Completion Report

– Project Number: 29601 Loan Number: 1552 April 2008

Sri Lanka: Second Perennial Crops Development Project

CURRENCY EQUIVALENTS

Currency Unit – Sri Lanka rupee/s (SLRe/SLRs)

At Appraisal At Project Completion 25 June 1997 31 December 2005

SLRe1.00 = $0.017 $0.009 $1.00 = SLRs58.40 SLRs102.11

ABBREVIATIONS ADB – Asian Development Bank AWDR – average weighted deposit rate CARP – Council for Agricultural Research Policy CBSL – Central Bank of Sri Lanka CRI – Coconut Research Institute DAPH – Department of Animal Production and Health DEA – Department of Export Agriculture DFCC – Development Finance Corporation of Ceylon DOA – Department of Agriculture EA – executing agency EAC – export agricultural crops EIRR – economic internal rate of return FIRR – financial internal rate of return fob – free on board GDP – gross domestic product HNB – Hatton National Bank HORDI – Horticultural Research and Development Institute M&E – monitoring and evaluation MADAS – Ministry of Agricultural Development and Agrarian Services MOF – Ministry of Finance NAC – National Agribusiness Council NDB – National Development Bank PCDP – Perennial Crops Development Project PFI – participating financial institution PMO – project management office PPP – public-private partnership PVIC – Plant Virus Indexing Centre RDB – Ruhunu Development Bank SPCDP – Second Perennial Crops Development Project SPMDC – Seed and Planting Material Development Centre TA – technical assistance

NOTES

(i) The fiscal year of the Government and all participating financial institutions ends on

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

Vice President L. Jin, Operations 1 Director General K. Senga, South Asia Department (SARD) Director F. Roche, Agriculture, Natural Resources, and Social Services Division,

SARD Team leader M. Mongiorgi, Senior Rural Development Economist, SARD Team member V. Mariano, Project Implementation Officer, SARD

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CONTENTS

Page

BASIC DATA i MAP

I. PROJECT DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 1

A. Relevance of Design and Formulation 1 B. Project Outputs 2 C. Project Costs 5 D. Disbursements 5 E. Project Schedule 5 F. Implementation Arrangements 5 G. Conditions and Covenants 7 H. Related Technical Assistance 7 I. Consultant Recruitment and Procurement 7 J. Performance of Consultants, Contractors, and Suppliers 8 K. Performance of the Borrower and the Executing Agency 8 L. Performance of the Asian Development Bank 9

III. EVALUATION OF PERFORMANCE 9 A. Relevance 9 B. Effectiveness in Achieving Outcome 10 C. Efficiency in Achieving Outcome and Outputs 10 D. Preliminary Assessment of Sustainability 10 E. Impact 11

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 12 A. Overall Assessment 12 B. Lessons 13 C. Recommendations 14

APPENDIXES 1. Performance Indicators and Achievements 16 2. The Credit Component: Analysis of the Borrowers 19 3. The Credit Component: Analysis of the Participating Financial Institutions 25 4. Noncredit Component: Programs with the Collaborative Institutions 30 5. Actual Project Costs 36 6. Annual Disbursement 37 7. Project Implementation Schedule 38 8. Status of Compliance with Loan Covenants 39 9. Economic and Financial Analyses 48 10. Overall Assessment 52 11. Photographs of the Project Activities 53

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BASIC DATA A. Loan Identification 1. Country 2. Loan Number 3. Project Title 4. Borrower 5. Executing Agency Part A Parts B, C, D, and E 6. Amount of Loan 7. Project Completion Report Number

Sri Lanka 1552 Second Perennial Crops Development Project Democratic Socialist Republic of Sri Lanka Central Bank of Sri Lanka Ministry of Agricultural Developmenta SDR14,743,000 1020

B. Loan Data 1. Appraisal – Date Started – Date Completed 2. Loan Negotiations – Date Started – Date Completed 3. Date of Board Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness – In Loan Agreement – Actual – Number of Extensions 6. Closing Date – In Loan Agreement – Actual – Number of Extensions 7. Terms of Loan – Interest Rate – Maturity (number of years) – Grace Period (number of years)

8. Terms of Relending from the Central Bank of Sri Lanka to participating financial institutions

– Interest Rate – Maturity (number of years) – Grace Period (number of years) a Formerly the Ministry of Agriculture and Lands.

25 June 1997 11 July 1997 25 August 1997 27 August 1997 25 September 1997 3 April 1998 2 July 1998 28 August 1998 2 30 June 2004 10 April 2007 1 1% per annum 40 years 10 years 6 percentage points below AWDR 8 years 10 years

9. Disbursements a. Dates

ii

Initial Disbursement

7 December 1998

Final Disbursement

29 August 2006

Time Interval

92 months

Effective Date

28 August 1998

Original Closing Date

30 June 2004

Time Interval

69 months

b. Amount (in SDR) Category

Original

Allocation

Last Revised

Allocation

Amount

Canceleda

Amount

Disbursed

Undisbursed

Balanceb

01 Credit 11,562,000 11,562,000 0 11,507,635 54,365 02 Civil Works 72,000 72,000 0 140,641 (68,641) 03 Equipment 377,000 377,000 0 438,337 (61,337) 04 Vehicles 501,000 501,000 0 279,121 221,879 05 Research 155,000 155,000 0 71,167 83,833 06 Materials 334,000 334,000 0 180,640 153,360 07 Training 576,000 576,000 0 142,369 433,631 08 Project Management 196,000 196,000 0 434,177 (238,177) 09 Consulting Services 55,000 55,000 0 0 55,000 10 Service Charge 463,000 463,000 0 463,000 0 11 Unallocated 452,000 452,000 0 0 452,000 Total 14,743,000 14,743,000 0 13,657,087 1,085,913 a There were no cancellations during project implementation. b The undisbursed balance was reallocated to ADB. 2006. Report and Recommendation of the President to the

Board of Directors on Proposed Supplementary Loans to the Democratic Socialist Republic of Sri Lanka for the Secondary Towns and Rural Community-Based Water Supply and Sanitation Project. Manila (Loan 2276-SRI).

10. Local Costs (Financed) Appraisal Estimate Actual - Amount ($) 10.465 million 10.564 million - Percent of Local Costs 40% 46% - Percent of Total Cost 29% 34% C. Project Data

1. Project Cost ($‘000) Cost Appraisal Estimate Actual

Foreign Exchange Cost 9,513 8,271 Local Currency Cost 26,255 23,112 Total 35,768 31,383

2. Financing Plan ($‘000)

Cost Appraisal Estimate Actual Foreign Local Total Foreign Local Total Borrower Financed 0 5,087 5,087 0 2,843 2,843 ADB Financed 9,513 10,465 19,978 8,271 10,564 18,835 Participating Financial Institutions

0

2,413

2,413

0

2,639

2,639

Private Sector 0 752 752 0 992 992

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Beneficiaries 0 7,538 7,538 0 6,075 6,075 Total 9,513 26,255 35,768 8,271 23,112 31,384

ADB = Asian Development Bank. 3. Cost Breakdown by Project Component ($‘000) Appraisal Estimate Actual Component Foreign Local Total Foreign Local Total A. Credit 6,032 18,098 24,130 6,180 18,346 24,526B. Farm Advisory, Marketing,

and Technical Services

320

2,690

3,010

23

1,962

1,985C. Research 1. Coconut Research

Institute 23 103 126 54 84 138

2. Department of Animal Production and Health

38

44

82

24

28

51

3. Department of Agriculture 168 54 222 250 182 432 4. Council for Agricultural

Research Projects

23

7

30

17

5

21 5. Contract Research 140 560 700 58 306 364 Subtotal (C) 392 768 1,160 403 604 1,006D. Seed and Planting Material 1. Department of Export

Agriculture 70 386 456 165 222 387

2. Seed Certification Service 225 527 752 191 150 341 3. Seed and Planting

Material Development

316

122

438

189

128

317 4. National Botanical

Gardens 0 0 0 89 243 332

Subtotal (D) 611 1,036 1,646 634 744 1,3780. E.

Institutional Strengthening

1. PMO 168 503 671 122 1,289 1,412 2. CBSL 95 8 102 62 9 71 3. Training 692 1,913 2,605 189 158 347 4. Consulting Services 74 0 74 0 0 0 Subtotal (E) 1,028 2,424 3,453 373 1,457 1,830Total Base Cost 8,384 25,015 33,399 7,613 23,112 30,725Contingencies 523 1,240 1,763 0 0 0 Subtotal 8,907 26,255 35,162 7,613 23,112 30,725Service Charge 606 0 606 658 0 658 Total Project Cost 9,513 26,255 35,768 8,271 23,112 31,383CBSL = Central Bank of Sri Lanka, PMO = project management office. 4. Project Schedule

Item Appraisal Estimate Actual Consulting Services Start of Services Apr 1998 Aug 2000 Completion of Services Jun 1998 Nov 2000 Credit Refinancing Date of First Release Apr 1998 Apr 1999 Date of Last Release Jun 2003 Oct 2005 Vehicles

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First Procurement Jan 1998 Mar 1999 Last Procurement Dec 1998 Feb 2003 Equipment and Supplies First Procurement Jan 1998 Sep 1998 Last Procurement Dec 1998 Dec 2005 5. Project Performance Report Ratings

Ratings Implementation Period

Development Objectives

Implementation Progress

From 1 January to 31 December 1998 Satisfactory Satisfactory From 1 January to 31 December 1999 Satisfactory Satisfactory From 1 January to 31 December 2000 Satisfactory Satisfactory From 1 January to 31 December 2001 Satisfactory Satisfactory From 1 January to 31 December 2002 Satisfactory Satisfactory From 1 January to 31 December 2003 Satisfactory Satisfactory From 1 January to 31 December 2004 Satisfactory Satisfactory From 1 January to 31 December 2005 Satisfactory Satisfactory D. Data on Asian Development Bank Missions

Name of Mission

Date

No. of

Persons

No. of Person-

Days

Specialization of Members

Loan Fact-Finding

2–16 May 1997

3

57

Project Economist, Credit Specialist, Project Specialist

Appraisal

25 Jun–11 Jul 1997

3

45

Project Economist, Counsel, Programs Officer

Inception

16–20 Nov 1998

2

10

Project Economist, Assistant Project Analyst

Review No. 1

13–23 Sep 1999

1

11

Project Economist

Review No. 2

17 Jul–4 Aug 2000

2

38a

Project Economist, Assistant Project Analyst

Review No. 3 (Midterm)

24 Sep–12 Oct 2001

3

50

Project Economist, Economist, Staff Consultant (Evaluation Specialist), Assistant Project Analyst

Review No. 4

9–20 Dec 2002

1

10

Project Economist

Review No. 5

26 May–03 Jun 2003

2

18

Project Economist, Assistant Project Analyst

Special Administration Mission

13–14 May 2004

1

2

Principal Project Economist

v

Special Administration Mission

14–16 Feb 2005 1 2 Project Economist

Special Administration Mission

5–10 Sep 2005

2

12

Project Economist, Associate Project Analyst

Project Completion Review

13–24 Nov 2006

3

34

Rural Development Economist, Staff Consultant/Agricultural Economist, Associate Project Analyst

a Also reviewed ADB. 1998. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Democratic Socialist Republic of Sri Lanka for the Tea Development Project. Manila (DOC 1639-SRI).

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I. PROJECT DESCRIPTION

1. Agriculture was an important sector for the Sri Lankan economy in 1997, contributing 20% of gross domestic product (GDP) and employing 35% of the population. However, past agricultural policies had concentrated on achieving food self-sufficiency, particularly in rice, while relying on plantation crops for export revenue. Although perennial crops (spices, fruits, and beverage crops) were contributing only 16% of agricultural GDP, the subsector was growing fastest in the sector with an average annual growth rate of 8.3% during 1990–1995. Therefore, there was a need to improve research, extension, seed quality, and other support services for the perennial crops sector, including possibly to privatize extension services and establish a fund scheme to promote investment in the subsector. The Second Perennial Crops Development Project (SPCDP), 1 following on to the first Perennial Crops Development Project (PCDP),2 was developed to assist the Government in its effort to promote crop diversification in Sri Lanka. The SPCDP (the Project) was designed to (i) support further perennial crop development using perennial crops-based farming systems for a more commercialized approach to farming, and (ii) institute measures that would ensure sustainability of credit facilities and extension services for perennial crops. SPCDP targeted three perennial crop subsectors: fruits, spices, and flowers and foliage. The Project covered 17 districts and seven provinces of Sri Lanka, and it had the following five components:

(i) a credit line, to provide low-cost credit to farmers to carry out approved subprojects for perennial crop development;

(ii) providing farm advisory, marketing, and technical extension services to the project beneficiaries on a commercial basis;

(iii) research, including funding for relevant research on perennial crops; (iv) seed and planting materials development, to strengthen seed production programs;

and (v) institutional strengthening, including support to the project management office (PMO)

and Central Bank of Sri Lanka (CBSL), training of farmers and implementing agencies’ staff, as well as consultancy services.

2. At appraisal, physical targets included (i) providing subloans to 10,000 subborrowers (farmers and agroprocessors) for crop development, nursery operations, and agroprocessing; (ii) providing technical and advisory services to 10,000 farmers and agroprocessors; (iii) diversifying 20,000 hectares (ha) into perennial crops and intercropping with short- and medium-term crops to produce 40,000 tons of high value crops; (iv) generating 12,000 person-years of employment during the development stage and 1,300 person-years of employment during the mature stage; and (v) establishing a private entity to provide extension services to farmers and agroprocessors.

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

3. The Project was designed to further support the development of perennial crops in Sri Lanka while building on the initial gains from the PCDP,3 which had demonstrated (i) the potential for crop diversification using an integrated farming systems approach for such perennial crops as

1 Asian Development Bank (ADB). 1997. Report and Recommendation of the President to the Board of Directors on the

Proposed Loan and Technical Assistance to the Democratic Socialist Republic of Sri Lanka for the Second Perennial Crops Development Project. Manila.

2 ADB. 1988. Report and Recommendation of the President to the Board of Directors on the Proposed Loan and Technical Assistance to the Democratic Socialist Republic of Sri Lanka for the Perennial Crops Development Project. Manila.

3 The project completion report for the PCDP, completed in July 1999, rated the Project successful.

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spices, fruits, and beverage crops; and (ii) the responsiveness of the farming community to a more commercialized approach to farming. The approach to fostering perennial crops development and commercialization focused on ensuring (i) sustainable credit facilities for the subsector by introducing a credit program and establishing a fund scheme for future investments; and (ii) effective extension services, through improved research, seed quality, and other support services for the perennial crops sector, including the privatization of extension services. These major activities were expected to enhance perennial crop production and develop the sector while contributing to improved overall agricultural productivity and efficiency. The Project was designed under ADB project preparatory technical assistance (TA). 4 The design process included stakeholder consultations (through participatory workshops at central and provincial levels) and drew upon previous experiences (in particular the PCDP). 4. At appraisal and at completion, the Project was highly relevant to the Government’s policies on agriculture and poverty reduction. Since 1996, the Government has adopted policies to assist growth in the agricultural sector and its modernization by shifting from low-value to high-value production. Furthermore, under the Public Investment Program of 1996–20005, the private sector was to act as the catalyst for growth while agricultural policies were to focus on institutional reorganization and strengthening to (i) transform from subsistence to commercial agriculture, (ii) improve marketing and processing, (iii) improve competitiveness of perennial crops, and (iv) provide employment opportunities. The Project was also attuned to the National Agricultural Policy and Strategy (2002) 6 , which emphasized the enhancement of private sector roles in agriculture, and the previous policy document Regaining Sri Lanka,7 which had focused on raising agricultural productivity and growth. At completion, the Project remained in harmony with the more recent policy document The Economic Policy Framework of the Government of Sri Lanka (2006)8, which is drawn largely from Mahinda Chintana (Mahinda’s Vision). 5. The Project was highly consistent with and relevant to ADB’s country operational strategy and program (1993–1997)9 at the time of approval, which was largely shaped by the need to address such key constraints for the agricultural sector as (i) low levels of technology and productivity, attributable to inadequate research and extension services; and (ii) a system of rural finance that was marked by subsidies and a tradition of debt forgiveness, effectively rationing financial resources away from rural areas. In particular, ADB’s agricultural strategy during that time had emphasized support to non-rice farming systems, which include tree crops and other high-value crops, and especially in the poorer regions where they were envisaged to contribute to poverty reduction. The project design, including the geographical scope, remained relevant throughout project implementation and at completion. B. Project Outputs

6. The expected outputs of the Project’s five components, along with their indicators, targets, and accomplishment at completion, are in Appendix 1. The Project Completion Review Mission in November 2006 estimated the overall physical completion rate at 92% by the Project’s completion date of 31 December 2005. Photographs depicting project activities are in Appendix 11.

4 ADB. 1996. Technical Assistance to the Democratic Socialist Republic of Sri Lanka for the Perennial Crops and Seed

Enterprise Project. Manila (TA 2608-SRI, approved on 11 July, for $600,000). 5 Government of Sri Lanka. Public Investment Program of 1996-2000. 6 Government of Sri Lanka . National Agricultural Policy and Strategy of 2002. 7 Government of Sri Lanka. 2002. Regaining Sri Lanka. Colombo. 8 Ministry of Finance and Planning. 2004. Economic Policy Framework of the Government of Sri Lanka: Creating our

Future, Building our Nation. Colombo. 9 ADB. 1992. Country Operational Strategy and Program. Manila.

