Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No. 16690

IMPLEMENTATION COMPLETION REPORT

SRI LANKA

FOREST SECTOR DEVELOPMENT PROJECT(Cr. 2043-CE)

June 13, 1997

Agriculture and Natural Resources DivisionCountry Department 1South Asia Region

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

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CURRENCY EQUIVALENTS

Currency = Sri Lanka Rupee (SLRs)Rates of exchange:

Appraisal (1989): US$1.00 = SLRs33.0Completion year: US$1.00 = SLRs56.49

FISCAL YEAR

January I to December 31

WEIGHTS AND MEASURES

Metric system

ABBREVIATIONS AND ACRONYMS

ADB Asian Development BankBFO Beat Forest OfficerCF Conservator of ForestsDCF Deputy Conservator of ForestsDFO Divisional Forest OfficerDWLC' Department of Wildlife ConservationERR Economic Rate of ReturnFD Forest DepartmentFINNIDA Finnish International Development AgencyFMP Forestrv Master PlanFPU Forestry Planning UnitFRDP Forestry Resources Development ProjectFSDD Forestry Sector Development DivisionGOSL Government of Sri LankaIUCN International Union of Conservation of NatureMALF Ministry of Agriculture, Lands and ForestryNCR National Conservation ReviewNGO Non-governmental OrganizationODA Overseas Development Administration (now DFID of the United Kingdom)RFO Range Forest OfficerSTC State Timber CorporationUNDP United Nations Development ProgramUSAID United States Agency for International DevelopmentUSJP University of Sri Jayawardenepura

Vice President Mieko NishimizuActing Director Fakhruddin AhmedDivision Chief/Manager Ridwan AliStaff Member Nadim Khouri

Table of Contents FOR OFFICIAL USE ONLY

Preface i

Evaluation Summary ii

PART I: PROJECT IMPLEMENTATION ASSESSMENT I

A. STATEMENT/EVALUATION OF OBJECTIVES IStatement of Objectives 1Evaluation of Project Objectives 2

B. ACHIEVEMENT OF PROJECT OBJECTIVES 2Overall Achievement 2

C. MAJOR FACTORS AFFECTING THE PROJECT 5

D. PROJECT SUSTAINABILITY 6

E. BANK PERFORMANCE 7

F. BORROWER PERFORMANCE 7

G. OUTCOME 8

H. FUTURE OPERATIONS 8

I. LESSONS LEARNED 8

PART II: STATISTICAL TABLESTable 1: Summary of AssessmentsTable 2: Related Bank Loans/CreditsTable 3: Project TimetableTable 4: Loan/Credit Disbursements: Cumulative Estimated and ActualTable 5: Key Indicators for Project ImplementationTable 6: Key Indicators for Project OperationTable 7: Studies Included in ProjectTable 8A: Project CostsTable 8B: Project FinancingTable 9: Economic Costs and BenefitsTable 10: Status of Legal CovenantsTable 11: Compliance with Operational Manual StatementsTable 12: Bank Resources: Staff InputsTable 13: Bank Resources: Missions

APPENDICESA. Aide-MemoireB. Economic Re-evaluationC: Government Comments

MAP

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

IMPLEMENTATION COMPLETION REPORT

SRILANKA

FOREST SECTOR DEVELOPMENT PROJECT(Credit 2043-CE'

Preface

This is the Implementation Completion Report (ICR) for the Forest SectorDevelopment Project (FSDP) in Sri Lanka for which Credit 2043-CE in the amount of SDR15.5 million (US$19.9 million) was approved on June 15, 1989, and made effective on June 1,1990.

The Credit closed on December 31, 1996, compared with the original closing dateof December 31, 1995. A sum of SDR 5.07 million (about US$7 million) was cancelled onSeptember 15, 1994 to take account of bilateral grants received and reduced scope ofoperations in certain areas due to security problems. Final disbursement took place on June 5,1997 at which time a balance of SDR 2.44 million (about US$3.4 million) was cancelled .

.2Cofinancing of the project was provided by the Finnish International Development Agency(FINNIDA), the Overseas Development Administration (ODA) and the United NationsDevelopment Program (UNDP).

This ICR was prepared by an FAO/CP3 mission which visited Sri Lanka inNovember 1996 and revised by the staff of the Agriculture and Natural Resources OperationsDivision of Country Department 1, South Asia Region.

Preparation of this ICR began during the Bank's final supervision mission forFSDP along with the completion mission in November 1996. It is based, among otherdocuments, on a review of the Staff Appraisal Report and legal documents, supervision reports,mid-term review report and project files as well as field investigations and discussions with theBank staff and GOSL officials associated with the project. The implementing agenciescontributed to the preparation of the ICR by commenting on the mission's Aide-memoire,arranging field visits and discussions with project staff, providing available data on projectperformance, and providing comments on this ICR (Appendix C). Two cofinancing agencies(ODA and UNDP) provided comments that were taken into account in the preparation of thefinal version of the ICR.

An additional amount of US$65,000 of unused funds in the special account will be returned to thecredit account and cancelled.

2 This was not a strict co-financing arrangement, but a form of "parallel financing" that was arrived atduring project implementation.

3 Messrs. K. Selvavinayagam (Financial Analyst, Mission leader) and Ajaz Ahmed Shah (Forester,Consultant).

IMPLEMENTATION COMPLETION REPORT

SRILANI(A

FOREST SECTOR DEVELOPMENT PROJECT (Credit 2043-CE)

Evaluation Summary

Introduction

The Bank initiated its involvement in Sri Lanka's forestry sector with a sectorreview in 1979. This was followed by the Forest Resources Development Project in 1983,which financed a modest plantation program and analysis of the sector. At the time of itscompletion, there was sufficient evidence of the need for further investment to justify a follow-up project - Forest Sector Development Project (FSDP)1 .

Project Objectives

The objective of the Forest Sector Development Project was to assist theGovernment to improve the performance of the forestry sector in line with the economic, socialand environmental requirements of Sri Lanka. This was to be achieved through: (a) theintensive management of plantations and natural forests; (b) establishment of an environmentalmanagement system; (c) expansion of resource base by establishing new plantations; (d)expanding and augmenting professional and technical education and training; and (e)strengthening of the institutional base.

Evaluation of project objectives. The objectives, which were clearly stated, wereconsistent with the forest sector development strategy. Project design, however, was ambitiouson new planting and management targets which were set at appraisal without properly analysingthe risks associated with the limited absorptive capacity of the Forest Department, the mainimplementing agency.

Implementation Experience and Results

The project was started after an 18 month delay, largely due to late finalization ofcofinancing arrangements. Despite shortfalls in planting targets, the project has substantiallyachieved its environmental objective and has made significant progress towards its institutionaldevelopment objective. A significant benefit was the introduction of indigenous forest policy

Following the signing of the project's legal documents, and in line with this agreement, theGovernment entered into separate bilateral agreements (including with UNDP, FINNIDA, ODA) for thesupport of activities in the overall scope of FSDP but with inputs that were in many cases above thelevels defined at appraisal (especially with respect to technical assistance, institutional support, andtraining). In keeping with all stakeholder's perceptions during project implementation and theGovernment's system of monitoring and evaluation, this ICR considers that all these additional bilateralfunds were costs to this umbrella project, recognizing that, in many cases, these costs included itemsthat were not necessarily appraised by the Bank.

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analysis capability - through the strengthening of the Forest Sector Development Division(FSDD) under the project. On the other hand, the studies under the project preparingproposals for reform of the State Timber Corporation (STC) have not yet led to significantprogress. However, discussions are still underway and the reforms envisaged may yet takeplace. In economic analysis, benefits were solely derived from the forest management andplantation activities. In the SAR and this ICR, other benefits arising from environmentalmanagement, institutional strengthening, education and training, although acknowledged, werenot quantified due to lack of reliable data. Nevertheless, investment costs for these componentswere included in the economic analysis. Re-estimated economic rates of return were lowerthan appraisal estimates, largely due to production volumes much smaller than expected atappraisal and to additional bilateral inputs not envisaged at appraisal, which were concentratedin the area of non-quantifyable benefits. The overall estimated economic rate of return of 13 %is still acceptable.

Project Sustainability

The project's achievements appear sustainable, although a major challenge is tointegrate the work of the consultants and the counterpart staff to ensure the correct transfer oftechnology. The factors influencing project sustainability, namely availability of trainednational staff in place with a low turnover rate, ability to meet the recurrent costs of the projectfully, and pursuit of active local support for project activities, have been met under the projectto varying degrees. Direct investments by the Bank on forest activities ended with the closureof the project in December 1996. The prospects for continuation of investments that wouldbuild on and implement the policy recommendations of this project appear bright with theexpressed interest of other donors in considering financing of the third phase of forestrydevelopment.

Actual Cost and Financing

The total final cost of the project at completion is estimated at US$46.4 million,representing about 47% increase over the appraisal cost of the project, due largely to theadditional bilateral financing received by GOSL after project signing (see footnote 1 on p. ii).Actual cost is strictly not comparable with appraisal estimates because new cofinancingarrangements with UNDP and ODA have been concluded since the signing of the DevelopmentCredit Agreement and included components not covered by the SAR. The project was financedby IDA (25%), ODA (38%), FINNIDA (6%), UNDP (5%) and GOSL (26%). IDAdisbursements of about US$11.5 million equivalent were about 58% of the US$19.9 appraisalestimate, due in part to increases in funding from other donors and reduced scope of operationsin certain areas due to security problems.

Key Factors Relating to Achievement of Project Objectives

The main contributory factors for the implementation delays/shortfalls were:

- Factors not generally subject to Government control. These included:late finalization of cofinancing arrangements, undependable weatherconditions in the dry zone and security problems in parts of the project area.

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- Factors generally subject to Government control. These included under-staffing, outdated financial regulations and centralization of decision-makingpowers in the Forest Department, delays in release of counterpart funds bythe Treasury, and delays in forest land assessment and allocation in the dryzone. These have slowed the pace of project implementation.

- Factors generally subject to implementing agencies' control. Theseincluded damage to plantations by fire and animals, slow progress inpreparation of forest inventories and management plans of the dry zonenatural forest and plantations and parts of the wet zone forests, delays inestablishing efficient working relationships between the Forestry PlanningUnit (FPU) and the Forest Department (FD), delays in procurement ofvehicles and equipment, and poor quality of planting stock in the dry zone.The combined effect of these have adversely affected the achievement ofproject targets.

Performance by the Bank and Borrower.

The performance of both the Bank and the Borrower has been generallysatisfactory. Both have satisfactorily carried out project identification and preparation.Appraisal and supervision of the project by the Bank have received adequate attention but theappraisal included some over-optimistic targets, especially concerning dry zone operations andthe speed of institutional reform. Notwithstanding the many obstacles which impeded smoothimplementation, the Borrower has generally complied with the covenants and responded torecommendations made by the Bank, which was firm while being friendly and constructiveduring its supervision of the project.

Project Outcome.

The project's outcome is rated satisfactory on the basis that the key elements forthe future course of forestry development - environmental management, education and training,and institutional support - were successfully implemented, although the implementation of theother two components - Forest management and Plantation establishment and maintenance -were below appraisal expectations, the latter mainly due to overly optimistic targets. It shouldbe noted that the agreement with respect to STC to carry out studies to prepare reformproposals has been met and that it is too early to judge whether the studies will lead to theanticipated reforms.

