Appraisal of Dairy Farm Develop- Ment Plans and in the In-Service Training of PTU Planning and Appraisal Teams;

Report No. 427-CE Appraisalof the FILECOpy SriLanka

Public Disclosure Authorized DairyDevelopment Project

June5, 1974 Asia ProjectsDepartment Not for PublicUse Public Disclosure Authorized Public Disclosure Authorized

Public Disclosure Authorized Document of the International Bankfor Reconstructionand Development InternationalDevelopment Association

Thisreport was preparedfor officialuse only by the BankGroup. It maynot be published,quoted or citedwithout BankGroup authorization. The BankGroup does not acceptresponsibility for the accuracyor completenessof the report. CURRENCY EQUIVALENTS

US$1 = Sri Lanka Rupees (Rs) 6-74M Rs 0.01 = Sri Lanka Cent Rs 1 US$0.148 Rs 1 million = US$148,368

WEIGHTS AND MEASURES (British System)

1 long ton 2240 lbs = 1.016 metric tons 1 hundredweight(cwt) 114 lbs = 50.8 kg 1 bushel (bu) 45 lbs (of paddy) 1 pint 0.57 liters (1) 1 acre 0.405 hectares (ha) 1 mile 1.609 kilometers (km) 1 gram (g) 0.035 ounce (oz) 1 inch = 25.4 millimeters (mm)

ABBREVIATIONS

APHD = Animal Production and Health Division (in the Ministry of Agriculture) CRB = CooperativeRural Bank DCS = Dairy Cooperative Society MPCS MultipurposeCooperative Society NMB = National Milk Board PTU = Project TechnicalUnit APC = Agricultural Productivity Center

FISCAL YEAR

January 1 - December 31

/1 The Sri Lanka rupee has been tied to the pound sterling since June 1972 at Rs 15.60 per pound and has consequently been floating with it. The US dollar rate is thus dependent upon the cross-rate between the pound and the dollar. The rate of US$1 = Rs 6.74 was establishedby the Central Bank of Ceylon on December 31, 1973. Under the Foreign Exchange Entitlement CertificateScheme (FEEC's), a levy of 65% is applied to most non-food imports. Since the major items to be imported by government agencies under the proposed Project are subject to the FEEC's, the exchange rate used in this Appraisal Report is US$1 = Rs 10, which is the approximate average FEEC rate between June 1972 and the time of project appraisal. SRI LANKA

DAIRY DEVELOPMENT PROJECT

TABLE OF CONTENTS

Page No.

SUMMARY AND CONCLUSIONS ...... i - i

I. INTRODUCTION ......

II,, BACKGROUND ......

A. General ...... 1 B. Agricultural Sector ...... 2 C. Milk Marketing and Processing ...... 3 D. Development Support Services ...... 4

III. THE PROJECT AREAS ...... 6

IV. THE PROJECT ...... 7

A. Description ...... 7 B. Detailed Features ...... 8 C. Cost Estimates ...... 10 D. Proposed Financing ...... 12 E. Procurement ...... 13 F. Disbursement ...... 14 C. Reporting and Auditing ...... 14

V. ORGANIZATION AND MANAGEMENT ...... 15

A. Administration ...... 15 B. Management and Technical Services ...... 15 C. Lending Operations ...... 17

VI. MARKETING, PRICES, SUBSIDIES AND PRODUCER BENEFITS .... 18

A. Marketing and Prices ...... 18 B. Subsidies ...... 20 C. Producer Benefits ...... 21

VII. ECONOMIC BENEFITS AND JUSTIFICATION ...... 21

VIII. AGREEMENTS REACHED AND RECOMMENDATION ...... 22

This report is based on the findings of a mission composed of R. Bailey (IDA), H. Groenewold (FAO/IBRD Cooperative Programme) and T. Haworth (Consultant) that visited Sri Lanka in June/July 1973. -2-

ANNEXES

1 - The Dairy Sub-Sector 2 - National Milk Board 3 - Pricing and Subsidies Relating to the Dairy Sector 4 - Recent Legislation: Land Reform and AgriculturalProductivity 5 - Agricultural Cooperatives 6 - The Lending Banks 7 - Dairy Farm DevelopmentProjections 8 - Management,Technical Assistance and Pilot Units 9 - Terms of Reference for Technical Assistance Specialists 10 - Terms of Reference for Milk Collectionand Transport Consultancy 11 - Project Costs by InvestmentCategories 12 - EstimatedSchedule of Disbur3ements 13 - FinancialRates of Return 14 - Economic Rate of Return

MAP SRI LANKA

DAIRY DEVELOPMENTPROJECT

SUMMARYAND CONCLUSIONS i. Agriculture plays a major role in the economy of Sri Lanka through its large contributionto GNP, foreign exchange earnings, and government revenue. In 1973 the agriculturalsector accounted for nearly 33% of GNP, about 77% of export earnings, and 50% of total employment. While livestock farming has considerablepotential it is now of minor economic importance, contributingonly about 7% of the gross value of agriculturalproduction. ii. The proposed Project would be the Bank Group's fourth in agriculture in Sri Lanka and the first IDA Credit in the livestock sector. It would provide for on-farm development on about 42,000 acres, comprising about 1,800 small (5-10 acres) and 600 larger (40-50 acres) farms in the Coconut Triangle and Mid-Country, including purchase of about 10,400 local and 3,200 imported heifers. Existing milk collection and transport services of the National Milk Board (NMB) and cooperativeswould be expanded and improved. Technical assistance is also prov:ldedin the form of pilot programs to develop and demonstrate systems of communal calf rearing and techniques for milk production in the Dry Zone area, as well as for in-service training. iii. Project cost is estimated at US$12.7 million equivalent, including working capital required during the on-farm investment phase, and covers a five-yearperiod, from 1974 to 1978. The proposed IDA credit of US$9.0 million would finance foreign exchange costs of US$5.5 million and about 502 of local currency costs. Government would establish a project account with the Central Bank of Ceylon through which the proceeds of the IDA credit would be channeled. The major part of the credit ($5.5 million) would be for on-farm development and milk collection and transport investments and would be relent by the Borrower to two participatingbanks - People's Bank and Bank of Ceylon - for 12 years including three years of grace with interest at 6% p.a., for subsequent relending to dairy farmers, NMB and cooperatives. The participatingbanks would augment these funds by contributing about $1.5 million of their own resources to the financing needs of the project bene- ficiaries. Relending terms to project beneficiarieswould be: (a) to farmers at 10% p.a. for 12 years; (b) to NMB at 8% p.a. for 10 years; and (c) to cooperativesat 8% p.a. for 12 years; all including a three year grace period. The remainder of the credit ($3.5 million) would be for imported livestock, the Project Technical Unit and pilot operations and would be disbursed through the Ministry of Agriculture, complementedby Government'scontribution of about $0.5 million. Government would also contribute about $0.9 million in the form of pasture development subsidies to participatingfarmers. Farmers would contribute about $0.9 million in labor, cash and kind toward the cost of on-farm development and livestock. iv. In order to ensure overall coordination,a Project Committee would be established under the chairmanshipof the Ministry of Planning and Econo- mic Affairs. It would include representationfrom all agencies and banks - ii - concerned in the Project. Responsibilityfor executing dairy farm development, livestock procurement, techuical services and pilot operations provided under the Project would lie with PTU, which would be established in the Mtinistryof Agriculture. The PTU would be headed by a Project Director who would report to the Deputy Director of Agriculture responsible for the Animal Productionand Health Division (APHD) and who would be supported by internationally recruited personnel, including a technical director and experts on tropical pasture and calf-raising. Responsibilityfor milk collection, transport and marketing would lie with NMB and be coordinated through the Project Committee. v. Internationalcompetitive bidding, in accordance with IDA guidelines, would be used for the purchase of imported milk storage equipment and vehicles and mobile testing units to be purchased by NMB - about US$0.6 million. Heifers valued at about US$1.4 million would be imported from selected countries free from foot and mouth disease in accordance with procedures acceptable to IDA. As most major vehicle manufacturersare represented in Sri Lanka, local competitive bidding would be used for purchase of imported vehicles required by PTU - about US$0.3 million. Seed and materials for pasture planting would be purchased from local suppliers. Local contractors would be used for constructionof selected buildings,and water supply facilities which would be of a small and scattered nature. Local cattle would be procured from both Government herds and from private farm herds through auctions organized by PTU. vi. Participatingfarmers are expected to benefit from higher net incomes at full development,expected in 1981, and the smallest farmers would more than double their incomes. Additional milk productionwould be about 43 million pints annually, amounting to about 25% of 1972 imports of dairy products giving estimated annual foreign exchange savings of about $2.0 million. The estimated financial rate of return to the farmers' investments would range from 15% to 19%. The economic rate of return for the proposed Project is estimated at 15%. The project would create new jobs for about 1,500 people. vii. The proposed Project would also assist the Governmentin its planned diversificationfrom marginally productive tea on 14,000 acres in the Mid- Country. In addition, the extension and research activities in pasture development, communal calf rearing and milk production would encourage sound animal husbandry not only on project farms but also in the surroundingareas. Moreover, the experience gained in financing development of small farmers under the Project is expected to contribute significantly to improved and expanded credit operations in the dairy sector. viii. The proposed Project is suitable for an IDA credit of US$9.0 million. SRI LANKA

DAIRY DEVELOPMENTPROJECT

I, INTRODUCTION

1.01 The Government of Sri Lanka has applied for Bank Group assistance in financing a part of its Five Year Plan (1972-76)in the dairy sector. The proposed Project would support dairy developmenton small to medium- sized farms, and help expand essentialmilk collectionand transport facilities. The Bank AgriculturalSector Mission of October 1971 identified the Project. It was subsequentlyprepared by an interagencyteam from various Sri Lanka Government departments,with assistance from the FAO/IBRD Coopera- tive Programme.

1.02 This would be the Bank Group's fourth agriculturalsector project in Sri Lanka. Credits 121-CE'for US$2.0 million in 1968 and 168-CE for US$2.5 million in 1969 supported irrigation and land reclamation. Loan 653-CE/Credit174-CE for US$29.0 million in 1970 supported power and irrigation. Although there were initial delays, progress on the three projects is satisfactory.

1.03 This report is based on the findings of a mission composed of R. Bailey (IDA), H. Groenewold (FAO/IBRDCooperative Progratme) and T. Haworth (Consultant)that visited Sri Lanka in June/July 1973. Consultationwith the Government of Sri Lanka regarding dairy pricing and other policy matters were undertakenfollowing the field appraisal.

II. BACKGROUND

A. General

2.01 The Republic of Sri Lanka covers an area of 25,300 sq mi and has a populationof about 13.5 million which is growing-by slightly more than 2% annually. Various governmentssince independencein 1948 have concentrated heavily upon a wide range of social welfare programs, expendituresfor which have tended to depress the rate of economic growth. The real GDP growth rate, which has averaged about 4% over the period 1960-1970,dropped to less than 1% in 1971 but recovered to about 2% in 1972 and to 2.5% in 1973. Per capita income in 1971 was estimated at US$100. Activity in the private sector remains depressed; unemploymentis high, particularlyamong the young; export earnings in real terms have declined sharply in recent years, and, with increasingprices for oil and other imports, the balance of payments is under strong pressure.

2.02 Sri Lanka's economy is predominantlyagricultural. Agricultureis the largest productivesector, accounting in 1973 for nearly 33% of GNP, 50% of total employmentand 77% of all export earnings through the sale of - 2 - tea, rubber and coconut products. In contrast, food imports, which have averaged about US$150 million p.a. in the past five years (over 50% of all foreign exchange earnings), have increased.

2.03 In its effort to reverse the deterioratingeconomic trend, Govern- ment is concentratingattention on both export expansion and import substitution programs, looking particularlyto increasing domestic production of rice and subsidiary food products, includingmeat and milk. The Bank Group is already assisting rice production through irrigation projects and with the proposed Project would provide effective support to developmentof the lagging dairy sector, aimed at increasingsupplies of milk and reducing the country'sdependence on imported milk powder. In 1972 these imports were worth about US$8 million representingabout 43% of the liquid milk sales of NMB. Even with imports at this level, the per capita availability of milk is only about 45 g per day compared with about 113 g per day in India. This is inadequateto meet even minimal daily nutritionalrequire- ments, estimated at about 150-200 g per capita.

B. AgriculturalSector

2.05 Sri Lanka's patterns of agriculturalproduction are extremely diverse, reflecting varied climat..cand topographicconditions. The Wet Zone (i.e. the highlands and the southwesternregion) receives both monsoons; the annual rainfall varies from 75 to 200 inches. This Zone covers 25% of the area and contains two-thirdsof the area under permanent agriculture. The Dry Zone, the northern and eastern 75% of the island, receives 35-75 inches of rainfall mostly during the four-monthNovember-February period. Rainfed crop growth is severely limited during most of the other months (Map).

2.06 Of a total land area of 16 million acres, only one-fourth is under permanent agriculture;most of the remainder is forest or bush, natural grasslandand scrub. Tree crops, mostly tea, rubber and coconut, are grown on both estates and smallholdingsand cover nearly 60% of the permanent cultivated area. Rice accounts for 30% of the cultivated area and, along with a great diversity of other crops as well as livestock, is produced mainly on peasant smallholdings. Farm sizes are generally small: of nearly 1.2 million total land holdings at the 1962 Census, only about 6,000 were larger than the 50 acre maximum subsequentlyimposed by 1972 land reform legislationand 85% were smaller than 5 acres (Annex 1, Table 4).

Livestock and Milk Production

2.07 Cattle and buffaloes,numbering 1.6 and 0.7 million respectively, are the most important farm animals. Most herds are very small, with the animals kept primarily for draught and milk on widely dispersed smallholdings throughout the island. About 90 million lb of beef (mostly by-product),20 million lb of other meat (chiefly pork and poultry), and 225 million pints of milk (bevond that fed to calves) were produced in 1972, accounting in total for about 7% of the gross value of agriculturalproduction. Consump- tion of livestock products is low, averaging about 7 lb of beef, 1.5 lb of - 3 -

other meats and 29 pints 1/ of milk (of which 12 plnts were imported) per capita in 1972. Includingeggs and milk, all livestockproducts combined account for only 6% of all food protein consumed.

2.08 Total livestockoutput lhasincreased since 1960 at an average rate of about 4% annually. Growth was confined to the early 1960's, however, and slaughter of all types of farm animals has increased since 1965 leading to a considerabledecline in cattle and buffalo numbers.

2.09 With only 40% of the total cattle numbers, the Wet Zone has great potential for dairy development. Conditionsfor pasture growth are such that it is possible to produce milk on a year round basis. Most cows in this area produce up to 10 pints per day during a 160-day lactation period compared with 2-3 pints in the Dry Zone. Basic informationon pasture developmentin the two main milk producingsub-zones in the Wet Zone (the Coconut Triangle and the Mid-Country)is available. The potential for increasingproduction from these sub zones is considerable,both through the applicationof known pasture technologyand the greater use of crossbredand purebred European dairy breeds. By contrast,pasture management technologyhas yet to be proven in the Dry Zone.

Animal Health

2.10 Sri Lanka is free of rinderpe;t. Foot and mouth disease, hemorrhagic septicemia,black quarter and anthrax are prevalentbut are effectivelycon- trolled through disease control programs (Annex 1). Foot and mouth disease ordinarily causes only a temporary reduction in performance. Hemorrhagic septicemiais normally fatal unless animals are vaccinated at six month intervals. Piroplasmosisand anaplasmosisdo not affect indigenouscattle, but all importationsrequire preimmunization. Internal parasitescan be controlledby drenching. Leeches attack grazing cattle on pastures above 1,200 feet elevationand cattle are customarilyhoused to prevent reduction in milk production. Calf mortality is a serious problem in the Mid and Up- Country where calves are normally separated from their mothers after birth, suffer from malnutritionand are made more vulnerable to disease. A pilot project to develop techniques for collectivecalf rearing is proposed (para 4.12).

C. Milk Marketing and Processing

2.11 About 75% of the milk produced domesticallyfor sale is marketed locally either directly or more commonly through middlemenwho pay the farmer 35-40/pint. The remaining 25% is sold through the Government-ownedNational Milk Board (NMB) which processes and markets mainly in the larger population areas.

1/ Liquid milk equivalent of all milk products consumed. - 4 -

2.12 The role of NMB. The NMBis the biggest milk marketingorganiza- tion in Sri Lanka and the only one with processing facilities. However, until May 1973 when the procurement price was increased from 40i to 60i per pint, the Board had great difficulty in obtaining regular supplies. Today more farmers are selling regularly to NMB through their cooperatives and its supply position is improving. However, many potential suppliers are unable to sell to NMB because of inadequate collection facilities.

2.13 Currently NMB has about 30 milk collection centers throughout the island with another 20 coming up by 1974. Processing capacity in NMB's five plants is now 281 million pints/year with the recent commissioning of a milk powder factory at Ambewela and a heat treatment plant at Colombo in 1973. At maximum operating capacity NMB could process nearly six times the quantity of milk collected in 1972.

2.14 Since late 1972, NMB has purchased milk almost exclusively from cooperative societies which collect milk from farmers and deliver it to NMB collection centers (para 2.20). NMB pays cooperatives monthly for whole milk delivered; cooperatives pay their suppliers one or two days later, after deducting a collection charge which by recent cabinet directive cannot exceed 5 cents 1/ per pint. Previously, collection charges ranged up to 11 cents.

2.15 NMI's financial structure, management and operating performance are presently weak (Annex 2). NMB's price policy is rigidly controlled by Government. The procurement price for;4% butterfat milk, which averaged 40 cents per pint (extremely low by international standards) over 1970-72, was increased to 60 cents in May 1973. Consumer prices of NMB milk products, which historically have been set below cost, were increased by 20-85% in May 1973, but the price of NMB's two major products, powder and condensed milk, were reduced a few days later, due to public protest and political pressure, to a point above their previous level but below cost (Annex 2 and paras 5.07-5.08).

D. Development Support Services

Research, Extension and Education

2.16 The Animal Production antdHealth Division (APHD) of the Department of Agriculture and Lands (Ministry of Agriculture) has primary responsibility or p,licy formulation, research, veterinary and extension services in the livestock sector. With 92 veterinarians filling most key positions on its total staff of 500, animal health has been given more emphasis in programs and services than has animal production, particularly with respect to extension services.

2.17 Pasture and forage research is conducted at Government farms (para 2.19), the University of Ceylon, the Coconut Research Institute and

1; Sri Lanka cent, equivalent to Rs 0.01. - 5 -

the AgriculturalResearch Station at Maha Illupallama. Pasture species adapted to conditions in the proposed Project areas have been proven and planting materials are produced and sold by both Government and private nurseries.

2.18 Four year B.Sc (Agriculture)and B.V.Sc degree courses at the University of Ceylon have produced 30-40 graduates per year; admissions have now been increased to 100 annually. A two-year animal husbandry diploma course at the Kundesale School )f Agriculture graduates about 100 per year, most of whom join the Department of Agriculture as inspectors,and two to six-month training courses in animal husbandry are offered on Government farms and at the APHD Training Institute at Peradeniya. While numbers of graduates are adequate to meet the manpower requirementsfor the Government services concerned, it is anticipated that further training of personnel to staff the proposed project will be required and conducted by the Project Technical Unit (para 4.03).

Government Farms

2.19 Three Government farms maintain herds of improved dairy cattle for research and training, multiplicationand sale of bulls and heifers to private farmers, and for milk production to supply nearby NMB milk processing plants. The farms alsc serve as quarantine stations for large scale imports of cattle. More emphasis has been placed on milk production than on the other service functions (Annex 1).

AgriculturalCooperatives

2.20 The cooperativestructure in Sri Lanka, at the primary level, consists of 368 large sized Multipurpose Cooperative Societies (MPCSs), most of whose main activity has beetito run consumer stores, and a number of specializedsocieties including 29 Dairy Cooperative Societies (DCS) and seven coconut producers' cooperatives. Two major changes significant to the proposed Project have occurred in the functions of the MPCSs following completion of a drastic reorganizationin 1971 (Annex 5). They, along with DCSs, have taken a much more active and generally efficient role in collecting milk for NMB (from 5% of NMB purchases in 1969 to 65% in 1973); further increases are expected and encouraged by NMB. Second, a program to establish Cooperative Rural Banks (CRBs) within the MPCSs has been actively pursued, with CRBs increasing from 20 in 1967 to 350 in April, 1974. Estab- lishment of CRBs in nearly all of the 368 MPCSs (152 in the proposed Project areas) by the end of 1974 is planned; each with deposit and agricultural lending facilities and with access to Peoples Bank for banking advances (para 2.22 and Chapter IV). Details of the perfortianceof the Banks are given in Annex 6.

Banking and AgriculturalCredit

2.21 The commercial banking system in Sri Lanka consists of four local banks and eight foreign banks. The former account for 77% of the deposits of all banks and of these, the Bank of Ceylon and the Peoples Bank are the largest, each with deposits of about Re 1 billion. Some 10% of the advances by the!Bank of Ceylon are for agriculture,mostly to the larger tea and rubber estates. Of the advances by the Peoples Bank, 20% are for agriculture, mainly to coconut farmers and cooperatives. The Bank of Ceylon, set up in 1938, is now fully state-owned,while Government and Cooperatives share about equally in ownership of the Peoples Bank. The Central Bank of Ceylon, which exercises supervisory powers over all banks in the country, provides rediscount facilities to banks from its general funds for short-term advances, and from its Medium and Long-term Fund for long-term (up to 15 years) advances. Interest rates vary from 8 to 12% for agriculturaladvances depending on collateral offered and period of the loan.

2.22 Two significant developmentsin banking and agriculturalcredit are in process. First, under the AgriculturalProductivity Act of 1972 (Annex 4), over 400 Agricultural ProductivityCenters (APCs) will be built (150 open at April 1, 1974), each to include a branch or sub-branch of the Bank of Ceylon. Bank of Ceylon is pressing the branch establishmentprogram, consistentwith a policy decision to participate more actively in smallholder farmer financing. Second, a network of CRBs is being established by cooperativeswith support of Peoples Bank. Plans are for about 90 Bank of Ceylon branches (or sub-branches) and 100 CRBs to be operative in the proposed Project areas (in which both banking systems are expected to participate as on-lenders) by the end of 1974. This rapid expansion is straining the supply of experiencedmanagement, particularlyat local (branch/CRB) level, and both banking systems are recruiting and expanding their management training programs.

Bilateral and MultilateralSupport

2.23 The proposed project was designed with the benefit of the experience gained under the UNDP/FA0 Project (CEY 22 "AgriculturalDiversifica- tion of Uneconomic Tea and Rubber Lands") which is identifyingalternative land uses including the development of improved pastures in the Mid-Country.

2.24 Dairy development is aided by various assistance programs, many of which are a part of the InternationalScheme for Coordination in Dairy Development (ISCDD) initiated by FAO in 1969/70. Bilateral aid includes a pledge of US$2.1 million from Sweden (SIDA) for artificial insemination, vaccine production and veterinary services; technical milk processing assistance and a soft loan for heifer imports from Denmark; US$0.2 million for pasture development fertilizer from Federal Republic of Germany; US$0.3 million annually from Australia for veterinary equipment and services; and in addition the United Kingdom has indicated it would probably consider favorably a request to finance a consultancystudy of milk collection and transport for MMB (para 4.10).

III. THE PROJECT AREAS

3.01 The proposed project would be located in the Wet Zone where conditions for dairy farming are most favorable. It would be concentratedin the two existing main milk producing sub zones --the Coconut Triangle and the Mid Country. The Coconut Triangle is located along the South West Coast - 7 - with genexally flat terrain at elevationsbelow 1,500 feet. The Mid Country sub zone is located to the east of the Coconut Triangle between 1,000 and 3,000 feet. The terrain is generally hilly.

3.02 Coconut Triangle. The population of the Coconut Triangle is about 4.3 million, including the city of Colombo. About 20% of the country's cattle and 33% of its buffaloes are located in the Coconut Triangle where they are used traditionallyfor coconut harvesting and transportpurposes. They are grazed under the coconut trees by day and housed and fed cut forage by night. Traditionally,milk is produced for home consumption. Any surplus is sold either fresh or as ghee. Average yields from local dairy stock and their crosses with Indian dairy bulls are about 1,200 pints per lactation.

3.03 Most of the area is well served with all-weather roads and almost all the settlementshave electricity. NMB has two milk processing plants and seven collection centers in the area; three further centers are under construction. Presently 15 DCS and 107 MPCS are in operation. The area is estimated to have over 18,000 farm holdings of 10 to 50 acres in size.

3.04 Mid-Country The population of the Mid-Country is about 1.6 million. In this area, the Government is encouraging the replacementof marginal tea and rubber with more profitable and reliable forms of production. Milk production is an attractive alternative. The area has about 7% of the island's cattle and buffaloes. Most farmers own cattle, almost all of which are upgraded crosses of native and Indian breeds stallfed on fresh indigenous roughage and home-mixed concentrate,and produce an average of 2,400 pints per 250 day lactation. The temperate climate is suitable for European breeds of cattle when they are given shelter against the heavy rains and external parasites.

3.05 The area is well served with narrow but mostly sealed all-weather roads. NMB has one milk processing plant and two collection centers in the area; eight further centers are under construction. Six DCS and 45 MPCS are in operation. The area is estimated to contain 12,000 farms of 5-10 acres and 4,200 of 10-50 acres in size.

IV. THE PROJECT

A. Description

4.01 The proposed Project would provide an integrated program for the development of milk production on about 42,000 acres comprising about 2,400 dairy farms in the Wet Zone. It would provide technical support and credit to farmer participants and would ensure adequate support for milk collection and transport and marketing.

4.02 Specifically the following activities would be undertaken:

(a) credit and technical serrices for on-farm development including purchase of livestock on about 800 farms of 5-10 acres and 400 farms of 40-50 acres in the Coconut Triangle and about 1,000 farms of 5-10 acres and 200 farms of 40-50 acres in the Mid Country;

(b) supply and installationof equipment for the expansion and improvement of milk collection and transportservices allowing NMB to handle the incrementalproduction expected from the project;

(d) establishmentof a Project Technical Unit within the Ministry of Agriculture,including technicala,isistance to help execute on-farm developmentand pilot operations;and

(e) establishmentof pilot units to (i) demonstratesystems of communal calf rearing through the establishmentof a pilot unit with a yearly throughput of 500 heads; (ii) develop pasturemanagement systems for increasingmilk productionin the Dry Zone using existing government land and livestockin the region.

B. Detailed Features

Dairy Farm Development

4.03 Approximately2,400 dairy farms would be developed by farmers selected in the Coconut Triangle and the Mid-Country. This is expected to involve about 42,000 acres of which about 14,000 acres in the Mid-Country is at present under sub-marginal tea or rubber production. An essential feature of the developmentplans in both areas would be the use of improved dairy cattle to increase herd sizes and production. These would be procured from local sources within and outside the project areas and through direct importation. Credit would also be provided for land clearing (in the Mid- Country),pasture establishment,buildings, fences,water supply and small dairy equipment (details in Annexes 1 and 7).

4.04 In the Coconut Triangle, improved pastures and fodder grasses would he pltnted to replace natural growth under coconut palms and domestically- procuredhigh grade heifers would be purchasedwhich, over a period of herd build-up, would replace indigenous cattle with crossbreds and increase average yield from the present 1,200 pints to 3,000 pints per lactation. Based on the experience of NMB'and the Animal Production and Health Division (APHD) it is estimated that development would take place on about 400 farms of up to 50 acres in size and 800 smallholder farms of around 10 acres. Investmentswould be phased over three years and total about US$94 per acre for the 50 acre holdings, and about US$80 per acre over two years for the 10 acre farms. 4.05 In the Mid-Countryabout one-half of the 1,200 farmers expected to participateare now located on marginal tea and rubber lands. They are maintainingcrossbred dairy cattle on indigenous forage cut and carried from wastelands and marginal tea (or rubber) gardens. Under the Project the original crops would be uprooted and replaced with improved fodder grasses. Herd sizes and productiiitywould be increasedby purchase of pure bred (European type) heifers, half of local origin; half imported. Lactationyields would increase from the present 2,400 to 3,600 pints per lactation. It is estimated that about 200 farms of around 40 acres and 400 of 8 acres in size would participate. Investments,phased over three years, would average about US$185 per acre for the 200 forty acre farms expected to participate. Similar but less intensive investmentswould be phased over two years on the eight acre holdings and would average about US$106 per acre. These investmentcosts are higher than in the Coconut Triangle because of the need for land clearing.

4.06 The remaining 600 Mid-Country farms which would participate are smallholdingsunder traditionalmixed tree, shrub and vegetable crops on farms ranging around 5 acres in size. Investmentsin addition to grass establishmentwould include purchase of one purebred heifer, shelter, water supply and minor equipment for a total of about US$100 per acre.

4.07 The integrationof high producing livestockinto mixed farming systems is one of the most desirable forms of diversificationfrom both the nutritional and economic aspects. The proposed investmentsper acre are comparablewith those for dairy development in similar environmentsin Thailand and Burma where pasture and breed improvementare also the two essential components.

Milk Collection and Transport

4.08 It is expected that NMBwould participateunder the Project as the main outlet for milk produced by farmer-participantsand as a sub-borrower for the purchase of essential imported equipment. However, NMB's finaucial situation is poor and measures for its improvementare to be taken, as set out in para 5.08.

