Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 2827-CE

SRI LANKA

STAFF APPRAISAL REPORT

SMALLHOLDER RUBBER REHABILITATION PROJECT

April 15, 1980

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

USSi = Rs 15.5Rs 1 US$0.065Rs 1 million = US$64,516

WEIGHTS AND K,ASURES

1 metric ton (mt) = 0.934 long ton = 2,204 lb1 kilogram (kg) = 2.2 lb

1 hectare (ha) = 2.47 ac

1 kg/ha 0 O.89 lb/ac1 meter (m) = 3.3 ft.1 kilometer (km) 0.62 mi

1 sq. km = 0.3:3 sq. mi

FISCAL YEAR

January 1 - December 31

ABBREVIATIONS AND ACRONYMS

ARTI - Agrarian Research and Training Institute

ASD - Advisory Services Department

CIDA - CanEadian Tnternational Development Agency

CFC - Ceylon Fertilizer Corporation

CPD - Commodity Purchase Department

CRI - Cost Recovery Indexdrc - dry rubber content

DRC - Department of Rubber Control

DREO - Divisional Rubber Extelision OfficerEO - Extension OverseerERR - Economic Rate of Return

GCE A - General Certificate of Education A Level

GCE 0 - General Certificate of Education 0 Level

GDP - Gross Domestic Product

GMO - Group Marketing Organization

GOSL - Government of Sri Lanka

GPC - Group Processing Center

ICB - International Competitive BiddingIDA - International Development Association

IRR - Internal Rate of Return

JEDB - Janatha Estates Development Board

M - Millionmt - metric ton

MPI - Ministry of Plantation Industries

NII - Net Income Increase

NPV - Net Present ValueODM - Overseas Development Ministry

PAD - Processing Advisory Division

PA - Processing AdvisorPCU - Project Coordination Unit

PY - Project Year

RAO - Regional Advisory Officer

FOR OFFICIAL USE ONLY

REO - Rubber Extension OfficerRIDA - Rubber Industry Development AuthorityRPPU - Rubber Policy and Planning UnitRPRC - Rubber Policy Review CommitteeRRISL - Rubber Research Institute of Sri LankaRRS - Rubber Replanting SchemeRSS - Ribbed Smoked SheetRs - Sri Lanka RupeesSD - Supplies DivisionSPA - Senior Processing AdvisorSPC - State Plantation CorporationSRMC - State Rubber Manufacturing CorporationTSR - Technically Specified Rubber

This document has a restricted distribution and may be used by recipients only in the performancetheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

SRI LANKA

Smallholder Rubber Rehabilitation Project

Staff Appraisal Report

Table of Contents

Page No.

I. SECTOR BACKGROUND ...................................... 1General ................................................ 1The Role of Agriculture in the Economy ................. 1The Tree Crop Sector ................................... 2The Rubber Sub-Sector .................................. 3IDA's Role in the Tree Crop Sector ..................... 6

II. THE PROJECT AREA ....................................... 7Physical Characteristics ............................... 7Socio-economic Characteristics ......................... 8Social Infrastructure .................................. 9Supporting Services and Institutions ................... 9

The Replanting Scheme ............................. 9Research .......................................... 9Extension ......................................... 9Department of Rubber Control ...................... 10Rubber Processing ................................. 11Rubber Marketing .................................. 12Government Rubber Estates ......................... 13

III. THE PROJECT ............................................ 13General Description ............... .. .................. 13Detailed Features and Project Activities ...... .. ....... 14A. Replanting Scheme ................................. 14B. Institutional Support ............................. 19C. Processing Component .............................. 20D. Research Component ................................ 22E. Project Evaluation ................................ 23F. Technical Assistance .............................. 24

This report is based on the findings of an Appraisal Mission which visitedSri Lanka in October 1979 and included G. Hayes, I. Girardot-Berg (IDA) andC. Brookson and S. Swaminathan (Consultants).

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Table of Contents (cont'd)

Page No.

IV. COST ESTIMATES AND FINANCING ........................... 24A. Cost Estimates .................................... 24B. Proposed Financing ........................ 26C. Procurement ....................................... 28D. Disbursements and Audits ........................... 28

V. ORGANIZATION AND MANAGEMENT ............................ 29A. Background ........................................ 29B. Project Organization and Management .... ........... 31C. Monitoring and Evaluation ......................... 37

VI. PRODUCTION ASPECTS . ..................................... 38A. Present Situation ............... .. ................ 38B. Project Replantings: Inputs and Yields .... ....... 39C. Intercropping ................. .. .................. 40

VII. DEMAND, PRICES, FINANCIAL ANALYSIS AND COST RECOVERY 41Demand, Prices and Marketing .41Financial Returns to Smallholders .43Financial Return to Government and Cost Recovery 44

VIII. BENEFITS AND JUSTIFICATION .45Project Benefits .45Project Beneficiaries .46Employment .47Environmental Effects .47Economic Analysis and Sensitivity Tests .47Project Risks .49

IX. RECOMMENDATIONS ........................................ 50

ANNEXES

1. Technical Aspects and Project Monitoring2. Terms of Reference for Technical Assistance3. Local Procedures for Project Funding4. Supporting Tables and Charts5. Selected Documents and Data Available in Project File

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LIST OF TABLES AND CHARTS

ANNEX 1

Table 1 - Per Hectare Replanting Costs for RubberTable 2 - Yield Profiles and Tapping SystemsTable 3 - Intercropped Bananas: Inputs and YieldsTable 4 - Estates Producing Planting Material for 1981

ANNEX 4

Table 1 - Project Participants by Size of HoldingTable 2 - ASD Incremental Staffing CostsTable 3 - Training Component

Table 4 - Investments and Other Operating Costs (ASD)Table 5 - DRC Regional Offices. Capital Expenditures,

Staffing and Other Operating CostsTable 6 - Costs of Project Coordination UnitTable 7 - Costs of Processing, Research, Project Evaluation,

and Technical Assistance ComponentsTable 8 - Group Processing Centers (GPC):

8.1 GPC Direct Processing Cost8.2 Financial Returns to GPC Members from a Successful GPC8.3 Financial Returns from GPC Processing8.4 Economic Returns from One GPC

Table 9 - Summary Project CostsTable 10 - Yearly Replanting Costs and Proposed PaymentsTable 11 - Cash Flow of the Rubber Replanting FundTable 12 - Disbursement ScheduleTable 13 - Detailed Disbursement CategoriesTable 14 - Financial and Economic Rubber PricesTable 15 - Share of FOB Returns from Rubber ExportsTable 16 - Financial Returns to SmallholdersTable 17 - Replanting Payments per hectareTable 18 - Cash Flow Analysis for Three Types of FarmTable 19 - Government Project Cash FlowTable 20 - Income Levels of Project Participants and

Project Impact on Poverty Income GroupTable 21 - Economic Benefit and Cost StreamsTable 22 - Conversion Factors

CHARTS 1. Implementation Schedule2. Proposed Project Organization3. Proposed Organization of Advisory Services Department

MAP 14733R

SRI LANKA

GLOSSARY

BUDDED STUMP A green or brown budding which has been pulled from thenursery and which has had the seedling stem trimmed offabove the budgraft, the lateral roots trimmed to aboutseven cm and the tap root trimmed to about 40 cm. Suchbudded stumps can be packed and transported for planting.

BUDDING The operation of grafting a bud onto a stock. Brown andgreen buds can be grafted onto brown stocks of up to four-teen (14) months; only green buds can be grafted ontogreen stocks.

BUDWOOD The result of growing a bud for multiplication for planting.Budwood can be brown (15 to 18 buds per meter) or green(2 or 3 buds per stick).

CLONAL SEED Open pollinated seed collected from monoclone or polycloneplantings.

CLONE All plants derived vegetatively from an individual sourceplant thus having the same genetic composition.

CREPE Processed rubber prepared by a number of passes, whilewashing, through patterned rollers revolving at unequalspeeds, which macerate the rubber into laces. Latexcrepe is prepared from freshly coagulated latex and isa premium product. It can be laminated into sole crepe.Scrap rubber, off-grades, and clippings can be cleanedin the above manner and made into brown crepe. All crepesare air-dried, either at ambient temperature or arti-ficially. Crepes are visually graded.

CRUMB RUBBER A processed rubber prepared by hammer-milling or by extru-ding and chopping, drying, and pressing into 32 kg blocks.The highest grades are prepared from fresh latex, butauto-coagulated rubber, scrap, off-grades, and earth scrapcan be cleaned and improved by this process. Prepared fromlatex, certain of the physical characteristics (such asviscosity) can be altered. Crumb rubber is graded on thebasis of its technical characteristics rather than itsvisual appearance.

CULTIVAR Cultivated varieties, either clonal seedlings or clones.

CUPLUMP Late drippings of latex that autocoagulate in the cup aftercollection of the main crop has been made. Collected dailyin tapping.

DRY RUBBER The amount of dry rubber that latex is estimated to con-CONTENT tain. A measurement required for payment of tappers(drc) and owners. Usually estimated by a "Metrolac". In some

other countries, a "chee" is used.

EARTH AND Overflow from the tapping cut onto the bark and the ground.BARK SCRAP Usually contaminated by dust and dirt.

METROLAC A hydrometer used to estimate the drc. It is accuratelycalibrated to only one reading and should the drc (for

various reasons) be above or below this, it will exaggeratethe difference.

NURSERY An area set aside for preparing planting material. Nurseriesare used to multiply buds (budwood nursery) or to grow seed-lings for stocks for budding (seedling nursery).

RIBBED A processed rubber prepared from latex by dilution, coag-SMOKED ulation with formic acid, milling with smooth and markingSHEET (RSS) rollers, washing, and drying in a smokehouse. The rollers

revolve at the same speed; the marking roller impressesribs to increase the surface area to aid drying. The sheetsare dried in a smokehouse. RSS is visually graded.

STIMULANT An ethylene-releasing substance which increases yield whenapplied to the tapping panel.

SUCKER Adventitious shoots or clumps of ILeaves used for vegetativereproduction of bananas and pineapples.

TECHNICALLY Rubbers, mainly crumb, from which adequate samples are takenSPECIFIED by a competent authority for testing and quality control forRUBBERS specification before shipping. The main parameter is dirt

content which, in parts per million identifies the rubber(5, 10, 30, 50). Other parameters are the plasticity reten-tion index (a measure of possible oxidation), viscosity,nitrogen content, volatile matter, ash and magnesium con-

tent. Other rubbers (crepe, RSS), if properly preparedand blocked, can be submitted for testing and qualify asa TSR.

TREE SCRAP T-he band of latex that coagulates on the tapping cut afterdripping occurs. It displays sometwhat different physicalproperties, when compounded, from the other scrap rubbers.

I. SECTOR BACKGROUND

General

1.01 Sri Lanka, with a population of 14.5 M (1978) and a total land areaof 65,607 sq. km. has a population density of about 220 per sq. km. Approxi-mately three-quarters of the population live in the wet zone in the southwestquadrant, comprising 23% of the country. The population density reaches700 per sq. km. in that region, contrasting with only 80 per sq. km. in thedry zone (64% of the country). While output and employment have grown slowlyover the past 20 years, the relatively rapid population growth of almost 2%has resulted in slow per capita GDP growth (1% annually), and increasingunemployment. The present per capita GDP of Sri Lanka is estimated at aboutUS$200 and about 22% of the population is estimated to have annual incomesbelow the absolute poverty level of US$76 per capita. 1/

1.02 Sri Lanka, nevertheless, compares favorably with neighboringcountries in provision of social services for education, health, othersocial welfare, and rural communications. Consequently, poverty in Sri Lankadoes not take the extreme form found in some other South Asian countries.Life expectancy and the literacy rate are high, and nutrition level is generallyadequate. The population growth rate is declining aided by emigration; itis currently 1.7% per annum.

The Role of Agriculture in the Economy and Government's Development Objectives

1.03 Agriculture plays a major role in the economy of Sri Lanka, account-ing for 39% of total GDP, over 50% of total employment, and almost 80% ofexport earnings. The processing of agricultural output and supply of inputsprovide further substantial indirect contributions to the economy. In ruralareas, dependence on agriculture is almost total with over 95% of the ruralpopulation either directly or indirectly involved in agriculture.

1.04 Sri Lanka's wide variations in precipitation, topography, and soilspermit cultivation of a wide range of crops. Out of some 2.24 M ha underpermanent cultivation (34% of total land area), paddy accounts for 0.65 M ha,coconuts 0.50 M ha, tea 0.24 M ha, rubber 0.19 M ha, and other perennialcrops 0.04 M ha. The remaining 0.62 M ha comprises mixed rainfed farming,mostly as small gardens around homesteads. An additional 1 M ha are undershifting cultivation.

1.05 Tea and rubber are the major export commodities and jointly accountfor 60% of total export earnings and 40% of government revenues raised throughexport taxes and duties. Coconut, after having satisfied the substantiallocal demand, is also exported. Paddy and most other food crops are grownsolely for domestic consumption. Domestic production of rice, sugar, andsubsidiary food crops fall short of demand, and are supplemented by imports.

1/ World Bank estimate, 1979.

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Foreign exchange earnings from tea and rubber exports assist in financingthese food imports. 1/

1.06 The objectives of the Government of Sri. Lanka (GOSL) with respectto agricultural development are based on the recognition of the pivotal roleof agriculture in stimulating the country's economic growth. The major objec-tives contained in GOSL's medium-term plans for agriculture are to increaseagricultural employment, income, and self-sufficiency in basic food items,and to expand agricultural exports.

1.07 The GOSL strategy for achieving these objectives emphasizes betteruse of the existing potential through institutional and policy improvementsas well as rehabilitation of the production base where necessary. GOSL hasgiven high priority to accelerated programs for the rehabilitation of thetree crops amongst others. The proposed project is consistent with thedevelopment objectives and strategy of GOSL.

The Tree Crop Sector

1.08 The tree crop sector is second only in importance to the food cropssector within Sri Lanka's agricultural economy. In recent years, tree cropsaccounted for 772 of total export earnings, provided some 45% of all agri-cultural employment, and contributed about 38% of the value added by theagricultural sector. They also provided some 47% of agriculture's contri-bution to governrient revenue in the form of taxes and levies. The health ofSri Lanka's economy thus reflects to a large degree the economic condition ofthe tree crop sector.

1.09 Unfortunately, the tree crop sector has been neglected in the past.The neglect has been most obvious in the failure to replant which has led toover-aged low-producing plantations of tea and rubber. The prime causes ofpast neglect have been the failure to provide adequate incentives to producersand the protracted nationalization of private estates. The potential of thetree crop sector to contribute to the economy has thus been seriously eroded.Bank projections 2/ are that the sector's growth rate for the period 1978-83would decline to 4.9% p.a. compared with the 9.0% achieved in the period1970-77. (This high growth between 1970 and 1977 was entirely due tohigh prices for tea; rubber showed a negative growth averaging -5.4% p.a.over the same period). More importantly, the tree crop sector is expectedto provide only 66% of total exports, down 14% on its achievements during1970-77. The net contribution of the sector to government revenue wouldfall more than proportionately because of the substantial need for govern-ment funded re-irvestment.

1/ Since 1950, Sri Lanka has maintained a barter agreement with the People'sRepublic of China, under which rubber has been exchanged for rice.

2/ Sri Lanka: Medium Term Investment Strategy 1979-83. Aide-Memoire tothe 15th MeeLing of the Sri Lanka Aid Group. April, 1979.

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The Rubber Sub-Sector

1.10 Rubber is the second most important tree crop after tea. In theperiod 1970-77, rubber accounted for 18% of total export earnings, providedsome 8% of all agricultural employment, and contributed about 5% of the valueadded by the agricultural sector. Duties and cesses levied on rubber exportsin 1979 accounted for some 12% of government tax revenue.

1.11 The total area of land currently planted with rubber in Sri Lankais reported 1/ to be 193,000 ha representing 11% of the total cultivable landand 20% of the tree crop area. The main rubber growing districts (Kalutara,Kegalle, Ratnapura, Galle and Colombo) are all situated within the Wet Zonein the South West quadrant of Sri Lanka. Rubber is also cultivated to alimited extent in districts within the northern margin of the Wet Zone.Official records of rubber area are based on registration of rubber holdingswith the Department of Rubber Control (DRC) which indicate an area of some263,000 ha. The discrepancy in area estimates reflects the fact that registra-tion records are out-dated and have not been corrected for change of land usesince initial registration. The discrepancy of some 70,000 ha probably over-estimates the contraction in rubber area which has taken place over the pastdecade. Nonetheless, at least 16,000 ha of rubber have been removed since1972-74 2/ owing to perceived higher profitability of alternative land uses(primarily coconuts and tea), uncertainties associated with land reform,and the lack of incentives or assistance for rubber replanting.

1.12 The ownership of rubber land is predominantly private (65%) with35% owned by the State following the nationalization of private estatesbetween 1972 and 1975. Under the Land Reform laws of 1972 and 1975, privateholdings were limited to a maximum of 20 ha. Land in holdings larger than100 ha is now owned by the state and operated by two government corporations -

the State Plantation Corporation (SPC) and the Janatha Estates DevelopmentBoard (JEDB) 3!. Land in holdings between 20 and 100 ha has also been takenover by the State but most of such land is to be transferred to the Agro-Industrial Corporation. A small proportion of State-owned rubber land hasbeen used for settlement of previously landless people, but most is held andoperated as commercial estates. Within the private sector, all holdings areclassified as smallholdings. The holding size distribution is considerablyskewed as indicated in Table 1.1; 39% of the total land area is owned by only5% of landowners. Holdings less than 4 ha comprise 98% of the total privateholdings and 71% of the total area of private holdings. Holdings less than1 ha account for 88% of the total but only 46% of the area. Thus the industryis dominated by very small producers for whom rubber is commonly one ofseveral crops grown.

1/ Report on the Rubber Industry Masterplan. Commonwealth Development Cor-poration, September 1979. Area estimate is based on survey results.Throughout this report this document is referred to as the Masterplan.

2/ Masterplan estimate.

3/ Recently, SPC and JEDB have been formed into separate ministries, withregional corporations performing the same functions.

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Table 1.1 PRIVATE HOLDINGS: SIZE DISTRIBUTION /a

% of Total % of Total Area ofHolding Size (ha) Private Holdings Private Holdings

0 - 0.5 67 23

0.5 - 1.() 21 23

1.0 - 2.0 7 15

2.0- 4.0 3 104.0 - 10.() 1.4 1410.0 - 20.0 0.4 8

20.0 + 0.2 7

/a Based orL Masterplan survey results.

1.13 Replanting of over-aged rubber first received direct Governmentassistance in 1953. In that year, GOSL initiated a Rubber Replanting Scheme(RRS) with an annual target of 6,073 ha (15,000 ac) based on replacement of3% per year of the then current rubber area. The scheme was initially financedby a GOSL grant supplemented by a cess on rubber exports. The export cess wassuspended in 1957 owing to low world prices for rubber; the scheme was fundedfrom general revenue until 1975 when the cess was reintroduced. The schemecontinues to be financed by the cess. Under the scheme, replanters receiveadvice, replanting inputs and some financial assistance to purchase otherinputs including labor during the immature period. The replanting payments tosmallholders have increased in nominal terms from Rs 2,470/ha in 1953 to thepresent level of Rs 16,050. 1/

1.14 The initial operation of the scheme was highly successful. Duringits first ten years 76,000 ha was replanted island-wide. From 1963 to 1976,

the area replanted annually declined continuously from 6,400. ha to 2,550.This decline in replanting rates has resulted in an over-aged national standwhich has reduced both present rubber production and the production potentialfor the next ten years. The total area now requiring replanting is estim-ated 2/ to be 55,000 ha, about 28% of the current rubber area. Some 41,000 haof this total are in private hands and the balance controlled by the State.Since 1976, the replanting rate has shown some improvement reaching 3,200 hain 1978 and a projected 4,000 ha for 1979.

1.15 The failure to replant rubber at a rate sufficient to maintain aneven distribution over the past decade reflects the lack of producers' incen-tives, particularly in the form of inadequate levels of replanting payments.The level of replanting payments (in constant terms) since 1960 follows a de-clining trend until 1976 when this trend was reversed. 1/ Replanting payments

1/ The payments were Rs 2,470 1953-63, Rs 2,964 1963-67, Rs 3,705 1967-75,Rs 4,940 1975-77, Rs 7,410 1977-79, Rs 9,880 to November 1979, andRs 16,050 from November 1979. In constant (1979) values, in terms ofreplanting costs, these payments would be Rs 12,630 (1963), Rs 10,740(1967), Rs 7,140 (1975), Rs 6,820 (1977), and Rs 16,050 (1979).

2/ Masterplan estimate.

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accounted for 50% of replanting costs in 1956 and about 25% in 1975. (Since1975 there have been several increases in the replanting payments and thecurrent level is adequate). The strong simple correlation between replantingrates and replanting payments as well as multiple correlation between replant-ing rates and replanting payments, producer prices (in real terms), andadjustments for the structural change due to land reform as well as theuncertainty preceeding it show convincingly that the level of the replantingpayment has been the principal determinant of replanting rates in Sri Lanka.

The analysis shows further that the level of producer margins, though less so,also contributed significantly in this respect. Thus, the steady decline in

rubber producer prices (in real terms) in Sri Lanka, which generally followedworld prices down but improved following the devaluation of the rupee in 1977,

contributed further to the decline in replanting activity. In addition, the

replanting scheme has been hampered by cumbersome administrative procedures,exacerbated by staff shortages, which have resulted in excessive delays in theprocessing of requests for assistance, and in failure to provide replanting

inputs when required. This has further constrained replanting and has probably

encouraged some of the change in land use referred to above (para 1.12).

1.16 Sri Lanka's rubber production is currently about 155,000 metrictons (mt) p.a., down 3% from the record production of 159,000 mt in 1970.In the mid 1950s, Sri Lanka's production of about 100,000 mt constituted 5%

of the world total. By 1968, production in Sri Lanka had risen to 149,000mt reflecting the boost from replanting prior to 1960; Sri Lanka's share of

world production was then at its highest at 5.5%. Since 1968, Sri Lanka hasbecome an increasingly minor rubber producer, and now accounts for barely 4%of the steadily increasing world total. Since 1968, production has averaged148,000 mt annually and despite marked annual savings, overall growth has beennegligible at 0.3% p.a. During the past decade, some 97% of Sri Lanka'sproduction has been exported, mainly to the People's Republic of China under

a barter agreement which has accounted for some 45% of exports. Since 1970,local consumption of rubber has grown at an average of 10% p.a.; the 1978consumption was 9,100 mt. Most of the local consumption is used in themanufacture of vehicle and tractor tires which are now exported by Sri Lanka.

1.17 The medium term outlook for the rubber subsector is poor, reflectingthe erosion of production potential caused by failure to maintain an adequate

replanting rate over the past decade. 1/ Assuming that replanting rates inthe private sector can be increased to 8,200 ha annually and sustained at thatlevel from 1984 to 1990, thereafter declining to about 3,000 ha/year by 2005,private sector production will decline about 40% to 55,000 mt by 1987. There-

after, production will increase fairly steadily at an average annual rate of5% to reach 143,000 mt by 2005. The current private sector production level

(90,000 mt), will not be achieved again until the mid 1990s. The outlook forthe estates sector is relatively better since much of its replanting backloghas been removed by concerted action over the past few years. Nonetheless,production from this sector is also projected to decrease from its present

1/ This outlook is based on Masterplan estimates.

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42,000 mt to a low of 39,000 mt in 1982. Thereafter, production would increaseat an average annual rate of 3% to reach 84,000 mit by 2005. The total rubberproduction in Sr-i Lanka is thus expected to decline about 35% to 101,000 mt in1986 and thereafter to increase at an average annual rate of about 4% to reach227,000 mt by 2005. The record 1970 production (159,000 mt) is unlikely tobe surpassed before the mid 1990s. These production projections are based onrather crude data and may overstate the magnitude of the production declineby inter alia undlerestimating the capacity for ccntrolled slaughter tappingof old trees. Nonetheless, a sharp drop in qut-pubt w-ill occur during the nextfive years.

1.18 Although rubber prices are projected to remain buoyant during thenext decade (para 7.02), it is unlikely that price increases would completelyoffset the declining production. The rubber subsector will thus contributemuch less to exports and to government revenue than it has done in the past.The proposed project replantings comprise almost two thirds of what is con-sidered as a feas,ible national target for the private sector island-wide forthe period 1981-85 1/. Without this early acceleration of replanting andthe enhanced capacity for future replanting which the proposed project wouldcreate, the outlook for the rubber subsector would be bleak.

IDA's Role in the Tree Crop Sector

1.19 IDA has financed a total of ten projects in Sri Lanka's agriculturesector since 1968. The majority of these has been directed towards increasingfood-crop production, mainly paddy, to reduce Sri Lanka's dependence on foodimports. IDA's interest in providing support to Sri Lanka's main export crops(tea and rubber) developed as the need for significant investments to arrestthe decline of the tea and rubber industries became evident. However, in theabsence of a policy framework for the development of these industries, IDA'sdirect involvement materialized in two relatively small and urgently neededprojects for tea rehabilitiation and tea diversification (Credit 818-CE,US$21.0 M and Credit 819-CE, US$4.5 M approved in May 1978). The progress inimplementation and general performance of both these projects has been highlysatisfactory. Meanwhile at IDA's suggestion, GOSL requested assistance fortwo policy studies. CIDA initiated its tea masterplan study in January 1978and ODM its rubber masterplan study in January 1979. Following the release ofthe Tea Masterplan in July 1979, an IDA subsector mission visited Sri Lanka inAugust/September to help identify an investment program for the tea industrywhich is now being considered by GOSL. The Rubber Masterplan has only recentlybeen released (December 1979). Because of this delay, the proposed project,the first which IDA would finance in the rubber subsector, has only a limitedscope and is intended to meet the most urgent needs of the industry. It isnevertheless envisaged that the Masterplan will iclentify a substantial invest-ment program for the rubber subsector which will provide further opportunitiesfor external assistance.

1/ The Masterplan suggests that a feasible replanting target over theperiod would be 30,000 ha constituting some 73% of the 41,000 ha alreadyover-aged.

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II. THE PROJECT AREA

2.01 The project area is located in the lowland wet zone of south westernSri Lanka and consists of the three administrative districts of Kalutara,Ratnapura and Kegalle (Map 14733R). Rubber is its most important crop,accounting for 49% of the total agricultural area of about 290,000 ha. Thebalance comprises coconuts 18%, paddy 16%, tea 15% and minor crops includingcinnamon, cardamom, cocoa and coffee, 2%.

Physical Characteristics

2.02 The project area includes some of the best rubber growing land inSri Lanka, and 68% of the country's total rubber. The climate is monsoonalwith 2,000-5,000 mm of annual rainfall associated largely with the southwestmonsoon (April-June) and the northeast monsoon (October-December). Dependingon location, between two and four months of the year have a 75% probable rain-fall between 25 and 75 mm. Since the soils are not excessively shallow orsandy, this relatively brief dry season does not restrict rubber yields signi-ficantly. The rainfall distribution conforms with the requirements for rubbercultivation. The main adverse effect of rainfall is the restriction of thenumber of tapping days to between 160 and 200 per year. Monthly mean tempera-tures range from 26 0C to 30 C with no cold season and relative humidityaverages 70% throughout the year: both are ideal for rubber cultivation.

2.03 The terrain varies from rolling to steep with more extreme slopesin Ratnapura district. Although rubber grows best on flat or only moderateslopes, it can be grown satisfactorily on slopes of up to 180 provided suit-able soil conservation measures are taken. More than half the rubber island-wide and within the project area is grown on hilly to very hilly land. Mostrubber is restricted to elevations below 370 m above sea level since yieldsare constrained by low temperatures and disease at greater altitudes.

2.04 The soils of the rubber growing areas in Sri Lanka are generallystony, often with visible rocky outcrops; even the better loamy soils commonlycontain many rocks. Fortunately rubber trees can adapt well to such soils.The soils of Sri Lanka have been mapped at the reconnaissance level and therubber growing soils provisionally classified into six series. 1/ Theserubber growing soils vary in texture from silty to gravelly loams. The RubberResearch Institute of Sri Lanka (RRISL) has developed fertilizer recommenda-tions specific for each soil series; in practice, one broadly based fertilizermixture is used successfully on all of the soils. Despite the steep terrainand high rainfall over much of the project area, soil erosion is not a majorproblem since there is widespread recognition of the need for soil conservationmeasures, with silt pits and bunds commonly used where required. In areaswith lower erosion potential, the widely established leguminous ground coverreduces soil disturbance and the many rocky outcrops serve both to holdsoil and to impede runoff.

1/ Handbook of the Soils of Sri Lanka. J. Soil Sci. Soc. of Ceylon, II,1972-73.

Socio-Economic Characteristics

2.05 The total population of the project area is about 2 M or some 14%of Sri Lanka's total. Fifty percent, or about 1 M are over 14 years old andpotentially economically active. Of the estimated 0.6 M people regularlyemployed, about two thirds work in agriculture, mainly on rubber and teaholdings. Apart from agriculture, employment opportunities are limitedprimarily to the tertiary sector, there being little secondary industry.Rubber cultivation entails a labor input of about 260 workdays/ha/year; eachhectare of rubber thus provides approximately one full-time job. On small-holdings, the workforce generally comprises the husband and wife assisted byone of their children. In many cases the husband may find employment as alaborer off the smallholding and the wife manages the rubber enterprise.Women are also employed as tappers on large smallholdings and on Governmentestates. Ownership of rubber holdings is predominantly private. The Master-plan survey data indicate that some 32% of all rubber land in the project areais state owned or controlled, with 68% in private 'hands. Some 90% of the manysmall landowners have clear title to their land.

