World Bank Document · PDF file · 2016-07-14AMUL -Anand Milk Union Ltd. ... MILCO -Milk Industries of Lanka Company ... SECOND DAIRY DEVELOPMENT PROJECT Loan-and Project Summary

Documet of

The World Bank

FOR OMCUAL USE ONLY

Rqmzt No. P-4085CE

REPORT AND RECOMHENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THEE

EXECUTIVE DIRECTORS

ON A

PRCPOSED LOAN

IN AN AMOUNT OF US$38.0 MLLION

TO THE

DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA

FOR A

SECOND DAIRY DEVELOPMET PROJECT

.

May 22, 1985

This d0cma ba a ieddud ilium amd ma be wed by hepiems iy In the pwiferu oftheir .d_ ditks la.tmt may me etbewe be dldoud wfitout WoU Ba.k autbodua

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CURRENCY EQUIVALENTS

Currency Unit = Sri Lanka RupeeUS$1.00 = SL Rs 25.00SL Re 1.00 = US$0.04

ABBREVIATIONS AND ACRONYMS

AMUL - Anand Milk Union Ltd.CWE - Cooperative Wholesale EstablishmentDAPH - Department of Animal Production and HealthDDF - Dairy Development FoundationMILCO - Milk Industries of Lanka CompanyMPC - Milkshed Producers' CompaniesMRID - Ministry of Rural Industrial DevelopmentNLDB - National Livestock Development BoardNMB - National Milk BoardVMPA - Village Milk Producers' AssociationsVMPC - Village Milk Producers' Companies

FISCAL YEAR -

January 1 - December 31

, '~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

FOR OmCIAL USE ONLY

SRI LANKA

SECOND DAIRY DEVELOPMENT PROJECT

Loan-and Project Summary

Borrower: The Democratic Socialist Republic of Sri Lanka

Beneficiary: Dairy Development Foundation

Amount: US$38.0 million (including loan interest duringconstruction)

Terms: Repayment in 20 years, including 5 years grace atthe standard variable interest rate

Relending Terms: The Government would relend the loan.proceeds to theDairy Development Foundation for 15 years includingyears grace at a variable interest rate coinciding

w.th the Bank's lending rate, plus a fee of 2 percentage_ points to cover the foreign exchange risk.

ProjectDescription: The project seeks to provide support for the long-term

development of dairying in Sri Lanka by assisting in thegeneration of an organizational structure for the dairyindustry; increasing rural employment and incomes;improving efficiency in production, collecting,chilling, processing, and marketing milk; increasing thesupplies of domestically produced and hygienicallyprocessed fluid milk; providing technical assistance andtraining; and strengthening the monitoring and evalua-tion of development projects in the livestock sub-sector. About 180,000 farm families are expected tobenefit from increased on-farm employment, mnd moreevenly distributed incremental income derived fromincreased milk production. Risks arise from the sub-stantial institutional changes to be effected by theproject, and farmer acceptance of the new village milkcompanies.

This document has a resticted distribution and may be used by recipients only in the performanceof their officud duties. Its contents may not otherwse be disckoed without Word Bank authorzation.

Estimated Costs: la Local Foreign Total-- -US$ MiLlion-

Land 0.8 - 0.8Civil Works 8.6 1.9 10.5Machinery and Equipment 4.4 15.6 20.0Vehicles 0.6 1.0 1.6Technical Assistance 0.8 2.7 3.5Training - 0.9 0.9Technical Services 1.9 5.3 7.2Organization and Management 3.6 - 3.6Support to VMPC/VHPA 8.8 0.2 9.0Recurrent Costs /b 7.8 - 7.8Working Capital 7c 4.0 - 4.0

Total Base Costs .41.3 27.5 68.8

Physical Contingencies 1.7 1.3 3.0Price Contingencies 19.7 9.7 29.4

Total Proj' -t Costs 62.7 38.5 101.2

Interest DuringConstruction - 10.0 10.0Total Financing Required 62.7 48.5 111.2

Financing Plan: Local Foreign TotalUS$ Million

Donated Comodities 39.5 17.4 56.9IBRD Loan 11.1 26.9 38.0Netherlands 3.3 4.2 7.5Short-Term Loan (Government) 0.4 - 0.4Funds from KILCO and Other

Project Entities 5.8 - 5.8Equity Investments 2.6 - 2.6Total 62.7 48.5 111.2

/a Including taxes and duties of US$4.2 million equivalent.7T Incremental costs relating to DDF's operations and support to MILCO

and the MPCs./c Incremental working capital for MILCO, MPCs and initial working

capital requirement for DDF.

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EstimatedDisbursements:

IBRD FY FY86 FY87 FY88 FY89 FY90- - US$ Viflions----

Annual 0.6 14.5 13.7 5.6 3.6Cumulative 0.6 15.1 28.8 34.4 38.0

Rate of Return: 23 percent

Staff AppraisalReport: No. 5089-CE, dated May 13, 1985

Map: IBRD 18398

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

REPORT AND RECOMMENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS

ON A PROPOSED LOAN TO TREDEMOCRATIC SOCIALIST REPUBLIC OF SRI LADKA

FOR A SECOND DAIRY DEVELOPMENT PROJECT

1. I submit the following report and recommendation for a proposed loanof US$38.0 million (including interest during construction) to the DemocraticSocialist Republic of Sri Lanka to help finance a Second Dairy DevelopmentProject. The loan would have a term of 20 years including 5 years grace atthe standard variable interest rate. The Covernment would relend the loanproceeds to the Dairy Development Foundation for 15 years, including 5 yearsgrace, at a variable interest rate coinciding with the Bank's lending rate,plus a fee of 2 percentage points to cover the foreign exchange risk.Cofinancing has been arranged with the European Economic Coumnity (EEC) fora grant in commodity aid valued at US$36.5 million equivalent, theNetherlands for a grant of US$7.5 million equivalent, and the World FoodProgram (WFP) for a grant in commodity aid valued at US$20.4 millionequivalent.

PART I - TEE ECONOMY 1/

2. A country economic memorandum, "Sri Lanka: Recent EconomicDevelopments, Prospects and Policies" (Report No. 5038-CE dated May 4, 1984),was distributed to the Executive Directors on May 18, 1984. Country data areprovided in Annex I.

3. After several years of relative stagnation, Sri Lanka's economy hasexperienced sustained growth as a result of the economic liberalization of1977 and a significant increase in foreign assistance. Before 1977,Sri Lanka's growth performance had been below the country's needs andpotential. Although in the 1960s the annual GDP growth of 4.4 percent wasabove the average for low-income countries, between 1970 and 1977 it slack-ened to 2.9 percent annually, which was just below the average for low-incomecountries. Through much of this period, the terms of trade deterioratedsteadily, eroding even these modest gains. The slowdown in economic growthin 1970-77 was the result of a combination of factors, including inadequateinvestment, poor management of the economy, and a policy environment not

1/ This part is substantially the same as Part I of the President's Reportfor the Second Roads Project for Sri Lanka (Report No. P-3999-CE), whichwas approved by the Executive Directors on April 16, 1985.

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conducive to growth and investment. These difficulties were compounded bypoor weather in some years and by a sharp rise in the cost of imported foodand petroleum over the period.

4. In contrast to this poor economic performance, Sri Lanka's socialachievements in relation to per capita income have been outstanding. Withrespect to the most important social indicators-life expectancy, literacy,infant mortality, birth rate, nutrition levels-Sri Lanka ranks significantlyhigher than other countries at the same per capita income level.Improvements in the quality of life, particularly the rise in heaLthstandards, the spread of education, and the availability of subsidized food,have been important factors in the decline in mortality. Also. the increas-ing age at marriage, the spread of female education and employment, and afamily planning program contributed to a sharp decline in fertility. As aconsequence, population growth, net of migration, dropped steadily, from 2.7percent annually in 1953-63 to 2.2 percent annually in 1963-71, and to 1.7percent annually in 1971-81.

5. However, the Government largely financed both its investment andsocial expenditures by extracting the surpluses yielded by the three majortree crops (tea, rubber, and coconuts), which traditionally have furnishedeasy sources of revenue and foreign exchange. However, these surpluses beganto decline in the late 1960s, as government export tax policies discriminatedagainst tree crops and export unit prices weakened. With growth in otherproductive sectors declining during 1970-77, budgetary resources availablefor social programs were squeezed between inelastic revenues and rapidinflation. As a consequence, expenditures for social services other than thefood subsidy declined as a proportion of total current expenditures and ofGDP, thus threatening the gains in health and education. In short, theeconomy could no longer generate the resources needed to sustain a largeprogram of welfare expenditures. Moreover, the size of that program reducedthe scope for policy-makers to shift resources to other developmentactivities.

6. In 1977, the Government, in consultation with the IMF, introduced apackage of policy measures to liberalize the economy and allow a greater rolefor the private sector. These policies were designed to (a) reduce govern-ment intervention in commodity markets, (b) reduce government consumptionsubsidies to assist in restoring producer incentives and public savings, and(c) create a favorable environment for private (foreign and domestic) invest-ment through tax concessions, the creation of an Investment Promotion Zone,and the unification and depreciation of the exchange rate. Two importantconsequences of this policy reform package were: (a) a decline in the costof selected subsidies and transfers from about 10 percent of GDP in 1977 toabout 3 percent by 1981; and (b) a periodic increase in the domestic supportprice for paddy (which brought it into line with world prices) that spurred ahighly positive response from paddy producers.

7. These policy reforms were introducei! along with an ambitious publicinvestment program that was made possible by the increased availability ofdomestic and foreign resources. As the Government began to tackle longoverdue investments, its capital expenditure as a share of GDP jumped from6 percent in 1977 to an average of 13 percent in 1978 and 1979 and a peak of19 percent in 1980, but subsequently declined to an average of 14 percent

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during 1981-83. The Government's investment plan centered on three majorinitiatives: (a) accelerated implementation of the Mahaweli GangaDevelopment Program, the largest multipurpose river basin development programever undertaken in Sri Lanka; (b) establishment of a 200-square mile freetrade zone to attract foreign investors located north of Colombo near theinternational airport; and (c) institution of a massive housing and urbanrenewal program focusing mainly on the Colombo metropolitan region, includingthe construction of a new capital complex at Kotte, a suburb of Colombo.

