Document of The World Bank FOR OmCAL USE ONLY Report No. P-5041-CE MEMORANDUM AND RECOMMENDATION OF TdE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 15.5 MILLION TO THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA FOR A FOREST SECTOR DEVELOPMENT PROJECT MAY 17, 1989 This document has a restricted distribution and may be used by recipients only in the performance of their offcial dutie Its contents may not otewise be disclosed witbout Wo.ld Bank authorization. CURRENCY AND EQUIVALENT UNITS Currency unit = Sri Lanka Rupees (SL Rs) US$1.00 = SL Rs 33.00 SL RS 1 - US$0.0303 WEIGHTS AND MEASURES 1 kilometer (km) - 0.62 miles (mi) 1 meter (m) = 1.09 yards (yd) 1 square kilometer (km2) - 100 hectares (ha) 1 hectare (ha) - 10,000 m2 (0.01 km2) - 2.471 acres (ac) 1 cubic meter (m3) - 35.315 cubic feet (ft3) 1 kilogram (kg) - 2.2 pounds (lb) 1 metric (m tons) . 1,000 kg - 2,205 lb ABBREVIATIONS ADB - Asian Development Bank CIDA = Canadian International Development Agency ED * Forest Department FINNIDA - Finnish International Development Agency GOSL - Government of Sri Lanka ODA = Overseas Development Administration of the United Kingdom STC - State Timber Corporation UNDP = United Nations Development Program USJ = University Sri Jayawardenapura FISCAL YEAR January 1 - December 31 FOR OMCIAL USE ONLY ,IMm 'E2AST SEC tOR DROPMEN? ?ICT Credit and Proiect Swuigry Borrower: Democratic Socialist Republic of Sri Lanka (GOSL) Beneficiaries: Ministry of Lands, Irrigation and Mahaveli Development (MLIHD), Forest Department (FD), University of Sri Jayawardenapura (USJ), and State Timber Corporation (STC) Amount: SDR 15.5 million (US$19.9 million equivalent) Terms: Standard, with 40 years maturity Onlending Terms: Not applicable FinancInR Plans (USS million) Government 8.7 FIMNIDA 2.8 IDA 19.9 Total 31.4 Economic Rate of Return: 282 Staff Appraisal Reiort: Report No. 7699-CE mat): IBRD 21471 This document has a esicted distribution and may be usd by reeipients only in the pfonance of their official duties. Its contents may no othrwe be dscked wiou Word Bak auonrizatn MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA FOR THE FOREST SECTOR DEVELOPMENT PROJECT 1. The following memorandum and recommendation on a proposed development credit to the Democratic Socialist Republic of Sri Lanka for SDR 15.5 million (US$19.9 million equivalent) is submitted for approval. The proposed credit would be issued on standard IDA terms with 40 years' maturity and would help to finance a forest sector development project. The project would be cofinanced by the Finnish International Development Agency (FINNIDA) which would provide a grant of US$2.8 million equivalent. 2. Background. In 1988, the forestry sector in Sri Lanka contributed about RS 4.7 billion to the country's economy, or 4.21 of GDP. Industrial processing of timber and paper products contributes an additional Re 1.4 billion. Forestry employs about 170,00 people and forestry products are the country's major source of energy, accounting for about 71? of total energy consumption and 94? of the energy used in households. However, the forest land area of Sri Lanka has been shrinking over the last 25 years, primarily due to the clearing of land for agricultural development. Illicit felling and shifting cultivation have also contributed to the reduction of forests. Most of the natural forests havy been logged over, and their stocking has been reduced to a level which allows recovery to be achieved only by resting and replanting. Over the last 50 years, the Forest Department has established about 150,000 ha of plantations to expand the productive resource base. However, most of these plantations, until recently, have not been tended or managed. IDA's involvement in the sector since 1979 has brought a new dynamism to Sri Lanka's forestry sector by starting forest inventories, bringing most of the plantations and selected natural forest under management, training staff, strengthening the institutional framework, and most importantly providing considerable assistance to the