World Bank Document · 2016. 7. 13. · cost of local expenditures. The Mahaweli TA Project was cofinanced with an EEC Special Action Credit of US$2.0 million equivalent. Like the

Document of

The World Bank

FOR OFFICIAL USE ONLY

Repon No. 7336

PROJECT PERFORMANCE AUDIT REPORT

SRI LANKA

MAHAWELI GANGA DEVELOPMENT PROJECT II (CREDIT 701-CE)MAHAWELI GANGA TECHITCAL ASSISTANCE PROJECT (CREDIT 979-CE)

June 30, 1988

Operations Evaluation Department

This document bas a resticted distibuion and may be used by recipients only in the perfonnance of.~ ~ .. . ., . . . .- S

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WEIGHTS AND MEASURES

Metric System

CURRENCY EQUIVALENTS

Appraisal Year Ave. (1973) US$1.00 - (Rupees) Rs 6.40Intervening Year Ave. US$1.00 - Rs 14.72Completion Year Ave. (1987) US$1.00 - Rs 30.62

ABBREVIATIONS AND ACRONYMS

AMP = Accelerated Mahaweli ProgramCECB = Central Engineering and Consultancy BureauCMD = Bank's Commodity Markets DivisionEEC = European Economic CommunityFAOICP - Food and Agriculture Organization/World Bank Cooperative ProgramGibb = Sir Alexander Gibb and Partners (UK consulting firm)GOSL - Government of Sri LankaHTS = Hunting Technical Services, Ltd.1/ICB - International Competitive BiddingIDA = International Development AssociationISS Implementation Strategy StudyJVMTD = Joint Venture Mahaweli Transbasin Diversion2/LCB = Local Competitive BiddingMASL = Mahaweli Authority of Sri Lanka (previously Mahaweli Dev. Auth.)MDB = Mahaweli Developnent BoardMEA = Mahaweli Economic AgencyMECA = Mahaweli Engineering and Construction AgencyMGDP = Mahaweli Ganga Development ProgramNCRB = North Central River BasinNEDECO = Netherlands Financed Consulting FirmNWDZ = Aorthwest Dry ZonenlED = Operations Evaluation DepartmentOFC = Other Field CropsO&M = Operation and MaintenancePCR = Project Completion ReportPPAM 5 Project Performance Audit MemorandumPPAR 5 Project Performance Audit ReportRPM 5 Resident Project ManagerRVDB = River Valley Development BoardSEDZ Southeast Dry ZoneWMP = Water Management PanelWMS 5 Water Management Secretariat

FISCAL YLAR

January 1 - December 31

)/ United Kingdom consulting firm, in association with Sir Alexander Gibb andPartners and Huszar Brammah and Associates.

2/ Consortium comprising Electrowatt Engineering Services Ltd., Zurich,Salzgitter Consult GmbH, Salzgitter, and Agrar-und Hydrotechnik, Essen.

FOR OMCAL USE ONLYTHM WORLD BANK

Washington. D.C 20433 1U.S

Oibe of OlDt.cuCwatIOpswatm lvaht.n

June 30, 1988

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Performance Audit ReportSri Lanka Mahaweli Ganga Development II Projectand Mahaweli Ganga Technical Assistance Project(Credits 701- and 979-CE)

Attached, for information, is a copy of a report entitled 'ProjectPerformance Audit Report: Sri Lanka - Mahaweli Ganga Development IIProject and Mahaweli Ganga Technical Assistance Project (Credits 701- and979-CE)" prepared by the Operations Evaluation Department. The PCRs wereprepared by the Asia Regional Office on the basis of PCRs prepared by theBorrower.

Yves Rovani

by Graham Donaldson

This document has a restncted distribution and may be used by rocipients only in the performanceof their official duties. Its contents may not otherwise be discksed without World Dank authorization.

FOR OMICUL USE ONLY

PROJECT PERFORKANCE AUDIT REPORT

SRI LANKA

MAaAWELI GANGA DEVELOPMENT PROJECT II (CREDIT 701-CE)MNAHWELI GANGA TECHNICAL ASSISTANCE PROJECT (CREDIT 979-CE)

TABLE OF CONTENTSPage No.

Preface ~~.... *.* ** *......*.................... i Basic Datsahet $Evaluation Suiay vom . .ooo .. Proy . . .. v$$

PROJECT PERFORMANCE AUDIT MEMORANDUM

I. BACKGROUND AND SETTING ...... ... ..................... ..... 1Ao Introduction ooo... 1B. Economic Development ... *... ........... 00 9-............. 2C. Setting and Context .. ***......*** * *0.....*.*...0.0000 3

II. IRRIGATION AND MAHAWELI GANGA DEVELOPMENT ... o....*........ 4A. Irrigation Sector ................ o..oo.*.*..........*.*.... 4B. The Mahsaveli Ganga Development Program..*#........... 6

III. PROJECT IMPLEMENTATION - MAHAWELI GANGA DEVELOPMENT II ... 8

A. Project Formulation ........... ...... 8B. Project Implementation ....... ... . ............ *. 9C. Project Administration ............................. .. 10D. Project Impacto........................................ 10

IV. PROJECT IMPLEMENTATION - MAHAWELI TA PROJECT .......... o... 11A. Project Formulation .... 11B. Project Implementation and Impact ................... 12

IV. MAIN FINDINGS AND ISSUES... .. ........................... .. 13

A. The Second Dimension of Sustainability ............... 14B. Bank Supervision ................. ..... .. ........ .. 15C. Civil Works Contractors .. . ........... ..... ...... . 16

PPAM Annexes

1. Sri Lanka Lending Program ........................... . 192. OED Project Evaluation ............................ .. 223. Borrower Comments.......................... 23

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authofiation.

PROJECT COMPLETION REPORT (MAHAWELI GANGA DEVELOPMENT II)

I. lackgroundo- .................................... 33II. Project Processing ........... *.*..* ....... .. 34III. Implementation ............................................... ........ 41IV. Organization and Manrgement ................................. 53V. Project Impact ......................................................... 57VI. Economic Analysis..*.................................. ..... 62VII. Suimmary and Conclusions. .................................... . 63

PCR Tables

1. Cultivation Loans in H4 Area ....................... 652. Project Cost ..............................a ..... .... 663. Crop Areas in H4 and H5 ... 5....................... 674. Alternative Estimates of Areas, Yields and Production....

of Paddy in all New Areas of System H .............. to 685. Estimated Crop Areas and Crop Production in H4 and

H5 Areas ................. .. ..... . 696. SAR and Revised Estimates on Crop Areas and Crop

Production in H4 and H5 Areas .................... 707. Crop Inputs per Acre ........... ............. . 718. Financial and Economic Prices ...................... 729. Budget for Farm of 2.5 aC ......................................... . 7310. Economic Cash Flow, H4 and H5 Areas ..... .................. 74

PROJECT COMPLETION REPORT (MAHAWELI GANGA TECHNICAL ASSISTANCE)

I. Project Data ......... *.......... . .......... .................to... 77II. Project Background ........... . . *. ... ............ . .......... . 71III. Project Costs and Financing t..........................to. 79IV. Project Undertakings and Results .... ..................... 80

Transbasin Diversion Study ........................ 80Minipe Right Bank Canal Review ........................... 81Design of Infrastructure in System C ..................... 81Support for Other Studies/Investigations ................. 82Training .............. ....... .... ......... ................. 82Performance of Consultants ............... ................ 83

V. Legal Undertakings and Compliance.o.......... ............ 83VI. IDA Supervision o*......... ....... 00..... ;-.... 84VIIo Conclusions to.................... ....0000 .............. ............ 84

MapsIBRD 14076R Agro-Ecological RegionsIBRD 13477R2 Mahaweli Ganga SchemeIBRD 11908R1 Mahaweli Ganga Development Project II


SRI LANKA

.AHAWELI GANGA DEVELOPMENT PROJECT II (CREDIT 701-CE)MAHAWELI GANGA TECHNICAL ASSISTANCE PROJECT (CREDIT 979-CE)

PREFACE

This is a performance audit of two Mahaweli development projectsin Sri Lanka. Credit 701-CE in the amount of US$19.0 million was approvedin April 1977 for the Mahaweli Ganga Development Project II (Mahaweli II).The last disbursement was made on February 6, 1986 followiug extensions ofthe closing date from June 30, 1983 to June 30, 1985. A total of US$7.69million was cancelled on February 6, 1986. Credit 979-CE in the amount ofUS$3.0 million was approved in January 1980 for the Mahaweli TechnicalAssistance Project (Mahaweli TA Project). It was originally expected to becomple':ed in 1982 and closed in September 1982 but the closing date wasextended three times, to September 1985, and the credit account was leftopen thereafter until June 1986. Extensions were granted to financeadditional urgent studies requested by Government. The final disbursementwas made on May 14, 1986 and the remainder of the IDA credit for a total ofUS$1.1 million cancelled.

Both Mahaweli projects benefitted from cofinancing. Mahaweli IIwas cofinanced by Canada (an interest-free loan of US$6.0 millionequivalent), the Netherlands (US$5.0 million equivalent), UK (a grant ofUS$7.2 million equivalent) and USA (US$5.0 million). The contributions byCanada, UK and USA were for tied procurement of equipment and forconstruction of rural works under parallel financing arrangements. TheNetherlands contribution was untied in joint financing with IDA.Subsequently, a further contribution of 2 million Units of Account (aboutUS$2.4 million equivalent at the time) was granted by the Commission of theEuropean Communities to help the Government of Sri Lanka (GOSL) defray thecost of local expenditures. The Mahaweli TA Project was cofinanced with anEEC Special Action Credit of US$2.0 million equivalent. Like the IDACredit it was extended three times. About US$280,000 equivalent of the EECSpecial Action Credit was ultimately cancelled.

The audit report consists of an audit memorandum prepared by theOperations Evaluation Department (OED), a Project Completion Report (PCR)on the Mahaweli II Project dated March 1987 prepared by the former Irriga-tion I Division in the South Asia Projects Department on the basis of adraft project completion report dated June 1984, which was prepared by thestaff of the Planning and Monitoring Unit of the Mahaweli Authority of SriLanka and a PCR on the Mahaweli TA Project dated June 30, 1986 prepared bythe same division also on the basis of a draft PCR prepared by theBorrower. The audit memorandum is based on a review of the Staff Appraisal

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Report for the Mahaweli II Project (Report No. 1487a-CE dated March 31,1977); the President's Reports (Mahaveli II: No. P-2021-CE dated April 7,1977; Mahaweli TA: No. P-2686-CE dated January 10, 1980); the CreditAgreements (for Mahaweli II dated June 27, 1977; and for Mahaweli TA datedApril 16, 1980); and the PCRs. Correspondence with the Borrower andinternal Bank memoranda on project issues as contained in relevant Bankfiles have also been consulted, and local representatives of cofinancersand Bank staff associated with the projects have been interviewed.

An OED mission visited Sri Lanka in July'August 1987. Discussionswere held with project and Government officials and project beneficiarieswho were interviewed during visits to project sites. The informationobtained during the mission was used to test the validity of theconclusions of the PCRs.

The audit concurs with the principal pcints made in the two PCRs.Points discussed in the audit memorandum have been selected because oftheir relevance and importance for these and other Bank-supported projects.

The draft report was sent to the Borrower and cofinanciers fortheir comments on May 24, 1988. Corments received have been attached tothe PPAK as an annex.

The valuable assistance provided during the preparation of thereport by the Government of Sri Lanka and the executing agencies and thehospitality received during the field trips is gratefully acknowledged.

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SRI LAKA

VAHAWELI GANGA DEVELOPMENT PROJECT It(CREDIT 7M1-CE)

BASIC DATA SHEET

KEY PROJECT DATAActual or Acul as X

Appraosal Current AppraisalEstimate Estimt Estmate

Total Project Cost (US mlillton) e9.e 84.9 195Credt Amount (US$ milloin) 109 11.08 aCo-financing (USS million)Canad 6.0 0.0 legThe Netherlands 5. 4.7 95United Kingdom 7.2 6.4 90United States 6.0 4.2 e6European Economic Community - 2.2 1N

L to Physical Componenta Completed 96/92 06/88Proportlon then Comploted (X) 100 100Economic Rate of Return (M) 21 -1Number of Direct Benfticieloro 76.9 790,96

STAFF IWrTS (Staff Weeks)

FY72 FY7 FY77 FY7Y FY79 FY69 FY01 FY82 FY68 FY6 FYj FY86 FY87

Pr.apprateal 62.8 25.0 1.1Appraisal 86.6 70.8Negotiation 6.7Supervision .2 0.4 88.6 20.9 24.6 21.0 15.8 12.8 18.9 15.6 5.6 .2Other .5 .6 1.1 .8

Total .2 62.8 25.0 70.2 00.1 U8.6 20.0 24.8 22.1 16.1 12.8 18.6 15.6 5.8 .2

CUULATIVE DISSURSEMENTSFY76 FY79 fY8 FY1 FY82 FYS0 FY84 FY8 FY8

Appraisal Estimte (US$ million) 1.6 6.4 12.6 16.6 19.0Actual (USS million) - 9.1 1.6 4.9 6.0 0.2 9.6 10.4 11.8Actual a ot Approial 0 2 12 29 82 48 86 66 6fDate of Final Disbursemnt February 6, 1906

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PROJECT DATESOn ginal Plan Actual

Identification R port 09/72Negotiations 08/77Board Approval 04/21/7Crilt Slgning 06/27/7Credit Eft.ti veness 10/89/77 12/20177Credit Closing 0J80//oS 63/89/35

MISSION DATACofinancelor ParticipatingIn Su4ervlsion Misslons

Specialitr- Perform- TypesDate No. of tlona Nether- once of

Mission (mo.1yr.) Persona Reporsented Canada lands UK USA Rating Trend Probloms/lb Lc Id

Project Prep. 11-12/78 1 EngProject Prep. Wr.4 1 EngProject Prop. 11-12/74 4 Eng, Ag, Ec(2)Project Prep. 98/76 6 Eng, Ag(4), EcFiret Appr. 04-65/75 8 Eng(8), Ag(4), EcPost Appr. 61/76 2 Ea, AgSecond Appr. 46-0/70 4 Ec(2), Eng, AgSupervision 1 68.-4/77 2 Eng, Ag No No yes No 1Supervision 2 is/m 2 Eng, 0 Yes Yee Yes Yes 1 2 PSupervision 8 9840/76 2 Engs Fin Yes Yes Yea Yes 8 2 U,T, PSuper-vision 4 94-45/79 1 Eng Yes Yen Yes Yes 2 1 M,TSupervlsion C 11/79 2 Eng, Ag Yes Yes Yes Yes 2 1 M,TSupervision 6 69/60 1 Eng Yes No Yes Yes 2 2 M,FSupervision 7 8-04/61 2 Eng, Ea Yes No Yes Yes 2 2 ,LSupervilsion 8 18/32 2 Eng, Ee Yes You Yes Yes 2 1 LSupervision 9 02/81 2 Eng, Ag Ye Yes Yes Yoe 2 2 HSuperviston 10 12/O8 8 Ag, Ec, Eng No Yes Yes Yes 2 2 HSupervision 11 61/85 2 Ag, Ee No Yes Ye No 2 2 U

OTHER PROJECT DATA

Borrower Gove rnmn t of Sri Lanka (GOSL)Executing Ageney Mahael1 Developmont Board (MDO)

Precedins Pr--lect Follow-on Projeets

Name MahnreI Mahaw lI TA Mahae IlI II Mhaw 1I IVCredit Number Cr. 174/Ln. 68 Cr. 979 Cr. 1166 4r. 1494/Ln. 2487Amount (US8 millions) 29.0 8.0 90.0 8O.0/12.1Appreval Date 61/89/70 91/15/79 66/28/81 96/67/34

!/ Eng a Irrigation Engineer; Ag = Agronomist; Ec * Economist; Fin a Flnancial Analyst; 0 a Other.k/ 1 a Problem free or minor problems; 2 a Moderate problema; = Major problems.cj 1 a Improving; 2 a Stationary; 8 a Deteriorating.y/ P u. Political; M a Managerial; T a Technical; F a Flnancial.


SRI LNKA

MAAUnELU OANGA TEC04ICAL ASSISTANCE PROJECT(IDA CREDIT 9T9-CE AND EEC SPECIAL ACTION CREDIT 40-CE)

BASIC DATA SHEET

KEY PROJECT DATA

Actual asActual or Porcentage

Appraisal Current AppraisalEtmato Estimate Estimte

Total Project Coot (USS1 million) 0.O 4.4 78IDA Credit Amount (USS million) 8.0 1.66 62EEC Credit Amount (USS million) 2.0 1.72 86

STAF- INPUTS (Statt Weeks)FY80 FY61 FY62 FY80 FY84 FY8S FY86 FY8? TOTAL

Preappralual 8.2 8.2Appraisal 8.0 8.eNK otiatlon .6 .5Supervision 6.1 5.6 4.0 .6 8.2 2.6 5.1 .2 26.7Other .8 2.8 8.1TOTAL 21.9 6.4 6.8 .6 8.2 2.8 5.1 .2 48.6

CUMULATIVE DIS8URSEMENTS

IDA Credit (USS million) fY80 FY1 FY62 FY88 FY84 FY85 Ff86

Appraisal Etimate (USS million) 0.8 2.0 8.6 - - - -

Actual (USS mlillon) a 0.29 1.87 1.61 1.61 1.66 1.86Actual as S of Estmte a 15 48 54 64 65 02

EEC Credit (US1 million)Appraisal Estimat (US8 million) 6.5 1.5 2.6 - - -Actual (USS million) 0 1.04 1.11 1.11 1.11 1.11 1.72Actual as X of Estimate 69 66 56 60 5s 86

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PROJECT DATESOriginal Plan Revision Actual

T.A. Credet Proposed te Govt. - 06/22/70Requet free Government - -_0/10/79Negobletlone 11/79 12/20/79 12/27/79Board Approvel 1/29/89 91/15/79 19/29/fiCredit Agromnt (IDA A EEC) -- -- 14/16/89Credit Effectiveneas (IDA A EEC) - -- O7/67,fClosingIDA Credit 09/80/92 -- 0/9/U65/EEC Credit 09/80/62 09/0/8/52/

MISSION DATAMonth/ No. of Specialls. Performance Types oftsar Porronu Rer nte d n . Rat/n_ _ _ / Trend ___Problo /

Preperatlon/Followup 11/79 a Eng,Ag,Chlef - - -

Supervision 09/80 1 Eng 1 2 -

Supervislon II 12/80 2 Eng, Eng 1 2 -

Supervision III U4/81 1 Eng 1 2 -

Supervision IV Ot/81 1 Eng 1 2 -

Supervision V 94/82 1 Eng 1 2 -

Superviston VI 01/85 1 Eng 1 2 U

OTHER PROJECT DATA

Borrow r ThO Deoeratic Socialist Republic of Sri Lanka (OOSL'Executing Aency Mshoseli Authority of Sri Lanka (MASL)

Preceding Prolects Follow-on ProJects

Name Mahaowol Nbhawe lI I Uaheweli III Mahawell IVLoan/Credit Number Cr. 174/Ln. 65 C. 791 Cr. 1106 Cr. 1494/Ln. 2487Amount (US$ million) 290. 19.0 90.0 80.0/12.1Approval Dote 01/80/79 94/21/77 06/28/81 96/07/84

l/ Although formal closing dat was 09/80/86, credit account was left open to 06/20/U8.fr/ Eng a Irrigetion Engineer, Ag a Agriculturist, Chlot = Projects Division Chief,~/ 1- Problem free or minor problms.i/ 2 a Stationary.2/ U a Managerial.

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SRI LANKA

MARAWELI GANGA DEVELOPMENT PROJECT II (CREDIT 701-CE)MAHAWELI GANGA TECHNICAL ASSISTANCE PROJECT (CREDIT 979-CE)

EVALUATION SUMMARY

Introduction

1. Sri Lanka is a tropical island with distinctly livided wet and dryzones (see map). The vet zone encompasses the southwest quadrant of theisland, or about 302 of the land area. At the time of project appraisal,the wet zone supported more than three-quarters of the nation's populationand accounted for about 822 of the cultivated land. The dry zone wasrelatively undeveloped although it wso there that the an.ient Singhalesekings developed a highly advanced and ingenious irrigation system.

2. During most of the project implementation period, Sri Lanka hasexperienced an unprecedented economic growth. Per capita incomes were muchhigher and unemployment much lower than a decade ago (before 1977). Theexpansion of economic activity also bonefitted the population below thepoverty line. However, the Government is now confronted with the mostdifficult economic (slowing growth, rising unemployment, precarious fiscaland balance of payment situation) and political problems since it tookoffice in 1977.

3. About 751 of Sri Lanka's population resides in rural areas, withsome 45Z of the total active labor force directly employed in agriculture.While agriculture has declined as a percent of GDP it continues to make asignificant contribution to both export earnings and Government revenue.

4. Bank lending for agriculture started in 1968 with three Irrigationprojects; it accelerated in the second half of the 1970s, and also becamemore diversified. Apart from more Irrigation projects, It includedtreecrop rehabilitation, rural development, dairy, forestry andagricultural support services. As of December 31, 1987, lending foragriculture amounted to about US$550 million, or Jus% under half of totallending to Sri Lanka.

5. The largest share of agricultural lending was for Irrigation,US$222 million or 441 of total lending for agriculture; about 751 of it insupport of the Mahaweli program. Five Mahaweli projicts were financed bythe Bank. The Bank's earliest irrigation projects primarily provided thephysical infrastructure necessary to distribute irrigation water, or toprotect and reclaim irrigated areas. Increased food production, In supportof the Government's self-sufficiency policies, was the main projectobjective.

6. The five loanslcredits in support of the Mahaweli Gangs program.

were for discrete elements of the program. Except for the first project,

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which included a power station, the Bank has only supported the downstreamdevelopment of the Mahaweli program (irrigation and related supportingservices, as well as technical assistance).

7. The Bank's first financed Mahaweli project (1970) is completed.Despite implementation delays of about two years, the project was regardedas economically and socially successful. The main reasons for success wereconsidered to be sound project design, continued support from governmentagencies, and the ability of farmers to adapt to the rigorous time frameimposed by double cropping. However, certain problems remained, such ascost recovery, monitoring and evaluation, effective water management, andillegal occupation of land. Although these problems were addressed infollow-up projects, they have remained critical issues until today.

Obiectives

8. The main objectives of the overall Mahaweli program are: (i) thereduction of unemployment by creating short-term and long-term jobopportunities; (ii) the increase of agricultural production, particularlyrice, to achieve food self-sufficiency; and (iii) the alleviation of powershortages. The Mahaweli I: Project would complete the irrigation anddevelopment in Mahaweli system H area (see maps), and provide productivesupport and social services throughout the system area. In this contextthe project would provide employment and substantial incremental productionof rice, as well as other output (pulses, chilies, Vegetables andoilseeds).

9. The Mahaweli TA Project aimed to support the Government's effortsto accelerate implementation of the Mahaweli development program byassisting with studies for conveying and utilizing surplus Mahaweli Gangawater to develop land in any of three alternative areas in order to selectthe best plan for a future transbasin diversion project. Technicalassistance was also to be provided for detailed engineering and design fordownstream development of head works already committed to be constructed.Finally, support for unspecified studies and designs, to be identified bythe Mahaweli Development Authority, were also;"included in the Mahaweli TAproject.

Implementation Experience

10. Work on the Mahaweli II Project was started by the Governmentwithout prior consultation with the Bank. The Government decided at theend of 1977 to accelerate the project ahead of schedule but this resultedin poor quality of works, excessive water conveyance losses and operationand maintenance costs higher than anticipated. Project implementation,however, improved in 1979/80 and progress as well as quality of works weresatisfactory. Implementation slowed down again in 1981, mainly due tobudget restrictions. In the end, instead of completing the project aheadof schedule the Credit had to be extended twice.

