Document of The World Bank Group FOR OFFICIAL USE ONLY Report No. 104606-LK INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL FINANCE CORPORATION MULTILATERAL INVESTMENT GUARANTEE AGENCY COUNTRY PARTNERSHIP FRAMEWORK FOR THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA FOR THE PERIOD FY17–FY20 May 31, 2016 Sri Lanka and Maldives Country Management Unit South Asia Region The International Finance Corporation South Asia Department Multilateral Investment Guarantee Agency Asia and the Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank Group authorization. The last Country Partnership Strategy Progress Report was discussed by the Board on April 22, 2014 CURRENCY EQUIVALENTS Currency Unit = Sri Lanka Rupees (Rs) US$ 1 = Rs 144.43 (as of March 12, 2016) FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS Japan International Cooperation AAA analytical and advisory JICA Agency ADB Asian Development Bank JIT just in time AGD Auditor General’s Department km2 square kilometer Korean International Cooperation ASA advisory services and analytics KOICA Agency ATI advanced technology institute £ United Kingdom pound note Cat Catastrophe Deferred Draw Down LKR Sri Lankan rupees DDO Option CFR Corporate Financial Reporting LMIC lower-middle-income country Content and Language Integrated CLIL m2 square mile Learning CLR Completion and Learning Report M&E monitoring and evaluation CMR Colombo Metropolitan Region MIC middle-income country Multilateral Investment Guarantee CO2 carbon dioxide MIGA Agency COP21 21st Conference of the Parties MIP Multiannual Indicative Program COPA Committee on Public Accounts MOE Ministry of Education micro, small, and medium-sized COPE Committee on Public Enterprises MSME enterprise CPF Country Partnership Framework MW megawatt CPS Country Partnership Strategy NBFI nonbank financial institution CRIP Climate Resilience Improvement Project NCD non-communicable disease North East Local Services CSO civil society organization NELSIP Improvement Project CY calendar year NDC Nationally Determined Contribution DB Doing Business NGO nongovernmental organization Australian Department of Foreign DFAT O&M operations and maintenance Affairs and Trade Department for International DFID OBA output-based aid Development ii Organization for Economic Co- DLI disbursement-linked indicator OECD operation and Development DP development partner OED Operations Evaluation Department Development Partners Coordination DPCF PER Public Expenditure Review Framework Public Expenditure and Financial DPF Development Partners Forum PEFA Accountability DPL development policy lending PFM public finance management DPS Development Partners Secretariat PforR Programs for Results Public-Private Infrastructure € euro PPIAF Advisory Facility ECD Early Childhood Development PPP public–private partnership ERD Department of External Resources PPP purchasing power parity EU European Union R&D research and development EXIM Export-Import Bank RDA Road Development Authority Food and Agriculture Organization of FAO RETF Recipient-Executed Trust Fund the United Nations FDI foreign direct investment Rs rupees FINDE financial data index S&P Standard & Poor's X FLFP female labor force participation SAR Special Administrative Region FSAP Financial Sector Assessment Program SCD Systematic Country Diagnostic FTA free trade agreements SDG Sustainable Development Goal FY fiscal year SFA sector framework agreement FY17– fiscal year 2017 to 2020 SMC school management committee 20 GCF Green Climate Fund SME small and medium-sized enterprise GDP gross domestic product SOE state-owned enterprise Gesellschaft für Internationale science, technology, engineering, GIZ Zusammenarbeit (German Technical STEM and mathematics Cooperation Agency) GoSL Government of Sri Lanka TA technical assistance GTFP Global Trade Finance Program TBD to be determined GWh gigawatt-hour TF trust fund Transforming the School Education ha hectare TSEP System Project Higher Education for the Twenty-first technical and vocational education HETC TVET Century and training Household Income and Expenditure HIES UK United Kingdom Survey International Bank for Reconstruction IBRD UMIC upper-middle-income country and Development ICR Implementation Completion and Results UN United Nations information and communications United Nations Development ICT UNDAF technology Assistance Framework United Nations Development IDA International Development Association UNDP Programme iii United Nations Educational, IDPs internally displaced persons UNESCO Scientific and Cultural Organization United Nations International IFC International Finance Corporation UNICEF Children’s Emergency Fund ILO International Labour Organization US United States IMF International Monetary Fund USD United States dollar Intended Nationally Determined INDC VAT value-added tax Contribution IPF investment project financing WB World Bank ISR Implementation and Status Report WBG World Bank Group International Standards of Supreme ISSAI WTO World Trade Organization Audit Institutions IT information technology World Bank IFC MIGA Vice President: Annette Dixon Dimitris Tsitsiragos Karin Finkleston Director: Françoise Clottes Mengistu Alemayehu Dan Biller (Acting) Task Team Leader: Rolande Pryce Amena Arif/Rafael Dominguez Petal Jean Hackett Acknowledgments The World Bank Group is grateful to the government of Sri Lanka, in particular the Ministry of National Policies and Economic Affairs and the Ministry of Finance, for their collaboration throughout the preparation of the Country Partnership Framework. Françoise Clottes, World Bank Country Director as well as Marc Sadler, Philip O’Keefe, Sanjay Kathuria, Mary Morrison (peer reviewers) guided its preparation. The core team included Kishan Abeygunawardana, Amena Arif, Rafael Dominguez, Petal Jean Hackett, Igor Kecman, Zeenath Marikar, Andrea Merrick, Rolande Pryce, Christine Richaud, Emanuel Salinas Munoz, Ulrich Schmidt, Charles Undeland, Ralph Van Doorn, and Hafiz Zainudeen. Sincere thanks to all, including the members of the Sri Lanka Country Team, who contributed to the preparation of the Country Partnership Framework. iv TABLE OF CONTENTS I. INTRODUCTION................................................................................................................. 1 II. COUNTRY CONTEXT AND DEVELOPMENT AGENDA ........................................... 1 2.1 Social and Political Context .................................................................................................. 1 2.2 Recent Economic Developments and Outlook ..................................................................... 3 2.3 Poverty Profile ...................................................................................................................... 8 2.4 Key Development Challenges............................................................................................. 11 Addressing the fiscal challenge ............................................................................................ 11 Enhancing competitiveness and creating more and better jobs for the bottom 40 percent ... 12 Addressing the challenges of social inclusion ...................................................................... 14 Tackling the sustainability challenge related to governance and the environment .............. 15 III. WORLD BANK GROUP PARTNERSHIP STRATEGY ................................................ 18 3.1 Government Program .......................................................................................................... 18 3.2 Proposed WBG Country Partnership Framework............................................................... 19 3.2.1 Lessons from FY13-16 CPS Implementation and Stakeholder Consultations ............ 19 3.2.2 Overview of World Bank Group Strategy ................................................................... 21 3.2.3 Objectives Supported by the WBG Program ............................................................... 26 3.3. Implementing the FY17–20 Country Partnership Framework .......................................... 45 IV. MANAGING RISKS TO THE CPF PROGRAM ............................................................. 48 Tables Table 1: Social Indicators for Sri Lanka and Comparator Economies .......................................................... 2 Table 2: Key Macroeconomic Indicators and Outlook ................................................................................. 8 Table 3: Sri Lanka has made significant progress in reducing poverty ........................................................ 9 Table 4: SCD priority areas to end poverty and promote shared prosperity in a sustainable manner ........ 17 Table 5: Systematic Operations Risk Rating .............................................................................................. 49 Boxes Box 1 – Public Procurement Reform in Sri Lanka .............................................................................. 47 Figures Figure 1: Geographic disparities persist...................................................................................................... 10 Figure 2: Inequality has increased since 2009 ............................................................................................ 11 Figure 3: Pillars and Objectives of the CPF ................................................................................................ 23 v Annexes Annex 1: CPF Results Matrix ..................................................................................................................... 51 Annex 2: Sri Lanka—Completion and Learning Report (CLR) Fiscal Years (FY) 2013–16 .................... 64 Annex 3A: Proposed International Development Association Program for Fiscal Years 2017–20 .......... 97 Annex 3B: Ongoing World Bank Portfolio ................................................................................................ 98 Annex 4: Selected indicators of Bank Portfolio Performance and Management ........................................ 99 Annex 5: Sri Lanka Operations Portfolio (IBRD/IDA and Grants) .......................................................... 100 Annex 6: IFC Committed and Disbursed Outstanding Investment Portfolio .......................................... 101 Annex 7: Partnerships and Donor Coordination ....................................................................................... 102 Annex 8: Summary of Stakeholder Consultations .................................................................................... 110 Annex 9: Mainstreaming Gender in the Country Partnership Framework’s (CPF’s) Implementation..... 114 vi FY17-20 COUNTRY PARTNERSHIP FRAMEWORK FOR THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA I. INTRODUCTION 1. The new Country Partnership Framework (CPF or Framework) presents the proposed engagement of the World Bank Group (WBG) in Sri Lanka over the next four years (fiscal years 2017–20 (FY17–20)). The CPF aims to support the achievement of some of the government’s medium-term goals in areas that are critical for reducing extreme poverty and promoting shared prosperity, and that are consistent with the WBG’s comparative advantage. Notably, the CPF provides the framework for engagement in several key policy areas. 2. Following presidential and parliamentary elections in 2015, the new coalition government—the National Government of Consensus—has set out an ambitious vision for Sri Lanka. It focuses on supporting job creation in the private sector, advancing the country’s global integration, improving governance, enhancing human development and social inclusion, and balancing development with environmental conservation. The vision has been captured in the Prime Minister’s Economic Policy Statement of November 5, 2015. 3. The new government’s development agenda is well aligned with the findings of the 2015 Systematic Country Diagnostic (SCD) for Sri Lanka. The SCD identified the most critical constraints and opportunities facing Sri Lanka in accelerating progress toward the twin goals of ending extreme poverty and promoting shared prosperity in a sustainable manner. The analysis concluded that key priorities are to address the country’s fiscal, competitiveness, and inclusion challenges, as well as cross-cutting governance and social, economic, and environmental sustainability challenges. The proposed CPF is anchored in this analysis. II. COUNTRY CONTEXT AND DEVELOPMENT AGENDA 2.1 Social and Political Context 4. Sri Lanka is a relatively small island nation in the Indian Ocean. Measuring 65,610 square kilometers, Sri Lanka has a population of 20.6 million people. Over the past decade, marked by the end of a debilitating internal conflict in 2009, the country’s performance on growth and poverty reduction has been remarkable. Sri Lanka is a lower-middle-income country (LMIC) with a per capita gross domestic product (GDP) of US$3,811 and a poverty rate of 6.7 percent in 2014.1 At number 73 (between Turkey and Mexico), Sri Lanka ranks high on the United Nations Human Development Index, and the related indicators are impressive by regional and LMIC standards (Table 1). Sri Lanka has comfortably surpassed most of the Millennium Development Goals. 1 All dollar amounts are U.S. dollars unless otherwise indicated. 1 Table 1: Social Indicators for Sri Lanka and Comparator Economies Sri Lanka LMIC UMIC SAR Indicator 2000 2014* 2000 2014* 2000 2014* 2000 2014* GDP per capita growth (annual %)+ 5.5 6.7 2.4 4.1 4.8 3.7 2.1 5.5 Improved sanitation facilities (% of 81.2 95.1 39.5 51.3 66.2 79.3 44.4 44.8 population with access) Total life expectancy at birth 73.8 74.2 66.1 67.0 73.7 74.3 66.7 67.8 (years) Infant mortality rate (per 1,000 live 14.0 8.4 65.7 40.0 31.4 15.2 68.8 41.9 births) Survival rate to the last grade of 97.8 98.4 67.2 70.2 87.4 89.8 60.9 62.8 primary education, both sexes (%) Sources: World Development Indicators and World Bank staff calculations. Notes: *or closest year; +GDP per capita provided in current U.S. dollar terms; LMIC = lower-middle-income country; SAR = South Asia Region; UMIC = upper-middle-income country. 5. Sri Lanka is in the midst of a major political and institutional transition. President Sirisena was elected in January 2015 on a platform of good governance, backed by a coalition of political forces opposed to the long-serving previous president. A constitutional amendment was subsequently adopted, which reduced the powers of the presidency, introduced a largely parliamentary form of government, and strengthened autonomous oversight commissions for various aspects of the public sector, such as the police and public service. In August 2015, parliamentary elections were held, yielding a coalition government involving the country’s two major parties. Since taking office, the new government has signaled several important policy changes, aiming at strengthening governance and transparency, achieving greater economic openness and global integration, and accelerating national reconciliation. Attention has also been devoted to investigating corruption allegations and recovery of stolen assets, largely in relation to the preceding government. Reforms of the state apparatus to achieve these objectives are still in their very early stages. 6. The newly elected Parliament is to serve as a Constitutional Assembly to formulate and adopt a new constitution, which will incorporate further changes that are yet to be agreed upon. The coalition agreement underpinning the present government has been explicitly defined for two years, with the expectation that the overhaul of the government will be completed in this period. Discussions about the current constitution and the changes triggered by the promulgation of a new constitution will set up a complex political environment in the near term. 7. Achieving national reconciliation remains a key objective in Sri Lanka, notably in framing the new constitution. Sri Lanka ended decades of military conflict in 2009, and the likelihood of a recurrence of conflict is currently negligible. Steps have been taken to address past grievances that fueled the Tamil militant movements, such as the holding of elections in the North and East Provincial Councils which have a high concentration of Tamils, and the resettlement of most of the internally displaced people. Yet some matters remain unresolved, in particular, the delineation of responsibilities between the central government and provincial and local 2 governments. The new constitution is expected to address these issues. In addition, Sri Lanka has been under domestic and international pressure to ensure accountability regarding allegations of crimes against humanity during the armed conflict. As a co-sponsor of a United Nations Human Rights Council resolution adopted in October 2015, Sri Lanka has undertaken to carry out credible investigations and, where appropriate, prosecutions, as a key step toward long-lasting reconciliation. 2.2 Recent Economic Developments and Outlook 8. After the conflict, Sri Lanka achieved high growth, but the drivers of growth may not be sustainable. Following the end of a three-decade military conflict, Sri Lanka’s economy grew at an annual average of 6.4 percent during 2010–15. Per capita GDP reached $3,924 in 2015—an increase of roughly 50 percent of per capita GDP over 2010.2 This growth reflected a peace dividend, reconstruction efforts, continued urbanization, and structural transformation from agriculture to manufacturing, especially services.3 Driven mainly by construction and other non- tradable sectors, this growth rate may be difficult to sustain in the long run. Overall, inflation has remained benign in the post-conflict period. 9. Low and declining revenues critically impact Sri Lanka’s fiscal position. Sri Lanka now has one of the lowest tax revenue-to-GDP ratios in the world, reflecting a decline from 24.2 percent in 1978 to 11.4 percent in 2015. The major causes of this decline are the low increase in the number of taxpayers, reductions in statutory rates without commensurate efforts to expand the tax base, inefficiencies in administration and numerous exemptions. Some limited reforms have been undertaken to address the issue in line with the recommendations of the Presidential Tax Commission report (2011). However, these reforms have not yet yielded the expected results and there is room for improvement in tax policy and administration. 10. Sri Lanka’s revised 2016 budget signals efforts to restart the fiscal consolidation path by increasing revenues. The postwar period was marked by a strong drive for fiscal consolidation, by tightening expenditure, leading to a lean and rigid budget.4 However, the 2015 budget contained increases in expenditures and subsidies, while revenues continued to be lower than expected, although shortfalls were partly offset by increased excise duties on vehicle imports in 2015 and one-off taxes. As a result, the overall fiscal deficit for 2015 was 7.4 percent of GDP, compared with the target of 4.4 percent of GDP. The original budget for 2016 included a few promising business-friendly measures, but also showed a large increase in capital expenditure with insufficient revenue enhancements leading to a projected deficit of 5.9 percent of GDP. Subsequent budget presentation, in March 2016, the government announced measures to augment revenue and to curtail the budget deficit to 5.4 percent in 2016 returning to a fiscal consolidation path. 2 The economy recorded a slower growth of 4.8 percent in 2015 due to uncertainties with two major elections, deceleration of the construction sector and the steps taken to reassess the already approved large investment projects. 3 In 2015, the service sector accounted for 62.4 percent of GDP, followed by manufacturing (28.9 percent) and agriculture (8.7 percent). 4 About 60 percent of total expenditure consists of wages, pensions, fertilizer subsidies, and interest costs. 3 11. The expansionary fiscal and monetary policy stance in 2015 led to a surge of non-oil imports, while significant foreign exchange outflows and low foreign direct investment (FDI) led to worsening of the balance of payments. Increased disposable incomes resulting from the post-election public-sector salary hike and rapidly rising private credit contributed to a temporary surge in imports of vehicles and other consumer goods,5 nearly offsetting the gains from lower commodity prices. Increased receipts from tourism offset the slowdown in growth in remittances, leading to an overall narrowing of the current account deficit. On the other hand, capital outflows from the local currency government securities market in the wake of rising global interest rates and lower-than-expected FDI inflows exerted pressure on the capital account. These factors, along with scheduled external debt obligations (the redemption of a $500 million Eurobond and a repayment to the International Monetary Fund (IMF)), contributed to heightened exchange rate pressure and increased commercial foreign borrowings.6 12. Official reserves declined, despite significant foreign borrowings. Sustained currency depreciation pressure, driven by adverse external developments, was partly offset by the Central Bank’s market intervention. Although the Central Bank decided to allow the market to play a greater role in the determination of the exchange rate in September 2015, net sales of foreign exchange continued into 2016 as the Central Bank was required to facilitate capital outflows in a thin market. As a result, despite borrowing more than budgeted on commercial terms and receiving support from the Reserve Bank of India in swap arrangements amounting to $1.5 billion, the reserve level declined to $7.3 billion in December 2015 (equivalent to 3.8 months of imports of goods), compared with $8.2 billion at end of 2014. Capital outflows and resultant foreign exchange sales reduced the reserve level to $6.2 billion as of end of March 2016. At the same time, a 10 percent depreciation against the U.S. dollar in 2015 partly offset the past real effective exchange rate appreciation. 13. Public debt rose as a share of GDP, primarily as a result of rising real interest rates and currency depreciation. Based on interim figures, public debt is estimated to have increased from 70.7 percent of GDP in 2014 to 75.2 percent of GDP at the end of 2015, and interest cost accounts for about 25 percent of total expenditure. The main factors for the increase in the level of debt include rising real interest rates on debt, exchange rate depreciation, and the persistent primary deficit. At the end of 2014, foreign currency-denominated debt and debt held by nonresidents represented about 42 percent of outstanding public debt, which exposes the portfolio to exchange rate risk.7 Furthermore, despite the increased issuance of long-term treasury bonds, about one-third of domestic debt is maturing within a year, creating refinancing and interest rate risks. 5 Growth of imports of vehicles and consumer goods tapered off toward the end of 2015, due mainly to measures to curb loan growth, vehicle imports, and the currency depreciation. 6 After redeeming a $500 million Eurobond in early January 2015, the government issued two Eurobonds totaling $2.15 billion later in the year. The Eurobonds comprised a $650 million bond issued in June 2015 at a yield of 6.4 percent, and a $1.5 billion bond issued in October 2015 at a yield of 6.8 percent. 7 Sri Lanka’s long-term foreign debt rating is at the same level for all three major ratings agencies: B+ (Fitch and Standard & Poor's (S&P)) and B1 (Moody’s). Fitch downgraded the long-term foreign debt rating by one notch to B+ from BB– with a negative outlook in February 2016, citing increasing refinancing risks, significant debt maturities, weaker public finances, a decline in foreign exchange reserves, and a high foreign-currency debt portion in the portfolio, while favorable economic growth, human development indicators, a clean debt service record, and a smooth 4 14. Fiscal risks emanating from state-owned entities (SOEs) are substantial. Debt by SOEs under a treasury guarantee increased from 1.4 percent to 5.8 percent of GDP between 2006 and 2015. While this includes debt by SOEs with their own sources of revenue, increasingly, guarantees have been given to entities with limited sources of revenue, such as the Road Development Authority (RDA). Many of these entities also have borrowed without a guarantee. . 15. Twin deficits in the fiscal and current accounts are mirrored by low national savings, with a persistent savings–investment gap being financed mostly through debt-creating flows over the last decade. National savings has averaged about 25 percent of GDP since 2010, while national investment was as high as 31 percent of GDP.8 Over the last decade, most of this gap has been covered by debt-creating flows, as opposed to FDI, which calls for the need to attract more FDI for enhanced sustainability. External debt amounted to about 55.1 percent of GDP at end of 2015. Outlook 16. Growth is expected to continue with manageable inflation in the medium term. Growth is expected to reach 5.3 percent in 2016 and remain at that level until 2020, driven mainly by capital expenditure and non-tradable sectors. As long as the global economy continues to be challenging, the tradable sectors are not projected to grow fast in the near term. Improving competitiveness, by attracting more efficiency-seeking FDI to plug into global value chains and global production networks, participating in new and enhancing existing free trade agreements (FTAs), and generally reversing the anti-export bias would be important conditions to further enhance the level of growth, which would also be supported by increased political stability and a stable and simple tax regime. The impact of past currency depreciation is expected to lead to an increase in inflation in 2016. Gradually recovering global commodity prices are projected to feed into inflation in the medium term (Table 2). 17. The current account deficit is projected to widen between 2017-2020 after reaching its narrowest point in 2016 as a result of the projected recovery of global commodity prices and a mixed remittances outlook. The current account is projected to improve further in 2016, thanks to the slowdown of imports in a context of a more restrictive policy environment and continued low commodity prices. However, the deficit is projected to gradually widen thereafter as commodity prices rebound and exports decline as a share of GDP. Remittances are projected to be weak owing to the impact of low commodity prices on the Gulf State economies during the period 2016 - 2020. transition of power were identified as positive factors. S&P kept Sri Lanka’s long-term sovereign credit rating at B+, but changed the outlook to negative from stable for similar reasons in March 2016. The recent rating actions can heighten the refinancing and interest rate risks mentioned above. 8 World Bank, Systematic Country Diagnostic, 2015. 5 18. Gross external financing needs are projected to be substantial, especially in 2016 and 2019, but manageable, provided FDI increases.9 While projected foreign exchange outflows from the public sector are significant in 2016, a large share of these consists of bonds and swaps with the domestic financial sector, which are projected to be rolled over. The gross financing needs are projected to be around $5.3 billion per year on average from 2017 to 2020, with amortizations picking up in 2019. These financing needs are expected to be covered mainly by FDI and loans for investment projects in the pipeline. With political stability and reforms to improve competitiveness, an increase in FDI is projected, driven by the recommencement of construction of the halted port city and related investments in mid-2016. In the outer years of the CPF period, unless exports grow faster than anticipated, more external borrowing will be needed when large debt repayments come due. The remaining gap of approximately 2.7 percent of GDP, on average, during the period 2016-2020 is projected to be financed through a mix of treasury bonds to nonresident investors, Eurobonds,10 private-sector borrowing, and budget support from multilateral and bilateral sources. With the expectation that commercial rates will become less favorable by 2019, prudent and forward-looking debt management will be needed to reduce the refinancing risk on commercial borrowing from 2019 onward given the reduced availability of concessional financing and rising external commercial and domestic interest rates. 