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EvaluationIndependent

Performance Evaluation

Report

Sri Lanka: Plantation Development Project

Reference Number: PPE:SRI 2016-06 Project Number: 34023 Loan Number: 1913/1914 Independent Evaluation: PE-787

Performance Evaluation Report March 2016

Sri Lanka: Plantation Development Project

This document is being disclosed to the public in accordance with ADB's Public Communications Policy 2011.

NOTES

(i) The fiscal year (FY) of the government ends on 31 December

(ii) In this report, “$” refers to US dollars.

In preparing any evaluation report, or by making any designation of or reference to a particular territory or geographic area in this document, the Independent Evaluation Department does not intend to make any judgments as to the legal or other status of any territory or area. The guidelines formally adopted by the Independent Evaluation Department (IED) on avoiding conflict of interest in its independent evaluations were observed in the preparation of this report. To the knowledge of the management of IED, there were no conflicts of interest of the persons preparing, reviewing, or approving this report.

Director General V. Thomas, Independent Evaluation Department (IED) Officer-in-Charge V. Salze-Lozac'h, Independent Evaluation Division 2, IED

Team leader M. Vijayaraghavan, Senior Evaluation Specialist, IED Team members O. Nuestro, Senior Evaluation Officer, IED

I. Garganta, Associate Evaluation Analyst, IED

Abbreviations ADB – Asian Development Bank CPS – country partnership strategy DFCC – Development Finance Corporation of Ceylon DMF – design and monitoring framework IED – Independent Evaluation Department IEM – independent evaluation mission MIRC – marketing intelligence and resource center MPI – Ministry of Plantation Industries O&M – operation and maintenance PCR – project completion report PDP – Plantation Development Project PFI – participating financial institutions PIU – project implementation unit TA – technical assistance PRP – Plantation Reform Project RPC – regional plantation company RRP – report and recommendation of the President TASL – Tea Association of Sri Lanka

Currency Equivalents Currency Unit – Sri Lankan rupee (SLRe)

At Appraisal

(20 June 2002)

At Completion

(6 November 2009)

At Independent Evaluation

(23 September 2015) SLRe1.00 = $0.0104 $0.0087 $0.0070 $1.00 = SLRs96.33 SLRs114.82 SLRs140.95

Contents

Page

Acknowledgements vii Basic Data ix Executive Summary xi Chapter 1: Introduction 1

A. Background and Project 1

B. Evaluation and Process 1

Chapter 2: Design and Implementation 3

A. Formulation 3

B. Impact, Outcomes, and Outputs 3

C. Cost, Financing, and Executing Arrangements 4

D. Procurement and Construction 5

E. Design Changes 6

F. Loan Covenants 6

G. Policy Framework 7

Chapter 3: Performance Assessment 8

A. Relevance 8

B. Effectiveness 9

C. Efficiency 13

D. Sustainability 14

E. Overall Assessment 15

Chapter 4: Other Assessments 16

A. Impact 16

B. Asian Development Bank and Borrower Performance 17

Chapter 5: Issues, Lessons, and Follow-Up Actions 19

A. Issues 19

B. Lessons 20

C. Follow-Up Actions 21

APPENDIXES 1. Design and Monitoring Framework 23 2. Project Cost Estimates 33 3. Implementation Schedule (Appraisal and Actual) 34 4. Major Loan Covenants Not Complied With by the Borrower 35 5. Characteristics of Estates Visited by the Independent Evaluation Mission 39 6. List of Regional Plantation Companies 40 7. World Commodity Prices and Regional Plantation Companies’ Profitability 41 8. Financial Internal Rates of Return for Crops 42

Acknowledgements

This project performance evaluation report was prepared by a team of staff and consultants from the Asian Development Bank (ADB) Independent Evaluation Department (IED). The team comprised staff members Maya Vijayaraghavan (team leader), Maria Olivia Nuestro, and Irene Garganta; and consultants Edward Breckner and Charith Amarasekara, who contributed to this report. The team is grateful for the support provided by ADB staff at the resident mission in Sri Lanka for mission planning and logistics. The team thanks ADB staff, staff in government offices in Sri Lanka, and representatives of nongovernment stakeholders who were interviewed for their time, assistance, and inputs. Thanks go to the peer reviewers Andrew Brubaker and Srinivasan Palle Venkata for their valuable comments, which improved the report. Comments on an earlier draft received from ADB’s South Asia Department were also considered. Nevertheless, the IED retains full responsibility for this report. The evaluation was conducted under the supervision of Bob Finlayson, Director,

Independent Evaluation Division 2, and the overall guidance of Vinod Thomas, Director

General, IED.

Basic Data LOAN 1913/1914-SRI: PLANTATION DEVELOPMENT PROJECT

PROJECT PREPARATION/INSTITUTION BUILDING

TA No. TA Name Type

No. of Person-Months

Amount ($’000)

Approval Date

3594 Technical Assistance to the Democratic Socialist Republic of Sri Lanka for the Plantation Development Project.

PPTA 46 800a 18 Dec 2000

PPTA = project preparatory technical assistance. a The amount pertains to ADB amount only.

Key Project Data ($ million)

As per ADB Loan Documents

Actual

Total Project Cost 114.4 67.2 ADB Loan Amount (Utilization) ADB Loan Amount (Utilization for 1914)

30.0 10.0

18.9 10.0

ADB Loan Amount (Utilization for 1913) 20.0 9.0 SDR (15.0) (5.9) ADB = Asian Development Bank, SDR = special drawing rights.

Key Dates Expected Actual

Consultation mission 15–20 Oct 2002 Fact-finding 21 Apr–1 May 2002 Appraisal 2–20 Jun 2002 Loan negotiations 25–27 Jul 2003 Board approval 13 Sept 2002 Loan agreement 8 Nov 2002 Loan effectiveness 6 Feb 2003 29 Aug 2003 Project completion 31 Dec 2008 22 Feb 2010

26 Nov 2009 Loan (1913/1914) Closing 30 Jun 2009 22 Feb 2010 Months (effectiveness to completion) 1913/1914 71 78

Borrower Government of Sri Lanka Executing Agency Ministry of Plantation Industries

Type of Mission No. of Missions No. of Person-Days

Fact-finding 1 55 Appraisal 1 95 Inception 2 20 Special project administration 2 5 Review 4 126 Completion 1 65 Evaluation 1 56

Executive Summary

Tree crops, especially tea and rubber, are an important component of Sri Lanka’s economy and a major source of employment and export earnings. About 40% of the country’s tea and rubber land is in the estate plantation sector managed by regional plantation companies (RPCs). RPCs are commercial entities that have leased formerly nationalized plantations from the government. The Asian Development Bank (ADB) helped the government denationalize the plantation operations in the 1990s. ADB’s Plantation Reform Project, implemented during 1996–2004 was designed to build up the RPCs and assist with replanting estate lands.

In 2002, ADB appraised its follow-up Plantation Development Project (PDP) in Sri Lanka, estimating its total cost at $114.4 million, of which ADB was to fund the equivalent of $30.0 million. It approved an Asian Development Fund loan equivalent to $20.0 million and a loan equivalent to $10.0 million from its ordinary capital resources to help finance the PDP. The project’s intended impact was to make the plantation sector sustainable over the long term without further external assistance. The intended outcomes were (i) the enhancement of the plantation sector’s profitability, and (ii) the improvement of the living and working conditions of the estate workforce.

The project scope was wide. The PDP had an investment component to provide long-term finance for the replanting and expansion of traditional crops, including tea, rubber, and coconuts; as well as for crop and non-crop diversification, factory consolidation and automation, and effluent treatment plants. Its social and environmental component covered self-help housing and amenities, social awareness programs, and the preparation of land surveys to enhance planning and land use. It was to support marketing initiatives through product research and development, as well as fair trade labeling and compliance with requirements of ethical trade. Its institutional strengthening component was to include assistance for an industry umbrella body, consulting services, and training and development for out-grower models. The intended beneficiaries were the estate workers, the RPCs, and their shareholders.

The project was implemented during 2003–2009, and an ADB project

completion report in 2010 rated it successful. A project completion validation report by ADB’s Independent Evaluation Department (IED) concurred with this assessment in 2012, although it was prepared immediately after a period of record high prices for tea and rubber that no longer prevail.

The findings of IED’s project performance evaluation of the PDP in this report are based on four core evaluation criteria—relevance, effectiveness, efficiency, and sustainability—and on the additional criterion of impact.

Relevance. The project reflected government and ADB objectives, but the

complex design had weaknesses. It had too many components, including many that were not feasible. The design included counterpart funding conditions for beneficiaries that discouraged participation by intended stakeholders. As a result, this evaluation report rates the project less than relevant.

xii Plantation Development Project

Effectiveness. The two intended outcomes of enhanced profitability of the plantation sector and improvements in the living conditions of the estate populations were achieved to only a limited degree. Only 16 of the intended 23 RPCs participated in the project, and the financial position of most of these enterprises remains highly dependent on the world prices for tea and rubber. In addition, the average tea and rubber yields and the labor productivity on these estates have not increased. The majority of output targets were either not achieved or could not be verified, and project subcomponents were dropped. A significant but uncertain area of tea and rubber land was replanted. The evaluation was told that some new planting of forest trees and oil palm and spice crops occurred. Despite this increased capacity, the RPCs are not profitable or self-sustaining under the current low commodity price regime and are asking for government assistance to ensure their continued operations. Although living and working conditions for estate workers have shown some improvements, indicating a partial achievement of the PDP’s second intended outcome, labor continues to flow out of the estates. Given these findings, the project is rated less than effective.

Efficiency. Implementation delays resulted from shortcomings in process

efficiency, the project was unable to spend funds as appraised, and a large part of the loan was cancelled. The evaluation could not verify the economic internal rate of return reported in the project completion report since the electronic files were not available, nor could the rate be estimated due to uncertainly in the achievement of output targets. Benefits were further eroded by the closure of the project with part of the social development component still uncompleted. The project is rated less than efficient.

Sustainability. No specific measures were included in the project design to

ensure sustainability of any component. Given commodity price forecasts and the financial state of some of the RPCs, the chances that the majority of the project RPCs will be profitable, sustainable entities in the future without external support are low. The project is rated less than likely sustainable.

Overall, the project is rated less than successful. The evaluation’s examination of the issues revealed no easy answer to the

questions surrounding the estate plantation sector’s future and the prospects for better lives for the sector’s labor force and the families living on the estates.

The PDP provides three lessons. First, the project’s failure to achieve its expected impact, and limited achievement of its expected outcomes highlights the need for ADB to fully assess and understand all socioeconomic, institutional, and policy considerations when preparing and appraising a project. Second, the targeted outcomes and outputs of ADB projects should be simple and straightforward, backed by clearly defined implementation arrangements, and involve a manageable number of implementing agencies. The PDP design called for dozens of diverse activities to be carried out by many different agencies. Finally, the PDP showed the need for sound project administration by ADB, and improvement in its business processes. ADB staff input for field reviews of the project were delayed; operations lost critical project files, such as economic and financial models and the PDP’s underlying assumptions—which highlights the need for more systematic retention of key ADB project records in electronic format.

Executive Summary xiii

ADB should continue to stay engaged in the sector, at least to monitor developments. The sector remains important to Sri Lanka’s economy, exports, and labor market. It should be included in any survey or review ADB undertakes within the agriculture sector as a whole.

