Sri Lanka - Second Smallholder Rubber Rehabilitation Project

Document of The World Bank FOR OFFICIAL USE ONLY c-I /4c'4- c Report No. P-4759-CE MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 17.0 MILLION TO THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA FOR A SECOND SMALLHOLDER RUBBER REHABILITATION PROJECT May 2, 1988 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.  CURRENCY EQUIVALENTS Sri Lanka Rupees (Rs) = 100 cents US$1.00, at appraisal, September, 1987 = Rs 30.50 (Free Market Rate) US$1.00, average 1986 = Rs 28.2 (Free Market Rate) FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES (metric system) 1 hectare (ha) = 2.47 acres ABBREVIATIONS GOSL = Government of Sri Lanka RRF = Rubber Replanting Fund  FOR OMCIAL USE ONLY SRI LANKA SECOND SMALLHOLDER RUBBER REHABILITATION PROJECT Credit and Project Summary Borrower: Democratic Socialist Republic of Sri Lanka Beneficiaries: Smallholders, Rubber Control Department, Advisory Services Department, Rubber Research Institute Amount: SDR 17.0 million (US$23.5 million equivalent) Terms: Standard with 40 years' maturity. Onlending Terms: Not applicable. Financing Plan: IDA US$23.5 million Replanting Fund 27.5 million Smallholder 17.1 million Government 5.0 million Total 73.1 million Economic Rate of Return: 19X Staff Appraisal Report: Report No. 7055A-CE Map: IBRD 19987 This document has a restricted distribution and may be used by recipients only in the perform#,-, of their official duties. Its contents may not otherwise be disclosed without World Bank authori.ation.  MEMORANDUM AND RECOMMENDATION OF ThE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA FOR A SECOND SMALLHOLDER RUBBER REHABILITATION PROJECT 1. The following Memorandum and Recommendation on a proposed development credit to the Democratic Socialist Republic of Sri Lanka for SDR 17.0 million (US$23.5 million equivalent) is submitted for approval. The proposed credit would be on standard IDA terms with 40 years of maturity and would help finance a second smallholder rubber rehabilitation project. 2. Background. Rubber is the second most important tree crop after tea, accounting for about 11% of export earnings, 8% of agricultural employ- ment and 4% of GOSL budgetary revenue. Rubber smallholdings generally occupy land with little prospects of alternative use and the majority are very small, supporting families with per capita incomes of about US$120 per year-only one third of the national average. Future prospects for natural rubber are satisfactory, except where production costs are very high. Sri Lanka accounts for only 4% of the world market in natural rubber and is a low-cost rubber producer, and thus has a comparative advantage in rubber production vis-a-vis some major producers. 3. Traditionally, the major tree c'ops (tea, rubber and coconut) have been mainstays of Sri Lanka's economy. Their importance, however, has diminished since the 1960s primarily due to the emergence of new industries, as well as past government policies regarding nationalization, land reform, and taxation which adversely affected tree crop producers. In the case of rubber, this led to a lack of interest in replanting, resulting in over-aged and derelict stands which must be replanted to sustain and improve small- holders' incomes and rubber's contribution to the economy. IDA has focussed on rehabilitating the tree crop sector through provision of finance and through policy interventions. There are two ongoing tree crop projects, a public sector-oriented Fourth Tree Crops Project (Cr. 1562-CE for $55 million, closing June 1990) and a Smallholder Rubber Rehabilitation Project (Cr. 1017-CE for $16 million, closing June 1988). Both projects are performin-g satisfactorily. The Fourth Tree Crops Project launched a comprehensive program geared at revitalizing public sector estates and provided for the establishment of a Working Group to monitor and advise on government taxation policies and producer incentives. The Working Group has become an effective policy advisory instrument and its recommendations for reducing taxation on tree crops have been implemented by GOSL. The Small- holder Rubber Rehabilitation Project fosters the development of institutions serving smallholdings which account for about 70% of total rubber area, and supports rubber replanting by smallholders in three districts (covering about two-thirds of Sri Lanka's rubber area). The proposed Project would extend coverage to all rubber growing districts and would further strengthen institu- tions serving smallholders. Smallholder rubber replanting, and limited new planting to replace rubber-land lost to other uses, is largely self-financed by the industry through the Rubber Replanting Fund (RRF).  4. The smallholder rubber sector is served by agencies of the Ministry of Plantation Industries. The Rubber Control Department manages the RRF, which is financed by a cess on rubber exports, and makes supervisory inspections of the replanting activities. It also has a number of regulatory functions. The Rubber Research Board is responsible for the Advisory Services Department, which undertakes the extension support of smallholders. 5. Rationale for IDA Involvement. The participation of the Association is necessary to continue the Bank's sector development strategy, implementa- tion of which commenced with the Fourth Tree Crops Project (Cr. 1562-CE), which addressed the public sector estates. The Bank's worldwide experience in the sector would benefit Sri Lanka's objectives of introducing better planting material, up-to-date agronomic and technical practices, and efficient adaptive research, and extension services to support them. Although the RRF is financed by a cess on rubber exports and the farmers' own contributions meet much of the cost of replanting, external finance is still required to permit the program to accelerate, to avoid the disincentive effect of an early substantial increase in the cess and to provide time for an orderly transition of the RRF to a self-sustaining position. Bank experience would also assist in reorganizing GOSL's rubber-related agencies to ensure their relevance and the efficiency of both adaptive research and the extension support for the smallholders. . Project Objectives. The proposed Project would seek to increase both smallholders' incomes and Sri Lanka's foreign exchange earnings by stimulating improvements in the quantity and value of smallholder rubber by accelerating the replanting of over-aged trees, planting new areas to partly offset the loss of rubber land to urbanization, and establishing group latex collecting ard processing centers to provide the advantages of higher value products and volume sales to the smallest farmers. The Project would also assist the Government to rationalize and improve the efficiency of its institutional support--notably the extension service and adaptive research. The negative impact on a minority of smallholders of a recent disease outbreak would also be alleviated. 