with the Article of Agreement of the Association. PART VI - RECOMMENDATION 47. 1 recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President Attachments June 19, 1974  ANNE I Page I of 3 papea WIlITRI DATA - SRI LAN1KA AMO bm I -"4*M u~~l~1I Liam (mid-1971) ST 3 a00 Par hy of sable. Ladd Sri Taok, 00 MAR CAPIA 528 (AMIS B431S) ~,l 90 /b 1 110 210 La 30 eWk C :t. ~per Blhonacs 36 29 3 320 Iafat mod aiteath e (prthonead lieb9h)8 16 11 70 iftflon -1:111Y.114,(Por tm.-. li. b52 /f)50 I. 120-1ll'0 L.sat.ey at birth (yac.). 63 66 ~ 19 56 Li 57 Oeoaa ea~~~~~roduotiw, eats .L?i *. ~~~~~~~2.1 2. 2.9 2.8 Peiealation1 pooth raI.te 2.6 2.1 2.39 3.0 3.1 ftp.lation gro..th rat. - urban * 3.5 5/k AP s-trutr (peroani) 0-Sih .1l/l .0 42 13 43/e 15-6b 51 7? So 55 53 51 65 and ne6 r T D-nedany ratio A1 7 1.2 /.o 1.3 ~, . i.ii 7? 1.3 /I L202 ___ Irban poltion as Ioruat of total 19 sSaE 20 35 Zk 29 o%Aq faiyplann:Fuo conptorn nus1atio ( Ith-si 160' 4n. 09 207 No . ofusr (C of aaenod aoo..7- 7; . 25 7; 7otal. lIbor forn (thuocAndo) 3.500 /1 1,100, 221,000 /nr13,2(00I 3,200 I Pernatoon P'y opoeieaorioot-r 197 52 ~ ~ 71 ~ 56 70. 1 Perentge o--lployad 2/ ils. 7; _ iCOOSt 1I2091027100 ~ ~ ~ g t 5 Peroet f naionl ooo,t naoind by hina 82 0 1 / 5/ S/ P-r I ot oI ntinol Ioonrnlo I by higo-t 20% 52 t l ?..S,7' 56 / er orto atoa inoo -oand by Ioast 20 5 fr 67-t 1 t 6 Penan- f-ntional inc- none -e by Ioa::t 10% 12 a1 _ . DSSThISITION OF I14ND OWNERSHIP S rod by top1%o uor . . Iood by -nallct10O%' of Ia,oe . . HEALTh Ago NUiTRITION P. oolaIo par hy Lun ,0 bo n/ 3,690 /0 1,000 Id 9,1. 1O 1,10IcO Population per ourebog paso Sald7?n tO4,150 7? 3aPol7;r 807n Pnpnlation par boapital bad ~~~290 2tt 300 1,630, 7;b 830 7t.0330 Psr,ap T to noneI supy or I of noquiro7dtsy4/5600 /.d 102 Ia 5 /ob 62 I 91 I a Pee nplia p_tet cply, toa gas e aT: 70T 49 7.- Lb 7ThE 53 7; 19 tf of blch,anta-1 odyuc iPT1 15M 6/on. 15 7T 22 7; 2o0f Daatb rota 1-1 team /7 .. . 7 EDUJCATION AdjosisOd /0 Prbaay sobool enrollment ratio 95 69 In99 Iz 16 9 Adjostoo d scgo- nry chan-l olon ai 27' 31 7;011?~l 29 lh Teana f schooling p-oeded, firt and caoe leve 12 12 12 10 11 Vnnati-na -nro1m-t as% Iof co.- enboeI cerolLmt . 2 7_; oI6Da 0/I 3 Adult itera-y retc C 61 h.,p 05Z b67d0ok 72 89/00 Aserags o ofpron a mono (urban) 2 0/j a P.,Ientcf oopiod oootc witboot piped watsn .9 /1 7h /6 Arn...t eetity(s% of ta talP aplation) 21 /1 ia .. 20 P.ernant of rural N. poa I.a...onated to aluotrinity 7... i La Par 1000 papolation 3n 39 /n21 1.5 /g ul" Pas.t or e Swt papelhio P.;-),1.1 621 "lnrnparnoopIno(o pc)Ji If tO 100 In 229 340 l. .leaslorint noosuption P... log Par yea 1.2 1.1 0.3 - .0 /ab 3.7 ?Notes, Figr- refer either to ths latort panioda or to ea"on feaioaeta tat]ahitlr, body Ma~te, aod the1 etee ycar. Latent perioda refer in principle to ditribntbne by q adt a"a nof eatiaa1 paPalate. the ya.r. 1956-60 or 1966-70; lbs latoat ya... to prit- j6 Prtelo stahd-rds (raeqalaweets) fnr all enotrias amatbR- ciple to 1960 nod 1970. liibhd by USDA Sa-omi Raaeaorh Sereica prneda far- aboim Tb. Per Capita GoP netleaso is at nakit rni-n for aoa.n- of 60 gret nf total protal par day, ead 20 go-m of yrav otbor tlu 9! nluee by Ibe .an.... era.. an-Ialndpaero , of bioh 10 grVe aRno1d be -elma tehieantbr 972 bod SBob btSon. prtein, Toos ataoaadad a- oedat love th-n thoae of 75 /2 Aero.gr