Government in the formulation of a Forestry Master Plan to guide the long-term development of the sector. As a result of the ongoing IDA-led support, Sri Lanka now has an up-to-date resource data base, a comprehensive sector development plan, and an integrated sector investment program in forestry. This experience is now being used to formulate forestry projects in Bangladesh, Korea and Nepal 3. Rationale for IDA Involvement. IDA conducted a Forestry Sector Review in 1979 and identified a development course for the forestry sector of Sri Lanka. It initiated the first phase of this development by providing support through the ongoing Forest Resources Development Project (Cr. 1317-CE) which became effective in 1983. Since then, a Forestry Master Plan has been prepared, a Five-Year Investment Program has been formulated, the education of professional foresters has started, and steps have been taken to introduce modern forest management practices. IDA is thus in a sound position to continue to lead the external support efforts needed to translate these plans into action. Continuation of IDA support to the forestry sector through this follow-up project would help channel assistance from other Donors and Aid Agencies into the sector more effectively. Finally, given IDA's involvement -2- would ensure that the development undertaken is consistent with strict environmental protection principles. 4. Protect ObLectives. The proposed project is designed to support the implementation of a five-year time slice (1990-1994) of the Forestry Master Plan. The main objective of the project is to improve the performance of the forestry sector in line with the economic, social, and environmental expectations of the Government throughs (a) the intensive management of all plantations and natural forests; (b) the establishment of an environmental management aystenl; tc) expansion of the resource base by establishing new plantations; (d) expanding and augmenting professional and technical education and training; and Ce) strengthening of the institutional base. 5. Protect Descriltion. The proposed project will be implemented under the umbrella of the Ministry of Lands, Irrigation and Mahaweli Development by the Forest Department, the State Timber Corporation, and the University of Sri Jayewardenepura over a period of five years. The Forest Planning Unit of the Ministry of Lands, Irrigation and Mahaweli Development will coordinate project implementation. The project objectives would be achieved by support fors (a) a FPorest Manaaement comoonent to enable the Forest Department to map and complete inventories and forest management plans for 35,000 ha of young plantations and about 100,000 ha of natural forests and carry out indicative inventory of about 500,000 ha of natural forest in the Dry Zone. Under this component the Forest Department, in coordination with the State Timber Corporation, will also carry out a silvicultural treatment program for the existing 60,000 ha of established ptmntations and 40,COO ha of natural forests; (b) an Environmental Manazement comoonent to establish a capability within the Forest Department to formulate and enforce environmental protection standards to ensure protection and preservation of the environment and biodiversity within the forest estate; and (c) a Plantation Establishment comDonent to enable the Forest Department to expand the productive and protective forest resource base by establishing and tending about 17,900 ha of new plantations; (d) an Educatlon and Training comuonent to enable the expansion of professional forestry education facilities in the University of Sri Jayewardenapura and the technical forestry training facilities of the Forestry School of Nuwara Elia; and (e) an Institutional Sunport component to enhance the capabilities of the Forestry Planning Unit to coordinate forestry sector institutions and to plan and monitor the development of the sector, equip the Forest Department and the State Timber Corporation with an up-to- date and functional information system, and provide infrastructure and mobility for efficient program implementation. Implementation of the project would require a technical assistance program consisting of 347 months of international consulting expertise and 138 months local expertise. About 502 of the technical assistance input will be utilized for education and training purposes, which would create benefits far beyond the five-year period of the project. The remaining technical assistance inputs should be considered modest in view of the anticipated modernization of the sector. 