[7

ASIAN DEVELOPMENT BANK PCR:SRI 21106

PROJECT COMPLETION REPORT

ON THE

SOUTHERN PROVINCE RURAL DEVELOPMENT PROJECT (Loan 1128-SRI [SF])

IN

SRI LANKA

March 2004

CURRENCY EQUIVALENTS (as of 1 November 2003)

Currency Unit – Sri Lanka rupees (SLRe/SLRs)

At Appraisal At Project Completion (October 1991) (February 2001)

SLRe1.00 = $0.0241 $0.0113 $1.00 = SLRs41.48 SLRs88.90

ABBREVIATIONS

ADB – Asian Development Bank CBSL – Central Bank of Sri Lanka CCD – Coastal Conservation Department CEA – Central Environmental Authority DFCC – Development Finance Corporation of Ceylon EA – executing agency EIRR – economic internal rate of return IRDP – integrated rural development project m – meter m2 – square meter MIS – minor irrigation schemes MPPI – Ministry of Policy Planning and Implementation MTR – midterm review NGO – nongovernment organization O&M – operation and maintenance PBME – project benefit monitoring and evaluation PCI – participating credit institution PID – Provincial Irrigation Department PMO – project management office RDB – Ruhuna Development Bank RDD – Regional Development Division SPC – Southern Provincial Council SPREAP – Southern Province Rural Economic Advancement Project SWED – saltwater exclusion and drainage TA – technical assistance TCCS – Thrift and Credit Cooperative Societies TOR – terms of reference VAP – village advancement program WID – women in development

NOTES

(i) The fiscal year (FY) of the Government ends on 31 December. (ii) In this report, "$" refers to US dollars.

CONTENTS Page

BASIC DATA ii MAP vii I. PROJECT DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 1 A. Relevance of Design and Formulation 1 B. Project Outputs 2 C. Project Costs 5 D. Disbursements 5 E. Project Schedule 6 F. Implementation Arrangements 6 G. Conditions and Covenants 7 H. Related Technical Assistance 8 I. Consultant Recruitment and Procurement 8 J. Performance of Consultants, Contractors, and Suppliers 8 K. Performance of the Borrower and the Executing Agency 9 L. Performance of ADB 9 III. EVALUATION OF PERFORMANCE 9 A. Relevance 9 B. Efficacy in Achievement of Purpose 10 C. Efficiency in Achievement of Outputs and Purpose 10 D. Preliminary Assessment of Sustainability 11 E. Environmental, Sociocultural, and Other Impacts 12 IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 13 A. Overall Assessment 13 B. Lessons Learned 13 C. Recommendations 14 APPENDIXES

1. Technical Assistance Completion Reports 162. Achievement of Project Outputs 203. Project Costs 214. Annual Disbursements of Asian Development Bank Loan 225. Project Implementation Schedule 236. Implementing Agencies 257. Status of Compliance with Loan Covenants 268. Consulting Services 349. List of Vehicles and Equipment 35

10. Incremental Staff Engaged under the Project 3711. Economic and Financial Analysis 38

BASIC DATA

A. Loan Identification 1. Country 2. Loan Number 3. Project Title 4. Borrower 5. Executing Agency

6. Amount of Loan

7. Project Completion Report Number

Sri Lanka 1128-SRI (SF) Southern Province Rural Development Project Democratic Socialist Republic of Sri Lanka Ministry of Policy Planning and Implementation SDR27,903,000 (equivalent to $38.0 million at the time of appraisal) PCR:SRI 780

B. Loan Data 1. Appraisal – Date Started – Date Completed 2. Loan Negotiations – Date Started – Date Completed 3. Date of Board Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness – In Loan Agreement – Actual – Number of Extensions 6. Closing Date – In Loan Agreement – Actual – Number of Extensions 7. Terms of Loan – Interest Rate – Maturity – Grace Period 8. Terms of Relending – Interest Rate – Maturity – Grace Period – Second-Step Borrower

7 August 1991 21 August 1991 21 October 1991 25 October 1991 26 November 1991 20 December 1991 19 March 1992 18 February 1992 0 31 December 1999 9 February 2001 1 1% per annum 40 years 10 years 6% per annum 10 years 2 years Central Bank of Sri Lanka

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9. Disbursements a. Dates Initial Disbursement

27 July 1992

Final Disbursement 9 February 2001

Time Interval 102 months

Effective Date

18 February 1992 Original Closing Date

31 December 1999 Time Interval

94 months

b. Amount (in SDR)

Category Original Allocation

Last Revised

Allocation Amount

Disbursed Undisbursed

Balance Cancelled at Closing Date

01 Civil Works 13,648,800 18,921,973 19,095,334 (173,361) 02 Equipment & Materials 1,143,300 900,993 900,993 0 03 Vehicles 701,300 307,383 307,383 0 04 Consulting Services 1,473,000 579,798 580,569 (771) 05 Training 837,100 644,592 607,627 36,965 06 Credit 6,388,300 5,268,953 5,108,868 160,085 07 Incremental Operating Cost 385,500 153,912 155,403 (1,491) 08a Survey & Investigation 391,400 297,796 286,590 11,206 09 Service Charge 827,600 827,600 827,600 0 10 Unallocated 2,106,700 0 0 0 Total 27,903,000 27,903,000 27,870,367 32,633

10. Local Costs (Financed) Appraisal Estimate Actual - Amount $24.5 million $23.3 million - Percent of Local Costs 71% 71% - Percent of Total Cost 51% 48% C. Project Data 1. Project Cost ($ million) Cost Appraisal Estimate Actual Foreign Exchange Cost

13.5

15.9

Local Currency Cost 34.5 32.7 Total 48.0 48.6

2. Financing Plan ($ million)

Appraisal Estimate Actual Cost Foreign Local Total Foreign Local Total

Implementation Costs Borrower-Financed 0 7.2 7.2 0 7.8 7.8 ADB-Financed 13.5 24.5 38.0 15.9 23.3 39.2 PCIs 0 1.2 1.2 0 0.7 0.7 Subborrowers/Farmers 0 1.6 1.6 0 0.9 0.9 Total 13.5 34.5 48.0 15.9 32.7 48.6 ADB = Asian Development Bank, PCIs = participating credit institutions.

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3. Cost Breakdown by Project Component ($ ‘000) Appraisal Estimate Actual Component Foreign Local Total Foreign Local Total

Part A: Productive Components 1. Irrigation and Drainage 1,631 4,601 6,232 1,113 3,199 4,312 2. Pilot Fisheries 3 160 163 0 243 243 3. Private Sector (i) Small and Medium Industry 843 3,467 4,310 121 528 649 (ii) Micro- and Self-Employment Credit

598 4,463 5,061 939 6,887 7,826

Part B: Economic and Social Infrastructure Components 1. Farm-to-Market Roads 2,477 4,074 6,551 7,138 11,706 18,844 2. Village Advancement 2,289 4,270 6,559 3,835 7,170 11,005 3. Women in Development 55 270 325 0 326 326 Part C: Institutional Support Components 1,626 2,507 4,133 1,676 2,618 4,294 Base Cost 9,522 23,812 33,334 14,822 32,677 47,499 Contingencies 2,869 10,672 13,541 0 0 0 Service Charges 1,127 0 1,127 1,137 0 1,137 Total Project Cost 13,518 34,484 48,002 15,959 32,677 48,636 4. Project Schedule

Item Appraisal Estimate Actual (i) Consulting Services Planning & Implementation Specialist (Foreign) Date of Contract with Consultants Jun 1993 Aug 1994 Date of Completion Dec 1996 Aug 1996 Industrial Development Specialist (Foreign) Date of Contract with Consultants Jun 1993 Apr 1994 Date of Completion Dec 1996 Apr 1996 Road Engineer (Domestic) Date of Contract with Consultants Jun 1993 Aug 1995 Date of Completion Jun 1994 Jun 2000 Irrigation Engineer (Domestic) Date of Contract with Consultants Apr 1993 Jul 1994 Date of Completion Sep 1996 Dec 1999 Agricultural Economist (Domestic) Date of Contract with Consultants Nov 1993 Dec 1994 Date of Completion Dec 1994 May 1996 Consultants for PBME (Domestic) Date of Contract with Consultants Jul 1993 Oct 1993 Date of Completion Dec 1999 Sep 1995 Consultants for SWED Scheme (Domestic) Date of Contract with Consultants Apr 1993 Mar 1994 Date of Completion Mar 1994 Sep 1995 Financial Management Specialist (Domestic) Date of Contract with Consultants Sep 1993 Mar 1993 Date of Completion Mar 1996 Sep 2000 Accountant (Domestic) Date of Contract with Consultant Sep 1998 Date of Completion Nov 1998

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Item Appraisal Estimate Actual Environment Specialist (Domestic) Date of Contract with Consultant Mar 1996 Date of Completion Mar 1999 Training Specialist (Domestic) Date of Contract with Consultant Aug 1996 Date of Completion Jan 1997 Hydrologist (Domestic) Date of Contract with Consultant Sep 1996 Date of Completion Mar 1997 Water Resources Inventory Study Consultant (Domestic) Date of Contract with Consultant May 1995 Date of Completion Mar 1996 Final Impact Evaluation Specialist (Domestic) Date of Contract with Consultant May 2000 Date of Completion Sep 2000 (ii) Civil Works a. Minor Irrigation Schemes Date of Award June 1994 Jan 1993 Completion of Work May 1999 Sep 2000 b. Industrial Estate Date of Award Jan 1993 Jul 1993 Completion of Work Dec 1994 Mar 1998 c. Rural Access Roads Date of Award Jan 1995 Nov 1992 Completion of Work Dec 1999 Sep 2000 d. Thawalama Bridge Date of Award Jan 1995 Jul 1992 Completion of Work Dec 1997 Dec 1996 e. Project Management Office Date of Award Jan 1993 Jan 1998 Completion of Work Dec 1995 Dec 1999 (iii) Equipment and Supplies First Procurement April 1993 May 1992 Last Procurement December 1993 October 1998 (iv) Other Milestones Reallocation of Loan Proceeds 24 October 2000 Final Cancellation of Undisbursed Loan Balance 9 February 2001

PBME = project benefit monitoring and evaluation, SWED = salt water exclusion and drainage.

5. Project Performance Report Ratings Ratings

Implementation Period Development Objectives

Implementation Progress

From 1 January to 31 December 1992 Satisfactory Satisfactory From 1 January to 31 December 1993 Satisfactory Satisfactory From 1 January to 31 December 1994 Satisfactory Satisfactory From 1 January to 31 December 1995 Satisfactory Satisfactory From 1 January to 31 December 1996 Satisfactory Satisfactory From 1 January to 31 December 1997 Satisfactory Satisfactory From 1 January to 31 December 1998 Satisfactory Satisfactory From 1 January to 31 December 1999 Satisfactory Satisfactory From 1 January to 31 December 2000 Satisfactory Satisfactory

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D. Data on Asian Development Bank Missions

Name of Mission Date No. of Persons

No. of Person-

Days Specialization of Membersa

Loan Fact Finding 7–29 May 1991 5 110 a, b, c, f, n Appraisal Mission 7–21 Aug 1991 6 84 a, b, c, d, e, f Inception Mission 31 Aug–16 Sep 1992 2 32 a, g Review Mission 1 23 Jun–5 Jul 1993 2 24 a, h Review Mission 2 1–9 Mar 1994 1 9 J Special Administration Mission 1–17 Feb 1995 3 21 b h, i, k Midterm Review 22 Mar–11 Apr 1996 3 42 c b, g, j Review Mission 3 30 Sep–10 Oct 1997 2 20 c , k Review Mission 4 22 Apr–5 May 1998 3 39 c, l, m Review Mission 5 28 Oct–5 Nov 1999 1 8 h Review Mission 6 22 Nov–3 Dec 1999 1 11 k Special Administration Mission 3–11 Apr 2000 1 8 h Project Completion Reviewd 20 Oct–7 Nov 2003 4 92 c, g, h, j

a a = Senior Financial Analyst, b = Project Engineer, c = Project Economist, d = Programs Officer, e = Counsel, f = Rural Institutions Specialist, g = Assistant Project Analyst, h = Rural Development Specialist, i = Manager, AWAR, j = Agricultural Economist, k = Project Administration Unit Head, l = Coastal Conservation Specialist, m = Implementation Officer, n = Rural Development Planner.

b The Manager AWAR joined the Mission on 2 February 1995, while the Rural Development Specialist joined the mission on 6 February 1995.

c The Project Engineer joined the mission from 29 March to 11 April, the Agricultural Economist joined the mission from 22 March to 11 April, while the Assistant Project Analyst joined the mission from 29 March to 7 April 1996.

d The Project Completion Report was prepared by Jiangfeng Zhang, Economist.

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I. PROJECT DESCRIPTION

1. Southern Province (the Province) has a population of 2.3 million spread across three districts, Galle, Matara, and Hambantota. Agriculture is the leading contributor to production and employment. At the time of project formulation, the Province was characterized by high unemployment, low levels of income, and high incidence of poverty. Though the Province had a relatively extensive road network, many of the roads were in disrepair, and village access was difficult. The social and economic infrastructure was lacking. Limited access and availability of credit constrained the development of small and medium enterprise. Due to lack of maintenance, many irrigation schemes operated below potential. The paddy yields in the Province were among the lowest in the country. The coastal areas of Galle had large tracts of degraded, saline and marginal land, while the dry zone of Hambantota had inadequate irrigation. Aging plantations and fragmented production in numerous small home gardens further constrained agriculture productivity.

2. The objective of the Southern Province Rural Development Project (the Project)1 was to raise the income and quality of life of the people in the Province by (i) creating income- and employment-generating opportunities, and (ii) strengthening the economic and social infrastructure in the project area. The Project targeted small and marginal farmers, landless laborers, small- and medium-scale entrepreneurs in the private sector, women, and the unemployed (particularly the youth).

3. The project scope included several components and subcomponents. Part A, Production Support, covered (i) the rehabilitation and construction of selected irrigation and drainage schemes, (ii) pilot schemes in lobster and mollusk production, and (iii) credit and other support for small- and medium-scale enterprises and rural micro-enterprises. Part B, Strengthening of Economic and Social Infrastructure, included (i) rehabilitation and construction of selected farm-to-market roads, (ii) a village advancement program (VAP) in selected remote villages, and (iii) a women-in-development (WID) program. Part C, Institutional Support, covered (i) project management support, (ii) training, and (iii) consultant services.

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

4. Given the circumstances in the Province at the time, the Project was relevant. In the mid-1980s, economic growth in Sri Lanka had slowed due to an intensifying domestic conflict. Civil disturbances initially were focused in the north and east of the country. However, the dimensions of the conflict spread by the late-1980s, as an insurgency emerged in the south. Though the Government eventually suppressed the uprising, the conditions in the Province remained depressed. Unemployment was widespread. The Government was faced with the challenge of addressing regional imbalances, and promoting economic growth. Major government investments heretofore had focused on large-scale irrigation projects in an attempt to achieve national self-reliance in paddy production. In taking on the Project, the Government embraced the broad-based approach of integrated rural development.

5. The Project was consistent with the Government’s goals of optimizing the production of basic food items, increasing income, and expanding employment in rural areas. These general 1 ADB. 1991. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and

Technical Assistance to the Democratic Socialist Republic of Sri Lanka for the Southern Province Rural Development Project. Manila.

2

thrusts were also consistent with Asian Development Bank (ADB) objectives. However, the integrated rural development approach did not provide for broader policy and institutional reforms for the agriculture sector, which were important in ADB program strategies.

6. Much of the design focused on infrastructure rehabilitation. Inadequate analysis of the cause of the widespread deterioration and neglect of infrastructure facilities was a major shortcoming of project preparation. Strengthening operation and maintenance (O&M) also should have been a key objective of the Project. During project preparation, additional analysis should have been provided in some other areas as well: (i) the complexity of integrated rural development projects (IRDPs) and the institutional capacity to implement them, and (ii) the causes of the Province’s low agricultural productivity in field crops other than irrigation infrastructure. The project design lacked support for agricultural extension services and demonstrations. Insufficient analysis of the economic activities and an absence of strong rationale or selection criteria for bringing components and subcomponents together undermined the relevance of the design and formulation. The project preparatory technical assistance (PPTA)2 should have contributed more in these areas. The design and formulation is rated partly relevant.

B. Project Outputs

7. The project scope was broad, requiring intense management and implementation. The Project Management Office (PMO) overcame significant design and capacity shortcomings among project partners to deliver on the appraised physical targets (Appendix 2).

8. Irrigation and Drainage. This subcomponent aimed to rehabilitate or construct minor irrigation schemes (MIS) and rehabilitate four saltwater exclusion and drainage (SWED) schemes. MIS accomplishments included (i) 75 rehabilitated schemes for 2,989 hectares (ha), compared with an appraisal target of 104 for 2,250 ha; and (ii) 46 new schemes for 938 ha, compared with an appraisal target of 43 for 850 ha. Four SWED schemes were completed under the Project for 3,279 ha, against an appraisal target of four for 3,900 ha. A small agricultural research and extension input for demonstration of other field crops also was added.

9. The number of MIS was slightly less than the appraisal target, but the area covered was greater. The unit costs for the MIS and SWED subprojects were substantially below estimates. Early delays were followed by rapid implementation in the latter part of the Project. This contributed to an approach that neglected design and viability considerations. While some increased water control and cropping intensity were achieved, paddy yields did not rise to the extent forecasted in the appraisal.

10. Fisheries. Pilot activities aimed to increase the potential for catching lobsters and cultivating mollusks. The first pilot activity involved sinking 1.6 meter (m) by 1.6 m concrete structures, known as casitas, in coastal areas in the hope of providing habitats for lobsters. Of the 1,250 casitas targeted at appraisal, 900 were sunk in the sea. Lobster colonization did not occur, however. Mollusk cultivation on lightweight floating structures was demonstrated, but fisherfolk were not drawn to the activity due to market and managerial requirements.

11. A fisheries research center was added after the midterm review (MTR). Given the coastal lagoons, inland aquaculture potential, ocean access, and the lack of such a facility in the south, the establishment of a research center had a sound basis. After a slow start, the center has added some capacity, and has the potential to boost regional fisheries production. To be

2 ADB. 1990. Technical Assistance to Sri Lanka for the Southern Province Development Project. Manila.

3

effective, however, operational needs, such as vehicles and equipment, quarters, research staff, and budget, must be addressed.

12. Private Sector. To strengthen the private sector, the Charley Mount Industrial Estate was constructed, and enterprises were financed with small-and-medium, rural micro-, and self-employment credit. The industrial estate was built on sloping terrain, which made the development costs relatively expensive. Within the 9.7 ha site, basic facilities were provided: a road network, electricity, water, telephone, and the provision for waste disposal. However, the estate was established without a proper study on the industrial demand in that area. As a result, some of the assumptions underlying the rationale for industrial estate development were not scrutinized. The key assumptions included a tie-in with the region's export processing zone and the demand by domestic industries to locate within the estate. The links with the export-processing zone, which is developing slowly, did not occur as most of its inputs are imported, reprocessed, and then exported.

13. Domestic industries have been slow to occupy the Charley Mount Industrial Estate, in large part because of its location. A site closer to a town center would have been more desirable for small and medium enterprises (the target group), as that would have made owners feel more confident about managing security, labor, and customer concerns. The project-funded development has 56 blocked occupancy sites, well below the planned capacity of 75.3 Only eight firms are in production within the estate, including small manufacturing types involved in, among other things, foam, mattress, and cushion; matches; coconut husk processing; and sheet metal furniture. Employment at the estate totals 194, or about 24 employees per establishment. The Development Finance Corporation of Ceylon (DFCC) was to make credit available to small and medium enterprises. However, because the sites are leased and not owned, collateralization was a constraint.