11. The Government's strong commitment to the project was reflected inadequate levels of funds and staff allocated to the project during mostyears. Management and organization of the Mahaweli Ganga developmentscheme were excellent.

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12. The Mahaweli TA Project was successful and all studies andactivities identified at time of approval were executed. Consultants wereselected expeditiously for the Transbasin study and fielded just two monthsafter Credit effectiveness. Equally fast was the contracting ofconsultants for the Minipe Right Bank Review which led to the successfulcompletion of the largest irrigation canal in Sri Linka. Due to financialand other considerations, funds for studies not identified during projectpreparation remained uncommitted despite Credit extensions. In retrospect,the envisaged implementation period of two years was unrealistic.

Results

13. The Mahaweli II Project should be considered successful in regardto attaining major objectives such as land development, settlement, andcrop production but there is scope for further development. The projectcreated employment for a large number of unemployed and inched Sri Lankaclose to becoming self-sufficient in food. However, the project ERR hasbeen recalculated at -11 mainly due to much lower actual and forecastprices for rice than the price forecasts at the time of appraisal.

14. The Mahaweli TA Project made a valuable contribution to theaccelerated implementation of the Mahaweli program (AMP). It also providedvaluable on-the-job training of counterpart staff by the consultants duringtheir work assignments.

Sustainability

15. The Mahaweli program has been considered a cornerstone ofdevelopment efforts by all Sri Lanka Governments. The projects underreview have been succeeded by two more Bank-assisted projects. From theside of Government there is full commitment to the program and thedevelopment authorities have proven their management capabilities. Farmerparticipation is also assured in light of lacking employmentifarmingopportunities elsewhere in the country. The real question is how thiscommitment can be transformed into realistic and lasting sustainability.

Findinzs and Lessons

16. The principal findings, which show relevance for other projectsituations as well, that emerge from the evaluation of these two projectsare:

- As shown by the problems (negative impact on costs, poor quality)caused by the accelerated startup of the Mahaweli II Project andthe inability of Government to select the unidentified studies inthe Mahaweli TA Project, the Mahaweli Ganga projects once againdemonstrate the need for proper planning prior to starting work(PPAM, paras. 28 and 41, Mahaweli II PCR, paras. 3.02 and7.02-7.03, and Mahaweli TA PCR, paras. 4.06-4.07 and 7.01).

- Reliance on small contractors is unjustified without a properassessment of overall capacity of the contras ting industry andcompeting demands for its services at tbe time of project

appraisal. Coordination between various Baik activities is alsowarranted in this context (EPAM, paras. 55-61);

Technical supervision was of high quality and staff continuity hada positive impact. However, there are limits to what technicalsupervision can be expected to solve in relation to "macro" issuessuch as cost recovery and water charges (PPAMI, paras. 51-54);

Two years for a technical assistance project is unrealistic,especially if it includes components that have to be defined duringimplementation (PPAM, para. 42 and Mahaweli TA PCR, para. 7.02);

Project sustainability depends on sustaining the interest ofparticipating farmers. This requires better consultation anddialogues with farmers and training of farm leaders (PPM, paras.45-48); and

While planning at the "micro" level (day-to-day management andexecution) was well taken care of, "macro" planning received lessattention. However, to ensure sustainability would require morefocus on long-term changes and the development of alternativescenarios to meet such changes (PPM, paras. 49-50).

PROJECT PERFOR1MANCE AUDIT MEMORANDUM

SRI LANXiA

MAHAWELI GANGA DEVELOPMENT PROJECT II (CREDIT 701-CE)MAHAWELI GANGA TECHNICAL ASSISTANCE PROJECT (CREDIT 979-CE)

I. BACKGROUND AND SETTING

A. Introduction

1. Bank lending to Sri Lanka (as of December 31, 1987) for 54 proj-ects amounted to about US$1.2 billion (see also Annex 1). The lendingprogram is largely concentrated on agriculture and power with the remainderscattered over other sectors as Table 1 below showst

Table 1: BANK LENDING TO SRI LANKA

No. of Loan/Credit PercentageSubsector Proiects Amounts of Total

(US$ million)

Agriculture 19 364.9 31Mahaweli 5 184.1 16Power 9 218.7 19Transportation 4 103.4 9DFCs 4 24.5 2Industry 5 111.0 10Training & Industrial 3 41.5 3

DevelopmentWater Supply & Sanitation 3 76.2 6Other a/ 2 45.0 4

54 1.169.3 100

8/ One telecommunications project and a program credit.

2. Bank lending for agriculture started in 1968. Three irrigationprojects were approved in 1968-70, which fitted the Goverament's objectiveof increasi'g food pr._uction, but they were designed without a clearlydefined Bank scracegy for the agricultural sector as a whole. Sector know-ledge was subsequently updated through an agricultural policy and programsreview mission which visited the country in 1974 to identify lending oppor-tunities. Lending for agriculture accelerated in the second 'nalf of the1970s, and also became more diversified. Apart from more irrigation proj-ects, it included treecrop rehabilitation, rural development, dairy, for-estry and agricultural support services. As of December 31, 1987, grosslending for agriculture amounted to US$550 million, or just under half oftotal lending to Sri Lanka.

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3. As expressed in various documents, the main element of the Bank'sstrategy since 1974 has been to help alleviate the country's foreignexchange constraints by supporting measures to increase agricultural outputand exports. Furthermore, the Bank saw its agricultural program as a vehi-cle to obtain policy changes in the agricultural sector, including costrecovery in irrigation. The Bank has also supported the Government's ruraldevelopment program to raise productivity, employment and living standardsof the rural population. More recently, the Bank has attached high prior-ity to the maintenance and rehabilitation of the existing capital stock inall productive activities.

4. To date OED has evaluated 15 projects in Sri Lanka; evaluations ofanother 7 are in progress (details in Annex 2). In addition, OED hasundertaken an impact evaluatlon of the Lift Irrigation Projectl/ andreviewed the World Bank/Sri Lanka relationship.2/ The Mahaweli Ganga Devel-opment Project II (hereafter referred to as Mahaweli II) was the Bank'ssixteenth lending operation in Sri Lanka. The Mahaweli Ganga TechnicalAssistance Project (hereafter referred to as Mahaweli TA) was the thirdlending operation in support of the Mahaweli program (see PPAM, para. 20).

B. Economic Development

5. Policies pursued by various governments have changed over time,and as a result so did socio-economic development. Four periods can bedistinguished: 1956-1965; 1965-1970; 1970-1977; 1977 to present. Allgovernments in Sri Lanka have been committed to welfare, equality and thealleviation of poverty and have seen economic growth as an important objec-tive. However, strategies to achieve growth have differed. The periods1956-65 and 1970-77 were characterized by a less open economy, emphasis onimport substitution, a diminished role for foreign aid and advice, nation-alization, public enterprises and an expansion of government control. Theperiods 1951-55, 1965-70, 1977 to the present relied more on private enter-prise and price incentives, opening up the economy, stressing export devel-opment, and attracting foreign resources--aid, foreign private investmentand foreign loans--with more emphasis on agriculture.3/

6. Since 1977, Sri Lanka has experienced an unprecedented economicgrowth of 5.6Z per year. Per capita GDP is now 402 higher, in real terms,and the rate of unemployment is much lower than a decade ago. Albeit at alower rate than the average, the population below the poverty line has alsobenefitted from the expansion in economic activity. There are, however,

11 Impact Evaluation Report, Sri Lanka Lift Irrigation Project (Credit121-CE), OED Report No. 5634, dated May 8, 1985.

2/ The World Bank and Sri Lanka, A Review of A Relationship, OED Report No.6074, dated February 24, 1986, later published as a World BankOperations Evaluation Study.

3/ These changes in economic development in Sri Lanka have been reviewed inmuch more detail in OED's Review of a Relationship, OD cit.

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clear indications of a reversal in economic performance and the Governmentis now confronted with the most difficult economic problems it has had toface since it took office in 1977. Growth is slowing, unemployment isrising, the fiscal situation is precarious, and a balance of paymentscrisis is not unlikely. The reasons for the deterioration of the economyare complex. They can be related to both external and internal adversedevelopments.

7. Prices of Sri Lanka's traditional exports, tea, rubber and coco-nuts, have been at their lowest level since World War II. The deteriora-tion in Sri Lanka's terms of trade (about 30% since 1978), thk 1uotas setby developed countries on Sri Lanka's exports of garments, the more recentstagnation in workers' remittances from the Middle East as a result of thedecline in the price of oil, the reduced flow of tourists, and higher for-eign exchange expenditures related to national security have all contrib-uted to further weakening of the balance of payments, and the Government'scapacity to respond vigorously to the deteriorating economic environment.4/

8. While these developments have serious implications for thesustainability of the projects under review, they were not prevalent duringmost of the periods these projects were executed. Neither is it likelythat they could have been predicted at that time.

C. Setting and Context

9. Sri Lanka has an estimated population of about 16.1 million, 80Xof which is rural. Of the total land area of 16.2 million acres (about25,300 sq. mi.), about 5 million acres are used for agriculture. Theclimate is characterized by nearly constant temperatures and large varia-tions in rainfall. The island can be divided into two distinct precipita-tion zones (see also map 14076R attached to this report)s the west zone(average annual rainfall over 75 inches), situated in the southwest quad-rant and covering about 301 of the land area, and the dry zone (averageanrual rainfall ranging from 35 to 75 inches) covering the remainder of theisland. The wet zone supports more than three-quarters of the total popu-lation and accounts for about 702 of the cultivated land.

10. Rice is Sri Lanka's most important staple and export crops such astea, rubber and coconuts form the backbone of the country's economy. How-ever, while export crops were largely and satisfactorily produced onestates, production of fooderops was left to small farmers and was far fromsatisfying the island's needs, necessitating substantial imports of basicfoods. For example, in 1968, 451 of the total value of imports was forfood: of this expenditure, rice accounted for about 351 and sugar about101. Although there was considerable room for increasing agriculturalyields, the main prospect for attaining self-sufficiency in food supplyexisted in the expansion and intensification of cultivated areas. Since

41 Details on the latest economic development can be found in the Bank'sreport: Sri Lanka--Issues in Macro-Economic and Industrial DevelopmentPolicy, Report No. 6701-CE, dated April 20, 1987.

there was a comparative scarcity of land for further cultivation in the vetzone, the expansion needed had to take place in the dry zone. Sri Lankaalso needed more electric energy. In 1968, the effective generating capa-city of the national system was 261 MW, including 191 MW of hydro capacity.The firm capacity was about 220 MW. Since the projected demand for 1973was already 296 MW, there was a need to increase the nation's generatingcapacity quickly. The development of the Mahaweli Ganga, the island'slargest and almost unexploited water resource which cuts through the east-ern portion of the dry zone, therefore, was seen by the Government as thecost logical source of irrigation water for arable lands in the dry zcne,ginerating more electric power to meet increasing demand, and creatingem2loyment opportunities.

11. Because of its difficult physical environment and the prevalenceof malaria, the dry zone has developed slowly in modern times. Yet it washere, rather than in the more inviting wet zone, that the ancient Singha-lese kings developed a highly advanced civilization, which flourished bymeans of ingenious and extensive irrigation modes (see also PPAM, para.18). But various wars and neglect took their toll on these irrigationsystems. However, it was again in this zone that the major Mahaweli GangaDevelopment Program (MGDP) was executed as Sri Lanka's bold attempt toiMrove its eco*omy and way of life.

II. IRRIGATION AND MAHAWELI DEVELOPMENT

A. Irrigation Sector

12. The Bank's involvement in irrigation in Sri Lanka has been sub-stantial. Not only has irrigation been the object of Bank funding from theearliest Bank projects in the agricultural sector, but the Bank has playedan important role in shaping the MGDP (see PPAM, paras. 16-22). It hasbeen able to mobilize substantial cofinancing, and cooperation with otherdonors in project preparation, appraisal and supervision has been good.Although project implementation generally has been satisfactory, seriouschallenges remain with respect to cost recovery, water management, and therehabrlitation of existing irrigation infrastructure. Also, with self-sufficiency in rice approaching, crop diversification in irrigated areaspresents a formidable challenge.

13. The largest share of agricultural lending was for irrigation,US$241 million or 44 percent of total lending for agriculture; about 75percent of it in support of the Mahaweli program, mainly downstream devel-opment. Five Mahaweli projects were financed by the Bank (see PPAM, para.20). Another five projects covered other types of irrigation in Sri Lanka.

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Table 2: BANK-FINANCED IRRIGATION PROJECTS La

Approval CreditProiect Name Year (FY) Number Amount

(US$ mil)

Lift Irrigation 1968 121 2.00Drainage and Land Reclamation 1970 168 2.64.ank Irrig. Modernization 1977 666 5.00Village Irrig. Rehabilitation 1981 1,160 30.00Major Irrig. Rehabilitation 1985 1,537 17.00

56.64

la Excluding Mahaweli projects.

14. The Bank's earliest irrigation projects primarily provided thephysical infrastructure necessary to distribute irrigation wattr, or toprotect and reclaim irrigated areas. Increased food production in supportof the Government's self-sufficiency policies were the main project objec-tives. The Lift Irrigation and the Drainage and Land Reclamation projectsencountered substantial implementation delays, owing to civil unrest, thechange in Government, and procurement problems. Overall, the Lift Irriga-tion scheme was a failure,51 while the Drainage and Land ReclamationProject6l was judged to have fared much better.

15. The later irrigation projects focussed on the rehabilitation ofexisting irrigation infrastructure, and addressed water management issuesand irrigation practices in order to achieve a more efficient use of water.The Tank Irrigation Modernization Project: aimed at improving water distri-bution systems, infrastructure and servtices in five major tank schemes inthe northern part of Sri Lanka. Implementation took three years longerthan expected owing to management and funding problems, but at completion7/project performance was judged to be satisfactory. The Village IrrigatlonRehabilitation Project supports the rehabilitation of 1200 village irriga-tion schemes and modernization of about 500 other small schemes. Progresshas fallen behind appraisal targets partly due to security problem., butthe quality of works is generally satisfactory. Under the Major IrrigationRehabilitation Project work remains suspended at three subprojects, but onthe four other subprojects good progress is being achieved. However, col-lection of O&M charges from beneficiaries continues to be poor. Suitable

5/ Project Performance Audit Report, OED Report No. 2801, dated December28, 1979, and Impact Evaluation Report, OED Report No. 5634, dated May6, 1985.

6/ Project Performance Audit Report, OED Report No. 2798, dated December28, 1978.

7/ Project Completion Repoit, OED Report No. 5986, dated December 23, 1985.

remedial action will be planned after study proposals on a feasible col-lection system have been evaluated.

B. The Mahaweli Ganaa Development ProRrsm

16. The MGDP has been the centerpiece of Sri Lanka's developmentefforts for the last 25 years. Formulation of the program was initiatedduring 1958-61 and implementation of the Master Plan commenced in 1970(Mahaweli II PCR, paras. 1.01-1.03). Late in 1977, the new governmentdecided to accelerate the implementation of the program. At that time workon the first phase of the MGDP was in progress, with part of the fundsprovided by the Bank. The projects of the Accelerated Mahaweli Program(AMP) included five major reservoirs and hydroplants with a total potentialpower capacity of 500-600 MW, and downstream development of about 112,000ha. After consultation with the Bank, in late 1977, GOSL agreed toundertake an implementation strategy study (funded by the Netherlands).While that study was going on, GOSL approached bilateral donors forfinancing. They responded favorably, and funding for the construction offour dams and reservoirs was obtained (see also Mahaweli TA PCR, paras.2.01-2.07).

17. As noted above (PPAM, para. 10), the main objectives of the Maha-weli program related to three of the major problems that were facing SriLankas (a) reducing unemployment by creating short- and long-term jobopportunities; (b) increasing agricultural production, particularly rice,to achieve food self-sufficiency; and (c) alleviating power shortages.

18. The acceleration of this large investment program has also to belooked at in its historical and political context. Politically, the deci-sion to accelerate was to a certain extent to provide compensation (throughincreased employment and production) for the costs of substantial economicreforms. Historically, the program pays tribute to the ancient civiliza-tion of Sri Lanka with its magnificent irrigation works (see also PPAM,para. 11). Every Sri Lankan knows of the philosophy of the ancient mon-archs, most clearly expressed by the 12th century King Parakramabahu I whosaid, 'Let not one drop of water reach the sea without first serving man'.Large-scale irrigation works were built as early as the 1st century A.D.High standards of irrigation technology enabled the monarchs to extendwaterworks throughout the dry zone by the 6th century A.D. So thorough wastheir work that many of those systems are still in use today.

19. From its inception, the Bank has been closely involved with MGDP.Over the last 15 years, there was substantial interaction at the technicallevel, mainly through supervision of Bank projects. A close relationshipdeveloped between the Bank and the Mahaweli Authority, and at the technicallevel the Bank's advice has always carried substantial weight. In additionto supervision, the Bank played a role in designing the overall developmentprogram, and in coordinating foreign assistance. A full assessment of MGDPand the Bank's involvement in it can be found in OED's special study: SriLanka and the World Bank: A Review of a Relationship, cited earlier.

20. The Bank has made five loans/credits (see Table 3) in aupport ofthe MGDP for a total of US$184 million, or 16 percenc of total Bank Grouplending to Sri Lanka. The projects were for discrete elements of theprogram. Except for the first project, which included a power station, theBank has only supported the downstream development of the MGDP: irrigationand related supporting services, as well as technical assistance.

Table 3: BANK-FINANCED MAHAWELI PROJECTS a!

Approval Loan CreditProiect Name Year amount amount

(US$mil) (US$mil)

1. Nshaweli Ganga 1970 14.50 15.462. Mahaweli Ganga II 1977 - 19.003. Mahaweli Ganga TA lb 1980 3.004. Mahaweli Ganga III 1981 - 90.005.. Maxaweli Ganga IV le 1984 12.10 30.00

26.60 157.46

la For details of individual projects see Table 1.lb Technical Assistance Project./c Not yet effective.

21. The Bank's first project (1970) has been completed and was auditedbw OED in 1981.81 Despite implementation delays of about two years, theproject was regarded as economically and socially successful. The mainreasons for success were considered to be sound project design, continuedsupport from government agencies, and the ability of farmers to adapt tothe rigorous time frame imposed by double cropping. However, certain prob-lems remained, such as cost recovery, monitoring and evaluation, effectivewater management, and illegal occupation of land. Although these problemswere addressed in follow-up projects, they have remained critical issuesuntil today.

22. Implementation of the second project (Mahaweli II - 1977) and theMahaweli TA Project (1980) are the subject of this report. Implementationof the Third Mahaweli Project (1981) was delayed and completion of theproject is now scheduled for December 1989. The Minipe Right BankTransbasin Canal has been in operation since 1984. Construction of themain and branch canals is more than two years behind the original scheduledue to long hauling distances of suitable materials, adverse weather andlarger than expected rock formations. Downstream construction work andsettlement activities have been rescheduled accordingly. The FourthMahaweli Project was approved in July 1984. Loan and Credit agreementshave been signed, but have only become effective in early 1988 due todelays in resolving questions concerning cofinancing.

8/ Project Performance Audit Report, OED Report No. 3730, dated December28, 1982.

III. PROJECT IMPLEMENTATION - MAHAWELI II PROJECT

A. Project Formulation

23. Bank staff was concerned upon receipt of the eight volume feasi-bility report that i.nvestment costs of about US$1,800 per ac were high andthat the proposed implementation rate of 14,000 ac per year was too opti-mistic. An FAOICP preparation mission was mounted in 1974 to prepare amuch smaller project. The GOSL was unhappy with the Bank's decision tosupport only a small project. An early 1976 post-appraisal mission discov-ered that GOSL had already initiated work on a large scale, i e., coveringabout 71,000 ac and recommended that Government's efforts be encouraged andincreased pace maintained (Mahaweli II PCR, paras. 2.01-2.10). Under thesecircumstances, a revised project was proposed. The Bank decided that thechanges required a new full appraisal which focussed on constructionmethods proposed, procurement procedures, the implementation schedule, andorganizationlmanagement aspects (see Mahaweli II PCR, paras. 2.11-2.17).

24. Negotiations took place in March 1977. Subjects discussedincluded procurement, audit arrangements, technical assistance and manage-ment appointment. However, the major debate centered around cost recoveryissues (see also Mahaweli II PCR, paras. 2.18-2.20). The Board approvedthe project in April 1977 but fin'lizing the cofinancing arrangementsresulted in delays in effectiveness. The Credit agreement beeame ulti-mately effective in December 1977 (see Mahaweli II PCR, paras. 2.21-2.25).

25. The project as approved included the following components (quanti-fied and tabulated in Mahaweli II PCR, para. 3.01)s

(a) Irritation and Land Development Works included completion of Kala-vewa Right Bank Main Canal and improving four major tanks alongthe canal; construction of branch and distributory canals, fieldchannels and other structures; improving natural drains (about 10miles) and construction of secondary and tertiary drains; clearingand land preparation of about 40,300 acres; and provision of vehi-cles and equipment and a construction workshop for the construc-tion, operation and maintenance of the works.

(b) Production Support included reorganization and strengthening ofagricultural extension services in the project area; provision ofstorage, marketing and processing facilities; provision of vehi-cles, equipment, farm implements and sprayers; and improvement ofsome existing roads and construction of new roads.

(c) Social Infrastructure included provision of schools, additionalmedical facilities and community development facilities as well asconstruction of about 1,235 village wells and about 200 miles ofvillage roads.

(d) Otiher Proiect C.mponents included the settlement of abouc 15,300famllies in the main project area; and provision of consultants'se-vices, studies and surveys.

26. Project costs were estimated at US$80.0 million, and fundingarrangements included: IDA, Canada, the Netherlands, UK, USA, EEC, andGOSL. For further details on planned and actual financing arrangements seeMahaweli II PCR, paras. 3.23-3.24.

B. Proiect Implementation

27. The decision to accelerate the MGDP (PPAM, para. 16) took placeshortly after Board apiroval of this project. While it had an importantbearing on the shape on the Mahaweli program it also had a rather immediateand chaotic impact on the implementation of the Mahaweli II Project (seealso Mahaweli II PCR, paras. 2.23-2.25).

28. Work on the Mahaweli II Pro4ect was started by GOSL prior to Bankinvolvement. Following the Government's decision at the end of 1977 toaccelerate the MGDP, the army and other public corporations were mov.'ed intothe project area to clear jungle and construct canals. However, this wadone without due regard for proper planning and work standards. The resultwas poor quality of works, excessive water conveyance losses in the canalsand operation and maintenance costs much higher than anticipated. The Bankrated the project as a problem project in 1978. Project implementation,however, improved in 1979180 and progress as well as quality improved.Implementation slowed down again in 1981, mainly due to budget restriction.In the end, instead of completing the project ahead of schedule asoriginally intended by Government, the credit had to be extended twice,until June 30, 1985, due, to a large extent, to the need for additionalcanal lining required as a consequence of poor design and standards priorto the Bank's involvement. However, ultimately the project successfullyattained its major land development, settlement and production objectives(for further details, see Mahaweli II PCR, paras. 3.02-3.22).

29. The Mahaweli Agencies' procurement actions for civil works causedmajor problems throughout the project implementation period. Contrary tothe agreement reached before the project's approval, MDB expressed the viewthat the private sector was not able to even undertake the agreed 502 ofthe construction. In the end, all civil works were undertaken by 5 publicsector agencies, including MDB, the &Army and the River Valley DevelopmentBoard (RVDB). The September 1978 supervision mission observed that nocontracts were bid competitively, none were submitted to IDA for approvaland that some of the works were proceeding on the basis of oral agreements.RVDB had been assigned the design, construction and supervision of irriga-tion and drainage works in over one-half of the project area and was oper-ating without a contract. With GOSL's decision to accelerate the MGDP, MDBhad no power to enforce proper planning or scheduling of work or to enforceconstruction quality standards. Later RVDB was excluded from furthercontracts because of poor quality of its construction work and because ofnon-completion of some of the work. From 1980 onward the public sectoragencies were phased out of the program and private contractors were

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awarded remaining contracts. Likewise, a relatively large procurement of1,050 two-wheel tractors was cancelled because IDA objected to MDB's awardprocess and because it was decided that farmers could buy tractors directlyfrom local suppliers. Other contracts for other items of equipment wereawarded late in 1984 following satisfactory ICB action by MEA (Mahaweli IIPCR, paras. 3.25-3.29).