4.09 The existing milk collection and storage facilities of NMB in the Project areas are hardly adequate for present levels of production. Expanded and improved facilities are needed to encourage the production of milk under the Project. Funds would therefore be provided for NMB to purchase storage tanks and chilling equipment for about 70 new milk collection centers, two mobile milk testing units, and for about 15 bulk milk tank trucks to transport milk from collection centers to processing plants. Funds would also be provided to cooperativesfor constructionor improvementof buildings to house the tanks. Tanks and equipment would be owned by NMB and maintained by the cooperativeswhich would manage and operate the collection centers. The testing units would be acquired in Project year 1 and the tankers in year 2. Constructionof buildings and installationof equipment for collection centers would be phased over years 2 and 3, coordinatedwith the expected flow of milk from participatingfarms. These investmentswill be phased following a special study to be undertaken by consultants to NMB (para 4.10). - 10 -

4.10 Based upon the estimated increases in milk production resulting from the Project, it is anticipated that about 40 of the new collection centers would be located in the Coconut Triangle and 30 in the Mid-Country. However, their exact number, distribution and specific locations as well as the specification of exact transport routes and procedures would need to be based upon the results of a comprehensive collection/transport study expected to be financed by the CommonwealthiFund for Technical Cooperation and to be completed by qualified consultants employed by NMB. Terms of reference for the consultantswere discussedwith NMB and are at Annex 10. Agreement was obtained that NMB would engage these consultants,under terms of reference agreed with the Association,not later than 60 days after Credit effectiveness.

Technical Services and Pilot Operatlons

4.11 Project technical support would be provided under the Project to all farmer participants to help them draw up farm investment plans and supervise their development programs. This would be done through a Project Technical Unit (PTU) (See Chapter V), which would also be responsible for setting up and demonstrating systems of communal calf retaringand of milk production in the Dry Zone.

4.12 Facilities for the pilot calf-rearingunit would be constructed near the Veterinary Research Institute at Peradeniya. The unit would have a capacity of 500 heifer calves per year, to be purchased soon after birth from dairy farmers, reared on purchased feed, and re-sold prior to first calving. Finance would be provided for the :onstructionof buildings and purchase of equipment, and to cover the first two years' operating expenses. First estimates have been made which suggest a capital investment of about US$65,000 and that the unit would be self-sustaining after the second year. Detailed planning would be a first responsibility of the calf rearing specialist to be employed under the Project.

4.13 The pilot operation in the Dry Zone would test the feasibility of increasing the low cattle carrying capacity under traditionalDry Zone land use by developing a ley (rotational)farming system in which feed grains and pulses would be rotated with grass and legume pasture for the production of draught animals and milk. Initial attention would concentrate on identificationof suitable field crop rotations and adapted grass and legume species for pastures, utilizing Government lands and cattle for experimentation. Finance would be provided for buildings, land clearing and some levelling, and establishmentcosts.

C. Cost Estimates

4.14 Total Project cost, including participating farmers' incremental working capital (US$0.57million) required during the on-farm development phase, is estimated at US$12.7 million (Annex 11) including contingenciesand taking into account the price rises which followed recent crude oil price increases . In particular fertilizer prices are about 250% of those prevailing - 11 - at appraisal in July 1973. 1/ A physical contingencyof 5% has been applied to all items and price contingencieshave been added as follows: imported cattle 5% p.a. cif; local cattle, farm deve3opmentand technical services 6% p.a.; and equipment,fertilizer and fuel 14% and 11% for 1974-75 and 7.5% for 1976 and thereafter. The estimated foreign exchange componentis about US$5.5 million, or about 43% of total Project cost. Details of investment costs and foreign exchange componentsby major categoriesare given in Annex 11 and summarizedin the following table.

Total Project Cost

Foreign Category Local Foreign Total Local Foreign Total Exchange -- (Rupees Million) -- -- (US$ '000)-----

Dairy Farm Devel- opment 22.9 17.0 39.9 2,288 1,700 3,988 42

IncrementalWorking Farm Capital 4.5 - 4.5 450 - 450 -

PurchasedLivestock 10.8 14.5 25.3 1,081 1,447 2,528 57

Milk Collection & Transport Equipment 5.8 5.5 11.3 575 553 1,128 49

CollectionCenter Buildings 0.9 0.2 1.1 92 16 108 15

Management, Technical Services & Pilot Units 12.5 4.8 17.4 1,252 481 1,733 28

Subtotal 57.4 42.0 99.4 5,738 4,197 9,935 42

Contingencies: Physical 2.9 2.1 5.0 294 205 499 41 Price 12.2 10.8 23.0 1,219 1,082 2,301 47

Subtotal 15.1 12.9 28.0 1,513 1,287 2,800 46

Total ProJect Cost 72.5 54.9 127.4 7,251 5,484 12,735 43

1/ Reflecting a projected farm gate price for urea of US$225 per m ton. - 12 -

D. Proposed Financing

4.15 The proposed IDA Credit of US$9.0 million would finance about 702 of total Project cost. ApproximateLyUS$5.5 million of the Credit would finance the full foreign exchange cimponentand US$3.5 million would finance about 50% of the local currency expenditure. The Projectwould be financed as follows:

(Rs Million)

Total Category Farmers Banks Government IDA Amount (Amount)------(Amount) (%)

Imported Livestock - 1.4 - 17.3 92 18.7

Local Livestock - 1.2 - 10.7 90 11.9

Dairy Farm Development 8.8 3.4 8.8 30.7 60 51.7

IncrementalFarm Working Capital - 0.6 - 5.1 90 5.7

Sub-Total 8.8 6.6 8.8 63.8 72 88.0

Milk Collectionand Transport Equipment - 8.0 7.7 49 15.7

CollectionCenter Build- ings 0.1 0.2 - 1.0 80 1.3

Mansnagement,Technical Services & Pilot Units _ - 4.8 17.5 78 22.3

TOTAL 8.9 14.8 13.6 90.0 70 127.3 4.16 Government.wouldestablish a project account with the Central Bank through which the proceeds of the IDA Credit would be channeled. The major part of the Credit ($5.5 million) would be for on-farm development, includingpurchase of domestic.livestock,and milk collectionand transport :-quipment and would be relent by Governmentto People's Bank and Bank of ,.eylon, which would augment these funds by contributing about $1.5 million of their own resources. Funds for on-farm development would be relent to dairy farmers by both banks: by Bank of Ceylon through its branches and by People's Bank to Cooperative Rural Banks (CRBs) and by CRBs to farmers. Funds for milk collectionand transportequipment would be relent by Bank of Ceylon to NMB, and funds for collectioncenter buildingswould be relent by People's Bank to the cooperatives(see paras 5.09-5.15for detailsof lending terms and operations). The remainderof the Credit ($3.5 million) would be for importedlivestock, PTU and pilot operations and would be - 13 -

disbursed through the Ministry of Agriculture,complemented by Government's contributionof about $0.5 million. Governmentwould also contributeabout $0.9 million in the form of pasture developmentsubsidies to participating farmers. Farmers would contribute about $0.9 million in labor, cash and kind toward on-farm developmentand livestock. Execution of subsidiary loan agreementsbetween the Borrower and People's Bank and Bank of Ceylon, as well as provisionof acceptable forms of lending agreementsbetween these banks, CRBs, NMB, farmers and cooperatives,would be conditionsof Credit effectiveness.

E. Procurement

4.17 Contractswith an estimatedvalue of about US$0.6 million net of contingencieswould be let under internationalcompetitive bidding, in accordancewith IDA guidelines,for the purchase of milk storage and transport equipment and mobile testing units which would have to be imported by NMB. Tenders would require the suppliers of milk storage equipment to supervise its installation. Specificationsfor milk storage and transport equipment, the timetEble for phasing its purchase and installationand the determination of sites for the installationof storage equipmentwould be set by NMB in accordancewith the findings of the milk storage and transport study to be completedby consultants (para 4.10), and would be subject to IDA approval. Agreement on these provisionswas obtained.

4.18 Approximately13,600 dairy heifers costing about US$2.5 million net of contingencieswould be purchased. Of these, about 3,200 costing US$1.4 million would be imported; 4,000, costing about US$0.5 million, would be purchased from existing Governmentherds; and 6,400, costing about US$0.7 million, would be purchased from privately-ownedherds. All purchase of dairy heifers would be subject to the supervision and approval of the PTU Project Director and, during the first three years, the Technical Director, for quality and suitabilityof stock. Purchase of imported heifers from outside Sri Lanka would be organizedby PTU. Because of the wide variations in breeds, types and adaptabilityof animals available,and the disease situation in supplying countries,proposals would be obtained from at least three countries free from foot and mouth disease, that can supply heifers of the type required, in accordancewith proceduresacceptable to IDA. This was agreed during negotiations. The allocation and sale of heifers and young cattle from existing Governmentherds to Project participantswould be carried out by PTU as would the organizationof local cattle auctions in the Mid and Up-Country throughwhich sales of privately-ownedcattle of suitable breeding to farmer participantsin the Project would be conducted.

4.19 Orders for the 19 four wheel drive'vehiclesand 90 motorcycles required by the PTU would total less than US$200,000and be of a piecemeal nature since they would have to be coordinated with the needs of the PTU technical staff which would be built up and trained under a gradually expanding program phased over 3 years to meet increasing demands of the Project. There- fore internationalcompetitive bidding would not be appropriate and procurement - 14 -

would be by local competitive bidding. Most major manufacturesof imported vehicles are represented in Sri Lanka and are competitive and offer satisfactory follow-up service facilities. PTU wiwuldincur additional costs of about US$0.4 million in direct expenditureson technical assistance salaries and vehicle operations. Pasture planting materials, fertilizer,buildings, water supply and other materials required for on-farm development,costing in total about US$5.3 million, would be obtained by farmers and PTU through local suppliers and contractors. These goods and services would be procured piecemeal over 5 years and could not reasonably be bulked to allow for competitivebidding. However, they are readily available locally and there is keen competition between suppliers in the Project areas. Erection of the collectioncenter buildings,which will be widely dispersed and of simple construction,would be carried out mainly by cooperativemembers. Any minor contracts required would be negotiated with domestic contractors.

F. Disbursement

4.20 The IDA Credit would be used to finance (a) the cif cost of dairy heifers and of milk storage, collection and transport equipment imported specificallyfor the Project; (b) 90% of sub-loan disbursementsto participating farmers on new on-farm development investmentsapproved under the Project including working capital and local cattle but excluding imported cattle; (c) 90% of sub-loan disbursementsto participatingcooperatives for collection center buildings aplproved under the project; (d) the cif cost of vehicles for the PTU; (e) 100% of the foreign exchange costs of technical specialists and calf rearing and dry land pilot operations; and (f) 80% of all other PTU expenditures on management, technical services and pilot units except for purchases of vehicles. Disbursement requests would be supported by the usual documents. Disbursements against sub-loans would be made on the basis of a statement of expenditurescertified by the Central Bank and participating banks. Detailed supporting documentation for local expenditures would not be submitted for review, but would be retained by the Borrower and be available for inspection by the Association during the course of project supervision.

4.21 Disbursement of the Credit would be over five years. The phasing of disbursements for each major investment category and the forecast of estimated disbursements on a quarterly basis are shown in Annex 12.

G. Reportlng and Auditing

4.22 Government would maintain a Special Project Account with separate accounts for the several components of the Project, i.e., dairy farm loans, imported livestock, purchased local livestock, milk collection and transport equipment, and PTU (management, technical services and pilot units). It would submit quarterly reports to IDA within 30 days of the close of the quarter. Within six months of the close of the fiscal year IDA would also - 15 -

require annual audited statements covering the Special Project Account, the entire operations of NMB and the Project-relatedaccounts of Bank of Ceylon and Peoples Bank by independentauditors acceptable to the Association. Agreement on these procedureswas obtained.

V. ORGANIZATIONAND MANAGEMENT

A. Administration

5.01 Responsibilityfor overall coordinationof the various agency activities related to the Project would be vested in a Project Committee to be appointed by Government under the Chairmanshipof the Ministry of Planning and Economic Affairs and to include representationfrom the Ministry of Agriculture (includingthe APHD), the Ministry of Finance, the Commissioner of Cooperatives,Peoples Bank, the Bank of Ceylon and NMB. It would be a condition of effectivenessthat the Project Comnittee has been established.

5.02 The PTU would be set up specificallyfor the purpose of the Project, and its establishmentwould be a condition of effectivenessof the Project. It would be responsible for the execution of on-farm development,livestock procurement and the technical services componentsof the project including pilot demonstrationoperations. It would be established as an autonomous unit within the APHD under a Project Director who would report directly to the Deputy Director of Agriculture in charge of APHD. Milk collectionand transport componentswould be executed by NMB. Coordinationof these activitieswith the on-farm developmentprogram under PTU would come through the existing APHD representationon the NMB board and also the Project committee.

B. Management and Technical Services

Project Technical Unit

5.03 The full-timeProject Director would be recruited locally. He would probably be drawn from the existing cadre of senior members of the APHD and would be an experiencedadministrator in livestock development services. It was agreed that the PTU would at all times be headed by a competent Project Director whose qualifications and experience shall be satisfactory to the Government and IDA and that his appointment would be a condition of effectiveness. He would be assisted by an internationallyrecruited Technical Director who would be experiencedin dairy farm development and the management of pastures under tropical conditions. The Technical Director would be responsible for training the technical staff of the PTU and participating banks, particularlyin preparationand approval of farm plans, and for the approval of farm plans submitted by farmers for financing under the Project. - 16 -

5.04 Two additional specialistswould be recruited and attached to the PTU staff as follows:

(a) a livestockspecialist responsible for planning and operation of the calf-raisingpilot operation. He would also participate in the livestock aspects of farm developmentplanning and appraisal and PTU staff training; and

(b) a tropical crops and pasture specialistresponsible for determining and training PTU staff in the most suitable kinds of pasture/foddercrops, production methods and seed multiplication on Project farms. He would also plan and conduct the Dry Zone rotational farming/milk .roduction pilot operation and participate in the technical aspects of a farm development planning and appraisal.

5.05 The Technical Director and two specialistswould be recruited in- ternationallyon terms and conditionssatisfactory to IDA and agreement on these points was obtained. Proposed terms of reference are at Annex 9. The appointmentof the Technical Director would be a condition of effectiveness and that the two specialistswould be appointedwithin 6 months of signing of the Credit. Other PTU)staff would be selected largely from members of the APHD with experience in dairy development in the Project areas. Staff requirementsare shown at Annex 8.

5.06 To ensure close contact with the farming community and success in promotion of the Project, the PTU would be decentralizedwith its head office located at Peradeniya (which is the HQ of APHD and where suitable accomodationsare available)and branch offices located at the existing APHD Livestock Offices in Nawalapitiya,Kurunegala and Welisara.

National Milk Board

5.07 Since its formation in 1954, NMB has, with the exception of small trading profits in 1970 and 1971, operated unprofitablywith losses covered annually (only partially in 1972) by Government. With the May 1973 price increases,profits of Rs 19 million were projected for 1973 but at the sub- sequently reduced (and present) prices, losses of up to Rs 11 million may be expected for the year. Further, at present prices and with or without the proposed Project, NMB future losses would likely be even greater (see Annex 2).

5.08 Strengtheningof NMB's financialmanagement and restorationof the organizationto a sound financial position through, inter alia, revision of its pricing structure are essential to its effective participationin the Project. NMB intends to recruit a competent finance manager empowered to achieve these goals, and appointmentof a person whose qualifications and experience are satisfactoryto IDA would be a conditionof effectiveness. In addition, it has been agreed that: - 17 -

(a) Governmentwould take all measures necessary to ensure the financial viability of NMB and to enable NMB to realize, by the end of its fiscal year 1977, and maintain a rate of return of 8% on NMB's total capital employed. These objectives could be attained initially if the schedule of milk and milk product price increases introduced by Government on May 26, 1973 but subsequentlyretracted, were re-established fully by January 1976 (see Annex 2, Table 4) with necessary adjustments for inflation; and

(b) Government would provide NMB with the funds necessary to enable NMB, not later than December 31, 1975, to write off all its losses accumulated up to December 31, 1974, such funds to be used by NMB to reduce its current liabilities.

C. Lending Operations

5.09 Sub-borrowersunder the Project would be NMB, Cooperativesand about 2,400 farmers approved by PTU. Initially the farmers in those areas nearest the main chilling and collection centers and with establishedbanking services would be brought into the Project. After the PTU and Bank staffs have been trained and had experience in these operations they will move to more isolated areas. Both the Bank of Ceylon, through its branches, and Peoples Bank, through CRBs would serve as on-lenders of Project funds for dairy farm development. In addition, Bank of Ceylon would serve as on-lender to NMB, and Peoples Bank would on-lend to cooperativesfor constructionof buildings to house milk collection equipment. Both Bank of Ceylon and Peoples Bank recruit and conduct training programs designed to provide competent managers for the 90 branches and 100 CRBs scheduled to be operative in the Project areas by end-1974. Government has undertaken to ensure the establishment of these banking facilities as well as any additional facilities necessary to carry out the project.

Procedures

5.10 Dairy Farm DevelopmentLoans. The PTU technicianswould collaborate with the participatingbanks and MPCS in the Project areas in the initial promotionof the project. This is considered an essential prerequisiteto success, since many farmers lack familiarity with improved livestock and pasture management. However, the limited experience to date in the project areas has shown that farmer interest in dairy development credit can be fos- tered with good promotion and advice. Farmer applicationsfor development credit (includingpurchase of cattle), would be submitted either to one of the participatingbanks or to a PTU farm planning technician located in the Project areas. Proceeding concurrently,the Bank would initiate investigation of the applicant's creditworthinessand, if need be, title to property offered for mortgage; the PTU technician, in cooperationwith the applicant,would prepare a farm developmentplan for submission to the PTU Technical Director - 18 -

(or his appointed representative)for approval which would be based on lending criteria as set forth in Annex 6, Appendix 1 and contingent upon assurance that timely payment would be made by Government to the applicant of the appropriate pasture developmentsubsidy (para 6.08). Upon receipt of the approved developmentplan from PTU the participatingbank, with power of approval limited to the applicant's creditworthiness,would secure mortgage of property, obtain an assignment from the borrower on his sales of milk and proceed with execution and disbursementof the loan.

5.11 Equipment and Building Loans. After receiving IDA approval of specificationsand bids, NMB would apply to the Bank of Ceylon for loans to finance the purchase of imported milk storage, transport and testing equipment. Cooperativeswould apply to Peoples Bank for loans to finance buildings to house collection center equipment.

5.12 Relending Terms. Relending terms for IDA funds from Government to Bank of Ceylon and People's Bank would be at 6% for 12 years. Bank of Ceylon wiouldrelend to farmers at 10% for 12 years and to NMB at 8% for 10 years. 1eople'sBank would relend part of its proceeds to CRBs at 7-1/2% for 12 years and the CRBs would relend to farmers at 10% for 12 years. People's Bank would relend the remainder of its proceeds to cooperatives (MPCS and DCS) at 8% for 12 years. All relending terms include a grace period of three years, These terms are consistent with prevailing terms for similar loans in Sri Lanka. The interest spreads would be sufficient to cover administrative costs and credit risks. Agreement has been reached that the above interest rates may be increased to reflect future increases in the interest rates charged by banking institutionsin Sri Lanka on loans for agricultural purposes.

VI. MARKETING, PRICES, SUBSIDIES AND PRODUCER BENEFITS

A. Marketing and Prices

6o01 NMB marketed about 215 million pints of milk equivalent in 1972, equal to about half the country's consumption. About 160 million pints of this was reconstitutedfrom imported milk powder while about 55 million pints of raw milk was collected locally and sold as processed milk. The balance of the domestic production of about 170 million pints was sold by producers oither directly or through collection agents to local rural customers.

6.02 The demand for milk and milk products has invariably exceeded supply over recent years. Although consumer prices have been controlled at levels that have stimulated demand, domestic production has stagnated due mainly to controls on producer prices which, up to recently, offered no incentive for commercial milk production. In addition, Government has re- stricted importationof milk powder. Over the next decade, Government plans to increase domestic production by 4-5% per year through a package of higher - 19 - producer prices, subsidies and improved technicalservices. However, this increase, if realized,will barely keep pace with increasingdemand which Governmentestimates will increase by 5% per year. The Project incremental productionof 43 million pints annually would have a significant impact in reducing import requirements.

6.03 Prices paid to most milk producers did not increase between 1960 and 1972 and, in fact, actually fell in the Mid and Up-Country. However, NMB raised its procurementprice from 40 to 60 cents/pint (55 cents/pintnet of collectioncharge) in May, 1973. Many small producers,having only three to six pints to sell daily, are outside NMB's existing collectionsystem and get 30-35 cents/pint from middlemen. In some productionareas raw milk can be retailed directly by producers at 50-55 cents/pintbut most producersnow appear to turn readily to the NMB channelwhen accessible. However, with the recent increase in fertilizer prices the financialbenefits to the farmers have been so reduced that unless procurementprices are increased there will be little incentive for investmentin dairy farming. At current costs and prices the milk procurementprice would need to be increased gradually from 60 to about 75 cents per pint by January 1977 in order to guarantee farmer interest. Agreement has thereforebeen reached that Governmentand NMB would keep milk procurementprices continuallyunder review, adjust prices whenever necessary to ensure that productionincentives for dairy farmers are maintained,and consult with IDA semi-annuallyon the suitabilityof the productionincentives.

6.04 Consumer milk price structure tends to follow NMB's pricing since NMB supplies half of the market. NMB's price structure is set by Government,and reflects the long-standingnational policy of consumer (esteciallyfoodstuffs) subsidization (Annex 3). Thus liquid milk, which is almost exclusivelyconsumed by the more affluent urban consumers,is priced relatively higher than powder which, because of its keeping quality, is consumed by the urban and rural poor. However, neither product is sold at prices that cover all costs. Powder, which at present world prices costs about 92 cents/pint equivalentto import and repack, is sold at 77 cents. The price of 91 cents/pintreceived by NMB for liquid milk covers direct costs but results in a substantialnet loss when overheads and depreciation are deducted.

6.05 Consumer prices of milk products were adjusted upwards by from 77% to 90% on May 26, 1973 but, due to public reaction and political pressures, prices of powder and condensed milk were brought back close to their previous levels and below NMB's costs. The Project requires Government to adjust milk prices and/or take such other actions as may be required to ensure NMB's financial viability as specified in paras 5.08 and 8.01 (c).

6.06 With lagging domestic production of beef and imports restrictedto hotel requirements,retail prices for beef have increasedmore rapidly than those of other foodstuffs. Retail prices per pound range upwards from the controlledprice of Rs 1.75 in Government shops to Rs 2.40 in unregulated private butcher stalls. To market animals legally for slaughter (through - 20 -

Governmentshops) proof of registrationand ownership is required. However, most producers do not register their animals, hence must sell to middlemen who arrange for the necessary documents,act as wholesalers,control supplies and set producer prices at low (Rs 0.30-0.40/lbliveweight) levels. However, the Project animals would all be registeredunder the Animals Regulations Act and surplus males or cull females could thereforebe sold into the domestic market for beef at reasonableprices.

6.07 Surplus dairy heifers are traded at about Rs 600 to 1,300 per head, dependingon quality, with the prices - particularlyfor low producing cattle - reflecting beef prices. Prices of imported purebred dairy cattle to farmers are subsidized at f.o.b. cost in country of origin -- about Rs 1,300 per head for heifers, and comparablepurebred heifers from Government farms are priced at the same level. Because of the unattractiveproducer prices for milk and unorganizedmarketing, there has been, until recently, a lack of enthusiasm for dairy operations. However, the incentivesoffered under the Project should correct this situation and Project output of surplusbreeding heifers which would be available in number from about 1980 should find a ready market. An increasedsupply of quality stock will be essential to meet the Governmentplans for expanded milk production.

B. Subsidies

Producer Subsidies

6.08 Four direct input subsidy schemes are available to dairy producers in the proposed Project areas. These are described in detail in Annex 3 and summarized as follows:

(a) Rs 500 per acre for pasture establishmentin the Mid-Country (for diversificationfrom tea and rubber);

(b) Rs 120 per acre for establishrentof improved pastures under coconut palms;

(d) pricing of imported cattle to dairy producers at f.o.b. cost in country of origin.

6.09 The pasture developmentsubsidies serve as an incentive to farmers to shift from traditionalland uses and farming practices to the different uses and more sophisticatedtechnologies required under the Project. They are consistentwith Government'sgoal of increasedproduction of food crops and livestockproducts. Similarly,the subsidy on imported dairy cattle is an incentive for farmers to change from their low producing native - 21 -

breeds to proven high producing dairy breeds and consistentwith goverment policy for a rapid build up of a high producing dairy herd. As new technology developed by the project becomes widespread, increasing the availabilityof high quality dairy cattle, and milk procurementprices rise gradually (para 6.03) the need for these subsidies will disappear.

C. Producer Benefits

6.10 Parmers participatingin the Project are expected to benefit from higher net incomes at full development. During appraisal it was estimated that the 600 smallest farmers, (five acres in the Mid-Country)would double their incomes (from Rs 700 to Rs 1,400) at year seven, with an increase again to 2,400 after debt retirement in year nine. Similar financial benefits would also accrue to the estimated 1,200 small farmers in the Mid- Country and Coconut Triangle with 8-10 acres. In the case of the 600 larger 'farmerswith 40-50 acres their net incomes currently derived from dairying are mLrginal and would increase under the Project to about Rs 5,000 to Rs 9,500 at full developmentin year 7. The financialbenefits from these investmentmodels are detailed in Annex 7 and show financialrates of return of 18% to 26%. The time required to reach full development ranges from 6 to 8 years. Although no substantial cash incomes are generated until years five to six for large and small farmers in the Coconut Triangle and the larger farms in the Mid Country, experience has shown that many farmers in the area are willing to forego higher initial incomes and rely on existing sources provided they can see that their investmentswill eventually result in considerableimprovement of their income and nutritional levels.

6.11 With fertilizer prices adjusted to reflect a projected farm gate price for urea of US$225 per ton, the rates of return at the present producer price for milk range from 7% to 11%. Phased increases of Rs 0.05 per pint per year 1975-77 (total increase Rs 0.15) in the producer price of milk would bring the rate of return into the 15 to 19% range. For this reason agreement has been reached that Government and NMB would keep milk procurement prices continuallyunder review and adjust the prices whenever necessary to maintain producer incentives (para 6.03).

VII. ECONOMIC BENEFITS AND JUSTIFICATION

7.01 The Project would assist Sri Lanka in the developmentof its livestock potential and, by substantially increasing domestic milk production, help conserve scarce foreign exchange resources. At full development, expected in 1981, additional milk production from project farms would be about 43 million pints annually, amounting to about 25% of 1972 imports of dairy products and savings of about US$2.0 million in foreign exchange. In addition, meat production in the form of cull animals from project farms is likely to be 1,250 tons liveweight annually (valued at US$418,000),equivalent to about 3% of domestic production in 1971. Also, the 1,400 head of purebred and 1,350 head of crossbred surplus breeding heifers, together valued at - 22 -

US$780,000, available annually from the project will offset the number of imported stock otherwise needed for a rapid build-up of the national herd.

7.02 Non-quantifiedbut significant benefits would result from the support that the project would provide in the implementationof the Govern- ment's plans relating to milk production. In general terms, it would encourage the integration of livestock into the farming system and the adop- tion of mixed farming which in turn would have marked effect in improvement of soil fertility and structure. Specifically,the extension and research activities in calf rearing and pasture management would encourage sound animal husbandry and effective pasture management not only on project farms but also in the surrounding areas and improved animal husbandry and pasture technology adapted to Sri Lanka's tropical environment would emerge. In addition, the experience gained in financing development of about 1,800 small farmers of about 5-10 acres under the Project should contribute materially to the improvement and expansion of credit operations for small farmers throughout the Island.

7.03 The Project would also assist the Government in its planned diversificationof marginally productive tea operations on 14,000 acres in the Mid-Country. Displacement of about 3,000 tons of present green leaf tea production is expected. The Project would increase the utilization of family labor and create employment for additional 1,500 full time workers. 7.04 To reflect the shortage of foreign exchange, an average FEEC rate of Rs 10 - US$1 was used in the economic rate of return calculations. Local crossbred animals were valued at the full domestic market prices as was all labor. The value of the lost tea production is taken equal to the cost of its production since mainly only the marginal operations are being sacrificed. All imports for and imports displaced as a result of the Project were valued at internationalprices. On these assumptions the economic rate of return for the Project has been estimated at 18% (Annex 14). No account was taken of the recent fertilizer price increases in this calculation. When this is included, and assuming no change in commodity prices, the economic rate of return is 15%. To test the Project against changes in investment costs and production results a sensitivity analysis was done. By increasing both investment and operating costs by 20% without changing the operating results, the return to the economy would drop to about 13%. Similarly, by reducing benefits by 20% without changing costs, the rate of return would be 12%. Additional sensitivity tests are given in Annex 14.

VIII. AGREEMENTS REACHED AND RECOMMENDATION

8.01 During negotiations, agreement was reached on the following principal points:

(a) NMB would employ, not later than 60 days after Credit effectiveness,qualified consultants to carry out, under terms of reference agreed with the Association, a study of milk collection and transport in the Project area - 23 -

'.r-a 4.0, and specificationsfor milk storage and transport equipment to be imported by NMB and the sites for the collection centers would be subject to IDA approval (para 4.17);

(b) PTU's Technical Director, Crops and Pasture Specialist, and Livestock Specialist would be recruited internationally on terms and conditions satisfactory to IDA, and the two Specialistswould be appointed within 6 months after signing of the Credit (para 5.05);

(c) Goveramentwould (i) take all measures necessary to ensure the financialviability of NMB and to enable NMB to realize, by the end of its fiscal year 1977, and maintain a rate of return of 8% on total capital employed and (ii) provide NMB with the funds necessary to enable NMB, not later than December 31, 1975, to write off all its losses accumulated up to December 31, 1974, such funds to be used by NMB to reduce its current liabilities (para 5.08);

(d) Government would keep milk procurement prices continually under review and adjust prices when necessary in light of the review to ensure that production incentives for dairy farmers are maintained (para 6.03).

8.02 Agreement was also reached on the following as conditions of credit effectiveness:

(a) Subsidiary loan agreements acceptable to IDA between the Borrower and the Bank of Ceylon and the Peoples Bank had been made (para 4.16);

(b) acceptable forms of the proposed lending agreements between the participatingbanks, intermediaryinstitutions and project beneficiarieshave been furnished to the Association (para 4.16);

(c) establishmentof the Project Committee and the PTU (paras 5.01, 5.02) and appointment of the Project Director (para 5.03);

(d) appointment of the Technical Director (para 5.05); and

(e) appointmentof the finance manager by NMB (para 5.08).

