The World Bank Integrated Rural Development and Climate Resilience Program Series of Projects 1 (P505241) @#&OPS~Doctype~OPS^blank@pidaprcoverpage#doctemplate Project Information Document (PID) Appraisal Stage | Date Prepared/Updated: 22-Jan-2025 | Report No: PIDIA00835 The World Bank Integrated Rural Development and Climate Resilience Program Series of Projects 1 (P505241) @#&OPS~Doctype~OPS^dynamics@pidaprbasicinformation#doctemplate BASIC INFORMATION A. Basic Project Data Project Beneficiary(ies) Region Operation ID Operation Name Integrated Rural Development and Climate Sri Lanka SOUTH ASIA P505241 Resilience Program Series of Projects 1 Financing Instrument Estimated Appraisal Date Estimated Approval Date Practice Area (Lead) Investment Project 15-Jan-2025 10-Apr-2025 Agriculture and Food Financing (IPF) Borrower(s) Implementing Agency Ministry of Agriculture, Ministry of Finance Livestock, Land and Irrigation Proposed Development Objective(s) The Project Development Objective is to increase productivity, market access, and climate resilience of agri-food producers in selected areas. Components Promotion of Climate-Smart Production, Value Addition, and Inclusive Access to Markets Integrated Management of Natural Resources for Climate Resilience Strengthening the Enabling Environment for Sectoral Growth Project Management, Monitoring and Learning Contingent Emergency Response Component @#&OPS~Doctype~OPS^dynamics@pidprojectfinancing#doctemplate PROJECT FINANCING DATA (US$, Millions) Maximizing Finance for Development Is this an MFD-Enabling Project (MFD-EP)? Yes Is this project Private Capital Enabling (PCE)? No SUMMARY Total Operation Cost 120.00 Page 1 The World Bank Integrated Rural Development and Climate Resilience Program Series of Projects 1 (P505241) Total Financing 100.00 of which IBRD/IDA 100.00 Financing Gap 20.00 DETAILS World Bank Group Financing International Development Association (IDA) 100.00 IDA Credit 100.00 @#&OPS~Doctype~OPS^dynamics@envsocriskdecision#doctemplate Environmental And Social Risk Classification Substantial Decision The review did authorize the team to appraise and negotiate Other Decision (as needed) B. Introduction and Context Country Context 1. Sri Lanka has regained stability and a path to growth following a severe economic crisis in 2022-2023, triggered by years of fiscal mismanagement, governance failures, and external shocks. The crisis, marked by debt default, soaring inflation, and sharp increases in poverty, saw extreme poverty rise from less than 1% in 2019 to over 5% in 2023. Structural reforms, including cost-reflective utility pricing, revenue measures, and prudent monetary policy, have stabilized external and fiscal balances, moderated inflation, and supported economic recovery. However, household budgets remain strained, with persistent risks of food insecurity and malnutrition linked to climate vulnerabilities and high cost of a nutritious diet, job losses, and a decline in female labor force participation, all of which have worsened human capital outcomes. 2. Sustained medium- to long-term growth requires greater private investment, higher exports, and productivity growth. Sri Lanka’s untapped export potential, estimated at $10 billion annually, could create over 140,000 jobs if structural reforms are implemented. Diversifying exports in manufacturing, services, and agriculture, alongside liberalized Page 2 The World Bank Integrated Rural Development and Climate Resilience Program Series of Projects 1 (P505241) trade and an improved investment climate, can enhance competitiveness. Leveraging the co untry’s strategic location, skilled workforce, and capacity in high-value sectors like agri-business and sustainable tourism offers a pathway to inclusive growth, addressing critical issues such as food security and labor market recovery. Addressing climate change impacts, including rising temperatures and extreme weather events, will also be critical to ensuring long-term resilience and sustainability. Sectoral and Institutional Context 3. The development of a modern and commercially diversified agri-food sector is a crucial part of the Government’s strategy for economic recovery and for bringing prosperity to rural areas. The agriculture sector is crucial for Sri Lanka's economy, employing a significant portion of the rural population and contributing 6.9% to GDP. It also supplies raw materials to the food and beverage manufacturing sectors, which account for around 26% of GDP. Sri Lanka’s agricultural sector is characterized by plantation (mainly tea, rubber, coconut, plus cinnamon and other spices) and food crops (mainly rice, maize, fruits, vegetables, and other crops) sub-sectors that are dominated by smallholder producers. The plantation sector especially tea, rubber and coconut earn foreign exchange to the country; before the economic crisis, the agri-food and fisheries accounted for 23 percent of total annual merchandise exports (2012-2022).1 However, of the country’s approximately 2.3 million hectares of agricultural land, 80 percent are used for non-plantation food crops. About 1.65 million smallholder farmers operate on less than 2.0 hectares of land and contribute 80 percent of total annual food production. The smallholder contribution, despite a declining share in GDP, remains the backbone of the agricultural sector and an important source of employment. Sri Lanka is beginning to realize benefits from a modernized agri-food system and private sector activity with the potential to help drive growth and exports. 