CHAPTER 1

Introduction

A. Background and Project

1. Tree crop production, primarily of tea, rubber, coconut, oil palm, and some spices, makes an important contribution to Sri Lanka’s economy. It comprised 24% of total exports by value in 20121 and accounted for about 800,000 jobs, or 10% of all employment in the country.2 The sector is divided into (i) smallholder production by farmers owning 20 hectares (ha) or less; and (ii) the estate plantation sector, producing mainly tea and rubber on about 450 estates. About 40% of the country’s tea and rubber land is held by the estate plantation sector, which accounts for 19% of foreign earnings and employs 290,000 workers (footnote 1). The estates are managed by regional plantation companies (RPCs), which are commercial entities that have leased formerly nationalized plantations from the government.3 2. The estate plantation sector underperformed after the nationalization in the 1970s of about 500 tea and rubber estates and 400 factories, all of which were put under the management of two state-owned plantation corporations. A restructuring in 1992 brought about more private sector involvement. A total of 450 plantation estates were put under the management of 23 state-owned RPCs, but their management was contracted out to private companies. In 1995, the government began turning the entire operation of the RPCs over to the private sector through 53-year leases of the plantation lands, which remained under government ownership. The Asian Development Bank (ADB) assisted with this process through its Plantation Reform Project (PRP), which was designed to build up the capacity of the RPCs and help in the replanting of estate lands.4 3. In 2002, ADB approved the follow-up Plantation Development Project (PDP), which is the subject of this evaluation by ADB’s Independent Evaluation Department (IED).5

B. Evaluation and Process

4. The project was implemented during 2003–2009, and an ADB project completion report (PCR) in 2010 rated it successful.6 IED’s project completion validation report in 2012 concurred with the PCR rating of successful.7

1 Central Bank of Sri Lanka. 2014. Sri Lanka Socio-economic Data 2014. Colombo. 2 Planters’ Association of Ceylon. 2014. Ceylon Tea Industry and Regional Plantation Companies. Colombo.

3 Each RPC manages about 20 estates that range in size from about 150 ha to 500 ha. 4 ADB. 1995. Report and Recommendation of the President to the Board of Directors: Proposed Loan and

Technical Assistance Grant to Sri Lanka for the Plantation Reform Project. Manila. 5 ADB. 2002. Report and Recommendation of the President to the Board of Directors: Proposed Loan to Sri

Lanka for the Plantation Development Project. Manila. 6 ADB. 2010. Completion Report: Plantation Development Project in Sri Lanka. Manila. 7 Independent Evaluation Department. 2012. Validation Report: Plantation Development Project. Manila:

ADB.

2 Plantation Development Project

5. IED selected the PDP for post-project evaluation and prepared an evaluation approach paper in 2015. Findings and lessons drawn from this evaluation will feed into the country assistance program evaluation (CAPE) for Sri Lanka scheduled in 2016. 6. The findings of IED’s project performance evaluation of the PDP in this report are based on four core evaluation criteria—relevance, effectiveness, efficiency, and sustainability—and on the additional criterion of impact.8 The evaluation aimed to assess various aspects of the project’s formulation, design, implementation, and operation and maintenance, as well as the living and working conditions of the estate workers and the sustainability of the project outcome and outputs. The evaluation was based on (i) a desk review of project documentation, (ii) information gathered during the independent evaluation mission (IEM), (iii) a review of available RPC annual reports and financial statements, (iv) a review of available project data and national statistics on socioeconomic indicators for estate workers, (v) discussions with ADB project staff at ADB headquarters and in Sri Lanka resident mission (vi) discussions with government agencies and other project stakeholders in the country; and (vii) site visits to a representative sample of the RPC estates.9

8 ADB. 2006. Guidelines for Preparing Performance Evaluation Reports for Public Sector Operations (amended

in March 2013). Manila. 9 The IEM to Sri Lanka during 28 September–9 October 2015 visited six estates selected to represent a variety

of different regions, districts, and crops.

CHAPTER 2

Design and Implementation

A. Formulation

7. The PDP built on the PRP. It had significant policy- and institution-building components designed, according to the RRP (footnote 4), to “to ensure the plantation sector’s long-term sustainability without further external assistance.” 8. The project was formulated under a project preparatory technical assistance (TA) grant.10 Preparation entailed consultations with the government, the RPCs, and representatives of the estate workers, who constituted a significant, socially distinct section of society. 9. The PDP’s scope was very broad and diverse. It covered almost every aspect of the support needed to implement the sector’s restructuring program and involved multiple subcomponents, several of which were divided into additional series of distinct activities. The project framework in the RRP—since renamed the design and monitoring framework (DMF) in RRPs—listed more than 30 discrete targets to be achieved to deliver the project’s outputs. The implementation schedule in Appendix 10 of the RRP listed 20 different implementation activities. The two loan agreements included a wide range of policy initiatives and covenants that the government needed to take and meet that were not listed in the project framework. 10. The all-encompassing project design produced under the PDP’s preparatory TA was adopted more or less fully by ADB’s project preparation team. The design was then broadened during ADB’s internal project processing to include more rigorous participation requirements.

B. Impact, Outcomes, and Outputs

11. The PDP’s intended impact, identified as the goal in the DMF terminology of the time, was the long-term sustainability of the plantation sector without external assistance.11 The impact indicator was to be sustained business operations by and sound financial positions at 23 RPCs. The project’s intended outcomes (termed objectives) were (i) the enhanced profitability of the estate plantation sector, and (ii) improved living and working conditions for estate workers. See Appendix 1.

10 ADB. 2000. Technical Assistance to the Democratic Socialist Republic of Sri Lanka for Preparing the

Plantation Development Project. Manila. 11 The RRP prepared in 2002 used terminology that had not yet been revised for the DMF that is currently in

use.


12. Key intended outputs were:

(i) Investment Component. The PDP was to rehabilitate or develop almost 30,000 hectares of tea, rubber, oil palm, and other crops on plantations, and supporting processing capacity. Non-crop diversification and estate tourism were also targeted by this component. 12

(ii) Social and Environmental Component. The project was to rehabilitate or construct housing and amenities for workers and their families implement social awareness programs, and prepare land use surveys. Following a change in scope to drop the housing component, it was also to rehabilitate 446 kilometers (km) of roads.

(iii) Marketing Initiatives Component. The project was to support marketing initiatives through product research and development, as well as fair trade labeling and compliance with requirements for ethical trade. A market intelligence and resource center (MIRC) for tree crops was to be established.

(iv) Institution-building and Project Management Component. The project was to establish an umbrella trade body, the Tea Association of Sri Lanka (TASL), and create workable models for subleasing RPC land to out-growers.

13. The intended beneficiaries were the estate workers, the RPCs, and their shareholders. The project’s intended impact, outcomes, and outputs are in the DMF in Appendix 1.

C. Cost, Financing, and Executing Arrangements

14. The PDP’s appraisal and actual costs and the financing arrangements are shown in Appendix 2. The projected cost at appraisal was $114.40 million and included physical and price contingencies and an estimate of service charges during construction. The actual cost at completion was $67.21 million.13 15. ADB provided one loan from its ordinary capital resources of ¥1,171,600 (equivalent to $10.0 million) and a second from the Asian Development Fund for SDR13.043 million (equivalent to $20.0 million). This was intended to finance 26% of the total projected project cost. The balance of the project costs was to be financed by (i) participating financial institutions (PFIs), which were to provide $8.5 million (or 7% of the project cost); (ii) the beneficiary RPCs, which were to contribute $38.3 million (or 34%); and (iii) a government share of $37.6 million (33%). In the end, ADB disbursed $19.0 million, or 28% of the actual project cost of $67.2 million. Two groups of PFIs provided $4.1 million (6%). The RPCs contributed $21.0 million (31%) and the government $23.2 million (34%). 16. The funds were to be allocated through an indirect funding mechanism for investments in RPCs, and for housing loans. A revolving fund established under the ADB’s prior PRP was to provide a credit line, and a new plantation fund established under the purview of the Ministry of Finance was to provide eligible RPCs with equity and quasi-equity funding instruments. The Development Finance Corporation of Ceylon

12 Project targets for non-crop diversification and estate tourism were: to refurbish 20 estate bungalows,

rehabilitate 20 mini-hydro schemes, and construct 1 crude palm oil factory. 13 Despite this significant cost underrun, the PCR reported that the project’s planting targets for tea and

rubber were doubled. The evaluation found these figures to be questionable.

Design and Implementation 5

(DFCC) Bank was the apex body for the administration of a credit line for the RPC investments and for a workers’ housing loan scheme. The PFIs were responsible for managing the two credit lines. 17. The Ministry of Plantation Industries (MPI) was the PDP executing and implementing agency responsible for overall supervision, management, and implementation. A project coordination committee, chaired by the secretary of MPI, was established to provide overall guidance and direction. The PRP’s project implementation unit (PIU) had performed adequately, so it was strengthened to help carry out the PDP. The Plantation Housing and Social Welfare Trust 14 was expected to help the PIU operate a workers’ housing loan scheme, construct common amenities for workers, and provide training for the social programs.

D. Procurement and Construction

18. The procurement of goods and services raised no major issues. The PDP used 52.5 person-months of individual national consulting inputs. The appraisal plan had called for 47.0 person-months of both international and nation consultancy services—23.0 person-months of international and 24.0 person-months of national. No significant recruitment problems were encountered, and the consultants were all recruited individually following ADB’s Guidelines on the Use of Consultants. 19. The PCR reported that participating RPCs carried out most of the project’s physical works, which were financed through the credit lines provided by the PFIs and to a lesser extent using equity sourced from the plantation fund. ADB’s PCR considered the performance of DFCC Bank and the PFIs to have been satisfactory. Delays occurred in the setting up of the plantation fund, as well as in sourcing funds from the PRP credit line. These problems delayed credit use. The RPCs did most of the small housing and roads works for the social component—such as reroofing; the construction of field restrooms, playgrounds, and toilets; and road rehabilitation. Bad weather caused some problems during the road work. 20. The PCR mission compared the appraisal and actual implementation schedules, and the results are in Appendix 3. Most components started much later than planned. Credit provision under the investment component began about 2 years late, and most social programs were delayed even longer. The government PCR said the credit provision was delayed mainly by the long time taken by the PFIs in meeting eligibility criteria, by the RPCs in submitting acceptable strategic plans, and delays in establishing the plantation fund. 21. The reluctance of RPCs to participate due to the project’s requirement that they provide 50% of the funding caused the social component’s major delays. This requirement was eventually reduced to 40% funding from RPCs for reroofing the worker’s line accommodation and ergonomic equipment, and 60% sourced from the project. In addition, the RPCs were released from the requirement to help fund the social awareness programs and road improvement which were funded from the ADB project (75%) and the government contribution (25%). Delays for providing training for RPC workers were resolved when ADB agreed to overseas training. Delays in

14 Later renamed the Plantation Human Development Trust (PHDT). Established by the Government of Sri

Lanka (GOSL) in 1992, it is a tripartite organization consisting of the GOSL, RPCs, and plantation trade unions. The main objective of PHDT is to implement social development programs to enhance the quality of life of the plantation community (of one million) in the estates managed by the RPCs.


implementing the marketing initiatives component and the institutional development component were primarily due to a lack of interest by stakeholders.

E. Design Changes

22. The major design change was the project’s dropping of the credit line to provide housing for 6,000 workers’ families under the social component and its replacement with a component for the construction of internal estate roads. The housing component was eliminated because another program under the Ministry of Estate Infrastructure and Livestock Development provided more attractive financing. The project rehabilitated 446 kilometers of roads using tar or concrete and repaired another 74 kilometers of gravel roads.15 These were basic 8-meter-wide rural roads but provided strategic access to schools, hospitals, and rural markets. The construction was supervised by the government’s Road Development Authority. 23. A minor scope change added the upgrading of tea factories to the PDP’s marketing initiatives component. In other small changes, components that were no longer considered viable or received little support from stakeholders were dropped. These included the planned improvement of common sites and services under the social development component—abandoned since the associated housing credit line component had been removed from the scope. An ethical trade initiative under the marketing initiatives component was replaced by minor factory upgrades. A study of out-grower systems under the institution-building component did not proceed due to the RPCs’ lack of interest.16

F. Loan Covenants

24. The PCR stated incorrectly that ”covenant compliance was generally achieved, but some were delayed.” This was not the case. Appendix 4 shows the record of government noncompliance with ADB loan covenants.17 Several important policy requirements relating to privatization and industry restructuring were not complied with. The government did not comply with its undertakings (i) to divest itself of the three remaining government-owned RPCs and warehouses; (ii) to refrain from intervening in wage determination in the collective agreements between estate workers and management; (iii) to eliminate all restrictions on tea exports, except those related to quality control, and to eliminate price control and panel ratification for non-auction sales between producers and international buyers; and (iv) to amend the legislation governing the tea-, rubber-, and coconut-related institutions and reconstitute their boards to permit greater private sector participation. This noncompliance was due mainly to a change in government in 2005 after the loan was negotiated. The new government changed the policy on privatization and divestment. 25. The PIU failed to comply with the requirements to carry out a social benchmark survey and monitor and evaluate the project benefits. This noncompliance created a significant challenge for the IED project performance evaluation. The absence of monitoring data made it difficult to verify the project’s accomplishments, particularly for the investment and social development components.

