Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 51494-LK

EMERGENCY PROJECT PAPER

ON A

PROPOSED ADDITIONAL FINANCING CREDIT

IN THE AMOUNT OF SDR 7.6 MILLION (US$12 MILLION EQUIVALENT)

TO THE

DEMOCRATIC SOCIALIST REPUBLIC OF S R I LANKA

FOR A

COMMUNITY LIVELIHOODS IN CONFLICT AFFECTED AREAS PROJECT

DECEMBER 2,2009

Sustainable Development Department Agriculture and Rural Development Unit South Asia Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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CAS CBO CDD COM D A

DFT DPMU ISDS EHRP

ENREP ESMF

F M FMIS

FR GA GAAC

GNDs GoSL

CURRENCY EQUIVALENTS (Exchange Rate Effective October 3 1, 2009)

Currency Unit = Sr i Lankan Rupee SLR115 = US$1

US$ = SDR 1.58

FISCAL YEAR January 1 - December 3 1

ABBREVIATIONS AND ACRONYMS

Country Assistance Strategy Community Based Organization Community Driven Development Community Operational Manual Designated Account

District Facilitation Team District Project Management Unit Integrated Safeguards Data Sheet North East Housing Reconstruction Project Emergency Northern Recovery Project Environmental and Social Management Framework Financial Management Financial Management Information Systems Financial Reports Government Agent Governance and Accountability Action Plan Gram Niladhari Divisions Government o f Sr i Lanka

IBRD

IDA IDP M C

M&E MNB

NEIAP NEERP

NEHRP O&M PAPS PC PPCC

PPMU PS VDP

International Bank for Reconstruction and Development International Development Association Internally Displaced People Mahinda Chintana (1 0-year Development Framework) Monitoring and Evaluation Ministry o f Nation Building (short name for Ministry o f Nation Building and Estate Infrastructure Development) North-East Irrigated Agriculture Project North-East Emergency Reconstruction Project North-East Housing Reconstruction Project Operations and Maintenance Project Affected People Provincial Council Provincial Planning and Coordination Committee Provincial Project Management Unit Pradeshiya Sabha Village Development Plan

Vice President: Isabel Guerrero Country Director: Naoko Ishii

Sector Directorhlanager Task Team LeaderKO-Team Leader:

John Henry SteidSimeon Ehui Barbara Verardo/Seenithambv Manoharan

.. 11

FOR OFFICIAL USE ONLY

TABLE OF CONTENTS

Page

PROJECT PAPER DATA SHEET

A. INTRODUCTION .................................................................................................. 1

B. BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING IN

THE AMOUNT OF US$12 MILLION .................................................................. 2

CONSISTENCY WITH CAS ............................................................................... 10 C.

D. APPRAISAL OF SCALED-UP PROJECT ACTIVITIES ................................... 1 i

E. EXPECTED OUTCOMES ................................................................................... 14

F. BENEFITS AND RISKS ...................................................................................... 15

G. FINANCIAL TERMS AND CONDITIONS FOR THE ADDITIONAL

FINANCING ......................................................................................................... 17

H. LESSONS FROM EXPERIENCE ....................................................................... 18

ANNEX 1: ECONOMIC AND FINANCIAL ANALYSIS ............................................ 19

ANNEX 2: REVISED RESULTS FRAMEWORK ......................................................... 24

ANNEX 3: CONFLICT AND RECONCILIATION FILTER ........................................ 28

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

... 111

Country: Sr i Lanka Verardo/Seenithamby Manoharan

SteidSimeon Ehui Project ID: P119152

Borrower: Democratic Socialist Republic o f Sri Lanka

o Y e s X N o

conflict-affected communities in the Northern Province to restore livelihoods and enhance agricultural and other production and incomes and build capacity for sustainable social and economic integration.

For LoandCreditdGrants: Total Bank financing: US$12 mi l l ion

i V

B. BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING IN THE AMOUNT OF US$12 MILLION

5. Since 1998, GOSL has been implementing rehabilitation projects in the conflict-affected areas (North, East and bordering districts) o f the country. The First North-East Irrigated Agriculture Project (NEIAP) was approved by the Board on November 04, 1999 for an amount o f US$27 million. NEIAP focused on helping conflict affected communities to reestablish at least a subsistence level o f production and basic community services. The Second Northeast Irrigated Agriculture Project (NEIAP 11) approved by the Board on M a y 25, 2004, and declared effective on October 12, 2004 (IDA Credit o f SDR44.6 million, equivalent to about US$64.7 million) added a focus on community development which became increasingly important over the l i f e o f the project.

OriPinal Proiect Obiectives, Design and Status:

6. NEIAP I1 was restructured in July 2007 and renamed Community Livelihoods in Conflict-Affected Areas Project (commonly known as “Re-awakening Project” in Sr i Lanka), for two main reasons. First, the escalation o f violence had made it difficult to implement large-scale infrastructure projects in conflict-affected areas. Second, community demand for immediate livelihood support had increased, and this required more flexible staffing arrangements with a greater emphasis on skills development and accountability at the community level for project management and facilitation.

7. The restructured project adopted a more Community Driven Development (CDD) approach, with communities assuming responsibility to plan, design and implement small-scale infrastructure and livelihood activities. This approach has proven to be more resil ient in conflict situations. Indeed, the project has come to be identified as one o f the best instruments for channeling funds and technical support quickly and efficiently for the rehabilitation and reconstruction o f productive and basic infrastructure and the restoration o f livelihoods, even under extreme security conditions. The importance o f an effective delivery mechanism in conflict-affected areas cannot be overstated.

8. The current undisbursed balance o f SDR 28.15 mi l l ion has been fully committed towards completion o f the development o f 540 villages and major irrigation schemes. The financial performance o f the project as o f October 15, 2009 is provided in Table 1. Thus, Additional Financing i s required to respond to urgent needs in the recently liberated areas in the North using the implementation arrangements o f the Original Project. To this effect, the Ministry o f Nation Building (MNB) has prepared an action plan under the leadership o f i t s Additional Secretary and oversight o f the President’s Secretariat to monitor progress o f the project activities on a monthly basis.

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Table 1: RAP status by component

Performance $ mill.

Commitment* $ Target Date mill.