30. Cost recovery for land improvements was to be accomplished by thesale of the farm and house plots given to each settler, wherein the directcosts of development would be charged and the settlers would receive cleartitle to the land. However, at completion no payments had been made by thesettlers and ownership still rested with GOSL (Mahaweli II PCR, paras.3.32-3.34). Collection of water charges began in 1984 after a publicityand education campaign regarding recovery of O&M costs was carried out in1983 (Mahaweli II PCR, paras. 3.35-3.36); while this was an encouragingstart, much remains to be achieved.

C. Project Administration

31. The Mahaweli Authority of Sri Lanka (MASL) was set up by an Act ofParliament in March 1979 to be the strong central planning and decision-making body that was needed to meet the challenges of the ambitious Accel-erated Mahaweli Program. Its two principal executing agencies were theCentral Engineering and Construction Bureau (CECB), responsible for thelarge head works project3 and the Mahaweli Development Board (MDB), chargedwith engineering and construction of downstream irrigation developmentprojects. Subsequently MASL set up a Settlement Division in July 1980 andby Cabinet decision the Mahaweli Econcamc Agency (MEA) was established in1981 to be responsible for downstream development and settlement. In 1983,MDB5s functions were taken over by its successor, Mahaweli Engineering andConstruction Agency (MECA), further streamlining the MASL organization andimproving the coordination between engineering, construction and settlement(for further details see Mahaweli II PCR, paras. 4.01-4.05).

32. Water management was controlled by the Water Management Secretar-iat (WMS) in accordance with an agreed plan, in close consultation withMEA's Resident Project Manager (RPM). Present imbalances between waterdelivery and off-take by the system are now reduced to some degree by theavailable storage capacity of the tanks. Improvements have been made toreduce water wastage by users, modifications to canal linings providebetter seepage control, measurement structures improve reliability andaccuracy of water issues, and training of operators and farmers in effec-tive and efficient water use has helped to improve water management in theSystem (Mahaweli II PCR, paras. 4.06-4.11).

D. Prolect Impact

33. Revised crop production estimates confirm that the production ofpaddy exceeded the SAR estimate--not only in exceptionally good years, butin average years as well. On the other hand, production of other fieldcrops has remained below the appraisal estimates, with the exception of

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chillies which has become the second most important cash crop, after paddy(Mahaweli II PCR, paras. 5.01-5.08).

34. Farm i_comes range widely (with a median of about Rs 4,900 and amean income of about Rs 8,500), according to a sample survey conducted byMEA in 1985, derived mainly from cultivation of fruits and vegetables,plant nurseries and livestock produce, inclvding hiring out of draughtanimals. Most families also have some non-farm income, including tractorhiring, leasing-in and cultivation of farm land, and trading (Mahaweli IIPCR, paras. 5.09-5.12).

35. The project financed a full package of investments in part of theH system and supporting services throughout the system area. Economicanalysis has been limited to the full package cost and benefits. Thereestimated rate of return is -12 compared to 21X estimated at appraisal.Depressed rice prices in recent years and low forecast are the dominatingreasons for the low rare of return: using appraisal price forecastsinstead would give a 162 rate of return (for further details see MahaweliII PCR, paras. 6.01-6.03).

IV. MAHAWELI TA PROJECT

A. Prolect Formulation

36. The MGDP was originally based on a Master Plan prepared jointly byUNDPIFAO and Sri Lanka engineers in 1965-68 which envisaged a three-phasedevelopment program of about 900,000 ac of irrigable land in the dry zone,as well as about 500 MW of hydropower. The new Government which came topower in 1977 decided to accelerate the program. During the early monthsof 1978 the Government consulted with IDA and contacted several donors forassistance in the preparation of five major projects, including dams andhydropower plants with an installed capacity of about 600 MW, anddevelopment of about 290,000 ac of new lands, as well as downstreamdevelopment and other works and studies (Mahaweli TA PCR, paras.2.01-2.03).

37. As part of the general agreement to accelerate the program, IDAundertook to advise on the scope of studies. To this end, an Implementa-tion Strategy Study was carried out, financed by the Netherlands, done in1979 by consultant*a, to determine a specific action plan; its findingsdiffered signific*e.tiy from the original UNDPIFAO Master Plan. Ar.an theimportant findings were that the system as proposed would have excess waterwhich could be used to irrigate lands elsewhere and that water diversionnorthward could be done at substantially lower cost as compared -ith theMaster Plan proposals. This brought out the need for further feasibilitystudies of the transbasin diversion plans. There was also an Immediateneed for detailed engineering and design in the command area to be servedby the Victoria Project, since its construction was to start in early 1980and the downstream development should be in place by the time the headworkswere to be completed in 1984. Accordingly, at GOSL's request, the proposed

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technical assistance project was identified and jointly prepared by GOSLwith IDA assistance (Mahaweli TA PCR, paras. 2.04-2.06).

38. Negotiations took place in Sri Lanka in December 1979 and theproject was approved by the Board In January 1980. The credit agreements,including an EEC Special Action Credit, were signed In April and becameeffective in July that same year. Total project costs were estimated atUS$6.0 million. IDA would fund US$3.0 million and EEC would provide US$2.0million equivalent for a Special Action Credit to be administered by IDA(for further details see Mahaweli TA PCR, para. 3.01).

39. The project's primary objective was to finance consr.ltants tos

(a) carry out reconnaissance level studies of transbasin diversionplans to convey surplus water developed under the AcceleratedMahaweli Ganga Program (AMP) to three alternative basins/areas forirrigation use and power production, determine the viability ofeach plan, and identify possible viable subprojects;

(b) review detailed designs of the Minipe Right Bank Canal (planned toserve Systems B and C) and prepare terder documents suitable forinternational competitive bidding and possible financing of thiscanal by the Bank Group;

(c) assist the Mahaweli Authority in the priparation of final designsand tender documents for irrigation and drainage systems andsocial infrastructure in part of System C, which was being consid-ered for Bank Group financing;

(d) carry out other studies/investigation plans or designs requiredduring the planning and implementation of the AMP; and

(a) provide training to counterpart staff and locally-hired personnelengaged in the work.

B. Project Implementation and Inviact

40. Most of the project objectives were achieved (project implementa-tion details are provided in the PCR, paras. 4.01-4.09). The projecthelped Government in defining development options for possible use of sur-plus Mahaweli water being developed by the various headworks projectsalthough the final report was not completed until the end of the extendedproject period. It also contributed substantially to the timely completionof the Minipe Right Bank Canal. The canal was financed by IDA (under theMahaweli III Project) and coAmir3ioned in April 1984. The assistance givenby consultants financed under the Mahaweli TA Project in thereview/preparation of designs and tender documents for civil works inSystem C enabled the Mahaweli III Project to be implemented as planned.The training and guidance given to MASL staff in the design of irrigationand social infrastructure and in the preparation of tender documents wasnot only instrumental in completing such work on a timely basis in System C

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but has contributed to the preparation of similar work in other projectareas by MASL staff trained by the consultants.

41. The project was least successful in providing support to otherstudies/investigations in the AMP. The main reason was that as a result ofa scaling back of the AMP, such studies were not identified by the Govern-ment in time to utilize the funds available. Some assistance was providednear the close of the credits in reviewing designs and tender documents forthe System B Right Bank project (also appraised by the Bank and approved bythe Board as Mahaweli IV). Because additional studies were not taken up asenvisaged, 38 percent of the IDA credit (US$1.14 million) and 14 percent ofthe EEC credit was eventually cancelled.

42. In retrospect, the two years provided for project implementationwas not realistic. Particularly the transbasin study, where various alter-natives or options kept surfacing, continued to require further study.Also, more time was needed to identify the other studies for AMP which hadnot been identified at the time of project preparation. The credits wereextended three times for a total of three years, making this a five-yearproject. Nevertheless, and this is unfortunate, there was a period ofnearly two years of project inactivity (during the third and fourth yearsof the project), due mainly to the scaling back of development plans in theMahaweli Program and to a lack of consensus within MASL/GOSL on thestudies/work to be undertaken.

V. MAIN FINDINGS

43. Government's commitment to the implementation of the MahaweliGanga Development Program has and continues to be strong and it succeededin attracting substantial external financing for the accelerated programfrom foreign donors. However, the decision to speed up was not withoutrisk. Mahaweli must be reviewed within its overall development context andrather than looking at individual components, the program should beevaluated as a whole. Obviously it is still too early to determine thefull development impact of the program although a first assessment has beenattempted in the OED study: Sri Lanka and the World Bank--A Review of ARelationship, cited earlier in this audit report.

44. On the other hand, the project completed one of the earliestsystems (System H) of the Mahaweli program. As such what happens here hasbeen and can continue to be replicated elsewhere in the program. There-fore, it is rather important to ensure a continued evaluation of the devel-opment impact of this project. Serious consideration is therefore given toan impact evaluation to assess sustainability and development impact ofthis project in more detail.

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A. The Second Dimension of Sustainabilitv

45. The 1985 OED Report Sustainability of Projects: First Review ofExperience defines project sustainability as 'the maintenance of an accept-able net flow of benefits throughout the economic life of the project".9/The report lists a number of factors which are necessary to achieve sus-tainability such ass (i) Borrower commitment which determines if thepolicy environment will be positive and whether the project will be ener-getically maintained and efficiently operated; (ii) continuity in projectorganization and management; (iii) project design which must provide thecorrect balance between the desirable and the feasible in its technical,institutional and socio-economic dimensions.

46. The Bank has been concerned with project sustainability for manyyears and project design, appraisal and supervision are encouraged to focuson the sustainability issue. However, in most projects in general, but inthe Mahaweli Ganga projects in particular, two factors enhancing projectsustainability did not receive the required emphasis: first, the socio-economic dimensions and second, the planning of future developments.

47. It is generally recognized that continuous successful operation ofany agricultural development project will depend on sustaining the interestof participating farmers. There is general agreement that consultationswith farmers are necessary prior to planning or deciding on policies sincethe ultimate success or the sustainability of any project depends on thecooperation of the farmers. While such consultations are relatively easyin developed countries because of the presence of active and often powerfulfarmer organizations, these 'farmer lobbies' are usually non-existent inthe Third World. To ask for views from all farmers would be unrealisticbut there must be a way to listen to farmer representations and take cogni-zance of their needs and expectations. Frank discussions with farmergroups before policies are decided and plans formulated are in support ofproject sustainability.

48. Since dealings/discussions with all project farmers are not feasi-ble, special emphasis on training of farmer leaders/speakers becomes imper-ative. A recent OED auditlO/ commented on a successful program introducedin Malaysia which focuses specifically on training farm group leaders.Some thought to this approach has been given not by the Bank but in SriLanka by the Mahaweli Ganga Authority in a reportll/ which states:

'The end result of an irrigation or rural development projectshould not be the provision of land and water for cultivation.

9/ See OED Report No. 5718, dated June 14, 1985, Executive Summary, page i.

10/ See Project Performance Audit Report, Malaysia: National ExtensionProject, (Loan 1493-MA), OED Report No. 7287 dated June 13, 1988.

11/ Sustainability of Irrigation and Rural Development Projects in SriLanka, July 15, 1987, by Dr. Abhaya Attanayake.

- 15 -

It should not only provide the much required water for culti-vation and all the other social, religious and medical needsbut also post settlement needs of the farmers. It is neces-sary to organize training programmes in agriculture, watermanagement enterprise and community development for farmers tobuild a rural leadership which would give the necessary impe-tus for settlers in development projects to take up theresponsibility of ensuring their own welfare. The ultimategoal of a settlement would be to make the maA4mum use of landthrough an all round development effort and farmer training.It is important in that it would facilitate the organizationof farmers who would point out their own needs and wants andalso be responsible for the smocth functioning of the project.In short, it would pave the way for the creation of a self-contained community based on agricultural, religious and othersocial needs and a well organized management system."

49. The second aspect of enhancing the chances of project sustaina-bility is proper planning of activities. While planning at the "microlevel", i.e. planning at management level to cope with day to day opesra-tions and adjusting to short term trends is well taken care of in the proj-ects under review, a different picture emerges when looking at the "macroeconomic" aspects which may have an impact on project sustainability andwhere some indicative planning, providing for alternative solutions underdiffering scenarios would be required. As far as Mahaweli is concerned theissue is not Implementation but sustainability. It is almost sure that thehigh level of support and management cannot be continued forever. However,no planning to face such realities is being undertaken even though sustain-ability experience with earlier basin developments in Sri Lanka has beenfar from satisfactory.

50. In the audit's view it will be necessary to give more attention toanalyzing long-term markets, production, price trends, etc., and preparingplans which could be implemented if certain anticipated trends materialize.

B. Bank Supervision

51. The PCRs emphasize the high standard of the Bank's project super-vision, especially the continuity of staff assigned and their positiveimpact on project implementation. This view is also shared by the SriLanka authorities associated with the project and the audit agrees withthis assessment. However, some observers within the Bank have reservationsabout the comprehensiveness of the supervision activities in regard to theprojects under review and the audit paid special attention to the super-vision aspects.

52. The above mentioned reservations were based on the fact that the"continuity" of project supervision of the Mahaweli Ganga projects wasassured by assigning a highly qualified and motivated engineer and otherdedicated staff to this task. Due to the specialization of the supervisorsin charge Bank staff feared that supervision missions may have tended to

- 16 -

emphasize engineering/agro-technical aspects to the detriment of economicladministrative problems.

53. Their criticisms are based on the fact that supervision reports ofthe Mahaweli Ganga projects mention that 'implementation has proceededwithout proper planning and coordination' or mention the 'failure to lookat trends in relation to social development and inequality, and to watermanagement". Concern was also expressed that the issue of water chargesremained unresolved for many years.

54. In reviewing the supervision aspects the audit found no indicationthat supervision missions were one-sided, i.e. emphasizing only technicalaspects. The examples listed in the Mahaweli Ganga projects, not tacklingproblems such as water charges and failure to recognize socio-economictrends cannot be considered to fall into the competence of supervisionmissions. The mentioned issues are highly political and sensitive and theaudit finds that by bringing these issues to management attention and byinviting management action the supervision missions adequately coveredtheir terms of reference.

C. Civil Works Contractors

55. The Mahaweli II Project had a sizeable civil works component ascan be seen from Table 4 below:

Table 4: CIVIL WORKS UNDER MAHAWELI II

Total Private Contract(US$ millions) (USS millions)

Kalawewa Main Canal, etc. 3.7 1.85Distributory Canals 13.8 13.80Roads, Social Infrastructure, Buildings 9.2 4.60Other 9.1 8.25

Total 35.8 28.50

56. This massive work program has to be seen in context with the over-all turnover of the country's construction sector which amounted to about'JS$120 million in the appraisal year (1977).121 The difficulty of copingwith the envisaged construction program was further exacerbated by theBank's recommendation that the major share of civil works contracts shouldgo to the "small contractors", whose share of the annual US$120 millionvolume could be considered small in light of the work done by government-owned or parastatal construction companies.

57. It is difficult to understand why the Bank insisted on getting thesa11 contractor sector involved since even the appraisal had reservations

121 See Sri Lanka Recent Economic Development and Policies for Growth,Report No. 5628-CE, dated May 14, 1985.

- 17 -

(SAR, para. 5.05) which states: 'The private sector in Sri Lanka has verylimited capacity for civil works construction.'

58. The apparent lack of analysis of the contractors sector led todelays in project implementation and contributed substantially to the costoverruns. The audit agrees with the statement of the Mahaweli II PCR(para. 3.25, 3.28) that 'procurement actions for civil works caused majorproblems throughout the project implementation period' and that contractsto small private enterprises" caused many problems until the very end ofthe project."

59. There were two shortcomings in the appraisal approach of the proj-ects' civil works component. First there was never a proper assessment ofthe country's construction sector, its weaknesses and specifically itsannual capacity. Second, a lack of interaction not only between the Bank'sdifferent technical departments but even within the Region's agriculturaldivisions. While the audit agrees that a developing country's smallcontractor Internrise sector needs to be developed there is little appreci-ation in the Bank on what the major constraints are that confront thesector. The situation has also been encountered in other projects.131

60. Small contractors as found in some--not all--villages tend toemploy very few workers. Due to transportation as well as housing prob-lems, the circle of work activities is rather narrow--it hardly reachesbeyond a village. Furthermore construction techniques may not be up torequired standards, a fact which cannot be overcome by providing thesecontractors with additional machinery. Since adherence to local biddingprocedures is the minimum condition regarding the Bank's procurement proce-dures, many of these contractors are not capable of submitting cost esti-mates in writing but present them orally which the Bank in turn would notaccept (Mahaweli II PCR, paras. 3.26).

61. The interaction between Bank divisions for any project is impor-tant and highlighted in this case by the, relatively speaking, small sizeof the country's construction sector. Interaction is missing if looking atprojects individually--without seeing the Bank-promoted construction volumein the aggregate. Since there is always a chance that the education, pub-lic utilities and transport sectors will also require local contractors, _.nannual assessment of these activities would be warranted prior to determin-ing the appropriate civil works contract arrangements.

13/ See also Ethiopia Second Livestock Project (Credit 365), OED Report No.3977, dated June 21, 1982.

- 19 - Table 1Pope 1

PROJECT PERFCRMANCE AWIT REPORT

SRI LANKA

MAIAUEU GANGA DEVELOPMW PROJECT I (CREDIT M91-CE)MWAAEU GANGA TEC04ICAL ASSISTANCE PROJECT (CREDIT 979-CE

SRI LANKA LENDING PROGRAM(as of December 81, 1987)

Loan/ Loan Credit Amount LaProJect Nam Credit No. Credit Loan Aprovel Dnate

SOR US11 lb US

Apricultue.

Lift Irrigation Cr. 121 - 2.20/d - June 1968

Drainage & Land Reclamation Cr. 168 - 2.64Ld - Oct. 19s9DaIry Dove lopoent Cr. 504 - 9.eeLd - July 1974

Agricultural Devolopment Cr. 696 - 2S.00Ld - Doe. 1975

Tank Irrigation Modernization Ce. 666 - s.ned - Nov. 1976

Tree Crop Divereittcation Cr. 819 - 4. SOld - June 1978

Tree Crop Rehabilitatlon Cr. 818 - 21msoed - June 1978Kurunegalu Rural Dovelopmnt Cr. 691 - 20. W 0d - March 1979Agricultural Extension and Cr. 981 - 15.6 5d - Juno 1979

Adaptive ResaarchSmalIholder Rubber Rehabilitation Cr. 1017 - 16.00 - may 1989Second Rural Developmnt Cr. 1079 25.00 88.60 - Dec. 19890Village Irrigation Rehabilitation Cr. 1160 24.50 89.80 - June 1981Tea Rehabilitation & Diveret- Cr. 1240 17.809L 2.00d - may 1982

ficationForest Resoure. Developmnt Cr. 1817 8.60 9.06 - Jan. 1988Third Rural Development Cr. 1863 21.40 28.00 - may 1988Major Irrigation Rhabilittation Cr. 1587 17.00 17.00 - DOc. 1984Fourth Tree Crops Cr. 1662 66.60 65.00 - March 1985Dairy Dovelopment II Ln. 2778L. - - 88.0J June 1985Agricultural Research Cr. 177lf 1S.40 18.60 - April 1987

186.70 826.94 88.00

Mahawelt Canoe Proprom

Mahawel G ango DOv. I Ln. 658 - 15.48Ld 14.S01d Jan. 1970Cr. 174

Mahawell Cango D-v. II Cr. 701 - 19.00/d - Apri l 1977MahaweII Gangs T. A. Cr. 979 - 8.0D/d - Jan. 1980

Mahawelt Gangs Dev. III Cr. 1106 78.89 90.60 - June 1981MahaweII Gangs Dev. IV Lo. 24871o 28.U8 80.00 12.10 June 1984

Cr. 1494101.00 157.48 26.80

- 20 - Tabl- 1Pag 2


SRI LANKA

MAHAIW.I GANA DOEVELOPMENT PROJECT T (CREDIT 701-CE)MAHAnELI QANGA TECHNICAL ASSISTANCE PROJECT (CREDIT 97t-CE)

SRI LANKA LENDIN4 PROGRAM(as ot Decber 81, 1987)

Loan/ Loan Credit Amount 1Project Nam Credit No. Credit Loan Asoroval Date

SOR US /b USS

Power

Aberdb n-Laksapana Power Ln. 16l - - 19.11/e Jun. 1904Grandpass Thermal Power Ln. 209 - - 7.40/e July 1905Norton Bridge Thermal Ln. 208 - - 15.6900 April 1#51

Power VI Ln. 687 - - 21.05od July 1989

Power V Cr. 872 - 6.665d - April 1978Power VI Cr. 1048 - 19.5 - June 1980

Power VII Cr. 1210 S1.80 86.00 - Feb. 1982Power VIII Ln. 2187 - - 42.70/d June 1982Power IX Cr. 1786 48.20 52.00 - Oct. 1984

74.S0 118.53 106.21

Tranuortatlon

Highway Ln. S69 - 5.C d 4.0kLe Oct. 1#68Cr. 188

Road Maintenance Cr. 900 - 1C6 SOj - May 1979Road Passenger Transport Cr. 994 - 6800/d - March 1980Road Maintenance T Ln. 2517 - 24.00 Aprll 1905

- 74.58 28.90

pFC

Develop men t Flnance Corp. I Ln. S20 - - 4.066& Nov. 1967Development Finance Corp. IT Ln. 684 - - *.005 July 1#90Developmnt Finance Corp. III Cr. Sa6 - 4.5COd - June 1975Develop men t Finance Corp. IV Cr. 742 - 8.001d - Sept. 1977

- 12 W 12.00

Industry

Small and Mdium Industry Cr. 942 - 16.05Ld - June 1979Small and dium IndustryII Cr. 1162 26.76 80.00 - Oct. 1to1Industriol Development Cr. 1401 28.10 25.05 - July 1908Second Industrial Development Cr. 1C92 17.40 20.05 - may 1986Third Smll and Medum Industrls Cr. 16k lS70 20 00 - Dec 1907

82.90 111.05 -

- 21 - Takla IPeg. 8

PROJECT PERFORMANCE AUIT REPORT

SRI LWNmA

MANAWELI GANGA OEVELOPMENT PROJECT IS (CREDIT 7M1-C£)MAHAWELI GANGA TECHNICAL ASSISTANCE PROJECT (CRELIT 979-CE

SRI LANKA LENDING PROGRAM(as of DeOcm_r B1, 19W)

Loan/ Loan Credit Amount 1Project om. Credit No. Credit Loan Anaroval Date

SOR US$ Lb USs

Trainins and Institutional Development

Construction Industry Cr. 1160 lO-900U 13. 6Ld - April 161Municipal Managemnt Cr. 1697 11.59 1.89- - may 1966Second Vocational Training Cr. 1696 lB.00 16.08 - ay 1986

85.20 41.60 -

Water SuPIvY and Sanitation

Water Supply Cr. 709 - 9.20J - may i9tWater Supply and Sewerage I Cr. 1941 - 80.L4 - June 1980Water Supply and Sanitation Cr. 1760 B210 837.00 _-. May 1986

Rehabilitation 82.10 76 20 _

Other Pro,,]fo

Telco_municationo Cr. 1M - B.O 0/ - June 108Progrm Credit Cr. 512 - 16.O/d - Sept. 1974

GRAND TOTAL 118.O0 A66.68 210.71

/ original principal; cancel lotions not taken Into account (totl cancellationg as of 12/J1/97amounted to USf29 Sl million or a litttl ovor 10 of the loan principal* and to U64 millionequivalent or l1e than OX of the country total for all credits.

