Sri Lanka - Second Smallholder Rubber Rehabilitation Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 17243 lMPLEMENTATION COMPLETION REPORT SRI LANKA SECOND SMALLHOLDER RUBBER REHABILITATION PROJECT (Cr. 1909 - CE) December 18, 1997 Rural Development Sector Unit South Asia Region 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 EOUIVALENTS Currency unit: Sri Lankan Rupees (Rs) 1987: US$1..00 = Rs 30.50- 1988: US$1.00 = Rs 31.80 1989: US$1.00 = Rs 36.04 1990: US$1.00 = Rs 40.06 1991: US$1.00 = Rs 41.37 1992: US$1.00 = Rs 43.83 1993: US$1.00 = Rs 48.25 1994: US$1.00 = Rs 49.41 1995: US$1.00 Rs 51.25 1996: US$1.00 = Rs55.27 1997: US$1.00 = Rs 58.50 FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES (Metric system) ABBREVIATIONS AND ACRONYMS ASD Advisory Services Department CLSD Corynespora Leaf Spot Disease CPD Commodity Purchases Department ERR Economic Rate of Retum GOSL Government of Sri Lanka GPC Group (Rubber) Processing Center ICR Implementation Completion Report LCPC Latex Collection and Processing Center MPAHAPI Ministry of Public Administration, Home Affairs and Plantation Industries PCU Project Coordinating Unit RDD Rubber Development Departnent RDO Rubber Development Officer RRB Rubber Research Board RRF Rubber Replanting Fund RRI Rubber Research Institute of Sri Lanka SAR Staff Appraisal Report Vice President Mieko Nishimizu Sector Managers Michael Baxter I Ridwan Ali Country Director Roberto Bentjerodt Task Manager Terrence Abeysekera  FOR OFFICIAL USE ONLY Table of Contents Preface ................................................................................... Evaluation Summary ..................................................ii PART I: PROJECT IMPLEMENTATION ASSESSMENT A. Background and Statement/Evaluation of Objectives ...........................................1 B. Achievement of Objectives ................................................2 C. Major Factors Affecting the Project .................................................8 D. Project Sustainability ........8........................................8 E. IDA Performance ................................................ 9 F. Borrower Performance .................................................9 G. Assessment of Outcome ................................................ 10 H. Future Operations ................................................ 10 I. Key Lessons Learned ..................................................11 PART II: STATISTICAL TABLES Table 1: Summary of Assessments .13 Table 2. Related IDA Credits .14 Table 3. Project Timetable .14 Table 4. Loan Credit Disbursements: Cumulative Estimated and Actual 14 Table 5. Key Indicators for Project Implementation .15 Table 6. Key Indicators of Project Operations .15 Table 7. Studies Included in Project .16 Table 8A. Project Costs .......................................... 16 Table 8B. Project Financing ........................................... 16 Table 9. Economic Costs and Benefits ........................................... 17 Table 10. Status of Legal Covenants .......................................... 18 Table 11. Compliance with Operational Manual Statements ................................. 19 Table 12. IDAResources: Staff Inputs .......................................... 19 Table 13: IDA Resources: Missions .......................................... 20 APPENDICES: A. Mission's Aide-Memoire ............................................... 21 Attachment - Plan for Future Operations ..................... .......................... 33 B. Financial and Economic Re-evaluation ............................................... 34 C. Borrower's Evaluation ............................................... 46 D. Rubber Replanting Fund Cash Flow Statement, 1995-2002 ................................... 54 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.   IMPLEMENTATION COMPLETION REPORT SRI LANKA SECOND SMALLHOLDER RUBBER REHABILITATION PROJECT (Cr. 1909-CE) Preface This is the Implementation Completion Report (ICR) for the Second Smallholder Rubber Rehabilitation Project in Sri Lanka for which Credit 1909-CE in the amount of SDR17.0 million (US$23.5 million) was approved on May 24, 1988 and made effective on January 6, 1989. The credit was closed on June 30, 1997 with a total disbursement of about SDR9.3 million (US$12.8 million). A sum of SDR3.75 million (US$5.4 million) was canceled as of February 6, 1996, mainly to take account of the depreciation of the Rs. from Rs. 31.80/US$ at project inception (1988) to Rs. 58.50/US$ at project completion (1997). The final disbursement took place on November 12, 1997, at which time the unutilized balance was about SDR3.9 million (US$5.4 million). Based on meetings and field visits in August/September 1997, the ICR was prepared by Terrence Abeysekera, SASRD Agricultural Economist in the Sri Lanka Field Office, working in close collaboration with Douglas W. Lister, SASRD Senior Agricultural Economist at Headquarters. Henry P. Gassner, SASRD Principal Operations Officer at Headquarters, served as peer reviewer. Preparation of this ICR was initiated during IDA's final supervision/completion mission for the project in August/September 1997. It is based, among other documents, on a review of the Staff Appraisal Report and legal documents, supervision reports and project files as well as field investigations and discussions with Bank staff and GOSL officials associated with the project. The borrower and implementing agencies contributed to preparation of the ICR by: providing data, arranging field visits and discussions with field staff and providing feedback which are reflected in the mission aide memoire (Appendix A); preparing an evaluation of the project preparation and implementation (Appendix C); preparing the cash flow statement of Rubber Replanting Fund (Appendix D) and commenting on the draft ICR. 1   IMPLEMENTATION COMPLETION REPORT SRI LANKA SECOND SMALLHOLDER RUBBER REHABILITATION PROJECT (Cr. 1909-CE) Evaluation Summary Project Objectives 1. The main objective of the project was to increase the incomes of smallholders and Sri Lanka's foreign exchange earnings by increasing the quantity and quality of smallholder rubber production throughout the country. The objective was to be achieved through the following broad measures: (i) field development -- replanting 35,500 ha of over-aged rubber and planting 3,200 ha of new areas on smallholdings, providing assistance for developing private nurseries and minimizing the effect of a major outbreak of disease; (ii) processing improvement -- establishing 20 new Latex Collecting and Processing Centres (LCPCs) and upgrading 80 existing Group Processing Centers (GPCs); and (iii) institutional development-- enhancing the efficiency of the institutional support available to the smallholders. 2. The project was well conceived and its objectives were clear and consistent with the development needs of the smallholder rubber sub-sector. The project design was largely based on the experiences and the lessons derived from the previous project implemented during 1980-88 in the major rubber growing areas of the country. The design, however, was over optimistic on the targets for replanting, establishing new Latex Collection and Processing Centers (LCPCs) and upgrading of Group Processing Centres (GPCs). As regards replanting, the project design did not fully take into account the likely impact of a host of factors outside the control of the implementing agencies that detennine the actual rate of replanting. Implementation Experience and Results 3. Overall, the project achieved its physical objectives satisfactorily. Despite set backs in the early stages due to major civil unrest and incidence of serious droughts, the project accomplished 71% of the revised replanting target of 30,500 ha and 95% of the revised new planting target of 8,000 ha, resulting in an overall achievement of 76% of the planting target. Significant achievements were made in introducing new high yielding rubber clones to smallholders including foreign clones, establishing clonal trials in major rubber growing areas as well as institutional consolidation and strengthening. The project, however, did not show satisfactory progress in establishing LCPCs and upgrading GPCs. ii  4. The project achieved its institutional objectives partially. The project accomplished its goal of consolidating the agencies within the rubber smallholder sector by amalgamating Advisory Services Department (ASD), functioning under the Rubber Research Board (RRB), with the Rubber Control Department (RCD), functioning under the Plantation Ministry, into a single agency, the Rubber Development Department (RDD). The abolition of the Rubber Purchasing Centres operated by the Commodity Purchases Department of the Trade Ministry in 1995, though not a direct outcome of the project, was a major step forward in stimulating private sector involvement in the marketing of rubber produced by the smallholders. However, the project failed to ensure the long-term sustainability of the Rubber Replanting Fund (RRF) by extending the cess levy to domestically processed rubber. As the cash flow statement (Appendix D) indicates, the long-term viability of RRF and hence that of RDD is uncertain. 5. The project did not show significant achievements in improving crop husbandry practices and tapping techniques adopted by the rubber smallholder growers, mainly due to poor extension-research linkages. Extension personnel were too preoccupied with "subsidy" payments and their linkages with the research system were particularly weak. 6. During the project period, rubber smallholders witnessed a sharp escalation of their replanting and field maintenance costs due to sharp increases in the price of both material and labor inputs. The cost increases had a disruptive influence on the replanting rate. In the case of labor input for instance, which accounts for 60-75% of the total replanting costs, the average wages rose from about Rs. 40.00 (US$1.3 1)/day at project inception to about Rs. 120.00 (S$2.05)/day at project completion. 7. At appraisal, the total project cost was estimated at US$73.1 million. The cost was to be financed by IDA, US$23.5 million (32%); the Rubber Replanting Fund, US$27.5 million (38%); smallholders, US$17.1 million (23%); and the Government, US$5.0 million (7%). At project closure, the total cost was estimated at US $63.9 million (87 % of the appraisal cost). This was financed by IDA, US$ 12.83 million (20%), the Rubber Replanting Fund, US$ 5.0 million (8%); the Government, US$ 1.0 million (2%), and a smallholder contribution estimated at US$45.0 (70%). About US$5.4 million was canceled in 1996 and the undisbursed amount at project closure was also about US$5.4 million. The actual IDA disbursements of US$12.8 million were about 55% of the appraisal estimate, mainly due to the depreciation of local currency from Rs. 30.50/US$ at appraisal to Rs. 58.50/US$ at closing. 8. Project economic performance measured in terms of Economic Rate of Return (ERR), was satisfactory (16.2%), but slightly lower than the SAR estimate (18.2%). However, if the value of timber produced from uprooted trees from replanted areas is also included, the project return rises to 18.3%. In the SAR as well as in this ICR, benefits arising from introducing new clonal material and other technology transfer processes, institutional strengthening and training, although acknowledged, were not quantified due to measurement problems. Nevertheless, initial costs of these components were included in the economic analysis. iii  Project Sustainability 9. The outcomes of the major field development components of the project, including the expansion of area under rubber by replanting and new planting with improved clones, establishment of clonal trials for evaluation purposes and introduction of imported clones are sustainable in the long-run. However, cash flow projections of the RRF clearly suggest that the current "subsidy" payment levels of the Rubber Development Department (RDD) are unlikely to be sustained in the long run. The sustainability of the RDD activities are dependent on four key factors: (i) amount of cess funds generated; (ii) availability of funds from GOSL budget; (iii) ability of RDD to reduce its operational costs; and (iv) the degree of cost recovery. Possibilities for enhancing RDD revenues through increased cess collection and obtaining more funds from government budget are remote. In the long-run, therefore, RDD must seriously consider reducing its overhead and operational costs by moving away from its present emphasis on "subsidy" payments and input distribution to the smallholders, while simultaneously pressing for an extension of the cess to domestically used rubber. Key Factors Affecting Achievement of Major Objectives. 10. A number of factors contributed to the slow progress of the project. Among them, the more important were: (a) civil unrest in most areas in the project during 1988-89; (b) high volatility of farm gate prices of rubber; (c) planting and production variation due to adverse weather influences; (d) inefficiencies in administrative and financial regulation systems including tender award and procurement delays; (e) tendency to centralize decision making; (f) optimistic physical targets; (g) delays in arranging foreign consultant visits and long-term training programs; and (h) inadequate levels of awareness of the project, its goals, strategies and resources by most stakeholders, including the farmers. IDA Performance 11. IDA performance during project preparation was satisfactory. The appraisal included over optimistic targets, especially concerning the area replanted and establishing Latex Collection and Processing Centres (LCPCs).The appraisal also under-estimated the area under new planting. Nevertheless, IDA recognized the problem early and showed flexibility in revising the SAR planting targets and this was appreciated by the borrower. 12. During the eight year implementation period, IDA fielded 12 supervision missions. The supervision missions played a constructive and catalytic role in achieving project objectives, but supervision efforts appear to have been biased more towards technical issues of the project. A closer attention to the project's overall implementation progress and fielding supervision missions with a mix of skills would have helped the project to achieve better results. Although the Mid-Term review was ctdrried out as scheduled in January 1994, the exercise was only partially successful in improving project performance. Given the relatively long length of the project implementation period, a comprehensive review should have been undertaken by IDA iv  supervision missions earlier in the project, which could have identified the emerging problems and the necessary corrective actions. Borrower Performance 13. The project was prepared adequately by the borrower with assistance from IDA. Appraisal and supervision of the project by IDA staff received adequate attention by the borrower. Except for the covenant to extend the cess to domestically used rubber, GOSL responded well to most recommendations made by IDA supervision missions. The performance of GOSL, however, was mixed in actual project implementation for reasons both within and beyond their control. Most shortcomings in the project implementation were identified and corrected expeditiously by project implementation agencies. 