Sri Lanka - Agricultural Development Project

Report No. 911-CE FILE COPY Republic of Sri Lanka Agricultural Development Project November 5, 1975 General Agriculture Division South Asia Projects Department Not for Public Use Document of the World Bank 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,  BASIC DATA CURRENCY EQUIVALENTS AS OF JUNE 19, 1975 Parity Rate FEEC Rate US$1 = Rs 6,87 US$1 Rs 11.34 Rs 1 = US$ 0.146 Rs 1 US$ 0.088 Rs 1 = US$ 145,560 Rs 1 million = US$ 88,183 WEIGHTS AND MEASURES (British System) 1 long ton = 2,240 lb = 1.016 metric tons 1 hundred weight (cwt) = 112 lb = 50.8 kg 1 bushel (bu) = 45 lb (of paddy) 1 pint - 0.57 liters 1 acre = 0.405 hectare AREA 2 POPULATION Total: 65,610 km 13.4 million (1974) 16.2 million acres Rate of growth: 1.7% (1971-74) Cultivated land: 5 million acres DENSITY 2 POPULATION CHARACTERISTICS (1973) 20 per km Crude birth rate (per 1,000) 28 3,030 per km arable land Crude death rate (per 1,000) 8 Infant mortality (per 1,000 live births) 46 HEALTH (1973) NUTRITION (1973, per capita per day) Population per physician 3,910 Calorie supply, % of requirements 101 Population per hospital bed 320 Protein supply (gram) 45 EDUCATION (1972) NUMBER OF IHOLDINGS (1972) Adult literacy rate, % 85 Tea 118,000 Primary school enrollment, % 89 Rubber 158,000 Coconuts 295,000 Paddy & Other 944,000 Total 1,515,000 EMPLOYMENT (1973) Total labor force ('000) 4,600 % in agriculture 45 % unemployed 16 FISCAL YEAR GNP per capita January 1 - December 31 US$ 120 (1973)  GLOSSARY AND ABBREVIATIONS Maha - Northeast Monsoon, October-February Yala - Southwest Monsoon, May-September Chena - Slash and Burn Cultivation HYV - High Yielding Varieties M - Million ADB - Asian Development Bank APC - Agricultural Productivity Center CB - Central Bank CC - Cultivation Committee CDA - Coconut Development Authority CFPP - Crash Food Production Program CRI - Coconut Research Institute DA - Department of Agriculture DI - Department of Irrigation DME - Department of Machinery and Equipment FEEC - Foreign Exchange Entitlement Certificate 1/ GOSL - Government of Sri Lanka MAL - Ministry of Agriculture and Lands MIPH - Ministry of Irrigation, Power and Highways MPEA - Ministry of Planning and Economic Affairs FPI - Ministry of Plantation Industries PCC - Project Co-ordinating Committee RRI - Rubber Research Institute SLSC - Sri Lanka Sugar Corporation SLTC - Sri Lanka Tractor Corporation TCEO - Territorial Civil Engineering Organization TRI - Tea Research Institute UNDP - United Nations Development Program 11 Sri Lanka is effectively operating a two-tier exchange rate system, originally introduced after the devaluation of the Rupee in 1967. An official exchange rate is laid down by the Central Bank (currently Rs 15.60 to the I Sterling). In addition, most payments for foreign exchange pay a surcharge to purchase Foreign Exchange Entitlement Cer- tificates (FEEC's) which raises the price of foreign exchange to 65% above the official rate. With significant exceptions, sellers of for- eign exchange are also entitled to receive a 65% premium over the offi- cial rate. FEEC's iay thus be considered equivalent to a 65% ad valorem tax on imports. FEEC's are not applied to imports of foodgrains, fer- tilizers and a number of smallvt import items.   REPUBLIC OF SRI LANKA AGRICULTURAL DEVELOPMENT PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS . .............................. i-iv I. INTRODUCTION . .......................................... 1 II. BACKGROUND . ........................................... 2 A. General . .......................................... 2 B. Agriculture's Role in the Economy ..... ........... 3 C. Food Production and Consumption ..... ............. 3 D. Plantation and Export Crops . ..................... 4 E. Sugar . ............................................ 5 III. GOVERNMENT POLICY AND DEVELOPMENT OBJECTIVES .... ...... 5 IV. THE PROJECT ............................................ 9 A. Project Definition and Scope ............... ...... 9 B. Detailed Features . ............................... 10 V. COST ESTIMATES AND FINANCING .......................... 19 A. Cost Estimates . .................................. 19 B. Proposed Financing ............................... 20 C. Procurement .. .................................... 22 D. Disbursement ................. .................... 23 VI. ORGANIZATION AND MANAGEMENT . ........................... 23 VII. BENEFITS AND JUSTIFICATION ............................ 24 VIII. AGREEMENTS REACHED AND RECOMMENDATIONS ........ ....... 26 This report is based on the findings of an appraisal mission which visited Sri Lanka from April 27, 1975 through May 17, 1975. The mission was composed of Messrs. R. Ellinger, N. Krafft, J.K. Lee, L. Hoppenbrouwer (IDA), and H. Kitching (consultant). Messrs. H.T. Chang (IDA) and D. Benor also briefly assisted the mission.  ANNEXES 1. The Agricultural Sector Table 1 - Agriculture's Share of the Economy (% of Total) Table 2 - GOSL Production Targets 1975- 1977 Table 3 - Land Use in Dry and Wet Zones, 1970 Table 4 - Paddy: Acreage, Yields and Production Table 5 - Production, Imports, Total Supply and Self- Sufficiency in Food Grains Table 6 - Tea, Rubber, Coconut - Production, Exports, Acreages and Yields Table 7 - Balance of Trade on Agricultural and Other Prodlucts Tables 8a, 8b Composit-.on of Imports and Exports Table 9 - Export and Import Price Index, Terms of Trade Table 10 - Prices oi. Selected Imports and Exports 2. Support to the DepartmerLt of Agriculture Table 1 - Characteristics of Agro-Climatic Regions Table 2 - Department of Agriculture Program Expenditure 1971/72 to 1975 Table 3 - Department of Agriculture: Proposed UNDP Support Table 4 - Department of Agriculture: Investment Proposal Major Research Stations Table 5 - Department of Agriculture: Investment Proposal Agricultural Training Table 6 - Department of Agriculture: Investment Proposal Agricultural Extension Services Chart 1 - Organization of the Department of Agriculture (1973) Chart 2 - Proposed Organization of the Department of Agriaulture (1975) 3. Seed MIultiplication, Preparation and Processing Table 1 - GOSL Seed Farms, Area and Production Table 2 - GOSL Program for Variety Testing and Seed Preparation Table 3 - Standards for Paddy Seed Table 4 - Expected Ilncremental Seed Requirements, 1977 and 1980 Table 5 - Department: of Seeds and Planting Material: Investment Proposal 4. Farm Power Table 1 - Paddy Cultivation Methods by District 1971/72 Table 2 - Cultivaticn Practices with Different Farm Power Table 3 - Tractor Imports Table 4 - Projected Minimum Development Requirements Table 5 - Import Charges for Farm Tractors and Implements Table 6 - Marketing Charges for Four Wheel and Two Wheel Tractors Table 7 - hargin for Tractor Spare Parts  -3- ANNEXES Appendix I - Draft Terms of Reference: Agricultural Engineer Appendix II- Draft Terms of Reference: Agricultural Service Engineer 5. Irrigation Table 1 - Estimated Average Annual Precipitation and Runoff Table 2 - Territorial Civil Engineering Services, Machinery, Surveying Equipment and Drafting Supplies Table 3 - Department of Machinery and Equipment, Repair of Existing Machinery Table 4 - Irrigation Department, Machinery and Equipment Appendix 1 - Draft Terms of Reference for Consultant 6. Tree Crop Sector Table 1 - Ownership of Tea Land 1971 Table 2 - Number and Area of Rubber Holdings by Size Classes, 1973 Table 3 - Tea - Revenues to Producers and State Table 4 - Registration of Tea Factories Table 5 - Summary of Project Support to Tree Crop Sector Table 6 - Analysis of Estate Expenditure Appendix 1 - Draft Terms of Reference of Consultant for Tree Crop Incentive Study Appendix 2 - Terms and Conditions for Sale of Motor Bicycles to Coconut Development Authority Extension Officers 7. Tree Crop Research Appendix 1 - Tea Research Institute Appendix 2 - Rubber Research Institute Appendix 3 - Coconut Research Institute Appendix 4 - Smallholder Coconut Development Project 8. Expansion of Sugar Production Table 1 - Sugar: Production and Consumption Table 2 - Sri Lanka Sugar Corporation, Mlachinery and Equipment Table 3 - Benefits from Increased Cane Production 9. The Lower Uva Project Table 1 - Machinery, Surveying Equipment and Drafting Supplies 10. Summary of IDA Contribution 11. Estimated Schedule of Disbursements  -4- ANNEXES 12. Initial Implementation Schedule 13. Procurement of Farm Tractors and On-estate Transport Vehicles 14. Benefits MAPS 1. Land Utilization - IBRD 11761 2. Land Classification - I]3RD 11762  SRI LANKA AGRICULTURAL DEVELOPMENT PROJECT SUMMARY AND CONCLUSIONS i) Agriculture is dominant in Sri Lanka's economy through its large contribution to GDP (about 33%), foreign exchange earnings (about 75%) and employment (about 50%). Yet, for the most part, agricultural output has stagnated in recent years and Sri Lanka has, for decades, imported up to half its basic food requirements. Tree crop production, the main source of foreign exchange, declined and, with increasingly adverse terms of trade, there has been a severe shortage of foreign exchange for the importation of capital equipment required by the food and tree crop sub-sectors as well as other sectors of the economy. ii) The major objectives of Sri Lanka's agricultural policies, include: self-sufficiency in food production; diversification of crop production to reduce dependence upon tea and rubber for foreign exchange earnings; expansion of employment opportunities in agriculture; and the improvement of rural living conditions and social services. While it is essential that Sri Lanka increases foodgrain production, foodgrain self- sufficiency may not be a feasible target in the short or medium run. Many parts of Sri Lanka are better suited to tree crop as compared to food crop production. Consequently, Sri Lanka's agricultural development strategy should concentrate on achieving a balanced growth. This would call for rea- lizing the potential for increasing foodgrain production, which is particu- larly high in the Dry Zone, parallel with improving output of the tree crop sub-sector. This policy would entail reassessment of taxation and subsidy systems and greater emphasis on management considerations in schemes aiming at improved income distributions such as land reform and settlement schemes. iii) Government's policy for tree crop diversification calls for the alternative development of 200,000 ac of marginal tea land and around 180,000 ac of marginal rubber land, one third of the total area under these crops. A first phase diversification program, covering about 75,000 ac, largely marginal tea land, is under preparation with the assistance of UNDP/FAO, and the FAO/IBRD Co-operative Program. Bank Group support for the implementation of this project has been sought by GOSL, and is scheduled for FY77. iv) In the past GOSL has shown a marked preoccupation with new devel- opment,- giving insufficient attention to the maintenance and utilization of existing assets. This policy inter alia has led to severe deterioration of irrigation networks, of farm power, of on-estate transport, and of irriga- tion construction capacity. Small investments would frequently allow the full and effective utilization of capital stock and would bring substantial economic benefits. Priority should therefore be given!to such rehabili- tation schemes.  