Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 27642-CE

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED GRANT

IN THE AMOUNT OF SDR 34.2 MILLION (US$5 1 .O MILLION EQUIVALENT)

TO THE

DEMOCRATIC SOCIALIST REPUBLIC OF S R I LANKA

FOR A

COMMUNITY DEVELOPMENT AND LIVELIHOOD IMPROVEMENT “GEMI DIRIYA” PROJECT

IN SUPPORT OF THE FIRST PHASE OF THE COMMUNITY DEVELOPMENT AND LIVELIHOOD IMPROVEMENT “GEMI DIRIYA ” PROGRAM

March 5,2004

Rural Development Sector Unit South Asia Regional Office

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

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ADB AG A&M APL BOD CA CAS CBO cc CDD CEO CF COM CPAR DFT DrFT DS EA EMF EO1 FA0 FMR FMS GDF GND GPN GTZ GOSL HEIS ICB ICTAD IEC IDA IFAD

CURRENCY EQUIVALENTS

(Exchange Rate Effective February 23,2004)

Currency Unit = Sri Lankan Rupees (Rs.) Rs. 1.00 = US$O.lO US$l.OO = Rs. 98.88

FISCAL YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS

Asian Development Bank Auditor General Appraisal and Monitoring Adaptable Program Loan Board o f Directors Chartered Accountant Country Assistance Strategy Community Based Organization Cluster Committee Community-Driven Development Chief Executive Officer Community Facilitator Community Operational Manual Country Procurement Assessment Review Divisional Facilitation Team District Facilitation Team Divisional Secretary Environmental Assessment Environmental Management Framework Expression o f Interest Food and Agriculture Organization Financial Management Report Financial Management System Gemi Diriya Foundation Grama Niladhari Division General Procurement Notice Deutsche Gesellschaft fur Technische Zusammenarbeit Government of Sr i Lanka Household Expenditure and Income Survey Intemational Competitive Bidding Institute o f Construction, Training & Development Infomation, Education & Communication Intemational Development Association Intemational Fund for Agricultural development

IPSAS JBIC KFW L S MALS MDGs MIS ML&E MRE MRRP MS NCB NGO O&M PAD PC PIP PRA PRSP PS RFP SA SG so SOE SPC TOR UNDP VDP vo vscc vsco VSHLI

Intemational Public Sector Accounting Standard Japan Bank for Intemational Cooperation Kreditanstalt fur Wiederaufbau Livelihood Support Ministry o f Agriculture, Livestock and Samurdhi Millennium Development Goals Management Information System Monitoring, Leaming and Evaluation Ministry of Rural Economy Mahaweli Restructuring and Rehabilitation Project Maha Sabha National Competitive Bidding Non-Govemmental Organization Operation and Maintenance Project Appraisal Document Provincial Council Project Implementation Plan Participatory Rural Appraisal Poverty Reduction Strategy Paper Pradeshiya Sabha Request for Proposal Special Account Small Group Support Organization Statement o f Expenditure Sub-project Committee Terms o f Reference United Nations Development Program Village Development Plan Village Organization Village Savings and Credit Committee Village Savings and Credit Organization Village Self-Help Leaming Initiative

V ice President: Praful C. Pate1 Country Director: Peter C. Harro ld

Sector Director: Constance A. Bernard Sector Manager: Gajanand Pathmanathan

Task Team LeaderKO-Task Leader: Meena M. Munsh f le r rence Abeysekera

FOR OFFICIAL USE ONLY

S R I LANKA Community Development and Livelihood Improvement “Gemi Diriya” Project

CONTENTS Page

A . STRATEGIC CONTEXT AM) RATIONALE ............................................................................... 1 Country and sector issues .................................................................................................................. 1 Rationale for IDA involvement ........................................................................................................ 2 fHigher ldvel objectives to which the project contributes ................................................................. 2

1 . 2 . 3 .

B . PROJECT DESCRIPTION ............................................................................................................... 2 -I 1 . Lending instrument .......................................................................................................................... 2

Program objective and phases .......................................................................................................... 3 Project development objective and key indicators ........................................................................... 4

Lessons leamed and reflected in the project design ......................................................................... 5 Altematives considered and reasons for rejection ............................................................................ 6

2.

3 . 4 . 5 . 6 .

Project components .......................................................................................................................... 4

C . IMPLEMENTATION ........................................................................................................................ 7 1 . Partnership arrangements (if applicable) ..................... ............................................................ 7

Institutional and implementation arrangements ............................................................................... 7 Monitoring. leaming and evaluation o f outcomeslresults ...............

4 . Sustainability .......................................................................... ....................................... 10 Crit ical risks and possible controversial aspects ............................................................................ 11

6 . Grant conditions and covenants .................................................... ......................................... 12

2 . 3 . ......................................... 9

5 .

D . APPRAISAL SUMMARY ............................................................................................................... 13 Economic and financial analyses ................................................................................................... 13

2 . Technical ......................................................................................................................................... 13 3 . Fiduciary ........................................................................................................................................ 14 4. Social ........................................................................................................ .............................. 15 5 . Environment ................................................................................................................................... 15

1 .

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 ................................ 23 Annex 3: Results Framework and Monitoring ....................................................................................... 25

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 W o r l d Bank authorization .

Annex 4: Detailed Project Description .................................................................................................... 31 Annex 5: Project Costs .............................................................................................................................. 38 Annex 6: Implementation Arrangements ................................................................................................ 39 Annex 7: Financial Management and Disbursement Arrangements ................................................... 58 Annex 8: Procurement Arrangements .................................................................................................... 69 Annex 9: Economic and Financial Analysis ............................................................................................ 79 Annex 10: Safeguard Policy Issues and Gender and Youth Study ....................................................... 80 Annex 11: Project Preparation and Supervision .................................................................................... 86 Annex 12: Documents in the Project F i le ................................................................................................ 87 Annex 13: Statement of Loans and Credits ............................................................................................ 88 Annex 14: Country at a Glance ................................................................................................................ 90

SRI LANKA

Source

COMMUNITY DEVELOPMENT AND LIVELIHOOD IMPROVEMENT “GEM1 DIRIYA” PROJECT

Local Foreign Total

PROJECT APPRAISAL DOCUMENT SOUTH ASIA

BORROWEFURECIPIENT IDA GRANT LOCAL COMMUNITIES Total:

SASRD

11.0 0.0 11.0 47.8 3.2 51.0

7.8 0.0 7.8 66.6 3.2 69.8

Date: March 5,2004 Country Director: Peter C. Harrold Sector Director: Constance A. Bernard

Team Leader: Meena M. Munshi Sector(s): Other social services (30%);General agnculture, fishing and forestry sector (25%);Water supply (20%);General industry and trade sector (1 5%);Sub-national government administration (10%) Theme(s): Rural services and infrastructure (P);Participation and civic engagement (P);Rural non-farm income generation (P) Environmental screening category: Partial Assessment Safeguard screening category: Limited impact

Project ID: PO74872

Lending Instrument: Adaptable Program Loan

Total Bank financing (US$5 1 .O mill ion equivalent) SDR 34.2 mil l ion

Pronosed terms: Standard IDA Grant terms I

Borrower: Democratic Socialist Republic of Sr i Lanka

Responsible Agency: Gemi Diriya Foundation, c/o Ministry o f Samurdhi, 7 A Reid Avenue, Colombo 7, S r i Lanka, tel: 94-1 1-2688947, fax: 94-1 1-2682029, batuwita@,sltnet.lk

Expected effectiveness date: August 15,2004 Exnected clnninn date: March 31.2009

[ ]Yes [XINO

[ ]Yes [XINO [ ]Yes [ IN0 [ ]Yes [XINO

[ X]Yes [ ] N o

[XIYes [ ] N o

Does the project depart from the CAS in content or other significant respects? Re$ PAD A. 3 Does the project require any exceptions f rom Bank policies? Re$ PAD D. 7

I s approval for any pol icy exception sought f rom the Board? Does the project include any critical r isks rated “substantial” or “high”? Re$ PAD C.5 Does the project meet the Regional criteria for readiness for implementation? Re$ PAD D. 7

Have these been approved by Bank management?

