Sri Lanka - Third Rural Development Project

w ~~~_ Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4377-CE STAFF APPRAISAL REPORT SRI LANKA THIRD RURAL DEVELOPMENT PROJECT April 18, 1983 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.  (i) CURRENCY EQUIVALENTS US$1 = Rs 23 Rs 1 = US$ 0.04348 WEIGHTS AND MEASURES I bushel (bu) of paddy = 46.00 lb 1 kilogram (kg) = 2.205 lb 1 acre (ac) = 0.405 hectare (ha) 1 mile (mi) = 1.609 kilometers (km) 1 square mile (sq.mi) = 640.00 ac (259 ha) 1 foot (ft) - 30.50 centimeters (cm) ABBREVIATIONS AND ACRONYMS ADB - Agricultural Development Bank AE&AR - Agricultural Extension and Adaptive Research AI - Artificial Insemination ASC - Agrarian Service Center BC - Bank of Ceylon DA - Department of Agriculture DAPH - Department of Animal Production and Health DAS - Department of Agrarian Services DLGS - Department of Local Government Services DM - District Minister ERR - Economic Rate of Return GA - Government Agent COSL - Government of Sri Lanka GDP - Gross Domestic Product GPS - Guaranteed Price Schemes IDA - International Development Agency ICB - International Competitive Bidding IFAD - International Fund for Agricultural Development LS - Lump Sum - Million O&M - Operation and Hfaintenance PB - People's Bank PCC - Proi,ect Coordination Committee PD - Project Director PS - Prudent Shopping PV - Present Valuje PW - Present Worth  (ii) FOR OFFICIAL USE ONLY RDD - Regional Developme RDP - Rural Development Project RT)PSC - Rural Development Project Steering Committee SCF - Standard Conversion Factor SDR - Special Drawing Rights T&V - Training and Visit VIRP - Village Irrigationa Rehabilitation Project GLOSSARY anicut - diversion scheme asweddumized - levelled and bunded land suitable for impounding water chena - shifting (slash and burn) cultivation district - principal administrative unit in the country; there are 24 districts in Sri Lanka Maha - northeast monsoon season (October to February) Paddy - unhusked rice tank - impounding reservoir for irrigation yala - southwest monsoon season (April to September) GOSL FISCAL YEAR January 1 - December 31 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   (iii) SRI LANKA THIRD RURAL DEVELOPMENT PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. SECTORAL CONTEXT ........................................ 1 Background .............................................. 1 General ................................................. 1 Agriculture ............................................. 2 Objectives and Strategy for Future Agriculture and Rural Development ....................................... 2 Bank Group Support to Rural Development ................. 3 II. THE PROJECT AREA ........................................ 4 General Features ........................................ 4 Land Use ................................................ 5 The Agriculture Sector .................................. 6 Fisheries Sector ........................................ 11 Economic Infrastructure ................................. 12 Social Infrastructure ................................... 13 III. THE PROJECT ............................................. 14 Objectives and Approach ........................ 14 Project Components ........................ 14 Main Project Features ........................ 16 IV. PROJECT COSTS, FINANCING AND PROCUREMENT ................ 24 Project Costs ........................................... 24 Financing ............................................... 26 Procurement ............................................. 26 Disbursements ........................................... 27 Accounts and Audits ..................................... 28 V. PROJECT ORGANIZATION AND MANAGEMENT ..................... 28 Overall Project Management .............................. 28 Project Implementation .................................. 30 Operation and Maintenance (O&M) ......................... 30  (iv) Monitoring and Evaluation ............................... 31 Staff Training and Technical Assistance ................. 31 VI. PRODUCTION, MARKETING, PRICES, FARM INCOMES AND COST RECOVERY ................... 32 Agricultural Impact ................... 32 Marketing and Commodity Prices .......................... 34 Farm Income ............................................. 35 Cost Recovery ........................................... 36 VII. BENEFITS AND JUSTIFICATION .............................. 38 General ................................................. 38 Employment and Income Effects ........................... 39 Economic and Social Infrastructure ...................... 39 Environmental Impact .................................... 39 Benefits to the Economy and Economic Analysis ........... 39 Project Risk and Sensitivity ............................ 41 VIII. AGREEMENTS REACHED ...................................... 42 LIST OF ANNEXES ANNEX 1 - Cost Tables Table A - Project Component by Time Table B - Mannar - Project Component by Time Table C - Vavuniya - Project Component by Time Table 1 - Vavuniya - Orchard Development Table 2 - Mannar - Forestry Table 3 - Vavuniya - Forestry Table 4 - Mannar - Major Irrigation Table 5 - Vavuniya - Major Irrigation Table 6 - Mannar - Minor Irrigation Table 7 - Mannar - Groundwater Development Table 8 - Vavuniya - Groundwater Investigation Table 9 - Mannar - Input Supplies Table 10 - Vavuniya - Input Supplies Table 11 - Mannar - Agricultural Credit Table 12 - Vavuniya - Agricultural Credit Table 13 - Mannar - Agriculture Adaptive Research and Training Table 14 - Vavuniya - Agricultural Adpative Research and Training Table 15 - Mannar - Livestock Table 16 - Vavuniya - Livestock Table 17 - Mannar - Fisheries Services Table 18 - Mannar - Rural Electrification Table 19 - Vavuniya - Rural Electrification Table 20 - Mannar - Rural Roads  (v) Table 21 - Vavuniya - Rural Roads Table 22 - Mannar - Health Table 23 - Vavuniya - Health Table 24 - Mannar - Education Table 25 - Vavuniya - Education Table 26 - Mannar - Rural Water Supply Table 27 - Vavuniya - Rural Water Supply Table 28 - Mannar - Management and Coordination Table 29 - Vavuniya - Management and Coordination Table 30 - Disbursement Schedule for IDA Credit ANNEX 2 - Guidelines for Planning and Design of Rehabilitation Works on Major and Minor Irrigation Schemes ANNEX 3 - Planning Consultants for Rehabilitation of Irrigation Schemes - Draft Terms of Reference ANNEX 4 - Project Salient Features and Procurement Schedule Table I - Major Irrigation Schemes - Salient Features Table 2 - Rural Electrification Schemes - Salient Features Table 3 - Feeder and Rural Roads - Salient Features Table 4 - Procurement Schedule for Vehicles and Equipment ANNEX 5 - Agricultural Credit - General Lending Terms and Conditions ANNEX 6 - Guidelines and Criteria for Rural Water Wells ANNEX 7 - Agency Responsibility for Project Implementation Chart 1 - Organization Chart ANNEX 8 - Economic and Financial Analysis Table 1 - Annual Crops, Cropping Intensities, Input Requirements and Yields (per ha) Table 2 - Mannar and Vavuniya - Plantations, Inputs Requirement and Yield Table 3 - Mannar and Vavuniya - Farm Budget for Livestock Owners Table 4 - Prices Used for the Financial and Economic Analysis Table 5 - Farm Budget for Farmers on Major and Minor Irrigation Schemes Table 6 - Farm Budget for Farmers on Tubewells and Dug Wells Table 7 - Farm Budget for Planting Orchards Table 8 - Economic Rate of Return, Relative Importance of Project Cost, Benefit Streams With Switching Values Table 9 - Economic Real Flow   SRI LANKA THIRD RURAL DEVELOPMENT PROJECT STAFF APPRAISAL REPORT I. SECTORAL CONTEXT Background The Government of Sri Lanka (GOSL) has successfully launched a number of district level rural development projects (RDPs) as part of its strategy to decentralize development planning and implementation, and to maximize local par- ticipation in the process. These projects are multi-sectoral and relatively complex. However, the existing decentralized political and administrative struc- ture in Sri Lanka has proved effective in dealing with implementation problems frequently associated with multi-sectoral projects. The proposed project would be the seventh RDP undertaken by GOSL and represents a five-year time slice of longer-term district development programs for MIannar and Vavuniya. The project was prepared by departments and agencies of GOSL in consultation with local institutions and leaders under the overall coordination of the Ministry of Plan Implementation (MPI). Local consultants assisted in the initial stages of project preparation, started in January 1980. Preparation reports were submitted to IDA in October 1982 for its consideration with the view to start implementation in early 1984. As in other on-going RDPs, the project is designed to promote balanced and accelerated growth based on assessement of resources and development priorities of the Districts. This report is based upon the findings of an appraisal mission that visited Sri Lanka in November 1982, comprising G. Lituma, A. Seager and M. Saeed (IDA) and Y. K. Murthy (Consultant). General 1.02 Sri Lanka is endowed with relatively favorable resources and diverse agro-climatic conditions that permit wide ranging agricultural pursuits. It also possesses a highly literate population and has achieved considerable success in curtailing population growth. Sri Lanka comprises a total area of about 65,600 sq km, with a population of about 15 M (mid-1982). About 76% of Sri Lanka's inhabitants live in rural areas and are principally dependent, directly or indirectly, on agriculture. Per capita GDP is about US$270 (1981 estimate). During 1970-77, real GDP grew by only 2.9% p.a., but in contrast during 1978-82 growth accelerated to an average of 5.5% p.a., largely due to economic reforms. Growth improved almost immediately following the introduction of the ambitious 1978 public investment program, and the economic liberalization accompanying it that released the private sector from extensive pre-1977 controls. Expansion of the investment program between 1977-82 was not complemented by significant increase in national savings, necessitating large inflows of foreign capital to finance large deficits in the budget and in the balance of payments. GOSL recog- nizing these deficits could not be sustained over time, introduced major cuts in budget allocations during 1980-81 and strengthened expenditure controls. Over the next few years, annual investment levels will need to be controlled closely and further policy changes introduced to restore economic balance in the economy.  -2- These measures would include emphasis on quick-yielding investments to sustain medium-term growth, while adjusting longer-term, large-scale investments to the absorptive capacity of the economy. 1.03 Based on rainfall patterns, the Island can be divided into two major zones: the wet zone (average annual rainfall of 1,900-2,500 mm) in the southwest quadrant, and the dry zone (average annual rainfall of 900-1,900 mm) covering about 64% of the Island. A narrow transition band between the dry and wet zones is referred to as the intermediate zone. About three-quarters of the population reside in the wet zone with an average population density of about 700 per sq km, compared to only 80 per sq km in the dry zone. Until 1950, much of the population growth took place in the wet zone. Therefore, GOSL has emphasized development of the dry zone through major irrigation and settlement schemes, such as the Mahaweli Ganga Development Program, which is scheduled to irrigate more than 100,000 ha by 1988. The proposed project would be located in the northwestern part of the dry zone. Agriculture 1.04 The agriculture sector, which employs about 50% of the labor force and accounts for about 25% of GDP and 60% of export earnings, grew at an average annual rate of 3.5% during 1978-80. W4hile paddy output steadily increased, mainly due to improvements in producer incentives, production of plantation crops, the main export earners fell due to a combination of management problems, abnormal weather, adverse prices, and lack of production incentives. Following more favorable weather conditions and the steady improvements in incentives in 1981, agriculture as a whole recorded a 6.9% growth rate. Growth was particularly encouraging in the paddy sector (7% p.a.) However, in 1982 the agricultural sector suffered a serious setback, because of unfavorable weather conditions. Tea and rubber production continued to decline, while paddy, in spite of recording continuous expansion since 1978, also declined. Nevertheless, agriculture in 1982 grew by about 2.2% due to expansion of coconut, minor export crops, and subsidiary food crops as well as forestry and fisheries. To stimulate agricultural produc- tion and exports, GOSL has provided direct financial assistance to individual farmers for planting/replanting tea, rubber, minor export crops, coconut, and fruit trees. Fertilizers are subsidized, but such subsidies are gradually being removed. GOSL also subsidizes milk and milk products, although this is being reduced. Objectives and Strategy for Future Agriculture and Rural Development 1.05 Principal objectives of GOSL's medium-term development program are to: (a) increase employment and income levels in rural areas, particularly those of economically disadvantaged people and educated youth; (b) achieve an agricultural growth rate of 5.0% p.a. over tha next five years to attain food self-sufficiency and better nutritional standards; and (c) expand export earnings from agricultural exports such as tea, rubber, coconut, cocoa, coffee, spices and fruits. GOSL strategy for achieving these objectives emphasizes: (i) maintaining appropriate  -3- price incentives; (ii) strengthening agricultural supporting services such as extension, research, credit, and marketing; (iii) improving input supply espe- cially for seeds, plant materials, fertilizers and pesticides; (iv) expanding and/or rehabilitating areas under plantations; (v) rehabilitatng existing irriga- tion schemes, expanding irrigated areas and improving water management; (vi) improving roads and expanding electrification; and (vii) decentralizing planning and development. 1.06 In its effort to accelerate growth and improve rural living conditions, GOSL designated the country's 24 districts as administrative units for planning and development. Measures adopted by GOSL to implement this approach include: (a) appointment of a District Minister and elected District Development Councils and Village Development Councils to oversee planning and development in each district; (b) provision for decentralized capital budgets; and (c) implementation of rural development projects (RDP) in selected districts. District Ministers are appointed by the President from elected members of Parliament. The decen- tralizqd budget finances a limited number of small-scale capital works (generally) costing less than Rs 500,000 each). Each fiscal year, each electorate receives Rs 2.5 M for such projects. 1.07 As part of this decentralized development program, GOSL has been implementing RDPs that include low-cost, quick-yielding, labor-intensive invest- ments aimed at better utilizing existing infrastructure and development potential of the districts. They attempt to respond to local developmental needs and priorities and provide opportunities to achieve regional equity by balancing GOSL investments in high capital cost projects, such as Mahaweli Ganga Development, with lower-cost, quicker-yielding projects in areas that receive no significant direct benefits from higher capital cost schemes. Bank Group Support to Rural Development 1.08 The IDA-supported Kurunegala RDP (Cr. 891-CE) was the first district level RDP implemented by GOSL in 1979. This was followed by the IDA-financed Second RDP (Cr. 1079-CE) in Matale and Puttalam Districts. RDPs are also underway in Matara, Hambantota, Nuwara Eliya, and Badulla Districts with financial assistance from Sweden, Norway, the Netherlands, and the International Fund for Agricultural Development (IFAD), respectively. In addition, RDPs are also under preparation for Monoragala, Ratnapura and Kegalle. Each district development plan is prepared after a field survey that takes into account leading sectors in need of investment support to promote balanced and accelerated growth. Although investment by sector vary among districts, main emphasis is given to income and employment generating activities and improvement/rehabilitation of existing structures and services. Given the multi-sectoral nature of RDPs, however, a great deal of flexibility in investment planning and implementation is necessary. So far, institutional arran- gements have been effective in coordinating activities within these relatively complex projects and in providing the desired flexibility. There is need, however, to improve monitoring and evaluation facilities at the central level.  -4- Kurunegala RDP had some problems of quality control during the initial construc- tion stage. Steps have been taken to remedy these shortcomings and results are encouraging. In addition to the two IDA-financed RDPs, the Bank is the supervis- ing agency for the IFAD-financed Badulla RDP. Progress reports for the three RDPs show that most components are being implemented successfully. Furthermore, interim evaluation reports on the impact of the Kurunegala RDP show that this project is already having favorable impact on the districts agricultural and social sectors as well as on the decentralization process for planning and implementing developmental activities at district level. However, extension of the closing date of Kurunegala will be necessary, mainly to complete irrigation works. Kurunegala and other on-going RDPs have provided valuable experience for designing future RDPs, and lessons learned in the course of their implementation have been incorporated in this proposed Third RD Project. II. THE PROJECT AREA General Features 2.01 The proposed project would cover the Mannar and Vavuniya Districts, which are among the poorest and least developed in Sri Lanka. Located in the northern lowlands of the island, Mannar has an area of about 2,010 sq km and Vavuniya, 2,190 sq km. Population is sparse and unevenly distributed (107,000 in Mannar and 96,000 in Vavuniya). Densities are about 53 persons per sq km in Mannar and 44 in Vavuniya, representing some of the lowest in Sri Lanka. In Mannar, there are three perennial rivers of which the Aruvi Aru is the most important; most of its dry season flow is diverted into the Giant's Tank which commands about 6,300 ha by feeding about 160 minor tanks. In addition there are nine other major irrigation schemes 1/ and about 200 minor schemes. Vavuniya has no major river that can be tapped for irrigation. There are 14 major schemes and about 200 minor irrigation schemes which depend mainly on rainfall. 2.02 Administratively, the Districts constitute one parliamentary electorate each, with a Dlistrict Minister and four AGA divisions (administrative units unde Assistant %overnment Agents) in each District. The rural population, 86% in Mannar and 81% in Vavuniva, has low per capita income; over 50% of the population in Mannar and Vavuniya are below the absolute poverty income level of about UJS$ 110 (1991 estimate). In Mannar, agriculture and fisheries are the most important sectors from the employment noint of view and in Vavuniya, agriculture. Given their agro-climatic characteristics, cultivation in both Districts and fishing activities in Mannar are confined to onlv one season. Employment is therefore highly seasonal. 1/ Major irrigation schemes commanding over 80 ha and minor schemes 80 ha or less.  -5- 2.03 Climate. Rainfall in the two Districts is highly seasonal. Mean annual rainfall varies from 530 mm to 1,200 mm (at 75% probability level) in Mannar and from 1,000 mm to 1,800 mm in Vavuniya of which about 80% falls during the northeast monsoon (maha season). The seasonal rainfall significantly limits agricultural production to only the maha season unless supplemental irrigation is provided. Temperatures,however, are generally suitable for crop production throughout the the year, provided moisture is available. Mean temperatures is relatively low (200-250 C) in October-January, with significant diurnal variation. 