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* ~qust Ne. P-3903-CE

REPORT AND RECO ON

OF TEE

PRESIDENT OF TEE

INTERNATIONAL DEVELCPT ASSOCIATION

TO TrEE

EXECUTIME DIRECTORS

ON A

PROPOSED CREDIT

OF SDR 17.0 ETILLION

TO THE

DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA

FOR A

MAJOR IRRIGATION REHABILITATION PROJECT

November 29, 1984

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CURRENCm EVALENTS

US$1.90 = SL Rs 25.20SL .e 1.00 US$0.0397

UNITS AlNl EOUIVALUTS

1 hectare (ha) = 2.47 acres1 kilogram (kg) = 2.2046 pounds (lb)1 metric ton (Mt) 1.0161 long tons (1 ton)

A3BREVIATIONS AND ACRONYMS

CIDA - Canadian International Development AgencyDA - Department of Agriculture -

DAC - District Agricultural CommitteeDAS - Department of Agrarian ServicesID - Irrigation Department3111 - International Irrigation Management Institute

DlM - Division of Irrigation ManagementINMAS - Program for Integrated Management of Major Irrigation SystemsLCD - Iand Commissioner-s DepartmentNCR - Million Cubic MetersMLDT - Ministry of Lands and Land DevelopmentPSA - Project Special AccountSDC - Swiss Development Cooperation

FISCAL YEAR

January 1 - December 31

FOR OmCIL USE ONLY

SRI LAA

NAJOR IRRIGATION RERABUIIT&TION PROJECT

Credit and Proiect Summary

Borrower: The Democratic Socialist Republic of Sri Lanka

Amount: SDR 17.0 million (US$17.0 nillion equivalent)

Terms: Standard

Project The proposed project seeks to increase agriculturalDescription: production on land commanded by seven selected major

irrigation systems by (a) rehabilitating sevenexisting irrigation systems serving a total area ofabout 46,000 hectares; (b) introducing an inte-grated management program to ensure proper operationand maintenance of the systems and distributien ofirrigation supplies; Cc) strengthening support servicesprovided by various government agencies; and (d) makingprovision for monitoring and evaluation of projectexecution and performance. The major project benefitswould be higher crop production, improved Vate; dis-tribution, and better water management. The projectwould promote an incremental production of 73,800 tonsof paddy; 6,200 tons of soya; and generate about 3,000new jobs during the execution period. The project hasno technical risk, but faces a general risk frompossible failure to implement the proposed watermanagement improvements.

|is document has a resrted distibuton and may be used by recipients only in the perfonnance of |thcir official dus. Its contents may not otherwise be disdowed without World Bank authorizaton.

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(US$ Million Eanivalent)Estimated Cost: {aLocal Forejn Total

Civil. Works 19.0 11.2 30.2Equipment and Vehicles 1.8 6.6 8.4Technical Assistance and

Training 1.3 0.4 1.7Administration 2.9 0.0 2.9

Total 25.0 18.2 43.2

Finaucina Plan: (US$ Million Equivalent)Local Foreign Total

IDA 7.2 9.8 17.0Government 1'.8 0.0 11.8CIDA 1.6 5.2 6.8SDC 4.4 3.2 7.6

Total 25.0 18.2 43.2

EstimatedDisbursements:

(USS Million Equivalent)IDA FY 1985 1986 1987 1988 1989 1990 1991

Annual 0.4 2.4 4.2 3.2 2.6 2.2 2.0Cumulative 0.4 2.8 7.0 10.2 12.8 15.0 17.0

Rate of Return: 16 percent

Staff AppraisalReport: No. 5231-CE, dated November 6, 1984

___S_ IBRD No. 18021, 18022

/a Includes taxes and duties of about US$2.6 million equivalent.

INTERNtAIONAL DEVELOPHENT ASSOCIATION

REPORT AND RECONMEUDAXIOR OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS

ON A PROPOSED CREDITrTO THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA

FOR A MAJOR IRRIGATION RFRA3ILITATION PROJECT

1. I submit the following report and reconmendation for a proposedcredit of SDR 17.0 million (US$17.0 million equivalent) to the DemocraticSocialist Republic of Sri Tanka to help finance a Major IrrigationRehabilitation Project on standard IDA. terms. Cofinancing arrangements bavebeen made with the Canadian International Development Agency (CMnA) for agrant equivalent to US$6.8 million and with the Swiss Development Cooperation(SDC) for a grant equivalent to US$7.6 million.

PART I - THE ECONOMY 1/

2. A country economiz memorandum, "Sri Lanka: Recent EconomicDevelopments, Prospects and Policies" (Report No. 5038-CE dated May 4, 1984),was distributed to the Executive Directors on May 13, 1984. Country data areprovided in Annex I.

3. After several years of relative stagnation, Sri Lanka's economy hasexperienced sustained growth. This growth has been the direct result of theeconomic liberalization of 1977 and a significant growth in foreignas:istance. Until 1977, Sri Lanka-s growth performance had been below bothneed and potential. Although the 4.4Z annual GDP growth in the 1960s wasabove the average for low-income countries, it slackened sharply in the1970-77 period to 2.9Z per annum, just below the average for low-incomecountries. Through much of this period, the terms of trade deterioratedsteadily, eroding even these modest gains. The slowdown in econom.c growthin the 1970-77 period was attributable to a combination of factors, includinginadequate investment, poor management of the economy, and a policy environ-ment not conducive to growth and investment; these difficulties were con-pounded by poor weather in some years and a sharp rise in the cost ofimported food and petroleum.

1/ This part is substantially the same as Part I of the President's Reporton the Nahaveli Ganga Development Project IV for Sri Lanka (Report No.P-3821-CE), that was approved by the Executive Directors on June 7, 1984.

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4. In sharp contrast to this poor economic performance, Sri Lanka'ssocial achievements in relation to per capita income have been outstanding.By virtually all social indicators-life expectancy, literacy, infantmortality, birth rate, nutrition levels-Sri TLaka ranks significantly betterthan other countries at its per capita income level. These improvements inthe quality of life, in particular the rise in health standards, the spreadof education and the availability of subsidized food, have been importantfactors in the decline in mortality. The increasing age of marriage, thespread of female education and employment, and a family planning program alsohave contributed to a sbarp decline in fertility. As a conseouence, popula-tion growth, net of migration, has dropped steadily, from 2.7Z per annum inthe 1953-63 period to 2.2Z per annum in the 1963-71 period, and to 1.7% perannum during 1971-81.

5. However, the Government financed both its investment and socialexpenditures largely through the extraction of the surpluses of the threemajor tree crops (tea, rubber and coconut), which traditionally have fur-nished easy sources of revenue and foreign exchange. These surpluses beganto decline in the late 1960s as government export tax policies discriminatedagainst tree crops and export unit prices weakened. With the growth in otherproductive sectors declining in the 1970-77 period, the budgetary resourcesavailable for social programs were squeezed between inelastic revenues andrapid inflation. As a consequence, expenditures for social services otherthan the food subsidy declined as a-proportion of total current expendituresand of GDP, threatening the hard-won gains in health and education. Inshort, the economy could no longer generate the resources needed to sustainthe large program of welfare expenditures. Moreover, the very size of thoseprograms reduced the scope for policy makers to shift resources todevelopment.

6. In 1977, a package of policy measures was introduced in order tobreak this vicious circle. In an attempt to liberalize the economy and allowa greater role for the private sector, the new Government introduced, inclose consultation with the INF, policies designed to (a) reduce sovernmentintervention in commodity markets, (b) reduce government consumption sub-sidies to assist in restoring producer incentives and public savings, and(c) create a favorable environment for private (foreign and domestic) invest-ment by tax concessions, the creation of an Investment Promotion Zone, andthe unification and depreciation of the exchange rate. Two of the moreimportant positive consequences of this policy reform package were that theburden of selected subsidies and transfers fell from around 1OZ of GDP in1977 to around 3% by 1981, and that the periodic increase in the domesticsupport price for paddy in line with world price trends resulted in a highlypositive producer response in rice.

7. In addition to these policy reforms, the Government also embarkedon an ambitious public investment program. As the Government responded tothe increased availability of resources (from domestic and foreign sources)to tackle long overdue investments, the Government-s capital expenditurejumped from 6X of GDP in 1977, to an average of 13% in 1978 and 1979, peakingat 19Z in 1980, and subsequently declining to an average 14% over the period1981 to 1983. At the center of the Government-s investment plan were threemajor new undertakings: (a) the accelerated implementation of the NahaweliGanga Development Program, the largest multipurpose river basin development

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program ever undertaken in Sri Lanka; (b) the establishment of a 200 squaremile free trade zone north of Colombo near the international airport, aimedprimarily at attracting foreign investors; and (c) a massive housing andurban renewal program with its main focus on the Colombo metropolitan region,including the construction of a new capital complex at Kotte, a suburb ofColombo.

