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Document o f The World Bank

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

FOR OFFICIAL USE ONLY

Report No: 28542-LK

PROJECT APPRAISAL DOCUMENT

PROPOSED CREDIT

IN THE AMOUNT OF SDR 44.6 MILLION (US$64.7 MILLION EQUIVALENT)

TO THE

DEMOCRATIC SOCIALIST REPUBLIC OF S R I LANKA

SECOND NORTH-EAST IRRIGATED AGRICULTURE PROJECT (NEW 11)

May 25,2004

Rural Development Sector South Asia Regional Office

CURRENCY EQUIVALENTS (Exchange Rate Effective May 1,2004)

ACLG ADD A I

CAS CBO CDD CST CF CDLIP

CFAA C M

cs DCA

DPO DS

E M F ERD

FO G A GN GOSL I A C ICB

IDA IP LDI LSA JBIC LTTE MHCIEPE&ID

Currency Unit = Sr i Lankan Rupees (Rs) Rs 98.32 - 1 US$ -

U S $ l SDR 0.68902

FISCAL YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS

Assistant Commissioner o f Local Govemment Agrarian Development Department Agricultural Instructor

Country Assistance Strategy Community Based Organizations Community Driven Development Community Support Team Community Facilitator Community Development and Livelihood Improvements ‘Gemi Diriya’ Project Country Financial Accountability Assessment Community Mobilizer

Chief Secretary Development Credit Agreement

District Project Office District Secretary

Divisional Secretary

Environmental Management Framework Extemal Resources Department o f the Ministry Finance Farmers’ Organizations Govemment Agents Grama Niladhari Govemment o f Sri Lanka Interim Administrator Council Intemational Competitive Bidding

International Development Association Indigenous Peoples Livestock Development Instructor Livelihood Support Activities Japanese Bank for Intemational Cooperation Liberation Tigers o f Tamil Eelam Ministry o f Housing and Construction Industry Eastem Province Education and Irrigation Department Ministry o f Provincial Councils and Local Govemment Ministry o f Relief, Rehabilitation and Reconciliation

NCB NE NEERP

NEIAP NERP NGO NPSC OP PA

PAD PCCDF

PDA PDAPH

PDO PEACE

PRS o f PSC

RDO R D S RRR SDA SIL T A TOR VADP VDP VSEP VRC VSHLI WRDS

Non Competitive Bidding North East North East Emergency Reconstruction Project North East Irrigated Agriculture Project North East Reconstruction Fund Non Govemmental Organization National Project Steering Committee (World Bank) Operation Policy Project Agreement

Project Appraisal Document Provincial Coordination Committee for Donor-Funded Projects Provincial Department o f Agriculture Provincial Department of Animal Production and Health Project Development Objective Pro-poor Economic Advancement and Community Empowerment Project Implementation and Operation Manual Poverty Reduction Strategy Project Steering Committee

Rural Development Officer Rural Development Societies Relief, Rehabilitation and Reconciliation Special Dollar Account Specific Investment Loan Technical Assistant Terms o f Reference Village Agricultural Development Plan Village Development Plan Village Socio Economic Profile Village Rehabilitation Committee Village Self Help Leaming Initiative Women Rural Develop-ment Society

Vice President: Praful C. Pate1 Country ManagedDirec tor: Sector Director: Constance Bemard Sector Manager: Gaj anand Pathmanathan Task Team LeaderKO-Task Leader:

Peter C. Harrold

Nihal Fernandomadhavan Balachandran

FOR OF'FICIAL USE ONLY S R I LANKA

Second North-East Irrigated Agriculture Project

. CONTENTS

A . STRATEGIC CONTEXT AND RATIONALE ........................................................................ 1 Country and Sector Issues ...................................................................................................... 1

.Rationale for Bank Involvement ............................................................................................. 2 Project Contributions to Higher-Level Objectives .................................................................... 3

1 . 2 . 3 .

B . PROJECT DESCRIPTION ..................................................................................................... 3 Lending Instrument ............................................................................................................... 3

Project Components ............................................................................................................... 4

Lessons Leamed and Reflected in the Project Design ............................................................... 5

1 . 2 . 3 . 4 . 5 .

Project Development Objective (PDO) and K e y Indicators ....................................................... 3

Alternatives Considered and Reasons for Rejection ................................................................. 6

C . IMPLEMENTATION ............................................................................................................. 7 1 . Partnership Arrangements: Inapplicable .................................................................................. 7

2 . Institutional and Implementation Arrangements ....................................................................... 7 3 . Monitoring and Evaluation of OutcomesResults ................................................................... 10

4 . Sustainability ...................................................................................................................... 10 5 . Critical Risks and Possible Controversial Aspects .................................................................. 11

6 . Loadcred i t Conditions and Covenants ................................................................................. 12

D . APPRAISAL SUMMARY ..................................................................................................... 13 1 . Economic and Financial Analyses ......................................................................................... 13

2 . Technical ............................................................................................................................ 14

3 . Fiduciary ............................................................................................................................ 14

4 . Social ................................................................................................................................. 15

5 . Environment ....................................................................................................................... 15

6 . Safeguard Policies ............................................................................................................... 16

7 . Policy Exceptions and Readiness .......................................................................................... 16

Annex 1: Country and Sector or Program Background ......................................................... 17

Annex 2: Major Related Projects Financed by the Bank and/or Other Agencies 22

This document has a restricted distribution and may be used by recipients only in the performance of their official duties . I t s contents may not be otherwise disclosed

................

lwithout W o r l d Bank authorization . 2

Annex 3: Results Framework and Monitoring ........................................................................ 24

Annex 4: Detailed Project Description ...................................................................................... 31

Annex 5: Project Costs ............................................................................................................... 35

Annex 6: Implementation Arrangements ................................................................................. 36

Annex 7: Financial Management and Disbursement Arrangements ..................................... 59

Annex 8: Procurement ................................................................................................................ 65

Annex 9: Economic and Financial Analysis ............................................................................. 73

Annex 10: Safeguard Policy Issues ............................................................................................ 77

Annex 11: Project Preparation and Supervision ..................................................................... 82

Annex 12: Documents in the Project File ................................................................................. 83

Annex 13: Statement of Loans and Credits .............................................................................. 84

Annex 14: Country at a Glance ................................................................................................. 86

Map(s):

IBRD No . 32950

S R I L A "

SECOND NORTH-EAST IRRIGATED AGRICULTURE PROJECT

PROJECT APPRAISAL DOCUMENT

SOUTH ASIA

Date: May 25,2004 Country Director: Peter C. Harrold Sector MangerDirector: Constance A. Bernard

Team Leader: Nihal Fernando Sectors: Irrigation and drainage (80%); Roads and highways (10%); Other social services (10%) Themes: Conflict prevention and post-conflict reconstruction (P); Rural services and infrastructure (P); Participation and civic engagement (P); Pollution management and environmental health (S) Environmental screening category: Partial Assessment Safeguard screening category: Requires framework

Project ID: PO86747

Lending Instrument: Specific Investment Loan

Project Financing Data [ ] Loan [XI Credit [ ] Grant [ ] Guarantee [ ] Other:

For Loans/Credits/Others:

Borrower: Democratic Socialist Republic o f S r i Lanka, Ministry o f Finance, Secretariat, Colombo 1, Sri Lanka Tel: 94 11 248 4510; Fax: 94 11 244 9823; st@,treasury.gov.lk

Responsible Agency: Project Management Unit, North-East Provincial Council, 171, Power House Road, Trincomalee, Sri Lanka; Tel: 94 26 222 4005; Fax: 94 26 222 4006; neiap@sltnet.lk

Annual Cumulative

[ ]Yes [XINO Does the project depart f rom the CAS in content or other significant respects? Ref: PAD A.3

3.24 9.00 10.60 15.91 14.42 9.31 2.22 0.00 0.00 3.24 12.24 22.84 38.75 53.17 62.48 64.70 64.70 64.70

Does the project require any exceptions f rom Bank policies? Re$ PAD D. 7 Have these been approved by Bank management? I s approval for any pol icy exception sought f rom the Board? Does the project include any critical risks rated “substantial” or “high”? Re$ PAD C.5 Does the project meet the Regional criteria for readiness for implementation? Re$ PAD D. 7

[ ]Yes [XINO [ ]Yes [XINO [ ]Yes [XINO

[XIYes [ ] N o

Project development objective Re$ PAD B.2, Technical Annex 3 The Project Development Objective (PDO) i s to help conflict-affected communities in the North-East Province and adjoining areas to restore livelihoods, and enhance agricultural and other production and incomes, and build their capacity for sustainable social and economic reintegration. The PDO wil l be achieved pr imari ly by: (i) creating, restoring, or improving essential village level social and economic infrastructure and facilities; (ii) improving productivity, sustainability and competitiveness o f agriculture; (iii) building community sk i l ls and capacity and decentralizing powers for decision malung, control o f resources and implementation o f programs at community level; and (iv) implementing targeted l ivelihood support programs for the most vulnerable people. Project description [one-sentence summary of each component] Re$ PAD B.3.a, Technical Annex 4 Component 1 : Vil lage rehabilitation and development Component 2: Essential rehabilitation and improvements to selected major irrigation schemes Component 3 : Farmer Organization capacity building, empowerment and agricultural support services

Component 4: Capacity building, project implementation support and project oversight Which safeguard policies are triggered, if any? Re$ PAD D. 6, Technical Annex 10 Environmental Assessment OPBP 4.0 1 Pest Management OP 4.09 Safety o f Dams OPBP 4.37 Significant, non-standard conditions, if any, for: Re$ PAD C. 7

Board presentation: None

Loadcredit effectiveness: None Covenants applicable to project implementation: Covenants (general)

A. General Implementation (i) GOSL and NEPC will implement the project in accordance with the D C A , the Operational Manual, the Financial Manual, the Social Safeguard Framework, and the Environmental Management Framework; and except as IDA may otherwise amee. the North-East Provincial Council shall not amend or waive anv

strengthening

provision o f these manuals without IDA'S pr ior approval.

(ii) NEPC to maintain the PMU and DPOs with adequate numbers, powers, functions and resources, satisfactory to IDA, for implementing, coordinating and monitoring the project.

B. Use of Credit Proceeds (iii) NEPC to ensure that a l l goods, works and services financed out o f the Credit proceeds are used exclusively for the project and if any funds are used in a manner inconsistent with the provision o f DCA, NEPC shall take a l l necessary measures to refund to IDA the said amount.

C. Appraisal, Evaluation and Implementation of Project Schemes (iv) NEPC will ensure that project schemes are: (a) selected and appraised in accordance with the criteria and procedure as specified in the Operational Manual and Environmental Safeguards Framework; (b) consistent with environmental and social criteria as agreed in Operational Manual; and (c) where appropriate and necessary, identify adequate mitigation measures to minimize any adverse effects and incorporate in the project design.

D. Terms and conditions of Sub grants (v) NEPC shall ensure that sub-grants are provided in a timely manner in accordance with Sub-Grant agreements as specified in the Operational Manual;

E. Land Mines (vi) NEPC will ensure that there will be n o involuntary land acquisition in relation to project activities: a l l land required for project activities will be through voluntary donation o f private lands, grant o f publicly owned land or lands purchased through outright purchase o f private lands based o n free market rates using own funds.

(vii) NEPC will ensure that n o project activities are carried out in areas declared as high security zones or land mined areas or any other areas which are prohibited f rom free public access without written permission o f Sri Lanka Army or designated representatives.

F. Monitoring and Evaluation: Mid-Term Review (viii) NEPC shall carry out a mid-term review by October 3 1,2006; and furnish to IDA the reports.

Covenants (financial)

(ix) PMU will ensure that throughout the project period a satisfactory financial management system i s maintained.

(x) GOSL to submit to IDA audited annual financial statements o f the project n o later than June 30 o f the following fiscal year.

(xi) GOSL to produce FMRs and submit to IDA n o later than 45 days fol lowing the end o f the reporting quarter.

A. STRATEGIC CONTEXT AND RATIONALE

1. Country and Sector Issues

A.l .l. The primary goals o f the Government o f Sri Lanka’s (GOSL’s) poverty reduction strategy are to secure peace and achieve significant transformation in the quality o f l i fe o f the people, especially in rural areas, through increased incomes, economic modernization and invigoration o f the rural economy. Over the last 4 years, GOSL has deepened i t s understanding o f the nature and root causes o f poverty in Sri Lanka including the areas affected by the conflict with a v iew to reassessing and reformulating i t s pol icy framework for reducing poverty. Broad stakeholder consultations have been carried out t o reach consensus on a medium- and long-term strategy for sustained economic growth and poverty reduction, and develop a Framework of RelieJ Rehabilitation and Reconciliation. These efforts culminated in a well-developed Poverty Reduction Strategy (PRS), which has been endorsed by development partners. Within the central goals, conflict-related poverty reduction i s one o f the core objectives o f the PRS. Given that about 80% of Sri Lanka’s population and 90% o f the country’s poor l ive in rural areas including the NE, the PRS recognizes rural development and empowering the poor among i t s core development objectives.

A.1.2. Sr i Lanka i s currently faced with the immense challenge o f establishing political, social and economic stability following almost two decades o f armed conflict f rom 1983 to 2002 between the GOSL and Liberation Tigers o f Tamil Eelam (LTTE). The protracted war has worsened the poverty situation in the entire country. The livelihoods of the people o f the eight administrative districts o f the North-East (NE),’ and to a lesser extent, o f the four adjoining districts2 (see M a p at the end) have been severely affected, and the social and economic costs o f the war in these areas are tremendous. The whole country has suffered severe hardships and forgone significant potential economic and social development opportunities. Without durable peace, sustainable economic growth and poverty reduction will be diff icult to achieve.

A.1.3. With regard to the conflict, negotiations with the LTTE are expected to commence shortly. A ceasefire has been in effect since February 2002 that marked the beginning o f a transitional phase towards a permanent solution to the conflict. Since then both the GOSL and the LTTE have maintained the ceasefire agreement for the longest period since the conflict began. The ceasefire agreement has significantly eased tensions, improved the security situation, galvanized socioeconomic activities, and increased the movement o f people, goods and commodities between the NE and the South. Although the situation remains fragile, there are varying expectations among the society towards a durable peace. However, the timing o f an interim or transitional administration arrangement, a peace agreement and subsequent political modalities are not yet certain. In the interim, the GOSL has been successfully engaged with international donors to mobilize financial support for immediate humanitarian assistance and rehabilitation, reconstruction and development needs o f the war-torn areas.

A.1.4. In the NE and the adjoining areas, the conflict has resulted in, inter alia, disruption o f local economies, damage to essential village-level infrastructure, breakdown o f government- and private-sector input and output markets and technical support services, dilution o f community organizations and institutional networks, shortage o f employment opportunities, and widespread vulnerability and social and economic insecurity. The major challenge for the affected and returning population, therefore, i s t o recover from the social and economic shocks and reintegrate into the socioeconomic mainstream. The conflict has also weakened the government institutions and administrative mechanisms in the NE and their abil ity and capacity to plan, implement and coordinate reconstruction and development initiatives. In

Districts of the NE province are Ampara, Batticoloa, Jaffna, Kilinochchi, Mannar, Mulaitivu, Trincomalee and Vavuniya ’ Neighboring districts are Anuradhapura, Pollonnaruwa (North-Central Province), Moneragala (Uva Province) and Puttlam (North-Westem Province).

this situation, the GOSL and the LTTE consider that resettlement o f displaced people, restoration o f social and economic infrastructure, and capacity building in the NE, are priority tasks in the recovery and reconciliation process. T o this end, providing access to shelter, food, education, water, health and sanitation, finding secure and sustainable on-farm and off-farm employment opportunities, and rebuilding village-level social networks and governance structures are essential to build the confidence o f the affected and returning population.

A.1.5. Whi le the sources o f long-term and sustained growth and poverty reduction in Sri Lanka will continue to be manufacturing and services sectors, many poor will remain engaged in agriculture in the short and medium term. Given that agnculture has been the main source o f l ivelihood o f the NE population before and during the war, restoring agricultural production and related income opportunities i s primary for quick economic recovery. The challenges facing agnculture demand a greater independence o f farmers, farmers’ organizations (FOs), farmer cooperatives, and farmer federations (FFs) to build their technical, managerial and financial capacity and a reduced dependency o n government extension and assistance. T o this end, rehabilitating irrigation works, restoring and enhancing agncultural services, strengthening village-level institutions, and building linkages between the farmers and public- and private-sector service providers and markets will be essential. Landless and other vulnerable people need to be supported with targeted special assistance programs for speedy recovery. In addition, capability o f progressive NE farmers needs to be developed to respond rapidly and competitively to market signals through innovative agricultural/irrigation extension, technology and services and market linkages. They need to be assisted to move away from subsistence-level production toward high productivity and commercial agriculture once the region returns to normalcy.

2. Rationale for Bank Involvement

A.2.1. The GOSL and the LTTE recognize the Bank as a key development partner in the implementation o f the PRS and the rehabilitation, reconstruction and development o f the conflict-affected areas. Since 1999, the Bank has played a pioneering role in assisting resettlement, rehabilitation and reconstruction, by catalyzing international donor assistance to help restore livelihoods o f conflict-affected people. Bo th the GOSL and the LTTE recognize that the Bank, through the ongoing North-East Irrigated Agriculture Project (NEIAP) and Nor th East Emergency Reconstruction Program (NEEM), has been able to help socioeconomic recovery of the region, reaching vulnerable groups in remote villages o f the NE. In addition, the GOSL and the LTTE requested the Bank to be the administrator o f a Nor th East Reconstruction Fund (NEW), a pool o f financial resources f rom bilateral and international NGOs for the rehabilitation and reconstruction o f the NE.

A.2.2. The Bank has been requested by major stakeholders to assist this repeater project because o f the Bank’s ability to design and provide guidance to implement community-based programs that target vulnerable people and reach rural remote villages in the conflict-affected areas as demonstrated through NEIAP and the Bank’s other programs within and outside Sri Lanka. Given the implementation experience and successful outcomes o f NEIAP, the Bank i s in a favorable position to scale up the ongoing NEIAP by augmenting, consolidating and sustaining i t s outputs and impacts, extending i t s scope and geographical spread, and reaching more conflict-affected communities. At present, the Bank i s engaged in the implementation of an innovative Community-Driven Development (CDD) p i lo t under Vil lage Self- Help Learning Initiative (VSHLI) and the Community Development and Livel ihood Improvement “Gemi- Diriya” project (CDLIP) in the south o f Sri Lanka (outside the conflict-affected area), the latter being the f i rs t phase o f an adaptable lending program that aims for rural development and community empowerment. While the other major donors are supplementing and complementing efforts for conflict- related poverty reduction and rehabilitation and reconstruction o f the NE, the Bank’s involvement in the proposed project will enable i t to facilitate closer interaction between these programs mutually sharing knowledge and experience and building synergies.

3. Project Contributions to Higher-Level Objectives

A.3.1, The project will strongly contribute to achieving the goals and outcomes o f Government’s Poverty Reduction Strategy (PRS) and Wor ld Bank’s current Country Assistance Strategy (CAS: FY03-06) for Sr i Lanka. The project i s strongly aligned with the three core areas o f the PRS (reducing conflict-related poverty; creating opportunities for pro-poor growth; empowering the poor and strengthening governance). And three priority themes o f the CAS (peace, equity, and growth). I t would provide strategic and financial support to the G O S L program for relief, rehabilitation and reconciliation (RRR) o f the NE. For example under CAS theme “peace,” the project will contribute to a strengthened institutional framework and capacity and restoring access to irrigation water in conflict-affected areas. Similarly, under “growth” and “equity” themes, it will help to increase productivity o f rural economy and access to basic services. The project will contribute to creating an enabling environment in the selected focal villages for socioeconomic recovery, mobilization and strengthening o f village-level community institutions, enhancement o f agricultural production and employment, and eventually help people reintegrate into the socioeconomic mainstream. It will also augment capacity o f the North-East Provincial Council (NEPC) in the planning and implementation o f rural development using community-focused approaches. Particularly, the proposed agricultural-support-services component would assist the Government and NEPC in the long term to meet economic growth and poverty-reduction objectives by supporting key institutional changes in the provincial agncultural agencies and funding strategic interventions to make the agriculture sector more competitive, market-oriented and independent o f public-sector assistance.

B. PROJECT DESCRIPTION

1. Lending Instrument

B. 1.1, The lending instrument i s Specific Investment Loan (SIL) similar to that o f the ongoing NEIAP. I t will be a standard IDA Credit o f US$64.7 million.

2. Project Development Objective (PDO) and Key Indicators

B.2.1. The Project aims to help conflict-affected communities in the NE Province and adjoining areas to restore livelihoods, enhance agricultural and other production and incomes, and build capacity for sustainable, social and economic reintegration. The PDO will be achieved through a) creating, restoring, or improving essential village-level social and economic infrastructure and facilities; b) improving productivity, sustainability and competitiveness o f agriculture; c) building sk i l ls and capacity and decentralizing powers for decision making, control o f resources and implementation o f programs at the community level; and d) implementing targeted livelihood-support programs for the most vulnerable (such as land mine victims, people with war-induced deficient abilities, widows, women-headed households).

B.2.2. The key Performance Indicators would be: a) percent targeted households (85,000) benefiting from increased income and village-level social and economic infrastructure; b) number o f employment opportunities generated f rom village level subprojects and increased agricultural production; c) number of self-reliant FOs, FFs or farmer cooperatives/companies engaged in productive, sustainable and competitive agncultural production and marketing; and d) number o f sustainable village-level community organizations capable o f planning, implementation and monitoring development activities. The project outcome and results indicators are in Annex 3.

1. Project Components

B.3.1. The proposed project would include the following four major components and subcomponents (Annexes 4 and 5).

B.3.2. Component 1: Village rehabilitation and development (US$53.14 million). This component will comprise: a) reviving, forming and strengthening community-based organizations (CBOs); b) Community-level subprojects for rehabilitation and improvements to essential village-level social and economic infrastructure and facilities; c) Livelihood support activities for vulnerable groups and people, and d) special development activities targeting women, widows, land mine victims etc. The main beneficiaries are Intemally Displaced People (IDPs) and other conflict-affected households in about 600 selected focal villages in the project area. This component would directly contribute to creating an enabling environment in the selected focal villages for quick socioeconomic recovery, through the restoration o f productive village-level assets, mobilization and strengthening o f village-level community institutions, promotion o f production and employment, and triggering economic activities at the household and village levels. The project would finance village subprojects, primarily c i v i l works, and sub-grants, goods, training and other services.

B.3.3. Essential rehabilitation and improvements to selected major irrigation schemes (US$16.74 million). This component will include essential dam safety repairs and improvements, and urgent rehabilitatiodimprovements to major irrigation, drainage, and conveyance/feeder canals o f selected major imgatioddrainage schemes. I t would benefit about 15,000 farming families who are dependent o n those schemes for their livelihoods by: (a) preventing potential risk o f failure o f the most dilapidated five major irrigation schemes (Allai scheme in Trincomalee district; Giants Tank scheme in Mannar; Iranamadhu scheme in Kilinochchi; Karavahu scheme in Ampara;, and Rugam scheme in Batticoloa); (b) improving serviceability, performance and improved water availability; and (c) restoring and enhancing agricultural production. The component would finance c i v i l and electromechanical works, goods and equipment, consultancy services and training activities.

Component 2:

B.3.4. Farmer Organization (FO) capacity building and empowerment and strengthening of agricultural support services (US$4.92 million). The objective o f this component i s t o develop abil ity and capacity o f farmer organizations (FOs) and farmer federations (FFs) o f the NE to improve productivity, sustainability and competitiveness o f agriculture. This component will include a) forming, supporting and strengthening viable and commercially oriented FOs and FFs; and b) strengthening capacity o f govemment agricultural research, extension and inputs supply services. This component would help a large number o f commercially oriented farmers, FOs, FFs, farmer cooperatives/companies in the NE province and adjoining areas to become self-reliant, competitive and sustainable and are independent o f public-sector assistance. The project would support and finance capacity building and training o f farmers, technical assistance, facilities and revolving seed funds to progressive FFs and FOs. It would also assist Provincial Department o f Agriculture (PDA) and Provincial Department o f Animal Production and Health (MPAP&H) at minimum essential level to renovate physical facilities, s h l l development o f i t s professional staff and improve mobi l i ty o f front-line staff to implement this component effectively and efficiently and achieve the component objectives.

Component 3:

B.3.5. Component 4: Capacity building, project implementation support and project oversight (US$6.34 mill ion) will consist of: a) Capacity building o f provincial, district/divisional, and local govemment agencies, other than agriculture-related agencies responsible for project implementation. This would include support for the enhancement o f equipment and facilities; improvement and establishment of regional laboratories for testing construction materials, quality assurance o f c iv i l works construction, and agricultural soil testing; short-term local and intemational training and study tours to selected staff to improve implementation o f the project and other long-term community-based reconstruction programs,

and post-conflict reconstruction and development; provision o f essential office equipment and facilities; and technical assistance for special studies and research; and b) Project implementation support and oversight through hiring consultants and staff for the project management unit and district project offices; and hiring NGOs and consultancy firms and consultants for external technical, social, financial and management auditing and project impact monitoring.

4. Lessons Learned and Reflected in the Project Design

B.4.1. Given the repeater nature o f the project, the init ial NEIAP has been considered a pi lot for the project design. NEIAP generated many lessons that were used in the design o f project components, implementation arrangements and monitoring. NEIAP I1 has greatly benefited f rom those lessons and implementation experience, particularly in the design of: project resources targeting among districts; focal village-selection process and criteria; vulnerability targeting within focal villages; subproject investment ceilings; community-mobilization approach; agricultural support services; livelihood-support activities; environmental and social safeguards and risks; implementation, coordination and monitoring arrangements; role o f partner organizations; and s l u l l and staffing levels.

B.4.2. The key lessons included: (i) the project can generate more impact by moving beyond assistance for jump starting agnculture toward agricultural productivity enhancements and commercialization; (ii) delegation o f more authority to districts would contribute to more meaningful targeting o f poor and vulnerable people and the use o f project resources; (iii) community development i s successful when the process i s closely monitored by the communities themselves using clear performance milestones and indicators; (iv) the front-line staff o f provincial and local government staff should be mobil ized to engage with community programs and subprojects for better sustainability; and (v) building capacity o f communities and front-line staff in c iv i l works construction and quality assurance will be essential for sustainability o f investments.

B.4.3.

In addition, the project design takes into account the fo l lowing global lessons:

Post-conflict reconstruction requires a broader and flexible approach that takes into account the multi-faceted impacts o f long, violent conflicts. Experience suggests that it i s not feasible to define an overall strategy a priori. A pragmatic and opportunistic approach i s needed building o n what i s feasible. Post-conflict and emergency projects can work wel l if they have well-defined objectives and a simple design. Devolution o f responsibilities o f implementing agency f ie ld staff expedites project implementation, pace and progress. Effective participation and empowerment o f beneficiaries and local authorities are necessary f rom the project’s inception to ensure sustainable post-maintenance and operation. This often conflicts with pressures to disburse and achieve quick results. Although trade-offs are unavoidable, high beneficiary participation would insure accountability, transparency and the l ikelihood o f sustainability . There may be constraints in some countries and in certain situations to giving full responsibility to a community (ie., lack o f community-level capacity, legal/institutional impediments to decentralization) and hence the use o f intermediaries (NGOs, private-sector entities, and/or government agencies) may be necessary.