Lk USJ equivolent ot SDR denominated credit at time of approval.LS fully repaid/cancelled credit or loan./j fully disburse credit or loan.LO not yat etfctive.

- 22 - Tobl-e

Pe 1


SRI LANKA

MNAUELI GANGA DEVELOPMENT PROJECT II (CREDIT M91-CE)MAMAWEL GANGA TECINICAL ASSISTANCE PROJECT (CREDIT 979-CE)

PROJECT EVALUATIONS /

Report Date of oeard DistrlbutlonNo. Report Title/Loan No. Sec. Mo

A. Prolect Evaluation* Issued

1622 93/15/77 Program Credit (Cr. 612) 77-1651688 12/22/77 Second Development Finance 77-894

Corp. (Ln. 84)2798 12/26/79 Drainage A Land Reclmation 39-12

(Cr. 161)2861 12/26/70 Lift Irrigation (Cr. 121) 8e-6r8272 12/81/80 Agricultural Dew. (Cr. 5695) wo-9n8871W 12/07/81 Fourth Powor (Ln. 686) 61-19118711 12/97/61 Fifth Power (Cr. 672) 61-10128789 12/26/81 Mahowell Gangs Dev. 81-1029

(Stage I) (Ln. 658/Cr. 174)3941 04/18/64 Tree Crop Diversiftictlon 04-815

(Tea) (Cr. 619)I045 04/16/84 Dairy Development (Cr. 504) U4-48US9a6 12/28/65 Tank Irrigation 86-67

Modernization (Cr. 666)b6229 6/02/66 Firest Water Supply (Cr. 709) 66-6646821 96/27/86 Third A Fourth DOvelopment 686619

Finance Corp. (Cr.. 56e/742)6795 95/22/87 First Smll and Medium 87-624

Industries (SMI) (Cr. 942)Lk

B. Prolect Evaluations Under Preparation

- - Agricultural Extenslon and -Ad.titve Research Project(Cr. 981-CE)

- - Construction Industry -Project (Cr. 1189-CE)

- - Eighth Power Project -(Ln. 21C7-CE) /

- - Second Water Supply and -Sewoerge Project(Cr. 1041-CE)Ib

- - Tr" Crop Rehabilitation -

(Tea) Project (Cr. 616-CE)- - Mahawell Gongs Dovelopment )

Project II (Cr. 7M1-CE) )- - ahawell GOngs Technical )

Assistance Project (Cr. 970-CE) )this report

La Status as of Decembr 81, 197.L Pass-through PCR.

- 23 - AnnexBorrower Comments

JUS0156 JGK848 IN 27/01:16 OUT 27/01:18

22049CECBJVR CE

OUR TLX: CECD 1010244

24TH JUNE 1988

TO: MR GRAHAM DONALDSON

CHIEFAGRICULTURE, INFRASTRUCTURE AND HUMAN RESOURCES DIVISION

OPERATIONS EVALUATION DEPARTMENT

UDRLD BANK

THANK YOU FOR SENDING COPY OF THE AUDIT REPORT RE:

PROJECT PERFORMANCE AUDIT REPORT SRI LANKA, MAHAUELI

GANGA DEVELOPMENT II PROJECT, MAHAUELI GANBA TECHNICALASSISTANCE PROJECT (CREDIT 701-CE AND CREDIT 979-CE)(STOP) THE MAHAUELI AUTHORITY OF SRI LANKA HAS ALREADYSENT ITS CONMENCTS TO YOU (STOP) I CONCUR UITH THOSEDOMMENCTS (STOP) OTHERUISE. THE AUDIT REPORT IS GENERALLY

ACCEPTABLE.

RODSR.S. JAYARATNE

SECRETARY

MINISTRY OF MAHAUELI DEVELOPMENTSRI LANKA

22049CECBJVR CE22049CECDJVR CE

506270619

NNNN

-25 - AnnexB-orro-wer- Comments

id SY;,. £q o: '. I-- so3e:a 9806,09*7

Pl_nng and Monito,ng Ui tA" *v>, N4. *9d/i. nd Fi.1e . th Colon** 10L

A_WUFPWUWflYIWiWWbW T tohdon,: Oitoco5971f/ * .I

20th June 1988.

Mr arahai,k Donaldson,Chief Agy cultureInfra.st.-ucture & HumanResources Division,

Operationa Evaluation DepartmentThe World bank,1818 H Street, N.W.Washington, D.C. 20433,

Dear Mr Donaldson,

rroject Performanco Audit Report Sri LankaMahaweli Canga Development II ProjectMahawoli Ganga Technical Aaaistance Project(Credit 701-Cs and Cr-edit 979-CE)

Vnclosed please find our commente on theabove.

Yours sincerely,

Lalith codamunneSecretary GeneralMIUH&WELI AtlTHORITY OF SRT LANK


'Comments on Mahaweli Ganga Development project 11 CompletionReport (1987) of the World Bank

The World Bank funded component of the Mahaweli Sys-Lem H develop-ment work commenced in December 1977 and was completed In mid19tIb. 'V'h.s was identified by the name "MahaweJi Ganga Project II"and consisted of the following aotivities.

(1) construction of irrigation and road infrastructure andprovision of construction equipment in the new 114 and H5 areas(39,000) acres;

(2) construction of boclal infrastructure in H4, Hb, H2, H7and H9 areas (6b,000 acres);

(3) provision of farm machinery and operation and wain-tenance equipment for areas mentioned in (2) above and HI ('(1,000acres):

(4) provision of support for agricultural extention and re-search, including vehicl"e and equipment for the areas mentionedin (2) and (3) above as well ae H3, H6, HO, HI0, H1l and H12(106,000 acres).

In March 1987, a Project Completion report was prepared by theWorld Bank based on a draft prepared by PMU/MASL In June 1984 andother date. obtained from the Financial Controller of MASL. Thedraft prepared by the PMU/MASL did not include a benefit costanalyals of the Stage II project either in financial terma oreconomic terms. The World Bank carried out an economic analysisof t.he project taking into account only the costa and benefits inH4 and H5 areas. This analysis reported in thn VCR yielded aneconomic rate of return (ERR) amounting to -1%.

This PCR does not elaborate in aufficient detail the assumptionson which the economic price for rice, the maJor product of theproJect was calculated. Further, the base year for the benefitcoat calQuJatjon is also not given. 'I'he only clues given are:

a/ that L!e economic prices of internationally traded itemaare based on IBRD commodity price forecasts, August 1986; and

b/ that the proJect has brought Sri Lanka's goal of toodself sufficiency within reach (page 32).

The comparion v'f actual costs in current terms of two itemswhich were exclusively for 1H4 and H5 areas, namely irrigation in-frastructure and on-farm works showed that the economic costsreported were about 30% higher than the actual costs. GiveA thattne standard conversion factor used was 0.85 which should reducethe economJc value of costa .n current prices, this implies anincrease of economic costs from financial costs by about 65%. Ap-parently thie was brought about as result of expressing the ac-


tual coots incurred in constant terms. The base year selected islikely to have been 1986, the year of project completion. Theshadow pri(;e for a commodity varies according to the base yearselected for calculation.

Tec et%jcnOmiC price of rius was apparently calculated on thehba.i of the export optiurI under the assumption that once selfsufficiency was achieved, the surplus would have been exported.

The cxpected EBIB at appraisal for this project waa 21%. TheComp)etion report identifi-ed the depressed rice price in theworld werket in the recent yearn and the low prJces projected forthe future aa the maJor reason tor the negative ERk obtained atshadow prices based on 1986 projections of the World Bank. Thereport also mentioned that the ERR in 16% when the rice pricesuaed at appraical are applietd to the anialysis.

1. The government of Sri Lanka has declared crop diversificationas a major goal of the oational agricultuire development strategy.Mahaweli Axthority has aleco recognised this as a priority and ispresently engaged in promoting the cultivation of non-rice crops.Further, private profitability (aB well as social profitability)of rice cultivation has declined in real absolute terms and inrol Ativa terms againot other crops. Therefore, it is reasonableto expect a signifcant departure from the present cropping orop-ping pattern in System H at least in the Yala season. The es-timateo of future with project cropping pattern used in theCompletion Report did not allow for this. Instead it was assumedthat the preeent (1984/85 crop year) cropping pattern willprevail, during the entire life time of the project. As noted inthe report crop diverMification should result in higher economicretturns from the project.

2. As rioted earlier, the shadow/economic price of rice used inthe analysis appearw to reflect the economic loss to the societydue to a reduction in exports. In our view, the realistic oppor-tunit.y cost of rice in System H is given by the lose to thesocicty as a result of having to import rice. Although Sri Lankais nearing the threshold of self sufficiency, at the margin sheis likely to continue to be a net importer of rice. The decliningrcal profits from rice oultivatiotn and the resulting concernabout farmer living standarde together with the difficulty of en-tering the world market has led to a significant shift in thegovernment agricultural policy. Apart from this the operation ofmarket forces by lowering the domestic rice prices in real termsshould force marginal farmers to move u.t of rice cultivation.TYI brief, the following points suport the view that arop diver-aification is more likelier than a situation of rice productionat levele exceeding local demand. a/ rice varieties which yieldgrains of exportable quality have not been bred to suit localconditions; b/ breeding Ruitable varieties takes a long time and

- 28 - AnnexBorrower Comment

in any case they are likely to he low yielding relative to thepresent varieties; c/ profits from rice mono-culture havedeclined Jn re6a tern:s and relative to other crops inr the recenttimes; d/ the coat of production of rlue in Sri Lanka too high tobe competitive In the wz,rld market, d/ given adequate extention,nredit. and marketing facilities, most farmers would favour thecultivation of other crops, a good example being t.he rapid oxpan-sion of the area cultivated in chi'lIee in 6y;stem H.

The most reeont excercise of the government planners to analyset.he dom"t.tei demand and supply situation in relation to rice wasoarried oAt in Novomber 1984 (Ministry of P'inance and Planning,1984, XLLCef SAl Stiff1r4enav =d B==od; ExiRort, ErQaPect&Co]ombc'). Thic report estimated that Sri Lanka will he producingkmell burpluees of rice from 1987 and that the surplus will growto a substantial level by 1991. Thlree alternative consumption andproduction estimates, i.e., lower bound, conservative and op-timistic were 001 Eired. The three production estimates for 1987were 129, 141 and 147 million bushels respectively. For 1991,these were 142, 1b8 and 170 million bushels of paddy. In 1986,only 120 million bushels of paddy was produiced in $ri Lanka. Inthe followlng year, 1987, only 102 million bushels of paddy was-aroduoed. Although much of the sudden shortfall in production in1967 can be attributed to adverae weather conditions and the dis-turbances in the North and East, the l.owr bound productlon cc-timates appear to be the moet realistic. Thus in 1991 only 142million buehels of paddy can be expected to be produced. The con-servative consumption estimate based on 10'( kgs./capita for 1991was lF1 millAon bushels. The actual consumption in 1980 - 87period averaged at 104 kgs./capita and therefore was closer tothe conservative estimate than the other two. Thus. even in 1991about 9 million bushels of paddy will have to be imported.

The economic price of rice used by the World Bank is Rs. 2.5 perkilo gra'i for the year i985. Our calculation of the economiQpricse for the import option is about Hu. 3.5 per kilo gram forthe Year 1986. The difference in the two is due to the cost offrieght apart from whiaL ever dlfrerenc-tii owi,g to tthe differenceein price projections between the two years.

Accordingly, even at the depressed present and projected futureprices the use of t,he more rea.listic ecoonomie price for the import option ohould yield a positive rate of return.

V,veri -i dom"oLlc riot production wae to improve in the post 1988peri.od, reaching levels of production indicated by the conservateor optimistic estimates given above, then self sufficiency wouldbe aohievad in the post 1991 period, Say from 1945 - 20(0'1 period.Then assuming that rice exports become feasible, export optionprices can be used only for that period. For the earlier periodimport option prices have to be used. Thus even at shadow pricesbased on 198bb projent.Jong the stage 11 would have a positive ERR.


3. Economi /shadow prices used in project appraisal aro usuallybased on world market prices for them in order to abstract fromimperfections and distortions commonly found in domestic markets.This Is expected to yield a more appropri ate scarcity value forgoods and services than the prevailing market prices. For manygoods and services the world market can be expected to be com-petitive due to the preeence of a large number of buyers and sel-lera. However, the international market for rice is very thinwit.h only 5% of total milled production being traded interna-tionally. Further, this market is highly fragmented and charac-terised by large scale bilateral agreements. In other words thismarket can hardly he considered an open competitive market. Ao-c,ordingly, shadow prices derived on the baiui of observed worldmarket prices cannot be expee.ted to reflect the true scarcityvalue of the commodity. As such, results obtained in this mannershould be interpreted carefully.

4. Food security of a nation is an important goal of governmentsin both developed and developing countries. Various policymeasures adopted towards this goal are motivated by soundeconomic. reasons (protecting the consumers and producers fromcyclical f3uctuations In prices of commodities). Thie explainsthe subsidJsed and apparently inefficient use of scarce resouroesfor farming in many developedi countrieo. Obviously the assuranceof sufficient availability of food at all times has to be pur-chaeed at a cost - that of higher than world market prices.Hence, where food security is sought the shadow price for thatcommodity should contain a premIum above its world market price.Since food security/self-sufficiency is a national goal, theRhadow price of rice for Sri Lanika should be higher then thatbated on a simple border price approach.

'i. Whtile economic benefit/cost arialysis is the standard tool ofthe deveJopment bankers and other policy makers in the appraisalof alternative projects the theoretical foundations of this isstill controversial. Although the principle of shadow pricingt.raded goods at their border price is widely accepted, this ap-proach is not appropriate for all traded goods and services. Agood example is the case olf rice discursed earlier. The deriva-tion of shadow prices of non-traded goods is a much more con-troversial. issue. It has been demonistrated that the informationalconstraints for shadow pricing non-traded goods are considerableand that the potential welfare gains from correct shadow pricescan be signiflcantly eroded by quite small errors in the es-timated shadow prices. Hence the advantages of shadow pricing asagairnst the use of market prices are not clear. It is well knownthat shadow pricing can be very demanding in terms of Jnforma-t.ional requirements and that most analysts rely heavily onvarious approximations and rules of thumb. The World Bank is noexception in this regard.


Any attempt to measure the success of land settlement andnaricultural projecto which have important cocio-political objec-tives in addition to economic product.lon goals by means of asingle index such as ErRR cannot. be considered reasonable. Theoalculation oif EXR is based onjy on the economlc costs andbenefits of projects. tJeually indirect economic benefits andcosts are aImo ignored and on.ly direct costs and benefits aretaken into account. I'he PCR for the St.age II suffers from allthese shortcomings and as a reeult obtained a negative ERR for asuccesful project as admitted by the authors of the document..."Demptte the negative economic rate of reWurn, the project canoertainly be classified as a succesful one. Major objectives interms land development, settlements, and crop production wereachieved and there is much promise for further develop-ment...."1Page 32).

20.06.1986Mahaweli P-ithority of Sri Lanka,Colombo.

- 31 -

SRI LANKA

MAHAWELI GANGA DEVELOPMENT PROJECT IICredit 701-CE

PROJECT COMPLETION REPORT

South Asia Projects Department March 1987Irrigation I Division

- 33 -

SRI LANKA

MAHAWELI GANCA DEVELOPMENT PROJECT rrCredit 701-CE


I. BACKGROUND

1.01 The Mahaweli Canga Development Program has been the centerpiece ofSri Lanka's development efforts for the last twenty-five years. SuccessiveGovernments have viewed che Program as the main vehicle to reduce unemploy-ment, imports of food stuffs, and energy deficiencies and to provide settle-ment opportunities to landless people. A large amount of financial supportwas generated from international donors when the present Government decidedin 1977 to accelerate the Mahaweli Program. At that time implementation ofthe present Mahaweli Ganga II project was just starting up.

1.02 Formulation of the Mahaweli Canga Development Program was initiatedduring 1958-1961, when the Government undertook extensive investigations ofthe water resources of the Mahaweli Ganga river, with the assistance ofUSAID. A Bank Group mission reviewed the results of the investigations in1961 and recommended a study of a proposed transbasin diversion scheme anda number of supplementary investigations. Subsequently, a full Master Planstudy was carried out by the Government during 1964-1968 with the assistanceof a UNDP/FAO-CP team. The Master Plan enJisaged the development of about900,000 acres irrigated agriculture and the installation of about 970 MW ofhydropower capacity from multipurpose reservoirs in the north-eastern dryzone of the country. Irrigation development would cover about 650,000 acresof undeveloped land (jungle and brushwood) and about 250,000 acres of exist-ing irrigated land where irrigation infrastructure would be rehabilitated andimproved and the supply of water would be augmented. As proposed in theMaster Plan, development would be divided into three phases, each includingseveral projects, for stepwise implementation over a 30-year period.

1.03 Implementation of the Master Plan comenced in 1970 with the con-struction of diversion headworks, diversion tunnels and power plants atPolgolla and Bowatenne to improve wvter supply to about 130,000 acres ofexisting irrigated land and to provide full irrigation supply to about 90,000acres of new land (Project r, Stage r). Construction of the head works anddiversion tunnels at Polgolla and Bowatenne and that of a 40 MW powerplant atPolgoll4 were in part financed from IBRD Loan 653-CE and IDA Credit 174-CE(USS 14.5 million each), approved by the Board on January 30, 1970.1/ TheIBD/IDA financed project included also feasibility studies for downstream

1/ See Mahaweli Canga Development Project, Stage I; Project PerformanceAudit Report, December 28, 1981.

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development of the System H area. The project was completed in 1978. Con-struction of a 40 MW power plant at Bowatenne was financed under a separateproject agreement by the Asian Development Bank and OPEC.

II. PROJECT PROCESSING

Project PreParation

2.01 An eight-volume feasibility report for the H System, entitled"Iahaveli Canga Development, Project I, Stage II", was submitted by consult-ants in September 1972. As proposed by consultants the project would consistof:

(i) irrigation development in 71,000 acres, of which 17,000 acres ofexisting paddy land (rainfed or irrigated from small villagetanks), gardens and land under shifting cultivation, and 54,000acres of new land; and

(ii) settlement of about 15,500 individual farm families and theintegration of some 8,000 families living already in the area.

2.02 Water from the Mahaweli Ganga r.7as expected to be available by mid1975 and would be channeled into the existing Kandalama and Kalawewa tanks.Construction of two main canals commencing from each tank would start in 1973and the construction of distributary and field channels was scheduled to keeppace with the settlement of the farmers from 1975. It was proposed to settlethe area fully by 1979 to reach full production levels by 1987. Projectinvestment cost was estimated at about Rs 766 million (about US$128 million)and the Economic Rate of Return was estimated at about 12 percent.

2.03 Bank staff had several problems with the proposed project, chiefamongst them:

(i) the very high investment cost of about US$ 1,800 per acre, caus-ing a marginal rate of return; and

(ii) the proposed rate of implementation of about 14,000 acres peryear, which was considered overly optimistic.

The Bank therefore advised that the project should be re-formulated.

2.04 A PAO/CP preparation mission was mounted in late 1974 to prepare amuch smaller, first phase, system H project, covering only 14,000 acres ofnew land (Zones H7 and H9)and 4,000 acres of existing irrigated land (ZonesH6 and H8), all located downstream from the existing Kandalama tank and thenew Dambulu Oya tank. The same FAO/CP mission also prepared an IrrigationModernization project located in other areas of Sri Lanka.

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First Appraisal (1975)

2.05 In April/May 1975 a Bank mission appraised a project, composed of thefollowing cwo parts:

(i) Mahaweli Canga Development Project, Stage It, Phase I, comprising14,000 acres of new land in Zones Ht and H9 (as proposed byFAO/CP) and 12,000 acres of new land in Zone H2, below theKalawewa tank; (estimated cost US$ 42 million, or about US$ 1,600per acre), and

(ii) Irrigation Modernization Project, comprising five existing tank-fed irrigation schemes, covering an area of about 31,500 acresoutside System H (estimated cost US$ 18 million).

2.06 The decision meeting (July 9, 1975) concluded that the two parts ofthe project were unrelated and decided to process them as separateprojects 1/. Both FAO/CP and Bank staff favoured irrigation modernizationbecause of expected higher rates of returno Government, on the other hand,gave a higher priority to the Mahaweli Canga project and was decidedlyunhappy with the Bank's decision to split the H System project into twophases. At the time of appraisal, Government had already started developmentof 6,000 acres below the Kalawewa tank with its own resources. The appraisalmission commented adversely on the quality of ongoing construction work inSystem Ho The mission also expressed concern over the availability of suffi-cient irrigation water for the entire System H area and recommended thatadditional studies should be undertaken.

2.07 In September, 1975, the Government again requested the Bank that thescope of the System H project be expanded to include the entire 71,000 acres,as proposed in the feasibility study. Earlier, the Government had unsuccess-fully approached a number of other donors (Canada, US, UK, Netherlands)requesting them to finance separate parts of the H System. All four donorshad, however, participated in the Bank's appraisal of the project and sharedthe Bank's view that Governsent's plans for implementation were overlyambitious. Government's request was therefore not accepted.

2.08 Agreements were reached on financing contributions and terms for theproject during a meeting of all donors which was held in Washington in Decem-ber 1975. In order to consult with Government prior to negotiations, theBank decided to send a post-appraisal mission for the Mahaweli Ganga projectto Sri Lanka in January 1976. To its surprise the post-appraisal missiondiscovered that:

1/ The Irrigation Modernization Project, renamed "Tank Irrigation Modern-ization Project", Credit 666-CE was approved by the Board on November 30,1976.

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"During the last few months, GOSL has stormed the proposed projectarea of 26,000 acres with equipment and men from ten governmentalorganizations and contractors and it is likely that they will com-plete civil works in 15,000 acres by the end of 1976 and all 26,000acres by mid-1977. So far, all efforts has been for civil engineer-ing works only. We have, therefore, proposed to reformulate theproject co comprise civil works and land leveling in new areas H4and HS, altogether 39,000 acres, and agricultural development,including supply of farm tractors and agricultural supporting serv-ices together with village infrastructures in all Stage rr areas of71,000 acres. COSL accepted this and we shall guide them withchecklists in preparing a report for our appraisal around earlyApril (1976)."

2.39 In its report of March 26, 1976, the post-appraisal mission concludedthat GOSL's speedy implementation of the irrigation works should beencouraged and the pace maintained. However, the mission also observed asevere shortage of fp.rm equipment in the area and that construction of socialinfrastructure was lagging behind the irrigation infrastructure and settle-nent of the new farmers. The -mission considered whether or not it shouldrecomend retro-active financing of ongoing civiL works in the originallyappraised Stage I area (26,000 acres). But since IDA procurement procedureshad not been followed in contracting the works and GOSL did not want to stopthe works and re-tender in accordance with IDA requirements, the missionrecommended against retro-active financing.

2.10 The mission proposed that the revised project should include:

(i) construction of irrigation and road infrastructure and provisionof construction equipment in the new H4 and HS areas (39,000acres);

(ii) construction of social infrastructure in the new H4 and H5 areasand in the three Stage I areas appraised in 1975, i.e. H2, H7and H9 (total 65,000 acres);

(iii) provision of farm machinery and operation and maintenance equip-ment in areas indicated under (ii) above plus the H1 area,developed in 1974/75 (total 71,000 acres); and

(iv) provision of support for agricultural extension and research,including vehicles and equipment in areas H1 through H9, includ-ing the H3, H6 and H8 areas, developed between 1946 and 1954(total 87,300 acres).