8. The initial result of both the policy reforms and increased levelof investment was an impressive jump in the GDP growth rate during 1977-80 toan annual average of 6.8 percent, which then declined to 5.3 percent in1980-83. The activities responsible for most of this increased growth wereproduction of paddy, export of garments, and services. The real growth rateof paddy production since 1977, for example, has averaged 5.7 percent a yearwith the result that rice imports declined from an average 33 percent oftotal rice consumption in 1970-77 to only 12 percent in 1978-83.Manufactured garment exports, which have increased from US$12 million in 1977to US$197 million in 1983, raised their share of non-petroleum manufacturedexports from 41 percent in 1977 to 76 percent in 1983. Tourist arrivalsincreased from 153,665 in 1977 to 407,230 in 1982, with a setback to 337,342in 1983 due to ethnic disturbances during July.

9. Despite these advances, some of the basic structural weaknesseswithin the economy-have not been addressed. Among the directly productiveactivities, three subsectors have continued to perform poorly, namely treecrops, public manufacturing enterprises, and non-traditional exports. Thevolume of output from the centrally important exporZ-oriented tree cropssubsector has continued to decline or stagnate. Public manufacturingenterprises, which account for approximately 40 percent of the value added inthe non-petroleum manufacturing sector, utilize resources inefficiently,thereby reducing the overall growth rate in manufacturing. In addition, thereal growth of non-traditional exports, other than garments, has been fairlylow and erratic. Underlying the poor performance of these subsectors are twoprincipal factors: poor management of publicly-owned enterprises, and anoverall incentive framework characterized by high and uneven levels of effec-tive protection with a general bias against export activities. Moreover, theincentive to invest in the production of traded commodities has been reducedin favor of non-traded goods, as the exchange rate has not been fullyadjusted in a systematic way since 1977 so as to compensate for the highlevels of domestic inflation.

10. Another principal source of macro-financial instability, particularlyin recent years, has been the Government's budgetary policy. As a share ofGDP, budgetary spending increased from 23 percent in 1977 to a record 43percent in 1980, subsequently declining to a still high 32 percent in 1983.Although much of this increased expenditure was accompanied initially by acorresponding inflow of foreign concessionary capital linked to the publicinvestment program, the need to resort to domestic or commercial foreignfinancing increased. In addition, the Government's efforts to mobilizeadditional domestic resources fell short of requirements. Due to fallingvolumes and prices in the tree crops subsector and an insufficient effort towiden the tax base beyond traditional sources, the Government increasinglyrelied on ad hoc taxation measures to maintain existing revenue levels. The

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rapid growth in spending coupled with increased inflows of foreign savingsand a weak domestic revenue effort resulted in large budget deficits, whichpeaked at the equivalent of 23 percent of GDP in 1980 and still amounted to15 percent of GDP in 1983. In response to increasing domestic deficits, theGovernment has squeezed current spending with negative and positiverepercussions. On the positive side, the reduction in subsidies is welcome,but on the negative side, the limits placed on both public sector salariesand operation and maintenance expenditure are beginning to impose significantcosts on the economy in terms of recruitmentlperformance in the public sectorand the efficient use of the existing publicly-owned capital stock. Even so,savings on the budgetary current account have remained negative since 1979.In summary, despite considerable donor support for the country's developmentprograms during 1981-83 (equivalent to 7.3 percent of CDP), the high level ofpublic expenditure has meant that only 45 percent of the overall deficit wasfinanced by concessionary flows, with about 10 percent being covered byforeign commercial borrowing and the remaining 45 percent through domesticborrowing.

11. The rapid expansion in investment and general economic activity hasbeen reflected vividly in the balance of payments. Between 1977 and 1980,import volumes grew at an average anmual rate of 18.8 percent-importedinvestment goods increased from US$83 million to US$493 million, while inter-mediate goods and petroleum imports tripled in current prices. As a resultof this fairly broad-based expansion, merchandise imports as a share of GDPincreased from 23 percent in 1977 to 51 percent in 1980. Export volumes,however, expanded at a much lower rate (an average annual growth rate of4.7 percent between 1977 and 1980) and the decline in tree crop exportvolumes offset the strong growth in garment exports from firms established inthe Investment Prvmotion Zone. Consequently, merchandise exports as a shareof GDP increased frcm 21 percent in 1977 to only 26 percent in 1980. Thesediverse trends in the volume of trade were accompanied by a 26 percentdeterioration in the terms of trace over the same period. Rapid growth intourism receipts and private remittances from abroad failed to offset thisdeterioration in the trade account, and the current account balancedeteriorated from a positiva 2.4 percent of GDP in 1977 to a record 19.8percent deficit in 1980. Deficits in 1978 and 1979 were more than offset byincreased net aid disbursements, even to the extent that Sri Lanka couldcontinue to add to net international reserves. Yet, in 1980 the situationchanged, international reserves fell by US$220 million, and the public sectorbegan to increase its use of commercial financing.

12. Since 1980, the external deficit has mirrored the erratic movementsof the budget deficit. Realizing that a continuation of the 1980 trendswould result in serious financial instability, the Government began in 1981,to take corrective measures. The measures agreed upon, in consultation withthe IMF, included tighter overall monetary policy, a substantial reduction ingovernment spending, and a gradual realignment of the exchange rate. Theeconomy began to respond positively by the end of 1981 (the current accountdeficit in the balance of payments had declined to 13.7 percent of GDP andthe budgetary deficit to 15.6 percent), but in 1982 the political resolve tocontinue to apply the needed policy mix weakened, largely because of thepresidential elections and a subsequent referendum to extend the life ofParliament. As a result, both the external and internal deficits increasedin 1982 (to 15.3 percent and 17.3 percent, respectively) and the GDP growth

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rate declined to 5.1 percent (the lowest since 1977). Although policymeasures did contribute to the decline (to 12.4 percent of GDP) in the cur-rent account deficit in the balance of payments in 1983, the primary factorwas the estimated 14 percent improvement in the terms of trade. By the endof 1983, net international reserves were slightly negative, gross officialreserves were equal to about two months of imports, and the debt serviceratio continued to increase (para. 16). In addition, as a result of thebudgetary deficit and some movement in the exchange rate, inflation duringthat year accelerated to an average 14 percent and the CDP growth rate fellto 4.9 percent.

13. Although the 1983-84 terms-of-trade improvement is bringing theeconomy some relief, the need for basic structural change has not diminished,particularly in the tree crops and manufacturing subsectors. One of theforemost objectives of government policy should be to restructure the economytoward exports rather than producing for the very limited domestic market.Basically what is needed is a more neutral incentive framework that wouldpermit the full diversity of Sri Lanka's particular comparative advantage todevelop. In the short run, however, such a policy package would have to besupplemented by other measures because, first, the capacity of the economy torespond to a changed set of incentives may be limited and, second, thenon-policy-related constraints on economic growth (such as the basicinfrastructure and imperfect credit markets) will continue to require the-careful attention of Government.

14. Although an uncertain sociopolitical situation constrains theGovernment from adopting a comprehensive economic policy package, recentmeasures demonstrate Government's awareness of medium-term problems and itswillingness to implement some required reforms. For example, in theNovember 1984 budget the Government moderately reduced the overall tax burdenon tree crops. This reduction, in combination with the management/incentivereform package for state-owned plantations implemented in early 1984, hasimproved incentives for producers throughout the subsector. The budget alsointroduced tariff changes based on recommendations made in the final reportof the Presidential Tariff Commission on trade taxes. Although importantactivities were omitted from these reforms, the general thrust of the _nangesis towards a more neutral framework. The Cabinet has also laid down criteriafor selecting projects in future public capital budgets--a measure that, ifimplemented, should redirect public investment into those areas where itcould be most efficiently used. In light of the rapid build-up of thecountry's capital stock since 1977, the highest return to public investmentprobably would come from complementary investments in existinginfrastructure, and in a few new projects that are appropriate in long-gestating activities (such as, power). However, on the negative side, the1984 budget also provided a wide range of tax concessions that will not serveto reduce either the budget deficit or level of inflation. The currentlyhigh tea price has enabled the Government to implement a basically expansion-ary budget while containing its budget deficit below 10 percent of CDP. Thusin the medium term, difficult issues related to changing the tax base and theoverall incentive framework stil' need to be addressed if the economy is toundergo the type of structural change necessary for sustained growth.

15. The international aid community has responded enthusiastically tothe Government's recent development efforts by stepping up project aid, in

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recognition of the Government's'efforts to increase such investment,particularly in the Accelerated Mahaweli Program. The overall level of aidcommitments iacreased from US$250 million in 1977 to a record US$814 millionin 1981, equivalent to US$55 per capita. Disbursements grew much more slowlyso that the aid pipeline rapidly expanded to around US$1.63 billion by theend of 1981. In 1982-83 public capital spending had to be curtailed, bothbecause of implementation and domestic financial constraints, with the resultthat commitments declined to US$550 million in 1982 and US$370 million in1983, halting further increases in the pipeline. Aid disbursements haveincreased steadily, from US$200 million in 1977 to US$450 million in 1983, ornearly US$30 per capita. The slow growth of disbursements relative to com-mitments through 1981 can be explained largely by two factors: the rapidacceleration in aid commitments and the relative shift over time from foodand commodity aid to slower-disbursing project aid. Continued high levels ofaid will depend upon donors' willingness to finance a sizeable portion oflocal costs, provide supplementary financing for ongoing p-ojects, whereneeded, and to increase non-project aid. To maintain donor confidence in itseconomic policies and management, the Government will have to strengthen itsdomestic resource mobilization effort and continue to restrain governmentexpenditures as long as the budgetary situation remains tight. Local costfinancing in support of Sri Lanka's resource mobilization efforts will notonly provide valuable relief from budgetary pressures, but will also supple-ment foreign exchange resources needed to support the balance of pavments.

16. At the end of 1983, external public debt outstanding and disbursedstood at an estimated US$2.2 billion, which was about 46 percent of GDP.Although a greater part of this debt is on concessional terms, the increasedfinancing resorted to in 1981 and 1982 helped to push the debt service ratio(excluding IMF charges and repurchases) up from 10.1 percent in 1982 to11.9 percent in 1983. Even though the record tea prices in recent mnnthshave enabled Sri Lanka to reduce its dependence on commercial financing inthe near term, any deterioration in the terms of trade would rapidly reversethe situation. This threat to the economy is partly offset, however, by theGovernsient's recent efforts to contain the budget deficit and to implementpolicy measures designed to stimulate exports and efficient import substitu-tion activities. If progress along these lines continues, the currentaccount deficit in the balance of payments should decline to approximately7 percent of CDP toward the end of the decade, and the debt service ratio,after temporarily rising to almost 17 percent because of existing debt repay-ment commitments, should drop below 15 percent in 1990.