14. Under the Project’s credit subcomponents, DFCC lent SLRs64 million to the small-to-medium enterprise subborrowers at an average loan size of SLRs621,000. The financier for the rural microcredit scheme was the Ruhuna Development Bank4 (RDB), which lent SLRs354 million. The financier for the self-employment credit scheme was the Thrift and Credit Cooperative Societies (TCCS), which lent SLRs77 million. The average loan sizes for RDB and TCCS were SLRs47,000 and SLRs75,000, respectively. For the credit subcomponents, RDB and TCCS accounted for 99% of the loans and 87% of the amount lent. The participating credit institutions (PCIs) that supplied requested financial information reported satisfactory recovery rates.5

15. While the recovery figures would seem to indicate generally acceptable performance, the figures do not reveal the long-term sustainability of ventures or the shares of loans used for other-than-intended purposes. Implementation officers and sector specialists reported a wide variance in business failures or discontinuations. According to the project completion review survey of 24 enterprises, a third failed or discontinued their businesses several years after the Project. The

3 Of the available blocks, 27 enterprises have committed to leasing 54 blocks. However, at the time of project

completion review, only 8 enterprises were in production, 5 more had constructed their building shells but had not begun production, 2 enterprise facilities were in construction, 11 enterprises had not started work on facilities, and 2 enterprises opened but had since closed down.

4 Formerly named the Regional Rural Development Bank. 5 Recovery was reported by RDB as 91%. For the three branches reporting for TCCS, the rates were reported as 91%

and 95% for two, with the third not reporting recovery rates. Some of the PCI response to information requests was inadequate, possibly indicating account management and reporting deficiencies.

4

survey team also noted frequent references to the use of loans for purposes other than intended, such as repaying other loans and building houses.

16. In terms of numbers of loans, all credit components fell slightly below appraisal expectations, mainly due to slow takeoffs (para. 32). Once underway, however, the rural microcredit and self-employment credit subcomponents were disbursed rapidly. RDB and DFCC provided the largest number of loans for self-employment (45%), business (17%), and small industries (14%). Other smaller categories of borrowing included agriculture, livestock, farm machinery and services. For TCCS, small industry was the dominant category, accounting for about 70% of loans. Agriculture accounted for 10% of TCCS loans, while fisheries accounted for 7%. For TCCS and RDB, 62% of the loans went to males. Borrowers 31 to 40 years old received about 63% of the loans, while those 21 to 30 years old accounted for about 25%. The size of loans was slightly larger than appraised. About 17% were less than SLRs10,000, about 40% were SLRs10,000-30,000, and about 75% were less than SLRs100,000.

17. As one of many components in the Project, credit did not receive special assessment or attention for strengthening the function and operation. Lending was carried out basically through standard operating procedures with certain guidelines for targeting. Since loan closing, the Central Bank—as apex organization for the small-and-medium scale credit and rural microcredit—has established a revolving fund. As repayments have accumulated, the credit has been re-lent. An additional PCI, the National Development Bank, was added to the post-project loan providers.

18. Farm-to-Market Roads. Farm-to-market roads were divided into two classes: (i) class C, D & E roads, and (ii) rural access roads.6 Under the Project, good progress was made on these roads, and targets were expanded at the MTR. For C, D & E roads, 290 kilometers (km) were completed, compared with an appraisal estimate of 168 km. For rural access roads, 430 km were completed, compared with the appraisal estimate of 230 km. The quality was uneven, however. Due to design and maintenance shortcomings, a number of rural roads have deteriorated already.

19. Other accomplishments included a 36 m bridge, 7 market centers, and 2 bus stands. These facilities improved access for rural inhabitants, saved time, and increased production (in such areas as tea and minor processing). Finally, a material-testing laboratory was built and equipped to enhance the provincial capability to rate the quality of contractor work.

20. Village Advancement Program. Remote and neglected villages were targeted. The Project hired 21 community mobilizers, including 16 women. They trained volunteers who worked with their communities to help formulate village plans. Within the plans and available budgets, priority projects were then undertaken. According to criteria established in the appraisal, the expenditure ceiling was $30,000 per village, which was about the average spent. This program covered 330 villages, compared with an appraised target of 240 villages. Village projects included roads, minor bridges, culverts, irrigation canals, latrines, community halls, rural electrification and water supply. The subcomponent was well received. However, design standards were sometimes inadequate and O&M was insufficiently planned.

21. Women in Development. The three targets were: (i) the development of training centers, (ii) training in computers, and (iii) improvement in household management. The development of 6 The C, D & E roads are mostly surfaced and designed to an all-weather standard. These roads connect to the

national system of A & B class highways and roads. The rural access roads are mainly gravel or unsurfaced roads linking farms areas and villages to C, D & E class roads. The rural access roads were only constructed in Galle as the other two districts, Matara and Hambantota, had been IRDP recipients of rural road improvement earlier.

5

training centers was dropped due to an inability to identify suitable sites and a program. Half of the 240 women envisaged at appraisal received computer training before the subcomponent was dropped for redundancy with private-sector training programs. However, 18,657 women were trained in home economics and awareness, exceeding the appraisal target of 7,000. Project activities included garden intensification, banana cultivation, distribution of fuel-efficient stoves, and training for overseas domestic work.

22. Institutional Support. Consultants assisted the Project in meeting its objectives. In Sri Lanka, IRDPs frequently had been implemented with significant management input from grant-financed consultants. Under the Project, however, the Government took the lead, used consultants as needed to strengthen specific areas and improve project performance, and gained experience and confidence from directing the process.

23. International and domestic training were provided. International training was provided for 48 individuals in regional development, project management, project benefit monitoring and evaluation (PBME), microfinance and market development. The training of domestic staff and implementing partners totaled 4,740 person-months, with volunteers for the VAP comprising the bulk. The Project financed the construction of a PMO building, staff housing, and training facilities, which were turned over to Southern Provincial Council (SPC) at loan closing. The Project also enhanced other training centers by providing equipment and trainers.

C. Project Costs

24. The Project cost $48.6 million (Appendix 3). Irrigation and small and medium enterprise development cost less than envisaged at appraisal. However, because the targets for roads and the VAP were increased, the expenditures for these two subcomponents grew correspondingly. Civil works expenditures also increased with this change. The selection of lower-cost international consultants from developing countries helped lower consultant expenditures. The ADB loan financed $39.2 million, compared with the appraisal estimate of $38.0 million. The higher dollar amount resulted from the appreciation of Special Drawing Rights against the dollar. The shares of project financing covered by ADB and the Government increased slightly from appraisal, while the beneficiary contribution decreased. Poor farmers had difficulty accepting the 10% beneficiary requirement under the irrigation component, which slowed progress in MIS.

D. Disbursements

25. Annual disbursements are shown in Appendix 4. Initial project disbursements were slow, with only 18% of the loan amount being disbursed after 4 years (or more than halfway through the appraised project period). Processing requirements also caused disbursement delays at times during the Project. Communication gaps between ADB, the PMO processing the withdrawal applications, and the Executing Agency (EA) in Colombo was one cause of the delays.

26. The disbursement schedule as appraised was realistic. To accommodate the slow start and the increased civil work targets, an extension of 17 months was made. The loan proceeds were reallocated twice. Retroactive financing, which had been approved earlier, was used for start-up expenditures in the period up to loan effectiveness. An imprest account was established to finance project activities, and it was fully liquidated before the loan closing in February 2001.

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E. Project Schedule

27. Beginning with loan effectiveness in February 1992, the Project was implemented over 8 years and 6 months, compared with a 7-year period envisaged at appraisal (Appendix 5). Delays in hiring the full deployment of project staff, engaging social mobilizers, fielding consultants, and procuring equipment slowed project implementation initially. The capacities of implementing agencies had been overestimated. The complexity of the Project and the management of the implementing agency activities affected project progress, especially early on. A number of political events also slowed project progress in the early stages: the dissolution of the Provincial Council in December 1993, the Provincial Council election of March 1994, the parliamentary election of August 1994, and the presidential election in September 1995. The MTR was conducted in April 1996.

28. The implementation of the irrigation subcomponent was slow. First, the subcomponent's 40 institution organizers, who were to work with farmers, were not hired until 1994. Second, the consultative process for undertaking the MIS small subprojects, which included more than 20 steps, was too cumbersome and time-consuming for farmers and the implementing parties. Third, finding contractors to undertake remote, small irrigation works was difficult. Fourth, the implementing capacity of the Provincial Irrigation Department (PID) was inadequate to handle its workload plus the required project works. Only six MIS schemes were finished by MTR. For the SWED schemes, technical studies and environmental clearance were achieved late in the Project. When the PMO pursued works, ADB ordered a stop to allow scrutiny of environmental issues and the attainment of approvals before permitting the Project to continue.

29. Under the credit subcomponent, DFCC and RDB lending were slow to take off due to an early lack of awareness of the credit programs. TCCS lending got under way even later in the Project, after MTR. Inadequate knowledge in the Divisional Secretariat offices for the preparation of designs, estimates, and contract documents delayed the rural roads program. The lack of laboratory testing facilities in the Province7 and adverse weather towards the end of the Project added to those delays. An extension of the loan closing was approved to complete the expanded civil works and accommodate weather-related delays.

F. Implementation Arrangements

30. As envisaged at appraisal, the Ministry of Policy Planning and Implementation,8 through its Regional Development Division, was the EA. Steering committees at the national and provincial levels guided implementation. A PMO was established under the Provincial Planning Secretariat of SPC. The Project was implemented according to the arrangements at appraisal. However, some adaptations were made to overcome constraints or enhance the Project.

31. To counter irrigation program shortcomings (i) additional staff and consultants were hired; (ii) additional implementing agencies9 were commissioned to help guide survey, design and construction supervision; and (iii) additional equipment and vehicles were delegated. At MTR, the 10% contribution from farmer organizations was relaxed in favor of a 2% commitment up front, with the balance of the 10% to be paid later in installments.

7 This was later addressed by constructing a lab under the Project. 8 Following government reorganization, the responsible ministry is the Ministry of Southern Regional Development. 9 Central Irrigation Department, Central Engineering Consultancy Bureau, and Mahaweli Engineering Construction

Agency.

7

32. Inadequate PCIs in the province and a lack of public awareness of the program initially delayed implementation of the credit component. Under the small-to-medium credit and rural microcredit schemes, only DFCC and RDB were recommended originally as PCIs. However, they did not have sufficient branches and staff in the three districts to implement the project. A change was required to get the self-employment credit subcomponent underway. From the start of the Project, an implementation agreement was lacking with the apex organization designated at appraisal, the Janasaviya Trust Fund. At MTR, the Janasaviya Trust Fund was dropped as the designated apex organization for the self-employment credit. TCCS was promoted to senior partner status to enable it to receive funds directly from the Project. For all credit components, the revised Loan Agreement of April 1996 changed the onlending interest rate for the PCIs to "at least 14% per annum" from the appraisal rate of 16%. This new rate was generally 4-6 percentage points lower than other prevailing loan market rates.

33. To overcome delays in the rural access roads, training and guidance in the preparation of estimates and contract documents was provided to the Divisional Secretariat technical officers. For the C, D & E roads, the Maheweli Engineering Construction Agency was engaged in the early stages for road supervision work for the Provincial Road Development Authority. Later, rural access and C, D & E roads progressed substantially, and the targets were increased at MTR. To enhance the farm-to-market roads component, market-related infrastructure (markets and bus stands) was also approved at the MTR. For the VAP subcomponent, additional village coverage also was targeted at MTR. In the concluding years of the Project, rural electrification was included as an eligible village investment.

34. In addition to consultants and contractors, the PMO managed or coordinated 12 types of project activities involving 14 implementing agencies. Many of the implementing agencies had multiple levels or offices, such as the Divisional Secretariats (16) and the provincial, district and divisional implementing agencies. The complexity of implementation arrangements and the number of subprojects and activities (Appendix 6) contributed to implementation deficiencies. To improve performance, more consultants could have been used (which would have required increased resources) or the design of the project scope simplified.

G. Conditions and Covenants

35. The Government generally complied with the loan covenants (Appendix 7), except for the submission of on-time statements of audited accounts and some qualifications on O&M. The statements of audited accounts frequently were submitted late and required follow up. The O&M covenants that were unrealistic and not complied with were: (i) farmers organizations will be responsible for the O&M of MIS and SWED schemes, and (ii) O&M of rural access roads and the VAP facilities will be carried out by village beneficiaries at their own expense. The O&M responsibility possibly could be discharged for the distributaries, but the support of PID is needed for the headworks and main canals. Many of the systems still provide inadequate water supplies and only support subsistence production. Such an impoverished setting hampers the farmers’ ability and willingness to generate surpluses for O&M.

36. All the other covenants were found to be relevant and complied with. The Project’s covenants on environmental issues deserve credit. At the time of project approval in 1991, the main environmental assessment requirements for ADB-funded operations were in their infancy. Still, the Project was designed with a range of environmental safeguards, as specified in paras.11, 18 and 25 of Schedule 6 in the Loan Agreement.

8

H. Related Technical Assistance

37. The PPTA (footnote 2) was comprehensive and included more breadth than the Project. Specifically, the PPTA provided greater coverage of agriculture, which was not carried forward to the Project. However, the PPTA did not offer sufficient rationale for the integration of the components and subcomponents, nor did it provide adequate economic analysis. The PPTA is rated partly successful.

38. To build capacity in the Province, two technical assistance (TAs) grants were processed with the loan: (i) TA 1613-SRI: Institutional Strengthening of the Southern Provincial Council, and (ii) TA 1614-SRI: Promotion of Micro Enterprise through Strengthening of Marketing. SPC administered the two TAs, independent of the PMO and loan activities. Appendix 1 contains the technical completion reports.

39. TA 1613 aimed to develop the planning process and documentation for SPC, its provincial planning unit, and local governments, which also would support implementation of the Project. The TA included training in strategic planning, basic computer applications, PBME, and environmental management. The Provincial Planning Secretariat adopted a number of planning processes, such as the provincial profile and rolling investment program. However, less was accomplished in PBME, environmental management, and integration with local government planning. TA 1614, which focused on enterprise development and marketing constraints, was directed towards private sector development. However, the TA was poorly thought out and the design was weak. Implementation of the TA included workshops and training of entrepreneurs, a study of marketing constraints in the Province, and the compilation of a marketing bibliography. The quality of the reporting was deficient and evidence of any sustained impact is absent.

I. Consultant Recruitment and Procurement

40. Consultants were recruited and employed for the Project (Appendix 8). A number of modifications were made from the appraisal estimates. The international and domestic fisheries specialists were not recruited since sufficient capacity was deemed available in National Aquatic Resources Research and Development Agency.10 For domestic consultants, the person-months for roads, irrigation, agricultural economics, and financial management exceeded appraisal estimates. To support implementation, additional domestic consultants not included in the appraisal were hired for accounting, environment, training, hydrology, water resources, and evaluation. These additions and changes were made to address limitations in the implementation capacity. The input from international consultants totaled 48 person-months (against 50 person-months at appraisal), while the input from domestic consultants was 342 person-months (against 108 at appraisal).

41. Vehicles and equipment were also procured in support of implementation (Appendix 9). Minor changes were made in procurement to adjust to the needs during implementation. For four-wheel vehicles, dredgers, grader, and materials testing equipment, international shopping was employed. The balance of motorcycles and equipment was procured by direct purchase.

J. Performance of Consultants, Contractors, and Suppliers

42. The performance of the implementation consultants was satisfactory. They addressed technical and managerial tasks that extended the reach of the EA and implementing agencies.

10 Formerly the National Aquatic Research Agency.

9

Baseline, midterm and final evaluations conducted under PBME were partially satisfactory, however. The evaluations would have been more useful if the PBME consultants had been knowledgeable about ADB evaluation standards, methodology and practice.

43. The performance of contractors and suppliers was satisfactory. Most contractor work was under the irrigation and roads subcomponents. However, some contractor difficulties arose in non-repayment of mobilization advances and non-responsiveness in guarantee periods. The Government took legal action against defaulters, and uncompleted subprojects were finished under force account.

K. Performance of the Borrower and the Executing Agency

44. The performance of the Borrower and EA during implementation was satisfactory. The Project executed a large contingent of works, the loan was fully disbursed with little delay, and many physical targets were achieved or surpassed. The EA coordinated with ADB, the consultants, and contractors. The EA provided the required contingent of staff for the execution of the Project (Appendix 10). However, their capacity to implement the project was lacking and was substantially supplemented by domestic consultants. The Project had good management continuity. One project director contributed from design through MTR, followed by two other project directors, one of whom had been with the Project since MTR.

45. Government performance could be strengthened in two areas: (i) submitting statements of audited accounts on time; and (ii) ensuring adequate funding and support of O&M for completed project facilities, notably the rural access roads. In the areas of disbursement and consultant and work approval, a lack of documentation and responsiveness to ADB fax requests caused some delays.

L. Performance of ADB

46. ADB fielded 10 missions from inception through loan closing. The project officers from ADB lacked continuity. Seven project officers led missions to the Project. ADB was responsive to requests by the EA for improvements in implementation, as evidenced by the number of changes agreed to at MTR. ADB fielded the project completion review mission 2½ years after loan closing. Such a delay risks losing the benefit of (i) institutional memory in ADB and the EA, and (ii) file information needed for the evaluation. Overall, ADB supervision is rated as satisfactory.

III. EVALUATION OF PERFORMANCE

A. Relevance

47. The thrust of the Project was reasonable given the circumstances at the time. The Province had gone through a period of considerable unrest, and the Government was striving to address neglect of rural areas, unemployment, and lack of opportunities. The integrated rural development approach showed potential for employment generation through public works, improved facilities for economic activity, and credit for new and expanding small enterprises. These directions were in line with the objectives of the Government and ADB.

48. Much of the project work, however, involved the rehabilitation of deteriorated infrastructure. The project design did not analyze the causes and tackle the issue of sustainability. The wide array of project activities had other shortcomings as well. Without a planning framework that carefully integrated investments, the individual effects stood largely

10

alone rather than reinforcing one another. While the Project attempted to target Galle district for rural roads and VAP, a logical plan to package or integrate investments was not apparent. The spread of project interventions across the Province also posed a challenge for monitoring and O&M. On balance, the need to address unrest and insurgency with a broad-based project outweighed the analytical shortcomings. The Project is rated as relevant.

B. Efficacy in Achievement of Purpose

49. While the number of MIS fell slightly below the appraisal target, the coverage area surpassed the appraisal. Four SWED schemes were rehabilitated, in line with the appraisal, but the resulting cultivation was less than appraised. While paddy yields were not significantly augmented, increases in cropping intensity and stability in water control resulted in more production. The fisheries pilots were unsuccessful. However, a fisheries research center was established that has the potential for future contributions.

50. While the local industries did not occupy the Charley Mount Industrial Estate as envisaged, the facility is experiencing a gradual increase in occupancy, production and employment. Under the Project's private sector support subcomponent, credit was disbursed rapidly after a delayed start. However, the quality of the portfolio and viability of the investments are less than desired.

51. The appraisal road targets were surpassed under the Project, resulting in time and cargo savings as well as induced production from previously remote areas. The quality and durability of the rural access roads temper this attainment. The VAP surpassed the appraisal coverage, providing improved livelihoods for households and a modality for participatory community development. Likewise, the WID subcomponent provided a venue for participation, awareness building, and some physical improvements. In both cases, however, the lasting impact and durability of the improvements are in question.

52. In sum, while the Project accomplished or surpassed physical targets, questions about durability and quality detract from these achievements. The Project is rated as less efficacious.

C. Efficiency in Achievement of Outputs and Purpose

53. The project costs were in line with the appraisal, though some unit costs were higher and some were lower.11 The main quantifiable benefits included increased agricultural output, enterprise development, time savings, reduced vehicle operating costs, and induced production. Unquantified benefits included institutional capacity building, human resource development, health and sanitation gains, empowerment through credit, voice in village development, better access to services and service providers, and household improvements from rural electrification. On balance, however, the quantified benefits generally did not match the levels forecast at appraisal. (Appendix 11)

54. Due to lowered yield assessments and the diminished duration of incremental gains, the economic internal rate of return (EIRR) of irrigation and drainage was reassessed at 9.7%, versus 22% at appraisal. The EIRR of the fishery pilot activities was minimal to nonexistent, depending

11 MIS and SWED schemes were accomplished at unit rates below dollar equivalents estimated at appraisal. For the

Charley Mount Industrial Estate, the amount expended was significantly above cost estimates for the initially envisaged first phase. C, D & E roads were accomplished at a dollar-equivalent unit rate of 11% less than the estimate at appraisal, while rural roads and the 36 m access bridge exceeded appraisal unit cost estimates. The VAP was achieved at slightly below appraised dollar-equivalent unit cost.

