Aquatic Resource Development and Quality Improvement Project

Major Change in Scope Project Number: 34318 Loan Number: 1910 July 2007 Sri Lanka: Aquatic Resource Development and Quality Improvement Project CURRENCY EQUIVALENTS (as of 30 June 2007) Currency Unit – Sri Lanka rupee/s (SLR/SLRs) SLR1.00 = ¥1.1059 or $0.0090 $1.00 = SLRs111.385 or ¥123.179 ¥1.00 = SLRs0.9043 or $0.0081 ABBREVIATIONS ADB – Asian Development Bank ADF – Asian Development Fund EIRR – economic internal rate of return ha – hectares m – meters MFAR – Ministry of Fisheries and Aquatic Resources NAQDA – National Aquaculture Development Authority NDB – National Development Bank NTDF – National Development Trust Fund OCR – ordinary capital resources PCFM – Peliyagoda Central Fish Market PMO – project management office SDR – special drawing rights UDA – Urban Development Authority NOTE In this report, "$" refers to US dollars. CONTENTS Page I. INTRODUCTION 1 II. BACKGROUND 1 III. THE PROPOSED CHANGE 3 A. Location and Design of the Peliyagoda Central Fish Market 3 B. Implementation Arrangements 3 C. Operation and Maintenance of the Peliyagoda Central Fish Market 3 D. Revised Objectives and Design and Monitoring Framework 4 IV. ASSESSMENT 4 A. Financial and Economic Analyses 4 B. Environmental and Social Safeguards 5 C. Project Risks 6 IV. RECOMMENDATION 6 APPENDIXES 1. Design and Monitoring Framework – Loan No. 1910 7 2. Detailed Summary of Works of the Projects Noncredit Components 12 3. Project Performance Report 13 4. Flowchart Illustrating Recommended Operational Management of the Peliyagoda Central Fish Market 15 5. Design and Monitoring Framework of the Peliyagoda Central Fish Market 16 6. Financial and Economic Analyses of Peliyagoda Central Fish Market 17 7. Summary Poverty Reduction and Social Strategy 22 I. INTRODUCTION 1. The Aquatic Resource Development and Quality Improvement Project (the Project)1 was approved on 5 September 2002 to help promote market-driven and sustainable management of inland fisheries and aquaculture. The Asian Development Bank (ADB) provided two loans for the Project─one amounting to SDR10.379 million ($13.8 million equivalent at the time of approval) from the Asian Development Fund (ADF) (Loan 1911); and another of ¥726.4 million ($6.2 million equivalent at the time of approval) from ordinary capital resources (OCR) (Loan 1910). The SDR loan became effective on 7 May 2003, and the OCR loan on 3 November 2003. Both loans are scheduled to close on 30 June 2010. 2. During a review of the ADB portfolio in Sri Lanka in August 2006, the Government requested that ADB review a proposal for a fish market development project for possible financing from unutilized funds (see para. 7) under Loan 1910. In September 2006, the Ministry of Fisheries and Aquatic Resources (MFAR) submitted a concept paper for the establishment of a central fish market at a proposed site in Peliyagoda, near the capital of Colombo. In response, ADB requested a prefeasibility study to be prepared for the project. MFAR submitted the study to ADB in November 2006. ADB reviewed the prefeasibility study and found that it needed improvement in several areas before ADB could proceed with the approval process. In February 2007, ADB offered to field a mission in order to assist MFAR in finalizing the prefeasibility study. The Mission and MFAR agreed to the basic design, cost, financing plan, and implementation arrangements for the Peliyagoda Central Fish Market (PCFM). 3. This paper seeks approval for the proposed major change in scope relating to the use of the unused loan balance of Loan 1910 amounting to ¥493.8 million ($4.0 million) to finance the PCFM. Prevailing health and hygiene levels in St Johns Fish Market (Colombo’s existing market) are well below the minimum required standard. In addition, a serious lack of space contributes to excessive congestion both within and outside the market, posing significant problems for Colombo residents. The justification for the proposed central fish market in Peliyagoda is strongly based on the constraints in the existing St. Johns Fish Market. II. BACKGROUND 4. Fish are the principal source of protein for Sri Lanka’s population and are vital in meeting basic nutritional needs and contributing to the livelihoods of the poor. Analysis of consumption trends shows a growing demand for fish in both rural and urban markets. Significant opportunities are also emerging for sale of fish and aquatic products beyond traditional local markets. Both community-based and private sector initiatives and interests exist to avail of these opportunities if there is appropriate support to invest in developing fisheries production and marketing. 