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Countries and Regions Country Partnership Strategies Document
II. Implementation of the Country Strategy and ProgramA. Progress under the Poverty Reduction Partnership Agreement9. A poverty reduction partnership agreement (PRPA) between the Government and ADB was signed in Colombo on 8 March 2002. The poverty indicators are in Appendix 1, Table A1.2. The PRPA is fully consistent with the Government’s poverty reduction strategy as well as the relief, rehabilitation, and reconciliation framework. Since the PRPA was signed only in March 2002, it is too early to assess the progress of the identified indicators and targets. The Government has strengthened the monitoring mechanism with stakeholder participation to regularly observe the progress and achievement of indicators and targets for priority areas under the poverty reduction strategy. The Government and ADB agree that the impact of ADB’s assistance on poverty reduction in Sri Lanka would be stronger if policy and institutional reforms improved the economic and sector investment environment. The ongoing ADB assistance is thus supporting a wide-ranging reform agenda. B. Progress in the Country Strategy and Program Focus Areas10. ADB assistance continues to emphasize a sector development approach, which has helped strengthen the sector policy and institutional environment. This approach will, however, be reassessed in the course of preparing the next CSP. 11. The Government agreed that ADB would progressively assess specific investment opportunities in public sector projects that would invigorate, strengthen, and speed up private sector development. ADB’s Private Sector Operations Department remains focused primarily on infrastructure projects in sectors that complement ADB's public sector operations and where ADB involvement can help to mobilize commercial financing. 1. Agriculture and Natural Resources12. ADB assistance in the agriculture sector focused on tree crops grown by plantations and smallholders. Progress was made in policy and institutional reforms, particularly the removal of export taxes, elimination of restrictive export regulations, elimination of restrictive labor practices, and the commercialization and privatization of state enterprises. In ADB’s support to rural development in the southern region, mechanisms were formulated to encourage the private sector to lead rural development, with the Government limited to being an enabler or facilitator. ADB will provide assistance through Japan Fund for Poverty Reduction (JFPR) in 2002 to establish an innovative maintenance system for rural infrastructure in the northwestern province. 13. ADB assistance aimed to enhance forests’ protection of the soil, water, and biodiversity; and to promote cost-effective and sustainable harvesting of natural and plantation forests by involving affected communities in formulating and implementing forestry development activities. In coastal zone management, ADB helped strengthen sector institutions, rehabilitate coastal habitats and beaches, reduce erosion-prone areas, and improve fish-breeding habitats and fisheries management to create income-generating opportunities for impoverished coastal people. ADB is pursuing livelihood development for coastal communities to be financed by JFPR in 2002. Continuous support is being built up along the eastern coast in the eastern province coastal community development project proposed for 2003. The proposed PPTA on river basin management project in 2005 will further this process and the development of integrated basin management systems. ADB also helped the Government strengthen its new institutional framework, formulate comprehensive water resource management, and facilitate agency restructuring in the water sector. ADB’s future assistance in the environmental and natural resource sector (the sustainable ecomanagement project, standby for 2004) will also focus on land resource management. To commercialize agriculture, an economic, thematic and sector work (ETSW) technical assistance (TA) on commercialization of agriculture is planned for 2004 to review international best practices and identify possible ADB interventions to improve commercialization in various subsectors in agriculture. 2. Energy14. To improve the financial viability and management of energy companies, ADB assistance has helped implement a transparent automatic price adjustment formula in the petroleum sector and develop a restructuring plan in the power sector. ADB is supporting the unbundling of the state-owned Ceylon Electricity Board into two hydropower generation companies; one thermal generation company; one transmission company with two separate divisions for transmission and bulk power purchase and sales; and four distribution companies. All the companies are to be regulated by an independent power sector regulator. The reforms will ensure adequate supply of electricity at the lowest sustainable price, particularly in rural areas. ADB is also supporting a power fund for the poorest to be financed under JFPR in 2002. Subject to the satisfactory progress of reform, ADB will continue its assistance by financing the rural electrification project in 2005 to help the Government meet its rural electrification target of 70% by 2007. The Government is also pursuing restructuring in the petroleum sector under a proposed ADB institutional development (ID) TA in 2002. An ETSW TA to draw up an energy sector master plan is to be prepared for 2003 to analyze all energy subsectors (power, petroleum, renewable energy, etc.) and their interlinkages to identify the policy, institutional, and investment requirements of a medium-term development framework. 