15 The original scope included the 74 kilometers of gravel road. The additional road building can be

considered an expansion of this subcomponent. 16 Some RPCs are now considering using out-growers (families which would cultivate idle estate lands and

provide the crop to estate factories for processing). 17 There were a number of non-complied covenants related to the cancelled workers’ housing component of

the project that are not included in this appendix.

Design and Implementation 7

G. Policy Framework

26. ADB’s 2010 PCR found that Sri Lanka’s plantation sector was still constrained by a relatively short remaining lease period. This referred to the period remaining on the RPCs’ leases of government-owned plantation land, which was 35 years at that time and is about 30 years now. The PCR saw this as a disincentive to continued investment. It also limited the leases’ usefulness as collateral. The PCR found that the RPCs were operating under several other constraints. Their workforce remained highly unionized, raising business and political risks from large-scale industrial action. They were subject to an uncertain political environment in which crucial government policies affecting investment decisions—such as those on taxation, forestry, labor rates, and subsidies—could change in unpredictable ways. Sri Lanka’s RPCs also had responsibility for a large resident workforce that competitors in India and Africa, for example, did not have. Added to these factors were the fundamental industry risks, such as extreme vulnerability to fluctuations in international prices for their products. 27. One of the aims of the project was crop and non-crop diversification. The RPCs were encouraged to plant trees on the estates both for ecological reasons and to grow the firewood required in tea drying. The PCR reported that 4,000 ha were planted with project funds, but the trees could not be harvested due to government restrictions. The IEM clarified that to protect the environment trees planted at altitudes above 5,000 feet (about 1,500 m) could not be harvested—this was in fact specified in the RRP’s environmental criteria—but the approval process for the permitted cutting of trees below this level was complicated and could take up to 1 year. One of the most promising crops for diversification was oil palm, and the project aimed to plant 2,500 ha of these trees. However, the government restricted both the conversion of rubber land to oil palm and the import of oil palm seed, imposing obvious constraints on achieving this objective. A participating PFI informed the IEM that it was expressly directed by DFCC Bank not to finance oil palm cultivation. 28. The obstacles posed by these government policies were exacerbated by a fixed exchange rate that tended to favor importers over exporters. The worldwide decline in commodity prices since 2011 has meant that Sri Lanka’s local currency costs for producing commodities such as tea and rubber have exceeded the prices on the world market once transport and other transaction costs are factored in. Because the industries producing these commodities are so important to the economy and labor market, the government has begun providing subsidies for smallholder producers. So far, however, it has not extended these to the RPCs in the commercial plantation sector.

CHAPTER 3

Performance Assessment

A. Relevance

29. Investment in the tree crop sector in Sri Lanka at the time the PDP was planned and approved was both relevant to and consistent with the policies and plans of the current government and ADB strategies and policies.18 The government and ADB viewed this sector as critically important as a source of employment and income for a large segment of the population and of exports and foreign exchange earnings for the economy overall. The project provided long-term finance for investment in the tree crop sector which was not readily available from other sources. The evaluation was unable to precisely determine the PDP’s relevance to ADB’s Strategy 2020.19 The 2014 midterm review of Strategy 2020 increases the focus on the agriculture and rural development sector, but the emphasis is on food security rather than the promotion of commercial industrial crops like tea and rubber.20 On the other hand, the 2015 agriculture and natural resources 2015–2020 sector operational plan lists agribusiness development as a key priority.21 30. The relevance of the project’s investment in the RPCs was diluted by a poor design that had too many components and included several ambitious policy requirements. The rigorous requirements imposed for RPC participation compounded these problems. The project design also included intended outputs that had no stakeholder support—such as the MIRC, the TASL, estate staff training, land use mapping, and out-grower studies. The broad scope and complex implementation arrangements made it difficult from the start to implement and manage the PDP efficiently. 31. The transfer of crop estates to the commercial companies using a 53-year lease while retaining land ownership with the government should have been taken into account in the project design. The government reforms had not provided freehold title to the RPCs, many of which considered the remaining lease period too short to provide sufficient incentive for investments or a basis for sound agribusiness management.22 Most commercial tree crops have a long gestation period before they come into production—6–7 years for rubber and 4–5 years for tea. This in turn requires that investors have a long period of production to pay back initial establishment costs. The

18 The PCR stated that the project’s goal—its impact, in ADB’s revised terminology—and objectives (its

outcomes) were consistent with the government's framework for poverty reduction and ADB’s country assistance plan.

19 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, 2008–2020. Manila. Long-Term Strategic Framework of the Asian Development Bank, 2008–2020. Manila.

20 ADB. 2014. Midterm Review of Strategy 2020: Meeting the Challenges of a Transforming Asia and Pacific. Manila.

21 ADB. 2015. Operational Plan for Agriculture and Natural Resources, 2015-2020. Manila.

22 The evaluation considered the fact that even shorter leases are the norm in some other tea-producing countries, but the IEM believes that this is not necessarily an efficient or effective means of land administration. Unlike the RPCs, for example, Sri Lanka’s smallholder producers have freehold of their tea and rubber lands.

Performance Assessment 9

project design included a complex funding mechanism based on a revolving fund, a new plantation fund, an apex bank, and the PFIs. The PRP had proved just a few years earlier that a much simpler funding model was a successful mode of operation. 32. As reported in the PCR, the project preparatory TA did not address the design risks or the need to ensure RPC ownership of the noninvestment components. It did not identify the influence of other government programs on the likely uptake of the housing loan scheme. It failed to deal with issues related to the PFI financial exposure to the sector at the time or with the government policies on land use and land-use diversification.23 33. The ad hoc inclusion during implementation of a road component to replace the housing credit component added more complexity. This additional component did not have a detailed design or detailed arrangements for supervising the selection of roads or their construction and operation and maintenance (O&M). 34. Given the project’s objective and the importance of the policy and institutional measures, ADB could have considered a smaller scope and a different financing modality. A sector development program might have been a better financing instrument, since the operation involved several policy actions. The significant and difficult policy requirements, such as the divestment of state enterprises and the reconstitution of industry regulatory agencies, should not have been included in a project in which ADB’s limited financial participation would give it limited influence. ADB was originally expected to contribute only 26% of the total project cost—$30.0 million of $114.4 million. This did not give ADB the leverage it needed to ensure that the necessary policy actions were undertaken or that the borrower complied with the ADB loan covenants. 35. The project’s intent was consistent with the government’s and ADB’s priorities, but the project’s design was weak overall. The PDP is rated less than relevant.

B. Effectiveness

36. The project’s intended outputs and outcomes and assessments by the PCR and PPER of their actual achievement are shown in the DMF in Appendix 1, and discussed below.

1. Outputs

37. Investment component. The evaluation team’s task of establishing the extent to which the project achieved the targets for the replanting and infilling outputs was greatly hindered since the monitoring component of the project was not implemented. ADB undertook no monitoring of these results of the planting support, and the PIU failed to undertake the field monitoring required by the loan covenants. Instead, the government’s and ADB PCRs simply estimated output figures for the areas planted to major crops (tea, rubber, coconut, and oil palm) from input credit line disbursement figures provided by DFCC Bank. The IEM learned through interviews that the PFIs did not in fact check the planting results in the field themselves and depended instead on

23 As the ADB PCR states in para. 68: “The core project components relating to investment and social

objectives were coherent and achievable. The inclusion of additional inputs for the development of TASL, marketing alliances, and demand-based public research were not client-driven nor demanded, (and) lacked appreciation of the commercial and proprietary rights attached to market relationships, and research findings as contributing factors for achieving competitive advantage.”


the RPC’s own reporting to determine the extent of development. The RPC figures indicate that infilling and replanting for tea and rubber nearly doubled in target areas as a result of the project. The PCR contends that replanting under the project covered about 7,861 ha estate plantation tea area and about 25,816 ha of estate plantation rubber area.24

38. The IEM’s own impression during the field visits to the six estates selected to represent those supported by the project was that no replanting of such extensive areas had recently taken place. This was particularly clear in the case of tea. The evaluation questions how the original replanting targets could have been doubled when only three-quarters of the credit line was used. This would have meant that the preparation consultants and the ADB preparation mission have greatly overestimated the replanting costs. The IEM attempted to check the replanting figures put forth by the PCRs by consulting official statistics published by the MPI and preparing a questionnaire for the project RPCs in which they were asked to provide their own data on areas replanted with funds from the credit line and the plantation fund.25 Only 6 of the 16 participating RPCs responded, so the evaluation did not take these data into account. Crop output data targets listed in the RRP, outputs reported in the PCRs, and total replanting recorded in official statistics are summarized in Table 1.

Table 1: Discrepancies in Major Output Data for the Investment Component (ha)

Crop Target in RRP

Reported Output in Text of Gov’t.

PCR and ADB PCR a

Recorded Total Replanting in

Official Statistics

b

Tea replanting and infilling 4,125 7,861 3,261 Rubber Replanting 11,250 25,816 25,078 Coconut Replanting 2,500 1,138 580 Oil Palm Development 2,500 2,478 438

ADB = Asian Development Bank, gov’t = government, ha = hectare, IEM = independent evaluation mission, RRP = report and recommendation of the President. a Based on DFCC Bank statistics, years not reported. b Government of Sri Lanka, Ministry of Plantation Industries. 2015.Statistical Information on

Plantation Crops 2013. Battaramulla, Sri Lanka. Replanting figures recorded for the years 2005–2010.

Sources: ADB. 1995. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Technical Assistance Grant to Sri Lanka for the Plantation Reform Project. Manila; ADB. 2010. Completion Report: Plantation Development Project in Sri Lanka. Manila; Government of Sri Lanka, Ministry of Plantation Industries. 2010. Project Completion Report, Plantation Development Project. Colombo; and Ministry of Plantation Industry statistics.

39. Official MPI statistics show much lower figures than do the two PCRs for the replanting or new planting of tea, oil palm, and coconut. They are also slightly lower for rubber. These figures cover all sources of funding and planting by all the country’s 23 RPCs, not just the areas replanted with project funding in the 16 RPCs that

24 The ADB PCR provides different figures in the text and in the DMF. The figures in the text are consistent

with the government’s PCR and are the ones that have been used for this analysis. 25 The spreadsheet questionnaire asked each respondent to identify its RPC parent company and shareholding

and to provide the available data for 1992–2015 on the size of the estate population and workforce, the gender composition of the workforce, and its total land and cultivated area. Each was also asked for the following data related to the major tree crops (tea, rubber, oil palm, coconut, other crops): cultivated area and production, net sales average and cost of production, labor cost as a percentage of the cost of production for each crop, the extent of replanting for each crop, the extent of replanting using ADB funds under the PRP and the PDP, and RPC financial information.


benefitted from the PDP. As shown in Table 2, long-term statistics on the total RPC estate tea and rubber areas reveal a continuing decline, rather than the maintenance of or an increase in areas planted that might be expected based on the PCRs’ reported planting figures. The only increases reported by the MPI were for oil palm.26

Table 2: Ministry of Plantation Industries Statistics on Total Regional Plantation Company Areas Planted to Tea, Rubber, and Oil Palm—2002, 2007, and 2013

(ha) Year Tea Rubber Oil Palm

2002 87,592 53,676 – 2007 82,513 47,948 5,408* 2013 71,757 46,313 7,937 ha = hectare, *= 2008 data Source: Government of Sri Lanka, Ministry of Plantation Industries. 2015. Statistical Information on Plantation Crops 2013. Battaramulla.