1. Village Reh 240 Focal Villages (Batch 1)

Irrigation Rehabilitation Rural roads Drinking Water Wells

iilitation ar

3.40 3.61 0.70

3. Farmer Organization and 1

Cluster Level Livelihoods I 1.60 Buildings I 0.20

0.10

1.63 6.22 5.80

Dec 2009 Completed Completed Completed Completed

Mar 201 1 Mar 2012 Sept 2012

Development

3.32 3.61 0.70 1.65 1 S O

Karavahu Drainage Scheme Rugam Irrigation Scheme Allai Irrigation Scheme Giants Tank Irrigation Scheme Iranamadu Irrigation Scheme

0.54 2.66 1.16

2.16 3.06 3.46 3.46 2.00

,igation Schemes 1.25

2.00 0.86 0.47

0.33 2.12 0.76

Tbd Mar 2010 Oct 2010

0.00 Valukai Aru Irrigation Scheme Pavatkulam Irrigation Scheme

0.93 0.03

1.80 0.50

.go)**

0.20 1.60 March 20 13

Completed

16.44 Mar 2010 Oct 2010

Tsunami Fund Transfer

TOTAL

1.34 I Mar2010 2.70 I Oct 2010

8.32 8.32

64.70 36.55 28.15

.uster Development (1.80)

4. Project Implementation Support (9.20) Goods, Consultants, Training, etc 1 9.20 I 7.47 I 1.72 I March 2013

9. Emergency Challenge in the Post-war Context: The protracted armed conflict in Sr i Lanka ended on May 19, 2009. The country now faces the enormous and complex challenges o f reconstructing damaged or destroyed physical infrastructure while making progress on social reconciliation and a political consensus-building after several decades o f conflict.

10. The greatest immediate challenge in this post-war context i s the situation o f those families who have been displaced. Even prior to the re-escalation o f fighting from April 2006, there was a caseload o f over 214,000 people who had been forced from their homes. B y February 2009, approximately a further 290,000 people had fled the fighting. O f these, as at August 28, 2009, some 290,000 persons were situated in camps and hospitals, including almost the entire populations o f Kilinochchi and Mullaitivu districts

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o f the Northern Province. Many o f these people were displaced o n multiple occasions during recent months. Three other districts (Vavuniya, Mannar and Jaffna) o f the Province were also heavily affected by the fighting.

11. The Government has announced its intention to return a significant number of the IDPs to their place of origin by the end of January 2010. The pace o f exits from the camps was init ial ly very slow, but has picked up dramatically o f late. As o f November 19, 2009, the Government had released an estimated total o f approximately 140,000 people from the camps (UNHCR Reports). Additional significant returns are expected in the coming weeks. The Government relaxed security restrictions for civi l ian people on movement on the A9 road linking north and south and announced o n November 23, 2009, that al l restrictions on movement o f IDPs both in and out o f the camps and in the North will be lifted from December 1,2009.

12. Performance of the Project: The project currently covers the eight districts in the Northern and Eastern provinces and four districts in adjacent provinces. It was designed to assist some 85,000 households in 600 villages, and to rehabilitate seven major irrigation schemes to improve cultivation for up to 35,000 households. To achieve this, the project has been working towards establishing inclusive Village Development Organizations to plan, implement and allocate funds for small-scale infrastructure and livelihoods. The project provides a per head budget envelope o f US$60. Each participating village receives a sum o f US$30,000-50,000 depending on population levels, plus approximately US$ 1 0,000 for livelihood support activities for marginalized groups such as elderly, women-headed households and youth.

13. The project has been suffering disbursements delays due to the conflict: (i) large scale irrigation activities in two districts in the north (Mullaitivu and Killinochchi) were temporarily suspended due to the war; (ii) the presence o f landmines in the irrigation scheme areas and restrictions o n movement affected hiring o f contractors and procurement o f material; (iii) 50 focal villages for Village Development Plan work had to be evacuated and moved into IDP camps; and (iv) social mobilization was affected by frequent turnover o f field staff and limited availability o f technical service providers. These factors have resulted in delays in completing the f i rst batch o f villages, slow init ial progress in major irrigation schemes, and a late start for the second batch o f focal villages.

14. Despite these and other implementation challenges, the project has demonstrated that it is effective and can reach beneficiaries in conflict-affected areas. Since the restructuring o f the project in 2007, supervision ratings have been Satisfactory for Implementation Progress and Moderately Satisfactory in achieving the Project Development Objective (PDO). Since the restructuring, the project has been yielding positive results at the community level: i t has been successful in enabling communities to plan, implement and monitor their own village development plans and in regaining dignity, trust and self-confidence in the process. The project has also been successful in strengthening community institutions and their linkages with local government and administration.

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15. To date, more than 38,000 households are benefitting f rom increased income and village-level social and economic infrastructure; more than 2,500 ha. o f land has become irrigated farm area; and more than 750 Community-Based Organizations have been formed and are satisfactory engaged in implementation and O&M o f sub-projects. In addition, more than 57,000 individuals are members o f savings and credit groups, thus benefiting from access to capital; and more than 7,000 productive loans have been issued.

1.

16. More importantly, since the end o f the armed conflict in M a y 2009, some important improvements have already taken place. Works related to the major irrigation schemes have picked up speed; the project development cycle has been revised to fast- track the social mobilization and micro-planning process without compromising on quality; and the staffing strategy at the field level has been revised to strengthen project support and facilitation at the community and Hub level.

2011 Households benefitting f rom 0 50,000 3 8,464 increased income and village level social and economic infrastructure

Tables 2 and 3 show the status o f PDO indicators as o f September 2009.

Indicator

Increase o f farm area due to increased supply o f water resulting from irrigation rehabilitation Number o f commercially oriented agriculture business plans developed and implemented by farmer ormnizations and farmer

Table 2: Status o f PDO indicator as at September 2009

Baseline

0

0

fezeratiom Number o f CBOs 0

Table 3: status o f Intermediate indicators as at September 2009 -

- 1.

2.

3. revived/formed and satisfactorily engaged in subproj ect implementation

Target for 2011

24,000 ha

10

600

Latest value

2,540 ha

0

Batch I CBO’S - 519

Batch I1 VDO - 254

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Reasons for Additional Financinv:

17. The long-lasting c iv i l war has destroyed assets, possessions and livelihoods o f the displaced people. Many people were displaced from their homes for security reasons (fighting and land mines) or were displaced when their areas were declared High Security Zone (HSZ). The Northern Province has been the worst affected area during the past three decades, especially during the escalation o f violence that started in October 2008.