5. Alternatives Considered and Reasons for Rejection

B.5.1. This i s a repeater operation that aims to expand the geographical spread, augment and scale up the development impact o f the init ial NEIAP (NEIAP), which has produced satisfactory implementation performance and development outcomes. Given the characteristics and volatile nature o f the project area, and the need to keep the project design as simple and flexible as possible, the project objectives and components closely followed the NEW. T w o new subcomponents were included to address urgently required repairs and dam safety improvements to major irrigation schemes and generate knowledge and capacity to move away from subsistence agriculture toward commercial agriculture. The design o f a l l project components, implementation processes and arrangements has been fine-tuned to improve efficiency, effectiveness and outcomes based o n the implementation experience. The fol lowing major alternatives were considered:

Centralized approach using line aaencies to plan and implement essential village infrastructure rehabilitation activities. In Sri Lanka, this centralized approach without the involvement o f beneficiaries in the planning, implementation and monitoring o f village-level development activities has proven unsuccessful. The project would adopt a decentralized, community-driven development approach to ensure that the project i s strongly owned by the target beneficiaries, targeting o f project resources i s inclusive, the use o f project resources i s more participatory, transparent and accountable, and the outcomes and impact o f the project are more effective and meaningful.

0 Direct financing to communities. One option considered in the project implementation strategy design i s the approach proposed in the Community Development and Livelihood Improvement Gemi Dir iya Project (CDLIP), that transfers development funds directly to village companies and village-level associations (VAS) newly formed under the latter. Whi le this approach has proven successful in VSHLI and elsewhere, the ground conditions in the project area are not yet conducive to replicate that approach due to institutional and capacity constraints. The project therefore, chose to rely upon the involvement o f traditional CBOs such as FOs and Rural Development Societies (RDSs), instead o f VAS in the planning, implementation and monitoring of the subprojects, but keeping communities in control o f a l l decision malung. Nevertheless, the project wil l include provisions to implement pi lot initiatives based o n globally and locally tested CDD approaches, for example, direct financing to communities bypassing govemment agencies. The project’s CDD strategy would be restructured later, based o n the lessons and outcomes of the pilots.

0 Agricultural support services. One option considered in the design o f Agriculture Support Services component (Component 3) was a uni form production-oriented extension approach across a l l planned 600 focal villages with similar production-oriented activities. This alternative was rejected because not a l l villages require the same extension support; and the extension system does not have the staff resources to meet such a geographic spread with equal intensity in al l villages. Alternatively, the project adopted a selective, needs-based and commodity-oriented agriculture extension and support services focusing o n progressive FOs and FFs and o n where significant potential exists for improving productivity, sustainability and competitiveness.

Supplementaw -financing. The project considered the alternative o f providing supplementary financing to NEIAP instead o f a full repeater project. The expected scaling up, which require substantive financial commitments, cannot be achieved by supplementary financing to the current project. As such, a repeater operation financed by the Bank i s the best option to maximize the development impact.

C. IMPLEMENTATION

1. Partnership Arrangements: Inapplicable

2. Institutional and Implementation Arrangements (Annex 6) C.2.1. Project Area and Implementation Responsibilitv. The project would be implemented in all districts o f the NE (see map at the end) and neighboring villages o f the districts over a period o f 6 years. It will be implemented either by the NEPC or any other successor administrative entity, which i s acceptable to GOSL and IDA and may be established in the NE as a result o f peace discussions. The Chief Secretary (CS) o f the NEPC or Chief Executive Officer o f the successor administrative entity would be responsible for the execution o f the project, the delivery o f project inputs and outputs, and the achievement o f project objectives. The project finances will f low directly from the Treasury o f the Ministry o f Finance to the NEPC. The Secretary o f the Ministry o f Relief, Rehabilitation and Reconciliation (MRRR) will be the chief accounting officer to the Treasury for the project. The implementation arrangements will be refined later to effect a smooth transition o f the implementation responsibility to the proposed successor administrative entity, once it i s established.

C.2.2. Project Implementation Process. The project will be implemented following the norms, ru les and procedures agreed in the PIOM. The implementation process, fund flow and coordination arrangements o f the ongoing NEIAP have been found conducive to implement the project satisfactorily. The same implementation arrangements would be used for NEIAP I1 with minor adjustments and additional staff/skill support to improve implementation efficiency and effectiveness. The implementation process wil l rely upon community involvement in the selection, planning, implementation and monitoring o f all subprojects. Relevant provincial, district, and local government l ine agencies, and partner organizations, such as NGOs and the private sector, will provide technical assistance to communities to plan and implement the subprojects. The implementation responsibility at district level will be anchored with the leadership and guidance o f Government Agents (GAs)/District Secretaries (DSs) who will oversee the district programs with the management support o f District Project Offices (DPOs) in each district. These implementation arrangements would be further modified later depending on the nature o f the successor administrative entity and i t s implementation arrangements at district and divisional levels.

C.2.3. Implementation Arrangements at Provincial Level. The existing Project Management Unit (PMU) with a full-time Project Director and full-time core staff will continue to oversee and facilitate the project implementation. The P M U will be the management arm o f the CS and will be responsible for achieving the project development objectives, implementation outputs and targets and disbursement milestones. I t will provide project management support to CS, monitor and facilitate project implementation at district levels, and play a facilitating, regulating and guiding role, coordinating the overall program with GAs/DSs and DPOs. The P M U i s responsible for overall project-wide budget control and financial management, quality assurance and control, monitoring o f project’s inputs, outputs, outcomes, processes and impacts, and providing timely and quality resources and technical assistance to DPOs. It will also be responsible for the preparation o f project-wide training curricula and manuals; management o f training; preparation and dissemination o f project information and progress reports to the general public, the govemment and the World Bank; and hiring o f staff and consultancy services, procuring goods and major civi l works that exceed the financial authority limits o f the DPOs. At the provincial level, the P M U will obtain, coordinate and facilitate the support o f provincial-level l ine ministr ies and line departments to reinforce their inputs and support to the DPOs at district and village levels. It will also coordinate all project-related matters and issues with the MRRR, External Resources Department (ERD), Treasury, World Bank and concerned donors, and with al l other national-level and provincial-level stakeholders. If necessary, the P M U wi l l obtain the services o f external professionals from governmental and nongovernmental sectors to periodically review project implementation independently and advise the P M U on improving the project’s implementation strategies, outputs and impacts. The Internal Audit

Department o f the NEPC will carry out on-the-spot and periodic financial and technical auditing o f the project and assist the PMU in complying with financial and technical norms and standards.

C.2.4. Implementation Arrangements at District Level. GAsDSs will be responsible for the management of the program in their respective districts supported by DPOs. District funds will be established and allocation o f these funds for district activities will be based on actual needs o f the districts, demands o f the communities and intentional targeting o n vulnerable groups and villages. Some selected progressive focal villages and CBOs of the NEIAP too will be further supported. GAsDSs will be delegated full authority for decision malung, planning, use and allocation o f funds, and monitoring in their respective districts subject t o common project-wide implementation principles, and focal village and subproject selection and investment criteria. The DPDs will be responsible for the implementation o f district programs and achevement of physical and financial milestones and targets and for diligent financial management, quality control and assurance, and worlung closely with communities o f the selected focal villages to achieve the project’s development objectives. Each DPO will function as a technical support unit for the district manned by part-time or full-time Deputy Project Directors (DPDs) assisted by a team of full-time experts and support staff (engineering, community mobilization, micro-finance and agriculture, etc). The private sector and NGOs will partner with the technical support unit and district- and local-government-level implementing agencies as wel l as district-level agencies o f the central government to provide technical and implementation support to the DPOs. The fi-ont-line staff o f these agencies wil l be grouped into divisional-level Community Support Teams (CSTs) to interact with communities to facilitate community mobilization and provide technical guidance to the communities in the implementation o f subprojects at the village level.

C.2.5. Implementation Process and Arrangements at Communitv Level. The project will continue to operate focusing o n village communities and using CDD principles. The CBOs at village level such as farmers organizations (FOs), Rural Development Societies (RDSs) and Women Rural Development Societies (WRDSs) will be responsible for planning and implementing a l l village level activities. A Village Rehabilitation Committee, consisting o f selected executive Committee members o f a l l major CBOs in the village will be responsible for monitoring the activities. The primary instruments for village institutional development and rehabilitation are Vil lage Rehabilitation Plan (VRP) and Vil lage Agriculture Development Plan (VADP). VRP i s primarily a document that reflects needs, priorities and action plans for village institutional development, capacity and s l u l l building, and subprojects that emerge from intensive participatory interactions among the community. I t includes the Vil lage Socioeconomic profi le (VSEP), strategy and action plan for forming and strengthening CBOs, cost estimates and action plans for subprojects chosen and prioritized by communities, and implementation o f agricultural development, l ivelihood support activities and O&M plans. VRP will be developed by community members, with technical assistance from CST, and be ratified by the Vil lage Rehabilitation Committee (VRC) through a participatory and demand-responsive process.

C.2.6. Project Steering and Coordination Arrangements at Provincial Level. The Provincial Coordination Committee (PCC) wil l be responsible for overseeing, steering, guiding and supervising the project. Bringing the project under the oversight o f PCC will facilitate the adoption o f provincial-wide common principles and norms and synergy with other complementary and parallel programs to maximize development effectiveness o f the project. The Committee will be chaired by the CS o f the NEPC (or Head of any later administrative entity in the NE). I t will comprise a l l Government Agents o f the project districts, Secretaries o f provincial ministries and Heads o f provincial agencies. Nominated representative(s) o f the participating ministries and agencies, Field Area Commanders o f the Sri Lanka Army; and a l l other concerned stakeholders will be invited to attend PCC meetings that review the project.

C.2.7. Project Coordination at National Level. A National Project Steering Committee (NPSC) will oversee the project implementation at national level. The purpose o f the NPSC will be to ensure that: a) project strategies and outcomes are consistent with national development goals, the project addresses and supports the regional development and resettlement, reconstruction and rehabilitation program for the Nor th and East; b) project outcomes and impacts are sustainable; and c) project funds are dil igently and efficiently utilized. The mandate and role o f the NPSC would be reviewed in the event that alternative administrative arrangements are established in the NE as a result o f peace discussions. This committee will be chaired by the Secretary of the MRRR and comprise representatives o f participating ministries, ERD, CS o f the NEPC and GAs/DSs of a l l project districts. This committee will meet once every 6 months.

(2.2.8. Project Auditing. The Internal Audit Unit o f the NEPC will be responsible for auditing the project records. This unit will be strengthened with technical and financial auditors hired competitively f rom the open market. A complementary objective o f strengthening the Unit i s t o improve overall financial management o f the NEPC extending i t s mandate and capacity beyond spot-checkmg and raising audit queries. Internal technical auditors and financial management auditors will be fielded at district levels and would have a dual reporting responsibility both to DSs at district levels as wel l as to the head o f the Audit Unit. The Governor o f the NEPC shall closely monitor the diligent and efficient use o f project b d s for the intended purposes and outcomes and take timely action on the implementation o f audit recommendations based o n spot-check reports and periodic audit reviews by the Unit.

C.2.9. Coordination with Other Programs. The implementation will adopt a common operational framework o f principles, norms and standards with other similar ongoing projects [WB-financed NEERP, NEW, ADB-financed North-East Community Restoration and Development (NECORD), Conflict Area Rehabilitation Project (CARP) and JBIC-financed Pro-poor Economic Advancement and Community Empowerment Project (PEACE), etc.]. These principles would cover cost recovery, community contribution, after-care arrangements, micro-finance, c i v i l works, norms and standards for community empowerment, construction rates, etc.

Disbursement and Fund Flow Arrangements

C.2.10. Disbursement Procedure and Arrangements. The project will fo l low the report-based disbursements, using reporting formats more flexible than those o f NEW. If the project reverts to transaction-based disbursement, the authorized allocation o f the Special Dol lar Account (SDA) will not exceed US$ 2,500,000. The S D A wil l be operated in accordance with IDA’S operational policies, and terms and conditions acceptable to the IDA.

C.2.11. Fund Flow and Reimbursement of Expenditure. Project funds will be deposited into SDA. The GOSL wil l advance funds to the PMU that, in tum, would give advances to the District Project Offices (DPOs). The DPOs will be responsible for activities implemented in their respective districts. The PMU will coordinate and consolidate information f rom the DPOs for submission to the Bank. Expenditure statements will be received o n a monthly basis f rom the DPOs, and will account for the advances received. The PMU will review these statements and replenish the accounts o f the DPOs. On a monthly or quarterly basis, withdrawals will be made fi-om the S D A to reimburse the GOSL for the IDA share of eligible expenditure reported up to that date. Thereafter, withdrawal applications, o n the basis o f FMRs, will be submitted to the Wor ld Bank by the PMU for a l l eligible expenditures incurred by the project in accordance with the provisions o f the Development Credit Agreement (DCA) and Project Agreement (PA).

3. Monitoring and Evaluation o f Outcomes/Results

C.3.1. Results Framework, results and outcome indicators and arrangements for monitoring, evaluation and leaming (ME&L) are presented in Annex 3. NEIAP has developed and successfully operationalized arrangements, including staffing and capacity and data collection formats, for tracking o f project, inputs, outputs, outcomes and impacts. Those institutional arrangements will be used with necessary adjustments to suit the repeater project (NEIAP II). For targeting communities and selecting focal villages, vulnerability maps and indicators that are being developed by the NEPC will be used with supplementary methodologies. Data and information for outcome and results indicators (Annex 3) wil l be collected at individual focal village, FO/FF, and scheme levels as appropriate, and aggregated at the district (DPO) and project levels. VSEPs will provide baseline socioeconomic information required to assess project development outcome and result indicators for components 1 and 3. The VSEPs will be compiled during the initial planning phase at each focal village in consultation with communities. Members o f the CBOs will be engaged in self-monitoring and evaluation o f processes, inputdoutputs, physical and financial performance, and outputs/outcomes o f the activities that are implemented at the community level either by themselves or by external contractors. The VSEPs will be updated during the project implementation and before the project i s withdrawn from each village, enabling the evaluation o f outcomes and results. Data and information for the results indicators will be collected by the P M U and will be included in quarterly and annual project progress reports.

(2.3.2. As part o f ME&L requirements, the P M U (with support from an independent external agency) will carry out biannual reviews to ensure the compliance with processes and procedures as agreed in PIOM and various manuals. The P M U will also carry out annual reviews to assess compliance with environmental management framework and social safeguard management framework. The project will facilitate opportunities to operational staff, communities and policymakers to learn from various successful programs that focus on modernized and improved agriculture, CDD and rural development approaches in both Sr i Lanka and the region. The quarterly Project Performance Monitoring and Evaluation Report, which i s already in use and has been modified to suit the project, will be the basis for presenting and disseminating the project implementation performance and achievement o f PDOs to NPSC, PCC, Bank and other concerned stakeholders. The project performance, outcomes and results will be periodically reviewed at various fora at different government’s administrative levels such as: divisional (Divisional Coordination Committee/monthly); district (District Project Review Committee and District Agriculture Committee/monthly); provincial (PCC/every 3 months) and national (NPSC/every 6 months). The DPDs and P M U would submit statements o f project outcomes and results to these management review and coordination fora. In addition, Governor o f the NEPC will closely monitor the diligent use o f project funds and compliance with technical and financial audit recommendations.

4. Sustainability

C.4.1. In NEIAP 11, more decentralized decision-malung authority wil l be delegated to district project offices, which will be the primary implementation units. This arrangement would enable smooth transition o f the project implementation responsibility to any successor administrative entity o f NE, which i s likely to use districts as primary development planning and implementation units.

C.4.2. The sustainability may also be jeopardized if there are significant variations in the concepts, principles, norms and standards adopted by the project vis-a-vis that o f the other ongoing and forthcoming rural development programs funded by other donors. To mitigate this risk, the project wil l operate within a common framework on principles, development norms and standards across a l l ongoing/forthcoming operations (not just IDA-financed).

C.4.3. Given the generally poor sustainability track record (in Sri Lanka and elsewhere) o f local revolving funds to provide financial services to the poorest, design, execution and monitoring o f the Livelihood Support Act iv i ty (LSA) subcomponent (which uses a revolving fund approach tailor-made to the specific situation in the conflict-affected project area) will be improved on the basis o f the sustainability outcomes o f the ongoing component. The component will be designed to create a saving mindset among the communities and to link the savings and credit organizations to existing Banks.

C.4.4. One o f the key sustainability issues o f NEIAP was inadequate quality o f c iv i l works. As a result o f the continuing emphasis o f the Bank’s supervision teams, quality assurance and adherence have been significantly improved and the PMU has developed project-wide capacity to comply with quality norms and standards. NEIAP I1 will include more competent professionals to continue and further intensify existing efforts to address the issue of poor quality o f c iv i l works. The project would finance the establishment and expansion o f material-testing o f c iv i l works and quality controlling facilities, and capacity and s k l l development o f the project staff as wel l as o f the NEPC.

5. Critical Risks and Possible Controversial Aspects

To Project Development Objectives The ongoing process towards a negotiated )eace settlement would be disturbed and the ;ecurity situation reverts to the pre-ceasefire cenario.

n the event peace restores, the transition o f iroject implementation responsibility f rom WPC to IAC (envisaged) would affect the ; taf fng and implementation arrangements.

Risk Mitigation Measures

a) Project design has not deviated significantly f rom NEW, which was launched and operated during the conflict; b) in the event, the security situation deteriorates, the project size would be reduced; and c) partnerships with UNHCR and ICRC will be reactivated to facilitate project implementation.

DPOs will have more project-related decision makmg and financial authority to enable smooth transition to the IAC, which i s l ikely to use districts as the primary planning and implementation units. The PMU will also enable smooth transition in the event an IAC i s established replacing the existing NEPC.

Risk Rating with

Mitigation

CBOs would be weak, not representative, inclusive, accountable and sustainable and fail to provide satisfactory aftercare o f project assets.

NEIAP recognized encroachment o n private lands as a major social risk, and project activities benefiting encroachers may pose a reputation risk to the Bank.

To Component Results Targeting and selecting o f focal villages will not be objective, and may be polit ically influenced limiting development effectiveness.

Other ongoing projects with similar components will compete with the project and confuse the beneficiaries.

rovera l l ksk Rating Risk Rating: H (high risk); S (substantial risk

The project includes provisions for: a) community mobilization and capacity/skill building; b) continuous monitoring and learning and periodic social auditing to adjust project strategies; c) p i lot initiatives to test and develop alternative C B O development models; and d) cross learning.

NEIAP developed a plan o f action to address this r i s k and the plan includes: a) awareness-creation among the public and government officials about the relevant government legal remedies; b) a framework o f monitoring; c) compilation o f a land register, as a part o f the VSEP; and d) enhancing land-dispute management sk i l ls . This plan o f action will be implemented under the project.

a) The project would use a publicity campaign to make potential beneficiaries aware o f the project and i t s assistance; b) implement a transparent focal village- selection process; and c) adopt objective selection criteria, which rely o n indicators that capture severely affected villages and vulnerable people. a) There will be district-level coordination committees; b) the project will build synergies with other ongoing projects; c) a common operational framework that defines common norms, procedures and standards that will be developed and used by a l l programs.

M (modest risk); N (negligible or l o w risk).

6. Loadcredit Conditions and Covenants

Covenants (general) General Implementation

0 GOSL and NEPC will implement the project in accordance with the DCA, PA, the PIOM, the Financial Manual, the Social Safeguard Framework, and the Environmental Management Framework; and except as IDA may otherwise agree, the North-East Provincial Council shall not amend or waive any provision o f these manuals without IDA’S pr ior approval.

0 NEPC to maintain the PMU and DPOs with adequate numbers, powers, functions and resources, satisfactory to IDA, for implementing, coordinating and monitoring the project.

Use of Credit Proceeds

0 NEPC to ensure that a l l goods, works and services financed out o f the Credit proceeds are used exclusively for the project and if any funds are used in a manner inconsistent with the provision of DCA and PA, NEPC shall take al l necessary measures to refund to IDA the said amount.

Appraisal, Evaluation and Implementation of Project Schemes

0 NEPC wil l ensure that project schemes are: (i) selected and appraised in accordance with the criteria and procedure as specified in the PIOM; (ii) consistent with environmental and social criteria as agreed in PIOM, Social Safeguard Framework, and the Environmental Management Framework; and (iii) where appropriate and necessary, identify adequate mitigation measures to minimize any adverse effects and incorporate in the project design.

Terms and conditions of Sub grants

0 NEPC shall ensure that sub-grants are provided in a timely manner in accordance with Sub-Grant agreements as specified in the Operational Manual.

Land Mines

0 NEPC will ensure that there will be n o involuntary land acquisition in relation to project activities: a l l land required for project activities will be through voluntary donation o f private lands, grant o f publicly owned land or lands purchased through outright purchase o f private lands based o n free market rates using o w n funds. NEPC will ensure that n o project activities are carried out in areas declared as high security zones or land mined areas or any other areas which are prohibited f rom free public access without written permission o f Sri Lanka Army or designated representatives.

Monitoring and Evaluation: Mid-Term Review 0 NEPC shall carry out a mid-term review by October 3 1,2006, and fmish to IDA the reports.

Covenants Cfinancial) 0

PMU will ensure that throughout the project period a satisfactory financial management system i s maintained. GOSL to submit to IDA audited annual financial statements o f the project n o later than June 30 o f the following fiscal year. GOSL to produce FMRs and submit to IDA n o later than 45 days fol lowing the end o f the reporting quarter.

D. APPRAISAL SUMMARY

1. Economic and Financial Analyses

D. 1.1. Although, most o f the project benefits are obvious, many o f those benefits cannot be quantified. The only quantifiable benefits would accrue from the rehabilitation o f irrigation schemes. The quantification o f benefits and costs for the economic analysis has been carried out using two approaches:

(i) the evaluation of potential per hectare benefits o f a minor irrigation scheme in the Northeast which i s s t i l l functioning, but in need of minor repairs; and (ii) evaluation o f potential benefits o f one major irrigation scheme selected under NEIAP 11 - Giants tank in Mannar district. The economic internal rates of return (EIRR) show similar results for the Giant’s Tank rehabilitation and the rehabilitation o f a minor tank in need o f minor repairs. In al l scenarios, the EIRR is above the opportunity cost o f capital (12%): the ERR ranges from 26% to 28% for the minor tank example and ranges from 26% to 30% for the rehabilitation o f Giants Tank. The sensitivity analysis suggests that these results are robust to various implementation schedules implying that such projects are economically viable and will bring economic benefits to the region. Summary of the economic and financial analysis i s provided in Annex 9.

2. Technical

D.2.1. Technical design o f a l l subprojects would closely fo l low the technical manuals and guidelines of NEIAP, which are satisfactory. Design and construction supervision o f subprojects will be carried out by the technical staff o f the existing agencies within the NEPC supplemented with inputs from individual technical consultants and f irms, recent university graduates and technical audits. These staff will ensure that project design and construction comply with standard technical norms, specifications and standards. In addition, communities wil l be provided with training in basic c iv i l engineering s lu l l s sufficient to execute community-level subprojects. T o ensure satisfactory quality o f c i v i l works, the project includes provisions for establishing two regional quality-control laboratories, procuring necessary simple and efficient quality management and testing equipment and sk i l l training to engineers, technical staff and communities.

D.2.2. The project uses the Technical Procedural Manual o f NEIAP, suitably modified and found in the project files as wel l as standard technical manuals o f Sri Lanka Irrigation Department and Road Development Authority and Department o f Agriculture for hydrological and structural design o f irrigation schemes, village roads and for design o f agricultural-development activities, respectively, which are satisfactory. In addition, feasibility and productivity enhancement studies were completed in November 2003 for a l l major irrigation schemes that will be supported by the project for dam safety improvements and agricultural productivity enhancement pi lot initiatives. These reports cover detailed technical proposals, environmental assessments, tentative cost estimates and cost-benefithost-effectiveness evaluations: The Rapid Assessment Study o f Jafha district (completed in October 2003) provides technical manuals for the planning and implementation o f physical activities in Jaffna, which are satisfactory. The reports and technical procedure manual are available in project files and design manuals are available with PMU.

3. Fiduciary

Financial Management (Annex 7) D.3.1. The financial management procedures and practices proposed are satisfactory to meet GOSL’s and IDA’S fiduciary requirements as per OP/BP 10.02, and are described in Financial Management Manual in Project Files. The project will follow the report-based disbursement method. A Special Dol lar Account wil l be established at the Central Bank of Sri Lanka and operated according to terms and conditions satisfactory to the Bank. Quarterly Financial Monitoring Reports will be submitted to the Bank within 45 days o f the end o f the quarter.

D.3.2. The project accounts will be audited by the Auditor General o f Sr i Lanka on an annual basis. In addition, the Internal Audit Department o f the NEPC will be strengthened to carry out quarterly audits o f the project at the PMU, DPOs and CBO levels. A computerized integrated project management information system will be developed and implemented for the project. This will be a networked system

connecting a l l the district offices and will have financial, physical, procurement and other outputhmpact monitoring indicators.

Procurements (Annex 8) D.3.3. Procurement administration and arrangements o f NEIAP as described in i t s procurement manual i s satisfactory. I t i s being updated to suit NEIAP I1 and will be available at appraisal. The proposed procurement procedures for c iv i l works and goods contracts to be financed under the Credit will be carried out in accordance with the Wor ld Bank Guidelines: Procurement under IBRD Loans and IDA Credits, dated November 2003 (henceforth referred to as Procurement Guidelines). Consultant Services financed by the Credit will be procured in accordance with the Wor ld Bank Guidelines on “Selection and Employment o f Consultants by Wor ld Bank Borrowers, November 2003 .” The PMU is preparing procurement p lan and bidding documents for works (samples), goods and consultancy services for the first 18 months o f the project. The PMU will have a full-time procurement officer, as per the Terms o f Reference and experience acceptable to IDA to oversee the procurement aspects o f the project.

4. Social

D.4.1. Social Assessments: The project’s social/community-development issues, and the resultant opportunities, social r isks and impacts have been identified through beneficiary assessment, stakeholder analyses, institutional analyses and evaluation o f the performance o f CBOs and partnering NGOs o f NEIAP. The findings have formed a basis for formulating the project’s strategy and components. The project design has been premised on a Community-Driven Development (CDD) approach, that addresses the key social issues and r isks identified in the assessments, through basic elements o f CDD approach which include: a) diversity; b) inclusion, equity and participation; c) autonomy and subsidiarity; d) self- selection and demand-driven; e) ownership, accountability and transparency; f ) human and institutional development, with a special provision for the social safety net; and g) social r i sk management. A detailed description o f the social development issues in the project area and h o w the project design has been tailored to address those issues using this CDD framework i s provided in Annex 10.