v) This report appraises an Agricultural Development Project support- ing tLe food crop and tree crop sub-sectors cf Sri Larnka. It would be the first !DA credit of this type in S ri Lanka. The proposed Project is designed to support priority Government aericultur-l rehahilitatLon and development programs through the provision of ;mporteid capital equipment and technical assistance. Support provided wouldi increase agricultural production in the short-term and would lay the foundation for longer term, more comprehensive development. IDA funds would provride finance for the cif costs of imported agricultural tractors, machinery, equipment and transport (US$18.0 M), spare parts for farm tractors, earth-moving equipment and for the coconut pro- cessing industry (US$6.5 XI). TechrLical assistance would be provided for pre-investment studies and for re-organization of machinery repair facilities (US$0.5 M). Programs selected for support were chosen because of their favorable impact upon early and sustained food production and on quality of tree crops products. Specifically the Project would strengthen agricultural research, training, extension and seed multip:Lication programs of the Department of Agriculture. It would provide support to the Ministry of Irrigation, Power and Highways for improved irrigation through better opera- tion and maintenance of existing networks and the rehabilitation of irrigation construction equipment. This support would complement other planned Government programs for which IDA support has been sought: separately, such as the Mahaweli Ganga Development Project (II) I, and a pioneer irrigation rehabilitation project. IDA funds would also increase privately owned farm power and provide support to the tree crop sub-sector to maximize benefits from present pro- duction through improved transportation and processing. Support would also be given to the Sri Lanka Sugar Corporation for the implementation of a sugar expansion program. No IDA funds would be used to import consumables such as fertilizer and farm chemicaLs. vi) The estimated total cost of programs to be supported would be US$60.5 M including duties and taxes. This takes into account an estimated US$2.1 M from UNDP for technical assistance and provision of research and extension facilities to the Department of Agriculture and to the three tree crop research institutes. The proposed IDA credit of US$25 M would finance 100% of the cif costs of imported equipment and of 11 man-years of technical assistance. IDA would thus cover about 41% of total costs. GOSL as well as quasi government beneficiaries would finance 44%, UNDP 3% and farmers, extension officers, and the estate sector 12%. Government contribution net of all taxes would be 33%, IDA contribution 62% and UNDP's 5%. vii) The main items to be financed under the Project would be spare parts for tractors, trucks and machinery, new vehicles and new tractors. Spare parts for existing vehicles and tractors (US$1.6 M), and for equipment owned by DME (US$2.9 N-) and the coconut processing industry (US$0.5 M) would be purchased directly from suppliers and would be sold to the end user on a cash basis. New tractors to augment farm power- (US$2.2 M) and vehicles for the estate sector (US$4.4 M), including 10% for spares, would be imported on the basis of international competitive bidding in accordance with IDA guidelines. Transport and equipment for TCEO (US$5.6 M), motorcycles for  - iii - extension officers and transport for all other governmental organizations (US$7.3 M) would be grouped and purchased by the appropriate agency also under ICB. Minor equipment, items valued at less than US$100,000 would be purchased through normal trade channels. Technical assistance specialists (US$0.5 M) would be recruited by the Ministry concerned in accordance with IDA guidelines for selection of consultants. viii) Overall responsibility for project implementation would be with the Ministry of Planning and Economic Affairs (MPEA), with execution of individual project components through participating Ministries. Inter-minis- terial coordination, supervision and monitoring would be ensured through a Project Coordinating Committee (PCC) to be established under the chairmanship of the Director, External Resources Division, MPEA. FCC would be assisted in its task by a permanent secretariat to be appointed by GOSL prior to project effectiveness. Members of the Committee would be representatives of the Ministries directly concerned with project components namely: the Ministry of Agriculture and Lands, the Ministry of Plantation Industries, and the Ministry of Irrigation, Power and Ilighways; as well as the Central Bank of Ceylon (CB). It was agreed that the establishment of the Committee would be a condition of effectiveness for the Project. ix) It is estimated that support to the food crop subsector would result in sustained production increases by about year six after Project implementation, of approximately 150,000 tons of paddy and 11,500 tons of sugar. The approximate value, at projected world market prices in constant dollars, would be US$41 M per annum. Quantitatively, this incremental production would be equivalent to over 40% of total present rice imports and 20% of recent sugar imports. Additional production increases would result from improved activities of the Department of Agriculture, particularly extension services. Support to the tree crop sector would primarily help to improve processing quality through reduction in raw material (latex and green-leaf) deterioration during transport from field to factory and through rehabilitation of coconut processing equipment. x) The Project would assist in one form or another the vast majority of smallholder paddy producers in the Dry Zone. The number of beneficiaries would be around 320,000 farm families or about 13% of the total population of Sri Lanka. In addition, support to the tree crop sector would improve the financial position and assurance of employment of tea pluckers and rubber tappers, the poorest segment of Sri Lanka's rural population. Pro- vision of transport to bought-leaf factories would assist the majority of the approximately 115,000 smallholder tea producers. xi) The proposed Project would assist the Government of Sri Lanka in its attempt to stimulate overall agricultural production and reduce its dependence upon importation of rice and sugar in addition to Govern- ment's plans to improve returns from cash crop production. The support  - iv - for the identification and preparation of smallholder development projects in the coconut area and in the Lower Uva region would provide for a contin- uation of planned agricultural development. xii) The Proect, is considered suitable for an IDA support of US$25 M.  SRI LANKA AGRICULTURAL DEVELOPMENT PROJECT I. INTRODUCTION 1.01 Agriculture plays a dominant role in Sri Lanka's economy. Yet, for the most part, agricultural output, has remained constant over the past few years. For decades, Sri Lanka has imported up to half its basic food requirements. The foreign exchange required for food and other imports is largely generated by exports of tree crops. With the stagnation of tree crop production and increasingly adverse terms of trade, foreign exchange availability has become precarious. This scarcity of foreign exchange restricted importation of capital equipment required to maintain production of the food crop and tree crop subsectors as well as of other segments of the economy. Consequent shortages of farm power, transport and spare parts reduced output further. Discussions with the Bank Group in connection with the Bank's Agricultural Development Policy and Program Review Mission 1/ focused on the urgent need to alleviate this shortage of capital equipment, and, as a result, the Government of Sri Lanka (GOSL) submitted an official request for IDA assistance for a broad based and comparatively quick dis- bursing Agricultural Development Project. In addition to this Project, proj- ects to develop food production and tree crop diversification are being processed. 1.02 Since the beginnings of its operation in Sri Lanka in 1954, the Bank Group has made seven loans and eight credits totalling US$127.6 M. Credits 121-CE for US$2.0 M in 1968 and 168-CE for US$2.5 M in 1969 sup- ported irrigation and land reclamation. Loan 653-CE and Credit 174-CE for US$29 1M in 1970 supported power and irrigation and Credit 504-CE for US$9 M assisted dairy development. A program Credit 512-CE for US$15 M, signed in 1974, allowed for limited importation of capital equipment and raw mate- rials for the agricultural and industrial sectors. 1.03 This report is based on the findings of an IDA appraisal mission to Sri Lanka in April/May 1975, comprising Messrs. K. R. Ellinger, N. Krafft, J. K. Lee, L. Hoppenbrouwer (IDA) and H. Kitching (consultant). The mission was also briefly assisted by Messrs. H. T. Chang (IDA) and D. Benor (consultant) . 1/ Republic of Sri Lanka, Agricultural Policy and Program Review, Report No. 579a-CE, February 1975.  II. BACKGROUND A. General 2.01 The Fepublic of Sri Lanka covers an area of 25,300 sq mi (16 M ac) and has a population of 13.4 M1 growing at an annual rate of about 2%. The island is geologically a part of the Indian Deccan Plateau and stretches 255 miles from north to south and 140 miles from east to west. The climate is characterized by low variaticn in temperature and heavy, variable rain- fall, especially during the northeast monsoon, October-February (Maha season) and the southwest monsoon, May-September (Yala season). About 5 M ac are used for permanent agriculture, about 7 M ac are under forest, 2.5 M ac are used for "chena" cultivation (slash and burn) and about 1.5 M ac are under natural grassland or scrub. The Wet Zone (Map 1) (rainfall 75-200"), in the hills and the southwest of the island, benefits from both monsoons, making rainfed agriculture and the growing of tea and rubber pos- sible. It is both the most intensively exploited area with 73% of land under permanent agriculture, and the most densely populated. The Dry Zone (rainfall 35-75") in the north and east depends, particularly for double cropping, on conservation and storage of water. However, with irrigation, this Zone has by far the greatest potential for expansion of foodgrain production. 2.02 Average per capita income is low at US$120 (1973), and since 1970 there has been no significant increase in real per capita income. Since Independence successive governments have concentrated heavily on social welfare, rather than productive investment. Government policies include free education (the adult literacy rate is by far the highest in South Asia at 85%) low cost health services, subsidized public transport, distribution of basic food rations, free or at subsidized rates, and an increasing Govern- ment participation in trade and industry. A land reform, introduced in 1972 and executed in 1974, established ceilings on privately held land. In October 1975 all publicly owned tea, rubber, and coconut estates were nation- alized. 2.03 The social program, largely benefitting the urban population about 20% of total), was based primarily on the contribution of the traditional export sector - rubber, tea, coconut products. However, world market prices for rubber and tea have been depressed for most of the last two decades; low prices, insecurity of tenure, and increasing taxation have reduced re-investment in the plantation sector leading to stagnation in output. The decline in exports and the general stagnation of economic activities limited expansion of the labor market and led to an estimated unemployment rate of nearly 16% of total labor force. Even if terms of trade had been more favorable the traditional export sector would probably not have been able to generate the necessary funds for an increasing social benefit program for a rapidly growing population. Rather it is now clear that the key to a sustained increase in prosperity for Sri Lanka's urban  -3- and rural poor lies in a broad based agricultural development strategy making full use of the country's rich and diverse physical and human resources. The proposed Project is designed to help GOSL pursue such a strategy. B. Agriculture's Role in the Economy / 2.04 Agriculture contributes 33% of GDP, 75% of foreign exchange earnings and is the main source of employment. About 80% of Sri Lanka's 13.4 M people are classified as rural, and 50% of total employment is in farming. Most people classified as rural non-farm (30% of total population) depend upon employment and income from service and manufacturing industries closely associated with agriculture. 2.05 Understandably, therefore, the nation's economic growth depends mainly upon the performance of the agricultural sector. In the period 1965-70 foodgrain and rubber production increased significantly and more than compensated for declines in tea and coconut production. However, since 1970 there has been a decline in both paddy and tree crop production. 2.06 The country's foreign trade is dominated by agriculture. Sri Lanka has for many years relied upon tree crop exports to finance a large part of its food supply (primarily rice and wheat flour, representing around 35% of the import bill) as well as financing essential capital equipment required for agriculture and other sectors. Recent world market price developments resulted in a serious deterioration of terms of trade. Prices for Sri Lanka's traditional export crops improved during 1973/74 but did not keep pace with import prices. C. Food Production and Consumption 2.07 Rice is the staple food in Sri Lanka; it constitutes more than 70% of total consumption of foodgrains and accounts for 30% of agricultural land. Domestic rice production reached a peak of 1.1 It tons in 1970, de- clined to about .9-.95 M tons during the years 1971 to 1973 and rose again in 1974 to 1.1 .1 tons. Iiowever, largely as a result of drought, 1975 rice production has been the lowest for 10 years at .75 1M tons. In no year has production been sufficient to meet demand. The ratio of production to con- sumption rose from a little over 50% in the early 1960's to around 75% in the early 1970's as rice production increased. While rice imports were reduced, wheat and flour imports remained high to meet growing foodgrain needs of a rapidly increasing population. Consequently, production for all foodgrains 1/ For a more detailed analysis of Sri Lanka's agricultural development problems, see Agricultural Policy and Program Review, Report No. 579a- CE, February 19, 1975.  