8.03 The proposed Project is financially and economicallysound and would be suitable for an IDA credit of US$9.0 million.

ANNEX1 Page 1

SRI LANKA

DAIRY DEVELOPMENTPROJECT

The Dairy Sub-Sector

Livestock In Sri Lanka Agriculture

1. Agriculture plays a major role in the economy of Sri Lanka through its large contribution to GNP, foreign exchange earnings, and government revenue. In 1973 the agriculturalsector accounted for nearly 33% of GNP, about 77% of export earnings, and 50% of total employment. While livestock farming has considerable potential it is now of minor economic importance, contributing only about 7% of the gross value of agricultural production.

2. Cattle and buffaloes are the most important farm animals, being widely dispersed on smallholdings and numbering about 1.6 million and 0.7 million, respectively(see Table 1 for livestock numbers). In the paddy and coconut growing areas of the south-west, cattle and buffalo numbers are linked to draught power requirements. In the dry north and east, cattle and buffalo grazing is based on the communal use of natural grasslands, and their numbers exceed the local requirements for draught power. Most cows are milked after parturition but yields are typically low. In the past some tea estates have used higher yielding European type cattle to supply milk for their laborers. This type of milk production has virtually ceased, the cattle having been transferred to small-holdersand estate laborers with milk used largely for home consumption.

3. There is no specializedbeef production in Sri Lanka; all beef is the by-products of traditional cattle and buffalo husbandry for draught and milk. Goat and sheep populations are relatively small and located predominantly in the Dry Zone. Pig numbers have remained constant at about 100,000, concentrated in small units on the west coast. Encouraged by government programs including the suspension of all imports of poultry products, poultry production increased rapidly in the 1960's. A network of private hatcheries and commercial production units around the consumption centers developed,but a serious setback to the poultry industry occurred in early 1973 when concentrateprices rose to an all-time high due to poor coconut harvests and the continued substantial export of dessicated coconut and of coconut cake (poonac).

4. Livestock output has increased since 1960 by about 4% annually, growth rates being higher in the early 1960'.. Since 1965, slaughter rates of all farm animals have increased and reportedly have caused considerable declines in cattle and buffalo numbers. 1972 estimates indicate that the slaughter rate in cattle still exceeds their rate of natural ANNEX1 Page 2 increase, but that buffalo numbers are increasing again. Total production of beef (including edible offal) was about 90 million lb in 1971, equivalent to about seven lb per capita per year (see Table 2 for present livestock production). Average consumption of all other meats is estimated at about 1.5 lb per capita per year. Ii 1970, about 220 miilion eggs were produced, corresponding to about 17 eggs per person. It is estimated that at present about 610,OCO pints of milk are available daily for human consumption from local production. This corresponds to about 224 millon pints total production per year and, including 1972 imports of about 160 million pints of fluid milk equivalent,gives an estimated average annual per capita consumptionof about 30 pints. All livestock products combined account for only 6% of all food protein consumed in Sri Lanka, less than half as much as fish.

Milk Production

Production Systems

5. Present conditionsand developmentpotential of milk production can best be consideredby referring to the different ecologicalzoues of the island (see Map and Tables 3 and 4).

6. The Dry Zone consists of about 11 million acres. There are about 400,000 individualholdings covering about 1 million acres of irrigable land, 2 million acres used for shifting cultivation (chena), 2 million acres of natural grasslands and 6 million acres of jungle. Most villages derive their subsistence food and income from the production of rice on individually owned lands. The Dry Zone has about 60% of the country's cattle and more than 50% of its buffaloes. Cattle herds average 10-15 head of indigenous stock. All animals are privately owned but collectively grazed during the day on the village or government owned natural ranges and jungle clearings around the villages. About three acres of unimproved rangeland are required per animal but grazing is seasonal and insufficient in quantity and quality during the long dry season from March until October. No concentrates are fed. After calving, most cows are milked; with once a day morning milking they produce 2-3 pints per day over a 160 days lactation: they produce a total of no more than about 500 pints of milk for home consumption or for curd production, and feed their calf.

7. NMBhas four milk collection centers in the area around Polonnaruwa; only about 5 million pints out of widely dispersed total annual production of about 95 million pints are collected. Although not much of the milk produced in the Dry Zone is available for consumptionoutside the area, this region provides the rural areas and urban populations of the southwest with large numbers of draught and slaughter cattle.

8. The Coconut TriLangle covers about 1.6 million acres in the southwest of the island. An area of about 1.2 million acres is under coconut palms, 280,000 acres on valley floors are used for paddy production. ANNEX1 Page 3

The area has about 20% of the country's cattle population, traditionally used for transportwork in coconut harvest, and about one-third of Sri Lanka's buffaloes used for paddy cultivation.

9. Grazing for the cattle is provided by the grasses, mainly Axonopus species, and shrubs which grow under mature coconut trees. On larger farms cattle are grazed free during the day; on smaller holdings they are tethered. All cattle are housed and fed cut forage at night when lactating cows are separated from their calves so that they can be milked next morning. Average yields from indigenous stock and their crosses with Indian dairy bulls (Sahiwal, Red Sindhi, Haryana) are about 1,200 pints per lactation in addition to calf requirements. All cattle have traditionally been given substantialamounts of coconut cake and rice bran and, on average, all nutrients required for the milk produced are derived from the daily average ration of about 6 lb of concentratesper cow. Improved grasses for grazing on larger holdings and for a cut-and-carry system on smaller farms have been planted only receatly to improve the forage supply for cattle.

10. It is estimated that about 36 million pints of milk are produced annually in the Coconut Triangle. Of this, about 6 million pints are delivered to NMB milk collectingcenters. So far, most milk delivered to the collectingcenters is from larger holdings of about 40-50 acres average, as the owners of smaller farms with one or two lactating cows find it unattractiveto bring the small quantitiesthey produce to the collectioncenters and as very few cooperativeshave taken up milk collection.

11. The Mid-Country occupies 1.3 million acres in the hill areas between 1,000 and 3,000 feet above sea level. The topographyis generally undulating to steep, the flat valley floors being used for paddy production. Tea is the predominant crop and occupies about 500,000 acres. Paddy and other annual crops are grown on about 130,000 acres, the remainder is taken up in about equal parts by rubber and forest gardening (mixed tree, shrub and vegetable production). The Mid-Country is the area where government policy is to replace marginal tea and rubber with more profitable land uses. This area has at present about 7% of the country's cattle and buffalo populations.

12. Generally, all animals are housed day and night throughout the year and stallfed with 80-100 lb of cut, fresh forage. Panicum maximum grows freely on the edges of roads and fields, and in empty spaces of tea or forest gardens and provides sufficientamounts of fodder throughoutthe year even for landless cattle owners. Most farmers own cattle, and the typical forest gardener with about five acres of land has fresh fodder collected daily in a radius up to one mile around his property, saving the more easily collected small amounts of fodder which grows on his own lands for festive days. There is competition for free growing fodder. Many tea estates have been subdivided during the last 20 years into holdings of 5-10 acres. Most of these farmers find sufficient fodder for their cattle on their own lands. ANNEX 1 Page 4

Sowe of the larger, owner-managed tea farms have started to keep dairy cattle in order to make use of those lands which cannot be used for tea and are now under indigenous or planted grasses. Lactating cows received about 5 to 6 lbs. daily of a home-mixed concentrate consisting of poonac and rice bran. Most cattle area of a non-descript type, being crosses between the native stock and Indian dairy breeds and then upgraded to imported European dairy stock. Lactation yields average about 2,400 pints in 250 days. Most cows are milked without their calves at foot.

13. It is estimated that about 41 million pints of milk are produced annually in the Mid-Country. Of this, about 18 million pints are delivered to NMBcollection centers. Most of this milk is produced on smallholdings, particularly of the forest garden type, and is collected and sent to the NMB centers through cooperatives.

14. The Up-Country is the area above 3,000 feet occupied, typically by Agency-House-managedtea estates. 1/ There are about 310 tea estates in the Up-Country. Some areas on hill tops are under grass cover (patua), some others have been planted to wattle, pines or are still under virgin forest. The Up-Country has about 6X of Sri Lanka's cattle population.

15. Most cattle in this area are owned in units of one or two cows by estate laborers for the augmentation of family income. European type cattle of Friesian and Ayrshire descent are kept in fully enclosed sheds and fed about 100 lb of indigenous grasses which are cut daily by family members on the waste areas accounting for about 5% of estate lands. On a few estates, centrally managed dairy herds are maintained. Very few pastures have been established so far on Up-Country tea estates. All cattle receive large rations of concentrates;6-7 lb of a poonac/ricebran mixture would be typical for a lactating cow. Averaga lactation yields are about 2,400 pints, without calf at foot.

16. Total annual milk production in the Up-Country is estimated to be about 38 million pints. Nine-tenthsof this is produced by estate laborers and about 24 million pints or 65%, is collectedby NNB collecting centers.

17. Southern Wet Zone. There are about 1.6 million acres, not included in the Coconut Triangle and the Mid- and Up-Country,located in the south and southwest of the island at elevations up to 1,500 feet. About 60% of this land is held in smallholdingsof less than five acres for rice and tree crop production. Most of the remainingcultivated lands are under plantation crops (rubber). This area has about 8% of the cattle and buffalo populations.

18. Cattle husbandry is generally similar to tnat in the Coconut Triangle,but because of high temperature and rainfall neither European breeds or upgraded cattle perform well. Cattle are mainly kept for

1/ Foreign owned. ANNEX 1 Page 5 draught and lactatingcows are milked once a day but with low production and only one NHB center in the area collectingabout 1 million pints annually the bulk of the 14 million pints produced per year is for home consumptionand processing into curd.

Cattle Breeds and Performances

19. The vast majority of cattle are of the indigenous (Bos indicus) type which thrives well under the local conditions. A number of Indian cattle have been used with limited success to increase the milk production potential and body size of Sinhala cattle. For a long time higher yielding purebred European dairy breds, mostly Friesian,Jersey, Ayrshire and Shorthorn, hav, been used on Up-Country estates. Their offspring and crosses with indigenous cattle have been passed on to the Mid-Country and, to a limited extent, also the Coconut Triangle where they have proven to be higher yielding than the indigenouscattle particularlywhen attention is paid to their nutrition. It is estimated that 90% of all cattle in the Up-Country and 50% in the Mid-Country are of European descent and their crossbreds. Only about 5-10% of cattle in the Coconut Triangle are European crossbred,but their number, particularlyfrom crossingwith Jersey bulls, is increasing rapidly.

20. Productivityof all cattle is low and generally less than genetic potential, largely reflecting low levels of nutrition and management. The calving rate approached 50% on a national level and is about 65% in the Mid- and Up-Country. Deficiencyand seasonality of feeding are the major cause of reduced fertility. Calf mortality is probably as high as 20% on the more intensivelyoperated dairy farms whereas adult mortality is quite normal at about 5%. Average liveweightof mature Sinhala cattle is 700-800 lb in bulls and 500-600 in cows. First calving occurs at three years of age.

Cattle Disease Situation and Calf Mortality

21. Sri Lanka has been free from Rinderpestsince 1964. Diseases of major economic importanceare haemorrhagicsepticaemia, foot-and-mouth disease, black quarter and anthrax. Haemorrhagicsepticaemia is normally fatal; it requires vaccination at six-monthly intervals. 0 and C type viruses are the causes of foot-and-mouth disease which normally only causes a temporary reduction in performance. Piroplasmosis and anaplasmosis are present. They do not affect indigenous cattle, but all importations require preimmunization. Internal and external parasites are widespread. Leeches attack grazing cattle on pastures above 1,200 feet elevation, cause considerableloss of milk productionthrough blood loss and disruption of grazing, and necessitatehousing of animals.

22. Calf mortality is a serious problem where calves are separated from their dams after birth and not needed for milk let-down in their mothers. This is normally the case in the Mid- and Up-Country, whereas in the Coconut Triangle and Dry Zone calves run with their mothers during the day and get some milk in the morning when they induce milk let-down. Most farmers try to sell all the milk they produce and, in the absence of ANNEX 1 Page 6 milk replacers,many calves are subjectedto malnutritionfor a very critical period before they become true ruminants. This malnutrition,often combined with Lo-hygienic and unhealthy stables, predisposes young calves to a series of contagious diseases, like white scours or pneumonia, which then are the final cause of death. Calf mortality is above 20X on many farms and represents a serious loss of valuable animal resources.

Forage Productivity

23. This section summarizes information obtained from discussions with private farmers and at various research centers regarding recent experienceswith pasture/fodderproduction in Sri Lanka.

24. To provide cattle regularlywith as much low cost energy as possibleis the key objectiveof pasture/fodderspecies selection. Con- siderableprogress has been made during recent years and the following results can be substantiated:

(a) In the Up-Country, Kikuyu graiss (Pennisetum clandestinum) grows well throughout the year; with a fertilization of 200 lb of N per acre, one acre can support 1.5 animal units. Nutrient intake is sufficientfor maintenance plus three to four pints of milk in lactating cows.

(b) In the Mid-Country, Napier grass (Pennisetum purpurem), Guinea A and B (Penicum maximum), Nandi grass (Setaria sphacelata) and various Brachiaria species grow well, With proper fertilization they will remain productive through the short dry seasons. At a fertilization level of 100 lb of N per acre, which seems the pro- bable practice on small holdings,about 1.0 - 1.2 animal units can be maintainedper acre. Nutrient intake provides for maintenancerequirements plus six to seven pints of milk.

(c) In the Coconut Triangle,Brachiaria miliiformis and B. brizantba are the most promising grasses for grazing, and Hybrid Napier or Guinea grasses for cut- and-carry systems. In areas with more than 75 inches of rain, coconut yields will not be depressedif the undergrowinggrasses are fertilizedwith 150 lb of N and 100 lb P205 per acre, plus K20 where required. With average intensityof shade in mature coconut groves, about 1.5 acres and 1.2 acres per animal unit are requiredunder cut-and-carryand under grazing conditions, respectively. In both caaes, about four pints of milk can be produced from grass. ANNEX 1 Page 7

(d) In the Dry Zone Brachiaria miliiformis and B. brizantha and Pangola grass (Digitaria decumbens) grow well. About four acres are required to support one animal unit. Forage conservationis not necessary in spite of the long dry season, if they have access to low lying grasslands (Villu)which remain productive during the dry season when inundation from the rivers terminates.

25. Little experience is available in Sri Lanka concerning the role of tropical legumes in pastures. They are probably of little value in tall growing grasses uader zero grazing and heavy application of nitrogen, but their role for less intensivelymanaged pastures for grazing animals in the Coconut Triangle and in the Dry Zone has priority for operational field research.

Production Support Services

Institutional Support

26. The Animal Production and Health Division (APHD) of the Depart- ment of Agriculture and Lands has primary responsibility for policy formulation, research, veterinary and extension services in the livestock sector. Its headquartersis in Peradeniya. It is headed by a Deputy Director of the Department of Agriculture,with assistants in charge of the four sectors: government livestock farms, production promotion, animal health and research. APHD has a staff of about 500 of which 92 are qualified veterinaries,a few are graduates in agriculture. About 310 of APHD staff is located at village level as agriculturalextension workers.

Veterinary Services

27. There are about 40 veterinary hospitals and dispensariesspread over the country. Each is under a veterinarianwho with his staff carries out the various field programs of the Division (vaccination, castration, etc.). Treatment is carried out free of charge at the hospitals and also at the owner's property against a fee for mileage and services. All veterinarians employed by APED are permitted to practice privately in their own time and to retain the fees earned. Some veterinary hospitalshave diagnostic labora- tories. During recent years about 80% of all analyses were of poultry. The veterinary diagnostic services are expected to be strengthenedby bilateral support from SIDA during the next year.

28. Vaccines and medicines required for the diagnosis and prevention of contagiousdiseases are produced in sufficient quantity locally. About 500,000 cattle are vaccinated annually against various diseases. This is done without charge under nationally sponsored program but cattle owners have to pay small fees if vaccinationsare carried out at their request. ANNEX 1 Page 8

Production Extension

29. APHD provides extension services through nine regional livestock offices. As most of these are under veterinary graduates, extension has a strong veterinary bias and insufficient attention is given to crop production, farm management and other related aspects of livestock production. The nine livestock officers are assisted by about 70 field staff who frequently have gone through several years f in-service training at government livestock farms. The entire livaostockextension service is weak technically and has very little contact with the livestock farmers in the vicinity. This is partly due to a grave shortage of vehicles and travel funds. Recruitment of additionalstaff, preferably graduates in agriculture, is needed to meet the needs of the proposed Project. A shift in program emphasis to give greater attention to the neglected (non-veterinary)aspects of livestock farm development is also needed and would be facilitated by the Project. Additional training, particularly in pasture/fodder development and the techniques of farm development planning is also provided under the Project.

Education and Training

30. Four year courses leading to B.Sc. (Agr.) and B.V.Sc. degrees are provided by the university at Peradeniya. So far graduates in agriculture from this university have not been accepted for employment in the professional category by APHD, although the university is relativelystrong in its animal production sector. The School of Agri- culture at Kundesale graduates, after a two year training program, about 100 students each year who become Agricultural Inspectors by joining the Department of Agriculture. Six month training courses for about 40 junior staff of APHD staff and different groups of livestock farmers are given at the Peradeniya In-ServiceTraining Institute with teaching assistance from APHD headquartersstaff. A new cattle production in-service training institute is under constructionat the government livestock farm near Kegalle.

Research

31. The Veterinary Research Institute and government livestock farms carry out research in animal production. Some research is also conducted by the University at Peradeniya, the Coconut Research Institute at Lunuwila and the AgriculturalResearch Station at Maha Illuppallama. The Veterinary Research Institute at Peradeniya does research in para- sitology, bacteriology,virology, animal breeding, animal nutrition, pastures and fodder production. Adaptable pasture species have been proven for the various agro-climaticzones. The University carries out trials on pasture and forage, fertilizer, yields, and feed value. At Maha Illuppallamaseveral grasses and legumes useful under irrigationhave been demonstrated and the Coconut Research Institute has identified and demonstrated pastures suitable under coconut. While a reasonably adequate base of research data relevant to the proposed Project is available, experience ANNEX I Page 9

In its application at farm level is limited. The project will afford the opportunity to widen this experience particularly in determination of the most suitable varieties and mixtures for forage and fodder, cultural techniques inc(luding seeding and fertilization rates, stocking rates and livestock management systems most suited to the various micro ecological environments within the Project areas.

Artificial Insemination (AI) and Bull Distribution

32. AI services were started in 1950 and the number of inseminations increased slowly to about 19,000 in 1971/72. Two bull centers collect semen from 42 dairy bulls and dispatch it thrice weekly by train to the 39 veterinary hospitals from where the inseminations are carried out by assistants on request. Charges are Rs 10 for the first insemination and Rs 5 each for two re-inseminations. The 90-day non return rate is claimed to be about 65%: acceptable for these tropical conditions. The AI center at Kundesale has been selected to become the center of Swedish bilateral assistance, which will also strengthen the use of deep frozen semen.

33. In areas where AI is not feasible, i.e. particularly in remote areas of the Dry Zone, young bulls of improved types are issued to villages or individual farmers under the Bull Calf Exchange Scheme. In this scheme, recipients are expected to return to APHDan equivalent weight of mature, local males and to give an undertaking to castrate all other males in the herds concerned. About 1,500 bulls are issued and 26,000 castrations carried out by APHDfield staff annually. Government Farms

34. Three farms, or groups of government farms are of importance to dairy development. Two of these are located in the Up- and Mid-Country and one in the Dry Zone. One additional farm with milk buffaloes is located in the southern Wet Zone. All the three first mentioned farms have NMBprocessing facilities nearby.

35. All government farms maintain improved dairy stock. Indian dairy cattle and buffaloes are kept at the Polonnaruwa farms in the Dry Zone, and European type dairy breeds at the Kegalle farm in the Mid- Country and the Ambewela farm complex in the Up-Country. Surplus bulls and heifers are sold to private farmers. Farmers apply to APHDfor female stock which are normally sold at 12-14 months of age for Rs 600-700 each. APHDreceives about 2,000 applications per year. The government farms in the Mid- and Up-Country are at present fully stocked and carry about 2,400 cows; considering actual calving and wastage rates, about 420-500 young females can be sold to the private sector each year.

36. Government farms also serve as quarantine stations for large scale cattle imports. European type imparted heifers are transported at once to the Ambewela farm complex for pre-immunization against tick-borne diseases under strict veterinary supervision. ANNEX1 Page 10

Cattle Marketing

37. The marketing of live animals follows traditional lines. No organized cattle markets exist from where draught animals, dairy replace- zunt cattle or stock for slaughter could be collected. Instead, middlmen and their agents visit rural communities at irregular intervals and try to obtain the kind of stock for which they have an outlet. Marketing channels are uncertain and margins excessive. Regular local auctions, with inspection and grading services are badly needed. 38. Marketing of cattle for slaughter is subjected to the Animals Regulations Act of 1968 which requires the registration of all cattle and buffaloes within 18 months of birth and proof of ownership when passed on for slaughter. The act is poorly implemented. It strengthens the bargaining position of the middlemen who normally arrange for the necessary documents. There is also a reluctance for religious reasons to sell ani-als directly for slaughter which further allows the intermediaries to purchase at low prices. Wholesale and retail prices of beef are supposed to be controlled at Re 1.00 and Rs 1.10 per lb carcass weight. Although these prices are not adhered to, they are the basis of price negotiations used by the middlemen. Accordingly, many iroducers obtain only Rs 0.30-0.40 per lb liveweight for beef which then is sold in unregulated butcher stalls for about Rs 2.40 per lb without bones. 39. A Livestock Development Board was established in 1972 within the Department of Agriculture and Lands with the objective, inter alia, to (a) establish a series of slaughterhouses suitable for veterinary inspection and by-product utilization, (b) establish a series of livestock and meat markets, and (c) introduce a beef-grading system. The Board is not yet operational. A Chairman was appointed in early 1972, and a study concerning the location and equipment of the required abattoirs was completed in July 1973 with assistance fromnDenmark. 40. Supply of dairy cattle is organized in two different ways: (a) by approaching APHDand requesting the allocation of surplus stock from government far",- (b) by approaching an intermediary. Due to the low farm gate price of milk until the end of Hay 1973 and very high concentrate prices, demand for dairy cattle has been low during the last year. However, a considerable number of pure-bred or high-grade dairy stock would be required under the envisaged dairy development project and in order to organize the procurement of all locally available cattle of suitable breeding, close cooperation between the project, AfPD and the Livestock Development Board would be essential. With a proper announcement campaign it would be possible to organize dairy cattle sales at regular intervals at the Grama Sevaka Division level.

1/ Milk marketing is described in Annex 2. ANNEX 1 Page 11

41. It has been estimated that between 420-500 dairy heifers could be released from government livestock farms annually. Assuming that 90% of all cattle in the Up-Country, and 50% of cattle in the Mid-Country are of suitable dairy merit, and accepting the performance parameters used in Table 3, it would appear that about 1,700 three-year old heifers would become available from the private sector. Obviously, it would depend on the effi- ciency of the dairy cattle marketing to be organized, but the number which could become available from local sources would be about 2,100 to 2,200 heifers per year.

Feed Supplies and Industry

42. Locally produced coconut cake (poonac) and rice bran are the main ingredients of concentratesin Sri Lanka. About 60,000-70,000tons of poonac and 30,000 tons of rice bran come on to the market per year. The State Flour Mill produces about 15,000 tons of good quality wheat bran from imported wheat, but this is normally re-exported to earn foreign exchange. Availability of high energy feed grains for the modern pig and poultry sectors is critical. About 10,000 tons of maize are produced now, mainly under shifting cultiv4tion and Rs 3.25 million has been accumulated under a World Food Programme (WFP) poultry feeding project in order to increase the local production of maize.

43. Most milk producers, even the smallholders,mix poonac and rice bran on their own farms. The feed industry consists of two large government mills, the Ceylon Oils and Fats Corporation operating under the Ministry of Industries, and the British Ceylon Trading Corporation operating under the Ministry of Commerce and Trade. Together, the two mills have a single shift capacity of about 100,000 tons per year which is at present utilized to about 50-55%, predominantly for the poultry industry. The bulk of the compounded dairy cattle feeds goes to the government livestock farms. Both mills have facilities for simple chemical analyses. An animal nutritionist from APHD visits the mills twice monthly to assist in ration formulation.

44. Attractive world market prices in 1971/72 led to a sharp increase in the export of dessicated coconut. This, together with a general depres- sion of coconut yields due to drought, resulted in a serious shortage of poonac toward the end of 1972. Local prices of poonac rose from about Rs 350 per ton in early 1972 to Rs 1,000 per ton in November 1972 and effected similar price increases in all other ingredients. Government has banned the export of dessicated coconut and of poonac since early 1973 in an effort to salvage the poultry industry and to halt the decline in milk production. These measures had reduced the price of poonac to Rs 850 per ton in May 1973. It is estimated that the future price of poonac will be about Rs 650-700 per ton, and that adequate supplies will be available. ANNEX 1 Page 12

Bilateral and Multilateral Support

45. Dairy development in Sri Lanka has been and is being aided by various foreign assistance programs, many of which are part of the International Scheme for Coordination in Dairy Development (ISCDD) initiated by FAO in 1969/70.

(a) Sweden has pledged US$2.1 million for the strengthening of artificial insemination services, vaccine production and veterinary diagnostic services.

(b) Denmark is providing funds for an expatriate milk plant manager during the running-in period of the Ambelwela spray drying plant and a soft loan for 480 in-calf Jersey heifers to be flown in during September 1973.

(c) The Federal Republic of Germany has provided fertilizers at a value of US$200,000 for pasture development and indicated its willingness to consider similar contributions in the future.

(d) Australia gives about US$300,000 per year for various veterinary equipment and will provide an expert to develop the techniques of pre-immunization against tick-borne diseases; a gift of dairy heifers is also under consideration.

(e) The United K gd is considering financing a consultancy study of milk collection and transport.

(f) The WorldFood Programme (WFP) sponsors a dairy cattle feed grain project under which, over a five year period, WFP-donated maize will generate a revolving fund of about US$3.1 million. These funds are available to government to finance infrastructural development (in-service training, artificial insemination, milk recording) and pasture development in the Coconut Triangle and the Dry Zone.

(g) FAO/UNDP Prolect CEY "Agricultural Diversification of Uneconomic Tea and Rubber Lands" is engaged in determining the extent to which diversification should be pursued and the types of alternative land uses to be recomended. The project operates in the Mid-Country.

(h) Numerous overseas training programs are executed with the assistance of various foreign donors. ANNEX 1 Page 13

Government Programs-and PIlans

46. Past livestock developmentpolicy has been principally concerned with veterinary programs and development of Government livestock farms. Livestock diseases of economic itportance are now under control, and improved breeding stock, as well as advice on the establishment and management of pasture/forage crops, can now be provided disseminated to the private sector.

47. The Five Year Plan (1972-76) aims at increasing milk production to attain the 1963 level of consumptionby utilizing the existing facilities and services for developmentsin the private sector. Rs 50 million, 47Z of total allocationsfor animal production in the Plan, have been earmarked for dairy development. Plan implementation is the responsibility of APHD. The bulk of Plan allocation is for pasture/forage developments in the Mid-Country and the Coconut Triangle, for dairy cattle importationand for AI development.

48. The Divisional DevelopmentCouncils (DDC) and the UDA-RATA Estates DevelopmentBoard also are involved in dairy development. The former are local authoritieswhich may prepare, with government support, development proposals eligible for public financing. DDC projects receive preference in the allocation of cattle from government farms. The UDA-RATABoard has been entrusted by government to develop 27 estates (total about 8,000 acres) which the government has acquired in the Mid- Country. Dairy development is under consideration for some of these estates.

49. Government supports milk production developments through various subsidies (described in detail in Annex 3).

(a) The Tea and Rubber Controller issues Rs 500 per acre for the uprooting of uneconomic tea and pasture establishment, including fertilizer, soil conservation measures and fencing.

(b) The Coconut Cultivation Board issues Rs 120 per acre for the planting of pasture/fodder grasses under coconut palms. Thereafter the permit holder is entitled to purchase fertilizer at half cost in the second year.

(c) Cabinet Paper June 1971 provides for government subsidy to allow distribution of imported stock to purchasers at cost in country of origin. The subsidy amounts to between Rs 3,000-3,500 per imported animal.

ANNEX 1 Table I

SRI LANKA

DAIRY DEVELOPMENTPROJECT

Livestock Populationin Sri Lanka ('000 head)

1960 1965 1970

Cattle 1,552 1,90h 1,593

Buffaloes 813 1.,051 736

Goats 419 600 556

Sheep 52 35 27

Pigs 76 117 108

Poultry 3,409 6,090 6,856

Source: Village Headman's Returns as reported by Departmentof Census

and Statistics.

October 10, 1973 ANNEX1 Table 2

SRI LANKA

DAIRY DEVELOPMENT PROJECT

Estimates of Productionand Consumptionof Livestock Products (Millions of Units)

Milk Beef Mutton Pork Poultry Meat Eggs 1972 1971 1970 1970 1970 1970 (Pints)/ ------(Pounds)------(Number)

Total Production 224 90.6 10.5 6.0 4.5 219

Total Imports 160 - - - - -

National Consumption 384 90.6 10.5 6.0 4.5 219 Average per Capita Consumption ]/ 29 7 0.8 0.5 0.3 17

j,f Based on a yield of 70% from cattle and buffaloes, including edible offal.

g,/ Liquid milk equivalent

y/ Units (pints, pounds or number) per capita

Source: (a) Consumer Finance Survey, November 1969 - October 1970.