D.4.2. Social risks. NEIAP recognized encroachment on private lands as a major social risk, which relates to the unauthorized occupation and use o f lands belonging to displaced people consequent to the conflict. This is, in fact, typical o f any post-conflict situation. NEIAP developed a plan o f action to address this risk as indicated in Section 5 above. This action p lan will continue to be implemented under the proposed project. The framework has been disseminated locally and i s in the Bank’s Infoshop.

5. Environment

D.5.1 . Environmental Catenow: NEIAP as we l l as NEIAP I1 are classified as Category B. Overall, the project will result in a net positive environmental impact. Given the localized and small-scale nature o f project activities, cumulative and long-term environmental impacts are small and negligible. Those can be easily managed with proper planning, oversight and monitoring with the involvement o f the beneficiary communities through the participatory process built into the project design.

D.5.2. Environmental safeguard management: The PMU has developed an Environmental Management Framework (EMF) and both the EMF and the institutional arrangements for the implementation o f the EMF are satisfactory. The EMF will serve as the operational manual and framework for environmental monitoring and management o f NEIAP 11. Extensive public consultations have been carried out in i t s preparation. As in NEIAP, the PMU will use District Environmental Officers (DEOs) o f the Central Environmental Authority, who are located in District Secretariats o f the eight participating districts, t o assist the P M U in environmental management o f the project. Details are provided in Annex 10.

6. Safeguard Policies

D.6.1. Social safeguards. The proposed repeater project’s activity portfolio i s similar to that o f the ongoing NEIAP. None o f the project activities require the state to acquire lands involuntarily and, therefore, OP 4.12 i s not triggered. However, OP 4.12 could arise in the case o f a) reassigning (if done) of the command area o f the rehabilitated tanks; and b) potential loss o f livelihoods o f people involved in cultivating crops in beds o f dysfunctional irrigation tanks consequent to the restoration o f such tanks. So far, no such cases are reported under the current project. In the case o f such an eventuality, the project has drawn measures to address the same. OD 4.20, related to Indigenous Peoples, i s no longer an issue as all the IPS have been addressed under the NEIAP. The project’s activities would be designed to prevent any impact on Cultural Property. These are outlined in “Social Safeguard and Risk Monitoring and Implementation Framework.”

D.6.2. Environmental safeguards. The three environmental safeguard policies triggered are indicated in the table below. The measures to address the provisions o f the policies, enhance positive environmental impacts and mitigate negative impacts are described in the EMF. Also the follow-up actions are outlined in section D.5.3

Yes No Environmental Assessment (OP/BP/GP 4.0 1) [ XI 11 Natural Habitats (OP/BP 4.04) [I [X 1 Pest Management (OP 4.09) [ XI [I Cultural Property (OPN 11.03, being revised as OP 4.1 1) [X 1 Involuntary Resettlement (OP/BP 4.12) [I [X 1 Indigenous Peoples (OD 4.20, being revised as OP 4.10) [ XI Forests (OP/BP 4.36) [I [X 1 Safety o f Dams (OP/BP 4.37) [ XI [I Projects in Disputed Areas (OP/BP/GP 7.60)* [I [X 1 Projects on International Waterways (OP/BP/GP 7.50) [I [X 1

7. Policy Exceptions and Readiness

D.7.1. The project complies with all Bank policies so that there are no policy exceptions requiring management approval.

D.7.2. The project i s ready for implementation. Preparatory actions to initiate implementation will commence immediately after Board approval and the project would be ready to move towards full implementation when the ongoing NEIAP closes in December 2004. The existing PMU, DPOs and the key staff are already in place, but need to be supplemented with new s h l l s for NEIAP 11; the project implementation and operation manual has been prepared. Technical design manuals, procurement and financial management arrangements used for NEIAP have been revised; procurement plan for the f i rs t 18 months o f the project has been prepared and cleared; and most o f the key and operational staff are conversant with the project concept and implementation strategies.

* By supporting the proposedproject, the Bank does not intend to prejudice the f inal determination ofthe parties’ claims on the disputed areas.

Annex 1: Country and Sector or Program Background

Sr i Lanka: Second North-East Irrigated Agriculture Project

Country Profile

1. S r i Lanka was one of the f i rs t developing countries to provide universal education and health coverage and promote gender equality and social mobilization. As a result, even the poor have a reasonably good access to education and health compared to other countries in the region. However, an assessment in 2002 (Sri Lanka: Poverty Assessment3) indicated that an estimated 25% o f Sri Lankans remain below the national poverty line; about 80% o f Sr i Lanka’s population and 90% o f the country’s poor l ive in the rural and estate (tea, rubber and other plantation) sectors; there are large disparities in poverty incidences among i t s nine provinces; and rural population remains especially vulnerable to income fluctuations. For about half o f the poor, small-scale agriculture and wage labor on farms and plantations provide the main source o f income and the poorest work in paddy production or in plantations. Poverty and isolation are worst and most widespread in remote, rural areas including the entire NE and adjoining villages o f the neighboring provinces (Uva, North-Central, North-Western provinces), which have been severely affected by the two-decade-long civil war.

2. In addition, S r i Lanka i s currently faced with the immense challenges o f establishing political, social, and economic stability following almost two decades o f armed conflict from 1983 to 2002 between the Government o f S r i Lanka (GOSL) and the Liberation Tigers o f Tamil Eelam (LTTE). The war has worsened the poverty level and human suffering in the NE, which had been predominantly rural prior to the war. The poverty conditions in the NE and adjoining areas affected by the conflict are quite severe and compounded by massive destruction o f economic and social infrastructure. Part o f Sr i Lanka’s difficulties in raising incomes and reducing poverty can be traced to the civil war.

Profile and Issues o f the North East

3. Wh i le this nearly two-decade-long conflict has taken an enormous toll o f the country’s human, economic, social and physical capital, i t s impact on the NE have been disastrous. The livelihoods, particularly o f the people o f the eight administrative districts4 o f the NE and, and to a lesser extent, o f the four adjoining districts5 (See Map) have been severely affected, and the social and economic costs o f the war in these areas are tremendous. The economic, social and humanitarian impact o f the war i s felt directly by populations in the NE and the areas bordering it. A large number o f people have been displaced, and they have lost most of their physical and economic assets and social ties. The essential public infrastructure (at urban, rural and village levels) i s severely destroyed. The conflict has caused severe social disruption resulting in trauma, unemployment, breakdown o f community organizations and networks, and loss of self-confidence and community spirit. The livelihoods o f many thousands o f displaced people as well as o f many other people who remained behind have fallen apart.

4. However, the emerging prospects for peace have resulted in over 300,000 displaced persons returning to their pre-war locations. The returning population as well as the non-displaced, but severely affected, groups need urgent support to reestablish their livelihoods and reintegrate with the social and economic

3 World Bank Report N o 22235-CE, June 2002. 4 T h e Eight administrative districts of the NE are Ampara, Batticoloa, Killinochchi, Jafha, Manna, Mulaitivu, Trincomalee, and Vavuniya. 5 The four administrative districts adjoining the NE are Anuradhapura, Moneragala, Polonaruwa, and Puttalam.

mainstream through gaining access to shelter, food, education, water, health and sanitation and finding secure and sustainable on-farm and off-farm employment opportunities.

5. Village settlements in the NE (Except in Jaffna) are typically polarized around and dependent on irrigation tanks, which harvest and store seasonal monsoonal rainwater for agriculture, livestock and inland fishing, domestic use and for recharge o f domestic drinlung water wells. In Jaffna, th is role i s played by a large number o f small ponds that harvest rainwater for the rechargmg o f i t s groundwater table, salt water exclusion dykes that prevents salt water entry to inland, and barrages that flushes o f f saline water to sea during rainy period. Typically, irrigation tanks, as well as groundwater recharge ponds, dykes and barrages in Jaffna, are indispensable assets for the existence o f rural communities as they provide water for their existence - - the lifeblood to the people and the ecological environment. The experience o f NEIAP indicates that the restoration and rehabilitation o f these water facilities have resulted in a significant contribution to the economic and social recovery o f the affected people in the focal villages through the generation o f direct and indirect on-farm employment opportunities. The restoration, rehabilitation and improvements to irrigation infrastructure are therefore vital.

6. The conflict has worsened the vulnerability o f the people to economic shocks. There are a large number o f families who do not possess irrigated agncultural lands or who are either landless or lack tenure security to engage even in rain-fed farming or livestock production. In addition, the war has increased the incidence o f widowed and women-headed households, and disabled people. Vulnerable groups requiring well-targeted basic livelihood-assistance support programs include those who are: a) l ikely to remain chronically poor because they cannot take advantage o f the existing limited opportunities (widows, landless, disabled, etc.); and b) trapped in pockets o f poverty because they are geographically isolated, face constraints o f mobility and integration in the short run. These groups need a cushion that enables them to return to productive activity. The most effective mode o f delivering assistance to al l these groups i s to help the poor help themselves and in the process reestablish village-level community spirit, self-confidence and social organization. This NEW I1 will address those urgent development issues on the basis o f the satisfactory development impact and implementation experience o f the ongoing NEIAP.

7. With the diminishing contribution o f the income from apculture for rural household income and national GDP for the majority o f the population, including the poor in the NE, the sources o f long-term and sustained growth and poverty reduction will continue to be manufacturing and services and improved or high-value agriculture. In the short and medium run, however, many o f the poor in Sr i Lanka will continue to remain engaged in agriculture. This i s especially true for the NE region where agriculture has always been a central part o f the economy with nearly two-thirds o f i t s prewar population depending on agricultural farming, livestock rearing and deep-sea fishing for their livelihoods. Agricultural production and household incomes regstered a substantial decline consequent to damage and destruction to irrigation infrastructure; deterioration o f rural roads, farm roads and access roads to markets; breakdown o f agricultural extension and other services; reduced access to farm inputs and credit facilities; and disruption o f marketing systems. Since the ceasefire, some o f the support services are slowly recovering but much remains to be done to revitalize the rural economic infrastructure and services toward speedy and full recovery.

8. Agricultural policy in Sri Lanka i s moving from emphasis on rice- based food self-sufficiency to a market-based approach emphasizing the development o f other crops. At the same time, the advent of South Asian Preferential Trade Agreement (SAPTA) in 1998 and i t s full implementation in 2008 will allow regional counties to withdraw import duties on many commodities including agricultural products and allow free export and import. This situation poses many challenges and opportunities for S r i Lankan agriculture to remain competitive and independent o f government subsidies. The challenges for the NE include: reduction o f production costs; acquiring new technology and business management slulls; overcoming trade restrictions imposed by the war; overcoming wasteful agricultural product packaging,

transport, loading and unloading o f goods across security check points; meeting market demands for quality and diversity; establishing strong market linkages and market information systems; and finding altemative sources and mechanisms to mobilize capital loans to progressive farmers, FOs and FFs in the absence o f poor banking services. However, there are many potential opportunities. Agriculture has always been a central part o f regional economy o f the NE with nearly two-thirds o f i t s prewar population depending o n agricultural farming, livestock rearing and deep- sea fishing for their livelihood. Until the mid-l980s, the NE region had enjoyed a high level o f agncultural development, was an area producing surplus rice, fruits, vegetable and other field crops and had a comparative advantage in the production o f vegetables, f ru i ts and other cash crops over most other parts o f the country. The production systems in the NE had a comparative advantage in facing the challenge o f reducing agricultural input costs to remain competitive with local and regional producers. NE agriculture has been historically based o n integrated nutrient management, clear understanding o f water balance and minimum external inputs caused by wartime restrictions. There i s potential for NE farmers to establish a “clean green” image associated with agncultural crops and products and develop opportunities to supply diary products, fruits such as mangoes and hybrid papaya, palmyra products, cash crops, etc., to target markets at competitive prices, diversity and quality.

9. Extension and research in Sri Lanka were largely developed under the program o f achieving r ice self- sufficiency to develop irrigation and agriculture technology and deliver extension support for paddy- productivity enhancement. Consequently, the shlls, experience and orientation o f agriculture extension staff as wel l as o f farmers and FOs to develop market competitiveness in prices, quality and diversity are weak. The war inhibited investments o n sk i l l development, and the development and maintenance o f the facilities and resources required to cater to the non-rice farming subsector. The absence o f the private sector in the NE has perpetuated the dependence o f farmers o n the public sector. At the same time, with the declaration of the ceasefire, chemical pesticide and fertilizer use in intensive agricultural areas, particularly around Jaffha, has increased resulting in increases in the agricultural input costs and potential threat to the environment. An extension methodology including, but not restricted to, experiential learning by farmers in farmer f ie ld schools i s required to reduce farmer dependence on training and extension by the public sector. Whi le the production-related technical sk i l l s for rice are largely available for such a system within public agnculture agencies in the NE, the system lacks business and market-development orientation, technology, sk i l l and capacity for non-rice crops, and teaching and training techniques and curricula. An extension approach to introduce and internalize integrated pest management (PM) and reinforce traditional organic culture methods and water management practices are urgently required. Given these short- and medium-term development needs, i t i s essential not only to restore agncultural production and related income opportunities for quick economic recovery but also to enhance productivity, sustainability and competitiveness o f agriculture in the NE to meet challenges and opportunities posed by the advent o f SAPTA.

GOSL’s Strategy

10. Over the last four years, GOSL has deepened i t s understanding o f the nature and root causes o f poverty in Sri Lanka including the areas affected by the conflict, with a v iew to reassessing and reformulating a policy fkamework for reducing poverty. Broad stakeholder consultations have been carried out to reach consensus on a medium- and long-term strategy for sustained economic growth and poverty reduction and develop a Framework of RelieJ Rehabilitation and Reconciliation (RRR). These efforts culminated in a well-developed, Poverty Reduction Strategy (PRS), which was endorsed by development partners at the June 2002 Development forum. The PRS gives high priority for rural development, reducing conflict-related poverty, and empowering the poor. The primary goals o f the strategy are to secure peace and achieve significant transformation in the quality o f l i fe o f the people, especially in rural areas, through increased incomes, economic modernization and invigoration o f rural economy.

11. The primary goal o f the PSR strategy i s to achieve significant enhancement o f the quality o f l i fe o f the rural people, through increased incomes, economic modernization and invigoration o f the rural economy. The PSR recognizes six strategic pillars: a) building a supportive macro-economic environment; b) reducing conflict-affected poverty; c) creating opportunities for the poor to participate in economic growth; d) investing in people; e) empowering the poor and improving governance; and f) implementing an effective monitoring and evaluation system. The proposed NEIAP I1 provides strategic and financial support to complement and supplement at least four out o f these six pillars. It directly supports the strategy and current program for resettlement, rehabilitation and reconstruction o f the NE.

12. There i s an ongoing attempt to reverse the legacy o f two decades o f pa inf i l and costly c iv i l conflict and enter into a new phase o f development that aims for poverty reduction and economic growth. The commitment o f the GOSL and the LTTE toward a negotiated settlement resulted in a ceasefire, which has now been in effect since February 2002. The ceasefire marked the beginning o f a transitional phase towards a permanent solution to the conflict. Since then both the GOSL and LTTE have maintained the ceasefire agreement for the longest period since the conflict began and have demonstrated patience and commitment to search for a lasting solution to the long-standing ethnic hostilities. Although the situation remains fragile, there are varying expectations among the society at large that peace talks will resume in the forthcoming months, although the timing o f an interim administration, a peace agreement and subsequent political modalities are not known as yet.

13. In the interim, the policy with regard to relief, rehabilitation and reconstruction has been to aim at resettlement o f the displaced people and bring the population back to productive l i f e by providing basic amenities including public, urban and rural infrastructure, and other basic facilities including housing and capacity building. There’s significant international and bilateral donor assistance, including Bank assistance, to fulfill the objective o f helping the conflict-affected people live with dignity and creating a physically, socially and economically conducive environment for their recovery and reintegration.

Rationale for Bank’s Involvement

14. Since 1998, the Bank has played a pioneering role in providing and catalyzing international donor assistance to help restore livelihoods o f conflict-affected people in Sr i Lanka. The Bank has used and extended funds, under the ongoing IDA Credits in irrigation and education, to finance minor reconstruction activities in the war-affected areas. In 2000, the Bank approved the ongoing North-East Irrigated Agriculture project (NEIAP, Cr 3301 CE), mobilizing US$27 mil l ion o f IDA funding to help jump-start agncultural and small-scale reconstruction activities o f about 400 villages. The proposed NEIAP I1 i s a repeater operation to scale up and augment outputs and impacts o f NEW. In 2001, the Bank provided a US$1 mill ion Post-Conflict Fund Grant to support de-mining activities. In late 2002, the Bank used existing IDA funds, which otherwise would have been cancelled, to provide another US$31 mil l ion for urgently needed support to restore health and water facilities and provide income opportunities for returning IDPs through the North-East Emergency Reconstruction Project (NEERP). In addition, the Bank has been requested by the GOSL and the LTTE to act as the administrator o f an NE Reconstruction Fund (NERF), a pool of financial resources from bilateral and international NGOs for the rehabilitation and reconstruction o f the NE. However, the NERF has not been activated yet due to the breakdown in the peace discussions.

15. Starting in January 2003, a group o f donors supporting Sr i Lanka, including the World Bank, in consultation with the GOSL, the LTTE and other stakeholders, carried out a Needs Assessment for the eight districts o f the NE and the four adjoining districts. Together with the PSR, the Needs Assessment was the basis for the unprecedented US4.5 bil l ion that was pledged at the June 2003 Tokyo Conference on the Reconstruction and Development o f S n Lanka. The NEIAP I1 i s a repeater operation to NEIAP and

i s a quick response to efforts to scale up the development impact o f the latter and that would complement and supplement broader rehabilitation and reconstruction initiatives in the NE.

16. The GOSL as well as the LTTE recognize the World Bank to be a key development partner in i ts efforts to promote rehabilitation, reconstruction and development o f the NE. T h i s i s due to the World Bank’s global experience in supporting rehabilitation, reconstruction and development in post-conflict environments and designing and supporting the implementation o f CDD and social-development programs; and the ability to bring in best international practices and experience in ensuring transparency, accountability and equity in targeting and delivering development assistance. The Bank’s participation will ensure that international experience with past and ongoing CDD programs and post-conflict operations are incorporated into the project design and sound international quality standards o f related technical aspects, social and environmental safeguards, monitoring and evaluation are applied. The Bank i s now engaged in the implementation of an innovative CDD pilot and the preparation o f a Community- Development and Livelihood Improvement Project in the south o f Sr i Lanka (outside conflict-affected area), the latter being the f irst phase of an adaptable lending program that aims for rural development and community empowerment.

17. The Bank has demonstrated i t s ability and capacity to implement community-based programs that target vulnerable people and reach rural villages, especially in conflict environments through NEW as well as the Bank’s other programs in and outside S r i Lanka. I t i s in a favorable position to scale up the ongoing NEW by augmenting, consolidating and sustaining the outputs and impacts, extending i t s scope and geographical spread, and covering additional conflict-affected communities in more villages. The expected scaling up cannot be achieved by supplementary financing to the current project, which has no contemplated cost savings. As such, a repeater operation financed by the Bank i s the best option to maximize the development impact. The Bank’s involvement in the proposed project will enable it to facilitate closer interaction between these programs as well as other donor programs mutually sharing knowledge and experience and building synergies.

Annex 2: Major Related Projects Financed by the Bank andor Other Agencies

Sri Lanka: Second North-East Irrigated Agriculture Project

ADB-Funded Projects Conf ict-Affected Area Rehabilitation Project Supporting rehabilitation o f essential infrastructure and restoration o f community livelihoods in the most severely conflict-affected areas o f the NE. NE Community Restoration and Development Project Contributing to the overall re l ie f and rehabilitation program for the NE o f Sr i Lanka, by improving the living conditions and well-being o f communities that have been affected by the ongoing ethnic conflict, particularly communities that contain significant proportions o f internally displaced people. NE Province Coastal Community Development Reduce poverty in vulnerable coastal communities in the three districts (Trincomalee, Batticaloa and Ampara) o f eastem Sr i Lanka through sustainable livelihood development and sound management o f natural resources. Eastern Province Coastal Community Development Project Promote sustainable redevelopment o f Sr i Lanka’s East Coast through better management o f i t s natural resources. Focusing on environmental protection and poverty reduction through improved management o f fisheries and coastal ecosystems. Southern Province Rural Economic Advancement Project

Support the efforts to promote the region’s development, accelerate economic growth and create income and employment opportunities in the Southern Province through greater participation and involvement o f the private sector. Plantation Development Project Ensure the long-term sustainability o f the plantation sector without external assistance. Improved profitability o f plantation companies and better living conditions to estate workers. Tea Development Project Increased income o f tea smallholders and private estates on a sustainable basis and improved institutional environment. JBIC-Funded Projects Small-scale Infrastructure Rehabilitation and Upgrading Project Contribute to the improvement o f basic conditions for living and socioeconomic activities in rural and urban areas through the rehabilitation and upgrading o f small-scale infrastructure (water supply and sanitation, irrigation, roads and bridges, and education). Pro-Poor Economic Advancement and Community Enhancement (Peace) Project NE Component Reduce poverty, increase productivity o f farmers and achieve sustainable agricultural development through such means as rehabilitation o f irrigation facilities and income generating activities, in North West, North Central, and Central Provinces as well as in the

Focusing on supporting the District Secretariats (Katchcheris) with necessary technical advice and financial assistance. Concentrating on the communities themselves, their self-initiated development and follow up with infrastructure. It follows a “Livelihood Approach to Community Development.”

Recent Projects Supported by the Bank

Sector Issues

Community -Driven Development

Project

Relevance and Quality o f Undergraduate Education Project (ongoing) Second Community Water Supply and Sanitation Project (ongoing) National HIV/AIDS Prevention Project (ongoing) Economic Reforms Technical Assistance Project (ongoing) Renewable Energy for Rural Economic Development Project (ongoing) Distance Leaming Initiative Project (ongoing) Central Bank Strengthening Project (ongoing) Land Titling and Related Services Project (ongoing) . Legal and Judicial Reforms Project (ongoing) . NE Irrigated Agnculture Project (ongoing) . General Education Project I1 (ongoing) Mahaweli Restructuring and Rehabilitation Project (closed on December 3 1,2003) . CONS o f Medic Plants Project (ongoing) North-East Emergency Reconstruction and Rehabilitation Project (NEERP) . Community Development & Livelihood Improvement “Gemi Diriya” Project

Latest Supervision (PSR) Ratings (Bank-Finance1

Implementation Progress (E’)

’rojects Only) Development

Objective (DO) S

Annex 3: Results Framework and Monitoring

Results Framework

Help conflict-affected communities in the NE Province and adjoining areas to restore livelihoods and enhance agricultural and other production and incomes, and build capacity for sustainable social and economic reintegration

Component One: Village rehabilitation and development for sustainable social and economic reintegration. a) Sustainable CBOs (1,000) are formed, strengthened and empowered.

Outcom

Percent targeted households (85,000) benefiting f rom increased income and village- level social and economic infrastructure.

Number o f employment opportunities generating f rom increased agricultural production potential and other sub projects;

Number o f sustainable village level community organizations capable o f village level planning, implementation and monitoring development activities.

Number o f self-reliant farmer organization, federations or companies engaged in productive, sustainable and competitive agriculture nroduction and marketing.

Component One:

Number (and %) o f CBOs functioning with executive committee and general membership inclusive and representative o f total village community .

Number (and %) CBOs satisfactorily engaged in subproject implementation.

Number ( and %) CBOs

YRO1-YRO5. Use the .nformation to target future post- :onflict reconstruction and levelopment programs o f GOSL md the Bank as wel l as other ionors.

Same as above

YR 03. Use the information to Streamline the strategies and shangehmprove the program at Mid-Term Review to result in sustainable village organizations.

YR 03. Use information to streamline the strategic plan and support services and continue supporting the objective o f the related subcomponent.

Component One:

YR 01 onwards. Poor representation and inclusion, flags poor sustainability and need to changehefine the strategy.

YR 03-05. Satisfactory levels would help better targeting villages and beneficiaries later for reliefkehabilitation programs.

YR 03-05. Poor levels would

3) Productive and service :apacity o f essential village-level social and economic infrastructure restored and xhanced.

:) Livelihoods o f vulnerable groups and people enhanced.

Component Two: Essential rehabilitation and improvements to selected major irrigation schemes:

a) Risks to human l i f e and public and private property, due to potential failure o f dilapidated dams, reduced and serviceability and performance o f major irrigation schemes improved.

Component Three: FO capacity building and empowerment, and strengthening apcu l tu ra l support services.

a) Self-reliant FO, federations or companies developed for productive, sustainable and competitive agriculture production and marketing.

satisfactorily engaged in the O&M o f completed assets and facilities at village level.

% increase o f area (24,000 ha) farmed due to increased supply o f water resulting f rom irrigation scheme rehabilitation.

Number o f poor and vulnerable household benefited.

Loan recovery ratio o f women rural development societies (at village, district and aggregate levels) Component Two:

Number o f periodic inspections by dam-safety panel.

Degree o f compliance with dam safety panel recommendations and conformity with norms and standards.

Component Three:

% number o f VADPs successfully implemented.

Number o f business plans developed and implemented by FOs/FFs.

Number o f business contracts signed by FOsRFs with private

indicate the need to streamline process, strategy and activities, including training and s h l l development.

YR 03-05. Data would help NEPC to plan its agricultural strategy and allocate resources to enhance agricultural productivity and production and to establish markeb'technological linkages between farmers and the public/private sector.

YR 03-05. Poor levels would indicate the need to revisit the project's development strategy and focus to ensure l ivelihood assistance to vulnerable people.

Component Two:

YR 02-06. Poor compliance, flags need to reemphasize o n dam safety aspects and enhance training and capacity building for dam safety related O&M.

Component Three:

YR 02 onwards. If VADP are not successfully implemented, it would flag the need to recognize issues affecting performance and appropriate remedial action.

YR 03 onwards. All o f the result indicators for this component shown on the second column wil l be used collectively to assess potential success or failure o f Component 3. If the results are

Component Four: Institutional capacity building, project- implementation support and project oversight.

a) Technical capacity o f related provincial and local government agencies strengthened to prepare for ongoing and future reconstruction and development o f the region.

sector for agricultural products.

Number o f FF staff received business management training and exposure visi ts outside the country.

Increase o f variety and value o f income sources for FOsEFs.

Component Four:

Increased level o f compliance with c i v i l works quality norms and standards.

% o f technical and financial audit recommendations complied with by the project annually.

Increased level o f compliance with accounting norms and standards.

slow that would flag the need to improve or restructure the strategies to ensure success and achievement o f objectives.