2.04 Soils and Groundwater Potential. There are two soil types in inland areas of Mannar: red-brown earths and low-humic gleys, both typical of the dry zone. Near the coast and on Mannar Island alluvia predominate: sandy on the Island and maritime clay in the coastal mainland areas. A substratum of miocene limestone in the coastal belt has considerable groundwater potential. Three basins have been identified for groundwgater exploitation: Murunkan, Mulankavil-Vellankulam, and Chilavathurai. About 200 deep tubewells were sunk mainly in the Murunkan basin in 1975/76; 125 are now in operation, all in the Murunkan basin. However, problems of saline intrusion from the sea constrain further expansion in this area. Potential for a limited number of tubewells has recently been confirmed in Mulankavil-Vellankulam basin. Investigations are still to be completed for Chilavaturai basin. There are also a large number of open wells in all parts of the District for drinking water and irrigation of small gardens. 2.05 Soils in Vavuniya are red-brown earths and low-bumic gleys. There are some pockets of red-yellow latosols in the northern part of the District, which are more fertile and have better groundwater potential than in the rest of the District. The substrata, except in the north, consist mainly of hard crystalline rocks with limited groundwater potential. There are about 3,000 shallow dug wells with 4.5-7.5 m diameters and about 9 m depth. About 30% of households utilize this groundwater to cultivate 0.2-1.0 ha of subsidiary foodcrops. Small farmers, however, are financially constrained from exploiting these groundwater resources. Land Use 2.06 Both Districts have a low proportion of cultivated land--about 9% in Mannar and 12.6% in Vavuniya. Of the 21,600 ha used for agriculture in Mannar, paddy accounts for 59%, while perennial crops (mango, citrus, coconut and pal- myrah), account for 25%. Subsidiary food crops cover only 3% and other crops account for the remaining area. Of the 27,100 ha used for agriculture in Vavuniya, 63% is used for paddy. Subsidiary and other crops account for 37%.  -6- 2.07 Land use in the two Districts is as follows: Table 2.1: Land Use in Mannar and Vavuniya Districts Mannar Vavuniya % of Land % of Land Agricultural Land Area Agric. Total Area Agric. Total ('000 ha) ('000 ha) Paddy Land Under Major Schemes 8.5 39.0 3.4 4.4 16.0 2.0 UJnder Minor Schemes 3.9 18.0 1.6 10.4 39.0 5.0 Rainfed/Lift Irrigation 0.4 2.0 0.2 2.2 8.0 1.0 12.8 59.0 5.2 17.0 63.0 8.0 Perennial Crops 5.4 25.0 2.2 - - - Subsidiary Food Crops 0.7 3.0 0.3 9.2 34.0 4.2 Other Crops 2.7 13.0 1.1 0.9 3.0 0.4 Subtotal Agric. Land 21.6 100.0 8.8 27.1 100.0 12.6 Forest 186.4 75.2 104.0 47.4 Uncultivated 40.0 16.0 88.3 40.0 Total 248.0 100.0 219.4 100.0 The Agricultural Sector 2.08 Land Tenure and Farm Size. Mannar has predominance of small agricultural holdings; about 55% of farmers operate holdings of less than 1.0 ha. In Vavuniya, about 55% of the farmers operate holdings of less than 2.0 ha. In general, hold- ings under major irrigation schemes are less than 1.5 ha, reflecting usual settle- ment scheme allocations. Holdings under minor irrigation schemes are also small. Larger holdings are usually located in rainfed areas with low levels of produc- tivity. In both Districts, over half of holdings are owned by cultivators. About 40% are held on long leases from GOSL and few (about 10%) are rented from individual owners. The following table shows the size distribution of operational holdings: Table 2.2: Land Tenure in Mannar and Vavuniya Mannar Vavuniya No of Farms 7 No of Farms x Less than 1.0 ha 6,400 55.0 3,600 27 1.0 - 2 ha 2,000 17.0 3,900 29 2 - 4 ha 2,400 21.0 4,100 30 Over 4 ha 900 8.0 1,900 14 Total 11 700 100.0 13,506 100 2.09 Agricultural Practices and Crop Yields. Paddy is the most important crop in the two Districts. Of the total asweddumized (levelled and hunded land  -7- suitable for impounding water) paddy area of about 12,800 ha in Mannar, about 8,500 ha are under major irrigation schemes, 3,900 ha under minor schemes, and about 400 ha under rainfed cultivation. In Vavuniya, of the total asweddumized paddy area of about 17,000 ha, about 4,400 ha are under major irrigation schemes, 10,400 under minor schemes and about 2,200 ha under rainfed cultivation. Typi- cally, 70%-80% of the total asweddumized land is cultivated during the maha season. In the southwest monsoon (yala), only about three percent of the total area is cultivated, confined principally to major schemes. This compares tnfavorably with irrigation schemes in other parts of the country. In Mannar, paddy yields average about 3.0 MT/ha, comparing well with average national figures. There are, however, wide yield variations depending on irrigation source and rainfall. Yields reach about 4.0 MT/ha on irrigated areas under the Giant's Tank; in rainfed areas, yields are only about 1.2 MT/ha. In Vavuniya paddy yields are lower than in Mannar, averaging about 2.5 MT/ha. Although less drastic than in Mannar, there are also wide yield variations, yields averaging as low as 1.0 MT/ha in rainfed areas. About 80% of paddy is planted with new improved varieties and the balance, with old improved varieties. Due to shortages of certified seed, especially during drier years, farmers generally keep their own seeds for at least three seasons before acquiring new certified seed. Currently, paddy is mostly broadcast, with transplanting practiced only on about 25% of area. About 55% of farmers in the two Districts use fertilizer, although not necessarily up to recom- mended levels. 2.10 Water from the Mahaweli Ganga will not reach Mannar District and will only reach Vavuniya in the last phase of the Mahaweli Program; therefore rice produc- tion in the two Districts will be mostly confined to maha for the foreseeable future, since most of the tanks are not large enough to store sufficient water for significant yala irrigation. The short-term and medium-term development potential lies in increasing paddy output by making water supplies more reliable and expand- ing the planted area by (a) improving distribution systems, (b) reducing con- veyance losses, (c) introducing improved water management techniques, and (d) increasing tank storage capacities. Experience elsewhere in Sri Lanka on very similar soils indicates that, given adequate water supplies, over 4 MT/ha are readily attainable and often exceeded. 2.11 At present, the bulk of subsidiary food crops and vegetables in both Districts is cultivated in rainfed upland farms during the maha. Upland areas grow pulses, sesame, sorghum, finger millet and maize. Where irrigation is avail- able, chillies, bombay onions, shallots and various other vegetables are grown during the two seasons. Orchard crops--bananas, citrus and mangoes--are slowly gaining popularity in Vavuniya as markets develop; currently, they occupy about three percent of the cropped area. To encourage area expansion of orchards, the Department of Agriculture (DA) administers a financial assistance scheme for farmer investment in new orchard plantings at the rate of Rs 7,900 per ha. In Mannar, only about 350 ha of subsidiary food crops and almost no vegetables are grown; 95% of consumption needs come from outside the District. Expansion of such  -8- crops during yala is highly desirable, given the labor-intensive nature of produc- tion and the severe unemployment in this season. Suitable land with adequate irrigation water potential is available for such cultivation in both Districts. 2.12 Development potential in upland areas without supplementary irrigation is limited; prospects lie in exploiting groundwater resources. In Mannar, investiga- tions have identified potential tubewell fields (para 2.04), but further groundwater use must be accompanied by careful monitoring of the water table to prevent over-exploitation and permanent damage to the acquifer from saline intru- sion. In Vavuniya, groundwater studies are yet to be implemented, but there is sufficient evidence to support development of a limited number of shallow dug wells. Existing wells do not generally provide year-round water for irrigation. Thus the extent of vegetable cropping may be limited to about nine months. In areas with lower-yielding wells, tree crops (mangoes, citrus) provide a good cropping alternative, since little irrigation is required once the plantation is established. 2.13 Agricultural Research and Extension. Well-documented investigations conducted over many years at the Dry Zone Research Station at Maha Illupallama provide a solid foundation for the adaptive research work required for this project. A new regional research station is being established under the IDA-supported Agricultural Extension and Adaptive Research (AE&AR) Project (Cr. 931-CE) in Kilinochchi, about 70 km north of Vavuniya, where agro-climatic condi- tions resemble those of the project area. Testing and adapting research findings to local conditions is being done at two adaptive research stations established under the AE&AR Project in Vavuniya and Murunkan (Mannar). However, the Murunkan station, located on low-humic gley soils, cannot assist upland cropping. 2.14 Agricultural extension is being strengthened and organized under the AE&AR Project according to the Training and Visit (T&V) system. Investments, staffing and staff training under this project are generally on target. The AE&AR Project would provide the additional staff and facilities required to implement activities envisaged under the proposed project. Farmer training beyond that conducted under the T&V system has been carried out successfully at a farmer training institute near Vavuniya, where facilities are also available for extension staff training. This center concentrates on training young farmers, who are required to conduct work on sample plots. A similar establishment needs to be set up in Mannar. 