number of dn-ghter Par amm of -pyrd-oti-e gat of total pratst Me 23 grooc of animal prettei -. an age. averge for the -Id, propo...d by TAO in tha Third Wend Feud P Peproltico grneh otet or for lbs decdes endog In Sury 196t nod 1970. /7 Sogod etdiee bar auggeotad that ruda danth r-tes of hildran HeRaio of under 15 and 61 and Ivr age br-ken to ages 1 tbr-gh a may be need as A first appron-tina ideo of thbocoI in ober fore b-unbt of ageo 55 t9,cogh 66. malntrition. fAO referenr etadoda represent pbyaiolngino re-_ /8 Parostago -nlled of orrasponding poPulatdon of sabool age quiremonto for _orea -tclvty ud be-ltb, t1hC ~ 00 defined far s.ob auotry. IA 1961; lb CoePabtd by applying In tin! 1970 IIIore the g-Aneh rots of GNP/eep in real lane fre 1960 to 1970; 7Z 1921 estie.T. Par onpita GNP of $210 b-ed on reised htoatel ooot oah .Ijoldes U.2. inflation; Id 19271 ectiate; 71. Weelt aayia I 1961; /1,IW161; A' 196l.61h; /1967; / 1965-70; Ar mte - e tto f -roa, ca U.N. Smmogrupbic .Yoorbok 1971, P. 156; - /I 1963; 7o 1969; Je1971; /oRatio of population under iS5and 65 and I'llr to lt: lube- foroe; /P Dfinllon not aelThe Ua.tted are - th populatioo of I0,0D0 or more; /n nIp estimte of labor for- it ugs geop 15-59; IRDS report give a figure of 180.1 mIllion base d on tho 1971 populatioeoe..... Tb. differe.cor is Jue tn hoaogea in IRa defini tion of a worker. 1n the 1971 0I0000, persona ... Jle- fied oly Io Ito basin of tbeir solo CtiniiL.enl thia led to tbe coldsion of aenre .. na.tegorise, .uoh an hooseobe-; /c gepboYvet in agriculture use o pnrosag' of total moploynot; /t H ..e.holds; /uMetre loool I 1962; 7; Pere..t.eI in gco--cen soroealy; 1o nniding ebd-elve IQnrmo y; In 1966; Iau anlding Thnl -bnpuui; /ab 19o.-6-9; /a EoIds Leproaar.a; /ad 196-62; /a otibeht; a16-66; Entiut . boo oiden -crenge ntur-ta; /ab Iooludeaovs stude-t; -Ti Dato for -ooatic..afIootioo refer LWtnn 'a ottt..o attuln.hd to hr Mlub,try offlu...tioo only; /a 965; 7-N Poploti-n of SO yera and ove ond e o rno apodl f 1971; /nI 15 year and -rsr 7a Lnpl eurre.y; /n 06 ci e In Irnnoo, of dariliogo wit:: piped note uode cr outside; lap ITh.entage of dwellings 1T,h elnol ighting; a TOe t1ncr :,r,:::Micyvonia bucd un I, abilty to nabon a higb rate of nocncio grnth ith an adequate level of velfone, iut nubcunu suitabl byonrpi n piymakers io Sin Loo-c- Rh Juno 13, 1971  ANNEX I Page 2 of 3 ECONOMIC INDICATORS GROSS NATIONAL PRODUCT IN 1973 ANNUAL RATE OF GROWTH (%, constant 1959 prices) US $ Mln. % 1960-65 1965-70 1973 GNP at Market Prices 2324 100.0 3.9 5.0 3.5 Gross Domestic Invest. 403 17.3 -2.0 14.1 7.1 Gross National Saving .. .. -1.2 13.2 Current Account Balance - 38 1.6 Exports of Goods, NFS 427 18.3 2.3 0.8 15.0 Imports of Goods, NFS 448 19.2 -4.3 -2.0 6.4 OUTPUT, LA30R FORCE AND PRODUCTIVITY IN 1973 Value Added Labor Force 12 V.A. Per Worker US$ lnM %n (000) - US $ % of Averag Agriculture 771 33 2098 55.8 367 60 Industry 365 16 419 11.0 871 120 Services 1205 51 1307 34.2 922 150 Unallocated . Total/Average 2341 100 3824 100.0 612 100 GOVEMMENT FINANCE Central Government (Rs Mln.) % of GDP 1973 1970-72 1973 Current Receipts 3638 24.9 23.8 Current Expenditure 3640 25.8 23.8 Current Surplus - 2 1.1 - Capital Expenditures 920 7.5 6.o External Assistance (net) 244 2.3 1.6 dONEY, CREDIT AND PRICES 1966 1969 1970 1971 1972 1973 (Nov.) (Million Rs Outstanding End Period) Money and Quasi Money 2202 2301 3061 3379 3917 3979 Bank Credit to Public Sector 1769 2334 2571 2724 2900 2520 Bank Credit to Private Sector 872 1470 1617 1760 2187 2127 (Percentages or Index Numbers) Money and Quasi Money as % of GDP /3 28.5 21.4 26.0 28.3 30.5 26.0 General Price Index (1963 = 100) 103.2 119.9 127.0 130.4 138.6 154.6 Annual Percentage Changes in: General Price Index .. 