40. Given these findings, this evaluation has viewed the DFCC Bank figures and the PCR figures with some skepticism, but no clear finding is possible on the actual physical product of the project investment component. The evaluation concluded that the replanted rubber area may have come close to the RRP target, but that the targets for tea replanting and infilling, coconut development, and oil palm development did not. 41. The PCR notes only 43% of the expected diversification into forestry was achieved, diversification into other crops was slow, and non-crop diversification was sluggish (footnote 6, para.54).27 Construction of the crude palm oil factory was declined by ADB on environmental grounds, and was built using commercial funding. 42. Social, marketing, and institution-building outputs. Most of the DMF output targets for these components were either not achieved or the subcomponents were dropped. Over 7,000 workers’ line rooms were reroofed out of a target of 11,000. The housing component was dropped, and the additional road work that replaced the housing credit subcomponent was reported by the PCR to have exceeded original targets. The IEM verified the existence of some of these roads during field visits (Appendix 5). Some success was achieved by the workers’ training programs and estate certification subcomponents. The MIRC was never established, and the TASL was closed at the end of the project due to a lack of funds for its operation. 43. Policy measures. The project loan agreements included a series of policy measures that the borrower committed to undertake relating to the privatization of the 3 RPCs and other facilities that were still owned by the government. The loan agreements also called for the restructuring of sector management and regulatory agencies such as the Tea Board, the Rubber Research Board, and the Coconut Research Board, as well as the establishment of an industry umbrella board. These steps should have been established as project outputs and listed in the DMF, but they were not. The only policy covenant complied with was the establishment of the TASL, which did not survive project closure because it lacked funds to support its ongoing operations.

26 According to MPI statistics, in 2008, 4 RPCs were cultivating oil palm—Agalawatte, Elpitiya, Namunukula,

and Watawala. The extent of mature oil palm planted on these RPCs expended from 4,517 ha in 2008, to 4,582 ha in 2009, and to 4,761 in 2010, before declining marginally in 2012 to 4,719 ha.

27 The PCR reports only 1 RPC invested in estate bungalows and a tea sales center, and there was overall lack of interest by RPCs.


2. Outcomes

44. The project’s two intended outcomes were (i) the enhanced profitability of the plantation sector, and (ii) the improvement of living and working conditions for estate workers. 45. Enhanced profitability of the plantation sector. The DMF sets four indicators and objectives for achieving the profitability outcome: (i) the transformation of 23 RPCs from primary producers to agribusiness enterprises; (ii) reductions in production costs from SLRs107 per kilogram (kg) for tea and SLRs57 per kg for rubber; (iii) increases in average kg-per-ha yields from baselines of 1,500 for tea; and 900 for rubber; and (iv) increases in labor productivity from 18 kg per workday for tea and 6 kg per workday for rubber.28 Only 16 of the 23 RPCs participated in the project (Appendix 6).29 The evaluation did not take the production cost reduction goal into account, because it was based on 2002 costs and did not factor in inflation or future pricing—although all parties to the project agree that in real terms, the cost of production has increased rather than decreased as was intended. Yields have dropped or stalled rather than risen, as targeted. MPI statistics show average RPC yields during 2010–2013 of 1,300 kg per ha for tea (a 200 kg per ha decline from the baseline) and 900 kg per ha for rubber (unchanged). 30 Labor productivity for tea and rubber also remained unchanged after the project. 46. In terms of actual profitability, the IEM examined the financial statements of 14 of the 16 participating RPCs listed on the Colombo Stock Exchange.31 Figure A7 in Appendix 7 provides the findings.32 They showed that in nominal terms the profitability of the RPCs was close to SLRs1.0 billion in 2005 when the project started. Profitability increased to more than SLRs5.0 billion in 2011 at a time of record prices for tea and rubber but dropped back to slightly above SLRs1.0 billion in 2015. In real terms, relative to 2005, aggregate profitability of the 14 listed RPCs declined by more than 50% in 2015. This suggests insufficient crop and non-crop diversification.33 The annual profitability figures for the 14 RPCs overall mask the highly variable performances by individual RPCs during 2005–2015. Only 4 of the 14 RPCs reported profits in every year. The rest reported losses in at least 1 year, and some reported annual losses four times during the period. With the exception of 2008 and 2011, the 2 years when commodity prices were high, losses were reported in every year by at least 1 of the 14 RPC and by as many as 4 in some years.

28 A further indicator on reduced cost of production has not been taken into account since it is based on a

2002 cost without relation to inflation or future pricing. Nonetheless, all stakeholders agree that the cost of production has increased rather than decreased.

29 The target number was reduced because the government did not divest itself of three RPCs, as was required under the loan covenants. It continues to own them. The other four originally targeted RPCs were excluded because they did not agree to cap their management fees, which was a requirement for access to the project credit line.

30 Government of Sri Lanka, Ministry of Plantation Industries. 2015. Statistical Information on Plantation Crops 2013. Battaramulla.

31 The RPCs’ nominal profitability during 2005–2015 period was highly correlated with global commodity prices for tea (r = 0.59; p = 0.05) and rubber (r = 0.69; p = 0.02).

32 Most banks and Government agencies in Sri Lanka adopt the December 31 financial year end, while most private corporations adopt March 31. Since the RPCs were state-run enterprises until the early 1990s, their financial year ends either on December 31 or March 31. As of 2014, 9 of the 14 RPCs had switched over to the March 31 financial year end i.e., financial year 2015 refers to RPC year ending on 31 December 2014 or 31 March 2015.

33 The PCR notes that “RPCs have increasingly sought to develop business plans on a diversified income stream while retaining their focus on core production systems.” (footnote 6, para.65).


47. At the price levels for their products in 2015, the RPCs claimed in interviews with the IEM that they could no longer harvest their crops at a profit due to what they contend are high labor costs. They have requested financial assistance from the government. Overall, the evaluation found no evidence that productivity and profitability improved during or since the project. 48. Improved living and working conditions for estate workers. Achievement of the second outcome—the improvement of estate workers living and working conditions—was to be measured against a list of 10 indicator targets.34 These required the project to (i) increase the average monthly earnings of workers from a baseline of SRLs2,600; (ii) provide sanitary and rest room facilities on 300 estates and factories; (iii) promote worker participation through joint management committees, quality circle, and other systems on 500 estates; (iv) provide house ownership for 6,000 estate families; (v) upgrade 11,000 worker line rooms; (vi) provide 150 common sites for leisure and social welfare facilities; (vii) reduce workers’ sickness incidence from 8.5%; (viii) increase the birth weight and child weight of workers’ children to the national average; (ix) integrate estate workers into mainstream village life; (x) reduce the stigma of estate employment; and (x) reduce the outflow of estate labor force. 49. Of the indicator targets that can be quantified and meaningfully checked, only the increase in nominal worker salaries was achieved by the end of the project. By the time of the PCR mission in 2010, the nominal average had reached SLRs7,605 per month. As of 2015, it was about SLRs15,000 per month in nominal terms. Most of the targets were not achieved. The project even fell about 40% short of the line room reroofing target, although accomplishing it should have been straightforward. 50. The project is rated less than effective in achieving its intended outputs and outcomes. The PDP had some positive effect on renewing tea and rubber planting and extending oil palm areas, although the precise extent of this success cannot be determined for certain. It improved the financial soundness of some of the RPCs, and improved the lives of a portion of the estates’ resident population. However, it was less than effective achieving either of the intended outcomes of enhanced profitability in the plantation sector as a whole and improvement of the living and working conditions of estate workers.35

C. Efficiency

51. This project performance evaluation could not calculate an economic internal rate or return (EIRR)36 due to the uncertainty over the extent of the intended benefits and outputs actually delivered under the project, and the lack of data due to the executing agency’s and ADB’s lack of monitoring. ADB’s operations department had lost the spreadsheets used for the PCR economic analysis, so the EIRR reported in the PCR could not be verified by the evaluation.

34 The evaluation found that the PCR had made changes in the RRP’s project framework by switching several

of the outcome indicators from the outcome section in the DMF and listing them as output indicators. The IEM has based its analysis on the indicators in the PCR DMF.

35 Workers continue to leave the estates. During discussions with the IEM, stakeholders reported that only about one-quarter of the population still residing on the estates remain employed by the estates, and these workers tend to be comparatively old. For this reason, their output is still low compared with workers in other tea-producing countries.

36 The evaluation also noted that project-wide EIRRs would not normally be calculated for credit lines to development banks, nor for social development activities such as those in which this project was primarily involved and which had no direct financial or economic output. The former would be tested on the basis of one or more representative models, and the latter on a least-cost basis.


52. From a process efficiency perspective, the evaluation found the benefits slow to emerge. The project was approved in 2002, but most implementation took place from 2006–2009. Delays were due to (i) difficulties establishing the apex agency and the PFIs for disbursing the funds, (ii) problems setting up the plantation fund, (iii) the reluctance of RPCs to provide counterpart funds for social improvements, (iv) the dropping of the housing component and its replacement by the road upgrading component, (v) and the reluctance of stakeholders to participate in several of the marketing initiatives and institutional development activities. Benefits were further eroded by the cancellation of part of the ADB loan and the closure of the project with part of the social development component still uncompleted.37 Only $67.2 million of the total anticipated project cost of $114.4 (59%) was invested, of which ADB funding constituted $19.0 million.38 53. The project is rated less than efficient.

D. Sustainability

54. No specific measures were included in the project design to ensure sustainability of any component. There were no measures to ensure that the increased planting to be provided by the investment component would be maintained by the estates and RPCs involved; or that the roofing provided, civil works undertaken, equipment purchased, roads improved, and agencies established under the project would be maintained after the project was completed. 55. Investment component. The evaluation was unable to verify the financial internal rates of return (FIRRs) reported in the PCR because the operations department lost the spreadsheets used to generate these estimates. As a proxy, the evaluation prepared model FIRRs on a per-hectare basis for the crops that were to be planted (Appendix 8). The models returned FIRRs of 4.57% for tea, 15.44% for rubber, and 42.92% for oil palm. This means that it would have been profitable for RPCs to participate in the project to replant rubber and oil palm even given the current and expected reduced international market commodity prices for these commodities.39 The analysis found tea replanting to be financially viable, although this viability was only marginal and highly sensitive to price movements and costs of production. 56. The project RPCs and the estate plantation sector as a whole have mixed prospects for achieving financial sustainability. Only a few of the participating RPCs have been consistently profitable. Most RPCs are owned by large holding companies, and they can potentially access working capital from their parent firms during periods of financial stress. All 16 participating RPCs operated profitably during years when prices for their commodities were high. All have survived the current low prices so far, although they are seeking government support. The estates that the IEM visited had diversified from commodity tea and rubber into alternative crops (particularly oil palm) or developed special products. These were green tea, other currently highly valued types of tea, and crepe rubber, all of which now fetch higher domestic and world market prices than do commodity tea and rubber. All of the six estates the IEM visited

37 The ADB PCR notes that “savings of SDR9.146 was cancelled on 23 April 2008 in response to a request

from the government, and reallocated to the Sustainable Power Sector Development Project.” The government’s PCR reports that additional funds had to be found from other projects to complete the activities that were already underway.

38 Out of the total ADB loan approval amount of $30 million. 39 The weighted average cost of capital was estimated at 4.15% on an after-tax basis in real terms.


were well-run and employing sound management practices adopted from their parent companies. 57. Despite a good performance by a few RPCs, the traditional tree crops estate plantation sector is in decline, and the outlook is not promising (Table 2). The area planted to tea on the RPCs shrank by 20% during 2003–2013, and land planted to rubber contracted by 15%. One bright spot is oil palm; planting by the RPCs is expected to continue expanding and reach 10,000 ha by 2016 from about 7,900 ha in 2013. Given commodity price forecasts and the financial state of some of the RPCs, there is a low probability that the majority will be profitable in the future without external support. The industry is unlikely to disappear altogether, however. 58. Social, marketing, and institutional strengthening. The PCR assumed that the achievements under the social, marketing, and institutional outputs of the project would be sustainable. The IED evaluation found this to be unlikely. The O&M required to sustain the project roads and social civil works has not been guaranteed. The continuation of the public good provided by these facilities demands public sector funding for their maintenance, and no provision was made for this in the loan agreement.40 The main institutions that were to be created by the project—TASL and the MIRC—cannot be sustained because one closed due to lack of funds, and the other was never established. 59. The project is rated less than likely sustainable.