The total cost of the revised project was estimated at about US$ 120 million,including US$ 32 million in taxes and duties and a foreign exchange componentof US$ 35 million.

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Second Appraisal (1976)

2.11 The project was appraised again in May/June 1976 by a team of fourIDA staff and a consultant, none of whom had participated in the firstappraisal. Representatives of Canada, Netherlands, UK and USA, participatedin various stages of the appraisal. The re-appraised project included aLlthe components outlined above in paragraph 2.10, except that the provision ofextension services was also extended to H10, Hll and H12 areas, develocedbetween 1954 and 1964. The total coverage of the extension component thusbecame 106,000 acres. The mission focussed its attention on a number ofsubjects, briefly discussed below.

2.12 Construction Methods. In view of the limited employment oppor-tunities in the area, the mission recommended that some works be done bymanual labour, instead of machines as proposed originally. These work itemswere ti) clearing of under-vegetation and small trees; (ii) land shaping onslopes of less than 2 1/2Z, and (iii) construction of field bunds. Althoughfinancial costs were about the same, economic costs for manual execution ofworks were only about two-thirds that of machines.

2.13 Procurement Procedures. Clearing of jungle (except large trees) andconstruction of distributaries, field chanaels, farm ditches and drains wouldbe carried out by small contracts following Local Competitive Bidding (LCB),or on a "piece work" basis. In view of the limited capacity of the privatesector, it was further proposed that up to 50Z of the capital intensiveworks, i.e. clearing of large trees, construction of main and branch canalsand roads and buildings, would be allocated under negotiated contracts topublic agencies, provided that (i) unit prices would not exceed those in thelowest evaluated LCB bid for similar work; (ii) prequalification standardsacceptable to IDA would have been met by all participants (whether LCB ornegotiated contract); and (iii) IDA would approve all public sector contractsbefore they were awarded.

2.14 Implementation Schedule. Completion of different project componentswas to be scheduled as follows:

Irrigation Infrastructure and Settlement 3 yearsSocial Infrastructure 4 yearsOn-farm Works 5 years

Conditionality was proposed to ensure proper sequencing of variousactivities, chief amongst them that no settlers would be brought into an areaearlier than three months before the expected delivery of water.

2.15 MD8 Organization. The mission proposed, and Covernment agreed, todivide 51DB's organization into two parts, i.e. (i) Engineering Design andConstruction and (ii) Operations, each under a Ceneral Manager who wouldreport to the Chairman, 1DB. The Operations Department would have threesections, i.e. (i) Agriculture, (ii) Settlement and Community Development,and (iii) Irrigation Operations and Maintenance. This set up was expected toresult in a better feed back from the field to the planning of new areas andto reduce the heavy emphasis on engineering at the management level of 1DB.

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2.16 Field Organization. In order to ensure proper coordination betweenagricuLtural extension, irrigacion and community developmenc, it was proposedto establish a project management team consisting of a Resident ProjectManager (RPM), reporting directly to the General Manager, Operations andthree Deputy RPM's, i.e. Agriculture; Engineering; and Settlement and Com-munity Development. Government had earlier decided to establish a separateextension district-for the System H area (as recommended by the firstappraisal mission) under a Project Agricultural Extension Officer (PAEO) whowould report directly to the Deputy Director, Extension, in the Department ofAgriculture. The PAEO, ex officio, would be Deputy RPM, Agriculture. AProject Advisory Committee (PAC) would be established under the chairmanshipof the RPM, with senior officers and farmers' representatives as members.

2.17 The second appraisaL mission produced its green cover report byNovember 1976. A meeting with the four co-financiers was held in December1976 to decide on contributions and on conditionality for external financing.An important issue all along had been the recovery of Operations and Main-tenance (0&M) and capital costs. Recovery of OEM costs was provided for inthe "Land Betterment Charges Act", passed by the Sri Lanka Parliament inOctober 1976. The Bank was led to believe that passage of the Act wouldimmediately be followed by detailed regulations to implement the Act. But byOctober 1976, it had become clear that regulations would not be issued untilafter the elections, scheduled for mid-1977, in view of strong opposition towater charges voiced in Parliament during the debate on the Act. The Bankconsidered for a while whether or not promulgation of detailed regulationsshould be made a condition for negotiations. But in consultation with theother donors, the Bank decided against this in order to avoid the risk ofdelays in capitalizing on the heavy investments already made under theMahaweli Ganga I Project. The Bank and the other donors therefore agreedthat Government should be required to complete by January 1, 1978, alladministrative and other measures necessary for imposition and collection ofappropriate charges. Part of the capital co_ts would be recovered under theprovisions of the "Sale of State Lands Law" under which the land would besold to the settlers.

Negotiations

2.18 Negotiations were held from March 7 - 15, 1977, in Washington. TheGovernment delegation was composed of the Secretary of Ministry of Irriga-tion, Power and Highways and the Director of Economic Affairs. Repre-sentatives of the Netherlands and UK attended the sessions. The proposedcost recovery plan was one of the main subjects discussed during nego-tiations. Other subjects discussed included procurement and audit arrange-ments, technical assistance and appointment of an additional General Managerfor MDB's Operations Department.

2.19 Recovery of Capital Cost. The Sri Lanka delegation said that underthe Sale of State Lands Li>-aof 1973, the Covernment was in the process ofselling State lands to settlers for cash or on a 20-year mortgage at 4iannual interest. Sales notices had been served to 90,000 settlers throughout

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the councry with the option to purchase irrigated land developed under pastschemes. In the project area, 4bout 68,000 acres or over 95% of the total,was State land. The balance had been, or was expected to be, acquired byGovernment by the end of 1971. Land sales would be completed in accordancewith the sectlement schedule. The average sales price, based on the cost ofimprovements provided to the land, would amount to about Rs 3,550 per acre(about Rs 8,900 per family).

2.20 Recovery of O&M Costs. The Government delegation said that thepreparation of detailed regulations for implementation of land bettermentcharges was nearly complete. The regulations would be submitted for approvalto Parliament following the 1977 national elections. Actual collection ofthe land betterment charges would begin after the 1978 Yala harvest.

Board Approval

2.21 An IDA Credit of US$ 19 million was approved by the Board on April21, 1977. A summary of estimated project costs follows below:

Rs M US$ M

Irrigacion and Land Development 303.6 41.7Production Support 112.7 15.5

L. Social Infrastructure 46.3 6.4Settlement 16.7 2.3Technical Assistance 4.0 O.5Monitoring Project Performance 4.4 0.6Engineering, Supervision, Administration 32.6 4.5Base Cost 520.3 71.5Physical Contingencies 49.4 6.8Price Contingencies 161.9 22.2Total Project Cost 731.6 100.5Total Project Cost, less Taxes and Duties 582.4 80.0

The foreign exchange component was estimated at US$ 32.6 M, or 41% of totalcost, net of taxes and duties.

2.22 Financing of total project cost, net of taxes and duties, wasarranged as follows:

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Source of AmountFunds (US$M) Terms

IDA 19.0 Standard

Canada 6.0 Interest free loan to be reoaid over 50years, including ten years' grace.

Netherlands 5.0 2 1/2Z interest loan to be repaid over30 years, including eight years' grace.

UK 7.2 Crant

US 5.0 3% interest loan (2% during graceperiod) to be repaid over 40 years,including ten years grace.

Commercial Banks;Suppliers Credits 9.1 Varying

GOSL 28.1Total 80.0

The contributions by Canada, UK and US were for tied procurement of equipmentand for construction of civil works under paralleL financing arrangements.The Netherlands contribution was untied in joint financing with IDA. Sub-sequently, a further contribution of 2 million Units of Account (about.US$2.4M) was granted by the Commission of the Eurovean Communities to helpGOSL defray the cost of local expenditures.

Credit Effectiveness

2.23 Due to delays in finalizing arrangements for the US contribution,the IDA Credit became effective only on December 29, 1977. Meanwhile,national elections had been held in July 1977 and the main opposition partyhad won a large majority of seats in the National Assembly. The new PrimeMinister (subsequently elected President of the Republic) had made a commit-ment during the election campaign to accelerate the implementation of theMahaweli Program, making it the cornerstone of his development policy for thecountry. The main objectives of the proposed acceleration of the MahaweliProgram were (i) immdiate reduction of unemployment, particularly among theyoung people, and (ii) rapid reduction in the import requirements for staplefood stuffs and petroleum products in order to save foreign exchange.

2.24 In a letter to the President of the World Bank (November 22, 1977),the Prime Minister stated that if the Mahaweli Program was to be implementcdover the scheduled period of 30 years, the benefits to be derived from thescheme would hardly have even a marginal impact on the expectations of theeducated unemployed youth, whose numbers were fast increasing as a resultof free education. The Prime Minister noted that the insurrection of 1971

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was a serious set back to the progress of the country's development programand that the situatior would become explosive once again in the not toodistant future, if not checked in time. The Government considered it animperative need to implement all the projects in the Master Plan in about sixyears, in order that it would have the desired impact to make the countryself-sufficient in its food requirements and to provide employment for atautone million people who were presently unemployed. The Government was com-mitted to settle about 22'.O00 families on the new lands to be opened up foragricultural production and to provide those families the social infrastruc-ture requirements, such as health, education, transport facilities, etc., inaddition co agricultural inputs to achieve maximum production.

2.25 The accelerated Mahaweli Program was estimated to cost about US$2billion over five years and the Government therefore decided to mount ahigh-level mission to seek international support. The Bank took a cauLiousbut supportive attitude toward this new development, noting that it repre-sented a rare political commitment to a productive endeavour which also hadsufficient charisma to induce public :ovings efforts. This episode was toshape future developments of the Mahaweli Program and is referred to in somedetail because it was to have an immediate, and rather chaotic impact on theimplamencation of the Mahaweli II project.

II. IMPLEMENTATION

3.01 The project's components and areas covered are summarized in thefollowing table.

Project CoverageProject Components H-areas Families Acres

Irrigation and Land DevelopmentIrrigation Infrastructure 4,5 15,300 40,300On-farm Works 4,5 15,300 40,300Construction Equipment 4,5O&N Facilities and Equipment 1,2,4,5,7,9 27,000 71,000

Production SupportAgricultural Extension and Research 1-12 39,300 106,000Farm Equipment 1,2,4,5,7,9 27,000 71,000Storage, Marketing and Processing 2,4,5,7,9 24,700 64,900Market Roads 4,5 15,300 40,300

Social InfrastructureSchools 2,4,5,7,9 24,700 64,900Medical facilities 2,4,5,7,9 24,700 64,90UCommunity Development Facilities 2,4,5,7,9 24,700 64,900Village Wells 2,4,5,7,9 24,700 64,900Roads in New Villages 4,5 15,300 40,300

Settlement 4,5 15,300 40,300Technical Assistance 1,2,4,5,7,9 27,000 71,000

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Overview

3.02 As explained above, Government started development of System H underthe Mahaweli Program with its own financial resources. The elections andrelated civil disturbances of mid 1977 had temporarily delayed constructionworks in System H. Effectiveness of the IDA Credit at the end of 1977 coin-cided with the new Government's decision to aScelerate the Program. Withregard to System H, the Government issued an order that all works should becompleted within one year. MDB was put under great pressure to comply withthis unrealistic time schedule. The Army and other public agencies weremoved into the H4 and HS areas to clear the jungle and build the canalswithout regard to proper planning and work standards. The September 1978supervision mission reported a large number of deficiencies in planning andexecution of the works and rated the project as a problem project. Muchdamage was done during the initial period of construction. Due to the poorquality of the works, water conveyance losses in the canals were much- largerand operation and maintenance costs much higher than originally planned.Project implementation started to improve in 1979 and by 1980 both theprogress made and the quality of construction works were satisfactory.Implementation slowed down in 1981, mainly due to budget restrictions. Lap-ses in the quality of construction works were again observed during the early1980's. Instead of completing the project ahead of schedule, as the Govern-ment had decreed, the IDA credit had to be extended two times until June 30,1985. This was to a large extent due to additional canal lining require-ments, part of which could have been avoided if the canals had been properlydesigned and constructed in the beginning. Also, the Government had tendedto delay all concrete canal lining work to the end of the implementationperiod, against tae counsel and recommendation of supervision missions toimplement such work much earlier.

Revisions

3.03 There were no major revisions in project contents. There was,however, a substantial increase in the project's social infrastructure com-ponent, mainly because of the addition of police stations, post offices, andliving quarters for all teachers, which had not been provided for in theoriginal project. Similar provisions were later also made for the MahaweliIII and IV projects. Several minor tanks in the H4 and H5 areas wererehabilitated instead of being breached as planned at first. It was alsodecided to metal and tar the principal roads in the project area, including72 miles in 14 and H5; the original plan provided for gravel roads. Thetarget for the construction of drinking water wells was changed from one wellfor 20 families to one well for six families. All the above changes couldeasily be accommodated within the available project funds.

Implementation Schedule

3.04 The Kalawewa Right Bank main canal was completed one year behindschedule in December 1980, and the last of the six branch canals one year

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later in December 1981. At the time of the project's scheduled completiondate, i.e. June 30, 1982, about 80X of the civil works had been completed.All works were fully completed by June 30, 1985, or three years behindschedule. A total of 90 schools, eight health centers, 300 buildings foragriculture activities and staff, and 600 buildings for O&M were completedthroughout System H. During the entire project implementation period thetime lag between jungle clearing and construction of irrigation infrastruc-ture on one hand and on-farm development and construction of socialinfrastructure on the other hand was much longer than originally planned. Insome instances, particularly in the H5 area, delays of up to five yearsoccurred between initial jungle clearing and the development of on-farmirrigation and drainage systems and land preparation. As a result, substan-tial expendicures had to be made to clear vegetative regrowth from the area.The settlement program frequently ran far ahead of the first delivery ofirrigation water and the completion of schools and clinics, causing unduehardship to the settlers. The major reason for the poor phasing of variousdevelopment activities during the first two years was Government's determina-tion to accelerate the Mahaweli Program, focussing primarily on jungle clear-ing, construction of main and branch canals and settlement. In later years,shortages of local funds delayed implementation progress. Late delivery ofequipment and spares and organizational changes in the Mahaweli agencies alsocaused some delays.

Settlement Program

3.05 Settlement in the new areas fell short of appraisal targets:

Zone Appraisal Actualp June 30, 1985Farm Area Number of Farm Area Number of(acres) Farm Families (acres) Farm FamiLies

Hi and H2 16,100 6,120 14,250 5,721H4 23,200 8,800 20,000 7,630H5 17,100 6,500 14,000 5,219H? and H9 14,600 5,600 13,800 4,603Total, New Zones 71,000 27,020 62,050 23,173

3.06 The shortfall was, amongst others, due to decisions to (i) retainand rehabilitate minor tanks which originally were intended to be breached;and (ii) retain land already planted with coconuts. More detailed mappingand design surveys also found more land to be outside of gravity command thanoriginally anticipated. All farm families were allocated 2.5 acres ofirrigable land and 0.5 acres non-irrigable homestead sites, as planned. Inaddition, some 3,600 non-farm families were settled in System H who receivedhomestead plots only. Among the families settled in H4 and HS, about 701were resettled from within the area; 201 were selected on the basis of elec-toral or district quota; and 101 were evacuee families.

3.07 Some encroachments by illegal settlers have occurred in the H4 andH5 areas, particularly in the parts reserved for forest plantings. However,it i.s believed that such illegal settlement amounts to not more than about 3Z

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of the irrigable land in H4 and HS. The Surveyor General's Department issurveying all farm Lots in the new H areas in order to offer all settlers theopportunity to purchase and receive free title to the Land, while at the sametime regularizing or evicting the illegal settlers, depending on each par-ticular case. During appraisal, it was estimated that about one quarter ofthe land in HA and HS was privately owned or had been leased out by theGovernment. In order t: 3ettle the planned number of families, privatelyowned land had to be acquired. Land acquisition notices were issued for some15,000 acres. However, relatively slow progress has been made in payingcompensation to the owners. As of June 30, 1985, about Rs 34 million hadbeen paid out for about 14,800 farm Lots. Compensation for another 8,650farm lots still had to be paid and the rate of progress in mid 1985 suggestedthat this would take another 12 to 18 months.

3.08 The original consultants feasibility report had recommended a modelfarm size of three acres, with actual size of the farms depending on the sizeof the farm family. Consultants had also recommended that all farms shouldinclude both low lying lands (suicable for rice only) and uplands.Presumably to avoid complications in the settlement program, standard 2.5acre lots of farmland (highland or lowland or a mixture of both) were dis-tributed regardless of the size of the families. This was a correct decisionsince the composition of families changes quickly.

3.09 From the beginning, some of the settlers have leased out part oftheir land. In the absence of a survey, it is not known why land is leasedout or how widespread this is being practiced. However, financial and landpreparation difficulties are considered to be the principal causes. Thesituation should be closely monitored and the causes identified with a viewof avoiding social imbalances in the project area and inequitable distribu-tion of benefits among the settlers.

3.10 Every effort was made to provide the settlers with basic needs duringtheir initial stay in the area, including: temporary housing for the heads ofhouseholds; initial jungle clearing; housing grant; provision of tools; paddyseed and planting materials; and food rations distributec by the World FoodProgramme, in accordance with plans made during preparation/appraisal of theproject. Nevertheless, many settlers experienced considerable hardship inthe first few years after settlement due to:

(i) initial land clearing had preceded settlements by a long periodand jungle regrowth hampered topographical surveys and landmarking;

(ii) some of the on-farm development work lagged behind settlement dueto shortage of machinery and labour at the right time;

(iii) water deliveries were not made within the period specified andflow of water to some fields was impeded because parts of thenewly constructed irrigation network were defective; as a resultthere were sometimes long delays between settlement and cultiva-tion of the first irrigated crop; and

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(iv) delays in construction of social infrastructure.

3.11 Pr ject staff have suggested that the emphasis on construccionactivities during the early years of System H and the relatively tate invol-vement of the Mahaweli Economic Agency (MEA) may have negatively affected thewell-being of part of the settler population. In the new B and C Systems,construction and development activities are better synchronized. System Hproject staff continue to explore possibilities to improve conditions for thesettlers, for exampLe by providing assistance in the procurement of buildingmaterials for their houses.

Social Services

3.12 The population .f the new H areas increased in accordance with theappraisal projections and had reached about 138,000 persons at the end of1983. But a survey of six villages in the new areas indicated that forunexplained reasons the student population was almost 50X higher thanprojected. This resulted in serious strains on the education facilitiesprovided for by the project. There are, at present, shortages of both class-rooms and teachers. The construction of health facilities was completed asplanned, except that some of the dispensaries were upgraded. However,according to the present Public Health Care (PHC) system there should havebeen a higher number of the lowest level of health facilities (dispensaries,maternity homes, etc.} and a lower number of rural hospitals and DivisionalHealth Centres. Medical staffing of the new facilities was in 1984 about 5Zbelow PHC standards. The new H areas are now fairly well served with waterwells for domestic use following the decision to increase the ratio from onewell for 20 families to one for six families. UNICEF has provided covers andhand pumps for about 700 wells. UNICEF also has provided funds for con-structing tubewells throughout System H to provide a perennial supply ofwater to areas where shallow wells do not provide adequate or suiteble water.

Agricultural Extension

3.13 The project has supported agricultural extension services in all Hareas, both old and new. In the new H areas, extension officers are respon-sible to the project management and not to the Department of Agriculture asin other parts of the country (see paragraphs 4.03 - 4.05). The Departmentof Agriculture supports extension work in all H areas through training ofextension workers and contact farmers at the Maha Illuppallama researchstation. Buildings, equipment and vehicles for training activities of theresearch station were provided by the project. Compared with appraisalestimates the actual number of senior agricultural staf. in the H area(project agricultural extension officer; subject matter specialist; agricul-tural officer) is about twice as large and the number of field staff (agricul-tural instructor; KVS) only about one half. The shortfall of field staffdoes not seem to have affected the quality of extension services in the area.The extension program emphasizes timely cultivation, fertilizer applicationand weed control in paddy. The high crop yields achieved in the project area

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after a relatively short period of development reflects well on the effec-tiveness of the excension services. As for the future, both agriculturalresearch and extension should place greater emphasis on aspects of watermanagement and on the cultivation of field crops other than rice.

Agricultural Credit

3.14 The objeccive of cultivation loans is to encourage the use of moderncrop inputs and cultivation practices and to provide the borrowers with somerelief from village money lenders. National schemes for the provision ofcultivation loans have been made available in the Mahaweli areas throughthree commercial banks, i.e. the Peoples Bank and the Bank of Ceylon (bothstate owned) and the Hatton National Bank (privately owned). The banks donot operate in the same area; for example H4 area is served by the PeoplesBank and HS by the Hatton National Bank. The Central Bank has been settingthe interest rates at well below market levels and has been refinancing up to1002 of disbursement for rhe scheduled repayment period of 270 days. Thecommercial banks have to carry the repayment risk. The risk has been verysubstantial during recent years. This has Led to a major reduction in theuse of credit for cultivation in the H areas. In H4 area, for example, thenumber of loans made and the amounts disbursed in the 1984/85 Maha seasonwere less than one third of the previous Maha season. Repayment for the1983/84 season was only 38% as of June 30, 1985, while repayment for thefollowing 1984/85 season had already reached 63Z on that date (see table 1for details). Repayment performance had been falling since 1980/81. Maha1983/84 recoveries were particularly poor because of excessive rains and cropfailures in many places. Farmers had to repay their previous loan in fullbefore they could qualify for a new one; in addition they required the signa-tures of two guarantors for the loan.

Use and Supply of Crop Inputs

3.15 Actual fertilizer use for paddy in the newly developed H areas isfairly consistene with the recommendation of the Department of Agriculture.Substantial amounts are also used on some other high-value crops such aschillies, but use is low on low value crops such as cowpeas. Fertilizer useis still being subsi dzed by the Government. Agro-chemicals for use againstpests and weeds are a* Kuseod widely; they are in part produced in Sri Lankaand in part imported. Ad te supplies of seeds are regularly availablefrom the Department of Agriculture and from licensed seed farmers in System H.

3.16 MEA acts as agent for the supply of major farm inputs and arrangesfor transport from suppliers warehouses to stores located in the projectarea. From there the inputs are sold to the farmers on cash terms or oncredit. The system has worked well and MEA has been performing an importantrole, since in the early years few private traders had established themselvesin the new settlement areas. In 1983/84 MRA handled all seed supplies, about70% of fertilizer supplies, and about one-half of the agro-chemicals used inthe project area. In 1985 changes were made in the system to ease HEA'slogistic problems. Fertilizers and agro-chemicals are now supplied directly

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to the farmers by agents of private suppliers on direct payment. MEA manage-ment correctly sees MEA's role in the input trade as temporary and isencouraging the private sector to take over a greater share.

Marketing of Crop Produce

3.17 Contrary to expectations at appraisal, the Paddy Marketing Board(PMB) purchases only a small part of the marketable output of paddy and othercrops produced in System H. Studies conducted during the 1982/83 crop seasonindicated that only about 10 of paddy production was purchased by PMB. MEAdata for Maha 1984/85 show that PMB purchased less than 5X of the paddyproduced in that season. In 1982/83, well over 50Z of the paddy productionwas sold by the farmers. Private sector trade appears to have an edge overthe Government's buying system because prices offered have generally beenhigher than the official guaranteed purchase prices. It would appear,however, that PMB's presence has helped maintain floor prices for paddy inSystem H. The original plan to establish a PMB processing complex in SystemH was cancelled. Milling of rice for home consumption is done in smallprivately owned mills.

3.i8 Little information is available on marketing of other field cropsbut it is believed that the greater part of the crops produced is consumed inthe home. Purchases by MEA have been insignificant. However, MEA hasassisted with the purchase and export of chillies to the Middle East and byhelping establish Export Promotion Villages (EPY). These EPV's haveregistered with the Esxport Development Board enabling them to benefit fromexport schemes formulated by Government; MEA recognizes the important role ithas in helping to identify and promote the cultivation of profitable fieldcrops other than rice in the new areas.