5. The long-term objective of the Aquatic Resource Development and Quality Improvement Project is to assist the Government of Sri Lanka to improve food security and reduce poverty, especially in rural areas. The Project is furthering this objective by promoting market-driven and sustainable management of inland fisheries and aquaculture through resource development and quality improvement. To this end the Project is structured in five parts: (i) inland fisheries and aquaculture development, (ii) fish quality improvement and marketing, (iii) facilitation of access to credit, (iv) institutional strengthening, and (v) project management. The successful 1 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 Aquatic Resource Development and Quality Improvement Project. Manila (Loan Nos. 1910-SRI and 1911-SRI[SF]). 2 implementation of the Project is expected to result in increased production of freshwater fish and other aquatic products for the rural, urban, and export markets; improved quality and increased consumption of inland fish; improved access to credit for use in inland fisheries and aquaculture; and strengthened capacity of the National Aquaculture Development Authority (NAQDA) and other sector institutions. MFAR is the Project’s Executing Agency. The lead implementing agency is NAQDA, which is responsible for parts (i), (ii), and (iv), and is facilitating implementation of parts (iii) and (v). Part (iii) comprises two subcomponents: microcredit for community investments, which is being implemented by the National Development Trust Fund (NTDF) using its own resources; and the credit line for commercial investments for fisheries and aquaculture enterprises,2 for which the National Development Bank (NDB) serves as the apex bank. The design and monitoring framework for the original project is in Appendix 1. 6. The physical progress of the Project’s ADF-financed noncredit components3 is estimated at 40% against an elapsed loan period of 61%. Disbursements, as well as contracting of major works (Appendix 2), were initially slow due to a loan covenant (related to the submission of the NAQDA Act to Parliament) for loan withdrawals. The condition was met in January 2006, and activities began to pick up soon thereafter. Appendix 2 summarizes the works being carried out or remaining to be completed under each contract. Total contracts awarded and disbursements to date are, respectively, about $6.3 million (40% of the loan amount) and $5.9 million (38% of the loan amount). 7. Progress of the Project’s OCR-financed credit component, on the other hand, has been below expectations. NDTF’s cumbersome lending procedures restrict access to the microcredit subcomponent financed through NDTF since they require potential clients to become partner organizations before they can borrow credits from NDTF. This requires substantial strengthening of small rural community based organizations in book-keeping skills and leadership training which the project has sought to provide to help improve access to microcredit. The demand for the credit line being implemented by NDB continues to be weak, which NDB attributes to the availability of cheaper credit schemes from other participating financial institutions, offered at 9% interest, compared with 12.85% under the Project at present).4 To date, only about $0.6 million (or 10%) of the OCR loan has been disbursed. In view of the very low utilization of the credit line and availability of other credit schemes at lower interest rates, the Government has proposed to utilize a portion of the undisbursed balance of the OCR loan to finance the construction costs of the PCFM. 8. Despite the slow progress of the credit component, the overall progress of the Project may be rated as satisfactory, as is compliance with the loan covenants. The project management office (PMO) has been established, monthly and quarterly progress reports are submitted regularly, and steering committee meetings are held every quarter. Project accounts are being audited annually and audited financial statements are generally submitted on time. All subprojects (Appendix 2) are planned for completion before the loan closing date as there are adequate plans and resources in place. The PMO is undertaking on-site monitoring of project progress, with ADB reviewing monthly and quarterly progress reports and fielding regular review missions. Apart from the low performance of the credit component, there are no major issues or problems affecting project implementation. The Project’s implementation progress is detailed in the summary of the latest project performance report (Appendix 3). 2 OCR Loan 1910-SRI finances 100% of the credit line. 3 ADF Loan 1911-SRI(SF) finances part of the Project’s noncredit components. 4 The interest rate for the end users under the Project is determined

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