=

8. The initial result of both the policy reforms and increased levelo. investment was an impressive jump in the GDP growth rate to an average6.8Z per amnum for the period 1977-80 declining to 5.3% in 1980-83. Themajor activities which accounted for most of this increased growth were paddyproduction, garment exports, tourism and the service sector. Paddy produc-tion has averaged an annual 5.7% real growth rate since 1977, resulting in adecline in rice imports from an average 33Z of total rice consumption during1970-77 to only 12% during 1978-83. Manufactured garment exports haveincreased from US$12 million in 1977 to US$197 million in 1983, raising theirshare of non-petroleum manufactured exports from 41% in 1977 to 76% in 1983,whereas tourist arrivals have increased from 153,665 in 1977 to 407,230 in1982, with a setback to 337,342 in 1983 due to ethnic disturbances duringJuly.

9. However, some of the basic structural weaknesses within the economyhave not been addressed. With respect to directly productive activities,three subsectors have continued to perform poorly; i.e., the tree cropsector, public manufacturing enterprises and non-traditional exports. Thevolume of output from the centrally important export-oriented tree cropsector has continued to decline. The public manufacturing enterprisesinherited by the present Government, which account for approximately 40X ofthe value added in the non-petroleum manufacturing sector, continue to util-ize resources inefficiently thereby reducing the overall growth rate inmanufacturing. And, lastly, the real growth of non-traditional exports hasbeen fairly low and erratic. Underlying the poor performance of thesesectors are two principal factors: poor management of publicly ownedenterprises and an overall incentive framework which offers high and unevenlevels of effective protection with a general bias against export activities.Moreover, as the exchange rate has not been fully adjusted in a systematicway since 1977 so as to compensate for the high levels of domestic inflation,the incentive to invest in the production of traded commodities has beenreduced in favor of non-traded goods.

10. In addition to these distortions in the incentive framework and theinefficient management of publicly owned assets, the Government's budgetarypolicy has been a major source of macro financial instability, particularlyover the past few years. As a share of GDP, budgetary spending increasedsharply from 23Z in 1977 to a record 43% in 1980, subsequently declining butstill remaining at 32% in 1983. Although initially much of this increasedexpenditure was accompanied by a corresponding inflow of foreign concession-ary capital which was linked to the public investment program, the need toresort to domestic or comercial foreign financing increased. In addition,the Government-s efforts to mobilize additional domestic resources fell shortof what was required. Due to falling volumes and prices in the tree cropsector and an insufficient effort to widen the tax base away from traditionalsources, the Government became increasingly reliant on ad hoc taxationmeasures to maintain existing revenue levels. The large growth in spending

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coupled with large inflows of foreign savings and a weak domestic revenueeffort has resulted in large budget deficits which peaked at the equivalentof 232 of GDP in 1980 and still amounted to 15Z of GDP in 1983. In responseto the increasing domestic deficits, current spending has been squeezed.Although the reduction in subsidies are welcome, the limits placed on bothpublic sector salaries and operation and maintenance expenditure are begin-ning to impose significant costs on the economy in terms of recruitment/performance in the public sector and the efficient use of the existingpublicly-owned capital stock. Even so, savings on the budgetary currentaccount have remained negative from 1979 to 1983. In swmmary, despiteimpressive donor support for the country-s development programs, equivalentto 7.3% of GDP during 1981-83, the high level of public expenditure has meantthat only 45Z of the overall deficit was financed by concessionary flowsduring these three years with about 10% being covered by foreign commercialborrowing and the remaining 45Z through domestic borrowing.

11. The rapid expansion in investment and general economic activity hasbeen reflected vividly in the balance of payments. Import volumes grew atan average annual rate of 18.8Z between 1977 and 1980, with investment goodsincreasing from USS83 million to US$493 million and intermediate goods andpetroleum imports tripling in current prices over the same period. Thisfairly broad-based expansion in imports resulted in the share of merchandiseimports as a percent of GDP increasing from 23% in 1977 to 51Z in 1980.Export volumes, however, expanded at a much lower rate (an average annualgrowth rate of 4.7% between 1977 and 1980) with the decline in tree cropexport volumes offsetting the strong growth in garment exports from new firmsestablished in the Investment Promotion Zone. As a consequence, merchandiseexports increased as a share of GDP from 21% in 1977 to only 26% in 1980.These adverse trade volume trends were accompanied by a 26% terms of tradedeterioration over the same period. The rapid growth in tourism receiptsand private remittances from abroad in this period failed to offset thedeterioration in the trade account, and the current account deficitdeteriorated from a positive 2.4% of GDP in 1977 to a record 19.8% deficitin 1980. Although the deficits in 1978 and 1979 were more than offset byincreased net aid disbursements, even to the extent that Sri Lanka couldcontinue to add to net international reserves, by 1980 the situation hadchanged. In the latter year net international reserves fell by US$220million and the public sector began to make increased use of commercialfinancing.

12. Since 1980, the external deficit has mirrored the erratic movementsof the budget deficit. Realizing in 1981 that a continuation of the 1980trends would result in serious financial instability, the government beganto take corrective measures, mainly in the form of tighter overall monetaryexpansion, a substantial reduction in government spending and a gradualrealignment of the exchange rate as part of a new IMF program. Althoughthese measures were beginning to show results by the end of 1981 (the currentaccount deficit in the balance of payments had declined to 13.7% of GDP andthe budgetary deficit to 15.6%), the political resolve to continue to applythe needed policy mix weakened in 1982 due in large part to the Presidentialelections and the subsequent referendum to extend the life of Parliament. Asa result, both the external and internal deficits increased in 1982 (to 15.3Zand 17.3%, respectively) and the overall growth rate declined to 5.1% (thelowest since 1977). Due partly to a continuation of this election process in

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response to post-referendum criticism and partly to the subsequent attemptsto find a solution to the continuing ethnic problems, the Government hascontinued to accord priority to the pressing political/social issues.Although policy measures did contribute to the decline in the current accountdeficit in the balance of payments to 12.4% of GDP in 1983, the estimated 14%improvement in the terms of trade was the primary factor. By the end of1983, net international reserves were slightly negative, gross officialreserves equal to about two months of imports, and the debt service ratiocontinued to increase (para. 16). In addition, as a result of the budgetarydeficit and some movement in the exchange rate, inflation accelerated to anaverage 14Z during 1983 and the GDP growth rate fell to 4.9x.

13. While the 1983-84 terms of trade improvement is giving the economysome breathing space, the need for basic structural change has notdiminished, particularly the tree crop and manufacturing sectors. Therefore,to avoid the consequences of an abrupt downward adjustment in aggregatedemand which is likely to follow from a continuation of past policies, one ofthe priority objectives of government policy should be to restructure theeconomy away from producing for the very limited domestic market towardsexports. The basic thrust of the required policy package would be to movetowards a more neutral incentive framework which would permit the full diver-sity of Sri Lanka's particular comparative advantage to develop. However, inthe short run, the implementation of such a policy package may not be suffi-cient because, firstly, the capacity of the economy to respond to a changedset of incentives may be limited and, secondly, the non-policy-related con-straints to economic growth (such as the basic infrastructure and imperfectcredit markets) will continue to require the careful attention of Government.

14. Although the uncertain political situation continues to constrainthe Government's ability to adopt a comprehensive economic policy package,recent measures demonstrate that the Government is both aware of the medium-term problems and capable of implementing some of the required reforms. Toillustrate, a program of management and incentive reforms in the tree cropssector has been initiated, and the Presidential Tariff Commission shouldpresent recommendations designed to reduce the overall anti-export bias ofthe incentive structure to Parliament this year. Furthermore, the revised1984 budget does imply a further reduction in the budgetary deficit and theGovernment has pledged to continue to reform its tax base so as to increasedomestic resource mobilization. Also, there have been encouraging institu-tional developments affecting the budgetary management. A comprehensiveinter-ministerial exercise is ongoing, designed to ensure adequate expendi-tures on O&M which, starting in 1985, will appear explicitly as a separatecategory of spending in the budget. Also the Cabinet has laid down criteriafor project selection for inclusion in future public capital budgets whichshould remedy a major weakness. Actual implementation of these measureswould improve coordination among the multitude of ministries, and representan important step forward in budgetary management. Nevertheless, continuedstrong measures will be required in order to curtail the size of the budgetdeficit and redirect public investment into those areas where it is mostefficiently used. Given the rapid build-up of the country's capital stocksince 1977, the highest return probably centers around complementary invest-ments to the existing infrastructure plus a few selected new projects inthose long-gestating activities (e.g., power) which, at this time, areappropriate for public sector investment. If these actions are taken,

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together with measures designed to remove the policy-related distortionswhich constrain efficient production decisions, the economy could stabilizeand continue to grow at the level attained in the recent past.