Project Cost

3.19 It has been difficult to determine with some degree of precision theactual cost of the project at completion. In part, this is due to the factthat the project, as defined at appraisal, was only one part of a largerongoing effort in System H. Other parts were financed entirely by theGovernment of Sri Lanka. This, together with the sudden acceleration of theMahaweli program in 1977/78 and the reorganization of MDB into MASL, MECA andKEA, has caused numerous bookkeeping difficulties. The best estimate avail-able at this time indicates an actual project cost of about Rs 1,496 million(US$86.2 m), including duti - and taxes, compared to the appraisal estimateof Rs 731.6 m (US$100.5 m). Excluding duties and taxes, the estimated actualproject cost is estimated at Rs 1,457 m (US$84.0 m). Contrary to theappraisal estimate, project goods and services were, for the most part,exempted from taxes and duties.

3.20 Details on the SAR and actual project cost estimates are as follows:

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Projecc Cosc (Rs m)

SAR EstimatedActual

trrigation and Land Development 303.6 779.0Production Support 112.7 195.6Social Infrastructure 46.3 380.6Settlement 16.7 52.1Technical Assistance 4.0 22.1Monitoring Project Performance 4.4 -Engineering, Supervision andAdministration 32.6 65.8

Base Cost 520.3 1,496.9Physical Contingencies 49.4 -Price Contingencies 161.9 -Total Project Cost 731.6 1,496.0Total Cost, Net of Taxes and Duties 582.4 1,457.0

In USS Million:

Total Project Cost 100.5 86.2Total Cost, Net of Taxes and Duties 80.0 84.0

3.21 Expressed in Rs, the estimated actual project cost is more than twiceas high as the-SAR estimate. However, expressed in US$, actual project cost,net of taxes and duties, was about the same as estimated at appraisal. Moredetailed actual costs estimates are given in Table 2. It appears that theactual cost of land clearing, on-farm dvel:-c-1p_nt and construction of irriga-tion infrastructure, expressed in Rs, corresponded quite closeLy to the SARestimates. However, the actual construction costs of roads was about sixtimes, and that of buildings about four times as high as estimated atappraisal. The increased cost of the roads was mostly due to changes inspecifications (asphalt instead of gravel) and that of buildings was mainlydue to increased numbers of such buildings (staff houses, schools, healthfacilities, etc.). Operation and maintenance (O&i) costs incurred by MEA in1981 and 1982 also are included in the actual total cost estimate.

3.22 About 701 of total project expenditures were incurred for works inthe H4 and HS areas, where a comprehensive package of development was sup-ported by the project. Project costs per net cultivated acre for the H4 andHS areas totaled about US$ 1,860 as shown below:

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USSIac

trrigation and Land Development 830Operation and Maintenance Facilities 190Productive Support (Roads) 315Social Infrastructure 355Settlement 90Engineering, Supervision, Administration 80Total, all costs 1,860

Project Financing

3.23 According to SAR estimates external donors would finance about 532 ofthe project cost, net of taxes, and commercial banks, buyers of equipment andGovernment aoout 47%. On the basis of confirmed actual contributions byexternal donors and the estimated actual cost data given in para 3.19, itappears that external donors actually financed 54X of project cost andCovernment and other local sources 462. Details follow below:

SAR ActualForeign USS m Rs M Foreign Rs MCurrency Equivalent Currency

IDA USSm 19.0 19.0 138.3 USSm 11.3 235.7Netherlands DFIm 13.0 5.0 36.4 DPIm 10.6 71.9United Kingdom UXLm 4.3 7.2 52.4 UKLm 3.6 65.0Canada CAN$m 6.0 6.0 43.7 CAN$m 4.5 64.8USA US$m 5.0 5.0 36.4 US$m 4.4 76.2USA Sector Support - - - US$m 10.0 240.1EEC - - - US$m 2.2 37.2Commercial Banks,Buyers of Farm Equip. - 9.7 70.6 - -Covernment - 28.1 204.6 - 666.1Total 80.0 582.4 1,457.0

3.24 Parts of the contributions of all five original donors lapsed or werecancelled at project completion. Only about US$11.3 m of the IDA Credit wasactually disbursed and the remaining balance or abuuc uS57.7 m was cancelledon February 6, 1986, the date of the last disbursement. On the other hand,additional contributions were received from EEC (about US$2.2 m equivalent)and the USA Sector Support program (about US$10 m). The total amount of thetwo supplementary contributions, i.e. about US$12.2 m, and the total amountof the original contributions that were cancelled, i.e. about US$11.9 m, areabout equal.

Procurement

3.2S The Mahaweli Agencies' procurement actions for civil works causedmajor problems throughout the project implementation period. As a result ofthe policies of the previous Covernment, favouring public sector execution ofcivil works, the private sector had only a very limited capacity at the time

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the credit was negotiated. In view of this situation, the Government hadreluctantly agreed with IDA that 50% of the contracts for the construction ofthe Kalawewa Right Bank canal, the branch canals and the village tanks and50% of jungle clearing and land preparation would be awarded to privatecontractors under LCB while the other 50% would be awarded to public agenciesunder negotiated contracts. After IDA credits' approval, M1DB expressed theview that the private sector did not have the required equipment capacity toundertake as much as 50% of construction work requiring the use of heavymachinery. IDA responded by recommending that project financed machinery bemade available to private contractors to improve their capacity for executionof the works. M1DB did not change its position on this and in fact nevercomplied with IDA's recommendation. In hindsight, required LCB procurementfor this work probably should have been made a condition of disbursementunder the credit.

3.26 All civiL works including construction of main, branch and dis-tributary channels, jungle clearing and the construction of the first lots ofboildings were undertaken by a total of five public sector agencies, includ-ing 11D, the Army and the River Valley Development Board (RVDB). The latteragency was given by far the largest share of the works, including the con-struction of the Kalawewa Right Bank Canal. The September 1978 supervisionmission observed that no contracts were bid competitively, none were sub-mitted to IDA for approval and that some of the works were proceeding on thebasis of oral agreements. RVDB had been assigned the design, constructionand supervision of irrigation and drainage works in over one-half of theproject area and was operating without a contract. Following Government 'sdecision to accelerate the Mahaweli Program, M4DB apparentLy had no power toenforce proper planning or scheduling of work or to enforce constructionquality standards. The mission insisted that a list of all civil workscontracts be prepared and submitted to IDA for review, showing details ofcontracts and costs.

3.27 It took almost two years before the situation was more or lessregularized. By mid-1979, most of the civil works contracts had been higned~and 14DB was starting to exercise more control over the other Governmentagencies carrying out construction contracts. By the end of 1979, IDA recom-mended that RVDB be excluded from further contracts because of poor qualityof its construction works and because of non-completion of some of the work.From 1980 onwards, when most of the project's large infrastructure workaLready had been completed, the public sector agencies were phased out.Contracts for all remaining buildings and road works were awarded to privatecontractors.

3.28 Small and medium size contracts for land development works had beenawarded to small private contractors from the beginning of the project.These also caused many problems until the very end of the project, despitethe fact that IDA had agreed to disburse on the basis of Statement of Expen-ditures for small sized contracts (see section on Disbursements).

3.29 Most of the equipment procured under the project was financed byother cofinanciers. The IDA financed equipment, procured between 1978 and

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1982, included mainly tires, spare parts and miscellaneous equipment. Arelatively large procurement of 1,050 two wheel tractors was cancelledbecause IDA objected to the final recommendation for award after MDB hadchanged its recommendation two times. In che end, MDB decided not to proceedwith the purchase because farmers could buy the tractors directLy from localsuppliers. Contracts for various items of operation and maintenance equip-ment were awarded in late 1984 following satisfactory IC8 action by MEA.

Disbursements

3.30 Because the EEC grant was fully used in earLy 1981 and since substan-tial savings in the IDA's and other donors' contributions were anticipated(following the devaluation of the Rupee), IDA and the Netherlands Governmentagreed in June 1981 to a request by Government to increase the disbursementpercentages against civil works as follows:

Old Percentages New Percentages

IDA NIO EEC IDA Nro

(a) Irrigation Infrastructure andLand Development and Roads 25 10 55 48 10

(b) Social Infrastructure andBuildings 47 13 30 65 30

3.31 Disbursements against civil works constructed in the initial projectyears were substantially delayed because of inadequate documentation. In1982, IDA agreed to simplify the procedures by allowing withdrawals againstcontracts below Rs 500,000 through Statement of Expenditures (SOE). Separateaudits by independent auditors were required to certify the SOE's. However,the Mahaweli Agencies were very slow in submitting required audit reports.The first audit reports on SOS's revealed deficiencies in the proceduresfollowed by the Nahaweli Agencies, such as signing of contracts after workswere completed, unauthorized change orders, etc. In view of these qualifica-tions IDA reduced reimbursements against the concerned SOE's.

Cost Recovery for Land Improvements

3.32 There has been broad agreement between Government and the Bank on theprinciple of charging the beneficiaries under the project for the works andservices provided. This was to be accomplished by the sale of the farm andhouse plots given to each settler, wherein the direct costs of developmentwould be charged and the settlers would receive clear title to the land.However, so far no payments have been made by the settlers and the landownership stIll rests with GOSL. The iY7, SAR estimacet ene cost of on-farmworks and other assistance to the settlers in System H to be about Rs 8,880per family. It was proposed that the farmers pay back over 20 years theprincipal amount, including 4% interest on the remaining balance. This wouldresult in an annual charge of about Rs 650 per farmer.

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3.33 Until the early 1980's land in the new H areas (HI, H2, H7 and H9)was alienated through notices published by the Land Commissioner under thesale of State Lands Law of 1973. Agreements were signed between Governmentand the farmers fixing tne costs to be paid by the settlers at Rs 7,862.50for the 2.5 acre irrigatk4 -!its and Rs 1,015 for the 0.5 acre homesteads.The farmers were informed that the payment could be made in one installmentor in ten annual installments, inclusive of interest at 41 per annum on theoutstanding balance. Lands recently occupied by settlers in H4 and H5 havebeen alienated on the same basis, but no agreements were signed between theGovernment and the farmers with respect to the costs to be recovered.However, they were verbally informed at the time of settLement that the samecosts, mentioned above, would apply to their cases. Alienations in H4 andH5, other than those to resettlers, have been made under the more recent LandDevelopment Ordinance Act of 1981. But again, no agreements have been drawnup between Government and individual farmers regarding the costs to becharged.

3.34 Government and the Bank reviewed the situation again during appraisaland negotiations of the Mahaweli Ganga IV project in 1983/84. At that occa-sion, Government gave assurances to the Bank that it would transfer the landrights to the farmers at rates sufficient to recover the costs of settlementassistance (housing, grant, tools, and seed/seedling materials), land clear-ing, on-farm development, field canals, field drains, and any other improve-ments agreed to between the Government and the Bank. The cost of on-farmworks and settlement assistance was estimated at that time at about Rs27,500per farm/family. However, so far no payments have been made by the settlersin any of the Mahaveli schemes.

Water Charges

3.35 In contrast to the lack of recovery of costs of capital development,an encouraging start was made in 1984 with the collection of water chargesAfter years of deliberations, and with due regard to the political sen-sitivities involved, Government finally made a number of firm decisions in1983. These included amendments of the Irrigation Ordinance, e.g. (i) tostreamline action against water charge payment defaulters; and (ii) toempower Covernment Agents to repair damaged irrigation works and recover thecosts from the offenders. At the same time, water charges for gravityirrigation schemes were fixed at Rs 200 per acre to cover the current averageO&M costs. In the initial year i.e. 1984, only as 100 per acre (one half ofthe established rate) would be charged. The rate would gradually beincreased in succeeding years so as to recover as 200 per acre by 1989.

3.36 Publicity and education programs regarding the recovery of 06) costswere carried out in System H in the latter half of 1983. The assessed amountof water charges for 1984 was about is 5.8m of whic 8is 4.2 m (73Z) nad beencollected as of June 30, 1985. Legal action under the Irrigation Act wastaken against farmers who did not pay water charges.

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IV. ORGANIZATION AND MANAGEMENT

Mahaweli Agencies

4.01 Until 1979 the organization of the Mahaweli Development Board (MDB)conformed, with some minor variations, to the description given in paras 1.16and 1.17 of the SAR. In view of the size of the System H project, two Resi-dent Project Managers (RPM) were established in the field instead of one -this was later further expanded to three.

4.02 In 1979 Government concluded that it required a strong central plan-ning and decision-making body to meet the challenges of the ambitiousAcceleraced Mahaweli Program. Therefore the Mahaweli Authority of Sri Lanka(MASL) was created by an Act of Parliament in March 1979. MASL's two prin-cipal executing agencies were at first the Central Engineering and Consult-ancy Bureau (CECB) and the Mahaveli Development Board. The CECB was maderesponsible for the large head works projects (Kotmale, Victoria, Madura Oyaand Randenigala dams and reservoirs) and MDB was charged with engineering andconstruction of downstream irrigation development projects. SubsequentlyMASL set up a Settlement Division in July 1980 and by Cabinet decision ofNovember 1981 the Mahaweli Economic Agency (MEA) was established. Theresponsibility for downstream development and settlement were given to MEA,leaving MDB with its previous responsibility for engineering and constructionof the irrigation and drainage systems. In 1983 the functions of MDB weretaken over by its successor, Mahaweli Engineering and Construction Agency(MECA). This change further streamlined the MASL organization and served toimprove the coordination becween engineering, construction and settlement.

4.03 Prior to the establishment of MASL and MEA, a multiplicity of exist-ing agencies provided agricultural and other support services in the newsettlement areas. For example, the Department of Agriculture was responsiblefor agricultural extension services to the settler families. The project'sAgricultural Extension Officer also acted as Deputy Resident Project Yanager,Agriculture. He was under the administrative control of MDB, but reporteddirectly to the Department of Agriculture. It was felt that the dual controlsystem led to inefficiencies. Therefore, when the Settlement Division wasestablished in July 1980, MASL decided to unify, on an experimental basis,the management of all settlement, agricultural and other support services inthe h5 area.

4.04 As set up in the 15 area, a Unit Manager is in charge of settlementand agricultural production for a hamlet of about 150-200 farm families. Heis responsible for the delivery of all settlement and agricultural require-ments, including settlement support, extension of agricultural know-how,water supply, supply of crop inputs, credit and marketing assistance. TheUnit Manager is assisted by two field assistants who are either secondedDepartment of Agriculture field staff or recruited directly by KEA.

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4.05 The new management system was considered a success and in 1981 it wasextended to the Hl, 2, 7 and 9 areas. Since then the new approach has beenadopted in the other Mahaweli Schemes as well. As for the future organiza-tion and management of support services in System H, no firm decisions havebeen taken as yet. For the time being the unified management system is beingfollowed in the completed zones of the project.

Water Supply and Management

4.06 Since water is in short supply in System H, particularly during theYala season, effective water management must be developed to maximizeagricultural output and ensure equitable water allocation to all farmers.Effective water management also is required throughout the entire MahaweliCanga Basin to realize the greatest benefit to the country from multi-purposeuse of the water developed under the Accelerated Program, whether for irriga-tion, power, fishery, or recreational uses.

4.07 A Water Management Panel (WMP), chaired by the Director Genaral ofMASL, manages all water resources in the Mahaweli project areac and isresponsible for bulk water releases from the main reservoirs for the purposesof power generation, irrigation and other uses. The WMP is provided withtechnical expertise by the Water Management Secretariat (WMS), established in1983. The WMS controls al' water releases down to System level in accordancewith an agreed plan, using .Lmulation models to monitor water availabilityand requirements, and to update the plan in accordance with actual conditionsof river flow and precipitation. At System level, MEA's Resident ProjectManager (RPM), in close consultation with the WMS, is responsible fir waterissues from the main and b-anch canals; the Block and Unit Managers .n turnare responsible for issues at distributary and field levels.

4.08 All operational units, set up to manage the supply and distributionof water in the Mahaweli Canga schemes, have performed well during the ini-tial years despite some unusual climatic conditions. Some of the seasonswere particularly difficult ones because of excessive droughts or rains. Thevariable weather patterns and occasional water supply shortages during theYala seasons make it often difficult to operate an efficient system in amanner that benefits all farmers equally.

4.09 The Water Management Secretariat has coped quite well with preparingseasonal operating plans, including monthly deliveries to the project reser-voirs. However, there is scope for fine tuning the water supply and waterdemand on a weekly and preferably daily basis. The present imbalancesbetween water delivery to, and water off-take by the system are now reducedto some degree by the available storaRe capacity in the tanks.

4.10 Progress has also been made in improving the water delivery systemfrom the headvorks to the irrigation sub-systems, blocks and units. Waterschedules and releases are in part based on weekly to ten-day water demandestimates sent up by the field units. MEA's Flow Monitoring Unit plays now acentral role in providing data for water management in the system. Efforts

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should continue to improve the prediction of needed water delivecies. Thiswill require collecting, analysing and processing of data on cropping pat-terns, soil types, weather conditions and irrigation methods and practices.

4.11 Water duties in System H were high in che initial years, which isnormal on newly irrigated soils. Improvements have been made to reduce waterwastage by the users. Modifications of the irrigation system such as liningof canal sections where excess seepage has occurred, providing becter controland measurement structures to improve reliability and accuracy of waterissues and training of operators and farmers in effective and efficient wateruse have all helped to improve water management in the System.

Demand Irrigation Pipe System Pilot Project

4.12 In early 1979, at the recommendation of the water management consult-ant, MDB committed itself to implement a proposed pilot project involving theinstallation of 850 acres of an automated concrete pipe system capable ofdelivering water under a socalled Limited Rate Demand Irrigation Schedule(DIS). The objective was to determine (i) what the proposed system wouldcost relative to the standard earth ditches and rotation schedule; (ii) whatthe unrestricted water use would be; (iii) what improved cultural practicesmight be used and what the resulting crop yields would be; and (iv) whatsocial benefits might develop.

4.13 Due to implementation problems and delays, only about 365 acres ofthe 850 acres planned were completed. Six irrigation seasons have beenmonitored between Maha 1961i82 and Nana 9084/180 5, d a iumuer oh conclusionshave been made in the consultant's final report, 1/ including:

(i) it was not practical to obtain costs from actual constructionfigures; it is estimated that project cost at the distributarychannel level are about double the cost of the present gravitysystem;

(ii) water use was initially high, but during the last few seasonsabout the same as in control blocks; several groups showedappreciably lower use rates;

(iii) paddy yields were between 131 and 291 higher than in the controlblocks; and

(iv) social benefits are high, e.g. distribution of water amongstfarmers is more even and tail-end problems do not occur.

1/ Demand Irrigation Schedule Concrete Pipeline Pilot Project, Kahawe.iDevelopment Board, Area H, Block 404, 0-1, by John L. Merriam, August1985.

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4.14 The experience gained sofar has been valuable but it is too early todraw definite conclusions. The benefits of such a system would perhaps bemore evident with vegetables and other high value crops where better watercontrol and timely deliveries are essential. It would be in the project'sinterest to keep the pilot scheme operational for some years and to monitorits performance closely under more stabilized conditions.

Performance of the Borrower

4.15 Throughout the project period the Government remained strongly com-mitted to the Mahaweli Program and thus to the implementation of thisproject. This commitment was reflected in the levels of financial and staffresources being made available to the scheme. Adequate funds were allocatedto the project in all years, except in 1981 when Covernment was forced toimpose some restrictions mainly due to the overall size of the MahaweliProgram at that time. Staff posted on the project generally performed welland vacancies were never left unfilled for long.

4.16 On the down side, Government's strong commitment to the program ledto over ambitious programming of works during the early years. This resultedin poor phasing and loss of quality for part of the works. It also strainedthe Mahaweli Development Board's capacity to administer the program,reflected in the shaky financial records of investments during the initialyears. To the Government's credit, it should be added that the necessarylessons were quickly learned. The establishment of MECA and MEA as separatework organizations under MASL has much improved the implementation of theprogram. KASL also deserves credit for its determination to devise andintroduce a workable system to recover part of the operation and maintenancecost from the settlers. On balance the performance of the Borrower can becharacterized as very commendable.

Performance of IDA

4.17 IDA also performed well during appraisal and supervision of theproject. Civen its knowledge of Government's capacity to implement thescheme, IDA appeared justified in cautioning against over-ambitious program-ming and insisting on a reduction in the size of the project during prepara-tion and first appraisal in 1975. However, IDA also showed flexibility inreconsidering its position in 1976 after Covernment had shown its strongdetermination to proceed quickly with the works and decided to implement theproject as proposed originally in the feasibility studies. Lack of under-standing of Government's position at that time could have resulted in IDA andthe other donors withdrawing or suspending their support for the program.This would almost certainly have led to disruption if not the demise of theprogram.

4.18 IDA staff succeeded in influencing implementation of the Mahaweliprogram for the better after the initial confusion had subsided. Workingrelations between IDA and Covernment staff were always good. There was goodcontinuity of staff assigned to the project from appraisal to project comple-tion. IDA staff also maintained close relations with other co-financing

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agencies. Representatives of other donors participated in all supervisionmissions, i.e. U.K. eleven times; USA nine times, and Canada and the Nether-lands eight times each.

V. PROJECT IMPACT

Crop Areas

5.01 A;praisal estimates on crop areas, yieLds and production were onlyprepared for the H4 and H5 areas since the present project was to provide thefull package of investments for only those two areas. Appraisal projectionsand actual crop areas in H4 and HS are detailed in Table 3. A summary isgiven below;

Crop Areas in H4 and H5 Areas, acres

Appraisal Projection ActualPresent Future Future 1984/85 1/

w/o Project with Project

Net Farm Area 36,300 33,100Maha SeasonIrrigated Rice 5,000 5,000 30,100 30,437Irrigated OFC 2/ - - 3,300 -Sub-total Irrig. 5,000 5,000 33,400 30,437

Rainfed Rice 300 400 - -Rainfed OFC 2/ 6,000 8,300 - 1,508Sub-total Rainfed 6,300 8,700 - 1,508Total Maha 11,300 13,700 33,400 31,945

Yala SeasonIrrigated Rice 1,000 1,600 13,100 15,895Irrigated OFC 2/ - - 17,500 9,590Sub-total Irrig. 1,000 1,600 30,600 25,485

Rainfed Rice - - -

Rainfed OFC 2/ 1,700 2,300 -Sub-total Rainfed 1,700 2,300 - -Total Yala 2,700 3,900 30,600 25,485

Grand Total 14,000 17,600 64,000 57,430

1/ 1984/85 Naha and 1985 Yala seasons.2/ OFC a Other field crops.

5.02 Cropping intensities as projected during ippraisal and as achievedin 1984/85 compare as follows:

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SAR Future Actualwith Project 1984/85

Maha SeasonIrrigaced Rice 83 92Irrigated OFC 9 -Rainfed OFC - 5Total Maha 92 97

Yala SeasonIrrigated Rice 36 48Irrigated OFC 48 29Total Yala 84 77

Crand Total 176 174

5.03 A number of observations can be made concerning the data given above:

(i) During the Maha season almost the entire farm area is cultivatedwith irrigated rice. Rice is the staple food crop; quality seedsare freely available; the surplus production is readilymarketable; it is a low risk crop since pests and diseases arewell researched and the crop also requires less ready cash andLabour than some of the potential alternative other field crops(OFC). Only a small part of System H is grown with rainfed OFC.Cultivation of irrigated OFC was practiced to some extent in1982/83 and 1983/84 but not at all in 1984/85 when rainfall wasabundant.