Summary of Findings, Future Operations and Key Lessons Learned

As in the case of its predecessor, FSDP was, by and large, implementedsuccessfully. Initially, the project was delayed by about 18 months mainly due to processingcofinancing arrangements and to a lesser extent because of funding issues. The most commonof the other constraints were the understaffing and centralized decision -making powers at theFD head office, delays in allocation of land for plantations in the dry zone, and slow progressin the preparation of management plans.

The Government has planned to start the third phase of the forest sectordevelopment program as the first stage of implementing the revised Forestry Sector Master

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Plan in line with the new forest policy. A National Task Force consisting of senior officialsfrom the relevant ministries and NGO representatives is currently engaged in formulatingguidelines to implement policy and reform-related legislation and procedures. The preparationof the proposed Forestry III project has therefore been postponed to a later date when therecommendations of the National Task Force will be officially known. The Ministry hasdiscussed with the EU, ODA and NORAD the possibility for further financing of forestrydevelopment and has requested the EU to provide two consultants to assist the local preparationmission for the Forestry III project.

The main lessons learned from the implementation of the project are:

a) Plantation sites should be clearly identified at appraisal in order to ensureavailability of land for plantations.

b) Over-extended state institutions like the Forest Department (FD) haveperformed poorly, in part due to the lack of incentives to perform efficiently.A realistic set of interventions should be envisaged (including strong privatesector participation) as a result of institutional capacity analysis. This is true atthe level of FD whose operations were hampered by understaffing, outdatedfinancial regulations and over-centralized decision-making.

c) The work of the consultants and counterpart staff must be integrated in projectactivities and evaluated systematically to ensure correct transfer of technology.

d) Although not obvious at the time, in retrospect it might have been advisable todelay appraisal of the project until the outcome of the cofinancing was knownso that more information on other donor programs and project priorities wouldhave been available.

e) The project made a positive contribution to improvements in the country'sforest policy and long-term sectoral development strategy. While any reformeffort will have to overcome vested interests, the on-going work of the NationalTask Force, including NGO representatives, is a hopeful indication of theGovernment's recognition of the need for reform.

f) The Bank's concern in this project for addressing important basic policy issuessuch as stumpage charges, self-financing of production plantations,restructuring of the State Timber Corporation (STC), must be continued byfuture donors as an integral part of any future investment in the forestry sectorto allow the technical and other developments from the sector program to yieldpositive results.

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IMPLEMENTATION COMPLETION REPORT

SRI LANKA

FOREST SECTOR DEVELOPMENT PROJECT

(Credit 2043-CE)

PART I: PROJECT IMPLEMENTATION ASSESSMENT

A. STATEMENT/EVALUATION OF OBJECTIVES

Statement of Objectives

1. The Bank's association with Sri Lanka's forestry sector dates back to 1979 when aForestry Sector Review was undertaken to assist GOSL in formulating a strategy for thedevelopment of its forestry sector. The Bank initiated the first phase of development byproviding support through the Forest Resources Development Project (Cr. 1317-CE) in 1983.This project laid the groundwork for long-term sectoral development through the preparation ofthe Forestry Master Plan. This was followed by the Forest Sector Development Project(FSDP) which thus became the logical next step in implementing the first Five-year InvestmentProgram, developed on the basis of the Forestry Master Plan.

2. The main objective of the project was to assist the Government to improve theperformance of the forestry sector in line with the economic, social and environmentalrequirements of Sri Lanka by implementing part of a five-year timeslice (1990-94) of theForestry Master Plan. This was to be achieved through: (a) the intensive management ofplantations and natural forests; (b) establishment of an environmental management system; (c)expansion of resource base by establishing new plantations; (d) expanding and augmentingprofessional and technical education and training; and (e) strengthening of the institutionalbase. The project included five components: (i) Forest Management; (ii) EnvironmentalManagement; (iii) Plantation Establishment and Maintenance; (iv) Education and Training;and (v) Institutional Support.

3. Project cost. The project was planned to be implemented over five years fromNovember 1989 to December 1994, and the total project cost including the physical and pricecontingencies was estimated at US$31.4 million (SLRs1,035 million). The IDA Credit ofUS$19.9 million was to finance about 63% of the total project cost. The remainder was to bemet by FINNIDA (US$2.8 million as a grant) and GOSL (US$8.7 million or 20% of totalproject cost). If the potential donors (ODA, UNDP/FAO) were to finance part of the projectcost, IDA was to consider cancellation and/or adjusting disbursement percentages accordingly.However, GOSL's contribution was to be maintained around 20% of the total project cost.

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Evaluation of Project Objectives

4. The project was well conceived and it established concise objectives consistentwith sectoral strategy. Moreover, the project design took into consideration other forestryprograms funded by external agencies such as the Asian Development Bank for the CommunityForestry Project and the Overseas Development Administration-supported Forestry Project for1988 to 1994. Project design, however, was overly ambitious on new planting andmanagement targets which were set at appraisal without properly analysing the risks associatedwith the limited institutional capacity of the main implementing agency - the Forest Department(FD). Implementation experience of FSDP shows that, despite belated improvement in thestaffing situation, the Forest Department still lacks capacity to provide additional staff and landfor plantations, a factor beyond FD's control.

B. ACHIEVEMENT OF PROJECT OBJECTIVES

Overall Achievement

5. The project has substantially achieved its environmental objective, but partiallyachieved its physical, institutional development, sector policy, financial and private sectordevelopment objectives. Macro policy, poverty reduction and gender objectives were notapplicable to this project.

6. Institutional development. The project had an overall aim of improving thecapability of the Ministry of Agriculture, Lands and Forestry (MALF) in policy-making,planning and monitoring its forestry development programs and enhancing the ForestDepartment's capacity for project implementation. The Forestry Planning Unit (FPU)established under the previous project has been strengthened and upgraded to the Forest SectorDevelopment Division (FSDD) to provide a link between the MALF and the executing agenciesin terms of planning, budgeting, monitoring and evaluation. The Forest Department (FD), akey implementing agency, has also been strengthened through provision of some additionalstaff, vehicles, equipment, education and training, and technical assistance. Three additionalDivisions have been formed by the FD increasing the total Divisions to 18. The Departmenthas restructured its headquarters on functional lines and appointed qualified staff to head itsDivisions and additional professional and technical staff (though less than required) toimplement its programs. The restructuring exercise has had some impact but the principles offunctional organization have not been fully applied. Another institution that was targeted underthe project was the State Timber Corporation (STC). The studies under the project preparingproposals for reform of STC have not yet led to significant changes. However, discussions arestill underway and the reforms envisaged may still take place. With respect to training, anexceptionally high intake of 27 students for the forestry M.Sc. course was recorded in 1996,almost twice the appraisal estimate of 15 students and three times the average intake of 9 during1990-1995. According to the course coordinator, some 20 students were initially selected onthe assumption that about five would drop out (only one dropped out due to medical reasons) ashad been the experience in the previous years. This number was boosted by the intake of fivesponsored students. The continuation of the M.Sc. course is in doubt due to lack of funds(after the closure of the project) although the University of Sri Jayawardenepura is in theprocess of integrating the Forestry program in its regular academic offering. The backlog oftraining at the Sri Lanka Forestry Institute is being cleared and the FD expects to complete

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training of the remaining backlog in about two years. Low attendance, ascribed to traineeshaving to attend court cases, continues to be a problem. The frequent turnover of trainers wassought to be minimized with the recruitment of five permanent lecturers. However, theMinistry of Public Administration has asked the Forest Department to obtain its clearancebefore holding examinations for recruitment.

7. Environmental management. The main objective of this component was tostrengthen the institutional capacity within the FD and Forestry and Environmental Division ofMALF to enable them to deal effectively with forest environmental management opportunitiesand constraints. This was, to a large extent, achieved. The Environmental ManagementDivision has been successfully established within FD. A thorough National ConservationReview was completed satisfactorily. It included field surveys in collaboration with theInternational Union of Conservation of Nature (IUCN) and FD. Out of this work, a total of 30areas have been identified in the wet zone for potential protected area management. Sevenconservation management plans (three in detail) have been prepared and implementation isreported to have started. Research needs in environmental management have been highlightedand some have already been undertaken. Environmental impact guidelines have also beenprepared and several workshops have been conducted. Other studies on site assessment,species selection and tree improvement have been completed and guidelines circulated. Despitethese substantial achievements, there is still a wide gap between diagnosis and implementation.Bridging this gap is of critical importance for the sustainability of the environment managementcomponent. The shortcomings have been identified and for the most part are being corrected.

8. Forest management. The objective of this component was to prepare managementplans for all plantations and for selected natural forests as a vehicle for improved management.For various reasons, there were serious delays in the preparation of these plans. Mid-termreview stressed the need for an early start-up of this activity and indicated that these plans needto be revised every five years on the basis of updated data collected by FSDD. Managementplans for eucalyptus are already operational, while those for teak and pine have not beencompleted. An interim management plan for mahogany has been completed and a forestmanagement plan outline had already been circulated among the field staff. There is somereservation among the field staff regarding some prescriptions which need to be clarified.Management plans have so far been prepared mostly by international consultants. This processneeds to be internalized and the local staff involved in the framing of prescriptions.

9. Plantation establishment and maintenance. The objective of this component wasto establish plantations in the different climatic zones of the country for production of timberand meet the prevailing and projected shortage in the country. Against a project target of23,0001 ha, about 15,859 ha were reportedly planted by the end of 1995 and an additionalplanting of 3,120 ha by the end of 1996. The target was reduced to 22,220 ha at mid-termreview. The planting program has deviated in the choice of species and also areas. Securityhas been one of the main reasons for the shortfalls in some areas. Another contributory factoris the shortage of staff in FD, which is attributed to a recruitment freeze imposed by GOSLthroughout the public sector in response to a continuously growing budget deficit, although

Originally, 17,900 ha of new plantation were targeted at appraisal. The target was raised to 23,000 hawith the finalization of cofinancing arrangements, and later, brought down to 22,220 ha at mid-termreview.

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some relief was provided to the Department in filling critical vacancies in later years of theproject. Sites selected in the dry zone are very harsh and are scattered over small areas.Overall survival in the dry and wet zones is reported between 65-90%; however it appears tobe overestimated. The quality of seedling production continues to need attention. There are nocertified seed sources or seed production areas. Nursery techniques remain unchanged. Thereis no provision for soil testing and fertilizers are used both in the nurseries and plantationsbased on past practice rather than defined needs. Water harvesting techniques especially in thedry zone, have not been adopted and this must have had a considerable effect on plant survival.Good success has been reported where communities' cooperation has been sought for plantationestablishment and maintenance.