14. The borrower generally complied with the covenants and responded to the recommendations of IDA except for the covenant to extend the cess to domestically used rubber and the covenant dealing with the appointment of the Head of Monitoring Unit. The non- compliance of the covenant concerning with the cess was a major issue between the borrower and IDA. Although the issue led to intensive communications with IDA, GOSL maintained the status quo, mainly due to its interest in promoting the domestic rubber processing industry and creation of employment opportunities. However, GOSL indicated that it would review the liquidity position of the RRF periodically with a view to bringing about necessary adjustments. They also defaulted on the covenant calling for the appointment of the Head of the Monitoring and Evaluation Committee. Project Outcome 15. Overall, the project's outcome is rated as satisfactory. The key elements of the project - field development, including replanting and new planting of rubber with improved clones, introduction of proven foreign clones and establishment of clonal trials, control of Corynespora leaf disease, establishment of RDD and consolidation of its activities, establishment of adaptive research stations and support to RRI activities were successfully implemented. However, the project outcomes were below appraisal expectations for establishing LCPCs and upgrading GPCs, mainly due to a lack of interest shown by the smallholders. The project showed an unsatisfactory outcome in relation to the objective of establishing a sustainable monitoring and evaluation unit. Summary of Findings and Future Operations Plan 16. The future operations plan for developing the smallholder rubber sub-sector prepared by RDD focuses on promoting the involvement of the skills and initiatives of private sector individuals and groups. In the past, rubber smallholders appear to have been playing the role of passive recipients of "subsidy" and other benefits from a number of state institutions. Due to various reasons, most growers continue to adopt conventional crop management and tapping practices. The RRI should improve its capacity to generate new, cost-effective production and processing technologies that are focused on the smallholders. Such changes in RDD and RRI v  should be based on a well prepared long-term plan, reflecting a well conceived vision of the future of the rubber smallholder sub-sector. The vision needs to be compatible with the emerging changes in the global as well as local economic conditions. The monitoring and evaluation capabilities currently available within the Ministry need strengthening. As regards the RRF, the government has stated its firm intention to review its cash flow status annually, or even at shorter intervals, and to make necessary adjustments. Key Lessons Learned for Future Projects 17. The main lessons learned from the implementation of the project are: a) Roles of private and public sectors: The project experience suggests that future development activities of the rubber smallholder growers should be based on a clear identification of the specific development roles to be played by the public and private sectors, respectively. The current development efforts in the smallholder rubber sub-sector are mostly driven by public sector initiatives and funds, thus reflecting a directed, supply driven approach. This has led to a significant misallocation and wasteful use of scarce resources with a dampening influence on the private sector initiatives. b) Expansion of private nursery activities: The under pricing of planting material produced in RDD nurseries is a deterrent to expansion of private nursery activities. The avoidance of direct competition of RDD nurseries with the private nurseries, and provision of a complementary, backstopping role by RDD and RRI would encourage expansion of private nurseries. There is substantial scope for improving the quality of planting material produced by private nurseries. A more rigorous nursery inspection and certification by Rubber Development Officers (RDOs) is a critical need. Reducing the time during which each nursery is certified would be an important step to minimize the common problem of budding runts. c) Effectiveness of the extension and research systems: In the past, RRI has been focusing its research attention mostly to large holdings, resulting in a relative neglect of the development needs of the smallholders. The level of acceptance of new innovations recommended to farmers by RRI is not solely determined by the technical superiority of the recommendation -- a perception that seems to be widely held by RRI -- but by a complex range of factors relating to economic and other behavioral characteristics of the smallholder. In addition, linkages between RRI scientists and RDOs were weak, and the flow of communication of research findings to the smallholder and vice versa was poor. The RDOs were also preoccupied with "subsidy" payments and distribution of inputs leaving little time to attend to their extension activities. d) Sustainability of Rubber Replanting Fund (RRF): Past investigations of the viability of RRF have been focused too narrowly and based on limited data. A vi  detailed analysis would throw light on important policy variables relating to the management of RRF. Project experience suggests that continuing the replanting/new planting "subsidy" program in its current form and intensity without an extension of the cess to domestically used rubber is unsustainable, mainly because the rubber exports on which the cess is collected represent a declining share of the total. More fundamentally, the justification for continuing to exempt the domestic rubber processing industry from the cess should be reviewed. If the industry is economically and financially viable, it should not need protection. e) Beneficiary participation: The project demonstrated that, to a large extent, the success of a project is dependent on the level of involvement of beneficiaries and other stakeholders. A greater initiative by the project staff to increase project awareness among all stakeholders from inception is a vital step in enhancing project outcome. The adoption of a top-down approach in project implementation and design reduces beneficiary involvement and ownership. f) Wider dissemination of ICR findings: Implementation of this project has generated many lessons of experience. A wider discussion of these lessons including the major issues and problems encountered would be most useful for the effective continuation of the programs financed under the project, as well as for the successful designing and implementation of future projects. vii  IMPLEMENTATION COMPLETION REPORT SRI LANKA SECOND SMALLHOLDER RUBBER REHABILITATION PROJECT (Cr. 1909-CE) PART I: PROJECT IMPLEMENTATION ASSESSMENT A. BACKGROUND AND STATEMENT/EVALUATION OF OBJECTIVES Background 1. Rubber is the second most important crop after tea, accounting for about 12% of total export earnings from agricultural products (2% of total export earnings) and 8% of total agricultural employment. Rubber occupies about 161,000 ha accounting for about 21% of the total area under tree crops. Smallholders account for nearly 65% of the total area under rubber with most holdings varying around .5 ha. Owing to many factors including increasing population pressure and the competition from other crops, the area under rubber has shown a steady decline over the last two decades averaging about 2% per annum. Resulting from the decline in area as well as the stagnant yields, total output of rubber since the 1970s shows a decline, averaging about 2% per annum. The smallholder sub-sector employs an estimated 250,000 persons or nearly 60% of the total employment in the rubber sector. Currently, 40% of the country's total rubber output is processed domestically, mainly for producing exportable items. 2. The more significant problems identified at appraisal as affecting the performance of the rubber smallholders were: low yields, adoption of poor crop husbandry practices, poor access to processing facilities, poor institutional mechanisms to serve the needs of the smallholders and low replanting rates. The replanting rate was particularly affected by the substantial large investment required in the first six years without any income from the crop. Thus, with a view to assisting the smallholders in their replanting activities, GOSL for many decades has been operating a replanting "subsidy" programme through a Rubber Replanting Fund (RRF) supported by a cess levied on exported rubber which currently amounts to Rs. 3.85 (US$ 0.06)/kg -- 4% of FOB price. To reflect the increasing costs associated with crop establishment the cess as well as "subsidy" payments were raised several times in the past. Although at project inception (1988) the "subsidy" accounted for nearly 60% of the smallholders total establishment costs, it accounted for only 40% of the total costs at project closure (1997). 3. The justification for supporting the "subsidy" programme under the project was based mainly on the need to address the intractable problems associated with the financing of rubber replanting on smallholdings. Private Sri Lankan smallholders have a strong comparative advantage in rubber production (stronger in fact than the large state-owned plantation  companies.) However, since replanting must be undertaken every 30 years as a "once in a (working) lifetime" activity, smallholders with their low incomes face difficulty in getting the long-term credit required until the newly planted trees become productive. Since the "subsidy" is financed by a cess on rubber exports, it can be regarded at least in part as forced savings. Project Objectives and Components 4. The main objective of the project was to increase the income of smallholders and Sri Lanka's foreign exchange earnings by increasing production and improving the quality of rubber produced by smallholdings throughout country. This was to be achieved through the following measures: (a) Field development -- replanting 35,550 ha of over-aged rubber and new planting of 3,200 ha of smallholdings with new high yielding clones; providing loans and extension support to private nurseries; and minimizing the negative impact of a major outbreak of a disease by providing relief payments for the removal of susceptible trees; (b) Processing -- providing financial assistance to establish 20 Latex Collection and Processing Centers (LCPCs) and upgrading 80 Group Latex Processing Centers (GPCs); (c) Institutional development -- strengthening the role of the Rubber Control Department (RCD) in rubber nursery development and enhancing its capacity to manage the Rubber Replanting Fund (RRF); strengthening the Advisory Services Department (ASD) to carry out farm level extension activities by providing supporting facilities; supporting the Rubber Research Institute (RRI) to establish three adaptive research sub-centers; and providing support for the Project Coordinating Unit (PCU) and setting up of a monitoring and evaluation unit. 5. Project Changes After Appraisal. The planting targets set at appraisal were changed in the early stages of the project by reducing the replanting target from its original 35,500 ha to 30,500 ha and raising the new planting target from 3,200 ha to 8,000 ha. 6. Project Cost. At appraisal, the total project cost, including physical and price contingencies, amounted to US$73.1 million. The IDA credit of US$23.5 million (SDR 17.0 million) was to finance about 32 % of the project. The remainder was to be financed by GOSL (US$5.0 million, 7%), Rubber Replanting Fund (US$27.5 million, 38%) and smallholders (US$17.1 million, 23% ). At project closure, the total cost was estimated at US$63.86 million of which IDA contributed US$ 12.83 million (20%); GOSL, US$ 1.0 million (2%); Rubber Replanting Fund US$5.0 million (8%); and smallholders US$45.0 million (70%). About US$5.4 million was canceled in 1996 and the undisbursed amount at project closure was also about US$5.4 million. The IDA disbursement of US$12.8 million was about 55% of the appraisal estimate, and the shortfall was mainly due to the depreciation of local currency from Rs. 30.50/US$ at appraisal to Rs. 58.50/US$ at completion. The project witnessed a sharp increase in replanting and maintenance cost of rubber by smallholders, mainly due to increases 2  in input prices, particularly labor. Wage labor costs which currently account for nearly 60% of the total replanting costs and about 80% of the maintenance cost of rubber increased threefold during the project period in local currency terms, although in US$ terms they only went up by 56%. Evaluation of Project Objectives. 7. Overall, the project was well conceived and its objectives were broadly consistent with IDA's sector development strategy defined in "Tree Crop Sector Review" of 1984 to arrest the decline in export earnings and to strengthen the agencies responsible to ensure continuing support to the sub-sector. The project design took into consideration the lessons derived from the previous project. The design, however, was over optimistic as regards the targets for replanting and establishment of Latex Collection and Processing Centers (LCPCs). The replanting rate is determined by a host of factors and the project design did not fully reflect the impact of factors outside the control of the implementing agencies. B. ACHIEVEMENT OF PROJECT OBJECTIVES Overall Achievement 8. The project achieved its field development objective including replanting and new planting to a substantial extent, but achieved only partially its institutional development, processing and monitoring objectives. By preventing a major disease outbreak, and also by increasing vegetative cover in the wet zone, the project fully achieved its environmental objectives. The processing centers were very smallscale operations, and posed no significant pollution hazard. Nor was excessive use of fertilizer a problem. The field development component of the project, by expanding the area under rubber cultivation, contributed substantially to environmental stability in the project areas. While macro-policy and gender issues were not applicable, project achievements on sector policy and poverty reduction objectives were partial and substantial respectively (Table 1). 9. Replanting/New Planting Program. Expanding the area under improved clones through replanting and new planting was a major objective of the project. From 1988-1997, the project established 21,549 ha (71% of the revised target of 30,500 ha) of replanting and 7,830 ha (95% of the revised target of 8,000 ha) of new plantings, reflecting an overall achievement of 76% of the revised target. Although the progress of replanting activity was relatively low, the new planting activity far exceeded the original project expectation of 3,200 ha. The rate of replanting was influenced by a combination of factors including rubber prices, level of "subsidy" relative to total planting cost, value of timber coming from sale of uprooted trees, availability of planting materials, economics of competing crops and weather conditions. The shift in the balance between the replanting and new planting in target achievement towards new planting reflects the relative profitability of rubber vis-a-vis other crops and the financial incentives provided by the planting "subsidy". The increased emphasis placed on new planting 3  was useful in mitigating the reduction in area under rubber due to increased urbanization and conversion of rubber lands into other uses in the wet zone. 10. Private Nurseries. The main objective of this component was to assist the expansion of the activities of private nurseries mainly through the provision of technical advice and improving the nursery certification processes. The objective was partially achieved. Currently, about 60-70% of the total planting material requirement of the country is supplied by private nurseries and the remainder is supplied by five RDD nurseries. Private nurseries are increasingly resorting to establish their own budwood nurseries, which is encouraging. To catalyze this process further, RRI should provide greater support to inspect and certify private budwood nurseries. The avoidance of direct competition of RDD nurseries with private nurseries and provision of a complimentary backstopping role by RDD and RRI would encourage expansion of private nurseries. 11. There is substantial scope for improving the quality of planting material produced by the private nurseries. Overcrowded beds, poor weeding and unremoved runts are common in most nurseries. A more rigorous nursery inspection and certification by Rubber Development Officers (RDOs) is essential. The RDOs should pay specific attention to improving nursery management practices, including the authentication of budwood used by proper documentation, removal of weak plants by more rigorous culling ad the application of recommended nutrient dosages. Incidence of budding runts is a major nursery problem and reducing the time during which each nursery is certified would be an important step in avoiding this situation. The interest of the private nurseries in adopting new grafting techniques such as green budding and young budding is growing, but the shortage of budders is a problem. 12. RDD Nurseries. The main objective of this component was to strengthen the capacity of RDD to provide planting materials to the smallholders. The project expected the five RDD operated nurseries to concentrate progressively on budwood supply to private nurseries with a view to ensure the legitimacy of planting materials produced. This expectation, to large extent, was not achieved. In most nurseries the land went underutilized. Brown budded stumps are sold by RDD nurseries at Rs. 10 per plant --which is about 20 % less than the price of those in the private nurseries. The current pricing system adopted in RDD nurseries needs careful review, as it has major influence on (i) the financial viability of these nurseries, and (ii) the level of participation of private nurseries in producing planting material. In addition, an investigation of the production costs including both recurrent and overhead is also recommended. 13. Planting and Maintenance of New Clones of Rubber in Smallholdings. The main objective of this component was to establish replanting/new planting of improved rubber clones in smallholdings and to popularize the adoption of improved crop management practices to achieve higher yields. Although the planting/replanting activities were undertaken satisfactorily, the level of adoption of new, improved technologies recommended by RRI was low. 4  14. The current girth criteria for "subsidy" payments are based on performance of PB86, an older clone with less vigorous growth. Since planting is now exclusively done with more advanced clones with greater vigor, it is necessary to update the payment criteria to encourage effort on the part of the farmers. With the introduction of advanced clones, such as RRIC 100, there is an urgent need to adopt appropriate tapping practices for these clones to avoid over- exploitation. Daily tapping of improved clones was widely observed, and the problem should receive greater attention by RDOs. 15. Control of Corynespora Leaf Spot Disease. The main aim of this component of the project was to eradicate this disease by eliminating the most susceptible clone RRIC 103 through relief payment arrangements to the affected growers. This objective was largely successful. However, RRI reports indicate that Corynespora attacks are presently observed in isolated locations from time to time and the Plant Pathology Division of RRI is closely monitoring these developments. 16. Establishment and Strengthening RDD. The establishment of RDD by pooling of staff and other resources in two separate Departments and re-designation of all field level staff as Rubber Development Officers (RDOs) achieved its objectives to a substantial extent. The RDOs are presently responsible for both extension as well as "subsidy" administration work at the farm level. The RDD's mandate includes a range of functions relating to market development and field development and "subsidy" administration. The RDD head office, after several changes in its location, is now functioning in its permanent premises, accommodating all staff in the same building. All seven RDD Regional offices are functioning satisfactorily. 17. The overall effectiveness of RDD, however, was affected by the continuation of some of the administrative and salary problems arising from the merger of staff coming from the two parent departments. Since satisfactory solutions to these problem have not been found so far, early action to resolve this is urgent. RDD has recruited 13 additional RDOs as recommended by the project. Mainly because of the extensive computerization, RDD will experience a surplus staff situation in the future, mostly in clerical grades. 