2.06 Estimates of holding size are available from a number of sources 1/and differ somewhat according to their bases. Mission estimates 2/ for theproject area suggest that some 46% of the private holdings are less than 0.8ha and account for about 14% of the private rubber area. Holdings between 0.8and 4.0 ha account for a further 49% of holdings and 57% of the private rubberarea. Thus smallholdings below 4 ha account for some 95% of all privateholdings and 71% of the private rubber area.

2.07 Land use within the project area is relatively intense and diver-sified, especially on the smaller holdings. Very few 3/ producers grow onlyrubber; other crops grown in order of decreasing importance include coconut,paddy, tea, spices, and vegetables.

2.08 Various surveys have collected data on smallholder income sourceswhich, while showing variation between surveys, indicate that many small-holders earn significant off-farm income. Data from the Masterplan survey of126 holdings indicate that 38% of owners of holdings less than 4 ha reportedoff-farm earnings and the corresponding figure for holdings above 4 ha was63%. The relatively high proportion of smallholders having off-farm employ-ment explains in part why some 47% of smallholders with less than 4 ha hiresome labor. Within the 0-4 ha group, the smaller Smallholders generally donot hire labor and it can be surmized that many such smallholders have fewoff-farm employment opportunities.

1/ MPI survey of 1,389 holdings in Kalutara and Ratnapura 1978; Inventorystudy and socio-economic survey by Masterplan team, 1979; and DRC records.

2/ Details in Project File.

3/ Some 15% according to Masterplan survey.

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Social Infrastructure

2.09 The project area is adequately served by all weather roads. Railservice connects the three administrative centers to Colombo and there arefrequent aiid cheap bus services throughout the area. Postal services areprompt and reliable. The literacy rate is high, newspapers are readily avail-able, and radio broadcasts can be received throughout the area. Governmenthealth and educational facilities are adequate. Produce for local consumptionis sold from roadside markets ("fairs") on a regular schedule.

Supporting Services and Institutions

The Replanting Scheme

2.10 The GOSL Rubber Replanting Scheme has been described previously(para 1.13). Replanting within the project area has accounted for about 70%of island-wide replanting since 1953, but only 36% since 1970.

Research

2.11 The Rubber Research Institute of Sri Lanka (RRISL) is responsiblefor all aspects of research into rubber husbandry, production and processing.Its main station is situated at Aglawatta within the project area. It alsooperates a sub-station in Ratnapura District and carries out field experimentsthroughout the rubber growing area and has maintained some contact withresearch institutes of other rubber producting countries. RRISL has provideda good service to the rubber industry in the past but requires strengtheningto better service the smallholder sector. Whilst improvements in researchcapability are both feasible and desirable, and are being considered bybilateral donors, the present level of research support available from RRISLis sufficient for the successful implementation of the proposed project.

Extension

2.12 The Advisory Services Department (ASD) is responsible for the com-munication of research findings to smallholders, and to the medium size estates.ASD officers also assist in the operation of GOSL's replanting scheme byinspecting rubber for registration purposes and for authorizing replantingpayments at the request of DRC. In addition, its staff are responsible for aprogram to establish and supervise Group Processing Centers (GPCs). ASD iscurrently operated as a department within RRISL and has its headquarters inColombo. For administrative purposes, the rubber growing areas have beendivided into three regions each of which is the responsibility of a RegionalAdvisory Officer (RAO) stationed in the field. Each region comprises three tofour divisions, there being 11 divisions covering the entire rubber area. ADivisional Rubber Extension Officer (DREO) is responsible for ASD serviceswithin each division. Finally, each division is sub-divided into six or sevenranges which are each the responsibility of a Rubber Extension Officer (REO).The 72 REOs are thus nominally responsible for some 196,000 private holdingswith 134,000 ha of rubber. In fact, ASD staff devotes most of its attentionto smallholders' replanting or new planting. Even with this reduction inresponsibilities, ASD is grossly understaffed: each REO deals with 1200 -2500 holdings accounting for 900 - 1300 ha of planted rubber. A reasonable

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target would be 900 - 1000 holdings per extension officer which implies a 300%staff increase if all 196,000 smallholders were to be adequately serviced.

2.13 Within the project area, there are six DREOs and 41 REOs whose work-loads tend to be higher than the country-wide averages presented above. Theunderstaffing is exacerbated by lack of transport for REOs and by the distancemany officers must travel from their homes to their range. The work of theREOs is primarily directed towards assistance to smallholders planting rubberand the major components of this work are as follows:

(a) recording details of holdings for registrationpurposes and certification that replanting isjustified;

(b) contour lining and design/specification of soilconservation works;

(c) advice to replanters on replanting practices andgeneral husbandry of immature rubber; and

(d) inspection of work carried out by smallholders (weedcontrol, girth increments, stand density, etc.) as thebasis for authorization of staged replanting payments.

Very little assistance is directed towards improving the husbandry of maturesmallholder rubber. The inspection activities (d) institutionally are aresponsibility of DRC which has its own staff of inspectors. However, sincethe workload has f-ar exceeded DRC capabilities, DRC has requested REOs tocarry out inspect:ions for a fee (Rs 30 per visit). This inspection work isnormally outside t:he control of ASD and its irregularity leads to problems ofwork:Load scheduling. In cases where DRC officers retain their responsibilityfor authorizing replanting payments, REOs have difficulty in convincingsmallholders to act on their technical advice on replanting procedures.

Department of Rubber Control

2.14 DRC was established in 1934 to control the production and plantingof rubber. In 1953, DRC undertook responsibility for the Rubber ReplantingScheme (RRS) (para 1.13). The major functions of DRC are: registration ofrubber holdings and producers; licensing of dealers, manufacturers, andnurseries; collection of industry statistics; and operation of the RRS includ-ing distribution of planting materials and fertilizer. DRC is headed by aRubber Controller and its operations under the RRS are guided by a RubberReplanting Advisory Board.

2.15 The work of DRC is organized on a regional basis with the exceptionof replanting payments. 1/ Each of the seven regions is the responsibility ofan Assistant Controller who reports to the Senior Assistant Controller. Within

1/ The regions do not correspond to those of ASD nor to administrativedistricts.

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each Assistant Controller's region, work is functionally organized (registration,replanting and new planting). In 1977, DRC opened a regional office in Kalutaraand has plans to decentralize operations further by opening an office in Kegalleand Ratnapura. To date, replanting payments are still made from the head officein Colombo but it is the intention to decentralize this responsibility toregional offices also.

2.16 The total staff of DRC is about 220 including 17 inspectors, 13 ofwhom carry out inspections for replanting payment authorization. DRC reliesheavily on ASD to conduct most of the inspections for replanting payments.The current procedures followed by DRC in administering the RRS are describedin the Project File. The operation of the RRS has been justly criticised bysmallholders for its cumbersome and slow moving administrative procedures, andfor its failure to provide necessary replanting inputs when and where required.DRC operations have been subject to a thorough study conducted as part of theMasterplan which has recommended some new procedures to improve operation ofthe RRS. It is understood that DRC would receive assistance from the UK gov-ernment to implement these Masterplan proposals.

Rubber Processing

2.17 The project area is generally well served with facilities for pro-cessing smallholder latex (or coagulum) virtually all of which is processedin the form of Ribbed Smoked Sheet (RSS). In periods of high prices for creperubber such as have been experienced during 1979, the few smallholders closeto crepe factories deliver latex to these factories.

2.18 Independent private operators process some 50% of the output on acustom basis for smallholders. The quality of RSS produced by private pro-cessors is quite high by smallholder standards. 1/ The private processor ispatronized primarily by smallholders with less than 2 ha. Some 40% of small-holder latex is processed on holdings using the smallholder's own rollers mostof which were purchased secondhand from estates or acquired long ago. The qua-lity of output tends to be low. 2/ An estimated 8% of latex or field coagulumis sold directly to factories for manufacture into crepe, crumb rubber orfinished products. There is one crumb rubber factory in operation at Mawanellawhich takes latex from about 2,500 smallholders within a 20 km radius. Inaddition, many of the Government estates have surplus processing capacity andaccept smallholder latex. Finally, 2% of smallholder latex is processed inGroup Processing Centers (GPCs).

2.19 About 100 GPCs have been established including 67 within the projectarea. The GPCs have been established under the supervision of ASD staff usinggrant and loan funds provided by GOSL through RRISL. They offer a potentiallyuseful means of improving smallholder returns in areas inadequately served bylatex processing factories or private processors. The principle of the GPC isthat 20 to 100 smallholders join together to collectively process and markettheir latex as RSS using modern equipment and techniques. Each GPC has a dailyprocessing capacity of some 225 kg drc. The GPCs have not been operating

1/ Averaging 50% of RSS1, 25% RSS2 and 25% RSS3.2/ Averaging 50% RSS2, 25% RSS4 and 25% RSS5.

Y

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satisfactorily primarily because of low throughpuc-, poor management, andabsence of a legal basis for operation. GPCs with low throughput must chargemembers a high processing fee to defray fixed staEf costs and this discouragesnew members. Poor management reflects the fact that office bearers are unpaidand often without managerial skills -- the employed 'managers' are in effectlaborers since the position pays too little to atltract capable managers. Thelack of legal status leads to problems of securitv of assets and to generaldistrust amongst members; it also means that there are no generally acceptedrules of conduct. 1/ Despite these problems, some 25% of GPCs operate effi-ciently and profitably in the smallholders' interests. GPCs do provide avaluable focus for smallholder development by providing a forum whichfacilitates group extension activities and enables the smallholders' views tobe noted. The quality of output from well-managed GPCs is comparable to orbetter than that from private processors. The processing fee GPCs chargemembers ranges between Rs 0.28 and Rs 0.33 per sheet and includes a nominalRs 0.04 to repay the loan which GPC members have t:aken. Many, but not allGPCs, gain further benefits for their members by selling relatively largeconsignments (4-6 mt) of graded, high quality RSS.

Rubber Marketing

2.20 Some 90% of smallholder production is marketed as RSS and scrap.GOSL operates a monopoly in the marketing of RSS (grades 1-3) and has, sincethe early 1950s, 'bartered this rubber for rice with the People's Republic ofChina. 2/ The Ministry of Trade and Shipping administers the China Contractthrough its Commodity Purchase Department (CPD). Although CPD is the onlyagency empowered to market RSS internationally, most of the purchasing,handling and shipping is carried out on behalf of CPD by registered privatesector individuals in return for handling charges. CPD also operates 51buying depots at which it buys directly from smal]holders. Within the projectarea, there are about 24 depots and two new depots are scheduled for con-struction in 1980. By regulation, CPD depots are required to accept all RSSoffered to them for sale but often intake is limited by lack of storage space.Furthermore their staff rules, which make field managers bear the cost of anyaccidental overgrading, put their buyers under strong pressure to undergrade.Although many GPCs sell their RSS to CPD, this is by no means universal sincesome GPCs have found they could obtain better gradings from private dealers.

2.21 CPD fixes its prices of all RSS grades daily and these are widelyreported. Private dealers generally pay the same prices as those announced byCPD. One price is given for Colombo and another f'or outside Colombo, with adifference of Rs 0.15 per kg to cover the handling and transportation cost toColombo. CPD bases its prices on the Singapore daily price and deductscesses, duties and handling charges to arrive at producer prices. Export duty

1/ Most GPCs have no legal status except for a f'ew registered as cooper-ative societies. The cooperative society ordinance is unsuited to aproduction enterprise and a more appropriate legal basis is beingsought.

2/ Under this so-called China Contract, Sri Lanka receives a premium of someRs. 0.1/kg over the prevailing world price.

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is fixed by the Customs Department once a week, based on the London WeeklyAverage CIF Quotation for RSS1. Duty is then levied on the basis of a slid-ing scale. Smallholders receive the RSS price announced for that day for thegrade to which their crop is allocated. At current prices, smallholdersreceive about 50% of the fob value of rubber.

2.22 There are more than 2,000 licensed rubber dealers in the projectarea and a significant but unknown number of unlicenced dealers. Most small-holders sell their RSS to the nearest dealer who transports it to Colombo tothe authorized shippers where it is sorted and packed. Some 75% - 80% of RSSis marketed in this way. CPD purchases between 15 and 20% of the total RSSproduction and ships it to packing centers in Colombo and Galle for export.About 4% of RSS is sold to unauthorized middlemen and then resold to dealers.About 1% of RSS is sold by cooperatives. The private dealers also purchaselower grade sheet (RSS 4 and 5 and unsmoked) and scrap which are freely marketedoutside CPD and generally processed into crepe.

2.23 The price smallholders receive for their output is a function ofquality and the extent to which buyers unfairly downgrade the quality of theiroutput. The only effective remedy to downgrading is to strengthen the positionof the seller by group marketing of relatively large lots. The prices receivedby smallholders using private processors, GPCs, or selling latex are about thesame. Prices received by home processors are some 30% lower owing both topoorer quality and buyer downgrading.

2.24 In summary, the smallholder rubber producer faces few difficultiesin marketing. The operation of CPD, though much criticized because of itslimited capacity and tendency to downgrade, serves a valuable purpose inestablishing a floor price. The coexistence of CPD depots and a widespreadprivate dealer network has resulted in relatively efficient marketing withoutthe dangers inherent in a completely government managed purchasing scheme.Given some improvement in grading practices, CPD could continue to ensure anefficient and fair marketing system.

Government Rubber Estates

2.25 Within the project area, SPC and JEDB control some 32% of the rubberarea. GOSL has recently encouraged greater integration between estates andsmallholders and many estates now accept latex from neighboring smallholderswhich is then processed into crepe at the estate's factory. Other opportuni-ties for closer integration exist and are being developed although SPC andJEDB are to remain as commercially operated corporations. Under the project,selected estates within the project area would supply planting material forsmallholders at commercial rates.

III. THE PROJECT

General Description

3.01 The proposed six year project would increase Sri Lanka's futurerubber production through its support of an on-going GOSL scheme to replant

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the backlog of over-aged, low-yielding smallholder rubber. The project wouldaccelerate replanting under this scheme within the project area. It wouldachieve this obj(ective by reorganizing and strengthening the agencies respon-

sible for replanting and by the provision of adecLuate replanting inputs andincentives. Concomitantly, the quality of smallholder rubber output wouldbe improved and the capacity for future replantirng expanded. The majorcomponents of the project would be:

(a) replanting of 18,800 ha with high yielding rubber onabout 27,000 smallholdings (below 20 ha) over five yearsto replace about 70% of the project area's, or 45% of theisland-wide total of over-aged privately owned rubber;

(b) institutional support for the two major implementing agencies(Department of Rubber Control [DRCI and Advisory Services

Department [ASD]) comprising reorganization and strengtheningthrough recruitment, training, and provision of equipmentand civil works, and the creation of a Project CoordinationUnit w:ithin MPI;

(c) improvement of smallholder processing standards throughestablishment of a Processing Advisory Division within ASDwhich would service private processors and 67 existingGroup Processing Centers (GPCs). And, following the attain-ment of- satisfactory operating norms for existing GPCs,establishment of 50 new GPCs;

(d) support for research directed towards the smallholderthrough the provision of vehicles and equipment for theRubber Research Institute of Sri Lanka;

(e) support: to the Agrarian Research and Training Instituteto conduct surveys and case studies aimed at evaluatingthe project's impact on smallholders; and

(f) provision of technical assistance for training, projectevaluation, development of improved procedures for admin-istration of the replanting scheme, and for the estab-lishment of the Processing Advisory Division.

An implementation schedule for the project is presented as Chart 1 (Annex 4).

Detailed Features and Project Activities

A. Replanting Scheme

3.02 Sri Lanka has permitted the replanting rate to decline dramaticallyover the past ten years resulting in an over-aged national stand and decliningrubber production (para 1.17). Failure to replant has been caused by lack of

incentives owing to low rubber prices and inadequate replanting payments, and

to an inefficient replanting scheme which failed to provide sufficient re-planting inputs when required and which was hampered by staff shortages and

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complex administrative procedures. The project would directly address each ofthese constraints other than price. The problem of low producer prices wouldbe addressed indirectly by proposing that a mechanism be established formaintaining adequate producer margins through variation in tax and cess levels(para 5.25). The specific improvements to the replanting scheme to be in-corporated in the proposed project are described below (para 3.03-3.13).

3.03 Selection of Replanters. Participation in the project would beopen to any smallholder having title to registered rubber which is eitherover 20 years old or particularly low yielding because of disease, damage, orinherent genetic potential. These conditions already apply for smallholderparticipation in GOSL's replanting scheme. It is expected that some 27,000smallholders or about 30% of the project area total, would replant 18,800 hawith high-yielding rubber over the project period. Table 3.1 provides asummary of proposed replanting under the project. Details of the assumedholding size distribution of project participants are presented in Annex 4,Table 1.

Table 3.1: PROJECT PLANTING SCHEDULE

Project Year Area Replanted (ha) Proposed District Share (%)

Kalutara Ratnapura Kegalle

2 1,600 50 25 253 2,800 42 28 284 4,000 50 25 255 4,800 46 25 296 5,600 36 28 36

Total 18,800 44 26 30

3.04 Publicity. Many smallholders are currently unaware of the extentand nature of the replanting assistance available and some postpone replantingbelieving old restrictions still apply. The project would include a publicitycampaign to ensure that smallholders are aware of the assistance availableand the new procedures. In each of the three administrative districts withinthe project area, a publicity unit would visit about 220 villages each yearfollowing a schedule prepared by the RAO. The mobile unit would comprise along wheel base vehicle equipped with a portable generator, public addresssystem, still and movie projectors, screen, films and slides. The localREO would advise smallholders of the date each village would be visited.Demonstration films, prepared by the RRISL film unit would be shown togetherwith a local commercial film to attract a wide audience. In addition,leaflets describing the assistance available for replanting would be widelydistributed and notices would be periodically carried in local newspapers.

3.05 Issue of Replanting Permits. Smallholders must be issued with areplanting permit by DRC before becoming eligible to receive assistance underthe replanting scheme. Apart from meeting the requirements outlined above

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(para 3.03) the smallholding must be registered with DRC prior to issue of areplanting permit. In the past, the issue of permits has been a slow process

with delays caused both by failure of the smallholder to understand hisobligations and by DRC's inadequate registration data base. The system ofregistration and issue of permits would be maintained under the project sinceit provides a check against fraud and valuable statistical information but itwould be facilitated by a number of changes. The smallholder would be madeaware of the procedure and his specific obligations by the publicity campaign.Application forms for permits would be readily available from ASD staff whowould assist the smallholder with the replanting permit application. DRCwould streamline its procedures for checking registration details and wouldprocess permit applications promptly (Annex 2, Appendix 1).

3.06 Provision of Replanting Inputs. The inputs required by the small-holder replanter include technical advice, high yielding planting material,fertilizers and cash payments for purchase of other inputs (including labor).Under the project, all of these inputs would be provided in a form and mannerconvenient to the replanter. In the past this has not been the case.

3.07 Technical advice has not always been provided in the past because ofstaff shortages within ASD. The capacity of ASD r:o provide technical adviceto replanters would be greatly expanded under the project. Firstly, ASD wouldbenefit from much closer integration of its activities with those of DRC,which would share its regional offices with ASD staff. ASD would use DRC'srecords on replanters to schedule field staff activities and to ensure thatall replanters were regularly visited and invited to group discussions onvarious aspects of replanting. ASD staff would direct particular attentiontowards replanters lagging behind in their replanting program as indicatedby non-authorization of annual replanting payments. Secondly, ASD staff woulduse the opportunity presented by their involvement: in distribution of plantingmaterial and fertilizer to conduct group discussions for replanters at thevarious distribution points. Thirdly, and most importantly, ASD professionalstaff would be increased from the present 54 to 154 and would be bettertrained and equipped to carry out their responsib:ilities. This staff increasewould mean that on average each field level extension officer would deal witha total of 175 new replanters over the six year project.

3.08 Planting material has been supplied by DRC but often the supplywas insufficient to meet demand and smallholders had to postpone planting orseek alternative and often unreliable sources of supply. The supply anddistribution of planting material would be improved under the project.Smallholders with replanting permits would automat.ically receive plantingmaterial without having to make prior application, The clones to be used arediscussed in Chapter VI (para 6.05). DRC would estimate planting materialrequirements based on replanting targets which would be set by the RubberPolicy and Planning Unit of MPI (para 5.24). These requirements would be esti-mated 30 months before expected delivery. All planting material would beproduced by SPC and JEDB estates under contract to DRC (para 6.04). ASD woulddistribute planting material using its own vehicles and contract carriers asnecessary. Within each range (the administrative zone of a REO), about teninput distribution points would be selected after consultation with small-holders. These distribution points would include the office of the REO, CPD

- 1 7 -

depots, GPCs, Agrarian Service Centers, Cooperative Stores and Gram Sevakaoffices. Each smallholder would nominate one distribution point for all hisinputs. ASD would arrange schedules for delivery of planting material suchthat the REO would spend one day at each distribution point. Each REO woulddistribute material to about 10 smallholders per day throughout the 3 weekplanting period.

3.09 Fertilizer supply has been the responsibility of DRC in the pastbut supplies have been insufficient, partly because of difficulties in obtain-ing fertilizer from the Ceylon Fertilizer Corporation primarily due to importrestrictions existing at the time, but also because of inadequate forwardplanning. Import liberalization policies and DRC's ability to also acquirefertilizer through direct imports has essentially estimated this problem.DRC uses the CPD depots as distribution points for fertilizer and for plant-ing materials. In cases where DRC is unable to supply the specially mixed fer-tilizer, 1/ the smallholder is authorized to purchase such fertilizers locallyusing a cash advance from his replanting payment. Unfortunately, supplies ofthe appropriate fertilizer mixture are often unavailable locally. It has beenestimated that only 20% of the required quantities of fertilizer has beenapplied to replanted rubber in recent years. This under-fertilization hasprolonged the immature period of replanted rubber and reduced the ultimateproduction potential. Fertilizer distribution would be improved under theproject. Total fertilizer requirements for all replantings would be calcu-lated by DRC and orders would be placed with the two major GOSL fertilizercompanies some six months in advance, for delivery over the year or importeddirectly by DRC. DRC would provide ASD with lists indicating the fertilizerentitlement of individual replanters. ASD's Supplies Division (SD) would useits own trucks plus contractors where necessary to transport fertilizer fromColombo to three regional fertilizer stores where it would be stored under ASDsupervision before distribution to smallholders by SD twice per year. Allreplanters would receive fertilizer in kind and there would be no cash pay-ments in lieu. Details of application rates are given in Annex 1, Table 1.The distribution points used for planting material would also be used forfertilizer as would be the system for scheduling distribution. Each REO wouldbe required to distribute fertilizer to about 35 smallholders per day over thefertilizer distribution period. The maximum quantity of fertilizer to bedistributed would be about 5,700 mt per distribution in project year (PY) 8which would be equivalent to about 7 mt/range/day.

3.10 The inspection of holdings for authorization of replanting paymentsand supply of replanting inputs has been the responsibility of DRC. The 13inspectors in DRC have been unable to cope with the volume of inspections andDRC has authorized ASD staff to assist by carrying out inspections for a fee.This has led to various problems described previously (para 2.13). Underthe project, the inspection of holdings for authorization of replantingpayments would be the sole responsibility of ASD. The schedule of inspec-tions and the criteria for authorization of payment and further supply ofinputs is discussed in Chapter VI. Staff of ASD would be provided with a listof all replanters in their range by the regional office of DRC/ASD. Based on

1/ The fertilizer most commonly used is R462 Mg. The analysis is9:5:3:1::N:P:K:Mg.

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this list, each REO and EO would prepare an inspection program which wouldensure that each replanter was visited annually ior inspection during theperiod May to mid October to keep the interval between payments as close aspossible to 12 months. The smallholder would be notified in advance ofthe proposed date of the inspection visit, and could request an earlieror a later inspection under exceptional circumstances.

3.11 Cash payments are disbursed by DRC following satisfactory inspectionand debited to each replanter's replanting payment account which is alsodebited with expenditures on planting material and fertilizer. These paymentsare for the purchase of inputs not supplied in kind such as agro-chemicals andfencing material, and for the smallholder's labor inputs. Although the cashpayments may be made either by cheque or money order and mailed to the small-holder, in practice the smallholder has often had. to visit DRC in Colombo tosecure the release of the payment. Under the project, the disbursement ofcash payments to replanters would be fully decentralized and proceduresstreamlined. Smallholders would nominate their preferred form of payment(money order or cheque) and their local bank or post office when applying fora replanting perrnit. Payments would be made promptly following receipt of asatisfactory inspection report from ASD indicating that specified standardshad been achieved (Annex 1). The number of inspections of the immature rubberwould be increased to eight to ensure that the trees were not opened fortapping prematurely.

3.12 Ombudsmen The operation of the replanting scheme would be furtherimproved under the project by the creation of an ombudsman position in each ofthe three administrative districts of the project area. These ombudsmenwould receive ancd investigate complaints from smallholders relating to thefunctions of DRC and ASD. Where complaints were found to be justified, theombudsman would refer these to the Secretary of the Ministry of PlantationIndustries for action. Further details are given below (para 5.28).

3.13 Intercropping. In the past, DRC has prohibited the cultivation ofany crop other than leguminous covers between the rows of immature rubbertrees. This prohibition reflected past industry bias toward estate-typeproduction goals where the objective was to maximize rubber production per se.The objective of the smallholder, and particularly the smaller smallholder, ismore to maintain adequate cash income levels and to maximize returns perhectare. Intercropping offers the opportunity to do this during the immatureperiod, and is therefore attractive to the smallhDlder. Intercrops can begrown successfully with rubber with little or no adverse effect on long termrubber production provided that the crop is adequately fertilized and certainother precautions are observed (para 6.12). DRC has recently permittedintercropping in suitable circumstances. The project would encourage wideradoption of intercropping through various means. Firstly, the publicitycampaign would include information on intercrops to create smallholder interestand awareness. Secondly, ASD would distribute leaflets describing appropriatecultivation techniques for the major approved intearcrops (bananas, passionfruitand pineapples). Thirdly, smallholders would be given the opportunity toorder planting material at the time of applying for a replanting permit. DRCwould aggregate the planting material requirements so identified and passthese estimates on to local Department of Agriculture farms which have agreed

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to supply the planting material at cost. Finally, ASD staff would stress theneed to apply adequate quantities of fertilizer to the intercrops and wouldindicate to the Agrarian Service Department the expected demand for intercropfertilizer from each of the project area's Agrarian Service Center. In viewof the high and prompt cash returns from intercrops, and the adequate replant-ing payments provided to replanters, it would not be necessary to provideintercrop inputs on a grant basis as had been originally considered. An agree-ment was obtained that adequate supplies of planting material would at alltimes be available to meet project requirements.

B. Institutional Support

3.14 In order to execute the replanting scheme outlined above, and toexpand the capacity for replanting in the future, the project would assist inthe strengthening and reorganization of the two major implementing agencies,ASD and DRC. In addition, the project would establish a Project Coordination

Unit (PCU).

Support for ASD, DRC and PCU

3.15 Details of the responsibilities of ASD, DRC and PCU, and of therecruitment and training of their staff, are given in Chapter V. The projectwould provide civil works and equipment to improve the functioning of theseimplementing agencies.

3.16 Civil Works. The project would construct a permanent trainingcenter for ASD staff at Nivitigalakele near RRISL. The center would comprisea lecture hall, classrooms, office, dormitory, kitchen and living facilities.It would accommodate 30 residential trainees in addition to teaching andsupport staff, and would be constructed early in project year 1 to facilitatetraining of incremental staff. (Cost details in Annex 4, Table 3). Threeregional offices would be constructed, one in each district to be used bothby DRC and ASD staff. Each office would accommodate about 50 DRC staff and4 ASD staff. Plans for these offices would be prepared by architects commis-sioned by PCU. Construction would commence mid PY1 and be completed by endPY2. (Cost details in Annex 4, Table 5). Three regional fertilizer storeswould be constructed adjacent to the regional offices. Each store would holdabout 2,000 metric tons, sufficient for the peak fertilizer demand from re-planters in the project area. A total of 78 houses would be provided for allfield level ASD staff above the level of EO, to minimize the considerablestaff time currently lost in travelling to work. Each house would be centrallylocated within the officers' administrative area. The houses for REOs andDREOs would include a small attached office and store. Designs for thehouses would conform with GOSL standards. (Cost details for houses and fer-tilizer stores are in Annex 4, Table 4).

3.17 Equipment. The project would provide 108 bicycles for EOs and92 motorbikes for REOs and PAs which would meet incremental staff needs andprovide necessary replacements during the implementation period. ASDofficers would be required to purchase bicycles and motorbikes and wouldreceive a loan for this purpose under the standard terms currently applying.The loans would be repaid from the proceeds of the travelling allowances

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paid to these staff. An agreement was obtained that GOSL would periodically

review travel allowances in relation to vehicle operating costs and would

undertake to ensure that project vehicles are fulLy utilized. Four wheel

drive vehicles would be provided for: RAO (3); SPA (3); DREO (9); Assistant

Controllers (3); the PCU (1); the training center (1); and for the ASD headoffice (3). Since these vehicles are expensive in relation to staff salaries,

they would remain the property of the implementing agencies and would be

driven and maintained by the agencies' drivers. Three mobile publicity

units would be provided to ASD for use in the project area. Three passenger

cars would be provided for the ASD head office and one for the PCU. Threemicrobus type vehicles would be attached to the training centers to transport

trainees to and from courses and on tours. Ten trucks would be provided

to distribute fertilizer and planting materials.

3.18 The project would also provide required office equipment for the

PCU and for all ASD and DRC offices in the project: area.

3.19 ASD staff would be provided with field equipment consisting of pro-

tective clothing including motorcycle helmets, ancL measuring tapes and levels

for contour lining. Each range would be provided with three tree pullers

(small winches) which would be loaned to smallholclers to facilitate uprooting

thus permitting more smallholders to earn substantial cash income through the

sale of old rubber trees.