(ii) The 1984 and 1985 Yala seasons were both very successful becauseof abundant rainfall. Between 75 and 1001 of the farm area wascultivated with irrigated crops in those two years. However,during the preceding low rainfall years 1981 and 1982, only 201-301 of the then cultivable area was planted with irrigated cropsand no irrigated cultivatior was permitted at all in H4 and H5 in1983. Shortage of irrigation water during the Yala season,because of limitations in the diversion capacity of the Bowatennetunnel and inadequate storage capacity in System i1 itself, arethe reasons for the erratic cropping intensities during the Yalaseason. According to the 1985 studies of Operating PolicyOptions of the Mahaweli Water Resources Management Project byConsultants, a reliable annual cropping intensity of 1651 can besupported in the H System under the present conditions. improvedwater use practices, i.e. cultivation of less demanding cropsthan rice and reduction in wastage of water, could raise thecropping intensity to 190.

(iii) The appraisal report projected 482 irrigated OFC and 361irrigated rice during the Yala season. But actually the propor-tion of irrigated OFC has always been mdch smaller than that ofirrigated rice, except in 1982. In that year there was a severe

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shortage of water and project authorities exercised strict con-trol over the cropping patterns.

Crop Yields

5.04 Paddy. Information on paddy yields is collected by the Departmentof Census and Statistics and by the MEA. The former estimates are based oncrop cutting-surveys and the latter on farmer interviews. Typically, MEA'sestimates are about 25% to 35% higher than those prepared by the Departmentof Census vnd Statistics (see Table 4). it is also noted that substantialvariations in yields occur from one year to another, depending mostly onmoisture conditions. A summary of 'AR estimates and reported actual yieldsis given below (m ton paddy per acre):

Yield

Maha Season

SAR - Lowland Rice 1.43SAR - Upland Rice 1.29Department of Census, Average1980/81-1984/85 1.56

MEA, Average 1980/81 - 1984/85 1.86

Yala Season

. SAR - Lowland Rice 1.43Qepartment of Census, Average1981 - 1984 1.11

MEA, Average 1981 - 1985 1.54

5.05 Other Field Crops. Appraisal estimates and incomplete estimates ofactual yields, collected by MEA, compare as follows (m ton per acre):

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SAR, Future with Project ActualMaha Yala Maha Yala

Cereals 0.90 1.10Maize 0.60 -

Pulses 0.50 0.55Cowpeas 0.35 0.45Green Gram 0.35 0.45Black Gram 0.50 0.50

Oilseeds - 0.75Groundauts 0.50 0.50Soybeans 0.60 0.60

Chillies - 0.40 0.25 0.60Bombay Onions - - 4.00

Crop Production

5.06 Paddy production in alL new H areas reached about 135,000 m ton in1984/8S, according to Department of Census data. This is equivalent to about-2 of Sri Lanka's total annual paddy production (about 2.4 million ton in1983 and 1984). According to MEA data, the annual production of other fieldcrops in the new System H areas increased from 6,000 m ton in 1982/83 toabout 15,000 m ton in 1984/85. Only about 1,000 to 2,000 m ton was grown inthe Maha season and the balance in the Yala season. Chillies is the mostimportant other field crop in System H, both in Maha and in Yala.

5.07 The Department of Census does not collect crop production data forthe H4 and HS areas separately; MEA does, but its crop yield and productionestimates have consistently been higher than the Department's estimates, asnoted above. Separate estimates for H4 and US are required to compare cur-rent estimates of crop production with the appraisal estimates, which referto the HW and HS areas only. MEA's information on crop areas in H4 and HS(which can be considered approximately correct) and average yields for thelast three years for all H areas, as reported by the Department of Census,have been used in the revised estimates. Further, a cropping intensity of1652 has been assumed, as suggested in the consultants study (see para 5.03).Details on the SAR estimate and the revised PCR estimate on crop productionin H4 and HS, based on the assumptions discussed above, are given in Tables Sand 6 and are sumarized below:

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Crop Area (ac) Production (m ton)SAR, Future

CLrop with Project PCR SAR PCR

Rice (paddy) 43,200 44,685 59,554 67,473Cereals (maize) 3,300 660 3,239 396Pulses 6,500 2,315 3,565 1,273Soybeans 5,700 330 4,348 198Chillies 3,500 6,620 1,422 3,972Vegetables 1,800 660 3,658 1,320Total 64,000 55,270

5.08 The-revised estimate confirms that the production of paddy exceedsthe SAR estimate - not only in exceptionalLy good years, but in average yearsas well. On the other hand, production of other field crops has remainedbelow the appraisal estimates, with the exception of chillies which hasbecome the second most important cash crop, after paddy.

Farm Incomes

5.09 Settler families cultivate 2.5 acres of irrigated land and reside ona 0.5 acre homeplot where they grow vegetables, spices and fruit trees andwhere they may raise animals. Farm incomes that typical settler familiesderive from their irrigated land can be estimated by using the information oncrop areas and production, discussed above and the estimates on crop produc-tion cost, given in Tables 7 and 8. MEA has undertaken a survey to estimateincomes from home plots.

5.10 As discussed in paragraph 5.07 cropping intensity on irrigated landwould in a normal year reach about 95Z during Maha and about 702 during Yala,or 165 for the year. It has been assumed here that farmers in Zones H4 andHS cultivate 4.15 acres per year, of which about 3.375 acres are planted withrice; 0.45 acres with chillies, 0.175 acres with pulses and 0.10 with othercrops (soy beans, maize, vegetables). Table 9 shows the financial resultsfor a typical settler family, using 1984/85 prices, and is summarized below:

Rs

Gross Value of Production 24,439Cash Crop Production Costs 10,002

Net Value of Production 14,437

Cash crop production costs include the present irrigation watercharge of Rs100 per acre, but no charge for development of the land is included. The NVPcorresponds to about Rs 5,775 per acre of irrigated land per year and toabout Rs 87 per family labour day. During appraisal in 1977 the average netfarm income from growing crops on irrigated land was estimated at about Rs6,390. In 1984/85 terms, the SAR farm income amounts to about Rs 15,725 orabout 10 over the present estimate.

- 62 -

5.11 A special sample survey conducted by MEA in 1985 disclosed thatincomes from homesteads range widely around a median income of about Rs 4,900and a mean (or average) income of about Rs 8,500 per homestead. Income fromhomesteads is derived mainly from cultivation of fruits and vegetables, plantnurseries and Livestock produce, including hiring out of draught animals.

5.12 Most families also have some non-farm income particularly those witholder children (for example, seven of the eleven families surveyed by MEA forthe homestead survey had some non-farm income). Non-farm incomes rangedwidely around a median of Rs 2,550 per annum and a mean income of about Rs10,900. Reported sources of non-farm income are tractor hiring, leasing-inand cultivation of farm land, and trading.

VI. ECONOMIC ANALYSIS

6.01 The project financed a full package of investments in the H4 and H5areas. In other areas of System H the project financed only parts of thepackage (see paragraph 3.01). The economic costs and benefits have thereforebeen analyzed for the H4 and 85 areas only, both at appraisal and for thisPCR (Table 10). The main assumptions made in the analysis follow below:

(i) A Standard Conversion Factor (SCF) of 0.6 was applied atappraisal and 0.85 for this PCR. During appraisal separateconversion factors were applied for capital-intensive works,skilled labour and unskilled labour. No separate conversionfactors were estimated for this PCR.

(ii) All Investments Costs incurred under this project were includedin the economic analysis, except for the cost of socialinfrastructure (schools, health facilities, etc.) for whichestimates of benefits cannot be readily quantified (both SAR andPCR). Stage I investment costs (i.e. Polgolla diversion works)were treated as sunk costs.

(iii) Incremental Crop Production estimates were based on the follow-rng:

- with project: actual crop production data until 1984/85(Table 3) and estimates on future crop areas, yieldsand producton as explained in Chapter V (Tables 5 and 6);

- without project: crop areas as estimated at appraisal and cropyields estimated to equal 80S of with project crop yields.

(iv) Incremental production costs:

- with project: labour and input requirements as detailed inTables 7 and 8;

- 63 -

- without project: input requirements estimated at 80Z of withproject estimates for fertilizer use and pest and weed control;at 100l of with project estimates for labour and other inputrequirements-

(v) Economic Prices of internationally traded commodities based onIBRD Commodity Price Forecasts, August 1986; for locally tradedgoods mid-1985 prices were used in the analysis (Table 8).

6.02 The Economic Rate of Return (ERR) of the project under the assump-tions outlined above is -1X. At appraisal the ERR was estimated at 21Z. Thedepressed rice price of recent years, and also projected for the future, isthe dominating reason for the low ERR. At appraisal it had been estimatedthat the 1985 rice price would be about 20X higher than the 1976 price (inconstant terms). But the actual 1985 rice price was almost 501 lower thanthe 1976 price. Using the rice prices projected at appraisal results in anERR of 16X. Using the rice prices projected in mid-1985 when the credit wasclosed gives an ERR of 71. It should also be noted that only benefits fromagricultural production were included in the analysis, as at appraisal.However, part of the investment costs, particularly in road construction,will also result in benefits in other sectors of the economy of the projectarea.

6.03 Future increases of incremental agricultural benefits irrespectiveof rice prices are quite possible and could be brought about by:

{i) increases in irrigated areas through water conservation and/orchanges in cropping patterns away from rice (see paragraph 5.03);and/or

(ii) increases in rice yields above the average yield for 1983-1985,used in this analysis.

VII. SUMMARY AND CONCLUSIONS

7.01 Government's comitment to the implementation of the Kahaweli GangaDevelopment Program has been very strong throughout the planning and con-struction period of the System H project. Government in fact rejected earlysuggestions by Bank preparation teams to give higher priority to therehabilitation of existing schemes, and to extend the implementation periodfor the project. Furthermore, finding itself under considerable politicalpressure, Government decided in 1977 to accelerate the implementation of theentire Mahaweli Program, including System H.

7.02 Government succeeded in attracting substantial external financingfor the Accelerated Program from foreign donors. The decision to speed upimplementation was not without cost, however, particularly in System H whereconqtruction had just started. The cost included amongst others:

- 64 -

(i) Lack of Proper Phasing of project activities; for example jungleclearing and construction of infrastructure ran several years(in some places upto five years) ahead of on-farm development andconstruction of social infrastructure; large parts of the projectarea had therefore to be cleared again of jungle regrowth; manysettlers were brought into the area far too early.

(ii) Loss of Quality of works because of lack of authority and ade-quate supervision of contractors by the Mahaweli DevelopmentBoard.

(iii) Unacceptable Procurement Procedures as most of the civil workswere let to incompetent parastatal agencies; works were fre-quently let without proper contracts being drawn up or signed.

(iv) Poor Accounting Practices as the administrative capacity of theMahaweli Development Board was inadequate to handle a workloadwhich had increased manifold within a short period.

7.03 When the problems, cited above, became apparent Government movedquickly to reorganize and strengthen MDB. The Mahaweli Authority of Sri Lank(MASL) was established in 1979 as a central planning and decision making bodyunder the Ministry of Mahaweli Development. The Central Engineering andConsultancy Bureau (CECB), the Mahaweli Engineering and Construction Agency(MEA) and the Mahaweli Economic Agency (MEA) were subsequently established asseparate work organizations, replacing MDB. Coordination between engineer-ing, construction and settlement activities has been much improved since thattime and the early mistakes in System H were not repeated in Systemsdevelopped subsequently (C and B).

7.04 Despite the negative economic rate of return, the project can cer-tainly be classified as a successful one. Major objectives in terms of landdevelopment, settlement, and crop production were achieved and there is muchpromise for further developments. The project has created useful employmentfor large numbers of people and has brought Sri Lanka's goal of food selfsufficiency within reach. The poor economic rate of return is almostentirely due to the depressed rice prices of recent years. The low riceprice, together with frequent shortages of irrigation water during the Yalaseason, underscore the urgent need for experimentation with other fieldcrops, preferably those which demand less water. Recent experience with thecultivation of chillies has been successful and the crop has become an impor-tant contributor to farm incomes.

7.05 An encouraging beginning has been made with the collection of watercharges. Assessment and collection is the responsibility of MEA staff. Theper acre rates are scheduled to increase to full 06M cost recovery levelwithin the next few years. Recovery of capital costs has, however, not yetbeen started.

7.06 Coortlination between the ezternal donors has been very goodthroughout the implementation period. All donors participated frequently insupervision missions organized by IDA and relationships were always construc-tive.

* - ~~65-Table I

SIU LANA

AEAURU CUAI DOIVWPNIT PI CT 1ICredit 701-CU

Cultivation Loans in 14 Area, in as N

Tocal Total Amunt go. ofMe* o. Amut Dis- I.- Out- DO. Z of Re-

se"oa Loans Granted bursied covered standing fautters coveries

1979/80 Mae 458 1.29 0.86 0.79 0.07 45 9219 Vale, 75 0.11 0.07 0.07 0.00 1 991960/61 11b. 1,374 4.74 3.28 2.90 0.36 191 891 " a l 1"l,02f 2.40 1.84 1.24 0.40 193 78198112 Uake. 3,474 14.40 9.98 7.56 2.40 2,740 761962 Yal 175 0.45 0.25 0.19 0.08 44 781921/3 Mak 3,511 14.83 10.07 8.11 3.98 1,767 611963 Ya No Cultivation1983/84 Ma... 2,25 14.89 10.27 3.93 6.34 1,646 381964 YAIe 459 2.14 I.09 0.69 0.40 193 431984/85 Nab 700 4.59 2.90 1.82 1.07 373 6398- *dYale- 514 14.51 1.83 - Not Available

cred it M14

fteiaect Cost. At I11i

Jil 1221§ JIl JIS7 12 19 112 U1 JIM kill 1163. 111 126 126 tineL .... 1... T.m..hha,1ff4~~~~~~~~~~~~~~~~~~~~~~~~~~~ tle aaios0L VS I/lerreiicati L.A mad ad Dtavelosamma

1 Ai itie - - - - - - 1.0 0.4 1.6 9.5 10.2 4.3 21.6 - - 100iririplom laraetmctwc 1.4 3.1 5.6 0.5 14.1 22.7 52.9 30.4 32.0 21.? 22.6 5.4 229.9 30 - 100oa-faw Works 1. 4.9 7.5 11.1 39.2 4.5 11.9 34.9 5.2 6.5 1.6 - 123.1 20 - 1

Caa.gnuctIoa Equi_st 3.0 6.2 12.4 38.6 31.9 36.9 26.4 20.6 13.2 0.4 3.1 10.0 194.2 55 20 55DO s ac113i.e - -- L - -,Ll Il -MAl l - - - A 25 - SS6mb-tot6l 4.2 36.8 25.9 36.2 41.9 81.7 125.6 I1.4 131.6 42.1 44.1 19.1 119.6

Production Sngtt OAeie. Satoaloe oad

hseearcblW.iter Woment 0.0 0.1 0.2 0.2 0.5 0.1 6.4 1.5 4.0 - - - 11.0 20 - 40heds Li. 2L Li L Li iLl hA 1A . L h kINA 30 - 110Uubiota l*0.1 0.4 0.3 0.5 1.3 9.2 11.1 1.9 1.1 16.4 14.9 11.2 195.4

1 al lsftmt& 1.2 3.3 5.1 6.0 13.2 34.2 1.0 64.5 80.4 4S.9 35.3 32.5 380.& 20 - SS8.aa1.r haaiataaja , 0.1 0.2 0.) 0.5 0.? 2.5 1.4 14.0 6.1 14.0 4.3 - 52.1 10 - 100Teeai2Lt= - - - - - 2.5 1.1 0.6 0.0 0.2 14.4 3.1 22.1 Is - 55Ingisoortme end mupervLisLm-

and Adaimlstratm leA I1 L4 IIA L L .2 W D. 7 14.4 11.5- Totle Coot . is a .1 22.0 33.6 S0.4 6.0 131.4 262. 305.6 243.S 124.4 113.0 *5 1t.49.0zcbene Igo 08,1 - .45 1.05 *.46 .15 5.43 15.5? 14.53 19.25 20.61 23.53 25.44 21.16

Total Cost, 0Goe 1.22 3.12 4.00 5.51 5."4 8.84 11.11 15.8 12.44 5.30 4.44 2.45 86.11

it From 1915 onerds.

I..

- 67 -

,AUVELL OMRVLORMPT 7Uz 1O. CDOT? 70t -

eras Argal. £4 and _3 (acrae)

11 VAual 211,eaeat Vucuwe Futute

vio with-PaIeE Ptraia 19 9/80 V I 19801 1 1981/82 1982/8) 19838 L98189

luisuiaL lice 5.000 5,000 30,100 5.000 13.318 24.375 28,266 29,860 30,437

Chilltes - 117 251 -

Canals l - - 1,100 - - - - 1l1 -

ulese A - - 1'300 1 - - 19 51 -

Vegesabhlee V. .4 . 290 a 2.9 194_subctatl 5.000 5.000 33,400 5,000 11 2,3 2633 30.463 30,437

lice 300 400 - - 433 27 - IVCereals 3,900 5.400 - X.A 376 931 743 926 323pulses 1,200 1.700 - N.A 1t0 420 75S 1,341 368Cbilise 900 1.240 - R.A 373 1.096 847 1,2" 370Vogetables l -- ..... A 22 4 2.2 .. .ol2"

ub-toatal :300 F.700 -. A 1.628 2,736 2,790 4,277 1.308

Total ltb 11,300 13,700 33.400 5,000 / 14.946 27,111 31,423 34.740 31.945

tice 1,000 1,600 13,100 1,365 5,41 1,591 - 22,220 15,695Ceeals - - 2.200 - - - - - -NIese 1/ - - 5,200 477 604 2,521 - - 714 2,222

utoy - - 5,700 20 321 616 - 32 138Chillie - - 3.500 165 362 1,062 - 3.279 6,810Vegetables V/ -- "a..... I. .....1 -.- 7.4Z 4

i000 1,600 30.600 2,060 6,746 5,978 - 26,420 '5,485

j lie - - - - - - 72 - -

Cerals 300 400 - - . a _ _ _l"ses 200 300 - - - 331 353 - -

CbillIes - - - - - 323 15 - -

Seam 1,200 1i,00 - - . - . . -

Vegetablee L/ '-1 - - - 9 -..- 49 _ _Sub-totl 1.700 2i300 - - 5JIj 2.73 1,242 - -

Total Tas. 2,700 3.900 30.600 2.060 12,47 6,313 1,242 26.420 23,485

CNa OIaga 14,000 17,600 64,000 7,060 if V,413 35,462 32,665 61,160 57,430

UI Sma 11, Table 1.ource: IUL.

1 979/60 W am 1960 ale./ belud "Wed no"s me"e, tpovtdil oat available.

/Gsee am, bla.bpm coupse/ Vgetables, eaoae sd e, crops. '-

mw)

-68-Table 4

SRI LANKA

KNAAWELI GANCA DEVELOPMENT PROJECT 11Credit 701-CE

Alternative Estimates of Areas, Yields and Production of Paddyin all New Areas of System v

Departmnt of Census and Statistics MEACultiv- Prod- Cultiv- Prod-

ated area Yield 2/ uction 1/ ated area Yield uctionSeason (ac) (a ton/ic) (N tonY (ac) (a ton/aC) (a ton)

Naba 80/81 37,998 1.75 66,579 40,216 1.72 69t274

Yala 81 16,447 0.96 1S5,7 17,038 1.64 27t868

Xab 81/82 50,667 0.91 45,934 51,047 1.70 86,804

Yals 82 6t606 0.95 6,277 6t229 l167 10,380

eba 82/83 53,663 1.92 102.857 54,872 1.89 103,585

Tals 83 9,678 1.47 14,254 11,481 1.27 14,650

Naba 83/84 55t638 1.50 83t632 58,030 2.17 125,912

Yala 84 35,316 1.03 36,442 36,610 1.57 57.331

Nab 84/85 56t729 1.77 97,646 57,106 1.82 103,772

YT1a 85 .A N..A N.A 24,676 1.57 38,680

1I Production prior to Naha 1983/84 was adjusted to allow for 101 (instead of20S) difference betwen 'Cross" and "Yet Harvested Ares" due to bunds,

dr4iAs, chaaels, etc.2/ Calculated by dividing "Production" and "Cultivated Areas". Crop cutting

surve yields were given for 'Net Harvested Ares" aod have not beenshown in this table.

- 69- Table

SRI LANKA

NAMAWELI CAUCGA DEVELOPMENT PUtOJECT 11Credit 701-CE

Estimated Crop Areas and Crop Production in H4 and H1 Areas

YalaCropping

Cropping Crop Prod- Zuten- Crop Prod-Intensity Area Yield uction sity Area Yield uction

Crop (2) (ac) (m ton/ac) (o eon) (Z) (at) (u ton/ac) (C ton)

Rice (paddy) 90 29,790 1.71 50,940 45 14,895 1.11 16,533

C vesls (maize) 2 660 0.60 396 - - -

PUlses 2 660 0.55 363 S 1,653 0.55 910

Soybeans - - 0.60 - 1 330 0.60 198

Chillies 2 660 0.60 396 18 5,960 0.60 3,576

Vegetables 1 330 2.00 660 1 330 2.00 660

Total 97 32,100 70 23,170

-70- -h

Cedit 701-

an.Cu . rotductiaa in1 and 1 Atras

Cre Area (Ce) cru cEtom __

1u, Putusti Flguo ue

2ithout vWt I wietbs with PC&buauLSma / slam Zursst Proimct uis am 1 Presht iu et a ra I cn Ia&.:sA

ties p ) 5,300 5.400 30,100 29.790 4.124 5.699 40,793 50,940Cetrals (3.) 3,900 3,400 i.100 660 1,584 2,691 1,005 396hl1oa 1,20 1.700 1.300 610 363 640 640 363Clit.l.e 900 1,200 - 660 92 A62 - 36

e,ahs - _2gfo .3 - - 1.829 640Total 11,300 13,700 33,400 32,100

Rie (pady) 1,00 1,600 13,100 14,695 711 1.565 18,171 16,533Cereals 300 400 2,200 - 92 153 2,234 -puls" 200 300 5,200 I,S55 40 71 2.905 910$oybe&us - - 5,700 330 - - 4,344 198CbiliUs - - 3,500 5,960 - - 1,422 3,576ssam 1,200 1.600 - - 304 So0 -_Veableo - -- 90 330 - - 1,829 660

Total 2,700 3,900 30,600 23,170

WAn *, Y1A-Rico (pad!) 6,300 7,000 43,200 4,6S 4,833 7,24 59,554 67,473Ce.OSI ( s"s) 4,200 5,800 3,300 660 1,076 2,54 3,239 296uidse. 1,400 2,000 6.500 2,315 405 711 3,565 1 273

Sbe - - 5,700 330 - - 4.348 Chilies 900 1,200 3,500 6,620 92 162 1,422 3,972Sa_om 1,200 1,600 - _ 304 50 - _Vegables - - . __ - - 3,656 1,220.L Soel14,000 17.600 64,000o 5,270

I/ Not tultivote.d e 30,300 ae.2 NotU ovltlvw.d area 33.100 se.

- 71 - Table 7

SRI LANMA

NAHAWETAI CAUCA DEVELOPMENT PROJECT 1ICredit 701-CE

Croa Inputs per Acre

Kabs Yala

Soybeans/Raice Rice Chillies Pulses/ Other Field

Cowpeas CragsLabour, m daysFialy Labour 27 31 115 49 41Hired Labour 21 19 59 12 29Total 4 174 1 75

Seed, kg 45 45 1 4 27

Fertilizer, kgBesal 50 42 33 100 5Ure 48 41 76 12 24TDM 45 38 87 - 5

votes:

Mi) Estimtes for equipment, tools, weed cg;trol and pest control have beenezpwessed in Is per *cre - see Table 8,

(ii) It has beta assumed that with and without-project input requiremeatswould be the same, exelgt £or fertilizer, wed control and pest controlbe"e without or3cet requirements have been estimated at 80S of the

with 9J17treuients, given above.

