Document of The World Bank FOR OFFICIAL USE ONLY Report No. 66286-LK INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND INTERNATIONAL DEVELOPMENT ASSOCIATION AND INTERNATIONAL FINANCE CORPORATION COUNTRY PARTNERSHIP STRATEGY (FY 2013-FY 2016) FOR THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA April 17, 2012 Sri Lanka and Maldives Country Management Unit South Asia Region International Finance Corporation South Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. The Last Country Assistance Strategy for Sri Lanka [Report No: 43471-LK] was discussed by the Board on June 5, 2008 Currency & Equivalents Currency Unit = Sri Lanka Rupees (Rs) US$ 1= Rs.128 (as of April 16, 2012) Fiscal Year January 1 – December 31 Abbreviations & Acronyms AAA Analytic and Advisory Activities MoFP Ministry of Finance & Planning ADB Asian Development Bank MSME Micro Small Medium Enterprises BB Bank Budget MPs Members of Parliament BOP Balance of Payments NDP National Development Planning CAS Country Assistance Strategy NIPP Netherlands IFC Partnership Program CASCR Country Assistance Strategy Completion Report NLTA Non-Lending Technical Assistance CBSL Central Bank of Sri Lanka OECD Organization for Economic Cooperation and Development CDD Community Driven Development ORAF Operations Risk Assessment Framework CPIA Country Policy and Institutional Assessment PADGO Portfolio Approach to Distributed Generation Opportunity CPS Country Partnership Strategy PER Public Expenditure Review DCS Department of Census and Statistics PFM Public Financial Management DPL Development Policy Lending PIU Project Implementation Unit ESCAP Economic and Social Commission for the PPPs Public Private Partnerships Asia/Pacific ESW Economic and Sector Work RDA Road Development Authority EU European Union ROSC Report on Standards and Codes FDI Foreign Direct Investment RE Recipient Executed FY Financial Year SMEs Small and Medium-sized Enterprises GDP Gross Domestic Product SOEs State Owned Enterprises GNI Gross National Income SWAP Sector Wide Approach GPOBA Global Partnership on Output Based Aid SPN Supervision IBRD International Bank for Reconstruction and TA Technical Assistance Development ICT Information Communication Technology TF Trust Fund IDA International Development Authority UN United Nations IDF Institutional Development Fund UNDP United Nations Development Program IDPs Internally Displaced Persons UNHCR The United Nations Refugee Agency IFC International Finance Corporation USD United States Dollars IFRS International Financial Reporting Standards VAT Value Added Tax IMF International Monetary Fund WB World Bank LEN Lending WBG World Bank Group LLRC Lessons Learnt and Reconciliation Commission WDI World Development Indicators M&E Monitoring and Evaluation YOY Year on Year MDG Millennium Development Goal MIC Middle Income Country IBRD/IDA IFC Vice President Isabel M Guerrero Karin Finkelston Country Director/Country Manager Diarietou Gaye Thomas Davenport/ Adam Sack Task Team Leader (TTL) Susan Razzaz Junko Oikawa Andrea Merrick (co-TTL) Acknowledgements This Country Partnership Strategy was prepared under the guidance of Diarietou Gaye, World Bank Country Director, and Adam Sack, IFC Country Manager. The core team included Victor Navaranjan Antonypillai, Lalima Maskey, Andrea Merrick, Junko Oikawa, Dilinika Peiris, Doina Petrescu, Susan Razzaz, Sandya Salgado, Luis Alvaro Sanchez, Alema Siddiky, Pavol Vajda, Anna Wellenstein, and Hafiz Zainudeen. The preparation of this CPS involved contributions from many units of the World Bank Group including the entire Country Team, Country Sector Coordinators, the World Bank’s Country Management Unit, and the IFC. The World Bank Group is grateful to the Government of Sri Lanka, particularly the Department of National Planning at the Ministry of Finance and Planning, for its active participation throughout the process.   COUNTRY PARTNERSHIP STRATEGY FOR THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA TABLE OF CONTENTS   EXECUTIVE SUMMARY ............................................................................................................. i  I.  COUNTRY CONTEXT ......................................................................................................... 1  A.   Political and Social Context .......................................................................................... 2  B.   Economic Context and Recent Economic Developments ............................................ 4  C.   Economic Outlook ........................................................................................................ 6  II.  COUNTRY VISION, ACHIEVEMENTS AND CHALLENGES ........................................ 7  A.   Doubling Per Capita Income through Investment ........................................................ 7  B.   Shifting the Structure of the Economy.......................................................................... 9  C.   Improved Living Standards and Social Inclusion ....................................................... 10  III.  WORLD BANK GROUP PARTNERSHIP STRATEGY ................................................... 12  A.  Lessons from the CAS Completion Report ................................................................ 12  B.  Findings from the Stakeholder Survey and Consultations .......................................... 13  C.  Assessment of the Current Portfolio ........................................................................... 14  D.  Principles and Rules of Engagement .......................................................................... 15  E.  Country Partnership Strategy Areas of Focus ............................................................. 18  F.  Implementing the Country Partnership Strategy......................................................... 24  i. Financing Parameters .................................................................................................. 24  ii. Instruments ................................................................................................................. 25  iii. Monitoring and Evaluation ....................................................................................... 26  iv. Complementarities with Activities of Other Development Partners ......................... 26  IV.  RISKS AND RISK MANAGEMENT ................................................................................. 27  A. Risks Related to the Implementation Environment ................................................... 27  B. Risks Related to the Program..................................................................................... 29  ANNEXES .................................................................................................................................... 31  Annex 1: Results Matrix ....................................................................................................... 31  Annex 2: CAS Completion Report ....................................................................................... 44  Annex 3: Sri Lanka At A Glance .......................................................................................... 81  Annex 4: Selected Indicators of World Bank Portfolio Performance and Management ...... 83  Annex 5: Sri Lanka IFC Investment Operations Program .................................................... 84  Annex 6: Sri Lanka Social Indicators ................................................................................... 85  Annex 7: Key Economic Indicators ...................................................................................... 86  Annex 8: Key Exposure Indicators ....................................................................................... 88  Annex 9: IDA Operations Portfolio ...................................................................................... 89  Annex 10: Statement of IFC’s Held and Disbursed Portfolio .............................................. 90  Annex 11: Summary of Development Partner Activities ..................................................... 91  Annex 12: Sri Lanka Statistical Assessment ........................................................................ 92  Annex 13: Summary of Non-Lending Services .................................................................... 96  Annex 14: Summary of Recipient-Executed Trust Funds .................................................... 97  Annex 15: Country Partnership Strategy (CPS) Process ...................................................... 98  Annex 16: Summary of Consultations ................................................................................ 100  Annex 17: Client Survey and Communications................................................................. 111  Annex 18: Gender Issues in Sri Lanka ............................................................................... 115  Annex 18: IDA/IBRD Program Summary .......................................................................... 121  TABLES Table 1 : Key Macroeconomic Indicators ....................................................................................... 5  BOXES Box 1: Summary of Ongoing and Proposed IDA and IBRD Portfolio......................................... 25  EXECUTIVE SUMMARY  i. The Sri Lankan country context has evolved considerably since the FY09-12 Country Assistance Strategy (CAS) was prepared. The 26-year conflict ended in May 2009 and resettlement of Internally Displaced Persons and demining are now largely complete. Sri Lanka is transitioning to middle income country status. The macroeconomic situation has improved. Sri Lanka can now focus on long-term strategic and structural development challenges. Key challenges include realigning public spending and policy with the needs of a middle income country, ensuring opportunities for all Sri Lankans to benefit from economic growth, ensuring appropriate resource allocations for the various tiers of Government, addressing the opportunities and impacts of the demographic transition, and enhancing the role of the private sector including provision of appropriate incentives for increasing productivity and exports. ii. The Country Partnership Strategy (CPS) for FY13-16 is designed to assist the Government of Sri Lanka to address the long term strategic and structural development challenges, while using the existing portfolio to support ongoing efforts to restore livelihoods of Internally Displaced Persons and others affected by the conflict. The World Bank Group’s relationship with the Government has strengthened with increased dialogue and support on the middle income country agenda. In recognition of its growth and economic stability, Sri Lanka has access to IBRD financing as of FY12, allowing for significantly increased financial support during the coming years. iii. Recognizing the need for sustained effort following the end of the conflict, the 2011 World Development Report on Conflict, Security and Development provides valuable insights for this CPS. Many of the principles of engagement proposed by the World Development Report are relevant for Sri Lanka: delivering early results to build public trust and confidence, strengthening institutions in a phased approach, focusing on social accountability, enhancing political and economic inclusion and applying community managed/driven approaches. Many of these principles, including community managed/driven approaches, were central in the FY09-12 CAS. This CPS continues to encompass these principles. iv. This CPS provides support to address the challenges for achieving the Government’s vision as laid out in the “Mahinda Chintana, Vision for the Future�. For each of the three central goals of the Government’s vision, the CPS lays out the key areas of engagement in which World Bank Group support can most effectively address the identified challenges. These areas of engagement were developed through a process of eighteen thematic consultations with the Sri Lankan Government, private sector, civil society, development partners and other stakeholders. Addressing these challenges will require a set of structural and behavioral changes in line with the new middle income status of Sri Lanka. i v. The first goal of the Mahinda Chintana -- to increase per capita income to US$ 4,000 by 2016 -- will require sustained high economic growth (8 percent per year), driven by a high investment rate. Of the targeted investment rate (33-35 percent of GDP per year), 6-7 percent of GDP per year is expected to come from public investment with the remainder coming from the private sector. While public sector investment targets were achieved in 2010 and 2011, it will be difficult to sustain these levels in the absence of increased fiscal space. On the private sector investment side, the level reached 22 percent and 23 percent in 2010 and 2011 falling short of the targets. Reversing this trend will require concerted efforts to improve the investment climate. vi. The second goal is shifting towards a more knowledge-based, globally integrated and competitive, environmentally friendly, internally integrated and increasingly urban economy. Sri Lanka has a solid base for achieving this goal, with a well educated population and a wealth of environmental assets. Challenges going forward include providing systems and incentives to build an appropriately skilled labor force, establishing economic policies that encourage competitiveness, stronger efforts on environmental sustainability and adaptation to climate change, and modernizing infrastructure systems to integrate the disparate parts of the country and meet the needs of the increasingly urban population. vii. The third goal is ensuring improvement in living standards and social inclusion. With its long history of attention to access to basic services, Sri Lanka excels for its income level on most social indicators, with the exception of malnutrition. As Sri Lanka becomes a middle income country, new challenges are emerging (e.g. a rapidly aging population) and improving the quality of services will be a major issue. While increasing the quality of services, an important challenge will be to ensure that benefits are equitably shared across all segments of the population and to prioritize social inclusion and ethnic reconciliation. Successful achievement of this goal will require continuation of Government efforts to resettle Internally Displaced Persons, to invest in the conflict- affected areas of the North and East, and to engage with the political opposition. viii. The proposed FY13-16 CPS builds on the successful engagement under the FY09-12 CAS and deepens the World Bank Group’s support to Sri Lanka in addressing its emerging middle-income country agenda. It is designed to be flexible, focusing on a small number of large projects. Further, country systems will be used to the extent possible. Moving toward increased harmonization with country systems and coordination with other development partners will be especially important in sector wide approaches. This engagement will be supported by International Development Association (IDA) and International Bank for Reconstruction and Development (IBRD) resources, using a full range of lending and non-lending instruments. The International Finance Corporation (IFC) will continue to play a key role in providing investment and advisory services to the private sector. ix. The CPS focuses on three areas:. These are: (i) facilitating sustained private and public investment; (ii) supporting the structural shifts in the economy; and (iii) improving living standards and social inclusion. ii x. In the area of sustained private and public investment, the World Bank Group will support the Government effort to improve the investment climate, strengthen governance and reduce the inefficiencies of the public sector. The IFC plans to catalyze private investment through directly investing in important projects in key sectors. The World Bank will also support the Government’s efforts to maintain a high level of public investment and improved efficiency of public expenditures and financial management and procurement practices in line with international standards, using both knowledge (e.g. Public Expenditure Review and Public Expenditure and Financial Accountability Assessment) and lending products (e.g. a development policy loan for investment policy and governance reforms and an investment loan for legal and judicial reforms). The World Bank will also advise Government on ways to improve the efficiency of key State Owned Enterprises (SOEs). xi. In supporting a structural shift in the economy, the World Bank Group will deepen its assistance to the knowledge based economy with investments in skills, research and innovation. In addition, support to the development of infrastructure needed for sustainable urban development and better linkages within Sri Lanka will be enhanced. xii. Finally, the World Bank Group will continue to support improvements in living standards and social inclusion in order to ensure the benefits of rapid growth and higher quality services are broadly shared. Activities in this area already include three ongoing livelihood projects in the conflict-affected North and East regions of the country which includes restoration of basic infrastructures, housing construction, and cash for work as well as support for starting new businesses. During the CPS period, the program will further include: (i) support to the national health sector program with a focus on supporting emerging service delivery demands resulting from Sri Lanka’s aging population, such as work on non-communicable diseases; (ii) inter-sectoral efforts to address malnutrition, economic integration of women and a range of other activities to further support the needs of women, youth and the disabled; (iii) analytical work on allocation of resources and benefits received by various groups; and (iv) IFC’s support for inclusive growth. xiii. The CPS includes an indicative pipeline of projects for financing. Reviews will be held annually to monitor CPS implementation and ensure continued alignment of the CPS with the evolving country needs. The program will be supported by approximately US$ 577 million (SDR 374.2 million) in funding under the remainder of IDA 16. The program will also be supported by a total of approximately US$ 450 million in IBRD financing over the period FY13-FY14. The Government has expressed interest in a significantly larger amount of IBRD financing for the outer years of the CPS, which would depend on the macroeconomic environment in Sri Lanka as well as the overall demand for IBRD resources from other clients, IBRD financial capacity and global economic developments. A Progress Report will be prepared in FY14 at which time any necessary revisions to the program, including the lending plans, will be discussed. iii xiv. Increased attention will be paid to results in all sectors. The choice of lending instrument will depend on the specific needs. Alongside specific investment loans, instruments are expected to include Development Policy Loans and Program-For-Results financing, as client demand and other conditions permit. Analytical work will also focus on results by helping to identify the driving forces and key constraints that need to be addressed through policies and investments. xv. This CPS includes a careful assessment of key risks in the program, and steps to manage such risks. The first set of risks is related to the implementation environment and is reflective of Sri Lanka’s specific development challenges. These include: (i) external shocks emanating from Euro Area crisis; (ii) macroeconomic and fiscal risks; and (iii) natural disasters. The second set of risks is related to the design of the program itself. These include portfolio risks related to governance, procurement and financial management and risks related to government capacity to manage the increased volume of lending. The CPS presents ways to mitigate these challenges. Moreover, the flexible approach of this CPS will allow adjustment in the program in line with evolving Government priorities and country needs, within the broad direction for engagement outlined in this CPS. iv I. COUNTRY CONTEXT  1. The Sri Lankan country context has evolved considerably since the FY09-12 Country Assistance Strategy (CAS) was prepared. The 26-year conflict ended in May 2009 and resettlement of Internally Displaced Persons and demining are now largely complete. The attainment of peace bolstered economic performance. The Sri Lankan economy grew at 8 percent average per year since the end of the conflict. Inflation is relatively low at about 6 percent in 2011, down from 22.6 percent in 2008. Public debt and deficit have been gradually brought down and Sri Lanka is transitioning to middle income country status.1 2. Sri Lanka can now focus on long-term strategic and structural development challenges. Key challenges include realigning public spending and policy with the needs of a middle income country, ensuring opportunities for all Sri Lankans to benefit from economic growth, ensuring appropriate resource allocations for the various tiers of Government, addressing the opportunities and impacts of the demographic transition, and enhancing the role of the private sector including provision of appropriate incentives for increasing productivity and export. 3. The Country Partnership Strategy (CPS) for FY13-16 is designed to assist the Government of Sri Lanka to address these long term strategic and structural challenges, while using the existing portfolio to support efforts to restore livelihoods in the parts of the country most affected by the conflict. The World Bank Group’s relationship with the Government has strengthened with increased dialogue and support on the middle income country agenda. In recognition of its growth and economic stability, Sri Lanka has access to IBRD financing as of FY12, allowing for significantly increased financial support during the coming years. 4. Recognizing the need for sustained efforts following the end of the conflict, the 2011 World Development Report on Conflict, Security and Development provides valuable insights for this CPS. Many of the principles of engagement proposed by the World Development Report are relevant for Sri Lanka: delivering early results to public trust and confidence, strengthening institutions in a phased approach, focusing on social accountability, enhancing political and economic inclusion and working with structures at the local level to identify priorities and deliver programs. Many of these principles were central in the FY09-12 CAS. This CPS continues to encompass these principles and adopts a pragmatic approach to address immediate and medium-term challenges towards strengthening basic institutional functions towards providing shared growth, security, justice and jobs. As such, it is strengthening institutions including the Auditor General and judiciary, enhancing the transparency and communication between Parliament and civil society, utilizing third party monitoring of projects, and emphasizing equitable allocation of resources and public service provision across the country to ensure that all Sri Lankans benefit. 1 GNI per capita was US$ 2,290 in 2010 and about US$ 2,350 in 2011. 1   A.    Political and Social Context  5. The current Government has strong political support. President Rajapaksa was first elected in 2005. Following a concerted military campaign, the Government defeated the separatist Liberation Tigers of Tamil Eelam in May 2009. Mr. Rajapaksa was re-elected in 2010 with a strong majority. Subsequent parliamentary, provincial and local elections have also brought strong support for the President’s United People’s Freedom Alliance. At the national level, the opposition now holds less than one third of Parliamentary seats. 6. Resettlement of internally displaced persons and demining have been major focuses of the past two years. About 277,000 people were displaced within the country during the conflict. The vast majority have been resettled, though about 14,000 individuals still remain in welfare centers and camps2. Many have returned to areas that were destroyed during the conflict and major efforts are ongoing to reestablish public services and infrastructure as well as to rebuild housing and re-establish income generating activities. Many development partners, including the World Bank, have supported the Government in the resettlement effort. 7. Broad social and economic inclusion has been occurring slowly and further progress is still required. A long lasting solution to the ethnic problem and setting up effective means of addressing grievances of minority communities is vital for sustained peace. President Rajapaksa appointed the Lessons Learnt and Reconciliation Commission and mechanisms have been put in place to implement key recommendations of the Commission. This process is closely monitored by the Government with support of key bilateral partners. 8. Sri Lanka is on track to meet most of the Millennium Development Goals. UNDP has identified Sri Lanka as an early achiever on 10 of the 21 indicators, including those related to universal primary education and gender equality. Sri Lanka is also expected to meet the goals of maternal health and HIV/AIDs. However, Sri Lanka is making slower progress on the goals related to malnutrition and child mortality. Indicators are mixed on the environment: while Sri Lanka is an early achiever on indicators of protected area, ozone depleting substance consumption, safe drinking water and basic sanitation, it has stagnated or is slipping backwards on forest cover and CO2 emissions.3 9. Sri Lanka compares favorably with other countries in its income band in terms of gender equality. Sri Lanka ranks 72nd out of 169 countries on the UN Gender Inequality Index.4 On the OECD’s Social Institutions and Gender Index, Sri Lanka scores highest among all South Asian countries.5 The main gender challenges relate to women’s access to employment opportunities and women’s nutritional status. Only 32.3 percent of females aged 15 or older 2 Data from UNHCR estimates. 3 Paths to 2015: MDG Priorities in Asia and the Pacific (2010/2011) by UNDP, Economic and Social Commission for Asia and the Pacific (ESCAP) and ADB. 4 The Gender Inequality Index is a composite measure of reproductive health (maternal mortality ratio and adolescent fertility rate); women’s empowerment (share of parliamentary seats held by women; and female secondary and tertiary educational attainment rates); and labor participation (share of women in the labor force). United Nations 2008. 5 The OECD index looks at family law, civil liberties, physical integrity (including violence against women), son preference and ownership rights. 2 participate in the labor force.6 Poor nutritional status of women is particularly severe in estate areas: the percentage of women with low body mass index is nearly 48 percent in estate areas, compared to 23 percent of rural areas, and just 12 percent in urban areas. Poor nutritional status of women reduces the woman’s own quality of life as well as her earning capacity and the health of her children. (See Annex 18: Gender Issues in Sri Lanka.) 10. Sri Lanka’s changing demographics – the aging and urbanization of the population – is having dramatic impacts on education and health as well as the economy. By 2036, more than 22 percent of the population will be over 60 and there will be 61 dependents per 100 adults. Unless labor force and employment rates increase, a very small number of employed persons will need to provide for a very large number of non-working persons – straining the budgets of families and Government. As the population becomes older and has a higher income, the types of public services required will change. The education system will need to give increasing emphasis on computer, English and higher level cognitive skills. The health system will need to focus more on non-communicable diseases.7 Social protection for the elderly will need to be enhanced. Increasing urbanization will require investments in mass transit and expanded water and sewage networks. 11. Unemployment rates have fallen since the end of the conflict. As of second quarter of 2011, unemployment was only 4.2 percent. Unemployment rates are higher among youth, women and the more educated: the unemployment rate was 7.6 percent among those 25-29 years old, 7.0 percent among women, and 7.8 percent among those with A-Level education and above.8 More than half (about 55 percent) of the employed population works as a paid employee9, although even among this group, a large share is in the informal sector.10 12. Poverty rates have fallen from 15 percent of the population in 2006/7 to 9 percent in 2009/10.11 The most dramatic decline has been in the estate sector (from 32 percent to 11 percent) following a major wage increase at the beginning of 2010. Remaining concentrations of poverty are not limited to a single part of the country: the four districts with the highest poverty rates are Batticaloa (20 percent) in the east, Jaffna (16 percent) in the north, Moneragala 15 percent in the south-east and Badulla (13 percent) in the south-east.12 Inequality of consumption declined between 2006/7 and 2009/10, with the Gini index falling from 0.40 to 0.36 and the quintile ratio falling from 6.7 to 5.7. 6 Female labor force participation is highest (50.2 percent) among those aged 40-44 years as of second quarter 2011. Female labor force participation rates would be somewhat higher if the large number of Sri Lankan women working outside the country (primarily as housekeepers) were included. 7 Non-communicable diseases are those diseases that are not transmissible from one person to another, including a wide array of health conditions such as injuries, mental health problems, disabilities, cardio-vascular diseases, endocrine disorders such as diabetes mellitus, non-infectious respiratory diseases such as asthma, degenerative diseases of old age, and cancers. 8 The Advanced Level General Certificate of Education, commonly referred to as an A-level, is a qualification offered by education institutions in Sri Lanka and other Commonwealth Countries. A-levels are studied over a two-year period and are recognized as the standard for assessing the suitability of applicants for academic courses in universities. 9 The remainder work as entrepreneurs or unpaid family workers. 10 The figures in this paragraph are from the Department of Census and Statistics Bulletin of Labor Force Statistics for 2011Q2. 11 These numbers are based on the national poverty line. Poverty rates are calculated separately for urban, rural and estate (plantation) sectors. World Bank estimates using international poverty lines find that as of 2007, 7 percent of Sri Lankans were below the US$ 1.25 line and 29 percent of Sri Lankans were below the US$ 2.00 line. 12 The 2009/10 survey did not include the Mannar, Kilinochchi and Mullaithivu Districts. The poverty rate in Colombo is under 4 percent. 3 B.    Economic Context and Recent Economic Developments  13. The Sri Lankan economy grew at a vigorous 8.3 percent during 2011, largely due to the post-conflict rebound. Sri Lanka was able to maintain relatively strong growth of about 5 percent per year even during the war, though growth dropped to 3.5 percent in 2009 during the last stage of the conflict, which coincided with the international economic crisis. The post- conflict rebound has helped all sectors, both on the supply side and the demand side. Agricultural land in conflict-affected areas could once again be cultivated; double shifts in manufacturing became possible as workers no longer had to worry about security restrictions. Domestic consumers’ and investors’ confidence revived, and services related to tourism picked up as tourist arrivals surged since the end of the war. 14. Sri Lanka has been experiencing an increase in the trade deficit, estimated to be about 17 percent of GDP in 2011. Goods exports declined as a share of GDP from 30 percent in 2001 to 18 percent by 2011. Sri Lanka’s low share of GDP from exports is not an outlier in the world perspective, but as an economy with a relatively small domestic population, with a favorable geographic location as a trade hub and close proximity to fast growing markets, Sri Lanka’s exports are below potential. Although exports have increased, they have not kept pace with the surge in imports. Increased imports reflected a rapid rise in consumer imports, tied to the rising income of the population; increased investment goods imports to support infrastructure development; and an increasing bill for intermediate goods imports due to higher commodity prices, notably oil. 15. The trade deficit has been financed largely by remittances (about 9 percent of GDP in 2011) and to a lesser extent by tourism receipts (1.5 percent of GDP in 2011). In 2010 the trade deficit was comfortably financed by remittances and tourism. However, despite strong remittances and tourism, the large increase in the trade deficit resulted in a more than doubling of the current account deficit and a rapid decline in foreign reserves in 2011. In February of 2012, the authorities introduced a package of measures to rein in the current account deficit, stem the reserve loss, bolster fiscal performance and increase the sustainability of growth. These measures included monetary and credit policy tightening, petroleum and electricity price increases, a petroleum tax increase and the abolishment of the rupee trading band to allow the exchange rate to adjust more flexibly. At the same time, the authorities increased the kerosene coupons available to the poorest in order to mitigate the adverse impact on that group. 16. The public debt and deficit have been gradually brought down. Public debt is estimated at 79 percent of GDP as of December 2011, compared to nearly 91 percent of GDP in 2005.13 The fiscal deficit excluding grants reached 10.4 percent of GDP in 2009, but the authorities made significant stabilization efforts under the IMF program since then to gradually reduce it to an estimated 6.9 percent of GDP in 2011.14 The debt sustainability analysis performed by the IMF in 2010 found the public debt to be sustainable and projects it to decline to 13 Domestic public debt is currently about 44 percent of GDP. 14 Reduced fiscal deficit was accomplished in large part through higher receipts from import duties, VAT and excise taxes. 4 64 percent of GDP by 2015, assuming 6.5 to 7 percent annual growth, 6 to 7 percent nominal interest rates and continuous fiscal stabilization efforts. 17. Inflation remains low. Having reached 22.6 percent (annual average) in 2008, inflation has fallen to about 6.0 percent in 2011. Monetary policy has been accommodative since the start of the global economic crisis.15 Strong credit expansion since 2009 has helped stimulate domestic demand. After falling by 5.8 percent in 2009, credit to the private sector increased by 24.9 percent in 2010 and about 33 percent in 2011 year-on-year. In its recent report, the Fitch ratings agency has warned that such fast credit growth, if maintained, and fast rising asset prices may be putting the financial system at risk.16 To address such concerns, the Central Bank of Sri Lanka recently raised policy interest rates.17 This move is expected to reduce growth in private sector credit and domestic demand and reduce emerging risks to the financial sector. Table 1 : Key Macroeconomic Indicators As a percent of GDP 2008 2009 2010 2011 Est 2012 F 2013 F 2014 F 2015 F 2016 F National Accounts Real GDP growth 6.0 3.5 8.0 8.3 6.8 7.7 7.0 7.0 7.0 Total investment 25.3 23.7 27.8 29.3 32.9 29.5 29.3 29.1 31.3 Private sector investment 19.3 17.3 22.0 23.3 26.9 23.7 23.6 23.4 25.3 Public sector investment 6.0 6.4 5.8 6.0 6.0 5.8 5.8 5.7 6.0 Monetary CPI 22.6 3.4 5.9 6.0 6.0 6.0 6.0 6.0 6.0 Public debt 81.4 86.1 81.9 78.8 75.4 71.1 67.6 64.2 60.7 External Account Current account balance (9.5) (0.5) (2.9) (7.0) (3.2) (2.7) (2.8) (3.0) (2.1) Trade balance (14.7) (7.4) (10.5) (17.0) (14.9) (15.4) (16.3) (17.6) (18.6) FDI 1.7 0.9 0.9 1.7 2.4 2.1 1.2 1.1 1.3 Remittances 7.2 7.9 8.3 9.1 9.7 10.3 11.1 12.0 13.4 Gross International Reserves of CBSL in months of imports 1.4 5.7 5.7 3.4 Fiscal Fiscal revenues 15.6 15.0 14.9 15.7 16.0 16.2 16.3 16.3 16.5 Primary current expenditure 16.9 18.2 16.7 16.3 16.0 15.4 15.0 14.7 14.8 Interest expenditure 4.8 6.4 6.3 5.4 5.2 5.0 4.8 4.6 4.7 Capital expenditure 5.7 6.7 6.4 6.0 6.2 6.0 6.0 6.0 6.0 Fiscal balance excluding grants (7.7) (10.4) (8.2) (6.9) (6.4) (5.5) (5.0) (4.6) (4.3) IMF and World Bank Group staff estimates 18. Sri Lanka entered into a US$ 2.6 billion IMF Stand-By-Arrangement in July 2009. The program aims to put Sri Lanka on a sustainable growth path, rebuild foreign exchange reserves, strengthen the fiscal position, bring down inflation and strengthen the financial system. In April, 2012, the Executive Board of the IMF completed the seventh review of Sri Lanka’s economic performance and disbursed SDR 275.6 million (about US$ 426.8 million) brining total disbursements under the arrangement to about US$ 2.13 billion. In addition, the Executive Board approved an extension of the arrangement period to July 23, 2012, to allow time for the completion of the eighth and final review. 15 Policy rates were lowered by a cumulative 350 basis points from November 2008 to January 2011 simulating credit demand. 16 Fitch Asia-Pacific Sovereign Outlook, December 23, 2011. 17  The Central Bank of Sri Lanka raised policy interest rates by 50 basis points in February 2012.  5   C.    Economic Outlook  19. The Government’s strategy aims at eight percent annual real growth over the medium term. Whereas the recent growth has been achieved in large part due to the one-time benefits of the end of the conflict, sustaining strong growth will require continued efforts to increase investment and raise productivity. To date, both domestic private investment and FDI have been well below desired levels: domestic private investment was 20.1 percent of GDP and FDI was 0.9 percent of GDP in 2010.18 Improvements in the investment climate will be essential to achieving sustained growth, and investor confidence is expected to continue to depend heavily on predictability of the policy environment. In addition to high investment ratios, total factor productivity increases will be crucial, particularly as the share of the population of working age declines. Increases in productivity will depend in large part on opening up the economy, a higher exposure to global knowledge and innovation, and general progress in the efficiency of production processes.19 20. Over the CPS period, both exports and imports of goods are expected to grow rapidly. As imports will start from a higher base, the merchandise trade deficit is expected to widen and remittances will continue to be a major source of financing. Imports are expected to increase in investment goods and intermediate goods as the economy rebuilds following the conflict, as well as in consumer goods, as an increasingly wealthy population demands a wider range of imported products. There are several potential areas for increased exports, including expanding labor intensive production (e.g. garments) as China moves out of these markets. The risks of declining export demand if the economies of Europe and the U.S. remain sluggish could be mitigated by completion of the trade agreement with India and expansion of exports to other fast growing developing countries.20 A simpler trade regime has the potential to improve the trade balance. Continued exchange rate flexibility will also be important to maintain macro stability (including rebuilding international reserves) and to maintain competitiveness. The Central Bank’s announcement in February 2012 that it will reduce intervention in the foreign exchange market is a positive sign. 21. Sri Lanka’s fiscal balance and debt situation is expected to continue to improve, assuming continued efforts to enhance revenues, reign in expenditures and strengthen debt management. The medium term fiscal framework relies heavily on revenue growth. There is considerable room for revenue growth, given that current levels (about 16 percent of GDP in 2011) are low by international standards and compared to levels achieved in the 1980s (about 23 percent of GDP). Important reforms were enacted last year, simplifying the tax regime and broadening the base, in an effort to increase revenues. Persistent inefficiencies in tax collection and widespread tax evasion, however, have meant that revenues have been slow to rise. Progress 18 The official numbers for 2011 are not yet publically available. 19 Recent analytical work finds that the two main constraints to labor productivity in Sri Lanka are: (i) low competition with foreign firms (i.e. insufficient incentives to produce efficiently) and (ii) low share of investment financed externally (i.e. insufficient exposure to state-of-the art global knowledge). See Dutz and O’Connell (2011), “The Business Environment, Productivity and Innovation in Sri Lanka: An Empirical Exploration� 20 Sri Lanka relies heavily on European demand for its merchandise exports as well as service exports (tourism). Thirty five percent of goods exports go to Europe and 37 percent of tourist arrivals come from Europe. 6 is expected going forward as the tax administration is modernized.21 Expenditures are expected to remain flat as a share of GDP despite pressure to increase public investment on infrastructure and to increase the remuneration of civil servants. Continued efforts to increase efficiency of public spending, including improving value-for-money from public procurement and management reforms in SOEs, will be essential. Government plans to improve the flow of reliable and timely information on budgets and outcomes are expected to improve the quality of budgetary decision making and confidence in sound policy making. Interest payments on public debt continue to absorb more than a third of recurrent expenditure.22 Despite its improved sovereign credit rating, Sri Lanka is vulnerable to increased costs of borrowing because overall debt remains high.23 22. Inflation is expected to remain moderate over the CPS period.24 The increased cost of imports (due to a weaker rupee) is expected to be offset by lower domestic food prices (thanks to increased production). Risks to inflation remain, however, if investment does not increase fast enough to avoid an overheating of the economy. II. COUNTRY VISION, ACHIEVEMENTS AND CHALLENGES  23. The Mahinda Chintana Vision for the Future lays out the Government’s vision for development over the period of 2010 to 2016. The Mahinda Chintana describes three goals. The first is the doubling of per capita income between 2009 and 2016 to be achieved through sustained high economic growth, driven by a high investment rate. Second is the shifting of the structure of the economy to be more knowledge-based, globally integrated and competitive, environmentally friendly, internally integrated and increasingly urban. And third is ensuring improved living standards and social inclusion. A.    Doubling Per Capita Income through Investment    24. The Government’s Vision, lays out a consistent set of macroeconomic goals. In particular, the Mahinda Chintana seeks to double per capita income, to about US$ 4,000 between 2009 and 2016. Accomplishing this will require about 8 percent GDP growth, which would in turn require investment of 33-35 percent of GDP per year.25 The Government plans include public investment of 6-7 percent of GDP, as the maximum affordable given the fiscal and debt situation. The remaining investment would need to come from the private sector. 21 An ongoing project financed by the Asian Development Bank is computerizing tax records and collection procedures. 22 Interest expenditure accounts for a one third of total recurrent expenditure. Yield rates on government short to medium term securities having risen considerable since the third quarter of 2011. 23 Costs of borrowing could rise if improvements in the sovereign credit rating were reversed or if international credit markets contracted as a result of ongoing problems in Europe. 24 In the near term, inflation could increase. The Government raised retail prices of gasoline, diesel and kerosene by 9 percent, 38 percent and 49 percent respectively in February 2012. In addition, electricity fuel surcharges were also raised between 15-40 percent in February (to take into account increased cost of thermal power generation) while transport fares in the privatized bus companies were also increased by 20 percent. These one-time increases in energy prices are expected to result in increases in food and other products over the coming months. 25 Achieving this level of per capita income by 2016 is consistent with assumptions for annual population growth of 1 percent, annual inflation of 2 percent and an annual appreciation of the rupee against the dollar of 1.6 %.   