Completion Report

Project Number: 29600 Loan Number: 1639 February 2008

Sri Lanka: Tea Development Project

CURRENCY EQUIVALENTS

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

At Appraisal At Project Completion (25 September 1998) (14 December 2007)

SLRe1.00 = $0.0151 $0.0092 $1.00 = SLRs66.07 SLRs108.95

ABBREVIATIONS

ADB – Asian Development Bank CBSL – Central Bank of Sri Lanka CTC – cut-torn-curled EA – executing agency EIRR economic internal rate of return IA – implementing agency M&E – monitoring and evaluation MPI – Ministry of Plantation Industries NIPM – National Institute of Plantation Management PCR – project completion report PFI – participating financial institution PMU – project management unit RDTRI – Rural Development Training and Research Institute SDR – special drawing rights SLTB Sri Lankan Tea Board TEO – tea extension officers TRI – Tea Research Institute TSHDA – Tea Small Holdings Development Authority VESP – voluntary early separation package

WEIGHTS AND MEASURES ha – hectare kg – kilogram t – metric ton

NOTES

(i) The fiscal year of the Government and all participating financial institutions ends on 31 December.

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

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

Division, SARD Team leader M.M. Mongiorgi, Senior Rural Development Economist, SARD Team member C.R.G. Razon, Assistant Project Analyst, SARD

CONTENTS

Page

BASIC DATA i

MAP

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

A. Relevance of Design and Formulation 1 B. Project Outputs 2 C. Project Costs 3 D. Disbursements 3 E. Project Schedule 4 F. Implementation Arrangements 4 G. Conditions and Covenants 5 H. Consultant Recruitment and Procurement 5 I. Performance of Consultants, Contractors, and Suppliers 6 J. Performance of the Borrower and the Executing Agency 6 K. Performance of the Asian Development Bank 7

III. EVALUATION OF PERFORMANCE 7 A. Relevance 7 B. Effectiveness in Achieving Outcome 8 C. Efficiency in Achieving Outcome and Outputs 9 D. Preliminary Assessment of Sustainability 9 E. Impact 11

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

APPENDIXES 1. Performance Indicators and Achievements 16 2. Institutional Reforms 19 3. Project Cost 25 4. Annual Loan Disbursements 26 5. Project Implementation Schedule 27 6. Financial and Economic Analysis 28 7. Status of Compliance of Loan Covenants 32

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BASIC DATA A. Loan Identification 1. Country 2. Loan Number 3. Project Title 4. Borrower

Sri Lanka 1639 Tea Development Project Democratic Socialist Republic of Sri Lanka

5. Executing Agency November 1998 to December 2001 Ministry of Public Administration, Home Affairs and Plantation Industries December 2001 to December 2005 Ministry of Plantation Industries (noncredit

component) Central Bank of Sri Lanka (CBSL) (credit component)

6. Amount of Loan 7. Project Completion Report Number

SDR26,326,000 (equivalent to $35 million at the time of appraisal PCR:SRI 1022

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

8 June 1998 26 June 1998 10 August 1998 13 August 1998 10 November 1998 28 January 1999 28 April 1999 10 June 1999 3 30 June 2005 10 April 2007 1 1% per annum 40 years 10 years

8. Terms of Relending Provision in Loan Agreement

Actual rate as per provision in late 2003

a. For replanting and infilling: – Interest Rate – Maturity (number of years)

Average weighted deposit rate (AWDR) less 6% 17 years

0.49% 17 years

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– Grace Period (number of years) – Onlending rate

7 years Relending rate plus 8%

7 years 8.49-10.5%

b. Factory Rehabilitation, transport vehicles, greenleaf handling, nursery operation, and worker housing construction:

– Interest Rate – Maturity (number of years)

– Grace Period (number of years) – Onlending rate

AWDR 7 years 2 years AWDR plus 6%

6.49% 10 years 1

5 years 112.49%

9. Disbursements a. Dates Initial Disbursement

22 July 1999

Final Disbursement

25 April 2006

Time Interval

82 months

Effective Date

10 June 1999

Original Closing Date

31 December 2005

Time Interval

79 months

b. Amount (in SDR)

Category

Original Allocation

Amount Cancelled2

Revised Allocation

Last Revised

Allocation

Amount

Disbursed

Undisbursed

Balance3

01 Credit 15,419,000 (2,700,000) 18,119,000 18,792,000 18,797,867 (5,867)

02 Civil Work 2,858,000 (166,000) 3,024,000 3,053,000 2,980,515 72,485

03 Equipment 241,000 123,000 118,000 118,000 55,091 62,909

04 Vehicles 218,000 0 218,000 218,000 153,503 64,497

05 Afforestation 421,000 0 421,000 421,000 273,862 147,138

06 Training 692,000 205,000 487,000 487,000 430,233 56,767

07 Project Management 354,000 (162,000) 516,000 516,000 482,364 33,636

08 Consulting Services 406,000 0 406,000 400,000 344,479 55,521

09 Institutional Reforms 1,655,000 0 1,655,000 959,000 870,913 88,087

10 Service Charge 602,000 0 602,000 602,000 602,000 0

11 Unallocated 3,460,000 3,376,000 84,000 84,000 0 84,000 Total 26,326,000 676,000 25,650,000 25,650,000 24,990,828 659,172

10. Local Costs (Financed) Appraisal Estimate Actual - Amount ($) 17.0 million 17.6 million - Percentage of Local Costs 24% 31% - Percentage of Total Cost 18% 24% 1 Loan amended in October 1999. 2 Reemployed to Loan 1649-SRI(SF): Road Network Improvement Project. 3 The undisbursed balance of SDR659,172 upon cancellation was reemployed to Loan 2276-SRI(SF): Secondary

Towns and Rural Community-Based Water Supply and Sanitation Project.

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C. Project Data

1. Project Cost ($ million)

Cost Appraisal Estimate Actual

Foreign Exchange Cost 24.0 17.9 Local Currency Cost 69.8 56.0 Total 93.8 73.9

2. Financing Plan ($ million)

Appraisal Estimate Actual Cost Foreign Local Total Foreign Local Total

Implementation Costs Borrower-Financed 6.0 18.3 24.3 1.3 14.1 15.4 ADB-Financed 18.0 17.0 35.0 16.6 17.6 34.2 Beneficiaries 0.0 30.8 30.8 0.0 20.4 20.4 PFIs 0.0 3.7 3.7 0.0 3.9 3.9 Total 24.0 69.8 93.8 17.9 56.0 73.9 ADB = Asian Development Bank, PFI = participating financial institution.

3. Cost Breakdown by Project Component ($ million)

Appraisal Estimate Actual Component Foreign Local Total Foreign Local Total

A. Base Cost 1. Institutional Reform and Strengthening 1.4 5.6 7.0 0.8 6.3 7.1 2. Tea Development Component 16.8 50.0 66.8 14.5 42.7 57.2 3. Social Infrastructure and Afforestation 1.6 4.1 5.7 1.1 5.5 6.6 4. Project Management & Implementation 0.4 0.9 1.3 .6 1.5 2.1 Subtotal (A) 20.2 60.6 80.8 17.0 56.0 73.0 B. Contingencies 1. Physical Contingencies 1.0 3.1 4.1 0.0 0.0 0.0 2. Price Contingencies 2.0 6.1 8.1 0.0 0.0 0.0 Subtotal (B) 3.0 9.2 12.2 0.0 0.0 0.0 C. Service Charge 0.8 0.0 0.8 0.9 0.0 0.9 Total Project Cost 24.0 69.8 93.8 17.9 56.0 73.9 4. Project Schedule

Item Actual A. Consulting Services 1. Legal Support, Organization and Management for Institutional

Reform of Tea-Related Institutes

a. Date of Contract Aug 2003 b. Date of Completion Mar 2004 2. Project Benefit and Monitoring Consultant a. Date of Contract Feb 2000 b. Date of Completion Oct 2005 3. Baseline Survey

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a. Date of Contract Aug 1999 b. Date of Completion May 2000 4. Factory Capacity Rationalization a. Date of Contract Sep 2000 b. Date of Completion Nov 2000 5. Afforestation Program a. Date of Contract Apr 2001 b. Date of Completion Jan 2002 B. Civil Works Contract 1. Feeder Roads a. Date of Award 1999 b. Completion of Work 2005 2. Workers’ Housing, Sanitary Facilities a. Date of Award 1999 b. Completion of Work 2005 3. TRI Buildings a. Date of Award 2003 b. Completion of Work 2005 C. Equipment and Supplies 1. First Procurement 1999 2. Last Procurement 2005 D. Other Milestones 1. Reallocation of Loan Proceeds a. First 2 Oct 2002 b. Second 9 Aug 2004 c. Third 22 Nov 2004 d. Fourth 11 Mar 2005 2. Partial Cancellation of Loan Proceeds a 22 Nov 2004 3. Final Cancellation of Undisbursed Loan Balance 10 Apr 2007 4. Extension of Loan Closing Date a. First 26 Oct 2004

a SDR 0.676 million ($1.0 million) was partially cancelled and reemployed to Loan 1649-SRI (SF): Road Network Improvement Project.

5. Project Performance Report Ratings Ratings Implementation Period

Development Objectives

Implementation Progress

From 1 January to 31 December 1999 Satisfactory Satisfactory From 1 January to 31 December 2000 Satisfactory Satisfactory From 1 January to 31 December 2001 Satisfactory Satisfactory From 1 January to 31 December 2002 Satisfactory Satisfactory From 1 January to 31 December 2003 Satisfactory Satisfactory From 1 January to 31 December 2004 Satisfactory Satisfactory From 1 January to 31 December 2005 Satisfactory Satisfactory From 1 January to 31 December 2006 Satisfactory Satisfactory

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D. Data on Asian Development Bank Missions

Name of Mission

Date

No. of Persons

No. of Person-Days

Specialization of Members a

Loan Fact Finding 30 Mar–20 Apr 1997 4 88 a, b, c, d Appraisal Mission 8–26 Jun 1998 6 114 a, c, d, e, f, g Inception Mission 16–26 Aug 1999 2 22 a, h Special Administration Mission 20–22 Jun 2000 2 6 a, i Review Mission 1 18 Jul–3 Aug 2000 2 34 a, h Review Mission 2 18–27 Apr 2001 1 10 a Midterm Review 2–19 Sep 2002 3 54 a, c, h Review Mission 3 26 May–12 Jun 2003 2 37 a, h Review Mission 4 16–24 Jun 2004 3 27 a, h, i Review Mission 5 12–16 Feb 2005 2 10 a, i Review Mission 6 11–18 Oct 2005 2 16 a, h Project Completion Review 5–14 Dec 2006 3 30 a, h, j a a = project economist or senior project economist, b = environmental specialist, c = institutional specialist

(consultant), d = financial specialist (consultant), e = programs officer, f = economist, g = counsel, h = assistant project analyst, i = resident mission representative, j = economist (consultant).

I. PROJECT DESCRIPTION

1. Tea is the most important tree crop in Sri Lanka, accounting for about 7% of total employment and 16% of export earnings in 1997. Tea smallholdings and private estates contributed 56% of total tea production and an estimated 70% of tea export earnings. 1 The remaining production is produced by the regional plantation companies. The 206,000 holdings provided livelihood for 1 million smallholder family members and employed about 100,000 workers in 1995. Productivity in tea smallholder and private estates was constrained by slow replanting and infilling of old seedling tea, which occupied about 50% of the tea plant stock. The replanting rate at appraisal was less than 1%, with an average replanting rate of 3% required for maintaining productive stock. The low replanting rate was attributable to a combination of factors, including lack of long-term credit and the capacity of the Tea Small Holdings Development Authority (TSHDA), which is responsible for providing extension services and managing the cess rebate for replanting and infilling. The assistance given by the tea industry to smallholders and plantations was weak in terms of its efficiency, accountability, and service delivery. The expected impact of the Tea Development Project 2 was to improve the comparative and competitive advantage of Sri Lanka in tea production through a sustainable increase in the income of tea smallholders and private estates and improvement of the environment. 2. To address the constraints facing tea smallholders and private estates, the Project was to (i) undertake institutional reforms to improve the effectiveness of tea-related institutions and rationalize the cess rebate3 to benefit the smaller holdings; (ii) provide credit financing for (a) replanting and infilling on smallholdings and private estates, (b) establishment of nurseries, (c) rehabilitation of tea factories, and (d) handling of green leaves; and (iii) improve social infrastructure such as workers’ housing and rural feeder roads, and undertake afforestation. All this was to be done sustainably, and result in improvement of the environment. The Project was preceded by the Smallholder Tea Development Project,4 which promoted the expansion of tea production areas of smallholders, use of improved varieties of tea, improvement of tea factories, access to credit, and strengthening of extension services.