11

on the assumptions of lobster colonization of casitas and non-adoption of mollusk cultivation. The EIRR for the Charley Mount Industrial Estate was low at 3.1% due to higher development costs and slow occupancy. The estimated EIRR for the credit component was 11.0% (versus 21% at appraisal) after accounting for nonproductive credit use, enterprise discontinuations and defaults. The EIRRs of the C, D & E roads and rural access roads were 8.5% (versus 17% at appraisal) and 8.2% (14% at appraisal), respectively, because shortcomings in design, construction, and O&M decreased serviceability. The VAP and WID returns also were compromised by decreases in their productive lives. The VAP EIRR was 12.0%, compared with 17% at appraisal.

55. The reevaluated EIRR for the Project was 8.7%, about half the appraisal estimate of 17%. The differences between the appraisal and reevaluated EIRRs were mainly attributable to the (i) uneven quality of the civil works, (ii) reduced performance by enterprises financed by credit, (iii) moderated achievement of some project benefits, and (iv) the deterioration of benefits over time due to inadequate O&M. The Project is rated as less efficient.

D. Preliminary Assessment of Sustainability

56. The sustainability of the irrigation and VAP works depends on the vitality of the farmer and village associations, respectively. About half of the farmer associations in the irrigation areas were found to be active. Maintenance of canals and systems is lacking. Farmer organizations have a history of forming under agriculture extension for service-delivery mandates. In low-performance irrigation systems, few resources are available and the incentives for activity are limited. As a result, the organizations exist more on paper than in reality. Cost recovery of the works was not part of project design.

57. For village advancement works, certain groups benefited from the fixed location of the investments. However, many other households are geographically spread over wider areas and benefited less. As a result, communities are unwilling to maintain village roads. The mobilizers and organizers for the Project were hired under contract, and later let go. A more sustainable, higher-quality approach may have been to use nongovernment organizations based in the Province.

58. The rural access roads were developed by the Divisional Secretariats with assistance from the PMO. Upon completion, they were turned over to the local government, the Pradeshiya Sabhas. The Pradeshiya Sabhas, which were not involved in design, tendering and supervision, have shown reluctance to shoulder the new costs. Furthermore, most Pradeshiya Sabhas have neither the technical nor the financial capacity to ensure O&M of the rural access roads. In response, building the capacity of the Pradeshiya Sabhas to maintain rural access roads has been made a priority component under a follow-on project.12

59. The Provincial Roads Authority maintains the C, D & E roads. The funds available for maintenance of the C, D & E roads are likely to be inadequate. For example, the current year's O&M budget for Matara district is SLRs13 million for 1,520 km of roads—or about SLRs8,550 per km. A special study13 estimated the annual O&M requirement for gravel to paved roads to be SLRs63,000–80,000 per km. Even at O&M rates one-half the consultant’s estimates, the large gap between actual and needed funding points to an insufficient budget to maintain provincial roads. 12 ADB. 2001. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the

Democratic Socialist Republic of Sri Lanka for the Southern Province Rural Economic Advancement Project (SPREAP). Manila.

13 D.P. Dayananda, Establishment of Provincial Infrastructure Maintenance Unit for Southern Province, 12 May 2000.

12

60. The sustainability of the credit component is also questionable. According to the PCIs, project credit was made available to small borrowers at 4–6 percentage points below interest charges on the regular loan portfolio. For interest rates to be sustainable, they must cover the cost of funds, administration, provision for losses, and profit on invested funds. Under the Project, however, the PCIs were charging below-market rates. Credit at these rates would only be available through a project. Once the project withdraws, so too would the funds. Furthermore, below-market rates can foster uneconomic business and, eventually, losses for the loan period.

61. Overall, the Project is less likely to be sustainable.

E. Environmental, Sociocultural, and Other Impacts

62. Project works were generally small-scale and spread over a large geographical area, making the environmental impact of any subcomponent negligible. The Project had no resettlement effects or adverse impacts on indigenous people. Because of earth cuts and filling in the construction of roads and the industrial estate, some soil erosion and spreading of earth occurred. However, the affect dissipated over a short period. On the positive side, the development of the industrial estate could facilitate the gathering of small industries for (i) collective waste management, and (ii) easier monitoring by concerned government officers.

63. The Project's SWED schemes were undertaken only after obtaining environmental approval from the Central Environmental Authority (CEA) and concurrence from the Coastal Conservation Department (CCD). Generally, the impact of the SWED and MIS schemes has been better drainage, control of water, and enhanced livelihoods. However, the Kogalla SWED scheme created a permanent outfall for the coastal lake, which allows seawater to flow in during high tides. This unintended project impact has the potential to make lands near the lake uncultivable. PID and CCD are studying and addressing this issue.

64. The Project improved rural participation, water supply, and access. While many of the village organizations are no longer active, the participatory process has been established. The groups are ready to reactivate when other projects or potentials arise. The experience in participatory development had some other positive residual effects. For example, women who were trained under the WID subcomponent have gone on to join farmer organizations. Women also benefited as direct users of the improved infrastructure, including roads, water supply, and rural electricity. In the credit component, female borrowers accounted for 38% of the loans. Women made up a substantial portion of the labor employed at Charley Mount Industrial Estate.

65. In terms of poverty and opportunity, the project generated some employment and contributed slightly to farm output. Most farms are small with low rice yields. Even with increases in rice production from irrigation, the gains are modest—not enough to have a substantial impact on poverty. As a result, many farmers have to generate outside income in addition to farm produce to reach the food poverty line. An estimated 15,000 jobs were created (mostly from the credit-financed enterprises), which amounted to opportunity for about 3% of the Province households.

66. In terms of institutional impact, the participating staff of the EA, implementing partners, and domestic contractors gained project experience and skills through the Project. In sum, the Project’s environmental, sociocultural, and other impacts are moderate.

13

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

67. The scope of work generally was achieved, and physical targets were surpassed for roads and village infrastructure. Many of the project objectives were attained, including increased employment, economic activity, and an improvement in quality of life. However, the achievements were not of the magnitude envisaged at appraisal. The project benefits reached poor households, especially those in remote villages. The project was completed without major delay.

68. In evaluation, the Project was found to be relevant, but the design did not emphasize sufficiently capacity assessment and sustainability. The Project achieved or surpassed appraisal targets for physical outputs. However, the quality was uneven, as was the attainment of the associated goals (employment, income, time savings, and agricultural production, among others). Some environmental, social, and institutional gains were made. Costs were in line with appraised amounts, but compromised benefits and a shortened life span for gains will cut into economic returns. For the main outputs of infrastructure and credit-financed enterprises, the sustainability is questionable. In sum, the Project is rated as partly successful. Of the accompanying TAs, TA 1613 was partly successful and TA 1614 was unsuccessful.

B. Lessons Learned

69. The Project’s management demonstrated an ability to achieve substantial disbursements and physical outputs for the Province. However, the numerous sectors, activities, and implementing agencies were spread over a large geographic area. As such, the Project did not achieve the focus and synergy that might be expected for an IRDP. This geographic spread stretched project management and limited the ability to focus on strategic issues, such as capacity building in implementing agencies, strengthening O&M, and ensuring sustainability.

70. In terms of closure and continuity, the Project and IRDPs typically employ an independent project management unit to coordinate activities and budgets during implementation. Upon completion, officers and staff frequently transfer and the project civil works are delegated—often to line agencies with inadequate O&M programs and budgets. The sense of continuity, commitment, and follow-through of the IRDP are generally casualties.

71. While the Project and other IRDPs have achieved some increases in rural income and employment, they generally have not resulted in a self-sustaining process of income growth to break the cycle of rural poverty. The projects typically have not provided rural inhabitants with the alternative skills, resources, and employment avenues required to move to higher levels of productivity.

72. The Project has not overcome the fact that lowland agriculture in the Province generally is practiced on a subsistence basis, involving uneconomic-sized farms, land tenure and labor constraints, limited access to technology and inputs, and low levels of technical know-how.14 The Project basically focused on upgrading infrastructure facilities. A more comprehensive approach to agriculture would include improving (i) farm practice and input use, (ii) input availability and product marketing, and (iii) crop diversification. This implies a higher profile for agricultural extension, farming systems, agribusiness and marketing, and policy assessment—areas less easily addressed in an integrated rural development approach. 14 The assessment was made through a review of reports, project evaluations, discussions with agriculture

professionals and irrigation technicians, farmer interviews, and direct observation.

14

73. The requirement of 10% farmer contribution to irrigation works was an obstacle to implementation. While this rate might be workable in high-performance systems, the appropriateness must be carefully considered when applied to subsistence agriculture. An alternative proposal for the future was half pay or food for labor. Under that proposal, poor farmers would have something to bring home at the end of the day, while simultaneously contributing to the irrigation works.

74. The PBME studies were partially satisfactory. The shortcomings were not necessarily in the execution of the PBME surveys by consultants. They were due partly to (i) inadequate ADB communication of its information and evaluation needs, and (ii) a lack of guidance to the local consultants conducting the surveys. To this end, more ADB contribution and guidance to these surveys is advisable if they are to provide useful input into ADB evaluations later.

75. If an environmental assessment study was done for at least one SWED scheme during project preparation, the SWED implementation could have been launched earlier. This Project highlights the importance of preparing a technically rigorous environmental assessment early in the business process. That would allow (i) the integration of safeguards into subproject design, (ii) the appropriation of funds, and (iii) the provision of adequate institutional support as needed. ADB’s suspension of SWED works until CEA approved the technical studies demonstrates the importance of monitoring safeguard compliance during project implementation.

C. Recommendations

1. General

76. In considering project implementing agencies and partners, stronger analysis of institutional capacities and enhancement strategies is needed. Too often, implementers are preoccupied with the attainment of outputs, rather than seeing them as a means to the desired end—poverty reduction. The project design should look beyond implementation and consider the measures needed to build long-term capacity in key sectors. Strengthening O&M should be a major focus, rather than a peripheral concern, in any project dealing with rehabilitation or construction of infrastructure. In addition, PBME should be strengthened starting with project formulation.15

77. In promoting industrial development, supply-driven projects should be approached warily in future. As a gauge of real market demand, a private development partnership should be sought with substantial risks shared by investors. Governments should facilitate rather than lead. Projects aimed at expanding emerging enterprise and industry should provide more than credit. To encourage the growth of medium, small and micro-enterprise, the capacity of entrepreneurs in business literacy, planning, record-keeping, management, and loan access must be strengthened. For banks, improved loan appraisal and monitoring also is needed. Furthermore, the long delays seen in the start-up of the self employment credit subcomponent could be avoided in future projects by securing understandings and agreements during project preparation or prior to loan effectiveness.

78. For wet zone agriculture, strategies should account for the changing structure of incentives (including reduced fertilizer subsidies and increased labor costs) and the potential for increasing income from cash crops (tea, cinnamon, pepper, etc.). In the dry zone, diversified and 15 To strengthen PBME during project formulation, greater specification could be made of the needs, in terms of

expertise, equipment, resources, reporting indicators, and procedures. The program for PBME surveys and studies could also be further specified and supplemented by samples of best practice.

15

high-value cropping should be selectively encouraged and supported. The potential for supplying high-quality fruit and vegetables to the growing tourist and urban markets should be explored.

2. Project-Related

79. To counter a number of substandard project outcomes in irrigation and drainage, PID should undertake an inventory of the project irrigation works to chronicle shortcomings, identify solutions, and prioritize follow-up actions. PID and CCD should start monitoring water quality in Kogalla Lake and other SWED areas. This requires the provision of equipment and the training of irrigation officers. A follow-up study is needed on (i) the increased salinity in the Kogalla SWED resulting from project work on the outfall, and (ii) proposed control measures.16 The Coastal Resources Management Project17 should consider incorporating works on Kogalla during its midterm review to be launched in 2004.

80. For the fisheries research center, efforts should be made to promote research with high potential for commercial applications. The institution should seek to strengthen private-sector partnerships and joint funding of research projects.

81. When providing development credit, the Central Bank and PCIs should weigh the perceived benefit of subsidized interest rates against the disadvantages. Below-market rates can (i) attract opportunistic borrowers rather than sound economic enterprises, and (ii) impair the financial viability of the banks by operating at less than cost. For banks to be sustainable in the long run, without dependence on government capital infusions, the interest rates should aim to cover the (i) cost of funds, (ii) cost of administration, (iii) provision for bad loans, and (iv) provision for profit or return to shareholders.

82. Future projects with a substantial roads component should draw from a preparation study or master plan for roads development and have a substantial commitment to developing O&M capacity. Maintenance systems and rates should be developed, standardized, and institutionalized to guide provincial and local governments in planning and budgeting for their needs.

83. Through the follow-on project (Loan 1849 SPREAP, footnote 12), ADB should follow up with the Government on important unresolved issues, such as inadequate O&M for infrastructure, limited sustainability of credit-financed enterprises, and limited agriculture impact. That project is attempting to (i) strengthen entrepreneur skill in business planning and loan access, and (ii) build capacities at the Pradeshiya Sabha level in O&M of rural access roads. The project performance audit report should be prepared in August 2005, about 1½ years after circulating the Project Completion Report and about 3 months before the expected midterm review of SPREAP.

16 The study should clearly assess technical, social, environmental, and economic factors. Remedial works should only

proceed if all hurdles are unambiguously dealt with. 17 ADB. 1999. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the

Democratic Socialist Republic of Sri Lanka for the Coastal Resources Management Project. Manila.

16 Appendix 1

TECHNICAL ASSISTANCE COMPLETION REPORTS A. TA1613-SRI: Institutional Strengthening of the Southern Provincial Council Division: SAAE

Amount Approved: $420,000 TA No., Country, and Name TA 1613-SRI: Institutional Strengthening of the Southern Provincial Council

Revised Amount: $420,000

Executing Agency: Ministry of Policy Planning and Implementation

Source of Funding: Technical Assistance Special Fund

Amount Undisbursed $84,682.98

Amount Utilized $335,317.02

Date of Report TA Completion Date Approval 26 Nov 1991

Signing 20 Dec 1991

Fielding of Consultants 4 Nov 1996

Original: 31 Dec 1999

Actual: 17 May 1999

Account Closing Date Original:

31 Dec 1999 Actual: 17 May 1999

Description The technical assistance (TA) was to strengthen the Southern Provincial Council (SPC), through its Provincial Planning Division and subsidiary field units, to address (i) recent governmental changes towards devolution, and (ii) implementation of Loan 1128-SRI(SF): Southern Province Rural Development Project (the Project). Since the Project involved numerous implementing agencies and partners, the need for capacity building in planning and coordination had been identified. The Project also was dependent on the involvement of various levels of government—from province, to district, to division, to local government (Pradeshiya Sabha), to the village level (Gramodaya Mandalaya). While the government's devolution was designed to support a bottom-up planning approach, the processes for decentralized planning were not developed or institutionalized at the time. The TA was to assist in defining and coordinating the planning process of local governments and the province. In doing so, the TA aimed to support the implementation of the Project. Objectives and Scope One objective of the TA was to enhance the planning, monitoring and implementation capabilities of the agencies involved in the project to enable them to fulfill their prescribed roles in development projects more effectively manner. The TA targeted (i) the SPC, (ii) its Provincial Planning Unit, (iii) Divisional Government Agents, (iv) the Pradeshiya Sabhas, and (v) other institutions involved in project implementation. Another objective of the TA was to prepare a local environmental management plan and train selected staff in environmental management. Evaluation of Inputs The TA provided 12 person-months of input from an international institutional and rural development planner and 24 person-months of import from a domestic planner. The input approach aimed to (i) institute systems; (ii) design and provide training; and (iii) provide material support, including office hardware and a final report encompassing the work of the TA. Given the transition in government and the new programs reaching numerous small local government units, the mandate of the TA was broad for the relatively limited consultant input. The performance of the SPC, executing agency, was satisfactory. The systems input included (i) institutional recommendations for the Provincial Planning Secretariat, councils and coordinating

Appendix 1 17

committees; (ii) a template for an updated socioeconomic profile, an outline for a provincial development plan, and a draft environmental management plan; and (iii) a basis for a provincial monitoring and evaluation system. The training included: strategic planning, basic computer applications, communication and negotiation, benefit monitoring and evaluation, a foreign study tour in the Philippines on devolution and local governance, rapid rural appraisal, environment, project preparation, and investment programming. Through 14 presentations, 298 participants received training, including 93 women. Hardware provided under the TA was limited to a fax machine, photocopier, computer, printer and generator. The consultants’ inputs were satisfactory. The cost of the TA was within budget. The client was satisfied with the input quality. The performance of ADB was partly satisfactory due to the mismatch of broad scope of work with resources provided to cover it. Evaluation of Outputs The consultants’ outputs were partly satisfactory. The consultant submitted required reports and documentation, including a seven-volume final report. The materials covered in training were appropriate. However, results were limited in (i) annual operational and longer-term planning, (ii) coordination and integration with the Project, (iii) establishment of a sound monitoring and evaluation unit, and (iv) preparation of a local environmental management plan. The skills of some government staff were upgraded through exposure to training, and the provincial government adopted some approaches and practices addressed in the TA (such as provincial profiling and investment programming). The integration with local government planning for a bottom-up approach was not evident. Absorption of the TA concepts at lower levels of government was even less tangible than at the provincial level. In terms of design, the scope for developing planning capacities across all levels of government in the province was too ambitious for the limited inputs. Since the resources were limited, the focus should have been on areas with strong bearing on the implementation of the Project. This was not accomplished satisfactorily. Sustainability of much of the work program was limited. Institutional impact was only fair. The client was partially satisfied. Overall Assessment and Rating The TA is rated as partly successful. The outputs were partially attained, and the TA was partly efficient. Parts of the TA outputs were incorporated into the provincial planning process, but other aspects of the TA were not. Major Lessons Learned The TA could have been more relevant and effective had its objectives and scope been more closely aligned with the implementation of the Project. Careful assessment of the scope of work should be made to ensure that adequate resources are available to execute it. Recommendations and Follow-Up Actions The project management office should be involved more deeply in the design and implementation of TAs associated with the loan. Prepared by Jiangfeng Zhang Designation Economist

18 Appendix 1

B. TA 1614-SRI: Promotion of Micro-Enterprise through Strengthening of Marketing Division: SAAE

Amount Approved: $320,000 TA No., Country, and Name TA 1614-SRI: Promotion of Micro-Enterprise through Strengthening of Marketing

Revised Amount: $320,000

Executing Agency: Ministry of Policy Planning and Implementation

Source of Funding: Technical Assistance Special Fund

Amount Undisbursed $191,088.87

Amount Utilized $128,911.13

Date of Report TA Completion Date Approval 26 Nov 1991

Signing 20 Dec1991

Fielding of Consultants 26 Nov 1996

Original: 31 Dec 1999

Actual: 2 Apr 1998

Account Closing Date Original:

31 Dec 1999 Actual: 2 Apr 1998

Description Unemployment and underemployment were widespread in Southern Province (the Province) during the preparation of Loan 1128-SRI(SF): Southern Province Rural Development Project (the Project). The project design focused on strategies to boost jobs. The TA was to examine several options for improving the marketing conditions for industry and enterprise. The presence of government backed Purchase Centers and the desire to assess the establishment of another organization in the Province, an Industrial Marketing and Information Center, provided additional backdrop for the TA.

Objectives and Scope The objective of the TA was to promote the growth and diffusion of industries in rural areas by overcoming what it identified as the most severe constraint—marketing. The TA consultant was to (i) study marketing for non-farm products in the Province; (ii) design a speedy system for communicating marketing information between the Government and relevant nongovernment organizations; (iii) develop computer software to analyze and present information in the desired forms for dissemination; (iv) conduct seminars and workshops; and (v) examine the feasibility of establishing an Industrial Marketing and Information Center. The terms of reference (TOR) called for an eminent market and small business expert.

Evaluation of Inputs The TA provided for 12 person-months of international consulting services. The input approach was to (i) assess market conditions, (ii) provide training to groups in the three districts of the Project (Galle, Matara, and Hambantota), and (iii) counsel entrepreneurs. The performance of the executing agency, the Southern Province Council, was partly satisfactory. The project director recommended an international consultant working on the Project as the TA consultant. Though this practice saved money, and TA activities did not deviate from the TOR, the quality of the consultant input was low. The client was less than satisfied with the TA inputs. The consultant inputs were unsatisfactory. The input of ADB was unsatisfactory. The TOR of the TA were poorly thought out and weakly written. Measurable indicators for TA targeting and monitoring were lacking. ADB did not supervise TA activities closely.