3.20 Further details including the costs of equipment for ASD, DRC and

PCU for training and for other activities, are provided in Annex 4, Tables 3,

4, 5 and 6 respectively.

C. Processing Component

3.21 By providing technical advice the project would improve the quality

of output from both private processors and GPCs arid, by strengthening and

expanding the GPCs, would provide alternative processing channels to reduce

the proportion home processed. This action would be in support of ASD'sgeneral approach to processing which is firstly tco encourage smallholders

to sell latex for crepe or block production wherever geographically feasible;

secondly to improve processing standards in the private sector; and thirdly to

establish GPCs where there are no factories or private processors. The cost

of the processing component is shown in Annex 4, Table 7.

3.22 Processing Advisory Division. A Processing Advisory Division (PAD)

would be established within ASD to provide technical and managerial advice to

both private processors and GPCs. Details of the staffing and training of PAD

staff are given in Chapter V.

3.23 Each Processing Advisor (PA) would supervise all the existing GPCs

in his division, taking over from the REO who has had this responsiblity in

the past. On average, each PA would be responsible for about 8 GPCs which he

would visit on a regular basis. The frequency of visits would depend on the

need of each GPC. Initially the PAs, with the assistance of the Senior Proces-sing Advisors (SPA), would survey the existing GPCs to define and record their

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characteristics (membership, throughput, financial status, etc.) and to iden-

tify their problems. After completion of this survey, ASD would develop astrategy to improve the performance of the GPCs. It is envisaged that this

strategy would include: provision of a sound and appropriate legal basis foroperation of the GPCs; development and institution of financial controls basedon a revised record keeping system; expansion of membership through recruitmentdrives and offer of incentives such as daily advance payments; improvement inquality of output through attention to technical procedures and improvementof facilities; and improvement in sale prices through greater use of group

marketing.

3.24 PAD would also provide advice to private processors. All privateprocessors within the project area would be contacted by mail and requested to

fill in a questionnaire concerning their equipment, processing methods andquality achievements. The questionnaire would be accompanied by a leafletintroducing the new service and explaining its potential benefits to processors.Processors would be invited to contact their local PA for advice on processingmethods likely to improve quality. In addition, staff of the PAD wouldcompile a list of the larger private processors and visit these processorsroutinely. It is envisaged that the major thrust of the advice to private

processors would concern improvements in the design and operation of smoke-houses since much of the quality deterioration is caused by incorrect smoking.

3.25 The Group Processing Centers. The GPCs offer a potentially usefulmeans for improving smallholder returns in areas not adequately served bylatex processing factories or private processors. In view of their potential,the project would assist in their improvement, and, following the achievementof satisfactory operating norms, in their expansion. To date, only a small

proportion of existing GPCs have realized their potential for reasons outlinedabove (para 2.19). The project would address the technical and managerialweaknesses through the efforts of the processing advisors.

3.26 The project would also support physical improvements to existing

GPCs. These improvements would include a tiled bulking tank, a dripping rackto prevent uneven enzyme darkening, a working table for coagulation pans, andan additional supply of 100 coagulation pans. Existing GPCs would be eligibleto borrow up to Rs 6,000 from ASD to meet the full cost of these improvements.

Loans would be available only to GPCs meeting the following conditions:

(a) that they had an adequate legal basis for their operationsincluding satisfactory operating by-laws (MPI is currentlystudying alternative forms of legal association and isexpected to propose an adequate basis in the near future);

(b) that they obtain pledges from members to collectivelyprovide a satisfactory minimum input of latex not lessthan 100 kg/day; and

(c) that a satisfactory system of accounting and auditing wasfollowed.

The project would provide for the rehabilitation of the 67 existing GPCs inthe project area once these conditions were met.

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3.27 Once existing GPCs have become financiaLly viable following theimprovements referred to above, the project would support an expansion ofGPCs in areas where existing processing facilities were inadequate. Duringnegotiations an assurance was obtained that: (i) GOSL would establish a legalbasis for the operation of GPCs satisfactory to II)A not later than March 31,1981, and (ii) that no new GPCs would be established in the project area untilthe potential members pledged to collectively supply not less than 100 kg oflatex per day of operation. ASD has already idenl.ified 50 potential sites 1/in the project area however detailed studies would be required before sitesare finally chosen. The new GPCs would be similar to existing GPCs but wouldincorporate various improvements. Details are given in Annex 2, Appendix 3.The cost of each GPC is estimated at Rs 50,000 including Rs 5,000 workingcapital. It is recommended that ASD should re-examine the design and con-struction standards to identify the scope for reducing capital and operatingcosts. It is proposed that Rs 20,000 would be provided as a grant, with thebalance in the form of a loan at 10% interest over 12 years. For GPCs oper-ating at 75% of capacity, the loan repayments would amount to 10 cents/kg.Details of the financial and economic returns expected from GPCs are presentedin Annex 4, Table 8. The operators of GPCs would be employed by the membersand would receive training from ASD in addition tc) the advisory serviceprovided by PAD.

3.28 The project would also encourage group miarketing of output. Groupsales are currently used by most GPCs but smallho]ders outside the GPCs almostinvariably sell their output individually. If such smallholders formed a groupmarketing organization (GMO) which could offer large lots of graded rubber tobuyers it would tend to reduce downgrading and thus provide a better return toGMO members. The GMO could also be used as a nucleus for the purchase of latexfor crepe or block manufacture. The staff of PAD would investigate the feasi-bility of establishing GMOs which would require very little capital since theywould use existing processing facilities. PAD would also investigate themarketing of scrap rubber all of which is currently sold at a low price byindividual producers. GPCs and GMOs could accept, dry, segregate, and grade,tree scrap, cup lamp, and earth scrap and sell in bulk lots. Such sales wouldprovide additional income for members.

D. Research Component

3.29 The Rubber Research Institute of Sri Lanka (RRISL) carries outresearch which is of potential benefit to smallholders. Work on cultivar test-ing, disease control, nutrient requirements, husbandry, intercropping, and

small scale processing are of immediate importance to smallholders. In addi-tion, officers from RRISL serve as subject matter specialists for the extensionstaff of ASD. The conduct of field trials and frequency of advisory visits byRRISL staff is constrained by a lack of vehicles within RRISL. In view ofthe wide range of soil types and micro-climates represented within the rubber

1/ Twenty each in Kalutara and Ratnapura, ten in Kegalle. The Mawanellablock rubber factory in Kegalle already collects smallholder latex froma 20 km radius thus reducing the need for new GPCs in Kegalle.

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growing area of Sri Lanka, it is important that RRISL have the mobility toconduct field trials over a wide area. RRISL laboratory work is constrainedby a shortage of support equipment. The recently completed Masterplan hasidentified major investment requirements for RRISL and it is understood thatthe UK government would provide financial assistance for such investments.The project would therefore limit its support for RRISL to the provision oftransport and some ancillary equipment to enable the Institute to better servethe smallholder sector of the industry.

3.30 The project would provide RRISL with 16 small conventional vehiclesand two four wheel drive vehicles. It would also provide fifteen 1.5 HP airconditioners and six 0.5 HP dehumidifiers. These would be installed inrecently completed laboratories and would provide a suitable environment forthe operation of costly existing equiment such as an autoanalyzer, and atomicabsorption spectrophotometer and direct recording balances. The lack ofair-conditioned laboratories has restricted the use of such equipment in thepast. Finally, to assist the publicity and training units within ASD, theproject would provide equipment for the photographic unit of RRISL. Theequipment would include slide and movie cameras, projectors and ancillaryitems. Provision would also be made for specialized aspects of film makingwhich would be carried out under contract by the established cinematographicindustry in Sri Lanka. These provisions would be sufficient for the productionof two, 20 minute demonstration films and would save foreign exchange whileproviding extension material tailored to the particular circumstances of thesmallholder in Sri Lanka. Details of the cost of the research component arepresented in Annex 4, Table 7.

3.31 The project would also provide for five 12 month post-graduatefellowships for selected RRISL staff. These fellowships would assist RRISLin countering the heavy attrition of its better staff through promotion toother organizations. The five fellowships offered would include SoilsChemistry, Plant Pathology, Genetics and Plant Breeding, and two other fieldsto be selected. The cost of these fellowships has been included in thetraining component (Annex 4, Table 3). Present rules require persons receiv-ing fellowship training to enter into a bond to serve the Government for astipulated period. This period often amounts to one year of service for everymonth of fellowship training received with a maximum of 7 years. Duringnegotiations agreement was obtained that persons receiving training under theproject would remain with their current employer at least for the period ofthe bond.

E. Project Evaluation

3.32 The proposed project would attempt to reverse the trend towardsdeclining replanting rates over the past decade by addressing the majorapparent causes of low producer prices, inadequate replanting payments, anda poorly administered replanting scheme. In view of the many factors whichare likely to influence the smallholder's decision to replant, it is probablethat a better understanding of the smallholder's viewpoint would reveal oppor-tunities to make the replanting scheme more attractive to smallholders and

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more efficient. It is therefore proposed that the project be evaluated duringits implementation in the belief that the results of such an evaluation wouldpermit fine-tuning of the replanting scheme so as to best serve the small-holders and the economy.

3.33 To avoid the risk of partiality, the evaluation would be carriedout by the Agrarian Research and Training Institute (ARTI). ARTI is an estab-lished national research organization with considerable experience in evalua-tion of agricultural projects. It is currently conducting similar evaluationsfor projects financed by the Asian Development Bank and IDA. The evaluationstudy has been discussed with ARTI which has agreed to the proposal that theproject would meett ARTI staff and operating costs associated with the conduct

of the evaluation. A consultant would assist ARTE in the design and initialimplementation of the study (para 3.34). It is envisaged that the evaluationwould comprise an initial baseline survey of smalLholders in the project areawhich would be ccmpleted together with a report by December 1980. In subse-quent years, case studies would be conducted as indicated in the terms ofreference for the consultant (Annex 2, Appendix 4) which give further detailsof the nature of the studies. ARTI would consult with IDA on the details ofproject evaluation. Details of the cost of project evaluation are presentedin Annex 4, Table 7.

F. Technical Assistance

3.34 Whilst Sri Lanka has considerable experience and expertise in mostaspects of the rubber industry, the project would introduce several newapproaches not previously undertaken by the project agencies. The projecttherefore would provide about 15 manmonths of consultant input to supplementresources within the implementing agencies. Details of this technical assist-ance are provided in the draft terms of reference (Annex 2, Appendices 1, 2,3 and 4). An assurance was obtained that the project consultants would beretained for the above assignments in accordance with the implementationschedule and on terms and conditions satisfactory to IDA. The cost of thetechnical assistance component is presented in Annex 4, Table 7. The averagecost of consulting services is estimated at US$6000 per man-month 1/.

IV. COST ESTIMATES AND FINANCING

A. Cost Estimates

4.01 The total cost of the six year project is estimated at US$28.0 M ofwhich US$7.4 M or 26% would be foreign exchange and US$0.25 M duties and taxes.Details of costs, summarized in Table 4.1 below, are in Annex 4, Table 9.

1/ Consisting of salary US$3,500, allowances, US$1,200, travel US$800, andmiscellaneous, US$500. The consultants are expected to be nationals ofSouth East Asian countries.

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Table 4.1: PROJECT COST ESTIMATES

----- Million Rs------ ---- Million US$---- % ofLocal Foreign Total Local Foreign Total Base Cost

Replanting Costs- Budded stumps 22.1 1.1 23.2 1.43 0.07 1.50- Fertilizer 12.8 51.2 64.0 0.82 3.30 4.12Labor and other

inputs 104.9 2.2 107.1 6.77 0.14 6.91Total replanting

costs 139.8 54.5 194.3 9.02 3.51 12.53 73.8

Institutional Support

Advisory ServicesDept. (ASD)Investments- Civil works 8.8 3.0 11.8 0.57 0.19 0.76- Equipment 0.6 7.7 8.3 0.04 0.50 0.54Staffing 15.8 - 15.8 1.02 - 1.02Operating Costs 2.8 5.0 7.8 0.18 0.32 0.50

Total ASD 28.0 15.7 43.7 1.81 1.01 2.82 16.6

Dept. of RubberControl (DRC)Investments- Civil works 0.6 0.2 0.8 0.04 0.01 0.05- Equipment 0.5 0.6 1.1 0.03 0.04 0.07Staffing 5.2 - 5.2 0.34 - 0.34Operating Costs 0.8 0.6 1.4 0.05 0.04 0.09Total DRC 7.1 1.4 8.5 0.46 0.09 0.55 3.3

TrainingInvestments- Civil works 0.9 0.5 1.4 0.06 0.03 0.09- Equipment 0.2 1.1 1.3 0.01 0.07 0.08Training Courses 1.7 2.3 4.0 0.11 0.15 0.26Total Training 2.8 3.9 6.7 0.18 0.25 0.43 2.6Technical Assistance 0.2 1.2 1.4 0.01 0.08 0.09 0.5Processing Component 1.7 1.2 2.9 0.11 0.08 0.19 1.1Research Component 1.3 2.2 3.5 0.08 0.14 0.22 1.3Project Coordination 1.2 0.6 1.8 0.08 0.04 0.12 0.7Project Evaluation 0.2 - 0.2 0.02 - 0.02 0.1

Total Base Cost 182.3 80.7 263.0 11.77 5.20 16.97 100.0Physical Contingencies 6.2 2.0 8.2 0.40 0.13 0.53 3.1Price Contingencies

and rounding 131.2 31.6 162.8 8.46 2.04 10.50 61.9

Total ExpectedProject Cost 319.7 114.3 434.0 20.63 7.37 28.00 165.0

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Cost estimates for equipment, civil works, staffing and technical assistance,are based on recent actual costs for comparable items or services in Sri Lankaadjusted to November 1979 levels. Replanting costs represent the full costof all replanting inputs provided to smallholders by GOSL under the RubberReplanting Scheme (Annex 4, Table 10). Staffing and other operating costs forASD and DRC include those recurrent costs directly attributable to projectactivities. The physical contingencies included in the estimates amount to3.1% of base costs and include 15% for planting material, 10% for civil worksand 5% for fertilizer. Contingencies included for subsequent price escalationover the project period amount to 60.0% of base costs plus physical contingen-cies. Price contingencies for local costs have bieen estimated on the basisof the following estimates of domestic inflation Eor the years 1980 to 1985respectively: 21%, 15%, 12%, 10%, 10%, and 10%. Price contingencies forforeign costs have been calculated using the following estimates of inter-national inflation for the years 1980 to 1985 respectively: 10.5%, 9%, 8%,7%, 7% and 7%.

B. Proposed Financing

4.02 Project Financing. The proposed IDA credit of US$16.0 M wouldfinance about 58% of the project cost excluding duties and taxes. It wouldcover the full foreign exchange cost (US$7.4 M) and about US$8.6 M equivalentof the local costs. GOSL would finance the balance of project costs includingtaxes and duties (US$12.0 M). Funds would be made available to the implement-ing agencies in the form of budgetary allocations, The proposed projectfinancing is summarized below:

Table 4.2: FINANCING PLAN(US$'000)

Total Project CostsComponents GOSL IDA including Contingencies

Replanting Costs /a- Replanting Payments 2,207 13,271 15,478- Fertilizer Subsidies 5,559 - 5,559ASD 2,967 1,551 4,518DRC 848 139 987Training 158 427 585Technical Assistance - 96 96Processing 48 237 285Research 17 253 270PCU 168 26 194Project Evaluation 28 - 28

Total 12,000 16,000 28,000

/a The replanting cost includes fertilizer subsidies which wouldbe funded by GOSL. These subsidies together with the replant-ing payments made under the Rubber Replanting Scheme, arefully recovered from rubber growers by GOSL (para 7.10).

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4.03 Retroactive financing is proposed for pre-project expendituresrequired to achieve the 1981 rubber replanting target. These include trainingof newly recruited extension staff, early construction of the training center,and procurement of some urgently needed vehicles and equipment. The amountsinvolved would be small and IDA's share of the retroactive financing would notexceed US$0.2 M.

4.04 Financing of the Rubber Replanting Fund. Rubber replanting paymentsare financed by a Replanting Fund which is financed by a Replanting Cesslevied on rubber exports. The Rubber Replanting Fund is administered by DRC.At the end of 1979, the fund had accumulated cash reserves of about US$3.1 M.Financial constraints have not restricted the rubber replanting program inthe past but the proposed rapid acceleration of replanting over the 1980-85project period would lead to a substantial cash deficit in the fund. As shownin Annex 4, Table 11, the replantings both within and outside the project areawould entail cash disbursements from the fund of US$39.1 M 1/ while totalrevenues over the same period would amount to only US$18.6 M assuming the cessremained at its current level of Rs 0.35/kg. 1/ Expenditure on replantingswould fully exhaust cash reserves of the fund by end PY2; thereafter the fundwould accumulate a deficit estimated at US$17.4 M by PY6. During the subse-quent five-year period, the annual deficit of the fund would be of the orderof US$5.5 M. 1/ IDA's proposed direct contribution to the Rubber ReplantingScheme of US$13.3 M would meet 47% of the expected accumulated fund deficitof US$28.4 M in current dollars (equivalent to US$17.4 M in constant 1979dollars) over the project period. The shortfall of US$15.1 M, as well as theannual deficits thereafter, would have to be funded from government resources.GOSL's commitment to finance the fund's impending deficits during and beyondthe project period would thus be crucial to the implementation of the accel-erated replanting program.

4.05 The deficits could be funded through budgetary provisions as indi-cated in Annex 4, Table 11. Alternatively, the replanting cess could beincreased to generate additional revenue for the fund, in which case a Replant-ing Cess of some Rs 0.80/kg would be required. The latter approach, however,would reduce the producers' margin unless the export duty were reduced by anamount corresponding to the increase in replanting cess. A decision on themethod by which the fund deficits would be financed would be reached duringnegotiations. In view of the importance of funding the accelerated replantingscheme adequately, and of the danger of eroding producer margins through indis-criminate increases in the cess, the following assurances were obtained atnegotiations. GOSL would (i) provide the Replanting Fund with the resourcesnecessary to finance deficits involved in implementing the project and sustain-ing the island wide replanting scheme at the optimum replanting rate of about8,100 ha per year; and (ii) annually review and submit to IDA the financingrequirements of the Fund to carry out the replanting scheme: such reviewwould include an analysis of the impact of financing arrangements on producermargins.

1/ In constant 1979 prices.

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C. Procurement

4.06 Replanting activities would be carried out by individual smallholdersusing family or hired labor. Replanting payments for such work would coverthe costs of (i) planting materials (US$1.50 M) ard fertilizer at the subsi-dized rate applicable to all fertilizer sales in Sri Lanka (US$1.51 M) whichwould be provided in kind to the planters; and (ii) the cost of other requiredinputs and of hir:Lng labor (or otherwise compensating the smallholder for hisown labor) (US$6.91 M). Nursery works to provide planting materials would becarried out by force account on State rubber estates (JEDB and SPC). Thisapproach is preferred both on grounds of quality and cost; the estates havethe expertise necessary to produce high quality planting materials, and theyhave a large, under-utilized work force. Fertilizer would be purchased by theproject at government rates from either of the two government corporationsdealing with fertilizers or imported directly by the DRC. Separate tendersfor the project requirements would not be practicable since rubber fertilizerrequires mixing of several inputs (themselves ingredients of other types offertilizer); nor would it be in the interest of economy since the governmentcorporations, by tendering on much larger quantities, would obtain morecompetitive prices. Contracts for civil works (US$0.99 M) would be small andwidely dispersed (one training center for US$0.09 M, three regional officebuildings for US$0.06 M, three fertilizer stores for US$ 0.06 M, 78 houses forUS$0.70 M and 50 GPCs for US$0.08 M). Such works would not be suitable forICB contracts and would be let following local competitive bidding amongst thenumerous local contractors. Contracts for vehicles and equipment (US$1.02 M)costing more than US$100,000 would be let following ICB: a preference limitedto 15% of the cif price of imported goods or the import duty, whichever islower, would be extended to local manufacturers in the evaluation of bids.All other contracts would be let following local competitive bidding inaccordance with local procedures acceptable to IDA. There is an adequaterepresentation of foreign suppliers in Sri Lanka. Items purchased undercontracts costing less than US$5,000 and specialized research equipment, wouldbe procured through prudent shopping. The balance of project costs wouldcomprise staff salaries and other administrative expenditures (US$ 2.08 M),technical assistance and overseas training (US$0.23 M), local training(US$0.12 M), fertilizer subsidies (US$2.6 M) and contingencies (US$11.03 M).

D. Disbursements and Audits

4.07 Disbursements from the proposed credit are expected to be completedby June 30, 1986, approximately six months after the end of project implemen-tation. The estimated schedule of disbursements is presented in Annex 4,Table 12. Disbursements under the Credit would cover:

(a) 80% of replanting payments made to rubber replanters (US$11.20 M);

(b) 80% of expenditures for civil works (US$'.15 M);

(c) 100% of foreign expenditures for imported equipment,

(d) 100% of local expenditures (ex-factory) ior locally manufac-tured equipment and materials following competitive biddingprocedur es,

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(e) 80% of local expenditures for vehicles and equipment locallyprocured without competitive bidding procedures (US$1.10 M); and

(f) 100% of the cost of technical assistance and overseas training(US$0.25 M).

The unallocated portion of the credit (US$2.30 M) would be reallocated tothe above categories as required. No disbursements would be made againstsalaries and related administrative expenditures or against local training.Details of disbursements for each component are given in Annex 4, Table 13.

4.08 Disbursements against replanting payments referred to in para 4.07would be made against quarterly certified statements of expenditures. Allpayments under small civil works, vehicles, and equipment procured throughlocal contracts, the value of which would not exceed Rs 100,000, would bemade against statements of expenditures. Documentation for these expendi-tures would not be submitted to IDA for review but would be retained by DRC,ASD, and RRISL, and made available for inspection by IDA on request. Fulldocumentation would be required for all other disbursements. Although theimplementing agencies' accounting procedures are adequate, the accountingunits require additional staff which the project would provide to enable theagencies to prepare adequate project accounts and statements of expenditures.During negotiations an assurance was obtained that the additional staffrequired would be appointed not later than January 1, 1981. Project accounts,including those related to statements of expenditures would be maintained inthe manner described in Annex 3 of the report. The estimated schedule ofdisbursements is presented in Annex 4.

4.09 Assurances were obtained that DRC, ASD and RRISL would keepseparate accounts of expenditures made under the project irrespective ofwhether these would be eligible for IDA disbursements. These accounts wouldbe audited annually for each fiscal year in accordance with sound auditingprinciples consistently applied. Accounts would be submitted for audit withinfour months 1/ of the end of the financial year, audited not later than tenmonths 1/ after the end of such year, and the audit report submitted to IDAwithin twelve months. Statements of expenditure would be audited at least onceevery six months and the reports furnished to IDA. Such reports would show,inter alia, that the funds withdrawn were used for the purposes intended, thatfunds have been received or work performed, and that payments have been made.

V. ORGANIZATION AND MANAGEMENT

A. Background

5.01 Two ministries within GOSL are directly concerned with the rubberindustry. The Ministry of Plantation Industries (MPI) is responsible for

1/ These requirements follow GOSL standing regulations for the routineaudit of government agencies' accounts.

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all aspects other than trading, while the Ministry, of Trade and Shippingregulates and participates in rubber trading. A third ministry, Industries,is indirectly involved with rubber through its responsibility for industrialdevelopment which includes rubber processing. ThE. key ministry for the rubberindustry is MPI. Agencies responsible to MPI include the Department of RubberControl (DRC), the Rubber Research Institute of Sri Lanka (RRISL) and itssubordinate Advisory Services Department (ASD), and the recently establishedState Rubber Manufacturing Corporation (SRMC) which implements the processingdevelopment program of GOSL. The State Plantation Corporation (SPC) and theJanatha Estates Development Board (JEDB), formerly under MPI, have now becometwo separate ministries and together operate public sector estates. Details ofthe operations of DRC, ASD and RRISL have been presented previously (para 2.11et seq).

5.02 The Ministry of Trade and Shipping regulates the export tradethrough its Commoclity Purchase Department (CPD). CPD exercises a monopoly onthe marketing of RSS grades 1, 2 and 3 (para 2.20), licenses shippers,issuesexport permits, and supervises the grading of shipments.

5.03 A fourth ministry, Finance and Planning, is peripherally involvedwith the rubber industry through its financing functions which include thecollection of cesses and duties on rubber exports by the Department of Customs.

5.04 The present system of management of the rubber industry has a majorweakness in the area of policy formulation and planning. Although these areresponsibilities of MPI, it does not have the capability to carry out thesekey functions effe!ctively with the result that there has been no consistentpolicy for rubber development. A further weakness related to the policy area,is lack of clearly defined responsibilities for the concerned institutions withsome areas of overlap in both regulatory and executive functions. This latterweakness suggests the need for some changes in the industry's organizationalstructure.

5.05 The Masterplan has proposed extensive reorganization of the industry.The report was released in December 1979 and its recommendations are currentlyunder consideraticn by GOSL. The Masterplan has proposed that a Rubber Indus-try Development Authority (RIDA) be established within MPI with responsibilityfor all aspects of the industry, including planning. It proposes that RIDAoperate through two executive boards; one for research and development, theother for rubber manufacturing and marketing. RIDA would be headed by aDirector-General with executive power over all agencies within RIDA. Hewoulc be responsible to and guided by a Board with members drawn widely fromthe industry and the concerned ministries.

5.06 The Masterplan was originally scheduled for completion by mid 1979and its delayed release has meant that the overall organizational structureof the rubber industry has yet to be formulated. IDA proposes to continue todiscuss this aspect with GOSL and has meanwhile indicated to GOSL what itregards as the critical elements of the overall organization. These criticalelements comprise a minimum package of organizationial changes which would berequired in any overall organizational restructuring and which at the sametime, would be sufficient to ensure successful implementation of the project.They consist of the establishment of a Rubber Policy and Planning Unit (RPPU),a Rubber Policy Review Committee (RPRC), and a Project Coordination Unit (PCU),

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and the separation of ASD from RRISL. MPI has agreed in principle with thesechanges which are in general conformity with the Masterplan proposals.

B. Project Organization and Management

5.07 The project would be implemented by three existing agencies: ASD,DRC and RRISL. Overall coordination of the project would be the responsibilityof a Project Coordination Unit to be created under the project. Projectevaluation would be carried out by ARTI (para 3.32). The overall projectorganization is presented graphically in Annex 4 Chart 2.

Project Coordination Unit (PCU)

5.08 PCU would be established within MPI and located in the MPI officesin Colombo.

5.09 Responsibilities. The PCU would coordinate all aspects of projectimplementation and would serve as the contact point between the implementingagencies and IDA. Its specific responsibilities would include:

(a) assistance to ASD and DRC in the preparation of annualwork plans and budgets for project activities. Thesewould be prepared at least six months prior to the startof each financial year;

(b) assistance to ASD and DRC in project procurement includingpreparation of tender documents, issue of tenders, evalu-ation of bids and recommendations for awards;

(c) design of progress reporting procedures for ASD, DRC andRRISL in conjunction with staff of these agencies;

(d) monitoring of project implementation through formal(progress report review) and informal means (fieldvisits and personal contacts);

(e) preparation and submission of applications for with-drawal from the proposed credit on behalf of ASD, DRCand RRISL;

(f) collation of progress reports and project accounts fromASD, DRC and RRISL, and preparation and submission toIDA of Quarterly Progress Reports and Annual ProjectAccounts and;

(g) liaison with the Agrarian Research and Training Insti-tute to coordinate and facilitate the evaluation study.

5.10 Staffing. PCU would have a professional staff of three with ninesupport staff (Annex 4, Table 6). It would be headed by a Project Coordinator(PC) who would be responsible to and report to the Chairman of the SteeringCommittee or its successor, the Rubber Policy Review Committee (RPRC) followingits formation. The RPRC would provide the forum for decisions on projectimplementation. A satisfactory Project Coordinator has already been designated

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and agreement is being reached on his terms of reference. An agreement wasobtained during negotiations that the position of Project Coordinator wouldat all times be filled by a person whose qualifications and experience weresatisfactory to IDA.

Advisory Services Department (ASD)

5.11 ASD would be transferred from RRISL and would become a departmentin its own right. During negotiations an assurance was obtained that ASDwould be established as a separate department and fully staffed not laterthan January 1, 1981.

5.12 Responsibilities of ASD would be revised under the project andwould comprise:

(a) provision of advice to smallholders and estates on allaspects of rubber husbandry, exploitation practices,disease control, and the transmission of researchfindings;

(b) provision of technical and managerial advice to RSSproducers comprising both private processors and groupprocessing centers;

(c) all field level contacts with smallholder replantersincluding inspection of holdings for issue of replantingpermits, inspection of replantings for authorization ofreplanting payments and inputs, and distribution ofreplanting inputs; and

(d) systematic quadrennial field checks on rubber holdingregistration details to update the industry records onextent, age, and condition of rubber on smallholdings.

Details of the monitoring system ASD would use are given in Annex 1.

5.13 Staffing. To enable it to carry out these activities, ASD wouldbe reorganized and its staff increased substantial:Ly. The proposed internalorganization of ASD is indicated in Annex 4 Chart 3. ASD would be headed bya Director who would be assisted by a Deputy Director for Field Services anda Deputy Director for Administration and Training. Field Services wouldcomprise three divisions: Extension, dealing with replanting and generaladvisory work; Processing, dealing with advice to processors; and Supplies,dealing with the distribution of replanting inputs to smallholders. TheTraining Division would be located at the training center. Administrativestaff would be located at ASD headquarters in Colombo and would include a newaccounts section. ASD professional field staff serving the project area wouldbe increased from 47 to 139 by recruitment and promotion over a period of fouryears. Head office professional staff would be increased from 8 to 15 includ-ing the staff of the Training Division. Details of incremental staff arepresented in Annex 4, Table 2.