7 25. While the growth target was met for 2010 and 2011, as a result of the post conflict rebound, sustaining this growth will require a substantial increase in investment. Public investment came close to the target in 2010 and 2011, at 5.8 and 6.0 percent of GDP respectively.26 The main challenge in this regard will be sustaining the high rate of public investment over the medium term given the tight fiscal space. The Mahinda Chintana proposes to bring the fiscal deficit to 5 percent of GDP by 2013 and maintain it at that level over the medium term. This goal is achievable but will require significant effort on both revenues and expenditures. At about 16 percent of GDP in 2011, revenues are low by international standards and well below the 23 percent Sri Lanka had in the 1980s.27 The budget for 2011 simplified and reduced taxes and broadened the base, in the hopes that this will boost receipts. Further tax regulation changes could enhance incentives for productive investment and reduce distortions. In addition, increased efficiency in tax collection and improved efforts to address the tax evasion are needed if revenues are to reach the targeted levels for 2012 and beyond. While revenues have been low, expenditures have been high (about 22 percent of GDP in 2011) due to the high level of investments in post war reconstruction and infrastructure modernization, transfers to loss-making State Owned Enterprises, a large wage bill and high interest payments on debt. The Mahinda Chintana identifies several important governance-related opportunities to increase efficiency of public spending. These include establishing a clear system for assessing costs and benefits of investments, reforming management and improving efficiency of State Owned Enterprises28 and improving the flow of budget information. Improvements in efficiency will also require continued efforts to improve financial management and procurement practices and to improve alignment of available resources of provincial and local authorities with the mandates they have been given. Sri Lanka’s ability to borrow to finance public investment has improved since the end of the war thanks to increased creditworthiness, as reflected in sovereign credit ratings. Nevertheless, borrowing costs could increase if there are problems in the international financial markets (e.g. related to the Eurozone crisis) or if credit ratings are not maintained. 26. Private investment has fallen far short of the amount needed to sustain growth. With private investment at 22 percent of GDP in 2010, total investment reached only 26 percent of GDP – far below the required 33-35 percent. Foreign Direct Investment has also been disappointing. Foreign Direct Investment is not only important for increasing total investment but also as a key source of global knowledge and technology. Achieving the private investment target will require concerted efforts to improve the investment climate. The World Bank Group’s Doing Business Indicators have identified areas of weakness including enforcing contracts, paying taxes, registering property, and obtaining construction permits. An interagency committee has been following up on reforms in these areas with the aim of achieving a 30th place ranking in Doing Business. A recently conducted survey of Sri Lankan businesses indicates that 26 Pubic investment numbers provided are capital investment numbers as reported by the Central Bank of Sri Lanka. 27 This decline is mainly attributed to the gradual removal of export related taxes, which was a significant source of revenue until the end of the 1980s. 28 Off budget financing activities are relatively low and loss-making state enterprises are financed mostly by direct transfers from the budget. The bulk of state-owned enterprise debt is from Ceylon Petroleum Corporation and Ceylon Electricity Board. Efforts are ongoing to try to help these enterprises break even. However, these enterprises and the country public finances will remain vulnerable unless Sri Lanka implements a price-setting mechanism that allows the full recovery of input prices. The recent revisions in energy prices are a positive move in this direction. The banking system poses modest contingent liabilities to the government, with adequate capitalization ratios and improving nonperforming loans. The Mahinda Chintana states that all SOEs will develop corporate mandates, all Board members will enter into performance contracts, and all SOE activities will be disclosed to the public by adopting a sound reporting system based on international best practices. 8 the biggest obstacles faced are access to finance, taxes, unfair advantages of the informal sector,29the formal/informal sector dichotomy, electricity, labor force skill mismatches, and access to land. B.   Shifting the Structure of the Economy  27. Sri Lanka has a generally well educated population for its income level, but faces challenges in becoming a knowledge-based economy. Sri Lanka does well in terms of access to education and completion rates.30 At the same time, however, employers complain that they are unable to find workers with the needed skills – especially information technology, English language, and soft skills (e.g. problem-solving skills, good communication and ability to work in teams). Although efforts have been made to introduce these skills into the curriculum, the emphasis on testing factual knowledge in the assessment system has meant that few resources are spent on the new skill curriculum. Moreover, addressing the knowledge-economy will require creation of a dynamic system in which curriculum focuses on higher level cognitive skills and a feedback mechanism to adjust to changes in the needs of the labor market. In addition, in light of the long-lasting impacts on both cognitive and non-cognitive skills, early childhood education needs attention. Keeping up with technology will be a particular challenge: information and communications technology adoption is identified as a weakness in both the Global Competitiveness Index31 and the Global Innovation Index. According to the Telecom Regulatory Commission, internet use at 12 percent of the population in 2010 is below the average for countries at Sri Lanka’s income level. 28. The Mahinda Chintana aims to increase Sri Lanka’s integration into the global economy and make it competitive internationally. Historically, Sri Lanka has been well connected internationally, making use of its excellent climate and strategic geographic position between the west and the east, and was considered the most open economy in South Asia. Over the past decade however, Sri Lanka has become less competitive, with the exports declining from 39 percent of GDP in 2000 to 17 percent in 2011. Although the high-end apparel sector has performed well and the number of tourist arrivals has increased dramatically since the end of the conflict,32 several challenges remain. The tourist industry competes with other destinations that offer very high value for money. High tech exports represented less than one percent of manufacturing exports in 2010.33 Sri Lanka’s high exchange rate has hurt export competitiveness, particularly as the currencies of several nearby countries have devalued in the past year.34 The agricultural export sector (including tea, historically a main export) operates well below potential due to low productivity; and complex, frequently changing, anti-export trade and pricing policies. In terms of the Logistics Performance Index, Sri Lanka ranks below 29 The formal or registered companies are perceived to be adversely affected by the informal or unregistered companies since they are not required to obtain various regulatory approvals and can evade taxes and also avoid maintaining accounts. 30 Primary completion rates are above 97 percent and secondary school enrollment is over 85 percent. 31 The Global Competitiveness Index measures the speed with which an economy adopts existing technologies to enhance the productivity of its industries, with specific emphasis on its capacity to fully use ICT in daily activities and production processes for increased efficiency and competitiveness. 32 Tourism receipts increased from US$ 380 million in 2008 to US$ 576 million in 2010 to about US$ 800 million in 2011. 33 World Development Indicators. 34 Unfolding events in Europe caused a retreat out of developing countries and into “safe haven� U.S. assets. As a result, currencies of Bangladesh, India, Pakistan, and others around the world depreciated sharply against the dollar. 9 the regional average, reflecting poorly developed railways and congested access to major ports, as well as problems in customs clearance times, logistical competence, and the ability to track shipments. The Government strategy aims to reverse these negative trends and make Sri Lankan exports highly competitive. 29. Sri Lanka has a wealth of environmental assets, boasting the highest biodiversity per square kilometer in Asia. During the conflict, the slow pace of economic development meant that degradation was slower than it otherwise might have been. Mahinda Chintana goals for 2016 include raising forest coverage from 23 percent to 35 percent of the land area. Despite official recognition of the importance of protecting environmental assets, the country’s performance on environmental sustainability has not been fully satisfactory. In fact, Sri Lanka risks losing many of its assets and biodiversity, as demonstrated by a recent survey that found that 33 percent of fauna and 61 percent of flora are threatened. Thirty five percent of old growth forest cover has been lost since 1990 – among the highest in the region – further increasing the challenge of meeting Government targets. Moreover, environmental neglect can directly and indirectly impact economic performance, and the rate and sustainability of long term growth. 30. For generations, Sri Lanka’s population has been more internally mobile than most countries, on account of the extensive network of roads, buses and railways and relatively compact geographic territory.35 During the war, much of this infrastructure was damaged and attention was not given to modernizing or even maintaining the infrastructure. Today, road travel within the country is very slow with average speed of only 26 kilometers an hour. A massive effort is currently underway to bridge the infrastructure gap, using domestic budget as well as support from the multilateral and bilateral community. The country’s first expressway opened in 2011, halving travel time from Colombo to Galle. Nevertheless, challenges remain. More needs to be done to understand and enhance the economic connections across the country to take advantage of forward and backward linkages in supply chains and of distinct comparative advantages of different parts of the country.36 C.   Improved Living Standards and Social Inclusion  31. Mahinda Chintana aims to ensure that all social groups benefit from the growth envisaged above. With a long history of attention to access to basic services, Sri Lanka excels for its income level on most social indicators. This includes life expectancy, education, births attended by a skilled professional, access to improved water source, and other key indicators. 32. Although Sri Lanka excels in most social indicators, malnutrition is a striking exception. About 22 percent of Sri Lankan children under 5 are underweight, as against the 14 percent expected for Sri Lanka’s income level. That malnutrition has persisted even as the GDP per capita has increased reflects the complexity of the problem. Tackling malnutrition will require a combination of actions involving healthcare, food security, water and sanitation, attitudes and behaviors. 35 As of 2010, there were 1.7 km of road per km2 and 97 percent of villages are reached by the road network. As of 2000, 86 percent of the roads were paved. 36 Based on current trends of urbanization and policies that support private vehicle ownership over mass transit, congestion rates are expected to increase dramatically over the coming decade. By 2031 travel speed is expected to decline to 19 kilometers an hour, with rush hour in Colombo District falling to below 9 kilometers per hour. 10 33. As Sri Lanka becomes a middle income country, new challenges emerge related to the interrelated phenomenon of increased wealth, changing age structure of the population and increasing urbanization. As the population becomes wealthier, citizens expect a higher quality and wider range of services and lower waiting times. The type of services needed also evolves with the changing diseases and the aging of the population: the health system, for example, must build capacity to address non-communicable diseases associated with a wealthier, more urban lifestyle (e.g. chronic conditions like diabetes and traffic accidents) and with an older population (e.g. geriatric care).37 The social security system needs to be made sustainable. And the population density associated with urbanization requires improved network services (e.g. mass transit and water and sewerage networks). 34. While increasing the quality of public services is an essential priority, it must be achieved in a manner that is fair to all citizens. Whereas post-conflict resettlement and reconstruction necessitates a focus on investments in the conflict-affected areas of the north and east, service quality modernization necessitates a national approach. As noted earlier in this document, pockets of poverty exist in various parts of the country. The challenge for service quality modernization will be to establish consistent, countrywide standards to support needs based resource allocations. 35. Similarly, social inclusion is a high priority in the Mahinda Chintana, including addressing issues of youth unemployment, equal employment opportunities for women, safety nets for the poor and vulnerable, economic opportunities for the disabled and the aspirations of Sri Lanka as a multi-ethnic and multi-lingual country. As in all countries, social inclusion is a challenge that requires continuous effort and the Government is taking steps in this direction. The challenges going forward include advancing on the ethnic reconciliation agenda and implementing key recommendations of the Lessons Learnt and Reconciliation Commission. The World Bank will assist the Government to increase social inclusion through analytical and advisory work, as well as through specific operations and as a cross-cutting theme overall in the portfolio. 36. The Mahinda Chintana emphasizes the importance of women in Sri Lankan society. The Ministry of Labor is currently in the process of preparing a strategy to encourage women’s employment opportunities. In the past women working abroad as maids has been the largest source of remittances, but there have been several cases of major physical and psychological abuse reported. The Ministry of Foreign Employment Promotion and Welfare has shifted its emphasis and is now providing training programs and encouraging women to seek skilled jobs. Regarding women’s nutritional status, the Government has introduced a nutritional supplement program for mothers and infants, which is well-targeted. 37 Sri Lanka has the oldest population age composition outside of the Eastern European transition economies. In two decades Sri Lanka’s age profile will be similar to that of Europe and Japan today, but with much lower income to support the large number of elderly dependents. 11 III. WORLD BANK GROUP PARTNERSHIP STRATEGY  A.  Lessons from the CAS Completion Report38  37. The design of CAS FY09-12 reflected country reality at the time it was written. Appropriately, the CAS FY09-12 focused on maintaining basic services in the midst of conflict, with strong attention to the conflict-affected north and east and other lagging regions and strong use of Community Driven Development (CDD) approaches. Over the course of the CAS FY09- 12, Sri Lanka’s context changed and the program appropriately adapted to those changes. Of the 15 lending operations that were planned in the CAS, five were dropped and two transformed. Meanwhile, four new projects were added and additional financing was provided for three projects. Of the 12 Analytic and Advisory Activities (AAA) that were planned in the CAS, three were dropped and two refocused. Meanwhile, four new AAA tasks were added. 38. In many ways, the World Bank was successful in responding to the changing priorities. The lending program responded to urgent needs – including resettlement and floods, while still focusing on the conflict and lagging regions. In other ways, however, the World Bank did not fully keep up with the changing issues. Authorities have noted that the World Bank was overly focused on what the Government views as a ‘low income country agenda’, and could have moved support to the emerging middle income country agenda, with which the Government has less experience. 39. The AAA program was small, and in some cases lacked a clear purpose and audience. Dialogue on policy issues was underdeveloped in most sectors. This was due to two factors. First, counterparts were primarily focused on engaging the World Bank in infrastructure, rather than policy issues. Second, the World Bank did not keep up with core AAA products needed to monitor the evolving situation (e.g. analysis of public expenditures, public financial management and poverty). 40. Engagement in education and health was more successful than in other areas. This success was due to several factors: (i) the substantive focus was well-aligned with Government priorities; (ii) interaction was sustained through a combination of lending and AAA used to inform the dialogue; (iii) sector-wide, results-based approaches were introduced including support for strategic planning, monitoring and results-based disbursement; and (iv) interactions at both national and sub-national levels. 41. The strategy of channeling resources through the banking system and of strengthening the alignment between IFC advisory services and investments worked well. Sri Lanka possesses a sound banking system, which both the IFC and the World Bank used effectively to channel resources, for instance, to engage the private sector in sustainable energy generation and in transferring resources to SMEs during the economic slowdown. The lesson is that anchoring support on strong local institutions helps by-pass local capacity constraints. In addition, in line with global guidelines, IFC’s work on the ground stressed the alignment between advisory and investment activities. For instance, in projects such as support to the 38 The full CAS Completion Report is provided in Annex 2. 12 Dialog telecommunications company, the advisory intervention broadened the range of benefits and beneficiaries that are being supported. 42. The last CAS committed to the use of a Conflict Filter to improve the peace and conflict sensitivity of operations. It was meant to help task teams better understand the operating environment at both national and local levels, as well as possible drivers of the conflict through deeper analysis on institutions, stakeholders and benefits-sharing. The Conflict Filter analyses have been conducted for all new projects in the current CAS period. The Filter was revised during the CAS period to map it to the new Operational Risk Assessment Framework (ORAF), which was introduced across the World Bank. 43. It takes longer-than-anticipated time for private sector investment to pick up in post-conflict markets. Expectations for a rapid pick-up in private investments after the conflict ended proved to be optimistic. The corporate/private sector may not have felt comfortable to make investments until peace was firmly cemented, including an easing of tensions with the international community, and seeing how the new Government would rebuild the ground for the private investment. On the latter, the signals of the Government regarding its commitment to a positive investment climate for the private sector have been perceived as mixed by potential investors. The lesson that emerges is that in post-conflict countries stronger and unambiguous messages are needed to motivate a strong engagement of the private sector. Going forward continued attention to the quality of the broad business environment is needed to enhance the opportunities for the private sector support in the country. B.  Findings from the Stakeholder Survey and Consultations39   44. Stakeholder surveys were conducted during the CPS preparation process to complement the World Bank’s self-assessed CAS FY09-12 Completion Report. A quantitative Client Survey captured views of 300 respondents. The survey findings support several of the conclusions from the CAS Completion Report. Although respondents perceived the World Bank to be more effective than it was when the survey was last conducted in 2007, respondents feel that the World Bank’s focus has not been sufficiently aligned with Sri Lanka’s current development priorities, notably middle income country issues. Respondents also indicated a need for an increase in the provision of knowledge and advice. 45. In addition to the quantitative Stakeholder Survey, in-depth interviews were conducted by an independent research company with key decision makers, government officials, private sector representatives and civil society leaders. The interviews reinforced the conclusions from the quantitative survey. The World Bank is seen as an organization able to catalyze transformational change in Sri Lanka, through combined knowledge and financial resources. Respondents perceive the World Bank to be extremely rigorous in its processes – a quality that some see as beneficial, while others felt is overly cumbersome. Respondents feel that in recent years, the World Bank has focused its attention on financing rather than knowledge and could play a more proactive, visible role in Sri Lanka’s transformation. 39 A more detailed description of the consultations is provided as Annex 16. A more detailed description of the stakeholder surveys is provided as Annex 17. 13 46. Consultations were held throughout the CPS preparation process. A total of 18 consultations were conducted, involving more than 400 participants including development partners, youth, gender and environmental activists, the private sector, Members of Parliament, and officials from central, provincial and local government. The consultations contributed to the diagnosis of Sri Lanka’s development challenges and provided an opportunity to obtain feedback as the strategy’s objectives, areas of focus, principles and rules of engagement emerged. Recurring issues raised in the consultations include: the need to reorient publically provided infrastructure and services to the needs of an urbanizing, middle income country; the institutional and financial needs of local and provincial government to allow them to fulfill their mandates; the need for increased clarity and consistency of policy vis-à-vis the private sector; the need for continued attention to poverty and inequality; the role the World Bank is expected to play in wide dissemination of knowledge; and the importance of World Bank coordination with other development partners. C.  Assessment of the Current Portfolio  47. The portfolio is generally healthy with no major problems. The current World Bank portfolio consists primarily of International Development Association (IDA) funded projects: the first International Bank for Reconstruction and Development (IBRD) loan was presented to the Board in March, 2012. As of March 31, 2012, the portfolio consisted of 14 projects with a total commitment of US$ 1.068 billion40 and a disbursement ratio of 17.9 percent (compared to 15.8 for South Asia as a whole and 14.9 for the World Bank as a whole.) Sri Lanka has a high percentage of projects at risk41 (21 percent), however measures are being taken to address these projects as reflected by the high proactivity index of 100 percent.42 48. The latest portfolio review held in October 2011 identified scope for further improvements in several areas including procurement43 and monitoring and evaluation44. The overall financial management performance of the Sri Lanka portfolio is satisfactory and the fiduciary risk after mitigation is rated as “moderate� for the majority of projects. Risk in some projects have been rated as “high� and “substantial� based on the nature and complexity of implementation arrangements, weak implementation capacities of implementing agencies and due to their reliance on aspects of the country financial management systems that are still weak. With the intention of the Government of Sri Lanka to promote the use of country financial management systems to the maximum extent, continued efforts are required to strengthen these systems. 40 The first IBRD loan, the US$ 213 million Metro Colombo Urban Development project, will bring the portfolio to 14 projects. 41 A project is considered “at risk� if it is not meeting its development objectives. It is the sum of actual problem projects and potential problem projects. A project is considered a problem project if implementation progress or the development objective is rated unsatisfactory in the latest project implementation status report. Disbursement ratio is defined as the ratio of disbursements during the fiscal year to the undisbursed balance at the beginning of the fiscal year. (Only investment operations are included in the calculation.) The net disconnect is defined as the difference between ratings given by the Internal Evaluation Group and those given by the Regions. 42 The proactivity index gives the percentage of projects rated as actual problem projects 12 months earlier than have been upgraded, restructured, suspended, closed or partially (20 percent or more of commitments) or fully canceled. 43 With regard to procurement of the 13 projects, 5 were satisfactory, 8 were marginally satisfactory and 2 were marginally unsatisfactory. 44 Of the 13 projects, 10 were satisfactory, 4 marginally satisfactory and 1 marginally unsatisfactory. 14 49. The World Bank Group program made significant use of trust fund resources during the FY 09-12 CAS period, supporting both analytical work and technical assistance. Trust funds have supported activities in a range of areas, from technical assistance on Public Private Partnerships for infrastructure development, to avian influenza preparedness, to renewable energy. Trust funds have significantly bolstered post-conflict and reconstruction efforts, including considerable Australian support for the cash-for-work component of the Emergency Northern Recovery Project and the Japan Social Development Fund support for nutrition in the Northern Province. They have also afforded meaningful support for the Government’s efforts to reform its main safety net program, Samurdhi, as well as for undertaking critical post-disaster needs assessments and expanding access to finance for poor women. Commitments from trust fund resources over the FY09-12 CAS period have amounted to US$ 42.2 million, over 39 World Bank operations. IFC's private sector development support benefited from donor support, including Norway for the Sri Lanka Development Facility, and The Netherlands-IFC Partnership Program and DevCO for the South Asia Infrastructure Facility. Global Environment Facility-backed PADGO (Portfolio Approach to Distributed Generation Opportunity) is also supported by Japanese and Irish funds. Recently, the European Union and IFC have strengthened their partnership, and the first such initiative has launched to benefit four post-conflict districts. 50. A performance review of the eight ongoing recipient-executed trust-funded activities (see Annex 14) identified several areas for increased attention. Among the issues identified are delays in effectiveness and implementation, lack of attention to results monitoring and evaluation, and high transaction costs for both the Recipient and the World Bank. A specific risk associated with the trust fund portfolio has been the limited institutional capacity of recipient institutions and the over-burdening of implementing agencies with the administration and management of small stand-alone trust funds. This has sometimes resulted in lack of compliance with fiduciary requirements, as in the case of the small post-conflict grants. 51. IFC’s portfolio is generally performing well and weathering the global economic challenges well. Two underperforming investments are being monitored closely. IFC’s ability to advise Government agencies on structuring and tendering projects and to fund infrastructure is constrained by limitations in the rules and competitive bidding process currently in place. D.  Principles and Rules of Engagement  52. Reflecting on the dialogue with the Government counterparts, consultations with stakeholders, and the CAS FY09-12 Completion Report, the World Bank Group has agreed on several principles and rules of engagement to guide the new CPS. 53. Focus will be placed on the middle income country agenda. For many years, Sri Lanka has served as an international role model in terms of access to basic services. As Sri Lanka moves into middle income country status, a new set of issues has emerged. Such issues include the fiscal and social impacts of the demographic transition, the Government’s role as facilitator/regulator of the private sector as well as direct provider of services, and alignment of roles and resources of provincial and local authorities. Building on the World Bank’s 15 comparative advantage in analytical work and as an institution working in a wide range of middle income countries, the World Bank will increase its efforts to identify the various options taken by other countries in the transition, to connect Sri Lankan practitioners with their counterparts from other countries. 54. The 2011 World Development Report (WDR) on Conflict, Security and Development provides valuable insights and lessons for this CPS. Sri Lanka emerged from 26 years of conflict in 2009; however it is important to note that it is not a standard post-conflict, fragile country that experienced a substantial breakdown in institutions. Even during the conflict, the public sector continued to function, providing increasingly better services, fostered substantial economic growth and the poverty conditions improved. Nevertheless, many of the principles of engagement proposed by the WDR are relevant for Sri Lanka: enhancing political and economic inclusion, delivering early results to build public trust and confidence, focusing on social accountability tools, applying community-driven approaches, and strengthening institutions in a phased approach. This CPS, as well as the past CAS, encompasses these principles. For example, under the last CAS and continuing during this CPS, the World Bank has supported the Government's rapid effort to resettle families dislocated by the conflict. This resettlement has helped build confidence in Sri Lanka going forward. On-going projects in the portfolio will continue to support building livelihoods and social capital among the resettled communities through a CDM approach. The CPS addresses social accountability through support to Parliamentary oversight committees, works with and strengthens all tiers of Government, and emphasizes broadly shared benefits of growth. 55. The CPS is designed to be flexible. The present document includes an indicative pipeline, which will be modified and supplemented during the CPS period. The World Bank Group will use the CPS Progress Report to review alignment of the project /AAA portfolio with evolving country needs and Government priorities and to modify program accordingly. 56. Increased attention will be paid to results in all sectors. Building on successful approaches in the education and health sectors, the World Bank will move toward increasing emphasis on results in all sectors. AAA will be used to identify the driving forces and key constraints to inform projects design. Results will also be emphasized in the formation of teams: it is anticipated that teams will increasingly need to include staff from more than one sector, and often including both the World Bank and IFC. Recognizing the difficulties inherent in this work, the Country Management Unit will play an active role in defining tasks around results and providing appropriate incentives and accountability. 57. The Government systems will be used whenever possible and strengthened. Over the upcoming CPS period, increased use of country systems is expected as capacity is built in line ministries and provincial and local governments. Where separate the World Bank systems need to be maintained, efforts will be made to reconcile the systems and build capacity. In financial management, the World Bank will agree with the Government on steps to increase the use of country financial management systems during the CPS period. Support to the strengthening of public audit to enhance the scope and coverage of public audits and to strengthen value added audit services will continue. Re-engaging in activities to strengthen Parliamentary oversight of public funds is also expected during the CPS period. In procurement, the recent portfolio review 16 and procurement assessment have identified scope for improvement. During the CPS period, fiduciary reviews will be conducted with an emphasis on improving the capacity to implement procurement in accordance with the national procurement legislation. The World Bank is also working toward mainstreaming project implementation in existing agencies, and move away from stand-alone Project Management Units, consistent with Government’s Management Circular 33. For example, in the recently approved Metro Colombo Urban Development Project, while a stand-alone Project Management Unit has been established, its mandate is limited to fiduciary issues and it is comprised of civil service staff temporarily released from their normal duties and paid salaries based on a regulated scale. 58. The pipeline will focus on a small number of large projects. Given that the Government is engaged in a major effort to modernize infrastructure and institutions, human capacity in Government agencies is being stretched by high transaction costs. Similarly, World Bank resources for both analytical work and lending will be stretched given the flat budget environment to support increasing lending. Under this CPS, lending will be through few, larger operations. This allows efficiency in delivery and focus on identified priorities of the Government. 59. Lending activities and dialogue will involve all relevant tiers of Government. This approach builds on the successes of the previous CAS in supporting capacity building at local, provincial and central levels in projects including North and East Local Services Improvement, Higher Education for the Twenty First Century, Provincial Roads, and the Health Sector Development Project. 60. Safeguards provide opportunities to support the Mahinda Chintana vision. For example, the World Bank will seek opportunities for projects to actively contribute to the Mahinda Chintana goal “to promote sustainable development in close liaison with the land, fauna and flora and to bestow our natural heritage to our future generation.� This approach will include efforts to maximize the environmental benefits of projects and to protect investments through integrated disaster risk management. Similar efforts will be made on other safeguards as well. 61. Analytical and advisory activities will be used strategically to support the CPS areas of focus. All potential AAAs will have clearly defined purpose and audience. AAA will be used to inform planned lending activities, to support dialogue in key policy areas where no lending activities have been planned and to fill gaps in the World Bank Group’s own knowledge, and due diligence. 62. Increased attention will be paid to communication. In addition to requesting the World Bank to provide more analytical work, respondents in the Stakeholder Surveys requested the World Bank to play a more visible and active role in broad knowledge dissemination and stimulating public debate on development issues. Going forward, consistent with the Access to Information Policy, the World Bank will increase the attention paid to dissemination of the messages of analytical work to a wide audience including Government counterparts, Parliament, think tanks and others. Increased attention will also be paid to communication with the media. 17 Greater emphasis will be placed on translating materials into Sinhala and Tamil and communicating with the Sinhala and Tamil media. (See Annex 17 on communication.) E.  Country Partnership Strategy Areas of Focus  63. This Country Partnership Strategy provides support to address the challenges for achieving the three main goals of the Government’s Mahinda Chintana Vision for the Future. For each of the three central goals of the Government’s vision, the CPS lays out the key areas of engagement in which the World Bank Group support can most effectively address the challenges identified in the Section II of this document. In particular, the CPS focuses on specific topics of the World Bank comparative advantage, with an emphasis on the middle income country agenda, the role of the private sector, and institutional and policy issues, and ensuring broadly shared benefits of growth. The CPS is organized as follows: Area 1: Facilitating sustained private and public investment A: Improving the investment climate B: Increasing fiscal space and the efficiency of public spending Area 2: Supporting structural shifts in the economy A: Supporting the shift to a knowledge-based economy B: Boosting international integration and competitiveness C: Supporting the internal integration of the economy Area 3: Improving living standards and social inclusion A: Increasing quality of services B: Reducing the prevalence of malnutrition C: Expanding social inclusion and equitable access 64. IFC’s focus areas during FY 13-16 will be fully aligned with the CPS and will be consistent with IFC’s Regional Strategy in South Asia, which emphasizes: i) Inclusive Growth; ii) Climate Change; and iii) Regional/Global Integration. While all of the three pillars support Area 1 of this CPS, the inclusive growth emphasis focuses on making an impact on the base of the pyramid, low income households through access to finance, infrastructure, social services and markets. This focus especially supports the outcomes set in the Areas 2 and 3 of the CPS described. The climate change emphasis supports renewable energy (hydro, solar, biomass, and wind), energy efficiency, and agricultural and irrigation efficiency activities, which are expected to result in reduced carbon footprints. This focus is aligned with Area 2. Finally, to promote integration, IFC supports South-South investments, knowledge transfer, improvements in the investment climate, and trade and logistics. This focus is in line with Areas 1 and 2 of the CPS. Area 1: Facilitating sustained private and public investment 65. The first CPS area, facilitating sustained private and public investment, provides support to the Mahinda Chintana goal of doubling per capita income through sustained 18 growth. The main challenges to achieving this goal relate to increasing private investment and making public investment sustainable. Area 1A: Improving the investment climate 66. The World Bank Group will support the Government’s efforts to improving the investment climate.45 The Government has requested financial assistance to support regulatory aspects of investment climate reforms. Potential areas for engagement include improving the business environment, enhancing investor confidence, and business-related legal and judicial reforms. The requested assistance is likely to include a multi-sector Development Policy Loan and an Investment Loan supporting the legal and judicial sector. 67. An enterprise perception survey of Sri Lankan firms was conducted in 2011 to gauge the constraints hindering the performance of firms. The findings of the survey revealed that the major constraints encountered by firms are access to finance, informal practices by firms, electricity and tax rates. The World Bank Group will continue to provide support to the Doing Business Committee (convened by the Central Bank and chaired by the Minister of Economic Development) as it facilitates the implementation of priority reforms. In particular, trust fund resources will be sought to connect relevant agencies to their counterparts in countries that have worked on similar reforms through a South-South Knowledge Exchange and other mechanisms. Trust fund resources will also be sought to provide support to development of the capital market for financial sector deepening and improving access. Ongoing projects include the Small and Medium Enterprise Development Facility (improving access to finance for Small and Medium Enterprises affected by the global financial crisis), the Sustainable Tourism Project (supporting environmentally and socially sound investments in tourism) and the Warehouse Receipts Trust Fund (providing farmers with access to storage and collateral needed for access to finance). 68. The World Bank will continue its support to the increased adoption of International Financial Reporting Standards (IFRS) and International Audit Standards in the private sector. Well defined standards and practices in Financial Reporting and Auditing in enhancing the quality of corporate governance and ability of the country to attract foreign investments will be critical. Following up on the recommendations of the Report on the Observation of Standards and Codes for Accounting and Auditing (ROSC A&A) diagnostic carried out by the World Bank (2004), support is being provided to the Institute of Chartered Accountants Sri Lanka through an Institutional Development Fund grant for enabling the adoption of International Financial Reporting Standards to small and medium enterprises and State Owned Enterprises as well as for improving the quality of audit practices. Support will be provided to oversight institutions like the Sri Lanka Accounting and Auditing Standards Monitoring Board that will help to improve the transparency and accountability in the private sector. Considering the changes and improvements that have happened internally and externally since the last ROSC A&A Report for Sri Lanka; an update of the diagnostic is planned to facilitate targeted support to emerging areas relating to the strengthening of corporate governance and financial management in the private sector. 45 Improvements in the investment climate will not only help increase total investment but also encourage foreign direct investment – a key source for global knowledge and technology. 19 69. Through its investment and advisory products, IFC will seek to promote private sector investment and work with the World Bank and the Government on the related agenda. To help Sri Lanka maintain strong economic outlook despite expected slow growth in the global economy in at least the initial part of the CPS period, it is critical to improve the investment climate by facilitating Government efforts on the comprehensive framework and fair rules to enable increased participation by the private sector. Complementing the World Bank’s support for legal and judicial reform, IFC plans to support the supply side by promoting transparency in the private sector and helping to clarify the private sector’s role, which can increase investor comfort level. In addition to supporting Doing Business, IFC will look for opportunities to improve regulations that constrain the financial sector, tourism and agribusiness. IFC will also seek to catalyze investments through directly investing in important projects in key economic sectors including the financial sector, tourism, agribusiness and infrastructure. IFC’s advisory program will expand its support for firm level capacity building in priority sectors. Capacity building in the financial sector will facilitate increased access to financial services for micro, small and medium enterprises as well as promoting low carbon growth. In the tourism and agribusiness sectors, IFC will also combine investment and a range of advisory activities – promoting sustainable practices, supply chain strengthening, particularly for small and medium enterprises, and regulatory improvement. To promote competitive and sustainable business practices, all IFC investments will provide assessment and advice on environmental and social standards and require IFC’s Performance Standard to be met. IFC also provides a corporate governance analysis of clients as a part of a new investment due diligence and will explore possibilities of providing more programmatic corporate governance assistance. Area 1B: Increasing fiscal space and the efficiency of public spending 70. The World Bank will support the Government’s efforts to maintain the high levels of public investment in a sustainable manner. As a first step, the World Bank will provide analytical support in the form of a Public Expenditure Review (PER), which will examine budget allocations across sectors, contingent liability issues related to State Owned Enterprises, the extent to which revenue policies are achieving their objectives, and a Public Expenditure and Financial Accountability report (PEFA) that will examine the performance of budget formulation and execution process and which will benchmark Sri Lanka against other middle income countries. AAA will also be provided to outline alternative financing arrangements for public infrastructure and services (including Public Private Partnerships) and the pros and cons of the various options. An existing activity, “Building Media and Civil Society Capacity for Budget Transparency� is supported by the Social Development Civil Society Trust Fund. A proposed Development Policy Loan is expected to include aspects of public financial management, building on the engagement begun during the CAS FY09-12 and including increasing efficiency of public spending in line ministries and State Owned Enterprises, as well as aspects of the investment climate (as described in paragraph69). 