E. Overall Assessment

60. The project is rated less than successful (Table 3). The evaluation rated it less than relevant because of weaknesses in the design. The design included counterpart funding conditions for beneficiaries that discouraged participation by intended stakeholders. Parts of the complicated funding arrangements were not acceptable to stakeholders, and the arrangements as a whole were too ambitious, multifaceted, and complex. The project was rated less than effective because it failed to achieve most of the targets for its two intended outcomes. It fell particularly short in its attempts to enhance the profitability of the plantation sector. It was rated less than efficient due to the delays in realizing the project’s benefits, an inability to spend project funds as appraised, and the limited achievement of the intended outcomes and outputs. The project was rated less than likely sustainable due to the low profitability achieved by many of the participating RPCs, the continuing contraction of the tree plantation sector, and the lack of O&M arrangements. A majority of the project RPCs are unlikely to be profitable, sustainable entities in the future without external support.

Table 3: Overall Performance Assessment

Criterion Weight Assessment Rating Value

Weighted Rating

Relevance 25% Less than relevant 1 0.25 Effectiveness 25% Less than effective 1 0.25 Efficiency 25% Less than efficient 1 0.25 Sustainability 25% Less than likely 1 0.25 Overall Rating Less than successful 1.00

Note: Highly successful (>2.7), successful (2.7 > S >1.6), less than successful (1.6 > LS > 0.8), unsuccessful (<0.8) Source: Asian Development Bank Independent Evaluation Department.

40 The IEM learned that some of the roads are being maintained by the local government authorities.

CHAPTER 4

Other Assessments

A. Impact

61. From available evidence, the evaluation concluded that the project did not lead to the changes in the policy environment to which the borrower committed in the loan documents, or to better or sustained productivity and profitability in the tree plantation sector. 62. The wholesale restructuring of the sector envisaged in the RRP has not occurred—nor was this likely given the less-than-relevant design of the project, the comparatively modest degree of project funding (and thus of leverage) by ADB, and the lack of government and stakeholder support for most of the reform measures proposed in the project design. 63. The expected impact (or goal) stated in the RRP and its DMF (project framework) to “ensure the plantation sector's long-term sustainability without further external assistance” was overambitious given the scale of ADB investment. More could have been achieved if a less ambitious and more focused project had been designed and implemented. Given the difficult outlook in the tea commodity market, the project design could have focused more on facilitating crop diversification. 64. In terms of social impact, some estate workers and their families benefited from (i) better roads and communications, (ii) improved living conditions due to improved roofs in their residences, (iii) enhanced social interaction due to training in financial management, (iv) increased gender sensitivity and alcohol abuse prevention, and (v) better working conditions through improved field and factory facilities and the provision of ergonomic equipment. To what extent these improvements will last is not clear, because little monitoring has been done and the project sustainability is less than likely. Roads and trails provided under the project are likely to have had a beneficial impact by enhancing the lives of the estate population through improved access to such services as education, health and markets; but the only evidence of this is anecdotal. 65. The project intended to have a positive environmental impact through land use mapping and afforestation. Only a small percentage of estate land was mapped.41 While the PCR and stakeholders report that about 4,000 ha of forest trees were planted under the project, there is no information on the actual number of trees or where they might have been planted. The evaluation found no reports of negative environmental impacts, and it is unlikely any occurred because most of the planting was to be undertaken on land already or previously under tree crop cultivation. In light of these findings, the impact of the project is assessed as moderate.

41 The PCR reports land-use surveys were conducted on 31,635 ha (17%) of the 190,000 ha targeted in the

RRP.

Other Assessments 17

B. Asian Development Bank and Borrower Performance

1. Asian Development Bank Performance

66. The project design was too ambitious and included many diverse project elements and policy conditions. Several of the loan’s policy covenants were not enforced. The project did not deliver many of the elements under the social and environmental component, the marketing initiatives component, and the institutional and project management component. These shortcomings indicate there was inadequate consultation with stakeholders during the design phase to gain an understanding of realities on the ground that could prevent achievement of the project’s intended objectives. Many factors and vested interests can undermine delivery of outputs and outcomes of development projects in Sri Lanka. In particular, it was not realistic for ADB’s project preparation team to think that the cash-strapped RPCs would provide up to 50% of the cost of investment in social components. 67. The PCR records that during the 6-year implementation period ADB fielded two special project administration missions, three loan review missions, one midterm review mission, and one project completion review mission.42 The first loan review mission was fielded in 2005, 3 years after project approval, and the midterm review mission was fielded in Dec 2007.43 The complexity of the project and known implementation problems warranted more timely ADB supervisory input than was provided. 68. Shortcomings in ADB’s administration of the project contributed to its poor performance. ADB allowed loan disbursements to continue even when the borrower did not comply with the covenant on establishment of a project monitoring system; this led to uncertainly about project outputs and benefits. 69. The evaluation concludes that the performance of ADB during project preparation and implementation was less than satisfactory.

2. Borrower Performance

70. The PCR said that the staffing by the PIU under the executing agency (MPI) was often inadequate, and that its performance of its core functions of monitoring, evaluation, and coordination were not effective. It reported that the key problems related to the PIU’s lack of a systematic project-wide management information system and weakness in the design and management of its impact assessment. This resulted in the prevailing uncertainty about the actual outputs and benefits eventually delivered by the project. The PCR said that the delays in establishing the revolving fund which resulted from unclear fund establishment requirements, delayed some investment programs. From the IEM’s point of view, the most serious deficiency in this list was the borrower’s failure to comply with the covenant on project monitoring. This has made it difficult to assess what the project actually achieved. 71. The borrower did not comply with a significant number of key policy covenants. This made three of the originally targeted 23 RPCs ineligible to take part in the project and forced the abandonment of several marketing and regulatory reforms integral to the project objectives. These difficulties arose because the government that signed the loan agreement was replaced by another in 2005, after project approval,

42 The 2 special project administration missions were fielded in 2004 for a combined total of 5 person days. 43 The midterm review mission was originally scheduled for 2005.


and the newly elected government did not agree with the previous government’s approach to privatization and the restructuring of the sector. Given these circumstances, the new government could have renegotiated the loan agreements rather than accepting the loan funds and conditions and then refusing to comply with them later. 72. The executing agency generally followed the agreed arrangement during implementation. According to the PCR, the turnover of senior staff at the PIU was high and replacement slow. The PIU's performance was hampered by the delay until 2006 in the implementation of a majority of the social and environmental program components due to the RPC’s reluctance to contribute 50% of the cost. 73. The PCR rated the borrower’s performance partly satisfactory. Based on the information available, the evaluation team confirms this view and borrower performance is rated less than satisfactory.

CHAPTER 5

Issues, Lessons, and Follow-Up Actions

A. Issues

1. Sustainability of the RPCs Uncertain

74. The RPCs account for about 30% of the production of tea and rubber in the country and 50% of the processing. They are a major source of foreign exchange and employment. They play a key role in ensuring product quality in the country’s economy both by producing high-quality goods (such as high-altitude teas and crepe rubber) and by maintaining quality control during processing. These value-added activities are an important part of Sri Lanka’s economy, agriculture sector, and social fabric. 75. The industry faces systemic issues that hurt its performance. First, the prices for its products are volatile on international markets. Second, it is constrained by a traditional and highly restrictive labor system that imposes very high costs that comparative industries in competing countries do not have to bear. Third, it is subject to greater government-imposed constraints than are its competitors in other countries. These include legal and policy restrictions that affect marketing, management, the crops RPCs can grow, and land ownership. The fourth major issue is the RPCs difficulty in accessing long-term credit in Sri Lanka. Many of these issues are political and will require political solutions and a long time to be resolved.

2. Status and Living Conditions of the Estate Workers

76. Estate workers constitute one of the poorest segments of Sri Lankan society. The status and living conditions of this minority population have been major concerns. The country’s international development partners have paid particular attention to trying to improve their standard of living, as ADB did in its design of the PDP. However, the need to assist them can conflict with the need to give incentives to firms to increase productivity in the plantation sector. 77. Education levels in the estate population have improved through the efforts of development partners and the government. Many of the younger generation have left the estates to find employment in urban areas and have integrated into Sri Lanka society. Poverty rates in the estates nonetheless remain higher than in other rural and urban areas.44 Despite increases in estate worker wages during the project period,

44 Based on data from the 2012/2013 government’s household income and expenditure survey, the poverty

headcount based on the national poverty line was 10.9% in the estates, compared with 7.6% in rural areas and 2.1% in urban areas. The poverty gap index was also higher in the estates, at 1.6%, compared with 1.4% in rural areas and 0.3% in urban areas.


estate household incomes are still lower than national and rural averages.45 They also lag these averages on the indicators for non-income poverty, health, nutrition, and education.46 The quality of housing and infrastructure in the estate sector remains poor, and access to high-quality health and education services is still lacking.47 78. The future of those who remain on the estates will depend on the estates’ profitability. Because labor costs make up a significant proportion of the cost of production, more efficient value chains must be developed.48 If the estates and RPCs can reduce overall labor costs and better commodity prices return, they will operate profitably and be able to pay wages that allow them to retain productive labor.

3. Considering Future ADB Involvement to help Workers

79. The estate worker population exceeds 200,000. With families, this demographic group includes more than 1 million of the country’s most socially and economically disadvantaged people. As a result, the plantation estate sector cannot be ignored. On the other hand, ADB’s past and often difficult experience in the sector and the industry’s persisting structural deficiencies suggest that ADB must be cautious when considering any further financing in the sector in the absence of major policy and structural reform.

B. Lessons

1. The Importance of the Socioeconomic, Institutional, and Policy Environment to Project Design

80. The failure of the project to achieve its intended impact, and limited achievement of expected outcomes shows that ADB needs to fully assess and understand all socioeconomic, institutional, and policy factors when it prepares and appraises projects. If these factors had been properly assessed in the case of the PDP, ADB could have lowered the outcome expectations. It could have adapted the design to match the capacity of the implementing agencies and stakeholders. With a full understanding of the difficult policy environment and entrenched obstacles, ADB could have imposed stricter policy requirements on the government and actually enforced these (and other loan covenants) as prior conditions for disbursements of the loans. One such policy requirement could have encouraged more investment in the RPCs by lengthening the lease period for the government-owned RPC estates’ lands. If these steps had been taken, the project might have been more successful.

2. Need to Understand the Limitation of Project Modalities

81. The complexity of the PDP’s design was a weakness. As a general principle, projects should aim for simple, straightforward outputs and outcomes and involve uncomplicated implementation arrangements and a small number of implementing agencies if they hope to be successful. Projects must be designed in a way that makes it feasible for national staff (generally government officers) who often have limited

45 Based on 2012/2013 household income and expenditure survey, mean household income in the estates

was estimated at SLRs30,220, compared with averages of SLRs45,878 at the national level, and SLRs41,478 in rural areas.

46 Levels of of child and maternal malnutrition are higher in the estates. 47 Over two-thirds of the estates’ population still live in line rooms and are less likely to have drinking water,

sanitary facilities, or electricity within the household. 48 The Planters’ Association of Ceylon estimates that labor costs account for 70% of the cost of production for

tea, 50% for rubber, and 25% for oil palm.

Issues, Lessons, and Follow-Up Actions 21

resources and capabilities to manage and implement them. They must also be workable within the established national practices and procedures. The PDP confirmed that preparing a project that has dozens of diverse activities to be implemented by a variety of agencies and seeks to set up new agencies with little stakeholder support, can lead to limited project success.

3. The Need for Adequate Staff Input and Maintenance of Project Records

82. The project’s midterm review was undertaken 2 years late and almost at the end of the project period at appraisal. This absence of timely oversight and ADB’s poor curating of the project data and documents contributed to the project’s limited success. ADB’s business processes could be improved to retain key project financial and economic analyses records systematically in electronic format.

C. Follow-Up Actions

83. In the wake of the adjustments of ADB’s 2020 priorities under the midterm review and under ADB’s revised interim country partnership strategy (CPS), ADB support for agriculture in Sri Lanka may once again be an option. ADB’s main thrust in the agriculture sector is expected to be lending for food security, but the new agriculture sector operational plan lists agribusiness development as a priority. Given the importance of the tree crop sector to Sri Lanka’s economy and its income generation and employment possibilities, ADB could certainly consider reviving its activities in the tree crop and plantation sectors. This evaluation report suggests that in considering any tree crop agricultural support ADB recognize that the country’s smallholders produce about two-thirds of the sector’s output, are more productive, and account for a greater proportion of the population than the estate plantations. 84. These issues should be taken into account during the preparation of the CAPE, and when preparing the next CPS. Any future ADB financing provided to the RPCs probably should be through nonsovereign operations.