(b) Mission Estimates

October 10, 1973 SRI LANKA

DAIRYDEVELOPIMENT PROJECT

Livestock Distribution And Cattle Paraneters

Unit Dry Zone Coconut Mid- Up- Southern Total Triangle Country Country Wet Zone

A. Ecological Characteristics

Elevation Feet 0-1,000 0-1,500 1,000-3,000above 3,000 0-1,500 - Temperature / °Fahrenheit75-90 75-85 65-85 50-75 71-85 - - Rainfall g/ inches 35-75 75-200 75-200 85-220 75-200

B. 'Livestock Distribution

Cattle % 59 20 7 6 8 100 Bur aIo % 54 33 (C..6 ... ) 7 100 Goats and Sheep % 63 21 (...... 12 . ) 4 100 Pigs % 2 97 (... .. - 100 Poultry 36 4 .. 12 .. ) 8 100

C. Cattle Paraneters

Total N-xnber1970 '000 949 32h 104 90 126 1,593 Cow Nu=ber '000 342 117 hi 38 45 586 Nurberof Calvings/Tear '000 188 64 29 25 25 331

D. Estimated Number of ,/ 3-YearOld Heirers '000 ... 114.0. ) Nurber Cows Culled '000 (..--12.3. ) SurplusHeiCers/Year '000 .. (.1.7 . )

Milinimum and maximunmonthly mean temperature recorded in the zone / Range in total annualrainfalI I 3/ Assuaming501 of the Hid-Countrycalf .crop.

Source: Mission Compilation. X

October10, 1973 ANNEX1 Table 4

SRI LANKA

DAIRY DEVELOPMENTPROJECT

On-Farm Land Use and Farm Size DistributionIn The Project Area by Climatic Zone

Land Use Plantation Paddy Other Grassland Other 1/ Total Crops Crops ...... '000 acres......

Mid Country 403.9 86.3 94.7 4.9 142.2 713.6 Coconut Triangle 1,123.7 295.9 103.1 6.4 140.5 1,669.6

Total Project Area 1,527.2 382.2 197.8 11.3 264.7 2,383.2

Whole Island 2,323 1,139 821 33 653 4,667

Farm Size Distribution(ac) 0-5 5-10 10-25 25-50 50-100 Over Total

...... '000 acres ......

Mid Country 194.0 77.5 47.7 25.1 20.8 347.7 713.6 Coconut Triangle 563.4 262.9 208.8 130.0 109.0 395.5 669.6

Total Project Area 758.2 340.4 256.5 155.1 129.8 743.2 2,383.2

Whole Island 1,482 852 530 262 192 134.9 4,667

...... Number of farms ('000)......

Whole Island 985.7 132.4 37.5 8.3 2.8 3.1 1,169.8 j Homesteads and on-farm waste land.

Source: DepartmentoV Census and Statistics - Census of Agriculture 1962 Vol. II Land Utilization. Colombo 1966.

October 10, 1973 ANNEX2 Page 1

SRI LANKA

DAIRY DEVELOPMENTPROJECT

National Milk Board (NMB)

A. Background

1. NMBwas constituted in 1954 3s a department of the Ministry of Agriculture and Lands to establish and maintain efficient milk collection, processing and marketing services. The Board consists of seven members appointed by the Minister of Agriculture and, within its principal function of milk marketing, acts in matters of contracts, sale and purchase of land, plant, livestock and recruitment of staff. The Board also raises commercial and government loans. However, decisions affecting national policy (especially pricing) are subject to confirmation by the Minister. Financially, the Board is responsible to the Minister and the Government is responsible for covering NMB losses.

B. Collection and Transport

2. Statistics available on livestock numbers and milk production in Sri Lanka are poor. Data on milk production are derived partly from Headman's 1/ stock counts (multiplied by an assumed average yield) and partly from a consumer survey (1968) of 4,300 households. Neither figure can be accurate, but it is estimated that the NMB, collecting about 54 million pints in 1972, handles about one-fourth of Sri Lanka's milk production meant for human consumption. The remainder is either consumed on the farm, retailed locally or marketed through private collection agents. NMB intake of liquid milk has increased to the present 54 million pints from a level of 22 million pints in 1967 following the installation of collection centers with chilling facilities and the expansion of its transport fleet. Location of new NMB collection centers has been decided on the basis of milk production surveys and has therefore largely attracted milk previously sold locally. NMBexpects the producer price increase of May 1973 (para 4) to further increase intake. Such collections of liquid milk accounted for about one third of NMB's total throughput in 1972, with the balance of 115 million pints equivalent being imported, mostly as powder milk.

1/ Village Headman. ANNEX 2 Page 2

Cooperatives

3. Until 1972, deliveries to NMBcollection centers were mostly by individuals, often through private collectors who purchased the milk from producers, typically at reduced prices. With the 1970-71 reorganization of cooperatives(Annex 5) and the establishmentof cooperative collectingpoints, deliveries to collection centers through cooperatives have increased sharply: from only 5% of NMB purchase in 1969 to 65% in May, 1973. Under Government encouragementNMB has supported the shift to cooperativecollection in order to improve quality and reduce rejections. Both multipurposecooperative societies (MPCS), 152 in the project area, and dairy cooperativesocieties (DCS), 21 in the project area, are engaged in milk collection and delivery. Each IPCS covers a large area and uses hired truck transport. The DCS are smaller and use whatever transport is available and suitable. Some use bicycles. All milk is delivered to collecting centers in cans; no bulk (tank) transport is used.

4. Collection and transport charges to producers have generally been high, in some cases as much as 11 cents per pint out of a producer milk price (until May, 1973) of 40 cents. DCS charges have typically been lower than HPCS, reportedlybecause of the greater influence of DCS members on management. A recent Government directive established 5 cents per pint as the maximum collection charge to be levied by cooperatives. This should stimulate collections. NMB tests all milk on arrival at the collection centers for fat content, solid content and keeping quality, and may reject a complete delivery if necessary. Rejections have fallen over recent years, and were less than 25% in 1972.

Producer Prices

5. For 4% fat raw milk NMB now pays 604/pint to the cooperatives compared to 35-404/pintbefore May 1973. Prices received by producers wholesaling through the cooperativesare now comparable to those received by producers able to retail locally. The latter receive between 50 and 55 cents per pint, but the majority sell through agents who pay 35 and 40 cents. Thus producers now turn readily to NMB when collection facilities are made available. NMB pays monthly for milk on the fifteenth day of the following month, and the cooperatives,after deducting collection charges, pay their suppliers one or two days later.

Traslort

6. Milk is transported once daily from the collection centers to the processing facilities by tankers, mostly of 1,200 gallon capacity. A fleet of 23 tankers was purchased between 1962 and 1969.and a DANIDA grant will provide for the replacement of the ten most aged vehicles in 1973. By then, NMB will have in commission a road tanker fleet with an operational capacity of 170 million pints Annually. Excluding milk transfers between plants, road hauls are short (approximately 20 miles) and it should be possible to achieve h_gh utilization of the transport capacity. ANNEX 2 Page 3

C. Processing

Cpacity

7. Almost all milk processing, except for the curd manufacturedin the productionareas, is done by NMB. By the end of 1973, NMB will have in commissiona total processing capacity of 281 million pints annually (Table 1) excluding the imported power repack operation. This is almost six times the amount of milk collected in 1972. Over half the capacity consists of a new spray drying plant at Ambewela, in the hill country, and the replacement of the 1957 pasteurized and sterilized milk plant at Colombo. The Anbewela plant is financed by DANIDAand by Government and is intended to reduce the imports of powder milk which has doubled in price on world markets since 1972. The initial throughput is expected to be about 24 million pints annually, rising to its full capacity of 74 million pints as the IDA project progressively reduces the need to use hill country milk for processing in Colombo. The new Colombo plant is financed by DANIDAand has an annual capacity of 100 million pints.

Products

8. The chief products from NNB plants are pasteurized and sterilized milk, powder milk, malted milk, condensed milk and small amounts of milk products manufactured from surplus fat content (ice cream, butter & yoghurt). Before the Ambewela plant was commissioned, all the powder milk output was from repacked imports. Details of milk movements into various products and channels are shown in Table 2. Two factors will affect the future product mix and processing schedule. The first is the effect of price changes. NMBexpects sales of pasteurized and sterilized milk not to have risen in the latter half of 1973; surplus milk is being transportedto the condenseryand stocked as condensed milk for sale in 1974. However, when the spray-drying plant is operative, it will process all the milk produced in the hill country taking about 1 million pints per year more than is currentlybeing processed for stock in Polonnaruwa. The amount of liquid mild sold will therefore fall by that amount. The second factor affecting the production schedule is the proposed IDA project. Under the farm component 43 million extra pints of milk per year will be produced from 1981 onwards. Transport costs will be reduced; Colombo's liquid milk consumption would increasingly be satisfied from local sources, and the surplus milk now processed at Pallekelle will be transported direct from the collection centers to the spray drying plant.

Marketing

9. Powder milk, malted milk and condensed milk are sold exclusively to the Ceylon Cooperative Marketing Union Ltd (CCMU), and then to the cooperatives. CCMUreceives a commission of approximately 6 cents/pint equivalent. Pasteurized and sterilized milk and other milk products are sold to agents for cash at a commission of 5 cents per pint (the previous practice of giving one week's credit had led to a bad debt problem), to hospitals on one month's credit, and for cash through milk bars owned by NMB. ANNEX2 Page 4

D. Financial Situation

OperationalProfitability

10 , The earning capacity of NMBdepends on government-regulated prices. Increases in product prices to eliminate operating losses and to enable iNNB to meet loan repayments are essential. Any changes in milk and milk product prices, both producer and retail, are subject to confirmation by Govern- ment. Both producerand consumer prices were increased on May 26, 1973. The producerprice increasewas maintainedand the' issionwas informedthat it would not be reduced. However,the increasesin consumerprices on two major products, powder milk and condensed milk, were reduced after four days on May 30, 1973 due to consumer and political pressures. The changes are given below Since powder and condensed milk together amountto almost 75Z of NMB'8 sales, these price reductions will clearly have an adverse effect on NMB's financial situation projected from the May 30 prices. Before May 26 After /2 Unit May 26 May 30 May 30

ProducerPrice- pt 0.40 0.60 0.60

Consumer Price

Pasteurized pt 0.55 0.95 0.95 Sterilized Pt 0.60 0.95 0.95 Vitamalt (it tins) lb 5.40 6.50 6.50 Powder(in tins) lb 3.65 6.75 4.75 Condensed(in tins) lb 1.25 2.25 1.75

/1 For 42 fat content; to cooperatives which now deductonly 5J/pintcollection charge comparedto 1/pint till 1972. /2 Pricesat appraisal. 11. At presentprices, condensery direct costs (i.e.excluding fixed overheads,depreciation and interest)xceed incomeby 16% The plants at Colombo and Pallekelle make direct profits, on the same definition, of 16Z and 22% of income respectively, but these are not sufficient for them to operate profitably after deducting overheads and depreciation. Pallekelle breaks even and, being a small plant operating near capacity, needs higher selling prices to achieve better results. Colombo needs significantly greater throughput at present prices. Breakeven now is 401 of capacity; the forecasts for 1974 and for 1981 are 10% and 42% of capacity, part of the increasearising from a reductionin Pallekelle'sthroughput. The profitability of the imported powder packing operation at Welisara depends on world prices for powder. At the time of the mission's visit it was ANNEX2 Page 5 profitable, but with subsequent increases in the price of imported powder, it barely covers costs: fixed costs are very low. This price results in an overall cost 20Z higher than that of powder from the Ambewela plant. Caitalization

12. Sources of capital at December 31, 1972 were as follows:

Total Equity Grant Loan Other (short-term) ------Rs million------

Sri Lanka Government 55.5 35.7 2.1 17.7/

Other Governments New Zealand 3.5 3.5 /2 Danida 5.0 Banks 12.2 9.9 2.y-=

Trading Credit 45.1 45.1

Depreciation -16.8 -

138.1 3 5 .7i4. 5.6 32.6 64.2

/1 Rs 13 million interest free.

/2 IDA terms.

/3 Overdrafts.

/4 The equity must be reduced by the accumulated loss of Rs 17 million.

From this summary it can be seen that about 12% of NMB' capital bears comercial interest: this will reach only 17% when the project loan is fully drawn. Sri Lanka Government has provided over 70% of the subscribed capital, almost entirely as equity, grant and interest-free loan. Table 3 shows balance sheets from 1969 to 1972.

13. Financial projections for NMBare given in Tables 3 and 4 where the existing price structure (after May 30, 1973) and full-increase price structure are analyzed. Without the project, an 8% p.a. growth in NMB0's local milk procurement is projected. With the project, at existing producer, product and import prices, operating losses (before depreciation aad interest) would amount to about Rs 26 million in 1975 and decline to Rs 15 million in 1981. However, any debt servicing without substantive government support is ruled out in these circumtances. If powder and condensed milk prices to consuers are increased to the May 26, 1973 level, ANNEX2 Page 6

NMB's operating income with the project would be increased sufficientlyto permit a 15 cent per pint increase in producer prices (required to provide minimum investment incentives to dairy farmers) and provide a return, after taxes, of 7 to 10% on NMB capital.

14. To meet the minimum requirements of profitability, debt servicing, re-investment needs, and higher producer prices, without recourse to government subsidy, price increases equivalent to those introduced by Government on May 26, 1973 need to be re-established. Given the fact that different products are consumed by different segments of the population, the price structure could be adjusted to deal with the issues relating to the low purchasing power of certain segments without sacrificing the requirements of NMB's financial soundness by increasing the price of liquid milk which is consumed mainly by the high income sector of the population relatively more than that for powdered and condensed milk which are consumed by the lower income group. More specifically, the following measures are recommended:

(a) NMBmilk and milk product selling prices would be increased to levels which will enable NMBto maintain, from the end of 1976 onwards, an operating income sufficient to provide a return after taxes of at least 8% on total capital employed;

(b) Government would subscribe in cash an amount to NMB's equity sufficient to write off NMB's retained losses, with the funds to be used by NMB to repay bank overdrafts.

Financial Management

15. NMB financial management is weak. Management information and budgetary control are lacking, and no accounts had been produced at the time of the mission's visit (June-July 1973), since those for 1972. NMB intends to recruit a high-grade financial controller,and certain changes to the accounting systems are contemplated which will increase their value to management. Recruitment of a financial controller whose qualifications and terms of reference are acceptable to IDA would be a conditiorn of Board presentation. Also agreement under the Project would be sought that NMB would submit to IDA annual statements covering its entire operations within 120 days of the close of the fiscal year. SRI LANKA DAIRY DEVELOPMENT PROJECT Channelsfor Milk and Milk Products Figures indicate movement of supplies, 1972 in million of pints of fluid milk equivalent

I MPORTS7 ESTIMATED _O FARO SALES MILK POWDER 1!01 224 BUTTER 10

PRODUJCER COOPERATIVES RETAI LERS TO & AGENTS N.M.B. 170 54 113

lNMB

& R EPACKlING

67 100 47

NMB NMB NMB NMB NMB PASTEURIZED OTHER CONDENSED SPRAY POWER MILK AND PRODUCTS 3 MILK 29 DRIER (NOT REPACK POWDER 37 STERI LIZED OPERATIONAL) 100 MILK WASTE 1 BUTTER 10

_ CONSUMER . _384

PRODUCTS SOURCE OF MILK 1972 DOMESTIC IMPORTS TOTAL . millions of pints..| . |

LIQUID 204 - 204 POWDER - 137 137 CONDENSED 16 13 29 OTHER BUTTER 4 10 14

TOTAL 224 160 384 | World Bank-8491

ANNEX 2 Table 1

SRI LANA

DAIEI DVEWPMEMTPROJECT

NMB Procegsing CamacitZ - End 1973

Million pints Liquid Milk Opening Sauivalent (IME) Date Capacity $ales, 1972

Powder Milk

Welisara: 1969 Powdermilk packing 158 85 Malted milk packing 50 15

Ambewela 1973 Powder Milk manufacturing A - Sub-Total 282 100

Liquid Milk

Colombo 1957/1973 100 Pallekelle 1962 22½! Polgahawela 1958 17½ Catlle 1959 11

Sub-Total 151 36 CondensedMilk

Polonnaruwa 1968 56 30

Total X89 166

January 3, 197h ANNEX 2 Table 2

MTAD3WlNlT PEWRT

1KB: Shgtl 1969:72

1969 1970 1971 1972

A. ASSETS 1. CurrentAssets Cash 152 3,552 106 3,757 Inventory 19,958 23,961 24i8468 31,156 Accounts Receivable 9,176 29,286 1 1 28 38,741 10.579 36,513 10,264 bS,173

2. Depoaits & Advances Deposits 96 114 223 9,132 Advances & Prepaid Expenses 1.823 1,919 1,612 1,726 1.504 1,727 3.1s 12,h70

3. FixedAssets Cost 37,821 41,281 45S,030 44,872 Original 8 11.174 30,107 13,717 31,31.3 16jLj 28,050 Lesst Depreciation 9.702 28,119 6 Plant Under Construction.- 2,158 14,519 1 ,142 18,180

4. Total Assets 61.482 85.695

B. LIABILITIES

1. Current Lisbilities Accounts sryable 10,403 16,706 14,942 16,711 RefundableDeposits and Subsidies 1,262 2,390 9,763 3,369 Bank Overdrafts& TR Loans 18,445 30,110 9,431 28,527 2,275 26,980 29 U 49,132

2. Long-TernLiabilities Governuent Loan 750 750 750 750 CommercialLoan 41,87L4 5,624 18,116 18,866 14J7 15,483 9.892 10,642 3. Capital, Ekiulty& Reserves GoverrnentEquiU' 24,645 26,595 26,895 39,602 Donated Gapitalf 5,010 14,10262 26,300 21,654 General Reserves 63 63 63 63 Retained Earnings (Losses)(4,170) 25,748 (3,360) 37,700 (4,026) 43,232 (17,420) 44,099

L. Total Liabilities 6i,482 65,093 85,695 103,873

C. OPEL TINGRESULTS

1. Net Sales h8,000 72,000 87,000 99,000

2. Gross MarginW' 8,334 11,334 10,857 (4,959) 3. Net Income (909) 1,115 240 (15,375) D. IMPORTANTRATIOS

1. Current Assets to Current Liabilities 0.97 1.36 1.35 0.92

2. Long Tern Debt to Net Worth 22% 50% 36% 24S

3. Current Liabilities to Fixed Assets 49% 33% 31% 47%

L. Inventories to Sales 42% 33% 29% 31%

5. Gross Margin - to Sales, 17% 16% 12% -5

1/ Sourcet HMB,Annual Report 1970 and draft annual report 1972. 2/ Chiefly Spray Drying Plant at Ambewela. 3/ Danidaand New Zealand Governuent.--Plant and Transport Vehicles. Income before administrative overheads, depreciation, izterest and taxes. Deceniber 1?, 1973 SRILANKA DAIRY DEVELOPMENT PROJECT NMB/ OPERATING STATEMENTCASE I: PRODUCT PRICES OF JUNE '73 ( Rs 000)

YEAR 1974 1975 1976 1977 1978 1979 1980 1981 A. WITHOUT PROJECT 2 1. SALES Pasturized & Sterilized Milk 20880 23040 25200 27360 29520 33840 45360 53280 Powder & Vita Milk 98530 101840 104330 106810 109300 110120 103500 101010 Condensed & Other 39410 40180 40900 41630 42360 43640 46690 48880 Total Sales 158820 165060 170430 175800 181180 187600 195550 203170

2. OPERATING COSTS Cost of Materials 134530 138730 142330 145930 149530 153730 58530 163330 Processing & Packing 29250 30370 31280 32200 33120 33950 134020 34580 Transport & Selling 6830 7200 7520 7850 8170 8620 9390 10015 Other Fixed Costs 14950 14950 14950 '14950 14950 14950 14950 14950 Total Operating Costs 185560 191250 196080 200930 205770 211250 216890 222870

3. OPERATING MARGIN (26740) (26190) (25680) (25130) (24590) (23650) (21340) (19700)

4. DEPRECIATION 7450 7450 7450 7450 7450 7450 7450 7450

5. INCOME BEFORE INTERST & TAXES (34190) (33640) (33100) (32580) (32040) (31100) (28790) (27150)

B. WITH PROJECT 3/ 1. SALES 5 Total Sales I58820 165060 170430 175800 181180 187600 195550 203170 2. OPERATING COSTS - Cosc of Materials 134530 138370 1410b0 142850 144630 147970 151300 155580 Processing & Packing 29250 30450 31610 32990 34360 35320 35860 36560 Transport & Selling 6830 7230 7640 8140 8630 9140 10070 10750 Other Fixed Costs 14950 14950 14950 14950 14950 14950 14950 14950 Total Operating Costs 185560 190950 195265 198930 202570 207380 212180 217840

3. OPERATING MARG1N 4/ (26740) (25940) (24830) (23130) (21390) (19180) (16630) (14670)

4. DEPRECIATION 7450 7460 7940 8240 8240 8240 8240 8240

5. INCOME BEFORE INTEREST & TAXES (34190) (33400) (32770) (31370) (29630) (27420) (24870) (22910) C, REDUCTION TN OPERAT NGTfSS DUE TO PROJECT 5i - 250 820 2000 3200 4470 4710 5030

1/ Consumer Prices as follows: P & S Milk at Rs 0.95/pint; Powder at Rs 4.75/lb, condensed milk at Rs i.,5/Vi. ImpocLs aze p.iced. at WS 987/ton or 76¢/pint equivalent - the CIF price 1973. Local procurement at Rs 0.60. - -

2/ Assumes a growth in local procurement of 8% p. a based on an actual growth of 12% in 1970-73. Imports are assumed constant at 121 million pints equivalent without the project and project incremental production determines the eatent of import substitution wqith project.

3/ Product mix is not changed as a result of the project, bua locally produced products are substituted for imports.

4/ Demonstrates inability to service any debts without substantial product price increases. (CASE II)

5/ 'Financial rate of return on incremental investment of Rs 13.3 million is 22%.

December 12, 1973

LO SRI LANKA

DAIRY DEVELOPMENT PROJECT I/ NIME - OPERATING STATEMENT CASE II: WITH PROJECT AND WITH PRODIUCTAND PRODUCER PRICE INCREASES (Rs '000)

YEAR 1974 1975 1976 1977 1918 1979 1980 1981 1. SALES

Pasteurized and Sterilzed Milk 20,880 23,040 25,200 27,360 29,520 33,840 45,360 53,280 Powder and Vita Milk 98,530 127,605 157,120 160,850 164,600 165,840 155,870 152,120 Condensed and Other 3911 44.800 50,230 50,870 51.600 52,880 55,930 ~ 58 ~12 Total Sales 158,820 195,445 232,550 239,080 245,720 252,560 257,160 263,520 2. OPERATING COSTS 2/

Cost of Materials 134,530 141,960 149,380 157,700 161,880 167,020 172,750 178,680 Processing and Packing 29,250 30,450 31,620 32,990 34,360 35,320 35,860 36,560 Transport and Selling 6,830 7,230 7,640 8,140 8,630 9,140 10, 070 10,7.50O Other Fixed Costs 14,950 14.950 14,~50 4,9 50 14,950 14,950 14j50~ 14,950 Total Operating Costs 185,560 194.590 203,580 213,780 219 820 __ 226.~430 __232_L,30 4094 3. OPERATING MARGIN (26,740 855 28,970 25,300 25,900 26,130 25,530 22,580

4. DEPRECIATION 7,450 7.460 7.940 8,240 _8, 740_ 8,240 820824

5. INCOME BEFORE INTEREST AND TAXES (34,190) (6,605) 21,030 17,060 17,660 17,890 17,290 14,340 6. TAXES -- 8,950 6,880 7a?290 7.~690 79 6.160 7. INCOME AFTER TAXES (34,190) (6,605) 12,080 10,180 10,370 10,200 9,660 8,580

8. AFTER-TAX RETURN TO CAPITAL 3/ (30%) (5%) 10% 8% 8% 8% 6011 7% DEBT SERVICE FOR PROJECT LOANS

1. LOANS

(a) IDA Funds -4,200 2,280----- (b) BlanIs of Ceylon Funds __4- Q ______2400______-______Total -8,660 4,680 --

2. DEBT SERVICE

(a) Interest (8) -335 870 1,060 940 810 675 525 (b) Principal - - - 1.485 1 6~05 1,730 020 Total- 355 870 2.5452,4 .4 .4 45

I/ Consumer prices increased on powder and condensed milk to the May 26, 1973 levels of Rs 6.75/lb on powder and Es 2.25/lb on condensed milk: half the increase effective January 1, 1975; half January 1, 1976. Procurement price increased from Es 0.60/pint to Es 0.75/pint (Rs 0.15/pint increase), phased at Rs 0.05/pint on January 1, 1975-76-77.

2/ Same as corresponding item in Case I, but with local milk procurement price increased.

3/ The capital base required for the projected scale of operations is fixed at the 1973 level (rs 113 million) plus project investments in 1975-76. ANNEX 3 Page 1

SRI LANKA

DAIRY DEVELOPMENTPROJECT

Pricing axadSubsidies Relating to the Dairy Sector

1. Agriculture in Sri LankE (including the dairy sector) is subject to a complex network of price supports, taxes, subsidies, and controls which severely distort price relationships. The most important factors have been:

(a) the maintenance of consumer subsidies on foodstuffs;

(b) the introductionof selective input subsidies;

(d) the gradual over-valuationof the official exchange rates, and the development of a dual exchange system following the introductionof the Foreign Exchange Entitlement CertificatesScheme (FEEC's) in 1968.

Consumer Subsidies

2. After achieving independencein 1948, Sri Lanka put high priority on improving the welfare of its less privilesed people. The subsidized rice ration initiated during World War II was extended to cover the entire population. Efforts to reduce consumer subsidies for rice and other foods in 1953 and 1970 had severe political consequencesand, except for these brief periods progressively more extensive and costly food subsidy programs were maintained until late 1973, when their cost comprised 20-25% of total Government current expenditures.

3. Sri Lanka's already acute foreign exchange shortage worsened in 1973, reflecting a sharp downward movement in the terms of trade. The adverse trends in both prices and availabilityof key imports in 1973 led Government to reconsider its policy of supporting and subsiding food consumption through the budget. In October major changes were made. The principle of public responsibilityfor a basic food supply for all the population was retained but the balance of the system was shifted to supply foodstuffs in a manner which sharply reduced the subsidy element.

4. Specific reductions in food subsidies include: (a) a halving of the free rice ration to one pound per person per week; (b) a halving of the wheat flour ration; (c) an increase of 60% in bread prices; and (d) a reduction in the sugar ration and an increase from RS 2 to Rs 5 per pound in the price of off-ration sugar. At the same time steps were taken to ANNEX 3 Page 2 start a national food drive to increasedomestic supplies and substitutes for imports, and to pass on sharp cost increasesof imports, particularly of petroleum products.

5. Subsidy payments on rice have been the largest single item of food subsidy, accounting for 80-90% of total food subsidies. As far as dairy products are concerned,consumer subsidieshave been maintainedsince 1972 on imported infant milk food (milk powder) by private importers. Governmentexpenditures on this Eubsidy item have been rather small: Rs 3.0 million in 1971/72 (provisionalactual for 15 months) and Rs 5.0 million in 1973 (mid-yearrevised estimates as of end June 1973).

6. In the dairy sector Sri Lanka has attempted to control wholesale and retail prices of milk products by fixing maximum prices at wholesale and retail stages. However, open market prices have averaged above those in regulated establishmentssuch as cooperativestores. Retail milk prices in Colombo set by the National Milk Bcard (NMB) had increasedonly 10% between 1964 and May 1973 when the NMB announced price increases for all its products, while in rural areas fluid milk prices to consumers had increased by more than 30% during the the same period.

7. Through the years, with the exceptionof 1970 and 1971, the NMB has incurred annual operatinglosses which have periodicallybeen replenished by governmenteither through increasing equity participation,or by loans or grants. Thus, the low wholesale and retail prices on milk products have been maintained through subsidizationof NMB.

8. Despite the May, 1973 milk price increase,at the present level of product prices, the NMB will continue to operate at a loss for the fore- seeable future. Unless a more realistic pri-ce formula is adopted (Annex 2 para 15) continuing government assistance will be required, contributing to an accelerated increase in government transfer payments (the most rapidly growing items in Government expenditures)since the performance of most other state corporationsis similar.

Producer Subsidies

9. At the producer level too, the governmenthas played and is playing a steadily increasing role in price control of agricultural products. It has long maintained a support price for the sale of paddy but in recent years the Guaranteed Price Scheme (GPS) has been extended to include other crops. In 1970 producer prices for rice, onions, chillies, uaize and sorghum ranged from 402 to over 100% aboveworld market prices (convertedat the official exchange rate).

10. In recent years Government policies and actions within the Agriculturalsector have been a disincentiveto private investmentwithin the sector. Thus most programs have been financed from Governmentsources. Tea replantinghas been carried out with payments to growers financed by the cess collected from tea exports. On the other hand, subsidy payments for replanting rubber have been made from general governmentrevenue. In the case of coconuts,fertilizer has been subsidizedand seedlingshave been made available at subsidizedprices. ANNEX 3 Page 3

11. Most existing producers subsidy schemes have been formulatedon an ad hoc basis to tackle specific difficulties rather than as part of integrated long-term planning. Consequently, several government agencies are simultaneously involved in various similar schemes among which there is no consistency in applying subsidy payments to the farmers. Budgetary responsibility to control various subsidy payments is thus scattered among many agencies. Moreover, some of the payments are disguised as a result of incorporatingthem into other broader categories.

12. The dairy sector has so far been one of the most neglected fields in agriculture in Sri Lanka. No significant measures were taken to stimulate dairy production until very recently. Producers' milk price had been kept at Rs 0.40 per pint (for 4% fat content) since 1957 until the overall price increases in milk and milk products on May 26, 1973, when the milk price to dairy farmers was raised to Rs 0.60 per pint.

13. Also, the dairy farmers had in the past received very little input subsidies. As a result, together with the disincentiveof a low producer price, many dairy farmers have delayed making development investments in the hope that subsidies similar to those for plantation crops would become available for pasture and herd development. In addition, insecurityof land ownership has discouraged any further fixed investments particularly in the tea and rubber growing areas. (The Land Reform Act of 1972 provides for a ceiling of 50 acres on the ownership of land by individuals.)