4. Several constraints contribute to slow growth and competitiveness of the agriculture sector in Sri Lanka. On- farm productivity is low, especially among smallholders, notably because of: (i) land fragmentation and limited use of farmer aggregation models that result in poor economies of scale;2 (ii) limited adoption of good production practices and integrated land use because of low knowledge at the grassroots level3 (iii) high dependence on rainfed irrigation, with susceptibility to climate change; and (iv) lack of diversification into high value crops, due, in part, to land use restrictions and a focus on paddy cultivation. Off-farm value addition and commercialization are constrained by: (i) inefficient post- harvest practices, including problems with farm-to-market transport and storage among other factors; (ii) institutional fragmentation with weak linkages between quality assurance and certification agencies that lead to delays in delivery and post-harvest losses; (iii) limited agri-processing and integration to markets, especially to export-oriented markets; and (iv) frequent changes in policies that undermine private investments. Post-harvest losses in Sri Lanka for fruits are estimated at 30-40 percent, and 20-40 percent for vegetables, due to poor post-harvest handling and gaps in cool chain practices.4 5. Key constraints to the private sector's expansion of agribusiness in Sri Lanka include limited access to financing, inadequate infrastructure, and fragmented institutions and regulatory processes. Many small and medium-sized enterprises (SMEs) struggle to secure affordable credit, hindering investment in modern and/or climate smart technologies and scaling operations. Banks cite poor quality of business plans and cash forecasts, as well as risk of losses as key constraints to expanding credit in the sector. Lack of familiarity of formal financial institutions with assessing 1 UNCOMTRADE mirror data 2 Farmer organizations such as Producer Groups (PGs) and Farmer Companies (FC) have been established under various project interventions in Sri Lanka with a view to accelerating commercialization in non-plantation agriculture, and to support improved market linkages. Recently, the Agriculture Sector Modernization Project (ASMP, P156019) has been supporting the formation of farmer-owned and operated Public Unlisted Companies (PUCs). 3 Several recent and ongoing projects in Sri Lanka support promotion and adoption of modern technologies and climate smart practices, including the Climate Smart Irrigated Agriculture Project (CSIAP, P163742). 4 Rajapaksha, L., et al, (2021) “Reducing post-harvest losses in fruits and vegetables for ensuring food security —Case of Sri Lanka,� MOJ Food Processing and Technology 2021:9(1):7-16. Page 3 The World Bank Integrated Rural Development and Climate Resilience Program Series of Projects 1 (P505241) borrower capacity amongst producer companies also remains a challenge. Farmer beneficiaries cite complex requirements for collateral and high cost of borrowing as hinderances. The country’s rural infrastructure, particularly in transportation and storage, remains underdeveloped, leading to high post-harvest losses and inefficiencies in the supply chain. Fragmentation and inefficiencies in regulatory services contribute to issues of credibility of certification in the marketplace, reduced quality and food waste. Quality infrastructure and the delivery of efficient quality services is critical to ensure that food products and agricultural commodities comply with market standards. Additionally, regulatory barriers, such as complex land tenure systems and inconsistent policy frameworks, create uncertainty for private investors. These challenges are further compounded by climate change, which disrupts agricultural productivity and increases risk for agribusinesses and finance institutions. 6. The proposed project is aligned with the Bank’s Maximizing Finance for Development (MFD) strategy. The project recognizes the role of the private sector in achieving agrifood system transformation and will support private sector participation through: (i) improving the enabling environment for private sector investments and/or participating in productive alliances5 (i.e., expanding agri-financing and direct participation in agrifood investments for small and medium producers and their Producer Organizations - POs); (ii) creating incentives for the private sector to provide specialized services to POs; and (iii) private sector engagement through procurement of goods and services. To maximize private sector engagement, the project will leverage synergies with the International Finance Corporation (IFC) through planned IFC investments and/or advisory services when opportunities arise. Also, the project will support a better business environment for investment through the improvements in last mile agriculture public goods and services delivery, including quality infrastructure, and enhancing the quality of data. This would enable private sector investment along different agricultural value chains that are dominated by small and medium producers. Access to finance is catalyzed through blended credit (including viability gap funding) and support for business development services. Public sector financing is appropriate as it will be used to (i) address multiple market failures; (ii) support investments in enabling public sector services and infrastructure; and (iii) stimulate private sector investment in line with Maximizing Finance for Development (MFD) principles. The project is coordinating closely with IFC to find opportunities to maximize MFD. 7. Rising impacts of climate change are a major threat to the agrifood sector in Sri Lanka. Changing rainfall patterns, rising temperature, and extreme weather events adversely affect farm production, aggregation, processing, and distribution along agrifood value chains. Future projections on climate change have predicted an overall scenario of drier areas becoming drier and wetter areas becoming wetter. Meanwhile, significant losses have already been reported due to rising incidence of climate shocks in the recent past, affecting livelihoods of farmers as well as other value chain actors. The prolonged drought experienced in 2016/17 reduced rice yields by 40 percent, largely affecting dry and intermediate zones of the country.6 Tea, the main export crop concentrated in wet zone of the country, also saw significant decline of production in years affected by drought.7 Rapid degradation of lands, watersheds and critical habitats due to unmanaged expansion of smallholder agriculture further increases the vulnerability of rural livelihoods. The decline of forest cover, loss of fertile soil and unsustainable land management leads to lower land productivity with direct economic losses. Climate change can have an especially large impact on poorer households who are more dependent on income from 5 A Productive Alliance (PA) involves smallholder producer organizations (POs), buyers, and the public sector. These agents are connected through a business plan, which describes the capital and services needs of the POs and proposes improvements that would allow them to upgrade their production capacities and skills to strengthen their linkage to markets. The implementation of business plans is done through subprojects, which are public grants which are matched by the beneficiary POs and buyer(s). The matching grants finances productive assets, technical assistance, and business development. 6Gunaratne et.al. (2021). Climate Change and Food Security in Sri Lanka: Towards Food Sovereignty. Humanities and Social Science Communications. 7Wijeratne (2018). Climate Change and its Implications on the Tea Industry in Sri Lanka. Sri Lanka Tea Industry in Transition: 150 Years and Beyond. It is also worth noting that Smallholder tea farmers who are at lower elevations than estates now account for most tea production are especially vulnerable to rising temperatures. Page 4 The World Bank Integrated Rural Development and Climate Resilience Program Series of Projects 1 (P505241) farming.8 According to the Climate Risk Index 2021, Sri Lanka is the thirtieth most climate-vulnerable country in the world, and the country is highly susceptible to extreme weather events such as prolonged droughts and floods. 8. Sustainable and climate resilient growth of the agri-food system requires improvements to water use efficiency, especially in the dry zones, which host two-thirds of Sri Lanka’s farmland and the bulk of its irrigation infrastructure. Agriculture is the largest consumer of water, and its efficiency remains low. The key staple crop, paddy rice, is highly water intensive and farmers face few incentives or opportunities to shift out of paddy production or improve efficiency, due to prevailing subsidies and restrictions on conversion of paddy land to other agriculture uses. Sri Lanka has relatively low levels of water productivity and water use efficiency, and its water and food security is highly vulnerable to climate change, including extreme weather patterns.9 At the same time, there is a need for investments to continue to improve Sri Lanka’s traditional “cascade systems,� which are small community-managed watersheds that include water storage tanks (artificial lakes), paddy command areas, upland farming zones and associated watersheds. Poor land management leads to siltation that decreases the holding capacity of irrigation reservoirs. Much of the irrigation infrastructure requires rehabilitation to improve reliability and availability of water and water use efficiency that are critical inputs to a modernized food system. Impacts of climate change exacerbate the risks created by degradation of resources and loss of ecosystem services and necessitate integrated solutions to support natural resources management effectively. 