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 agri- culture 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, includ- ing 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 develop- ment, 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 inter- nationally 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 guide- lines, 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 pro- cedures 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' invest- ments