Appendixes

APPENDIX 1: DESIGN AND MONITORING FRAMEWORK

Design Summary Project Targets (Verifiable

Indicators) Achievements at PCR Stage Achievements at PPER Stage

Remarks 1. Goal (Impact)

1.1 Long-term sustainability of the plantation sector without external assistance

Sustained business operations of 23 RPCs

16 RPCs participated. Their ability to finance adequate replanting, infrastructure maintenance, and social programs is still weak. Four RPCs have failed to achieve cash surpluses.

The viability and sustainability of the RPCs is still in question. Since 2011, prices of tea and rubber have collapsed to below the cost of production and are expected to remain at these levels for some years to come.

Sound financial position of 23 RPCs

Of the 16 RPCs, 12 achieved profitability in 2009 based mostly on record tea and rubber prices.

In nominal terms, the cumulative profitability for the 14 publicly listed RPCs was close to SLRs1.0 billion in 2005 when the project was initiated. This increased to more than SLRs5.0 billion in 2011 at a time of record prices for tea and rubber and then dropped again to only a little more than SLRs1.0 billion in 2015. In real terms, compared to 2005, cumulative profitability declined by more than 50% in 2015.

Productivity gains from project investment are not expected for 5–7 years.

Any tea which was planted under the project is now coming into full production and will likely be harvested in preference to old areas with declining yields and quality. Rubber areas may or may not be tapped, depending on price trends. Overall rubber production in the country dropped from 158,000 metric tons in 2011 to 130,000 metric tons in 2013, probably due to declining prices. The estate plantation area under tea and rubber has decreased significantly between 2002 and 2013 despite replanting under the project.

24 Appendix 1



Remarks 2. Objectives (Outcomes)

2.1 Enhance profitability of the plantation sector

Transform 23 RPCs from primary producers to agribusiness entities

Most RPCs remain plantation companies. Value addition has increased, but this remains limited by government sector policy. Quality certification established for 61 factories, while minor upgrading to meet quality standards has been implemented in 118 factories.

While several RPCs have improved their management practices and efficiency, most still remain focused on the production of bulk products. In reality, not much scope exists for value addition in the production of any of the four major crops concerned (tea, rubber, oil palm, and coconut) given the markets that they serve. Moreover, current government policy restricts changes from one crop to another, and it is even difficult to obtain approval for the replacement of low-return rubber with higher-return oil palm. Factory upgrades seem to be effective.

Reduce cost of production from SLRs107/kg for tea and SLRs57/kg for rubber

Cost of production increased to SLRs332/kg for tea and SLRs178/kg for rubber, attributable to increased fertilizer and labor costs.

In nominal terms, by 2014 the costs of production increased to SLRs459/kg for tea and SLRs334/kg for rubber. This was due mainly to very significant increase in labor costs, which make up 70% of the production cost.

Neither the RRP nor the PCR specified if the costs are expressed in nominal or real terms. The PPER made the assumption that all costs were reported in nominal terms.

Increase average yields from 1,500 kg/ha for tea and 900 kg/ha for rubber

Yields decreased to 1,124 kg/ha for tea and 733 kg/ha for rubber in 2009 due to drought, the global economic crisis (reduced fertilizer use due to price escalation), and industrial action. In 2008, tea yields were 1,419 kg/ha, and rubber yields were 900 kg/ha.

Tea estate yields from 2010–2013 averaged 1300kg/ha, while rubber yields averaged 900 kg/ha.

Increase labor productivity from 18 kg/workday for tea and 6 kg/workday for rubber

Minimum labor productivity is set at 16 kg/day for tea, but additional kg are available at a different wage rate.

The mandated production base for tea is still 16kg/day, but incentives are provided by some estates for higher plucking amounts. The basic daily tapping rate for rubber is still 6kg/day, but incentives also apply for increased

Design and Monitoring Framework 25



Remarks tapping levels. Some estates are experimenting with novel harvesting techniques and arrangements to reduce harvesting costs.

2.2 Improve living and working conditions of estate workers

Increase workers’ average monthly earnings from SLRs2,600

With current negotiated wages up to SLRs405/day for more than a minimum of 19 days per month, monthly income increased to SLRs7,695.

In nominal terms, current monthly income for estate workers is SRLs15,500 based on a 25-day month.

Neither the RRP nor the PCR specified if the income is expressed in nominal or real terms. The PPER made the assumption that they were reported in nominal terms.

Promote workers’ participation through joint management committees, “5S” quality circle, and other systems on 500 estates

Joint management committee concept changed to wider worker empowerment strategies.

The IEM was not able to observe any significant impact for this outcome. It noted a high degree of unionization among the estate workers.

Improve access to workers’ homes and other facilities

A road and track upgrading component was added to the project and successfully completed. Rehabilitation of 446 km of tar and concrete roads, 74 km of gravel roads, and construction of 47,187 linear feet of concrete footpaths.

Most stakeholders indicated that the road and track component had a significantly positive social impact, and that the RPCs were responsible for their upkeep. Since most of the roads were concrete, they are likely sustainable for at least 10 years from the time they were constructed.

Reduce workers’ sickness incidence from 8.5%

Although current data are unavailable for the estate sector, estates report significant increases in attendance of workers. Nutritional programs targeting mothers and children have improved the overall the physical condition of children.

Data reported in the 2012/2013 household income and expenditure survey indicate that 7.8% of estate workers were hospitalized in the survey year.

Increase birth weight and child weight to national average Integrate estate workers

Nutritional programs targeting mothers and children have improved the overall the physical condition of children.

The rates of underweight children in Nuwara Eliya District (25.5%) and Badulla District (32.8%) where the majority of estate workers live is still

26 Appendix 1



Remarks into mainstream village life.

Workers are encouraged to undertake additional income-generating activities in villages.

above the national average of 21.1%. A significant but not quantifiable percentage of the estate population undertakes economic activities outside of the estates.

Reduce outflow of estate labor force

Improved living environments, working conditions, and higher wages have reduced the tendency to migrate out of estates.

Outmigration remains a problem. About 61% of the remaining resident estate workers are 30–60 years old and unlikely to leave the estates.

3. Outputs

3.1 Investment Component Establish Plantation Fund A plantation fund was established, and SLRs535 million disbursed.

The plantation fund has been liquidated, and funds are now with DFCC Bank pending return to the government treasury and repayment to ADB.

Core Activities Replant 1,750 ha of tea, infill 2,375 ha of tea, and replant 11,250 ha of rubber

7,861 ha of tea replanted and infilled, and 25,816 ha of rubber replanted.

The actual extent of planting under the project could not be verified. Areas given in the PCR are based on DFCC figures, but these were not field-checked and are not consistent with official government replanting statistics or the IEM’s field observations.

Replant or rehabilitate 2,500 ha of coconut

1,138 ha of coconut replanted. Official national statistics indicate very little coconut land was replanted.

Consolidate 14 tea factories

2 factories consolidated, 27 factories upgraded, and 6 factories automated.

No change.

Develop 40 rubber effluent treatment facilities

All participating estates were required to install effluent treatment as a condition of participation in the project, but no discussion in PCR if this requirement was met.

No change.




Remarks Crop diversification and forestry

Develop 9,500 ha of forest, 2,500 ha of oil palm, and 2,400 ha of other crops

4,114 ha forest developed (43% of target), 2,478 ha of oil palm developed (99%), 646 ha of other crops developed (27%), and 187 ha of crop diversification and forestry undertaken (43%).

The figures for forest development and oil palm plantation cannot be verified, but those for oil palm are particularly questionable in view of official statistics and a government policy that restricts oil palm seed imports and the conversion of rubber lands to oil palm. Fuelwood trees (mostly eucalypts) planted at altitudes over 5,000 feet (about 1,500 meters) cannot be harvested due to environmental regulations. Trees planted below 5,000 feet may be harvested, but the approval process is long and complicated and may take more than 1 year. RPCs therefore prefer to purchase fuelwood for the tea factories from outside sources. The returns on the forestry development was therefore not realized despite a significant development cost.

Noncrop diversification and estate tourism

Refurbish 20 estate bungalows, rehabilitate 20 mini-hydro schemes, and construct 1 crude palm oil factory

Only one RPC invested in estate bungalows and a tea sales center. Overall lack of interest by RPCs.

No change.

The palm oil factory was declined by ADB on environmental grounds and was built using commercial funding.

No change. ADB had required an environmental clearance in order to approve funding for the factory. The responsible government agency had indicated that under their regulations clearance was not required and therefore did not produce the required documentation.

Marketing initiatives Establish 5 joint marketing alliances

One RPC invested in marketing initiatives. Overall lack of interest.

No change.

28 Appendix 1



Remarks 3.2 Social and Environmental Programs

Workers’ housing and amenities

Upgrade and rehabilitate estate roads by means of tar and concrete, and construct concrete footpaths

446 km of tar and concrete roads and 74 km of gravel roads rehabilitated.

The bulk of the roads (400 km) were minor internal estate roads 8 meters wide and constructed of concrete. The IEM reported that most of the roads it observed were still in operable condition.

Construction of 47,187 linear feet of concrete footpaths.

Reroof 11,000 line rooms, and construct 150 common site services for housing

7,413 line rooms reroofed (67%). The roofing on reroofed line rooms seen by the IEM was still in good condition.

Common site services were not constructed due to non-implementation of the associated housing loan scheme.

No change.

Construct 30 playgrounds 8 playgrounds constructed (27%).

No change.

Construct 300 restrooms and sanitary facilities

312 restrooms constructed. Those observed by the IEM were simple open shelters, but estate staff indicated they were appreciated by the workers.

Construct ramps and drains for reroofed housing units

Ramps and drains for 700 housing units completed.

No change.

Construct new preschools 4 new preschools constructed.

No change.

Construct or renovate water supply schemes for workers housing

6 water schemes constructed or renovated.

No change.

Social Programs Procure 60,000 units of ergonomic equipment

Allocation fully utilized.




Remarks Train 30,000 workers on gender issues

18,988 workers provided with gender training.

PHDT indicated that lectures included both gender issues and alcohol abuse, and that statistics show that the incidence of each has declined on the estates.

Train 30,000 workers in skills to strengthen housing cooperatives

21,000 workers trained in estate worker institutions (70%).

No change.

Train 30,000 workers on household cash management

30,989 workers trained in household cash management (100%).

No change.

Train 30,000 participants in alcohol abuse prevention programs

30,009 workers trained in alcohol abuse prevention programs (100%).

PHDT indicated that lectures included both gender issues and alcohol abuse, and that statistics show that the incidence of each has declined on the estates.

Establish 250 social development centers

30 social development centers established (12%), but RPCs unwilling to contribute 40% of cost.

No change.

Orient 600 managers on human resources development and 600 estate staff on social development

196 managers received orientation (33%), while no estate staff members received orientation.

No change.

Environmental Initiatives Conduct land-use capability survey on 190,000 ha

31,635 ha were surveyed (17% of target).

No change.

3.3 Marketing Initiatives

Research and Development Support collaborative product and research and development programs

3 research projects implemented on pesticide residues in tea, leaf protein from refuse tea, and tea

No change.

30 Appendix 1



Remarks extract for value-added products.

Establish marketing intelligence and resource center

Center not established. No change.

Automate tea auction and electronic trading

Automation of auctions not undertaken due to reluctance by key stakeholders in the trade.

No change.

Compliance of 100 estates with social and environmental certification requirements

118 estates obtained quality certification (118%).

No change

Certify 50 factories for fair trade

As far as the IEM could ascertain, no factories had been certified for fair trade although several had been certified for environmental soundness.

3.4 Institutional Strengthening and Project Management

Support for industry umbrella body

Establish umbrella body, and ensure that it functions

Umbrella body (Tea Association of Sri Lanka) supported during project but eventually closed down due to inability to finance itself.

Funding by the government of the umbrella body through taxes was one of the policy loan covenants that it did not comply with.

