Project Number: 39293 June 2013

Proposed Results-Based Loans Democratic Socialist Republic of Sri Lanka: Education Sector Development Program

Report and Recommendation of the President to the Board of Directors

CURRENCY EQUIVALENTS (as of 13 May 2013)

Currency unit – Sri Lankan rupees (SLRe/SLRs)

SLRe1.00 = $0.0079 $1.00 = SLRs126.10

ABBREVIATIONS

ADB – Asian Development Bank ADF – Asian Development Fund DLI DLR

– –

disbursement-linked indicator disbursement-linked result

EIRR – economic internal rate of return ESDFP – Education Sector Development Framework and Program ESDP – Education Sector Development Program ESMF – Environmental and Social Management Framework GDP – gross domestic product GCE – general certificate of education MOE – Ministry of Education MOFP – Ministry of Finance and Planning NHREP – National Human Resources and Employment Policy OCR – Ordinary Capital Resources RBL – results-based lending SMTSU – Sector Monitoring and Technical Support Unit TA – technical assistance

NOTES

(i) The fiscal year (FY) of the Government of Sri Lanka and its agencies ends on 31

December.

(ii) In this report, "$" refers to US dollars.

Vice-President X. Zhao, Operations 1 Director General J. Miranda, South Asia Department (SARD) Director S. Ra, Human and Social Development Division, SARD Team leader S. Shakil, Social Sector Specialist, SARD Team members H. Huang, Economist, SARD

S. Muthugala, Senior Procurement Officer, SARD M. Mukai, Senior Information Technology Specialist (Business Process Management), Office of Information Systems and Technology B. Panth, Lead Education Specialist, SARD B. Reid, Principal Financial Management Specialist, Operations Services and Financial Management Department (OSFMD) R. Sabur, Senior Safeguards Specialist, SARD S. Shafiq, Financial Management Specialist, SARD R. Shaheen, Procurement Specialist, OSFMD A. Syed, Counsel, Office of the General Counsel Y. Tatewaki, Senior Financial Control Specialist, Controller’s Department K.M. Tilakaratne, Senior Implementation Officer, SARD F. Tornieri, Senior Social Development Specialist, SARD

Peer reviewer S. Jagannathan, Senior Education Specialist, Regional and Sustainable Development Department

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

PROGRAM AT A GLANCE

I. THE PROPOSAL 1

II. THE PROGRAM 1

A. Strategic Context 1 B. Rationale and Key Features 2 C. Scope 3 D. Results 3 E. Program Expenditure Framework and Financing Plan 4 F. Disbursement Arrangements and Verification Protocols 5 G. Program Action Plan 5 H. Implementation Arrangements 5

III. SUMMARY OF ASSESSMENTS 6

A. Soundness 6 B. Results 7 C. Expenditure and Financing 7 D. Systems and Institutions 8 E. Risks and Mitigating Measures 9

IV. ASSURANCES 10

V. RECOMMENDATIONS 10

APPENDIXES

1. Design and Monitoring Framework 11

2. List of Linked Documents 14

PROGRAM AT A GLANCE

1. Project Name: Education Sector Development Program 2. Project Number: 39293-037 3. Country: Sri Lanka 4. Department/Division: South Asia Department/Human and Social Development Division 5. Sector Classification:

Sectors Primary Subsectors Education √ Education sector development Upper secondary education

6. Thematic Classification: Themes Primary Subthemes Social development √ Human development Gender equity Gender equity in economic opportunities

Capacity development Institutional development

6a. Climate Change Impact No Climate Change Indicator available.

6b. Gender Mainstreaming Gender equity theme (GEN) √ Effective gender mainstreaming (EGM) Some gender elements (SGE) No gender elements (NGE)

7. Targeting Classification:

General Intervention

Targeted Intervention Geographic

dimensions of inclusive growth

Millennium development

goals

Income poverty at household

level √

8. Location Impact: National Medium Rural High Urban Medium

9. Project Risk Categorization: Complex

10. Safeguards Categorization: Environment B Involuntary resettlement C Indigenous peoples C

11. ADB Financing: Sovereign/Nonsovereign Modality Source Amount ($ Million) Sovereign Results-based lending Asian Development Fund 100.0 Sovereign Results-based lending Ordinary capital resources 100.0

Total 200.0

12. Cofinancing: Financier Category Amount ($ Million) Administration Type World Bank Official-Loan 100.0 Not ADB Administered

Total 100.0

13. Counterpart Financing: Source Amount ($ Million) Government 4,601.0

Total 4,601.0

14. Aid Effectiveness: Parallel project implementation unit No Program-based approach Yes

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on proposed results-based loans to the Democratic Socialist Republic of Sri Lanka for the Education Sector Development Program (ESDP).1

2. The proposed results-based lending (RBL) program will support the Government of Sri Lanka in equitably developing its human capital base in order to meet the objectives of the Mahinda Chintana: Vision for the Future and the National Human Resources and Employment Policy (NHREP) for Sri Lanka.2 The proposed program will support the government’s Education Sector Development Framework and Program (ESDFP), which seeks to transform the school education system to create a human capital foundation for a knowledge economy. It builds on the extensive experience of the Asian Development Bank (ADB) in Sri Lanka’s education sector.3