15. The aid community has responded enthusiastically to the Government'sdevelopment efforts in recent years. Most of the growth has come in projectaid, reflecting the Government's efrorts to increase investment, particularlyin the Accelerated Mahaweli Program. The overall level of aid commitmentsincreased from US$250 million in 1977 to a record US$814 million in 1981,equivalent to US$55 per capita. Disbursements grew much more slowly andthere was a rapid build-up of the aid pipeline to around US$1,630 million bythe end of 1981. With the need to curtail public capital spending during1982-83, both because of implementation and domestic financial constraints,commitments declined to US$550 million in 1982 and US$370 million in 1983,halting further increases in the pipeline. Aid disbursements have grownsteadily, from US$200 million in 1977 to US$450 million in 1983, or close toUS$30 per capita. The slow growth of disbursements relative to commitmentsthrough 1981 can be explained largely by two factors: the rapid accelerationin aid commitments themselves which proved to be beyond the country's absorp-tive capacity, and the relative shift over time from food and commodity aidtowards slower disbursing project aid. Continued high levels of aid willdepend upon donors' ability to finance a sizeable portion of local costs, toprovide supplementary financing for ongoing projects where needed and toincrease non-project aid, as well as upon Government's ability to make effec-tive use of the assistance. The Government will need to maintain donorconfidence in its economic policies and management through a continuedvigorous domestic resource mobilization program and continued restraint ingovernment exp2nditures as the budgetary situation remains tight. Local costfinancing, in support of Sri Lanka's own resource mobilization efforts willnot only provide valuable relief from these budgetary pressures but alsosupplement foreign exchange resources needed in support of the balance ofpayments.

16. External public debt outstanding and disbursed stood at an estimatedUS$2,205 million at the end of 1983, amounting to about 46Z of GDP. Althougha greater part of this debt is on concessional terms, the increased resort tocommercial finance during 1981 and 1982 has contributed to the debt serviceratio increasing from 10.1% in 1982 to 11.9% in 1983 excluding IMF chargesand repurchases. Even though record tea prices in recent months continue tomaintain Sri Lanka's export earnings at a high enough level to enable it toreduce its dependence on commercial finance in the near term, any deteriora-tion in the terms qt trade would rapidly reverse the situation. However, theGovernment has taken measures to reduce the budget deficit and is activelyconsidering policy measures designed to stimulate exports and efficientimport substitution activities. If the Government continues to make progressalong these lines, the current account deficit in the balance of paymentsshould decline to approximately 7Z towards the end of the decade with thedebt service ratio declining to below 15% in 1990 after temporarily rising toalmost 17% due to existing debt repayment commitments.

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PART II - BANK GROUP OPERATIONS

17. Since the beginning of its operations in Sri Lanka in 1954, theBank Group has approved 10 loans totaling US$127.7 million (net ofcancellations) and 36 credits totaling US$695.6 million (net of cancel-lations) in support of 43 projects. About 52Z of Bank Group assistance hasbeen for agriculture (irrigation, agricultural, and dairy development), 23%for power, 10% for transport, and the remainder of 15Z among developmentfinance company operations, a program crodit (mainly involving the importof raw materials for industry), water supply, construction industry,telecommunications, and small and medium industries. Eight loans and 13credits have been fully disbursed so far. This is the first Sri Lankanoperation to be presented to the Board in FY85. Annex II contains a summarystatement of Bank Group operations as of September 30, 1984.

18. In Sri Lanka, the IFC has a total investment of US$2.13 millionequivalent in equity and US$16.74 million equivalent in loans. Investmentshave been made so far in two textiles industries, one polypropylene bagindustry, one equipment leasing company, one hotel, and two IFC lines ofcredit (US$7.0 million), which have been extended to the government-ownedBank of Ceylon for term loans to medium-sized industries.

19. The Bank Group's current strategy is primarily to assist-Sri Lanka inreaching a more sustainable balance-of-payments position in the medium termthrough export promotion and import substitution. The strategy focuses onthe agriculture sector and therein grants the highest priority to stabilizingthe vital tree crops subsector in the short term and to stimulating sus-tai e export growth in the medium term. This strategy includes projectsto bilitate rundown infrastructure that is necessary to support expandedeco.. .Lc activity, particularly in the private sector. Projects currentlyunder preparation include a fourth tree crop project, a second road main-tenance project, and a second dairy project.

20. The Bank Group, as of the end of 1983, accounted for 10.7% (IBRD,1.6%; IDA, 9.1%) of Sri Lanka's total debt outstanding and disbursed, and5.0Z of debt service on medium- and long-term debt. The projected BankGronp's share in total existing external debt outstanding and disbursed willincrease to 17: by 1985 (with IBRD's share declining to 1.3%). The Bank andIDA portions of debt servica are expected to decline to about 4% by 1985.

PART III - THE AGRICULTURE SECTOR

21. Agriculture plays an important role in Sri Lanka's economy itaccounts for about 25Z of GDP, more than 50% of the labor force, and about60% of export earnings. About 95% of the rural population is involveddirectly in agriculture-related activities. In addition, much of theactivity in manufacturing, transport, and the service sectors relates toeither supplying agricultural inputs or processing agricultural produce.

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22. Traditionally, agricultural development has been concentrated in thewet zone in the southwest portion of the island. Accounting for only one-third of Sri Lanka's surface area, this zone contains about two-thirds ofits population and 50% of its paddy land. Future agricultural growth in thewet zone will depend primarily on whether the productivity of alreadydeveloped land can be increased. In contrast, the dry zone to the north issparsely populated and underdeveloped despite continuing migration andsettlement. Permanent agriculture in the dry zone accounts for less than 30%of the 2.24 million ha which are considered potentially arable nationwide.(An additional 1.0 million ha are under subsistence-type slash and burn(chena) agriculture.) Cultivation in the southwest monsoon season (yala) isconfined to irrigated areas. Wato'r and other constraints limit averageland-use intensities to about 100-120%. Considerable potential exists in SriLanka both for increasing cropping intensities on already developed land, andfor limited expansion of cultivated areas, particularly in the dry zone.

Objectives and Stratezy for the Future

23. The Government recognizes the pivotal role of agriculture instimulating economic growth and rural development in Sri Lanka. Its medium-term strategy for agriculture emphasizes (a) better utilization of existingresources through institutional and policy reform, as well as strategicallyselected investments to increase the production base. Some high-priorityareas are: (a) appropriate price incentives for producers; (b) agriculturalsupport services, such as research and extension, credit, farm power supply,and fertilizer distribution; and (c) stronger irrigation water management.Following adoption of measures in 1977 designed to implement the above anddue partly to favorable weather, the agriculture sector has responded well.Agricultural performance during 1978-82 improved substantially, with growthaveraging 4.0% annually and the increase in paddy production averaging 5.22anuually. As a consequence, imports of rice declined dramatically. Climaticvagaries, however, continue to plague Sri Lankan agriculture. To mitigatethe impact of variations in rainfall on production, for the long term theGovernment is expanding irrigated agriculture further into the dry zonethrough accelerated development of its major river basins, the Mahaweli Gangaand Maduru Oya.

The Irrigation Subsector

24. In the wet zone, irrigation normally consists of run-of-the-riverdiversion to supplement rainfall, whereas in the dry zone, where rainfall isless certain, schemes irrigation are based on the use of water storage tanksto supplement rainfall in the maha season (October to February). To theextent possible, the residual supplies of water from the tanks are used tosupport yala season (May to September) cultivation. Some 180 major tanksystems irrigate about 165,000 ha, and about 2,500 smaller irrigation schemescommand a comparable area. The ongoing Nahaveli Ganga program will irrigateultimately about 365,000 ha of new or poorly-irrigated land both within thebasin, and by transfer of supplies to the neighboring dry zone. Mahawelisupplies already reach a number of tanks in the dry zone, including threethat are to be rehabilitated under the proposed project.

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Irrigation Nanafement and Rehabilitation

25. Inspite of increased irrigation coverage and growth in paddy produc-tion (para. 23). most of Sri Lanka-s major irrigation systems are yet to befully utilized, mainly due to to inefficient distribution of water, wastageas a result of poor water manegement, the absence of adequate controlstructures, and lax maintenance and general deterior8tion of structures. TheGo6vernment has decided to rehabilitate all major tank irrigation systemsunder a phased program, and five systems have been rehabilitated under theIDA-assisted Tank irrigation Nodernization Project (Cr. 666-CE). The

-' proposed project seeks to rehabilitate another seven systems, whilefeasibility studies are about to commence with Japanese assistance forrehabilitation of four more systems. The systems selected for rehabilitationcommand relatively better paddy lands and benefit from releases from theNahaweli Ganga system.

Bank Group Support for Irrization Develoiment

26. The Bank Group has provided assistance to the irrigation subsectorin Sri Lanka through the Nbhaveli program, water sector projects, and ruraldevelopment projects- Under the Nahaveli program, four projects totalingabout US$160 million and a technical assistance credit of US$3 million havebeen approved by IBEDIIDA; one of these projects (Ln_ 653-CElCr_ 174-CE forUS$14.5 million each) has been completed. Three water sector projectsfinanced by IDA have also been completed: Lift Irrigation (Cr. 121-CE-US$2million), Land Reclamation and Drainage (Cr. 168-CE-US $2.5 million) and TankIrrigation Modernization Project (Cr. 666-CE-US$5 million). A fourthproject, the Village Irrigation Rehabilitation Project (Cr. 1160--CE-US$30million), which is also financed by rDA, is progressing well. Irrigationrehabilitation is also an important component in three ongoing rural develop-ment projects (Cr. 891-CE, Cr. 1079-CE, and Cr. 1363-CE). Past operations inthe irrigation sector, particularly the Tank Irrigation ModernizationProject, have taught a number of important lessons, which have guided theplaning and design of this project- These lessons include attention todetailed design, advanced planning, and construction periods of sufficientlength; prevention of indiscriminate land and water use in catbchent areas;and establishmeat of efficient water managenent systems.