Appendix 1 19

Evaluation of Outputs The consultant outputs included an inception report, market study, training, and a final report. The market study was summarized in the consultant final report. The final report was not well written, rambling, and only partly addressed the TOR. Analysis was inadequate, and the conclusions were poorly supported. The report did not support the establishment of another new institution, the Industrial Marketing and Information Center. It did lament, however, the death of the government-pushed Purchase Centers for each division in the country. In the final report, the consultant provided a simple data entry proposal of no value for developing a computerized market information system. Lastly, the final report contains a short bibliography on enterprise. The consultant output was unsatisfactory. Reports on the questionable subject matter of the TOR were not accomplished well and the output was ineffective. The quality of the output was deficient. The client was not satisfied with the output. Overall Assessment and Rating The TA is rated as unsuccessful.

Major Lessons Learned The relevance of the subject matter did not seem to have been scrutinized. It appeared to be patched together from various parties without sufficient analysis of the issues presented.

Recommendations and Follow-Up Actions TA proposals should go through thorough interdepartmental review for logic and program consistency before being processed and approved.

Prepared by Jiangfeng Zhang Designation Economist

20 Appendix 2

ACHIEVEMENT OF PROJECT OUTPUTS

Components/Subcomponents

A. Productive Components 1. Irrigation and Drainage a. Minor Irrigation no. 147 121 121 82 100 b. Saltwater Exclusion Drainage Scheme no. 4 4 4 100 100 c. Agriculture Research demo plots 25 10 40 d. Agricultural Extension SLRs million 3

2. Pilot Fisheries a. Lobster Production casitas 2,500 900 900 36 100 b. Mollusc Production rafts 6 9 9 150 100 c. Regional Fisheries Research Center no. 1 1 100

3. Private Sector a. Small- and Medium-Scale Industries Provision of Infracture to the Charley Mount Industrial Estate hectare 20 8 8 40 100 Provision of Credit to Entrepreneurs at the Estate plots 53 56 106

SLRs million 171 60 37 22 62 b. Rural Microcredit and Self-Employment Rural Credit loans 10,500 10,500 9,202 88 88

SLRs million 330 346 515 156 149

B. Economic/Social Infrastructure Components 1. Farm-to-Market Roads a. Rural Village Access Roads in Galle District km 230 430 430 187 100 b. Feeder Roads (C, D, E class) km 168 290 290 173 100 c. Small Access Bridge no. 1 1 100 d. Local Market Centers no. 7 7 100 Bus Stands no. 2 2 100 e. Soil Testing Laboratory and Equipment no. 1 1 100 2. Village Advancement Program villages 240 330 330 138 100 3. Women-in-Development a. Upgrading of VocationalTtraining Centers no. 2 b. Provision of Computer Traning trainees 240 120 120 50 100 c. Awareness and Home Economics Training trainees 7,000 20,000 18,657 267 93

C. Institutional Support Components 1. Project Management Support PMO staff no. 51 75 103 202 137 Renovation of DD and AD Wings no. 1 1 1 100 100 Staff Quarters no. 20 20 23 115 115 PMO Building no. 1 1 1 100 100 Double cabs no. 20 36 40 200 111 Micro Bus no. 1 1 100 Car no. 1 1 100 Computers/Printers no. 7 10 143 2. Training and Fellowships Rehabilitation of Training Center no. 1 1 1 100 100 In-Country Training pm 4,390 4,390 4,740 108 108 Overseas Training pm 28 38 48 171 126 AD = additional director, DD = deputy director, demo = demonstration, km = kilometer, no. = number, pm = person-months, PMO = project management office.Source: Asian Development Bank estimates.

against Target atAchievement in % Achievement

at Completion AppraisalUnit

Midtermat Appraisal

Output Targets

at Midterm

Appendix 3 21

PROJECT COSTS ($’000)

Foreign Local Total Foreign Local Total Foreign Local Total

A. Productive Components1. Irrigation and Drainage 1,631 4,601 6,232 895 2,572 3,467 1113 3,199 4,312 2. "Pilot" Fisheries 3 160 163 196 196 243 243 3. Private Sector

a. Small/Medium Industry 843 3,467 4,310 97 425 522 121 528 649 b. Rural Micro/Self-Employment Credit 598 4,463 5,061 755 5,536 6,291 939 6,887 7,826

Subtotal 3,075 12,691 15,766 1,747 8,729 10,476 2,173 10,857 13,030

B. Economic/Social Infrastructure Component1. Farm-to-Market Roads 2,477 4,074 6,551 5,739 9,411 15,150 7,138 11,706 18,844 2. Village Advancement 2,289 4,270 6,559 3,083 5,764 8,847 3,835 7,170 11,005 3. Women-in-Development 55 270 325 262 262 326 326

Subtotal 4,821 8,614 13,435 8,822 15,437 24,259 10,973 19,202 30,175

C. Institutional Support Components 1,626 2,507 4,133 1,347 2,105 3,452 1,676 2,618 4,294

D. Service Charge 1,127 1,127 1,142 1,142 1,137 1,137

E. Contingencies 2,869 10,672 13,541

Total 13,518 34,484 48,002 13,058 26,271 39,329 15,959 32,677 48,636Source: Asian Development Bank estimates.

Appraisal EstimateComponent

Revised after Midterm Actual

22 Appendix 4

ANNUAL DISBURSEMENTS OF ASIAN DEVELOPMENT BANK LOAN ($’000)

No. Category Name Total

01 Civil Works 522 332 2,090 2,809 5,766 6,477 5,120 1,868 1,853 68 26,905 02 Equipment & Materials 54 40 19 16 176 853 85 15 1 1,260 03 Vehicles 114 70 96 93 24 42 440 04 Consulting Services 126 188 360 53 50 8 53 0 839 05 Training 13 108 33 311 85 100 118 91 3 862 06 Credit 47 556 738 2,908 1,624 769 486 7,128 07 Incremental Operating Cost 8 30 21 65 17 50 14 13 2 220 08a Survey & Investigation 10 14 10 140 75 113 15 25 402 09 Service Charge 2 6 16 56 102 185 272 325 175 1,137 10 Unallocated99 Imprest Fund99A CBSL Imprest Account

Total 691 480 2,548 3,689 7,751 10,652 7,439 3,132 2,739 74 39,193 CBSL = Central Bank of Sri Lanka.Source: Asian Development Bank estimates.

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Appendix 5 23

PROJECT IMPLEMENTATION SCHEDULE

C o m p o n e n t / S u b c o m p o n e n tI . P r o d u c t i v e C o m p o n e n t

A . I r r ig a t io n a n d D r a in a g e1 . S a l t W a t e r E x c lu s io n D r a in a g e S c h e m e

2 . M in o r I r r ig a t io n S c h e m e s

3 . A g r i c u l t u r e R e s e a r c h a n d E x t e n s io n

B . F is h e r ie s1 . P i lo t P r o je c t f o r L o b s t e r a n d M o l lu s c

2 . F is h e r ie s R e s e a r c h C e n t e r

C . P r iv a t e S e c t o r1 . S m a l l / M e d iu m I n d u s t r y( i ) C o n s t r u c t io n o f I n d u s t r ia l E s t a t e

( i i ) P r o v is io n o f C r e d i t t o S m a l l / M e d iu mI n d u s t r ie s

2 . P r o v is io n o f R u r a l M ic r o c r e d i t

3 . P r o v is io n o f S e l f - E m p lo y m e n t C r e d i t

I I . E c o n o m i c / S o c i a l I n f r a s t r u c t u r e C o m p o n e n t

A . F a r m - t o - M a r k e t R o a d s1 . R e h a b i l ia t io n o f C , D , & E C la s s R o a d s

2 . C o n s t r u c t io n o f R u r a l A c c e s s R o a d s

3 . C o n s t r u c t io n o f T a w a la m a B r id g e

5 . M a t e r ia ls T e s t in g L a b o r a t o r y

6 . M a r k e t R e la t e d I n f r a s t r u c t u r e

B . V i l la g e A d v a n c e m e n t P r o g r a m1 . I m p le m e n t a t io n o f V i l la g e A d v a n c e m e n tP r o g r a m

2 . R u r a l E le c t r i f i c a t io n P r o g r a m

C . W o m e n - I n - D e v e lo p m e n t

1 9 9 3 1 9 9 4Q 1 Q 2 Q 3 Q 4Q 1 Q 2 Q 3 Q 4

1 9 9 5Q 1 Q 2 Q 3 Q 4

1 9 9 6Q 1 Q 2 Q 3 Q 4 Q 4

1 9 9 7Q 1 Q 2 Q 3 Q 4

1 9 9 8Q 1 Q 2 Q 3

1 9 9 9Q 1 Q 2 Q 3 Q 4

2 0 0 0Q 1 Q 2 Q 3 Q 4

24 Appendix 5

Component/Subcomponent

III. Institutional Support Components

A. Project Management1. Construction of PMO Buidling and staff quarters

2. Procurement of Equipment & Vehicles

B. Consulting Services1. International Consultants

2. Domestic Consultants

C. Training1. Local Training

2. Overseas Training

3. Upgrading of Habarakade, Galle, Baddegama and Elpitiya training center

IV. TA ConsultantsA. TA 1613

B. TA 1614

PMO = Project Management Office, TA = technical assistance. Legend: = Appraisal = Actual

Q1 =first quarter = Actual Program, Minor Progress

1993 1994 1995 1996 1997 1998 1999 2000Q1 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

Appendix 6 25

IMPLEMENTING AGENCIES

Components Appraisal Revised at Midterm ActualA. Productive Components 1. Irrigation and Drainage a. Minor Irrigation i. Construction PID DAS/CECB/MECA DAS/MECA ii. O&M and Water Management DAS DAS/CECB/MECA DAS/MECA iii. 20 ha or less command area PID PID iv. 20 ha or above command area CID CID

b. Saltwater Exclusion and Drainage Scheme i. Ella, Koggola, Madampe, Moragoda PID PID PID/CCD ii. Rantotuwela PID CID CID

2. Pilot Fisheries PMOa PMO/NARRD PMO/NARRD

3. Private Sector a. Small- and Medium-Scale Industries PMO/PCIsa PMO/DFCC PMO/DFCC

b. Rural Microcredit PCIs/NGOsa /VG/AGA CBSL/RDB NDB/CBSL/RDB

c. Self-Employment Credit JTF TCCS TCCS

B. Economic/Social Infrastructure Components 1. Farm-to-Market Roads a. Rural Village Access Roads in Galle District PMOb/AGA PMO/DS PMO/DS

b. Feeder Roads (C, D, E class) PHD CECB/MECA/PRDA PRDA/MECA

c. Small Access Bridge (Thawalama) PRDA PRDA

d. Local Market Centers PMO PMO/ESUSP Bus Stands

2. Village Advancement Program PMOb/AGA PMOb/DS PMOb/DS

3. Women-in-Development PMOc/PS/AGA PMOc PMOc

C. Institutional Support Components PMO PMO PMO

a In association with private sector.b In association with village groups.c In association with women.Source: Ministry of Southern Regional Development.

AGA = additional/assistance government agent, CBSL = Central Bank of Sri Lanka, CCD = Coastal Conservation Department, CECB =Central Engineering Consultancy Bureau, CID = Central Irrigation Department, DAS = Department of Agrarian Services, DFCC=Development Finance Cooperation of Ceylon, DS = divisional secretaries, ESUSP = Engineering Services Unit, Southern Province, ha =hectare, JTF = Jasanaviya Trust Fund, MECA = Mahaweli Engineering Construction Agency, NARRD = National Aquatic Resources andResearch Development, NDB = National Development Bank, NGO = nongovernment organization, O&M = operation and maintenance PCIs= participating credit institutions, PHD = Provincial Highways Department PID = Provincial Irrigation Department , PMO = ProjectManagement Organization, PRDA = Provincial Road Development Authority PS = private sector, RDB = Ruhuna Development Bank, TCCS =Thrift and Credit Cooperative Society, VGs = village groups.

26 Appendix 7

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant Reference Status of Compliance Imprest Fund The Borrower shall establish an imprest account at Central Bank of Sri Lanka (CBSL) to ensure the timely release of the proceeds of the Loan.

Schedule 3, para. 12

Complied with. Initial advance to the imprest account was value dated 27 July 1992.

Executing Agency Ministry of Policy Planning and Implementation (MPPI), acting through Regional Development Division (RDD), shall have overall responsibility for the execution and coordination of the Project at the national level.

Schedule 6, para. 1

Complied with.

Southern Provincial Council (SPC) SPC shall be responsible for project implementation at the provincial level. Within one month of the effective date, SPC, in collaboration with MPPI/RDD, shall establish a Project Management Office (PMO) in Galle.

Schedule 6, para. 2(a)

Complied with.

Project Management Office The PMO shall be headed by a full-time project director acceptable to the Asian Development Bank (ADB) and assisted by an adequate number of suitably qualified staff. The project director shall have sufficient authority and rank to perform his functions effectively. The project director and key staff of the PMO and the implementing line agencies shall be provided appropriate facilities to perform their tasks in an adequate manner.

Schedule 6, para. 2(b)

Complied with.

Divisional Coordination Committee (DCC) At the divisional and village level, the DCC shall be responsible for the coordination of the village advancement program (VAP) and the village roads, as well as the rural and self-employment credit components. For the purposes of the Project, DCC shall include the project director or his representative, the agriculture officer of the Provincial Agriculture Department, the institutional organizers of the Agrarian Services Department, the irrigation engineer of the Provincial Irrigation Department, the Grama Niladharis, representatives from the participating credit institutions (PCIs) and nongovernment organizations (NGOs), and selected agencies and farmers.

Schedule 6, para. 3

Complied with. DCC is a permanent committee of the Government that normally meets monthly. It not only reviews progress of development activities under the Project but also activities under the Samurdhi (poverty alleviation) movements.

Central Bank of Sri Lanka Under the overall project coordination of MPPI, CBSL shall be the implementing agency for the implementation of the credit component under Part A.c(ii) and its part of Part A.c(iii) of the Project and shall as such be responsible for the supervision of the PCIs for these components.

Schedule 6, para. 4

Complied with.

Appendix 7 27

Covenant Reference Status Of Compliance

High Level Intersectoral Steering Committee The high level intersectoral steering committee for the Southern Province Development, chaired by the state secretary of MPPI, shall be responsible for coordination of the Project with other ongoing and prospective projects in the Province and ensure liaison at the national level between MPPI/RDD, the implementing line agencies, CBSL, Thrift and Credit Cooperative Societies (TCCS) and the PCIs.

Schedule 6, para. 5

Complied with.

Provincial Project Steering Committee Within one month of the effective date, the Borrower shall establish a provincial project steering committee, chaired by the chief secretary of SPC, and comprising a representative from MPPI/RDD, SPC’s deputy chief secretary (planning), the project director, provincial heads of the line implementing agencies, heads of provincial branches of the PCIs, and selected agencies.

Schedule 6, para. 6

Complied with.

Selection Criteria for Minor Irrigation Scheme Except as ADB may otherwise agree, minor irrigation schemes shall meet the following criteria for inclusion under the Project: (i) the command area of the scheme shall be at

least 4 hectares (ha) and at least 10 families shall benefit from the scheme;

(ii) the base cost of the scheme shall not exceed SLRs30,000 per ha for rehabilitation and SLRs60,000 per ha for a new scheme (based on 1991 prices);

(iii) a farmers’ organization for the scheme shall have been established and registered in accordance with the Borrower’s Agrarian Services Act of 1979 as, amended from time to time;

(iv) the farmers’ organization shall have agreed to (a) contribute at least 10% of the cost of rehabilitation and construction in the form of labor or cash; and (b) operate and maintain the scheme after completion, at its own expense;

(v) the scheme shall have an economic internal rate of return (EIRR) of at least 12%.

Schedule 6, para. 7

Complied with.

Contract with Farmers’ Organization Within three months of the effective date, the PMO shall submit to ADB for its review and comments a draft contract between the Borrower and the farmers’ organizations, reflecting the farmers’ organizations’ undertakings pursuant to paragraph 7(iv) above.

Schedule 6, para. 8

Complied with.

28 Appendix 7

Covenant Reference Status Of Compliance

Approval of Minor Irrigation Schemes Feasibility studies of the first five irrigation schemes to be implemented under the Project, comprising one new scheme each in the Galle and Matara districts, and one rehabilitation scheme each in the Galle, Matara and Hambantota districts, each with an area of more than 20 ha, shall be submitted by MPPI to ADB for its review and approval prior to implementation of such schemes. All other schemes shall be subject to approval by the project director.

Schedule 6, para. 9

Complied with.

Approval of Salt Water Exclusion and Drainage (SWED) Schemes Technical and economic studies of the SWED schemes shall be submitted by MPPI to ADB for its review and approval prior to implementation.

Schedule 6, para. 10

Complied with.

Selection of Rural Access Road The PMO shall select the rural access roads to be included under the Project, on the basis of the following criteria: (i) the roads shall provide access to areas of high

farm and non-farm production potential, to facilitate the marketing of products and services;

(ii) priority shall be given to areas where other development programs are either ongoing or planned for the immediate future;

(iii) the road length shall be not more than 10 kilometers, except where the existing road network is inadequate and constitutes a bottleneck to development;

(iv) the route shall avoid big fills over long distances, stretches that are extremely rocky or have sustained lengths of gradient exceeding 10%, and areas that will require construction of expansive structures; and

(v) the road shall connect onto classified C, D and E roads.

Schedule 6, para. 11

Complied with.

Village Advancement Program NGOs and selected volunteers, especially women, shall be utilized to act as social mobilizers.

Schedule 6, para. 12

Complied with.

Relending and Onlending Terms and Conditions The Borrower and CBSL, respectively, shall relend, under prudent banking terms and conditions, the portions of the proceeds of the loan relating to the credit components, to TCCS and eligible PCIs as specified in paragraph 16 of this schedule, for the purpose of onlending such proceeds to eligible sub-borrowers for eligible subprojects as specified in paragraphs 17 and 18 of this Schedule.

Schedule 6, para. 13

Complied with.

Appendix 7 29

Covenant Reference Status Of Compliance

The Borrower and CBSL, respectively, shall cause TCCS and the PCIs to finance at least 10% of the total cost of each subproject from their own resources and to make the subloans under prudent banking terms and conditions.

Schedule 6, para. 14

Complied with.

The Borrower, TCCS and CBSL shall review the interest rates specified in paragraphs 13 and 14 above on a semi-annual basis and, upon prior approval by the Borrower and ADB, revise such rates, if deemed appropriate on the basis of the market conditions and the need to provide the PCIs with an adequate spread.

Schedule 6, para. 15

Complied with. The Borrower requested ADB to reduce interest rate for the Project to 12% from 16%. ADB reduced the rate to 14%.

Eligibility Criteria for PCIs The PCIs shall be selected by CBSL. The selection shall be subject to approval by MPPI. Except as ADB and MPPI may otherwise agree, the eligibility criteria for PCIs and their branches shall include: (i) each PCI shall have at least 2 years experience in lending to the target sub-borrowers; (ii) each PCI’s loan recovery rate during the 2 years preceding its application to participate in the credit operations, shall be at least 70%; (iii) each PCI shall be operated in accordance with sound financial, banking and management practices, including maintenance of an appropriate debt-equity ratio and adequate provision for bad debts in accordance with general guidelines in this regard of CBSL; (iv) each PCI shall have established an accounting and financial reporting system and credit monitoring procedures acceptable to CBSL and have its accounts audited annually by an independent auditor; and (v) each PCI providing subloans to sub-borrowers under Part A.c(iii) or (iv) of the Project shall operate a savings program for its sub-borrowers, which program shall be kept active as long as subloans are outstanding with such PCI.

Schedule 6, para. 16

Complied with.

Eligibility Criteria for Subborrowers Sub-borrowers under part A.c(ii) of the Project shall be small- and medium-scale entrepreneurs participating in the industrial estate at Charley Mount. Sub-borrowers under Part A.c(iii) and (iv) of the Project shall be small- and medium-scale rural entrepreneurs, and villagers from villages included in the VAP, respectively. Such sub-borrowers shall be selected on the basis of their personal integrity and positive attitude.

Schedule 6, para. 17

Complied with.

Eligibility Criteria for Subprojects To be eligible for financing under the Project, and except as ADB may otherwise agree, subprojects shall meet the following criteria: (i) the subproject

Schedule 6, para. 18

Complied with.

