Reporl No. 14760-CE Sri Lanka Impact Evaluation Report Smallholder Rubber Rehabilitation Project (Credit 1017-CE) Fourth Tree Crops Project (Credit 1 562-CE) June 30, 1993 Doe n V,dL1t ft e p r nke Document of the World Bank Currency Equivalents (Year-end values) Weights and Measures Currency Unit = Sri Lanka Rupee (LKR) I Metric ton (mt) = 1,000 Kilograms (kg) 1 Kilogram (kg) = 2.204 Pounds (lb) 1979 US$1.00 = LKR 15.44 1 Hectare (ha) = 2.47 Acres (ac) 1980 US$1.00 = LKR 18.00 1 Kilometer (km) = 0.62 Miles (mi) 1981 US$1.00 = LKR 20.55 I Billion (bn) = 1,000 Million (m) 1982 US$1.00 = LKR 21.32 1983 US$1.00 = LKR 24.99 1 Metric ton of copra = 4,925 coconuts (equivalent) 1984 US$1.00 = LKR 26.27 1 Metric ton of desiccated coconut = 6,800 coconuts (equiv.) 1985 USS1.00 = LKR 27.40 1 Metric ton of coconut oil = 8,000 coconuts (equivalent) 1986 US$1.00 = LKR 28.51 1 Metric ton of poonac = 16,000 coconuts (equivalent) 1987 USS.00 = LKR 30.74 1988 US$1.00 = LKR 33.02 1989 US$1.00 = LKR 39.99 Fiscal Year 1990 US$1.00 = LKR 40.24 1991 US$1.00 = LKR 42.57 1992 USS1.00 = LKR 46.00 January I - December 31 1993 US$1.00 = LKR 49.55 1994 US$1.00 = LKR 49.90 All references to US dollars in the report should be taken to mean US dollars equivalent. Acronyms and Abbreviations NORAD Norwegian Agency for Development AMSCO African Management Services Company NSA Net Sales Average ARTI Agrarian Research and Training Institute PAR Performance Audit Report ASD Advisory Services Department PB People's Bank ADB Asian Development Bank PCR Project Completion Report BOC Bank of Ceylon PHSWT Plantation Housing and Social Welfare Trust CCB Coconut Cultivation Board PMMD Plantation Management Monitoring Division CDA Coconut Development Authority PRU Plantation Restructuring Unit CENWOR Center for Women's Research RCD Rubber Control Department COP Cost of Production RDD Rubber Development Department CR1 Coconut Research Institute REO Rubber Extension Officer CTC Cut, Tear and Curl Tea ROE Return on Equity DRC Domestic Resource Cost RPC Regional Plantation Company EMC Estate Management Company RPPU Rubber Policy and Planning Unit EPF Employees' Provident Fund RPRC Rubber Policy Review Committee ERR Economic Rate of Return RRF Rubber Replanting Fund FRR Financial Rates of Return RRISL Rubber Research Institute of Sri Lanka FOB Free on Board RSS Ribbed Smoked Sheet FTC Fourth Tree Crops Project SAL Structural Adjustment Loan GDP Gross Domestic Product SAR Staff Appraisal Report GONL Government of the Netherlands SCB State-owned Commercial Banks (BOC & PB) GOSL Government of Sri Lanka SDD Social Development Division GPC Group Processing Centre SECAL Sectoral Adjustment Loan IDA International Development Association SLSPC Sri Lanka State Plantation Corporation JEDB Janatha Estates Development Board SRR Smallholder Rubber Rehabilitation Project KTDA Kenya Tea Development Authority SWP Social Welfare Program MOF Ministry of Finance TAT Technical Assistance Team MPI Ministry of Plantation Industries TCR (Proposed) Tree Crops Restructuring Project MTIP Medium Term Investment Program TRI Tea Research Institute NGO Non-governmental Organization TSHDA Tea Smallholdings Development Authority THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation June 30, 1995 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Impact Evaluation Report on Sri Lanka Smallholder Rubber Rehabilitation Project (Credit 1017-CE) Fourth Tree Crops Project (Credit 1562-CE) Attached is the Impact Evaluation Report on the Sri Lanka-Smallholder Rubber Rehabilitation project (Credit 1017-CE, approved in FY80) and the Fourth Tree Crops project (Credit 1562-CE, approved in FY85) prepared by the Operations Evaluation Department. The Smallholder Rubber Rehabilitation (SRR) project was the first of two IDA financed projects designed to support the government's scheme to replant over-aged, low- yielding smallholder rubber trees. To do so, the project aimed to strengthen the administrative capacity of agencies responsible for replanting; provide adequate inputs and incentives; improve the quality of smallholder rubber and expand the capacity for future replanting. The main objective of the Fourth Tree Crops (FTC) project was to reverse the decline in Sri Lanka's production of tea, rubber and coconuts by improving the performance of two large, government-owned plantation corporations. This was to be achieved by improving producer incentives, increasing productivity, rehabilitating factories and strengthening the management and financial control of the corporations. The project also aimed to stabilize lands through soil conservation and improve the health and welfare of estate workers. During implementation, GOSL decided to privatize the management of the two corporations because of rapidly increasing losses. Privatization became the most important institutional development issue under the project. After some delay, both projects largely achieved their physical (replanting) targets, but these did not translate fully into achievement of project objectives, particularly in the FTC project. The disconnect is explained by a number of missing links between physical targets and project objectives, notably quality factors (such as poor clonal varieties or inadequate field maintenance) and constraints that were not addressed under the projects (such as labor distortions and deficient management incentive systems under the FTC project). There were also important external shocks, particularly the decline in prices for all three tree crops, the escalation of violent political and ethnic confrontation, and the rise in the opportunity cost of labor as Sri Lanka's textiles and services sectors flourished. Economic rates of return were below ten percent for both projects. The SRR project yielded an ERR of 4.8 percent, whereas the FTC project generated returns of 8.2 percent for tea, 7.4 percent for rubber and 2.0 percent for coconuts. The main reasons for the low returns were unforeseen declines in commodity prices, lower than expected yields (for rubber and coconuts) and higher than projected costs of production. Based on these returns, both projects are rated as unsatisfactory at impact evaluation. 2 The FTC project's social welfare objectives were largely achieved. After appraisal, beneficiary surveys were conducted and the resulting findings were used to identify and prioritize social welfare improvements. Beneficiary participation was high in the construction of latrines and the re-roofing of houses, both of which were added to the project as a result of the surveys. Appraisal targets with respect to dispensaries and health centers were also exceeded. These successes are clearly associated with improvements in health and demographic indicators for estate residents that occurred during the project period. Institutional objectives were, on the whole, not achieved. Bank-proposed reforms under the SRR project to improve rubber policy development and planning, as well as to integrate extension with the authorization of government grants for replanting, were soon reversed due to differences of opinion in the administration. The FTC project had little effect on the quality of management systems at the two corporations. Institutional development for both projects is rated as modest, at best. Around the mid-point of project implementation, privatizing the corporations became an explicit objective of the FTC project. This is not reflected in the above ratings of the project's performance. Although the Bank's objectives and approach were generally sound and its supervision and technical support increased the transparency of the privatization process, the final outcome was unsatisfactory and unsustainable. The Bank encouraged GOSL to privatize the ownership of the estates or to grant long-term leases to private companies. However, the government opted to retain full ownership of the estates and to grant short-term, renewable management contracts to private agents. Political interference in the management of the estates has persisted, especially in wage determination and the deployment of labor. The management arrangements have also provided little incentive for the private sector to inject much needed capital into the plantations. Thus, in spite of improvements in cultivation practices, the estates have continued to make losses and their debts are escalating rapidly. The sustainability of the FTC project's benefits hinges on a resolution of the privatization issue. The SRR project has benefitted from continued support for strengthening extension and other services under the follow-on operation. However, the need to increase the levy on exports of rubber (proceeds from which are used to replenish the Rubber Replanting Fund, which gives grants to farmers for replanting), and the continuing shortage of labor for tapping call into question the sustainability of the project's benefits. Therefore, the sustainability of both projects' benefits is rated as uncertain. OED has received comments from the Borrower and from the Government of the Netherlands, one of the cofinanciers for the Fourth Tree Crops project. These have been taken into account in the text and are attached as an annex to the report. Attachment Contents P reface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 B asic D ata . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Evaluation Sum m ary ............................................... 9 1. Introduction ................................................. 17 A . B ackground ............................................... 17 B. Focus of Investigation and Layout of the Report ...................... 19 C . The Projects ............................................... 20 2. Key Accomplishments at Impact Evaluation .......................... 23 A . Production Im pact ........................................... 23 B . Econom ic lm pact ........................................... 31 C . Financiallm pact ............................................ 35 3. Social and Institutional Developments ............................... 49 A . Sociallm pact .............................................. 49 B . Institutional Im pact .......................................... 58 4. The Evolution and Consequences of the Privatization Strategy ............. 63 A. Transparency and Fairness ..................................... 63 B. The Support of Stakeholders .................................... 64 C . Political Popularity .......................................... 68 D. Governance .................er........ 68 E. The Management Contract Compromise ............................ 69 5. Strategies for Sustainable Development .............................. 75 A . Findings . ...... .............................. ......... .... 75 B . Lessons . ...... .. ............. ........................ .... 79 Annexes A. Institutional Arrangements in the Tree Crops Sector ..................... 85 B. Macroeconomic and SectoralData ................................. 89 C. Financial Data on JEDB, SLSPC and the Regional Plantation Companies ...... 97 D. Economic and Financial Analysis of the Smallholder Rubber Rehabilitation P roject . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 E. Economic and Financial Analysis of the Fourth Tree Crops Project .......... 120 F. Comments from theBorrower .................................... 135 G. Comments from Cofinanciers...................................... 137 H. Notes to the Comments from the Borrower and from Cofianciers ............ 139 This Impact Evaluation was initially task managed by Ms. Kathryn McPhail and subsequently by Mr. Andrew Spurling. The principal author is Mr. McDonald Benjamin (consultant). Additional assistance was provided by Mr. Thomas Russo and Ms. Padmini Abeywardena (consultants). The projects were evaluated in October and November 1994. Ms. Silvana Valle provided administrative support. 2 Boxes 2.1 The State-Owned Banks and the Plantation Sector ...................... 42 3.1 Harvesting of Green Leaf in Commercial Estates in Eastern Africa ........... 58 4.1 A Brief Overview of Management Contracts .......................... 70 Figures 2.1 Impact of the FTC Project on the Production of Tea on Government Estates ..... 24 2.2 Private and Government TeaYields ................................ 25 2.3 Domestic Consumption ofRubber ................................. 26 2.4 M ature RubberStands.......................................... 27 2.5 Incremental Rubber Production under the FTC Project ................... 29 2.6 Coconut Area Planted andYields .................................. 30 2.7 Actual and Projected TeaPrices ......... .......................... 32 2.8 JEDB and SLSPC CumulativeLosses ............................... 36 2.9 JEDB and SLSPC Working Capital ................................ 36 2.10 Declining Revenues and Rising Costs per Worker ....................... 37 2.11 Tea Exports and GOSL Revenue .................................. 40 2.12 Rubber Exports & GOSLRevenue ................................. 40 2.13 Net Direct Fiscal Impact of JEDB and SLSPC ......................... 41 2.14 Incremental Revenues for Smallholder Rubber Growers Based on Different Cultivation Practices .................................... 43 2.15 Ratio of Grants to ReplantingCosts ................................ 45 3.1 Seasonal Variations in Monthly Wages and in Pay Advances .............. 51 3.2 Estate Population and Labor Force ................................. 52 4.1 Tea Producer, Broker, Buyer and Fiscal Margins ....................... 67 4.2 Debt Position of the 22RPCs .................................... 73 Tables 1.1 Bank Lending for Tree Crops in Sri Lanka ........................... I8 2.1 Economic Rates of Return at Appraisal, Project Completion and Im pact Evaluation ........................................... 31 2.2 Financial Rates of Return at Appraisal, Project Completion and Impact Evaluation of the Fourth Tree Crops Project ................... 38 2.3 Net Direct Fiscal Impact of the Tree Crops Sector ...................... 39 2.4 Financial Rates of Return at Appraisal, Project Completion and Impact Evaluation of the Smallholder Rubber Rehabilitation Project ......... 44 2.5 Rubber Replanting Fund- CashFlow .............................. 47 3.1 Literacy Rates and Educational Attainment by Location and Gender .......... 53 3.2 Health Indicators for the Plantation Sector, 1980-1993 ................... 55 5.1 SRR Project Key Performance Indicators ............................ 76 5.2 FTC Project Key Performance Indicators ............................. 76 5.3 Factors Affecting the Achievement of Objectives under the FTC Project ....... 77 Maps IBRD 14733R and IBRD 18232 3 Preface This report is one of a series of impact evaluations undertaken as a result of the Bank's increased emphasis on the sustainability of the operations it finances. To complete the evaluation in a timely fashion, an analysis of all aspects of project impact was eschewed in favor of those factors thought most likely to determine the future of the tree crops sector in Sri Lanka. The most significant of these is the 1992 privatization of the management of two of the world's largest plantation corporations. The decision to privatize the management of the estates was driven by rapidly increasing financial losses under government management. Privatization of ownership was not considered politically feasible. Although the new management was appointed after the Fourth Tree Crops (FTC) project was closed, the Bank played an important role in the privatization process during project implementation by funding technical assistance, undertaking sector work and sustaining a dialogue on policy changes. The report analyses the agricultural, economic, financial, social and institutional impact of the Smallholder Rubber Rehabilitation (SRR) project and the Fourth Tree Crops (FTC) project. The two projects were selected for an impact evaluation because of the importance of the tree crops sector to Sri Lanka's development and because together the two projects offered an opportunity to review and contrast experience with tree crop development at the smallholder and the estate level. The privatization issues related to the FTC project were also regarded as relevant for other borrowing member countries of the World Bank Group that are considering privatization of state-owned agricultural enterprises. Finally, the evaluation of the SRR project is timely in that it allows for an assessment of the long term effects of the first SRR project, while informing the on-going, follow-on SRR operation, notably with regard to factors that are likely to influence the sustainability of both projects' benefits. The report is based on a review of the appraisal reports, the loan documents, the project completion reports, the Performance Audit Report for the SRR project, the transcripts of the Executive Directors' meeting at which the projects were considered, project files, and a number of other relevant documents prepared by the Borrower, the Bank and cofinanciers. The projects were discussed with Bank staff associated with their design and implementation. In October/November 1994 an OED mission visited Sri Lanka. Discussions were held with government officials and representatives of the cofinanciers, non-governmental organizations (NGOs), private management companies, brokers and dealers. The mission also undertook field trips to tea, rubber and coconut growing areas to meet with private and government estate managers, supervisors and workers, and with rubber smallholders. The valuable assistance provided by the Government of Sri Lanka, as well as all the persons contacted by the mission, is gratefully acknowledged. 5 Basic Data Sheet SMALLHOLDER RUBBER REHABILITATION PROJECT (CREDIT 1017-CE) Key Project Data (amounts in US$ million) Item Appraisal Actual or Actual as % of Estimate Current Estimate Appraisal Estimate Total Project Cost 28.0 19.6 70 Credit Amount 16.0 - - Disbursed - 11.1 69 Canceled - 4.9 31 Economic Rate of Return 23.0 4.8 21 Cumulative Estimated and Actual Disbursements (amounts in US$ million) FY FY FY FY FY FY FY FY FY FY 80 81 82 83 84 85 86 87 88 89 Appraisal Estimate 0.2 1.3 3.0 5.2 8.3 13.0 16.0 - - - Actual - 0.3 0.8 1.8 3.4 5.5 7.5 9.4 11.0 11.1 Actual as Percent of Appraisal (%) - 23 27 35 41 42 47 59 69 69 Date of Final Disbursement: March 1, 1989 Project Dates Original Actual Identification 8/78 9/78 Preparation - 2/79 Appraisal 9/79 10/79 Negotiations 3/80 4/80 Board Approval 11/79 5/80 Signing (Credit Agreement Date) - 6/80 Effectiveness 8/80 9/80 Project Completion 12/85 3/89 Closing Date 6/86 6/88 Staff Inputs (staff weeks) FY FY FY FY FY FY FY FY KY FY FY FY FY Total 76/79 80 81 82 83 84 85 86 87 88 89 90 91 Preappraisal 63.3 9.5 - - - - - - - - - - - 72.8 Appraisal - 89.5 - - - - - - - - - - - 89.5 Negotiation - 4.4 - - - - - - - - - - - 4.4 Supervision - 0.4 11.8 7.0 10.2 5.6 7.6 4.8 9.3 11.7 0.9 12.6 1.0 82.8 Other 0.3 8.1 - - - - - - - - - - - 8.4 Total 63.6 92.0 11.8 7.0 10.2 5.6 7.6 4.8 9.3 11.7 0.9 12.6 1.0 237.9 6 Mission Data Month/ No. of Staff Specialization Performance Type of Year Persons Days Represented' Rating1 Problemc Identification 4/78 3 18 2E,A - Preparation 9/78 4 20 2A,E,P - Pre-Appraisal 8/79 3 10 A,2E - Appraisal 10/79 4 23 E,R,T,AC - Supervision 1 7/80 1 6 E 1 Supervision 2 3/81 1 7 E 1 Supervision 3 2/82 1 6 E I - Supervision 4 10/82 1 9 E 2 0 Supervision 5 5/83 2 6 E,A 2 0 Supervision 6 12/83 1 6 E 2 0 Supervision 7 7/84 1 8 E 2 Supervision 8 3/85 1 10 E 2 Supervision 9 11/85 1 12 E 2 - Supervision 10 4/86 1 7 E 2 - Supervision 11 10/86 2 9 E,T 2 - Supervision 12 10/87 4 23 2E,T,AC 2 - Supervision 13 6/88 1 6 T 2 Other Project Data Borrower: Democratic Socialist Republic of Sri Lanka Executing Agencies: Rubber Control Department; Advisory Services Department Rubber Research Institute of Sri Lanka Follow-on Operations Credit No. Amount Approval (US$) Second Smallholder Rubber Rehabilitation 1909-CE 23.5 1988 a. Specialization: A = Agriculture, E = Economist, AC = Accounting Specialist, P = Processing Specialist, T = Tree Crop Specialist b. Performance Rating: I = Problem-free or minor problems, 2 = Moderate problems, 3 = Major problems receiving adequate attention, and 4 = Major problems not receiving attention. Where a sequence of four figures is shown (from June 1985), the ratings refer to availability of funds, project management, development impact and overall status, respectively. c. Type of problem: 0 = Organizational 7 Basic Data Sheet FouRTH TREE CROPS PROJECT (CREDIT 1562-CE) Key Project Data (amounts in millions) Item Appraisal Actual or Actual as % of Estimate Current Estimate Appraisal Estimate Total Project Cost - US$ 211.8 237.7 112 Credit Amount - SDR 56.5 56.5 100 - US$ 55.0 73.6 134 Economic Rates of Return - Tea 28-31 8.2 28 - Rubber 24-28 7.4 28 - Coconuts 18 2.0 11 Cumulative Estimated and Actual Disbursements (amounts in millions) FY FY FY FY FY FY FY 86 87 88 89 90 91 92 Appraisal Estimate - SDR 15.2 30.5 42.9 50.3 56.5 - - - US 14.8 29.7 41.8 49.0 55.0 - - Actual - SDR 8.5 16.3 22.1 29.6 35.7 53.7 56.5 - US$ 9.3 19.1 26.9 36.6 44.6 69.9 73.6 Actual as Percent of Appraisal (%) - SDR 56 53 52 59 63 95 100 - US$ 63 64 64 75 81 127 134 Date of Final Disbursement: May 27, 1992 Project Dates Planned Revised Actual Identification - Preparation 1983/84 Pre-Appraisal 01/84-02/84 03/84 Appraisal 01/84-02/84 03/84 Negotiations 07/84 02/85 Board Approval 10/84 03/21/85 Signing - - 05/09/85 Effectiveness 06/85 10/85 09/23/85 Closing Date 06/30/90 (i) 06/30/91 - (ii) 12/31/91 12/31/91 Project Completion - 04/30/92 8 Staff Inputs (staff weeks) Total Through Appraisal 99.0 Appraisal through Board Approval 12.5 Board Approval through Effectiveness - Supervision 175.9 Total 287.4 Mission Data Month/ No. of Staff Specialization Performance Type of Year Persons Days Represented' Rating, Problemc Pre-appraisal 03/84 7 26 A,B,D,E,I,P - Appraisald 03/84 - - - - Supervision 1 06/85 5 16 A,B,E 2 d,f Supervision 2 06/86 3 22 A,B,C 2 Supervision 3 01/87 3 11 A,B,J 2 d Supervision 4 09/87 2 6 B,C 2 c Supervision 5 01/88 2 13 B,C 2 b,e,d,f Supervision 6 05/88 2 2 B,C 2 d,e,f Supervision 7e 09/88 7 12 A,B,C 3 d,e,f Supervision 8 04/89 2 7 B,C 3 d,e,f Supervision 9 06/89 2 8 B,C 3 b,d,e,f Supervision 10 12/89 4 10 B,C,l 4 b,d Supervision 11 05/90 2 20 C 3 b,d,f Supervision 12 07/90 1 4 C - d, Supervision 13 10/90 4 19 B,C,E 3 d,e,f Supervision 14f 03/91 8 22 B,C,D,E,F,G,H,K 2 d,e,f Supervision 15 11/91 1 22 C 3 d,e,f Other Project Data Borrower: Democratic Socialist Republic of Sri Lanka Executing Agencies: Janatha Estates Development Board (JEDB) Sri Lanka State Plantation Corporation (SLSPC) Follow-on Operations: Proposed Tree Crops Restructuring Project (preparation suspended in February 1992) a. Specialization: A= Agronomist or Agricultural economist; B = Financial analyst; C = Tree crops specialist; D= Tea specialist; E= Rubber specialist; F = Coconut research specialist; G = Tea research specialist; H = Tea marketing specialist; I = Institutional development specialist; J = Forestry specialist; K = Rubber research specialist; P = Power (mini-hydro) engineer. b. Performance Rating: I = Problem-free or minor problems, 2 = Moderate problems, 3 = Major problems receiving adequate attention, and 4 = Major problems not receiving attention. Where a sequence of four figures is shown (from June 1985), the ratings refer to availability of funds, project management, development impact and overall status, respectively. c. Type of problem: a = Field development; b = Factory rehabilitation/procurement; c = Institutional development; d = Financial performance; e = Environmental aspects; f = Management performance. d. No separate appraisal mission. Following IDA/Government agreement on sectoral issues after the pre-appraisal mission, the project was considered appraised in July 1984. e. Mid-term review. f. Combined FTC project supervision, ongoing support to proposed Tree Crops Restructuring project, and preliminary design of Tree Crops VI. 9 Evaluation Summary Background 1. Tree crops have played a central role in Sri Lanka's development since the 19th century, when tea and rubber were introduced to the island. At that time coconuts were already a long-time staple, grown primarily by smallholders. Sri Lanka is currently the world's largest exporter of tea and one of the world's five largest exporters of coconut kernel products, such as desiccated coconut. While Sri Lanka's output of natural rubber is modest compared to its main competitors, export duties on rubber have been a major source of earnings for the government (12 percent of revenues in 1979). 2. Until the late 1970s, Sri Lanka adopted a generally inward-oriented development strategy that entailed increasing government intervention in the economy. The tree crops sector had long been an exception to the inward-oriented policy, accounting for more than three quarters of Sri Lanka's export earnings by 1979. However, heavy taxation of the sector's earnings, coupled with repeated threats of nationalization and declining commodity prices, led to inadequate investment in replanting. By the late 1970s, the actual and potential output of tree crops had been seriously eroded by years of neglect. Furthermore, new challenges had emerged after 1972 as a result of the nationalization of all landholdings over 20 hectares. Two government-owned plantation corporation-the Janatha Estates Development Board (JEDB) and the Sri Lanka State Plantation Corporation (SLSPC)-gained control of more than half the area under tea cultivation, 30 percent of the area under rubber and about 5 percent of the area under coconuts. 3. GOSL recognized these challenges and sought external assistance to reverse the decline in the sector. The Bank's overall strategy supported the government's policy of gradual trade liberalization, deregulation and privatization. However, since the privatization policy did not extend to JEDB and SLSPC, in 1978 the Bank embarked on a series of four projects that aimed to rehabilitate tree crops and diversify production on government-owned estates. Taken together, the four projects accounted for 43 percent of Bank-wide lending for tea during the last two decades. These four projects aimed at government estates were complemented by two projects targeted at smallholder rubber growers. This Impact Evaluation Report (IER) focusses on the first Smallholder Rubber Rehabilitation project (Credit 1017-CE) and on the Fourth Tree Crops project (Credit 1562-CE). The Projects 4. An IDA credit of US$16 million equivalent was approved for the first Smallholder Rubber Rehabilitation (SRR) project in May 1980. The objectives of the project were to improve production and enhance earnings for rubber smallholders by supporting the replanting of over-aged and degraded stands, in-filling of gaps in viable stands, rehabilitation or expansion of group processing centers, and institutional strengthening of the Rubber Control Department (RCD) and Advisory Services Department (ASD) of the Ministry of Plantation Industries (MPI). A small component was provided for the Rubber Research Institute of Sri 10 Lanka (RRISL) and funding was provided for impact evaluation surveys and case studies by the Agrarian Research and Training Institute (ARTI). Most of the IDA credit was to be channelled to the government's Rubber Replanting Fund (RRF), which provides grants to smallholders for replanting rubber. While grant payments are recovered in part via a cess on exports of rubber, cess revenues have not been sufficient to cover the RRF's expenditures (paras. 2.39ff). 5. The Fourth Tree Crops (FTC) project was supported by an IDA credit of US$55 million equivalent, approved in March 1985, and cofinanced with the Asian Development Bank (ADB); the Governments of the Netherlands, Norway and the United Kingdom; and the Bank of Ceylon, a state-owned commercial bank. The objective of the project was to reverse the decline in tea, rubber and coconut production on public sector estates operated by JEDB and SLSPC, two of the world's largest plantation corporations at that time. This objective was to be achieved by improving estate productivity through field development (replanting and in- filling of degraded and over-aged areas under tea and rubber, replanting and under-planting of areas under coconuts, and diversification into fuelwood in areas considered unsuitable for tree crops), development of field nurseries to produce replanting materials, factory rehabilitation, strengthening the corporations' management and financial control capabilities, and improving housing, health and social amenities for estate workers through respective project components, collectively referred to as the Social Welfare Program (SWP). Project Implementation 6. The SRR project was closed in June 1988, 22 years later than planned. About US$4.9 million of the credit was canceled, primarily due to depreciation of the Sri Lankan rupee (LKR), which increased the local value of IDA funds beyond what was required to implement the project. The final project cost was US$19.6 million, compared to an SAR estimate of US$28 million. The project got off to a good start but ran into trouble in 1983 as a result of drought conditions and a shortage of replanting materials. The appraisal objective of replanting 18,800 hectares was achieved at project closing in 1988, notwithstanding the need to uproot 1,500 ha of rubber in the project area due to an attack of Corynespora leaf spot (a fungal disease). 7. Civil unrest led to implementation delays in the FTC project, which was closed in December 1991, 1/2 years late. Actual costs were US$237.7 million, compared to US$211.8 million at appraisal. Much larger areas of tea and rubber were replanted than had been planned, whereas in-filling targets for tea were not met. This was due to the fixed cost nature of labor costs and the existence of surplus labor, for which estate superintendents attempted to create employment. The excessive replanting rate outpaced the flow of counterpart funds, leading to the reallocation of most Bank funds earmarked for nursery development and institutional development to the field development component. In addition, senior Bank management approved an increase in IDA's disbursement percentage for the field development component from 35 percent to 90 percent. Government intervention in labor matters precluded effective direct bargaining between the unions and plantation managers and resulted in substantial wage increases and employment guarantees that reduced efficiency and drove up costs. This is largely attributable to pressure from labor unions representing the largely Tamil estate workforce. The unions acquired considerable political clout as a result of the extension 11 of voting rights to Tamils of Indian origin in the early 1980s and of the government's security concerns resulting from the ethnic conflict in Jaffna. While progress was made under the project on housing and health care for estate workers, conditions for estate residents are still poor, compared with those of the rural population. Project Results 8. Virtually the entire area replanted under the Smallholder Rubber Rehabilitation project (18,800 ha) is now mature, although the earliest replantings are just reaching full development. By 1999, it is estimated that production will reach 19,530 tons/year, equivalent to 22 percent of average annual output by private producers during the project period, 1981-88. Yields are expected to peak at 1,080 kg/ha, 15 to 17 years after replanting. These figures are the same as the PCR's, but are 20 percent lower than appraisal projections. 9. Both the SAR and the PCR calculations assume no replanting in the absence of the project, so that all production at full development is incremental. But given the age of rubber stands, there would clearly have been some replanting even without the project. The impact evaluation estimates that production would have reached only 9,080 tons by 1999 in the absence of the project, due primarily to funding constraints on the RRF and to more limited outreach by the extension services. The SRR project's net impact on production is therefore estimated at 10,450 tons/year. 10. At appraisal of the SRR project, economic rates of return were expected to reach 23 percent (paras. 2.17ff). At project completion, ERRs were re-estimated at 18 percent, mainly because of reduced yields and lower prices. A further unforeseen decline in rubber prices coupled with a sharp upswing in real wages for tappers have reduced the re-estimated ERR for the project to 4.8 percent. 11. Re-estimated financial returns (FRRs) on replanted rubber were attractive at impact evaluation (14.4 percent) for smallholders who used family labor for tapping. However, FRRs were below ten percent for smallholders who relied on hired labor for tapping, i.e. about half of all smallholders with less than four hectares of land (paras. 2.35ff). These returns are lower than estimates for FRRs for various farm models at appraisal (11 to 21 percent). One reason for the decline is real wage inflation prompted by the growth of Sri Lanka's textiles and services industries. Another reason is lower than expected yields. Eighty percent of the project area was replanted with a low-yielding clone (PB 86) that had been superseded in Malaysia in the 1960s. This was a serious error. The problem of insufficient clonal material of acceptable quality was compounded by poor cultivation practices. A further reason for the low returns is the low quality of smallholder-processed rubber. While the project attempted to address this via co-operative-style Group Processing Centers, the GPCs experienced numerous logistical problems and failed to attract members (para. 2.38). 12. Replanting grants and intercropping with bananas raised FRRs on rubber investments to acceptable levels. However, only one in eight farmers planted intercrops and most growers, especially those with less than one hectare, failed to maintain proper cultivation practices and were therefore ineligible for the full grant. 12 13. Under the Fourth Tree Crops project, annual production of tea on government estates is expected to reach 185,200 tons by the year 2014, compared to estimated without-project production of 141,300 tons as a result of no replanting, for an increment of 43,900 tons/year. The SAR and PCR estimated incremental production at 47,900 tons/year and 39,700 tons/year, respectively. At impact evaluation, yields on replanted areas are expected to average 2,125 kg/ha made tea at full development (12 years after replanting), which is fairly standard for vegetatively propagated (VP) clonal teas, and is consistent with SAR and PCR estimates. 14. With respect to rubber, annual production on government estates is expected to peak at 65,800 tons in the year 2002, compared to without-project production of 49,200 tons/year. The incremental production of 16,600 tons/year at full development is explained by a larger replanting program and by higher yields than in the absence of the project (para. 2.12). The project's net impact on production is unlikely to reach appraisal projections of 20,100 tons/year at full development. 15. With regard to coconuts, annual production on government estates is expected to reach 57.1 million nuts/year at full development of the FTC project (in 2006). Without a replanting program, production on the estates would have declined to 49.6 million nuts/year in 2006. Thus the FTC project will result in incremental production of up to 7.5 million nuts/year at full development. This is less than half the appraisal estimate of incremental production, 18 million nuts/year, due to major shortfalls on both yields and area replanted. 16. Economic rates of return at appraisal of the FTC project were projected to reach 28 to 31 percent for tea, 24 to 28 percent for rubber and 18 percent for coconuts. The ERR for the project was estimated at 26 percent. The PCR re-estimated the project ERR at 10 to 15 percent. Rates of return were found to be 10 to 11 percent for tea and 11 to 15 percent for rubber. The PCR did no calculations for investments in coconuts, since these accounted for less than 5 percent of project costs and information was inadequate. The decreases in ERRs for tea and rubber were due to higher production costs and lower output prices than foreseen at appraisal. The impact evaluation revealed a further modest decline in returns. Revised ERRs range from 8.2 percent for tea to 7.4 percent for rubber and only 2 percent for coconuts. The ERR for the project (excluding unquantified welfare benefits and related costs) is estimated at 7.9 percent (paras. 2.17ff). 17. The financial performance of the two government corporations has been dismal. JEDB lost money every year after Bank approval of the FTC project, while SLSPC reported a profit only twice. Both companies became increasingly reliant on external borrowing and on overdrafts from government-owned commercial banks for day-to-day expenditures. For example, JEDB's debt-equity ratio soared from 0.8 in 1982 to an unsustainable 9.8 in 1989. "Creative accounting techniques" were employed to make the financial position of SLSPC appear less dire (para. 2.25). In 1990, the two corporations had to be bailed out at a cost of LKR 3.6 billion. Since then, the tree crops sector has been a major burden on the fisc, as GOSL's expenses on the estates have risen while export duties on tea and rubber and the ad valorem sales tax on tea have been phased out (para. 2.32). 18. The main reasons for the losses at JEDB and SLSPC were depressed world prices, stagnant productivity and rising costs of production. The latter two were attributable to internal factors, including restrictions on the movement and use of labor, political patronage 13 and mismanagement of the estates. Project investments added to the corporations' short term liquidity problems, while yielding unattractive returns in the longer term: FRRs at impact evaluation range from 8.3 percent for rubber to 0.4 percent for coconuts. 19. The FTC project included social welfare objectives that were largely achieved (paras. 3.1 Iff). After appraisal, beneficiary surveys were conducted and social welfare services were identified and prioritized on the basis of the resulting "Needs Assessments". Beneficiary participation was high in the construction of latrines and re-roofing of houses. These items were not included at appraisal but were identified as high priorities by estate residents. Appraisal targets with respect to dispensaries and health centers were exceeded. These successes are clearly associated with some of the improvements in health and demographic indicators for estate residents that occurred during the project period. Privatization 20. Privatization became the most important institutional issue for the FTC project, although it was not an objective at appraisal. Following the mid-term review of the project in September 1988, the Bank encouraged GOSL to establish a Core Group to solve the growing financial crisis at JEDB and SLSPC. This led eventually to the establishment of a Task Force in 1990 with a broader mandate, namely to consider the "..appropriate structure, organization and management of the two corporations.." (para. 3.36). The Task Force met with considerable resistance, due to the political sensitivity of the privatization issue. 21. The Bank was the main source of external guidance on the privatization process, but its objectives and approach differed significantly from GOSL's (para. 4.10). In particular, the Bank supported the transfer of ownership to the private sector, including to foreign firms, so as to attract skills and capital. The government favored and finally adopted a management contract approach to privatization that relied on management contracts with no equity stakes for management companies and no foreign participation. GOSL wanted to retain control of the assets and ensure that employment would not be adversely affected. What emerged in 1992 was a highly restrictive management arrangement with 22 private Sri Lankan Estate Management Companies (EMCs, para. 4.27). The winners were identified via open bids in April 1992 after more than 150 local and foreign firms had expressed an interest. The 22 EMCs signed management contracts with 22 new, wholly government-owned Regional Plantation Corporations, which were given control over most of JEDB's and SLSPC's 500 estates. 22. In January 1992, the Bank withdrew its intended support for a follow-on to the FTC project, because GOSL was not prepared to make a time-bound commitment to privatizing the ownership of the estates or to awarding long term leases to the EMCs as a second-best solution. In practice, private management has reduced losses on the estates and increased efficiency. However, the private sector has been unwilling to inject funds into state-owned companies in which it has no equity share and with which it only has five-year management contracts. Furthermore, GOSL interference in wage decisions has persisted. Thus costs have not been reduced sufficiently, nor has private capital been attracted to the sector. These problems have led to rising debts that are undermining the sustainability of the current arrangement. 14 Findings at Impact Evaluation 23. Both projects are rated as unsatisfactory at impact evaluation. To be sure, they were implemented under challenging circumstances, arising from an ethnic conflict that erupted in the north of the island in 1981 and from violent political confrontation in the south in the late 1980s. The FTC project was particularly affected by these conflicts, both indirectly via the northern conflict's effects on wage determination and directly via the murder of 25 estate superintendents following the southern outbreak. Furthermore, during 1980-92 world prices declined for all three tree crops. 24. Successes in other sectors, notably the high rates of growth achieved in the labor- intensive textiles and services sectors, resulted in labor shortages on rubber smallholdings and drove up the cost of labor. The labor issues on government estates were somewhat different: a blend of ethnic and political factors contributed to high wage increases, constraints on the movement of labor between estates, year-round employment guarantees, low work norms, declining productivity and severe underemployment of estate labor, particularly in the mountainous tea-growing areas in the centre of the island. In addition, political and cultural factors have militated against reforms to a highly inefficient work rule for tea pluckers, who are almost exclusively women. They are required to work eight hours to receive the daily wage even if they can complete their assigned task (and more) in less than eight hours. Male workers, on the other hand, are free to leave as soon as they finish their assigned task and are still guaranteed a full day's wage. 25. The price and labor factors, combined with low yields due to weak management, outdated cultivation and processing practices, and poor quality inputs, undermined the expected returns under the two projects. Notwithstanding improvements in cultivation practices on government estates under private management, these factors continue to make the sustainability of project benefits uncertain. Lessons at Impact Evaluation 26. The tree crops sector is likely to prosper if and only if appropriate policy measures are taken. Past approaches have failed to be sufficiently comprehensive or structured. For example, the FTC project was part of a medium term investment program that did not address pressing labor concerns. The ultimate objectives should be to: i) generate sustainable growth, and ii) improve the welfare of those who earn a living from the tree crops sector. These ultimate objectives can only be achieved by galvanizing the sector via improved technology and increased factor productivity, and by competing more effectively in international markets, in ways that are specified below. Success with regard to these intermediate objectives in turn requires a significant injection of capital, investment in human resources, exploitation of the industry's global expertise, and elimination of inefficient practices. 