6. The project cost is estimated at US$31.4 million, with a foreign exchange component of US$12.4 million (39S). This includes an investment cost of US$24.9 million (79?) and an incremental operating cost of US$6.4 (20X). IDA would finance US$19.9 million (63S of total costs), includin; US$18.1 million of the investment cost and US$1.8 million of the incremental recurrent -3- cost. FINNIDA would provide US$2.8 million of grant financing for the investment cosz of the technical education component, excluding civii works and the investment cost of the program for the Forestry Planning Unit. The total external financing of the project would be US$22.7 million (782 of total cost, excluding taxes and duties). The Overseas Development Administration of the United Kingdom (ODA) and the United Nations Development Program (UNDP) indicated that they would be willing to provide grant financing for certain activities included in the project. However, scope and the extent of this financing have yet to be determined. The Government is also pursuing possible cofinancing from the Canadian International Development Agency (CIDA). If the Government of Sri Lanka reaches agreement on this cofinancing the IDA Credit would be reduced by the amount applicable to the related activities. A breakdown of costs and financing is shown in Schedule A. Amounts ana methods of procurement and disbursement are shown in Schedule B. A time table of key processing events and the status of Bank Group operations in Sri Lanka are given in Schedules C and D, respectively. A map, IBRD 21471, is attached. The Staff Appraisal Report No. 7699-CE, dated May 17, 1989, is. being distributed separately. 7. ARreed Actions. The Government of Sri Lanka has agreed on the following actionss (a) to undertake all forestry operations according to forest management plans; (b) to carry out a study to assess the future direction of the Forestry MSc course and discuss it with IDA; (c) to maintain a Forestry Planning Unit; (d) to establish separate profit centers for STC's logging, sawmilling, wood treatment, and furniture manufacturing operations; (e) to undertake a study to explore possibilities for privatizing STC's sawmill operations; (f) to maintain separate project accounts; (g) to audit Statement of Expenditures annually; (h) to maintain the Interministerial Forestry Master Plan Steering Committee; (i) to reorganize the Forestry Department's headquarters and expand its field organization; (j) to establish an Environmental Management Division within the Forest Department organization; (k) to maintain the University Coordinating Committee; (1) to establish all forest plantations on lands formally allocated for forestry purposes; and (m) to undertake a mid-term review of the project and discuss the findings with IDA. 8. Conditions of Credit Effectiveness are that: (a) the Government has made arrangements satisfactory to IDA for commitment of the FINNIDA financing; (b) project coordinators for the Forest Department, State Timber Corporation, and University of Sri Jayewardenepura have been appointed and are in position; (c) the technical assistance team has been appointed; and (d) STC's log sale prices have been deregulated. 9. Benefits. Through the project modern and economically and scientifically sound forestry practices would be introduced in Sri Lanka. These practices would increase the production of wood, provide greater protection to the environment, and create employment opportunities for the rural population. Altogether they would allow the country to meet most or all of its requirement for wood and wood products over the long term. The various physical components of the project have directly quantifiable benefits, mainly increased wood production, which give an internal economic rate of return of 28X. -4. 