Project development objective Re$ PAD B.2, Technical Annex 3 The development objective o f the proposed 12-year program i s to enable the rural poor to improve their l ivelihood and quality o f life. The objective o f the proposed f i r s t four-year phase o f the program would be to enable the communities o f Uva and Southern provinces to build accountable and self-governing local institutions and to manage sustainable investments by: (i) devolving decision-making power and resources to community organizations; (ii) strengthening selected local governments which demonstrate responsiveness and accountability to rural communities; and (iii) working with federations o f village organizations, the private sector and Non-Governmental Organizations (NGOs) o n economic empowerment to increase the size and diversity o f l ivelihood options. Project description Re$ PAD B4, Technical Annex 4 The proposed project includes the following five components: (i) Component 1 : Village Development to strengthen Village Organizations (VOs) and fund priority sub- projects. (ii) Component 2: Institutional Strengthening to build the capacity o f local and national agencies and support organizations to respond to community demands. (iii) Component 3: Innovation Seed Fund to p i lo t innovative ideas that need experimentation, learning and incubation. (iv) Component 4: Project Management to facilitate overall coordination, implementation and management o f the project. (v) Component 5: Village Self-Help Learning Initiative pi lot to complete implementation o f the ongoing pi lot in Polonnaruwa district. Which safeguard policies are triggered, if any? Re$ PAD D. 6, Technical Annex 10 Environmental Assessment OPBP 4.01, Pest Management OP 4.09, Safety o f Dams OP/BP 4.37 Significant, non-standard conditions, if any, for: Re$ PAD C. 7 Board presentation: None

No

Loadcredi t effectiveness: None

General Implementation and Proiect Management (i) The Gemi Di r iya Foundation (Foundation) shall implement the project in accordance with the Project Implementation Plan (PIP), the Community Operational Manual (COM), and the Environmental Management Framework (EMF) as agreed with International Development Association (IDA). (ii) The Foundation shall ensure that i ts Chief Executive Officer (CEO) shall be assisted by suitably qualified and experienced procurement, financial, and operational specialists and other staff in adequate numbers to perform project implementation and monitoring functions. (iii) The Foundation shall appoint by n o later than September 30, 2004, and thereafter maintain during the project implementation period, internal auditors, whose qualifications and experience are satisfactory and acceptable to IDA.

(iv) The Foundation shall establish by no later than by September 30, 2005, and maintain thereafter during the project implementation period, a satisfactory computerized FMS for the project, acceptable to IDA.

Sub-Proi ec ts (v) The Foundation shall ensure that: (a) community sub-projects would be selected and appraised in accordance with the criteria and procedure specified in the COM; (b) Grant funds would be released to VOs and PSs implementing the project in a timely manner in accordance with agreed Sub-Grant Agreements; (c) the Sub-Grant Agreements would be used exclusively to finance goods, works and services required for preparation and approval o f Village Development Plans (VDPs); and (d) each Sub- Grant shall be calculated according to a pre-determined cost-sharing formula as specified in the COM. (vi) The Foundation shall prepare by September 30, 2004, a long l i s t o f accredited and competent support organizations and service providers and widely publish it to enable transparent selection by VOs and Pradeshiya Sabha (PSs).

Land Use and Acquisition (vii) In carrying out the Project, the Foundation shall ensure that there would be no involuntary land acquisition under the project; and the Project shall be implemented as far as reasonably practicable on publicly-owned land, using exclusively land free from squatters, encroachments or other encumbrances; any acquisition o f private land, if needed, would be through outright purchase at market rates or through voluntary donation and in accordance with guidelines and procedures set forth in the PIP.

Monitoring and Evaluation (viii) The Foundation shall prepare an annual plan and budget for implementing the project for the financial year, not later than October 31 o f each year, starting from year 2004, and such plan will be finalized not later than December 3 1 o f that year taking into account IDA’S comments. (ix) The Foundation shall carry out an evaluation o f implementation o f the on-going intensive hands-on leaming phase covering twenty-four Grama Niladhari Divisions (GNDs), not later than June 30, 2005; review with IDA the lessons leamed; and thereafter incorporate such lessons in the design and implementation o f subsequent batches. (x) The Foundation shall, beginning not later than December 31, 2004, have technical, social, environmental, and process audits (independent reviews) o f the Project undertaken at six monthly intervals by external independent agencies, share results o f such audits with IDA, and integrate the lessons from such audits by talung corrective measures as may be necessary. (xi) The Foundation shall carry out a mid-term review by September 30, 2006.

A. STRATEGIC CONTEXT AND RATIONALE

1. Country and sector issues

A.l.l Poverty reduction in rural areas i s a key objective o f the Government o f Sri Lanka’s (GOSL) poverty reduction strategy. Almost a quarter o f Sri Lanka’s population are s t i l l poor, and 90% o f them l ive in rural areas or estates. There are large regional disparities in poverty incidence, with the south and north east showing higher levels o f poverty (although comprehensive poverty data for the north east i s laclung). In the recent years, as part o f i t s sectoral work, IDA has completed two major studies-”Sri Lanka: Poverty Assessment’’ and “Promoting Agricultural and Rural Non-farm Sector Growth”. The f i rs t study shows that poverty in Sri Lanka i s largely a rural phenomenon and that the majority o f the poor are employed in apcul ture. The second study outlines a number o f key constraints, including poor access to critical infrastructure and services (such as, roads, markets, telecommunications, electricity and banlung services), ineffective public sector expenditure programs, poor f low o f information on technology transfer, dominance o f public sector as a service provider and underutilization o f private sector interests and initiatives. L i ke other South Asian countries, poor communities in Sri Lanka lack access to basic services and financial resources to improve their income and welfare. In addition, the poor lack decision- malung power to articulate local development priorities. In the search for sustainable solutions to address these problems, GOSL has been implementing a variety o f development programs for several decades. Unfortunately, most o f these efforts have not been able to contribute adequately to the government’s goal o f alleviating rural poverty o n a sustainable basis.

A. 1.2. Over the past four years, GOSL has made major efforts to deepen i t s understanding o f the nature and root causes o f poverty in Sri Lanka, mainly to reassess and reformulate i t s pol icy fi-amework for reducing poverty. GOSL’s Poverty Reduction Strategy Paper (PRSP) leans towards greater reliance on economic opportunities and growth than on redistribution; addresses the inefficiencies and inequities in the social protection system, particularly in the Samurdhi program’; and promotes empowerment o f the poor through improved governance. The primary goals o f the GOSL’s strategy are to secure peace, growth and equity and to achieve significant transformation in the quality o f l i f e o f the people especially in rural areas, through increased incomes, and invigoration o f the rural economy.

A.1.3. Although, Sri Lanka has made remarkable progress in the area o f human development, equity remains a serious issue for two reasons. First, equity i s needed to ensure balanced growth at the national level, with a special focus on the southern part that i s lagging behind the rest o f the country. The volume of resources currently available (through various programs) in the southern provinces (Uva and Southern Province) i s considerable. Despite this, a large share o f these resources either does not reach the rural poor, or i s not directed to activities that are not among the highest priorities o f the poor, or i s not delivered in a cost effective manner. Second, Sri Lanka may not be able to meet the Mi l lennium Development Goals (MDGs) if it does not achieve equity.

A. 1.4. Faced with these challenges, and recognizing the need for innovative solutions to alleviate rural poverty, GOSL has taken a pol icy decision to address poverty in the country by adopting the Community- Dr iven Development (CDD) approach.

’ Samurdhi i s a national poverty alleviation program implemented since 1995-96, by the Ministry o f Samurdhl, and has been designed to focus on the poor and vulnerable in rural areas. The program covers a wide range o f services, such as, monthly cash grants to the recipients, subsidized consumer items; a compulsory savings and credit mechanisms using a village level banking system; an insurance mechanism for the poor; scholarships and books and other basic needs for school children, etc. The program has a wide geographic coverage--25 districts (3 10 Divisions and 14,000 GNDs, implemented by a cadre o f 26,000 specially recruited social mobilizers) with an annual budget o f about Rs. 13.5 billion.

1

2. Rationale for IDA involvement

A.2.1. GOSL has requested IDA to assist in adopting the CDD approach and developing a long-term strategy for transferring funds for rural development through this approach. I t believes that IDA’S support wil l trigger a strong demonstration effect nationwide. IDA i s uniquely positioned to support GOSL’s long-term reform agenda o f devolving powers to communities and local governments, and can make available to GOSL i ts considerable knowledge o f national and international experience and best practices. By serving as a facilitator, IDA can play a critical role in promoting local institutions as key partners in the local development process, be catalytic in helping to consolidate the participatory and transparent resource allocation at the local level, and ensure that these processes continue beyond the l i fe and scope of the project, when external support will be gradually phased out. In the context o f this program, IDA i s in constant dialogue with other international agencies, including ADB, JBIC, UNDP, GTZ, KfW and IFAD.