PART II - WORLD BANK GROUP OPERATIONS

17. Since the beginning of its operations in Sri Lanka in 1954, the WorldBank has approved 11 loans totaling US$151.7 million (net of cancellations)and 38 credits totaling US$769.1 million (net of cancellations) in support of49 projects. About 52 percent of World Bank assistance has been for agricul-ture (irrigation, tree crops, and rural and dairy development), 23 percentfor power, 10 percent for transportation, and the remainder of 15 percentamong development finance company operations, a program credit (involving theimport of raw materials for industry), water supply, construction industry,telecommunications, and small and medium industries. Eight loans and 13

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credits have been fully disbursed. Annex II contains a summary statement ofWorld Bank Group operations as of March 31, 1985.

18. In Sri Lanka, the IFC has a total investment of US$2.13 millionequivalent in equity and US$16.39 million equivalent in loans as ofMarch 31, 1985. Investments have been made so far in two textilesindustries, one polypropylene bag industry, one equipment-leasing company,one hotel, and two IFC lines of credit, one of which has been extended to thegovernment-owned Bank of Ceylon for term loans to medium-sized industries.

19. The World Bank Group's current strategy is primarily to assistSri Lanka in reaching a more sustainable balance-of-payments position in themedium term through export promotion and import substitution in viableeconomic activities. In order to achieve this, the lending strategy includessupport to policy changes in a number of areas: investment priorities,incentive framework, coordination of economic policies and programs, opera-tion and maintenance expenditures, and cost recovery.

20. Within the above framework, the World Bank Group lending programwould concentrate resources on productive sectors and in support of energyand transport infrastructure. Within agriculture, the strategy gives thehighest priority in the vital tree crops subsector. The objective is tochannel resources into an activity in which Sri Lanka has a comparativeadvantage so as to stabilize the sector in the short term and to promotesustainable export growth in the medium term; Whether in the irrigation,rural development or tree crops subsector, the strategy focusses onrehabilitating the existing capital base, increasing its utilization capacityand ensuring better operation and maintenance in the future.

21. The Government's priority to rehabilitate rundown infrastructure iswell placed and needed to support expanded economic activity, particularly inthe private sector. Major elements of the lending program would be directedat helping the energy needs of the economy and easing transport bottlenecks.The World Bank has provided financing to a number of power projects forgeneration, transmission and distribution. The future program would focus onenergy conservation through both required investments and policy measures.The old and inefficient power distribution system would be rehabilitated toreduce system losses; small but significant improvements in energy conserva-tion would be undertaken in large energy consuming industrial/commercialunits; and a study is underway to recommend measures to improve energyefficiency in the transport sector, a large consumer of commercial energy inSri Lanka. All of these activities would be supported through policymeasures and institutional development. Support to the transport sectorwould continue with rehabilitation of the road network, institutionalizingproper maintenance methods-and improving sectoral planning of policies andprograms.

22. The World Bank has provided financing for a broad range of large-,medium- and small-scale industrial enterprises, primarily in the privatesector, through support of development finance companies. Export developmentwould focus on this assistance which has also included support to improvingthe performance of private enterprises. Future lending in the sector wouldcontinue to have this focus.

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23. Institutional capabilities, at both the planning and implementationlevels, have been constrained with the recent rapid expansion of publicinvestment. While continuing the emphasis on institution building projectcomponents, future projects would also focus on such areas as human resourcedevelopment, business and industrial management, and public administration.

24. The need for a substantial transfer of resources to Sri Lanka hasbeen a recurrent theme of World Bank economic reporting, both to offset thedeterioration in the world trade environment and to support a high and sus-tained growth rate. Despite Government's increased domestic resource mobi-lization effort in the recent past, World Bank projects in Sri Lanka haveincluded financing of local expenditures. The World Bank's strategic focuson agriculture, rehabilitation rather than new infrastructure, and institu-tional development means that the foreign exchange component of projectstends to be small. Also, the Government's budgetary situation continues tobe tight as increased operational and maintenance requirements make-demandson domestic resources.

25. The World Bank Group, as of the end of 1983, accounted for 10.7percent (IBRD, 1.6 percent; IDA, 9.1 percent) of Sri Lanka's total debtoutstanding and disbursed, and 5.0 percent of debt service on medium- andlong-term debt. The projected World Bank Group's share in total existingexternal debt outstanding and disbursed will increase to 17 percent by theend of 1985 (with IBRD's share deslining to 1.3 percent). The IBRD and IDA..portions of debt service are expected to decline to about 4 percent by theend of 1985.

PART III - THE LIVESTOCK AND DAIRY SUBSECTOR

26. Agriculture plays an important role in the economy of Sri Lanka: itaccounts for about 25 percent of GDP, about 50 percent of the labor force,and 60 percent of export earnings. The contribution of livestock to thegross value of agricultural production is estimated to be 8 percent. Thisfigure may be considerably lower than the actual contribution because it doesnot take into account the value of manure, hides and skins, and draft power.Furthermore, the subsector generates employment and contributes significantlyto the economy by utilizing much land that would have little alternative use.

Milk Production and Processing

27. Estimates of domestic milk production range from about 0.4 millionliters per day (lpd) (according to consumption surveys) to 0.7 million lpd(according to numbers of livestock). Some 70 percent of the milk produced isconsumed at home or is marketed locally, and only about one-third is procuredby the organized dairy subsector. Most of the milk processed by the NationalMilk Board (NMB) is collected by middlemen directly from producers or throughcooperatives. The country's processing capacity is about 0.6 million lpd.Current throughput (locally produced milk plus imported commodities) is about0.3 lpd.

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Milk Imports, Consumption, and Demand

28. In 1983, Sri Lanka imported about 27,000 tons of dairy products,which provided the liquid milk equivalent of a further 0.4-0.5 million lpd.The total value of milk imports has increased from SL Rs 55 million in 1970to SL Rs 380 million in 1978, and SL Rs 870 million in 1983. Average urbanper capita consumption of milk and milk products is estimated at 76 grams perday compared with an average rural per capita consumption of 48 grams perday. Consumption varies considerably between income classes, the poorerurban classes consuming an average of about 40 grams per day and the upperincome classes up to 130 grams per day. The income elasticity of the demandfor milk and milk products is about_0.6-0.8 at mean consumption levels,indicating that a 10 percent growth in per capita income would result in anestimated 6 to 8 percent rise in per capita milk consumption.

Milk Prices, Subsidies, and Tariffs

29. Prices. The Government controls both producer and consumer pricesof milk bought and sold by NMB, which, in turn, controls all sales of liquidmilk except small quantities traded in rural markets. Up-to March 1983,producer milk prices generally ranged from SL Rs 2.00 to 2.80 per liter,depending mainly on fat content. In March 1983, the Government increased theproducer milk price to about SL Rs 3.20 per liter and consumer prices toSL Rs 6.07 per liter. In September 1984, the producer milk price was furtherincreased to SL Rs 3.70 per liter'and consumer price to SL Rs 8.00 per liter.-While the consumer price remains at SL Rs 8.00 per liter for pasteurizedfluid milk, the current producer price is SL Rs 4.30 per liter of 4 percentfat milk as a result of a recent (post-September 1984) government decision.Bulk imported whole milk powder (the main substitute for pasteurized fluidmi't), repackaged in Sri Lanka, is currently retailed on average at SL Rs8.90 per liter equivalent after payment of a 15 percent import duty. Thecurrent retail price set by the largest processor of domestically producedwhole milk powder is SL Rs 8.40 per liter equivalent.

30. Subsidies. NMB operates at a financial loss and has a negative cashflow which is financed by government subsidies. These losses occur in largemeasure because of insufficient margins between government-controlled pricesof raw milk and finished products, low plant throughput combined with a highproportion of fixed costs, and overstaffing. The size of the subsidy hasbeen reduced in recent years as a result of the above-mentioned consumerprice increases and increased efficiency in NMB's operations. In 1983-84,the average annual subsidy payments to UMB for liquid milk amounted to SL Rs23 million compared with SL Rs 45.9 million in 1982. The Government hadexpected that continued improvements in the efficiency of NMB operationswould permit the elimination of the subsidy by the end of 1984. The neces-sary improvements in NMB were not forthcoming and ir. the November 1984 budgetthe subsidy was raised from SL Rs 0.375 to SL Rs 0.50 per liter of raw milkprocessed as fluid milk. The Government, however, remains committed to theelimination of this subsidy and specific action to accomplish this objectiveis included under the project (Section 4.05(a), draft Loan Agreement). Thereis at present a need to ensure that some local fluid milk is incorporatedinto locally produced whole milk powder (which also incorporates bulk recon-stituted imported powder). Without this outlet, some rural producers wouldlack an effective market for their milk. Also, markets distant from milk

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processing plants would be mainly dependent upon imported milk products. Tomake local fluid milk an attractive ingredient for local milk powderprocessors, the Government presently pays a subsidy of SL Re 1.00 per literon fluid milk absorbed by these processors. The total subsidy to NMBbudgeted for 1985 is SL Rs 33 million. The Government, however, has agreedto progressively abolish, but in any event not later than December 31, 1987,the existing SL Re 1.00 subsidy (Section 4.05(b), draft Loan Agreement).

31. Until 1983 the Cooperative Wholesale Establishment (CWE), which isthe agency responsible for most imports of dairy products, was also receivinga subsidy to cover its operating losses. Prior to March 1983, the subsidyamounted to about SL Rs 5.00 per kilogram of powdered milk. The annual costto the Government was about SL Rs 100 million. In March 1983, the consumerprice of milk powder imported and repackaged by CWE was raised sufficientlyto eliminate this subsidy.