PART IV - THE PROJECT

Background

27. The feasibility report for the proposed project was prepared byFAO/CP in 1983. Engineering Consultants Ltd. prepared the reports on thecropping potential under the project, and the University of Peradeniya(Sri Lanka) provided the socioeconomic data. On the basis of these reports,the project was appraised by a joint IDA/CIDA mission in March 1984.Negotiations were held in Washington, D.C. October 29 - November 2, 1984.The government delegation was led by Mr. Nanda Abeyvickerema, Secretary,Ministry of Lands and Land Development.

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Proiect Objectives

28. The proposed project seeks to increase agricultural production onland commanded by seven selected major irrigation systems by promoting moreeffective use of irrigation vater, introducing systematic water management,strengthening agricultural support systems, improving roads, and conductingstudies to improve system performance.

Proiect Description

29. The principal project components are:

(a) Rehabilitation of the Irrigation Systems and Pilot Proaram: Theproject would rehabilitate the irrigation systems including seven majortanks: Giants' Tank (12,460 ha), Nuruluwewa (4,090 ha), Iranaadu (9,430ha), Kantalai (6,990 ha), Noraweva (1,960 ba), Nachchaduwa (5,400 ha), andRajangana (5,910 ha). The rehabilitation works in each system would differ,depending on the nature of work required to upgrade and improve the system.These works would mostly involve constructing new structures, remodelingexisting structures,-raising and strengthening channel banks, improving fieldchannels and farm turnouts, improving drainage and, in some cases, raisingtank storage. Four systems would be selected for a pilot program to deter-mine how technological changes to irrigation structures could improve .-ntrolof water supplies. These changes would ensure that controlled releasrs .afwater would rotate to individual farms for a fixed duration for each crop.Since such methods are not currently used in Sri Lanka's irrigation systems,the possible use of the new methods would be evaluated against conventionalones.

(b) Equipment. Buildinus, and Survevs: To facilitate the rehabilita-tion work and maintenance thereafter, the project would provide additionalconstruction machinery and buildings to supplement available accommodationfor field staff. It would also provide equipment for the collection ofhydrological data and the modeling of systems, as well as for surveys anddesigns, quality control, laboratory vork, and vehicles.

(c) Program for InteRrated Manaxement of Maior Irrigation Systems(INMAS): The project would provide support to the Government-s recentlyintroduced national Program for Integrated Management of Major IrrigationSystems. In each irrigation system, the program seeks to establish manage-ment units that would, in cooperation with far!mer organizations and govern-ment agencies, schedule cropping patterns, plan distribution of water,activate maintenance programs, encourage farmer participation, make propossfor adequate water charges and ensure payment, and monitor and evaluateagricultural benefits. A Project Manager (PM) in each system would coor-dinate these activities. System-level institutional officers would assistthe PMs in promoting farmer organizations and encouraging farmer participa-tion in system management. In consultation with other line agencies, a tea=of specialists located within the newly-created Irrigation ManagementDivision (IMD) in the Ministry of Lands and Land Development (NLLD) wouldidentify actions and recommend measures to be taken for long-term integratedmanagement of the irrigation systems. The specialists would also providetechnical guidance and support to the PNs. INMAS would improve coordinationbetween the Irrigation Department (ID) operating and maintaining the system,

-ll-

other line agencies providing agricultural inputs and services, and farmers.The project's support to INMAS would include financing investment costs forsetting up IMD, training of PHs, institutional officers, and farmers of theproject area, and research studies of water management problems. Variousitems to be financed would include office and audio-visual trainingequipment, overseas study tours,-and staff housing.

(d) Rewularization of Landholdings and Relairs of Roads: The projectwould provide financing for the incremental cost of regularizing landholdingsin the project area; although some land encroachments may have to be cleared.others will need to be regularized to establish clearly the irrigated areaunder each system. The project would also provide assistance for the repairof 35 miles of gravel-topped road and 255 miles of unpaved roads in theproject area. The Land Commissioner's Department (LCD), which has both thephysical and budgetary resources, would maintain the roads rehabilitatedunder the project.

(e) Construction of A2rarian Service Center and Fertilizer and InputStores: If agricultural inputs are to be made available to farmers in atimely manner, additional facilities will have to be provided in the projectarea. The project would, therefore, provide for construction of one agrarianservice center, 35 stores for fertilizer and seed to supplement existingfacilities, and some additional vehicles (for moving the staff and supplies)for the Department of Agrarian-Services (DAS).

(f) Local Costs of Establishinm International Irritation NanaxemeutInstitute (II111): A team to study irrigation management recommended estab-lishment of IIKI in Sri Lanka. The Consultative Group on InternationalAgricultural Research constituted the study team in 1981 and endorses theestablishment of IDE. The principal objectives of IDE are to conductmultidisciplinary research on management of irrigation systems, providetraining and short study courses, and prepare and disseminate research andtraining materials. IM} is funded currently by a support group of about 11members including ADB, IFAD, USAID, UNDP, and the Government of Sri Lanka.It is expected to start functioning by the end of 1984. The Government hasagreed to renovate and expand existing housing and other facilities at Kandyand to construct new facilities at field sites. The project would financepart of the Government-s contribution to the creation of these facilities.

(g) Studies on Catebment Nana2ement and On-Farm Water Management:The project would include a study on catchment management and a study onon-farm water management in selected project areas. The study on catchmentmanagement would require about two years to complete and would provideinformation needed to model (a) catchment water balance, Cb) the pattern forthe catchment management organization, and (c) changes to the existinglegislation, if necessary, to ensure proper catcbment management. Draftterms of reference have been prepared. The on-farm study would provide aclear understanding of the utilization of water and of measures that couldimprove utilization. The Government has agreed to prohibit further develop-ment of tanks or diversion weirs in the catchbent areas of the seven systems.It would submit to IDA by December 31, 1987 (Section 3.01(b) and Schedule 4(para. 5), draft DCA), a proposal for the organizational set up and legalframework for proper catchment control in the project area.

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(h) Socioeconomic Survevs: The project includes provision for twosocioeconomic studies in the project area: one during project implementationand the other upon project completion. The studies vould be undertaken bythe staff of University of Peradeniya, and would be follow-ups to theirinitial baseline surveys.

(i) Technical Assistance and Trainina: The project onuld providetechnical assistance for developing hydrological simulation models for eachirrigation system, the pilot program and systems management. It would alsofinance a local and overseas training program for staff of ID, ID and DA.The draft terms of reference for consultants and the training program bave abeen prepared.

Water Availability

30. Water supplies from the Mahaveli Ganga that are diverted through thePolgolla tunnel (Map IBRD 18021) directly-augment the inflow to three tanksystems of the seven (Huruluvewa, Kantalai, and Nachchaduva). In recentyears the annual diversions have exceeded 1,000 million cubic meters (HM()at Polgolla tunnel. However, with the completion of the dams at Kotmale,Victoria and Randenigala in the near future, power generation at these damswould create a conflict of interest. Therefore, the cropping patterns onland commanded by these three Mahaveli-fed systems will have to be developedon the basis of an average annual diversion of 875 MM (a range of 675-1,100NCN, depending on dry or wet year) through the Polgolla tunnel.

31. Water releases from the Mabaveli reach the tanks through long feederchannels and often pass through village tanks, with unauthorized tappingsoccurring en route. To limit unauthorized use, ID has recently announcedthat the management responsible for operation and maintenance (OiN) of tankswill also be responsible for ODH of feeder channels. ID proposes to monitorthe efficiency of transmission through the feeder channels, with efficiencydetermined in each crop season, and to take appropriate steps to reduce loss.A report would be submitted to IDA vithin three months after each season(Section 3.01(b) and Schedule 4 (para. 6), draft DCA).

Project Organization and NanaLement

32. The newly created InD of MUnM has overall responsibility forimplementing the project and coordinating.the activities of the participatingagencies. IDD would also be responsible for the implementation of INH&S andrelated activities, including the appointment of PNs for each of the sevensystems. PNs would be responsible for the management and implementation ofINNAS at the system level. A Deputy Director of IKD would be designatedProject Director with sole responsibility to implemeut the project and coor-dinate the activities of the participating agencies. The Government wouldreviev the effectiveness of the administrative changes under IhEAS and submita report to IDA on the findings no later than Deceuiber 31, 1987 (Section3.01(b) and Schedule 4 (para. 1), draft DCA).

33. ID would be responsible for the rehabilitation vork, the pilotprogram, and technical assistance to and training of its staff and for 06Mof the rehabilitated irrigation systems. A Deputy Director of ID would beappointed Project Officer with responsibility to coordinate all activities of

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rehabilitation work. The appointments of the Project Director, ProjectOfficer, and PMs for the irrigation systems would be conditions of effective-ness of the proposed credit (Sections 3.05. 3.06 and 6.01(d and e), draftDCA).