27. The analysis in this impact evaluation suggests that these objectives cannot be attained under government management of the industry, nor will the restrictive private management arrangement currently in place suffice. A coherent set of measures should be considered and adopted by GOSL to create an enabling environment in which the private sector can flourish (see the lessons below). The government's full commitment to this approach is as yet 15 uncertain, but will be essential in order to restore domestic and external investors' confidence and provide investors with appropriate incentives. The Bank and other donors can and should continue to play an important supporting role in the fulfillment of these objectives. These policy proposals are consistent with the intentions communicated in a Policy Framework Paper for 1994-96, that was prepared by GOSL in collaboration with staff of the International Monetary Fund and the World Bank. Finally, the proposals are consistent with the lessons of experience drawn from the evaluation of the SRR and FTC projects. These are summarized as follows: (a) Support of Viable Tree Crops Projects. In the event of sharp movements in prices and costs during implementation, the Bank should re-assess economic returns to ensure that: i) the focus is maintained on development objectives rather than just on implementation indicators; ii) projects that become inviable are restructured or suspended in a timely manner without saddling the borrower with additional debt. (b) Support of Viable Rubber Replanting Schemes. The Bank should only support a cess- based, accelerated replanting program for tree crops if: i) the clonal material to be replanted is of an internationally acceptable standard and has been thoroughly tested; ii) the replanting grant is adjusted regularly to reflect changes in investment costs and guarantee a minimum acceptable level of support; and, iii) cess rates are adjusted to reflect changes in the level of grants. (c) Privatization as a Process. A process of privatization should: i) be transparent; ii) enjoy unwavering commitment from the government; iii) be open to foreign investment and expertise; iv) encourage participation by all stakeholders; v) secure popular backing, rather than just the support of vested interests; and, vi) publicize the positive case for privatization. (d) Attracting Private Capital. The privatization strategy adopted to date fails to provide the private sector with adequate incentives to invest its capital and is therefore unsustainable. The experience of the past two years suggests that privatization will only succeed if private managers are given the option of purchasing a substantial share of the equity of the corporations. This will: i) enable them to borrow and invest against their shares; ii) provide incentives to invest in long-term projects and manage the estates accordingly; and, iii) provide them with some down-side risk so as to discourage excessive risk-taking. (e) Criteria for Management Contracts. The design of the management contracts adopted thus far has limited their effectiveness. The contracts are short-term and grant private managers little operating autonomy. If management contracts are to be used for tree crops plantations, they should be given for an extended period of time, e.g. 50 years, and should provide substantial operating autonomy to private managers in order to encourage long-term planning and investment. Even then, they must be regarded as second-best arrangements for attracting private capital. (f) The Policy and Regulatory Environment. i) the elimination of export taxes was a sound policy decision that should be maintained, together with an exchange rate policy that takes into account its effects on the tree crops sector; ii) other regulatory reforms 16 warrant consideration, e.g. the removal of restrictions on direct sales outside the auction system, in order to encourage vertical integration, the development of brand names, price stabilization through forward contracts, and reductions in the lag between production and disposal of tea. (g) Labor Wages and Productivity. i) Wages and benefits should be subject to collective bargaining between managers and unions; ii) specific contractual commitments are required to safeguard private sector investments against arbitrary administrative decisions on labor matters; iii) jobs can only be preserved if productivity is increased, e.g. by allowing workers to move from labor surplus to labor deficit areas and by renegotiating work norms that have been set at unduly low levels. (h) "Putting People First". i) Needs assessments and beneficiary participation were key elements in the success of the social welfare program; ii) the underemployment of estate youth is an acute problem requiring urgent attention, e.g. via training and promotion of off-farm opportunities; iii) women's work norms as tea pluckers result in compulsory overtime that is inefficient and lowers women's effective wage rates. Therefore the best practices applied in tea growing countries in Eastern Africa should be piloted and then, if successful, applied more widely on Sri Lankan estates. 17 1. Introduction A. Background 1.1 Tree crops have played a central role in Sri Lanka's development since the 19th century, when tea and rubber were introduced to the island. At that time coconuts were already a long-time staple, grown primarily by smallholders. By 1965, Sri Lanka had become the world's largest exporter of tea, a position that it lost to India during the 1970s but regained in the late 1980s. Natural rubber production is second in importance to tea in terms of export revenues, but has been a major source of earnings for the government, accounting for as much as 12 percent of government revenues in 1979. Although more than three-quarters of Sri Lanka's coconuts are consumed domestically, Sri Lanka ranks among the world's top five exporters of kernel products. 1.2 Following Independence in 1948, the Government of Sri Lanka (GOSL) pursued an inward-oriented development strategy that involved increasing government intervention in the economy. The proposal to nationalize tree crop estates was repeatedly raised after Independence, leading landowners to limit their long-term investments in the industry. After a change of government in 1972, all landholdings exceeding 20 hectares (50 acres) were indeed nationalized. This placed two government-owned plantation corporations-the Janatha Estates Development Board (JEDB) and the Sri Lanka State Plantation Corporation (SLSPC--in control of more than half of the area under tea cultivation, 30 percent of the area under rubber and about 5 percent of the area under coconuts. The two corporations were then among the largest plantation corporations in the world. 1.3 The predominant role of tree crops as a source of export revenues changed after 1977, when a change of government led to liberalization of the trade regime and then to new sources of export earnings and economic growth. Furthermore, the growth potential of tree crops had been eroded by years of inadequate investment in replanting. The new administration recognized this and other challenges (e.g. falling real prices for tree crops) and sought external assistance to reverse the decline in the sector. During 1978-79, the Canadian and British Governments provided technical assistance to prepare masterplans for tea and rubber, respectively. IDA simultaneously began preparing the first of two projects targeted at smallholder rubber growers and the first of four projects targeted at the government estate sector (Table 1.1). Taken together, the latter four projects have accounted for 43 percent of all Bank lending for tea in the last two decades.1 1.4 This Impact Evaluation Report (IER) focusses on the first Smallholder Rubber Rehabilitation project (SRR, Credit 1017-CE, approved in 1980) and on the Fourth Tree Crops project (FTC, Credit 1562-CE, approved in 1985). The two projects were selected for an impact evaluation because of the importance of the sector for Sri Lanka's development and because together the two projects offered an opportunity to review and contrast experience 1. See the Operations Evaluation Department: Bank Lending Policy for Plantation Crops, Report No. 12110, The World Bank, 1993. 18 with tree crop development at both the smallholder and the estate level. The privatization issues related to the FTC project were regarded as relevant for other borrowing member countries of the World Bank Group that are considering privatization of state-owned agricultural enterprises. Finally, the evaluation of the SRR project is timely in that it allows for an assessment of the long term effects of the first SRR project, while informing the follow- on SRR operation with regard to the factors that are likely to influence the sustainability of both projects' benefits. 1.5 The projects were implemented under challenging circumstances arising from an ethnic conflict that erupted in the north of the island in 1981 and from violent political confrontation in the south in the late 1980s.2 The macroeconomic environment was also unfavorable in the early 1980s, with a downturn in growth and employment and a rise in the real effective exchange rate. The environment improved in the second half of the decade after the government had launched economic stabilization and reform programs. Table 1.1: Bank Lending for Tree Crops in Sri Lanka IDA Approval Date Closing Credit Percent Project The Projects Credit Date Amount Canceled Rating The Smallholder Rubber Series Smallholder Rubber Rehabilitation 1017 05/06/80 06/30/88 16.0 30.4% Satis.a,b Second Smallholder Rubber Rehabilitation 1909 05/24/88 06/30/97c 23.5 n/ac n/ac The Government Estate Series Tree Crops Rehabilitation 818 06/01/78 12/31/85 21.0 23.0% Satis.a Tree Crops Diversification 819 06/01/78 06/30/83 4.5 6.2% Unsat.a Tea Rehabilitation and Diversification 1240 05/04/82 09/30/86 20.0 30.3% Satis.ab Fourth Tree Crops 1562 03/21/85 12/31/01 55.0 0.0% Satis.b a = Performance Audit Report Rating; b = Project Completion Report Rating; c = under implementation Source: OED Evaluation Text Database 1.6 Since 1993, the economy has grown at over 6 percent per annum. Central Bank data suggest that much of the expansion in output has come from the labor-intensive textiles and 2. A number of estate superintendents were murdered in the late 1980s as the country was virtually brought to a standstill. Indeed, both JEDB and SLSPC financial statements reflect expenditures on defence in 1989 and 1990 to protect staff. The PCR (para. 5.10) notes that the estate staff "..were completely exposed to terrorist activity throughout the period. The successful physical achievements in field development serve as a monument to their loyalty and bravery." 19 services sectors. Consequently, labor shortages have emerged on rubber smallholdings and the cost of labor has risen (Annex D). The labor issues on government estates are somewhat different: a blend of ethnic and political factors has contributed to high wage increases, declining productivity and severe underemployment of estate labor, particularly in the mountainous tea-growing areas in the centre of the island. 1.7 The labor distortions, coupled with declining prices for tea crops resulted in increasing losses for the two plantation corporations. Since privatization of ownership was felt to be politically infeasible, GOSL decided to privatize the management of the estates as a way of halting the drain on public coffers. The 1992 transfer of management responsibilities to 22 estate management companies (EMCs, Annex A) was one of the largest agricultural sector privatization in the world to date. The approach adopted by GOSL was rather unusual-open bids for management contracts with no equity stakes and no foreign participation-which makes it an interesting case study for an impact evaluation. The Bank believed that the strategy did not go far enough and withheld support for a proposed follow-on operation to the FTC project. In practice, private management has reduced losses on the estates and increased efficiency, but rising debts are undermining the sustainability of the current arrangement. B. Focus of Investigation and Layout of the Report 1.8 First and foremost, this impact evaluation attempts to estimate the net benefits of the two projects and assess whether these benefits are sustainable. Subsequently, the report identifies the agricultural, economic, financial, social and institutional impact of the two projects on key stakeholders: smallholder rubber growers, GOSL, the plantation corporations, and estate labor. 1.9 Second, the report addresses key issues that arise from the experience of the two projects. These include: The viability of the smallholder rubber replanting scheme. At appraisal of the Smallholder Rubber Rehabilitation project, the level of the replanting grant was found to be closely correlated with replanting by borrowers. This report discusses the adequacy of the replanting grant and the liquidity of the rubber replanting fund (RRF) from which the grant is paid. The report also considers whether replanting is warranted even with increased grants, in the light of the increasing cost and scarcity of labor for tapping. * The viability of the plantation corporations. The report examines the financial position of the corporations both before and after privatization of management. Reasons are identified for changes in the financial position and those related to the FTC project are highlighted. The analysis suggests lessons for improving the financial performance of the government estates. * The evolution and implementation of the privatization strategy. The report attempts to throw some light on the merits of the strategy adopted in 1992, on the nature of the advice provided by the Bank and on the sustainability of the approach. 20 The socio-economic status of estate labor, particularly of women. The report traces developments in the socio-economic status of estate workers, identifies constraints to opportunities for enhancing their status and suggests possible solutions based on the experience of the last ten years. Particular attention is paid to the problem of incentives, notably for tea pluckers, who are predominantly women. 1.10 This impact evaluation is based on field-level interviews conducted by an OED mission that visited Sri Lanka in October/November 1994; on extensive interviews with Bank and Borrower officials and other individuals associated with the projects; on a review of financial data for JEDB, SLSPC, the RPCs, and the RRF; on data on the tree crops sector provided by the Ministry of Plantation Industries, and on extensive documentation in Bank files. The analysis in this report is constrained by the fact that data for 1994 are not available for most variables. Furthermore, while the impact evaluation mission obtained payroll data on wages and employment for a sample of estate workers (para. 3.25 and Annex B), no structured survey of beneficiaries was conducted at impact evaluation. Finally, an assessment of the environmental impact of the two projects is beyond the scope of this report.3 1.11 The remainder of this chapter describes the objectives and implementation experience of the two projects. Chapter 2 analyses the agricultural, economic and financial impact of the two projects, whereas Chapter 3 discusses social and institutional developments under the projects. The themes identified under the bullets above are introduced in the relevant sections of the two chapters. Chapter 4 focusses on the privatization strategy. Sri Lanka's strategy is examined in the context of transparency and fairness, the support of stakeholders, political popularity and governance. These features have characterized successful privatization in other countries. Chapter 5 draws together the key findings and lessons of the impact evaluation.4 C. The Projects 1.12 Smallholder Rubber. In May 1980, an IDA credit of US$16 million equivalent was approved for the first Smallholder Rubber Rehabilitation project (Credit 1017-CE). The objectives of the project were to improve production and enhance earnings for rubber smallholders by supporting replanting or in-filling of overaged and degraded stands, rehabilitation or expansion of group processing centers, and institutional strengthening of the Rubber Control Department (RCD) and Advisory Services Department (ASD) of the Mnistry of Plantation Industries (MPI). A small component was provided for the Rubber Research Institute of Sri Lanka (RRISL) and funding was provided for impact evaluation surveys and case studies by the Agrarian Research and Training Institute (ARTI). 1.13 The SRR project was closed in June 1988, 2/2 years later than planned. About US$4.9 million of the credit was canceled, primarily due to depreciation of the Sri Lankan rupee. The final project cost was US$19.6 million, compared to an SAR estimate of US$28 3. See the Government of the Netherlands' comments in Annex G on the environmental sensitivity of the project areas and OED's notes on those comments in Annex H. Also see paragraph 6.6 of the FTC project completion report (no. 12045, dated July 16, 1993) for an assessment of the project's effect on the environment. 4. The annexes include the following: a brief characterization of key institutions in the tree crops sector (Annex A); selected macroeconomic and sectoral data (Annex B); an analysis of financial statements for JEDB and SLSPC and financial data on the Regional Plantation Companies (described in Annex A) that inherited their assets (Annex C); analysis of financial and economic returns under the two projects (Annexes D and E); comments from the Borrower (Annex F) and from cofinanciers (Annex G), and notes to those comments (Annex H). 21 million. The project got off to a good start but ran into trouble in 1983 as a result of drought conditions and a shortage of replanting materials. The appraisal objective of replanting 18,800 hectares was achieved at project closing in 1988, notwithstanding the need to uproot 1,500 ha of rubber in the project area due to a fungal attack of Corynespora leaf spot on areas planted with RRISL's RRIC 103 clone.5 Sustainability was considered promising at project completion, given projected rubber prices in 1990. The PCR re-estimated the ERR at 18 percent, compared to 23 percent at appraisal. 1.14 Fourth Tree Crops Project. The project was supported by an IDA credit of US$55 million equivalent (Credit 1562-CE), approved in March 1985, and cofinanced with the Asian Development Bank (ADB); the Governments of the Netherlands, Norway and the United Kingdom; and the Bank of Ceylon (BOC), a state-owned commercial bank. The objective of the project was to reverse the decline in tea, rubber and coconut production on public sector estates operated by the Janatha Estates Development Board and the Sri Lanka State Plantation Corporation. This was to be achieved by improving estate productivity through field development and factory rehabilitation, strengthening the corporations' management and financial control capabilities, and raising workers' quality of life through a Social Welfare program (SWP) aimed at improved housing, health and social amenities. 1.15 Civil unrest led to implementation delays and the project was closed in December 1991, 12 years late. Actual costs were US$237.7 million, compared to US$211.8 million at appraisal. Much larger areas were replanted than had been planned for tea and rubber, whereas in-filling targets for tea were not met. This was due to the fixed cost nature of labor costs and the existence of surplus labor, for which estate superintendents attempted to create employment. The high replanting rate placed considerable strain on counterpart funds, leading to the reallocation of most project funds from factory development to field development and to an increase in IDA's disbursement percentage from 35 percent to 90 percent. 1.16 Due to higher production costs and lower output prices, the ERRs ranged between 10 and 15 percent at completion, well below SAR expectations of 26 percent. Institutional development was limited. On the one hand, an innovative inter-ministerial Investment Monitoring Board was established and proved effective in monitoring the quality of project investments. On the other hand, insufficient attention was paid to institutional development (e.g. of management systems) by the corporations. There was persistent political and bureaucratic interference in management at all levels. Government intervention in labor matters precluded effective direct bargaining between the unions and plantation managers and resulted in inappropriate labor and wage policies that reduced efficiency and drove up costs. Housing and health care were improved for estate workers during the project period-appraisal targets for construction of housing and latrines were exceeded, although the building of creches and dispensaries fell short of SAR estimates. The services provided were identified and prioritized on the basis of "Needs Assessment" surveys. 5. The Rubber Development Department reports that 20,729 hectares on 35,046 holdings were replanted as part of the first SRR project (including areas affected by Corynespora leaf spot). An additional 16,815 hectares on 25,132 holdings were replanted under the follow-on SRR project (Cr.1909-CE) between 1988 and 1993. 6. The British Government withdrew its intended support for mini-hydro development during project implementation. 23 2. Key Accomplishments at Impact Evaluation A. Production Impact 2.1 Tea. The first three Bank projects in the government estates series sought to rehabilitate suitable tea-growing areas and to diversify out of tea in less suitable areas. The diversification goals were partly a response to Bank policy on beverage crops (tea, coffee and cocoa), which postulated that inelastic demand for these crops depressed export earnings when production increased. However, under the Fourth Tree Crops project, diversification objectives were de-emphasized as the focus shifted to arresting the decline in production of tea. These attempts were enshrined in a Medium Term Investment Program (MTIP) prepared by the two corporations in 1983, appraised by the Bank and cofinanciers in 1984 and financed by the FTC project approved in 1985. The project is synonymous with the MTIP and nearly all investments under the five-year program are associated with the project.7 2.2 Tea production rose 12 percent worldwide during the FTC project period (1985 to 1991) but fell by 8 percent on GOSL estates, due to a decrease in mature area. While the FTC project helped to maintain yields at current levels, it did not reverse the long-term decline in area cultivated by the government estates. The reduction in mature area is attributable mainly to old tea fields being taken out of production, rather than to the increase in immature tea resulting from replanting under the FTC project.8 2.3 Although about 80 percent of the area replanted under the project is now (1995) in production, the replanted areas have yet to reach full development. Annual production on government estates is expected to reach 185,200 tons by the year 2014, compared to estimated without-project production of 141,300 tons as a result of no replanting, for an increment of 43,900 tons/year (Figure 2.1 and Annex E). Based on the same counterfactual scenario, the SAR and PCR analyses estimated incremental production at 47,900 and 39,700 tons/year, respectively. Yields on replanted areas are expected to average 2,125 kg/ha made tea at full development (12 years after replanting), which is fairly standard for VP teas, and is consistent with SAR and PCR estimates. 2.4 While the main focus of Bank assistance for tea production has been the government sector, the most striking achievements have been those made by the private sector, which is dominated by smallholders. Yields on smallholdings have risen dramatically, notably in low- country areas in the south-west of Sri Lanka. In 1991, average private sector yields (1,110 7. The exceptions are investments funded by projects already under implementation in 1985, i.e. the first and third tea projects (Credits 818-CE and 1240-CE), which were both closed by September 1986, (Table 1.1). 8. Both poor management of suitable tea areas and highly warranted, Bank-supported diversification out of unsuitable tea areas explain the decline in area planted with tea. 24 kg/ha) surpassed those on government estates (1,047 kg/ha) for the first time (Figure 2.2).9 Increases in area cultivated and production by private growers have also partly offset declines on government estates (Annex B). The performance of the private sector enabled Sri Lanka to retain most of its world market share during the project period (1985-91) in spite of growing competition from Kenya and China. Figure 2.1: Impact of the FTC Project on the Production of Tea on Government Estates (Thousands of Tons) 200 Production with FTC project r15 Production with no O replanting C 100- a :3 -o 0 a 50 Q) Incremental o production C"In 0 0 0- E -50 -4 -I l i I I 1985 1990 1995 2000 2005 2010 Note: There was a drought in 1992. Source: Annex E. 2.5 Preliminary findings suggest that since 1992 the government estates have benefitted from private management, although it is too early to measure the impact of the estate management companies (EMCs) on production performance. Yields in 1993 were higher than 9. These yield figures are based on area planted, rather than area in production, for which no information is available for the private sector. They are also based on tea produced rather than tea processed; thus, the data drawn from the Plantation Sector Statistical Pocket Book are adjusted by including tea bought by the government estates from private producers under private production rather than government production. The private sector yields reported in this study fall far below the 2,440 kg/ha reported in the Tree Crops Strategy Study (Report No. 12356-CE), although private sector yields of well over 2,000 kg/ha have been obtained for vegetatively propagated (VP) tea in low-country areas. 25 the JEDB/SLSPC average for any year in the 1980s.10 Part of the increase may have been achieved by sacrificing quality, as plucking three leaves and a bud has become commonplace, although the best teas are made with two leaves and a bud. This may be the result of a policy decision by the new managers.' The effect on prices is difficult to assess. Figure 2.2: Private and Government Tea Yields 1, 200 1, 100- Government (D 1, 000 an Q no o 900- 800 - 700- Private 600 - 80 81 82 83 84 85 86 87 88 89 90 91 92 93 Year Source: Annex B 2.6 Rubber. Since the 1950s, Sri Lanka's rubber industry has steadily lost market share to competitors. During the period 1980-91, i.e. from approval of the SRR project to closing of the FTC project, world production of rubber rose by 22 percent, whereas production in Sri Lanka fell by 22 percent (or 29,300 mt, see Annex B). Average yields stagnated, rising slightly for the private sector but falling on government estates. On the positive side, there has been a sharp increase in domestic consumption of rubber since the mid-1980s (Figure 2.3) associated with rapid growth in exports of rubber products and thus of domestic value added. 10. The Government of Sri Lanka has commented that tea and rubber yields may have been underestimated, due to overestimates of the area under tea and rubber (see Annex F and OED's notes to GOSL's comments in Annex H). I1. "A new plucking system, previously unknown in Sri Lanka, was introduced whereby even three leaves and a bud, instead of the traditional two leaves and a bud, were plucked as a matter of policy during rush crops. Plucking averages improved from 14 to 22 kg per plucker and will improve still further with the use of plucking shears." [Sepala Ilangakoon: Progress of Plantation Management Companies in Sri Lanka, Tea International, Issue 3, March/April 1994, emphasis added]. 26 Figure 2.3: Domestic Consumption of Rubber 35 30 25 -aJ 20 C '-0 -~15 10 0 81 82 83 84 85 86 87 88 89 90 91 92 Year Dry Rubber = Latex Source: Annex B 2.7 The key factor that explains Sri Lanka's weak production performance, compared to international rivals, is the very high replanting rate during the past decade. This resulted from insufficient replanting during the 1960s and 1970s, when declining (real) replanting grants, concerns regarding nationalization and high export duties discouraged private investment in rubber. The share of immature rubber in total stands rose from 14 percent in 1981 to 27 percent in 1988, far above the recommended ratio of 18-20 percent (Figure 2.4). Bank staff were aware of this problem at appraisal. In 1979, the rubber masterplan, funded by the British Government, noted that 28 percent of rubber stands in 1979 needed to be replanted and predicted that output would decline until the mid-1990s. The Bank sought to alleviate the consequent strains on the rubber replanting fund (RRF) by providing external support to the fund under the SRR project.12 12. The RRF was established in 1953 to support the replanting of over-aged rubber. Growers are provided advice, replanting inputs and financial assistance during the immature period. The RRF is financed by a cess on exported rubber and by GOSL grants. Since 1980, the RRF has been supported with IDA funding under the first and second SRR projects (paras. 2.39ff). 27 Figure 2.4: Mature Rubber Stands 180_ 160 Mature 1401 Immature 120 X 1'1 100 0 W- 80 ~0 (D 0- - 110 o11,0011 1, 11,1 0OO1 Immature 14 17 17 18 24 26 27 27 26 27 26 25 24 -as share of (20) total area 1981 1983 1'985 1'987 1989 1'991 1'993 Year Source: Annex B 2.8 Virtually the entire area replanted under the project (18,800 ha) is now mature, although the earliest replantings are just reaching full development. At full development of the project (1999) it is estimated that production will reach 19,530 tons/year, equivalent to 22 percent of average annual output by private producers during the project period (Annexes B and D). Yields are expected to peak at 1,080 kg/ha at full development, 15 to 17 years after replanting. 2.9 At appraisal 5-20 percent of the rubber stands in the project districts were over 30 years old. Thus there would certainly have been some replanting even without the SRR project. However, given the funding constraints on the Rubber Replanting Fund (para. 2.39), the without-project replanting program would have been more modest, covering perhaps half the project area. Furthermore, farmers would not have benefitted from the same level of support from extension services and would have applied less inputs to their rubber. Under this alternative scenario (Annex D), the impact evaluation estimates that: i) yields would have peaked at 994 kg/ha (8 percent less than with the project); and, ii) production would have reached 9,080 tons in 1999. Incremental production under the SRR project is therefore estimated at 10,450 tons/year. 28 2.10 The yield curve at impact evaluation is the same as that reported at project completion, but is on average 20 percent lower than projected at appraisal. The main reason is that 80 percent of the project area was replanted with a relatively low-yielding variety of rubber, namely the Malaysian clone PB86.13 This was a serious error. The clone was developed in the first half of the century and has long been superseded by better clones in Malaysia and elsewhere. RRISL figures indicate a peak yield of about 1150 kg/ha for PB86, compared to 1,430 kg/ha for the locally developed RRIC 100 clone and to significantly higher yields for clones planted in other rubber-producing countries during the 1980s. For example, an impact evaluation of Bank-supported rubber projects in Thailand generated a composite yield profile, based on actual tapping practices, that averaged 1,570 kg/ha and peaked at over 2,000 kg/ha.14 The Bank's repeated advice that the Indonesian GTI clone be used for replanting under the SRR project was not heeded. RRISL trials focussed on locally developed varieties until the mid-1980s, when 3,000 hectares replanted with the RRIC 103 clone had to be uprooted due to an outbreak of Corynespora leaf spot, to which the clone was particularly susceptible.15 The failure to ensure that good quality, high-yielding clones were planted was an important error that will depress earnings on 15,000 hectares of Sri Lankan rubber stands for 20 years or more. 2.11 The same commentary applies to the Fourth Tree Crops project. Although the appraisal report (SAR) presents a yield curve that projects yields in excess of 1,600 kg/ha at full development, these figures are optimistic even in the context of higher-yielding local varieties. This evaluation expects yields to peak at 1,260 kg/ha at full development and hover slightly above 1,200 kg/ha under stimulation and slaughter tapping in the final years before replanting.16 It is estimated that the project resulted in ten percent higher yields than would have prevailed in the absence of project support for replanting, due to more intensive monitoring of the quality of investments and to project requirements that: i) old rubber be exploited by chemical stimulation and by upward tapping above the regular tapping panel; and, ii) investments in replanting generate an ERR of at least 10 percent. The incremental yield might have been greater if these project requirements had been observed more widely. 13. Agrarian Research and Training Institute: Post Project Evaluation: Smallholder Rubber Rehabilitation Project of Sri Lanka, August 1988. 14. Operations Evaluation Department: Thailand: Impact Evaluation Report - Second Tree Crops Project (Ln.2078-TH) and Third Rubber Replanting Project (Ln.2691-TH), Report No. 13244-TH, The World Bank, 1994. 15. The Second Smallholder Rubber Rehabilitation project (Cr. 1909-CE) contained conditionality requiring RRISL to acquire and rapidly test well-established, high-yielding foreign clones for their suitability under local conditions. This requirement was followed in 1987 by a US$18.6 million credit in support of an Agricultural Research project, cofinanced by the German Government, that aims to develop better varieties of tea, rubber and coconut, and to improve farmers' husbandry practices and farming systems. The project is scheduled to close in December 1996. Finally, the Bank has recently (1994) persuaded GOSL not to provide grants for replanting with PB 86. 16. Yields have historically been higher for the estates than for smaltholders, due to better cultivation practices and to better planting material. Indeed, a major problem under the SRR project was that the government estates held a monopoly on nurseries and retained the best planting materials for their own use, offering lower quality budded stumps for sale to smallholders (especially during the 1983 drought). This problem, which was not foreseen at appraisal, was addressed quite successfully during implementation by promoting private nurseries. 29 2.12 Annual production of rubber on government estates is expected to peak at 65,800 tons in the year 2002 (Annex E). Without the project, it is estimated that in 2002 production would have reached only 49,200 tons/year, due to lower yields and to a more modest replanting program (3,000 ha instead of 15,000 ha). Thus the project is expected to result in incremental production of 16,600 tons/year at full development (Figure 2.5). This is lower than the SAR and PCR estimates of 20,100 tons/year and 21,900 tons/year, respectively.17 Figure 2.5: Incremental Rubber Production under the FTC Project (Thousands of Tons) 20 - 15 C) 0 0 - - -10 - Cr 010 - -20- -25 e s l i i I I 1985 1990 1995 200 2005' 201'0 Source: Annex E 2.13 Coconut. Three-quarters of coconut production in Sri Lanka is by smallholders. Private estates account for about 20 percent and government-owned estates account for less than 4 percent of the area cultivated and less than 2.5 percent of production (Figure 2.6). The overall area under coconuts has fallen by 48,000 hectares (11I percent) since 1980, due in large measure to urban spread into coconut-growing areas. 17. As noted earlier, the SAR's yield assumptions are optimistic, so that the appraisal projection for incremental production is higher than that at impact evaluation. The SAR also assumes no replanting in the absence of the project. The PCR recognizes that there would have been some replanting without the project (estimated at 25 percent of the area replanted under the project). However, the PCR uses the appraisal yield curve for the with-project scenario, even though it notes that the SAR yield estimates are sanguine. 30 2.14 Yields, and thus production and exports, fluctuated sharply during the 1980s in response to weather conditions. However, yields have consistently been 2-3,000 nuts/ha higher for private growers than for government estates (Figure 2.6). This is explained in large measure by poor maintenance and by praedial larceny on government estates. Stands planted during the Medium Term Investment Program (MTIP) supported by the FTC project are sparse and require rehabilitation. Re-estimated yields are as much as 25 percent lower than the 12,250 nuts/ha estimated at appraisal (the PCR did not re-estimate returns on coconut investments, which account for only 3 percent of the total tree crop area rehabilitated under the project). 2.15 Annual production on government estates is expected to reach 57.1 million nuts/year at full development of the FTC project (in 2006). Without a replanting program, production on the estates would have declined to 49.6 million nuts/year in 2006 (Annex E). Thus it is doubtful that the FTC project will increase production by more than 7.5 million nuts/year at full development. This is less than half the appraisal estimate of incremental production, 18 million nuts/year, due to shortfalls on yields and area replanted. Figure 2.6: Coconut Area Planted and Yields 8, 000 Coconut Yield (nuts/ha) 6, 000 Private 4, 000 EMCs JEDB 2, 000 0____ 500 4 4 416 412 407 403 400 396 389 388 384 379 375 376 Total 250 -125 11 11 10 16 1 14 15 1 13 12 12 12 12 125 80 81 82 83 84 85 86 87 88 89 90 91 92 93 Year Coconut Area ('O00s ha) Source: Annex B 2.16 On the positive side, the new private management on government-owned coconut estates seems dynamic. Diversification efforts are underway, as are efforts to enhance 31 efficiency. In 1993, yields rose by 500 nuts/ha on EMC-managed lands, while production fell sharply on private lands. This suggests that the improvement on government estates may have been due to better management rather than to weather conditions, but it is too early to reach a definite conclusion. B. Economic Impact 2.17 Economic Rates of Return. The adjusted cost and benefit streams for the Smallholder Rubber Rehabilitation project are presented in Annex D. The revised ERR for the project is 4.8 percent, which is well below SAR and PCR estimates (Table 2.1).18 Incremental production at full development (1996) is valued at LKR 330 million in terms of undiscounted, constant (1990) Sri Lankan rupees, equivalent to US$8.2 million. Due to the low ERR, the project outcome is rated as unsatisfactory. 2.18 The adjusted cost and benefit streams under the Fourth Tree Crops project are presented in Annex E. The revised ERR is 8.2 percent for tea, 7.4 percent for rubber and 2.0 percent for coconuts. These returns are much lower than the ERRs at appraisal and at project completion (Table 2. 1). The overall ERR for the project at impact evaluation, 7.9 percent, compares unfavorably with the appraisal projection of 26 percent and the re-estimated return of 10 to 15 percent at project completion. In all three cases, the project ERR omits unquantified welfare benefits. The value of annual incremental production for the three crops is projected to exceed LKR 3,500 million by the year 2014, in terms of undiscounted constant (1990) Sri Lankan rupees, equivalent to (1990) US$88 million. This is 35 percent less than at appraisal and 15 percent less than estimated at completion. Due to the low rates of return, the project outcome is rated as unsatisfactory. Table 2.1: Economic Rates of Return at Appraisal, Project Completion and Impact Evaluation Figures in Percent SAR PCR IER Smallholder Rubber Rehabilitation: 23 18.3 4.8 Fourth Tree Crops Project - Total: 26 10.0-15.0 7.9 Tea: 28-31 9.6-10.9 8.2 Rubber: 24-28 11.2-15.0 7.4 Coconut: 18 - 2.0 Note: FTC Project-JED3 and SLSPC figures are separate at SAR and PCR, but aggregated at IER. Source: Annexes D and E 18. In August 1988 the Agricultural Research and Training Institute (ARTI) published a Post Project Evaluation: Smallholder Rubber Rehabilitation Project of Sri Lanka, which estimated that as of 1987, ERRs had dropped to around 16 percent for project investments. 32 2.19 The critical factors that explain the low rates of return compared to appraisal estimates are: Prices. There were unforeseen declines in world prices for all three commodities, but especially for tea (Figure 2.7 and Annex B). The FTC project was appraised in 1984, when prices were exceptionally high and the corporations were generating significant returns (Annex C). However, just one year into the project, prices had plummeted by more than 50 percent in real terms. Projected tea prices are currently half the appraisal forecasts and 25 percent below PCR projections. Similarly, projected rubber and coconut prices are currently both 30 percent below appraisal forecasts.19 Figure 2.7: Actual and Projected Tea Prices 600- 550- Appraisal 500- < 450- C 0 c 400- o Actual Price SAR Projection 6,350- 1 300- ' 250- PCR Pr jection 0 oi 200- 150- ER Projection Closing 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Sources: SAR, PCR and World Bank commodity price data and projections. 19. In the case of rubber, prices fell significantly after the PCR for the SRR project was written; adjusting the PCR's analysis to reflect rubber prices at impact evaluation yields an ERR figure of 13.4 percent, rather than 18.3 percent. 33 While the long-term downward trend in rubber prices was reversed sharply in 1994-95, the Bank's medium-term projections suggest that this is a temporary phenomenon. Thus rates of return on investments in rubber under the two projects are not likely to rise to acceptable levels. In order for FTC project investments in rubber to yield a 10 percent economic rate of return, rubber prices would have to be 23 percent higher than projected at impact evaluation over the remaining life of the investments. The increment in rubber prices required to achieve a 10 percent ERR on SRR project investments is 29 percent.20 * Production. Yields were below appraisal projections for rubber and coconuts (paras. 