3. Private Sector Development—Industry and Finance15. ADB has supported policy reform and creation of a favorable environment for the development of the private sector, particularly small and medium enterprises (SMEs). ADB has helped privatize the National Development Bank of Sri Lanka and introduce private sector management to estates through management contracts. While progress has been made, reform is still not complete and several vestiges of the command economy remain. The following still have to be completed: (i) ADB’s ongoing program for private sector development; (ii) the newly approved SME Sector Program and the proposed private sector development subprogram II to help the Government eliminate distortions arising from regulatory barriers and specific privileges accorded to SOEs; (iii) privatization and restructuring of SOEs; (iv) relaxation of labor market rigidities to accelerate private investment and raise industrial productivity; and (v) the promotion of greater competition and freer entry and exit. A project preparatory (PP) TA on SME development is planned in 2005 to build on the progress and achievements of the ongoing sector program. ADB assistance will improve the rural population’s access to a broad spectrum of efficient financial services such as safe and reliable deposit service facilities and insurance services apart from credit. To this end, the proposed rural finance sector development project in 2003 is expected to enhance continuous access of the poor to sustainable financial services and help a wide spectrum of financial institutions, including nongovernment organizations, to provide these services in response to market demand. 4. Social Sectors16. ADB’s role in the urban sector is that of a sectoral “agent for change,” and is not investment oriented or geographically specific. ADB assistance has helped (i) develop an urban land management system; (ii) strengthen local urban institutions in technical, financial, and management aspects; (iii) improve access to housing for low-income groups; and (iv) develop 5 adequate infrastructure and services in urban areas outside Colombo. ADB will continue to support the Government in urban planning and development, particularly to relieve the pressure on the urban centers and connecting them with the rural population, under a proposed PPTA for regional infrastructure development in 2004. 17. ADB assistance has aimed to provide water supply and sewerage infrastructure to stimulate economic activity and to ensure that growth is not impeded by infrastructure bottlenecks. These efforts focus on improving access of the poor to these facilities, particularly outside Colombo and the western region, through community-based operations. Ongoing reform measures cover (i) operation and maintenance cost; (ii) private sector participation to supplement public investments in selected urban areas; and (iii) establishment of a regulatory body to, among other things, regulate private sector participation. Subject to the satisfactory progress in pursuing policy and institutional reform measures, ADB will assist the proposed secondary towns water supply and sanitation project in 2003 (standby for 2002) and a proposed PPTA for the greater Colombo sewerage system project in 2004. The scope of the first proposed project will include areas in the north and east as peace progresses. 18. In education, ADB has supported secondary and postsecondary education, complementing the efforts of the World Bank and other agencies, which have focused on providing primary and lower secondary school education. ADB assistance has provided the poor with greater access to quality schools and/or teaching. Ongoing assistance has also provided more opportunities for all pupils from grade 10 on to meet the demands of the labor market. ADB will continue to support the Government’s reform initiatives to improve access and quality, particularly in rural and conflict-affected areas, and to help reduce poverty and promote social cohesion under the proposed postsecondary education modernization project in 2003 (standby for 2002). The proposed secondary education computerization project in 2004 will help extend educational opportunities to youth and reduce inequalities between students of full and limited curriculum schools, improving quality through improved curriculum relevance, teaching and educational management, and resource provision. In higher education, ADB will support reforms to (i) develop employable skills for private sector employment, (ii) provide career guidance for students, (iii) partially recover costs and regulate private education to improve its quality and sustainability, (iv) expand tertiary education, and (v) improve administration and management under a proposed skills development project in 2005. 