10. Financial and sector policy. The project's financial and sector policy objectiveswere to have been achieved through proper pricing of logs and collection of realistic stumpagefees from the State Timber Corporation (STC). These have only been partially achieved.Although no royalty is collected on poles and sleepers, the increased royalty (from 10% tobetween 26% and 40% of logs' sales value) represents a positive improvement. The presentcollection (SLRs5O million) is 333% of previous payment (SLRs15 million) by STC. However,in the absence of reconciliation of logs extracted by the STC with the estimated extractabletimber by the FD, it is difficult to assess the extent to which the increased royalty has improvedthe effectiveness of royalty collection. The recommended management accounting tool ofprofit-centre accounting has not been fully applied in STC's operations like logging, sawmillingand furniture manufacture. Instead, logs are transferred to other operating units within STC atcost price, not market price, resulting in undervaluation of forests and loss of accountability onthe part of STC.

11. Private sector development. A legal covenant was included in the projectrequiring a study on the privatization of STC-owned sawmills. This study was carried out and,based on its recommendations, six sawmills were closed down (their equipment sold to privateparties); the remaining five are operated by the Corporation. Of these five, three are reportedto be making losses. In December 1994, it was agreed that the MALF would take a decisionon the status of STC after two years, if the STC had not performed well in the meantime. Asof June 1997, MALF had not reached a decision on overall STC status. It is accepted thatending STC's monopoly and providing a favorable investment climate for private sectorinvolvement would have signficantly improved the management of plantations.

12. Project inpact. The project has had a significant impact on the country's forestsector, but the potential for further progress is still substantial. A significant, thoughunquantifiable, benefit was the introduction of some form of indigenous forest policy analysiscapability through the strengthening of FSDD under the project. This has instilled some lifeinto a process (that was somewhat moribund) by promoting market-friendly policy reforms andinstitutional coordination. Other benefits included increased capability of the FD througheducation and training of its staff at both the technical and post-graduate level; improvedecological management of forests with the establishment of the Environmental ManagementDivision with the necessary equipment and training; and increased timber production (thoughless than expected). For the purpose of economic analysis, total benefits for the project wereassumed to be solely derived from the forest management and plantation activities. Otherbenefits - environment management, institutional strengthening, education and training - were

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not quantified due to lack of data and difficulty in measurement. Nevertheless, investmentcosts for these components were included in the economic analysis.

13. An economic re-evaluation has been undertaken for the project as a whole and fortwo of its components - new plantations and forest management. Re-estimated economic ratesof return (ERR) are 13% (project as a whole); 6% (new plantations); and 30% (forestmanagement), compared to 28%, 13% and 45 % respectively at appraisal. The lower ERRs atcompletion are due essentially to production volumes being much smaller than expected atappraisal and to the additional bilateral inputs (in technical assistance, training etc.) that werenot included at appraisal (see footnote 1, p. ii) and which were concentrated in the areas ofnon-quantifyable benefits. The overall estimated economic rate of return of 13% is stillacceptable.

14. The sensitivity analysis indicates that a reduction in benefits by 20% would lowerthe ERR for the project as a whole to 10%; a reduction by 50% would lower the ERR to 6%;while an increase in cost by 20% and by 50% would reduce ERRs to 11% and 8%respectively. The tests indicate that the project would remain modestly sensitive to reductions inbenefits.

C. MAJOR FACTORS AFFECTING THE PROJECT

15. Implementation record. As in the case of its predecessor, FSDP was, by andlarge, implemented successfully. Initially, the project was delayed by about 18 months mainlydue to processing cofinancing arrangements and to a lesser extent because of funding issues.The most common of the other constraints were the understaffing and centralized decision-making powers at the FD head office, delays in allocation of land for plantations in the dryzone, and slow progress in the preparation of management plans. Despite these delays, theproject has resulted in noticeable achievements, particularly in environmental management andinstitutional development. The updating of the Forestry Master Plan and the formulation of thenew forest policy are also significant contributions under the project.

16. The main contributory factors for the implementation delays/shortfall were:

- Factors not generally subject to Goverrnent control. These included:delay in finalizing cofinancing arrangements, undependable weatherconditions in the dry zone and security problems in parts of the project area.

- Factors generally subject to Government control. These included under-staffing, outdated financial regulations and centralization of decision-makingpowers in the Forest Department, delays in release of counterpart funds bythe Treasury, and delays in forest land assessment and allocation in the dryzone. These have slowed the pace of project implementation.

- Factors generally subject to implementing agencies' control. Theseincluded damage to plantations by fire and animals, slow progress inpreparation of forest inventories and management plans of the dry zone

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natural forest and plantations, and parts of the wet zone forests, delays inestablishing efficient working relationships between the Forestry PlanningUnit (FPU) and FD, delays in procurement of vehicles and equipment, andpoor quality of planting stock in the dry zone. The combined effect of thesehas adversely affected the achievement of project targets.

17. Actual project costs. The project was completed by the extended Credit ClosingDate of December 31, 1996 (one year later than the original Closing Date). The total final costof the project at completion is estimated at US$46.4 million, representing about 47% increaseover the appraisal cost of the project, due largely to the additional bilateral financing receivedby GOSL after project signing (see footnote 1 on p. ii). Actual cost is strictly not comparablewith appraisal estimates because new cofinancing arrangements with UNDP and ODA havebeen concluded since the signing of the Development Credit Agreement and includedcomponents not covered by the SAR.

18. Project fmancing. The total actual expenditure was met by IDA, ODA,FINNIDA, UNDP and GOSL. IDA provided 25%, ODA 38%, FINNIDA 6%, UNDP 5%and the remaining 26% was met by GOSL. IDA disbursements of about US$11.5 millionequivalent were about 58% of the US$19.9 appraisal estimate. An amount of US$7 millionfrom the IDA Credit was cancelled in 1994 to take account of the use of bilateral grants andreduced scope for project operations in certain areas due to security problems. An additionalSDR 2.44 million (about US$3.4 million equivalent) was cancelled at the time of finaldisbursement in June 1996.1

D. PROJECT SUSTAINABILITY

19. Project sustainability would involve continuation of project activities after theending of donor support. It depends on four main factors: availability of trained national staffin place with a low turnover rate; ability to meet the recurrent costs of the project fully;pursuit of not only local acceptance but active local support for project activities, to minimizethe risk of degradation, illicit felling or sabotage; and conservation of forests because of theirdistinctive biological diversity, watershed qualities, cultural value and degree of threat to theirintegrity. These factors have been fulfilled under the project to varying degrees as illustratedhereafter. The strengthening of the FSSD to provide support for the development of theforestry sector over the long term is a major accomplishment under the project. The educationand training component has assured availability of trained national staff. In this respect, the on-going process of integrating the project's Forestry program as an integral BSc program at theUniversity of Sri Jayawardenepura is a concrete step towards sustainability of this projectcomponent. Adequate budgetary resources to meet recurrent costs have been a problem notonly for the FD but other state institutions as well. The freeze on recruitment is a manifestationof this problem. Direct investments by the Bank in forestry activities ended with the closure ofthe project in December 1996. Whether the specific objectives of the project and benefits willbe sustained will have to await investment decisions by other donors. There are indications thatother donor agencies like the European Union and the Norwegian Agency for DevelopmentCooperation are interested in considering financing of the third phase of forestry development.

An additional amount of US$65,000 of unused funds in the special account will be returned to thecredit account and cancelled.

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20. In a small way, the FD is experimenting with participatory forest management withlocal people in order to maintain the natural forests so that they continue to contribute tosustainable rural development and remain as part of the natural heritage of Sri Lanka. The FDhas scheduled 30 wet zone forests for conservation management, following recommendationsmade in the Accelerated Conservation Review and the National Conservation Review carriedout under the project. In view of the progress mentioned above, the project's achievementsappear sustainable, although a major challenge is to integrate the work of the consultants andthe counterpart staff to ensure correct transfer of technology.

E. BANK PERFORMANCE

21. Project concept and design. Overall, appraisal established clear projectobjectives consistent with sectoral strategy and learning experience from the previous project.Two appraisal missions with the participation of seven and three professional specialistsrespectively had carried out a thorough review of the project concept and components. Themissions were fairly well-balanced and well-represented in relevant disciplines. However, theinstitutional analysis of the FD should have analyzed in greater detail the range of possibleinterventions to overcome the risks associated with FD's limited implementation capacity. Thiswould have led to less ambitious physical targets and the identification of more realistic designoptions (including public/private partnerships to complement public sector involvement inplantations). With the benefit of hindsight, the Bank might have been well-advised to delayappraisal of the project until the outcome of cofinancing was known so that more informationon other donor programs would have been available.

22. Supervision. The Bank's supervision performance was satisfactory. As shown inTable 11 of Part II, the project enjoyed intensive supervision by the Bank - 12 supervisionmissions with five consisting of the Task Manager only over five years (April 90 - Nov. 95) foran average duration of 11 days in the field. The skill mix reflects the presence of a forester(Task Manager) in each mission. The missions reviewed the project performance highlightingthe main problems and recommending corrective measures which were carefully followed upon subsequent visits. The Bank was firm while being friendly and constructive during itssupervision of the project. Apart from periodic supervision missions, a Mid-term review wasalso undertaken with the participation of cofinancing agencies. The review recommended andthe FD accepted the downward revision of the planting targets. Other recommendations madeby the Mid-term review mission were also seriously considered and for the most partimplemented. The Bank also correctly identified the problems of the STC and persistentlysought remedial action by the Government, without significant success in reforming STC.However, the agreed studies to prepare reform proposals were carried out and dialogue onthese proposals is underway (including consideration by a National Task Force and discussionswith the prospective donors for Forestry III).

F. BORROWER PERFORMANCE

23. Implementation. The project was prepared adequately by the Borrower withassistance from FAO/CP and the Bank. The performance of GOSL and the implementingagencies was mixed in the actual implementation of the project for reasons both within andbeyond their control (see para 16). Notwithstanding the many obstacles which hindered smooth

7

implementation, the implementing agencies have generally responded positively to suggestionsmade by the Bank both during supervision and the Mid-term review.

24. Legal covenants. As Table 10 in Part 11 shows, the Borrower met almost all ofthe legal covenants (some partially and some with delays) except the one on establishment ofnew plantations on lands allocated to forestry, which was not complied with. The covenantdealing with establishment of separate profit centres for the STC was partially complied withsince the transfer price on logs to other units was based on cost and not on market price.

G. OUTCOME

25. The project's outcome is rated satisfactory on the basis that the key elements forthe future course of forestry development - environmental management, education and training,and institutional support - were successfully implemented, although the implementation of theother two components - Forest management and Plantation establishment and maintenance -were below appraisal expectations, the latter mainly due to optimistic targets. The overallERR, while lower than the appraisal estimate, is still satisfactory, particularly since it includessubstantial costs for inputs leading to non-quantifyable benefits. It should be noted that theagreement with respect to STC to carry out studies to prepare reform proposals has been metand that it is too early to judge whether the studies will lead to the anticipated reforms.

H. FUTURE OPERATIONS

26. The Government has planned to start the third phase of the forest sectordevelopment program as the first stage of implementing the revised Forestry Sector MasterPlan in line with the new forest policy. A National Task Force consisting of senior officialsfrom the relevant ministries and NGO representatives is currently engaged in formulatingguidelines to implement policy and reform related legislation and procedures. The preparationof the proposed Forestry III project will start when recommendations of the National TaskForce are officially known. The Ministry has discussed with the EU, ODA and NORAD thepossibility for further financing of forestry development and has requested the EU to providetwo consultants to assist the local preparation mission for the Forestry III project.