4 - increased only slightly and Sri Lanka has been dependent upoin imports for 45' to 50; of its foodgrain requirements since 1970. The major features of foodgrain production in Sri Lanka are - its dependence on irrigation and on tractors for cultivation, particularly in the Dry Zone where any substantial increases in foodgrain production must tal.e place (of all the countries of South and South East: Asia, Sri Lanka has the greatest density of mechanically cultivatcri land) as well as on the widespread use of high yielding varieties (about 30% of the gross icreage harvested in 1974). But if maximum use is to be made of these input'-, improvements in land and water management are retuired, including the introduction of cropping patterns and varieties suited to individual ecological zones. Production of foodgrains other than rice, is smiall, consisting mainly of millet and rainfed pulses; maize and sorghum cultivation is being promoted. Othbr food crops are coconut, chillies, onions, sugarcane, manioc, fruits and vegetables. Soybeans have been introduced very recently. Animal production is limited. 2.08 Rice, wheat flour and sugar have been subject to a rationing system under which they have been made available to consumers free or at low prices. Free and subsidized rations have been progressively reduced, the latest re- duction being the abolition of the wheat flour ration on April 1, 1975. D. Plantation and Export Crop 2.09 The importance of the traditional export crops lies not only in the fact that in the foreseeable future they will remain the major source of foreign exchange earnings but also in that a stagnation in their exports affects the whole economy. The three crops account for nearly all agricul- tural export earnings (72.5% of total), about 45% of agricultural employment, about 40% of the value added in the agricultural sector; and, furthermore, they make a substantial contribution to government revenues through taxes and levies (about 16% based on provisional 1974 figures). In addition, coconuts are a major food source. 2.10 Production of tea has declined slightly over the last years while rubber production, after increasing considerably during the 1960's, stagnated, reaching a peak of 160,000 tons in 1970 and declining again in 1974 to 135,000 tons. Mlost of the tea and rubber lands are operated on an estate basis, with rubber less so than tea. Coconuts are grown in all settled areas but are concentrated in the Coconut Triangle in the western coastal region. lIany parts of Sri Lanka are better suited to tree crop as compared to food crop production; much of the land in tea and rubber is not suitable for growing other crops and would have much less value in alternative uses. Both tea and rubber are subject to a wide network of cesses and taxes. At the same time GOSL has various subsidy prograras to encourage replanting; nevertheless replanting performiance has been poor due to lack of investment incentives qnd adequate supporting services. The recent nationalization of all publicly owned estates might substantially alter future management decisions. Tree crops prcvide year-round employment and since tea, in particular, is highly labor in--ensive, production declines severely affect employment opportunities.  - 5 - There remains considerable scope for better adaptation of Sri Lanka's tree crop economy to changing world market circumstances through better land-use planning leading to diversification and replanting with improved material. 2.11 GOSL is embarking on a program for diversification of tea and rubber lands (para 3.06(g)). This program foresees diversification of around 200,000 ac of tea and 180,000 of rubber land, approximately one third of total land under these crops. GOSL, with the support of UNDP/FAO, has already started with project development planning. It is operating a pilot diversification scheme on about 16,000 ac and, with the support of UNDP/FAO, is formulating a diversification project to cover some 75,000 ac in the Kandy region. This land, largely under tea, is to be developed under food crops, tree crops other than tea, pasture and forest. Bank Group support for this project has been sought by GOSL and is scheduled for FY77, E. Sugar 2.12 Imports of refined sugar reached 283,000 tons in 1971 but were cut back sharply to 190,000 tons in 1973 and to 42,000 tons in 1974. Yet due to considerably higher prices, sugar imports accounted for over 10% of total imports in 1973 and sugar is the largest single food item imported after grain. During 1960-1971, domestic production of refined sugar never exceeded 10,000 tons but rose to 19,000 tons in 1973. In addition, farmers have customarily planted about 10,000 ac to cane for direct consumption or for processing into jaggery - an unrefined sugar. Appreciable areas of the Dry Zone could, with irrigation, be used for sugar production; yet, pro- posals for increased sugar production need to be investigated further before attempting any large scale expansion. In the meantime, emphasis should be given to better utilization of partially developed sugar cane land and existing factory capacity. III. GOVERNMENT POLICY AND DEVELOPMENT OBJECTIVES 3.01 GOSL places high priority on agriculture as evidenced by ambitious production targets in the current Five-Year Plan (1972-76), equally ambitious programs and projects (for example, the Crash Food Production Program (CF?P), and the Mahaweli Ganga Development Project) and policy actions introduced recently to attempt to stimulate agricultural production. However, in no year hag the 1972 foodgrain production target been met, let alone any of the later targets, and for some time the Plan has generally been regarded as obsolete. It has been replaced by annual Implementation Programs and special schemes reflecting more socio-political ideals than realistic targets. 3.02 The major objective of Sri Lanka's agricultural policies include: self-sufficiency in food production; diversification of crop production to reduce dependence upon tea and rubber for foreign exchange earnings;  - 6 - expansion of employment opportunities in agriculture; and improvement of rural living conditions and social services. While it is essential that Sri Lanka increases foodgrain production, foodgrain self-sufficiency may not be a feasible target in the short and medium run 1/. Many parts of Sri Lanka are better suited to tree crop as compared to food crop pro- duction, therefore agricultural development strategy should concentrate on achieving a balanced growth. This would call for realizing the potential for increasing foodgrain production, which is particularly high in the Dry Zone, parallel with promoting output of the tree crop sub-sector. This policy would entail reassessment of taxation and subsidy systems and greater emphasis on management considerations in schemes aiming at improved income distribution e.g., land reform, settlement schemes. 3.03 Recent policy measures taken by GOSL are discussed in detail in the Agricultural Policy and Program Review 2/ and include:- (a) An increased paddy procurement price, additional credit for food production and priority for fertilizer availability to the food crop sub-sector; (b) Establishment of 480 AgriLcultural Productivity Centers (APC) under the Agricultural Productivity Law (1972); APCs have far reaching powers to improle extension, credit, input supply and marketing services; (c) Enactment of the Agricultural Lands Law (1973) providing for the security of tenants and control of rents for highland as well as paddy land; (d) A reduction in export duties on rubber and coconut products (1975); (e) Enactment of the Land Reform Law (1972) limiting individual private ownership of land to 25 ac for paddy and 50 ac for all other agricultural land. 3/ 1/ In Sir Lanka foodgrains account for only about 41% of the gross acreage under cultivation compared with about 70--80% in India and Bangladesh and 67% in Burma. 2/ Ibid. 3/ The objective of the Law was to increase productivity and employment opportunities. Implementation of the Law was completed by August 1974 and a total of about 1 M ac was affected. The Land Reform Commission, under the Ministry of Agriculture and Lands (MAL), responsible for law implementation, alienated about 560,000 ac, more than 60% being under tree crops. No consistent plani for the future use and management of land taken over has yet been designed. The diversification program for marginal tea and rubber land, for which Bank Group assistance has been sought, will be largely concerned with utilization and management of land affected by the land reform. More recently (October 1975) GOSL nationalized all foreign owned estates.  -7- 3.04 GOSL programs concentrate on new development with insufficient attention being given to the maintenance and utilization of existing assets. This, for example, has resulted in a considerable run down of irrigation networks. Their maintenance must be given priority and this would call for greater allocation of funds for operation and maintenance. Similarly agri- cultural machinery and transport fleets have been severely depleted through lack of spares and replacements and should be rehabilitated. In these and similar cases, because of sunk costs, small investments would bring substan- tial benefits and would allow fuller and more effective utilization of existing stock whether human or capital, at the same time helping to meet GOSL's social objectives. 3.05 GOSLts major agricultural programs and projects (excluding live- stock, fisheries and forestry), include: (a) A comprehensive and well conceived plan to reorganize the Department of Agriculture's research, training and extension services aimed at increasing crop yields and at diversifying production based on cropping patterns adapted to individual ecological zones (Paras 4.04, 4.05, Annex 2 and Map 2); (b) A program under which GOSL's seed farms would be more fully exploited and seed production improved by better seed drying, processing, multiplication and storage facilities (Paras 4.06, 4.07 and Annex 3); (c) Improved paddy marketing and milling: This program is supported by USAID and UNDP; (d) A highly ambitious program of improved land and water man- agement in the Dry Zone including the Mahaweli Ganga Develop- ment Project for which the Bank Group provided assistance to Stage I and has recently appraised Stage II, and the Lower Uva Project which aims at increased water supply and settlement in the underpopulated South East (Annex 9); (e) The CFPP, initiated in late 1974 and replacing a similar Food War Program, which had limited effect on production. A multi- tude of agencies are involved in its implementation, it is poorly put together and development targets exceed past performance; (f) The 'Package Deal' for the tea industry providing for substantial subsidies for replanting, fertilizer and tea chests as well as increasing control of fertilizer application, replanting, factory development and crop diversification. This complements tea and rubber factory rehabilitation and development schemes which have been ongoing for several years (the tea factory development scheme has received support from ADB);  - 8 - (g) An ambitious program for the diversification of sub-marginal tea and rubber lands on some 380,000 ac. This would diversify about one third of land currently under tea and rubber. To implement these plans GOSL is operating a pilot scheme to diversify an area of about 16,000 ac and U?NDP is assisting in the formulation of an integrated and comprehensive program of diversification on about 75,000 ac in the Kandy region. Bank Group assistance for this project is scheduled; (h) Production expansion of refined sugar on estates and of jaggery on smallholdings, to reduce the gap between current production and requirements and to wake full use of existing factory capacity (Paras 4.26-4.2E and Annex 8); (i) Promotion of fertilizer use through subsidies. In doing so, GOSL has developed a three-tier price system: (i) unsubsidized fertilizer for food crops (except paddy), rubber and some minor export crops; (ii) paddy fertilizer with a subsidy of 30% to 40% of actual market price; and (iii) tea, coconut and most minor export crop fertilizer with a subsidy of 50% of actual market price. For economic, technical and administrative reasons, the Association urged that fertilizer subsidies should be progressively reduced and standardized. In October 1975, GOSL introduced a standard subsidy rate of 50% for all fertilizers. 3.06 Several of GOSL's major programs and projects already receive bilateral or multilateral assistance or negotiations for assistance are under way (e.g. the Hahaweli Ganga Development Project (II) I). Of the others, priority should be given to the Department of Agriculture's research, training and extension services and to its seed production program, to GOSL's program of diversification out of tea and rubber and to the program to in- crease sugar production. It is important to support GOSL's objective of employment generation and to understand that for the foreseeable future tree crop products will continue to be the major source of foreign exchange while at the same time taking full accounm: of the limited world market prospects for tea. Bearing these aspects in mind, GOSL assistance to the tea in- dustry aims at increasing yields, decreasing unit production costs, and improving product quality while simultaneously reducing total acreage through crop diversification schemes on an estimated one third of the total tea area (see para 2.11).  - 9 - IV. THE PROJECT A. Project Definition and Scope 4.01 The Project would assist GOSL in achieving an early and sustained impact on foodgrain and sugar production by providing foreign exchange for the importation of basic, specified, capital equipment--the shortage of which is limiting production expansion - and by providing technical assist- ance. In addition, it would provide support to the tree crop subsector for improved transport, processing, research and extension so as to maintain output and improve quality thereby maximizing the benefit from present production. No Project funds would be used to finance importation of re- current inputs, i.e., fertilizer, chemicals, etc. Foreign exchange would be provided for both the public and the private sector, to provide farm power and transport vehicles in short supply after years of reduced imports due to lack of foreign exchange. To ensure continued benefits, assurances have been obtained that GOSL will provide for continued replacement and supply of spares for the rehabilitated farm power and transport fleets. 4.02 The Project would assist in: (a) Increasing production of foodgrains and rotation crops through: (M) Improved research. training and extension services of the Department of Agriculture. (ii) Expanded certified seed Production on 42 GOSL seed farms. (iii) Expanded farm power availability through the rehabilitation of 1600 privately owned tractors; the importation of new tractors; provision of new tractor implements; and technical assistance to the Sri Lanka Tractor Corporation (SLTC). (iv) Improved operation and maintenance of irrigation networks serving about 950,000 ac operated by the Territorial Civil Engineering Organization (TCEO). (v) Expanded irrigation construction capacity through the rehabilitation of heavy construction equipment of the Department of Machinery and Equipment (DME), as well as technical assistance for the reorganization of DME's repair and maintenance facilities, and through provision of new equipment to the Department of Irrigation (DI) for the completion of two irrigation schemes covering 8,000 ac.  - 10 (b) Increasing returns from tree crop products by improving quality of the end product tlhrough rehabilitation of on-estate trans- port, provision of new vehicles to estates and bought-leaf factories, provision of spare parts for the coconut processing industry, and provisLon of transport for zesearch and extension. (c) Expanding sugar production through land clearing and irrigation on 4,600 ac. (d) Preparing pre-investmnent studies for - (i) smallholder development in the coconut area. (ii) land development: and settlement in the Lower Uva. (e) Studying the pricing and subsidy systems affecting the tree crop sector. 4.03 The impact of the various project components would be felt through- out the island but would vary irom one ecological zone to the other: (a) Throughout the island better agricultural extension services and increased certified seed production would help improve land and water management and increase food production per ac. (b) In the Dry Zone increased farm power would help reduce delays in cultivation and expand double cropping. Completion of two irri- gation schemes by DI and support to the Sugar Corporation would increase agricultural production. (c) In the Dry and Intermediate Zones water conservation would be improved as a result of improved 0 & M by the TCEO while in- creased availability of irrigation construction equipment would help expand irrigatecd agriculture. (d) In the Wet Zone improved transport for green-leaf and latex would raise returns per unit of production through quality im- provement of the end product and would contribute to assured employ ment. B. Detailed Features Agricultural research, trainin, and extension (Annex 2) 4.04 The Department of Agriculture, responsible for research, training and extension, has prepared a comprehensive and well conceived plan for the reorganization of these services. This pLan, approved by Cabinet, has as its main objectives increasing crop yields and diversification of production  - 11 - on the basis of a more effective use of rainfall and storage water, and in- troducing cropping systems and farm practices better adapted to local eco- logical conditions. The Department's extended activity will be based upon six to eight regional research, extension and training centers. The Project would support four centers and their 11 satellite stations, as well as the School of Agriculture and Regional and District Training Centers, by pro- viding foreign exchange for the importation of spares for the repair of tractors, farm machinery, equipment and vehicles already in the possession of the Department, but not operative due to lack of replacement parts, and specified new farm machinery, equipment and transport. In addition, the Project would provide transport for extension officers and their supervisors. The Department would be responsible for construction or rehabilitation of necessary farm buildings and for operation and maintenance of the equipment. Assurances have been obtained from GOSL that foreign exchange will be avail- able to the Department to assure continued operation and maintenance of equipment and transport provided. Further assurances were obtained that adequate credit arrangements will be made available to allow extension staff to purchase motorcycles. 4.05 IDA support would be closely linked to a parallel UNDP financed project under which technical assistance as well as laboratory equipment, audio-visual aids, and technical literature would be provided. FAO would be the executing agency for this project. Preparation of this project is underway. It was agreed with GOSL that the effectiveness of IDA support for this component be contingent upon signature of a relevant UNDP project agreement and that IDA will be given the opportunity to comment on terms of reference for the consultants to be employed. Seed Multiplication and Processing (Annex 3) 4.06 Certified seed production is insufficient to meet requirements. It is low in quantity and quality resulting in nearly half of the total production being rejected for certification. The Department of Agriculture's new Division of Seed and Planting Material has developed a program under which 42 GOSL seed farms would be fully developed for expanded registered seed production with certified seed multiplication mainly on private farms. Seed drying, pro- cessing, and storage facilities would also be expanded and improved. The Department's program calls for an increase by 1980 in certified seed for paddy from the present 5,250t/year to 20,000t/year and for other cereals and pulses from 1,400t to 2,200t. This production would be ample for the pro- jected 2.4 M ac of paddy and 0.6 M1 ac of cereals and pulses. Local staff is adequate in number and experience to implement the program. 4.07 The Project would assist in the development of Government farms through the provision of finance for the importation of farm machinery, equipment, and transport. Assurances were obtained that necessary seed storage facilities will be constructed by GOSL on Department farms. Re- sponsibility for operating and maintaining machinery and equipment provided would be the Department's.  - 12 - Expansion of Farm Power in the Dry Zone (Annex 4) 4.08 Cultivation in Sri Lanka, particularly in the Dry Zone, is highly mechanized because (i) soils are subject to extreme baking and (ii) of the need for timely cultivation. Shortages of foreign exchange reduced the number of operating four-wheel tractors from some 11,000 units in 1969 to an estimated 5,750 units in 1975., It is further estimated that no more than two-thirds of these tractors work. in agriculture, the others being employed in the tree crop sector or in road haulage. Of the agricultural tractor fleet it is assumed that some 3,200 units work in the Dry Zone, probably not more than 1,600 units being fully operative. 4.09 Total requirements of four wheel tractors for agriculture in the Dry Zone are estimated at nearly 3,300 units, rising to 4,400 units by 1985 with increased land use. The Project would provide foreign exchange for importation of new tractors and of spare parts for the rehabilitation of the inactive tractor fleet and the maintenance of operative units. It would also provide for the importation of new tractor implements for demonstration on GOSL farms. Given an annual replacement rate of 7%, this rehabilitation program would be insufficient to assure total farm power requirements and IDA input would have to be complemented by an import program for new tractors for which bilateral assistance might be sought. New tractors to be imported under the Project would be distributed to private farmers who are also tractor custom operators, on the basis of an eligibility pre-selection. Responsibi- lity for this preselection will rest with the Ministry of Agriculture. Assurances have been obtained thaLt necessary credit facilities will be avail- able to farmers to purchase tractors. Tractors to be procured under the Project would be purchased on the! basis of international competitive bidding in accordance with IDA guidelines. 4.10 Repair facilities and experienced mechanics are available in Sri Lanka. However, to ensure that the run down of farm power through lack of spare parts and replacements (abcout 200 units per annum for the rehabilitated fleet) would not recur, assurancets were obtained that, after completion of disbursement, GOSL will make annually sufficient foreign exchange available to maintain the tractor fleet. 4.11 New tractors to be imported would in the majority be four-wheel units since GOSL has a program irn hand for their local manufacture. This program, however, appears overambitious and the type of tractor to he manufactured not suitable to most of Sri Lanka's conditions. To assist in realistic production planning the project would provide for the services of two experts to advise GOSL on tractor production. These consultants would also assist in the re-organization of private and public repair facilities, in the planning of importation and distribution of tractor spare parts through SLTC, and the production of tractors, tractor implements and farm tools. The two experts to be recruited, subject to their qualifications being acceptable to the Association, would work together with the consul- tant to be employed by DfEl (see rpara 4.15). Terms of reference are given in Annex 4.  - 13 - Operation and Maintenance of Trrigation Networks (Annex 5) 4.12 Food crop production in the Dry Zone is largely dependent upon controlled water supply. Approximately 1 1f ac out of a total agricultutral area of 1.8 Mi ac are in some way irrigated. Responsibility for operation and maintenance of 177 existing major tanks, providing water for 477,000 ac, and minor irrigation schemes covering around 470,000 ac, rests with the TCEO. TCEO is also responsible for construction of minor tnnks. The Organization is structured in 9 regional and 115 divisional offices; it is well staffed but lacks transport and equipment essential for supervision of irrigation networks and for proper water management. 4.13 The Project would provide foreign exchange for the importation of inspection vehicles and surveying and drafting equipment for TCEO. The Project would also finance limited construction equipment for DIuE, for assignment to TCEO on a rental basis for specific jobs. Ilowever, since poor water management on most irrigation schemes is due to lack of operation and maintenance funds and lack of water discipline amongst farmers, in the absence of remedial action, support to TCEO, and indeed to the food crop sector, would be ill advised. During negotiations assurances were obtained that GOSL will gradually increase allocations from the present Rs 25/ac/year to reach, not later than 1979, the level required to allow proper operation and maintenance, estimated in current terms at Rs 50/ac/year. Rehabilitation of earth-moving and construction machinery (Annex 5) 4.14 The bulk of earth-moving and construction machinery in Sri Lanka is under the operational supervision of DME. DME also operates 3 major and 11 regional repair and maintenance shops. Mluch of DME's machinery and equip- ment is non operational for want of spares and replacement parts and the De- partment, with its machinery park operating at about 25% of its potential, is no longer able to assure equipment availability to construction organizations when requested. 4.15 The Project would provide for the recruitment, within six months of signature of the Development Credit Agreement, of one consultant with qualifications acceptable to the Association, who would be responsible for: (a) proposals for the introduction of a meaningful policy of spare part procurement and disbursement; and (b) the reorganization of DME's repair facilities. The consultant would work in close co-operation with the two experts who would assist in the re-organization of tractor repair facilities (para 4.11). For terms of reference see Annex 5, Appendix 1. The Project would further provide funds for the importation of spare and replacement parts to rehabilitate about 150 major pieces of equipment; and workshop equipment for DME's repair facilities. DME would assess spare and replacement part requirements and would submit these to the Association for approval.  - 14 - Corapletion of Two Irrigation Proiects (Annex 5) 4.16 The 1975 work program of the DI includes the construction or reconstruction of 12 irrigation projects. Seven of th-ese projects have been under construction for a nurmber of years but, although development is advanced, completion of work has been delayed by lacl of machinery. In particular, two projects near4y completed, could shortly be brought into production through the provision of some earth-moving and construction equipment. Sound technical and economic feasibility studies for the two projects have been completed. The Department has the technical competence and manpower to undertake the completion of these projects. 4.17 One project, the Wahalkade irrigation scheme, consists of the reconstruction of an ancient tank with a storage capacity of 30,000 ac feet to serve an area of 2,000 ac. The work remaining calls for the construction of four miles of main canals, the construction of distributaries, and jungle clearing on 1,750 ac. After completion of construction, settlement would be undertaken by the Department of Land Settlement. Plans for this have been formulated. The major crop to be grown would be paddy. 4.18 The second project, the Iluthuaiyankaddu scheme, involves drain- age on 6,000 ac. Remaining work consists of earthmoving, construction of drainage structures, internal roads and field channels as well as iungle clearing on 200 ac. The area is already settled and improved drainage would result in immediate increases in yields of crops grown, mainly chillies and vegetables. 4.19 The Project would provide finance for the importation of machinery and equipment for the completion of the two schemes. This equipment would be initially entrusted to DI, but after completion of the two schemes would revert to DME for reassignment to other irrigation construction jobs. Tree Crops, On-Estate Transport, Extension Services and Coconut Processing (Annex 6)1/ 4.20 Transport vehicles on t:ea and rubber estates and transport for smallholder bought-leaf factories are inadequate and for the most part obsolete. Insufficient availability and frequent breakdown of transport result in undue delays in processing and in deterioration in quality of green-leaf or in co- agulation of latex, detrimental to quality of the end-product. Transport constraints also lead to postponements in plucking, affecting employment as well as quality of end-product. Antiquated transport is expensive to operate and the shortage of transport has forced numerous tea and rubber factories to switch from solid fuel (wood) to liquid fuel for firing driers, further in- creasing the cost of production and requiring scarce foreign exchange. Lack 1/ The recent nationalization of tea and rubber estates will not affect the need for this project component as it is GOSL's intention to con- tinue to operate nationalized land on an estate basis.  - 15 - of transport in the coconut sector limits the implementation of GOSL's policy of extended undercropping. In 1974, GOSL resolved to allocate Rs. 5 H1 in foreign exchange equivalent for the importation of about 150 trucks and tractors for the estates, to temporarily alleviate the critical transport constraints. As yet, however, GOSL has not been able to implement the resolution. 4.21 The Project would provide for the importation of about 615 tractors or lorries for transport on tea, rubber and coconut estates as well as for green-leaf transport to bought-leaf factories. These imports, together with the proposed GOSL inputs, would be sufficient to meet immediate mini- mum transport requirements; they would not increase production of tea. In addition, the Project would provide for the importation of about 150 motor- cycles for estate supervision. Funds would also be made available for the provision of spare parts to rehabilitate the existing transport fleet. Allocation of vehicles would be the responsibility of the Tea Controller Department, the Rubber Controller Department and the Coconut Development Authority - (for proposals as procurement see Annex 13). These agencies would ensure that vehicles would be allocated to factories ,rocessing smallholder leaf and to estates with a satisfactory management record. Tlo vehicles would be allocated to factories processing leaf from marginal areas or to estates which are subject to diversification (para 2.11). Assurances have been obtained that estates will have access to the necessary commercial credit and that, after project disbursement has been completed, foreign exchange for the importation of spare and replacement parts will continue to be made available by GOSL to keep the rehabilitated transport fleet operational. Provision of this additional transport would not per se lead to production increases. 4.22 Smallholder tea production is characterized by low quality, re- sulting from poor agronomic practices and irregular pluckling, and small- holder rubber production by low qualitv end products. The extension ser- vices of the Tea and Rubber Controller's Departments are responsible for improving performance on smallholdings and also for the administration and supervisiion of a large number of subsidy schemes. Inspection of the subsidy programs takes priority. Increased mobility would mean that extension staff would be able to devote more time to extension services to smallholders. The Project would provide for the importation of about 145 motorcycles and about 10 supervision vehicles for allocation amongst the Tea and Rubber Con- troller's Department and the Coconut Development Authority. The motorcycles would be sold to extension officers on credit as it is felt that this is the best means of ensuring optimum care and maintenance (see para 4.04 for necessary assurances). The proposed support to the tea industry has to be seen against GOSL's program of large scale diversification (see para 2.11). 4.23 Improvement in tea and rubber processing is sponsored by GOSL qilbgfyv nrograms, nart1o11.v financed tlirough ADB credits. However, no such support is available for the coconut processing industry. This industry, primarily in private ownership, is characterized by numerous small, generally  - 16 - poorly equipped units. Lack of spare parts adversely affects production per- formance and quality of the end product. The Project would provide funds for the importation of the most critical spare parts. A complete re-oroani- zation of the inidustry might eventually become necessary but should await clarification of production trends and hence raw material supply. The need for a reorganiz5tion would be examined as part of the proposed smallholder development proj27ct in the coconut production area (para 4.29(a) and Anrex 7). Tree Crops Research (Annex 7) 4.24 Tree crop research is the responsibility of three research insti-tutes under the control of the Ministry of Plantation Industries. Tea and rubber research is financed through a cess on exports; coconut research is partly financed by GOSL grant, partly by a cess. The Tea and Rubber Research In- stitutes (TRI and RRI) render technical services and advice to the industry based on applied research. Work of the Coconut Research Institute (CRI) tends to be more academic than applied. TRI and CRI suffer from a lack of economic evaluation capacity. All three institutes, but in particular the TRI and CRI, lack basic laboratory and research equipment. The work on all three is curtailed by lack of transport. 4.25 The purchase of much needed transport under the Project would be closely linked to a parallel UNDP support. This support, to be executed by FAO, would provide technical assistance in the field of economics, research, and laboratory equipment. During negotiation it was agreed that in order to assure that transport to be provided under the Project is effi- ciently used, it would be a condition of disbursement against this component that the aforementioned UNDP project be signed and that the Association be given the opportunity to comment on terms of reference of consultants to be employed by UNDP. 1/ E~p~1ainof Sugar Production (Annex 8) 4.26 Production of refined sugar commenced in the mid 1950's and is based on two sugar schemes operated by the Sri Lanka Sugar Corporation (SLSC). Cane production per acre has recently Increased to 40 t. The cost of production at Rs 0.98/lb refined sugar, has been substantially below import prices. SLSC has prepared detailed development plans for the two schemes. ADB assistance has been obtained for one. 4.27 The second scheme, the Kantalai sugar project, covers an area of 9,600 -ac to be irrigated from a reservoir of 110,D00 ac feet storage. To date 5,000 ac have been developed, an additional 3,100 ac have been cleared, and 1,500 ac are still under jungle. Land development was delayed due to 1/ One of the primary responsibilities of the Agricultural Economist to be provided by UNDP to the CRI would be the organization and supervision of a pre-investment project in the coconut area (see para 4.29a).  - 17 - water shortages which will be overcome with the completion of the Mahaweli- Ganga Development Project I in early 1976. Lack of machinery prevented SLSC from preparing the land in time for the arrival of the irrigation water. Processing capacity of the factory is sufficient to handle potential production from the total 9,600 ac. 4.28 The Project would provide for the importation of equipment to develop 4,600 ac, and for transport, communication equipment and workshop machinery and tools. No funds would be used for procurement of factory equipment and spares. The Management of the project has the necessary skills to implement the expansion program. Pre-Investment Studies (Annexes 7 and 9) 4.29 Because past agricultural planning has been concentrated on global targets and emergency or crash programs, preparation of specific investment projects has been lacking. The Project would make provision for importation of necessary equipment and technical assistance to help develop two invest- ment projects, namely: (a) A smallholder development project in the coconut production area which has been discussed by GOSL and the Bank for some time (Annex 7); (b) The rehabilitation of the Lower Uva region planned by GOSL which, as an initial step, has inaugurated a five-year plan calling for irrigation development of 15,000 ac and the development of an additional 15,000 ac for rainfed agriculture. The Project would provide for equipment and technical assistance required for development planning (Annex 9). The Association would be given the opportunity to comment on the terms of reference of the consultant. Study of Pricing and Subsidy Systems affecting the Tree Crop Sector (Annex 6) 4.30 The traditional export sector remains very important to the country's economic development (Annex 1 and 6). The sector is subject to numerous supports, subsidies, controls and taxation, which, as is common in long established industries, have grown from year to year over the last decades. Their impact, cross influences, and cost to GOSL have never been fully analyzed. The Project would provide assistance for a comprehensive study of economic factors affecting the tree crop industry with the aim of providing GOSL with a policy framework giving clear indications of various alternatives, such as the trade-off between using the sector as a major source of taxation while at the same time attempting to enhance exports and employment. The study, to be carried out by GOSL, would also examine the special problems of housing and nutrition of estate workers. The Project would provide funds for the recruitment of a consultant with qualifications acceptable to IDA, for broad terms of reference see Annex 6, Appendix 1. During negotiations it was agreed that it would be a condition of disbursement for any support to  - 18 - the tree crop subsector that this study will have been started within six months of signing of the Development Credit Agreement, through the recruit- ment of the consultant. Environmental Impact 4.31 The Project would have no adverse effect upon the environment. Increased farm power would reduce water wastage and erosion. This would be further supported by improved maintenance of irrigation networks controlled by TCEO. As a result of project activities, water in irrigation tanks as well as in the canal systemi would remain longer. This would not only pro- vide water for household and animal needs but result in a better recharge of groundwater with beneficial effects upon domestic wells.  - 19 - V. COST ESTIMATES AND FINANCING A. Cost Estimates 5.01 Detailed cost estimates of the Project are given in Annexes 2 to 9 and are summarized below: Thousand Rupees Thousand US Dollars Foreign Cost Items Local Foreign Total Local Foreign Total Exchange Dept. of Agriculture (a) Research, Training, Extension 30,430 15,870 46,300 4,430 2,310 6,740 34 (b) Seed Production 9,070 8,620 17,690 1,320 t9255 2,575 49 Farm Power 17,485 23,495 40,980 2,545 3,420 5,965 57 Ministry of Irrigation, Power and Highways (a) TCEO 84,710 33,765 118,475 12,330 4,915 17,245 28 (b) DI4E 17,795 17,795 35,590 2,590 2,590 5,180 50 (c) DI 3,915 3,780 7,695 570 550 1,120 49 Ministry of Planta- tation Industries (a) On-Estate Transport & Processing 27,890 29,335 57,225 4,960 4,270 8,330 51 (b) Extension 550 1,200 1,750 80 175 255 69 (c) Research 12,505 5,460 17,965 1,820 795 2,615 30 SLSC 11,750 10,305 22,055 1,710 1,500 3,210 47 Lower Uva Project 4,120 3,810 7,930 600 555 1,155 48 Technical Assistance 4,670 12,330 17,000 680 1,795 2,475 72 Sub Total 224,890 165,765 390,655 32,735 24,130 56,865 44 Price Contingencies 4,845 20,265 25,110 705 2,950 3,655 81 GRAND TOTAL 229,735 186,030 415,765 33,440 27,080 60,520 45  - 20 - 5.02 Cost estimates are based on findings during appraisal; and relate to prices in May 1975. No physical contingencies have been applied. Price contingencies were applied on the basis of projected inflation rates affec- ting prices of imported equipment, machinery,and spare parts and costs of civil works over the two vear project period.1/ Since the Project provides assistance to ongoing programs for which GOSL support is assured, only incremental costs have been included (for incremental GOSL contribution see para 5.05): In estimating equipment requirements, Dngoing or planned bilateral and multi- lateral aid schemnes have been taken into account, so has the absorptive capacity of the agencies concerned. B. Proposed Financing 5.03 Finance to cover total project costs of Rs 415.7 (US$60.5 M) would come from the following sources: Thousand US Dollars Farmers, SLSC, Extension TRI/c Staff & IDA UJNDP-= GOSL- RRI& CRI Estate Sector Total Department of Agriculture (a) Research, Training, Extension 2,325 270 4,340 - 295 7,230 (b) Seed Production 1,427 - 1,330 - 20 2,777 Farm Power 3,890 - - - 2,545 6,435 Ministry of Irrigation, Power and Highways (a) TCEO 5,590 - 12,800 - - 18,390 (b) DME 2,945 - 2,590 - - 5,535 (c) DI 625 - 570 - 1,195 Ministry of Plantation Industries (a) On-Estate Transport & Processing 4,815 - - 4,060 8,875 (b) Extension 240 - - - 80 320 (c) Research 260 565 - 1,820 - 2,645 SLSC 1,705 - - 1,710 - 3,415 Lower Uva Project 628 - 600 - - 1,228 Technical Assistances & Fellowships 550 1.245 680 - - 2,475 TOTAL 25,000 2,080 22,910 3,530 7,000 60,520 Percent.of Total 41 3 38 6 12 100 Net of tax 25,000 2,080 13,140 - - 40,220 Percent of Total 62 5 33 - - 100 /a First three years of a five year program, subject to revision. T7 Includes local cost contribution to Project and to UNDP projects plus FEEC's and import taxes. /c Represents FEEC's and import taxes. 1/ Price contingencies 2nd half 1975 1976 1977 Equipment 6% 10% 8% Civil Works 8% 14% 12%  - 21 - 5.04 IDA Contribution. The proposed IDA Credit of US$25 M would fi- nance about 41% of total project costs or 62% of project costs net of taxes. Except for minor items to be financed by UNDP, IDA financing would cover all direct foreign exchange expenditures, and the foreign exchange cost of consultant services as set out in Annexes 4, 5, 6 and 8. The major part of IDA funds (US$15.7 I1) would be channelled to Government and quasi-government institutions, namely, the Ministry of Agriculture (Department of Agriculture and the SLSC), the Iiinistry of Irrigation, Power and Highways (TCEO, ME and DI) and the Ministry of Plantation Industries (the Tea Control Department, Rubber Control Department, the Coconut Development Authority and the Tea, Rubber and Coconut Research Institutes) under the supervision of a Project Coordinating Committee which would be established (para 6.01). IDA funds for the purchase of vehicles and spare parts for on-estate transport (US$4.3 M) and new agricultural tractors (US$2.2 M) and for the provision of spare parts for the existing agricultural tractors (US$1.8 M), would be channelled through either the SLTC, responsible for the importation of tractors, tractor implements and tractor spare parts, or through resident supplier agents. As agreed in principle with GOSL, commercial banks, as well as the People's Bank and the Bank of Ceylon, would provide credit (Rupees), up to 80% of the retail price at prevailing interest rates, with repayment over 5 years to farmers, estates and bought-leaf factories if required for the-purchase of new vehicles. Assurances have been obtained that these credit facilities will be available. Further assurances were obtained that refinancing by the Central Bank of Sri Lanka will be available for up to 75% of the total farm credit. Refinancing would be required for five years, with repayment to coincide with the scheduled collection of loans made by banks. IDA funds for spares for the coconut processing industry (US$0.5 M), would be channelled through the Coconut Development Authority. Technical Assistance (US$0.5 M) would be allocated to the different line ministries' involved. 5.05 Government Contribution. GOSL's financial contribution (US$23 M) for farm buildings, seed storage, incremental 0 & M contribution to TCEO during the estimated two-year disbursement period, local cost for technical assistance and for the proposed UNDP projects, and for payment of FEEC's and duties, would finance about 38% of project costs. Contribution from quasi government institutions would be about US$3.5 M. Net of taxes, GOSL's con- tribution would be US$13.1 M equivalent or 33% of total costs. Government and quasi government contributions do not take account of long-term commitments by GOSL to maintain equipment provided under the project or to continue increased 0 & M allocation after completion of project disbursement for which assurances would be sought. 5.06 UNDP and Private Sector Contribution. The UNDP contribution of US$2.1 M for technical assistance and minor equipment would finance about 3% of project costs 1/. The contribution of farmers, extension staff (who would be sold motorcycles), estates and the coconut processing industry to the project is estimated at US$7 M and covers 12% of project costs. These contributions would consist of payment of FEEC's and import duties. 1/ This is an estimate as the precise costs for the UNDP project to assist the tree crop institution is not yet known.  22 - C. Procurement 5.07 The main items to be financed under the Project would be spare parts for tractors, trucks and machinery, new vehicles and new tractors. Spare parts for existing vehicles and tractors (US$1.6 M), equipment owned by DME (US$2.9 M) and the coconut processing industry (US$0.5 M) would be purchased directly from suppliers and would be sold to the end user on a cash basis. Farm tractors (US$2.2 M) and vehicles for the estate sector (US$4.4 M) including 10% for spares, would be imported on the basis of inter- national competitive bidding in accordance with IDA guidelines. Procurement procedures would take account of the need for standardization of the tractor fleet and in particular of individual estate fleets. Consideration would also be given to the availability of repair and maintenance facilities. Annex 13 provides details of the proposed procedure to select suitable and required makes. Imports would be handled by either the SLTC or the resident supplier agents. Transport and equipment for TCEO (US$5.6 M), motorcycles for extension officers and transport for all other governmental organizations (US$7.3 M) would be grouped and purchased by the appropriate agency under I.C.B. in accordance with IDA guidelines. Minor equipment items valued at less than US$100,000 would be purchased through normal trade channels. Assurances were obtained from GOSL that for all contracts for the importation of new machinery and equipment in excess of US$100,000, technical specifications and draft tender documents will be submitted to IDA before bidding documents are issued and bid evaluations will be submitted to IDA before making awards. Importation for the rehabilitation of the existing tractor and equipment fleet would be placed in bulk but spares would be released by GOSL on the basis of the capacity of existing facilities to undertake repair work. Importation of new farm tractors, transport vehicles and equipment would be staggered, based on quantities manufacturers are able to supply within a given timeframe. It is expected that equipment would arrive over a period of 24 months. 5.08 Technical assistance specialists provided for SLTC (US$200,000), DME (US$100,000), the Lower Uva Development Program (US$200,000) and the Tree Crop Incentive Study (US$50,000) would be recruited by the Ministry concerned in accordance with IDA guidelines for the selection of consultants. D. Disbursement 5.09 Disbursement from the proposed project would be against 100% of cif costs of imported equipment, machinery and spare parts and 100% of for- eign exchange costs for technical assistance. Any savings arising from one project component would be reallocated to others as mutually agreed between GOSL and IDA. It is estimated that disbursement would be over a 30 months period (Annex 11).  - 23 - VI. ORGANIZATION AND MANAGEMENT 6.01 Overall responsibility for project implementation would be with the Ministry of Planning and Economic Affairs (MPEA), with execution of individual project components through participating Ministries. Inter- ministerial coordination, supervision and monitoring would be ensured through a Project Coordinating Committee (PCC) to be established under the chair- manship of the Director, External Resources Division, MPEA. PCC would be assisted in its task by a team of Government staff assigned to work as a secretariat on a full time basis. Members of the Committee would be repre- sentatives of the Ministries directly concerned with project components namely: the Ministry of Agriculture and Lands, the Ministry of Plantation Industries, and the Ministry of Irrigation, Power and Highways; as well as the Central Bank of Ceylon (CB). It has been agreed that the establishment of the Committee be a condition of effectiveness. Furthermore, the project implementation schedule in Annex 12 was agreed upon. 6.02 Specifically, PCC would be responsible for, inter alia, resolving all issues in the administration of the project; approving project plans; coordinating the preparation of tender documents for ICB; allocating vehicles and equipment to different line Ministries; supervision of line Ministries and their subordinate departments to ensure that vehicles and equipment imported under the project would be used for the purposes intended; guiding technical assistance programs; coordinating GOSL activities supported by the project with those of UNDP or other donor agencies; and advising GOSL on follow-up projects and programs. It was agreed that PCC would be made responsible for monitoring the impact of the Project in order to help the Government and-the Association in project evaluation and future project preparation. Broad outlines of the methods for such monitoring were agreed upon, details will be finalized during the first project supervision mission. &.03 To support PCC, technical subcommittees would be established within the three line Ministries most directly concerned with the project (para 6.01). These subcommittees, to be established in agreement with PCC, would be responsible for technical advice on the implementation of the project subcomponents including the establishment of priorities in allocating farm tractors and vehicles going to the estate sector (Annex 13). They would also be responsible for technical supervision of project activities and for monitoring subproject implementation. Membership of the technical subcommittees would depend upon the nature of the task but might include the departments of the Ministries concerned, the import agencies (for example, the SLTC or the resident supplier's agents), rural banks and other technical units which are able to assist. 6.04 The PCC would submit quarterly progress reports to IDA which would be based on reports of the technical subcommittees. The PCC would also pro- vide IDA with information regarding GOSL budgetary allocation supporting the various project subcomponents and on the provision of UNDP inputs.  - 24 - 6.05 GOSL and trhe participating government agencies will maintain separate records which will reflect operations, resources and expenditures in respect of the Project. For this purpose special accounts would be established and PCC would be respDnsible to submit to IDA quarterly statements and an annual, gow-ernment audited, statement for each of the individual accounts or finaiucial statements kept by the participating agencies. The quarterly PCC statements should also show GOSL contribution to the Project (i.e. buildings and seed storage on Government farms, incremental operational and maintenance costs for TCEO) aad local support for technical assistance which would be financed through the GOSL budget. VII. BENEFITS AND JUSTIFICATION 7.01 The primary project benefits would be an early and sustained in- crease in foodgrain and sugar production and at the same time increased benefits from the export sector by improvement of the quality of tree crop products. This would effect very considerably long run foreign exchange earnings and savings through import substitution as well as having a substantial impact on employment (for details see Annex 14). 