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5.14 Staff of the Extension Division would be increased threefold. Thethree new RAOs would be either experienced graduates or senior field staffwithout university qualifications and the three new DREOs would be promotedfrom REO ranks. The existing cadre of 41 REOs would be expanded to 54 byrecruitment of high school graduates with GCE A level qualifications. Theposition of REO is eagerly sought after and there would be no difficultyselecting suitable staff. The bulk of the incremental staff in ASD wouldcomprise 108 Extension Overseers (EO) who would be locally recruited. Thequalifications for this new cadre would be high school graduate with GCE 0level. Competition for these positions is expected to be intense.

5.15 The Processing Advisory Division (PAD) would be established withinASD under the project. Its staff would comprise three Senior ProcessingAdvisors (SPA) located at the regional offices, and nine Processing Advisors(PA) who would be located in the field. Each SPA would supervise all PAs inone region and would assist them in field activities. The SPAs and PAs wouldbe recruited in project year 1 and would participate in a one month trainingcourse to be given at the ASD training center early in year 2 after the moreurgent training of new ASD recruits had been completed. All recruits wouldbe required to have had extensive experience in RSS production and should pre-ferably be experienced in bookkeeping and accounting. Academic qualificationsof SPAs and PAs would be the same as for REOs. It is envisaged that some ofthese positions would be filled from DREO/REO ranks and the rest by recruit-ment outside ASD. The Supplies Division (SD) would be a new division withinASD with responsibility for supply of replanting inputs to smallholders. Itshead would be located at the head office and he would operate through the RAOsat regional offices. The Training Division would also be established withinASD under the project. It would have a professional staff of seven includingthe publicity unit and its staff would operate from the training center. TheAdministrative Division would comprise an administrative officer, an accoun-tant, and 14 clerks, and would include a new accounting unit.

5.16 Training. The project would support a greatly expanded training pro-gram for ASD staff which is summarized in Annex 4, Table 3. All formal train-ing courses would be conducted at the ASD training center under the supervisionof the Training Division. Teaching staff would also be drawn from RRISL, DRCand SPC/JEDB as required. Newly recruited REOs would undergo a three monthinduction course and EOs a two month induction course. Refresher courses forexisting REOs would last one to two weeks. Courses would also be conductedin rubber processing: the new cadre of processing advisors would be trainedin year 2 and regular courses conducted twice yearly from year 2 onwards forprivate sector processors and GPC members. These regular courses would coverboth the technical aspects of processing, and the managerial and financialaspects of GPC operations. The training courses in processing would bedesigned by senior ASD staff working in conjunction with the processing con-sultant. A consultant would assist ASD in developing curricula for the variouscourses. Two senior ASD staff would participate in a six week pre-projectstudy tour to Malaysia, Thailand and Indonesia, to review the operation ofreplanting programs in those countries. Two officers from DRC and the ProjectCoordinator would also participate in the study tour. Three RAO's from ASDwould join three Assistant Controllers from DRC for a three week study tourto Malaysia in year 1. From year 2 onwards, three selected ASD field staff

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would visit one country to be decided for a three week study tour. The projectwould also provide two fellowships for postgraduat:e studies for ASD staff.

5.17 Funding. ASD would be funded by Budgetary allocation followingnormal GOSL procedures as outlined in Annex 3.

Department of Rubber Control (DRC)

5.18 DRC would be strengthened under the projlect and would revise someof its procedures for the administration of the replanting scheme. Theserevised procedures would be necessary to continue its decentralization toregional offices, and to increase its processing efficiency to enable it toservice increased numbers of replanters. DRC would establish three regionaloffices in the project area which would also accomodate the regional staff ofASD, to improve inter-agency coordination. One regional office has alreadybeen established in Kalutara, and the other two offices would be occupied assoon as construction is completed.

5.19 Responsibilities. DRC would relinquish t:o ASD its present responsi-bilities for inspection of holdings, authorizatioa of replanting payments,and distribution oDf replanting inputs. It would also hand over its respon-sibility for production of planting material to SFIC/JEDB. Its previousresponsibility for setting replanting payments anc, cess levels, would beassigned to the Rubber Policy and Planning Unit in MPI (para 5.24). An agree-ment on a satisfactory timetable for the transfer of these responsibilitieshas been obtained. Within the project area, DRC operations would be fullydecentralized with one regional office servicing each region. The regionaloffices would register holdings, issue replanting permits and make cash pay-ments on receipt of authorization from ASD. DRC would continue to collectand maintain industry statistics relating to rubbe!r area, production, process-ing and marketing. DRC would estimate replanting input requirements andprocure these inputs. It would retain its inspectors to verify a sample ofthe inspections carried out by ASD officers.

5.20 Procedures. DRC would develop simpler procedures for the adminis-tration of the replanting program (Annex 2, Appendix 1). These procedureswould be fully developed under the project after DRC staff had studied pro-cedures in Malaysia and Thailand. A consultant would assist in the develop-ment of such improved procedures (para 3.34). It is envisaged that DRC wouldreach a decision on procedural changes by end PYI and would implement thesechanges gradually over the subsequent years of the project. In the interven-ing period, DRC would continue to follow its present procedures but the staff-ing proposals outlined below would enable it to speed up its handling ofreplanting assistance. The Masterplan includes de!tailed recommendations forprocedural and organizational changes within DRC. It has proposed that futureDRC operations makie extensive use of a computer to speed up its work but ithas also proposed an alternative manual system. Ihe UK Government is expectedto provide additional assistance, 1/ to DRC to further improve its capacity to

I/ Such assistance is expected to include computer facilities and technicalassistance.

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service replanters and to maintain industry statistics. There is a clearneed to ensure conformity between the responsibilities of DRC under theproject, and those that may be envisaged for DRC under the anticipated UK-financed project referred to in the Masterplan. Therefore, during nego-tiations, an agreement was obtained that GOSL would consult with IDA concern-ing any proposed changes to its procedures for the administration of thereplanting scheme.

5.21 Staffing. Despite the reduction in its responsibilities, DRC wouldrequire some additional staff to reduce the time taken to process the paperworkfor replanting assistance. The total personnel required to staff the regionaloffices would be 162, of whom all but 11 would be clerks or support staff. Thestaffing has been based on work norms suggested by senior DRC officers andwould be subject to revision after details of improved administrative proced-ures are decided. Staff requirements would be reduced if DRC proceeds with aproposal to use a computer-based data retrieval system. Details of the staffrequirements are presented in Annex 4, Table 5.

5.22 Training. Two senior DRC staff would participate in a pre-projectstudy tour to Malaysia, Thailand and Indonesia, to review the operation ofreplanting programs in those countries. In addition, the three AssistantControllers in charge of the regional offices would study the administrativeprocedures of one national replanting program for a period of three weeks inyear 1. All other training of new and existing staff would be carried out onthe job in Colombo and the regional offices.

5.23 Funding. In the past, DRC administrative costs have been met froma number of cesses with resulting complications in maintaining accounts whichallocate costs to the appropriate cess. The increased workload of DRC underthe project would result in increased administrative costs necessitatingincreases in the cesses. However, since DRC's operations on behalf of rubberproducers are comparable to those of ASD which are funded by budgetary alloca-tion, it has been proposed that DRC operations would in future also be fundedby budgetary allocaton from MPI, and only replanting payments themselves bemet from the replanting cess.

Rubber Policy and Planning Unit (RPPU)

5.24 RPPU would be established within MPI to develop appropriate policiesfor the rubber industry and to plan their implementation. It is envisaged thatRPPU would have a staff of about 10 comprising a senior economist, an econome-trician, two graduate assistants and the staff of the Economic Research Unitcurrently under RRISL. In addition, RPPU would co-opt the services of special-ists in particular areas requiring technical knowledge beyond that of its staff.

5.25 RPPU would serve in an advisory role and would submit its policyand planning recommendations via the Secretary, MPI to the Rubber Policy ReviewCommittee whose compostion and functions are described below (para 5.26). Thespecific concerns of RPPU would include the following:

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(a) Replanting Targets -- these would be fonnulated by RPPUbased on the age structure of the national stand, exploit-ation rates, and projected demand prospects. Data for thisanalysis would be drawn from DRC registration records, aerialsurveys, and specific studies as required;

(b) Replanting Payment Levels -- the level of replanting paymentswould be adjusted in future according to movements in thecosts of labor and material inputs which RPPU would monitor;

(c) Producer Margins -- RPPU would monitor the costs of produc-tion of rubber for producers of differing holding sizesin order to recommend appropriate levels of producer marginsand thus to define the surplus available for export duties,taxes and cesses;

(d) Processing Capacity -- RPPU would review market prospectsfor alternative forms of processed rubber and recommendlevels of processing capacity appropriate to such prospects.These recommendations would form the basis on which licenceswould be issued for capacity expansion. RPPU would alsorecommend what level of incentives, if arLy, would be requiredto induce private enterprise to expand processing capacity;and

(e) International Organizations -- RPPU would represent SriLanka in its dealings with the Association of NaturalRubber Producing Countries (ANRPC), the InternationalRubber Study Group (IRSG) and other similar organizations.

An assurance was obtained during negotiations that a Rubber Policy and PlanningUnit would be established within MPI not later than January 1, 1981, withstaffing and terms of reference satisfactory to IDA which would include, interalia, responsibility for advising the RPRC on levels of industry cesses,duties, and replanting payments.

Rubber Policy Review Committee (RPRC)

5.26 RPRC would review all policy proposals produced by RPPU. Itsfunction would be to ensure that policy recommendations to the Minister MPIreflected adequately both the views of the various interests in the rubberindustry and those of the three other ministries concerned with rubber. Themembership of RPRC would thus necessarily be broad. The existing SteeringCommittee, established within MPI to coordinate the preparation of this pro-posed project and to guide the Masterplan team, would form the basis of RPRC.Additional members would be drawn from the other ministries and from rubberproducers and processors. The proposed composition of RPRC is indicated inChart 2 of Annex 4.

5.27 RPRC would meet as required to review policy proposals from RPPU.Those proposals endorsed by the Committee would be conveyed in the form of

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recommendations to the Minister MPI, by the Chairman. Proposals not receiv-ing the Committee's endorsement would be either submitted to RPPU with sug-gested amendments, or passed on to the Minister for consideration togetherwith a report of the Committee's views. The Committee would also review theproposed workplan of RPPU and suggest areas worthy of detailed analysis. Afurther function of the RPRC would be to receive reports from the PCU and toreach agreement on details of project implementation. At the discretion ofthe Chairman, this latter function would be carried out by a working groupcomprising those members of RPRC directly involved in project implementation.During negotiations an assurance was obtained that a Rubber Policy ReviewCommittee would be established within MPI with powers and composition accept-able to IDA, not later than January 1, 1981.

Ombudsmen

5.28 The ombudsmen proposed under the project would be appointed by theSecretary MPI. It is envisaged that the ombudsmen would be respected localofficials such as district court judges and that they would devote up to twodays per month reviewing written or verbal complaints from smallholders con-cerning the operation of the replanting scheme. The ombudsmen would receivean honorarium from MPI for their work. One ombudsman would be appointed ineach district for a three year term. Smallholders would be advised of theservices available from the ombudsman and each leaflet produced by ASD andDRC would include a statement recommending that smallholders with complaintsconcerning the services of ASD or DRC should contact their local ombudsmanfor action.

C. Monitoring and Evaluation

5.29 The project would strengthen existing internal monitoring systemsin both ASD and DRC and would support the development of a project-specificmonitoring system within PCU. Details are given in Annex 1.

5.30. The project's achievements would be evaluated throughout the projectperiod by ARTI. The evaluation would be carried out from the viewpoint of thesmallholder and would seek to identify any potential changes in the replantingscheme which would make it more attractive to smallholders. It would also seekto identify any means whereby the work of RRISL could be modified to betterservice smallholders. Further details of the evaluation component are givenin Chapter III (para 3.32 et seq) and in the terms of reference for the evalua-tion consultant (Annex 2, Appendix 4).

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VI. PRODUCTION ASPECTS

A. The Present Situation

6.01 About 30% of smallholder rubber is either currently over-aged orwill be due for replanting within five years. 1/ 'While the average yieldof smallholder rubber is fairly satisfactory (750 kg/ha 1/), the yield fromaged and over-aged smallholder rubber is very low (100-500 kg/ha 1/). 2/Much of the old rubber is unselected seedling material with low genetic yieldpotential. Taken over all age groups, about 70% is budgrafted with relativelyhigh yielding clones (of which PB86 accounts for more than 70%); 20% isseedling material, and 10% clonal seedling (mainly Tj 1). Stands are high(about 440 trees/ha) reflecting both high planting densities and low lossesdue to disease or wind damage. Runts are common since thinning is not normallypracticed. Some 70% of smallholder rubber has beea assessed as acceptable orbetter in respect to evenness, vigor and weed control. Ground covers aregenerally good with adequate leguminous covers established at planting andsatisfactorily maintained. Soil conservation works are also generally ade-quate; these usually take the form of small platforms at the planting pointsrather than continuous terraces. Fertilizer is rarely applied by smallholdersexcept during the immature period. Even then, only 20% of the recommendedfertilizer is being used. Disease incidence is geaerally low: oidium out-breaks occur in some years, particularly at higher elevations; panel diseasesare uncommon despite high rainfall; white root disease is however, common,particularly on estates.

6.02 Exploitation standards are variable and could be considerablyimproved. Smallholders normally tap daily but not continuously since tappingis carried out according to convenience rather than system. Thus there is notapping during festivals, paddy planting, fruit harvesting or wet days. Tap-ping may be discontinued during periods of low rubber prices. On average,smallholders tap about 180 days per year. Although high level tapping of oldertrees is common, it is usually of poor standard with excessive bark consumption.Unplanned slaughter tapping causes considerable loss of potential crop and hashastened the need for replanting. Poor exploitation practices, includingpremature opening, reduces the life of many plantings by as much as one thirdto about 20 years.

1/ Estimates based on surveys conducted as part of the Rubber MasterplanStudy, 1979.

2/ The average yield for smallholder rubber in Malaysia is about 950 kg/ha.

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B. Project Replantings: Inputs and Yields

6.03 The projected yield from replanted rubber would average about 1,060kg/ha over the 24 years of tapping with a peak yield of 1,350 kg/ha. The aver-age yield thus represents a 400% increase of the present yield of over-agedrubber which itself could only be sustained for about five years. Completedetails of replanting inputs and projected yields are presented in Annex 1.The major points concerning replanting procedures are described below.

6.04 Planting Materials. All replanters would be provided with bare rootbrown budded stumps produced by selected SPC/JEDB estates. The cost ofproduction is currently Rs 1.85 per budded stump and the ex-estate price hasbeen set at Rs 2.50 per stump for 1981. DRC and ASD have selected 33 estatesfor planting material production based on the likely geographical distributionof replanting: the locations are indicated on Map 14733R. Nurseries for 1981replantings have already been satisfactorily established. An agreement hasbeen obtained that the terms and conditions of the contract for the productionof planting material by SPC and JEDB would be satisfactory to IDA. A draftoutline of contract conditions for planting material supply has been providedto MPI.

6.05 The clones used for project replantings would be those recommendedby RRISL. At present, these are PB 86, RRIC 100 and RRIC 103. 1/ Clone PB 86has been extensively planted and, although not among the highest yielders inmajor rubber producing countries, has proved successful under conditions inSri Lanka. Clones RRIC 100 and 103 have been tested, but are not yet plantedextensively. It is probable that there would be a considerable smallholderpreference for PB 86. It is strongly recommended that RRISL should considerusing GT1 for part of the project plantings. The Rubber Masterplan has alsorecommended the gradual introduction of higher yielding varieties and thesesuggestions are being considered by GOSL. A conservative projected yieldprofile for project replanting is presented in Annex 1, Table 2. RRIC 130 iscurrently being tested and provided its potential by RRISL is proven, it wouldbe recommended for use by smallholders.

6.06 Land Preparation and Planting. All felling, uprooting and sawing ofold rubber trees would be manual. The only tools used would be hand winchesand cross-cut saws. Wherever possible, timber would be sold for firewood orhigher use purposes, 2/ otherwise it would be windrowed and burned. Sufficientbranch timber would be retained to obtain an adequate burn of the roots and areburn would be necessary. White Root disease is an increasing problem inreplanting, and every effort would be made to remove and destroy all sourcesof nutrients for it by following prescribed uprooting practices.

6.07 Planting distances would be 7.3 m x 3.6 m (24 x 12 feet) on flatland and 9.1 m x 2.4 m (30 x 8 feet) on slopes over 80 or where intercrops are

1/ RRIC refers to Rubber Research Institute of Ceylon.

2/ If properly and promptly treated to resist decay, rubber wood is a usefullumber for furniture, flooring and structural purposes. The project wouldendeavor to expand this use of old rubber trees by notifying potentialusers of the availability of supplies.

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planted. All replantings on slopes of over 8 0, wou]d be either on rehabili-tated terraces or on platforms; both would be aligned on the contour. Drainswould be dug between the rows. The location and frequency of these and othersoil conservation works would be decided by the REO during lining. Cover cropswould be established as early as possible to prevent erosion; if burningpermits, covers would be established in the pre-plarting period. Puerariaphaseloides and Desmodium sp. are currently used and would be recommendedunder the project. Covers would be established using cuttings and/or freshseed, and establishraent aided by the addition of rock phosphate.

6.08 Although planting can be carried out in both May/June and October/November, the May/June plantings are preferable since the risk of subsequentdrought is much lower than later in the year. The project would therefore aimto complete all plantings in June although inevitably some plantings wouldbe delayed until October/November. Supplies (11%) wDuld be made from buddedstumps planted in trenches on smallholdings at the time of the main planting.

6.09 Upkeep to Maturity. ASD officers would ensure that the RRISL recom-mendations for disease control, weeding frequency, cover crop and soil conser-vation measures would be followed. Details of the operations to be carried outfor the life of the plantation are given in Annex 1, Table 1. Fertilizer wouldbe distributed twice per year, but ASD officers would encourage smallholdersto retain half their allocations to make four applications in the planting andsecond years; thereafter, two applications per year would be satisfactory.

6.10 Inspection Procedures. ASD field officers (REOs and EOs) wouldconduct regular inspections of replantings as a basis for authorization ofreplanting payments. During the seven year period from uprooting to opening,eight standard inspections would be carried out; additional inspections wouldbe required for those replantings failing to meet prescribed standards. Re-planting payments would be made to smallholders by DRLC following satisfactoryinspection. The inspections would ensure that prescribed replanting procedureshad been followed. Further details of these procedures and standards arepresented in Annex 1. An agreement was obtained that: not later than January1, 1981, DRC and ASD would jointly issue a revised Advisory Leaflet for small-holders detailing the revised procedures to be followed for replanting underthe project which wouald be satisfactory to IDA.

6.11 Exploitation. Tapping of replanted rubber would commence in theseventh year after planting and all trees would be brought into tapping by theeighth year. The suggested tapping system would be alternate daily althoughsome smallholders would continue to tap daily. Yield stimulants would beused only for the last six years of exploitation. Further details of exploita-tion practices are given in Annex 1.

C. Intercropping

6.12 The project: would encourage the cultivation of intercrops togetherwith rubber in those areas technically suited to intercropping. The majorrisks of intercropping are that it would compete with immature rubber for

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nutrients, light, labor and capital and increase soil erosion. To minimizethese risks, intercropping under the project would be carefully supervised andpermitted only for certain crops which would be adequately fertilized andcultivated so as to minimize soil erosion.

6.13 The intercrops to be encouraged under the project would have goodmarket prospects, give a quick return, be shade tolerant, non-competitive,and require minimal soil disturbance. In addition, they would be crops whichRRISL had researched and satisfied itself as to their potential. All rubberto be intercropped would be spaced at 9.1 x 2.4 meters (30 x 8 feet) which isstandard for the sloping land generally found in the project area. ASDofficers would indicate the intercrop most appropriate to the smallholder'scircumstances although the final choice of intercrop would rest with thesmallholder. Bananas could be cultivated almost universally throughout theproject area and are expected to be the most common intercrop. A single rowwould be planted at the center of the inter-row with 3.65 m spacing within therow to give 296 plants/ha. The two favored cultivars would be edible typesequivalent to Gros Michel (synonym Ambon) and Cavendish. Planting material(suckers) are readily available locally. Smallholders would establish anursery in the year prior to planting equivalent to 10% of the final area,to reduce the cost of planting material. ASD staff would ensure that small-holders applied recommended levels of fertilizer (15:15:5) and controlledweeds to minimize competition. Banana is subject to few diseases althoughthere is some Panama disease and bunchy top and a possibility of nematodebuild-up after four years cultivation. No plant protection chemicals wouldbe used. Details of operations, inputs, yields are given in Annex 1, Table 3.Annex 4 Table 16 indicates the financial returns to smallholders. Details ofoperations, inputs, yields and returns for alternative intercrops (pineapplesand passionfruit) are available in the Project File. For the purpose ofeconomic analysis, it has been conservatively assumed that less than onethird of smallholders would grow intercrops on an area equivalent to 11%of the total area of holdings.

VII. DEMAND, PRICES, MARKETING, FINANCIAL ANALYSIS AND COST RECOVERY

Demand, Prices and Marketing

7.01 Demand. The demand outlook for elastomers, including both naturaland synthetic rubber is bright, and the competitive position of natural rubbercompared with synthetic rubber is now favorable. It has been strengthened byrecent technical and economic developments, such as the strong market penetra-tion of radial tires that require more natural rubber, and the improvement inthe price competitiveness of natural rubber compared to petroleum-basedproducts. Data on projected production from the world's existing area ofrubber and on the planting intentions of producing countries, indicate a futuredecline in the rate of expansion of natural rubber output. Unless investmentin natural rubber production increases within the next few years, growth inconsumption of natural elastomers will be severely constrained by supply. Ifthis supply shortfall is not filled by natural rubber, the synthetic rubberindustry will expand its capacity to produce polyisoprene rubber instead. Theproposed project investments are thus most timely and Sri Lanka would have no

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difficulty in exporting the additional project output. This output of about25,000 tons/year would represent some 5% of the incremental world demand. 1/

7.02 Prices. The rubber prices used for financial and economic analyseswere derived from the most recent forecast for RSS1 prices in 1990, and usedthroughout the project period. Even though the world market demand forelastomers is highly insensitive to price changes, the incremental projectoutput will not affect world market prices due to its small size relative tototal world rubber production. The incremental project output represents only5% of the projected increase in world demand and only 0.4% of the 1980 pro-duction of natural rubber (or alternatively 0.13% of the total 1980 elastomerproduction). Consequently, the possible depressive effect on (projected)world market prices, due to the project would be insignificant. In theanalysis the economic price for rubber is the world price for RSS1 correctedfor freight costs and quality differentials and expressed as the FOB Colomboprice (Rs 19.45/kg). The farmgate financial price within the project area(Rs 7.60/kg) was estimated by deducting projected levels of cesses and dutiesas well as handling charges and profit from the financial FOB price. 2/ Thebasis for estimates of the project's financial and economic prices for rubberare presented in Annex 4, Table 14.

7.03 Price Structure. The forecast rubber price of Rs 19.45/kg FOBColombo would be shared as follows: GOSL 55% (52.5% from export duty, and2.5% from cesses;) intermediaries 5%; rubber producers 40% (Table 15 of Annex4). Duties and cesses levied on rubber would thus ba quite high, in fact thehighest of any ANRPC 3/ country. For example, at the price level forecast for1990 total government deductions would be only 27% in Malaysia, and about 25%in Thailand. On the other hand, the Sri Lankan rubbar producer would benefitfrom a more generous package of government assistance in the form of replant-ing payments and fertilizer subsidies -- which are indirectly financed bylevies on rubber. GOSL deductions of 55% of the FOB price wot'd be appliedagainst replanting payments (22%) and rubber fertilizer subsidies (14%),leaving GOSL with 19% of which 8% would be used to administer the RubberReplanting Scheme. Thus GOSL's surplus would be only 11% of the FOB price.In practice therefore the Sri Lankan rubber producer would receive 76% of theFOB price (40% directly, and 36% in the form of government incentives to rubberproduction). Provided that the replanting payments are maintained at theprevailing rate in real terms (Rs 16,050 in 1979 prices), this would constitutean appropriate package by providing adequate incentives for the producer (para7.07), while making a substantial contribution to Govrernment General Revenuefor investment in other sectors (para 7.10).

1/ On conservative assumptions, an annual supply shortfall of about 0.5 Mtons is expected to develop by 1985. Source: The World Rubber Economy,Structure, Averages, Prospects: World Bank/FAO 1978.

2/ This approach reflects the price setting mechanism used by CPD (para2.21).

3/ Association of Natural Rubber Producing Countries.

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7.04 Rubber Marketing. The bulk of project output would be processedas at present (details in para 2.18). Under the project, a slightly increasedshare of the output (4-5%) would be processed by GPCs with a correspondingreduction in processing by smallholders. All project output would be marketedthrough existing channels (para 2.20) which provide an efficient and fairmarket to smallholders. As indicated, only small quantities of rubber areexpected to be sold as latex to crepe or block factories. In the longer term,it is possible that latex sales would increase in response to changes in worlddemand for RSS compared with other forms of rubber. Such a change is toouncertain to warrant investment in latex collection centers at this stage.

7.05 Intercrop Marketing. No difficulty is foreseen in the marketing ofbananas for which there is a strong local demand. The crop is traditionallygrown in home gardens throughout the rubber area and there is a well estab-lished network of small middlemen who go on foot from farm to farm to contractthe purchase of bunches before maturity. They later collect the bunches andtransport them by hired truck to the local fair where larger middlemen fromColombo purchase their weekly supply. The rapidly expanding tourist industryin Sri Lanka, and increasing demand from the Middle East is expected to main-tain the recent trend of strong local prices. Hence, for the financial analy-sis, current prices for bananas of average grade were projected throughoutthe period. (Rs 20/bunch at farmgate, resold at about three times that amountin Colombo.) Colombo prices less estimated costs for transport and handling(Rs 20/bunch) were used in the economic analysis (Rs 40/bunch).

7.06 Marketing of the alternative intercrops (pineapples and passion-fruit) would present no difficulty: there is a strong demand for these fruitswhich are purchased by GOSL's efficient Marketing Department and by privateprocessors. Details of marketing arrangements for pineapples and passionfruitare available in the Project File.

Financial Returns to Smallholders

7.07 An analysis of financial returns from replanting was carried outto ascertain whether the proposed replanting scheme would be attractive tosmallholders. Two extreme cases are presented: firstly the smallholder whouses only his family's labour, and secondly the smallholder who hires labour.It was felt that in the latter case, which applies to the larger smallholdings,the smallholder would be mainly interested in increasing his return to capital,and hence the financial internal rate of return (IRR) provides an appropriatemeasure of incentive. In the former case however, the smallholder does notcontribute capital and the IRR is less relevant. Such smallholders would beinterested in increasing annual income and the net return to family labor.The appropriate measures of incentive for such smallholders are thus the netincome increase (NII) 1/ and the net return per man-day (NR/MD) at full devel-opment. Values for these indicators are presented in Annex 4, Table 16. The

1/ NII = Present Value of Incremental Net IncomePresent value of Without Project Net Income

It represents the increase in the smallholder's average annual income asa result of the investment, and is expressed in percentage terms.

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results indicate that, without intercrops or financial assistance, the proposedinvestment has a marginal NII of 18% and an unsatisfactory IRR of 11% andhence would provide little incentive to either category of smallholder. How-everD with financial assistance in the form of replanting payments, replantingwould be attractive with a corresponding NII and IRR of 35% and 32%, respec-tively.

7.08 Replanting Payments and Smallholder's Cash Flow. Smallholders parti-cipating in the project would receive replanting payments to offset the costsof replanting. These replanting payments comprise both the supply of inputs inkind (planting material and fertilizer) and payments in cash. The cash paymentsprovide for the purchase of inputs not supplied in kind including payment forlabor inputs. For smallholders using only family labor, part of the cashpayments represents compensation for their own labor. The replanting paymentsconstitute an advance to replanters since they are fully recovered throughtaxes on rubber exports (para 7.10). The replanting payments would be spreadover eight installments as shown in Annex 4, Table 18. (A comparison withactual replanting costs is presented in Annex 4 Table 10)

7.09 These replanting payments, totalling Rs 16,050, would provide anadequate cash flow for the smallholder throughout the immature period as shownin Annex 4, Table 18. They would fully compensate the cash deficit 1/ ofa smallholder using only family labor (Case I of Table 18). Smallholders ableto sell their rubberwood, would earn a net surplus of about Rs 2,500 per ha,which would provide an additional incentive to replant. Smallholders whointercropped their immature rubber (Case II) would earn incomes in excess oftheir pre-project income during the immature period. Intercropping would thusprovide a further incentive to replant. The larger smallholder who uses allhired labor on his rubber plantation (Case III) would receive identical replant-ing payments. This is reasonable in view of the administrative difficultiesinvolved in providing differential replanting payments, the lack of long-termcredit for investments in agriculture, the marginal return on replanting with-out the replanting assistance (IRR of 11%), and in view of past low replantingrates among this category of producers in times of low replanting payments.Furthermore, some 57% of the replanting payment would comprise payment forlabor which would be largely drawn from the under-privileged landless group.Finally, the overall cost recovery by Government wDuld be most satisfactory,even excluding additional revenue from increased income tax levied on thelarger smallholders.

Financial Return to Government and Cost Recovery

7.10 While providing smallholders with adequate remuneration and incen-tives, the replanting scheme would also provide Government with an adequatefinancial return. Government contribution to the replanting scheme takes theform of replanting payments, administrative overheads and fertilizer subsidies.

1/ Defined here as cash outlay on inputs plus inzome foregone from uprootedold rubber.