34. LCD would be responsible for regularizing landholdings and forrepairing roads in the project area. The Department of Agriculture (DA.)would be responsible for conducting studies and training its staff on catch-ment management and on-farm water management. The Department of AgrarianServices (DAS) would be responsible for the construction of the additionalinput stores, and the University of Peradeniya would be commissioned to carryout the socioeconomic surveys. ID would be responsible for the renovationand construction of the additional facilities at I1IM headquarters and fieldsites.

35. There would be a Project Steering Committee at the national levelin M1LD with the Secretary, MILD, as the Chairman and the Project Directorin DMO as the member-secretary. Representatives to the committee would comefrom ID, the Ministry of Agricultural Development and Research, D&, AS. LCD,the Ministry of Finance and Planning, the Department of External Resources,University of Peradeniya, and other agencies, as deemed appropriate. Thecommittee would approve annual programs and budgets, allocate funds to thevarious departments, review and monitor programs, resolve implementationproblems, and change project design, as necessary. At the district level,subcommittees of the District Agricultural Committee (DAC) would be estab-lished with the Government Agent as Chairman, IDWs Range Deputy Director asmember-secretary, and the district departmental heads and the PHs as members.The subcommittees would provide policy and program guidance and resolve allproject problems at field level in all major irrigation systems under theproject. The formation of the Project Steering Committee would be a condi-tion of effectiveness of the proposed credit (Sections 3.04 and 6.01(c),draft DCA).

Operation and Maintenance (O&M)

36. O&M of the irrigation systems would continue to be the responsibilityof ID, but would be subject to overall coordination by DO. There would besufficient staff for each system, and although the staff-would be under ID,they would have close liaison with IND staff and farmers. In the past, notenough funds have been available to maintain the irrigation systems properly.

-The Government would review water charge collections around March 1985 andconfirm to IDA as a condition of effectiveness (Section 4.03 and 6.01(f),draft DCA) that adequate funds would be available in 1985 to meet the fullO&M requirement of the major irrigation systems. Also, by January 31 eachyear the Government would submit a report to IDA indicating that sufficient

* funds have been allocated to meet 06 costs for the project during the fiscalyear (Section 4.02, draft DCA).

Cost and Finance

37. The total cost of the project is estimated to be about US$43.2 mil-lion (including taxes and duties amounting to US$2.6 million equivalent),of which about US$18.2 million (42Z) would be in foreign exchange. The civilvorks would cost about US$30.2 million (70Z); equipment and vehicles about

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US$8.4 million (192); technical assistance and training about US$1.7 million(4%); and engineering and administrative support, US$2.9 million (7%). Thesecosts are based on mid-1984 prices. They include provision for a physicalcontingency of 10%. They also include a price contingency for foreignexchange costs amounting to 8% for 1985, 92 for 1986 to 1988, 7.5% for 1989,and 6% for 1990; and local cost contingency amounting to 12Z for 1985, llZfor 1986, 10% for 1987, 9% for 1988, 7.5% for 1989, and 6% for 1990.

38. The proposed IDA credit of US$17.0 million would finance about 422of the total cost, net of taxes and duties. The cofinanciers of the projectare CIDA with a grant of US$6.8 million equivalent and SDC with a grant ofabout USS7.6 million equivalent. The Government would provide about US$11.8million toward the project cost. Total foreign financing would provide about80% of the project cost net of taxes and duties, 1OOZ of the project-s for-eign exchange cost, and 532 of the local cost. The project's civil workswould be financed jointly by CIDA, SDC, and IDA. Equipment and vehicleswould be procured under parallel financing provided by IDA and CIDA, whiletechnical assistance and training would be financed by SDC. Effectiveness ofthe CIDA grant and the SDC grant would be a condition of effectiveness of theproposed credit (Section 6.01(b), draft DCA).

Procurement

39. The project-s procurement arrangements are -ummarized below:

Procurement Method- - nUss million

TotalProiect Component ICB LCB OTHER Cost

Civil Works - 18.1 12.1 30.2(8.4) (5.8) (14.2)

Equipment 3.4 - 5.0 8.4(2.5) (0.3) (2.8)

Technical Assistance and Training - - 1.7 1.7Engineering and Administration - 2.9 2.9

TOTAL 3.4 18.1 21.7 43.2(2.5) (8.4) (6.1) (17.0)

Note: Figures in parentheses are the amounts to be financed by IDA.

40. Since civil works (US$30.2 million) would be small-scale, labor-intensive and scattered, they would be carried out partly through localcompetitive bidding and partly through force account. ID has establisheddetailed procedures for calling bids and awarding contracts that are satis-factory to IDA. All work contracts over US$100,000 would be subject to IDAreview before being awarded. Other awards would be subject to selectivepostaward review. Equipment and vehicles (US$8.4 million) to be funded byIDA and CIDA would be procured under the procedures of the respectivecofinanciers. IDA-financed equipment estimated at US$2.5 million vould beprocured through ICB. The equipment procurement would be phased under three

--15-

teuders; the first to be issued in 1984 and the other two in 1985 and 1986.ID would be responsible for the procurement of all necessary equipment,including that required by other implbuenting agencies. Local manufacturerswould be given a preference of 15Z of the c.i.f. price, or the amount ofcustoms duties and other import taxes, whichever is lower. Hydromechanicalequipment and other items (costing less than US$10,000 each), for whichinternational tendering is impracticable, would be procured after prices fromnot less than three independent suppliers were compared, in accordance withgovernment procurement procedures acceptable to IDA. Such purchases wouldnot exceed the equivalent of US$0.25 million.

Disbursements

41. Disbursement of the IDA credit, the CIDA joint contribution and theSDC contribution would be made for:

(a) Civil works-75X (45Z, TDA; 10%, CIDA; and 20X, SDC)

(b) Equipment and vehicles-100Z of foreign expendituresfor directly imported, 100% of ex-factory cost, or 80% ofexpenditures on locally procured equipment and vehicles(to be financed by IDA)

(c) Technical assistance, surveys and training-by SDC, 10OZ

42. Disbursements for civil works carried out by force account and smallcontracts would be made against statements of expenditures, which would beproperly audited according to procedures acceptable to IDA. Reimbursementapplications would be submitted when the expenditures reach the equivalent ofUS$20,000. Supporting documents would be retained by the Government and madeavailable to supervision missions whenever required. Disbursement-againstcivil works contracts exceeding SL Rs 500,000 and contracts for items otherthan civil vorks would be documented in accordance with IDA's standardrequirements. IDA would administer CIJA funds for civil works through atrust account and would administer all disbursements for SDC funds. It isanticipated that the final disbursements of the IDA credit, CIDA grant, andSDC grant would be made by June 30, 1991, about six months after thescheduled completion of project implementation. These disbursement projec-tions are based on the standard sectoral disbursement profiles for IDAcredits deemed appropriate for rehabilitation projects.

Project Special Account (PSA)

43. To avoid delays in implementing the project and to ease the pressureon local funds, a PSA would be established in US dollars for financing thecivil works. Funding by IDA, CIDA and SDC would be through the PSA. The PSAwould be established and operated under procedures acceptable to IDA.Opening of the PSA in the Central Bank would be a condition of effectivenessof the proposed credit (Sections 2.02(b) and 6.01(a), draft DCA).

Cost Recovery

44. The total investment costs of the project works would amount toabout SL Rs 601.4 million in present value (PV) terms discounted at 10%.

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Incremental expenditure for O0M of the project works would amount to aboutSLRs 57.2 million (PV). Estimated recovery from the incremental water chargecollections (para. 45) would amount to about SLRs 67.7 million (PV) over aperiod of 25 years. This estimated amount of recovery would meet about 101of the investment costs and incremental OEM expenditure, or about 118Z of theproject's incremental O02 expenditures.

Water Charzes

45. After extensive dialogue with IDA, the Government agreed to introducewater charges in the Mahaveli irrigation system under the Hahaveli GangaDevelopment Project III (Cr. 1166-CE). It agreed to start collecting watercharges in 1982 at 202 of O&M costs and to reach 10OZ of such costs by 1991.However, collection did not start as originally agreed because of the 1982elections and the drought conditions that prevailed during 1981-82. Someinadequacies were also found in the Irrigation Ordinance of 1946 under whichthe water charges were to be collected. In 1983, the Government decided toremedy some of these deficiencies and to start collections beginning in 1984at 50Z of OhH costs. The target of 100% recovery of OM costs by 1991 wasreiterated. The Government also approved the following rates to coveraverage a&M costs: SL Rs 2,000/ha for major lift irrigation, SL Rs 688/hafor drainage, and SL Rs 500/ha for gravity irrigation. In addition, theGovernment approved special accounts for O&2 of irrigation systems into whichcollected vater charges would be credited. The entire range of issues per-taining to water charges was discussed under the Mahaweli Ganga DevelopmentProject IV (Cr. 1494-CE/Cr. 2437/CE). The Government has reiterated itscommitment to the above provisions in respect of major irrigation systems andthe following agreements were reached: (a) the Government would by September30, 1991 achieve full OEM cost recovery in the irrigation systems; (b) byJuly 31, 1986, it would review the vater charge collection program to assessits success plus what adjustments might be necessary, and it would propose aprogram for annual rate increases; (c) by July 31 of each year it wouldprovide IDA with a detailed report on the progress of water charges collec-tion and take steps to improve collection charges; and (d) until such time asfull recovery of annual O&M costs is achieved, it would provide adequatefunds for O&M of the irrigation systems (Section 4.03, draft DCA).