7.02 The support to the Department of Agriculture, resulting in improved farm services, would have a considIerable but not easily measurable impact upon production. The seed improvement program would result in substantial yield increases; certified seed would increase yields per acre by at least 5% in the case of paddy and by 15% for pulses and other foodgrains. Incremental production of rice resulting from distribution of improved seed is estimated at around 75,000 t or nearly one quarter of present imports. Incremental production of other foodgrains andl pulses would be substantial for example: maize 6,000 t, sorghum 3,500 t and grams 5,500 t (Annex 3, paras 17 and 18). 7.03 The rehabilitation of 1,600 farm tractors and the importation of new units would increase the area which could be mechanically tilled by around 200,000 ac during the Maha season. Due to timely tillage, Maha crop yields would increase and, due to water conservation resulting from dry ploughing and dry seeding, double cropping would be possible on about 30% of the land mechanically tilled during M&aha (Annex 4). The estimated incremental production would be 45,000 t of rice annually at full development. 7.04 Improvements and expanslon of irrigation networks would be pro- vided through assistance to the M:Lnistry of Irrigation and its sub-units TCEO, DME and DI. Improved water management through better irrigation maintenance and operation resulting from greater mobility of TCEO staff and greater availability of funds to TCEO is estimated to result in a 5% increase in paddy production (Annex 5). The rehabilitation of DME equip- ment would allow an estimated 4,000 ac of additional irrigation construction per annum (Annex 5). Support to ])I would advance completion of the drainage- irrigation schemes by 2 years (Annex 5). This would lead to an estimated incremental production of a further 40,000 t of rice.  - 25 - 7.05 Sugar cultivation on the Kantalai project, currently restricted to 4,000 ac, would be expanded to 9,600 ac through provision of limited amounts of machinery and equipment and would lead to an increase in production of 11,500 t of refined sugar (Annex 8). 7.06 In summary, the support to the food crop subsector costed at US$31 M net of ta,es, would result in an estimated production increase from about year six after project effectiveness of 155,000 t of rice, 15,000 t of cereals and pulses, and 11,500 t of sugar. The approximate value of these commodities at projected world market prices in constant dollars would be about US$41 M per annum. Quantitatively this incremental production would be equivalent to over 40% of total current rice imports and to 20% of recent, sharply reduced sugar imports. Additional production increases could be expected through the improved activities of the Department of Agriculture, particularly extension services. 7.07 Measuring the incremental benefits which would arise out of the support to the tree crop subsector (US$4.8 M) is particularly difficult (Annex 6 paras 42 to 44). Project support would primarily help improving quality of processing through reduction in deterioration of raw material during transport from field to factory, or through rehabilitation of processing equipment. Given GOSL's overall diversification policies, increased market returns resulting from this support should improve Sri Lanka's foreign exchange earnings. Apart from the monetary value of quality improvement, the big positive impact would be the general improvement in the financial position of the estate sector with resultant greater assurance of employment for tea pluckers and rubber tappers. Transport for the bought leaf factories would be essential to smallholder tea producers and would complement the proposed improvement in extension activities. 7.08 On-estate transport would also help reduce foreign exchange ex- penditure through reduction of fossil fuel (imported) requirements of tea factories in favor of solid fuel (local wood supply). Savings to the factories themselves would be around Rs 17/100 lb made tea or 7% of the cost of production (Annex 6, Para. 43). 7.09 Due to the nature of the Agricultural Development Project no rate of return has been calculated. The existence of high sunk costs in relation to incremental investment would imply an unusually high rate of return. For example the rehabilitation of one farm tractor at a total cost of US$600 would result within one year in incremental paddy production of 40 tons of rice, equivalent to foreign exchange savings of US$9,750 for the remaining life of 'the tractor (Annex 4). Number of Beneficiaries 7.10 The various project components provided to support food production would affect the majority of paddy farmers in the Dry Zone, estimated at some  - 26 - 320,000 families. Benefits would vary from case to case, basically being a combination of improved services, better seed, access to farm power and better water availability. 7.11 In the tree crop subsectorc immediate beneficiaries would be the public and private estates, tea smallholders and coconut producers. Indirectly the support would go considerably further through increased income and greater assurance of employment for tea pluckers and rubber tappers, the poorest seg- ment of Sri Lanka's rural population. VIII. AGREEMENTS REACHED AND RECOMENDATIONS 8.01 During negotiations the fcllowing major points were agreed to: (a) GOSL would make necessary provision for continued availability of replacements and of spare parts to maintain the farm power and on-estate transport fleets at the levels to which they have been brought as a result of the Credit (paras 4.01, 4.10 and 4.21); (b) GOSL would provide funds for the construction of seed storage facilities on the 42 Government Seed Farms (para 4.07); (c) after completion of disbursement, foreign exchange would be made available by GOSL to the Department of Agricul- ture and to other Government departments to allow proper operation and maintenance of equipment and machinery provided to them (para 4.04); (d) medium term credit facilit:ies would be made available to farmers, estates and bought-leaf factories for the purchase of new tractors and trucks (para 4.21 and 5.04); (e) re-financing facilities by the Central Bank of Sri Lanka would be made available to commercial banks which extend credit for the purchase of tractors and trucks (para 5.04); (f) credit arrangements would be made available to allow extension officers to purchase motorcyles (paras 4.04 and 4.22); (g) funds to TCEO for the maintenance of iLrrigation networks would be raised, not later than 1969, to levels allowing proper operations and maintenance, this level is estimated at Rs 50/acre/annum in current terms (paras 4.13 and 5.05);  .7 _ (h) c'^nsultants to be appointed to assist SLTC, DME and the Lower Uva Development Team would have qualifications acceptable to IDA (paras 4.11 and 4.15); (i) the consultant to assist DME would be appointed not later than six months after the date of signature of the Development Credit Agreement (para 4.15). 8.02 The following Conditions of disbursement against specific Project components were agreed to: (a) in the case of support to the research, training and extension activities of the Department of Agriculture, as well as in the case of support to the three Tree crop research institutes, agreements on the necessary, complementary UNDP projects have been signed (paras 4.05 and 4.25); (b) in the case of support to the tree crop subsector, the study of the effects of subsidies and taxation on production, export earnings and Government revenues would have started through the recruitment of a consultant with qualifications acceptable to IDA (paras 4.30 and 8.02 (i)); (c) in the case of financing imports of spare and replacement parts for DME, the Department's proposal for the importation spare and replacement parts have been approved by the Association (para 4.15). 8.03 The following condition of project effectiveness was agreed to: the Project Coordinating Committee, responsible for overall co-ordination and supervision of the Project, has been established (para 6.01). 8.05 Given the above assurances, the Project is suitable for an IDA allocation of US$25 M.   ANNEX 1 Page 1 SRI LANKA AGRICULTURAL DEVELOPMENT PROJECT THE AGRICULTURAL SECTOR 1. Structural change in Sri Lanka's economy has been very limited over the past decade, with agriculture remaining the mainstay of the economy (Table 1). Table 1: AGRICULTURE'S SHARE OF THIE ECONOMY (% OF TOTAL) 1963 1970 1971 1972 1973 1974 Employment 53 n.a. 51 50 n.a. n.a. GDP (constant 1959 factor cost prices) 41 35 34 34 33 33 GDP (current factor cost prices) 38 34 33 32 33 42 Exports 94 90 86 85 78 72 Source: Department of Census and Statistics, Central Bank Annual Reports. The Bank has studied the agricultural sector in some depth and has recently published the following reports: (a) "Agricultural Sector Survey, Republic of Sri Lanka," Report No. PA-134, February 1973; (b) "Agricultural Policy and Program Review," Report No. 5791a CE, February 1975. It is therefore not necessary to repeat the findings of these reports. Hence this Annex only updates and modifies tables which may have changed in the light of more recently available data and includes some additional information (for example, production targets). 2. Marked differences in climate and soil divide the country into two agricultural zones, 1/ the Wet zone, covering the southwest 30%, and the Dry Zone in the north and east. In the Wet Zone, where elevation rises to over 8,000 feet, rainfall is quite evenly distributed throughout the year, aver- aging 75-200 inches annually. Most soils are red-yellow podsolic. In the 1/ The so-called intermediate zone which is sometimes distinguished, con- sists of semi-dry areas where climatological conditions and soils are similar to the Dry Zone and semi-wet areas that are similar to Wet Zone areas.  ANNEX 1 Page 2 Dry zone rainfall averages 35-75 inches annually concentrated during the northeast monsoon from September through Janlary. Soils are mainly red- dish-brown earths, terrains are undulating. 3. The Wet Zone, with 75% of the rural population, is densely popu- lated and accounts for 70% of total cropland area. It produces virtually all of the export tree crops--tea, rubber and coconut--and accounts for about half of all paddy and other cropland. The Dry Zone is sparsely settled but has the greatest potential for expanded agricultural produc- tion, either irrigated or rainfed (Table 3). 4. Paddy, the most important staple crop, and other annual crops are produced mainly on small holdings. Forty-eight percent of these holdings are less than one ac and 88% are under 5 ac. The average is about 2.5 ac. Production of paddy (Table 4) and other annual crops is exclusively for domestic consumption but is insufficient to meet requirements of a popula- tion growing at an average rate of 2% (1968-74). In fact, the self-suffi- ciency ratio for all foodgrains increased only slightly and Sri Lanka has been dependent upon imports for about 50% of its foodgrain requirements since 1970 (Table 5). 5. Production of tree crops (Table 6), concentrated in the Wet Zone, is mainly for export. The tree crop sector provides the bulk of Sri Lanka's foreign exchange earnings (Tables 7 and 8a), nearly half of all agricultural employment and about 40% of the value added in the agricultural sector. However, as a result of declining production and deteriorating terms of trade (Table 9) the share of traditional exports in total commodity exports has declined. While there are a considerable number of smallholders, tea, and to a lesser extent rubber production, is dominated by estates. In 1972 1/ holdings over 10 ac accounted for 82% of the land in tea, and for 69% of that in rubber. Coconuts are grown extensively in all settled areas with about 50% of total acreage in holdEngs of less than 10 ac. Of the total production an increasing share is consumed locally, yet exports of coconut products (coconut oil, dessicated coconut or copra) still account for over 10% of export earnings. 6. Livestock, fisheries, and forestry are of minor importance. Their production, only 13% of total values added in the agricultural sector, is for the domestic market and despite low per capita consumption imports are re- quired to satisfy demand. 7. Production Targets. The 1972-76 Five-Year Development Plan estab- lished ambitious targets to agricuLtural production (Table 2). These tar- gets have not been met and for some time the plan has generally been regarded as obsolete. The revised production targets 1/ (Table 2) for the years 1975-77 are considerably lower than the original targets but considering actual performance in recent years are unlikely to be met either. 1/ Prior to the Land Reform which established ceilings on privately held lands. 2/ Ministry of Planning.  