9. Efforts to improve the competitiveness of the sector must also address structural inequities to strengthen opportunities for economic inclusion. Sri Lanka has relatively high levels of gender equality, especially in comparison to other South Asian countries. However, high levels of gender parity in health and education are offset by low levels of female participation in the labor force. Sri Lanka’s female labor force participation rates remain consistently around 30 percent (as compared with around 75 percent for men). Rates of informal employment for women are highest in the agriculture sector (43 percent) as opposed to the services sector (33 percent); in the agriculture sector (non-plantation), women are likely to be involved in unpaid labor and/or have less control over the later stages of production that are linked to income generation. There are less than half as many female-led SMEs in agriculture than male-led ones and women- led firms face greater barriers in accessing business skills and markets and possess lower knowledge of agricultural machinery and technologies. Gender disparities in land ownership, control over resources such as water, access to markets, and skills training are often neglected aspects in rural development programming,10 and limit women’s ability to obtain agricultural assets, services, and benefits, such as subsidies, credit, irrigation water, etc. Significant gender disparities especially in participation and leadership in local decision-making bodies, such as Watershed Management Committees (WSM), FOs, and irrigation organizations exist with women’s membership at around 40 percent among WSM Committees.11 Women in rural areas or from low-income families are particularly vulnerable to predatory lending practices, especially from microlenders who fall outside of regulatory requirements. People with disabilities are highly vulnerable to exclusion from economic activities; around 71 percent of people living with disabilities above the age of 18 are not engaged in economic activities.12 The project will address these gaps by specifically targeting women in productive partnerships, entrepreneurship, and strengthening decision making in cascade management committees and farmer organizations. 8World Bank. 2021.Rural nonfarm sector and livelihood strategies in Sri Lanka: background report to Sri Lanka poverty assessment 9Salman, M., et al. (2022). “Efficient agricultural water use and management in paddy fields in Sri Lanka – National outlook�. Rome, FAO. https://doi.org/10.4060/cc2778en 10 USAID/Sri Lanka “Gender and Social Inclusion Analysis� Final Report, June 2020 (https://pdf.usaid.gov/pdf_docs/PA00WQ5R.pdf) 11 Irrigation organizations in general tend to accept membership only of farmers who own land for growing paddy (Source: http://www.fao.org/3/CA1516EN/ca1516en.pdf). A review report on women’s involvement in agriculture in Sri Lanka indicates that in FOs of minor systems, women’s involvement averages around 22 percent but in major irrigation systems (200+ ha), female representation is 2– 5 percent (Source: http://lankajalani.org/wp-content/uploads/2015/03/Gender-Issues-in-Agriculture.pdf). 12 USAID/Sri Lanka “Gender and Social Inclusion Analysis� Final Report, June 2020 (https://pdf.usaid.gov/pdf_docs/PA00WQ5R.pdf) Page 5 The World Bank Integrated Rural Development and Climate Resilience Program Series of Projects 1 (P505241) C. Proposed Development Objective(s) Development Objective(s) (From PAD) The Project Development Objective is to increase productivity, market access, and climate resilience of agri-food producers in selected areas. Key Results • Area provided with improved irrigation or drainage services (Ha) • Agri-food producers adopting improved and climate-resilient technology or practices (Number) • Agri-food producers with increased market value of their produce of at least 15 percent through Productive Partnership (Percentage)13 • People with enhanced resilience to climate risk (disaggregated by sex) (Number) [CRI] D. Project Description 10. Component 1: Promotion of Climate-Smart Production, Value Addition, and Inclusive Access to Markets (US$30 million). This component will support growth-oriented small and medium producers to establish and/or upgrade their market linkages with off-takers in a market-driven, profitable, and sustainable way and intensify and add value to their production. The Project will do so by: (i) supporting the formation of organized producer groups or producer companies and facilitating Productive Partnerships (PPs) between producers and buyer through the preparation of business plans; and (ii) competitively selecting and facilitating access to blended finance for the most commercially viable, inclusive, and climate-smart business plans. The Project will also spur private sector provision of agri-services targeting youth entrepreneurs through training and business development support. The project will focus on investments for producers and producer groups to build capacity and link effectively to market. This will complement ongoing and planned investments and advisory services from IFC focused on agri-businesses and tighten value chains in the agriculture sector, especially for exports. Additional resources are being sought from the Global Climate Fund Cooling Facility to strengthen investments in cooling along the value chain. 