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Its revenues from the scheme include cesses and export duties. An illustra-tive Government Project Cash Flow is shown at Annex 4, Table 19. High replant-ing payments and overhead costs, plus loss of revenue from uprooting wouldresult in a cumulative deficit of Rs 350 M (US$22.6 M) over the projectimplementation period. Government expenditure on fertilizer subsidies wouldfurther increase the total cumulative deficit to Rs 391 M (US$25.2) by PY6.An additional Rs 299 M (US$19.3 M) would be required between PY7 and PYIO tobring all project plantings into production, resulting in a peak cumulativedeficit of Rs 690 M (US$44.5 M) in PY10. Beyond PY10 there would be annualsurpluses in net GOSL revenue and all project costs would have been recovered(without interest) by PY15 when the cash flow shows a cumulative surplus ofRs 0.35 M (US$0.2M). Annual surpluses from that year on would progressivelyincrease from Rs 200 M (US$12.9 M) to Rs 251 M (US$16.2 M) in PY20 when peakyields would have been reached. The financial rate of return to Governmentfrom the project is estimated to be about 14%. The project cost recoveryindex (CRI) 1/ at the estimated opportunity cost of capital (12%) would be1.10. The CRI for replanting payments to smallholders would be 2.2 (i.e.,excluding administrative overheads and subsidies).

7.11 Although the replanting cess is earmarked to finance the nationalreplanting program, cess revenue would contribute only part of the revenuerequired to meet all replanting payments as they became due. As indicated inAnnex 4 Table 11, cess revenue would meet 71% of total replanting payments inPY1 but only 36% in PY6. The balance would come from the export duty which iscredited to Government general revenue. If the replanting cess were to fullymeet replanting payments as they became due, thus maintaining the liquidity ofthe Replanting Fund, it would have to be set at a level of about Rs 0.80/kg 2/(see paras 4.04 and 4.05).

VIII. BENEFITS AND JUSTIFICATION

Project Benefits

8.01 The project's direct benefits would result from increased productionand improved quality of rubber most of which would be exported thus improvingSri Lanka's balance of payments. The benefits would take the form of addi-tional Government revenue from export taxes levied on the project's rubberoutput and increased earnings for some 33,000 smallholders, half of whom wouldbe drawn from the poverty income target group. The project would also streng-then the national institutions responsible for smallholder rubber development,thus yielding benefits much beyond the immediate project.

8.02 At full development in 1999, successful project implementation wouldlead to incremental annual production of about 25,000 tons of rubber, a 15%increase over Sri Lanka's current annual production. At projected worldmarket prices, the gross value of the annual incremental output would decline

1/ CRI = NPV Government RevenueNPV Government Expenditures

2/ In 1979 dollars.

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from a peak of US$30 M 1/ in 1999 to about US$23 bN 1/ at the end of theproject life in 2009. Allowing for the added imports of fertilizers and agro-chemicals which would be necessary to obtain the projected yields, the projectwould represent a net annual foreign exchange savings of about US$28 M 1/ in1999. The processing component would yield additional foreign exchange earn-ings of about US$0.25 M by 1990, US$0.70 M in 1999, decreasing to US$0.6 Mby the end of the project life. Intercrops would provide an additionalUS$1.6 M 1/ annua'lly between PY2 and PY9 as a result of the increased avail-ability of fruits which would make it possible to release part of the con-strained domestic output for exports and for sale within Sri Lanka to thelocal tourism industry. In terms of net present value at the estimatedopportunity cost of capital (12%), total net foreign exchange savings fromrubber production alone would be about US$30 M ovEr project life, or approx-imately 6 times the foreign exchange cost. These foreign exchange benefitswould, however, bes slow to materialize due to the long gestation period ofrubber trees. External assistance support to GOSL's balance of payment inthe medium term would therefore be warranted.

Project Beneficiaries.

8.03 Some 27,000 smallholders would benefit f'rom the project by replant-ing. Another 6,000 smallholders would benefit from the processing componentof the project. 'In an effort to determine project impact on the target group(income below US$76 per capita per year or Rs 1,178), pre-project householdincome levels of project participants were estimated using results of previoussurveys. Data remain uncertain since household incomes were influenced markedlyby off-farm earnings for which only average figures were available. Missionestimates of per capita income for the four representative holdings of 0.4,0.8, 2.6 and 12 ha are shown in Annex 4 Table 20. It shows that pre-projecthousehold income of the two smaller holdings is below the poverty income level.Given that these fEigures are averages, one can expect a proportion of thesesmallholders to be absentee owners with possibly substantial off-farm earnings.Hence, to be conservative, it has been assumed that only 80% of the 0.4 ha andonly 70% of the 0.8 ha project participants would be drawn from the targetgroup. Under these assumptions, at least 47% of direct project beneficiarieswould belong to the target group and would share 26% of total project bene-fits. 2/ At present the income distribution in Sri Lanka is such that thetarget group (lowest 22% income group) receives some 10% of total privateincome. Thus, by allocating 26% of total project benefit to this group, theproject will have a positive impact on income distribution. At full develop-ment, the total income of the first category of smallholders would increaseby more than 50% on average but would still be below the poverty income level.The incomes of the next larger smallholders (0.8 ha) would increase 70% whichwould bring them above the poverty income level. These findings are sum-marized in Annex 4 Table 20 which indicates that as a result of the project,the proportion of project participants within the poverty income group woulddecrease from 47% to about 18%.

1/ In 1979 dollars.

2/ This analysis has been restricted to beneficiaries of the replantingcomponent and does not inc'Lude some 6,000 smallholders expected to bene-fit marginally through improved processing services under the project.

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Employment

8.04 Under the assumption that without the project, plantations of alreadyover-aged rubber would be abandoned after five years, the project would resultin a net increase in labor demand of 5 million workdays/year at full develop-ment, or approximately 19,000 full-time jobs. In practice, however, it islikely that some of this land would be replanted using poor cultural techniquesand low yielding seedlings even without assistance from a replanting scheme.The project would therefore provide fewer jobs than indicated above. Assumingthat half the project rubber area would have been replanted anyway, the projectwould provide an additional 9,500 full-time jobs. The project's impact onlabor productivity would be more certain: the net return to labor wouldincrease fourfold to reach Rs 32 at full maturity (15 years after planting).Since many hired tappers are paid on the basis of output, it can be expectedthat part of the incremental earnings from rubber would be passed on to theselaborers, most of whom would certainly belong to the poverty income group.Thus, the project would have a significant but unquantifiable impact on theincomes of many poor laborers in the project area.

Environmental Effects

8.05 The project would have no adverse effects on the environment. Pro-ject replantings would generally improve ground cover and reduce soil erosion.Agro-chemical use with rubber is minimal and the chemicals are non-toxic. Thesmall scale processing supported by the project has no associated effluentdisposal problems.

Economic Analysis and Sensitivity Tests

8.06 The economic analysis has been carried out for the project as awhole. Summary economic costs and benefits are presented in Annex 4, Table21 and details are included in the Project File. The following assumptionshave been used in the analysis.

(a) benefits and costs are expressed in constant end-1979prices, net of identifiable local taxes and subsidies;

(b) the incremental project output of rubber and bananas isvalued at forecast world prices as described in paras 7.02and 7.05;

(c) the exchange rate is taken at a constant Rs 15.5 = US$1.0,which was the prevailing official exchange rate (OER) attime of appraisal;

(d) incremental farm labor is valued at a seasonally adjustedwage rate ranging from 50% to 100% of the peak market rate,

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in order to reflect the prevailing unemployment and under-employment in the project area. 1/

(e) The economic prices for traded goods (ruhber, bananas, fertil-izers and equipment) are based on their 'order prices at theOER. The domestic cost components, i.e. transport and market-ing charges, are adjusted by conversion factors (CF) respec-tively 1.11 (CF for road transport) and 0.91 (Standard CF).The specific conversion factors applied to all major non-tradedinputs are indicated in Annex 4, Table 22.

(f) Expected benefits from upgrading of rubber through betterprocessing as a result of the processing component have beenincluded;

(g) Production foregone as a result of uprooting and replantingof rubber is fully costed at an average yield of 265 kg/ha forthe estimated remaining productive life of the plantation (fiveyears);

(h) Full costs of the institutional support components (DRC, ASD,technical assistance, research and project administration)have been included, without allowance for residual values onbuildings and equipment; and

(i) The period of analysis is 30 years.

Using the assumptions given above, the best estimate for the ERR is 23%, andfor the NPV (at the estimated opportunity cost of capital of 12%) Rs 484 M.Sensitivity tests indicate that the project is remarkably insensitive to allimportant parameters and would therefore remain viable under a variety ofadverse circumstances (Table 8.1).

1/ Rs 12 per day during peak periods of agricultural activity correspondingto land preparation, sowing and harvesting of the maha paddy crop (20%of project labor requirement); Rs 10 per day (luring medium peak periodscorresponding to land preparation, sowing and harvesting of the yalacrop (20% of project labor requirement); and Rs 6 per day at all othertimes (60% of project labor requirement. Based on these assumptions,an average shadow wage rate of Rs 8/day (or 66% of the market rate) wasobtained.

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Table 8.1: SENSITIVITY ANALYSIS

Test Cases ERR (%) NPV (Rs M)

Base case 22.8 483.7No return from processing component 22.0 448.9No return from intercropping 19.3 383.8No sale of rubber-wood 21.6 458.2Farm labor at market rate 22.4 451.620% decrease in rubber yields

or price /a 21.5 344.020% decrease in rubber yields

and price /a 20.0 232.450% increase in fertilizer prices 20.4 398.420% increase in rubber production

costs 21.3 425.720% increase in all overheads 22.3 473.720% increase in all costs 20.8 415.71 year lag in rubber production 21.4 398.12 year lag in rubber production 20.4 321.5

/a Switching Value for Rubber Yield at OCC (12%) is 69% belowthat projected or 420 kg/ha at full maturity instead of1,350 kg/ha. Rubber Price switching value is Rs 5.9/kgcompared to the base estimate of Rs 18.9/kg.

Project Risks

8.07 The project faces no major risk. The economic rate of return isrelatively insensitive to variations in the key parameters such as rubberyields, prices and production costs. The techniques and inputs for replantingand maintenance are all proven. It is possible that the rate of uptake of theGPCs may be less than projected in the project. However, even if no improve-ments in rubber quality were achieved under the project, the ERR would bereduced by less than one percentage point (Table 8.1). There is, however, arisk that the project may over-extend the implementation capacity of theconcerned institutions. Should this occur, replanting targets would not bemet and both benefits and costs would be less than projected. The projectwould, nonetheless, remain viable under such circumstances. The problem ofconstrained implementation capacity has been directly addressed in designingthe project. Firstly, it has been accepted that some 30% of the over-agedrubber now awaiting replanting would have to be excluded from this firstproject. Secondly, the annual replanting targets build up slowly giving timefor the institutions to recruit staff and to implement the new procedures.Thirdly, the institutions themselves would be strengthened under the projectand their activities would be coordinated and monitored by PCU. Finally, some70% of project disbursements are directly tied to actual replanting achieve-ments, providing a strong incentive for GOSL to ensure that implementationcapacity does not become a constraint.

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IX. RECOMMENDATIONS

9.01 During regotiations, the following principal assurances were obtainedfrom GOSL:

(a) (i) GOSL would establish a legal basis for the operationof GPCs satisfactory to IDA not later than March 31,1981; and

(ii) no new GPCs would be established in the project areauntil the potential members pledged to collectivelysupply not less than 100 kg of latex per day of opera-tion (para 3.27);

(b) GOSL would (i) provide the Replanting Fund with the resourcesnecessary to finance deficits involved in implementing theproject and sustaining the replanting program at the optimumrate of about 8,100 hectares per year; and (ii) annuallyreview the financing requirements of the Fund to carry outthe project and thereafter to continue the replanting scheme,and submtit to IDA the results of that review (para 4.05);

(c) GOSL would ensure that the additional accounting staff re-quired by ASD and DRC would be appointed and posted not laterthan January 1, 1981 (para 4.08);

(d) ASD would be established as a separate department and fullystaffed not later than January 1, 1981 (para 5.11);

(e) an adequately staffed Rubber Policy and Planning Unit wouldbe established within MPI not later than January 1, 1981with terms of reference satisfactory to GOSL and to IDAwhich would include inter alia responsibility for advisingthe RPRC on levels of industry cesses, duties and replantingpayments (para 5.25); and

(f) a Rubber Policy Review Committee would be established withinMPI whose powers and composition would be mutually acceptableto GOSL and IDA, not later than January 1, 1981 (para 5.27).

9.02 During negotiations, the following major agreements were obtainedfrom GOSL:

(a) MPI would periodically review travel allowances in relationto operating costs and would undertake to ensure that projectvehicles are fully utilized (para 3.17);

(b) staff receiving post-graduate training under the projectwould remain with their current employer for at least theperiod of the bond as stipulated under the present govern-ment rules (para 3.31);

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(c) the position of Project Coordinator would at all times befilled by a person whose qualifications and experience weresatisfactory to IDA (para 5.10);

(d) GOSL would consult with IDA concerning any proposed changesto its procedures for the administration of the replantingscheme (para 5.20);

9.03 With the above assurances, the project would be suitable for an IDAcredit of US$16.0 M on standard IDA terms. The borrower would be the Govern-ment of Sri Lanka.

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ANNEX IPage 1

SRI LANKA

RUBBER REHABILITATION PROJECT

Technical Aspects and Project Monitoring

A. Replanting Procedures

Replanting Operations and Costs

1. The replanting operations have been described in Chapter VI andtheir estimated costs together with further detailed are presented in Table 1.

2. Planting Materials have been described in Chapter VI (para 6.04).The project would use brown budded stumps initially although it is suggestedthat green budding should be further investigated by RRISL since it offersconsiderable time savings. 1/ The use of green budding by smallholders shouldalso receive consideration from RRISL. To produce brown budded stumps, freshseed would be collected in July/August, germinated and planted in seedlingnurseries. Budwood nurseries would be cut back in November/December of thesame year and budding carried out 14 to 16 months later. The stumps would bepulled in May about: twelve months after budding, trimmed, labeled and packedfor dispatch. The budded stamps would be packed in bundles of 25 for transportto the replanting areas. 2/

3. Fertilizer use has been described in Chapter VI (para 6.09). GOSLis currently considering the use of urea-based fertilizers for smallholdersrather than those based on sulfate of ammonia. In view of the poor handlingcharacteristic of urea, it is recommended that urea-based fertilizer be care-fully evaluated in a small but practical field trial involving smallholders,before introduction of such fertilizers nationwide.

4. Exploitation Practices have been briefly mentioned in Chapter VI(para 6.11). Table 1 provides further details. Tapping would commence in areplanted stand when 50% of the trees reach a girth of 50 cm at 90 cm abovethe union. ASD officers would provide stencils anc, demonstrate the marking ofpanels; instruction would also be given in tapping, bark conservation and pro-cessing. The system recommended would be s/2 d/2, 3/ but owners of very small

1/ Green budding may be carried out with 5-6 mont:h old seedlings which couldbe delivered to smallholders one month after budding.

2/ Per hectare distribution would be 494 plants; 445 for field establishmentand the balance planted in trenches for later infilling of vacancies.

3/ Tapping systems are by convention indicated by the symbols s/2 (forhalf spiral cut) and d/2 for alternate daily tapping.

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ANNEX 1Page 2

areas would probably still tap daily. Other owners would usually tap s/2 d/2,but after long periods of rainy weather, would recover crop by daily tapping.ASD officers would stress the need to avoid a prolonged period of daily tapping.Tapping would be stopped for a month during wintering (February). Some treesare expected to reach opening standards in the seventh year and tapping wouldcommence in April of that year with the balance brought into production in theeighth year. Annex 1, Table 1 indicates the operations, inputs and costs fromthe seventh year over the normal s/2 d/2 tapping on virgin and first renewedbark to the 24th year.

5. Stimulation would only be employed in the six final years of exploit-ation. Yield stimulation during the seventh to 24th years would not bepractised: the necessity for large nutrient inputs would not be understoodby smallholders and under-fertilization would reduce the productive life.In addition, since smallholders commonly use family labor with few alterna-tive employment opportunities, the increased labor productivity resulting fromstimulation and reduced tapping frequency has no particular appeal. Underthe project, stimulant would be applied three times per year in the 25th and26th years, and the tapping system would be amended to 2 s/2 d/3 (25th year)and 2 s/2 d/2 (26th year). In the 27th and 28th years, stimulant would beapplied four times per year on a 2 s/2 d/2 system. The 2 s/2 cuts would be onopposite sides of the tree, separated by about 30 cm to avoid any girdlingeffect. Stimulant would be applied four times a year for the final two yearswith a 4 s/2 d/2 system, opening two upward cuts above the existing downwardcuts. The use of stimulant for final exploitation would require controlledtapping (not what is locally termed "slaughter tapping") to obtain worthwhileresults. ASD officers would offer courses and advice on the methods to beemployed in specific cases. It would be advisable if RRISL were to reinvest-igate such controlled final exploitation and also the possibility of use ofvirgin bark with stimulant above the existing 90 cm tapping panels. With theuse of a stool (ladders being impractical on steep terrain), it is possiblethat high yields would be obtained.

Yields

6. The yield projections for replanted rubber under the project areshown in Table 2. A separate projection has been given for rubber grown withintercrop which is assumed to yield slightly less during the first nine yearsresulting in an average lifetime yield some 2% below that of rubber grownwithout an intercrop. Stimulation is assumed to start in the nineteenth yearof tapping and to be continued for six years although some smallholders mayhave insufficient bark reserves for a full 24 year period of exploitation.The projected yields are modest and are based on the performance of PB 86.Since it is likely that clones with higher yields than PB 86 would be plantedwithin the project period, the projections understate the likely incrementalrubber production.

Inspection Procedures and Replanting Payments

7. Under the project, the procedures for replanting would be modifiedand an Advisory Leaflet describing the new procedures would be issued to small-holders. The Advisory leaflet would incorporate the new schedule of inspec-tions, and replanting payments as described below.

- 54 - ANNEX IPage 3

8. The first instalment (Rs 1,000/ha) would be paid when clearing anduprooting had been satisfactorily completed. All trees and other vegetationmust be uprooted and either removed from the holding or burnt. The inspectionto authorize this payment would be conducted between February and April.Lining, holing, and specification of soil conservation works would be completedduring this inspection.

9. The seccnd instalment (Rs 3,550/ha) would be paid when planting hadbeen completed and the area securely fenced with all conservation worksconstructed and covers established. To be eligible for payment there must bea full stand of trees (445/ha) with stumps for supplies planted in trenches.All points must be circle weeded. This payment would normally be authorizedbetween July and September of the planting year.

10. The third instalment (Rs 2,500/ha) would be paid following satis-factory inspection 12 months from planting. The replantings should have beenregularly weeded and fertilized, covers should be well established, intercropsif planted should conform with requirements (see para 6.12 et seq) and soilconservation works maintained.

11. The fourth, fifth, sixth, seventh and eight instalments would bepaid following achievement of satisfactory growth as measured during annualinspectons around the planting anniversary. (Replanters may request earlierinspection and authorization). The growth as measured by girth incrementwould be compared with norms to be established for each clone. The tablebelow shows the norms for PB 86. The minimum stand should be 370/ha.

Instalment Required girth at 90 cm above unionNumber and Areas above Area below Expected YearsAmount (Rs) 2,500 mm rainfall 2,500 mm rainfall from Planting

4 (2,500) 10 cm 10 cm 25 (2,500) 16 cm 14 cm 36 (2,000) 26 cm 24 cm 47 (1,000) 36 cm 32 cm 58 (1,000) 50 cm /a 50 cm /a 6

/a 60% of trees should have achieved this girth before opening. Replant-ings in which trees were opened before 60% ac'hiieved 50 cm girth wouldnot be eligible for the final payment.

Arrangements for Supply of Planting Material

12. As indicated in Chapter VI, SPC and JEDB estates within the projectarea would produce budded stumps for DRC on a contract basis. The 33 estatescurrently contracted to supply budded stumps for 1981 plantings are indicatedin Table 3. Based on current nursery areas, these estates would produce960,000 budded stumps for 1981, some 170,000 or 22% over present estimatedrequirements. It is anticipated that any oversuppLy could be used outsidethe project area.

- 55 - ANNEX IPage 4

13. In view of the importance of ensuring adequate supplies of plant-

ing materials, formal contracts for the production of planting materialbetween DRC and the estates would be established. The contract should includeinter alia:

(a) An estimate of numbers and types of budded stumps required24 months in advance of delivery.

(b) An agreement on delivery price (ex-estate on trucks) with anescalation clause based on, perhaps, an index of labor costs.

(c) A statement of required quality standards and the basis foracceptance rejection.

(d) Acceptance of a system of quality control based on three visitsper year by a Visiting Agent with a report to be submitted toboth Buyer and Seller; the Seller undertaking to implement Visit-ing Agents' recommendations.

(e) Guaranteed access by the Buyer to the nursery provided noticeis given.

(f) An agreement that delivery shall only be made to the Buyer orhis authorized representative.

(g) Payment within 30 days subject to arbitration of disputes.

(h) Arbitration by representatives of both sides with expertopinion to be provided by the RRISL.

B. Project Monitoring

14. Monitoring within ASD would be based on a series of work plansand systematic work scheduling which would be subject to regular checks foreach level of field staff. Indicative annual workplans would be prepared foreach field officer based on DRC records of registered holdings and replanterswithin each range. These plans would cover all ASD functions outlined above(para 5.11). Each officer would use the annual workplan as the basis forpreparing weekly workplans which would indicate the functions to be performedand holdings to be visited in the forthcoming week. The weekly plans would besent to the supervisor prior to the start of the week together with actualwork achievements for the previous week. These work records for each level offield staff would be monitored by the immediate supervisors. The supervisorwould visit subordinates weekly to check whether the officer was following thecurrent work program, and, by visiting holdings already reported to have beenserviced by the officer, to check whether the work had been carried outadequately. Minor infringements would be dealt with by the supervisor but allmajor deviations from the work plan would be reported to the next highestlevel within ASD for disciplinary action.

- 56 - ANNEXI

Page 5

15. Monitoring within DRC would comprise both internal and externalsystems. The internal system would monitor the processing of DRC's admin-istrative work in relation to established work norms and processing times.Each functional unit within DRC would be required to report its work achieve-ments weekly to the Assistant Controller in charge of each regional office.DRC would also set indicative annual workplans on the basis of projectedworkloads from existing and anticipated replanting activities. These workplanswould specify target dates by which various critical actions were to becompleted. The head office of DRC would monitor the work of the regionaloffices on the basis of monthly reports from the Assistant Controllers,supplemented by regular visits to each regional office. The external monitor-ing system of DRC would consist of field checks on replanting inspections byASD and would include all observations required in the ASD inspection. TheDRC inspectors would be provided with a list of holdings to visit by theAssistant Controller for each region but would not be informed as to theoutcome of the ASD inspection. Any discrepancy between the recommendation ofASD staff and those of DRC inspectors would be reported to the Rubber Con-troller who in turn would take the matter up with the Director of ASD.

16. PCU would monitor overall project implementation. Together withthe staff of the implementing agencies, the PCU would prepare annual workplansagainst which project implementation would be assessed. PCU would assist theimplementing agencies in the preparation of progress reporting formats includ-ing the selection of appropriate key progress indicators. The implementingagencies would submit monthly progress reports tc PCU which would provide thebasis for the formal monitoring of implementation. They would be supplementedby reports on procurement and disbursement activities which would be preparedby PCU. Project accounts would also be reviewed by PCU as part of itsformal monitoring role. PCU would monitor implementation informally throughfield visits and personal contacts with the implementing agencies to provideearly indications of potential implementation problems which PCU would attemptto resolve. PCU would bring outstanding problems to the attention of RPRC fortheir resolution. PCU would also monitor the adequacy of budgetary allocationsfrom the Treasury to the implementing agencies.

SRI LANKA

I'

Per Hectare Replanting Costs for Rubber (Labor valued at Rs 17.5 /MD)

Per Hectare Replanting Costs for Rubber Smallholdings

Second Year Upkeep

CALENDAR YEAR OPERATIONS Work Days Material Labor Total 1) Weeding (7 months by 12 man days,

Per Hectare (Rupe) (Rupees) (Rupees) 1 month X 5 man days) 89 1557 1557

2) Pests and diseases:Pre-Planting Year Materials 65 65

(1) Felling, rooting, cutting, stacking, Labor 5 88 88

burning ( 2 1/2 trees per man day) 140 2,450 2,450 3)Supplying labor (44 plants to vacancies) 3 53 53

Total 140 - 2,450 2,450 4) Fertilizer:960gm of R462 Mg to 445 plants in 4

Planting Year applications (427kg at Rs 1.103/kg) 471 471

(1) Reburning 3 52 52 Labor for application 10 175 175

(2) Rehabilitation of plantforms, 5) Covers: Reseeding 10% 26 26

terraces and drains (silt pits) 37 648 648 Labor 1 18 18

(3) Lining, including cutting pegs 5 88 88 TOTALS 108 562 1891 2453

(4) Holing, 462 holes, 60cm X 60cm X 75cm(12 holes per man day) 37 648 648

(5) Filling holes (45 holes/man day) 10 175 175 Third Year Upkeep

(6) Fencing material 1,390 1,390 1) Weeding (7 months X 8 man days,

Labor for erection 15 263 263 1 month X 4 man days) including

(7) Covers: Seed, 12kg, Rs 22/kg 264 264 pruning 60 1050 1050

Rock phosphate, 50kg, Rs 0.69 35 35 2) Pests and diseases:

Labor, drilling seed and Materials 65 65

fertilizer 10 175 175 Labor 5 88 88

(8) Weeding inter-rows and covers. One 3) Fertilizer:

round at 20 man days, one at 15 man 1.44kg of R462 Mg to 432 plants in

days, eight at 12 man days 131 2,293 2,293 2 applications (622kg at Rs 1.103/kg) 686 686

(9) Planting (including supplies) Labor for application 10 175 175

Purchase of 494 budded stumps at 4) Soil Conservation, terraces and drains 5 88 88

Rs 2.50 1,235 1,235 5) Fencing repair 3 53 53

Transport to holding at Rs 0.2 99 99TOTALS 83 751 1452 2205

Planting (30 stumps/man day) 17 298 298 T

(10) Fertilizer:120gms rock phosphate/plant Fourth Year Upkeep

(60kg at Rs 0.69/plant) 41 41 1) Weeding (7 months X 6 man days120gms R462 Mg/plant including 1 monthsXX2 man days)

supplies (60kg at Rs 1.103/kg) 66 66 1 month X 2 man days) including

480gm R462 Mg to field stand of 445 2) Pesrs and diseases:

plants in 4 applications 35ad s(214kg at Rs 1.103/kg) 236 236 Materials 35 35

240 gm application of crushed dolomite 3) 4e70izr

to field stand (107kg at Es 0.18/kg)199 3) Fertilizer:to fiel stand(107kg t Rs 018/kg)19 19 1.44kg of R462 Mg to 420 plants inLabor for application 12 210 210 14k fR6 gt 2 lnsi

(11) Pests and diseases: 2 applications (605kg at Rs 1.103/kg) 667 667

Materials 50 50 Labor for application 10 175 1753s4) Soil Conservation, maintaining terraces

Labor for application 3 52 52 and drains 5 88 88

TOTALS 280 3,435 7,352 8,337 TOTALS 63 702 1103 1805

1/ See Annex 4, Table 10.