Component Four:

YR 0 1. Unsatisfactory compliance with c i v i l works quality, audit and financial management will f lag immediate strategic attention o f the NEPC as wel l as donors supporting reconstruction and development. I t wil l enable designing and adopting further measures to build capacity o f the NEPC.

g 2 E' a 3 a

g 0 0 i i

g 00 z

5 a ru

s 0 00

s g In N m

a & Ea

Annex 4: Detailed Project Description

Project Area, Target Beneficiaries and Expected Benefits

1. The project would reach selected conflict-affected communities and villages in eight administrative districts o f the NE province (Ampara, Batticaloa, Trincomalee, Vavuniya, Mannar, Mullait ivu, Kilinochchi, and Jaffna) and neighboring villages o f the four administrative districts in the adjoining three provinces namely Moneragala (Uva), Puttalam (North West) and Anuradhapura and Polonnaruwa (North Central). The project would reach around 85,000 families totaling around 400,000 people. The process and criteria for allocation of project funds among districts, selection o f focal villages within districts, and selection o f target beneficiaries in focal villages are described in Annex 6.

2. The project would adopt community-driven development (CDD) principles, building primarily on the CDD lessons and experiences o f both NEIAP and the Vil lage Self-Help Learning Initiatives (VSHLI) p i lot as appropriate. Major tangible benefits would include: a) sustained improvement in basic living conditions in about 600 villages affected by the conflict as a result o f increased agncultural production and other project-supported reconstruction activities; b) enhanced mobi l i ty and access to farms, schools and market centers and safe drinlung water facilities; c) enhanced village-level institutional arrangements and capacity for self-management o f village-level activities; d) generation o f employment for displaced people; e) improved food security; f) formation and strengthening o f FOs and farmer federations with a commercial focus: and g) strengthened agncultural support services. These benefits are expected to lead to improvement in overall living conditions o f target beneficiaries. The project would also help restore t rust and self-reliance among the target population enabling them to play a more proactive role in planning and implementation o f project activities.

3. Training and s k i l l development as wel l as project implementation experience would further strengthen the s lu l ls and capacity o f CBOs, governmental staff and NGOs. This capacity building, together with project interventions o n the ground, would create init ial conditions to later build a firmer base for sustainable development in the region.

Project Component and Subcomponents

4. The project would comprise the following four major components: a) Vil lage rehabilitation and development; b) Essential rehabilitation and improvements to selected majodmedium irrigation schemes; c) Farmer organization capacity building and empowerment, and agricultural support services strengthening; and d) Institutional capacity building, project implementation support and project oversight. A br ie f description o f each o f the above components i s provided below:

5. Component 1 - Village Rehabilitation and Development (US$53.2 million). This component will comprise the following subcomponents: a) reviving, forming and strengthening o f community-based organizations (CBOs); b) community-level subprojects for rehabilitation and improvements to essential village-level social and economic infrastructure and facilities; c) l ivelihood support activities for vulnerable groups and people; and d) p i lo t programs to test innovative community development and empowennent approaches. The main beneficiaries are IDPs and other conflict-affected people in about 600 selected focal villages in the project area. This component would directly contribute to creating an enabling environment in the selected focal villages for quick socioeconomic recovery, through the restoration o f productive village-level assets, mobil ization and strengthening o f village-level community institutions, promotion o f production and employment, and triggering economic activities at the village level. The project would finance village subprojects, primarily c i v i l works, subgrants, goods, training and

other services. The criteria for selecting FVs and investment criteria and ceilings for FVs and typical subprojects are outlined in Annex 6.

6. Subcomponent 1.1: Reviving. forming and strengthening o f community-based organizations (CBOs) (US$ 1.76 million). The goal o f this subcomponent i s to reestablish and create sustainable village-level institutional arrangements that are capable o f village-level planning, implementation and monitoring development activities in the rural areas. The project would primarily work through the traditional CBOs such as FOs, Rural Development Societies (RDSs) and newly created Women Rural Development Societies (WRDSs). This subcomponent would finance: a) community mobilization activities leading to the formation and/or revitalization o f inclusive CBOs and institutional arrangements at village level; b) preparation o f village base-line social economic profiles (VSEP) and village rehabilitation plans (VRps); c) building capacity and improving technical, financial, organizational and management slulls o f communities to plan, execute and manage development activities on a demand-responsive manner. The outcome o f this component would be inclusive, sustainable and viable village-level CBOs that are capable of maintaining the village assets created and repaired under the project using their own initiatives and finances and managing village-level revolving funds. The subcomponent wil l finance technical assistance, consultancy services and training.

7. Subcomponent 1.2: Community-level subprojects for rehabilitation and improvements to essential village-level social and economic infrastructure and facilities (US$ 45.34 million). The goal o f this subcomponent i s t o reestablish and improve productive and service capacity o f village infrastructure essential for basic living conditions and employment. T o achieve this goal the project wil l finance: a) the rehabilitation, restoration, improvement and augmentation o f minor and medium irrigation schemes; b) rehabilitation o f ponds, dykes, saltwater exclusion structures and barrages in the Jaffna district; c) repairs and improvements to rural access roads to farms and schools, etc., and link roads to markets and townships; d) construction o f drinkmg water facilities, school buildings and community centers and community storage facilities for agricultural inputs and produce; and e) implementation o f complementary agricultural-productivity enhancement activities under the rehabilitated irrigation schemes. All o f the activities will be selected and prioritized by the villagers and be planned, implemented and monitored with the active participation o f the communities. This subcomponent will finance c iv i l works and consultancy services required to implement these activities.

8. Subcomponent 1.3: Livelihood assistance activities for vulnerable groups and people (US$ 6.0 million). The objective o f this component i s to enhance living conditions and quality o f l i fe o f vulnerable people. The target group will compromise those who do not possess irrigated lands and other income- generating opportunities, widows, women-headed households, etc. These goals would be achieved through providing: a) financial grants to village-level CBOs and women R D S s to disburse small loans to the most vulnerable people in the community to start income-generating activities using principles of micro-finance and revolving fund programs to the specific socioeconomic situation prevailing in the project area. WRDSs will be the village institution responsible for targeting and selecting beneficiaries, financial management and procurement and monitoring and account keeping o f the repayable loans to individuals using the financial grants f rom the project to WRDSs.

9. Subcomponent 1.4: Pilot programs to test and develop innovative village community development and empowerment approaches (US$ 0.1 million). The purpose o f this component i s t o test and develop innovative community mobilization and community-driven development approaches and models appropriate to specific socioeconomic and cultural settings o f the conflict-affected NE province. This subcomponent will allow testing o f alternative self-sustainable institutional mechanisms and arrangements at the village level learning f rom successfully tested and proven CDD approaches locally, regionally and globally. One o f the pilots will be to test and develop community mobil ization approaches, institutional arrangements, procurement and financial management procedures and monitoring

arrangements appropriate and suitable for direct financing o f communities to plan and implement subprojects. The pilots wi l l be implemented in about 2-3 FVs in selected districts.

10. Component 2: Essential rehabilitation and improvements to selected major irrigation schemes (US$16.75 million): Maintenance o f most major irrigation schemes in the project area have been largely neglected over last 20 years due to the prolonged conflict. Consequently, the major components o f headworks such as dams, spillway structures and sluices including electro-mechanical components, ma in supply, feeder canals, drainage canals and canal structures are heavily dilapidated. Some structural components are dilapidated to the extent o f verge o f potential failure causing potential loss o f production and damage to human l i fe and physical property.

1 1. The objectives o f this subcomponent are to: a) prevent potential loss o f human l i f e and employment, and damage to public and private property and environment by ensuring structural stability and safety against failure o f most dilapidated major irrigation headworks o f the project area; and b) improve water- management capacity of, and water availability, t o farmers by enhancing serviceability and performance of badly dilapidated irrigation systems. This component will include essential dam safety repairs and improvements and urgent improvements to major irrigation and drainage canals and feeder canals o f selected major irrigatioddrainage schemes. It would benefit about 15,000 householddfarming families who are dependent o n those schemes for their livelihoods. The schemes selected for improving serviceability, performance and improved water availability, and restoring and enhancing agricultural production are: Allai scheme (Trincomalee district); Giants’ Tank scheme (Mannar); Iranamadhu scheme (Kilinochchi); Karavahu scheme (Ampara); and Rugam scheme (Batticaloa). The f i rs t three schemes were enlisted for rehabilitation under the World-Bank-funded Major Irrigation Rehabilitation Project implemented during the mid-1980s but were suspended during implementation due to the ethnic conflict. The component would finance c iv i l and electro-mechanical works, goods and equipment, consultancy services and training activities.

12. However, comprehensive environmental assessments for a l l f ive schemes should be carried out before the commencement o f the rehabilitation works o f a l l f ive schemes. For Iranamadhu, Giants tank and Allai schemes, updating o f the environmental assessments (EAs) conducted under Productivity Enhancement Studies (Oct 2003) will be sufficient. For Rugam scheme, where farmers propose the construction o f permanent diversion weirs downstream o f the reservoir and connecting two existing tanks, requires comprehensive environmental and social assessments. Fo r Karavahu drainage scheme, where major focus will be o n improving drainage, the potential environmental impacts, particularly on the natural wetlands, should be assessed. The PMU will obtain Bank clearance for the TORS for EAs and final E A s before the commencement o f rehabilitation works.

13. Component 3: FO Capacity Building and Empowerment, and Agricultural Support Services Strengthening (US$ 4.92 million): The objective o f this component i s develop abil ity and capacity o f farmer organizations and farmer federations o f the NE to improve productivity, sustainability and competitiveness o f agriculture. In order to address the major challenges and constraints in the agnculture sector o f the NE and capture opportunities to improve productivity, sustainability and competitiveness o f agriculture, this component will include four subcomponents: a) Capacity building o f FOs and FFs, Provincial Agriculture agencies and private-sector service providers; b) Technical Assistance in FO development; c) Provision o f infiastructure for training, research and seed production and quality monitoring; and d) Supply o f vehicles, equipment and facilities. This component will provide budgetary support necessary to: institute the changes in orientation o f farmers toward commercial agriculture; develop institutional capacity, technical knowledge and resources o f farmers, FOs and FFs to establish market linkages and capture market opportunities; enhance their abil ity and capacity to respond rapidly and competitively to market signals; and help become self-reliant and independent o f public sector agricultural support and services.

14. Subcomponent 3.1: Capacity building o f FOs and FFs and provincial agriculture agencies (US$ 3.29 million). Th is component will include the formation, training and strengthening FOs and FFs. I t will finance training and slul l development and resources and technology needed to manage agnculture as a productive, sustainable and competitive business activity. The focal FOs will be selected from major irrigation schemes on the basis o f a commodity or geographic focus. This component will finance the training and services required for agncultural development planning and demonstrations in focal villages, including the preparation o f Village Agriculture Development Plans (VADPs), and exposure v i s i t s and academic training to selected entrepreneurial farmers in regional countries. I t wil l also finance and administer a revolving fund to provide larger loans to FOs and FFs commencing in the third year o f project implementation.

15. Subcomponent 3.2:. Technical Assistance in support o f training and FO development (US$ 0.31 million). This subcomponent will finance international and local technical assistance required to develop training curriculum, techniques and material, monitoring and quality control/enhancement. An international agency, such as the FA0 or any other regional international agency that has a proven track record and experience will be hired.

16. Subcomponent 3.3: Provision o f infrastructure for training, research and seed production and quality monitoring (US$ 0.44 million). This subcomponent includes: a) minimum and essential provisions required to upgrade buildings and facilities, and reconstruct damaged buildings at district-level agriculture research and training centers of provincial agnculture department and provincial department o f animal production and health; and b) development o f a market information systems.

17. Subcomponent 3.4: Supply o f vehicles, equipment and facilities (US$ 0.88 million). This subcomponent includes provision for procurement o f vehicles and motorcycles to ensure adequate and efficient mobility of field-level staff engaged in farmer capacity-building program, and supply o f equipment and facilities to district, segment and divisional offices.

18. Component 4: Institutional Capacity Building, Project Implementation Support and Project Oversight (US$ 6.34 million). This component consists o f the following two subcomponents: a) Capacity building o f national, provincial and local government agencies; and b) Project management, implementation support and oversight.

19. Capacity building o f provincial, district/divisional and local government agencies (US$ 5.26 million). This subcomponent would support: a) the enhancement o f equipment and facilities required to carry out the project activities; b) the improvement and establishment o f regional laboratories for testing construction materials, quality assurance o f civi l works construction, and testing agricultural soil; c) support for the establishment o f the groundwater monitoring network in Jaffha district; d) short-term training and study tours to selected staff to improve implementation o f the project and other long-term community-based reconstruction programs; e) the provision o f essential office equipment and facilities; and f) technical assistance for special studies and research.

Subcomponent 4.1:

20. Subcomponent 4.2: Project implementation support and oversight (US$ 1 .OX million): This subcomponent would support hiring: a) consultants and staff for the project management unit and district project offices; and b) hiring partner organizations, NGOs and consultancy f i r m s and consultants for extemal technical, social and financial auditing and project-impact monitoring.

Annex 5: Project Costs

Local Foreign Total US$ million US$ million US$ million Project Cost b y Component and/or Activity

(1) Village Rehabilitation and Development 46.934 0.503 47.434

(2) Essential rehabilitation and improvements to selected 14.699 0.253 14.952 major irrigation schemes

(3) Farmer organization capacity building and 3.335 1.056 4.391 empowerment, and agricultural support services strengthening

(4) Institutional capacity building, project implementation support and project oversight

4.955 0.706 5.661

Total Baseline Cost 69.923 2.518 72.441 Physical Contingencies 2.180 0.00 2.180 Price Contingencies 6.520 2.518 6.520

Total Project Costs' 78.623 2.518 81.141 Interest during construction

Front-end Fee Total Financing Required 62.182 2.518 64.70

'Identifiable taxes and duties are US$5.839 million, and the total project cost, net o f taxes, i s US$75.301 million. Therefore, the share o f project cost net o f taxes i s 92.8 %.

Annex 6: Implementation Arrangements

Project Execution Responsibility and Arrangements

1. Public administration in Sri Lanka i s carried out at five levels-national, provincial, district, division, and village. The national government i s responsible for formulating and administering national policies, programs and projects in the country. The provincial councils are responsible for the devolved administrative and technical functions as per the 13" Amendment to the Constitution. The Chief Secretary (CS) i s the chief administrative officer o f the Provincial Council, overseeing provincial ministries and departments that implement the provincial functions and work programs. Administrative functions and technical functions that are the responsibility o f the national government are implemented by regional offices o f the respective line ministries located within the provinces. The District Secretary/Govemment Agent (DS/GA) i s the chief administrative officer o f a district. DSs/GAs bear the responsibility for coordinating and ensuring effectiveness o f the public service delivery o f those l ine agencies within the district. A district i s divided into a number o f administrative divisions. A division i s a designated cluster of villages that provides various administrative services to people through a Divisional Secretariat headed by a Divisional Secretary (DVS). A Divis ion i s further divided into a number o f sub clusters o f villages, each of which i s headed by a village-level officer (Grama Niladhari-GN). A GN i s responsible for delivery o f various public services to the communities living in his area o f jurisdiction called G N division. Line agencies o f the national government, provincial council, and local authorities are responsible for providing various public-sector technical functions to village communities. These agencies employ front- l ine field-level staff o f various technical disciplines who work directly and closely with communities. Whi le those technical staff report directly t o the heads of respective district, provincial or local government agency offices, the DSs/GAs and DVSs are expected to coordinate their services at the district and divisional levels respectively.

2. The project wil l be implemented in al l the districts o f the North-East6 (map at the end) and conflict- affected villages o f the neighboring districts7 over a period o f 6 years. The project will be implemented by the NEPC under the supervision o f the MRRR that, in turn, will be accountable to the Ministry o f Finance, the GOSL. However, should the administrative arrangements change as a result o f the peace discussions, the implementation responsibility could be transferred to any successor-administrative entity acceptable to the GOSL and the IDA. The CS o f the NEPC will be the Chief Executive Officer (CEO) and will be the main contact person for the project.

Key Project Implementation Principles and Guidelines

3. The principles and guidelines governing the project implementation process, mechanisms and arrangements are described below.

4. Communi&-Driven Development (CDD). The project development strategy i s premised o n a CDD approach. K e y elements underpinning the C D D approach are as follows: a) diversity - need to recognize that the village communities are heterogeneous; b) inclusion, equity and participation - discriminatory targeting and prioritization to ensure that a l l conflict-resultant subgroups do get an opportunity to participate in the project; c) autonomy and subsidiarity - communities will have full control o f resources and decision making. The decision making will take place at the lowest appropriate level; d) self-selection

Distr icts o f the North-East province are Ampara, Batticoloa, Jaffna, Kilinochchi, Mannar, Mulaitivu, Trincomalee, and V avuni ya. ' Neighboring districts are Anuradhapura, Pollonnaruwa (North-Central Province), Moneragala (Uva Province) and Puttlam (North-Westem Province).

and demand-driven-following an informed decision malung, communities wil l decide whether to participate or not in the project; e) community contribution towards capital cost, as an expression o f demand; f ) human and institutional development-revivinglrejuvenating traditional CBOs and/or forming new CBOs and building their capacity; g) ownership, accountability and transparency; h) impacts monitoring and risk management leading to enhanced social and economic integration. The operational strategies to ingrain the above CDD principles are described under the fo l lowing subheadings: focal village selection, resources allocation, beneficiary targeting, investment criteria, community development cycle (CDC) and institutional arrangements.

5. Focal Village Ranking and Selection Principles. The NEPC has developed poverty and vulnerability indicators and developed vulnerability maps for Trincomalee districts. The maps for Batticoloa district are under preparation. The project will assist the NEPC to carry out a province-wide poverty and vulnerability assessment and complete vulnerability profiles and maps for a l l the districts by June 30, 2005. If poverty and vulnerability maps or data are available to apply the poverty and vulnerability indicators developed by the NEPC, those maps and indicators will be the basis o f selection and prioritization o f FVs. However, GAs/DSs will be the best judges o f the needs o f people in their respective districts and therefore should have the final decision-making authority o f the selection and prioritization o f FVs. The GAsDSs are expected to select FVs on principles o f demand led, vulnerability, poverty, transparency, and economy of resources use.

6. F V Ranking and Selection Criteria. Until poverty and vulnerability maps for a l l the districts are available, the project will use f ive proxy poverty and vulnerability indicators, that ingrain the above principles, for which data are generally available with GNs and DVSs (Attachment 1 of annex 6). The purpose o f these indicators i s to ensure that prioritization and selection o f FVs are objective, transparent, wel l targeted, and the project catalyzes the return o f IDPs and maximizes i t s impact o n the conflict- affected people. However, these indicators will be used only as a guide and not t o eliminate any vulnerable and poor community or village. Indicators and the scores assigned to each o f them are as follows: (i) proportion o f the present IDPs in the village (30%); (ii) families settled or planned to be settled (30% marks); (iii) families who do not own irrigated lands (20%); and (iv) the current serviceability status o f the irrigation tank (if exists in the village) (20%). The ranlung for villages with and without irrigation schemes will be done separately. The last indicator (serviceability o f the irrigation scheme) will not apply to Jaffna, whose hydrological regime and use and sharing o f ponds and canals are different f rom the rest o f the project area. I t i s accepted that small villages that hosts less than 30 households will not be selected to ensure economy o f resources use, but alternatively, a contiguous cluster of such small villages may be selected. A guideline for Jaffna district i s outlined in paragraph 13 below.

7. F V Ranking and Selection Process. DPDs with assistance support f rom DSs and D V S s in each district will initiate the process through an awareness campaign using both mass media and village to village canvassing. For the latter, PMU will develop a pamphlet which will be disseminated in the project area to inform and encourage communities to submit applications for project support. The pamphlet will include a concise description o f the project, rules and regulations governing participation, instructions on how to apply, and a sample application template to be f i l led in by the applicant. Fol lowing this, the project will invite applications f rom interested villages. However, this approach may have both merits and demerits. Whi le this process will enable the project to be objective and transparent in the targeting o f communities, i t may o n the other hand raise expectations and disappoint a large number o f communities that are not selected for project support. I t i s not necessary that a villagelvillage community alone should apply. Any CBO, NGO, c iv i l society member, government officer or UN agency can and will be encouraged to apply for assistance from respective DSs/GAs or DPDs o n behalf o f any village community. Any application should contain signatures o f at least 70% o f the heads o f a l l families living in candidate villages at the time o f application. However, candidate villages located in any protected area (natural habitats, forests

and wildlife reserves, and national parks) or in land- mine areas will not be considered. Selection o f FVs will be done twice a year.

8. Village Resources Allocation (Attachment 2 to Annex 6). Based on the NEIAP implementation experience, the project recognizes that villages requiring rehabilitation / restoration o f irrigation tanks require relatively more financial allocations. Therefore, financial allocation for a FV i s made depending upon whether the respective village has an irrigation scheme or not. Further categorization i s made based on the number o f households in the village: small (30-100 households); medium.( 100-200 households); and large villages (more than 200 households). For very large villages (for example, number o f households are more than 500), the GAsDSs will allocate sufficient funds to meet minimum essential requirements o f VDPs within the project’s development framework subject to prior clearance from PMU and Bank on case by case basis.

9. Activitv- wise Resources Allocations (Attachment 2 to Annex 6). From the view point o f equity, the project has felt it necessary to indicate per village investment ceilings for different activities chosen by the communities. These ceilings have been decided based upon the implementation experience o f NEW. For irrigation rehabilitation activities, a sum o f US$30,000 (Rs300,OOO) i s indicated as minimum and a sum o f US$40,000 (Rs400,OOO) as maximum. For road rehabilitation, the ceiling i s US$20,000 (Rs200,OOO) per village. For Livelihood Support Activities, which would comprise income-generating activities o f individual households as well as common community assets, the corresponding value i s US$20,000 (Rs200,OOO). The allocation for individual income-generating activities would not exceed US$200 (Rs20,OOO) per household subject to the stipulation that no more than 50% o f the eligible households will receive assistance in the f i r s t round. Similarly, common community asset costs will not exceed US$5,000 (Rs500,OOO). Further, communities may choose not to use any money for common assets construction. The funds provided to the communities are grants. However, the grant component allocated for LSA will be used as a revolving fund to provide loans to individual households. It should be noted that these are ceilings for resources allocations and not norms for framing cost estimates for civi l works. Also these are guidelines for planning and budgeting. In exceptional circumstances, GAsDSs may exceed the ceilings to accommodate essential and specific needs o f VDPs, subject to prior clearance with the PMU and Bank.

10. LSA Beneficiaq Targeting and Selection (Attachment 3 to Annex 6). In order to ensure equity, the project will resort to selective targeting o f beneficiaries in the f i rst round. Thus, female-headed households, landless laborers, disabled and ex-combatants (in this order) will be eligible to receive individual loans on priority basis. Households owning irrigated lands will receive lower priority. The selection o f beneficiaries, however, will be done in a transparent way by the W R D S using prioritization and ranking criteria presented in the attachment.

11. Revising and Fine Tuning the Targeting Criteria. The above procedures and criteria for targeting vulnerable and poor people will be implemented over a pilot period o f 6 months from the launching o f the project to test their effectiveness under the conditions prevailing in the target districts. Wh i le there i s a reasonable level o f comfort in the targeting process developed for NEIAP 11, it must be recognized that the process has been developed in an atmosphere where reliable data on poverty and conflict impacts are scarce, requiring the use of proxies and other mechanisms for identifylng the most vulnerable communities. Several diagnostic exercises (undertaken by the NEPC, UNHCR and other agencies), are currently being initiated or are in the planning stages. These include the development o f poverty and vulnerability profiles and maps for all the districts o f the NE. Over the next 6 months, some or all o f these initiatives may provide new information which can be incorporated into targeting processes. Therefore, at the end o f the pilot period, the targeting process and criteria will be revisited and fine-tuned by the PMU in consultation with all project stakeholders and tahng advantage o f new sources o f information and lessons leamed during the initial period o f operation.

12. Communitv Development Cvcle (CDC) (Attachment 4 to Annex 6). The project has developed a CDC, which will primarily serve as a participatory as well as a capacity-building framework for undertalung the village-development activities. The CDC includes five phases--preparatory, preplanning, planning, implementing and post-project operation, and will require a period o f around 24 months. It describes the sequence o f activities, processes, success/performance indicators, and roles and responsibilities o f the key actors. A key principle o f the proposed CDC i s that i t defines milestones which need to be achieved at the end o f each phase o f the CDC and will serve as performance indicators or triggers to move from one phase to the next. In order to keep track o f the quality o f the CDC implementation process and successful achievement o f the end o f the phase milestones, the entire CDC process will be closely monitored by an extemal and independent partner organization hired and deployed at district level.

13. Jafna District. Jaffna peninsula i s different from other project districts in both socioeconomic and hydrological aspects. The FV selection process in Jaffna will follow the same approach as used in the other districts. However, the criteria for FV selection and resources allocation for FVs will need to be applied with some adjustments. Typically, a pond in Jaffna i s shared by communities dispersed over a large number o f villages. Hence, serviceability o f an irrigation tank will not be a criterion for selecting an FV. For the allocation o f funds, the investment ceilings applicable to FVs not served by an irrigation scheme (attachment 3) will apply. However, the project wil l finance the rehabilitation o f ponds, canals, dykes, and barrages separately on the basis o f economic and ecological requirements decided by the District Agricultural Committee. The planning, design and rehabilitation o f water structures in Jaffna will be carried out on the basis o f the guidelines recommended in “Rapid Assessment Study to Streamline the Planning and Implementation of NEIAP Interventions in Jaffna District, University of Jaffna, October 2003.”

14. Rehabilitation of Thondamanaru Barrage in Jaffna. The GOSL requested the Bank to provide finances to rehabilitate the Thondamanaru Barrage in Jaffna. The proposed rehabilitation includes the repairs to existing damaged superstructure and re-installation o f old radial gates that have been repaired at Colombo and are ready at present for the transport and installation at site. There i s a demand from some communities to restore this barrage. However. the available literature* reports that: (a) the design intention o f the system including the barrage and canals linking Elephant Pass Lagoon and Vadamarachchi Lagoon, and earthen embankments and spill/causeway structures, was to channel freshwater from the mainland through the lagoon to prevent saltwater entry to make the lagoon a freshwater environment; (ii) this system never functioned fully since i t s construction in 1950-1960s as an integrated unit in a manner the designers intended; (iii) there i s the issue o f conflicting demands on the Vadamarachchi lagoon system, one for fisheries which require braclush if not salty lagoon, and the other for freshwater conservation and land reclamation which requires the lagoon to have freshwater; and (iv) rehabilitating the system should be subject to the resolution o f these two issues o f conflicting demands and confidence in the efficacy o f the salt flushing method. The P M U conducted a preliminary evaluationg on the rehabilitation of the barrage. Wh i le the study recommends the rehabilitation o f the barrage, it also emphasizes the complete absence o f environmental information and studies, the need to adopt a holistic and integrated approach, and importance o f comprehensive field surveys, community consultations, monitoring o f tidal behavior, salinity levels etc., and hydraulic and physical simulation model studies. In keeping with the Bank’s environmental safeguard policies, the P M U will carry out a comprehensive EA

Sanmuganathan, K; June 1999; Indicative Project Document prepared on behalf o f Ministry o f Finance and Planning,

University o f Jaffna; March 2004; Thondamanaru Barrage Rehabilitation, Evaluation Report for the North-East Provincial Government o f S r i Lanka for Jaffna Water Conservation Actions and Environmental Management Scheme.