II. THE PROGRAM

A. Strategic Context 3. Sri Lanka is a middle-income country with an average per capita gross domestic product (GDP) of $2,836 in 2011 (nominal terms). The per capita GDP grew at 7.1% in 2011 and is expected to reach about $4,000 by 2016. The unemployment rate declined from about 8% in 2003 to below 4% in 2012 because of the economic boom since the end of a long civil conflict.4 The remarkable economic achievements, coupled with a low dependency ratio of 50% in 20125 provide a significant opportunity for Sri Lanka to develop its human capital base in order to accelerate its economic development and transformation into a knowledge-based economy. 4. Sri Lanka has made commendable progress in basic education.6 It has achieved universal primary enrollment and high literacy rates (91%), placing the country far ahead of its neighbors.7 The completion rate is 98% at the primary level and 91% for the basic education cycle (footnote 7). Gender parity is 1.01, indicating a slightly higher number of girls than boys in school.8 On average, students attend school for about 10 years as compared to 6 years in neighboring South Asian countries. This success has been the result of the government’s sustained strong commitment to education, including a free education policy backed by interventions such as free textbooks and uniforms, scholarships, and adequate provision of schools and teachers.

5. However, Sri Lanka must now improve the quality, relevance, and equity of secondary

1 The design and monitoring framework is in Appendix 1.

2 Government of Sri Lanka, Ministry of Finance and Planning, Department of National Planning. 2010. Sri Lanka:

The Emerging Wonder of Asia. Mahinda Chintana—Vision for the Future. Colombo; Government of Sri Lanka, Secretariat for Senior Ministers. 2012. The National Human Resources and Employment Policy for Sri Lanka. Colombo.

3 A Project Preparatory Technical Assistance was provided. ADB. 2012. Technical Assistance to Sri Lanka for

Education Sector Development Project. Manila. 4 Government of Sri Lanka, Department of Census and Statistics. 2012. Labor Force Survey, 2nd Quarter, 2012.

Colombo. 5 Ratio of population ages 0–15 and 65+ / population ages 15–64.

6 The school structure consists of primary (grades 1–5), junior secondary (grades 6–9), and senior secondary

(grades 10–13). Basic education comprises primary and junior secondary grades. 7 Government of Sri Lanka, Ministry of Education. 2012. Education Sector Development Framework and Program

(2013–2017). Colombo. 8 United Nations Educational, Scientific, and Cultural Organization. 2012. EFA Global Monitoring Report. Paris.

2

education. Building on the progress made in basic education, Sri Lanka plans to modernize and transform secondary education to shift from providing basic skills to highly cognitive and job-relevant competencies. The secondary education net enrollment rate at grades 10–13 is still only 65%. Pass rates for the grade 11 ordinary level examination improved from 50% in 2005 to 61% in 2011, but are still low.9 Pass rates for grade 13 advanced level examination have stagnated at about 60% for the last 5 years, and are significantly lower in science, mathematics, and English than in other subjects. Only about 6% of students entering grade 1 each year end up enrolling in university; as many as 33% enter the labor market without proper academic qualifications or skills training, leading to an unemployment rate of 18% for the 15–24 age group.10 6. Key challenges include (i) poor quality of education characterized by low learning outcomes and low completion rates at the senior secondary level (grades 10–13); (ii) insufficient number of schools offering science, mathematics, and English―subjects that are essential for preparing graduates to enter the knowledge economy; (iii) inadequate pathways from school education to post-secondary education and skills training, which affects the relevance and gender-inclusiveness of education to labor market requirements; (iv) a need for more integrated computer-aided learning, sustainable system for maintenance of school facilities and equipment; and (v) stronger school leadership and management capacity, and academic support for teachers to strengthen the quality and relevance of education. Given the limited capacity of universities and low capacity and weak relevance of skills training programs, a significant challenge will be addressing the needs of those students who do not receive relevant qualification before entering the labor force. A modernized and more relevant secondary education sector can create a platform to better prepare youths to enter the skills training sector and the labor market, and can fuel the knowledge economy. 7. To consolidate government initiatives and development partner assistance, the government is implementing the ESDFP with a rolling medium-term sector plan in the education sector since 2006. The ESDFP 2013–2017 (footnote 7) aims to transform the school system, enhance the achievements of general education, and increase secondary education equity and quality in subjects relevant for a knowledge-based economy. This mirrors the objectives in the national vision document, the Mahinda Chintana. The ESDFP is also embedded in the NHREP, the overarching framework for human capital development in Sri Lanka, which prioritizes education and skills for creating a globally competitive and multiskilled workforce, and supports the sector strategies.11

B. Rationale and Key Features 8. ADB has supported the government’s education and skills training programs since the 1980s. The proposed ESDP builds on past successes and learning, and is aligned with the country partnership strategy.12 Earlier projects made significant investments in many of the quality and physical aspects of secondary education that now form part of the ESDFP. Country and sector evaluations have assessed the overall performance of the education sector as highly relevant to, and consistent with, the country's evolving priorities and ADB's corporate policies.

9 Government of Sri Lanka, Ministry of Education, Department of Examinations. 2011. National Symposium on

Reviewing of the Performance of School Candidates: G.C.E. (O.L.) Examination. Colombo. 10

The government plans to increase the number of students entering universities to 10% of the cohort in the medium term, which requires a large increase in the number of university seats available for high school graduates.

11 Government of Sri Lanka's Human Capital Development Strategy (accessible from the list of linked documents in Appendix 2).