-72 - Table 8

SRI LAtIIA

KAHWILI CAUCA DEVEWPHENT PROJECT II -Credit 701-CE

Financial and Economic Prices

FinancialUnit Price Economic Price

(1984/85) 1985 1990 1995

Crops Rs/kgPaddy 3.0 2.4 2.6 2.3chillies - 5 22.5 22.5 22.5Coupeas 8.0i 6.8 6.8 6.8Soybeans 7.0 5.1 4.3 4.4

Crop Inputs Rs/kgBasal Fertilizer 3.0 4.7 5.0 5.5Urea 3.0 6.1 6.5 8.0TDM 3.0 5.4 5.1 6.7

Weed and Pest Control Is/acfor Paddy - Kah 160 290 305 350

Paddy - Yala 185 335 350 405Chillies 1,200 2,160 2,280 2,640Covpeas 275 495 520 605

Equipmet and Tools its/acfor Paddy - Mahe 740 630 630 630

Paddy - Yals 715 610 610 610Chillies SOO 425 425 425Cowpeas 400 340 340 340Saybeas 400 340 340 340

see" iL/acfor Paddy - XIa 195 165 165 165

Paddo - Yala 180 155 155 155Chillies 140 120 120 120Coupeas 60 50 50 50Soybeans 280 240 240 240

farm Labour Rs/day 30 25 25 25

Irtigation Is/ac 100 85 85 85

Table 9- 73 --

sa LOU

MARAVILI CAN"c DSVRWPs PROJECT rrCredit 701-Cg

Bud80t for Farm of 2.5 ac

Gross Crop NvtCropping Crop Crop Prod. Prod. Prod. familyIntensity Area Prod. Value Costs Value Labour

2 ac t tons Rs Rs Rs Days

lhaPaddy 90 2.25 3.85 11,550 5,040 6,510 61Chillies 2 0.05 0.03 795 217 578 6Pulses 2 0.05 0.0275 220 77 143 2Other Crops 2 0.05 0.03 210 80 122 2

YalePaddy 45 1.125 1.249 3,747 2,351 1,396 35Chit1ies 18 0.45 0.27 7,155 1,949 5,206 52Pulses S 0.125 0.069 552 192 360 6Other Crops 2 0.05 0.03 210 88 122 2

4.15 24,439 10,002 14,437 166_ - __ _

t~~~~~~~~~~~~~~~~~

3Rt 1 twa_ 6mWAAU WM Wm&m R*as ma imi st-a.1CK an no am4 mS inM

_._ ........

Io n 919 am 1"1a am aw MO1g It" al1 Sam au 1" Ins 1912 a aW 1s1 km .0r.. -_- - ------------._.... 8---_--. _._..-.-... S --..... _ ___.___., ,--.h.. u......-..-.-.... . -- ---- .. -.... - -............. ... ... - .-.-..._- .-..... .. ..- -. -.-.-..

U Ms me - - - .sau 2. v 5.n u2r.a ama.u 2aaIms.u as1:.v asawa 2swat ISAW W A1.216=.1 216516.3 109322 29J3 .o2806144

mamm amin - 4- - 3S. 51 469. 1 56. 1419" ll" O2W3N.63 7 1 5-4 U1N - 1 .2 1 1 2 412 IUb.16690 SWIWIEI1 I.X UN%* 2125.11 411514.1 5926. M.39 131.13

mInImnsa a_il 01.1 ,ti.ae 7.ea ig.a 17n 21162 - t -l -- - - -

--- 21-6.4 -mKU -Y.A- - .- 2- - -- - - -I-. --1 . ------ 14 - - - - - - - - -

m. m m mi2.2 m _wsa.s 4m naa. uiag" swn p.1 - " n- s - s 7 s - 1 - - aamu1 aa.u 6l6.61 6263.1 79h.U1 430.36 3162.21 nu66- .- 4 - - - - - -

_13U ila 1f6 NUll 61.43 111. 95.6 A026- U -7v -z. - - - - -dom aau me11'wa 214J W13 561.1 - - - -

*~~~~~~~~~~~~~. _.15 .a.... _. .... ...... _... ... _ .a_. a _.sSaS .. a h.. .nsna sas.... . a.s.. .. _... ,_........... ..... a.a..... . _... .... L.a...... a..a..... 5.f5. na. ... an.. ..... .. a...

ttWl IIIIII IImMI UAIA Mt$ 1.Lh UM.U 21'.s -2 2

~~~~~~~~~~~~~& 1110461011l WAM.17 4u7.2* "IT1.9 .MIX 416nw "

WA If mmim noLn~~~XU. no. t"WAA 2-5." 11611.01 tht" H2w." 974.2

1111111I111a WLWu a226."1 111.4 1 . 62.22 6 . - - 4 9

- - - - -a .----- --- -- s58.----- ----------. --------- - --m ----- -------- --------- --------- -------- -- - - --. - -- - - -- --- -

.. _.__ ......... _._ ..... _ ................. ... ... .. , . . ......... -... 4. . ........... . ...... ........ ... . . . . _............. ., ....... --

-75-


SRI LANKA - MAHAWELI GANGA TECHNICAL ASSISTANCE PROJECT

(CREDIT 979-CE)

AND

(EEC SPECIAL ACTION CREDIT 46-CE)

June 30, 1986

. ~~~~~~~~~~~~~4

South Asia Projects DepartmentIrrigation I Division

- 77 -


SRI LANKA - MAHAWELI GANGA TECHNICAL ASSISTANCE PROJECT

IDA CREDIT 979-CE AND

EEC SPECIAL ACTION CREDIT NUMBER 46-CE

I. PROJECT DATA

1.01 Amount of CreditsIDA : US$3.0 millionEEC : US$2.0 m.e.

Amount DisbursedIDA : US$1.86 millionEEC : US$1.73 m.e.

Date of Credit Agreements : April 16, 1980Effective Date (both) : July 7, 1980Original Closing Date (both) : September 30,' 1982Actual Closing Date

IDA Credit (formal) : September 30, 1985EEC Credit L September 30, 1985

II. PROJECT BACKGROUND AND OBJECTIVES

2.01 The basic concept underlying the Mahaweli Ganga DevelopmentProgram CMGDP) stemmed from the need to overcome two major problems facingSri Lanka at that time, unemployment and excessive imports of agriculturalproducts, particularly rice. The Program, based on a Master Plan preparedjointly by UNDP/FAO and Sri Lanka engineers in 1965-68, envisaged develop-ment of about 900,000 ac (365,000 ha) of irrigable land in the dry zone,as well as about 500 MW of hydropower. It was divided into three phases,each including several projects, for implementation over a 30-year period.Initial construction of the Program began in 1970, with Bank Group financ-ing (Loan No. 653 and Cr. 174-CE), including the transbasin diversionbeadworks at Polgolla and Bowatenna and other associated works, completedin 1978. Under a second project, financed by IDA (Cr. 701-CE) and fivecofinanciers in late 1977 and completed in 1985, development of 70,000 ac(28,000 ha) of land in System H was accomplished.

2.02. The new Government, which came to power in 1977, realixed thatat the ongoing rate of construction of the MCDP and the population growthrate in Sri Lanka, the Program would not have much impact on the country'seconomy in terms of meeting existing serious food shortage and unemploy-ment problems. General agreement was reached between the Covernment andthe Association on the desirability of accelerating the Program. TheAssociation undertook to help mobilize international financial support for

- 78 -

the Program and to advise on the scope of the studies and investigationsrequired to carry it out. To this end, an Implementation Strategy Study(ISS) was carried out by Netherlands financed consultants (NEDECO) todetermine a specific action plan, and the Association engaged consultants(SOGREAH) to act as general consultants to provide technical assistance toGOSL in the planning and preparations of final designs and tender docu-ments for the major features.

2.03 After a review of available financial resources, constructioncapabilities and trained technical personnel, the Government decided toaccelerate the construction of five major projects, comprising five damsand hydropower plants with an installed capacity of about 600 Mh, anddevelopment of about 290,000 ac of new lands. During the early months of1978, the Government consulted with the Association and contacted severalprospective donor countries for assistance in the preparation of the fiveprojects. Expressions of interest were received for these projects aswell as for downstream development and other works and studies.

2.04 NEDECO's final report was completed in August 1979, severalmonths after bilateral-financed consultants had started feasibilitystudies of four of the major projects. NEDECO's findings differed sig-nificantly from the UNDP/FAO Master Plan -- in part due to updated infor-mation and in part due to the use of more advanced analytical techniquesand assumptions (e.g. with regard to water availability, water require-ments, regulation capability of the reservoir system and alternative waterconveyance systems). Two of the significant NEDECO findings were:

(a) the Victoria, Haduru Oya and Kotmale reservoirs together couldsupply enough vater to fully irrigate existing irrigated landsand the new areas proposed for development under the AMP, thuspermitting the water developed by the Randenigala andMoragahakanda reservoirs (and several small reservoirs) toirrigate lands elsewhere in the North Central River Basins(NCRB) or the Northwest or Southeast Dry Zones (NWDZ or SEDZ);and

(b) if surplus Mahaweli water were to be diverted to the NCRBarea, a different plan could be developed for conveying thewater northward which would substantially lower the cost ascompared with the conveyance system proposed under theUNDP/FAO Master Plan.

2.05 In view of NEDECO's findings and the Government's desire toconstruct Randenigala and Moragahakanda projects as soon as feasibilitycould be established, there was immediate need to carry out stuties of thetransbasin diversion plan, as well as to determine the areas for whichwater developed by these projects could best be utilized. There also wasneed to carry out promptly the preparation of final designs and tender

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documents for the development of the downstream works (irrigation andsocial infrastructure) in the command area to be served by the VictoriaProject (System C), since the construction of the Victoria Project wasexpected to begin in early 1980 and the ongoing study carried out by theGovernment (assisted by its consultants, Hunting Technical Services, Ltd.(HTS)) was only a feasibility-grade study of the area. By end 1984, whenthe headworks for the Victoria Project were expected to be completed. thedownstream development for the project Ahould be in place so as to maxi-mize benefits from the investment. Since the Government's experiencedengineering and technical staff were fully committed to other ongoingworks, it was believed necessary to prc;.Jc technical assistance for theabove work as well as for other studies and investigations which might berequired for expeditious implementation of the AMP.

2.06 Accordingly, at the Government's request, the proposed techni-cal assistance project was identified jointly by the Government of SriLanks and the Association. It was prepared by the Government with IDAassistance. A mission visited Sri Lanka in November 1979 to discuss theproject and the draft terms of reference for technical assistance preparedby IDA. A Staff Appraisal Report was not required. Negotiations wereheld in Colombo, Sri Lanka, on December 27, 1979 and the project wasapproved on January 29, 1980.

2.07 The project's objectives were to support the Government'sefforts to accelerate the implementation of the Mahaweli Canga DevelopmentProgram by providing consultants' services, vehicles, equipment and sup-plies to the Government for: (i) preparation of a reconnaissance-levelstudy of plans for conveying and utilizing surplus Mahaweli Canga water todevelop land in any of three alternative areas (or any combination ofthem) in order to select the best plan for a transbasin diversion project;(ii) on-going review of designs and tender documents for the Right BankCanal planned to serve Systems C and B; (iii) preparation of final designsand tender documents for construction of civil works and socialinfrastructures (e.g., village and township centers and roads) in Zones 3to 6 of System C; and (iv) other studies and designs of projects in tneMahaweli Program to be undertaken by the Mahaweli Development Authority(MDA) during implementation of the Program. Training of local staff wasincluded in all the above studies. The proposed project was to be carriedout over two-year period beginning in 1980.

III. PROJECT COSTS AND FINANCING

3.01 Total project costs were estimated to be about US$6.0 million.During financing discussions with GOSL and the European Economic Community(eec), it was agreed that the EEC would provide US$2.0 million equivalentfor a Special Action Credit to be administered by IDA to finance consult-ants' services for the ongoing review of the designs and tender documents

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for the Right Bank Canal and for preparation of final designs and tenderdocuments for System C (US$1.5 million), as well as vehicles, equipmentand supplies for the entire technical assistance project (US$0.5 million).Retroactive financing of up co US$200,000 equivalent (dating back toDecember 1, 1979) was agreed for the ongoing review of the Right BankCanal documents. The IDA Development Creeit of US$3.0 million wouldfinance the consultants' services for the study of a transbasin diversionproject (US$1.5 million) and the other studies and designs of projectsunder the Mahaweli Program (US$1.4 million), as well as the training forlocal scaff (US$0.1 million). The Government's contribution of US$1.0million would finarre counterpart personnel, offices, and houses forconsultants.

IV. PROJECT UNDERTAKINGS AND RESULTS

Transbasin Diversion Stu.y

4.01 The consultants for this study (Joint Venture Mahaweli TransbasinDiversion - JVMTD) were selected expeditiously and were appointed andfielded just two months after credit effectiveness. The team providedproved to be exceptionally competent and the studies progressed rapidly,even though delays in data collection (mapping and aerial photography) andin appointing technical counterpart by GOSL somewhat delayed the consult-ants' work. The consultants first review report, which identified alter-native development options and study constraints, was prepared on scheduleand set the stage for further work to be carried out and key decisionsrequired by GOSL. Delays by the Survey Department in completing requiredtopographic mapping when due and additional areas incorporated in thestudy caused a postponement in the consultants' planning report by abouttwo months, which ended the first phase of the study - some nine monthsafter its initiation (June 1981). The consultants' contract was amendedduring this period to incorporate -he addendums requested by GOSL.

4.02 Several key decisions were made during review of the consultant3'planning report: (i) due to the apparent low rate of return resulting fromthe preliminary studies and the high energy requirements envisaged, nofurther consideration would be given to either pump or gravity irrigationconveyance schemes to serve a portion of System M or the NCRB; (ii) workwould be termizated on studies relating to the Kelani Diversion (diversionto the Mahaweli service area); (iii) the fixed diversion policy of 875 McMannually at Polgolla would be maintained; (iv) additional studies would bemade to determine the effect on Polgolla diversion capability by raisingKotmale Dam to its original proposed level of 731.5 meters a.s.l.; and (v)studies would be made of the conveyance of Mahaweli Canga water to twoadditional existing schemes not included in the planning report, the CalOya scheme and a small area to the northwest of Anuradhapura. During theremainder of the study the consultants would concentrate on completing

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water balance calculations, agricultural benefits and preliminary designsand cost estimates, particularly in relation to the NWDZ and SEDZ schemes,which appeared to be marginally viable.

4.03 The consultants' Draft Final Report was completed in December 1981and reviewed in March 1982. The study showed that development of about14,500 ha in the SEDZ (mainly for rice) was economically feasible (ERRabove 12X) an5 about 10,000 ha in the NWDZ (mostly for sugar cultivation)under the fixed Polgolla diversion policy, was marginally viable (ERRabout 10%). During 1982 and 1983, GOSL requested the consultants to carryout further studies and sensitivity analyses to refine these schemes andimprove their viability, and the consultants contract was amended accord-ingly. The date for completing the Final Report was delayed pending theoutcome of these studies and the credit closing date was extended. Verylittle progress was made during 1983-84. Additional analyses and studiesto review implications of a modified Polgola diversion policy wererequested in mid 1985, which were completed in March 1986. This resultedin rates of return for development in the NWDZ of between 10-12X. Theconsultants' Final Report has been printed and is being assembled inColombo, but has not yet been released.

Minipi Right Bank Canal Review

4.04 The Government engaged Sir Alexander Gibb and Partners (Cibb),through Hunting Technical Services Ltd. (HTS), to make a detailed reviewof the Minipe Anicut and the Minipe Right Bank Canal and preparespecifications and tender documents for the canal suitable for interna-tional competitive bidding (ICB). Due to the urgency of this work toenable IDA financing of the canal under the proposed Mahaweli III preject,soon to be appraised, this work was started prior to effectiveness of theEEC credit and was partly retroactively financed. The consultants sta-tioned two engineers in the 14ahaweli Development Board (MDB) office toassist with this work. The contract documents, specifi.ations and biddrawings were prepared by the consultants in their head office in consult-ation with 1DB. Excellent progress was made, enabling a contract to beawarded for construction of the Right Bank Canal shortly after appraisalof the Mahaweli III project. The consultants assisted with the prepara-tion of working drawings for construction use and were able to keep pace-with the contractor's requirements, finally phasing out the two eng.neersworking with MDB in September 1981. The Right Bank Transbasin Canal wassuccessfully comoleted and commissioned and is largest irrigation canal,concrete lined its entire length, in Sri Lanka.

Design of Infrastructure in System C

4.05 In as much as the UTS consultants had carried out the feasibilitystudies for developing System C under grant financing from the United

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Kingdom in conjunction with the financing of Victoria Dam and Reservoir,which develops the water from System C, the Government engaged HTS toassist lDB in preparing final designs, specifications and tender documentsfor the irrigation and social infrastructure. Although some differencesarose between MDB and HTS on criteria to be used in the designs midwayduring the working period and some of MDS's design drawings had to beredone, the issue was resolved and the work was completed satisfactorily.The designs prepared are being utilized in the development of System Cunder Credit 701-CE (Mahaweli III), cofinanced by Japan and the KuwaitFund; the project is well underway and completioii is expected by 1988.

Support for Other Studies/Investigations

4.06 It was envisaged at the time of project preparation that therewould be a need to carry out other studies and designs in support ofimplementation of the AMP that could not be identified at that time, andUS$1.4 million of the IDA credit was allocated for that purpose. Thestudies anticipated included geophysical investigations of dam sites andtunnel and main canal alignments, hydraulic model studies of spillways andirrigation outlets, testing of foundation and construction materials, anddetailed planning and design studies. Unfortunately, such assistance wasnot requested by the Government until the last year of credit effective-ness, even though the credit was extended a total of three years to enableGOSL to identify and carry out the studies!investigations needed.

4.07 Because of delays by the Saudi Fund in financing as agreed (i) themain and branch canals for the System B Right Bank Project (Mahaweli IV -with cofinancing by Canada and the Bank Group) and (ii) the consultantsselected to assist in carrying out this work, it was agreed to use techni-cal assistance funds to finance the consultants to review and update thefinal designs and tender documents for the canals, to enable early tender-ing of this work when financing problems were resolved. On October 23,1984 the credit was extended nine months to September 30, 1985 for thispurpose. The consultants were appointed in May 1985 and completed theassignment successfully in late 1985. Significant design modificationswere made and the canal construction work is ready for tendering whenproject financing permits.

Trainina

4.08 Considerable on-the-job training was provided to counterpart staffand local employees by HTS, JVMTD, and the Cibb consultants during thecourse of thei work assignments. Such training included all aspects ofirrigation system and social infrastructure planning and design, prepara-tion of cost estimates, specifications and tender documents for both localand international competitive bidding, river basin planning at both recon-naissance and feasibility level, and basic computer techniques. In addi-tion to this training, two study tours were organized for senior staff of

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MASL, the first to Egypt by three senior officers to review irrigation anddrainage work (and problems) resulting from Aswan Dam development and workin the Nile Delta. The second tour, for four senior officials, was toSouth Korea, the Philippines and Thailand to familiarize these officialswith water management/allocation aspects of multi-purpose projects and

i operation and maintenance procedures and practices being carried out forlarge irrigation projects. The tours provided a good insight toproblems/difficulties which might be encountered in development of theAMP. The JVMTD consultants also provided training abroad for threeengineers for three months during January-April 1982.

1-zrformance of Consultants

4.09 Overall performance of the three consulting firms/consortiumsproviding services and assistance to MASL under the project was exception-ally good. The personnel appointed were competent and highly motivated.As a result, critical studies and designs were completed successfully andwhen required, which enabled the implementation of key projects in execu-tion to be carried out without delay. The designs produced with consult-ants' assistance were of good quality and embodied modern design tech-nologies and concepts. Although the final report for the transbasindiversion study was not completed until near the end of the credit closingperiod (and the fina' printed copy still has not been provided to IDA),the quality of the studies carried out was excellent and delays were dueto additional refinements and study alternatives requested by GOSL tofurther define development options.

V. LEGAL UNDERTAKINGS AND COMPLIANCE

5.01 The specific major legal un vrtakings of the credits with theGovernment were relatively simple, involving primarily (i) the carryingout of the project with diligence and efficiency e-.d the prompt provisionof funds, facilities and services as required; (i) employment of consult-ants under terms of reference and with qualifications, experience andterms and conditions of employment satisfactory to IDA, and to facilitatethe work of such consultants; (iii) appointment of qualified counterpartpersonnel to consultants; (iv) all goods and services financed fromproceeds of the credits to be used exclusively for the project and alldocuments, reports, etc. to be furnished to the Association as reasonablyrequested; (v) maintenance of adequate records and preparation of projectcompletion report and audit reports on timely/agreed basis; and (vi)Borrower and Association to exchange views with respect to evaluation andimplementation oF recommendations and conclusions in report documents.

5.02 The performance by the Borrower in fulfilling the above undertak-ings was, for the most part, satisfactory. Possible exceptions wereobserved in (i) and (v). Delays in identifying otherstudies/recommendations in support of the AMP resulted in extending the

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IDA credit a total of three years and in the cancellation of U5$ 1.14million. In fact, there was a period of nearly two years (1983-84) whenrelatively little work was accomplished. The other exception concerns theaudit covenants. Delays in carrying out required audits and in preparir;annual audit reports resulted in only one audit being made for the entirefive-year project implementation period. The audit report (received inDecember 1985) covers all reimbursements made to just beyond the formalclosing date, however the IDA and EEC accounts were not closed until June1986, some eight months later. Reimbursement applications and supportingdocuments within this extended period have yet to be audited. In regardsto (iv) above, although IDA oarticipated in most of the principal reviewmeetings concerning the findings and recommendations of the consultantsfor the transbasin diversion studies, the consultants' Final Report hasyet to be published and given to IDA.

5.03 Although it was believed at the time of preparation of thisproject that a follow-on project would be needed to prepare final designsand specifications for subprojects identified under the Transbasin Diver-sion Study, development of such projects may be delayed indefinitely and afollow-on credit is not needed at this time.

VI. IDA SUPERVISION

6.01 In terms of frequency and staff continuity, the project was wellsupervised. During the period of relatively little project activity, nofull supervision missions were mounted; rather, the IDA project of-ficerroutinely checked on implementation progress and the consultants'activities while in country under other terms of reference, which resultedin complete continuity being maintained by IDA supervision staf'throughout the implementation period. Supervision missions participatedin most of the principal reviews of the findings of consultants for theTransbasin Diversion Studies and provided recommendations on furtheraction to be taken. Continuing encouragement also was given to MASL toinitiate other studies in support of the AMP for which financing had beenprovided in the IDA credit.

VII. CONCLUSIONS

7.01 The project financed under these credits played a significant rolein assisting the preparation and implementation of the AMP, particularlythe Minipe Right Bank Canal (the largest irrigation canal in Sri Lanka)and System C, both of which IDA later financed. Through the TransbasinDiversion Study, the project was of great benefit to the Government inidentifying viable projects for future use of surplus water developedunder the MGDP. All studies and the assistance given to the Borrower inpreparing designs and tender documents were successfully completed asenvisaged. The only significant delay experienced and the aspect of theproject where improvement could have been made was in identifying and

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carrying out other studies/investigations in support of the AMP. However,the fact that such assistance was not requested is evidence that thisproject component was not particularly needed.

7.02 The principle lesson learned from this project is that the twoyears provided for project implem'entation was not realistic. A five-yearimplementation period for future technical assistance credits is believedto be more appropriate, particularly where studies of development alterna-tives are involved which usually require further detailed review ofvarious options or plans to fully delineate the most viable option ordesirable use of a limited natural resource.

/0

.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

SRI LANKAAGRO - ECOLOGICAL S IBD 14

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Documents

World Bank Document · 2016. 7. 13. · cost of local expenditures. The Mahaweli TA Project was cofinanced with an EEC Special Action Credit of US$2.0 million equivalent. Like the