19. Going forward, Sri Lanka’s key challenge is to restore fiscal sustainability. In an environment of rising domestic interest rates, tightening global financial conditions, and a less welcome climate for emerging markets, more decisive and sustained fiscal adjustments are warranted in the coming years to increase fiscal space for development spending, reduce the fiscal deficit and stabilize the public debt. In addition, maximizing the efficiency and effectiveness of expenditures, particularly investment in human capital, will also be important to fiscal consolidation. If the fiscal consolidation measures announced in March are implemented, and assuming sustained efforts to increase revenue in the coming years, the fiscal deficit is projected to be 3.5 percent of GDP by 2020, thanks to a total revenue and grants increase of up to 14.9 percent of GDP, and a reduction of expenditure to 18.4 percent of GDP by 2020. Public debt is projected to gradually decline to 70 percent of GDP by 2020.11 20. To address the deterioration of the fiscal accounts and pressure on the balance of payments, the government has reached a staff-level agreement on an IMF-supported program. The IMF’s Extended Fund Facility is scheduled for Board approval on June 3, 2016. The program establishes a path of medium-term fiscal consolidation, supported mainly by revenue measures (broadening the tax base and structural reforms in tax policy and administration), public finance management, and SOE management. 9 The recommencement of construction of the halted port city in mid-2016, which is the largest single FDI inflow into the country, and its related investments will be key drivers of FDI. 10 The Central Bank appointed lead managers for issuance of Eurobonds up to $3.0 billion for the year 2016. 11 The government’s macro framework projects the fiscal deficit at 3.5 percent of GDP by 2020, driven by an overall increase of total revenue and grants to 17 percent of GDP, and total expenditure of 20.5 percent of GDP by 2020. Public debt is projected to gradually decline to 60 percent of GDP by 2020 6 21. The quality of the expected fiscal consolidation will be as important as the reduction in the fiscal deficit. A careful reconsideration of taxes and expenditure could make the overall fiscal policy more progressive and reduce the burden on the poor. A simpler and more predictable tax system with more efficient investment incentives would improve the business climate, offsetting to some extent the increased tax collection and reconsideration of incentives. 22. The scenario outlined above entails substantial external and domestic risks. On the external side, a more challenging global environment, including slower-than-projected growth in the EU and the US and a slowdown in China, could impact Sri Lanka’s economy through lower remittances, exports, tourism inflows and financing, which would weigh on the balance of payment, investment and growth. In particular, financial market problems in China could directly affect official bilateral financing and financing through China’s development banks and FDI inflows. Faster tightening of global financial conditions could also lead to further capital outflows and restrict Sri Lanka’s access to capital markets, especially once Sri Lanka’s Eurobonds start to mature beginning in 2019. On the domestic side, there is a risk that the fiscal consolidation program may not be implemented as decisively as currently envisaged in a context of fluid politics, and that fiscal slippages may occur, resulting from inadequate tax policy reform or decreased efficiency of tax collection, pressure to increase current expenditure, or the realization of contingent liabilities. 23. Policy and structural reforms as elaborated in the government’s policy statement could mitigate some of these risks. A firm commitment to fiscal consolidation and consistent macroeconomic policies -- notably through sound implementation of the planned program with the IMF – are expected to help regain investor confidence. Structural domestic reforms and new trade agreements could lead to access to new fast-growing export markets and export of new goods and could increase the value added. These reforms could be supported by increased attraction of efficiency-seeking FDI, which would also reduce the country’s reliance on external borrowing. A well-considered fiscal consolidation path could reduce the political risk by improving the investment climate through a simpler tax system, and could minimize the burden on the poor—for example, through a well-targeted social protection system. Improved debt management will be necessary to manage the cost and risk of the debt and guarantee portfolios and deepen the domestic securities market. Stronger corporate governance could reduce the fiscal risk posed by the SOEs. 7 Table 2: Key Macroeconomic Indicators and Outlook 2014 2015 2016p 2017p 2018p 2019p 2020p Real economy GDP (LKR million, current) 10,448 11,183 12,309 13,464 14,711 16,126 17,629 GDP per capita (USD, current) 3,853 3,924 ... … … … … GNI per capita (Atlas method, 3,440 … … … … … … US$, current) Real GDP growth (percent) 4.9 4.8 5.3 5.3 5.3 5.3 5.3 Unemployment rate (percent) 4.3 5.0 … … … … … CPI inflation (percent, annual average) 3.3 0.9 4.2 3.8 3.8 3.9 3.9 2014 2015 2016p 2017p 2018p 2019p 2020p Fiscal accounts Revenue (share of GDP) 11.5 13.1 13.9 14.0 14.4 14.8 14.9 Expenditure (share of GDP) 17.2 20.5 19.3 18.9 18.7 18.7 18.4 Fiscal balance (share of GDP) -5.7 -7.4 -5.4 -4.8 -4.3 -3.9 -3.5 Public debt (share of GDP) 70.7 76.0 75.3 74.6 73.5 71.8 70.0 Treasury guarantees (share of GDP) 5.4 5.8 … … … … … Balance of payments Current account (share of GDP) -2.5 -2.4 -0.8 -1.6 -2.1 -2.6 -2.8 Exports (share of GDP) 13.9 12.8 12.5 12.4 12.2 12.0 12.0 Imports (share of GDP) 24.3 23.0 21.2 21.7 21.9 22.0 22.1 Foreign Direct Investment (share of GDP) 1.0 0.8 1.2 1.2 1.3 1.3 1.3 Gross official reserves (USD billion) 8.2 7.3 7.7 … … … … In months of imports 4.3 3.8 4.2 … … … … Exchange rate (LKR/USD) 131.1 144.1 … … … … … * Treasury guarantees as of the end of September 2015. Notes: Gross official reserves as of the end of 2015, but the full-year estimates of the balance of payments have not yet been published. CPI = Consumer Price Index; e = estimated; GDP = gross domestic product; GNI = gross national income; LKR = Sri Lankan rupees; p = projected. Sources: Central Bank of Sri Lanka, Ministry of Finance, staff projections. 2.3 Poverty Profile 24. Strong economic growth in the last decade has led to an important decline in poverty and enhanced shared prosperity. Excluding the Northern and Eastern provinces, the poverty rate fell from 22.7 percent to 6.1 percent between 2002 and 2012/13. When including the North and East in the 2012/13 estimates, the poverty rate rises only slightly to 6.7 percent using the 8 national poverty line, which is equivalent to about $1.50/day in purchasing power parity (ppp) terms. Poverty reduction has been particularly significant in the estate and rural sectors, where the poverty rate between 2002 and 2012/13 dropped from 30.0 percent to 10.9 percent and from 24.7 percent to 6.8 percent, respectively (Table 3). Table 3: Sri Lanka has made significant progress in reducing poverty Categories 2002 2006/07 2009/10 2012/13 2012/13* National poverty 22.7% 13.5% 7.4% 6.1% 6.7% line Urban 7.9% 6.2% 4.1% 1.8% 2.1% Rural 24.7% 13.8% 7.8% 6.8% 7.6% Estate 30.0% 27.7% 10.5% 10.9% 10.9% $1.90 (2011 ppp) 8.3% 3.9% 2.3% 1.7% 1.9% *National estimates. All other years exclude Northern and Eastern provinces to maintain comparability. ppp = purchasing power parity. 25. The decline in poverty is corroborated by improvements in several alternative indicators. Per capita incomes rose for the poor, and the share of consumption devoted to nonfood items and ownership of durable assets also increased, especially for the poorest populations. School attendance at the primary level is essentially universal, and attendance at the secondary level also increased between 2002 and 2012/13. Completion of secondary education saw a major improvement, as the share of 17 and 18 year olds who completed secondary school rose from 40 to 60 percent between 2002 and 2012/13. Health indicators also progressed significantly during this period, particularly with regard to maternal and infant mortality, and the near elimination of communicable diseases and vaccine-preventable diseases. However, malnutrition among women and children remains relatively high. Overall, although Sri Lanka has excelled in overcoming human development challenges typical of a low-income country, its service delivery systems in education, health, and other areas must now adjust to face new and changing demands typical of a middle-income country (MIC). 26. Most of the reduction in poverty over the last 10 years stemmed primarily from increases in labor incomes, particularly earnings, as opposed to higher employment or higher transfers. Between 2002 and 2012/13, increased labor income accounted for about 60 percent of the 16.5 percentage point reduction in headcount poverty, which is similar to results from Bangladesh and Nepal. Wages and employment grew, particularly in the manufacturing, construction, commerce, transport, and communications sectors. In addition, returns to agriculture increased, particularly for self-employed farmers, but also through sizable increases in minimum wages for agricultural workers, most of whom are employed in the estate sector. Non-labor income accounted for another 27 percent of the reduction in Sri Lankan poverty during this time, with the decline in household size accounting for the remaining 13 percent. As opposed to labor incomes, the decline in spending on social assistance (from 4 percent of GDP in 2004 to 2.5 percent in 2012), coupled with inefficient targeting, has weighed on poverty reduction. In particular, 9 declining transfers from the country’s main safety net program, Samurdhi, is estimated to have slowed poverty reduction by 1.5 percentage points between 2002 and 2012/13. 27. Four potential factors can help explain the increase in labor incomes: (1) the economy’s gradual structural transformation out of primary agricultural production into more productive sectors; (2) urbanization and agglomeration effects in the West and other urban centers across the country; (3) changes in relative prices, with rising international prices for food and tea in the first part of the period, which led to increased earnings in agriculture; and (4) strong growth in domestic aggregate demand, including public-sector investment, which led to increases in labor demand. 28. Despite rapid progress on poverty Figure 1: Geographic disparities persist reduction, living standards remain low for most Sri Lankans, and pockets of severe poverty persist in Northern, Eastern, and Uva provinces. A large portion of the population remains close to the poverty line, as 36 percent of the population lives on less than $4.00 per day (in 2011 PPP terms). Pockets of high poverty continue to persist—specifically, in the districts of Mullaitivu, Mannar (both in Northern Province), Batticaloa (Eastern Province), and Moneragala (Uva Province)—where headcount poverty rates (based on the national poverty line) are close to or even exceed 20 percent (Figure112). In the estate sector, poverty measured by consumption has dropped significantly among workers; however, welfare indicators, such as asset ownership, educational attainment, and the share of food consumption devoted to protein, continue to lag, and many residents remain vulnerable to poverty. Areas with higher poverty rates also tend to have a larger portion of the bottom 40 percent of the consumption distribution. Notwithstanding the locational concentration of high poverty rates in Northern and Uva provinces, the majority of the poor and bottom 40 percent live in populous areas in the center of the island. 29. Inequality in both consumption and income has increased since 2009. Inequality in Sri Lanka has traditionally been moderate by international standards. Between 2002 and 2009, inequality in both consumption and income declined, as pro-poor growth led to sizable increases in consumption for the bottom 40 percent of the consumption distribution. However, this pattern 12 Figure 1 depicts the district poverty head count rate based on the national poverty line across Sri Lanka. 10 was reversed in the second part of the decade. Although poverty continued to decline between 2009/10 and 2012/13, inequality in both consumption and income increased, as growth of per capita consumption and income of the bottom half of the distribution was slower than growth of the top half.13 Figure 2: Inequality has increased since 2009 50 46.4 Gini Coefficient 44.4 45 43.2 43.1 40.2 39.9 38.9 40 36.3 35 30 Consumption Inequality Income inequality 2002 2006/07 2009/10 2012/13 2.4 Key Development Challenges 30. The 2015 SCD found that despite a number of advantages, sustaining inclusive growth to end extreme poverty and boost shared prosperity in Sri Lanka faces several challenges. The country has great potential, with its enviable location in a fast-growing region along a major trade route, opening opportunities to serve as a regional trading hub; relatively strong infrastructure and human capital; and unique natural assets, giving it a strong basis for tourism and other nature-base activities. However, Sri Lanka will need to address several constraints to achieving further progress, such as (1) the challenge of fiscal sustainability; (2) the challenge of promoting more and better jobs for the bottom 40 percent as an emerging MIC; (3) the challenges of providing for social inclusion for disadvantaged segments of the population; and (4) longer- term sustainability challenges to preserve the environment, ensure political stability, and support an aging population. Governance is a cross-cutting challenge in all of these areas. Addressing the fiscal challenge 31. Sri Lanka faces a major challenge of low and declining tax revenue as a share of GDP, which threatens fiscal and debt sustainability. The major causes of this decline are the low increase in the number of taxpayers, reductions in statutory rates without commensurate efforts to expand the tax base, inefficiencies in administration, and numerous exemptions and investment incentives. 32. Increasing fiscal space is an important priority for the government to support sustained economic growth and social inclusion. Relative prioritization of public investment in 13 The increase in inequality holds after removing the top 0.5 percent of households in the income distribution. Official statistics, which are based on the full distribution of income, do not show an increase in inequality during this period. 11 capital infrastructure following the conflict, in a context of fiscal constraints has squeezed spending on other public goods, including health, education, and social protection, which are currently below the levels in other regional and emerging market comparators. While Sri Lanka’s infrastructure is strong for South Asia, levels of public service provision vary across the island, particularly in pockets of poverty. Moreover, 60 percent of expenditures are for wages, allowances, and interest payments, which cannot be cut or reallocated easily, depriving the government of flexibility in its budget to address emerging needs or respond to fiscal shocks. 33. Increased and better-targeted support to the most vulnerable households is particularly critical to help ensure a continued improvement of living standards and eliminate the remaining pockets of persistent poverty. In the past decade, declining and poorly targeted social assistance has weighed on poverty reduction. Devoting more generous resources to social spending and social protection and better targeting the poor are critical to help sustain the country’s efforts in favor of economic and social inclusion. 34. Furthermore, Sri Lanka is well into its demographic transition, which raises specific fiscal challenges and places new and changing demands on health and social protection systems, public service delivery, and labor markets, and calls for decisive action to avoid growing old-age poverty. The share of Sri Lanka’s population over the age of 60 will roughly double over the next 25 years as people live longer (life expectancy at birth increased from 40 years in 1930 to 72 years by 1990). The transition also comprises a decrease in the younger population (the total fertility rate declined from around 4.7 in 1970 to 2.3 in 2006), and the cascading effects of the latter through various age groups over time. The proportion of the population over 60 years, which was 9.2 percent in 2000, is expected to reach 28.5 percent by 2050. This increase already places new demands on health and social protection systems, including pensions, and the delivery of public services. It also affects labor markets, as there is now a window for a potential demographic dividend that requires managing proactively the larger working-age population to prevent unemployment, so as to prepare for the projected doubling of Sri Lanka’s dependency ratio over the next two decades. Overall, the country’s success in transitioning to upper-middle-income status depends critically on how the demographic transition is managed and how well prepared the country is for the future needs of the dramatically different population age structure that will ensue from the transition. Enhancing competitiveness and creating more and better jobs for the bottom 40 percent 35. The SCD indicates that further progress on the twin goals depends largely on the country’s ability to diversify the drivers of growth and create more and better jobs for the bottom 40 percent. Poverty reduction in the past decade has been primarily driven by increases in labor incomes, particularly earnings, in a context of robust growth. However, some of the key drivers of this evolution are not likely to be sustained in the future, particularly the high rates of public investment and favorable commodity prices observed in the last few years. 36. Among the challenges that lie ahead are to secure the broad and deeply rooted commitment and ability to overcome long-standing structural constraints; adopt economic policies that are more consistent, predictable, and conducive for privates sector growth, 12 increased productivity and competitiveness; and deepen the integration with the global economy. Sri Lanka’s economy has grown increasingly inward-oriented over the past decade. The country’s world market share has fallen to levels last seen in the 1980s, with a steady decline in commodity exports and an export basket that has remained largely unchanged. The last decade has also seen a noticeable shift toward protectionism. Higher rates of protection on final products than on inputs used in their production lead to an anti-export bias, since producers have strong incentive to sell goods domestically, even though their domestic costs are higher than their opportunity costs through trade. This is particularly worrying for the agriculture sector, where high protection of import-competing crops and fertilizer subsidies have created strong disincentives for crop and export diversification. In addition, domestic and foreign direct investment—a critical driver of economic diversification, technology transfer, and productivity growth, and an important contributor to external sustainability—has remained low despite costly fiscal incentives offered. The low levels of FDI are partly the result of perceived political risks and institutional legal and regulatory constraints. 37. Looking ahead, sustained economic growth and job creation will need to be driven by the domestic private sector and FDI. This, in turn, also calls for rebalancing the role of the state in the economy away from a direct participant in commercial activities to a regulator and service provider. SOEs are prominent, particularly in financial services, with state-owned banks accounting for 41 percent of the banking sector. The state employs 13 percent of the labor force—levels comparable to those of Organisation for Economic Development and Co-operation (OECD) countries—despite the fiscal pressures. With such a large proportion of the economy. The current regulatory environment has weaknesses, such as property rights registration systems and land-use regimes that introduce limitations; slow resolution of litigated matters; and labor legislation, particularly requirements for generous severance payments, which hinder private- sector development and encourage informality. Informality in turn tends to curtail access to finance, investment, uptake of technology, and ultimately productivity gains. Regulatory barriers are a hindrance to the formal sector: policy-induced barriers consisting of regulatory and institutional bottlenecks account for nearly 70 percent of the total time spent on exporting or importing goods. Moreover, the linkages between public research and development (R&D) institutions and the needs of the private sector are poor, preventing innovation, particularly in agriculture, where a greater focus on technology-driven production and value-chain development could generate new employment opportunities in lagging rural areas. 38. The quality of general education lags behind that of upper-middle-income countries (UMICs), and private sector firms have difficulty accessing the skills they need. Although Sri Lanka’s human development indicators are ahead of those of its regional peers, the quality of education, as measured by periodic internationally comparable tests, lags behind that of UMICs, particularly in language and numeracy skills. Sri Lanka also lacks the vocational and technical skills in its workforce that are increasingly in demand, reflecting constraints on the quality and relevance of higher education and research. Also, the linkages between what the private sector needs to innovate and the R&D institutions that could meet these needs are poor. 39. Modernization of the agriculture sector is needed if agriculture is to realize its potential for greater value generation through processing and value addition and for new 13 employment generation, and become a new source of rural growth that can be harnessed for poverty reduction and shared prosperity. This modernization will involve aligning current sector policies to better enable high-value export agriculture; shifting public-sector support away from general subsidies to better-targeted interventions and R&D; revisiting and relaxing the rice self-sufficiency policy and allowing for more demand-driven and market-oriented production; and overcoming long-standing structural constraints, such as the low organizational levels of farmers, land fragmentation, and a poor price information system. These issues are particularly relevant for improving rural livelihoods in the lagging areas, by enhancing productive assets and infrastructure and creating employment opportunities in agriculture and along the value chain; exploring access to high-value export markets; and improving environmental sustainability, in particular soil and water resource management and the climate resilience of current production patterns. Addressing the challenges of social inclusion 40. Large numbers of poor people and people among the bottom 40 percent live in Sri Lanka’s urban agglomeration areas, highlighting the need for efficient, inclusive , and sustainable urbanization for cities to become centers of growth and employment for those already living in cities, but also the need to develop the capacity to absorb rural labor that will migrate to cities, and at the same time provide livable and resilient environments. Urbanization and agglomeration have been strong drivers of growth in the past. This trend will most likely persist as urban areas will continue to attract new residents. There is an urgent and ongoing need for investments in urban public infrastructure and services, along with improvements in more efficient and integrated urban planning and management for cities to provide the needed services and economic opportunities. Streamlining the currently scattered institutional arrangements for urban planning, management, and governance; clarifying the mandates for functional services delivery; and improving the administrative capacity of municipal and local authorities to deliver such services, combined with proper resourcing, will be important to Sri Lanka’s urban development agenda and to the cities to better respond to present and future needs. 41. In Sri Lanka’s lagging rural areas, including the North and East and the estate sector, reducing poverty and achieving shared prosperity present different and complex development challenges. These areas have relatively high poverty rates, which reflect limited economic opportunities, underdeveloped productive infrastructure, and somewhat poorer access to public services. The North and East are also affected by particular issues stemming from the conflict, with a larger concentration of people with physical disabilities and psychological problems, in particular ex-combatants and widows. In the estate sector, poverty measured by consumption has dropped significantly, but nonmonetary measures of poverty and vulnerability remain high. Workers continue to be largely dependent on the estate’s management for many basic needs, particularly housing, while their access to services and the quality of services are comparatively low. Furthermore, poor outcomes in education impede the ability of the estate population to participate in the economy. 42. Closing gender gaps is central to shared prosperity, in terms of social inclusion, improved competitiveness, and enhanced sustainability in a context of an aging population. Women made up 53 percent of the working-age population in 2012, but only 34 percent of the 14 employed population, a figure that has remained static for decades. Women are less likely to participate in the labor market, but when they decide to look for work, they are more likely to be unemployed. Social norms related to a woman’s role in the household, especially as related to childcare responsibilities, restrict women’s opportunity to participate in the labor market. However, beyond social norms, gender wage gaps and occupational segregation dissuade and constrain women from participating in the labor force. At the same time, the formal legal framework for labor prevents women from taking up night work or part-time work in the growing service sector, and the laws governing maternity benefits make the costs of these benefits weigh exclusively on women’s jobs, potentially deterring employers from hiring women. Tackling the sustainability challenge related to governance and the environment 43. The sustainability of Sri Lanka’s development will involve maintaining the momentum toward reconciliation and successful completion of institutional reforms. Achieving a lasting settlement of conflict that ensures peace and security for Sri Lankans is the sine qua non for progress. Thus, addressing issues that led to grievances that, in turn, fueled conflict in the past will be critical. Sri Lanka has taken notable steps along this path, including following up on extensive recommendations by its Commission of Inquiry on Lessons Learned and Reconciliation. Important measures have occurred since January 2015, including initiating the return of land occupied by the military after the conflict ended. Sri Lanka will also need to follow through on major institutional reforms to achieve a lasting political settlement and become a government that is more transparent and accountable. 