32. Tariffs. Until January 1985, import duties on whole milk powder,skim milk powder, and butter oil were 5 percent, 7.5 percent, and 12.5percent, respectively. Effective January 1, 1985, the duty on all theseproducts was raised to 15 percent. A Steering Committee to be establishedunder the project would periodically review cost data for domestic milkproduction and international prices of dairy products and recommend anynecessary changes in tariffs on imported dairy products (Section 4.01, draftLoan Agreement). The Government would seek the concurrence of the Bankbefore raising the tariff above 25 percent.

Dairy Cooperatives

33. Dairy cooperatives in Sri Lanka date back to about 1930; however, themajor force in the cooperative movement, the Cooperative Union in Colombo,was organized during the 1940s and continued to work efficiently until theinception in 1954 of the state-owned NMB. The NMB started selling milk inColombo at prices lower than those of the Cooperative Union, which was run onsound financial principles, and eventually drove the Union out of business in1958. The dairy cooperative movement resurged in 1979 under the IDA-assisteddairy project (Credit 504-CE).

34. At present, there are 100 milk cooperatives in Sri Lanka, 90 of whichare classified as small primary societies and 10 as large primary societies.Cooperatives of the former type cover a relatively small area (generally onevillage) and their by-laws do not provide for elected branches. Some 50 ofthese societies, known as Dairy Producers' Associations (DPAs), wereorganized by the National Livestock Development Board (NLDB) under the firstdairy project and are members of the Coconut Triangle Milk Producers'Cooperative Union. The large primary societies, organized by both the NLDBand the Department of Animal Production and Health, have adopted by-lawssimilar to the existing multipurpose cooperatives and consist of centralunits with varying numbers of branches which are supervised by elected branchcommittees. The central units of these societies are frequently located atthe headquarters of the assistant government agent, and their executivecommittees generally consist of four government nominees and five membersseLected from among the producers by an electoral college. Four of the tenlarge primary societies each cover an administrative district. Because ofits more centralized nature, distance of the Central Unit from the villages,

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and the presence of government nominees on its board, producer influence andcooperative autonomy are limited, and the Large primary society is oftenviewed as another agency of the Government. The dairy cooperative societiesto be formed under the ADB-assisted livestock development project would be ofthe large primary type.

35. The total membership of the primary milk societies is about 23,000,and since 1979 these societies have averaged about 31 million liters of milkcollected annually (about 54 percent of the total milk collected by NMB).Although many of these societies have operated with considerable degree ofautonomy and with producer-based participatory management, they have hadlittle or no involvement beyond the village level, that is in milk processingand marketing. Furthermore, while both types of cooperatives offeradvantages in terms of economies of scale in milk collection and transportcompared to the private collector, both place the producer in a disadvan-tageous position in terms of bargaining for price increases and for theprovision of production inputs. As a consequence, producer milk prices areonly about 54 percent of retail prices with margins between collection,chilling, transport, and processing being extensive. Likewise, retail priceincreases have a significant likelihood of not being fully reflected inproducer prices but may result instead in increased margins and lossesbetween producer, cooperative, chilling center, processing plant, andconsumer. Thus, a reorganization of the existing cooperative system, whichwould allow producers wider participation and greater control, is needed.

The ADB Livestock Development Project

36. The ADB is financing an ongoing livestock development project whichproposes, inter alia, to undertake dairy development in six districts ofSri Lanka. Under the project, assistance would be given in the establishmentand operation of dairy producer cooperatives. The structure and operation ofthe cooperatives are expected to be similar to the structure and operation ofthe Village Milk Producers' Companies (VMPCs) to be established under theproposed project, and would therefore provide a consistent approach to dairyfarmer involvement at the village level.

Bank Involvement in the Subsector and Project Rationale

37. The Bank's involvement in Sri Lanka's dairy industry began with anAgricultural Sector Mission in 1971. In early 1973, a project was preparedby a Government interagency team with the assistance of the FAOIIBRDCooperative Program. This multicomponent project--which included credit andtechnical services for dairy farm development, credit to cooperatives, supplyof equipment for expansion of milk collection, and the establishment ofdemonstration units for calf rearing and for forage production andmanagement-was appraised in mid-1973. Because of slow progress, the projectwas reformulated in 1978 and emphasis was shifted from providing commercialdairy farms with credit to forming dairy producer associaticn .Subsequently, project progress still remained slow, and in December 1981,after a one year extension, the project closed. Although the project con-tained no provision for monitoring and evaluation, as pointed out in thePro ect Completion Report, the results obtained indicated that the formationof producer associations, and milk collection through them, had been suffi-ciently successful to demonstrate the validity of this approach to dairy

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development. Furthermore, it was clear from the outcome of the project thatissues pertaining to institutional structure, pricing, and project perfor-mance could not be separated. Consequently, it was agreed that, beforefurther livestock investments were considered, a joint Government-IDA reviewmission would study the sector. A review mission, which was carried out inNovember-December 1982, confirmed the potential of the Sri Lankan dairyindustry and recommended that substantial institutional changes leading tothe privatization of the industry be initiated.

PART IV - THE PROJECT

38. The proposed project wab prepared/appraised in October 1983 after theGovernment had reviewed the sector mission's report. Negotiations were heldin Washington, April 22-26, 1985. The Government of Sri Lanka was repre-sented by a delegation led by Mrs. S.L. Kuruppu, Additional Director,External Resources Department, Ministry of Finance and Planning. A staffappraisal report (Report No. 5089-CE) is being distributed separately to theExecutive Directors. Special conditions of the loan are listed in Annex III.

Project Design

39. If both producers and consumers are to gaijn from a program of dairydevelopment, major institutional and organizational changes must be intro-duced that would increase milk production and promote efficient processingand marketing. The proposed project would therefore put the greatestemphasis on these goals. The proposed project would be nationwide incoverage and the country would be divided into five milksheds for operationalconvenience. Each milkshed would consist of three to seven districts.

40. To improve the efficiency of milk collection, processing, andmarketing, the Government has agreed that it would divest itself of themanagement of investments in milk processing and marketing. These commercialactivities would be carried out by the private sector. If producers are toreceive the benefits of higher milk prices, they should be granted greatercontrol over milk processing and marketing and be permitted to enter intopartnership with entrepreneurs in building the dairy industry. The projectdesign draws heavily on the experience gained during the last ten years incooperative dairy development in the region. The proposed project wouldestablish an organizationaL infrastructure patterned after the Indian AMUL(Anand Milk Union Ltd.) model. The various entities created under theproject, except for the Village Milk Producers' Associations (VMPAs), wouldbe registered under the Companies Act rather than the Cooperatives Act, whichwould minimize some of the limitations in the cooperative structure. Thisarrangement would have the advantage of embodying the most desirable featuresof smallholder dairy cooperatives while minimizing public sector influence,and it would place each project entity under the same requirements ofaccountability and operating procedures as any other private sector firm.The proposed institutional changes would ensure that the technical inputs andadvisory services necessary for increasing milk output and improving theefficiency of production are provided to producers. They would also allowproducers to participate in the profits obtainable in milk processing andmarketing and would provide a mechanism by which incentive prices could reach

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the farmer. Given the substantial institutional and infrastructuraldevelopment, the project would be implemented over seven years.

Project Objectives

41. The primary objectives of the project would be to: (a) create aninstitutional structure to provide technical support and financing for thelong-term development of dairying in Sri Lanka; (b) increase rural employmentand incomes; tc) improve efficiency in producing, collecting, chilling,processing, and marketing of milk; td) increase the supplies of domesticallyproduced and hygienically processed fluid milk; (e) provide technical assis-tance and training to support the development of the industry; and(f) strengthen and support the monitoring and evaluation of projects in thelivestock subsector.

Project Components

A. Organization and Management

42. The project would support the establishment of an institutionalstructure for the dairy industry consisting of The Dairy DevelopmentFoundation (DDF), The Milk Industries of Lanka Company (MILCO), five MilkshedProducers' Companies (MPCs), and about 1,950 Village Milk Producers'Companies (VMPCs). Dairy cooperatives, (referred to as Village MilkProducers' Associations CYMPAs)), meeting specific criteria, especially thoserelating to management practices and financial status, and abiding by thesame rules and procedures as the VMPCs, would participate under the project(Schedule 2, draft Loan Agreement). As part of the privatization of thedairy industry in Sri Lanka, the Government would lease NMB's chilling cen-ters and milk plants to MILCO (Sections 4.03(a) and 6.01(f), draft LoanAgreement), and would abolish NiMB by September 30, 1986 (Section 4.03(b),draft Loan Agreement).

43. DDF has been established as a non-profit guarantee-limited company toprovide financing for investments in dairying, as well as training, technicalassistance, research and development, and management support in organizingand developing the dairy industry. DDF would be the focal point forimplementation, and all project funding would flow through it. It would usefunds derived from donated commodities, the Netherlands and the Bank tofinance investments in dairy production, processing and marketing, and itwould also provide or obtain training, technical assistance, management, andresearch to support the organization and development of the dairy industry.As a non-profit organization, DDF would be exempt from income tax.

44. MILCO would be owned by producers (49 percent) and private investors(51 percent) and its functions would be to: (a) purchase, process and marketfluid milk and milk products (it would set the pricing from producer toretail level); (b) reconstitute donated and commercially procured milkproducts; (c) expand the capacity and continue the modernization of the miLkprocessing industry; (d) operate existing processing facilities now owned byNMB; and Ce) provide professional management under contract with concernedorganizations to undertake the management of dairy processing facilities andany other entities in the dairy industry.

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45. Five MPCs have been established to cover all districts of Sri Lanka.These companies would be owned by producers and would: (a) lease from MILCOand manage NMB chilling centers as well as new chilling centers; (b) tran-sport milk from VMPCs and VMPAs to chilling centers or dairy plants; (c)provide technical and extension services to VMPCs and VMPAs; td) train VMPCand VMPA staff and farmers; and (e) invest in MILCO on behalf of their memberVMPCs and VMPAs and pass on to them MILCO dividends earned.

46. About 1,950 VMPCs would be established. They would be owned byproducers and would: (a) collect, test, and arrange payment for milk fromindividual producers; (b) provide technical services (artificial inseminationand animal first aid care) to their members; (c) disseminate to their membersextension information on fodder and dairy production; and (d) invest in MPCson behalf of their members. The VMPAs would perform the same functions fortheir members as the VMPCs.