1. LESSONS LEARNED

27. The main lessons learned from the implementation of the project are:

a) Plantation sites should be clearly identified at appraisal in order to ensureavailability of land for plantations.

b) Over-extended state institutions like the Forest Department (FD) haveperformed poorly, in part due to the lack of incentives to perform efficiently.A realistic set of interventions should be envisaged (including strong privatesector participation) as a result of institutional capacity analysis. This is true atthe level of FD whose operations were hampered by understaffing, outdatedfinancial regulations and over-centralized decision-making.

8

c) The work of the consultants and counterpart staff must be integrated in projectactivities and evaluated systematically to ensure correct transfer of technology.

d) Although not obvious at the time, in retrospect it might have been advisable todelay appraisal of the project until the outcome of the cofinancing was knownso that more information on other donor programs and project priorities wouldhave been available.

e) The project made a positive contribution to improvements in the country'sforest policy and long-term sectoral development strategy. While any reformeffort will have to overcome vested interests, the on-going work of the NationalTask Force, including NGO representatives, is a hopeful indication of theGovernment's recognition of the need for reform.

f) The Bank's concern in this project for addressing important basic policy issuessuch as stumpage charges, self-financing of production plantations,restructuring of the State Timber Corporation (STC), must be continued byfuture donors as an integral part of any future investment in the forestry sectorto allow the technical and other developments from the sector program to yieldpositive results.

9

PART 11: STATISTICAL TABLES

Table 1: Summary of Assessments

A. Achievement of objectives Substantial Partial Negligible Not Applicable

(9') (9') (9') (9')Macro policies El ] El Sector policies E] El El

Financial objectives LI El LIInstitutional development El EI lI

Physical Objectives 13 L LIPoverty reduction El E lI

Gender issues El LI 0EOther social objectives 1 LEnvironmental objectives El E lIPublic sector management L L LIPrivate sector development L] LI LIOther (specify) L El L

B. Project sustainabilitv Likely Unlikely Uncertain

(9') (9') (9')

HighlC. Bank performance satisfactory Satisfactory Deficient

(9') (9') (9')Identification E] LIPreparation assistance 13 13Appraisal L IE lSupervision E LI

HighlyD. Borrower performance satisfactorv Satisfactory Deficient

(9') (9') (9')Preparation E lIImplementation El ECovenant compliance 1 13Operation (if applicable) 1 13

High ly HglE. Assessment of outcome satisfactory Satisfactorv Unsatisfactorv unsatisfactorv

(9) (') (9) (9)

10

Table 2: Related Bank Loans/Credits

Loan/Credit Title Purpose Y ear of Approval Status

Preceding operations

Forestry Sector Review To assist GOSL in formulating a strategy for 1979 Completedthe development of its forestry sector.

Forest Resources To provide Sri Lanka with a strategy for the 1983 PCR issued inDevelopment Project development of its forestry sector. to May 92(Cr.1317-CE) strengthen GOSL's forestry training capability.

establish and manage plantations as well ascarry out silvicultural treatments, and tostrengthen applied research programmes.

Followving operations

Nil

Table 3: Project Timetable

Steps in project cycle 1 Date planned | Date actual/latest estimate

Identification (Executive Project Summary) Oct. 19, 1988

Preparation Feb. 1988 Feb. 1988

Appraisal Oct. 1988 Jan/Feb. 1989

Negotiations April 24-28, 1989 April 24-28, 1989

Letter of development policy (if applicable)

Board presentation June 1989 June 15, 1989

Signing Dec. 6, 1989

Effectiveness June 1, 1990

First tranche release (if applicable) l

Midterm review (if applicable) March 1992 Aug. 1994

Second (and third) tranche release (if applicable)

Project completion Dec.31, 1994 Dec.31, 1996

Loan closing Dec. 31, 1995 Dec. 31, 1996

11

Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual(US$ thousands)

FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97

Appraisal estimate 1:700 6.500 10.300 14.400 18.800 19,800 19,900 19,900

Revised estimate" 7,700 10,500 12,900

Actual 0 1.030 1,800 3,180 5.710 7.150 9,400 11,480

Actual as%of appraisal 0 16 17 22 30 36 47 58

Actual as% of revised estimate 93 90 89

Date of final disbursement June 5, 1997

1' US$7,294,716 cancelled with effect from September 15, 1994.

Table 5: Key Indicators for Project Implementation

1. Key implementation indicatorsin SARF President's Report Estimated Actual

1. Forest Management- Established plantations 60,000 ha 32,810 ha- Natural forests 40,000 ha Nil

2. Plantation Establishment andMaintenance- New plantations 23,000 ha1' 18,979 ha- Young plantation 1,200 ha

Lt Originally, 17,900 ha of new plantation were targeted at appraisal. The target was raised to 23,000 ha with thefinalization of cofinancing arrangements, and later, brought down to 22,220 ha at mid-term review.

12

Table 6: Key Indicators for Project Operation

1. Key operating indicators inSAR/President's Report Estimated Actual

1. Training of RFO 50 157

2. Training of BFO 100 231

3. STC Staff 541

4. Training of others1' 99

5. Technical Assistance- International 347 mm 770 mm- Local 138 mm 230 mm

11 Includes CF, additional CF, DCF, ACF and Research Officers.2/ Includes 36 coupe officers.

Table 7: Studies Included in Project

Purpose as definedStudy at appraisal/redefined Status Impact of study

I. STC Privatization To explore possibilities of privatizing Completed Recommendations partiallysawmill operations and assess the implemented. Six out of 11 efficiency of its management. sawmills closed down and

their equipment sold toprivate parties.

2. Environmental Impact To carry out environmental impact CompletedAssessment assessment for 48,000 ha of natural forest

set aside for economic utilization.

3. National Conservation To carry out a comprehensive and Completed A total of 30 areas have beenReview systematic evaluation of Sri Lanka's identified in the wet zone.

natural forests for biological diversity and Seven conservationsoil and water conservation. management plans (3 in

detail) have been preparedand implementation isreported to have started.

4. Stumpage Charges To rationalize the calculation of stumpage Completed Stumpage fees paid by STCfees. to the Treasury increased

from 10% to about 40% ofsales value of logs.

5. Restructuring STC To review STC for possible restructuring. Completed Recommended removal ofthe current monopolisticprivileges and therestructuring of STC as alimited public company, notimplemented yet.

6. Institutional Development To assess the future forest policy. Completed Recommendations areStudy institutional structure of the forestry selectively used for updating

sector and division of responsibilities the Forest Sector Masterbetween the public and private sectors. Plan.

13

Table 8A: Project Costs

Appraisal Estimate Actual

Project component SLRs M US$ M SLRs M US$ M

1. Forest Management 101.9 3.1 465.8 9.6

2. Environmental Management 42.0 1.3 102.5 2.1

3. Education & Training 186.1 5.7 301.9 6.2

4. Institutional Support 265.2 8.0 822.9 16.9

5. Plantation Establishment 440.0 13.3 564.6 11.6

Total Project Cost 1,035.2 31.4 2,257.7 46.4

Table 8B: Project Financing

Appraisal estimate (US$M) Actual (US$M)

Source

IBRD/IDA 19.9 11.5

Cofinancing institutions1 / 2.8 22.8

Other external sources

Domestic contribution 8.6 12.1

TOTAL 31.3 46.4

1' Since the signing of the Development Credit Agreement, new cofinancing arrangements with FINNIDA, UNDP (to finance theenvironmental management component) and ODA (to finance part of plantation establishment in the up-country and some selectedtechnical assistance inputs) were agreed.

14

Table 9: Economic Costs and Benefits

Variables Appraisal Estimate ICR Estimate

Output from Existing Plantations

- Sawlogs by 1997 120,000 m3 176,600 m3

- Smallwood by 1997 120,000 m' 50,640 m

Output from New Plantations

- Sawlogs by 2019 350,000 m3 29,530 m3

- Smallwood by 2019 117,000 m 146,000 m

Total Production over the Life of Project

- Sawlogs 3.9 M m3 1.12 M m3

- Smallwood 1.3 M m3 0.72 M m 3

Economic Rate of Return (%)

- Forest management 45% 30%- New plantations 13% 6%- Total project 28% 13%

Underlying Assumptions:

- Project life (years) 45 45

- Standard conversion factor 0.75 0.9

- Specific conversion factor for unskilled labour 0.65 0.9

15

Table 10: Status of Legal Covenants

Original fulfillment Revised fulfillmentText Covenant type Present date date Description of

Agreement Reference status covenant CommentsCREDIT 2.02(b) I C Govemment to open and maintain a special account in

dollars.4.01(a) 3 C Project implementing agencies will open and maintain project

accounts.4.01 I C Govemment will have project accounts audited each fiscal

year and furnish to IDA not later than 9 months after end offiscal year.

SCHED. 4 Item (I) 5 C Project coordinators will be appointed.Item (2) 5 C Govemment to establish and maintain a technical assistance

team satisfactory to IDA.Item (3) 5 C Govemment to maintain Forestry Planning Unit and the

Steering Committee.Item (4-a) 5 C 01/01/90 Govemment by Jan. 1, 1990, to complete a reorganization of

the Forest Department.Item (4-b) 5 C 01/0190 Govemment by Jan. 1, 1990, to establish an Environmental

Management Division within the Forest Department.Item (5) 5 CP 01/01/92 Govemment by Jan. 1, 1992, to undertake all forestry Forest Management Plans have been

operations according to forest management plans. prepared for eucalyptus in the up-country.Other plans are in the process of

es completion.Item (6) 5 CP Ne-w plantations will be established on lands allocated to Some plantation sites still awail formal

forestry. transfer to the forest estate.SCIIED. 4 Item (7) 5 CD 01/01/94 Govemment by Jan. 1, 1994, to complete a review of forestry Done with one year's delay.

graduate course and discuss it with IDA.Item (X) 9 CD 03/31/92 Govemment to undertake a Mid-Tenm Review of the project.Item (9) 5 CD Govemment to maintain the University Coordination It took a longer time than estimated.

Committee.Item (10) 2 CP 01/01/90 Govemment to establish a separate profit center for the State Logs are still transferred to sawmills,

Timber Corporation (STC). furniture manufacturers and impregnationplants at cost.

Item (I I) 5 CP 12/31/90 Govemment to complete a study on the privatization of STC Recommendations partially implemented.owned sawmills and discuss findings with IDA, and re- Six of II sawmills closed down and theirexamine the organizational structure. equipment sold to private parties.

Status: C - Complied with Covenant Class:CD - Compliance after Delay I Accounts/auditNC - Not Complied with 2 Financial performance/generate revenue fram beneficiariesSOON - Compliance Expected in Reasonably Short Time 3 Flow and utilization of Project fundsCP - Complied with Partially 4 Counterpart fundingNYD - Not Yet Due 5 Management aspects of the Project or of its executing agency

6 Environmental covenants7 Involuntary resettlement8 Indigenous people

9 Monitoring, review and reporting10 Implementation11 Sectoral or cross-sectoral budgetary or other resource allocation12 Sectoral or cross-sectoral regulatory/institutional action13 Other

Table 11: Compliance with Operational Manual Statements

Statement number and title I Describe and comment on lack of compliance

No deviation from applicable Operational Manual Statements observed.