2.10 and 2.14 above). This contributed to lower incremental revenues under both projects. In the case of coconuts, the area rehabilitated also fell far short of appraisal projections. * Costs of Production. The yield shortfalls also contributed to unforeseen increases in unit costs of production, since up to 55 percent of production costs are fixed costs. Thus, for example, unit costs of production of coconut are projected to be almost twice the appraisal projections by 1997. Unforeseen increases in real wages have also driven up the costs of production. While real wages for tappers decreased gradually throughout the 1980s, they rose 30 percent after 1990 as a result of greater opportunities for employment in other industries, especially the garment industry. This has particular implications for the economic analysis in the Smallholder Rubber project, where an adjustment to the PCR's figures to reflect current and projected shadow wages yields a return of 11.2 percent instead of 18.3 percent.21 2.20 Methodological differences had relatively minor effects on the rates of return for the FTC project, but were important in the case of the SRR project: the IER assumed an alternative (without-project) scenario with a replanting program covering half the project area whereas the SAR and PCR assumed a without-project scenario of no replanting. Under the SAR/PCR assumptions, the ERR at impact evaluation would have been 0.2 percent instead of 4.8 percent.22 20. The Government of Sri Lanka has commented that the sharp variations in medium to long term price projections since project completion raise concerns about the reliability of the ERR analyses, so that sensitivity analyses with regard to price movements are warranted (see Annex F and OED's notes to those comment in Annex H). The above findings suggest that it is unlikely that returns on rubber investments will exceed 10 percent. The same is true for coconuts, for which prices would virtually have to triple to yield a 10 economic rate of return. In the case of tea, if prices were to be 16 percent higher than projected at impact evaluation over the period 1995-2014, then the re-estimated ERR would rise to 10 percent. A price increment of 38 percent would raise the ERR to 12 percent. These increments are considered unlikely in the light of past trends in tea prices. 21. When the labor cost and rubber price factors mentioned in footnote 19 are combined, the ERR is undefined for the PCR's analysis - the net present value at 10 percent is negative LKR 500 million. 22. The PCR also made less conservative assumptions than the IER regarding rubber benefits foregone (Annex D). For example, it assumed that there were no benefits foregone on any area replanted in the last three years of the project (1986-88). These assumptions would have boosted the returns at impact evaluation by approximately 3 percentage points. 34 2.21 These disappointing results should not necessarily be taken to conclude that Sri Lanka has lost its comparative advantage in the production of tea, rubber or coconuts. A 1994 analysis of domestic resource costs by the World Bank suggests that the opportunity cost of domestic resources used in the production of all three tree crops on government estates is lower than the domestic value added by those resources. Thus Sri Lanka was found to have a comparative advantage in all three tree crops, although there is a danger that further wage increases or price declines could reverse this finding, especially for tea.23 2.22 Contribution to Foreign Exchange Earnings. Sri Lanka no longer relies on the tree crops sector for most of its export earnings. In the ten years to 1993, the sector's share of total export earnings fell from 55 to 18 percent, as total exports rose 45 percent and tree crop export revenues fell by more than 50 percent. The largest reductions in export earnings were for tea (1990 LKR 15 billion, equivalent to 1990 US$373 million), in spite of (or perhaps because of) consistent increases in the volume of tea exports. Other producers, notably Kenya and China, also increased export volumes, contributing to the downward pressure on prices mentioned earlier. In this context, export duties clearly did not sustain prices by curtailing exports, notwithstanding the inelastic world demand for tea and Sri Lanka's dominant position in the market. 2.23 Foreign exchange earnings from natural rubber and coconut kernel products also fell by a total of 1990 LKR 4.8 billion (US$118 million) in the decade to 1993. These declines were driven by both reduced volume and depressed prices. In the case of rubber, the reduced export volume is largely explained by the increase in domestic consumption, much of it as an input for export-oriented industries, such as apparel, tires and vulcanized rubber thread or cord. These industries have boomed and the real value of total exports of rubber end-products quadrupled during implementation of the FTC project. 2.24 While the two projects had unsatisfactory rates of return, their impact on foreign exchange earnings is still expected to be significant. By the year 2004, the FTC project is expected to generate net benefits totalling LKR 1,650 million per annum for the three crops, in terms of undiscounted, constant 1990 rupees. This is equal to 10 percent of Sri Lanka's export earnings from tree crops in 1992. The Smallholder Rubber project is expected to generate net annual benefits in excess of LKR 100 million over the next four years, equivalent to 5 percent of 1992 export earnings from natural rubber. Taken together, the two projects' total incremental benefits over the next twenty years should yield net, undiscounted foreign exchange earnings or savings equivalent to 1990 US$770 million. These earnings might have been achieved at lower cost to the public purse if more decisive measures had been taken to upgrade factor productivity and improve incentives for producers (paras. 2.10-2.11, ? and 2.31). 23. The ratio of the economic value of non-traded factors to domestic value added is referred to as the DRC ratio. A country has a comparative advantage in the production of a good if the DRC ratio is less than unity. The Sri Lanka Tree Crops Strategy Paper, (Report No. 12356-CE, dated July 5, 1994) found that the DRC ratio for tea produced on government estates was 0.8, whereas for rubber and coconuts it was 0.69 and 0.33, respectively. Prices have moved favorably for rubber since then, whereas costs for all three tree crops have changed little over 1994-95. However, if e.g. prices for tea were to fall 15 percent or wages were to increase by 30 percent, the DRC for tea would rise to unity, thereby making Sri Lanka's government estates non- competitive in tea production. 35 C. Financial Impact 2.25 Financial Performance of JEDB and SLSPC. The quality of the plantation corporations' financial accounts is poor. In 1983, Auditors stated that they were unable to form an opinion as to whether SLSPC's accounts constituted a fair presentation of the corporation's financial position. During the Fourth Tree Crops project, external Auditors repeatedly issued numerous qualifications to the financial statements. Bank staff and consultants also questioned the corporations' accounting practices. For example, one internal Bank memorandum notes that "In the case of [SL]SPC, it was found that excessive reliance had been placed on creative accounting techniques to present a picture of profitability which was not supported by reality".24 It is doubtful whether this was a wise strategy, since it made it easier for GOSL to entertain requests for pay raises from estate labor unions. This is particularly true for the policy of capitalizing replanting expenditures, rather than presenting them in the profit and loss statement. JEDB and SLSPC switched to the capitalization approach in 1982, thereby obscuring the exorbitant costs of later wage increases. The situation worsened after 1990, when several accountants at JEDB and SLSPC resigned, and has not improved with privatization.25 On balance, while the statements should be used with a measure of caution, they cannot hide the weak financial performance of the government estates. 2.26 The financial performance of the two plantation corporations has indeed been dismal (Figures 2.8 and 2.9, and Annex C). Cumulative retained losses at the end of 1992 amounted to LKR 4.6 billion for JEDB and LKR 1.7 billion for SLSPC, in spite of equity injections totalling LKR 3.4 billion for JEDB and LKR 3.6 billion for SLSPC over the period 1983- 92.26 JEDB lost money every year after Bank approval of the FTC project, while SLSPC reported a profit only twice. As a result, both corporations became increasingly insolvent (Figure 2.9) and had to rely heavily on borrowing from external sources and from the government-owned commercial banks.27 Bank overdrafts tripled at SLSPC over the life of the FTC project, and increased more than ten-fold for JEDB. Overall, JEDB's debt-equity ratio soared from 0.8 in 1982 to an unsustainable 9.8 in 1989, before GOSL converted LKR 1.6 billion of debt into equity. SLSPC's debt-equity ratio rose less dramatically, to 3.2 in 1988, before debts of almost LKR 2 billion were capitalized. 24. Internal Bank Memorandum, dated April 17, 1989. 25. For example, the impact evaluation team was presented with unaudited balance sheets and income statements that were internally inconsistent for two of the 22 RPCs. 26. The impact evaluation team was not able to obtain financial statements for JEDB or SLSPC for 1993, due to delays in the preparation of the statements. Comparisons with earlier years would in any case be vitiated by the fact that JEDB and SLSPC each only retained about 25 of the poorest performing estates after the 1992 privatization of management. This caveat also applies to comparisons of certain financial data for 1992 with earlier years. It is nonetheless clear from COP and NSA figures (even without calculating overhead costs) that GOSL has had to continue to channel an undetermined amount of resources to the two corporations. Based on available data, the impact evaluation team estimates that losses in 1993 exceeded LKR 350 million for the two corporations. 27. They also accumulated massive unfunded pension liabilities. These have been passed on to the 22 RPCs. 36 Figure 2.8: JEDB and SLSPC Cumulative Losses 1,000 - SLSPC 500- JEDB 0 8(500)- T(1. 000)- c 3(1,500)- (2, 000)- 84 85 86 87 88 89 90 91 92 Source: Annex C Figure 2.9: JEDB and SLSPC Working Capital 1,000- SLSPC 0r- IJEDB (1. 000) 8 (2, 000) (3, 000) - (4,000) -- (5, 000) 84 85 86 87 88 89 90 91 92 Source: Annex C 37 2.27 The main reason for the losses is a price-cost squeeze that was largely but not entirely beyond the control of estate managers. Real average revenue per worker declined after 1984, due to depressed world prices for all three crops and to stagnant productivity. At the same time, real wages for plantation workers rose rapidly (Figure 2.10). 2.28 The fall in prices was clearly an external shock, but it was exacerbated by heavy taxation of the industry (paras. 2.31 ff). The stagnant productivity and rising production costs were largely attributable to internal factors, including: Labor distortions. Restrictions on the movement and use of labor effectively turned labor into a fixed cost (paras. 3.8 and 3.10). The problem was exacerbated by Government approval of wage increases that were unrelated to productivity. These interventions demoralized estate managers as it frustrated their efforts to contain costs. Their incentives to do so were further undermined by the fact that managers were entitled to pay increases linked to increases in estate labor wages; * Past failures to invest in replanting. See paragraph 2.7 above; Figure 2.10: Declining Revenues and Rising Costs per Worker 45, 000 72 JEDB: Real Turnover per Employee (left axis) 40, 000- -68 35, 000- -64 30, 000_ Trend -60 .25, 000- 56 Actual a7 20, 000- -52 15, 000- -48 10, 000- -44 Trend 5, 000- Real Tea Wage Rates for Males (right axis) 40 0 Actual36 82 83 84 85 86 87 88 89 90 91 92 93 Sources: JEDB financial statements and the Plantation Sector Statistical Pocket Book. * Mismanagement of the estates. The size of the corporations provided opportunities for political patronage that undermined the companies' financial position. There was also little incentive for estate superintendents to improve performance since staff rules precluded incentive payments for individual managers. In practice, the estate-level 38 managers' response to the labor distortions, and possibly to the broader atmosphere of civil disturbances prevailing in the late 1980s, was logical: employ workers in more labor-intensive activities, notably replanting. However, the largely debt-financed replanting activity resulted in high current expenditures on debt service in addition to the labor expense, but yielded no offsetting current income, due to the gestation period for the tree crops. This contributed to a dramatic change in the corporations' asset structure: in 1984, JEDB's short-term assets were 56 percent of total assets; by 1991, they had fallen to 23 percent (Annex C). The story is the same for SLSPC and the figures are almost identical. These problems underscore a major lack of financial planning and oversight by central staff at JEDB and SLSPC. 2.29 GOSL proved reluctant or unable to address the mismanagement and the labor distortions adequately in the course of the MTIP. Since the FTC project attempted to address the investment needs of the sector without targeting these critical areas, low productivity and high costs reduced the profitability of investments supported under the project.28 Re- estimated financial rates of return range from 8.3 percent for rubber to 7.4 percent for tea and almost zero for coconuts (Annex E). These returns are similar to those re-estimated by the PCR (except coconuts, for which no return was calculated) but are 8 to 15 percentage points lower than appraisal estimates (Table 2.2). Table 2.2: Financial Rates of Return at Appraisal, Project Completion and Impact Evaluation of the Fourth Tree Crops Project Figures in Percent SAR PCR IER Fourth Tree Crops Project: Tea 21-22 6.6-6.9 7.4 Rubber 15-18 7.8-9.4 8.3 Coconut 12 0.4 Note: JEDB and SLSPC figures are separate at SAR and PCR, but aggregated at IER. Source: Annex E 2.30 Notwithstanding these problems, IDA increased the disbursement percentage for the replanting category from 35 percent to 90 percent in 1989.29 In January 1991, SDR 9.3 million (US$12.2 million) in Bank funds intended for the institutional development and nursery development components, together with SDR 3 million (US$3.9 million) in unallocated funds, were reallocated to the field development component. The Asian Development Bank (ADB) also reallocated a total of US$14.5 million to field development during 1991-92, primarily from the factory development component. Given the constraints on alternative sources of funding, the Bank/ADB support during this period was critical to maintaining the replanting program. It is an open question as to whether the increases in disbursements for replanting were an appropriate policy response. On the one hand, the 28. This point is made in the Sri Lanka Tree Crops Strategy Report. No. 12356-CE. prepared by the Agriculture Operations Division in Country Department III of the South Asia Regional Office, The World Bank, 1994. 29. Senior management approved the increase, with notification to the Executive Directors. At the same time, the project description was expanded to permit the procurement of specialized equipment (e.g. color separators for improved sorting of tea at tea factories) and the preparation of studies (regarding privatization). In practice, no funds were withdrawn for specialized equipment and the studies were suspended in 1990. 39 corporations' capacity to participate in the replanting program had clearly been overestimated at appraisal as a result of higher commodity price projections, and the amendments to the financing plan enabled the corporations to continue replacing over-aged tea and rubber and providing work for underemployed labor. On the other hand, appraisal replanting objectives had already been exceeded considerably by 1989; the requirement that all replantings meet the minimum criterion of a 10 percent ERR was not enforced; the corporations missed an opportunity to convert to cut, tear and curl (CTC) teas, since funds were reallocated away from the factory development component;30 and the increase in long-term funding for replanting may have facilitated a short-term, stop-gap approach to the labor issue, rather than encouraging the adoption of longer-term solutions. 2.31 Impact on Government Revenues. GOSL taxed the tree crops sector heavily throughout implementation of the two projects. In 1981, one-third of tea export revenues and more than half of rubber export revenues were absorbed by the .ovemment in the form of export duties and cesses (Figures 2.11 and 2.12 and Annex B). Part of these earnings were channelled back into the sector in the form of replanting grants to smallholders and capital contributions to the government estates. However, net government revenues from the tree crops sector reached (1990) LKR 10.9 billion in 1984 and remained positive and substantial until 1990 (Table 2.3). Overall, GOSL earned LKR 31.7 billion from the tree crops sector over the period 1983-92 (measured in 1990 rupees), equivalent to US$787 million. Table 2.3: Net Direct Fiscal Impact of the Tree Crops Sector (1990 LKR Millions) Tree Crops Sector FY83 FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92 FY93 GOSL Revenue 7,535 11,555 5 697 3.010 3,291 3,033 2.334 3,093 1,511 916 418 GOSL Expenditures 673 650 624 689 379 469 348 3,946 1,658 1,043 - Net Fiscal Impact 6,862 10,905 5.073 2,321 2,913 2.564 1,986 (853) (147) (127) - Source: Annex B 2.32 The tree crops sector became a major burden on the fisc from 1990 onwards as GOSL revenues fell due to declining export earnings and expenses rose as a result of the financial crisis at JEDB and SLSPC. The weakness of the sector eventually led GOSL to eliminate the export duties on tea and natural rubber and the sales tax on tea in 1992. Cesses were maintained to fund replanting by tea and rubber smallholders.32 30. World demand for CTC teas is growing rapidly, relative to demand for bulk tea, since CTC tea is more suitable for use in tea bags. Sri Lanka's output of CTC tea is increasing, but still accounts for less than 5 percent of all Sri Lankan tea. 31. Other taxes included in the analysis for later years are an ad-valorem sales tax on tea, introduced in 1984, and income tax on the plantation corporations' profits. The sector has also been taxed via macroeconomic policies, notably the failure to maintain a competitive real effective exchange rate over an extended period. These issues are not tackled here, however for more information see Sri Lanka: Strategic Issues in the Development of Sri Lanka's Agricultural Sector, Report No. 8229-CE, prepared by the Agriculture Operations Division, Country Department III in the South Asia Region of the World Bank, 1991. 32. Coconut replanting grants are paid from general revenues. 40 Figure 2.11: Tea Exports and GOSL Revenue 30- 25· c 20- cl mo 0 Olo c 80 818538S58 7 88 09 29 0ý 7- 6-ý S5- 4- 8081 82 83 84 85 86 87 88 89 90 91 92 93 = Value of Exports -A-- Export Duty & Cess Source: Annex B 65- 0- 80802834 58 78 8 09 29 Vou0fEpo1 Ä uy.Cs a S 3re Ane- Fiur 2.2 Rubber Ex ort &xot GOSL REnue uyCs 8ore ne 41 2.33 GOSL managed to avoid significant direct losses prior to 1990 by relying on the banking sector and on the Bank and other external donors to support the two plantation corporations. But by 1990, the debt burden on JEDB and SLSPC had become unsustainable, as had the state commercial banks' (SCBs') exposure to the tree crops sector (and other) bad loans (Box 2.1). In 1990, GOSL converted most of the debt of the two corporations into equity and assumed their liabilities (including IDA and ADB loans under the MTIP). That same year, the combined losses of JEDB and SLSPC resulted in a LKR 3.1 billion drain on the public coffers, with an additional LKR 2.1 billion for the two corporations in 1991-92 (Figure 2.13).33 Figure 2.13: Net Direct Fiscal Impact of JEDB and SLSPC 1, 500 - Appraisal JEDB 1, 000- SLSPC Approval q 500- a Surplus for GOSL 00 Pol Deficit 1.0 (50) for GOSL 0 (500)- o0 Closing (1, 000) (1, 500) (2, 000) I I I Is 83 84 85 86 87 88 89 90 91 92 Source: Annex C 33. On the revenue side, these figures include income tax, export duty, cess and ad-valorem sales tax paid to GOSL by JEDB and SLSPC. They exclude revenues from the business turnover tax. On the expenditure side, the figures include replanting and factory development subsidies, other income support (e.g. via the tea stabilization fund), capital contributions by the tesury and by government agencies, (such as the Sri Lanka Tea Board), and conversions of liabilities into equity for JEDB and SISPC. These net direct fiscal transfers do not reflect significant indirect support through loans to the two corporations at below-market rates of interest, assumption of the foreign exchange risk on their external liabilities, and guarantees on debts retained by the corporations. For example, in 1989 SLSPC's ratio of interest expense to average outstanding loans was 11.1 percent, compared to average deposit rates of 13.2 percent and lending rates of 16.4 percent. If SLSPC had been required to borrow at 16.4 percent, its interest expense would have been LKR 108 million higher. 42 2.34 Since the privatization of management, losses have been reduced on government- owned estates, as has the direct fiscal burden on government of its estates.34 However, contingent liabilities have continued to rise as GOSL has guaranteed debentures issued by the RPCs to the Employees' Provident Fund (EPF) at rates below market rates of interest. These advances amounted to LKR I billion in 1993 and an additional LKR 600 million in the first half of 1994 (para. 4.30 and Figure 4.2). Further indirect support is provided to the RPCs via GOSL guarantees on commercial bank loans. Box 2.1: The State-Owned Banks and the Plantation Sector 1. The commercial banking system consists of two state-owned commercial banks (the Bank of Ceylon (BOC) and the People's Bank (PB)), four domestic private banks and 17 foreign banks. The banking sector is dominated by the two state-owned commercial banks (SCBs), which presently account for 60 percent of total loans and advances, down from 75 percent in 1980. 2. The SCBs have been used by the government to direct credit to public enterprises and to rural areas at relatively low interest rates. This has adversely affected their viability. In 1984, one year before Board Approval of the FTC project, the SCBs earned a 9.5 percent net return on equity (ROE). By 1989, the return on equity had fallen to 3 percent. Over the same period, ROEs rose from 6.5 percent to 14.9 percent for private banks and from 13 percent to 18.5 percent for foreign banks. SCB loans to the plantation sector also increased significantly, rising from (an almost entirely externally funded) 2 percent of risk assets to 11 percent (of which over one-third were own funds). Exposure to plantations soared from 24 to 195 percent of stated capital. In practice, net worth was overstated by not making sufficient provisions for loan losses and by failing to fund pension liabilities adequately. An audit by an international accounting firm in 1990 found that restating the financial statements adequately entailed a negative net worth of Rs. 14.7 billion on assets of Rs. 74.1 billion. One year later, the accounting firm estimated bad debts on loans to JEDB and SLSPC at LKR 4.6 billion, with loans to the two corporations increasing at a rate of LKR 120 million per month. 3. In 1990, commercial bank overdrafts for JEDB and SLSPC were converted into government-guaranteed, long-term loans. Since the privatization of estate management, exposure to government-owned plantation corporations has again increased rapidly, with overdrafts rising by 140 percent to LKR 1.53 billion between December 1992 and June 1994. Source: Project files for the Sri Lanka Private Financial Development project (Credit 2484-CE), approved in 1993 34. Data are weak on net flows to the government-owned estates since 1992, but GOSL appears to have injected LKR 40 million of capital into the 22 Regional Plantation Companies (RPCs) formed in 1992 (paras. 3.37ff and Annex A). This is far less than earlier commitments to JEDB and SLSPC. 43 2.35 Returns to Smallholder Rubber Growers under the SRR Project. Financial Rates of Return (FRRs) for smallholder rubber growers are presented in Table 2.4. They vary considerably, depending on the cultivation practices of the grower. FRRs to smallholder rubber growers using only family labor for the rubber and planting intercrops during the immature period (Case 2) were 49 percent at appraisal and 17 percent at impact evaluation. On the other hand, returns to smallholders using hired labor and not planting intercrops during the immature period (Case 3) were 11 percent at appraisal and only 5 percent at impact evaluation. Incremental returns under these two scenarios are presented in Figure 2.14. Since only 13 percent of smallholders planted intercrops, and since hired tappers are used on holdings as small as 1.2 hectares, it is likely that in most cases financial returns to smallholders on project investments (before replanting grants) have been less than 10 percent. Figure 2.14: Incremental Revenues for Smallholder Rubber Growers Based on Different Cultivation Practices 40- Case 2 30 - Case 3 o 20- 10 4) C: 0 >0 a(20)- E (30)- -u (40)- (30) 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 Year Note: Case 2 assumes intercrops and the use of family labor for tapping rubber: Case 3 assumes no intercrops and the use of hired labor for tapping. Source: Annex D 44 Table 2.4: Financial Rates of Return at Appraisal, Project Completion and Impact Evaluation of the Smallholder Rubber Rehabilitation Project Figures in Percent SAR PCR IER 21.2 17.1 14.4 Case 1: family labor, no intercrops Case 2: family labor, with intercrops 49.2 34.6 17.2 Case 3: hired tappers, no intercrops 10.5 -- 5.0 Source: Annex D 2.36 While such modest returns are clearly not sufficient to encourage replanting, replanting grants made the investments considerably more attractive. In Table 2.4, Case 3 (hired labor and no intercrops), replanting grants were projected to increase returns to smallholders from 10.5 to 30.6 percent at appraisal.35 At impact evaluation, the corresponding increase would have been from 5.0 to 28.7 percent, using the SAR replanting grant installment profile (in constant 1990 LKR). However, the value of the replanting grant has declined almost 40 percent in real terms since 1980, so that the replanting grant prevailing at impact evaluation (LKR 37,050/ha) would raise returns to only 12.8 percent. In 1981, the replanting grant covered 55 percent of replanting costs, but by 1994 the real value of the grant had fallen to less than 30 percent of replanting costs (see Figure 2.15). 2.37 While it is appropriate to deny replanting grants to smallholders with poor cultivation practices, the drop-out rate has been staggering: a 1992 survey of households in two of the three project districts found that only 12 percent of smallholders received the full eight installments.36 Furthermore, the post-evaluation survey conducted by the Agrarian Research and Training Institute found that drop-out rates were inversely correlated with the size of holdings. Between 76 and 90 percent of dropouts in the project area were smallholders with less than 0.8 hectares. ARTI concluded that "The problem of drop outs highlighted above could affect the sustainability of the project replanting program as well as future replanting programs." 35. In practice, it should have been somewhat less, since the SAR analysis did not adjust the grant installments for projected inflation. 36. Centre for Women's Research (CENWOR): Women in the Rubber Sector in Sri Lanka, 1993. The survey covered 50 smallholdings and 50 estate families in Kalutara and Kegalle districts. The third project district was Ratnapura. In 1986, ARTI conducted a somewhat larger survey (covering a total of 300 smallholdings) that showed only 22 percent of smallholders received the third installment. 45 Figure 2.15: Ratio of Grants to Replanting Costs 65%- G0%- V, -Z; 55%- 0 40% 345%~ 0% 0% 81 82 83 84 85 86 87 88 89 90 91 92 93 94 Source: RDD's Sri Lanka Rubber Statistics 2.38 There are several reasons for the disappointing returns at the smallholder level. In addition to the external factor of falling rubber prices, there were three major internal factors that the project attempted to address: Low yields. Yields have been consistently lower for smallholders than for the government estates. Some of the reasons for this (notably the lack of adequate clonal material) have been discussed above. Others include poor cultivation practices, e.g. insufficient application of fertilizers; inadequate soil conservation practices and premature tapping or over-tapping. These were to be addressed under the SRR project by strengthening the Advisory Services Department of the Ministry of Plantation Industries. In practice, the ASD extension officers had a relatively modest outreach and impact, because there were insufficient rubber extension officers (REOs) and smallholders often did not follow their advice (recruitment fell far short of SAR objectives and the Bank-proposed strategy of making extension staff responsible for inspecting replantings and authorizing grants was reversed in the course of the project for administrative reasons). High labor costs. Part of the reason that cultivation practices are relatively poor is that smallholders cannot afford the labor required for adequate cultivation practices. Even on smallholdings using family labor, the replanting grant incentive is clearly less attractive than the opportunity to earn income from off-farm activities. 46 Low quality output. Most smallholders (80 percent) do part or all of the processing of their latex into ribbed smoked sheet (RSS). However the quality of smallholder- processed RSS is poor. The ARTI post-evaluation survey found that only 36 percent was graded RSS I to RSS 3. The rest was RSS 4 or 5, or ungraded. The low quality of smallholder rubber is rewarded by somewhat lower prices. In practice, one of the reasons for the low quality is that there are insufficient price incentives to increase quality, because a large share of dealers' profits comes from down grading RSS purchased from smallholders and upgrading it at point of sale. The project attempted to address this by improving existing, co-operative-style Group Processing Centers (GPCs) and building new ones. This initiative was warranted, insofar as GPCs managed to improve the quality of their production considerably during the project (the share of RSS 1 in total production rose from 55 percent in 1981 to 78 percent six years later). However, the component fell short of SAR objectives because of poor management and inadequate marketing. These factors discouraged smallholders from supplying latex to the centers, so that average throughput per GPC was halved in the course of the project. 2.39 Impact of the SRR Project on the Rubber Replanting Fund. The rubber replanting fund maintained a positive cash flow in 8 of the last 13 years (Table 2.5), however in only 3 of the last 13 years has this been due to an excess of cess income over replanting grants. The last positive net cess flow was obtained in 1988, the year that the first SRR project was closed. Bank contributions under the SRR projects have been instrumental in sustaining the fund and at the Bank's insistence, the replanting cess rate was also raised, from LKR 0.50/kg in 1980 to LKR 1.15/kg in 1983 (an 11.6 percent increase in real terms . However, the RRF is unsustainable without external support at current cess rates.3 2.40 Three important factors explain the liquidity problems of the RRF: * The replanting rate was too high during the 1980s, due to inadequate replanting in earlier periods. * Domestic consumption of rubber increased sharply in recent years, reducing the base (exported rubber) on which the cess is charged (Figure 2.3). * The cess rate has not been changed since August 1983, in spite of increases in the replanting grant. 37. Similar problems with liquidity characterize the rubber replanting aid fund (ORRAF) in Thailand. The Royal Thai Government has decided to emphasize progress on replanting rather than self-sustainability of the fund and has supported ORRAF with direct budgetary support as well as grants financed with loans from donors. See the Operations Evaluation Department: Thailand - Impact Evaluation Report: Second Tree Crops Project (Ln.2078-TH) and Third Rubber Replanting Project (Ln.2691- TH), Report No. 13244-TH, The World Bank, 1994. 47 Table 2.5: Rubber Replanting Fund--Cash Flow (LKR Millions) Net IDA Overall Balance Cess Grants Cess SRRP Other Other Flow off Carried Year Inflows Paid Flows Funds Income OutFlows Funds Forward 1980 - - - - - - - 22 1981 58 69 (11) 4 1 (5) (11) 11 1982 95 91 4 22 - (5) 21 32 1983 85 104 (19) 54 - (16) 19 51 1984 80 110 (30) 61 - (20) 11 62 1985 196 136 61 67 4 (55) 78 140 1986 135 137 (2) 67 20 (30) 55 195 1987 121 131 (10) 32 25 (50) (3) 191 1988 108 100 8 70 25 (47) 56 247 1989 103 136 (33) 5 19 (73) (82) 165 1990 82 152 (69) 47 20 (72) (73) 92 1991 79 152 (73) 164 17 (14) 94 186 1992 96 124 (28) 50 14 (16) 20 206 1993 63 141 (78) 59 24 (12) (12) 193 Source: Rubber Development Department 2.41 Currently, smallholders are being cross-subsidized by the estate sector, which is not eligible for replanting grants even though the cess is collected on exports of estate rubber. Additional cess revenues are therefore required to convert the RRF into a fund exclusively targeted at smallholders, (who lack the access to financial markets that would permit them to finance replanting with formal credit), and to ensure that a high degree of coverage of applicants is maintained. While the ratio of permits issued to applications received rose impressively during the first SRR project, reaching 91 percent in 1988, it has slipped since Project Closing. Furthermore, if smallholders manage to improve cultivation practices, RRF liabilities will increase. Finally, additional cess revenues are required to ensure that replanting grants keep pace with replanting costs. Under the second SRR project, the Bank has urged GOSL to double the replanting grant, which has slipped since Board Approval in 1986 from over 50 percent to less than 30 percent of replanting costs. In January 1995, the replanting grant was increased by almost 25 percent to LKR 49,722/ha, far less than the LKR 72,000/ha proposed by the Bank. 2.42 The Bank has also encouraged GOSL to cover the rising administrative expenses for the RRF from general funds and to double the cess to LKR 4.35/kg. Domestic rubber consumers have also urged GOSL to raise cess rates, because Sri Lanka's position as a price taker in international markets means that a higher cess would drive down domestic rubber prices. However, there would clearly be trade-offs that should be evaluated. On the one hand, the RRF would be more liquid; smallholders who are about to replant their stands would be net gainers, since the increased grants up-front would more than outweigh (discounted) reductions in prices at maturity (as long as they receive at least the first two grant installments), and domestic rubber consumers would enjoy lower prices for rubber. On the other hand, smallholders who have already planted their crops (e.g. SRR project beneficiaries), 48 smallholders who do not qualify for the second installment, and government 3lantation corporations (which are not eligible for grants) would be adversely affected. One measure that the Bank haspressed for is expanding the base on which cesses are charged to include domestic rubber.39 This could be done by collecting cesses from the 2,000 or so licensed dealers, rather than just from exporters. 2.43 The broader issue that should be considered is whether the replanting program is economically warranted. Given the present yields at the smallholder level, it is not. Therefore, an increased grant could simply make economically inviable investments financially attractive for smallholders, unless intensive efforts are undertaken to increase yields, improve quality and reduce unit costs of production. 38. For Table 2.4 Case 3, before replanting grants, if the price to growers were to be reduced by two (1990) rupees from 1995 until 2010, the net present value to growers of an investment made in 1981 would fall by one-third from an already negative value of LKR 12,200. The same price reduction would decrease the plantation corporations' FRR on rubber under the FTC project from 8.3 percent to 5.2 percent, unless the additional cess payments were to be refunded to the corporations. The Bank is currently urging GOSL to adhere to its commitment to refund the corporations for all cess payments, since they are not eligible for RRF grants. 39. The Second SRR project contains a covenant requiring the extension of the cess to domestically consumed rubber by December 31, 1996. 49 3. Social and Institutional Developments A. Social Impact 3.1 This section discusses social developments under the two projects. The SRR project did not have explicit social objectives and there is little ex-post data to link improvements in social welfare to the project. Therefore, the section on the SRR project relies on available survey data (from CENWOR, para. 2.37) to shed some light on socio-economic conditions for smallholders and on the outreach achieved by government services supported under the project. In contrast, the FTC project included components for housing and social welfare totalling US$22.8 million at appraisal (14 percent of base costs). The section on the FTC project describes conditions before and after the project, as well as the physical contributions made by the project to improving welfare and living conditions for estate residents. It also discusses ethnic and political factors that give rise to labor distortions discussed elsewhere in the report, and highlights gender differences in work norms on tea estates that are both inequitable and inefficient. 3.2 Socio-Economic Conditions in the SRR Project Area. While there have been a number of noteworthy developments in the socio-economic status of smallholders in the project districts (Kalutara, Kegalle and Ratnapura), it is difficult to associate them with the SRR project. On the positive side, health indicators have continued to improve nationwide, including in the project area (Annex B); educational attainment has improved and gender disparities in access to education became less pronounced, and housing conditions in 1991 were generally found to be good in project districts.40 3.3 On the other hand, CENWOR's 1991 surveys of smallholders and estate workers in two project districts suggest that: * the percentage of smallholders below the poverty line is higher than that for resident estate labor, but comparable to that of non-resident estate workers. Around 30 percent reported annual household incomes of less than LKR 15,000 or US$350 per year, compared to 10 percent for resident estate workers; * smallholders' incomes are more vulnerable to changes in market conditions and are being eroded by rising costs of production; * around 60 percent of those surveyed received replanting grants during the 1980s. Of these, only one in five received the third of seven (later eight) installments; * around 70 percent of those surveyed received extension advice from the Advisory Services Department, but very few received advice on all stages of production, and generally extension does not reach women, even though they participate actively in tapping and other tasks; 40. The Center for Women's Research (op.cit.) found that more than 85 percent of houses in Kegalle and Kalutara were owner- occupied and that the majority have tiled roofs, brick walls and cement floors. 50 * in spite of underemployment, rubber tapping almost never features among employment aspirations (government jobs headed the list of specified objectives); * 90 percent of holdings are less than 0.8 hectares, with the average holding having only 0.4 hectares under rubber. Smaller holdings tend to spread risks through diversified production. This of course makes it much more difficult to reach smallholder rubber growers with services or for farmers to become really proficient rubber growers. 3.4 The CENWOR study concludes that "..the majority [of smallholders] were not able to generate adequate incomes to ensure significant upward socio-economic mobility.. .It is likely that replanting, adverse weather and production costs affected their incomes adversely.. .It is significant, too, that.. .rubber based industries have not been perceived by anyone as a strategy to increase economic returns and thereby to improve living standards." 3.5 The Social Status of the Labor Force on Government Estates Almost 90 percent of the 738,000 workers and family members residing on government estates in 1985 were of South Indian Tamil origins.41 The Tamils were socially, educationally and culturally disadvantaged, relative to the population at large. Their ancestors were virtually conscripted by higher caste kanganis acting as agents for management and were brought to Sri Lankan estates beginning in the 1870s, because the expropriated Sinhala smallholders generally refused to work on the colonial estates. The Tamils became politically stateless in 1948, when Sri Lanka gained its Independence. Attempts to address their status in the 1970s and early 1980s involved efforts to repatriate large numbers of them and gradually grant citizenship to others. The 1988 Grant of Citizenship to Stateless Persons Act No. 5 and the 1993 Citizenship (Amendment) Act, at least dejure, finally reached those whom India had refused to accept for repatriation. Nevertheless, the historical antecedents entailed a significant degree of marginalization of the plantation work-force and contributed to underlying ethnic tension between Tamil estate workers and the majority Sinhala population in neighboring villages. These tensions were exacerbated by the outbreak of conflict in the early 1980s between the Sri Lankan army and (non-estate) Tamil separatists in the north of the island (around Jaffna). 3.6 The grant of citizenship to the estate population gave it voting rights that have markedly strengthened the political hand of its labor leaders, particularly in the light of security concerns resulting from the ethnic conflict in Jaffna. This political clout has contributed to significant increases in plantation workers' wages since 1984. That year, male wages rose by 33 percent (14 percent in real terms), whereas female wage rates rose by 60 percent (a real increase of 36 percent) to equal male wages for the first time. Between 1984 and 1993, wage rates rose by another 20 percent in real terms.42 As a result, plantation workers' incomes in 1992 amounted to LKR 2,700 per month for the average two-worker 41. The remainder were Sinhala (about 10 percent) and Muslim (1 percent). See the Plantation Housing and Social Welfare Trust's Vital Statistics in the Plantation Sector, 1980-1993. 