10. Risks. Possible risks include a delay by the Forest Department in establishing the required organizational structure and enforcing the standards for the forest management. However, to minimize this risk the project provides for a fomal and well structured link between the Department and the Ministry through the Forestry Planning Unit, which will closely monitor project implementation. In addition the technical asesstance program provided by the project is designed to eliminate all technical hesitations by the Department. While direct project risks should be minimized, the ongoing political disturbances may delay the start-up of some operations and cou: prevent targets from being reac.ed at certain locations. This risk is minimized by using conservative targets for these localities in the early years of the project. Therefore even if political problems continue at present level and at the present locations neither the economic viability nor the development impact of the project will be reduced significantly. 11. Recommendations. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed Credit. Barber B. Conable President by Moeen A. Qureshi May 17, 1989 Attachments Washington, D.C. - - SceduLe A SRI LANKA FOREST SECTOR DEYELOPMENT PROJECT Estimated Cost and Financina Plan Estimated Proiect Cost: aJ Local Porerin Total --__- (US$ million) ------ A. Forest management 1.3 1.2 2.5 B. Environmental management 0.2 0.8 1.1 C. Education and training 1.2 3.4 4.6 D. Institutional support 3.8 2.3 6.1 E. Plantation establishment 6.6 2.9 9.5 Total Baseline Costs 13.2 10.6 23.8 Physical contingencies 0.7 0.3 1.0 Price contingencies 5.1 1.5 6.6 Total Project Costs 19.0 12.4 31.4 la Including taxes and duties of US$2.1 million. Financing Plan Local Foreisn Total …----(US$ million) ------ IDA 11.3 8.6 19.9 FINNIDA 0.2 2.6 2.8 Government 7.5 1.2 8.7 19.0 12.4 31.4 - 6 - Pogo I of 2 SRI LANX FOREST SECTOR DEVELOPMENT PLiJECT Procurement Method and Disburs.ments (US$ million) Procurement Category ICB LCB Other la N/A Total Cost 1. Goods Vehicles 2.04 - - 0.17 lb 3.11 (2.48) (0.00) (2.48) Equipment 0.8 0.87 0.4 0.44 Lb 2.51 (0.70) (0.70) (0.29) (0.00) (1.69) Materials - 1.30 0.96 - 2.26 (1.00) (0.70) (1.70) 2. Works Civil Works - 1.84 0.2 - 2.04 (1.38) (0.15) - (1.53) Site Preparation 3.58 - - 3.58 Contracts (2.15) - - (2.15) Plantation/Forest - - 5.12 - 5.12 Management Labor (4.61) (4.61) 3. Services Technical - - 2.96 1.66 lb 4.62 Assistance (2.96) (0.00) (2.96) Fellowships - - 1.07 0.52 lb 1.59 (1.07) (0.00) (1.07) Salaries - - 3.13 3.13 (1.56) (1.56) Allowances - - 0.38 0.38 (0.19) (0.19) Operating and 3.014 3.014 maintenance - - - (0.00) (0.00) Total 3.74 7.59 10.71 9.314 31.4 (3.18) (5.23) (9.76) (1.7) (19.9) Note: Figures in parenthesis are the respective amounts financed by IDA. la Other" includes shopping procedures, consultant contracts, and force account. lb Procurement under FINNIDA funding. 7 _ Schedule B Page 2 of 2 DIS-URSEMENTS Cateaorv Amount 2 (US$ million) (1) Works (a) Building and contruction 1.53 752 (b) Site Preparation Contract 2.15 602 (c) Plantationl/orest Management Labor 4.61 902 (2) Vehicles. equipment 1002 of foreign and materials expenditures including plantation 5.87 1002 of local inputs expenitures (ex-factory cost) and 702 of local penditures for other items pro- cured locally. (3) Incremental staff 1002 of local salaries and 1.75 expenditures until allowances January 31, 1991, 702until January 31, 1992, 502 until December 31, 1994 and 202 of local expendi- tures thereafter. (4) Consultants' services and training 4.03 100? Total 19.9 Estimated IDA Disbursement IDA Fiscal Year 90 91 92 93 94 95 96 Annual 1.7 9.8 3.8 4.1 4.4 1.1 0.1 Cumulative 1.7 6.5 10.3 14.4 18.8 19.8 19.9 - 8 - Schedule C SRS LANKA FOREST SECTOR DEVELOPMENT PROJECT