Table 12: Bank Resources: Staff Inputs

Planned" Revised"' ActualStage of

project cycle

Weeks US$ Weeks US$ Weeks US$

Preparation to 113.9 116,300appraisal

Appraisal 31.2 74,100

Negotiations through 7.7 20,200Board approval

Supervision 124.6 383,900

Completion 9 .0a' -

TOTAL 286.4 594,500

I/ Data not available.2/ Includes only FAO/CP time of 2 staff.

17

Table 13: Bank Resources: Missions

Performance rating

Stage of Month/ Number Days in Specialized Implemen- Develop- Types ofproject cycle year of field staff skills tation ment problems

persons represented" status objectives

Appraisal I Jan/Feb.88 7 21 EC,ECO,FA,FL.FR,SA,SC

Appraisal 2 Nov/Dec.88 3 14 FR.SA,SC -

Supervision I April 90 3 1 5 FR 2 1 M. LC

Supervision 2 July 90 2 7 EC.FR 2 I LC

Supervision 3 March 91 3 19 EC.FR(2) 2 I LC

Supervision 4 Dec. 92 2 14 FR(2) 2 1 LC. M

Supervision 5 May/June 92 1 14 FR 2 1 LC

Supervision 6 Feb.93 4 13 AGFR(3) I I LC

Supervision 7 May/June 93 1 8 FR 2 1 LC

Supervision 8 Oct/Nov.93 9 12 AG.FR(2) + ADB(I), 2 1 LC(mid-term review) ODA(2), UNDP(I),

FINNIDA( I ).FAO( I)

Supervision 9 June/July 9441 4 18 FR(2),TR(]) S HS LC

Supervision 10 Feb/March 95 2 14 AGFR S S LC

Supervision II May/June 95 I 7 FR S S LC

Supervision 1251 Nov.95 I 6 FR S S LC

Completion Nov.96 23 14 FA.FR

" AG = Agriculturalist; EC = Economist, ECO = Ecologist; FA Financial Analyst; Fl = Forest Industries; FR = Forester;SA = Systems Analyst; SC = Silviculturist.

LC Legal Covenants; M = Management.

'/ Combined supervision of Forest Resources Development Project (Cr.1317-CE) and Forest Sector Development Project (Cr.2043-CE).

41 Mid-term economic analysis carried out in September 94 by an economist following mid-term review.

5J Combined supervision of Cr.2043-CE and discussion of the proposed Forestry III project.

18

IMPLEMENTATION COMPLETION REPORT

SRI LANKA

FOREST SECTOR DEVELOPMENT PROJECT (Cr.2043-CE)

Appendix A

Aide Memoire

A. Introduction

1. A joint mission comprising the final supervision team from the World Bank, and anFAO/CP mission for the preparation of the Implementation Completion Report (ICR) visited SriLanka from November 10-22, 1996. After initial meetings with the project staff from theconcerned implementing agencies, field visits were made to selected project sites in theintermediate zone (Kuliyapitiya), the dry zone (Puttalam and A'pura), the up-country (N'Eliyaand Bandarawela), and the wet zone (Matara) areas. The mission had discussions with officialsof the Ministry of Agriculture, Lands and Forestry (MALF), the Forest Department (FD), theState Timber Corporation (STC), the Forestry Unit of the University of Sri Jayawardenepura(USJP) and other donor agencies including ODA, UNDP and FAO. This aide memoiresummarizes the main findings and conclusions of the ICR mission and is subject tomodifications following detailed analysis in Rome. The final aide memoire will be transmittedto the Government later by the Bank in Washington.

2. The mission wishes to thank all concerned staff for the assistance and hospitalityextended to the mission during its stay in the country.

B. The Project Objectives

3. The main objective of the project was to assist the Government to improve theperformance of the forestry sector in line with the economic, social and environmentalrequirements of Sri Lanka by implementing part of a five-year time slice (1990-94) of theForestry Master Plan. This was to be achieved through: (a) the intensive management ofplantations and natural forest; (b) establishment of an Environmental management system; (c)expansion of resource base by establishing new plantations; (d) expanding and augmentingprofessional and technical education and training; and (e) strengthening of the institutional base.The project included five components: (i) Forest Management; (ii) Environmental Management;(iii) Plantation establishment and maintenance; (iv) Education and training; and (v) Institutionalsupport.

4. The Forest Sector Development Project (FSDP) was a follow-up to the Forest ResourcesDevelopment Project which was the first free-standing forestry project financed y the Bank in SriLanka. The first project laid the groundwork for long term sectoral development through thepreparation of the Forestry Master Plan. The FSDP thus became the logical next step in

I

implementing the first Five-Year Investment Program, developed on the basis of the ForestryMaster Plan and further updating this Plan. The project was well conceived and it establishedconcise objectives consistent with sectoral strategy. Moreover, the project design took intoconsideration other forestry programs funded by external agencies such as the AsianDevelopment Bank for the Community Forestry Project and the Overseas DevelopmentAdministration-supported Forestry Project for 1988 to 1994. Project design, however, wasoverly ambitious on new planting and management targets which were set at appraisal withoutproperly analyzing the institutional capacity of the main implementing agency-FD.Implementation experience of FSDP shows that, despite belated improvement in the staffingsituation, the Forest Department still lacks capacity to provide additional staff and land forplantations, a factor beyond FD's control.

C. Implementation Experience

5. The project was delayed by about 18 months mainly due to processing cofinancingarrangements and to a lesser extent because of funding issues. Disbursements gatheredmomentum from FY1992 and by FY1996, over 70% of the revised Credit amount (original sumof $19.9 million less canceled amount of about $7 million) had been utilized. Since June/July1994, supervision ;missions have reported that the implementation status and developmentobjectives were satisfactory. However, outcomes under the five components have been mixed asexplained in para 10. The shortcomings have been identified and for the most part are beingcorrected.

6. Actual Project Costs: The project, as envisaged at appraisal, is expected to becompleted by the extended Credit closing date, i.e. December 31, 1996. When allowance ismade for costs to complete, the total final cost would amount to SLRs2258 million. (Or $43million), representing a 118% cost overrun in nominal rupee terms and 37% in US dollar terms.Actual expenditure is strictly not comparable with the appraisal cost, as the former includesexpenditures due to widening the scope of the project by other donors like ODA.

7. Project Financing: The project financed about 79% of the total actual expenditurecompared to 63% of the project cost at appraisal. IDA provided 31 %, ODA 38%, FINNIDA 5%,UNDP/FAO 6% and the remaining 20% was met by GOSL. IDA Credit of $7 million wascanceled in 1994 to take account of the use of bilateral grants and reduced scope for projectoperations in certain areas due to security problems.

D. Major Factors Affecting the Project

8. The main contributory factors for the implementation delays/shortfalls were:

Factors not generally subject to Government control: These included undependableweather conditions in the dry zone and security problems in parts of the project area.

Factors generally subject to Government control: These included understaffing,outdated financial regulations and centralization of decision-making powers in the Forest

2

Department, delays in release of counterpart funds by the Treasury, delays in forest landassessment and allocation in the dry zone. These have slowed the pace of projectimplementation.

Factors generally subject to implementing agencies' control: These included damageto plantations by fire and animals, optimistic physical targets, slow progress in preparation offorest inventories and management plans of the dry zone natural forest and plantations, and partsof the wet zone forests, delays in procurement of vehicles and equipment, and poor quality ofplanting stock in the dry zone. The combined effect of these have adversely affectedachievement of project targets.

E. Performance of the Bank and the Borrower

9. The performance of both the Bank and the Borrower is generally satisfactory. Both havesatisfactorily carried out project identification and preparation. Appraisal and supervision of theproject by the Bank have received adequate attention. Notwithstanding the many obstacleswhich impeded smooth implementation, the Borrower has generally complied with the covenantsand responded to recommendations made by the Bank which was firm while being friendly andconstructive during its supervision of the project.

F. Assessment of Outcome

10. The overall project outcome is rated as satisfactory and the outcomes of the individualcomponents are briefly summarized in following paragraph.

G. Summary of Findings, Future Operations, and Key Lessons Learned

11. Findings: As in the case of its predecessor, FSDP was, by and large, implementedsuccessfully, but it too experienced implementation difficulties. The most common of thesewere the under-staffing and centralized decision-making powers at the FD head office, delays inallocation of land for plantation in the dry zone, and slow progress in the preparation ofmanagement plans. Despite these delays, the project has made noticeable achievementsparticularly in environmental management and institutional development. The updating of theForestry Master Plan and the formulation of the new forest policy are also significantcontributions under the project. The sustainability of the departmental forests will depend on thelevel of staffing of the FD, complemented by improved and clear working methods, concentratedinstitutional support ;and adequate budgetary resources. This in turn will require a strongpolitical will from the Government to support institutional changes including the restructuring ofthe STC and the involvement of rural communities in resource planning and use, as well aspromotion of private investment in resource expansion and management. The performance ofthe five components are briefly discussed below.

3

Forest Management: The main objective of this component was to prepare management plansfor all plantations and for selected natural forests as a vehicle for improved management. Forvarious reasons, there were serious delays in the preparation of management plans. Mid-termreview stressed the need for early start up of this activity and indicated that these plans need tobe revised every five years on the basis of updated data collected by FSDD. An interimmanagement plan for mahogany has been completed and a forest management plan outline hadalready been circulated among the field staff. There is some reservation among the field staffregarding some prescriptions which need to be clarified. Management plans for eucalyptusplantations are already operational, while those for teak and pine have not yet been prepared.Management plans have so far been prepared mostly by international consultants. This processneeds to be internalized and the local staff involved in the framing of prescriptions.

Environmental Management: The progress under this component, albeit delays, is the bestamong project activities. The Environmental Management Division has been successfullyestablished within the FD. The Environmental Management Division set up within the MALFhas been upgraded as Natural Resources Management and Environmental Division. NationalConservation Review field surveys have been completed. A total of 30 areas have beenidentified in the wet zone. Seven conservation management plans (3 in detail) have beenprepared and implementation is reported to have started. Research needs in environmentalmanagement have been highlighted and some have already been undertaken. Environmentalimpact assessment guidelines have also been prepared and several workshops have beenconducted. Other studies on site assessment, species selection and tree improvement have beencompleted and guidelines circulated. Despite these substantial achievements under thiscomponent, there is still a wide gap between diagnosis and implementation. This needs to bebridged.

Plantation Establishment and Maintenance: Against a target of 23000 ha, about 15858 hawere reportedly planted by the end of 1995 and an additional planting of 3120 ha is expected bythe end of 1996. The original targets were reduced at mid-term review to a total of 22220 ha.The planting program has deviated in the choice of species and also areas. Security has been oneof the main reasons for shortfalls in some areas. Sites selected in the dry zone areas are veryharsh and are scattered over small areas. Overall survival in both the dry and wet zones isreported between 65-90%; however it appears to be overestimated. The quality of seedlingproduction continues to need attention. There are no certified seed sources or seed productionareas. Nursery techniques remain unchanged. There is no provision of soil testing and fertilizersare used both in the nurseries and plantations on account of past practice and no defined need.Water harvesting techniques especially in the dry zones have not been adopted and this musthave had considerable effect on plant survival. Good success has been reported wherecommunities' cooperation has been sought for plantation establishment and maintenance.