42. This includes the first (nominal) 18 percent of a 30 percent across-the-board increase promised to workers in December, 1992, after privatization of management. When the second part of the increase came up for implementation before the elections in the summer of 1994, the private management companies (Annex A) threatened to renege on their contracts. 51 plantation household, which is well above what is earned by the rural and urban poor.43 Furthermore, these figures exclude other income-generating activities, such as earnings from vegetable plots and dairy production that can yield LKR 10-12,000 per year. Figure 3.1: Seasonal Variations in Monthly Wages (LKR) and in Pay Advances (Percent) 2, 500- Monthly Wage 8 2, 000 - 1, 938 1, 910 Pay Advance 1,662 1, 500 1, 000 34% 31% 37% 500 46% 0-4-- Dec/93 Apr/94 Jun/94 Sep/94 Source: Payroll data, Liddesdale Estate, Maturata Plantations Ltd. 3.7 A World Bank poverty assessment, based on sample surveys conducted in 1985/6 and 1990/1 found that poverty declined by 12 percent over the period on estates, compared to a 23 percent decline in rural areas and an 11 percent increase in urban areas.44 Estates were found to have the lowest income inequality as well as the lowest incidence of poverty (13 percent, versus 18 percent in urban areas and 24 percent in rural areas, based on a headcount index using 1990 LKR 471.20/month as the poverty line). However, there are significant variations in income over the course of a year (Figure 3.1). Monthly wages fall significantly during and after the dry season. 43. Technical Assistance Team: Needs Analysis of Plantation Women: Phase 1, September 1992. 44. South Asia Region, Country Department II, Country Operations, Industry and Finance Division: Sri Lanka Poverty Assessment, forthcoming, The World Bank. 52 3.8 Another apparent benefit to estate workers of their voting power has been their unions' ability to secure modest work-loads on the tea estates and a guaranteed number of work-days. While the minimum plucking requirements (norms) vary by season and by the quality of the bushes, they are generally set at around 18 kg/day on the government estates, compared to 30kg/day for one private tea estate visited by the authors, and to over 30kg/day in Kenya. In 1984, GOSL agreed to a demand from labor unions for a guaranteed 6 day work-week, with wages being paid whether or not there was work to do. This guarantee was originally provided by the Estate Labor (Indian) Ordinance of 1889. Although it has not yet officially been put into effect, it put pressure on JEDB and SLSPC managers to create work for labor during the FTC project even if they were not economically warranted. Figure 3.2: Estate Population and Labor Force 900, 000 800, 000- Estate Population 700, 000 600, 000- 500, 000 Estate Emp oyment 400, 000 1980 1982 1984 1986 1988 1990 1992 Sources: PHSWT Vital Statistics in the Plantation Sector 1980-93 and the Plantation Sector Statistical Pocket Book 3.9 Ordinary least squares analysis indicates a downward trend in the labor force of just over 13,000 workers per year during 1980-93. Reductions were particularly sharp during 1982-84 (27,000 per annum) and again following privatization in 1993 (22,000). Nevertheless, rapid wage increases, distorted labor regulations and management weaknesses have increased underemployment (Figure 3.2). This problem is compounded because the estate labor force is inadequately served by otherwise far-reaching national health and education programs (paras. 3.11 ff). 53 3.10 These reductions in the labor force also reflect a lack of opportunities for plantation families, especially youths. Limited opportunities contribute to widespread alcoholism and threaten peace and stability on the estates. Average unemployment on the estates is below the national average (8.9 percent for men and 6.4 percent for women, compared to national rates of 10.7 percent and 20.8 percent, respectively), however this hides significant differences between estates. Low country estates tend to be short of labor for tapping and plucking, whereas high country estates have a surplus. Unions have actively discouraged mobility of labor across estates, for reasons that reflect both underlying ethnic tensions and union politics. GOSL has also demurred from actively encouraging the movement of workers from estates with surplus labor to estates with shortages, even when the estates have been part of the same plantation corporation. While the Bank and other donors were aware of the seriousness of these problems, the project did not attempt to target the issue of labor distortions, because of the political sensitivity surrounding it. However, it did attempt to ameliorate the sub-standard living conditions of estate workers. 3.11 Health, Demographic and Education Indicators for the Estate Population. In spite of the Education Ordinance of 1920 that introduced compulsory education on estates, at project appraisal (1984) 41 percent of the estate population had never been to school. This is because the government, which is responsible for education on the estates, did not provide as comprehensive a coverage as in urban and rural areas. Accordingly, literacy rates for estate workers lagged well behind those of the rural and urban populations, gender disparities were much more acute and post-primary educational opportunities were scarce (Table 3.1). However, the situation has improved over time.4 The project did not attempt to address these issues. Table 3.1: Literacy Rates and Educational Attainment by Location and Gender (Percent) Estate All Island Male Female Male Female Literacy Rates, 1985 74.5 45.9 88.6 80.0 Share of Population Progressing Beyond Primary Education, 1986/7 15.1 8.5 39.5 39.1 Source: Central Bank survey, quoted in S. Rajaratnam: Voice of the Voiceless, 1992 3.12 Estate workers also received poorer health services, relative to the general population. When the FTC project was approved in 1985: 45. Estate workers' literacy rates are catching up with those of the general population. Gender disparities are also falling rapidly. For example, a 1989 survey by the National Association for Total Education found that 49 percent of males over 65 and 14 percent of females over 65 were literate, compared to 79 and 72 percent, respectively, in the 14-19 age group. 54 * the maternal mortality rate on the estates (1.2 per 1,000 live births) was more than twice the national average; * the infant mortality rate on the estates was 49.6 per 1,000 live births, compared to the national average of 29; * one in three children was born with low birth weight; * the 1985 crude birth rate (31 per 1,000 of population) on the estates equalled the national average of the late 1960s. 3.13 An attempt was made to address these health and demographic challenges by strengthening the Social Development Divisions (SDDs) of the two plantation corporations through a team of technical assistants (TAT) and by financing a Social Welfare Program (SWP) that was to improve housing, rehabilitate and construct new water supply and sanitation facilities and renovate or construct new medical centers and creches. These project components were financed by the Asian Development Bank and the Governments of the Netherlands (GONL) and of Norway (NORAD). In a second phase of the program (SWP II), surplus GONL and NORAD funds (resulting from exchange rate movements) were used to establish a Plantation Housing and Social Welfare Trust (PHSWT), with a view to ensuring the continued improvement of estate workers' living conditions under private sector management. 3.14 By the time the project was completed in 1991, remarkable progress had been made on the estates with respect to health indicators (Table 3.2): * after rising initially, the maternal mortality rate had been reduced to I per 1,000 live births; * the infant mortality rate had been cut to 29 (i.e. the national average at the start of the project); * less than one in six children was born with low birth weight; * the crude birth rate had been reduced by one-third to 20.5 per 1,000 of population; 3.15 Several of these improvements can be traced to a remarkable increase in deliveries at health institutions, which rose from 61 percent of all estate births in 1985 to 83 percent in 1991. The increase is attributable in large measure to the provision of new and upgraded maternity wards, health centers, hospitals and ambulances under the project. 3.16 One benefit of the social welfare component of the Bank-supported MTIP has been to intensify monitoring of a wide range of health indicators on the estates. This solid institutional development, coupled with efforts to assess the needs of estate workers in general and female workers in particular, has contributed to the development of a second phase for the social welfare program that has adopted beneficiary participation as its operating principle. The success of the second phase will, however, depend critically on commitment from the EMCs to improving the health and welfare of their labor force. 55 3.17 Privatization, which followed the project, has not yet further improved health indicators for the resident population. On the contrary, there has been some slippage with respect to certain indicators. Thus 4 of the 9 indicators in Table 3.2 were less favorable in 1993 than at Project Closing in 1991. It remains to be seen whether or not progress on the health front has been arrested temporarily or whether workers' health is being given less attention by the new management than it received during the MTIP.46 3.18 Estate Workers' Living Conditions. Living conditions are poor on the estates. Almost all the estate workers live in "line rooms" that are just 11 square meters in size, often have leaky roofs and lack kitchens or latrines. Water piping to common stand pipes is often in disrepair, and water is inadequate and of poor quality. Overcrowding has become more severe over time, with 4 to 6 members of a family, including married children, sharing the same room, for an average of less than 3 square meters per person. In 1983, the average floor space in estate line rooms was 4 square meters per person, whereas the national average was 11 square meters per person.47 However, some progress was made on housing during the project period: the PCR for the Fourth Tree Crops project found that the number of houses considered to be in good condition went up under the MTIP, from 33 percent in 1986 to 40 percent in 1990. More than half still required upgrading and the proportion slated for demolition remained virtually constant at 7 percent. Table 3.2: Health Indicators for the Plantation Sector, 1980-1993 Post- Crude Infant Still Perinatal Neonatal Neonatal Maternal Percentage Percentage Birth Mortality Birth Mortality Mortality Mortality Mortality Institutional Low Birth Year Rate Rate Rate Rate Rate Rate Rate Births Weight 1980 37.6 74.7 78.7 na na na 0.9 na na 1981 33.8 69.6 73.8 104.3 41.7 26.9 1.4 na na 1982 29.8 73.6 66.7 98.8 45.6 28.0 1.2 49.0 36.0 1983 32.2 61.0 63.6 86.6 39.0 21.0 0.9 52.0 35.0 1984 28.7 54.4 57.1 79.8 36.0 18.0 1.2 62.0 32.0 1985 30.6 49.6 55.8 80.8 36.0 12.8 1.2 60.8 42.0 1986 24.8 51.7 65.2 88.7 37.9 13.7 2.2 62.7 33.0 1987 23.1 52.6 61.9 90.1 36.6 16.1 2.4 66.1 24.4 1988 22.8 38.4 55.2 74.0 27.7 10.6 1.7 70.7 20.4 1989 21.4 42.6 54.0 72.4 29.4 13.2 2.0 72.6 18.3 1990 18.9 38.6 50.7 67.8 25.5 13.1 1.8 78.7 17.8 1991 20.5 29.0 44.3 57.5 20.8 8.2 1.0 83.4 15.7 1992 18.3 27.9 42.6 55.7 20.7 7.2 1.2 85.5 19.4 1993 17.2 29.4 43.6 55.7 18.3 11.1 1.8 86.3 21.6 Source: PHSWT-Vital Statistics in the Plantation Sector, 1980-1993 46. The Government of the Netherlands has commented that even during implementation of the FrC project, insufficient attention was paid to the SWP, so that it evolved more or less independently from the rest of the project, thereby contributing to decreased awareness of the need for social development (see Annex G and OED's notes to those comments in Annex H). 47. Sri Lanka Department of Census and Statistics: Economic Survey of Sri Lanka, 1981/82. 56 3.19 Targets with respect to construction and upgrading of water supply schemes were exceeded and 33,425 latrines were constructed during the MTIP. Nevertheless, water and sanitation infrastructure reached only 24 percent of plantation households in 1990. This compares to national averages of 67 percent for water and 59 percent for sanitation. 3.20 The preliminary findings of an on-going study of estate child care services suggest that facilities are generally adequate, but that the accountability of creche attendants should be improved together with their basic Tamil language skills (many of the attendants are Sinhala). Increased supervision of the creches by estate medical assistants is also warranted. 3.21 The Status of Women on the Plantations. The marginalization of Tamil estate workers together with a culture of social subordination and of patriarchal norms has made living conditions particularly difficult for Tamil estate women. Although women on average earn slightly more than men, only between 8 and 35 percent of female workers collect their own wages. These are collected by men, treated as family income rather than women's income, and frequently spent on alcohol. Purchasing food is also a male activity, which constrains the female worker's ability to determine how her earnings might be used to enhance her family's nutrition. The same difficulty arises with earnings from produce grown by women in line gardens. This is because marketing is done by men for various reasons, including culturally inspired restrictions on women's mobility, women's lack of time and men's relatively higher numeracy. To sum up, women have a limited say in the way that their earnings are spent. 3.22 At project appraisal, women were found to be actively engaged in paid labor. Sixty- seven percent of women were economically active on the estates, compared to 27 and 31 percent in the urban and rural sectors as a whole. However, trade union activity is dominated by male estate workers. Labor force participation on tea estates is also gender-stereotypical. Plucking is an almost exclusively female task. Even though careful plucking is critical in the production of quality tea, it is considered unskilled work that falls in line with alleged feminine attributes of patience, endurance and tolerance for repetitive actions. Women do work alongside men in tea factories, but other tasks such as pruning, uprooting and clearing are almost exclusively male tasks. There is much less gender stereotyping in labor assignments on rubber and coconut plantations. 3.23 Gender Differences in Work Norms. A key difference between the status of male and female workers on tea estates is in the work norms that they must fulfill to earn the minimum daily wage. Tea pluckers, who are predominantly women, are entitled to a minimum wage only if they fulfill both a plucking norm and a minimum number of hours of attendance.48 The attendance hours are generally 7:30 a.m. to 4:30 p.m., with a one-hour break, but exclude time spent transporting green leaf tea to the muster shed and weighing it. If pluckers fulfill the work norm before 4:30 p.m., (i.e. they are "efficient"), they are still required to work in the fields until 4:30 p.m. to earn the minimum daily wage. 48. The work norms depend on the condition of the fields, the variety of tea grown, seasonal variations (i.e. "lean" or "flush" conditions), but tend to be around 18kg/day in the monsoon season and as little as 8kg/day in the dry season. Any collections above the norm are treated as "over-kilos" and are remunerated at a higher rate (LKR 3.75/kg - n.b. this is far more than the LKR 1.50/kg offered for over-kilos on a private tea estate visited by the authors). 57 3.24 In sharp contrast, men are assigned tasks, such as pruning and clearing, that are judged by the estate superintendents to take only 6 hours to do, i.e. from 7:30 a.m. until 1:30 p.m.. If they finish their tasks early they may leave, and will still earn the minimum daily wage. Thus "efficient" males can earn a day's wage for only a few hours work. This has the following implications: * Male wages far exceed female wages on an hourly basis, even though daily wage rates are nominally equal. * Men are guaranteed more leisure time than are women. * Although both male and female workers are paid the daily wage for completing a task (or norm), only women are compelled to work overtime to earn their wage if they are "efficient". * Women whose opportunity cost of time spent plucking exceeds the effective wage rate on over-kilos are penalized for their efficiency in completing norms ahead of time. 3.25 Studies by the project-financed Technical Assistance Team and others have found that women's earnings have been consistently higher than those of men. Payroll data on 104 workers (9 percent) at one estate visited by the authors show that women earned an average of LKR 1,752 per month (including payment for over-kilos), compared to LKR 1,572 for men, but that this difference was not statistically significant (Annex B). On the other hand, women were a far more reliable source of income than were men.49 Furthermore, women appeared to be able to husband resources more carefully, insofar as there was a statistically significant difference in advances paid before payday. Women on average took out only one-third of their wages before pay-day, whereas men took out half of theirs.50 While the higher advances to men may have made it easier for women to wait until payday, there is anecdotal evidence that a significant portion of male workers' earnings is spent on alcohol. 3.26 Throughout Sri Lanka there is considerable resistance to improving the status of women, largely due to conservative attitudes and to concern about potential opposition to change from labor unions. The Bank's own initiative to enhance the role of women in development through policy dialogue and project support also gained momentum only after the FTC project had been approved. As a result, gender disparities have persisted on the estates, even though, as a recent OED Study notes, "[r]esearch findings have demonstrated, and in some cases quantified, the benefits from addressing gender issues", and there are significant productive efficiency gains that have yet to be exploited.51 The lessons to be learned from 49. The coefficient of variation (ratio of standard deviation to mean) on men's incomes was 0.57, or 48 percent higher than that for women (0.39). 50. Strictly speaking, the payments before payday need not be advances, insofar as payday falls on the 10th day after the end of the month and payments before payday may be far less than the accrued wages payable on the dates of the early payments. 51. Operations Evaluation Department: Gender Issues in Bank Lending: An Overview, Report No. 13246, The World Bank, 1994. 58 plucking practices in Eastern Africa are instructive, and merit study in the context of Sri Lankan estates (Box 3.1). Box 3.1: Harvesting of Green Leaf on Commercial Estates in Eastern Africal 1. "There are no minimum hours which must be worked by pluckers - they can go home after they have plucked the minimum amount of 32kg if they wish. However, given the wages structure the incentive is for most pluckers to pick more than the average." 2. "Most major companies pay for green leaf on a piece-rate basis. Over the last decade there has been close interaction of management with pluckers, backed by intensive training based on a greater understanding of the physiology of the tea bush; which has brought about a fundamental change to the style of harvesting. The old "gang" system of a group of pluckers (about 20 to 30) under the control of a supervisor and treated as a collective entity, has given way to transferring more responsibility to the individual plucker. "Where best practices are operating, the pluckers "own" their plots in each field, which means they will always return to the same plots at each plucking round. The result is that the better the care of the plucking table and the better the plucking technique, the greater will be the benefit to the plucker in future rounds. This self-discipline creates improved consistency and quality of leaf, less petty supervision and, therefore, less friction. A mutual advantage is that pluckers accept their own responsibility to organize who will pluck their plots if they themselves are unable to do so. The "task", therefore, is to complete an area of tea within a day but the pluckers use their own initiative with regard to the speed at which they work. "Management is now able to concentrate control in ensuring that the timing and overall organization of harvesting is correct, so the pluckers are in the right field at the right time." B. Institutional Impact 3.27 The SRR Project's Impact on the Ministry of Plantation Industries. Extension services were reorganized during implementation of SRR I. The Advisory Services Department was detached from RRISL to become a department in its own right, subsequently generating a successful training program for extension officers and farmers. However, ASD remains understaffed and the return of replanting inspection functions to the Rubber Control Department (RCD) in 1984 reduced farmers' incentives to listen to the extension officers. A Processing Advisory Division was established within ASD as planned under the project, with a 59 view to improving the quality of processing. However, it focussed on upgrading selected GPCs, even though their throughput was declining, and neglected to provide assistance to private processors. These factors all contributed to shortcomings in the impact of ASD at the field level (para. 2.38). 3.28 The research component was designed to provide only limited support to RRISL (laboratory equipment, vehicles and 5 fellowships), because the British Government was planning to fund a major investment program at the institute. Although RRISL was an implementing agency under the project, only passing reference was made to it in the six-page section of the SAR on project organization and management. It was thus accorded relatively little importance in the design of the project and insufficient attention was paid to supervising the institute during implementation. 3.29 With hindsight, the lack of attention to RRISL's work was unfortunate. The institute's failure to develop an adequate variety of high quality clones is a major shortcoming of the project. Of the three locally developed clones that it disseminated in the early 1980s, only one proved to be of adequate quality (RRIC 100). A second one (RRIC 102) produced latex that commanded lower prices because of its yellowish tinge, and the disastrous consequences of the Corynespora leaf spot attack on RRIC 103 were mentioned earlier (para. 2.10). Following the attack, the Bank obliged RRISL to place greater emphasis on testing foreign clones for their suitability to local conditions, as part of the second SRR project. 3.30 The Bank did play an active role in technology transfer earlier in the project, both by funding study tours and by encouraging the adoption of green budding as opposed to traditional brown budding techniques. The introduction of this technique and support for the development of private nurseries in the course of the project were unplanned but extremely positive institutional developments. 3.31 Administration of the RRF improved considerably when RCD hired additional staff and began to computerize the processing of grant applications with project support. Processing delays were reduced from 6 months to 3 weeks, and the annual ratio of replanting grants to applications received rose from 74 percent in 1983 to a peak of 91 percent in 1988, before declining to 83 percent in 1992 (the last year for which data are available). Nevertheless, the full potential of the computerization remains to be exploited.52 3.32 Rubber Policy and Planning were to be strengthened by the establishment of a Rubber Policy and Planning Unit (RPPU) and a Rubber Policy Review Committee. These were established at the Bank's insistence after some delays, but were essentially dissolved within a year, due to both non-cooperation by other agencies involved in the industry and conflict with other parts of government arising from policy decisions that cut across ministries. In 1985 a Tree Crops Working Group was established in MOF with a broader mandate than the RPPU. Its responsibilities included recommending changes in export and ad valorem taxes to maintain remunerative producer prices, although it clearly fell short in this regard (para. 2.31). In 1989 it was wound up when MOF established a Core Group to advise on restructuring the plantation 52. An internal communication to OED from regional staff, dated June 12, 1995, notes that the computers were underutilized because their programs were not sufficiently user-friendly. This problem is being addressed under the Second SRR project. 60 sector (para. 3.34). Although the Rubber Development Department (which merged RCD and ASD functions in 1993) includes a Directorate for Market Intelligence and Planning, the major policy coordination role intended for the RPPU is not being fulfilled. 3.33 The FTC Project and Steps Leading up to Privatization. The Fourth Tree Crops project had already been approved when GOSL seriously considered privatizing its holdings in the sector. In 1989 the Credit Agreement was revised to allocate US$500,000 for a privatization study and GOSL officials, Bank staff and external consultants began to develop a strategy for privatization. The Bank eventually declined to support the privatization program favored by GOSL, since it did not go far enough, and suspended preparation of the proposed follow-on Tree Crops Restructuring project (TCR). 3.34 Following a mid-term review of the FTC project in September 1988, Bank staff strongly encouraged GOSL to establish a senior Core Group to solve the growing financial crisis at JEDB and SLSPC. By that time, key financial ratios had reached alarming levels (para. 2.26 and Annex C). MOF agreed to this recommendation and established a Core Group early in 1989. The Core Group focussed on financial restructuring, since it was not within the group's mandate to consider fundamental changes in management or corporate structure. The Cabinet approved the group's recommendations in August 1989, but parliamentary ratification and resistance at JEDB and SLSPC delayed implementation. MOF also delayed action on converting debt to equity until it obtained a firmer commitment to corporate restructuring from other parts of government, notably MPI and the Presidency. 3.35 An immediate transition to private ownership of the estates had already been ruled out, although a five-year phase-in period during which private companies would manage government estates was still under consideration. The Minister of Plantation Industries at that time favored privatization and reorganized the estates into clusters to facilitate the move. Furthermore, an agreement with labor representatives was concluded in 1989 that delayed implementation of the exorbitant six-day work week guarantees. However, early in 1990, a new minister was appointed at MPI. He reversed the organizational changes introduced by his predecessor, instructed his ministry to adopt a negative stand towards the privatization process and the Bank was informed that the privatization consultancy had been canceled. 3.36 On the other hand, the MOF continued to push for privatization in the light of the massive drain on public finances, and established a Task Force on Restructuring in May 1990. Although the Task Force had high level support, its terms of reference made only an oblique reference to "..appropriate structure, organization and management of the two corporations..", due to the political sensitivity of the privatization issue. Nevertheless, the Task Force proceeded to develop a strategy for restructuring the industry. The Bank provided low-profile support for this initiative in order to avoid being seen as instigating the restructuring effort. However, it linked release of the second tranche of an Economic Restructuring Credit (Cr.2128-CE, approved in May 1990) to progress by the Task Force. 3.37 A major preliminary finding of the Task Force was that the size of the two corporations and the long and extremely wide span of control were a severe hindrance to efficient operation. Thus a feature common to all the alternatives considered by the Task Force, was to restructure the two corporations into smaller, more compact and manageable entities, independent of each other with substantial delegation of authority to these smaller 61 units. Initial proposals were based on the 12 existing regional boards, although by June 1991 the number had risen to 22. The Task Force recommended that: government estates be leased for 99 years to 22 new publicly-owned regional plantation corporations (RPCs), rather than transferred outright; ownership be transferred to management companies in the medium term;53 private management be introduced from the outset, via 22 estate management companies (EMCs); JEDB and SLSPC retain control of the 50 least viable estates; and control and oversight of the restructuring process be transferred from MPI to a separate unit responsible to the Treasury. 3.38 Since these proposals had to be further detailed, a second phase of the Task Force was initiated in 1991. A Plantation Restructuring Unit (PRU) was established within MOF with a Steering Committee to take key decisions, supported by a Secretariat to interface with teams of consultants. The Bank helped GOSL secure US$1.3 million in funding from the Japanese Government in June 1991 to finance four major studies: preparation of management contracts and open bid documents; valuation of estates' assets; taxation policy, and human resources. 3.39 There were significant disagreements between the Bank and the PRU throughout 1991, especially regarding the influence of the PRU Secretariat (hereafter the PRU) on the content of the studies. GOSL criticized the quality of the valuation study and neglected the taxation policy study. The Bank considered the valuations to be satisfactory, although it was critical of the quality of the related company prospecti, prepared by the same consultants. The human resources study was not undertaken (in spite of the Bank's insistence) because it would have had to deal with the sensitive issue of retrenchment. The absence of a human resources study denied the Bank a useful vehicle for policy dialogue on the question of labor distortions. Finally, an important study on bidding documents and management contracts was completed by consultants and was used to guide the privatization process, the PRU's attempts to steer the study's findings greatly impeded the consultants' work. 3.40 By December 1991, commitment to eventual privatization of ownership had faded. Bank management decided that they would not adopt the East African gradualist approach of the 1970s and would insist on a firm, time-bound commitment to privatization as a condition for approving the proposed sectoral adjustment (TCR) credit. In February 1992 the decision was taken not to proceed with the credit, since GOSL refused to commit to anything more than privatization of management. The Bank continued to support the study process. 3.41 Although the original intention was to open the bidding process for management contracts to foreign companies, by December 1991 GOSL had decided that any foreign bidders must not only bid in conjunction with domestic companies, but that the majority partner had to be Sri Lankan. After the prequalification round of bidding, foreign firms were disallowed entirely. By May 1992, negotiations had begun with the 22 winners that had been selected on the basis of management skills, assets, liquidity and management fee expense (expressed as a share of profit). Five-year management contracts were signed with the 22 EMCs, beginning in June 1992, to manage the 449 estates that were leased to the RPCs. JEDB and SLSPC 53. It's original suggestion that privatization take place within two years met with staunch opposition, and earlier support from the Presidency waned after a political crisis in the Summer of 1991. 62 continued to operate the weakest 50 or so estates and retained the central staff and most of the debts of the old corporations. 3.42 To sum up, the FTC project did not include privatization as an objective at appraisal, but privatization became the most important institutional development issue under the project. Together with other Bank operations (including the proposed follow-on TCR project and the Economic Recovery Credit) the FTC project served as an important vehicle for policy dialogue with GOSL, and considerable staff-time was devoted to the privatization issue during implementation. In the end, the Bank's efforts to secure a time-bound commitment from the Borrower to the privatization of ownership were frustrated. The next chapter explores the reasons for this. 63 4. The Evolution and Consequences of the Privatization Strategy 4.1 A successful privatization process is characterized by a few common principles.54 Those relevant to the Sri Lankan experience are: i) transparency and fairness; ii) the support of stakeholders; iii) political popularity, and iv) governance. An analysis of the project experience and its aftermath reveals, with the benefit of hindsight, that some of these principles were followed whereas others were not. Some progress towards privatization has been made, but much remains to be done to complete the process. A. Transparency and Fairness 4.2 Procedures must be put in place in order to achieve fairness and transparency in the privatization process. This ensures that rent-seeking by influential parties is minimized and that assets, or in this case the management of assets, are transferred to the most qualified private sector candidates. 4.3 On balance the privatization of management was achieved fairly and transparently. About forty companies were pre-qualified, which reduced the likelihood of collusion in the bidding process. All pre-qualified companies were asked to name the 3 RPCs that they were most interested in managing. The resulting 120 expressions of preference were distributed over the 22 RPCs in such a manner that there were about 5 candidates per RPC and that each candidate was able to bid on at least two of its three top choices. An external consultant was hired to monitor the PRU's evaluation of the bids, in order to ensure that points were assigned fairly with respect to the criteria for selection of EMCs. The criteria themselves were largely based on a key study by external consultants. Finally, Bank supervision can be credited with playing a major role in ensuring that the process achieved the degree of transparency it did. 4.4 There were, however, also lapses in the process.55 Perhaps the most serious one involved two groups of high quality estates. In January 1992 they were leased for 30 years to private Sri Lankan and Indian interests with considerable status and influence. These leases were much more attractive than the ones put up for open bid. The argument given at the time was that "it would moderate public opinion if a respectable firm was given a contract as well as one viewed as being of favored status."56 The two private sector groups were required to improve performance, subject to stiff penalty clauses if they failed, and to pay a fixed income 54. 1. Lieberman and J. Nellis: Russia: Creating Private Enterprise and Efficient Markets, 1994. 55. For example, the Bank insisted on the use of one consultant firm for the study on bids and management contracts, whereas the PRU favored another. GOSL eventually acceded to the Bank's request, but commissioned a second study with USAID support to study the same issues. The Bank attempted to block the USAID funding, but USAID provided the PRU with a grant in December 1991. Other examples include references in Bank tiles on the FTC and proposed TCR projects to alleged manoeuvreing by ministerial staff to ensure that they obtained influential positions following the privatization, especially on supervisory boards. 56. Confidential letter to Bank staff, dated January 30, 1992. 64 to the EMCs that managed the RPCs from which the estates were drawn. In practice, it has proven extremely difficult to secure payments from the lessees. 4.5 The exclusion of foreign firms from the bidding process was another major lapse in transparency and fairness, particularly since the policy on external participation was reversed after invitations to prequalify and bid had been published prominently in international journals. With 70 foreign firms expressing an interest and several of them preparing bids, the policy reversal clearly damaged the government's credibility, and could dampen the interest of foreign companies in investing in Sri Lankan plantations in the future. The decision was also a departure from Sri Lankan policy in other sectors, where roughly one-quarter of investment in privatized enterprises came from foreign sources.57 4.6 Transparency and fairness are required not only in the privatization process, but also in the contractual agreement. In practice, GOSL has interfered with the management of the RPCs, after signing the management contracts, in ways that have made it much harder for the EMCs to generate profits from the RPCs. These issues are treated below in the section on governance. 4.7 Labor policy was not treated transparently during the privatization process. Estate labor unions had acquired considerable political influence by the early 1980s (para. 3.6) and the plantation industries were also a significant source of employment for the civil service. Thus in order to allay fears that the privatization would lead to massive retrenchment, GOSL announced that there would be no lay-offs. EMCs were required to provide employment for all regional and estate level staff associated with their respective RPCs. In practice, GOSL has generally turned a blind eye to the relatively high staff reductions since 1992 (para. 3.9). However, GOSL reckoned that transparency with regard to retrenchment would have rendered the entire privatization process politically infeasible. This of course raises the issue of stakeholder support. B. The Support of Stakeholders 4.8 The principal stakeholders in the privatization were: GOSL's Ministry of Finance; GOSL's Ministry of Plantation Industries; the central, regional and estate management staff of JEDB and SLSPC; the estate laborers and their union representatives; foreign and domestic private companies; tea shippers and exporters; tea brokers; transporters and dealers; and international donors (including the Bank, ADB, and the Governments of Norway, the Netherlands, the United States and Japan). A common agreement and understanding was not established amongst these disparate stakeholders and as a result the necessary commitment to a decisive, time-bound privatization strategy was not secured. 4.9 The key decision-makers in this process were the Presidency and the Ministries of Finance and of Plantation Industries. Their ideas found expression in the proposals of the Task Force on Restructuring. These proposals clearly also reflected the views and pressures of powerful interested parties (paras. 4.12 and 4.13). In sharp contrast to the GOSL Task Force 57. Operations Evaluation Department: World Bank Assistance to Privatization in Developing Countries, Report No. 13273, The World Bank, 1994. 65 perspective, the Bank's perspective was one of long-term maximization of benefits for the whole industry. The Bank was the main source of external guidance regarding the process, and was prepared to commit funds for an adjustment credit in support of the restructuring of the tree crop sector. 4.10 While differences can and often do exist between major parties to a privatization, a convergence of objectives and approach is required in key areas. The columns below highlight the main differences and similarities between the Bank's and the GOSL Task Force's objectives and approach to privatization of JEDB and SLSPC: The Bank's Objectives GOSL's Objectives * Increase operational efficiency. * Increase operational efficiency * Halt the drain on the public * Halt the drain on the public resources. resources * Transfer ownership to the private * Retain ownership of the estates sector. * Inject greater dynamism / * Ensure that privatization is responsiveness in the sector. politically acceptable and avoids major disruptions * Improve the financial reporting * Privatize management to improve system and financial control of the financial control and labor companies. efficiency The Bank's Approach GOSL's Approach * Undertake a detailed valuation of * Undertake a detailed valuation of the 22 RPCs with a view to selling the 22 RPCs as a political them. safeguard and to help prevent stripping of assets * Prepare a taxation reform study * Suspend the ad-valorem sales tax with a view to eliminating the tax and export duties temporarily in burden on the industry. order to boost the industry * Prepare a human resources study to * Devolve the labor issue to EMCs propose solutions to labor and avoid preparing a human distortions. resources study 66 The Bank's Approach (Cont.) GOSL's Approach (Cont) * Sign long-term management * Sign short-term, renewable contracts with qualified EMCs. management contracts with qualified EMCs * Accord EMCs the right to buy into * Retain ownership of all land and the RPCs, so that the transfer of avoid the transfer of RPC assets ownership is achieved within a (including land leases) to the given time-frame. private sector * Permit foreign firms to bid, in * Preclude foreign ownership of Sri order to attract skills and capital Lankan plantations 4.11 There were clearly major differences in the objectives and the approach favored by the Bank and GOSL with regard to privatization. In 1992, the GOSL approach was implemented and the Bank withdrew its support for the proposed TCR credit. The key discrepancy that triggered the Bank's disengagement was GOSL's reluctance to commit to the transfer of estates to the private sector. GOSL never seriously considered selling the estates, arguing that to do so would contravene existing laws governing landholdings. A less widely expressed but equally important reason was that the sale of land to private estates or to immigrant workers might raise considerable opposition from the families of smallholders who were dispossessed over 100 years ago. The concept of leasing plantations to private interests was considered but later dropped. Long-term management contracts were also considered, but then uncertainty regarding the EMCs' management skills led GOSL to opt for renewable contracts that were contingent on performance in the first five years. 