18. The Government has prepared a 1 80-day Plan to guide the return o f the IDPs. The Plan i s being implemented in five phases. The Government has requested Bank's urgent assistance for rapid return o f the IDPs planned under Phases I11 and IV o f i t s Plan. In total, these two phases include about 32,600 IDP families (about 100,000 persons). Implementation o f these plans will however depend upon progress in on-going de-mining activities, and in the rehabilitation and/or setting up o f basic infrastructure.

19. Responding to GOSL's request for assistance for rapid o f IDPs, IDA has developed an emergency response package, o f which this Additional Financing i s a key component. This Emergency Additional Financing i s sought as the undisbursed balance o f the Original Project has already been committed to ensure satisfactory completion o f project activities.

20. This Additional Financing will respond to these urgent needs by extending project activities into an additional 135 villages where IDPs will return under Phases I11 and IV. The Additional Financing will also rehabilitate an additional 8,000 hectares o f recently clearedheing cleared major irrigation lands benefitting another 9,000 farmers.

21. Eligibility for Processing under OP/BP 8.0: This Additional Financing and the Emergency Recovery Northern Project (ENREP) have been discussed with government and donors as being part o f a coordinated and simultaneously delivered set o f interventions. The project area and target population under this Emergency Additional Financing and ENREP are the same. Similarly to ENREP, this Emergency.Additiona1 Financing i s processed under OP8.00 as it helps reintegrate the economic l i f e o f the IDPs and restore their human, institutional and social capital destroyed by the past three decades o f violent conflict. It will also assist the IDPs with the crucial initial stages o f building institutional capacity for longer-term reconstruction and the promotion o f reconciliation and coexistence for long-term stability.

22. The two projects are implemented in the same areas and are complementary to one another. ENREP will support the return o f IDPs through the rehabilitation o f essential public and economic infrastructure damaged by the war. Once the IDPs have returned it will provide immediate access to cash through the workfare program, and emergency assistance to restore their agricultural activities. The Additional Financing will help IDPs restore their social capital and restore their sustainable livelihoods, including off-farm and non-farm activities, through micro-credit facilities, sk i l ls development and youth employment programs.

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23. More importantly, this Additional Financing complements ENREP by providing a vehicle for community based consultations for investments financed under ENREP to ensure that the investments are owned and sustained by the communities. In addition, the Additional Financing provides for the delivery o f small scale, village level infrastructure that i s delivered through a C D D approach. IDPs that have returned to their places o f origin will feel in charge o f the development o f their own communities as they formulate and implement their own Village Development Plans, which will help IDPs avoid becoming victims o f the “dependency syndrome” that often accompanies prolonged exposure to camp life.’Activities to be financed under this Additional Financing will also promote reconciliation and co-existence by building and strengthening community institutions and linking them with local government structures.

24. N o changes are envisaged in the project design or implementation arrangements, although some minor modifications will be introduced to reflect emerging conditions o n the ground (discussed below). This Additional Financing will only focus on the Northern Province. It will continue to help conflict-affected communities in the Northern Province to restore livelihoods and enhance agricultural and other production and incomes and build capacity for sustainable social and economic integration. Most o f the return areas have suffered severe damage during the war. It will assist returnees in approximately 135 villages, and scale up activities in three major irrigation schemes. In total, about 27,000 households will directly benefit from the expanded activities.

25. M ino r modifications to reflect recently emerging ground conditions: While no changes in the four components o f the Original Project are envisaged, some minor modifications will be introduced to reflect the new challenges deriving from the return scenario and these will be reflected in the revised C O M and PIP:

a) Fast-tracking the village project cycle: The Pre-planning and Planning phases o f the Village Project Cycle will be fast-tracked and made more flexible, given the urgent need for the returnees to mobilize to restore their sustainable livelihoods and formulate their own Village Development Plans. As the Emergency Operation will focus on addressing infrastructure needs in the return areas, the Village Development Plans will focus o n ensuring access to credit, sk i l ls development, technical assistance, and seed capital especially for off-farm activities. They will also leave open the possibility for community groups to propose very small-scale local infrastructure investments that beneficiaries may define as priorities for them and that are linked to their livelihood activities. The formation o f self-help groups and other community-based organizations should help to build mutual t rust and confidence, contributing to a more stable and cohesive social fabric and an enabling environment for growth and for peace.

b) Reintegration o f Youth and Ex-combatants: The Additional Financing will enhance the project focus on youth and ex-combatants by supporting their reintegration under the Government’s National Framework to increase their employability and to effectively involve them in the reconstruction efforts. This will be achieved through counseling intended to support attitudinal changes;

7

mainstreaming them by channeling their energy into project activities; providing special funds and programs to enhance sk i l ls and empower them economically and socially; and enhancing their access to j o b opportunities through partnerships with various employment growth sectors and sub-sectors such as constructioh, hospitality, FMCG, security, ICT, and health-care, and so on.

26. Implementation Arrangements: Implementation arrangements under the Additional Financing will continue to be the responsibility o f the existing Executing Agency, the MNB. The same Ministry i s implementing the 180-day Plan. This will ensure streamlined and effective coordination o f the return process. The MNB already sees this project as an effective implementation instrument on the ground. At the national level, the project i s chaired by a National Steering Committee, headed by the Secretary, MNB. The P M U based in Trincomalee consists o f a small number o f fiduciary and monitoring staff, complemented by a coordination cell at MNB whose primary function i s to coordinate between the five provinces and manage activities directly in the four adjacent districts (Pollonnaruwa, Anuradhapura, Puttalam and Moneragela). The Project Director reports directly to MNB and coordinates with the Chief Secretaries o f the five Provincial Councils. At the provincial level, Provincial Project Management Units (PPMU) have been established in Vavuniya for the Northern Province, and Batticaloa for the Eastern Province. These have Additional Project Directors and fiduciary and technical staff. At the district level, District Project Directors and technical staff facilitate and monitor field-level activities. At the community level, two Community Facilitators per village are assisted by one Community resource person per village and one community mobilizer who covers 3-4 villages to facilitate implementation o n the ground.