12 ADB. 2011. Country Partnership Strategy: Sri Lanka, 2012–2016. Manila.

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The contribution of the education sector assistance program to the country's socioeconomic development is ―likely to be substantial.‖13 Project assessments have recommended scaling up of past investments to strengthen system-wide efforts such as school-based assessment to ensure equitable access to quality and relevant education, and shifting to a sector-wide approach to maximize impact and achieve scalability.14 9. The RBL program is highly relevant and an appropriate modality to support the ESDFP as it (i) reduces transaction costs by focusing on results, rather than inputs, for fundamental second-generation reforms in education quality, by linking the disbursement of ADB financing more directly to agreed-upon results; (ii) uses government systems to strengthen program implementation and fiduciary systems to improve efficiency and manage risks adequately; and (iii) enables sector-wide predictable and sustainable financing for the ESDFP expenditure framework from the Ministry of Finance and Planning (MOFP). This approach also helps to align ADB financing with assistance of other development partners and jointly strengthen government capacity to manage and monitor the ESDFP. C. Scope 10. The program supports the four policy themes of the ESDFP, with sharper focus on the quality, relevance and equity of secondary education. Theme 1 of the ESDFP seeks to increase equitable access to education, especially through the flagship 1,000 Secondary Schools Development Program, which was an outcome of years of investments supported by ADB and focuses on equitable distribution of secondary schools offering all subject streams. Theme 2 seeks to improve the quality and relevance of education, emphasizing teaching and assessment standards and integration of school-based assessment. Science and math are prioritized (with greater computer-assisted learning), and a technology stream is introduced. Theme 3 seeks to strengthen education governance by improving the capacity of school principals and expanding the Program for School Improvement. Theme 4 includes gender-inclusive education planning and budgeting, and focuses on the monitoring and evaluation of results and outcomes.

D. Results 11. The impact of the ESDP will be enhanced youth employability. The outcome will be the development of a modernized secondary education school system. The disbursement-linked results (DLRs) consist of incremental disbursement-linked indicators (DLIs) that are development outcomes, sector results, and institutional development indicators.15 These DLIs and program actions form a results chain that will contribute to the achievement of the ESDP objectives through the four interrelated results areas that define the ADB-financed program (paras. 12–15). 12. Result 1: Improved student learning. This will be achieved by (i) developing a national student assessment framework that integrates school-based assessment with external examinations to fundamentally change the landscape of student learning that would lead to improved pass rates for general certificate of education (GCE) examinations at the ordinary level and advanced level (DLRs 1 and 2); (ii) introducing a technology stream in secondary schools to develop pathways from secondary education to vocational training, which will help to

13

ADB. 2007. Evaluation Paper on Education Sector Assistance in Sri Lanka. Manila; ADB. 2007. Evaluation Study: Sri Lanka Inclusive Development and Conflict Resolution―Major Challenges in the Future. Manila.

14 ADB. 2012. Completion Report: Secondary Education Modernization Project II in Sri Lanka. Manila.

15 Disbursement-Linked Indicators Matrix, Verification Protocols, and Disbursement (accessible from the list of linked documents in Appendix 2).

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expand the curriculum by making it more responsive to the labor market (DLR 3); and (iii) integrating computer-aided learning as part of the curriculum, building upon the earlier physical investments.16 13. Result 2: Improved equity and efficiency of the school system. This will be attained by (i) upgrading the facilities in secondary schools in accordance with the 1,000 Secondary Schools Development Program, which includes provision of all necessary physical facilities such as additional classrooms, laboratories, gender-segregated latrines (DLR 4); and (ii) recruiting, training, and deploying teachers with relevant qualifications, based on detailed teacher mapping and deployment planning. Together, these will lead to increased participation in science and commerce streams at the advanced level (DLRs 5 and 6). 14. Result 3: Strengthened school leadership. This will be achieved by (i) strengthening the capacity of central educational institutions such as the National Institute for Education and the Center for Leadership and Development, and training school principals by implementing a gender-inclusive human resource training program for enhancing school quality and leadership (DLR 7); and (ii) introducing a financing facility to support sustainable school infrastructure maintenance as part of the Program for School Improvement, including information and communication technology and other higher-order learning equipment and facilities. 15. Result 4: Strengthened capacity for effective program planning and implementation. This will be achieved by (i) supporting effective management of ESDFP through the Ministry of Education (MOE)’s Sector Monitoring and Technical Support Unit (SMTSU); (ii) performance-based partnership agreements between the MOE and provincial education authorities to improve the alignment of the provincial education sector plans with the ESDFP and ensure better funds allocation and flow (DLR 8); and (iii) strengthening provincial and zonal education capacity, including fiduciary aspects, through capacity development and provision of implementation support (DLR 9). E. Program Expenditure Framework and Financing Plan 16. ADB’s ESDP supports the government’s ESDFP, which includes a rolling medium-term expenditure framework for the sector. The ESDFP expenditure projections are based on provincial plans with school-based targets. The ESDFP (2013–2017) is estimated to cost $4.9 billion including estimated recurrent budget requirements of $4.2 billion and $720 million in capital expenditures. ADB will finance $200 million and the World Bank is also providing parallel collaborative cofinancing of $100 million for the ESDFP.17 17. The government has requested (i) a loan of $100 million from ADB’s ordinary capital resources (OCR); and (ii) a loan in various currencies equivalent to SDR66,588,000 from ADB’s Special Funds (ADF) resources to help finance the project. The OCR loan will have a 26-year term, including a grace period of 5 years, an annual interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility,18 a commitment charge of 0.15% per year, and such other terms and conditions set forth in the draft loan agreement. The ADF loan will have a 25-year term, including a grace period of 5 years, an interest rate of 2.0%

16

An e-learning initiative is being piloted and will support this activity. ADB. 2011. Technical Assistance to Sri Lanka for Learning from e-learning: Testing Intelligent Learning Systems in South Asia. Manila.