18. Computerization of RDD. Computerization of the RDD and linking all its regional offices with the Colombo office through a computer network was a major project achievement. The computer network is now operating satisfactorily in all intended locations. The establishment of computer links between regional offices and head office has helped RDD to increase its work efficiency. Computer use has resulted in shortening the time taken for releasing "subsidy" installments to recipients and improving the accounting processes of the RDD. Although adequate basic training was provided to computer staff, the senior staff of the RDD need further training in computer applications. At present, the computers are mostly used for work relating to "subsidy" payments. 5  19. Operation of Replanting "Subsidy" and Rubber Replanting Fund (RRF). The objective of this component was to enhance the capacity of RDD to manage the Rubber Replanting Fund (RRF). The most important source of replenishing the RRF, from which the "subsidy" payments are made, is the cess levied on exported rubber. The rubber replanting "subsidy" which stood at Rs. 32,085 (US$1,008)/ha at project inception declined to US$801/ha by 1990 due to depreciation of the Rs. It was then raised to Rs. 37,050 (US$ 925)/ha and in 1995 to Rs. 49,722 (US$ 970)/ ha. Today, however, this amount is only worth US$850, again due to currency depreciation. The increase in the "subsidy" payment was a major factor affecting the viability of the RRF. In order to maintain the viability of the fund, the cess levied from exported rubber was increased in 1994 from Rs. 1.15 (US$ 0.02)/kg to Rs 3.85 (US$ 0.08)/kg. In today's terms, it is the equivalent of US$0.07/kg. As the liquidity position of the RDD was still continuing to erode in the subsequent years, mainly due to sharp reductions in the level of raw rubber exports, and also to ensure long-term viability of the RRF, IDA in 1995 reminded GOSL of its legal obligation to extend the cess to domestically used rubber by January 1996. However, GOSL chose to maintain the status quo, arguing the need to promote the domestic rubber products manufacturing industry. 20. Establishment of Latex Collection and Processing Centres (LCPCs). The main objective of this component of the project was to provide the farmers with an opportunity to improve their quality of processed product. With this in view, the project planned to establish 20 new LCPCs and upgrade 80 existing GPCs. The approach to establishing the LCPCs appears to be reminiscent of the paternalistic approach adopted earlier for sector development. Due to a variety of reasons, achievements in processing activity were less satisfactory. In most major rubber growing areas, smallholders prefer to sell latex directly. In general, smaliholders are reluctant to join group processing centers, but prefer to process their latex by themselves. In some remote areas, however, where rubber growing is totally a new activity, farmer interest to join LCPCs is high. The low farmer involvement in establishing the building and the operational activities of the LCPCs reflects the top-down approach followed by the project in mobilizing group efforts. A needs assessment, if undertaken at the preparation stage, would have helped to design this component better. 21. Civil Works. The implementation of the civil works component of the project is partially satisfactory, mainly due to major delays in contract awards and subsequent follow-up. The new Regional Office building established in Galle was completed satisfactorily. Out of 10 RDO quarters planned, only seven were completed at project completion and the remaining three are expected to be completed before December 1997. Although 20 buildings were planned for new GPCs and LPCs, only 15 were completed before the project closure. Of the planned rehabilitation of 80 GPC buildings, only 8 were completed by project closure. The low performance of this component was mainly due to difficulties of locating suitable land, complications arising from the involvement of Provincial Councils and contract administration problems. The new building established by the project at the Training Center at Nivitigala Kele remained idle since its commissioning in 1994. The overall quality of construction of buildings visited, however, appeared to be satisfactory. 6  22. Support to Rubber Research Institute (RRI). The objective of this component was to strengthen the capacity of the RRI to address the problems of the small scale rubber growers. Based on the activities including the initiation of the foreign and local clone trials in several locations in Kalutara, Ratnapura, Kegalle and Moneragala areas and the progress of work on adaptive research , the achievements of this component of the project is considered satisfactory. These adaptive research trials are performing well and have provided an invaluable, long-term resource base to the development of the rubber industry. In fact, some of the successful foreign clones tested in these trials have been recommended for wider scale use (group II). The intermediate zone replicate of foreign clone trials at Moneragala estate suffered a set back due to adverse weather but was established satisfactorily. The RRI indicated potential problems of continuing some of their clonal trials after the project, because of funding shortages. 23. Adaptive Research. The main objective of this component was to establish three adaptive research centers and to carryout research trials with a view to disseminate improved technology to the smallholder rubber growers. The establishment of the adaptive research centers has been satisfactorily carried out. Adaptive research trials were established by RRI in a number of locations relating to a variety of practices including the use of rainguards, tapping frequencies, spacing, yield stimulation and inter-cropping. However, the low level of acceptance of new innovations by smallholders is a chronic problem affecting production efficiency of the smallholders. Farmers continue to be reluctant to accept the RRI recommendations as they are not convinced of the additional benefits of adopting such innovations. Currently, there is a substantial gap between the research information available in the Rubber Research Institute (RRI) and the actual practices followed by farmers. 24. Although the project aimed at improving the rates of adoption of new technologies among smallholders, mainly due to weak research/extension linkages the achievement of this objective has been poor. Linkages between the RRI scientists and RDOs continue to remain weak and the flow of communication of research findings to the smallholder and vice versa remain poor. The current arrangement to hold a week-long technical training course for RDOs once a year at RRI is inadequate. A more intensive training for the RDOs to diagnose and solve field problems of the smallholder, on a more frequent basis is a critical need. The RDOs are mostly pre-occupied with "subsidy" payments and distribution of inputs leaving little time to attend to their extension activities. 25. Training and Consultancy Support. This component aimed to provide short-term training, study tours abroad and to bring in international expertise to improve local capacity. Achievement was partially satisfactory. The project provided short-term study tours abroad for 156 persons (SAR target, 43). The long-term training (MSc.) programmes, however, showed a substantial under-achievement. Of the 6 MSc. degree courses offered to RRI, only three have been used (para 26 of aide-memoire). The project also provided training for 20 persons, locally, mostly on computer use. 7  26. Although the project provided for a few consultancy visits from abroad, the opportunities were not utilized satisfactorily. The planned visit by the international nursery consultant did not materialize. However, the alternative arrangements for RRI to undertake this task was helpful and resulted in the preparation of a useful manual on nursery preparation. The short-term consultancy assignment to strengthen the latex analysis capabilities and to upgrade the technical know-how of RRI staff also did not materialize. Delays in communications have led to the non-utilization of this facility. 27. Project Coordinating Unit (PCU) and Monitoring Unit. The main objective of this component was to establish a PCU and a monitoring unit within the Ministry. The PCU played a pivotal role in undertaking the project work. Mainly due to staffing problems, the monitoring functions were carried out by consultants recruited from outside, and with their departure the monitoring unit has become non-functional. C. MAJOR FACTORS AFFECTING THE PROJECT 28. The main contributory factors for the implementation delays/shortfalls were: * Factors generally not subject to government control. These include civil unrest in most parts of the project area during 1988-89, uncertain and volatile rubber prices in international markets and recurrent drought conditions. The replanting/new planting and nursery preparation activities were affected by a major drought in 1992. - Factors generally subject to Government control. These include (i) inefficiencies in administrative and financial regulation systems including tender award procedures and, (ii) tendency to centralize decision making. * Factors generally subject to implementing agencies' control. Several factors in combination adversely influenced the achievement of project targets and the utilization of project resources. These include: (i) optimistic physical targets, slow progress in awarding contracts and inadequate follow-up in civil works; (ii) delays in procurement; (ii) delays in arranging foreign consultant visits and long-term training programs; (iii) inadequate awareness of the project; its goals, strategies and resources among most stakeholders including the farmers; (iv) weak extension/research links; (v) inadequate support to private nurseries; and (vi) failure to develop policy for financial sustainability. D. PROJECT SUSTAINABIIATY 29. The outcomes of the field development activities of the project, including the establishment of replanting and new plantings with improved clones, establishment of improved clonal trials in several areas for evaluation purposes and introduction of imported clones, are sustainable in the long-run. The current cash flow projections of RDD (Appendix D) indicate 8  that its activities, particularly "subsidy" payments and input distribution, are sustainable only in the short-run. In the long term, the ability of RDD to continue to function in the present operational mode is dependent on four key factors: (i) amount of cess funds generated; (ii) availability of funds from the Government budget; (iii) ability to reduce its own operational costs; and (iv) exploring possibilities for recouping some of its operational expenses. Prospects for generating more funds for RDD operations through an increase in the cess levy and Government budget are bleak. In order to maintain its long-term continuity therefore, RDD must wean away from its present emphasis on administering subsidies involving input delivery, while simultaneously pressing for extension of the cess to domestically used rubber. E. IDA PERFORMANCE 30. Project Concept and Design. Overall, project identification and preparation was guided by the experiences gained from the previous project and the appraisal established clear project objectives consistent with sectoral strategy. The design was based on learning from experiences from the previous project. 31. Supervision. IDA undertook 12 supervision missions during the eight year period. Reports indicate that the missions undertook detailed reviews of project implementation progress, while indicating deficiencies in implementation and gave helpful and constructive advice to overcome such problems. Overall, IDA supervision efforts showed a bias towards technical issues of the project. Supervision missions with a greater mix of skills would have helped the project to achieve a better outcome. The Mid-Term review carried out in January 1994, would have been more effective if greater attention had been paid to the problems arising from optimistic replanting targets, slow progress in awarding contracts and inadequate follow-up of civil works. Given the relatively long project implementation period, a comprehensive assessment should have been undertaken in the initial period of the project which could have flagged emerging problems and indicated necessary corrective actions. F. BORROWER PERFORMANCE 32. - Preparation and Implementation. The project was prepared by the borrower with assistance from IDA. Appraisal and supervision of the project by IDA staff received adequate attention by the borrower. Except for the covenant to extend the cess to domestically used rubber, GOSL responded well to most recommendations/suggestions made by IDA supervision missions. Most shortcomings in project implementation were identified and corrected expeditiously by project implementation agencies. The performance of GOSL, however, was mixed in the actual implementation for reasons both within and beyond its control. 9  33. Legal Covenants. The failure of the government to carryout the agreed extension of the cess to domestically used rubber was a major issue between the borrower and IDA. Although the issue led to intensive communications, GOSL favored the position of maintaining the status quo. The GOSL agreed, however, that it would review the liquidity position of the RRF periodically to effect necessary adjustments. The covenant for calling appointment of a Head of Monitoring and Evaluation Committee was not fulfilled. All other covenants were carried out satisfactorily. G. ASSESSMENT OF OUTCOME 34. On the basis of its initial expectations, the project's overall outcome is rated as satisfactory. The key elements of the project - field development, including replanting and new planting of rubber with improved clones, introduction of proven foreign clones and establishment of clonal trials, control of Corynespora disease, establishment and consolidation of RDD activities, initiation of adaptive research stations and support to RRI were successfully implemented. However, the effectiveness of the extension component in introducing improved technologies to smallholders was disappointing. The project outcomes are also below appraisal expectations for establishing LCPCs and upgrading GPCs, mainly due to a lack of involvement of the smallholders. The project also showed an unsatisfactory outcome in relation to the objective of establishing a monitoring and evaluation unit under the Ministry. H. FUTURIE OPERATIONS 35. RDD must focus on activities to involve the entrepreneurial skills and initiatives of the private individuals and groups. The broad strategy of RRI should be to improve its technological capacity to generate new, cost-effective technologies that are acceptable to smallholders. GOSL should prepare a well prepared long-term plan for the smallholder sub- sector based on a well conceived vision of the future, compatible with the emerging local and global economic changes. The monitoring and evaluation capabilities functions in the Ministry needs strengthening. Government is aware of the inability to sustain the replanting "subsidy" program using current financial sources and confirmed its intention to review the cash flow status of RRF annually and to make needed adjustments as necessary. According to current projections made by RDD, the level of cess levied at present is adequate to keep the RRF viable only up to until the year 2002 (Appendix D). Both the decreasing quantity of rubber exported as well as the increases in the overhead costs of the RDD could reduce the viability of the fund. 36. The future improvement plans of the rubber smallholder sub-sector, should be based on a clear identification of the roles to be played by the public and private sectors agencies. Most of the mandated activities of RDD are centered around procurement and distribution of production inputs and issuing "subsidy" payments, and hence are supply driven. This approach has resulted in a significant wastage of scarce resources and dampening influence on the private sector initiatives in the smallholder rubber sub-sector. 10  I. KEY LESSONS LEARNED 37. Among many lessons that could be learnt for future projects, the following need emphasis: a) Roles of private and public sectors: The future development activities of the rubber smallholder growers, should be based on a clear identification of the specific development roles to be played by the public and private sector respectively. Current efforts to develop the rubber smallholders are mostly driven by public sector initiatives and funds and reflect a directed, supply driven approach. This approach has resulted in a significant misallocation of scarce resources and a dampening influence on private sector initiatives. b) Expansion of private nursery activities: The under pricing of planting material produced in RDD nurseries is a deterrent to expansion of private nursery activities. The avoidance of direct competition of RDD nurseries with the private nurseries, and provision of a complementary, backstopping role by RDD and RRI would encourage expansion of private nurseries. There is substantial scope for improving the quality of planting material produced by private nurseries. A more rigorous nursery inspection and certification by Rubber Development Officers (RDOs) is critical. RDOs should pay specific attention to improving nursery management practices including the authentication of the budwood used by proper documentation, more rigorous culling of weak plants, and use of balanced nutrient applications. Reducing the time during which each nursery is certified would be an important step in reducing the incidence of budding runts. c) Effectiveness of extension and research activities: Research conducted by RRI is mostly focused on large rubber holdings, resulting in a relative neglect of smallholder needs. Most modem innovations generated by RRI are unacceptable to smallholders. The acceptance of new innovations ( e.g. rain guards) is not solely determined by its technical efficiency -- a perception that seems to be widely held by RRI -- but by a complex range of factors relating to economic and other behavioral characteristics of the smallholder. Technical recommendations of RRI should therefore be evaluated adequately by appropriate economic analyses. The extension and research services should support the development of private nurseries. In addition, linkages between RRI scientists and RDOs were weak, and the flow of communication of research findings to smallholders and vice versa was poor. The RDOs were also preoccupied with "subsidy" payments and distribution of inputs leaving little time to attend to their extension activities. 