Consulting inputs Provide 23 person-months of international and 24 person-months of national consulting services to supplement expertise of RPCs

36 person-months of national consultants utilized.

No change.

Training Train 1,000 management staff members and 30,000 workers

Training provided for 3,732 management staff members, 1,543 estate staff members, and 5,859 estate workers.

No change.

Support for developing and Develop workable models Not implemented due to lack of No change.




Remarks subleasing outgrower models

for subleasing RPCs’ land and outgrowers

stakeholder support.

Project management Strengthen project implementation unit

Project implementation unit affected by high turnover of senior staff.

No change.

4. Activities 4.1 Investment Component Provide $66.5 million in

credit and equity and quasi-equity instruments

$41.6 million in commercial investments provided.

This figure should be reduced to about $39.0 million, since about half of the plantation fund was used for balance sheet restructuring rather than investment.

4.2 Social and Environmental Programs

Workers’ housing amenities Provide $6.6 million for estate roads, $3.7 million for workers’ amenities, $4.1 million for social development programs, and $1.8 million for land-use capability surveys

Actual expenditure of $13.2 million for workers’ amenities, $0.4 million for social programs, and $0.3 million for environmental initiatives.

No change.

Social programs

Environmental initiatives

Component dropped from project

4.3 Marketing Initiatives Research and Development Provide $1.5 million for

product research and development

SLRs40 million was provided for product research and development.

No change.

Support for ethical trade initiatives

$1.9 million for marketing intelligence and resource center, $0.5 million for automated tea auction, and $2.5 million for support to nongovernment organization initiatives and fair trade labeling

$0.017 million was provided for alternative marketing initiatives.

No change.

32 Appendix 1



Remarks 4.4 Institutional

Strengthening and Project Management

Support for umbrella body Provide $1.8 million for support to umbrella body

$0.46 million was provided to the Tea Association of Sri Lanka.

The association is now defunct.

Technological support Provide $0.7 million for consultancy inputs

$0.112 million was provided for consultancies.

No change.

Training Provide $ 2.9 million for management training

$0.424 million was provided for training.

No change.

Support subleasing grower models

Provide $0.4 million for developing subleasing and out-grower models

This component was dropped due to lack of stakeholder interest.

Project management Provide $1.2 million for project management

$1.168 million was provided for project management.

No change.

ADB = Asian Development Bank, Ha = hectare, kg = kilogram, km = kilometer, PCR = project completion report, PPER = project performance evaluation report, RPC= regional plantation companies. Sources: ADB. 2012. Completion Report: Plantation Development Project. Manila; and ADB Independent Evaluation Department.

APPENDIX 2: PROJECT COST ESTIMATES

Appraisal Actual Component Foreign Local Total Foreign Local Total

Exchange Currency Cost Exchange Currency Cost A. Investment Component 21.60 44.90 66.50 20.10 29.80 49.90

Subtotal 21.60 44.90 66.50 20.10 29.80 49.90 B. Social and Environmental Programs 1. Workers' housing loans 1.90 4.60 6.50 0.00 0.00 0.00 2. Workers' amenities 1.00 2.70 3.70 2.30 9.20 11.50 3. Social development programs 0.80 3.30 4.10 0.00 0.50 0.50 4. Environmental initiatives 0.00 1.80 1.80 0.00 0.20 0.20

Subtotal 3.70 12.40 16.10 2.30 9.90 12.20 C. Marketing Initiatives 1. Research and development 0.30 1.20 1.50 0.25 0.70 0.95 2. Marketing intelligence and research center 0.00 1.90 1.90 0.00 0.00 0.00 3. Support for automated tea auctions 0.40 0.10 0.50 0.00 0.00 0.00 4. Support for alternative marketing Initiatives 0.00 2.50 2.50 0.46 1.40 1.86

Subtotal 0.70 5.70 6.40 0.71 2.10 2.81 D. Institutional Strengthening 1. Support for industry Umbrella body 0.10 1.70 1.80 0.10 0.42 0.52 2. Consulting inputs 0.50 0.20 0.70 0.00 0.10 0.10 3. Training 0.50 2.40 2.90 0.10 0.30 0.40 4. Support for developing subleasing and outgrower model 0.00 0.40 0.40 0.00 0.00 0.00 5. Project management 0.40 0.80 1.20 0.20 0.96 1.16

Subtotal 1.50 5.50 7.00 0.40 1.78 2.18 Total base costs 27.50 68.50 96.00 23.51 43.58 67.09 Physical contingencies 1.40 3.40 4.80 0.00 0.00 0.00 Price contingencies 3.20 8.10 11.30 0.00 0.00 0.00 Interest during construction 2.30 0.00 2.30 0.12 0.00 0.12 Total 34.40 80.00 114.40 23.63 43.58 67.21

Source: Asian Development Bank estimates.

APPENDIX 3: IMPLEMENTATION SCHEDULE (APPRAISAL AND ACTUAL) PROJECTED AT APPRAISAL ACTUAL

Task Description 2003 2004 2005 2006 2007 2008 2003 2004 2005 2006 2007 2008 2009

1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

A. Project Management 1. Strengthening PIU

2. Establishment of implementation procedures

B. Investment Component 1. Establishment of the plantation fund 2. Provision of credit line through PFIs and equity through plantation fund

C. Social and Environment Component

1. Self-Help housing 2. Reroofing schemes

3. Common sites serviced 4. Social awareness programs 5. Strengthening of EWHCS

6. Gender programs 7. Training on household cash management

8. Worker welfare facilities

9. Land survey D. Marketing Initiative 1. Research and development

2. Ethical trade initiatives 3. Support for alternative marketing initiative—Quality cert.

E. Institutional Development 1. Support for industry federation of associations

2. Technological support to RPCs (Consulting Services)

3. Technical training for workers 4. Training on HR for management and staff 5. Study on outgrower systems and pilot scheme

S EWHCS = estate worker housing cooperative scheme, PFI = participating financial institution, PIU = project implementation unit, RPCs = regional plantation companies. Source: ADB. 2010. Completion Report: Plantation Development Project in Sri Lanka. Manila.

APPENDIX 4: MAJOR LOAN COVENANTS NOT COMPLIED WITH BY THE BORROWER

Table A4.1: Major Loan Covenants for Loan 1913 Not Complied With by the Borrower

Reference in Loan Agreement

Covenant Expected Compliance Date

Status at Project Completion

Schedule 6, para. 9

The Borrower shall ensure that the PA (Sri Lanka Planters Association) shall contract NGOs satisfactory to the Bank for the social and environment programs, fair trade labeling, and strengthening of the EWHCS subcomponents based on their local knowledge, experience in the plantation sector and with international fair trade measures, and experience in participatory delivery mechanisms in demand driven project interventions. The PA, as representatives of the RPCs, shall assume greater responsibilities in project implementation including identifying the gaps in technological expertise in the industry as well as selection and recruitment of consultants and NGOs. The role of the PA shall be documented in agreement(s) among the Borrower, the PA and the RPCs.

At the beginning of implementation

Not complied with.

Schedule 6, para. 10

The Industry Umbrella Body shall have been established under the Companies Act and initial staff shall have been recruited to the satisfaction of the ADB. The Industry Umbrella Body shall (i) initiate product development and research, quality assurance certification and consumer and generic trade promotion, (ii) facilitate strategic alliances and collaborate with supporting institutions, such as the Tea Related Institutions, to ensure alignment with the industry needs, (iii) serve as the conduit for trading, (iv) establish liaisons with NGOs for awareness raising on international codes of conduct and certification standards relating to social, welfare and environmental conditions, (v) initiate research and development for ergonomic equipment, (vi) initiate incentive and award schemes on an industry level for promoting social and processing standards, and (vii) organize trade fairs for information exchange.

Within one month of effective date

Originally complied with. The Tea Association of Sri Lanka was established but is now defunct.


Wage Determination: That the Government shall refrain from intervening in wage determination in the collective agreements between estate workers and management.

During implementation

Partly complied with. The government intervened for a wage increase in October 2007.


Accessibility of tax funds: The Borrower shall reallocate tax funds to the industry Umbrella Body for research on product development and process improvement and consider favorably allocating tax funds to operating expenditures of the industry Umbrella Body.

By 30 June 2003 Not applicable since the umbrella body was discontinued due to lack of funds.

36 Appendix 4




Schedule 6, para. 28(a)

Monitoring and Evaluation: The PIU shall carry out monitoring and evaluation of the Project benefits in coordination with Apex Body, the PFIs, Plantation Fund, RPCs, PHSWT and EWHCS.


Not complied with. No evaluation of investment component conducted.

Schedule 6, para. 28(c)

The PIU shall monitor relevant indicators to assess the performance of the Project, including the ability of RPCs to list their debt and equity instruments on exchanges; improvement in workers’ conditions including reduction in the outflow of estate labor, improved income, health and nutrition status and improved status of estate employment, increase in the number of RPCs registering for fair trade labeling and ISO standards, and disbursement of worker housing Subloans, factory and field restroom construction, use of ergonomic equipment and levels of indebtedness and alcoholism. The PIU shall carry out an impact evaluation study upon project completion.


Not complied with.

ADB = Asian Development Bank, EWHCS = Estate Workers Housing Cooperative Society, ISO = International Organization for Standardization , JEDB = Janatha Estate Development Board, LA = loan agreement, MPI = Ministry of Plantation Industries, NGO = nongovernment organization, PA = Planters' Association of Ceylon, PCR = project completion report, PFI = participating financial institution, PHDT = Plantation Housing Development Trust, PIU = project implementation unit, PHSWT = Plantation Housing and Social Welfare Trust, RPC = regional plantation company, SLSPC = Sri Lanka State Plantation Corporation. Sources: ADB. 2012. Completion Report: Plantation Development Project. Manila; and ADB Independent Evaluation Department mission 2015.

Table A4.2: Major Loan Covenants for Loan 1914 Not Complied With by the Borrower Reference in Loan Agreement



Schedule 5. para. 8

Plantation Fund (PF): The Borrower shall ensure that the PF is established under the purview of the Ministry of Finance of the Borrower as a Trust under the Trust Ordinance No. 9 of 1917 as amended, the Fund Manager is to be appointed to the satisfaction of ADB, and that the PF Subsidiary LA satisfactory to ADB is signed, in each case prior to disbursement for the PF.

Within 6 months of effective date (Feb 2004) Within 9 months of effective date (May 2004)

Partly complied with. Establishment of PF delayed (Oct 2004). Fund manager appointed only in Mar 2006.


Establishment of Plantation Fund and appointment of Fund Manager with the concurrence from ADB.

By Feb 2004 Complied with but delayed (see Schedule 5, para. 8).


The Government shall review the need for the Revolving Fund before closing the Project and take necessary action for its continued operation or winding up.


Not complied with.


The Borrower shall ensure: Divestment of Elkaduwa Plantation Ltd. through the stock market,

By Dec 2002

Not complied with. Six attempts were made to privatize but

Major Loan Covenants Not Complied With by the Borrower 37




Chilaw Plantation Ltd through the stock market Kurunegala Plantation Ltd through the stock market Divestment of the estates and warehouses of JEDB and SLSPC Marketing of Tea: Elimination of all restrictions on tea exports (on recommendation of the Industry Umbrella Body), except quality control, and, as a first step, elimination of price control and panel ratification for non-auction sales between producers and international buyers. Institutional Reforms: Amendment of the acts of the Tea Related Institutions, reconstitution of the boards for greater private sector participation and restructuring of the institutions; Submission of the bill on reconstitution of the boards of the Coconut Research Board, and the Rubber Research Board, to the Parliament for approval;

Jun 2003 Dec 2003 By Jun 2003 By Jun 2003 During implementation Feb 2004

failed. Per new government policy, no divestment will happen. Not complied with. Will remain under private management contract but will not be divested, per government policy. Not complied with. No action has been taken. Management contract terminated, and the government took over the management. Not complied with, owing to resistance from stakeholders. Not complied with. The Tea Board maintains its former role. Not complied with. The tea-related institutions were not reconstituted or restructured. Not complied with. Not complied with.

