Sri Lanka - North-East Irrigated Agriculture Project

Document of The World Bank Report No: 19859-CE PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 19.6 MILLION (US$27.0 MILLION EQUIVALENT) TO THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA FOR THE NORTH-EAST IRRIGATED AGRICULTURE PROJECT November 4, 1999 Rural Development Sector Unit South Asia Region  CURRENCY EQUIVALENTS (Exchange Rate Effective September 1, 1999) Currency Unit = Sri Lanka Rupees (Rs) Rs71.50=US$ 1 US$ 1 =Rs 0.014 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS ASC Agrarian Service Center NEPC North-East Provincial Council CAS Country Assistance Str ategy NGO Non-Govermnental Organization CBO Conimunity Based Organization NIRP National Irrigation Rehabilitation Project CPR Comprehensive Project Review NPCC National Project Coordinating Committee CS Chief Secretary NWSDB National Water Supply & Drainage Board DAC District Agriculture Committee O&M Operation and Maintenance DPD Deputy Project Directer PD Project Director DPO District Project Office PIP Project Implementation Plan DS District Secretary PMR Project Management Reporting DVS Divisional Secretary PMU Project Management Unit ERR Economic Rate of Return PPF Project Preparation Facility EIRR Economic Internal Rate of Return PS Pradeshiya Sabhas FMPM Financial Management Procedural PSC Project Steering Conmmittee Manual PSR Project Status Report FO Farmers Organization QCBS Selection Based on Consultant's GOSL Government of Sri Larka Qualifications Ha Hectare SM Social Mobilizer ICB International Competitive Bidding SOE. Statement of Expenditure ICR Implementation Completion Report TD Technical Director ICRC International Committee of the Red TOR Terms of Reference Cross UN United Nations IDA International Development Association UNHCR United Nations High Commissioner for LTTE Liberation Tigers of Tamil Eelam Refugees M&E Monitoring and Evaluation VDP Village Development Plan MPCLG Ministry of Provincial Councils and WRB Water Resources Board Local Government NCB National Competitive Bidding Vice President: Mieko Nishimizu Country Director: Mariana Todorova Sector Director: Ridwan Ali Task Team Leaders: Nihal Fernando/Geoffrey Spencer  SRI LANKA North-East Irrigated Agriculture Project CONTENTS A. Project Development Objective Page L. Project development objective 2 2. Key performance indicators 2 B. Strategic Context l. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 4 C. ]Project Description Summary 1. Project components 6 2. Key policy and institutional reforms supported by the project 6 3. Benefits and target population 7 4. Institutional and implementation arrangements 7 D. Project Rationale 1. Project alternatives considered and reasons for rejection 10 2. Major related projects fmanced by the Bank and other development agencies 1 1 3. Lessons learned and reflected in proposed project design 11 4. Indications of borrower commitment and ownership 12 5. Value added of Bank support in this project 13 E. Summary Project Analyses 1. Economic 13 2. Financial 14 3. Technical 14 4. Institutional 14 5. Social 16 6. Environmental assessment 17 7. Participatory approach 17 F. Sustainability and Risks 1. Sustainability 18 2. Critical risks 18 3. Possible controversial aspects 19  G. Main Loan conditions 1. Effectiveness conditions 20 2. Other 20 H. Readiness for Implementation 21 I. Compliance with Bank Policies 21 Annexes Annex 1: Project Design Suinmary 22 Annex 2: Detailed Project Description 26 Annex 3: Estimated Project Costs 46 Annex 4: Cost Benefit Analysis Summary 47 Annex 5: Financial Summary 51 Annex 6: Procurement and Disbursement Arrangements 52 Annex 7: Project Processing Schedule 62 Annex 8: Documents in Project File 63 Annex 9: Statement of Loans and Credits 64 Annex 10: Country at a Glance 66 MAP(S) Map of the project area: IBRI) 30482  SRI LANKA North-East Irrigated Agriculture Project Project Appraisal Document South Asia Regional Office SASRD Date: November 4, 1999 Team Leader: Nihal Fernando/Geoffrey Spencer Country Manager/Director: Mariana Todorova Sector Manager/Director: Ridwan Ali Project'ID: P058070 Sector(s): Al - Irrigation & Drainage Lending Instrument: Specific Investment Loan (SIL) Theme(s): Poverty Targeted Intervention: Y Project Financing Data 3] Loan 2 Credit L Grant O Guarantee D Other (Specify) For LoainslCredits/Others: Amount (US$m) $27.0 million (SDR 19.6 million) Proposed Terms: El To be defined C Multicurrency X Single currency O Standard Variable [O Fixed El LIBOR-based Grace period (years): 10 Years to maturity: 40 Commitment fee: 0.5 Service charge 0.75% JFinan6inq Plan: E, To be defmied $ouvoe Lo"a Tt. Government 4.00 0.00 4.00 IIBRD | IDA 24.50 2.50 27.00 BENEFICIARIES 1.40 0.00 1.40 Total: 29.90 2.50 32.40 Borrower: DEMOCRATIC SOCIALIST REP. OF SRI LANKA Guarantor: Responsible agency: NORTH-EAST PROVINCIAL COUNCIL Other Agency(ies): Estimated disbursements ( Bank FYJUS$M): Annuat 4.3 5.7 6.5 6.8 3.7 Cumulative 4.3 | 10.0 16.5 23.3 27.0 Project implementation period: 5 years Expected effectiveness date: 03/01/2000 Expected closing date: 06/30/2005 OCS AO F- , R 1R95  A: Project Development Objective 1. Project development objective: (see Annex 1) The project development objective is to help conflict affected communities in the North-East Prov:nce and adjoining areas to reestablish at least a subsistence level of production and basic community services, through assistance with jump starting agricultural and small-scale reconstruction activities, and to build their capacity for sustainable social and economic reintegration. 