30 Appendix 7

Covenant Reference Status Of Compliance

shall consist of a small- or medium-scale industrial enterprise at Charley Mount Industrial Estate, a small- or medium-scale rural enterprise in the project area, or a self-employment scheme in a village included in the VAP; (ii) the cost of the fixed assets of the subproject shall not be more than SLRs5,000,000; (iii) the subproject shall be productive and income generating, labor intensive and employment creating; (iv) the subproject shall utilize local raw materials; (v) provision shall be made for the marketing of finished products; (vi) the subproject shall be technically and financially sound, with a financial internal rate of return of at least 20%; and (vii) the subproject shall have no or negligible adverse environmental impact, and shall be in compliance with the Borrower’s environmental laws and regulations.

Approval of Subloans Subloans under Part A.c(ii) of the Project of SLRs4,000,000 or less shall be approved by the PCI concerned. Proposals for subloans exceeding SLRs4,000,000 shall be submitted to ADB for its prior approval. Subloans under Part A.c(iii) and (iv) of the Project of SLRs1,500,000 or less in the case of Development Finance Corporation of Ceylon (DFCC) and of SLRs500,000 or less in the case of TCCS and Ruhuna Development Bank (RDB), shall be approved by the PCI concerned. Proposals for such subloans exceeding SLRs1,500,000 by DFCC and SLRs500,000 by TCCS and RDB, shall be subject to prior approval by the Borrower, in respect of subloans from TCCS and by CBSL, in respect of subloans from the PCIs.

Schedule 6, para. 19

Complied with.

Specific Arrangements for Credit MPPI shall cause the PCIs to encourage NGOs and social mobilizers to assume responsibility for social mobilization and the supervision of beneficiaries target groups through provision to the NGOs and social mobilizers of service fees contingent upon loan recovery.

Schedule 6, para. 20

Complied with.

Implementation of Charley Mount Industrial Estate Prior to the operation of the estate and the provision of credit under Part A.c(ii) of the Project, and within 1 year of the effective date, PMO shall submit to ADB for its concurrence an implementation plan on the legal and institutional structure of the estate and the management thereof, and appropriate financial arrangements, including compensation for the use of the estate facilities and management services.

Schedule 6, para. 21

Complied with.

Appendix 7 31

Covenant Reference Status Of Compliance

Annual Work Programs MPPI shall, before 30 September of each year of project implementation, submit to ADB for its review and comments, draft annual work, credit and training programs, budgets, and staff requirements in connection with the implementation of the Project, for MPPI, the PMO and the implementing line agencies, together with the staff positions and the recommended division of responsibilities.

Schedule 6, Para. 22

Complied with.

Training MPPI, in consultation with SPC and PMO, shall prepare a detailed program for training, including selection criteria, duration and proposed locations of the training courses, and submit such program to ADB for its review and approval within 12 months of the effective date.

Schedule 6, para. 23

Complied with.

Operation and Maintenance (O&M) The Borrower shall take appropriate measures and provide the necessary funds, manpower and facilities for proper O&M of the project facilities. O&M of minor irrigation schemes and SWED schemes shall be carried out by the farmers’ organizations established for the schemes concerned in accordance with paragraph 8 (iii) of this Schedule. O&M of rural access roads and works provided under the VAP shall be carried out by the village beneficiaries groups at their own expense. O&M of class C, D and E roads shall be the responsibility of the Provincial Highways Department. All motorcycles provided under the Project shall be transferred to the end-users on a hire-purchase basis, in accordance with the Borrower’s rules and regulations. Such end-users shall be responsible for O&M of the motorcycles at their own expense.

Schedule 6, para. 24 Schedule 6, Para. 24

Not complied with. Maintenance for head works and main canals for minor irrigation schemes and SWED was supported by the Provincial Irrigation Department. Many farmers’ organizations exist administratively, but are not active at the field level. Rural access roads were turned over to the Pradeshiya Sabha, which generally has insufficient funds and staff to carry out this task effectively. Complied with.

Environmental Impact (a) MPPI and SPC shall ensure that contract

specifications for civil works under the Project are in accordance with existing environmental laws and regulations of the Borrower and shall require contractors to (i) consult with beneficiaries prior to construction, and (ii) take appropriate measures to ensure the protection of the environment.

(b) MPPI and SPC shall ensure that all subprojects comply with existing environmental laws and regulations of the Borrower. MPPI, in consultation with the Borrower’s Central Environment Authority (CEA), shall ensure

Schedule 6, para. 25

Complied with.

32 Appendix 7

Covenant Reference Status Of Compliance

environmental impact. Subprojects with potentially significant adverse environmental impact shall be cleared by the CEA prior to approval of the subloan for such subprojects.

Midterm Review In 1994, MPPI shall carry out a midterm review to assess the Project’s performance, identify problems encountered in project implementation, and propose remedies to problems identified, together with any reallocation of funds among project components as required for the remainder of the implementation period.

Schedule 6, para. 26

Delayed compliance. The midterm review mission was fielded in 1996 due to the Provincial Council election in March 1994, Parliamentary election in August 1994 and the Presidential election in September 1995.

Project Benefit Monitoring and Evaluation (PBME) The Provincial Planning Division within SPC, at the provincial level, together with MPPI/RDD at the national level, shall be responsible for monitoring project implementation and evaluating project benefits. For this purpose, the Borrower shall cause MPPI to submit to ADB for its approval a monitoring and evaluation program, within 3 months of the effective date. SPC and the PMO, with the assistance of the PBME consultants provided under the Project, shall carry out (i) benchmark surveys in the project area, within 12 months of the effective date; (ii) the midterm review referred to in paragraph 26 of this Schedule, by 1994; and (iii) a post-evaluation PBME report, within 6 six months after project completion.

Schedule 6, para. 27

Complied with.

Recording System The Borrower shall maintain, or cause to be maintained, records and accounts adequate to identify the goods and services and other items of expenditure financed out of the proceeds of the Loan, to disclose the use thereof in the Project, to record the progress of the Project (including the cost thereof) and to reflect, in accordance with consistently maintained sound accounting principles, the operations and financial condition of CBSL, TCCS, the PCIs and any other agencies responsible for carrying out the Project and operation of the project facilities, or any part thereof.

Article IV, section 4.06(a)

Complied with.

Audited Financial Statement The Borrower shall furnish to ADB, as soon as available but in any event not later than 6 months after the end of each related fiscal year, unaudited copies of such accounts and financial statements, and not later than 12 months after the end of each related fiscal year, certified copies of such audited accounts and financial

Article IV, section 4.06(b)(iii)

Delayed compliance. The statement for the FY1999 and 2000 was given to the project completion review mission. For FY1999, the auditor gave qualifications in the audit, which the Project furnished the mission with a

Appendix 7 33

Covenant Reference Status Of Compliance

statements and report of the auditors relating thereto, all in the English language.

copy of their response. The auditor gave an unqualified opinion on the FY2000 statement.

Quarterly Progress Report Without limiting the generality of the foregoing, the Borrower shall furnish, or cause to be furnished, to ADB quarterly reports on carrying out the Project and on the operation and management of the project facilities.

Article IV, section 4.07(b)

Complied with.

Project Completion Report Promptly after physical completion of the Project, but in any event not later than 3 months thereafter or such later date as may be agreed for this purpose between the Borrower and ADB, the Borrower shall prepare and furnish to ADB a report, in such form and in such detail as ADB shall reasonably request, on the execution and initial operation of the Project, including its cost, the performance by the Borrower of its obligations under the Loan Agreement and the accomplishment of the purposes of the Loan.

Article IV, section 4.07(c)

Complied with. ADB received Project Completion Report on 29 May 2001.

34 Appendix 8

CONSULTING SERVICES

Item

A. Consulting Services for Project Implementation

1. Internationala. Planning and Implementation Expert 24 24 24 24b. Industrial Development Expert 24 24 24 24c. Fisheries Specialist 2 0 0 0

Total 50 48 48 48

2. Domestica. Road Engineer 6 20 36 43b. Irrigation Engineer 18 24 54 103c. Agriculture Economist 6 6 6 17d. Fisheries Specialist 6 0 0 0e. PBME Specialist 30 4 30 23f. SWED Scheme Expert 18 62 36 20g. Financial Management Specialist 24 29 24 81h. Accountant 0 6 6 3I. Environment 0 9 6 25j. Training Specialist 0 6 6 6k. Hydrologist 0 6 6 6l. Water Resources Inventory Study 0 5 0 10m. Final Impact Evaluation Study 0 5 6 5

Total 108 182 216 342

B. Consulting Services for TA 16131. International

a. Institutional & Rural Development Planner 12 12 12 12

2. Domestica. Local Level Planner 24 24 24 24

Total 36 36 36 36

C. Consulting Services for TA 16141. International Industrial Marketing2. Promotion Expert 12 12 12 12

Total 12 12 12 12pm=person-month, PBME = project benefit monitoring and evaluation, SWED = salt water exclusion and drainage.Source: Asian Development Bank estimates.

(pm)Actual (pm)

As PerAppraisal

(pm)

As PerContract

(pm)

As PerMidterm

Appendix 9 35

LIST OF VEHICLES AND EQUIPMENT

O rig in a l a s p e ra s p e r R e v is e d

A p p ra is a l a t M id te rmV e h ic le s4 W D D o u b le C a b s n o . 3 5 2 1 3 7 IS • 3 D D Irr ig a tio n G a lle

• 1 D D Irr ig a tio n H a m b a n to ta• 2 P ro v in c ia l C o u n c il• 3 P ro v in c ia l R o a d A u th o r ity• 1 D S G a lle ; 1 D S L a b u d u w a ; • 1 D S H a b a ra d u w a ; 1 D S B a d d e g a m a ; • 1 D S E lp it iya ; 1 D S N a g o d a ; 1 D S H ik a d u w a ; • 1 D S B a la p it iy a ; 1 D S T h a w a la m a ; • 1 D S Y a k a la m u lla ; • 6 C h ie f S e c re ta ry S o u th e rn P ro v in c ia l C o u n c il• 1 2 C h ie f S e c re ta ry S o u th e rn P ro v in c e (w o rk in g c o n d it i

4 W D J e e p n o . 0 0 1 IS D e p u ty C h ie f S e c re ta ry P la n n in gC a r n o . 2 1 1 IS P D o f S P R E A PM in ib u s n o . 1 0 1 IS C h ie f S e c re ta ry S o u th e rn P ro v in c e (w o rk in g c o n d it io n )V a n n o . 0 0 1 IS C h ie f S e c re ta ry S o u th e rn P ro v in c e (w o rk in g c o n d it io n )M o to rc y c le s n o . 2 1 0 1 9 D P • 5 o ff ic ia lly h a n d e d to th e P M O o f f ic e rs w h o p a id fo r it;

• 1 2 w ith T C C S o ff ic e rs ; 2 w ith N A R R D (w o rk in g c o n d itioB ic y c le s n o . 0 1 6 2 2 D P S o c ia l M o b iliz e rsF ib e rg la s s B o a ts n o . 0 0 1 1 D P • 4 N a g o d a P S ; 2 T h a w a la m a P S ; 2 N e lu w a P S ;

• 1 K a ra n d e n iy a P S ; 1 Irr ig a tio n E n g in e e r A m b a la n g o d a• 1 P ro v in c ia l D ire c to r o f Ir r ig a t io n

E q u ip m e n tL e v e llin g E q u ip m e n t n o . 1 4 6 1 4 D P • 4 D D Irr ig a tio n G a lle

• 1 D D Irr ig a tio n H a m b a n to ta• 2 P ro v in c ia l D ire c to r S o u th e rn P ro v in c e• 2 S o u th e rn P ro v in c e A g ra r ia n S e rv ic e s D e p a rtm e n t• 5 S P C R o a d D e v e lo p m e n t A u th o r ity

T h e o d o lite n o . 1 0 5 1 0 D P • 1 D e p a rtm e n t o f Ir r ig a t io n , G a lle• 2 D e p a rtm e n t o f Ir r ig a t io n , H a m b a n to ta• 1 P ro v in c ia l D ire c to r S o u th e rn P ro v in c e• 2 S o u th e rn P ro v in c e A g ra g ia n S e rv ic e s D e p a rtm e n t• 4 S P C R o a d D e v e lo p m e n t A u th o r ity

G ra b D re d g e r n o . 0 1 2 IS P ro v in c ia l D ire c to r o f Ir r ig a t io nM o to r G ra d e r w ith L o a d e r/ n o . 0 1 1 IS S o u th e rn P ro v in c e R o a d D e ve lo p m e n t A u th o r ity B la c k H o eM a te r ia l T e s tin g E q u ip m e n t n o . 0 1 1 IS • M a te r ia l T e s tin g la b a t T h o ta g o d a , G a lle

T a rg e ts

C u rre n t U s a g eM o d e o f P ro c u re m e n t

A c tu a lly P u rc h a s e dU n itIte m

36 Appendix 9

Computer no. 7 4 16 DP • 2 SPREAP (out of order); 8 Chief Secretary (out of order);• 3 DD Irrigatoin Hambantota; 1 Provincial Council (PID);• 2 CBSL

Printer no. 2 0 4 DP 2 SPREAP (working condition);2 Chief Secretary's office (out of order)

Typewriters no. 5 0 9 DP Chief Secretary's office (2 working condition; 7 out of order)

Photocopier no. 6 2 6 DP • 1 SPREAP (working condition)• 2 handed over to Chief Secretary Provincial Council (out of order)• 1 DD Irrigation, Galle; 1 DD Irrigation, Hambantota• 1 PID

Industrial and Light Engineering no. LS LS LS DP Vocational training centers in the Southern Province Equipment

Survey and Drawing Equipment no. LS LS LS DP Most handed over to local government agencies for new projects

Drafting Equipment no. LS LS LS DP DD Irrigation, Galle; PID

Blue Printing Machine no. 0 0 1 DP Chief Secretary's Office (out of order)

Generator no. 2 0 1 DP Chief Secretary's Office (working condition)

Overhead Projector no. 0 0 2 DP 1 SPREAP working; 1 Chief Secretary's Office

Office Equipment no. LS LS LS DP Most of the equipment are with SPREAP office

Duplicator Printer no. 0 1 1 DP Chief Secretary's office (working condition)

Air Conditioner no. 10 1 7 DP • 3 SPREAP (2 working condition 1 being repaired)• 2 Chief Secretary's Office (out of order)• 2 Deputy Chief Secretary's office (working condition)

Furniture set 0 LS LS DP PID

Source : Ministry of Southern Regional Development.

4WD = four-wheel drive, CBSL = Central Bank of Sri Lanka, DD = deputy director, DP = direct purhcase, DS = deputy secretary, IS = international shopping, LS = lump sum, NARRD = National Aquatic Resources and Research Department, no. = number, PD = project director, PID = Provincial Irrigation Department, PMO = project management office, PS = Pradesha Subha, SPC = Southern Province Council, SPREAP = Southern Provine Rural Economic Advancement Project, TCCS = Thrift and Credit Cooperative Societies.

Mode of Procurement Current UsageItem Unit

TargetsActually

PurchasedOriginal as per Appraisal

as per Revised at Midterm

Appendix 11

37

INCREMENTAL STAFF ENGAGED UNDER THE PROJECT

P o s itio n

A . P ro je c t M a n a g e m e n t O ffic e1 . P ro je c t D ire c to r 1 1 1 1 0 0 1 0 02 . D e p u ty D ire c to r 2 1 3 1 5 0 3 0 03 . P ro je c t E n g in e e r 1 1 1 1 0 0 1 0 04 . A s s is ta n t D ire c to r 5 8 8 1 6 0 1 0 05 . A c co u n ta n t 1 1 1 1 0 0 1 0 06 . A d m in is tra tive O ff ice r 0 1 1 1 0 07 . P la n Im p le m e n tin g O ff ic 1 0 0 0 08 . P ro je c t A s s is ta n ts 0 9 9 1 0 09 . A s s is ta n t E n g in e e r 1 2 0 0 01 0 . T e ch n ica l O ff ic e r 4 4 4 1 0 0 1 0 01 1 . D ra fts m a n 1 1 1 1 0 0 1 0 01 2 . C h ie f C le rk 0 1 1 1 0 01 3 . A cc o u n t C le rk 3 5 5 1 6 7 1 0 01 4 . B o o k k e e p e r 1 2 2 2 0 0 1 0 01 5 . C le rk 5 4 4 8 0 1 0 01 6 . S e c re ta ry 1 0 0 01 7 . S te n o /T yp is t 4 6 7 1 7 5 1 1 71 8 . O ff ic e S ta ff 4 5 9 2 2 5 1 8 01 9 . D r ive r 5 1 3 3 0 6 0 0 2 3 12 0 . W a tch m a n 2 2 5 2 5 0 2 5 02 1 . S u p e rv is o r 0 7 1 0 1 4 32 2 . R e c e p tio n is t 0 1 1 1 0 0 S u b to ta l 5 1 7 5 1 0 3 2 0 2 1 3 7

B . P ro g re s s a n d M o n ito rin g U n it1 . A s s is ta n t D ire c to r 1 1 1 1 0 0 1 0 02 . C o m p u te r P ro g ra m m e r 1 0 0 03 . C o m p u te r O p e ra to r 1 2 3 3 0 0 1 5 04 . S ta tis tica l A s s is ta n t 1 0 0 0 S u b to ta l 4 3 4 1 0 0 1 3 3

C . D o c u m e n ta tio n U n it1 . A s s is ta n t D ire c to r 1 1 1 1 0 0 1 0 02 . P ro g ra m s O ff ice r 1 0 0 03 . P ro g ra m s A ss is ta n t 1 0 0 04 . O th e r S ta ff 3 0 0 0 S u b to ta l 6 1 1 1 7 1 0 0

D . M in o r Irr ig a tio n C o m p o n e n t1 . In s titu tio n a l O rg a n ize r 4 0 4 0 4 0 1 0 0 1 0 0

E . S e lf-E m p lo ym e n t C re d it C o m p o n e n t1 . S o c ia l M o b ilize rs 8 0 3 0 2 1 2 6 7 0

T o ta l 1 8 1 1 4 9 1 6 9 9 3 1 1 3M T R = m id te rm re v ie w .S o u rc e : A s ia n D e ve lo p m e n t B a n k e s tim a te s .

A s P e r A p p ra is a l

A s P e rc e n ta g e o fT a rg e ts

A p p ra is a lR e v is e da t M T R

R e v is e da t

M T R

A c tu a lD e p lo y-

m e n t T a rg e ts

Appendix 11 38

ECONOMIC AND FINANCIAL ANALYSIS

A. Introduction 1. Employing an integrated rural development approach, the Project encompassed a broad array of activities, mostly small-scale and spread over a wide area. This analysis is presented by subcomponent, along with a presentation of the benefits, costs, and assumptions for the models. The economic internal rates of return (EIRR) and net present values are calculated for each subcomponent. A summary for the Project as whole is then provided. A sensitivity analysis tests key parameters and assumptions. Finally, the section examines the financial, distribution, poverty, and employment aspects of the Project.

B. Approach and Methodology 2. Reports and data gathered from the field, secondary sources, a project impact evaluation study, and a project completion review corroborative survey supported the analysis. The framework employed in the economic analysis was:

(i) A domestic price numeraire is used. (ii) Sri Lanka Rupees are the unit of account with a constant price year of 2003. (iii) The shadow exchange rate factor is 1.11, consistent with conversion factors

employed in other recent evaluations in Sri Lanka. (iv) A shadow wage rate factor of 0.8 is applied to non-skilled labor to reflect

unemployment and underemployment in the rural project area. (v) Cost conversion factors have been formulated for key categories based on

estimated shares of foreign exchange and labor. (vi) Transfer payments such as taxes, duties, and interest are excluded from the

economic analysis. 3. A list of project-related prices is presented in Table A11.1 and border pricing for tradables is presented in Table A11.2.

C. Subcomponent Analysis

1. Irrigation and Drainage 4. Four types of irrigation were analyzed: new diversion ("annicut") schemes, rehabilitated diversion schemes, small impoundment ("tank") schemes, and coastal saltwater exclusion and drainage (SWED) systems. The first three types were grouped under "minor irrigation schemes" (MIS) and totaled of 3,927 hectare (ha), with an average of about 30 ha each. The four SWED schemes covered 3,279 ha and ranged from 130 ha to 1,630 ha. 5. Quantified Benefits. The quantified benefit of these irrigation schemes is the net value of increased rice production. Lowland cultivation in Southern Province is almost exclusively rice. The expected incremental production at appraisal was derived from two factors: higher yields and increased cropping intensity. Actual outcome was less than appraised on both counts. Table A11.3 shows that the appraised yields of 3.5 ton (t) per ha for the diversion schemes have not been attained, while the other yields were comparably below appraisal.