17 World Bank. 2011. Transforming the School Education System as the Foundation of a Knowledge Hub–Project

Appraisal Document. Washington, DC. 18

In addition, the interest includes a maturity premium of 0.10% per year.

5

per year during the grace period and thereafter, and such other terms and conditions set forth in the draft loan agreement.

Table 1: Program Financing (2013–2017) ($ million)

Source Amount

ADB (Asian Development Fund) ADB (ordinary capital resources)

100.0 100.0

World Bank 100.0 Government of Sri Lanka 4,601.0 Total 4,901.0

ADB = Asian Development Bank. Sources: ADB staff estimates; Government of Sri Lanka Education Sector Development Framework and Program 2013–2017 medium-term budgetary requirements.

F. Disbursement Arrangements and Verification Protocols 18. ADB loans totaling $200 million will be disbursed over 5 years, subject to the achievement of the DLIs. The first disbursement will be made after the achievement of at least three DLIs. With at least three of the annual DLIs, the MOE may submit a withdrawal application along with the evidence verifying the achievement of the DLIs. If all DLIs are achieved, the annual disbursement will be $40 million, and any amounts not disbursed for unmet DLIs will be disbursed once they have been achieved. Verification mechanisms and protocols have been established and include verification by public, autonomous, and independent sources depending on the nature of the DLI (footnote 15).

G. Program Action Plan

19. A program action plan has been developed to strengthen implementation of ESDFP’s four results areas and achievement of program objectives.19 This includes key actions relating to technical, fiduciary, safeguards, and gender aspects of the program. H. Implementation Arrangements

20. The program will be implemented from June 2013 to May 2018. The MOE will be the executing agency and the implementing agencies will be the MOE and the nine provincial education departments.20 The MOE will be responsible for ESDFP coordination with development partners and provinces, program monitoring and reporting. It will be supported by the SMTSU with staff nominated by the MOE to provide outreach to the provinces. The SMTSU will undertake timely monitoring and support for implementation of the DLIs. The provincial education departments will be responsible for formulating and implementing provincial ESDFP plans. Performance-based partnership agreements between the MOE and provincial education departments will be put in place to strengthen the alignment between resources and results and to ensure effective implementation of provincial sector plans. The MOFP will ensure adequate budget appropriation and smooth funds flow. The National Planning and Project Management and Monitoring departments of the MOFP will be on the program steering committee.

19

Program Action Plan (accessible from the list of documents in Appendix 2). This will guide the implementation of critical actions that complement the DLIs.

20 Details of program implementation and institutional arrangements are in the Detailed Institutional and

Implementation Assessment and Program Action Plan (accessible from the list of linked documents in Appendix 2).

6

21. To support the SMTSU and provinces to implement these actions and the DLIs with incremental capacity building, ADB is implementing parallel capacity development technical assistance (TA).21 The outputs of this TA include improved technical capacity for planning and institutional and fiduciary capacity to support the efficient implementation of the ESDFP. The TA will also support independent verification and performance reviews. The financial auditing and reporting arrangements will rely on country systems and will be based on financial statements prepared for the ESDFP in line with Sri Lanka Public Sector Accounting Standards and audit reports by the Auditor General’s Department. ADB will conduct annual fiduciary and third party reviews to monitor performance and safeguards compliance.

III. SUMMARY OF ASSESSMENTS

A. Soundness

22. The program has strong economic and social benefits. Human capital accumulation and technological change are key drivers of economic growth. Investing in human capital through quality education is crucial for Sri Lanka as the country strives to accelerate growth and reduce youth unemployment. Recent academic literature on the economic benefits of education shows the importance of the impact of learning rather than of just completion rates on economic growth.22 In addition, studies indicate that the rates of return on secondary education (passing the advanced level) in Sri Lanka are high, averaging 15% for men and 18% for women.23 In 2011, the World Bank undertook an analysis of the economic internal rate of return (EIRR) for the ESDPF (footnote 17). It concluded that the program would have significant EIRRs ranging between 29% in the low case scenario to 38% in the high case scenario.24

23. The program has three substantial economic benefits. First, students are more likely to enter tertiary education or skills training programs, and gain the skills to find productive employment. This would reduce the high youth unemployment rates, as reflected in the high EIRR. Second, equity of opportunity and income are likely to improve significantly as the program supports the equitable distribution of schools offering all subject streams. Empirical evidence suggests that reducing regional and socioeconomic differences in cognitive skills shrinks income disparities.25 Third, overall economic welfare is likely to improve. A recent survey report shows that households in which the head has completed secondary education are likely to have 50% higher income than those in which the household head has passed only the ordinary level examination (grade 11).26

24. The ESDFP’s emphasis on equity to ensure that all administrative divisions have at least one secondary school offering all subject streams will help reduce poverty and socioeconomic inequalities by improving access for girls and boys in rural areas. The emphasis on quality to strengthen teaching of science and technology will improve the likelihood of students gaining skills that will lead to productive employment. Although girls have consistently higher enrollment,

21

ADB. 2012. Technical Assistance to Sri Lanka for Human Capital Development Capacity and Implementation Support. Manila.