-s H4

Fifth Ylear UFkcg-pFifth Yeear ( kmonchs X 6 man days, Eighth Year (12 Months Taping)

1 month X 2 man days) 44 770 770 1) Weeding (6 months X 2 man days) 12 210 2102) Pests and diseases: Materials 35 35 2) Pests and diseases: Materials 35 35

Labor 4 70 70 Labor 4 70 703) Fertilizer: 3) Fertilizer:

1.44kg of R462 Mg to 415 plants in 2 1.44kg of R462 Mg to 408 plants in 2applications (598kg at Rs 1.103/kg) 660 660 applications (588kg at Rs 1.103/kg) 649 649

Labor for application 9 158 158 Labor for application 9 158 1584) Soil conservation, maintaining terraces 4) Tree girth census and marking for opeining 1 18 18

and drains 3 53 53 5) Tracing tapping panels on 200 trees 2 35 35

TOTALS 60 695 1051 1746 6) Clearing tappers paths 2 35 357) Tapping equipment (as year seven) 190 1908) Tapping and processing labor for s/2 d/2;

Sixth Yea U k 2 tasks, 180 tappings each at 5 1/2Weedn months X 4 man days, hrs./task 248 4340 4340

1 month X 2 man days) 30 525 525 Processing 620kg rubber 19 333 3332) Pests and diseases: Materials 35 35 9) Soil conservation. Upkeep of terraces

Labor 4 70 70 and drains 2 35 353) Fertilizer: TOTALS 299 874 5234 6108

1.44kg of R462 Mg to 408 plants in 2applications (588kg at Rs 1.103/kg) 644 644

Labor for application 9 158 158 Ninth to Twenty-Fourth Years4) Soil conservation, maintaining 1) Weeding (6 months X 2 man days) 12 210 210

terraces and drains 3 53 53 2) Pests and diseases: Materials 35 35

TOTALS 46 679 806 1485 Labor 4 70 703) Fertilizer:

1.44kg of R462 Mg to average 312Seventh Year (9 months Tap .im) plants in 2 applications1) Weeding (8 months X 2 man days) 16 280 280 (450kg at Rs 1.103/kg) 496 4962) Pests and diseases: Materials 35 35 Labor for application 7 123 123

Labor 4 70 70 4) Clearing tappers paths and removing3) Fertilizer: dead trees 2 35 35

1.44kg of R462 Mg to 408 plants in 2 5) Tapping equipment (every 4th year),applications (588kg at Rs 1.103/kg) 649 649 average cost 50 50

Labor for application 9 158 158 6) Tapping and processing labor: 1 1/2 tasks/5 Tree gftth cene'iF ond -srkl-n, fr- n-e,I 2 35 35 180 tappings each at 5 1/2 hrs./task 214 3745 37455) Tracing tapping panels on 204 trees 4 70 70 Frocessing average 1l0kK -ubLei 2. 43e A25

6) Cleaning tappers paths 2 35 35 7) Soil conservation. Upkeep of terraces7) Tapping equipment: Spouts 40 40 and drains 1 18 18

Hangers 40 40 TOTAL AVERAGE YEAR 265 581 4639 5220Half shells 20 20 TOTAL 16 YEARS 4240 9246 74,224 83,520Buckets (2) 50 50Knives (1) 40 40

8) Tapping and processing labor at one 200tree task (Tapping 2 1/2 hrs., drip-ping 1 hr., collection 1 1/2 hrs.,transport 1/2 hr., total 5 1/2 hrs. day)for 135 tapping days s/2 d/2 93 1628 1628

Processing 240kg rubber 17 298 298

TOTALS 147 874 2574 3448

Twenty-Fifth Year1) Weeding (6 months X 2 man days) 12 210 2102) Pests and diseases: Materials 35 35 Twenty-Ninth and Thirtieth Years

Labor 4 70 70 1) Stimulant: Materials ta4U trees X 43) Clearing tappers paths and removing applications at Rs 0.50) 480 480

dead trees 2 35 35 Application labor (100 trees/man day) 10 175 175

4) Stimulant: Materials: ethylene releasing 2) Tapping and processing labor for 4 s/2 d/2,(300 trees X 3 applications at Rs 0.50) 450 450 1 1/2 tasks at 80 trees a task,

Application labor (100 trees/man day) 9 158 158 6 1/2 hrs. 439 7683 76835) Tapping and processing labor for 2 s/2 d/3, Processing 870kg rubber 21 368 368

one task of 133 trees (Tapping 3 hrs., TOTAL 470 480 8226 8706dripping 1 1/2 hrs, collection 1 1/2 hrs, TOTAL 2 YEARS 940 960 16,452 17,412transport 1/2 hr, total 6 1/2 hrs) 293 5127 5127

Processing 1225kg rubber 26 455 455

TOTAL 346 485 6055 6540 Notes to Table

1. All wages at Rs 17.50 per man day.Twenty-Sixth Year1) Weeding (6 months X 2 man days) 12 210 210 2. Since replanting is assumed, no underbrushing is included.2) Pests and diseases: Materials 35 35

Labor 4 70 70 3. Pruning of stock shoots is included in the earlier weeding rounds.

3) Clearing tappers paths and removingdead trees 2 35 35 4. R462 Mg is a 9:5:3:1 mixture.

4) Stimulant: Materials (290 trees X 3 appli-cations at Rs 0.50) 435 435 5. Fertilizer costs including delivery charges at subsidized prices are:

Application labor (100 trees/man day) 9 158 158 Rock phosphate Rs 690/metric ton5) Tapping and processing labor for 2 s/2 d/2, Crushed dolomite Rs 180/metric ton

1 1/3 tasks of 120 trees, 6 1/2 hrs. 390 6825 6825 R462 Mg Rs 1103/metric ton

Processing 1070kg rubber 23 403 403

TOTAL 440 470 6601 8171 6. Task size is a mission estimate of 200 trees per tapper for s/2 d/2 tapping, 120 treesfor 2 s/2 d/3 tapping, 100 trees for 2 sf2 d/2 tapping and 80 trees for 4 s/

2d/2

tapping. The latter assumes two upward cuts. Labor productivity is based on

Twenty-Seventh and Twenty Ei hth Years reported task sizes and is 20 to 35X below that of other rubber producing countries.1) Weeding (t montls A mang7 12 210 210 The major factors appear to be the steep topography over much of the area, un-

2) Pests and diseases 2 35 35 warranted care in making shallow tapping cuts, and lack of routine in tapping/

3) Removing dead trees 2 35 35 collection procedures.4) Stimulant: Materials (260 trees X 4 appli-

cations at Rs 0.50) 520 520 7. Stimulant costs are an estimate of the cost of purchase of the proprietary stimulant

Application labor (100 trees/man day) 11 193 193 "Ethrel" and consequent dilution. Prices may fall.

5) Tapping and processing labor for 2 s/2 d/2,one task of 120 trees, 6 1/2 hrs. 293 5128 5128 8. Application costs for stimulant can very according to the method employed.

Processing 955kg rubber 22 385 385Processing 955kg rubber 22 385 385___________________________________________________ 9. It is unlikely that sufficient bark will remain for the 29th and 30th years explof-

TOTAL 342 555 5951 6506 tation in many smallholdings. Commitment of final exploitation would depend onTOTAL 2 YEARS 684 1120 11,902 13,012 advice from the local extension officer.

10. The large labor Inputs for final exploitation may deter some smallholders.

11. Processing labor costs were computed at a standard rate for diluting, coagulating and

smoking and a variable rate, depending on crop, for rolling.

December 17, 1979. > Dm ' '

- 60 -

SRI LANKA ANNEX 1Table 2

Smallholder Rubber Rehabilitation Project

Yield Profiles and Tapping Systems,Smallholder Budded Rubber

YEAR FROM TAPPING EXPLOITATION FREQUENCY OF YIELD IN KG./HECTAREPLANTING YEAR SYSTEM STIMULATION W/ COVER CROPS W/INTER

CROPS

1.2345-67 1. (9 mos.) sf2 d/2 300 2408 2 II-675 6209 3 it-840 78510 4 if-955 90011 5 It.- 1070 101012 6 - 1180 102513 7 - 1235 123514 8 1290 123515 9 1350 129016 10 1350 135017 11 - 1350 135018 12 - 1350 135019 13 2- 190 129020 14 2- 35 123521 15 " - i180 118022 16 "- 1.125 112523 17 - 1070 107024 18 - 1010 101025 19 2 s/2 d/3 3 1225 122526 20 2 s"2 d/2 3 1070 107027 21 4 1070 107028 22 4 900 90029 23 4 s/2 d/2 4 955. 95530 24 4 785 785

December 17, 1979.

- 61 -

ANNEX 1Table 3

SRI LANKA

Smallholder Rubber Rehabilitation Project

Intercropped Bananas: Inputs and Yields(Per Hectare)

LABOROPERATION MAN DAYS MATERIAL Rs 12/ YIELD

MAN DAY (BUNCHES)

YEAR 11) Holing (including lining) 15 1802) Planting Material (Rs 1/point) - 296 -3) Transport (estimated) - 150 -4) Planting 12 - 1445) Weeding (2 rounds/annum) 18 - 2166) Fertilizer (1 kg/clump/annum) - 370 -

(296 kg at Rs 1.25/kg7) Fertilizer application (1) 7 - 848) Harvesting 6 - 729) Tools - 100 -

TOTALS 58 916 696 150

YEAR 21) Weeding (2 rounds/annum) 20 - 2402) Fertilizer (2 kg/clump/annum) - 740 -

(592 kg at Rs 1.25/kg)3) Fertilizer application 14 - 1684) Supply vacancies 2 _ 245) Removing suckers 4 - 486) Transport - 300 -7) Harvesting 12 - 144

TOTALS 52 1040 624 290

YEAR 3

As for Year 2 except:

1) No supply -2 - -242) Extra harvesting 6 - 72

3) Extra transport - 50 -TOTALS 56 1090 672 290

YEARAs fo Year 3 except:1) Re uction in transport - -50 -2) El mination of plants 9 - 108 -

TOTALS 65 1040 780 250

i I

- 62 -ANNEX 1Table 4

SRI LANKA

Smallholder Rubber Rehabilitation Project

Estates Producing Planting MaterialE for 1981

DISTRICT RESPONSI'3E ESTATE ]NA1E LOCATION Nl?MERS OFAUTrHORIT` BUDDED STUMPS

Kalutara SPC Sorana S. P'. Horana 50,000Perth S. P. " 40,000Mirishena S.P. Mahagoma 20,000Frocester S. P. Govinna 40,000Halwatura S. P. Ingiriya 40,000Yatadola S. P. Matugama 40,000St. George S. P. " 40,000Eladuwa S. P. Paiyagala 40,000Miriswatte S. P. Walipenne 40,000Pimbura S. P. A,alawatte 40,000Hillstrean S. P. Bilathsinhala 10,000

SUBTOTAL 400,000

Ratnapura SPC Mahawela S. P. Ritnapura 45,000Pussella S. P. Parakadewa 45,000Peenekande S. P. Uda-Karawita 30,000Durampitiya S. P. Gatehat'he 45,000Galatura S. P. Ktriella 45,000Matuw.agala S. P. " 30,000

SUBTOTAL 240,000

Klegalle JEDB Udapolla Estate Doraniyagala 20,000Panawatte Estate Yatiyantota 20,000Avissawella Estate Pilwakpitiya 20,000Moralioya Estate Riiwanwella 20,000Sunnycroft Estate Waharaka 20,000Clunes Estate Dehiowita 20,000Atale Estate AI:ale via Kegalle 20,000Kiripiruwa Estate Yontiyantota 20,000Pallegama Estate MRyandurapola 20,000Ederapolla Estate Biilathkohupitiya 20,000Urumiwella Estate " 20,000Halgolla Estate Yctiyartota 20,000Parambe Estate UTdugoda 20,000Ambadeniva Estate Aionayake 20,000'Hatbawe Estate R mbukkama 20,000Etana Estate Wcrikarola 20,000

SUBTOTAL 320,000 1/

TOTAL 960,0C0 2/

1/ *Estate and subtotal figures liable to revision.

2/ 1620 hectares are die for replanL.ing in 1981, at 494/1-ectarc (including s Lpi,li.s)which requires some F00,000 units; there wotuld arpeur to be a potential oc-r s;pplyof lf0,000 unlits (3 '4 hi. or 20. at a possible ccst of Ks 400,000). Althougl thisMAight he taken up b 'ncreased azpplications or b1 e thclc sales, it points tc thltrequlrernct for foril l arrangements in the 1980 cc der.

- 63 - ANNEX 2Appendix 1Page 1

SRI LANKA

RUBBER REHABILITATION PROJECT

Draft Terms of Reference for Technical Assistance

Replanting Scheme Administration

1. Background. The Department of Rubber Control (DRC) plans to improveits procedures for the administration of a rubber replanting scheme. The majorobjectives of the intended improvements would be:

(a) to make the scheme more attractive to smallholders by reducingto a minimum the various actions required of the smallholder inapplying for, and being provided with, replanting assistance;

(b) to simplify procedures for the granting of replanting permitsand supply of replanting inputs to minimize delays and staffcosts and to maximize cost effectiveness;

(c) to ensure that the administration of the scheme can be easilyand continually monitored to give early warning of problemsand to simplify audit procedures; and

(d) to incorporate a simple system of data retrieval to permitcurrent information on the status of individual replantersto be promptly provided to field staff responsible foradvice to replanters.

2. DRC officers would study the operations of replanting schemes inThailand, Malaysia and Indonesia, to provide information on alternative proce-dures. A consultant would be required to work with DRC staff for about sixmonths to develop and implement the new procedures. Some of the majorfeatures of the anticipated changes in DRC procedures are:

(a) information on registration of rubber holdings would berevised to reflect the present situation and thereafterregularly updated. Registration details would thus permitearly identification of smallholders whose rubber is duefor replanting;

(b) replanting targets would be set by a Rubber Policy andPlanning Unit based inter alia, on age statistics pro-vided by DRC from its registration of holdings;

-64 - ANNEX 2

Appendix 1Page 2

(c) processing of all paperwork associated with registrationand replanting would be hastened by (a) use of simplifiedforms and procedures; (b) increased staff in regionaloffices, and (c) introduction of a monitoring system whichwould facilitate daily checks on progre!ss and comparisonwith established norms;

(d) responsibility for checking and authorization of routinework would be delegated to staff at lower levels to avoiddelays; and

(e) DRC would identify holdings due for inspection well inadvance and would pass this informatior. to ASD.

3. The recesntly completed Rubber Masterplarn for Sri Lanka containsconsiderable information on the existing procedures used by DRC and makesrecommendations for an improved system. The consultant and DRC would ensurethat due attention is given to these proposals in developing any new scheme.

4. Qualifications. The consultant would have at least ten years experi-ence with a rubber smallholder replanting program and be familiar with thedetails of replanting programs in Thailand, Malaysia and Indonesia. Althoughthere are no specific discipline requirements, the consultant would be requiredto have competence in accountancy, bookkeeping, auditing, monitoring and dataprocessing including design of forms, vouchers, etc. Familiarity with elec-tronic data processing would be required although no decision has yet beentaken to base the improved procedures on the use of a computer.

5. Specific Responsibilities. The consultant would be required to:

(a) provide detailed descriptions (including copies in englishof forms/vouchers) of the replanting schemes in Thailand,Malaysia and Indonesia;

(b) review and comment on the adequacy of the existing proce-dures followed by DRC;

(c) review with DRC staff the proposals for revised proceduresrecommended in the Rubber Masterplan anc. establish whatassistance is to be provided in this fie!ld from the UKGovernment. (It would be important to ensure that therewas close coordination between inputs under this consul-tancy to DRC and any other consultancy cealing withrelated aspects);

(d) propose a revised set of administrative procedures togetherwith supporting documentation (forms, vouchers, records,etc.); and

(e) assist :DRC in the implementation of the revised proceduresfor administration of the replanting scheme.

- 65 -

ANNEX 2Appendix 2Page 1

Draft Terms of Reference

Training

1. Background. The Advisory Services Department (ASD) has undertakennew responsibilities in the provision of assistance to smallholders to increasereplanting rates. In order to carry out this task, its staff would be increasedby recruitment of some 154 new officers. All existing and new staff wouldrequire some training which is to be provided under the project. ASD hasbegun work on a residential training center and it is expected that the firsttraining courses would commence about mid 1980. The specific courses envisagedunder the project include:

(a) an annual three month induction course for 15 new RubberExtension Officers which would prepare high schoolgraduates for extension work by providing the rudimentsof rubber husbandry and replanting technology in addi-tion to training in extension methodology;

(b) refresher courses for ASD staff; two courses per year,two week duration with 30 participants per course.Course to cover changes in the replanting scheme proce-dures, recent advances in rubber husbandry, and extensionmethodology;

(c) induction courses for Extension Overseers; two courses peryear, two month duration with 30 trainees per course.Similar to induction course for REOs but simplified andcondensed and with more emphasis on replanting activitiesincluding contour lining;

(d) an induction course of one month duration for a new cadreof ASD staff (Processing Advisor) for 15 trainees. Thiscourse and the course described below (e) would be preparedby the consultant on processing; and

(e) twice yearly courses of one week duration on processingfor private processors and smallholders.

2. Qualifications. The consultant would be qualified as a lecturerwith specific experience in the preparation of curricula and course materialfor training of extension staff. The consultant would have had field experi-ence in an extension service for rubber smallholders.

3. Specific Responsibilities. In conjunction with the staff of ASDand RRISL, the consultant would:

(a) prepare detailed curricula and outline lecture notes for

the induction courses for REOs and EOs, and for therefresher courses;

- 66 -

ANNEX 2Appendix 2Page 2

(b) assist in the preparation of course material for thecourses;

(c) assist in the presentation of the first course for REOs;

(d) prepare detailed proposals for the publicity campaign tobe launched under the project; and

(e) provide necessary specific training to the publicity andtraining officers within ASD.

- 67 - ANNEX 2Appendix 3Page 1

Draft Terms of Reference

Processing

1. Background. The Advisory Services Department (ASD), plans to createa Processing Advisory Division (PAD) to provide private processors and GroupProcessing Centers (GPCs) with advice on rubber processing. The new divisionwould take over and expand the advisory activities directed towards processors.The total staff strength of PAD is expected to be about 12 all of whom wouldbe located in the field. Each processing advisor would closely monitor theoperation of about 8 GPCs providing technical, managerial and financial advicewhere required. In addition, PAD staff would contact private processors toprovide advice on processing technology with the objective of raising thequality of rubber output. ASD seeks the services of a qualified consultantfor a period of about three months to assist in the development of PAD. Theproject activities directed towards improvement in smallholder processing aredescribed in the Staff Appraisal Report (para 3.21-3.28). Additional suggestionsfor processing improvements are given below:

(a) Smallholders would be encouraged to use a 50/60 double meshmonel sieve to remove impurities from latex rather than thecommonly used pad of grass. Subject to a field evaluation ofits practicality, estimation of drc at GPCs or latex collec-tion centers (LCC) would be improved by use of the 'chee'system. If the 'chee' system did not prove practicable, theMetrolac would continue to be used but with greater caretaken in making readings.

(b) The milling of the coagulum would be improved to producethinner sheets by adjustment to rollers and by minimizingthe handling of coagulum prior to rolling. Sheets would bewashed and allowed to drip from racks to remove serum and tominimize uneven enzyme discoloration.

(c) Improvements would be made in the drying process. Wet sheetswould be loaded onto the lowest racks of the smokehouse (thecoolest part), to avoid the formation of a skin which hinderssubsequent drying. Hangers would be rotated after 24 hoursto avoid hanger marks and the formation of bubbles. Ratherthan the present technique of excessive stoking at longintervals, the fire would be stoked about every three hoursand the furnace doors would be fitted with adjustable airinlets. When dry, the rubber would be stored off the groundprior to sale to prevent sweating and consequent mouldgrowth.

(d) The improvements in processing techniques outlined abovewould be promoted by PAD staff for existing GPCs, privateprocessing centers, latex collection centers, and for home

- 68 -ANNEX 2Appendix 3Page 2

processors. In addition, the project would support theexpansion of new GPCs subject to the existing GPCs improvingtheir performance. The new GPCs would include the followingspecific improvements:

- a tiled bulking tank;

- ia tiered wooden rack for dripping sheets beforesmoking;

- aE two-chambered smokehouse (each chamber 680 kgcapacity) with flue gas entry system such thatone chamber could be closed when intake is low,to reduce expenditure and to maintain an eventemperature;

- the furnace door will be cut to provide for expan-sion of metal without buckling and will have a rowof air inlets.

- internal drainage in the smokehouse to remove serumwater.

2. Qualifications. The consultant would have had at least five yearsexperience in the operation of group processing and/or marketing schemes forrubber smallholders. In addition to having technical competence in all aspectsof Ribbed Smoked Sheet production, the consultant: would have had experience inthe provision of managerial advice to smallholder processing groups. Theconsultant would also be familiar with record keeping and accounting proce-dures appropriate to the operation of GPCs.

3. Specific Responsibilities. The consultant would work closely withASD and would inter alia:

(a) assist in the formulation and presentation of a one monthtraining course for PAD staff;

(b) assist in the formulation and initial presentation of a oneweek course for GPC imembers and privatE: processors;

(c) assist in the preparation of material for the above twotraining courses; and

(d) assist in the formulation of an appropriate strategy forimproving smallholder processing which may include specificactions to strengthen and expand the GPCs if appropriate.

- 69 - ANNEX 2Appendix 4Page 1

Draft Terms of Reference

Project Evaluation

1. Background. The Agrarian Research and Training Institute proposesto evaluate the impact of a project to accelerate replanting of rubber bysmallholders. A replanting scheme has been in operation in Sri Lanka since1953, but its performance over the past decade has been disappointing withthe result that the national stand of rubber has become over-aged. The projectwould directly address the major apparent constraints to smallholder replant-ing which are low producer prices, inadequate compensation for income foregoneand a cumbersome replanting scheme. However it is likely that there are lessobvious factors which influence the smallholder's decision to replant and

that a better understanding of the smallholder's viewpoint would reveal oppor-tunities to make the replanting scheme more attractive to smallholders. Itis therefore proposed that the project be evaluated during its implementationto identify opportunities for improvement. ARTI plans to carry out a baselinesurvey covering a representative sample of the 90,000 smallholders in theproject area. This survey would be followed by case studies. Through theseinvestigations, ARTI would try to:

(a) identify why some smallholders with over-aged rubber failto replant;

(b) identify what changes in the replanting scheme are requiredto induce such smallholders to replant;

(c) establish how effective the services of ASD, DRC and RRISLhave been in improving production of smallholder rubber; and

(d) identify the changes required in the operation of ASD, DRCand RRISL to better service smallholders in a cost-effectivemanner.

ARTI proposes to recruit a qualified consultant to assist in the evaluationstudy for a period of about three months.

2. Qualifications. The consultant would have had at least five yearsexperience in the design and conduct of surveys and case studies of smallholderproducers, preferably rubber producers. He would be a University Graduate withtraining on/in survey design and analysis, rural sociology, agriculturaleconomics and statistics.

3. Specific Responsibilities. The consultant would work with ARTI staffconsulting with the Project Coordinator and other staff of the implementingagencies as necessary. He would:

(a) assist in the design of the baseline survey of project areasmallholders including sample selection and questionnaireformulation;

- 70 -

ANNEX 2Appendix 4Page 2

(b) advise on the supervision of the baseline survey as required;

(c) assist in the design of the case studies including preparationof specific terms of reference for about: four or five studieswhich are likely to provide the requirea. information; and

(d) prepare a suitable format for the report on survey findings andthe case studies.

- 71 - ANNEX 3Page 1

SRI LANKA

Rubber Rehabilitation ProjectLocal Procedures for Project Funding

Project Funding

1. Government funding for a project is based on a Project Reportprepared by the implementing agency (the PCU for the proposed project). TheProject Report must be approved by the Development Committee of Secretariesbefore sanctioning by Cabinet. All implementing agencies keep a separate headfor the project in their annual budget. Initial budget proposals are submittedto the Treasury by the various departments through the relevant ministry byMay 31st of the preceeding year. Draft budget estimates proposed must besubmitted to the Treasury by June 12 for inclusion in the annual budget, whichin turn is submitted to Parliament for approval in November/ December. 1/

2. Release of funds to the departments by the Treasury is on a monthlybasis, against the annual budget as sanctioned by Parliament and approvedin detail by the Ministry of Finance. A monthly return of expenditures mustbe submitted to the Treasury for comparison with the annual budget and forrelease of funds in the succeeding month. Annual estimates of expendituresmust be revised by May 31st in the light of expenditures made during the firstquarter. After sanction of the revised estimates by the Treasury, requisitionof funds are made against these revised estimates.

3. Annual budgets for the project would be prepared by each implement-ing agency (DRC, ASD and RRISL) with the assistance of the PCU which wouldascertain that the proposed estimates match those of the Project Report. ThePCU would consolidate the project annual budget and submit it to the Treasurythrough the Ministry of Plantation Industries.

4. Funds for capital and operating expenditures would be released bythe Treasury directly to the respective implementing agencies, while staffwould be paid directly by Treasury. Replanting payments to smallholders(including fertilizer and planting materials to be delivered in kind) would bemet from the Rubber Replanting Fund administered by DRC. The revenues of theFund would initially comprise the Replanting Cess which is paid directly intothe Fund by the Customs Office,- and from end of project year two the shortfallin cess revenue would be met by annual Government contribution to the Fund.

Accounting Records and Annual Controls

5. Adequate books of accounts are maintained at the headquarters of DRCand RRISL. Internal control is adequate within both agencies. The Chief

1/ This procedure does not apply to DRC since it is currently funded bycesses. However, it would apply under the project if, as envisaged, the

capital and operating costs in administering the Replanting Fund werenow funded by normal budgetary provisions.

- 72 -ANNEX 3

Page 2

Accountant's office of the RRISL is well run and has the capacity to maintainaccounts efficiently; the accounts of the RRISL are subject to regular checkingby the RRISL internal auditor. The Accounting Section of DRC is headed bya competent Chief Accountant. However, his office is understaffed with theresult that DRC accounts have been systematically late. Disbursements fromthe Replanting Fund are subject to a severe, and possibly unnecessarilythorough, system of checking with multiple layers of control before paymentsare made.

6. The annual accounts of both agencies are subject to an externalaudit which is carried out yearly by a team of Public Auditors under thedirection of the Auditor General. The finance Act No. 38 of 1971, requiresthat accounts be prepared and submitted for audit by April 30th of the fol-lowing year, and the audit completed by October 31st. At the time of themission's visit (September 1979), the 1978 accounts of RRISL were availableand the mission was advised that their audit was in progress. The 1978accounts of the DRC were also available but the latest audited accounts werethose of 1976.

Accounting Arrangements for the Project

7. Under the project, a new accounting unit would be set up withinASD which would become an independent department. In addition, accountingsub-units would be established in each of the three DRC regional offices;this would considerably lessen the workload of the Chief Accountant's office.Project accounts would be kept under separate heads by DRC, ASD and RRISLand submitted quarterly to the PCU for purpose of monitoring and preparingdisbursement applications.

Disbursements Against Statements of Expenditures

8. For the purpose of Credit disbursements against statements ofexpenditures, the budgeting, accounting and auditing procedures of DRC andRRISL are satisfactory, and with the proposed strengthening of their staff,their institutional capability would be adequate. The Auditor General wouldaudit the statements of expenditures biannually and GOSL would furnish thereports to IDA. Supporting documents and vouchers retained by the AuditorGeneral would be made available for inspection by Supervision missions.

9. Credit disbursements against statements of expenditures would befor petty contracts for civil works and equipment (individually less thanRs 100,000) and for replanting payments. In view of the large volume ofreplanting payments, (US$9.8 M), DRC would be required to maintain a sub-sidiary Project Replanting Fund account relating to the project replantings.Disbursement under the Credit would be against a statement of expenditure fromthis Project Replanting Fund account submitted quarterly. At the end of eachfiscal year, these statements would be reconciled with the annual audited DRCproject accounts. The DRC project accounts would be supported and reconciledwith the annual audited accounts relating to the overall Replanting FundAccount.

- 73 -

ANNEX 3Page 3

10. Records of progress of replanting work would be systematic, andup to date. Both for management and audit purposes, DRC would be requiredto submit Quarterly Progress Reports to the PCU giving, for each year ofpermit issue, particulars of:

(a) area approved for replanting;

(b) replanting payments committed; and

(c) installments paid.

11. ASD would be responsible for the issue of fertilizer and plantingmaterials to smallholders against permits approved by DRC. Adequate stocksfinanced out of the Replanting Fund would be carried by ASD for this purpose.After being issued to replanters, the materials would be charged to theReplanting Fund Account, against which IDA disbursements would be made.

SRI LANKA

Smallholder Rubber Rehabilitation Project

Project Participants by Size of Holding

I. Representative Farm Models

Holding Total Paddy Rubber Replanted Intercrop

Category Holding Area Rubber

…-- - - - - - - - - --- ha -- - -- …---------------- ---- - _________________

- Small 0.4 0.2 0.2 0.2 0.2

- Medium 1 0.8 0.4 0.4 0.4 0.4

- Medium 2 2.6 0.6 2.0 1.0 1.0

- Large 12.0 2.0 10.0 5.0 1.0

II. Participation in Project

Holding Number of Area of Rubber Area Replanted Rubber Intercropping

Category Holdings Holdings Area No. of Area

No. % Ha % Ha x Ha % Holdins Intercropped

- Small 5,85Q 22 2,340 5 1,170 4 1,170 6 1,897 379

- Medium 1 11,095 42 8,876 20 4,438 14 4,438 24 3,584 1,434

- Medium 2 8,810 33 22,906 51 17,620 55 8,810 47 2,895 2,895

- Large 877 3 10,524 24 8,770 27 4,385 23 291 291

Total 26,632 100 44,646 100 31,998 100 18,803 100 8,667 4,999

Average 1.7 1.2 0.7 0.6

January 15, 1980 a

SRI LANKA ANNEX 4,Table 2

Smallholder Rubber Rehabilitation Project Page 1 of 2

Advisory Services Department

Incremental Staffing Costs

(Rs '000)

Present Unit Cost 2/ Year 1 3/ Year 2 Year 3 Year 4 Year 5 Year 6 Incremental

Incremental Staffing Number 1/ Rs '000 No. Cost No. Cost No. Cost No. Cost No. Cost No. Cost Cost

Head OfficeDirector 0 35.1 1 17.6 1 35.1 1 35.1 1 35.1 1 35.1 1 35.1 193.1

Personal Asst. to Dir. 0 11.9 1 6.0 1 11.9 1 11.9 1 11.9 1 11.9 1 11.9 65.5

Deputy Director (Field) 0 31.6 1 15.8 1 31.6 1 31.6 1 31.6 1 31.6 1 31.6 173.8

Head (Devt. Div.) 1 27.1 - - - - - - - - - - - _ _

Publicity Officer 0 11.9 1 6.0 1 11.9 1 11.9 1 11.9 1 11.9 1 11.9 65.5Film Operators 0 7.2 3 10.8 3 21.6 3 21.6 3 21.6 3 21.6 3 21.6 118.8Graduate Assistants 3 9.9 - - - - - - - - - - - - -

Head (Supplies Division) 0 27.1 .Graduate Assistant 1 9.9 - - - - - - - - - - -

Head (Processing Advisory) 1 27.1 1 13.6 1 27.1 1 27.1 1 27.1 1 27.1 1 27.1 149.1

Graduate Assistant 1 9.9

Deputy Dir. (Training/Admin.) 0 31.6 1 15.8 1 31.6 1 31.6 1 31.6 1 31.6 1 31.6 173.8Chief Admin. Officer 0 27.1 1 13.6 1 27.1 1 27.1 1 27.1 1 27.1 1 27.1 149.1

Asst. Admin. Officer 1 18.0Asst. Accountant 0 18.0 1 9.0 1 18.0 1 18.0 1 18.0 1 18.0 1 18.0 99.0

Chief Clerk 1 10.1Clerk 4 9.8 2 9.8 2 19.6 2 19.6 2 19.6 2 19.6 2 19.6 107.8Clerk/Typists 3 8.7 3 13.0 3 26.1 3 26.1 3 26.1 3 26.1 3 26.1 143.5Stenographer 1 9.8 1 4.9 1 9.8 1 9.8 1 9.8 1 9.8 1 9.8 53.9

Receptionist 1 8.7 - - - - - - - - - - - - -

Graduate Assistant 1 9.9 1 5.0 1 9.9 1 9.9 1 9.9 1 9.9 1 9.9 54.5

Head (Training Div.)4/ 0 27.1 1 13.6 1 27.1 1 27.1 1 27.1 1 27.1 1 27.1 149.1Asst. Training Off. 4/ 0 11.9 1 6.0 1 11.9 1 11.9 1 11.9 1 11.9 1 11.9 65.5

Graduate Assistant 4/ 0 9.9 1 5.0 1 9.9 1 9.9 1 9.9 1 9.9 1 9.9 54.5Clerk/Typist 4/ 0 8.7 2 8.7 2 17.4 2 17.4 2 17.4 2 17.4 2 17.4 95.7Watcher/Cook 4/ 0 5.0 2 5.0 2 10.0 2 10.0 2 10.0 2 10.0 2 10.0 55.0Drivers 2 7.0 9 31.5 9 63.0 9 63.0 9 63.0 9 63.0 9 63.0 346.5Office Peons 0 5.0 2 5.0 2 10.0 2 10.0 2 10.0 2 10.0 2 10.0 55.0

Sub-Total Head Office 21 34 215.7 34 430.6 34 430.6 34 430.6 34 430.6 34 430.6 2368.7

1/ Present positions do not correspond exactly with proposed staffing.2/ Based on midpoint of salary range plus allowances including 15% Provident Fund contribution and travelling allowance.3/ Year 1 cost for half year only.4/ Included with head office staff although located at the training center.