11  d) Sustainability of Rubber Replanting Fund (RRF): Past analysis of the viability of RRF is based on limited data and short-term projections. Project experience suggests that the continuation of the replanting/new planting "subsidy" program in its current form and intensity without an extension of the cess to domestically used rubber is unsustainable, mainly because the rubber exports on which the cess is collected represent a declining share of the total. More fundamentally, the justification for continuing to exempt the domestic rubber processing industry from the cess should be reviewed. If the industry is economically and financially viable, it should not need protection. e) Beneficiary participation: The success of a project, to a large extent, is influenced by the level of involvement and sense of ownership of beneficiaries and other stakeholders from its inception. A high degree of awareness of the project objectives, implementation and other details by all concerned is vital for enhancing project outcomes. The adoption of a participatory approach in project design and implementation would have helped to improve beneficiary involvement and ownership. f) Need for wider dissemination and discussions of the ICR findings: Implementation of this project has generated many lessons of experience. A wider discussion of these lessons including major issues and problems encountered would be most useful for effective continuation of the programmes financed under this project as well as for successful designing and implementation of future projects. 12  PART II: STATISTICAL TABLES Table 1: Summary of Assessments A. Achievement of Objectives Substantial Partial Negligible Not Applicable ("I) (0 ( )(/ Macro policies O O Ol 0 Sector policies O 0 O O Financial objectives O El E 0 Institutional development O el 0 O Physical objectives 0 E O E Poverty reduction 0 O O O Gender issues O O E 0 Other social objectives O O O 0 Environmental objectives 0 O 11 O Public sector management O E 0 O Private sector development O 0 E O Other (Human resource development) O E0 El O B. Project Sustainability Likely Unlikely Uncertain ('/) (1 ) (1 ) 0 El E C. Bank Performance Highly Satisfactory Satisfactory Deficient Identification a 0 El Preparation assistance E 0 El Appraisal 0 0 El Supervision E 0 El D. Borrower Performance Highly Satisfactory Satisfactory Deficient (V) (V/) (1) Preparation El 0 0 Implementation E 10 0 Covenant compliance E E 0 Operation (if applicable) E 0 E Highly Highly E. Assessment of Outcome Satisfactory Satisfactory Unsatisfactory Unsatisfactory ("i) () (1,') (v') 0 0 0 El 13  Table 2: Related IDA Credits Loan/ Purpose Year of Status Credit Title Approval Preceding Operations: None Smallholder Rubber Develop smallholder rubber sector by re- May PCR Rehabilitation Project planting uneconomic rubber in major rubber 1980 issued in growing areas and strengthening institutional Feb. activities. 1991 Following Operations: None Table 3. Project Timetable Date Actual/ Steps in Project Cycle Date Planned Latest Estimate Identification Jan. 29, 1986 Jan. 29, 1986 Preparation Apr. 16,1987 Apr. 12, 1987 Appraisal Jun. 1, 1987 Aug. 27, 1987 Negotiations Dec. 7, 1987 Apr. 18, 1988 Letter of development policy Board presentation Jan. 9, 1988 May 24, 1988 Signing effectiveness Aug. 31,1988 Jan. 6, 1989 Mid term review Oct. 10, 1994 Oct. 10, 1994 Project completion Dec. 31, 1996 Dec. 31, 1996 Loan closing Jun. 30, 1997 Jun. 30 1997 Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual (US$ thousands) FY89 FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 Appraisal estimate 1,200 3,500 6,400 9,900 12,900 15,500 18,800 21,200 23,500 23,500 Revised estimate 1/ - - - - 14,800 18,000 18,000 Actual 799 1,941 3,361 7,071 8,186 9,543 10,698 11,643 12,338 12,809 Actual as % of appraisal 67 55 53 71 63 62 57 55 53 55 |Actual as % of revised estimate l - 79 l70 l 1 l |Date of fmaldisbursement November I1',1997 D/ USo5.4 million was canceled as of February 6, 1996. 14  Table 5: Key Indicators for Project Implementation Key Implementation Indicators in SAR Estimated Revised Actual SAR l 1. Field Development: I Area replanted 35,500 ha 30,000 ha 20,428 ha Incremental area new planted 3,200 ha 8,750 ha 7,830 ha Establishment of clonal trials 7 __7 2. Institutional Strengthening: Establishment of LCPCs 20 15 15 Upgrading GPCs 80 8 8 Establishment of Adaptive Research Centers 3 2 2 Computer Terminals 11 34 34 Vehicles; Cars/ Jeeps/4WD 11 14 Motorcycles 250 156 Tractors 1 1 3. Civil Works: LCPC buildings 20 12 8 4. Project Management: Project Director 102 - 102 (person months) 5. Corynespora Control 2750 ha 2750 ha Table 6: Key Indicators of Project Operations Key Operating Indicators in Estimated Actual SAR/President's Reportl Training of computer operators 10 |Staff Training : l 4. Foreign: Long term 15 persons 7 persons |Short term 70 persons 156 persons Local: 20 persons 20 persons 5. Quarterly Reports 26 24 15  Table 7: Studies Included in Project Study Purpose as Defined at Status Impact of Study Appraisal/Redefined 1. Implications To investigate the impact Completed Assisted in highlighting of using RRF funds of using RRF funds for the economic and other for subsidizing processing machinery issues involved in processing machinery purchases operating the "subsidy" 2. Manual of To provide technical Completed Recommendations are Nursery guidelines for improving extensively used by Management nursery management extension officials and practices farmers in raising nursery standards. 3. Clone To provide guidelines Completed Assisted extension Recommendation: for the extension workers and rubber RRI Advisory circular workers and rubber growers in choosing No 1996/04 growers in selecting clones clones Table 8A: Project Costs Appraisal Estimate (US$ M) 1/ Actual/Latest Estimate (US$M) ITEM Local Foreign Total Local Foreign Total Costs Costs Costs Costs Costs Costs Field operations 53.38 13.28 66.66 60.93 0.21 61.14 Civil works .59 .13 .72 0.60 0.04 0.64 Vehicles and equipment 1.04 1.17 2.21 0.40 0.36 0.76 Training and consultancies .19 1.18 1.37 0.01 0.52 0.53 Incremental staff & operating 2.05 0.01 2.06 0.77 0.02 0.79 Total 57.25 15.77 73.02 62.71 1.15 63.86 1/ SAR - Annex 2, Table 1. Table 8B: Project Financing Source Appraisal Estimate (US$M) 1/ Actual/Latest Estimate (US$M) Local Foreign Total Local Foreign Total Costs Costs Costs Costs Costs IDA 7.7 15.8 23.5 11.68 1.15 12.83 GOSL 5.0 - 5.0 1.03 - 1.03 RRF 27.5 - 27.5 5.00 - 5.00 Smallholders 17.1 - 17.1 44.91 - 45.00 Total 57.3 15.8 73.1 62.71 1.15 63.86 1/ SAR-pagev. 16  Table 9: Economic Costs and Benefits Variables SAR Estimate ICR Estimate Output from replanting ('000 tons) 602 452 Output from new planting ('000 tons) 172 158 Total output ('000 tons) 774 610 Economic Rate of Return (%) 18.2 16.2 Underlying assumptions: - Project life (yrs) 1/ 37 37 - Standard conversion factor (average) 0.9 0.9 -Specific conversion factor for unskilled labor 0.9 0.9 / Implementation phased over 8 years, the immature period of rubber is 6 years and trees would be tapped for 24 years before the next cycle of replanting. 17  Table 10: Status of Legal Covenants Agreement Text reference Covenant Present Original Revised Description of covenant Comments type status fulfillnent date fulfillment date CREDIT 2.02b I C Borrower shall maintain in US $ special Account in In compliance Central Bank Schedule P4.1 (a) 12 C 12/31/88 Issue directives to LCPC and GPC In compliance P4.1 (c) 11 C Make budgetary locations for LCPC and GPC In compliance 0P4.1 (d) 3 C 12/31/88 Establish Revolving funds for loans and grants to LCPC In compliance and GPC P2 (b) 3 C 12/31/88 maintain full time project coordinator In compliance P 3 3 C Extend loans to field staff to purchase motorcycles. In compliance P4(a) 12 C 12/31/89 Transfernursery inspection unitto RCD In compliance P 4 (b) 10 C 12/31/90 Recruit field staffto raise number to 200 In compliance P4(b) 5 C P6 9 NC Establish M&E Committee Head not appointed P7 12 C Establish RRF certification procedure In compliance P8(a) 13 C 10/1/88 Begin study on rubber machinery subsidies In compliance P 8 (b) 13 C 3/31/89 Complete study In compliance P 8 (c) 13 C 9/30/89 Implement study findings In compliance P9 (c) 13 NC 1/1/96 Extend RRF cess to rubber used domestically Not in compliance Status: Covenant Class C - Complied with I Accounts/audit CD - Complied after delay 2 Financial perfomnance/generate revenue from beneficiaries NC - Not complied with 3 Flow and utilization of project funds SOON - Compliance expected 4 Counterpart funding in reasonably short time 5 Management aspects of the project or its executing agency CP - Complied partially 6 Environmental covenants NYD - Not yet due 7 Involuntary settlement 8 Indigenous people 9 Monitoring reviewing and reporting 10 Implementation 11 Sectoral or cross sectoral budgetary or other resource allocation 12 Sectoral or cross sectoral regulatory institutional action 13 Others 18  Table 11: Compliance with Operational Manual Statements Statement Number and Title I Describe and Comment on Lack of Compliance I No deviation from applicable Operational Manual Statements observed Table 12: IDA Resource: Staff Inputs Stage of Project Cycle Planned 1/ Revised 1/ Actual 2/ Weeks US$ Weeks US$ Weeks US$ (000) (000) (000) Preparation to N/A N/A N/A N/A 40.6 104.0 appraisal Appraisal N/A N/A N/A N/A 41.3 103.3 Negotiations through N/A N/A N/A N/A 2.9 7.7 Board approval Supervision N/A N/A N/A N/A 64.2 223.4 Completion 3/ 12.8 25 N/A N/A 9.0 2.7 TOTAL N/A N/A N/A N/A 157.0 441.1 I/ Estimates for original and revised staff weeks and dollar budgeting introduced only in FY95 and therefore total original and revised staff weeks and costs cannot be computed. 2/ Data from World Bank MIS 3/ Actual cost relates only to staff in Colombo office. 19  Table 13: IDA Resources: Missions _ _ _~ ~~~~~_ .... - Stage of Month/Year Numbe Days Specialized Types of Project Cycle r in Staff Skills Performance Rating b/ Problems c/ of field Represented al Persons Implementation Develop-ment Status Objectives Through Appraisal e/ Appraisal through Board Approval el _ Supervision 1 Nov. 1989 1 12 Ag. 2 2 M Supervision 2 May 1990 2 15 Ag., FA 2 1 M Supervision 3 May 1991 1 19 Ag. 2 2 Supervision 4 Nov. 1991 1 7 Ag. 2 2 Supervision 5 Feb. 1992 1 24 Ag. 2 1 T Supervision 6 Dec. 1992 1 12 Ag. 2 1 Supervision 7 July 1993 2 17 Ag., FA 2 1 M Supervision8 Jan. 1994 1 16 Ag. 2 1 T Supervision 9-fl Sep. 1994 2 15 Ag., EC s s Supervision IO Apr. 1995 1 19 Ag. s s F Supervision Il Nov. 1995 1 15 Ag. s s F Supervision 12 July 1996 1 14 Ag. u s F Completion Aug. 1997 1 7 ECs a! Staff specialization: Ag. - Agriculturist; EC - Economist; FA - Financial analyst. bl Performance ratings based on IBRD and IDA - implementation summary Form 590 (before FY94) =l-.Problem free; 2- Moderate; 3- Major problems, Implementation/development impact status (from FY94) - HS - Highly satisfactory; S- Satisfactory; U- Unsatisfactory; HU- Highly Unsatisfactory c/ Types of problems: T - technical; M - Managerial; and F - Financial. d/ Project identification. e/ Information not found in project files. f/ Mid-Term review. 20  APPENDIX A SRI LANKA SECOND SMALLHOLDER RUBBER REHABILITATION PROJECT (CR: 1909 CE) SUPERVISION/COMPLETION MISSION - AUGUST/SEPTEMBER 1997 AIDE-MEMOIRE Introduction 1. A mission to undertake the final supervision and the preparation of Implementation Completion Report (ICR) comprising of Terrence Abeysekera, SASRD Agricultural Economist in the World Bank Colombo Field Office, visited the project during the period August 20 to September 20, 1997. The mission had detailed discussions with the additional Secretary (Plantation Industries), Ministry of Public Administration, Home Affairs and Plantation Industries (MPAHAPI); Director General (Development, MPAHAPI); Director General and senior staff of the Rubber Development Department (RDD); Director and senior scientists of the Rubber Research Institute (RRI); and the Project Coordinator and staff of the Project Coordinating Unit (PCU). Visits were made to selected project sites in Kalutara, Homagama, Ratnapura, Galle and Moneragala districts. The mission inspected foreign clonal trials and adaptive research trials; newly constructed project buildings; computer installations in the RDD regional offices; a range of newly planted smallholdings; RDD nurseries; and several private nurseries. The views and preliminary findings presented in this draft aide-memoire reflect those of the mission and are based on discussions with project staff and information available in project documents at World Bank and are subject to review by IDA management. 2. The mission wishes to thank all staff in the Ministry, PCU and RDD, staff in field offices and scientific staff in RRI for their excellent cooperation and support, giving generously of their time, sharing information and providing assistance at the meetings and field visits. A. Statement/Evaluation of Project Objectives 3. The project was prepared in May 1987 by GOSL with IDA assistance and was appraised by an IDA mission in September, 1987. The project was a follow-up of the Smallholder Rubber Rehabilitation Project implemented during 1980-88 by extending the area coverage to all rubber growing areas. The project primarily intended to accelerate the replanting of unproductive, senile trees in smallholdings with proven high yielding clones and establish a firm institutional base capable of addressing problems of the smallholder rubber growers. 21  Project Objectives 4. The main objective of the project was to increase the income of the smallholders and Sri Lanka's foreign exchange earnings by stimulating improvements in the quantity and quality of smallholders rubber output throughout the country. This was to be achieved through: (i) Field development -- replanting 35,550 ha of over-aged rubber and new planting of 3,200 ha of smallholdings with new high yielding clones, providing loans and extension support to private nurseries; and minimizing the negative impact of a major outbreak of a disease by providing relief payments for the removal of susceptible trees; 1 (ii) Processing -- providing financial assistance to establish 20 Latex Collection and Processing Centres (LCPCs) and upgrading 80 Group Latex Processing Centers (GPCs); (iii) Institutional development -- strengthen the role of the Rubber Control Department (RCD) in rubber nursery development and enhance its capacity to manage the Rubber Replanting Fund (RRF); strengthen Advisory Services Department (ASD) to carry out its extension activities by providing supporting facilities; establish three adaptive research sub- centres of the Rubber Research Institute (RRI) and enhance the capacity of RRI to support rubber smallholders; and (iv) Support for the Project Coordinating Unit (PCU) and setting up of a monitoring and evaluation unit within the Ministry. 5. Project Costs. The project was planned to be implemented over eight years from May 1988 to June 1996. The total project cost including physical and price contingencies was estimated at US$ 73.1 million. The IDA credit of US$ 23.5 million (SDR 17.0 million) was to finance about 32 % of the project. The remainder was to be financed by GOSL (US$ 5.0 million, 7%), Rubber Replanting Fund (US$ 27.5 million, 38% ) and smallholders (US$ 17.1 million, 23%). B. Achievement of Project Objectives Evaluation of Project Objectives 6. The project was well conceived and its objectives were consistent with IDA sector development strategy defined in "Tree Crop Sector Review" of 1984. The project design took into consideration the lessons derived from the previous project. The design, however, was over The planting targets set at appraisal were changed subsequently. The replanting target was reduced from its original 35,500 ha to 30,000 ha and the new planting target was raised from 3,200 ha to 8,700 ha. 22  optimistic as regards the targets for replanting and establishment of Latex Collection and Processing Centres (LCPCs). Replanting rate is determined by a host of factors and the project design has not fully analyzed the impact of factors outside the control of the implementing agencies. Overall Achievement 7. The project achieved its field development objective to a substantial extent, but achieved only partially its institutional development, processing and monitoring objectives. The objective of eliminating the disease problem was fully achieved. The field development component of the project, by expanding bringing a large area under rubber cultivation, contributed substantially to the environmental stability in the project areas. Macro policy, sector policy, poverty reduction and gender objectives were not applicable to this project. Field Development 8. Replanting/New Planting Program. Expanding the area under improved clones through replanting and new planting was a major objective of the project. During 1989-1997, the project has established 20,428 ha (67% of the revised target of 30,500 ha) of replanting and 7,830 ha (90% of the revised target of 8,700 ha) of new plantings, reflecting an overall achievement of 72% of the revised target. Although the progress of replanting activity was relatively low, the new planting activity has far exceeded the original project expectation of 3,200 ha. The rate of replanting was influenced by a combination of factors including rubber prices, level of "subsidy" payment2 relative to the total planting costs, value of timber coming from sale of uprooted trees, availability of planting materials, economics of competing crops and weather conditions. The shift in the balance between the replanting and new planting in target achievement towards new planting, reflects the relative profitability of rubber vis-a-vis other crops and the financial incentives provided by the replanting "subsidy". The increased emphasis placed on new planting was useful in mitigating the reduction in area under rubber due to increased urbanization and conversion of rubber lands into other uses in the wet zone. 9. Private Nurseries. The main objective of this component was to assist the expansion of the activities of private nurseries, mainly through the provision of technical advice and improving the nursery certification processes. The objective was partially achieved. Currently, about 60-70% of the total planting material requirement of the country is supplied by private nurseries and the remainder is supplied by RDD nurseries. It was observed that the recent increase in price of the planting material produced by RDD nurseries from Rs. 6.00 to 10. 