44. Sri Lanka’s transition to a well-performing MIC will require renewed attention to the sustainable management and governance of the country’s natural resources , as well as management of the environmental impacts associated with economic growth, structural transformation, and urbanization. The environmental services created by the country’s available natural resources are undervalued. Despite conservation efforts placing 14 percent of land area under legal protection, deforestation and forest degradation continue. Deforestation, conversion of mangrove forests, destructive mining practices, weak land management and erosion, pollution and poor management of groundwater and surface water resources, among other factors, are driving the county’s resource degradation. Environmental degradation is also accelerating because of a nearly exclusive focus on protection, along with outdated policies and institutional arrangements that, combined with weak institutional capacity and financing models, are no longer capable of effectively governing the environment or enforcing compliance with rules and regulations as pressure on natural resources is growing. In urban areas, unresolved issues stemming from solid waste management, water pollution, and agricultural non-point source pollution through over-fertilization require the country to move toward more integrated environmental management and introduce more effective policy and economic instruments to address these issues. As Sri Lanka’s natural and environmental resources are important for livelihoods and economic activities, environmental management will have to emerge as a key element in the country’s development agenda. 45. Additional risks to livelihoods and economic assets are emerging from natural disasters and the expected longer-term impacts of climate change. While Sri Lanka is 15 considered well-endowed with a per capita water availability of 2,450 cubic meters, the figure ignores the temporal and spatial variations in availability and demand. Some districts in the wet zone are expected to become water scarce in the near future, as extraction rates are expected to grow substantially to meet future demand. Several major rice-producing districts are already using substantial amounts of their available water resources and will face severe shortages if current inefficiencies in irrigated agriculture are not addressed and as competition for water from other sectors increases. At the same time, annual losses from natural disasters, particularly flooding landslides and drought, have been sizable over the past decade and are estimated to represent $380 million annually, with a disproportionate impact on the poor. While progress has been made, a more comprehensive approach to disaster risk management and adaptation is needed to protect livelihoods and reduce the government’s contingent liabilities for relief support. 46. Sri Lanka is well placed to capitalize on green development as a source of a new growth momentum and jobs, and become a leader in climate change mitigation and adaptation. Sri Lanka has strong untapped potential to diversify its energy generation mix by expanding capacity in unconventional renewable energy. This approach would also allow the country to access concessional climate finance resources for sustainable development. The diversification of the energy mix will also help reduce the country’s high dependence on imported fossil fuels. Besides diversifying the energy mix, energy efficiency improvement, urban green growth, more efficient integration of modes of transportation in urban areas, climate-smart agriculture (especially in rice-based irrigation areas), the blue economy, coastal zone management and protection of mangrove resources, and forest protection have significant mitigation and adaptation potential that can be harnessed for growth and prosperity. Sri Lanka has shown strong commitment to these objectives in its Nationally Determined Contributions (NDCs) that were adopted at the United Nations Framework Convention on Climate Change’s 21st Conference of the Parties (COP21) in Paris in December 2015. 16 Table 4: SCD priority areas to end poverty and promote shared prosperity in a sustainable manner PRIORITIES FISCAL  Maintaining continued commitment to fiscal sustainability will require long-term revenue measures.  Simplifying the tax regime and improving tax administration to increase the tax base could reverse the declining revenue trend.  Low revenues and rigidity in expenditures undercut investment in human development, while higher levels of financing and effectiveness are needed to meet Sri Lanka’s needs as it transitions to a UMIC.  Inefficiencies in social protection and management of the public service particularly undermine efficient use of resources. COMPETITIVENESS  Review and revise the country’s trade-related policies.  Invest in education and training and enhance the dialogue between the private sector and education system to ensure that the population has the skills demanded by high-productivity enterprises.  Promote innovation by establishing linkages between R&D institutions and networks of entrepreneurs who can benefit.  Improve the regulatory environment, reduce informality and allow for economy wide increases in productivity to allow firms to grow to attain economies of scale.  Review the role and participation of the public sector in the economy. INCLUSION  Using urbanization to drive inclusion. This strategy is enhanced if there is a governance framework that empowers local decision making and is responsive to the needs of the poor and bottom 40 percent for public services and infrastructure.  Using multi-sectoral interventions to improve public service provision and promote employment opportunities in areas where poverty is localized, including Northern and Eastern provinces, Moneragala, and the estates, where emphasis should also be devoted to reducing nutritional deprivation.  Promoting reconciliation and efforts to improve equality of opportunity across ethnic groups. This strategy includes promoting employment opportunities, addressing land claims in the Northern and Eastern areas, providing assistance to new and former internally displaced persons, and integrating efforts to assist widows and ex-combatants.  Increasing female labor force participation by increasing education, ensuring better alignment between the education women pursue and the demands of the market, reforming legislation that prevents or deters women from being hired, and promoting greater participation of women in leadership positions. SUSTAINABILITY  Sustaining peace and security through long-term reconciliation efforts among Sri Lanka’s heterogeneous society is the sine qua non for progress toward the twin goals.  Developing a more accountable and effective state to follow through on recently initiated governance reforms.  Placing a heavier emphasis on direct investment and long-term private-sector flows to sustain Sri Lanka’s external fiscal position.  Balancing imperatives to preserve Sri Lanka’s natural assets, provide for the health and livability of its citizens (especially in urban areas), and foster growth.  Managing the impact of climate change through adaption, mitigation, and strategies that reduce the country’s carbon footprint.  Addressing long-term fiscal sustainability concerns related to population aging. GOVERNANCE (cross-cutting theme)  Improve the regulatory environment to allow firms to grow and enhance overall productivity in the economy.  Review the role and participation of the public sector in the economy.  Improve the efficiency of the public sector. 17 III. WORLD BANK GROUP PARTNERSHIP STRATEGY 3.1 Government Program 47. The new government envisages promoting a globally competitive, private-sector-led economy, with a strong emphasis on jobs and inclusion. In November 2015, the Prime Minister presented a reform oriented economic policy statement to Parliament. This statement identified the following development goals and key policy priorities: generating one million jobs; enhancing income levels; developing rural economies; ensuring land ownership by the rural and estate sectors, the middle class, and government employees; and creating a broad and a strong middle class. The policy statement also proposed consolidating fiscal operations by raising revenue and reducing the fiscal deficit to 3.5 percent of GDP by 2020. 48. Balancing development with environmental conservation and enhancing resilience to climate change across sectors are also important priorities for the new government. Building on past positive steps, this agenda involves protecting and managing the country’s extraordinary natural assets for sustained growth and livelihoods. It also involves managing the environmental and social impacts of urbanization and economic growth and transformation. Furthermore, in its NDCs of October 2015 prepared for COP21, the government committed to important mitigation measures, focusing on energy, transportation, industry, waste and forestry, and proactive adaptation measures in the key areas of food security, health, water, coastal and marine resources, biodiversity and ecosystems, infrastructure, and human settlements. 49. As the new government turns its attention more fully to economic and social development, having advanced critical governance reforms in the early days of its term, the development priorities outlined in the November 2015 economic policy statement are being further refined and supplemented. High-level policy dialogue between the government and the WBG has intensified during this period. Other development partners are also being engaged for their support. The government’s decisions are being crystalized in recently approved strategies and action plans, such as the Public Investment Plan 2016–2020, the National Plan of Action for the Social Development of the Plantation Community 2016–2020, and the NDC. However, a comprehensive development strategy articulating the steps to implement the government’s vision has not yet been defined. 50. The new coalition government will confront the challenge of securing the commitment and marshalling the capacity needed to carry out the envisaged structural policy and institutional reforms that are a key part of its vision. Implementation of its vision is feasible but will likely be a complex endeavor, given the diversity of views inherent in a coalition government; the weak implementation capacity of the public sector; the political economy surrounding some of the planned policy reforms; and the instinctive policy responses at odds with them. 18 3.2 Proposed WBG Country Partnership Framework 3.2.1 Lessons from FY13-16 CPS Implementation and Stakeholder Consultations 51. The previous Country Partnership Strategy (CPS) was designed to address long-term strategic and structural development challenges as Sri Lanka positioned itself to manage its emerging MIC agenda. The then government’s Mahinda Chintana, Vision for the Future, is the foundation for the design of the FY13–16 CPS, which reflected its three goals in the following three focus areas: (1) facilitating sustained private and public investment, (2) supporting structural shifts in the economy, and (3) improving living standards and social inclusion. The 2014 CPS Progress Report added a fourth area of focus: improving resilience to climate and disaster risks. 52. The overall performance of the FY13–16 CPS is rated moderately satisfactory (see the Completion and Learning Report (CLR) in Annex 2). The program achieved substantial progress in improving access to and the quality of general tertiary education, the investment climate, the quality and sustainability of roads and connectivity, and fiscal resilience to climate- related risks, as well as delivering services and local infrastructure at the provincial level in the Northern and Eastern provinces. The program made some progress on improving access to finance for small and medium-sized enterprises (SMEs) and accountability and transparency in the use of public funds, enhancing protection of productive land from hydro-meteorological events, improving health service delivery, and improving livelihoods among select disadvantaged groups. Project implementation delays resulted in little progress made on reducing vulnerability to flooding in the Colombo metropolitan area and improving planning for disaster risk management, while the prevalence of malnutrition in selected areas remained high. Lessons learned 53. The FY13–16 CPS CLR identities several important lessons that have been integrated in the design of this framework. The key lessons follow:  Building opportunities for WBG engagement where there is initially little client interest requires a high degree of flexibility. With perseverance and persistent engagement across a broad group of stakeholders, potential entry points emerge. A high degree of responsiveness backed by strong analytics further engages client interest. Analytical and advisory work, from just-in-time policy notes and rapid assessments to more substantial flagship reports, has created openings for broader policy engagement.  Improving the investment climate and fiscal management cannot be addressed without sustained policy reform. While WBG interventions demonstrated progress on improving access to finance, improving investment climate and fiscal management proved difficult, despite the continuing importance of these goals, owing to the limited engagement at the policy level and the institutional flux resulting from the political transition.  Despite sustained successful engagement, social inclusion in the lagging areas of the country (the Northern and Eastern provinces, the estate sector, and Uva Province) remains an acute issue. Despite the success of WBG interventions in the North and East, gaps in economic opportunities and access to services remain significant between lagging areas compared with the rest of the country. 19  The introduction of performance-based or results-based instruments has led to more strategic engagements between line ministries and the Treasury, as well as between the government and the WB. It has proved to be good practice to assess and revise targets and the project architecture (particularly institutional arrangements and flow of funds) within the first 18–24 months to improve results and, where possible, heighten the level of ambition.  A selective approach to defining CPS outcomes and corresponding results indicators is warranted to ensure that they are attributable to WBG interventions, are scheduled to be achieved within the CPS period, and have a logical link to the activities to be undertaken.  To mitigate delays in project effectiveness, which usually carry over to implementation delays, the government should be encouraged to advance (1) the identification or hiring of project management unit staff, (2) the finalization of technical designs and the preparation of bidding documents and terms of reference, and (3) the streamlining of the approval process for disbursements. Government processes for hiring staff are cumbersome; in some instances, remuneration is not competitive; and outside of Colombo, it is often difficult to find qualified technical personnel. This should be properly taken into account during project preparation. Consultations 54. To inform the preparation of the CPF, extensive consultations were conducted across a broad spectrum of stakeholders in four geographically dispersed cities in Sri Lanka and online. The consultations were held between February and April 2016, and the objective was to elicit stakeholder feedback on what should be the focus of the WBG’s support to the government over the coming four years. The face-to-face events, both large public meetings and smaller gatherings with targeted invitees, drew participation from representatives of central and local government; the private sector (from micro, small, and medium-sized enterprises (MSMEs) to large corporations); civil society organizations (from think tanks to women’s groups and faith- based organizations); academia; media; youths; and development partners. A summary of the consultations appears in Annex 8. 55. Overall, stakeholder feedback was well aligned with the conceptual framework of the CPF, validating the relevance of the objectives and thematic areas identified. The relevance and quality of and access to education, particularly vocational and higher education, were concerns common to all groups of stakeholders. The private sector underscored the fact that uncertain and shifting policies were damaging to investor confidence and the business environment. Increasing access to finance and removing obstacles to business development by reducing regulation, and improving agricultural productivity and value chains, were repeatedly echoed as priorities. The poor system for the registration of lands was regarded as an obstacle to competitiveness in general, as lack of land ownership prevented land from being used as collateral and stymied agricultural productivity in some instances. Reforming the estate model for greater productivity and the enhanced welfare of workers was also discussed. In addition to the stark disparity in opportunities in the lagging regions relative to the rest of the country, the prevailing social ills, including drug and alcohol abuse particularly affecting the young, were highlighted. The need to address the 20 challenges of urbanization, disaster risk mitigation, renewable energy development, and better management of natural resources was raised. 3.2.2 Overview of World Bank Group Strategy 56. The CPF will support Sri Lanka in its transition to a more competitive, globally integrated, private-sector-led, inclusive, and resilient UMIC. The CPS Progress Report presented to the WBG Board in April 2014 recognized that, with the end of almost three decades of internal conflict, the country had started shifting from a focus on reconstruction to addressing the challenges of development on a MIC trajectory. Therefore, the report proposed refocusing WBG engagement on creating the enabling environment for increased foreign and domestic investment and enhancing the efficiency of the state, and added a new strategic area aimed at increasing resilience to natural disasters and climate change. The proposed CPF builds and expands on this engagement. 57. The government envisages that policy reform, institutional development, and significant investment will be needed to support this transition. Accordingly, much greater prominence is given to policy reform than in previous strategies, consistent with the government’s policy reform orientation and the SCD’s findings that broad policy reform is fundamental to eliminating poverty and boosting shared prosperity in Sri Lanka. The CPF provides for new engagement in several areas—such as competitiveness, fiscal policy, and public finance management—that were not embraced under the previous government. The program’s inclusion of policy dialogue in these areas also draws on lessons learned in the implementation of the last CPS. Given Sri Lanka’s important financing needs and with graduation from International Development Association (IDA) financing on the horizon, exercising selectivity and increasing leverage were guiding principles in the CPF’s design. 58. In defining the program, selectivity will be driven by three main considerations: (1) alignment with government development priorities; (2) alignment with SCD priorities; and (3) the WBG’s comparative advantage, taking into account the support provided by other development partners in the relevant sectors. The WBG—consisting of the International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), and World Bank (WB)—will work closely together and leverage each institution’s strengths and comparative advantage. In implementing the CPF, IFC will give priority to sustainable infrastructure, financial inclusion, and access to input/output markets, products, services, and jobs. MIGA will work closely with WB and IFC colleagues to support foreign investment projects, where possible, across sectors. Indicative IDA/International Bank for Reconstruction and Development (IBRD), IFC, and MIGA activities for the FY17–20 period are set out in the results framework. At the mid-point of this CPF period, the WBG will conduct a Performance and Learning Review to take stock of progress toward the CPF objectives, and will make mid-course adjustments to the program and corresponding results indicators as needed. 59. Further, the WBG will engage selectively in some areas according to its comparative advantage and the depth of engagement by other development partners. Going forward, the 21 WBG does not envisage supporting entirely publicly financed large infrastructure projects but would instead seek to assist in helping the government access alternative sources of funding including through public–private partnership (PPP) solutions, in part because of the relatively limited IDA and IBRD resources available, but also to help address fiscal sustainability going forward. The Asian Development Bank (ADB) and the Japan International Cooperation Agency (JICA) are active in the infrastructure arena. The government’s reconciliation efforts (SCD sustainability and inclusion challenges), which are important for sustaining peace and security, are being supported by a number of donors, including the European Union (EU); United Nations Educational, Scientific and Cultural Organization (UNESCO); United Nations Development Programme (UNDP); United Nations International Children’s Emergency Fund (UNICEF); United States Agency for International Development (USAID); and Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ). The WBG will contribute in this area by supporting the government’s efforts to improve service delivery to address spatial disparities and increase economic opportunities for people in disadvantaged areas. Several donors are paying particular attention to rural livelihood development by providing strong support to the government on fisheries sector development, including the Food and Agriculture Organization of the United Nations (FAO), Asian Development Bank (ADB), Norway, and the EU. Finally, numerous donors are devoting attention and resources to tackling gender-based violence (see Annex 9); the WBG will target its efforts toward improving women’s economic empowerment. 60. Opportunities to leverage financial resources to complement WBG interventions for greater results will continue to be sought from the private sector, other development partners, and global resources. The WBG can leverage private resources through WB and MIGA guarantees, IFC investments, and ongoing global initiatives, and can facilitate access to related resources (e.g., Climate Investment Funds, the Green Climate Fund, and the global Energy Sector Management Assistance Program initiative). Preparation of the first operation aiming to tap Green Climate Fund resources is already well underway, and the operation will be using a WB guarantee instrument. In particular, trust funds are expected to continue to play an important role in implementing the CPF, supporting both analytical work and technical assistance, as well as providing parallel financing or co-financing for projects. The Australian Department of Foreign Affairs and Trade (DFAT) has committed to finance WBG technical assistance to support the government on policy and institutional reforms to improve competitiveness. Additionally, such partners as, JICA, the EU, and the United Kingdom have expressed a strong interest to co-finance or provide support with trust funds to WBG interventions in some of the new areas of engagement under this CPF, including competitiveness, public finance management (PFM), agriculture and natural resource management. 22 61. The Framework is articulated within three pillars and across 10 objectives (Figure 3) Figure 3: Pillars and Objectives of the CPF Proposed Country Partnership Framework Pillar 3 Seizing Green Growth Pillar 1 Pillar 2 Opportunities, Improving Improving macro-fiscal Promoting Inclusion and Environmental Management, Stability and Competitiveness Opportunities for All and Enhancing Adaptation and Mitigation Potential Objective 1.1 Objective 2.1 Objective 3.1 Improving public finance Strengthening education and Greening urban development management training systems Objective 1.2 Objective 2.2 Objective 3.2 Improving the enabling Improving health and social Strengthening climate environment for private protection systems to address resilience and disaster risk investment and trade the challenges of the management demographic transition Objective 1.3 Scaling up infrastructure through public–private Objective 2.3 Objective 3.3 partnership solutions Improving living standards in Enhancing mitigation and the lagging areas adaptation potential Objective 1.4 Enhancing financial inclusion and financial sector efficiency Gender Governance 62. The three pillars and the corresponding objectives are summarized below. They are consistent with the WBG’s 2016 South Asia Regional Update priorities of private-sector development, social and financial inclusion, and governance and security. The corresponding program will support Sri Lanka’s attainment of the Sustainable Development Goals.14 14 See https://sustainabledevelopment.un.org/?menu=1300 23 1. Improving macro-fiscal stability and competitiveness: The first pillar’s objective is to accompany the country’s transition to become a more outward-oriented, competitive, globally integrated economy for the enhanced sustainability of the country’s growth and the promotion of more and better-paying private-sector jobs for the bottom 40 percent. This objective will require improving PFM, improving the enabling environment for private investment and trade, scaling up infrastructure through PPP solutions, and enhancing financial inclusion and financial sector efficiency. This is an area of re-engagement for the WBG, as the government is embarking on a comprehensive policy reform agenda to overcome long-standing structural, regulatory, and institutional constraints and promote openness, competitiveness, and productivity. 2. Promoting inclusion and opportunities for all: The second pillar aims to support the government’s objective to enhance the inclusiveness of the country’s growth and development model. This will require strengthening education and training systems to deliver the skills needed for the advanced industrial and service sector activities of a globally competitive MIC, improving health and social protection pensions systems to address the challenges of the demographic transition, and improving living standards in the lagging regions. Interventions would aim to address inclusion challenges and provide economic opportunities through reforms and the transition toward a more effective model for service delivery and local governance. While education, health, social safety nets, have been the subject of study and analysis, the thinking on development solutions in the lagging regions and pension reform is much less evolved. 