Countries and Regions

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p. 4 of 7 BACK | NEXT Executive Summary I. Current Development Trends and Issues II. The Government's Development Strategy III. ADB’s Development Experience IV. ADB's Strategy V. ADB's Assistance Program VI.Risks and Performance Monitoring and Evaluation

Country Strategy and Program 2004-2008: Sri Lanka

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III. ADB’s Development Experience

A. Impact of Past Assistance

43. From 1990 through 2002, Sri Lanka received 52 loans, 47 from Asian Development Fund (ADF) resources and five from ordinary capital resources (OCR). Of these, 18 ADF and two OCR loans were for agriculture and natural resources, or 25.8% of the total of $1,998 million approved for Sri Lanka in the period (including $151 million from OCR) reflecting economic diversification in the country. The share of industry and finance (including private sector development) was 21.7%; that of social infrastructure 18.9%; that of transport and communications (especially of roads after 1997) 18.2%; and that of energy 15.4%.

44. Moreover, reflecting ADB’s concern for policy and institutional reform, four program loans (in finance, agriculture, private sector development, and energy), one sector development program loan to SMEs, and eight sector loans (three in energy, two in urban development, and one each in water supply and sanitation, forestry, and fisheries) were approved. In addition, more emphasis is placed on investment-cum-policy-reform projects than on physical investment projects alone.

45. In keeping with such trends, the 1998 country operational strategy (COS) aimed to accelerate the process of structural transformation and its reliance on the private sector to identify and pursue growth opportunities; and to improve the targeting of social programs and the preservation of natural resources to ensure that growth was sustainable and translated into overall welfare and a better quality of life for all. Thus, its strategic focus was to assist in the process of structural transformation through: (i) support for policy and institutional reforms that would support an environment favorable to private sector-led growth, improved public/private dialogue, and a more focused role for the private sector in the economy; (ii) focused support for human resources development to address the need for marketable skills and attitudes, thereby improving employment and earning opportunities; (iii) targeted enhancements of the infrastructure endowment, with emphasis on the promotion of private sector participation in the provision of infrastructure and physical and institutional development of secondary towns outside Colombo; (iii) improved management of the natural resource base to ensure long-term sustainability; and (iv) mitigation of the social costs and environmental impacts related to the transition process.

46. It is difficult to quantify the overall impact of ADB operations in Sri Lanka. First, in terms of promoting growth, ADB annual assistance, though substantial in terms of the annual national development budget (equivalent to over 20%), remains very small relative to the size of the Sri Lankan economy.¹⁴ Second, assessing ADB’s impact on reducing poverty is rendered difficult by the earlier scarcity of numerical targets in appraisal reports and, in any event, by the lack of adequate disaggregated poverty data against which to judge them. However, given that the capital contributions to development projects from domestic government revenue are severely limited, the capital budget for development projects is largely financed by external assistance. This renders ADB (and other) funding of critical importance to Sri Lankan development.

47. However, it is clear that the potential impact of external loans—particularly those of the pre-1990 period—has been diluted by the characteristically weak managerial, implementing, or financial capabilities of the agencies executing them, and by the many wider distortions inherent in input and output pricing policies, procurement policies, business regulations, nationalization, land tenure, local currency scarcity, public sector inefficiency, etc. This policy regime has probably had as much harmful effect on the impact and dispersal of individual project benefits as it has had on the returns to domestic investment generally. Since 1990, on the other hand, ADB’s growing support for policy and institutional reform has had more beneficial and longer-lasting impact. The Government’s new strategy is partly a reflection of the course set by such influences particularly to strengthen project impact by addressing past deficiencies.

48. ADB's assistance can be shown to have had a positive impact, both in terms of the physical products of past projects and in terms of policy and institutional reforms they have generated. In recent years, for example, projects in energy, road, water supply and sanitation, and education have succeeded in meeting their physical implementation targets. ADB’s efforts to address structural issues in projects in plantation, power, SMEs and private sector development, roads, and distance education have led to major reforms to improve sector efficiency, including privatization of the plantation companies; measures to unbundle the power sector agencies; changes to the legislative and regulatory framework to promote private sector activities; encouraging local contracting in road rehabilitation and maintenance; developing public-private partnership in road construction and distance education; and improving public expenditure management. ADB, by and large, managed to implement some major reforms, although there were instances of the Government backtracking for political reasons, e.g., fertilizer subsidies eliminated under the ADB-financed Agriculture Inputs Program were brought back soon after the completion of the program in 1990.

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B. Portfolio Performance and Status

49. Portfolio performance has generally been weak. Of the net loan amount of $1.4 billion for 36 ongoing public sector loans as of 30 June 2003, $941 million or 66% remained undisbursed. As of 30 June 2003, 2 project loans had delays of nearly 40%, 1 with delays of more than 20%, and another 11 projects had delays of over 10%. Key indicators of portfolio performance include implementation progress, disbursement performance, contract award performance, and compliance with loan covenants. Many projects have suffered from implementation delay at the outset due to the excessive time taken to satisfy conditions for loan effectiveness. Although the lengthy process of securing legal opinion from the Government often delays effectiveness, most delays result from a failure to meet project-specific conditions. There is generally a lack of aggressive action by agencies to ensure that these conditions are met in a timely manner. Belated effectiveness typically translates into the need to extend the loan period at a later stage.