B. Technical and Extension Services

47. To increase the productivity of the national herd, the project wouldprovide dairy producers with: (a) artificial insemination services usingimported frozen semen; (b) routine and emergency veter-inary services;(c) paraveterinary first aid services; (d) production inputs, such as plant-ing materials, compound cattle feed and minerals; and (e) advisory serviceson fodder and dairy production. The VMPC and VMPA members would pay forartificial insemination and emergency veterinary services. Individualfarmers would expect to benefit from these activities in two important ways.First, more effective services would be available to them at the villagelevel, and second, farmers would have opportunities for training providedthrough extension services.

C. Dairy Processing Plants and Chilling Centers

48. To modernize, expand, and improve the efficiency of milk chilling,processing, and marketing, the project would refurbish the existing Colombomilk plant; construct three new dairy plants at Colombo, Kilinochchi/Vavuniva, and Ampari; and construct about 10 new chilling centers.Refurbishing of the existing Colombo plant for the reconstitution of donatedcommodities would be carried out as a part of the Netherlands assistance. Toensure that the designs and layouts of the new pLants and chilling centersare completed in a timely manner, the Government would appoint byDecember 31, 1985 a dairy plant engineer to work with local staff (Part II,para 2 of the Schedule to the draft Project Agreement). Further, theGovernment would ensure that acquisition of building sites and the Einaldesigns for the processing and chilling facilities scheduled for constructionin the first two years would be completed by September 30, 1986 (Section2.07, draft Project Agreement).

D. Training and Technical Assistance

49. About 700 staff-months of overseas training and study tours wouldbe provided in addition to the training of local staff at the MPC trainingcenters. The training program would cover Spearhead Teams who would beresponsible for organizing VMPCs, trainers for the MPC training centers,study tours of selected milk producers, and fellowships for selected

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personnel of DDF, MILCO, and MPCs. VMPC and VMPA staff would be trained inartificial insemination, animal first aid, fodder production, milk testing,basic record keeping and accounting at the MPC centers. The centers wouldalso be responsible for the training of project farmers. About 400 staff-months of technical assistance provided under the proposed project wouldcover management and human resource development, dairy engineering, process-ing and marketing, planning, monitoring and evaluation, farmer organization,livestock and fodder production. The terms of reference for all the techni-cal assistance have been drawn up.

E. Monitoring and Evaluation

50. A project monitoring unit would be established within DDF to monitorphysical and financial progress of the project. Also, an existing technicalmonitoring unit within the Ministry of Rural Industrial Development (MRID)would be strengthened to enable it to organize and carry out studies assess-ing the impact of the project on a number of variables, including the impacton small farmers. The MRID unit would prepare annual project evaluationreports as well as the Project Completion Report.

Cost Estimates and Financing

51. The total project costs are estimated to be US$111.2 million, includ-ing taxes and duties of about US$4.2 million. The foreign exchange componentamounts-to US$48.5 million, which represents 44 per.cent of total projectcost. Physical contingencies have been estimated at 5 percent of of basecosts, except for vehicles for which no physical contingencies have beenprovided. Price contingencies have been applied at 8 percent in 1985; 9 in1986-1988; 7.5 in 1989; and 6 in 1990-1992 for foreign costs. For localcosts, rates have been applied at 12 percent in 1985; 11 in 1986; 10 in 1981;9 in 1988; 7.5 in 1989; and 6 in 1990-1992.

52. Ihe proposed Bank loan of US$38.0 million would finance about 34percent of total costs, including foreign exchange costs of US$26.9 million(55 percent) and local costs of US$11.1 million (18 percent). The EEC andthe WFP would donate cozmuodities the value of which would amount to a totalof about US$56.9 million (51 percent of total costs) (Section 6.01(a). draftLoan Agreement). The EEC has indicated that it would be prepared to &onateabout 13,000 metric tonnes of skim milk powder and about 6,500 metric tonnesof butter oil over the life of the project, subject to year-to-year reviewsof project requirements. The WFP has also indicated that it would beprepared to donate about 13,000 metric tonnes of skim milk powder.Assistance from the Netherlands of about US$7.5 million (7 percent of totalcosts) would be provided (Section 6.01(b), draft Loan Agreement). Localsources of financing would include a short-term loan from the Government toDDF for about US$0.4 million, on terms and conditions comparable to thoseextended by DDF to MILCO and related project entities (para. 53); funds fromthe operations of MILCO and related project entities amounting to aboutUS$5.8 million; and equity investments of about US$2.6 million.

53. The Government would be the Borrower of the Bank loan and wouldexecute a Subsidiary Loan Agreement with DDF under which it would onlend Bankfunds to DDF at a variable interest rate coinciding with the Bank's rate, tobe repaid over 15 years, including 5 years of grace. The Borrower would bear

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the foreign exchange risk and charge the DDF a guarantee fee of 2 percentagepoints. Execution of a Subsidiary Loan Agreement between the Government andDDF on terms and conditions satisfactory to the Bank would be a condition ofeffectiveness (Section 6.01(c), draft Loan Agreement). 'aDF would enter intoParticipation Agreements with MILCO, MPCs, and VMPCs and VMPAs providing forrelending part cf the funds onlent to DDF by the Government, along with otherarrangements for project execution. Execution of the ParticipationAgreements between DDF and MILCO, and between DDF and the MPCs would be acondition of effectiveness of the proposed loan (Section 6.01(d), draft LoanAgreement). Sale proceeds of the commodity aid would also be lent by DDF tothe other project entities on the same terms as the onlending terms of theBank loan. DDF would extend both long-term and short-term loans to MILCO,MPCs, and VMPCs and VMPAs at interest rates ranging from 14 percent per annum(long-term loans) to 16 percent per annum (short-term loans). Onlendingrates of DDF would be reviewed semiannually by the Government and DDF toensure that they remain positive in real terms (Schedule 5, Part II(b), draftLoan Agreement).

Procurement

54. Proposed procurement arrangements are:

Procurement Method TotalProject Component ICB LCB Other N.A. Cost

---- (Us$ Million)--

Land 1.0 1.0

Civil Works 14.7 14.7(10.3) (10.3)

Machinery, Equipment, 16.8 23.1 3.0 42.9Vehicles and Materials (13.4) (0.5) (13.9)

Consultant Services, Training, 9.5 9.5Fellowships and Study Tours (2.5) (2.5)

Organization and Management 27.5 27.5and Recurrent Cost (1.3) (1.3)

Working Capital 5.6 5.6

Financing Charges 10.0 10.0_____ _____ ___ (10.0) (10.0)

Total Project Costs 16.8 37.8 13.5 43.1 111.2

(IBRD Financing) (13.4) (10.8) (2.5) (11.3) (38.0)

Note: Figures in parentheses are amounts to be financed from the IBRD loan.

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55. Goods and services financed by the Bank would be procured by DDF.The land for the construction of the dairy plants and chilling centers wouldbe procured in accordance with established government procedures acceptableto the Bank. Civil works contracts (US$14.7 million) would be small anddispersed in time and place. Thus, they would be unsuitable for ICB andwould be contracted through local competitive bidding under proceduresacceptable to the Bank. Machinery, equipment, vehicles and materials(US$16.8 million) would be procured in bulk by ICB in accordance with Bankguidelines. Minor equipment (US$0.5 million) costing less than US$15,000 percontract that could not be suitably packaged for ICB, or that would berequired urgently for project implementation, would be procured aftersolicitation of quotations from at least three independent suppliers inaccordance with procedures satisfactory to the Bank. Bids for importedfrozen semen (US$6.0 million) would be sought from at least three suppliers(to be selected in agreement with the Bank). Consultants (US$4.2 million)would be hired in accordance with Bank guidelines. Machinery, equipment andmaterials supported by aid from the Netherlands would be procured accordingto their procedures. Bids for civil works contracts costing more thanUS$185,000 equivalent and equipment contracts exceeding US$50,000 would besubject to prior Bank review. Other contracts would be subject to selectivepost-award review.

Disbursements

56. Disbursement: under the loan would cover: Ca) civil works-90percent; (b) equipsent, vehicles and materials (including frozen semen)-100percent of foreip-. expenditures, 100 percent of local expenditures (ex-factory), and 6', percent of local expenditures for other items procuredlocally; (c) cinsultant services, training, and fellowships and study tours-100 percent; and (d) incremental staff salaries and operating costs on adeclining basis: 95 percent in FY1986 and FY1987, 80 percent in FY88.Disbursements for small civil works contracts (that is, less than SL Rs500,000) and for items under (d) above would be made against statements ofexpenditure certified by the chief executive of the executing entityconcerned. Documentation supporting the statements would be retained in thereler.vat project office and made available for review by Bank staff onrequsest. All documents supporting statements of expenditure would be auditedannually by independent auditors acceptable to the Bank. Disbursements forcivil works contracts for SL Rs 500,000 or more and for items under (b) and(c) above would be documented in accordance with the Bank's standardrequirements. Approximately 80 percent of total project expenditures areexpected to be incurred by year 1990. In the later years, after Bank fundshave been utilized, the Government would permit DDF to purchase foreignexchange for the purpose of financing project activities. Disbursements ofthe Bank loan are expected to be completed by December 31, 1991.

Project Preparation Facility

57. The Bank and the Government have agreed upon an advance of US$600,000through the Project Preparation Facility (PPF) for recruiting and trainingkey staff, establishing pilot milk producer companies, obtaining technicalassistance, and undertaking key organizational activities. DisbursementsFrom the advance would cover: (a) 100 percent of expenditures for technicala3sistance and training; (b) 100 percent of foreign expenditures for directly

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imported equipment, chemicals, and vehicles, 100 percent of local expendi-tures (ex-factory) for locally manufactured items, and 65 percent of localexpenditures for locally procured items; and (c) 95 percent of expendituresfor DDF and MILCO staff salaries and other operating costs. Advances drawnfrom the PPF, with the service charges accrued thereon, would be repaid outof the proceeds of the loan as soon as it is declared effective (Section2.02(d), draft Loan Agreement).

Project Special Account

,-_ To ensure that adequate funds are available for the prefinancing ofsmall contracts and other project expenditures and to facilitate theproject's timely implementation, a Project Special Account in US dollarswould be established in the Central Bank of Ceylon and operated under proce-dures acceptable to the Bank. Only the Bank's share of project costs wouldbe deposited into and disbursed out of the account. The account would beoperated by the Chief Executive of DDF, or his designate. The initialdeposit made by the Bank into the Project Special Account would be US$1.0million, equivalent to about four months expenditure (Section 2.02(b), draftLoan Agreement).