Council.

(in accordance with a TOR cleared with the Bank) that covers the above recommendations before the commencement o f any physical interventions on the system using project funds.

15. Investment Criteria -for Small Irriaation Schemes. For a dilapidated but partially operational scheme, where original community has already been resettled and lands are partly cultivated at present, and no improvements to tank embankments are required, the allowable investment must be less than US$200/ha (Rs20,OOOha). However, in exceptional circumstances, where technical consultants approve that extensive improvements to tank embankment are essential for physical stability, the allowable investment must be less than US$750/ha (Rs75,OOOha). For a dysfunctional scheme, where embankment'anicut i s breached and consequently the scheme cannot store water and lands are not cultivated at present, the allowable investment must be less than US$900ha (Rs90,OOOha) and total rehabilitation cost must be limited to US$60,000 (Rs 6.0 million). For the latter case, a minimum o f 14% ERR must be realized. However, i f the project wishes to increase the storage capacity o f tanks, i t i s required to carry out adequate hydrological analysis to ascertain the potential reduction o f water availability to downstream users that may result from increasing the water storage capacity. It i s also required to consult downstream users o f tank cascades and obtain their consent for such improvements.

16. Investment Criteria for Maior Irrigation Work. For the rehabilitation o f major dams under Component 2, the investments will be on the basis o f actual cost estimates to implement essential and urgent repairs to ensure serviceability and safety o f dams and related structures. But, cost estimates for the rehabilitation o f canals should not exceed US$200ha (Rs20,OOOha). I t must be noted that these investment ceilings are not norms for framing civi l works cost estimates; actual cost estimates are expected to be lower than this ceiling. Special approval must be obtained from the IDA for rehabilitation o f medium schemes each o f whose command area i s more than 100 hectares on a case by case basis. For those schemes allowable, investment level as well as the total allowable investment will be determined on the basis o f urgency, scale o f rehabilitation, logistical aspects, and the expected impact. For all cases, beneficiaries are expected to provide free labor or material or a combination o f both valued at 10% o f the value o f civi l works o f the canal system. Caution would be taken that the burden o f community contribution does not fall on the poorest. Concerned communities would decide and upfront agreements would be reached between VRC, CBOs and DPDs regarding location, type and quantity o f civi l works that are completed as voluntary community contribution and for post-project O&M arrangements.

17. Investment Criteria for Rural Roads. The maximum allowable investment ceiling for the rehabilitation o f rural roads would be about U S $ 6 , 0 0 0 h (Rs600,000/km). I t must be noted that these investment ceilings are not norms for framing civil works cost estimates and therefore most cost estimates are expected to be lower than this ceiling. For each road scheme, benefiting villagers are expected to contribute an equivalent o f 10% o f the total estimated value o f the earthwork, in either cash or in kind. Caution would be taken that the burden o f community contribution does not fall on the poorest.

18. Investment Criteria for Drinking Water Wells. The maximum allowable investment for drinlung water wells or tube wells would be US$2000 (Rs200,OOO) per well, but the actual cost would be expected to be lower than tYs value depending on the site conditions. I t must be noted that this investment ceiling i s not a norm for framing cost estimates and actual cost estimates are expected to be lower than this ceiling. Dnnlung water wells will be financed under the project if only the following requirements are fulfilled: a) at least 25 families should benefit from a single well; b) a potable water source i s not available within a radius of 0.5 km from the location o f the beneficiaries; c) safe drinking water i s available in adequate quantity and quality, as certified either by the National Water Supply and Drainage Board, Water Resources Board or any other specialist private-sector firm; d) land for locating the well i s provided by the state or by an individual voluntarily and free o f charge; e) in the case o f tube wells, beneficiary communities have agreed to help in the installation o f hand pumps and construct the basement

at their own expense; f) in the case o f open dug wells, beneficiary communities should share 10% o f the construction cost; and g) communities take over the responsibility for maintenance.

19. District Resources Allocation. I t would be logical and desirable to allocate the project’s financial resources among candidate districts based on poverty, vulnerability, agricultural productivity and production indicators to maximize the project’s outcomes and impacts. But, this i s constrained not only by lack of accurate and comprehensive data and information on population demographics, poverty, and vulnerability but also by the dynamic nature o f the population. This in view, initially, P M U will make indicative district-wise financial allocations using the template shown in Attachment 5 to Annex 6. For Component 1, allocations may be based on the population and the performance o f the districts under the NEIAP. Similarly, allocations for Component 2 districts (Ampara, Batticoloa, Kilinochchi, Mannar, Trincomalee,) that host the five selected major irrigation schemes are determined on the basis o f estimated cost o f rehabilitation o f those schemes. Allocations for Component 3 are made on the basis o f the estimated cost o f anticipated civi l works, goods, training and services in each district. Finally, the district allocations for Component 4 are made corresponding to the estimated cost o f administration, oversight and operational costs o f DPOs required to implement and supervise Components 1, 2 and 3. A template for aggregating district financial allocation i s presented in attachment 5. These allocations will be reviewed and readjusted upwards or downwards once every 18 months during the implementation phase, based on actual performance and disbursement o f each district. A detailed discussion on the issue of resources and vulnerability, FV selection criteria, and inter-village poverty and vulnerability targeting criteria are presented in Technical Annex 1 o f the project fi les.

Overall Project Implementation and Oversight

20. As in NEIAP, the MRRR will be accountable to the Treasury for diligent and efficient utilization o f Credit funds and supervision and compliance with the provisions o f the Development Credit Agreement (DCA) signed between the GOSL and the IDA and Project Agreement (PA) signed between the IDA and the NEPC. The Secretary o f MRRR will also be responsible for coordinating and liaising the project at national level with the programs related to RRR, and concerned donors and l ine ministries. However, as in NEIAP, the MRRR will delegate the project implementation responsibility to the NEPC to implement the project in accordance with the provisions o f the PA. While, the Chief Secretary (CS) o f the NEPC remains to be the CEO o f the project, the decision-mahng authority and implementation responsibility within the NEPC and bordering districts will be furfher delegated to DSs/GAs for targeting beneficiaries, selecting focal villages, planning, implementing and monitoring project activities within the district. This arrangement would enable not only speedy and efficient project implementation but also smooth transition o f the project implementation responsibility to any successor administrative entity o f NE later, which i s l ikely to use districts as primary development planning and implementation units. At the village level, the decision-malung authority i s anchored with the CBOs. The overall implementation arrangements, decision-malung authority and oversight arrangements at national, provincial, district and village level are presented in the figure below. These arrangements are further elaborated in the following paragraphs.

Institutional Arrangements at National Level

21. At national level, a senior officer o f the MRRR, designated as Coordinator for NEIAP 11, will assist the Secretary o f MRRR for the coordination o f all project activities at national level and representing the project at various national- level coordination for an RRR o f the North-East. He/she will also be responsible for collaborating with other ongoing and proposed donor-funded programs o f the North-East at the national level. The coordinator will help the Secretary o f the MRRR in monitoring the project’s physical and disbursement progress, overall project performance and outcomes, complying with the provisions o f the D C A and P A and help the Project Director o f P M U in resolving issues that require

attention o f the concerned ministries and l ine agencies at national level. The coordinator will attend all Provincial Coordination Committee meetings to review the project and follow up on the decisions taken at such meetings that require national-level coordination.

Institutional Arrangements at Provincial Level

22. Project Management Unit (PMU). The CS of the NEPC will be responsible for overseeing the project at the provincial level and i s responsible for achieving the project development objectives, implementation outputs and targets and disbursement milestones. He will be assisted by a Project Management Unit (PMU) with a full-time Project Director and full-time multidisciplinary and gender- balanced core team comprising a Technical Director, Financial Management Specialist, Livelihood Support Specialist, Agriculture Development Specialist, Human and Institutional Development Specialist, and a Monitoring and Evaluation Specialist. The core group will be assisted by some subject matter professionals and support staff. In addition, P M U will enlist national and international experts hired on a short-term and intermittent basis to provide specialized inputs in areas such as dam safety, agriculture support services, micro-credit, community development, etc. The Internal Audit Unit o f the NEPC, which wil l be strengthened under the project, will carry out financial and technical auditing o f the project’s proceedings and would help the P M U in complying with financial procedures and technical norms and standards. A complementary objective o f strengthening the Internal Audit Unit wil l be to develop a satisfactory financial management culture report to the CS on concerned matters with information to Governor o f the NEPC, concerned DS/GA and PMU for necessary remedial action.

23. Role and Responsibility of the PMU. P M U will facilitate DSs/GAs and DPOs in implementing the project at the district level. I t will be responsible for overall project-wide budget control and financial management, quality assurance and control, monitoring o f project’s inputs, outputs, outcomes, processes and impacts, and providing timely and quality resources and technical assistance to DPOs. It wil l also be responsible for preparation of: project-wide training curricula and manuals; management o f training; preparation and dissemination of project information and progress reports to the general public, the GOSL and the World Bank; hiring o f staff and consultancy services, procuring goods and major civi l works that exceed the financial authority limits of the DPOs. A t provincial level, the P M U will obtain, coordinate and facilitate the support of provincial-level l ine ministries and l ine departments to reinforce their inputs and support to the DPOs at district and village levels. I t will also coordinate all project related matters and issues with the MRRR, all concerned central and provincial l ine ministries, departments, and local government agencies, ERD, Treasury, the World Bank and concerned donors, and with al l other provincial-level stakeholders.

24. Role of the Governor of the NEPC. The Govemor shall play a special role in the supervision o f the project. H e shall provide guidance to the NEPC and P M U to enhance development effectiveness and outcomes o f the project. As the Internal Audit Unit will be responsible for auditing o f the project, the Governor shall closely follow on the observations and recommendations o f the audits and direct the CS and concerned secretaries and heads o f provincial ministries for urgent remedial action as necessary. He/she shall summon special meetings o f all project stakeholders to discuss project implementation progress, strategies and impact or any critical issues that require attention and intervention at higher levels o f the Government.

NEIAP II - Project Implementation and Oversight Arrangements

Decision - Making Authority

Implementing Authority and Oversight

Implementing Responsibility/ Implementation Guidance Level

Provincial

Project Di rector

District Level

D e p n t y P r o j e d Direator

Village

Rehabilitation Committee/

ElrecufiVb

any other successor admnistrative enhty for the North East Ministry o f Relief, Rehabilitation, and Reconciliahon Extemal Resources Department Farmer's Organizations Woman Rural Development Societies Community Based Organizahons Decision Making Implementation Guidance and Review

* NEPC 01

WRDSS CBOs

Coordination, Implementation Oversight and Monitonng

0 Implementation Responsibility

Institutional Arrangements at District Level

25. Role and Resaonsibilitv ofDSs/GAs. DSs/GAs will be District Executive Officers o f the project and wil l be responsible for the management o f the program in their respective districts. DSs/GAs will be delegated full authority for: a) designing and implementing information, education and communication campaigns; b) selecting FVs; c) recruiting and mentoring project staff, community mobilizers, village facilitators, and partner organizations; d) selecting agencies, including local authorities, for the implementation supervision o f various project activities; e) district-level operational planning; f ) allocating and managing project funds; g) mobil izing district-level agencies and staff; h) guiding DPDs; i) dovetailing with other projects/ programs; and j) monitoring, evaluating and continuous learning in their respective districts.

26. District Project Qffices. The DS/GAs will be supported by District Project Offices (DPOs). A DPO will function as technical support and implementation units headed by a full-time or part-time Deputy Project Director (DPD) assisted by a full- time multidisciplinary and gender balanced team comprising experts in engineering, community mobilization, agriculture development, l ivelihood support activities, and finance and administration. In addition. The DPO will also draw upon the services o f technical specialists o f the concerned central government, provincial council and local government agencies who, together with Community Mobilizers (CMs), will form a Community Support Team (CST). The Government staff o f CST would include frontline staff o f the central, provincial and local government agencies such as Agriculture Instructor, Irrigation Technical Officer, Livestock Development Instructor (LDI), Divisional Officer (DO) o f Agrarian Development Department (ADD) and the Rural Department Officer (RDO) o f the Rural Development Department (RDD). These teams will directly interact with the communities and guide and supervise project implementation in FVs. The DPDs will obtain the services o f the l ine departments o f the government, provincial councils and local government to implement the project through close working relationships with the district-level heads o f the concerned agencies. In particular, the district staff o f the Central Environmental Authority (CEA) will assist the DPDs in the project’s activities related to environmental management.

27. Communitv Support Team. The central actor of the CMT i s Community Mobi l izer (CM). G A s D S s will have the option o f recruiting CMs directly from the market, or hiring an NGO to provide the required services, or t o mobilize RDOs o f the RDD any combination o f the above options. However, it will be ensured that at least 50 percent o f the CMs should come f rom the non-government sector. It i s preferable that CMs should be graduates or diploma certificate holders in agriculture, social sciences or business development. C M s and RDOs functioning as CMs would report to DPDs and operate under the guidance of Institutional Development Officer o f the DPO. The primary roles o f the ID0 and CMs are to lead and facilitate the implementation and completion o f the CDC with technical assistance o f the CST. I t i s expected that, o n average, one CM would be in-charge o f about a cluster o f 4-5 villages. In addition, GAsDSs will appoint two members f rom each focal village as Community Facilitators (CF), chosen by the village community transparently and objectively. The VFs will work closely with the CMs and CST in the implementation of CDC. One CF will be a woman who wil l be assigned to work exclusively with the village W R D S in the planning, implementing, financial management and record keeping and monitoring o f the L S A activities.

Institutional Arrangements at Community Level

28. Villaae Rehabilitation Committee and CBOs. Majo r focus at the community level will be on reviving/rejuvenating/establishing the traditional Community-Based Organizations (CBOs) such as FOs, Rural Development Society and Women Rural Development Society. Mobi l iz ing and enhancing membership o f these institutions wil l receive due attention. Representatives o f each o f these CBOs will be federated into a Village-Level Apex Body- Vi l lage Rehabilitation Committee (VRC). Whi le VRC will

be an informal body, the CBOs will continue to be legal entities. Building the capacity o f individuals as well as the CBOs, will underpin the project’s community-development efforts.

29. Village Development Plan. The primary instrument for village institutional development and rehabilitation i s the Village Development Plan (VDP). VDP i s primarily a document that reflects the needs, priorities and action plans for village development, capacity and s l u l l building, and subprojects that emerge from intensive participatory interactions among the community. I t includes Village Socioeconomic Baseline Profile (VSEP), and Village Agriculture Development Plan (VADP), strategy and action plan for forming and strengthening CBOs, cost estimates and action plans for subprojects chosen and prioritized by communities, and implementation o f apculture development, livelihood support activities and O&M plans. VSEP would include the socioeconomic status o f the village and other baseline information related with potential social safeguard and risks, which will be the baseline for monitoring and evaluation o f the project’s outcomes and impacts. VDP will be developed by community members, with technical assistance from CST, and be ratified by the Village Rehabilitation Committee (VRC) through a participatory and demand-responsive process. The orientation and mobilization o f communities for group action and preparation o f VDP will be facilitated by C M and CFs and guided by CSTs. The VDP i s used by GAs/DPDs as the primary instrument to allocate project funds to implement the plan. The GAs/DSs will use the VDP to obtain financial and technical assistance from other ongoing government, NGO and donor programs in the district to fulfill the priority needs o f communities expressed in the VDP but not financed by the project.

Project Steering and Coordination Arrangements

30. Provincial Coordination Committee. The Provincial Coordination Committee for Donor-Funded Projects (PCC) will be responsible for steering, guiding and supervising the project. Bringing the project under the oversight o f PCC will facilitate the adoption o f provincial-wide common principles and norms and synergy with other complementary and parallel programs to maximize development effectiveness o f the project. The Committee will be chaired by the CS o f the NEPC (or Head o f any later administrative entity in the NE). It will comprise al l Government Agents o f the project districts, Secretaries o f provincial ministries and Heads o f provincial agencies. Nominated representative(s) o f the concerned central ministries, ERD, UN agencies, or any concerned civi l society member or NGO will also be invited to attend PCC meetings that review the project. The PCC will meet once every 2-3 months. The P D will serve as Secretary to PCC meetings that review the project. The PD will prepare progress reports and issue papers to be tabled at PSDFP meetings and distribute them to all PCC members two weeks prior to the meeting, record and disseminate minutes o f the meetings, and follow up on al l decisions taken at the PSDFP. At district levels, the GAS will conduct monthly project review meetings with all project stakeholders at the district level and table and discuss issues that require attention o f the District Coordination Committees and District Agriculture Committees held quarterly and monthly, respectively. Heads o f all ongoing relevant programs o f other donors and NGOs in the district will be invited by GAs/DSs to participate at these meetings to facilitate the coordination o f resources.

31. A National Project Steering Committee (NPSC) will oversee the project implementation at the national level. The purpose o f NPSC will be to ensure that: a) project strategies and outcomes are consistent with national development goals and project addresses and supports the regional development and resettlement, reconstruction and rehabilitation program for the North and East; b) project outcomes and impacts are sustainable; and c) project funds are diligently and efficiently utilized. This committee wil l be chaired by the Secretary o f the MRRR and comprise Secretaries o f the Ministr ies o f (MHCIEPE&ID), (MIAL&I), Ministry o f Relief, Rehabilitation and Reconciliation (MRRR) o f Presidential Secretariat, ERD, Chief Secretary o f the NEPC and GAs/DSs o f all project districts. T h i s committee will meet once every three months.

32. Technical and Financial Auditinx. The financial and technical auditing o f NEW was carried out by two extemal private-sector f i r m s throughout project implementation to date. Wh i le this arrangement significantly improved the transparency, cost-effectiveness and accountability o f the utilization o f project funds, there were delays and shortfalls in the implementation o f audit recommendations. In order to enhance the impact o f auditing and the implementation o f audit recommendations in NEIAP 11, the internal audit department o f the NEPC will be strengthened with technical and financial auditors hired competitively from the open market. Auditors will be fielded at the district level and would have a dual reporting responsibility both to DSs/GAs at district levels and to the Chief Internal Auditor. Auditors will cany out on-the-spot checks at field sites both on technical and financial management aspects o f the project activities.

33. The Internal Audit Department will submit i t s major audit observations and recommendations as well as Annual Audit reports to the Secretary to the Governor, with copy to the CS and Secretary o f MRRR, for review by the Governor. The Secretary to the Govemor will direct CS and PMU to take remedial actions on the audit observations and ensure diligent and efficient use o f project funds for the intended purposes under the Govemor’s advice. All related correspondence should be copied to the Secretary, MRRR and Wor ld Bank’s country office for necessary follow up. The Govemor shall summon discussions and meetings o f the GAS, Project Director, DPDs, Financial Management Staff o f the PMU/DPOs or any other concerned staff member for this purpose at h i she r discretion.

Specific Implementation Arrangements and Responsibilities for Project Components

34. Component 3. The Provincial Department o f Agriculture will be responsible for overall coordination of the Agriculture Support Services Strengthening Component (component 3) and the implementation o f activities related to improvement o f agnculture in focal villages to be supported by the project. The component would be managed at provincial level by the Provincial Director o f Agriculture (PDA) assisted by two component coordinators nominated by the PDA to oversee the north and east. They will be assisted with advice f iom an intemational Training Coordinator and other consultants attached to the technical assistance team supplied by FA0 or any other regionalhntemational body and will work with FO representatives through a Project Advisory Committee to organize annual planning workshops and ensure that plans and programs at village and FO level reflect both the village-level planning process and the needs of FOs. The Component Coordinators will be stationed in the PDA’s Office and would be responsible for general component management and coordination; selection o f staff (mostly AIS) to be trained as Farmer Field School (FFS) master trainers; supervision and rendering assistance to program implementation in the focus villages; functioning as resource personnel in training o f staff, organization and implementation o f information campaigns, and interpretation and reporting on monthly progress. The Agriculture Development Specialist o f the P M U will be in charge o f coordinating this program among districts.

35. At the district level, the irrigated agnculture component would be managed by the Asst. Director o f Agriculture o f the district who will be the Distr ict Coordinator. The District Coordinators (DCs) (8) would supervise and assist implementation o f the component in the district, through their Segment Agricultural Officers (20), to oversee FFS curriculum development, identify and retain the services o f specific subject matter officers and other service providers when necessary, and monitor and report on progress o f implementation within the district. They will be assisted by the technical assistance team. The Segment Officers will also ensure adequate monitoring and reporting o f FFS activities and other related NEIAP agricultural activities. The Subject Matter Officers (32) attached to the District Office wil l act as technical resource personnel for the Agriculture Instructors in the field. Such personnel wil l include research staff attached to research stations who will use adaptive research to improve the demonstration program at the village level in areas such as I P M and integrated nutrient management.

36. The Provincial Director o f Animal Production and Health, assisted by the Deputy Director, will coordinate implementation o f activities related to animal production and health in the project area. H e will be assisted by four Regional Directors in oversight o f the work o f 47 Veterinarians and 9 9 Livestock Development Instructors (LDI) at District and Division levels. The District Veterinarians will be based at Veterinary Dispensaries in the Districts and will develop, with FOs, appropriate programs for disease control and animal breed improvement for extension by Livestock Development Instructors. The LDI will be based at Divisional level and will work in the support service team to identify village priorities and implement appropriate responses by demonstration or coordination o f loans from either livelihood support funds or the revolving loan funds for FOs and federations.

Monitoring and Evaluation of Outcomesmesults

37. The project recognizes that monitoring and evaluation-led learning (MEL) i s indispensable for efficient program management. The NELAP has developed and successfully operationalized arrangements, including staffing, capacity, and data generation and analysis, for monitoring and evaluation. However, the existing system needs to be strengthened in the areas o f process monitoring, continuous feedback led learning, thematic evaluations and dissemination. From this perspective, the project will strengthen PMU/ DPOs; empower communities and in particular, women; enable nehvorlung among the stakeholders; and obtain external consulting services. MEL would form an integral part o f the project and comprise: a) implementation monitoring; b) output and outcome monitoring; c) processes monitoring; d) sustainability assessments; e) thematic evaluations; and f ) impact assessments. Community-mobilization instruments, such as VSEP, VDP, VADPs, will serve as a baseline for comparisons to be made in future. CDC will form the basis for overall track recording o f the implementation process and milestone achievements at the community level.

38. PMU/DPOs will use a number o f other instruments to monitor aspects related to annual implementation plans, budgets, financial management, civi l works, social safeguards and risks, and the environment. District and project-wide annual implementation plans will be the basis for monitoring the physical progress and performance. The procurement plan developed at appraisal will be an init ial tool for monitoring procurement. This plan will be used for planning and monitoring procurements and for assessing the procurement Performance o f the project. The P M U reviews and updates the annual implementation plans and procurement plan once in 6 months. P M U and DPOs will be responsible for the financial monitoring supported by reviews by the Internal Audit Department. The project cost estimate prepared at project appraisal (Cost tables) provides a detailed breakdown o f implementing agency-wise project activities categorized as civi l works, goods, training, consultancy services, and operational overhead costs. The P M U will use Cost tables as a tool to plan, allocate, control and monitor project finances as well as to budget, monitor and manage government fund contributions to the project, Cost tables will be reviewed and updated annually by the PMU. Technical staff o f the Implementing Agencies assisted by technical auditors o f the IAD and external consultants will monitor technical aspects, particularly, quality control o f design and construction activities. The project adopts social safeguards and the risk management framework o f NEW to monitor and take remedial measures related to potential social risks. The land register, which is'an integral part o f VSEP, will provide a basis to monitor potential land encroachment issues. The project will use environmental checklists, dam safety management framework and integrated pest management plans developed as a part o f Environmental Management Framework to monitor environmental aspects and take remedial measures.

39. Members o f the CBOs will be enabled in self-monitoring and evaluation o f processes, inputs/outputs, physical and financial performance, and outputs/outcomes o f the activities that are implemented at the community level. D S s will engage NGOs to monitor community-development process and report for corrective action as an ongoing activity parallel with the implementation o f the

CDC. Data and information for the results indicators will be collected by the P M U and wil l be included in quarterly and annual project progress reports.

40. As part o f ME&L requirements, P M U will carry out, if necessary with support from an independent external agency, biannual reviews to ensure the compliance with processes and procedures as agreed in PIOM and various manuals; and to assess social and environmental impacts within the agreed environmental and social safeguard management framework. The project will organize opportunities to operational staff, communities and policymakers to cross-learn from various other donor-funded and GOSL programs that focus on community-based rural development approaches both within Sr i Lanka and in the region. I t will also provide learning opportunities to project staff and selected promising farmers from project focal villages to cross-leam from successful agricultural technologies and practices and FOs in nearby countries in the region. The quarterly Project Performance Monitoring and Evaluation Report, which i s already in use, will be the basis for using the outcome and results indicators by the Govemor, Project Director, DPDs, CS o f the NEPC, and other policymakers to assess the project’s effectiveness. The fora set up at various administrative levels for management reviews are divisional (Divisional Coordination Committee/monthly); district (District Project Review Committee and District Amculture Committee/monthly and District Coordination Committee quarterly); provincial (PCC at least every 3 months, and PPCC at least every 6 months).

Consistency and Synergy with Other Ongoing CDD Programs in the NE

41. The project will be implemented following the norms, rules and procedures agreed in the Project Implementation and Operation Manual (PIOM), which will be available in Project Files. The implementation will also comply with the Bank’s fiduciary and safeguard management requirements, norms and practices as agreed between the GOSL and the Bank at Credit negotiations and as described in the PAD, D C A and PA. It will also adopt a common operational framework o f principles, norms and standards with other similar ongoing projects [WB-financed NEERP, NEW, ADB-financed North-East Community Restoration and Development (NECORD), Conflict Area Rehabilitation project (CARP) and the JBIC-financed Pro-poor Economic Advancement and Community Empowerment Project (PEACE), etc.]. These principles would cover cost recovery, community contribution, after-care arrangements, micro-finance, civi l works, norms and standards for community empowerment, construction rates, etc.

Attachment 1 to Annex 6

District-Level Focal Village Ranking and Selection Criteria

1. FV selection i s based on the principles o f self-selection, demand-led, and vulnerability and poverty. Once the poverty and vulnerability profiles and maps are available for a l l the project districts, those will be used as the basis for ranlung and selecting FVs. Unless those maps are completed, the project will use four proxy poverty and vulnerability indicators for the ranlung and selecting FVs. The date for these proxy indicators are generally available with GNs and DVSs. The indicator and the scores assigned to each o f them are as follows: (i) proportion o f IDPs in the village (30%); (ii) families settled or planned to be settled (30% marks); (iii) families who do not own irrigated lands (20%); and (iv) the current status of the irrigation tank (if exists in the village) (20%). If more reliable and accurate poverty and vulnerability data at village level become available later, the indicators will be further refined and changed, if necessary, on mutual agreement between the Wor ld Bank and the GOSL. I t may however be noted that the project will support only those villages which have a minimum o f 30 households. Villages located in protected areas and land-mined areas will not be considered.