3. Higher level objectives to which the project contributes

A.3.1. The proposed program i s closely aligned to GOSL’s strategic priorities. I t would particularly focus on rural infrastructure, which i s viewed as a major bottleneck for increasing rural growth, strengthening market, credit and technical support services to the poorer communities, strengthening local governments’ planning and implementation capacity, and ensuring effective involvement o f the communities in the programming o f investments and their implementation. By improving access o f village communities to basic economic and social infrastructure and productive opportunities, the proposed project will help raise incomes and improve well-being. The use o f participatory processes that have proven to increase the voice o f rural communities in priority-setting and decision-malung over resource allocation will help build social capital, strengthen local governance, and improve the effectiveness and sustainability o f development mechanisms.

A.3.2. The Country Assistance Strategy (CAS), discussed in April 2003, indicates a strong focus on support to the peace process, growth and equity. To achieve sustainable poverty reduction, the CAS recommends support for well targeted anti-poverty programs to enhance the human and physical capital of the poor, both to improve social conditions and to allow communities to make better use o f economic opportunities. In l ine with the CAS goals, the proposed program promotes sustainable poverty reduction in the poor regions o f the country and helps to leverage resources for local development.

A.3.3. The proposed program also supports the MDGs of: (i) improving incomes o f the poorest - reducing the proportion of people living on less than US$1 a day (Goal 1, Target 1); (ii) promoting gender equality and empowering women (Goal 3, Target 4); and (iii) sustainable access to safe drinlung water and improved sanitation (Goal 7, Targets 10 & 11).

B. PROJECT D E S C R I P T I O N

1. Lending instrument

B.1.1. The CDD approach adopted by the project to address rural poverty focuses on building and sustaining village level institutions and transferring decision-malung responsibilities and resources to communities. International experience suggests that sustainable community development i s a long-term process and sustainable poverty reduction cannot be achieved quickly. Experience also suggests that the scaling up o f anti-poverty programs needs to be approached in a gradual and phased manner to allow the institutional support framework to be established. Against this background, GOSL and IDA have agreed that a long-term programmatic approach would be most suitable for addressing sustainable poverty

2

reduction in Sri Lanka. The Adaptable Program Loan (APL) instrument has therefore been identified as the appropriate lending instrument for this program.

2. Program objective and phases

B.2.1. The long-term objective o f the proposed program i s to support GOSL’s strategy o f reducing rural poverty and promoting sustainable and equitable rural development through: (i) better access o f the poor to basic social and economic infrastructure and services and support for productive activities; and (ii) the development o f policies, rules, systems, procedures and institutional arrangements that would al low the government to transfer funds directly t o communities and provide them with technical and other support o n a demand-driven basis. The key expected outcomes o f the program are: (a) at least 75 percent o f the households in the project area benefit fi-om increased income, incremental income generated from sub- project investments and improved access to social and economic infrastructure; and (b) at least 50 percent o f national, provincial and district budgetary resources for rural development are channeled directly t o community organization and reflect community priorities.

B.2.2. The project will achieve the program goals by following a phased approach o f progressive geographic expansion (ie., the “horizontal” version o f the APL) and policy deepening (ie., vertical version o f the APL). GOSL’s vision o f the program, as conveyed through the Letter o f Development Policy, i s to influence the overall transfer o f budgetary resources to communities through decentralized programs. The performance o f key local government institutions would be clearly monitored to draw lessons for future pol icy dialogue with the Ministry o f Finance and the Ministry of Policy Development and Implementation and with other stakeholders.

B.2.3. The APL instrument will provide a flexible and long-term approach under which IDA would commit support for 12 years (about US$181 .O mill ion) in three overlapping phases. The program would cover 4,000 to 5,000 village communities in about 2,000 Gram Niladhari Divisions (GNDs - lowest administrative unit) in 12 years’ time. At the end o f each phase, the expected outcomes would be to have local self-goveming institutions that are able to manage their resources sustainably and to mobilize resources from the private and public sector. Overall, the lessons leamed fi-om each phase would be incorporated into the strategies and approaches o f the next phase. The process therefore would allow for continuous adjustment o f the project design, early r i s k identification, and implementation o f corrective measures before expanding to other phases. If the performance triggers are not met, subsequent phases may not take place.

B.2.4. Phase 1 (APL 1) would cover the f i rs t four-year period, supported by an IDA grant o f US$51.0 mi l l ion (subject o f this PAD) and would be implemented in about 1,000 village communities (in about 5 10 GNDs) in two provinces o f U v a and Southem Province. The program would be deepened in Phase 1 provinces by enlargmg the scale o f the proposed activities and focusing o n institutional change in local governments to enable them to become more responsive to citizens’ demands and o n establishing federations and networks. The program would be gradually expanded f rom the southem districts to include a l l the poorest districts o f the country. Phases 2 and 3 (APL 2 and 3) will be initiated independently o f the termination dates o f the previous phase and would cover 800 GNDs and 700 GNDs respectively. Each Phase will begin when readiness criteria for expansion are satisfied. During Phases 2 and 3, the project will also invest in institutional partnerships which will increase the communities’ ability t o bargain and negotiate and to achieve economies o f scale.

B.2.5. Each Phase will focus o n three stages: (i) empowerment o f communities and building o f community organizations i.e. Vil lage Organizations (VOs); (ii) institutional development process, which would include formation and strengthening of federations o f VOs and building accountable and demand

3

responsive local governments; and (iii) forging partnerships between federations of VOs, local government, financial institutions, the private sector, etc.

B.2.6. Moving from Phase 1 (APL 1) to Phase 2 (AF’L 2) will depend on achievement o f the following performance triggers related to the satisfactory implementation o f Phase 1: (i) at least 60% o f VOs in the project villages covered in the f irst two years o f Phase 1 have accessed the Village Development Funds (VDFs) while complying with ru les as described in the COM; and have at least completed one sub-project activity; (ii) at least 30% o f women participate in decision makmg by holding management positions (either as members o f the Board o f Directors or as members o f VOs’ sub-committees) in the f i rs t two years o f Phase 1; (iii) at least 50% o f the members o f the project villages covered have contributed 20% or more toward capital cost of community infrastructure activities; (iv) at least 50% o f the members o f the project villages covered during the first two years of Phase 1 have benefited from project interventions; and at least 60% o f these beneficiaries belong to the poorest households as identified by the Maha Sabha; and (v) at least 25% o f the Divisions covered in the first two years o f Phase 1 have established participatory sub-committees at the PS level with 30% elected representatives and 70% representatives o f community organizations to enhance their capacity for decentralized decision making.

B.2.7. The performance triggers for moving to Phase 3 (APL 3) will be related to policy and horizontal scaling up o f the program. Policy triggers will refer to the establishment o f institutional arrangements for transfer o f resources and delivery of services following the CDD approach. These triggers would be reviewed and agreed during the preparation o f Phase 2 (AF’L 2).

3. Project development objective and key indicators

B.3.1. The overall development .objective o f the 12 year program would be to enable the rural poor to improve their livelihood and quality o f l i fe. The objective o f Phase 1 would be to target poor communities in the Uva and Southern provinces and improve their livelihood and quality o f l i fe. Phase 1 would enable them to build accountable and self-governing local institutions and to manage sustainable investments by: (i) devolving decision making power and resources to community organizations; (ii) strengthening selected local governments that demonstrate responsiveness and accountability to rural communities; and (iii) working with federations of VOs, private sector and Non-Govemmental Organizations (NGOs) on economic empowerment to increase size and diversity o f livelihood.

B.3.2. The key performance indicators to measure the achievements o f the project activities would be the following: (i) number of VOs formed and percentage o f these functioning effectively in priority setting and decision makmg on resource allocation; (ii) percentage o f sub-projects that are implemented and maintained by the communities; (iii) percentage increase in household incomes o f the poor; (iv) percent o f VOs with sustainable savings and credit system at the end o f the project; and (v) an increase in private sector investment in the communities.