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

3. The project design was consistent with the Government’s overall objective of accelerating economic growth under the public investment program of 1996–2000. The private sector was to act as the catalyst for growth, while targeted assistance to those in need—such as smallholders and estate workers—would be highly encouraged. The public investment program also supported the promotion of environmentally sustainable agricultural and industrial practices, and recognized the need to increase land and labor productivity, and to relate labor costs to prices and productivity, if the country was to retain its competitive position as a tea exporter. This was supported by the national agriculture, food, and nutrition strategy of 1984, which called for (i) crop diversification, (ii) investments in the tree crop subsector, (iii) enhancement of export earnings

1 The Sri Lanka Tea Board Law of 1983 defines tea smallholdings as those with an area of 4 hectares (ha) and estates

as holdings of 4 ha and above. 2 ADB. 1998. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and

Technical Assistance to the Democratic Socialist Republic of Sri Lanka for the Tea Development Project. Manila. 3 Part of the cess collected from tea exports is used to finance the operations of the tea-related institutions. 4 ADB. 1988. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the

Democratic Socialist Republic of Sri Lanka for the Smallholder Tea Development Project. Manila; ADB. 2000. Project Completion Report on the Smallholder Tea Development Project in Sri Lanka. Manila (Loan 955-SRI [SF]).

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from tree and other export crops, and (iv) promotion of agro-industries. At approval, the Project was also consistent with and relevant to the Asian Development Bank’s (ADB) medium-term country operational strategy (1998–2003). The project objectives were in line with the ADB’s country strategy, which aimed to address unemployment and poverty through (i) faster growth rates, (ii) better access by the poor to productive assets, and (iii) environmental improvement and protection. The Project was adequately formulated and designed to address these issues through the preparatory technical assistance. 5 Potential stakeholders, including women smallholder members, were consulted during project formulation and their problems and views were reflected in the project design. The project design remained relevant throughout project implementation and at completion. B. Project Outputs

4. The Project comprised four components—institutional reform and strengthening, tea development, social infrastructure and afforestation, and project management and implementation. The expected outputs, their indicators and targets, and accomplishment at completion are provided in Appendix 1. The overall physical completion rate was estimated at 89% at the project completion review mission in December 2006. 5. Institutional Reforms and Strengthening. This was a key component intended to improve the availability and accessibility of cess funds for field development, and increase the efficiency of tea-related institutions in service delivery. The institutions involved in the reforms were (i) the TSHDA, the nodal agency for implementing and monitoring smallholder programs; (ii) the Sri Lanka Tea Board (SLTB), the policy formulator, promoter of tea exports, and provider of financial assistance for tea research and smallholder development; (iii) the Tea Research Institute (TRI), the body in charge of research and investigation of all problems and matters affecting the production and manufacture of tea, including research into the economic viability and future economic trends in the industry; and (iv) the National Institute of Plantation Management (NIPM), which provides training in plantation management to personnel working in the plantations. Reforms of cess-financed institutions were undertaken slowly and only partially. A study of the reforms by the consultant was scheduled in the first year of the Project, but did not commence until August 2003, in the fourth year, with a final report submitted in March 2004. Of the agreed reforms, only three have been partially implemented: (i) cess allocation to smallholder development (26% for TSHDA, but none for research); (ii) passage of the bill to amend the board constitution of tea-related institutions (but not the board of TSHDA); and (iii) provision of the voluntary early separation package (VESP).6 The main reforms that were not implemented were the cess reallocation for the purposes of the Project, amendments to existing or new enabling legislation to make the tea-related institutions independent from the Government, and conversion of NIPM into an independent, self-financed training organization. The component was not implemented as per the appraisal design due to insufficient support among the institutions concerned, and changes in political commitment. Details about this component are provided in Appendix 2. 6. Credit and Noncredit Components. The credit component consisted of the credit facilities and cess-financed field development (new planting, replanting, and infilling of bushes), to finance replanting, establishment of commercial nurseries, rehabilitation and modernization of leaf factories, purchase of vehicles, and construction of green leaf collection centers. The credit 5 ADB. 1997. Technical Assistance to the Democratic Republic of Sri Lanka for the Second Smallholder Tea

Development Project. Manila (Japan Special Fund-financed). 6 The effect of the VESP was undermined, as fewer staff took the VESP than recommended, and new employees

were then recruited.

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line from the loan proceeds was fully utilized, exceeding targets in terms of (i) the amount of the credit ($25.4 million, as compared to the target of $20.5 million), and (ii) the credit-financed activities.7 A revolving fund using credit repayments was established for further onlending for the same activities, and operation began (albeit slowly) in June 2006. 8 Cess-financed field development was partly implemented (achieving 76% and 45% of the target areas for replanting and infilling, respectively), due to some delays in the release of cess funds and a lack of demand from smallholders for infilling activities. Other activities—the mother bushes program (planting of new tea clones), strengthening of the TRI, rehabilitation of workers housing and sanitation facilities, rehabilitation of feeder roads, afforestation of degraded land, and training programs for various stakeholders—were fully completed, and some targets exceeded. The Project did not anticipate any indigenous peoples issue at the time of appraisal and this remained valid throughout implementation, as no indigenous people work in the tea sector. C. Project Costs

7. At appraisal, the total project cost was estimated at $93.8 million equivalent, consisting of a foreign exchange cost of $24.0 million and a local currency cost of $69.8 million equivalent. The actual cost was $71.0 million, including a foreign exchange cost of $17.2 million and a local currency cost of $53.7 million equivalent. The actual costs by project component are compared to the cost estimate at appraisal in Appendix 3. The lower-than-estimated project cost is mainly attributable to the depreciation of the Sri Lankan rupee against the US dollar, as well as cost savings and/or underachievement of envisaged targets in some activities. D. Disbursements

8. At completion, the Project had disbursed $34.2 million, or 97% of the loan proceeds. The annual disbursement of the loan proceeds is shown in Appendix 4. In July 2004, loan savings of $1.0 million was reallocated to the Road Network Improvement Project (Loan 1649-SRI)9 upon the request of the Government. The reallocated savings were due mainly to depreciation of the local currency. Although the loan closing date was 31 December 2005 (reflecting a 6-month extension), actual closure was on 10 April 2007, as closure was delayed until the Secondary Towns and Rural Community-Based Water Supply and Sanitation Project (Loan 2276-SRI) became effective 10 (the undisbursed balance of SDR659,172.3 [$997,572 equivalent] was reallocated to the Community-Based Water Supply and Sanitation Project, as agreed with the Government). The Project used an imprest account and statement of expenditure procedures,

7 In 2002, the amount allocated for the credit line was increased from SDR15 million to SDR18 million, reallocating the

loan savings due to depreciation of the Sri Lankan rupee against the US dollar and SDR. Targets for line of credit to finance the establishment of nurseries and rehabilitation of factories have been achieved, except for leaf vehicles and sheds.

8 The approved amount of the revolving fund is SLRs1.1 billion. At the time of the project completion review mission, 211 loan applications (with a value of SLRs203.7 million) were received by the participating financial institutions (PFIs), of which seven loans had been approved, seven others were to be approved before the end of December 2006, and a total of SLRs10 million had been disbursed by PFIs. The terms of lending from the revolving fund are the same as those of the Project’s credit line except for (i) interest rate to final borrower is fixed at 9%, (ii) the interest rate is common for all subprojects, and (iii) factory development is eligible only if the investment is to obtain the Hazard Analysis and Critical Control Point certification to promote and prioritize the highly needed quality certification of factories.

9 ADB. 1998. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance to the Democratic Socialist Republic of Sri Lanka for the Road Network Improvement Project. Manila.

10 ADB. 2006. Report and Recommendation of the President to the Board of Directors on a Proposed Supplementary Loan to the Democratic Socialist Republic of Sri Lanka for the Secondary Towns and Rural Community-Based Water Supply and Sanitation Project. Manila.

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which helped eliminate liquidity constraints and reduced the accounting burden associated with implementation of project activities. The turnover ratio of the imprest account utilization over the project period was 3.88, which is higher than the ADB-wide average of 1.6 in 2006. Account replenishment and liquidation were processed efficiently. E. Project Schedule

9. Commencement of the Project was delayed by 2 months because of late compliance with loan effectivity conditions, including ratification, execution and submission to ADB of subsidiary loan agreements with participating financial institutions. Once the Project began activities were not implemented according to the corresponding time period in the original implementation schedule. Progress was extremely slow during the first 3 years (1999–2002) because of (i) currency depreciation that required budget revisions; (ii) delay in implementation of policy reforms of the tea-related institutions; (iii) lack of support and cooperation from TSHDA, one of the implementing agencies, for the first 3 years of the Project;11 and (iv) a vacancy in the project director position for 15 months at the beginning of the Project, and lack of proper technical experts in the project management unit (PMU). 12 These implementation delays led to an extension of the loan closing date by 6 months to enable completion of project activities. Appendix 5 indicates the planned and actual implementation schedule of project activities. F. Implementation Arrangements

10. The Project followed the implementation arrangements designed at appraisal. The Ministry of Plantation Industries (MPI)13 was the executing agency for the noncredit components and the Central Bank of Sri Lanka (CBSL) for the credit component. The PMU was established under MPI for overall supervision and implementation of the Project, including coordination with three implementing agencies (IAs), comprising (i) TSHDA, which was responsible for extension services to the smallholders, approval and cess disbursement for replanting and infilling, and promotion of the credit scheme; (ii) TRI, which was responsible for research relevant to smallholders and establishment of mother bushes to provide cuttings of new clone material; and (iii) NIPM, which undertook training. CBSL’s responsibility was carried out by its rural credit department, with nine participating financial institutions (PFIs) as implementing agencies.14 The implementation of the institutional reforms was to be facilitated by the PMU and monitored by MPI. However, MPI did not have the technical staff needed to undertake such tasks, and had to depend on professionals from the tea-related institutions that were subject to reforms. This weakened the effectiveness of the reforms due to conflict of interest. Furthermore, no mechanism was in place to ensure reforms were implemented: the PMU could monitor progress but lacked the power to pressure the Government to implement the reforms. 11. During the project period, several minor changes were made to the project implementation arrangements agreed to between the EA and ADB. To improve access to the credit scheme, the 11 The TSHDA was the main implementing agency of the previous smallholder tea development project; the EA (MPI)

utilized the TSHDA for extension services, training, civil works, consulting services and monitoring and evaluation. TSHDA had reservations with the implementation arrangements for the new Project, as its role was significantly reduced.

12 It took 6 months for the EA to obtain approval to create a new position before it could start the selection process. 13 At appraisal, the name of the ministry was the Ministry of Public Administration, Home Affairs and Plantation

Industries. Functions other than those related to the plantation industry were separated as a result of a ministerial reorganization in 2001.

14 Comprising the Bank of Ceylon, Commercial Bank of Ceylon Limited, Development Finance Corporation of Ceylon Bank, Hatton National Bank, Kandurata Development Bank, Lanka Orix Leasing Co. Ltd., National Development Bank of Sri Lanka, Ruhuna Development Bank, and Sampath Bank.

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eligibility criteria for the PFIs were modified to allow participation by the Bank of Ceylon and the Lanka Orix Leasing Co. Ltd., which undertakes broad outreach to the target beneficiaries.15 In addition, the free limit amount for subloan approval was increased from $100,000 to $200,000 in August 2001, mainly to address the demand for loans for rehabilitation of factories. These changes were effective in achieving the project objectives by expanding the reach of the credit line to all smallholders, and expediting the subloan approval process. 12. Under the noncredit components, the strengthening of societies and associations of tea smallholders through training by private sector and nongovernmental organizations was critical for the implementation of several project activities. For example, the distribution of mother bush cuttings was expected to be assigned to the newly strengthened societies. However, awards for the training of society members were delayed due to resistance by public sector agencies to the planned assignment of training to the private sector. The Government of Sri Lanka’s Rural Development Training and Research Institute (RDTRI) was therefore added as implementing agency in 2004 to undertake mobilization and strengthening of societies and associations of tea smallholders. Following this change, the Project succeeded in strengthening 100 societies (25% of the 400 targeted at appraisal). The societies also participated in construction and maintenance of feeder roads on a voluntary basis, thus assuring sustainable maintenance. G. Conditions and Covenants

13. The major loan covenants have generally been complied with, with the exception of those related to the institutional reforms and the allocation of cess funds. The status of compliance with all loan covenants is in Appendix 7. Some of the proposed measures for institutional reforms—such as provision of the VESP and legislation for reform of tea-related institutions—were undertaken by the Government. However, these reforms are considered insufficient to achieve the project objectives of (i) directing more cess funds to field development; and (ii) improving the autonomy, accountability, transparency, efficiency and effectiveness of the tea-related institutions. Noncompliance with these covenants reflects a change in the Government’s earlier commitment to sector reforms, and would undermine the Project’s sustainability (para. 29). H. Consultant Recruitment and Procurement

14. At appraisal 10 person-months of international and 46 person-months of national consultant services were slated to assist the PMU to undertake specific studies for strengthening of the sector’s institutional framework. The consultants were to be recruited individually. In addition, three benefit monitoring and evaluation (M&E) studies were planned for benchmark, midterm progress, and completion impact assessment. During implementation a total of 10.0 person-months of international and 58.1 person-months of national consultant services were used to provide support to the PMU. The increase in national consulting inputs was due to the (i) extension of the Project and the parallel extension of the M&E consultants; and (ii) expansion of the terms of reference of the consultants for legal reforms.16 A benchmark survey was completed in May 2001, followed by a midterm survey in 2002; a final impact assessment survey was undertaken in September–October 2005. The M&E consultants were recruited through a firm,

15 Inclusion of the Bank of Ceylon was provisionally approved by ADB on the condition that it would meet the financial

criteria (these were not met prior to 1997, but were expected to be met for 1998). Similarly, inclusion of the Lanka Orix Leasing Co. Ltd. was approved in August 2001 by waiving the condition of the minimum return on equity ratio of 10%, which was applied to banks but considered too high for a leasing company.