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7. Credit Component. The credit line was the Project’s major activity. It provided farmers low-cost credit to carry out such eligible subprojects as (i) perennial crop field development, including intercropping with short- and medium-term crops and livestock development in association with perennial crops; (ii) nursery operations; (iii) post-harvest processing and agroprocessing; and (iv) market development by wholesalers and exporters. The progress of the credit component was slow during the first 2 years of the Project because of (i) inadequate agricultural knowledge (especially regarding the suitability of crops suggested in the development plans, their costs and returns) by the credit officers at some branches of the participating financial institutions (PFIs); (ii) PFIs’ inadequate knowledge of the SPCDP and the operating instructions prepared by CBSL for the credit scheme; and (iii) reluctance of credit officers at some PFIs to appraise and approve agricultural and small loans, as well as to accept relaxed collateral requirements for them. After conducting seminars for the PFIs’ credit officers and awareness programs for potential borrowers, demand for the credit line picked up in its third year. In the end, the $24.1 million credit line from the loan proceeds was fully utilized and the targets even exceeded (as total lending amounted to $24.5 million) in making a total of 4,586 subloans. Of these, 3,805 subloans (83%) were for crop cultivation. Detailed analysis of this component is provided in Appendixes 2 and 3. A revolving fund using credit repayments10 was established for further onlending to the same activities, and it began operating in 2006.11 At the time of the Project Completion Review Mission, 1,127 borrowers had already applied for new loans in a total amount of SLRs444.4 million. 8. Noncredit Components. The farm advisory, marketing, and technical services component was to (i) provide extension services on a commercial basis to the project beneficiaries for establishing business enterprises related to perennial crops, and (ii) transfer extension services to a private entity. Establishing a private entity for extension service on a commercial basis was a recommendation of the associated advisory TA.12 During implementation, the TA recommended that, instead of a single private entity, seven contracts should be awarded to different private sector service providers for delivering extension services to seven different area clusters, with varying emphasis on crops and districts (para. 15). The research component funded relevant institutions, such as the Department of Agriculture (DOA), Department of Animal Production and Health (DAPH), Coconut Research Institute (CRI), and National Botanic Gardens. It also promoted contract research in perennial crops by awarding grants to potential researchers through the Council for Agricultural Research Policy (CARP) and the National Agribusiness Council (NAC). Through the Department of Export Agriculture, the Seed Certification Service, and the Seed and Planting Material Development Centre of DOA, the Project strengthened seed production programs by supporting (i) institutional strengthening, research, and development activities relating to agricultural crops for export (such as pepper, coffee, and vanilla); (ii) production of quality planting materials from mother plants; and (iii) training on seed production for farm managers. More details on these activities are provided in Appendix 4. 9. Major extension activities implemented by the PMO included (i) awareness and promotional programs (909 programs for 22,830 attendees); (ii) advisory services for subborrowers in the form of assisting to prepare loan applications, subproject proposals, cash flow forecasts, and other

10 The overall recovery rate of the loans is on average above 90%. The National Development Bank had the highest

recovery, at 95% and Sampath Bank had the lowest, at 90%. 11 The revolving fund for further onlending to eligible subborrowers was due to be established within 1 year from loan

effectiveness (i.e., 1999). The long delay in approving the revolving fund was due to the process of getting clearance from the Treasury (which finally came on 22 August 2005) approving SLRs300 million for the revolving fund. The terms of lending from the revolving fund are the same as those for the Project’s credit line.

12 ADB. 1997. Technical Assistance to the Democratic Socialist Republic of Sri Lanka for the Privatization of Advisory Services for Perennial Crops. Manila. (TA 2877-SRI).

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documents needed by the PFIs; (iii) training programs13 (652 programs for 11,352 farmers), field days and practical demonstrations (40 sessions with 704 attendees), seminars on marketing and processing (12 programs for 414 attendees), and similar skill development programs for farmers; and (iv) seminars for investors and bank officers (56 seminars for 1,124 attendees). Regarding transfer of extension services to the private sector, the PMO finalized four of the seven contracts and the selected contractors14 commenced delivering their services to the four clusters in April 2001. The services included (i) identification of potential subborrowers, assistance in the loan procedures, and provision of technical support during disbursement; (ii) agronomic, marketing, financial, and management advisory services; (iii) contract farm management; and (iv) provision of training courses for farmers, processors, and nursery operators. The PMO stopped selection for the remaining three contractors due to limited response to the invitation for the second bidding15 and a change in the policy environment regarding support for private sector participation in extension services. 10. The DOA, through its various departments, such as the Horticultural Research and Development Institute, undertook the following activities: (i) providing training to 711 farmers and students at the Faculty of Agriculture on propagation techniques for fruit crops and principles of nursery management; (ii) developing tissue-culture protocols to produce healthy banana planting material of selected varieties; (iii) producing tissue-cultured pineapple plants with their field multiplication; and (iv) developing new virus detection techniques and training farmers, extension officers, and DOA officers regarding them. To implement these activities, laboratory facilities were acquired for the general virology, molecular virology, tissue culture, and virus epidemiology laboratories. The CRI administered an adaptive research program to evaluate perennial intercrops with coconut for different agro-ecological zones and established 125 research sites in 15 districts. The activities of the National Botanic Gardens, undertaken to overcome the most important factors limiting the industry’s expansion (i.e., the supply of quality planting material and dissemination of technical know-how) included upgrading nursery facilities to increase the production of basic plant material as well as training of growers. The CARP and NAC approved and administered 46 and 13 research programs, respectively, for 10 different institutions and 39 researchers.16 11. The DEA, Seed Certification Service, and Seed and Planting Material Development Centre implemented the following activities: (i) certifying 227,858 budded fruit plants of mango, rambutan, citrus, avocado, guava, durian, and pomegranate; (ii) selecting and certifying 3,215 mother plants for major fruit crops; (iii) training 1,037 officers and nursery personnel on the production of quality planting materials; (iv) establishing two post-control fruit units for collecting plants from each recommended variety; and (v) producing the first variety identification handbook for avocado varieties and directory of nursery personnel. The DAPH upgraded the sheep flock by issuing 483 quality breeding animals to farmers and establishing four regional sheep breeding units. The Project also assisted the goat improvement program by importing 1,592 Jamnapari goat does and semen from India for artificially inseminating goats. The DEA intensified its extension services (388 training programs and 551 field day sessions trained 11,330 and 15,131 farmers, respectively), established 180 export agriculture demonstration plots, and maintained 600 ha of export crop

13 The programs were conducted for the following areas: (i) crop production in cinnamon, pepper, banana, pineapple,

rambutan, mango, and papaya; (ii) nursery management; (iii) floriculture for cut flower and ornamental plants production; and (iv) post-harvest processing and marketing.

14 CIC Fertilizers (Pvt.) Ltd (fruits), MA's Tropical Food Processing Ltd. (spices), and Environmental Management Lanka (Pvt.) Ltd. (floriculture).

15 During the first phase bidding, 30 companies expressed interest and 12 companies participated in the final bidding. 16 Research topics varied from intercropping of rubber with cocoa and cinnamon to developing strategies for high value

crop new ornamental plants (under CARP) to developing health beverages from spices and developing pepper drying technology using renewable energy sources for medium and large-scale growers (under NAC).

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cultivation in 14 districts using improved agricultural practices. As a result of all the activities, it is estimated that overall agriculture production will increase by 400,000 metric tons over 1998–2010 and have an impact on GDP of $12 million over the same period.17 C. Project Costs

12. At appraisal, the total project cost was estimated at $35.8 million equivalent, consisting of $9.5 million in foreign exchange costs and $26.3 million equivalent in local currency cost. The actual costs amounted to $31.4 million, of which $8.3 million was the foreign exchange cost and $23.1 million equivalent the local currency cost (Appendix 5). The underspending can be attributed to depreciation of the Sri Lanka rupee against the US dollar, which changed the exchange rate by 75%. Although there were savings in activities relating to farm advisory, marketing and technical services, research, and seed and planting materials, the PMO’s spending was notably higher than estimated because the envisaged restructuring of the PMO into a smaller unit during project implementation did not materialize. Furthermore, the cost of local training activities was overestimated at appraisal, while the cost of equipment and vehicles was underestimated. D. Disbursements

13. Total disbursements under the loan were $18.8 million or 92% of the approved loan amount. The foreign and local currency amounts disbursed were $8.3 million (or 99.1% of that approved) and $10.6 million, respectively. A relatively large proportion of disbursement took place in 2004, particularly under the credit line. Utilization of loan proceeds in the various categories and annual disbursements are in Appendix 6. The savings of more than $1.2 million were generated mostly by currency depreciation. ADB provided for establishing imprest accounts for the credit and noncredit components, with initial advances of $1.0 million and $0.5 million, respectively. The imprest accounts were well maintained and the statement of expenditure procedures facilitated timely payment to PFIs, contractors, and suppliers. The advances for the noncredit components were reduced to $0.3 million during implementation, as the initial amount was deemed more than actual requirements. The turnover ratio measuring the imprest account’s utilization reached the ADB-wide average of 2.3 in 2002 when the Project’s momentum picked up. E. Project Schedule

14. The Project’s commencement was delayed by 2 months because of late compliance with the loan effectivity conditions, which included ratifying and executing subsidiary loan agreements with PFIs and their submission to ADB. Subsequently, the project activities were not implemented according to the time frame in the original implementation schedule. Progress was extremely slow during the first 2 years (1998–1999) because of (i) delays in raising awareness regarding the credit line and other services provided by the Project, and (ii) the currency depreciation for the credit line. This delay led to an extension of the loan closing date by 2 years in order to complete project activities (see Appendix 7 for the planned versus actual implementation schedule). F. Implementation Arrangements

15. The Project followed the implementation arrangements designed at appraisal. The Ministry of Agricultural Development and Agrarian Services18 (MADAS) and the Central Bank of Sri Lanka

17 Some crops will continue to see improved yields even after 2010. 18 What was the Ministry of Agriculture and Lands at the appraisal stage was the Ministry of Agricultural Development at

the Project’s closure and has since become the Ministry of Agricultural Development and Agrarian Services.

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(CBSL) were the executing agencies (EAs) for the noncredit component and the credit component, respectively. A PMO was established by MADAS with overall responsibility for project supervision, coordination, and monitoring. The Rural Credit Department of the CBSL was responsible for designating, supervising, and monitoring PFIs. MADAS implemented the noncredit components of the Project with the assistance of several collaborating institutions: (i) the CARP and NAC, for contract research; (ii) the DOA, for production, certification, and quality control of seeds and plant materials; (iii) the DEA, for research and provision of seeds and planting materials of export agriculture; and (iv) CRI for testing intercropping of coconut with perennial crops. In 2001, instead of having the PMO converted into a private entity, as per project design, an alternative procedure was adopted (i.e., implementing a pilot project on extension services through existing private sector companies). A pilot project monitoring unit was established in the Projects Division of MADAS to monitor this activity. 16. During the project period, several minor changes were made in the project implementation arrangements as agreed between the EAs and ADB. To improve accessibility to the credit scheme, the eligibility criteria for PFIs were modified to allow participation of banks with broad outreach to the target beneficiaries.19 Under the credit line, the PMO and CBSL took timely steps to approve the following changes: (i) cultivation of high cash value vegetables under controlled environment (polytunnels and fertigation systems) was included as an eligible subproject; (ii) the free limit amount for subloan approval was increased from $50,000 to $100,000 in August 2000, mainly to address the rising cost of production; and (iii) the formula to determine the onlending interest rate was revised in August 2000 to have the minimum lending rate that moves in tandem with the Averaged Weighted Deposit Rate (AWDR) to address the decreasing interest rates. Two new collaborative institutions were included during implementation: (i) the National Botanic Gardens,20 as the main institution dealing with floriculture development; and (ii) the NAC to administer contract research proposals coming mainly from the private sector. The need for an extra outlet for contract research and other services, like training and supply of technical information, became clear during implementation in view of (i) the high potential demand of the private sector for contract research, (ii) the different type of training needed by the private sector, and (iii) CARP’s highly time-consuming procedures. The NAC, being the apex body of several private sector agricultural producer groups, was accepted from 2002 to undertake such activities. 17. The following additional changes were also approved during project implementation to expedite project activities: (i) to include the Industrial Technology Institute under the contract research component for short-term customized services to the private sector, (ii) to contract NAC to perform the functions of providing international market information (via website, databank, and publications) and support for training programs in lieu of establishing a specific agribusiness advisory company, (iii) to contract the Agrarian Research Technology Institute to collect and disseminate domestic market information for 100 agricultural products, and (iv) to permit the PMO to charge minimal fees for its extension services (1% of the subloan amount versus 2% charged by the private contractors) from December 2001 to eliminate any perception of discrimination against the beneficiaries served by the private service contractors.

19 At the inception of the Project, (i) Bank of Ceylon, a state-controlled bank with a very wide network of branches and

strong outreach to the farming communities; (ii) Kandurata Development Bank, a rural development bank in mid and up country; and (iii) Ruhunu Development Bank, a rural development bank in the south, were not included as PFIs. The latter two had emerged from reorganization of previously existing regional rural development banks and had not functioned for a minimum auditable period at project inception. However, they had the advantages of being very close to rural communities and the ability to promote very small loans.

20 Comprising primarily the Royal Botanic Gardens at Peradeniya (Kandi District), and the Botanic Gardens at Gampaha (Gampaha District) and Hakgala (Nuwara-Eliya District).

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G. Conditions and Covenants

18. Most covenants of the loan agreement have been fully or partially complied with, with some exceptions and delays (Appendix 8). The transfer of extension services to private service providers was not fully achieved (Schedule 6, para. 5), and therefore the reorganization of the PMO was not carried out. Steps to recruit private service providers for the remaining project districts were initiated in 2003, but the new Government formed after the general elections in 2004 decided to discontinue expansion of the pilot privatization because of its less favorable policy regarding public-private partnership (PPP) and the limited response to the invitation to bid for the remaining districts. As a result, the restructuring of the PMO into a smaller unit did not materialize and the PMO continued to provide extension services in districts where the private service providers were not in operation. Furthermore, the revolving fund for further onlending to the same activities (within 1 year from loan effectiveness, according to Schedule 6, para. 30) was established in a timely manner but started its operation only in the last quarter of 2005. Except for the expected privatization of the PMO, and therefore full commercialization of the extension services, the partial compliance with some of the covenants did not significantly impact the project implementation. H. Related Technical Assistance

19. With the objective of increasing the effectiveness and sustainability of agricultural extension services, privatization of extension services had been accepted as a policy objective of the Government at the time of the Project’s appraisal in 1997. The Government had therefore requested ADB to implement a pilot project to study the effects of privatized extension services prior to adopting such a strategy on a broader scale. Advisory TA on privatizing extension services relating to perennial crops was implemented at a cost of $550,000 from February 1999 to October 2003 to support private sector participation in delivering advisory services in conjunction with the provision of credit to project beneficiaries. The scope of the TA included (i) conducting a feasibility study for privatization of extension services, including a market demand survey designing an institutional framework, and identifying private sector participants; (ii) facilitating consultation between sector stakeholders; (iii) assisting in the formation of a new private sector entity and the transfer of functions to the new entity; and (iv) monitoring the activities of the new entity. The TA was rated successful,21 as it demonstrated that the private sector is capable of providing extension services and the recipients of extension services are willing to pay, provided the services are of good quality. However, the TA encountered the following difficulties: (i) the pilot was designed with a view that the target beneficiaries of the Project would be medium to large commercial farmers when in reality the credit line reached mostly small farmers; (ii) there were three different governments during the project implementation, and their policies ranged from overwhelmingly favorable toward PPP for extension services to less favorable; and (iii) the focus of the TA was on studying the feasibility of the model for private sector participation in extension services rather than on implementing that model, which was de facto left to the SPCDP. I. Consultant Recruitment and Procurement

20. At appraisal, 3 person-months of international consultant’s inputs were to assist the PMO in monitoring and evaluation (M&E) of the project activities. This was to include a benchmark survey, midterm survey, and a final impact assessment at completion. During implementation, the PMO had difficulty in recruiting an international consultant due to the short-term nature of the contract and instead recruited a local consultant almost 2 years after loan effectiveness. As a result, the

21 ADB. 2004. Technical Assistance Completion Report of Privatization of Advisory Services for Perennial Crops. Manila

(TA 2877-SRI).