22 E. Hanushek. 2012. The 4% Solution: Unleashing the Economic Growth America Needs. New York: Crown

Business. pp. 226–239. 23

World Bank. 2011. Transforming School Education in Sri Lanka: From Cut Stones to Polished Jewels. Colombo. 24

Since the scope and costs of the ESDFP do not change, this analysis is also valid for ADB’s ESDP. 25

D. Hawks and M. Ugur. 2012. Evidence on the Relationship Between Education, Skills and Economic Growth in Low-Income Countries. London.

26 Government of Sri Lanka, Ministry of Finance and Planning, Department of Census and Statistics. 2011.

Household Income and Expenditure Survey 2009/10. Colombo.

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completion, and pass rates at all levels of schooling,27 female youth unemployment (21.6%) is much higher than that of males at 15.7% (footnote 4). This is partly caused by the disproportionate enrollment of girls in the arts stream: only 19% of girls who took the advanced level enrolled in a science stream, compared with 27% of boys. Thus, girls are not acquiring the skills required by a changing labor market. The focus of the program on science and technology—subjects that girls may be less inclined to participate in—could put female participation rates at risk and lead to further gender disparities in employment trends. However, the program proposes to address this by including a communication campaign to raise awareness among girls and increase their participation in such subjects, which would improve their preparedness for the labor market, and ensure that the economic and social benefits accrue to both girls and boys. The program will also ensure that the upgraded schools have adequate female-friendly facilities and resources.

B. Results

25. The DLRs, DLIs, and program actions that the government has agreed are derived from the ESDFP’s results framework, which supports national and sector objectives (footnote 15). These form the results chain that was developed with extensive consultations with program stakeholders. Together, they contribute to achieving and sustaining meaningful results in the outputs and the outcome of the program, to modernize secondary education to better prepare graduates to meet the requirements of the knowledge economy.

C. Expenditure and Financing

26. The ESDFP medium-term expenditure framework is adequate to meet the key sector results. It was developed based on the realistic needs of schools, and is updated annually on a rolling basis. Based on its medium-term expenditure framework and in anticipation of external financing, the government has allocated 13% towards capital expenditures in 2013–2015, an increase from an average of 8% during 2006–2011 to finance the critical capital requirements of the ESDFP. These capital expenditures are front-loaded and will decrease incrementally. ADB’s financing of $200 million is 4% of the total education budget and 28% of the capital budget, making it a sustainable investment.28

27. The long-term sustainability of the ESDFP will depend on (i) adequate financing by the MOFP for the ESDFP expenditures; and (ii) improvements in quality and efficiency of expenditures, as envisaged in the program.29 In the coming years, the rapidly growing economy and government’s current tax reforms, including expansion of VAT, are likely to increase the fiscal space allowing sustained financing for ESDFP.30 As such, reliance on external financing for capital budget is likely to diminish once ESDFP reforms are institutionalized. It is expected that recurrent expenditures, such as teacher salary budget, will be maintained at reasonable levels, as the government plans to limit new recruitment only for specialized subject teachers while addressing inequitable distribution of teachers through redeployment. The program also includes innovative methods to introduce a school facilities maintenance fund to manage recurrent costs. The program brings three major benefits that will improve efficiency in

27

There is gender parity at the primary level and grade 9 completion rates are 93% for girls and 89% for boys (2010 data); and 51% participation in secondary for girls, 49% for boys.

28 With the World Bank’s $100 million financing expected to be disbursed during the same period, the combined

contribution is about 40% of total required capital expenditures for the program. 29

The Expenditure and Financing Assessment includes the detailed fiscal sustainability analysis conducted for the program (accessible from the list of linked documents in Appendix 2).

30 International Monetary Fund. 2013. IMF Country Report No. 13/120. Sri Lanka: 2013 Article IV Consultation and

Proposal for Post-Program Monitoring. Washington, D.C.

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expenditures. It will (i) strengthen budget execution in the education sector; (ii) ensure better predictability of funds from MOFP; and (iii) protect priority programs to meet the ESDFP results.

D. Systems and Institutions

28. Monitoring and evaluation system. The ESDFP has a strong monitoring and results framework, and the systems for monitoring and evaluation are adequate to meet the program reporting needs at the central level. However, the SMTSU will need to help strengthen provincial capacity in order to improve timely implementation and reporting.