14. The first attempt at input subsidies in the dairy sector field was the Crop Diversification Pilot Project in 1969. The government launched this pilot project on a limited and experimentalbasis ove r-thezperiodof three years comencing on October 1, 1969, for replanti a8,0acresof uneconomic tea and rubber lands (registeredin the Tea indRXibber Control Departments),with coconut, cocoa, cardamom, cloves, nutmeg, pepper, pineapple,passion fruit, pasture, timber, rubber (in tea lands) and oil palm (in rubber lands). However, the result of this pilot project was disappointing. By the closing date of July 10, 1970, 522 applications (of which only seven were for pasture development subsidies)had been received covering an area of 4,726 acres. Out of these, 70 applications (includingtwo for pasture development),covering 1,756 acres, were rejected, leaving the remaining 2,970 acres eligible for receiving subsidies. Thus, only 37% of the project's objective of 8,000 acres was achieved. In the case of pasture development,only 152 acres received a subsidy of Rs 500 per acre.

15. In the course of preparing the current National Five-Year Plan (1972-76),animal husbandry - which had previously not been included in the draft proposal prepared at the working level - was given very high priority as a means of import substitutionof the basic protein food items, and of the diversificationof agriculturalproduction. Con- sequently, in July 1971, the Ministry of Agriculture and Lands recommended, and the Cabinet approved, the following four types of input subsidy schemes for the dairy sector: ANNEX 3 Page 4

(a) subsidy for pasture establishmentin mid-country under the enlarged Crop Diversification Subsidy Scheme;

(b) subsidy for pasture establishmentunder existing coconut trees;

(c) extensionof the Coconut FertilizerSubsidy Scheme to pasture establishmentafter the above subsidy has been granted;and

(d) subsidy scheme for making imported cattle available to dairy producersat f.ob. prices.

Although it is too early to determinehow effectivethese subsidieshave stimulateddairy productionthey do indicate a positive effort by Government to encouragedevelopment within a long regulatedsubsector particularly as when consideredin conjunctionwith recent increasesin the price of milk purchasedfrom farmer cooperativesby NMB (pars 12).

16. In the Five-Year Plan, Rs 90 million was estimated to be required over the plan period for pasture development, importation of cattle, and improvement in milk collection centers and procesoing, but no breakdown mong these items nor annual allotments was spelled out (the Five-Year Plan, Table 3, page 39). In the 1971/72Budget, covering 15 months what is significantis the capital expenditureallocation for the first time in recent years of Rs 15,985,865for the developmentof animal husbandry. This capital expenditureincludes: (a) constructionof permanent buildings such as veterinary offices and animal quarantine sections; (b) purchase of equipment and vehicles, (c) land development and (d) grants and contributions to such organizations as tfhe Veterinary Council of Ceylon. In the current 1974 Budget the provision for capital expenditureis Rs 14,570,000, which is approximatelythe same magnitudeas the previous year's on a 12 month basis.

17. The followingprovisions are made in the currentBudget:

Purpose BudgetaryAllocations (Rs) (1) Pasture Developmentsubsidy to the privatesector farmers in the mid-country 1,150,000

(2) Pasture subsidy scheme (in the coconut areas) 600,000 ANNEX3 Page 5 -

(3) Coconut fertilizersubsidy programl/ 22,500,000

(4) Subsidy for the purchase of imported cattle None2/

18. Under the present Crop DiversificationSubsidy Scheme, a subsidy of Rs 500 per acre is paid to farmers in two installments for the estab- blishment of pasture in old tea and rubber lands as follows:

(a) First installment - Rs 400 per acre. On the uprooting of old tea and rubber and the establishment of pasture (including soil conservation and fencing);

(b) Second installment- Rs 100 per acre. One year after establishmentof pasture for applicationof fertilizer and maintenance.

To date only areas in and around the existing milk collectingcenters run by the NMB in Colombo, Kandy, Matale, Nuwara-Eliya,Kurunegala, Ratnapura, Kegal½e, Badulla and Galle districts are entitled to participate in this subsidy scheme. Applicationsfor permits under the scheme are scrutinized by the Tea and Rubber Control Departments to meet the following conditions:

(a) that the applicanthas title to the land in question;

(b) that no subsidy has previouslybeen paid for that parcel of land;

(c) that the land in question is not suitable for economic tea or rubber productionand that it is suitable for pasture production. For the latter assurance,the Tea/RubberController is entirely dependent on the Animal Production and Health Division of the Ministry of Agriculture and Lands.

19. Regarding the input subsidy for pasture establishmentunder the existing coconut trees, a subsidy of Rs 120 per acre is paid to owners of coconut lands in two installments as follows:

I/ Included in this fertilizer subsidy scheme are those subsidies not only to farmers who would grow pasture under existing coconut trees, but also to all coconut growers. No distinction between these farmers is made in the budget.

2/ Althouah no subsidies for this purpose are provided in the current Budget, a provision of Rs 150,000 is stipulated for the purchase of 400 heifers (Friesian and Jersey) for Government farms. ANNEX 3 Page 6

(a) Firbt installmentof Rs 50 per acre - upon completion of planting of pasture/foddergrass;

(b) Second installmentof Rs 70 per acre - two months after planting on applicationof fertilizer.

Those entitled to participate in the subsidy scheme are the owners of coconut lands in the administrativedistricts of Colombo, Kalutara and Kegalle and Wet Zone parts of the districts of Kurunegala,Puttalam and Matale which receive a fairly evenly distributedannual rainfall of 75 inches or more are eligible to apply. Owners of coconut lands who do not possess cattle may also participate in the scheme if they can dispose of their pasture/foddergrass to other cattle owners. Applicationsfor participatingin this scheme are scrutinizedby the Coconut CultivationBoard.

20. Those who have granted the above subsidy are also entitled to purchase fertilizer at 50 percent of the cost from the second year on under the Coconut Fertilizer Subsidy Scheme. A special permit will be issued for this purpose as in the case of coconut fertilizer. (The existing Coconut FertilizerSubsidy Scheme started in 1956, following the recommendationof the Coconut Research Institute. From 1956 to 1966, the Scheme provided fertilizerat prices subsidizedby 33-1/3 percent for estates larger than 20 acres and by 50 percent to small holders. Since 1966, the subsidy has been 50 percent equally for all growers.)

21. Regarding the fourth type of input subsidy to make imported cattle available to dairy farmers, at f.o.b. prices, Cabinet approval was obtained on May 15, 1973. In 1968, 500 imported cattle (temperatebreeds) were offered for sale but only 22 were sold and the rest had to be added to the stock of governmentfarms. Since the import of cattle is subject to FEEC's rate, the Governmenthas to absorb under the proposed subsidy scheme the FEEC portion of 65 percent in addition to the cost of freight and insurance. Because pasture establishmentshould precede importationof cattle, no provision for this subsidy is made in the current 1973 budget.

22. In reviewing the aforementionedfour types of proposed input subsidy schemes, what seems to be highly inconsistentis the pricing policy for fertilizer. All fertilizeris imported almost exclusivelyby the FertilizerCorporation at the official exchange rate, i.e. fertilizer import is FEEC exempt. Since the costs of handling, transportationand storage are so high the market price to farmers is double the CIF cost. In order to encourage its use in certain selected crops a 50 percent subsidy (i.e. close of the CIF price) is offered to farmers. Until recently this was restrictedto the production of paddy, coconut and cinnamon;other farmers had to pay the full price. In addition, in order to ensure that subsidized fertilizeris used only for the purpose intended, farmers must follow an extended bureaucraticprocess which requires considerable paper work. Realizing these constraints,the present government is attempting to apply a uniform price for fertilizerand has extended a 50 percent subsidy to other crops, includingmulberry, cocoa, cashew cardamon,cloves, nutmeg, pepper, citronella oil palms, coffee and papaw and so encouragesnon-traditional minor exports. However, there are still inconsistencies. ANNEX 3 Page 7

23. For instance, under special permit, the owners of coconut land are entitled to participate in the Coconut Fertilizer Subsidy Scheme from thc second year on, in addition to an initial grant of Rs 120 per acre of whiichi rs 70 is supposed to subsidize fertilizer cost. Hlowever, farmers in the mid-cotunitry are not entitled to a 50 percent subsidy on fertilizer after receipt of grants of Rs 500 per acre in two years. In the latter case only Rs 100 per acre out of the total Rs 500 appears to be a fertilizer subsidy while an estibilated expenditure of Rs 300 per acre is required for fertilizer in most circumstances in mid-country. This means that farmers in mid- country receive a fertilizer subsidy equal to only one-third its cost.

24. For consideration of equity and for administrative convenience, it is undesirable to maintain a selective fertilizer subsidy system and the Government recognizes that it should be replaced by a single price gradually approaching world prices. As a step toward this goal the government is currently taking action to reduce distribution costs by designating multipurpose cooperative societies as sales agents for the Fertilizer Corporation. This is expected to reduce distribution costs by eliminating the involvement of the Agrarian Services Department in the distribution process. In addition, the Asian Development Bank is currently considering financing the establishment of a urea factory witlh a 280,000 ton capacity.

25. m)ajor uncertainties regarding fertilizer usage in Sri Lanka (as well as many other developing countries) in 1974 and very possibly beyond, are the physical availability of supplies and import prices. The present short-term outlook is for a world-wide shortage, particularly of urea, and very high prices. If this proves to be the case, Sri Lanka's food drive, dairy development program and programs designed to increase the output of traditional agricultural exports, tea, rubber and coconut products, will very likely be affected adversely.

ANNEX 4 Page 1

SRI LANKA

DAIRY DEVELOPMENTPROJECT

Recent Legislaticn. L_m_ Reform and Agricultural Productivity

Ls-end Reform Law No. 1 of 1972

1. In 1972, the National State Assembly of Sri Lanka passed the Land Reform Law which became effective from August 26, 1972. The purpose of the law, as stated in the preamble, is to establish a Land Reform Commission to fix a ceiling on the extent of agriculturalland that a person may own, to provide for the vesting of lands owned in excess of such ceiling in the Land Reform Commission and for such land to be held by the former owners on a statutory lease from the Commission and to prescribe the purposes and the manner of dispositionby the Commission of agricultural lands vested in the Commission so as to increase productivityand employment.

2. The specific provisions of the Act dealing with the above objectives are set out below:

Section 3

(1) On and after the commencementof this law, the maximum extent of agriculturalland which may be owned by any person, in this law referred to as the 'ceiling', shall:

(a) if such land consists exclusively of paddy land, be twenty-fiveacres; or

(b) if such land does not consist exclusively of paddy land, be fifty acres, so however that the total extent of paddy land, if any, comprised in such fifty acres shall not exceed the ceiling on paddy land specified in paragraph (a).

(2) Any agriculturalland owned by any person in excess of the ceiling on the date of commencement of this law as from that date:

(a) be deemed to vest in the Commission; and

(b) be deemed to be held by such person under a statutory lease from the Commission. ANNEX4 Page 2

Section 8

Where any agriculturalland is vested in the Com- mission under this law, such vesting shall have the effect of giving the Commissionabsolute title to such land, as from the date of such vesting, and free from all encumbrances.

Section 14

(1) Any person who becomes a statutory lessee of any agricultural land under this law may within three months from such date make an application to the Commission in the prescribed form for the transfer by way of sale, gift, exchange or otherwise, of the entirety or portion of such agriculturalland to any child who is eighteen years of age or over or to a parent of such person.

(2) The Commissionmay, by order made under its hand, grant or refuse to grant, approval for such transfer.

(3) Any transfer effected in accordancewith the provisions of an order made under sub-section (2), or such order as amended, varied or modified on appeal, shall have the effect of transferring the right, title or interest in property so transferredfree of the statutory lease.

Section 15

(a) The statutory lease may be terminated at any time at the option of the Commission. Unless terminated earlier, such lease shall run for one year from the date of commencement of his statutory lease and may be renewed for a further period of one year. No further renewals of such leave shall be given except with the express approval of the Minister.

Section 22 of the Act describes the variety of purposes for which land vested in the Commissionmay be used. A major purpose is sale, exchange, rent, purchase or lease of such land for agriculturaldevelopment or animal husbandry, to (i) persons who do not own agriculturalland or who own less than the ceiling; or (ii) to cooperativesocieties or collectivefarms. ANNEX 4 Page 3

Section 28 of the Act defines the oompensation payable to owners who are dispossessed of land in excess of the ceiling. The compensation is fixed as the higher of either (a) not exceeding 15 times the average annual profit on such land if such land is not paddy land and 10 times the average annual profit if it is paddy land, and (b) the value of such land as assessed by the Commissionerof Inland Revenue for the assessment year ended 31 March 1971.

Under Section 65 of the Act, the provisions of the law are not applicable to (a) any State Corporation and (b) any Government sponsored cooperative society.

AgriculturalProductivity Law No. 2 of 1972

3. The above law was passed in the Sri Lanka National State Assembly and became effective from 21 September 1972. The object of the law is to provide for maximum productivity through the proper use and management of agriculturalland and the efficient management of agricultural crops and livestock. The law also provides for the establishment of AgriculturalProductivity Committees and Agricultural Tribunals.

4. The important provisions of this law are as follows:

Section 2

(1) It shall be the duty of every owner or occupier of any agricultural land to farm such land with such crops or breed of the livestock as are best suited for the land, having regard to the extent and the situation and the natural resources of the land, and to manage it in accordancewith the rules of good management, as are hereinafter provided by this law or any regulationsmade thereunder, with a view to improving the productivity and maintaining efficient standards of production, both as to quantity and quality of the produce.

(2) Where the owner is not in occupation of such agriculturalland and the occupier is in posses- sion by virtue of a formal or informal agreement with the owner, it shall be the duty of the owner, unless there is an express provision to the contrary in any agreement, to provide the capital works and equipment necessary to enable the occupier to farm such land and maintain an efficient standard of production. ANNEX 4 Page 4

Section 3 of the Act describesthe various steps to be taken by the owner or occupier for efficient management or agriculturalland. These relate to the varieties and strains of crops used, manner of cropping, drainage and irrigationof land, steps taken to maintain soil fertility, steps taken to ensure eradicationof pests and diseases,steps for protection and preservationof growing crops and adequacy of repair and maintenancework.

Under Section 4 of the Act, any owner or occupier who fails to fulfill the obligationsunder Section (3) is guilty of an offence under this law.

Section 6 states that when the Minister is satisfied that any agriculturalland is not being farmed as required in Section (3), the Minister may place the owner or occupier under a SupervisionOrder.

Section 7 states that where, after a SupervisionOrder has been in force for a period of twelve months, the Minister is satisfiedon the report of any authorized person .... that no satisfactory improvementhas been shown notwithstandingany direction given (by the authorizedperson) the Minister may make an Order of Dispossession. The land in respect of which an Order of Disposses- sion is made shall, from the date of such Order, vest in the Government.

Where the occupier of the land is not the owner, the land shall not be so vested, but shall, on the recommendationof the AgriculturalProductivity Commission,within whose area of Authority the land is situated,be let to a suitable person.

An owner or occupierwhose right, title or interest is affected by the Order of Dispossessioncould either appeal against the Order to the Agricultural Tribunal or apply for compensationto an authorized officerwho will decide the amount payable as compensation. The Act also provides for an appeal to the Board of Review constituted under the Land Acquisition Act if the owner or occupier is dis- satisfied with the amount of compensation. ANNEX4 Page 5

Section 23 of the Act provides for the setting-upof an AgriculturalProductivity Committee for each area determinedby the Minister. Such a Committee shall, within the area of its authority,be charged with "the duty of promotion,coordination and developmentof agriculture,of assisting in the formulationof implementationprogrammes and targets for the productionof crops and livestock".

Under Section 20 (1) of the Act, the Minister may constitutesuch number of areas as he may consider expedient, for which AgriculturalTribunals may be established. Each AgriculturalTribunal shall consist of not more than eight members appointed by the Cabinet. The AgriculturalTribunal will consider appeals made by persons on whom an Order of Dispossessionhas been served. The Tribunal will also consider disputes relating to management or farming of any agricultural land within its jurisdictionand referred to it by the Minister or by the AgriculturalProductivity Com- mittee in the area.

The decision of the Agricultural Tribunal shall be final but the parties to an appeal will have the right of further appeal to the Supreme Court.

The Act also provides for the organizationof AgriculturalCooperative Societies in each AgriculturalProductivity Committee area.

AgriculturalProductivity Centers

5. The main thrust of Government in implementingthe Agricultural ProductivityLaw is the establishmentof AgriculturalProductivity Centers in each AgriculturalProductivity Committee area. A stereotype building has been designed which will house the Committee's offices, the AgriculturalTribunal, and offices of key rural communityservices including a sub-branch of the Bank of Ceylon.

6. At June 30, 1973, 135 ProductivityCenters had been opened, in 20 of which Bank of Ceylon sub-brancheswere operational. Government is pressing the constructionprogramme which calls for Centers to be established in 438 AgriculturalProductivity Committee areas, mostly fitting into the boundaries of existing MultipurposeCooperative Societies.

ANNEX 5 Page 1

SRI LANKA

DAIRY DEVELOPMENTPROJECT

Agricultural Cooperatives

Historical Background

1. The first legislative enactment for the organizationof cooperative societies in Sri Lanka was the 1911 Cooperative Credit Society Ordinance. This Ordinance was subsequentlyamended to provide for the organizationof secondary and non-credit types of societies. During the earlier years the main type of soAieties promoted were thrift and credit societies. The need to supply rationed rice and flour at controlled rates during the second world war led to the setting up of nearly 4,000 cooperative consumer stores during the war years. By 1957 this number was brought down to about 2,500 by consolidationand amalgamation. Post-war years also saw the growth of nearly 1,000 cooperative agriculturalproduction and sales societies for distributionof production inputs to farmers and marketing of their produce.

2. In 1957, a reorganizationof all rural cooperatives into multipurpose cooperatives,one for each village, was attempted. This led to the organizationof about 5,000 small-sized multipurpose cooperatives, many of which were formed by conversion of existing consumer cooperatives or agriculturalproduction and sales cooperatives. Due to their larp numbers and small sizes, they were not always viable,in 1966 over half incurred lo-ree.overnment control, although excessive, was ineffectual and several instances of default and of malpractice were publicized. As a result, a Royal Commission was appointed in 1968 and reported in 1970. Two of the more significant recommendationswere that the many small MPCS be reorganized into larger ones with branches and Government control be eliminat- ed but that it should still supervise and advise MPCS in their operations. Both were accepted; new by-laws were adopted to improve operation, and auditing procedures were greatly strengthened.

3. By 1971, reorganizationhad been completed and 368 large, multipurpose cooperative societies (MPCS) now remain, each covering some 10 to 15 villages. In addition, a number of other societieswith specialized functions exist in the country. Of these, 29 are dairy cooperatives (DCS) and 7 are coconut producers' cooperatives. In the proposed Project areas there are 152 MPCS (107 in Coconut Triangle; 45 in the Mid-Country) and 21 DCS (15 in the Coconut Triangle; 6 in the Mid Country). ANNEX 5 Page 2

Functions

4. A major activity of most MPCS is the running of consumer stores, with a society having, on average, 10 to 12 stores located in its branches. Most serve as the marketing channel for members' produce and a supply channel for farm inputs, including supplement feeds. Since 1971, MPCS have been designed as agents for the Paddy Marketing Board: the sole authorizedbuyer of paddy. Some make monthly advances of up to 50% of the value of estimated milk deliveries as well as limited numbers of loans to members for cattle purchase, against mortgage of land.

5. Milk Collection. Since April, 1972, MPCS and DCSA have moved much more heavily into the role of milk collection for the National Milk Board (NMB), following a decision by NMB to eliminate most private milk deliveries (other than producsrs supplyingmore than 100 pints per day) and otherwise to accept milk only from cooperatives. Collectionsby cooperativeshave, as a result, increasedfrom 5% of NMB purchases in 1965 to 65% in May, 1973 and further increases are expected and encouraged by

6. Under the proposed Project it is envisaged that additionalNMB collection centerswill be establishedin MPCS and DCS to provide the storage and collectionfacilities required to accommodatethe increased farm production of milk resulting from the Project.

7. Based upon the estimated increases in milk production to result from the project, it is anticipated that new collection centerswould be established in about 66 cooperatives: 38 in the Coconut Triangle; 28 in the Mid-Country. Their specific locations, however, would be based upon the findings of a comprehensive study of milk collection and transport requirementsby consultants to NMB. Storage tanks and chilling units would be purchased by NMBunder the Project and installed in buildings provided and owned by the cooperatives. Cooperatives would thereafter manage and operate the collection centers. If required, cooperatives would borrow from Peoples Bank to finance the construction of necessary buildings (Annex 6).

S. Banking and Credit. Cooperativeshad mainly served as agents of Government in their agriculturalcredit activities,and particularly in the financingof paddy productionwhich accountedfor the bulk of their advances,until their reorganization,which was completed in 1971. To 1967 MPCS advances to farmers were on behalf of a series of Government departments: for the 10 years ending in 1967, the Department of Agrarian Services. The record of performanceleft much to be desired: defaults were high (nearly 16% by 1964-65) and in 1967 (just preceding the start of the MPCS reorganization program) Peoples Bank was given the responsibility for financing the cooperatives. Performancecontinued to be poor, however, and, of Rs 235 million disbursed in paddy loans between 1967-68 and 1971-72, Rs 81 million were outstanding in 1968, of which Rs 67 million were overdue. The main defect from which the latter program suffered was failure to give the cooperativesauthority to assess members' creditworthiness and refuse loans. ANNEX 5 Page 3

9. 1Aithreorganization of the MPCSs completed,and taking in- struction from past mistakes, Governmentis sponsoringa new agricultural credit scheme in which MPCSs establish CooperativeRural Bank (CRB) branches to administer their credit operations and in which the CRBs, functioning in considerable part under Peoples Bank guidance and supervision, have discretionaryauthority to assess applicants'creditworthiness and establishcredit limits. The program has progressed rapidly: 20 MPCSs had CRB branches in 1967; in January, 1973 there were 252 CRBs and it is expected that by the end of 1974 almost all MPCSs will be operatinga CRB branch.

10. At December 31, 1972 the CRB8shad aggregate deposits of Rs 23 million, of which Rs 22.7 million were deposits of 103,000savers. Short- term loans of Rs 8.2 million to 11,500 borrowers and 60,700 pawn loans for Rs 7 million were outstanding. Total deposits exceeded total loans and advances by Rs 8.1 million. People's Bank, being the banker to the cooperativemovement, lends both to MPCS's for their working capital needs in their consumer retail businesses and, when necessary, to CRBs for their banking advance businesses. In addition People's Bank has a considerable supervisoryresponsibility over CRB activities (the relationship and the operating proceduresare describedin Annex 6).

Organization,Control and Financial Performance

11. The CooperativeDevelopment Commission is responsible for supervising the formation and operationsof the cooperatives. It's head office is in Colombo, but it is largely decentralized. Assistant Commissioners of Cooperativesare at twelve main centers,with Assistant Commissioners of Audit at most. Detailed monthly reports are submittedby MPCSs (althoughnot by DCSs) to the regional Assistant Commissioners,but the informationfrom these, and from the annual accounts, appear only occasionallyto be forwarded to Colombo.

12. The organizationand control of DCS are less stringent than of NPCSs because their functions are typically limited to collection,delivery and finance of milk productionand they have fewer members (seldommore than 400). The MPCS organizationchart at Table 1 shows the functions of policy- making and management clearly separated;a general manager at the main office and branch managers at the branch offices are responsiblefor executionof policy. A typical DCS organizationchart is shown at Table 2.

13. The financialperformance of cooperativeshas improved greatly since reorganization. Prior to amalgamationnearly half of the small village cooperativesoperated at a loss. As of 1971-72 only nine of the 368 MPCSs incurred losses. Consolidatedbalance sheets for MPCSs and DCSs in the Project areas are shown in Tables 3 and 4.

SRI LANKA DAIRY DEVELOPMENT PROJECT Structure of a Multi-Purpose CooperativeSociety

1 ------ei BODY I -- T

| DELEGATES PRESIDENT CREDIT TO GENERAL BODY ~m BOARD - r COMMITTEE

JI |BRANCH l GENERAL | COMMITTEESg MANAGER

| MAANACGERS||MARKETING | AAE AEGR ||ACCOUNTANT ||AMNSRTV # ~I II

.RuRALBANK MANAGER World Bank-8489

SRI LANKA DAIRY DEVELOPMENTPROJECT

Structure of a Dairy CooperativeSociety

PRESIDENT

BOARD

GENERAL MANAGER

COLLECTORS CLERK

World Bank-8490

ANNEX 5 Sli- LAIKA Table r

DAIRY DEVELOPMENTPRtOJECT

Financial Position of Multiple Purpose Cooperative Societies in the Project Area (Consolidated from most recent returns, 1971-72) (Rs '000)

Coconut Triangle Mid-Counta (107 Societies) (45 Societies) Liabilities Total Average Total Average

Share capital 4,6541 43 1,701 38 Stationary reserves 10,823 101 2,417 54 Other reserves 5.591 52 1.908 42 21,068 196 6,O26 134

Deposits 4,687 44 731 16 Peoples' Bank 7,948 74 4,477 99 Other liabilities 1) 17,599 164 5,206 116

Total 51,302 478 16,440 365

Represented by;

Fixed assets 6,118 57 2,595 58 Loans and advances 13,924 130 6,381 142 Financial investments 5,981 56 1,056 23 Stock 8,609 80 2,628 58 Other assets 1) 9,285 86 2,164 48 Cash 7,385 69 1,616 36

Total 51,302 378 16,44o 365

1) Other assets and liabilities are mainly current accounts.

IRovember 15, 1973 ANNEX ' SltI lANKA Table T

DAIRY DEVELOPMENTPROJECT

Financial Position of Dairy Cooperative Societies in the Project Area (Consolidated from most recent returns, 1971-72) (Rs tooo)

Coconut Triangle Mid-Countr (15 Societies) (6 Societies) Liabilities Total Average Total Average

Share capital 16.9 1.1 14.1 2.4 Reserves 19.6 1.3 49.5 8.2 36.5 2.4 63.6 lo.6 Deposits 5.5 .h 7.7 1.3 Peoples' Bank 38.0 2.5 - - Other Liabilities 1) 12.3 .8 54.1 9.0

Total 92.3 6.1 145.4 20.9

Represented by:

Fixed assets 5.9 .4 11.8 2.0 Loans and advances 2) 35.5 2.4 74.2 12.4 Financial investments 17.4 1.2 4.9 0.8 Stock 0.5 0.1 Other assets 14.3 1.0 21.0 3.5 Cash 7.2 0.5 7.8 1.3 Total assets -8.3 5.5 120.2 40.1 Losses 3) 12.0 5.2

Total 92.3 125.4

Notes:

1) Mainly milk payments received, not disbursed

2) Advances on milk and of concentrates

3) Four DCS in the Coconut Triangle and 2 in the Mid-Country were in loss positions at the dates of their latest returns.

November 15, 1973 ANNEX 6 Page 1

SRI LANKA

DAIRY DEVELOPMENT PROJECT

The Lending Banks

Background

1. The commercialbanking system in Sri Lanka consists of four local banks (Bank of Ceylon, People's Bank, CommercialBank of Ceylon and Hatton National Bank) and eight foreign banks (four British, three Indian and one Pakistani). The local banks account for 77% of the deposits of all banks, the British banks for 19% and the Indian and Pakistani banks for 4%. Among local banks, Bank of Ceylon and People's Bank are the largest; together holding 69% of total deposits. CommercialBank of Ceylon and Hatton National Bank, having been set up very recently, are much smaller (Table 1). Under the Monetary Law Act, the Central Bank of Ceylon exercises supervisionover the operationsof all banking institutionsin the country.

2. Together, Bank of Ceylon and Peoples Bank have over 200 branches in Sri Lanka and both are increasingrapidly the outlets for credit in the agriculturalsector, as described below. None of the other banks have the necessary facilitiesto provide credit to agriculture, other than to the larger estates.

3. Until recently,most agricultural credit was for crop production, mainly loans by Bank of Ceylon to the estate sector. Up to 1967, the major:ty of advances on paddy were by Government departments through cooperatives;collection procedureswere inadequateand heavy defaults resulted. In 1967, People Bank took over paddy crop advances through cooperativesto smallholdersof less than 10 acres; from 1971, Bank of Ceylon has lent to larger holders through its regular branches. Ulnder the former scheme, the Central Bank of Ceylon guaranteed the Peoples Bank 75% of defaults by cooperativesin return for a fee of 1/2%. Of Rs 235 million advanced through People's Bank for paddy production for 1968 to 1972, nearly 30% was overdue at December 31, 1972, and of this only one-third was due to crop failure. Although the loan applications were on the basis of plans drawn up by agriculturalextension workers, the People Bank guarantee contributed little to the desire of the cooperatives and the People's Bank to recover, and societies in default were able to continue to borrow provided the final loan was to a non-defaulter.

4. Following,this experienceand with the reorganizationof cooperatives into 368 multipurpose cooperative societies completed (Annex 5), policies and mechanisms for providing credit to the agricultural sector have been greatly altered since 1971. First, Peoples Bank has been given responsibilityfor serving as banker to the network of Cooperative Rural Bank branclhes(CRBs) being establishedby MPCSs. In this capacity, it ANNEX 6 Page 2

is responsible for formulation and control of CRB procedures, for training of CRB personnel, and for preliminary review and approval of loan applications. Peoples Bank personnel supervise CRB operations, with powers of audit and the right to participate in CRB/NPCS Board meetinos.