Education and Training: At appraisal, it was envisaged that the education of professionalforesters, training of FD and STC staff would be supported under the project. Compared to thetarget of 1 5 students for the forestry MSc course, actual intake has not exceeded 10 until 1996when some 27 students were registered. The main reason for this high intake, as stated by thecourse coordinator, was that 20 students were selected on the assumption that about five woulddrop out as had been the experience in the previous years. However, only one dropped out dueto medical reasons, while another five sponsored students joined the course. The closure of theproject and the consequent funding problem in financing projects (Rs25000 per project) bystudents is likely to affect the continuation of the MSc course. The backlog of training is being

4

cleared and is not likely to be completed by the end of the project. Low attendance is also aproblem and it is ascribed to trainees having to attend disciplinary proceeding and cases. Thefrequent turnover of the teaching staff will be minimized with the recruitment of five permanentlecturers soon.

Institutional Support: Institutional development was planned to be achieved throughstrengthening FSDD, FD and the STC. The Forestry Planning Unit established under theprevious project has been upgraded to Divisional status within the MALF. It provides asatisfactory link between the Ministry and the executing agencies in terms of planning,budgeting and programming. The sector has been redefined through the Forestry Master Planand a new and progressive forest policy has been adopted, which promotes increasedinvolvement of the private sector and communities in resource management, use and investmentfor resource expansion and improvement. The FD has also been strengthened through provisionof vehicles, equipment, training and technical assistance. Staffing constraints of the FD areexacerbated by the excessive time to protect forests from encroachment and illicit felling. Thisactivity along absorbs over 50% of the field staffs' time and even at this level of staff timeinvolvement, the FD is not able to protect the forests effectively. The STC has computerized itsaccounting system and the regional offices have established separate profit centers for differentsegments of operations. As required under the project and the mid-term review, a structuringstudy was carried out. The study recommended removal of the current monopolistic privilegesof the STC and restructuring it as a public company. Action on these recommendations has beenpostponed until the recommendations of the National Task Force are officially known.

12. Future Operations: The Government has planned to start the third phase of the forestsector development program as the first stage of implementing the revised Forestry SectorMaster Plan in line with the new forest policy. A National Task Force consisting of seniorofficials from the relevant ministries and NGO representatives is currently engaged informulating guidelines o implement the policy and to reform the related legislation andprocedures. The preparation of the proposed Forestry III project has therefore been postponed toa later date when the recommendations of the National Task Force will be officially known. TheMinistry has discussed with EU, ODA and NORAD possibility for further financing of theforestry development and has requested EU to provide two consultants to assist the localpreparation mission for the Forestry III project.

13. Key Lessons Learned: The main lessons learned from the implementation of theproject are:

(a) Plantation sites should be clearly identified at appraisal in order to ensure availability of landfor plantations.

(b) Institutional capacity analysis may be needed before a project can be executed. This is trueat the level of FD whose operations were hampered by understaffing, outdated financialregulations, and overcentralized decision-making.

(c) The work of the consultants and counterpart staff must be integrated in project activities andevaluated systematically to ensure correct transfer of technology.

5

(d) Although not obvious at the time, in retrospect it may have been advisable to delay appraisalof the project until the outcome of the cofinancing was known so that more information on otherdonor programs and project priorities would have been available.

(e) The Bank's experience in this project of having addressed some important basic policyissues such as stumpage charges, selfinancing of production plantations, restructuring of STC,must continue to form an integral part of any future investment in the forestry sector to allow thetechnical and other developments from the sector program to yield positive results.

H. Next Steps

14. Upon return to Rome, the mission will prepare a draft ICR in accordance with theBank's Guidelines for submission to the Bank by the end of December 1996. GOSL will prepareits own evaluation and send it to the Bank in due course for incorporation in the final ICR.

Colombo, 22 Nov. 1996

6

IMPLEMENTATION COMPLETION REPORT

SRILANKA

FOREST SECTOR DEVELOPMENT PROJECT (Cr.2043-CE

APPENDIX B

ECONOMIC RE-EVALUATION

A. Introduction

1. This appendix presents the assumptions and results of investments made by theForest Department under the Forest Sector Development Project. Since a Mid-term evaluationhad been carried out by the Bank in 1994, the present evaluation builds on it, updatingphysical and financial values to constant 1996 prices. The economic rates of return (ERR) arere-estimated at 13% (for the project as a whole), 30% (for the forest management component)and 6% (for new plantations). Both direct and indirect costs have been included in estimatingthe ERR for forest management and new plantations. Other main assumptions made in theSAR/Mid-term evaluation and ICR are set out below.

B. Economic Analysis

Appraisal Estimates.

2. At appraisal, the project's ERR was estimated to be 28%, and the ERRs for forestmanagement and new plantations to be 45% and 13% respectively, based on the followingassumptions:

project life of 45 years;

- all values expressed in constant 1989 prices;

- quantifiable benefits to be the output of sawlogs and small wood;

- without the project, the management and silvicultural treatment tocommence five years later than with the project;

- logs adjusted upwards by 30% to arrive at a sawlog price from which thefelling and transport costs (adjusted by 0.75 SCF) were deducted;

- economic stumpage value of small wood (used for pulpwood, poles andfuelwood) arrived at by deducting the felling and transport cost (adjusted by0.75 SCF) from market prices; and

See memo dated September 27, 1994, by H. Lee, SA3AG.

1

economic prices of non-tradeable outputs derived from their financial pricesadjusted by 0.75 SCF, and unskilled labour by a conversion factor of 0.65.

ICR Estimnates.

3. The recalculations of the ERRs follow the SAR methodology, refined by mid-termand ICR mission's evaluation. The main differences are:

- project life of 45 years for teak plantations and 40 years for the mahoganyplantations;

- all values expressed in constant 1996 prices;

- quantifiable benefits to be the sawlogs, small poles and fuelwood;

- without the project, forestry management treatment to commence five yearslater than with the project and the total output of the existing plantationswithout project to be 20% of the 'with project' situation;

- teak price is based on imported sawn timber price of Burma teak, and 25 %deduction made for quality differentials; mahogany, which is consumeddomestically and will not be internationally traded, is derived by applyingthe SCF; the economic stumpage value of other round woods (used forpulpwood, poles and fuelwood) is derived by using the SCF;

- actual investment costs used for project years 1990-96 with pastexpenditures restated in 1996 prices using wholesale price (Table 1); and

- SCF of 0.9 used to convert financial prices to economic values in respect ofnon-tradeable inputs and output, and a conversion factor of 0.9 forconverting financial wage (unskilled labour) into economic wage.

Based on the above assumptions, prices (Table 2), plantation programme (Table 3), and speciesmix and expected yields (Table 4), the current estirnates of ERRs for the project as a whole, forforest management and new plantations are 13%. 30% (Table 5) and 6% (Table 6)respectively. The principal factors which have contributed to the lower ERRs compared withthe appraisal estimates are much smaller production volumes from new plantations thanexpected at appraisal, and the addition of substantial bilateral inputs (in technical assistance,training etc.) which were not included at appraisal and which were concentrated in the areas ofnon-quantifyable benefits..

C. Sensitivity Analysis

Tests have been conducted to assess the sensitivity of the project's ERR to possible adverseimpacts. The results are presented in Table 6. The tests indicate that the project will remainsensitive to reduction of benefits.

SRI LANKA: Forest Sector Development Project (Cr.2043-CE)Implementation Completion ReportAppendix B: Economic Re-evaluation

Table 1. Economic Costs1/ (in SLRs million)

Project Components 1990 1991 1992 1993 1994 1995 1996

Forest Management 6.1 10.5 33.1 34.4 31.3 25.9 58.5

Environmental Management 2.5 34.1 26.5 13.8 7.9 8.4 9.4

Education and Training 7.2 8.0 18.5 23.8 6.7 6.8 10.9

Institutional Support 2 114.4 168.4 161.4 203.6 141.5 260.0 274.1

Plantation Establishment 12.1 35.6 82.8 91.2 94.1 136.7 110.8

Total Historical Costs 142.3 256.6 322.3 366.8 281.5 437.8 463.7

Total Costs in 1996 Prices3/ 238.9 394.5 455.9 482.3 352.5 503.5 463.7

Total Cost in Economic Values4/ 215.0 355.1 410.3 434.1 317.3 453.2 417.3

/ Historical costs updated to 1996 and converted to economic values./ OOATC funds of SLRs664.2 million allocated to institutional support equally over 1990-96.3/ Wholesale prices used to update costs are: 100.0 (1990); 109.2 (1991); 118.7 (1992); 127.7 (1993); 134.1 (1994); 146.0 (1995) and 167.9 (1996).4/ Converted to economic values using SCF of 0.9.

SRI LANKA: Forest Sector Development Project (Cr.2043-CE)Implementation Completion Report

Appendix B: Economic Re-evaluation

Table 2. Financial and Economic Prices of Inputs and Outputs

Item Unit Financial Economic

A. Inputs

- Nursery materials lump sum/ha 100 103.5

- Fertilizer (NPK) kg 10 10.4

- Labour day 105 94.5

- Tractor (D7) hour 1,167 1,200.0

- Disc harrowing hour 417 429.0

- Ripping hour 420 432.0

- Supervision (for new plantations) lump sum/day 100 85.5

- Supervision (for existing plantations) lump sum/day 44 37.6

B. Outputs

1. Sawlogs _

- Teak mr 5,068 47,139

- Mahogany m3 3,322 2,990

- Eucalyptus m3 2,007 1,806

- Dipterocarp m3 1,834 1,650.~~~~~~~~~~~~~~~~~~~~~~~~~

- Cypress m3 1,834 1,650

-Pine m3 502 452

2. Smallwood/poles

- Teak m3 1,166 1,049

- Mahogany m3 339 305

- Eucalyptus m3 600 540

- Dipterocarp m3 510 459

- Cypress m3 510 459

-Pine m3 121 109

3. Firewood m3 71 64

4

SRI LANKA: Forest Sector Development Project (Cr.2043-CE)Implementation Completion ReportAppendix B: Economic Re-evaluation

Table 3. Plantation Establishment Programme

Climatic zones Unit 1990 1991 1992 1993 1994 1995 19961/ Total

Dry zone (Manual) ha - 1,000.0 728.0 950.9 962.5 1,210.0 1,125.0 5,976.4

Dry zone (Mechanical) ha 40.0 12.0 120.4 50.0 50.0 - 272.4

Dry zone (Mounding) ha 30.0 - - - - - 30.0

Up country Eucalyptus ha 42.2 138.25 152.0 48.0 66.8 61.4 508.7

Wet zone (enrichment) ha 225.0 675.0 360.1 150.0 842.3 1,300.0 3,552.4

c,- Wet zone (block pLanting) ha 1,261.0 1,355.0 1,496.6 2,753.5 1,138.9 633.6 8,638.6

Total 2,598.2 2,908.3 3,080.0 3,964.0 3,308.0 3,120.0 18,978.5

1J Targets proposed to be completed by end of 1996.