4. Project components (refer to Annex 4 and 5)

B.4. The proposed project would include the following five components:

B.4.1. Component I: Village Development (USU6.6 million) - This component will have two sub- components: (i) Development and Strengthening of Village Organizations; and (ii) Funding o f Community Sub-projects. The first sub-component will help develop self-reliant and self-managed people’s organizations for community development and livelihood improvement in rural areas. The activities under the second sub-component would include capacity building, social and community

4

infrastructure, and livelihood support activities. procurement o f goods, training, and other services.

The component will finance village sub-projects,

B.4.2. Component 2: Institutional Strengthening (US$6.0 million) - This component would strengthen capacity o f local and national agencies and support organizations (SOs) to facilitate implementation o f the program effectively and broaden their skil ls, especially in participatory development, as wel l as to develop a monitoring and learning system to capture results on the ground, and respond to the needs and demands o f the community. The component will include introduction o f social and public accountability mechanisms, l ike participatory budgeting, community report cards, social audit and expenditure trackmg to trigger changes in responsiveness and accountability among local govemment institutions and communities. The component will also include a Policy Dialogue sub-component to help policy makers develop policies, rules, systems and institutional arrangements that would allow the government to transfer funds and technical support to communities o n a demand driven basis. The component will finance training, workshops, technical assistance, exposure visits, and goods.

B.4.3. Component 3: Innovation Seed Fund (US$1.5 million) - This component would pi lot innovative ideas that need experimentation, learning and incubation and have the potential for being scaled up and replicated. Some o f the pilots will include technology and product development related to agricultural processing and value addition and information technology in collaboration with other development initiatives l ike E-Lanka, U v a Community Radio and Pradeshiya Sabha Incentive Fund. The component wil l finance goods, training and services.

B.4.4. Component 4: Project Management (US$4.7 million) - The component would facilitate overall coordination and management o f the project at national, provincial and divisional levels. The component will finance goods, works, services and recurrent costs.

B.4.5. Component 5: Village Self-Help Learning Initiative (VSHLI) Pilot (US$l.O million) - The component would complete implementation o f the ongoing p i lo t in Polonnaruwa district. The pi lot was initiated in 2000 under the Mahaweli Rehabilitation and Restructuring Project (MRRP), which closed in December 2003, to test an institutional model that empowers village communities and builds partnership at the local level. The pi lot has successfully demonstrated that given the participatory framework, communities can articulate their needs and priorities and take responsibility for implementing and monitoring village development. The pi lot will n o w test the second stage o f institutional development - federation o f VOs and partnership with private sector. The component would finance village subprojects, goods, training and services.

5. Lessons learned and reflected in the project design

B.5.1. Experience with GOSL's previous work in poverty alleviation and the recent experience with the C D D approach under the pi lot project supported by IDA', as wel l as with several other interventions funded by GOSL, IDA and other donors, have provided extensive lessons and generated beneficiary expectations with regard to sustainable results in poverty alleviation. The proposed program seeks to build on the following lessons: 0

0

Best results on the ground are obtained by listening to the people and enabling them to participate in the design and implementation o f projects based o n self-identified needs and priorities. Experience has shown that the CDD approach can reduce bureaucracy, eliminate administrative bottlenecks and reinforce accountability for project outcomes by placing decision malung closer to beneficiaries.

The proposed program builds on the success of a pilot - Village Self-Help Leaming Initiative (VSHLI) - 2 that GOSL has been implementing with IDA support for the last four years.

5

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6.

Provide direct finance to community groups has shown to improve cost effectiveness o f small infrastructure works, build community confidence and capacity to manage, and increase accountability of service providers to communities. Communities are willing to contribute-in cash and labor-and invest their t ime in managing (including Operation and Maintenance (O&M)) sub-projects when they: (i) see clear benefits; (ii) have a role in managing their own development and controlling and allocating funds for various priorities (accountability and authority are clear); (iii) select the common and basic needs first; and (iv) have full freedom in selecting the technology options and in procuring goods and services. Transparency and proper dissemination of project rules are the two most critical factors for community participation and empowerment. Simple and clear rules o f business need to be widely disseminated and then consistently and transparently enforced. Once the rules are agreed upon, they should be adhered to by a l l parties concemed. Developing effective institutional linkages with the relevant local authorities and assisting capable members o f communities (especially the youth) to develop as “paraprofessionals”, f rom the inception itself, are critical factors for overall project sustainability. Sustainability o f externally financed activities - such as a loan fund - i s enhanced when communities have a strong sense of ownership of the assets and effective guidelines and systems to manage the assets. There should be a simple and user-friendly monitoring and evaluation system that facilitates the subproject evaluation process, provides feedback and al l necessary information to improve targeting and efficiency, and functions as management and planning tool. Intensive supervision of C D D projects i s an indispensable determinant o f success and sustainability. I t needs to be reinforced at a l l levels and involve local agencies that are closest to the communities, particularly PS and Divisional staff.

Alternatives considered and reasons for rejection

B.6.1. In designing the proposed project, various altemative approaches were considered. included the following options:

These

Traditional, centralized approach to implementation using line agencies: Experience with integrated rural poverty reduction projects in Sri Lanka during the past 20 years has demonstrated that more centralized approaches to poverty reduction are not very effective in dispersed rural areas for reasons including: coordination difficulties, sub-projects that did not accurately respond to community needs and poor sustainability. By contrast, the project builds o n a successful community driven pilot, recognized for its effectiveness, transparency and strong performance in building social capital among

.rural communities.

Channeling resources directly to line agencies: Decentralization o f finance and program responsibilities to l ine agencies without building capacity at the community level t o interact effectively with these governments, carries the risk o f merely replicating difficulties associated with centralized decision-making albeit at a lower level.

A program loan to the central government to be passed on to the Provincial Councils: Consideration was given to a single large IDA loan to GOSL to be passed o n to the provincial councils. However, the benefits in terms of demonstrated commitment and ownership o n the part of village communities were judged to outweigh any apparent savings in time and cost o f processing individual provincial loans. Implementation delays resulting from more complex arrangements for transferring funds f rom the central to the provincial level might offset such savings and would certainly undermine the credibility o f the project among the beneficiaries.

6

C. IMPLEMENTATION

1. Partnership arrangements (if applicable)

C. 1.1. N o t applicable

2. Institutional and implementation arrangements

Project Design Elements:

C.2.1. The main strategic choices made in the project design include:

0 Cost Sharing to ensure genuine demand for services and community ownership and commitment.

0 Institutional Reforms and Decentralization to ensure institutional sustainability. Local

The participating communities contribute between 20 to 30% in infrastructure sub-projects and ensure cost effectiveness o f the investments by exploring various possibilities and options.

government would be involved, in a phased manner, to increase their capacity to deliver services and raise revenues.

mechanism would be strengthened by establishing appropriate rules, regulations and systems that would ensure transparency and accountability.

l imited resources among the competing needs and accountability o f local organizations. Each VO would be eligible for a fixed budget envelope based on per capita criteria and funds would be transferred to the communities on achievement o f agreed milestones.

the project. In the case o f savings and loans activities, the community organizations will be responsible for maintaining the value o f the loan fund.

among the communities and other stakeholders.

o f community sub-project proposals have total independence and autonomy to appraise and monitor the project in accordance with the agreed rules.

0 Direct Transfer of Funds to Communities to ensure proper accountability and use o f funds. This

Fixed Budget Envelope and Milestone-Based Disbursement to ensure rational allocation o f 0

0 Devolution of O&M Activities to Communities to ensure the sustainability o f assets created under

Simple and Transparent Rules of Engagement to ensure proper dissemination and understanding

Independence and Autonomy of the “Guardian of Rules” t o ensure that appraisers and approvers

0

0

C.2.2. Project Implementation Process: The project would be implemented according to rules and procedures agreed in the Project Implementation Plan (PIP) and COM. These documents outline roles and responsibilities o f individual agencies and provide details o f project processes and project cycle. The PIP and COM are based on the experiences gained during the implementation o f the V S H L I pi lot and testing o f hands-on learning phase and various preparation workshops, studies and analyses that were carried out as part o f project preparation. The hands-on learning phase, in particular, focused o n validating various assumptions about community participation and ownership, willingness to contribute, partnering capabilities o f local institutions and capacity building efforts required. COM will be subject to periodic reviews conducted jo in t ly by GOSL and IDA, with stakeholders’ participation, to ensure flexibil i ty and to promptly address any constraints to the successful implementation o f the program. Any changes in the PIE’ and COM would require IDA’S pr ior concurrence.