29. Governance and fiduciary systems. Governance and fiduciary systems have been assessed based on earlier country and sector assessments, and recent analysis and field assessments conducted in accordance with the requirements in the RBL policy.31 Sri Lanka’s education systems and performance in terms of outcomes are strong and its education governance and service delivery track record is sound. Sri Lanka has a functional public educational system where all children 6–18 years old are able to access schooling within easy distance of their homes. The school-based management system is also strong. Sri Lanka ranked better than most of its neighbors in South Asia and several countries in Southeast Asia in the Transparency International Corruption Perception Index in 2012.32 Nonetheless, the government is committed to strengthen anticorruption mechanisms. The 2011 governance risk analysis of the education sector33 noted instances of bribery in primary school admissions and found that parents prepared fraudulent documents to establish residency in order to get into ―popular‖ schools, as reported in complaints to the Commission to Investigate Allegations of Bribery and Corruption in 2008.34 The ESDFP will help alleviate these cases of petty corruption by improving equitable access to high-quality schools in every division of the country. The risk analysis also identified absence of sector-specific corruption prevention measures for procurement, but these will be developed under the program. Specific measures to improve the capacity, compliance, and efficiency measures of fiduciary systems have been identified in the detailed action plans to reduce risks associated with using these systems.35

30. Financial due diligence was carried out in accordance with ADB’s methodology.36 The financial management systems assessment builds on the general and sector public financial management risk assessments, as well as those undertaken in the preparation of ADB’s country partnership strategy with Sri Lanka (footnote 12). The assessment of the government’s general financial management system—particularly financial management capacity and procedures for the program within the MOFP, MOE, and provinces—focused on internal controls, funds flow, accounting, financial reporting, and audit. The due diligence identified weaknesses in (i) subnational accountability mechanisms and arrangements; (ii) staffing because of a shortage of suitably skilled accountants and auditors; (iii) financial reporting standards and arrangements; and (iv) external auditing, oversight, and public accountability. Risk mitigation has been introduced in the program to manage the weaknesses identified in the financial management systems (Table 2).37 The substantial risks associated with the use of the government’s financial

31

ADB. 2013. Piloting Results-Based Lending for Programs. Manila. 32

Sri Lanka (40), the People’s Republic of China (80), India (94), Philippines (105), Indonesia (118), Viet Nam (123), and Bangladesh (144). A lower score shows a lower perception of corruption. Sri Lanka ranked 79 out of 176 countries.

33 ADB. 2011. Sri Lanka: Education Sector: Governance Risk Analysis. Manila.

34 The permanent commission was reconstituted in 2011.

35 Summary Fiduciary Systems Assessment (accessible from the list of linked documents in Appendix 2).

36 ADB. 2009. Financial Due Diligence: A Methodology Note. Manila.

37 Details are in the Summary Fiduciary Systems Assessment (accessible from the list of linked documents in

Appendix 2).

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management arrangements are acceptable given the track record in education and recent system improvements, provided that recommended risk-mitigating actions are undertaken.

31. A rigorous assessment of procurement systems was conducted, which also benefited from the findings of earlier assessments of country and program procurement systems, as well as a review of procurement in ongoing education projects.38 The program will rely on local program systems, based on the national framework, and will exclude high-value contracts in accordance with the RBL policy. Sri Lanka has a functional public procurement system, based on comprehensive National Procurement Guidelines issued in 2007. In the absence of a codified public procurement statute, these guidelines have the force of law, and are supplemented by detailed manuals for procurement of goods and works, and consultant recruitment. While the MOE has reasonable capacity and expertise for procurement, capacity in the provinces is limited, making the risks high. Mitigating measures to manage the procurement risks have been identified and included in the program to strengthen application of sound procurement practices and improved transparency and complaint-handling mechanisms.

32. Safeguards systems. A diagnostic assessment of the program systems for environmental and social safeguards and the Environmental and Social Management Framework (ESMF) was conducted in accordance with the due diligence requirements in the RBL policy.39 It was disclosed on 3 April 2013. The program is designed to exclude activities with significant environmental impacts (category B). It is likely that limited adverse environmental impacts may result from subprogram activities, particularly during construction and renovation. The program will exclude activities that have land acquisition, involuntary resettlement, or indigenous peoples impacts (category C for both the involuntary resettlement and indigenous peoples). Adequate measures to mitigate such impacts and improve compliance are outlined in the assessment. An action plan to improve safeguards compliance and monitoring, in line with ADB’s Safeguard Policy Statement (2009) principles and all applicable environmental laws and regulations of Sri Lanka, has been prepared.

E. Risks and Mitigating Measures

33. Major risks and mitigating measures are summarized in Table 2.40

Table 2: Risks Assessment and Mitigation Risks Assess-

ment Mitigation

Results. Difficult sector results,

such as examination reform, could face resistance from parents, teachers, and other stakeholders; and could be challenged by implementation capacity; emphasis on science and

Medium The program includes a number of strategies to enhance government and stakeholder ownership for the planned reforms, such as training of concerned staff and awareness campaigns (including enhancing girls’ participation in non-arts subjects), and is building on the government’s processes for the quality reforms. The results-based lending approach will also provide incentives to keep these programs on track, while

38

ADB. 2013. Spot Review Report: Proposed Loan and Asian Development Fund Grant to the Democratic Socialist Republic of Sri Lanka for the Education for Knowledge Society Project. Manila; World Bank. 2011. Transforming the School Education System as the Foundation of a Knowledge Hub–Project Appraisal Document. Washington, DC.

39 Government of Sri Lanka, Ministry of Education. Education Sector Development Framework and Program II 2012–

2016: Transforming School Education as the Foundation of a Knowledge Hub Project, Environmental and Social Management Framework. Colombo. This ESMF was prepared for the World Bank’s TSEP and for all external financing for the ESDFP, and the government has agreed that it will be applied to all subprojects supported with ADB financing.