46. The present water charge collection program is a major step towardrecovery of OEM costs in irrigation projects and emanates from a recognitionof past inadequacies. The Government has already sent IDA interim reports onthe collection of water charges. Thus far the 1984 collection record isreasonable, in view of the lack of rain in the early 1983-84 maha season, andthe subsequent record rains from December to March, as well as the newness ofthe collection system itself.

Farm Income

47. About 34,400 farm families (population 193,000) depend on the projectirrigation systems. Persons less than 30 years old constitute 65-75% of thepopulaton, and about 50% of these are less than 15 years old. The literacylevel is high and fairly uniform throughout the project area; about 90X ofthe population have at least five years of schooling. Land holdings varyfrom less than 0.4 ha Cl acre), owned by about 5% of farmers, to more than2 ha (5 acres), owned by about 25%. Farmers have ownership title deeds for

-17-

about 51% of land area and Land Development Ordinance permits for about 24Z,the remainder is leased land or held by unauthorized occupation.

48. Annual farm income currently varies from SL Rs 2,200 to SL Rs 11,000;the variation mainly depends on whether one or two crops are grown. Withoutthe project, but with various ongoing government programs, farm income isexpected to increase and range from SL Rs 5,700 to SL Rs 16,400 by 1995.Upon completion of the project, farm income will increase further and isexpected to range between SL Rs 14,600 to SL Rs 27,300.

Project Benefits and Justification

49. The project covers a net irrigable area of about 46,000 ha and repre-sents 28% of the total lands irrigated by major tanks in Sri Lanka. Theproduction potential of these systems has not been fully realized owing toinadequate maintenance, an inefficient distribution system, and poormanagement. Without the project, land resources in these systems vill remainunderutilized, and productivity of land may deteriorate. The principalbenefits would be higher cropping intensity, improved cropping practices, andtherefore higher production and increased farm income.

50. The significant changes in the cropping practices in the project areawould include dryland cultivation and sowing, early cultivation, intensiveapplication of herbicides, improved on-farm water management, and cropdiversification. The cropping intensity, currently averaging 98Z in theproject area, would increase to 138Z. Paddy yields are projected to increasefrom 2.9 tons/ha without the project, and to 3.98 tons/ha with the project.The project would increase production by about 73,800 tons of paddy and6,200 tons of soya, yielding a net value of SL Rs 78 million annually to theecoiony. These incremental outputs of rice and soya would result in a netforeign exchange saving of about US$3.1 million annually. The net benefitper hec-tare of agricultural land would increase from SL Rs 1,950 vithout theproject to SL Rs 3,640 with the project at full development. The increasein farm family income would range between 36% and 156%. The project wouldcreate an estimated 3,000 new full-time jobs yearly during its executionperiod.

51. The project-s net present value over its lifetime, at a discount rateof 10% (the estimated opportunity cost of capital), is about SL Rs 211.4million (US$8.4 million). The economic rate of return (ERR) is estimated tobe about 16%. The project's economic viability is sensitive only to shocksarising from major cost increases or reductions in benefits, both of whichare unlikely. The project can withstand up to a 1.5-year delay (which repre-sents three cropping periods) in generating incremental benefits and stillremain economically viable. There are no serious technical risks in theproject; however, it faces the possible risk of a failure to implement theproposed water management improvements.

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.PART V - LEGAL INSTRUMENTS AND AUTHORITY

52. The draft Development Credit Agreement between the DemocraticSocialist Republic of Sri Lanka and the Association and the recomiendation ofthe Committee provided for in Article V, Section l(d) of the Articles ofAgreement of the Association are being distributed to the Executive Directorsseparately. Special conditions of the credit are listed in Section III ofAnnex III. The opening of the PSA, effectiveness of the CIDA grant and theSDC grant, establishment of a Steering Committee, availability of sufficientO&M funds for 1985, and appointment of the Project Director, Project Officerand Project Managers would be additional conditions of effectiveness of thecredit (Section 6.01, draft DCA).

53. I am satisfied that the proposed credit would comply vith theArticles of Agreement of the Association.

PART VI - RECOMMENDATION

54. I recommend that the Executive Directors approve the proposed credit.

A.W. ClausenPresident

AttachmentsNovember 29, 1984Washington, D.C.

-19- AN ITAULK a Page 1

-? W- - ineC t awom m ROU l&su

201U70t m caRSrU JL 3 NCL .wi:

ACCULDIBUL 17.2 26.2 26.0 .

mCP (356 c60| x.0 100.0 320.0 273.4 10g1.2

(CKlOCUNS 0F OML EZAL1r) 122.0 152.0 123.0 272.0 567.3

Q %MAnOWA EL S_L22pOvwanou,nn-uAa (SSAN) 9U9.0 12SIL0 15139.0URBAN POPZAOM CZ or TOTAL) 17.9 21.9 24.4 21.7 34.7

IPOPMATSM ICJUCTIU5IlLAbTbI UAR 2000 OML) 21.1

STAxaUr MPOLATW (NLL) 32.5FAOII of 1.6

vn SQ. a. 150.7 190.6 238.0 165.6 261.9PE SQ. a. AC8L LAID 573.9 517.6 576.6 345.5 1735.1

OPiAflO AS SUCT03 tS)0-14 IRS 4.l1 41.9 35.2 35.8 39.0

1S- S - 54.3 54.5 60.8 59.8 57.665 ANDAB E 3.4 3.6 4.3 4.3 3.3

POPULATION GRTWh 36K CE)TOtL 2.5 2.4 1.6 1.9 2.3URB 1.7 4.3 M5 4.1 1.3

cu SUM RAZE CPEL T2OUS) 35.7 29.4 26.5 27.7 30.!CRUD1 DEAT RATE (i MM5) 9.2 7.5 6.0 10l1 9.5GROSS 26OUCTO RATE 2.4 2i 1.7 1.8 LC

ANML PLAIEND -ACCSP?ORS. AUIUL (t105) - 55.3 O 100.5usES C:OF HAED UlUW) .. .. 55.0 .. 52.7

IlD OF FOOD PROD M CAPTA(1969-71-100) 93.0 103.0 151.0 112.8 123.0

PER CAPITA SULY OFCAlOUES (Z OF 1S) 10.0 103.0 lO.0 97.7 134.4PROTEINS (GCRAS in DAY) 46.0 47.0 43.0 56.8 57.0

OF 1ICR ANIMEDIL ALD PULSE 11.0 12.0 1.0 ic 14.9 14.1

aCUa (AnEs 1-4) OAtll RAE 7.1 5.1 2.9 9.8 7.2

LIFE EECT. Ar 11BT (TEAM) 62.0 63.6 68.9 60.0 60.4INAFAJr 1. RATZ (P EROT 5) 70.6 58.5. 3lL0 *3.J 66.3

aCCESS TO SAFE YATE (%10P)TOL .. 21.0 20.0 7d 32.9 37.0

iAN .. 46.0 4S.O 77 70.9 54.8RwL .*- 14.0 13.0 fd 22.1 26.4

AS ETO RETA DISPOSALCZ OF POPULATIO)

TOTAL .. 64.0 59.0 /a 18. 41.3URN.. 76.0 6L0 7; 72.8 47.'RUNL .. 61.0 55.07; 1.6 33.3

2OPULATI PER PM RS1CI8A1 4490.0 5950.0 7170.0 3846.2 7749.1POP. InER NSIN PERSO 4170.0 If 2260.0 1340.0 4793.1 2660.4POP. PR HOSPITAL -ED

TOTAL 320.0 330.0 340.0 1066.5 10".2URBA 120.0 if 210.0 240.0 Id 296.0 651.2RURAL 1060.0 if 570.0 511.07d 593.4 2594.6

auSSnss Pu HOSPTLE .. 56.4 .. .. 27.0

ARACE SIZE OF HOSEDDTOTL 5.4 lb 5.8CRBAN 6.3 7ir 6.3RUlAL 5.2 /b 5.5

AVERAE N. OF PRBSONS/ROGETOTAL 2.0 /h L5 .. -.URUBN Z1 7; L7.RURAL 0-7; s 2.5

ACCESS TO ULCT. (Z rF WALDN)TOTAL 7.5 /b P.0URBAN 35.9 /b 34.5RURAL 2.L3b 7 3.0

-2o0-ANEX I

T AL 7I X Page 2

i~sLk .,ok um0hJk ASA aPAcFI £8U26 &umz PACsiuma

ADJUSTID Z{ -NIISUOLI 3T10iM~ia TOTAL 95.0 99.0 1030 97.6 I02.O

MM 100.0 106.0 104.0 110.5 10N.9nzz 90.0 94.0 100.0 83.7 8.2

SECOUDIT TOL. 27.0 67.0 51.0 35.9 46.0388* 38.0 66.0 69.0 66.6 6M

nWAIX 16.0 68.0 54.0 26.8 43.1

,ocazzau u(o of swcnua) .. 0.6 0.6 d 2La 17.5

FUPIL-UIACUERL RATIOP3EDM 31.0 .. 32.0 38. 51.8S y .. .. . 18.7 22.5

ArLDT LITUACT RATZ CZ) 75.0 af 77.6 16.0 53.6 72.9

PASSEM CARSIIouSAND PFOP 8.6 7.0 7.3 LI 0.9 10.1RADIO 3ZC MVESIUO D FO 35.8 39.9 98.7 112.1 113.6TV zc7.IvEIO/DUA POP .. .. 2.4 15.7 50.1N EIA4 C"'I GENEUAL