16 The additional cost for this input was covered by the additional funds available due to the depreciation of the Sri Lankan rupee.

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which also carried out the surveys. Recruitment of the consultant and survey firms was carried out without delay.

i. Performance of Consultants, Contractors, and Suppliers

15. The consultants’ overall performance was satisfactory. A consulting firm was engaged for the study on legal support for and organization and management of institutional reform of tea-related institutes from August 2003 to March 2004, while another consulting firm was engaged on an intermittent basis from 1999 to 2005 for project benefit monitoring and surveys. The design of the afforestation program was done by an individual consultant, and the factory capacity rationalization study was conducted by a firm. Both the firms and the individual consultants were engaged directly by PMU. The report on reforms—such as legislative changes to the roles and structures of the tea-related institutions and the Tea Cess Act, and rationalization of administrative expenses through reduction of the staff of these institutions—was acceptable to ADB. MPI also accepted most of the report’s recommendations and submitted them to the cabinet for approval. The M&E consultants assisted the PMU in M&E, including financial, credit and tea advisory services, and performed well throughout the Project. 16. The procurement of goods and services under the noncredit component was carried out by the PMU in accordance with ADB’s Procurement Guidelines (2007, as amended from time to time). Requisite project vehicles and equipment were procured on a timely basis. Motorcycles and vehicles were made available to the staff of the PMU, TRI, and TSHDA. Due to lack of proper maintenance, the vehicle assigned to TRI was returned to the PMU. Local contractors were used for the Project’s civil works and their performance was satisfactory. The amount of civil works was significant, and the PMU was assisted in civil works implementation by various agencies, such as the district secretaries (for the feeder roads), and the Plantation Housing Development Trust (for the workers’ housing). Commencement of civil works for the improvement of the TRI buildings was delayed, but the works were completed on time. I. Performance of the Borrower and the Executing Agency

17. Despite the slow progress during the first 3 years of implementation, performance of the PMU and CBSL were generally satisfactory, given that most project output targets were delivered, and the loan period extended only once (by 6 months). PMU staff provided useful guidance to the beneficiary smallholders in the field, which was much appreciated by the stakeholders met by the project completion review mission. CBSL and PFIs fully released the credit line, which was increased from SDR15 million to SDR18 million in 2002. Creation of an independent PMU contributed to increased efficiency in project implementation, allowing flexible and independent management of the Project. 17 Changes in project scope and implementation arrangements required approval by MPI, the Ministry of Public Administration and Home Affairs, and the Ministry of Finance and Planning. A period of about 6 months was needed to obtain such government internal approvals and adversely affected project implementation. 18. The Government’s performance in terms of implementing the agreed policy reforms was unsatisfactory, leaving several loan covenants related to policy and institutional reforms only partly complied with. During the appraisal phase, the Government had a strong interest in reforming the tea-related institutions, and the institutions themselves were in favor of a certain level of internal restructuring to increase their effectiveness. However, the MPI and PMU were

17 The need to establish a strong PMU was one of the lessons that emerged from the earlier Smallholder Tea

Development Project (footnote 4). See para. 61 of the project completion report (IN.189-00, 18 August 2000).

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awaiting finalization of the tea industry strategy study under the Plantation Reform Project,18 and deliberately rescheduled the institutional reforms study. They anticipated that the tea industry strategy study would make major recommendations regarding the institutions, but in fact the study dealt only with external market strategy, especially with respect to tea marketing. Recruitment of the consultant for the study was therefore significantly delayed and the final report finally submitted in March 2004, a little more than a year before the original loan closing date. Furthermore, the change in the Government in 2004 caused a further delay in the acceptance of the recommendations on the restructuring of the tea-related institutions, for two reasons: (i) the parliament could not pass any bills for the first half of 2004, and (ii) the new Government was less supportive of private sector participation. For example, several initial steps had already been taken by MPI to enhance private sector participation in NIPM by transforming NIPM into a company with overseas partners and leasing its property to a private entity. When the Government changed, this process was halted. 19. The PMU faced difficulties at the outset of the Project due to a lack of skilled professional staff for implementation of specialized components, such as forestry, mother bush development and feeder roads. As the initial project design did not include these positions, government approval had to be obtained for a change in sanctioned staff positions, as allowed for in the project administration memorandum. While ADB could promptly approve deviations from the provision in the memorandum, government procedures for creating and recruiting for these positions were cumbersome, and resulted in the positions being filled only in the third year of the Project, causing delayed commencement of the respective components. Before project completion, the finance manager of the PMU resigned and was not replaced by the MPI, as staff believed that a ministry accountant would be able to prepare the final project accounts in a timely manner. As a result, submission of the final project accounts to ADB was delayed by 1 year after the loan closing date. In addition, the PMU did not record the actual cost by project component, due to inadequate financial data management. J. Performance of the Asian Development Bank

20. ADB fielded one review mission per year, for a total of seven from 1999–2005, including the midterm review mission in September 2002. These missions reviewed progress of project activities, met stakeholders, assessed project outcomes and impacts, found solutions for implementation issues, and recommended necessary changes in project scope and implementation arrangements. Recommended changes were promptly processed, and helped in adjusting the project design as required during implementation. The guidance and support provided by ADB review missions and through formal and informal communications with ADB headquarters and the Sri Lanka Resident Mission were adequate and timely, and highly appreciated by the executing agency. Throughout the project period there was only one replacement of the ADB project officer (in 2004). The performance of ADB is rated “satisfactory”.

III. EVALUATION OF PERFORMANCE

A. Relevance

21. The project design was relevant at appraisal and throughout the implementation period (para. 3). To improve the relevance of the Project, tea factory workers’ housing was added to the list of eligible activities under the credit line at the midterm review. Also, the targets for the tea

18 ADB. 1995. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and

Technical Assistance to the Democratic Socialist Republic of Sri Lanka for the Plantation Reform Project. Manila.

8

development and social and rural infrastructure components were increased, as indicated in Appendix 1. These revisions increased the outputs, broadened the beneficiary coverage, and enhanced project impacts. The Project was consequently rated “relevant”. However, the commitment and political will to implement institutional reforms that was present at appraisal diminished following a change in the Government, frustrating efforts to improve the effectiveness and efficiency of the tea-related institutions. B. Effectiveness in Achieving Outcome

22. The expected outcomes of the Project were to maximize the income of tea smallholders on a sustainable basis, and improve the environment. The project outcomes exceeded the performance indicators established at appraisal: (i) tea yield at completion (in 2005) averaged 2,254 kilograms per hectare (kg/ha), compared to a target of 1,700 kg/ha in the lowlands and 1,600 kg/ha in the middle and high elevation areas;19 (ii) annual incremental tea production was about 27,000 metric tons (t), valued at about $40 million, in 2005, compared to a target of 20,000 t valued at $38 million; and (iii) and 1,263 ha of degraded area were afforested, compared to the target of 1,000 ha.20 These outcomes exceeded the targets and demonstrate that the Project was effective in achieving outcomes. 23. The credit facilities for replanting provided by the Project have been equitably distributed, with 80% of project credit facilities reaching growers with holdings less than 2 ha in size. Average green leaf prices have increased some 35% during the project period due to the improvement in leaf quality as a result of project activities. The income of smallholders (measured per ha) has increased by 33% in nominal terms and 12% in real terms between the midterm and end of the project period. This is due mainly to improvements in productivity, yields, and quality, which allowed the smallholders to fetch a better price for their leaves. The benefit monitoring survey in 2005 reported that the unit yields of the participating smallholders have increased by 33% (from 1,689 kg/ha in 1999 to 2,254 kg/ha in 2005). The tea factories that obtained credit facilities from the Project have higher output and prices, and a lower cost of production, than do nonparticipating factories. 24. The VESP program was implemented by the Project without any link to staff performance. The more capable staff members at SLTB and NIPM applied for the VESP, while the less capable and redundant staff opted to remain. In the case of NIPM, the director, chief accountant and administrator of the institute left after applying for the VESP. After losing its key managerial staff, NIPM’s operations faced severe constraints. For TRI and TSHDA, most of the employees who accepted the VESP were from the clerical grades, negatively affecting the daily operations of many regional offices. 25. The Project provided funds for the rehabilitation of 5,705 housing units, resulting in positive impacts on the beneficiaries. Around 30% of this investment was for construction of hostel-type units for occasional accommodation (a new item introduced during implementation), which helped workers from distant locations, who previously had to commute to the estate. The restrooms provided at the private tea factories have positively impacted the workers, and worker–management relationships. The rehabilitation of feeder roads frequently used by tea smallholders improved access to markets and improved access by leaf collectors, increasing competition for leaf and thus smallholder returns; it also provided easier access to amenities. The benefit survey

19 The tea yield of the participating smallholders was not segregated into lowlands and middle and high elevation areas. 20 Employment generation was not monitored under the benefit M&E surveys; the target called for annual generated

employment of 34,000 person-years during the development stage, and 15,000 person-years at full maturity.

9

found that the traffic volume of lorries and other heavy vehicles had increased by 62% and the average time needed for transporting tea leaves to factories was reduced by 15 minutes (from 46 minutes to 31 minutes), as compared to before the Project. 26. Afforestation under the Project was well received by the smallholders, and area targeted was increased during implementation as a result. The Project also implemented a homestead development program, whereby smallholdings were provided with various species of fruit plants through the smallholder societies; this reached more than 50,000 households at completion. This component improved the plant stock as well as the income potential of smallholders. The Project also established about 80 ha of mother bushes. At project completion, cuttings were already reaching smallholders, private estates and commercial nurseries. This component is expected to have a major impact in further improving the plant stock of smallholders by disseminating the latest clones. Extension services to tea smallholders by TSHDA were strengthened under the Project and around 35,000 tea smallholders were trained under the Project’s training programs. Although outcomes of these activities cannot be quantified, beneficiaries and training participants indicated through the benefit monitoring surveys that they had increased tea production. C. Efficiency in Achieving Outcome and Outputs

27. At appraisal, the economic and financial analysis estimated that the economic internal rate of return (EIRR) of the overall project was 18%; EIRRs for specific activities ranged from 14% for replanting in middle and high elevation areas to 40% for green leaf handling. The estimated financial rates of return by activity ranged from 9% for replanting in middle and high areas to 36% for green leaf handling. An updated economic and financial analysis at project completion estimates the EIRR of overall project remains at 18% with some differences among activities (Appendix 6). These EIRRs demonstrate the Project’s efficiency in terms of an investment return. 28. Project management by the PMU and ADB supervision were both found to be efficient (para. 17). Upon project completion, PMU employees have been absorbed as permanent staff of the MPI and TSHDA, or were working for projects funded by other development partners. Therefore, the project experience was sustained despite the temporary nature of the project-specific PMU. However, the effectiveness and efficiency of the Government on policy and institutional reforms was limited, resulting in less-than-satisfactory achievement of this aspect (para. 5). Despite this, in view of the efficiency in investment and project management, the Project is rated “efficient”. D. Preliminary Assessment of Sustainability

29. Despite sustainable productivity increases, project sustainability is rated “less likely” because of (i) the reversal in the Government’s policy towards the envisaged reforms of the tea-related institutions, (ii) lack of continuation of some project activities, such as training and strengthening of societies, and (iii) lack of maintenance mechanisms for other project outputs, such as feeder roads. The following points describe sustainability per type of activity:

(i) The restructuring of the tea-related institutions is unlikely to be sustainable because of the reversal in the Government’s policy with respect to the envisaged sector reforms. For instance, the downsizing effect of the VESP at the SLTB was negated the following year when a number of unemployed graduates were employed. In addition, the plan to allocate the savings in administrative expenses to running the tea-related institutions is unlikely to be sustainable, due to the

10

negligible amount of savings, recurring salary increases, 21 and the reversal in policies relating to restructuring.22 Cess funds continue to be spent mainly on the administration costs of the tea-related institutions, leaving inadequate funds for research and extension. However, if instituted, the reforms are expected to strengthen institutions, minimize administrative costs and facilitate the management and direction of the entire tea industry.