C.2.3, Proposed Implementation Arrangements : The implementation arrangements at various levels are described below:

7

(a) Community Level Arrangements. The proposed institutional arrangements would ensure that communities are in the driving seat in terms o f organizing themselves, priorit izing their investments, allocating resources, preparing subproject proposals, implementing sub projects and maintaining their assets. There would be three levels o f community organizations: (i) Village Assembly or Maha Sabha (MS); (ii) VOs; and (iii) Federation o f VOs.

Village Organization (VOs): Constituted under the Companies Act, VOs comprise the MS, the Board o f Directors, and various sub-committees. VOs will have access to a Village Development Fund to undertake investments in social, economic and community infrastructure. Part o f the Vil lage Development Fund will be allocated to a Loan Fund that will enable villagers to engage in income generation activities o f their own choice. T o be eligible for the Village Developmental Fund, communities must agree to the project rules, and proceed through the “project cycle”. Vil lage communities will receive technical assistance in participatory appraisal, community contracting and financial management to competently manage the developmental funds. All critical decision-mahng power and O&M responsibility will be at the community level. SOs wil l partner with local level agencies and local govemments and will p lay a critical ro le in creating community awareness and ensuring empowerment. Over time, the project would support federations o f VOs to achieve scales o f operations especially in income generating programs and to establish direct partnership with the private and public sectors.

Jb) Divisional Level Arrangements: Divisional Facilitation Teams (DFTs) will be responsible for community facilitation. DFTs will assist communities in planning, implementation, monitoring, analyzing and adjusting the project. Their key role includes promoting and guarding program principles at the divisional level, helping VOs in securing services o f SOs and other service providers, providing technical assistance as and when requested by VOs, reviewing progress o f implementation and helping VOs in removing hindrances to project implementation, and resolving conflicts.

Pradeshiya Sabha (PS) Level: The devolution o f power, responsibilities and funds to a highly committed local government authority i s critical for institutional sustainability and scaling up o f the project. For this purpose, PS level would be involved throughout the program. The project would invest in building their capacity and creating an enabling environment for them to be able to respond to community demands. Their involvement would be achieved gradually, in three stages, as described in Annex 6.

lc) District Level Arrangements: The District Facilitation Team (DrFT) will promote and guard the program principles at the district level. DrFTs will assist in the self selection o f GNDs, prepare a roster o f service providers, provide technical assistance and support, facilitate linkages with private sector, ensure convergence and linkage with other projects, review progress and resolve conflicts at the district level.

(d) National Level Arrangements: An Inter-ministerial Committee and the Gemi D i r i ya Foundation would be the two institutions at the national level. The Inter-ministerial Committee, consisting o f Ministers o f Samurdhi, Rural Economy, Southem Development, and Central Development, will be chaired by the Minister, Samurdhi and will p lay an advisory and oversight role.

Gemi Diriya Foundation (Foundation): This i s an autonomous agency established under the Company’s Act. ’The Board will be chaired by the Secretary, Samurdhi, and will comprise the Secretary Ministry o f Rural Economy (ME) a senior representative o f Planning and Policy Implementation Ministry, a senior representative o f Finance/ERD, two representatives f rom outside the Govemment (such as CDD practioners, private sector, banking sector, etc) whi le the Chief Executive Officer (CEO) would act as the Convener. The Board would review project progress, resolve impediments, sanction annual plans, provide policy reform and strategic support, and act as guardian of project rules. The CEO would

8

be responsible for the day-to-day management o f the project and be accountable to the Board. The Foundation would be responsible for project coordination, monitoring, financial management, procurement, disbursement, and audit. The operational autonomy o f the Foundation would allow the management team to remain flexible and adapt, based o n implementation experience. The staff o f the Foundation will be selected through open competition and be professionally competent. The Foundation will have two Teams: (i) Management Team at the national level; and (ii) Appraisal and Monitoring ( A M ) Team located in each Province. Bo th Teams would be headed by the CEO o f the Foundation. The Management Team at the national level would be responsible for the project information education campaign and promotion, overall coordination and monitoring and evaluation, and would consist o f three units: (a) Vil lage Institutions Unit; (b) Business and Livelihood Development Unit; and (c) Project Management Support Unit. The A&M Team with one f ie ld office in each o f the two provinces will be responsible for institutional and technical appraisal o f the sub-projects and for ensuring compliance with the rules o f the game and good quality o f service provision to communities. The project would devolve powers, responsibilities and funds to local governments by using a gradual approach in three phases (See Annex 6).

Funds Flow Arrangements:

C.2.4. Disbursement Procedures: Disbursements f rom the Grant account would init ially be made o n the transaction-based system (reimbursement with full documentation) and against statements o f expenditure, direct payment and Special Commitment. GOSL may request withdrawals f rom the Grant account to be made on the basis o f reports to be submitted to IDA in form and substance satisfactory to IDA, such reports to include the Financial Management Reports (FMRs) and any other information as IDA shall specify by notice to GOSL (Report-based Disbursements). Annex 7 gives details o n the fund f l ow processes.

C.2.5. A Special Account (SA) would be opened at the Central Bank and would be operated by the Foundation. The authorized allocation o f the Special Account would be US$3.8 mill ion, that represents about four months o f average estimated eligible expenditures f rom the IDA Grant. The Special Account would be operated in accordance with IDA’S operational policies.

C.2.6. Retroactive Financing: GOSL has requested retroactive financing o f US$2.0 m i l l i on to meet the expenditures incurred after August 3 1, 2003, including those that are anticipated upto the Grant signing. The activities to be covered by retroactive financing are consistent with the project’s financing categories as agreed with IDA.

3. Monitoring, Learning and Evaluation of OutcomeslResults:

(2.3.1. Monitoring will have two components. One would deal with pol icy impact and compare performance o f existing systems and procedures with those being tested out in the project and compare i t s impact and cost effectiveness with other governmental welfare programs and service delivery systems. Results o f policy level impact would be continuously shared with decision makers in the Ministry o f Finance and Ministry of Policy Development and Implementation. The second component o f monitoring will deal with project level impacts. A Monitoring, Learning and Evaluation (ML&E) system has been developed under the project, and i s being tested out in 24 pi lot GNDs, with the objective o f generating analytical information o n the project’s progress and performance, and disseminating this information among stakeholders to enable them to effectively address project implementation issues, and revisehefine the implementation approach as needed. The ML&E system will include: (i) monitoring o f project progress and utilization o f village development funds- or inputs, outputs and outcomes; (ii) monitoring o f performance o f project institutions; systems, procedures and processes; and (iii) project impacts. The ML&E system will be established at three different levels - community, divisional and national. The

9

information will f low from community members to the CEO through the divisional coordinator interfacing with divisional secretaries and service providers. As part o f monitoring and learning, six- monthly audits (independent reviews) would be carried out by an external agency to ensure that processes and procedures as agreed are followed. The lessons emerging from the independent audits (reviews) would be disseminated and discussed with the village level institutions, communities, divisional and district teams and SOs, and corrective measures would be taken on a continuous basis.

C.3.2. Social Accountability Mechanisms. The project would promote and set up social accountability mechanisms and systems within and between VO and community and service providers, and between the Foundation and the communities. Among other instruments, report cards will be used to ensure accountability o f VOs, service providers, DFTs and SOs to the communities. The project would promote transparency by openly displaying al l financial and physical information in accessible form. Social Audit Sub-committees (one o f the various VOs’ sub-committees) will use input and expenditure tracking and report cards to develop a culture o f accountability within communities. T h i s information will be used for developing rating system for VOs, and would be scaled up with local govemments after initial piloting.

4. Sustainability

C.4.1. The project will focus on ensuring sustainability o f investments. An effort i s made to create mechanisms to involve al l sections o f the community in the prioritizing o f investments, and in the selection o f technical options based on their affordability and viability. For infrastructure investments, the sustainability analysis would be made part o f the participatory appraisal at the community level to ensure selection o f technical choices that are affordable to the communities and can be managed and operated by the communities themselves. For livelihood support investments, the project would provide technical assistance and exposure to communities to ensure that viable activities are undertaken as business opportunities and that the products and services chosen by the communities have markets.