2. Data for the indicators wil l be provided by GNs and DVSs and serviceability state o f the irrigation scheme (indicator 4) will be confirmed both by the GN and concerned irrigation engineer. A matrix table showing the ranks received for each candidate FV wil l be prepared by DPOs and presented to District Coordination Committee for ratification. The FV ranking matrix wil l be made available to the Bank for review during the Bank’s biannual project reviews.

Proportion o f IDPs in the candidate FV (total 30 points).

0 More than 60% - 30 points 0 Between 40-60% - 20 points 0 Less than 40% - 10 points

Proportion o f families returned or resettled (total 30 points).

0 FV already earmarked for immediate resettlement or More than 60% IDPs returned or resettled - 30 points

0 40-60% IDPs returned or resettled - 20 points 0 Less than 40% IDPs returned or resettled - 10 points

Proportion o f families who do not own lands receiving water f rom any irrigation scheme (total 20 points).

0 More than 60% - 20 points 0 Between 40-60% - 10 points 0 Less than 40% - 5 points

Current serviceability state o f irrigation scheme (if any) (total 20 points).

0 Scheme (tank or diversion weir) dysfunctional - 20 points 0 Scheme semi-functional and needs extensive rehabilitation - 10 points 0 Scheme i s functional but needs moderate repairs - 5 points

Village /Size

Villages not served

Village-Wise Ressources Allocation

Investment Ceilings for Focal Villages US$ (LKR) per village

Small (30-100 Medium (1 00-200 Large (more than 200 households) households) households)

35,000 (3.5 million) 40,000 (4.0 million) 45,000 (4.5 million)

1. Equitv in Resources Allocation. Based on the NEIAP implementation experience, the project recognizes that villages requiring rehabilitatiodrestoration o f irrigation tanks require relatively more financial allocations. Therefore, financial allocation for a FV i s made depending upon whether the respective village has an irrigation scheme or not. Also allocation o f project financial resources to FVs should be consistent with the number o f beneficiary families in the FVs to ensure a reasonable level o f equity in per-capita resources allocation. For this purpose, FVs are subcategorized based on the number o f households in the village: small (30-100 households); medium (100-200 households); and large villages (more than 200 households). Except in exceptional circumstances, villages having less than 30- 40 families will not be considered for project assistance. The agreed investment ceilings are as follows.

by irrigation schemes Villages served by 70,000 (7.0 million) 75,000 (7.5 million) 80,000 (8.0 million)

I irrigation schemes

2. Activity-wise Allocations. From the viewpoint o f equity, the project has felt i t necessary to indicate per village investment ceilings for different activities chosen by the communities. These ceilings have been decided based upon the implementation experience o f NEW. For irrigation rehabilitation activities, a sum of US$40,000 (Rs400,OOO) may be used as the investment ceiling for a single irrigation scheme. For road rehabilitation, i t i s US$20,000 (Rs200,OOO) per village. For Livelihood Support Activities, which would comprise individual household level income-generating activities, the corresponding investment per village i s US$20,000 (Rs2,000,000). O f this amount, the allocation for individual income-generating activities would not exceed US$200 (Rs20,OOO) per household subject to the stipulation that not more than 50% o f the eligible households will receive assistance in the f i rs t round. Similarly, total expenditure for common community assets (other than irrigation schemes, roads and wells etc.) would not exceed US$5,000 (Rs500,OOO). Further, when the priority in a village i s to rehabilitate more village roads or existing common village building(s), communities may choose to use this allocation for those work instead for the construction o f new common-assets. In exceptional circumstances, GAs/DSs may exceed these ceilings to accommodate essential and specific needs o f VDPs, subject to prior clearance with the P M U and Bank.

3. Investment Criteria -for Subproiects. Investment criteria for irrigation schemes, rural roads and drinlung water wells are outlined in the main text o f annex 6 o f PAD. Investment criteria for LSA activities are described in the LSA manual.

Criteria for Targeting Beneficiaries for L S A Individual Household Loans

Prioritization Criteria of Households

0 Priority 1- Female-headed families. 0 Priority 2- Households not owning any agncultural lands. 0

Priority 3 - Disabled and ex-combatants. Priority 3- Households not owning irrigated lands o f the tank rehabilitation under the project. Priority 4 - Others such as households owning irrigated lands under other tanks.

Community Development Cycle (CDC)

Preparatory Activities - @istrict/PMU level - 02 months)

Critical Activities

Finalize Annual District Focal Village(FV) l i s t

Select and Hi re Community Mobilizer (CMs)

Hi re Partner Organizations* (PO) for Conducting/ Coordinating Training and M&E

Nominate (Divisional) Community Support Teams (CST)* *

Special Training to CMs

Orientation Training to CSTs, Including PNA S h l l Training

Success Indicators- Performance

Triggers for Moving to Next Phase

0 FVs ranked and selected objectively

CMs selected objectively

0 POs selected (one per district)

0 CST selected and enabled

0 CMstrained

0 CST trained and enabled

K e y Instruments/Tools/ Guidelines Used/ Prerequirement

0 FV selection and ranking criteria

0 SM profile and selection process

0 Terms o f reference for PO.

0 Operational guidelines for CST

0 Training manual and TOT training manual.

Guidelines and curriculum for

K e y Responsibility

D DS/GA

DS/DPD

D DPD/GA

DS/DPD

0 PMU/PO

0 P M U

0 Hi re Technical Consultants for C iv i l Works Subproject Designs (optional)

* NGOs or Private-Sector Organizations.

** Community Support Team Members: 1. Assistant Director o f Planning (ADP- Team Leader and Coordinator for DS); 2. Rural Development Officer, (RDO), Agrarian Development Officer (ADO), Agriculture Instructor (AI), Livestock Development Officer (LDO), Community Mobi l izer (CM), Technical Assistant (TA), h g a t i o n Department.

Technical orientation training consultants selected. TOR and sample bidding

document

1. Preplanning (step 1) - Promotional Phase (village level - 01 month)

0 C M i s introduced t o villagers by GNs

0 Community awareness building o n project concept and approach

0 Select two Community facilitators (CFs) by villagers

0 Training o f CFs

0 Community awareness created adequately

0 CFs selected by villagers i s objective and participatory.

0 CFs sufficiently trained

0 Meetings and 2-3 page project leaflet in local languages.

0 CF profi le and selection criteria

0 CF training module

2. Preplanning (step 2) - Initial Mobilization and Institutional Framing Up Phase (Village level - 03 months)

0 Participatory need assessment

0 Assess CBO his tory/current status

0 Preparation o f village socioeconomic (base line) profi le (VSEP)

0 Membership drive for CBOs

0 PNA satisfactorily completed

0 VSEP completed and published

More than 90% villagers obtained membership o f

PNA checklist

VSEP template

0 Membership registers

D V S / G N

PMU/IDOs and CMs

0 DPD/CSTs

P N A b y C S T

0 CM with CBO leaders

IDO,CM, CFs CM/CFs and ID0

0 CBOs formed or revived

0 Village Rehabilitation Committee (VRC) established

0 District level training to CBO EC members

0 Decide prioritized village rehabilitation plan (VRP) by villagers and ratified by VRC.

0 Prepare Vil lage Amcul ture Development Plan (VADP)

CBO registered, Executive Committee (EC) selected, bylaws adopted, bank accounts opened and record books ready

VRC i s inclusive and representative

Training i s satisfactory and effective

VRP targets o n vulnerable people too.

VADP i s approved by the ~~

authorities

0 Sample bylaws for each CBO, Criteria for ECs, Sample record books and account ledgers

0 VRC composition criteria

CBOtraining modules and plans

0 VADP template and guideline for VADP preparation process

0 PMU/DPD accountants

0 I D 0 , C M a n d CFs

POand agencies, DO, CM and CFs

Relevant CST members, Department o f Agriculture

3. Planning Phase - Formulation of SubDroiect and institutional develoument, (04 months) LSA Activities

Select potential loan beneficiaries f rom applicantslcandidates

W R D S appoints procurement and FM committees

Exposure visi ts o f EC members

W R D S decides on operational rules such as interest rates, grace period for activities, etc.

WRDS develop necessary books o n accounts

First tranch o f funds released to W R D S

Selection i s participatory and objectively done

0 Procurement and FM committees operational

Operational rules developed and approved by EC

0 LSA targeting and priority criteria

Community procurement and training o n FM rules

0 LSAmanual

W R D S facilitated by RDO, CM and CF

0 Sameas above

Sameas above

Civil Works

Need identification with beneficiaries

Prepare subproject proposals with cost estimates

Ratify subproject proposals and cost allocations by VRC

Decide on procurement and contracting arrangements

Mobilize and complete voluntary community contribution

Finalize O&M plans and MOU for aftercare signed by CBOs and VRC

Appoint procurement and FM committees

Completion o f books and accounts trainings

Award contracts to CBOs and private contractors

0 Walk-through surveys done

0 Subproject proposals approved

0 Cost estimates countersigned by VRC

0 VRCrati fy contractual and procurement plan

0 Community contribution completed, recorded and certified

O&M plans and MOU signed

0 Committees trained

0 Committees established

0 Training completed

0 Contracts awarded

0 Investment criteria and ceilings

0 Financial approval authority ceilings

0 Subproject proposal outline and guidance

0 Community contribution guidelines for different civil work types

0 O&Mplan template

0 Training manual

0 Guidelines

4. Implementation Phase - Execution of community subprojects ( 12 months)

LSA Activities,

Procurement o f input and supply 0

0 Training related to quality control and quality assurance

0 Input purchased and supplied

0 Quality o f input

CST/CM

m PMUDPO

D CST/CM

CST/CM

0 PMU/DPD

0 DPD/PO

0 Procurement guidelines

0 Guidelinedstandards

W R D S

supply i s assured for quality control and quality assurance

Training o f record keeping

Training related to revolving credit fund (RLF) system for WRDS

Organizing VRC and W R D S Meeting to discuss progress and issues (when necessary)

Release o f subsequent payments

Improving recovery mechanism

Promote participatory monitoring system

Monitor ing by DPDs / P M U

Re-investment o f funds

Training o n O&M aspect o f the assets

Preparation o f work schedule

Payment o f mobilization advance

Follow-up training

Weekly progress meetings

Selection and sending persons for regional exposure (inside and outside the country)

Release o f subsequent payments

Participatory M&E

Proper record system in place

Training completed

Progress monitored and issues addressed.

First round o f LSA completed

High recovery rate achieved.

Remedial measures undertaken

Rest o f beneficiaries are benefited

Seconded round lending started

O&M training completed

Advance released

Training completed

Exposure plan completed

P& ME process unpleased

Books are up to

Incorporation with department supervision

Participatory monitoring training manual

Financial guidelines

Guidelines

Monitoring framework and indicators

Guidelines for capacity building-

I W R D S / C M

1 WRDS/CM

1 W R D S N R C

1 CMDPD

CF/WRDS

D WRDs/Po

D CF/WRDS

D CM/PO

CBO/CST

0 GAPMU

0 CBO/PO

0 CBO/DO/RDC

e Regularizing final books and accounts

Agriculture Program

e Training on Agricultural

e Organizing monitoring meeting Productivity and new markets

with stakeholders

standard

Training completed

Monitoring ongoing Guidelines

4. Post-implementation Phase - Sustainability arrangement (04 months)

e Establishing P&ME system at the village level

e Training o n water budgeting management in tank and within the D&F canal system

e Guideline for asset inventory

e Promoting strong linkages or sustainability measures for Promoting sustainable linkages for CBO & line agency

e Updating VSEP

e Assessment o f PME Report

Assessment o f in -built capacity o f CBO to continue i t s development process.

Operational plans for P& ME Completed

e Training completed

Asset inventory completed

Sustainability arrangement in place.

e VSEP updated

e Final evaluation report i s completed

Capacity assessment and recommendation completed

Guidelines for jo in t P&ME Process with C B O a n d l ine Departments

Guideline for asset management (joint program+ with departments +CBO+VRC)

Template o f asset inventory

e Guidelines

Guidelines

FO/AI/DO

CBO/CMPO

CBOiCMiCST

IDO/CM

CBO/DO/RD O/AI

CM/CBO/PO

CM/CBOPO

e CM/CBO/PO

Template for Annual District Resources Allocation

District

Districts

(hectares)

Mannar

Jaffna* NIA

Distr icts in Border Provinces Category C Moneragala Pollonnaruwa Anuradhapura Puttlam Project

, Management NIA N / A N/A ~ Unit (PMU) Total Notes

Allocation Comp. 1

(US$ million)

Allocation Comp. 2

(US$ million)

Allocation Comp. 3

(US$ million)

District Total

million) ””I

1. N / A - Not Applicable. 2. * Jaffna’s water regime i s different from the rest o f the districts and therefore the number o f irrigation schemes i s not a criterion for district allocation o f funds under Component 1. Instead, the district allocation for component 1, i s based on a cost estimate o f the rural infrastructure rehabilitation, primarily ponds, wells, dykes and canals, to be followed using technical criteria described in “Rapid Assessment of NEIAP Interventions in Jaffna District, Study conducted and completed by University of Jaffyla”, on behalf o f NEIAP. 3. This i s only an indicative opening allocation o f project funds which are subject to review 18 months after beginning o f the project implementation. Based on the review, the funds are redistributed by adjusting these indicative allocations either upwards or downwards depending on actual performance of each district judged by three indicators. 4. The following indicators wil l be used to rank and assess overall performance o f the districts.

(A) CDC has reached the implementation stage (total 25 points as follows).

In more than 90% FVs - 25 points In60-90%FVs - 15 points In less than 60% FVs - 5 points

(B) Bylaws o f both FOs and WRDSs adopted and operationalized (total 25 points as follows).

In more than 90% FVs - 25 points In60-90%FVs - 15 points In less than 60% FVs - 5 points

(C) Overall physical implementation progress compared to district implementation plan targets to date (total 25 points as follows).

More than 90% - 25 points Between 60 -90% - 15 points Less than 60% - 5 points

(D) Overall disbursement performance compared to estimated district financial targets to date (total 25 points as follows).

More than 90% - 25 points Between 60 -90% - 15 points Less than 60% - 5 points

(E) Overall district performance i s rated as follows.

P Highly Satisfactory if total score i s 80-100 (Significant upwards adjustment o f district allocation for next 18 months).

P Satisfactory if total score i s 60-80 and the score obtained for Indicators A and B are 25 (Moderate upward adjustment o f district allocation for next 18 months).

P Average if total score i s 60-80 but the score for Indicators A or B or both are below 25 (moderate downward adjustment o f district allocation for next 18 months).

P Unsatisfactory if total score i s below 60 (significant downward adjustment o f district allocation for next 18 months).

Annex 7: Financial Management and Disbursement Arrangements

accounting system. 3. Lack o f knowledge o f software

Country Issues

M T w o options are considered: (i) Arrangements will

1. The recent Country Financial Accountability Assessment (CFAA) for Sri Lanka recommends several public financial management reforms at country, provincial and local government levels. Of the issues, t imely unavailability o f counterpart funding i s one constraint that would affect the financial management and disbursements o f the project. However over the recent period, GOSL has made arrangements to ensure timely availability and smooth f low o f counterpart funds to donor-funded projects. For example, the ongoing pioneer project (NEIAP) did not suffer f rom counterpart funding issues and, therefore, would not be a major r i sk to the project. As in the case o f NEIAP, the project would devolve the responsibility for financial management and auditing o f project activities to NEPC thereby building capacity at the provincial and divisional levels, as recommended in the CFAA. A s the current project i s a repeater project and the project implementation arrangements and mechanisms do not significantly deviate f i o m those o f the pioneer and as most o f the financial management staff will continue to be engaged in the project, n o financial management capacity constraints are envisaged. The PMU i s currently revising i t s Financial Management Manual, which has been cleared by the Bank for NEIAP.

Risk Analysis:

2. The project has the following risks.

Risk 1 Rating I Risk Mit igat ion Measures 1. Funds transferred to communities are I M I Training has been provided to staff o f NGOs,

not accounted for and reported o n a timely basis.

operate the computerized integrated

CBOs, District Project Offices (DPOs), and PMU o n monitoring and supervising this aspect. This training will be further intensified and continued. Full-time project accountants will be assigned at each DPO. I

programmers at the software vendor’s to carry out modifications required (eg. providing information, by district) to the current accounting software

be made to obtain the intellectual property rights o f the accounting software f rom the current software vendor, and thereafter assign a software company to carry out the necessary changes to meet the requirements o f NEIAP 11; and (ii) new software svstem will be imdemented.

14 Overall Risk rating IM

Strengths and Weaknesses:

3. The project has the fol lowing strengths:

0 A wel l functioning financial management system for recording, accounting, and reporting o n financial transactions of the project at the DPD and PMU levels. This system provides a good framework to build on and continue the activities o f NEIAP 11.

0 An effective and efficient report-based disbursement method facilitating cash-flow and h n d s management o f project at the various levels.

0 An existing cadre o f competent financial management and accounting staff.

The project has the following weaknesses:

Significant weaknesses

1. The Internal Audit (Financial Management Audit) was n o t effectively used in the ongoing NEIAP project, as many recommendations were not followed-up with implementation.

2. Project Management Reporting system was used only at the PMU level and was not used for data entry or for reporting purposes by the DPOs. It also essentially captured onlv financial data.

Resolution

Instead o f hiring an external audit firm, the capacity o f the Intemal Audit Department o f NEPC will be augmented and built-on for carrying out the internal audit o f NEIAP 11. This will also ensure implementation o f recommendations as it will be

Under NEIAP 11, an integrated computerized system will be developed and deployed at the DPD and the PMU level, with linkages to the NEPC system.

Implementing Agency

4. The key implementing agency for the project i s the Project Management Unit (PMU) set up under the North-East Provincial Council. The PMU established before the implementation o f ongoing NEIAP i s fully staffed and has a well-functioning financial management system. Therefore, NEIAP I1 too will continue to re ly o n the same institutional arrangements for financial management purposes, with minor adjustments to reflect lessons learnt and to accommodate the needs o f additional components. NEIAP I1 wil l be coordinated and supervised by the PMU now set up under the NEPC or would be established under any other administrative entity in place in the NE later. The PMU will be responsible for regular supervision o f project activities and coordination o f activities o f the DPOs. Implementation o f project activities wil l be the responsibility o f the DPDs and f ie ld officers reporting to DPDs and l ine agencies at district levels.

Funds Flow

5. The figure depicting fund flow/document f low o f the project i s given below. Project funds will be deposited into a Special Dol lar Account (SDA) to be opened at the Central Bank o f Sri Lanka and operated by the PMU. The GOSL will advance funds to the PMU that, in turn, would give advances to the DPDs. Expenditure statements will be received o n a monthly basis f rom the DPDs, and will account for the advances received. The PMU will review these statements and replenish the accounts o f the DPDs. On a monthly or quarterly basis, withdrawals will be made f rom the S D A to reimburse the GOSL for the IDA share o f eligible expenditure reported up to that date. Thereafter, a withdrawal application, o n the basis o f FMRs, will be submitted to the Wor ld Bank.

Staffing

6. The PMU i s adequately staffed with qualified professionals. However, as NEIAP I1 will re ly o n DPD offices for data entry into the integrated project management information system, additional capacity will

be required at the D P D level than i s available at present. The staffing plan o f the PMU and DPOs has taken this need into account.

Agency k

Accounting Policies and Procedures

7. The PMU will follow the accrual basis o f accounting for the project. The accounting policies as l a id out in the Financial and Administrative Regulations (FRs) o f the GOSL will be adopted by the PMU and DPDs, as modif ied in the Financial Management Procedures Manual. This Manual will be updated and revised, where necessary, to incorporate any special provisions necessary for the additional components.

Agency PMUDPO PMU/DPO PMU

Accounting procedures at CBOs:

Project December 3 1 st June 30th SOE December 3 1 st June 30th Special Account December 3 1 st June 30th

8. The financial management manual will outline the simple accounting procedure to b e followed at the CBO level. The financial framework within which the CBOs' operate include: (1) T w o cashhank books, one for the revolving fund and one to record a l l other receipts and payments related to project work; (2) register o f contributions received f rom member in cash, labor or in kind; (3) individual accounts for a l l loans given under the revolving fund. CBOs wil l be prepare an annual p lan which includes: (1) the total cost o f the work; (2) work completion mi le stones; and (3) amount o f beneficiary contribution. Payments to CBOs will be against physical milestones reported by the CBOs and verified and certified by the DPOs.

Project SOE Special Account

Internal Audit

December 3 1 st June 30th December 3 1 st .lime 70th December 3 1 st I JWlG 3U111

9. NEW engaged the services of a private audit firm to carry out the financial management audit o f project activities, at the PMU, DPD and CBO level. However, this function was not effective as the audit recommendations were not appropriately followed-up with implementation. Under NEIAP 11, it i s proposed that the Internal Audit Department (IAD) o f the NEPC will take o n this function and carry out the terms o f reference o f the financial management auditor. However, as IAD does not have sufficient capacity, NEW I1 will provide the necessary technical assistance for strengthening the IAD to canyout the TOR. T h i s approach ensures that the internal audit function i s mainstreamed in the NEPC control system and also that appropriate follow-up actions are taken by the respective offices.

External Audit

10. Project accounts will be audited annually by the Auditor General o f Sri Lanka (AG). IDA would require annual audit reports f rom AG within six months after the end o f each fiscal year.

' Audit Reports:

11. Fol lowing audit reports will be monitored in the ARCS.

1 Implementing 1 Audit Repodop in ion I FY End Date I Report Due Date

(5) Approves Claim. 4-. -. - . -. -. - . -

! ! ! ! ! !

FundsinSDA. ! ! !

! ! ! ! i (A I f‘lnim tn ! !

! CENTRAL, BANK

transferred in Special I?-”-- A settlement o f RFA.

Ch & U A allocatlons. 1 \ * J -- , withdraw j f rom ‘ C n A -rcc-----

! ‘Ullal mL-2 / ! !

enishment Application ! ! continue and periodically (7) Rep1 Step 8 i s carried out. to deposit funds in the SDA. \ !

(3)b. Expends on Project - Payments to CBOs - Payments to contractors - Payments to consultants - Payments to NGOs - Incremental Operating Costs Cash Flow

CBOs CF DPOs DSA ERD MoF MRRR NEPC P M U RFA SDA

b Document Flow - Community Based Organizations - Consolidated Fund - District Project Offices - Department o f State Accounts - Extemal Resources Department - Ministry o f Finance - Ministry o f Relief, Rehabilitation and Reconciliation - North East Provincial Council - Project Management Unit - Reimbursable Foreign Aid - Special Dollar Account

Reporting and Monitoring

I Projected

12. The PMU will be required to submit quarterly financial management reports to IDA as per the agreed formats. The PMU, with the leadership o f the project financial management specialist, will be responsible for overall monitoring to ensure appropriate and diligent use o f project finances and compliance with the financial management norms, procedures and requirements set out in the project Financial Management Manual at DPO, implementing agency and CBO level. In each district, the DPOs, with the overall leadership o f district project accountants, will assist the PMU in monitoring and reporting.

1 2005 I 2006 I 2007 I 2008 I 2009 I 2010 I 2011 I

Information Systems

Disbursements

Credit (US$ m)

13. Financial transactions o f the project are computerized at the P M U level. All DPDs forward the reports and supporting documents to the PMU, wherein the data are entered in the system. For NEW 11, an integrated, decentralized, web-based, project management information system will be developed. This will facilitate data entry at the DPD level and will also incorporate monitoring indicators, procurement data and other physical data. A specialized software will be developed for this purpose and a network system installed to connect al l the DPD offices.

Annual 3.24 9.0 10.6 15.91 14.42 9.31 2.22 Cumulative 3.24 12.24 22.84 38.75 53.17 62.48 64.7

Retroactive Financing

14. Preparatory and start-up activities such as hiring o f consultants and key project staff, orientation training o f community mobilizers, investigations and surveys for rehabilitation o f major irrigation works, and environmental assessments, should start up at least six months before the commencement o f project implementation. Expenditures for these activities would be eligible for retroactive financing, provided that the contracts for such activities are awarded following Bank’s procurement guidelines. An amount o f SDR 2.2 mil l ion or 5% o f the Credit (approximately US3.19 million) can be used as retroactive financing for expenditures for those preparatory and start-up activities incurred after June 30,2004.

Disbursement arrangements

15. The project will follow the report-based disbursements. The ongoing NEW follows the PMR disbursements. However, for NEW I1 report formats would be made more flexible. If the project reverts to transaction-based disbursement, the authorized allocation o f the Special Dollar Account (SDA) will not exceed US$2,500,000. The IDA may require withdrawals from the Credit Account to be made on the basis o f statements o f expenditure for expenditures under contracts for: (a) goods costing less than US$250,000 equivalent per contract; (b) works costing less than US$500,000 equivalent per contract; (c) for services o f individual consultants costing less than US$500,000 equivalent per contract; (d) for services o f consulting f i r m s under contracts costing less than US$lOO,OOO per contract; (e) all training; and (f) all incremental operating costs al l under such terms and conditions as the IDA shall specify by notice to the Borrower.

Disbursement Schedule

16. The disbursements schedule over the project period, estimated on the basis o f project implementation schedule and cost-tables i s as follows.

Action plan

17. The key action to ensure that efficient and adequate financial management arrangements are in place are as follows.

Action

DPD Offices to identify and assign a full-time oroiect accountant to work on NEW 11.

Responsable Person NEPC/DPDs

Review the Financial Management Procedures Manual, and revisehpdate, where necessary. Capacity building plan for strengthening the capacity o f the Internal Audit Department o f

Director, IAD, NEPC

NEpc: Develop an integrated project management information system and install the network to

the requirements o f NEIAP I1 or implement a new software system.

Completion

operate this system. Modify the current accounting software to meet

October 3 1, 2004

Prior to negotiations

June 30,2005

18. The project FM will require regular supervision during the l i f e o f the project. The FM specialist based in the field office will interact with the P M U to guide the FM and resolve any operational issues that might occur during the implementation.

Annex 8: Procurement

A. General Description

1. The IDA would finance about US$64.7 mi l l ion for the NEIAP 11. The Project components are: Component 1 : Vi l lage Rehabilitation and Development for Sustainable Social and Economic Reintegration; Component 2: Essential rehabilitation and improvements to selected majodmedium irrigation schemes; Component 3 : Farmer organization capacity building and empowerment and agricultural support services strengthening; Component 4: Institutional capacity building, project- implementation support and project oversight: There will be several subcomponents under each o f the above focusing on building, strengthening and empowering CBOs; Creation, rehabilitation and improvements to essential village-level social and economic infrastructure, services and facilities; Livelihood assistance activities for vulnerable groups and people; Essential repairs and improvements to major irrigation structures to ensure structural stability and safety o f major components including dams and embankments; Capacity building o f national, provincial and local government agencies; Project implementation support and oversight. The menu o f activities proposed under NEIAP 11, therefore, wil l not significantly deviate f rom i t s pioneer project (NEIAP), for which procurement management has been rated satisfactory, despite minor shortcomings during i t s implementation to date.