4.12 The approach that was eventually adopted reflected a balancing of interests and pressures from the most powerful groups. Central, regional and estate-level staff were ambivalent towards privatization, as were estate laborers. On the one hand, there was a clear recognition that the future of the employees hinged on the future of the estates, and that this was likely to improve with privatization. On the other hand, there was concern that privatization might lead to retrenchment of staff and labor. Estate laborers were also concerned that privatization might lead to more demanding work norms and uncertain tenure of homes on the estates. Consequently, GOSL guaranteed employees continued employment by retaining the weakest JEDB and SLSPC estates, as well as by stipulating in the management contracts that EMCs were obliged to retain all employees assigned to their RPCs. The retention of weak estates went only half-way toward the Core Group's recommendation of segregating and disposing of non-viable estates and entailed a continued fiscal burden for GOSL. However these policies were backed by labor, after a leading estate labor union publicly announced its support in 1991 for the privatization of management. Estate labor unions also pressed for worker ownership of line houses, but this was resisted by GOSL and by the new management.58 GOSL also tacitly assented to sharply increased voluntary retirements after EMCs assumed responsibility for management. 58. De facto, workers are assigned line houses that they and their families live in even after the workers have retired, although de jure the properties belong to the estates. 67 4.13 Tea brokers and buyers also had a major influence on key aspects of the privatization. The first was the exclusion of foreign bidders and the second was the retention of limits on sales of tea outside the auction system. These are capped as a proportion of production (10 percent until 1993, 50 percent thereafter) and are reviewed for their "appropriateness" by the Sri Lanka Tea Board (non-auction sales are still less than 10 percent, in spite of the relaxation of the official cap). Tea brokers and buyers clearly have a strong vested interest in maintaining the auction system, which is the world's largest for tea. Brokers gain a one percent commission on all auction sales, plus income from charges related to storage and other services. There are only half a dozen major buyers, and there have often been allegations of collusion. While there is no direct proof of this, the authors were informed both by government and by private estate operators that the direct sale price exceeds the auction price by as much as LKR 30-40/kg. These figures are supported by data on FOB prices and Colombo Auction prices (Figure 4.1). In 1993, tea buyers' margins (net of cess payments) were 22 percent of the FOB price, far exceeding buyers' margins on rubber exports, for which only one-quarter of production passes through the auction system. Admission of foreign firms to the bidding process would clearly have increased direct sales and reduced brokers' and buyers' earnings. Removal of the controls on non-auction sales would probably have had a similar effect. Figure 4.1: Tea Producer, Broker, Buyer and Fiscal Margins Expressed as a Percentage of the FOB Price 100% - - 90% - Duty 80%- Cess 70%- Exporter Sales Tax 60% - Broker EN, Producer 20% 30% 80 81 82 83 84 85 86 87 88 89 90 91 92 93 Source: The Pocket Book, JEDB/SLSPC financial statements and mission interviews. 68 4.14 There appears to have been little consultation with other stakeholders, e.g. local transport companies, packagers, tea chest suppliers and other input suppliers. At a more general level, consumers and taxpayers appear not to have been informed throughout the privatization of Sri Lanka's largest industry. C. Political Popularity 4.15 In the light of the importance of the tree crops sector to the Sri Lankan economy, it was important to build up broad political support for privatization. However, the GOSL made only a modest effort to educate the general public on both the process and the impact of privatization. There is no indication of plans or a budget for a public relations campaign in Bank documents.59 4.16 Two shortcomings stand out with regard to dissemination. The first is that no serious attempt was made to address social issues related to privatization. No provisions were made to educate workers and staff at the plantation level. MPI did issue a press release in May 1992 in a question and answer format that explained why the privatization was necessary. However, only 3 of the 23 questions were related to the social impact of the restructuring exercise. The answers to these three questions were cursory at best and could not have placated the concerns of the large number of families living on the estates or in neighboring villages, who would be affected by the process. The phasing of the privatization process and its possible social impact was never raised or discussed with those who would be involved. 4.17 The second shortcoming is that privatization was generally motivated by, and portrayed as, a response to an immediate fiscal crisis, rather than as an opportunity to create longer-term benefits. The positive case for privatization has still not been disseminated widely in Sri Lanka. This is not an uncommon situation. An OED study on privatization reports on a survey of Bank task managers regarding Borrowers' motivations for privatization: "Reducing the fiscal deficit was ranked first by 39 of the 119 managers who responded in assessing the actual state of affairs in 137 country operations-despite the fact that several Bank papers on the subject (including the 1992 Second OED Review of SALs and SECALs, p. 104 de- emphasized fiscal burden as an important motivator for public enterprise reform." D. Governance 4.18 The transition to private-sector management was greatly complicated by a crisis of governance that has characterized Sri Lanka since the early 1980s.61 The outbreak of ethnic violence in the north of the country was followed by violent conflict in the south in the late 59. Regional staff have informed OED that the PRU had budgeted funds for a public relations campaign targeted at key stakeholders (JEDB/SLSPC management, staff and workers), but that in the end the relations effort was limited to a couple of seminars (Internal memorandum, dated June 21, 1995). 60. Operations Evaluation Department: World Bank Assistance to Privatization in Developing Countries, Report No. 13273, The World Bank, 1994. 61. Governance capacity can be defined as the ability to coordinate the aggregation of diverging interests and thus promote policy that can credibly be taken to represent the public interest (Leila L. Frischtak: Governance Capacity and Economic Reform in Developing Countries, World Bank Technical Paper No. 254, 1994). This is not easily done if the state apparatus is overgrown or over-captured by powerful (private and government) interests. In certain cases, crises of governance may become so severe that the state's incapacity to deploy power makes it difficult to provide law and order. 69 1980s that nearly brought the country to a standstill. In 1991 there was an attempt to impeach the President. In 1993 he was assassinated. There ensued other killings of senior government officials (including two, both of whom had at some point served as Minister of Plantation Industries). Although disturbances in the south were firmly suppressed by 1990, the conflict surrounding Jaffna province is still unresolved. 4.19 Several key decisions must be seen in the context of this crisis of governance. For example, estate wages started increasing rapidly from 1984 onwards, i.e. one year after a major eruption of ethnic violence in Jaffna. These increases, coupled with employment guarantees, constraints on labor transfers between estates and other labor restrictions, became increasingly inconsistent with financial viability for the plantation corporations. However, they reflect the key political role that labor unions have played during the past decade. 4.20 By 1989, the real choice was not whether to restructure or not to restructure, but rather how to go about restructuring the industry. The weakness of the executive at a key juncture in 1991 diluted GOSL's commitment to a time-bound strategy for transferring assets to the private sector. This weakness coincided with a rapid turnover of the Bank's regional management team. Three different Bank directors and division chiefs were involved in the privatization process over a two-year period. This reduced the Bank's ability to respond quickly and to influence and support GOSL at the highest levels. 4.21 The solution that emerged was a highly unusual management contract approach (Box 4.1) that enshrined labor distortions, precluded foreign involvement and retained marketing controls. The latter two constraints reflect the entrenched interests of brokers and buyers (para. 4.13).62 4.22 GOSL's interference in management decisions has continued since the June 1992 privatization of management. The most damaging intervention was the approval of a 30 percent across-the-board wage increase for estate labor in December 1992. The first part of the increase was effected in January 1993, but when GOSL required the EMCs to implement the second part a few months before the parliamentary elections in August 1994, the EMCs threatened to renege on their contracts. Clearly, the effects of the crisis of governance are still being felt in the tree crops sector, notwithstanding the privatization of management. This raises serious concerns about the sustainability of the industry under the management contract approach that has been adopted to date. E. The Management Contract Compromise 4.23 Issuing management contracts was a compromise, rather than an optimal solution to the problem of improving the efficiency and financial performance of JEDB and SLSPC. This does not mean that management contracts cannot be effective solutions to improving efficiency-they often do help to overcome many of the problems of centralized, bureaucratic decision-making that is common in public sector enterprises (see Box 4.1). However, management contracts are most effective when the private sector managers are granted a large degree of autonomy and adequate incentives. Neither of these conditions have been met in Sri Lanka. 62. The long term leases signed in January 1992 (para. 4.4) should also be viewed in the context of over-capture by influential private interests. 70 Box 4.1: A Brief Overview of Management Contracts I. Management contracts were first introduced in the 1940's by the Hilton hotel chain within the United States. They came to be used more widely only in the 1970s, when private investors in hotels around the world sought to avail themselves of the name recognition, brand loyalty and reservations network of established hotel chains. Management contracts are now the predominant contractual arrangement in the international hotel industry (62 percent), far outstripping franchises (28 percent), leases (5 percent) and direct management by owners (5 percent). 2. There has been little reliance on management contracts outside of the hotel industry. They have been used to a modest extent for water utilities (between French utilities and Francophone African ones), sugar companies and lately power companies (for independent power projects). They have not caught on because implementing the contracts can be costly, there are few management companies with adequate skills, and owners fear that their companies' assets might be stripped. Poland's strategy of relying on management contracts to accelerate the privatization of restructured state enterprises has met with few takers, due to perceived risk on the operators' side as well as risks associated with finance and governance. 3. Management contracts in effect throughout the world have several features in common: a Operators are rewarded for their performance via a combination of fixed and performance-related fees. The former generally cover fixed operating expenses (mainly salaries). whereas operators' profits are derived from the performance-related fees. These fees are usually related to net profits. o Investment and working capital requirements are often met by the owners. o Operators have the option, or are required, to take a small equity position in the overall company. 4. International donors have balked at financing the significant transaction costs associated with management contracts. There are only a few exceptions. The AMSCO (African Management Services Company) was set up in the late 1980s with the help of the International Finance Corporation and was financed mainly with bilateral funds. AMSCO signs management contracts with privately owned African companies and provides them with supplemental management support. In Asia, there is only one major management contract that has been in effect for some time: it governs the Light Rail Transit Authority (LRTA) in Metro Manila, whiclh began operations in 1984. The decision to follow this route was influenced by Metro Manila's power companr, which originally controlled the management company. In practice, there is little distinction between the management company and the Government owners. LRTA is not making a profit, but is well managed, has an extraordinarily high ridership and is earning a positive net operating income before debt service. The Philippine Government recently considered fully privatizing the LRTA, but postponed a decision when additional concessional financing was made available by the Government of Japan to fund the expansion of the LRTA system. 5. The international lending community has tended to view a managemrent contract as an interim step to full privatization. It has considered such arrangements to be compromises, rather than optimal solutions. It has supported the use of management contracts only in situations in which immediate privatization has not been a politically viable alternative. Sri Lanka is an example of such a situation. 6. Sri Lanka's approach to management contracts has been virtuallN unique in four key respects: o Sri Lanka is the only country outside of Eastern Europe that has relied on management contracts as part of an organized strategy for privatization. o Sri Lanka is the only country that has barred foreign firms from bidding for a management contract. o Instead of negotiating each contract on a case-by-case basis (as is common e.g. in the hotel industry). GOSL adopted an open bid procedure (typically used for full privatization) to select the EMCs. o GOSL has to date denied EMCs the option to take an equity share in the RPCs they manage. Source: Authors' research 71 4.24 Some of the deficiencies of the process that generated the management contracts have been described in the previous sections of this chapter. The most critical one was the lost opportunity to re-introduce foreign financial resources and technical and managerial expertise into the industry. Most of Sri Lanka's largest private companies had little or no prior experience with estate management. Therefore they generally hired former JEDB/SLSPC staff to manage the estates. However, while many of these staff were highly competent managers or supervisors, they typically lacked the private sector/marketing expertise that was sorely needed in the sector. On the financial side, the largest private sector companies were roughly ten times smaller than the RPCs that the winning bidders would manage. This limited the financial contributions that they could make to the sector and also the relevance of their management experience. 4.25 Another major shortcoming is that the process was not governed by an overall privatization action plan. In spite of the work of the Task Force, major elements of the privatization strategy were not adequately considered. These included: i) the incongruity between reliance on management contracts and attracting new sources of funding; and, ii) the absence of clear linkages between the use of management contracts and the valuation of estates. 4.26 While asset valuations are often prepared prior to a sale of assets, they are rarely considered prerequisites for the issuance of management contracts. However, the Bank had a number of good reasons for insisting on a valuation of JEDB's and SLSPC's assets. First, the value ascribed to the two corporations' fixed assets in their financial statements was unrealistically low; second, opening balances of assets and liabilities had to be prepared for the 22 newly-established RPCs, third, the Bank shared GOSL's concern about the possibility of asset stripping by the management companies. Finally, although GOSL was leaning towards the privatization of management without any transfer of ownership to the private sector, the Bank was preparing for the possibility of such a transfer within the following two or three years. The valuation of assets was considered essential for transparency in the privatization process. A team of consultants was hired to conduct a thorough valuation based on both an assessment of physical assets and a discounted cash flow approach. The Bank also committed considerable staff time to monitoring the valuation process. However, in the end the private companies that bid for the management contracts rejected the valuations because they did not reflect the bidders' risk perceptions or their concerns regarding the quality of the estates. Furthermore, GOSL also rejected the valuations, and the opening financial statements for the 22 RPCs failed to include fair assessments of the value of the estates under RPC control. 4.27 In addition to weaknesses in the process, the contracts themselves were marred by design failures. These failures severely constrained the scope of EMCs' decision-making and reduced their incentives to enhance the performance of the RPCs . The main shortcomings were: The initial contracts were for only five years, which acted as a disincentive for EMCs to plan longer-term developments. Because of the gestation period for tree crops, the EMCs were not assured of an opportunity to recover the costs of field investments financed with their own resources. The lack of security for EMCs was increased because they were not given the option to purchase shares in the RPCs. Although the possibility of granting EMCs such an option resurfaced in April 1994, it was postponed due to electoral considerLtions. 72 * The contracts required the creation of new management companies, to be held entirely by the winning bidders. The newly created EMCs have virtually no assets, and therefore are unable to borrow directly from the banking system. * The privatization did not lead to new sources of financing for the industry, only to the hope that expenses would decline and that the pressure on existing sources would therefore be relieved. In practice the scope for reducing costs has been limited and GOSL has had to tap into the Employees' Provident Fund, (since GOSL has a large fiscal deficit and the banking system is already overexposed to the sector). * EMCs were granted negligible formal control over the deployment of labor. They were obliged to absorb all regional and estate level staff and labor associated with the transferred JEDB and SLSPC estates. Many of the regional staff have considerable plantation experience but lack marketing and financial management skills. The EMCs cannot relocate labor-not even temporarily--from surplus to deficit areas, nor can they terminate staff without GOSL approval. * EMCs have virtually no control over labor wage rates. Until 1984, negotiations took place under the oversight of a wages board based in the Ministry of Labor. Since then, high-level executive decisions, influenced by powerful unions, have determined wages and employment conditions. This situation has continued even though management of the estates has been privatized. * EMCs cannot optimize the value of land. They cannot allow unproductive tea estates to be left fallow, nor can they readily convert them to alternative uses, such as cash crops, golf courses, resorts, etc. * EMCs cannot sell assets without GOSL approval, or buy assets worth more than US$2,000 without GOSL clearance. While the PRU has approved most requests, the process is overly bureaucratic and second-guesses the EMCs. * Marketing of tea is highly restricted. Direct sales outside the auction system must be cleared by the Sri Lanka Tea Board and are less than 10 percent of total sales-although the cap was formally relaxed to 50 percent in 1993. Expenditures on overseas trips to establish contact with new markets are rarely approved by the PRU. * EMCs bear no financial down-side risk. They earn a negotiated share of profits, but all losses are borne by GOSL. This distorts incentives in favor of more risky investments. 4.28 The last of these shortcomings is attributable both to uncertainty with regard to the quality of the estates and to the crisis in governance. GOSL could not credibly commit to not interfere in key management decisions, particularly those pertaining to deployment and remuneration of labor. 4.29 The government's half-way approach to privatization has met with partial success. On the one hand there have been reductions in losses (para. 2.34 and Annex C). The EMCs have managed to curtail praedial larceny and to cut staff and labor by offering severance packages, particularly to less competent employees. At the field level, EMCs have introduced a number of improvements with regard to tea cultivation, including field-by-field fertilizer mixtures 73 based on soil and foliar analysis, rather than the TRI's countrywide standard mix; bush-by- bush application of fertilizer, rather than broadcast application; new pruning practices; and proven South Indian VP techniques, rather than TRI-recommended internodal cuttings.63 Rubber cultivation has also benefitted from field-by-field fertilizer mixtures, increased usage of rain guards, and greater use of grafted plants, rather than budded stumps. Coconut cultivation has been upgraded by the application of fertilizer, replanting and underplanting, and introduction of successful hybrid varieties that have yet to be sanctioned by the CRI. 4.30 On the other hand, the debt of the original 22 RPCs (overdrafts, long term loans and debentures) has increased from LKR 658 million in December 1992 to LKR 3.5 billion in June 1994 (Figure 4.2).64 Even though operating losses have been reduced, current performance does not inspire confidence in the RPCs' ability to repay the principal on the LKR 1.6 billion in debentures issued as of June 1994 when these begin to mature in 1998. Debt service is furthermore absorbing an increasing proportion of the RPCs' resources. For example, for the period June-December 1992, capital expenditures were 20 times higher than interest expenses, and both were at about 70 percent of budgeted rates. By January-June 1994, interest expenses had grown to equal 57 percent of the value of capital expenditures. During that period interest expenses were above budget by 11 percent, whereas capital expenditures were only 40 percent of budgeted rates. This trend is not sustainable, and calls for bolder reforms to ensure that the sector can be set on a sound financial footing. Figure 4.2: Debt Position of the 22 RPCs 2, 000 1, 500 1. 000 r (1,00 Z Cf) 0 0-1 0 (500)- (1, 000) Dec/92 Dec/93 Jun/94 Term Loans Debentures Overdrafts Net Curr. Assets Source: Annex C 63. Sepala Ilangakoon: op.cit., p.26 64. These data are based on performance reports submitted to the PMMD. No audited financial statements were available at the time of the impact evaluation mission for the 22 RPCs, which is a major shortcoming requiring immediate attention (para. 2.25). 75 5. Strategies for Sustainable Development A. Findings 5.1 Project Objectives and Sector Strategy. The Smallholder Rubber Rehabilitation project was designed to support the government's scheme to replant the backlog of over-aged, low-yielding smallholder rubber. To do so, the project aimed to strengthen the administrative capacity of agencies responsible for replanting; provide adequate inputs and incentives, improve the quality of smallholder rubber and expand the capacity for future replanting. The scale of the backlog (one-third of the rubber in private hands) and the need for an investment program to replant it had been identified in the 1979 rubber masterplan. The project was therefore highly relevant to sector objectives. 5.2 The main objective of the Fourth Tree Crops project was to reverse the decline in Sri Lanka's production of tea, rubber and coconuts by improving the performance of the plantation corporations. This was to be achieved by improving producer incentives, improving productivity, rehabilitating factories and improving estate transportation. The project also aimed to strengthen management and financial control of the corporations, stabilize lands through soil conservation and improve the health and welfare of estate workers. These objectives were consonant with those of the Medium Term Investment Plan developed by the central managers of the plantation corporations on the basis of estate-level investment proposals. In that sense, the project's objectives were highly relevant. However, the project objectives included the replanting of rubber, even though an excessive 32 percent of JEDB and SLSPC rubber stands were immature at appraisal. Furthermore, the project did not attempt to deal with the critical issue of labor distortions, which was neglected in the MTIP proposals. Thus the project failed to address one of the key factors that eventually undermined its outcome. 5.3 Achievement of Project Objectives. The SRR project largely achieved its physical objectives, albeit with a three-year delay, (Table 5.1). The only significant shortfall was with respect to the number of new Group Processing Centers, which is explained by registration delays at the Cooperative Department and by a lack of demand for GPC services. The outcome of the GPC component, together with deficiencies in the supply of planting materials, affected the fulfillment of project objectives with regard to quality. Institutional objectives were on the whole not achieved. Bank-proposed reforms to improve rubber policy development and planning were soon reversed, as were measures aimed at integrating the provision of extension services more closely to the authorization of replanting grants. The reversals were driven by administrative opposition to the changes. On the other hand, RCD's processing of grant applications was greatly accelerated via the hiring of additional staff and to some extent via the introduction of computers. 76 Table 5.1: SRR Project Key Performance Indicators Appraisal Completion Change Area Replanted (ha) 18,800 18,800 0% Percent Intercropped 11% 13% 18% GPCs Upgraded 67 67 0% GPCs Established 50 15 -70% RCD Computers 0 5 - RCD Clerical Officers 139 92 -34% ASD Extension Officers 121 77 -36% Advanced Courses/Fellowships 9 19 111% Source: PCR, Report No. 9261, pages 18-20. 5.4 The FTC project's physical achievements on the whole far exceeded appraisal targets (Table 5.2). However, a number of project objectives were not achieved, for reasons identified in Table 5.3. The disconnect between achievement of inputs and achievement of objectives points to a number of missing links between the two. These were either quality factors (poor clonal varieties, field maintenance, accounting information, etc.) or constraints that were not addressed under the project (labor distortions, management incentive systems, etc.). The relatively poor performance with regard to institutional development objectives (para. 1.16) is also not explicit in the figures since the objectives were not quantified. Table 5.2: FTC Project Key Performance Indicators Appraisal Completion Change Field Development (ha) 27,944 31,040 11%, Note I Tea: Replanting 3,116 8,178 162% Tea: In-filling 10,330 4,295 -58% Rubber: Replanting 9,644 14,927 55% Coconut: Replanting 1,469 808 -45% Factory Rehabilitation 331 408 Note 2 Worker and Staff Housing 1,141 3,838 236%, Note 3 Social Welfare - - Note 4 Creches (new/upgraded) 794 583 -27% Health Facilities 201 467 132% Water Supply Schemes 928 Latrines (new/upgraded) - 33,425 - Re-roofing (workers' houses) - 11,498 - Note 1: Includes newly planted tea and rubber, excludes diversified area. Note 2: SAR does not specify how many rubber factories were to be rehabilitated. Note 3: SAR targets exceeded by 182 percent for workers and 388 percent for staff. Note 4: Vehicles and medical staff housing not included. Source: PCR, Report No. 12045, page 18. 77 Table 5.3: Factors Affecting the Achievement of Objectives under the FTC Project Overall Principal Factors Favoring Principal Factors Inhibiting Objective Outcome Achievement of Objectives Achievement of Objectives 1. Reverse the decline in tea, Performance Reduction in export taxes Civil unrest; rubber and coconut production by did not Decline in commodity prices; improving the performance of the improve Political interference in plantation corporations management; Labor distortions. 2. Strengthen management and Financial Use of technical assistance by Rejection of TA by SLSPC; financial control of the control JEDB Radical organizational changes in corporations collapsed 1989 and 1990; Failure to appoint qualified financial directors; Inadequate follow-up to recommendations. 3. Improve producer incentives Mixed Export taxes were reduced and Limited management control over eventually eliminated labor decisions; Staff bonuses were not related to individual performance. 4. Improve productivity Labor Old seedling teas (OST) were The movement of labor from productivity replaced with VP teas surplus to deficit areas was declined restricted; Inadequate norms were set for tea pluckers; The six-day work-week law led to employment of workers in uneconomic activities. 5. Stabilize lands through soil Promising in Physical soil conservation Replanting is highly disruptive to conservation the medium measures were undertaken; soil cover in the short run. and longer OST planted in rows running term down the hillsides were replanted with VP teas planted along contour lines; Shade trees were planted in tea areas; Diversification into fuelwood. 6. Improve the health and welfare Positive Investments were identified via Dialogue with GOSL on the SWP of estate workers needs assessments, based on component was not sufficiently surveys of beneficiaries; integrated with that on other estate workers participated in the aspects of the project; construction of latrines and re- Water facilities were sometimes roofing of houses. sabotaged by workers in conflict over limited water supplies; Workers' views of the quality of health services were mixed. 78 5.5 The mixed overall performance, relative to project objectives, should be viewed in the context of the unrest and insurgency of the late 1980s and of the unforseen decline in world prices for all three commodities. However, a number of internal factors also influenced the attainment of objectives, notably political interventions in labor matters and other aspects of the management of the estates. 5.6 Returns on Project Investments. Economic rates of return were below 10 percent for both projects. The main reasons were unforeseen declines in commodity prices, lower than expected yields (for rubber and coconut) and higher than projected costs of production. Unit costs of production at both the estate and the smallholder level were driven up by real wage inflation that was not matched by increases in productivity. The Smallholder Rubber Rehabilitation project managed to boost ERRs to 4.8 percent, relative to a without-project scenario with less replanting, lower overheads and slightly lower yields, but the ERR was only 0.2 percent when compared to a scenario of no replanting. The Fourth Tree Crops project generated returns of 8.2 percent for tea, 7.4 percent for rubber and 2.0 percent for coconuts.65 5.7 Financial returns to smallholder rubber growers depended on cultivation practices and on the size of the holdings. Relative to a without-project scenario of no replanting, they ranged from 5 percent for farmers hiring tappers and not planting intercrops to 17 percent for farmers using family labor for tapping rubber, and planting intercrops.66 These returns to growers do not include benefits from replanting grants, which make all investments attractive, except the use of hired labor for all farm activities. Government estates experienced growing losses during the project period as real prices declined, productivity stagnated and real costs of production increased. These same factors will depress earnings on project investments over the next two decades. Re-estimated FRRs at impact evaluation range from 8.3 percent for rubber to 0.4 percent for coconuts. 5.8 Overall Assessment of the Two Projects. Both projects are rated unsatisfactory at impact evaluation. This assessment reverses the satisfactory ratings given at project completion, for reasons described earlier. The two projects are not likely to generate acceptable economic returns, nor will financial returns be attractive, except for certain smallholder rubber growers. 5.9 There is considerable uncertainty as to whether the benefits generated under the two projects are sustainable. Both PCRs had considered the sustainability of project benefits to be likely, but a number of factors have intervened since completion to alter the sustainability ratings. In the case of the SRR project, the follow-on SRR operation is continuing to strengthen extension services to smallholders, which should help to improve cultivation practices and therefore yields. On the other hand, increased cess rates, which are required to make the RRF self-sustaining, will adversely affect beneficiaries under the first SRR project. 65. The SAR assumed no replanting in the absence of the project for each crop. The PCR assumed a modest replanting program for rubber but not for tea (it did not recalculate the ERR for coconuts). The IER made the same assumptions as the PCR for tea and rubber, and as the SAR for coconuts. 66. Compared to the alternative replanting scenario without the project, returns are solid (14 to 33 percent) since yields would have been lower. 79 The benefits generated under the FTC project would be enhanced by privatization of ownership, a more profit-oriented investment program and better cultivation practices. On the other hand, GOSL has not yet committed itself to privatization of ownership, the burgeoning debts of the RPCs may stifle investment, and GOSL may oblige the RPCs to pay the outstanding portion of a 30 percent pay raise approved in 1992, even if labor productivity is not increased. Finally, there is the possibility that GOSL may reinstitute export taxes if the industries improve, which would adversely affect producer incentives. 5.10 Institutional development under both projects is rated as modest, relative to project objectives. Under the SRR project, there were shortcomings with regard to policy, planning, research and extension aspects of institutional development (paras. 3.27ff). On the other hand, the project played an important role in encouraging the development of private nurseries and the application of new budding technologies, both of which emerged as objectives only during project implementation. The FTC project's impact on institutional development, notably of management systems, was limited, although the establishment of an inter-ministerial Investment Monitoring Board yielded valuable information regarding the quality of project investments (paras. 1.16). 5.11 The above ratings do not reflect the FTC project's performance with respect to the objective of privatizing the corporations. This objective was only introduced during implementation, but it became the most important institutional development issue under the project. It is very hard to assess the project's overall impact on the privatization process. The objectives and approach proposed by the Bank were generally sound (para. 4.10), Bank supervision and technical support increased the transparency of the privatization process, and certain project-financed investments (e.g. in VP teas) may have made the estates more attractive to private investors. However, the Bank's capacity to influence the process might have been enhanced by the presence of a privatization expert and by less turnover of the management team at a critical juncture (1990-92), when the Borrower's resolve was beginning to weaken. Finally, a number of policymakers believed that "their backs were not up against the wall", due in part to relief provided by the FTC project funds (and the reallocation of Bank and ADB funds to the replanting component). Even though privatization was mooted as early as 1986, when falling prices cut the corporations' profits, serious action on the matter was deferred for three years. It is therefore an open question whether or not the MTIP support postponed the required restructuring of the industry. B. Lessons 5.12 Tree crops have played a major role in the development of Sri Lanka since the 19th century. The industry is likely to prosper if and only if appropriate policy measures are taken. The privatization of management has contributed to improved performance in key aspects of the estates' operations, however it has fallen short of what was originally intended and of what is required to turn the fortune of the tree crops sector around decisively and sustainably. 5.13 A comprehensive strategy, organized around a logical framework, is required in order to: i) generate sustainable growth, and ii) improve the welfare of those who earn a living from the tree crops sector. These ultimate objectives can only be achieved by galvanizing the sector via improved technology and increased factor productivity, and by competing more effectively 80 in international markets. Success with regard to these intermediate objectives in turn requires a significant injection of capital, investment in human resources ("putting people first"), reliance on the industry's global expertise, and elimination of wasteful practices. 5.14 The analysis in this impact evaluation suggests that these objectives cannot be attained under government management of the industry, nor will the fettered private management arrangement currently in place suffice. A coherent set of measures should be adopted by GOSL to remove market distortions and create an enabling environment in which the private sector can flourish. The government's full commitment to this approach is as yet uncertain, but will be essential in order to restore domestic and external investors' confidence and provide investors with appropriate incentives. The Bank and other donors can and should continue to play an important supporting role in the fulfillment of these objectives. The above policy proposals are consistent with the intentions communicated in a Policy Framework Paper for 1994-96, that was prepared by GOSL in collaboration with staff of the International Monetary Fund and the World Bank.67 Finally, the proposals are consistent with the lessons of experience drawn from the evaluation of the SRR and FTC projects. These are summarized next. 5.15 General Lessons (a) Sectoral Strategy. i) a comprehensive vision is required for the sustainable development of the tree crops sector, with attention to input supply, production, marketing arrangements and institutional support; and ii) a strategy is required that includes a complete, coherent and time-bound set of measures for realizing the vision. (b) Support of Viable Operations. In the event of sharp adverse movements in prices and costs during implementation, the Bank should re-assess economic returns to ensure that resources are directed only to viable activities. If ERRs (or FRRs) fall below 10 percent, corrective action should be taken to restructure the project or suspend it. Covenants requiring minimum rates of return for investments to qualify for project support should be enforced (c) Information and Accounting Systems. i) information and accounting systems should provide managers with accurate and timely information; ii) accounting systems should meet generally accepted accounting principles; iii) the Bank should monitor and relate its support to the quality of information and accounts that it receives, and enforce covenants pertaining to them. 5.16 Rubber Replanting Programs (a) Technology. The Bank should only support accelerated replanting programs for tree crops if the clonal material to be replanted is of an internationally 67. They are also consistent with those of the 1994 Sri Lanka Tree Crops Strategy Report, No. 12356-CE, prepared by the Agriculture Operations Division in Country Department III, South Asia Region of the World Bank. 81 acceptable standard, has been thoroughly tested and is readily available for distribution together with adequate technical support for farmers. (b) Replanting Grants. If a cess/grant system is used to support replanting, then the grant should be adjusted regularly to reflect changes in investment costs, so as to provide a minimum acceptable level of support. Cess rates should in turn be adjusted to reflect changes in the grants, and should also be assessed on domestically-consumed rubber. (c) Management of Replanting Programs. i) Attention should be paid to stabilizing replanting cycles, so that, wherever possible, the liquidity problems associated with large immature areas can be avoided; ii) attention should also be paid to the distributional implications of replanting programs. Unlike credit arrangements, cess schemes require that all (exported) rubber be taxed, even if only qualifying smallholders receive grants. Those who qualify may be wealthier smallholders with more technical support. Measures may be required to counteract this tendency. 5.17 Private Sector Participation in Tree Crop Development (a) Privatization as a Process. The process of privatization should: i) be transparent and explain why as well as what is proposed; ii) enjoy unwavering commitment from the government; iii) be open to foreign investment and expertise; iv) encourage participation by all stakeholders; v) secure popular backing, rather than just the support of vested interests; and vi) publicize the positive case for privatization. (b) Management Contracts. The design of the management contracts adopted thus far has limited their effectiveness. The contracts are short-term and grant private managers little operating autonomy. If management contracts are to be used for tree crops plantations, they should be given for an extended period of time, e.g. 50 years, and should provide substantial operating autonomy to private managers in order to encourage long-term planning and investment. Even then, they must be regarded as second-best arrangements for attracting private capital. (c) Private Capital. It was appropriate for the Bank not to support the privatization approach adopted in 1992, since it lacked a strategy for attracting private capital and was therefore unsustainable. The experience of the past two years suggests that privatization will only succeed if private managers are given the option of purchasing a substantial share of the equity of the RPCs (or are given long-term leases on the land). This will: i) enable them to borrow and invest against their shares; ii) provide them with incentives to invest in long-term projects and manage the enterprise as a long-term business; and iii) provide them with some down-side risk, thereby discouraging excessive risk-taking. 