38 Appendix 4




Phasing out the Plantation Management Monitoring Division’s role in monitoring the management and financial performance of the RPCs when all RPCs are divested. Wage Determination: That the Government shall refrain from intervening in wage determination in the collective agreements between estate workers and management.

During implementation During implementation

Not complied with.

Schedule 5, para 31

Monitoring and Evaluation The PIU shall carry out monitoring and evaluation of the Project benefits in coordination with Apex Body, the PFIs, PF, RPCs, PHSWT and EWHCS. The PIU shall conduct a benchmark socioeconomic survey based on a representative sample of the estates to be assisted under the Project. The data to be collected by the PIU shall include indicators of social welfare of the estate workers. The PIU shall monitor relevant indicators to assess the performance of the Project. The Borrower through the Apex Body, cause PFIs to monitor and evaluate the benefits of the Subprojects after they have been completed in accordance with a schedule to be agreed upon by the Borrower, the PFIs and ADB.

During implementation During implementation During implementation During implementation

Not complied with. Complied with, but delayed until 2005. Not complied with. Not complied with.


Carrying out of the Midterm Review by the Borrower, MPI, Apex Body and ADB.

Year 3 of project implementation

Complied with, but delayed. A midterm review mission was fielded in Dec 2007.

ADB = Asian Development Bank, EWHCS = estate workers' housing cooperative society, JEDB = Janatha Estate Development Board, LA = loan agreement, MPI = Ministry of Plantation Industries, PCC = project coordination committee, PF = plantation fund, PFI = participating financial institution, PHSWT = Plantation Housing and Social Welfare Trust, PIU = project implementation unit, PRP = Plantation Reform Project, RPC = regional plantation company, SLSPC = Sri Lanka State Plantation Corporation. Source(s): ADB. 2012. Completion Report: Plantation Development Project. Manila and Asian Development Bank Independent Evaluation Department Mission 2015.

APPENDIX 5: CHARACTERISTICS OF ESTATES VISITED BY THE INDEPENDENT EVALUATION MISSION

Name of Estate

Estate’s Parent RPC

Location of Estate

Altitude of the Estate

(feet) Estate

Population

Number of

Families Number of

Workers

Female Workers

(% of total)

Estate Total Area

(ha) Main Crops

Lavant Estate

Kelani Valley Plantations PLC listed on the CSE (CSE: KVAL)

Sabaragamuwa Province, Kegalle District

700 (Low grown)

987 250 252 (26% of estate

population)

52 569 Rubber (287 ha bearing) Coconut (8 ha bearing) Timber (8 ha) Cinnamon (2 ha bearing)

Sanquhar Estate

Pussellawa Plantations LTD – not listed on the CSE

Central Province, Kandy District

2,800 (Mid grown)

2,066 466 214 (10% of estate

population)

60 260 Tea (80 ha bearing) Rubber (46 ha bearing) Timber & Eucalyptus (50 ha)

Demodera Estate

Hapugastenne Plantations PLC listed on the CSE (CSE: HAPU)

Uva Province, Badulla District

3,000 (Mid grown)

4,300 756 636 (15% of estate

population)

60 709 Tea (533 ha bearing) Timber (75 ha)

Bearwell Estate

Talawakelle Tea Estates PLC listed on the CSE (CSE: TPL)

Central Province, Nuwaraeliya District

4,000 (High grown)

3,646 756 669 (18% of estate

population)

61 423 Tea (307 ha bearing) Timber (28 ha)

Pelmadulla Estate

Kahawatte Plantations PLC listed on the CSE (CSE: KAHA)

Sabaragamuwa Province, Ratnapura District

700 (Low grown)

4,146 1,133 385 (9% of estate population)

56 840 Tea (109 ha bearing) Rubber (280 ha bearing) Cinnamon (23 ha)

Peenkande Estate

Agalawatte Plantations PLC listed on the CSE (CSE: AGAL)

Sabaragamuwa Province, Ratnapura District

300 (Low grown)

2,099 535 698 (33% of estate

population)

54 1,200 Rubber (745 ha bearing) Oil Palm (111 ha bearing)

Note(s): Low grown = Grown at an elevation below 2,000 feet, Mid grown = Grown at an elevation from 2,000-4,000 feet, High grown = Grown at an elevation above 4,000 feet. AGAL = Agalawatte , CSE = Colombo Stocks Exchange , ha = hectares, HAPU = Hapugastenne , KAHA = Kahawatte, KVAl = Kelani Valley, LTD = limited, PLC = Public limited company, RPCs = regional plantation companies , TPL = Talawakelle.

APPENDIX 6: LIST OF REGIONAL PLANTATION COMPANIES

Name Number of Estates

Listed on the Colombo Stock Exchange

1 Agalawatte Plantations 15

2 Bogawantalawa Tea Estates 28

3 Elpitiya Plantations 13

4 Hapugastenne Plantations 19

5 Horana Plantations 16

6 Kahawatte Plantations 16

7 Kegalle Plantations 17

8 Kelani Valley Plantations 26

9 Kotagala Plantations 21

10 Malwatte Valley Plantations 22

11 Namunukula Plantations 19

12 Talawakelle Tea Estates 16

13 Udapussellawa Plantations 7

14 Watawala Plantations 19

Participating but unlisted

1 Maturata Plantations 19

2 Pussellawa Plantations 24

Listed but not participating

1 Balangoda Plantations 22

2 Madulsima Plantations 12

3 Maskeliya Plantations 18

Note: Listed and unlisted refer to listing on the Colombo Stock Exchange. Source: Government of Sri Lanka, Ministry of Plantation Industries. 2015. Statistical Information on Plantation Crops 2013. Battaramulla.

APPENDIX 7: WORLD COMMODITY PRICES AND REGIONAL PLANTATION COMPANIES’ PROFITABILITY

Figure A7: Profitability of 14 Participating Listed Regional Plantation Companies and Commodity Price

Movements, 2005–2015

Note: All figures are in nominal terms. 2005 refers to either the financial year ending on 31 December 2004 or 31 March 2005; same for all years through 2015. The Companies Act of Sri Lanka allows for financial year ending either on December 31 or March 31. Most banks and Government agencies adopt the December 31 financial year end, while most private corporations adopt March 31. Since the RPCs were state-run enterprises until the early 1990s, their financial year ends either on December 31 or March 31. As of 2014, 9 of the 14 RPCs had switched over to the March 31 financial year end. Sources: World Bank commodity price data, October 2015; Government of Sri Lanka, Ministry of Plantation Industries; RPC annual reports; and Colombo Stock Exchange filings.

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Net Profits of 14 Listed Participating RPCs (SLRs 000's)

Tea Prices ($/Kg)

Rubber Prices ($/Kg)

Oil Palm Prices ($/Kg)

Net

Pro

fits

Pri

ces

APPENDIX 8: FINANCIAL INTERNAL RATES OF RETURN FOR CROPS

A. Introduction

1. The project performance evaluation report calculated a financial internal rate of return (FIRR) on a per-hectare basis for each of the main crops that were to be planted under the Plantation Development project in Sri Lanka—tea, rubber, and oil palm. This was done to assess the financial viability of these plantings from the perspective of the RPCs, which the Asian Development Bank loan would support. This analysis computed in real terms the weighted average cost of capital (WACC), the FIRR, and net present value (NPV) of these planting activities. 2. The WACC calculation considered various funding sources and their terms. For the replanting of crops, the only funding source was to be term loans to RPCs provided by the Development Finance Corporation of Ceylon (DFCC) Bank and other participating financial institutions (PFIs) with annual interest rates of 10%–15%. For the purpose of calculating the WACC, an average annual interest cost of 13% was assumed, along with the current corporate tax rate of 28%. The domestic long-term inflation rate of 5% was assumed to convert the nominal rates into real rates. The WACC for the RPCs related to the three crops was computed as 4.15% on an after-tax basis in real terms.

3. In determining an establishment cost per hectare for each of the three crops, as well as yields and costs of production, the analysis used data and information provided by the Ministry of Plantation Industries and the RPCs. Operations and Maintenance costs have been assumed to grow at 2% per annum on a real term basis. October 2015 World Bank commodities price indices were used for price forecasts.

Table A8.1: Parameters for Financial Analysis

Crop Year of

Plantinga Year of

Production

Establishment Cost

(SLRs)

Cost of Production

(SLRs per ha)b Yield

(tons per ha) FOB Price

(SLRs per ton) Tea 2006 2010 SLRs1.95

million, with 50% in year 1 and the rest phased in

Starting in 2010 SLRs700,000

0.5 tons/ha in year 2010; 1.0 tons/ha in 2011; 1.5 tons/ha in 2012; 2.0 tons/ha from 2013 to year 2050

2010 to 2013 data from MPI statistics, and World Bank price projections thereafter

Rubber 2006 2012 SLRs200,000, with 50% in year 1 and the rest phased in.


0.25 tons/ha in year 2012; 0.5 tons/ha in 2013; 0.75 tons/ha in 2014; 1.0 tons/ha from 2015 to 2036

2010 to 2013 data from MPI statistics, and World Bank price projections thereafter

Oil palm 2006 2010 SLRs200,000, with 59% in year 1 and the rest phased in


1.0 tons/ha in 2010; 2.0 tons/ha in 2011; 3.0 tons/ha in 2012; 4 tons/ha from 2013 to 2026

World Bank prices from 2013 to 2013, and price projections thereafter

FOB = free on board. a The bulk of the investment component expenditure was in 2005 and 2006, based on the project’s completion report. b Most statistics use a measure of SLRs per kilogram. Based on expected yield, the estimates were converted to SLRs/ha. Sources: Government of Sri Lanka, Ministry of Plantation Industries. 2015. Statistical Information on Plantation Crops 2013. Battaramulla; World Bank commodity price data; and Asian Development Bank Independent Evaluation Department.

Financial Internal Rates of Return for Crops 43

B. Tea

4. Table A8.2 summarizes the FIRR analysis for tea on a per-hectare basis. The FIRR for tea was calculated at 4.57%, marginally above the WACC and suggests that planting of tea is marginally financially viable. However, this financial viability was highly sensitive to movements in tea prices and the cost of production. As Table A8.2 shows, a 10% decrease in revenue or a 10% increase in the cost of production would result in an FIRR lower than the WACC.

Table A8.2: FIRR and Sensitively Analysis for Tea

Scenario NPV

(SLRs ) FIRR (%) SI

Change (%)

SV (%)

Base case 2,11,090 4.57

10% increase in establishment costs 26,832 4.20 0.80 10 125 10% increase in cost of production (1,210,015) 1.44 6.85 10 15 10% decrease in revenue (1,415,382) 0.77 8.30 10 12

() = negative, FIRR = financial internal rate of return, SI = sensitivity indicator, SV = switching value. Source: Asian Development Bank Independent Evaluation Department.

C. Rubber

5. Table A8.3 summarizes the FIRR analysis for rubber on a per-hectare basis, which determined an FIRR of 15.44%. This is well above the WACC and suggests that planting rubber is financially viable.

Table A8.3: FIRR for Rubber

Scenario NPV (SLRs) FIRR (%) SI % Change SV (%)

Base Case 847,245 15.44

10% Increase in Establishment Costs 829,132 14.68 0.49 10 202 10% Increase in Cost of Production 557,493 12.19 2.10 10 48 10% Decrease in Revenue 454,655 11.13 2.79 10 36

FIRR = Financial Internal Rate of Return, NPV = Net Present Value, SI = Sensitivity Indicator, SV = Switching Value. Source: Asian Development Bank Independent Evaluation Department.

D. Oil Palm

6. The analysis for oil palm on a per-hectare basis, presented in Table A8.4, showed an

FIRR of almost 43%, making this crop the most financially viable of the three assessed.

Table A8.4: FIRR for Oil Palm

Scenario NPV (SLRs) FIRR (%) SI %

Change SV(%)

Base Case 2,528,619 42.92

10% Increase in Establishment Costs 2,510,027 40.86 0.48 10 209 10% Increase in Cost of Production 2,428,435 42.20 0.17 10 599 10% Decrease in Revenue 2,156,982 39.88 0.71 10 141

FIRR = Financial Internal Rate of Return, SI = Sensitivity Indicator, SV = Switching Value. Source: Asian Development Bank Independent Evaluation Department.

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