C.4.2. Strengthening the capacity o f local governments to provide public expenditures and services in a transparent and accountable manner directly to communities and strengthening o f VOs and savings and credit organizations owned by their members w i l l lead to institutional sustainability. Besides, the project will focus on developing a diversified sk i l l base (technical, financial and managerial) including fuflctional leaders and village para-professionals at the community level who would be hired and paid by VOs and other local institutions. The project will also support development o f a network or federated VOs which will support community organizations after the project period and also help them access markets, investments and the private sector.

C.4.3. Contributions by the village community members towards the capital cost and full contribution towards the recurring cost o f maintaining assets would lead to financial sustainability. Also, developing a capital base at the VO level by using contributions and income from credit given to members; encouraging a savings mindset to reach the goal o f sustainable livelihood, and linking savings and credit organizations to banks will lead to financial sustainability.

10

#, Critical risks and possible con

R i s k s

To Project Development Objectives 0 Foundation’s operations and

targeting o f poorest are subject t o polit ical interference

0 DFT at the division and DrFT at the district levels are not committed to the C D D principles o f devolution o f decision-making powers to the communities VOs are weak, have l o w or n o accountability and are unsustainable

0

0 Women may not be permitted to participate in key decisions and in O&M management

T o Component Results

0 Communities do not effectively prioritize their developmental needs

0 Communities may not be willing to share costs

oversial aspects

Risk Mitigation Measures

0 (i) Foundation has a competent CEO and would maintain an independent Board; (ii) continuous monitoring o n the status o f compliance o f the agreed rules o f the business between the Foundation and IDA; (iii) well-defined criteria and a transparent process for selection o f GNDs developed Intensive information and communication campaign o n CDD principles followed by capacity building support to implement C D D approach

0 (i) Resources available for capacity building o f village organizations; (ii) competent service providers would be identified for training and helping communities build strong institutions; (ii the project monitoring system will include mechanisms to develop a culture o f accountabilit within the VOs and the community; (iv) targeted intervention to build “functional leaders (parameters) and raise local resources. Project rules o f inclusion o f at least 30% o f 0 women at a l l levels particularly in decision- malung roles and at least 50% benefits would be closely monitored and gender specific traininglcapacity building provided to ensure the active participation.

0 Information dissemination o f proj ect guidelines and processes. Short negative l i s t o f sub-project that are ineligible for funding. Selection criteria for village communities will include willingness to pay. Good dissemination o f clear benefits o f investments to the communities will be carried out.

0

Risk Rating with

Mitigation

S

M

M

L

L

L

11

Sub-projects not maintained by communities

project appraisal criteria o f sustainability o f investments; and provide technical assistance to communities on O&M.

0 Emphasis on community participation in implementation and maintenance, ensure sub-

0 Inadequate andor untimely flow o f counterpart funds

0 PSs are not committed to the CDD principles and not accountable

and financial management. V- Negligible Risk; L -Low Risk; M- Medium Risk; S - S~bstantial Risk; H - High Risk;

High level GOSL commitment to the project should facilitate timely release o f funds; to service standards o f the Foundation, and local level teams will be monitored. The project would invest in capacity building o f PS functionaries on the ru les o f the game, village development planning, technical service provision

M

M

0 Overall Risk Rating: M

6. Grant conditions None.

C.6.1. Grant Covenants: The following are the main Grant Covenants:

0

0

0

GOSL shall take al l necessary actions to ensure that the Foundation remains responsible for management and coordination o f project activities. GOSL shall ensure the Memorandum and Articles o f Association o f the Foundation shall not be amended, suspended, abrogated, repealed, or waived without IDA’S prior consent. GOSL shall nominate or appoint the CEO, directors, and ordinary members o f the Foundation, with satisfactory and acceptable qualifications and experience, in accordance with the Foundation’s Memorandum and Articles o f Association after prior consultation with IDA.

General Implemen~ation and Project Management 0

0

GOSL and the Foundation shall implement the project in accordance with the PIP, the COM, and the Environmental Management Framework (EMF) as agreed with IDA. The Foundation shall ensure that i t s CEO shall be assisted by suitably qualified and experienced procurement, financial, and operational specialists and other staff in adequate numbers to perform project implementation and monitoring functions. The Foundation shall appoint by September 30,2004, and thereafter maintain during the project implementation period, internal auditors, with qualifications and experience satisfactory and acceptable to IDA. The Foundation shall establish by no later than September 30,2005, and maintain thereafter during the Project implementation period, a satisfactory computerized FMS acceptable to IDA.

0

0

Su b-Projects 0 The Foundation shall ensure that: (i) community sub-projects would be selected and appraised in

accordance with the criteria and procedure specified in the COM; (ii) Grant funds would be released to VOs and PSs implementing the project in a timely manner in accordance with agreed Sub-Grant Agreements; (iii) the Sub-Grant Agreements would be used exclusively to finance goods, works and services required for preparation and approval o f VDP; (iv) each Sub-Grant shall be calculated according to a pre-determined cost-sharing formula as specified in the COM; and (v) goods, works and services shall be procured in accordance with procedures as agreed in COM.

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The Foundation shall prepare by September 30,2004, a long l i s t o f accredited and competent support SOs and service providers in a transparent manner and widely publish the l i s t to VOs and PSs.

Land Use and Acquisition The Foundation shall ensure that there would be no involuntary land acquisition under the project; and the Project shall be implemented as far as reasonably possible o n publicly-owned land; any acquisition o f private land, if needed, would be through outright purchase at market rates or donation and in accordance with guidelines and procedures set forth in the PIP.

Monitoring and Evaluation The Foundation shall prepare an annual plan and budget for implementing the Project for the financial year, not later than October 31 o f each year, starting f rom 2004, and such plan will be finalized not later than December 3 1 , o f that year taking into account IDA’S comments. The Foundation shall carry out an evaluation o f implementation o f the on-going intensive hands-on learning batch o f 24 GNDs, by June 30, 2005; review with IDA the lessons learned; and thereafter incorporate such lessons in the design and implementation o f subsequent batches o f GNDs. The Foundation shall, beginning by December 3 1, 2004, have regular technical, social, environ- mental, and process audits (independent reviews) o f the Project undertaken at six monthly intervals by external independent agencies, share results o f such audits with IDA, and integrate the lessons from such audits by talung corrective measures as may be necessary. The Foundation shall carry out a mid-term review and impact evaluation by September 30,2006, and furnish to IDA the reports.

.

D. APPRAISAL SUMMARY

1. Economic and financial analyses

D. 1.1, The proposed project focuses o n social organization and empowerment, improved local governance, capacity building and community initiated and demanded sub-projects, including income generation and rural infrastructure. Hence, economic opportunities f rom subprojects are but one o f the project’s outputs; the other two being empowered and active groups o f disadvantaged people and their ability to promote more effective, accountable and inclusive local institutions. Due to i t s demand-driven character, the project does not lend itself easily to a detailed ex-ante cost-benefit analysis and rate o f return calculations. I t will be the beneficiaries who ultimately determine the scope and mix o f the investments.

2. Technical

D.2.1. Based on the experience o f VSHLI pilot, the community, economic and social infrastructure would mainly consist o f activities, such as, rural water supply schemes, community and environmental sanitation facilities, water harvesting measures, minor irrigation rehabilitation, community centers, improvement o f inter village roads providing access to link roads and savings and credit facilities. Savings and Loan Guidelines, as part o f the COM, have been developed and will be accompanied by a well-documented accounting system. The community will choose the desired technology and service levels, based on their affordability, with the help o f SOs, divisional teams and technical service providers. A Technical Manual, as part o f the COM, has been developed with various technical options, and standards for viable per unit costs. Guidelines and codes o f conduct to guide the community and facilitation teams have been developed for effective decision malung during the planning and implementation process. DFTs will be responsible for facilitating and ensuring that the communities have access to trained technical service providers to support feasibility, design and implementation o f

13

subprojects. The &M Team would appraise community infrastructure sub-project proposals and ensure their compliance with technical standards and safeguard requirements, economic viabil ity and ease o f operation and management after completion. Adoption o f internationally tested labor based construction technique will be encouraged while implementing the sub-projects. Communities, SOs, divisional teams and A&M Team would supervise the quality o f works under implementation. Social audits by an internal sub-committee as wel l as extemal audits will be carried out every six months to check compliance with procurement process, quality o f material and works and financial management aspects.