71. Following up the public private partnership workshop organized by the World Bank Group in December 2010, IFC is prepared to continue to collaborate with the World Bank and Government partners to further develop a competitive Public Private Partnership framework in Sri Lanka. This would include supporting the Government in 20 structuring specific PPP projects and bidding these on a transparent, competitive basis in line with international best practice. This would help free up public sector resources and ensure that Sri Lanka benefits from private sector efficiency and cutting-edge practices. Area 2: Supporting structural shifts in the economy 72. The second CPS area supports the Mahinda Chintana goal of shifting the economy to be more knowledge-based, globally integrated and competitive, internally integrated, increasingly urban and environmentally friendly. Area 2A: Supporting the shift to a knowledge-based economy 73. The World Bank will support the Government’s efforts to shift toward a knowledge- based economy.46 In addition to the ongoing lending activities on Higher Education for the Twenty First Century, the E-Sri Lanka project, and the Trust Fund for Information and Communications Technology Regulatory Capacity Building, two additional lending activities have been requested. The proposed skills development project aims to enhance the relevance of training programs for the needs of the labor market. AAA task on skills development and another specifically examining skills training for women are ongoing and will support preparation of this project. The proposed innovation and research project aims to encourage private sector innovation and technology adoption. AAA on middle income approaches to innovation and technology adoption will be conducted in advance of project design. IFC seeks to continue to provide support in this area through capacity building for financial institutions and skills training in partnership with companies to strengthen the performance of SMEs. IFC will continue to introduce innovative products to improve funding flows to Sri Lanka, such as a diversified- payments loan committed in FY12. These products can help lower the cost of financing for financial institutions and their customers, thus boosting competitiveness. Area 2B: Boosting international integration and competitiveness 74. The World Bank Group will support Sri Lanka’s international integration and competitiveness through AAA activities. These activities include an analysis of policy options for improving the trade balance and an analysis of Sri Lanka’s potential to become an international hub for naval, aviation and commercial services. IFC will seek opportunities to support South-South investments into and from Sri Lanka and help catalyze foreign investments. Area 2C: Supporting the internal integration of the economy 75. The World Bank Group will support the Government’s efforts to enhance Sri Lanka’s urban areas and support internal integration. A proposed project would provide a package of investments which would support economic connectivity and provide infrastructure services appropriate for rapidly growing secondary cities. Analytical work to better understand 46 Sustained long term growth will require increases in productivity as well as increased investment. Education is important not only for direct increases in productivity but also as a prerequisite for innovation and technology adoption. 21 economic drivers and connectivity with the national economy will be conducted to help inform project design. In addition, IFC is currently preparing an economic development project to be funded by the European Union, complementing the World Bank’s support for in-country integration. The project, also supporting Area 3, is designed to focus on four conflict affected districts of Mannar and Vavuniya in the north and Batticaloa and Ampara in the east, improving the business environment, local employment and micro and small enterprise development. 76. The Mahinda Chintana advocates for an environmentally friendly economy. The World Bank will continue to engage in this area, seeking opportunities to support the mutually reinforcing aspects of economic growth and environmental sustainability as well as ensuring compliance to environment-related safeguards. Although no new financial assistance has been requested, the World Bank would be prepared to provide financial support if needed in this sector. The ongoing AAA on Mainstreaming Disaster Risk Management looks to strengthen Sri Lanka’s early warning system and the capacity of Government to assess risks, integrate disaster risk reduction into the planning process and prepare post-disaster assessments. The World Bank will continue to strengthen the institutional framework for environmental and socially sound investments especially in the East, including training eco-tourism guides and matching grants for reduction in carbon emissions. Building on its sustainable energy risk sharing facilities and direct financing for wind power generation, IFC will support projects that address climate change issues, such as renewable energy, cleaner production and energy efficiency. Area 3: Improved living standards and social inclusion 77. The third CPS area is to support the Mahinda Chintana goal of improved living standards and social inclusion and equitable access. Area 3A: Increasing quality of services 78. The World Bank will support increasing the quality of services. A national health sector program, currently under preparation, will improve the quality of services provided throughout the country and modernize the Government managed health system. The loan will specifically address the health care quality improvements required to address non-communicable diseases and will support modernizing the health system. The loan will be complemented by already ongoing AAA on the role of the private sector in health care in Sri Lanka and the recently concluded AAA on chronic and non-communicable diseases. The program is expected to be presented to the Board in FY13 and have disbursements linked to key results. In addition, the Government has requested financial support for the transportation sector and for urban infrastructure (including water systems and solid waste management). Analytical work on options for internal transport is ongoing. Early childhood education will be assessed and reviewed through AAA in preparation for a lending operation. Ongoing activities include support to education and transportation and improved local service delivery in the conflict-affected North and East. 22 Area 3B: Reducing the prevalence of malnutrition 79. The World Bank will aim to support reducing the prevalence of malnutrition, a key human development area in which Sri Lanka lags behind its peers. In addition to the nutrition component of the health program, new multi-sector AAA work will be carried out and will build on existing analysis to identify policies for addressing malnutrition, including links to water supply and hygiene. Further engagement in the form of technical assistance or lending may be developed based on the analysis. In the meantime, the trust fund activity “Local Level Nutritional Intervention for the Northern Province� fosters changes to improve nutrition outcomes in resettled populations of the Northern Province.47 Area 3C: Expanding social inclusion and equitable access 80. Support for equitable access to public services and social inclusion includes activities specifically focused on conflict-affected areas as well as activities which address these issues at the national level. Activities focused on conflict-affected areas include; the Community Livelihoods in Conflict Affected Areas project, the Emergency Northern Recovery project, and the trust fund supported North and East Pilot Water, Sanitation and Hygiene project for post conflict resettlements. As the focus shifts from post-conflict reconstruction to an emphasis on equitable access and social inclusion across the entire country, new activities will seek to analyze and address inequities using a more systemic and sustainable approach. Activities which address equitable access and social inclusion at a national level include: (i) the Second Community Development project; (ii) a Poverty and Inequality Assessment; (iii) a trust fund on economic integration of vulnerable groups; (iv) a Poverty and Social Impact Analysis on the potential effects of various policy options on employment of women; (v) technical assistance to the Ministry of Labor on their gender strategy; (vi) technical assistance on the Government’s social protection strategy and Samurdhi program; (vii) vocational training for the disabled; (viii) pilot approaches to sustainable, affordable sanitation services to under-served low-income groups; and (ix) work with youth organizations to support their involvement in development issues. 81. IFC will seek to help improve living standards and social inclusion especially through support for access to finance, infrastructure, agribusiness and farmers (particularly in post-conflict northern and eastern regions), and micro, small and medium enterprises. Mindful of the post-conflict and transition state of the country, IFC has been increasingly supporting some of these areas in Sri Lanka in recent years and will build on those experiences to enhance the reach and impact for inclusive growth. For example, microfinance projects have been promoting women’s financial inclusion and an agri-business advisory project, supported by a multi-donor Global Index Insurance Facility, is building on pilots in other developing countries and helping create a weather-index based crop insurance to support farmers. The new economic development initiative mentioned in paragraph 76 is also expected to contribute to social inclusion. Geographically, IFC will seek to support regions outside of generally more affluent Western and Southern Provinces. 47 This activity is supported by the Japan Social Development Fund. 23 F.  Implementing the Country Partnership Strategy  i. Financing Parameters   82. Sri Lanka became an IDA-IBRD blend country as of FY12, eligible for IDA16 resources and IBRD lending. This marks Sri Lanka’s re-access to IBRD resources for the first time since blend status was lost in 1986. An indicative lending program for IDA and IBRD combined for the first two years of the CPS is US$500 million in FY13 and US$527 in FY14. Sri Lanka’s eligibility for IDA will likely end at the end of the IDA16 cycle. The Government is interested in IBRD lending of up to US$500 million annually during FY15 and FY16, which would, however, depend on the macroeconomic environment in Sri Lanka, overall demand for IBRD resources from other clients, IBRD financial capacity and global economic developments. It is foreseen that IBRD financing will be used primarily for investment projects supporting regional economic development, urban infrastructure, encouraging innovation and technology adoption, and improving the skills of the labor force. Lending plans will be reviewed at the time of the CPS Progress Report. 83. Assuming growth prospects remain strong and macroeconomic balances and overall creditworthiness continue to improve, it is expected that IDA resources will be phased out during the CPS period through a managed transition to IBRD-only status. The indicative country envelope for IDA16, covering FY12-14, is SDR 458.1 million (about US$ 688 million).48 This represents an increase of about 30 percent over its IDA 15 envelope, mainly due to increased IDA resources in the IDA 16 replenishment as well as improvements in Sri Lanka’s country performance.49 In FY12, the first year of IDA16 which preceded this CPS period, the IDA allocation amounted to SDR 162 million (about US$ 249.8 million).50 The same year saw the introduction of IBRD financing for the Metro Colombo Urban Development Project. Given that Sri Lanka has obtained access to IBRD resources, and its per capita income has exceeded the IDA income cutoff for more than three consecutive years,51 the country is expected to graduate from IDA through a managed transition as IBRD resources are phased in. During the transition to the IBRD-only status, IDA resources would continue to play on important role to support governance reforms and to address the critical needs in the social sectors. In addition, the World Bank could work with the authorities to explore the additional flexibility for more front/back- loading of IDA resources across the years in FY12-14 to help ensure a stable level of overall financing. Box 1, below, summarizes the ongoing and proposed IDA and IBRD portfolio. 48 IDA envelope beyond the first year of the IDA16 period is indicative and could change depending on: (i) total IDA resources available, (ii) the country’s performance rating, (iii) the number of IDA eligible countries, and (iv) the performance and assistance terms of other IDA-eligible countries. Also, IDA allocations are provided in SDRs, and the US dollar equivalent amount for IDA 16 is based on replenishment rate of 1SDR=US$1.50233, but the exchange rate for each IDA operation depends on the applicable prevailing rate at the time of approval. Furthermore, about 97 percent of the IDA resource is available as IDA credits on blend terms, while the remaining 3 percent is available on hard terms that can only be accessed by blend countries but has lower concessionality. 49 IDA resources are allocated through a performance based allocation system that provides higher allocations to countries with better performances in delivering results at the same income level, other things equal. 50 The actual commitment of IDA resources in FY12 was US$ 111, with the expectation that the unused FY12 allocation would be committed in FY13. 51 The GNI per capita of Sri Lanka has exceeded the IDA operational income cutoff since 2004 but the country did not become credit-worthy for IBRD lending until 2011. In FY12, the corresponding IDA cutoff is a 2010 GNI per capita of US$ 1,175 while the figure for Sri Lanka is US$ 2,290. 24 Box 1: Summary of Ongoing and Proposed IDA and IBRD Portfolio Ongoing Dam Safety and Water Resources Planning (FY08) Public Sector Capacity Building (FY08) Sustainable Tourism Development (FY10) Higher Education for the Twenty First Century (FY10) Provincial Roads (FY10) North East Local Services Improvement (FY10) Emergency Northern Recovery (FY10) Second Community Development and Livelihood Improvement (Gemi Diriya) (FY10) Small and Medium Enterprise Development Facility (FY11) Community Livelihoods in Conflict Affected Areas (Reawakening) (FY11) Road Sector Assistance (FY11) Transforming the School Education System as a Foundation of a Knowledge Hub (FY12) E-Sri Lanka (FY12) Metro Colombo Urban Development (FY12) Indicative FY13 and FY14 lending Second Health Sector Development (FY13, $200 million IDA) Regional Growth Pole/Economic Development (FY13, $50 million IDA and $250 million IBRD) Skills Development (FY14, $100 million IBRD) Urban Infrastructure/Transport (FY14, $227 million IDA, $100 million IBRD) Investment Policy Reform (FY14, $100 million IDA) Tentative FY15 and FY16 lending Private Innovation and Technology Adoption (FY15) Legal and Judicial Reform (FY15) Water and Sanitation (FY15) Solid Waste Management (FY16) Early Childhood Education (FY16) Note: FY13 and FY14 total IDA lending is expected to be $577 million. FY13 and FY14 total IBRD lending is expected to be $450 million.   ii. Instruments  84. In order to address the shift in focus toward support for the evolving middle income country agenda, the range of instruments will expand. As there is increasing demand from Government for information on how other countries have addressed the transition to middle income country status, the demand for AAA has increased. Also, with an increasing need for policy actions (in addition to investments in hardware), the demand for policy lending has increased as well. And, as institutional capacity to focus on results increases, the demand for results-linked disbursements has increased. It is therefore anticipated that a wider range of instruments will be used,52 including Development Policy Loans and Program-for-Results 52 A delegation from the Government of Sri Lanka visited the World Bank Group in Washington in July 2011 and met with the World Bank Treasury Department, the Multilateral Investment Guarantee Agency and representatives of other parts of the World Bank Group. In addition, staff of the Treasury Department of the World Bank conducted a workshop in Colombo to familiarize Government counterparts with IBRD. 25 financing, with the appropriate instrument for each specific project to be determined during project preparation. 85. The new CPS aims to better coordinate and integrate Trust Funds in the portfolio, in line with the World Bank’s policy to modernize Trust Funds through operational simplification and strategic alignment. This would include: (i) aligning Trust Fund management to the way the World Bank products are defined, managed and reported; (ii) using the same control and quality assurance framework for trust funds that are used for IBRD and IDA resources; (iii) using a strengthened approach to better define the results and risk management of Trust Funds. More specifically, going forward we aim to not only include Trust Funds in the CPS, but also to: (i) integrate Trust Funds into the results framework of the CPS by tracking results in the CPS from all funding sources; (ii) include Trust Funds in the portfolio reviews in order to examine alignment with the CPS; and (iii) track similar portfolio indicators for Trust Funds, such as riskiness, disbursements and performance. New Trust Fund tasks will be carefully selected to focus only on key strategic goals and not to overload the Government and the task teams. 86. IFC intends to continue to actively provide both investment and advisory services. Over the coming CPS period, IFC will design programmatic solutions instead of individual products and one-off projects. iii. Monitoring and Evaluation  87. Monitoring and evaluation will be especially important given the CPS’s flexibility and the shift in focus toward the middle income country agenda. Strategic reviews will be held annually to monitor CPS implementation and ensure continued alignment of the CPS with the evolving country needs. A CASPR will be prepared in FY14 at which time any necessary revisions including the results matrix will be discussed. 88. Pilot use of third party monitoring will be evaluated and scaled up if found useful. Currently, third party monitoring is being conducted for the Road Sector Assistance Project53 to involve users and stakeholders in the monitoring process and to strengthen the capacity of the Road Development Authority to make benefit monitoring an integral part of road sector. Over the coming CPS period, the World Bank hopes to expand the existing pilot to other projects. As part of the planned engagement with youth, it is hoped that the youth networks will take an active role in monitoring the impact of the CPS as a whole with particular emphasis on activities that are of direct relevance to youth. iv. Complementarities with Activities of Other Development Partners  89. The development partner landscape in Sri Lanka continues to evolve. While the World Bank has traditionally been one of the ‘big three’ development partners in Sri Lanka, together with Japan and the Asian Development Bank, China and India have emerged as the largest contributors, primarily through export credits. With Sri Lanka’s transition to MIC status, 53 The ongoing pilot is being conducted with support from the Demand for Good Governance window of the Social Development Civil Society Trust Fund. 26 the Government has broadened its options for foreign financing for public investment, through a blend of concessional and non-concessional external assistance. Capital market financing is also increasingly being tapped with issuance of long-term sovereign bonds. Sri Lanka continues to benefit from a number of grants from multilateral and bilateral development partners. Development partners’ respective areas of support are highlighted in Annex 11. 90. In line with the Paris Declaration on Aid Effectiveness, both development partners and the Government have strengthened efforts to coordinate and harmonize foreign assistance. Among the mechanisms in place in this regard are: (i) the Development Partners Forum; (ii) the Development Partners Committee supported by a Secretariat and sector-based working groups. 91. Development Partners Forum. The Development Partners Forum is a broad information-sharing and coordination mechanism, in which Development Partners share respective assistance strategies, programs and new initiatives. The World Bank is one of the six foreign aid missions that form the Development Partner Committee, mandated by the larger Development Partners Forum to manage the interaction with the Government on behalf of the development partners. The Development Partner Committee comprises of three multilateral - World Bank, UN Resident Coordinator, Asian Development Bank, and three bilateral missions selected on an annual basis by the Bilateral Donor Group.54 The Chair of the Development Partners Forum also chairs the Development Partners Committee. 92. During the CPS period the World Bank Group will continue to be an active member of the development partner community, coordinating with relevant working groups and reaching out to new development partners. IFC is a member of the Development Partner Forum Private Sector Development working group, chaired by USAID. IV. RISKS AND RISK MANAGEMENT  93. This CPS includes a careful assessment of key risks in the program, and steps to manage such risk. The World Bank Group program in Sri Lanka faces two types of risks in implementation of the Country Partnership Strategy. The first set of risks is related to the implementation environment and is reflective of Sri Lanka’s specific development challenges. The second set of risks is related to the design of the program itself. A. Risks Related to the Implementation Environment  94. External shocks could impact the macroeconomic framework. The main external risk is that key trading partners, lenders and financers would be unable to sustain expected levels of engagement. Sri Lanka is vulnerable to Euro area debt problems and weakening growth in several large emerging economies. Sri Lanka relies heavily on European demand for its merchandise exports as well as service exports.55 A deepening of the Euro Area crisis would 54 For 2012, the three bilateral Development Partners on the Committee are AusAID, Japan International Cooperation Agency and USAID. 55 Thirty five percent of goods exports go to Europe and 37 percent of tourist arrivals come from Europe. 27 lead to weaker exports and capital flows.56 Sri Lanka is also vulnerable to disruption in imports of petroleum products, most of which come from Iran. The risk of reduced demand for exports can be mitigated by increased focus of trade with growing economies of East and South Asia. 95. There are also macroeconomic risks originating from within Sri Lanka. Increased international competitiveness leading to a reduced trade deficit is essential for macroeconomic stability. Without an increase in exports, remittances or FDI, Sri Lanka will be unable to finance the investment and intermediate imports required for growth. To that end, an exchange rate that is both market-driven and reasonably stable will be essential. To the extent the exchange rate volatility witnessed in February and March 2012 (when the Central Bank curtailed its intervention) reflects a short-lived process of finding equilibrium following the Central Bank’s reduced intervention, it is a positive sign, though one that requires close monitoring. 96. Expenditure pressures may slow down the progress on reducing the fiscal deficit. Continued efforts will also be required to ensure progress in reducing the fiscal deficit and debt. Strong effort on tax administration can mitigate the risk of slower than anticipated progress on fiscal deficits. Analysis of State Owned Enterprises (including that being performed by the World Bank) will help identify the extent of risk associated with contingent liabilities. Although Sri Lanka’s cost of borrowing has declined thanks to improvements in the sovereign credit ratings, costs could increase if there are problems in the international financial markets or if Sri Lanka’s credit ratings are not maintained. Investment and productivity increases are essential for the achievement of sustained growth. Both rely heavily on further improvements in the investment climate and predictability of the policy environment. Lapses on either issue would result in lower than expected growth. Inflation is expected to remain low over the CPS period. This scenario is subject to risk, however, if the economy were to overheat. Finally, rapid credit growth achieved in the past year could be a foreshadowing of an increase in non-performing loans and potentially serious issues in the financial sector, ultimately raising the risks of high contingent fiscal liabilities. The Government is a significant stakeholder in a number of private commercial banks. There is a risk that the Government’s ownership and position on the Board of Directors may influence the decisions of the banks’ management for non-commercial purposes. 97. Macroeconomic risks will be monitored throughout the CPS period. The World Bank produces monthly and semi-annual macroeconomic monitoring notes, and has initiated an analysis of potential impacts of a Eurozone crisis. In addition, the CPS program includes a growth analysis report, a fiscal issues note, a Public Expenditure Review/ PEFA, analysis of the judicial system, as well as dialogue on public financial management and investment climate reforms. All of these activities will be shared with Government in an effort to agree on a set of measures to mitigate the associated macroeconomic risks. 56 Since mid-2009 significant investment flows from Europe has found its way into assets in the country particularly through successive GoSL Eurobond issues, investments into the Colombo Bourse and investments into GoSL treasury bills and treasury bonds. The recent Global Economic Prospects report estimates exposure to Sri Lankan assets by European banks at close to 10 percent of country’s GDP or US$ 5.5 billion. This presents a significant vulnerability in face of a sudden withdrawal of investments as the exposure amounts to near entirety of country’s gross official reserves as of end 2011. However, such risks are mitigated by the fact the much of these investments are medium to long term in nature. The spreads on Sri Lanka Eurobonds in secondary markets trading has been rising since end 2011. The current spreads of 461 basis points is the highest in 20 months. 28 98. Continued efforts will also be required to ensure social inclusiveness and political openness as well as economic integration of conflict affected areas and to make sure that the benefits of growth are widely and equitably shared. A process for implementation of recommendations of the Lessons Learned and Reconciliation Commission will be important. The World Bank Group is providing support including ongoing projects to help internally displaced persons resettle and reestablish livelihoods. Analytical work on inclusive growth, labor and poverty will also support dialogue and actions in these areas. 99. Sri Lanka is vulnerable to natural disasters and extreme weather events, including floods, droughts, and cyclones. In addition to the immediate impact of destroyed assets, natural disasters and extreme weather events can affect economic growth by diverting the development funds for emergency response, relief and recovery efforts and by affecting the income generating activities of the population. The CPS program includes a trust funded activity, “Strengthening the Disaster Management System and Mainstreaming Climate Change Mitigation in Urban Development�, which supports the Government of Sri Lanka’s efforts to address these risks. B. Risks Related to the Program 100. The World Bank’s portfolio faces risks related to governance, procurement and financial management. Recent assessments on these topics concluded that Sri Lanka has made efforts toward reforming and developing its systems, while suggesting areas for further modernization. Portfolio related governance risks will be addressed through project and sector specific mitigation measures, including through Governance, Accountability and Anti- Corruption Action Plans (GAAP). The proposed AAA to improve SOEs management and effectiveness, the DPL to improve the overall investment climate, as well as the proposed Judicial Reform Project to support legal and regulatory reforms will also contribute to enhancing the dialogue on governance related issues. Fiduciary risks will be mitigated by continued support to the Auditor General Department for enhancing the scope and coverage of public audits as well as to strengthen value added audit services, and support to the Institute of Chartered Accountants of Sri Lanka for enabling the adoption of IFRS to State Owned Enterprises and small and medium enterprises, as well as for improving the quality of audit practices. In addition, the World Bank expects to build on support provided during the FY09-12 CAS to the Parliamentary committees for budget oversight to strengthen their oversight functions. In addition, fiduciary assessments will be performed at a sector level in advance of any proposed Program-For-Results operation. 101. Program implementation also faces risks related to Government capacity to manage the increased volume of lending. Although Government agencies have skilled professional staff, the massive public investment program will put strains on staff. The risk that capacity within Government will be insufficient, given the increased level of engagement in addition to the Government’s existing investment program, is mitigated by the World Bank minimizing transaction costs by moving toward use of country systems for financial management, and proactively restructuring projects. A related risk is that Government priorities may change over the course of the CPS period. This risk will be minimized by taking a flexible approach, with the CPS used to set the broad direction for engagement in line with the Government’s own strategy 29 and to identify the program for the first two and a half years. The CPS Progress Report will provide opportunities to realign and modify the program accordingly. 102. In addition to the risks above, there are two sets of key risks faced by IFC. The first is a program risk due primarily to IFC’s catalytic role that appropriate partners may not be found for the planned initiatives. This risk should be mitigated by lessons learned from IFC’s past experience in Sri Lanka and its growing network of partners. The second is the risk from the expected increased weighting to the financial sector in IFC's investment portfolio, which will be above 50 percent for much of the CPS period. Sri Lanka has a relatively sound banking system overall, and the exposure is therefore not an immediate concern. However, IFC will actively seek to build a diversified portfolio, will diversify within the financial sector across different types of financial institutions, and, through advisory services, will strengthen its portfolio financial institutions, where necessary. 30 ANNEXES  Annex 1: Results Matrix  NOTE: Consistent with the flexible approach of the Country Partnership Strategy, outcomes and indicators will be further refined and clarified at the time of the Progress Report. CPS Outcomes & Results Milestones Country Development Goals (as Indicators Issues and (to be achieved by described in the Mahinda (to be achieved by June World Bank Group Program Obstacles June 2014, unless Chintana Vision for the Future) 2016, unless otherwise otherwise stated) stated) AREA OF ENGAGEMENT 1. PRIVATE AND PUBLIC INVESTMENT 1.1 Improving the investment Access to finance Improved investment Completion and Ongoing lending climate. (especially non-bank) is environment as measured dissemination of  Warehouse Receipts Project inadequate; contract by: “Making Private (Recipient-executed TF) Government Goals and Indicators: enforcement is very Investment Attractive�  Small and Medium Enterprise  Increasing Foreign Direct slow, procedures for Time taken to register a Development Facility project study. Investment. registering property and property.  IFC investment and advisory obtaining construction Baseline: 83 days ROSC A&A Update services for NTB and NDB  Improving the investment permits are Target: 50 days Baseline: not performed commercial banks to support climate as measured in Doing cumbersome. Target: performed. SMEs/ Business  IFC investment in LR Global Microfinance Time taken to obtain a Twinning arrangements Private Equity Fund (which institutions have construction permit. established with relevant provides financing for SMEs) difficulty attracting Baseline: 217 days agencies in Malaysia and deposits (to be used for Target: 180 days Thailand construction Planned lending lending to permits process.  Investment Policy Reform microenterprises) due Time taken to enforce a Baseline: 0 Operation to lack of clear contract. Target: 2  Legal and Judicial Reform regulation. Baseline: 1318 days (in 2012)  IFC’s possible investments in Target:300 days (in 2014) the financial sector, tourism agribusiness and infrastructure Improved access to finance  IFC’s capacity building as measured by: support for two commercial banks for SME finance. Volume of lending to SMEs Increased number of  IFC’s advisory support for by the SMEDef Project staff trained in SME 31 CPS Outcomes & Results Milestones Country Development Goals (as Indicators Issues and described in the Mahinda (to be achieved by World Bank Group Program Obstacles (to be achieved by June Chintana Vision for the Future) June 2014, unless 2016, unless otherwise otherwise stated) stated) through the 8 participating lending in licensed Secured Transaction Registry banks. commercial/specialized and Payment System Baseline: 0 banks. Target:$28 million Baseline: 0 Target: 400 (through the Ongoing and Planned AAA/TF SMEDeF project).  Making private investment attractive (ongoing) Number of farmers accessing Warehouses offering  South-South Knowledge credit from the Warehouse receipts established and Exchange: Middle income Receipts Financing system. operational. country experiences with Baseline: 0. Baseline: 0 investment climate reforms Target: 20,000. Target:3 (initial focus on construction permits)  Improving the non-bank financial sector (e.g. capital markets)  ICT Regulatory Capacity Building (ongoing, TF)  Stregthening the Institute of Chartered Accountants of Sri Lanka (IDF TF) 1.2 Increasing fiscal space and There is immense scope Enhanced accountability Auditor General’s Ongoing lending increased efficiency of public for efficiency gains in and transparency in the use Department strengthened  Public Sector Capacity spending. public expenditure of public funds as measured as measured by: Building Project management by by: Government Goals and Indicators: reducing waste and Technical staff trained Planned lending Financial audits by Auditor and using recommended  Reducing the fiscal deficit to 5% improving  Investment Policy Reform of GDP by 2013 and performance. General Department in practices Operation maintaining it at that level compliance with International Public audit bill is Standard Supreme Audit Baseline – 40% staff thereafter. Ongoing and Planned AAA/TF  Reducing current expenditure as outdated. Government Institute framework trained  Resource allocation and a share of GDP. has stated its intention revenue generation for growth 32 CPS Outcomes & Results Milestones Country Development Goals (as Indicators Issues and described in the Mahinda (to be achieved by World Bank Group Program Obstacles (to be achieved by June Chintana Vision for the Future) June 2014, unless 2016, unless otherwise otherwise stated) stated)  Increasing revenue as a share of to have get a new audit Baseline: 0 (2012) Target – 100% staff (PER/PEFA) GDP. bill passed through  Alternative financing for  Improved flow of budget Parliament. Target: Auditor General public goods information including reliable Department states in the Restricted fiscal space  Issues note on SOEs (ongoing) and timely information on AGD’s annual report that all budgets and outcomes. limits public audits (approx 1000 audits) are  Issues note on fiscal policy investment and broad in compliance with the ISSAI. Resource allocation and (ongoing) revenue efforts are revenue generation for  Strengthening the needed to increase Parliamentary budget revenues. growth (PER/PEFA) Increased value added services studies completed and oversight committees (planned provided by the Auditor disseminated. TF) General’s Department  Financial Management reports Timely legislative on health and education Performance audits reported to scrutiny of audit reports sectors. (ongoing) Parliament Baseline: Committee on Baseline: 0 Public Enterprises Target: At least 10 per year (COPE) made its first report to Parliament after 18 months; Committee on Public Accounts (COPA) did not report to Parliament in its first 20 months Target: Reports COPE and COPA report to Parliament at least annually 33 CPS Outcomes & Results Milestones Country Development Goals (as Indicators Issues and described in the Mahinda (to be achieved by World Bank Group Program Obstacles (to be achieved by June Chintana Vision for the Future) June 2014, unless 2016, unless otherwise otherwise stated) stated) AREA OF ENGAGEMENT 2. STRUCTURAL SHIFTS IN THE ECONOMY 2.1 Shifting the structure of the Skills and education Progress made in aligning Level indicators and Ongoing lending economy to be more knowledge- system not well aligned skills with job market award types defined for  Higher Education for the based. with the needs of the demand as measured by: the higher education Twenty First Century Project labor market leading to Enrollment in job-oriented sector.  E- Sri Lanka Project  Knowledge based economy a mismatch between the Advanced Technological Skills development  IFC investment and linkages skills of the labor force Institutes. advisory for Dialog defined as one that applies and those required for a strategy articulated and Baseline: 8,500 (end of 2011) telecommunications company global knowledge to all agreed upon by relevant knowledge-based Target: 12,500 (by 2015).  IFC investment in Suntel economic activities as opposed economy. agencies to select areas. Planned lending IT/ITES industry generates Analytical tasks (listed at  Skills development project US$1 billion per year by 2016. right) completed and  Current ICT work force  Innovation and technology Baseline: US$310 million in disseminated. adaption project expected to increase to 186,000 in 2016 from 50,000 in 2010. 2011. Beneficiaries of public Computer literacy. Ongoing and Planned AAA/TF telecenters. Baseline: 35% of population  Middle income country  Increased computer literacy Baseline: 35,000 (2012) approaches to encouraging Target: 70% of population by Target: 40,000 private sector innovation and 2016.  Introduction of new demand technology adoption driven skills development Quality of higher education  Skills development strategy programmes that enhance programs enhanced as for Sri Lanka employability. Higher education and measured by: training programs need to be incorporated Higher education programs within a National that are classified and operate Qualification within a National Framework which Qualification Framework. enables horizontal and Baseline: framework being 34 CPS Outcomes & Results Milestones Country Development Goals (as Indicators Issues and described in the Mahinda (to be achieved by World Bank Group Program Obstacles (to be achieved by June Chintana Vision for the Future) June 2014, unless 2016, unless otherwise otherwise stated) stated) vertical mobility prepared. between the education Target: 15 universities and and training systems Advanced Technological and provides Institutions operate within the information to employers on learning National Qualification and skills outcomes. Framework Computer literacy low. Lack of local language content in the internet is a constraint for the majority of citizens. Low level of innovation in both private and public sectors. National expenditure on research and development is very low. 2.2 Supporting international Exports not keeping Enhanced efficiency of the Number of matching Ongoing lending integration and competitiveness. pace with imports tourism sector as measured grants for upgrading  Sustainable Tourism by: hotels (e.g. green Development project Government Goals and Indicators: In the tourism industry, Number of professionally certification and  IFC asset-backed loan to CBC  Exports to grow at twice the rate lack of professionally trained hotel staff homestays) provided by  IFC's GTFP support to Union of real GDP. trained staff is a Bank Target: 500 trained (through World Bank.  High spending tourism to grow constraint to the  IFC investment in Fitch Sri tourism industry, World Bank project). Baseline: 0 Lanka in order to generate fourfold expansion in tourist earnings. especially outside of Target: 200 grants Colombo.  An efficient system to actively Community participation in provided. Planned lending harness innovations and tourism in tourism projects  IFC’s possible innovative 35 CPS Outcomes & Results Milestones Country Development Goals (as Indicators Issues and described in the Mahinda (to be achieved by World Bank Group Program Obstacles (to be achieved by June Chintana Vision for the Future) June 2014, unless 2016, unless otherwise otherwise stated) stated) technologies that increase high- and development zones. investment in the financial tech value added exports and Target: 4 consultative sector. production for domestic workshops held  IFC’s possible South-South markets. investments to/from Sri Lanka Ongoing and Planned AAA/TF  Policy options for improving the trade balance (ongoing)  Improving the feasibility the naval, aviation and commercial hubs 2.3 Supporting internal integration Economic linkages Increased internal Ongoing lending and increasing urbanization. between rural and integration as measured by:  Provincial Roads Project urban areas and among  Metro Colombo Urban Government Goals and Indicators: Provinces need to be Travel time on UV1. Development Project  The share of rural employment built. Baseline: 100 minutes (2009)  IFC investment and advisory to decline from about two-thirds Target: 80 minutes (2013) service for NTB and CBC, to to half. As a result of the 26- develop sustainable energy  The share of urban population to year conflict, transport finance capacity increase from a quarter to a networks for people,  IFC investment for Senok third. goods and services wind power generation have eroded.  Sri Lanka is to have well- planned, economically Planned lending Networked services are Environmentally sustainable  Regional productive, environmentally Delivery of an Integrated needed for the urban areas as measured Growthpole/Economic sustainable, culturally vibrant, Flood Management urbanizing population. by: Development Project safe, and well-linked network of Flooding, traffic System.  IFC advisory program for local cities and towns congestion and Reduction in the area under Baseline: no system is in economic development in environmental risk of flooding (50 year return place. post-conflict districts of degradation are period) in the Metro Colombo Mannar, Vavuniya in the 36 CPS Outcomes & Results Milestones Country Development Goals (as Indicators Issues and described in the Mahinda (to be achieved by World Bank Group Program Obstacles (to be achieved by June Chintana Vision for the Future) June 2014, unless 2016, unless otherwise otherwise stated) stated) resulting. The impact project area. Baseline: North and Batticaloa and is reduction in the 5.5km2 Target: functioning Ampara in the East. quality of life and Target: 3km2. system at Sri Lanka Land environmental Reclamation and Ongoing and Planned AAA/TF sustainability. Natural Development  Competitiveness and disasters and climate Corporation Development Models for change exacerbate Districts, Secondary and these impacts. Emerging Cities Staff of relevant  Options for internal transport government agencies (ongoing) trained to carry out  Strengthening Disaster Risk disaster risk assessments Management system and mainstream disaster risk and post-disaster needs reduction and climate change assessments. and adaption into urban Baseline: 0 development(ongoing, TF) Target: 35. AREA OF ENGAGEMENT 3. LIVING STANDARDS AND SOCIAL INCLUSION. 