Preinvestment Activities

59. To ensure more rapid implementation of the project, the Governmenthas initiated a number of activities. Some activities have already beencompleted. These are: (a) establishment of an Interministry ActionCommittee chaired by the Minister of Rural Industrial Development and includ-ing representatives of the Ministries of Trade and Shipping, and Finance andPlanning; (b) registration, under the Companies Act, of DDF, MILCO, and theMPCs, and the appointment, by Government, of the initial chairmen and boardsof directors of DDF, MILCO and MPCs; and (c) plans for initial staffing ofDDF, MILCO and MPCSs. Activities underway include: (a) recruitment of thefirst 50 Spearhead Team members and about 15 trainers; (b) market survey toassist in detailing the product mix of the milk processing plants; and(c) initiation of work on the refurbishment of the Colombo Milk Plant.

Interministerial Coordination

60. A Steering Committee, with terms of reference and compositionsatisfactory to the Bank (Section 4.01(a), draft Loan Agreement), would beestablished to coordinate interministerial activities and policies and serveas a decision-making body on policy matters affecting the dairy industry.The Committee, chaired by the Minister of Rural Industrial Development, wouldformulate and recommend to the Cabinet, through the appropriate Ministry,policies and directives for Sri Lanka's dairy development.

Marketing, Prices, Subsidies, and Tariffs

61. Domestic milk production would not be sufficient to meet demand.Although milk production under the proposed project would increase by about100,000 lpd by 1991 and 200,000 lpd by 1994, imports of dairy products arenot expected to decrease during the project period and may, in fact, increasesomewhat. The main marketing strategy of the proposed project would be toincrease consumption of fluid milk in both urban and rural markets.

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Pasteurized milk would be distributed in the larger urban markets closer tothe dairy processing plants, while long-life milk would be supplied to moredistant markets. The existing private distribution system would be used toretail project milk and milk products.

62. Under the project, MILCO would be granted autonomy to set prices ofits milk products from the producer to the retail level (Section 4.04, draftLoan Agreement).

63. The proposed project would promote the development of a moreefficient dairy industry through the introduction of major institutional andorganizational changes. However, improved efficiency in the production,collection, processing and marketing of milk would not be apparent untilthese changes are in place and the industry is adequately staffed withtrained personnel. The dairy industry in Sri Lanka would, therefore, con-tinue to need some protection from imports during the life of the project.The price of dairy imports would determine the upper limits within whichMILCO would be able to set retail prices of milk and milk products. Producerprices would be determined by deducting from the retail price the marginalcosts of marketing, processing, collecting and transporting.

64. The level of tariffs on imported dairy products would need to be setin the light of actual trends in international prices. At the present time,world prices of milk products (US$650, US$950 and US$1,475 per metric ton forskim milk powderr whole milk powder and butteroil respectively) are at ornear the GATT minimum prices, below which dumping is deemed to occur. TheSteering Committee would conduct periodic reviews of costs and prices relatedto domestically produced and imported milk and make recommendations toGovernment on tariff policy (Section 4.01(b), draft Loan Agreement).

65. The Government is committed to removing the existing subsidy to NMB.It has therefore agreed that as a condition of loan effectiveness the exist-ing subsidy of SL Re 0.50 per liter on fluid milk would be removed (Sections4.05(a) and 6.01(g), draft Loan Agreement). Furthermore, it has agreed thatthe present subsidy of SL Re 1.00 per liter on milk used for the localmanufacture of whole milk powder would be phased out by December 31, 1987(Section 4.05(b), draft Loan Agreement). At this stage, it is not possibleto say whether elimination of these subsidies can be eventually absorbed bythe processing industry through improved efficiency and reduced costs, orwhether there would have to be some combination of higher consumer prices andlower producer prices. It is expected, however, that the SL Re 0.50 subsidywould be passed entirely to the consumer initially, raising the retail priceof fluid milk to SL Rs 8.50 per liter. Under the proposed project, MILCOwould take over the operation of NNB's existing milk powder factory and,through diversification into more profitable products, eliminate the basis ofthe subsidy on fluid milk processed locally into powder.

Financial Viability of Project Entities

66. DDF's main operational concern would be to ensure that sufficientfunds were available to provide the necessary inputs to project operatingunits during implementation. Detailed financial projections indicate thatnet fund flows for DDF would be adequate. From 1989 on, DDF would generatesufficient internal cash flow to cover operational requirements and could

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begin retiring its debt. While DDF's cumulative profits are not positive,its cumulative cash flow is and it would have sufficient assets to retire itsremaining debt.

67. Detailed financial projections indicate that MILCO would be a viabieand profitable operation from its incorporation at existing levels ofprotection. Sales revenues are projected to increase from a level of aboutSL Rs 800 million in 1986 to upwards of SL Rs 4,400 million by 1995.Profitability is relatively consistent over the period, with gross profitaveraging 11 percent of sales and net profit after tax about 3 percent. Netcash flows are positive for all years, and after dividend payments andincluding allowances for working capital would accumulate to about SL Rs 900million by 1995. The financial rate of return is estimated at 26 percent.Over this period, MILCO's total assets would increase to SL Rs 1,326 millionand owner's equity to SL Rs 902 million in current terms.

68. A consolidated income statement for the five MPCs indicates thatestimated revenue would provide sufficient funds to cover operating costs.Consolidated revenue is expected to increase from SL Rs 96 million in 1986to about SL Rs 600 million in 1995. Cash flow from operations is expectedto accumulate to SL Rs 150 million over the first ten years.

69. Significant growth of the VMPCs is projected, with sales revenue incurrent prices increasing-from about S. Rs 89 million in 1986 to SL-Rs 1,518million in 1992. Net cash flow is expected to be positive for all VMPCs from1986 onward. Total net cash flow is expected to total SL Rs 1.6 million in1986 and to reach SL Rs 28.5 million by 1992.

Benefits and Risks

70. Benefits. The main institutional and organizational changes broughtabout by the project would (a) help ensure that the technical inputs neces-sary for increasing milk output and improving the efficiency of productionare provided; (b) allow producers to participate in the profits obtainable inmilk processing and marketing through shareholdings in MILCO; (c) provide amechanism by which incentive prices can reach the farmer; and (d) help ensurethat consumers have increasei access to high-quality milk and milk productsat fair prices.

71. Milk production is projected to increase by 4 percent annually by1992. Incremental milk production would result from increases in milk yieldas a result of improved feeding and management and the partial conversion ofthe herd from low-yielding indigenous animals to higher yielding crossbreds,and modest growth of the national herd due to increased calving rates andreduced mortalities. The technical and extension services (para. 47)provided to VYPCs and VI4PAs under the project would contribute to increasedmilk production.

72. Incremental on-farm employment generated during the first seven yearsof the project is estimated at 25,000 person years distributed among about180,000 households. The producers' share of consumer payments for processedmilk (now about 54 percent) is expected to reach 60 percent under the projectthr3ugh more efficient collecting, processing, and marketing of milk. TheshiEt to a vertically integrated organizational structure with producer

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ownership in the collecting, processing, and marketing entities would ensurethat benefits from increased efficiency in milk processing and ma:keting arepassed on to the farmers. In terms of gross income, project participants in1992 would receive an estimated SL Rs 750 million (US$30 million) from thesale of milk. This is expected to yield an increase in net income of aboutSL Rs 265 million, or SL Rs :.470 per household. The overall economic rateof return is about 23 percent.

73. As cattle are more evenly distributed than land, the incrementalincome from milk production among rural households would tend to be moreevenly distributed than in land-based development projects. Furthermore,since dairying is expected to expand into the Dry Zone (where incomes andopportunities for alternative productive activities are particularly low),regional distribution of income should also improve.

74. Risks. The proposed project would require substantial institutionalchanges and, like all such projects, would have inherent risks. Change,while welcomed by many, is resisted by those with vested interests in thestatus quo, despite the inefficiencies and costs this imposes. TheGovernment realizes that such inefficiencies must be alleviated throughrather drastic change. Further, registration of DDF, MILCO and the MPCswithin a relatively short time also reflects Government's commitment toprivatization of the dairy industry and the interest of the private sector indairy development. The success of-the project would also depend on ensuring- -that tha project entities are managed by qualified personnel. The institu-tions established in the private sector under the project should be able toattract and hold highly qualified management staff available in Sri Lanka.

75. The project carries a financial risk. Monetized donated commoditiesare expected to finance about 50 percent of total project costs. Both theEEC and WFP have indicated an interest in supporting the project through theprovisiin of dairy commodities, and it is expected that such support would beprovided throughout the project implementation period.

76. There is a risk in the degree of farmers' response to the project,since they may be reluctant to accept the new village companies. The MPCs'Spearhead Teams will be formed and trained under the project to minimize thisrisk.

PART V - LEGAr. INSTRUHE.7rS AND AUTHORITY

77. The draft Loan Agreement between the Democratic Socialist Republicof Sri Lanka and the Bank, and the report of the Committee provided for inArticle III, Section 4(iii) of the Articles of Agreement of the Bank arebeing distributed to the Executive Directors separately.

78. Special conditions of the proposed loan are listed in Section IIIof Annex III. Additional conditions of effectiveness include arrangementsfor commodity aid from the EEC and the WFP; effectiveness of cofinancingagreement with the Netherlands; execution of the Subsidiary Loan andParticipation Agreements; signed lease agreement between NMB and NILCO andabolition of SL Re 0.50 subsidy. Other conditions include appointment ofdairy engineering consultant by December 31, 1985; and completion of the

-22-

final designs and the acquisition of land for four chilling centers and thenew Colombo plant by September 30, 1986.