27. The project has been suffering from vacant key positions, namely the post o f Additional Director, as wel l as posts o f procurement, livelihood, environmental specialists, and senior engineers. However, the end o f the armed conflict has already mitigated most implementation constraints. Since M a y 2009, most staff vacancies have been filled up. Staff o f Northern Provincial PMUs and the respective District PMUs in Vavuniya, Mannar and Jaffna i s now fully operational with 100% staff and equipment, and have been undergoing aggressive training by the Task Team during the last three months. District PMUs for Kilinochchi and Mul la i t ivu are temporarily functioning at the office o f Provincial P M U in Vavuniya. It i s planned to shift them to their districts as soon as GOSL provides approval. In addition, the project i s planning to formulate a Human Resource strategy to strengthen i t s team with professional staff along key themes, and to retain the best performers through the introduction o f incentives, revised appraisal processes and career development opportunities.

28. The project i s also considering introducing some minor changes at the field and provincial level. At the field level, hub offices will be set up, as an extension o f district offices, to cater to a group o f 5-10 villages in a given radius o f about 5-10 kilometers, mainly to: (i) respond pro-actively to emerging needddemands from the communities in real time; and (ii) ensure that the government's plan' o f resettling several villages in batches i s fully supported. These hubs would consist o f a Team Leader, a Micro-Finance Officer and a Livelihood Development Officer. In addition to their responsibilities, they

8

will also manage and supervise Community Mobilizers and Community Facilitators who are located in every village in their hub areas. At the provincial level, the PPMU wi l l have adequate authorities to guide and monitor the project on fast track basis.

29. The project will continue to be implemented according to the Community Operational Manual (COM), with the modifications outlined above. The revised COM wi l l be finalized before Board approval. The fiduciary rules and procedures for procurement and financial management as detailed in the COM are satisfactory to IDA, and wi l l remain unchanged under the proposed Additional Financing. Audit reports and reviews during supervision o f the Original Project confirm the effectiveness o f these arrangements. The additional 135 focal villages will be developed using fast tracking strategy and a village development cycle o f 18 months as stated in the revised Operational Manual.

30. Given the nature o f the proposed ENREP and the time required to set up project specific implementation structures, MNB would set up arrangements with the Project Management Unit (PMU) o f the Original Project to help manage the initial activities o f the emergency project. In addition, the Secretary, MNB, would advise the District Project Directors o f the Original Project, initially at Jaffna, Vavuniya and Mannar districts, to assist in the initial project implementation planning and monitoring at district level. If additional staff i s required to strengthen the existing staffing o f these units, the funds o f the Original Project would be used and hiring o f the staff should be done in a speedy manner. In this way, the synergy between Community Livelihoods in Conflict Affected Areas Project and ENREP wi l l be established.

3 1. Procurement under the project would be carried out in accordance with the World Bank’s Guidelines: Procurement under IBRD Loans and IDA Credits o f May 2004 revised October 2006 (Procurement Guidelines), and Guidelines for Selection and Employment o f Consultants by World Bank Borrowers o f May 2004 revised October 2006 (Consultant Guidelines). Introduction o f the Bank’s revised guidelines under additional financing will not require revisions to the procurement arrangements currently in place, except that the operational manuals wi l l include reference to the Bank’s revised guidelines.

32. The’project will be carried out in accordance with the provisions o f the World Bank’s Anti-Corruption Guidelines: Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants, dated October 15, 2006.

33. Closing Date: The current closing date o f March 31, 2011 i s proposed to be extended to March 31, 2013 to enable adequate time to complete all activities o f the Original Project that have been delayed as a result o f the conflict, without compromising on quality. As Table 1 shows, while the rehabilitation o f major irrigation schemes wi l l be completed by the original closing date, the rehabilitation and development o f batch I1 villages and the cluster development activities wi l l require more time. Cluster development activities are yet to start, yet their relevance cannot be overstated as they

9

would ensure the consolidation o f gains achieved by the project and the institutional and economic sustainability o f groups formed and economic activities promoted by the project.

Amount o f the Additional Credit allocated SDR Million

(US$ million equivalent)

34. Allocation o f Credit Proceeds: The same expenditure categories wi l l be maintained as under the Original Project. For the Additional Financing, IDA will fund 100% o f expenditures for all categories including incremental and operating costs as well as taxes and duties. The financing percentage in these Categories i s justified and i s within the approved Country Financing Parameters. Expenditure Categories for Additional Financing are shown below:

% o f Expenditures to be financed

Table 4: Expenditure Categories

Works

Category

3.47 (5.5) 100%

Goods, including vehicles and equipment

Consultant’s services, including audit, training, third party monitoring

Incremental staff salaries and operating costs

I Sub-grants 3.47 (5.5) 100% I I I 0.32 (0.5) 100%

0.2 (0.3) 100%

0.14 (0.2) 100%

I I I I 7.6 (12) 100%

C. CONSISTENCY WITH CAS

35. The Additional Financing i s part o f IDA’S strategy to support GOSL’s response in the conflict-affected areas o f the North. I t i s targeted at the citizens who will now begin to return to their villages to rehabilitate their land, restore village infrastructure and re- establish their livelihoods. It i s fully consistent with the objectives o f the CAS in i t s support for the generation o f economic opportunities in the country’s most lagging region, the North, while seeking to address the causes and consequences o f conflict. The project objectives are also fully aligned with the government’s development strategy, the Mahinda Chintana, which aims at accelerating growth, with particular emphasis on equitable development.

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36. The activities to be supported under the Additional Financing have been designed to offer economic opportunities in a way that i s adapted to the hard realities o f the post- war context. The project’s support for community mobilization and the formation o f village development organizations, moreover, i s designed to reconnect the communities with the state agencies that are mandated to provide public services to them and to empower citizens to monitor government performance. This should help to overcome distrust and divisions that have driven conflict in the past.

incremental financial benefits to Project Activities FRR (?A)

the tune o f Rs. 576 million, Irrigation Canal Rehabilitation 24.0 Livelihood Funds 19.5 contributed by irrigation canal

Community Infrastructure 17.6 rehabilitation (30%), livelihood support activities (55%) and small

Overall Project 20.6

D. APPRAISAL OF SCALED-UP PROJECT ACTIVITIES

ERR (?A) 20.9 17.0 14.9 17.9

Economic and Financial Analysis

37. The main objective o f Project i s to improve the livelihood and quality o f l i fe through sustainable development o f the village communities in the project area. To date community sub-projects have been directed towards capacity building (1 O%), infrastructure development (50%) and livelihood support (40%) activities. O f the latter, the project has so far released LKR 230 mi l l ion for income generating loans through 257 village savings and credit committees and their small group members in 12 districts. These small groups have a total membership o f 57,000 individuals. For livelihood improvement, more than 7,000 productive loans have been issued as o f August 2009. The community managed livelihood support loans are utilized for enhancing household income from agriculture, animal husbandry, fisheries and self employment activities. A sample o f livelihood support activities i s being analyzed to quantify the multiple impacts o f income generating loans availed by the project beneficiary households.