50. Physical implementation is directly linked to contract awards and disbursements. While contract awards and disbursements reached projections for 2002, primarily due to $66.5 million disbursed for program loans, performance is still less than satisfactory. Considering project loans alone, contract awards totaled only $93 million in 2002, against projections of $125 million. The contract award ratio for project loans of 13.7%—significantly below the ADB-wide average of 17.9%—reflects the lengthy procurement process. Although the Government has introduced new, streamlined tender procedures, significant delays in awarding contracts persist.

51. Disbursements for project loans in 2002, for example, reached $82.4 million, roughly 93% of projections. The disbursement ratio (excluding program loans) was a very low 11.9%. The disbursement ratio including program loans was noticeably higher, at 17.6%, but still below the ADB-wide average of 22.2%. Accordingly, implementation performance, particularly for project loans, is quite poor and projects take longer than necessary—over 8 years—to implement. Interim disbursement projections are set too low and do not reflect this.

52. With the establishment of the pool accounting system in the Treasury, shortages of counterpart funds or their delayed release have not affected recent project implementation, although insufficient counterpart funds did hamper project implementation in 2001 and in the years before. Despite this improvement, most projects still suffer from delay—some by nearly 40%—but if projects were implemented on schedule, demand for counterpart funds would increase and, without appropriate budgeting, this could again result in shortages.

53. Thus, delayed loan effectiveness, slow project progress, and poor contract award and disbursement performance all contribute to slow implementation and unnecessary delay, which ultimately result in higher project costs and late, probably reduced, project impact. The ADB resident mission in Colombo has implemented additional measures to enhance project implementation in Sri Lanka. Apart from the annual country portfolio review exercise during which an action plan to improve project performance is agreed between ADB and the Government, a monthly meeting with all project directors is organized to review the progress of the action plan as well as to address and resolve project implementation issues as they arise.

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C. Conclusions and Lessons for the CSP

54. In terms of ADB’s sector classification, the current program as of end June 2003 covered five sectors but, in reality, it covered 12: agriculture and rural development, natural resources, energy, private sector development, roads, ports, SMEs, credit, education, water supply and sanitation, urban development, and urban housing.¹⁵ The ongoing technical assistance program covered 41 projects (18 of them project preparatory technical assistances) for $28.6 million, also exhibiting a wide sector spread. Intuitively, 12 sectors for 36 ongoing loan projects seem a little excessive. Having greater sector concentration in the country program would build more trust between ADB and the executing agencies concerned as repeat assistance is provided over time, and also provide ADB with greater influence to trigger policy and institutional reform. As stated above, this has made the most impact in the past, with repeat assistance, for example, in the plantation, power, and road sectors being an important source of key sector reforms and longer-lasting sector impact.

55. In addition, the major deficiencies in project implementation must be addressed, in order to improve the overall performance of the Sri Lanka project portfolio. Portfolio performance will have a direct impact on the future assistance program in Sri Lanka due to ADB’s performance-based allocation of ADF resources to all its developing member countries. The Government is acutely aware of the problem, both because poor implementation impacts its development vision, and because essential external agency funding will decrease if the problem is not effectively addressed. Several committees and measures have been introduced to strengthen aid utilization generally, with close involvement of the major external agencies. A review with the Government of all projects is being made—particularly those with implementation delays of more than 20%—for a possible reallocation of those funds that are not likely to be utilized in the remaining project period. These funds could then be considered for more effective uses, either to finance specific solutions to particular project delays or to finance other national priorities, including post-conflict reconstruction.

56. As of 30 June 2003, the project disbursement record by sector varied significantly (Table 3). The undisbursed amount of ADF resources associated with slow projects represents an unnecessary waste of increasingly scarce ADF funds. Moreover, ongoing assistance will help establish the necessary policy and institutional environment as well as strengthen implementation capacity. New projects will be considered on the basis of these improvements.

57. ADB has a large ongoing portfolio in natural resources, covering forestry, protected area and upper watershed management, and water, coastal, and aquatic resources. Similar to other sectors, this portfolio has encountered delays in loan effectiveness, recruitment, and other implementation problems. More fundamental issues have related to delays in policy and institutional reforms, which have been prominent in ADB's lending for natural resources management.¹⁶ Natural resources projects are inherently complex, as they create a nexus between common property resources, poor rural communities, and, in many cases, entrenched public institutions that have traditionally managed natural resources through command and control in a fashion that fails to integrate the interests of multiple resource users. Sound natural resources and environmental management with strong community participation will be of enduring importance, both for long-run development and for sustained rural and urban poverty reduction in Sri Lanka, which ADB is committed to supporting. However, to allow time for the consolidation of the reforms and institutional capacity building supported under the ongoing portfolio, the CSP plans no new lending for natural resources management. During annual reviews of the CSP, new projects may be considered based on the consolidation of reforms and, as in other sectors, improvements in portfolio performance.

58. To combat project implementation deficiencies more broadly, and aside from identifying and reallocating loan savings from poorly performing loans, greater use of sector and sector development program loans will be considered. They would provide more flexibility to the process of project execution, and would allow greater attention to be paid to potential policy and institutional obstacles prior to, or alongside, the physical investments. At the same time, up-front project activities—such as environmental clearances, land acquisition, and resettlement—need to be completed before the investment loan is contracted, because it is often these kinds of activities that delay the disbursements of approved investment loans. In appropriate sectors, for example roads, ADB will facilitate this process by providing technical assistance loans to prepare a shelf of projects, followed by investment loans to improve and strengthen linkages between project planning and implementation. In addition, the Government has placed high priority to improve aid utilization and project performance. Measures are being undertaken to reorganize its project planning and monitoring activities through the establishment of a new development agency with private sector representation. ADB will provide necessary support and assistance to further these initiatives once they are finalized.

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