SRI LANKA: Forest Sector Development Project (Cr.2043-CE)Implementation Corpletion ReportAppendix B: Economic Re-evaluation

Table 4. Output from Existing Plantations Page 1

With Project Unit 1991 1992 1993 1994 1995"/ 1996 1997 1998

1. Volume of Output__

A) Teak

- Sawlogs 5,161 7,186 7,036 5,217 5,217 5,217 5,217 5,217- Small wood & Poles "' 1,842 2,620 1,662 1,640 1,640 1,640 1,640 1,640- Fuelwood 2,883 4,254 5,986 4,868 4,868 4,868 4,868 4,868

8) Eucalyptus Firewood _

- Firewood m3 13,118 19,357 27,238 22,150 22,150 22,150 22,150 22,150

C) Eucalyptus

- Sawlogs 8,103 15,728 10,658 8,466 8,466 8,466 8,466 8,466- Smalt wood & PoLes 2 2,580 3,668 2,271 2,278 2,278 2,278 2,278 2,278- Fuelwood 5,622 8,296 11,673 9,493 9,493 9,493 9,493 9,493

Oz D) Cypress _ _

- Sawlogs m 1,032 1,330 1,407 1,043 1,043 1,043 1,043 1,043- Small wood & Poles m3 466 524 325 305 305 305 305 305- Fuetwood m 1,442 2,127 2,993 2,434 2,434 2,434 2,434 2,434

E) Pine & Softwood

Sawlogs 4,129 5,318 5,629 4,174 4,174 4,174 4,174 4,174- Small wood & Poles 1,486 2,096 1,298 1,400 1,400 1,400 1,400 1,400- Fuelwood m 2,883 4,254 5,986 4,868 4,868 4,868 4,868 4,868

F) Hardwood (45 years)

- SawLogs 159 875 1,550 979 979 979 979 979- Small wood & Poles m1 8 1, - - -

- Firewood m

G) Other Hardwoods

SawLogs 2,938 3,652 2,672 3,130 3,130 3,130 3,130 3,130- Small wood & Poles m 1,106 1,572 973 915 915 915 915 915- Firewood m 2,883 4,254 5,986 4,868 4,868 4,868 4,868 4,868

Total Volume of output 57,833 87,111 95,343 78,228 78,228 78,228 78,228 78,228

SRI LANKA: Forest Sector Development Project (Cr.2043-CE)ImpLementation Comptetion ReportAppendix B: Economic Re-evaluation

Table 4. Output from Existing Plantations Page 2

With Project Unit 1999 2000 2001 2002 2003 2004 2005 2006 2007

1. Volume of Output-_

A) Teak

Sawtogs 5,504 5,504 5,504 5,504 5,504 5,504 5,504 5,504 5,504- Small wood & Poles 3 812 812 812 812 812 812 812 812 812- Fuelwood m 3,563 3,563 3,563 3,563 3,563 3,563 3,563 3,563 3,563

B) Eucalyptus Firewood

- Firewood m -

C) Eucalyptus

- Sawlogs m3 3,048 3,048 3,048 3,048 3,048 3,048 3,048 3,048 3,048- Smatt wood & Potes 3 524 524 524 524 524 524 524 524 524- Fuelwood m 3,038 3,038 3,038 3,038 3,038 3,038 3,038 3,038 3,038

D) Cypress

- Sawtogs m 31 31 31 31 31 31 31 31 31- SmalL wood & Potes '3 15 15 15 15 15 15 15 15 15- Fuelwood m 73 73 73 73 73 73 73 73 73

E) Pine & Softwood

- Sawtogs 8,765 8,765 8,765 8,765 8,765 8,765 8,765 8,765 8,765- SmalL wood & PoLes m' 602 602 602 602 602 602 602 602 602- FueLwood m 5,466 5,466 5,466 5,466 5,466 5,466 5,466 5,466 5,466

F) Hardwood (45 years)

- SawLogs 999 999 999 999 999 909 999 999 999- Smalt wood & Potes 12 12 12 12 12 12 12 12 12

G) Other Hardwoods

-Sawtogs m 31 31 31 31 31 31 31 31 31-Small wood & Poles m'9 9 9 9 9 9 9 9 9-Firewood m'49 49 49 49 49 49 49 49 49

Total Volume of Output 32,541 32,541 32,541 32,541 32,541 32,541 32,541 32,541 32,541

Output volume figures as per actual for the years 1991, 1992, 1993 & 1994. Source: FSDD Status Report, Nov. 1996; MALAF - SRI LANKA.Estimates as according to Economic Model, Managing Existing Ptantations, WB Office Memorandum dated September 27, 1994.

SRI LANKA: Forest Sector Development Project (Cr.2043-CE)Implementation Completion ReportAppendix B: Economic Re-evaluation

Table 5. Costs and Benefits from Existing Plantations (in Rs million) Page 1

'~~~ - i / - . -Production Cost17 Unit Value 1990 1991 1992 1993 1994 1995" 1996 1997 1998

Rs million

1. Plantation Management (Labour)

A) Teak 0.000095 - 2.4 2.2 2.6 2.5 3.6 2.7 2.7 2.7

8) Eucalyptus Firewood 0.000095 0.2 0.6 0.2 0.5 0.7 0.5 0.5 0.5

C) Eucalyptus Logs 0.000095 0.3 0.9 0.3 0.8 1.0 0.7 0.7 0.7

D) Cypress 0.000095 0.1 0.2 0.1 0.2 0.2 0.2 0.2 0.2

E) Pines 0.000095 - 0.3 0.9 0.9 1.4 1.4 1.7 1.7 1.7

F) Hardwood (45 years) 0.000095 - - - - - - -

G) Other Hardwoods 0.000095 - 0.2 0.6 0.2 0.6 0.7 0.5 0.5 0.5

co Sub-Total - 3.5 5.4 4.3 6.0 6.6 6.3 6.3 6.3

2. Direct Investment Costs 10.2 16.1 46.8 45.2 39.2 29.8 58.5

3. Apportioned Sh ies (70%) of 14.6 227 204 222 136 221 207Indirect Costs

4. Recurrent Cost 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1

Total Cost (rounded) 157 248 257 273 182 259 273 7.4 7.4

Value of Output 0 272 388 370 278 278 278 278 278

Without Project 9 0 54 78 74 56 56 56 56 56

Incremental Value of Output 0 218 310 296 222 222 222 222 222

Incremental Net Benefit (157) (30) 53 23 40 (37) (51) 215 215

Production cost information for years 1991-96, source FSDD - Status Report, Nov. 1996; Sri Lanka, HALF.2/ Production cost estimated as per model used: Managing Existing Plantations, W.B., Office Memorarsum, Sept. 27, 1994.

Indirect costs are expenditures on envirorwnment management, education and training, and institutional support.4/ Without the project, benefits were assumed to be about 20% of the "with project" situation.

SRI LANKA: Forest Sector Development Project (Cr.2043-CE)Implementation Completion ReportAppendix B: Economic Re-evaluation

Table 5. Costs and Benefits from Existing Plantations (in Rs million) Page 2

Production Cost Unit VaLue 1999 2000 2001 2002 2003 2004 2005 2006 2007-2035Rs million (per year)

|1. Plantation Management (tabour)

A) Teak 0.000095 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8

B) Eucalyptus Firewood 0.000095 - - - - - - - -

C) Eucalyptus Logs 0.000095 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2

D) Cypress 0.000095 - - - - - - - -

E) Pines 0.000095 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

F) Hardwood (45 years) 0.000095 - - - - - - - -

'D | G) Other Hardwoods 0.000095

Sub-Total 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5

2. Direct Investment Costs

3. Recurrent Cost 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1

Total Cost (rounded) 3 3 3 3 3 3 3

Value of Output 273 273 273 273 273 273 273 273 273

Without Project 55 55 55 55 55 55 55 55 55

Incremental Value of Output 218 218 218 218 218 218 218 218 218

Incremental Net Benefit 215 215 215 215 215 215 215 215 215

ERR = 30%

SRI LANKA: Forest Sector Development Project (Cr.2043-CE)Implementation Completion Report

Appendix B: Economic Re-evaluation

Table 6. Establishment of New Plantations Page 1

Item 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Costs (SLRs million)

Establishment& Maintenance - 14.40 46.50 53.60 70.40 80.53 79.30 61.00 18.20 5.80costs

Direct (Remaining) Investment 20.0 40.6 70.5 66.4 47.6 76.5 31.7 - - -

costs

Apportioned Share (20%) of 41.0 64.7 58.0 63.3 39.3 63.3 58.7 - -

indirect costs-'

Thinning & Marking 1.28 3.85

Sub-Total 61.0 120.0 175.0 183.0 157.0 221.0 170.0 61.0 19.5 9.7

2. Volume of Output (m3)

A) Teak- Sawlogs- Smallwood/poles- Fuelwood 1454

B) Eucalyptus- Sawlogs- Smallwood/poles- Fuelwood 3754 4564

C) Pines-Sawlogs

- Smallwood/poles- Fuelwood 521 270

D) Mahogany- Sawlogs- Smallwood/poles- Fuelwood

E) Mixed- Sawlogs- Smallwood/poles- Fuelwood

3. Benefits (Returns) (SLRsmillion)

Sawlogs

Smallwood & Poles

Fuelwood 0.27 0.71

Sub-Total 0.27 0.71

Net Benefits (rounded) -61.0 -120.0 -175.0 -183.0 -157.0 -221.0 -170.0 -61.0 -19.2 -9.0

i/ Indirect costs comprise expenditure on environment management. education and training., and institutional support. These are apportioned: 70% to forestmanagement and 20% to plantations. The remaining 10% represents expenditure on the master plan which extends beyond project scope analysis.