SRI LANX~A AGRICULTUPAE DTEVELOPINT PROJECT TABL, 2: GOSL PRODUCTIOII TARGETS 1975-1977 1970 1973 1974 1975 1976 1976 1977 (Actual) (Actual) (Actual) (Revised (Original Plan (71evised (revised Ta_rge_t) Target) Target) Target) Paddy (Gross extent sown ('000 acres) 1,878 1,792 2,038 2,188 2,031 2,362 2,408 Yield per acre (bushels) a/ 51.3 4h.6 45.7 52.7 72.3 5o.7 52.7 Production (N bushels) 77.5 62.9 76.8 90.6 116.0 94.5 100.1 Tea Pro-21iction (E lbs) 468 466 h50 470 551 480 492 Exports (M lbs) 460 454 387 430 511 440 L52 Rubber Production (M lbs) 351 3h0 301 369 400 376 380 Exports (M lbs) 35 354 283 355 380 360 362 Coconut Production (M nuts) 2,510 1,935- 2,031 n.ao 3,000 n.a. 2,750 Exports (M nuts equivalent) 880 422 468 nta. 1,300 n.a. n.a. Sugar Production (Tons) 8,100 12,000 19,000 n.a. >',000 n.a. n.a. Subsidiary Food Crops ('000 ac) 466 675 n.a. 890 n.a. 1,070 1,220 a/N1et acre harvested . at HS C Source: Central Bank Annual Report, Ministry of Planning, Development Plan J  ANNEX 1 Table 3 SRI LANKA AGRICULTURAL DEVELOPMENT PROJECT Table 3: LAND USE IN DRY AND WET ZONES, 1970 ('000 acres) Wet Zone Dry Zone Total Cropland Tea 635 - 635 Rubber 561 - 561 Coconuts 516 115 631 Rice 631 744 1,375 Mixed farming /a 1,005 380 1,385 Other /b - 360 360 Sub-total 3,348 1,599 4,947 Non-agricultural /c 980 5,680 6,660 Potential for development 254 4,367 4,621 Total Area 4,582 11,646 16,228 /a Includes most of smallholder coconut. /b Land extensively used with occasional cropping. /c Includes reserved forest lancl, catchment, water bodies, rivers, urban areas, and waste land. Source: Division of Land Use, Ministry of Irrigation Highways and Power, 1971.  A T'T',X17 13 ble 4 ht N-'IC iJLTT J - L DNWILPE, TVp, ,V,i-'' 1959/60 1968/69 1969/70 1970/71 1971/72 1972/73 1973/74 Acreage ('000) Gross Extent Sown 1,468 1,709 1,878 1,794 1,794 1,792 2,038 Gross Extent Harvested 1,398 1,539 1,776 1,711 1,579 1,660 1,925 Damaged Area 70 169 99 79 208 161 113 Area Under Lmproved Varieties Maha n.a. 809 907 832 872 891 1,078 Yala n.a. 300 418 372 380 282 507 Total n.a. 1,109 1,325 1,204 1,252 1,173 1,585 Fertilizer Use ('000 tons) n.a. 84.7 88.1 89.4 80.6 96.8 124.4 Yields Per Acre (bu) Maha 36.1 51.2 52.2 44.9 48.1 45.5 47.7 Yala 36.8 48.0 49.8 47.7 44.5 42.8 41.7 Average 36.3 50.3 51.3 45.9 46.9 44.6 45.7 Production (mil bu) Maha 26.3 47.0 49.5 41.6 42.3 42.0 52.6 Yala 16.7 18.9 28.0 25.3 20.6 20.9 24.2 Total 43.0 65.9 77.5 66.9 62.9 62.9 76.8 Cropping Intensity- (%) 162 150 159 157 152 153 150 a/ Total harvested acreage of paddy divided by Maha harvested acreage. Source: Ministry of Agriculture and Lands, Central Bank Annual Reports.  A TIMEX 1 Table 5 S-I lU'TKA AGCTUItJLTUPTRAL DF,7J0LOPiTT PF''CXI TABLE 5: PROBUCTIOIT, IrcP7TS, TOT' L STTPPLY ANI) SFLF-SUMFIC=C'TZCY L' itUUD G14JLS ('000 tons) 1960 1970 1971 1972 1973 1974 A. Rice Production 528 952 822 773 772 926 B. Imports, total 677 949 751 676 782 812 1. Rice 532 526 339 262 338 297 2. Wheat - 54 82 90 79 74 3. Wheat flour 145 369 330 324 365 441 C. Total Supply (A+B) 1,205 1,901 1,573 1,449 1,554 1,738 D. Self-sufficiency (%) Rice (A/A+B.1) 50 64 71 75 70 76 Rice & Wheat (A/C) 44 50 52 53 50 53 a/ Net production adjusted for seed and waste. Source: Ministry of Planning and Economic Affairs, based on data from Food Commissioner's Department.  ANNEX 1 Table 6 SRI LANKA AGRICULTURAL DEVELOPMENT PROJECT Table 6: TEA, RUBBER, COCONUT - PRODUCTION, EXPORTS, ACREAGES AND YIELDS 1970 1971 1972 1973 1974 TEA Production (mil. lb.) 468 480 471 466 450 Exports (mil. lb.) 460 443 419 454 387 Gross Acreage ('000) 597 597 598 599 598 Yields per acre (lb.) /a 784 804 788 778 753 RUBBER Production (mil. lb.) 351 312 309 340 301 Exports (mil. lb.) 354 285 286 354 283 Gross Acreage ('000) 569 568 567 565 563 Yield per acre /b 707 657 658 694 701 COCONUT Production (mil. nuts) 2,510 2,610 2,963 1,935 2,031 Exports Total: (mil. nuts equivalent) 880 1,019 1,258 422 468 Coconut Oil ('000 Cwts) 1,142 1,388 1,709 361 430 Desiccated Coconut ('000 Cwts) 967 1,043 973 742 838 Copra ('000 Cwts) 305 344 872 55 8 Yields per acre (nuts) 2,289 2,444 2,688 1,997 2,080 /a Production divided by gross acreage. /b Mature area only. Source: Central Bank Annual Report, Coconut Cultivation Board.  ANNEX 1 Table 7 SR" LANKA AGRICULTURAL DEVELOPMENT PROJECT Table 7: BALANCE OF TRADE ON AGRICULTURAL AND OTHER PRODUCTS (US$ Million) 1960 1963 1970 1971 1972 1973 1974 Agricultural /a Major Tree Crop Exports 348 335 302 290 274 314 374 Food Imports 145 160 181 148 138 201 310 Balances 203 175 121 142 136 113 64 Other Products Exports 25 24 33 49 49 88 142 Imports 267 224 208 186 197 225 373 Balance -242 -200 -175 -137 -148 -137 -231 All Products Exports 373 359 335 339 323 402 516 Imports 412 384 389 334 335 426 683 Balance -39 -25 -54 + 5 -12 -24 -167 /a Tea, Rubber, and Major Coconut Products. Source: Ministry of Planning and Economic Affairs.  ANNEX 1 Tables 8a, 8b SRI LANKA AGRICULTURAL DEVELOPMENT PROJECT Table 8a: COMPOSITION OF IMPORTS (US$ Million) 1970 1971 1972 1973 1974 US$ Z US$ % US$ % US$ % US$ Rice 57 14.7 33 9.9 26 7.8 42 9.9 108 15.8 Flour 43 11.1 35 10.5 31 9.3 71 16.7 129 18.9 Sugar 29 7.5 41 12.3 40 11.9 50 11.7 28 4.1 Other Food 52 13.2 39 11.6 41 12.2 38 8.9 45 6.6 Sub-Total Food 181 46.5 148 44.3 138 41.2 201 47.2 310 45.4 Other Imports 208 53.5 186 55.7 197 58.8 225 52.8 373 54.6 of Which: (Fertilizer) (14) (3.6) (10) (3.0) (10) (3.0) (17) (4.0) (33) (4.8) (Petroleum Products) (10) (2.6) ( 4) (1.2) ( 6) (1.8) (46)(10.8)(136) (19.9) (Investment Goods) (92) (23.7) (70) (21.0) (71) (21.2) (71)(16.9) (69) (10.1) Total Imports 389 100.0 334 100.0 335 100.0 426 100.0 683 100.0 Source: Ministry of Planning and Economic Affairs, Central Bank Annual Reports. Table 8b: COMPOSITION OF EXPORTS (US$ Million) 1970 1971 1972 1973 1974 US$ X US$ Z US$ % US$ % U15 X Tea 188 56.1 192 56.6 188 58.2 198 49.3 204 39.5 Rubber 74 22.1 52 15.3 43 13.3 93 23.1 111 21.5 Coconut Products 40 11.9 46 13.6 43 13.3 23 5.7 59 11.5 Sub-Total 302 90.1 290 85.5 274 84.8 314 78.1 374 72.5 Other Exports 33 9.9 49 14.5 49 15.2 88 21.9 142 27.5 335 100.0 339 100.0 323 100.0 402 100.0 516 100.0 Source: Ministry of Planning and Economic Affairs.  ANNEX 1 Tables 9, 10 SRI' LANKA AGRICULTURAL DEVELOPMENT PROJECT Table 9: EXPORT AND IMPORT PRICE INDEX, TERMS OF TRADE (1970-74) (base 1967 = 100) Export Price Import Price Terms of Index Index Trade /a 1970 118 140 84 1971 117 150 78 1972 118 158 75 1973 137 209 65 1974 213 370 58 /a Export Price Index Import Price Index x 100 Source: Central Bank Annual Report, 1974. Table 10: PRICES OF SELECTED IMPORTS AND EXPORTS 1971 1972 1973 1974 Imports (c.i.f., Rs/ton) Rice 562 544 953 2,686 Wheat 440 432 646 1,464 Wheat Flour 629 667 1,254 2,124 Sugar 844 1,168 1,752 5,486 Pulses 921 1,076 1,269 n.a. Urea 470 501 630 1,730 Ammonia Sulphate 225 266 362 852 Exports (f.o.b.) Tea (Rs/lb) 2.50 2.77 2.78 3.52 Rubber(Rs/lb) 1.08 .93 1.68 2.61 Copra (Rs/Candy) 347.72 296.40 324.25 566.91 Coconut Oil (Rs/ton) 2,142 1,549 1,489 6,573 Desiccated Coconut (Rs/lb) .88 .72 1.34 2.68 Source: Central Bank Annual Report, Fertilizer Corporation, Food Commissioner's Department.  ANNEX 2 Page 1 SRI LANKA AGRICULTURAL DEVELOPMENT PROJECT SUPPORT TO THE DEPARTMENT OF AGRICULTURE Introduction 1. The Department of Agriculture, the executive arm of the Ministry of Agriculture and Lands, is responsible for agricultural research, training extension, seed multiplication and certification, and plant protection services. The Department operates 65 Government farms, 3 main research stations and 18 smaller satellite stations, an agricultural training institute and eight practical farm training schools. In addition, the Department main- tains one large central machinery and equipment workshop and 4 field repair workshops. A farm machinery research center is responsible for testing and designing farm equipment, machinery and tools and a farm Mechanization Train- ing Center is responsible for training extension personnel as well as farmers and tractor operators. Finally, the Department has responsibility for the development of animal husbandry, including research, A.I., and animal health. Responsibility for tree crop research rests with the 3 tree crop research institutes (Annex 7). The Department is physically removed from the Ministry, being in Peradeniya near Kandy, and enjoys a considerable amount of indepen- dence; it operates under a director. Chart 1 gives an outline of the present organization of the Department. Present Organization Research 2. The Research Division, headed by an Assistant Director, has on- going research programs in plant breeding, agronomy, entomology, pathology and soil and water management. Research has, until recently, concentrated on the agronomic aspects of rice cultivation, particularly rice breeding. Little attention was given to other crops or to general land and water management. The three main research stations are located one in each of the three major climatic zones of the country, namely: - Peradeniya in the intermediate zone - Maha-Illuppallama in the dry zone - Sita Ellya in the wet zone. 3. The smaller stations are distributed all over the island; they have their own research programs, covering, for instance, cotton, dry zone vegetables, rice breeding. All stations are poorly supplied with  ANNEX 2 Page 2 basic field and laboratory equipment, all lack transportation and many have insufficient communication facilities. Senior research staff is generally competent but many support staff Lack experience. Due to poor pay scales and lack of equipment restricting work possibilities, turnover of staff is high. Training 4. Training, under an Assistant Director, is currently provided at four levels: (a) at Kundasale, in the intermediate zone, a two-year course for high school graduates covering crop husbandry, animal husbandry, farm engineering, horticulture and rural home management. The school has an annual intake of about 160. Graduates from the school are the main source of recruits for the extension service. Training is adequate but hampered by lack of teaching facilities; (b) at eight practical farm training schools offering one-year courses for 50 to 60 students each. The training provided tends to be too theoretical; (c) short courses of 1 day to 3 weeks duration. These courses are given for farmers at 14 district training centers located on Department farms and focus on specific topics. Training staff and equipment is barely adequate; (d) in-service training for extension staff at the three main research stations mentioned in para. 2 above. The training provided is not enough and tends to be too general. Extension 5. The structure of the extension services at end 1974 was: At Headquarters One Deputy Director Three Assistant Directors Five Senior Agricultural Officers In 22 Districts 22 District Agricultural Officers (DAEO) plULS 4 additional District Agricultural Officers In 230 Divisions 281 Agricultural Instructors (AI) and 1,150 Village Workers (KVS) On average, each AI supervises 4 Village Workers and each village worker supervises about 1000 ac. or 500 farm families. Major emphasis has been given so far to paddy cultivation and contact between farmers and extension staff was, until now, largely through the Cultivation Committees (CC). The  ANNEX 2 Page 3 effectiveness of extension services has been limited by lack of demonstra- tion and transportation facilities and by the heavy administrative burden placed on extension officers. Extension of use of improved rice varieties has been quite successful. However, rice yields have not reached the potential of the HYV's because of unreliable water supply and problems frequently faced by smallholders in obtaining other inputs in time and quantity required. 6. The Department's extension services are not responsible for advice on tree crop cultivation and management, and some agencies, such as the Sri Lanka Tobacco Board, have established their own promotion and advisory serv- ices. The Need for Reorganization 7. With the concentration of agricultural research, training and extension services on rice cultivation, insufficient attention is given to advising farmers on cultivation practices for other foodgrains, pulses, vegetables, and oil seeds which traditionally are grown under a system of shifting cultivation (Chena system). The services are also not equipped to provide guidance on improving total farming patterns, i.e., a combina- tion of paddy, upland, chena and, occasionally, tree crop cultivation. Nor are the services geared to develop farming systems for the most effi- cient use of land and water resources in different agro-climatic zones or sub-regions. 8. Government's concern about increasing self-sufficiency in food, and in greater crop diversification culminated in the passing of the Agri- cultural Productivity Law of 1972. 1/ Government also became increasingly concerned about smallholders' income. The existing services, in their struc- ture and orientation, are not in a position to support Government aims and the continuing uneconomic use of land and water has clearly emerged as a main constraint to improvement of agricultural production. The Proposed Reorganization Program (Chart 2) 9. MAL and, more specifically, the Department of Agriculture, have realized the inefficiency of their present services and have drawn up a detailed proposal for the reorganization of the Department's services. This proposal, approved by Cabinet, provides for a closer integration and a general strengthening of research, extension and training activities. The firnal aim is the introduction of a system of optimum land use patterns, crop varieties to be grown, fertilizer application, water use, based on local ecological conditions. 1/ For a summary explanation of this Law, see IBRD Report No. 579a-CE, paras 3.14 to 3.17.  ANNEX ? Page 4 10. mle .nd TJse Divisi-; jf t'