82 (d) Valuation of Assets. A simple valuation of assets was clearly warranted in order to guard against asset stripping by the management companies. However, the Bank-supported discounted cash flow analysis which aimed to inform the private sector's valuation of the estates was rejected by the bidders. This is because it was conducted from a seller's perspective and failed to reflect the market's risk perceptions or concerns regarding the quality of the estates. If and when the RPCs are privatized, it will be essential to adopt a buyers' perspective to assign a value to their assets. This will reinforce the argument for a credible commitment from GOSL to a private-sector-led approach, since GOSL's commitment will be essential to narrow the gap in (subjective) valuations between buyers and sellers. (e) Foreign Participation. The privatization of a large scale industry, such as Sri Lanka's tree crops industry, should be open to international bidders. This can: i) attract managerial and marketing expertise; ii) attract financial capital; iii) promote competition and efficiency; and iv) enhance transparency. 5.18 Removal of Market Distortions and Wasteful Practices (a) Policy and Regulatory Environment. i) the elimination of export taxes was a sound policy decision that should be maintained, together with an exchange rate policy that takes into account its effects on the tree crops sector; ii) restrictions on direct sales outside the auction system should be eliminated, in order to encourage vertical integration, the development of brand names, and price stabilization through forward contracts and reduction in the time lag between production and disposal of tea; iii) the productivity of land was kept low by restrictions on land use, especially in mid-level estates, where diversification from tea into alternative crops is most warranted; iv) research recommendations from CRI, TRI and RRISL need to be up-to-date, thoroughly tested and responsive to growers' needs so as to avoid wasteful practices, e.g. the use of inappropriate clonal varieties or application of fertilizer that is not tailored to specific local conditions. (b) Determination of Wages and Benefits for Estate Labor. Wages and benefits should be subject to collective bargaining between managers and unions. Specific contractual commitments are required from government, in this regard, to allay private sector concerns that returns on their investments might be undermined by arbitrary administrative decisions. (c) Labor productivity. Sri Lanka's wage rates are still low by international standards, but productivity is also low. Jobs can only be preserved if productivity is increased. This might be done by: i) allowing workers to move from labor surplus to labor deficit areas; ii) renegotiating work norms that have been set at unduly low levels; iii) adopting the best labor management practices employed in other countries; iv) broadening the scope of labor assignments in areas where the traditional estate crops are no longer viable; and v) proposing less burdensome alternatives to the guaranteed six-day work- week. 83 5.19 "Putting People First" (a) The Social Welfare Program. i) Needs assessments and beneficiary participation were key elements in the success of the program; ii) the EMCs have displayed at best modest interest in the SWP. This may be due to the short-term nature of the management contracts and the long-term nature of the benefits of investing in a healthy and educated work-force; iii) the continued commitment of external donors to the SWP after project closing has sustained the SWP's benefits. (b) Off-Farm Opportunities for the Estate Population. The underemployment of youth on the estates is an acute problem that calls for urgent attention. This might be done via: i) technical and skills training using existing rural and urban programs, as well as Sinhala language training; ii) home-based, income- generating projects for women; and iii) employment in the Middle East and Far East, organized through the Foreign Employment Bureau. (c) Women's Status and Living Conditions. i) Regulations requiring that wages and maternity benefits be paid directly to women are not being enforced; ii) women's work norms result in compulsory overtime that lowers their effective wage rates and does not necessarily generate additional tea plucking, nor is it required to ensure that all the fields get plucked. Indeed, by limiting opportunities for women to generate income in other activities, household earnings are depressed. This can increase pressure for higher wages. Therefore the best practices applied in tea growing countries in Eastern Africa should be piloted and then, if successful, be applied more widely on Sri Lankan estates. 85 Annex A Institutional Arrangements in the Tree Crops Sector 1. The Government Estate Sector. Until the early 1970s, tea, rubber and coconuts were grown primarily on private estates and smallholdings. The Sri Lanka State Plantation Corporation, which had been established in the 1950s, managed the production of tree crops for GOSL. 2. Following a change of government in 1972, all landholdings exceeding 20 hectares (50 acres) were nationalized. In order to manage the nationalized tea, rubber and coconut estates, the government created the Janatha Estates Development Board (JEDB) and expanded the operations of the Sri Lanka State Plantation Corporation (SLSPC). The two companies came to be among the largest plantation corporations in the world. During the 1980s, their top administrative levels were organized into government ministries, with His Excellency the President serving as Minister for JEDB and Minister for SLSPC. Following a change of administration in 1989, the Ministries for JEDB and SLSPC were reorganized into the Ministry of Plantation Industries, which had until then focussed on the smallholder sector. 3. In 1992, GOSL decided to privatize the management of most of its estates. About 90 percent of the 500 estates owned by JEDB and SLSPC were leased for 99 years to 22 newly- established, wholly government-owned Regional Plantation Companies (RPCs).68 The government then invited Sri Lankan companies to bid for management contracts for the 22 RPCs. Each of the 22 winning bidders was required to establish a new subsidiary to manage the RPC for which it bid successfully. The subsidiaries are referred to throughout the report as Estate Management Companies (EMCs). Five-year, renewable contracts were signed in June 1992 between the EMCs and their respective RPCs. 4. The RPCs share a common board of directors and are supervised by the Plantation Management Monitoring Division (PMMD) of the Ministry of Plantation Industries (MPI). This division succeeded the Plantation Restructuring Unit (PRU) of the Ministry of Finance (MOF) that oversaw the privatization. The PMMD also supervises the operation of about 50 estates that have remained under JEDB and SLSPC control. 5. Tea. The Ministry of Plantation Industries continues to provide numerous services to the tree crops sector. The principal MPI agencies in the tea sector are the Sri Lanka Tea Board, the Tea Smallholdings Development Authority (TSHDA) and the Tea Research Institute (TRI). The Sri Lanka Tea Board administers subsidies and collects cesses, monitors tea factories, promotes and markets tea, approves sales of tea outside the auction system, collects data and provides policy advice to the government. The TSHDA provides extension services to tea smallholders. 6. About 95 percent of Sri Lankan tea is marketed through the Colombo auctions, the largest tea auctions in the world. The tea is brought to the auctions either by dealers, who purchase it from several hundred private and government-owned tea factories, or by the 68. A twenty third RPC was established in July 1993. Annex A 86 factory owners themselves. Producers were not allowed to sell more than 10 percent of their output outside the auction system, until 1993, when the ceiling was raised to 50 percent. 7. Seven brokers auction the tea on behalf of the planters. They also provide godowns, arrange for sampling of the tea by buyers and offer advances to producers. The tea is purchased by buyers/exporters who are associated with a few large multinationals. Some of the tea bought at the auctions is blended and/or packaged before it is exported. The exporters pay any cess or export duties assessed by GOSL. 8. Rubber. The principal MPI agencies in the rubber sector are the Rubber Development Department (RDD) and the Rubber Research Board. The latter administers the Rubber Research Institute of Sri Lanka (RRISL), whereas the former is the product of a Bank- supported merger of the Rubber Control Department (RCD) and the Advisory Services Department (ASD). This merger was effected in June 1994. Until then, the ASD had provided extension services to smallholders and the RCD had collected cesses on exports and provided subsidies to smallholders through the Rubber Replanting Fund (RRF). 9. Less than 15 percent of Sri Lankan rubber is marketed through the Colombo auctions. The auctions have a limited number of brokers and buyers, and there have been allegations of collusion by buyers. Most of the auctioned rubber comes from government-owned estates, since dealers encourage smallholders to bypass the auction system. The dealers often provide a credit service to smallholders. On the other hand, most of their profit is made by understating the grade of rubber purchased from smallholders and upgrading it at point of sale. Dealers also obtain their rubber from government-organized Group Processing Centers (GPCs), other rubber processors or from smaller local traders, who purchase it from smallholders. a. A substantial share of smallholders' latex is processed into ribbed smoked sheets (RSS) before it leaves the farm-gate. About 20 percent is sold as latex to private and public sector factories that produce latex crepe, sole crepe, centrifuged latex or technically specified rubber (TSR). Since the quality of rubber produced by GPCs and private or estate factories is far higher than that processed by smallholders, the Bank has supported the establishment and upgrading of GPCs and latex collection centers. 10. Until 1981, GOSL had a monopoly on exports of RSS grades 1-3, which it bartered for rice with the People's Republic of China at a premium over the world price for rubber. Most of the purchasing, shipping and handling of RSS was carried out on behalf of the Ministry of Trade and Shipping's Commodity Purchase Department (CPD) by registered private dealers. CPD also operates depots that accept any RSS offered to them by GPCs, smallholders or traders, but their importance has declined since the removal of the export monopoly. In their heyday, CPD fixed a purchase price based on Singapore spot prices that provided a reference price for dealers and local producers/traders, however by 1988 CPD depots accounted for a mere 3 percent of marketed RSS. 11. Coconuts. The coconut sector is assisted via MPI's Coconut Development Authority (CDA), which controls two statutory boards: the Coconut Cultivation Board (CCB), which mainly provides support to smallholders, and the Coconut Research Institute (CRI). 87 Annex A 12. While a significant share of smallholders' coconuts are produced for home consumption, most nuts are either offered for direct sales in the marketplace or sold to local dealers who pass them on to stockists (wholesalers). The wholesalers sell them directly to marketers in the fresh nut market, directly to local processors, or put them up for sale in the Colombo auction. About 90 percent of the fresh nuts marketed by estates pass through the Colombo auction. The buyers are generally local processors, who produce copra, coconut oil, desiccated coconut or coir fibre for local retail and for export. Exports of copra were restricted until recently, in order to ensure a ready supply for the local market. Thus most of the kernel exports have been in the form of desiccated coconuts. s 89 Annex B Macroeconomic and Sectoral Data I. This annex comprises nine tables. The macroeconomic indicators in Table BI are drawn from an updated version of Table 1.1 (Key Economic Indicators) presented in the FY93 Country Economic Update for Sri Lanka (Report No. 11862-CE), prepared by the World Bank's South Asia Region, Country Department 111. 2. Table B2 presents data on export revenues from tree crops, drawn from Central Bank Bulletins and from the 1993 Plantation Sector Statistical Pocket Book (hereafter the Pocket Book). Tables B3 to B5 present key indicators for each of the three major tree crops: tea, rubber and coconuts. The data were culled from the Pocket Book, an updated version of the Sri Lanka Rubber Statistics (1991-1992) prepared by MPI's Rubber Control Department, and the Coconut Development Authority's Sri Lanka Coconut Statistics (1993). 3. Table B6 on the fiscal impact of the tree crop sector is based on calculations by the impact evaluation team, using data from JEDB and SLSPC financial statements, Performance Report Summaries presented to PMMD by the EMCs (see Annex A), and the Pocket Book. 4. Data on social indicators are presented in Tables B7 and B8. They are drawn from the Sri Lanka Poverty Assessment, (forthcoming), prepared by the World Bank's South Asia Region, Country Department III. Table B9 presents summary statistics on payroll variables, such as wages earned and number of days worked, for a sample of 104 estate workers at Liddesdale Estate, Maturata Plantations Ltd. The payroll data were obtained by the impact evaluation team in an October 1994 visit to the estate. Annex B 90 Table 1 Key Macroeconomic Indicators 1985-1994 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Prov. Population Growth Rate 1.5 1.8 1.5 1.4 1.3 1.1 1.5 1.0 1.2 1.4 National Income & Expenditure Annual GOP Growth (at 1982 prices) (%) 5.0 4.3 1.5 2.7 2.3 6.2 4.6 4.4 6.9 5.6 GNP Per Capita US $ 337 354 360 375 367 417 460 497 526 583 Investment/GDP Ratio (%) 23.8 23.8 23.3 22.8 21.7 22.2 22.9 24.3 25.8 27.1 Domestic Savings/GDP Ratio (%) 11.9 12.0 12.8 12.0 12.2 14.3 12.7 15.0 16.2 15.2 External Trade Indicators Export Volume Index (1985=100) 100.0 105.2 103.8 101.4 103.0 120.0 125.0 143.9 163.6 183.7 Import Volume Index (1985=100) 100.0 100.8 101.0 95.6 90.0 95.2 107.7 119.0 136.5 153.8 Terms Of Trade (1985 =100) 100.0 89.3 98.7 93.0 91.4 87.4 85.7 89.1 90.9 86.6 Share of Non-traditional Exports 53.1 60.4 63.6 64.0 66.7 67.7 72.9 81.0 82.0 83.0 C/A Balance (before grants) as % of GDP -9.9 -9.5 -8.0 -8.5 -7.1 -5.5 -7.6 -6.1 -5.3 -7.9 Overall BOP Surplus/Deficit USS Mn. -111 -77 -80 -86 -76 207 209 187 516 310 External Debt Service Ratio (%) 21.0 26.2 27.5 28.6 24.2 17.8 18.5 17.1 13.8 13.0 Exchange Rate (Annual Average) Nominal Average Exchange Rate (Rs/US$) 27.2 28.0 29.4 31.8 36.0 40.1 41.4 43.8 48.3 49.4 Real Effective Exchange Rate (1980=100) 116.7 103.9 93.0 90.9 86.1 87.7 92.4 93.9 93.2 95.6 Annual Change in REER (%) -6.5 -11.0 -10.5 -2.3 -5.2 1.8 5.3 1.6 -0.7 2.5 Public Finance (% of GDP) Government Revenue (excl. grants) 22.3 20.7 21.4 18.8 21.4 21.1 20.4 20.2 19.8 19.1 Gov: Current Expenditure 20.1 18.9 20.1 20.8 22.6 22.3 22.5 21.1 20.3 22.3 Gov. Capital Expenditure 14.0 14.0 12.4 13.7 10.0 8.7 9.6 6.5 7.6 6.6 Budget Deficit -11.7 -12.2 -11.1 -15.7 -11.2 -9.9 -11.6 -7.3 -8.1 -9.7 Money Credit (Annual Increase %) Growth in Broad Money (M2) 11.5 5.1 14.5 16.6 11.3 20.5 22.1 17.4 23.3 19.7 Growth in Domestic Credit 18.6 8.2 16.9 28.8 5.1 14.6 10.2 12.7 4.7 15.3 Growth in Public Sector Borrowing 32.5 10.1 23.5 37.4 5.5 4.2 -3.0 -3.3 -27.2 -4.3 Growth in Private Sector Credit 10.3 6.9 12.0 21.7 4.7 24.3 20.5 22.9 20.5 21.2 Velocity (GDP/M2) 3.6 3.5 3.6 3.5 3.5 3.9 3.4 3.3 3.1 3.0 Prices and Real Wages Annual Change in Consumer Price Index (%) 1.5 8.0 7.7 14.0 11.6 21.5 12.2 11.4 11.7 8.4 Annual Change in GNP Deflator (%) 0.7 5.5 6.8 11.5 9.9 20.0 10.5 10.0 9.7 9.5 Minimum Wage - Wages Boards (1978-100) 105.8 103.2 101.8 107.9 112.0 107.6 109.7 112.0 116.6 111.7 Government Wage (1978= 100) 121.2 117.5 109.1 125.4 121.9 113.2 113.2 106.0 114.8 115.4 Table 2 Export Revenues from Tree Crops (1990 LKR Millions) 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Total Exports 68.112 65.074 56.709 63,557 63,610 68.251 76.624 73.295 88,315 98,956 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Total Agricultural Exports 40,113 32.938 24.874 25,683 25.351 25.934 27,235 22,748 20,270 21.776 59% 51% 44% 40% 40% 38% 36% 31% 23% 22% Tree Crops 37,403 30.438 22,602 23.365 23,028 22,823 24.827 19,897 16,302 17,604 55% 47% 40% 37% 36% 33% 32% 27% 19% 18% Tea 28,753 21,569 15,401 16,461 16,680 16,599 19.797 15,821 11,633 13.737 42% 33% 27% 26% 26% 24% 26% 22% 13% 14% Rubber 6.020 4.617 4.364 4,527 5,025 3,781 3,079 2,371 2,368 2,210 9% 7% 8% 7% 8% 6% 4% 3% 3% 2% Coconut (Kernel Products) 2.629 4,252 2,837 2.377 1,323 2,443 1,951 1,704 2.301 1.657 4% 7% 5% 4% 2% 4% 3% 2% 3% 2% Rubber End-Products 225 285 409 767 1,065 1,217 1.074 1.157 2.173 0% 0% 1% 1% 2% 2% 1% 2% 3% Non-Kernel Coconut Products 1,233 1.593 1.883 1,866 1,632 2,400 1,674 1.313 1.811 1.608 2% 2% 3% 3% 3% 4% 2% 2% 2% 2% Table 3 TEA: KEY NDICATORS 1960 1961 1on0 19(3 1964 1985 196 19117 196 199 1990 1991 1992 1993 Area Planted (hctares) Total 244,706 244.919 24Z 141 23Q145 228874 231.650 222905 221.498 221,883 222,110 221,758 221,691 221,83B Private 9a349 9395 94.254 94,6B3 9364 91864 9R134 98414 911917 99,097 99,978 1002BB 111268 Government 151.357 150.961 147,807 135462 133.510 134,786 124,771 123004 122966 12i013 121.780 121,403 111,570 1CfP670 w Share of Govt Area Bearing 789% 77.7% 738% 79.9% 833% 808% 84.7% 835% 81.5% 79.9% 80.7% 79.7% 859% 927% Production (mions of kg) Total 191 210 188 179 208 214 211 213 227 207 233 241 179 232 Private 32 37 36 39 48 55 58 66 74 69 86 92 78 86 Government 163 175 147 137 161 159 153 149 153 141 147 146 105 146 Colombo Auction Sales/fotal Output 932% 950% 982% 931% 97.5% 92.2% 96.3% 976% 92.2% 936% 931% 940% 986% 92.8% BoughtTeaasShareofGovtOutput 125% 128% 11.7% 120% 123% 11.8% 11.3% 11.5% 11.7% 122% 132% 131% 158% 17.2% SrlLanka'sShareofWorldOutput 10.4% 11.2% 98% 89% 97% 95% 9.4% 92% 9.2% 85% 9.3% 95% 7.4% Average Yields (kgha) Total 782 858 776 779 909 924 948 963 1,023 932 1,051 1,086 BD6 Private 345 391 377 409 508 566 587 674 747 695 859 918 705 Incluiding Sold Tea 564 629 559 582 715 759 762 847 928 868 1.054 1,110 854 Government 1,078 1,161 996 1,014 1.203 1.178 1,224 1.209 1.246 1.143 1.206 1,205 938 1,417 Excluding Bought Tea 943 1,012 BBD 893 1,055 1,039 1,086 1,070 1.101 1,004 1,047 1.047 790 1,173 India 1.644 1,508 1,498 1,740 1,645 1.714 1,742 Bangladesh 970 032 021 875 938 824 826 Indonesia 1,790 1,057 1,56 1,324 1.572 1.608 1.645 Kenya 1,839 1.769 1,877 1,953 2.010 2177 2,237 Matawl 1,905 1,056 1,519 2114 2,024 1,946 1,929 Exports Value (UKR m) 6170 a314 8343 8296 15766 12,001 9.253 10,653 12,3D6 13,662 19,797 17,749 14,536 19.181 Volume (kg m) 184 192 181 15B 204 198 208 201 220 204 216 211 178 211 OWhichulk Tea 831% 784% 809% 729% 769% 7(12% 682% 593% 635% 630% 61.9% 64.5% 680% 61.2% OfWhIchPacketedTea 189% 187% 182% 264% 22.3% 283% 31.9% 38.6% 34.5% 355% 354% 330% 309% 355% SriLankavs.WorldExports 21.5% 21.5% 221% 181% 21.7% 20.8% 213% 206% 209% 182% 19.0% 19.5% 17.6% Indlavs. WorldFxxts 200% 2)3% 232% 29% 2')(%M 224% 20 X 210% 2t.0% 1119% 1115% 108% 1680% indonesiavs.WoldExports 7.9% 84% 7.8% 7.9% 9.1% 9.5% 81% 93% 88% 102% 9B% 103% 120% Chinavs.WorldExports 126% 108% 129% 14.3% 154% 14.4% 17.*7% 17.9% 188% 183% 17.3% 17.3% 17.4% Kenyavs.WorldExports 87% 88% 9.7% 11.5% 9.7% 132% 120% 139% 131% 14.6% 150% 184% 185% Prices (LKR/kg) FOBUnit Value 3348 3354 3502 52.0 7721 6072 4453 52.97 5595 6891 91.82 84.03 81.57 91.04 Colombo Auction, Unit Value 1836 1806 2343 4327 62.79 39.01 3060 39.X) 4277 5461 7097 5827 61.75 6888 Table 4 RUBBER: KEY DICATORS 1990 1911 192 1983 1964 1965 1986 1987 19BB 1989 1990 1991 1992 1993 Area Planted (hectares) Total 205605 205.688 205650 205589 204.293 202771 201.861 200391 199,233 199,694 197.475 195393 19a4428 Private 141,155 14a671 14f180 143,349 141,610 142832 140,760 140,201 13EI818 139,488 137,720 135185 134,644 Government 64,450 59,017 59,470 62240 62,683 59,939 61,101 60,190 60,415 60,206 59,755 59,206 58,020 Mature Area as Share of Total 855% 830% 82.9% 821% 756% 739% 73.1% 726% 739% 733% 739% 74.9% 7&0% Production (millions of kg) Total 1332 1219 1256 140 141.9 137.5 137.8 121.8 122.8 1107 1131 10a9 1061 104.2 Private 827 738 837 991 954 9i5 960 81.2 80.7 7i7 753 659 695 738 Government 50.5 50.1 41 9 409 45S 41 41 8 406 42.1 35 37.8 37 356 3014 DomesticConsumptionfrTotalOutput 131% 130% 11.7% 106% 11.0% 11.9% 159% 152% 18.9% 20.8% 258% 27.2% 31.6% Bought Latex/Total Govt Output 33% 4.3% r3% 4.8% 4.2% 4.3% 35% 24% 22% 20% 20% 1.5% 37% 46% SrlLanka'sShareofWorldOutput 35% 33% 31% 3.1% 25% 2.4% 2.1% 22% 20% 1.9% Average Yields (kg per Mature Hectare) Total 705 733 821 841 890 919 826 841 752 773 70B 725 714 Private 568 650 769 761 82 83 773 795 722 702 36 667. Government 1,097 1.019 999 1,069 959 989 945 954 820 938 870 877 877 Exports Value (LKR m) 2,590 2.887 2.323 2,852 3301 2,569 2,622 2,930 3 707 1112 3079 2660 2959 a086 Volume (kgm) 120.9 1325 131.3 1252 1262 120.4 110.0 1060 993 860 86R7 76.4 756 69.6 of which Ribbed Smoked Sheet 50.1% 535% 549% 41.3% 414% 536% 5118% 51.2% 51.6% 49.6% 558% 50.7% 48.7% 51.9% of which Latex Crepe 31.6% 259% 27.3% 495% 41.6% 282% 257% 30.9% 30.0% 29.6% 30.9% 3a4% 282% 31.4% Sri Lanka vs. World Exports 31% 28% 24% 22% 1.9% 1.6% Indonesia vs. World Exports 250% 24.8% 24.6% 237% 251% 256% Malaysia vs. World Exports 37.1% 34.6% 34.1% 331% 32.2% 2a9% Thailand vs. World Exports 152% 17.0% 173% 193% 189% 224% Export Value of Rubber End-Products (LKR m) 123 158 246 496 786 1,002 1,074 1,298 2,716 Prices FOB (Rs/kq) FOBUnit Value 21.79 17.69 22.70 26.16 2384 2384 2765 37.32 3518 3550 34.59 37.64 44.34 Colombo Auction, ASS 1 1072 1007 1043 14.66 14.94 1516 17.13 2021 24.30 2263 2294 2358 29.26 3566 Colombo Auction, ISS3 9.24 7.54 9.34 1373 1390 1546 16.49 1922 2327 21.20 2(43 223B 2653 3338 Table 5 COCONUTS: KEY INDICATORS 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Area Cultivated (OODs of hectares) Total 423.495 419.469 415.527 411.534 407,470 403,492 399,500 395,513 388,644 381,520 383,520 379.496 375,470 375,500 Private 412311 408,304 405,169 395,263 392,775 389.507 384,965 382,116 375,760 374.788 371,335 367,973 363,506 363,167 Government 11.184 11,165 10.358 16.271 14,695 13,985 14.535 13,397 12.884 12,732 12,185 11,523 t1.964 12,333 Production (millions of nuts) Total 2.026 2,258 2,521 2.312 1.942 2,958 3,039 2.292 1.937 2,484 2,532 2,184 2,296 2,164 Private 1,993 2,215 2,476 2.261 1.912 2,892 2,979 2,251 1,06 2,434 2,485 2.145 2.252 2,118 Government 33 44 45 51 30 66 6t 41 31 50 47 39 44 48 Domestic Consumption/Total Output 88 1% 06% 75 1% 753% 855% 685% 61 8% 755% 878% 763% 79.7% 822% 81 0% 854% Yields (nuts per hectare) Total 4,784 5,383 6,067 5,618 4.766 7,331 7.607 5,795 4.984 6,410 6.602 5,755 6.115 5,762 Private 4.834 5,424 6,111 5,720 4,867 7,425 7,737 5,890 5,072 6.494 6,693 5,828 6,195 5,826 Government 3,038 4,246 4,819 3.553 2,117 4,865 4.664 3.219 2,601 4.130 4,149 3,993 4,012 9,570 CoconutTriangle Rainfall (inches) 63.9 71.5 85.8 58.1 96.5 80.6 589 80.1 73.3 73.1 766 69.1 732 79.2 EXorts Value (Kernel Products, LKR m) 758 1,076 1.081 1,476 1,442 2.366 1.705 1,538 976 2,010 1,951 1.912 2,875 2,314 Total (million nuts equivalent) 242.0 439.0 628.0 572.0 2820 931.0 1162.0 5610 236.0 588.0 514.0 388.0 437.0 317.0 of which Coconut Oil 8% 38% 49% 46% 22% 57% 59% 25% 18% 40% 19% 2% 4% 7% of which Copra 1% 2% 3% 3% 4% 4% 4% 8% 12% 7% 7% 10% 7% 8% of which Dessicated Coconut 91% 60% 46% 50% 73% 38% 36% 65% 65% 50% 70% 82% 83% 78% Non-Kernel Coconut Products* 543 506 616 625 676 886 1,131 1,206 1,204 1,976 1,674 1,473 2.013 2.242 k Sri Lanka vs. World Exports 9.2% Indonesia vs. World Exports 19.9% Philippines vs. World Exports 56.7% Malaysia vs. World Exports 6.3% Prices (LKR/nut equivalent) FOB Coconut Oil 2.00 1.43 1.29 1.57 307 1 76 1.04 184 4.09 3.16 264 4.36 541 5.61 FOB Copra 3.35 4.18 3.38 3.64 6.16 2.82 1.77 1.79 3.55 3.64 3.36 4.94 6.52 6.85 FOB Dessicated Coconut 328 306 2.11 316 544 370 209 3.04 4.05 3.48 3.96 4.82 6.53 6.31 FOB fresh Nuts 358 3.33 3.65 647 358 3.04 428 5.82 554 565 6.23 8.72 10.05 FOB Unit Value, All Kernel Exports 3.13 2.45 1.72 2.58 5 11 2.54 1 47 2 14 4 13 3.42 3.79 492 6.61 7.34 Colombo Averaqe Nut Equiv. Price 126 1.46 125 222 367 186 123 244 375 267 2.75 4.08 5.45 5.85 Wholesole Price k) I resth Nuts 1.21 1.34 1.09 1.78 3.20 1.39 095 I 89 3 13 1.93 2.01 320 425 4.69 Non-kernel coconut products include coir fibre, yam, fibre finished products, shell products and other by-products. Table 6 95 Annex B FISCAL IMPACT OF TREE CROPS 198s 1981 1982 1983 19s4 1985 1988 1ee? 1988 1ee9 1eco 191 1902 1993 DIRECT FISCAL REVENUES FROM TEA Unit Value of Tea Exports (LKR/kg) 33.48 32.89 35.02 52.54 7721 60.61 4453 52.97 55.96 66.90 91.82 84.04 61.57 91.03 Total Collected by Govt (LKR/kg) 11 78 11.12 9.73 16.18 24.84 1102 6.32 7.27 5.7a 5.00 10.17 5.12 3.90 2.11 Total Collected by Govt (%) 35 2% 33.8% 278% 30.8% 32.2% 18.2% 14.2% 13.7% 10.3% 7.5% 11.1% 6.1% 4.8% 2.3% Average Duty Rate (LKR/kg) 1Q35 978 797 8.13 7.03 5.95 450 4.43 2.76 1.34 1.35 0.92 0.75 0.00 Average Duty Rate (%) 309% 29.8% 228% 15.5% 9.1% 9.8% 10.1% 8.4% 4.9% 2.0% 1.5% 1.1% 0.9% 0.0% Average Tax Rate (LK/kg) 0.52 045 0.83 6.94 16.52 3.69 0.30 1.30 1.21 2.11 5.78 1.40 1.27 0.00 Average Tax Rate (%) 1 5% 1.4% 2.4% 13.2% 21.4% 6.1% 0.7% 2.5% 2.2% 3.2% 6.3% 1.7% 1.6% 0.0% Average Cess Rate (LKR/kg) 090 088 0.93 1.11 1.29 1.37 1.53 1.54 1.80 1.55 3.05 2.80 1.88 2.11 Average Coss Rate (%) 2 7% 2.7% 2.7% 2.1% 1.7% 2.3% 3.4% 2.9% 3.2% 2.3% 3.3% 3.3% 2.3% 2.3% Volume of Tea Exports (millions Ig) 1843 192.0 181 1 1579 2042 196.0 207.8 201 1 219.9 204.2 215.5 211.2 178.2 2107 Total Revenues to Govt (LKR m) 2.171 2.135 1.762 2.555 5,071 2.182 1314 1,462 1,271 1.022 2,193 1,081 605 448 CIRECT =1SCAL REVENUES -ROM RUBBER Unit Value of Rubber Exports (LKA/kg) 21 78 1769 22 77 28.16 21 33 2383 2754 37.33 36.18 35.50 34.84 37.04 4434 Total Collected by Govt fLKA/kg) 11 47 663 7.89 9.39 3.40 4.17 8.30 9.73 10.45 10.37 8.04 5.71 1.98 Total Collected by Govt (%) 526% 375% 346% 35.9% 15.9% 175% 22.8% 26.1% 28.9% 292% 23.1% 15.2% 4.5% Average Duty Rate (Rsikg) 1081 575 6.8, 8.02 2.12 2.79 4.95 8.33 8.91 8.62.6.23 4.05 0.00 Duty Rev /Export Value (%; 49 6% 32.5% 29 9% 30.7% 99% 11 7% 17.9% 22.3% 24.6% 24.3% 17.9% 10.6% 0.0% Average Cess Rate (LKR/kg) 0.66 0.88 1.07 1 37 1.28 1 38 1.35 1.40 1.55 1.75 1.11 1.67 1 98 Average Cess Rate (%) 3.0% 5.0% 4.7% 5.2% 6.0% 5.8% 4.9% 3.7% 4 3% 4.9% 5.2% 4.4% 4 5% of which Replanting Cess (LKR/kg) 0.55 0 77 0.92 1 16 1.09 1.17 1.14 1.08 1.19 1.1a 1.27 1.12 0.79 of which Replaniang Coss (%) . 2.5% 44% 4 0% 44% 5.1% 4.9% 4.1% 2.9% 3.3% 3.3% 3.6% 3.0% 1.8% Volume of Rubber Exports (mrlIons kg) . 132.5 131 3 125.2 126 2 1204 1100 106.0 99.3 86.0 88.7 76.4 78.6 69.6 Total Revenues to Govt. (LKR m) 1,520 870 987 1,184 409 459 a66 966 899 900 614 449 138 DIRECT -iSCAL REVENUES FROM COCONUT Unit Value of Coconut Exports (LKR/nut) 313 2.45 1.72 2.58 5.11 254 1.47 2.7A 4.13 3.42 3.79 4.92 6.61 7.34 Volume of Nut-Eouivalant Exports (m nuts) 2420 4390 6280 5720 282.0 931 0 1162.0 581 0 236.0 588.0 5140 3680 4370 317.0 Total Collected by Govt (LKR/nut) Zero. Support for tre Coconut Sector is funded from General Revenues OTHER FISCAL REVENUES FROM THE SECTOR Income Tax on JED8 80 379 Income Tax on SLSPC .. .. .. 200 36 EXPENDITURES ON TEA. RUBBER AND COCONUT GRANTS Total Grants for Tea (LKR m) 10.54 11.75 1637 14.53 18.19 38.62 695 59.97 42.12 71.2 79.56 80.1 78.41 79.9 Total Grants for Rubber(LKRm) . 679 91 7 105.2 111 9 142.9 1379 129.3 113.8 122.6 154.6 147.0 129.4 1464 Total Grants for Coconuts (LKR m) 19.5 36.1 39 1 279 29 1 39 45 7 43.1 37.7 41.9 52.9 35.9 51.02 58.8 OTHER EXPENDITURES ON THE SECTOR Reported Grants to JEDB . 99 77 67 96 (59) 54 23 1,612 710 512 Reported Grants to SLSPC .. . 7C 122 62 65 72 98 28 2,047 678 533 Reported Grants to EMCs -- 40 NET IMPACT OF TREE CROPS ON GOVERNMENT REVENUES Govemment Revenues from Tree Crops 3.542 6,336 3,170 1.808 2,130 2.237 1,921 3,093 1,695 1.14A 583 Government Expenditures on Tree Crops 316 358 347 41A 245 348 267 3,946 1,68 1,304 323 Net Fiscal Impact (Current LKR millions) 3,226 5,979 2,822 1.394 1,885 1,892 1.834 (853) (185) (159) 260 Net Fiscal Impact (1990 LKA millions) 8,882 10.905 5,073 2321 2,913 2,584 1,988 (853) (147) (127) 186 Net Fiscal Impact (1990 USO millions) 171 271 128 58 72 64 49 (21) (4) (3) 5 Anne B 96 Table 7 Sri Lanka: Long-term Trends in Social Ilndicatrs Indicators 1950 1960 1970 1980 1990-91 1993 Life Expectancy at Birth - Female 57.5 61.4 67.1 71.1 Life Expectancy at Birth - Male 58.8 61.9 64.2 67.5 Life Expectancy at Birth - Both 71.0 72.0 Infant Mortality Rate 82.0 57.0 47.5 34.4 19.3 15.0 Neonatal Mortality Rate 49.2 34.2 29.6 22.7 15.7 na Maternal Mortality Rate 5.6 3.0 1.5 0.6 0.4 na Crude Birth Rate 40.4 36.6 29.4 28.4 20.6 21.0 Crude Death Rate 12.6 8.6 7.5 6.2 5.5 6.0 Adult Literacy 69.0 77.0 82.4 86.5 88.0 na School Enrollment: ages 5-14 58.0 65.0 86.0 89.0 na na Total Fertility Rate na 5.0 4.2 3.7 2.4 na Table 8 Sn Lanka and Other Low/Mddle-income Countnes: A Comparson of Selected Basic Indicators Lower Middle- Low-income Mid.-Income Income Sri Lanka Economies Economies Economies GNP per caput (USO, 1990) 470 350 1,530 2,220 Life Expectancy at Birth (years, 1990) 71 62 65 66 Adult Literacy Rate (percent, 1990) 88% 60% 75% 78% Total Fertility Rate (1990) 2.4 3.8 4 3.7 Infant Mortality Rate (per 1,000 live births, 1990) 19 69 51 48 Net Pnmary Enrollment Rate (percent, 1989) 100% 68% 86% 89% Gross Secondary Enrollment Rate (percent, 1989) 74% 38% 54% 55% Table 9 Payroll Variables by Gender for a Sample of Estate Workers, December 1993 Income on Total Share of Pay-day as Monthly Days Days on Wages per Wages from Share of P aI Plucking Other Tasks Day Overkilos Net Income Gender Statistic Years LKR No. No. LKR Percent Percent Female Average 31.9 1,752 19.7 22.8 86.6 17.6% 66.9% Max. 58.0 3,568 26.5 31.5 134.6 46.4% 100.0% Min. 18.0 144 2.0 18.0 33.1 1.5% 0.0% St Deviation 9.5 678 5.7 7.5 15.5 11.0% 18.8% No. of Obs. 64 60 57 3 60 52 60 Male Average 33.2 1,572 17.5 86.2 49.5% Max. 57.0 3,809 33.5 187.3 98.5% Min. 18.0 108 1.5 72.0 0.0% St. Deviation 10.4 903 7.3 22.1 26.4% No. of Obs. 38 38 0 38 38 0 38 All Average 32.4 1,682 19.7 17.9 86.4 9.3% 60.1% Max. 58.0 3,809 26.5 33.5 167.3 46.4% 100.5% Min. 18.0 108 2.0 1.5 33.1 1.5% 0.0% St. Deviation 9.6 773 5.7 7.3 18.3 11.0% 23.5% No. of Obs. 102 98 57 41 98 52 98 Note: the sample consisted of 65 female and 39 male estate workers at Liddesdale Estate, Maturata Plantations Ltd. 97 Annex C Financial Data on JEDB, SLSPC and the Regional Plantation Companies 1. This annex comprises eight tables. The data in Table Cl are drawn from the 1993 Plantation Sector Statistical Pocket Book (hereafter the Pocket Book). The data in Tables C2- C7 are presented for the convenience of the reader. They are based on financial statements and accompanying notes for JEDB and SLSPC, except for data on estate numbers and areas, number of employees and wage rates, which are drawn from the Pocket Book. The reader is reminded that Auditors have issued qualifications regarding a number of financial statements prepared by JEDB and SLSPC between 1983 and 1992, and that for most purposes the statements should be used with accompanying notes, which are not provided in this report. The data in Table CS are drawn from unaudited annual performance reports, prepared by the EMCs for the Plantation Management Monitoring Department of the MPI. No audited financial statements were available for any of the 22 RPCs. Table C1: JEDB and SLSPC Unit Values and Costs of Production for Tea, Rubber and Coconuts (LKR/kg for Tea and Rubber, LKR/nut for Coconuts) 80 81 82 83 84 85 86 87 88 89 90 91 92 93 Tea JEDB: NSA 16.53 16.88 22.76 38.43 43.78 32.27 30.26 35.99 41.20 55.54 61.70 53.32 55.91 55.36 COP 16.20 17.00 20.96 24.11 30.50 36.51 37.95 40.11 48.10 52.68 58.85 62.16 102.98 97.10 Margin 0.33 -0.12 1.80 14.32 13.28 -4.24 -7.69 -4.12 -6.90 2.86 2.85 -8.84 -47.07 -41.74 SLSPC: NSA 18.31 18.17 23.93 41.83 44.89 32.61 32.13 38.77 41.39 58.34 65.52 56.09 58.87 61.76 COP 17.32 18.43 22.13 25.40 35.37 35.58 35.24 37.79 43.56 49.69 58.69 61.00 95.45 92.45 Margin 0.99 -0.26 1.80 16.43 9.52 -2.97 -3.11 0.98 -2.17 8.65 6.83 -4.91 -36.58 -30.69 Rubber JEDB: NSA 10.27 10.55 11.03 16.11 15.51 17.77 21.81 20.38 27.85 26.11 26.04 25.37 40.15 38.60 COP 8.65 9.13 10.22 11.13 13.01 17.75 18.45 20.12 24.82 29.95 29.38 30.11 37.72 45.44 Margin 1.62 1.42 0.81 4.98 2.50 0.02 3.36 0.26 3.03 -3.84 -3.34 -4.74 2.43 -6.84 SLSPC: NSA 9.22 9.80 11.04 16.50 15.14 17.39 21.28 20.02 26.52 24.87 25.29 23.85 28.24 - COP 9.12 8.84 10.50 11.74 15.03 16.79 18.95 20.08 23.07 27.31 28.58 29.62 40.76 - Margin 0.10 0.96 0.54 4.76 0.11 0.60 2.33 -0.06 3.45 -2.44 -3.29 -5.77 -12.52 - Coconut JEDB: NSA 0.95 1.14 1.01 1.66 2.94 1.25 1.13 2.20 3.09 2.14 2.10 3.36 .. 4.50 COP 0.70 0.70 0.74 0.93 1.96 1.17 1.10 1.49 2.68 1.85 1.99 2.36 .. 4.70 Margin 0.25 0.44 0.27 0.73 0.98 0.08 0.03 0.71 0.41 0.29 0.11 1.00 .. -0.20 Table 2 JANATHA ESTATES DEVELOPMENT BOARD KEY FINANCIAL RATIOS AND DATA (Current LKR 000s. unless otherwise indicated) 1982 1983 1964 1965 1986 1967 1988 1989 1990 1991 1992 KEY FINANCIAL RATIOS Current Ratio 1.83 2.51 1.67 1.76 1.19 0.94 0.69 072 0.75 0.56 0.15 AcidTest 0.72 1.11 1.14 0.98 0.59 0.45 0.28 030 0.27 0.29 0.14 Debt-Equity Ratio 0.80 0.82 1.17 1.11 I.86 2.81 7.06 9.83 2.53 293 7.07 Long-term Debt-Equity Ratio 0.43 0.46 0.45 0.64 1.04 1.75 3.49 4.64 1.12 1.32 2.06 Gross Tree Crops Proceeds / Avg. Assets - 1.45 1.53 0.81 0.73 0.76 0.79 0.81 0.84 0.66 0.36 Estate Revenues / Estate Expenditures 1.11 1.45 1.29 0.95 0.91 0.99 0.96 1.13 1.07 0.90 0.86 Interest Expense / Average Outltanding Loans - 19.0% 4.7% 4.3% 8.0% 13.2% 12.5% 14.7% 12.6% 12.7% 7.6% Ratio of Short Term to Total Assets 37.8% 50.2% 55.5% 39.3% 33.9% 26.1% 30.7% 34.3% 30.2% 230% 9.2% Return on Average Equity - 11.7% 3.3% -7.8% -30.5% -23 4% -65.8% -21.2% -29.0% -60.2% -141.8% Return on Average Assets - 6.4% 1.7% -3.6% -12.5% -7.1% -12.2% -2.3% -5.5% -16.2% .28.3% Net Profit i Gross Tree Crops Proceeds 0.1% 4.5% 1.1% -4.5% -17.2% -9.4% -155% -2.8% -6.6% -23.8% -78.8% Growih in Equity - 26.0% 23.4% -38% -19.2% -202% -41.7% -14.1% 223.9% -9.0% -64.8% Growth in Assets - 2.6% 46.6% -6.5% 9.5% 6.4% 23.2% 15.5% 5.7% 1.2% -27.6% Growth in Liabilities 30.8% 74.8% -8.8% 35.5% 20.8% 46.3% 19.7% -16.6% 5.2% -14.9% KEY FINANCIAL DATA Cumulative Retained Earnings (start of year) (137,102) (135,240) 19.226 74.375 (64,364) (548,088) (845.843) (1,433,835) (1.563,450) (1.911.243) (2,964,539) Net Profit Carried Forward 1.862 154,466 55,149 (138.739) (483.725) (297,755) (587.991) (129.614) (347,793) (1.053.296) (1,598.196) Cumulative Retained Earnings (end of year) (135.240) 19,226 74.375 (64.364) (548,069) (845,643) (1,433,834) (1.563.449) (1.911.243) (2.964.539) (4.562,737) .0 00 Working Capital 359,501 814.324 83,996 626,699 219.167 (72,961) (719.033) (833.261) (638.489) (1,175,469) (2,492.307) increase in Borrowing from All Sources - (282.045) 6,910 204,104 500.407 374.072 856.332 597.982 (89.756) 660.969 919,335 Equity Injections from Al Sources - 120,255 88.654 94.318 133.027 (2.623) 56,264 26,412 1.611.752 710.719 512,525 Real (1990 LKR) Revenue / Worker 21.200 32,881 40.078 23.254 19.815 21,627 23.028 25.666 24.768 19.302 14,842 FISCAL IMPACT OF JEDB Government Assumption of JEDB Liabilities (92.308) 1,591,725 Government (Agency) Contributions to Equity 99.019 76,906 67.049 75,110 33.336 54.457 22.867 19,951 710,408 511,736 Government Support to income 20,801 Sub-total: Government Subsidies for JEDW 99,019 76,906 67,049 95,911 (56,972) 54,457 22.867 1,611.679 710,406 511.736 Govt. Revenue: Income & Sales Tax. Export Duty & Ceass 554,330 1,225,636 498.492 60,786 81,798 81.871 202,578 230,596 52,624 35,168 Total: Net Direct Fiscal Impact of JEDB on GOSL 455,311 1,148,730 431,443 (35,125) 140.770 27.414 179.711 (1,381,083) (657,784) (476.570) OTHER KEY DATA Number of Estates 272 293 299 288 285 278 269 266 269 263 33 Total Area (hectares) 119,660 135,073 14t520 142.848 141,930 141,224 139.342 139.384 140,149 140,179 14,157 Number of Staff 10,076 11,274 1,1.633 12,445 12.480 .12,265 12.087 11,929 11,937 11,091 1,404 Number of Labourers 217,796 213,068 220,261 225,876 223,694 214,736 211,163 206.720 201.766 192,886 13,479 Daily Wage (LKR) for Tea Labourers: Men 16.42 17.89 23.78 24.50 26.21 27.83 3652 4060 48.32 52.24 61.84 Daily Wage (LKR) or Tea Labourers: Women' 13.97 1495 23.78 24.50 26.21 27.83 3652 40.60 48.32 52.24 61.84 Daily Wage (LKR) for Tea Labourers: Children* 13.41 14.39 20.23 20.71 21.85 22.93 30.64 33.70 39.49 42.43 5063 *: The same wages apply at SLSPC. See SLSPC Key Financial Data for Rubber Wage Rates. Table 3 ,IANATHA ESTATES DEVELOPMENT BOARD BALANCE SHEET (lKn ODS) 182 1963 1004 185 16 1981 t966 1961 t60 2962 1662 ASSETS Cah at Bnmk amd In Hd 22,306 240.406 017,615 238.246 62,603 91.487 30,155 110,713 142.717 105,636 145.567 OtherShootTermAssets 768,600 1,112,971 1.276,665 1.211,530 1,266.722 1,031,496 1,595,454 1.991,291 1,613.170 1,366,62 291,265 SUB-TOTAL: SHORT TERM ASSETS 791,256 1,353,379 2,194,860 2,450,766 1,371,325 1,122,993 1,825,600 2,102,004 1,955,867 1,504,727 436,662 inwsionento 32,00 48,674 42,636 64,212 62,419 61,894 61,81 54,577 42.146 .61520 3.65,746 NotFixedAssat 1,272,447 1,292,727 1,713,614 2,178,513 2,610,310 3,119,365 3,615,296 3,967,782 4,472.364 4,981,262 415,261 TOTALASSETS Z095.785 2,604.90 3,051,132 3,663,513 4,044,054 4,304.242 5,302,586 6.124.343 6,471,067 8,547.500 4.737.901 LmLI ES AND CAPITAL LIABILITIES BankOverdraft 33,063 203,67 215,467 726.294 1,027,247 654,700 1,236.352 2,443,373 Other ShdorTeMLoon 14,460 121,604 6,964 25,055 25,428 6,191 65,304 220,453 a6,262 65,025 34,000 Creditors and Provom 3 417,251 1,301,0 796,034 823,065 972, 12 1 1,751 1,378,819 451816 SUB-TOTAL: SHORT TEM LIABITIES 431,757 539,055 1.310.684 824.069 1,152,158 1,195,924 2,344,642 2,935,265 2,594,376 2.60.190 2,929,2a8 External Credtors 112,369 136,984 251,475 435.272 674,346 1,032,255 1.307,247 1,510,591 420.791 413,480 413,460 Local Creditors 366,353 4.161 11,100 15,336 72,631 94.229 107,539 246.175 850,96 660.32 604,171 Deferred LiabWilies 535,340 554,698 065,623 728,142 852,234 864,92 911,562 972.378 925,528 204,237 TOTAL LIABIUTIES 930,499 1,217,249 2,127,955 1,940,320 2,629,277 3.174,842 4,644.320 5,558,613 4.636,503 4.600,016 4,151,057 TOTAL CAPITAL 1,165,286 1,477,731 1,823,177 1,753,193 1,415,777 1,129,600 656,266 565,730 1.632,593 1,667,403 566,834 TOTAL LIABILITIES AND CAPITAL 2,005,705 2,694,960 3.951,132 3,693,513 4,044,054 4,304.242 5,302,566 6,124,343 6,471,096 6.547.500 4,737,801 Table 4 JANATHA ESTATES DEVELOPMENT BOARD - PRF)IT AND LOSS STATEMENT (LK W COD) 1962 1963 1964 1965 196 1967 1968 1980 1990 1991 1992 ESTATE-LEVEL REVENUES & EXPENDITURES Estate-Level Revenues 2,012,462 3,490,905 5,136,450 3,130,696 2,662,992 3.230,457 3,646,430 4,60,979 5,384,827 4.509,426 2,066,228 Eslar-LevelExpendiures 2.611,729 2,402.821 3,979,772 3,292,010 3,181,305 3,272,414 4,021.91 4.136.511 5,052,801 5,015,186 2,362,566 PIllKXIIlOSSAI IIL.SIAIELEVEL 200,754 1,06n,04 1,150,018 (161,212) (290.343) (41.951) (175,551) 544,408 332,939 (505,700) (325,340) Conral & Reional Board Expernses 22,040 27,064 (36.665) (604) 6D,647 112,937 154.350 108.640 71,710 107,418 92,765 Interns on Loans and OverdraR 113,2147 75.13 12,31 15,5905 56,9a 150,273 220,015 306,243 264,465 279,75 220.275 Provisions. Deprecation md Other Charges 56,367 136,062 * 225,378 56076 50,403 30,346 36,451 186.266 221,748 124,944 0,026 OVERALL PRFIT/LOSS FOR THE YEAR 6.300 49.195' 957,699 (232,666 (486,379) (335,513) (566,367) (126,707) (5,965) (1.017,873) (1.553,408) Provisions. Transfers & Adjustments (4.436) (094,72) (802,520) 93,950 2,654 37,756 (1,924) (10,07) (1,600) (35,424) (44,791) NET PRDFITILOSS CAFlED FORiWARD ,262 254,46 55146 (3739) (463,725) (97,755) P86,96) (12964) ,47704) (2,053.297) (2,566,106 Table 5 SPI LANKA STATE PLANTATION CORPORATION KEY FINANCIAL RATIOS AND DATA (Curen LKR 000., unles1 otherwase kcated) 1982 1963 1964 1965 1986 1987 1968 1969 199 1991 1992 KEY FINANCIAL RATIOS CurrentRalio 1.00 1.58 2.17 1.83 1.18 1.03 0.74 0.84 1.15 0.79 0.14 Acid Ted 0.48 0.65 1.47 0.95 0.56 0.50 0.32 0.32 0.44 0.40 0.09 Debt-Equity Ratio 1.20 1.59 1.03 1.44 1.94 2.14 3.22 28 0.80 0.92 -204 Long-tern Debt-Equity Ratio 0.23 0.70 0.52 0.83 .09 1.31 1.84 1.53 0.41 0.36 -0.79 Gras Tree Crops Proceeds / Avg. Assets - 1.64 1.67 0.92 0.85 0.85 0.83 0.86 0.91 0.73 0.52 Estae Revenues / Estate Expendibes 1.02 1.41 1.22 1.01 1.01 1.08 1.02 1.18 1.09 0.96 0.95 nterestExpense AverageOutalandingLoans - 23.9% 11.7% 68% 12.2% 9.8% 9.0% 111% 184% 17.4% 14.8% Ratio of Short Term to Total Assets 44.1% 54.3% 54.8% 40.9% 33.5% 27.3% 24.2% 29.1% 25.4% 22.4% 16.5% Return an Average Equty - 45.6% 460% 21.1% .5.3% 32% -25.4% 23.3% -9.5% -21.4% -65.8% Rtturn on Average Assets - 19.1% 20.6% -9.5% -5.7% 1. 1% -7.0% 5.8% -3.9% -11.5% -26.5% Net Proft I Gross Tree Crops Proceed 0.1% 11.6% 12.3% -10.4% -6.7% 1.2% -6.4% 6.7% -4.3% -15.8% -51.5% GrowihinEquity - 6.7% 73.2% -t91% -I06% 8.5% -14.4% 30.9% 127.4% -3.2% -1307% Growth in Assets - 25.8% 35.5% -2.5% 7.7% 16.0% 14.8% 20.5% 5.7% 3.2% -63.4% Growth In Uabiliies 41.8% 11.0% 13.6% 20.3% 19.9% 28.5% 17.2% -36.6% 11.2% -32.1% KEY FINANCIAL DATA Cumulative Retained Earnings (start of year) (375.776) (373.315) 47,420 644.172 330.132 137,546 177,512 (126,421) 170,371 (54.697) (749.034) Net Profit Carried Forward 2,461 420.735 596.750 (314,040) (192,568) 39.966 (303.933) 296.792 (225,068) (694.337) (946.959) Cumulative Retained Earnings (end of year) (373,315) 47,420 644.170 330,132 137.546 177.512 (126.421) 170.371 (54,697) (749,034) (1.695.993) Working Capital 3.375 492.324 986,000 514,720 160.739 31.747 (400.210) (320.205) 202.296 (359.552) (1.053.936) increase in Botrowing from All Sources - (247.549) (54.162) 489.620 284,116 394.427 543.765 381.815 (1,456.426) 222.832 531,804 Equity Injections from Al Sources - 47.744 106.970 68,670 52.602 62.197 118.728 45,036 2,069,293 593,782 393.114 Real (1990 LKR) RevenuelWorker 18.137 30,745 39,342 24,714 22,625 24.585 24.216 26,679 27,260 21,148 14,458 FISCAL IMPACT OF JEDB Government Assumption of SLSPC Liabilities 15.481 1981,306 Government (Agency) Contributions to Equity - 42.241 97,671 40.500 27.260 41,738 74.232 7,599 46,013 806.270 393.114 Government Support to IAcome 27,500 24,700 21200 37,0 29.881 8,100 20569 19.637 7 2,600 14005 Sub-lotal: Government Subsidies for SLSPC 69,741 122,371 61.700 65,040 71.619 97,813 28,168 2,046.956 877.870 533,171 Govt. Revenue hom Income, Export & Sales Taxes 515,843 1,155,800 417,790 76,415 94.328 6836 175.306 296.443 74.253 30.245 Total: Net Direct Fiscal Impact of SLSPC on GOSL 446.102 1,033,429 356.090 11.375 22,709 (10.977) 147.140 (1,750.513) (803,617) (502.926) OTHER KEY DATA Number of Estates 283 279 271 261 256 251 249 249 240 240 31 Total Area (hectares) 144,896 145,080 144.172 139,635 138,496 137,297 135,456 135,456 135.120 132,720 17,918 Number of Staff 10.625 10,633 ,10,959 10,933 10,706 . 