3. Fiduciary

Procurement Issues: D.3.1. GOSL prepared guidelines on "Government Tender Procedure" in 1996 (revised in August 1997) under Chapter 13 o f the Financial Regulations. The Guidelines and Rules provide the framework for a l l public procurement in the country including Provincial Councils (PCs), local governments, etc. I t also includes a separate chapter (XIII) for projects assisted by foreign funding agencies (this chapter has been revised in December 2000 and issued as a separate booklet) and has resulted in marked improvements in the transparency o f procurement processes. These Guidelines are n o w being revised to accommodate recommendations following the Country Procurement Assessment Review (CPAR), which was completed in 2003.

D.3.2. Community Procurement: Procurement at the community level will be guided by the Community Participation in Procurement (CPP- Para. 3.15 o f the Procurement Guidelines). The procurement procedures, processes and methods have been developed extensively during the implementation o f the V S H L I pilot. These procedures and guidelines have been further reviewed during the project preparation, and are being tested in the 24 intensive learning GNDs. COM gives detailed procedures, rules and methods o f community procurement. Prior to transferring funds to VOs, community procurement training modules would be developed and the relevant committee members and Board o f Directors would be trained in community procurement.

D.3.3. Other Project Procurement: The Foundation will be responsible for the procurement o f goods and services for the remaining project components, and will comply with the IDA'S procedures as described in the relevant Guidelines. The capacity o f the Foundation core team and district and divisional level staff will need to be improved through procurement training programs both at national and provincial levels.

Financial Management Issues D.3.4. The financial management system proposed for the project i s adequate to meet GOSL and communities' project management needs as wel l as IDA'S fiduciary requirements as per OPBP 10.02. The financial management framework envisages that the project will maintain accounts using standard double entry cash hybrid-accounting systems. The project implementation agencies will prepare monthly/quarterly/annual reports required for project management at the village, district and national levels. The accounting and reporting system wil l be manual in the beginning and wil l move into a computerized environment during the l i f e o f the project. GOSL will, by September 30, 2005, establish and maintain thereafter the computerized Financial Management System (FMS).

D.3.5. The Financial Management Manual along with the Financing Agreements entered into between the Foundation and VOs would include detailed guidelines o n the agreed financial management arrangements. The main challenges to satisfactory financial management o f the project relate to the capacity to maintain quality and robustness o f the systems put in place, whi le scaling up the project. The financial management arrangements have consequently focused on: (i) simplifylng the financial management framework and minimizing the number o f accounting centers; (ii) building the robustness of

14

the appraisal mechanisms for sub-projects; and (iii) ensuring that the project invests substantially in building the capacity of communities in book-keeping and accounting through trainings o f office bearers o f VOs and developing a cadre o f para-professional book-keepers. Important lessons learned from the implementation experiences in other C D D projects in the region and during the implementation o f V S H L I p i lo t have been incorporated into the design o f the FMS. The financial management arrangements would focus o n providing local level transparency, social audit and self-accountability. The institutional framework for the project envisages adequate levels o f staffing for financial management and accounting functions at the national, provincial, district/divisional and village levels (Annex 7).

D.3.6. Audit: The Foundation, in consultation with the Auditor General o f Sri Lanka (AG), wil l appoint an independent firm o f chartered accountants to conduct annual audit o f the project. The audit would cover a l l project operations o f the national and provincial levels, and will also cover the VO accounts o n a sample basis. The selection and appointment o f the private Chartered Accountant (CA) firm will be based o n TOR(s) acceptable to IDA, and the selected firm will need to be acceptable to IDA. The audit report would consist of: (i) financial statements; and (ii) audit opinion confirming: (a) whether the project financial statements have been prepared in accordance with consistently applied Accounting Standards and give a true and fair v iew o f the operations o f the project during the year; and (b) that the withdrawals f rom the IDA Grant made o n the basis o f Statement o f Expenses (SOEs)/FMRs together with the procedures and internal controls involved in their preparation, can be relied on to support the related withdrawals. The auditor wil l be required to provide a letter to project management highlighting findings during the audit. The audit will be conducted as per internationally accepted standards and financial reporting will fo l low the International Public Sector Accounting Standard (IPSAS) standards.

4. Social D.4.1. The project seeks to improve the quality o f l i f e o f the target population through village investments under a C D D approach, thereby increasing the social capital o f rural communities v ia their participation at a l l levels o f the sub-project cycle. Under the project’s participatory approach, the wide inclusion o f a l l potential beneficiaries including women, youth and vulnerable groups, would be ensured through an information campaign designed to create awareness regarding the project’s objectives, rules and guidelines, and how to access project benefits. A gender and youth strategy specifically focusing o n their ro le as decision makers and beneficiaries has been designed and will be implemented during project implementation (Annex 10). The project also includes incentives and’rewards (such as Grants to the Poorest and Incentive Fund) for the VOs to include the poorest and vulnerable members in the project benefits. Strategies to mobilize active participation and inclusion o f the most vulnerable members such as, the landless, widows and female-supported households, and the disabled have been incorporated.

5. Environment D.5.1. The project i s classified as category B as it i s expected to be beneficial f rom an environmental and social perspective as the project investments will be small, very localized, and labor intensive. No significant impacts are expected o n any critical ecosystems or culturally or socially sensitive areas. GOSL carried out an Environmental Assessment (EA) o f possible activities that may be included in the project and a study to assess impact o f human-elephant conflict in the project areas and management options for their mitigation. Considering the demand driven nature o f this project, specific village investments or subprojects cannot be identified during preparation. As part o f the EA, an EMF has been developed, which will serve as a template for ensuring that village investments or subprojects are conducted in an environmentally sound manner. The EMF identifies: (i) tools for screening o f activities at the village level, including a negative l is t that would be excluded f rom project funding; (ii) screening and clearance procedures for village level activities at three levels (village, district and provincial); and (c) capacity building to ensure effective implementation o f the EMF at various levels. All sub-projects will be subject to environmental screening based o n the tools as identified in EMF and referenced in COM. A pest management plan and dam safety p lan have also been developed as part o f the EA. The pest

15

management strategy will attempt to strengthen linkages with existing programs o f the Department o f Agriculture, Provincial Departments o f Agriculture, Divisional Secretaries and NGOs. In terms o f the human-elephant conflict, the project will provide resources and options during village-level planning in the most severely affected areas to reduce and manage the conflict through promotion o f non-agricultural investments, crop protection devices, community patrolling and guarding, ecotourism and pi lot testing o f physical barriers.

D.5.2. Public Consultations: Public consultations were carried out, as part o f the environmental and social assessments, in al l project districts and provinces. Consultations were also held with officials o f the national, provincial, district and divisional level, and NGOs. Detailed consultations were held with 15 households in four villages in each o f the five project districts. The summary o f the draft EA and EMF have been made available at the District Secretariats and other public places for comment and feedback.

6. Safeguard Policies D.6.1. Involuntary land acquisition (OP 4.12): Most o f village sub-project activities need very l itt le or n o land acquisition. Land needed for income generation through private enterprise would be procured at market rates. A detailed Social Assessment (SA) carried out in the project area indicates that minor land needed for up-gradation o f common infrastructure i s already available. Other private facilities do not need involuntary land acquisition. Based on these considerations, OP 4.12 i s not triggered.

D.6.2. Indigenous people (OD 4.20): The SA indicates that the indigenous population (Veddas) i s located in a very l imi ted area o f U v a province and had been already integrated into the mainstream under Mahaweli Development Program. As such OD 4.20 i s not triggered.

Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OP/BP/GP 4.0 1) [XI [I Natural Habitats (OP/BP 4.04) [ I tx1 Pest Management (OP 4.09) [XI [ I Cultural Property (OPN 1 1.03, being revised as OP 4.1 1) [XI Involuntary Resettlement (OPIBP 4.12) [I [XI Indigenous Peoples (OD 4.20, being revised as OP 4. I O ) [XI Forests (OP/BP 4.36) [I [XI Safety o f Dams (OP/BP 4.37) [XI [ I Projects in Disputed Areas (OP/BP/GP 7.60)* [I [XI Projects on International Waterways (OP/BP/GP 7.50) [I [XI

[ I

[I

7. Policy Exceptions and Readiness D.7.1. The project complies with a l l applicable Bank policies and there are n o pol icy exceptions requiring management approval.