5. Transport19. ADB assistance has identified inefficiency in the road sector, including inadequate maintenance, which was linked to lack of capacity and competition, and cumbersome procedures. ADB helped the Government prepare a sector development framework, which includes medium-term sector reforms to improve sector performance.5 The framework includes (i) reengineering road sector institutions; (ii) promoting private sector participation; (iii) improving passenger transport services including the regulatory framework; and (iv) supporting priority investments in roads and road safety. 20. The Government is committed to these reform measures and has (i) prepared reengineering plans to be approved by the Cabinet and be incorporated in the national road policy and (ii) agreed to assign an increasing proportion of road works to the domestic private sector. The framework serves as a roadmap for ADB operations in the sector. Subsequent interventions will be contingent upon satisfactory progress of successive reform milestones. Indicative interventions were identified, including proposed investments for road sector development (with an ETSW TA for passenger transport service improvement) in 2002 and primary road development in 2004. Two PPTAs are tentatively programmed for tollway public-private partnership in 2004 and north east road improvement in 2005. 21. The port subsector is a key link in the development of trade and competitive industries for Sri Lanka. As an island state, it relies on Colombo port for its international trade links. It is principally a transshipment port, with only 30% of containers for domestic trade. The advantages brought by large vessels calling on Colombo port are carried over to domestic trade and, hence, to the economy in general, in the form of lower transport costs. This cost advantage helps to generate trade and productive opportunities for the poor. Depending on the outcomes of the feasibility study financed under an ADB TA loan, a proposed ordinary capital resources (OCR) lending for the Colombo south harbor development project is programmed in 2005 with substantial cofinancing requirement. 6. Governance22. ADB continues to help the Government strengthen public administration. Following the ongoing assistance to prepare the national resettlement policy, an IDTA is planned for implementing the national resettlement policy in 2003 through training, particularly to establish the capacity and mechanism for implementation through local universities and institutes with in-house expertise. 23. To effectively implement the tax administration reform measures, including the modernization of the Revenue Authority as outlined in the budget, and the recommendations of the ongoing TA on Public Expenditure Management System, a proposed loan for a public sector resource management project is included in the program period. ADB will work closely with the International Monetary Fund (IMF) to formulate the intervention, particularly to draw on its international expertise in tax legislation and administration, and continual dialogue with it under its standby arrangement6 reviews in these areas. B. Highlights in Coordination of External Funding and Partnership Arrangements24. Germany, the Netherlands, and the Organization of Petroleum Exporting Countries (OPEC) Fund for International Development have provided $12 million cofinancing in two out of four ADB projects approved in 2001. Commercial cofinancing of up to $90 million supported by ADB’s partial credit guarantee was also mobilized to partly finance the lines of credit under the SME Sector Program. The United Kingdom will support the ongoing ADB project in the north and east by financing an implementation expert based in the Sri Lanka Resident Mission. Close coordination with the World Bank and IMF will continue, particularly in helping the Government implement the poverty reduction strategy, develop the private sector and SME, and improve public sector resource management. ADB will continue to pursue official cofinancing opportunities (particularly from grant and concessional sources) for public sector projects and commercial cofinancing opportunities (including the use of guarantees) for commercially viable private and public sector projects. A development coordination matrix summarizing the current strategies and activities of ADB and its development partners is in Appendix 1, Table A1.5. 25. A local development forum, led by the Government, was held in Colombo on 5–6 June 2002. ADB was represented among 40 funding agencies and local delegations. Two documents were distributed for discussion: “Connecting to Growth: Sri Lanka’s Poverty Reduction Strategy,” which will form the basis for a poverty reduction strategy paper to be considered by the World Bank and IMF; and “National Framework for Relief, Rehabilitation, and Reconstruction.” The consensus was that the documents are well prepared, reflecting necessary actions and elements for sustained development in Sri Lanka. The forum participants also greatly appreciated the participatory process of preparing these documents. The representatives complimented the Government’s commitment to reform measures and the progress in the peace process. However, the representatives noted that efforts to improve project implementation must be expedited and necessary policy measures pursued to achieve the goals and targets identified in the documents. The next development forum is scheduled for 15-17 December 2002 in Paris. ____________________
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