Table 5: Summary of Project Economic Analysis 38. Rate o f Return. The project interventions will generate annual

39. Economic analysis revealed overall project rate o f return at 17.9% with al l project costs included. O n the benefits side, the benefits due to multi-purpose buildings as a part of the community infrastructure could not be quantified, and to that extent the rate o f return i s underestimated. Economic prices are higher than the financial prices for some inputs like fertilizer but less in some outputs l i ke paddy and overall effect i s lower economic rate o f return than the financial rate o f return. More details are provided in Annex 1.

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Environmental and Social Analysis

40. The Additional Financing i s expected to have l imited negative impact and a very positive social impact as it will help IDPs return to their original villages to restart their l i f e and benefit from sustainable livelihoods. There would not be any land acquisition or involuntary resettlement under the Additional Financing. Where land has been required during the Original Project, i t was managed through voluntary donation or mutually agreed sale. Clear procedures are incorporated into the PIP as guidance in cases where land i s donated for small infrastructure schemes. The Additional Financing would fund community infrastructure and livelihoods subprojects, al l similar in scale and scope to those implemented under the original project with regard to policy.

OP/BP 4.12 Involuntary Resettlement: Physical works will comprise reconstruction o f damaged infrastructure (irrigation, drinking water, roads, and public buildings) and no construction o f new buildings, which means that there should be no need o f land acquisition under the project. Since the exact location and nature o f project interventions are not known at appraisal, and will be determined according to the criteria agreed upon between the Bank and the Government o f Sr i Lanka, the GoSL has prepared an Environmental and Social Safeguards Framework (ESAMF), which provides guidance and procedures to be followed in case land acquisition i s unavoidable. While resettlement and land acquisition will be kept to a minimum, and will be carried out in accordance with these guidelines, the ESAMF provides guidelines, principles and instructions to compensate negatively affected persons to ensure that they will be assisted to improve, or at least to restore, their living standards, income earning or production capacity to pre- project levels regardless o f their land tenure status.

41. N o sub-project requiring land acquisition will be allowed prior to resettlement o f the affected fami l ies as that would violate OP 4.12’s requirement o f consultations with Project Affected People (PAPs). No sub-project will be allowed which causes displacement o f more than 200 people or result in more than 10% loss o f productive assets. In compliance o f the Bank’s Operational Policy 4.12, in case o f less than 200 PAPs, an Abbreviated Resettlement Framework shall be followed in order to restore housing and issue economic compensation for loss o f land and livelihood through a consultative and mutually agreeable process.

42. appeal. Compliance with OP/BP 4.1 1 and 4.10 i s discussed below.

A Grievance Redress Mechanism will be established, detailing PAPS’ options for

OP/BP 4.1 1 Physical Cultural Resources: The proposed operations pose limited risks o f damaging physical cultural resources since physical works wil l only comprise reconstructiodrehabilitation o f existing war damaged structures.

OP/BP 4.10 Indigenous Peoples: The issue o f ethnic and religious affiliation i s a larger factor in determining vulnerability at national and local level in the present Sr i Lankan context. It i s not expected that stand-alone Indigenous Peoples Development Plans

12

(IPDP) will be justifiable, as the main investments go to reconstruction o f war damaged infrastructure and livelihoods.

43. The ongoing project has a Category B environmental classification, with no significant environmental impacts on the human population or ecologically important areas. The Environmental Safeguards Management Framework (ESMF) will continue to be applicable. N o subprojects are approved or funds transferred until the environmental viability o f the investments i s determined, and subproject agreement between the project and the community organizations contain environmental compliance clauses, as detailed in the Environmental Manual. The project will ensure adequate specialized staff to handle environmental and social safeguards as per the ESMF will be taken on board under the PMU and the two PPMUs.

Fiduciary Analysis

44. The financial management (FM) and procurement arrangements used in the Original Project, which are satisfactory to IDA, will be used under the Additional Financing. To reach out to the new areas, the P M U i s strengthening i t s capacity and hiring additional dedicated FM staff at the hub level. Financial Management and Procurement performance have been consistently rated Moderately Satisfactory since project restructuring. Experience to date shows that the fiduciary controls in place at the national, provincial and district level are functioning reasonably well. For the Original Project, external auditing is being conducted by the Auditor General, and annual audited financial statements have been received on a timely basis'. Nevertheless, due to the specific nature o f this project, the FM risk associated with this Additional Financing has been rated as High. Consistent with the risk based approach to supervision o f the Original Project, there i s a continued need for intensive supervision from an FM perspective.

45. The procurement risk associated with the Additional Financing i s rated substantial. Project post reviews indicate weaknesses in filing and record-keeping. Retention o f experienced procurement staff has posed a problem throughout project implementation, and has led to irregular procurement monitoring and reporting. Procurement staffing at the PMU, which will be responsible for processing al l procurement activities, i s expected to improve fol lowing cessation o f the conflict. A computerized system for financial reporting has also been introduced. This will be enhanced to include procurement monitoring as well. An action plan identifying risks and mitigation measures will be agreed on at negotiations and closely monitored during implementation.

46. Disbursement arrangements: The Additional Financing will use a separate designated account. The disbursement method will continue to be report based. The format o f the Interim Unaudited Financial Reports (IUFRs) that are prepared for the

There i s one outstanding audit issue related to eligibility o f expenditures amounting to Sr i Lankan rupees 103 million, for which the Bank has requested a formal certification of eligibility from the Auditor General (AG). An interim report has already been issued by the AG and the Bank team i s following up to receive the final report on a priority basis. This issue will be taken up as part of the 2009 audit.