10

SRI LANKA: Forest Sector Development Project (Cr.2043-CE)Implementation Completion Report

Appendix B: Economic Re-evaluation

Table 6. Establishment of New Plantations Page 2

Item 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Costs (SLRs million)

Establishment & Maintenancecosts

Direct (Remaining) Investmentcosts

Apportioned Share (%) ofindirect costs

Thinning& Marking 3.96 2.92 6.18 4.29 4.35 0.3 1.01 0.55 0.85 1.46

Sub-Total 4.0 2.9 6.2 4.3 4.4 0.3 1.0 0.6 0.9 1.5

2. Volume of Output (mi)

A) Teak- Sawlogs- Smallwood/poles 1356 528 3377Fuelwood 558 3574 1909 6336 916 351 2252

B) Eucalyptus- Sawlogs 3134- Smallwood/poles 3108 3778 5948 2120 5374 10047-Fuelwood 7185 2560 6492 5222 4662 5668 8922 3179 8061 10369

C) Pines- Sawlogs- Smallwood/poles 1595 827 1102- Fuelwood 360 684 354 472

D) Mahogany- Sawlogs- Smallwood/poles- Fuelwood

E) Mixed- Sawlogs- Smallwood/poles 3030 2722 2938 4228-Fuelwood 4320 4665 6711 5829 3182 4544 4082 4408 6341

3. Benefits (Returns) (SLRsmillion)

Sawlogs 5.66

Smallwood & Poles 1.77 2.13 4.72 2.39 4.80 10.91

Fuelwood 0.76 0 50 1.07 0.83 0.95 0.39 0.95 0.64 0.82 1.21

Sub-Total 0.76 0.50 1.07 0.83 2.72 2.52 5.67 3.03 5.62 17.78

Net Benefits -3.2 -2.4 -5.1 -3.5 -1.7 2.22 4.7 2.4 4.7 16.3

11

SRI LANKA: Forest Sector Development Project (Cr.2043-CE)Implementation Completion Report

Appendix B: Economic Re-evaluation

Table 6. Establishment of New Plantations Page 3

Item 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Costs (SLRs million)

Establishment & Maintenancecosts

Direct (Remaining) Investmentcosts

Apportioned Share (%) ofindirect costs

Thinning & Marking 0.91 1.28 0.16 0.32 0.21 0.45 0.34 0.42 0.86

Sub-Total 0.9 1.3 0.2 0.3 0.2 0.5 0.3 0.4 0.9

2. Volume of Output (m3)

A) Teak- Sawlogs 358 137 880- Smallwood/poles 2105 5987 2147 824 5277-Fuelwood 1403 3992 1074 412 2639

B) Eucalyptus-Sawlogs 3810 5998 2138 5419 4443- Smallwood/poles 6858 10796 3847 9754 7998-Fuelwood 4572 7198 2564 6503 5332

C) Pines-Sawlogs 1454 754 1006-Smallwood/poles 2181 1131 1508-Fuelwood 1212 629 838

D) Mahogany-Sawlogs- Smallwood/poles- Fuelwood

E) Mixed- Sawlogs- Smallwood/poles 3672 2004 6509 5848 6313 9083-Fuelwood 5508 3007 5326 4784 5166 7432

3. Benefits (Returns) (SLRsmillion)

Sawlogs 6.88 11.49 4.20 10.24 8.02 16.88 - 6.46 41.48

Smallwood & Poles 7.60 13.26 2.19 5.43 4.32 5.24 2.68 3.76 9.71

Fuelwood 0.73 0.99 0.20 0.47 0.34 0.41 0.31 0.36 0.64

Sub-Total 15.21 25.74 6.59 16.14 12.68 22.53 2.99 10.58 51.83

Net Benefits 14.3 24.4 6.4 15.8 12.5 22.0 2.7 10.2 51.0

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SRI LANKA: Forest Sector Development Project (Cr.2043-CE)Implementation Completion Report

Appendix B: Economic Re-evaluation

Table 6. Establishment of New Plantations Page 4

Item 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Costs (SLRs million)

Establishment & Maintenancecosts

Direct (Remaining) Investmentcosts

Apportioned Share (%) ofindirect costs

Thinning & Marking 0.58 0.90 0.30 0.32 0.21 0.27 0.63 0.42 0.43 0.83

Sub-Total 0.6 0.9 0.3 0.3 0.2 0.3 0.6 0.4 0.4 0.8

2. Volume of Output (m3)

A) Teak-Sawlogs 548 1559 2104 804 5170- Smallwood/poles 3289 9356 1052 404 2585-Fuelwood 1645 4678 1052 404 2585

B) Eucalyptus-Sawlogs 38198 46434 73102 26050 66044 54148-Smallwood/poles 19099 23217 36550 13025 33022 27074-Fuelwood 19099 23217 36550 13025 33022 27074

C) Pines-Sawlogs 11521 5973 7965- Smallwood/poles 5760 2987 3982-Fuclwood 5760 2987 3982

D) Mahogany-Sawlogs 1175 9958 5234 8804 748 9972 9389 4935 8302- Smallwood/poles 914 7745 4071 6848 582 7397 4268 2243 3774-Fuelwood 522 4425 2326 3913 332 4341 3414 1795 3018

E) Mixed- Sawlogs 4175 3751 4049 5826- Smallwood/poles 7890 4308 5569 5002 5399 7769-Fuelwood 6456 3524 4175 3751 4049 5826

3. Benefits (Returns) (SLRsmillion)

Sawlogs 25.83 151.20 116.33 151.27 49.73 121.50 233.67 34.26 59.32 278.13

Smallwood & Poles 7.07 23.00 15.23 21.41 9.12 18.00 20.53 3.59 3.56 7.42

Fuelwood 0.52 2.15 1.96 2.74 1.08 2.13 2.35 0.46 0.40 0.73

Sub-Total 33.42 176.35 133.52 175.42 59.93 141.63 256.55 38.31 63.28 286.28

Net Benefits 32.8 175.A 133.2 175.1 59.7 141.3 256.0 37.9 62.9 285.2

13

SRI LANKA: Forest Sector Development Project (Cr.2043-CE)Implementation Completion Report

Appendix B: Economic Re-evaluation

Table 6. Establishment of New Plantations Page 5

Item 2030 2031 2032 2033 2034 2035

Costs (SLRs million)

Establishment & Maintenance costs

Direct (Remaining) Investment costs

Apportioned Share (%) of indirect costs

Thinning & Marking 0.58 0.95 0.42 0.49 0.28 0.48

Sub-Total 0.6 0.9 0.4 0.5 03 0.5

2. Volume of Output (m3)

A) Teak- Sawlogs 3222 9168- Smallwoodlpoles 1611 4584- Fuelwood 1611 4584

B) Eucalyptus- Sawlogs- Smallwood/poles- Fuelwood 1334 1643 2586 920 2326

C) Pines- Sawlogs 5973 7965- Smallwood/poles 2987 3982- Fuelwood 2987 3982

D) Mahogany- Sawlogs 7061 11128 23472 12338 20754 17654- Smallwood/poles 3210 5308 12803 6730 11320 9629- Fuelwood 2568 3794 6401 3365 5660 4815

E) Mixed- Sawlogs 5061 2763- Smallwood/poles 6748 3684- Fuelwood 5061 2763

3. Benefits (Returns) (SLRs million)

Sawlogs 181.35 469.99 701.18 36.89 62.05 7955.34

Smallwood & Poles 14.37 8.11 3.90 2.05 3.45 136.42

Fuelwood 0.59 0.80 0.51 0.38 0.42 13.8

Sub-Total 196.31 478.9 74.59 39.32 65.92 7295.0e

Net Benefits 195.7 478.0 74.2 38.8 65.6 7294.5

ERR = 6%

' Although final felling would extend beyond Year 2035. for purposes of analysis. a deduction of 100/0 is made on total harvests in Years2036-41.hypothetically assuming all felling in Year 2035.

14

IMPLEMENTATION COMPLETION REPORI

SRI LANKA

FOREST SECTOR DEVELOPMENT PROJECT (Cr. 2043-CE)

APPENDIX C

GOVERNMENT'S COMMENTS

1. Project Description

The project was designed to: (a) strengthen the management of forests and establishedplantations, and inventory of additional natural forests and young plantations for managementpurposes; (b) establish an environmental management system to ensure conformity of forestryoperations with environmental guidelines; (c) establish and maintain 17,900 ha of newplantations; (d) expand and augment resources for professional and technical education andtraining facilities; and (e) strengthen the Forestry Planning Unit of the Ministry of Lands,Irrigation and Mahaweli Development, reorganize the management and strengthen the fieldorganization of the Forestry Department, and upgrade information and data processing at theState Timber Corporation. The project also includes an applied research program consisting ofspecies trials, as well as technical assistance, civil works, vehicles, equipment, materials, andadditional staff to be used for the project.

Through the project modern, economically, environmentally and scientifically sound forestrypractices would be introduced in Sri Lanka. These practices would increase the production ofwood, provide greater protection to the environment, and crate employment opportunities forthe rural population. Altogether they would allow the country to meet most or all of itsrequirements for wood and wood products over the long run. The investments to be madeunder the project do not convey any major risk. However, implementation might fall short ofexpectations if the current political situation does not improve in the near future.

2. Project Costs

IDA allocation for the project was SDR 15.5 (US 19.9 million equivalent). FINNIDA agreedto provide US$ 2.8 million as a grant under a separate agreement, while the Government of SriLanka agreed to provide US$ 8.7 million. However, after the agreement was entered, otherdonors (ODA, UNDP/FAO) pledged support towards the project. The reduction of theplantation program in the dry zone and the delay in preparing management plans in the wetzone as a result of the conservation review being carried out resulted in further savings of IDAproject funds. Under these circumstances it was mutually agreed to cancel US$ 7 million fromthe IDA credit.

The total project expenditure as at February 1997 is approximately US$ 11.16 million.

1

3. Progress of Project Components

A summary of progress of the main aspects in the project components are given below:

Environmental management: The section on environment management within the ForestDepartment was established and has contributed towards integrating the environmentalmanagement aspects in forestry development activities. A conservation review in the wet anddry zones of the country were completed. Seven Management plans for areas in the wet zonehave also been prepared and are due to be implemented. A data base on environmentalinformation management system has been set up at the Forest Department. In addition,development of EIA guidelines, guidelines for harvesting and logging have been developed.

Forest management: Two management plans for up-country Eucalyptus plantations have beenprepared and implemented. Work on preparation of management plans for teak and pinecommenced although not fully completed. An interim management plan for mahogany wascompleted and is being implemented.

Plantation establishment and maintenance: The original target of plantation establishment of23,000 ha had to be considerably reduced in view of the problems encountered in the dry zoneand also the non-accessibility in certain areas due to security reasons. However, the originalplanting targets were over ambitious in comparison to the capacity of the Forest Department.The total extent planted during the project period is 18,894 ha throughout the country.

Education and training: The MSc in Forestry at the University of SJP has so far trainednearly 69, including 11 from the Forest Department and 2 from the private sector. The courseis drawing more students particularly more independent students. The intake of students foracademic year 1996 is 27. A new BSc. course in Environmental Science was also introducedand a new department of forestry was created. The university is well equipped with thenecessary infrastructure and with the increase in intake of independent students the coursecould be sustainable in the future. The Sri Lanka Forestry Institute is also equipped with allnecessary infrastructure required for training technical forestry personnel.

Institutional support: The Forestry Sector Development Division (FSDD) of the ministry hascontributed much towards the development of the sector in terms of policy and planning. Thedevelopment of the Forestry Sector Master Plan (FSMP) and a National Forestry Policy wereinitiated and coordinated by the FSDD. The FSDD also initiated the necessary legislativechanges required for the forestry sector to implement the new policy and the FSMP. Theestablishment of the environmental management division in the Forest Department is animportant aspect. The department was also able to increase its field cadre and other requiredstaff so that the capacity for carrying out the expected activities could be increased.

4. Obligations under the loan agreement

The government came into several agreements during negotiations, as per Appraisal Report ofMay 17, 1989.

All agreements were complied with except for: (i) all forestry operations will be undertakenaccording to management plans, which are partially completed; (ii) establishment of new

2

plantations on lands allocated for forestry, maps are being prepared at present. However, thismatter will be taken care of with the establishment of the National Forest Estate.

5. Comments

One of the most important aspects of the project was the activities performed in respect ofenvironment management. In addition, activities relating to forest management, plantationestablishment and maintenance, forestry education have contributed to the development of thesector. However, the progress made in the project was overshadowed by the IDA withdrawalfrom the forestry sector, having on many occasions consented to continue to assist the sectoractivities. The sudden withdrawal with short notice has hampered the systematic developmentof the sector to a great extent.

3

MAP SECTION

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IMAGING

Report No.: 16690Type: ICR