ZEZUEZST") CIRCULATIONPt TDUSIAND POPULATIOI 36.0 U8.9 ,, 16.2 53.9

c A U .L chAPr 2.9 1± 7.8 4.9 / 3.6 3.6

TOTAL LASM POMCE (71030) 3391.0 *188.0 5771.0FDUIAl (1Z3CEUT 22.6 23.7 26.9 33.3 33.5ACRCU QTI (P.CZNrT) 56.0 55.0 54.0 69.6 52.2[}808Th? (PERCE2IV) 14.0 14.0 14.0 15.8 17.9

PARTYCIPATIOERATE (PERCENT)TOTAL 34.3 33.5 3L0 62.6 38.7KMAl 50.8 49.1 53.0 5.7 50.9FW" 16.2 16.5 21.0 29.8 26.6

ECOUOIC SEPEIDUCTY RATI 1.3 1.4 1.0 1.0 1.1

PRCENor OF PRIVATE DfCwRECIVD 6Y

HrsMsT 5 I DUSEOLDS 26.4 18.Z .. .. 22.2HIGNEST 202 OF UOUDE 52.1 /b 63.4 .. .. 4.0LoamES 20 OF HOUSEHOLDS 4.5 b 7.5 .. .. 6.4LowER? 602 or HUSCIIDLDS 13.7 7lb 19.2 .. .. 15.5

ESTThAM ABSOLUTE POVmtY INCON?LEVE (U1$ PER CAPITA)

RBAN .. .. .. 133.9 18L6RuAL .. .. .. 111.6 152.0

S RElATIVE FOVER? [lLEEL (an PUE CAPITA)

URBAN .. .. .. .. 177.9

RURAL .. .. .. .. 164.6

ESTIRATED POP. BELO ABSOLTPOVET IIIcME LEm (I.)

AN .. .. .. 43.8 23.4RUAL .. .. .. 51.7 37.7

NOK AVAILAESOT APPLICANLX

11 O T E S

/a Tbc group averaoe for each dlicator are population-witted a e sc m . Coverag of esqtrde theIdicatocs doamads on sva±labillty of date a"d I not unform.

tb Wase otherws nuoted. 'lata for 1960t refer to ay rew betw.m 1959 ad 1961; "Data for 1970" betwen 1969 and1971; and data for -1o.t Namt Eatlato" betwee 1980 and 1982.

/c 1977; Id 1976; 1/ 1975; /f 1962; 1R 1979; /h 1963; /I 1978; LI 1958.

JUNE, 1981

.... I*hl*1113 513133V

I- p- .'~~s 11I44 V J.1 13- hII 543513451-1 1

I Ms... j- .- Vm __4,ru- . l *i .1)1 1131151 .iIsd.. 314 r1114.s1

1-1- 1.1-- -14 .. , -_b~ 11--- .,1I41 U1.1-l.141653IS 14-p511 15* aw .5 1-3T-K .4- -3 Am~~~~~~~ -Im4s11 (sir j131 l 19135.91*11 431 lA 1

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-22-

ANNEX IPage 4

SRI LANKA - ECONOMIC INDICATORS

OUTPUT IN 1983 BY SECTOR ANAL RATE OF GROWN-M(1costant-prices)

Value Added$ Million z 1970-77 1977-83 1970-83

Agriculture 1,304 27.5 2.0 4.2 3.0Industry a/ 1,257 26.6 2.1 5.8 3.8Services 2.171 45.9 3.7 27. 0.tTotal / 4,732 100.0 2.9 6.0 4.3

GROSS DOMESTIC PRODUCT IN 1983

USS Million _x_

GDP at Market Prices 5,199- 100.0Investment 1,488 28.6Gross National Savings 843 16.2Current Account Deficit 645 12.4Exports of Goods and NFS 1,354 26.0Imports of Goods and NFS 2,136. 41.1

GOVERNMENT FINANCECentral Government

(Rs million) Z of GDP at Market Prices1983 1975 1982 1983

Current Receipts c/ 21,088 17.2 16.6 17.2Current Expenditures A/ 23,822 18.3 18.0 19.5Current Surplus -2,734 -1.1 -1.4 -2.3Capital Expenditures e/ 15,578 7.3 15.9 12.7External Assistance 10,974 3.2 8.1 9.0

a/ Manufacturing, mining, construction, and utilities.jt GDP at factor cost.c/ Includes capital revenue.4/ Includes advance accounts.e/ Includes net lending.

-23-AME IPage 5

SRI LAuA - =c31C ZDIC&gS

"oin- cuutr. AND UtIGIS 1970 JL7 19 I979 U191 1962 1983(end of period) (Ca s

300&7 guDfi qsasi Money 3.1I5 8.T17 10.892. 15,05 19.860 24,447 30,510 37,257

- ak C-edit to Public Sector 2,856 4,659 4,226 6,267 13.095 IT.277 21.828 21.918Ba%k Credic to Private Sector 1.320 4.116 6,4.9 8,705 £Z.709 16.690 20.570 27,375

CPercentages or Index INubers)

Nuey and Quasi oney as Z of CDP 22_8 23.9 25.5 28_7 29.9 28.8 30.4 30.5General Price Index (1970-100) 100.0 147.0 164.. 182.6 230.2 271.6 301.1 343.3

Annual Percentage Changes in:General Price Index *5.9 -1_2 .12.1 *10.S *26.1 *18.0 -10.9 -14.0Bank Credit tD Public Sector -10.4 *7.7 -9.3 b48.3 -109.0 .31.9 *26.3 '0.4

1nk Credit to Private Sector 48.6 '40.5 +56.7 .35.0 +46.0 .31.3 .23.2 -33.1

3ALANCEOF PA FAS3S HRCRANTSE WPORTS (1983)

196 1982 1983 - milion _

(USS Million)res 353 33.3

Exports of Goods, NES 1,346 1,305 1,354 Rubber 1Z2 11.4rmports of Goods, NES Z.055 2.205 2,136 Cocont Products 60 5.7Resource Gap (deficit -) -709 -900 -782

All Othr Coiodities 5Z5 49.6Interest Payments (net) -_82 -80 -117Vorkers a sirttnces - - - TOL 1.059 100.0Other Factor Pzyecs (net) -15 -18 -18get Transfers 203 264 272Balance on Current -603 -734 -5 E DErT "LS Million) Al

Direct Foreign uvestowent 49 63 35 December DecemberNet MwIXr Loans 337 416 360 1982 1983

Disbursements 380 484 445A=ortizatiou 43 68 85 Total Outst-nding 3.561 3.614

Capital Grants 161 162 171Otebr Capital (net) 23 66 77 Total OutstandingChange in Reserves C- - increase) -33 -27 .-I and Disbursed 1.965 2.205

Gross Reserves (end-year) 451 520 5A4Net Reserves (end-year) 5 -22 -21

DEMT SERVICE RATIO k/ C:) 10.1 11.9 -Crude Oil and Petrolezz Products

Imports 4&8 590 469Exports 175 158 114 IBRD/IDA LEDINI. Seotember 30. 1984 (USS Million)

IBRD IDALRATE OF EXCRANGE

Outs..anding and Disbursed 54.9 342.9End 1978 End 1951 Undisbursed 11.5 318-SUSS1-00 - Bs 15.51 USS1.00 - Rs 20.55as 1.00 - USS 0.06 Rs 1.00 - USS 0.05 Outstanding. including

Undisbursed 66.4 661.4End 1979 End 1982USl1.00 - Rs 15.45 US$1.00 - Rs 21.32Rs 1.00 - US$ 0.06 as 1.00 - USS 0.05

End Z980 End 1983USS1.00 - Rs 18.00 U5S$.OO - Rs 25.00Rs 1.00 - USS 0.06 Is 1.00 - USS 0.04

a/ Repayable in foreign currencies and with a maturity over one yer.k/ Ratio of debt serwice on public and publicly guaranteed N&LI debt (excluding IMF charges

and repurchases) to exports of goods and services.