10.300 10.399 10,479 9,199 10.000 1.427 Number of Labourers 254,105 239,677 213.421 209.363 200,044 191.588 191.472 t69,973 282,402 175,572 16,652 Daily Wage (LKR) for Rubber Labourers: Manr 18.17 19.64 23.93 24.65 26.36 27 98 36.52 40.60 48 32 52.24 61.84 Daily Wage (LKR) for Rubber Labourers: Women' 15.87 16.85 23.93 24.65 26.36 27.98 36.52 40.60 48.32 52.24 61.84 Daily Wage (LKR) for Rubber Labourers: Children* 15.29 16.27 20.38 20.86 22.00 23.08 30.64 33.70 39.49 42.43 50.63 The same wages apply at JFDH. See JEDB Key Financial Date for Ten Wagn iles Table 6 SRI LANKA STATE PLANTATION CORPORATION - BALANCE SHEET (LKRFO0s) 1982 1983 1984 1965 1968 1987 1988 1969 1090 1991 1992 ASSETS CashatBank andInHand 1.597 12.600 30,200 17,350 22.532 46.326 37,170 110.22 66.579 70,334 14,467 Other Short Term Assets 859,818 1,322,557 1,797,750 1,310,960 1,149.111 1,063.477 1,088,878 1,523,005 1,441,248 1,301,122 152,585 SUBTOTAL SHORT TERM ASSETS 861,415 1,335,157 1,827,050 1,328,310 1,171,643 1.109,803 1,126,048 1,633,827 1,507,827 1,371,456 167,052 Investments & Other Long Term Assets 26,950 72,341 79,370 276,390 265.570 259,882 304,873 345.523 498,964 412.812 339.030 Net Fixed Assets 1,064,391 1,052,389 1,425,00 1,644,290 2,060,366 2,689,189 3,230,132 3,634,962 3,924,736 4.337,132 507,486 TOTAL ASSETS 1,954,758 2,459,187 3,333,120 3,248,990 3.497,579 4.056.874 4,660,853 5,614,312 5,931,527 8,121,201 1,014,479 LIABILITIES AND CAPITAL LIABILITIES Bank Overdraft 110,953 35,733 5,070 236,190 154.091 175,845 372,506 744,220 228,363 664,191 894,826 Other Short Term Loasre, Deposits & Securities 186,059 131,730 450 1,280 200,337 200.844 231,062 81,561 36,682 15,954 15,524 Creditors, Accruals and Provisions 561,028 675,370 636,430 578, 856,476 701,467 22.690 1,128,251 1,040,484 1,050,883 310,9 SUB-TOTAL: SHORT TERM LIABILITIES 858,040 842,833 641,950 813,590 1.010,904 1,078,056 1,526,258 1,954,032 1,305,529 1,731,008 1,220,80 External Loans 67,524 60,959 144,700 405,790 502,002 838.095 1,105,571 1,420,194 63,629 0 0 Local Creditors 131,435 0 23,960 20,640 91.656 126,919 177,229 13.208 483,083 354,443 663,040 Deferred Liabdities 8,260 806,996 678,487 678,574 703,311 723,536 746,486 770,742 787,924 850,240 109,877 TOTAL LIABILITIES 1,085.259 1,510.788 1,689.157 1,918,784 2.307,963 2,767,606 3.555.544 4.167,176 2,640,165 2.835,692 1,B93.901 TOTALCAPITAL 889,497 94896 1,643,963 1,330,205 1,189,615 1,291,270 1,I05.310 1,447,138 3,291,383 3,185,509 (979,427) TOTAL LIABILITIES AND CAPITAL 1,954,756 2,459,886 3,333,120 3,246,989 3,497,578 4,058,876 4,660,854 5,914,314 5,931,528 8,121,20 1,014,480 Table 7 SHI LANKA STATE PLANTATION CORPORATION - PROFIT AND LOSS STATEMENT (LKR 000s) 1962 1983 1984 1985 198 1967 1988 1969 1990 1991 1992 ESTATE-LEVEL REVENUES & EXPENDITURES Estate-Level Revenues 2,078,644 3.838.394 4,963.580 3.165,030 2,932,748 3.272,942 3,669.011 4,493,131 5,331,557 4,603,033 2.073,017 Estate-Level Expenditures 2,030,152 2,572,369 4,064,300 3,133,690 2,913,100 3,017,405 3,599,001 3,815,344 4,982,955 4,810,323 2,187,174 PFOFIT/(LOSS) AT THE ESTATE LEVEL 48,492 1,066,025 899,290 31,340 19,648 255,537 70.010 677,707 448,602 (207.290) (114.157) Central & Regional Board Expenses 20,880 24,722 30,850 52.800 64,124 68.037 618,60 92,015 117,228 120.551 76.007 Interest on Loans and Overdraft 8,8985 83,924 23,480 26,500 96,504 112,305 145,196 229,819 250.181 156,107 187,458 Provisions, Depreciation and Oler Charges 63,467 113,920 48,070 55,069 59,326 76,773 84,782 223,795 140,885 75,149 OVERALI PROFIT/(LOSS) FOR THE YEAR 101,073) 873.90 731,030 (98 520) (196,049) 15,869 (233,621) 271,381 (142,902) (634,633) (453,371) Provisions. Transfers & Adustmnents 63,534 (453.177) (134.280) (215,920) 5,463 24,097 (70,312) 25,411 (62,466) (59,704) (493.5868) NET PROFIT/(LOSS CARIED FORWARD 2,461 420.735 56,750 (314,040) (192,58) 39,966 (303,933) 296,792 225,000) 894,337) (940,05) Annex C 102 Table 8 PERFORMANCE OF THE REGIONAL PLANTATION CORPORATIONS (Original 22 Companies) (LKR 000s, unless otherwise Indicated) Dec/92 Dec/93 Jun/94 TEA Production (Kg. '000s) 50, 751 134, 431 78, 110 Net Sales Average (LKR/kg) 69.95 66.15 61.52 Cost of Production (LKR/kg) 90.30 77.56 69.06 Margin (LKR/kg) -20.35 -11.41 -7.54 RUBBER Production (Kg. '030s) 22, 776 38, 984 20, 175 Net Sales Average (LKR/kg) 38.35 38.75 42.31 Cost of Production (LKR/kg) 32.04 39.88 39.67 Margin (LKR/kg) 6.31 -1.13 2.64 COCONUT Production ('000 nuts) 20, 865 39, 672 22, 836 Net Sales Average (LKR/nut) 5.15 4.65 3.82 Cost of Production (LKR/nut) 3.90 4.13 3.50 Margin (LKR/nut) 1.25 0.52 0.32 REVENUES AND EXPENDITURES + Turnover 4, 653, 097 10, 946, 275 5, 875, 113 - Estate Level Expenditures 5, 134, 694 11, 186, 112 5, 818, 426 - Overheads 325, 572 1, 178, 188 531, 705 Profits/(Losses) (807, 169) (1, 418, 025) (475, 018) Interest Payments - Budget 48, 835 287, 208 242, 312 Interest Payments - Actual 33, 651 320, 194 268, 210 Actual as Percent of Budget 69% 1 1 1% 1 11% Capital Expenditure - Budget 853, 945 2, 187, 130 1, 163, 669 Capital Expenditure - Actual 613, 736 1, 208, 592 467, 851 Actual as Percent of Budget 72% 55% 40% LIABILITIES & WORKING CAPITAL Total Bo:rowings 658, 040 2, 472, 630 3, 517, 664 of which Overdrafts 626, 921 1, 221, 330 1, 525, 834 of which Long-term Loans 31, 119 236, 300 391, 830 of which Debentures 0 1, 015, 000 1, 600, 000 Net Current Assets (37, 681) (758, 584) (900, 722) 103 Annex D Economic and Financial Analysis of the Smallholder Rubber Rehabilitation Project This annex presents the assumptions underlying the economic and financial analysis of the Smallholder Rubber Rehabilitation project and the following tables: Table DI(a)-(b) Model 1: rubber-yields, labor and inputs Table D2 Derivation of financial prices for rubber Table D3 Price indices Table D4 Conversion factors and derivation of economic prices for rubber Table D5(a)-(b) Model 1: rubber-financial and economic output and input prices Table D6 Areas replanted and intercropped Table D7 Model 2: banana (intercrop)-yields, labor and inputs Table D8(a)-(b) Model 2: banana (intercrop)-financial and economic prices Table D9 Financial analysis: revenues and costs per hectare Table DIO Financial analysis: incremental benefits, FRRs and NPVs Table D1 1(a)-(b) Economic analysis: incremental benefits, ERRs and NPVs Assumptions Underlying the Financial Analysis Yields: The yield curve used in the PCR for new investments (referred to as the new technology) was found to be reasonable, based on field interviews by the impact evaluation team, and was used for the impact analysis (Table DI(a)-(b)). The impact adjusted the without-project (or existing technology) yield assumptions: the PCR had assumed that yields on all areas replanted would decline by 50 kg/year from 350 kg/ha in 1981 to 150 kg/ha in 1985 and that there would be zero benefits foregone on any area replanted thereafter (1986-88). The IER assumes that the same yield decline applies to each cohort of replantings, so that e.g. benefits of 150 kg/ha were forsaken in 1992 on areas replanted in 1988.69 This reflects a more conservative estimate of the age of uprooted trees. According to ARTI, 5-7 percent of trees in Kalutara and Kegalle and 19 percent in Ratnapura were over 30 years old at appraisal. Thus there would have been some replanting even in the absence of the project. This possibility is omitted in the SAR and PCR analyses. It is referred to as the alternative technology in the impact analysis. It is assumed that as a result of the project's extension outreach, quality inspections and technology transfer, cultivation practices (e.g. fertilization, drainage and terracing) and clonal material improved, thereby increasing yields under the project by 8 percent relative to the alternative technology. Labor: Labor usage was generally taken to be in line with PCR estimates, except for tapping labor requirements, which were found to have been over-estimated for the with-project situation; they were adjusted upwards for the without-project scenario. The impact evaluation team found that hired labor was employed not only for uprooting but also 69. The SAR assumes foregone yields of 265 kg/ha for five years on each area replanted. Annex D 104 for tapping on holdings as small as 1.2 hectares (3 acres). The cost of hired labor for tapping is therefore included in the analysis. In the PCR, labor for intercropped bananas is costed as hired labor, except for labor for harvesting and transport the bananas. The impact costs all labor employed in producing and marketing the intercrop. Labor assumptions are the same for bananas under the alternative technology. Inputs: PCR estimates of materials appeared to be consistent with those provided by RRISL and those obtained from field level interviews by the impact evaluation team. They were thus used in the impact analysis. Applications of fertilizer was taken to be lower under the alternative technology than under the project. Intercropping: PCR estimates with regard to labor and inputs were found to be reasonable. Following the PCR, the impact analysis assumed that intercropping with bananas was done on 13 percent of area replanted, although a small portion of the intercropping consisted of passion fruit or pineapples, rather than bananas. Insufficient data were available on these other crops. Areas intercropped by year are presented in Table D6. The PCR's calculation was adjusted by reducing hectarages for the third year of benefits by half, since farmers often uproot banana early for fear of reducing yields on rubber. Under the alternative technology, the intercropped area is taken to be only 10 percent of the estimated hectarage that would have been replanted under the alternative scenario during the project period (see aggregation below). Yields and inputs are taken to be the same under the new and the alternative technologies. Output Prices: Unlike the PCR, which used a single projected price figure for rubber throughout the analysis, actual prices were used in the IER for 1980-1993. New York RSS I spot prices for rubber were adjusted for quality, based on actual quality premia on the Colombo auction for the years 1980-93, and for freight charges. For the financial analysis, prices were converted to Lankan Rupees at the official exchange rate. After 1994, the exchange rate was projected to depreciate in nominal terms based on projected MUV and domestic inflation rates so as to remain constant in real terms at the 1994 rate. The FOB Colombo price in LKR was adjusted for actual export duties and cess payments per kilo of rubber exported and for estimated shipper, broker and dealer charges to arrive at a farmgate price. Estimates for these charges were derived from appraisal and impact mission information. Projected world prices for rubber were based on World Bank projections as of February, 1995. Banana and wood prices were estimated based on actual figures at SAR, PCR and IER. Projected prices for wood and bananas were assumed to remain constant in real terms from 1994 onwards. Input Prices: Annual data on average retail prices for inputs were obtained from data issued by RDD, PCR data and impact mission interviews. Projected prices for inputs were assumed to remain constant in real terms. Labor rates for tapping and uprooting were taken from RDD data for 1981-91 and from impact information for 1994. Real wage inflation of 1.8 percent per annum was assumed thereafter, reflecting the average real wage inflation rate for these two labor activities over the period 1985-94. Aggregation: Following the PCR, aggregation was based on a model for rubber and a model for intercropped bananas. For the new technology (i.e. the project), the model for rubber was applied to the actual hectarage of rubber replanted each year and the model for bananas was applied to the entire intercropped area each year. For the alternative 105 Annex D technology, the hectarage that would have been replanted each year during the project period is assumed to be one-half of that actually planted, and the alternative intercropped hectarage is estimated at 10 percent of the alternative rubber hectarage. Aggregation was done first for yields and inputs, and the resulting annual totals were multiplied by actua! prices for the year in which the yields were obtained/inputs were applied. Assumptions Underlying the Economic Analysis Conversion Factors: Standard conversion factors were applied, except for labor, for which a specific conversion factor was used, and fertilizer, for which the shadow price was derived. Farmgate prices for rubber were derived from world prices (see the derivation in Table D4). Overheads: Project overheads were based on PCR data. It was assumed that under the alternative technology, overheads would have been one-third of those incurred under the project. �! .'� Е4! 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S х 8 � и . g..e .. � ^ и _ О Р . . М $ S = и � О Р . . $ ^ 1� j � '^ _ '° _ . . � Е ь я ., - д а..8 В $ _ .. - д Р..8 3 $ .. _ а •..8 Х � д � � и и - а _..$ ^ а Ф х я и - д >..$ 1 - � �' О_ О д а д н и и О � TJ _ О вв n 7 � � - а д а д � и и е ^ � � е д �а а яиио а � о FО - v '^ е1 а � д нии� � � � n n j w fZ д д а R и и р С _ а_ .в n У � � � д - д "ии.°^. ^ � � а д � д яии^ ^ Е = • и ' а ' � я � х � " -= а -".о., .а�. � � ' = � " ^ .. -- . д .+о � а - n г°�. - $ .. . .. - - n ry � - $ н . - - - а - м О � и $ � � м $ � � ~ и и � :, _ я : _ _ � яаи я _ . я яв- � _ � �-__�� -- я��:=яr- _ � а �" RC;.' А�йСАGА�А�А � а E.s �а;4е� У aaa;a=���i? r, у'� ����д'� oiiiëi fY�fStf�� iii�i�i���� � .С У $ �./ � ` � � � �я� .� � s� � � � � �.!. � � �G� �. У � ; ..r �$ � �.1д$ .1?���го �рΡi�� i rg � 7рΡ� Н • z��3S�� �� ��д�� i ag ëij��$ 3�3� s 7� �� ��`�����до� FHAWLk- AN&YSIS Table 2: DERVATION OF RAWER PRIDES - PANEL 1 1981 1982 1983 1904 1905 1906 1987 lose 1989 1990 1991 1992 1993 1994 1995 Rubber - Now Yolk Spol, FISS I USQ/kg 125 100 124 1 10 092 084 1 12 129 1 12 102 1.01 1.02 0.99 1.32 1.52 Queft Adjustment Based an 36% FISAI .3, 84% FtSS4 5 etc. USD/kg -017 009 -017 .000 -0 05 -005 -0.07 006 007 012 -005 -0.03 -005 -0.07 -008 Adjusted price USD/kg 109 091 1.07 102 Ose 090 105 122 105 0.91 095 090 004 125 144 Shipping and handling USO/kg -010 0 14 022 -010 -015 -018 -021 -020 023 -013 -0 Is -025 -010 -029 -034 FOB Colombo lCuiorml USO) USD/kg 0.06 0 7? 084 0.92 013 074 064 102 082 0.77 077 074 0 7111 Ose 1.10 Official Exchange Role USD/LKR 2055 2132 2409 2627 2740 2651 3074 3302 3999 4024 4257 46.00 4950 4905 5440 I-Oll Colombo I KRAO 20 18 1632 2108 24 16 1095 2100 25 as 33.02 3284 3100 3272 3402 3878 4792 6008 ShippecaMokers'Chalges LKIVkg 040 033 042 048 040 042 0 b2 061 0 GO 002 0 U13 0 as 076 -000 -120 Coss LKfVhg -066 089 -1.07 -1.37 -1.28 -130 -1.35 -140 155 -1 75 lot -107 -1.08 -247 -316 Expod Duly LKPAq -1081 -575 -dot 802 -212 270 .495 833 Sol 862 -623 -405 Upgrading In Coloml.,u I KM9 050 041 -053 .0 00 050 053 005 084 082 078 -052 .085 -091 120 -160 Dealeraftlansport LKFVkg -020 Ole -021 -024 -040 -042 -052 -067 099 093 -098 -102 -1.18 -144 -1.80 Farmilate Price, Current LKR LKPJkg 159 ego 1203 1345 1520 1554 1790 2171 1992 1030 2222 2570 3390 4195 5238 Domestic Deftaim Units 031 041 047 055 050 080 065 074 082 100 1.12 1.25 1.40 1.51 1.67 > Faimilate Price, (1900 LKFI) LKR1kg 20.36 21 33 2559 2453 27 42 2587 2766 2942 2420 1830 lost 20al 24.28 27.65 3132 nERVATION OF FILIBOER PFVCES - PANEL 2 lose IGq7 I M 1999 20DO 2001 2OD2 2003 2004 2005 2006 2007 2008 2000 2010 Rubber - Now York Spok FIBS I USD/kg 1.52 1 46 1.45 1 42 140 1 44 148 1 52 158 160 183 1.08 1.70 1.73 1 77 Quality Adjustment Based an 30% FISS) -3. 84% FISS4-5 etc. USIDA9 -0.00 -007 -007 -007 -007 -007 -007 -008 008 -008 -006 -008 -0.00 -009 -009 Adjusted price LISM9 1 44 141 138 1 35 1.33 137 1.41 1.44 146 152 155 156 101 184 1811 Shipping and handling USD/kg 0.34 033 .032 032 0.31 -0.32 -033 -034 035 -036 -030 -037 -036 -030 -039 F013 Colombo USn/kg 1 10 107 1.05 103 1.02 1.05 107 1 10 1 13 1 Is 1.19 1.21 123 126 1.26 OfficLell Exchange Rate USO/LKR 57.72 6076 6303 6722 7109 7467 7077 8313 87 79 9350 98.00 104.83 110.09 117.52 12444 O FOBColombo LKFVkg 8372 6532 6723 6933 7229 78 10 94.67 81.78 9947 10056 117.36 12674 13666 14793 15966 Shippers/13tokers' Charges LKFVkg -127 -1 31 -1 34 -139 -145 -156 189 -1.84 199 -217 -2.35 -2.53 -2.74 -296 -3.19 Coss LKPJkg -335 -344 -353 -361 -3 73 -402 -4.40 -479 5 Is -564 -8.11 -0.80 -7.13 -7.70 -631 Export Duty LKRtkg Upgrading In Colombo LKFVkg -159 -163 -168 -173 -181 -1.95 -212 229 .249 -272 -2.83 -317 -3.42 -370 -399 DealerWfransport LKfVkg -191 -196 -202 -206 -2 17 -234 -254 -275 -2.96 -326 -352 -380 -411 -444 -479 Fwmgate Price, Current LKR LKFVkg 5559 5698 5868 6052 83.15 6822 73.92 8011 8683 9497 10245 11004 11940 12905 13036 Domestic Deftakm Units 181 195 211 2.2a 240 265 2.87 310 334 3.61 3.90 421 455 491 531 > Farmilate Price, 11990 LKFQ LKFVkg 3078 2921 27.64 26.00 2569 2570 2579 2568 2597 2627 2627 2627 20.27 2027 28.27 Table 3: PFOCE INDICES - PANEL 1 1981 10112 1003 1964 1905 1080 too/ 1968 1909 1900 loot 1992 1993 1994 1995 Official Exchange Flaut (LKP4USD) 2055 2132 2490 2627 2740 2851 3074 33 02 3999 4024 42.57 4800 49.58 4908 54.40 G5 Manulacturets' Unit Value Index 0681 0 076 0679 067t 0 6ae 0809 Osse 0 95a 0047 1 ODO 1022 1088 1042 1074 1090 Sri Lanka Consumer Price Index 0372 0412 0470 0548 0556 0501 0647 0736 0823 1 ODD 1 122 1250 1396 1514 1.873 Real Tapping Labour Wage Index 1 155 1 105 109 - 2 1068 1 160 1 122 1 114 1096 1071 1000 IA27 1.132 1.215 1.307 1.331 Nominal Tapping Labour Wage Index 0430 0458 0 51 0596 0645 0874 0721 0809 0882 1 ODO 1.284 1.415 1.897 1.978 2.215 Nominat Uprooting Labour Wage Index 0504 0551 0594 0653 0696 0715 0772 0878 09" 1000 1559 1.513 Lam 2311 2 5" PnCE INDICES PANEL 2 1990 11097 1998 1999 2000 2001 2002 2003 2004 2005 2008 2007 2008 2009 2010 Official Exchange Rate (LKFVUSD) 57.72 6078 6363 6722 7109 7467 7877 63 13 87 79 93.50 09.00 10483 11099 11752 12444 G5 Manufacturers' Unit Value Index 1.100 1 138 1 170 1 200 1225 1260 1290 1320 1350 1369 1.396 1 424 1453 1482 1511 Sri Lanka Consumer Price Index I am 1951 2107 2275 2458 2654 2 ON 3096 3343 3011 3 9DO 4212 4 W 4913 5300 Beal Tapping Labour Wage index 1355 1379 1 404 1 429 1 455 1481 1508 1 535 1 562 1591 lots 1.646 1.676 1708 1 739 Nominal Tapping Labour Wage Index 2423 2651 2900 3 173 3471 3701 4 155 4545 4973 5440 5952 6512 7 124 7794 8527 Nominal Uprooting Labour Wage Index 2.858 3 142 3454 3798 4 175 4590 5047 5549 6101 0707 7 374 a 107 5914 9.000 10774 Table 4 ECONO C ANN.YSS STANDARD CONVERSON FACTOIIS AND ECONOMIC PFUCES PANEL 1 1991 1982 1963 1964 195 1966 1967 1988 19 1990 1901 19m 19 1994 199 Standrd Conve onFacto 091 090 090 095 065 085 08 0ss 090 001 090 090 000 090 090 Lau • SpocConversc o Fmc~r 083 075 070 065 060 065 070 075 060 065 0.90 000 00 095 095 Fer~se Uta - NW Euope FOS USOkg 022 016 014 017 0.14 011 012. 016 0.13 016 017 014 011 015 01 S~pping &and"ng ~U9D/ag 002 002 001 002 001 001 001 002 001 0.02 002 001 001 001 002 CIF Coombo USDAg 024 0 17 015 018 015 012 013 017 015 017 Ole 015 012 016 017 OlIcalxEchange ~te USD/LKR 2055 2lf32 2499 2627 27.40 2851 3074 3302 3999 4024 4257 46 00 458 49 6 54 40 CIFComo LMR/kg 488 373 371 494 410 338 396 563 591 05 605 706 583 14 938 Domst Transpo~g/Margins LKPikg 015 0I1 0i1 015 0 12 010 012 017 017 021 024 021 017 024 028 FarmgaloEc P.ice,Cur. LIKkg 503 364 382 509 422 346 407 590 599 719 630 730 601 938 996 Domedc~ Da U 037 041 0.47 055 058 000 065 074 082 100 112 1.25 140 1.51 107 > Econm For~gale Pie LfRIkg 1351 031 6 13 926 759 575 630 766 727 7 16 730 584 430 554 579 Flubbet NwYok Spat. RSSI USD/kg 125 100 124 1 10 092 094 1 12 129 1.12 102 101 1.02 0DD 132 152 OuyAcquImt US~kg -017 009 -017 -006 -005 -005 007 006 -007 -012 0.05 -0.03 -005 -007 -008 Ad~uSdPrc. USDIg 100 091 107 102 0m 090 105 122 105 09G 095 099 094 125 1.44 Shppng & Hndling USDIkg -010 -014 -022 -010 -015 -016 -021 -020 -023 -013 -016 -025 -016 -029 -034 FOOColobo USo/ 096 077 064 092 073 074 084 102 082 077 0.77 0.74 076 096 110 Oficl Exchan gFal USDIL KR 2055 2132 2496 2627 2740 2651 3074 3302 3998 4024 4257 4600 49.58 490 5440 FOB Co~ombo LKA/kg 2011 1832 210 24 19 1995 2106 2569 3362 3264 3100 3272 3402 3878 4702 8006 Shp./ks chaugs I KR/kg 037 029 -039 -041 034 -038 048 050 -059 056 05 -061 -070 -096 -106 Da~lMrsrnpot LKflg 011 015 -019 -021 -034 -036 -046 -059 -090 -085 -0.96 -002 -1.05 -120 -182 Farmga Ec. Pdca Cua LKfRkg 1961 1588 2051 2355 1927 2038 2497 3244 3138 299 31.25 3246 3704 4576 57.35 DomuskDaIor Unk 031 041 047 055 058 090 065 074 082 100 1.12 125 140 151 1.07 > Economc F*mgato Price LKFklg 5289 3650 4382 4295 3464 3399 3859 4397 38. 10 2958 2795 2600 2853 30 23 3420 PANEL 2 1998 1997 108 199 2000 2001 2002 2!3 2 5 2 07 20 2010 Slandad Converslen Føc 090 090 090 000 090 090 090 090 090 090 090 000 090 090 000 Laou - Spaclleconverslon Fac 095 095 095 095 095 095 095 095 090 09 095 0905 095 0.95 090 Ferfisew Ukea - NW Euopo FOB Urti/kg 015 016 016 017 017 Ola 09 0a 6 0*8 019 019 01 020 020 021 Sh~ppng& Handing tJOkg 0 02 002 002 002 002 002 002 002 002 002 002 002 002 002 002 CIF Coobo ~SDtkg 0 17 0*9 019 019 019 019 020 020 020 021 021 021 022 022 023 Olicind Exchange ltale MBM KR 57 72 00/9 8393 8/22 7109 7487 7 77 63*3 67 79 9350 9800 10413 11096 11752 12444 CIF Cobo LUVkg 978 1069 11 52 1250 1381 1448 1542 1655 17 77 1923 2077 2243 2423 2817 2828 Dom~stkicTnspoW/agint LR/kg 029 032 035 037 041 043 046 050 053 058 062 067 073 070 0S Farngsae Ec. Prce, Cur. tlIkg 1007 1101 %186 1267 1402 1489 1599 1/05 1*30 1961 2140 23.11 2406 2995 2911 DomscD~oafr Unkt 1e *95 211 228 246 295 287 310 334 381 300 421 455 401 5.31 > EconomicFwmgaløPic LKRIkg 558 565 583 56 570 561 554 55* 547 549 549 5.49 549 548 546 pRbbe ew York Spot, Sfl USD/kg 152 148 145 142 140 144 *49 152 158 100 163 1 m 1 70 1 73 177 Uua*SA iustmenI US~9kg 006 00/ 00/ 007 007 -001 0*1 06 006 -006 -006 -006 -000 -000 -006 Adqus~dP#c USlkg 144 141 f,31 135 133 137 14* 144 146 1.52 155 1.58 1.61 1.64 1.68 Shippig& awnug USWkg -034 -033 032 -032 -031 -032 -0,33 -034 035 -0 38 -03 -037 036 -038 -038 FOBCa.~ USO/kg *10 107 105 103 102 105 107 110 1.13 Il 1.19 121 123 1.29 126 ~WIEcIal~Euchang Rel USDLR 57 72 9076 83 83 6722 7106 7467 7877 63*3 87 79 9350 900 10493 1100 117.52 124.44 FOB CaLRIkg 63 72 6532 6723 0933 7229 7810 0467 9*7 9 947 10686 11738 12874 130 a 147.63 15 8 ShIpperf/Sborscharg L/kg -115 -1I1 -121 -125 -1.30 -141 -152 -165 -170 -1ø -211 -229 -246 -2.96 -287 D.alers/Tanpl LKIkg -172 -176 -182 -1.87 -195 -211 -229 -246 -299 -223 -3.17 -342 -3.70 -310 -431 Farg EcS Pic, Cur. 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[(( 1{[ t1L LtC 61С 90С OtS 1[t 609 11► С9► S[l [ОУ С([ L9[ С[[ 1[1 11► L1f RвРлууХ� /в1[Чаевб �1в1 о[t огt о[t огс огt оtt о[t ог[ оtt огС огt оtC огС огС оtC огС огС огс огс оtc 1ге огс ►о[ 1о( оw о69 оw огс оtL бzL v1 ^ап.r'1 v�а„1 96[ 91[ 9 t[ 91[ 91[ 9 6[ 71[ 9/[ 9 t[ 91С 9 tC 9 t( 91[ 9 6[ 91[ 9 t[ 91[ 9 t[ 91С 91[ 0 6[ t tC {/С 1 t( [ С[ L 6[ 16[ 1 0{ С[{ [►f адlllllMl вР!л . в�1 i MeJ tврвлд0 � lt[ С�1[ CtL L1L L1L C1L ►�R (1L [б[ 1tL 11[ 16[ {0( OL[ б[[ [►[ [О[ f9L 09[ 6LL 76L 11[ ОГf 9f[ 6[[ 9►[ ЬС► f[ь ftC LLS 1V11A"1a�Vah/�!•аМ7"у 010[ f00[ 100[ l00[ 900L f00L 100[ [OOL L00[ 100[ OOOZ 6661 1661 (661 ,9661 fбfl ►661 [661 [661 1661 0661 6161 1t61 Lt61 9К1 fK1 /t61 [бЫ [К1 1161 �J�aB ADOlON1L)Э1 СМ(11i1ХЭ swьэi iиvisиo� иi sэ�1а� эiwоио�э сааvi�эн аио) аэеапа аэоiа nivws � iiэoow wav� ( q) 5 аlqег 112 Annex D FARM MODEL 2: BANANA INTERCROP (ONE HECTARE) PRODUCTION, LABOR AND INPUTS Table 6 AREA REPLANTED New Technology > Rubber - annual ha 2418 2991 2429 2900 3472 2391 1817 392 Rubber - cumulative ha 2418 5409 7838 10738 14210 16591 18408 18800 Banana - annual ha 157 232 239 322 285 255 130 35 Banana/pineapple - annual ha 13 33 66 49 54 72 3S 9 Passion fruit etc - annual ha 88 149 97 8 27 7 34 14 > Intercropped - annual ha 260 414 402 379 366 404 202 58 Intercropped - cumulative ha 260 674 1076 1455 1821 2225 2427 2485 Alternative Technology " Rubber - annual ha 1209 1495.5 1214.5 1450 1736 1190. 5 908.5 196 Rubber- cumulative ha 1209 2704.5 3919 5369 7105 8295.5 9204 9400 " Intercropped - annual ha 121 150 121 145 174 119 91 20 Intercropped - cumulative ha 121 270 392 537 711 830 920 940 Table 7 NnVTECHNOLOGY Benefits 1981 1982 1983 1984 1985 1986 1987 1988 Yield bunches 200 240 110 Operating Costs Inputs fertfliser kg 80 too 100 50 compost tons 2 Labour holing man-days 12 p!anting man-days 10 applic. fertil/cornpost man-days 3 4 4 2 weeding man-days 25 20 20 10 harvesting/transport man-days 4 6 6 Investment Costs Inputs planting materials points 270 Note: No existing banana cultivation, so new incremental production. Table 8 (a)-(b) FARM MODEL 2: SMALLHOLDER BANANA (ONE HECTARE), (CONSTANT TERMS) NEW TECIINOLOGY (FINANCIAL PRICES) Bentits 1981 1982 19t3 1984 1985 1916 1987 1989 1919 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Yield bunchcs 53.7 57.7 602 61 5 72.1 794 87 8 91 6 97.2 92 0 94 3 97.4 1002 1057 1057 1057 1057 105.7 1057 105.7 105.7 1057 105.1 105.7 105.7 105.7 105.7 1057 105.7 105.1 Opeafing Costs Inpuus fe~iliser LKRkg 63 69 6.5 5.4 5.4 SI 46 44 43 74 69 62 62 62 62 62 62 62 62 62 6.2 62 62 62 6.2 62 62 6.2 6.2 62 compost . LKlÅon 243.0 2430 2430 243.0 2430 2430 2430 2430 2430 2430 2430 2430 2430 243.0 2430 2430 2430 2430 243.0 2430 2430 2430 2430 243.0 243.0 2430 2430 243.0 243.0 243.0 Labour holing LKR/man-day 659 651 616 580 609 580 581 579 583 487 67.6 590 645 74.3 757 770 784 798 85.3 827 842 857 87.3 888 90.4 92.5 93.7 954 97.1 98.9 planting LKRInan-day 659 65.1 61.6 580 609 580 581 579 583 487 67.6 590 645 743 757 770 784 798 813 827 84.2 85.7 473 888 904 92.1 937 93.4 97.1--989 applic. ferticompas LKIUman-day 659 65.1 61.6 58.0 609 58.0 581 57.9 58.3 487 61.6 590 645 74.3 757 770 784 79.9 81.3 82.7 84.2 85.7 87.3 88 904 92.1 93.7 95.4 97.1 989 weeding LKR/man-day 65.9 65.1 616 580 609 510 58.1 519 583 43.7 67.6 590 645 743 757 710 184 198 813 827 842 857 81.3 888 90,4 92.1 93.7 95.4 97.1 989 harvestinghanspon LKRhnn-day 659 65.1 616 580 609 580 58.1 519 583 48.1 676 590 645 743 757 770 784 198 11.3 327 842 55.7 87.3 888 90.4 92.1 93.7 95.4 97.1 98.9 Investmen~ Costs plamngMacrials LK/pJin 2.7 3.1 3.5 3.8 4.8 5.7 63 16 8.8 83 88 8 8 8. 1.8 8 88 18 83 . 8.8 88 8.8 8.3 8 88 8.8 38 8.8 18 8 Note: No existing banana cuhivation, so new - incmn~al produclion. NEW TECNOLOGY (ECONOMIC PRICES) Benefis Yiedd bunches 439 519 54.2 522 65 3 67 5 77 2 80.6 87 5 83 7 849 87 6 902 95 l 95 l 955 95 l 951 95 l 95 1 95 l 95 1 95 l 95.1 95.1 95.5 931 95.1 95 95. Operating Costs Inputs fenilis LIKRkg 13.5 9.3 I1 93 76 51 63 79 13 12 74 58 43 55 58 56 16 56 5.1 57 56 5.5 5.5 .55 5.5 5.5 5.5 55 55 55 com§pos LKRhon 221 1 218.7 2187 2065 206.5 2065 213 213 8 2187 221 1 2187 2147 2187 2537 217 218 7 217 218.7 21.7 2197 2187 2117 2187 2187 2181 2187 2187 2187 218.7 218 Labour holing L.KR/man-day 547 488 43.1 377 365 377 407 435 467 454 609 535 580 706 719 732 745 758 772 786 800 814 829 844 85.9 87.5 890 906 92.3 939 planling LKit/man-day 547 438 431' 377 365 317 407 435 467 414 609 53l 580 706 719 732 145 175 712 786 800 81.4 829 844 859 87.5 89.0 906 923 939 appihe. fetil/compos LKImam-day 547 483 431 31.1 365 371 407 435 467 414 609 531 580 706 119 732 745 158 772 786 800 85.4 82.9 84.4 85.9 87.5 890 906 92.3 939 weeding LKPJman-dy 547 488 43.1 377 365 317 401 435 467 414 609 53.1 580 106 719 732 745 758 112 786 800 31.4 829 34.4 85.9 81.5 890 906 923 939 haresighranspan LKR/man-day 547 488 43.1: 377 36.5 37.7 407 435 467 41.4 609 53.1 580 706 719 732 745 738 77.2 786 800 81.4 329 84.4 859 875 90 906 923 93.9 Investment Costs Inpufs planfingmaaåks L.KIVpoint 24 2.8 3l 33 41 4.9 60 67 79 30 1.9 19 19 19 79 19 19 79 19 19 19 7 9 19 1.9 1.9 7.9 79 7.9 7.9 79 Nca: No exilig baana a gvaton. sa new hnraental produclion. Алдех D 114 ' 2$:а С$$ �3:� $5� я 8$$� ��� $$$� *S йёlй' r.бй Ritй^ °-�Я! �:е^ !.!в oi�^ �.r1. ' $=�.i aii ���� i�� � �а ëi� оА'Rw �аг�i� �й ё:ё(i�^ й�i$ й R' ir.A ��'i°-- a.ëg �А°^- si. = =":_$а $_� $��� $Q$ R $$�� ва� 3$�� :`� йа� ^ иS�i йы� ^ й в� .^.i�й^ �С� SR й^ i.l. ^ �ао S '$-,`7{ r+�o�'ё �$i �' о� g� ёа7{ 7�7{ �� $� �Ri.. у� i д�в ^ �� д�й- l.S� °й й^ I1.Sц ' ё$n� $dR б�ё= S�= R' Rw��'г� R�!'й аё�`г�_ 8У �ii�^ SCj� oi_ �ц' ^f ��+R- �.ао °й,Q' "" � i?fi1 У�я а�i=ц .R3й к +S� �� iнй nй пi`г�_ �i � �°^ =Q� � �°^ L�t� SdйR^ = -° SvйR^ .^^ ' $$�� ��� �$$$ n=п « в:�� ��га ���� �'$ Jва ^ � ^ d��i ^ ^ йй й ^ � � �iй й^ -•^ ' $i3s ой'� ë�roë �от й �ап$i ësm �нпп �ш � S� '� 'д�� ^ �'� йtL й^ �V°^ ййй^ =^ " '. �$й� ��$ 3$й= F3itii ��ië'д R3,o � ад�г�i ёё idd� �о;� °е�' =уУт йi'i й^ '.f о ййй^ ' в oooogo$ео ооооя ,�оо й$$�рΡгпi_ ��В т�аa"�. �' 3^ % `„ NИ И � � N Й И' "' М� ��=: ¢ р$ о о О О g Q Q� Q О е е О� $�$$ R �� е� �^ О Й Р! е Г�f О О � ri�:1Y 8=а�вi wд�c,SR'�' ��8'=2 F:йR^ й айR^ гi � � � о: 3 К 8 ii i= i{ о о о о 3 3 8 i.� о а о о g i S� �� ' й$$ г� R� ё 'гЗ �$`��3 й 3 :� .r :1й �[б✓ ,::с=� 1'S=� йрR� .:.;й �Н£Z' �� п s оs уΡ� ��n о оеоуΡ� �+ е� о ооод а п� ^ .. п�. Q 7f$ 3 $$SR й�� ёоцоо д4$��� �Rn`�, goë тiпл bia С1 'й � iii lyид wйбСl�ц а^l11t3 Rйй^ п�й � ймй^ �� 1jiZг� И йло8 $wiii ё�$ оооо4��8$ оооо�Ё�а8 ^ oSnй о.:� n^пл �i�i qRM 4.еХ . 11ЕТ �REfEMT ЕСоМо111С VAtt1E о10Х (190,б16) Table I I (b) SRI LANKA - SMALLHOLDER BIEBER REHABILITATION PROJECT ECONOMIC ANALYSIS: NEU VS. EXISTING TECHNOLOGY 1981 19112 1983 1964 1985 1996 1987 1988 1959 Mo 1"1 1"2 1993 IM 1"5 TOTAL BENEFITS Rubber (44,595) (611,225) (102,594) (127,769) (126,547) (119,792) (".650) (16.857) 85.700 149,219 223,697 286,018 359.792 468.019 581,805 Rubberwood 11,898 16.1`19 n."I 15,776 Is'"a 12.953 10,233 2,208 0 0 0 0 0 0 0 Bananas 0 2,700 7,873 10's" 13,346 14,070 16,243 14,319 9,143 3,026 542 0 0 0 0 ---------------------------------------------------------------------------------------------------------------------------------------------- Total Benefits (32,697) (49.405) (80,730) (101,107) (94.313) (92,769) (73,174) (329) 94,843 152,244 224,238 286,818 359,792 4611.039 581,805 TOTAL COSTS Rubber Production Costs (25,317) (48,302) (61,571) (73,553) (91,793) (94,079) (71,731) (24,466) 33,426 98,697 194,333 253,508 317,907 388,925 407,489 Banana Production Costs 1,107 2.097 2,687 3,100 z.a92 2,?45 2,387 1,8" 1,034 336 115 a 0 0 a Rubber Investment Costs 120,476 153.191 137,897 171.760 206,909 162,459 149,385 108,032 74,108 44,069 26,397 6,039 682 0 0 Banana Investment Costs 172 312 340 333 405 530 326 105 0 0 0 0 0 0 0 Overheads/ProJect Costs 0 1 9 Q 15 26 31 28 28 29 20 20 is 9 2 ---------------------------------------------------------------------------------------------------------------------------------------------- Total Costs 96,43? 107,299 79,363 101,651 118,42a 71,681 80,401 85,566 103,595 143,132 220,835 259.566 318,607 388.933 407,491 Met Benefits (129,133) (156,704) (160,093) (202,758) (212,741) (164.450) (153,575) (85,895) (13,753) 9,113 3,403 27,251 41,185 79.105 174,314 ...... ......... man ..... C..Zz= ....... a ........ 2.8a..ax.. 1996 1"? 1998 1999 2000 2001 2002 2003 Z004 2005 2006 NOT 2008 2009 2010 TOTAL BENEFITS Rubber 610,132 604.502 589,867 5611,236 545.193 532,819 516,922 504,036 490,950 4111,11T]l 463,021 445.814 422,480 392,031 353,494 Rubberwood a 0 0 0 0 0 0 0 0 0 0 0 0 0 a Bananas 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 .............................................................................................................................................. Total Benefits 610,132 604,502 589,867 568,236 545,193 532,819 516,922 504,036 490.950 481,3T3 463.021 445.1114 422,480 392,031 353,494 TOTAL COSTS Rubber Production Costs 420,41] 428.299 434,929 436,536 437,539 439,131 439,911 439,676 441,252 440,639 441,703 442.1185 443,067 437,720 423,810 Swum Production Costs a 0 0 0 0 0 0 0 0 0 0 a 0 0 0 Rubber Investment Costs a 0 0 0 0 0 0 0 0 a 0 0 0 0 0 lanans Investment Costs 0 0 0 0 0 0 0 0 0 0 a 0 0 0 0 Overheads/Project Costs 0 0 a 0 0 0 0 0 a 0 0 0 0 0 0 .............................................................................................................................................. Total Costs 420,413 428,299 434,929 436,836 437,539 439.131 439,911 439,676 441,252 440.639 441,703 442,885 443,067 437,720 423.810 Met Benefits 1119,710 176,203 154,938 131,400 107,654 93,68a 77.011 64,360 49,698 40,734 21,318 2,929 (20,587) (4S.689) (70,317) ................. ...... ===a ....... ECONOMIC RATE OF RETLIRM 0.21 NET PRESENT ECONOMIC VALUE 210% (653,545) t e 119 Annex E Economic and Financial Analysis of the Fourth Tree Crops Project This annex presents the assumptions underlying the economic and financial analysis of the Fourth Tree Crops project and the following tables: Table El(a)-(d) Tea, rubber and coconuts: production with and without the project Table E2(a)-(c) Tea, rubber and coconuts: with- and without-project prices Table E3(a)-(c) Financial analysis: incremental benefits, FRRs and NPVs for the three crops Table E4(a)-(c) Economic analysis: incremental benefits, ERRs and NPVs for the three crops Assumptions Underlying the Financial Analysis Production: The impact analysis followed the SAR and PCR in presenting a crop base without the project and deriving an incremental production stream that was added to the crop base to obtain the with-project output. The incremental stream reflects both foregone production and new production on areas replanted. Yields on foregone production were not made explicit in the PCR's analysis, but interviews by the impact team suggested that the SAR's without-project yields were representative of actual experience; therefore they were used in the impact analysis. The SAR assumed no replanting in the absence of the project. The PCR added a modest replanting program for rubber in the absence of the project. The IER followed the PCR's assumptions in order to obtain comparable results. In practice, likely without-project replanting programs are highly uncertain in the case of the FTC project, due to considerable uncertainty regarding the timing and nature of privatization that might have occurred in the absence of the project. For example, without the flow of funds provided by the project, the government might have privatized management of government estates earlier than it did, and might have allowed private ownership of shares in the RPCs in order to attract private capital. This scenario would probably have entailed substantially lower production costs as well. On the other hand, without Bank support for and monitoring of the process, privatization might have occurred much later than it did and might have been significantly less transparent. The PCR used SAR yield curves for the with-project analysis of tea and rubber-it did not re-estimate returns on coconut investments. The SAR yield curves were found to be appropriate for tea, but optimistic for rubber (as noted in the PCR, p. 31) and for coconuts. The impact analysis therefore derived more modest yield curves for tea and rubber, based on information obtained during mission interviews (Tables El(a)-(d)). Actual output figures were used for the with-project production streams for each crop for the years 1985-1993. Costs of Production: Following the PCR, actual average costs of production, were used for the with-project analysis for each crop for the years 1985-1994. Thereafter, costs of production were Annex E 120 related to output under the assumption that fixed costs and variable costs of production would remain constant over time. Fixed costs were set at 30 percent of the total cost of production in 1993 in the case of tea, 25 percent of 1992 costs in the case of rubber, and 55 percent of (average) total costs for 1992/93 in the case of coconuts. These proportions are consistent with those applied at appraisal. The remaining costs for each crop in 1992/93 were taken to be variable and were used to derive average variable costs of production per kilo for tea and rubber, and per nut for coconuts. This permitted the calculation of projected total costs of production for 1995-2014 that were related to with- and without-project production streams. In distinguishing between fixed and variable costs, the impact analysis followed the SAR but departed from the PCR's analysis, which did not distinguish between the two. However, the impact followed the PCR in adjusting without-project costs of production up, relative to the with-project scenario. The impact's adjustment (one percentage point, attributable to efficiency gains from project-supported factory development) was more modest than the PCR's adjustment (3.5 percentage points, attributed (PCR p.36, footnote d) to poorer labor management without the project). Prices: Prices for the three commodities were derived as shown in Tables E2(a)-(c). With- project financial prices were net of average export taxes for tea and rubber. For the period 1985-1993, actual net sales average (NSA) figures were used. Thereafter, financial prices were assumed to change in the same proportion as projected world prices, relative to a base obtained by averaging the NSA for 1989-1991. Under the without-project scenario, it was assumed that quality of production would have been poorer, resulting in a 2 percent lower price. Wood Values: Financial prices were not available by year for coconuts and were taken to remain constant in real terms at the SAR value. Financial prices for rubberwood were the same as those used for the SRR project analysis and were based on interpolations of SAR, PCR and IER data for that project. The total values of coconut palm and rubberwood sales each year were obtained by multiplying the respective prices by the product of hectares foregone and trees per hectare. Wood values are subtracted from the (incremental) investment cost for rubber and coconuts in tables E3(a)-(c) and E4(a)-(c). Investment Costs: These were re-estimated on the basis of information provided by JEDB and SLSPC in annual reports on the MTIP, and on information in the PCR. In the case of rubber, incremental investment costs were presented net of a without-project investment stream equal to 14 percent of the with-project stream (70 percent of with-project costs on one- fifth of the with-project area). Since the investments in social welfare yielded unquantified welfare benefits in addition to their impact on productivity, part of the welfare investment costs (50 percent) were excluded from the calculations. Assumptions Underlying the Economic Analysis Costs of Production: Three adjustments were made to the financial costs of production described above. First, allowances were made for depreciation and interest payments. Second, the labor components of financial costs of production were adjusted by a specific conversion 121 Annex E factor for labor. The SCF that was used was lower than that for the smallholder rubber project, due to the lower opportunity cost of estate labor, except in the case of coconuts, for which the impact team found an acute shortage of labor and a relatively high proportion of non-resident workers. Third: the non-labor components of financial costs were adjusted by the standard conversion factor. The proportion of labor costs in total costs, the conversion factor for labor and the standard conversion factor were assumed to remain constant after 1994, so that the proportional difference between financial and economic prices was held constant over time. Just as under the financial analysis, a one-percent adjustment was made for efficiency improvements under the project, relative to the without-project scenario. Prices: Tea and rubber prices are equivalent to financial prices, as described above, augmented by the average export taxes collected by GOSL. Following the SAR, economic prices for coconuts were set equal to the world price of bulk coconut oil, CIF NW Europe, adjusted for manufacturing and export costs using a 1.2 cost factor that also reflects the benefits from sales of poonac, a by-product of the manufacture of coconut oil (the SAR adjustment factor was 1.17). Just as for the financial analysis, it is assumed that tea, rubber and coconut prices would have been 2 percentage points lower in the absence of the project, due to quality improvements. Wood Values: Financial values for sales of coconut palms and rubberwood were converted to economic values using the standard conversion factor. Investment Costs: Investment costs in financial terms for the three commodities were converted to economic values using the standard conversion factor. As noted above, part of the welfare investment costs were omitted from the calculations, since the benefits associated with them could not be quantified. Table 1 (a) TEA PAOIUCTION WITHOUT PROJECT - WITH PROJECT -- Total Total Production Immature Without Annual Cumulative Immature Production New Production Production Production IER Aflter 1tWr Pre- Bought Project Production Area Area Yield Foregone Pm- Bought Yield In Area Planting In New In-Fillings In Area With incremental Eroelo P Production Crop Replt R Foregone Production Subtotal Proiect Crop Subtotal Curve R Area Areas Area In-Filled Pre Production Kg 00e Kg Me Kg OW9 Kg Ws Kg 000e He He Kg/ha Kg 000s Kg OOs Kg 000s Kg OODs kg ODs kg/ha kg Os he kg Os la kg 000s kg OCs kg 00a 1985 1 130.165 2,139 1,739 151,063 130,185 899 899 800 719 129,466 2,139 18,739 150,344 231 1,557 150,782 (301) 1888 2 120,884 3,678 17,202 148,781 125,884 875 1,774 800 1,419 127,464 3.76 17.202 148.342 147 812 144,758 (5.003) 1987 3 127,505 5,576 17,048 150.210 127.595 988 2,742 800 2,194 125,401 5,578 17,048 148,025 135 639 140,222 (9,997) 1988 4 126.319 7,320 17,572 151,510 126,319 1,20 4,008 900 3,208 123,112 7.320 17,972 148,304 196 430 143,80 (7,530) 1989 5 125,056 8,867 17,112 151,055 125,056 1,336 5,344 aOD 4,275 120,780 8,687 17,112 146.760 600 539 100 139 337 561 132,800 (18.255) 190 6 123,05 9,457 19,434 152.08 123,805 1,231 8.575 00 5,260 118,545 9,457 19,434 147,436 800 1,244 80 273 305 1,040 136,777 (13,919) 1981 7 122.587 10.090 10,174 151,640 122,567 1,603 8,178 600 6,542 116,025 10,099 19,174 145,298 1,000 2,160 109 430 215 1,554 130,157 (13,683) 1992 8 121,341 11,141 16,780 110,454 122,567 8,176 600 8.542 116,025 11,141 16,780 143,946 1,300 3,578 674 2,163 102,300 (6,154) 1993 8 120.126 12,302 25,110 187,540 122,567 8,178 600 6,542 110,025 12,302 25,110 153,437 1,00 5,356 968 2,839 138,000 (18,740) 1994 10 110,927 12,081 30,250 101,268 122,567 8,170 600 6,542 118,025 12,091 30.250 158,366 1,00 7,350 1,225 3,489 156,048 (5.220) 1995 II 117,737 12,770 30,250 180,757 122,567 8,178 800 8,542 118,025 12.770 30,250 150.045 1,400 9.311 1,381 3,560 173,296 12,539 1996 12 110,50 13,52 30,250 160,392 122,567 6.178 600 8,542 116,025 13.582 30,250 159.857 1,00 10,882 1,54 3.829 175,916 15,524 1907 13 116,304 13,751 30,250 150,395 122,567 8,178 800 6,542 116,025 13,751 30,250 100,028 2,200 12,353 1,00 4,526 178,710 19,315 1998 14 114,240 13,16 30,250 157,656 122,567 8,178 60D 6,542 116,025 13,16 30.250 159,441 2,500 13,952 2,006 5,206 180,865 22,948 1990 15 113,096 13,440 30,250 156,794 122,567 8,178 80D 6.542 116,025 13,446 30,250 159,721 1,500 14,342 1,912 4,894 180,80 23,875 t 2000 16 111.167 13,753 30,250 155,070 122,567 8,178 800 8,542 116,025 13,753 30,250 100,028 1,00 14,972 2,045 4,844 181,88 25,918 2001 17 110,847 13,751 30,250 154,848 122,567 8,178 000 8,542 118,025 13,751 30,250 180,026 2,800 15,770 2,276 5,493 183,564 26,716 2002 18 109,730 13,106 30,250 153,155 122,567 8.178 00 8,542 116,025 13,166 30,250 159,441 2,125 16,537 2,252 5,482 183,711 30,556 2003 19 108,842 13,440 30,250 152,308 122,567 8,178 800 8,542 116,025 13,446 30,250 159,721 2,125 17,300 2,255 5,552 184,828 32,490 2004 20 107,56 13,753 30,250 151,56 122,567 8,178 800 6,542 116,025 13,753 30,250 100,028 2,125 17,511 2,358 5,487 185,354 33,826 2005 21 106,40 13,751 30,250 150,461 122,567 8,178 000 6,542 116,025 13,751 30,250 too,026 2,125 18,734 2,320 5,450 184,530 34,050 2008 22 105.415 13,751 30,250 140,416 122,57 8,178 00 8,542 116,025 13,751 30,250 100,026 2,125 17,602 2,330 5,534 185,492 36,076 2007 23 104,361 13,751 30,250 148,362 122,57 8,178 800 6,542 116,025 13,751 30,250 100,020 2.125 18,140 2,368 5,537 186,071 37,700 200 24 103,317 13,751 30,250 147,318 122,56? 