2.15 Land Use Planning. DA operates a land use planning unit in Peradeniya. This unit receives technical assistance under the Anuradhapura Dry Land Farming Project supported by the Asian Development Bank (ADB). Under the AE&AR Project, the Regional Research Station in Killinochchi will have a land use planning unit. However, to develop local planning capability within the project area, it would be necessary to establish one new land use planning sub-unit in the project area. 2.16 Agricultural Inputs. Inputs are available through government agencies such as Agrarian Service Centers (ASC) and from private dealers. Agricultural staff of various departments are generally posted at ASCs. Department of Agrarian  -9- Services (DAS) staff sells fertilizers and pesticides at those centers. Both Districts have 2000-ton fertilizer stores operated by the Ceylon Fertilizer Cor- poration. Fertilizers and pesticides are also sold by Multi-Purpose Cooperative Societies and private dealers from about 25 sales points in each District, accounting for most of the trade in more accessible areas. Mlore remote areas, however, currently have no such facilities. 2.17 Seed is processed at DA plants in Murunkan (Mannar) and Maha Illupallama, (Anuradhapura) and sold at ASCs. Most of the sales volume in certified seeds is paddy, but pulses (green and black gram, cowpeas, groundnuts and some soybeans) are also grown on contract, certified and sold to farmers. The seed cleaning plant in Murunkan has a capacity of about 500 kg/hr, sufficient to process the paddy requirements for the two Districts. The plant can also process pulse seeds. Most vegetable seed comes from a specialized plant in Nuwara Eliya where the climate is suitable for production. 2.18 Livestock. Cattle, about 100,000 in each District, are mostly indigenous, small Zebu-type, but clear signs of many decades of cross-breeding with Sindhi, Sahiwal, Mysore and Ongole are also evident; there are very few buffaloes and pigs, and a negligible number of sheep and goats. Cattle graze mostly in forest areas or on clay plains near the beach (Mannar) in the maha season and on rice stubbles after harvest. They are kept principally for manure which farmers value highly for production of paddy, chillies and onions. Generally, milk production is limited to home consumption with off-farm sales only within 20-25 km of the Vavuniya and Mannar Milk Board chilling plants. Oxen and bulls are used for tillage, but the demand for draft animals appears limited due to small farmers' financial constraints. Surplus male animals are disposed of at consumption centers in larger towns. There are no organized cattle markets: buyers contact stock owners individually. 2.19 There are two veterinary surgeons in Mannar and three in Vavuniya, assisted by a number of livestock development technicians. Veterinary services are focussed principally on prevention of foot and mouth disease and haemmoragic septicemia, both of which are endemic,and antihelminthic treatment. Veterinary surgeons do provide artificial insemination (AI) service, using semen from exotic bulls maintained in Jaffna. This service is only useful to a small, affluent minority which can confine cows within farm holdings. AI success is handicapped by poor viability of semen delivered in ice by public transport. In addition, there are about six Sindhi-type bulls at a stud center in Mannar maintained by t'he Livestock Development Board. Their impact, given the large number of males in herds, is limited. 2.20 Agricultural Credit. Institutional agricultural credit is provided primarily by the two State-owned banks: the People's Bank (PB) and the Bank of Ceylon (BC). National agricultural credit policy is established by a Rural Credit Advisory Board. The Board, chaired by the Governor of the Central Bank, consists of representatives of all institutions involved in agriculture credit. The  -10- Central Bank's Department of Rural Credit functions as the Board's secretariat and implements the Board's recommendations. 2.21 In Mannar District, PB operates through a district office and one branch office. These service one multi-purpose cooperative and two rural banks. BC has a district office, two ASC branches and a branch at the District' administrative headquarters; they operate directly through branches. In Vavuniya District, PR operates through a regional head office and two branch offices, which service four multipurpose cooperatives and three rural banks. BC has a district office and a network of eight ASC branches. Because of this limited branch network, institu- tional credit satisfies only a small proportion of agricultural financing needs; non-institutional sources still provide most of agricultural financing. Both PB and BC follow similar credit policies. Cultivation loans for annual crops are generally provided for six to ten months, at 9% interest. Medium and long-term credit is available to farmers for investments such as farm equipment, at 12.5% interest p.a., with 80-90% bank financing and up to 7 years repayment. The Central Bank provides a 100% refinance facility for short-term loans at a conces- sionary rate of 1.5% and for medium and long-term loans at 8.5%. 2.22 Inflation, as measured by Colombo's cost of living index, has risen sharply in Sri Lanka since 1978, averaging 22% during 1980-81. However, sub- sequent improvements in budgetary policies helped reduced lnflation rate to about 11% in 1982 over 1981, and to only 5.4% during calendar 1982. Therefore, current agricultural lending rates are positive in real terms. However, the devaluation of the rupee during February 1983, and subsequent price adjustments are expected to raise the inflation rate to about 15% in 1983. Inflation should begin to decline immediately thereafter, falling to about 10% by 1986. Thus, interest rates on medium- and long-term loans are expected to be positive over most of the project's disbursement period but interest on short-term loans are likely to remain marginally negative. 2.23 In the two Districts, as in the rest of Sri Lanka, a long-standing problem of rural credit in general and agricultural credit in particular has been a high default rate (around 50%). This was aggravated during the 1977-78 maba season when GOSL relaxed lending criteria. During that year disbursements of agricul- tural credit increased tenfold but recoveries were negligible (less than 5%). Annual volume of loans in these two Districts fluctuates widely, but has decreased sharply since 1977-78 due mainly to farmer non-eligibility because of prior default. During 1980-81, due to unfavorable weather conditions, the amount dis- bursed under the Central Bank refinancing facility in Mannar were Rs 3.5 M of which about 50% has been recovered. In Vavuniya, only Rs 0.25 M were disbursed, of which about Rs 0.15 was recovered. 2.24 Withdrawal of the Central Bank guarantee in 1979 has forced banks to be more cautious about borrower creditworthiness and loan recovery. GOSL has launched a nationwide recovery drive which includes closely monitored reschedul- ing. This, together with a more comprehensive approach towards credit viability, which emphasizes medium-term investments to improve productivity, should allow  -11- future expansion of the agricultural credit program based on an improved credit delivery system and healthier farmer-bank relationships. This, however, should be complemented with additional staff and facilities, and should be closely coor- dinated with improvements in the agricultural extension service and distribution of inputs supply. 2.25 Forestry. Most of mainland Mannar is covered with natural forest inter- spersed with upland garden plots exploited under chena cultivation. The only forest reserve is part of the catchment area of Giant's Tank. The Forest Depart- ment, which does not maintain staff in the District, exercises limited control functions from Vavuniya. In Mannar, the palmyrah palm (Borassus flabellifer) is common. It grows on vacant land, field boundaries and abandoned fields. It produces a sweet sap from which jaggery, sugar or palm toddy is made. Leaves are a good dry season fodder; the leaf base yields a tough, hard-wearing fiber and the mature stem gives good salt water and rot-resistant poles. Recently, a Palmyrah Development Board, based in Jaffna, was established. Its role is to promote cultivation of the tree and develop markets for jaggery and fiber. 2.26 Vavuniya has a forest reserve of about 43,000 ha and another 61,000 ha under forest. Departmental staff, supervised by a Jaffna-based Divisional Forest Officer, are posted to the area. They maintain a nursery which has recently started distributing tree saplings to the general public under a social forestry scheme. Much of the reserve land is degraded forest and slowly regenerating chena land, which for improved productivity should now be reforested. Past plantations in both Districts have demonstrated that teak and eucalyptus grow successfully, thus the species proposed for forest plantations in the project are known, and planting material is readily available. Fisheries Sector 2.27 The coastal fishery of Mannar produces about 12,000 MT of fish annually, the landed value of which is about Rs 52 M. This is about eight percent of the total marine fish harvest of Sri Lanka. The industry employs nearly 4,000 people in about 30 villages along the coast and on the island of Talaimannar. The residential coastal fishing fleet, consists of over 1,200 craft, In addition, there are about 850 migrant craft mainly from Negombo, Wannapuwa, Chilaw, Thaduwewa and Jaffna. The mechanized resident fishing fleet of about 900 and a migrant fleet of about 670 mechanized vessels account for approximately 85% of the total marine fish catch in the District. The average catch per mechanized craft is lower than the national average. This appears to be due mainly to antiquated fishing techniques, inadequate input supplies and poor marketing arrangements. 2.28 Vidathalthivu is the fourth largest fishing village in Mannar. To enable fishermen to moor boats during low tide, a 150 m channel to the sea, the Arnolda Canal, was dug in 1950; however, due to silting its current use is limited. Ceylon Fisheries Harbour Corporation has recently desilted nearly 30 m, still leaving 120 m in need of dredging. The viability of this operation and the pos- sibility of alternatives need to be studied.  -12- 2.29 Ice requirements for fish preservation exceed the supplies produced within the District; the remainder is brought in by wholesale agents. Control of the ice supply by these agents weakens the bargaining position of fishermen. To address this problem, GOSL in 1979 introduced tax incentives to stimulate private invest- ment in ice plants. The response in other districts has been quite positive; however, the major impediment to such expansion in Mannar District has been the lack of electricity connections with the national grid. This handicap would be overcome both under this project and the on-going IDA Sixth Power Project (Cr.1048-CE). 2.30 Engine repair services within the District are provided by four ill-equipped, private sector workshops and itinerant mechanics, as well as by one workshop owned by the Ceylon Fishery Harbour Corporation. The Ministry of Fisheries has an on-going program to increase and mechanize the existing fishing fleet whereby up to 35% of the costs of boat hulls and engines are subsidized and credit facilities for up to 88% of investment costs net of subsidy are offered. In addition, credit is offered for repair and purchase of fishing gear and for establishment of workshops. Functions and services of the Ministry of Fisheries also include promotion and operation of the boat mechanization program, assistance to fishermen's organizations, enforcement of fishery regulations and statistics collection. The effectiveness of the organization is limited by lack of transport facilities and training programs for fishermen. Economic Infrastructure 2.31 Rural Electrification. In the entire project area, only Vavuniya town is supplied with electricity from the Anuradhapura grid substation (capacity 2 x 10 KVA) through a 33 KV transmission line approximately 50 km in length. Mannar is one of the few districts still not connected to the national electricity grid. Several small thermal plants based on diesel fuel are currently in operation, but these are very expensive to maintain and their coverage is limited and unreliable. Provision of hydro-power to Vavuniya and Mannar Districts is considered a priority by GOSL. Mannar is expected to be connected to the national grid under the Sixth Power Project during 1983. 2.32 Rural Roads. Roads are classified into four categories (A to D). A and B roads are metalled and tarred; they are maintained by the Department of Highways. Class C and D are minor roads which are metalled, tarred or gravelled and are maintained by the Ministry of Local Government. The network of major roads is inadequate in both Districts. There are 200 km of major roads in Mannar and 180 km in Vavuniya or about 0.10 and 0.08 km/km2, respectively, which are much lower than in comparable districts. Minor roads (rural roads) serve highly scattered agricultural and fishing villages and have evolved from foot tracks. Mlost rural roads are in disrepair and are particularly difficult to use during the rainy season. Their poor condition has prevented evolution of adequate marketing facilities for agricultural and fishery products, and public transport expansion to remote areas.  -13- Social Infrastructure 2.33 Health. The project area is served by one base hospital, three district hospitals and five central dispensaries in each District. In addition, there are three rural hospitals in Mannar and two in Vavuniya. Hospital beds per 1,000 population average 3.5 in Mannar and 2.3 in Vavuniya, compared to 2.6 for the entire nation. Health institutions of the two Districts are comparable to those elsewhere in the country. Available health facilities are scattered and often inadequate to service both in-patients and out-patients. Some, however, are underutilized and are unable to provide comprehensive health care, including preventive and curative services. The referral system, whereby serious cases are sent to larger institutions by ambulance is often ineffective because of ambulance shortage, distances to be travelled and poor communications. Also it is difficult to attract to and retain qualified medical personnel in smaller, more remote locations due to poor facilities and lack of equipment. The Ministry of Health, with financial assistance from ADB, is rationalizing the health care delivery system to integrate curative and preventive care through a primary health care delivery system in eight districts; Mannar and Vavuniya are excluded. To that end, strategically located health centers have to be reorganized and strengthened by upgrading: (a) village health centers to provide preventive health care at village level; (b) sub-divisional health centers to provide preventive and cura- tive out-patient service; and (c) a divisional health center to provide in- and out-patient services. 2.34 Education and Vocational Training. Both Mannar and Vavuniya have a high proportion of schools in remote areas. The need for many small schools has increased because of low population density and the existence of both Sinhala- and Tamil-speaking communities. This has created problems in attracting qualified teachers, principally because of lack of housing facilities. Mannar has a total of 104 schools, of which 58 are primary, 32 are junior secondary and 14 are senior secondary schools. Vavuniya has 139 schools, of which 81 are primary, 38 are junior secondary and 20 are senior secondary school. Despite a large number of schools, Mannar and Vavuniya lag behind the rest of the country in important indicators of educational performance such as school attendance, average time required for primary school graduation, and enrollment in advanced science. 2.35 While the education system under the Regional Department of Education is considered satisfactory, there is need for greater emphasis on science and techni- cal education to match the demands of the job market. There are only two schools in the District which teach science to advanced level; however, facilities and laboratory equipment are poor. Availability of science facilities at the junior secondary level is also substandard. Training in technical fields is generally inadequate as reflected in the "Report of the Committee on Technical Education" that called for establishment of a Junior Technical College in Vavuniya to serve the Districts of Vavuniya, Mannar and Mullaitivu.  -14- 2.36 Water Supply. Main sources of drinking water supply in the project area are open wells, tubewells and pipe-borne supply schemes. The latter have restricted coverage, and many schemes established some years ago are now in dis- repair and are inadequate to meet the demands of a growing population. The drink- ing water problem is particularly acute in fishing villages in Mannar because of proximity to the sea. A project providing a pipe-borne water supply to Mannar and other towns is being carried out with aid from the Netherlands. In Vavuniya, a survey of groundwater potential mainly around towns is being carried out with the assistance of the Federal Republic of Germany (GTZ) with the objective of install- ing about 350 drinking water schemes (well and pipe-borne) over a ten-year period. However, there is still need for drinking wells in rural areas not covered by any existing project. III. THE PROJECT Objectives and Approach 3.01 The project seeks to raise income and living standards of the rural population in Mannar and Vavuniya Districts, which have predominantly Tamil populations and are among the poorest and least developed in Sri Lanka. These objectives would be achieved through measures to increase agricultural production and enhance economic and social infrastructure. Project Components 3.02 The project would include the following: A. Productive Components: 1. Plantations. Establish about 100 ha of horticultural crops, and 2,100 ha of forestry plantations by: a) providing financial assistance to smallholders for planting about 100 ha of horticultural crops in Vavuniya; b) distributing seedlings to small holders to plant about 700 ha with eucalyptus and indigenous fuelwood species; c) reforesting about 1,400 ha of degraded and marginal State-owned land and catchment areas mainly with eucalyptus and teak; and d) expanding existing fruit tree and forestry nurseries and providing additional staff, equipment and vehicles to strengthen and upgrade the implementation capacity of the Department of Agriculture, Forest Department and the Palmyrah Development Board. 2. Irrigation. Increase production of paddy, subsidiary and horticultural crops through:  -15- a) rehabilitating about 19 major irrigation schemes and introducing improved water management; b) repairing/modernizing about 60 minor irrigation schemes in Mannar and introducing improved water management; c) installing 15 tubewells and settling about 150 unemployed youths in the Vellankulam area of Mannar; d) carrying out a groundwater exploration program to determine groundwater potential in Vavuniya; and e) providing additional staff, equipment, transport, facilities and planning consultancy services to strengthen and expand the implemen- tation capacity of the Irrigation Departments (ID) in both Districts and DAS in Mannar. 3. Agricultural and Fisheries Support Services. Increase food and cash crops, livestock and fisheries products by: a) strengthening DAS capacity through construction of fertilizer and seed stores, offices and transport, and enhancing seed multiplica- tion programs with upgraded facilities for its seed multiplication farm; b) providing smallholder credit for construction of open dug wells and purchase of bullocks, handsDrayers, pumps and farm implements. Credit would also be provided for land improvement; c) strengthening adaptive agricultural research and farmer training by complementing activities provided under the AE&AR Project and establishing a land use planning unit; d) establishing a fisheries service center in Mannar to provide serv- ices and facilities for fishing inputs and fish handling, and a repair workshop. The project would also include a study of the feasibility of improving the Arnolda Canal and would provide the Department of Fisheries with training facilities and transport; and e) strengthening livestock services through provision of buildings, additional staff, transport and equipment for the Department of Animal Production and Health (DAPH); and improving livestock market- ing system by organizing producers' associations and establishing two milk chilling centers and two cattle markets.  -16- B. Economic Infrastructure: 1. Rural Roads. Rehabilitate and maintain about 750 km of feeder and rural roads to facilitate transport of agricultural inputs and outputs in both Districts, and of fishery products in Mannar. The project would also assist the Department of Highways with additional staff, facilities, transport and equipment to increase implementation and maintenance capacity. 2. Rural Electrificaton. Electrify about 13 villages in Mannar and 10 villages in Vavuniya giving priority to fishery areas and areas with substantial groundwater potential for agricultural development. C. Social Infrastructure 1. Health. Improve existing health care services in strategically located centers to remedy current shortages of facilities and personnel with provision of new service buildings, staff quarters, vehicles and equip- ment, training and additional staff for the Department of Health. 2. Education. Improve the quality of education services by providing in-services training, facilities and equipment to rectify current shortages at strategically located schools; developing vocational training facilities; and additional staff and transport facilities to improve supervision capability of the Department of Education. 3. Rural Water Supply. Sink about 100 community wells in water deficient areas, giving priority to areas where voluntary labor would cover at least 25% of labor cost requirements. Main Project Features 3.03 Horticultural Development in Vavuniya District (Base Cost Rs 0.7 M - Annex 1,Table 1). The project would establish 100 ha of horticultural crops. This activity would be supported by increasing the coverage of GOSL financial assistance for smallholder investments in new plantings of mixed and pure stands of mangoes and citrus exceeding 0.2 ha. Implementation of this program would be the responsibility of DA. Applicants would be required to use approved planting material produced in part at the DA nursery and budwood orchards. The latter would be established under the project at an existing DA farm; however, the project would finance some additional equipment and staff for the departmental farm to carry out the expanded program. 3.04 Forestry (Base Cost Rs 18.1 M - Annex 1, Tables 2 and 3). Forestry development under the project would include establishing (a) industrial planta- tions on about 1,400 ha of degraded and marginal State-owned land, and (b) reforestation through a social forestry program involving tree planting on about 700 ha of degraded and marginal smallholder land and areas along field boundaries,  -17- roads and canals. About 1,000 ha of uplands, previously farmed under chena cul- tivation in Vavuniya, and about 400 ha of catchment area of the Giant's Tank in Mannar would be converted into industrial plantations. Soil and site surveys for these plantations, to be carried out by the Forest Department in conjunction with the land use planning unit (para 3.17), would provide the basis for necessary site selections. These plantations would be developed by the Forest Department under small contracts. Abotut 70% of plantings would be eucalyptus and about 30% teak. 3.05 The social forestry program would encourage (a) smallholders to plant suitable trees on marginal/uncultivated areas; and (b) schools and commtnity groups to take up planting on vacant areas and along roads and canals on an experimental basis. Farmers would be informed of the benefits obtained from homestead and communal forestry plantations, assisted in demarcating areas of waste land suitable for planting trees and provided with free seedlings. Tree species likely to be used are eucalyptus, fruit trees, ipil-ipil, and palmyrah palm. 3.06 Planting material for all species to be planted under both industrial plantation and social forestry components (except palmyrah) would be produced at existing Forest Department nurseries in Vavuniya and Mannar. The project would provide additional equipment, nursery staff and materials for the Forest Depart- ment nursery to carry out the expanded program. Overall implementation of the forestry program (except palmyrah) would be the responsibility of the Forestry Department, which would be strengthened by the provision of additional forestry staff, training, offices, housing, equipment and transport. The project would also include four sttudy tours for Forestry Department officials to learn from the social forestry projects being implemented in neighboring countries. Distribution of palmyrah seeds to smallholders would be the responsibility of the Palmyrah Development Board. A four-ha palmyrah plantation would be established on an experimental basis to test its potential under plantation conditions. The Pal- myrah Development Board would post two development officers to Mannar to promote exploitation of established trees and provide an outlet for leaf bases. 3.07 Irrigation (Base Cost: Major Schemes Rs 138.6 M, Minor Schemes Rs 9.1 M, Groundwater Investigation and Development Rs 12.4 M - Annex 1 Tables 4 to 8). Irrigation development and water management under the project would include: (a) rehabilitation of 19 major irrigation schemes (five in Mannar and 14 in Vavuniya) commanding a total irrigated area of about 4,400 ha; (b) rehabilitation of about 60 minor schemes in Mannar commanding a total irrigated area of about 1,000 ha; (c) installation of about 15 tubewells irrigating about 60 ha in Mannar; and (d) exploration of groundwater potential for irrigation in Vavuniya. ID would be responsible for investigating, planning, designing and constructing major schemes as well as operating and maintaining them down to field channels. Operation and maintenance (O&M) of field channels would be the responsibility of farmers through an elected farm leader (vel-vidane). DAS would carry out planning, investiga- tions, designs, and rehabilitation/modernization of minor schemes, not exceeding Rs 100,000 per scheme, and, in conjtnction with farmers, would be responsible for  -18- O&M of all such schemes. Each major and minor scheme would be planned and con- structed in consonance with standard ID specifications and the procedures, criteria and guidelines given in Annex 2, which are similar to those agreed with IDA for on-going rural development projects and the Village Irrigation Rehabilita- tion Project (Cr. 1160-CE) (VIRP). However, earthwork for field channel rehabilitation in major and minor schemes, estimated to average an equivalent of Rs 1,650/ha, would be carried out by the benefiting farmers. Labor intensive construction methods would be employed for civil works, although a limited quan- tity of construction equipment would be provided to ID and DAS in both Districts. Upon project completion, equipment provided would be used for O&M activities in the project area. 3.08 Rehabilitation and restoration of civil works would include: (a) strengthening of tank hunds and repair or restoration of sluices, spillway and anicut structures and augmentation works; (b) desilting, resectioning and improv- ing main canals distributaries and repairing or reconstructing control structures; (c) repairing and resectioning embankments and gravelling canal embankment tops to be used as access roads; (d) constructing additional cross regulators, regulator-cum-bridges, drainage outlet structures, culverts, canal escapes, and silt traps; (e) installing measuring devices in main canals, head regulators, and distributories to monitor discharge and seepage losses; (f) installing turnouts of suitable size and control gates in distributories; and (g) rehabilitating farm and field channels with appropriate structures to improve water management programs including rotational distribution of irrigation water. 3.09 Of the 19 major schemes to be rehabilitated, one has been prepared to feasibility level. A pre-feasibility study for Kurai tank in Mannar and sample survey and preliminary designs for two additional schemes has also been completed. Cost estimates for the remaining schemes have been prepared based on these estimates, and on preliminary surveys of two breached tanks. Local engineering consultants were employed in January 1983 to prepare feasibility studies and final designs which ae expected to be completed by August 30, 1983. The cost of these consultants (Rs 2 M) is recommended for retroactive financing (para 4.02). Addi- tional local engineering consultants would be employed to prepare feasibility reports for the rehabilitation of five breached schemes in Vavuniya. Criteria and guidelines for the selection of the five breached schemes are in Annex 2. Assurance has been obtained from GOSL that it would employ local engineering consultants to plan and design these irrigation works on terms and conditions satisfactory to IDA no later than January 1, 1985. Terms of reference for the consultants to be employed under the project are included in Annex 3. Plans for the remaining four schemes are being finalized by ID. Detailed engineering designs and working estimates of five schemes to be constructed during the first year of the project (including the Kurai Tank) and of two breached schemes would be reviewed by IDA. Remaining schemes would be reviewed by the Project Directors (PD) through contract staff (para 5.04). Salient features of the rehabilitation program for major schemes are shown in Annex 4, Table 1.  -19- 3.10 DAS has identified 60 minor schemes; final selection, however, would follow selection criteria presented in Annex 2. To ensure proper planning and selection, detailed engineering designs and working estimates of the first ten minor irrigation schemes would be reviewed by IDA. Remaining schemes would be reviewed by PD through contract staff (para 5.04). DAS is establishing a nation- wide program to promote improved water management under VIRP. This includes a systematic approach to water management planning, strengthening farmer groups to carry out such programs, and establishing regular DAS supervision. This improved system would be adopted in this project. The project would utilize training facilities established under VIRP for technical officers. It would provide DAS (Mannar) with additional staff, supplementary training facilities, and equipment to carry out its expanded program. 