8

benchmark survey was carried out with delay (from November 1999 to March 2000) and a midterm survey was never carried out. 22 The procurement of goods and services under the noncredit component was carried out by the PMO in accordance with ADB’s Procurement Guidelines. Civil works, field equipment, and vehicles were procured through competitive bidding and direct purchase on a timely basis.23 Materials plus office and laboratory equipment were procured to support the research activities of the Project’s collaborating agencies. Procurement was also done in line with the Government’s tender procedures, and this required that the collaborating agencies had their respective tender boards. This caused some delays in selecting and awarding contracts to contractors and suppliers due to cumbersome procedures and inadequate support from the PMO in preparing the technical specifications (particularly for civil works). J. Performance of Consultants, Contractors, and Suppliers

21. The M&E consultant satisfied the PMO’s requirements and his performance was rated as satisfactory overall, despite its late input. The performance of the contractors and suppliers for civil works and equipment was generally satisfactory. The performance of the contractors for private extension services was partially satisfactory, although they did ensure high professional standards and transparency of operations. Although assigned to the most promising districts for perennial crop operations, 24 the contractors enabled the approval of only some 46% of the total loan applications they processed. One of the contractors had more than 70% of the subloans it recommended turned down by PFIs. This was due to (i) the PFIs’ preference for PMO-prepared loan applications, (ii) the interest of private contractors in bigger loans to reduce their transaction costs, and (iii) the private contractors’ dedicating less time to preparing the loan applications. These implementation issues were not brought to the attention of ADB review missions. K. Performance of the Borrower and the Executing Agency

22. Despite the slow progress during the first 2 years of implementation, MADAS’ performance was satisfactory. It provided support to the PMO as and when needed and maintained continuity of PMO management. The PMO managed the Project with adequate flexibility to meet changes in the operating environment and new demands on project resources. The PMO and CBSL took timely steps to (i) include Bank of Ceylon and two rural development banks as PFIs, and NAC and Royal Botanic Gardens as collaborative agencies; (ii) add polytunnels and fertigation as eligible projects under the credit line; and (iii) revise the minimum onlending interest rate to make the scheme competitive with other ongoing lending schemes. Due to the lack of M&E personnel, however, PMO staff was also entrusted with the Project’s M&E tasks in addition to their own terms of reference. For this reason, the M&E system to collect data on all key variables of the Project’s various components was established late and no data on the without-project situation was available. The M&E system was limited to monitoring project activities, produced only periodic progress reports, and included no impact assessment. Although a database of subborrowers was established, the collection of such key data as increases in income due to project investments and actual gains in output and yields was missing.

22 The final impact assessment was carried out with the Hector Kobbekaduwa Agrarian Research and Training Institute

as consultants and is dated January 2007. As this organization is under MADAS, however, the results cannot be viewed as independent, in particular when evaluating the performance of the private sector extension services.

23 The civil works included constructing a circuit bungalow, laboratory facilities, potting sheds for nurseries, and net houses for planting materials, as well as to renovate existing facilities of the various collaborating agencies.

24 At the design stage, it was decided that the nascent private providers had better chances for sustainability in the most promising districts. However, the contract-generated turnover (mainly from loan facilitation) of the three service contractors was too small to sustain operations. Two of the contractors benefited from selling inputs and establishing a procurement network. The third contractor depended solely on contract-related income and faced financial difficulties.

9

23. There was no consistent government policy on the private sector’s role in agricultural extension services during the period of implementing the TA and Project. In the earlier phase, from 2001 to 2004, the Government had encouraged private participation in extension. 25 This was reversed with a change in government in April 2004, after which the private sector’s role was minimized in state policies for agriculture. Therefore, stakeholders received mixed signals from the Government during implementation and operated within an uncertain policy environment. This negatively impacted on the outcome of the TA and Project. Furthermore, cooperation between the private sector contractors and public sector officials during implementation was less than desired. This reflected, in part, a belief of public sector officials that the Project provided funds for salaries, plus fees, to private parties for work that could easily have been done by the public sector. The private contractors, meanwhile, were critical of the fact that the Government was offering free what they had to sell for a fee, thereby limiting their revenue potential. This lack of cooperation prevailed throughout the project period and was the reason for delayed payments of contractors’ fees. L. Performance of the Asian Development Bank

24. ADB fielded five review and three special administration missions during 1999–2005, including the Midterm Review Mission in September 2001. There was consistently one in each year. These missions reviewed progress of both the Project and the pilot for privatization of extension services, assessed project outcome and impact, found solutions for implementation issues, and recommended necessary changes in project scope and implementation arrangements. Sufficient flexibility was provided to the PMO to make changes to the implementation arrangements, with prompt responses to requests for such changes. The missions conducted meetings with key stakeholders and also participated in several project-related workshops. The EAs and PMO were satisfied with the support given by ADB to project management, particularly with ADB’s regular and timely contacts and its flexibility. Through the project period, there were two replacements of the ADB project officer – in 2004 (for only few months) and in 2005 – but this did not affect the continuity and efficiency of supervision. ADB’s performance is rated satisfactory.

III. EVALUATION OF PERFORMANCE

A. Relevance

25. At appraisal and completion, the Project was relevant. It was consistent and relevant to both the ADB country operational strategy (1993–1997) 26 at the time of approval and the Government’s overall objective of accelerating economic growth under the Public Investment Program. The Project is fully justified, as it supported the initial gains from PCDP. The introduction of a credit program and provision of extension services were expected to enhance perennial crop production and develop the sector while contributing to improved overall agricultural productivity and efficiency. Hence, sustaining credit facilities and improving extension services for perennial crops was crucial to fostering development and commercialization of perennial crops. The several minor changes introduced during implementation further increased the Project’s relevance.

25 A government policy statement published in May 2003 explicitly stated that agricultural extension services were seen

to be suited to PPP and should include the principle of fee payment by their users. 26 ADB. 1992. Country Operational Strategy. Manila.

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B. Effectiveness in Achieving Outcome

26. The Project is rated as less effective, as it did not achieve a majority of its envisaged outcomes in the time period allotted. Project extension for 2 years was approved in July 2003 due to initial slow progress and the following factors: (i) delay in loan effectiveness and (ii) slow progress of the credit component in the first 2 years. The credit component of the Project performed well in monetary terms. The total cost of the component was estimated to be $24.13 million at appraisal and was $24.53 million at project completion. Thus, its achievement rate was 102%. If we take into account currency depreciation, the cumulative value of the credit line was 158% of the original credit line and the achievement even greater. 27. At appraisal, it was envisaged that 10,000 subborrowers would diversify 20,000 ha into perennial crops and intercropping with short- and medium-term crops. The total number of subborrowers under the credit line was 4,586, showing an achievement rate of 46%, while the total extent of land developed under perennial crops was 7,200 ha, for an achievement rate of 36%.27 Nevertheless, the full amount of the credit line was utilized. This reflects the facts that bigger subloans and more subprojects for value addition and nurseries were approved than anticipated at appraisal. It is estimated that the Project will generate 40,000 tons of high-value crops during 1999–2010.28 The extension services, in various forms, reached more than the targeted 10,000 farmers. C. Efficiency in Achieving Outcome and Outputs

28. The Project is rated as efficient. At appraisal, the economic internal rate of return (EIRR) was calculated for the different activities and it was estimated to range from 19% for monocropping to 38% for intercropping to more than 100% for agroprocessing and nursery development for planting materials. The estimated financial internal rates of return by activities ranged from 17% for monocropping to 39% for intercropping to more than 100% for agroprocessing and nursery development for planting materials. An updated economic and financial analysis at project completion estimates the EIRRs of the various activities slightly higher than the EIRRs at appraisal for all activities, with the exception of the EIRR for nursery development (Appendix 9). These EIRRs demonstrate the Project’s efficiency as measured by investment return. Project management by the PMO was found to be efficient, as was ADB’s supervision. The Government’s limited effectiveness and efficiency in supporting PPP in the extension services, however, means that achievement in this aspect was less than satisfactory. D. Preliminary Assessment of Sustainability

29. The Project is assessed as likely sustainable, with strengthened government agencies and improved crop productivity, extension services, and adoptive farm trials. Further, enhanced private sector participation is a vital element in sustaining project benefits, and particularly at the farm level. The extension services provided to farmers and institutions are expected to improve farm practices. Moreover, the credit component is likely to be sustained, as the revolving fund for the credit line is 27 This does not fully reflect the true picture, however. In fact, the achievement rate of number of subborrowers would

increase to 57% through September 2006 because 1,127 applications were received by PFIs under the revolving fund. Assuming all the applicants received subloans and that more subloan applications would have been filed after September 2006, then the achievement rate would continue to increase in the following months and years. Also, the cropped area would continue increasing after the first batch of subborrowers through those subborrowers under the revolving fund. Furthermore, the cropped area developed by farmers under 430 nursery enterprises is not captured in these data, despite the fact that it is attributable to the Project.

28 Because of the different gestation periods and plant cycles of the crops and the increase of the planted area at different times of the Project, the estimate of the production of selected crops was projected to 2010.

11

operational for further onlending to the perennial crop subsector of the proceeds recovered under the credit line. An important feature of the long-term sustainability of the SPCDP is its much greater focus on nursery development, as this group of activities received more and bigger loans than during the PCDP. Furthermore, the average subloan amount under the Project was more than three times greater than that of loans disbursed under the PCDP. That is due partly to inflation, but more importantly to greater emphasis on nursery development and viable agroprocessing and marketing facilities. Nursery development is the key to sustainable perennial crop development, because it ensures availability of planting materials to the growers. It also develops small entrepreneurs who are mostly landless or have subsistence landholdings by providing a critically useful service to the perennial crop developers i.e., the supply of planting materials. In the agroprocessing category, 43% of the total subloans were above SLRs0.5 million. At that level, the chances for commercially viable and sustainable enterprises are greater, thus creating a pull effect on the perennial crop outputs in the long term. 30. The following points describe sustainability per type of activity: (i) new agribusinesses were created and are continuing; (ii) institutional capacity of various government institutions and departments of MADAS was improved; (iii) PFIs have maintained agricultural graduates in their branches to continue lending to the sector, as they learned that the agricultural sector, while risky, can also be profitable; (iv) research programs are continuing under government funds, their findings have been adapted, and the value of demand-driven research for perennial crops and agroprocessing has been proven; (v) adaptive farm trials and demonstration plots are maintained by the various implementing agencies and used by the farmers; and (vi) two out of three private sector service providers are still continuing their extension services. 31. Nonetheless, there are impediments to sustainability that should be addressed. The market for private extension services is still weak and not encouraged by the current policy environment. For instance, only two private sector service providers are continuing their activities. Furthermore, the government institutions such as the DOA, DEA, and DAPH tend to implement project components only during the project period. Activities similar to project components, concepts, policies, and strategies are hardly internalized for continuity. There are two main reasons for this: (i) the Government’s focus and policies might change suddenly and no longer align with the ADB policy recommendations, and (ii) the regular government budget is insufficient for replicating project activities once the Project is over. E. Impact

32. The Project’s goal was to support growth of the perennial crops subsector in order to increase the incomes and employment opportunities of smallholders. The Project achieved its goal by addressing the lack of sustainable credit for perennial crop development and the weaknesses in research-extension links, marketing aspects, and production of quality seeds and planting materials. Overall, the main impact of the Project was to create a business orientation in the agricultural sector among beneficiaries for increasing productivity, competitiveness, and diversification into high-value crops. It also facilitated the setting up of 308 agroprocessing enterprises, for mainly small-scale fruit and nuts processing. 29 In addition, the Project demonstrated the interest among investors in developing commercial agriculture,30 with its inherent income-generating advantages over traditional subsistence production. The perennial crop production grew as a result of improved inputs in terms of credit (83% of loans and 61% of loan

29 Such as packaging of cashews, dehydration and canning of fruits, packaging of spices, and extraction of cinnamon oil. 30 At Project closure, the unmet demand for loans was around $3 million, based on the loans applications by

subborrowers submitted to PFIs.

12

value went to crop cultivation), extension services (652 training sessions for 11,352 farmers and 40 field demonstrations for 704 farmers), research activities, and farm trials, mainly to small and medium farmers. Because of the absence or distant location of financial institutions in remote rural areas, the bulk of the credit was utilized by the two western districts near Colombo, limiting the main project impact to those areas. Through its credit component, the Project was able to change the PFIs’ perception that providing credit to the rural sector entails high transaction costs and low recovery rates.31 PFIs benefited also by the expansion of their credit markets. 33. Farmers have been generally responsive to the new technology offered by the Project, which resulted in improved productivity. Demand-driven research increased the viability of new agricultural enterprises. Furthermore, the increase in area under cultivation (and particularly in that perennial crops are in general labor intensive) will create employment of as much as 19,000 person-years from 1999 to 2010. The commercial-scale production of quality perennial crop planting materials made possible by identifying suitable mother plants, training nursery personnel, providing required handbooks, and certifying planting materials will allow the perennial crop sector to develop further. The Project has established 183 plant nurseries for fruits and spices and 240 nurseries for floriculture to fill farmers’ needs for planting materials. Establishment of commercial nurseries will generate wider benefits for the sector’s long-term development. Moreover, consumers benefited from the Project through improved availability of fresh vegetables and fruit at lower prices, as well as from new products becoming locally available. However, some of the constraints on agricultural commercialization in general that existed prior to the Project remain, such as uncertain agricultural policies, market imperfections, and inappropriate technology. 34. The Project did not anticipate any indigenous peoples issue at appraisal and this remained valid throughout implementation, as no indigenous people work in the perennial crop sector. Similarly, no resettlement was involved under the Project. At appraisal, Project was considered to have a favorable impact on environment through soil and water conservation farming and increased vegetative coverage. This has been valid throughout the Project period, and no adverse impact has been observed.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

35. Overall, the Project is rated successful (Appendix 10). It was relevant to and consistent with the development policies of the Government and ADB. The Project was implemented largely as it was conceived, with only minor changes to improve the outcomes, although it required a 2-year extension. It was well managed by the PMO, which was aided by various implementing agencies and continuity of project management. Most of the financial objectives were met, although the physical objectives were met only in part. The M&E was not carried out as planned, but it did not affect the achievement of the outcomes. 36. The Project is rated efficient in economic terms, with subproject EIRRs at project completion ranging from 21% for monocropping to more than 100% for agroprocessing and greenhouse types of cultivation. Farmers’ increased incomes due to project support are considered sustainable in view of the improved access to sustainable credit, good seeds and planting material, and private sector extension services. The Project has led to a general commercialization of some perennial crops, such as spices, fresh fruits and vegetables, and cut flowers, and to the emergence of new types of business, such as processing and exporting, organic foods, and reselling of

31 Recovery rate recorded by PFIs at project closure was around 90%.

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vegetables and fruits to urban markets after direct purchase from the producers. These activities created backward linkages to crop producers that resulted in a change from subsistence to commercial agriculture, despite the Project’s being still mainly production oriented. The project activities concentrated on the western provinces despite the aim to promote greater rural development around the country. Research-extension linkages were strengthened, even though provision of extension services by the private sector did not expand beyond the pilot project. B. Lessons

37. The Project confirmed the high development potential for perennial crops and reconfirmed the creditworthiness of smallholder farmers. Important lessons were learned from the Project in relation to perennial crops development and commercialization of agriculture, institutional aspects, and project-specific implementation arrangements. Both public and private extension services, provided by PMO and contractors respectively, facilitated subborrowers’ obtaining subloans. While two thirds of subborrowers obtained subloans through the PMO, only half of the total credit amount was facilitated by the PMO. This means (i) private contractors facilitated larger average subloans due to their focus on agroprocessing and marketing (while the PMO had a greater number of subloans in crop development);32 and (ii) the private extension services pursued their mandate more aggressively in a limited time, given that they entered into extension service delivery much later than the PMO and were covering just 5 of 17 districts where credit operations took place. It is clear that private sector participation in providing extension services is crucial to commercializing agriculture. 38. The experience of the pilot activity under the Project shows that potential exists in Sri Lanka for a gradual introduction of a fee-levying private extension service among commercial farmers with a better ability to pay, leaving scarce government resources to serve the poor and subsistence level groups of farmers more effectively. Commercial farmers need different kinds of services, including farm planning and budgeting, financial management, and post-harvest operations, in addition to the more traditional advice on production technology. They require need-based extension services with which they could reduce cost of production. Furthermore, user-pay services are accountable, collectively and individually stimulating service providers’ performance and commitment related to demand. However, the process of introducing private sector service providers requires a clear policy framework and an effective framework for cooperation between the Government and private sector stakeholders. Government staff sees the private sector as competitors, while private sector services feel threatened by the services available free-of-charge from the public sector. Nevertheless, 40% of farmers have expressed a willingness to pay even for extension services now provided free.33 39. To be profitable, private sector extension services need to be integrated into other commercial operations, such as sale of farm inputs. A company set up solely to provide extension services may not be viable in the long term. This is seen in the less than optimal scale of operations of the three service contractors. Contractors expressed views that (i) the financial benefits of input sales as setting off any operational losses in providing extension services, and (ii) the establishment of a reliable network of high-quality producers as of sufficient benefit to offset its operational losses in providing advisory services. Without such externalities, the operation may not be attractive. In fact, one of the contractors did not benefit from either input sales or output marketing. The following lessons were also learned:

32 Private extension services facilitated 220 agroprocessing subloans versus the 151 of the public extension services. 33 As predetermined by the pilot project monitoring unit survey.

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(i) The outcome of project interventions was affected by changes in the direction of government policies during project implementation.

(ii) An EA’s firm commitment is essential to promote private sector participation in activities that could potentially be undertaken by public sector agencies, as government tends to be reluctant to take actions that broadly diminish its power and enhances the influence of the private sector.

(iii) Introducing new approaches requires public awareness campaigns at a project’s outset to obtain stakeholders’ support. Public understanding of proposed changes’ rationale and expected outcomes can facilitate introducing new interventions.

(iv) Without specific activities for the most isolated rural areas, project investments remained biased towards suburban, more developed districts.

(v) After completion of projects, EAs do not have procedures and systems in place to build upon the knowledge gained by implementing the projects. This results in inadequate transfer of project knowledge to government institutions and staff.

(vi) Government institutions are in general not geared to working with the private sector and therefore have inadequate mechanisms to interface with it.

(vii) The multiplicity of government ministries and agencies involved in the agricultural sector poses serious challenges for coordination and synergy.