SRI LANKA ANNEX 4,Table 2

Smallholder Rubber Rehabilitation Pro ject

Advisory Services Department

Incremental Staffing Costs

(Re '000)

Present Unit Cost Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 IncrementalNumber Rs '000 5] No. Cost No. Cost No. Cost No. Cost No. Cost No. Cost Cost

Field Staff

Regional OfficesRegional Advisory Off. 0 26.6 3 39.9 3 79.8 3 79.8 3 79.8 3 79.8 3 79.8 438.9Senior Processing Adv. 0 23.9 3 35.9 3 71.7 3 71.7 3 71.7 3 71.7 3 71.7 394.4Clerk/Typists 0 8.7 6 26.1 6 52.2 6 52.2 6 52.2 6 52.2 6 52.2 287.1Drivers 0 7.0 13 45.5 13 91.0 13 91.0 13 91.0 13 91.0 13 91.0 500.5Office Peons 0 5.0 3 7.5 3 15.0 3 15.0 3 15.0 3 15.0 3 15.0 82.5

Divisional OfficeDiv.Rubber Ext.Officers 6 20.5 3 30.8 3 61.5 3 61.5 3 61.5 3 61.5 3 61.5 338.3Processing Advisor 0 23.2 9 104.4 9 208.8 9 208.8 9 208.8 9 208.8 9 208.8 1148.4Clerk/Typist 0 8.7 9 39.2 9 78.3 9 78.3 9 78.3 9 78.3 9 78.3 430.7Driver 0 7.0 9 31.5 9 63.0 9 63.0 9 63.0 9 63.0 9 63.0 346.5

Range OfficeRubber Ext. Officer 41 20.5 13 133.3 13 266.5 13 266.5 13 266.5 13 266.5 13 266.5 1465.8Ext. Overseer 0 14.3 54 386.1 54 772.2 54 772.2 108 1544.4 108 1544.4 108 1544.4 6563.7

Sub-Total Field Staff 47 125 880.2 125 1760.0 125 1760.0 179 2532.2 179 2532.2 179 2532.2 11996.8

Fertili4zer 5t^,re StnffStorekeeper 0 9.0 6 54.0 6 54.0 6 54.0 6 54.0 6 54.0 270.0Truck Driver 0 8.4 10 84.0 10 84.0 10 84.0 10 84.0 10 84.0 420.0Cleaner 0 7.2 10 72.0 10 72.0 10 72.0 10 72.0 10 72.0 360.0Watchers 0 6.0 9 54.0 9 54.0 9 54.0 9 54.0 9 54.0 270.0Casual Laborers 0 20.3 20.3 20.3 20.3 20.3 101.5

Sub-Total Fertilizer Store 284.3 284.3 284.3 284.3 284.3 1421.5

Total Incremental Staffing Cost 1095.9 2474.9 2474.9 3247.1 3247.1 3247.1 15787.0

5fSalary costs for field level staff are based on midpoint of salary range but include allowance and costsof subsistence. For REOs and EOs costs of operating the officers' vehicle are included.

- 77 -

ANNEX 4SRI LANKA Table 3

Smallholder Rubber Rehabilitation Project

Training ComPonentRs (000)

Unit Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Total ForeignCost Years 1-6 Exchange

Cost

TRAINING INVESTMENTS

Training Center: Civil WorksLecture hall 115 sq mClassroom 100 sq mDormitory/study 190 sq mWashroom 30 sq mDining room 95 sq mLiving area 95 sq mKitchen 95 sq mOffices 45 sq m

765 sq m 1.5/sq m 1,033 115 1,148 402Accomodation for Training staffRenovation existing house 10.0 10 10 4House 165 165 165 41Lecturer quarters 140 - 140 140 35

Subtotal civil works 1,208 255 1,463 482Training Center: EquipmentFurniture & Kitchen equipment - 200 56 256 102Training aids 1/ - 380 100 480 456Microbus (trainee transport) 150 300 150 450 428

Total Investments 2L088 561 6 1,468

Training Operations 2/Induction course for REO- 68 68 68 68 68 68 408 41Refresher courses 3/ 42 42 42 42 42 42 252 25Induction course for EO4- 180 180 180 180 180 180 1,080 108Processing course ] 6 - 11 11 11 11 11 55 6Processing Advisor coursed - 23 - - - - 23 2

Study Tours 7/Preproject (ASD)-, 120 120 120Preproject 12Q 120 120Preproject (PCU)- 60 60 60Project (ASD) 8/ & 9/ 84 84 84 84 84 84 504 504Project (DRC) 8/ 84 - - - - - 84 84

Postgraduate Studiesfor RRISL staff 10/ 145 145 145 145 145 725 725for ASD staff 11 r - 145 - 145 - 290 290for Planning Unit 12/ 145 - 145 - - 290 290forPlnnigUnit -

Total Operations 758 698 675 675 675 530 4,011 2,375

l/ Slide projector, cine projector, epidiascope, screen, portable generator, video camera system, P/A system, films,and taperecorder.

2/ One course per year, 3 month duration, 15 trainees. Subsistence, accomodation and training supplies at Rs 50 perhead per day.

3/ For all ASD field staff. Two courses per year, 2 week duration, 30 trainees per course. Rs 50/head/day.4/ Two courses per year, 2 month duration, 30 trainees per course. Rs 50/head/day.5/ Two course per year, 1 week duration, 30 trainees per course. Rs 50/head/day.6/ One course in year 2, one month duration, 15 trainees per course. Rs 50/head/day.7/ Two staff from ASD, 2 from DRC, one from PCU. Six week duration, 2 weeks each in Malaysia, Indonesia and Thailand.

Rs 60,000 per tour.8/ Study tour for 3 RAO's from ASD and 3 Assistant Controllers from DRC year 1 only. Three weeks duration. Country

to be selected Rs 28,000 per tour.9/ Study tour for one selected DREO and 2 selected REO's per year starting year 2. Three week duration in one country

to be selected. Rs 28,000 per tour.10/ Twelve month fellowships in soils chemistry, plant pathology, genetics and two subjects to be selected.

Rs 145,000 per fellowship.11/ Twelve month fellowship in extension methodology. Rs 145,000 per fellowship.12/ Twelve month fellowship in agricultural economics,development planning,or related field. Rs 145,000.

January 7, 1980.

- 78 -

ANNEX 4SRI LANKA Table 4

Smallholder Rubber Rehabilitation Project

Investments and Other Operating Costs (ASD)-Rs ('000)

Unit Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Total ForeignCost No. Cost No. Cost No. Cost No. Cost No. Cost No. Cost No. Cost Exchange

Cost

Investments: EquipmentTrucks (5 ton capacity) 220 5 1,100 5 1,100 10 2,200 2,090Mobile Publicity Units 150 3 450 - - 3 450 4284 wheel drive vehicles- 105 6 630 10 1,050 3 315 19 1,995 1,895Cars 3/ 90 1 90 2 180 - - 3 270 257Motorcycles- 15 32 480 12 180 12 180 12 180 12 180 12 180 92 1,380 1,311Bicycles 5/ 1 54 54 - - - - 54 54 - - - - 108 108 86

- 6/Office equipment- - - 200 - 190 - 390 215Tree pullers 7/ 8 54 432 54 432 54 432 162 1,296 1,231Field equipment- 3 63 189 63 189 170

Subtotal Equipment 3,625 3,132 927 234 180 180 8,278 7,683

Civil Worksl'

Houses for RAO 165 1 165 2 330 3 495 124Houses for SPA ]L55 1 155 1 155 1 155 3 465 116Houses for DREO 150 2 300 4 600 3 450 9 1,350 338Houses for PA 150 2 300 4 600 3 450 9 1,350 338Houses for REO 135 10 1,350 24 3,240 20 2,700 54 7,290 1,823Regional fertilizerstore 300 1 300 2 600 3 900 225

Subtotal Civil Works 2,570 5,525 3,755 11,850 2,964

Total Investments 6,195 8,657 4,682 234 3180 180 20,128 10,647

Operating Costs 6,Vehicle operations- 619 998 1,106 1,106 1,106 1,106 6,041 4,832Office operations 97 193 193 193 193 193 1,062 -Building maintenance-O - 39 121 1'8 178 178 694 174

Total Operating Costs 716 1,230 1,420 1,477 1,477 1,477 7,797 5,006

1/ Excludes items for training center shown in Annex 4, Table 3.2/ Four attached to Head Office including training center, one each for RAO, SPA and DREO.3/ In car pool for Head Office.4/ 32 for existing or new staff in Year 1, balance of 12 per year as replacements for existing motorbikes.5/ For Extension Overseers./ For Head Office 1 photocopier, 6 calculators, 6 typewriters, filing cabinets and desks; for Regional offices

6 typewriters, 6 filing cabinets and desks; for Divisional offices 9 typewriters, 9 filing cabinets and desks;for Range offices desks and filing cabinets.

7/ Three tree pullers per range to be kept in the custody of the RE0 and loaned to smallholders for uprooting oldtrees.

8/ For each DREO and REO (63) Abney level, measuring tape and protective clothing including motorcycle helmet anddocument satchel.

9/ Trucks 10,000 km at Rs 3.5/km 35,000/year; 4 wheel drive vehicles 12,000 km at Rs 3/km 36,000/year; cars 12,000 kmat Rs 2.5/km 30,000/year. Motorcycle operating costs are met by staf.E from travelling allowance. Includes

10 operating cost for training center vehicles Rs 90,000/year.10/ Maintenance at 1 1/2% of capital cost.

January 7, 1980.

SRI LANKA

S1,allholder Rubber Rehabilitation Project

Department of Rubber Control

Regional Office8

Capital Expenditures, Staffing and Other Operating Costs

R. (O000)

1980 1981 1982 1983 1984 1985 Foreign

Unit Coat Year I I/ Year 2 Year 3 Year 4 Year 5 Year 6 Total Exchange

Rs '000 No. Cost No. Cost No. Cost No. Cost No. Cost No. Cost Cost Cost

(:ptl xedture 2/Office Btuildings (190 sq.m (d Rsl500/sq.m) 285 1 285.0 2 570.0 - - - - - _ _ _ 855.0 214.0

Vehicles 3/ 105 1 105.0 2 210.0 - - - - - - - 315.0 300.0

Furniture and Equipment 4/ 240 1 240.0 2 480.0 - _ - - - 720.0 240.0

Total Capital Expenditure 630.0 1260.0 - _ - - - 1890.0 754.0

IncremegtaleStafting Cost

SalariesAsaistant Rubber Controller 12.30 1 6.1 1 12.3 2 24.6 4 49.2 6 73.8 8 98.4 264.4 -

Chief Clerk 8.28 3 12.4 3 24.8 3 24.8 3 24.8 3 24.8 3 24.8 136.4 -

Uead of Branch 8.16 1 4.1 1 8.2 2 16.3 4 32.6 6 49.0 8 65.3 175.5 -

Accountant 11.58 - - - - 3 34.7 3 34.7 3 34.7 3 34.7 138.8 -

Office Aasistant - Accounting 10.56 - - - 3 31.6 3 31.6 3 31.6 3 31.6 126.4 -

Accounting Clerk 5.25 9 23.6 9 47.2 9 47.3 12 63.0 18 94.5 24 126.0 401.6 -

Registrationi Clerk 5.25 3 7.9 3 15.7 3 15.8 3 15.7 3 15.8 3 15.7 86.6 -

Checking Clerk 5.25 - - - - 3 15.7 6 31.5 9 47.3 9 47.2 141.7 -

Clerk 5.25 11 28.9 11 57.8 25 131.2 44 231.0 92 483.0 1278.4 -

Stenographer 5.25 3 7.9 3 15.7 3 15.8 3 15.7 3 3 15.7 86.6

Typist 5.25 3 7.9 3 15,7 3 15.8 6 31.5 6 31.5 6 31.5 133.9 -

Sub-Total Salaries 34 98.8 34 197.4 59 373.6 91 561.3 126 765.3 162 973.9 2970.3

Allowances (582/ of Salariea plus Rs 55/man-month) 68.2 136.4 254.5 384.0 524.0 688.9 2036.0

Overtime (57, of Salary Cost) 8.4 16.7 31.4 47.3 64.5 82.1 250.4

Total Inctreental Staffing Coat 175.4 350.5 659.5 992.6 1353.8 1724.9 5256.7

Other Operatinlg C6otsStationery 20.0 44.0 68.0 101.0 135.0 173.0 541.0 178.0

Other Office Expenses 23.0 45.0 45.0 45.0 45.0 45.0 248.0 -

Vehicle Runniing Expenses 5/ 18.0 108.0 108.0 108.0 108.0 108.0 558.0 446.0

Building Maintentance 6/ - 4.3 12.8 12.8 12.8 12.8 55.5 -

Total Other Operating Costs 61.0 201.3 233.8 266.8 300.8 338.8 1402.5 624.0

GRANO) TOIAL 866.4 1811.8 893.3 1259.4 1654.6 2063.7 8549.2 1378.0

1/ First year costs for six months only.

2/ These regional offices are shared with ASD.3/ One four-wheel drive vehicle per regiornal office.4/ For eacb office: 3 typewriters (Rs 18,000), 6 calculators (Rs 12,000), desks, filing cabinets and other office furniture (Rs 210,000).

5/ 4-wheel drive vehicles 12,000 knm at Rs 3/km Rs 36,000/year.

61 Maintenance at 1.5% per year.

hieceslmer 5, 1979 4

- 80 - ANNEX 4Table 6

SRI LANKA

Smallholder Rubber Rehabilitation ProJect

Costs of Project Coordination UnitRs ('000)

Unit Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Total ForeignCost No. Cost No. Cost No. Cost No. Cost No. Cost No. Cost No. Cost Exchange

Cost

Investments4 wheel drive vehicle 105 1 105 1 105 100Car 90 1 90 1 90 86Photocopier 75 - - 1 75 1 75 68Typewriters 6 3 18 2 12 8 30 27Calculators 2 4 8 4 8 8 16 14Office furniture - - 26 - 30 10 - 66 12

Total Investment 147 125 10 382 307

Incremental StaffingProject coordinator 26.4 1 26.4 1 26.4 1 26.4 1 26.4 1 26.4 1 26.4 158.4Accountant (Class II) 15.4 1 15.4 1 15.4 1 15.4 1 L5.4 1 15.4 1 15.4 92.4Project officer 14.4 1 14.4 1 14.4 1 14.4 1 L4.4 1 14.4 1 14.4 86.4Senior clerk 9.8 1 9.8 2 19.6 2 19.6 2 19.6 2 19.6 2 19.6 107.8Clerk/typist 3.7 3 26.1 4 34.8 4 34.8 4 34.8 4 34.8 4 34.8 200.1Driver 7.0 2 14.0 2 14.0 2 14.0 2 :L4.0 2 14.0 2 14.0 84.0Peon 5.0 1 5.0 1 5.0 1 5.0 1 5.0 1 5.0 1 5.0 30.0Allowances 30% - - 33.3 - 38.9 - 38.9 - :38.9 - 38.9 - 38.9 227.8

Subtotal Staff Costs 10 144.4 12 168.5 12 168.5 12 1678.5 12 168.5 12 168.5 986.9

Vehicle Operating Expenses 33 66 66 66 66 66 363 290Office Operating Expenses 5 10 10 :'0 10 10 55 -

Total Operating Cost2/ 182 245 244 2i44 24 245 14405 290

1/ Staff engaged for all of Year 1.2/ Figures rounded. Dioes not include study tour for project coordinator.

December 10, 1979.

-81- ANNEX 4Table 7

SRI LANKA

Smallholder Rubber Rehabilitation Prolect

Costs of Processing, Research, Project Evaluation, and Technical Assistance ComponentsRs ('000)

Unit Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Total ForeignCosts No. Cost No. Cost No. Cost No. Cost No. Cost No. Cost No. Cost Exchange

Cost

Processing Component-/ (ASD)Rehabilitation of existingGPCs 6 5 30 15 90 47 282 67 402 270

Establishment of new GPCs 50 - - - - 10 500 20 1,000 20 1,000 50 2,500 925

Total Processing Component 30 90 782 1,000 1,000 2,902 1,195

Research Component (RRISL)Cross country vehicles 75 4 300 8 600 4 300 16 1,200 1,1404 wheel drive vehicles 105 2 210 2 210 200Laboratory air conditioners(1.5 HP) 19 15 285 15 285 270

Laboratory dehumidifiers(0.5 iP) 2/ 14 6 84 6 84 80

Photographic equip /ent- 155 155 147Ftilm production 3/ 300 500 500 250 1,550 310

Total Research Component4/ 1,334 5 3,484 2,147

Project Evaluation ComponentBaseline survey 5/Staffing and transport costs 60 60 6Analysis and reporting 40 40 4

Case studies 6/ - 30 30 30 30 30 150 15

Total Evaluation Component7 I_ __ __ 70 30 -22

Technical Assistance ComponentCoasultancies for:Replanting SchemeAdministration CDP.C) 93 4 372 2 136 6 558 5^0

Training (ASf) 93 3 279 3 279 250Processing (ASD) 93 3 279 3 279 250Project evaluation (ARTI) 93 3 279 3 279 250

Total Technical Assistance L,209 186 151

1/ Excludes cost of Processing Advisory Division salaries and operating costs shown in Annex 4, Tables 2 and 4.2/ Includes slide cameras, lens, slide copier enlarger, processing equipment, screens, projector, and 8 mm cameras,

sound recording equipment and projectors.3/ Includes funds for scripting, directing, shooting, striping and titling two 20 minute films.4/ Excludes cost of postgraduate fellowships for RRISL staff presented in Annex 4, Table 3.5/ Two research officers for 6 months, 10 enumerators for 6 months, vehicle operating costs and data processing.6/ Two research officers for 3 months/years and 4 enumerators for 3 months/years, vehicle operations and data processing.

7! Excludes cost of technical assistance presented below.

December 10, 1979

- 82 -

ANNEX 4Table 8Page 1

SRI LANKA

Smallholder Rubber Rehabilitation P?roject

Group Processing Centers (GPC)

Table 8.1: GPC - Dlirect Processing Cost (i.e. excluding overheads)

Item Consumption Cost/Price Cost of Processingc/kg drc

Chemicals 0.0067 1t Rs/kg 9.4kg/kg drc

Fuel (Firewood) 3.60 cu. yd/ 50 Rs/cu. yd 18.01,000 kg drc

Transport for 2 units - 10 Rs/mile/ 1.0mton/drc

Labor for processing 0.0275 10 Rs/MD 27.5and smokehouse MD/kg drc

Total 55.9

Table 8.2 Financial Returns to GPC Members from a. Successful GPC(Rs/kg)

GPC Processing Other Smallholder Processing

60% RSS I/ 5.82 20% RSS I 1.9430% RSS II 2.75 30% RSS II 2.737% RSS III 0.62 30% RSS III 2.663% RSS IV & V 0.23 20% RSS IV & V 1.55

Average RSS price 9.40 8.88less Direct 2/Processing cost- 0.56 0.45

Less Overheads 3/3/ 0.09 -Less Debt Service- 0.10

Net Price Paidto Producers 8.65 8.43

Net Premium to GPC Members: Rs 0.22/kg

1/ Based on actual November 1979 prices paid by CPD Depots: RSS I 9.71;RSS II 9.10; RSS III 8.88; RSS IV 7.90; RSS V 7.55.

2/ From above Table.3/ Based on a throughput of 200 kg/day, and 220 days of operation in a year.

Overheads include 1 watchman (Rs 1,200), Village tax and insurance (Rs 275),and I manager (220 days at Rs 12/day). Debt service to repay a Rs 30,000loan at 10% over 12 years.

January 7, 1980.

SRI LANKA

Smallholder Rubber Rehabilitation Project

Group Processing Centers (GPC)

Table 8.3: Financial Returns From GPC Processing (RS/kg)

Processing Costs Total Proces- Price Paid to Premium Paid

Throughput Direct Overheads Total sing Charge GPC Member to GPC Member

200 kg/day 0.56 0.09 0.65 0.75 8.65 0.22

150 kg/day 0.56 0.12 0.68 0.81 8.59 0.16

100 kg/day 0.56 0.18 0.74 0.94 8.46 0.03

75 kg/day 0.56 0.25 0.81 1.08 8.32 (0.13)

Table 8.4 : Economic Returns From One GPC (Rs/kg)

Processing Costs Incremental Incremental Net Incremental Net Incremental

Throughput Direct Overheads Total Processing Cost Benefit* Benefit Benefit/GPC/yr R.O.R NPV f 12%

(Rs) (Rs)

200 kg/day 0.56 0.09 0.65 0.20 1.04 0.84 39,960 90% RsI77,100

150 kg/day 0.56 0.12 0.68 0.23 1.04 0.81 26,730 83% Rs159,300

100 kg/day 0.56 0.18 0.74 0.29 1.04 0.75 16,500 35% Rs 47,400

75 kg/day 0.56 0.25 0.81 0.36 1.04 0.68 11,220 21% Rs 18,200

* Premium due to better quality RSS of Rs 0.52 fetched in the project area is only half the premium fetched from export sales since

at the forecast rubber price level of Rs 19/kg the marginal export duty rate is 50% of the export price. S H >'m

- 84 -

ANNEX 4Table 9

SRI LANKA

Smallholder Rubber Rehabilitation ProlectSummary iro1ect costs

(Rs '000)

Total F.E.Years 1 2 3 4 5 6 Total in in

Components Cost US$ '000 US '000

Replanting Costs

Replanting Payments:Payments in Kind

Budded Stumps - 1,977 3,456 4,940 5,930 6,916 23,219 1,498 75Fertilizer - 636 1,866 4,005 6,780 10,155 23,442 _1512 1,210

Sub-Total - 2,613 5,322 8,945 12,710 17,071 46,661 3,010 1,285Payments in Cash - 4,672 11,416 20,255 30,139 40,618 107,100 6,910 134

Sub-Total Replanting Payments - 7,285 16,738 29,200 42,849 57,689 153,761 9,920 1,419

Fertilizer Subsidies - 1,013 3,123 6,862 11,773 17,761 40,532 2,615 2,091Total Replanting Cost - 8,298 19,861 36,062 54,622 75,450 194,293 12,535 3,510

Institution Building

Dept. of Rubber Control (DRC)Investments - Office Building 285 570 - - - - 855 55 14

- Vehicles & Eqpt. 345 690 - - - - 1,035 67 35Sub-Total 630 1,260 - - - - 1,890 122 49

Staffing 175 350 660 993 1,354 1,725 5,257 339 -Operating Costs 61 201 234 267 301 339 1,403 90 40

Total DRC 866 1,811 894 1,260 1,655 2,064 8,550 551 89

Advisory Service Dept. (ASD)Tnvestments - Bldg. & Housing 2,570 5,525 3,755 - - - 11,850 764 191

- Vehicles & Eqpt. 3,625 3.132 927 234 180 180 8,278 534 496Sub-Total 6,195 8,657 4,682 234 180 180 20,128 1,298 687

Staffing 1,096 2,475 2,475 3,247 3,247 3,247 15,787 1,019 -Operating Costs 716 1,230 1,420 1,477 1,477 1,477 7,797 503 323

Total ASD 8,007 12,362 8,577 4,958 4,904 4,904 43,712 2,820 1,010

TrainingInvestments - Buildings 1,208 255 - - - - 1,463 94 31

- Vehicles & Eqpt. 880 306 - - - - 1,186 77 64Sub-Total 2,088 561 - - - - 2,649 171 95

Training Courses 758 698 675 675 675 530 4,011 259 153

Total Training 2,846 1,259 675 675 675 530 6,660 430 248

Technical Assistance 1,209 186 - - - - 1,395 90 81

Processing Component 30 90 782 1,000 1,000 - 2,902 187 77

Research Component 1,334 1,100 800 250 - - 3,484 225 138

Project Coordination Unit (PCU)Equipment 247 125 10 - - - 382 25 20Staffing 144 168 168 169 169 169 987 64 -Operating Costs 38 76 76 76 76 76 418 27 19

Total PCU 429 369 254 245 245 245 1,787 116 39

Project Evaluation 100 30 30 30 30 30 250 16 2

Total Base Cost 14,821 25,505 31,873 44,480 63,131 83,223 263,033 16,970 5,194

Physical Contingencies 406 1,022 1,183 1,324 1,856 2,433 8,224 530 130

Price Contingencies and Rcunding 1,364 6,743 13,349 24,892 44,501 71,894 162,743 10,500 2,040

GRAND TOTAL 16,591 33,270 46,405 70,696 109,488 157,530 434,000 28,000 7,364

January 25, 1980

SRI LANKA

Smallholder Rubber Rehabilitation Project

Yearly Replanting Costs & Proposed Payments (Rs/ha)

Actual Replanting Cost Replanting Costs for Estates Replanting Payment

(labor valued at market rate) (labor valued at official rate)

Labor Payment Payment

Stage Required Labor Material Total Labor Material Total in in Total

(MD) (at Rsl2/MD) (at Rsl7.5/M0) _ _-Cash Kind

2/

Preliminary Works 257 3,084 - 3,084 4,498 - 4,498 1,000 - 1,000

Planting Year 163 1,956 3,435 5,391 2,695 3,435 6,130 1,918 1,632 3,550

Second Year 108 1,296 562 1,858 1,890 562 2,452 2,029 471 2,500 1

Third Year 83 996 751 1,747 1,452 751 2,203 1,814 686 2,500

Fourth Year 63 756 702 1,458 1,103 702 1,805 1,833 667 2,500

Fifth Year 60 720 695 1,415 1,050 695 1,745 1,340 660 2,000

Sixth Year 46 552 679 1,231 805 679 1,484 360 640 1,000

Seventh Year n.r. n.r. n.r. n.r. n.r. n.r. n.r. 350 650 1,000

Total 780 9,360 6,824 16,184 13,493 6,824 20,317 10,644 5,406 16,050

1/ Further details in Annex 1, Table 1.

2/ Actual costs -in government estates (SPC & J1DB) where minimum wage laws are enforced.

December 20, 1979

SRI LANKA

Smallholder Rubber Rehabilitation Project

Cash Flow of the Rubber Replanting Fund A'(Rs M)

Years 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991onwards

Receipts (in constant 1979 prices)Replanting Cess 1/ 34.3 46.4 46.9 47.1 47.2 47.5 48.3 49.8 51.4 53.3 55.4 57.9 60.6Investment Income 4.0 3.7 2.2 -

2/ Sub-Total Receipts 38.3 50.1 49.1 47.1 47.2Opening Balance 52.5 48.4 28.8 (1.8) - - -_ _

Total Cash Available 90.8 98.5 77.9 45.3 47.2 47.5 48.3 49.8 51.4 53.3 55.4 57.9 60.6

Disbursements (in constant 1979 prices)Replanting Payments 3/ 38.1 65.4 77.7 90.3 105.5 119.9 134.0 134.6 137.0 137.2 135.6 133.2 132.0Other Incentive Schemes 4/ 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0Administrative Expenses 5/ 2.3 2.3 - - - - - - - - - - -

Total Cash Disbursements 42.4 69.7 79.7 92.3 107.5 121.9 136.0 136.6 139.0 139.2 137.6 135.2 134.0

Closing Balance 48.4 28.8 (1.8) (47.0) (60.3) (74.4) (87.7) (86.8) (87.6) (85.9) (82.2) (77.3) (73.4)

Contribution Required From - - 47.0 60.3 74.4 87.7 86.8 87.6 85.9 82.2 77.3 73.4Budget Sources (in constant 1979 prices)

Contribution Required From _ _ _ 3.1 3.9 4.8 5.6 5.7 5.7 5.5 5.3 5.0 4.7 1Budget Sources in constant US$ equiv.)

Contribution Required From 6/ - - - 4.1 5.8 8.0 10.5 11.9 13.4 14.4 15.6 16.5 17.3Budget Sources (in current US$ equiv.)

IDA Contribution to the Fund _ _ 0.5 1.0 1.8 2.9 3.4 3.7 - - - - -

Net GOSL Contribution -/ - - (0,5) 3.1 4.0 5.1 7.1 8.2 13.4 14.4 1% g lh S 17.3(in current US$ equiv.)