(ii) The credit component is likely to be sustained as the revolving fund for the credit

line has become operational and has started onlending to eligible sub-borrowers, using the proceeds recovered under the credit line. The increased tea productivity as a result of investments (such as the replanting of tea trees) supported under the credit line has increased the average yield among the smallholdings, increasing the real income of smallholders, and is making the replanting of tea trees more likely. However, this is vulnerable to fluctuations in the international price of tea in the long term. 23 To increase the income of tea smallholders in a sustainable manner, it has been recognized that increasing the value added of their tea products and selling their products outside the tea auction is essential. However, this requires a change in policies to eliminate (i) price controls and (ii) panel ratification for non-auction sales between producers and international buyers. This policy change was included in the loan covenants for the ongoing Plantation Development Project24 but has not been complied with to date.

(iii) The sustainability of the mother bush program is rated “likely”, because (a) the

private sector is involved in its operations; (b) both TRI and TSHDA can avail themselves of sufficient funds to cover the maintenance costs of the mother bushes; and (c) TRI, TSHDA, managers of nurseries and plantation sites, and smallholders established coordination mechanisms and finalized guidelines for post-project operations.

(iv) Without continuing external support, the sustainability of institutional strengthening

of tea-related institutions is rated “less likely”. TRI would be able to maintain equipment provided under the Project,25 but lacks the resources needed to replace it at the end of its service life. The awareness-raising programs to strengthen grassroots societies (which were to be carried out by nongovernmental organizations, but were ultimately carried out by RDTRI), were less than adequate in terms of the scale and contents that were envisaged in the project design. Only 100 societies of tea smallholders were strengthened through the RDTRI mobilization program, which reported good results despite the time constraints. Recognizing the importance of the mobilization program for tea smallholders, RDTRI intends to continue the program, but is uncertain whether funds will be available.

21 In January 2006, the salaries increased by 25%. 22 Under the Project, 40 staff of the Sri Lanka Tea Board received the VESP. However, the same institution has

recruited new 40 staff, nullifying the VESP’s effect. 23 The average price of three major auctions markets (Colombo, Kolkata, and Mombasa) was above $2.00 per kg in

1997 and 1998, but declined to $1.40–$1.65 per kg during 1999–2003. The price has subsequently increased: from $1.87 per kg in 2006 to $1.94 per kg in May 2007. The monthly average of the Colombo auctions price in May 2007 was $2.42 per kg.

24 ADB. 2002. Report and Recommendation of the President to the Board of Directors on Proposed Loans to the Democratic Socialist Republic of Sri Lanka for the Plantation Development Project. Manila.

25 The project-supported Ratnapura station of TRI is now fully functional.

11

(v) The effects of capacity development for private and public sector beneficiaries remained after project completion, with some training activities continuing. However, the majority of the activities ceased upon completion of the Project.

(vi) Sustainability of improvements in workers’ living conditions is rated “less likely”, as

this was intended as a temporary intervention until new houses could be built, and the maintenance of those investments is inadequate. Latrines were built without water, as water piping was not foreseen in the original Project design, and therefore would not improve the sanitation situation.

(vii) The sustainability of the provision of feeder roads is rated “less likely” due to lack

of funds from the implementing institutions for operation and maintenance. The maintenance of the feeder roads was assigned to the local authorities as per the project design. During project implementation, it was found that local authorities did not have the resources to maintain the roads. In some instances, the smallholder societies have been maintaining the roads on a voluntary basis but the arrangement was not institutionalized.26

(viii) The afforestation program is considered “likely” to be sustainable. However, it is

unlikely that similar programs will be implemented without further project support. E. Impact

30. The goal of the Project was to improve the comparative and competitive advantage of Sri Lanka in tea production. The target indicators set at appraisal comprised a growth rate of 2.9% in the plantation sector, a 20% increase in the unit yield of tea, and a 20% share of crush-tear-curl (CTC) tea production.27 Achievement of these indicators requires a favorable environment for tea and other plantation sector crops; this includes the successful implementation of the Project, as well as appropriate policies that encourage investment in the sector, and a favorable world market. For instance, the world demand for CTC tea was lower than estimated at appraisal and production in Kenya was sufficient to meet world demand.28 In addition, Ceylon tea is known in the world as orthodox black tea and the Sri Lankan producers prefer the traditional method of tea production, despite the higher price of CTC tea. For this reason, the share of CTC tea production at project completion remained 7%. 29 At project completion, the average growth rate of the plantation sector during the project period was 2.5%, slightly lower than the target. Given that this is a sector indicator and the smallholders are one of the sector stakeholders, the project 26 ADB’s review missions noted that maintenance of the feeder roads was already an issue only a few months after

completion of the rehabilitation works. In some places, the lack of maintenance has been addressed through agreements between the local authorities and the stakeholders, with (i) responsibility divided between the tea smallholders’ societies and local authorities, with the former being responsible for minor maintenance works, and the latter for the costs of major maintenance works; and (ii) tea smallholders’ societies setting up a maintenance fund by collecting monthly fees from the residents along the roads and the transport service providers. However, these agreements were not practiced broadly.

27 The share of CTC tea was included in the impact indicators as it represents a shift in Sri Lanka’s tea production towards in-country value adding.

28 CTC factories are large by Sri Lankan standards (typical capacity is around 1,000 t of processed tea per year), not efficient on a small scale, and require big initial investments. At appraisal, three new CTC factories were expected to be built under the Project; however, typical factory loan size under the Project was about SLRs5 million–7 million, far below the needed investment cost of SLRs100 million for a CTC factory.

29 As of December 2007, of the three major tea manufacturing methods, the conventional form (orthodox black tea) contributes about 92.8% of the total tea crop, while CTC and green tea contributed only 6.0% and 1.2%, respectively. A remarkable drop in CTC tea was evident during the third quarter of 2007, while the production of green tea increased to meet the increase in demand.

12

interventions had a very positive impact on the whole sector. The average smallholder tea yield increased from 1,800 kg/ha in 1999 to 2,450 kg/ha in 2007, well above the project target. Smallholder crop productivity in Sri Lanka is now comparable with South Indian and Kenyan levels and much higher than the average yield of the corporate sector. 31. In addition to having met the sector indicator targets, the M&E survey found that the Project has had a significant positive impact on the participant smallholders. The average yield among participants has increased by 33% (from 1,689 kg/ha in 1999 to 2,254 kg/ha in 2005). This has increased total tea production by 27,000 t annually (valued at about $40 million). Most (73%) of the total tea production came from private tea smallholders in 2006, compared to 58% in 1999.30 The increased production has had a direct impact on smallholders’ income, increasing the income per ha in real terms by 12% between 2002 and 2005.31 In addition, the Project has improved the social infrastructure, such as worker houses and restrooms, and rural roads (para. 25), thereby contributing to improved quality of life. Agricultural best practices have improved through training (pruning and plucking) and nursery programs for the smallholders. Afforestation of 1,263 ha of degraded land has directly improved the environment, though the area is rather limited. The homestead development component, where the smallest holdings were provided with fruit plants, benefited around 50,000 smallholders. This component included institutional strengthening activities, such as training on forestry practices for tea extension officers, provision of planting material by the Forest Department, and distribution of plants by the tea smallholder societies.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

32. Overall, the Project is rated “partly successful”. The Project's assistance to smallholders was relevant and consistent with Sri Lanka's overall development needs and ADB's assistance strategy. It was implemented largely as it was conceived, with only minor changes to improve the outcomes (para. 11). The Project was well managed by the PMU, which was aided by intermittent inputs from local consultants and various implementing agencies. The Project was effective in achieving its physical and financial objectives, but was not effective in achieving its institutional objectives. The outcome targets were fully attained and in some cases exceeded (e.g., annual increase of tea production, number of ha of afforested land, and rehabilitation of factories). The physical targets of infilling of tea land and share of CTC tea production were not achieved (the project met only 45% and 33% of the targets, respectively) because of the traditional approach to production of black tea in Sri Lanka. The Project's institutional objectives were partially achieved in terms of reconstitution of the boards of the tea-related institutions. However, restructuring through reduction of staff numbers and rationalization of administrative expenses of the tea-related institutions were not achieved, due to reversals in government policies relating to the roles of the government sector and private sector participation. 33. The physical and economic implementation of the Project was efficient, producing an EIRR of 18%. The Project was completed with only one 6-month extension. Smallholder incomes increased with support from the Project, and these increases are considered sustainable in view of the improvements in TSHDA's extension services, and in access to credit and planting material for tea smallholders. However, other Project investments in institutional strengthening and capacity building, including restructuring of the tea-related institutions and reallocation of cess

30 Data are based on the tea smallholders census carried out under the Project in 2005. 31 The baseline survey in 1999 did not collect the income data. The 2002 data is of midterm monitoring survey.

13

funds to research, are not sustainable. Also, linkages between research and extension remain weak. The training intended to strengthen smallholder societies was of limited benefit, as the training program was not fully completed. B. Lessons Learned

34. The Project confirmed the high development potential of the tea smallholder sector and reconfirmed the creditworthiness of tea smallholders. The following important lessons, relating to tea sector development policies, institutional aspects, and project-specific implementation arrangements, were gleaned from the Project:

(i) The outcome of several project interventions was affected by changes in government policy during project implementation. The success of institutional reforms is closely linked to consistency in government policies.

(ii) To ensure implementation of institutional reforms, an agency or unit that has adequate mandate and power should be involved. A PMU lacks the power to put pressure on the Government to enact policy reforms.

(iii) A voluntary staff separation package program for streamlining an institution should use staff performance as an eligibility criterion. The VESP program under the Project did not achieve the expected results because it was not linked to staff performance indicators.

(iv) A plan for institutional reforms should be designed with due consideration for the effectiveness of the proposed actions. The reconstitution of the boards of the tea-related institutions was a reform intended to ensure the perspectives of the private sector and the tea smallholders were heard with respect to management decisions. Although the boards were reconstituted, their effectiveness did not increase as the role of the boards did not change, despite the inclusion of the new members.

(v) A mechanism to continue and replicate successful activities after a project ends needs to be established prior to project completion. Despite the potential for continuity of the homestead development component, all activities ceased at the end of the Project and the increase in capacity relating to homestead development is not being utilized.

(vi) The capacity of the entity that will be responsible for operation and maintenance of project facilities should be assessed carefully at appraisal.

(vii) The EA’s firm commitment is essential to promote participation by the private sector in activities that could potentially be undertaken by public sector agencies.

(viii) Consideration should be given to institutional sustainability after the project period, including coordination among related agencies and M&E of project benefits. Temporary arrangements for project implementation, such as the PMU and a steering committee, cannot continue their activities once a project closes. The stimulus for successful activities tends to disappear quickly upon project closure.

(ix) Project management should be given flexibility in modifying staff positions, especially for key technical positions.

(x) The time and resources needed to finalize project accounts should be considered in preparing project implementation arrangements.

(xi) The record of fund utilization segregated by project activities is essential information for M&E, and adequate arrangements for financial management should be established early in a project, particularly when multiple IAs are involved.

14

C. Recommendations

Project-Related

35. Future Monitoring. MPI should continue to monitor and support those activities implemented by TRI and TSHDA, such as the mother bush program and tea smallholder extension services. MPI should also monitor the operation and maintenance of the project investments in civil works (feeder roads, workers houses, restrooms, and TRI buildings) and equipment (laboratory, vehicles, and etc.). 36. Covenants. The loan covenants related to the institutional reforms are partly complied with. Limited downsizing and restructuring of the tea-related institutions took place, with the SLTB expanding again by recruiting new staff after implementing the VESP. The Government is generally reluctant to implement reforms that broadly diminish the power of the government and/or ministers, and enhance the influence of the private sector. Covenants on such institutional reforms would not be effective in practice unless an agency with adequate authority is strongly committed to taking the needed actions. If reforms are pivotal to the achievement of the project development objectives, ADB should ensure that the covenants are complied with in the given timeframe, and consider including the covenants as conditions to loan approval or loan effectiveness. 37. Further Action or Follow-Up. It is recommended that the following actions be undertaken by the EA, IAs and other relevant agencies:

(i) The homestead development component involves a very low cost per homestead for the planting material, and the institutional framework has already been established under the Project. The Forest Department should initiate action to continue with this activity, as there was widespread demand by smallholders that was not fully met by the Project (para. 34 [v]).

(ii) MPI should lobby to lower the criteria of eligible farm size for the tea replanting subsidy from the current level of less than 1 acre to ½ acre, to prevent subsidies from reaching the nontarget population.

(iii) MPI should continue the component to strengthen the tea smallholders’ societies to train a larger number of smallholders and form more effective societies. The smallholder societies have the potential to expand their activities more broadly, from sponsoring research and extension to direct marketing of tea. The services for strengthening the societies should be carried out by the private sector, as foreseen in the Project (para. 34 [vii]).

(iv) MPI should support the tea industry bodies, such as the Federation of Tea Smallholder Societies and the Private Tea Factory Owners Association, to strengthen their capacity in undertaking research, extension and marketing for growth of the tea industry. Ideally, these tasks should be run by the sector stakeholders as represented in these bodies. The weakness of the industry bodies contributes to lack of continuity of project activities and to dependence of producers on the Government.