00/plant, has resulted in renewed enthusiasm of private nurseries. 2 This refers to the payment made by the government to the smallholders through the Rubber Replanting Fund (RRF) financed out of the cess levied from exported rubber, to partly offset the large initial costs involved in replanting and new planting. 23  10. There is substantial scope for further improvements in the quality of planting material produced by private nurseries and in their management. Over crowded beds, poor weeding, and unremoved runts are common in most nurseries. A more rigorous nursery inspection and certification by Rubber Development Officers (RDOs) is a critical need. The RDOs should pay specific attention to improving nursery management practices including the authentication of the budwood used by proper documentation, removal of weak plants by more rigorous culling and systematic application of recommended fertilizer dosages. Incidence of budding runts is a major nursery problem and reducing the time during which each nursery is certified is an important step in avoiding this situation. The interest of the private nurseries to take to new grafting techniques such as green budding and young budding is also on the increase, but the shortage of budders is a major problem in most nurseries. The adoption of green and young budding techniques by private nurseries are increasing, though slowly. The expansion of the use of these techniques would be possible by providing more training opportunities to nursery operators. 11. Private nurseries are increasingly resorting to establish their own budwood nurseries and this is an encouraging trend. To catalyze and expand this process further, RRI should provide greater support by extending their support to inspect and certify private budwood nurseries. In any case, RRI is unlikely to get into the operation of large budwood nurseries. The avoidance of direct competition of RDD nurseries with the private nurseries, and provision of a complementary, backstopping role by RDD and RRI could encourage expansion of private nurseries. 12. RDD Nurseries. The main objective of this component was to strengthen the capacity of RDD to provide planting materials to the smallholders. The project expected the five RDD nurseries to concentrate progressively on budwood supply to private nurseries with a view to ensure the legitimacy of planting materials produced. However, this expectation, to a large extent, not been achieved. Although the visits to RDD nurseries in Ratnapura and Kalutara indicated that commendable attempts to produce high quality planting material, their emphasis is placed mostly on producing planting material. Currently, brown budded stumps are sold by the RDD nurseries at Rs. 10 per plant --which is about 20 % less than the price of those in the private nurseries. The pricing system of planting material produced the RDD nurseries, is an important issue that needs careful examination, as it has major influence on (i) the financial stability of these nurseries and (ii) the level of participation of private nurseries in producing planting material. A detailed study designed to investigate the production costs including both recurrent and overhead, pricing mechanism adopted and the resource utilization of RDD operated nurseries is recommended. 13. Planting and Maintenance of Rubber in Smallholdings. The main objective of this component was to establish replanting/new planting of improved rubber clones in smallholdings and to maintain improved crop husbandry practices to achieve higher yields. Visits to smallholders indicated that the planting/replanting activities are implemented 24  satisfactorily. However, the level of adoption of new, improved technologies recommended by RRI by smallholders are generally low. In some farms visited, intercropping has been done in a manner that it is in direct competition with the main plant. 14. The current girth criteria for "subsidy" payments are based on performance of PB86, an older clone with less vigorous growth. Since planting is now exclusively done with more advanced clones with greater vigor, it is necessary to update the payment criteria to encourage effort on the part of the farmers. With the introduction of advanced clones, such as RRIC 100 there is an urgent need to adopt appropriate tapping practices for these clones to avoid over- exploitation. Daily tapping of improved clones was widely observed, and the problem should receive greater attention by RDOs. 15. Control of Corynespora Leaf Spot Disease. The main aim of this component of the project was to eradicate this disease by eliminating the most susceptible clone RRIC 103 through relief payment arrangements to the affected growers. This objective was largely successful. However, RRI reports indicate that Corynespora attacks are presently observed in isolated locations from time to time. The Plant Pathology Division of RRI is closely monitoring the situation. Institutional Development. 16. Establishment and Strengthening RDD. The formation of RDD by amalgamating Advisory Services Department (ASD) and the Rubber Control Department (RCD) was a major project objective that evolved after the project was initiated. The amalgamation has achieved its objectives to a substantial extent. The change involved the pooling of staff and other resources in two separate Departments and re-designation of all field level staff as Rubber Development Officers (RDOs). The RDOs are presently responsible for both extension as well as "subsidy" administration work at the farm level. The RDD's mandate includes a range of functions relating to market development, field development and "subsidy" administration. The RDD head office, after several changes in its location, is now functioning in its permanent premises, accommodating all staff in the same building. All seven RDD Regional offices are functioning satisfactorily. The Moneragala regional office has recently shifted to its new location and is functioning well. 17. The overall effectiveness of RDD, however, appears to be affected by the continuation of some of the administrative and salary problems arising from the merger of staff coming from two parent departments. Since satisfactory solutions to the problem have not been found so far, early action to resolve this is urgent. RDD has recruited 13 additional RDOs as recommended by the project. Mainly because of the expanded computer usage, RDD is likely to experience a surplus staff situation in the future, mostly in clerical grades, and the Department is well aware of the situation. 25  18. Computerization of RDD. Computerization of the RDD and linking all its regional offices with the Colombo office through a computer network was a major achievement of the project. The computer network is now operating satisfactorily in all intended locations. The establishment of computer links between regional offices and head office has helped RDD to increase its work efficiency. Computer use has resulted in shortening the time taken for releasing "subsidy" installments to recipients and improving the accounting processes of the RDD. Adequate basic training has been provided to computer staff. However, the senior staff of the RDD, both in head office and regional offices, need further training in computer applications as this would help to increase the overall management efficiency of the Department. At present, the computers are mostly used for work relating to "subsidy" payments and efforts to extend the use of computers for other administrative and related activities of the RDD should be encouraged. 19. Operation of Replanting "Subsidy" and Rubber Replanting Fund (RRF). The objective of this component was to enhance the capacity of RDD to manage the Rubber Replanting Fund (RRF). The most important source of replenishing RRF, through which the "subsidy" payments are made, is the cess levied from exported rubber. The rubber replanting "subsidy" which stood at Rs. 32,085/ha prior to 1990 was raised to Rs. 37,050 in 1990 and this was furthered raised in Rs. 49,722/ ha in 1995. The increase in the "subsidy" payment was a major factor affecting the viability of RRF. In order to maintain the fund in a positive balance, the cess levied from exported rubber was increased in 1994 from Rs. 1.15/Kg to Rs. 3.85/Kg As the liquidity position of the RDD continued to erode further in the subsequent years, and also to ensure long- term viability of the RRF, the Bank in 1995 suggested GOSL to extend the cess levy to cover the domestically used rubber as well (by covenant to be agreed before January, 1996). The appropriateness of cess-funded "subsidy" payments to smallholders needs to be assessed in light of other alternatives means available to finance their long-term financial requirement for replanting/new planting. 20. Establishment of Group Processing Centres (GPCs). The main objective of supporting group activities for processing latex by the project was to provide the farmers with an opportunity to improve their quality of processed product. With this in view, the project planned for establishing 20 new LCPCs and upgrading of 80 existing GPCs. Due to a variety of reasons achievements in this activity are less satisfactory. In fact, in most major rubber growing areas, smallholders sell unprocessed latex directly to buyers. In general, most smallholders are reluctant to join group processing centres, but prefer to process their latex by themselves. However, in some remote areas, where rubber growing is totally a new activity as in parts of Moneragala, farmer enthusiasm to join GPCs are high. The mission visits to some of the newly established GPCs indicated poor levels of farmer involvement in establishing the building and its operational activities. The main reason for this problem appears to be the top-down approach followed by the project in mobilizing group efforts. A clear assessment of the actual needs of the farmers, if conducted before implementing this component, would have led to better results. 26  21. Civil Works. The implementation of the civil works component of the project is partially satisfactory, mainly due to major delays in contract awards and subsequent follow-up. The new Regional Office building established in Galle was completed satisfactorily. Out of 10 RDO quarters planned, only seven were completed at project completion and the remaining three are expected to be completed before December 1997. Although 20 buildings planned for new GPCs and LPCs, only 15 were completed before the project closure and the remaining are expected to be completed by December 1997. Of the planned rehabilitation of 80 GPC buildings only 8 were completed by project closure. The low performance was due to a range of problems including difficulties of locating suitable land, complications arising from the involvement of Provincial Councils and contract administration problems. The mission also observed that the new building established by the project at the training centre at Nivitigal Kele remained idle since its commissioning in 1994. This building is not maintained adequately and is currently used only as a storehouse for discarded items. This building could, perhaps, be better utilized by RRI for their training purposes as it is located in close proximity to the RRI. The overall quality of construction of all buildings visited appeared to be satisfactory. 22. Support to Rubber Research Institute (RRI). The objective of this component was to strengthen the capacity of the RRI to address the problems of the small scale rubber growers. Based on the activities including the initiation of the foreign and local clone trials in several locations in Kalutara, Ratnapura, Kegalle, and Moneragala areas and the progress of work on adaptive research, the achievement of this component of the project is considered satisfactory. These adaptive research trials in particular, are continuing to perform well and have provided an invaluable, long-term resource base to the development of the rubber industry as a whole. In fact, some of the successful foreign clones tested in these trials have been recommended for wider scale use (group II). The intermediate zone replicate of foreign clone trials at Moneragala estate suffered a set back due to a fire, but since then it has been re-established. The RRI indicated potential problems of continuing some of their clonal trials after the project, because of funding shortages. 23. Adaptive Research. The main objective of this component was to establish three adaptive research centres and to carryout research trials with a view to disseminate improved technology to the smallholder rubber growers. The establishment of the adaptive research centres has been satisfactorily carried out. Adaptive research trials have been established by RRI in a number locations relating to a variety of practices including the use of rainguards, tapping frequencies, spacing,, yield stimulation and inter-cropping. However, the low level of acceptance of new innovations by smallholders is a common problem affecting production efficiency of the smallholders. On a purely technical basis, some of the new innovations recommended by RRI through their trials are superior when compared to the conventional practices adopted by farmers. However, the actual rates of acceptance of these recommendations by smallholders are low as farmers are not convinced of the additional benefits coming from adoption of such innovations. Field observations confirmed the existence of a substantial gap 27  between the research information/knowledge available in the Rubber Research Institute (RRI) and farmer's actual crop husbandry practices. Bridging this gap is a crucial step in improving the productivity of the smallholder. 24. Although the project aimed at improving the rates of adoption of new technologies among smallholders, mainly due to weak research/extension linkages the achievement of this objectives has been poor. Discussions with farmers and scientists indicated that the linkages between the RRI scientists and RDOs continue to remain extremely weak and the flow of communication of research findings to the smallholder and vice versa are poor. The current arrangement of RRI scientists to hold a week-long technical training/refresher course for training RDOs once a year at RRI seems to be totally inadequate. An intensive effort for training RDOs to diagnose and solve field problems of the smallholder on a more frequent basis is a critical need. New approaches should be explored to strengthen the technical competency of the RDOs and to improve the RRI involvement with actual problems of the smallholder rubber growers. 25. The mission also observed that in most areas visited, the RDOs are mostly pre-occupied with "subsidy" payments and distribution of inputs such as planting material, fertilizer and polythene bags etc., with little time left to focus on extension activities. The priority given for "subsidy" related work by the RDO is partly a result of the orientation of the "subsidy" program itself, in which the RDO is expected to deliver pre-determined work targets at the end of the year. 26. Training and Consultancy Support. An objective of this activity was to provide short-term training, study tours abroad and to bring in international expertise to improve local capacity. Overall, the achievement of this component is partially satisfactory. The project provided short-term study tours abroad for 156 persons (SAR target, 43), the long-term training, (MSc.) programs showed a substantial under-achievement. Of the 6 MSc. degree courses offered to RRI, only three have been used. The requirement laid by the project for the trainees to undertake a MSc degree with one year duration has not been useful to the younger scientific staff in RRI because their promotions are based on completing a MSc. degree by research, which usually takes two years. The project provided satisfactory training for 20 persons, locally, mostly on computer application. 27. Although the project provided for a smaller number of consultancy visits, the actual utilization of these opportunities by the project, were unsatisfactory due to various reasons including some, beyond control of the project. The planned visit by the international nursery consultant did not materialize. However, the alternative arrangements made for an RRI scientist to undertake this task was satisfactory and this has resulted in the preparation and distribution 28  of an extremely useful manual on nursery preparation. A second short-term consultancy assignment to strengthen the latex analysis capabilities and to upgrade the technical-know-how of RRI staff also did not materialize. This consultancy would have been an extremely useful opportunity to upgrade the laboratory facilities of RRI. Delays in communication and inadequate institutional coordination have led to the non-utilization of this facility. 