7. Project Description. The proposed Project would support: (a) replanting of about 35,550 ha of over-aged rubber on smallholdings; (b) planting of 3,200 ha of new rubber on smallholdings; (c) rehabilitation of disease-affected holdings; (d) provision of credit facilities for private nur- series and of small grants and loans to upgrade 80 and establish 20 new latex collecting and processing centers. At the institutional level, the Project would: (a) consolidate and improve the control of rubber nurseries; (b) sig- nificantly strengthen and rationalize the extension advisory service and the supervision of participating smallholdings; (c) establish three adaptive research and demonstration sub-centers and an additional large nursery; and, (d) set-up a Monitoring and Evaluation Committee. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key processing events and the status of Bank Group operations in Sri Lanka is given in Schedules C and D, respectively. A map, IBRD No. 19987, is attached. The Staff Appraisal Report, No. 7055A-CE dated May 2, 1988, is being distributed separately.  - 3 - 8. Agreed Actions. The Government has agreed on the following actions: (a) establish the Monitoring Committee and determine the procedure and responsibility for replanting certification as conditions of effectiveness; (b) issue directives for the establishment of latex collecting and processing centers; (c) provide funds through the Advising Services Department to make loans and grants for 20 new processing centers and the upgrading of 80 exist- ing ones; (d) provide funds through the Rubber Control Department for loans to private nurseries and to Rubber Planting Aides; (d) provide loans for exten- sion field staff to purchase motorcycles; (e) complete the transfer of the nursery inspection unit from the Rubber Research Institute to the Rubber Control Department; (f) recruit additional extension staff; (g) give priority to the testing of proven advanced clones; and (h) study the implications of the subsidies for rubber processing machinery and implement the resultant findings. 9. Benefits. Economic benefits under the proposed Project are expected from: (a) enhanced production through replacement of worn-out trees and new planting; (b) improved returns from upgrading of group processing centers and establishing of latex collecting and processing centers; (c) improved effec- tiveness of the extension service and (d) maintenance of economic activity in rubber growing areas which would become depressed without a rubber replanting program since there are rarely any viable alternative cropping opportunities for the land on which rubber would be replanted. The economic rate of return of the proposed Project is 19Z. 10. Risks. There are no significant implementation risks as the project is relatively insensitive to quite substantial decreases in the assumed price of rubber, and in the yield estimates. In addition valuable experience was gained from implementing the ongoing Project and further rationalization and improvement of the institutional support are incorporated in the proposed project. Corynespora Leaf Spot Disease poses a threat to the industry, but the Project would support eradication of susceptible trees and rehabilitation of affected holdings. 11. Recommendation. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Barber B. Conable President Attachments Washington, D.C. May 2, 1988  Schedule A -4 - SRI LANKA SECOND SMALLHOLDER RUBBER REHABILITATION PROJECT Estimated Costs and Financing Plan Estimated Costs Cost Local Forei n Total Project component US$ miil ion Investment Costs field Operations 43.6 11.0 54.6 Civil Works 0.5 0.1 0.6 Machinery, Equipment and Vehicles 0.8 1.0 1.8 Technical Assistance, Training and Adaptive Research 0.2 1.0 1.2 Total Investment Costs 45.1 13.1 58.2 Incremental Costs Staff, Operation and Maintenance 1.9 0.0 1.9 Base Cost 47.0 13.1 60.1 Physical Contingencies 4.4 1.1 5.5 Price Contingencies 5.9 1.6 7.5 Total Project Cost /a 57.3 15.8 73.1 /a Including taxes and duties equivalent to US$0.6 million. Financing Plan Amount Local Aoruign Total Financier ---- US$ mill ion -- IDA 7.7 15.8 23.5 Replanting fund 27.5 0.0 27.5 Smallholders 17.1 0.0 17.1 Government 5.0 0.0 5.0 Total 57.3 15.8 73.1  Schedule B Page 1 of 2 -5- SRI LANKA SECOND SMALLHOLDER RUBBER REHABILITATION PROJECT Procurement Method and Disbursements Procurement Method Method Procurement Component ICB LCB N/A Total cost (US$ million) ----- Field operations - - 67.06 67.06 (19.4) (19.4) Civil works - 0.71 - 0.71 (0.6) (0.6) Machinery, Equipment, and Vehicles .1.50 0.48 - 1.98 (1.1) (0.3) (1.4) Technical assistance - - 0.11 0.11 (0.1) (0.1) Adaptive research - - 0.13 0.13 Training - - 1.02 1.02 (1.0) (1.0) Incremental Recurrent Costs - - 2.06 2.06 (1.0) (1.0) Total 1.50 1.19 70.39 73.07 (1.1) (0iY (iTY7 (23.5) /a Figures in parentheses indicate IDA financing.  Schedule B -6- Page 2 of 2 Disbursements Amount Category (US$ million) Criteria (1) New planting and replanting 19.4 100% of local expendi- support tures (2) Civil works 0.6 80% of expenditures (3) Vehiclesp machinery and 1.4 100% of foreign expen- equipment ditures; 100% (ex- factory) locally manu- factured items; 702 of local expenditures (4) Training and technical 1.1 10O% of expenditures assistance (5) Incremental operating costs 1.0 50% of local expendi- tures (on a declining basis) 23.5 Estimated IDA Disbursements IDA fiscal year 1989 1990 1991 1992 1993 1994 1995 1996 1997 - - - - - US$ million - -------- -