3. Seizing green growth opportunities, improving environmental management, and enhancing adaptation and mitigation potential: The third pillar aims to improve the country’s capacity to address and mitigate the environmental impacts of the economic transformation and better manage and govern its natural resources and assets for sustainability and growth. This will include greening urban development, strengthening climate resilience and disaster risk management, and enhancing mitigation potential through the development of renewable energy and management of natural resources. Climate change is a cross-cutting theme within this pillar. Of the issues addressed under this pillar, policy and strategic directions relative to disaster vulnerability reduction are well-developed. 63. Strengthening governance is a cross-cutting objective and is also integral to achieving the objectives across the three pillars. The improved capacity of the state and stronger accountability and transparency mechanisms to ensure responsiveness and integrity are key objectives of the CPF. Pillar 1 is predicated on governance improvements to build state capacity, particularly in mobilizing revenues and improving the effectiveness of expenditures. Improved public finance will in turn contribute to macroeconomic stability—a key condition for making Sri Lanka more competitive. More responsive and effective governance is also integral to an improved regulatory environment for private investment and trade. Regarding Pillar 2, enhanced governance—particularly in clarifying mandates for and adequate resourcing of functional service delivery—is a key element in providing for higher-quality education and healthcare, better- targeted and comprehensive social protection, and enhanced livelihoods. Finally, under Pillar 3, more responsive, capable, and effective government systems contribute substantially to the 24 objectives of more effective management of natural assets and climate and disaster risks. Stronger governance in formulating policies and providing for effective implementation is also a condition for developing a regulatory environment conducive to green growth objectives. 64. During the CPF period and across the portfolio, the WBG plans to step up efforts to improve gender equality. Under the first pillar, addressing constraints and harnessing opportunities to enhance women’s economic empowerment will be imperative for growing the labor force and helping to maintain strong economic growth. Efforts to economically empower women likely will involve tackling obstacles to female labor force participation and improving gender inclusion in MSMEs and the financial sector. Regarding the second pillar, Sri Lanka has a number of critical gender gaps to address, particularly regarding disadvantaged and vulnerable groups. Bringing boys’ educational attainments in secondary and higher education up to par with those of girls is one example, as is supporting war widows, which comprise an extremely vulnerable group. Under the third pillar, recent research and good practices developed by the WBG show how women can play a unique role in improving climate change adaptation, resilience, and disaster risk management.15 The ADB/GIZ 2015 Country Gender Assessment, Sri Lanka: An Update, the forthcoming update on the 2013 female labor force participation report and the planned gender mainstreaming technical assistance will empower teams across the portfolio to obtain improved gender outcomes for ongoing and pipeline projects. Results will be monitored using gender-disaggregated indicators, where possible. Development partners in Sri Lanka are very active in supporting efforts to improve gender equality. Annex 9 discusses the role of gender in the CPF and provides a more detailed mapping of donor support in this area. How the CPF relates to the SCD 65. The priorities identified by the SCD to meet the fiscal and competitiveness challenges are addressed under the first pillar of the CPF, which focuses on macro-fiscal stability and competitiveness. The areas addressed under the first CPF pillar are interlinked and mutually reinforcing. To a large extent, the pillar’s scope mirrors the breadth of the ongoing policy reform dialogue, which has been intensifying over the past year and is being supported by the reengagement-focused development policy operation under preparation. The pillar also addresses the emphasis on FDI (under the SCD sustainability challenge), with its mutual support to improving competitiveness and the balance of payments. The pillar includes modernization of the financial sector, which was not an explicit priority in the SCD but for which there is strong government demand in the wake of the Financial Sector Assessment Program finalized in October 2015, and which is indispensable to private-sector development and for supporting social sectors through pension and insurance reforms, among others. If the policy reform dialogue gains traction in other relevant sectors, such as agriculture, these policy reforms will also be supported under this pillar. 15 See, for example, World Bank. 2011. Gender and Climate Change: Three Things You Should Know (http://documents.worldbank.org/curated/en/2011/01/17497304/gender-climate-change-three-things-know). . 25 66. The second pillar of the CPF addresses the priorities identified under the inclusion pillar of the SCD. With gender as a cross-cutting theme, the CPS program will focus on increasing female labor force participation through education. This pillar also includes support for finding a workable solution to empowering local government for better service delivery. Addressing the locational concentration of poverty in urban areas will be an important priority related to inclusion, and is also relevant to the third pillar of the CPF, which among other things is focused on sustainable urbanization for cities to become centers of growth and employment. This pillar also addresses issues relating to aging (under the SCD sustainability challenge) and social protection (under the SCD fiscal challenge). 67. The third pillar of the CPF addresses and expands on two priorities identified under the sustainability pillar of the SCD: (1) balancing imperatives to preserve Sri Lanka’s natural assets, provide for the health and livability of its citizens (especially in urban areas), and foster growth; and (2) managing the impact of climate change through adaptation, mitigation, and strategies that reduce the country’s carbon footprint. 3.2.3 Objectives Supported by the WBG Program Pillar 1—Improving Macro-fiscal Stability and Competitiveness 68. The objectives to be pursued under this pillar include (1) improving public finance management; (2) improving the enabling environment for private investment and trade; (3) scaling up infrastructure through PPP solutions; and (4) enhancing financial inclusion and financial sector efficiency. 69. As the objectives under Pillar 1 are areas of re-engagement, the WBG will lead with targeted advisory services and analytics (ASA) to support the government to prioritize, sequence, and implement planned reforms and follow with development policy financing, if conditions permit. As the dialogue is at a nascent stage, it is difficult to predict with specificity the particular outcomes that will be attainable during the CPF period and thus the results will be reviewed and updated as needed in the PLR. If traction is sufficient in implementing the reform program and the macroeconomic and fiscal policy framework is adequate, the reforms would be supported through a series of programmatic development policy financing operations. Without an adequate macroeconomic and fiscal policy framework, investment lending operations would be considered. IFC investment and advisory services and MIGA instruments will be engaged, as outlined under each objective below. Objective 1.1. Improving public finance management Key development challenges and government priorities 70. The key challenge is to restore fiscal sustainability, primarily by increasing revenue, while making expenditure more efficient. Fiscal consolidation, with improved governance and reduced fiscal risk stemming from SOEs, is a prerequisite to create the fiscal environment needed to achieve many of the government’s objectives. While the agenda of increasing revenue is taking 26 shape, it would be important to understand the structure of expenditure, including support to SOEs and credit support programs run by public entities, and the fiscal risks posed by SOEs and state- owned financial institutions, including the public reinsurance company. 71. Public finance management has been undermined in several ways, on both the revenue side and the expenditure side. Tax revenue mobilization is hampered by a complex tax policy as well as weak tax administration. Tax collection is low; the tax base is narrow and is undermined further by many exemptions and investment incentives; and the tax system is complex, unfair, and inefficient. Weak coordination between sector planning and budget planning and execution, and lack of rigor in capital investment planning and implementation, contribute to suboptimal use of resources. In addition, Sri Lanka’s debt management framework needs to be improved with better inter agency coordination and the adoption of a comprehensive debt management strategy that will result in efficient and cheaper borrowings to the government. The absence of such a strategy has led to vulnerability to fiscal risk and shocks, and obstacles to the deepening of the domestic government securities market. Furthermore, the state has not been effective in exercising oversight over SOEs, from the standpoints of both managing contingent liabilities and reviewing the need for continued state involvement. Inefficiencies in SOEs also weigh on the government budget— diverting scarce resources from more productive uses—and undermine the quality of public services provided by SOEs, notably infrastructure services. These weaknesses are critical constraints to fiscal sustainability, a threat to macroeconomic sustainability, and a significant impediment to private-sector growth. The state’s multiple roles as market participant, employer, and regulator have impeded private-sector development, constrained competitiveness, and disrupted labor market dynamics. 72. The government’s key objectives in this area are to improve tax revenue mobilization in order to increase fiscal space for development expenditures, especially social spending, while restoring sound fiscal balances and to improve public-sector performance in carrying out its service delivery and regulatory functions. Importantly, the government has reached staff- level agreement with the IMF on a multi-year revenue-led fiscal consolidation program. This consolidation, if managed well, could put public finances in a stronger position for the medium term. Further, the government has launched a series of administrative reforms, including implementing a more systemic approach to public investments, creating a special ministry to undertake more proactive oversight of SOEs, strengthening debt management, and improving the budget process and tax administration through automation and procedural changes. Additionally, constitutional changes adopted in 2015 ushered in new or strengthened institutions of accountability, notably concerning audit, procurement, and the disclosure of government information. However, while stronger accountability mechanisms and oversight are expected to stimulate greater government effectiveness and forestall abuse of office, challenges remain in operationalizing these institutions. Objectives of the WBG engagement 73. The WBG’s ongoing portfolio includes a number of innovative sectoral interventions that contribute to Sri Lanka’s long-term fiscal sustainability. The Catastrophic Deferred Drawdown Option (Cat DDO) provides a contingent line of credit to strengthen the country’s fiscal 27 resilience to extreme weather events. The Transport Connectivity and Asset Management Project assists the Road Development Authority’s (RDA’s) transition to the implementation of long-term contracts for rehabilitation and maintenance by adopting output- and performance-based contracts, as well as developing the capacity of the RDA for overall asset management. The Climate Finance for Renewables project will enhance Sri Lanka’s capacity to access international climate finance and improve fiscal resilience through the achievement of nonconventional renewable energy targets. 74. The WBG will contribute to improving public finance management to reduce vulnerabilities and boost growth by supporting future generations of reforms in the following areas:  Improving the tax system so that it takes into account the poverty and inequality impacts of tax reform.  Reforming PFM, contributing to increasing the credibility of the budget, and strengthening the medium-term fiscal framework and debt management capacity through implementation of the Public Finance Management Law and the medium-term PFM strategy, which are being developed by the government. Many development partners are interested in supporting these efforts. For example, the EU has proposed supporting a WBG-administered trust fund, while USAID is directly supporting the government on procurement reform. Future interventions on debt management will build on a recently completed Debt Management Performance Assessment. The WB will also support the strengthening of debt management and development of capital markets under Objective 1.4.  Managing public expenditure. As Sri Lanka is embarking on a medium-term fiscal consolidation, to better understand the structure of expenditure, a comprehensive Public Expenditure Review—including debt servicing costs, SOE financing and support, credit support programs, and economic resilience—will be prepared to help the government decide on necessary trade-offs in expenditures.  Operationalizing strong institutions of accountability in the areas of audit, procurement, and right to information. Recent institutional reforms call for significant capacity improvements, which will be the focus of WBG interventions in this area. Trust funds will be mobilized to support the Right to Information Act’s implementation and to strengthen the Auditor General’s Department, especially to enable it to deliver on its enhanced mandate to audit SOEs.  Supporting broader ownership of SOEs by advising the government on viable options in restructuring and strengthening SOEs, including through public listing. IFC may provide advisory and investment services to commercialize SOEs, help attract strategic investors and help prepare SOEs for initial public offerings, as appropriate. The WB will also support the government’s strengthening of SOE oversight and performance management. The activities contemplated are linked to those described under Objective 1.3.  Strengthening statistics and monitoring and evaluation (M&E) capacity. At the outset of the CPF period, WBG interventions will target shortcomings in the quality and timeliness of data collection for household and labor surveys, capacity building on evaluation techniques and efforts to make national household survey data more policy relevant. 28 75. The WBG will implement the activities under this objective in close coordination with the IMF that is expected to support government’s fiscal consolidation effort through its prospective program. The preparation of a re-engagement development policy financing operation has opened the dialogue on improving revenue collection and building institutional capacity (including the capacity of the Treasury) for the enhanced efficiency, effectiveness, and accountability of the state in carrying out its core functions. If the IMF program materializes, it will facilitate the deepening of the WBG’s engagement, creating opportunities to coordinate on complementary aspects of tax policy and tax administration, public finance management and SOE management; with a focus on reforms to improve competitiveness and attract more FDI (Objective 1.2), financial sector efficiency (Objective 1.4) and the distributional impact of the revenue mobilization efforts to help the government address the tensions between fiscal consolidation and protecting the poor. The WBG is well positioned to contribute to implementing the PFM strategy under preparation and strengthening institutions of accountability, in light of the breadth of its coverage of PFM institutional and procedural issues and its ability to draw on regional comparators. Through its engagement on both the fiscal and the competitiveness sides, the WBG is also well positioned to help address tensions between revenue collection on one hand, and FDI, investment climate, and trade facilitation on the other. Objective 1.2. Improving the enabling environment for private investment and trade Key development challenges and government priorities 76. Sri Lanka’s location on a major trade route and its proximity to some of the largest manufacturers and markets (China, India, and Pakistan) in the world offer a unique opportunity for the country to take part in trade logistics and manufacturing activities in the region. The location advantage could help position Sri Lanka as a key logistics hub for the region, particularly with the expansion of the western region’s Port of Colombo, the development of the southern region’s Hambantota port, and the plan to develop a major port in the Northeast. The bilateral FTAs with Pakistan and India, as well as the potential FTA with China and the deepening of the trade arrangement with India (through the Economic and Technical Cooperation Framework Agreement), will give Sri Lanka access to a huge manufacturing base and to a combined market of almost 3 billion people, opening up opportunities for exports and for participation in the regional and global value chains, especially those related to agriculture, services, and textiles and garments. 77. Sri Lanka needs to improve its investment climate to facilitate a larger and more competitive export-oriented private sector to lead growth, integrate into global value chains, and create quality jobs to improve shared prosperity. Private enterprises, notably SMEs, face high transaction costs involved with doing business formally, particularly with respect to regulatory and tax compliance. Shortages of skills, lack of access to finance and technology, and limited access to efficient input and output markets also represent important constraints to innovation and productivity. The present trade regime in Sri Lanka is one of the most complex and protectionist in the world. Trade distortions prevent the country from capitalizing on comparative advantages and are resulting in significant distortions in production and consumption patterns, while they have led to a heavy reliance of fiscal revenue on trade taxes (tariffs, para-tariffs, levies, and excises), reinforcing the need to reform the tax system. A strong anti-export bias, particularly 29 in the agriculture sector, prevents the sector from diversification. In addition, at below 2 percent of GDP, the level of FDI remains much lower than in other comparable MICs, such as Vietnam or Cambodia, and FDI inflows have been largely focused on infrastructure (inclusive of real estate development). These elements weigh on the ability of the private sector to take advantage of the country’s significant assets, achieve productivity gains, enhance competitiveness, and grow, thus limiting opportunities to provide more and better-paying jobs for the population, notably women and youths. 78. In light of these challenges, the government has articulated its vision of promoting competitiveness and global integration through international trade, and investment both domestic and foreign; diversifying exports; and creating an enabling environment for small- and large-scale farmers and entrepreneurs to participate in the global economy. To move toward its vision, the government has initiated a number of actions that are intended to address some of the obstacles to a more outward orientation. These actions include eliminating some obstacles to FDI; ratifying the WTO Trade Facilitation Agreement, which commits the government to a medium-term agenda for reform on trade facilitation; passing legislation to enhance SMEs’ access to finance; and supporting efforts to facilitate the diversification of agricultural production toward higher-value-added crops. The government has started to rethink its investment incentive scheme, which has been fiscally costly and an obstacle to restoring fiscal sustainability. However, while acknowledging the necessity of a greater private- sector role to lead growth, the government does not currently have the implementation mechanisms to address this need. 79. In addition, modernization of agriculture is an important government priority for improving economic growth. The National Program for Food Production 2016–2018 explicitly highlights the need for diversification away from basic staples toward higher-value crops (fruits and vegetables), specialized crops (spices), aquaculture, and livestock. Diversification is to be achieved by gradually releasing farmland that was previously mandated exclusively for rice production. The program further emphasizes the need for an integrated approach that involves smallholder farmers, the government, the commercial private sector, and research institutions as partners. In addition, putting the agriculture sector on a more sustainable growth path driven by comparative advantage and productivity growth will require significant policy reforms to overcome structural constraints and target public funding more effectively away from input subsidization and toward service provision and R&D. Objectives of WBG engagement 80. In support of the government’s policy direction, the WBG is stepping up its engagement in this area to help address some of the obstacles constraining private sector development and to catalyze a stronger orientation towards global integration. The main thrust of the program will be to contribute to the design and implementation of a medium-term program policy and institutional measures aimed at: (1) improving the investment climate to attract and retain efficiency-seeking FDI, (2) contributing to fiscal sustainability by supporting a move to a more efficient incentives framework, (3) improving the business environment to reduce the cost of doing business, (4) addressing trade distortions and fostering trade facilitation and trade policy 30 formulation, and (5) encouraging SME development through innovation and entrepreneurship development. Fostering private sector development and global integration will be supported by complementary WBG interventions in other areas of the program such as enhancing PFM for macroeconomic stability (Objective 1.1), expanding the supply of skilled and employable workers to meet the demand of the private sector (Objective 2.1); and managing the urbanization through strategic planning and investments in urban areas to attract the private sector and improve competitiveness (Objective 3.1). 81. The WBG will also support actions geared toward enhancing the competitiveness of firms in selected priority sectors, such as tourism and agriculture, and in the regional value chains. In particular, the WBG will support the modernization of agriculture through continuous analytical work and through investment and development policy financing to promote sector reform, diversification, value addition, and competitiveness. WBG will promote women’s economic empowerment through female labor force participation as a key contributor to competitiveness. IFC will continue engaging in priority segments and sectors, such as SMEs, agriculture, and tourism, by fostering the development of regional value chains; facilitating firms capitalizing on Sri Lanka’s locational advantage as a potential regional hub; enhancing SME access to value chains; and fostering increased productivity in agriculture through its investments and advisory services in financial institutions that lend or offer crop insurance to small farmers, and through technical assistance to improve the national agricultural insurance schemes. 82. This program will be closely coordinated with other partners active or interested in this area, notably the WTO, UNDP, and EU. Grant financing from DFAT will facilitate intensive WBG advisory services to support implementation of policy reforms relating to competitiveness. The EU has expressed its desire to co-finance the planned Agriculture Modernization project. Also, the re-engagement development policy operation under preparation may benefit from parallel financing by JICA. Objective 1.3. Scaling up infrastructure through PPP solutions Key development challenges and government priorities 83. Continued investments in infrastructure services are necessary to keep pace with the demand of a growing and competitive economy. Sri Lanka had a successful record of using PPPs 20 years ago for building new infrastructure assets and improving services in ports and in the power and telecom sectors. However, the use of PPPs has declined as a result of weakening of political commitment. In the past decade, major infrastructure projects have been financed through the public sector. Given the tightening in the fiscal environment, this approach can no longer be sustained. In this regard, the government has recently indicated a strong interest to re-engage private-sector participation in the development of major infrastructure, but is hampered by a number of issues, including the loss of institutional capacity in the identification, assessment, and preparation of bankable PPPs. This lack of capacity also undermines the effectiveness of the state, while forgoing an opportunity to spur private-sector investments, including FDI; to leverage alternative sources of financing; and to achieve efficiency gains. 31 Objectives of WBG engagement 84. The WBG will provide advisory and financing services to facilitate PPP approaches toward improving the quality of, increasing access to, and expanding infrastructure assets and services. It will help the government build capacity to identify, assess, prepare, and oversee PPP projects, as well as review the existing regulatory and incentive framework for PPPs. The proposed Infrastructure Investment Diagnostic and Strategy would articulate options for an appropriate use of private-sector financing and expertise through PPPs and for improved investment prioritization across sectors. It would also propose a roadmap of institutional and regulatory reforms for enhanced infrastructure services and support, establishing a strategy for reform of the key infrastructure sectors. This intervention is also relevant for Objective 1.1 as a vehicle to reform SOEs to improve the efficiency of public-sector expenditure and create opportunities for private sector engagement. WBG engagement in the energy sector (Objective 3.3) will promote an enabling environment for scaling up private-sector investment in nonconventional renewable energy generation, including supporting reforms in the electricity sector to enhance the independence, transparency, and accountability of the Ceylon Electricity Board and to facilitate PPPs in the sector. IFC’s advisory services will focus on supporting the government to structure, design, manage, and implement PPPs to attract qualified foreign and domestic developers for key infrastructure projects, including in the energy and transport sectors. IFC will also provide and mobilize financing for PPP projects that meet its financial, economic, and sustainability standards. MIGA also stands ready to support inward foreign investment, where private-sector interest exists and where project structures allow. Objective 1.4. Enhancing financial inclusion and financial sector efficiency Key development challenges and government priorities 85. Greater financial inclusion and more efficient finance can boost the competitiveness of Sri Lankan private firms and job creation, while helping to meet some of the country’s fiscal challenges for enhanced macroeconomic stability. Enhanced access to and availability of appropriate financial products—particularly for MSMEs, microfinance clients, farmers, and agribusinesses—are needed to support innovation, productivity gains, and growth in the private sector. However, MSMEs' access to finance has remained limited in spite of increased liquidity in the banking sector; a microfinance sector has grown in the absence of basic consumer protection measures; and lack of competition has hampered financial innovation, resulting in underdeveloped basic financial services needed by enterprises and the population at large. At the same time, deficiencies in credit infrastructure and the legal framework governing financial activities have hampered access to financial services by new entrepreneurs and have increased the risk aversion of formal lenders, reducing accessibility to and the affordability of financial services. At the other end of the spectrum, deficiencies in the functioning of capital markets undermine the accessibility to long-term finance, while limiting investment opportunities to pension funds. An incomplete and fragmented supervisory structure introduces market distortions and an uneven playing field for market players, while significant state presence among the financial intermediaries introduces governance issues. 