28. PCU and Monitoring Unit. The main objective of this component was to establish a project coordinating unit as well as a monitoring and evaluation unit within the Ministry of Plantation Industries. The PCU, played a pivotal role undertaking the project work. Mainly due to staffing problems, the monitoring functions were carried out by consultants recruited from outside and with their departure, the monitoring unit has become virtually non-functional. Absence of a sustainable arrangement for monitoring and evaluation of the development activities in the rubber smallholder sector is a major problem that needs closer attention of the Ministry. C. Major Factors Affecting the Project 29. Factors generally not subject to government control: These include civil unrest in most parts of the project area during 1988-99, uncertain and volatile rubber prices in international markets and recurrent drought conditions. The replanting/new planting and nursery preparation activities were affected by a major drought in 1992. 30. Factors generally subject to Government control: These include (i) inefficiencies in administrative and financial regulation systems including tender award procedures and, (ii) tendency to centralize decision making. 31. Factors generally subject to implementing agency control: Several factors in combination had adverse influence on the achievement of project targets and the utilization of project resources. These include; (i) optimistic physical targets, slow progress in awarding contracts and inadequate follow-up in civil works, (ii) delays in procurement (ii) delays in arranging foreign consultant visits and long-term training programs and, (iii) inadequate awareness of the project, its goals, strategies and resources by all stakeholders. D. Project Sustainability 32. The outcomes of the field development activities of the project, including the establishment of replanting and new planting with improved clones, establishment of improved clonal trials in several areas for evaluation purposes, introduction of imported clones, are sustainable in the long-run. Given the current cash flow projections, the RDD activities, particularly "subsidy" payments and input distribution, are sustainable only in the short-run. In the medium to long term, however, the ability of RDD to continue to function in the present 29  operational mode is highly unlikely, and is dependent on four key factors; (i) level of cess funds generated, (ii) availability of funds from the consolidated funds, (iii) ability to reduce its own operational costs and (iv) exploring possible means of recouping some of its operational expenses. Prospects for generating more funds for RDD operations through an increase in the cess levy appears to be bleak. In order to maintain its sustainability in the longer term, therefore RDD must design a planned effort to wean away from its present emphasis on administering subsidies involving input delivery and "subsidy" payment to the smallholders. In executing this change, RDD must focus more on a supportive and catalytic role with emphasis on extension work on production, processing and marketing of output. E. Bank Performance 33. Overall, project identification and preparation was guided by the experiences gained from the previous project and the appraisal established clear project objectives consistent with sectoral strategy. The design was based on learning from the experiences of the previous project. The supervision missions have played a constructive and catalytic role in achieving project objectives. During the eight year project period, Bank fielded 12 supervision missions. Supervision efforts were biased more towards technical issues of the project and a closer attention by the Bank staff on project's financial progress of civil works component would have produced better results. A better skill mix in the supervision missions would have helped to improve project performance. Although the Mid-Term review was carried out in January 1994, it was partially successful in improving project performance. The low impact of the Mid-Term review on the project is partly due to its lack of focus on key problems arising from optimistic replanting targets, slow progress in awarding contracts and inadequate follow-up of civil works. F. Borrower Performance 34. The project was prepared adequately by the borrower with assistance from IDA. Appraisal and supervision of the project by the Bank staff have received adequate attention by the borrower. Except for the covenant to extend the cess collection to domestically used rubber, GOSL has responded well to most recommendations/suggestions made by Bank supervision missions. The performance of GOSL, however, was mixed in the actual implementation for reasons both within and beyond their control. Despite many problems, in general, the borrower has responded well to the suggestions of Bank supervision missions. Most shortcomings in the project implementation, were identified and corrected expeditiously by project implementation agencies. The need for extending the cess to domestically used rubber was a major issue raised by the borrower with the Bank. Although the issue led to intensive communications with the Bank, GOSL favored the position of maintaining the status quo. However, GOSL indicated that it would review the liquidity position of the RRF periodically with a view to bring about necessary adjustments. 30  G. Assessment of Outcome 35. On the basis of its initial expectations, the project's overall outcome is rated as satisfactory. The key elements of the project - field development, including replanting and new planting of rubber with improved clones, introduction of proven foreign clones and establishment of clonal trials, control of Corynespora leaf disease, establishment of RDD and consolidation of its activities, establishment of adaptive research stations and support to RRI activities were successfully implemented. However, the project outcomes reflect a below appraisal expectation for establishing LCPCs and GPCs, mainly due to a lack of involvement of the smallholders. The project also shows an unsatisfactory outcome in relation to the objective of creating a monitoring and evaluation unit under the Ministry. H. Key Lessons Learned 36. Among many lessons that could be learnt from the project, the more significant are: a) Efficiency of extension/research service delivery: The relative neglect of the research-extension interface as an integral component of the knowledge dissemination process underlying the project has resulted in a lower project performance with respect to the adoption of new research information by farmers. In this regard, a fundamental assumption underlying the project design seems to imply that once the RDD is established and extension workers (RDOs) are in place, and the RRI is entrusted to undertake research, the rest, including the flow of information back and forth from the farmer to RRI would automatically follow. The project experiences clearly indicate that designing research/extension components of a project that reflects a highly top-down and a supply driven approach is unlikely to deliver expectations. This also suggests that there is a clear need for RRI to shift the balance of its current research focus more towards of the smallholder. The project provided ample evidence to suggest that the level of farmer acceptance of new innovations recommended by RRI is not entirely dependent on the technical superiority of the recommendation -- a perception that seems to be widely held by RRI -- but by a complex range of factors relating to economic and other behavioral characteristics of the smallholder. b) Beneficiary participation: The project's success to a large extent, appears to have been reduced by the low level of involvement of beneficiaries on project related activities. The attempt to establish GPCs in which the beneficiary farmers were reduced to mere recipients of the whole investment activity is a clear illustration of the results of lack of farmer participation. A greater initiative by the project staff to increase the level of participation of the main beneficiaries and other key interest groups in key activities of the project during its initial stages would have paid substantial dividends in terms of improved implementation and 31  outcomes of the project. In particular, a beneficiary assessment undertaken at the inception would have helped the project by identifying key issues and problems that are likely to affect the project progress well in advance. The project implementation process, by and large, has followed a blue-print approach and this too was also responsible for lower beneficiary involvement. c) Level of awareness of project stakeholders: Mission observations strongly suggested a relatively low level of awareness of the project details by stakeholders. The low level of awareness relating to the objectives, development strategies and resource availability of the project by stakeholders had an adverse influence on the effectiveness of project implementation. A greater effort made at project inception to provide such information to all key actors of the project would have helped them to understand and carryout their respective roles and responsibilities of the project better. The absence of an effective Mid-Term review covering all project components, focusing on the problems affecting its progress and identifying needed adjustments was also a major impediment to project success. d) Viability of Rubber Replanting Fund (RRF) and continued need for subsidies: Given the wide ranging revenue, employment and other implications associated with the current system of levying the cess only from exported rubber and cross subsidization of the smallholder sector, there is a critical need for investigating the issues involved in-depth. Attempts made so far to examine the status of viability of RRF appears to be focused relatively narrowly and is based on a limited data base with unrealistic projections. A broader data base and a more insightful analysis with more precise information on important variables including replanting/new planting rates and export volumes etc. would throw light on important economic issues including sustainability of the current approach. Similarly, the need for continuing the replanting and new planting "subsidy" programme in the current form and intensity is an emerging issue that needs critical evaluation. e) Need for looking beyond production: The project experience suggests that in designing projects of this nature, a heavy emphasis on increasing production levels at the farm level alone is unable to deliver expectations. In this connection it is essential to recognize that the problems associated with the low incomes of the rubber smallholders are also related to the processing and marketing of the output. A project design with a greater emphasis on improving the quality of processed product and on developing better marketing approaches would have been more effective. I. Next Steps 37. The mission will prepare a draft ICR in accordance with the Bank's guidelines for submission to the Bank by mid-December 1997. The GOSL must prepare their final assessment of the project according to the guidelines provided by the mission. The amended aide memoire, with a copy of the GOSL project completion report to the ICR prepared by the mission for submission to the world Bank. 32  Aide Memoire Attachment Plan for Future Operations 1. The future operations of the RDD for improving the rubber smallholder sub-sector performance will focus on activities to promote the involvement of the entrepreneurial skills and initiatives of the private individuals and groups. This would be based on a clear identification of the relative roles to be played by the public and private sectors for developing rubber smallholder sector. Currently, most of the mandated activities of RDD are centered around procurement and distribution of basic production inputs such as planting material, fertilizer and rubber milling equipment and also on issuing "subsidy" payments to the smallholders. Future development of RDD would therefore be based on a broad approach that will reduce dependency of the smallholders on the government for input distribution and enhance greater involvement of the private sector. 2. As regards the involvement of RRI in developing the smallholder rubber growers, further attempts will be made to reduce the gap between the available research information and the actual farm practices adopted by smallholders, through improvements in the extension system operated by RDD. The strategy would also involve the improvement of the capacity of RRI to generate new, cost-effective production and processing technologies that are more acceptable to the smallholders. Such changes in RDD and RRI, however, will be implemented within a well prepared long-term plan involving a well conceived vision of the future of rubber smallholder sector. The vision would be compatible with the emerging changes in the global as well as local market and economic conditions. The monitoring evaluation capabilities currently available within the Ministry will be further developed. 3. Government is aware of the fast changing situation of the RRF and the inability to sustain the replanting "subsidy" programme using current financial sources. As a means of maintaining the viability of the RRF, therefore, the government intends to review the cash flow status of RRF annually and to make adjustments as necessary. According to current cash-flow projections made by RDD, the level of cess levied at present is adequate to keep the RRF viable only up to until the year 2002 (See Appendix D). 33  APPENDIX B IMPLEMENTATION COMPLETION REPORT SRI LANKA SECOND SMALLHOLDER RUBBER REHABILITATION PROJECT (Cr. 1909-CE) FINANCIAL AND ECONOMIC RE-EVALUATION A. Introduction 1. This appendix presents the results and assumptions of the financial and economic re- evaluation of the investments made by the project, based on actual physical and financial information of the project up to 1997. To facilitate comparison the analytical approach adopted in this re-evaluation closely followed the methodology used in the SAR and is based on the data provided by the RDD. Farmer interviews and information gathered from RRI suggested that the basic production related coefficients of the smallholder farmers including crop yield profiles and physical input mix have not undergone significant changes during the project period. B. Financial and Price Analysis 2. Analysis of financial data relating to farm level costs and returns indicated two key factors were affecting farm profitability and economic viability of the smallholder rubber growers during the project period. They are: (a) rising production costs, and (b) high variability of the farm gate prices of rubber. The cost of production of processed rubber, has risen nearly three times over the project period, from Rs. 13.41/kg in 1988 to Rs 40.37/kg in 1997, reflecting an average increase of about 22% per annum. The main source of this increase is the wage labor costs which accounts for nearly 60% of the total farm production costs. During this period, average daily wages have risen from Rs 40.00/worker in 1988 to about Rs 125.00/worker in 1997. The increase is even more in areas closer to urban centres. Currently, in most rubber growing areas there is an acute shortage of labor, particularly for tapping because of the reluctance of the younger age groups to undertake tapping. 34  3. In terms of output prices, however, smallholder rubber growers have not witnessed major increases. The average farm gate price of processed rubber has increased form Rs. 19.50/Kg in 1987 to Rs. 55.88/Kg in 1997, reflecting an annual increase of about 23% --barely keeping up with increases in production costs. Moreover farm gate prices of rubber during the project period were extremely erratic creating a high degree of price uncertainty for the growers. The analysis of farm data in 1977 indicated that the break-even price of rubber for the smallholders is currently about Rs. 38.00/Kg suggesting the high degree of vulnerability of farmers to price fluctuations. 4. In the major rubber growing areas, direct sales of rubber latex to nearby factories is the preferred mode of disposal. However, at present, bulk of the rubber sales by most smallholder is in the form of ribbed smoked sheets (RSS). Farmer preference for selling unprocessed latex is due to its higher farm gate price-- about 20% more than the price of RSS. 5. The financial analysis of this ICR was undertaken using two farm models of one ha each. The first, reflecting only family labor use, showed an estimated internal rate of return of 23.2%, as compared to 30.9% in SAR (Table 5). The second farm model reflecting the only hired labor use, showed an estimated internal rate of return was 16.9%, as compared to 18.2% in SAR (Table 6). If the value of timber from uprooted trees at the time of replanting is also included in the analysis, the rate of return improves substantially; 25.3% for farms using only family labor and (18.6%) for the farms using hired labor. C. Economic analysis 6. The economic rates of return (ERR) is re-estimated at 16.2% for the project as compared to SAR estimate of 18.2%. Both direct and indirect costs have been included in estimating the ERR for the project. A re-estimation of the ERR incorporating the value of timber from uprooted trees indicated a higher ERR of 18.2%. The main assumptions made in the SAR and the ICR are set out below. D. Appraisal Estimates 7. At appraisal, the project's ERR was estimated to be 18.25%, and this was based on the following assumptions: - project life of 37 years - all values expressed in constant 1989 prices - quantifiable benefits to be the output of rubber - economic prices of non-tradable outputs derived from their financial prices adjusted by .75 SCF, and unskilled labor by a conversion factor of 0.65. - exchange rate purchasing power parity would be maintained. 