(viii) The plan to use a short-term international consultant for M&E appeared to be inappropriate. When an assignment for consultants in a socioeconomic field is short term, national consultants are more appropriate than international consultants.

(ix) When procuring goods and services involves multiple agencies, each of them forms its own tender committee. Having several committees for procurement is extremely cumbersome. Despite the Government’s having more flexible procurement guidelines for donor-funded projects, the EAs do not follow them.

C. Recommendations

1. Project Related

40. Future Monitoring. MADAS should continue to monitor and support the activities implemented by DOA, DEA, CRI, and CARP, such as production of seeds and planting material, certification of mother plant materials, and contract research. MADAS should also monitor operation and maintenance of the project investments in civil works (such as the glass and shade houses, auditorium of National Botanic Gardens) and equipment (laboratory equipment, chemicals, and vehicles). 41. Covenants. The loan covenant related to downsizing the PMO was not complied with, and it is no longer relevant given the changed policy environment for PPP in providing extension services to farmers. Covenants that involve support for PPP cannot be effective in practice unless the Government is and remains strongly committed. Such covenants should not be linked to pilot projects. 42. Further Action or Follow-Up. It is recommended that the following actions be undertaken by the EAs and other relevant agencies:

(i) The CBSL should continue operating the revolving fund for long-term sustainability of the improved access to credit.

(ii) MADAS should ensure the proper maintenance of the project equipment. (iii) MADAS should encourage regional development programs while acknowledging the

importance of the capital in supply chain linkages, particularly with respect to value addition and export marketing.

15

(iv) MADAS should provide greater and appropriate support to the development of private sector agroprocessing industries and its ancillary services for promoting commercialization of agriculture.

(v) The MOF should ensure streamlining of the procurement procedures for projects involving multiple government agencies. For instance, establishing one central tender board for the entire project procurement could be more efficient.

(vi) The PMO should have adequate technical experts for preparing specifications for procurement items.

43. Additional Assistance. None is required. 44. Timing of the Project Performance Evaluation Report. As the Project was physically completed in 2005, the Project is ready for a project performance review.

2. General

45. Recommendations for future projects include the following: (i) Commercialization of agriculture will need strong policy coherence, improvement in

the business climate, and strong private sector participation. (ii) A clear policy framework should be in place for the establishment of private

extension services. (iii) A good and contextual understanding of political and legislative processes, including

policy and regulatory environments, are key requisites in project preparation and implementation.

(iv) Different interventions should be designed for commercial-scale and small farmers. (v) When the project objective is poverty reduction, strategies should be formulated to

promote small-scale farmers and specific social groups, such as unemployed rural youth, using commercial and demand-driven activities. 34 At the same time, the targets of interventions should not be limited to the poor, as excluding nonpoor participants may isolate the poor from the more dynamic actors in the society and from the mainstream of economic growth.

(vi) When the project objective is to promote private sector participation, a government-led PMO is not the most efficient way to implement the project. A private sector-led PMO that is itself a PPP could be used.

(vii) Priority should be given to developing a project management and information system for effective project implementation and monitoring.

(viii) Given the complexity and diversity of the agricultural sector, projects should be designed in a flexible and robust way to meet evolving and emergent development needs. Targets should also be flexible and realistic.

(ix) A pilot approach is desirable for introducing new development concepts, approaches, and technologies.

34 Established organizations, such as nongovernment organizations and chambers of commerce, are appropriate

mediums through which agribusiness may be promoted among different target groups.

16 Appendix 1

PERFORMANCE INDICATORS AND ACHIEVEMENTS

Design Summary Targets in Original Design Revised During Implementation Achievements

1. Impact To increase growth of the agricultural sector

Raise annual growth of non-plantation crops subsector to 3.4%

In 2005, the annual growth rate of the non-plantation sector was 11%.a

2. Outcome 2.1 Support further perennial crop development

20,000 ha diversified into perennial crops and intercropped with short- and medium-term crops

12,000 person-years of employment created

40,000 tons of high-value crops valued at $12 million produced annually

7,200 ha of land developed

19,420 person-years of employment created

$12 million worth crops produced over the project period

2.2 Institute measures for sustainability

A private entity established to provide technical and advisory services to farmers and agroprocessors

7 contracts to private sector service providers

4 contracts awarded

A revolving fund established for further onlending for perennial crops

Revolving funds established and operational

3. Outputs 3.1 Credit Component 10,000 subborrowers for crop

development, nursery operations, agroprocessing, and agricultural equipment for fruits, spices, flowers, and foliage

Vegetable cultivation under protected environments and livestock under perennial crops added

4,586 subborrowers from 7 banks for 5 subsectors

3.2 Farm Advisory, Marketing, and Technical Services

Services provided to 10,000 farmers and agroprocessors

704 extension programs for 12,470 farmers, 3,017 persons trained, and 148 awareness programs

Assist 50 farmer groups, 15 agroprocessors, and 20 exporters and wholesalers

41 exhibitions and 5 seminars for 1,124 participants

Extension functions transferred to a private entity

Extension functions transferred to service providers in all districts

Extension functions transferred to service providers in 8 districts; the remaining 9 districts remained covered by project management office

3.3 Research Research system strengthened Research institutions provided facilities (see 3.5); establishment of 125 research sites in 15 districts by the Coconut Research Institute

Appendix 1 17

Design Summary Targets in Original Design Revised During Implementation Achievements

Research for perennial crops supported

46 research projects by Council for Agricultural Research Policy and 13 research projects by National Agribusiness Council

3.4 Seed and Planting Materials

Production of seeds and planting materials, including pineapple suckers, banana suckers, pepper plants, papaya plants, and ginger root

227,858 budded plants produced; awareness programs for 485 officers and 552 nursery people

Identification, certification, and quality control of mother plant materials to provide to private nurseries

25% increase in certified fruit plant availability of mango, rambutan, and citrus plants; 1,627 mango, 1,068 rambutan, 161 citrus, 111 avocado, 102 guava, 29 jack, 3 durian, and 114 pomegranate mother plants were selected and certified.

3.5 Institutional Strengthening

Project management office staff trained

No data available

Training of trainers provided, plus Central Bank of Sri Lanka’s and participating financial institutions’ staff trained

56 seminars for 1,124 participants

Equipment and materials provided

4 polytunnel houses, 1 net house, 1 fiberglass house, 1 glass house, lab equipment, 4 shade houses, and construction of 1 auditorium for the National Botanic Gardens; 2 clonal seed gardens, tissue-culture lab equipment, and chemicals for the Horticultural Research and Development Institute; establishment of general virology laboratory, molecular virology laboratory, and tissue-culture laboratory; establishment of the Plant Virology Unit at the Horticulture and Development Institute; 1 net house, 1 potting house, plus laboratory equipment and chemicals at the Fruit Crops Research and Development Centre; computer and training instrument, construction of 1 circuit bungalow, improvement of

18 Appendix 1

Design Summary Targets in Original Design Revised During Implementation Achievements

several plant nurseries, and

establishment of a gene bank for the Department of Export Agriculture; improvements to library facilities, and establishment of an e-learning center and facilities for using a geographical information system database at the Department of Animal Production and Health.

Farmers trained in crop production and marketing

Trained 5,444 farmers on crop production in 386 programs; trained 276 farmers on marketing in 12 programs

30 agroprocessors trained 12 seminars for 414 participants

4. Inputs

4.1 Credit Line $24.2 million in subloans to farmers through participating financial institutions

A revolving fund using repayments to be established within 1 year from the Loan’s effectiveness (i.e., 1999)

$24.5 million disbursed Established in 2005

4.2 Consulting Services

3 person-months of international consultancy

3 person-months of national consultancy

3 person-months of national consultancy

Note: The Project Completion Report has used the original framework for comparability but with suitable amendments: (i) "Achievements" replaces "Project Monitoring Mechanism;" (ii) headings have been changed to conform to current terminology (goal = impact, purpose = outcome); and (iii) outputs listed in the report and recommendation of the President but not shown in the original framework, or included later, have been added. a In 2006, the recorded growth was 0% due to weather fluctuations that affected fruit and vegetable outputs.

Appendix 2

19

THE CREDIT COMPONENT: ANALYSIS OF THE BORROWERS 1. Background. The first Perennial Crops Development Project (PCDP) initiated a credit scheme for perennial crops development. This was continued by the Second Perennial Crops Development Project (SPCDP), which facilitated credit to the rural agricultural sector through participating financial institutions (PFIs). The projects promoted the credit culture in the sector and have encouraged some PFIs to extend small loans to rural farmers. The PFI’s thereby become agents of change by encouraging the use of credit in commercial agriculture. 2. Utilization of Subloans: PCDP versus SPCDP. A total of 3,780 subloans (82.4%) were disbursed for perennial crop development; 435 subloans (9.5%) for nursery development, floriculture, and polytunnels; and 371 subloans (8.1%) for agroprocessing and/or marketing (Table A2.1). At completion of the first PCDP, such distribution had been 91% for field development, 1% for nursery development, and 8% for agroprocessing. The total amount approved for the subloans under the SPCDP was almost three times (272%) the amount disbursed under the PCDP, while the number of subborrowers was 80% fewer. This means the average subloan amount of SLRs384,513 under the SPCDP was also three times (341%) higher than that disbursed under the PCDP. That was due in part to inflation, but more importantly it reflects greater emphasis on nursery development plus viable agroprocessing and marketing facilities. While the average subloan amount for the perennial crop development category was SLRs274,812 (245% more than the average subloan amount for field development), the average subloan amount for nursery development was three times (SLRs716,895 versus SLRs231,321) that in the PCDP while that for agroprocessing was 10 times (SLRs1,112,496 versus SLRs109,140) that in the PCDP.

Table A2.1: Distribution of Subloans by Purpose for the SPCDP

Category/Purpose of Amount Average Amount % Distribution

Subloan Number ………..…...(SLRs)……..………. by No. by Loan Amount Perennial Crop Development 3,780 1,038,791,147 274,812 82.4 58.9 Nursery Developmenta 435 311,849,245 716,895 9.5 17.7 Agroprocessing/Marketing 371 412,736,068 1,112,496 8.1 23.4 Total 4,586 1,763,376,460 384,513 100.0 100.0 a Nursery development category includes floriculture and vegetables in polytunnels. Sources: Project management unit, data processed by the Project Completion Review Mission.

3. Subloans by Size. About 50% of all subloans were up to SLRs75,000 (Table A2.2). Of these, 2,171 were for perennial crop development and 140 for nursery development. The size distribution indicates that perennial crop development subloans dominated the lower subloan sizes, while nursery development subloans were more in the middle range of subloan sizes, and most agroprocessing subloans were between SLRs250,000 and SLRs5 million. While private extension services facilitated more agroprocessing subloans (220) than did the public extension service (151), about 81% of agroprocessing subloans facilitated by the private sector were between SLRs75,000 and 5 million. On the other hand, the public extension facilitated 68% of its agroprocessing subloans in this size range. About 22%, or 985 subloans, were between SLRs75,000 and SLRs250,000. Of these, 752 were for perennial crop development, 125 for nursery development and floriculture, and 108 were for agroprocessing and/or marketing. In the range between SLRs250,000 and SLRs500,000, there were 625 subloans, or 14% of the total. Of these, 448 were for perennial crop development, 75 for nursery development and floriculture, and 102 for agroprocessing and/or marketing. In the SLRs500,000 to SLRs1 million range, there were 347 subloans, or 8% of the total. Of these, 233 subloans were for perennial crop development, 43 for nursery development and floriculture, and 71 for agroprocessing and/or marketing. In the category

Appendix 2

20

greater than SLRs 1 million, there were 318 subloans, or 7% of the total. Of these, 176 subloans were for perennial crop development, 52 for nursery development and floriculture, and 90 for agroprocessing and/or marketing.

Table A2.2: Classification of Subloans by Loan Size

Overall Public Extension Private Extension % Share % Distribution Loan Size (SLRs) Number % Number % Number % Public Private CD ND AP <75,000 2,311 50.4 1,996 65.2 315 20.7 86.4 13.6 57 32 0 75,001–250,000 985 21.5 511 16.7 474 31.1 51.9 48.1 20 29 29 250,001–500,000 625 13.6 259 8.5 366 24.0 41.4 58.6 12 17 27 500,001–1,000,000 347 7.6 140 4.6 207 13.6 40.3 59.7 6 10 19 1,000,001–5,000,000 279 6.1 135 4.4 144 9.4 48.4 51.6 4 9 19 5,000,001–10,000,000 31 0.7 16 0.5 15 1.0 51.6 48.4 0 2 4 >10,000,001 8 0.2 5 0.2 3 0.2 62.5 37.5 0 1 1 Total 4,586 100.0 3,062 100.0 1,524 100.0 66.8 33.2 100 100 100

AP = agroprocessing, CD = perennial crop development, ND = nursery development. Source: Mission estimates. 4. Distribution of Subloans by Farm Size. According to the Sri Lanka Census of Agriculture 2002, there are about 1.8 million landholdings in the country. Of these, 32% are subsistence type (landholding size below 0.4 hectare), 30% are small farms (0.4–0.8 ha), and 38% are medium to large farms (above 0.8 ha). There was a quantum shift in the number of subloan beneficiaries in the subsistence landholdings category during the SPCDP as compared with the PCDP (about 48% versus 17% of their respective totals) (Table A2.3). Subsistence landholders, therefore, received about 50% more loans than would be in proportion to their total representation by size category. Thus, the SPCDP’s subloan distribution was more equitable than the PCDP’s. The lending focus during the PCDP was on medium farms (to which 52% of subloans were disbursed), while medium farms this time received only 28% of subloans as compared with their 33% representation in national landholdings.

Table A2.3: % Distribution of Subloans by Farm Size

5. Under the SPCDP, the average subloan amount per subborrower has been SLRs384,528, but excluding the agroprocessing loans this average has been SLRs331,527 (SLRs1 million being the average for agroprocessing loans) (Table A2.4). A breakdown of all perennial crop development and nursery development subloans by farm size shows that the landless category has an average subloan amount of SLRs0.4 million, with an average recorded by the private extension of SLRs0.6 million while that by the public extension is SLRs0.3 million. The relatively higher subloan amount for the landless is largely reflective of nursery development, floriculture,

Number of Subloans (%)

Farm Type Landholding Size

(hectare) SPCDP PCDP Subsistencea >0–0.4 47.6 17.3 Small >0.4–0.8 20.0 26.9 Medium >0.8–8.0 28.2 51.5 Large >8–0 4.2 4.2 Total 100.0 100.0 PCDP = Perennial Crops Development Project; SPCDP = Second Perennial Crops Development Project. a Including landless farmers. SPCDP data source: project management unit database; PCDP data source: report and recommendation of the President for the SPCDP

Appendix 2

21

and polytunnels, which are rather capital intensive. Such subloans (277) outnumbered the perennial crop development subloans (98) for the landless. Another interesting pattern is that the average subloan amount per subborrower mediated by the private extension for subsistence and small farmers was almost double that mediated by the public extension. This difference narrows for the medium farmers but finally reverses for the large farmers, where the average subloan amount mediated by the public extension (SLRs2.9 million) far exceeds the SLRs2 million mediated by the private extension. The average subloan amount mediated by the public extension for the bigger entrepreneurs (i.e., agroprocessors and marketers) is also about 50% greater than that mediated by the private extension. Table A2.4: Average Subloan Amounts by Farm Size under the SPCDPa (SLRs)

Item Landless Subsistence Small Medium Large Overall Farm AP/Mktg

All Subloans

Public Extension Service 320,048 63,261 78,802 451,866 2,947,138 244,362 1,307,452 287,413 Private Extension Services 611,911 101,263 136,814 491,329 2,064,702 527,316 896,560 579,650 Overall 411,887 70,918 87,171 471,323 2,380,184 331,527 1,046,415 384,528

AP/Mktg = agroprocessing and/or marketing. a Excluding agroprocessing and/or marketing, but including nursery development and floriculture. Source: Mission estimates. 6. The landless category of subborrowers represents perhaps one of the outstanding achievements of the credit component, because it consists of such diverse interest groups as crop developers, entrepreneurs (nursery operators, floriculturists, polytunnel growers of off-season and/or exportable commodities), agroprocessors, and marketers. As shown in Tables A2.5 to A2.9, there are 715 beneficiaries in this category who obtained SLRs510 million of credit, which accounts for 16% of all subloans and 29% of the total credit disbursed. Diversification of subloans in this category is evident from the fact that 48% of the subborrowers obtained credit for agroprocessing, utilizing almost 70% of the credit. Another 39% of them utilized 29% of the credit for nursery development and floriculture, which again points to stronger small and micro entrepreneurship. Of all subloans, subsistence farmers represented the largest number of subborrowers (32%) but used only 6% of the total credit. Medium farmers were the next dominant group in terms of subborrower numbers (28%), and they used the highest percentage (35%) of total credit. In the subsistence to large farm size categories, perennial crop development subloans accounted for 93% to 98%. The total credit amount ranged from 71% to 85% of the total credit disbursed in their respective categories. Of these, subsistence farmers had a noticeable bias towards nursery and floriculture enterprises because of limited land and greater need to create self-employment, while less than 3% of medium and large farmer subborrowers invested in nursery and floriculture enterprises although they used 11% and 15% of total credit in this category, respectively. 7. Geographical Distribution of Subloans. Ratnapura zone, handled by the public extension, accounted for the most subloans disbursed (38% of all subloans) while in terms of loan amount the private companies extension zone accounted for almost 50% of the total subloan amounts disbursed. Hambantota District, a public extension service domain, accounted for the highest number of subloans (1,567 valued at SLRs95.5 million). However, the average subloan size in this district was a mere SLRs60,958. The highest total amount of all subloans for a single district (SLRs382.7 million) was disbursed in Gampaha District, which was in the mandate of private extension companies. The average subloan size in Gampaha District was a hefty SLRs608,372, which is almost 10 times more than that of Hambantota. The highest average subloan amount of SLRs1.79 million was recorded for Nuwara-Eliya District, which accounted for only 65 subloans but had a total disbursement of SLRs116.2 million. Nuwara-Eliya District was followed by Colombo District, where the average subloan amount was SLRs1.52 million.