Timetable of Rev Proiect Processint Events (a) Time taken to prepare: Twelve months (b) Prepared by: GOSL with FAO/CP assistance (c) First IDA missions MaylJune 1988 (d) Appraisal mission departures January 1989 Ce) Negotiations April 1989 (f) Planned date of effectiveness: October 2, 1989 (g) List of relevant PCRs and PPARIs None Schedule D Page 1 of 2 SRI LANRA FOREST SECTOR DEVELOPMENT PROJECT THE STATUS OF BANR GROUP OPERATIONS IN SRI LANMA A. STATEMENT OF BANK LOANS AND IDA CREDITS la (As of March 31, 1989) Amount in USS million Loan or (less cancellations) credit Fiscal uno s- number year Borrower Purpose Bank IDA bursed lb Ten loans and twenty eight credits fully disbursed 107.1 414.0 1017 1980 Sri Lanka Smallholder Rubber Rehab. 12.0 0.9 1079 1981 Sri Lanka Second Rural Development 33.5 6.4 1160 1981 Sri Lanka Village Irrigation Rehab. 30.0 12.0 1166 1981 Sri Lanka Mahaweli Ganga Dev. III 90.0 36.3 1317 1982 Sri Lanka Forestry I 9.0 6.5 1363 1983 Sri Lanka Third Rural bevelopment 23.0 24.5 1401 1983 Sri Lanka Industrial Dev. Project 25.0 0.2 1494 1984 Sri Lanka Mahaweli Ganga Dev. IV 30.0 36.6 2437 1984 Sri Lanka Mahaveli Ganga Dev. IV 12.1 12.1 1537 1985 Sri Lanka Major Irrigation Rehab. 17.0 10.7 2517 1985 Sri Lanka Second Roads 24.0 6.7 1562 1985 Sri Lanka Fourth Tree Crops 55.0 37.2 1692 1986 Sri Lanka Industrial Dev. II 20.0 6.5 1697 1986 Sri Lanka Municipal Management 13.0 9.1 1698 1986 Sri Lanka Second Vocational Training 15.0 13.0 1700 1986 Sri Lanka Water Supply and Sanitation 37.0 35.0 1736 1987 Sri Lanka Ninth Power 52.0 48.2 1776 1987 Sri Lanka Agriculture Research 18.6 18.7 1860 1987 Sri Lanka TMird Small & Med. Indus. 20.0 15.5 1883 1988 Sri Lanka Emergency Recon. & Rehab. 78.0 65.4 1903 1989 Sri Lanka Health & Family Planning 17.5 16.9 1909 1989 Sri Lanka 2nd Smallholder Rubber Rehab. 23.5 22.0 1933 1989 Sri Lanka Distribution & Transmission 40.5 36.0 1948 1989 Sri Lanka Third Industrial Development 43.8 41.0 Total 143.2 1.117.4 517.0 Of which has been repaid 62.7 9.2 Total now Held by Bank and IDA 80.5 1.108.2 Amount sold 3.5 Of which repaid 3.5 Total Undisbursed 18.8 498.2 517.0 La The status of the projects listed in Part A is described in a separate report on all Bank IDA-financed projects in execution, which is updated twice yearly and circulated to the Executive Directors on April 3o and October 31. Lb As credits are denominated in SDRs (since IDA Replenishment VI), undisbursed SDR credit balances are converted to dollars At the current exchange rate between the dollar and the SDR. In some cases, therefore, the uncisbursed balance indicates a dollar amount greater than the original principal credit amount expressed in dollars. Schedule D -10- Page 2 of 2 B. STATEMENT OF IFC INESTMENTS (As of March 81, 1989) Total Total undisbureed Fiscal hold including Year Obligor Business Loan Equity Total by IFC participants 1978, Dov-lopm.nt Flnance Development Finance - 0.5 0.5 0.5 - 80, 83 Corporation ot Coylon 1970 Pearl Textile Mille Textile and Fibers 2.5 0.8 8.8 - - 1978, 81 Bank of Ceylon Development Finance 7.0 - 7.0 2.8 - 1979, Ceylon Synthetic T*xtile and Fibers 8.1 0.5 8.6 - - 1981 Textilo 1979 Mlkechres Industrles Woven Polypropylene 0.9 0.1 1.0 - - Limited and Ceylon Bage Paper Sacks Ltd. 1980/84, Lanka Orient L eaing Capital Morket 8.0 0.8 8.8 0.1 - 1985 Company Ltd. 1988 UAL Money end Capital - 0.4 0.4 0.4 - Market 1988 Lanka Hotels Tourism 18 0.7 2.5 2.5 0 : Total 18.8 8.8 21.6 5.8 0.1 ItRD 21471 SRI LANKA FOREST SECTOR DEVELOPMENT PROJECT (FORESTRY 11) Vomo D.W ovtk ft a¢w k ~~~~~~~~~~~~~~~~~~~Pre19S" _w_d I | --~~~~~~~~~~~~~- PC6t-l9Uh -- Pwoi-16 iqe ho=,go * -tiag Pkb.uwho.. Fo,e, R~ese, Agqmcho,o,c Zo,e Bo,~dn- V Tom., " '"log- Noftd Copt.1o Roifo&d *dS4~/ * vg! s O T hA-I ; /~~~~~~ ~~~~~ 0 N, E, . kt E;h I n d, sO n u 'AE'E A * - i+Y AS + ~~~~~~(tbATICALOA) ) ce '' n KILOMITESS g; AAIL8S~ ~~~~~~~~~~~~ . |ND|^ \* > gv~~~~all G * To..ol o° AMAARC 18 o., iO ivD AMLE z nin C.e SRI~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 7.NK CC ;M08,R o- ^t . t r~~~~~~~~~~~~~~~~