5.1 5.9 2.6 6.3 16.0 Bank Credit to Public Sector .. 10.1 9.6 6.o 6.4 Bank Credit to Private Sector .. 19.0 10.0 8.8 24.0 /1 Provisional /2 Does not include unemployed who are estimated to number about 800,000 in 1973. /3 GDP at current factor cost. Not available Not applicable  ANNEX I Page 3 of 3 ECONOMIIC INDI CATORS BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1969-73) 1969 1970 1973 (US $ Kln.) US $ an. , Exports of Goods, NFS 345 362 427 Tea 179.4 _T7 Imports of Goods, NFS 456 400 448 Rubber 64.4 19.6 Resource Gap (deficit .-) *ll- -21 Coconut Products 36.4 11.2 All Other Commodities 47.6 14.5 Interest Payments (net) -18 -21 -17 Workers' Remittances - 1 - 2 - Total 327.8 100.0 Other Factor Payments (net) -12 -10 Net Transfers - - - EXTERNAL DEBT. DECfEBER 31, 1973/- Balance on Current Account -142 -71 -38 US $ Mln. Direct Foreign Investment - 3 - 1 4 Total Outstanding 712.6 Net MLT Borrowing 48 31 30 Total Outstanding & Disbursed 484.2 Disbursements (61) (50) (52) Amortization (13) (19) 22) DEBT SERVICE RATIO FOR 1973 Sub-total 30 3 % Capital Grants 8 13 13 Other Capital (net) 31 26 40 Total Outstanding & Disbursed 15.5 Other items n.e.i. 1 -14 - 3 Increase in Reserves (+) -54 14 42 Gross Reserves (end year) 63.3 67.6 117.5 Net Reserves (end year) -122.0 -107.8 4.9 2970 1972 1973 (US $ Mln.) Fuel and Related Materials Imports 23 32 46 of which: Petroleum 23 32 46 Fxports 7 11 13 of which: Petroleum 7 11 13 RATE OF EXCHANGE IBRD/IDA LENDING, DECE2BER 1973 (US $ Mln.) Through 1967 Foreign Ixchange 7ntitlement IBRD IDA Certificate (FE C) Rates us $1.00 = Rs 5.95 Outstanding & Disbursed 31.8 14.1 Rs 1.00 = US$0.21 1968 US$1.00 = Rs.8.57 (44% FEEC) Undisbursed 21.8 12.9 1969 to 1971 US$1.00 = Rs.9.22 (55% FE:EC) Outstanding incl. Undisbursed 53.6 27.0 1968-71 1972 US5$1.00 Rs.9.92 (55% F_r.C) 1973 US$1.00 = Rs.10.76(65% FEEC) US $1.OO = Rs 5.95 Rs 1.00 = US$0.17 1972 US $1.00 = Rs 6.40 Rs 1.00 = US$0.16 1973 US $1.00 = Rs 6.52 Rs 1.00 = US$0.15 /1 Repayable in foreign eurrenmies and with a maturity over one year. June 13, 1974   Page 1 THE STATUS OF BANK GROUP OPERATIONS IN SRI LANKA A. STATEMENT OF BANK LOANS AND IDA CREDITS (as at May 31, 1974) Loan or US$ Million Credit Amount (less cancellations) Number Year Borrower Purpose Bank IDA Undisbursed Four loans and one credit fully disbursed 39.5 0.6 - 121 1968 Sri Lanka Irrigation 2.0 0.8 634 1969 Development Finance Industrial Fi- 3.0 0.9 Corp. of Ceylon nance 636 1969 Ceylon Electricity Power 16.5 5.1 Board 168 1969 Sri Lanka Land Reclamation 2.5 1.2 615743 ) 1970 Sri Lanka Irrigation/Power 4 145 14.0 372 1973 Sri Lanka Power Transm. 