B. Procurement Responsibility, Capacity and Risk Mitigation

2. The procurement arrangements under the project are primarily based o n the arrangements and experience of NEIAF’ and IDA’S appraisal o f the capacity that already exists in the PMU and DPOs. There have been n o major lapses in the procurement administration o f the ongoing project other than the delays in the execution o f some activities o f the agreed annual procurement plans. However, the time taken to finalize contract award recommendations has shortened recently. Given the similarity and nature of the project activities with that o f NEIAP, and that o f the satisfactory procurement administration performance to date, the PMU and DPOs will have adequate capacity to manage and administer the procurements. Overall, n o major risks are anticipated. The procurement r isk at the PMU level i s rated low, at the DPMU and implementation agency levels average, and at community level high. T o mitigate the risks, CBOs will be provided with training o n the management o f c i v i l works contracts and selected project staff will be provided training o n Bank’s procurement guidelines and best practices and in-country and regular regional procurement training centers.

3. The existing PMU will continue to have a full-time Technical Director and Procurement OfficedEngineer to oversee and guide the procurement administration o f the project. I t will facilitate, guide, coordinate and monitor the procurement activities at the DPMU and community levels. The PMU i s responsible for the overall project-wide compliance with agreed procurement rules, procedures, norms and standards and be the main contact with the Bank. The PMU will be responsible for the execution o f a l l major procurement o f goods and hiring o f Technical Assistance consultants. However, almost a l l c i v i l works contracts will be executed at the DPOs with supplementary support f rom line agencies, such as the Irrigation Department (Central Government), Provincial Irrigation Department, Provincial Road Development Authority, Department o f Agriculture, Department o f Agrarian Services and Local Government Department. These agencies have technical staff including engineers who are skilled in the administration o f small-scale c i v i l works and procurement o f goods. As has been the practice o f NEIAP, DPOs and line agencies will award most o f the civil-works contracts to registered CBOs, and to private contractors in the case o f works that are beyond the skill and capacity o f the CBOs. There will be a project implementation and operations manual (PIOM) which includes a chapter on community procurement. The procurement methods are described in the fol lowing paragraphs.

C. Procurement Procedures and Methods

4. Procurement o f all civil works and goods contracts to be financed under the Credit will be carried out in accordance with the World Bank Guidelines: Procurement under IBRD Loans and IDA Credits, dated M a y 2004 (henceforth referred to as Procurement Guidelines). Consultants’ Services financed by the Credit will be procured in accordance with the World Bank Guidelines on “Selection and Employment o f Consultants by Wor ld Bank Borrowers, November 2003.” For the procurement o f Civil Works and Goods, IDA Standard bidding documents including evaluation reports for Procurement under International Competitive Bidding (ICB), and Sri Lanka-specific Bank model documents for Procurement under National Competitive Bidding (NCB), which are already being agreed under the NEIAP shall be used. For the selection o f Consulting Firms, NGOs and Individual Consultants, the Bank‘s Standard Request for Proposal (SRFP) or a modified version with the prior agreement o f the Bank will be used. Also, a General Procurement Notice (GPN) will be published in the UN Development Business (UNDB) on-line and print version after the Appraisal mission. All ICB contracts for goods and c iv i l works, including prequalification notices, and contracts for consulting services estimated to cost US$200,000 or more will be advertised in the UNDB on-line and Market o f Development Gateway.

D. Procurement Methods (Table A and Table Al)

5. Community Subprojects oJS$23.65 million). Community-level subprojects will be selected by the communities based on the VDPs. These subprojects are demand-driven in nature, making it difficult to determine ex-ante what i s to be procured. The community and social infrastructural subprojects would include, but not be limited to, rehabilitation, restoration and improvements to village-level irrigation tanks, anicuts, and other water-related structures, rehabilitation o f rural roads, community centers and open dug wells. The productive subprojects will include, but not be limited to, income-generation activities, such as ski l ls building, micro-businesses, livestock and poultry-production activities, procuring of agricultural water pumps, and hiring o f technical services for skill-building training for employment opportunities. Credit funds from the project can be used for services, goods, training, and works. The CBOs may obtain technical, management support and advice from the l ine agencies at the divisional and district level to execute these activities on their own or decide to hire local consultants, NGOs/CBOs and qualified private contractors for these services. The average value o f each subproject would be about US$20,000 and maximum value would not exceed US$50,000. If the community decides not to carry out works by itself, then these works may be procured through local shopping, i.e., on the basis o f comparison o f price quotations obtained from at least three pre-qualified contractors who are eligible as per the Guidelines, or from registered and experienced NGOs or CBOs. The agreed procedures for community procurement are as follows:

5.1. Works. Most works undertaken in the project will use community participation to mobilize and pay labor. A small number o f works may need to be procured through small works. The following methods will be used: a) execute the works themselves by employing labor and by procuring the needed materials and technical assistance; or b) award the whole or part o f work on direct contract to community organizations or registered NGOs; or c) award the whole or part o f work to qualified domestic contractors after inviting three quotations with public bid opening (value o f each contract less than US$50,000) in response to a written invitation; or d) award the whole or part o f work to qualified contractors after inviting competitive bids following NCB procedures for contracts estimated to cost more than US$50,000 equivalent. Construction o f tube wells shall be contracted to National Water Supply and Drainage Board and Water Resources Board following direct contracting procedures.

5.2. Goods. The goods estimated to cost less than US$500 per contract may be procured through direct contracting procedures, and the direct contracting should be in accordance with the procedures as

specified in the PIOM. Goods estimated to cost less than US$30,000 per contract would be procured through shopping procedures on the basis o f at least 3 quotations.

5.3.Sewices. The services estimated to cost less than equivalent o f US$l,OOO may be hired following section V o f Bank's Guidelines for the Selection o f Consultants by inviting proposals from 3 or more servic'e providers or technical consultants or under single source method. Consulting services estimated to cost less than US$lO,OOO may also be hired based on consultant qualifications. Any service contracts costing more than US$lO,OOO but less than US$50,000 should be invited through newspaper advertisement

6. Civil works (LJS$41.97 million). The civi l works will be procured as follows.

a) National Competitive Bidding (NCB) (USS40.61): All road works contracts, village level irrigation rehabilitation, restoration and improvement works beyond the community capacity, essential and urgent dam safety repairs and improvements, and rehabilitation and improvements to major irrigation, drainage and feeder canals would be procured following N C B procedures in accordance with the provisions o f paragraphs 3.3 and 3.4 o f the Guidelines.

b) Shopping (USSl.16 million): small works. estimated to cost less than US$50,000 would be procured following shopping procedures with public bid opening in accordance with paragraph 3.5 o f Banks Guidelines.

7. Goods and Equipment (US$1.47 million). The project would support the procurement o f light construction equipment, quality control equipment, dam safety equipment, laboratory equipment, office and training equipment, computer hardware and software, office furniture and audiovisual equipment, media equipment, communication equipment, inspection and transport vehicles, R&D equipment for water management, books and periodicals, etc. The following procedures would be adopted.

a) International Competitive Bidding (ICB). Contract for goods estimated to cost US$250,000 equivalent or more per contract would be procured following ICB procedures. Domestic preference wil l be available for all ICB contracts.

b) National Competitive Bidding (NCB). Packages o f goods and equipment estimated to cost less than US$250,000 equivalent per contract but more than US$50,000 per contract would be procured following NCB procedures in accordance with the provisions o f paragraphs 3.1, 3.3 and 3.4 o f the Guidelines.

c) Shopping (S): Packages o f Goods, equipment, furniture etc. estimated to cost less than US$50,000 per contract would be procured under contracts awarded on the basis o f shopping procedures in accordance with the provisions o f paragraphs 3.1 and 3.5 o f the Guidelines.

d) Direct Contracting: Proprietary equipment and spares, books, periodicals, software, training materials (Video/Audio, etc.) and small equipment (costing less than US$l,OOO per contract ) would be procured following Direct Contracting procedures in accordance with paragraphs 3.1 and 3.6 o f the Guidelines.

8. NCB contracts: All NCB contracts to be financed from the proceeds o f the credit shall follow the improved bidding procedure listed below:

a) Only the model bidding documents for NCB agreed with IDA (and as amended from time to time) or the Procurement Support Bureau (PSB) shall be used for bidding.

Invitations to bid shall be advertised in at least one widely circulated national dai ly newspaper, at least 30 days prior to the deadline for the submission o f the bids. Bid documents shall be made available by mai l or in person to al l who are willing to pay the required fees. Qualification criteria (in case prequalification was not carried out) shall be stated in the bidding documents and, if a registration process i s required, a foreign firm declared as the lowest evaluated responsive bidder shall be given a reasonable opportunity o f registering, wi thout let or hindrance. No special preference will be accorded to any bidder when competing with foreign bidders, state-owned enterprises or small-scale enterprises. B ids shall be opened in public in one location, immediately after the deadline for submission o f bids. B ids shall not be rejected merely o n the basis o f a comparison with an official estimate

without prior concurrence o f the IDA. Contracts shall be awarded to the lowest-evaluated responsive bidders. Except with the pr ior concurrence o f the IDA, there shall be n o negotiation o f price with the bidders, even with the lowest-evaluated bidder. Re-bidding shall not be carried out without pr ior concurrence o f the IDA. Except in cases o f force majeure and/or situations beyond the control o f the project states, extension o f bid validity shall not be allowed without the pr ior concurrence o f the IDA (i) for the first request o f extension if it i s longer than 8 weeks; and (ii) for al l subsequent requests for extension irrespective o f the period. All bidderdcontractors shall provide bidperformance security as indicated in the bidding documents. Evaluation o f bids shall be made in strict adherence to the criteria disclosed in the bidding documents, in a format and specified period agreed by the IDA. A bidder’s bid security shall apply only to the specific bid, and a contractor’s performance security shall apply only to the specific contract under which it was furnished. Bids shall not be invited on the basis o f percentage premium or discount over the estimated cost. There shall not be any restrictions o n the means o f delivery o f the bids.

9. Technical Assistance, Studies, Training and Workshops (US$7.89 Million). Technical Assistance and Consultancy Services would be required for management support, implementation (technical) support. Consultants would be selected fol lowing Quality Based Selection (QBS), Quality and Cost-Based Selection (QCBS), Single Source Selection (SSS), and Selection based o n Consultants Qualification (CQ) methods. Where appropriate Individual Consultants (IC) would also be hired.

10. selected either o n Quality Based, Sole Source or o n the basis o f Consultant’s Qualification.

Consultancies that are estimated to cost less than the equivalent o f US$lOO,OOO and would be

11 200,000 shall be contracted to Food and Agriculture Organization fo l lowing SSS procedures.

Contract for advisory services on Integrated Pest Management estimated to cost around US$

12. Incremental Operating Costs (US$6.16 million). The incremental costs would be financed o n a declining basis and would cover incremental recurrent expenditures incurred o n account o f the Project for per diems, office supplies, vehicle rental charges (including passenger insurance), government motorcycle and vehicle operating charges (fuel, maintenance, and insurance), maintenance o f office equipment, telephone and other communications charges, office rent, salaries o f contract staff, but excluding salaries of officials o f the Borrower’s and the North-East Provincial Council’s c i v i l service.

E. Assessment o f Borrowers Readiness to Implement the Project

13. Due to the demand-driven nature o f the project, it i s not possible to prepare a detailed Procurement Plan and Schedule for the community driven activities. However, a procurement plan has been prepared for the goods and equipment and consultancy services to be procured in the project outlining proposed methods o f procurement, which has been reviewed and agreed and would be updated annually.

F. Disbursements Profile

14. For the f i rs t year, disbursement i s expected to be low, at about 5% because the initial year could consist largely o f capacity building o f key implementing agencies and orientation to promote familiarity with work plans, sub-project cycle, procedures, and development o f training materials. Disbursement will pick up at year 2 and 3 at about 15%, increasing to 25% in years in years 4 and 5 and tapering o f f to 10% in year 6.

G. Review by the Bank of Procurement Decisions

15. Procurement pZanning. The proposed Procurement Plan for the f i rs t 18 months has been submitted. Annual Implementation plans for works and Procurement plans shall be reviewed by the Bank.

16. Prior Review. All ICB contracts for goods estimated to cost more than US$250, 000 wil l be subject to prior review. First two N C B contracts for: (i) goods; and (ii) works contracts estimated to cost more than US$50,000 and the f i rs t two community contracts in each district and all c i v i l works contracts estimated cost more than US$500,000 equivalent will be subject to prior review by the Bank as per provisions set forth in paragraphs 2 and 3 o f Appendix 1 o f the Bank Guidelines. All consultancy contracts with f i r m s o f value more than US$lOO,OOO and with individuals o f value more than US$50,000 would be subject to prior review as per provisions set forth in paragraphs 2 and 3 o f Appendix 1 o f the Bank Consultancy Guidelines. Despite the low limits stipulated for prior review o f contracts, not more than 5% o f the contracts are expected to come under the provisions o f prior review. This appears reasonable considering the nature o f the project and the procurement involved therein.

17. Post review. The, contracts below the prior review threshold for Works, Goods and Consultancy contracts shall be subject to post review as per procedure set forth in paragraph 5 o f Appendix 1 o f the Bank Guidelines and Bank Consultancy Guidelines. Post award reviews on the India portfolio as a whole, Bank staff would conduct post award review during supervision missions.

H. Procurements Information

18. Procurement information would be collected and recorded as follows:

Prompt reporting o f contract award information by all individual implementing agencies to the PMU. Comprehensive semiannual reports by indicating: (i) revised cost estimates o f individual contracts and the total project; and ii) revised timings o f the procurement actions including advertising, bidding, contract award, and; Completion time for individual prior review contracts; and Completion report by the Borrower within 3 months o f the Credit closing date.

I. Proposed Procurement Arrangements

19. The project elements, their estimated costs, and proposed methods o f procurement have been summarized in Table A. Figures in parenthesis are the respective amounts to be financed by the IDA/Bank.

Table A: Project Costs by Procurement Arrangements (US$ million equivalent)

Procurement Method'

Expenditure Category ICB NCB Other2 N.B.F. Total Cost 1. Works 0.00 40.61 1.36 0.00 41.97

(0.00)

3. Consultancy 0.00 (0.00)

4. Traininglworkshops 0.00 (0.00)

5. Incre. Op. Costs 0.00 (0.00)

6. Com. Subprojects 0.00 (0.00)

2. Goods 1.25 (1.25)

(34.5 2) 0.14

(0.12)

(0.00)

(1.16) 0.08

(0.07) 6.79

1.10 (0.68) 6.16

(2.15) 23.65

(4.73)

(20.00)

(0.00)

(35.68) 1.47

(1.44) 6.79

1.10 (0.68) 6.16

(2.15) 23.65

(4.73)

(20.00)

Total 1.25 40.75 39.14 0.00 81.14 (1.25) (34.64) (2 8.79) (0.00) (64.70)

'Figures in parentheses are the amounts to be financed by the Credit. All costs include contingencies.

'Includes c iv i l works and goods to be procured through national shopping, consulting services, services o f contracted staff o f the project management office, training, technical assistance services, and incremental operating costs related to The incremental costs would be financed o n a declining basis and would cover incremental recurrent expenditures incurred o n account o f the Project for per diems, office supplies, vehicle rental charges (including passenger insurance), government motorcycle and vehicle operating charges (fuel, maintenance, and insurance), maintenance o f office equipment, telephone and other communications charges, office rent, salaries of contract staff, but excluding salaries o f officials o f the Borrower's and the North-East Provincial Council's public service and community procurement.

Table Al. Consultant selection arrangements (optional)(US$ million equivalent)

Selection Method

Total Services QCBS QBS SFB L C S CQ Other N.B.F. Expenditure Category

A. Firms 1 .oo 1 S O 0.00 0.00 0.38 0.00 0.00 2.88

B. Individuals 0.00 0.00 0.00 0.00 0.00 3.91 0.00 3.91 (0.80 (1.20) (0.00) (0.00) (0.30) (0.00) (0.00) (2.30)

(0.00) (0.00) (0.00) (0.00) (0.00) (2.43) (0.00) (2.43)

Total 1.00 1 S O 0.00 0.00 0.38 3.91 0.00 6.79 (0.80) (1.20) (0.00) (0.00) (0.30) (2.43) (0.00) (4.73)

Table B. Thresholds for procurement methods and prior review.

1. Works

2. Goods

3. Community Sub- projects

4.Consulting Services

a) Contracts o f value more than US$50,000

b) Contracts o f value <= US$50,000 equivalent

c) Contracts o f value >= US$250,000 equivalent

d) Contracts o f value >= US$50,000 equivalent and <US$250,000 equivalent

e) Contracts o f value less than US$ 50,000.

f , Contracts o f value less than US$l,OOO equivalent.

(i) Contracts more than US$ 50,000 equivalent

(ii) contracts less than US$50,000 equivalent

a) Firms (i) Contracts >= US$lOO,OOO equivalent.

(ii) Contracts < US$lOO,OOO

(b) Individual Consultants (i) Contracts >= US$50,000 equivalent

(ii) Contracts <US$50,000 equivalent

National Competitive Bidding

Shopping with public bid opening

International Competitive Bidding

National Competitive Bidding

Shopping

Direct Contracting

National competitive bidding.

Paragraph 3.17 o f Guidelines.

Quality and Cost- Based Selection (QCBS), Single Source Selection (SSS).

QCBS, SBCQ, Fixed Budget Selection and Least Cost selection. In accordance with Section V o f the Consultants guidelines

In accordance with Section V o f the Consultants guidelines

Fist two contracts and dl contracts above US$500,000 411 contracts Post Review

All contracts above US$250,000

First two contracts

A l l contracts Post Review

All contracts Post Review

Post review.

First two contracts in each district. Others Dost review.

All contracts

TOR and shortlist to be prior reviewed.

All contracts

TOR to be prior- reviewed

1. Total value of contracts subject to prior review: US$l5.0 million.

2. Overall Procurement Risk Assessment: Average at P M U level, High at Community Level

3. Frequency of procurement supervision missions proposed. Once every (6 months (includes special procurement supervision for post-review/audits)} . P M U on behalf o f GOSL shall hire an external consultant to carry out ex-post reviews and asset verifications for not less than 10% (by value and by numbers) o f the contracts. IDA will conduct a sample ex-post audit o f contracts including consultant’s outputs. IDA will also review procurement actions as necessary either by site visi ts or by desk reviews o f documentation or both.

Table C. Allocation of Credit proceeds.

Amount in US$ million (SDR Expenditure Category amount in millions in Financing Percentage

parentheses)

1 Works

2. Goods

3. Consultants’ Services. including audit and training

4. Incremental Operating Costs

5. Goods, works, services and training financed through sub-Grants

32.1 (22.1) 85 %

1.3 (0.9) 100% o f foreign expenditures, 100% o f local expenditures (ex- factory cost) and 85 % o f local expenditures for other items

procured locally.

4.9 (3.4)

2.0 (1.4)

18.0 (12.4)

6. Unallocated 6.4 (4.4)

100% o f foreign expenditures, 80% o f local expenditures for consulting f i rms and 75 % o f local expenditures for individual

consultants.

90 % up to December 31, 2005; 70% from January 1, 2006 to December 31, 2007; and 25 %

thereafter.

Total Project Costs 64.70 (44.6) Interest during construction Front-end Fee Total 64.70 (44.6)

Annex 9: Economic and Financial Analysis

Summary of Project Benefits and Costs

1. The proposed project has three main components: 1) Village Rehabilitation and Development; (2) Essential rehabilitation and improvements to selected majodmedium irrigation schemes; (3) Farmer organization capacity building and empowerment, and agricultural support services strengthening; and (4) Institutional capacity building, project implementation support and project oversight. The project will be implemented in about 600 focal villages and five major irrigation schemes.

2. The primary benefits o f the proposed project include the following:

Increased apcultural production and incomes due to: (i) expansion o f area cultivated under irrigated conditions; (ii) increased production o f crops (paddy and major field crops); (iii) change in cropping patterns; (iv) increased cropping intensity and yield; (v) reduction in crop damagesflosses; and (vi) improved irrigation and drainage water management. These benefits are likely to be realized from rehabilitation and improvements o f a large number o f small irrigation schemes (under Component l), essential and urgent rehabilitation o f major head works and canal systems o f five major irrigation schemes (Component 2), agricultural extension and other support services provided to farmers (Component 3), and from improved operation and maintenance o f these facilities by farmers organizations.

Increased safety and reduced potential disruption o f economic and social activities, reduced risk of potential loss o f l ives and damage to private and public property resulting from repairs to embankments o f a large number o f small irrigation tanks (Component 1) and essential and urgent dam safety related repairs and improvements to four five dams and major structures (Component

Improved profitability, productivity and sustainability o f agricultural activities consequent to pilot initiatives, training, technology adoption and improved market linkages to selected, commodity based, farmers organizations and farmer federations (Component 3)

Improved mobility o f people, goods and agricultural produces and accessibility o f people to paddy fields, markets, banks, schools, medical and health centers and government offices, which i s likely to be realized from the village road rehabilitation in about 600 focal villages. (Component 1). Such benefits will apply across the entire village community in focal villages assisted by the project. There i s also a possibility that the road improvement will increase the values o f the land slightly in the village at least closer to the roads.

0 Increased household level livelihood support and employment opportunities to landless, vulnerable and conflict affected people which are l ikely to realized as a result o f small individual financial loans channeled to conflict-affected women in about 600 focal villages through a revolving fund mechanism. (Component 1).

Human development, institutional development and empowerment o f communities which are likely to be realized from the formation and revitalization o f farmers organizations, rural development societies, and women rural development societies and from capacity building o f communities through training and agricultural support services (Components 1 and 3).

Economic Analysis

3. I t might be difficult to evaluate the project through a full economic cost-benefit analysis as most benefits deriving from it are non quantifiable in terms o f economic or financial returns. The only quantifiable benefits are likely to be derived f iom rehabilitation and improvements to small irrigation schemes and selective rehabilitation o f f ive major irrigation schemes in the project area. Also, bulk o f the project funds will be used to finance investments for a menu o f activities chosen by the communities in selected focal villages. Therefore, the exact mix o f the investments on community subprojects i s also unknown at this stage. The exact division o f finances for the menu o f activities in focal villages, which typically include rehabilitation and improvements to small irrigation schemes and rural roads, construction o f drinking water wells and other common community assets, are also unknown.

4. The quantification o f benefits and costs for the economic analysis has been carried out using two approaches: (i) the evaluation o f potential per hectare benefits o f a minor irrigation scheme in the Northeast which i s s t i l l functioning, but in need o f minor repairs; and (ii) evaluation o f potential benefits o f one major irrigation scheme selected under NEIAPII - Giants tank in Mannar district. The economic analysis extrapolates the benefits to quantify the overall project benefits and costs.

Main assumptions e

A project l i f e o f 25 years i s assumed for all schemes.

The standard discount rate i s assumed to be 12%, as i s common practice in the analysis o f World Bank-financed projects.

All costs and benefits have been updated to 2003 prices.

Parity prices of paddy, urea, TSP and M O (KCl) were computed for the economic analysis based on commodity price projections from the World Bank’s 2004 Global Economic Prospects

Although some farmers receive paddy by-products such as the bran and the brokens, local mi l lers indicated that this i s not common practice in the Northeast. The value o f bran and brokens i s incorporated into the farm gate price. However, i t i s common practice to allow farmers to keep the husks, which can be used to collect animal droppings that can be sold as fertilizer. Husks can also be shredded and used to increase productivity in sonic soils or be burned for fuel. Since husks are not sold in markets and are difficult to price, such benefits accruing from additional paddy production represent a benefit that has not been quantified in this analysis.

An exchange rate o f U S $1 .OO = Rest 96.5 was assumed.

A standard conversion factor o f 0.85 was used to adjust financial prices o f non-traded goods and services to economic prices.

The prices and quantities o f inputs used in growing paddy are based on cost o f production data from Trinomial. Northeast province agricultural officers confirmed that these data provide an accurate representation o f the Northeast region as a whole.

To remain consistent with the cost o f production data available in Trinomial, labor was divided into two categories: Male-Days (MD), priced at 150 Rupees per day and Female-Days (FD), priced at 75 Rupees per day.

The paddy yield under Giant’s Tank o f 2023.5 kg/acre, which i s a bit high for the region, i s taken from the October 2003 Productivity Enhancement Study on the Giant’s Tank Irrigation Scheme.

The paddy yield o f 1385 kg/acre i s the average yield under minor irrigation in Batticaloa. T h i s yield, which i s a bit low for the region, i s used as a starting point to illustrate an example o f the benefits expected from a project to repair a minor irrigation scheme in need o f minor repairs.

The Giant’s Tank analysis considers several scenarios based o n past experience with moderate rehabilitation o f large irrigation schemes. For an overall budget o f $750/ha, the distribution o f costs among the six years are considered for four different cases: (i) Case 1: 5%-10%-20%-30%- 30%-5%; (ii) Case 2: 10%-10%-20%-25%-25%-10%; (iii) Case 3: 10%-15%-15%-20%-25%- 15%; and (iv) Case 4: 5%-10%-10%-35%-35%-5%

The Giant’s Tank analysis assumes there would be 10% yield increase over five years with rehabilitation and a 10% yield decrease over 5 years without the project.

The minor irrigation scheme analysis considers a small tank which i s already functioning, but in need o f minor repairs. For an overall budget o f $200/ha, the distribution o f costs among the six years are considered for four different cases: Case 1: 10%-90%-0%-0%-0%-0%; Case 2: 20%- 80%-0%-0%-0%-0%; Case 3: 30%-70%-0%-0%-0%-0%; Case 4: 40%-60%-0%-0%-0%-0%

Due to the fact that the small tank i s assumed to be functioning and only in need o f minor repairs, only a 5% increase in yields over 5 years i s predicted with the project and a 5% decrease in yields over the same time period i s assumed for the area without the project.