1/ Based on (i) cess level at prevailing rates of Rs 0.26/kg in 1979 and Rs 0.35 thereafter; it is assumed that the current rate of Rs n.35 will be maintained inreal value throughtout; (ii) 90% of total expected production being exported; and, (iii) average yields of 265 kg/ha for rubber uprooted and average yield of1,070 kg assumed over recently replanted mature rubber.

2/ Deposit with Treasury (Rs 50 M), Investment in Government loan (Rs 2 M), and other loans (Rs 0.5 M).3/ Based on following total planting targets (smallholder and estates):

1979: 4,900 ha 1983: 8,500 ha1980: 6,100 ha 1984: 9,300 ha1981: 6,900 ha 1985: 10,100 ha1982: 7,500 ha 1986 onwards: 8,100 ha

It also assumes a Rs 16,050 replanting payment (eight installments in seven years as follows: Rs 3550 + 1000; 2500; 2500; 2500; 2000; 1000; 1000.Same replanting payment applying to smallholders and estates. Should the payment to estates be terminated, cash disbursements on replantingpayments should be reduced by 35 % and the required contribution from budget resources reduced accordingly.

4/ Rubber New Planting, Crop Diversification, Factory Modernization and Subsidy Schemes.5/ Administrative expenses to be funded from budget from 1981 onwards.6/ Assuming average domestic price increases of 12% per annum. and corresponding annual adjustments of the cess level and replanting payments.7| To dbtain Net GOSL contribution in local currency in any given year, the US$ amount shown should be converted at the exchange rate prevailing in that year. n M

A/ Based on replanting payment rates and corresponding targets prevailing at the time of appraisal (footnote 3/). Should be reworked as and whenreplanting nayment rates and targets are revised.

December 11, 1979

- 87 -

ANNEX 4Table 12

SRI LANKA

Smallholder Rubber Rehabilitation ProjectDisbursement Schedule

US$ '000

Project Year (Calendar Year) Disbursements Cumulativeand Quarter per Quarter Disbursements

PY I (1980)- Fourth 150 150

PY II (1981) - First 300 450- Second 350 800- Third 250 1,050- Fourth 250 1,300

PY III (1982) - First 400 1,700- Second 400 2,100- Third 450 2,550- Fourth 450 3,000

PY IV (1983) - First 500 3,500- Second 500 4,000- Third 600 4,600- Fourth 600 5,200

BY V (1984) - First 700 5,900- Second 700 6,600- Third 850 7,450- Fourth 850 8,300

PY VI (1985) - First 1,100 9,400- Second 1,100 10,500- Third 1,250 11,750- Fourth 1,250 13,000

(1986) - First 1,500 14,500- Second 1,500 16,000

December 10, 1979

SRI LANKA

Smallholder Rubber Rehabilitation Project

Detailed Disbursement Categories(Rs '000)

----------------------------------------------------------------------- Categories ------------------------------------------------------Components Fertilizer Cash Fertilizer Planting Civil Vehicles & Salaries & Operating Local Foreign Train- Unallocated Total

Subsidy Payments Materials Works Equipment Allowances Costs Training ing & T.A.

Replanting 40,532 107,100 23,442 23,219 - - - - 194,293

DRC Component - - - - 855 1,035 5,257 1,403 - _ 8,550

AID Component - _ _ 11,850 8,278 15,787 7,797 - - 43,712

Training - - - 1,463 1,186 - - 1818 2,193 6,660

Technical Assistance - - - - 1,395 1,395

Processing Component - - - - 1,296 1,356 _ 250 - 2,902

Research Component - - - _ - 3,484 - - _ - 3,484

Project Coordination - - - - _ 382 987 418 - - 1,787

Project Evaluation - - - - - - 250 - - - 250

Base Total 40,532 107,100 23,442 23,219 15,464 15,721 22,281 9,868 1,818 3,588 263,033

Physical Contingencies 2,025 - 1,172 3,481 1,546 - - - - - 8,224

Total incl.Phys.COnt.(Rs'000) 42,557 107,100 24,614 26,700 17,010 15,721 22,281 9,868 1,818 3,588 271,257

Total incl.Phys.Cont.(US$'00O) 2,746 6.910 1.588 1,723 1,097 1,014 1,437 637 117 231 17,500

Disb-rsement Percentages uh 807 su. 8u7. uil Ui Uio lU

Credit Allocation 8,177 878 811 - 231 5,903 16,000

Credit Allocation after - 11,200 1_150 1,100 _ _ _ 250 2,300 16,000

reducing the unallocated andround ing

1/ 5a/ on fertilizer, 15% on planting material and 10/ on civil works.

December 7, 1979

- 89 -

ANNEX 4Table 14

SRI LANKA

Smallholder Rubber Rehabilitation Project

Financial and Economic Rubber Prices

1990 Forecast

US cents/kg.

RSS 1 CIF New York 1/ 115.0in 1977 prices

Adjusted to 1979 prices 152.4(Inflation Factor 1.33)

CIF New York adjusted 2/ 142.9for quality differential -

FOB Colombo after shipping 125.5and handling charges 3/

-______-___ - Rs -- -

Financial CF Economic

FOB Colombo -/ 19.45 19.45

Less

Shippers and Brokers Charges 0.42 0.91 0.38

Cesses: Rubber Replanting 0.3500 -Rubber Control 0.0100Rubber Research 0.0800Medical 0.0165 -

Sub-Total 0.4565 -Say 0.46 -

Export Duty -/ 10.31

Upgrading in Colombo 0.50 -

Dealers Charges 6/ 0.15 1.11 0.17Sub-Total Deductions 11.84 0.55

Price in Project Area 7.61 18.90Say 7.6 18.9

1/ Source: International Rubber Study Group as quoted by EPDCE (January 1979).2/ Quality adjustment factor of 0.938 on the basis of an average mix

of export grades and prices constant throughout the period.

RSS Grade 1 2 3 4+5 )Percent of exports in this grade 47 20 25 8 ) 0 938Price relative to RSS 1 100 0.94 0.90 0.69 ) 0

3/ Actual Singapore-New York freight cost for rubber of US¢ 15.8/kg in 1979+ 10% cost increase, i.e. US¢ 17.4/kg.

4/ At O.E.R.: Rs 15.5 = US$1.00.5/ Export duty as levied per gazette of November 15, 1977.6/ Mostly transport cost, while profit is made by downgrading at the

purchase point.

December 14, 1979

- 90 -

ANNEX 4Table 15

SRI LANKA

Share of FOB Returns from Rubber Export

Amongst Producers, Market Intermediaries and GOSL

Share of FOB Returns Application of

from Rubber Exports FOB Returns toRubber Production Costs

Replant ing

Payments

(22%)Export

DutyFertilizer

GOSL (52.5%) , Subsidies

(55%) (14%)

TechnicalAssistance

(8%)

Surplus(11%)

MARKET Cesses (2.5%)

INTERMEDIARIES(5%)

ProductionCosts(22%)

RUBBER ProducerPRODUCERS- Price _

(40%) .

(40%)Net Return

to Producer

(18%)

FOB Returns to Rubber Producers:

Producer Price 40%Replanting Payments * 22%Fertilizer Subsidies: 14%

Total 76%

-91 - ANNEX 4

Tables 16 and 17SRI LANKA

Smallholder Rubber Rehabilitation Project

Table 16: FINANCIAL RETURNS TO SMALLHOLDERS

Category of Smallholder Indicator ----- Results ------------Before Financial After Financial

Assistance Assistance

Smallholder usingfamily labor % increase in

NR/MD 1/ +421% +421%

- no intercrop NII 2/ + 18% + 35%- with intercrop NII 2 + 30% + 43%

Smallholder usinghired labor

- no intercrop IRR 3/ 11% 32%

1/ NR/MD Net Return per man-day (full development vs preproject)

2/ NII = Present Value of Incremental Net IncomePresent Value of Without Project Net Income

It represents the increase in the smallholder's average annual income asa result of the investment, and is expressed in percentage terms.

3/ Financial Rate of Return.

Table 17: REPLANTING PAYMENT PER HECTARE

Years Installment Stage ReplantingPayment (Rs)

First First Land Preparation 1,000First Second Planting 3,550Second, third Third, fourthand fourth and fifth 3 x 2,500

Fifth Sixth Maintenance 2,000Sixth Seventh Maintenance 1,000Seventh Eighth Opening 1,000

16,050

January 21, 1980

SRI LANKA

Snollholder Robber Rehabilitation Project

Cash Flow Analysi. for Three Tyves of Farm

u-ne Rectare Model

Years 1 2 3 4 5 6 7 8 9 10 11 12 20 24 30

Case I - Srsallh.ldi.g Withoot Inte--rp

Without ProjectOperating In-.e 2014 2014 2014 2014 2014 2014 _ - - -_ _Operoting Costs (Inpots only) 201 201 201 201 201 201

Net Income 1813 1813 1813 1813 1813 1813

With Proiect

Capital Costs (Inputs only) - 3 1/ 562 751 702 695 683 - - - - - -Operating Incom.e 2014 2470 - - - - - 2280 5130 6384 7258 8132 9804 8132 7258Operating Costs (Inputs only) 201 - - - - - 1158 1258 1060 1126 1191 1317 1157 1074

Net Intone 1813 (965) (562) (751) (702) (695) (683) 1122 3872 5324 6132 6941 8487 6975 6184

Incremental Net Income - (2778) (2375) (2564) (2515) (2508) (683) 1122 3872 5324 6132 6941 8487 6975 6184

Pi.s Replaoting Paymn.t - 4550 2500 2500 2500 2000 1000 1000 - - - - - - -

Incremental Cash Flow . 1772 125 (64) (15) (508) 317 2122 3872 5324 6132 6941 8487 6975 6184

NPV of Incrementol Cash Flow at 122.: Re 22.919/ho

Case II - nSmllholdin8 With IntercroP

Without Project

Net Income 1813 1813 1813 1813 1813 1813 -

With ProiectCapital Costs (Inputs only) - 3435 562 751 702 695 683Operating Income - Rubber 2014 2470_ - - - - - 1824 4712 5966 6840 7675 9804 8132 7258

- Ranana - 3000 5800 5800 5000 - - - -Sub-Total 2014 5470 5800 5800 5000 - - 1824 4712 5966 6840 7675 9804 8132 7258

operoting Costs (Input) - Robber 201 - - - - - - 1102 1227 1029 1094 1157 1317 1157 1074

- 8anana - 916 1040 1090 1040 - - - - - -_Sub-Total 201 916 1040 1090 1040 - - 1102 1227 1029 1094 1157 1317 1157 1074

Net Income 1813 1119 4198 3959 3258 (695) (683) 722 3485 4937 5746 6518 8487 6975 6184

Incremental Net Income - (694) 2385 2146 1445 (2508) (403) 722 3485 4937 5746 6518 8487 6975 6184

Plus Replanting Payment - 4550 2500 2500 2500 2000 1000 1000 - - - -

Iocremental Cash Floe 3856 4885 4646 3945 (508) 317 1722 3485 4937 5746 6518 8487 6975 6184

NPV of InTrementol Cash Flo. at 12%: Rs 36.112/ho

Case ITT - Smallholdimg Using Hired Labor

Without Pro1lectOperatfng Incone 2014 2014 2014 2014 2014 2014 - - - - - _ _Operating Conts - I.puts 201 201 201 201 201 201

- Labor 1422 1422 1422 1422 1422 1422Net Iscone 391 391 391 391 391 391

With ProiectCapital Crst - Inputs - 3435 562 751 702 695 683

- Labor 1680 3360 1296 996 756 720 552Sub-Total 1680 6795 1858 1747 1458 1415 1235

Op-rating I-come 2014 2470 -_ _ _ _ 2280 5130 6384 7258 8132 9804 8132 7258

Operating Costs - Inputs 201 - - - - - - 1158 1258 1060 1126 1191 1317 1157 1074- .ab,or 1422 _ - - _ - - 1644 3564 3180 3180 5180 3100 5180 5520

Sub-Total 1623 _ - - - - 2802 4822 4240 4306 4371 4497 4337 6594

Net Income (1289) (4325) (1858) (1747) (1458) (1415) (1235) (522) 308 2144 2952 3761 5307 3795 664

1ncremental Net Income (1680) (4716) (2249) (7138) (1849) (1806) (1235) (522) 308 2144 2952 3761 5307 3795 664

Plus Replanting Payment - 4550 2500 2500 2500 2000 1100 1000 - - - - -

Incrneental C.sh Flow (1680) (166) 251 362 651 194 (235) 478 308 2144 2952 3761 5307 3795 664

NPV of Incremental Cash Flow at 12,: R.s 9 742/ho

1/ Rubber wood sales.t|

December 12 1979 w!a=Deceber 12, 1979 0-i

sc-

SRI LANKASmallholder Rubber Rehabilitation Project

Government Project Cash Flow

(Rs '000)

Replanting Administrative Fertilizer Revenue Revenue Net GOSL CumulativeYears Payments Overheads Subsidy from Cess from Export Duty Revenue Net Revenue

I 0 13487 0 0 0 -13487 -13487

2 7285 16107 1013 -149 -4375 -28928 -42415

3 16738 11212 3123 -408 -12021 -43502 -859174 29200 8188 8862 -779 -22950 -67960 -153877

S 42849 8509 11773 -1224 -36070 -100425 -254301

6 57688 7773 17761 -1744 -51373 -136340 -380641

7 43207 5090 20599 -1595 -46986 -117490 -508131

8 38408 4660 22486 -1175 -34598 -101327 -609457

9 30406 3900 22152 -314 -9243 -66014 -675472

10 20004 2810 21542 987 29085 -14285 -689756

11 10403 1520 20668 2729 80387 50525 -639231

12 5601 0 19576 4311 126978 106111 -533120

13 0 0 18265 5650 166445 153830 -379290

14 0 0 16736 6459 190250 179973 -199317

15 0 0 16736 7105 209293 199662 345

16 0 0 16736 7671 225964 216899 217245

17 0 0 16736 8114 239017 230395 447640

18 0 0 16736 8500 250399 242164 689803

19 0 0 16736 8499 250358 242121 931924

20 0 0 16736 8804 259327 251395 1183319

21 0 0 16736 8687 255905 247856 1431175

22 0 0 16736 8395 247306 238966 1670141

23 0 0 16736 8089 238274 229627 1899768

24 0 0 16736 7685 226387 217336 2117105

25 0 0 16736 7339 218180 206783 2323888

26 0 0 15312 7186 211664 203538 2527426

27 0 0 12819 7104 209262 203547 2730972

28 0 0 9259 6770 199416 196927 2927899

29 0 0 4985 6634 195405 197054 3124953

30 0 0 0 5346 157475 162821 3287774

Financial IRR to Government 15.3% excluding overhead costs13.7% including overhead costs

NPV of Government Revenue @ 12%: Rs 128.3 M excluding overhead costsRs 74.5 M including overhead costs

Cost Recovery Index @ 12% 1.53 excluding overhead costs1.25 including overhead costs X

F u 41

February l5, 1980

SRI LANKA

Soallholder Rubber Rehabilitation Project

1/Income Levels of Project Participants (Rs)

------------- ---------------- Pre-project …------- ----------- Full Project Devt .--------------

Categories of Household Per Capita % above Household Per Capita % aboveBeneficiaries Income Income Poverty Income Income Income Poverty Income

Small (0.4 ha) 2511 474 - 60% 3930 741 - 37%

Medium I (0.8 ha) 4142 781 - 34% 6980 1316 + 12%

Medium II (2.0 ha) 13010 2455 +108% 20026 3778 + 221%

Large (12.0 ha) 40239 7592 +544% 74620 14079 +1095%

1/ From Models 1 to 4 in Project File.

Proj ect Impact on Poverty Income Group

Category of % Number % Household % Household % Household in % Project Benefits- % Project BenefitsHolding of in Poverty in Poverty Poverty Income Accruing to Each Accruing to(ha) Households Income Group Income Group Group at Full Category Poverty Income

before Project Development Group

0.4 22 80 17.6 17.6 6 4.8

0.8 42 70 29.4 24 16.8

2.6 33 - 47 -

12.0 3 - - 19 -

Landless n.a. 1007. _ _ n.a. 4 4.0

100 47.0 17.6 100 25.61/ Estimated on the basis of shares of the financial NPV of the project, calculated Xi

at the OCC = 12%, going to each group. axN >.

40

SRI LANKA

Smallbolder Rubber Rehabilitation Project

Economic Benefit and Cost Streams

(Rs '000)

Years ----------------------------- Benefits ----------------- _--_________ ---------- Production Costs ------------- .roject Net Economic

Rubber GPC Rubber Banatnas Wood Total Inputs Labor Total Overheads Benefits

----------- ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 4151 ------ 7-36.( )), ;y t) f1 tl 00! 0 ., 1 .00 0 1487.36 1487. 36 13205. 78 - 4Gi3. *4

3075-) 31 1; P G 1'tl , 72 i8 E o7 5e79 .elf , -0 F.4 9h90.1i .44 0091 F . I3 -2 354 7 4.36-413083 5" 1498.90 ~~~~~~~~~~~~~~~~~~~~~~~~~~7. 1' 3-.1 7 -8'3 -49C1533't 3;!42249Ci PS F3t' ~ 9>;7 zJ'??. F.-75-195 'i 31, _q 1 '' 8<3l,,ft 57S>. -c4 99953_r478'

- 7-143 I 4 -2 27- t i' ' -ff 9i?t' _i4-79if , 7 i 7 S?-5' 2 r 0-A 37 25pe56i. f3 6V-- * r3 1 47Ge3. 25

- 114 '-' 12 -Ve 5 43fi ! .7'3 .t 30(.2V 35 1 'f; 7 f!94.-97i -?2-5, -4 3-992 ,52 3c925i 16t7. 7- e52. 39 -86036.05

-. f5i473 .8 1 25F7. -35240l7. , r39 5021-91 .77 -2-3-ll _,l 4t-3 . . 632 S8.39 -7105407 -'!F ' ,) ) "41 0 -7 *' 0 (0 ~398 1-'4~4,047 O 4 1 4 -7- s F, 7F 0 4 '5449.513 4-71 . .00 -6455S.33

9 _f'33183-v 3;5 '7'747 60 "r"3';3gi mtr 0 .. -- ?3 3-3tlF 70 4'"F7d l;03 _t9729t9MS 330281.342 4723 .00 -58E'f3.66

1 - 9 A 4 -2.j 74 5l .. 3 - -.. 4 4 ' 0 , ? .01 4. 4011A .'7' , . -4?s 359 >3.S' A31o. 0 -2342!?1.2 :

Id0 -391'!SiS 0 31 i3 C 07 l- 00 ?:58.:04 . 90) 71F.7 9F7 G 35 ~ ~' -4.a 5 .?983., 3G1 7. 0-0o 24776.t41

53542 -9 14 I ) i44 30 - 34 '4 .33 C 8438.i 2 7e9.4 60496G. ' 0 2 12.00 e 0 4 3 5 . 43

;;3? 01-1 4107q7 40 ' "s 3t4l7 740Z"'3. 4fl 3907,5.80 86i 7601 6856.20 1407.007 A169945.20

44 0 -30 9 , 3 q7 3 3 3F07.70 0 61 I 3 4540' 6 .83030. 04 :734J9 . 72 723767. 0 .00 2 412S5 .84

t14 !?6; 1310 S 01. 0" 3cj79 6 S0 3"3J00 3104 77 7 6 '6 ? G89R7 - SO . CO 289289.71

.5 0 .'73 8 01' i'v? r7 f3 V ,0 ' 00 36673. '139tS7, 1 2 69 760.46 0.0 32Ti35.57

22*400)?.- RO "'l 3'' 40' 30 1 :.' 4241.j G.20 3i735i. I 3 33CS7.' 70A36.4A 0.00 -353877 77 77

72tY41277 4X-} "3' Y-7,19 7(, l{)(; (-1 0 448595.60 37893.94 330l87.1 70970.76, 0.0t- 377624,62

-2 257291w7f/ X 4o \-' 7t ' -'3 aF-9 9 4t . .1 32e340.48 . 30F7- 2 71427.64 33.00 39825 0.6

'- S . 174 ;b C 33 3 Z t3 5 . ( C 8 .0 ?S5F'o .397,. 79f. 9. 0 . 00 408367.59,9 ! 3. Cl " 1 " 70 O . 00 48635,.70 38 7C . e 33087.12 7'3 '. 97.97 0. 00 414556.73

?t. "7_747 8f3. SO ?17/ PI C 0. 003 490055.F0 38577.99 330637.12 7166S5.' 0.0O 408390.69

22 ?'i 72 5.44"" "0 0 'O 4,A1446.'S 3240. 36 330t7.12 71327.50 0.00. 392820.70

23 .13.17741 2 -, j9; e .'' 30 e.3e 447, ''20 ',707'9 33067.12 70956.04 0.a0 376371.6624 "I' " 8 -C-' " ' t; 0 5 t s25186.iC3 37379.52 32087.12 703t4S5.64 0.33O 354719.46

.~5 21I 7S ?4.?0 ""9 PZ C3' i-!.l 4.9085.J'' 369F5O.3t 33087.t2 70038.03 0.0(0 328047.17'3- ".')0 4:9SQ if! .3jL5X;? ") t30l e0 397f911 t.0 2 6660.5A ?3943.ER 6BS04.69 0. }3.

7 3--'?; 33 l92.6?,tg- i C "3 03 2?935133 2'z 3hf02.6s 36453.GO 6705G.29 9.00 326456.61

;'t? '8H5722.30 3 89368.40 0tC 0 .00 3759OP.701 24fi'?7 42 239266. '12e 63926.30 .0O 311172.40

:8C 3e; 307. 2- :2,10.00 a, oe)0 0.00} no 36757: .70 1780e'5.80 4250S.2£? 60.J .02 '_.00 307256.6210} 1 79!.-,0.9. 3 '.1 $ ?12,. 80 fCt. 1 30 3: .B00 3S20)33.90 983.R41 - 47242.. .0 570t6a4. 5 0.00 304949.2w

NPV at 12 = Rs 484 MERR = 22.8%

I-.t|I-t 3

- 96 -ANNEX 4

Table 22

SRI LANKA

Smallholder Rubber Rehabilitation Project

Conversion Factors

Cost Item % of Project ConversionEconomic Cost Factor

Fertilizer 24 1.01 /aBudded Stumps 9 0.69 IaCivil Works 6 0.71 /aEquipment 6 0.98 /aLabor 40 0.83 lbStaff salaries 9 0.77 /cOthers 6 0.91 Id

/a Details are in Project File./b Rural Consumption CF./c Weighted Average of Rural Consumption CF of 0.83 (1/3)

and Urban Consumption Factor of 0.75 (2/3)./d Standard Conversion Factor (SCF).

Source: SCF, CF (Road Transport), CF (Rural Consumption)and CF (Urban Consumption) from "Estimates ofAccounting Prices for Sri Lanka" by Deepak Lal(June 1979).

January 16, 1980

SRI LANKASMALLHOLDER RUBBER REHABILITATION PROJECT

IMPLEMENTATION SCHEDULE

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

GENERAL (PCU) } Release of Funds for Preproject Activities.Creation of PCU. VSubmission Study Tour Itinerary to IDA. . .Submission of draft Tender Documents for '

Equipment and Civil Works to I DA.Advertisements for Consultants.Recruitment of Consultants. ' 5 c

Preparation of Reporting Format. V .

Submission of Quarterly Progress Reports. . v v V c 'V ' v v v V v V v v V REPLANTING PROGRAM

Finalize Contracts for Planting Material (DRC). V VV VPublicity Campaign (ASD). - - - - - - - - -Issue Revised Forms/Procedures (DRC). VIssue Lists of Registered Growers by Ranges : .(DRC/ASD).

Select Distribution Points Within Ranges (ASD). vOrder Fertilizer Requirements (DRC). 'Vv V" V vIssue Lists of Replanters and Entitlements byV V"Range (DRC/ASD). 5

Submit Inspection Program (ASD). 'V v V ' vAppoint Ombudsmen. :v

Distribute Intercropping Advisory Leaflets (ASD). vEstimate Intercrop Fertilizer, Platting Material

Requirements (DRCi. ,Annual Replanineg Targets (Hectares) 1600 2800 4000 4800

INSTITUTIONAL SUPPORTRecruit Incremental Staff (ASD). .

Recruit Incremental Staff (DRC). __.Study Tours (PCU/ASD/DRC). 'V 'V

Select Tenderer for Training Center IASO). -

Start Construction Training Center IASD).:. 5

Start Procurement Training Equipment and _ --

Vehicles (ASDI.Start Training Courses (ASD).Complete Design all other Civil Works (ASD). ,Construction Regional Offices IASD/DRC). - - - IConstruction Fertilizer Stores (ASD).Construction Houses/Offices (ASD). - -- - - - - - -3

Equipment Procurement (ASD).PROCESSING COMPONENT (ASD) i '3

Establish PAD, Review Rehabilitation Proposals. 3 4Survey Existing GPCs/Private Processors. V3Review Proposals for Expansion of GPCs. 'V

EVALUATION COMPONENT (ARTI/ASD/PCUIDesign Surveys/Studies. . |Baseline Survey. VReport Findings from Survey. 3 'Design Case Studies. .

Conduct Case Studies.TECHNICAL ASSISTANCE ' _ .

Replanting Scheme Administration.Training.Processing. /

Project Evaluation. PH17

//Main Planting Season. ol an-13

_ 98 -

ANNEX 4Chart 2

SRI LANKASMALLHOLDER RUBBER REHABILITATION PROJECT

Proposed Project Organization

Mi nister of PlantationIndustries

tary Rubber Policy!J ~~~~Rubber PolicyI Secretary MPI |-rRubber Policy11 ad lnnn

Review Committee Unit

Agrarian Research *n ining Project Coordination _ _ _ _

Rubber Research Advisory Services Department of

Institute of Department IRubber ControlSri Lanka L ~

1/ Rubber Policy Review Committee

Chairman - Secretary of MPI

Members

Representative of Ministry of Finance and Planning Representative of SPCRepresentative of Ministry of Trade and Shipping Representative of JEDBRepresentative of Ministry of Industries Representative of rubber smallholdersDirector, RRISL Representative of private rubber estatesRubber Controller Representative of SRMCDirector, ASD Representative of private rubber processors

Representative of the Colombo Chamber of Commerce

World Bank -- 21274

SRI LANKASMALLHOLDER RUBBER REHABILITATION PROJECT

Proposed Organization of Advisory Services Department

| Director |

HEAD OFFICE

Deputy Dlrector l l ~~~~~~~~~~Deputy Director

(Admimstion & Training) | | (Field Services)

Head HeadJ

(Administration & (Training Unit)Accounts

Administrative Staff Training Staff" (Processing Advisory (Extension (Supplies

REGIONAL - -

OFFICE

DIV ISIONA L,_______________OFFICE _ dvis Dvso

Advsors Offiers Staf

RANGE_________

OFFICE

OFFICE~~~~~~~~~~~~~~~~~

j/ Training staff are located at Training Center r

World Bank--21169 W 4-

- 100 -

ANNEX 5Page 1

SRI LANKA

RUBBER REHABILITATION PROJECT

Selected Documents and Data Available in the Project File

A. General Reports and Studies on the Sector and Sub-Sector.

Al. World Bank, "Development in Sri Lanka: Issues and Prospects" ReportNo. 1937-CE March 22, 1978.

A2. World Bank "Sri Lanka. Medium Term Developmaent Strategy 1979-83.Aide Memoire to the 15th Meeting of the Sri Lanka Aide Group."April 1979.

A3. Commonwealth Development Corporation. "Report on the Rubber IndustryMasterplan Study". Twelve volumes. September 1979 (released December1979). South Asia Records.

A4. Dr. Jogaratnam et al, "Report on Pricing ancl Subsidy Policies AffectingTree Crop Production in Sri Lanka," September 1979.

A5. Agriculture/Fertilizer Industry of Sri Lanka, September 1979.

B. Reports and Studies Relating to the Project

Bl. FAO/World bank Cooperative Program Investment Center "Draft Report ofthe Sri Lanka Smallholder Rubber Replanting Project Preparation Mission",Report No. 15/79 CEY 15. March 9, 1979.

B2. GOSL (MPI) Smallholder Rubber Replanting Prcject Revised PreparationReport.

B3. The Rubber Research Institute of Sri lanka "Annual Review, 1978",August 1979;

B4. John Keels "Rubber Statistics, 1978, Sri Lanka."

B5. Messrs. A.B. Dissanayake, W.H. Premachandra and A. de Vass Gunawardena,Ministry of Plantation Industries, January 1979. "Sample Survey of theRubber Smallholdings in Ratnapura and Kalutara Districts".

B6. Sri Lanka: The Rubber Replanting Scheme (IMF Draft July 19, 1979).

C. Selected Working Papers

Cl. Farm Models and Analysis Procedures.

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ANNEX 5

Page 2

C2. Agricultural Project Analysis System:

- Data for Financial and Economic Analysis Stored on Magnetic Tape.

- Complete Set of Financial Commodity and Farm Budgets.

- Project Labor Use.- Physical Inputs and Outputs for the Project.

- Farm Size Distribution.

C3. Production Aspects.

- Labor Productivity and Calendar of Operations for Rubber and

Intercrops.- Inputs and Returns for Pineapples and Passionfruit as Intercrops.

C4. Group Processing Centers.

- Construction Costs.- Operating Norms.- Prodution Records for 1978.

C5. Project Specific Conversion Factors.

C6. Accounts.

- DRC Annual Accounts 1978.

C7. Replanting Scheme.

- Achievements Within Project Area 1953-1978.- Achievements Island-Wide 1953-1978.

C8. Export Duty Sliding Scale.

C9. Legislation: Rubber Control Act and Rubber Replanting Subsidy Act.

C10. Application for Replanting Permit.

Cll. Consultants'

C12. Miscellaneous Statistics.

C13. Miscellaneous Working Papers.

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