3.11 Under the project, 15 deep wells would be drilled in the Mulamkavil- Vellankulam basin in Mannar. Each well, discharging about 15 1/sec (1/2 cusec), would serve 4 ha. Each farmer would be given 0.4 ha irrigated land and 0.2 ha unirrigated land. Farms would be allocated to qualified, young settlers selected from the Mannar District. Water would be lifted to a forebay from which irriga- tion would be provided through a gravity-based distribution system lined to field level. Final locations and construction of wells would be entrusted to the Water Resouces Board. The project would provide investigation, drilling, equipping and energizing of wells, a trunk-water distribution system, and additional staff and transport to supervise the program. Land clearing and development would be financed with credit (para 3.14 (c)); settlers would operate, maintain and replace the pumps. 3.12 The project would include an exploration program to determine the scope for economical groundwater exploitation in Vavuniya and to identify suiitable areas for development of about 350 dug wells (para 3.14(c)) for irrigation and about 50 wells for drinking purposes (para 3.30). Support would include geophysical survey and mapping of about 1,000 sq km, drilling of about 50 investigation boreholes and 50 six- and eight-inch test wells. This exploratory program would be coordinated with the groundwater program being funded by GTZ. The geological survey and mapping would start end-1983 and exploratory borehole drilling would start in early 1984. The program would be carried out by the Water Resources Board. 3.13 Input Supplies (Base Cost Rs 6.9 M - Annex 1, Tables 9 and 10). The project would improve supplies of farm inputs through the following activities: (a) DAS would be strengthened with two new Agrarian Services Centers in Mannar, six additional outlets for fertilizer, pesticides and seeds in each District, dunnage to all existing fertilizer and seed stores, and provision of offices, staff quarters, transport and equipment. New facilities would be sited in remote areas. (b) Seed supply by DA would be facilitated by providing limited equipment, transport and staff quarters at he Murunkan (Mannar) seed processing plant, improving the seed store facilities, and  -20- constructing a 20-ton store for storing pulses and an air- conditioned store room for vegetable seeds in Vavuniya. 3.14 Agricultural Credit (Base Cost Rs 33.9 M - Annex 1, Tables 11 and 12). The project would expand medium- and long-term agricultural credit to smallholders through PB and BC in support of investments included in the project. Such credit would include: (a) medium-term (up to 3 years) loans to individual farmers for purchase of sprayers and pumps for dug wells. Institutional credit is expected to cover about 800 (300 in Mannar and 500 in Vavuniya) hand-operated and motorized sprayers and about 900 pumps. Loans would also be provided for tools and other farm equipment; (b) medium-term (up to five years) loans to individual farmers or farmer associations for purchase of draft animals. Institutional credit is expected to be provided for about 450 animals (200 in Mannar and 250 in Vavuniya); and (c) long-term (up to seven years) loans to individual farmers to construct open dug wells and to carry out land improvement. It is expected that during the project period institutional credit would be extended for about 700 wells and 200 ha of improved land. 3.15 The project would strengthen the drive launched by PB and BC to recover or otherwise rescheduled overdue loans. To implement the recovery program and provide additional credit, each bank would establish an agricultural credit unit in each District and would start posting additional staff by January 1984. The project would provide required transport and foreign study tours for such staff. The two banks would furnish to IDA by November 30, 1983: (a) an inventory of defaulters; (b) an analysis and classification of portfolios (based on assessment of farmers' income levels, earlier payment records, and loan reschedulings); and (c) a collection program against willful defaulters. 3.16 Lending terms and conditions for loans to be financed under the project are shown in Annex 5. Signing of subsidiary agreements between GOSL, PB and BC, specifying the agricultural credit procedures to be followed under the project and establishing agricultural credit units, with terms and conditions satisfactory to IDA, would be a condition of credit effectiveness. 3.17 Adaptive Research and Farmer Training (Base Cost Rs 9.1 M - Annex 1, Tables 13 and 14). A land use planning unit would be established in Vavuniya to aid implementation of the agricultural and forestry components and to improve future agricultural planning in both Districts. The unit would consist of a Planning Officer, a Soil Conservation Officer and two Agricultural Instructors trained in soil conservation and land use planning. It would be supervised by the DA's land use unit in Peradeniya. The project would provide offices, vehicles, equipment, and aerial photographs.  -21- 3.18 A two-ha adaptive research farm would be established under the AE&ARP in the Vellankulam area to support tubewell irrigation development (para 3.11). About one-ha would be irrigated for testing continuous cropping systems. The remainder would be devoted to developing systems of unirrigated cropping. The project would upgrade hostel facilities at the farmer training center near Vavuniya. A new training center would be established in Mannar. This center would also cater for in-service and pre-season staff training, and provide train- ing in palmyrah development. The project would supply staff housing, equipment, vehicles, and additional DA staff to carry out expanded activities. It would also include overseas training for thte Land Use Planning Officer and study tours for agricultural officers. 3.19 Livestock Development (Base Cost Rs 16.3 - Annex 1, Tables 15 and 16). The project would cover a number of separate hut related activities including (a) strengthening DAPH services, (b) establishing cattle markets, and (c) enhancing milk processing and marketing. To improve DAPH services, one additional veteri- nary range and two existing ranges in Mannar and two additional ranges in Vavuninya would be provided with adequate facilities, including clinics and hous- ing. With the participation of the Livestock Development Board, the project would encourage formation of livestock producer associations and through these would provide farmer training in animal husbandry. The project would provide about 20 stock handling facilities in each District. 3.20 Artificial insemination program would be strengthened by supplying liquid nitrogen containers for the transport of frozen semen. The project would import seven Sindhi bulls for breeding. One-year old male offspring would be selected and sold to herd owners. Until descendants of imported bulls become available, suitable young Sindhi-type bulls would be made available to stock owners. The project would provide offices, stores, quarters, furniture, equipment, transport and additional staff for DAPH to implement these expanded programs. 3.21 One cattle market would be established under the project in each District to facilitate efficient transport of animals to consumption centers. Markets would be administered by each District Government Agent and supervised by DAPH. The project would finance construction and recurrent costs of these markets. 3.22 To encourage milk production, an additional 4,000 liter milk chilling center would he set up in each District. One would be in Murunkan (about 25 km from Mannar) which would serve inland areas. The other would be in Neddukerny, about 70 km from Vavuninya. In addition, about 15 collecting centers would be set up in each District where milk would be bulked for transfer to the chilling cen- ter. Facilities at this center would be adequate for washing and storing of milk cans and keeping of hydrometers for testing incoming milk. Dairy producer associations (para 3.19) would manage the collection centers and would also tran- sport the milk. Chilling centers would be administered by the Milk Development Board.  -22- 3.23 Fisheries (Base Cost Rs 3.7 M - Annex 1, Table 17). The project would improve fish marketing and input supply by providing for a service center at a site to be determined to supply ice and to provide space for the sale and servic- ing of fishing equipment and supplies. All commercial activities would be carried out by private entrepreneurs with facility management under the Ceylon Fishery Harbour Corporation. This center, to be located at a site within easy access of large fishing villages and electricity supply, would be capable of generating sufficient ice sales and fish storage demand to finance its O&M. A detailed feasibility study of the service center, including design of the facility, and financial and economic analyses would be reviewed by IDA prior to its implementa- tion. 3.24 To ensure safer and quicker access from the sea to landing centers, the project would install beacon lights at six on-shore locations. Local Government authorities, in coordination with the Welfare Division of the Ministry of Fisheries, would be responsible for installing these beacon lights. To assess the feasibility of improving the landing facility at Vidathalthivu, the project would cover necessary investigations for the rehabilitation of Arnolda Channel. The project would also include a training component to upgrade fishing techniques, and the repair and maintenance know-how of fishermen. The project would use the regional training center in Jaffna, but would also provide for a limited number of training staff and facilities in the District. This component would be imple- mented by the Ministry of Fisheries which will be strengthened by providing addi- tional staff, transport and equipment. 3.25 Rural Electrification (Base Cost Rs 39.2 M - Annex 1, Tables 18 and 19). The project would provide electricity to 23 village areas with potential for rapid economic growth. In Mannar, three fishing villages and ten villages with prospects for groundwater development would be electrified. In Vavuniya, the project would electrify ten villages with a high concentration of dug wells. About 100 km of 33 kv line, 40 substations and about 60 km of low tension lines (Annex 4, Table 2) would be constructed by the Ceylon Electricity Board which would also operate the schemes. 