3.1 Increasing quality of services. As a middle income Improved student learning Ongoing lending country, new and outcomes based on quality  Transforming the School  Introduced measures to increase higher quality types of education services as Education System Project quality and motivation of services need to be measured by:  Road Sector Assistance developed. Project existing service providers. A system of national Cognitive tests and  North East Local Services The quality of water assessments of learning Improvement Project  Ensure service providers are determinants of supply is declining due outcomes for program outcomes for English,  Dam Safety and Water client oriented such as ensuring to the increasing and development in primary and Resources Planning competing demands on secondary education (Core Sinhalese, and Tamil and public health services are patient  IFC advisory services for water resources. Sector Indicator). mathematics for primary 37 CPS Outcomes & Results Milestones Country Development Goals (as Indicators Issues and described in the Mahinda (to be achieved by World Bank Group Program Obstacles (to be achieved by June Chintana Vision for the Future) June 2014, unless 2016, unless otherwise otherwise stated) stated) oriented and in line with education (grade 4) Global Insurance Index Fund changing economic and Baseline: Sequence of national developed. Cognitive Sanasa Insurance demographic needs. Provincial and Local assessments of learning tests and determinants of  IFC advisory service for Authorities lack outcomes in primary and performance-based grant outcomes for English, adequate capacity and secondary education planned initiative Sanasa Development resources to deliver (2011). mathematics and science Bank services and local Target: Two national for secondary education  IFC advisory performance- infrastructure. assessments of learning (grade 8) developed. based grant initiative Lanka outcomes in English, Orix Micro Finance Company Sinhalese and Tamil, and School management  IFC investment in Asiri mathematics for primary teams and school Hospital education (grade 4) completed development committees by 2013. Two national Planned Lending: trained for the assessments of learning  Second Health Sector outcomes in English, implementation of the Development Project mathematics and science for Program for School  Infrastructure/Transport secondary education (grade 8) Improvement. Project completed by 2014. Baseline: 0  Water Supply and Sanitation Targets: 40 % of the 93 Project Program for School MOE zones  Waste Management Project Improvement Completed.  Primary Education For The Sri Baseline survey on Lanka Education Sector Baseline: Program for School Development Framework Improvement (covering health care quality in Program (recipient-executed planning, implementation and public and private sector TF) management) developed. facilities conducted in 2012. Endline survey on Ongoing and Planned AAA/TF Target: Program for School quality of health care  Private health sector review Improvement completed in at conducted in 2016. (ongoing) least 70 percent of education zones.  Options for Modern Health Care Management (planned) Number of districts with  Health results innovation trust 38 CPS Outcomes & Results Milestones Country Development Goals (as Indicators Issues and described in the Mahinda (to be achieved by World Bank Group Program Obstacles (to be achieved by June Chintana Vision for the Future) June 2014, unless 2016, unless otherwise otherwise stated) stated) Health services improved as a functioning NCD fund TA for piloting Results- measured by: Rehabilitation Center based financing (ongoing)  Adolescent Reproductive Number of men and women Baseline: 3 out of 26 Health Assessment (ongoing) screened for diabetes and districts  Assessment of Water Supply hypertension. and Sanitation at provincial Baseline: to be measured in level (ongoing TF) Target:13 out of 26 2012. Target: increase of 25% districts (50% of districts) Percentage of health facilities with a functioning 24-hour Emergency Treatment Unit. Private health sector Baseline: 22 % of health review prepared and facilities (2011) disseminated. (Includes Target:75% of health facilities baseline survey on health care quality in the public and private sectors.) Improved local service delivery as measured by: Local Authorities in the North Local Authorities in the and East deliver services and North and East provide local infrastructure in a information needed for responsive and accountable accountability as manner. measured by the number Baseline: Estimated citizen 39 CPS Outcomes & Results Milestones Country Development Goals (as Indicators Issues and described in the Mahinda (to be achieved by World Bank Group Program Obstacles (to be achieved by June Chintana Vision for the Future) June 2014, unless 2016, unless otherwise otherwise stated) stated) satisfaction near 20% in 2011. of Local Authorities (Survey results should be submitting annual audits. available soon.) Baseline: 30 (2011) Target: 80% % citizen Target: 60 (2014) satisfaction by 2015. Improved quality and sustainability of infrastructure as measured Increased attention to by: maintenance as measured Road network in poor or bad by: condition. Routine and periodic Baseline: 38% in 2011 maintenance funding Target: 35% in 2014 allocated annually. Baseline: 8.3 LKR billion (2011) Target: 6.6 LKR billion Improved safety of dams as (2014) measured by: Number of large dams with unacceptable risk index. Long term sustainable Baseline: 14 (2011) National Plan for Target: 0 (2013) operation and maintenance of large dams is in place. Baseline: No arrangements for operation and 40 CPS Outcomes & Results Milestones Country Development Goals (as Indicators Issues and described in the Mahinda (to be achieved by World Bank Group Program Obstacles (to be achieved by June Chintana Vision for the Future) June 2014, unless 2016, unless otherwise otherwise stated) stated) maintenance currently exists. Target: Plan in place. 3.2 Reducing prevalence of Malnutrition found Reduced prevalence of Districts implementing Ongoing and Planned AAA/TF malnutrition across all segments of malnutrition as measured multi-sector nutrition  Local Level Nutrition the population and by: intervention. Interventions for the Northern  Eradication of hunger and remains much higher in Province (ongoing, TF) Baseline: 0 hard-core poverty Sri Lanka than in other Under-five underweight rate  Malnutrition: Causes and countries of similar among population in identified Target: 6 Policy Responses  Reducing malnutrition rate of income level. areas. children from a third to 12-15 Baseline: Areas to be Multi-sector plan to percent. Malnutrition has identified and baseline rate address under-nutrition  Increasing access to clean multiple causes measured during project with focus the period water in urban areas from 65 to including beliefs about preparation. conception to 24 months proper diet, hygiene Target: Rate reduced by 5 90 percent. developed by MOH habits and access to percentage points.  Strengthening nutritional clean water as well as (2013) surveillance of pregnant affordability of food. mothers , infants and preschool children (less than 5 years of age) 3.3 Increasing social inclusion and Communities affected Enhanced inclusion and Ongoing lending equity of access by the war have lower improved access to services  Community Livelihoods in human and physical among disadvantaged Conflict Affected Areas  Ensuring accessibility capital than groups as measured by: Project (Reawakening) especially for vulnerable communities in other  Emergency Northern Recovery parts of the country. Conflict and flood affected Project groups with equitable access households restore their  Second Community for social services and safety Displaced communities livelihoods (including Development and Livelihood nets in place. need assistance agricultural production) and Improvement Project (Gemi resettling in their own build capacity for sustainable Diriya) 41 CPS Outcomes & Results Milestones Country Development Goals (as Indicators Issues and described in the Mahinda (to be achieved by World Bank Group Program Obstacles (to be achieved by June Chintana Vision for the Future) June 2014, unless 2016, unless otherwise otherwise stated) stated) land. social and economic  Household access to domestic reintegration as measured by: sanitation in Greater Colombo Management of safety Beneficiaries of Community (GPOBA TF) net has insufficient Livelihoods in Conflict capacity and Affected Areas Project whose Planned lending information to incomes increase by at least  IFC’s possible investments in effectively target the 30% between 2008 and end of access to finance, SMEs, agri- poor and disabled. 2012. sector, and infrastructure Baseline: 148,000 (2011) Target: 213,000 households Ongoing and Planned AAA/TF (2013)  Youth integration (TF)  Improving monitoring and evaluation of Samurdhi safety Displaced families returned to net program (ongoing, TF) their communities and  Vocational Training and recommenced their livelihood Financial Support for Disabled through the Emergency Persons - Dirisawiya (planned Northern Recovery Project. TF) Baseline: 0  North and East Pilot WASH Target: 140,000 families. for Post Conflict Resettlements (ongoing, TF)  Employment program for youth (TF) The National Water Supply  Improving Gender Equity in and Drainage Board uses the Sri Lankan Labor Markets GPOBA approach to urban The National Water (TF) sanitation. Supply and Drainage  Assessment of Water Supply Baseline: 0 cities using Board adopts the and Sanitation at provincial approach GPOBA approach to level (ongoing TF) Target: 2 cities using approach deliver affordable urban  Poverty Assessment sanitation service. 42 CPS Outcomes & Results Milestones Country Development Goals (as Indicators Issues and described in the Mahinda (to be achieved by World Bank Group Program Obstacles (to be achieved by June Chintana Vision for the Future) June 2014, unless 2016, unless otherwise otherwise stated) stated) Improved coverage of safety Improved accountability net system as measured by: of safety net program as measured by: Disabled persons receive safety net allowance through the project. Samurdhi (safety net) Baseline: 0 Management Target: 2,500 Information System. Baseline: Samurdhi program currently using manual MIS. Target: Electronic system is in place, linked to central administration. Review of disability assistance program. Baseline: review not completed. Target: review completed. Note: Baseline data is the most recent year. 43 Annex 2: CAS Completion Report     CAS COMPLETION REPORT Country: Sri Lanka CAS Coverage: FY2009-2012 Date of Progress Report: June 10, 2011 I. Executive Summary 1. The World Bank Group’s FY09-12 Country Assistance Strategy (CAS) for Sri Lanka was discussed by the Board of Executive Directors on June 5, 2008. The CAS, prepared against the backdrop of a protracted civil conflict, centered attention on the conflict-afflicted areas of the Northeast and the poor areas of the South. When the conflict ended in May 2009, the World Bank Group strengthened this strategic focus, adding priority support for the resettlement of internal refuges, the reconstruction of infrastructure and the improvement of livelihood opportunities in afflicted areas. During this CAS period Sri Lanka transitioned from a Low to a Middle-Income Country (MIC) and was declared creditworthy for IBRD financing in December 2010. A CAS Progress Report in June 2011 adjusted the program to take account of implementation and the country’s emerging priorities. It also drew the implications of these developments for Sri Lanka’s CAS program moving forward. 2. This Completion Report finds that WBG made a positive contribution to the delivery of development outcomes in the lagging regions of the country including former conflict areas by improving access services, advancing reconstruction of housing and productive infrastructure, and involving the communities in these processes. The World Bank helped with the monitoring of the resettlement of displaced persons program and informing the international community of the progress made. The contribution in health and education was likewise significant nationwide, as has been the work on mainstreaming ICT practices in government and the private sector and improving the road network. The IFC’s alignment of its advisory and investment activities and the coordination with the World Bank helped deliver in areas such as renewable energy and ICT. In some areas, such as improving public expenditure practices, supporting SOE reform and developing formal PPP frameworks, CAS delivery fell below expectations. 3. This joint World Bank-IFC report is based on an extensive review of the World Bank project documents, analytical work and evaluations of specific programs undertaken by IBRD, IFC, Government, and other external partners during the CAS period. It is also informed by interviews with several Government officials (from ministries and other public sector institutions), relevant civil society representatives, external partners and World Bank staff. 44 II. Progress towards Long-Term Development Goals 4. The country made good progress towards the development objectives set under the Government Strategy Mahinda Chintana’s vision for Sri Lanka (2007). The achievements include resumption of rapid economic growth, reduction in poverty levels, infrastructure upgrading, and continued gains in health and education. Since the end of the conflict the Government has carried out a rapid resettlement of displaced persons and taken actions to improve economic opportunities in the afflicted zones. The end of the conflict and the rapid pace of recent economic growth open the opportunity for institutional reforms in line with the ambitions of the government to transform Sri Lanka into a full-fledged middle income economy. 5. Brisk economic growth has taken the country to middle-income status. The 2008/2009 global crisis slowed but did not stop the path of rapid economic growth. A drop in external revenues induced an economic contraction during the last quarter of 2008 and the first quarter of 2009. Skilled macroeconomic management supported by an IMF program (20-month Stand-By Arrangement amounting to US$2.6 billion57) and the end of conflict contributed to a rapid recovery and the economy grew at 3.5 percent in 2009. The rate of economic growth increased to 8 percent in 2010 and the estimate for 2011 is 8 percent as well. The income per-capita of the country is over US$2,400. 6. The quality of the macroeconomic environment has improved. Economic growth and a process of fiscal consolidation that includes revenue and expenditure measures have reduced the ratio of the fiscal deficit and of the public debt to GDP. A 2009 IMF –World Bank Debt sustainability analysis found the risk of debt distress to be moderate. But, there are concerns about over-heating from demand pressures and the rapid expansion of credit to the private sector that may be pressuring the stability of the financial sector. 7. The end of the conflict and an ambitious public investment program are contributing to an improved attractiveness of the business environment, but full impact has yet to be achieved. Sri Lanka’s ranking according to the Global Competitive Index58 improved rapidly going from a position of 77 in 2008-2009 to 52 in 2011-2012. Rankings improved across the board, with significant gains made regarding infrastructure, macroeconomics, basic health and education, and security.59 The improvements in infrastructure have been the result of the Government’s emphasis on reconstruction; public investment has increased from around 4 percent in 2006 to reach 7 percent of GDP in 2011. Private investment a percentage of GDP, however, does not show an increasing trend and FDI remained low during the period. In the meantime, remittances have grown in importance and now represent half of the value of exports. The increase in remittances has coincided with a drop in the share of exports in GDP that has fallen from 30 percent in 2006 to 22 percent in 2011, reflecting a slowdown in the economies of several important trade partners in Europe and North America during and following the crisis, a loss of competitiveness due to an appreciating real effective exchange rate, and a negative shift in Sri Lanka’s terms of trade. 57 November, 2009. 58 The GCI, produced annually by the World Economic Forum, ranks countries along a wide range of factors that affect competitiveness. 59 According to Doing Business (DB) indicators, progress in improving the regulatory framework for business has been more limited. However, the DB indicators consider a narrower set of variables. According to the Logistics Performance Index, produced by the World Bank, the progress between 2007 and 2010 has been uneven. Updated analytical work on competiveness and growth is needed to provide a consolidated view.   45 8. A process of internal reconciliation is underway. The resettlement of displaced persons is almost completed and reconstruction in the conflict-affected areas is underway. Economic activity is recovering, especially the Eastern province where the process of reconstruction has been going for a longer period of time. A Lessons Learnt and Reconciliation Commission commenced its work in August 2010 and has issued final recommendations on the reduction of high security zones, release of ex-combatants, resolution of land disputes and disarming of paramilitary groups. Still, the relationship with some members of the international community remains tense, particularly as it refers to the accountability for actions during the war. 9. Sri Lanka is likely to reach all of the MDGs, except for the environment. Sri Lanka has continued delivering outstanding basic social outcomes far above those of countries with similar levels of income. Poverty incidence continues to decline. Excluding the conflict-affected North and East, the poverty headcount ratio fell from about 15.2 percent in 2006/2007 to about 8.9 percent in 2009/10. This rapid decline reflects broad reductions across much of the country including in urban, rural and plantation areas. In education, major progress was made in increasing access, enhancing quality and improving governance of basic and secondary education as well as setting the basis for an overhaul of higher and vocational education. The primary completion rate is over 97 percent, and the survival rate to the end of basic education (age 14) is over 91 percent. Sri Lanka has made considerable progress in putting in place a National Policy Framework for University, Technical and Vocational Education. Implementation of this framework is commencing. Less attention has been placed on pre-school education, where access remains low. Life expectancy is comparable to that of upper middle-income countries, with the emerging challenge centered on addressing communicable deceases. HIV/AIDS incidence is very low. Relatively high levels of child malnutrition in rural and urban areas reportedly are mostly related to cultural practices and not responsive to increases in incomes. 10. Progress has been slower regarding implementation of the environment agenda. Sri Lanka was the first country in Asia to prepare in 1992 a National Environmental Action Plan (NEAP), which has been updated periodically with the latest update, “Caring for the Environment: A Path to Sustainable Development 2008-2012� prepared in 2008. In addition, “Haritha (Green) Lanka� program has been published by the Ministry of Environment in 2010, as an output of the National Council for Sustainable Development.� The Mahinda Chintana identifies precise targets in all environment fronts. Still, on results the country appears to lag behind many of its peers. The overall approach to environmental management has been a combination of environmental policies and strategies, such as regulation and the establishment of a dialogue with the private sector in order to strike the right balance between economic development and environmental protection. However, actual steps taken to resolve environmental and natural resource issues have been weak. Therefore, on most measures of environmental stewardship Sri Lanka’s performance remains disappointing. The only MDG the country is unlikely to achieve is MDG 7 on ensuring environmental sustainability by 2015. III. Design and Relevance 11. The four pillars of the World Bank Group’s FY09-12 Country Assistance Strategy (CAS) for Sri Lanka were aligned with selected aspects of the government strategy Mahinda Chintana’s vision for Sri Lanka (2007). They were also relevant to the challenges that the country faced. The emphasis of the first pillar was on bringing services and opportunities to the lagging regions of the country and rehabilitating the areas affected by the conflict. The second pillar focused on improving the foundations for sustained economic growth. The third pillar maintained the World Bank’s involvement in health and education, areas with a strong track record of cooperation. The 46 fourth pillar sought to support the strong emphasis on the environment found in the government strategy. 12. The CAS, in addition, stressed two crosscutting themes. First, a key-driving theme of the CAS was addressing the challenges of the conflict-affected areas and more generally the challenge of generating opportunities in the lagging regions of the country. With the end of the conflict the government further prioritized this objective and the WBG increased its support for it. The attention to the lagging areas was mainstreamed into several operations that included housing reconstruction, rural development, irrigation repair, micro-finance, community development, rebuilding of infrastructure and service delivery. Second, the CAS design emphasized Transparency and Accountability as a thematic issue and focused its program on (i) supporting core governance institutions; (ii) strengthening sectoral governance in sectors where the World Bank is engaged; and (iii) fostering increased demand for good governance. In the difficult implementation environment of conflict, the CAS introduced a conflict filter to guide both the selection of activities to engage as well as to guide implementation. 13. During implementation and towards the end of the CAS, as reflected in the CAS Progress Report, the WBG began to broaden the scope of engagement to cover priority areas of the evolving government strategy, with attention to urban development, a holistic view of infrastructure, social security and growth. IV. Results delivered with the support of the CAS program 14. This section reviews the contribution of the CAS program to the delivery of results following on the commitments made under the original CAS and the revisions introduced by the CAS Progress Report. This review examines, in addition, the rationale behind revisions introduced in the Progress Report introduced. Strategic Objective 1: Expanding Economic opportunities in Lagging Regions. Inclusive and Equitable Economic Development. 15. Support for expanding economic opportunities in lagging regions centered on (a) promoting rural development and (b) improving access to infrastructure and services in the conflict areas. The relevance of these objectives was grounded on (i) the wide income discrepancies between the Western region, where the capital Colombo is located, and the rest of the country and (ii) the fact that 90 percent of the poor live in rural areas. The World Bank examined the challenges the country faced to redress these discrepancies in the widely disseminated Growth Potential in Lagging Regions (Connecting People to Prosperity Study) (FY08). A strong delivery of results was aided by several projects under implementation at the beginning of the CAS and the approval of new operations that included support for the resettlement of refuges as the conflict ended, support for infrastructure reconstruction, and rapid response to emergency situations such as the flooding of late 2010. A nationwide decline in poverty incidence suggests that the welfare of the lagging areas is increasing and that regional disparities have not widened. 60 60 Urban poverty incidence dropped from 6.7percent in 2006/2007 to 5.3 percent in 2009/2010. Rural poverty incidence dropped from 15.5percent in 2006/2007 to 9.4percent in 2009/2010. The drop in poverty incidence in the areas under tea estates was significant going from 32percent to 11.4percent during the same period. 47 Outcome 1.1: Supporting Integrated Rural Development 16. Implementation of the WBG delivered significant positive outcomes regarding electrification, roads, and irrigation in the poor regions of the South and the conflict- affected areas of the Northeast. The Agricultural Commercialization (FY2009) Report studied value chains for key products and presented recommendations for raising their productivity; these recommendations remain valid and could be the basis for future engagement on rural development by the World Bank or other donors. However, the foreseen Agricultural Research and Productivity Improvement Project was not delivered, possibly because the limited success of a previous engagement. 61 The original CAS included, under this strategic objective, results on improving the level of nutrition in children, which the Progress Report eliminated because of delays in launching the supporting instrument. Only in January 2011, a Trust Fund was approved to focus on nutrition interventions in the Northern Region, with results due in the next strategy. 62 17. The WBG contributed both to a greater availability of electricity in rural areas and to an increase in energy supply from renewable sources. The IFC and the World Bank contributed towards increasing the supply of renewable energy. The World Bank has done so through the Renewable Energy for Rural Economic Development Project and the IFC through a special program called PADGO or Portfolio Approach to Distributed Generation Opportunity. With the support of the World Bank project 139,241 new rural households have access to electricity as of November15, 2011. In addition, the amount of renewable energy supplied to the national grid from small and medium generation plants has expanded to reach 174.2 MW 63. The IFC- supported, innovative risk sharing facility with two commercial banks, in combination with advisory services, is supporting small hydro and wind power projects with total installed generation capacity of 65.4MW thus far, enabling 72,000 MT GHG emissions yearly. IFC has also provided direct financing for wind power generation. The World Bank and IFC support for Sri Lanka’s renewable energy sector is having a transformational impact through increased private sector participation in generation. 18. Availability of drinking water in rural areas has expanded. The share of rural households with access to an improved water source reached at 74 percent in 2011 up from 71 percent in 2008. 64The World Bank contributed partially to this increased availability of improved water through the Second Community Water Project that has recently been completed and that provided around 384,100 people in rural areas with access to improved water sources and about 92,000 new piped household water connections as of the end of 2010. The satisfaction of the beneficiaries of this project was 88percent as per surveys under project. The project ICR rated the achievement of development outcomes as moderately satisfactory, and noted that both the initial and revised designs had set unrealizable goals regarding the number of people that could be covered with the resources available under the project. 61 The achievement of development outcomes under for the Sri Lanka Land Titling and Related Services Project was rated as moderately unsatisfactory. See corresponding ICR March 2007. A key recurrent concern remains the role that land titling is to play in a rural development strategy. 62 Nutrition is discussed further ahead under the Health section outcome 3.2 and paragraph 43. 63 November 15,2011 64 There remains a wide discrepancy between rural and urban areas in the availability of pipe borne water supply; approximately 75percent of the urban population having access while only 14percent of the rural population does. In sanitation, it is estimated that 85.7percent of the population has access to adequate sanitation, with no major urban rural disparities. 48 19. Efforts are on going to improve the irrigation system and reduce the risk from dam failure, but implementation is behind schedule. Sri Lanka possesses an extended irrigation system, part of which is one of the oldest in the world and is in dire need of repair in order to raise agricultural productivity and reduce risks from inundations. The Dam Safety and Water Resources Planning Project (FY08) focuses on establishing long-term sustainable arrangements for operation and maintenance of large dams and on improving water resources planning. Initial implementation was slow to pick-up and heavy rains during 2010 further delayed progress. The CAS Progress Report consequently downgraded initial expectations about progress; today, implementation is picking up and already two out of 32 larger dams are considered not to pose a major risk for the population Irrigation repair components included under various World Bank projects are beginning to deliver results, as reported in paragraph 23. Several projects planned in the water sector could not be delivered: Irrigation Maintenance and Water Resource Management Project; Community Water and Poverty Alleviation in Plantation Districts Project; and Provincial Water Supply Project. 20. IFC has been supporting increasing the financial inclusion amongst the poor. IFC also provided capacity building support to micro, small and medium enterprises in five lagging districts in the South with the Business Edge toolkit as well as helped partnered financial institutions to offer financing to MSMEs. These support helped improve rural entrepreneurs’ know-how and access to finance. Outcome 1.2: Improving Access to Public Services and Infrastructure in the North and East 21. An ambitious resettlement of displaced persons advanced rapidly after the conflict ended. When the conflict ended the government placed a high priority on reconstruction so as to enable the rapid return of displaced persons to their place of origin. The support of the World Bank for these efforts came through an operation that tracked the resettlement process by focusing on key performance indicators and, in addition, financed the repair and improvement of infrastructure in afflicted areas. 65 Tracking of resettlement targets and informing the international community of the progress achieved was timely and relevant at the time when the country under was considerable scrutiny. As it turned out, resettlement was undertaken rapidly despite the substantive preparatory work that was required, including mine removal in the areas of resettlement. As of October 31,2011, 187,533 IDPs returned home exceeding the target of 100,000 introduced by the CAS Progress Report. By the same date, employment equivalent to 1,653,000 person-days had been generated, above the target of 1,070,000. The World Bank project continues to work on providing solid opportunities for the returnees. Considerable progress has already been made to reach the targets under the project. For instance, the target (7,600 Has) for farm and high land recuperated is close to being reached. The designs are ready for 600 sub-projects costing around US$60 million that would finance roads, water supply, irrigation and other infrastructure. 22. The World Bank program contributed to increasing the stock of available housing in conflict affected areas of Sri Lanka. Two World Bank projects contributed to the reconstruction of housing destroyed during the conflict: Puttalam Housing and North East Housing Reconstruction, which has received additional financing. This support has led to the reconstruction of 52,193 houses as of November 28, 2011, with 532 villages receiving basic infrastructure improvements—the additional financing is refurbishing infrastructure in 217 villages more. These results exceed the milestones set under the CAS and come close to the 65 The Emergency Northern Recovery Project (FY2010) 49 target set by the CAS Progress report.66 The housing projects have emphasized the involvement and participation of the potential beneficiaries and their communities with the expectation that the capacity acquired and lessons learned can serve the country and the government in reducing the remaining housing gap. 23. The CAS program has contributed to improved access to infrastructure services in the zones that experienced conflict. The share of rural population with access to basic infrastructure facilities in the heavily affected communities of the North and East reached at 15 percent in 2011, up from 9 percent in 2008. The World Bank supported this achievement through the Community Livelihoods in Conflict-Affected Areas Project. As the conflict ended, the project received additional financing in 2009 to scaling up the resettlement process by scaling-up support for village development and irrigation. A third additional financing (2011) was designed to respond to the impact of severe rains in November and December 2010, exacerbated by further flooding in January/February 2011, which affected the livelihood of around half a million people. 67 In addition, the North East Local Services Improvement Project (FY10) supports construction and rehabilitation of rural roads and drainage systems. The full impact of this project will be realized during the next CAS period. 24. A Community Driven Development (CDD) approach has been an effective instrument for improving service delivery in the targeted regions where poverty is prevalent. Two projects 68 have focused primarily on involving communities in service delivery. First, in the northeastern regions, the Community Livelihoods in Conflict-Affected Areas Project is utilizing a CDD approach with around 1,506 Community Based Organizations involved in project implementation and monitoring and evaluation at the village level. This project has contributed to improving the access of the rural population of the Northeastern regions to services and markets as reported in the paragraph 23. Second, the Integrated Community Development and Livelihood Improvement APL that is covering the Southern regions of the country followed a more ambitious CDD approach. The ICR for the first operation under this APL project rated delivery of outcomes as satisfactory; IEG in turn, rated it highly satisfactory and noted the quality of the targeting and the high impact on incomes and employment of the interventions. Notably the project has been the executed by a semi-autonomous foundation. The second leg of the APL (FY10), referred to locally as the Gemi Diriya (GD) Project, reportedly faced implementation difficulties69 due to an emerging lack of Government ownership over the conceptual framework of the project including the role played by the independent Gemi Diriya Foundation. The Government and the World Bank have reached agreements on future implementation arrangements, which will integrate the project structures within government structures but maintain community involvement in project implementation. 66 The North East Housing Reconstruction Project, as of May 2011, was close to meeting its target of number of 29,079 houses reconstructed with 27,000 completed. The Puttalam Housing Project, as of May 2011, had met 86percent of the target for construction of houses. However, the project required an extension, approved in June 2011, due to the slower pace of implementation of the infrastructure component that was designed to cover roads, water and sanitation. 67 The project has remained focused on twelve districts in the Eastern and Northern provinces and adjoining areas and is assisting in improving the livelihood opportunities of 136,000 households in 1,000 villages and to rehabilitate seven major irrigation schemes benefiting over 35,000 farmers. Already 90 percent of the target households have benefited from various income generating schemes and 19,200 ha of land have been rehabilitated and brought under cultivation. Around 1,506 Community Base Organizations are actively engaged in reconstruction activities. 68 A CDD approach has been mainstreamed to several other projects as well. 69 ISR dated November 30, 2011. 50 Strategic Objective 2: Improving the Investment Climate and Competitiveness. Accelerate and Sustain Economic Growth. 25. The Government’s strategy to accelerate growth to a steady annual eight percent per year called for placing great emphasis on closing the infrastructure gap within a vision of Sri Lanka as hub or magnet in the South Asia region. In addition, the Government strategy foresaw creating conditions for a dynamic private sector to emerge and take the lead in growth and job creation. Along these lines, the implementation of the national roads agenda has advanced satisfactorily, under the leadership of the Government and with the support of the development partners, including the World Bank. The World Bank Group contributed to creating conditions for a more dynamic private sector to emerge in the areas of its limited engagement: easing the conditions for opening up a business, finance, and ICT development. The CAS Progress Report revised the results framework regarding the transparency and effectiveness of budgetary practices to account for the limited traction in advancing this agenda. With hindsight, the limited support that the WBG provided towards improving the business environment for private enterprise and for improving budgetary practices was due in part to a lack of supporting analytical work to guide the dialogue with government and perhaps, as well, to divergent views, between the Government and the WBG, on how to achieve the goals set out in the national strategy. In addition, the messages sent by the government have been ambiguous. On the one hand, the recently established Strategic Investment Law helps fast-track approved projects/investors to reduce red tape. On the other hand, the Under-performing Enterprises and Underutilized Assets Act has raised concerns among potential investors. Towards the end of the CAS, the World Bank has been working on improving its competitiveness diagnostic and understanding the challenges of improving budgetary practices in order to step up the dialogue with the government in these areas. Outcome 2.1: Improving Infrastructure Provision 26. The CAS program contributed to improving road interconnections across the country, with the central government responsible for the national road network; and, as established in the Article 13th of the Constitution, provincial and local governments taking the lead in secondary and tertiary roads. The World Bank, jointly with other development partners has been supporting up-grading national and provincial roads. 27. Substantive results have been achieved in upgrading of the national road network. On the institutional front, the capacity of the Road Authority has been strengthened, as has been the financing of the Road Maintenance Trust Fund that increased from $13 million in 2005 to $64 million in 2010. The quality of the national road network has improved with a reduction in the International Road Roughness Index and a decline in the Network Vehicle Operating Costs. The World Bank support has come through the Road Sector Assistance Project (FY06) that has received additional financing. Under the project a total of 618 km of national roads have been upgraded and the Road Roughness index under the project is far below the national average. A component on rural roads has contributed to 154 KMs of repaired roads, with a reduction of 60 percent in travel time on these roads, far above the 4 percent target set in the initial project design.70 The Provincial Roads Project (FY10), consistent with supporting conflict affected areas and poor areas, is working to improve road conditions in three provinces in the North, East and South. This project is commencing implementation. 70 Additional information is provided in the July 12, 2011 ISR for Road Assistance Project. 51 28. Recently, the World Bank work is refocusing its support on infrastructure. A project has been negotiated71 to support program of work on urban and water issues in the metro Colombo region, signaling a welcome shift in the World Bank agenda towards helping with emerging urban challenges. This will be the first IBRD operation in the country when approved. 29. IFC has also been supporting improvements in infrastructure. IFC contributions comprised: direct and indirect support for scaling up renewable energy; portfolio support for two major communications companies (Dialog and Suntel); South Asia Gateway Terminals investment, which was completed during the CAS period; as well as efforts to try to facilitate the development of a PPP project. On this, WB, WBI, and IFC jointly held a workshop on PPPs in Colombo in December 2010 and continue follow-up dialogues with the Government. The scope for PPP work by the WBG has been limited by the Government’s preference for bi-lateral solutions to the construction of large infrastructure projects, such as ports. Outcome 2.2: Improving the Business Environment for Stronger Entrepreneurship and a Knowledge- Based Economy 30. The World Bank and IFC’s regulatory support for improving the business environment was selective with a focus on facilitating entry through a reduction in the costs of opening up a business. According to the 2012 Doing Business Report (DBR) Sri Lanka ranks second in South Asia on the quality of the business environment. The efforts supported by the WBG to facilitate business creation reduced by half the number of days needed to open a business. IFC- WB Doing Business Reform Technical Assistance and IFC advisory support in selected municipalities provided the necessary support to achieve this result. The Ministry of Economic Development has recently launched an initiative to improve the quality of Sri Lanka’s business environment ranking over the next two years, beginning with tax reform, as the global DBR ranking for Sri Lanka at 82 in 2012 is dissonant with the notable achievements in other areas such as education and health.  31. The World Bank and the IFC’s successful support for ICT development and technology- enabling innovation were part of a broader effort to bolster private sector competitiveness, expand electronic government services and reach out to communities in rural and remote areas. The World Bank’s e-Sri Lanka Development Project, has established over 600 tele-centers throughout the country, linking over 70,000 users monthly, half of whom are women. The project has trained 35,000 private sector participants to incorporate ICT into their businesses and is helping to improve government efficiency and transparency by introducing ICT in government agencies and taking public services online. These results are helping reduce the regulatory burden for businesses and individuals.72 Additional finance for this project, has been approved (FY12) and , aims to (a) consolidating high impact activities including e-applications, common platforms and service delivery points; and (b) addressing constrains to expansion by bridging gaps in infrastructure, training, technical standards, regulations and legislation. The project is one of the most comprehensive ICT initiatives by the World Bank which is now under implementation. 32. Towards the end of the CAS two World Bank projects were approved in support of the development of the private sector with emphasis on small and medium enterprises (SMEs). The Sustainable Tourism Development Project (FY2010) is designed to strengthen the 71 Metro Colombo Project expected Board Date March 15, 2012. 72 The contribution of this project extends beyond the indicators included in the CAS. See November 3, 2011 ISR for the e-Lanka Development Project. 