South Asia Programs DepartmentNovember 16. 1964

-24- ANNEKh I_ ':

Page 1

THE STATUS OF BANK GROUP OPERATIOS IN SRI LANKA

A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of Sentember 30. 1984)

US$ MillionLoan or AmountCredit (net of cancellations)No. gar Borrower Purpose Bank IDA Undisbursed

Eight 1I as and thirteen credits fully disbursed 72.9 96.1701 1977 Sri lanka Nahaveli Ganga Development II 19.0 9.5818 1978 Sri Lanka Tree Crop Rehabilitation (Tea) 21.0 10.1891 79 Sri Lanka Kurunegala Rural Development 20.0 9.4900 I Sri Lanka load Maintenance 16.5 7.5931 1; , Sri Lanka Agricultural Extension and

Adaptive Research 15.5 11.3942 19 Sri Lanka Small and Medium Industries 16.0 3.4979 19E Sri Lanka Kahaveli Ganga Technical Assistance 3.0 1.4994 19E Sri Lanka Road Passenger Transport 53.0 21.7

1017 198 Sri Lanka Rubber Rehabilitation 16.0 13.21020 198L Sri Lanka Telecommunications 30.0 6.91041 1980 Sri Lanka Second Water Supply 30.0 20.11048 1980 Sri Lanka Sixth Power 19.5 10.61079 la 1981 Sri Lanka Second Rural Development 33.5 16.01130 /a 1981 Sri Lanka Construction Industry 13.5 5.91160 Ja 1981 Sri Lanka Village Irrigation Rehabilitation 30.0 20.21166 /a 1981 Sri Lanka Nahaweli Ganga Development III 90.0 44.81182 la 1982 ___ Lanka SNI II 30.0 25.51210 /a 1982 Sri Lanka Seventh Power 36.0 16.31240 Ja 1982 Sri Lanka Tea Rehabilitation and

Diversification 20.0 14.12187 1982 Sri Lanka Eighth Power 42.7 - 11.51317 /a 1982 Sri Lanka Forestry 1 9.0 2.31363 /a 1983 Sri Lanka TLird Rural Development 23.0 21.11401 /a 1983 Sri Lanka Industrial Development Project 25.0 21.21494 /a 1984 Sri Lanka Mahaveli Ganga Development IV 30.0 30.02437 Iatb 1984 Sri Lanka Mahaveli Ganga Development IV 12.1 12.1

TOTAL 127.7 695.6 372.1of which has been repaid 49.2 4.2 -

Total nov outstanding 78.5 691.4Amount sold 3.6

of which has been repaid 3.6Total nov held by Bank and IDA /c 73.5 691.4

Total Undisbursed 23.6 348.5 372.1

/a IDA 6th Replenishment Credits, principal amounts shown in US dollars equivalentat date of negotiations, as shown in the President's Reports and undisbursedamonts shown in US dollars equivalent at the rate of exchange for the SDR atSeptember 30. 1984.

/b Not yet effective.[c The original principal of credits under replenishments 1, 2 and 3 has been

increased by the amount of the translation adjustment as a result of thedevaluation of th US dollar in 1972 and 1973.

-25-

AUME IIPage 2

B. STATEMENT OF IFC INvESTIENTS (as of September 30. 1984)

Year Oblizor Type of Business Amonmt (USS Million)Loan Eit Total

1970 Pearl Textile Textiles 2.50 0.75 3.251978180/83 The Development Finance

Corporation of Ceylon Development Banking - 0.45 0.451978181 Bank of Ceylon Development Banking 7.00 - 7.001979 Cyntex Textiles 3.15 0.54 3.691979 llikecbris Industries Polypropylene Bag 0.89 0.10 .991980184 LOLC Leasing - 0.34 0.341981 Taj Lanka Hotels Hotel 19.30 .70 20.00

Total Gross Couitments 32.84 2.88 35.72

- Less: Cancellations, TerminatidKW,Repaymts, and Sales 16.10 .75 16.85

Total Conitments now Held by IFC 16.74 2.13 18.87

-26-

AM InPage 1

SR LANKm

NAJOR IRRIGATION REEA ILITAIION PROJECr

Su§Mlementary Project Data Sheet

Section I: Timetable of Key Events

(a) Time Taken to Prepare the Project TWo Years

(b) Project Prepared by FADICP

(c) First Presentation to the Bank Group June 1982

Cd) Departure of Appraisal Mission March 1, 1984

Ce) Completion of Negotiations November 2, 1984

gf) Planned Date of Effectiveness April 15, 1985

Section II: Special BankIlDA Implementation Action

None

Section III: SDecial Conditions

(a) Condition of Effectiveness

Ci) Opening of project special account (para. 43)..

(ii) Fulfillment of the effectiveness conditions of theCIDA grant and the SDC grant (para. 38).

(iii) Appointment of the Project Director, the ProjectOfficer, and the Project Nanagers (para. 33).

(iv) Formation of the Project Steering Committee (para. 35).

(v) Availability of sufficient O&N funds for 1985 (para. 36).

-27-

ANNEK IIIPage 2

(b) Other Conditions

(i) Proposal for catchment management to be submitted toAssociation by December 31, 1987 (para. 29(g)).

(ii) Kid-ter- review to determine effectiveness of administrativechanges introduced in InRAS (para. 32).

(iii) Allocation of sufficient funds to meet operational andmaintenance costs (para. 36).

(iv) Water charge collection progrm (pmra. 45).

SRI LANKA

K L I N O C H CH MAJOR IRRIGATIONK,Iinochchi -;lncc ~g.J '', >(' REHABILITATION PROJECT

: -zr' (u:~ L I .T-' Location of Subprojects

, v ~~M U IL L A I T T I v.,u // j '\,&, ,,n,w,,, X ~~~~~~~~~~~~~~~~~KILOMETERS9 20 2p~~~~11 41O

1'~~~~~ A'- N N{/ h,, A R

V A V u I Y A

%t > ~~~~~~~~~Vovuniyo 4 o r 2

S ~~~~~~~~~~TRINCOM

| t- \9-r<Me~~~~~~~~~~~adowachthiyc a

Anuradhopurq",., ., ihintale t

fMi n

k C \, �' ^"'" , X i'a,l

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~,I'. / j w :l , C,oloaJunctn A 0

0

rha foa his been piepated by -Twe v>td Dank's sta# exdUfteitf Golgamu lOta the conversence ot th /.l,ot | -uw,eacds and As fcOnr aNWn Ie/r t\ e onnoruTm1ernat use at The tWtufM ankand tdIfe t-hoanahcaa FNnceCoIca rhoTwd &envtwlomas K R L' I E 'AI Ausred and Me bouandns rhown\-on tha map dr noI p an he

\IctlotnlthvFramnc Coipcla he. n /ambuluD' I/ DLt4 .Iany pudgrment on the legal status ?1at any tau.toiy of anyondoe.sent ar oacceptance 01 t|such beamdat,es

E I

SRI LANKA ELEVATION IN FEET ALPROPOSED

OVer 5000 DIVERSION WEIR ( ( 2 4$#j REHABILITATION. ; m 3Q0Q -5000 gt z ^, S ~~~~~~~~~~SUBPROJECTS3000 -5000 EAEA ~ -POOE-| t 500 - 3000 EXISTING FEATURES

0100 IVRIN..I RESERVOIRS & TANKS9g M A T A 10 E -( -- RIVERS

I 6 ( sD v o l ) I -- CANALS.- ,, t jAREA OF MAP ) I U POWER HOUSE

/ pD & oX r; otcittJ i t >s r / t;11 * ~~~~~INTAKES

V!t a 3 (fc' |1 ten t;i ||< < )91 WEIRSa /~~~~~~~~~~~~~ ~~~K A N D Y-- TUNNELS

? \ \, *.7 @ > ' >IRRIGArED AREASPO ~~~~~~~0 TOWNS

l CSJ < ) A? < R) Z~~~~~~~IVERSION DAM-01o SO 'J4y\;- ON0- LI ~ ~ oa .~*- MAIN ROADS~~pBI *2 ,-.---,---.- ~RAILROADS

:c0@ > F 4 g S < )-- *-- DISTRICT BOIJNDARIES

b < , , ;;3. / \a. ' t \ ~~~~~BADULl A 600 -Ar; 810 r82^ ToNuwaroE/iya -1- 'N U W A R A

\ rDt ; \' ?/ \ ~~~~~~~~~~~E L I Y A a6~~~~~~~l '2 ro$Ur -uar N@

evioS 0. o 5 an Pass 80l 25S

Fo/z/tz2 \--'XIta\o!ib r)t-< e*>01

:~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Joffno LrubandgJngl

~~~N\ Fores ~ ~ ~ ~ ~~crb n

J"S N \ b 0

9020 < X \ ! Z } { / Tt"HCttW"t0

rhu Z1W Fos bean Prepared by

18,wi & Dis cOOOia* Oi ft~ ~ ~~mre f ade w w O U o8C fl W t V V

on hafl's row doE OVPM, on IIIpall of rho biA'* DaM and VIIrifersim;na Puruura CopaqWaW%

SRI LANKA \ow*v.or art. of

MAJOR IRRIGATION REHABILITATION PROJECT Tank

Iranamadu Subproject / ofKILOMEIRS *_0 1 2 3 4 5

MILES ~rrO~d0lt 2 -- 3 c; rnl;

PROPOSED CANAL REHABILITATION BUILT -UP AREA N- MAIN CANALS PRINCIPAL ROADS S R I

- - BRANCHES & DISTRIBUTARY CANALS OTHER ROADS-- PROPOSED DIVERSION STRUCTURE - RAILROADS INDIAN LANKA

AREA UNDER PADDY CULTIVATION TANKS & RESERVOIRSAREA OF TRADITIONAL CULTIVATION > RIVERS -

* EXISTING PUMP HOUSE DISTRICT BOUNDARY*Field canals not sh6wn. '00

80o 20' 8 25 '