79. I am satisfied that the proposed loan would comply with the Articlesof Agreement of the Bank.

PART VI - RECOMMENDATION

80. I recommend that the Executive Directors approve the proposed loan.

A.W. ClausenPresident

AttachmentsWashington, D.C.May 22, 1985

-23- wANN I

TABtE S3 Page 1 of 5QRI LANKA - SOUCK IIDICATOM RIA SEK

SRl LANlKA WKRUU GROUPS IMECCD YUfBJ Hst D URST E-Z uma) AMM CHbI UWC DE"A Z

MaLb 1970L tSjj~ ASA & PAUP ASI & PACIC_ ~ ~ ~ ~ ~ 90k i,o nL ai.aNWa tmf

AMUN Ci00SNDa So a)TOTAL 65.6 45.6 5.6.AGRICULTURAL 17.2 24.2 26.0

Cy PM CAPU Co") 60.0 I10. 320.0 278.6 1091.2

Rom OMartONs sKcanCRILOQAs or o. OIL vquuval) 122.0 152.0 123.0 272.0 567.3

VOAOfA nL S _IZCPOPULATION.MID-MR, CYNOUSAJUS) 9359.0 12314.0 15149.0UNmAm POPULATIN (2 Or TOAL) 17.9 21.9 24.4 21.7 34.7

POPUIATION PRDJXCIOISTOPUAIONI IN US 200 CMILL) 21.1

-STAOA POIWLI (Nu) 32.5POPULATION NU tEi I.6

PER SQ. 1D. 1507 190;8 2Z8.0 166.6 261.9PU SQ. L AU;Il LAW 573.9 517.6 57646 345.5 1735.1

POPMLATION ACE SXUCtUE (Z)0-14 US 42.1 41.9 35.2 35.0 39.0

15-4 YES 54.3 54.5 60.8 59.8 57.665 AM AROE 3.6 3.6 4.3 4.3 3.3

POPMJTIO1 RM RAtE CZ)TOTAL 2.5 2.4 1.6 1.9 2.3UnM 4.7 4.3 2.5 4.1 4.3

CRME SI RATE (PU TMMS) 35.7 29.4 26.5 27.7 30.1CIURD DEATH RATE (t TBDS) 9.2 7.5 6.0 10.1 9.5GROSS WRISClTION RATE 1.6 LZ 1.7 1.8 2.0

FARMIY PLANNIN -- ACCErORS. AUNUI (THOU) . 55.3 100.5

-i-rH (2 or RIED waS) . 55.0 57

INDX OF FOOD PRD. PUR CAPITA(1969-71-100) 93.0 103.0 154.0 112.8 t23.0

PU CAPTA SUPLX oFCALORIES CZ or REgITCNTS) 102.0 108.0 lWO 97.7 114.4PRUIEDS (CRcS PU DMY) 46.0 47.0 43.0 54.6 17.0

OF WHICH ANIMAL AN E 1P0 12.9 t.0 14.9 14.1

ClM.D (ACAS 1-4) DEM AE 7.1 5.1 2.9 9.8 7.2

LIF rXECr. AT DIXIR (TEARS) 62.0 63.6 56.9 60.0 60.4INFANrT PKIT. RATZ (C OS) 70.6 56.5 32.0 8J 66.3

ACCESS TO SAFE WAMt (flOP)TOaL *- 21.0 20.0 /d 32.9 37.0on" .. 46.0 45.0 7i 70.9 54.6RURAL .. 14.0 13.0r7d 22.1 26.4

ACCESS TO !flEZA DISPOSALZ OP POPULATINm)TOAL .. S4.0 59.0 /. 1.1 41.3son 7640 U.O7 7L8 47.4LR .. 61.0 55.0 4.G 33.3

POPULATION PU IMSICIA 4490.0 950.0 7170.0 3U4 .2 7749.4OP. P SICN PERSON 4170.0 /f 2260.0 130.0 4793.1 2460.4

POP. PU IOSPIAL BIDTOZIAL 320.0 33L0 310.0 A 1066.5 1014.2URBAN 120.0 f 210.0 240 id 2960 651.2RAL z1060.o 7 570.0 550.0 593.4 2594.6

A 1WM PUR HOSPTAL HO . 54.4 ,, ,, 27.0

LYRRUS SZE or HOUSEHOLDTOTAL 5.4 5.8.

6.37i 6.3RUAL 5.2A 5.-

ALISa NO OF PRSOUS/ROONTOTAL 2.0 A 2.5

DaN 2.1 A 2.7 LUNA. 12.0 f 2.5

ACCESS TO EXLCT. (X aF OWELl3S)TOTL 7.5 1 9.0D~lREAD 35.9 A 34..-aL 2.3 3.0

-24-

ADJUSTED ZNI.OUNENT BATIOB~~~ANEX

HAIR 100.0 104.0 104.0TAZ 110.5105.90.0 94.0 100.0 83.7 93.2~~~Pae 0

*sx~~~~~~~~~~a li lm PC

SEMAKTIT TOTML 17.0 99.0 103.0 97.9 102.0ILUZ 100.0 104.0 106.0 ILO.5 105.9rnmLA 9O.0 94.0 100.0 83.7 98.2

SEOD:OYS TOTAL 27.0 47.0 51.0 33.9 46.0HALE 38.0 46.0 49.0 ".6 4. 7pUZw 16.0 48.0 54.0 26.8 43.1

VOCAT1OAL (0 orCOUDAYT) O- 0.4 0.4 jd 2.2 17.5

PUPIL-ThWC BATECPIRIA 31.0 .. 32.0 3L5 31.8SECOA .. .. .. 15.7 23.5

ADUL LITfLCT BZA (2) 75.0 /f 77.6 86.0 53.4 72.9

PASSCE CARS/u1oSAD POP 8.4 7.0 7.3 /I 0.9 10.1RADID pEEIopSIUSUD POP - 35.8 * 39.9 98.7 112.1 113.6TV RECE SITUSAD POP .. .. L4 15.7 50.1UN.APYZ ("DAY GEEMAL

MIERBES`) CICUATIOm PERTHUSAJ POPULATION 36.0 48.9 .. 16.2 53.9

CINiA ANNUAL ATXENDANCE/CPFA 2.9 LI 7.8 4.9 LI 3.6 - 3.4

TOL LABOR FORC (TWOUS) 3391.0 4188.0 5771.0FrEALe (PERET) 22.6 23.7 24.9 33.3 33.5AGRICULTRE (PERCENT) 56.0 55.0 54.0 69.6 52.2XNDUSrY CPEJITp) 14.0 14.0 14.0 15.8 17.9

PARTXCIPATXON RATE (PECENT)TOTAL 34.3 33.5 3B.0 42.6 38.7NALR 50.8 49.1 53.0 54.7 50.9FEAL 16.2 16.5 21.0 29.8 26.6

cnuaKIC DEPENDECY RjxM 1.3 1.4 1.0 LO 1.1

IXNCOK osmxutxmP_n,CENr OF PRIVAZ XNC!RECEIVED BY

HIGHEST 52 OF HOUSEHOLDS 26.4 /b 18.2 .. .. 22.2HICHEr 20S OF HONSEHOLDS 52.1 7Th 43.4 .. .. 48.OLOVEST 2S OF HOUSEHOLDS 4.5 Z 7.5 .. .. 4LOVES 402 OF HOUISEHOLDS ! 7 19.2 . . _.5

ESYIMAZED ABSOLUIE PriVERTT INCC-'.LEL (USS PER CAPITA)

URBAN .. .. .. 133.9 188.6RURAL .. .. .. 111.6 152.0

ESTIBAMED EULfrg= POVERTT INCOMELEVE (US$ PMR CAPIMA)

URBAN .. .. .. .. ~~~~~~~~~~~~177.9DURAL .. .. .. .. 164.6

ESTUATED POP. Ui ALPOVERTY INcOI lEVEL (Z)

uAN .. .. .. 43. 23.4RUAL .. .. .. 51.7 37.7

NOT AVALARZNOT APPLICABLE

nur c ~ ~ ~ ~ NOE

/b&gre Sup averaes for eah 1nd1"tor are papulaet1ou-uShtbd aritmetic _mm. C.veage of countrtes amog theindiators depends an avlablity of data and la not unhfam.

/b Utl_ otbeahrd noted, "hta for 1960" refer to ay year between 1959 and 1961 "Do for 1970" between 1969 and1971; a data for 'Mat Scat Eatlace" between 1980 and 1982.

/e 1977; /d 1976; f 1975; /f 1962; 1 1979; A 1963; /. 1978; /j 1958.

lE. 1984

-~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ -5

-s25ess MANEX ImttE|enot umeePage 3 of 5

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-26-

Annex IPage 4 of 5

SRI LANKA - ECONOMIC INDICATORS

OUTPUT IN 1984 BY SECTOR ANNUAL RATE OF GRO1WTH{Z, constant prices)

Value Added$ million z 1970-77 1977-84 1970-84

Agriculture 1,519 28.0 2.0 4.0 3.0Industry a/ 1,347 24.8 2.1 5.3 3.9Services 2.566 47.2 3.7 7.1 5.4

Total b 5,432 100.0 2.9 5.7 4.4

GROSS DOMESTIC PRODUCT IN 1984US$ Million Z

GDP at Market Prices 6,012 100.0Investment 1,567 26.1Gross National Savings 1,347 22.4Current Alccount Deficit' 220 3.7Exports of Goods and NFS 1,755 29.2Imports of Goods and NFS 2,121 35.3

GOVERINENT FINAFCECentral Government

(Rs million) Z of GDP at Market Prices1984 1975 1983 1984

Current Receipts &/ 33,342 17.2 18.9 21.8Current Expenditures / 27,795 18.3 18.6 18.2Current Surplus 5,547 -1.1 0.3 3.6Capital Expenditures e/ 21,105 7.3 13.7 13.8External Assistance 12,934 3.2 8.0 8.5

a/ Manufacturing, mining, and construction.bl GDP at factor cost.cj Includes capital revenue.A/ Includes advance accounts.e/ Includes net lending.