52 institutional framework for the tourism sector in order to facilitate environmentally and socially sounds investments, with particular attention to the East of Sri Lanka. Specifically, the project supports drastically reducing the connection time between Colombo and the East, training human resources for tourism, and the development of SME sector. The progress towards the development outcomes under this project has been substantial, already exceeding in some cases 201473end of project target. The project complements IFC’s advisory work for sustainable tourism (including supplier medium, small and micro Enterprises capacity building) and south- south capacity building for SMEs. The Crisis Response Small and Medium Enterprises Development Facility Project (FY10) built on the success of the Renewable Energy for Rural Development Loan, an operation with a large financial intermediation component, and complemented credit lines provided by other international organizations and the government. In addition, the World Bank Group has provided assistance for the development of the non-banking sector through TA funded by the FIRST initiative. This support included technical assistance to the Securities Exchange Commission to amending the SEC Act to enable demutualization of Colombo Stock Exchange (Support has also been provided for insurance supervision.) In addition, at the end of the last calendar year, the World Bank produced a Financial Sector Policy Note that takes stock of the progress and challenges in the financial sector against the backdrop of the 2007 FSAP. 33. The IFC has supported SMEs and micro enterprises by facilitating access to finance, skills, capacity, and training opportunities. Enhancing its financing for Dialog, IFC provided linkages advisory support to build MSME capacity and trained over 5000 participants to date and helped increase revenues. IFC is also helping strengthen technology-based financial infrastructure through, for example, the establishment of Secured Collateral Registry. With the use of the Performance Based Grant Initiative, IFC encouraged the expansion of microfinance services provided by LOLC Micro Credit and SANASA Development Bank to urban and rural lower income segments. Focusing on the post-conflict and less developed regions, IFC’s support helped these microloan providers to increase aggregate new loans by over 266,000 in the amount of US$275million in a year and a half to Dec 2011. It is noteworthy to point out that Sri Lanka has one of the most advanced micro-credit sectors in the region. Outcome 2.3: Improving the Strategic Relevance and Transparency of Public Spending 34. Overall, the progress made during the CAS in improving public expenditure practices was limited. To begin, the expectations regarding results from World Bank engagement under the original CAS document were modest and targeted towards selected objectives, reflecting a de facto limited engagement. Moreover, the CAS Progress Report eliminated several of the expected outcomes in procurement, PPP and SOEs. 35. The Public Sector Capacity Building Project (FY08) has been slow to deliver results. The project was designed to enhance the effectiveness and productivity of the Department of Census and Statistics (DCS) and the Auditor General’s Department (AGD), but a slow and difficult implementation has meant that the project will not be completed on time. The DCS component has been marred by procurement difficulties and has been cancelled. But, significant progress has 73 Since the end of the internal conflict tourism has picked exceeding the expectations for the end of 2014 set under the Bank project. Tourism receipts went from US$ 320 millions at the end of 2008 to US$ 580 million September, 2011. The target for the end of the project was US$400 million. During the same period, occupancy rates went from 44percent to 72percent, still below the 90 percent target at the end of the project. However, during the same period, the occupancy in the East (where the project is operating) went from 21.6percent to 68percent above the end of 2014 target of 45percent. Notably, streamlining licensing procedures has reduced the number of days in registration from 147 to 30, again below the target of 75 days. 53 been made at AGD with an improved external audit function that has reduced the time lag in submitting the national budget audit to parliament (now 8 months, when it was 2 to 4 years in early 2008.) In addition, public audit coverage has extended from 50 percent of the public sector in 2008 to 100 percent as of May 2011. 36. The CAS Progress Report eliminated several results where the dialogue between the government and the WBG was making limited headway. The World Bank support for SOE reform did not materialize after early-on analytical work was completed; however, the IMF program is focusing on reducing the losses of the SOE sector to help buttress the fiscal stand of the public sector and open space to finance a more aggressive public investment program in line with the objectives of government. The Progress Report eliminated reference to establishment of a framework for PPPs. Although the Government has not established a formal framework for PPP, it has engaged international partners in the construction of infrastructure arrangements that in the view of the government are PPP-like arrangements. Expected outcomes on improving budgetary practices were also scaled backed in the Progress Report. The information available suggests limited progress was made during the CAS period in improving public expenditure practices. On public procurement, after disbanding the National Procurement Agency, a new Project Implementation Unit at the Ministry of Finance and Planning is tracking procurement, but no indicators are available to judge that this is an improved arrangement. Regarding, Public Financial Management, a unified treasury remains in place, but commitment control remains a challenge. The Government would benefit from a thorough stocktaking, such as through a PEFA, to set a baseline to track the impact of policy actions to improve the quality of fiscal governance in the future. Strategic Objective 3: Improving the Quality of Services and Accountability. Provision of High Quality, Relevant and Cost Effective Public Services, Including in Conflict-Affected Areas 37. Sri Lanka has traditionally posted a strong performance in health, education and social assistance achieving levels similar to those of countries with higher levels of income. The CAS program under this objective was built on a long-standing relationship between the WBG and the country to continue its support for stronger health and education outcomes and commenced assistance to improve the national social assistance program. The World Bank support for primary education and health is being done in cooperation with the provincial and local governments through SWAP operations, which have been well received and set the basis for more ambitious results-based approaches in the future within the framework of strengthening local governments. Work under this strategic objective has benefited from grant financing, especially on the area of social protection. The grants have proven effective in assisting the government in defining the scope and direction of the policy agenda in social assistance. Outcome 3.1: Improving Quality, Relevance and Governance of Education 38. Access, quality and retention rates in basic education improved during this CAS. School survival rates through grade nine increased from 78 percent in June 30, 2005 to 91 percent in June 30, 2011 and the proportion of primary school students attaining competence in mathematics increased from 67 percent to 82 percent during the same period. 74Access to basic education and secondary education was improved through the activation of school attendance committees, 74 Strengthening Mathematics Education in Sri Lanka—July 2011 Report No. 43 South East Asia: Human Development Sector Discussion Papers Series 54 expansion of basic facilities such as classrooms, water and sanitation, school health and nutrition programs for poor children, and special and non-formal education. The improvement of the quality of education was achieved through curriculum modernization, teacher development and delivery of textbooks on time. In additional, the school-based management approach was expanded from 16 zones (17 percent of all zones) to all zones in the country. The support has been provided through the Education Sector Development Project, which was completed in June 2011. The recently completed ICR (dated December 19, 2011) rates the project as satisfactory on all aspects, with moderate risks to development outcomes. The ICR highlights the usefulness of the SWAP approach in the context of decentralization and the major contributions resulting from that increasing community and parental involvement. 39. The CAS contributed to improved educational outcomes in undergraduate education and enhanced multi-ethnic awareness early on in the learning process. The IT achievement scores of undergraduates have risen from 49 percent in 2005 to 56 percent in 2008, the year the targeted intervention, Institutional Block Grants, was completed. The achievement of development outcomes under the Improving Relevance and Quality of Undergraduate Education Project was ranked as satisfactory by the team and as moderately satisfactory by IEG, who recognized the achievement of highly relevant development objectives but questioned on the lack of evidence for the efficient use of project resources. The project contributed to implementing IT learning and English improvement learning programs in all universities. The school curriculum promotes bilingual education and includes civics as a subject. Multi-ethnic and multicultural curriculum review committees are over-seeing the design and delivery in the areas of civics, history and English. 75 40. Support for education was further strengthened during the second half of the CAS. The Higher Education for Twenty First Century (FY10) Project aims to enhance the capacity of the higher education system. The design of the project benefited from analytical work such as Towers of Learning: Higher Education Report (FY09) that has been widely disseminated and consulted. Already, progress has been made in the development of a national qualifications framework and legislation has been approved to enable registration, quality assurance and accreditation of state and non-state higher education in line with the Higher Education Development Strategy of the government. Observers in the country and abroad consider this a major institutional achievement in Sri Lanka. In addition, the Transforming School Education as the Foundation of a Knowledge Hub Project (FY12) seeks to further enhance the quality of primary and secondary education as the foundation for the knowledge-based economic and social development of the country. Building on previous efforts that have increased the completion rate at grade nine, this project proposes to improve the completion rate at grade 11 and the national assessments of learning outcome for key subjects. It also aims to strengthen governance and delivery of education services.76 Outcome 3.2: Improving Health and Social Protection Services 41. The significant progress that Sri Lanka has made in health translates into a high level of life expectancy (75 years) that compares well with indicators from higher middle-income countries. The long life expectancy and the dropping fertility rates have meant that Sri-Lanka is 75 The Promotion of Social Cohesion through Education in Sri Lanka September 2011 Report No. 46 South East Asia: Human Development Sector Discussion Papers Series 76 The analytical basis was provided by “Transforming Education in Sri Lanka: From Cut Stones to Polished Jewels.� World Bank. 55 experiencing a rapid demographic transition (mainly characterized by an ageing population. The World Bank’s study Demographic Transition (FY08) study examined the consequences of this in detail and which it’s contributing now to a rich national dialogue on its implication for development opportunities in all sectors of the economy. 42. The World Bank worked directly with the nine provinces of Sri Lanka, as well as the central Ministry of Health to deliver a stronger national primary health network. A sign of increased administrative planning and monitoring capacity at the provincial level is that all districts are now using a logical framework and reporting regularly on performance, while when in 2006 only 26.9 percent did so. The contribution of the World Bank has been through the Health Sector Development Project and Additional Financing, whose development outcomes have been rated as moderately satisfactory by the management77. This rating reflects initially over-ambitious objectives and immeasurable indicators chosen at project preparation, and the transfer of significant project resources for the tsunami relief operation; but, delivery on the revised objectives / indicators was satisfactory. The project has contributed to a reduction in infant and maternal mortality as well as to a lower disparity in these indicators across regions. In addition, the project contributed to improved administrative output indicators, including for increased utilization of lower level hospitals and improvements in screening services for selected non communicable diseases (NCD), and better emergency health care through newly established emergency treatment units. The project also made a substantial contribution (especially through its additional financing) to the post-conflict reconstruction of health facilities in the Northern and Eastern provinces. 43. The World Bank is supporting government’s efforts to address the challenges of non- communicable diseases and malnutrition. The World Bank’s analytical work has focused on the health challenges arising from increased burden incidence of non-communicable diseases, made more severe with the aging of the population, as noted in the corresponding World Bank prepared Study of the Aging (FY08). The Government has issued a National Action Plan for prevention of NCDs which includes a national surveillance system, whose design has benefited from the Health Delivery System Review and Non-Communicable Diseases Strategy (FY10.) The IFC in turn has invested in an additional private hospital while the portfolio hospital project, rated mostly successful in its most recent development outcome, was completed in September 2011. The World Bank mobilized trust funds78 to design community-based nutrition interventions. Further trust funds were received from the Japan Social Development Fund to finance a project on improving nutrition outcomes among vulnerable population groups in the Northern Province, using the community based design. This project has successfully introduced community based nutrition interventions linking the service providers with the community to improve nutrition outcomes. 44. The World Bank began to support selected aspects of Social Assistance reform with trust fund financing. First, the IDF grant Improving the Monitoring and Evaluation of the Samurdhi Safety Net Program is financing the development and testing of a comprehensive Management Information System (MIS) for the Samurdhi Food Stamp and Cash Transfer Program, Sri Lanka's largest transfer program. The IDF grant will be used to design and pilot the new MIS in three selected locations. The Government of Sri Lanka has committed funds to replicate the system in three additional locations. It is expected that the experiences of the six locations, upon evaluation, will form the basis for the scaling up of the MIS across all other locations across the country where the program operates. Second, the Rapid Social Response Multi Donor Trust Funded 77 The ICR (ICR- 1842) produced by the team in July 21,2011is not yet been reviewed by IEG. 78 The Trust is Funded is from Government of Australia. 56 Strengthening Targeting, Monitoring and Evaluation of Safety Nets in Sri Lanka is financing the scaling up and evaluation of an improved targeting and MIS system that is being developed for the Samurdhi safety net program. Outcome 3.3: Strengthening Environmental Protection 45. The WBG delivery of results regarding environmental protection has been mixed. Highly positive results were achieved on renewable energy, but efforts to support preservation of the biodiversity of the country fell through, when the government’s priorities changed. 46. The IFC and the World Bank work on renewable energy is contributing to an improved environment, specifically through WBG contributions to reduction in greenhouse emissions. As has been noted, both the World Bank and the IFC have provided effective support to an renewable energy effectiveness initiative that has not only helped connect people in rural areas to electricity but also increase the supply of electricity while abating energy emissions. The Renewable Energy for Rural Economic Development Project has contributed an estimated 1.75 million tons of carbon abatement based on projects commissioned to date. The IFC supported projects have also contributed in this regard, as reported in paragraph 17. 47. The IFC has been actively involved in the environment sector. IFC has been committed to ensuring that all current and future clients meet Environment Performance Standards. IFC’s Advisory Services have been working with SMEs on upgrading environment protection. SME Hotel operators are being assisted with achieving operational efficiencies (such as energy efficiency practices, quality standards) and obtaining the US green Building Council’s Green Building Certification. 48. The CAS objective centered on the preservation of the country’s rich bio-diversity could not be delivered. The activities foreseen under the CAS included attention to management of the elephant human conflict and the rationalization of tourism flows to the national parks. Following on preliminary analytical work and in line with the national strategy, the Ecosystems Conservation and Management Project reached the negotiation stage, at which point the government proposed substantial changes to the design that would have substantially altered the original development objectives. As a result, the project preparation was stopped which has meant a postponement of the intended World Bank work through the project and affected the delivery of intended results during this CAS. V. World Bank Group Performance 49. A large share of commitments and disbursements went towards the rehabilitation of the conflict-affected areas. The World Bank committed a total of US$1016.5 million of IDA and IBRD79 resources and has disbursed US$579.4 millions during the CAS period, as of January 31, 2012. The undisbursed balance increased from US$483.0 million at the beginning of the CAS to reach US$582.8 million by January 31, 2012. In FY09 at the beginning of the CAS, 13 projects were under implementation of which three focused on conflict-related areas, as of January 2012 five out of 13 projects did. Out of the total disbursements during the CAS period around 33percent went to conflict areas and 63percent went to both infrastructure and conflict areas. 79 This includes US$213 million of IBRD resources for the Metro Colombo Project expected to go to Board in March 15, 2012. 57 50. Delivery of projects differed from the planned program. As detailed in Table 2 comparing planned IDA/IBRD Lending Program for FY09-12 and actual deliveries, five of the 15 proposed lending activities, were dropped. Four Additional Finance operations were approved.80 Table 3 shows that of the 12 AAA activities in the original CAS, three were dropped and two refocused. As of September 2011, four projects, three AF operations and four AAA activities, which had not been foreseen in the CAS, were added, along with additional technical assistance support that had not been envisioned in the CAS. IFC’s program has also adapted to respond to emerging needs and opportunities over the course of the CAS period. 51. Various reasons stood behind the difference between planned and actual delivery of projects. First, the space opened by cancelled projects provided opportunities to finance conflict affected areas and infrastructure (roads) through additional financing, which has become a significant lending instrument during this CAS period, in terms of project performance, cost- effectiveness and in enabling the World Bank to swiftly respond to unforeseen or emergency needs, such as for post-conflict reconstruction or in response to the 2010/2011 floods. Second, cancelled projects reflected shifts in the preferences of government (environment), failure to make traction around a common vision that could be supported (agricultural competitiveness) or an overestimation of the pace at which an agenda could be developed (water.) 52. Portfolio performance has remained steady and compares well with the performance of the region. The disbursement ratio was 33 percent for FY11 and 13.4 percent in FY12 as of January 31, 2012. The percentage of projects at risk is 17 percent as of December 31, 2011, reflecting in part the relatively small number of projects in the portfolio. One project in the portfolio, the Second Community Development and Livelihood Project, is currently classified as a problem project with unsatisfactory ratings. The commitments at risk amount to 36 percent. A Portfolio Review in October, 2011 concluded that overall the portfolio is generally healthy and identified no major problems. The recommendations include strengthening procurement and further integrating PIUs into the implementing agencies.81 All projects completed during the CAS have been rated as either satisfactory or moderately satisfactory. The pro-activity is 100 percent. 53. The current portfolio to implement and deliver results early in the next CPS period is quite concentrated. As of end-January 2012, the active IDA portfolio in Sri Lanka consists of 13 projects with a net commitment value of US$ 1,074.1 million. The share of undisbursed resources available for both conflict areas and infrastructure amounts to 61 percent as of January 2012. Two education projects that have been approved recently account for 23 percent of the total undisbursed balance as of January 2012. Recent approvals and additional financing are shifting alignment towards growth and competitiveness issues (SME financing, tourism, higher education, and e-Sri Lanka) and thus responding to concerns of the government about the concentration of the World Bank agenda on IDA priorities. 54. The satisfactory performance of SWAP operations has set a solid basis for results-based approaches and for working with the provinces. The design of some of the operations under the present CAS tested or piloted interesting approaches to delivering results—such as CDD, - housing self-construction, etc. The broader long-term impact of these initiatives will depend on how the government incorporates them into its own regular programs. Two SWAPs, one in health 80 One came from the previous CAS. Two were road projects. Another supported the impact of the 2010 rains on the conflict-affected areas. 81 As of November 2011, the share of commitments are risk in Sri Lanka (15percent) compared to the South Asia countries was only higher tan India (12percent) and Bangladesh (9percent) and Afghanistan (14percent.) The disbursement ratio at midyear compared to 6.6 percent for India, 8.3 percent for Afghanistan and 7.7 percent for Pakistan. 58 and one in education, successfully tested a different implementation approach. The SWAP instrument allowed the World Bank to work with the provinces in advancing national policies within the framework of implementing the decentralization mandate. For future lending, a programmatic approach is a better alternative as oppose to isolated smaller projects as reflected in a programmatic budget of the government. 55. While some of AAA has been of good quality and effective, it has been narrowly focused with gaps in core products and limited alignment with the larger government priorities. The quality of some AAA, such as the work on health and education, is contributing to the national dialogue and had an impact either on policies or project designs. In certain areas the impact has been more limited, such as in agriculture and environment. In agriculture, this is because of divergent views between the government and the World Bank. In environment, the failure to agree on the content of the proposed project has delayed impact even though the issues raised by the World Bank’s analytical work are judged relevant by the sector government. There are two concerns with the AAA agenda that was developed and implemented during this CAS. First, gaps in traditional products such as Country Economic Memorandum (CEM), poverty assessment, Public Expenditure Reviews, and Public Financial Management impaired the capacity of the World Bank to engage in core areas of its competence. Second, the AAA was not aligned with the broad concerns of government and specifically with the ambitious transformation agenda of the current administration. The AAA program was not relevant for the government and weakened the World Bank as an interlocutor as the government sought to further develop and implement its vision. This is being reversed at the end of the CAS with the preparation of strategic notes on several themes that are top priorities to government. 56. The World Bank launched efforts to reach broader audiences through more forceful dissemination efforts. The World Bank has been extending its outreach effort by responding to the dynamic dialogue on development carried out in the local press, including that in the two native languages, which plays an important role in shaping public opinion. The local press has its own dynamics apart from the English press. The World Bank has begun to publish the Executive Summary of new AAA in Singhalese and Tamil in a first effort to breach this gap. This is a welcome step towards developing a more accurate view of the World Bank’s work in the country. In addition, the World Bank has involved local research institutions and think tanks in the preparation of key pieces of analytical work. 57. IFC’s advisory services have also been supporting SMEs, providing technical assistance to financial institutions and maximizing linkages in tourism, ICT and agriculture. IFC’s completed sustainable tourism advisory project facilitated 555 SME contracts and US$1.12 million in collective sales revenues for participatory MSMEs in FY08-11. In response to the growing interest in PPPs, IFC, in collaboration with the World Bank and World Bank Institute (WBI), held a well-received workshop in Colombo on the topic for government and the private sector. 58. IFC has increased the number of new commitments and sought to diversify its portfolio during this CAS period. Annual commitments will have averaged around US$45 million during FY09-11. New commitment volumes in Sri Lanka had peaked at US$175 million in FY08, in the wake of two large transactions. Since FY09 through December CY2011, IFC has invested a total of US$238 million (including $19 million mobilized from external partners) in 20 projects. These encompassed diverse sectors, such as renewable energy (including its first direct investment in wind power), healthcare and the financial market (including Global Trade Finance Program (GTFP) trade finance facilities and IFC’s first direct investment in a private equity fund). As of November 2011, IFC’s committed portfolio of US$198 million (not including a 59 mobilized amount) consisted of ICT companies promoting enhanced communication access, financial institutions supporting SMEs and sustainable energy, a credit rating agency, hospitals, and a Sri Lankan hotel operator active in the region. The portfolio is generally performing well. IFC’s investment and/or advisory support for the financial sector has focused on developing local banks’ capacity to provide trade financing, renewable energy financing, SME- and agri-finance, and household access to finance. IFC has been providing locally-scarce financial instruments, such as risk capital, trade finance guarantees, and risk sharing facilities. Risk sharing facilities, structured with a first-loss partial guarantee from the Global Environment Facility (GEF), are helping two leading national banks develop know-how in financing private sustainable energy projects. IFC is also supporting leading private hospitals to help meet the country’s growing demand for healthcare. 59. Trust Fund (TF) resources have supported key CAS initiatives, but the TF portfolio is dispersed adding to the costs of coordination. The commitments available from TF sources amounted to US$ 42.175 million in 39 operations. Eight operations over US$1 million each, accounted for 75 percent of the total. TF resources have served various purposes. Several have complemented World Bank operations, such as the Northern Emergency Project, and Energy for Rural Development. Other TF operations are filling gaps, such as nutrition in the Northern region and access to finance in the Southern region. Others are serving to scout reform options, as in the on-going work on social assistance that is financed from several trusts funds. Likewise IFC’s private sector development support benefited from donor support, including Norway for the Sri Lanka Development Facility, and NIPP82 and DevCo83 for the South Asia Infrastructure Facility. The latest Country Portfolio Review (November, 2011) noted that there are delays between the approval and effectiveness of trust funds, with high transaction costs for all. In addition, TF activity was not evenly integrated into the results framework of the CAS. 60. Government’s access to international finance and the emergence of new partnerships with major regional powers changed significantly the financing opportunities for the country during the implementation of this CAS. First, the government has issued 2 (10-years) US$ 1 billion rounds of bonds in the international markets. This instrument was not available in the past, but is now, as the country’s paper is rated as BB-. Second, the emergence of China and India as the dominant bi-lateral partners has enabled the government to start undertaking ambitious infrastructure projects. Third, the weight of traditional Overseas Development Assistance (ODA), as defined by the OECD, has been decreasing since 2005, when support came in to help the country in the aftermath of the Tsunami. The architecture of the development community has yet to adjust to this emerging reality. The mixed IDA/IBRD status will provide the opportunity to develop a new CPS consistent with the middle-income status of the country and shift from an exclusive IDA focus that the government deem incomplete. VI. Ratings Results 61. The CAS Completion Report rates the achievement of results, as amended by the CAS Progress Report, as moderately satisfactory. The program achieved good progress toward most major expected outcomes, with some slight shortcomings. Under the first pillar, the program 82 The Netherlands-IFC Partnership Program. 83 The Infrastructure Development Collaboration Partnership Fund, an untied facility established by IFC and the United Kingdom’s Department for International Development and supported by the Dutch Ministry of Foreign Affairs and the Swedish International Development Cooperation Agency. 60 supported a rapid resettlement of displaced persons; it contributed towards increasing access to electricity and water in rural and conflict areas and the supply of housing available for resettlement; and, through a CDD approach, has helped in engaging marginalized communities in their own development. In addition, it played the important function of signaling to the international community the progress made in resettling displaced persons. 62. Under pillar 2, the program, working with other development partners and under the leadership of the government, contributed to road rehabilitation. The contribution of the program towards improving access to ITC services by the public and small and medium enterprises and a better interface between the public and private sectors is notable and has been widely acknowledged within the World Bank and by external observers. Progress under the tourism project is likewise notable. The contribution of the WBG to improving the business environment helped reduce the number of days to open a business, but engagement on PPP and SOE reform did not materialize as originally expected and the Progress Report had to scale down the expectations about results. The contribution of the program to the institutional improvement of the budgetary framework was limited as acknowledged by the Progress Report. 63. Under pillar 3, the CAS delivered strong results in education and in health in line with expectations. The impact on education has gone beyond delivering outcomes as the analytical work has had an impact on the national discourse on higher education and contributed to the introduction of reforms that have opened greater scope for the private sector in the delivery of education services while setting in place an accountability framework for both public and private institutions to ensure adherence to quality standards. The health program contributed to improving local sector institutions and indirectly to improved health outcomes nationwide. The analytical work on health is contributing to a dialogue on future adjustments to the health system to address the rising challenges of non-communicable deceases and the aging of the population. On-going social assistance work, with the support of trust funds, is providing inputs for the government as it examines options to improve the effectiveness of the current extensive system of social assistance. 64. The agenda on the environment, under pillar 4, made a contribution to increasing the supply of generation capacity from renewable sources at a pilot scale setting the basis for a larger contribution towards closing the energy gap as the economy expands. These interventions have abated carbon emissions. The remaining environment agenda was derailed when the foreseen project was stopped at the point of negotiation, due to a change in government’s priorities, despite considerable efforts that included prior analytical work and extensive dialogue. 65. Regarding the crosscutting CAS agenda, the delivery of results in support of conflict- affected areas was strong. Achievements on the transparency and accountability agenda were mixed, with progress on demand-side of governance through the work involving communities in their own development and the institutional improvements in health and education. However, results on core governance (under the second pillar) felt short of the initial expectations, with the Progress Report eliminating most of the results that appeared in the original CAS. WBG Performance 66. The CAS Completion Report rates the performance of the World Bank and the IFC as moderately satisfactory. The design the program was relevant and made a contribution to the achievement outcomes by responding to government priorities and country needs. In responding to emerging priorities and needs (post-conflict) the World Bank exhibited flexibility, as noted by 61 the Progress Report. The management of the World Bank’s portfolio, which compares favorably with the region, provided a steady flow of resources and contributed to the delivery of resources. However, in a few cases delays in project implementation made it necessary to revise the original targets set under the CAS. Quality AAA in education and health contributed to a national policy dialogue and project design; however, lack of timely AAA in the critical areas of growth and governance limited the World Bank’s ability to engage the government fully in areas that the CAS had identified as a priority. This is being remedied now at the end of the CAS through the on-going production of policy notes to advance the dialogue in the preparation of the forthcoming CPS. These efforts are an important first step in addressing the skepticism of the government regarding the role of the World Bank as a source of policy advice. That skepticism has arisen in part from the presumption that the World Bank does not respond to local realities and rather resorts to general remedies. 67. The CAS Progress Report was prepared relatively late during the CAS due to the vacuum created by the delay in appointing a new World Bank Country Director. At the end of the CAS, the portfolio was heavily concentrated in a few areas of engagement: reconstruction of conflict-afflicted areas and roads. However, the WGB is beginning to give more attention to growth and competitiveness issues, both in AAA and lending, especially with the availability of IBRD resources. 68. The IFC maintained a limited but targeted engagement and its work complemented the World Bank in areas like finance, IT, and renewable energy, contributing to strong results delivery. The IFC continued solidifying its presence and PSD engagement in Sri Lanka and has led the program in several areas helping to build local capacity to address financial inclusion, enterprise development, and climate change. The IFC complemented well advisory services and investment activities. IFC, like the World Bank made limited traction in advancing the PPP and the deregulation agendas. VII. Lessons and recommendations 69. The forthcoming CPS is being prepared in an environment very different from that in which the previous CAS was prepared. Internal armed conflict has ended; economic growth is fast and the mandate of the government is strong. The government seeks a rapid transformation of the economy within a very specific vision of the country in the region and the world. The challenge for the government is to develop the concrete steps, policies and investments to reach this vision. The World Bank needs to support government in responding to these challenges. The experience during the implementation of this CAS provides several lessons that are relevant for the design and implementation of the next strategy. Strategy Design and Implementation 70. Flexibility in both design and implementation of a strategy is necessary to deliver a program in an uncertain and evolving environment. This CAS strategy ended up with a flexible implementation to accommodate emerging developments and shifts in policy stance. As a result, the lending program differed from the original plan and the Progress Report revising the results framework. Even if now no major upheavals are expected, it is advisable to embed flexibility into the design of the next CAS. In a transitional context like Sri Lanka, it would help to adopt an exploratory stance, where a combination of AAA, dialogue and pilot engagements is used to explore the likelihood of successful engagement as areas of potential engagement open 62 up. A Progress Report strategically timed and hopefully at an earlier point in time than during this CAS can be used to further tighten the areas of engagement during implementation. 71. Delivery is likely to be more effective in areas where the World Bank supports the revealed priorities of the government on the ground. The government’s commitment to infrastructure, resettlement, IT, education and health provided a solid ground for World Bank engagement. However, the CAS committed to deliver results in areas where either the government had not articulated a precise agenda. Consistent with a flexible stance, the next strategy may want to the limit its commitments to areas where solid programs are in place for delivery and to adjust the program as new agreements come into place. It may also engage the government in development of a monitoring instrument to track progress in national goals such as the reduction in regional disparities. 72. The World Bank responded to the priorities of the government but could have been better prepared to respond to emerging priorities such as economic growth. The WBG responded appropriately to the priority that was given to rehabilitating conflict-affected zones and, more broadly, to help reduce regional disparities. In doing so, it concentrated a large share of its portfolio towards this objective. The downside has been a limited attention to other relevant issues of the development agenda, such as economic growth and public sector capacity building. The challenge moving forward will be to balance the response to the emerging priorities of a middle-income country with the reconstruction needs that remain. Since reducing regional disparities will remain of concern, the WBG can, first, support mainstreaming the lessons from past interventions, for instance, by focusing its support on budget programs through instruments such as P4R or sector DPLs. And, second, it can look for complementarities between social inclusion and strengthening the productive capacity of provinces within the context of diversification and competitiveness. Moving to a growth and competitiveness agenda need not mean abandoning inclusion and reconciliation. IFC 73. The strategy of channeling resources through the banking system and of strengthening the alignment between IFC advisory services and investments worked well. Sri Lanka possesses a sound banking system, which both the IFC and the World Bank used effectively to channel resources, for instance, to engage the private sector in sustainable energy generation and in transferring resources to SMEs during the economic slowdown. The lesson is that anchoring support on strong local institutions helps by-pass local capacity constraints. In addition, in line with global guidelines, IFC work on the ground stressed the alignment between advisory and investment activities. For instance, in projects such as Dialog, the advisory intervention broadened the range of benefit/beneficiaries that are being supported. 74. It takes a longer-than-anticipated time for private sector investment to pick up in post- conflict markets. Expectations for a rapid pick-up in private investments after the conflict ended proved to be overly optimistic. The corporate/private sector may not have felt comfortable to make investments until peace was firmly cemented, including an easing of tensions with the international community, and how the new Government would rebuild the ground for the private investment. On the latter, the signals of the Government regarding its commitment to a positive investment climate for the private sector have been perceived as mixed by potential investors. The lesson that emerges is that in post-conflict countries stronger and unambiguous messages are needed to motivate a strong engagement of the private sector. Going forward continued attention to the quality of the broad business environment is needed to enhance the opportunities for the private sector support in the country. 63 Projects 75. Appropriate design and timely implementation of programs and projects is required for the effective delivery of results. Regarding design, two issues stand out during this CAS. The first is the importance of designing relevant and realistic results frameworks for projects and for the CAS. Several ICRs (health and water) illustrated how unrealistic results designs harm the perception of achievements, even when these achievements have been substantial. Likewise, the CAS Progress Report found it necessary to scale back initial expectations about results in part due to the progress in project implementation. Regarding implementation, the negative impact of delays on the reputation of the World Bank is of significance. The latest Portfolio Review (October, 2011) identifies procurement weaknesses and limited integration of PIU units into the public administration as factors that need attention. It also pointed out to the need to balance the contribution of trust funds in advancing programs, with the high transactions costs for trust fund approval and implementation. The second pertains to the selection of instruments suitable for the specific conditions of the country and the sectors. Here, the SWAPs in health and education were suited to support strengthening service delivery at the local level. Likewise the design in support of resettlement combined attention to meeting national commitments, with support for rehabilitation in the conflict areas. AAA 76. Quality AAA can contribute to the national dialogue on policy and better ground the dialogue with the government. The effective dissemination of quality analytical work on education has had a positive impact on policy reform and policy design. Similarly, other analytical work on demography and health is contributing to policy dialogue nationwide. Going forward, it is advisable that the WBG fills the AAA gaps regarding growth and public sector management to be in a better position to engage the government on a dialogue around the options to unbundle and implement its vision of rapid and sustained growth. In doing so, the WBG should rely on evidenced-based arguments and by focusing on options rather than definite prescriptions. 77. Outreach efforts to the broader constituencies are a powerful instrument to increase the understanding of the issues and the reform options. With a literate population, an active press and strong civil society organizations, dissemination is a powerful tool for contributing to the national debate on development choices. In broadening the outreach, the WBG though needs to continue to go beyond English to the two national languages. The dialogue in the local languages dominates the policy discussion, with substantial variation in content and tone. The World Bank has already commenced by publishing the executive summary in the two languages. Further efforts at outreach would be consistent with shift in strategy that is ahead. 64 Table 1. Summary of CAS Program Self-evaluation Cluster of outcomes and Status and evaluation summary Lending and non-lending activities Lessons and suggestions for outcome indicators that contributed to the outcome the new CPS STRATEGIC OBJECTIVE 1: EXPANDING ECONOMIC OPPORTUNITIES IN LAGGING REGIONS. INCLUSIVE AND EQUITABLE ECONOMIC DEVELOPMENT CAS Outcome 1.1: Supporting Integrated Rural Development  40 percent increase in rural  Achieved: 139,241 households as of 15-11-2011, a 54.7 percent Completed or Ongoing : The rural areas are now better households electrified by off increase over the baseline of 90,000 in 2008.   connected to the markets. The grid electrification. (90,000  Rural Electrification and Renewable alignment of the CAS support households as of 2008)   Energy Development Project – for rural development with the renamed Renewable Energy for government’s commitment to  Share of rural households with  Achieved: 74 percent as per the Progress Report   Rural Economic Development reducing regional disparities access to improved water Project (Completed)  helped deliver positive results Note: The World Bank contributed through the Second Community source reach 74 percent (71  IFC advisory and investment support especially in electricity and Water Supply and Sanitation Project that linked 348,100 persons in percent as of 2008)   for electric power (Ongoing)  water, with the delivery in rural rural areas with improved sources of water. (ICR June 2011.)  