6.0 6.0 Total 73.5 25.6 29.0 of which has been repaid 21.2 - Total now outstancling 52.3 25.6 Amount sold 3.6 of which has been repaid 3.6 - Total now held by Bank and IDA /a 52.3 25.6 Total undisbursed 20.0 9.0 29.0 /a Prior to exchange adjustment. B. STATEMENT OF IFC INVES1TMENTS (as at May 31, 1974) N o N E  ANNEX II Page 2 C. PROJECTS IN EXECUTION - Cr. No 121 - Lift Irrigation Project; US$2 millio-a of June 19, 1968; Original ClosinR Date: June 30, 1973, Revised ClosinL_Date: Dec,cber 31, 1975 Construction is about two years behilnd che appraisal schedule, but most problems causing the delay - governiment change, reorganization, insurrection in 1971, strikes in 1972 and inadequate repair faciliLies - have now been solved and little Lurther slippage is expected. In particular, problems of maintenance and repair of machinery and equipment are consider- ably reduced, since the repair shops recenitly completed are now operational. Savings from the disbursement category Lor civiL works have recently been reallocated to allow purchase of additional vehicles for irrigation and agricultural staff irn order to improve supervision and operation of the project. The project is now expected to be completed by the enad of 1974 and the credit fully disbursed and the area ftully irrigated by the revised Closing Date of December 31, 1975. Ln. No. 634 - Second Development Finance Corporat_Project; US$3 million of July 18, 1969; Ori*inal Closing Date: December 31 197 Revised Daisente: December 31, 1975 Because of the slow-down in economic activities, there were delays in committing funds and the original Closing Date of December 31, 1973 has been postponed for a second time from December 31, 1974 to December 31, 1975, to allow sufficient time for presentation of new sub-projects to the Bank and the completion of disbursement. Helped by Government's policy to encourage tourism and non-traditional exports, commitments under the Loan picked up in 1973 and were completed by last December. Loan disbursements are expected to be completed by the revised Closing Date. Ln. No. 636 - Maskeliya Oya Power Project; US$16.5 million of July 28, 1969; Original Closing Date: September 30 1973, Revised Closing Date: December 31, 1974 The first unit of 50 MW was commissioned on February 24, 1974, about 1-1/2 years later than originally estimated. The second unit is ex- pected to be commissioned in June. Delays were caused mainly by problems 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the act'ion beilg taken to remedy them. They should be read in this sense, and with tne under- standing that they do not purport to present a balanced evaluation of strengths and weaknesses ln project execution.  ANh-S:X LI Page associated with the appointment of acceptable consultants, landslides in the penstock area and various strikes in manufacturers' factories. Site work has in general been carried out satisfactorily. There may be some savings in foreign exchan,ge costs which the Ceylon Electricity Board, the beneficiary, wishes to utilize for financing the first stage of a much needed system control center. Details of the equipment required are being prepared by CEB. The original Closing Date of September 30, 1973 has been extended to December 31, 1974, but a further extension may be recuired to allow for completion of disbursements, including for retention payment for major equipment and for the contr3l center. Cr. No. 168 - Land Reclamation and Drainage Project; US$2.5 million of November 13, 1969; Closing Date: December 31, 1974 Construction is about two years behind schedule (for the same reasons as under Credit 121 above), but