D.7.2. The project will be ready for implementation at Board Presentation. Core operational and financial staffing appointments have been made; GOSL has allocated adequate budgetary provisions for the current financial year; a financial management system i s in place; the COM and PIP have been prepared and tested in 24 p i lo t GNDs during the preparation. The first year procurement and implementation plans have been prepared and key process steps and institutional arrangements to start the f irst batch o f GNDs have been agreed. A participatory ML&E system has been put in place and i s being tested in the pilots.

a By supporting the proposed project, IDA does not intend to prejudice the j n a l determination of the parties' claims on the disputed areas

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Annex 1: Country and Sector or Program Background S R I LANKA: Community Development and Livelihood Improvement "Gemi Diriya" Project

Country Profile 1. In the recent past, GOSL has made major efforts to deepen i t s understanding o f the nature and root causes o f poverty in Sri Lanka, with a v iew to reassessing and reformulating i t s policy framework to reduce poverty. As a part o f these efforts, IDA completed two major studies-'Si Lanka: Poverty Assessment" and "Promoting Agncultural and Rural Non-farm Sector Growth". The f irst study concludes that poverty in Sri Lanka i s largely a rural phenomenon. 90% o f those living below poverty level are located in rural areas. 75% o f the total population i s located in rural areas, and 27% o f the rural population lives below poverty level, with the majority being employed in apcul ture. In contrast to the population o f the rural sector, that o f the estate and the urban sector below poverty level accounts for 25% and 12% o f the total respectively. T h e second study highlights a number o f key constraints to the development o f the rural sector, including poor access to critical infrastructure and services, (such as, roads, markets, telecommunications, electricity and banking services), ineffective public sector expenditure programs, poor f low o f information technology, dominance o f public sector as a service provider and underutilization o f private sector interests and initiatives. Despite numerous efforts to reduce poverty, the problem continues to remain high in Sri Lanka with about one-fourth o f the population living below the poverty line. About 7% o f the population l ive o n incomes less than US$1 a day, and 45% l ive under US$2 a day. These estimates do not reflect the poverty status in the north-eastern parts o f the country, where poverty would have worsened due to the on-going c iv i l conflict.

2. The data also suggest the existence o f large regional inequities in poverty incidence with two o f the provinces (Uva and Southern) in the southern part o f country having the highest rural poverty rates in the country. Whi le Sri Lanka has made remarkable progress in the area o f human development over the last decades, regional inequities remain a serious economic and social issue and this may hamper Sr i Lanka's abil ity to meet the Mi l lennium Development Goals (MDG).

Regional Variations in Poverty 3, The latest Household Expenditure and Income Survey (HEIS) data show that at the national level, poverty has increased f rom 20 percent in 1990/91 to 25 percent in 1995/96. The data also suggest that significant regional disparities s t i l l continue to exist despite good macroeconomic performance witnessed during the early 1990s. Except for the Western province, a l l other provinces, including U v a and Southern provinces have experienced a relative worsening o f poverty situation between 1990-96 (Fig 1.1)

Figure 1.1: Incidence o f Poverty by Province, 1985-96

Sources: Datt and Gunewardena (1997) based on 1985/86-1990/91 HEIS: Gunewardena (2000) based on 1995/96 HEIS

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Project Area - Uva and Southern provinces 4. Of the seven provinces for which detailed information on poverty profile i s available, Uva i s the fourth largest one. I t occupies 15% o f the country’s land area and contains 6% o f the total population. Uva province covers Badulla and Moneragala districts and both o f them are entirely rural. In terms o f poverty, Uva shows the highest incidence with about 37% of i t s population below poverty line. Despite the implementation of numerous development programs, Uva province i s continuing to be one o f the most economically backward regions in the country. Mainly due to problems o f accessibility, connectivity, non availability o f quality infrastructure and poor quality o f economic services, Uva i s continuing to be isolated from the rest o f the economy. Production o f primary commodities, mainly seasonal crops and livestock i s the main source of economic sustenance. Access to health and education and other basic services are less than satisfactory. The development o f Uva province i s affected by a number o f economic, and social problems and its overall physical characteristics including hilly terrains, low and long dry spells and absence o f internal road network has accentuated these problems further.

5. The Southern Province, consisting of Hambantota, Matara and Galle districts, shows a significantly high average poverty incidence (27%) along with a high adult illiteracy (11%) with about 60% o f the population having no access to electricity, 35% with no access to safe water and 20% having no access to safe sanitation. However, in terms o f district-wise distribution o f poverty and related indicators, the Southern Province shows a remarkable disparity between districts. Among the three districts, Hambantota i s the most affected by poverty and related problems. It i s located in the arid zone and endowed with the lowest rainfall in the country and hence subject to frequent and prolonged droughts and chronic water shortages. Access to water for drinking and irrigation i s a critical problem, Almost al l o f Hambantota’s population (97%) i s rural and the population i s primarily dependent on production o f seasonal crops and livestock as their main source o f economic sustenance. In addition, Hambantota district also shows a high degree o f economic isolation from the rest o f the country due to remoteness from main markets, poor quality of infrastructure and service provision, poor equity and inclusion. In contrast to Hambantota, the other two districts in the Southern Province (Matara and Galle) are generally endowed with relatively better climatic and other factors. However, in the isolated pockets o f the hinterlands, poverty i s generally rampant. The coastal areas, being closer to main markets and the cities, are better served with infrash-ucture and service facilities.

6. The average monthly income of the project area i s Rs. 5381 or about US$54 (Table 1.1). The income distribution shows a substantial variation across the districts. About 50% the population in the project area lives below poverty l ine (less than US$1 per day).

Table 1.1 Average Household Income in the Project Area

District Avg. Monthly Income (Rs)

Uva Province: Badulla 4634 (US$47) Moneragala 5840 (US$59)

Hambantota 5878 (US$59) Matara 7017 KJS$71)

Southern Province

Galle 5024 (usrssij Source: SLIS: 1999-2000

Developmental Program in the Project Area 7. With a view to improve the livelihoods o f the rural poor in the Uva and Southern provinces, GOSL in the past has provided significant amounts o f funds for implementing a large number of development programs (Table 1.2).

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Table 1.2 Average Annual Public Expenditures for Uva and Southern Provinces 1998-2002

Badulla 588 1,196 Moneragala 1,095 1,815

Sub Total 1,683 3,011 Total 5,580 6,429

Total

1,784 2,910 4,694 15,009

Source: District Secretary office records

8. The analysis o f the total public expenditure incurred during the period 1998-2002 (Table 1.2) for the two provinces for recurrent and capital costs per year averages to about Rs.15 bil l ion. The overall expenditure program i s dominated by agriculture (24%) and the transport (23%) sector. About 45% o f the total expenditure in agriculture was aimed at rehabilitating minor and major irrigation schemes. Social infrastructure provision and improvement accounted for only 15% o f the total public expenditure.

9. GOSL i s also implementing a major welfare and service delivery program, called Samurdhi and in 2002, i s reported to have spent about Rs. 1.6 b i l l ion o n this program (Table 1.3). The program covers a wide range o f sectors including health, education, agriculture, and infrastructure. Despite the channelling of significant amount o f resources, the total number o f Samurdhi recipients in the two provinces during 1998- 2002 has seen only a marginal decline o f 3.4%. In other words, only 14,049 persons (out o f total o f 41 1,776) have benefited and weaned out o f the program. Data relating to the overall physical quality o f life o f the poor in both these provinces confirm that l ivelihood standards among the poor have not experienced appreciable improvements.

Table 1.3 Expenditure Incurred for Samurdhi Program in Uva and Southern provinces, 2003

Source :Ministry of Samurdhi

10. Despite government spending such significant amount o f resources, poverty levels in these two provinces remain virtually unchanged. The non-responsiveness o f the public expenditure programs and their lack o f cost-effectiveness i s a major cause o f concern among key pol icy planners and implementers in Sri Lanka. The volume o f resources currently available to these two provinces i s considerable, and yet, a large share o f resources available under these programs either does not reach the poor, or i s directed to activities that are not among the highest priorities o f the poor, or i s not delivered in a cost effective

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manner. Faced with these challenges, and recognizing the need to try innovative solutions to rural poverty, GOSL has taken a policy decision to address poverty in the country using the CDD approach.

11. Evidence from VSHLI pilot and from international experience shows that CDD i s an effective mechanism to make poverty reduction efforts more de