2. K:ey performance indlicators: (see Annex 1) The key performance indicators for this project would be: (a) increased irrigated farming area and agricultural production; (b) sustained improvement in basic living conditions generated by increased agriculture production and other project supported reconstruction activities; and (c) improvement in service capacity of, and acce!,s to basic village level physical infrastructure and social services. B: Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see AnULex 1) Document number: IDA/R98-190 (CAS Progress Report) Date oil latest CAS discussion: 01/19/99 The 16-year long ethnic conflict in the North-East has taken an enormous toll on the country's human, financial, and plhysical resources. It has cost the lives of over 70,000 people, displaced close to 500,000 men, women, and children, and deteriorated the ethnic harmony and social cohesion within the country. The economic csts of the war have also been tremendous. Recognizing that peace is a prerequisite for sustained economic gioowth and poverty alleviation, as noted in the CAS Progress Report, the next CAS will examine the underlying causes of the conflict and explore ways, within the Bank's mandate of political neutrality, to support efforts to prorn ate ethnic harmony. The Government has made succeeded in restoring peace to part of the conflict area. By and large, nine out of the twelve administrative districts within the project area are now classified by the Government as "cleared" I "cleared" refer to areas which are under normal civil administration of the Goverrnent, while "uncleared" areas are those subject to dispute between the Government and the Liberation Tigers of Tamil Eelam (LTTE)J. This s .gnificant irnprovement has resulted in the Government, with thle assistance of UN and, bilateral aid ager. -ies, and international and national Non-Govermnental Organizations (NGOs), helping the refugees to return a:id restart their lives. This assistance is directed at the re-establishment of livelihoods and basic community services and infrastructure. In the meantimne, to help restore hope to people in the areas of the North-East, the Bank has used, ancl plans to continue to use funds under existing (as well as proposed) IDA Credits in irrigation and education to finar ce minor reconstruction activities in the war affected areas. The extension of recently concluded National 'Irrigation Rehabilitation Project (NIRF') into the North-East, which included 106 small irrigation schemes in both 'cleared" and "uncleared" areas, provided valuable implementation experience. In February 1999, a Project Prnparation iFacility (PPF) of $200,000 was approved by the Bank to assist with the preparation of the proposed projec& i:n July 1999, the Bank approved a grant of $185,000 from the post conflict fund to an international NGO acti;e in the North-],ast for a pilot initiative on inland aquaculture development in the East. These activities would coni:ribute to building self-reliance among the local people. The recent (May 1999) quarterly monitoring report of the Post Conflict Unit recognizes Sri Lanka as a country in "early reconstruction phase", although the conflict sit..ation by nature remains volatile. This means some parts of the region may move back and forth from in-conflict ,itaation to post-conflict status, transition from conflict to peace can be supported by well-timed technical intervent ons that remove some of the impediments to post-conflict reconstruction and build a firmer base for socially sumtainable development. -2 -  The proposed project is in line with the above CAS approach and the Bank's post-conflict reconstruction strategy, and is in response to the Government of Sri Lanka's (GOSL) request for assistance during the transitional period fi om humanitarian aid to reconstruction. The project would also enable the Bank to gain experience and build partnerships with other stakeholders, which would enhance its preparedness and ability to move into the post-conflict reconstruction phase once peace is achieved. 