8,178 800 8,542 118,025 13,751 30,250 180,026 2,125 17,378 2,316 5,470 185,196 37,878 2000 25 102,284 13,751 30,250 148,265 122,5a7 8,178 600 8,542 118,025 13,751 30,250 10,026 2,125 17,378 2,316 5,476 185,100 36,911 2010 20 101,261 13,751 30,250 145,262 122,567 8,178 00 6,542 116,025 13,751 30,250 180,026 2,125 17,378 2,318 5,476 185,198 30,934 2011 27 100.248 13,751 30.250 144,240 122,567 8,178 600 8,542 116,025 13,751 30,250 180,026 2.125 17,376 2,310 5,476 185.196 40,947 2012 28 00.246 13,751 30,250 143,247 122,567 8,178 600 6,542 118,025 13,751 30,250 180,026 2,125 17,378 2,316 5,470 185,198 41,949 2013 29 8,253 13,751 30,250 142,254 122,567 8.178 600 6,542 118,025 13.751 30,250 100,026 2,125 17,378 2,316 5,476 185,198 42.942 2014 3D 07,271 13,751 30,250 141,272 122,57 8,178 00 6.542 116,025 13,751 30.250 100,026 2,125 17,378 2,316 5,476 185,196 43,924 Table 1 (b) RUBBER PRODUCTION WITHOUT PROJECT Area Proportion Area Average Yield Production Replanted Replanted Re-/Newly Production Production Extent Extent Age, (No Without Without Under the Without Planted Foregone Foregone From Area Without Cultivated Bearin Mature Reinvest.) Project Investment Project Proiect w/o Project Yield Production Replanted Proiect Ha Ha Ha Years Kg/ha Kg 000s Ha Percent Ha Kg/ha Kg 0OOs Kg 000 Kg 000s 1985 1 62,683 41,470 66.2% 11 1,000 41,470 1,497 20.0% 299 675 202 41,268 1996 2 61,743 44,306 71.8% 12 1,000 44,306 2,125 20.0% 425 506 438 43,867 1987 3 60,817 47,047 77.4% 13 962 45,259 3,600 20.0% 720 360 815 44,444 1988 4 59,904 49.696 83.0% 14 917 45.571 2.326 20.0% 465 285 925 44,646 1989 5 59,006 52,255 88.6% 15 946 49,433 2,081 20.0% 416 214 975 48,456 1990 6 58,121 54,725 94.2% 16 930 50,895 1,619 20.0% 324 160 950 80 50,025 1991 7 57,249 57,249 100.0% 17 920 52,669 1,681 20.0% 336 120 939 271 52,001 1992 0 56,390 56,390 100.0% 18 910 51,315 90 704 645 51,255 1993 9 55,544 55,544 100.0% 19 900 49,990 68 528 1,109 50,570 1994 10 54,711 54,711 100.0% 20 900 49,240 51 396 1,618 50,462 1995 11 53,80 53,80 100.0% 21 900 48,501 30 295 2,108 50,314 1996 12 53,082 53,082 100.0% 22 900 47.774 18 217 2,568 50,126 1997 13 52.286 52,206 100.0% 23 900 47,057 11 154 2,883 49,786 1998 14 51,502 51,502 100.0% 24 900 46,351 7 107 3,087 49,332 1999 15 50,729 50,729 100.0% 25 900 45,656 71 3,175 48,761 2000 16 49,968 49,968 100.0% 26 900 44,971 44 3,214 48,141 2001 17 49,219 49,219 100.0% 27 900 44,297 24 3,227 47,500 2002 18 48,400 48,480 100.0% 28 950 46,056 12 3,203 49,247 2003 19 47,753 47,753 100.0% 29 950 45,365 6 3,169 46,529 2004 20 47,037 47,037 100.0% 30 900 42,333 2 3,119 45,450 2005 21 46,331 46,331 100.0% 31 675 31,274 3,073 34,347 2006 22 45,636 45,636 100.0% 32 506 23,103 3,050 26,153 2007 23 44,952 44,952 100.0% 33 380 17,068 3,005 20,073 2006 24 44,277 44.277 100.0% 34 285 12,609 2,960 15,569 2009 25 43,613 43,613 100.0% 35 214 9,315 2.992 12,307 2010 26 42,959 42.959 100.0% 36 160 6.881 3,062 9,944 2011 27 42.315 42,315 100.0% 37 120 5,084 3,092 8,176 2012 28 41,80 41,60 100.0% 38 90 3,755 3,162 6,918 2013 29 41,055 41,055 100.0% 39 68 2.774 3,209 5,963 TO 2014 30 40,439 40,439 100.0% 40 51 2,050 3.274 5,323 Table 1 (c) FL ER PRO-CTIN Mm PRIECT Area Arom Newly Output New Total ProDect Aplanted Planted Foregone Production Basa Net Actual Output Incremental Weited Under Under 0 to Under the flubber Output Total With Output Ybåd Project Project Replant. Proect Production Stream Output Project Stream Kgffa Ha Ha Kg O00 Kg ow0s Kg 0os Kg 0Os Kg OD0s Kg O0s Kg O0s 195 1 1,497 202 1,617 41,470 39,853 41,000 41,000 (26) 19I 2 2125 236 3,508 44,306 40,798 41,800 41,800 (2067) 1087 3 a3X 240 6,519 45259 38740 40,600 40,600 (3844) 1088 4 2326 362 7,401 45,571 38,170 42100 42100 (2546) 19 5 2081 226 7,798 49.433 41,634 35000 35,000 (13453) 1000 6 296 1,619 286 7,597 5M 50,895 43799 37,800 37,800 (12,225) 1001 7 588 1,681 190 7,513 1,696 52669 4Q851 37,000 37,000 (15001) 1902 8 848 5,635 3962 51,315 49,642 36,600 36,600 (14.655) 193 9 1,040 4,226 6,817 49,990 52581 3,400 3,400 (20,1 70) 1904 10 1,168 3170 9,953 49,240 5Q023 42000 42,000 (E462 105 11 1,212 2,359 13,004 48501 59,146 59,146 5832 190 12 1,243 1,733 15,878 47,774 61,919 61,919 11,794 1007 13 1,185 1,234 17,852 47,057 63,676 63,676 13,80 1008 14 1,205 857 19,135 46351 64,629 64,629 15297 190 15 1,179 568 19,703 45,656 64,791 64,791 16,031 2000 16 1,168 354 19,938 44,971 64.555 64,555 18414 20M1 17 1,260 190 20,031 44.297 64,138 64,138 16,638 2002 18 1,108 99 19,871 4656 65828 65,828 16581 2003 19 1,072 46 19,645 45,365 64,964 64,964 18435 2004 20 1,181 18 19,370 42333 61,686 61,686 16,236 2005 21 1,091 19,072 31,274 50,346 50346 15,990 2006 22 1,051 18919 23,103 42,022 42022 15869 2007 23 1,099 18,653 17.068 35,721 35,721 15,648 2008 24 1,158 18,369 12609 30978 30,978 15,409 2009 25 1,186 1a567 9,315 27,881 27,881 15,575 2010 26 1,222 1a990 Q881 25,871 25,871 15,927 2011 27 1,201 19,171 5084 24,255 24,255 18079 202 28 1,271 19,607 3,755 23,362 23,362 16445 2013 29 1,183 19,906 2774 2261M 22,680 1,697 2014 30 1,26 20,298 2,060 22348 22,348 17,024 Table I (d) COCoNUTPRODUCTON WITHOUT PROJECT- WITH PROJECT- Output w/o Project Annual Average Production Total lor (Equal to Area Under- Thinning Hectares Yield Foregone Yield In Area Production incremental SAR data) Planted proportions Foregone Foregone Production Subtotal Curve Replanted With Prolect Production Nuts 000s Ha Ha Ha Nuts/ha Nuts 000s Nuts 000s Nuts/ha Nuts 000s Nuts 000S Nuts 0006 1985 1 65800 90 2500 0 65,OO 65800 0 1985 2 eD,500 111 2,500 0 60,500 60,500 0 1987 3 41,400 92 2500 0 41,400 41,400 0 19B 4 34,576 147 025 23 2,500 56 34,520 31,000 (3576) 1989 5 35,526 109 28 2500 69 35,457 50,200 14,674 1990 6 37,224 137 23 2500 58 37,167 46,600 9,376 1991 7 3R754 106 Qi 46 2,500 114 39,640 39,400 (354) 1992 8 42,218 010 47 2500 118 42,100 396 36 44,100 1,882 1993 9 43,971 055 104 2,500 260 43,711 1,543 183 48,300 4,329 1994 10 4f316 111 2,500 279 46037 3018 479 46,517 201 1995 11 48073 76 2.500 191 47,883 4,837 970 48,853 780 1996 12 49,464 105 2.500 264 49,200 5,528 1,582 5Q782 1,318 1997 13 5Q655 84 2,500 211 50,444 6,392 2.300 52,744 2,089 1998 14 5684 86 2,500 215 50,469 7,063 3149 53618 2,934 1999 15 SQ553 58 2,500 146 50,407 8,120 4,022 54,429 3,876 2000 16 5(,422 50,422 9,448 4,928 55350 4.928 2001 17 5Q291 50,291 9,448 5,654 55,945 5,654 2002 18 51160 50,160 9,448 6,196 56,356 6,196 200 19 SQ029 5(0029 9,448 8690 5f;719 6,690 2004 20 4RBB 49,898 9,448 7,050 58948 7,050 2005 21 48768 49,768 9,448 7,342 57,110 7,342 2006 22 48637 49,637 8448 7,483 57,120 7,483 2007 23 49,506 49,506 9,448 7,483 58,989 7,483 2008 24 49,375 49,375 9,448 7,483 56,858 7,483 2009 25 48,244 49,244 9,448 7,483 5a727 7,483 2010 26 48,113 49,113 9,448 7,483 5R596 7,483 2011 27 48,982 48,982 9,448 7,483 58465 7,483 2012 28 4RB51 4851 9,448 7,483 54334 7,483 2013 29 48,720 48,720 9,448 7,483 58,203 7,483 2014 30 48,720 48,720 9,448 7,483 56,203 7,483 tri Table 2 (a) TEA PRICES WITH PROJECT WITHOUT PROJECT Average of Quality All teas at World Bank Average Average Economic Domestic Economic Financial Reduction Economic Financial London Tea Price Weighted Duty, cess Tax as % Price Deflator Price Plice Without Price Price MUV Index Auctions. Projections NSA & Sales Tax of NSA Curr. LKR 1990=100 Constant Constant Project Constant Constant 1990=100 USD/kg 90 USD/kg (LKR/kg) (LKR/kg) (%) (LKR/kg) (Units) (90 LKR/kg) (90 LKR/kg) (%) (90 LKR/kg) (90 LKR/kg) A B C=A(1+B) D E=CxD F=E/(l+B) G H=E(I-G) I=H/(1+B) 1985 1 0.686 1.98 2.89 32.43 11.02 34.0% 43.45 0.556 78.10 58.29 0.0% 78.10 58.29 1986 2 0.809 1.93 2.39 31.18 6.32 20.3% 37.50 0.601 62.41 51.89 0.0% 62.41 51.89 1987 3 0.888 1.71 1.92 37.33 7.27 19.5% 44.60 0.647 68.92 57.68 0.0% 68.92 57.68 1988 4 0.953 1.79 1.88 41.29 5.78 14.0% 47.07 0.738 63.81 55.97 0.0% 63.81 55.97 1989 5 0.947 2.02 2.13 56.88 5.00 8.8% 61.88 0.823 75.18 69.10 0.5% 74.81 68.70 1990 6 1.000 2.03 2.03 63.53 10.17 16.0% 73.70 1.000 73.70 63.53 1.0% 72.97 82.00 1991 7 1.022 1.84 1.80 54.67 5.12 9.4% 59.79 1.122 53.30 48.73 1.5% 52.60 48.00 1992 8 1.066 2.00 1.88 65.92 3.90 5.9% 69.83 1.250 55.88 52.76 2.0% 54.76 51.70 1993 9 1.042 1.86 1.78 65.78 2.11 3.2% 67.90 1.396 48.63 47.11 2.0% 47.65 46.17 1994 10 1.074 1.83 1.70 3.0% 57.79 56.11 2.0% 56.63 54.98 1995 11 1.090 1.90 1.74 3.0% 59.10 57.38 2.0% 57.92 56.23 1996 12 1.109 1.97 1.78 3.0% 60.20 58.44 2.0% 58.99 57.28 1997 13 1.138 2.03 1.78 3.0% 60.47 58.71 2.0% 59.26 57.53 1998 14 1.170 2.09 1.79 3.0% 60.56 58.79 2.0% 59.35 57.62 1999 15 1.200 2.15 1.79 3.0% 60.74 58.97 2.0% 59.52 57.79 2000 16 1.225 2.20 1.80 3.0% 60.B7 59.09 2.0% 59.65 57.91 2001 17 1.260 2.25 1.79 3.0% 60.54 58.77 2.0% 59.33 57.60 2002 18 1.290 2.30 1.78 3.0% 60.44 58.68 2.0% 59.23 57.51 2003 19 1.320 2.35 1.78 3.0% 60.35 58.60 2.0% 59.15 57.42 2004 20 1.350 2.40 1.78 3.0% 60.27 58.51 2.0% 59.06 57.34 2005 21 1.369 2.45 1.79 3.0% 60.67 58.91 2.0% 59.46 57.73 2006 22 1.79 3.0% 60.67 58.91 2.0% 59.46 57.73 2007 23 1.79 3.0% 60.67 58.91 2.0% 59.46 57.73 2008 24 1.79 3.0% 60.67 58.91 2.0% 59.46 57.73 2009 25 1.79 3.0% 60.67 58.91 2.0% 59.46 57.73 2010 26 1.79 3.0% 60.67 58.91 2.0% 59.46 57.73 2011 27 1.79 3.0% 60.67 58.91 2.0% 59.46 57.73 2012 28 1.79 3.0% 60.67 58.91 2.0% 59.46 57.73 2013 29 1.79 3.0% 60.67 58.91 2.0% 59.46 57.73 2014 30 1.79 3.0% 60.67 5B.91 2.0% 59.46 57.73 Table 2 (b) RUBBER PRICES WITH PROJECT WITHOUT PROJECT World Bank Average Average Economic Domestic Economic Financial Reduction Economi Financial New York Rubber Price Weighted Export Duty Tax As % Price Deflator Price Price Without Price Pdoce MUV Index RSS1 Spot Projections NSA And Cess of NSA Curr.LKR 1990=100 Constant Constant Project Constant Constant 1990=100 USD/kg '90 USD/kg (LKR/kg) (LKR/kg) (%) (LKR/kg) (Units) (90 LKFlVkg) (90 ULR/kg) (%) (90 U(R/kg) (90 LKlVkg) A B C=A(1+B) D E=CxD F=E/(1+B) G H=E(I-G) I=MW(1+B) 1985 1 0.686 0.92 1.35 17.57 3.40 19.3% 20.96 0.556 37.68 31.57 0.0% 37.68 31.57 1986 2 0.809 0.94 1.17 21.52 4.17 19.4% 25.68 0.601 42.75 35.81 0.0% 4275 35.81 1987 3 0.888 1.12 1.26 20.18 6.30 31.2% 26.49 0.647 40.93 31.19 0.0% 40.93 31.19 1988 4 0.953 1.29 1.35 27.13 9.73 35.9% 36.86 0.738 49.97 36.78 0.0% 49.97 36.78 1989 5 0.947 1.12 1.18 25.41 10.45 41.1% 35.86 0.823 43.57 30.87 0.5% 43.35 30.72 1990 6 1.000 1.02 1.02 25.63 10.37 40.5% 36.00 1.000 36.00 25.63 1.0% 35.64 25.37 1991 7 1.022 1.01 0.99 24.51 8.04 32.8% 32.55 1.122 29.02 21.85 1.5% 28.58 21.52 1992 8 1.066 1.02 0.96 34.56 5.71 16.5% 40.27 1.250 32.23 27.66 2.0% 31.59 27.11 1993 9 1.042 0.99 0.95 34.24 1.98 5.8% 36.22 1.396 25.94 24.52 2.0% 25.42 24.03 1994 10 1.074 1.32 1.23 42.31 3.0% 43.58 1.514 28.79 27.95 2.0% 28.22 27.39 *4 1995 11 1.090 1.52 1.39 3.0% 47.53 46.15 2.0% 46.58 45.23 1996 12 1.109 1.52 1.37 3.0% 46.70 45.34 2.0% 45.77 44.43 1997 13 1.138 1.48 1.30 3.0% 44.32 43.03 2.0% 43.44 42.17 1998 14 1.170 1.45 1.24 3.0% 42.24 41.01 2.0% 41.40 40.19 1999 15 1.200 1.42 1.18 3.0% 40.33 39.16 2.0% 39.53 38.38 2000 16 1.225 1.40 1.14 3.0% 38.94 37.81 2.0% 38.17 37.05 2001 17 1.260 1.44 1.14 3.0% 38.95 37.82 2.0% 38.17 37.06 2002 18 1.290 1.48 1.15 3.0% 39.10 37.97 2.0% 38.32 37.21 2003 19 1.320 1.52 1.15 3.0% 39.25 38.11 2.0% 36.46 37.34 2004 20 1.350 1.56 1.16 3.0% 39.39 38.24 2.0% 38.60 37.47 2005 21 1.369 1.60 1.17 3.0% 39.84 38.68 2.0% 39.04 37.90 2006 22 1.17 3.0% 39.84 38.68 2.0% 39.04 37.90 2007 23 1.17 3.0% 39.84 38.68 2.0% 39.04 37.90 2008 24 1.17 3.0% 39.84 38.68 2.0% 39.04 37.90 2009 25 1.17 3.0% 39.84 38.68 2.0% 39.04 37.90 2010 26 1.17 3.0% 39.84 38.68 2.0% 39.04 37.90 2011 27 1.17 3.0% 39.84 38.68 2.0% 39.04 37.90 2012 28 1.17 3.0% 39.84 38.68 2.0% 39.04 37.90 2013 29 1.17 3.0% 39.B4 38.68 2.0% 39.04 37.90 2014 30 1.17 3.0% 39.84 38.68 2.0% 39.04 37.90 Table 2 (c) x COCONUT PRICES t WITH PROJECT WITHOUT PROJECT Bulk Coconut World Bank Constant Financial Number of Cost Colombo 1990 Economic Reduction Economic Financial Oil, CIF Coconut, oil Weighted Price nuts per Factor for FOB Price Exchange Price Without Price Price MUV index NW Europe Projections NSA Constant Kg of oil Converting For nuts Rate Constant Project Constant Constant 1990= 100 USO/kg '90 USD/kg ([KR/kg) 90 LKR/nut Units Oil to Nuts '90 USD/nut LKR/USD '90 LKR/nut (%) '90 LKR/nut '90 Kf/nut a b c=b/a d e=d&cl/cO 1 g h=(e*g)/1 I j=h'I k 1=j(1-k) m=e(1-k) 1985 1 0.686 0.59 0.86 225 2.25 800 1.20 013 40.24 5.19 0.0% 5.19 2.25 1986 2 0.809 0.30 037 1.80 1.88 8.00 1.20 0 06 4024 2.22 0.0% 2.22 1.88 1987 3 0.888 0.44 0.50 3.40 3.40 8.00 1.20 007 40.24 3.00 0.0% 3.00 3.40 1988 4 0.953 0.56 0.59 4.19 4.19 8.00 1.20 009 40.24 3.58 0.0% 3.58 4.19 1989 5 0.947 0.52 055 260 2.60 8.00 1.20 000 40.24 3.30 0.5% 3.28 2.59 1990 6 1.000 0.34 0.34 2.10 2.10 8.00 1.20 005 40.24 2.03 1.0% 2.01 2.08 1991 7 1.022 0.43 0.42 3.00 3.00 8.00 1.20 0.06 40.24 2.56 1.5% 2.52 2.95 1992 8 1.066 0.58 0.54 3.79 379 8.00 1.20 008 40.24 3.27 2.0% 3.20 3.72 1993 9 1.042 0.45 0.43 3.33 3.33 800 1.20 006 40.24 2.61 2.0% 2.56 3.26 1994 10 1.074 0.61 0.57 3.34 8.00 1.20 008 40.24 3.42 2.0% 3.35 3.27 1995 11 1.090 0.60 0.55 3.24 8.00 1.20 0.08 40.24 3.32 2.0% 3.26 3.18 1996 12 1.109 0.58 0.52 305 800 1.20 008 4024 3.13 2.0% 3.07 2.99 1997 13 1.138 0.59 0.52 3.05 8.00 1.20 008 40.24 3.13 2.0% 3.07 2.99 1998 14 1.170 0.64 0.55 3.21 8.00 1.20 008 40.24 3.29 2.0% 3.23 3.15 1999 15 1.200 0.69 0.57 3.37 8.00 1.20 0.09 40.24 3.45 2.0% 3.38 3.30 2000 16 1.225 0.73 0.60 3.53 8.00 1.20 0.09 40.24 3.62 2.0% 3.54 3.46 2001 17 1.260 0.72 0.57 3.37 8.00 1.20 009 40.24 3.45 2.0% 3.38 3.30 2002 18 1.290 0.71 0.55 3.23 8.00 1.20 0.08 40.24 3.31 2.0% 3.25 3.17 2003 19 1.320 0.70 0.53 3.10 8.00 1.20 00 40.24 3.18 2.0% 3.11 3 04 2004 20 1.350 0.68 0.51 2.98 800 1.20 00e 40.24 3.05 2.0% 2.99 2.92 2005 21 1.369 0.67 0.49 2.88 8.00 1.20 007 40.24 2.95 2.0% 2.89 2.82 2006 22 0.49 2.88 8.00 1.20 0.07 40.24 2.95 2.0% 2.89 2.82 2007 23 0.49 2.88 8.00 1.20 0.07 40.24 2.95 2.0% 2.89 2.82 2008 24 0.49 , 2.88 8.00 1.20 0.07 40.24 2.95 2.0% 2.89 2.82 2009 25 0.49 2.88 8.00 1.20 0.07 40.24 2.95 2.0% 2.89 2.82 2010 26 0.49 2.88 8.00 1.20 007 40.24 2.95 2.0% 2.89 2.82 2011 27 0.49 2.88 8.00 1.20 0.07 40.24 2.95 2.0% 2.89 2.82 2012 28 0.49 2.88 800 1.20 0.07 40.24 2.95 2.0% 2.89 2.82 2013 29 0.49 2.88 800 1.20 007 40.24 2.95 2.0% 2.89 2.82 2014 30 0.49 2.88 8.00 1.20 0.07 40.24 2.95 2.0% 2.89 2.82 Table 3 (a) TEA REVISED FINANCIAL RATE OF RETURN CALCULATIONS AT IMPACT EVALUATION .-- ----------- WITH PROJECT -------------- --------------- ---------------- ------ WITHOUT PROJECT -------- ------ Not Calendar Project Financial Financial Total Net J Financial Financial Total Net I incremental Incremental Year Year Production Price Revenue COP Cost Value Production Price Revenue COP Cost Value I Benefit Investment Benefit (tons) (LKR/kg) (LKR m.) (LKIVkg) (LKIt m.) (LKII m.) | (tons) (LKIVkg) (LKR m.) (I KIVkg) (LKR m.) (LKR m) I (LKR m.) (LKR m.) (LKR m.) 1985 1 150.762 58.29 8,789 6481 9.771 (982) I 151,063 58 29 8,806 6481 9,790 (984) | 2 785 (783) 1986 2 144.758 51.89 7,511 60.95 8,824 (1.312) I 149,761 51.89 7.771 60.95 9,129 (1,357) | 45 826 | (781) 1987 3 140,222 57.68 8,089 60.25 8.448 (359) j 150.219 57.68 8,665 60.25 9,050 (385) I 26 986 | (960) 1988 4 143,90 55.97 8,059 62.23 8.959 (901) I 151,510 55.97 8,480 62.54 9,475 (995) 94 1,086 (992) 1989 5 132.800 69.10 9,177 62.27 8,270 907 | 151.055 68.76 10,386 62.58 9,453 933 (26) 813 I (839) 1990 6 138,777 63.53 8.817 58.77 8,156 661 I 152.696 62.90 9.604 59.07 9,019 585 76 609 | (534) 1991 7 138.157 48.73 6,733 54.91 7.586 (853) 151,840 48.00 7.288 5546 8.420 (1,132) 279 641 (362) 1992 8 102,300 52.76 5.397 66.14 6.766 (1.369) 110,454 51.70 5.711 66.80 7,379 (1,668) 299 356 (58) 1993 9 138.800 47.11 6,539 56.17 7.796 (1.257) 157,540 46.17 7,273 5673 8.937 (1,663) 407 255 151 1994 10 156,048 56.11 8.755 46.25 7.217 1.539 | 161.268 54.98 8,867 4671 7.533 1,335 | 204 177 28 1995 11 173.296 57.38 9,943 52.81 9,152 791 j 160,757 56.23 9,039 54.40 8,746 294 | 498 106 391 1996 12 175,916 58.44 10,281 52.61 9.255 1,026 160,392 57.28 9.187 54.44 8.731 455 571 49 522 1997 13 178,710 58.71 10.491 52.40 9,365 1.126 159,395 57.53 9.170 54.53 8.692 479 | 648 648 1998 14 180,605 58.79 10,618 52.27 9,439 1,179 | 157.656 5762 9,084 5469 8,623 461 | 718 718 1999 15 180,669 58.97 10,654 52.26 9,442 1,212 | 156,794 57.79 9,061 54.77 8,588 473 | 739 | 739 2000 16 181,888 59.09 10,749 52.17 9.490 1,259 | 155.970 57.91 9.033 5485 8,556 477 I 782 I 782 2001 17 183,564 58.77 10,789 52.06 9,556 1,233 | 154.848 57.60 8,919 54.96 8,511 408 I 825 I 825 2002 18 183,711 58.68 10,781 52.05 9,562 1,219 | 153.155 57.51 8,808 55.13 8,444 364 I 855 I 855 2003 19 184,828 58.60 10,830 51.97 9,605 1,225 j 152.338 57.42 8.748 55.22 8,411 336 | 888 B . 888 2004 20 185,384 58.51 10,B47 51.93 9.627 1.220 I 151,558 57.34 8.691 5529 8,380 310 | 910 | 910 2005 21 184,530 58.91 10,870 51.99 9.594 1.276 I 150,481 57.73 8,687 5541 8,338 349 | 927 927 2006 22 185.492 58.91 10,927 51.92 9,632 1,295 | 149,416 57.73 8,626 5552 8.295 330 965 965 2007 23 186,071 58.91 10.961 51.89 9,654 1,306 I 148,362 57.73 8,565 55.63 8,253 311 | 995 I 995 2008 24 185.196 58.91 10,909 51.94 9,620 1.289 I 147,318 57.73 8,504 55.74 8,212 292 I 997 | 997 2009 25 185.196 58.91 10,909 51.94 9,620 1,289 | 146,285 57.73 8.445 5586 8,171 274 | 1,016 I 1,016 2010 26 185,196 58.91 10.909 51.94 9,620 1,289 j 145,262 57.73 8,386 55.97 8,130 255 | 1,034 I 1,034 2011 27 185.196 58.91 10,909 51.94 9,620 1,289 | 144,249 57.73 8,327 56 08 8,090 237 I 1.052 ( 1,052 2012 28 185,196 58.91 10.909 51.94 9,620 1,289 I 143.247 57.73 8,269 5620 8,050 219 1,070 I 1,070 2013 29 185,196 58.91 10.909 51.94 9.620 1,289 | 142.254 5773 8,212 5631 8,011 201 | 1,088 I 1,088 2014 30 185,196 58.91 10.909 51.94 9,620 1,289 141,272 57.73 8,155 56.43 7,972 183 | 1.106 | 1.106 INCREMENTAL REVENUE: 12,398 FRR: 7.4% NPV @ 10%, (LKR m.): (1,168.2) Table 3 (b) RUBBER REVISED FINANCIAL RATE OF RETURN CALCULATIONS AT IMPACT EVALUATION WITH PROJECT ------ -------- ----------------- ---------- WITHOUT PROJECT ------ ---- --- 4/ Net Calendar Project Financial Financial Total Net Financial Financial Total Net I incremental Incremental Incremental Yew Year Production Price Revenue COP Cost Value | Production Price Revenue COP Cost Value I Benefit Investment I Benefit (ons) (LKRMkg) (LKR m.) (LKR/kg) (LKR m.) (LKR m.) I (tons) (LKR/kg) (LKR m.) (t K(Vkg) (LKR m.) (LKR m.) (LKR m.) (LKR m.) j (1.KR m.) I I 1985 1 41,000 31.57 1,294 30.97 1,270 25 41.268 31.57 1.303 30.97 1,278 25 (0) 266 (266) 198e 2 41,eoo 35.81 1.497 31.17 1.303 194 43.867 35.81 1.571 31.17 1,367 204 | (10) 277 | (287) 1987 3 40.600 31.19 1.266 31.06 1,261 5 44,444 31.19 1.386 31.06 1.380 6 ( (1) 326 I (326) 1968 4 42.100 36.78 1,548 32.36 1.363 186 | 44.646 36.78 1,642 32.53 1.452 190 (4) 367 | (371) 1969 5 35.000 30.87 1,080 34.57 1.210 (130) | 48,458 30.72 1.488 34.75 1,684 (195) I 66 273 (207) 1990 6 37.800 25.63 969 28.94 1.094 (125) | 50,025 25.37 1.269 29.06 1.455 (186) I 61 204 I (144) 1991 7 37,000 21.85 808 26.59 984 (176) | 52,001 21.52 1.119 26.86 1,397 (278) | 102 213 | (111) 1992 a 36,600 27.66 1,012 27.82 1.018 (6) | 51.255 27.11 1,389 28.10 1,440 (51) | 45 124 | (79) 1993 9 30,400 24.52 746 28.57 869 (123) | 50,570 24.03 1,215 28.66 1,459 (244) I 121 100 | 21 1994 10 42,000 27.95 1,174 26.43 1,110 64 | 50.462 27.39 1.382 26.17 1.321 62 | 2 72 I (69) 1995 11 59.146 46.15 2,730 25.17 1.489 1.241 | 50.314 45.23 2.276 26.19 1,318 958 283 46 | 236 1996 12 61.919 45.34 2,807 24.98 1,547 1.261 | 50,126 44.43 2,227 26.20 1,314 914 347 26 I 321 1997 13 63.676 43.03 2,740 24.86 1,583 1.157 | 49.786 42.17 2.100 26.24 1,306 793 j 364 8 356 1996 14 64,629 41.01 2,650 24.81 1.603 1.047 | 49.332 40.19 1.983 26.29 1,297 686 361 | 361 1999 15 64.791 39.16 2.537 24.80 1.607 931 | 48,761 38.38 1,671 26.35 1,285 586 | 344 344 C 2000 18 64.555 37.81 2,441 24.81 1.602 839 I 48,141 37.05 1.784 26.42 1,272 512 327 1 327 2001 17 64,138 37.82 2,426 24.84 1,593 833 47,500 37.06 1,760 26.49 1,258 502 | 330 | 330 2002 8 65.828 37.97 2,499 24.73 1,626 871 j 49,247 37.21 1,832 26.30 1.295 537 334 I 334 2003 19 64,964 38.11 2,475 24.79 1.610 865 | 48,529 37.34 1.812 26.37 1,280 532 I 333 | 333 2004 20 61.686 38.24 2.359 24.99 1.542 817 45,450 37.47 1.703 26.73 1.215 488 j 329 I 329 2005 21 50.346 38.68 1,947 25.92 1,305 642 34,347 37.90 1,302 28.56 981 321 | 321 I 321 2006 22 42,022 36.68 1.625 26.92 1.131 494 26,153 37.90 991 30.91 808 183 I 311 311 2007 23 35,721 38.68 1,382 27.99 1,000 382 I 20,073 37.90 761 33.88 600 81 | 301 I 301 2008 24 30,978 3866 1,196 29.00 901 297 I 15,569 37.90 590 37.59 585 5 ( 292 ( 292 2009 25 27.81 38.68 1.078 30.00 836 242 | 12.307 37.90 466 41.97 516 (50) I 292 | 292 2010 26 25,871 38.68 1,001 30.71 794 206 | 9,944 37.90 377 46.93 467 (90) I 296 I 296 2011 27 24,255 38.68 938 31.36 761 177 I 8.176 37.90 310 52.52 429 (120) | 297 297 2012 28 23.362 38.66 904 31.76 742 162 | 6,918 37.90 262 58.24 403 (141) I 302 302 2013 29 22.680 36.68 877 32.09 728 149 5.983 37.90 227 64.05 383 (156) | 306 300 2014 30 22,348 38.66 864 32.26 721 143 | 5,323 37.90 202 69.38 369 (168) | 311 I 311 INCREMENTAL REVENUE: 4,481 FRR: 8.3% NPV @ 10%. (LKR m.): (256.5) Table 3 (c) COCONUTS REVISED FINANCIAL RATE OF RETURN CALCULATIONS AT IMPACT EVALUATION WITH PROJECT --------- ---- ------ WITIOUT PROJECT -------- ------- Net Calendar Project Financial Financial Total Net I Financial Financial Total Net I Incremental | Incemental Year Year Production Price Revenue COP Cost Value I Production Price Revenue COP Cost Value Benefit Investment I Benefit ons) (LKRVkg) (LKR n.) (LKR/kg) (LKR m) (LKR m.) I (tons) (LKRVkg) (LKR m.) (I KR/kg) (LKR n.) (LKR m.) I (LKR m.) (LKR m.) (LKR m.) II I 1985 1 65,00 2.25 148 2.10 138 9| 65,800 2.25 148 2.10 138 91 0 341 (34) 1966 2 60,500 1.88 114 1.83 111 31 60,500 1.86 114 1.83 111 31 0 361 (36) 1987 3 41,400 3.40 141 2.30 95 45 I 41.400 3.40 141 2.30 95 45 0 43 ( (43) 1988 4 31,000 4.19 130 3.63 113 17 34.576 4.19 145 3.65 126 19 | (1) 47 I (48) 1989 5 50,200 2.60 131 2.25 113 18 35.526 2.59 92 2.26 80 12 6 35 | (29) 1990 6 46,600 2.10 98 1.99 93 5 37,224 208 77 200 74 31 2 261 (24) 1991 7 39,400 3.00 118 2.10 83 35 39.754 2.95 117 2.12 84 33 j 2 28 (25) 1992 8 44,100 3.79 167 1.94 85 82 42.218 3.72 157 196 83 74 8 15 I (8) 1993 9 48.300 3.33 161 2.96 143 18i 43.971 3.26 143 2.99 131 12 6 12 | (6) 1994 10 46.517 3.34 155 2.31 108 48 46,316 3.27 151 2.34 108 43 I 4 8 I (4) 1995 11 46,853 3.24 158 2.39 117 42 ) 48,073 3.18 153 2.41 116 37 j 5 5 I (0) 1996 12 50,782 3.05 155 2.34 119 36 j 49.464 2.99 148 2.37 117 31 I 6 2 ( 3 1997 13 52,744 3.05 161 2.29 121 40 ( 50.655 2.99 152 2.34 119 33 | 7 0 I 7 1996 14 53.618 3.21 172 2.27 122 50 50,684 3.15 160 2.34 119 41 | 9 (1) I 10 1999 15 54,429 3.37 183 2.25 123 61 I 50,553 3.30 167 2.34 118 48 | 12 (0) j 13 2000 16 55,350 3.53 195 2.24 124 72 I 50,422 3.46 174 2.35 l11 56 16 16 2001 17 55,945 3.37 189 2.22 124 64 50,291 3.30 166 2.35 118 48 | 16 ( 16 2002 18 56,356 3.23 182 2.22 125 57 j 50,160 3.17 159 2.35 118 41 | 16 I 16 2003 19 56,719 3.10 176 2.21 125 51 ) 50,029 3.04 152 2.36 118 34 j 16 16 2004 20 56,948 2.96 170 2.20 125 44 I 49.898 2.92 146 2.36 118 28 j 16 16 2005 21 57,110 2.88 164 2.20 126 39 | 49,768 2.82 140 2.36 118 23 | 16 I 16 2006 22 57,120 2.88 164 2.20 126 39 I 49.37 2.82 140 2.37 117 23 | 16 I 10 2007 23 56,969 2.86 164 2.20 126 39 I 49.506 2.82 140 2.37 117 22 I 16 j 16 2008 24 56,858 2.68 164 2.21 125 38 I 49,375 2.82 139 2.37 117 22 ( 16 | 16 2009 25 56,727 2.88 163 2.21 125 38 49,244 2.82 139 2.38 117 22 | 16 j 16 2010 26 56.596 2.86 163 2.21 125 38 49,113 2.82 139 238 117 22 16 16 2011 27 56,465 2.88 163 2.21 125 38 48,982 2.82 138 2.38 117 21 ) 16 | 16 2012 28 56,334 2.88 162 2.22 125 37 I 48.851 2.82 138 2.39 117 21 j 16 I 16 2013 29 56,203 2.6 162 2.22 125 37 48.720 2.82 137 2.39 116 21I 18 j 16 2014 30 56.203 2.88 162 2.22 125 37 | 48,720 2.82 137 2.39 116 21 I 16 I 16 INCREMENTAL REVENUE: 17 FRR: 0.4% NPV @ 10%, (LKR m.): (140.3) ТаЬ1е 4 (а) ТЕА � � REVISED ECONOMIC RATE OF RETURN CALCULAT1oNS АТ 1MPAGT EVALUATION м ._-_-•------- ----- w1Тн PRaECT ----------•- ----------•--- ------------•--• ___._-. wпЧоиТ РПо�ЕсТ ---------- •------•- Чег Саlапдвг Pгojact Есогатlс Есопогпiс Tota1 Net � Economic Economic То[в1 Net � lncremental � lпсгетепlаl Уеаг Уевг Ргодtк:Ноп Рг1се Revenue СОР Cost Va1ue � Productlon Price Revenue СОР Cost Va1ue � 9enelit lnveatment � Ввпеfl[ ((tons) (�кпn+0у (LКП т ) (1 К(VИ1{) (1 КП т ) (1 К1{ т ) � (1+н+ъ) (lКП/k0) (L КП т ) (1 K1Vkp) (l КП п+ ) (l KR т ) ) (1 КП т.) (l KR т.) ( St КН т ) I I I 19В5 1 150,762 78.10 11,774 43.25 6.521 5,253 � 151,063 78.10 11,79В 4Э 25 6,534 5,264 � (10) 667 � (878) 1988 2 144,75В 62.41 9,035 42.04 6,086 2,949 � 149,761 62.41 9,347 42.04 В,296 3,051 � (102) 702 � (804) 19В7 3 140,2?2 68.92 9,664 44.18 6,196 3,468 � 150,219 68.92 10,353 44.18 6,637 3,716 � (247) В67 � (1.115) 19В8 1 14Э,980 83.81 9,1В7 47.56 6.848 2.339 � 151.510 63.81 9.б67 47.60 7,242 2,125 � (Вб) 956 � (1.042) 19В9 5 132,800 75.1В 9,9В4 49.75 6,607 3,377 � 151,055 74.81 11,300 50.00 7,55Э 3,747 � (370) 732 � (1,102) 1990 6 13В.777 73.70 10,228 47.06 6.531 3.697 � 152.696 72.97 11.142 47.30 7.222 3,920 � (222) 555 I (777) 1991 7 13В.157 5Э.30 7.363 43.76 6.046 1,317 � 151,840 52.50 7.971 44.20 6,711 1,260 ) 57 577 � (520) 1992 8 102.300 55.88 5,717 52.72 5,393 324 � 110,454 54.76 6,049 53 21 5,881 16В ( 156 321 � (165) 1993 9 138,800 �8.63 6.749 44.77 6,214 538 � 157.540 47.65 7,507 45.21 7,123 3В4 � 151 230 � (7В) 1994 10 156,048 57.79 9,018 38.В6 5,752 3,266 � 161,268 56.63 9,133 37.2Э 6,004 3,129 � 137 159 � (22) 1995 11 173.296 59.10 10.241 42.09 7,295 2,947 � 160,757 57.92 9.310 4Э.36 6.971 2,340 � 607 96 � 511 1996 12 175,916 60.20 10,590 41.93 7,377 3,213 � 160,392 58.99 9,462 43.39 6,959 2,503 � 710 44 � 666 1997 13 178,710 60.47 10,806 41.77 7,464 Э,342 � 159,Э95 59.26 9,445 43.46 В,928 2,518 � В24 � 824 r-+ 1998 14 180,605 60.56 10,937 41.66 7,524 3,413 � 157,656 59.35 9,356 43.59 6,873 2,484 � 930 I 930 N 1999 15 180,669 60.74 10,974 41.65 7,526 3,448 � 156,794 59.52 9,333 43 бб 6,845 2,488 � 960 � 960 2000 16 181,В88 60.87 11,071 41.59 7,564 3,507 � 155,970 59.65 9,304 43.72 6,819 2,484 � 1,02Э � 1,02Э 2001 17 183,564 60.54 11.112 41.49 7.616 3.496 � 154.В48 59.33 9,1В6 43.81 6,7В4 2.403 � 1,093 ( 1.09Э 2002 1В 183,711 60.44 11,104 41.4В 7,621 3,4В3 � 153,155 59.23 9,072 4394 6,730 2.342 ) 1.141 � 1.141 2009 19 184.828 60.35 11,155 41.42 7.656 3,499 ( 152,338 59.15 9.010 11.01 6.704 2,306 � 1.193 � 1,193 2004 20 1В5,3В4 60.27 11,173 41.39 7,673 3,499 � 151,558 59.06 В,951 44.07 6,6В0 2,272 � 1,227 � 1,227 2005 21 184,530 60.67 11,196 41.44 7.647 3,549 ( 150,481 59.46 8,948 4416 6,645 2,302 � 1,247 � 1,247 2008 22 185.492 60.67 11.254 41.39 7.677 3.57В � 149.416 59.48 9.884 44 25 6.612 2.272 � 1,305 ) 1.305 2007 2Э 188.071 60.67 11,290 41.36 7,695 3,595 ( 148,362 59.46 8,822 44.34 6,578 2,243 � 1,351 � 1,351 2008 21 185,196 60.67 11,237 41.40 7,668 3,569 � 147,31В 59.46 8,760 44.43 6,545 2,214 � 1,355 � 1,355 2009 25 185,196 60.В7 11,237 41.40 7,668 3,569 � 146,285 59.46 8,698 44.52 6,51Э 2.185 ) 1,3В4 � 1.384 2010 26 1В5,196 60.67 11,2Э7 41.40 7,668 Э,569 � 145,262 59.46 8,637 44.61 6,4В0 2,157 � 1,412 � 1,412 2011 27 185,196 60.67 11,237 41.40 7.668 3,569 � 144,249 59.46 8,577 44.70 6,44В 2,129 � 1,440 ) 1,440 2012 28 1В5,196 60.67 11.2�7 41.40 7,668 3,569 � 143,247 5946 8,517 44.79 6,417 2,101 � 1,168 � 1,468 2013 29 1В5,196 60.67 11.237 41.40 7,66В 3,569 � 142,254 59.46 8,458 44.89 6,385 2,073 � 1,498 j 1,498 2014 30 1В5,198 60.87 11,237 4140 7,GGB 3,569 � 141,272 59.48 В,400 449В 6,354 2,048 � 1,523 ( 1,523 1NCREMENTAL REVENUE: 17,247 ERR: 8.29Ь NPV @ 1096, (LKR т.): (954.7) ТаЫе 4 (Ь) RUBBER REVISED ЕСОИОМIС НАТЕ OF RETURN CALCULATIONS АТ 1МРАСГ EVALl1AT10N ----------------- ----------- W1TH PROJECT ------- -- - - ---- ---------� -°- ------------- WITHOUT PROJECT --------------- -°------- а/ Net Cabndar Рго)scf Есопотlс Economic То1а1 Net � Есопотlс Fconomic То1а1 Net � lпсгетепtаl lncremantal � lncremental Уеы Уеаг Productlon Price Revenua СОР Cost Va1ua � 1'roduction Рг1се Паvвпие CUP Cosl Ve1ue � Beпeflt lnvestment � Benelll (toпs) (LKR/kg) (LKR т.) (LKR/kg) (l KFi т.) (LKR т ) � (tons) (I.KR/kg) (LKR т.) (l KR/kгЭ) (LKR т.) (LKR т.) � (LKH т.) (LKR т.) � (LKR т.) � I I 1965 1 41.000 37.68 1,545 20.45 В38 706 � 41,268 37 68 1,555 20.45 В44 711 � (5) 226 � (231) 1986 2 41,800 12.75 1,787 21.85 913 873 � 4з,В67 42.75 1,В75 21.В5 959 917 � (43) 236 � (279) 1987 3 40,600 40.93 1,662 22 88 929 733 � 44,444 40.93 1,819 22 88 1,017 802 � (69) 287 � (356) 19ВВ 4 42.100 49.97 2,104 24.86 1,047 1,057 � 44.646 49.97 2.2Э1 24.9В 1.115 1,115 � (58) 323 � (381) 1989 5 35,000 43.57 1,525 2759 966 559 � 4В,458 4з.35 2,101 27.73 1,341 757 � (198) 246 � (444) 1990 6 37,800 36.00 1,361 23.14 В75 486 � 50,025 35.64 1,783 23.26 1,164 619 � (133) 1В6 � (319) 1991 7 37.000 29.02 1,074 21.20 784 289 � 52,OOi 28.58 1,486 21.41 1.113 373 � (84) 191 � (275) 1992 В 36.600 32.23 1.180 22.18 812 ЗБВ � 51.255 31.59 1,619 22.40 1,14В 471 � (103) 112 � (215) 1993 9 30,400 25.94 789 22.77 692 96 � 50,570 25.42 1.286 2Э.00 1,163 122 ) (26) 90 � (11Ьу 1994 10 42,000 28.79 1,209 21.06 885 325 � 50,482 28.22 1,424 20.86 1,053 371 � (47) 65 � (111) 1995 11 59,146 47.53 2.811 20.99 1,242 1.570 � 50,314 46.5В 2.344 21.84 1,099 1.245 � 325 12 � 283 1996 12 61.919 16.70 2,892 20.83 1,290 1.602 � 50.126 45 77 2,294 21.В6 1.096 1.19В � 403 23 ( 380 1997 13 63,676 44.32 2.822 20.74 1.321 1.502 � 49.786 4Э.44 2.163 21.89 1.090 1,073 � 429 7 � 422 W 1998 14 64,629 4224 2.730 20.69 t,337 1,39Э � 49.3Э2 41.40 2.042 21.93 1.082 9Е1 ) 432 ) 432 W 1999 15 64,791 40.33 2,613 20.68 1,340 1,273 � 48,761 39.53 1,927 21.98 1,072 В5В � 41В ) 418 2000 16 64,555 ЗВ.94 2,514 2069 1,336 1,17В � 4В.141 38.17 1,В37 22.03 1,061 777 � 402 � 402 2001 17 64,13В 38.95 2.49В 20.72 1,329 1,170 � 47.500 38.17 1.В13 22.09 1,049 764 � 406 � 406 2002 18 65,828 39.10 2,574 20.63 1,358 1,216 � 49,247 38.32 1,887 2193 1,060 В07 � 409 I 409 2003 19 64,964 39.25 2,550 20 67 1,343 1,207 � 48,529 38 46 1,867 22.00 1,068 799 � 40В ) 406 2004 20 61,688 39.39 2,430 20.В5 1,286 1,144 � 45,450 38.60 1,754 22.30 1,013 741 � 403 � 10з 2005 21 50,з46 39.84 2,006 21.62 1,089 917 � 34,з47 з904 1,341 23.82 818 523 � 394 � 394 2006 22 42,022 39.В4 1.674 22.46 944 730 � 26.153 39.04 1.021 25.78 674 347 � 384 � з84 2007 2з 35,721 з9.84 1,423 23.35 834 589 � 20,073 з9.04 784 28.26 567 216 � Э73 ( Э7з 2оое 24 эо,s7в зs.е4 1,г3а г4.г6 75г 4е3 � 1s,5ss зs.оа soe з1.зs 18в 12о � зsэ � эs3 2009 25 27,881 39.84 1,111 2502 69В 413 � 12,307 39.04 480 3501 4з1 50 � з83 � з83 2010 28 25,871 39.В4 1,031 25.61 663 36В � 9,944 39.04 38В 39.15 389 (1) � 369 � 369 2o1t 27 24.25s зs.е4 ss6 2s.1s бза ззz � е,176 3s.04 з1s 4з.е1 з5В (э9) � з71 ( з71 201г 2е 23,362 зs.е4 s31 гs.4s s19 з1z � s.91e зs.оа 27о 4в.sе ззs (sв11 з7е � 37е гоlз 29 гг,вео эs.е4 9а гs.77 607 zss � 5,9еэ зs.оа 23а 5зл2 эго (es) 1 зег 1 зв2 2014 30 22,Э48 39.84 890 26.91 601 289 � 5,323 Э9.04 208 57.В7 308 (100) ) 3В9 � 3� 1NCREMENTAL REVENUE: 5,000 ERR: 7.4% NPV Q 1096, (LKR т.): (489.5) м ТаЬ1е 4 (с) сосоиитs � REVISED ECONOMIC RATE OF RETURN CALCULATIONS АТ 1МРАСТ EVAI.UATION м ---------------- ------ W1TH PROJECT ---- -------- --------�----- --�------------ ----------- WITHOUT PROJECT -------- ------ Net Сдепды Project EcOnomic Economic Tota1 Net � Есопотlс Econamic Tota1 Net � lпаепюпtеl а/ � lпсгегпмfвl Уеп Уеаг Production Ргfсе fievenue СОР Cost Va1ue � Production Price Revenue GOP Совt Vdue � Вмге(1t lnvssUnsnf � BendN (nuts 000) (LKR/nut) (LKH т.) (LKR/пиt) (LKR т ) (LKR т.) � (nuts 000) (LKR/пи1) (LKR т.) (LК1Э/пи1) (LKR т ) (LKR т.) � (LKR т.) (LKR т.) � (LKR т.) I I I 1985 1 65,800 5.19 342 1.Э6 89 252 � 65,800 5.19 �42 1.з6 89 252 � 0 29 � (29) 19ев 2 so.5oo г.гг 134 1.2з 7а бо � бo,soo 2 n 134 1.гз г4 бо � о э1 � (зq 1987 3 41.400 3.00 124 1.64 68 57 � 41,400 3.00 124 1.64 68 57 � 0 38 � (38) 198В 4 31,000 3.58 111 2.6В 83 28 � 34,576 3.58 124 2.70 9з 30 � (3) 11 � (44) 1989 5 50,200 3.30 165 1.74 87 78 � 35,526 3.28 116 175 62 54 � 24 32 � (8) 1990 6 48.600 2.03 95 160 75 20 � 37,224 2.01 75 1.61 60 15 � 5 24 � (19) 1991 7 39.400 2.56 101 1.74 69 32 � 39.754 2.52 100 1.7В 70 30 { 2 25 � (23) 1992 В 44.100 3.27 141 1.66 73 71 � 42,21В 3.20 195 1.67 71 85 � 6 14 � (� 1993 9 4В.300 2.61 126 2.61 126 (0) I 43.971 2.56 112 2.61 116 (4) � 3 11 � (7) 1994 10 46.517 3.12 159 2.10 98 61 ( 46.316 3.35 1ц 2.12 98 57 � 4 7 � (3I 1995 11 48.853 3.32 162 2.17 106 56 � 4В,073 3.26 157 2.19 105 51 � 5 5 � 0 1996 12 50.782 3.13 159 2.13 108 51 � 49.464 Э.07 152 2.16 107 15 � 6 2 � 4 1997 13 52,711 3.1Э 165 2.08 t10 55 � 50,655 3.07 155 2.13 108 18 � 8 0 � 7 �.+ 1998 14 5з.61В 3.29 176 2.07 111 66 � 50.684 3.23 163 2.13 10В 56 � 10 (1) � 11 � 1999 15 54.429 3.45 188 2.05 112 76 � 50,553 3.3В 171 2.1Э 108 63 � 13 (0) � 13 2000 16 ц.350 3.82 200 2.0.7 112 В8 � 50,422 3.54 179 2.13 10В 71 � 17 � 17 2001 17 ц,945 3.45 193 2.02 113 80 � 50.291 3.38 170 2.14 107 63 � 17 � 17 2002 18 56.358 3.31 187 2.01 114 73 � 50.160 Э.25 163 2.11 107 56 � 18 � 18 2003 19 58.719 3.18 180 2.01 114 68 � 50,029 3.11 156 2.14 107 49 � 18 � 18 2004 20 56,94В 3.05 174 2.00 114 60 � 49.89В 2.99 149 2.15 107 12 � 17 � 17 2005 21 57.110 2.95 168 2.00 114 54 � 49,768 2.В9 144 2.15 107 37 ( 17 � 17 2008 22 57.120 2.95 168 2.00 114 54 � 49.637 2.89 143 2.15 107 37 � 1В � 18 2007 23 58,989 2.95 16В 2.00 114 54 � 49,506 2.89 143 2.15 107 36 � 18 � 18 2008 24 56.858 2.95 168 2.01 114 54 � 49.375 2.В9 143 2.1б 107 36 ( 17 � 17 2009 25 58.727 2.95 167 2.01 114 53 � 49.244 2.89 142 2.18 108 38 � 17 � 17 2010 26 56.596 2.95 167 2.01 114 53 � 49.113 2.89 142 2.16 108 38 � 17 � 17 2011 27 56.485 2.95 167 2.01 114 53 � 48,982 2.В9 142 2.17 106 35 � 17 � 17 2012 ze 5в.зэ4 2.95 166 2.01 11з sз � 48,е51 2.е9 14t г.17 1os 35 � 17 � 17 2013 29 58.203 2.95 188 2.02 11з 5? � 48.120 ?.89 141 2.17 1(10 35 � 17 � 17 2014 3(1 5б,203 2.95 18В 2.U2 11з 52 � 48.720 2.89 141 2.17 106 35 � 17 � 17 1NCREAAENiAL FiEVENUE: 88 ERR: 2.0% NPV ®1096, (LKR т.): (1W.8) 135 AnnexF Comments from the Borrower ‘戶細‘州陽騙陶閑叫‘蛹屆中甲坤•:一:;中哼化州1 ·示黝jj、·fl&‘··一“·-一輊乏斤低胛‘「 _人一L•甲',廈吃---.••`口讓鳥』口唱▼名,祝h& ‘網,■•.•-·r&,&J,-.j口匹 k勵j口悶『』_一州必丁•‘~.一 ~二_,‘江州留訕斗兀一,二斤•L 方彎戶••戶.,I二..一么一抓必豐,二奮織織口江-·r .勰鴛讓才r&~&.__.二.…薇.戶髡于____,.Y-寧 悶必細.·一:以甲究亡計邵•尸‘口’化馴舛•一即‘ 蠶富糁r濾,&”〞甲叩勿網甲魚令夠胛門•門_·:.一二 編v編珍.,:··一中戶繪劍甲.&j柚甲‘馴•-咸守巒州梯們于',”緝不寫認二二望二訕· 七亡豐上亡計于〕門平’.國婦‘馳斗黠•陋`。鰓伊吧馴細•,•”開•.•一’胤~‘頗i一 ―了〕兀了丁‘_-.》O劉國奮『閱了O了萬吧,悶』CA勵闕颼他嗡實調矗t膩霄〔汨朧瀾“寫AJ,馮必必鳥.•闔口•、 -.咸,二間,1 541!&O’鰍LA荊鬧偽〕」O州闐闖幼C當t自悶方么取。中閣(」決劇江劉間矗萬望AF亂糾口巳O‘•陶“■細』二L 妝不筍幫~,o、____,一” •滷騙調,自·’】望_.`。d訓乏甲啊•黑•勾目•二: 擺戶棟f~,一。罵汰盆誌盡寫亂戶 一----一一-霄--一一一一一 J工〕由工6,.衫拍5• .州常馴兀k讓界。g江么己•. 中田j丰 乓向併寧b寫總一曰亡d坤國aa。。鄴隨」究摔.止’刀力d盞蠶屹 q婦糁熔斗衫當勵膩卹辭尖不。苓曰d二既丰 ·紫無界婉霹4分悲此計二 么工昌工當革荊邢甲中,啊J几一 :騙柴秀平平飲t弟D-二20略33 二t化S」編必 B韻。’(20之)js視•3123 D他曰r祝加七之Shi匕妒 召匕二“p響甲土乃瀾五•七化么.’叩七h曰_鉤弁工.亡七亂 _S勿由1工b』d匕亡”方劉bb巴亡玉他b細hLLU法止d。。n闐j膩上仔計‘幼口》抑司‘.。已 拙B嘆蠶土江公戊絕·p二賽‘.工上勿。。匕·(O‘乃細讒叫。刃 邊t麾e匕二中。.丫不二細上力已二d匕上曰d乎排丰股響’華”二tb•a七。常•露至仕磁堅號d知分.&’·凡s。· O狗坤裂b神,sk二dh黑計。亡七出斗蔥釭返方b,· 髦蕪聱襲霪覬龔爍藝妒觀 r織讓遛。亡上寫b刀口。亡br 力.d’絕七.亂〞:‘必d遼潤r ’叢聖d丈斤辟‘ 蕪濃鑼馨鑼退鑿羹攣 ,b•‘。。岑甲.:件d華中舛喪彎單楓tbej萬寧膩上d廿境!。,’潤才力償幼d馴已11·二•,幼上化• 。‘琴魚Y·3寺調1寡亨話總江粤〔‘上江adk .&t曰a上名織d讓·乃中︰七,偉七h已。也萬rb由。己袱,刀d. 土。亡蠢鷥‘鼯·狗7Oly喪器.& Thq,戶摔跑二•曰江p亡讓跑中血么。a。·b•卹,化么緘fb二七•.頗y th•、 劉開亡ZOaO&&‘么。二二已寫看tot力ef號。二。曰2-7司羅神國。。giop弗神神力亡七h曰d波•亡七.方鳥神d斗 I.A 9.1 ORV 9 R. 137 Annex G Comments from Cofinanciers Ministry of Foreign Affairs P.O.Box 20061 2500 EB The Hague Telex :31326 Buza n1 Telephone :070-348e6e6 U G2eMaLJ%L General faxnx :070-3484848 9ML -- PACSIMILE Tel: +31.70.348.51.55 (direct) Fax: +31.70.348.63.38 (4zect) Date : 20 June 1995 No of pages (including frontpage) : From David Zeverijn South Asian Countries Section, Developmegt Co-operation Asia Department To The World Bank (00.09.1.202.522.31213) Operations Evaluation Department Agriculture and Human Development Division Attn. : Mr Roger Slade Subject: Sri Lanka/Impact Evaluation Smallholder Rubber Rehabilitation Project (Cr.1017-CE) and Fourth Tree Crops Project (Cr.1562-CE) Dear Mr Slade, Thank you for your facsimile, relating to the extension of the deadline for co=ents on the draft Impact Evaluation Report on the two above World Bank projects. Please be informed the Netherlands would appreciate it if the following coments were reproduced in an Annexure to the final report. Quote: The Netherlands, being the principal donor to the Social Welfare Programme (SWP, the social development component of the Fou,th Tree Crops Sector Loan/FTC), welcomes the emphasis the Impact Evaluation Report puts on the importance of adequate social development strategies ("putting people first") for the future approaches of assistance to the tree crops sector in Sri Lanka. Although the results of the. SWP compare favourably with the jeconomic and finateial returns of the FTC, it is felt. the overall soci4l impact Annex G 138 Ministry of Foreign Affairs P.O.Box 20061 25.00 EB The Hague Telex :31326 Buza nl Telephone :070-3488686 General faxnr :070-3484848 of the tree crops assistance could have been more comprehefaive if more attention were paid to these issues during the implement tion of the FTC project, for instance though regular consultations with the donors concerned. Although formulated as an integral part of the FTC in the course of its implementation the SWP evolved more r less independently from it. This development might have contribute dto the .decreasing awareness observed amongst principal Sri Lankan stakeholders (e.g. the Goverment and the Estate Management Corporations) of the need for social development, given the f ct that their policy dialogue with the World Bank could concentrate ly on institutional and financial concerns, the social concerns being catered for more or less independently by other donors. This disentanglement of the FTC and SWP projects could help to explain why the principal focus of the Impact Evaluation Repor is on financial, economic and institutional issues. Although Chap r 3 of the Report relates exclusively to the social impact of the p ojects, it is felt more could have been made out of it, for instance through more extensive discussions of the Evaluation Team with the T1chnical Assistance Team associated with SWP and through analysis f more recent data available. Finally, it should be noted at the environmental sensitivity of the project area (e.g. erosi'n prone highlands) and of project activities (e.g. pesticide pr ctices) -warrants careful scrutiny of the environmental impact of the p ojects. Regrettably, an environmental impact assesspent is not includeE in the impact evaluation report. Unquote Sincer ly, veri n So Asian Countries Section, Development Co-operation Asia Department, Ministry of Foreign Affairs 139 Annex H Notes to the Comments from the Borrower and from Cofinanciers A. Notes to the Comments from the Borrower The price projections used for the impact evaluation were derived from World Bank commodity price forecasts. It is indeed a matter of some concern that there has been significant short term variability in medium to long term forecasts. The tendency in the past has been for commodity forecasts to overestimate commodity prices, as is indicated in the text (para. 2.19 and Figure 2.7). However, the latest World Bank report on Commodity Markets and the Developing Countries: A World Bank Quarterly, dated May 1995, notes that "Tea prices at the London auction remained stalled at depressed levels during the quarter...If no output disruptions occur, this year's world black tea output is expected to substantially exceed demand for the third consecutive year." Thus a conservative forecast of tea prices is not unwarranted. With regard to rubber, the same report notes that "Prices will remain above long-term trends during the next three years because of the absence of new plantings during the recent years of low prices. Indonesia, Malaysia and Thailand will dampen initial price-induced supply gains, though global natural rubber production is expected to return to 1992 levels this year, easing current prices." OED has followed up on the Borrower's suggestion to discuss the sensitivity of the estimates of economic returns to price projections and to conduct a sensitivity analysis in the case of prices (para. 2.19). The sensitivity analysis suggests that the report's conclusions are fairly robust. OED has reflected the Borrower's comment that the area under tea and rubber may have been overestimated in the past, whereas production figures are more reliable, so that yields may have been underestimated (footnote 10). Without a more complete set of revised figures on the extent under cultivation, OED has continued to use the figures in the Plantation Sector Statistical Pocket Book published by the Ministry of Plantation Industries. The Borrower noted that the reduced areas under cultivation imply that "the incremental benefits from the two projects would appear to be larger than it is thought to be with the higher total extents assumed in the calculations". Since the economic analysis compares with- and without-project production levels rather than acreages, and since the production figures are considered reliable, no change has been made to the analysis. While the revised figures on tea and rubber extents would clearly affect the ratio of the net present value of the project investments to the area under cultivation, this ratio has not been calculated for the impact evaluation. B. Notes to the Comments from the Government of the Netherlands OED shares GONL's concern with regard to the decreasing awareness among key Sri Lankan stakeholders of the need for social development. GONL's explanation for this, namely that the SWP component evolved independently from the other components of the project, is reflected in the chapter on Social and Institutional Developments (footnote 46). The social aspects of the project were a high priority for OED. OED highlighted welfare and gender issues not only in the impact evaluation but also in meetings that the OED mission held with government officials in Sri Lanka. The mission also met with officials of the Technical Assistance Team, NORAD, the Plantation Housing and Social Welfare Trust, the Ceylon Workers' Congress, the Annex H 140 Institute of Ethnic Studies, the Center for Women's Research, Sarvodaya Women's Movement, CARE International Sri Lanka, and Satyodaya Kandy. In addition, the mission leader met with FAO sociologists working on Sri Lanka, and with representatives of large, London-based tea companies that operate in East Africa so as to compare their labour practices with those on Sri Lankan estates (see Box 3.1). Finally, the mission visited line houses on tea and coconut estates and interviewed workers, health staff and estate superintendents in order to make a qualitative assessment of living conditions, constraints and priorities. Regrettably, most of the analysis in the report had to be based on data through 1993 (obtained from the TAT and the PHSWT), since the OED mission visited Sri Lanka late in 1994 and figures for 1994 were not yet available for most variables. OED recognized that an environmental impact assessment of the two projects was probably warranted. For example, the Bank had included conditionality in the Development Credit Agreement regarding flows of untreated effluents from factories that was not complied with, due to shortages of local funds. However, in the light of the priority assigned to the social component and to the overriding issue of privatization, careful scrutiny of the environmental impact of the projects was beyond the scope of this report. This issue therefore merits attention in a future review of the sector. 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