3.26 Roads (Base Cost Rs 60.4 M - Annex 1, Tables 20 and 21). About 500 km of public feeder roads would be rehabilitated under the project. About 50 separate road sections have been identified and are listed in Annex 4, Table 3. Rehabilitation would include forming platforms by excavation, embankment gravell- ing (in the case of gravelled roads), and remetalling and tarring metalled roads. Because the terrain is reasonably level, existing platforms need not be widened. Roads would have a minimum right-of-way of 15 m, 5 m platform, 3.5 m roadway, and about 15 cm gravel compacted to 10 cm thick surfacing. In addition, the project would also include rehabilitation of about 250 km of rural roads. Rural roads would be built with a 11 m wide right-of-way, 5.5 m platform, 3.5 m roadway and about 15 cm gravel compacted to 10 cm thick surfacing. Rural road sections in urgent need of rehabilitation have already been identified. However, segments to be rehabilitated would be prioritized annually taking into account: (a) the agricultural and fishery potential of the areas, (b) project works proposed under  -23- productive components, (c) population, and (d) current road condition. Preference would be given to roads where community groups are willing to provide at least 25% of total unskilled labor requirements. Selected roads sections would be included in the project annual work program (para 5.11). 3.27 All feeder roads and at least 60% of the rural roads to be rehabilitated under the project would be undertaken by the Department of Highways and the remaining rural roads by the Department of Local Government Services (DLGS). Labor-intensive construction methods would be employed. DLGS, with the assistance of the project office staff (para 5.03), would organize community labor for road rehabilitation. To upgrade the capability of the Department of Highways to carry out its construction program, the project would provide a limited amount of con- struction equipment, staff, material and transport. Equipment would be allocated exclusively to the two Districts and would he used for O&M of the public road system after construction work. 3.28 Health (Base Cost Rs 30.4 M - Annex 1, Tables 22 and 23). The project would improve the effectiveness of the existing health care delivery system by strengthening strategically located health units. It would upgrade selected existing health facilities at divisional (four), subdivisional (nine) and village (30) levels to standard design used by the Ministry of Health. Centers to be upgraded have been identified. The health component would be implemented by the Department of Health. However, construction would be carried out by the Building Department. The project would utilize Department of Health training facilities as well as monitoring and evaluation methods established under the Health and Popula- tion Project funded by ADB. The project would provide selected centers with additional administrative and service buildings, wards, staff quarters, wells, equipment, vehicles, staff, supplies and supplementary local training. 3.29 Education and Vocational Training (Base Cost Rs 41.7 M - Annex 1, Tables 24 and 25). The education component to be executed by the Regional Department of Education and Ministry of Higher Education is designed to improve the quality of education through: (a) providing in-service training and refresher courses for teachers; (b) improving science training; (c) upgrading selected junior and senior secondary schools; (d) attracting and keeping qualified teachers in remote areas; and (e) establishing the first phase of a Junior Technical College. To that end, the project would construct about 55 science rooms, 80 classrooms, 20 library rooms, teacher quarters and the first phase of a Junior Technical College at Vavuniya to provide vacational training to serve the Districts of Mannar, Vavuniya and Mullativu. New facilities would be fully equipped and about 150 primary schools would also be provided with basic science equipment and teaching aids. Project would also provide vehicles and additional staff to assist in supervising the education and construction programs. A preliminary list of schools to be upgraded has been prepared. Priority would be given to schools with currently qualified teachers, inadequate facilities and most remote locations. Buildings would be of standard design used by the Ministry of Education. Equipment lists for science rooms and laboratories, as well as for the technical college, have  -24- been completed. Regional Departments of Education would conduct refresher cour- ses, in-service training and seminars for teachers. 3.30 Rural Water Supplies (Base Cost Rs 5.2 M - Annex 1, Tables 26 and 27). The project would include construction of about 50 community wells in each Dis- trict. The wells would be of closed construction, and would be fitted with hand pumps (UNICEF Specifications) to meet safe drinking water standards. Guidelines for selection of well sites are given in Annex 6. Water quality tests would be carried out on nearby wells before implementation. For siting new wells, preference would be given to water-deficient areas and, within such areas, to villages where organized community groups are willing to contribute at least 25% of total unskilled labor requirements. The DLGS would carry out construction through small private contractors or community groups and would install hand pumps. Responsibility for well maintenance would be taken by local authorities, under supervision of DLGS. 3.31 Project Coordination and Management (Base Cost Rs 22.3 M). The structure of and arrangements for project management are discussed in Chapter V. Assistance for these activities would include additional staff, quarters, vehicles, office buildings, office equipment and supplies for project coordination and management in the two Districts, and limited support in terms of staff and vehicles for the Regional Development Division (RDD) within the Ministry of Plan Implementation (MPI). The project would also provide a technical assistance in the form of local contract staff (paras 5.04 and 5.06) to assist PDs in supervising and monitoring work progress and quality control, preparing reports, processing reimbursement applications and general budget control, and RDD in monitoring the project and maintaining general budgetary control at the central level. Funds would also be provided for employing suitable local consultants to carry out project evaluation. IV. PROJECT COSTS, FINANCING AND PROCUREMENT Project Costs 4.01 Total project costs over the five-year period (January 1984 to December 1988) are estimated at Rs 717.4 M (US$31.2 M), with a foreign exchange component of about 23%. Base costs are estimated at February 1983 prices, and include about US$1.2 M in taxes and duties, but exclude expected farmer labor contributions for field channel construction and O&M of field distribution systems, rural roads and drinking water supplies. Physical contingencies amount to 11% of total base costs. Price contingencies are estimated at 49% of base costs according to the estimated annual inflation rates given in the footnote to Table 4.1.  -25- Table 4.1: Project Cost Summary by Components % of Foreign % of Total Local Foreign Total Local Foreign Total Cost Base Costs -Rs M-------- ------US$ M-------- A. PRODUCTIVE COMPONENTS 1. Plantation Crops Horticultural Develop. 0.5 0.2 0.7 0.0 0.0 0.0 30.0 0.2 Forestry 13.2 4.9 18.1 0.6 0.2 0.8 27.0 4.0 Subtotal 13.7 5.1 18.8 0.6 0.2 0.8 27.0 4.2 2. Irrigation Major Schemes 113.2 25.4 138.6 4.9 1.1 6.0 18.0 31.0 Minor Schemes 6.8 2.4 9.2 0.3 0.1 0.4 26.0 2.0 Groundwater 6.4 6.0 12.4 0.3 0.3 0.6 48.0 2.8 Subtotal f26.4 33.8 160.2 5.5 1.5 7.0 21.0 35.8 3. Supporting Services Input Supply 4.8 2.1 6.9 0.2 0.1 0.3 30.0 1.5 Agricultural Credit 23.6 10.3 33.9 1.0 0.4 1.4 31.0 7.6 Agri. Research & Train. 6.0 3.1 9.1 0.3 0.1 0.4 34.0 2.0 Livestock 8.4 7.8 16.2 0.4 0.3 0.7 48.0 3.6 Fisheries 2.3 1.4 3.7 0.1 0.1 0.2 39.0 0.8 Subtotal 45.1 24.7 69.8 2.0 1.0 3.0 35.0 l5.5 Subtotal Productive Comp. 185.2 63.6 248.8 8.1 2.7 10.8 26.0 55.5 B. ECONOMIC INFRASTRUCTURE 1. Rural Electrification 23.5 15.7 39.2 1.0 0.7 1.7 40.0 8.7 2. Rural Roads 46.8 13.6 60.4 2.0 0.6 2.6 23.0 13.5 Subtotal 70.3 29.3 99.6 3.0 1.3 4.3 29.0 22.2 C. SOCIAL INFRASTRUCTURE 1. Health 24.6 5.8 30.4 1.1 0.3 1.4 19.0 6.8 2. Education 26.4 15.2 41.6 1.1 0.7 1.8 37.0 9.3 3. Water Supply 4.1 1.1 5.2 0.2 0.0 0.2 21.0 1.2 Subtotal 55.1 22.1 77.2 2.4 1.0 3.4 29.0 17.3 D. MANAGEMENT & COORD. 17.6 4.7 22.3 0.8 0.2 1.0 21.0 5.0 Total Baseline Costs 328.2 119.7 447.9 14.3 5.2 19.5 27.0 100.0 Physical Contingencies 38.0 12.8 50.8 1.7 0.5 2.2 25.0 11.3 Price Contingencies 1/ 187.2 31.5 218.7 8.1 1.4 9.5 14.0 48.9 Total PROJECT COSTS 553.4 164.0 717.4 24.1 7.2 31.2 21.0 160.2 l/ Estimnates of price contingencies are based oni the following annual percentages: FY83 FY84 FY85 FY86 FY87 FY88 Local Costs 1.9.0 13.0 I'.0 10.0 10.0 10.0 Foreign Costs 8.0 7.5 7.0 6.0 6.0 6.0  -26- Financing 4.02 The proposed IDA credit of SDR 21.4 M (US$23.0 M equivalent) would finance approximately 77% of project costs net of taxes and duties, equivalent to 100% of foreign exchange costs and 69% of local costs. Remaining funds (Rs 188.6 M or US$8.2 M) would be provided by GOSL (94%) and by beneficiaries (6%). To ensure timely project implementation, some buildings, vehicles, and equipment would be required immediately to carry out planning, designing and pre-construction inves- tigations of project works. In addition, a local consulting firm was engaged in January 1983 to prepare pre-construction designs and cost estimates for ten major irrigation schemes to be rehabilitated under the project. Therefore, the project would include up to SDR 0.47 M (US$0.5 M equivalent) of retroactive financing for expenditures incurred on such items from January 15, 1983. The proposed financing plan is summarized in Table 4.2 below: Table 4.2: Proposed Project Financing Total Benefi- IDA Contribution Cost IDA GOSL ciaries Contribution