Second Community Water Supply roads lagging, but picking-up. and Sanitation Project (Completed)  The increased availability of  Integrated Community Development energy in rural areas   – renamed Second Community emphasizing the use of Development and Livelihood  Share of rural roads (in nine renewable sources as well as  Indicator eliminated by the CPR  Improvement Project (Gemi Diriya) channelling the support through pilot Pradeshe Sabahs) in Implementation of the supporting project was slower than expected.  (Ongoing)  the local financial sector and ‘good’ or ‘fair’ condition reach  Infrastructure Assessment (AAA) involving the private agents 64 percent (47 percent as of (Ongoing)  2008)   teaches that it is possible to be  National and Provincial Road combine innovation in delivery  Share of underweight estate  Indicator eliminated by the CPR projects – note that national roads are with attention to the poorest sector children under age 5 The indicator was eliminated due to the delays in launching supporting supported under Road Sector regions of the country reduce to 34.9 percent (from instrument. Assistance Project and its Additional 44.1 percent in 2000)   Financing (New National Roads A challenge going forward for Project proposed in CAS was rural development will be to 65 Table 1. Summary of CAS Program Self-evaluation Cluster of outcomes and Status and evaluation summary Lending and non-lending activities Lessons and suggestions for outcome indicators that contributed to the outcome the new CPS  Increase share of CDD projects  Achieved: Increase of about 15 percent as per of the Progress converted into AF for Road Sector complement the investments in that involve functional Report  Assistance Project) (Ongoing)  infrastructure with attention to collaboration across ethnic  Road Sector Second Additional marketing and technological groups.   Note: Under the Community Livelihoods in Conflict Areas Project Financing (Ongoing)  change through rebuilding the 1,506 Community Based Organizations have been either revived or  Dam Safety and Water Resources extension services. The AAA is created and are operating satisfactorily in subproject Planning Project (Ongoing)  available to support these implementation and O&M at village level, exceeding already the  Lagging Regions – renamed efforts. target of 600 at the end of the project in 2013. (Source: ISR-Nov- Connecting People to Prosperity 2011 ) (AAA) (Completed)   IFC advisory for MSME capacity The use of a CDD approach to building in 5 lagging districts in the rural development has been South (Completion expected June effective and considered as best 2012)  practice. The challenge going  IFC advisory for SME linkages and forward will be to address the Business Edge MSME training (incl. concerns of the government in the North) (Completed)  regarding the sustainability of the initiatives and the alignment with government programs in a way that preserves the achievements of the past and retains its commitment to broaden its impact nationally. CAS Outcome 1.2: Improving Access to Public Services and Infrastructure in the North and East  Share of rural population with  Achieved: 15 percent as per the Progress Report (Note: Internal Completed or Ongoing: The internal conflict destroyed access to basic infrastructure Team Calculation. Community Livelihoods in Conflict Areas infrastructure and housing and facilities in North and East to Project)    Puttalam Housing Project displaced people. The CAS reach 15 percent (9 percent as (Completed) program was effective in 66 Table 1. Summary of CAS Program Self-evaluation Cluster of outcomes and Status and evaluation summary Lending and non-lending activities Lessons and suggestions for outcome indicators that contributed to the outcome the new CPS of 2008)    Tsunami Emergency Reconstruction helping the government address Program (Completed) these challenges. The positive  Share of destroyed residential  Achieved: 17.3 percent 28-11-2011   Community Livelihoods in Conflict results (foremost the rapid houses in North and East Affected Areas Project resettlement of refugees) reflect rehabilitated to reach 37 Note on the calculation: 300,000 was the stock of damaged housing as (Reawakening Project) (Ongoing) government commitment, percent. (Baseline corrected: of June 2008. Under the North-East Housing Reconstruction Program  North East Housing Reconstruction World Bank and other donors’ 10 percent as of 2008; Target 48,049 housing had been constructed (28-11-2011) and under the Program and Additional Financing rapid response and an increased to be revised: to 18 percent;   Puttalam Housing Project 4,144 (20-09-11) for a total of 52, 193 units. (Completed) allocation of (IDA) resources  Integrated Rural Development – towards these objectives. renamed North East Local Services Improvement Project (Ongoing)  100,000 Internally Displaced  Provincial Road Project (Ongoing)  New Indicator; Achieved: 187,533 IDPs returned as of 31-10-2011, This experience exemplifies the Persons returned to their place  Impact Evaluation of Gama Naguma exceeding the target set by the CPR and the supporting project importance of the a flexible of origin.   (TA) (Completed) approach that responds to (Emergency Northern Recovery ISR.)  Emergency Northern Recovery emerging developments,. Project (Ongoing) The challenge ahead will be  1, 070,000 person-days of  New Indicator; Achieved: 1,713,603 person-days of employment aligning continued support for employment generated for generated as of 31-10-2011, exceeding the target set by the CPR  Community Livelihoods in Conflict increasing economic returnees.   and the supporting project (Emergency Northern Recovery ISR.) Affected Areas Project Additional opportunities in conflict Finance (Ongoing)  119,200 hectares cultivated affected areas with he after irrigation rehabilitation. government growth strategy  Achieved. Farm area has increased by 19,200 ha due to increased that emphasizes strong growth (New Indicator; Achievement supply of water resulting from irrigation rehabilitation. poles throughout the island. expected by end of CAS period: 03/11/2011(Community Livelihoods in Afflicted Areas Project These two goals are quite 300 hectares cultivated as of ISR.) The final objective under this project is 213,000 ha for compatible. 2011.)  December 2013. While the original target was too ambitious, the revised target in the Progress Reports seems low.) 67 Table 1. Summary of CAS Program Self-evaluation Cluster of outcomes and Status and evaluation summary Lending and non-lending activities Lessons and suggestions for outcome indicators that contributed to the outcome the new CPS (Note: Other projects also focus enabling land for cultivation in the conflict affected areas. For instance, under the Emergency Northern Recovery Project, around 6,000 HAs have been made available for around 28,000 resettled persons.) STRATEGIC OBJECTIVE 2: IMPROVING THE INVESTMENT CLIMATE AND COMPETITIVENESS. ACCELERATE AND SUSTAIN ECONOMIC GROWTH CAS Outcome 2.1: Improving Infrastructure Provision  Reduction in International Road  Achieved: Average IRRI for Sri Lanka equal to 6.2 as of 2010 Completed or Ongoing: Redressing the infrastructure Roughness Index to 8.4 (Source: PAD for Second Additional Financing (credit) for the gap has been a top government (Average IRRI for Sri Lanka Road Sector Assistance Project, March 15, 2011)  Road Sector Assistance Project priority that has received the equal to 9.5 in 2005) (Ongoing) support of the donor  Second Community Water Supply community. Major institutional  4 percent decline in Average and Sanitation Project (Completed) gains have been made and Network Vehicle Operating  Achieved: 14.6 in 2010, a reduction of 39 percent, (Source: PAD  National and Provincial Road Sector results delivered. A key lesson Costs (23.8 in 2005) for Second Additional Financing (credit) for the Road Sector Projects (Ongoing) learned here is the importance Assistance Project, March 15, 2011)  Infrastructure Assessment (AAA) of the government leadership in (Ongoing) coordinating the contribution of  TA for Regulatory Agencies (IDF traditional donors.  Reduction in road network in Likely to be Achieved: 38 percent in 2010. The target under the Roads grant for telecom sector) poor or bad condition to 35 The challenge ahead lies in Sector Project for 2011 is 37. Road performance information for 2011 (Completed) percent (52 percent in 2005) shifting the focus from Target revised by PR : 37 is not yet available. (Source: PAD for Second Additional Financing  IFC completed portfolio investment in South Asia Gateway Terminals infrastructure to logistics with percent by end of CAS period) (credit) for the Road Sector Assistance Project, March 15, 2011) (port) (Completed) the view to develop efficiency corridors that improve the  IFC portfolio investments in Dialog and Suntel (ICT) (Ongoing) integration of the domestic economy and link it with the external markets. 68 Table 1. Summary of CAS Program Self-evaluation Cluster of outcomes and Status and evaluation summary Lending and non-lending activities Lessons and suggestions for outcome indicators that contributed to the outcome the new CPS CAS Outcome 2.2: Improving the Business Environment for Stronger Entrepreneurship and a Knowledge-Based Economy  Share of commercial lending for  Achieved: Share of commercial lending for SMEs has increased by Completed or Ongoing: WBG support for improving the SMEs from World Bank 15 percent as per CAS Progress Report. business environment was increased by 10 percent.  SME Development Facility Project effective but limited, especially Note: World Bank support for lending to the SME sector has come (Ongoing) given the importance the through the Small and Medium Enterprise Development Facility  IFC GTFP support for SMEs government assigns to rapid Project approved in FY11. As of 01-12-2011, 209 loans had been (Ongoing) economic growth. The processed and 46 approved, with 75 percent more than three-year  IFC investment and advisory for intervention to support IT maturity. The total amount of resources made available had reached MSME finance (Ongoing) development in government and US$4.4 million. (ISR—April-2011)  IFC Dialog investment capacity the private sector has been very  20 e-government services building for MSMEs via SME effective and is a good example  Achieved: 130 e-government informational services offered 03-11- Toolkit and ICT (Ongoing) established and used by private of a well targeted operation that 2011 (ISR –e-Sri Lanka Project.) sector (Baseline: zero as of  IFC advisory on Corporate responds to the strategic priority 2008) (Note: Contribution of the e-Sri Lanka Project and parallel IFC efforts Governance in the Financial and of the government. go far beyond the above indicator. See, ISR 03-11-2011.) Corporate sectors (Ongoing)  IFC study and software development Channelling resources through support for Secured Collateral the financial sector worked well Registry and Payment System both for the IFC and the World  Achieved: 35 days as per the 2012 Doing Business report, a 50 (Completed) Bank and helped by-pass local  Time to start up a business capacity constraints. reduced by 25 percent (70 days percent reduction.  Transition to IAS32, IAS39 and as of 2008) IFRS7 (TA funded by FIRST) .Arguably the lack of up-to-date (Completed) analytical work affected the  Amending SEC Act to enable capacity of the WBG to engage demutualization of Colombo Stock more effectively around the Exchange (TA funded by FIRST) growth agenda. A strong lesson (Completed) that emerges is the need to be 69 Table 1. Summary of CAS Program Self-evaluation Cluster of outcomes and Status and evaluation summary Lending and non-lending activities Lessons and suggestions for outcome indicators that contributed to the outcome the new CPS  Insurance Supervision support (TA ready with supporting funded by FIRST) (Completed) background work when a  E-Sri Lanka Project (Ongoing) strategy focus changes as in this  Private Sector Development in case from a strict IDA focus to Tourism Resources Project – a middle income agenda. This renamed Sustainable Tourism AAA gap was being redressed Development Project (Ongoing) by the end of the CAS period.  IFC advisory for sustainable tourism (incl. supplier MSME capacity building) (Completed)  IFC-WB support to Doing Business reform (TA) (Ongoing)  IFC portfolio investment in John Keels (Ongoing)  IFC advisory for investment climate reforms in one municipality (Completed)  Growth, Outsourcing and Jobs (AAA) – refocused (Ongoing)  IFC investment support for banks (Ongoing)  IFC investments in microfinance and equity funds supporting SMEs (Ongoing)  IFC advisory program for MSMEs via investment linkages and Business Edge (Completed)  IFC Access to Finance (risk management, agri-finance insurance) (Ongoing) 70 Table 1. Summary of CAS Program Self-evaluation Cluster of outcomes and Status and evaluation summary Lending and non-lending activities Lessons and suggestions for outcome indicators that contributed to the outcome the new CPS CAS Outcome 2.3: Improving the Strategic Relevance and Transparency of Public Spending  Share of budget expenditures  Achieved: As of 2011, no budget expenditures are categorized as Completed or Ongoing: The limited impact of the classified as ‘other’ in the ‘other’—CAS Progress Report program supporting the MTEF reduced to 5 percent (30  Public Sector Capacity Building strategic relevance and the percent in 2006) Project (Ongoing) transparency of public spending  IDF Grant for COPE/COPA was partly the result of low (Completed)  Quasi-fiscal losses of SOEs  government interest, lack of reduced to less than 0.5 percent  Target eliminated by the CAS Progress Report. Debt Management (TA) supporting analytical work and World Bank support for SOE did not materialize after an early on (Completed) of GDP (2 percent in 2006)  Infrastructure Assessment the difficulties with analytical work was completed due to lack of government’s demand. (AAA) (Ongoing) implementing the Public Sector Capacity Building Project, with  Improved public procurement,  Partial Progress. No noted progress in either public financial the exception of the support to public financial management management or public procurement, but some progress has been the office of the Auditor and parliamentary oversight made in improving parliamentary oversight over public spending: General that has worked well. over public spending (a) external auditing has widened to 100 percent of the public Efforts are underway to build a sector now, when it was 50 percent in 2008, and (b) the Audit program that can help Sri Lanka Agency is in time with the annual audit plan rather than 2 to 4 strengthen its country systems years late in 2008..(ISR Public Administration Project.) and develop effective results oriented budget programs. It is advisable that this area become a priority in the next strategy. 71 Table 1. Summary of CAS Program Self-evaluation Cluster of outcomes and Status and evaluation summary Lending and non-lending activities Lessons and suggestions for outcome indicators that contributed to the outcome the new CPS STRATEGIC OBJECTIVE 3: IMPROVING THE QUALITY OF SERVICES AND ACCOUNTABILITY. PROVISION OF HIGH QUALITY, RELEVANT AND COST EFFECTIVE PUBLIC SERVICES, INCLUDING IN CONFLICT-AFFECTED AREAS CAS Outcome 3.1: Improving Quality, Relevance and Governance of Education  School survival rates through  Achieved: 91 percent in 2010 as of 06/30/2011 Completed or Ongoing: The supporting environment in grade 9 increased from 79 education contains all of the key percent to 85 percent.  Education Sector Development elements for successful Project (Completed) cooperation. Strong institutions  Proportion of primary school  Achieved: 82 percent as of 06/30/11  Increasing Relevance and Quality of in education have steered the students attaining competence in Undergraduate Education Project delivery of strong results over a mathematics increased from 67 (Completed) long period of time. The percent t o 71 percent  Higher Education for the 21st analytical work of the World Century Project (Ongoing) Bank in education was amply  School based management  Achieved: The Program for School Improvement; which allows  Impact evaluation of school based discussed and disseminated. increased from 16 zones (17 local communities to play a role in school management was piloted management (TA) (Ongoing) The government has undertaken percent of zones) to at least 46 tested and extended to all zones in the country by 12/31/2011.  Higher Education Study (AAA) important institutional reform in zones (50 percent of zones). (Completed) tertiary education. The World Bank has worked with regions  Higher education development  Achieved in improving results at the local strategy completed and notified.  General Education Project – renamed level. All expected outcomes Transforming School Education as under the CAS were delivered.  IT achievement scores of the Foundation for a Knowledge Hub undergraduates rise from 49  Achieved: 56 percent as of 2008 (the end of project figure was Project (Ongoing) One lesson for cooperation in percent in 2005 to 60 percent in measured in 2008 when the targeted interventions, Institutional other sectors is to take a long 2008. English language Block Grants was completed)See ICR for Improving Relevance and term perspective to build solid achievement scores of Quality of Undergraduate Education12/31/2008 results overtime. Another lesson undergraduates rise from 59 that emerges is the importance percent (as of 2005) to 67  Achieved: 69 percent as of 2008. See ICR for Improving Relevance of SWAPs and results-based instruments to implement 72 Table 1. Summary of CAS Program Self-evaluation Cluster of outcomes and Status and evaluation summary Lending and non-lending activities Lessons and suggestions for outcome indicators that contributed to the outcome the new CPS percent in 2008 and Quality of Undergraduate Education 12/31/2008 program that have a strong regional focus.  Promote a multi-ethnic and multicultural society through the  Achieved School curriculum promotes bilingual education and school curriculum. includes civics as a subject, in 2011 CAS Outcome 3.2: Improving Health and Social Protection Services  Percentage of districts with  Partially achieved: 77 percent of districts as reported by the CAS Completed or Ongoing: The country has sustained the MMR of 46.9/100,000 or lower Progress Report. improving trend in health equal to 80 percent  Health Sector Development Project indicators, such as maternal and Note: The ICR for the Heath Sector Delivery Project reports 70 and Additional Financing infant mortality. The percent for 12/31/2010 and 68percent for 12/31/2009) (Completed) contribution of the World Bank  National HIV/AIDS Project has come in supporting  Achieved: 122,130 women screened, an increase of 112 percent, 1as (Completed) improved managerial practices  Number of women more than 35 per the CAS Progress Report  Health Delivery System Review and at the local level. The analytical years screened for cervical Non-Communicable Diseases work of the World Bank has cancer increased by 25 percent Note: the ICR for Heath Sector Delivery Project reports an increase Strategy (AAA) (Completed) pointed out the challenges of (57,639 screened in 2007) of 200 percent between 2008 and 2010 in the percentage of women  Study on Private Sector in Health the demographic transition and screened for cervical cancer. (AAA) (Ongoing) non-communicable diseases. As  IFC investments in hospitals in the case of education, (Ongoing) SWAPs and results-based  Coverage of HH receiving  Achievement expected by end of CAS period. 30 percent of HH  IDF to improve targeting and instruments seem quite Samurdhi benefits reduced from receive benefits, with 13.2 percent of beneficiaries in the East and appropriate to help implement administration of Samurdhi 47 percent to 40 percent while 4.1 percent in the North, based on most recently available data as of programs that have a strong (Ongoing) the share of Samurdhi 2011.  Towards a Social Protection system regional focus. Going forward 73 Table 1. Summary of CAS Program Self-evaluation Cluster of outcomes and Status and evaluation summary Lending and non-lending activities Lessons and suggestions for outcome indicators that contributed to the outcome the new CPS beneficiaries in the East for the poor (programmatic TA) the challenge will be how to increases from 11.7 percent to (Completed) address the changes in demand 15 percent, and in the North  Income Support to Disabled and for health services that come from 3.5 percent to 5 percent  Achieved: 90,000. (Source: CAS Progress Report) Elderly Project (Global Food Crisis with an aging population. Rapid Response Program) (Ongoing)  30 percent increase in the  JSDF Proposal Development Fund coverage of the Employment (Completed) Promotion and Creation Program (baseline 3.000 per  Post Disaster Safety Net Project. year) (Global Food Crisis Rapid Response Program) (Completed)  30 percent increase in social  Achieved: 44 centers in 2011, an increase of 63 percent (Source:  Implementation and evaluation of care centers for vulnerable CAS Progress Report) Samurdhi targeting (TA) groups (baseline 27 centers in  Demographic transition (AAA) 2008) (Ongoing) CAS Outcome 3.3: Strengthening Environmental Protection  25 percent reduction in time for  No progress as per the CAS Progress Report Completed or ongoing: World Bank work on processing environmental environment was impaired by approvals (180 days today for  Sri Lanka Country Environmental the fact that the Ecosystems EIAs and 45 days for EPLs) Analysis –Natural Resources, Conservation and Management Target revised by the CAS PR: Environment and Development Project did not materialize to 15 percent reduction in time. (AAA) (Completed) during this CAS period, owing  Environmental impacts of coal power to changed government generation (AAA) – refocused priorities. Given that the project  20 percent of GOSL policies (Completed) was designed and developed  IFC advisory for energy efficiency in 74 Table 1. Summary of CAS Program Self-evaluation Cluster of outcomes and Status and evaluation summary Lending and non-lending activities Lessons and suggestions for outcome indicators that contributed to the outcome the new CPS and programs will be subject to  Achieved: 20 percent. (Source: CAS Progress Report) the tea industry (Completed) jointly with sector government Strategic Environmental  IFC investment and advisory for officials, these events point to Assessments (none today) sustainable energy projects via the type of risks that can arise PADGO (Portfolio Approach to today in Sri Lanka. Efforts  40 percent increase in Distributed Generation Opportunity) should be made to mitigate international tourist visitation to  Target eliminated by the CAS Progress Report risk sharing facilities and direct these risks without protected areas and forest Supporting program did not materialize. support. (Ongoing) compromising an open reserves (Currently 50,000  Nature Based Tourism and Human approach to cooperation. international tourists per Elephant Conflict (AAA) annum) To the contrary the progress  Target eliminated by the CAS Progress Report (Completed)  Reducing the human/elephant with increasing the supply of Supporting program did not materialize renewable energy and abating conflict; annual number of human deaths from wild carbon emissions has been quite elephants reduced by 25 percent effective, even if at a pliot level. (75 deaths in 2006); number of The experience provides a wild elephants killed reduced by valuable experience for Sri 25 percent (160 killed in 2006) Lanka and for other countries. 75 Table 2: Sri Lanka Planned and Delivered Operations—FY09-FY12 CAS Fiscal CAS Planned Project Planned Status Approved Year Amount Amount (US$m) (US$m) FY09 Integrated Community Development – 75 Approved in FY10* Gama Naguma/Lagging Regions (renamed Second Community Development and Livelihood Improvement Project) Provincial Road (East and 150 Approved in FY10* Sabagaragamuwa) Development (renamed Provincial Road Project) Additional Actual Projects Health Sector Development Additional 24 Financing Road Sector Assistance Project – Additional Finance (programmed for FY08; approved FY09) 98.1 TOTAL FY09 122.1 FY10 Integrated Rural Development— Gama 50 Actual 50 Naguma/ Lagging Regions for East (renamed North & East Local Services Improvement Project) Higher Education 40 40 Environmental Resource Management 20 Dropped (renamed Ecosystems Conservation and Management Project) Private Sector Development in Tourism 15 18 Resources (renamed Sustainable Tourism Development project) 76 National and Provincial (Western and 115 Dropped Uva) Road Development (AF for Road Sector Assistance Project, FY09 ongoing) Second Community Development and Shifted from FY09 75 Livelihood Improvement Project Provincial Road Project Shifted from FY09 105 Additional Actual Projects Emergency Northern Recovery Project 65 Community Livelihoods in Conflict Affected Areas – Additional 12 Finance TOTAL FY10 365 FY11 National and Provincial (North Central 100 Dropped and North Western) Road Development (converted into 2nd AF for Road Sector Assistance Project, FY11) Irrigation Maintenance and Water 50 Dropped Community Water Supply & Poverty 40 Dropped Alleviation in Plantation Districts Agriculture Research and Productivity 35 Dropped Improvements (renamed Agricultural Competitiveness Project) Additional Actual Projects SME Development 57.4 Facility Project Road Sector Assistance 100 Project – 2nd Additional Finance 77 Community Livelihoods 48 in Conflict Affected Areas – 2nd Additional Finance (flood response) TOTAL FY11* 205.4 FY12 General Education 50 Actual 100** (renamed Transforming School Education as the Foundation for a Knowledge Hub) Health Sector Development 35 Slipped to FY13 Water Supply in the Northern Easter and 75 Dropped Sabaragamuwa Province National and Provincial (North Central 50 Dropped and Northern Road Development) (converted into 2nd AF for Road Sector Assistance Project, FY11) Additional Actual Projects Metro Colombo 213** Integrated Urban Development Project E-Sri Lanka 11 TOTAL FY12** 324 Note: *Project moved to FY 10 and lending amount is shown under FY10. ** Indicative. 78 Table 3 : Summary of Planned and Delivery Non-lending Services FY09-12 Completion Product*,** ESW TA FY Programmatic Area: Supporting the Mahinda Chintana goal of doubling per capita income / sustained economic growth ‘Completions Growth Potential in Lagging Regions 2009  Cost of No Reform 2009  Towers of Learning: Higher Education Report 2009  Environmentally Sustainable Power Development 2010  Knowledge Economy Report** 2010  Nature-Based Tourism & Human Elephant Conflict 2010  Valuation of Environmental Services 2010  Agricultural Policy Options 2010  Benchmarking of procurement system 2010  Transport Policy Note 2012  Post FSAP, Crisis Management, Financial Safety Net and Lender of Last Resort 2012  Underway Support for Post-Crisis PPP framework development in Sri Lanka** 2012  Infrastructure Assessment 2012  Impact of the current trade policies on the agricultural incentive framework (Promoting broad based agricultural growth in Sri Lanka: Policy and investment priorities) 2012  Strategic Development Framework Eastern Province** 2012  Pre-feasibility assessment of the conditions of degradation of the Sigiriya Frescoes in Sri Lanka** 2012  Procurement policy note 2012  Use of Country Financial Management System 2012  Financial Sector Policy Note * 2012  79 Completion Product*,** ESW TA FY Investment Climate Assessment Policy Note 2012  Fiscal Policy Note 2012  2020 Raising the Game: Growth Report 2012  Competitive Skills for a MIC 2011  Supporting the Mahinda Chintana goal of a high quality of life for all its people/ public service provision in the middle income country context Completions Lagging Regions Phase 2 2010  Health Services Delivery in Sri Lanka 2010  Social Protection TA 2010  Excellence in General Education 2011  Sri Lanka Development Partners Coordination** 2011  Underway Private Health Sector Assessment* 2013 Strengthening Samurdhi Targeting Systems** 2012  Demographic Transition Study* 2012  Disaster Reduction and Recovery in Sri Lanka** 2012  Environmental Assessment System 2011  Implementing the Sri Lanka Conflict Filter** 2012  Assessment of the Secondary Cities of Sri Lanka * 2012  Tackling Persistent Gender Issues* 2012  Urban Policy Notes 2012  NOTE: This Table updates the information presented in the CAS Progress Report. * AAA not foreseen in FY09-12 CAS. ** TA not foreseen in FY09-12 CAS. 80 Annex 3: Sri Lanka At A Glance  2/25/11 Lower- POVERTY and SOCIAL Sri South middle- Development diamond* Lanka Asia income 2009 Population, mid-year (millions) 20.3 1,568 3,811 Life expectancy GNI per capita (Atlas method, US$) 1,990 1,082 2,316 GNI (Atlas method, US$ billions) 40.4 1,697 8,825 Average annual growth, 2003-09 Population (%) 1.0 1.5 1.2 GNI Gross Labor force (%) 0.6 2.2 1.5 per primary Most recent estimate (latest year available, 2003-09) capita enrollment Poverty (% of population below national poverty line) .. .. .. Urban population (% of total population) 15 30 41 Life expectancy at birth (years) 74 64 68 Infant mortality (per 1,000 live births) 13 55 43 Child malnutrition (% of children under 5) 21 41 25 Access to improved water source Access to an improved water source (% of population) 90 87 87 Literacy (% of population age 15+) 91 61 80 Gross primary enrollment (% of school-age population) 101 108 107 Sri Lanka Male 101 110 109 Lower-middle-income group Female 102 105 105 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1989 1999 2008 2009 Economic ratios* GDP (US$ billions) 7.0 15.7 40.7 42.0 Gross capital formation/GDP 21.7 27.3 27.6 24.5 Trade Exports of goods and services/GDP 27.3 35.5 24.8 21.4 Gross domestic savings/GDP 12.2 19.5 13.9 18.0 Gross national savings/GDP 18.9 23.5 14.8 20.2 Current account balance/GDP -5.2 -3.6 -9.5 -0.5 Domestic Capital Interest payments/GDP 2.2 1.4 0.9 0.8 savings formation Total debt/GDP 74.2 62.6 38.3 41.0 Total debt service/exports 18.2 11.1 9.3 10.1 Present value of debt/GDP .. .. .. 31.6 Present value of debt/exports .. .. .. 94.5 Indebtedness 1989-99 1999-09 2008 2009 2009-13 (average annual growth) GDP 5.3 5.3 6.0 3.5 7.2 Sri Lanka GDP per capita 4.3 4.3 5.2 2.8 .. Lower-middle-income group Exports of goods and services 7.4 .. .. .. .. STRUCTURE of the ECONOMY 1989 1999 2008 2009 Growth of capital and GDP (%) (% of GDP) 10 Agriculture 25.6 20.7 13.4 12.6 8 Industry 26.8 27.3 29.4 29.7 6 Manufacturing 15.3 16.4 18.0 18.1 4 Services 47.6 52.0 57.2 57.7 2 0 Household final consumption expenditure 77.3 71.5 70.0 64.3 04 05 06 07 08 09 General gov't final consumption expenditure 10.5 9.0 16.2 17.6 GCF GDP Imports of goods and services 36.8 43.3 38.5 27.9 1989-99 1999-09 2008 2009 (average annual growth) Agriculture 2.0 2.4 7.5 3.2 Industry 7.0 5.2 5.9 4.2 Manufacturing 8.3 4.3 4.9 3.3 Services 5.7 6.0 5.6 3.3 Household final consumption expenditure 4.9 .. .. .. General gov't final consumption expenditure 20.1 .. .. .. Gross capital formation 6.4 .. .. .. Imports of goods and services 8.4 .. .. .. Note: 2009 data are preliminary estimates. This table was produced from the Development Economics LDB database. * The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. 81 PRICES and GOVERNMENT FINANCE 1989 1999 2008 2009 Inflation (%) Domestic prices 25 (% change) 20 Consumer prices 11.6 4.7 22.6 3.4 15 Implicit GDP deflator 10.9 4.2 16.3 5.7 10 Government finance 5 (% of GDP, includes current grants) 0 Current revenue 24.0 18.4 15.6 15.1 04 05 06 07 08 09 Current budget balance 1.4 -0.4 -1.3 -3.1 GDP deflator CPI Overall surplus/deficit -8.6 -6.9 -7.0 -9.8 TRADE 1989 1999 2008 2009 Export and import levels (US$ mill.) (US$ millions) Total exports (fob) 1,558 4,610 8,111 7,085 15,000 Tea 379 620 1,272 1,185 Other agricultural goods and unclassified expor 86 374 583 505 10,000 Manufactures 490 2,425 3,469 3,274 Total imports (cif) 2,282 5,979 14,091 10,207 Food .. 661 1,138 987 5,000 Fuel and energy .. 500 3,368 2,167 Capital goods .. 1,565 3,048 2,451 0 03 04 05 06 07 08 09 Export price index (2000=100) 16 92 140 138 Import price index (2000=100) 26 86 153 155 Exports Imports Terms of trade (2000=100) 64 107 91 89 BALANCE of PAYMENTS 1989 1999 2008 2009 Current account balance to GDP (%) (US$ millions) Exports of goods and services 1,904 5,578 10,115 8,977 0 03 04 05 06 07 08 09 Imports of goods and services 2,621 6,799 15,694 11,708 -2 Resource balance -717 -1,221 -5,579 -2,731 -4 Net income -163 -254 -972 -487 -6 Net current transfers 519 913 2,666 3,004 -8 Current account balance -360 -562 -3,885 -214 -10 Financing items (net) 396 299 2,778 3,491 -12 Changes in net reserves -36 263 1,107 -3,277 Memo: Reserves including gold (US$ millions) 254 1,639 5,467 5,578 Conversion rate (DEC, local/US$) 36.1 70.6 108.3 114.9 EXTERNAL DEBT and RESOURCE FLOWS 1989 1999 2008 2009 Composition of 2009 debt (US$ mill.) (US$ millions) Total debt outstanding and disbursed 5,181 9,800 15,611 17,208 IBRD 82 20 0 0 1873 2487 IDA 702 1,651 2,381 2,487 Total debt service 422 757 1,231 1,418 721 IBRD 12 8 0 0 2685 IDA 7 27 74 73 Composition of net resource flows Official grants 195 112 520 497 3388 Official creditors 298 151 268 603 Private creditors -48 -83 163 638 Foreign direct investment (net inflows) 20 176 752 404 Portfolio equity (net inflows) 0 0 -488 -382 6054 World Bank program Commitments 20 56 279 99 Disbursements 59 49 95 147 A - IBRD E - Bilateral Principal repayments 6 21 55 56 B - IDA D - Other multilateral F - Private C - IMF G - Short-term Net flows 53 28 40 91 Interest payments 12 14 19 17 Net transfers 41 14 21 74 Note: This table was produced from the Development Economics LDB database. 2/25/11 82 Annex  4:  Selected  Indicators  of  World  Bank  Portfolio  Performance  and  Management  Indicator 2009 2010 2011 2012 Portfolio Assessment Number of Projects Under Implementation a 13 16 15 13 Average Implementation Period (years) b 4.8 3.7 3.6 3.2 Percent of Problem Projects by Number a, c 7.7 6.3 13.3 15.4 Percent of Problem Projects by Amount a, c 3.3 2.7 7.9 8.5 Percent of Projects at Risk by Number a, d 7.7 6.3 20.0 23.1 Percent of Projects at Risk by Amount a, d 3.3 2.7 16.5 36.8 Disbursement Ratio (%) e 24.6 48.3 33.5 13.5 Portfolio Management CPPR during the year (yes/no) Supervision Resources (total US$) Average Supervision (US$/project) Memorandum Item Since FY 80 Last Five FYs Proj Eval by OED by Number 82 4 Proj Eval by OED by Amt (US$ millions) 2,302.5 140.2 % of OED Projects Rated U or HU by Number 31.6 25.0 % of OED Projects Rated U or HU by Amt 35.5 5.7 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the World Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the World Bank's portfolio at the beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. 83 Annex 5: Sri Lanka IFC Investment Operations Program    * As of March 13,2012 2009 2010 2011 2012* Original Commitments (US$m) IFC and Participants 51 74 31 83 IFC's Own Accounts only 38 69 30 83 Original Commitments by Sector (%)- IFC Accounts only COLLECTIVE INVESTMENT VEHICLES 34 ELECTRIC POWER 19 13 0 FINANCE & INSURANCE 100 52 54 100 HEALTH CARE 29 Total 100 100 100 100 Original Commitments by Investment Instrument (%) - IFC Accounts only Equity 46 4 Guarantee 100 71 54 18 Loan 29 78 Total 100 100 100 100 84 Annex 6: Sri Lanka Social Indicators  Latest single year Same region/income group Lower- South middle- 1980-85 1990-95 2004-10 Asia income POPULATION Total population, mid-year (millions) 16.2 18.2 20.9 1,567.7 3,810.8 Growth rate (% annual average for period) 1.4 1.0 1.0 1.5 1.2 Urban population (% of population) 18.0 16.4 15.1 29.8 40.9 Total fertility rate (births per woman) 2.9 2.2 2.3 2.8 2.5 POVERTY (% of population) National headcount index .. 26.1 15.2 .. .. Urban headcount index .. 16.3 6.7 .. .. Rural headcount index .. 29.5 15.7 .. .. INCOME GNI per capita (US$) 370 690 2,240 1,107 2,321 Consumer price index (2005=100) 22 65 273 135 130 Food price index (2000=100) .. .. .. .. .. INCOME/CONSUMPTION DISTRIBUTION Share of income or consumption Gini index 32.5 32.5 40.3 .. .. Lowest quintile (% of income or consumption) 8.3 8.7 6.9 .. .. Highest quintile (% of income or consumption) 41.1 41.5 47.8 .. .. SOCIAL INDICATORS Public expenditure Health (% of GDP) .. 1.6 1.8 1.3 2.1 Education (% of GNI) .. .. .. 2.9 4.1 Social security and welfare (% of GDP) .. .. .. .. .. Net primary school enrollment rate (% of age group) Total .. .. 95 86 87 Male .. .. 95 88 88 Female .. .. 95 83 86 Access to an improved water source (% of population) Total .. 73 90 87 87 Urban .. 93 98 95 95 Rural .. 69 88 83 81 Immunization rate (% of children ages 12-23 months) Measles 20 87 96 75 79 DPT 70 93 97 72 79 Child malnutrition (% under 5 years) .. .. 22 43 24 Life expectancy at birth (years) Total 69 69 75 64 68 Male 66 66 72 63 66 Female 72 73 78 66 70 Mortality Infant (per 1,000 live births) 31 23 14 55 43 Under 5 (per 1,000) 37 27 17 71 58 Adult (15-59) Male (per 1,000 population) 200 182 190 242 201 Female (per 1,000 population) 152 122 77 169 136 Maternal (per 100,000 live births) .. 73 39 290 230 Births attended by skilled health staff (%) .. 94 99 47 67 CAS Annex B5. This table was produced from the CMU LDB system. 02/03/12 Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollment rate: break in series between 1997 and 1998 due to change from ISCED76 to ISCED97. Immunization: refers to children ages 12-23 months who received vaccinations before one year of age or at any time before the survey. 85 Annex 7: Key Economic Indicators  Actual Estimate Projected Indicator 2007 2008 2009 2010 2011 2012 2013 2014 2015 National accounts (as % of GDP) a Gross domestic product 100 100 100 100 100 100 100 100 100 Agriculture 12 13 13 13 14 15 15 15 16 Industry 30 29 30 29 28 27 26 26 25 Services 58 57 58 58 58 58 59 59 59 Total Consumption 82 86 82 81 81 79 82 83 84 Gross domestic fixed investment 25 25 24 28 29 33 30 29 29 Government investment 5 6 6 6 6 6 6 6 6 Private investment 20 19 17 22 23 27 24 24 23 b Exports (GNFS) 29 25 21 22 24 26 27 28 30 Imports (GNFS) 39 39 28 31 35 37 39 41 43 Gross domestic savings 18 14 18 19 19 21 18 17 16 c Gross national savings 23 18 24 25 27 30 28 28 27 Memorandum items Gross domestic product 32351 40715 42068 49552 57210 61423 70585 80058 89036 (US$ million at current prices) GNI per capita (US$, Atlas method) 1570 1770 1960 2300 2570 2880 3230 3570 3990 Real annual growth rates (%, calculated from 82 prices) Gross domestic product at market prices 6.8 6.0 3.5 8.0 7.7 6.8 7.7 7.0 7.0 Gross Domestic Income 5.8 3.1 10.0 7.5 6.8 6.6 7.3 6.5 6.4 Real annual per capita growth rates (%, calculated from 82 prices) Gross domestic product at market prices 5.7 4.9 2.6 7.0 7.7 6.8 6.6 5.9 5.9 Total consumption 3.4 6.8 2.7 7.4 6.9 3.4 11.0 6.8 6.8 Private consumption 2.9 6.5 0.0 8.7 7.6 2.7 12.0 6.9 7.0 Balance of Payments (US$ millions) b Exports (GNFS) 9415 10115 8977 10775 13348 16393 19265 22655 26660 Merchandise FOB 7640 8111 7085 8307 10487 13060 15382 18132 21391 b Imports (GNFS) 12768 15694 11708 15282 22163 24283 28532 33620 39688 Merchandise FOB 11296 14091 10207 13512 20230 22190 26277 31190 37070 Resource balance -3353 -5579 -2731 -4507 -8815 -7890 -9267 -10966 -13028 Net current transfers 2311 2666 3004 3660 4574 6583 7879 9435 11302 Current account balance -1400 -3885 -214 -1419 -4005 -1960 -1927 -2221 -2657 Net private foreign direct investment 548 691 384 435 1000 1500 1500 1000 1000 Long-term loans (net) 672 252 840 1796 -142 -2017 1172 2760 3262 Official 304 271 605 1297 1245 995 357 -121 -516 Private 368 -19 235 499 -1386 -3012 815 2882 3778 Other capital (net, incl. errors & ommissions) 851 1835 2455 1027 3150 2945 1086 1684 2360 c Change in reserves -671 1107 -3465 -1839 -3 -468 -1830 -3224 -3964 Memorandum items Resource balance (% of GDP) -10.4 -13.7 -6.5 -9.1 -15.4 -12.8 -13.1 -13.7 -14.6 Real annual growth rates ( YR82 prices) Merchandise exports (FOB) 1.0 2.6 -17.3 7.6 32.5 16.2 16.3 16.4 16.5 Primary .. .. .. .. .. .. .. .. .. Manufactures -1.5 0.3 -10.6 -1.8 36.0 17.7 17.9 18.1 18.2 Merchandise imports (CIF) -2.4 6.3 -14.8 14.9 35.6 14.6 15.9 16.0 16.1 86 Actual Estimate Projected Indicator 2007 2008 2009 2010 2011 2012 2013 2014 2015 d Public finance (as % of GDP at market prices) Current revenues 16.6 15.6 15.0 14.9 15.7 16.0 16.2 16.3 16.3 Current expenditures 17.4 16.9 18.2 16.7 16.3 16.0 15.4 15.0 14.7 Current account surplus (+) or deficit (-) -0.8 -1.3 -3.2 -1.8 -0.6 0.1 0.8 1.2 1.5 Capital expenditure 6.1 5.7 6.7 6.4 6.0 6.2 6.0 6.0 6.0 Foreign financing 3.7 0.6 5.3 4.7 2.6 2.0 0.3 0.5 0.2 Monetary indicators M2/GDP 41.8 37.5 40.5 40.2 43.3 49.8 49.2 49.2 49.2 Growth of M2 (%) 19.8 10.6 18.4 14.9 24.5 31.0 13.4 13.4 13.4 Private sector credit growth / 124.6 34.2 -149.1 97.6 177.1 121.7 100.2 78.2 66.4 total credit growth (%) Price indices( YR82 =100) Merchandise export price index 200.5 207.5 219.2 238.9 240.8 243.9 247.1 250.3 253.6 Merchandise import price index 213.1 250.1 212.6 244.9 253.9 258.8 264.3 270.4 276.8 Merchandise terms of trade index 94.1 83.0 103.1 97.6 94.8 94.3 93.5 92.6 91.6 e Real exchange rate (US$/LCU) 100.4 117.8 119.7 123.0 123.0 124.0 125.0 126.0 127.0 Real interest rates Consumer price index (% change) 15.8 22.6 3.4 6.7 6.7 6.0 6.0 6.0 6.0 GDP deflator (% change) 14.0 16.3 5.9 7.3 7.2 6.7 6.7 6.0 6.0 a. GDP at market prices b. "GNFS" denotes "goods and nonfactor services." c. Includes use of IMF resources. d Consolidated central government. e. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation. 87 Annex 8: Key Exposure Indicators   Actual Estimated Projected Indicator 2007 2008 2009 2010 2011 2012 2013 2014 2015 Total debt outstanding and 14369 15615 17213 20452 21534 21766 21414 20504 19125 a disbursed (TDO) (US$m) a Net disbursements (US$m) 1158 356 1145 2334 1099 232 -352 -911 -1379 Total debt service (TDS) 837 1231 1417 1445 1480 2032 1958 2102 2235 a (US$m) Debt and debt service indicators (%) b TDO/XGS 116.2 120.1 138.6 134.4 112.0 95.5 79.5 64.4 50.8 TDO/GDP 44.4 38.4 40.9 41.3 37.6 34.1 29.7 25.6 21.5 TDS/XGS 6.8 9.5 11.4 9.5 7.7 8.9 7.3 6.6 5.9 Concessional/TDO 67.8 68.0 64.5 60.6 62.0 65.0 67.4 70.0 72.8 IBRD exposure indicators (%) IBRD DS/public DS 0.0 0.0 0.0 0.0 0.0 0.1 0.3 0.4 0.5 Preferred creditor DS/public 26.2 27.5 26.7 25.4 28.2 22.4 46.5 48.8 26.6 c DS (%) IBRD DS/XGS 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 d IBRD TDO (US$m) 0 0 0 0 0 36 112 232 400 Of which present value of guarantees (US$m) Share of IBRD portfolio (%) 0 0 0 0 0 0 0 0 0 d IDA TDO (US$m) 2357 2381 2487 2531 2632 2716 2756 2752 2713 IFC (US$m) Loans 27 136 85 93 79 79 n.a n.a n.a Equity and quasi-equity /e 30 39 24 18 15 18 n.a n.a n.a MIGA MIGA guarantees (US$m) 0 0 0 0 0 0 n.a n.a n.a a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short- term capital. b. "XGS" denotes exports of goods and services, including workers' remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for International Settlements. d. Includes present value of guarantees. e. Includes equity and quasi-equity (including both loan and equity types)   88 Annex 9: IDA Operations Portfolio  Operations Portfolio (IBRD/IDA and Grants) As Of Date 3/29/2012 Closed Projects 104 IBRD/IDA * Total Disbursed (Active) 488.93 of w hich has been repaid 0.00 Total Disbursed (Closed) 973.42 of w hich has been repaid 480.08 Total Disbursed (Active + Closed) 1,462.36 of w hich has been repaid 480.08 Total Undisbursed (Active) 793.10 Total Undisbursed (Closed) 1.37 Total Undisbursed (Active + Closed) 794.46 Active Projects Difference Between Last PSR Expected and Actual Supervision Rating Original Amount in US$ Millions Disbursements a/ Development Implementation Project ID Project Name Fiscal Year IBRD IDA GRANT Cancel. Undisb. Orig. Frm Rev'd Objectives Progress P086411 LK - Road Sector AssistancS S 2006 298.1 116.9558 -81.56415 17.08835 P113036 LK: N&E Local Services ImS S 2010 50 31.66799 P087145 LK: 2nd Comm Devt & LivelMU MU 2010 75 41.64753 3.3705245 P086747 LK: Community Livelihoods S S 2004 124.7 53.99892 -9.142432 -9.14243 P081771 LK: E-Sri Lanka DevelopmeS S 2005 64 10.29228679 13.8022 10.375577 0.085576 P118870 LK: Emergency Northern R S S 2010 65 23.82835 8.2871218 P122735 LK: Metro Colombo Urban D # # 2012 213 213 P107847 LK: Provincial Roads ProjecS MS 2010 105 69.55786 P121328 LK: SME Development Fac S S 2011 57.4 29.45749 P113709 LK: Sustainable Tourism De S MS 2010 18 18.44142 P113488 LK: Transforming School Ed # # 2012 100 99.64409 P093132 LK:Dam Safety & Water ReS S 2008 65.3277 43.21821 38.359401 P113402 LK:Higher Educ. for Twenty S S 2010 40 33.85628 3.516244 P097329 SL: Public Sector Capacity MU S 2008 22.6 7.329915 4.019057 12.28609 Overall Result 213 1085.1277 17.62220179 793.0952 -96.20452 8.031493 89 Annex 10: Statement of IFC’s Held and Disbursed Portfolio  Sri Lanka Committed and Disbursed Outstanding Investment Portfolio As of 2/29/2012 (In USD Millions) Committed Disbursed Outstanding **Quasi Partici **Quasi Partici FY Approval Company Loan Equity Equity *GT/RM pant Loan Equity Equity *GT/RM pant 2010 Asiri Hospital 20.00 0.00 0.00 0.00 0.00 20.00 0.00 0.00 0.00 0.00 2003/ 2004/ 2007/ 2008/ 2009/ 2010/ 2011/ 2012 CBC 65.00 13.82 0.00 1.74 0.00 0.00 13.82 0.00 1.61 0.00 2009 CBCSL 0.00 0 0.00 12.94 0.00 0.00 0.00 0.00 4.48 0.00 2004 Dialog 0.00 2.71 0.00 0.00 0.00 0.00 2.71 0.00 0.00 0.00 2000 Fitch Srilanka 0.00 0.06 0.00 0.00 0.00 0.00 0.06 0.00 0.00 0.00 2008 John Keells Hold 50.00 0.00 0.00 0.00 0.00 50.00 0.00 0.00 0.00 0.00 2011 LR Global PEF 0.00 10.