5. A second recent change significant to banking and agricultural credit resulted from the enactment of the AgriculturalProductivity Act of 1972 (see Annex 4). Under this Act, Governmentwill construct over 400 AgriculturnlProductivity Centers (APC) and provision has been made for Bank of Ceylon to open a branch in each APC. At June 30, 1973, 21 branches had been opened and the program of APC construction/branchopening was proceeding rapidly. Plans are for about 125 branches to be operative in the Project areas by end-1974. Thus, between Peoples Bank and CRBs and Bank of Ceylon and its branches -- both intended as on-lenders in the proposed Project -- local coverage with banking points will be adequate to service participatingfarmers. The rapid expansion,however, is straining the supply of trained, experienced personnel. Although recruiting and training programs are conducted, continuingattention by the banks to staff training will be required for quality of service to be maintained.

Bank of Ceylon

6. Bank of Ceylon was formed in 1938 as a state-aided institution under the Bank of Ceylon Ordinance with a share capital of Rs 4.5 million, of which Government contributed Rs 3 million. It was nationalizedunder the.FinanceAct of 1961. The Board has six members; one is the Secretary to the Treasury (ex officio), the others are appointed by the Minister of Finance. The bank has a total staff of 2,990 of which 576 are in the supervisory and executive grades. The chief executive is the General Manager who is assisted by one Deputy General Manager and two Assistant General Managers. Two credit managers at the head office are in overall charge of the credit portfolio. Branch Managers are responsible to five regional managers. The branches at June 30, 1973 were as follows:

Colombo 14 Country 51 Kachcheri (regional Government offices) 19 AgriculturalProductivity Centers 21 Pay Offices 7 London 1

7. The General Manager or his Deputy and the Assistant General Managers have power to sanction loans and advances up to Rs 100,000. All loans up to Rs 50,000 are sanctionedby the Credit Managers or Branch Managers. Loans above Rs 100,000 are sanctioned by the Board which meets three times a month.

8. The accounts (see Table 2) show that deposits have risen 63% from the beginning of 1970 to the end of 1972. They now represent 38% of the country's total. The liquidity ratio, after several years at a low level, is now satisfactory. The level of guarantee and acceptancebusiness is ANNEX 6 Page 3 high, although experience with this business in recent years has been good. Overdue accounts amount to less than 5% of loans and advances, and are fully provided for in the accounts.

9. When operative, the loan assessment procedures in Bank of Ceylon sub-branches1/ in AgriculturalProductivity Centers will be concerned both with the viability of the proposed projects and the credit-worthiness of the individuals.For a production loan, the farmer will complete a three page questionnaire;the sub-branch manager has a three page checklist of similar questions and a separate checklist has been prepared for dairy development. Both are described as suggestive rather than exhaustive. It is expected that in many cases the farmer will be assisted in preparing his applicationby the AgriculturalProductivity Committee and his application will be countersignedby it. The sub-branch manager must address himself to technical, management nd organization,financial and economic aspects of the application. He will then forward it to the branch manager with a recommendationor with a request for advice. The branch manager may approve to a limit of Rs 25,000. Other applicationswill be forwarded to regional offices. Approved qualificationswill be returned to sub- branch managers with the necessary security documents. Short-term loans are secured either on movable property (with or without guarantors) or immovable property (including99-year leases). Branch managers have discretion as to the security taken. Processing time will vary according to the security taken but, with the complexityof the application/approval procedure, could be lengthy, especially in the case of larger loans which exceed the branch managers' authority.

10. Loan disbursementsare usually in kind. For repayment from paddy sales the branch manager can arrange with the MPCS as agent for a written agreement with the farmer that payments for his crop will be made direct to his account. A similar authorization (assignment)may be obtained for repayment of Project loans from proceeds of milk sales to MPCS but a pledge to not sell milk elsewhere will also be required. Loan releases will be subject to satisfactoryreports from either the Agricul- tural ProductivityCommittee or, in the case of Project loans, the Project Technical Unit. If an unsatisfactoryreport is received, the sub-branch manager may refuse disbursement.

11. Sub-branch managers will be graduates, trained for three months in a branch of the ~ank of Ceylon before posting.

1/ Although it is intended that the AgriculturalProductivity Center operations will have full branch status, they are presently sub- branches with one supervisory staff member and two clerks. ANNEX 6 Page 4

Peoples Bank and Cooperative Rural Banks

12. Peoples Bank was set up in 1961 as the successor institution to the Cooperative Federal Bank of Ceylon under the Peoples Bank Act (No. 29 of 1961). A number of district cooperative banks existing in the country were also amalgamatedwith the Peoples Bank in subsequent years (10 banks amalgamatedin 1962 and 7 in 1971). Section 4 of the Act states that the 'purposeof the bank shall be to develop the cooperative movement of Ceylon, rural banking and agriculturalcredit'. The bank since its inception has been the financing agency for the village multipurpose cooperative societies and the cooperative agriculturalproduction and sales societies. Cooperatives,including the Cooperative Rural Bank (CRBs) within MPCS, are not permitted to maintain deposits with, nor to obtain medium or long term loans from other banks. Peoples Bank has considerablepowers of inspection of Cooperativesand of their borrowers, and they may recommend to the Commlssionerthe dissolution of a Cooperative which does not meet its inspection criteria.

13. Accounts of Peoples Bank are audited by the Auditor-General. Annual accounts to December 31, 1971 have been audited and the audited reports published. The 1972 audit has not been completed.

14. Branch Managers have responsibilityfor supervising the Coop- eratives' (including CRBs) financial affairs. They are expected to attend the Board meetings at least every six months, to study performances regularly, and to make random inspections. They have considerable audit duties with respect to CRBs and are empowered to discuss the Cooperatives' financial affairs with the District Assistant Commissionersof Cooperatives. The Peoples Bank branch employees with Cooperative duties must attend all Board meetings, assist with loan applicationsand other documentation, and supervise the utilization of funds.

15. Excessively cumbersome lending procedures have been specified for CRBs by Peoples Bank. Instructionshave been issued which cover:

(a) maximum loan limits and repayment periods;

(b) security;

(c) individual maximum credit limit (a member has to complete a six page form -- even if his credit limit is more than Rs 5,000, he may only borrow above that limit under a special scheme approved by Government or by Peoples Bank, which would include this project);

(d) application procedures (applications go through five stagep before approval by the MPCS Board of Directors. These include review by the Peoples Bank advisor, and by the Cooperative'slawyer to inspect security. Although title inspections can ANNEX 6 Page 5

be carried out quickly, the latter process sometimes takes six weeks. Productionloan applications are simpler and quicker to process in that no collateral other than the crop is required);

(e) loan release (loans are normally granted in kind);

(f) supervision (the Branch Committee inspects every six months. If the loan is more than Rs 2,000, the MPCS General Manager and the Credit and Marketing Manager also supervise).

16. Adherence to the present lending procedures is likely to cause serious delays in the processingof loan applicationsunder the proposed Project. Farm developmentplans approved by the Technical Director of the Project Technical Unit (PTU) should be accepted by CRBs and Peoples Bank as sufficient technicaland financialbasis for approval, other than with respect to determinationof individual credit-worthiness,sufficiency of security and the taking of an assignment on the borrower's proceeds from sales of milk.

17. Rural Bank managers will be university graduates,trained in Peoples Bank branches and at the school for Cooperativeemployees.

Interest Rates

Interest rates prevailingon July 12, 1973, were as follows: ANNEX6 Pagen%6

Bank of C!rl !isiJBeank RuralBa_k# ------Pereettp.a ------Borrou1nW SavingsDeposits 4.5 4.5 ) ) 5-6 FixedDepewts 4.5-5.75 5-5.75 ) SevenDays' Notice 4.25 4C25 8

FromPeople' Bank 8

Rural Bank Deposit 8 Leadind

Agricultural Development 7-9. 4 (On XNttgageof FixedPtrperty) 8.5 9-11

(UnsecuredLoan.) 12-14

To Coopi$itivea- Fisheries Loan Li 8.5 8

To Rural B*iks 8

Deposits with People* Bank 8 Central BW3k Rate 6-1/2%

Treasury Bills 5t

?*AL4 iiad Long Teref Fund I3 (MLF) 6% (Agriculture)

DEpending on security offered

/2 Finance provided by Asian Development Bask for de*elopfent of fishing industry north of Colombo (not yet operative).

/3 The MLF was created for the promotion of developmentof agriculture and intdustry, for the iodernization and coUtruction- of the faetories, and for the promotion and d&velopient of trade,coi_erce and business. Its repaiynht periods are 5-15 years. SRI LANKA

DAIRY DEVELOPMENTPROJECT

Principal Indicators of Financial Position of Local Banks: 1971 1/

'Deposits Financial Loans and Fixed Shere and Other Cash Investments Advances Assets Capital Reserves Accounts

------(Rs million)…------

Bank of Ceylon 4.5 45.0 1,220.4 221.0 435.0 575.2 20.9

People's Bank 6.3 21.7 1,041.7 135.6 133.4 793.1 4.8

Commercial Bank of Ceylon 5.0 0.2 64.5 11.1 26.6 33.0 0.4

Hatton National Bank 2.7 0.3 49.9 18.7 6.7 26.3 1.7

1/ As at Dec. 31, 1971 for Bank of Ceylon, Commercial Bank of Ceylon and Hatton National Bank As of Sept.30, 1971 for People's Bank.

October 17, 1973 iID ANNEX 6 SRI LANKA Table 2

DAIRY DEVELOPMENT PROJECT

3ank of Ceylon iA'innncialStatement and Profit and Loss Accounts, Year-End, 1969-72 (Rs ilillion)

1969 1970 1971 1272 (unaudited)

Liabilities Issued share capital 4.5 4.5 4.5 4.. Reserves 38.4 43.4 45.4 47.4 42.9 47.9 49.9 51.9 Deposits 1/ 951.7 1,110.0 1,220.4 1,554.2 Other liabilities 30.3 0.3 7.3 2.9

1.024.9 1,158.2 1,277.6 1,609o.

Representedby:

Cash on hand and with banks 143.4 206.5 221.0 330.( Money on call and short notice 7.5 - 0.4 6.5 Government investments 195.8 412.7 1430.1 514.14 Bills discounted 174.2 21.5 25.5 85.: Other financial investments 6.3 5.9 4.5 4.0 Advances 478.2 491.2 575.2 648.5 Fixed Assets 19.5 20.4 20.9 20.'-

1.024.9 1.158.2 1,277.6 1,609.0

Guarantees and acceptances 970.7 646.5 771.4 1,077.3 - as % of total assets 95% 56% 60% 67% Linuidity ratio 3/ 16% 18% 17` 21A

Profit and Loss

Net profit after tax 5.4 5.5 1.3 _5.

Transfers to general and other reserves 5.0 5.0 - 2.D

Payments to ConsolidatedFund - - 0.7 2.; Dividends 0.5 0.5 o.6 0.6

Net Profit after tax as % of average assets 0.55% 0.5% 0.11% 0.14% i/ Deposits on December 31, 1972: Rs Million

Current accounts 829.5 Davings deposits 273.0 Timiedeposits 134.7 Other (includingcheques in collection" 317.0

1t55) .9 ~ 2/ See Table 3 Cor most recent breakdown of advances.

3/ Cash on hand and with banks, money on call and short notice, as a percentageoL total assets.

October 17, 1973 AIINEX 6 TaLble 7

SRI LANKADAIRY DEVELOPMENT PROJECT

Bank of Ceylon Classification of Advances. December 31. 1971, by Purpose and Period (Rs Minlion)

Number of Up to 1 to 5 Above Prpose Advances 1 Year Years 5 Years Total

Comercial 4,377 117.5 35.1 24.3 176.9

Financial 1,412 57.0 9.4 12.2 78.6

Agricultural 3,103 19.9 17.1 13.5 50.5

Industrial 1,371 67.3 13.6 44.8 125.7

Consumption 11,292 16.0 28.1 21. 4 65.5

Others 633 8.5 9.6 0.4 18.5

Total 22,188 286.2 112.9 116.6 515.7

October 17, 1973 AM=IEX6 Table -7 SRI LANKA

DAIRY DEVELOPMENTPROJECT Peoples Bank Financial Statement and Profit and Loss Accounts, Year-End, 1969-72 (Rs Million)

Sept. 30, Sept. 30, Sept. 30, Dec. 31, 1969 1970 1971 1972 (unaudited)

Liabilities

Issued share capital 5.7 5.7 6.3 6.8 Reserves 17.6 16.4 21.7 25.2 23.3 24.1 28.0 32.0 Deposits l/ 851.0 935.5 1161.2 1690.1 Other liabilities 4.7 7.6 10.1 19.4

879.0 967.2 1199.3 1941.5

Represented by:

Cash on hand and with banks 72.0 81.2 135.6 282.8 Money on call and short notice 40.0 - 11.3 19.3 Cheques in collection 151.2 151.9 128.0 252.2 Government securities 53.8 57.9 122.1 111.1 Advances 2/ 554.2 669.1 793.1 12 2.9 Fixed assets 4.9 3.6 4.8 4.7 Other assets _ .9 3.5 4.4 18.5

879.0 967.2 1199.3 1 241.5

Guarantees and acceptances 882.7 863.3 871.2 875.0 - as % of total assets 100% 89% 73% 45% Liquidity ratio 1V 30% 24% 23% 29%

Net profit after tax 2.3 2.1 1.2 2.1

Transfers to general and other reserves 2.0 1,8 0.7 1.5

Pamnents to Consolidated Fnd - - 0.1 Dividends 0.3 0.3 0,4 0.5 2.3 2.1 1.2 2.1

Net profit after tax as % of average assets 0.27% 0.24% 0.11% 0.13%

1/ Deposits on December 31, 1972: Rs Million

Current accounts 440.3 Cheques in collection 170.9 Savings accounts 257.9 Fixed deposits 148.3 Others (including amount received from Central Bank on account of cultivation loans) 872.7 1890.1

2/ See Table 5 for recent breakdown o' advances.

3/ Cash on hand and with banks, money on call and short notice, and cheques in collection as a percentage of total assets.

October 17, 1973. ANNEX 6 Table W SRI LANKA

DAIRY DEVELOPMENTPROJECT

People's Bank Classificationof Advances.June 30. 1972 by Purmose and Period (Rs Million)

Period of Advance No. of Up to 1 to 5 Above Purpose Advances 1 Year Years 5 Years Total

Commercial / 8,485 136.6 53.1 5.5 195.2

Financial 2/ 8,420 3.5 14.1 7.3 24.9

Agricultural 3/ 26,278 86.8 52.5 3.1 142.4

Industrial i/ 2,817 120.9 106.9 9.0 236.8 Consumption 5/ 120,592 19.5 38.6 9.6 67.7

Other loans 6/ 82,613 15.1 27.6 5.0 47.7

Total 249,205 382.4 292.8 39.5 714.7

1/ Export, import, wholesaleand retail trade.

/ Advances to financial institutions and individuals for purchase of assets (shares, securities, real estate).

3/ Production loans for tea, rubber, coconut and other crops as well as for livestock and dairying.

4/ For processing of agricultural commodities and for manufacturing industries including mining and fisheries.

5/ For purchase of consumer goods.

6/ Miscellaneous, not covered under above classifications. iptober 18, 1973.

ANNEX6 Appendix I Page 1

PROJECTLENDING POLICIES ANDPRsOCEDURES

I. Investments to be Financed

1. Sub-loans would be granted to finance the acquisition of dairy cattle, land clearing, pasture establishment, construction of buildings to raise cattle and store animal feed, erection of fences, procurement and installation of small dairy equipment, and construction of water supply facilities.

2. Credit would be provided to NMBfor the purchase of storage tanks and chilling lUnits for about 70 new milk collection centers, two mobile testing units and about 15 bulk milk tank trucks.

3. Credit would be provided to MPCSand DCS for the construction or improvement of about f'ifty facilities to house the milk collection equipment to be provided under para 2, above.

II. Lernding Terms

A. Except as Government and the Association shall otherwise agree, the following lending terms and conditions would be used in implementing the Project:

Lending Terms - Government to BC and PB

(a) Term: 12 years including a three-year grace period;

(b) Interest: 6% per annum on outstanding balance;

Leriding Terms - BC or CRB's to Farmers

(a) Term: 12 years including a three-year grace period;

(b;) Interest: 10% per annum on outstanding balance;

(c) Sub-loans would be made to finance not more than 90% of the total cost of the proposed investment exclusive of pasture deve'lopment subsidies. The balance of the cost would be provided in cash or in kind by the borrowing farmer.

Lending Terms - BC to NMB

(a) Term: 10 years including a three-year grace period;

(b) Interest: 8% per annum on outstanding balance.

Lending Terms - PB to CRB's

(a) Term: 12 years including a three-year grace period;

(b) Interest: 7-1/2% per annum on outstanding balance;

(c) Repayments to be in installments set to coincide with scheduled collection of sub-loans made by CRB's to farmers. ANNEX 6 .plendix I Page 2

Lending Terms - PB to MPCS and DCS

(a) Term: 12 years including a three-year grace period;

(b) Interest: 8% per annum on outstanding balance

B. The initerest rates specified under para A above may be increased by agreement between Government and the Associationto reflect future increases in the interest rates charged by banking institutions in Sri Lanka on loans for agricultural purposes.

III. Proceduresfor ProcessingSub-Loans to Farmers

1. PTU staff would assist farmers in preparingfarm plans and budget, appraise proposed investments, provide supervision during the carrying out thereof, and would regularly, thereafter, provide consultation to farmers until sub-loans shall have been fully repaid.

2. All sub-loans to farmers would be appraised in terms of incremental returns, and particular consideration would be given to repayment capacity of the borrower.

3. Sub-loans would be made only to such farmers who:

(a) are in areas where satisfactory milk collection, storage and transport facilitiesshall exist;

(b) are eligible for payment by Governmentof the appropriatepasture development subsidy; and

4. BC and CRB's would accept PTU's approval as satisfactoryevidence of the technicaladequacy of fanm development plans submitted to them for sub-loans, and would base their approval of applicationsonly upon applicants'creditworthiness. ANUZ 7 Table 1

ORI LANKA Dariy Oevelop-enL ?roljct

Model 1: C--nt Trisoole- 50 Acre Farn Herd Development Projections

6 ff Before Ir 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr Yr 7 Yr 8-25 ]Development ( Number of Head A - Parameters of -lerd Perfornance

Calving Rate 71 55 55 60 65 70 70 70 70 70 Mortality Adults % 10 10 5 3 3 3 3 3 3 Mortality Birth -I yr % 15 15 10 8 8 8 8 8 8 Cow Culling % 10 15 25 25 tS 15 t5 15 15 2-3 yr Heifer Cullng 104 1 10 10 10 10 15 1 10 Milk Sales (pt/lactation) Original Coms 1200 1200 1450 1700 1700 1700 1700 1700 1700 Upgraded or Parchased Cow. - - 2000 2200 2400 2800 3000 3000 3000 Sale Weights (lb liveweight) Cull Cows 600 600 600 625 65o 675 700 700 700 Cull Heifern 400 450 455 475 500 525 550 550 550 Calves 120 120 130 140 150 150 150 150 150 Males 1-2 yr 250 250 300 350 375 400 400 400 400 Males over 2 yr 700 700 750 800 850 850 850 850 850

Age at First Calving (months) 36 36 36 32. 32 30 30 30 30

Carrying Capacity 1A0/farn) 16 20 30 36 36 36 36 36 36

B - Herd Development Projections (100 UOits)

Cows On hand 655 655 622 990 1312 1654 1723 1827 1811 Plus in-calf heifers 145 145 584 616 596 378 427 323 339 Total mated 800 800 1206 1608 1908 2032 2150 2150 2150 Less deaths 80 80 60 48 57 61 65 65 65 Less sales 65 98 156 248 197 248 258 274 274 On hand at end 655 622 990 1312 1654 1723 1827 1811 1811

Heifers 2-3 yr on hand 168 168 168 178 263 311 299 317 317 Plus -urchIsev - 500 500 400 - - Sub total 168 668 668 578 263 311 299 317 317 Less deaths 17 67 33 17 8 9 9 10 10 Less sales 6 17 17 18 32 173 284 301 285 On hand at end 145 584 618 543 223 129 6 6 22

Heifers 1-2 yr on haod 187 187 187 326 480 615 654 693 693 Less deaths 19 1g 9 10 14 18 20 20 20 On hand at end 168 168 178 316 466 597 634 634 634

Calves Born during year 440 440 724 1045 1336 1422 1505 15)5 1505 Less deaths 66 66 72 84 107 114 120 120 120 Male calves sold - - - - 200 380 472 472 472 On hand at end 374 374 652 961 1029 928 913 913 913

Males 1-2 yr on hand 187 187 187 326 481 454 274 220 220 Less deaths 19 19 9 10 14 12 8 7 7 Less sales - - - - 417 352 216 163 163 On hand at end 168 168 178 316 50 50 50 50 50

Males Over 2 yr on hand 318 318 318 328 466 200 200 230 200 Lessdeath. 32 32 16 10 15 6 6 6 6 Less sales 136 136 152 168 302 44 44 464 44 On hand at eld 150 150 150 150 150 150 150 150 150

Bulls On hand 16 16 16 16 16 16 17 17 17 Plus purchases 3 3 3 3 3 4 4 4 4 Subsotal 19 19 19 19 19 20 21 21 21 Less deaths 1 1 1 1 1 1 1 1 1 Less sales 2 2 2 2 2 2 3 3 3 On hand at end 16 16 16 16 16 17 17 17 17

Total Animalunits 1668 2179 2585 3185 3617 3592 3598 3601 3601- Total Cows calving 440 420 724 1045 1336 1422 1505 1505 1505

1/ Increvental Herd Growth = 1933 AU

February 1, 1974 SRI LANKA

Dairy Development Project

Model 1: Coconut Triangle - 50 Acre Farm

InvestmentProjection

Year 1 Year 2 Year 3 Total Units Unit Cost Units Cost Rs Units Cost Rs Units Cost Rs Units Costs Rs Rs 1/ Pasture Establishment/ ac 340 24 8,160 24 8,160 - - 48 16,320

Fencing2/ chain 60 48 2,880 48 2,880 - - 96 5,760

Buildings3/ lact.cow 810 8 6,480 7 5,760 _ - 15 12,240

Water Suppuply- 4 farm 1,000 1 1,000 - - - - 1 1,000

Dairy Equipment 5 ' farm 300 ½ 150 12 150 - - 1 300

Livestock Purchases Heifers or Young Cows head 800 5 4,000 5 4,000 4 3,200 14 11,200

TOTAL 22,670 20,950 3,200 46,820

1/ Land preparationby hired labor (Rs 80/acre); seed and planting (Rs 120/acre);fertilizer during year of establishment: 150 lb/acre of urea (Rs 60) plus 175 lb/acre triple superphosphate(Rs 65) plus 75 lb/acrepotash (Rs 15). 2/ 2 chain new fence per acre required at Rs 60/chain. 3/ 36 sq ft at Rs 10/sq.ft per lactating cow plus 30 sq ft at Rs 15/so ft per calf = Rts810/3lactating >ows Ii? Water reticulationto centraldairy buildings. §/ Buckets, churns, etc. R

February 1, 1974 ~ C SitII1NKA

Dai. DevelopmrentProject

iKodel1: Coconut Triangle - 50 Acre Farm

Sales and Operating Expenses Projections

(Rs '000)

Before Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 and Onwards

A. Farm Livestock Sales

filk Sales 1/ 2.9 2.9 6.7 11.8 16.8 21.3 24.8 24.8 24.8 Cattle Sales for Beef, Cull Cows, Heifers, Bulls and Other 2/ 1.0 1.1 15 2.1 4.1 2.9 2.8 2.7 2.7 Breeding Heifers 3/ - - - - - 0.9 1.7 1.7 1.6

Total Livestock Sales 3.9 o/ 4.0 8.2 13.9 20.9 25.1 29.3 29.2 29.1

B. Operatin5g ;xnenses Labor 4j 1.2 2.2 2.2 2.9 2.9 2.9 2.9 2.9 2.9 Disease Control and AI 51 0.1 0.3 0.3 0.4 0.5 o.5 o.5 o.5 0$5 Concentrate Feeds 6/ 3.3 2.6 3.6 5.1 6.3 7.0 7.6 7.6 7.6 Pasture Maintenance 7/ - - 1.2 2.14 2.14 2.4 2.4 2.4 2.4 Maintenance of StrucTures 0/ - - o.5 1.0 1.0 1.0 1.0 1.0 1.0 Purchase of Bulls 9/ 0.1 0.1 0.1 0.1 0.1 0.1 3.1 0.1 0.1

Total Operating Expenses 4.710/ 5.2 7.9 11.9 13.2 14.3 15.0 15.0 15.0

1/ Rs o.55/pt of milk with 4Z fat, assuning Rs 0.05 for transport. 2/ Rs 0.70/lb liveimight. 3/ Rs 650/heifer. 1/ 1 laborer at Rs 100/mon'th before development; 1.5 laborers at Rs 120/month in years 1 and 2; 2 laborers at Rs 120/month from year 3 onwards. 5/ Rs 3/AU plus Rs.2/lactating cow before development; Rs 10/AU plus Rs 10/lactating cow from year 1 onwards. 7/ Rs 6 00/lg ton;2 lb/AU daily before development; 1 lb/AU daily plus 1/3 pt of milk sold from year 1 onwards. 7/ Nil before establishment:Rs 50/ac/yr (100 lb P205) starting in year after establishment. W/ 5% of investmerlt/year. 9/ Share of bull purchased 9 Rs 2,000w 10/ Exclusive of sales of and expenses on coconuts. Febru ry 1, 1974 DAIRY DNVELOFPiEUTPitJeCT DAiry Farm Development ProjAections

Model 1: Coconut Triangle - 50 Acre Farm Financial Projections

Farm Year 1 2 3 4 9 10 11-15 ------Rs000------Cash Inflow

Sales 4-. 8.2 13.9 20.9 25.1 29.3 29.2 29.1 29.1 29.1 29.1 Subsidy 1/ 2.9 2.9 Loan: Loan-term 16.4 14.9 2.7 Medium-term 2.1 2.5 2.0 Farmer's Contribution 3.4 3.1 0.5

Total 28.8 31.6 19.1 20.9 25.1 29.3 29.2 29.1 29.1 29.1 29.1

Cash Outflow

Investment 22.7 20.9 3.2 Operating Expenses 5.2 7.9 11.9 13.2 14.3 15.0 15.0 15.0 15.0 15.0 15.0

Total 27.9 28.8 15.1 13.2 14.3 15.0 15.0 15.0 15.0 15.0 15.0

Annual Cash Balance Before Debt Service 0. 2.8 4.0 7.7 10.8 1413 14.2 14.1 14.1 14.1 14.1

Debt Service

Long-term: Interest (10%) 0.8 2.4 3.3 3.4 3.3 3.1 2.5 1.9 1.2 0.6 Principal - - - 1.0 2.0 6.2 6.2 6.2 6.2 6.2 -

Medium-term: Interest (12%) 0.1 0.4 0.7 0.8 0.5 - Principal - - 2.5 4.1 _

Total 0.9 2.8 4.0 7.7 9.9 9.3 8.7 8.1 7.4 6.8 -

Annual Cash Balanee Aftpr Dpht,RP;iftp_ - - - 0.9 5.o 5.5 6.o 6.7 7.3 14.1

1/ Rs 120/acre for establishment of improved pastures under coconuts.

February l, 1974. SRI LANKA

Dairy Develop-ent Project

Model 2: Coconut Triangle - 10 Acre Farm

Herd Development Projections

Before | n Yr 2 Yr 3 Yrs4 Yr Yr 6 Yr 7 Yr 8-25 Development Nubers of Head

A - Parameters of Herd Performance

Calving Rate h 55 55 60 65 70 70 70 70 70 Mortality Adults % 10 10 5 3 3 3 3 3 3 Mortality Birth - 1 yr % 15 15 10 8 8 8 8 8 8 Cow2 Culling % 10 15 25 25 15 15 15 15 15 -3yr Heifer Culling X 5 10 10 10 10 10 10 10 10 Milk Sales (pt/lactation) Original Cows 1200 1200 1450 1700 1700 1700 1700 1700 1700 Upgraded or Purchased Cows - - 2000 2200 2400 2800 3(00 3000 3000 Sale Weights (lb liveweight) Cull Cows 600 600 600 625 650 675 700 700 700 Cull Heifers 450 450 450 475 500 525 550 550 550 Calves 120 120 130 1410 150 150 150 150 150 Males 1-2 yr 250 25o 300 350 375 400 500 400 400 Males over 2 yr 700 700 750 800 85o 850 850 850 850 Age at First Calving (months) 36 36 36 34 32 30 30 30 30 Carrying Capacity/farm (AU) 3 5 7 7.5 7.5 7.5 7.5 7.5 7.5

B - Herd Development Projections (100 Units)

Cows On hand 164 164 155 226 289 287 319 369 362 Plus in-calf heifers 36 36 124 131 51 86 111 61 68 Total mated 200 200 279 357 340 373 430 430 430 Less deaths 20 20 14 11 10 11 13 13 13 Le_s Sales 16 25 39 57 43 43 48 55 55 0 hand at end 164 l55 226 289 287 319 369 362 362

Heifers 2-3 yr on hand 42 42 42 45 61 69 53 58 67 Plus purchases - 100 100 ------Sub-total 42 142 142 45 61 69 53 58 67 Lens deaths 4 14 7 1 2 2 2 2 2 Less sales 2 4 4 5 7 10 58 56 65 On hand at end 36 124 131 39 52 57 3 0 0

Hleifers 1-2 yr on hand 47 47 47 75 106 110 120 139 139 Less deaths 5 5 2 2 3 3 4 4 4 On hand at end 42 42 45 73 103 107 116 135 135

Calves Born during year 110 110 167 232 238 261 301 301 301 Less deaths 17 17 17 19 19 21 24 24 24 Wale calves sold - - - - 45 90 108 108 108 On hand at end 93 93 150 213 174 150 169 169 169

Males 1-2 yr on hand 46 46 46 75 107 64 33 30 30 Less deaths 5 5 2 2 3 2 1 1 1 Less sales - - - 42 75 33 - - - On hand at end 41 41 44 31 29 29 29? 29 29

Males 2-3 yr on band 151 151 151 155 131 129 129 129 129 Less deaths 14 14 7 4 4 4 4 4 4 Less sales 27 27 34 40 27 25 25 25 25 On hand at end 100 100 100 100 100 100 100 100 100

Bulls On hand 4 4 4 5 4 4 4 4 4 Plus purchases 1 1 2 - 1 1 1 1 1 Sub-total 5 5 6 5 5 5 5 5 5 Less deaths - - Less soles 1 1 1 1 1 1 1 1 1 On hand at end 4 4 5 4 4 4 4 4 4

Total animal units 481 581 661 701 750 750 767 791 7911' Total cows calving 110 110 167 232 238 261 301 301 301

I/ I-cre eotal Herd -roeth = 310 AU

Febr-ery 1. 1974 SRI LANKA

Dairy Development Project

Model 2: Coconut Triangle - 10 Acre Farm

Investment Projection

Unit Cost Year 1 Year 2 T_t_l Investment Unit Rs Units Cost Rs Units Cost Rs Units Cost Rs

Fodder Establishment1/ ac 300 6 1,800 3 900 9 2,700

Buildings 2/ AU 360 7 2,520 1 360 8 2,880

Water Supply 3/ Farm 500 1 500 - - 1 500

Dairy Equipment4/ Farm 100 1 100 - - 1 100

LivestockPurchases Heifers or Young Cows Head 800 1 800 1 800 2 1,600

TOTAL 5,720 2,060 7,780

1/ Land preparation labor (Rs 80/ac); grass cutting and planting (Rs 60/ac); fertilizer at establishment 200 lb/ac of urea (Rs 80) plus 175 lb/ac of phosphate (Rs 65) plus 75 lb/ac potash (Rs 15). 2/ 40 sq ft plus 5 sq ft for storage per AU at Rs 8/sq ft. 3/ Reticulationto central building. LT/ Buckets, churns, etc.