22 Appendix 2

Table A2.5: Summary of Farm Subloans by Farm Size Landlessa Subsistence Farmers Small Farmers Medium Farmers Large Farmers All Farm Subloans Item Number Amountb Number Amountb Number Amountb Number Amountb Number Amountb Number Amountb Public Extension Service 257 82,252,250 1,173 74,204,745 783 61,701,950 656 296,424,097 69 203,352,500 2,938 717,935,542 Private Extension Services 118 72,205,500 296 29,973,800 132 18,059,500 638 313,468,050 124 256,023,000 1,308 689,729,850 Total 375 154,457,750 1,469 104,178,545 915 79,761,450 1,294 609,892,147 193 459,375,500 4,246 1,407,665,392 Percentage Distribution (%) Public Extension Service 69 53 80 71 86 77 51 49 36 44 69 51 Private Extension Services 31 47 20 29 14 23 49 51 64 56 31 49 Total 100 100 100 100 100 100 100 100 100 100 100 100 a Landless category excludes subloans for agroprocessing and/or marketing, but includes loans for nursery development, floriculture, and polytunnels. b Amounts in SLRs. Source: Mission estimates.

Table A2.6: Summary of Perennial Crop Development (CD) Subloans by Farm Size Landless Subsistence Farmers Small Farmers Medium Farmers Large Farmers All CD Subloans Item Number Amounta Number Amounta Number Amounta Number Amounta Number Amounta Number Amounta Public Extension Service 85 4,463,800 1,109 55,859,450 765 48,701,950 619 223,064,097 63 138,302,500 2,641 470,391,797 Private Extension Services 13 670,000 250 18,523,800 129 16,409,500 626 294,114,050 121 238,682,000 1,139 568,399,350 Total 98 5,133,800 1,359 74,383,250 894 65,111,450 1,245 517,178,147 184 376,984,500 3,780 1,038,791,147 Percentage Distribution (%) Public Extension Service 87 87 82 75 86 75 50 43 34 37 70 45 Private Extension Services 13 13 18 25 14 25 50 57 66 63 30 55 Total 100 100 100 100 100 100 100 100 100 100 100 100 CD = perennial crop development. a Amounts in SLRs. Source: Mission estimates.

Appendix 2 23

Table A2.7: Summary of Nursery Development (ND) Subloans by Farm Size Landless Subsistence Farmers Small Farmers Medium Farmers Large Farmers All ND Subloans Item Number Amounta Number Amounta Number Amounta Number Amounta Number Amounta Number Amounta Public Extension Service 172 77,788,450 61 13,970,295 14 3,685,000 21 46,710,000 2 51,000,000 270 193,153,745 Private Extension Services 105 71,535,500 45 9,950,000 2 850,000 10 19,019,000 3 17,341,000 165 118,695,500 Total 277 149,323,950 106 23,920,295 16 4,535,000 31 65,729,000 5 68,341,000 435 311,849,245 Percentage Distribution (%) Public Extension Service 51 52 58 58 88 81 68 71 40 75 62 62 Private Extension Services 31 48 42 42 13 19 32 29 60 25 38 38 Total 81 100 100 100 100 100 100 100 100 100 100 100 ND = nursery development. a Amounts in SLRs. Source: Mission estimates.

Table A2.8: Summary of Agroprocessing and/or Marketing Subloans by Farm Size

Landless Subsistence Farmers Small Farmers Medium Farmers Large Farmers All AP/Mktg Subloans Item Number Amounta Number Amounta Number Amounta Number Amounta Number Amounta Number Amounta Public Extension Service 124 162,124,068 3 4,375,000 4 9,315,000 16 26,650,000 4 14,050,000 151 216,514,068 Private Extension Services 216 193,657,000 1 1,500,000 1 800,000 2 265,000 0 0 220 196,222,000 Total 340 355,781,068 4 5,875,000 5 10,115,000 18 26,915,000 4 14,050,000 371 412,736,068 Percentage Distribution (%) Public Extension Service 36 46 75 74 80 92 89 99 100 100 41 52 Private Extension Services 64 54 25 26 20 8 11 1 0 0 59 48 Total 100 100 100 100 100 100 100 100 100 100 100 100 AP/Mktg = agroprocessing and/or marketing. a Amounts in SLRs. Source: Mission estimates.

24 24 A

ppendix 2

Table A2.9: Summary of All Subloans by Farm Size

Landless Subsistence Farmers Small Farmers Medium Farmers Large Farmers All Subloans Item Number Amounta Number Amounta Number Amounta Number Amounta Number Amounta Number Amounta Total of All Subloans 715 510,238,818 1,469 104,178,545 915 79,761,450 1,294 609,822,147 193 459,375,500 4,586 1,763,376,460 Percentage Distribution 15.6 28.9 32.0 5.9 20.0 4.5 28.2 34.6 4.2 26.1 100 100 Distribution by Purpose (%) Crop Development 13.7 1.0 92.5 71.4 97.7 81.6 96.2 84.8 95.3 82.1 82.4 58.9 Nursery Development 38.7 29.3 7.2 23.0 1.7 5.7 2.4 10.8 2.6 14.9 9.5 17.7 Agroprocessing/Marketing 47.6 69.7 0.3 5.6 0.5 12.7 1.4 4.4 2.1 3.1 8.1 23.4 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 a Amounts in SLRs. Source: Mission estimates.

Appendix 3

25

THE CREDIT COMPONENT: ANALYSIS OF THE PARTICIPATING FINANCIAL INSTITUTIONS

1. Participating Financial Institutions. At the beginning of the Project, the Central Bank of Sri Lanka (CBSL) registered qualifying banks as participating financial institutions (PFIs), based on criteria agreed in the loan negotiations.1 Accordingly, only Development Finance Corporation of Ceylon (DFCC), National Development Bank (NDB), Hatton National Bank (HNB), Commercial Bank, and Sampath Bank qualified as PFIs. All are private banks, usually catering to medium-big size loans with lower risk. At the Project’s outset, just DFCC and NDB were actively promoting the credit line. Only towards the end of 1999 did HNB, Commercial Bank, and Sampath Bank became active. During the second half of 2000, Kandurata Development Bank and Bank of Ceylon became PFIs under the Project, while Ruhunu Development Bank (RDB) enrolled in early 2003. The eight PFIs, therefore, came on board at different times in the Project’s implementation, and this was a major reason for their varying performances. Furthermore, some PFIs’ limited branch networks in the provinces were not conducive to making perennial crop development subloans, while the regional development focus of some other PFIs was a strong point in promoting the subloans. The highest number of subloans was disbursed by RDB (1,878, or 41%, of all subloans), although it accounted for just 6% of the total sublending. Almost 25% of the total credit was disbursed by DFCC, while HNB did not lag far behind as it disbursed 24%. While DFCC and HNB together accounted for nearly half of total disbursals, they served only 27% of all subborrowers (Tables A3.1 and A3.3).

Table A3.1: Credit Disbursement Summary, by Financial Institution

Subloan Amounts

(SLRs million)

Participating Financial Institution Number Amount

Approved Disbursed Refinanced %

Disbursed %

Refinanced Development Finance Corporation of Ceylon 419 443.6 438.1 374.6 98.8 85.5 National Development Bank 260 267.1 266.6 218.8 99.8 82.1 Hatton National Bank 833 432.4 431.7 364.5 99.8 84.4 Commercial Bank 425 283.3 282.9 217.3 99.9 76.8 Sampath Bank 101 96.7 96.5 82.6 99.8 85.6 Bank of Ceylon 566 119.7 118.4 91.7 98.9 77.5 Ruhuna Development Bank 1,878 110.1 110.1 95.1 100.0 86.4 Kandurata Development Bank 104 10.6 10.0 8.5 95.0 85.0 Total 4,586 1,763.4 1,754.4 1,453.1 99.5 82.8

Source: Mission estimates. 2. Subloan Recovery Performance. Overall, all PFIs together disbursed 99.5% of approved subloan amounts and obtained about 83% refinancing from the CBSL. The refinance ratio varied from as low as 77% (Commercial Bank) to as high as 86% (RDB). (See Table A3.1.) Based on the recovery of refinanced subloan amounts,2 overall recovery as of 31 December 2005 of all eight PFIs was 49.6%. This recovery performance is understated, because it has not been measured against the total amount of subloans that fell due by 31 December 2005 and data broken down by

1 Among others, the criteria included (i) minimum annual collection ratio of 80% for the total portfolio; (ii) minimum

cumulative collection ratio of 70%; (iii) maximum portfolio infection ratio of 15%; (iv) minimum return on average assets at 2% for development finance institutions and 1% for domestic commercial banks; (v) maximum debt-to-equity ratio of 8:1 for development finance institutions and, as decided by CBSL, for domestic commercial banks, (vi) availability of a branch network; and (vii) availability of trained staff.

2 Data table taken from the borrower’s project completion report dated April 2006. The recovery figures are against the refinanced amounts that CBSL advanced through the PFIs and not the amounts due by 31 December 2005.

Appendix 3

26

PFI was not available to the Project Completion Review Mission. What we term “falling-due” amounts were therefore simulated based on a set of assumptions.3 Overall recovery of the eight PFIs at the end of 2005 is estimated at 67.3%. The simulation exercise was carried further to extrapolate recovery performance4 through the end of 2006 against the fell-due amounts as of that date. The simulated recovery of all PFIs is 71%. Three of the eight PFIs (Sampath Bank, NDB, and RDB) had 79–81% simulated recovery by 31 December 2006. Good PFIs’ recovery performance of 70–80% against the past and current amounts due is marginally satisfactory. Better PFIs are expected to have recovery of their amounts due greater than 95%. Notwithstanding this recovery data, the Project Completion Review Mission was informed by the CBSL (without being provided a concrete data set) that the overall recovery rate for the subloans is on average above 90%, the highest being 95% at NDB and lowest being 90% at Sampath Bank.

Table A3.2: Recovery of Subloans (1999–2005), by Financial Institution (refinanced amounts in SLRs million)

Participating Financial Institution

Refinanced Loan

Amounts Total

Recovered %

Recovereda Amount due (1999–2005)b

% Recoveryc

Simulated % Recoveryd

Development Finance Corporation of Ceylon 374.563 162.959 43.5 292.201 55.8 62.5 National Development Bank 218.842 141.549 64.7 188.974 74.9 80.6 Hatton National Bank 364.456 170.621 46.8 255.402 66.8 71.1 Commercial Bank 217.253 106.080 48.8 152.200 69.7 70.9 Sampath Bank 82.640 50.301 60.9 70.333 71.5 79.3 Bank of Ceylon 91.734 37.805 41.2 60.964 62.0 65.5 Ruhuna Development Bank 95.111 47.847 50.3 45.973 104.1 80.6 Kandurata Development Bank 8.536 3.223 37.8 4.674 69.0 68.7 Total 1,453.136 720.385 49.6 1,070.721 67.3 71.0 a Percent recovered against total loan (refinanceable) amounts. b Simulated based on a set of assumptions. c Percent recovery against loan amounts (refinanceable) falling due by December 2005. d Recovery for 2006 included as simulated amounts based on the past trend and rate of increase between 2004 and 2005. All past due and

currently due amounts falling due by December 2006 are also included in the computations. Source: Mission estimates.

3. Interest Rates. The CBSL determined the onlending interest rates that PFIs would charge, based on the average weighted deposit rate (AWDR). Interest rates for subborrowers were set at two percentage points above the AWDR, and the interest rate to PFIs for refinancing the credit was set at six percentage points below the AWDR with a cap at 4%. When the AWDR dipped below 10%, the CBSL would freeze the onlending rates and refinancing rates at a previous level. The CBSL would announce the AWDR rate relevant for the previous 6 months in January and July, which the PFIs would use to calculate the rates for the upcoming 6 months. At the beginning of the Project, the onlending interest rate thus calculated was 12%, which was lower than both the 14% charged during the PCDP and prevailing market rates. After a slight increase in the onlending interest rates to above 13% at the beginning, the AWDR continued to decline during the project period, thus decreasing the onlending interest rate to 13.1%, 12.9%, and 12.1%. In 2002, the AWDR dipped below 10%, which forced the CBSL to freeze the onlending interest rate at 12%. The decline in market interest rates continued, however, and forced some banks to offer lower interest rates in their regular agricultural credit schemes. During that period, the CBSL announced 3 It was assumed that every subloan has an average maturity of 4 years, with a 1-year grace period and three

subsequent annual installments. Average recovery during the grace period was assumed to be 10%, and the amount due in years 2–4 was assumed to be 30% for each year.

4 Extrapolated recovery amounts were based on the past trend and rate of increase between 2004 and 2005. All past due amounts and currently due amounts falling due by December 2006 were also included in the computations.

Appendix 3

27

floating interest rates of 9.0–10.5%. As floating rates pose interest rate risk management difficulties, the CBSL almost immediately fixed the onlending interest rate at 10.5% from 2003 until the Project’s end. Therefore, we can conclude that subborrowers received the subloans at slightly below the market rates throughout the Project’s implementation, mainly because PFIs kept their spreads fixed at 5–7%. 4. Sustainability of the Credit. A revolving fund for onlending to subborrowers after the Project’s credit line would be exhausted was to be established from the proceeds of the PFIs’ recoveries against the subloan amounts refinanced from the CBSL. The revolving fund for further onlending to eligible subborrowers was to be established within 1 year from the loan’s effectiveness (i.e., 1999), yet it formally started only in 2006. There was a protracted delay in approving the revolving fund due to a need to obtain Treasury’s clearance, and an SLRs300 million revolving fund was approved in August 2005. As of 30 September 2006, 1,127 borrowers had been registered for a total amount of SLRs444.4 million, of which 418 borrowers had received loans in an amount totaling SLRs164.1 million. Because of the revolving fund mechanism and PFIs’ continued involvement to support lending operations in the perennial crop subsector, sustainability of the credit appears to be satisfactory. At the end of the SPCDP, when the credit line funds were fully committed, PFIs had already financed 731 subloans worth SLRs52 million from their own funds and there was a further registration of 217 subborrowers’ applications for about SLRs162 million.5

5 These figures are quoted from the Borrower’s project completion report, Chapter 5.

Appendix 3 28

Table A3.3: Summary of Bank-wise Subloans by Farm Size (amounts in SLRs)

Landless Subsistence Farmers Small Farmers Medium Farmers Large Farmers All Farm Subloans Percent Share

Bank's Name Number Amount Number Amount Number Amount Number Amount Number Amount Number Amount

in Num- ber

in Amounts

DFCC 94 102,081,068 14 9,350,000 6 2,100,000 238 167,202,000 67 162,862,500 419 443,595,568 9 25

Nat Dev Bank 83 76,126,000 46 4,800,850 17 1,650,950 90 80,237,750 24 104,270,000 260 267,085,550 6 15

Hatton Nat Bank 168 143,660,000 69 11,008,000 110 21,270,500 434 178,193,250 52 78,292,000 833 432,423,750 18 25

Comm. Bank of SL 112 107,147,800 60 9,604,100 51 8,221,000 169 88,654,500 33 69,671,000 425 283,298,400 9 16

Sampath Bank 32 44,781,650 9 5,890,000 9 1,100,000 42 16,655,000 9 28,280,000 101 96,706,650 2 5

Bank of Ceylon 91 21,353,500 270 17,414,095 78 9,392,000 121 56,519,530 6 15,000,000 566 119,679,125 12 7

Ruhunu Development Bank 113 12,743,800 953 42,606,500 624 34,752,000 187 19,480,117 1 500,000 1,878 110,082,417 41 6

Kandurata Dev Bank 22 2,345,000 48 3,505,000 20 1,275,000 13 2,950,000 1 500,000 104 10,575,000 2 1

Total 715 510,238,818 1,469 104,178,545 915 79,761,450 1,294 609,892,147 193 459,375,500 4,586 1,763,446,460 100 100

Bank-wise Percentage Distribution of Subloans by Farm Size DFCC 22 23 3 2 1 0.5 57 38 16 37 100 100 Nat Dev Bank 32 29 18 2 7 1 35 30 9 39 100 100 Hatton Nat Bank 20 33 8 3 13 5 52 41 6 18 100 100 Comm. Bank of SL 26 38 14 3 12 3 40 31 8 25 100 100 Sampath Bank 32 46 9 6 9 1 42 17 9 29 100 100 Bank of Ceylon 16 18 48 15 14 8 21 47 1 13 100 100 Ruhunu Development Bank 6 12 51 39 33 32 10 18 0 0 100 100 Kandurata Dev Bank 21 22 46 33 19 12 13 28 1 5 100 100 Overall Percentage 16 29 32 6 20 5 28 35 4 26 100 100 Percentage of Banks' Share in Subloans by Farm Size DFCC 13 20 1 9 1 3 18 27 35 35 Nat Dev Bank 12 15 3 5 2 2 7 13 12 23 Hatton Nat Bank 23 28 5 11 12 27 34 29 27 17

Appendix 3 29

Landless Subsistence Farmers Small Farmers Medium Farmers Large Farmers All Farm Subloans AP/Marketing

(Landless) All Subloans Item Number Amount Number Amount Number Amount Number Amount Number Amount Number Amount Number Amount Number Amount Public Extension Service 257 82,252,250 1,173 74,204,745 783 61,701,950 656 296,424,097 69 203,352,500 2,938 717,935,542 124 162,124,068 3,062 880,059,610 Private Extension Services 118 72,205,500 296 29,973,800 132 18,059,500 638 313,468,050 124 256,023,000 1,308 689,729,850 216 193,657,000 1,524 883,386,850 Total 375 154,457,750 1,469 104,178,545 915 79,761,450 1,294 609,892,147 193 459,375,500 4,246 1,407,665,392 340 355,781,068 4,586 1,763,446,460 Percentage Distribution Public Extension Service 69 53 80 71 86 77 51 49 36 44 69 51 36 46 67 50 Private Extension Services 31 47 20 29 14 23 49 51 64 56 31 49 64 54 33 50 Total 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

DFCC = Development Finance Corporation of Ceylon. Source: Mission estimates.