Appendix 11 39

Table A11.1: Farmgate Pricesa and Other Values (Price Year 2003)

Item Unit Financial (SLRs) Economic (SLRs)A. Agricultural Inputs 1. Seed /kg 19.0 19.7 2. Urea /kg 18.0 18.6 3. Other Fertilizersb /kg 25.0 25.6 4. Agrochemical bottle 500.0 555.0 5. Land Preparation /tractor-ha 5,830.0 6,150.7 B. Outputs 1. Rice /kg 12.5 13.0 2. Green Gram /kg 44.0 44.0 3. Kurakkan /kg 25.0 25.0 4. Pepper /kg 120.0 120.0 5. Cinnamon /kg 400.0 400.0 6. Tea Leaf /kg 25.0 25.0 7. Lobster /kg 675.4 675.4 Item Unit Financial (SLRs) Economic (SLRs)C. Labor 1. Unskilled Labor /person-day 275.0 220.0 2. Skilled Labor /person-day 450.0 450.0 D. Land 1. Paddy /ha 263,000.0 263,000.0 2. Upland/Garden /ha 786,000.0 786,000.0 E. Interest 1. Money Lender per month 16% 2. Bank per annum 18% F. Transport 1. Passenger trip to nearest market 7.0 8.0 2. Cargo Cost Per 50 kg Sack 15.0 16.0 ha = hectare, kg = kilogram.

a Tradeable commodity prices derived through border pricing; foreign exchange value components adjusted by shadow exchange rate factor; labor adjusted by shadow wage rate factor.

b Farmers use a variety of nonstandard fertilizers pre-mixed. Price assumes equivalent subsidy/kg as for urea.

Source: Impact Evaluation Study (2000), Project Completion Review Mission (2003), World Bank Global Commodity Price Prospects- Appendix 2 (2003).

40

Appendix 11

Table A11.2: Derivation of Economic Prices of Tradable Project Commodities

Year

Import Parity Price Units 1995 2000 2003 2005 2010 2015

Rice, Thai 5% Broken, FOB $/t 270 201 199 203 208 208 Quality Factor Allowance, Adjusted FOB (80%) $/t 216 161 159 162 166 166 Freight and Insurance $/t 44 44 44 44 44 44 CIF Value Colombo $/t 260 205 203 206 210 210 Domestic Import Border Price (CIF Colombo) SLRs/t 24,690 19,470 19,300 19,580 20,000 20,000 Freight and Handling from Colombo SLRs/t 760 760 760 760 760 760 Local Wholesale Price SLRs/t 25,450 20,230 20,060 20,340 20,760 20,760 Processing Ratio (68%) SLRs/t 17,310 13,760 13,640 13,830 14,120 14,120 Processing Cost SLRs/t 390 390 390 390 390 390 Freight to Farmgate SLRs/t 760 760 760 760 760 760 Farmgate Price SLRs/t 16,160 12,610 12,490 12,680 12,970 12,970 Urea, Bagged E. Europe $/t 178 100 130 125 118 118 Freight and Insurance $/t 62 62 62 62 62 62 CIF Value Colombo $/t 240 162 192 187 180 180 Domestic Import Border Price (CIF Colombo) SLRs/t 22,800 15,440 18,240 17,790 17,120 17,060 Freight and Handling from Colombo SLRs/t 760 760 760 760 760 760 Price Wholesale Market SLRs/t 23,560 16,200 19,000 18,550 17,880 17,820 Transport and Handling to Farm Level SLRs/t 760 760 760 760 760 760 Economic Price at Farmgate SLRs/t 24,320 16,960 19,760 19,310 18,640 18,580

CIF = cost, insurance, and freight; FOB=free on board; t=ton. Source: World Bank Commodity Price Projections, Jun 2003.

Appendix 11 41

Table A11.3: Rice Yields with Project: Appraised and Actual

Appraised Actual 1st Season

(Maha) 2nd Season

(Yala) 1st Season

(Maha) 2nd Season

(Yala) (t/ha) (t/ha) (t/ha) (t/ha)

Annicut New 3.5 3.5 2.6 2.5 Annicut Rehabilitated 3.5 3.5 2.9 2.8 Tank Rehabilitated 2.7 2.5 3.0 2.5 Salt Water Exclusion 2.3 2.3 2.4 2.3 ha = hectare, t = ton Source: Impact Evaluation Study (2000), Project Completion Review Mission (2003).

6. Rice farming in Southern Province is generally practiced on a subsistence basis only, and the returns are low. Farmers produce primarily for home consumption, minimizing inputs and expense. The cost of labor is rising as fewer and fewer young people take up farming as a vocation. For two of the Southern Province's three districts, Galle and Matara, rainfall is plentiful to excessive, so additional water supplies provided by irrigation have done little to boost cropping intensities. In the drier western district of Hambantota, many of the small impounding schemes are not functional due to silting and lack of water. The coastal SWED schemes are beset by a number of other problems, including the prohibitive reclamation cost of abandoned lands, tenancy issues, and limited farmer interest. Much of the SWED area intended for re-establishment remains uncultivated. 7. For the MIS and SWED schemes, the gains expected due to more intensive cropping over two seasons were not realized. At appraisal, the cumulative gains from increased yield and cropping intensity were envisaged to be in the range of 2-3 t/ha per annum for the MIS, and 1.2 t/ha for SWED. The actual gains have been 1-1.5 t/ha per annum for MIS and 0.9 t/ha for SWED (Table A11.4). Increased rice production is presented in Table A11.5. 8. Cost and Reevaluated EIRR. After a slow start, the construction of many schemes proceeded rapidly prior to loan closing, and at costs lower than appraised. However, the lower costs and speed appear to have come at the expense of design considerations. In addition, the systems, in general, are poorly maintained. Given the low level of returns and the limited performance of many of the systems, this is not too surprising. While farmer organizations are registered under the Department of Agrarian Services guidelines, they generally have not emerged as active and involved participants. 9. The reassessment of the irrigation and drainage subcomponent took into account low rice yields, limited gains in cropping intensity, and shorter life for the small-scale improvements due to poor maintenance. Works were judged to have a serviceable life of 10 years as opposed to an appraisal estimate of 20 years. The reevaluated EIRR was 7%, compared to the appraised 22%. The individual breakdowns by types of irrigation are presented in Table A11.6.

42

Appendix 11

Table A11.4: Crop Yields and Cropping Intensities Appraisal Project Completion Review Item Maha Season Yala Season Annual Maha Season Yala Season Annual Without With Without With Without With Increment Without With Without With Without With IncrementAnnicut New Yield (t/ha) 2.00 3.50 2.00 3.50 2.10 2.60 2.00 2.50 Cropping Intensity (%) 0.80 0.90 0.40 0.60 1.20 1.50 0.30 0.80 1.00 0.80 0.90 1.60 1.90 0.30 Production (t/ha) 1.60 3.15 0.80 2.10 2.40 5.25 2.85 1.68 2.60 1.60 2.25 3.28 4.85 1.57 Annicut Rehabilitation Yield (t/ha) 2.50 3.50 2.50 3.50 2.50 2.90 2.40 2.80 Cropping Intensity (%) 0.80 0.90 0.40 0.60 1.20 1.50 0.30 0.90 1.00 0.80 0.90 1.70 1.90 0.20 Production (t/ha) 2.00 3.15 1.00 2.10 3.00 5.25 2.25 2.25 2.90 1.92 2.52 4.17 5.42 1.25 Tank Rehabilitation Yield (t/ha) 2.00 2.70 2.00 2.50 2.10 3.00 2.00 2.50 Cropping Intensity (%) 0.80 0.90 0.00 0.50 0.80 1.40 0.60 0.80 0.90 0.10 0.20 0.90 1.10 0.20 Production (t/ha) 1.60 2.43 0.00 1.25 1.60 3.68 2.08 1.68 2.70 0.20 0.50 1.88 3.20 1.32 Salt Water Exclusion Yield (t/ha) 1.70 2.30 1.70 2.30 1.90 2.40 1.90 2.30 Cropping Intensity (%) 0.35 0.60 0.35 0.45 0.70 1.05 0.35 0.35 0.50 0.30 0.40 0.65 0.90 0.25 Production (t/ha) 0.60 1.38 0.60 1.04 1.19 2.42 1.23 0.67 1.20 0.57 0.92 1.24 2.12 0.89 ha = hectare, t = ton.

Sources: Appraisal Report (1991); Project Impact Evaluation Report (2000); Project Completion Review Mission (2003).

Appendix 11 43

Table A11.5a: Rice Production Without Project

at Economic

Values

Item

Rice Area without

(ha)

Rice Yield without

(t/ha)

Rice Production

without (t)

Rice Net unit Value without

(SLRs/ha)

Total AnnualNet Value without

(SLRs '000) Maha Season Annicut New 863 2.1 1,813 2,038 1,759 Annicut Rehabilitated 1,538 2.5 3,846 6,296 9,685 Tank Rehabilitated 911 2.1 1,913 1,988 1,811 Salt Water Exclusion 1,148 1.9 2,181 1,276 1,464

Subtotal 4,460 9,752 14,719 Yala Season Annicut New 863 2.0 1,726 661 570 Annicut Rehabilitated 1,367 2.4 3,282 4,919 6,726 Tank Rehabilitated 114 2.0 228 611 70 Salt Water Exclusion 984 1.9 1,869 1,276 1,255

Subtotal 3,328 7,105 8,621

Total 7,788 16,857 23,340 ha = hectare, t = ton.

Source: Project Completion Review Mission, 2003.

Table A11.5b: Rice Production with Project

at Economic

Values

Item

Rice Area with (ha)

Rice Yield with (t/ha)

Rice Production

with (t)

Rice Net Unit Value with (SLRs/ha)

Total AnnualNet Value with

(SLRs '000)

Maha Season Annicut New 1,079 2.6 2,805 7,709 8,318 Annicut Rehabilitated 1,709 2.9 4,957 10,840 18,529 Tank Rehabilitated 1,025 3.0 3,074 12,217 12,520 Salt Water Exclusion 1,640 2.4 3,935 7,044 11,548

Subtotal 5,453 14,772 50,915 Yala Season Annicut New 971 2.5 2,428 6,332 6,149 Annicut Rehabilitated 1,538 2.8 4,308 9,463 14,558 Tank Rehabilitated 228 2.5 569 5,332 1,214 Salt Water Exclusion 1,312 2.3 3,017 5,667 7,432

Subtotal 4,049 10,321 Total 9,501 25,093 50,915

ha = hectare, t = ton. Source: Project Completion Review Mission, 2003.

44 Appendix 11

Table A11.6: Reevaluated EIRR by Irrigation Schemes

Irrigation Type EIRR Annicut New 10.5% Annicut Rehabilitated 14.4% Tank Rehabilitated 7.6% Salt Water Exclusion 7.0%

EIRR = economic internal rate of return. Source: Project Completion Review Mission estimate.

10. The rehabilitated annicut systems had the lowest cost per ha for development. Being in the wet zone, they were generally evolving from less stressful production environments, where farmers have more experience with improved practices. These systems exhibited the highest returns. The tank (impoundment) schemes were more expensive, and have been particularly affected by lack of water, siltation of impoundment areas, and limited maintenance of canals. The SWED schemes have not generated the interest or demand to put abandoned areas back into production.

11. Non-Quantified Benefits. Despite the limited performance of the systems, other non-quantified benefits were evident. The limited or shallow water in the tanks provided a washing point, water source, and watering area for livestock. Some of the headworks provided a transport bridge across streams or bog areas.

2. Pilot Fisheries

12. Two pilot fisheries were implemented: lobster habitat enhancement and mollusk cultivation. For the habitat enhancement, concrete structures were sunk in coastal areas to provide shelter for lobsters. The anticipated colonization has not occurred, however. According to fisheries personnel, the concrete structures might accumulate enough natural growth over time—say, 5 years—to make them a suitable habitat for lobsters. The mollusk cultivation in bamboo rafts was not adopted due to market and management concerns.

13. Quantified Benefits. If the colonization of the concrete structures occurs, divers potentially could capture lobsters and generate an economic return. For a 12-structure model, a two-lobster harvest per structure is assumed twice a year. The market for output is strong. The mollusk pilot project has not been adopted and, thus, has generated no yield.

14. Cost and Reevaluated EIRR. Incorporating a 5-year lag before possible lobster colonization and the increased costs per project expenditure, the reassessed EIRR is 5.0%, compared to an appraised 29%. However, even this low return remains in question.

15. Non-Quantified Benefits. A fisheries research center constructed under the Project is slowly building staff and capacity. With increased funding and support, it has the potential to contribute to the southern fisheries by linking research to commercially viable applications.

3. Industrial Estate Development

16. An estate for small to medium industries and enterprises was established. By physical completion of the Project in 2000, the estate had only four small industries operating in the 56 blocks available for occupancy. However, one or more blocks may be leased per enterprise. By 2003, eight firms were operating, with more entrepreneurs preparing sites for future operations. The outlook for full capacity is about 30 occupants, with an average of two blocks taken per business.

Appendix 11

45

17. Quantified Benefits. The expected benefit of this subcomponent was incremental economic output. However, the limited operations to date and the fact that firms have relocated from previous operations make this benefit difficult to judge. Lease income is the proxy for the economic worth of the industrial estate. In this case, the economic value is opportunity cost for leasing comparable space elsewhere. Low occupancy rates and slow growth rates, however, have limited the attainment of lease value. The industrial estate is far from an urban setting—a concern for small- and medium-sized producers (the target group) who value proximate urban settings for security as well as easy access to customers, service providers, and employees. Based on growth trends, attainment of full occupancy is projected by 2009. 18. Cost and Reevaluated EIRR. In addition to the poor location, the site was physically inappropriate. It was built on relatively steep, sloping land, which drove up costs beyond those appraised. The construction period was also excessive, lasting nearly the full 9-year Project. The higher costs and slow construction, combined with the slow growth in occupancy, resulted in a 3.1% EIRR. 19. Non-Quantified Benefits. By bringing industry together in one place, a number of benefits might be possible—from easier environmental monitoring and tax collection, to engendering a greater collective voice for the grouped entrepreneurs.

4. Credit-Financed Enterprise 20. Three credit categories were available of decreasing scale: (i) small and medium enterprise, (ii) rural micro, and (iii) self employment. The analysis of this component was based on a sample of enterprises financed under the subcomponent. Business discontinuation was common. The project completion review mission survey of 24 enterprises found that one third of the sample had dropped out, while others had various degrees of success. Further, the use of loans for other-than-intended purposes was reported to be widespread. 21. Quantified Benefits. The quantified benefit was based on the net output of sample enterprises, including new and expansions. Table A11.7 displays financial and economic rates of return for the sample of successful enterprises. From this sample, a composite average enterprise cost and revenue stream was constructed, which was adjusted further to account for the business discontinuations.1 22. Cost and Reevaluated EIRR. To arrive at economic models, the financial model costs were shadow priced to account for unpaid labor (valued), for unskilled labor (adjusted by the shadow exchange rate factor), and for foreign exchange premiums. The composite EIRR, which accounts for the one third enterprise discontinuations, was 11%. The appraisal EIRR estimate was 21%. 23. Non-Quantified Benefits. Intangible benefits for new borrowers have included a sense of empowerment and the opportunity to establish a credit history. However, some perspective on this benefit is in order. The loans made during the Project totaled 8,663. Since Southern Province has about 460,000 households, the loan coverage was, at best, 1.9% (assuming no repeat loans given to beneficiary borrowers—something for which no records were provided.

1 Enterprise disappearance was a major reason for the design of the follow-on project, Southern Province Rural

Economic Advancement Project (SPREAP), enterprise development services (EDS) and the requirement that entrepreneurs work with business advisory professionals to prepare business plans before approaching participating financial institutions for project credit.

46

Appendix 11

Table A11.7: Sample Project-financed Enterprises

No.

Enterprise

Investment

SLRs

Loan Amount at 70% SLRs

FIRR

EIRR

Annual Incremental Employment Person-days

Return perLabor Unit

SLRs

1. Three-Wheeler Service Station 397,106 277,974 29% 27% 360 444

2. Rice Mill 1,945,010 1,361,507 20% 18% 1,800 358

3. Sweetmeats Production, Distribution, and Transport 94,549 66,184 47% 38% 210 376

4. Aluminum and Glass Furniture Production 121,563 85,094 41% 33% 300 338

5. Plantain Cultivation (1 acre) 75,693 52,985 25% 29% 48 225

6. Poultry Egg Layer Enterprise 287,699 201,390 30% 26% 360 384

Combined Sample Result 2,921,622 2,045,135 24% 22% 3,078 437

Average Sample Result 486,937 340,856 24% 22% 513 437

EIRR = econoimc internal rate of return, FIRR = financial internal rate of return.

Source: Project Impact Evaluation Study (2000) and Project Completion Review mission (2003).

Appendix 11

47

5. Farm-to-Market Roads 24. Two broad classes of roads—the C, D & E class of roads and the rural access roads— were covered in this category. The first set falls under the jurisdiction of the Provincial Roads Authority; the second set ("unclassified" roads) is delegated to the local government unit (the Pradeshiya Sabha). 25. Quantified Benefits. Reduced vehicle operating costs and time savings were the main quantified benefits for the roads.3 Traffic and speed are less important for the lower-cost rural access roads than for the C, D & E roads. However, another benefit was induced agricultural production resulting from access to new areas via rural access roads.4 Approximately 1 ha of agricultural land has been developed per kilometer (km) of rural road. 26. However, the surfaces of both classes of roads are deteriorating due to inadequate maintenance and design shortcomings. Inadequate funding severely constrains the ability of the Provincial Roads Authority and local government to maintain the roads. For the provincial roads, an operation and maintenance (O&M) system is at least in place, whereby the private sector is contracted to carry out maintenance works. For the rural access roads, the capacity to maintain the large stock of "unclassified" roads that come under local government jurisdiction is very limited. Accordingly, for the purposes of this analysis, the useful life of these roads and benefits has been reduced to 10 years from 20 years. 27. Cost and Reevaluated EIRR. Costs for C, D & E roads were generally in line with those at appraisal, while costs for the rural access roads were higher than appraised. The C, D & E roads had an EIRR of 8.5%, compared with an appraisal EIRR of 17%. Largely due to the inclusion of the development impact, the rural access roads had an 8.2% EIRR, versus the appraised 14%. While the lack of maintenance has undermined the serviceability of the rural access roads, tractors generally can still move new agricultural output and needed inputs. 28. Non-Quantified Benefits. The social value of access to services and increased mobility are substantial, though not quantified. Despite the deterioration of the roads, they retain a residual value by generating hope among the people that they will be upgraded or improved in the future.

6. Village Advancement Program (VAP) and Women in Development (WID) 29. A large number of options were available under these subcomponents, and selections were made generally based on demand. Under VAP, subprojects included village tracks and conveyance structures, latrines, simple water supply, rural electrification, community halls, and small irrigation enhancements. For WID, the actions included gardening, fuel efficient stoves, and training. 30. Quantified Benefits. A sample seven-village development scheme, which included village tracks and rural electrification, was surveyed. The quantified benefits were time savings on travel, incremental agricultural production, and new small industry development. Three quarters of the population saved travel time, with an average savings of 20 minutes per household for two trips a week. Included in the road works were culverts and small bridges. New agricultural land brought into cultivation totaled 27 ha, consisting of tea, cinnamon, coconut, fruits and vegetables. Due to access to electricity and transport, a number of small industries started up, including: 3 gravel crushers, 5 cinnamon oil extractors, and 2 electric saw mills. The net value of incremental production from agriculture and industry includes revenues, investment costs, and operating expenditures. 3 Values for vehicle operating costs are based on figures provided in Loan 1986-SRI, Road Sector Development, for

$56.5 million, approved on 19 December 2002. 4 To preclude any double counting, generated cargo benefits for rural roads are excluded.

48 Appendix 11

31. Cost and Reevaluated EIRR. Rural roads and electrification accounted for the project costs. This scheme covered 21 km of roads and 6.3 km of electricity lines. Like other subcomponents, the shortcoming was O&M. The life of incremental benefits for the Project's larger roads was compromised. In the model, the time savings on travel was restricted to 10 years. However, due again to the development impact and new production, the investments still generated an EIRR of 12%. The appraised EIRR was 17%. 32. Non-Quantified Benefits. As with the farm-to-market roads subcomponent, non-quantified benefits included the value of greater access to service providers. Increased access to the household benefits that electricity brings, improved community interaction, and better health from water and sanitation subprojects were other non-quantified benefits under this subcomponent.