South Asia Programs DepartmentMay 14, 1985

-27-

Pala of 5

MOUnT. ClUD!?. hUD lUCXE 1970 1972 1111 1111 m5aS JULA 19U2 JIl JIM.(eDd of period) (Rs million)

Money and Quasi Money 3,115 .8,717 10,892 15,055 19,60 24,447 30,510 37,257. 43.427Bank Credit to Public Sector 2,B56 4,659 4,226 6,267 13,0f5 17,277 21,S28 21,91S 18,703Bank Credit to Privaet Sector 1.320 4,116 6,449 8,705 12,709 16.690 20,570 27,375 31,224

CI'ercntages or Index Numbers)

kmony atA Quasi Money am 2 of CDP 22.8 23.9 25.5 28.7 29.9 2S.8 30.5 30.6 28.4C-enral Yrice Index (1970-100) 100.0 147.0 164.5 18.6 230.2 271.6 301.1 343.3 400.5

Annual Percentage Cbaeg.. In:General Prie Index +5.9 +1.2 +12.1 .10.8 +26.1 418.0 .10.8 +14.0 +16.7Bank Credit to Public Sector +10.4 +7.7 -9.3 448.3 +109.0 431.9 +26.3 40.4 -14.7lank Credit to Private Sector +8.6 440.5 +56.7 +35.0 446.0 +31.3 +23.2 +33.1 14.1

RALARC 07 ?PADUTE MUCUUDISI ZPORT8 (1984)

1982 1983 J2IM JSlNiWn CUSS M{illion)

Tea 620 42.0Exports of Goods, Ws 1.305 1,360 1,755 Rubber 130 8.8Deort. of Goods, Ws 2,205 2,138 2,121 Coconut Pr)ducta 60 4.1Resource Cap (deficit - -) -900 -778 -366 All Other Commdities 665 45.1

Not rector Income -98 -138 -131 TOTAL 1,475 100.0Not Transfers & Ramittanee 264 274 277Balance on Current Account > -734 -64Z -220

- XX~~~~~~~EIDRi. DOI (S Million) jIDirect Foreign Inyentsent 63 37 36Not MALT lono 403 292 311 December December

Disbursements 472 373 410 _983 .9..Auortizatiou 69 1 99

Capital Grants 162 171 154 Total Out.tandiag 3,678 3.738Other capital (net) 79 143 24Chang- in Aee .:e_ : eace; -27 *1 305 Total Outstanding

and Disbursed 2.214 2,420Groca I.j t, ten. -_*.: .*e.--, Up. ,:^ -. :;

*rcde EL .u ndn.tx u* - . :. DZIT SUVICIU ATiCO II (S) 17.7 14.2npaor:. 590 60

Txcoor- .1

ITh/DU LlIDIN. Marcb 31. 1985 (USS Million).'at OF amaCII P-

End 1979 ZALd 1982US$1.00 - Rs 15.45 USS1.00 - Rs 21.32 Ogtstcndiug and Diabtreed 53.9 329.2Ra 1.00 - 1S$ 0.06 PA 1.00 JS 0.05 UOdiubursed 14 287.0

t1940 ad 1943 Outetandiung includingUS$l.OO - Rs 18.00 US$1.00 - Rs 25.00 Undisbured 64.3 616.2Rs 1.I0 - 19$ 0.06 3. 1.00 - 1SS 0.04

flId 1941 d 1981US$1.00 - Rs 20.55 USS1.00 - 11a 26.28Rs 1.00 - 'S$ 0.05 R 1.00 - uS9 0.04

x/ Rayable in foreign currencies end with a aturity over one year.i Ratio of debt service on public end publicly guarnated KLT debt (including fw charges

and repurchsee) to exports of goode ad services.

South Asia Programe DepartmentMay 14, 1985

-28- A II

Page 1 of 2

THE STATUS OF BANK GROUP OPERATIONS IN SRI LANKA

A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of March 31, 1985)

US$ MillionLoan or AmountCredit (net of cancellations)

No. Year Borrower Purpose Bank IDA Undisbursed

Eight loans and thirteen credits fully disbursed 72.9 96.1701 1977 Sri lanka Mahaweli Ganga Development II 19.0 9.2818 1978 Sri Lanka Tree Crop Rehabilitation (Tea) 21.0 9.3891 1979 Sri Lanka Kurunegala Rural Development 20.0 8.9900 1979 Sri Lanka Road Maintenance 16.5 6.3931 1979 Sri Lanka Agricultural'Extension and

Adaptive Research 15.5 10.6942 1979 Sri Lanka Small and Medium Industries 16.0 2.9979 1980 Sri Lanka Mahaweli Ganga Technical Assistance 3.0 1.4994 1980 Sri Lanka Road Passenger Transport 53.0 17.4

1017 1980 Sri Lanka Smallholder Rubber Rehabilitation 16.0 12.11020 1980 Sri Lanka Telecommunications 30.0 4.91041 1980 Sri Lanka Second Vater Supply 30.0 17.21048 1980 Sri Lanka Sixth Power 19.5 10.01079-/a 1981 Sri Lanka SecoudRural Development 33.5 15.41130 /a 1981 Sri Lanka Construction Industry 13.5 4.81160 /a 1981 Sri Lanka Village Irrigation Rehabilitation 30.0 19.21166 /a 1981 Sri Lanka Nahaweli Gauga Development III 90.0 36.41182 La 1982 Sri Lanka SKI II 30.0 24.41210 /a 1982 Sri Lanka Seventh Power 36.0 14.01240 /a 1982 Sri Lanka Tea Rehabilitation and

Diversification 20.0 12.72187 1982 Sri Lanka Eighth Power 42.7 - 10.41317 /a 1982 Sri Lanka Forestry I 9.0 8.01363 /a 1983 Sri Lanka Third Rural Development 23.0 20.01401 /a 1983 Sri Lanka Industrial Developmernt Project 25.0 18.01494 /a 1984 Sri Lanka Nabaweli Ganga Development IV 30.0 30.02437 /b 1984 Sri Lanka Mahaveli Ganga Development IV 12.1 12.11537 la 1985 Sri Lanka Major Irrigation Rehabilition 17.0 17.0

TOTAL 127.7 712.6 352.6of which has been repaid 49.7 5.6 --

Total now outstanding 78.0 707.0Amount sold 3.6

of which has been repaid 3.6Total now held by Bank and IDA /c 78.0 707.0

Total Undisbursed 10.4 342.2 352.6

/a IDA 6th Replenishment Credits, principal amounts shown in US dollars equivalentat date of negotiations, as shown in the President's Reports and undisbursedamonts shown in US dollars equivalent at the rate of exchange for the SDR atMarch 31, 1985.

lb Not yet effective.Lc The original principal of credits under replenishments 1, 2 and 3 has been

increased by the amount of the translation adjustment as a result of thedevaluation of th US dollar in 1972 and 1973.

-29-ANNE IIPage 2 of 2

B. STATEMENT OF IFC INVESTMNTS (as of March 31. 1985)

Year Obligor Tvye of Business Ahount (US$ Million)Loan Equity Total

1970 Pearl Textile Textiles 2.50 0.75 3.251978/80J83 The Development Finance

Corporation of Ceylon Development Banking - 0.45 0.451978/81 Bank of Ceylon Development Barking. 7.00 - 7.001979/81 Cyntex Textiles 3.15 0.54 3.691979 Mikechris Industries Polypropylene Bag 0.89 0.10 .991980184 LOLC Leasing - 0.34 0.341981 Taj Lanka Hotels Hotel 19.30 .70 20.00

Total Gross Comitments 32.84 2.88 35.72

Less: Cancellations, Terminrations,Repayments, and Sales 16.45 .75 17.20

Total Commitments now Held by IFC 16.39 2.13 18.52

. ,

A,

-30-

ANNEX IIIPage1 of 2

SRI LANKA

SECOND DAIRY DEVELOPMENT PROJECT

Supplementary Project Data Sheet

Section I: Timetable and Key Events

(a) Time taken by the Government to 24 monthsprepare the project

(b) The agency which has prepared Government with Bankthe project assistance

(c) Date of first Bank mission to November 1982consider the project

(d) Date of departure of appraisal October 1983mission

(e) Date of completion of negotiations April 1985

Cf) Planned date of effectiveness September 1985

Section II: Special Bank IDplementation Actions

None

SECTION III: Special Conditions

Conditions of Effectiveness

(a) Lease agreement between NMB and MILCO has been enteredinto (para. 42).

(b) Execution of a Subsidiary Loan Agreement between theGovernment and DDF on terms and conditions satisfactoryto the Bank (para. 53).

(c) Execution of Participation Agreements between DDF and NILCO,and DDF and MPCs (para. 53).

(d) Effectiveness of cofinancing agreement and arrangements forcommodity aid (para. 52).

-31- ANN III

Page 2 of 2

(e) Abolition of SL Rs 0.50 subsidy (para. 65).

Other Conditions

(f) Government would abolish NMB by September 30, 1986(para. 42).

Appointment of dairy engineering consultant byDecember 31, 1985 (para. 48).

(h) Final designs and land acquisition for four chilling centersand Colombo plant by September 30, 1986 (para. 48).

(i) Establish a steering committee to recomuend policies anddirectives for Sri Lanka's dairy development (para. 60).

(j) MILCO would be granted autonomy in milk pricing (para. 62).

S.~~~~~~~~~~~~~~~~~~~~~.

IBRD 18398

=---~~~s a, : l°-: .. SRI LANKA S2

DA I RY DEVELOPMENT 11 Pr2OJECTMILOO Headquarters

Milkshed Boundarls

Proposed New Piant

C Kllilnochchl' EC3 - - Proposed Pant to be Rehabilitated

4c P )gMUIIaItlw Proposed New Chilling Center

a 10000-20000 Ipd capacity

*20000--40000 Ipt capacityExisting Milk Plant

-WET MEDIATE CRY

9 C Rainfall Zone 9MDtnnartS . J _2015 65

Percentae of Cattil bY RaIntall Zone

* E J7 Percentage of Buffalo by Rainfall Zone

Gulf of \ e0 0 National cpitalt ~~~~~Vavunlya

*nnar 1 e Selecte Towns and Cities

vTlnc.nalee §szrX aJri Dsw

or WkovaeL

Anuradhapuira

Puttaiam

Pbilonnanswa 8

*Galleia

e ~~~Ch'enkl Al

' - 3esBatticaloa

Kurunegaia*I-

'1 -Malaek-l c- Knit 1 xlekai -i'Am>,arS' ',

Kuuna; J'''9W!*,. - .' ' e J;; t\o Cit -X ;<- 'W eSh1r )

Yi aM.paha -1

-7 - Ri -; adull a-,3S7

cowmanu%m - .c -a

OCrAN~ ~ ~ ~ ~~~~~~~~4ail ..- -8 -4 - _

~~~~~- .-. - 02 06 0di

twa~~~~~atauaKalutaa

-Tissamaarna

INDIAN yl we..m

OCEAN -Hmat

60 aie 60-

.0 20 40 650 80o8no - ~ ... 81° KILOMETERS 820 f e_f _

JULY 1984