Table 1. Net Benefits of Economic Analysis

Yr NPV Minor Irrigation Implementation Schedule Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 7-25 (Rs,acre)

10%-90%-0%-0%-0%-0% -304 -5255 1080 1440 1801 1801 1801 5877

20%-80%-0%-0%-0%-0% -968 -4591 1080 1440 1801 1801 1801 5813

30%-70%-0%-0%-0%-0% -1632 -3927 1080 1440 1801 1801 1801 5750

40%-60%-0%-0%-0%-0% -2295 -3263 1080 1440 1801 1801 1801 5686

Yr NPV Major Irrigation Implementation Schedule Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 7-25 (Rs,acre)

10%-10%-20%-25%-25%- 10% -1935 -883 -2818 -3260 -2208 2274 5261 13915

10%- 1 5%- 15%-20%-25%- 15% -1935 -883 -1325 -1766 -2208 780 5261 15177

5%-10%-10%-35%-35%- 5% -442 -883 169 -6247 -5195 3767 5261 15272

Table 2. Financial and Economic Analysis Results

Minor Tank: $200/ha distributed over the six years as follows FIRR ERR Scenario 1 : 10%-90%-0%-0%-0%-0% 23% 28%

Scenario 2: 20%-80%-0%-0%-0%-0% 23% 27%

Scenario 3: 30%-70%-0%-0%-0%-0% 22% 26%

Scenario 4: 40%-60%-0%-0%-0%-0% 22% 26%

Giant’s Tank: $750/ha distributed over the six years as follows FIRR EIRR

Scenario 1: 5%-10%-20%-30%-30%-5% 21% 28%

Scenario 2: 10%-10%-20%-25%-25%-10% 20% 26%

Scenario 3: 10%-15%-15%-20%-25%-15% 23% 30%

Scenario 4: 5%-10%-10%-35%-35%-5% 22% 30%

Economic Internal Rates of Return (EIRR)

The economic internal rates of return (EIRR) show similar results for the Giant’s Tank rehabilitation and the rehabilitation o f a minor tank in need o f minor repairs. In all scenarios, the ElRR i s above the opportunity cost o f capital (12%): the EIRR ranges from 26% to 28% for the minor tank example and ranges from 26% to 30% for the rehabilitation of Giants Tank. The sensitivity analysis suggests that these results are robust to various implementation schedules implying that such projects are economically viable and will bring economic benefits to the region.

Annex 10: Safeguard Policy Issues

Sri Lanka: Second North-East Irr igated Agriculture Project

Social Safeguard Development Issues and Risks

1. As i s evident from the implementation experience o f the ongoing NEW, this repeater project i s no t expected to result in significant potential social safeguard issues and negative impacts. The project does no t envisage involuntary resettlement, land acquisition, and does not affect cultural property and indigenous people. If there are any potential negative impacts or risks they are mostly village-specific and can be easily managed through the participatory and community-based planning (VSEPs, vil lage development plans, landownership and encroachment inventory), implementation and monitoring mechanism o f the project. The proposed repeater project’s activity portfolio i s similar t o that of the ongoing NEW. None of the project activities require the state to acquire lands involuntarily; therefore, OP 4.12 i s not triggered.

2. OP 4.12 i s not triggered because the project need not acquire lands involuntarily. Repeater Project’s activity portfolio, similar to the current project, would comprise: a) rehabilitating vil lage tanks for irrigated agriculture, b) rebuilding needed infrastructure, such as rural roads, drinking water facilities and community facilities c) mobil izing the rural population in the focal villages for collective action in development activities, and d) supporting a menu o f l ivelihood support activities (LSA) to provide supplementary income to the poor and vulnerable segments o f the popdation. None o f these activities require the state to acquire land involuntarily fkom the owner, who has n o course o f legal redress. NEIAP I1 would simply assist farmers who either remained in their present villages, retumed to their original villages, or jo ined host villages, to restart agricultural production. In the case o f roads, social mobil ization and L S A components of the project do not require land. In the case o f rural roads, existing roads are being rehabilitated. The social mobilization activities o f the project foster local organizational development only. LSAs are meant to assist in grounding income-generating micro-enterprises, such as livestock, poultry, dairy, agro services, petty trade, etc., which require n o lands. Therefore, the project would not trigger OP 4.12. However, OP 4.12 could arise in the case of: a) reassigning (if done) o f the command area o f the rehabilitated tanks; and b) potential loss o f livelihoods o f people involved in cultivating crops in beds o f dysfunctional irrigation tanks consequent to the restoration o f such tanks. So far, n o such cases are reported under the current project. In such an eventuality, the project has drawn measures to address the same.

3 . OD 4.20. Indigenous Peoples (IPS) will not be triggered. There are very few indigenous populations in Sri Lanka except, specifically, the Veddahs (or Wanniyala-aetto). The Veddahs are by n o means a homogeneous group, sharing a common religion, language, and culture, which i s one reason why some people c la im that the groups do not actually exist. Nevertheless, there are populations that identify themselves as Veddahs, even if they n o longer hunt and gather, and these are a l l r ecog ized by the government as indigenous populations. OD 4.20, unlike OP 4.12, does not apply to individuals, rather, i t i s applicable to “groups.” However, in the country, in general, and the project areas, in particular, there are hardly any villages comprising exclusively IPS. Hence, for operational purposes, i t was decided that a l l those villages with a population of 50% or more IPS, would be considered as IP villages. Fol lowing this criterion, the init ial inventory has identified only four villages in Batticaloa district (Akurani, Kaddumunru, Madurankumy, Muruthanai), two in Ampara district (Aligambai, Bintenna), and two in Polonnaruwa district (Ihala Yakkure, Pahala Yakkure) as the majority IP villages. A plan o f action has been drawn and i s being implemented under the current project. The repeater project i s unl ikely to encounter any more IP villages. Therefore, OD 4.20 wil l not be triggered in the project as a l l the IPS have been addressed under the NEIAP.

Social Development Approach

4. The project’s social/community-development issues and concerns and the resultant opportunities, impacts and risks have been identified, based on beneficiary assessment, stakeholder analyses, impact evaluation o f NEIAP and institutional analysis. These assessments have formed the basis for formulating the project’s strategy and components, which are essentially premised on a Community-Driven Development (CDD) approach. The project addresses the key elements o f CDD approach as follows.

5. Diversity. Fol lowing the ceasefire agreement in February 2002, more displaced communities are returning to their original villages. Consequently, a typical village community in the project area i s more heterogeneous. Recognizing this, key stakeholders have been identified, consultations held, and project component design and project support are tailored to ensure that al l subgroups [commercial farmers, subsistence farmers, owners o f irrigated land, rain-fed highland farmers, landless, agricultural labor, groups due to different ethnic/religious affiliations, women (in general), widows, women-headed households, disabled (due to war), ex-combatants] are covered.

6. Inclusion, eauity and partic@ation. Given limitations o f the availability o f reliable and accurate data and information in the dynamic situation, focal village selection process and focal village selection criteria are sufficiently transparent and objective at the start o f the project t o ensure inclusion, equity and participation o f the communities in the project. The project has developed mechanisms and included provisions for selective targeting o f vulnerable groups within an FV and to mobil ize and build capacity of subgroups to plan, implement, operate and maintain the chosen village-level activitiedfacilities.

7. Subsidiaw. Decision-making authority for a l l three major project components will be carried out at the lowest appropriate level. For example, the focal village will be the project’s primary management unit for Components 1 and 3 and the project implementation authority has been decentralized f rom the center t o the province and, in turn, f rom the province to the district.

8. Human and institutional development (HID). The project emphasizes o n revivinghejuvenating traditional CBOs or forming new CBOs, such as FOs, RDSs and W R D S s . With project inputs for membership expansion o f the CBOs, mobil izing for decision making, planning and implementing subprojects, and sk i l l and capacity building through training, these CBOs are expected to sustain as effective legally recognized village institutions beyond the project closure

9. Ownershin accountabilit?/ and transparencv. Because the communities are the key stakeholder o f the project, project design includes mechanisms to ensure their ownership, accountability and transparency in the project. For example, communities will choose and prioritize subprojects by themselves using collective need assessments, and implement and monitor subprojects, most ly by CBOS through community-contracting arrangements and manage revolving funds.

10. Social develoument impacts and M&E. Majo r social development impacts include: a) establishing local-level autonomous, inclusive and accountable institutions; b) empowering women by restoring their confidence and ability to manage village-level revolving funds; c) enable CBOs to p lan and manage subprojects and O&M; and (d) enhance social and economic integration o f the communities. Monitor ing and Evaluation Framework developed in the f i rst project will be revisited, performance indicators reviewed, and revised appropriately to enable concurrent learning.

11. Management qf social risks. NEIAP as wel l as recent social assessments have recognized encroachment on private lands as a major social risk, which relates to the unauthorized occupation and use of lands belong to displaced people consequent to the conflict. This is, in fact, typical o f any post- conflict situation. NEIAP developed a plan o f action to address this risk that included: a) awareness-

creation among the public and government officials about the safety measures outlined in the state regulations; b) developing a Framework o f Implementation Monitoring; c) establishment o f a land register, as a part o f the VSEC; and d) enhancing land-dispute management skil ls. These will continue under the proposed project. A framework for monitoring social r isks and implementing remedial measures have been developed and put into operation in NEW and it will be used for the project. I t has been reviewed and cleared by SASES (refer “Sri Lanka North-East Irrigated Agriculture Project: Social Safeguards and Risk Management Framework”, which i s available in Infoshop and project files).

Environmental Safeguards and Management

12. Overall, the project will result in a net positive environmental impact. Given the localized and small- scale nature o f project activities, cumulative and long-term environmental impacts are small and negligible. These can be easily managed with proper planning, oversight, and monitoring with the involvement o f the beneficiary communities through the participatory process built into the project design. However, the nature o f project components will trigger three Bank safeguard policies and the remedial actions are outlined below.

13. Environmental Assessment (OP 4.01, BP 4.01. GP 4.01). The project activities would be identif ied by the communities through a transparent participatory needs assessment and planning process through the development o f village-base l ine social profiles (VSEPs), village-development plans (VDPs) and VADPs. The data and information pertaining to potential social and environmental impacts and issues o f the identified subprojects (as discussed above) will be primarily collected through this process.

14. During the in i t ia l needs assessment process to develop VDPs and VADPs, communities will be provided awareness o n relevant social and environmental aspects. All project activities and subprojects that will be prepared o n the basis of VDPs and VADPs will undergo environmental screening using the checklists (already available and used under NEW) by the communities as wel l as project implementing staff. Environmental screening process will distinguish subprojects and activities that will require thorough environmental review to preventlmitigate negative environmental impacts or those which will provide opportunities to enhance positive impacts. For medium irrigation schemes (schemes serving 80- 400 ha) feasibility reports will be prepared on a case by case basis using the templates used for NEIAP and cleared by the Bank task team. Feasibility reports will include a comprehensive assessment o f the environmental parameters associated with the schemes and potential environmental impacts o f the project proposals and, based this assessment, specific measures will be designed and implemented to address them. Services o f the district environmental officers or subject matter specialists wil l be obtained to modify project designs and incorporate environmental management aspects depending o n the complexity o f the issue.

15. The project will provide environmental awareness and s h l l development training to field-level project staff, social mobilizers, and community members to cany out environmental screening, monitoring and incorporating appropriate mitigation measures during subproject formulation and execution. The training manuals as wel l as the environmental assessment checklists developed and made operational in NEW will be used. In addition, specification o f c i v i l works contract documents will continue to include and enforce generic- and activity-specific clauses requiring environmental compliance in the execution o f the project’s c i v i l works (e.g., safe disposal o f construction spoils and excavated waste material, treating earth borrow pits, etc.). Provisions wil l be included in cost estimates o f c i v i l works to undertake measures both for enhancing positive environmental impacts and for mitigating/preventing negative effects.

16. Safety of dams (OP 4.37, BP 4.37). The project wil l not include creation o f new reservoirs or dams. It will only finance the rehabilitation of small and medium irrigation works and the urgent measures to

improve stability o f dadembankments o f selected major irrigation works in the project area. Embankments o f a l l small and medium irrigation works are less than 15 m in height, whi le those o f a few major works are between 15 and 20 m. Even for the latter, the project investments will be targeted pr imari ly t o enhance structural safety o f dams and related major structures.

17. The project will employ full-time irrigation and water-resources engineers at the levels o f project management unit (PMU) and district project offices to design, supervise, and do quality control o f the rehabilitation o f small and medium irrigation works. Satisfactory design manuals developed by the PMU for NEIAP will be used. In addition, the PMU has developed a detailed design manual for the rehabilitation o f groundwater ponds in Jaffha and it i s satisfactory. For the design o f dam-safety enhancement measures for major irrigation schemes the project will use the services o f dam-safety specialists. A dam-safety panel, consisting o f local specialists f rom the Irrigation Department and the private sector, will guide and oversee construction and post-rehabilitation O&M. In addition, O&M plans will be developed for al l irrigation works rehabilitated by the project and communities, and project staff will be trained o n basic managerial and technical sk i l l s required to carry out O&M after the rehabilitation.

18. The project will continue the initiatives o f NEW to enhance the capacity o f project engineers, technical staff and community members for quality assurance o f c iv i l works construction. It will provide training to engineers on quality assurance and control o f c i v i l works (QA &QC) norms and measures, and employ independent audits to monitor the compliance on a sample basis. A comprehensive QA &QC procedural and technical manual has been prepared and i s being enforced under NEIAP. The project will provide financial assistance to the establishment o f two regional c iv i l engineering material testing and construction o f QA & QC laboratories in the project area to increase the capacity o f the Borrower.

19. Pest manapement - (OP 4.09). The project will provide extension support t o farmers in small and medium irrigation schemes and limited pi lot initiatives in the major irrigation schemes to enhance agricultural production and productivity. Some o f these interventions will increase the use o f agrochemicals, but the incremental use i s not expected to create significant on-site and off-site adverse impacts. Nevertheless, the project will be used as a vehicle to increase the environmental awareness related with agriculture and to promote environmentally friendly agricultural practices, such as Integrated Pest Management (IPM). Toward this end, as a part o f project implementation p lan (PIP), the Borrower will develop an Integrated Pest Management (IPM) plan as an integral component o f i t s agncultural development activities. The project will use specialized inputs f rom international organizations such as FA0 to develop strategies, training curriculum and techniques to train both the agricultural extension staff and farmers to internalize and adopt IPM techniques both for rice and non-rice crops. Provincial Departments o f Agriculture and private-sector consultants wil l provide inputs to this task. The strategy would include a generic inventory o f NE-specific pests and natural enemies, cultural practices, pest- resistant crop varieties, and a strategy for sustainable pest management, p lan for training o f developing a cadre of trainers among agricultural extension staff and farmers, and budget and outputs o f the training plan etc.

20. The project will finance the implementation o f the IPM plan. T o complement this, the project will support the capacity development o f the Provincial Department o f Agriculture to adopt IPM o n a sustainable manner. In addition, the project will support the University o f Jaffna to develop agricultural soil-testing facilities.

2 1. Environmental Management Framework. The PMU has completed environmental assessments covering ten selected major irrigation schemes in the NE and assessment o f the Jaffha district. Based on the assessment and the environmental checklist used in NEW, the PMLT has developed an Environmental Management Framework (EMF), which has been reviewed by the Bank and stated as satisfactory. This will serve as the operational manual and framework for environmental monitoring and

management o f NEW 11. The EA and EMF describes: a) rationale for triggering the Bank's environmental safeguards; b) process and tools for screening, monitoring and mitigating environmental aspects during project planning, design, construction and operation; c) integrated dam-safety management action plan; and d) an integrated pest management plan (PM). The pest management strategy will build o n the existing PM strategy and plans o f the Department o f Agriculture o f the Provincial Council and i t s implementation will be guided by the Departmental staff. For dam-safety management strategy, the project will build linkages with the Central h g a t i o n Department and Mahaweli Authority o f Sri Lanka that are national expert agencies. The project will have provisions to build capacity and skills o f the relevant staff o n dam safety, IE'M and environmental assessment and monitoring.

22. Project staff carried out public consultations as part o f environmental and social assessments, in project districts. The EAs and EMF have been made available at District Secretariats and public places for comments and feedback.

Annex 11: Project Preparation and Supervision

Planned Actual PCN review October 23,2003 October 23,2003 Init ial PID to PIC December 01,2003 December 0 1,2003 Init ial ISDS to PIC December 08,2003 February 18,2004 Appraisal April 19,2004 April 20-May 12,2004 Negotiations May 18,2004 May 18-19,2004 BoarcWRVP approval June 22,2004 June 22,2004 Planned date o f effectiveness Planned date o f mid-term review

December 15,2004 June 30,2007

Planned closing date December 3 1,20 10

Key institutions responsible for preparation of the project: North-east Provincial Council, Ministry o f Provincial Council, Home Affairs and Local Government, Imgation Department (Central Government) - Component 2

Bank staff and consultants who worked and would work on the project include: Name Title Unit

Agriculture Development FA0 Alvaro Bueno Anne Ritchie Brenda Scott Deborah Ricks Deepal Fernando Eashwaray Ramachandran Gaj anand Pathmanthan Gloria Kessler Harini Wijesundara Hiran Herath Irene Julitta Ponnaiah Jiwanka Wickramasinghe Madhavan Balachandran Malcolm Jansen Max Blacker Nihal Fernando Richard Chisholm R K Malhotra S Manoharan Samantha de Silva Steve Holtzmann Sumith Pilapitiya Suryanaryan Satish Suzanne Morris Vikram Raghavan

Micro-Finance Aspects Information Assistant Program Assistant Procurements Environmental Aspects Sector ManagedQuality Control and Guidance Economic and Financial Analysis Team Assistance Financial Management (FM) Financial Management (FM) Financial Management (FM) Co-Task Team Leader/Costing/FM Environmental Aspects Rural Roads Task Team Leaderproject Des ign Agriculture Support Services Dam SafetyKivil Works Quality Implementation Aspects Direct Financing CDD Pilot Post Conflict Aspects Environnemental Aspects Social Development/Livelihood Support FinanceAkbursements Legal Counsel

PSDCG SASRD SASRD S A R P S SASES SASRD SASRD C M U Consultant SARFM SARFM SASRD SASES FA0 SASRD EASRD Consultant Consultant HDNSP SASES SASES SASES LOAG2 LEGMS

Annex 12: Documents in the Project Fi le

Project Implementation and Operation Manual (PIOM)

Environmental Assessments

Framework for Monitoring Social Safeguards and Risks and Mitigation

Livel ihood Support Assistance (LSA) Implementation Manual

Financial Management Manual

Procurement Administration Manual

Rapid Assessment o f Planning and Implementation o f NEIAP Activities in Jaffna

Evaluation o f NGO Performance

Assessment o f Performance o f CBOs

Appraisal Summary o n Poverty and Vulnerability Targeting (Technical Annex 1 to PAD)

Appraisal Summary - Engineering Guidelines for Component 2 (Technical Annex 2)

Appraisal Summary - A p c u l t u r a l Support Services (Technical Annex 3)

Appraisal Summary - Social Assessment and CDD Principles for NEIAP I1 (Technical Annex 4)

Appraisal Summary - Operational Framework for Direct Financing Pi lo t (Technical Annex 5)

Framework for Management of Social Safeguard and Risks (Technical Annex 6)

Environmental Management Framework (Technical Annex 7)

Procurement Plan (Technical Annex 8)

Project Detailed Cost Estimate (Technical Annex 9)

M&E framework (Technical Annex 10)

Annex 13: Statement of Loans and Credits

Difference between expected

and actual disbursements Original Amount in US$ Mill ions

ProjectID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d

PO86747

PO50741

PO58067

PO74730

PO77586

PO76702

PO77761

PO69784

PO71 131

PO50738

PO44809

PO58070

PO10525 PO34212 PO35828

PO 105 13 PO10517 PO42266

1998 1998 1998

1997 1996 1996

Community Dev. and Livel ihood Improvement

Relevance and Quality o f Undergrad. Educ Second Community Water National H IV iA IDS Prevention LK Economic Reform TA Renewable Energy for Rural Economic Dev. Renewable Energy for Rural Economic Dev. Distance Learning Initiative - LIL LK Central Bank Strengthening Land Titling & Rel. Serv (LW Legal and Judicial Reforms North-East Irrigated Agriculture Project General Education I1 Mahaweli Restructuring Cons. o f Medicinal Plants Environmental Action Pvt Sector Infias Dev.

Teacher Education & Teacher Deployment

0.00 0.00 0.00

70.30 57.00 0.00

14.80 77.00 64.10

0.00 0.00 0.00

0.00 0.00 4.60

0.00 0.00 0.00

0.86 0.00 0.00

0.00 15.02 0.00

23.60 9.25 0.39

1.44 19.94 7.99

25.33 9.75 0.39

1.96 40.73 12.59

-0.85 0.00 0.00

0.00 23.59 16.72

- - Total: 0.00 582.60 0.00 12.60 15.88 319.37 101.65 39.46

S R I L A N K A STATEMENT OF IFC’s

Held and Disbursed Portfolio In Millions o f U S Dollars

Committed Disbursed

IFC IFC

FY Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. Approval

0196 2003 1999 1997 198 1182189 2000 0199 1997 1999 2000 1988195

Asia Power CBC Fitch Srilanka

LOFAC Lanka Hotels

NDB Housing COT Nations Trust

Packages Lanka

SAGT Suntel

Union Assurance

6.56 0.00 0.00 0.42 0.00 0.00 0.00 0.00 33.50 0.00 0.00

2.27 0.00 9.96 0.00 0.09 0.00 0.00 0.00 0.00 0.00 1.06 0.00 1.09 0.00 1.11 0.00 7.30 0.00 7.50 0.00 0.50 0.00

4.92 6.56 2.27 0.00 4.92 0.00 0.00 9.96 0.00 0.00 0.00 0.00 0.09 0.00 0.00 0.00 0.42 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.06 0.00 0.00 0.00 0.00 1.09 0.00 0.00 0.00 0.00 1.11 0.00 0.00 0.00 23.50 3.62 0.00 0.00 0.00 0.00 7.50 0.00 0.00 0.00 0.00 0.50 0.00 0.00

Totalportfolio: 40.48 30.88 0.00 4.92 30.48 27.20 0.00 4.92

Approvals Pending Commitment

FY Company Approval

Loan Equity Quasi Partic.

2003 CB Ceylon 0.01 0.00 0.00 0.00 2003 Dialog 0.04 0.00 0.01 0.00 200 1 SAGT SWAP 0.00 0.00 0.00 0.00

Total pending 0.05 0.00 0.01 0.00 commitment:

Annex 14: Country at a Glance

1.7 1.7 -3.3 2.5 1.0 5.1 5.7 -2.1

6.8 6.4 -4.2 2.2 4.2 5.3 -0.3 6.0

3.1 4.7 -1.4 11.6

POVERTY and SOCIAL

2002 Population, mid-year (millions) GNI per capita (Mas method, US$) GNI (Atlas method, US$ billions)

Average annual growth. 1996-02

Population I%) Labor force (56)

Most recent estimate (latest year available, 1996-02)

Poverty (% ofpopulafion below national PoveIfY line1 Urban population (% of fofal populafionl Life expectancy at birth (years1 Infant mortality (per 1,OOOlive births) Chiid malnutrition (% ofchildren underli) Access to an improved water source (% of populafion) Illiteracy I% ofpopulafion age 15+1 Gross primary enrollment (% of school-age populafionl

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982

GDP (US$ billions) 4.8 Gross domestic investmenffGDP 30.8 Exports of goods and serviceslGDP 27.4 Gross domestic savings/GDP 11.9 Gross national savingsiGDP 18.8

Current account balancelGDP -11.9 Interest paymentsiGDP 1.4 Total debffGDP 55.1 Total debt serviceiexpork Present value of debtiGDP Present value of debffexpork

1982-92 1992-02 (average annual growth) GDP 3.9 4.6 GDP per capita 2.8 3.2 Exports of goods and services 5.6 6.3

Sri Lanka

19.0 850 16.1

1.4 2.2

25 23 74 16 33 77 -

8 106 107 104

9.7 24.3 31.7 15.0 18.6

-5.7 1.4

86.7 12.3

-1.5 -2.9 -5.3

5.1 9.2 9.3 -11.5 0.3 4.5 -17.5 1.7

South Asia

1,401 460 640

1 8 2 3

28 63 71

84 44 97

108 89

15 7 22 0 37 3 15 8 20 3

-1 5 1 3

55 0 10 1 43 9 92 9

4 0 2 7 5 6

- 2 0 1

--"-Exparts .'O-lmports

Lower- middle- income

2,411 1,390 3,352

1 0 1 2

49 69 30 11 81 13 Ill 111 110

16 6 21 0 36 2 14 6 19 9

-1 6 1 3

57 9 9 4

2002.06

5 5 4 4 7 9

Development diamond*

Life expectancy

T GNI Gross per primary capita nrollment

1 Access to improved water source

-Sri Lanka Lower-middle-income group

Economic ratlos' I Trade

Investment Domestic savings

Indebtedness

Sri Lanka - - -- Lower-middle-income group

STRUCTURE of the ECONOMY

(% of GDPI Agriculture Industry

1982 4992 2001 2002

;E:: E:: ;::; ;::: Manufacturing 14.4 15.3 15.9 15.9

Services 47.3 48.5 53.1 53.6

Private consumption 79.8 75.4 74.0 76.6 General government consumption 8.3 9.6 10.3 8.8 Imports of goods and services 46.3 41.0 43.6 42.9

(average annual growth) Agriculture Industry

Services

Private consumption General government consumption Gross domestic investment Imports of goods and services

Manufacturing

1g82-92 199242 2o02 1 Growth of exports and imports (%) 1

Note: 2002 data are preliminary estimates.

* The diamonds show four key indicators in the Country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete.

Sri Lanka

PRICES and GOVERNMENT FINANCE

Domestic prlces (% change) Consumer prices Implicit GDP deflator

Government finance (% of GDP, includes current grants) Current revenue Current budget balance Overall surpius/deficit

(US$ millions) Total exports (fob)

Tea Other agricultural goods Manufactures

Total imports (cifl Food Fuel and energy Capital goods

Export price index (1995=100) Import price index (1995=100) Terms of trade (1995-700)

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including gold (US$ millionsJ Conversion rate (DEC, IocaVUW

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

IBRD IDA

Total debt service IBRD IDA

Composition of net resource flows Official grants Ofticial creditors Private creditors Foreign direct investment Portfolio equity

World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

-94 426

521 47

2,625 32

245 4 3

171 175 22 1 64

126 60 4

11.4 9.4

22.1 1.0

2,459 340 164

1,214 3,676

524 175 851

3,081 3,976 -895

-178 523

897 -347

936 43.8

6,475 65

453 15 14

122 188 -37 121 26

39 74 14 60 14 46

14.2 13.7

17.0 -4.5

4,817 690 330

2,543 5,974

654 731

169 130 130

6,172 7,154 -982

-267 1,006

464 -220

1,181 89.4

8.658 8

198 174 61

172 -1 1

37 39 31 8

9.6 8.3

16.9 -3.9 -8.5

4,699 660 319

2,424 6,106

696 789

173 135 1 28

5,967 7,103

-1,136

-252 1,123

602 -338

1.566 95.7

9,592 4

55 179 -56 235 25

75 91 36 55 13 42

Inflation (%)

” T I I

Export and Import levels (US$ mill.)

8.000 T

96 97 98 99 00 01

EXPOIIS BlmpOltS

Current account balance to GDP ( O h )

Composition of 2002 debt (US$ mill.)

G 4 9 8 A:4

A - IBRD B - IDA D -Other multilateral F - Private C- IMF G - Short-term

E - Bilateral

Development Economics 8/29/03

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