2. Main sector issues and Government strategy: Aigriculture has always been a central part of the economy in the North-East region with nearly two thirds of its pre-war population depending on agricultural farming, livestock rearing, and deep sea fishing for their livelihood. Out of its 369,000 ha of agricultural land, about 50% is fed by irrigation tanks/run-off-river (anicut) schemes and 16% by shallow open dugwells. Until the mid 1980s, the region had enjoyed a higher level of agricultural cLevelopment than most other parts of the country, was a surplus rice producing area, and had a comparative advantage in the production of vegetables, fruits and other cash crops. Since 1983, the Government has faced the military challenge for control of the North-East region. Agriculture production and household incomes in the region have registered a substantial decline due to war related damage/destruction of public and private sector assets (including farm equipment and irrigation works), displacement of people, breakdown of the public and private sector support services, reduced access to farm inputs and credit, deterioration of rural roads, and disruption of distribution and marketing systems. Of 134 major/medium schemes (command area 147,500 ha) and about 2,400 minor irrigation schemes (command area 42,000 ha), most are heavily dilapidated due to lack of maintenance and war damage. These schemes are either operating at much lower capacity or damaged to the extent that no irrigated agricultural production takes place in the command areas at present. Most of the rural roads, which link farming and fishing conmmunities to nearby market centers and townships are heavily deteriorated causing severe hardships to day-to-day life. According to the assessment carried out in 1994, an estimated 40,000 ha of agricultural land has gone out of production; losses of annual production of rice and cash crops are estimated at Rs I billion and Rs 2 billion respectively. Given that traditional economic activity in villages in the North-East is centered around irrigation schemes, restoration of productive capacity of these schemes and rural roads would be a priority in the resettlement of returning displaced people. The long ethnic conflict has also caused severe social disruptions resulting in trauma, unemployment, breakdown of traditional values, loss of self-confidence and community spirit. While rehabilitation of the physical infrastructure and the support services system is essential for reviving the economy, it is also necessary to rebuild trust and self-reliance among the conflict-affected communities. No meaningful and sustained rehabilitation and reconstruction can take place at the village level, now and in the future, without the communities themselves being in the "driver's seat", and participating fully in the reconstruction process. The Government recognizes that peace is essential for nation building and economic development. Since the LTTE broke off peace talks in early 1995, the Government has pursued a two-pronged strategy to end the conflict, combining a military offensive to defeat or marginalize the LTTE with proposed constitutional amendments designed to give greater autonomy to the North-East Province. However, progress on both fronts is difficult. Nevertheless, the Government has recognized the need to rebuild self-reliance among the affected communities. The Government, with assistance from aid agencies and other donors, has been proceeding with relief and small-scale reconstruction activities in the region, with a view to building momentum towards an eventual peace settlement, and plans to continue to involve communities in the restoration of basic infrastructure and social service facilities. The government policy with regard to relief, rehabilitation and reconstruction aims at bringing the population affected by the conflict back to productive life by providing basic amenities to help the people to live with dignity, and to create a physically, economically, and socially sustainable environment for their reintegration. Priority is given to reviving agricultural production in the region as the returning displaced people depend on agriculture as their main source of income. -3 -  3. Sector issues to be addressed by the project and strategic choices: Because of its unique context, the project would not address specific policy issues as pertaining to the agriculture sector such as land tenure, water rights, cost recovery, and input and output pricing. However, it woul':. address GOSL's policy of greater community participation in decision making, implementation and the principle of community taking over operation and maintenance (O&M) responsibilities of the irrigation assets and drinking water i'acilities. To address risks of the operating environment and ensure sustainability, strategic choices have been made with respect to project focus and approach, project implementation management, beneficiary and stakeholder participation, and partnerships with NGOs and UN agencies. Proiecl approach and focus: Given the whole region, to varying degrees, is affected by the conflict, the situation on-the-ground would remain fluid for some time. In balancing the urgent need to provide speedy assistanze to the target population and the risky implementation environment, the project design adopts a program approach and combines small-scale rehabilitation/reconstruction of irrigation and road infrastructure and provision of drinking water facilities, with measures for empowerment of war-affected communities in selected villages. In addition, the project would have provisions for other priority reconstruction activities, which are difficult to define at p -esent in terms of their nature, locatiorn, and quantity, but would be identified during the project implementation in ine with the "early reconstruction activities", as defined in the Bank's post-conflict reconstruction framew