(v) The Government should pursue the reform of the cess allocation proposed under the Project. Allocation of the cess funds remains firmly controlled by the Government, and fails to reflect the views of the nongovernment stakeholders who actually contribute the cess. The cess funds are also held up at the Treasury, and not promptly released to the tea-related institutions. The current cess system should be reviewed to ensure (a) greater stakeholder representation, (b) speedy

15

release of funds from the Treasury, (c) improved efficiency to reduce administrative costs, and (d) access to the fund for industry-related research.

38. Additional Assistance. No additional assistance in the form of technical assistance or a loan is proposed, as the recommended actions above could be implemented by the Government with its own resources. 39. Timing of the Project Performance Evaluation Report. As the Project was physically completed in 2005, the Project is ready for a project performance review. General

40. The following are recommended for future projects: (i) Loan covenants on institutional reforms and the use of private sector resources in

training and strengthening should specifically describe the requirements. The responsible agencies, steps to take, measures to judge compliance, timeframe, and actions to be taken if covenants are not complied with by the due dates need to be agreed upon by the Government and ADB.

(ii) The time needed for required changes in legislation should be carefully assessed. The timeframe should be adequate and the designated EA should have appropriate authority to initiate the envisaged policy changes.

(iii) Participation of beneficiaries in civil works should be encouraged as far as possible, to ensure sustainable maintenance of the facilities.

(iv) The difference between the project completion and loan closing dates in the loan agreement should be recognized by EAs and ADB and reflected on the implementation schedule, to minimize delays in closing the loan account due to delayed submission of financial documents to ADB. All project activities should be completed by the project completion date and the expenditures between the completion and loan closing dates should be limited to administrative costs related to finalization of the project account.

(v) When multiple IAs are involved in a project, the financial management system becomes complicated. In addition to agreements on the fund flows and implementation arrangements, financial reporting flows should also be agreed on among the EA and IAs, so that the EA is able to monitor the progress of fund utilization for all activities. Electronic transfer from the IAs to the EA of relevant data could be encouraged in future projects.

16 Appendix 1

PERFORMANCE INDICATORS AND ACHIEVEMENTS

Design Summary

Performance Indicators/Targets in Original Design

Revised During Implementation

Achievements at Project Completion

Impact To improve the comparative and competitive advantage of Sri Lanka in tea production

• Growth rate of 2.9% in the

plantation sector • 20% increase in unit yield of

tea • A 20% share of crush-tear-

curl (CTC) production

• National average growth rate

was 2.5% during 1980–2005. • Increase was not significant.

The increase in the average unit yield between 1999 and 2005 was only 2.7%.

• Share of CTC in 2007 is 7%. Outcome

To maximize income of smallholders on a sustainable basis

• Tea yield increased to 1,700 kg/ha in lowlands and 1,600 kg/ha in middle and high elevation areas

• Beneficiaries’ average yield increased by 33% from 1,689 kg/ha in 1999 to 2,254 kg/ha in 2005

• Annual incremental tea production of 20,000 tons (t), valued at $38 million

• Production increased by 27,000 t, and valued at about $40 million

• Annual employment of 34,000 person-years during development stage, and 15,000 person-years at full maturity

• Data not available

To improve the environment

• 1,000 ha of degraded land afforested

Increased to 1,300 ha

• 1,263 ha afforested(126% of the original area and 97% of the revised target)

Outputs 1. Institutional

Reforms and Strengthening

• Reform of the Sri Lanka Tea Board (SLTB), Tea Small Holdings Development Authority (TSHDA), Tea Research Institute (TRI), and the National Institute of Plantation Management (NIPM) through (i) reconstitution of the boards, (ii) changes in legislation, (iii) rationalization of administrative expenses, and (iv) restructuring through staff reduction to match needs.

The reforms were agreed to be carried out after the completion of the Tea Sector Strategy Study in 2002. During midterm review in September 2002, a timeframe for actions to be carried out (i.e., reconstitution of the boards of tea-related institutions and recruitment of required consulting services) was agreed upon.

• The bill to amend the acts governing the constitution of the boards and granting majority private sector representation was revised several times and was submitted to parliament on 25 July 2003. Subsequently, the study to assess and recommend institutional reform of the tea institutions commenced in August 2003, with the final report submitted in March 2004. Following cabinet approval in August 2004, the study recommendations were implemented, apart from the proposed autonomy of the institutions and exemption from the Finance Act. Although all institutions participated in the voluntary early separation package

Appendix 1 17

Design Summary

Performance Indicators/Targets in Original Design

Revised During Implementation

Achievements at Project Completion

(VESP), several issues negated the benefits produced by VESP. In addition, measures implemented by the institutions created negligible savings.

• Reallocation of cess funds, directing more funds to replanting and infilling, as follows: 34% for research; 36% for smallholder development; and 30% for promotions and programs implemented by the SLTB.

• Incomplete. The agreed cess allocation was implemented in January 1999, but was subsequently revised, allocating more funds to SLTB for promotions and programs. The cess funds were not reallocated to research. Allocation in 2005 was 39.5% for TSHDA, 26.0% for TRI, and 34.5% for SLTB.

• Increase the number of tea inspectors by 8 and tea extension officers (TEOs) by 48

• Completed: an additional 48 TEOs recruited and provided with motorcycles and computers

• Provide a laboratory, staff houses, equipment and vehicles for TRI Ratnapura Research Station, and support the establishment of about 80 ha of mother bushes by TRI and TSHDA, including on homestead gardens

Increased to 90 ha

• Construction of TRI's laboratory, library facilities, hostel, administrative block, glasshouse, lecture hall, and five staff quarters completed; provision of vehicles and equipment to TRI completed; 83.7 ha of mother bush planted

• Training of TSHDA extension officers, participating financial institutions staff, and staff of private estates and factories

• A total of 1,132 programs completed, comprising 82 for TEOs, 100 for faculty staff, 37 for PFI staff, 839 for smallholders, and 74 for members of the tea smallholder societies

2. Tea Development

• Establishment of 455 nurseries

• 544 nurseries established (120% of the target)

• Rehabilitation of 85 factories

• 180 factories rehabilitated (212% of the target)

• Replanting of 9,600 ha (6,100 ha cess-financed and 3,500 ha credit- financed)

Increased to 10,400 ha (6,100 ha cess-financed and 4,300 ha credit-financed)

• 4,625 ha cess-financed (76% of the revised target) and 4,400 ha credit-financed (102% of the revised target) for a total of 9,025 ha (87% of the revised target)

• Infilling of 35,800 ha (effective area:1,790 ha)

• 15,980 ha infilled (effective area 799 ha, 45% of the target)

• Establishment of 80 ha of Increased to 90 ha • 83.7 ha established (93% of

18 Appendix 1

Design Summary

Performance Indicators/Targets in Original Design

Revised During Implementation

Achievements at Project Completion

mother bushes by TRI and TSHDA

the revised target)

• Improvement to 5,000 worker houses and provision of 300 latrines and 200 labor restrooms

Increased to 6,000 houses; latrines were dropped

• 5,705 houses improved (95% of the revised target)

• 215 restrooms provided (108% of the target)

3. Social and rural infrastructure improvement and restoration

• Improvement of 250 km of rural roads

Increased to 613 km

• 652 km improved (109% of the revised target)

• Afforestation of 1,000 ha of nonproductive land

Increased to 1,300 ha

• 1,263 ha afforested (97% of the revised target)

4. Project management

• Establishment and operation of a project management unit (PMU)

• PMU established; functioned as designed

Inputs

1. Consultant • 10 person-months of international consultant services

• 10.0 person-months of international consultants

• 46 person-months of national consultant services

• 58.1 person-months of national consultant services

2. Credit line • $20.5 million disbursed to smallholders and private estates through participating financial institutions

• $25.4 million disbursed

• A revolving fund using repayments is established by June 2000.

• Established in June 2006

CTC = crush-tear-curl, ha = hectare, NIPM = National Institute of Plantation Management, PFI = participating financial institution, PMU = project management unit, SLTB = Sri Lanka Tea Board, TEO = tea extension officer, TRI = Tea Research Institute, TSHDA = Tea Small Holdings Development Authority, VESP = voluntary early separation package. Source: Asian Development Bank.

Appendix 2 19

INSTITUTIONAL REFORMS

A. Introduction

1. The institutional reforms and strengthening component of the Tea Development Project aimed to enhance and support the expected benefits from the Project’s other investment components to improve tea productivity and infrastructure in tea smallholder areas. The expected outcome of this component was to rationalize the diverse demands for the cess funds, and maximize the share of the cess funds allocated for activities such as tea replanting. In line with the institutional reforms proposed at appraisal, the Project carried out a study to make specific recommendations on reform of the tea-related institutions (listed in para 3). The consultant commenced work in August 2003 and the draft final report was submitted in December 2003 (hereinafter, referred to as the 2003 study). The final report was submitted in March 2004, incorporating comments and feedback. 2. The analysis and recommendations for each institution covered (i) the legislative environment and changes required; (ii) assessment of mandates, functions and activities; (iii) organizational structure, staffing and voluntary early separation package (VESP); and (iv) financing, accountability and reporting. The key recommendations submitted in the report are as follows:

(i) Strengthen mandates of the tea-related organizations by narrowing their legally mandated functions, thereby avoiding duplication and overlap of organizational mandates.

(ii) Create a new statutory body to replace the cess committee, and include industry stakeholders as representatives. The cess committee would process applications based on assessment of the use of previously received funds and program effectiveness. The customs department would release funds directly to the receiving organizations.

(iii) Reform the organizational structures of the tea-related institutions. (iv) Improve the staff of the tea-related institutions by reducing staff numbers by 41%

through the VESP. (v) Give greater financial flexibility to the tea-related institutions so that they can

pursue commercial activities. They will be provided legislative exemptions from some provisions of the Finance Act. The cess committee will be given statutory powers to assess cess fund utilization.

(vi) Carry out a full-scale regulatory review of the tea industry. (vii) Strengthen the tea development societies to allow them to assume some of the

commercial functions of the Tea Small Holdings Development Authority (TSHDA). B. Reforms of Tea-Related Institutions

3. Four tea-related institutions were involved in the reforms exercise: TSHDA, the Sri Lanka Tea Board (SLTB), the Tea Research Institute (TRI), and the National Institute of Plantation Management (NIPM).

1. Tea Small Holdings Development Authority

4. TSHDA interfaces with about 400,000 mostly small-scale tea growers. The tea smallholders account for around 10% of the rural population of the country. The activities of TSHDA have long generated interest among politicians, with the Government showing a keen interest in its operations. TSHDA is funded from the tea cess that is collected from the

20 Appendix 2

producers. During project preparation in 1998, 63% of the cess funds allocated to TSHDA were used for administrative costs, mainly due to the large number of administrative staff (75% of total staff). A reduction in administrative staff numbers was needed to enable allocation of more staff to fieldwork and extension. The number of extension staff (118 officers in place in 1998) was seen as inadequate, and a substantial increase was recommended; such an increase was expected by the tea producers, who contribute (indirectly) to the cess funds. Staff cutbacks were also needed to reduce the number of field offices, which was considered excessive. 5. Prior to the implementation of the project-funded VESP, TSHDA had 661 staff. The consultants recommended 299 staff be eliminated, with 362 retained following the reforms. The recommended reduction in TSHDA staff numbers was only partially achieved: a total of 160 employees (54% of those slated for elimination) accepted the VESP, and another 25 employees (8%) were redeployed to other institutions. Most of the employees who accepted the VESP were from the clerical grades of the organization. The TSHDA head office saw this as meeting the objectives of the VESP, but the retirement of many support staff in the regional offices is said to have had an adverse effect on regional office operations, according to some TSHDA regional managers. 6. The 2003 study was conducted before the 2005 census of tea smallholdings. The 2005 census results indicated there was a significant increase in the number of smallholdings (from 207,000 in 1994 to 397,000 in 2005, a 92% increase). Based on the 2005 census figures, there are some 2,500 smallholders for every extension officer. This ratio serves as an approximate indicator of the efficiency of TSHDA’s extension coverage; the target ratio set by TSHDA is 1000 smallholders per extension officer. The number of field staff recommended in the 2003 study was based on the 1994 census result and is therefore far lower than the actual number needed, on the basis of the 2005 census results. 7. The 2003 study also recommended that TSHDA’s commercial nursery and fertilizer distribution operations be turned over to the tea smallholder development societies. This assumed that the capacity of the societies was sufficiently strengthened under the Project. However, the societies remain weak, due to late and partial implementation of the Project’s institutional strengthening activities. Similarly, the recommended delegation of other TSHDA activities to industry stakeholders did not take place, as stakeholder organizations in the tea industry are not prepared to assume a major facilitation role.