40 Integrated Risk Assessment and Risk Mitigation Measures (accessible from the list of linked documents in

Appendix 2).

10

Risks Assess- ment

Mitigation

technology could put girls’ participation at risk.

the incremental approach will help make introduction of these reforms manageable.

Expenditure and Financing.

Inadequate budget allocations and delayed funds releases and execution.

High A disbursement-linked indicator and program action on sector financing provides incentive to Ministry of Finance and Planning to allocate adequate budget for timely budget execution.

Fiduciary. Inadequate capacity in

provincial procuring entities; lack of transparency in procurement and complaints-handling mechanism; weak compliance monitoring; weak capacity for internal audit

High Procurement actions include: (i) updating and making easily accessible bidding and related documentation, and improving transparency of procurement processes; (ii) aggregating bid packaging at the district level to maximize efficiencies; (iii) training on bid packaging, evaluation, and contract management, particularly at the provincial level; and (iv) annual procurement reviews.

Financial management actions include: (i) implementation of financial management actions for detailed capacity building measures for provincial accounting staff, internal and external auditors, as well as enhanced controls over fixed assets; and (ii) annual fiduciary reviews.

Source: Asian Development Bank.

IV. ASSURANCES 34. The government has assured ADB that implementation of the program shall conform to Piloting the Results-Based Lending for Programs Policy. The government has agreed with ADB on certain covenants for the program which are set forth in the loan agreements.

V. RECOMMENDATIONS

35. I am satisfied that the proposed loans would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve

(i) the loan in various currencies equivalent to SDR66,588,000 to the Democratic Socialist Republic of Sri Lanka for the Education Sector Development Program, from ADB’s Special Funds resources, with an interest charge at the rate of 2.0% per annum during the grace period and thereafter; for a term of 25 years, including a grace period of 5 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan agreement presented to the Board; and

(ii) the loan of $100,000,000 to the Democratic Socialist Republic of Sri Lanka for the Education Sector Development Program, from ADB's ordinary capital resources, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; for a term of 26 years, including a grace period of 5 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan agreement presented to the Board.

Takehiko Nakao President

4 June 2013

Appendix 1 11

DESIGN AND MONITORING FRAMEWORK

Design Summary

Performance Targets and Indicators with

Baselinesa

Data Sources and Reporting Mechanisms

Assumptions and

Risks

Impact Enhanced youth employability in Sri Lanka

Unemployment rates for youth (15–24 years old) reduced from 17.8% (15.7% male; 21.6% female) in 2012 to 12% in 2021

Department of Labor, annual labor survey

Assumption Economy continues to create jobs, and requires new and higher-level skills

Outcome A modernized secondary education school system developed

Participation rates in non-arts advanced level streams increased (science from 22% to 28%, with 25% female enrollment from 19%; commerce from 26% to 33%, with 29% female enrollment from 22%) 10% participation rate in GCE advanced level technology stream (at least 25% female) Pass rate of GCE advanced level increased from 62% to 65% (male 54%; female 69%) Pass rate of GCE ordinary level increased from 61% to 65% (male 52%; female 68%)

For all indicators: School census, MOE Examination results (NETS)

Assumption Government remains committed to ESDFP Risk Quality improvements in curriculum teaching take time to roll out and gain recognition by parents and students

Outputs 1. Improved student learning

NSAPF implemented, integrating SBA with terminal examination scores (Baseline: SBA scores not considered in final examination score) Technology stream in GCE advanced level fully operational with adequate teachers and facilities in at least 100 secondary schools, and at least 50% female enrollment, by June 2016 Expansion plan to roll out technology stream approved (Baseline: no technology stream) Integrated computer-aided learning for mathematics implemented in at least 250 schools

For all indicators: Quarterly SMTSU reports

Assumptions Commitment to institutionalizing FEMF as a part of PSI MOE receives financing for SMTSU Risks Resistance from stakeholders towards an integrated national student assessment framework Inadequate budget allocation for comprehensive physical and human resource development in selected schools

12 Appendix 1

Design Summary

Performance Targets and Indicators with

Baselinesa

Data Sources and Reporting Mechanisms

Assumptions and

Risks

2. Improved equity and efficiency of the school system

At least 250 schools upgraded from type 1C (offering arts and commerce advanced level streams only) to type 1AB status (offering science, arts, and commerce streams in GCE advanced level) with at least 25% female enrollment in science streams 250 advanced level science teachers (at least 50% females) with relevant qualifications deployed in at least 250 upgraded secondary schools 200 advanced level technology teachers (at least 50% females) with relevant qualifications deployed to at least 100 secondary schools

For all indicators: Quarterly SMTSU reports School census, MOE

Assumption Government’s continued emphasis on the 1,000 Secondary Schools Development Program Risks Reluctance of parents and girls to enroll in science and technology subjects Difficulties in deploying teachers to remote schools

3. Strengthened school leadership

Additional staff recruited with at least 50% women (i) NIE: 60 (ii) CELD: 16 (iii) 18 NCOEs: 100

HRD and Staffing Plan for central training institutions implemented At least 600 principals (at least 25% women) and 900 deputy principals (at least 50% women) complete training program at CELD by June 2017 School FEMF Scheme piloted in 250 schools (Baseline: No school-level maintenance scheme available)

For all indicators: Quarterly SMTSU reports MOE and MOF circular for the implementation of FEMF

Risk Challenge to identify sustainable sources of financing for school maintenance