7. Institutional Support 33. The quality of government services was upgraded under the Project through the provision of training, buildings, equipment, and vehicles. As one example, the project-financed training center continues to be actively engaged, reflecting high demand for the services. The planning capacities of the provincial government were also strengthened through work with consultants. This was evident in the updating of rolling documents for provincial profiling, budgeting, and planning.

D. Overall Project 34. To arrive at an overall project EIRR, economic models were scaled up proportionately to match the expenditures of the subcomponents. In addition to the subcomponents with quantified benefits, the institutional support expenditures were also included. The resulting overall project EIRR is 8.7%. Costs were broken down into three major categories. Farm-to-market roads accounted for 38% of project expenditure, village advancement for 24%, and credit for 18%. Table A11.8 summarizes appraised and actual project and subcomponent EIRRs. Table A11.9a, 9b, and 9c show the cash flow, EIRR, and net present value for the subcomponents and overall project.

Table A11.8: Appraised and Actual Project and Subcomponents EIRRs Component/Subcomponent Appraisal

EIRR PCR EIRR Summary Comment

A. Productive Components 1. Irrigation and Drainage 22% 9.7% Lower yields and cropping intensities. Limited sustainability

and design shortcomings. 2. Fisheries 29% 5.0% Deferred yield from lobster program; Mollusk pilot not taken up

by fisherfolk. Fisheries center established. 3. Private Sector

(i) Small and Medium Industry

18% 3.1% Cost overruns on industrial estate; low demand and slow occupancy.

(ii) Credit-financed enterprise 21% 11.0% Significant rates of business discontinuation.

B. Economic / Social Infrastructure 1. Farm-to-Market Roads

(i) C, D & E Roads 17% 8.5% Design, quality and maintenance issues. (ii) Rural Roads 14% 8.2% Design, quality and maintenance issues.

2. Village Advancement 17% 12.0% Design, quality and maintenance issues. C. Overall Project Including

Support Costs 17% 8.7% Follow-on project designed to address lack of sustainability in

enterprises and lack of capacity in local government for O&M of roads.

EIRR = economic internal rate of return, O&M = operation and maintenance, PCR = project completion report. Source: Project Completion Review (PCR) Mission estimate.

Appendix 11 49

N o . Y e a r C o s ts B e n e fits C o s ts B e n e fits C o s ts B e n e fitsN e t B e n e fits C o s ts B e n e fits1 1 9 9 12 1 9 9 2 6 0 8 (6 0 8 ) 1 5 ,7 7 8 (1 5 ,7 7 8 ) 3 1 9 9 3 9 5 1 0 8 1 3 7 2 (7 2 ) 1 ,8 8 3 (1 ,8 8 3 ) 4 1 9 9 4 6 ,8 8 5 1 2 4 (6 ,7 6 1 ) 1 ,2 9 1 (1 ,2 9 1 ) 1 ,6 0 3 (1 ,6 0 3 ) 8 0 ,4 5 8 (8 0 ,4 5 8 ) 5 1 9 9 5 8 ,2 3 8 1 ,3 4 7 (6 ,8 9 0 ) 2 ,5 9 4 (2 ,5 9 4 ) 2 5 ,2 9 7 (2 5 ,2 9 7 ) 5 8 ,3 4 8 1 3 ,3 6 6 (4 4 ,9 8 2 ) 6 1 9 9 6 7 1 ,5 2 1 2 ,7 7 7 (6 8 ,7 4 3 ) 4 ,4 0 6 (4 ,4 0 6 ) 1 0 ,9 2 8 (1 0 ,9 2 8 ) 1 3 9 ,4 3 9 2 3 ,2 1 3 (1 1 6 ,2 2 6 ) 7 1 9 9 7 7 2 ,5 6 1 1 4 ,0 9 5 (5 8 ,4 6 6 ) 5 ,0 4 5 (5 ,0 4 5 ) 1 0 ,6 3 2 (1 0 ,6 3 2 ) 2 3 9 ,3 2 6 4 6 ,7 3 8 (1 9 2 ,5 8 9 ) 8 1 9 9 8 5 7 ,6 2 0 2 6 ,4 5 8 (3 1 ,1 6 1 ) 4 ,0 6 3 (4 ,0 6 3 ) 3 ,2 4 5 (3 ,2 4 5 ) 9 9 ,9 2 8 8 6 ,8 7 8 (1 3 ,0 5 0 ) 9 1 9 9 9 9 3 ,0 5 0 3 6 ,1 7 7 (5 6 ,8 7 3 ) 3 ,6 4 3 9 (3 ,6 3 4 ) 1 ,1 1 4 (1 ,1 1 4 ) 9 5 ,7 3 7 2 3 ,8 6 3 (7 1 ,8 7 3 )

1 0 2 0 0 0 3 2 ,4 8 3 5 1 ,8 4 7 1 9 ,3 6 5 3 2 1 7 1 1 4 0 1 ,0 2 0 1 ,1 5 6 1 3 7 7 6 ,0 5 9 7 6 ,0 5 9 1 1 2 0 0 1 2 ,7 6 7 5 6 ,9 2 9 5 4 ,1 6 1 9 3 4 9 8 4 0 5 9 0 5 1 ,4 5 7 5 5 2 5 ,1 1 2 5 ,1 1 2 1 2 2 0 0 2 2 ,7 6 7 5 6 ,9 2 9 5 4 ,1 6 1 1 9 6 1 ,0 5 2 8 5 6 9 0 5 1 ,8 3 6 9 3 0 (7 1 ,0 3 7 ) (7 1 ,0 3 7 ) 1 3 2 0 0 3 2 ,7 6 2 5 6 ,8 2 0 5 4 ,0 5 8 3 1 4 1 ,6 8 6 1 ,3 7 2 9 0 5 2 ,3 1 3 1 ,4 0 8 1 0 8 ,4 2 3 1 0 8 ,4 2 3 1 4 2 0 0 4 2 ,7 6 1 5 6 ,8 0 4 5 4 ,0 4 3 4 0 9 2 ,1 9 7 1 ,7 8 8 9 0 5 3 ,5 1 2 2 ,6 0 6 4 9 ,6 0 0 4 9 ,6 0 0 1 5 2 0 0 5 2 ,7 0 5 5 5 ,5 8 1 5 2 ,8 7 6 4 9 5 2 ,6 5 5 2 ,1 6 1 9 0 5 5 ,3 3 2 4 ,4 2 6 1 8 3 ,8 3 0 1 8 3 ,8 3 0 1 6 2 0 0 6 2 ,6 3 8 5 4 ,1 5 1 5 1 ,5 1 4 4 9 5 2 ,6 5 5 2 ,1 6 1 9 0 5 8 ,0 9 5 7 ,1 9 0 1 0 2 ,9 4 5 1 0 2 ,9 4 5 1 7 2 0 0 7 2 ,0 5 1 4 2 ,8 3 3 4 0 ,7 8 3 4 9 5 2 ,6 5 5 2 ,1 6 1 9 0 5 8 ,0 9 5 7 ,1 9 0 3 ,0 4 8 3 ,0 4 8 1 8 2 0 0 8 1 ,4 6 0 3 0 ,4 7 0 2 9 ,0 1 0 4 9 5 2 ,6 5 5 2 ,1 6 1 9 0 5 8 ,0 9 5 7 ,1 9 0 1 4 1 ,7 4 8 1 4 1 ,7 4 8 1 9 2 0 0 9 9 9 7 2 0 ,7 5 2 1 9 ,7 5 5 4 9 5 2 ,6 5 5 2 ,1 6 1 9 0 5 8 ,0 9 5 7 ,1 9 0 6 5 ,9 0 5 6 5 ,9 0 5 2 0 2 0 1 0 2 4 6 5 ,0 8 1 4 ,8 3 5 4 9 5 2 ,6 5 5 2 ,1 6 1 9 0 5 8 ,0 9 5 7 ,1 9 0 1 8 3 ,8 3 0 1 8 3 ,8 3 0 2 1 2 0 1 1 4 9 5 2 ,6 5 5 2 ,1 6 1 9 0 5 8 ,0 9 5 7 ,1 9 0 1 0 2 ,9 4 5 1 0 2 ,9 4 5 2 2 2 0 1 2 4 9 5 2 ,6 5 5 2 ,1 6 1 9 0 5 8 ,0 9 5 7 ,1 9 0 3 ,0 4 8 3 ,0 4 8 2 3 2 0 1 3 4 9 5 2 ,6 5 5 2 ,1 6 1 9 0 5 8 ,0 9 5 7 ,1 9 0 1 4 1 ,7 4 8 1 4 1 ,7 4 8 2 4 2 0 1 4 4 9 5 2 ,6 5 5 2 ,1 6 1 9 0 5 8 ,0 9 5 7 ,1 9 0 1 4 6 ,3 6 3 1 4 6 ,3 6 3 2 5 2 0 1 5 4 9 5 2 ,6 5 5 2 ,1 6 1 9 0 5 8 ,0 9 5 7 ,1 9 0 2 2 8 ,8 1 2 2 2 8 ,8 1 2 2 6 2 0 1 6 4 9 5 2 ,6 5 5 2 ,1 6 1 9 0 5 8 ,0 9 5 7 ,1 9 0 2 1 9 ,1 7 1 2 1 9 ,1 7 1 2 7 2 0 1 7 4 9 5 2 ,6 5 5 2 ,1 6 1 9 0 5 8 ,0 9 5 7 ,1 9 0 1 9 5 ,6 3 6 1 9 5 ,6 3 6 2 8 2 0 1 8 4 9 5 2 ,6 5 5 2 ,1 6 1 9 0 5 8 ,0 9 5 7 ,1 9 0 1 5 4 ,7 9 8 1 5 4 ,7 9 8 2 9 2 0 1 9 4 9 3 2 ,6 4 6 2 ,1 5 3 9 0 5 8 ,0 9 5 7 ,1 9 0 1 3 7 ,7 7 9 1 3 7 ,7 7 9 3 0 2 0 2 0 4 6 3 2 ,4 8 4 2 ,0 2 1 9 0 5 8 ,0 9 5 7 ,1 9 0 1 0 7 ,7 7 1 1 0 7 ,7 7 1 3 1 2 0 2 1 4 0 2 2 ,1 5 8 1 ,7 5 6 9 7 ,8 3 3 9 7 ,8 3 3 3 2 2 0 2 2 2 9 9 1 ,6 0 4 1 ,3 0 5 7 4 ,0 8 5 7 4 ,0 8 5 3 3 2 0 2 3 1 8 1 9 6 9 7 8 8 3 3 ,3 2 4 3 3 ,3 2 4 3 4 2 0 2 4 8 5 4 5 8 3 7 3 1 6 ,3 0 5 1 6 ,3 0 5 3 5 2 0 2 53 6 2 0 2 63 7 2 0 2 73 8 2 0 2 83 9 2 0 2 94 0 2 0 2 0

E IR R 9 .7 % E IR R 5 .0 % E IR R 3 .1 % E IR R 1 1 .0 %N P V @ 1 2 % (1 4 ,9 2 5 ) N P V @ 1 2 % (6 ,9 6 9 ) N P V @ 1 2 % (3 3 ,9 3 3 ) N P V @ 1 2 % (4 1 ,9 7 9 )

E IR R = e c o n o im c in te rn a l ra te o f re tu rn , N P V = n e t p re s e n t va lu e .S o u rc e : P ro je c t C o m p le tio n R e v ie w M is s io n e s tim a te (2 0 0 3 ).

N e t B en e fitsN e t B en e fitsN e t B e n e fitsC re d it-f in a n c e d E n te rp ris e

T a b le A 1 1 .9 a : P ro je c t E c o n o m ic R e tu rn s - P ro d u c tive C o m p o n e n t (S L R s '0 0 0 )

F ish e rie s In d u s tria l E s ta teIrrig a tio n a n d D ra in a g e

50

Appendix 11

N o . Y e a r1 1 9 9 1 1 8 0 ( 1 8 0 ) 2 1 9 9 2 2 4 2 ( 2 4 2 ) 5 , 0 9 6 ( 5 , 0 9 6 ) 1 4 , 0 4 3 1 4 ( 1 4 , 0 2 9 ) 3 1 9 9 3 1 6 , 3 2 6 3 3 ( 1 6 , 2 9 3 ) 3 0 , 7 3 4 6 8 9 ( 3 0 , 0 4 5 ) 4 2 , 8 8 1 1 , 1 2 9 ( 4 1 , 7 5 3 ) 4 1 9 9 4 3 8 , 3 6 6 2 , 2 7 5 ( 3 6 , 0 9 1 ) 6 8 , 0 0 2 4 , 8 6 7 ( 6 3 , 1 3 5 ) 1 0 4 , 4 3 3 7 , 1 4 0 ( 9 7 , 2 9 2 ) 5 1 9 9 5 7 2 , 4 6 8 7 , 6 1 3 ( 6 4 , 8 5 5 ) 6 8 , 6 1 8 1 4 , 2 1 7 ( 5 4 , 4 0 0 ) 1 5 2 , 7 7 2 2 4 , 4 5 3 ( 1 2 8 , 3 2 0 ) 6 1 9 9 6 1 3 7 , 7 1 4 1 7 , 8 0 1 ( 1 1 9 , 9 1 4 ) 1 3 3 , 6 8 8 2 3 , 9 5 0 ( 1 0 9 , 7 3 9 ) 3 0 0 , 7 1 9 5 7 , 9 9 3 ( 2 4 2 , 7 2 6 ) 7 1 9 9 7 1 8 7 , 3 7 4 3 7 , 2 6 9 ( 1 5 0 , 1 0 5 ) 9 4 , 3 9 7 4 2 , 7 9 5 ( 5 1 , 6 0 2 ) 3 7 0 , 7 5 2 1 1 3 , 3 2 6 ( 2 5 7 , 4 2 6 ) 8 1 9 9 8 1 4 6 , 7 5 4 6 4 , 1 7 8 ( 8 2 , 5 7 7 ) 6 0 , 7 2 4 5 6 , 9 3 4 ( 3 , 7 9 0 ) 3 8 4 , 9 7 1 1 9 8 , 0 7 0 ( 1 8 6 , 9 0 0 ) 9 1 9 9 9 1 8 4 , 8 5 3 8 6 , 3 7 9 ( 9 8 , 4 7 4 ) 5 5 , 1 4 4 6 6 , 9 8 3 1 1 , 8 3 9 3 5 1 , 6 4 4 2 9 9 , 8 3 9 ( 5 1 , 8 0 5 )

1 0 2 0 0 0 4 6 , 9 3 3 1 1 4 , 5 3 6 6 7 , 6 0 3 2 4 , 5 4 6 7 6 , 6 1 6 5 2 , 0 7 0 2 6 3 , 8 9 6 3 8 5 , 8 8 5 1 2 1 , 9 8 9 1 1 2 0 0 1 6 , 6 7 9 1 2 4 , 6 8 7 1 1 8 , 0 0 8 4 , 3 1 4 8 2 , 4 3 9 7 8 , 1 2 4 2 3 2 , 1 5 3 4 4 3 , 0 9 8 2 1 0 , 9 4 5 1 2 2 0 0 2 6 , 6 7 9 1 2 9 , 6 7 5 1 2 2 , 9 9 6 4 , 3 1 4 8 5 , 7 3 6 8 1 , 4 2 2 2 3 0 , 1 7 5 4 6 4 , 6 3 7 2 3 4 , 4 6 2 1 3 2 0 0 3 6 , 6 7 7 1 3 4 , 8 1 2 1 2 8 , 1 3 5 4 , 2 7 2 8 8 , 1 4 6 8 3 , 8 7 3 2 3 0 , 0 6 0 4 6 4 , 9 4 8 2 3 4 , 8 8 8 1 4 2 0 0 4 6 , 5 4 3 1 3 6 , 8 8 9 1 3 0 , 3 4 6 4 , 0 2 0 8 5 , 5 2 8 8 1 , 5 0 8 2 2 9 , 7 6 9 4 6 2 , 2 2 3 2 3 2 , 4 5 4 1 5 2 0 0 5 6 , 2 2 8 1 3 4 , 5 9 8 1 2 8 , 3 7 0 3 , 4 6 3 7 5 , 3 9 7 7 1 , 9 3 3 2 2 9 , 0 9 4 4 5 5 , 9 0 8 2 2 6 , 8 1 4 1 6 2 0 0 6 5 , 6 3 6 1 2 5 , 3 5 2 1 1 9 , 7 1 5 2 , 9 0 6 6 4 , 8 4 8 6 1 , 9 4 2 2 2 8 , 2 9 8 4 4 8 , 4 6 1 2 2 0 , 1 6 3 1 7 2 0 0 7 4 , 5 1 3 1 0 2 , 6 0 1 9 8 , 0 8 9 1 , 8 1 9 4 0 , 9 6 4 3 9 , 1 4 6 2 2 6 , 5 1 8 4 3 1 , 8 1 4 2 0 5 , 2 9 6 1 8 2 0 0 8 2 , 9 9 0 6 9 , 0 8 1 6 6 , 0 9 1 1 , 0 6 3 2 4 , 2 0 7 2 3 , 1 4 4 2 2 4 , 8 8 4 4 1 6 , 5 2 3 1 9 1 , 6 4 0 1 9 2 0 0 9 1 , 8 1 4 4 2 , 7 8 1 4 0 , 9 6 7 5 9 0 1 3 , 6 7 2 1 3 , 0 8 1 2 2 3 , 5 0 0 4 0 3 , 5 8 3 1 8 0 , 0 8 2 2 0 2 0 1 0 3 3 4 7 , 9 2 8 7 , 5 9 4 1 6 8 3 , 9 2 6 3 , 7 5 8 2 2 2 , 6 6 6 3 9 5 , 7 8 2 1 7 3 , 1 1 6 2 1 2 0 1 1 2 2 2 , 6 0 9 3 9 5 , 2 4 0 1 7 2 , 6 3 1 2 2 2 0 1 2 2 2 2 , 5 6 5 3 9 5 , 1 6 3 1 7 2 , 5 9 8 2 3 2 0 1 3 2 1 9 , 1 9 2 3 8 9 , 1 7 4 1 6 9 , 9 8 2 2 4 2 0 1 4 2 1 0 , 6 2 1 3 7 3 , 9 5 7 1 6 3 , 3 3 5 2 5 2 0 1 5 1 9 0 , 7 6 5 3 3 8 , 7 0 3 1 4 7 , 9 3 7 2 6 2 0 1 6 1 6 7 , 3 4 8 2 9 7 , 1 2 5 1 2 9 , 7 7 7 2 7 2 0 1 7 1 1 5 , 0 0 5 2 0 4 , 1 9 1 8 9 , 1 8 6 2 8 2 0 1 8 6 6 , 9 2 4 1 1 8 , 8 2 2 5 1 , 8 9 9 2 9 2 0 1 9 2 6 , 2 3 2 4 6 , 5 7 5 2 0 , 3 4 3 3 0 2 0 2 0 1 , 7 0 5 3 , 0 2 6 1 , 3 2 2 3 1 2 0 2 13 2 2 0 2 23 3 2 0 2 33 4 2 0 2 43 5 2 0 2 53 6 2 0 2 63 7 2 0 2 73 8 2 0 2 83 9 2 0 2 94 0 2 0 2 0

E I R R 8 . 5 % E I R R 8 . 2 % E I R R 1 2 . 0 %N P V @ 1 2 % ( 6 0 , 8 5 9 ) N P V @ 1 2 % ( 4 7 , 8 8 2 ) N P V @ 1 2 % ( 5 4 7 )

E I R R = e c o n o i m c i n t e r n a l r a t e o f r e t u r n , N P V = n e t p r e s e n t v a lu e .S o u r c e : P r o j e c t C o m p l e t i o n R e v i e w M is s i o n e s t i m a t e ( 2 0 0 3 ) .