11. Component 2: Integrated Management of Natural Resources for Climate Resilience (US$55 million). The objectives of this component include (i) improving the institutional governance of natural resources in cascades and village 13 As compared with a counterfactual set of small-scale producers who did not receive support from the project. Page 6 The World Bank Integrated Rural Development and Climate Resilience Program Series of Projects 1 (P505241) tanks14 through continued strengthening of cascade management committees15 (CMCs); (ii) enhancing water resources management in small, medium, and major irrigation systems to increase water use efficiency and productivity, and; (iii) building climate resilience through supporting the accelerated adoption of climate smart agriculture (CSA) practices for improving productivity, adaptability, and mitigation. The component builds on, replicates and scales several successful models and interventions from the CSIAP and the IWWRMP, and aims to bring improved institutional coordination between both the agriculture and irrigation sectors. 12. Component 3: Strengthening the Enabling Environment for Sectoral Growth (US$13 million). This component supports the enabling environment to boost competitiveness and modernization of the agriculture sector by: (i) improving the quality and availability of sector data for improved evidence-based decision making; (ii) developing critical quality infrastructure for market access and competitiveness, and (iii) supporting the provision of agricultural insurance. 13. Component 4: Project Management, Monitoring & Learning (US$2 million). This component will support the overall management, implementation, and supervision of Project interventions, capacity building, as well as monitoring, evaluation, communication, dissemination, and continuous learning throughout the life of the Project. T he Project’s progress and impacts will be monitored and evaluated, notably through a baseline, mid-term, and end-of-project impact assessment, as well as on-demand quantitative or qualitative studies. 14. Component 5: Contingent Emergency Response Component (US$0 million). This component will support provision of immediate response to an Eligible Crisis or Emergency, as needed. @#&OPS~Doctype~OPS^dynamics@pidaprlegalpolicy#doctemplate Legal Operational Policies Triggered? Projects on International Waterways OP 7.50 Yes Projects in Disputed Area OP 7.60 No Summary of Screening of Environmental and Social Risks and Impacts 14 The cascade is a diversified system, including water areas, crop production and cattle, gathers a high biodiversity, including forest areas, plant species and freshwater fish. The cascade system consists of a series of tanks (minor water reservoirs) set one after the other on a natural drainage line in a watershed. These tanks are built by constructing an earthen dam across the water stream to collect rainwater. Excess water from the tank at higher elevation, spills over to the one below. The watershed of the tank comprises several land uses, such as forest, village hamlets, paddy fields and uplands of crop fields, etc. (FAO 2017). The mean size of a catchment area of a cascade is estimated to be around six to seven square kilometers, and the average number of tanks per cascade is about four, although in some it exceeds ten. (IWMI). Protecting cascade ecosystems and landscapes from land use conversion enhances climate adaptation by preserving the natural functions that these ecosystems provide – water regulation, soil stability, biodiversity, carbon sequestration, and natural buffers against extreme weather and precipitation – which are essential for community resilience and agricultural sustainability. 15 CMCs are committees of technical officers at the divisional level from agriculture, forest department, and farmer groups who provide avenues for locally led and coordinated action for natural resource management and reliable and sustainable delivery of water for agriculture. The CMC is headed by the Divisional Secretary. Page 7 The World Bank Integrated Rural Development and Climate Resilience Program Series of Projects 1 (P505241) The environmental & social risk rating is considered substantial owing to the (i) type of civil works activties that will be supported by the project including reservoir and canal rehabilitation that may require dredging, spill level raising, tree removal, quarrying and burrowing and (ii) multiple parallel sub-projects that will take place simultaneously and spread out in a considerable area requiring strong inter-agency co-ordination and diligent team work. Overall, the project will have a positive environmental impact that will result from increased water storage, sustainable land management