2. Sri Lanka Tea Board 8. The primary objective of SLTB is “the promotion by such measures as it thinks fit the development of the tea industry in Sri Lanka”. Over the years, in addition to promotional activities, SLTB has taken a strong regulatory role in all stages of the tea production cycle. The rationale at the project design stage for restructuring of SLTB was to transfer the responsibility for running SLTB from government institutions to private sector (industry) bodies. The Tea Commissioners Division (TCD) was seen to be involved primarily in monitoring the reasonable price formula at the field level. At the central level, TCD was involved in the regulation of tea factories, monitoring of exports and other regulatory activities. The design was intended to close TCD and transfer some of its functions to other institutions. 9. Despite the reform initiative, TCD continues to function as it did previously, and there is widespread belief that there is a continuing role for TCD in many aspects of the tea industry. The premise for the proposed closure of TCD was that the regulatory role could be taken over

Appendix 2 21

by the private sector stakeholders of the tea industry. However, these stakeholders still lack the cohesiveness, unity of purpose and technical capacity to undertake self regulation. 10. Under the VESP, 47 SLTB employees undertook voluntary retirement (76% of the 62 proposed retirements). However, the effectiveness of the streamlining through voluntary retirement was negated by later recruitment of more staff under the graduate employment scheme of the Government. SLTB also opened two new regional offices, mainly to support its monitoring and regulation of the tea factories. This was considered necessary, as the number of tea factories has increased rapidly. Engagement of new staff for these offices was restricted by the ceiling on staff numbers, but VESP implementation made it possible to recruit new staff. As a result, there was a net increase in SLTB total staff numbers. 11. During project implementation, SLTB legislation was amended to increase private sector representation on SLTB’s board. The board now comprises five government members, six private sector members and two trade union members.

3. Tea Research Institute

12. During project preparation, stakeholders in the tea industry expressed the view that TRI lacked a clear purpose, and had low staff motivation, due mainly to low salaries. The producers were poorly represented on the Tea Research Board (TRB), which governs TRI activities. Administrative costs were high, exceeding the amount spent on research by a factor of five. Several scientific positions remained vacant due to difficulties in attracting qualified scientists. The 2003 study made several recommendations to overcome these deficiencies: (i) elimination of the TRB as the governing body and transferring its powers to TRI; (ii) granting more autonomy to TRI, to allow it to undertake more commercially oriented activities. The proposals also included a VESP program. The consultant also prepared a draft revised TRI Act. 13. Some amendments were made to the existing legislation, although the previous governing structure (that includes the TRB) remains unchanged. The composition of the board was amended to include the director and 10 members comprising representatives of the Planters Association of Ceylon, Tea Smallholder Society Federation, and the Private Tea Factory Owners Association. Representatives of brokers and exporters were not included, against the recommendation of the 2003 study. Under the VESP, of the 28 positions slated for elimination, 10 employees (38%) accepted the voluntary retirement package.

4. National Institute of Plantation Management

14. NIPM was included in the institutional reforms exercise, although NIPM staff members are of the view that it is not a tea-related institution, as other plantation crops such as rubber and coconut are also included in the institute’s curricula. NIPM also does not receive cess funds. NIPM is the only training organization specializing in plantation sector training, and the leading provider of training to industry in Sri Lanka; it operates under government sponsorship and funding. 15. An attempt was made under the ADB-funded Plantation Reform Project35 to reorient NIPM to be an independent, self-financed training organization with overseas affiliation. This 35 ADB. 1995. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and

Technical Assistance Grant to the Democratic Socialist Republic of Sri Lanka for the Plantation Reform Project. Manila (Loan 1402-SRI [SF]). The loan was approved on 9 November 1995, became effective on 26 May 1996, and closed on 22 November 2004.

22 Appendix 2

was expected to adapt NIPM to meet the different needs of the staff and workers of the recently privatized state plantations. This was not successful, partly because of lack of support within the organization for any major change. 16. Under the institutional reforms component of the Project, the consultant recommended that a company be formed to take over the training, publications and consultancy functions of NIPM. The role of NIPM was redefined as that of enabling and guiding the activities of the company. Legislative amendments were drafted in line with the recommendations, and a VESP was proposed to reduce staff numbers. 17. NIPM proceeded with the recommended reform measures. A cabinet paper approved in 2004 enabled the institute to seek overseas partners for the proposed company. A valuation of NIPM property in Aturugiriya was undertaken to lease the property to a private entity. However, the entire process for business streamlining was reversed with a change of the government and related policies in 2005. On the other hand, under the VESP scheme, 35 staff (94% of the proposed target of 37 persons) took voluntary retirement, including the director, chief accountant and administrator of the institute. The number of training officers was reduced from nine to four. NIPM is now expected to perform its previous role with a vastly reduced staff, and claims to have lost market share to other institutes. 18. The composition of the governing board has been changed to four ex-officio members (directors of NIPM and the tea, rubber and coconut research institutes) and nine nominated members. The Planters Association of Ceylon, the Tea Smallholder Society Federation, the Private Tea Factory Owners Association and coconut interests are all now represented on the board. C. Reforms of the Cess Fund 1. Background 19. The tea cess is a form of export tax that is levied on the volume of tea exports in Sri Lanka, with the objective of using these funds to support the institutions that serve the tea industry, and to develop the industry through various means. The tea cess is collected from the exporters by the customs department. The applied rate of the cess has been SLRs4.0 per kilogram of tea exported since April 2006. From April 1997 to April 2006, the cess levy was lower (SLRs2.5 per kilogram). Since December 2003 the cess collected by the customs department has been remitted to the Treasury. Prior to this, the customs department remitted the fund to SLTB, which is statutorily empowered to administer the application of the cess funds. 20. The cess funds collected and received by SLTB are distributed to three institutions: SLTB, TRI (through TRB), and TSHDA. The funds are allocated to these institutions according to a ratio determined by the cess committee, members of which are appointed by the Minister of Plantation Industries. The committee membership comprises representatives of the Ministry of Finance and Planning and the receiving organizations, while the secretary of the Ministry of Plantation Industries serves as the chairperson. 2. Issues Related to the Cess Fund 21. The administration of the tea cess has raised several concerns among stakeholders in recent years. These are mainly rooted in the premise that the producers have “ownership” of the

Appendix 2 23

funds collected and that the ultimate benefit of the cess funds should accrue to the producers. These issues are briefly described below.

a. Use of Cess Funds 22. It is of concern to producers that much of the cess funds allocated to the three institutions are used for their administrative costs. In the view of the exporters, who pay the cess directly to the customs department, the receiving institutions are “overstaffed and largely unproductive” state organizations. Overall, the administrative costs of the three institutions appear to account for around 50% of the total cess funds collected (administrative costs account for an average of 65% of TSHDA’s budget, followed by SLTB [47%], and the combined TRB and TRI [40%]). TSHDA reduced administrative costs to 44% in 2004, but stated that this would be quickly negated by mandatory salary increases for public servants. 23. Of the development activities undertaken by the three institutions, the largest expenditure is subsidy payments made by TSHDA to smallholders for replanting, new planting and infilling. This is followed by research expenditures by TRI, and the promotional activities of SLTB. Producer interests agree that these activities are necessary uses of cess funds, but also raised a concern about the use of cess funds for seemingly politically driven programs, rather than using the funds for the real objective—that is “enhancing productivity, promoting Sri Lankan-owned brands, stimulating value-added exports, facilitating food hygiene initiatives and supplementing research and analysis”.

b. Allocation of Cess Funds 24. The standard allocation of cess funds among the three organizations is 40% for SLTB, 30% for TRB and TRI, and 30% for TSHDA, but this varies every year. In 2005, the allocation was 35% for SLTB, 25% for TRB and TRI, and 40% for TSHDA. The cess committee meets at irregular intervals to address requests for additional funds, with total requests for funds usually exceeding the amount collected. The timing of the allocation decision is awkward, with the respective institutions informed of their allocations in January, after their annual budgets are finalized and approved. 25. The present method of allocation of cess funds, through the cess committee, is also criticized by industry representatives as being ad hoc, lacking transparency and not having adequate representation from the industry. The committee is composed solely of government representatives at present, even though the cess funds are collected from the producers. Industry representatives cite the cess administration in other sectors, such as in rubber and coconut, where the cess administration mechanism has adequate representation from the industry.

c. Delays in Receipt of Funds 26. Until 2003, the cess funds collected by the customs department were remitted to SLTB. The funds are currently sent to the Treasury, which is then required to remit the funds to SLTB for onward transmission to the three recipient institutions. Industry stakeholders as well as the receiving institutions report that the funds that are due are not transferred in a timely manner. SLTB reported that although its annual allocation in 2006 was SLRs340 million, only SLRs20 million was received monthly. TSHDA also reported a shortfall in its 2005 allocation amounting to SLRs60 million (this was received only in 2006), while release of the 2006

24 Appendix 2

allocation has a large shortfall. The Ceylon Tea Traders Association (CTTA) reported that SLRs280 million in cess funds were withheld in 2006 and not transferred to the three institutions. 3. Project Interventions to the Cess Fund 27. The operational, legal and institutional aspects of the tea cess funds were reviewed under the study. The main observations of the consultants were:

(i) There are discrepancies between the amount that can be claimed by SLTB and the actual amounts received. The flow of the funds has been irregular and the cess-funded institutions face cash flow difficulties.

(ii) Industry stakeholders were concerned about the lack of transparency in cess fund collection, disbursement and expenditure.

28. The consultant proposed a new method of allocation, with a new statutory body created to replace the current cess committee. The new body would provide sufficient representation to industry stakeholders, and provide adequate opportunity for the institutions to prepare and submit their annual budgets prior to allocation. The consultants prepared a draft cess act in line with their recommendations. However, the draft act was not approved at the cabinet subcommittee level, after which this initiative was discontinued. D. Conclusions

29. Overall, the institutional reforms and strengthening component of the Project is assessed “partly successful”, primarily because of a lack of consistent ownership of the reforms by the Government and respective institutions. The component was designed based on a strategy of introducing flexibility, greater private sector participation and more efficient operation of the tea-related institutions. These objectives were achieved to a certain extent, albeit with some exceptions. Amendments to legislation resulted in better representation on the boards of the institutions, with the exceptions of TSHDA and the cess allocation process, where the amendments are still pending or were not approved. 30. Streamlining the tea-related institutions to reduce their heavy administrative costs through the voluntary retirement scheme was partly achieved, with the exception of SLTB, where the effect of the voluntary retirement was negated by recruitment of new staff. In NIPM, the scheme was implemented without outsourcing its training and other services, which made it impossible for NIPM to continue to provide the same level of services. While this was due to the Government’s policy change and outside the responsibility of NIPM, this provides a lesson: successful institutional reforms require consistent government policy.

Appendix 3 25

PROJECT COST ($ million)

Appraisal Estimate Actual

Component Total Cost

Total Cost FX LC FX LC

A. Institutional Reform and Strengthening

1. Institutional Reforms 0.000 2.800 2.800 0.000 1.650 1.650 2. Strengthening TSHDA Extension

Service 0.200 0.400 0.600 0.062 0.253 0.315 3. Strengthening of Ratnapura

Research Station 1.100 1.100 2.200 0.808 1.310 1.840 4. Strengthening of Societies and

Associations 0.000 0.600 0.600 0.007 0.200 0.200 5. Training 0.100 0.700 0.800 0.000 0.900 0.900 Subtotal 1.400 5.600 7.000 0.877 4.350 4.950

B. Tea Development Component 1. Subprojects 11.000 20.500 31.500 13.274 25.100 38.900 2. Cess-financed Activities 5.800 29.500 35.300 1.299 17.300 17.300 Subtotal 16.800 50.000 66.800 14.573 42.400 56.300

C. Social Infrastructure and Afforestation

1. Rehabilitation of Workers' Housing and Sanitary Facilities 0.900 1.500 2.400 0.347 2.300 2.700

2. Improvement of Feeder Roads 0.700 1.700 2.400 0.710 2.700 3.600 3. Afforestation Program 0.000 0.900 0.900 0.000 0.900 0.900 Subtotal 1.600 4.100 5.700 1.057 5.900 7.200

D. Project Management and Implementation

1. Project Management and Implementation Unit 0.100 0.600 0.700 0.254 0.900 1.100

2. Consultancy Input 0.300 0.300 0.600 0.356 0.200 0.600 Subtotal 0.400 0.900 1.300 0.610 1.100 1.700 Total Base Cost 20.200 60.600 80.800 17.117 53.700 70.100 Physical Contingencies 1.000 3.100 4.100 0.000 0.000 0.000 Price Contingencies 2.000 6.100 8.100 0.000 0.000 0.000 Service Charge 0.800 0.000 0.800 0.853 0.000 0.900 Grand Total 24.000 69.800 93.800 17.970 53.700 71.000

FX = foreign exchange, LC = local currency. Source: Asian Development Bank estimates.