32 86. The government has expressed commitment to a reform program aimed at enhancing the overall efficiency of the financial sector. A recently completed Financial Sector Assessment Program (FSAP) provided a wide range of recommendations to address the shortcomings affecting the efficiency of the financial sector, including at (1) the legal, regulatory, and supervisory levels; (2) the governance of state-owned financial institutions; (3) credit infrastructure; and (4) nonbank financial institutions (NBFIs). The government has shown interest in implementing a medium- term reform program that addresses the obstacles identified in the FSAP in a sequenced and programmatic manner. Objectives of the WBG engagement 87. The objective of the WBG engagement is to enhance financial inclusion and financial sector efficiency through a diversified, liquid, and well-regulated financial market. The WBG will focus on various activities, including (1) expanding access to finance to the underserved segments, including MSMEs, women, small farmers, and renewable energy finance through banks and NBFIs, by developing strategy and capacity, as well as by providing financing through IFC; (2) strengthening and enhancing regulatory, supervisory, and governance structures in line with international standards; (3) developing and deepening the capital market through necessary legal, regulatory, and market infrastructure, and introducing new products, instruments, and markets (digital finance, e-payments, local currency bonds); and (4) supporting the development of necessary elements of the credit infrastructure through joint WB–IFC interventions. The work on capital market development will complement the activities on pension reform (Objective 2.2) and debt management (Objective 1.1). 88. With the diagnostic work complete, WBG will support the achievement of this CPF objective primarily through an investment lending operation that is scheduled to be delivered in the early part of the CPF. The WBG has relied heavily on the FSAP findings and has complemented those findings with targeted technical assistance supporting legal reforms. Going forward this assistance is expected to continue and broaden with grant resources from the Financial Sector Reform and Strengthening (FIRST) Initiative. This technical assistance will be continued and ensuing policy reforms could be supported through the planned programmatic series of development policy financing operations. The WBG will continue to coordinate efforts with other key development partners active in this area, particularly ADB, EU, JICA, and GIZ, with a view to ensuring coherence, and maximizing leverage and impact. Pillar 2—Promoting Inclusion and Opportunities for All 89. WBG activities under this pillar supports the government in its efforts to enhance the inclusiveness of growth and address the challenges of persistent poverty in the lagging regions. The objectives to be pursued under the program include (1) strengthening education and training systems for inclusive growth, (2) improving health and social protection systems to address the challenges of the demographic transition, and (3) improving living standards in the lagging regions. 33 Objective 2.1. Strengthening education and training systems Key development challenges and government priorities 90. Sri Lanka faces an acute shortage of the high-level human resources needed for the advanced industrial and service sector activities of a globally competitive UMIC. Increasing numbers of educated youths are seeking jobs in government but lack the knowledge, skills, and attitudes needed to work in the dynamic and better-paying private sector. Sri Lanka lags behind other MICs in terms of participation in early childhood and higher education, the quality and relevance of technical and vocational education and training (TVET), learning outcomes, and socio-emotional skills. About one-fifth of children age 3–5 years, mainly from poor households, do not have access to preschool education. Global evidence indicates that early childhood development leads to better educational outcomes at primary school and beyond and minimizes learning disparities of under-privileged children. Participation in higher education, with a nominal enrollment of 17 percent (and only 9 percent on a full-time basis), is far below the average participation rates of 28 percent for all MICs and about 34 percent for UMICs. Furthermore, the quality of education at all levels is a major challenge facing Sri Lanka, with substantial regional disparities. The quality and relevance of TVET need to be strengthened to provide the middle- grade staff needed for a growing private sector. Weaknesses in the education and training systems particularly constrain the ability of the bottom 40 percent, notably youths, to access higher-paying jobs and share in economic growth. 91. The government’s vision includes expanding and improving human capital to transform the Sri Lankan economy to upper-middle income status, and promoting more and better jobs and greater female labor participation. It is important to note that, given the relatively small size of the Sri Lankan economy, making significant inroads to external markets is required to bring the government’s vision of creating one million new jobs a reality. Toward that end, the government has pledged to increase expenditures on education. The government is developing a strategy and program for the education and training sectors, with WBG support that builds on the findings of the WBG’s FY16 Education Sector Review, and is in line with Sustainable Development Goal (SDG) 4.16 Objectives of the WBG engagement 92. The WBG is engaged at all levels in Sri Lanka’s education sector; early childhood development, primary and secondary education and technical and vocational skills development. The objective of the WBG’s ongoing engagement in early childhood development is to enhance equitable access to and improve the quality of early childhood education and care for children age 3–5 years. WBG’s engagement focuses on disadvantaged areas, including the estates (which supports the achievement of Objective 2.3). The objective of the primary and secondary education engagement is to promote equitable access and quality to provide knowledge-based economic and social development. The key objective of the ongoing vocational and technical skills 16 See https://sustainabledevelopment.un.org/?menu=1300. 34 development engagement is to expand the supply of skilled and employable workers by increasing access to quality training programs that are relevant to labor markets. While there has been good progress as a result of previous and ongoing interventions more remains to be done and thus WBG support in this area will be sustained. 93. Going forward, the WBG plans to deepen its engagement in higher education and in the outer years of the CPF in primary and secondary education systems, to enable youths to seize opportunities for more productive, higher-paying jobs and support the development of future higher-value-added industries. The WBG will contribute to the development of the higher education sector—for example, by deepening the relevance of and improving course curricula and offerings in science, technology, engineering, and mathematics. Emphasis will be placed on increasing the quality and relevance of teaching, learning, and research and development through tighter linkages with the private sector. Based on the strategy under preparation, another objective of the program will be to support the development of a primary and secondary education system (particularly in the rural areas and estates) that combines the development of learning outcomes and socio-emotional skills and is benchmarked against the education outcomes of UMICs and OECD countries. In doing so, emphasis will be placed on strengthening school-based management, in line with good practice for UMICs. 94. The WBG’s sustained engagement with government and development partners in the education sector, sets the stage for the use of more sophisticated instruments and closer collaboration. Drawing on lessons learned in the implementation of the CPS, the WBG will emphasize using performance- or results-based financing instruments that enhance the level of strategic engagement among the ministries and with the WBG. IFC will look for opportunities to support private-sector engagement in education and skills training. The WBG is well positioned to help deliver results in the education sector, as it brings a unique combination of global expertise and financing, particularly in the higher education sector and in early childhood development. In doing so, partnerships will continue to be leveraged. Currently, a joint program is being implemented by the WBG and ADB in skills development. WBG interventions also benefit from trust fund financing from DFAT. Furthermore, the WBG has partnerships with UNICEF, UNESCO, GIZ, and the Korean International Cooperation Agency, as well as international and national nongovernmental organizations (NGOs). Objective 2.2. Improving health and social protection systems to address the challenges of the demographic transition Key development challenges and government priorities 95. The ongoing demographic transition places new demands on the health and social protection systems, including pensions, and raises new challenges in terms of fiscal sustainability and public service provision. Sri Lanka has a well-developed social safety net, but it is in need of urgent reform to improve its governance and poverty impacts. The system is fragmented, with more than 30 different programs run by 10 ministries with varying selection criteria and no coordination; the key safety net programs are poorly targeted; and pension coverage is very low, covering around 24 percent of the work force, or 15 percent of the working-age population. The country’s noncontributory civil service pension system places a growing burden 35 on public finances, and existing informal sector pension schemes are fragmented, poorly regulated, and inefficiently invested. Informal sector retirees depend on the public social protection system for elderly and disabled care. Many workers are not covered by any of the existing schemes, will not be in good health as they age, and will require adequate social assistance to sustain themselves in retirement. Furthermore, there is a need to ensure that the working-age and older-age populations remain productive and healthy. However, Sri Lanka faces a growing burden of non- communicable diseases (NCDs), which are lifelong diseases and require increased expenditure within hospitals and in the community. The trend of key health indicators, such as life expectancy and adult morbidity rates, suggests that Sri Lanka is struggling to make meaningful progress against NCDs; this issue will become more pressing as the population ages. NCDs call for an improvement in the quality of health care, particularly in lagging regions where a comprehensive package of NCD services is not available and where human resources and advanced diagnostic and laboratory facilities are lacking. The return to fiscal sustainability (Pillar 1) is a key condition to create the fiscal environment needed to successfully deal with the transition. 96. The government recognizes the need to strengthen health and social protection systems in general, and specifically to support a rapidly aging population. However, a fully defined, comprehensive vision with concrete steps to address the challenge has yet to be articulated. The government plans to modernize safety net systems to develop an integrated system for the identification, selection, and payment of beneficiaries, which the government hopes will improve targeting and governance of safety net programs. The fragile political environment has long been a deterrent to implementing needed reforms on targeting and graduation of ineligible participants, even though there is ample evidence of the necessity of reforms to improve the poverty impact of the system and to mitigate the potential negative impacts of the fiscal consolidation process on the poor. The government has acknowledged the need to move to a contributory pension system for the civil service, increase the retirement age, and strengthen the options available to private- and informal-sector workers to save for their retirement. There is also recognition that prevention and treatment of NCDs is the key challenge facing the health system of the future. The initial steps of developing NCD national targets specific to Sri Lanka and the associated multi-sectoral action plan are now in place. Objectives of the WBG engagement 97. The objectives of the WBG engagement will be strengthening social protection and health systems to proactively address the fiscal, productivity, and equity aspects of an aging population. In recent years, the WB has had a limited but sustained engagement with the government on social safety nets. Pensions is a new area of engagement for the WBG in Sri Lanka. Through analytics and technical assistance, the WBG is supporting the government in streamlining the civil service pension system and determining ways to strengthen contributory schemes for private-sector workers. Building on this through technical assistance and the planned Social Safety Nets Project, the WBG will support the government in improving the equity, efficiency and transparency of Sri Lanka’s social safety nets programs, by developing an integrated social registry, strengthening the mechanism for targeting (including through improved transparent eligibility criteria) and moving to electronic payment of benefits. This engagement would be carried out in parallel to and would complement the work on financial intermediation (Objective 36 1.4). Going forward, policy and institutional reforms could be supported through the programmatic development policy financing series articulated under Pillar 1. The update of the female labor participation report and subsequent follow-on activities also cuts across the issue of pension sustainability, as it is important for Sri Lanka to bolster activity among the working-age population to reap the demographic dividend during the transition phase. 98. In the health sector, building on ongoing investment financing and technical assistance, a lending operation is planned for the outer years of the CPF that will focus on strengthening key health system components, such as human resources, financing, pharmaceuticals, and information technology, with a particular focus on the primary care level. The operation could also support improving the quality of the health services to better manage NCD patients at primary, secondary, and tertiary levels, including disability care, with particular emphasis on lagging regions. In relation to this effort and more broadly, high-level policy dialogue will be initiated on ways to attain universal health coverage for populations in the lagging regions and for the poor and vulnerable in urban areas. IFC will continue to support private provision of healthcare, especially those providers who help increase access to affordable and quality healthcare. 99. The WBG is also well positioned to support the design and implementation of comprehensive, multi-sectoral approaches to the broader challenge posed by the demographic transition, by working to address the key linkages between macroeconomic, fiscal, labor force, social protection, and health policies. The WBG will carry out analytical work in this area, starting with a comprehensive aging report. The WBG will collaborate closely with other development partners in all these areas, such as the International Labour Organization, to ensure coherence in approaches and maximize impact. The referenced interventions will contribute to Sri Lanka’s progress toward SDGs 1, 5, 8, 10, and 16.17 Objective 2.3. Improving living standards in the lagging areas Key development challenges and government priorities 100. Addressing the multifaceted challenges confronting the poor in the lagging regions (the Northern and Eastern provinces, the estate sector, and Uva Province) poses significant challenges to social and economic inclusion, which calls for targeted multi-dimensional solutions. There is an urgent need to address the issues of war-affected rural communities, including internally displaced persons (IDPs) who have returned or are returning to their original villages after the war. While the government has released land for returning families, they require more support to rebuild their lives in undeveloped areas ravaged by the war. These resettled IDPs are struggling to restart their livelihoods as a means to economic inclusion, by increasing productivity in fishing, farming and rearing livestock. The incidence of social issues, particularly in relation to high risk behaviors of youth, warrant special attention in post-conflict development 17 See https://sustainabledevelopment.un.org/?menu=1300. 37 planning. Under the FY13–16 CPS, the WBG financed multiple interventions to rehabilitate local infrastructure, provide for livelihoods, and build local government capacity in certain conflict- affected areas. These efforts were matched by development of livelihoods for poor households islandwide. Despite the success of these programs, the needs persist. In this context, the government aims to reintegrate ex-combatants, and provide social support for war widows and other entitled communities for meaningful and long-lasting reconciliation. 101. In the estate sector, malnutrition in mothers and children remains a persistent problem, and reflects low living standards and livelihoods. Nationally, about 22 percent of children under 5 years of age are underweight and 18 percent are stunted, while 23 percent of all pregnant mothers have a low body mass index (less than 18.5 percent). This issue is even more acute in the estate sector, where 36 percent of the children below 5 years are stunted. The government recognizes the need to address malnutrition, but has not yet adopted a targeted approach to address high-risk population pockets. 102. Equally important is the establishment of a model that empowers and equips local authorities with resources to deliver demand-driven public services to close the delivery gap. Building on existing WBG experiences in delivering public services, including water supply and sanitation services and general public infrastructure, there is a need to assess post-conflict priority development needs for economic revival and chart the path for the transition toward a more effective model for service delivery and local governance. Through its ongoing constitutional reform process, the government is seeking to provide for clearer delineation of responsibility between the central government and provincial and local governments. Objectives of the WBG engagement 103. To inform its next generation of targeted interventions that support government efforts in addressing poverty in the lagging regions, the WBG will immediately engage in the preparation of three targeted analytical pieces. Through a planned social assessment of the North and East, the WBG will attempt to provide a better understanding of the social and economic conditions of resettled communities, including gender dimensions and needs in a post-conflict environment; poverty, economic vulnerability, and livelihood issues as well as levels of social capital; and reconciliation and development needs and aspirations. Additionally, the WBG will examine how to provide economic opportunities through institutional and economic reforms in the estate sector. A proposed study on local government public service delivery will assess the immediate and medium-term capacity development needs of the local authorities to deliver services, including the institutional, human resources, financial, technical, and administrative infrastructure capacity development needs relevant for planning, implementing, and monitoring local development interventions and longer-term management and governance, and for the improved provision of public services by local authorities toward strengthening local administrative and fiscal capacities. 104. Building on the WBG’s experience providing support in the post-conflict regions of the North and East and planned analytical work, the WBG program would include selected and targeted community-based interventions in the lagging regions. The planned investment financing operations would seek to enhance rural livelihood assets, employment opportunities, 38 infrastructure and social services, markets and social rehabilitation, with specific attention to newly resettled IDP communities, ex-combatants, war widows, youths as well as poor and vulnerable families in the plantation estate sector. Any future intervention will seek to include activities aimed at economically empowering rural communities through holistic livelihood development including viable local institutional arrangements to foster improved governance and assets management. Simultaneously, the ongoing interventions in water supply and sanitation and in early childhood development and primary and secondary education, as well as the proposed interventions in education, health, and social safety nets, will significantly contribute to the improvement of living standards as they aim to mitigate the observed regional disparities in outcomes between the lagging areas and the rest of the country. The activities under this objective will be implemented in coordination with other development partners involved in reconciliation and rural development, notably UN agencies, GIZ, USAID, EU and international and local NGOs. (see Annex 7 for a comprehensive list of development partners) 105. IFC will continue to target MSMEs and local businesses in lagging areas. IFC is working toward increasing access to finance and financial services, including agri-insurance, for low-income communities. It is helping to build the capacity of MSMEs though its advisory program and investments in banks and NBFIs in these regions. IFC is also contributing to the development of the regional tourism industry, specifically in promoting the East as a tourism destination. Pillar 3—Seizing Green Growth Opportunities, Improving Environmental Management, and Enhancing Adaptation and Mitigation Potential 106. The program under Pillar 3 aims to support activities for: (1) more efficient, resilient, and sustainable green urban development; (2) improved management of the environmental impacts of urbanization and economic transformation; (3) expansion of clean energy generation; (4) improved management of natural resources and assets; and (5) enhanced resilience to climate- related events and disaster risk management. Climate change considerations—adaptation and mitigation—feature prominently in the WB’s ongoing program. The selectivity of the future program will be informed by planned analytical work which will be launched at the start of the CPF period, and will be guided strategically by the relevance of WBG-supported activities and their contribution to Sri Lanka’s NDCs and by the integration of mitigation and adaptation aspects into overall development policy and programs. Objective 3.1. Greening urban development18 Key development challenges and government priorities 107. Sri Lanka is undergoing a dynamic spatial and structural transformation process that manifests itself in the emergence of the economically dominating Colombo metropolitan 18 To develop urban areas in a more environmentally friendly manner. 39 region (CMR) and the Kandy–Colombo–Galle multicity agglomeration, as well as various other urban centers across the island. In January 2016, the government launched a Western Region Megapolis Master Plan, which aims to outline the future development strategy for the capital region. The initiative fully recognizes that Sri Lanka’s growth path will be dependent on exploiting the competitive advantages of the CMR, as well as positive agglomeration and urbanization effects to drive future growth, including larger and more efficient labor markets, lower transaction costs, and easier knowledge and technology spillovers. The CMR can be expected to generate much of the capital, human resources, technology, and services needed for growth and employment generation in the future. It can also serve as the driver of a green growth model. While the CMR covers only about 6 percent of the country’s total land area, it is home to 28 percent of Sri Lanka’s population, accounts for about 45 percent of national GDP and 80 percent of industrial value added, is the country’s major urban agglomeration, and is growing faster than any other area in Sri Lanka. The CMR also hosts the highest numbers of the country’s poor and bottom 40 percent populations. Sri Lanka’s future success in moving toward UMIC status largely depends on how the CMR is managed, not only within Sri Lanka but also regionally and globally. 108. The CMR is not realizing the full benefits from agglomeration and urbanization because of certain obstacles. In the absence of sound public policy, the effects of congestion, pollution, and higher costs of living may outweigh the benefits of agglomeration. The specific obstacles include the increasingly inadequate provision of urban infrastructure and public services; under-designed and poorly maintained drainage and solid waste management and urban environmental management systems; inefficient and inadequate urban transportation systems; and vulnerability to flooding, which is likely to increase in the course of a changing climate and sea level rise. In addition, limited financial and human resources available to municipal and local authorities in the CMR, combined with poor coordination among agencies, absence of integrated urban planning, and institutional fragmentation and overlapping mandates, hinder the effective delivery, operation, and maintenance of urban public services, as well as the closer and more efficient integration of the central and peripheral areas of the CMR. Addressing the bottlenecks that inhibit the competitiveness of urban and metropolitan areas and promoting coordinated and better-planned development are essential for inclusive growth (see Objective 1.2). Objectives of the WBG engagement 109. The WBG is engaged in supporting efficient, resilient, and more sustainable urban development in the CMR and other cities, including Galle, Kandy, and Jaffna, through analytical work and investment financing. Notable interventions include the Metro Colombo Urban Development Project, the Strategic Cities Development Project, and an analytical strategic Green Growth Technical Assistance Program for Colombo. Through these interventions, the WBG has been supporting the government in improving urban road infrastructure and traffic management systems, rehabilitating drainage infrastructure, building flood-retention areas, developing an urban wetland management strategy for integrated environmental and urban planning in the catchment of the Colombo Water Basin, and strengthening the capacity of local authorities in the CMR to manage key urban infrastructure and services. The WBG has also been supporting local authorities in various provinces to rehabilitate and manage streets and drainage infrastructure, and improve local public facilities and other urban services. WBG technical 40 assistance has also supported assessment of performance, institutional, and policy constraints, and development options for railway and airport transportation systems. 