4. Strengthened capacity for effective program planning and implementation

SMTSU fully operational by June 2014 (Baseline: No designated unit at MOE to perform these functions) ESDFP performance agreements between MOE and provincial education authorities finalized and updated annually Spending on education sector capital budget execution as a percentage of approved budget increased to 85% (Baseline: average 80% in 2008–2010) Share of total capital education budget for higher order learning spaces and capital assets at schools increased to 45% (Baseline: 42%) 30% of school and/or civil works contracts awarded on basis of district-level bundled contracts (Baseline: none in place)

For all indicators: Quarterly SMTSU reports MOFP budgets compared with unaudited expenditure statements for school education sector for each province and MOE

Assumption Government provides financial and human resources for SMTSU

Appendix 1 13

Activities with Milestones Inputs Output 1: Improved student learning 1.1 NSAPF developed (2014), piloted (2016), and assessed (June 2017) 1.2 Awareness program on NSAPF launched (June 2015) 1.3 Detailed plans and programs for technology stream defined and approved (June 2014) 1.4 Information education and communication campaign to promote technology stream launched

(June 2015) 1.5 Technology stream operationalized in 100 schools (June 2016) 1.6 Preliminary assessment of technology stream completed and expansion plans prepared (June

2017) 1.7 Plan for expanding and implementing computer-aided learning in mathematics developed (by

January 2014) Output 2: Improved equity and efficiency of the school system 2.1 250 schools selected for upgrading to 1AB status (June 2013) 2.2 Detailed plans for upgrading physical and human resources in selected schools prepared

(June 2014). 2.3 Upgrading activities initiated in all 250 schools, and 85% of selected schools upgraded (2017) 2.4 Teacher mapping study completed and findings disseminated to all provinces (June 2014) 2.5 Technology stream teachers trained and deployed in 100 secondary schools (June 2016) 2.6 Teachers deployed and trained for the selected 250 upgraded secondary schools (June 2017) Output 3: Strengthened school leadership 3.1 HRD and staffing plan for NIE, CELD, and NCOE completed and approved (June 2013) 3.2 NIE, CELD, and NIE 90% staffed with trained personnel according to HRD and staffing plan

(June 2017) 3.3 Feasibility study for FEMF scheme completed and approved (June 2014) 3.4 FEMF scheme piloted in 250 schools (June 2015) 3.5 FEMF scheme fully integrated with PSI (June 2017) Output 4: Strengthened capacity for effective program planning and implementation 4.1 SMTSU established at MOE (June 2013) and fully staffed (June 2014) 4.2 ESDFP performance agreements between MOE and provincial councils developed and

updated annually 4.3 Procurement capacity building plan for education sector institutions developed (June 2013) 4.4 Procurement capacity building plan for education sector institutions implemented (June 2017) 4.5 Financial management action plans agreed and implemented to improve overall fiduciary

practices, based on initial due diligence and annual fiduciary reviews conducted (commencing 2015)

4.6 Issuance of financial statements in accordance with Sri Lankan Auditing Standards and Generally Accepted Accounting Principles (starting 2014)

4.7 Six-monthly monitoring reports and six-monthly financial reports prepared (starting 2014) 4.8 Annual program performance reports prepared (February 2014, for year ending 2013; and

each year thereafter).

Total ESDFP (government and external development financing): $4,901 million ADB: $200 million World Bank: $100 million

ADB = Asian Development Bank, CELD = Center for Education Leadership Development, ESDFP = Education Sector Development Framework and Program, FEMF = Facilities and Equipment and Maintenance Financing, GCE = general certificate of education, HRD = human resource development, MOE = Ministry of Education, MOFP = Ministry of Finance and Planning, NCOE = National College of Education, NETS = National Evaluation and Testing Services, NIE = National Institute of Education, NSAPF = National Student Assessment Policy Framework, PSI = Program for School Improvement, SBA = school-based assessment, SMTSU = Sector Monitoring and Technical Support Unit. a

Baseline data is 2011, unless otherwise indicated. Target is 2017, unless otherwise indicated.

Source: Asian Development Bank.

14 Appendix 2

LIST OF LINKED DOCUMENTS http://adb.org/Documents/RRPs/?id=39293-037-3

1. Loan Agreement: OCR

2. Loan Agreement: ADF

3. Country Economic Indicators

4. Sector Assessment: Education

5. Program Description and Soundness Assessment

6. Development Coordination

7. Disbursement Linked Indicators Matrix, Verification Protocols, and Disbursement

8. Contribution to ADB Results Framework

9. Expenditure and Financing Assessment

10. Program Action Plan

11. Summary Poverty Reduction and Social Strategy

12. Summary Fiduciary Systems Assessment

13. Monitoring and Evaluation Systems Assessment

14. Environment and Social Systems Assessment

15. Integrated Risk Assessment and Risk Mitigation Measures

Supplementary Documents

16. Economic Analysis

17. Financial Management Systems Assessment

18. Procurement Systems Assessment

19. Detailed Institutional and Implementation Assessment

20. Government of Sri Lanka’s Human Capital Development Strategy

21. Consultative Process

22. Templates for Audited Financial Statement

23. Outcomes of Group Consultations and Field Visits

24. Environmental Management Plan for Education Sector Development Program

25. Education Sector Development Framework and Program Environmental and Social Management Framework