and improved agricultural productivity & profitability. It has been learnt from the ongoing operations in the agriculture and irrigation sectors, that removal of trees on earthen dams & canals can be a significant issue during dam/canal rehabilitation requiring careful management. Some of these reservoirs are located within or adjacent to protected forest areas and as such increase to spill levels and access to burrow areas can cause impacts to forests and wetlands, hence need to careful screening and management. This has particularly been experienced with the small tanks in cascade systems under the ongoing CSIAP. Working in remote locations, as many of these water infrastructure are, also poses OHS issues especially from wild life attacks. Presence of labor gangs in sensitive locations also carry the risk of accidental forest fires and increased poaching. The dam works that will be supported by the project are all small dams and not located in known sensitive geological areas. However, for medium sized earthen tanks that come under the Ministry of Irrigation under component 2 will go through dam safety review measures that has been already set up under the Bank financed ongoing IWWRMP. While the presence of labour gangs in sub- project sites could potentially cause adverse consequences with the local community, this has never been observed in the ongoing projects with similar investments. It is possible that some of the selected sub-project sites are within and adjacent to historical settlements as the country has a vast distribution of ancient sites of cultural interests. Sub-project site identification will take place during project implementation and at that stage known sites of cultural heritage will be identified and appropriate measures taken. What is more likely is chance finds as has been the experience with similar projects in the past and present. As such, E&S risk management framework of the project will duly incorporate all needed measures to diligently deal with cultural chance finds. All these issues with a potential to cause adverse environmental consequences are manageable with early planning, screening and adopting the mitigation hierarchy. E. Implementation Institutional and Implementation Arrangements 31. Borrower and Implementing Agency. The borrower of the IDA Credit will be the Democratic Socialist Republic of Sri Lanka, represented through the External Resources Department (ERD) of the Ministry of Finance (MoF). The overall responsibility for project implementation, including management and coordination will lie with the Ministry of Agriculture, Livestock, Lands and Irrigation (MoALLI) through a Project Management Unit (PMU). 32. A Project Steering Committee (PSC) will be established to ensure effective coordination at a higher level and provide strategic advice. The PSC will have participation of relevant Ministries and Departments. The key functions of the PSC will be to review the annual workplans and budgets (AWPB), and to provide overall guidance and debottlenecking for the Project. The PSC will convene quarterly, or as needed for implementation. 33. Project Management Unit (PMU) will be established at the Ministry level and will be responsible for coordinating the implementation of different activities and sub-components under respective departments. The PMU will bear the responsibility for the procurement arrangements of all investments, which will include drafting the TORs, technical Page 8 The World Bank Integrated Rural Development and Climate Resilience Program Series of Projects 1 (P505241) specifications, bidding documents and requests for proposals, and also conducting the selection of consultants and procurement activities; signing, paying, and managing contracts; monitoring; and reporting and all other procurement- related activities, as specified in the Project Operations Manual (POM), and unless otherwise delegated. MoALLI will manage a Project Designated Accounts (DA) in the Central Bank and will be responsible for overall project reporting to the World Bank (WB). The PMU will draw primarily on Government staff, and will be strengthened with technical experts, as needed, either through internal staff appointed or through external hiring. @#&OPS~Doctype~OPS^dynamics@contactpoint#doctemplate CONTACT POINT World Bank Thiruni Udeshika Lekamwasam Liyanage Senior Water Specialist John C. Keyser Senior Agriculture Economist Borrower/Client/Recipient Ministry of Finance Samantha Bandara Director General, Department of External Resources info@erd.gov.lk Implementing Agencies Ministry of Agriculture, Livestock, Land and Irrigation D. P. Wickremasinghe Secretary info@agrimin.gov.lk FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects @#&OPS~Doctype~OPS^dynamics@approval#doctemplate Page 9 The World Bank Integrated Rural Development and Climate Resilience Program Series of Projects 1 (P505241) APPROVAL Task Team Leader(s): Thiruni Udeshika Lekamwasam Liyanage, John C. Keyser Approved By Practice Manager/Manager: Tomas Ricardo Rosada Villamar 12-Dec-2024 Country Director: David N. Sislen 22-Jan-2025 Page 10