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original credit wi l l continue to be used for the Additional Financing as well. Hence, IUFRs wi l l be prepared for the exiting project and Additional Financing separately and wi l l be submitted to IDA within 45 days from the end o f each quarter.

E. EXPECTED OUTCOMES

47. The implementation o f the program o f activities supported by the Additional Financing will not modify the original expected outcomes. However, to capture the impact o f the proposed scale up, some additions to the project’s outcome indicators i s proposed. Preparation o f the Additional Financing has also provided the opportunity to strengthen the Results Framework for the Project including the outcome indicators as shown in the Revised Results Framework (Annex 2) and summarized in the table below:

Table 6: Outcome Indicators

PDO

To help conflict-affected communities in the North and East and adjoining areas to restore livelihoods and enhance social and economic integration.

Outcome Indicators

At least 30% o f targeted households in focal villages have increased their net income (farm and non-farm) by at least 40%

At least 50% o f targeted households are active members o f CBOsNDOslSHGs with satisfactory performance ratings

Use o f Outcome Information

Periodic evaluation o f project impact on income and employment

On-going assessment o f appropriateness o f project strategy and role in affecting the formation o f community groups and livelihood groups which are inclusive and sustainable

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32,000 ha. of irrigation area rehabilitated

At least 80% vulnerable people are VDO members and at least 50% of them obtain financing for livelihoods development

At least 30% of village youth and ex-combatants assisted

At least 1,000 job created through partnerships with private andpublic sector

On-going assessment o f project’s effectiveness and capacity to restore sustainable livelihoods among IDPs

Ongoing assessment o f project’s effectiveness in targeting youth and in providing job opportunities through partnerships with private and public sectors

F. BENEFITS AND R I S K S

48. Benefits: Scaling up o f the project will positively improve the living conditions and improve sustainable livelihoods o f 100,000 IDPs, including vulnerable women, disabled, youth and ex-combatants, and victims o f trauma.

Potential Risks I Mitigation Measures I Rating with Mitigation

T o Project Development Objective

Politicallbureaucratic interference with community demand driven investment priorities - a risk successfully mitigated at present but which may resurface.

Strong empowerment o f VDOs and transparency and accountability mechanisms at a l l levels including participatory M&E wil l effectively mitigate such risks. Clear guidelines and rules for transfer o f funds and close supervision o f the program, with strong focus on downward accountability systems, wil l be put in place. Joint evaluations will particularly focus on the ability acquired by the government agencies to ensure that resources are allocated in a transparent and fair manner and not according to political pressure.

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Moderate

Potential Risks I Mitigation Measures I Rating with Mitigation

Pace o f de-mining activities may hinder the progress o f return.

To Project Development Objective (continued)

0 GOSL has initiated action to High increase resources for de-mining

I I To Components

Maintaining technical quality may prove difficult as program scales up significantly with the return and may encounter political pressure to dilute the project rules.

Lack of a complaint handling mechanism at village level as well as at project level undermines villagers' trust in the project.

Procurement: Inadequate procurement capacity provides avenues for misappropriation o f resources and rent seeking at various levels. Absence o f a system for procurement performance and compliance monitoring.

The risks o f proceeding too fast have to be balanced against the risks of losing momentum by moving too slowly. The right balance may entail accepting a medium level o f risk. In addition, process monitoring mechanisms will be strengthened in checking quality standards and compliance.

The project will develop and maintain a Complaints and Grievance Handling system and set up an Independent Committee composed of project staff as well as VDO members.

Procurement processing will be confined to the PMU level with adequate staff in place, with contract supervision carried out at the district and hub levels. Disclosure o f contract award information and a computerized procurement monitoring system will be mandated and rigorously monitored. Bank procurement staff would provide continuous guidance and feedback on post reviews, to ensure rules and procedures are clearly understood. In-depth post reviews will be conducted every six months, or more frequently, as required, together with independent third party technical audits.

Moderate

Moderate

Moderate

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G. FINANCING

FINANCIAL TERMS AND CONDITIONS FOR THE ADDITIONAL

49. standard IDA terms for Sri Lanka.

The proposed additional financing will be financed as an IDA Credit with

Credit conditions and covenants

Prior to Negotiations: The Government submits i t s Return Plan.

Conditions for Board Presentation:

(i)

(ii)

Submission to IDA o f detailed Progress o f the return as o f October 30,2009 according to the Government’s Plan. Submission to IDA o f revised C O M

Conditions for Effectiveness: None

Conditions during Implementation:

Government shall ensure that the Additional Project Director (North) i s empowered adequately until project completion. Government shall ensure that Provincial Planning and Coordination Committee (PPCC) for North, Project Management Unit (PMU), Provincial Project Management Unit (PPMU) for Nor th and District Project Management Units (DPMUs) for North are maintained until project completion. The PMU, PPMU(N) and DPMUs(N) maintain the financial management system for the Project with qualified staff, until project completion. Government will ensure that independent private auditors are engaged to provide an assurance on the effectiveness and application o f internal controls and to carry out post-procurement reviews. Government will ensure that procurement documentation and record keeping systems, including the website showing the status o f procurement o f various contracts and their performance and a procurement complaint handling system would be maintained by P M U and PPMU(N). The P M U and PPMU(N) will monitor the physical and financial progress o f the Project, implementation o f the overall as wel l as subproject level environmental and social management plans, analyze the data on key performance indicators on a regular basis and prepare and submit quarterly and annual progress reports, and by February 15 each year annual work plans for the following year. The annual work program for the following year will be finalized in agreement with the Association, not later than April 15 each project year.

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H. LESSONS FROM EXPERIENCE

50. The immediate context o f I D P return in which the project will be working i s a particularly complex one. There have been multiple waves o f displacement in the conflict-affected areas o f the North and return i s l ikely to happen faster in some districts than in others. All agencies, including the project staff, will face practical constraints on the degree to which returnees and non-displaced villagers can be consulted o n where they want to go and what help they need.

5 1. To mitigate the risks, the project team i s liaising closely with government and UN agencies to ensure that local communities are assisted in ways that are most supportive o f their livelihoods and sustainable reintegration. Close attention i s being paid to the lessons o f other crises whereby complementary relief, rehabilitation, reintegration and development activities need to be implemented in parallel, but tailored to the variables that exist in the operating environment.