30 Appendix 4

NONCREDIT COMPONENT: PROGRAMS WITH THE COLLABORATIVE INSTITUTIONS

1. Horticultural Research and Development Institute (HORDI). Several programs were undertaken by HORDI, under the Department of Agriculture (DOA), in collaboration with tissue culture propagation at HORDI, Gannoruwa; Tissue Culture Propagation at Makandura; Virus Indexing at the Plant Virus Indexing Centre (PVIC), Homagama; Virus Indexing at HORDI, Gannoruwa; and the Fruit Crops Research and Development Centre, Horana. The main activities were (i) establishing the Papaya Clonal Seed Gardens, where clonal seed gardens isolated from other diseased plants in order to obtain disease-free papaya seeds were established with 300 plants that produced more than 10 kg of seed; (ii) propagating healthy planting materials,1 which were then distributed among the registered nurseries and governmental farms; (iii) constructing two greenhouses and a potting shed to produce basic planting materials for fruit crops required by registered nursery personnel, DOA nurseries, DOA gene banks, and some fruit growers; and (iv) providing training courses for farmers, DOA officials, and nursery personnel on various issues such as improved vegetative propagation techniques for fruit crops, principles of nursery management, and production technologies for various crops. 2. Tissue Culture Program for Bananas. Bananas represent an important fruit crop in Sri Lanka. Since the banana is a vegetatively propagated plant, there is high demand for banana planting material. A major problem in banana cultivation is a lack of healthy planting material, since most banana plants are infected with diseases, and especially viral diseases. Tissue-culture technology permits mass-scale propagation of healthy plants. Since these plants are grown in vitro under aseptic conditions and with appropriate nutrients, the tissue-cultured plants grow into healthy and vigorous plants that ultimately produce good bunches of fruit that command high market prices. Demand is high for tissue-cultured plants. The program’s ultimate objective was to develop a tissue-culture protocol for producing healthy banana planting material of selected varieties. In order to realize this objective, the following activities were undertaken: (i) receipt of virus-indexed banana suckers from HORDI’s pathology division, (ii) in vitro establishment of suckers, (iii) in vitro multiplication, (iv) soil planting and acclimatization, and (v) field evaluation of tissue-cultured plants in comparison with conventional suckers. The Tissue Culture Unit in 2005 also initiated a study in collaboration with HORDI on field evaluation of banana tissue cultures in comparison to conventional suckers. It compares the performance of tissue-cultured planting materials against conventional planting materials in terms of bunch yield and aims to understand the adaptability of tissue-cultured banana planting material. The Unit also produced handouts on plant tissue culture for schoolchildren and farmers. 3. Tissue Culture Program for Pineapples. The pineapple is one fruit that has reached semi-industrial status, with a well-developed production base and organized domestic and export markets. Sri Lankan pineapples are appreciated for their sweetness, especially when consumed as fresh fruit. While enjoying healthy domestic sales, fresh pineapples are exported to many foreign markets (including the Middle East, Maldives, Europe, and Japan). The pineapple is Sri Lanka’s main export fruit crop, but a mealy bug problem associated with wilting virus disease is the major constraint upon large-scale pineapple cultivation. This makes tissue-culture technology an important remedy, and so the SPCDP funded a program to produce (and popularize) healthy tissue-cultured pineapple planting material. The project activities included (i) developing a tissue culture laboratory and facilities, (ii) producing tissue-cultured pineapple plants, and (iii) field multiplication of tissue-cultured pineapple plants. In addition to production of tissue-cultured plants, 1 For lemon, papaya, sweet orange, mandarin, pomelo, avocado, jack fruit, rambutan, durian, mango, banana, and

grapes.

Appendix 4 31

research works 2 and training programs for farmers and students were also carried out at the Regional Agricultural Research and Development Centre. The Project developed the tissue culture facilities by (i) constructing a tissue culture laboratory, including to purchase such laboratory equipment as a lamina floor, electronic balance, autoclave, ovens, distillation unit, pH meter, shaker, refrigerators, and glassware; and (ii) purchasing laboratory chemicals. 4. Plant Virus Indexing Centre (PVIC). Viruses and virus-like organisms comprise an important group of pathogens causing damage and yield losses in agricultural crops. The extent of damage and crop losses may depend upon the particular virus, susceptibility of the host plant, and environmental conditions. Therefore, timely control of these pathogens is important to profitable returns. Viruses are submicroscopic and can be observed only under electron microscopy. This capability is not freely available in Sri Lanka, and hence other modern technologies such as serological and molecular-based investigations have to be used. To fulfill this national need, the PVIC was established in 1999 with the following objectives: (i) proper identification of disorders due to viruses and virus-like pathogens, (ii) development of modern virus detection techniques, (iii) production of antisera for locally important viral diseases, (iv) development of possible virus-related preventive methods, (v) indexing of field samples for quarantine purposes, and (vi) genetic manipulation to produce virus-resistant cultivars. The PVIC has the following facilities: (i) general virology laboratory, for identification of viruses; (ii) molecular virology laboratory, for molecular-basis identification of viruses; (iii) tissue culture laboratory, to establish and multiply virus–free banana and pineapple foundation stock; and (iv) virus epidemiology laboratory, for studies on the environment and insect behavior. 5. Technical Achievements. Modern research and diagnostic laboratories like the PVIC use new techniques of serological assays and nucleic acid-based methodologies to detect plant viruses. The PVIC utilizes its own facilities to produce polyclonal antisera for important viruses. This allows it to utilize locally produced antisera, which will last for more than 10 years with proper storage facilities. In an antisera production program, a plant virus is initially isolated and then multiplied in a suitable host plant. About 1 kg of tissue is used to produce a single antiserum. For the production of a single antiserum, a period of about 6–8 months is required. The PVIC uses enzyme-linked immunosorbent assay (ELISA) tests for identifying viruses, producing virus-free banana foundation stock, developing purification procedures, and testing samples received from researchers and farmers. These tests are suited to Sri Lankan requirements, as they yield their results in less than 2 days. Molecular-based detection methods (i.e., detecting viruses by identifying their nucleic acids) are among the foremost innovations in molecular biotechnology. This technology has been widely used in the field of horticulture for detecting viruses in fruit crops and has been introduced by the Centre. The PVIC’s achievements include the following:

(i) identifying new viruses, such as mild mosaic virus in banana, mild yellow edge virus in strawberry, strawberry shock virus in strawberry, Cymbidium mosaic virus and Odontoglossum ring spot virus in orchid, mealy bug wilt in pineapple, three strains of banana streak virus, banana bunchy top virus strains, three viral diseases in passion fruit, and viruses in papaya;

(ii) producing antisera for (a) passion fruit mottle virus, (b) papaya ring spot virus, (c) banana bunchy top virus, (d) banana streak virus, (e) banana bract mosaic virus, (f) strawberry shock virus, (g) cassava mosaic virus, (h) potato leaf roll virus, (i) potato virus X, (j) citrus greening bacteria, (k) pineapple wilt virus, and (l) potato virus Y;

2 (i) Title: Identification of suitable sucker size of pineapple to use as ex-plant, (ii) Title: Study on different level of indol

acetic acid (IAA) concentration for root formation of pineapple, and (iii) Title: Identification of suitable media for shoot initiation of Hybrid Pineapple.

32 Appendix 4

(iii) identifying relationships between vector and virus to minimize virus infection, including to identify (a) “podisinnomaran” and “wathupalu” as alternative hosts for Apis spiracola, which spreads passion fruit mottle virus, and (b) cassava mosaic virus as being transmitted by the white fly Aleurodicus sp. that mainly harbors on wild cassava;

(iv) identifying relationships between viruses and alternative hosts to minimize virus infection, including to (a) determine that tobacco necrosis virus in wild tobacco infects strawberry plants; (b) identify the virus that causes cassava mosaic in cassava, and determine that it multiplies in “hulanthala” and “wild” rubber, and (c) identify a solanaceous weed called “thamberiya” that acts as an alternative host for potato Y virus;

(v) developing techniques for managing viral diseases, including for (a) early detection of symptoms, (b) papaya ring spot and passion fruit mottle viruses; (c) preventing wilt virus in pineapple; (d) controlling papaya ring spot and cucumber mosaic viruses using barrier crops; and (e) producing virus-free mother stock of banana, pineapple, strawberry, and potato using tissue-culture technique; and

(vi) conducting training programs, including (a) short courses on plant virology for officers of the DOA who are new agriculture graduates, (b) awareness programs for extension officers (40 classes), and (c) training for farmers (15 classes).

6. Plant Virology Activities at HORDI. The virus indexing facility at HORDI was established in March 1999. The SPCDP assisted the unit with laboratory equipment and chemicals, including to purchase test antibodies and enzyme-conjugated antibodies for banana streak virus, banana bract mosaic virus, banana mosaic virus, banana bunchy top virus, citrus tristeza virus, papaya ring spot virus and PNP substrate, tween-20, and bovine serum albumin. The following activities were undertaken: (i) testing of the Plant Genetic Resources Centre’s banana germ plasm collection, the Angunukolapellessa banana germ plasm collection, and International Network for the Improvement of Banana and Plantain banana varieties; (ii) developing after virus-indexed samples for banana, citrus, papaya, lime, sweet orange, mandarin, pummelo, vegetables, flower crops, and potato; (iii) mother plants indexed for banana and citrus; (iv) training farmers, DOA officials, and university students, including 6-month training for two university students on virus indexing; (v) providing disease diagnostic services; (vi) virus indexing for tissue culture for banana and papaya; and (vii) carrying out field visits. 7. Fruit Crops Research and Development Centre, Horana. The Centre was established in 2001 under HORDI. Its mandate is to conduct research on fruit crops and disseminate appropriate technologies to increase fruit production in the country. In order to fulfill this mandate, the Centre needed to be developed with necessary infrastructure facilities, and especially laboratory buildings, equipment, and screen houses. Hence, project funds were sought and provided to build up the Centre’s basic structure by purchasing basic farm implements for horticultural crops, constructing a net house plus potting and screen houses, and acquiring various equipment. In addition, during 2004–2005, funds were received from SPCDP through the Council for Agricultural Research Policy for research projects to (i) develop guava and papaya hybrids, and (ii) enhance guava productivity. The following research activities were also implemented:

(i) Several propagation studies are being carried out and technologies developed, including: (a) grafting of gaduguda, (b) production of quality durian planting material, (c) studying the effect of seed size on quality of planting material production, and (d) studying slow initial growth rates in mangosteen plants.

(ii) A large number of fruit germ plasms (mango, gaduguda, sapodilla, durian, jackfruit, bael, and others) were collected and propagated for conservation and evaluation. Fourteen such gene banks were established with 224 accessions.

Appendix 4 33

(iii) In addition to annually producing over 50,000 planting materials at the two farms belonging to the Centre in Horana, a large number of fruit plants are produced for research purposes. Also pathology research was initiated utilizing the laboratory facilities. Studies are being conducted to determine causal agents, screening protocols, and control measures for a number of diseases in fruit crops. There is also indexing of disease-free mother plants in the field.

(iv) Field experiments on nutrient management and organic fruit production of fruit crops have been established.

(v) Development activities have been initiated, such as (a) propagating elite accessions of durian, avocado, and gaduguda for distribution among commercial growers to be evaluated in the field; (b) grafting gaduguda-25 plants and providing seedlings to a commercial farm; (c) developing durian-621 plants of eight durian accessions; and (d) developing avocado-157 plants of four accessions. These durian and avocado varieties were distributed among growers in Gampaha and Kalutara districts for evaluation under the supervision of researchers and extension officers.

8. Seed Certification Service: Seed and Planting Material Development Centre. Production and use of authentic planting material is important to develop the perennial crop sector. Commercial-scale production of quality perennial crop planting materials through identifying suitable mother plants, training nursery personnel, providing needed handbooks, and certifying planting materials is a necessity to develop the perennial crop sector. The DOA’s Seed Certification Service is responsible for these activities. Financial assistance from the Project was sought to improve the Service. Activities under the Project are outlined below.

(i) Planting materials quality assurance and certification: 227,858 budded fruit plants of mango, rambutan, citrus, avocado, guava, jack, durian, and pomegranate were certified during the project period.

(ii) Mother plant certification (identification, selection, and location mapping of fruit crop plants): mother plants of mango, rambutan, avocado, guava, jack, durian, pomegranate, as well as citrus from recommended varieties were identified and certified in private orchards throughout the country.

(iii) Practical training on certified planting materials production: upgrading the knowledge of officers and nursery personnel on producing quality planting materials was undertaken.

(iv) Establishment of post-control fruit units: a minimum of two plants from each recommended variety was maintained in different post-control fruit units located in different agro-ecological regions. These units play an important role in quality control especially in resolving varietal confusions. Two such units were established during the project period, one at Hingurakgoda and the other at Gannoruwa.

(v) Publication of a variety identification handbook and a nursery personnel directory containing the names and address of registered nursery personnel.

9. Seed and Planting Material Development Centre (SPMDC). The SPCDP provided assistance to the SPMDC to improve its production of quality planting materials. HORDI and SPMDC manage nine agricultural crop production farms each. These are run with minimal government funding and have basic facilities. Under the Project, facilities were provided to establish mother plant orchards on 10 farms managed by SPMDC and HORDI. Genuine mother plants of mango, rambutan, citrus, durian, avocado, banana, guava, mangosteen, jack, and underutilized fruit crops obtained from the relevant research divisions were cultivated on 16 hectares (ha). Funds were used for initial land preparation in accordance with correct land use practices and drip irrigation systems. The next step was to produce quality planting materials from

34 Appendix 4

mother plants to distribute among farms and private sector organizations. Production of quality planting materials need to be carried out under controlled conditions in standard propagators and properly designed and constructed net houses equipped with microirrigation, fertigation, and proper light penetration. These facilities were provided to every farm (18 farms in total) under the SPCDP. In order to promote planting material production, such basic needs as chemical fertilizer, agricultural chemicals, hormones, sand, and compost were also provided. Similar attention was given to equipping these farms with pruning and grafting equipment, sprayers, tractors, cultivators, and chain saws. Transport facilities were also provided. The SPCDP assisted, too, in upgrading the knowledge of farm managers, assistant farm managers, field staff, and private sector personnel by providing local and foreign training. Such training aids as slide projectors, digital cameras, and computers were also provided. 10. Department of Export Agriculture. The PCDP supported the Department of Export Agriculture (DEA) through institutional strengthening and in research and development activities regarding export agricultural crops (EAC). This support was continued with the SPCDP. The DEA operated in 14 districts and achieved the following:

(i) Constructed an office building for the Moneragala District Office and the EAC development program.

(ii) Constructed a circuit bungalow at the Cinnamon Research Station to provide accommodation for visiting scientists and others on official visits.

(iii) Improved the infrastructure facilities of central nurseries by providing a nursery office and pump house, potting sheds, plant houses, water supply systems, etc.

(iv) Provided agricultural inputs and tools to produce quality plants at the nurseries. (v) Annually produced about 250,000 plants of improved varieties in the four nurseries. (vi) Established gene banks with germ plasm of garcinia, citronella, and cinnamon at the

Cinnamon Research Station. Selected 10 cinnamon lines with superior quality. Produced over 30,000 cinnamon plants, and completed planting some of them in different locations for evaluation.

(vii) Provided laboratory equipment and chemicals to strengthen the Cinnamon Research Station’s research activities, as well as the Pallolpitiya and Walpita research stations.

(viii) To improve their mobility, provided vehicles to research and development divisions and motorcycles to the extension officers, farm service assistants, and research assistants;

(ix) Established and maintained 180 demonstration plots, totaling 25 ha. (x) Trained more than 35,000 farmers on improved agricultural practices, post-harvest

technology, integrated pest management, nursery management, and entrepreneurship.

(xi) Established and properly maintained about 600 ha of EAC cultivation in 14 districts using improved agricultural practices under the guidance of EAC extension officers.

(xii) Supported a betel research and development program by establishing facilities and training centers at Intercropping and Betel Research Station with training equipment and materials, and by establishing five betel demonstration plots to demonstrate improved agricultural practices in Kurunegala and Gampaha districts.