February 1, 1974h SRI LANKA

Dairy DevelopmaentProject

Model 2: Coconut Triangle - 10 Acre Farm

Sales and Operating Expense Projections

(Rs '000)

Before Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 and After

A. Sales Proiections Milk Sales 1/ 0.7 0.7 1.0 1.9 2.5 3.6 5.o 5.0 5.0 5.0 Cattle Sales for Beef Bull Cows, Heifers, Bulls and Others 2/ 0.2 0.3 0.4 o.6 o.6 o.6 0.5 o.6 o.6 o.6 Breeding Heifers 3/ ------0.2 0.3 0.3 0.3

Total LivestockSales -o/ 0.9 1.0 1.4 2.5 3.1 4.2 5.7 5.9 5.9 5.9

B. Operating Expenses Labor V - - - - - _ _ _ _ _ Disease Control and AI 5/ - 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 ConcentrateFeeds 6/ 007 0.7 o.8 1.0 1.1 1.3 1.6 1.6 1.6 1.6 Fodder Maintenance7/ - - 0.5 0.7 0.7 0.7 0.7 0.7 0.7 0.7 Maintenance of Structures8/ - 0.1 0.2 0.1 0.2 0.1 0.2 0.1 0.2 0.1 Purchase of Bulls 9/ - 0.1 - - - - 0.1 - - -

Total Operating Expenses-l/ 0.7 1.0 16 1.9 2.1 2.2 2.7 2.5 2.6 2.5

1/ Rs 0.55/ptof milk with 4% fat, assuming Rs 0.05/ptfor collection. 2/ Rs 0.70/lb liveweight. 3/ Rs 650/heifer. 4/ Family labor only. 7/ Rs 3/AU plus Rs 2/lac-tatingcow before development;Rs 10/AU plus Rs 10/lactating cow starting in Year 1. &/ Concentrateat Rs 600/ton; 3 lb/AU daily before developnent;1 lb/AU daily plus 1/3 lb/pt of milk sold from Year 1 onwards. 8 7/ Nil before dc-velopment;Rs 0/ac/year (200 lb urea), starting in year after establishment. C' 7/ 5% of investmen-tstarting one year after investmentis made. 7/ Share of communallyused bull purchase @ Rs 2,000 each, occurring every fifth year. 10/ Exclusive of sales of and expenses on coconuts. February 1, 1974. SRT LANKADATRY DEVELOPHENT PHOJECT

DLirY Farm Development Projections

Model 2: Coconut Triangle - 10 Acre Farm Financial Projections

Farm Year 1 2 3 4 R 7 9 10 11-15

Cash Inflow

Sales 1.0 1.4 2.5 3.1 4.2 5.7 5.9 5.9 5.9 5.9 5.9 Subsidy l/ 0.7 0.7 Loan: Long-term 4.1 1.1 Medium-tern 0.3 o.8 0.1 Farmer t s Contribution 0.9 o.3

Total 7.0 4.3 2.6 3.1 4.2 5.7 5.9 5.9 5.9 5.9 5.9

Cash Outflow Investment 5.7 2.1 Operating Expenses 1.0 1.6 1.9 2.1 2.2 2.7 2.5 2.6 2.5 2.5 2.5

Total 6.7 3.7 1.9 2.1 2.2 2.7 2.5 2.6 2.5 2.5 2.5

Annual Cash Balance Before Debt Service 0.3 o.6 0..7 1.0 2.0 3.0 3.4 3-3 3 3.. Debt Service

Long-ten : Interest (10%) 0.2 0.5 0.5 0.5 0.5 0.5 0.4 0.3 0.2 0.1 - Principal - - - 0.2 0.3 1.0 1.0 1.0 1.0 0.7 -

Medium-term: Interest (12%) 0.1 0.1 0.2 0.2 0.1 Principal - - 0.1 1.1

Total 0.3 o.6 0.7 1.0 2.0 1.5 1.4 1.3 1.2 o.8 Annual Cash Balance After Debt Service - - - - - 1.5 2.0 2.0 2.2 2.6 3. i

1/ Rs 120/acre for establishment of improved pastures under coconuts.

February 1, 197h1 SRI LANKA

DAIRY DEVELOPMENTPROJECT ANNEX 7 MODEL 3: MID-LOUJNTRY-40 A~CREFARM Ta_ble9

Herd Development Projections

6 Before 1 Yr 2 Yr 3 Yr 4 Yr 5 1'r Yr 7 Development Yhunabers of Head ---- )and after

A - Parameters of Herd Perforoance

Calving Nate 1 65 65 70 73 75 75 75 75 Mortality Adults % 10 10 5 3 3 3 3 3 Mortality Birth - 1 yr X 20 20 15 10 8 8 8 8 Cow Culling X 15 25 25 25 15 15 15 15 2-3 yr Heifer Culling % 5 15 15 15 15 15 15 15 Milk Sales (pt/lactation) 2400 2400 2850 3300 3600 36co 3600 3600 Sale Weights (lb liveweight) Cull Cows 700 700 700 725 750 775 800 800 Cull Heifers 500 500 500 515 550 575 600 600 Calves 120 120 130 140 150 150 150 150 Males 1-2 yr 350 350 350 375 4°0 425 425 425 Males over 2 yr 800 800 800 825 850 875 875 875

Age at First Calvint (months) 30 30 30 28 26 24 24 24

Carrying Capacity/farm (AU) 8 23 46 50 50 50 50 So

B - Herd Development Projections (100 Units)

Cows On hand 470 470 390 1243 1941 2384 26,9 2610 Plus in-calf heifers 130 130 1022 1079 817 716 451 490 Total mated 600 600 1412 2322 2758 3100 3130 3100 Less deaths 60 60 71 70 83 93 93 93 Less sales 70 150 98 311 291 358 327 397 On hand at end 470 390 1243 1941 2384 2649 2610 2610

Heifers 2-3 yr on hand 70 70 70 74 136 125 41.2 548 Plus purdases - 1000 1000 500 - - - Sub total 70 1070 1070 574 136 125 4 .2 51.8 Less deaths 7 107 54 17 4 4 14 16 Less sales 3 11 11 11 31 121 458 532 On hand at end 60 952 1005 546 101 - - _

Heifers 1-2 yr on hand 156 156 156 420 763 952 1 9'0 1070 Less deaths 16 16 8 13 23 29 32 32 On hand at end 1140 140 148 407 740 923 1038 1038

Calves Born dering year 390 390 988 1695 2069 2325 2325 2325 Less deaths 78 78 148 170 165 185 185 185 Male calves sold - - - - 150 740 71.0 740 On hand at end 312 312 840 1525 1751 1400 14100 1400

Males 1-2 yr on hand 156 156 156 420 762 802 :13: 330 Less deaths 16 16 8 13 23 24 10 10 Less sales 140 140 148 407 735 778 320 320 On hand at end ------

Bulls On hand 18 18 18 20 20 20 20 20 Plus purchases 7 7 7 5 5 5 5 5 Sub total 25 25 25 25 25 25 25 25 Less deaths 3 3 1 1 1 1 1 1 Less sales 4 4 4 4 4 4 4 On hand at end 18 18 20 20 20 20 20 20

Total animal units 1007 2007 2819 3761 4444 5004 4997 4997 l/ Total cows calving 390 390 988 1695 2069 2325 2325 2325

1/ Incremental herd growth = 3,990 AU

February 1, 1974 SRI LANKA

DAIRY DEVELOPMENT PROJECT

MODEL 3: MID-COUNTRY - 40 ACRE FARM

Investment Projections

Year 1 Year 2 Year 3 Total Investments Units Unit Cost Units Cost Units Cost Units Cost Units Cost Rs Rs Rs Rs Rs

Forage Establishment

Waste Land 1/ ac 320 4 1,280 3 960 - - 7 2,240

Tea Land 2/ ac 540 7 3,780 18 9,720 6 3,240 31 16,740

Boundary fence 3/ Chain 60 30 1,800 15 900 - - 45 2,700

Buildings 4/ AU 360 30 10,800 20 7,200 - - 50 18,000

Water Supply 5/ Farm 1,000 1 1,000 - - - - 1 1,000

Dairy equipment 6/ Farm 500 0.6 300 0.4 200 - - 1 500

Livestock purchases

Heifers or young cows Head 1,300 10 13.000 _10 13.000 5 6.500 25 32,500

Total 31 960 31 980 9 740 73 680

1/ Land preparation TRs 80/ac); grass cutting and planting (Rs 60/ac); fertilizer at establishment: 300 lbs urea/ac (Rs 120); 125 lbs triple superphosphate/ac (Rs 50); 50 lbs potash/ac (Rs 10).

2/ Uprooting tea and preparing land (Rs 300/ac); grass cutting and planting (Rs 60/ac); fertilizer as above (Rs 180/ac).

3/ Boundary fence, of which 50% is existing.

4/ 30 sq ft stables plus 5 sq ft storage/AU @ Rs 12/sq ft; 15% of requirements already existing.

5/ Water supply to central dairy barn.

6/ Churns, buckets, etc.

February 1, ]974 o z o _ SRI LANKA

DAIRY DEVELOPMENT PROJECT

MODEL 3: MID-COUNTRY - 40 ACRE FARM

Sales and Operating Expense Projections (Rs '000)

Before 1 2 3 4 5 6 7 8 And Later

A. SALES

Milk 1/ 5.0 5.0 14.9 29.6 39.5 44.4 44.4 44.4 44.4 Cattle for beef 2/ 0.8 1.2 1.0 2.8 4.0 5.2 4.3 4.4 4.4 Breeding heifers 3/ - - - - 0.1 0.7 2.7 3.3 3.3

Total Livestock Sales 5.8 6.2 15.9 32.4 43.6 50.3 51.4 52.1 52.1

Tea Sales 4/ 1.7 1.3 0.3 ------

Total Sales 7.5 7.5 16.2 32.4 43.6 50.3 51.4 52.1 52.1

B. OPERATING EXPENSES

Labor 5/ 2.4 3.8 6.5 7.7 8.9 10.1 10.1 10.1 10.1 Disease control and A.I. 6/ 0.1 0.2 0.4 0.5 0.7 0.7 0.7 0.7 0.7 Concentrate feeds 7/ 4.0 3.2 6.6 11.4 14.4 16.2 16.2 16.2 16.2 Forage maintenance 8/ - - 1.3 3.8 4.6 4.6 4.6 4.6 4.6 Maintenance of structures 9/ - - 0.7 1.1 1.1 1.1 1.1 1.1 1.1 Purchase of bulls 10/ 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

Total Operating Expenses 6.6 7.3 15.6 24.6 29.8 32.8 32.8 32.8 32.8

1/ Rs 0.53/pt of milk with 3.8% fat, assuming Rs 0.05 for transport.

2/ Rs 0.70/lb liveweight..

3/ Rs 700/heifer.

4/ Plucking cost Rs 0.15/lb greeu leaf, sold at Rs 0.22/lb; net proceeds of Rs 0.07/lb;yield of 800 lb green leaf/ac.

5/ Two laborers at Rs 100/month before development; 1 milker at Rs 120/month plus 3 laborers at Rs 100/month in year 1; two milkers at Rs 120/month plus 4 laborers at Rs 100/month in year 2; 2 milkers at Rs 140/month from year 3 onwards, five laborers at Rs 120/month in year 3, 6 in yzar 4, 7 laborers d RS 12aII,IILh foiua yeaL 5 unwaids. 6/ Rs 3/AU plus Rs 2/lactating cow before development; Rs 10/AU plus Rs 10/lactating cow from year 1 onwards.

7/ Rs 600/lg ton; 4 lb/AU daily before development; 1 lb/AU daily plus i lb/pt of milk sold from year I onwards.

8/ Nil before development; 300 lbs urea/ac (Rs 120) annually starting in year after establishment.

9/ Starting in year after establishment; 3% on buildings, 5% on fences and water, 20% on equipment.

10/ Share of communally used bull purchased at Rs 2,000.

February 2, 1974 D..B - , ,IP P3aRO

D trs' FaruDev Pto.tionsoent Model3: Nid-CQaZ - ore lam Financial Prolections Farm Tear 1 2 3 4 < - b 7 8 9 10 11-15 (------Rs '000 ------Cash Inflow Sales 7.5 16.2 32.4 43.6 50.3 51.4 52.1 52.1 52.1 52.1 52.1 Subsidy - 2.8 7.9 4.2 Loan: Long-term 24.4 19.3 4.0 Medium-term 1.1 3.1 - Farmer'sContribution 4.8 4.8 1.5 Total 40.6 51.3 42.1 43.6

Cash Outflow Investment 32.0 32.0 9.7 Operating Expenses 7.3 15.6 24.6 29.8 32.8 32.8 32.8 32.8 32.8 32.8 32.8 Total 39.3 47.6 34.3 29.8 32.8 32.8 32.8 32.8 32.8 32.8 32.8 Annual Cash Balance BeforeDebt Service 1.3 3:7 13.8 17.5 18.6 12-3 jY_2 19.3 E.32 12.3 Debt Service

Long-term: Interest(10%) 1.2 3.4 4.6 4.8 4.2 3.5 2.8 2.1 1.4 0.7 - Principal - - - 5.7 7.0 7.0 7.0 7.0 7.0 7.0 Medium-term: Interest(12%) 0.1 0.3 0.5 0.2 - Principal - 2.7 1.5 -

Total 1.3 3.7 7.8 12.2 11.2 10.5 9.8 9.1 8.4 7.7 - Annual Cash Balance After DebtService - - - 1.6 6.3 8.1 9.5 10.2 10.9 11.6 19.3

1/ Total of Rs 500/acre for tea up-rooting, pasture establishment and pasture maintenance.

F.bruary 2, 197l. 1r oz SRI LANKA ANNEX 7 DAIRY DEVELOPMENTPROJECT Table 13

MODEL 4: MID-COUNTRY - 8 ACRE FARM

Herd Developmer.t Projections

Before Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Development and onwards D(velopment- Nmbers of Head )

A - Parameters of Herd PerfoMsance

Calving Rate % 65 65 70 73 75 75 75 Mortality Adults % 10 10 5 3 3 3 3 Mortality Birth - 1 yr % 20 20 15 10 8 8 8 Cow Culling % 15 25 25 25 15 15 15 2-3 yr Heifer Culling % 5 15 15 15 15 15 15

Mill Sales (pt/lactation) 2400 2400 2850 3300 3600 3600 3600

Sale Weights (lb liveweight) Cull Cows 700 700 700 725 750 775 800 Cull Heifers 500 500 5°° 525 550 575 600 Calves 120 120 130 140 150 150 150 Males 1-2 yr 350 350 350 375 400 425 425 Males over 2 yr 800 800 800 825 850 875 875

Age at First Calving (manths) 33 33 33 31 29 27 27

Carrying Capacity/farm (AU) 2 5.8 7.0 7.0 7.0 7.0 7.0

B - Herd Development Projections (100 Units)

Cows On hand 237 237 211 287 356 377 381 Plus in-calf heifers 63 63 147 154 87 73 69 Total mated 300 300 358 441 443 450 450 Less deaths 30 30 18 13 13 14 14 Less sales 33 59 53 72 53 55 55 On hand at end 237 211 287 356 377 381 381

Heifers 2-3 yr on hand 52 52 52 56 63 68 79 Plus purchases - 100 100 - - - - Sub-total 52 152 152 56 63 68 79 Less deaths 5 15 8 2 2 2 2 Less sales 2 8 8 8 61 66 77 On hand at end 45 129 136 46

Heifers 1-2 on hand 78 78 78 107 14S 152 152 Less deaths 8 8 4 3 4 4 4 On hand at end 70 70 74 104 141 148 148

Calves Born during year 195 195 251 322 332 332 332 Less deaths 39 39 38 32 28 28 28 Male calves sold - - 17 103 129 140 140 On hand at end 156 156 196 187 175 164 164

Males 1-2 yr on hand 78 78 78 89 42 23 12 Less deaths 8 8 4 3 1 1 Less sales 70 70 74 86 411 22 12 On hand at end

Bulls On hand 5 5 6 6 6 6 6 Plus purchases 1 2 1 1 1 1 1 Sub-total 6 7 7 7 7 7 7 Less deaths 1 1 Less sales _ _ 1 1 1 1 1 On hand at end 5 6 6 6 6 6 6

Total animal units 514 615 673 700 700 700 700 I/ Total cows calving 195 195 251 322 332 332 332

1/ Increeental herd growth = 186 AU

-ruary 2, 1974 SRI LANKA

DAIRY DEVELOPMENT PROJECT

MODEL 4: MID-COUNTRY - 8 ACRE FARM

Investment Projection

Year 1 Year 2 Total Units Cost Units Cost Units Cost Units Cost (Rs) (Rs) (Rs) (Rs)

Forage Establishment

Waste land 1/ ac 320 1 320 - 1 320 Tea land 2/ ac 540 4 2,160 - 4 2,160 Pasture Improvement 3/ ac 180 2 360 - 2 360

Buildings 4/ AU 350 7 2,450 - 7 2,450 Water supply 5/ Farm 500 1 500 - 1 500 Dairy Equipment 6/ Farm 100 1 100 - 1 100

Livestock Purchases

Heifers or Young cows Head 1,300 1 1.300 1 1,300 2 2,600 Total 7.190 1,300 8,490

1/ Land preparation (Rs 80/ac); grass cutting and planting (Rs 60/ac); fertilizerat establishment; 300 lbs urea/ac (Rs 120) 125 lbs triple superphosphate/ac (Rs 50), 50 lbs potash/ac (Rs 10).

2/ Uprooting tea and preparing land (Rs 300/ac); grass cutting and planting (Rs 60/ac), fertilizer at establishment;same as in 1/ above.

3/ Fertilizer only, as in 1/ and 2/ above,

4/ 30 sq ft stable plus 5 sq ft storage/AUat Rs 10/sq ft (Rs 350); 15% of facilities already existing.

5/ Water supply to dairy barn.

6/ Churns, buckets, etc.

February 2, 1974

_l SRI LANKA

DAIRY DEVELOPMENTPROJECT

MODEL 4: MID-COUNTRY - 8 ACRE FARM

Sales and Operating Expense Projections (Rs '000)

Before Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

A. Sales Projections

Milk sales 1/ 2.5 2.5 3.8 5.6 6.3 6.3 6.3 6.3 6.3 Cattle for beef 2/ 0.4 0.5 0.5 0.8 0.6 0.6 0.6 0.6 0.6 Breeding heifers 3/ - - - - 0.4 0.4 0.5 0.5 0.5

Total Livestock Sales 2.9 3.0 4.3 6.4 7.3 7.3 7.4 7.4 7.4

Tea Sales 4/ 0.4 ------

Total Farm Sales 3.3 3.0 4.3 6.4 7.3 7.3 7.4 7.4 7.4

B. Operating Expenses Projections

Labor 5/ ------Disease control and Al 6/ - 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Concentrates 7/ 2.0 1.2 1.6 2.1 2.3 2.3 2.3 2.3 2.3 Forage maintenance 8/ - - 0.8 0.8 0.8 0.8 0.8 0.8 0.8 Maintenance structures 9/ - - 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Purchase of bulls 1O/ 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

Total Operating Expenses 2.1 1.4 2.7 3.2 3.4 3.4 3.4 3.4 3.4

1/ Rs 0.53/pt of milk with 3.8% fat, assuming Rs 0.05/pt collection costs.

2/ Rs 0.70/lb liveweight.

3/ Rs 700/heifer.

4/ Selling at Rs 0.22/lb green leaf; plucking cost Rs 0.10/lb (1/3 family labor); net profit Rs 0.12/lb; yield of 800 lbs/acre green leaf.

5/ Family labor only.

6/ Rs 3/AU plus Rs 2/lactating cow before development; Rs 10/AU plus Rs 10/lactating cow as of Year 1.

7/ Rs 600/lg ton; 4 lb/AU daily before development; 1 lb/AU daily plus ½ lb/pt of milk sold from Year 1 onwards.

8/ Nil before development; Rs 120/ac (300 lb urea/ac) annually starting year after establishment.

9/ Starting in year after establishment; 3% on buildings, 5% on water, 20% on equipment.

10/ Share of communally used bulls purchased at Rs 2,000.

February 2, 197h. o

m x SRI LANKA

DAIRY DEVELOPMENTPROJECT Dairy Farm Development Projections

Model 4: Mid-Country - 8 Acre Farm Financial Projections

Farm Year 1 2 3 4 5 6 7-15 (------Rs '000 ------… ------Cash Inflow

Sales 3.0 4.3 6.4 7.3 7.3 7.4 7.4 Subsidy - 1.6 0.4 Loan: Long-term 3.2 - Medium-term Farmer's Contribution 1.1 0.2

Total 8.9 4.9 6.4 7.3 7.3 7.4 7.4

Cash Outflow

Investment 7.2 1.3 Operating Expenses 1.4 2.7 3.2 3.4 3.4 3.4 3.4

Total 8.6 4.0 3.2 3.4 3.4 3.4 3.4

Annual Cash Balance Before Debt Service 0.3 0.9 3.2 3.9 3.9 4.0 4.0

Debt Service

Long-term: Interest (10%) 0.2 0.3 0.3 0.3 0.2 0.1 _ Principal - - 0.2 1.0 1.0 1.0 _

Medium-term Interest (12%) Principal

Total 0.2 0.3 0.5 1.3 1.2 1.1 - Annual Cash Balance After Debt Service 0.1 o.6 2.7 2.6 2.7 2.9 4.0

I/ Total of Rs 500/acre for tea up-rooting, pasture establishment and pasture maintenance.

February 2, 1974| SRI _.55405 SRI LASiA ~~~~~~~~~~~~~~~TableANNEX717 DAIRY DEVELCI22fNT 0R2172J

1MODEL5 MHID-CfL7RY - S ACPE_AR

1:erd DeeelopsleocPrcjecctons

Before Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 YrS. Yr 7 Yr 8 Developient and onwards -- N' ,bers of Head - -

A - Parameter of Herd Perfo.,ance

,alvin Ratei 65 .S 15 70 75 7' 75 75 Mort.ality Adollts 2. 10 10 5 3 3 3 3 3 3 lMortality Birth - yr 40 0 1 ' H 3 H18 8 C-' 10111i-. 1. 21 25^? 1S 15 15 15 15 '-' yr Holler Culling 1 3 10 15 15 15 15 1'1 15 15

dI i,l5.1e^ 2400 ?400 2853 2300 3600 3600 3600 3620 3600

.1-e eights (lb liveweight) Cull Cows 700 70C 70" 723 750 775 800 8D0 800 Cull Heifers 500 500 - 5- f 575 60r 600 600 Ca Les 120 120 130 140 510 150 15(1 150 150 H1a1s over 2 yr 300 800 800 825 8s0 875 873 875 875

Age at First alving (osonths) 33 33 33 31 29 27 2' 27 27

-arrying lapasityr/fart. (AUV 1.5 3.0 3.75 3.75 3.75 3.75 1.75 3.75 3.75

B - Herd Development =r_ jcticns (100 Units)

COWs Oln hand 119 119 105 1 6 163 182 220 229 229 Plus in-calf heifers 31 31 118 30 49 73 50 41 41 Tftal mated 150 150 223 216 212 255 27() 270 270 Less deaths 15 15 11 6 6 3 8 8 8 Less sales 16 30 26 47 24 27 33 33 33 On hand at sod 119 105 186 163 132 22D 225' 229 229

!eifers 2-3 yr on hand 26 26 26 28 39 27 2' 44 50 Plus rurchases - 100 - - - Sub-total 26 126 26 28 39 27 21 46 50 Less deaths 3 13 1 1 1 1 ' 1 2 Less saLes 1 4 4 4 6 26 20) 43 48 On hand at md 22 10, 21 23 32 - - - -

'eifers 1-2 yr on sand 39 32 39 67 71 73 89 94 94 Less deaths 4 6 2 2 3 2 7 3 3 on hand at end 35 35 33 65 68 71 85 91 31

'alves Horn durangYear 90 98 156 190 159 191i 203 ~ 203 203 Less deaths 2' 90 23 16 13 15 15 15 15 Male calves sold 39 35 66 71 73 38 9', 94 94 On hand at end 39 39 67 71 73 88 94 94 94

ulls Cn hand 2 2 4 6 4 4 4 4 4 rLUS purchases 1 3 1 1 1 1 1 1 1 Sub-total 3 5 5 5 5 5 5 5 5 Less deaths Less sales 1 1 1 1 1 1 1 1 1 On hand at end 2 4 4 4 4 4 3. 4 4

Total animal units 213 320 293 316 327 358 386 413 419 1/ Total cows calving 98 98 156 158 159 191 20:; 203 203

1/ l-cce-osntol berd gro-th = 201 AL' SRI LANKA

DAIRY DEVELOPMENT PROJECT

MODEL 5: MID-COUNTRY - 5 ACRE FARM

Investment Projections

Year 1 Year 2 Total Units Cost Rs Units Cost Rs Units Cost Rs Units Cost Rs

Forage Development 1/ ac 450 2.5 1,125 - - 2.5 1,125

Buildings 2/ AU 400 4 1,600 - - 4.0 1,600 Water supply 3/ farm 500 1 500 - - 1 500 Dairy Equipment 4/ farm 100 1 100 - - 1 100

Livestock purchases head 1,300 1 1,300 - - - 1,300

Total 4.625 4,625

1/ Land preparation (Rs 70/ac); grass cutting and planting (Rs 60/ac); fertilizer at establishment: 250 lbs urea/ac (Rs 100), 125 lbs triple superphosphate/ac (Rs 50), 50 lbs potash/ac (Rs 10); fertilizer for pasture improvement: same as at establishment (Rs 160/ac).

2/ 35 sq ft stable plus 5 sq ft storage/AU at Rs 10/sq ft (Rs 400); 15% of facilities already existing.

3/ Water supply to dairy barn.

4/ Churns, buckets, etc.

'itc a-ry 2, ?

FeDa) Z

X x SRI LANKA

DAIRY DEVELOPMENT PROJECT

MODEL 5: MID-COUNTRY - 5 ACRE FARM

Sales and Operating Expenses Projections (Rs '000)

Before Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

A. Sales Projections

Milk sales 1/ 1.25 1.25 2.36 2.76 3.03 3.64 3.87 3.87 3.87 Cattle for beef 2/ 0.13 0.22 0.22 0.35 0.25 0.28 0.32 0.34 0.34 Breeding heifers 3/ - - - - - 0.15 0.12 0.25 0.25

Total livestock sales 1.38 1.47 2.58 3.11 3.28 4.07 4.31 4.46 4.46

B. Operating Expenses Projections

Labor / ------Disease control and Al 5/ 0.01 0.04 0.04 0.05 0.05 0.05 0.06 0.06 0.06 Concentrate feed 6/ 0.64 0.64 0.89 1.01 1.09 1.28 1.37 1.40 1.40 Forage maintenance Y/ - - 0.38 0.38 0.38 0.89 0.50 0.50 0.50 Maintenance of structures 8/ - - 0.10 0.10 0.10 0.10 0.10 0.10 0.10

Total Operating Expenses 0.65 0.68 1.41 1.54 1.62 2.32 2.03 2.06 2.06

1/ Rs 0.53/pt of milk with 3.8% fat, assuming Rs 0.05/pt transport cost.

2/ Rs 0.70/lb liveweight.

3/ Rs 700/heifer.

4/ Family labor only.

5/ Rs 5/AU plus Rs 2/lactating cow b6fore development; Rs 10/AU plus Rs 10/lactating cow as of year 1.

6/ Rs 600/lg ton; 3 lb/AU daily before development; I lb/AU daily plus i lb/pt of milk sold starting in year 1.

7/ Nil before development; Rs 150/ac (400 lb urea/ac) annually starting year after establishment; additional 0.8 acres forage establishment in year 5.

8/ Starting in year after establishment; 3% on buildings, 5% on water, 20% on equipment.