35  E. ICR Estimates 8. The re-calculation of the ERRs basically followed the SAR methodology, refined by ICR mission evaluations. The main differences are: all values expressed in constant 1997 prices; quantifiable benefits to be the output of rubber (an additional re-estimation was done to include the value of timber from uprooted trees); SCF of 0.9 used to convert financial price to economic values in respect of tradable inputs; and outputs and a conversion factor of 0.9 for converting financial wage (unskilled labor) into economic prices. The SAR estimates have not taken the value of timber generated by the uprooted trees at the time of replanting. 36  SRI LANKA: SECOND SMALLHOLDER RUBBER PROJECT (Cr.1909 - CE) Implementation Completion Report Appendix B: Economic Re-evaluation Table 1. Rubber Yields and Tapping Systems (kg/ha) Year from Planting Without Project With Project Tapping | ___________________ (kg/ha) (Kg/ha) System 1 800 2 800 3 750 . 4 750 5 700 6 600 7 500 300 s/2,d/2 8 500 675 9 300 840 10 955 11 1,000 12 1,100 153 1,100 ,, 1 4 _ _ _ _ _ _ _ 1,100 1 5 __ _ _ _ _ _ _ 1,100 _ _ _ _ _ _ 16 1,100 17 1,100 1 8 __ _ _ _ _ _ _ _ 1,100 19 1,100 20 1,000 21 -900 22 850 23 750 , 24 _ _ _ _ _ _ _ 700 _ _ _ _ _ 25 1,000 s/4,s/2,d/2 26 1,000 ,, 27 800 ,, 28 700 ,, 29 700 2s/4,s/2,d2 30 400 4s/4,2s/2,d3 Total production per ha. 5,700 20,970 Mean yield 633 kg/ha 875 kg/ha 37  SRI LANKA: SECOND SMALLHOLDER RUBBER PROJECT (Cr.1909 - CE) Implementation Completion Report Appendix B: Economic Re-evaluation Table 2. Estimated Rubber Production From the Project Area Year Without Project Project Production With Project (M.Tons) (M.Tons) (M. Tons) 1988 16,333 16,333 1989 13,963 13,963 1990 10,403 10,403 1991 8,036 8,036 1992 6,049 6,049 1993 3,750 . 3,750 1994 2,275 451 2,726 1995 1,380 2,148 3,527 1996 307 5,198 5,505 1997 9,088 9,088 1998 12,879 12,879 1999 16,435 16,435 2000 19,862 19,862 2001 22,959 22,959 2002 25,953 25,953 2003 28,472 28,472 2004 30,176 30,176 2005 31,706 31,076 2006 31,461 31,461 2007 31,262 31,262 2008 30,504 30,504 2009 29,324 29,324 2010 28,100 28,100 2011 26,795 26,795 2012 25,917 25,917 2013 25,674 25,674 2014 25,398 25,398 2015 24,824 24,824 2016 23,679 23,679 2017 22,516 22,516 2018 20,127 20,127 2019 16,922 16,922 2020 13,623 13,623 2021 10,720 10,720 2022 8,040 8,040 2023 5,684 5,684 2024 3,860 3,862 2025 2,129 2,129 Total 611,256 611,256 38  SRI LANKA: SECOND SMALLHOLDER RUBBER PROJECT (Cr.1909 - CE) Implementation Completion Report Appendix B: Economic Re-evaluation Table 3. Changes in Smallholder Producer Margins, 1988-1997 (Rs./Kg) 1988 1991 1994 1997 Average (1988-97) Cost of Production: Cultivation Costs Labor 7.62 11.29 14.06 22.80 13.94 Other 0.92 1.76 2.20 3.56 2.11 Sub Total 8.54 13.05 16.26 26.36 16.05 Processing Costs Labor 1.05 1.57 1.97 3.19 1.94 Other 1.01 1.29 1.57 2.55 1.60 2.06 2.86 3.54 5.74 3.54 Marketing Costs 0.53 0.65 0.82 1.33 0.83 Other Charges 2.30 3.37 4.28 6.94 4.36 Total Cost of Production: 13.41 19.96 24.90 40.37 24.66 Farm- gate Price 19.50 18.66 44.81 55.88 34.71 Producer Margin 6.09 -1.30 19.91 15.51 10.05 Source: Rubber Control Department. 39  SRI LANKA: SECOND SMALLHOLDER RUBBER PROJECT (Cr.1909 - CE) Implementation Completion Report Appendix B: Economic Re-evaluation Table 4. Financial Price of Rubber 1994 1995 1996 1997 Average 1998 1999 2000 2005 2010 1994-97 World Market Price 1.13 1.58 1.39 1.32 1.36 1.41 1.42 1.43 1.68 1.95 (US$ /kg)al _a Farm-gate Price (tJS$/kg)b/ 0.90 0.86 1.10 0.95 0.95 0.97 0.99 1 .00 1.17 1.36 Farm-gate Price 44.64 44.36 61.27 55.88 55.44 58.68 61.38 64.00 76.05 88.40 (Rs/kg) b/ --- Projected Farm-gate Price (Rs/lg) 58.68 59.58 60.41 63.37 65.00 1998 Constant Value ______ a/ IBRD price projections (August 1997) in current dollars. b/ Prices up to 1997 derived from actual farm-gate price available in RDD for RSS I and RSS III. Projection based on the relationship between 1994-1997 farm-gate price and world market price 40  SRI LANKA: SECOND SMALLHOLDER RUBBER PROJECT (Cr.1909 - CE) Implementation Completion Report Appendix B: Economic Re-evaluation Table 5. Financial Analysis of Smallholder Farm of One Ha. in Extent - Operated With Family Labor (Rupees) 1988 1989 1990 1991 1992 1993 1994 1995 1996 2000 2005 2010 2017 Benefits: Production With Project (kg) - - - - - - 300 675 840 1100 1100 750 400 Price (Rs/lkg) 19.50 20.97 20.31 22.39 29.65 35.90 53.56 53.23 73.52 60.41 63.37 65.00 65.00 Benefit With Project - - - - - - 16068 35930 61756 66451 69707 48750 26000 Replanting Payment 11120 4201 3952 5928 5928 5928 6175 - - - - - - Total Benefit With Project 11120 4201 3952 5928 5928 5928 22343 35930 61756 66451 69707 48750 26000 Production Without Project (kg) 550 500 450 400 350 300 250 200 150 - - - - Price (Rs/kg) 19.50 20.97 20.31 22.39 29.65 35.90 53.56 53.23 73.52 60.42 63.37 65.00 65.00 Benefit Without Project 10725 10485 9139 8956 10377 10770 13390 10646 11028 - - - - Incremental Benefit -10725 -10485 -9139 -8956 -10377 -10770 2678 25284 50728 66451 69707 48750 26000 Costs: Operating Cost (labor) - - - - - - - - - - - - - Other Operating Cost - - - - - - 2581 3672 4171 4200 4300 3800 3800 Total Operating Cost - - - - - - 2581 3672 4171 4200 4300 3800 3800 Establishment Cost (Material) 15500 2000 2700 3900 3200 3200 3900 - - - - - - Establishment Cost (Labor) 15435 5460 6000 7125 6400 4725 4320 - Total Establishment Cost 15500 2000 2700 3900 3200 3200 3900 - - - - - - Total Cost 15500 2000 2700 3900 3200 3200 6481 3672 4171 4200 4300 3800 3800 Operating Cost of Labor (Without) - - - - - - - - - - - - - Other Operating Cost (Without) 992 600 400 200 175 175 Total Operating Cost (Without) 992 600 400 200 175 175 - - - - - - - hncremental Cost 14508 1400 2300 3700 3025 3025 6481 3672 4171 4200 4300 3800 3800 IncrementalNet Benefit -25233 -11885 -11439 -12656 -13402 -13795 -3803 21612 46557 62251 65407 44950 22200 Internal Rate of Return of Net Benefit Stream 23.22%. (SAR = 30.90%) 41  SRI LANKA: SECOND SMALLHOLDER RUBBER PROJECT (Cr.1909 - CE) Implementation Completion Report Appendix B: Economic Re-evaluation Table 6. Financial Analysis of a Smallholder Farm of One Ha in Extent Operated with Hired Labor (Rupees) 1988 1989 1990 1991 1992 1993 1994 1995 1996 2000 2005 2010 2017 Benefits: Production With Project (kg) - - - - - - 300 675 840 1100 1100 750 400 Price (Rs/kg) 19.50 20.97 20.31 22.39 29.65 35.90 53.56 53.23 73.52 60.41 63.37 65.00 65.00 Benefit WithProject - - - - - - 16068 35930 61756 66451 69707 48750 26000 Replanting Payment 11120 4201 3952 5928 5928 5928 6175 - - - - - - TotalBenefit WithProject 11120 4201 3952 5928 5928 5928 22243 35930 61756 666451 619707 48750 26000 production Withoutproject (kg) 550 500 450 400 350 300 250 200 150 - - - - Price (Rs/kg) 19.50 20.97 20.31 22.39 29.65 35.90 53.56 53.23 73.51 60.41 63.37 65.00 65.00 Benefit Without Project 10725 10485 9139 8956 10377 10770 13390 10646 11028 - - - - Incremental Benefit -10725 -10485 -9139 -8956 -10377 -10770 2678 25284 50728 66451 69707 48750 26000 Costs: Operating Cost (labor) - - - - - - 11000 11500 12000 13000 13000 6000 6000 Other Operating Cost - - - - - - 2581 3672 4171 4200 4300 3800 3800 Total Operating Cost - - - - - - 13581 15172 16171 17200 17300 9800 9800 Establishment Cost (Material) 15500 2000 2700 3900 3200 3200 3900 - - - - - - Establishunent Cost (Labor) 15435 5460 6000 7125 6400 4725 4320 - Total Establishment Cost 30935 74602 8700 11025 9600 7925 8220 - - - - - - Total Cost 30935 7460 8700 11025 9600 7925 21801 15172 16171 17200 17300 9800 9800 Operating Cost of Labor (Without) 6200 5270 4300 3330 2300 2300 - - - - - - - Other Operating Cost (Without) 992 600 400 200 175 175 Total Operating Cost (Without) 7192 5870 4700 3530 2475 2475 - - - - - - - Incremental Cost 23743 1590 4000 7495 7125 5450 21801 15172 16171 17200 17300 9800 9800 IncrenentalNetBenefit -34468 -12075 -13139 -16451 -17502 -16220 -19123 10112 34557 49251 52407 38950 16200 Internal Rate of Retumn of Net Streams 16.89 %. (SAR= 18.25%) 42  SRI LANKA: SECOND SMALLHOLDER RUBBER PROJECT (Cr.1909 - CE) - Implementation Completion Report Appendix B: Economic Re-evaluation Table 7. Projected Economic Price of Rubber 1994 1995 1996 1997 Average 1998 1999 2000 2005 2010 1994-97 World Market Price (US$/kg) a/ 1.13 1.58 1.39 1.32 1.36 1.41 1.42 1.43 1.68 1.95 Colombo FOB Price (US$/kg)b/ 0.98 1.30 1.15 1.20 1.16 1.20 1.21 1.22 1.43 1.66 Colombo FOB price (Rs/kg) 48.42 66.63 63.56 70.20 62.19 72.60 75.02 78.08 91.52 106.24 Projected FOB Price Rs/kg) (1998 - - - - - 72.60 73.10 73.58 76.27 78.26 constant price) Less Marketing and Other Local - 4.50 4.50 4.50 4.50 4.50 Costs in Economic Values c/ I Economic Farm-gate Price - 68.10 68.60 69.08 72.77 73.66 Source; IBRD Price Projections (August 1997) in current dollars. a/ Financial costs adjusted by standard conversion factor of .90. b/ Actual average Colombo FOB price converted at relevant year's rate of exchange rate. c/ Financial costs adjusted by standard conversion factor of .90. 43  SRI LANKA: SECOND SMALLHOLDER RUBBER PROJECT (Cr. 1909 - CE) Implementation Completion Report Appendix B: Economic Re-evaluation Table 8. Replanting Costs and Financing Arrangements, 1989-97 (Rs/ha)a/ Stage of Labor Labor Material Total Cost "Subsidy" Farmer Payment Cost Cost Payment Contribution (M.d.) Value (Rs.) (Rs.) (Rs.) (Rs.) _ _ _ _ _ _ _ (R s.) _ _ _ _ _ _ _ _ _ _ _ 1 130 5,850 4,500 10,350 1,483 8,867 2 207 9,585 11,000 20,585 9,637 10,948 3 123 5,460 2,000 7,460 4,201 3,259 4 71 6,500 2,700 9,200 3,952 5,248 5 71 7,625 3,900 11,525 5,928 5,597 6 59 6,900 3,200 10,100 5,928 4,172 7 42 4,725 3,200 7,925 5,928 1,997 8 27 3,420 3,900 7,320 6,175 1,145 Total 730 49,465 34,400 84,465 43,232 41,233 ________ _ _ _ l_ _ l _ _ l (100%) (51%) (49%) Source: RDD a! Since 1988, the "subsidy" payment rates were revised three times, the latest being in 1995. The amount paid per ha. varied from Rs. 22,230 (1988) to Rs. 49,722 (1995). 44  SRI LANKA: SECOND SMALLHOLDER RUBBER PROJECT (Cr.1909 - CE) Implementation Completion Report Appendix B: Economic Re-evaluation Table 9. ECONOMIC ANALYSIS (Rs.'000) 1988 1989 1990 1991 1992 1993 1994 1995 2000 2005 2010 2015 2024 ECONOMIC BENEFITS Production with Project (Tons) - - - - 451 2148 19862 31076 28100 24824 3862 Economic Price 43.25 43.46 33.96 32.85 39.45 44.25 60.72 83.92 69.08 72.77 73.76 73.76 73.76 Benefit with Project - - - - - 27379 180229 1372049 2261369 2072663 1831040 284839 Production Foregone (Tons) 623 2048 3455 4334 4518 4590 4250 3758 - Benefit Foregone 26951 88984 117335 142359 178227 203094 258045 315371 - - - - - Incremental Benefit -26951 -88984 -117335 -142359 -178227 -203094 -230666 -135143 1372049 2261369 2072663 1831040 284839 ECONOMIC COSTS Operating Cost (labor) - - - - - 17626 63086 410810 612073 627349 627349 141444 Other Operating Costs - - - - - 3634 13012 84154 124976 127832 124059 79921 Total Operating Cost - - - - - 21260 76098 494964 737049 755180 751408 221365 OperatingCostofLabor(Without) 20416 17454 13871 10715 8641 6250 4550 2759 - - - Other Operating Costs (Without) 12250 10472 8323 6429 5185 3750 2730 1655 Total Operating Cost (Without) 32666 27926 22194 17144 13826 10000 7280 4414 - - - Incremental Operating Cost -32666 -27996 -22194 -17144 -13826 -10000 13980 71684 494964 737049 755180 751408 221365 Converted Establishment Cost (Labor) 14479 65133 141625 71677 68223 53208 98531 83824 36431 - - - Converted Establishment Costs (Material) 67356 94486 110584 99452 206096 105837 107751 105507 15522 - - - -- TotalEstablishmentcost 81835 159619 252209 171126 274319 159045 206282 189331 51953 - ConvettedCivil Works 60 859 2121 396 378 1598 6023 8910 - - Converted Machinery and Equipment 874 3220 2357 1349 9446 2945 8277 9982 - - Converted Technical Assistance/Training 3240 1692 1845 1663 950 2910 2754 5494 - - - - Converted Adaptive Research 39 144 299 154 172 136 236 221 - Converted Operating Costs 1166 1224 1550 1821 6998 7585 2754 2574 - - - Total Economic Costs 54548 138832 238187 159365 278437 164219 240306 288196 546917 737049 755180 751408- 221365 Incremental Net Benefits -81500 -227816 -355523 -301724 -456665 -367313 -470972 -423339 825132 1524320 1317483 1079632 63476 Internal Rate ofReturn ofNet Benefit Stream = 16.22%. (SAR = 18.25%) 45  A?PENDIX C Second Smallholder Rubber Rehabilitation Project (Cr-1909-CE) Borrower's Final Evaluation Report 1. Prelude In discharging its assigned responsibilities in the preparation of the Implementation Completion Report concerning the above subject the Borrower is pleased to state its views as captured hereunder. Mindful of the space limitations set for the write up, the Borrower proposes to confine its views to what are deemed to be critical components and issues that characterize Project objectives, design, pragmatic experiences and constraints while highlighting lessons to be drawn. 2. Partnership and Relations with the IIDA By way of a fitting preface to this exercise the Government of Sri Lanka seeks to place on record its candid appreciation over the highly supportive role and contribution through the staff resources of the Agriculture Division and Credit line of the IDA thus partnering the many positive achievements of the Project. Technology transfer through training of staff at several levels attached to the implementing agencies, overseas as well as locally, institutional strengthening via additional staff, machinery, equipment, vehicles and buildings redounded to the inventory of resources, which will continue to have a decisive impact on servicing the Rubber Sector in Sri Lanka for years to come. Shortfalls in physical targets and time frames are to be expected in implementing a Project of such magnitude spanning almost a decade. It will be agreed that what could not be realized cannot obliterate the signal achievements of the Project. The close rapport maintained throughout the Project between the Sri Lankan participants and the IDA staff through correspondence, reporting, periodical Country Portfolio Performance Reviews, and regular Bank Supervision Missions and Aide Memoires, stimulating discussions on and off the field unfolded the status of the Project from time to time. The advantage of having a formal Mid-Term Review of the Project could have been made available to the Borrower. It is also felt that disclosing the rating given by the Bank annually on the performance levels would have had a salutary effect in apprising the Borrower of the need to steer the Project on course and sustain the momentum. 46  On the contrary the announcement made in the letter of 21st October 1997 to the effect that the concern over the issue of the domestic cess had resulted in a situation of "an otherwise satisfactory project being downgraded to a problem Project status in the IDA portfolio" was not well received by the Borrower who labored over the past 9 years to achieve what has been indelibly registered. With the experience gained from the First Project and the lessons learnt in the course of implementing the Second, it emerges that a higher degree of flexibility to readjust and restructure the original design would have yielded better results. 3. Replanting and New Planting Activities Versus Project Targets In appraising the field performance of a tree crop one has to reckon the retarding impact of natural causes such as adverse weather conditions, disturbed civil conditions and violent market fluctuations. During its implementation SRRP II did have more than its tolerable share of such forces. Beginning with the turbulent civil strife which almost coincided with the launch of the Project in July, 1998 extending till about 1990, prolonged periods of drought and, spells of torrential rains which in 1992 submerged most parts of the country etc. Besides poor seed fall and resulting scarcity of planting material in 1995 had protracted unfavorable effects. Such unforeseen disruptions as were recognized even by successive Supervision Missions were real causal factors for periodical depressions in planting activities rendering original targets unattainable. Owing to such interruptions, efforts to motivate smallholder participation in planting activities became doubly difficult by the fact that unlike tea, rubber is a crop with a relatively long gestation period. An equally important factor that has had a potent influence on the motivation of smallholders to stay in the industry is the market scenario. Understandably a downturn in prices will dampen their interest in Replanting as well as New Planting. Paradoxically, boom conditions which for instance persisted for a considerable interval since the second half of 1994 could not have encouraged smallholders to uproot and replant. Perhaps consistently remunerative price levels over a protracted period will be the ideal, for replanting. When the real experience is viewed against the concomitant factors analyzed, it emerges that the targets set by the Project for Replanting and New Planting activities are seen to be exceedingly high to the point of being acutely unrealistic. In the First Project a target of Replanting 18800 ha. was set and it was only after an extension by another 2 years, i.e. after 7 years that it could be achieved. The Performance Audit Report dated January, 1993 on the First Project observed that "unrealistically high targets such as were eventually set in the case of the Rubber Project imposed undue strains on the institutions responsible for implementation." 