52. Following the global advice o f expert organizations l ike the International Organization for Migration (IOM), the project will embrace not only returning refugees and IDPs, but also other actors in the conflict-affected areas - not distinguishing between ‘returnees’ and ‘stayees’. Discussions with WFP, ILO, U N H C R and the existing project staff are helping to shape, on the one hand, the nature o f the init ial support that will be offered by the project as wel l as, on the other hand, the types o f assistance that will be necessary to transform levels o f t rust and the quality o f local livelihoods in the longer term. International experience shows that the two must be taken together. Going forward, constant dialogue between project staff and local government officials as well as close Bank contact with demining agencies (under the government-UNDP umbrella) will help the project to respond rapidly as return picks up speed without compromising on the safety o f the returnees.

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ANNEX 1: ECONOMIC AND FINANCIAL ANALYSIS

Area expansion Net cultivated area Net irrigated area

Gross cultivated area Cropping intensity Gross irrigated area Irrigated crop intensity

Average pad& productivity Financial gross margin

Area intensification

1. Additional Financing o f US$12 mill ion i s proposed to scale-up activities o f the ongoing project by extending the project coverage in the Northern Province o f Sr i Lanka. Major interventions proposed are; (i) extended rehabilitation works in the canals o f three on-going projects to benefit 8000 ha o f irrigated area, and (ii) CDD sub-projects for the IDP both for community infrastructure as well as for their economic livelihood activities in about 135 additional villages. About 100,000 IDPs from 27,000 households will be benefited with CDD sub-projects and extended canal rehabilitation works. The proposed activities will be implemented during 2009 to 2012.

ha 6800 8000 ha 4400 8000

ha 8400 10400 YO 105 130 Ha 6000 10400 YO 75 130

t/ha 4.6 5 .O

2. The project’s cost-benefit analysis i s conducted separately for the main investment activities - irrigation rehabilitation, livelihood and infrastructure- together accounting for over 95% o f the project costs, and then aggregated for the entire project taking total project costs (including contingencies) into account. The analysis i s based on the mission’s field visits, impact assessment data from Bank funded projects in the north- east and south Asia, and published data sources on cost o f cultivation for the project area2 from the Socioeconomics and Planning Centre, Department o f Agriculture, Peradeniya and statistical publications from the Government o f Sr i Lanka. Using the impact assessment report, published data sources and mission’s interactions with the NEIAP phase-I and I1 beneficiaries and implementing agencies, crop productivity and associated crop budgets and financial livelihood activity models are formulated. Project costs and benefits are estimated at 2009 prices over a period o f 10 years with 12% as the opportunity cost o f capital. Market prices are assumed for the financial analysis. Conversion factors based on the import/export parity prices o f internationally traded inputs and outputs are used for the economic analysis. A SCF o f 0.85 to 0.90 i s assumed for non-internationally traded inputs and outputs.

Project Benefits 3. Irrigation canal rehabilitation works account for 1/3rd o f the project costs. The main source o f benefits i s expected gains from increased crop productivity due to increase in irrigated area and cropping intensity (T-1). Paddy i s the dominant crop in the irrigated lands. Due to conflict and displacement o f people, only part o f the area i s getting irrigated

T-1: Projected impacts Impacts I Unit I Without I With I project I project Command area I ha I 8000 I 8000

now with low cropping intensity. Perhaofcommandarea I Rs/ha I 52600 I 74700

While part o f the data i s available for Killinochi and Mullaithivu districts, for the missing data, published data from the neighboring district namely Anuradhapura i s used.

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‘Without project’ assumptions are; irrigated maha paddy i s cropped in 55%, rainfed maha paddy i s cultivated in 30%, and irrigated yala paddy i s cropped in 20%. ‘With project’ assumptions are; irrigated maha paddy i s cropped in loo%, irrigated yala paddy i s cultivated in 30%, average paddy yield from the cropped area increases by 9%, gross irrigated area increases by 73% and overall cropping intensity increases by 24%. About 8000 families with a population o f 32,000 will be benefited by the irrigation rehabilitation investments.

Sub-proj ects infrastructure works account for 17% o f the project costs. Analysis o f Re-awakening project Batch I villages covering 876 infrastructure sub- projects (T-2) revealed that; rural roads, Rural roads drinking water, irrigation and multi-purpose buildings accounted for 39%, 7%, 36% and 18% o f the infrastructure sub-project investments. I t i s assumed that similar pattern will be adopted

Infrastructure

Drinking water wells Irrigation works Multi-purpose buildings Total

4. The irrigated area expansion and intensification benefits will start flowing from one year after rehabilitation but will improve gradually by 20% every year to reach the full benefits only five years after the completion o f rehabilitation. These assumptions are conservative to number o f returnees. Using the crop budgets differentiated by rainfed and irrigated paddy and by maha and yals seasons for with and without project situations, incremental benefits due to irrigation canal rehabilitation i s quantified and aggregated. Irrigation rehabilitation alone can generate Rs 177 mill ion as annual incremental benefits at full project development, due to the extension o f irrigated area and intensification o f paddy cultivation in the rehabilitated command area.

Sub-projects Number Amount

(Rs M)

200 450 367 86 105 41 1 204 206

876 1153

6. Rural roads: Sub-proj ect investments in rural roads infrastructure would be about Rs 92 M. Analysis o f four village rural roads infrastructure in the WB funded Gemi Diriya project in Sr i Lanka during 2009 revealed that for every km o f roads infrastructure completed with an investment cost o f Rs 2 M, incremental benefits to the tune o f Rs 1.2 mill. i s generated at full development over a four year period with an estimated IRR o f 26%. Major sources o f benefits from improved roads connectivity come from better price for the agriculture produce due to improved access to market, reduced losses during transportation, and improved productivity due to better access to farm machinery for farm operations. Based on Re-awakening project batch- 1 village experiences, Rs 1 million will be the cost o f one km road improvement at 2009 prices. Adjusting for the roads project cost, 92 km o f rural roads can be expected to generate incremental annual financial benefits to the tune o f Rs 49 mill. at full development over a five year period. Based on the data from other WB funded projects in north east Sr i Lanka, 5920 families with a population o f 23680 are estimated to be benefited by the improved rural roads.