(xiii) Provided Matale Training Centre with computers and accessories, a digital camera, and training materials to improve the quality of training for the 1,200 personnel being trained there annually.

11. Coconut Research Institute. Among the several collaborative institutions receiving project assistance, the Coconut Research Institute (CRI) was the only one falling outside the administration of the Ministry of Agriculture. It administered an adaptive research program to

Appendix 4 35

evaluate perennial intercrops3 for better utilization of coconut lands in different agro-ecological zones through the establishment of 125 research sites on farmers’ fields in 15 districts. Evaluations of coconut varieties, fertilizer, and soil conservation were also parts of the trials. Additionally, CRI conducted training classes or demonstration tours to disseminate the research findings. The SPCDP funded the research and training costs while supporting infrastructure development. The Project also supported CRI in strengthening its laboratory facilities, office, and farms facilities.

12. Pepper was the most popular intercrop from the beginning of the Project, but continuously low prices over 2 years discouraged farmers from expanding pepper as an intercrop in coconut lands. Cocoa creates a favorable microclimate in coconut lands by adding leaf litter, increasing microbial activity, and boosting earthworm activity. Cinnamon was an attractive intercrop especially among coconut growers in the southern region, and trials showed that cinnamon could be grown successfully also in the Gampaha, Kegalle, and Kurunegala districts.4 Grafted cashew was well established in all dry regions, and even on farms with low inputs and/or investments. As a result of improved farm management under the Project (for instance, bunch management), Dole Asia Ltd. expanded banana cultivation over 1,200 acres with its Kavendish variety.

3 The selected intercrops were cocoa, coffee, pepper, rambutan, clove, avocado, grafted cashew, mango durian,

cinnamon, lime orange, banana, pineapple, papaya, and passion fruit. 4 Average yield of cinnamon under coconut was 350 kg/ha/year and a profit of at least SLRs80,000 per ha could be

attained. There were no constraints on cultivation except a need for skilled labor in processing.

36 A

ppendix 5

ACTUAL PROJECT COST

Table A5: Actual Costs by Component and Fund Source ($’000)

Private Benefi-GoSL Sector ciaries PCIs

Foreign Local Total Foreign Local Total Local Local Local Local Total Foreign Local Total

A. Credit 6,032 18,098 24,130 6,180 9,632 15,812 0 0 6,075 2,639 8,714 6,180 18,346 24,526 B. Farm Advisory, Marketing, and

Technical Services 320 2,690 3,010 23 240 263 731 992 0 0 1,722 23 1,962 1,985 C. Research

1. Coconut Research Institute 23 103 126 54 16 70 67 0 0 0 67 54 84 138 2. Department of Animal

38 44 82 24 13 37 14 0 0 0 14 24 28 51 3. Department of Agriculture 168 54 222 250 61 311 121 0 0 0 121 250 182 432 4. Council for Agricultural

23 7 30 17 1 17 4 0 0 0 4 17 5 21 5. Contract Research 140 560 700 58 82 140 224 0 0 0 224 58 306 364

Subtotal 392 768 1,160 403 173 576 431 0 0 0 431 403 604 1,006 D. Seed and Planting Material

1. Dept of Export Agriculture 70 386 456 165 55 220 168 0 0 0 168 165 222 387 2. Seed Certification Service 225 527 752 191 34 225 116 0 0 0 116 191 150 341 3. Seed and Planting Material

316 122 438 189 39 228 89 0 0 0 89 189 128 317 4. National Botanical Gardens 0 0 0 89 72 161 171 0 0 0 171 89 243 332

Subtotal 611 1,035 1,646 634 199 834 544 0 0 0 544 634 744 1,378

E. Institutional Strengthening1. Project Management 168 503 671 122 310 433 979 0 0 0 979 122 1,290 1,412 2. Central Bank of Sri Lanka 95 8 103 62 1 63 8 0 0 0 8 62 9 71 3. Training 692 1,913 2,605 189 8 197 150 0 0 0 150 189 158 347 4. Consulting Services 74 0 74 0 0 0 0 0 0 0 0 0 0 0

Subtotal 1,029 2,424 3,453 373 320 693 1,137 0 0 0 1,137 373 1,457 1,830

Total Base Cost 8,384 25,015 33,399 7,613 10,564 18,177 2,843 992 6,075 2,639 12,548 7,613 23,112 30,725 Contingencies 523 1,240 1,763

Subtotal 8,907 26,255 35,162 7,613 10,564 18,177 2,843 992 6,075 2,639 12,548 7,613 23,112 30,725 Service Charge 606 0 606 658 0 658 0 0 0 0 0 658 0 658

Total 9,513 26,255 35,768 8,271 10,564 18,835 2,843 992 6,075 2,639 12,548 8,271 23,112 31,383

Development

ADB

Actual

Total

Production and Health

Research Projects

ComponentAppraisal Estimate

Source: Basic data of the report.

Appendix 6 37

ANNUAL DISBURSEMENT

Table A6: Actual Costs per Category per Year (ADB Funds) ($)

No. Category Name 1998 1999 2000 2001 2002 2003 2004 2005 2006 Total

01 Credit

1,000,000

1,051,187

1,804,739

2,394,808

2,494,107

2,832,896

4,165,832

68,395 0

15,811,964

02 Civil Works

46,538 1,700 3,661 6,627 2,309

35,853

37,576

16,326

50,542

201,132

03 Equipment

109,542

80,922

46,855

51,950

14,332

40,639

124,029

78,288

70,089

616,646

04 Vehicles

71,659

209,860

22,741

59,947 0 0

17,547 0 0

381,754

05 Research

23,435 2,438

18,212 9,018

10,541

12,158

10,148

6,631

5,753 98,334

06 Materials

36,910 1,027

38,982 8,759 120

13,321

54,735

49,445

55,278

258,577

07 Training

84,657 486

41,485

11,695 8,368 1,601

48,292 360 152

197,096

08 Project Management

127,259

61,127

30,348

22,379

60,404

87,158

128,685

60,263

33,672

611,295 09 Consulting Services 0 0 0 0 0 0 0 0 0 0

10 Service Charge 0 7,823

25,239

40,596

66,240

99,274

143,193

186,880

89,115

658,360

Total 1,500,000

1,416,570

2,032,262

2,605,779

2,656,421

3,122,900

4,730,037

466,588

304,601

18,835,158

Source: Asian Development Bank.

38 A

ppendix 7

PROJECT IMPLEMENTATION SCHEDULE

BME = benefit monitoring and evaluation, CBSL = Central bank of Sri Lanka, PFI = participating financial institution. Source: Asian Development Bank.

Year 1 2 3 4 5Component I II III IV I II III IV I II III IV I II III IV I II III IV I II III I II III I II III

1. Credit - - - - - - - - - - - - - - - - - - - - - - - -

1. Farm Advisory, Marketing andTechnical Services - - - - - - - - - - - - - - - - - - - - - - - -

2. Research - - - - - - - - - - - - - - - - - - - - - - - -

3. Seed and Planting Material - - - - - - - - - - - - - - - - - - - - - - - -

4. Institutional Strengthening

a. Consulting Services

- BME Consultant, international (3 person-months)

- Baseline Survey, domestic institution (4 person-months)

b. Training

- Project Staff/Project Management - - - - - - - - - - - - - - - - - - - - - - - -

- CBSL/PFI Staff - - - - - - - - - - - - - - - - - - - - - - - -

- Farmers (Crop Production/Marketing) - - - - - - - - - - - - - - - - - - - - - - - -

- Agroprocessors/Agroprocessing - - - - - - - - - - - - - - - - - - - - - - - -

c. Procurement of Equipment and Vehicles - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Legend: = Appraisal - - - - - = Extension = Actual

2006

1998 1999 2000 2001 2002

IV IV

2004 20056 7 8

2003

IV

Selection process started.

Selection process started.

Loan Effectivity Date:28 Aug 1998

Appendix 8 39

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant

Reference in Loan

Agreement

Status of Compliance Central Bank of Sri Lanka (CBSL) The CBSL shall be responsible for supervision, control and execution of the credit component (Part A) of the Project.

Schedule 6, para. 1

Complied with.

Ministry of Agricultural Development (MOAD) (formerly Ministry of Agriculture and Lands) (i) The MOAD shall be responsible for the

overall supervision, control and execution of the Project’s components on farm advisory, marketing and technical services (Part B), research (Part C), seed and planting materials (Part D), and institutional strengthening (Part E). In addition, MOAD shall provide overall project management and coordination through its Project Management Office (PMO), and through its Project Management Unit (PMU) upon the transfer of the extension services for perennial crops from the PMO to a private entity.

(ii) The PMO established under the Perennial Crops Development Project (the First Project) shall continue as the PMO under the Project, with its Project Director and supporting staff, including the three Deputy Directors (Credit, Extension Services and Administration) and with its existing support facilities.

Schedule 6, para. 2

Complied with. The PMO retained its stature due to partial achievement of the pilot privatization of extension services.

Project Steering Committee (PSC) The MOAD shall ensure that the Project Steering Committee (PSC) established under the First Project is also responsible for coordination of Project activities, making decisions on policy matters related to Project implementation and providing guidance to the PMO for Project implementation. The PSC shall be chaired by the Secretary of the Ministry of Agriculture and its other members shall include representatives from all the concerned Government agencies, the participating financial institutions (PFIs) and the private sector. The PSC shall meet as often as required but at least once every six months.

Schedule 6, para. 3

Complied with.

40 Appendix 8

Covenant

Reference in Loan

Agreement

Status of Compliance Project Implementation Committee At the provincial and district levels, the MOAD shall establish within one month after the Effective Date a Project Implementation Committee (PIC), chaired by the Project Director, to ensure smooth Project implementation. The PIC shall meet as often as required but at least once every three months.

Schedule 6, para. 4

Complied with. Established in September 1998.

Transfer of Extension Services Within one year after the Effective Date, the Borrower and the Bank shall discuss and agree on the recommendations under the Technical Assistance for Privatization of Extension Services for Perennial Crops (the Technical Assistance) on the arrangements for the transfer of extension services for perennial crops from the PMO to a private entity, and the Borrower shall ensure that these services are transferred to a private entity within two years after the Effective Date, or at another date as may be agreed upon by the Bank, under arrangements satisfactory to the Bank, including the following: (i) the PMO shall be reorganized into a

Project Management Unit (PMU), which shall continue to have overall responsibility for Project implementation;

(ii) the PMU shall be headed by a full-time Project Director with qualifications and experience acceptable to the Bank;

(iii) the PMU shall be supported by an adequate number of suitably qualified staff, and shall have adequate support facilities; and

(iv) the PMU shall enter into an agreement with the private entity to ensure that Project beneficiaries are provided with adequate extension services.

Schedule 6, para. 5

Partly complied with. Instead of a single private entity, it was agreed that private firms would be selected for 7 contracts for different clusters with varying emphasis on crops and districts. Agreements with 3 private firms for 4 contracts were signed in February 2001. Their services commenced in April 2001. Selection of private contractors for the remaining project districts was initiated in 2003 but was discontinued because of lack of interest. The restructuring of the PMO did not materialize since the PMO continued to provide extension services in project districts where the private contractors were not operating.

Project Implementing Agencies (i) The PFIs shall be implementing agencies

for Part A of the Project and shall be responsible for processing subloans under the supervision of CBSL.

Schedule 6, para. 6

Complied with. In November 2001, ADB approved a minor change in the Project’s implementation arrangements to include: (i) the National Agribusiness Council to administer contract research

Appendix 8 41

Covenant

Reference in Loan

Agreement

Status of Compliance (ii) The MOAD shall execute Parts B, C, D,

and E of the Project. The MOAD shall: (i) execute Part B through the PMO and a private entity, upon transfer of extension services for perennial crops from the PMO to such entity; and (ii) cause the Sri Lanka Council for Agricultural Research Policy (CARP) to implement Part C.

(iii) The Department of Agriculture (DOA) and the Department of Export Agriculture (DEA) shall implement Part D of the Project. The DOA shall be responsible for identifying, screening and selecting mother plant mother plant materials for horticultural crops in the Project area. The DOA’s Seed and Planting Material Development Center (SPMDC) shall be responsible for producing basic seed and mother plant materials for horticultural crops. The DOA’s Seed Certification Service (SCS) shall carry out certification, quality control and quarantine of plant materials. The DEA shall be responsible for research, production, and provision of mother plant materials for export agricultural crops to the private sector in the Project area.

(iv) The PMO shall be responsible for implementing Part E of the Project.

in parallel with CARP; and (ii) the DOA’s National Botanic Gardens to conduct training and produce planting materials for the floriculture industry.

Criteria for PFIs The CBSL shall ensure that the PFIs satisfy the criteria for participation under Part A of the Project.

Schedule 6, para. 7

Complied with.

Subsidiary Loan Agreements Each subsidiary loan agreement shall include the terms and conditions as agreed between the Borrower and the Bank. The CBSL shall furnish the Bank with a copy of each subsidiary loan agreement entered into by CBSL with the PFI concerned upon execution of each such agreement.

Schedule 6, para. 8

Complied with.

Amount Relent to PFIs The proceeds of the loan allocated to Part A of the Project shall be relent to each PFI on a first-

Schedule 6, para. 9

Complied with.

42 Appendix 8

Covenant

Reference in Loan

Agreement

Status of Compliance come-first-served basis, on the basis of the terms and conditions of the relevant subsidiary loan agreement. Relending Terms The terms for relending proceeds of the loan to each PFI for the purposes of Part A of the Project shall include: (a) a repayment period of not more than 15 years including a grace period of not more than 5 years for a subloan with a maturity of up to 8 years or a repayment period of not more than 20 years including a grace period of not more than 10 years for a subloan with a maturity of more than 8 years; (b) foreign exchange risk to be borne by the Borrower; and (c) interest per annum shall be 6 percentage points below AWDR, and the interest rate and the formula for the relending rate shall be reviewed by the Borrower, CBSL and the Bank during project implementation.

Schedule 6, para. 10

Complied with.

Utilization of Amounts Relent Loan amounts relent to PFIs shall be used only for making subloans to subborrowers to finance the reasonable foreign exchange and local currency cost of goods and services required for subprojects.

Schedule 6, para. 11

Complied with.

Selection of Subborrowers Each PFI shall ensure that any applicant to be selected as an eligible subborrower for a subloan satisfies the Project’s selection criteria.

Schedule 6, para. 12

Complied with.

Criteria for Selection of Subprojects Each PFI shall ensure that an eligible subproject satisfies the following criteria: (i) the subproject covers field development of perennial crops, intercropping with short-term and medium-term crops, pasture and livestock development under perennial crops, nursery operations, agroprocessing, market development and other activities as may be agreed upon by the Bank and CBSL; (ii) the financial internal rate of return is higher than the prevailing onlending interest rate; (iii) the economic internal rate of return is at least 12 per cent; and (iv) certification by the PMO to the PFI concerned that the subproject

Schedule 6, para. 13

Complied with. In November 2001, ADB approved a minor change in the Project’s scope to expand credit facilities to include financing of capital costs for polytunnels and fertigation systems for vegetable production.

Appendix 8 43

Covenant

Reference in Loan

Agreement

Status of Compliance satisfies the Bank’s environmental guidelines and the Borrower’s environmental legislation, including the environmental requirements set by the Borrower’s Central Environment Authority. Financing Sources for Subprojects The financing package for each subproject shall be as follows: (i) up to 65 percent of the estimated subproject cost may be financed through the subloan; (ii) at least 10 percent of the estimated subproject cost shall be provided by the PFI out of its own resources (and may be available through the subloan); and (iii) at least 25 percent of the estimated subproject cost may be provided by the subborrower as equity in cash or in kind.

Schedule 6, para. 14

Complied with.

Terms and Conditions of Subloans The amount of an individual subloan shall be not more than the equivalent of $150,000.

Schedule 6, para. 15

Complied with.

Subloan Agreements Each subloan to be made on terms whereby the concerned PFI shall obtain, under a written subloan agreement, rights adequate to protect the interests of the Government, the ADB and the PFI.

Schedule 6, para. 16

Complied with.

Accounts and Financial Statements (i) Each PFI shall maintain appropriate

accounts or records to indicate, inter alia, subloan appraisals, approvals, disbursements and recoveries.

(ii) Each PFI shall cause auditors acceptable to the Bank to review its loan and investment portfolio and its subloan operations, and the report of this review shall be furnished to CBSL.

Schedule 6, para. 18

Complied with.

Exchange of Views and Inspections (i) CBSL, the PFIs and the Bank shall from

time to time, at the request of any party, exchange views through their representatives with regard to any matters relating to the Subsidiary Loan Agreements.

(ii) The PFIs shall enable representatives of

Schedule 6, para. 19

Complied with.

44 Appendix 8

Covenant

Reference in Loan

Agreement

Status of Compliance CBSL and the Bank to inspect the PFIs, the subborrowers, the subprojects, and any records and documents relevant to the Project.

Termination of Subsidiary Loan Agreements CBSL shall be entitled to suspend further access by a PFI to use of the proceeds of the loan, or terminate the relevant subsidiary loan agreement, upon failure of such PFI to perform its obligations under the subsidiary loan agreement, provided that such action shall not unduly disrupt subloan activities under the Project.

Schedule 6, para. 20

No subsidiary loan agreement was suspended by the CBSL during project implementation.