26 Appendix 4

ANNUAL LOAN DISBURSEMENTS ($)

No. Category Name 1999 2000 2001 2002

1 Credit 1,109,864 3,368,597 4,682,694 5,291,133

2 Civil Work 383,738 33,516 232,225 703,111

3 Equipment 7,802 14,512 14,472 11,980

4 Vehicles 41,202 132,335 0 2,920

5 Afforestation 0 6,571 0 58,216

6 Training 47,250 11,956 33,235 95,162

7 Project Management 62,109 47,368 52,306 146,604

8 Consulting Services 17,164 69,441 39,784 19,598

9 Institutional Reforms 0 0 0 0

10 Service Charge 2,376 19,319 57,461 112,978

Total 1,671,505 3,703,615 5,112,177 6,441,702

No. Category Name 2003 2004 2005 2006 Total

1 Credit 4,472,656 2,542,971 3,919,542 25,656 25,413,113

2 Civil Work 544,085 1,533,286 749,526 30,932 4,210,419

3 Equipment 10,102 9,498 6,921 0 75,287

4 Vehicles 30,199 0 0 0 206,656

5 Afforestation 54,307 136,825 131,029 3,190 390,138

6 Training 119,086 230,042 71,695 0 608,426

7 Project Management 67,717 122,860 161,846 7,849 668,659

8 Consulting Services 85,074 219,701 13,346 23,471 487,579

9 Institutional Reforms 0 0 1,319,676 0 1,319,676

10 Service Charge 184,877 252,907 223,419 0 853,337

Total 5,568,103 5,048,090 6,597,000 91,098 34,233,290 Source: Asian Development Bank estimates.

.

1. Ina.

b.

c.

d.

e.

2. Deva.

3. Soca.

b.

c.

4. Proja.

b.

Year

Components/Activities Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

stitutional Reform and StrengtheningInstitutional Reforms

Strengthening of TSHDA

Strengthening of TRI Ratnapura Research Station

Strengthening of Societies and Association

Training

elopment ComponentCredit and cess disbursement

ial Infrastructure and AfforestationImprovement of Workers' Housing and Sanitary Facilities

Improvement of Feeder Roads

Afforestation Program

ect Management and ImplementationProject Management and Implementation Unit

Consultancy Input

- - - - - - - - - - - - - - - - - - - -

- Appraisal - Actual

1 2 3 4 5 62005200420032002200120001999

Benchmark socioeconomic survey during first year of implementation. monitoring throughout Project period

PMU started operations in May 1999.

Cess financing commenced in Jul 99.

Credit activities commenced in Aug 99.

Benchmark survey

Factory Rationalization

Afforestation

Institutional Reforms

Baseline

Appendix 5 27TRI = Tea Research Institute, TSHDA = Tea Small Holdings Development Authority.

PROJECT IMPLEMENTATION SCHEDULE

Source: Asian Development Bank.

28 Appendix 6

FINANCIAL AND ECONOMIC ANALYSIS A. Introduction 1. This appendix provides the results and conclusions of the post-project financial and economic analysis of the Tea Development Project. The analysis has two main objectives: (i) to compare the actual performance of the Project, as measured by the financial and economic rates of return, with the corresponding projections at the time of the loan appraisal (in 1998); and (ii) to measure the efficiency of the project, using the economic internal rate of return (EIRR) as the main indicator. The main benchmarks against which the actual project results are compared are the project indicators shown in the project appraisal report (October 1998). B. Key Assumptions and Data Sources 2. The Project was implemented from 2000 to 2005. The financial analysis utilizes constant 1998 prices for costs and benefits (the same prices were used for the appraisal). Consumer price indexes are used to convert current prices to constant 1998 prices. The price projections for tea are based on the World Bank commodity price forecasts (real prices) dated May 2006. The appraisal was based on the World Bank commodity price forecasts (real prices) of February 1998. 3. The main sources used to obtain actual project-related data for the analysis are (i) the project completion report (PCR) prepared by the project management unit (PMU) in 2005 and (ii) the final impact assessment surveys conducted by the PMU in 2005. The former was used to obtain actual project performance data (e.g., achievement of project activities), while the latter was used to obtain economic data (such as costs and prices) for use in the analysis. C. Project Components 4. Some of the assumptions made at appraisal were not valid at project implementation. In some cases actual project achievements varied significantly from the appraisal assumptions. A brief comparison of each component—as assumed at appraisal and achieved at the end of the Project—is provided below.

1. Replanting 5. The Project included a component for the replanting of tea, since the tea bush has a limited effective life span of around 25 years, after which yields decline and become unprofitable. Smallholders receive no income during the replanting period, which lasts from 4–5 years, depending on the elevation. The appraisal was based on replanting 7,800 hectares (ha) in tea, with replanting spread evenly over the project period. The project completion report (PCR) analysis is based on the actual area replanted, as reported by the project beneficiaries. Since the data for all elevations was combined when reported to the PMU, the actual ratio of high and middle elevation areas versus low elevation smallholdings was used to allocate the areas replanted. The appraisal was based on the assumption that only 10% of the land in the low elevations would require soil rehabilitation. In practice, all land scheduled for replanting required soil rehabilitation during project implementation. This is assumed in the PCR analysis and is reflected in the costs.

Appendix 6 29

Table A6.1: Area Replanted in Tea Under the Project (ha) Item 2000 2001 2002 2003 2004 2005 Total All Elevations (100%) 724.6 1,129.2 888.0 863.7 503.5 292.0 4,401.0Low Elevations (69%) 500.0 779.1 612.7 596.0 347.4 201.5 3,036.7High & Middle Elevations (31%) 224.6 350.1 275.3 267.7 156.1 90.5 1,364.3

Source: Project management unit; project completion review mission estimates. 6. The low elevation replanted areas commenced production after 4 years, while the high and middle elevation areas produce a harvest after 5 years. The tea plants were assumed to follow their respective yield curves with varying yields every year. The financial and economic analysis is carried out on an incremental basis, where a without-project cash flow quantifies costs and benefits if replanting does not take place, while a with-project scenario produces a cash flow with replanting. The internal rate of return is calculated on the incremental cash flow that results. The unit investment cost per hectare of replanting is based on the actual experience of beneficiaries as reported to the PMU, deflated to constant 1998 prices. The appraisal was based on a theoretical farm model, with costs reflecting the prevailing levels in 1998.

2. Tea Infilling 7. Infilling—planting tea plants in vacant areas in a tea field—can be considered a form of replanting for economic and financial evaluation. Five per cent of the total replanted area is assumed to have undergone infilling. The investment costs, yields, costs and benefits are based on the unit values utilized in the replanting evaluation.

3. Factory Rehabilitation 8. The Project disbursed a cumulative total of SLRs1,229 million for the rehabilitation and modernization of private tea factories.

Table A6.2: Factories Rehabilitated and Modernized Under the Project Item 2000 2001 2002 2003 2004 2005 TotalNumber of Beneficiary Factories 47 69 26 19 19 5 185Total Subloan Amount (SLRs million) 271 412 185 127 140 92 1,227

Source: Project management unit. 9. The factory rehabilitation component was evaluated based on a sample of 16 factories that benefited from the Project. The cost and benefit data were collected under the evaluation program of the PMU, at commencement, at the midpoint, and at project completion. The investment costs are the actual values reported by the factories for the 6-year period and allocated over the period. The tea sales prices—termed the net sales average and the unit cost of production—are also sourced to the sample factories. The factory rehabilitation component is also evaluated using the incremental cash flow methodology. The approach differs from the one used at appraisal, where investments were assumed to include new crush-tear-curl (CTC) factories in addition to rehabilitation and modernization of orthodox tea factories.

30 Appendix 6

4. Commercial Nurseries 10. The Project also provided financial assistance for the establishment of tea nurseries. The PCR evaluation of the nurseries utilized actual nursery operation data (e.g., actual investment, number of nurseries established, and the number of plants per nursery). An evaluation was conducted of 544 nurseries with an average capacity of 46,000 plants per year, which was the actual record during project implementation. In contrast, the appraisal was based on a total of 455 nurseries with an average capacity of 49,726 plants per year. D. Project Benefits 11. The Project was designed to generate a wide range of quantifiable and nonquantifiable benefits to tea smallholders and other stakeholders in the industry. The key quantifiable benefits include incremental increases in green leaf production by tea smallholders as a result of project-supported replanting and infilling and the availability of quality planting material. The private tea factories were able to obtain higher prices by investing in modern machinery and expanding their productive capacity. 12. The Project also included several components that had nonquantifiable benefits. A total of 5,705 worker housing units were rehabilitated with project assistance. Other components that contributed to the improvement of the tea smallholder sector were the rehabilitation of rural roads, the afforestation of neglected tea land, the strengthening of tea extension services, and training of tea smallholders to improve their productivity. E. Results of Financial and Economic Analysis 13. All cash flows are first derived using financial prices. For economic analysis, the cash flows are converted to economic prices. The analysis uses the foreign exchange numeraire, where economic prices are expressed at border prices. Non-traded items are converted to border prices by means of a conversion factor. A standard conversion factor (SCF) of 0.9 is used in the analysis. To eliminate market distortions in the economic analysis, transfer payments such as taxes, duties and subsidies are removed from the financial prices in order to derive the economic prices. Tea smallholders pay market wage rates for workers, hence the actual wage rates are considered to represent the economic price of labor.

Table A6.3: Key Values in Financial Prices (Estimated at Appraisal and Actual) Item Project Year 1 Project Year 5

Appraisal Price of tea (SLRs/kg) 125.46 153.91Actual 131.87 157.42Appraisal Total production cost at low

elevation (SLRs/kg) 105.75 105.75

Actual 127.42 120.31Appraisal Investment cost for replanting at

low elevation (SLRs/ha) 17,425 0

Actual 205,539.00 0Appraisal Low elevation replanted area (ha) 1,305.00 1,305.00Actual 500.00 347.00Appraisal Factory rehabilitation investment

cost (SLRs million) - 174.00

Actual 51.00 51.00ha = hectare, kg = kilogram.

Appendix 6 31

Source: Project management unit; consultant’s report of the Second Smallholder Tea Development Project.

14. The following table summarizes the results of the financial and economic analyses at appraisal and at project completion. The green tea handling activities are not evaluated, as those financed by the project credit line had a negligible share of the entire lending portfolio.

Table A6.4: Financial and Economic Internal Rates of Returns of the Project (%)

At Appraisal At Project Completion Activity

Financial Economic Financial EconomicReplanting at middle and high elevation 9 14 8 12Replanting at low elevation 14 19 18 19Tea infilling 11 16 25 32Factory rehabilitation 20 21 19 28Commercial nurseries 28 30 24 25Green leaf handling 36 40 – –Overall Project – 18 – 18Source: ADB. 1998. Report and Recommendation of the President to the Board of Directors on a Proposed

Loan to the Democratic Socialist Republic of Sri Lanka for the Tea Development Project. Manila. 15. As shown in the above table, the actual EIRRs for infilling and factory rehabilitation are higher than at appraisal, while those for middle and high elevation replanting and commercial nurseries are lower. The lower EIRR for replanting of tea is attributable to (i) the higher than estimated costs of investment and production in real terms, and (ii) the size of the replanted area, which was smaller than planned at appraisal. The EIRR for the overall project is 18%, which is identical to the estimate at appraisal.

32 Appendix 7

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Reference in Loan Agreement Schedule Status Covenants

Project Execution

The goods, services and other items of expenditure to be financed out of the proceeds of the Loan and the allocation of amounts of the Loan among different categories of such goods, services and other items of expenditure shall be in accordance with the provisions of Schedule 3 to this Loan Agreement, as such Schedule may be amended from time to time by agreement between the Borrower and the Bank.

Section 3.02 During project implementation

Complied with.

Establishment of a Project Steering Committee to be chaired by the Secretary of the Ministry of Plantation Industries (MPI).

Schedule 6, Loan Agreement (LA), para. 2

September 1999

Complied with in a timely manner

The Project Management Unit (PMU), established by MPI, shall be responsible for overall project implementation of the noncredit components (i.e., institutional reforms and strengthening, social infrastructure and afforestation).

Schedule 6, LA, para. 3

During project implementation

Complied with

The Rural Credit Department (RCD) of the Central Bank of Sri Lanka (CBSL) shall be responsible for executing the credit component and supervision of the participating financing institutions (PFIs).

Schedule 6, LA, para. 4

During project implementation

Complied with

The PFIs, under the supervision of RCD shall be the implementing agencies for the credit component.

Schedule 6, LA, para. 5

During project implementation

Complied with

The Tea Small Holdings Development Authority (TSHDA) shall be responsible for: (i) providing extension services to smallholders; (ii) receiving and processing requests for replanting and infilling rebates; (iii) inspection and approval for replanting and infilling; (iv) disbursement of cess for replanting and infilling; (v) promotion of the credit scheme; and (vi) monitoring the reasonable price formula for green leaf.

Schedule 6, LA, para. 6

During project implementation

Complied with

Appendix 7 33

Reference in Loan Agreement Schedule Status Covenants

Schedule 6, LA, para. 7

During project implementation

Complied with; to achieve the Project’s target for mother bush, it was decided to carry out the program in some TSHDA sites and in private tea estates and factories.

The Tea Research Institute (TRI) shall be responsible for: (i) adaptive and collaborative research relevant to the tea smallholder sector; (ii) establishment of mother bushes; (iii) carrying out inspection, approval and certification of commercial nurseries; (iv) provision of advisory services to private estates and tea smallholders; and (v) training of the tea extension officers (TEOs) and staff of tea factories and estates in conjunction with the National Institute of Plantation Management (NIPM) and TSHDA.