all necessary equipment is now on order and no further delays are anticipated. The project is expected to be completed by December 1976, which would necessitate extension of the Closing Date. Allocation of the proceeds of the credit has recently been modified to permit purchase of additional equipment and vehicles to improve engineering and agricultural supervision in the widespread project area. Ln. No. 653 and Cr. No. 174 - Mahaweli Ganga Development Project (Irrigation/Power); US$14.5 million each, both of January 30, 1970; Closing Date: June 30, 1976 The expected date of first water delivery is now one and a half years behind the appraisaL schedule and overall completion of the project is expected to be November 1975, nearly a year behind appraisal target. Delays were due mainly to foundation problems at Polgolla power house and a slow start at Bowatenna diversion dam. Construction is now progressing satisfactorily. Good prolyress has been recorded to date on agricultural extension and research in the project area. Total project costs have increased by about 10% largely as a result of rising costs for electro- mechanical equipment. Cost overruns are being met by reallocation from the Unallocated category of disbursements. The Loan and Credit are ex- pected to be fully disbursed by the Closing Date. Cr. No. 372 - Power Transmission and Distribution Project; US$6.0 million of April 18, 1973; Closing Date: December 31, 1976 Preparation for construction is proceeding satisfactorily. Bids for imported equipment and materials have been received and bid evaluation has been cleared by the Association for the award of contracts to the value of about US$5 million equivalent. Bids for remaining items are expected to be received by the Association shortly.   ANNE): III Page 1 SRI LANKA - DAIRY DEVELOPMENT PROJECT CREDIT AND PROJECT SUMMARY Borrower: Republic of Sri Lanka Beneficiaries: The major part of the credit ($5.5 million) would be relent to People's Bank (PB) and Bank of Ceylon (BC), for subsequent relending to (i) dairy farmers both directly and through the Cooperative Rural Banks (CRB's); (ii) the National Milk Board (NMB); and (iii) Multipurpose Cooperative Societies (MPCS) and Dairy Cooperative Societies (DCS). Amount: US$9.0 million Terms: Standard Relending Terms: Borrower to PB and BC at 6% for 12 years; PB to CRB's at 7-1/2% for 12 years; BC and CRB's to farmers at 10% for 12 years; BC to NMB at 8% for 10 years; and PB to MPCS and DCS at 8% for 12 years, all including three years of grace. Project Description: The purpose of the project is to increase production of milk as well as to improve the institutional, technical and financial basis for dairy development. The project components are: (a) Credit and technical services for on-farm development' of about 1,800 small (5-10 acres) and 600 larger (40-50 acres) dairy farms in the Coconut Triangle and Mid-Country of the Wet Zone, including purchase of about 10,400 local and 3,200 imported heifers; (b) Credit to NMB for supply and installation of equipment for the expansion and improvement of existing milk collection and transport serv- ices of NMB; (c) Credit to MPCS and DCS for construction or improvement of facilities to house milk col- lection equipment; (d) Establishment of pilot units to demonstrate (i) systems of communal calf-rearing, and (ii) techniques for increasing milk production in the Dry Zone; and  ANNEX III Page 2 (e) Establishment of a Project Technical Unit to help execute on-farm development and pilot operations, including technical assistance for1 management support and training. Estimated Costs: US$'000 Local Foreign Total Dairy Farm Development 2,288 1,700 3,988 Incremer.tal Working Farm Capital 450 - 450 Purchased Livestock 1,081 1,447 2,528 Milk Collection and Transport Equipment 575 553 1,128 Collection Center Buildings 92 16 108 Mlanagement, Technical Services And Pilot Units 1_252 481 1,733 Sub-Total 5,738 4,197 9,935 Contingencies Physical 294 205 499 Price 19219 13082 2,0t Sub-Total 1,513 1,287 2,800 Total Project Cost 7,251 5,484 12,735 Financing Plan: US$ Million Local Foreig Total IDA 3.52 5.48 9.00 Government 1.36 - 1.36 Local Banks 1.48 _ 1.48 Farmers 0.89 _ 0.89 Total 7.25 5.48 12.73 Estimated Disbursements: US$ Million FY75 FY76 FY77 FY78 FY79 FY80 Annual 0.5 2.3 3.0 2.0 0.9 0.3 Cumulative 0.5 2.8 5.8 7.8 8.7 9.0  AN1NEX III Page 3 Procurement Arrangements: International competitive bidding on IDA guidelines for milk storage and transport equipment and mobile testing units; heifers to be imported from selected countries free from foot and mouth disease in ac- cordance with procedures acceptable to IDA; local competitive bidding for PTU vehicles; local suppliers and contractors for collection center construction and for on-farm development supplies and construction; local cai.tle would be procured from Government herds and from private herds through local auctions. Technical Assistance: hrree specialists in tropical dairy farming, tropical crops and pastures, and calf rearing. Economic Rate of Return: 1:5% Appraisal Report: No. 427-CE of June 5, 1974   ItfI< I)UYU 8G0 81 82. FEBRUARY 1974 SRI LANKA Konkesonturfi LIVESTOCK PRODUCTION ZONES AND PROJECT AREA AGRICULTURAL ZONE 1, M 0-COUNTRY t0G5nD ~~~~~~~~~~~~~~~~~~~~~~~~~~LINES E= 1PRUJECT AREA I DRY ZONE _UPCOUNTRY I'I COCONUT TR ANGLE S OTHER WET AREAS EXISTING MILK PROCESSING CENTERS COLONBO POLOAEWELA PALLEELLE IELN-ASALEI IPOLONNARLIA GALLE ARBEWOLA MIL; COLLECTION CENTERS AND GOVERNMENT LIVESTOCK FARRS MEEPE MINUWAGODA GIRILELA . NATHANOIYA CHILAW KARUNEGALA GAMPLA DODOOANSANDA KOT-GALA ankuGl=kUIm -AMPITIYA BALANGODA RAGALLA Tloilmonnar MEEPILIMANA HAPUTALE AMPARAI - CRENEALA-I POLONNARUWA MUTLGALA AKEARAIPATTR EULIYAPITIYA HOPATALAWA -9. Mnnar | . AMOEWELA DAYAGAMA NEMW ZEALAND AAR ________ /NATIONAL ROADS DISTRICT BOUNDARIES - vunIN-ERNATIONAL ISOHYET IS INCHES oUorLya BOUNDARIES - w: < \ wrincomolee Boy o f B eT ncomale Anurmdho / n d 7 a n / i o M,tugol \ | J \ / ~~~~~~~ ~ ~~~~~Polonna 0 c e a n\ - A o~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~otc /\ Gtl oa ' , ,., ~K.ruinega/ a _Mat\cl KNegombo > ,g 7eg2 z' \ 2 tAkkaroIpoI Ne Akk.,.,rp a X1g ,_!Spto\ 7 COLOMBO N5 Eottuvil .Qansatnopura Boongod,]l \ / 71~A op .hr ....I..I. /111m11 11 11111 I .IIeII 0 /J i11/1,11 VOrIE 01111 AICIAI Nr/u O p 1oSo'.k/E V ZS \ KlutoraI P k \1:\S! Al // | '. CHINA K,L PAKISTAN) I>IBET/ ., j . SIt , ' .'IM} 7- BoX O bO t t O s I D INArho X / --< tE 0 20 40 NO 8 A,ob,an I U -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 20 50~~~~~~~~~~~~~~~~~5 19~~~~~~~~~~~~~~~y ~~~~~~~~Hombonloto 0 IS OLUVR 40 0 /n dli a n Oc ea n SRI LANKA ZIWrTe en 80'eb t