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2007/ 2009/ 2010/ 2011/ 2012 NDB SriLanka 0.00 0.00 0.00 2.30 0.00 0.00 0.00 0.00 2.30 0.00 2008/ 2009/ 2010/ 2011 NTB SriLanka 0.00 0.00 0.00 0.05 0.00 0.00 0.00 0.00 0.05 0.00 2011 Senok WindEnergy 0.00 1.69 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2011 Senok WindResour 0.00 1.69 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2001 Suntel 0.00 1.42 0.00 0.00 0.00 0.00 1.42 0.00 0.00 0.00 Total Portfolio: 135.00 31.40 0.00 17.03 0.00 70.00 18.02 0.00 8.44 0.00 * Denotes Guarantee and Risk Management Products. ** Quasi Equity includes both loan and equity types. 90 Annex 11: Summary of Development Partner Activities    Sector/Thematic Areas HUMAN RESOURCE DEVELOPMENT PRIVATE SECTOR DEVELOPMENT FINANCIAL & FISCAL SECTOR EDUCATION & VOCATIONAL AGRICULTURE, LIVESTOCK, HUMANITARIAN RESPONSE DISASTER PREPAREDNESS / Development Partners WATER AND SANITATION URBAN DEVELOPMENT BALANCED REGIONAL JUDICIAL AND LEGAL POWER AND ENERGY SOCIAL PROTECTION PORT AND AVIATION ROADS / BRIDGES PUBLIC SECTOR DEVELOPMENT ENVIRONMENT IRRIGATION TRAINING RAILWAY TOURISM HEALTH ADB X X X X X X X X X X X X Australia / AusAID X X Austria X X Belgium Brazil X Canada / CIDA X X X X China X X X X X Colombo Plan Commonwealth Denmark X X X Egypt X EU Delegation / ECHO X X X X X Finland X France X X X X Germany /GiZ X X X X X X X Hungary India X X X X X X X X X X X X X X X Indonesia Iran X X Israel X Italy Japan / JICA X X X X X X X X X X X X X X Korea / KOICA X X X X X Kuweit Fund X Malaysia X X Netherlands X X X X X Norway X OPEC Fund X Pakistan X Russia SAARC X Saudi Fund X X Singapore Spain X Sweden X X Switzerland X X Thailand X United Kingdom X X United Nations X X X X X X X X X X USA/USAID X X X X X X X World Bank IDA/IBRD X X X X X X X X X X World Bank IFC X X X X X X X X X X 91 Annex 12: Sri Lanka Statistical Assessment  Sri Lanka – Statistical Systems Review and Suggestions for Further Strengthening of Statistical Capacity Introduction 1. Over the past decade – since the turn of the millennium Sri Lanka has made considerable progress -- transitioning from a low income country to a middle income country and seeing an end to the 30-year long armed conflict – which was the biggest impediment to country’s development. Indeed, post-conflict Sri Lanka presents considerable opportunities for investors – both domestic and foreigners to embark on wealth generating endeavors as well as for the policy makers to embark on crucial policy reforms that could truly unleash country’s full potential. It is at this juncture, crucial consideration of the adequacy of the country’s statistical systems to meet both these requirements comes into play. This note analyses the current position of the national statistical systems and how best it could be geared to face challenges of a new Sri Lanka. Overview of the Current Statistical Systems. 2. Currently in Sri Lanka a number of institutions are engaged in the compilation of statistical data. On the real sector, the department of Census and Statistics (DCS) is the sole authority responsible for the preparation of National Accounts data, demographic and population data, labor force data, price indices, HIES and the poverty estimates. Earlier, prior to 2007, the Statistics Division of the Central Bank of Sri Lanka (CBSL) also prepared national accounts data in parallel with DCS84 but since that year this function has been solely assumed by the DCS85. The CBSL also maintains a fully fledged statistical division, and it continues to prepare data on provincial level GDP, district level price indices and many other statistics particularly on the monetary, banking & finance sectors and the BoP. The main source of fiscal data in the country is the Ministry of Finance and Treasury – which in turn relies on a number of agencies – such as the Inland Revenue Department, the Customs Department and the Excise Department to provide with data. The Customs Department is the main agency for the external trade data while several other agencies86 also provides various external sector related data. 3. A Statistical Master Plan (SMP) for the country87 was developed in mid 2006 and this provided a basis for the STATCAP project of the bank (see box for a description of the project). The SMP underscored the importance of developing an appropriate statistical system (conforming to international standards) commensurate with needs of a middle income country. In addition, the SMP also laid focus on upgrading IT facilities, upgrading of skills of staff and moving towards a more efficient system of data gathering, coordination and data dissemination. One of the more important anticipations of the SMP was to establish a National Data Committee (NDC) – comprising officials from the Ministry of Finance88, CBSL, DCS and the independent research institution – the Institute of Policy Studies (IPS) to spearhead the activities of the SMP and chart its way forward. Unfortunately, the NDC did not get established until 2010 – a time the DCS was contemplating shelving the SMP and move towards an Official Statistics Plan (OSP). 84 With some discrepancies – particularly in National Accounts data observed for many years. 85 Nevertheless, the CBSL has been entrusted with the task of preparing forecasts for the medium term macro framework – for which the DCS lacks sufficient capacity. 86 Such as the CBSL, the Bureau of Foreign employment and the Board of Investment (BoI) 87 Titled the Reform and Strengthening of the Sri Lanka Statistical System: A “Statistical Master Plan�, Department of Census and Statistics. 88 The Deputy Secretary to the Treasury (DST) functions as the Chairman of the NDC. 92 4. The OSP is a five year plan that is expected to consolidate upon SMP and the experiences following the SMP. Ordinarily, OSP’s focus on a number of things including: (a) principles of official statistics (b) monitoring of evaluation; (c) statistical infrastructure ; (d) data quality assurance and (e) publication and dissemination. The DCS expects to embark on an OSP by first identifying the exact data requirements of the country through a comprehensive needs assessment identifying which agency will provide which information89 and in what frequency. In essence, the proposed OSP will define multiple responsibilities for the collection and compilation of statistical data. BOX: The World Bank Statistical Capacity Building (STATCAP) Project The Sri Lanka Public Sector Capacity Building Project was approved by the Board in mid 2008 and became effective on September 5, 2008. The project was geared to enhance the effectiveness, efficiency and productivity of two key public sector agencies, Department of Census and Statistics (DCS) and Auditor General’s Department (AGD) through an investment package that included organizational strengthening, capacity building, information management, communication improvements, physical and information technology (IT) infrastructure, and Information and Communication Technology (ICT) support. A total of US$ 22.65Mn was allocated for the project – of which US$ 12.05Mn was for the DCS component and US$ 10.55Mn for the AGD component. The project has most recently been rated as Moderately Unsatisfactory for Project Development Objective (PDO) and Implementation Progress (IP), primarily due to delays in the construction of the building for the DCS. However the PDO and IP under Part 2 (AGD component) of the Project have been consistently rated as Satisfactory. As a result, the team concurred in late 2011 to cancel all undisbursed balances under the DCS component and extend the project closing date (earlier set for 31 December 2011) by one year to support remaining work only under the AGD component. The Supply and Demand Consideration: National Level Statistics 5. With the country making a transition to middle income status and considerable opportunities opening up after the end of the war, the need for credible and timely data for investment analysis, project appraisals and measurement of policy efficacy have been increasingly felt. At present, Sri Lanka has a statistical system that appears fairly adequate for a low income country. Its statistical capacity score -- as estimated by the World Bank in 2011, was 78 percent compared to an average for all IDA countries of 62 percent. Over the years various statistical agencies have systematically improved data coverage, periodicity and timeliness of data90 with several of these agencies (in particular DCS and CBSL) having advance release calendar which informs of the release of various data in advance91. By and large the CBSL functions as the defacto statistical repository with data from many different institutions (including DCS and CBSL itself) being compiled and published on a regular basis. The CBSL flagship weekly economic indicator (WEI) and the monthly economic indicator (MEI) serve as the two most comprehensive statistical dissemination vehicles which provide regular updates of key economic data. 89 Or assume responsibility for that piece of information. 90 For example, headline inflation numbers are announced by the last day of the month – compared to the 1-month lag earlier. 91 Adherence to the advance release calendars has also been very consistent. . 93 6. Notwithstanding the significant strides made in improving the coverage and timeliness of statistical data a few shortcomings still underlie the supply side: i. Firstly, several aggregate level statistics lacks sufficient timeliness. The DCS – who assumes the primary responsibility for preparing national accounts, still does not produce within year (or interim) aggregate demand data92 – which is a considerable shortcoming. There is a clear need to see this data at least on a semi-annual (or if possible, quarterly) basis. In addition, several other macroeconomic indicators also lack sufficient timeliness. Monetary aggregates prepared by CBSL have a 3-month time lag93 while those of fiscal, external trade, wages and industrial production also comes with a 3-month lag. Key banking sector indicators comes with at least a 6- month lag. ii. There have also been issues obtaining sufficient granular level information needed for analysis. Record level data from the DCS HH surveys and LFS are not readily accessible94. Potential users are first released a minimal 5percent sample – from which they have to build a case for the use of the data. The ‘proposal’ would then be evaluated by the DCS after which the full sample may be released subject to the discretion of the DCS. The CBSL also collects several high frequency data which is normally not published for various reasons. For example, central bank intervention in the currency markets and gross official reserve (GOR) figures are compiled on a daily basis – but are published after a 3-month lag! The most likely reason for this is to prevent any adverse reactions by market players during times of volatility95. However, not having data in sufficient frequency and granularity also creates uncertainty – which could lead to unnecessary speculation and bring about instability in the markets. There is a clear need for statistical data to be more accessible and usable particularly through the vantage point of the private sector. A systematic move towards an ‘open-data’ policy would benefit the country immensely. iii. At present, Sri Lanka subscribes to the IMF's General Data Dissemination System (GDDS). However, as a MIC needing to sustain high rates of investments the country may want to move onto Special Data Dissemination Standard (SDDS). With the momentum gained in recent times in developing the statistical system this could very well be an achievable medium-term goal. A major focus in the transition would be to improve data timeliness, frequency96 whilst also catering to demands for more high-frequency, real time economic data. The main constraints faced by the National Statistical System and its use by the users. 7. Several capacity limitations still underlie the NSS in the country. One of the foremost constraints faced by the DCS – the main statistical agency in the country is the lack of a permanent abode to house its various units currently scattered in different parts of Colombo. To address this need the STATCAP project earmarked a sum of US$ 6.8Mn to establish a permanent office for the DCS97 – amounting to 57 percent of the total allocation under the DCS component (see box). However, due to various factors the project got delayed and with the cancellation of the remaining credit under the component the DCS now envisages to complete the building with GoSL funds and have it completed by 2014. Until such time a permanent office is established the DCS will not be expected to reach its full potential efficiency. 8. Coordination among various statistical agencies in the management of the national statistical system could also be improved. Despite the progress made, the consensus is that existing coordination among various statistical agencies could be further improved particular through vehicles such as the 92 Both nominal and real 93 Before being published 94 Even with a configuration that hides the identity of the unit. 95 Such as time of significant foreign outflows or one-time transactions which could be perceived wrongly. 96 Particularly on National Accounts as discussed earlier. 97 Under the ‘works’ component. 94 newly established NDC. The DCS currently has around 600 staff98 in decentralized offices, with several staff seconded to other line Ministries. At times certain ‘conflict of interest’ is witnessed when these staff are requested to attend to Ministry work in addition to DCS work. In parallel to statistical agencies improving coordination there is also a need for various donors supporting the development of statistical systems in the country to also optimize coordination among themselves so that the necessary support is provided sans duplication and overlap. 9. On the user side, despite the significant improvement in data availability, coverage and periodicity the country still lacks a formal agency (government or private) that could provide formal data services to the clients99. As a result, for those who cannot afford expensive data solution from off-shore providers, considerable time and effort is spent on collecting data which at times undermines efficiency and timeliness of analysis/appraisals and research100. Secondly, it is also clear that among various users the data awareness remains considerably weak – as many users are not fully aware of what type of data is available and their sources. This usually results in country missing out on very critical analysis at times and also an element of ‘wastage’ on the part of the sources who spend resources gathering information – which for most part remains ‘invisible’. 10. The proposed OSP would greatly address the ‘invisibility’ aspect by compiling a formal list of data items to be gathered and identifying the associated responsibility so that ‘what’ type of data is available would no longer be relegated to guess work. More importantly by having a continues monitoring and feedback process the NSS would also be in a position to continually ‘upgrade’ itself both in terms of data span101 as well as portability. Prognosis and Recommendation to the CPS. 11. Through a review of the NSS and its related issues the team is of the view, that the country currently has an adequate platform of statistical systems to support results based management. However, the underlying issues looked at above also indicate a clear need for the bank engagement beyond the current STATCAP project to continue support the statistical system in the country. The salient recommendations to the CPS team in connection include: i. To examine means of providing support for the development of the OSP which would be a crucial landmark in the development of NSS in the country. ii. To continue support the DCS in terms of necessary capacity building excluding any physical works. In particular, support towards continues staff training and ICT enhancement could be thought of provided they are carefully planned and outcomes monitored. In particular, country’s newly acquired MIC status may also mean that it transforms from a GDDS to a SDDS which the World Bank102 could support. iii. To support the establishment of independent data solution providers103 (either public or private) to facilitate data provision to companies and the public sector. These providers will specialize in management of data (from various sources) and providing client services based on specific formats and requirements. The providers should also ensure adequate data quality assurance whilst also taking responsibility to update relevant data when necessary. 98 Around 700 staff is in Colombo based offices. Total number of staff at DCS around 1,300. 99 Much akin to for example data services provided by organizations such as CEIC – for which the World Bank is also a subscriber. 100 This is also compounded by several user complaints that awareness of data availability and who has it 101 i.e. bringing in new feeds of data when demanded 102 In collaboration with the IMF 103 Much akin to services such as the CEIC 95 Annex 13: Summary of Non­Lending Services   As of 3/13/2012 Completion Cost Product FY (US$000) Audiencea Recent Completions Environment Policy Note FY12 66.6 Government Urban Policy Note FY12 27.9 Government Investment Climate Assessment Policy Note FY12 36.8 Government Transport Policy Note FY12 34.3 Donor Fiscal Policy Note FY12 35.6 Government Use of Country Systems (Use of Country Financial Management Systems) FY12 69.4 Government Procurement Policy Note ( Public Procurement Review) FY12 90.2 Government Impact of current trade and price policies on the agriculture incentive framework (Promoting Broad Based Agriculture Growth in Sri Lanka - Policy and Investment Priorities) FY12 262 Public Dissemination Infrastructure Assessment FY12 161.5 World Bank Sri Lanka Development Partners FY12 127.0 Donors Post FSAP, Crisis Management, Financial Safety Net & Lender of Last Resort FY12 208.6 Government Underway 2020 Raising the Game: Middle Income Age FY13 150.0 Government Demographic Transition Study FY12 153.7 Public Dissemination Financial Sector Policy Note FY12 83.4 Government Implementing the Sri Lanka Conflict Filter FY12 135.7 "How-to "Guidance Sri Lanka - Strengthening Samurdhi Targeting Systems FY12 75.0 "How-to "Guidance Sri Lanka - Disaster Reduction and Recovery in Sri Lanka FY12 93.3 Government Gender Analysis of Sri Lanka FY13 47.1 Government Planned Options for Optimizing Internal Transport FY13 Competitiveness and Development Models for Districts, Secondary and Emerging Cities FY13 Analysis of Policy Options for Improving the Trade Balance FY13 Improving the Feasibility of the Naval, Commercial and Aviation Hubs FY14 Making Private Investment Attractive FY13 Sharing Middle Income Country Experiences with Investment Climate Reforms FY13 Improving the Non-Bank Financial Sector FY13 Resource Allocation and Revenue Generation for Growth: Experiences from Other Middle Income Countries and Options for Sri Lanka FY13 Options for Modern Health Care Management FY13 Alternative Financing for Public Goods FY14 Middle income country approaches to encouraging private sector innovation and technology adoption FY13 Skill Development Strategy for Sri Lanka Youth Integration FY13 Malnutrition: Causes and Policy Responses FY14 Knowledge Generation in Education (TF) FY14 Poverty Assessment tbd Improving Gender Equity in Labor Markets (TF) FY13 a. Government, donor, World Bank, public dissemination. b. Knowledge generation, public debate, problem-solving. 96 Annex 14: Summary of Recipient­Executed Trust Funds  Trust Project Grant Sign Program Trust Fund Name Project Name Donor Name Fund # # Date Source Australian Agency for SRI LANKA - NORTH EAST WASH FOR LK: N&E WASH For Post International TF010773 C ONFLIC T AFFEC TED REGIONS P126697 C onflict Resettle 11/29/2011 PFSA Development (AusAID) Norway - Ministry of TF051074 NORWAY 5TH DIMENSION - SRI LANKA 1/12/2004 DS Foreign Affairs GEF2-SRILANKA:RENEWABLE ENERGY FOR LK:Renewable Energy for TF051248 RURAL EC ONOMIC DEVELOPMENT P077761 Rural Econ. Dev. 7/12/2002 GEFIA MULTIPLE DONORS EFFEC TIVE, SAFE AND SUSTAINABLE HUMANITARIAN ASSISTANC E AND DEVELOPMENT C OOPERATION OF AGENC IES IN SRI LANKA: MAINSTRE Effective, Save, Sustainable TF058303 AMING C ONFLIC T P105082 C ooperation 8/23/2007 DGF MULTIPLE DONORS SRI LANKA - IDF GRANT FOR INFORMATION AND C OMMUNIC ATIONS TEC HNOLOGY REGULATORY C APAC ITY Sri Lanka IC T Regulatory TF094299 BUILDING PROJEC T P116377 C apacity Buildi 6/16/2009 IDF IBRD 1818 H Street, NW IMPROVING MONITORING AND EVALUATION OF SAMURDHI SAFETY NET LK: Improving M&E of TF094313 PROGRAM P115525 Samurdhi 7/10/2009 IDF IBRD 1818 H Street, NW SRI LANKA - AUSTRALIA C O-TF FOR Australian Agency for EMERGENC Y NORTHERN REC OVERY LK: Emergency Northern International TF096422 PROJEC T (C HILD FUND) P118870 Recovery Project 8/13/2010 FS-C O Development (AusAID) ROUND 1: SRI LANKA-LOC AL LEVEL NUTRITION INTERVENTIONS FOR THE LK: Local Level Nutrition Japan - Ministry of TF097171 NORTHERN PROVINC E P121571 Interventions 1/31/2011 JSDF Finance Planned LK: AUS AID SUPPORT FOR PRIMARY P113488 Sri Lanka - Transforming the TF Australian Agency for EDUCATION FOR THE SRI LANKA EDUCATION School Education System as International SECTOR DEVELOPMENT FRAMEWORK AND the Foundation of a Development (AusAID) PROGRAM Knowledge Hub TF098602 DIRISAWIYA P123632 DIRISAWIYA 12/31/2014 GFRP IBRD 97 Annex 15: Country Partnership Strategy (CPS) Process  1. The Country Partnership Strategy (CPS) has been a two track process. (See figure below.) The first track involved a thorough review of the Sri Lankan vision for development and the current situation with regard to each aspect of the vision. The second track involved a thorough review of the World Bank Group’s engagement over the Country Assistance Strategy FY09-12 (CAS FY09-12) period. 2. Country Vision. The Government’s vision is laid out in the document “Mahinda Chintana Vision for the Future� prepared by the Department of National Planning, Ministry of Finance and Planning in 2010. 3. Diagnosis of Achievements and Challenges. The diagnosis of achievements and challenges is based on a wide variety of sources. The Annual Reports of the Ministry of Finance and Planning and of the Central Bank of Sri Lanka were essential inputs, as was the “Global Partnership in Development� report of the External Resources Department of the Ministry of Finance and Planning. The CPS consultations conducted by sector colleagues were used as an opportunity to hear from Government, private sector, civil society and development partners about the current situation and the challenges related to several themes. (See below for more details on the consultations.) Finally, issues notes were prepared by sector colleagues as part of the FY12 work program. The purpose of these notes was to take stock of selected issues, fill specific knowledge gaps and explore opportunities for engagement.104 The notes included:  Agriculture  Environment  Transport  Urban  Water supply and sanitation  Investment climate  Financial sector  Fiscal  Public procurement 104 Issues notes were not prepared in areas where recent analytical work was available, such as education and health. 98  Public financial management  Gender  National statistical systems 4. Assessment of the Appropriate Role for the World Bank Group. The review of World Bank Group engagement took several forms. A portfolio review (jointly organized by the Department of Project Management and Monitoring of the Ministry of Finance and Planning and the World Bank) October 24-25, 2011, provided an opportunity to reflect on each project and the portfolio as a whole. The Client Survey provided insight into how the World Bank’s work is perceived by stakeholders. The quantitative Client Survey was supplemented with a qualitative Client Survey which provided more in- depth perceptions through structured interviews. Reflections on the existing and appropriate future role of the World Bank Group were discussed at meetings held September 14, 2011 in Washington and October 20-21, 2011 in Habarana, as well as in various staff meetings. The Completion Report for the FY09-12 CAS evaluated the performance of the program and the World Bank and is included as an annex in the present document. 5. Dialogue and Consultations. Dialogue and consultations were held throughout the past year. Counterparts in the Department of National Planning and External Resources Department of the Ministry of Finance and Planning worked closely with the World Bank team throughout the entire process. An extensive consultation process, involving Government counterparts, private sector, and civil society and development partners was also conducted throughout the process. The consultations provided essential inputs into the diagnosis of achievements and challenges as well as providing feedback on the preliminary drafts of the CPSfor FY13-16. A total of 18 consultations were organized, some focusing on a specific theme, others organized for a specific group of stakeholders. 6. World Bank Group Country Partnership Strategy. The World Bank Group Country Partnership Strategy, described in the present document, is based on all of the above elements. 99 Annex 16: Summary of Consultations  Consultation process 1. A total of 18 consultations involving more than 400 participants were carried out amongst a wide cross section of Sri Lankan society as part of the preparation of this CPS.105 The participants at the consultations represented government ministers, opposition members of parliament, central and provincial government officials, Local government representatives, a plethora of NGO’s covering a wide section including youth, gender, environment, advocacy and governance, representatives from Chambers of Commerce from the Northern, Eastern and southern province, Academics, think tanks, key members from large conglomerates, bankers and other representatives from the financial sectors and also bilateral and multi lateral donor and UN agencies. The process of consultation served a dual purpose by both allowing Sri Lankans to have an input into the country’s development agenda and by allowing the World Bank Group to further clarify its role in helping the Government of Sri Lanka achieve the results identified by the development policy framework of the government, in selected areas of comparative advantage where it could best contribute. 2. The consultations were carried out from September to March, with early consultations being broader in scope and narrowing down as the CPS took shape over the preparation period. A total of nine consultations were broadly thematic and focused on the education, health, urban, environment, private sector, financial sector, SME’s, and transport sectors. The balance were broader and cross cutting in scope involving consultations with parliamentarians, the general public, the donor community, media personnel, and youth. 3. Although a majority of the consultations were in Colombo, consultations with youth and SME’s took place in the northern, eastern, central and southern provinces. Theses consultations were an opportunity to capture geographic area specific, gender specific and national policy level challenges. The purpose of involving youth who are and have been beneficiaries of many World Bank supported projects and operations, from the conceptual stage of the Country Partnership Strategy, was to actively engage them as key stakeholders in World Bank operations in Sri Lanka from the very outset. The youth participating at the consultations represented young men and women from academic, civil society, government and private sectors. 4. In order to ensure a structured discussion all participants were provided along with their invitations a two page introductory note that described the CPS process, the reason for consulting with that particular group, the key areas that the particular consultation would focus on, and a detailed agenda. All consultations began with brief introduction followed by a short presentation by a member of the CPS preparation team on the CPS process. The participants were informed from the outset that none of their comments would be individually attributed to them and that therefore they could be as candid as they wished. Simultaneous translation in Sinhala, Tamil and English was also provided at all consultations that took place out of Colombo. All consultations were well attended and a common complaint echoed by participants was that the two hour stipulated time limit was insufficient. 5. The following is an attempt to extract some of the important issues captured owing to the difficulty in presenting all the ideas and comments received. The summary is presented thematically for easy reference. 105 A comprehensive list of participants is available on request. 100 Health Sector consultation 6. A health sector dialogue was held on the 30th of September, 2011 at the Galle Face Hotel. Participants included the Secretary of Health, Provincial Directors of Health Services from Western and Sabaragamuwa provinces, other government representatives, and private sector health service providers, Vice Chancellors, University Professors, representatives from the colleges of medical specialties, representatives from think tanks and a representative from the NGO sector. 7. Gaps in clinical quality of care provided in both public and private health facilities were discussed. The necessity for the establishment of national accreditation systems, an independent quality assurance body, introduction of death audits, finalizing of a national essential drug policy to prevent excessive control by market forces to protect the majority of the population were highlighted. It was felt that improving access to the full package of care at the province level would better address geographical equity in Sri Lanka. Further the development of a National Health Development Plan (NHDP) for the health sector was identified as an important step in addressing geographical equity and overall health sector development. With the changing disease trends, ageing pattern and peoples’ health seeking behavior there was also an urgent need to reorient the health service delivery model to better provide long term, integrated care (different experts need to work together for managing the patient) and specialized elderly care. The existing quality of data and the new improvements needed for better data quality were also discussed in detail. Participants also felt that a stronger focus should be placed on better utilization of health information for planning and budgeting purposes, with the existing health information system being modernized (i.e., automated) to increase the reliance on the system data as seen in developed countries. 8. The audience stressed that the World Bank should facilitate knowledge dissemination on private public partnerships specifically for the health sector, to introduce cross country learning by sharing best practices in areas where improvements are required in the health sector, and assist with studies concerning private health services models that could be applied to Sri Lanka. Urban sector consultations 9. On the 22nd of September, 2011 a brainstorming meeting was held with a number of public and private sector representatives and World Bank staff to share early ideas on the vision for the future development of Metro Colombo, at the World Bank Colombo Country office. 10. The main conclusion of the discussion on the City Vision was that the visioning exercise should be included in the development of the City Development Strategy. The city’s vision should be a synthetic statement balancing the seemingly opposing challenges of managing environmental, social and economic sustainability with modernization, along with history together with development. 11. To ensure this delicate balance, the vision of Colombo Metropolitan Area should be based on a series of inputs, that when integrated, provide a comprehensive picture of the city's present state of affairs along with the proposed next steps. 12. On the 4th of October 2011, a full day consultative work shop was held at Hotel Renuka with the participation of government official, academics, participants from the donor community, and members from the private sector and World Bank Staff. 13. There was consensus that the current statistical definition of urban areas based on administrative criteria (i.e. urban areas are defined by the administrative boundaries of Municipal Councils and Urban Councils) is inadequate to capture urbanization trends on the ground with a new definition of urban areas 101 based on population/economic criteria needing to be developed. Urban sprawl was described as resulting from inefficient city management, which is in turn due to confusion about administrative authority and boundaries. There was also consensus that the traditional scope of urban services needed to be broadened to include social services. Limited capacity at local level is the main constraint for improved the delivery of urban infrastructure & services. Finance was a major constraint with participants discussing the need to move to a new model of municipal finance. Cluster-based systems of service delivery should be encouraged to improve efficiency and reduce costs in services provision at local level. Improving the competitiveness of secondary cities requires exploiting the unique character of each city. Growth will occur when cities are dynamic and vibrant and offer high quality services. Environment Sector Consultation 14. On the 13th of January, 2012 a consultation with environmentalists, academics, members of the private sector and World Bank staff was held at the DFFCC bank conference room. 15. The critical environmental issues that would need to be addressed in order to ensure environmental sustainability of Sri Lanka's rapid development program included urban environmental issues such as flood management, solid waste management, the quality of urban environment, air pollution, water and sanitation. The fragmentation of the concept of “Environment� into various agencies (and Ministries), some of which do not have a mandate to protect/conserve/manage the Environment; the lack of coordination amongst the various institutions responsible for environmental management, the lack of clarity of institutional mandates, weak institutional capacity and infrastructure to monitor/assess the various environmental issues in development projects; the non-integration of environment in the early stages of the development (and project) planning process; and not using the Strategic Environmental Assessment (SEA) findings nor incorporating them into the overall development planning process were highlighted as key issues. 16. Other issues that were highlighted included the lack of conservation and management of Marine Protected Areas and Coastal Ecosystems (includes coastal and other sanctuaries), biodiversity issues such as Human-wildlife conflicts (elephants/monkeys/wild boar) in both rural and urban areas; threats to isolated natural landscapes through the promotion of unregulated “ecotourism�; the disruption of river ecosystems through various human activities; and the lack of consideration of ecosystem services during land allocation for development projects. 17. The development of strategies, policies and actions that place an economic value on ecosystem services and promoting business opportunities through ecosystem conservation and management, restoration of degraded ecosystems, strengthening of environmental and sectoral agencies responsible for mainstreaming environmental and natural resource management in the development planning process, ensuring that the protection/conservation of environment is integrated into the school curricular, the adoption of a holistic approach to growth by avoiding isolated development planning, ensuring the integration of environmental considerations into every aspect of the development activity, and the active participation of beneficiaries in the planning were some of the options listed that would enable Sri Lanka to simultaneously harness the twin benefits of growth and environmental sustainability. 18. In addition to providing assistance with the above the World Bank was also requested to undertake studies to value environmental services to assess the conservation values of the environment, undertake economic, social, and livelihood related impact projections of the loss of these resources, and ensuring that World Bank projects shift from merely ensuring environmental safeguard compliance to a more holistic integration and main streaming of environment by integrating safeguards for sustainability into the development activities and projects. 102 Consultation with the Private sector 19. A consultation with key members from the private sector and World Bank Group Staff was held on the 17th of January 2012 at the Cinnamon Lakeside Colombo. 20. A principal concern voiced by the participants was that the Government was sending out mixed signals. This lack of clarity and consistency was exacerbated by uncoordinated ministries in the country. Insufficient communication between the private sector and the Government and also between the public sector hierarchy and the lower levels and provinces also compounded the problem. Participants went on to explain that even some of the positive policy measures taken at the Central government level do not get effectively implemented at the lower levels or at the provincial level owing to this problem. 21. The participants described how the availability of land remained a major constraint. With the government owning large tracts of land, obtaining land for commercial purposes remained difficult. Increased transparency in the process, a one stop shop in most of the industries for investment information and approvals, an education system geared towards producing a skilled labor force, and improved public and corporate sector governance were cited as key policies that would boost investor confidence. 22. Regular dialogue between the government and the private sector would increase the trust between the two parties and would lower confusion as in the case of Expropriation Bill, Pensions, and Private University Bill. The World Bank Group was requested to play an enhanced role in facilitating dialogue between the private sector and the government. A detailed government vision and the provision of a clear and consistent operational framework for major sectors were important next steps that would allow the private sector to operate freely within those sectors and thereby rapidly develop. Consultation with Development Partners 23. A consultation with the donor community active in Sri Lanka was held on the 18thth of January 2012 at the World Bank Colombo Country office. 24. The WBG was encouraged to look more specifically at the extent to which the distribution of income (or consumption expenditure) among Sri Lankan households has increased (as reflected in the increased Gini index) and to ensure that the new strategy towards better social inclusion. 25. Development Partners also highlighted the need to continue supporting the most vulnerable in the country, including those who had suffered the direct brunt of the war. Internally Displaced Persons were listed as still requiring assistance towards their return (e.g. from India), their “resettlement “and their access to sustainable source of income and livelihood. 26. Issues relating to internal and external Sri Lankan migrants, and the promotion of safe and fair labor mobility were also discussed by the participants. The WBG was encouraged to ensure equality and social protection in a dynamic way, and to also bolster basic social support to the poorest and the most vulnerable was stressed. 27. The participants also suggested that the WBG work collaboratively and dynamically with other development partners, to maximize impact. Recognizing that working jointly could exponentially increase complexity and bureaucracy, especially when using sector wide approaches (as the CPS proposes) coordination in such cases was likely to be time consuming. In order to overcome these issues it was felt that actively seeking collaboration and jointly agreeing on division of labor, which goes further than just information-sharing would be useful. 103 Consultation with Financial Sector 28. A consultation with key members from the financial sector and World Bank Group staff was held on the 19th of January 2012 at the Cinnamon Lakeside Colombo. 29. The participants explained that funding requirements for the Banking Sector are a cause for concern with banks experiencing difficulty in managing liquidity, with deposit growth not keeping pace with loan growth and with savings rates also being relatively low in Sri Lanka compared to rest of region. Long term funding options for banks also remain limited. Banks are often unable to access long term FCY funding as long term swaps are not available in the local market. 30. Such liquidity issues may affect future credit growth. It was also felt that the capital markets was being under-utilized with a clear need emerging to develop the local bond market, explore options of dual currency listing in the CSE, remove ambiguity on capital gain taxes, proper development of the yield curve. Overall it was felt that the World Bank Group (WBG) can play a critical role of strengthening the governance structure and capital market products in Sri Lanka. 31. Large shareholding by government entities in the financial sector was seen as sending mixed signals to the investors. It was felt that long term banking reforms are required; especially to address need for industry consolidation. Further, reforms on corporate governance structure can strengthen the banking sector. 32. It was felt the WBG can help the sector in designing products that package both the finance and the ‘know how’ for more productive use of the funding by the Micro and Small Enterprise segments. It was also felt that policy support is required for Banks to focus more in this segment. The participants felt that the high cost structure of banks makes them ineffective in bottom of pyramid financing. High documentation requirements under KYC were often a deterrent for small borrowers to open an account or take a loan from a bank. It was also felt that WBG can assist the sector by funding a study to formulate a comprehensive policy on mobile banking operations. 33. Citing human resources as a key challenge, the NBFC players mentioned of lack of qualified entry level staff for their regional expansion. The participants requested WBG to look into strengthening existing training institutes in the country to be able to support the sector better. 34. Participants felt that the perception of Sri Lanka can be improved in the eyes of the international community/international investors, by projecting the post war positive developments in the country. The participants in the discussion felt that consolidation was the way forward in the financial sector, with the development strategy of the sector having a four pronged focus on capital markets, private equity, banking and mobile banking. Consultation with Parliamentarians 35. A consultation with key members from the government and the opposition was held on the 20th of January 2012 at the Parliamentary complex. 36. The participants were keen to understand what the transition from a lower income country to a middle income country entailed specifically in terms of different funding options available through the IBRD lending window and the current blend status of funding. 104 37. The opposition noted that the main reason the private sector was not investing further was because there was concerns raised on the decision making process involved in passing legislature such as the Revival of Under-Performing Enterprises and Under-Utilized Assets Act and the alienation of land. There was also concerns raised on the consistency and clarity of the policy of the government, which was cited as the principle deterrent to potential investors. The members from government responded that most of the companies coming under the Revival of Under-Performing Enterprises and Under-Utilized Assets Act were loss making institutions that were a drain on the national economy. 38. Issues concerning the sovereign guarantees the government could provide for FDI's was also discussed. It was noted that the while the government could facilitate such investments it would face difficulties in guaranteeing. 39. There was also discussion on issues concerning the manner in which agricultural productivity could be raised in the country. Solid waste management was described as a priority area where assistance is required. Issues concerning the decentralization of solid waste management to municipal authorities, and the lack of coordination with the central authority were highlighted. 40. Issues relating to micro finance including the role of the IFC in facilitating increased access to micro finance and the possibility of increased usage of mobile phones to facilitate such transactions were also discussed. 