7. Drinking water wells; Sub-project investments in drinking water wells infrastructure would be about Rs 16 M. Based on the ongoing Re-awakening project experience, about 50 drinking water wells wi l l come up in villages, contributing to

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improved supply o f drinking water to the communities in the project area. Each drinking water wel l benefit on an average 25 families. Based on this, 1245 households with a population o f 4980 will be directly benefited by getting access to drinking water source due to project. Field surveys during the mission's visit and experience in Sri Lanka Gemi Dir iya project and similar projects elsewhere in south Asia revealed that o n an average 1 to 2 hours per day per beneficiary family i s saved due to improved access to drinking water source for around 120 days in a year. With the opportunity cost o f time taken as an average o f peak and o f f season wage rates in agriculture at Rs 17 per hour and time saving per beneficiary at one hour per day, the annual financial benefits due to drinking well related investments i s estimated to be not less than Rs 5 M. Actual value o f time saved could be higher than this in view o f (i) improved irrigation coverage, cropping intensity and productivity along with scope for diversification subject to opening up o f market opportunities in south and (ii) more income generating opportunities through livelihood sub-projects providing gainful employment for landless and poor households in the villages.

8. Irrigation infrastructure: Sub-project investments in irrigation infrastructure would be about Rs 85 M. Based o n the average investment cost per ha o f net irrigated area observed in the on-going Re-awakening project villages, i t i s estimated that in the project villages, about 456 ha o f land area can be brought under irrigation coverage, which i s otherwise cropped with rainfed paddy and that too only in ha l f o f the area. Average area under paddy in the paddy farm holders in Sri Lanka i s 0.5 ha. Hence, about 1000 fami l ies with a population o f 4000 are l ikely to be benefited by the irrigation infrastructure sub-projects. Using the season wise irrigated and rainfed paddy crop budgets formulated for the irrigation canal rehabilitation investments, it i s estimated that incremental financial benefits o f Rs 28500 per ha o f irrigated area can be generated annually. In yala, 35% o f the area will come under irrigated paddy. From al l the irrigation infrastructure sub-projects, annual incremental financial benefits will be Rs 3 1 M.

9. Livelihood activities account for 50% o f the project costs. Analysis o f Re- awakening project Batch I villages covering 793 0 livelihood support activities revealed that livestock (cow and goat), agriculture (high land and paddy cultivation), and other activities (small shop) account for more than 50% o f the livelihood funds utilized. These five major livelihood support activities are analyzed using the data compiled from multiple sources. Investment for the major livelihood support activities varied from Rs 18,800 to 25,000 per sub-project. With the planned allocation o f Rs 690 My about 32900 livelihood sub-projects can be taken up by the 135 village residents.

10. Average per unit investment cost for the livelihood projects i s Rs 21 175 at 2009 prices with a grace period o f 4 months and loan repayment period o f 5 months. This loan carries an interest rate o f 12%. Individual sub-project wise financial rate o f return varied from 13.1% for cows to 45.6% for small shops. Annual incremental benefits varied from Rs 8370 for high lands cultivation to Rs 27750 for small shops. Over a ten year cycle, with the sustainability o f the livelihood activities restricted to 2/3rd o f the sub-projects initiated, annual incremental financial benefit i s estimated at Rs 3 14 M.

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Economic and Financial Analysis

the effects o f uncertainty on the projected outcomes o f the project Expected value

Standud deviation Minimum

Coefficient o f variation Probability o f negative outcome

investments and determined the confidence limit for realizing the expected economic benefits. Maximum Monte Carlo simulation model i s used to analyze the distribution

11, Rate o f Return. The project interventions will generate annual

NPV (Rs billion) ERR 13.1% 46 1.1% 45 9.7% (103)

16.7% 190 0.081 0.983 0.0% 15.6%

T-3: Summary o f Project Economic Analysis

incremental financial benefits to Project Activities I FRR (%) 1 ERR (%) the tune o f Rs 576 My contributed by irrigation canal rehabilitation (30%), livelihood support activities (55%) and small community infrastructure (1 4%). Financial rate

Irrigation Canal :habilitation1 rfi 1 ii!i Livelihood Funds Community Infrastructure

Over all Pro'ect 20.6

o f return i s estimated to be 20.6% for the entire project. For individual activities it varies f rom 17.6% for community infrastructure to 24% for irrigation canal rehabilitation. The project i s expected to yield net present value of. Rs. 410 mi l l ion in 2009 prices over a 10 year project cycle.

Economic analysis revealed overall project rate o f return at 17.9% with al l project costs included. O n the benefits side, the benefits due to multi-purpose buildings as a part o f the community infrastructure could not be quantified, and to that extent the rate o f return i s underestimated. Economic prices are higher than the financial prices for some inputs l ike fertilizer but less in some outputs l ike paddy and overall effect is lower economic rate o f return than the financial rate o f return.

12. Sensitivity analysis: For 20% increase in costs and 20% fal l in project benefits, when considered independently, community infrastructure investments turned out to be more sensitive than others. As indicated earlier, the benefits estimated for community infrastructure are l imited to irrigation, rural roads and drinking water wells only. Switching value analysis indicated that increase in costs by 23% and fal l in benefits by 19% independently will reduce the overall project ERR to 12%. One year delay in project implementation wil l reduce the project ERR to 14.8% and net present value by 2/3rd. Sensitivity analysis highlights the importance o f timely implementation o f project activities to secure maximum incremental benefits from the proposed project investments,

13. Risk Analysis estimated T-4 Risk analysis summary

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costs and 20% decrease in benefits on the relevant risk variables, Monte Carlo simulation was done (1000 runs) to capture their combined effects o n the projected results (T-4). The simulated ERRS ranged from 9.7 to 16.7% with a coefficient o f variation o f 8%. Hence, the expected ERR, estimated by the risk model at 13.1 % i s considered reasonably stable, since the probability o f ERR exceeding 12% i s 85% as predicted by the risk model (Fig. 1).

100%

80% -

60% -

e 40% - P

20% -

0%

2. 3 2

# - - - ” / e

I /

t *

f ’ / ,

/ -8- .+- -- -

I I I I I ,

Fig.1 Cumulative Distribution of ERR

23

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8 5 '5 3 i

& Y 0 W '7

E; .e

x - b 5 Ef

k 0 C 0

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