Processing of Subloans Whenever the PFI proposes to make a subloan in an amount exceeding the equivalent of $50,000 or such other amount as may be agreed by CBSL, the PFI, and the Bank, the PFI concerned shall submit to the Bank through CBSL an application for approval of such subloan.

Schedule 6, para. 21

Complied with. In August 2000, ADB approved an increase in the free limit of subloans from $50,000 to $100,000.

Review of Subloan Operations by CBSL The Borrower shall cause CBSL to review, during its regular inspection of the accounts and operations of each PFI, the implementation status of subprojects and the repayment performance of subloans and the report thereon shall be furnished to the Bank.

Schedule 6, para. 24

Complied with.

Designation of Other Financial Institutions by CBSL Within three years after the Effective Date, CBSL shall have the authority to designate other financial institutions as a PFI, subject to the Bank’s approval. CBSL shall enter into a Subsidiary Loan Agreement with each newly-designated PFI and furnish the Bank with a copy of such Subsidiary Loan Agreement.

Schedule 6, para. 25

Complied with.

Training for PMO Staff Within 18 months after the Effective Date, the PMO shall submit to the Bank for approval a program for PMO staff to undertake local training and overseas study tours to be provided

Schedule 6, para. 26

Complied with. Submitted in October 1999.

Appendix 8 45

Covenant

Reference in Loan

Agreement

Status of Compliance under the Project. Training for Farmers and Agroprocessors Within 18 months after the Effective Date, the PMO shall submit to the Bank for approval a training program for farmers and agroprocessors to be provided by SPMDC, DOA, DEA, and any suitable organization on agrotechnologies, agribusiness, marketing and nursery management.

Schedule 6, para. 27

Complied with. Submitted in October 1999.

Training for CBSL and PFI Staff Within 18 months after the Effective Date, CBSL shall submit to the Bank for approval a training program for CBSL staff and PFI staff.

Schedule 6, para. 28

Complied with. Submitted in June 2000.

Training for Staff of the Private Entity Within 2 years after the Effective Date, or at another date as may be agreed upon by the Bank, the Borrower shall cause the Private Entity to submit to the Bank for approval a training program for its staff under arrangements acceptable to Bank.

Schedule 6, para. 29

Complied with. The Pilot Project Management Unit created within the MOAD to monitor the performance of the private contractors undertook the identification of training needs of the staffs of the private contractors.

Revolving Fund Within one year after the Effective Date, the Borrower shall cause CBSL to establish a revolving fund. CBSL shall operate the revolving fund from the date of establishment for a period of 10 years. CBSL shall utilize the resources of the revolving fund to refinance subloans made by the PFIs for eligible subprojects. The Borrower shall ensure that upon the closing date for withdrawals from the Loan Account, disbursement of any subloan approved under the Project shall be made from the revolving fund.

Schedule 6, para. 30

Complied with delay. The revolving fund was established in January 1999. However, operationalization of the revolving fund was approved only in August 2005.

Fee Payment for Extension Services The Borrower shall ensure that the PMO and the private entity charge recipients of extension services a fee payment. Fees are to be progressively increased so that these recipients bear the full payment at the end of Project implementation.

Schedule 6, para 32

Complied with. The private service providers are collecting fees for loan facilitation services. The PMO started collecting fee payment for extension services from Dec 2001.

46 Appendix 8

Covenant

Reference in Loan

Agreement

Status of Compliance Proposals Relating to Impositions and Subsidies The Borrower shall discuss with the Bank any proposals with regard to perennial crops relating to impositions including tariffs, export taxes and cess, and subsidies, including setting of food prices; and to consider Bank’s comments before finalizing any proposal.

Schedule 6, para. 33

The occasion has not risen.

Writing Off Subloans The Borrower shall not grant debt forgiveness for any subloans approved under the Project.

Schedule 6, para. 34

Complied with.

Benefit Monitoring and Evaluation The Benefit Monitoring and Evaluation (BME) Unit of the PMO shall carry out a benchmark socioeconomic survey during the first year of the Project, and maintain records of the survey to provide a profile of subborrowers. The profile shall be supplemented by a survey to be carried out in the third year of the Project to provide an indication of the effect of the Project on the beneficiaries. Within 3 months after Project completion, the BME Unit shall carry out an impact assessment study to evaluate the impact of the Project.

Schedule 6, para. 35

Complied late. Conduct of baseline survey was delayed. The PMO submitted the Final Report in Mar 2001 due to the delay in reviewing the report. It was agreed that a second full-scale survey would not be needed. Case studies would be undertaken instead. The impact assessment study was completed on 1 March 2007.

Midterm Review The Borrower, CBSL and the Bank shall carry out a midterm review on all aspects of the Project.

Schedule 6, para. 36

Complied with. Midterm review carried out in September 2001.

Particular Covenants The Borrower shall make available, promptly as needed, funds facilities, services, land and other resources in addition to the Loan proceeds required to carry out the Project and for the operation and maintenance of the Project facilities.

Article IV, Section 4.02

Complied with.

The Borrower shall maintain, or cause to be maintained, records and accounts adequate to record the progress of the Project and each subproject, and identify the goods, services and other items of expenditures financed out of the

Article IV, Section 4.06[a]

Complied with.

Appendix 8 47

Covenant

Reference in Loan

Agreement

Status of Compliance Loan proceeds. The Borrower shall cause CBSL and MOAD to: (i) maintain separate accounts for their respective parts of the Project; (ii) have such accounts and related financial statements audited; and (iii) furnish to the Bank not later than 12 months after the related fiscal year certified copies of such audited accounts and financial statements and the report of the auditors, including the auditors’ opinion on the use of the Loan proceeds, compliance with the Loan covenants, and the use of the Imprest Account and SOE procedures, among other things.

Article IV, Section 4.06[b]

Complied with for fiscal years 1999 – 2005 without any major qualification.

The Borrower shall cause MOAD (through the PMO) to coordinate with CBSL and furnish to the Bank quarterly progress reports on the overall carrying out of the Project and on the operation and management of the Project facilities.

Article IV, Section 4.07[b]

Complied with.

MOAD (through the PMO) in coordination with CBSL shall prepare and furnish to the Bank a Project Completion Report promptly after physical completion of the Project, but in any event not later than 3 months thereafter.

Article IV, Section 4.07[c])

Complied with.

48 Appendix 9

ECONOMIC AND FINANCIAL ANALYSES

A. Assumptions 1. The following are the assumptions used for carrying out the economic and financial analysis:

(i) The project implementation period was from September 1997 to December 2006. However, since the disbursements under the credit components occurred between 1999 and 2005, and the subloans were the driving force for the subprojects, the mid-point year of 2002 is assumed to be the starting point of subprojects subjected to economic and financial analyses.

(ii) The benefits and costs are expressed in constant 2006 prices. The prices of 2002 and thereafter were converted to constant 2006 prices using the consumer price indexes of 2.6% for 2003, 7.9% for 2004, 11.7% for 2005, and 5.7% for 2006.

(iii) The economic life of subprojects is assumed to be 10 years for crop development, nursery development, polytunnels, and agroprocessing subloans.

(iv) The export and import prices of traded inputs, mainly fertilizers, are derived from the World Bank’s commodity prices projections. For the traded outputs (pepper, cashew, cinnamon, mango, coconut, banana, and vegetables), these were based on the export prices (free on board [fob] Colombo) compiled by the Sri Lanka Department of Export Agriculture (DEA) for 2004 and 2005. For 2006, fob prices were taken from the Sri Lanka Spices and Allied Products Producers’ Association’s bulletin of October 2006 or (in the case of mango and other fresh fruits, vegetables, and flowers) from the AgStat pocketbook of 2006 published by the Socio Economic and Planning Centre, Sri Lanka Department of Agriculture (DOA). The fob values of these outputs for earlier years (2002–2004) were taken as the current prices for the respective years either from the available published sources or were derived from the fob values of 2004 or 2005 using the corresponding local currency deflation factors. Farm gate prices were taken from the DEA database, and conversions derived from this database were used to convert other fob prices.

(v) Financial prices were converted to economic prices, using the standard conversion factor of 0.9 for local materials and labor rates. The following conversion factors1 were also used: 0.785 for machinery and equipment, or its hire, and for pesticides; and 0.85 for buildings.

(vi) Hired labor for all subprojects involving crop development, nursery development, and polytunnels was assumed to be 95% of all labor input in the first year of investment, and 75% in the subsequent years. The remaining labor input was assumed to be family labor and therefore not accounted for in the cash outflows.

(vii) Indicative subprojects for perennial crop development subloans are based on 2,253 actual beneficiaries in the subsistence and small farmer categories who make up about 60% of all subloans. Their average farm area per beneficiary is 0.5 hectare. The average subproject’s loan requirement is computed to be around SLRs61,915, which is the actual average of all subloans for perennial crop development between 1999 and 2005. However, subloan amounts in the indicative models vary in

1 Based on an average conversions factor of 0.785 using the semi-input-output method developed by Sri Lanka’s

National Planning Department, Ministry of Policy Planning and Implementation, quoted by economic researchers in Rafeek and Smaratunge. 2002. An analysis of competitiveness of the rice sector in Sri Lanka. Paper presented in the Annual Symposium of the Sri Lanka. DOA.

Appendix 9 49

accordance with each specific crop’s investment requirements and assume a 25% equity contribution. Indicative subprojects for nursery crop development subloans are based on 164 actual subloan beneficiaries, for floriculture on 234 actual beneficiaries, and for polytunnels on 47 actual beneficiaries. Their average farm area per beneficiary is taken as 0.5 hectare. Most of those in the nursery development subprojects category are landowners although a few are in the landless class. On the other hand, most beneficiaries in the floriculture and polytunnel subprojects did not have land and wanted to establish their enterprises on leased land. Average subloan requirement is computed as near to the actual subloan amounts of SLRs490,068 (nursery development), SLRs928,096 (floriculture), and SLRs488,426 (polytunnels) as possible. Indicative subprojects for agroprocessing subloans are based on 371 actual beneficiaries with actual average subloan of SLRs1.112 million.

B. Financial and Economic Viability 2. At the Project’s appraisal and midterm stages, indicative subprojects were chosen for estimating financial and economic internal rates of return (FIRR and EIRR). These models included pepper, cinnamon, cashew, mango, and their intercropping combinations with other short- and medium-term crops; nursery development for fruit plants and foliage; floriculture; off-season vegetables under polytunnels; and a composite agroprocessing unit for fruits and spices processing. The same subprojects have been used for analysis at the project completion report stages of the Project.

3. All costs, including capital and other investment start-up and operating costs, and benefits, including farm gate (or factory gate) revenues accruing from the outputs, are taken into consideration in preparing the subprojects’ cash flows. All subloans are assumed to have 5 years of grace period and an average interest rate of 12% per annum. Table A9.1 indicates that all subprojects are viable in accordance with their FIRRs and EIRRs.

4. The FIRR and EIRR results also are compared with similar indices at the Project’s appraisal stage (Table A9.1). The EIRRs of pepper, cinnamon, cashew, and mango subloans are almost 50% higher than obtained at the appraisal (1997). The EIRRs of nursery development subprojects are 50% for fruit and spices plants, but, by adding foliage to the product line, EIRRs of 88% can be expected. The EIRRs of floriculture subprojects are quite high, depending on the type of flower and its export market: EIRRs of 96% for gliricidia and more than 200% for anthurium were calculated. Similarly, EIRR is expected to exceed 200% for off-season mostly exportable vegetables. For the sample agroprocessing unit involving fruit and spices packaging and/or processing, more than 100% EIRR is possible. The FIRRs presented in Table A9.1 also show better returns for all subprojects than projected at appraisal (1997), which means that all the subprojects have significant incomes from the investments made for perennial crops development. C. Sensitivity Analysis 5. Sensitivity analyses were performed on the EIRRs for 10% cost overrun, 10% decrease in revenues, and a combination of both 10% cost overrun and decrease in revenues. Switching values were also computed to show the extent of cost overrun or decrease in revenue that subprojects would sustain before the EIRRs decrease to zero. The results of sensitivity analysis (Table A9.2) show that all subprojects are robust, as no subproject is sensitive to either cost overrun or decrease in revenue. An exception sensitive to simultaneous cost overrun and decrease in revenue, however, is agroprocessing for fruits and spices (EIRR reduced to 1%). The switching

50 Appendix 9

values indicate that generally subprojects are more sensitive to shortfall in revenues than to cost overrun with only a few exceptions. Cashew intercropped with banana, and nursery development for fruit, spices, and foliage plants are more sensitive to cost overrun than to shortfall in revenues. This implies that adding more product lines in this case (intercropping with banana in the case of cashew or adding foliage in the nursery development operations) increases the risk of cost overrun comparatively more than it does that for shortfall in revenues.

Table A9.1: Summary of Subloan Analysis for Financial and Economic Internal Rates of Return

(%)

At Appraisal Stage At Project Completion

Report Stage Subproject or Purpose of Subloan FIRR EIRR FIRR EIRR Pepper 17 19 19 29 Cinnamon 33 40 61 66 Cashew 24 37 57 60 Mango 30 30 42 45 Pepper intercropped with replanted coconut 0 0 40 53 Pepper and banana under replanted coconut 54 79 64 80 Cinnamon intercropped with coconut 0 0 88 93 Cashew intercropped with banana 64 66 82 90 Mango intercropped with banana 39 38 60 67 Floriculture: Gliricidia 0 0 88 96 Floriculture: Anthurium 0 0 214 229 Nursery development (fruit and spices plants) 0 0 48 50 Nursery development (fruit, spices, foliage) >100 >100 85 88 Agroprocessing: Fruits and spices >100 >100 133 142 Polytunnel: Off-season vegetables 0 0 189 207

EIRR = economic internal rate of return, FIRR = financial internal rate of return. Source: Mission estimates.

Appendix 9 51

EIRR = economic internal rate of return. Source: Mission estimates.

Table A9.2: Sensitivity Analysis EIRR (%) Ratio EIRR (%) Ratio EIRR (%) Switching Value (%)

Subproject or Purpose of Subloan Base Case

10% Cost

Overrun Sensitivity Indicator

10% Revenue Decrease

Sensitivity Indicator

Both Cost

Overrun and

Revenue Decrease

Cost Overrun

Revenue Decrease

Pepper 29.0 25.5 1.14 25.2 1.15 21.6 56.5 36.3 Cinnamon 65.8 60.2 1.09 59.6 1.10 54.2 173.0 63.4 Cashew 59.8 56.4 1.06 56.1 1.07 52.7 310.0 75.6 Mango 45.2 40.9 1.11 40.5 1.12 36.1 103.6 50.9 Pepper intercropped with replanted coconut 53.4 46.3 1.15 45.6 1.17 38.9 82.1 45.1 Pepper and banana under replanted coconut 79.7 67.4 1.18 66.2 1.20 55.3 94.6 48.6 Cinnamon intercropped with coconut 93.3 84.4 1.11 83.5 1.12 75.3 221.0 68.9 Cashew intercropped with banana 90.3 68.8 1.31 79.9 1.13 69.6 69.7 229.3 Mango intercropped with banana 66.7 49.9 1.34 57.1 1.17 41.6 43.3 51.4 Floriculture: Gliricidia 95.6 66.4 1.44 78.9 1.21 51.7 32.4 42.9 Floriculture: Anthurium 228.7 181.8 1.26 201.3 1.14 160.7 180.2 87.3 Nursery development (fruit and spice plants) 49.6 38.2 1.30 43.3 1.14 32.4 41.2 49.8 Nursery development (fruit, spices, foliage) 88.4 72.1 1.23 80.3 1.10 65.1 56.2 257.0 Agroprocessing: Fruits and spices 142.1 35.6 3.99 69.6 2.04 0.8 14.1 23.2 Polytunnel: Off-season vegetables 207.2 126.1 1.64 156.6 1.32 96.9 48.5 54.5

52 Appendix 10

OVERALL ASSESSMENT Loan 1552-SRI(SF): Second Perennial Crops Development Project

Criterion Weight

(%) Definition Rating

Description Rating Value

1. Relevance 20 Relevance is the consistency of a project's impact and outcome with the government's development strategy, the Asian Development Bank's lending strategy for the country, and the Asian Development Bank's strategic objectives at the same time of approval and evaluation, as well as the adequacy of the design.

Highly relevant Relevant Partly Relevant Irrelevant

3 2 1 0

2. Effectiveness 30 Effectiveness describes the extent to which the outcome, as specified in the design and monitoring framework, either as agreed at approval or as subsequently modified, has been achieved.

Highly effective Effective Less effective Ineffective

3 2 1 0

3. Efficiency 30 Efficiency describes, ex post, how economically resources have been converted to results, measured by the economic internal rate of return, or cost effectiveness, of the investment or other indicators and considering the resilience to risk of the net benefit flows over time.

Highly efficient Efficient Less efficient Inefficient

3 2 1 0

4. Sustainability 20 Sustainability considers the likelihood that human, institutional, financial, and other resources are sufficient to maintain the outcome over its economic life.

Highly sustainable Likely Less likely Unlikely

3 2 1 0

Overall Assessment

100 (Score of 1.6 to 2.7 = Successful)

Successful 1.7

Source: Project Completion Review Mission.

Appendix 11 53

PHOTOGRAPHS OF THE PROJECT ACTIVITIES

Pineapple under coconut cultivation Banana cultivation

Papaya cultivation Pepper cultivation

Plant nursery Flowers under polytunnels

54 Appendix 11

Processing of fruits into bottled fruit drinks

Field level farmer training classes