41. The need for greater engagement with parliamentarians in the future and the enhanced role of the World Bank Group as a key knowledge provider was described as key priority areas for future engagement. Suggestions were made for the World Bank to organize similar dialogues so as to present recent findings and other information directly with parliamentarians. The importance of continued World Bank support for education and skills, labor markets, health, and malnutrition was also highlighted. Transport sector Consultation 42. A consultation on the issues facing the transport sector was held on the 23rd of January 2012 at the Cinnamon Grand Hotel. The participants included representatives from the Ministries of Finance (National Planning Department & Department of Public Finance) and Transport, representatives from the National Physical Planning Department, National Transport Commission, Civil Aviation Authority, Sri Lanka Railways, Sri Lanka Transport Board, Road Development Authority, Sri Lanka Ports Authority, Colombo Municipal Council, Private Omnibus Association, Ceylon Chamber of Commerce, Association of Container Transporters, ADB, JICA, members of the Private sector, and World Bank Group staff. 43. The major issue facing the sector was recognized as “rapid motorization� whilst outdated transport networks, inadequate institutional capacity, inadequate maintenance, land acquisition, safety, inadequate land use planning, funding constraints, inadequate regulation in the bus sector and inadequate administrative structure for central Government coordination were recognized as the issues facing the transport sector. 44. There was unanimous agreement that increasing the share of public transport was paramount with a paradigm shift in attention for public transport required for the resolution of these issues. There was agreement that improving the quality of public transport (both Bus and Rail) as well as a new mode of transport was required and demand management measures such as rationing the number of vehicles and vehicle use management was required through appropriate policy measures to address the issue of motorization. The participants were also in agreement that other capacity improvement measures on the road sector is required as a priority as opposed to the acquisition of land for capacity increases in the metro areas. 105 45. With regard to freight transport, there was agreement that internal Container Depots and logistics centres were required although there was no clear agreement on shifting goods transportation from road to rail. It was agreed that the development of domestic airports should take account of proposed expressways as they would compete with each other. 46. Due to the location of the new port and airport, Hambanthota was identified as having significant potential for development and connectivity to and from Hambanthota was considered a priority in order to make such economic model work. SME consultations Eastern Province 47. A consultation with key members from the business chambers of the Ampara, Moneragala and Batticoloa districts and World Bank Group Staff was held on the 24th of January 2012 at the Monty hotel in Ampara. 48. The principle constraints to the development of the districts were described as being the lack of access to finance, the lack of a viable market for their products, and the lack of information and knowledge. With agriculture being the most important economic driver in the province, the very poor value addition that is observed along the agricultural value supply chain with no off-season strategy being implemented were described as being the key causes for low agricultural productivity. Infrastructure issues such as inadequate government emphasis on the rural road network, the lack of transport facilities after 5 pm , frequent power failures and high electricity tariffs, were other issues that were presenting problems for SME’s in the district. In the Batticaloa district in particular a key cause of unemployment was the lack of SME businesses / industries. Over a period of time the majority of the industries in the district were shut down due to the difficulties faced in accessing markets for their products. 49. On potential next steps, the creation of master plan by government, (focusing on key aspects such as agriculture and tourism) for the districts, in consultation with all relevant stakeholders, and wide dissemination upon its completion was seen as an essential. The creation of an agricultural technical knowledge hub in the province and greater government support for the activities of the chamber to ensure its long term sustainability were seen as key measures that would result in enhanced benefits over time. The WBG was requested to provide support towards the development of the technical capacity, and Research and development initiatives of the private sector, with the IFC being listed as key partner that could contribute to the growth of the province. The provision of vocational training was described as a primary requirement, especially IT education with an increased emphasis on skilled labor such as masons, carpenters, plumbers and electricians with the WBG urged to assist in conducting a feasibility study to explore and identify feasible business opportunities in the district. Northern Province 50. A consultation with key members from the business chambers of the Trincomalee, Anuradhapura and Jaffna and Mannar districts along with World Bank Group staff, was held on the 26th of January 2012 at the Heritage hotel in Anuradhapura. 51. Overall, businesses were described as being affected severely by war with no forum/dialogue yet established for business owners to discuss problems and come up with solutions together with the government and other stakeholders. Access to finance remains a key barrier with issues including - high interest rates, high tax rates, collateral on loans, and the lack of long term loans being listed as specific 106 constraints. The lack of information on new technology, and resources available was a reason for limited capacity for the creation of goods for exports. The lack of skilled personnel with the required technical skills, marketing and management skills to increase productivity and the lack of opportunities specifically with regard to access to economic zones were also highlighted. SME's in province are finding it difficult to cope with the competition from well established companies based in the western province. Government policies, with regard to leasing or purchasing land are considered as an extremely cumbersome process. As a result the lack of land hinders investment opportunities. 52. The shortage of SME's in the province was described as the key concern of the business chambers. With no impact assessment having been carried out thus far, the unavailability of data makes business decisions an even more complex process. Cultural issues such as those that discourage women from participating in the tourism sector have resulted in increased gender income disparities. 53. As plausible next steps, the promotion of joint ventures that utilize both human capital and other resources readily available in province, and greater emphasis on encouraging private sector activities in the post conflict set up was seen as key means of alleviating the issues faced by SME’s in the province. PPP's were seen as viable options for enhancing gains. The creation of knowledge banks, skills and capacity building, were areas listed for WBG engagement. Education sector Consultation 54. An education sector dialogue was held on the 2nd of February, 2012 at the World Bank Colombo country office. Participants included officials from TVEC, officials from the ministry of education, university professors, undergraduates, and private sector education service providers, representatives from UNICEF, representatives from YESL, representatives from LYON and a student representative from the Model United Nations. 55. The participants felt that education and skills remain a key issue as critical skill gaps are hampering the performance of the economy, with continued World Bank to support being required to address this issue. It was felt that advocacy programs should be conducted with a need to consider market requirements of specific skills and then develop a pool of such skilled personnel. The skill development paths should be communicated to parents and families, with greater emphasis on attracting students for some of the skills related courses where challenges exist, (the examples cited were construction, carpentry). Professionalization of such skills was also important with career guidance especially before and after GCE O/L examination being cited as crucial. The participants felt that too much emphasis was being placed on the Grade V exam. 56. Vocational skill development courses should be introduced within the school with the inferior social status of vocational training being addressed. It was felt that integrated policies are required to address the needs of students in addition to the introduction of technical streams. 57. It was also felt that a review of vocational training is important, along with the content, quality and quantity of the entire education sector being evaluated. The service delivery system issues should be addressed, with accountability and monitoring being important to improve the overall efficiency. 58. A competency based assessment was considered important, with teacher development also being cited as a critical area. The National Qualification Framework being developed under the World Bank Higher Education Project is very important. 59. Early childhood education was another area where World Bank support was requested. Although a proliferation of Montessori’s, but a lack of teachers trained for this level. Maintenance of quality was cited as being of utmost importance. Although a policy was developed a long time ago but only some 107 aspects of the policy have been implemented. Support from provincial councils to assist in the implementation of policies, activities was important. Advocacy programs were also cited as important. 60. Research and development especially in terms of studies identifying skills mismatch was described as being important. Participants also felt that there was a need for tracer studies to be conducted along with research into evidence based management. Consultations with Youth 61. Five consultations were conducted in Northern, Eastern, Western, Central and Southern Provinces with the participation of a group of 20 – 30 young men and women, representatives of organizations working on youth and gender in development and World Bank staff. With nearly 5 million of Sri Lanka’s population being below 30 years of age and with unemployment among educated youth being significantly higher than the overall unemployment rate, common grievances shared by youth in all 5 consultations related to the lack of opportunities to develop knowledge and skills, a mismatch between employment requirements and skills development, unmet youth aspirations, parental attitudes and expectations, lack of career guidance, a lack of trained and informed teachers at primary and secondary levels and lack of knowledge on developing entrepreneurial skills. The absence of a national policy on youth development was an overarching national level challenge for youth development. 62. In the Northern Province during the consultation held on the 27th of January 2012, at the University of Jaffna, space and opportunities for open dialogue was identified as a strong need for youth to voice their opinion on development and related issues in the region. Issues brought out were related to the lack of a longer term citizen engaged approach to development, the need for a social and political solution to address grievances of the Tamil community, improve the quality of education, with a focus on higher education, an increase in violence against women, and a greater need for private sector investment. The need to increase entrepreneurial skills and financial management skills among youth in the region by creating opportunities to gain professional qualifications was discussed. Most of the manufacturing, agricultural and fisheries sectors in the area remain largely neglected due to the protracted conflict. Opportunities for rapid expansion in these areas are available but yet to be achieved in a consultative and citizen centered manner. The requirement of addressing issues related to the political economy of development taking place in the region was also discussed. 63. A consultation for youth form the Eastern province was held in the Batticaloa public library on th the 7 of February 2012. The Lack of resources (financial and human), the need for increased private sector investments and the strong need to change people’s attitudes towards work ethic were the key issues highlighted. Most educated youth (at graduate level) were seen to be primarily focused on securing public sector jobs. The key reasons for this being assumptions of job security and stable pension schemes offered by the public sector, cultural impetus and lack of private sector involvement in the area. Private sector job opportunities were considered remote and often unstable. Internship facilities were only being provided by a few public sector organizations and most youth were unaware of such opportunities. The lack of internship opportunities were highlighted as key constraints in finding jobs. Current problems relating to the theory based rote learning methodology of education and the skills mismatch between graduate skills and what was demanded by potential employers was also highlighted. 64. Issues relating to the education sector in Sri Lanka were identified by participants from the Western Province as the key drawback that was preventing youth from actively accelerating the countries development. This consultation was held on the 13th of February, at the World Bank Colombo Country Office. A loosely based definition of entrepreneurship, the failure to identify that most youth did not have the drive and determination required , were often risk averse, and did not possess the required skill set, was seen as important issues that had to be addressed prior to the national promotion of entrepreneurship 108 culture. An increased emphasis on standards through rankings system especially for the faculties and individual departments was seen as key means of raising overall standards in state run universities. Recommendations made at this consultation included the need to collaborate effectively, share knowledge and information related to youth development efficiently, to provide opportunities and space for youth to voice their concerns in a non-threatening and non-patronizing environment. 65. During the consultation held on the 17th of February 2012 at the Peradeniya University, the participants form the central province described job matching as a key issue, with the aspirations of undergraduates being much higher than what the job market in the country has to offer. Youth continued to demand public sector employment in search of job permanency and pension schemes. Private sector jobs were seen to be difficult to obtain as there was a significant skills mismatch and also lack of private sector opportunities in the central province. Issues relating to state run tertiary education such as the lack of practical training and insufficient emphasis on soft skill development and relevant career guidance was highlighted. There was also discussion on the lack of internship opportunities and overall job opportunities with the private sector in the central province. The western province remained the area of choice for the securing of good jobs. Solutions to these issues included increase opportunities for knowledge sharing and platforms for youth to highlight their issues. Even though the central province had an ideal climate and the resources for agricultural expansion youth were not keen to seek opportunities in agricultural activities owing to social stereotypes associated with farming and agriculture. A lack of knowledge on the potential for increased agricultural productivity and the returns that could be obtained was acknowledged by the participants. 66. In the southern province recommendations from participants included the need for private sector investment mainly in education and related fields, the need to coordinate donor support and efforts giving priority to the country’s vision and development challenges and increased linkages with stakeholders of development. The discussion also revealed that no forum existed in the southern province for youth to discuss provincial issues and have a greater impact on the development of the province. Issues such as the culture of alcoholism among the fishing community that resulted in the perpetuation of alcoholism amongst successive generations of youth in the fishing community were also discussed. This consultation was held on the 22nd of February at the Solis hall in Matara. Consultations with media 67. A consultation with media personnel representing print, electronic, television and radio was held on the 28th of February 2012 at the DFCC Bank auditorium. 68. A principal issue discussed was the role an enhanced adherence to the rule of law and democratic principles would play in the development of the country. Media freedom remained a key cause for concern along with access to information. The participants also highlighted the need for a clear and descriptive strategy for the country for the next 10 -20 years that will provide all stakeholders with clarity and consistency on the growth trajectory of the country. 69. Issues concerning health (focusing on the issue of malnutrition and its link to poverty/behavior change) was also discussed by participants with a possible role the media could play in spreading important messages to educate the public on proper nutrition. 70. Problems relating to the education sector were also discussed. The school to university and then to work transition was seen as a key stumbling block with a clear need to improve the quality of education. With youth unemployment being a cause for concern in the country, participants felt that politicians could play a key role in dissuading youth from solely seeking public sector jobs. 109 71. The participants recommended that as the media was largely unaware of the WB Access to Information policy the World Bank must take pro-active measures to generate awareness on the policy and work with media to make this information accessible in formats that would enhance public consumption and dialogue. Consultations with General Public 72. A consultation with members of the Sri Lankan general public, who had registered for participation through an online application process, was held on the 29th of February 2012 at the World Bank Colombo country office. 73. A significant portion of the discussion centered on the education sector with participants describing it as the crucial sector that must be reformed if the country was to reach its goals. Some participants stated that state run universities in the country must be transformed from the traditional silo based systems to those that incorporate a multi or intra disciplinary approach. It was also stated that undergraduates in particular were highly risk averse and this lead to an increased demand for public sector jobs over private and entrepreneurial professions. Internship opportunities form the 1st year onwards was described as being important in this regard as it would allow undergraduates to obtain jobs more easily and also avail them of job market realities for the outset. 74. On entrepreneurship development, the participants agreed that there was a need to increase technological entrepreneurship, set up innovation parks and ensure that social benefits from such schemes are widely distributed. A key factor that would influence the development of an entrepreneurial culture was described as attitudinal change. 75. The participants also felt that the government should not get involved in sectors where the private sector was already involved in as at time they were unable to compete. Road safety and the increasing number of roads traffic accidents was also highlighted. 76. Some participants also felt that corruption was another aspect that needs to be addressed by the country’s development framework. They also called for the strengthening of public accountability mechanisms such as the COPE and COPA parliamentary committees by enhancing their capacity to implement the recommendations suggested in their reports. Participants also stated that governance and the adherence to the rule of law would be enhanced if forums to voice concerns were made more freely available. Accountability and transparency to be included in curriculum. 77. The needs of the vulnerable population (especially IDP’s), was also discussed with the World Bank being requested to provide increased grant facilities in this regard. A further recommendation was in relation to greater Civil Society participation and donor coordination. CSO engagement in monitoring evaluation and social accountability measures was discussed, with participants describing a need for a development monitoring mechanism. 110 Annex 17:  Client Survey and Communications  Communications and Outreach Brief Introduction 1. This brief outlines the World Bank’s approach to communications and outreach targeting its clients in government, private sector and Civil Society groups including media, academia and parliamentarians. This brief also outlines some key findings of the client surveys, the long term goals of communications and outreach strategy in support of the broader goals of the CPS and the medium term objectives that the External Affairs unit of the World Bank will undertake. 2. There are two objectives for the strategy: (a) to disseminate our global and local knowledge which would be of much use to the country; and (b) to strengthen the World Bank-Government-Public policy dialogue. Through this process the World Bank team envisages to play a major supporting role in achieving country's ambitious development targets over the medium term. Over the years the World Bank has gathered a considerable wealth of global knowledge and expertise through its extensive operations in over 150 countries. Increasingly, client countries are seeking this global expertise with the view of applying similar approaches to their own challenges and issues – albeit with some adjustment for the domestic context. As such, the World Bank now promotes sharing of this global expertise through a multitude of means including the highly successful South-South exchanges. At the same time, the country specialist knowledge as well global interlinks allows the World Bank to position itself as a vital partner in the policy dialogue process. 3. To support the World Bank and its client the Government of Sri Lanka as well as the public groups that are both the clients of the Government of Sri Lanka and beneficiaries and contributors of World Bank support to Sri Lanka. World Bank Clients 4. The World Bank is owned by the people in countries in which it operates or the tax payers. Hence the people of Sri Lanka are a significant part of the clientele of the World Bank. Representing the people of the country, the elected Government becomes the main interlocutor or the primary client of the World Bank. Sri Lankan  Public The World  GoSL Bank Key and noteworthy findings of the Client Survey 5. To check the pulse of World Bank clients in Sri Lanka, to seek recommendations to be incorporated into the CPS and to provide as a baseline for communications and outreach to clients, the 111 External Affairs unit of the World Bank facilitated a client survey. This survey was administered using both quantitative and qualitative survey methods. In addition, eighteen different consultations were conducted island wide to gather insights that would inform the future engagement needs of the World Bank. An island wide consultation was also completed to triangulate the findings. This was done in the form of focused group discussions capturing a sample of young men and women below 35 years of age and a selected number of representatives from government, private sector and civil society106. 6. The main purpose of the client survey was for the World Bank to gain understanding of how its stakeholders Specific Areas of Effectiveness perceive the World Bank and its operations in Sri Lanka. For the purpose of this brief, the focus will remain in the client “Helping to bring about economic growth�; survey findings that are related to World Bank “Encouraging greater transparency in communications and outreach. governance�; 7. Respondents from the media and PIUs/PMUs indicated the highest levels of familiarity with the World Bank “Helping to strengthen the regulatory whereas respondents from NGOs, other organizations, and the framework�; office of a Parliamentarian had significantly lower levels of familiarity. Respondents from the Western Province indicated “Helping to strengthen the judicial system�; significantly higher levels of familiarity with the World Bank compared to respondents from other areas. “Helping to strengthen the public sector�; 8. The survey findings demonstrate the widely held view “Helping to strengthen the education sector�; that growth and government effectiveness/governance are the top development priorities in Sri Lanka. The top weakness of “Helping to strengthen the health sector�; the World Bank is identified in the survey as ‘inadequate “Safeguarding against corruption in projects/ alignment with country priorities’ in Sri Lanka. The survey also identified the lack of awareness and proper consultations programs that it funds with its procurement at all levels and groups as a contributor to this perceived rules�; weakness. “Helping to strengthen agricultural 9. Respondents report the greatest level of satisfaction development�; with sector wide approaches and results based lending and investment lending in Sri Lanka. “Helping to reduce corruption in the country with its advice and support�; and 10. A nearly equal number of respondents believe that the World Bank can increase its value in the future in Sri Lanka if “Helping Sri Lanka adapt to/avert risk of climate it offers more tailored services for a Middle Income Country, change�. reduces the complexity of its financing, improves the quality of its expertise’s as related to Sri Lanka, and helps to build institutional greater capacity. 11. The respondents believe that the primary obstacle to World Bank assisted reform efforts in Sri Lanka is that they do not take into account adequate consideration of the country’s challenges. This obstacle to reform succeeding is followed by political pressures and an inadequate level of citizen/civil society participation. The World Bank’s new focus on civil society is particularly relevant now in Sri Lanka in light of these survey findings. Communication and outreach 106  Civil Society includes Academia, NGOs, CBOs etc.  112 12. Two-thirds of all respondents indicated that they got most of their information about economic and social development issues in Sri Lanka from local newspapers. The Internet was also a popular information source. A large number of the respondents have visited the World Bank website and prefer to get updates through web sources. (This includes respondents from outside the Western Province). Nevertheless there is a significant number of respondents without any knowledge or awareness of the World Bank Access to Information policy and how to access information from online sources. 13. Therefore, there is a need to position the Goal: World Bank to be perceived as an effective Development Partner, committed to partnering the GOSL and its people fairly, transparently and impartially. To achieve this goal, the following three communication objectives are proposed: Objectives: 1. Communicate for results 2. Communicate for transparency 3. Communicate for social accountability 14. Communicate for results. Development communications play a crucial role in the success or failure of a development project or operation. The need to share global knowledge and expertise has been identified as a very important expectation from the people of Sri Lanka. As such, there will be a conscious effort to plan and implement a comprehensive knowledge and information dissemination strategy that would help build capacity of those who come into constant contact with the development agenda planned for Sri Lanka. This strategy would help stakeholders institutionalize development knowledge and information in daily operations. It would also benefit development stakeholders in applying knowledge for change and development by improving their capacities to engage in evidence based policy dialogue, which is much needed to achieve the ambitious development goals of Sri Lanka. Targeted and systematic stakeholder consultations, monitoring the socio-political and economic climate through media and other information sources, coordination with development partners and taking proactive measures to mitigate risks can support a development operation reap maximum results. 15. The World Bank External Affairs unit in collaboration with other sectors will work closely to document achieves project results as well as to communicate effective practices. This would also help the World Bank to align its support to country priorities as well as transfer greater ownership of Sri Lanka’s development to the elected Government and its people. 16. Communicate for transparency. The client survey finds that there is a significant lack of awareness of the World Bank policy on Access to Information. With this policy, the World Bank now makes all its information other than a few exceptions available for public access. In the short term, strategies will be developed to promote awareness of the policy and what it means in terms of achieving development effectiveness. Given that most of World Bank clients access information through local newspapers, media capacity will be built to access information and use the information for public consumption. In the longer term, World Bank will also engage with public and private sectors as well as NGOs to work towards policies that promote greater transparency of their work. South-south knowledge exchanges and technical expertise are available through World Bank resources. 17. Communicate for social accountability. The client survey also identified the need to actively engage citizens and Civil Society groups in collaboration with the client Government, specifically at the local government levels. Such engagements could also help the client government to monitor its development effectiveness through third party monitoring mechanisms and through initiatives to promote media and citizens awareness. of budgeting and budget transparency. The CPS consultations also initiated an engagement with parliamentarians. A strategy to engage parliamentarians to adopt social accountability tools in their work is another area to be developed. 113 18. Following up on findings of the client survey, more World Bank staff will engage in communications and outreach in a systematic manner as facilitated by the World Bank External Affairs unit. 114 Annex 18: Gender Issues in Sri Lanka  Gender and Poverty in Sri Lanka 1.1 Sri Lanka is a lower-middle income country with a per capita income of approximately US$ 2,400 and a population of around 20 million people. Basic human development levels are high, with the country performing well across a number of socio-economic indicators, including gender indicators. The country has been ranked in the Global Gender Gap Index 16th out of 134 developing and developed countries in terms of closing gender gaps in economic participation and opportunity, educational attainment, health and survival and political empowerment.107 Gender gaps in education and health indicators tend to be low, particularly when compared with other countries in the South Asia region; however, women persistently lag men in terms of economic participation: female labor force participation rates remain low, and unemployment rates are double those of men (World Bank 2011a). Women are also segregated into lower paying, low-skilled employment in both the formal and informal sectors, and into domestic service overseas (ibid). Sri Lanka’s performance on the UN Gender Inequality Index (see Figure 1) is second only to the Maldives in South Asia (ranked 72 among 169 countries, compared to the Maldives 59th place ranking)108, and is rapidly approaching the rank of such upper middle income countries as Malaysia (ranked 55th).109 1.2 In Figure 1 – Gender Inequality Index 2008   terms of social indicators, the country performs at 0.900 the level of middle income countries (see Table 1). Literacy at GII ( 0 = Least Inequality) 0.800 0.700 91 percent is near universal and 0.600 0.500 basic indicators of health are 0.400 uniformly high across income 0.300 groups, with 99 percent of births 0.200 attended by skilled health staff 0.100 (World Bank 2011a; World Bank 0.000 2007). The total fertility rate has been dropping from 2.9 births per woman in 1980-85 to 2.3 births per woman in 1990-95 and 2002-08 (World Bank 2011a). MDG Country/Region (among 169 countries) timelines for universal primary   school enrollment, gender parity in (Source: UN 2008)  primary and secondary school enrollment, and universal provision of reproductive health services are on track. Sri Lanka has met the MDG numerical goals relating to universal primary school enrollment and completion, reaching near universal enrollment (96 percent) and gender parity in primary and secondary enrollments since the early 1990s (World Bank 2007), though quality questions remain (World Bank 2005a). Its performance on infant and under-5 107 2010 Gender Report presented at World Economic Forum (cited in World Bank 2011a). 108 The Gender Inequality Index is a composite measure of reproductive health (maternal mortality ratio and adolescent fertility rate); women’s empowerment (share of parliamentary seats held by women; and female secondary and tertiary educational attainment rates); and labor (share of women in the labor force) (UN 2008). 109 On the OECD’s Social Institutions and Gender Index which looks at family law, civil liberties, physical integrity (including violence against women), son preference, and ownership rights, Sri Lanka scores highest among all South Asian countries (score 0.059 versus average regional score of 0.335), due especially to lack of son preference in the country. (See OECD SIGI Index at http://my.genderindex.org). 115 mortality rates is also very strong, and four times better than what might be expected for a country of its income level. Sri Lanka should reach the goal by 2015 of 6.3 deaths per 1000 live births (ibid).110 Table 3 - Human Development Indicators of Gender Equality: Sri Lanka compared to South Asia and Lower-middle Income Country Averages   Sri Lanka  South Asia  Lower middle� income countries  Gender Inequality Index (GII)   .599  .739  .591  Life expectancy at birth (years):  females/males  77.7 / 71.6  66.3 / 63.6  66.8 / 63.4  Youth literacy rate (percent age 15�24):   97 / 97  62 / 77  78.6 / 88.8  girls/boys b  Sex ratio (number of females per 1000 males)  961.5  933.4  940.1  Source:  World Bank 2011a, based on World Development Indicators database  1.3 The Government’s 10-year Development Framework entitled the Mahinda Chintana: Towards a New Sri Lanka, sets out three pillars: i. equitable development through accelerated rural development; ii. accelerated growth through increased infrastructure investment; iii. strengthening of public service delivery (World Bank 2011a).111 A key challenge for the Government is to successfully manage development and poverty reduction efforts in a manner that is inclusive, pro-poor and gender-responsive. Improved performance on MDG 3 (Gender equality) will be a challenge given the gender gaps that remain in most aspects of economic and political empowerment, especially in areas such as representation in decision-making and public life. Persistent poor performance on indicators such as women’s labor force participation outside of agriculture, and poor nutritional outcomes across income quintiles, point to challenges that require a multi-pronged gender-sensitive approach. This is particularly pressing given the government’s goals of reducing rural employment from two-thirds to a half, and increasing the urban population from a quarter to a third. Migration policy also seeks to double the proportion of remittances earned on the basis of skills, with important implications for female overseas workers. Women’s participation in the garment sector, in particular, remains significant.   1.4 Remittances by female overseas workers working in domestic service and the health sector contribute greatly to national and household incomes. Remittances are the second largest earner of foreign exchange in Sri Lanka (Abayasekera 2010) and women are significant participants in the overseas Sri Lankan labor force--53 percent of the total in 2003 (World Bank 2007). Abroad they work largely as domestic staff in households in the Middle East (90 percent). Many of these women come from the generally poor estate sector; however, individual households sending women to work abroad tend to have more assets than other non-migrant sending households (ibid). Government policy toward female overseas workers is mixed. The Government of Sri Lanka (GoSL) supports migration because of remittance earnings, yet it seeks to bar married women with young children from such work since work conditions abroad can be abusive. Indeed, the government has done little to work with host countries to reduce these abuses endured by both female and male migrant workers from Sri Lanka (Gunatilaka et al 2010; ADB 2008) . 110 Nonetheless, even infant mortality rates (IMR) vary widely by region: e.g., in 1996, the district with the highest IMR rate in the country (i.e., Anuradhapura) had a rate almost 20 times that of the district with lowest (that is, Trincomalee) (World Bank 2005). Progress since then has been similarly varied spatially. 111 Sri Lanka’s strategy for attaining high-middle income status is centered around five key hubs for growth, viz: i. knowledge- based industries and services; ii. ports and shipping; iii. aviation; iv. commercial hub; and v. energy (World Bank 2011b). 116 Persistent Gender Inequities in Sri Lanka: Statistical Summary 2.1 Despite favorable composite scores on gender, Sri Lanka performs less well than expected for its GNI per capita level in two key areas: women’s labor force participation, and nutritional status of women and children. Figure 2 – Gender Differences in Labor Force  Figure 3 � Female Labor Force Participation Time  Participation   Trend  100 80 70 % of Female Population ages 15�64 80 60 % of population 15�64 50 60 40 30 40 20 20 10 0 yr1980 yr1983 yr1986 yr1989 yr1992 yr1995 yr1998 yr2001 yr2004 yr2007 0 PAK AFG IND LKA MYS MIC SSF NPL Female Male LKA SAS MYS MIC UMC (Source: ILO, 2010) (Source: ILO Key Indicators database) 2.2 Women’s Labor Force Participation: Women’s labor force participation in Sri Lanka is just 37 percent, below that of Nepal (NPL); middle-income countries (MIC); Sub-Saharan Africa (SSF); Malaysia (MYS), which has gender equality outcomes in other areas that are similar to Sri Lanka’s; and not much higher than in India or Afghanistan (Figure 2). The government is committed to improving this performance, particularly as the country transitions further into the services and industry sectors. However, a historical look at Sri Lanka and other comparator countries shows remarkable persistence in women’s labor force participation in the last three decades, with Sri Lanka actually demonstrating a slight decline in women’s participation rates as the economy develops (Figure 3). These figures mask differences in rates in rural and urban areas. Rural women participate in the labor force slightly more than do urban women, and this disparity persists over time (Figure 4). Women’s labor force participation for female youth aged 15-29 from 1992-2006 was just 38 percent compared to their male counterparts’ participation at 66 percent, though women’s participation was increasing by 3.4 percent per year compared to the male increase of 1.8 percent per year (Arunatilake and Jayawardena 2010). Still, from 1992 to 2006, women’s labor force participation (ages 15 and over) increased from 36 percent to 39 percent, while men’s increased from 75 percent to 77 percent of the respective population (ibid, based on DCS data). The overall unemployment rate for females was double that of men (i.e., 9.7 percent compared to 4.7 percent) (ibid). Unemployment for women is higher than for men in all sectors, but highest in the rural sector, followed closely by urban unemployment (Figure 5). 117 Figure 4 – Female LFP, Rural vs Urban   Figure 5 ��  Unemployment by Sector and Gender   60 9 8 % of Population in Labor Force 50 7 40 % Unemployment 6 30 Total 5 Urban 20 Urban 4 Rural Rural Estate 3 10 2 0 1 2001 2003 2005 2007 2009 Year 0 Total  Male  Female   (Source: Sri Lanka DCS Annual Bulletin, 2010) (Source: Sri Lanka DCS Annual Bulletin, 2010)   2.3 Nutrition of Women and Children: Consumption and income poverty persist in Sri Lanka, as does malnutrition, especially among the poor. While the prevalence of malnutrition is not as high as in other South Asian countries and even many middle income countries (Figure 6), overall child malnutrition rates in 2002-08 were 21 percent (World Bank 2011a). Among children under age five, 18 percent are stunted, 22 percent are underweight, and 15 percent are wasted (UNICEF 2009). These malnutrition levels are higher than what is expected for countries at similar GDP per capita levels. National aggregates, moreover, mask widening disparities between different groups in the population. While child malnutrition is present across all income quintiles, it declines as income levels rise. In the estate sector, where child malnutrition rates are among the highest in the world, stunting (height for age) affects more than 40 percent of children. A Country Assistance Strategy (CAS) indicator for the period FY09-12 was to reduce the share of underweight children under age 5 in estate areas from 44.1 percent in 2000 to 34.9 percent in 2011-12; however, this indicator has since been dropped (World Bank 2011a). Figure 6 � Malnutrition Prevalence in South Asia  100.00 % of children below age 5 50.00 0.00 AFG NPL LMC PAK MIC UMC IND BTN SAS MDV LKA BGD Country Stunting (Height for Age) Wasting (Weight for Age)     Source: (Latest Available Data, WDI)  118 References Cited Abayasekera, Asha. 2010. “Youth Mobility and Overseas Migration in Sri Lanka� in R. Gunatilaka, M. Mayer, and M. Vodopivec (eds.) The Challenge of Youth Employment in Sri Lanka. Pp. 139-166. Abbott, Pamela, Dorothy Tukahabwa, Jean Providence Nzabonimpa, and Roger Sapsford. 2010. “Girls into Science and Technology: Policy Brief - DelPHE Project Girls into Science and Technology�. Kigali, Rwanda: Kigali Institute of Education. 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Food and Nutrition Bulletin, vol. 24, no. 1, The United Nations University. 120 Annex 18: IDA/IBRD Program Summary  Fiscal Year Project IDA (US$ m) IBRD (US$ m) FY13 Second Health Sector Development 200 - Regional Growth Pole/ Economic Development 50 250 FY14 Skills Development - 100 Urban Infrastructure/Transport 227 100 Investment Policy Reform 100 - FY15 Private Innovation and Technology Adoption tbd tbd Legal and Judicial Reform tbd tbd Water and Sanitation tbd tbd FY16 Solid Waste Management tbd tbd Note: FY13 and FY14 total IDA lending is expected to be $577 million. FY13 and FY14 total IBRD lending is expected to be $450 million. Lending program for FY15 and FY16 is tentative and will be developed as part of the CPS Progress Report process. 121 IBRD 33485 80°E 81°E I N DIA SRI LANKA 10°N 10°N SELECTED CITIES AND TOWNS PROVINCE CAPITALS it r a Point Pedro NATIONAL CAPITAL St RIVERS k Jaffna MAIN ROADS Pal Delft Elephant Pass RAILROADS Island PROVINCE BOUNDARIES Palk Bay Killinochchi INTERNATIONAL BOUNDARIES Iranamadu Tank Mullaittivu Ferr y Ad Talaimannar Manakulam am 's B ridge 9°N Mannar Island Mannar NORTHERN Pulmoddai Aruvi A Vavuniya ru SRI LANKA Trincomalee Gulf of Karaitivu NORTH CENTRAL Island Rambewa Mutur Mannar Anuradhapura Yan Oya Galkulama Kalpitiya Ka Kaud la Oya ulla Oya Bay of Bengal Puttalan Habarane 8°N 8°N NORTH Madura Oya WESTERN Maho Oya Batticaloa uru ed Kattankudi Mahaweli Ganga D EASTERN Chilaw Madura Oya Kurunegala Reservoir Kalmunai CENTRAL ha O y a Ma Ampara Negombo Kandy Gal Oya y Kegalla Victoria Falls Reservoir U VA Pidurutalagala Senanayake WESTERN (2,524 m) Samudra g Badulla 7°N Kelan Gan 7°N COLOMBO Sri Jayewardenepura Kotte Pottuvil Monaragala Moratuwa Ratnapura lu Wellawaya Ka Kirin SABARAGAMUWA in d Kalutara i Oya Kumana ya Laccadive Wala Kataragama l aw INDIAN e eG Sea an OCEAN g g a SOUTHERN Hambantota Galle 6°N Tangalla 0 20 40 60 Kilometers 6°N Matara This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information Dondra Head shown on this map do not imply, on the part of The World Bank 0 10 20 30 40 Miles Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. 80°E 81°E 82°E SEPTEMBER 2004