February 2, 1974

'0 SRI LANKA

DAIRY DEVELOPMENTPROJECT Dairy Farm Development Projecticus

Model 5: Mid-Country - 5 Acre Farm Financial Projections

Farm Year 1 2 3 4 7 6 7 8 9-15 -E------Rs '000 ------Cash Inflow Sales t.5 2.6 3.1 3.3 4.1 4.3 4.5 4.5 4.5 Subsidy Loan: Long-term 3.3 Medium-term Farmer'sContribution 0.7

Total 5.5 2.6 3.1 3.3 4.1 4.3 4.5 4.5 4.5

CashOutflow

Investment 4.6 OperatingExpenses 0.7 1.4 1.5 1.6 2.3 2.0 2.1 2.1 2.1

Total 5.3 1.4 1.5 1.6 2.3 2.0 2.1 2.1 2.1 AnnualCash Balance Before Debt Service 0.2 1.2 1.6 1.8 2.3 2.4 2 2.4 DebtService

Long-term: Interest (1i%) 0.2 0.3 0.3 0.3 0.3 0.2 0.1 0.1 - Principal - 0.3 0.4 0.5 0.8 1.0 0.4 _

Total 0.2 0.3 0.6 0.7 0.8 1.0 1.1 0.5 - Annual Cash Balance After DebtService - 0.9 1.0 1.0 1.0 1.3 1.3 1.9 2.4

February 2, 1974 SRI 1ANKk

DAIRY DEVELOPMENT PROJECT

Star Yf Velhicle Requirements of Project Technical Unit

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Sta P

Technical Specialists

Technical Director 1 1 1 Tropical Pasture Expert 1 1 1 - - - -

Call Raising Expert 1 ½ - _ _ _

Local

Project Director 1/ 1 1 1 1 1 1 1 Planning and Appraisal Teams Farn Planning Technicians 10 15 15 15 12 9 5 Agricultural Technicians 10 15 15 15 12 9 5 Extension Advisors 10 35 75 45 45 45 45 Drivers 1)4 20 20 16 16 16 16 Secretaries 5 8 8 8 8 8 8

Vehicles 2/

Four-wheel passenger 13 6 - - - - - Motorbikes 20 30 40 - - - -

]/ Each team to plan and appraise 40 Carms in Year 1, 60 in Year 2 and 80 in Year 3. It is assumed that the teams would gradually shirt to employment with banks after Year 3; those remaining with PTU to strengthen the extension/supervisionstaff.

2/ Number to be purchased annually.

February 8, 1974 613

H1c ANNEX 8 Table .2 SRI LAWA

DAIRY LEVELP}ENT PROJECT

YANAGEMENT,TECHNICAL SERVICES AND PILOT UNITS

Proi-eted Co-t, Foreign Exchaane Coanonent and Ccntingencies

Pro'e t Year Total Coot __ c3 e Lesn With (Rs T0o0) Contingencie3 ContinROoiiS

FOREIGN ElRHAINE

A. Tenhioiu Unit SAIorien: Spenialni 675 e00 675 2,150 0 2,893 Lanai Sta f - - Vehiclen: Purohase h95 1,10 350 1,255 1,689 Operation 120 210 290 290 290 1,200 1,615

Sub-Total 1,290 1,420 1,j15 290 290 1,60• 6,197

B. Calf-Rearing: lnvest-er.t 35 - 35 4 Op-ratin-. 45 ' 5 61

Sob-Total S0C) - 80 lob

C. Dry-Load Pilot: Investment 5° So - - 100 135 Operation 10 10 - 20 27

Suab-Total _- 60 c - - 120 162

Sub-Total: Foreign Exchange 1,290 1,560 1,375 290 290 4,805- 6,467 Contingenaies: Physi-al (5%) 65 00 70 15 15 245 - Sub-Total y 1,355 i,6bC 1,415 301 305 5,0950 Friae (5%) _ 33 79 45_21 . , 1,417

Total Foreign Eoahnge 1,531 1,979 1,396 508 553 6,4W 6,467

LOCAL CURPENCY

A. Tecbhnial Unit ,si,ries: Zpaeoi..lla aDl075 Uo 675 - - 2,15u 2,716 Local Staff 638 1,240 1,840 1,375 1,370 6,463 8,i64 Vehitles: Parehase 632 525 450 - - 1,607 2,030 Operation 120 210 290 290 290 1.200 1.516 S.,h-Tot-i1 2,^65 2,775 3,255 1,665 1,660 11,420 14,426

B. Calf-Rearing: Investment - 100 - - 100 126 Operation - 44° _ - -- __ _- - 4 -…

5ab-Total 40 - 540 662 C. dry-La-d Pilot: In-vtment - 150 150 - - 300 379 Operation - io 10 0 30260 ~320

Sob-Total - 250 250 30 30 560 707 Sub-Total: Local Currenoy 2,065 3,565 3,505 1,695 1,690 12,520 15,d15 Contingencies: Physiaal (5%) iO5 180 175 35 85 630 , Sob-Total 2,170 3,745 3,660 1,780 1,775 13,150 2/ Price (6%)5 _0 573 080 7h 605 2,665 -

Total Local Currency 2,3757 ,31j ,4a8 ,2%5. 2300 15,815 15,815 TOTALFOREIGN AND LOCAL

A. Technical Unit Saladeis: Speoialists 1,350 1,600 1,350 - - 4,300 5,o09 Loana Staff 630 1,240 1,840 1,375 1,370 6,463 8,161, Vehileao: Purohase 1,127 935 000 - - 2,862 3,719 Operation 240 420 580 580 580 2,400 - 3131 Sub-Total 3,355 4,195 4,570 1,955 1,950 16,025 20,623

3. Co-11-earing: Investrent - 135 - - - 135 173 Opsrstion - 48 - _ - _ 486 17

Sub-Total - 620 - - - 620 72O C. Dry Land Pilot: In-stment - 200 200 - - 400 51u Operation - 110 110 30 30 280 355 SAt-Totl - 3100 311 3 30 689- 69

Sub-fatal. Foreign a.d lcca 3,355 5,125 4,588 1,905 1,9L1 17,325 22,282

>nn;innnr.tlnn: Pbalc' ll 0261 2745 11O 11 875 - oloI'rlce s 1.:w 112 ^25 0_- 677 95fi3 4.092 Sub-Total 1 0,l72 1,501 77 953 4,957 outa: Foreti-n, _ooal and Contingencies 32906 6.297 6.38h 2,762 2,931 222.L..22.282

1/ Reflecting projeated rate of inflation inountries of ioport, plas rounding. For ehibiles and The1 a contingency hbo baen added of 14 and 11% for 1974-75 and 7.5% for 1976 and the.rafter.

2/ Reflecting projected loca1 rae of Inflation, plan ounnclag.

Souoe: Bank Staff

February 12, 1974 ANNEX9 Page 1

SRI LANKA

DAIRY DEVELOPMENTPROJECT

Terms of Reference for Technical Assistance Specialists

1. The TechnicalDirector would have at least 5 years experience in dairy productionunder tropical or subtropicalconditions similar to those of the ProjectAreas. He should also be experiencedin tropical pasture managementand establishmentand includingthe use of tropical legumles. A degree in AgriculturalScience or Veterinary Science or equivalenl:would be preferredbut this could be overlooked for a person with wide experience but lesser qualifications.

2. Under the directionof the Project Director he would be responsible for all technicalaspects of the project during the first three years. He would be the chief technicaladvisor of the Director and be attached to the PTU headquartersstaff. Including,but not limiting the generality thereof, he would have the followingminimum specific duties, responsibilities and powers, which he might delegate in whole or in part to assigned technical staff:

(a) advising the administrativeofficials on major policy decisions in respect to the Project;

(b) supervisingthe technicalaspects of the project in accordance with policies and proceduresagreed to with the members of the Project Committeeof which he would be an ex-officio member;

(c) recommendingto the Minister of Agricultureand Lands through the Project Director the employmentof livestock technicians needed to carry out the project activities;

(d) prescribingthe duties and responsibilitiesof the livestock techniciansand training them in the technicaland economic aspects of livestockproduction and dairy farm developmentplan preparation;

(e) on behalf of the Project Director review dairy farm development plans prepared by PTU and recommend approved plans to on-lending banks;

(f) inter alia, providing guidance on farm buildings, feeding arrangements,milking practices,hygienic milk production includingidentification and control of mastitis; approving the selectionof imported female dairy stock and their ANNEX 9 Page 2

distributiornto participatingfarmers; and assisting in the organizationof artificialinsemination field services and in establishingmonthly cattle markets in the Mid- and Up-Country;

(g) organizingand supervisingthe technicalassistance necessary to ensure successful completion of each dairy farm developmentpian and lcan;

(h) training of a counterpartreplacement;

(i) organisingtraining programs and in-servicetraining for PTU technicians;

(j) establishinga farm accountiingsystem, with particular attention to maintaininga recordingsystem suitable for the evaluationof Project resuzs;

(k) giving assistanceand cooperationto the tropical pasture expert and the calf raising technicianin carrying out their assignments.

3. The Tropical Pasture Expert - would be a graduate in Agricultural Science with at least five years experience in Tropical pasture agronomy and extensionwith emphasis in the use of tropical legumes. This experiencewould include, species selection and establishmentincluding plant nutrition,seed productionand management. He would be attached to the PTU and be responsibleto the Project Director. Including,but not limiting the generalitythereof, he would have the followingminimum specific duties and responsibilities:

(a) carrying out investigationalwork on participatingfarms to determinethe most suitable grass, forage and legume plants for different ecological conditions, including:

(i) methods of establishment and cultivation techniques;

(ii) seeding and planting rates;

(iii) response to fertilizers; and

(iv) grassland and forage management, stocking rates and possibilities to develop year-round forage supplies;

(b) investigating methods of minimizing the cost of establishing pasture and fodder grasses under coconut palms, in up-rooted tea gardens and on wastelands, with particular attention to the timing of various operations and the effect of planting time on forage productivity after establishment; ANNEX 9 Page 3

(c) planning the dry-land pilot project, including investigating techniques for establishing rotational ley-farming systems in the Dry Zone including attention to suitable rotations of field crops, as well as suitable grass and legume species for the pasture phase; giving attention to the developmentof a pastoral system which, with the utilization of crop by-products, would provide sufficient year-round fodder;

(d) participatingin the technicalappraisal of dairy farm development plans and in the in-service training of PTU planning and appraisal teams;

(e) formulatingand supervisingschemes for pasture/forage seed multiplicationwith participatingproject farmers using, where necessary, imported foundationseeds;

(f) cooperatingwith the FAO/UNDP Project "Agricultural Diversificationof UneconomicTea and Rubber Lands".

3. Calf Raising Technician- would be attached to the PTU and be responsible to the Project Director. Including,but not limiting the generalitythereof, he would plan the pilot calf-raisingproject and have the followingminimum specific duties and responsibilities:

(a) determiningthe most economic feeding system for raising calves up to the age of two years, including:

(i) the concentrateingredients of local origin most suitable for raising calves below six months of age;

(ii) the response of calves to different locally available legumes and grasseswhen fed either as hay or fresh and;

(iii) developing feeding systems which can be applied on a year-roundbasis;

(b) evaluating the financialviability of calf raising using differentmethods of feeding;

(d) participatingin the technicalappraisal of dairy farm developmentplans and in the in-servicetraining of PTU planning and appraisal teams.

ANNEX 10 Page 1

SRI LANKA

DAIRY DEVELOPMENTPROJECT

Terms of Reference for Milk Collection and Transport Consultancy

Background

1. The National Milk Board (NNB) proposes to increase its network of milk collectioncenters to (a) accommodatethe increasedproduction of milk in the CoconutTriangle and Mid-Countryexpected to result from the proposedDairy DevelopmentProject to be carried out in those areas and (b) enable NMB to increaseits collectionsfrom other (non-Project)milk producersin the areas. NMB also proposes to increase the efficiencyof milk collectionand transportto its processingplants by rationalizing its milk to transportroutes and procedures.

2. It has been estimatedthat about 66 new collectioncenters -- approximately38 locatedin the CoconutTriangle; 28 in the Mid-Country-- will be required to handle the increasedoutput of milk under the proposed Project (however,this will provide some surplus capacityavailable for milk produced outside the Project). Storage tanks and chillingunits would be purchasedby NMB and installedin buildingsprovided by cooperatives,who would then operate the collectioncenters.

Responsibilities

3. In the contextof the foregoingthe consultantswill collectand assemblesuch informationas is requiredwith respect to (a) present and prospectivepatterns of milk productionand supply, (b) locations,capa- cities and utilizationof existing collection,storage and transportfacil- ities, (c) roads, routes and distancesand (d) processingfacilities. In this regard they will work closelywith, in addition to NMB, the Director and staff of the Animal Productionand Health Division (APHD) of the De- partmentof Agriculture at Peradeniya, particularly with respect to milk production patterns under the prospective Dairy Development Project. On the basis of this informationthe consultantswill:

(a) determinethe optimum number,sizes, locations and other pertinentspecifications of milk collectionfacilities required in the Coconut Triangle and Mid-Country; ANNEX 10 Page 2

(b) determine and produce detailed specifications for the most suitable equipmentand procedures for transportingthe milk from collectioncenters to processingplants, this to include but not be limited to specificationsof routes and scheduling; and

(c) review in detail their recommendationswith NMB and the Director of the Project TechnicalUnit in APHD and obtain concurrenceof both with the recommendations before leaving the country. AN5EX 11 SRI LANKA

DAIRY DEVELOPMENTPROJECT

Pe.ejot Costs by Investment Categoies (R. '800)

Percent Year 1 2 3 4 5 Total Foreign Exchange Category

A. On FPrn Dev-lop-ent

1. Past-ro EctablIuhsent 2,155 5,675 9,004 4,986 455 22,275 57 2. Feucing and Buildings 1,948 4,311 6,763 2,682 - 15,704 20 3. Water Su,pply 262 488 750 - - 1,500 80 4. Daity Equip-eot 54 117 179 50 - 400 80

Sub-total 4,419 10,591 16,696 7,718 455 39,879 42

5. Contingeuoieu Physical (5%) 217 526 831 394 26 1,994 Price 1/ 795 2,321 4,109 2,377 201 9.803

Sub-total 1,012 2,847 4,940 2,771 227 11,797 55 Total Os FPar 5,431 13,438 21,636 10,489 682 51,676 45

B. Livestock Purchase

1. Iuported 1,533 3,163 5,362 3,284 1,123 14,465 92 2. Local 865 2.271 4,000 2,704 975 10815-

Sub-total 2,398 5,434 9,362 5,988 2,098 25,280 57

3. Coutinge-cies Physical 119 272 468 300 105 1,264 Price 364 856 1,507 991 377 4,095

Sub-total 483 1.128 1.975 1.291 482 5.359 57

Total Licostock P-rcho.e 2,881 6,562 11,337 7,279 2,580 30,639 57

C. Milk Callectio- a-d Transport

1. Tacks and cooling equipetut - 3,818 3,817 - - 7,635 49 2. Teotiag Units 106 - - - - 106 57 3. Tr-osport Equipment - 3.538 - - - 3,538 48

Sub-total 106 7,356 3,817 - - 11,279 49

4. Coutingencies Physical 5 368 191 - - 564 Price 22 2.295 1.569 - - 3.886

shb-totul 27 2,663 1,760 - - 4,450 49

Total Collection cud Tran-port 133 10,019 5,577 - - 15,729 49

D. Collection Center Buildinng

1. Tasku: 1,000 and 1,400 pints - 315 315 - - 630 15 2. Tanks: 1,800 pints - 225 225 - - 650 15

Sob-total - 540 540 - - 1,080 15

3. Coetingentiee Physical _ 35 35 _ _ 70 Price - 70 135 - - 205

Slb-total - 105 170 - - 275 15

Total Callection Cectera - 645 710 - - 1,355 15

E. M.naunuent aud Technical Services

1. Technical Unit 3,355 4,195 4,570 1,955 1,950 16,025 50 2. Calf Rearing - 620 - - - 620 16 3. Dryland Pilot - 310 310 30 30 680 18

Sub-total 3,355 5,125 4,880 1,985 1,980 17,325 28

4. Continenc-ies Physical 170 260 245 100 100 8u7 Price 381 912 1.259 677 853 4.082

Sub-total 551 1,172 1,504 777 953 4,957 31

Total Mlinageuent and Technical Secvice- 3,906 6,297 6,364 2,762 2,933 22,282 29

F. Working Capital 400 830 1,500 1,370 400 4,500 -

1. Centingeucies Physical 20 40 75 70 20 225 Pricu 30 110 300 360 140 940

Sub-total 50 150 375 430 160 1,165

Total Working Capital 450 980 1,875 1,800 560 5,665 -

G. Project Costs

1. Without C50tingeocies 10,678 29,876 36,795 17,061 4,933 99,343 42.2 2. Contingencies Physical 531 1,501 1,845 664 251 4,992 41.0 Price 1,592 6,564 8.879 4,403 1,571 23,011 47.0

Sob-total 2,123 8,065 10,724 5,269 1,822 28,003 46.0

Total Project Costs 12,801 37,941 42,519 22,330 6,755 127,546 4.,0

1! Pcice contingencies have been applied us follows: inputted cattle 5% pe- ann= dif; local cattle, fern developneut and techbical services 6% p,a,; eqoipnent, fertili-er and fael 14% and 11% for 1974-75 and 7.5% for 1976 and thereaftar. There ore uo civil weeks corponents nuder the Project.

Source: BRok Staff

Febrpary 12, 1974 ANNEX 12

SRI LANKA

DAIRY DEVELOPMENTPROJECT

Estimated Scheduleof Disbursements (us$ '000)

IDA Fiscal Year and Quarter Quarterly Disbursement Cumulative at End of Quarter

1274/75

March 31, 1975 197 197 June 30, 1975 277 474

1975/76

September30, 1975 450 924 December31, 1975 274 1,198 March 31, 1976 1,130 2.328 June 30, 1976 470 2,,798 1976/77

September30, 1966 641 33439 December31, 1976 847 4,286 March 31, 1977 398 4h684 June 30, 1977 1,141 5:825

1977/78

September 30, 1977 532 6,357 December 31, 1977 647 7,004 March 31, 1978 169 7,173 June 30, 1978 648 7,821 1978/79

September30, W78 169 7,990 December31, 1973 253 8,243 March 31, 1979 253 8,L4.96 June 30, 1979 252 8,748

1979/80

September30, 1979 252 9, 'Doo

May 29, 197h SRI LANKA IAIRY DEVELOPffENTPROJECT

Financial Rates of Return (RS '000)

Before ------Farm Year ------MODEL Development 1 2 3 4 5 6 7 8 9 10 1 51-4

COCONUTTRIANGLE MODEL1 - 50 Acre Farm

Sales 3.9 4.0 8.2 13.9 20.9 25.1 29.3 29.2 29.1 29.1 29.1 29.1 29.1 Incremental Herd Value - 19.3 Operating Expenses 4.7 5.2 7.9 11.9 13.2 124.3 15.0 15.0 15.0 15.0 15.0 15.0 15.0 Investment - 22.7 21.0 3.2 Incremental Financial Balance - (23.1) (19.9) (0,4) 8.5 11.6 15.1 15 0 14.9 14.9 14.9 1IJ9 34.2 Financial Rate of Return: 21%

MODEL2 - 10 Acre Fam

Sales 0.9 1.0 1.4 2.5 3.1 1o2 5o7 5 5.9 5.9 5,9 5.9 5.9 Incremental Herd Value - 3.1 Operating Expenses 0.7 1.0 1.6 1.9 2.1 §2 2,7 2 2.6 2,5 2.5 1U5 2.5 Investment - 5.7 2.1 IncrementalFinancial Balance - (5.9) ( .5) 0.4 0.0 1G8 2,8 3.2 3.1 32 3.2 3.2 6.3 FinancialRate of Return: 20C%

NID-COUNTRY MOIDEL3 - 40 Acre Farm

Sales 7.5 7.5 16.2 32.4 43.6 >!) 3 51.4 'e,1 52.1 542-1 52.1 52-1 52.1 IncrementalHerd Value 39.9 Opersting Expenses 6.6 7.3 15.6 24.6 29., 13 32,8 e N 32.3 52.8 32.8 .Ja 32e8 Investment - 32.0 32.0 9.7 IncrementalFinancial Balance - (32.7) (32.3) (2.8) 1<2 jc,6 1o7 t8 i8.h 182 ,R7484 18.24 58.3 Financial Rate of Return: 18%

MODEL4 - 8 Acre Fan,

Sales 3.3 3X .3 6,24 7r3 ?(.4 7.4 7,24 7,24 7 J4 7,24 7c24 7.24 Incremental Herd Value - 1.9 OpereRting Eapenses 2.1 1.4 2.7 3.2 3.4 5,24 3,4 3.4 3.4 3.4 3.4 3e4 3.4 Investment - 7.2 1.3 IncrementalFinancial Balance - (6.8) (0.9) 2.0 2.7 2.7 2.7 2.1 2,7 2.7 2.7 2.7 4.6 FinancialRate of Return: 26%

MODEL 5 - 5 Acre Farm

Sales 1 .4 1 .5 2.6 3.1 3.3 4.1 4.3 2l.5 4.5 4.5 4.5 1.5 4.5 IncrementalHerd Value - 2.0 Operating Expenses 0.7 0.7 1.4 1.5 1.6 2.3 2.0 2.1 2.1 2.1 2.1 2.1 2.1 Investment - 4.6 IncrementalFinancial Balance - (4.5) 0.5 0.9 1.0 1.1 1.6 1.7 1.7 1.7 1.7 1.7 3.7 FinancialRate of Return: 23%

Source: Bank Staff

January 31, 1974 SRI LANKA

DAIRY DEVELOPMENTPROJECT

Sensitivity Tests of Financial Rates of Return

Financial Rate of Return With Operating With Benefits At Project Costs Increased Decreased MODEL Prices +02 - COCONUTTRIANGLE

Model 1 - 50 acre farm 21 19 18 17 13

Model 2 - 10 acre farm 20 19 17 17 14 MID-COUNTRY

Model 3 - 40 acre farm 18 15 12 13 7

Model 4 - 8 acre farm 26 25 24 22 18

Model 5 - 5 acre farm 23 21 19 18 14

Source: Bank Staff

January 31, 1974 ANNEX 14 Page 1

SRI LANKA

DAIRY DEVELOPMENTPROJECT

Economic Rate of Return Calculations

1. Primary project benefits would be (i) increased domestic milk productionresulting in reduced level of imports, (ii) meat production from project farm cull animals, and (iii) surplus good-qualitybreeding heifers from project farms.

2. Key assumptionsand adjustmentsthat were made are:

(a) an average FhEC rate of Rs 10 to $1 (US$) was used;

(b) pure bred heifers procured from Governmentfarms were valued at the CIF prices for imported pure-bredheifers; local cross-bredheifers procured from mid and up- countrywhere they are surplus, were valued at the domestic market price;

(c) domestic milk productionwas valued at the CIF price (liquidmilk equivalent)of milk powder and butter fat importsdisplaced; similarly for other project outputs;

(d) all operatingcosts, includingcollection, transport, and processing,associated with the substitutionof imports by domestic productionwere charged to the project;

(e) the labor componentwas costed at the market wage rate;

(f) costs of technicalservice, extensionand pasture research were charged to the project;

(g) the prices of outputs, operating inputs,and investment items, in real terms, were assumed to remain at the current levels; and

(h) in the basic economic analysis,fertilizer was valued at its July, 1973 internationalprice (price increases estimatedat 150% after that date were not included since their impact upon commodity prices has not been quantified);however, the sensitivityof the project to the fertilizerprice increase has been tested (para 5). i3. Based on these assumptions,the economicrate of return is projectedat 18%. Under the most conservativeapproach, costing the input pure-bredsat the import price (Rs 4,800) rather than the domestic subsidized ANNEX 14 Page 2 price (Rs 1,300) and, at the same time, valuing the output at the lower price, the economic rate of return would be 15%. The project output uses about 15% of the already installedprocessing capacity and if part of the investmentin NMB's processing capacity is charged to the project, the return to the economywould be 16.5%.

4. A sensitivityanalysis has been carried out with respect to investmentcost, operating cost and benefits. By increasingboth investment and operating costs by 20% without changing the operatingresults, the return tu the economy would drop to about 13%. Similarly,by reducing benefits by 20% without changing costs, the rate of return would be 12%. This is consideredsatisfactory, in relation to the opportunitycost of capital in Sri Lanka. As can be seen from Table 2 to this Annex, when a 20% reduction in benefits is combined with a 20% increase in costs, the rate of return drops to about 7%. The risk of such a combinationof events is not great.

5. If dairy farm investmentand operatingcosts are increasedto include the full increase in fertilizerprices since July 1973 (reflecting a projected farm gate price of urea of US$225 per m ton), and with no change in commodityprices, the economic rate of return would be 15%. SRI LANkSA

DAIPY MVELOPViL0i.TPROJECT

Rate of Return to the Economy - (Rs '000)

Year 1 2 3 4 5 6 7 8 9 10-16 17

A. I1iCR4E-OOTALI14VLSTIPANT / 1. N'ationalJ-ilk Toard 110 7100 3927 - - 2. On - Farm 7847 17811 29256 15655 3580 3. Froject Technical Unit 1230 1335 1050 - - 4. 5eoperativeInvestment - 575 5"s _ _ TOTAL INCRN2IT.TALI1E3ST717T 9187 26821 34807 15655 3580

T. LNCUTZIIITALOtTiP'I? 1. ,kim .'iLkPowder (000 lbs) - 329 1,224 2,965 4,740 5,568 6,965 7,396 7,396 7,396 7,396 Value at Rs 4.40/lb - 1,440 5,335 13,045 20,855 24,500 30,645 32,540 32,940 32,540 -1,540 2. ratter Fat (ooo its) 12 47 114 182 214 267 284 284 234 284 Value at Rs 9.10/lb 110 430 1,035 1,655 1,945 2,430 2,585 2,589 2,53 5 2585 3. IncrementalIeef Output 112 309 1,200 2,442 3,972 4,672 4,296 4,04'j 4,130 4,130 L,130 4. Surplus reeding Nleifers - - - 242 1,012 3,004 5,327 7,357 7,885 7,785 7,785 5. Residual Ilerd Value _- - - -_ - - 57_0 ~0TO1TNC1a~30iL 0TA1O1 112 1,859 7,015 16,764 27,494 34,121 42,698 4',531 47,06 4 104,940

C. 2 CG10 TTS / 1. 'lational ilk Board (a) Pranstort - 30 120 290 460 550 640 740 740 740 740 -(-) Lve_>-lli80 330 790 1240 1370 1650 1980 1980 1980 1980 _ 110 450 1080 1,700 1920 2290 20 0 2720 2720 oc,ervative olle.t1on _ 212 424 424 424 424 404 424 4-4 41 424 ,n -ar 97 1.274 4,056 8.210 11.729 13,237 14,111 14,239 4,238 14,23C 14,'-3 rollct echnicc.lUnit 2223 4,005 515 2,627 2 622 1,400 1,400 - - - _ TOTAL I12111= L 0021 2320 5,601 9,445 12,541T 1,475 16,981 18,225 17,383 17 ,382 17,382 17,382

* i-T0 0 1=3_l`T (11,395) (30,563) (37,237) (11,432) 7439 17,140 24,473 29,148 29,678 29, 65- 87,558

.;. .OQIT 'IC UL 01TEOf -TIT?. - = 19'

1/ An average FtEC rate of exchange of Rs 10 to US$ 1 has been used for the economic analysis.

2/ Pure bred heffers procured locally, mainly from Government farms, are valued at cif price of imported pure breds (Rs 4,800/head); cross brds, available in surplus in the Up-Country are valued at the market price (Rs 800/head). Fertilizer for pastuireestablishment valued at July, 1973 prices.

3/ The project milk production becomes a part of NMB inputs while the output remains the same with and without the project. Increiaentalproject production is valued at the cif price of dairy imports displaced (mainly powder and butter fat); beef is valued at Rs 1.50/lh, the cit price for equivalent quality; surpluisbreeding beifer output is valued in the same manner as the input.

4; Incremental costs of collection, tran-ortation and processing into powder end butter fat associated with milk substitution of imports with local Ml,id milk. All labor is costed at the market wage and fertilizer imports at the sverage FEEC rate.

5/ If the pure bred heifer output is valued at the domestic subsidized price of Rs 1,300/head while the input is valued at-the cif price of Rs 4,800/head the rate of return is projected at 15%. If a part of the investment cost of the Ambewala spray power plant is assigned to the Project in proportion 8o the use to be made of it by the Project, the rate of return is projected at 16.5%.

Source: Bank Staff.

January 25, 1974 SRI1 lANXA * n~DIRDu PROJT

Economic Rate of Aiurn: Sensitivity AnP1yl5s

|lommic Rt. @1 Retumn Asrnuing that

S ARE BD5 S ARE

Standard - 10% - 20%

StandArd 18.6 15.4 12.0

+ 1% 15.7 12.7 9.3

+ 20% 13.2 10.2 6.9

Source: Bank Staff

January 25, 1974 IBRD 109 ,0 BRFRu"E 190Y ,2 71-> w eP , - k SRt LANKA -UVE0 . .R6C T ION ZONES AND PROJECTAREA

LMAGRIZOLTURALZONJE 1fMIO-CoUCHTRY .JCY''. AREA I DRY ZONE: UPCOUNTRY

.OCONUTC TRIANGLE V OTHER WET AREAS UEANGIRRO MCLKPROCENFCNKUEMTER 1 - d

4 PARLCA 5 oALLe 6 AMBEWELA

- A>'RL |* TION CENTERSf AND OVERMNNT LIVESTOCK FARMS

1 ;M 2 NmfWAGaOA3 GORCULLA 4 NfFwiWYA 5 fILNAW. 6 KURUNEGALA

7 m _/o\ 8 O0OAGASLANDA 9 KOTAGALA 10 'AMNfTIYA 11 SALHNROD 12 RAGALC.A imuNtAN 15 AGPARAt n t Mankul(lm 13 14 mAuTE ;l. < / UJ < m ^ U~N > I YA , \ / / \ \ VAV16 K*GEAK,AE17 oEYNAuwR 18 mIIUWALA AK9 wAuo 20 CCu4tvAFCTYA 21 ROPATLAWA

22 mS",4A("1 23 vAVAoAnk 24NEW ZEALANOFARM

IMi P> M A N N_AR RONaALRODS…S D RISTOISACRIE

-.-- V---- -RAfLRlA RIVERS

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