B e n e f i t s N e t B e n e f i t s

E c o n o m i c / S o c i a l I n f r a s t r u c t u r e C o m p o n e n t

C o s t s B e n e f i t s N e t B e n e f i t s C o s t s N e t

B e n e f i t s N e t C o s t s

T a b l e A 1 1 . 9 b : P r o j e c t E c o n o m i c R e t u r n s - S o c i a l I n f r a s t u c t u r e C o m p o n e n t ( S L R s ' 0 0 0 )

C D & E R o a d s R u r a l A c c e s s R o a d s V i l l a g e A d v a n c e m e n t P r o g r a m

Appendix 11 51

No. Year Costs Costs Benefits Net Benefits1 1991 180 (180) 26,899 27,079 (27,079) 2 1992 16,386 (16,386) 19,381 14 (19,368) 27,563 63,330 14 (63,317) 3 1993 2,050 108 (1,942) 89,941 1,851 (88,090) 38,520 130,511 1,959 (128,552) 4 1994 90,236 124 (90,112) 210,800 14,282 (196,518) 58,066 359,103 14,406 (344,697) 5 1995 94,475 14,713 (79,762) 293,858 46,283 (247,575) 67,045 455,378 60,996 (394,382) 6 1996 226,294 25,991 (200,304) 572,121 99,743 (472,378) 50,430 848,846 125,734 (723,112) 7 1997 327,565 60,833 (266,731) 652,523 193,390 (459,133) 30,248 1,010,336 254,223 (756,112) 8 1998 164,855 113,336 (51,519) 592,450 319,182 (273,267) 26,885 784,190 432,518 (351,671) 9 1999 193,544 60,049 (133,495) 591,640 453,201 (138,439) 60,818 846,002 513,250 (332,752) 10 2000 33,534 129,234 95,700 335,375 577,037 241,662 16,657 385,565 706,271 320,706 11 2001 3,765 63,995 60,230 243,146 650,224 407,078 246,911 714,219 467,308 12 2002 3,868 (11,221) (15,089) 241,168 680,048 438,880 245,037 668,828 423,791 13 2003 3,982 169,243 165,262 241,010 687,907 446,897 244,992 857,150 612,158 14 2004 4,076 112,114 108,038 240,332 684,640 444,308 244,408 796,753 552,345 15 2005 4,105 247,398 243,293 238,786 665,903 427,117 242,891 913,301 670,410 16 2006 4,038 167,847 163,810 236,840 638,661 401,820 240,878 806,508 565,630 17 2007 3,451 56,632 53,181 232,850 575,380 342,530 236,300 632,012 395,711 18 2008 2,860 182,969 180,109 228,937 509,812 280,875 231,797 692,780 460,984 19 2009 2,397 97,408 95,011 225,904 460,035 234,131 228,301 557,443 329,142 20 2010 1,647 199,662 198,015 223,168 407,636 184,468 224,814 607,298 382,484 21 2011 1,400 113,696 112,296 222,609 395,240 172,631 224,009 508,936 284,927 22 2012 1,400 13,799 12,398 222,565 395,163 172,598 223,965 408,961 184,996 23 2013 1,400 152,499 151,098 219,192 389,174 169,982 220,592 541,672 321,080 24 2014 1,400 157,114 155,714 210,621 373,957 163,335 212,022 531,071 319,049 25 2015 1,400 239,562 238,162 190,765 338,703 147,937 192,166 578,265 386,100 26 2016 1,400 229,922 228,522 167,348 297,125 129,777 168,748 527,047 358,299 27 2017 1,400 206,387 204,987 115,005 204,191 89,186 116,405 410,578 294,173 28 2018 1,400 165,549 164,148 66,924 118,822 51,899 68,324 284,371 216,047 29 2019 1,398 148,521 147,122 26,232 46,575 20,343 27,631 195,096 167,465 30 2020 1,368 118,350 116,982 1,705 3,026 1,322 3,073 121,376 118,303 31 2021 402 99,991 99,589 402 99,991 99,589 32 2022 299 75,688 75,390 299 75,688 75,390 33 2023 181 34,293 34,113 181 34,293 34,113 34 2024 85 16,763 16,678 85 16,763 16,678 35 202536 202637 202738 202839 202940 2020

EIRR 10.0% EIRR 10.6% EIRR 8.7%NPV@ 12% (79,059) NPV@ 12% (97,636) NPV@ 12% (402,433)

EIRR = econoimc internal rate of return, NPV = net present value.Source: Project Completion Review Mission estimate (2003).

Benefits Net Benefits CostsBenefits Net Benefits Costs

Overall Project

Table A11.9c: Project Economic Returns - Overall Project (SLRs '000)

Economic/Social Infrastructure ComponentsProductive Components Institutional Support Components

52 Appendix 11

E. Sensitivity Analysis 35. O&M is the most important variable for sustaining the stream of benefits. For the purposes of modeling, in the base case scenarios, O&M was applied at a rate of 1% per annum of the value of project-created assets. Under this low maintenance approach, the life of incremental benefits in irrigation and roads was limited to 10 years. For a stronger program of O&M, using a proxy value of 3% per annum, the sustained period of benefits was 20 years.

Table A11.10:Sensitivity Test

Sub-Components Base EIRR Changes for the Sensitivity Test Re-estimate

EIRR 1. Irrigation and Drainage 9.7% Increased O&M and 20-year life for benefits 13.2% 2. Irrigation and Drainage 9.7% Above, plus increase of 10% in value or yields 20.4% 3. Irrigation and Drainage 8.2% Base-case, minimal O&M, plus decrease of 6%

in value or yields 0%

4. C, D & E Roads 8.5% Increased O&M and 20-year life to benefits 13.9% 5. Rural Roads 8.2% Increased O&M and 20-year life to benefits 13.6% EIRR = economic internal rate of return, O&M = operation and maintenance. Source: Project Completion Review Mission estimate.

36. In cases 1, 4, and 5 in Table A11.10, the impact of improved O&M and a 20-year life to the benefits of the roads and irrigation schemes are significant. Cases two and three extend the analysis for the irrigation and drainage. If improved O&M is combined with better farm practices, resulting in 10% higher yields or value from other crops, the impact is large. This is because lowland rice farming is practiced on a subsistence basis, making it basically a break-even venture. The main goal of farmers is to meet household needs, with minimum input and exposure. In case 3, a drop of only 6% in yield or values reduces the investment to a zero EIRR, because rice farming is being practiced at a break-even level. 37. Under sensitivity testing, as seen in case 2, even small increases in value from a near-zero profit produce significant gains. However, farmers are averse to attempting other field crops in the lowland, because of the heavy and unpredictable rains that are common in Southern Province. Rice farming is more suitable to the wet conditions, whereas other field crops are much more susceptible to damage and loss. Still, other farming technologies could be applied, such as building up beds and furrows for better drainage, and employing poly-tunnels for high-value vegetable production. This implies that successful demonstrations could produce significant returns for irrigation. However, approaches need to be identified, tested and demonstrated before poor farmers would risk their families' food security for cash crops. The Project did not address this dilemma.

F. Financial Analysis 38. Household Farm Analysis and the Poor. Financial analysis of the household farm is consistent with the analysis on subsistence farming. Farms are typically small with low productivity. A representative farm is about 1.4 ha, and divided among three land classes: (i) 0.6 ha of lowland, which is planted for rice farming, (ii) 0.8 ha of upland or highland crops, and (iii) 0.2 ha of home garden (Table A11.11). In the western districts, highland crops include tea, cinnamon, coconut, and rubber, among others. In the drier Hambantota district to the east, coconut is more prevalent, followed by cinnamon, pepper and cashews. Home gardens provide vegetables and fruits, while additional livestock-derived income is usually modest. In a without-project farm setting, rice production from 0.6 ha is sufficient for home consumption, with a narrow surplus to trade for other goods. Most of the farm cash income is derived from the

Appendix 11 53

upland and highland crops, with some contribution from the home garden and livestock. The total value of annual farm income in this setting is about SLRs41,000 per household. 39. Based on a "food-poverty" rate of SLRs1,100 per capita per month,5 and an average household size of five, the required annual household income to overcome this level would be SLRs66,000 per year. The SLRs25,000 gap underscores the poverty common in the Province’s farm households. However, farm households produce much of what they need in food, rather than buying at higher market prices, which should temper this assessment. Nonetheless, farm incomes are low, and there are needs other than food. To overcome the cash value of the food poverty gap, a without-project farm household would have to work 90 days per year in other- or off-farm employment. 40. If a farm household benefited from the Project by gaining access to improved irrigation and improved home gardening, the additional farm income is estimated at about SLRs12,400. The 30% increase over without-project income is not significant in absolute terms. The percentage gain is due to the low base income of farm households. The additional income would increase the farm household income SLRs41,000 to SLRs53,400—still short of the SLRs66,000 poverty target. The household would then have to work an additional 45 days per year in other- or off-farm employment, as compared to 90 in the without-project scenario. For a smaller, marginal farm of about 0.6 ha, the outside work requirements would involve 2-3 times the days of the typical farm household. This implies 145 (with project) to 165 days (without project) of other- or off-farm income for the small farm household. 41. The significance of this analysis is that the gains from the Project for the farm household are not very significant in the overall picture. Other- or off-farm income is needed with or without the project intervention. Poor farmers that managed to benefit from the Project are assisted marginally by the irrigation and gardening improvements. However, these impacts are far from enough to break the cycle of poverty. 42. Other Financial Considerations. The industrial estate was built by the Government under financing from the Project. Although the sites have been made available for 30-year leases at near-giveaway rates, occupancy still lags. The lease rate is SLRs8,000 per acre per year, with most blocks averaging a third of an acre. Thus, the average lease per block would cost about SLRs2,667 per year. While the rate was established to cover planned O&M expenses, it likely will be insufficient even for those purposes. A high degree of lease subsidy was included in this subcomponent. 43. The project-financed credit also was provided at sub-market rates. ADB endorsed this government policy, first by agreeing to 16% per annum rates at appraisal, and then agreeing to lower the rates to 14% later.6 Throughout the project period, these rates were about 4-6 percentage points lower than comparable loans in the banking system. One rationale for subsidized credit was the difficult circumstances that the country was experiencing due to war. However, submarket loan rates might have encouraged opportunistic borrowers and unsustainable enterprises, while weakening the participating credit institutions. 44. Government funds were insufficient to sustain project-financed infrastructure in all categories. For C, D & E roads, the cost of maintenance was estimated by a number of consultant studies to be SLRs60,000-80,000 per km per year. A sample analysis from Matara district showed that the funds available from Provincial Roads Authority for O&M were SLRs13 million for 1,520 km of roads—or about SLRs8,550 per km. Even at half of consultants’ estimates of O&M requirements, a large gap remains between government funding and needs. 5 S. Vidyaratne. March 2003. Sectoral and Provincial Poverty Lines for Sri Lanka. Department of Census and

Statistics, Sri Lanka. 6 ADB facsimile to Government, 9 June 1995.

54 Appendix 11

Of the project-funded infrastructure, the C, D & E roads are in the strongest position, because some capacity exists and O&M systems are in place. C, D & E road maintenance is being undertaken by contract. For the rural access roads, village infrastructure, and irrigation, the maintenance situation is worse. The project design overlooked this important shortcoming.

G. Distribution Analysis and the Poor 45. Though each subcomponent varies in the distribution of benefits, three representative infrastructure models were assessed: (i) irrigation, (ii) roads, and (iii) VAP (Tables A12a, b, and c). For irrigation, the benefits and costs were allocated among farmers, labor, and Government. Of these groups, the shares of the poor were estimated as 70% of farmers, 90% of labor, and 10% of Government (approximately equal to the poor's share in gross domestic product). The net benefit for the poor per project cost on irrigation was 0.68. 46. For roads, the shares of the poor in beneficiary groups were estimated as 90% of unskilled labor, 0% of private vehicle owners, 30% of passengers and freight users (about equal to the poor's representation in the population), and 10% of Government. Under this assessment, the net benefit for the poor per project cost on roads was 0.15. 47. For VAP, the shares of the poor in beneficiary groups were estimated as 20% of the producer-entrepreneurs, 90% of unskilled labor, 30% of travelers, and 10% of Government. Under this assessment, the net benefit for the poor per project cost on VAP was 0.38. 48. The irrigation works appear to target the poor most effectively, since 70% of the farmers are poor, and the poor make up a substantial proportion of labor. However, this facile conclusion misses the fact that the returns for the subproject are quite low to begin with. Conditions that lay the foundation for sustained growth in income and employment in the economy are more important to the poor. These include a government commitment to sound macroeconomic fundamentals on the policy side, while investing in basic physical and social infrastructure that will underpin long-term stability and expansion.

H. Employment 49. One of the goals for the Project was employment generation. The Project had two impacts on employment: (i) the jobs created in implementing the Project (construction and services), and (ii) the permanent employment resulting from the Project. In the first case, the Project generated about 3.5 million days of unskilled labor and 736,000 days of skilled labor. For permanent employment, the Project generated 2.75 million days of unskilled labor per year and 978,000 days of skilled labor. 50. These might seem like impressive figures. However, upon further analysis, the figures take on more meaning. If the labor days for employment generated in implementing the Project are first converted into years, the result is 13,800 years of unskilled labor and 2,950 years of skilled labor. If these years are then divided by the number of years in project implementation, the result is 1,540 unskilled jobs per year and 330 skilled jobs per year. 51. For the permanent employment generated by the Project, almost 85% was estimated to be generated from the credit-financed enterprise. The assumptions were that two incremental jobs were created for each surviving enterprise, and that each loan was for a different borrower (this assumption may be off the mark as there were no figures provided on repeat borrowers). For the permanent jobs launched by the end of the Project, the labor-days figure converts into about 15,000 jobs. A last qualification is also in order. The portion of credit administered by the Central Bank is being retained for up to 20 years as a revolving fund. On the assumption that the funds are lent out and recovered over several more cycles, there would be some additional job creation potential.

Appendix 11 55

Table A11.11: Household Farm Impact

A. Average Farm (1.4 ha)Paddy Area (ha) 0.6 0.6Cropping Intensity (%) 140% 163% 23%Value Paddy (SLRs) 4,307 15,113 10,806

Upland/Highland Area (ha) 0.8 0.8Cropping Intensity (%) 100% 100% 0%Value Upland Crops (SLRs) 29,896 29,896 0

Home Garden Area (ha) 0.02 0.02Cropping Intensity (%) 200% 300% 100%Value Home Garden (SLRs) 3,155 4,733 1,578

Miscellaneous Livestock Income (SLRs) 3,736 3,736

Total Farm Size (ha) 1.4 1.4Subtotal Farm Income (SLRs) 41,094 53,477 12,384

Other or Off-Farm Family Employment (days/year) 90 45 (45)Value of Off-Farm Employment (SLRs) 24,750 12,375 (12,375)

Household Income Total (SLRs) 65,844 65,852 9Household Income/Capita ($) 139 139 0

Household Food Poverty Linea 66,000 66,000Household Total Poverty Linea 102,000 102,000

B. Small Farm (0.6 ha)

Paddy Area (ha) 0.3 0.3Cropping Intensity (%) 140% 163% 23%Value Paddy (SLRs) 2,154 7,557 5,403

Upland/Highland Area (ha) 0.4 0.4Cropping Intensity (%) 100% 100% 0%Value Upland Crops (SLRs) 14,948 14,948 0

Home Garden Area (ha) 0.01 0.01Cropping Intensity (%) 200% 300% 100%Value Home Garden (SLRs) 1,578 2,366 789

Miscellaneous Livestock Income (SLRs) 1,868 1,868

Total Farm Size (ha) 0.7 0.7Subtotal Farm Income (SLRs) 20,547 26,739 6,192

Other or Off-Farm Family Employment (days/year) 165 145 -20Value of Off-Farm Employment (SLRs) 45,375 39,875 -5,500

Household Income Total (SLRs) 65,922 66,614 692Household Income/Capita ($) 139 140 1

a S. Vidyaratne. 2003. Department of Census and Statistics. Sri Lanka.ha = hectare.Source: Project Completion Review Mission, 2003.

Description Without With Difference

56

Appendix 11

(SLRs '000)

FNPV ENPV Government/@12% @12% ENPV-FNPV Farmers Labor Economy Total

Investment (1,830) (1,781) 49 110 (60) 49

Incremental O&M (103) (83) 21 21 21

CostsIncremental Labor (954) (1,018) (64) (64) (64)Incremental Fertilizer (166) (171) (5) (5) (5)Incremental Agrochemical (21) (23) (2) (2) (2)Incremental Cost Other (333) (347) (14) (14) (14)

RevenueIncremental Paddy Revenue 3,267 3,389 123 123 123Incremental Byproduct Revenue 209 209 0

Project Effects 68 176 107 0 67 41 107

Net Financial Effects 68 1,899 (1,830) 68

Net Economic Effects 176 1,899 67 (1,790) 176

Proportion of the Poor 70% 90% 10%Net Benefits for the Poor 1,329 60 (179) 1,210

Present Value of Economic Cost 1,781Net Benefits for the Poor Per Project Costa 0.68

a (net benefits for the poor) / (present value of economic cost).ENPV = economic net present value, FNPV = financial net present value, O&M = operation and maintenance.Source: Project Completion Review Mission estimate (2003).

Table A11.12a: Distribution Analysis - Sample Irrigation Project (Annicut Rehabilitated)

Economic Benefits Going to the Poor

Project Costs and BenefitsProject Financial and Economic Effects Distribution of Project Effects Among Stakeholders

Appendix 11 57

(SLRs '000)

Investment (21,100) (20,530) 570 1,266 (696) 570

Incremental O&M (3,577) (2,861) 715 715 715

BenefitsVehicle Operation Savings 0 13,472 13,472 5,389 4,042 4,042 13,472Passenger Time Savings 0 4,962 4,962 4,962 4,962

Project Effects (24,676) (4,958) 19,719 1,981 5,389 9,003 4,042 (696) 19,719

Net Financial Effects (24,676) (24,676) (24,676)

Net Economic Effects (4,958) 1,981 5,389 9,003 4,042 (25,373) (4,958)

Proportion of the Poor 90% 0% 30% 30% 10%Net Benefits for the Poor 1,783 0 2,701 1,212 -2,537 3,159

Present Value of Economic Cost 20,530Net Benefits for the Poor per Project Costa 0.15

a (net benefits for the poor) / (present value of econmic cost).ENPV = economic net present value, FNPV = financial net present value, O&M = operation and maintenance.Source: Project Completion Review Mission estimate (2003).

Economic Benefits Going to the Poor

Project Financial and Economic Effects Distribution of Project Effects Among StakeholdersProject Costs and Benefits

Passengers

Table A11.12b: Distribution Analysis - Sample Road Project (CD&E class)

ENPV-FNPVFNPV @ 12% ENPV @ 12% TotalUnskilled

Labor

Private Vehicle Owners

Government/Economy

Freight Users

58

Appendix 11

(SLRs '000)

FNPV ENPV Governm ent/@ 12% @ 12% ENPV-FNPV Producers Labor Travelers Econom y Total

RevenueTim e Savings 0 6,331 6,331 6,331 6,331

Agricultural Production 16,531 16,531 0

Enterprise/Industry Production 22,332 22,332 0

CostsAgriculture

Non-Labor-Only Investm ent (702) (683) 19 42 (23) 19

(9,863) (7,890) 1,973 1,973 1,973Nonlabor Operating Costs (2,586) (2,586) 0

IndustrialInvestm ent (4,548) (4,425) 123 273 (150) 123Labor in Operations (6,253) (5,002) 1,251 1,251 1,251Nonlabor in Operations (9,379) (9,379) 0

Project Investm ent (14,973) (14,569) 404 898 (494) 404O&M (846) (677) 169 169 169

Project Effects (10,287) (18) 10,270 0 4,606 6,331 (667) 10,270

Net Financial Effects (10,287) 5,532 (15,820) (10,287)

Net Econom ic Effects (18) 5,532 4,606 6,331 (16,487) (18)

Proportion of the Poor 20% 90% 30% 10%Net Benefits for the Poor 1,106 4,145 1,899 -1,649 5,502

Present Value of Econom ic Cost 14,569Net Benefits for the Poor per Project Costa 0.38

a (net benefits for the poor) / (present value of econm ic cost).ENPV = econom ic net present value, FNPV = financial net present value, O&M = operation and m aintenance.Source: Project Com pletion Review M ission estim ate (2003).

Econom ic Benefits Going to the Poor

Project Costs and Benefits

Table A11.12c: Distribution Analysis - Village Advancem ent Sam ple Project

Labor in Investm ent and Operating Costs

Project Financial and Econom ic Effects Distribution of Project Effects Am ong Stakeholders