110. Going forward, the WBG will seek to continue and broaden its engagement to assist the government in addressing urban development bottlenecks and promote a coordinated and planned development approach for the CMR that builds on the principle of resilient, sustainable, and inclusive urban development, including more efficient urban transportation. In particular, through analytical work and technical assistance, the WBG will seek to define and then stimulate reforms for more efficient and participatory urban planning, governance, and management, and based on its international experiences in urbanization, will provide the government and the CMR with international best practices in planning, coordinating, regulating, and implementing strategic actions for urban development and for promoting green urbanization for efficiency gains, competitiveness and resilience. The WBG program will seek to build capacity within those institutions responsible for urban planning and development and related coordinating agencies. Therefore, the program will include strategic assistance for improving the efficiency of urban transport systems; exploring private-sector financing options, including through PPPs for infrastructure and public services development (see Objective 1.3); and effectively integrating strategic land use, transport investment, and urban growth management. Through PPP advisory and investments, IFC will look for opportunities to demonstrate proof of concept in private-sector participation in urban infrastructure, as well as urban–rural connectivity, such as mass transit, rail, port terminals, and roads. Objective 3.2. Strengthening climate resilience and disaster risk management Key development challenges and government priorities 111. Climate-related hazards put future economic and social development in Sri Lanka at risk, increasing the importance of management. Extreme variability of rainfall and droughts is already a defining feature of Sri Lanka’s climate. Climate projections indicate an increasing rainfall trend in the wet zone and a decreasing rainfall trend in the dry zone, meaning that the risks associated with water-related hazards are likely to increase. Annual average losses associated with disasters are estimated to be already in excess of $380 million, but can significantly exceed this amount in any given year. Sri Lanka is vulnerable to more frequent and severe storms, cyclones, and rising sea levels, at a time when development pressures on its coastal assets are also increasing, underscoring the importance of science-based integrated coastal zone management. This calls for renewed efforts to strengthen an evidence-based approach to coastal zone planning and development, and an institutional framework for managing multiple uses, access rights, and trade- offs; facilitating cross-sectoral coordination and community engagement in decision making; and monitoring implementation of coastal plans. 112. The government has made disaster risk management a priority. The increasing frequency of recurrent natural disasters is driving the government’s interest to scale up investments in strengthening the climate resilience of Sri Lanka’s infrastructure and assets. In recent years, the government has made notable efforts to improve the policies, institutions, human resources, technology, and tools needed to enhance the country’s knowledge, information, 41 and capacity for improved climate-related disaster forecasting, preparedness, and management. The government is currently integrating disaster risk management into its investment plans, while scaling up investments in risk mitigation. The Comprehensive Disaster Management Program (2014–2018), developed by the Ministry of Disaster Management, calls for ensuring the safety of Sri Lanka by reducing the impacts of disasters on people, property, and the economy as a whole. The program is in line with the Sendai Framework (2015–2030), agreed upon by governments at the Third United Nations World Conference on Disaster Risk Reduction, which aims to substantially reduce the risks of disasters and losses to lives, livelihoods, and health and to the economic, physical, social, cultural, and environmental assets of people, businesses, communities, and countries. 113. Water resource development and management are a continuing priority, in light of increasing climate related risks. As the population grows and the economy develops, increasing demands are being placed on water resources for irrigation, hydropower, and municipal and industrial use. Signs of water stress are emerging, with competition among uses and users; overexploitation of groundwater and deteriorating groundwater quality; pollution from agrochemicals, industrial effluent, sewage, and solid waste; deforestation in the upper catchment; problems of surface water drainage and widespread downstream flooding; sand mining and saltwater intrusion; and degradation of the coastal and marine environment. With dams operated by up to four different authorities, there is potential conflict among users for hydropower, irrigation, and water supply, as well as the risk of reduced environmental flows. Risks are increasing sharply with climate change, which is bringing more extreme events (rainfall excesses or deficits, increased variability in precipitation and runoff) and provoking floods, droughts, and increased or reduced stream flows. Sri Lanka’s water institutions have not adapted to these challenges, which are best managed within a coherent basin framework. Objectives of the WBG engagement 114. The objective of the WBG engagement over the CPF period is to enhance resilience and reduce the vulnerability of people and assets to natural disasters, climate variability, extreme weather events, and long-term climate changes. The WBG has a well-developed program to improve short-term and long-term resilience to climate and disaster risks. Ongoing interventions include investment support and technical assistance through the Climate Resilience Improvement Project (CRIP), to improve the physical resilience of road and irrigation production infrastructure and enhance the government’s technical capacity relating to climate change and disaster risks to target future risk mitigation investments strategically and cost effectively. Also, the Dam Safety and Water Resource Management project supports the establishment of long-term sustainable arrangements for the operation and maintenance of large dams and the improvement of water resources planning. These interventions complement the WBG’s activities in support of urbanization (Objective 3.1) by providing investments to enhance the resilience and adaptation of infrastructure and protect public assets through the introduction of resilience considerations in the design of new infrastructure. The water management and resilience agenda is also closely linked to the agriculture development agenda in the dry zone and the need for a climate-smart approach 42 to agriculture production toward achieving SGD #2.19 In addition to the CRIP, the WBG has supported the country’s disaster risk management plan through a Cat DDO, a contingent line of credit that will provide immediate financing in the aftermath of a natural disaster. 115. In this CPF, the WBG will partner with the government to expand the current engagement toward implementing a comprehensive, evidence-based, and innovative climate resilience program that addresses the physical and fiscal impacts of climate change and natural disaster, and toward more integrated water resource management. The planned CRIP II investment operation will finance a portion of the larger resilience investments program that is being defined under CRIP, with the objective to reduce annual disaster-related economic losses by 15–20 percent. CRIP II will include activities to strengthen the forecasting capabilities of the Department of Meteorology. Through technical assistance financed by the Global Facility for Disaster Reduction and Recovery, the WBG will support the government’s efforts aimed at developing a landslide risk mitigation solution for certain vulnerable communities, especially in the estate settlements; enabling government to capture the actual economic impacts of disaster events and better modulate relief and recovery efforts; and assessing the vulnerability of countrywide road infrastructure to floods and landslides, to anticipate costs and accompanying management actions. In addition, the ongoing Blue Economy ASA could provide the basis for supporting climate-resilient development of the coastal areas and related economic sectors. 116. The WB and the IFC will work jointly to provide comprehensive solutions, especially in developing risk transfer mechanisms. IFC will continue to apply its environmental performance standards in its investments to help client companies identify and mitigate environmental risks, and will seek opportunities for climate change adaptation in its projects. IFC also will continue to support weather index-based insurance to help farmers mitigate weather- related risks. The WBG will coordinate with other partners engaged in this area, notably JICA, UNDP, and possibly the Asian Infrastructure Investment Bank. Objective 3.3. Enhancing mitigation and adaptation potential through renewable energy development and natural resource management Key development challenges and government priorities 117. Sri Lanka‘s electricity generation mix has shown a progressive shift from hydropower to fossil fuel-based technologies, increasing the country’s dependence on imported energy sources. More than 50 percent of electricity generation currently relies on imported fossil fuels, mainly coal and oil. In addition, the increasing electricity demand resulting from the progressive shift of the economy toward energy-intensive manufacturing and services further amplifies the vulnerability of the Sri Lankan economy to fossil fuel prices and increasing price volatility, with important implications in terms of competitiveness and macroeconomic stability. The government aims to develop further renewable energy sources, notably wind-based power generation, with the objectives of (1) increasing the country’s energy sector resilience by 19 See https://sustainabledevelopment.un.org/?menu=1300. 43 diversifying the sources of electricity generation and acting as a fossil fuel price hedge, (2) reducing public contingent liabilities associated with the energy sector, and (3) becoming more climate friendly. In particular, Sri Lanka has made a voluntary commitment through its NDC to reduce emissions by 4 percent through its own efforts and by 16 percent conditional to international support by 2030 against the 2010 baseline, notably through the development of renewable energy. 118. Sri Lanka is also exceptionally well endowed with biodiversity and natural resources, which are important assets for future economic development and climate change mitigation and adaptation. Sri Lanka derives significant benefits and services from its environmental assets, including direct economic benefits from resource exploitation, flood protection, integrity of landscapes to support agricultural production, drinking water supply, nature-based tourism, and cultivation of medicinal plants. However the value of these assets is often poorly understood, leading to their undervaluation and weak management. About one-third of Sri Lanka’s total land area is covered with natural forests; however, about 30 percent of dry zone forests is already degraded, and wet zones are increasingly characterized by highly fragmented small forest patches. Therefore, the government has committed in its NDC to increase forest coverage by 32 percent by 2030, which will increase the country’s carbon sinks and capacity to adapt to climate change. In addition, Sri Lanka’s coastal zone areas and resources—including extensive natural mangrove areas, coral reefs, lagoons, and marine species—are critical environmental and economic assets and highly relevant from both climate resilience and mitigation perspectives. Nevertheless, these resources are being subjected to increasing development pressure and remain essentially as open- access resources with no management framework in place. Objectives of the WBG engagement 119. The objective of the ongoing and planned WBG engagement is to support the shift toward renewable energy sources and enhanced energy efficiency and to strengthen the management of coastal and terrestrial ecosystems for improved conservation, economic benefit, and climate adaptation and mitigation. These are areas of re-engagement for the WBG. In each area an investment lending operation is coupled with analytical work to address knowledge gaps and support the government in thinking through development solutions in relatively unfamiliar areas. 120. WBG engagement will deepen support to the government in the implementation of the long-term power generation program, expansion of nonconventional renewable energy resources (notably wind and away from fossil fuel-based electricity generation), and enhancement of energy efficiency; assist in meeting the NDCs through renewable energy development; and, linked to Objective 1.4, support the piloting of private-sector-led investments for renewable energy scale-up through PPPs. WBG support will include investment support (including innovative guarantee-based financing models), complemented with concessional financing from the Green Climate Fund, technical and policy advice, and analytical support to inform policy and regulatory reforms in the energy sector in FY17. Investments would include support of improvements in the grid reserve and dispatch capacity for higher penetration of renewable technologies, and technical assistance would inform the design of the government strategy for the power sector. An important modality of the WBG engagement in the renewable energy sector will be to help leverage private and global sources of financing in support of the 44 government agenda, including global climate finance resources and results-based payments for greenhouse gas emission reductions. IFC will look for opportunities to support private-sector engagement in pioneering renewable energy and waste-to-energy projects through PPP advisory and investment support. Where possible, MIGA will consider supporting foreign investment in the renewable energy sector. 121. The WBG program in natural resource management and sustainable coastal development will be delivered through investments and technical assistance, in close coordination with other development partners that are active in the sector, notably UNDP and FAO. The objective supports the more sustainable use of terrestrial and coastal ecosystems. (This outcome is well positioned to contribute to SDG 15.)20 The recently approved Eco-systems Conservation and Management Project aims to improve the management of eco-systems in select areas of Sri Lanka for conservation and community economic benefits. In addition it aims to mitigate the human-elephant conflict which is set to worsen, unless remedial action is taken, due to increased development and inevitable erosion of habitats. The United Kingdom has expressed an interest in supporting the scaling up of the program. In addition, the WBG will provide technical assistance to strategically assess Sri Lanka’s mitigation potential and options for greening traditional sectors in the economy and to assist the country in meeting NDC commitments. As a follow-on, an Adaptation and Sustainable Development project is proposed toward the outer years of the CPF to comprehensively address institutional capacity, and investment needs for a long- term adaptation and a greener development trajectory. 3.3. Implementing the FY17–20 Country Partnership Framework WBG resources 122. The proposed interventions under the CPF will be delivered through a combination of investment financing, development policy financing (including guarantees), analytical and advisory services, and technical assistance (see Annex 3A). The current active WBG portfolio in Sri Lanka comprises 14 projects (12 IDA operations and two IBRD operations) with a total net commitment value of approximately $1.66 billion (see Annex 5), and six recipient-executed trust funds with a total net commitment value of $54.4 million. Sri Lanka has requested support from the IDA17 Scale-Up Facility, which could provide Sri Lanka resources additional to the IDA17 national allocation. Sri Lanka is expected to graduate from IDA financing at the end of the IDA17 period. As part of the ongoing IDA18 replenishment discussions, which will conclude at the end of December 2016, possible modalities for IDA transitional support mechanisms for graduating countries like Sri Lanka are being considered. The government is interested in IBRD lending of up to $300 million annually. The availability of these resources would depend on the macroeconomic environment in Sri Lanka and its demand for IBRD resources over the CPF period, overall demand for IBRD resources from other clients, and IBRD’s lending capacity. WB, IFC, and MIGA interventions will be designed and implemented so as to complement and leverage each other in support of the overall CPF objectives. 20 See https://sustainabledevelopment.un.org/?menu=1300. 45 123. IFC’s committed portfolio comprises $223 million in 16 investment operations covering financial markets, manufacturing, agribusiness, services, and infrastructure, including information and communications technology and funds, as of April 30, 2016 (Annex 6). IFC’s projected long-term finance commitment volume during the CPF period is expected to be about $1 billion. In implementing the CPF, IFC will address the overarching theme of enhancing the competitiveness of Sri Lankan firms across the various areas of the program. In doing this, IFC will give priority to three areas of engagement: (1) infrastructure, (2) financial inclusion, and (3) access to markets, products, services, and jobs. In infrastructure, IFC will continue to engage with the government and the private sector to develop effective PPP service delivery; support transformational infrastructure projects with private-sector participation, including roads and port terminals; and support projects that promote efficiency and green growth, such as urban–rural transport, renewable energy, and customs modernization for efficient trade. In financial inclusion, IFC will boost access to finance for MSMEs, through banks and NBFIs; provide locally scarce long-term funding; support short-term trade; deepen capital markets with new products, such as a local currency bond; develop local bank capacity to provide SME finance, agri-finance, renewable energy finance, and access to finance for underserved segments; and develop and promote new markets and products, such as gender finance (which may include interventions to help partner financial institutions develop gender-sensitive products to better target women) and digital finance to help market players expand their reach. Regarding access to markets, products, services, and jobs, IFC will focus on supporting regional value-chain opportunities for Sri Lankan firms and labor-intensive and strong linkages to sectors where the country has comparative advantage, such as tourism, organized retail, and agribusiness. IFC will help build the management skills of small-scale entrepreneurs through IFC products (e.g., SME Toolkit, Business Edge), including in Northern and Eastern regions, and will provide linkage support to strengthen value chains. MIGA will look to facilitate private investment inflows to Sri Lanka via its political risk guarantees. 124. In implementing the program, the WBG will also seek to leverage other sources of financing, including financing from other development partners, the private sector, and global resources. In particular, trust funds are expected to continue to play an important role in implementing the CPF, supporting both analytical work and technical assistance, as well as providing stand-alone financing or co-financing for projects. Fiduciary aspects 125. The overall financial management performance of the Sri Lanka portfolio is satisfactory, and the fiduciary risk after mitigation is rated as “moderate” for the majority of projects. However risks in some projects have been rated as “high” and “substantial,” based on the nature and complexity of implementation arrangements and implementation capacity in implementing agencies. 126. During the CPF period, the WB will continue to make use of country systems wherever possible and make efforts to increase the use of country systems as capacity is built in line ministries and provincial and local governments through some of the project-specific interventions. The WBG makes already full use of Sri Lanka’s country systems in budgeting and 46 external auditing, and partial use of country systems in accounting, financial reporting, funds flow, and internal controls under financial management for the WB-funded projects. Where separate WB systems need to be maintained in the short term, efforts will continue to be made to reconcile the systems and build capacity as necessary. 127. For the sustained use of the country’s financial management systems in WB- financed projects, the WB will continue to support strengthening public audits, to enhance the scope and coverage of public audits, and to strengthen value-added audit services. During the CPF period, the WB also expects to re-engage in activities to strengthen the parliamentary oversight of public funds. Along with the intention of the government to increase the effectiveness of PFM, a PFM strategy is being currently formulated and will be supported over the course of the CPF. 128. The overall procurement risk under the WB-financed projects is considered to be substantial. This is mainly owing to low procurement capacity, limited oversight arrangements within the public procurement guidelines, and a limited procurement-related complaint redress system. All WB-funded projects follow the WB procurement guidelines, and each project is equipped with specific procurement safeguards. The WB has allowed the use of national bidding documents subject to certain modifications. In its Public Procurement Modernization and Reform Assessment Report (FY12), the WB identified weaknesses in the national public procurement systems. These weaknesses have been acknowledged by the new government, which has expressed its intention to modernize the public procurement system (Box 1). As soon as these critical reforms are underway, the WB will assess the feasibility of using the country’s procurement system for WB-financed projects. The WB systematically engages in capacity-building initiatives targeting the public sector, under WB-financed projects and as part of its broader dialogue to address current weaknesses in procurement capacity. Box 1: Public Procurement Reform in Sri Lanka Improving governance is a top priority of the new government. One of the first and most significant steps has been taken to strengthen the public procurement system. The recently approved 19th constitutional amendment created a new National Procurement Commission with broad powers. Realizing the full benefits of this amendment will require a significant upgrade in procurement capacities. Four main focus areas have been identified to help achieve the government’s objective of modernizing the public procurement system. These areas are expected to be included as part of the overall National Public Procurement Modernization Strategy that is under preparation. 1. Develop and implement an electronic government procurement system to be used by all public procuring entities in Sri Lanka. 2. Develop and implement a framework for contract procurement and implementation arrangements, including the establishment of a “supply chain management” process to meet the demand for standardized procurement processes. 3. Update the current procurement guidelines, manuals, and standard bidding documents; establish and maintain a public procurement portal to make key procurement data available to the public; establish and support the effective functioning of a procurement regulatory body; encourage green procurement; and design and use procurement performance standards to monitor and evaluate the public procurement function. 4. Upgrade the skills of public officials involved in procurement through the development and delivery of a procurement accreditation program. 47 Implementation management and monitoring and evaluation 129. During the CPF period, the WBG interventions may be adjusted flexibly within the proposed framework, in line with the government’s evolving priorities and circumstances. In particular, if the macroeconomic policy framework is considered to be inadequate for the purpose of development policy financing, the WBG will adjust the mix of instruments accordingly in support of the CPF objectives and expected results. 