Except as the bank may otherwise agree, the Borrower shall cause CBSL to ensure that the PFIs satisfy the following criteria for initial designation and continuing participation.

Schedule 6, LA, para. 8

During project implementation

Complied with.

Subsidiary Loan Agreements. (a) Except as the Borrower and the bank shall otherwise agree, the Subsidiary Loan Agreements to be entered into between CBSL, on behalf of the Borrower, and each of the PFIs shall include the terms and conditions in accordance with this Schedule. (b) The Borrower (through CBSL) shall furnish the Bank with a copy of each Subsidiary Loan Agreement entered into by CBSL with the PFI concerned upon execution of each such agreement.

Schedule 6, LA, para. 9

During project implementation

Complied with.

Relending Terms. (a) The proceeds of the Loan allocated to the Credit Component shall be relent to each PFI on a first-come-first served basis, and subject to the terms and conditions of the relevant Subsidiary Loan Agreement.

Schedule 6, LA, para. 10

During project implementation

Complied with.

The terms for relending the relevant proceeds of the Loan to each PFI under the Subsidiary Loan Agreement shall include the following, and shall be subject to the provisions of paragraph 20 (b) of this Schedule; (i) replanting and infilling, (ii) factory rehabilitation, transport vehicles, greenleaf handling and nursery operation, and (iii) foreign exchange risk shall be borne by the Borrower.

Schedule 6, LA, para. 11

During project implementation

Complied with.

34 Appendix 7

Reference in Loan Agreement Schedule Status Covenants

Loan amounts relent to the PFIs (including amounts arising from Subloan repayments) shall be used only for making Subloans to eligible Subborrowers and to eligible Subprojects, to finance the reasonable foreign exchange and local currency cost of goods and services required for Subprojects.

Schedule 6, LA, para. 12

During project implementation

Complied with.

Schedule 6, para. 13

During project implementation

Complied with. Subborrowers. Each PFI shall ensure that any Subborrower to be eligible for a Subloan (i) is an individual, group of individuals, registered company, or registered tea smallholder cooperative owning a Smallholding or a Private estate; (ii) has no default or defaults on any previous loan from a formal financial institution, (iii) agrees to make an equity contribution of at least 25% of the Subproject cost; (iv) is able to provide collateral acceptable to the PFI, and (v) is able to demonstrate capacity to effect repayment.

Schedule 6, para. 14

During project implementation

Complied with. Subprojects. Each PFI shall ensure that the following criteria are satisfied as an eligible Subproejct: (i) the Subproject is included in the scope of the Credit Component, (ii) the financial internal rate of return (FIRR) is higher than the onlending interest rate in real terms, (iii) be certified as having met the environmental guidelines and requirements by the Central Environment Authority and the Bank’s applicable environmental guidelines published from time to time and (iv) the economic internal rate of return (EIRR) is at least 10%.

Schedule 6, para. 15

During project implementation

Complied with. The financing package for Subprojects for each Subborrower shall be as follows: (a) up to an average of 65% of the estimated Subproject costs may be financed out of the Loan (and made available through the Subloan); and (b) remainder percentage of the estimated Subproject costs shall be provided by (i) the PFI out of its own resources of at least up to 10% (and made available through the Subloan) and (ii) the Subborrower as equity in cash or in kind of at least 25%.

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Reference in Loan Agreement Schedule Status Covenants

Schedule 6, para. 16

During project implementation

Complied with. Subloans. (a) The amount of an individual Subloan shall not be more than the equivalent of $ 300,000. (b) Subloans in excess of $ 100,000 equivalent shall be referred by the concerned PFI to the CBSL for review and reference to the Bank for prior approval. (c) Each Subloan shall be made on terms whereby the PFI concerned shall obtain, under a written Subloan agreement with the Subborrower in form acceptable to the Bank, rights adequate to protect the interests of the Borrower, the Bank and the PFI. (d) Without limiting the generality of paragraph (a) above and in addition to any other provisions which may be required to ensure enforcement of the terms of the Subsidiary Loan Agreement and which a prudent lender would require, and subject to the provisions of paragraph 20(b) of this Schedule, each Subloan agreement shall include additional provisions. (See Loan Agreement for full details) Each PFI shall promptly and effectively exercise its rights under each Subloan agreements in accordance with the standards of a prudent lender and in such manner as to protect the interests of the Bank, the Borrower and the PFI.

Schedule 6, LA, para. 17

During project implementation

Complied with.

Schedule 6, LA, para. 18

During project implementation

Complied with. Withdrawals of Loan Proceeds for Subloans. (a) Each PFI, in requesting a withdrawal of Loan proceeds for a subloan, shall submit a withdrawal application to CBSL in form and substance satisfactory to the Bank and CBSL. (b) CBSL shall make disbursements from the Imprest Account only in respect of Subloan withdrawal applications corresponding to Subprojects which (i) have been proposed by an eligible Subborrower for an eligible Subproject; and (ii) have been processed in full compliance with the applicable provisions of this Schedule. (c) Any amount disbursed by CBSL from the Imprest Account shall be deemed to have been relent to the relevant PFI under the relevant Subsidiary Loan Agrement and onlent to the relevant Subbrorower under the relevant Subloan agreement.

36 Appendix 7

Reference in Loan Agreement Schedule Status Covenants

(a) The Government shall contribute 20% of the cost of the voluntary early separation package (VESP).

Schedule 6, LA, para. 19

During project implementation

Partly complied with;

(a) The Government contributed 20% of the cost of the VESP;

(b) In case of increase in the staff of the tea-related institutions (other than the increase of TEOs of the TSHDA) under the right-sizing of tea-related institutions, the Government shall bear the costs of such increase.

(b) less staff and staff of different levels than planned took the VESP;

(c) The allocation of costs on account of increase in the number of TEOs in TSHDA shall be in line with Schedule 3 (allocation and withdrawal of loan proceeds) of the Loan Agreement.

(c) after the VESP, the institutions hired new staff.

(a) The Government to complete legislative reforms (amendments to existing legislation or new enabling legislation for purpose of achieving institutional reforms).

Schedule 6, LA, para 21

June 2000 Partly complied with;

(b) The Government to complete rationalization of administrative expenses of TSHDA, NIPM, and TRI.

June 2000

the Cess Act was submitted to the cabinet but rejected by a cabinet subcommittee.

(c) The Government to complete right sizing of staff of TSHDA, TRI, and the Sri Lanka Tea Board (SLTB) through the VESP and/or other appropriate measures.

June 2000

(d) The Government to complete reconstituting the boards of the tea-related institutions with appropriate private sector representation.

December 2000

Amendments to existing legislation were made to enable more private sector representation on the boards of tea-related institutions.

(e) The Government to complete restructuring and reorganizing the tea-related institutions.

Right-sizing of staff, restructuring and reorganization of tea-related institutions was partly carried out with 262 staff availing of the VESP. However, this was not fully completed due to a reversal of Government policy.

June 2001

(f) The Government to implement the cess reallocations as follows: (i) 34% - research; (ii) 36% - tea smallholder development, and (iii) 30% - promotion and programs implemented by SLTB. Provided that the Bank shall be entitled to review with the Government, on an annual basis, the cess reallocation for the purposes of the Project and such revisions shall be carried out and maintained by the Government throughout project implementation.

January 1999 Partly complied with; the agreed cess allocation was revised and implemented from 1 January 1999. However, the cess allocation has been continuously revised during project

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Reference in Loan Agreement Schedule Status Covenants

implementation, without informing ADB. The cess allocation for 2005 was as follows: (i) 26% for research; (ii) 39.5% for tea smallholder development; and (iii) 34.5% for promotions and programs by the SLTB. Reallocation to research was not done.

Schedule 6, LA, para. 22

During project implementation

Complied with. PMU to provide (i) leadership training to tea smallholders development societies through the Federation, (ii) training on accounting and administration practices to tea smallholders development societies through the Federation, (iii) office facilities and equipment to the Federation, and (iv) training and technical support to producer associations to be identified by the Government.

Schedule 6, LA, para. 23

During project implementation

Complied with; the Private Tea Factory Owners’ Association also conducted technical training for officers and staff of factories. Training on strengthening of societies was also provided.

TSHDA, TRI and NIPM to provide training to TEOs of TSHDA on tea cultivation practices and promotion of credit facilities. TRI and the TEOs to provide training to tea smallholders on tea replanting, infilling, and cultivation practices. NIPM and TRI to provide training to tea factory staff on tea processing and provision of agricultural extension services to smallholders. Staff of PFIs to be provided with training on (i) appraisal of agricultural loan applications, and (ii) rural credit outreach and sustainability. The Government shall not finance parallel concessionary credit schemes for commercial activities undertaken under the Project.

Schedule 6, LA, para. 24

During project implementation

Complied with; in August 2000, the Government appropriated funds for the Tea Shakthi Fund, which utilized the funds to acquire and operate tea factories among others. The Government has ceased providing funds to the Tea

38 Appendix 7

Reference in Loan Agreement Schedule Status Covenants

Shakthi Fund at the beginning of 2002.

TSHDA's TEOs to be responsible for providing tea extension services on tea cultivation practices to tea smallholders. A separate division of TSHDA shall provide social welfare activities other than the tea extension services.

Schedule 6, LA, para. 25

During project implementation

48 new TEOs were appointed during project implementation.

Cess rebates for replanting and infilling to be available to all tea smallholders regardless of their affiliation with tea smallholder development societies.

Schedule 6, LA, para. 26

During project implementation

Complied with

(a) PMU to carry out monitoring and evaluation of Project benefits in coordination with the PFIs, TSHDA and TRI.

Schedule 6, LA, para. 28

During project implementation

Complied with

(b) PMU to conduct benchmark socioeconomic survey.

During first year of project implementation

Complied with; the baseline survey was completed in July 2000.

(c) PMU to carry out an impact evaluation study.

3 months after project completion

Complied with; the final impact assessment survey was undertaken in September–October 2005.

The Government, CBSL and the Bank to carry out a comprehensive midterm review on all aspects of the Project.

Schedule 6, LA, para 29

During the third year of project implementation

Complied with; midterm review conducted on 2–19 September 2002.

The Government to enable the Bank to monitor and review the progress and effective implementation of the institutional reforms in accordance with the policy matrix.

Schedule 6, LA, para 30

During project implementation

Complied with

The Government to amend para. 37, Schedule 6 of the LA for the Plantation Reform Project (Loan No. 1402-SRI[SF]) to the effect that the Government shall carry out the reconstitution of the Boards of Governors of the Tea Research Board, Rubber Research Institute, Coconut Research Institute, Sri Lanka Tea Board, and NIPM.

Schedule 6, LA, para. 31

30 June 2000 Complied with delay; the bill to reconstitute the boards of SLTB and TSHDA was submitted to parliament on 25 July 2003. The bill to reconstitute the boards of the Coconut Research

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Reference in Loan Agreement Schedule Status Covenants

Board and Rubber Research Board was approved by parliament on 28 August 2003.

CBSL to establish a revolving fund to credit the interest payments and principle repayments by PFIs under the Project.

Section 3.16, Article III, Project Agreement (PA)

June 2000 Complied with delay; revolving fund was approved in June 2006. As of the project completion review mission, there had been 7 loans approved, 211 registered applications, and SLRs 10 million disbursed.

Particular Covenants

The Borrower to (i) cause MPI and CBSL to maintain separate accounts for their respective components of the Project, and (ii) furnish to the Bank certified copies of audited accounts and financial statement and the auditor's report relating thereto.

Section 4.06 (b), Article IV, LA

Submission of audited accounts and reports due after 12 months of the related fiscal year

Complied with in each year between 1999 and 2004; auditor’s report for 2005 has been submitted to ADB on 17 December 2007.

MPI, in coordination with PMU, CBSL, TSHDA and TRI, to furnish to the Bank a Project Completion Report.

Section 4.13 3 months after project completion

Complied with

CBSL to furnish the PMU (for submission to the Bank) with quarterly reports on the execution of the Project and on the operation and management of CBSL and the PFIs relating to the Project.

Section 3.08 (b), Article III, PA

1 month after the related quarter

Complied with

CBSL to furnish the Bank certified copies of audited accounts and financial statements and the auditor's report relating thereto.

Section 3.09 (a), Article III, PA

12 months after the related fiscal year

Complied with in each year between 1999 and 2004. However, auditor’s report for 2005 has not been submitted to ADB as of 30 June 2007.

ADB = Asian Development Bank, CBSL = Central Bank of Sri Lanka, LA = loan agreement, MPI = Ministry of Plantation Industry, NIPM = National Institute of Plantation Management, PFI = participating financial institution, PMU = project management unit, RCD = Rural Credit Department, STC = State Timber Corporation, SLTB = Sri Lanka Tea Board, TA = technical assistance, TEO = tea extension officer, TRI = Tea Research Institute, TSHDA = Tea Small Holdings Development Authority, VESP = voluntary early separation package. Source: Project completion review mission.