47  Accordingly, attaining a target of 35,500 ha. in Replanting and 3200 ha. of New Planting when taken together (38,700 ha) represents an overall increase of 106% over and above the target of SRRP I. Where Replanting is concerned when it was realized though rather late in 1992 the IDA agreed to readjust the original targets to 30,000 ha. of Replanting and New Planting of 8,700 ha. The combined achievement of 28279 ha. at the end of the Project marks a 72% fulfillment, on which a fair judgment should be passed. The contentions of the Borrower is by no means intended to rely on certain circumstances and developments as extenuating factors for not being able to realize the targets. We make the point, that, had a realistic planting target been given the performance would have been appreciated better. 4. Propagation of Planting Material and High Yielding Clone Trials Well-conceived, meaningful and resolute measures were taken to ensure an uninterrupted supply of high quality, select, planting material in adequate quantities. Programmes to train private/commercial nursery owners in advanced plant propagation techniques such as green- budding and young budding have been launched and client response is promising as is heartening. Collecting seeds from surplus areas and distributing these among smallholders in regions where the seed fall failed and promoting polybagging of plants to preserve the quality and enabling carry over from one season to the next were other strategies adopted. Exposure offered to a group consisting of nurserymen from the private sector and Nursery Managers and Field Officers of the RDD to visit Thailand was of significant value and use. The assignment of the Sri Lankan Consultant from the RRI in taking the practitioners on a guided tour of some areas raising planting material in Thailand was followed up on his return by conducting a series of seminars and workshops on nursery management and practices for the benefit of Field Officers and smallholders. The publication of a Manual on the subject in Sinhala is a permanent contribution that was facilitated by the Project. This commentary is meant to focus attention on the fact that this Project succeeded largely in remedying a serious shortcomings identified in the First Project, namely, non production of quality planting material by the then State-owned Estate Sector to satisfy the demand. Besides, stress on stringent enforcement of conditions governing nursery permits and legitimizing issue of budwood material by proper records and certification and carrying out inspections by teams of monitoring officials were important measures. Agriculturally, another positive and permanent achievement of the Project is the very successful experiments carried out by the RRI in proven high yielding, exotic clones, planted side by side with selected RRIC varieties covering 7 different ago- climatic regions. 48  In the 2 large trials at Salawa and Eladuwa Estates, 7 and in the 5 smaller trials, 6 foreign clones were replicated and were tested for disease tolerance with varying results. Except for PR 261 and RRIM 712 all clones were recommended to the Estate Sector for experimental scale planting and sufficient quantities of budwood were distributed. PR 260 and PB 235 were upgraded to Group II in the recommended list. The dedicated efforts to implement the clonal trials programme, where in 6 of 7 locations the trees have reached tappable girth is a means of assuring that a fair basket of clones is in hand to guarantee against any untoward eventuality. Hence, in discussing the field development programme and targets under the Project it is urged that credit be given to the resourceful measures adopted to ease the problem of raising planting material and experimenting with foreign high yielding clones which, when viewed in the correct perspective should be acknowledged as satisfactorily compensating for the inability to reach a tall order in planting per se. 5. Concept of Group Processing Centres (GPCs) and Latex Collecting and Processing Centres (LCPCs) Prospects of establishing viable GPCs that would produce high quality Ribbed Smoked Sheet RSS are seen to be presumptuous when the experience under SRRP I is evaluated. In 1981 there were 65 GPCs in the 3 Project Districts, which increased to 79 under the Project. However by the end of the Project period only about 48 were found to be functioning. The exercise of establishing 20 new GPCs and upgrading 80 existing GPCs to LCPCs status goes well beyond the concept of "limited development" envisaged under the Project. Despite the fact that from the early phase of the SRRP II all determined efforts launched to popularize these institutions among smallholders, they were not enamored as their real problems were subsumed in the visionary goals set by an external agency. To delve into some of the realities; 1. Lofty ideals of the Co-operative system could not fire the imagination of significant numbers of clients who were witnesses to many instances of operational failures of these bodies due to inefficiencies of one kind or another under the First Project. Failure to recognize such negative attitudinal response and the pervasive individualistic and free market development trends can be described as the aftermath of a design fault about the Project. 2. Obtaining a plot of land in a suitably well appointed location is easily said than found, particularly with an escalating opportunity-cost of land year by year. Giving legal status to these Centres by registering them with the Co-operative Development Department is no big issue as was made out to be in the SAR. 49  3. To conjure a situation of setting up " bulk latex handling facilities that would enable smallholders to sell latex directly to crepe factories" presume the availability of several ground conditions, such as availability of transport facilities, location of processing factories within a reasonable radius of the LCPCs, a sustained demand for field latex, without which, smallholders will be driven to roll into sheet rubber. Also, what is the demand for latex and the capacity of factories processing crepe rubber? 4. It is a home-truth that efforts to enthuse smallholders to produce high quality sheet rubber cannot produce the desired results as long as the system of visual grading and bulk purchases by rubber dealers prevails. The real impediment to smallholders securing a reasonable farmgate price for their produce should be identified with lack of marketing facilities. Providing LCPCs and GPCs with processing facilities alone will not suffice. They could have been assisted with some amount of working capital to collect the produce of the members after paying spot cash and have the goods transported for disposal where required. Even though this problem was brought to the notice of the Supervision Missions, the Bank did not view with favor the proposal to support smallholder marketing activities. Notwithstanding the handicaps and constraints another thrust was made in the final lap of the Project to establish 15 LCPCs and rehabilitate 8 GPCs. 6. The Rubber Control Department (RCD), Advisory Services Department (ASD) and the Rubber Development Department (RDD) Under SRRP I the ASD was separated from the Rubber Research Board (RRB) to become a Department in its own right and its staff position was strengthened. Its responsibilities were to include provision of advice to smallholders and estates on all aspects of rubber husbandry, transmission of research findings, provision of technical advice to rubber processors, inspection of replanting for registration permits and "subsidy" payments, distribution of replanting inputs etc. RCD was to relinquish to ASD its responsibilities for inspection of holdings, authorization of "subsidy" payments and distribution of planting inputs. However, gradually, in actual practice the functions relating to inspection of holdings meant for "subsidy" administration came to be exercised by the Rubber Inspectors of the RCD, thus negating the objective of forging a strong extension-farmer linkage for optimum results. Rubber extension Officers (REOs) of the ASD felt themselves to be less acceptable to the smallholder rubber growers. 50  Call the ASD into existence and giving it a distinctly separate identity, severing it from the RRB and advocacy of reinforcing its manpower resources for extension, training and advisory activities, generated undesirable trends, which had the ultimate effect of placing the smallholder in a hapless quandary. Authors of SRRP 2 were quick to detect and declare, on inefficiencies due to overlapped functions of the RCD and ASD and wanted a Committee appointed by the Ministry of Plantation Industries to study the respective roles of the RCD and ASD in respect of field activities. The eventual outcome of the exercise was the amalgamation of the two organizations with effect from 1st July 1994 to form the Rubber Development Department. Stiff resistance and much lobbying at several levels were encountered over a prolonged period before a single organization in the present form emerged. The Borrower has this to say about the creation of the ASD and establishment of the RDD. 1. Dissecting the extension functions from the RRB to form a new independent institution under the name and style of the ASD in a way atrophied the research - extension linkage. 2. Vehement insistence under SRRP II to "formalize the status of the ASD" and strengthen it physically and institutionally by increasing the number of Extension Officers to 254 with appropriate supporting facilities, which unfold an attempt to perpetuate its separate existence meant ignoring the lessons drawn from the First Project. 3. The ASD survived in such form for well over 12 years. which according to the staff seemed to lend a basis to stake claims over and above their RCD counterparts. The friction spilling over at times to acrimony was exacerbated by the fact that Field Officers of the RCD in general claim to possess higher pre-entry qualifications than the ASD outfit. The oft-repeated contention that Extension, Training and Advisory functions remain the exclusive preserve and forte of ROE and that the II are not competent to perform such services is a grave misconception generating unsalutory repercussions. 4. The ill-effects of a separate identity which both Projects labored to foster brought about irreconcilable differences in the terms and conditions of employment applicable to the staff and internal relations in the two institutions. 5. Even after three years following amalgamation, the clash of identities persist with competing claims made for higher remuneration scales, more fringe benefits, promotions and intense rivalry, which remain as the outcome of creating a separate entity, personified in the ASD. It generated a host of problems for the Smallholder Rubber Sector with which the Ministry and the Department are still grappling to resolve. 51  7. Addressing the Real Problems of the Smallholders That the Project focused heavily on "accelerating replanting of over-aged trees and planting new areas," is evidenced in the fact that 82% of the IDA Credit support was meant for field development activities. While expansion in the physical extent of planting would have worked towards raising the production potential of rubber, taking the country as a whole, such a scenario by itself could not have improved the lot of the smallholder without providing him with the facilities and incentives that he really required. The great expectations for upgrading the quality of the farmer's produce, thereby adding to the value and assuring him of an enhanced income through propagating the GPC concept were not realized (as referred to elsewhere). Besides, the emphasis placed by Project on stepping up "the efficiency of institutional support available to smallholders" should have taken into account their requirements in a pragmatic sense. In regard to a number of matters what the Project was determined to force feed him, was not what he wanted to take in, which caused a dissipation of valuable resources and efforts. The assumptions on which some proposals and activities were mounted and vigorously pursued turned out to be glibly over-optimistic as illustrated below. "Family labor participation is forthcoming and assured in both cultivation and processing and the increased income would raise the standard of living of the household". In the Financing Plan a component of US$17.1 million was expected to be contributed by smallholders in the form of notional value of their labor and this factor was to cause a sizable reduction in the COP thus guaranteeing attractive producer margins. This thesis came to grips with the reality of a perennial acute scarcity of labor in this industry, pushing the COP upwards through excessive rates of hired hands, which became a serious disincentive to their continuing in the rubber industry. Dearth of skilled tappers to work on lands of smallholders unsupported by family labor is an issue that should be addressed so that the youth are encouraged to take to this vocation by bringing about an attitudinal change in them. Giving them a uniform and if possible concessionery credit facilities to buy a motor cycle should provide an attraction to lure them away from urban based employment spawned by rapid industrialization. In this context, the heavily-sponsored Project proposal of training rural youth to be licensed private Rubber Planting Aides to undertake field tasks relating to contouring, marking planting points and holing, did not find any significant appeal. Despite the offer of loans through a Revolving Fund to purchase the basic equipment, the selectees dropped out rapidly. They did not find the employment to be an attractive proposition as they could not secure a living income. Fizzling out of this experiment once again should make us cautious not to misread real constraints and expectations. 52  8. Covenant No. 9 (A) in the Development Credit Agreement Relating to Extending the Cess to Domestically used Rubber The above Covenant which was required to be implemented by January 1996 was rendered a conflicting issue by reason of the stance adopted by the IDA in response to what the Borrower proposed as eminently rational modifications in the incremental quantum of such cess and extending the deadline to the end of 1998. 1 While the Borrower conceded in principle that domestic manufacturers of rubber too should be called upon to subscribe to sustain the Rubber Replanting "Subsidy" Fund (RRSF) in a healthy positive balance, it was indisputably shown that the financial reserves of the RRSF, the projected inflow of funds and the prevailing rate of planting do not give any cause for alarm as the Cash Flow till about the year 2002 was noted to be satisfactory. Action taken by the Borrower to increase the Rubber Replanting Cess from Rs. 1.15 to Rs. 3.85 per Kg. (235% like) as from 1995 and enhancing the Replanting and New Planting "subsidy" rates by as much as 35% illustrate the positive measures taken on behalf of the RRSF and its beneficiaries. It must also be emphasized that in the context of an economic policy of promoting domestic value addition pursued by the GOSL, when the Rubber industry in Sri Lanka has entered a phase where a premium is placed on exporting rubber in value-added forms by promoting downstream activities, generating increased export earnings and more employment opportunities, it will be most inopportune and counter productive to impose a cess on domestically-used rubber. When the Project proposals were evolved almost a decade ago, and the deadline was fixed as 1st January 1996 even economists with the most penetrating foresight could not have forecasted the path of the Sri Lanka economy that is characterized by the present trends. The Borrower is convinced that a dogmatic insistence on compliance with a covenant by the IDA stood in the way of being granted an extension in the life of the Project, which would have enabled the implementing agencies to meet the project targets as endorsed by the following statement by Mr. Ridwan Ali in his letter of 15/8/1997. "We recognize that the slippage which has occurred is almost entirely the result of circumstances beyond the control of the implementing agencies and that they are capable of meeting the Project targets with additional time". 53  APPENDIX D SRI LANKA: SECOND SMALLHOLDER RUBBER PROJECT (Cr.1909 - CE) Implementation Completion Report Appendix D: Rubber Replanting Fund Cash-Flow Statement, 1995- 2002 Table 1. RUBBER REPLANTING FUND CASH-FLOW STATEMENT, 1995-2002 1995 1996 1997 1998 1999 2000 2001 2002 Annual exports (000 tons) 68.24 72.59 68.00 68.00 60.00 62.50 62.60 62.75 Local consumption (000 tons) 36.94 39.91 44.00 50.00 56.00 62.50 62.50 62.50 Total (000 tons) 105.18 112.5 112.00 118.00 115.00 125.0 125.10 125.25 Smallholder replanting (ha) 17.78 1983 2400 2400 2400 2400 2400 2400 Smallholder new planting (ha) 651 1208 850 850 850 850 850 850 Total area replanted/ new planted 2429 3191 3250 3250 3250 3250 3250 3250 Cash inflow (Rs. million): Cess collection 1/ 262.72 279.47 169.4 192.5 211.75 240.63 240.63 240.63 IDA receipts (SRRP II) 39.65 51.06 - - - - - - Sale of planting material 6.18 6.70 7.00 8.40 8.40 10.50 10.50 10.50 lIlvestments (Bank interest) 10.40 10.40 10.40 10.40 10.40 10.40 10.40 10.40 Treasury grant 26.00 26.00 26.00 26.00 26.00 26.00 26.00 26.00 Total 344.95 373.63 212.8 237.30 256.35 287.53 287.53 287.53 Cash Outflow (Rs. Million) Payments for replanting 2/ 77.32 77.71 96.96 94.55 99.92 103.21 109.26 112.4 Payments for new planting 2/ 27.38 29.33 4.37 37.82 41.17 42.83 45.44 47.35 Nursery maintenance cost 7.30 6.30 11.55 11.00 10.00 10.00 10.00 10.00 RDD expenses 55.00 56.50 58.28 61.29 64.25 67.46 70.83 74.37 Total 167.00 169.34 207.16 204.56 215.34 223.50 235.53 244.12 Net Flow (Rs. million): Opening balance 187.90 365.85 570.14 575.78 608.52 649.73 713.76 765.76 Cash inflow 344.95 373.63 212.80 237.30 256.5 287.53 287.53 287.53 Cash outflow 167.00 169.34 207.16 204.56 215.34 223.50 235.35 244.12 Net Closing Balance 365.85 570.14 575.18 608.52 649.73 713.76 765.76 809,17 Source: Rubber Development Department 1/ Cess collection calculated @ Rs. 3.85/Kg. 2/ Replanting "subsidy" of Rs. 49,722/ha 3/ New planting "subsidy" of Rs. 48,165/ha 4/ Replanting rate, 3.5% over the previous year 54  IBRD 19987 -ai LANKA -ECND-$mAkLLHOLDER-RUBBER. s -S~~~~~~A