130. The CPF Results Matrix will be the principal tool for monitoring and evaluating the achievements under the CPF program. The WBG will carry out M&E activities, in close partnership with the government and other stakeholders—for example, through periodic results- based portfolio reviews—drawing on specific M&E arrangements instituted for ongoing and planned interventions under the program. Project monitoring and evaluation arrangements will include estimates of the share of project beneficiaries that are poor and in the bottom 40 percent, where possible, and in selected cases will incorporate an impact evaluation to estimate the causal effect of the intervention. Possible changes to expected outcomes and targets will be introduced as relevant in the matrix at the time of the Performance and Learning Review. Partnerships and donor coordination 131. The total aid commitment to Sri Lanka for 2014 stood at approximately $5.8 billion. Approximately 65 percent of foreign aid disbursements was obtained from bilateral donors. The top five-largest disbursements were received from China (22 percent of total disbursements), Japan (18 percent), India (10 percent), ADB (18 percent), and the WBG (14 percent). Sectors with the highest level of donor financing were roads and bridge infrastructure (approximately 50 percent of total disbursements); energy and water supply (approximately 9 percent each); and education, labor, and vocational training (approximately 7 percent). (see Annex 7 for further details) 132. Committed to strong donor coordination, the WBG is an active participant in the Development Partners Framework which is the mechanism for foreign aid coordination in Sri Lanka. IFC and the WB co-chair the private-sector development thematic group, and the WBG chairs the public financial management thematic group. In this transition phase, coordination is crucial, as the government, with significant needs and decreasing aid flows, decides how to use most effectively the resources and expertise that DPs bring. The WBG seeks to minimize the transaction burden for the GoSL and to leverage resources for greater impact during the CPF period. Further, given limited resources, the WBG has chosen not to engage in sectors where other DPs already have robust and adequate programs. IV. MANAGING RISKS TO THE CPF PROGRAM 133. Risks to achieving the CPF program’s objectives are rated as moderate overall. Sri Lanka is subject to a number of potential risks and vulnerabilities that may affect its economic and social goals, and that could significantly affect the expected results of the WBG interventions under the proposed CPF, which are discussed in more detailed below. Substantial risks stem from 48 the government’s challenging fiscal position, weak institutional capacity, and the lack of sector strategies and policies. Also, the time limit on the current government coalition poses a political risk to the program outcomes. Table 5: Systematic Operations Risk Rating Risk Categories Rating 1. Political and governance Substantial 2. Macroeconomics Substantial 3. Sector strategies and policies Substantial 4. Technical design of project or program Low 5. Institutional capacity for implementation and sustainability Substantial 6. Fiduciary Moderate 7. Environment and social Moderate 8. Stakeholders Low Overall Moderate 134. Political and governance (Substantial). Increase in outward orientation and reductions in protectionism could prove threatening to domestic industry and may stymie reform ambition due to fears of withdrawal of support in the fragile political environment. Varying degrees of policy coherence among members of the coalition may slow decision-making, retarding implementation of the government’s vision and negatively impact implementation of the CPF program. Furthermore, the two-year time limit on the current coalition agreement between the ruling political parties creates uncertainty as to whether a change of policy priorities may occur in the second half of the CPF period, potentially affecting the thrust of the CPF program. This risk is partially mitigated through the design of the CPF which allows for flexibility in the WBG’s response to evolving policy priorities. 135. Macroeconomics (Substantial). Low tax revenue and a challenging fiscal position risk affecting both program implementation and expected outcomes. If revenue performance and fiscal balances do not improve, the program could be affected in a number of ways: (1) reduced fiscal space could prevent the government from implementing some of the actions supported by the program, including counterpart funds and public investments; (2) increasing fiscal imbalances and debt could threaten macroeconomic stability, which would directly detract from the country’s attractiveness for investors, competitiveness, and growth prospects; (3) deficit financing could lead to further crowding out of the private sector, thereby undermining the objective of promoting an enabling environment for private investment and job creation, or could lead to inflation, which may result in a decline in real incomes, notably for the poor; and (4) the lack of fiscal buffers undermines the state’s ability to cope with external shocks, such as deteriorating global conditions or natural disasters. The proposed program is designed to mitigate this risk to some extent, by supporting measures aimed at enhancing revenue mobilization and improving macro-fiscal management. This effort will be further enhanced, if the government concludes an IMF program that anchors a fiscal consolidation path and that program stays on track during the CPF period. Moreover, if the macroeconomic policy framework is deemed to be not conducive to development policy financing, the WBG will seek to pursue the CPF objectives with a different mix of 49 instruments. However, in the current challenging global environment, risks associated with the government’s fiscal position remain substantial. 136. Sector strategies and policies (Substantial). There is a dearth of sector strategies and policies. The new government is currently designing strategies across the various areas of the program, but this process will take time and may lead to uncertainties and delays. To mitigate this risk, strong emphasis has been placed on the design of the CPF to support the government with analytical and advisory services aimed at informing its strategic thinking and decision-making processes, and the formulation of policies and action plans. 137. Institutional capacity for implementation and sustainability (Substantial). Capacity and experience to lead transformative policy and institutional reforms is not readily available among the public service cadre. The CPF program envisages significant technical assistance to accompany the government in carrying out reforms. Relatively weak institutional capacity at the decentralized levels could constrain the country’s ability to implement solutions in the lagging regions, particularly with regard to delivering services to the citizens in these predominantly poor areas. Simplicity in project design will be essential for development solutions in lagging regions where capacity is weakest. The government places a strong emphasis on building civil service capacity. Thus across the program, the proposed interventions in the CPF are designed to address capacity building, of a technical nature but also relative to project management. 50 Annex 1: CPF Results Matrix21 Pillar 1—Improving macro-fiscal stability and competitiveness Definition of Focus Area: This focus area concentrates on improving macro-fiscal stability and competitiveness by i) improving public finance management, including supporting improvements in the tax system, SOEs, debt management, and budget credibility; ii) improving the enabling environment for private investment and trade; iii) scaling up infrastructure with PPP options; and iv) enhancing financial inclusion and financial sector efficiency. This will require advancing a comprehensive policy reform agenda to overcome long-standing structural and institutional constraints, and promoting sound fiscal and debt management, and enhanced efficiency and openness in the real and financial sectors. Links between the Focus Area and Twin Goals: The Systematic Country Diagnostic (SCD) shows that in the context of robust growth, poverty reduction in the past decade has been primarily driven by increases in labor incomes. The SCD also shows that sustained economic growth will need to be driven by the private sector and foreign direct investment (FDI), which calls for rebalancing the role of the state from a participant to a regulator. Improving macroeconomic stability and competitiveness will accelerate the transition toward a more outward-oriented, diversified economy, promoting more and better private-sector jobs for the bottom 40 percent of the economy. Country Development Goals: The government’s key policy priorities include generating one million jobs, enhancing income levels, and creating a b road and strong middle class. Enhancing competiveness and sustaining growth are indispensable to achieving those goals. CPF Objective 1.1—Improving public finance management Intervention Logic: Combined with low revenue mobilization, weaknesses in accountability and budget planning, execution, monitoring and evaluation (M&E), weak debt management, and weak oversight and operations of state-owned enterprises (SOEs) represent important areas of vulnerability which undermine fiscal sustainability and competitiveness. WBG Interventions: World Bank Group (WBG) activities will seek to contribute to the efforts to restore fiscal sustainability by improving public finance management, and improving the capacity to manage public debt and fiscal risks associated to SOEs. Assistance will be provided for (1) ) supporting improvements in the tax system, (2) reforms targeting the increase in the credibility of the budget, strengthening of the Medium-Term Fiscal Framework, and debt management capacity; (3) State Owned Enterprises reform; and (4) strengthening statistics and M&E capacity. CPF Objective Indicators Supplementary Progress Indicators WBG Program 1.1.1 Two year average variance between projected Medium-term PFM strategy adopted Ongoing and actual total revenue (as % of projected) as per Baseline: No (2016) Trust Fund (TF) for Statistical Capacity Building Target: Yes (2018) for Improving Poverty Estimation (TF) 21 Changes to expected outcomes and targets will be introduced as relevant at the time of the PLR. 51 the budget and the audited public accounts Catastrophe Deferred Draw Down Option (Cat (respectively)* DDO) Baseline: average deviation 2013-14: 18 percent Macro-fiscal analysis and support (advisory Target: average deviation 2018-19: 10 percent services and analytics (ASA)) Public Finance Act (to strengthen Poverty monitoring and analysis (ASA) preparation, execution, and oversight of the 1.1.2 Number of audit reports on SOEs budget, including oversight of SOEs) Proposed incorporated under the Companies Act tabled in enacted Competitiveness development policy financing Parliament and posted on the official website of Baseline: No (2016) (DPF) (FY17) the national audit office Target: Yes (2018) Programmatic DPF Baseline: 0 (2016) Revenue administration and SOE oversight (ASA, Target: TBD** (2020) FY17) Supreme Audit Institutions Performance Measurement Framework (ASA, FY17) 1.1.3 Number of hours taken to pay taxes per year PFM support (ASA, FY 17) reduced Public Expenditure Review (ASA, FY18) Baseline: 167 (2016) Debt Management Unit established Target: 100 (2020) Baseline: No (2016) Target: Yes (2018) Electronic data collection occurs in pilot districts for the Household Income and Expenditure Survey 2016/17 Baseline: No (2016) Target: Yes (2018) Data Sources: 1) Implementation Completion and Results (ICR) of Competitiveness DPL 2) ICR of Programmatic DPLs 3) Doing Business report 4) ICR for Trust Fund for Statistical Capacity Building Grant 5) Minister of Finance budget speeches and Ministry of Finance Annual Reports for the year 2013, 2014 and 2018, 2019 * Due to the number of revenue deviations, the average of 2 years is taken. Total revenue consists of tax and non-tax revenue, excluding grants **Values to be identified after PFM law enacted and PFM strategy issued. CPF Objective 1.2— Improving the enabling environment for private investment and trade 52 Intervention Logic: Regulatory hurdles and deficiencies in business regulations create high transaction costs and increase incentives for informality. Trade opportunities are hampered by a complex and protectionist trade regime and inefficiencies in trade facilitation. Legal, regulatory, and institutional obstacles affect the ability of the country to attract and retain FDI, thereby limiting opportunities for job creation and linkages to global value chains. WBG Interventions: WBG interventions will assist in the design and implementation of policy and institutional measures aimed at (i) improving the investment climate to attract and retain FDI; (ii) supporting a move to a more efficient, fiscally sustainable incentives framework; (iii) improving the business environment to reduce the cost of doing business; (iv) addressing trade distortions and fostering trade facilitation and trade policy formulation; (v) encouraging SME development through innovation and entrepreneurship development; and (vi) supporting actions geared toward enhancing the competitiveness of priority sectors, such as tourism and agriculture. CPF Objective Indicators Supplementary Progress Indicators WBG Program Ongoing 1.2.1 Number of hours taken to process FDI One-stop shop for FDI established Agriculture Sector Modernization Project applications reduced Baseline: No (2016) Sri Lanka Investment Policy Project (TF) Baseline: TBD* (2016) Target: Yes (2018) IFC investment in private-sector firms to support the Target: TBD* (2020) competitiveness of priority sectors Unleashing the Competitiveness of Sri Lankan 1.2.2 Share of women-led, famer producer Number of female clients who adopted Enterprises (ASA) organizations and agribusiness partnerships improved agriculture technology making a profit in selected districts in the Baseline: 0 (2016) Proposed lagging regions Target: 3,000 (2020) Competitiveness DPF (FY17) Baseline: 0% (2016) Programmatic DPFs Target: 50% (2020) Agriculture Institutional and Policy Reform (ASA, FY17) 1.2.3 Reformulated trade policy adopted Sri Lanka Investment Climate Reform (ASA, FY17) Baseline: No (2016) Sri Lanka Business Environment Reform (ASA, FY17) Target: Yes (2019) Sri Lanka Tourism Competitiveness Report (ASA, FY17) 1.2.4 Revised legal framework governing WBG advisory services to facilitate access to finance investment adopted for the agriculture sector Baseline: No (2016) WBG advisory services to improve investment climate Target: Yes (2018) IFC investment in private sector firms to support the competitiveness of priority sectors Data Sources: 1) ICR of Competitiveness DPL 2) ICR of Programmatic DPLs 3) Implementation and Status Report (ISR) and ICR of Agriculture Sector Modernization Project *The establishment of the one-stop shop is required to compute the reduction in time taken for application processing. 53 CPF Objective 1.3—Scaling up infrastructure through PPP solutions Intervention Logic: Given the tightening fiscal space, the financing of major infrastructure projects from public funds is no longer viable. However, a lack of institutional capacity exists for the identification, assessment, and preparation of bankable public –private partnerships (PPPs). This prevents private-sector investment (including FDI), the leveraging of alternative sources of financing, and achieving efficiency gains. WBG Interventions: The WBG will provide advisory and financing services to facilitate PPP approaches and build capacity to identify, assess, prepare, and oversee PPP projects, as well as review existing regulatory and incentive frameworks for PPPs. CPF Objective Indicators Supplementary Progress Indicators WBG Program 1.3.1 Number of PPPs awarded and relevant Potential PPP projects identified by Proposed contractual documentation signed between GoSL Infrastructure Investment Diagnostic and Strategy (ASA, GoSL and private party Baseline: 0 (2016) FY17) Baseline: 0 (2016) Target: 10 (2017) Public–Private Infrastructure Advisory Facility Target: 2 (2020) (PPIAF) Building Government Capacity for Conducting PPP Transactions (TF, FY18) GoSL engagement of PPP Transaction IFC PPP Transaction Advisory Adviser Baseline: 0 (2016) Target: 4 (2018) PPP structure finalized and Request for Proposals (RFP) issued by the GoSL Baseline: 0 (2016) Target: 3 (2019) Data Sources: 1) IFC Sri Lanka project data base 2) Publicly available information CPF Objective 1.4— Enhancing financial inclusion and financial sector efficiency 54 Intervention Logic: Lack of competitive, diversified, and well-regulated financial markets limits the access to investment finance for SMEs and corporates and economic opportunities for underserved segments of the population. WBG Interventions: The WBG will promote (i) strengthening and enhancing regulatory, supervisory, and governance structures in line with international standards; (ii) boosting supporting access to finance for MSMEs and underserved segments through banks and nonbank financial institutions by developing strategy and capacity, as well as providing financing (through IFC) in such areas as SME finance, agri-finance, and renewable energy finance; (iii) developing and deepening the capital market through necessary legal, regulatory, and market infrastructure, and introducing new products, instruments, and markets (digital finance, e-payments, local currency bonds); and (iv) executing funding arrangements (long-term infrastructure, short-term trade finance) supporting the development of necessary elements of the credit infrastructure. CPF Objective Indicators Supplementary Progress Indicators WBG Program 1.4.1 Percentage of MSMEs using the services of Secured Transactions Act enacted Ongoing a financial institution that is formerly regulated Baseline: No (2016) Financial sector development (ASA) Baseline: 17%* (2016) Target: Yes (2019) IFC investment and advisory services for partner Target: 25% (2020) financial institutions to support MSMEs and risk management 1.4.2 Increase in number of bank loans with Financial Consumer Protection Act IFC’s GTFP support to banks and trade supplier finance movable assets as collateral enacted IFC’s advisory services to support insurance firms Baseline: 6,000 (2016) Baseline: No (2016) WBG’s advisory services to improve access to finance Target: 35,000 (2020) Target: Yes (2019) by strengthening financial infrastructure 1.4.3 Online filing & reporting systems Insurance risk-based capital returns first Proposed developed for the regulator (Insurance Board of review completed Competitiveness DPL (FY17) Sri Lanka/ Securities and Exchange Baseline: No (2016) Programmatic DPLs Commission) Target: Yes (2019) Financial Sector Modernization Project (FY17) Baseline: No (2016) The Financial Sector Reform and Strengthening Target: Yes (2020) Initiative (FIRST) Initiative IFC investment and advisory services for financial institutions to support MSMEs and risk management WBG advisory services to facilitate access to finance for the agriculture sector WBG advisory services to promote low-cost financial services using technology Data Sources: 1) ICR of Competitiveness DPL 55 2) ICR of Programmatic DPLs 3) ISR of Financial Sector Modernization Project (FY17) 4) WBG financial data index (FINDEX) *Value represents borrowing from a formal financial institution. Source: FINDEX (2016) Pillar 2—Promoting inclusion and opportunities for all Definition of Focus Area: This focus area promotes inclusion, economic opportunities and living standards in a sustainable manner by i) strengthening education and training systems, ii) improving health and pension systems to address the challenges of the demographic transition, iii) improving the efficiency and effectiveness of social safety nets, and iv) improving living standards in the lagging regions. Links between the Focus Area and Twin Goals: The SCD concludes that the bottom 40 percent faces more constraints in accessing education and training opportunities to seize higher-paying jobs, and thus investing in human capital is crucial for boosting growth and increasing shared prosperity. Youth and female unemployment is an island wide issue, but is particularly acute in the North and East. Overcoming the skills mismatch is an effective way to enhance participation of the bottom 40 percent, including women and youths, in the economy. The SCD also finds that Sri Lanka’s success in transitioning to upper - middle-income status depends critically on how the demographic transition is managed, and how well prepared the country is for the future needs of the dramatically different population age structure of the future. In Sri Lanka’s lagging regions, higher poverty head count rates are associated with limited economic opportunities. Improving service delivery and livelihoods will help achieve higher living standards in these lagging regions and thereby contribute to poverty alleviation. Country Development Goals: A key government objective is to enhance the inclusiveness of the country’s growth and development model, as is evidenced by the following key policies priorities: to develop rural economies; to ensure land ownership to rural and estate sectors, the middle class, and government employees; and to create a broad and strong middle class. The government has also signaled its commitment to (i) support skills development in response to market demand and foster greater economic participation for women; (ii)) improve the health, pension, and social safety net systems; and (iii) support reforms in the estate sector and transition toward a more effective model for service delivery and local governance. CPF Objective 2.1—Strengthening education and training systems Intervention Logic: Sri Lanka lags behind other middle-income countries (MICs) in terms of early childhood and higher education participation and quality, relevance of technical and vocational education and training, learning outcomes, and socio-emotional skills. An acute shortage of the high-level human resources required for the advanced industrial and service sector activities of a globally competitive upper-middle-income country also exists. WBG interventions: WBG interventions will seek to build on the findings of the Education Sector Review and support the development of a strategy and program for the education and training sectors, with a focus on increasing access to and the quality of early childhood development (ECD) for the economy’s bottom percentage of households, and vocational and technical skills development to create a better link between private-sector demand and the supply of skilled labor. Further interventions will be undertaken to focus on primary and secondary education systems in the rural and estate sectors (where learning outcomes and socio-emotional skills are significantly lower than in urban schools) and in the higher education sector to increase the quality and relevance of teaching, learning, and research and also to increase enrollment rates. CPF Objective Indicators Supplementary Progress Indicators WBG Program 56 2.1.1 Total number of trainees enrolled in public Number of active registered training Ongoing and private (technical and vocational) training institutions (technical and vocational) Skills Development Project institutions, along with number of females Baseline: 1,321(2015) Transforming the School Education System as the Baseline: 178,326 (74,595 female) (2015) Target: 2,481(2018) Foundation for a Knowledge Hub Project Target: 185,363 (83,945 female) (2018) Early Childhood Development Project Proposed 2.1.2 Percentage of the Program for School Content and Language Integrated Higher Education Project (FY17) Improvement cycle (for primary and secondary) Learning (CLIL) framework to be General Education Project (FY19) implemented and completed in all zones developed and established Baseline: Implemented in 70% of zones (2015) Baseline: CLIL framework for all Target: Completed in 100% of zones (2017 bilingual schools has been introduced in onward) Grades 7, 11, and 13 in the nine provinces (2015) Target: CLIL framework introduced for secondary education (2018) 2.1.3 Total number of children enrolled in ECD centers, along with number of females Baseline: 512,620 (253,900 female) (2015) Target: 661,150 (327,400 female) (2020) 2.1.4 Total number of ECD centers meeting national quality standards, along with number of centers established for estates Baseline: 1,000,(371 estates) (2015) Target: 3,000 (515 estates) (2020) 2.1.5 Total number of students enrolled in science, technology, engineering, and Number of STEM study programs in mathematics (STEM) study programs in higher higher education developed or newly education, along with number of females introduced Baseline: 33,000 (17,000 female) (2015) Baseline: 0 (2015) Target: 56,000 (29,000 female) (2020) Target: 40 (2020) Data Sources: 1) ISR and ICR of Skills Development Project 2) ISR and ICR of Transforming the School Education System as the Foundation for a Knowledge Hub Project 3) ISR and ICR of Early Childhood Development Project 57 CPF Objective 2.2—Improving health and social protection systems to address the challenges of the demographic transition Intervention Logic: Sri Lanka’s demographic transition has resulted in an increase in non -communicable diseases (NCDs); a growing burden on public finances from the country’s well-developed but fragmented social safety net system; and a noncontributory formal civil service pension system, while informal sector pension schemes are fragmented, poorly regulated, and inefficiently invested. These issues are expected to become more acute as the country faces the challenge of its demographic transition. WBG Interventions: WBG interventions will support the design and implementation of comprehensive, multi-sectoral approaches to the broader challenge posed by the demographic transition. Ongoing investment financing and technical assistance in the health sector will be built on to strengthen key health system components to better manage NCD patients at primary, secondary, and tertiary levels, including disability care, with particular emphasis on lagging regions. WBG interventions will contribute to government efforts to reform the social protection system, including pensions, through technical assistance, for enhanced efficiency, effectiveness, and fiscal sustainability. CPF Objective Indicators Supplementary Progress Indicators WBG Program 2.2.1 Percentage of people (over 40 years of age) Percentage of primary health care Ongoing screened for selected NCDs (diabetes and institutions having one month’s buffer Second Health Sector Development Project hypertension) at healthy lifestyle centers stock for 16 selected NCD drugs Strengthening Social Protection Systems (ASA) Baseline: 19% (2015) Baseline: 60% (2015) Health Sector Programmatic Review (ASA) Target: 35% (2020) Target: 70% (2020) Proposed 2.2.2 Coverage of the poorest 20% by the Welfare Welfare Benefit Scheme beneficiaries Social Safety Nets Project (FY17) Benefit Scheme qualifying under the revised eligibility Health Sector Development Project III (FY19) Baseline: 36% (2016) criteria Pensions Non-Lending Technical Assistance (ASA, Target: 50% (2020) Baseline: 50% (2016) FY18) Target: 70% (2020) Comprehensive Aging Report (ASA, FY19) Data Sources: 1) ISR and ICR for Second Health Sector Development Project 2) GRM for Strengthening Social Safety Nets Trust Fund 3) ISR and ICR for Social Safety Nets Project CPF Objective 2.3—Improving living standards in the lagging areas Intervention Logic: Persistent pockets of poverty in the lagging regions pose a fundamental challenge of social and economic inclusion and social sustainability of the country’s development model. For war-affected internally displaced persons who have been newly resettled, restarting their livelihoods via farming in jungle-like areas has been difficult, which makes them particularly vulnerable. Communities in lagging regions are also affected by malnutrition in mothers and children. The issue is particularly acute in the estate sector. 58 WBG Interventions: WBG interventions will include systemic, multidimensional interventions targeted at the lagging regions to improve access to rural livelihood assets and employment opportunities, infrastructure and social services, micro-finance and other financial services, and markets. The WBG program will also focus on accompanying the GoSL’s efforts toward improved provision of public services by local governments in selected areas. Other interventions will target the strengthening and monitoring of nutrition outcomes of the populations living in the estate sector and in war-affected areas. CPF Objective Indicators Supplementary Progress Indicators WBG Program 2.3.1 Number of people provided with access to Number of new piped household water Ongoing improved water sources (in rural areas and connections (in estates) Water Supply and Sanitation Improvement Project estates), including percentage of females Baseline: 4,000 (2015) Early Childhood Development Project Baseline: 0 (0% female) (2015) Target: 11,800 (2020) Dam Safety and Water Resource Management Project Target: 343,900 (% female TBD) (2020) Agriculture Modernization Project WBG advisory services to improve livelihoods and 2.3.2 Number of people provided with access to Number of people trained in improved living standards improved sanitation (in rural areas and estates), hygiene behavior or sanitation practices IFC Advisory Services (AS) to support District including percentage of females (in rural areas and estates) Development Program (EU- SDDP) Baseline: 0 (0% female) (2015) Baseline: 0 (2015) Target: 129,000 (% female TBD) (2020) Target: 160,000 (2020) Proposed North and East Social Assessment (ASA, FY17) 2.3.3 Number of ECD centers established in Local Government Public Service Delivery (ASA, FY17) unserved and underserved areas (includes rural Gender Mainstreaming (FY17) and estate sectors) Estate Institutional and Economic Reforms (ASA, FY17) Baseline: 0 (2015) Improving Public Service Delivery in Lagging Regions Target: 150 (2020) Project (FY18) Estate Sector Reform Project (FY18) WBG advisory services to improve livelihood and living 2.3.4 Number of new jobs generated through Number of MSME value chain clients standards investments in agriculture SMEs reached in lagging regions Baseline: 0 (2016) Baseline: 0 (2016) Target: 4,000 (2020) Target: 2,000 (2020) Data Sources: 1) ISR and ICR for Water Supply and Sanitation Improvement Project 59 2) ISR and ICR for Early Childhood Development Project 3) ISR and ICR for North East Local Services Improvement Project 4) ISR and ICR for Dam Safety and Water Resource Management Project Pillar 3—Seizing green growth opportunities, improving environmental management, and enhancing adaptation and mitigation potential Definition of Focus Area: This focus area will contribute to i) more efficient, resilient, and sustainable green urban development; (ii) improved management of environmental impacts of urbanization and economic transformation; (iii) expansion of clean energy generation; (iv) improved management of natural resources and assets; and (v) enhanced resilience to climate-related events and disaster risk management. Links between the Focus Area and the Twin Goals: The SCD notes that Sri Lanka has a significant advantage in its rich natural asset base that can be a long- term contributor to economic growth and quality of life. The country’s sustainable development will require greater attention to the sustainable management and governance of the country’s natural resources, as well as the management of the environmental impacts associated with economic growth, structural transformation, and urbanization. Annual losses from natural disasters have been sizable, with a disproportionate impact on the poor. The country needs to better manage disaster risk to reduce its vulnerability to natural disasters, particularly for the poor. Country Development Goals: In its Intended Nationally Determined Contributions (INDCs) of October 2015 prepared for the 21st session of the Conference of the Parties to the United Nations Framework Convention on Climate Change, the GoSL committed to important mitigation measures, focusing on energy, transportation, industry, waste and forestry, and proactive adaptation measures in the key areas of health, water, coastal and marine resources, biodiversity and ecosystems, infrastructure, and human settlements. CPF Objective 3.1—Greening urban development Intervention Logic: Urban infrastructure and services are currently inadequate and are poorly designed and maintained to generate the capital, human resources, technology, and services needed for sustainable growth and employment generation in the future through the dynamic spatial transformation process that Sri Lanka is undergoing. Large numbers of people among the bottom 40 percent of the economy live in urban agglomeration areas, highlighting the need for efficient, inclusive, and sustainable urbanization of cities to become centers of growth and employment for those already living there and those who will migrate from rural communities, and at the same time to provide livable and resilient environments. It is also necessary to manage the environmental impacts of urbanization and economic transformation. WBG Interventions: WBG interventions will build on ongoing operations that improve selected urban services and public spaces in key city regions of Sri Lanka and will help stimulate more efficient and participatory green urban planning, governance, and management of cities in line with international best practice. The program will also include strategic assistance in exploring private-sector financing options for development of resilient infrastructure and public services. CPF Objective Indicators Supplementary Progress Indicators WBG Program 60 3.1.1 Reduction in square kilometers (km 2) Metropolitan Colombo City Development Ongoing under risk of flooding (25-year return period) Strategy and Integrated Master Plan delivered Metro Colombo Urban Development Project in the Metro Colombo area and endorsed by the Ministry of Megapolis Strategic Cities Development Project Baseline: 5.5 km2 (2015) and Western Province Transport Connectivity and Asset Management Target: 3 km2 (2019) Baseline: No (2015) Project Target: Yes (2019) Proposed 3.1.2 Square miles (m2) of new or rehabilitated Asset management system with maintenance Urban Green Growth (FY17) urban public spaces in secondary city regions program for municipal infrastructure Infrastructure Investment Diagnostic and Strategy (Kandy, Galle, and Jaffna) developed and adopted in the Kandy City (ASA, FY17) Baseline: 0 m2 (2016) Region (second city) PPIAF Building Government Capacity for Target: 250,000 m2 (2020) Baseline: No (2016) Conducting PPP Transactions (ASA, FY17) Target: Yes (2020) Number of completed strategic plans/studies in public transport and traffic management, drainage, and spatial development Baseline: 0 (2016) Target: 3 (2020) Data Sources: 1) ISR and ICR for Metro Colombo Urban Development Project 2) ISR and ICR for Transport Connectivity and Asset Management Project 3) ISR and ICR for Strategic Cities Development Project Additional Financing CPF Objective 3.2—Strengthening climate resilience and disaster risk management Intervention Logic: Extreme variability of rainfall and droughts is already a defining feature of Sri Lanka’s climate. The annual average loss as sociated with disasters is estimated to be already in excess of US$380 million and affecting more than 1 million citizens. Water resource development and management risks are increasing sharply with climate change, and Sri Lanka’s water institutions have not adapted to these challenges through t he adoption of a coherent basin- level framework. WBG Interventions: WBG interventions will build on ongoing operations to improve short-term and long-term resilience to climate and disaster risk by moving toward implementing a comprehensive, evidence-based, and innovative climate resilience program that addresses further the physical and fiscal impacts of climate change and natural disaster risks. Support will also be provided for agencies to move toward basin-level integrated planning, and to ensure adoption of an integrated water resource development and management framework that respects requirements for protecting society and the environment. CPF Objective Indicators Supplementary Progress Indicators WBG Program 61 3.2.1 Number of hectares (ha) benefitted with Percentage of detailed flood mitigation Ongoing reduced annual crop losses from weather- designs to address the impacts of extreme Climate Resilience Improvement Project related events rainfall events completed Cat DDO Baseline: 0 ha (2016) Baseline: 30% (2015) Dam Safety and Water Resource Management Target: 149,000 ha (2019) Target: 100% (2019) Project Water Supply And Sanitation Improvement Project Agriculture Sector Modernization Project 3.2.2 Reduction in number of people at risk to Length of roads with transport connectivity Global Facility for Disaster Reduction and Recovery weather-related transport interruptions ensured financed TA Baseline: 0 (2016) Baseline: 0 kms (2016) Target: 1,000,000 (2019) Target: 410 kms (2020) Proposed Climate Resilience Improvement Project II (FY18) 3.2.3 Number of government agencies using Hydrology and meteorology databases improved water database for flood forecasting, developed and accessible to different users dam operations, and water allocations Baseline: No (2016) Baseline: 0 (2016) Target: Yes (2019) Target: 25 (2019) Data Sources: 1) ISR and ICR for Climate Resilience Improvement Project 2) ISR and ICR for Dam Safety and Water Resource Management Project CPF Objective 3.3—Enhancing mitigation and adaption potential through renewable energy development and natural resource management Intervention Logic: Sri Lanka’s electricity generation mix has shown a progressive shift from hydro- to fossil fuel-based technologies, with more than 50 percent of electricity generation currently relying on imported fossil fuels. This shift, together with the growth of energy-intensive manufacturing and services, amplifies the vulnerability of the Sri Lankan economy to the increasing price volatility of fossil fuels. Sri Lanka is also exceptionally well endowed with biodiversity and natural resources, which are important assets for future economic development and climate change mitigation and adaptation. However the value of these assets is often poorly understood, leading to their undervaluation and weak management. In Sri Lanka, 30 percent of dry zone forests is already degraded, and wet zone forests are characterized by highly fragmented small forest patches. Deforestation and forest degradation contribute to carbon emissions and pose a significant threat to the economic services Sri Lanka derives from its forests. WBG Interventions: WBG interventions will support the shift away from fossil fuel-based electricity generation through planned investment support featuring innovative financing structures for development of wind and other sources of renewable energy. Support for strengthening the management of forests and marine natural resources for improved conservation, community economic benefits, and climate mitigation will also be provided. 62 CPF Objective Indicators Supplementary Progress Indicators WBG Program 3.3.1 Number of people living adjacent to Percentage of beneficiaries feeling that their Ongoing targeted protected areas who receive improved properties and crops have increased Capacity Building for Planning and Variable access to income generating activities protection and livelihoods have been Renewable Energy Grid Integration (TF FY16) (includes benefits derived within the protected enhanced owing to implementation of Ecosystem Conservation and Management Project areas and from unprotected/multiple use community action plans that reflect Managing Nature’s Wealth—Blue Economy (ASA) ecosystems) of which female (percentage) community preferences and human-elephant IFC investment in renewable energy sector Baseline: 0 (0% female) (2016) co-existence actions IFC financing for installation and use of renewable Target: 4,500 (10% female) (2020) Baseline: 0% (2016) energy platforms in private-sector firms Target: 50% (2020) Proposed 3.3.2 Areas brought under enhanced Number of monitoring systems established to Climate Finance for Renewables (FY17) biodiversity protection track the conservation status of protected Wind Development Program (FY17) Baseline: 0 ha (2016) areas INDC-Related Adaptation and Sustainable Target: 100,000 ha (2019) Baseline: 0 (2016) Development Project (FY19) Target: 1 (2020) Power Sector Planning Optimization Study (ASA, 3.3.3 Metric tons of reduced carbon dioxide FY17) (CO2) greenhouse gas emissions) associated Wind-generated electricity in gigawatt-hours Support to Sri Lanka INDC Implementation (ASA, with wind development (GWh) increased FY17) Baseline: 0 tons (2016) Baseline: 0 GWh per year (2016) IFC investment in renewable energy sector Target: 400,000 tons (2020)* Target: 324 GWh per year (2019) Data Sources: 1) ISRs and ICR for Sri Lanka Wind Development Program 2) ISRs and ICR for Ecosystem Conservation and Management Project *Approximately 4.6 million tons of CO2 reduction over the 20-year life cycle of the first 100-MW wind project (20192038), and 18.4 million tons of CO2 reductions through subsequent 400-MW wind development (2020–2039) will occur. 63 Annex 2: Sri Lanka—Completion and Learning Report (CLR) Fiscal Years (FY) 2013–16 Date of Country Planning Strategy (CPS): April 2012 (Report no. 66286-LK) Date of CPS Progress Report: March 25, 2014 (Report no. 84426-LK) Period Covered by the CLR: July 1, 2012, to June 30, 2016 I. Context and Overview 1. The FY 2013–16 CPS aimed to build on Sri Lanka’s strong development outcomes and was successfully implemented. The country enjoyed growth rates of more than 6 percent following the end of armed conflict in 2009, saw poverty fall to 6.7 percent in the most recent 2012/13 Household Income and Expenditure Survey (HIES), and had met almost all Millennium Development Goal indicators. The CPS was formulated to build on the country’s success as an emerging middle-income country (MIC) and was responsive to the priorities set out in the government’s development vision. Implementation was strong in the first two and a half years, albeit with some limitations on engagement in the areas of fiscal management and trade and investment policy, owing to low client demand. The CPS Progress Report led to adding a fourth area of resilience to climate and disaster risks and a more demand-driven analytical program. Snap elections in 2015 led to a change of president, constitutional reforms, and the subsequent formation of a new coalition government. The political transition and associated reorganization of the government led to delays in implementation, which were nonetheless overcome in the last year of the CPS. The change in government also led to substantial broadening of policy dialogue and areas of engagement. With the political transition largely complete, the lending program was ramped up toward the end of the CPS period to embrace new areas with greater emphasis on policy reforms. Development Outcome 2. The development outcome of the CPS program is rated Moderately Satisfactory. The CLR rating is based on an aggregate assessment of 17 outcomes and 27 associated indicators in the revised results framework introduced in the 2014 CPS Progress Report. A total of 8 out of 17 outcomes were fully achieved. With regard to outcome indicators, 14 were fully achieved, 6 were mostly or partly achieved, 4 were not achieved, and 2 could not be verified. Outcomes were rated as satisfactory in the areas of engagement of supporting structural shifts in the economy and improving livelihoods and social inclusion. There was moderately satisfactory progress in achieving outcomes in the areas of engagement of facilitating sustained private and public investment and improving resilience to climate and disaster risks. World Bank Group (WBG) Performance 3. The overall performance of the WBG in designing and implementing the CPS is assessed as Good. The design reflected a nuanced assessment of where Sri Lanka’s development challenges lay as an emerging MIC with inclusion challenges still present after decades of conflict. The CPS was also strongly aligned with the government’s development vision. Adjustments in design were timely, reflecting client demand and new opportunities that emerged from the country 64 context. Implementation was strong, although the level of commitments of US$947 million in the first three years and expected $587 million in the final year was less than the average of $500 million per year envisaged in the document.22 The extended political transition throughout 2015 as well as limited client demand for policy and governance operations in the first two years created some limitations in implementation, but the pace of delivery increased substantially toward the end of the CPS, with seven operations delivered or on track for delivery in the latter half of fiscal 2016 (FY16). II. Assessment of CPS Outcomes AREA OF ENGAGEMENT 1: FACILITATING SUSTAINED PRIVATE AND PUBLIC INVESTMENT— MODERATELY SATISFACTORY 1.1 IMPROVING THE INVESTMENT CLIMATE Development Challenge Outcomes Sought by CPS Status Indicators Status  Increase foreign direct  Improved investment Achieved  Time taken to register a Mostly investment and access environment property achieved to finance  Improved access to Mostly  Time taken to obtain a Achieved finance for small and achieved construction permit medium-sized enterprises (SMEs) and farmers  Volume of lending to SMEs through institutions supported Achieved by the WBG  Number of farmers accessing Not credit from the Warehouse achieved Receipts Financing system 4. WBG support contributed to improving Ease of Doing Business (DB) ratings and more generally enhancing the investment climate. Knowledge exchanges, analytical work on reducing constraints to foreign direct investment (FDI) and improving corporate reporting, and policy advice to a working group on DB reforms housed in the Central Bank led to improvements on two targeted DB subindicators. Sri Lanka rose from 116th place to 77th place in ease of dealing with construction permits, thanks to a reduction in the number of days required from 217 to 116, exceeding the CPS target of 180 days. The improvement reflected steps to eliminate superfluous requirements, reduce permit fees, and streamline the internal review process. Sri Lanka also took steps to ease registration of property, such as automating elements of the Land Registry in Colombo. This reduced the number of days required for this process from 83 to 51, essentially meeting the CPS target of 50 days. Despite this progress, Sri Lanka’s ranking on ease of registering a property declined from 136th place to 153rd owing to relatively greater improvements in other countries. Preparation of a development policy operation to support investment climate reforms was deferred from delivery in fiscal 2014 to delivery by the end of fiscal 2016; the operation supported facilitating trade, easing regulation of FDI, and reforming governance and fiscal policy. 22 All dollar amounts are U.S. dollars unless otherwise indicated. 65 The International Finance Corporation (IFC) continued to support the private sector through strategic investments and advisory services in key sectors, such as financial markets, agribusiness value chain, infrastructure, and tourism. 5. The WBG also had a significant impact on improving access to finance, particularly for SMEs and farmers. A wide range of activities was undertaken by the WBG and IFC to address structural issues negatively impacting access to finance in Sri Lanka, particularly low levels of servicing of micro, small, and medium-sized enterprises (MSMEs); lack of flexibility in managing collateral; financing products; and legal impediments. The WBG financed a credit line and risk- sharing facility for long-term funding for SMEs that led to more than 800 loans totaling nearly $45 million, and trained more than 12,000 bank staff on SME lending and about 21,000 SMEs on accessing credit. IFC provided complementary advisory services and financing to support MSMEs, which contributed to improving lending institutions’ business approach. IFC SME banking clients disbursed a total of $3.3 billion in loans to 139,000 SMEs during the CPS period. IFC’s support included providing advice on legislation to enable movable collateral, assisting private banks in diversifying their approach by shifting to higher-volume business models, and employing more group lending. IFC further supported the development of weather-index-based crop insurance for crops to which 45,000 small farmers subscribed. Some 400,000 loans to microenterprises, 240,000 of which were to enterprises owned by women, were made possible following IFC advisory and investment interventions in Sanasa Development Bank alone. IFC also contributed to the establishment of a credit-rating industry through its investment in Sri Lanka’s first credit-rating agency. Finally, a WBG-financed Warehouse Receipts project to provide quality storage facilities for agricultural products that could be used as collateral was slow to be implemented, with only 825 loans provided as of October 2015, when the project completed (though there is anecdotal information that many more loans were awarded on the basis of receipts after completion). 1.2 INCREASING FISCAL SPACE AND INCREASED EFFICIENCY OF PUBLIC SPENDING Development Challenge Outcomes Sought by CPS Status Indicators Status  Increase the scope for  Enhanced accountability Mostly  Financial audits by Auditor Achieved efficiency gains in and transparency in the achieved General’s Department in public expenditure use of public funds compliance with International management Standard Supreme Audit Institute framework  Performance audits reported Partially to Parliament achieved 6. Accountability for the use of public funds was enhanced through stronger audit capacity, though fiscal space constraints remain. The WBG’s Public Sector Capacity Project contributed to improved financial accountability through support to the Auditor General’s Department (AGD) for capacity development, improvement of audit standards, and the introduction of performance and investigative audits. Performance audits were carried out for a smaller number of public institutions than was expected owing to the complexity of measuring performance as well as technical challenges for auditors. The improved performance of the AGD was also reflected in more timely submissions of audit reports to Parliament, though full compliance with time requirements was not achieved. Audit reports were made publicly available 66 through Web sites, thereby increasing transparency. In parallel to support for the audit function, a Recipient-executed Trust Fund (RETF) to support parliamentary committees helped build the analytical capacity of staff. Subsequent to the end of the project, the Government of Sri Lanka (GoSL) further strengthened the financial and administrative independence of the Auditor General as part of the 19th Constitutional Amendment. While CPS objectives were met, the impact of a strengthened audit function on the broader issue of addressing Sri Lanka’s fiscal space issues was limited; to a large degree, the country’s fiscal problems lie in its inability to collect sufficient revenues. These broader issues related to fiscal space were captured in WBG analytical work, particularly a Public Expenditure & Financial Accountability (PEFA) assessment (FY13), a Public Expenditure Review (PER) (FY14), and a revenue policy note (FY15). This analysis is providing underpinnings for policy actions to strengthen public financial management and revenue enhancement as part of a development policy loan planned for the end of FY16. AREA OF ENGAGEMENT 2: SUPPORTING THE STRUCTURAL SHIFTS IN THE ECONOMY— SATISFACTORY 2.1 SHIFTING THE STRUCTURE OF THE ECONOMY TO BE MORE KNOWLEDGE-BASED Development Challenge Outcomes Sought by CPS Status Indicators Status  Better align Sri  Increased alignment of Achieved  Enrollment in job-oriented Achieved Lanka’s skills base skills with job market advanced technology and education system institutes (ATIs) with the needs of its labor market, and  Increased computer Not  70% of population is Not improve the quality of literacy verified computer literate verified higher education  Increase computer  Enhanced quality of Achieved  Number of universities and Achieved literacy and workforce higher education ATIs that are classified and employed in institutions operate within a National information and Qualifications Framework communications technology 7. The WBG played a key role in helping the GoSL ramp up efforts to achieve better alignment of skills of Sri Lanka’s labor force with the job market. The WBG supported efforts to enhance capacity and the quality of instruction in higher education institutions to meet the needs of Sri Lanka’s economy; to improve the technical and vocational training system; and to increase the level of key skills, such as computer literacy, among the population. The Higher Education for the Twenty-First Century (HETC) project developed the Sri Lanka Qualifications Framework to continuously improve the quality of higher education, thanks to regular updates based on implementation experience in universities. The project also supported the GoSL’s efforts to strengthen its Quality Assurance Program, which has now been implemented in 87 percent of universities and in 100 percent of advanced technology institutes (ATIs). Widespread recognition of the importance of English language, information and communications technology (ICT), and soft skills is feeding into the design of university curricula, teaching and learning, and assessments. University development grants were provided to carry out programs in all 15 universities to improve the information technology (IT), English language, and soft skills of students. Approximately 81,000 undergraduates (89 percent of enrolled students) have benefited from the 67 IT programs, and 76,000 undergraduates (84 percent of enrolled students) have benefited from the English language programs. Approximately 17,600 students are enrolled in ATIs, exceeding the project target of 12,500 students by the end of 2015. Short-term professional development activities have benefitted about 6,200 university administrators and managers, academics, and technical and support staff. The WBG played a major role in shaping renewed the GoSL’s efforts to reform technical and vocational education through its “Competitive Skills for a Middle Income Country” analytical and advisory (AAA) work, which in turn laid the foundation for the Skills Development Project that was initiated in 2014. IFC’s knowledge interventions were largely through training in entrepreneurship for small telecom retailers and workshops in sustainable practices in tourism and agribusiness. 8. Use of ICT has continued to grow. The WBG’s long-standing E-Lanka Development Project supported popularization of the use of ICT through the establishment of 740 telecenters, which, as of the closure of the project in FY14, were being used monthly by more than 70,000 citizens in rural and peripheral areas of the country. The project supported Sri Lanka’s government portal and the Lanka Gate middleware infrastructure, which have provided a platform for a wide range of services for citizens and businesses. These achievements have contributed to Sri Lanka being ranked the highest among Special Administrative Region (SAR) countries on the United Nations’ (UN’s) e-Government Readiness Index. The project also included an e-local language initiative to improve the accessibility of government services using ICT for all ethnic communities. IFC supported the expansion and upgrading of ICT infrastructure through its investment in a major ICT company, Dialog Axiata. WBG support indirectly contributed to broader indicators of higher levels of Internet penetration and use of mobile telephony. These indicators place Sri Lanka higher than SAR comparators, such as India, though still lower than other MIC comparators, particularly in Southeast Asia. IT-enabled services and the software industry have grown rapidly and now account for $500 million in annual export receipts and around 70,000 employed. The indicator for computer literacy in the results framework mistakes the E-Lanka Development Project indicator of improved literacy among employees of targeted agencies with an indicator of computer literacy for the overall population; computer literacy rates among people in targeted agencies exceeded the 70 percent target. 2.2 SUPPORTING INTERNAL INTEGRATION AND INCREASING URBANIZATION Development Challenge Outcomes Sought by CPS Status Indicators Status  Build economic  Increased connectivity Achieved  Travel time on the UV1 road Achieved linkages between rural and urban areas  Increase networked Partially Not services for the achieved achieved urbanizing population  Reduced vulnerability to  Reduction in the area under  Build a productive, flooding in Metro risk of flooding (50-year environmentally Colombo return period) in Metro sustainable, culturally Colombo vibrant, safe, and well-linked network of towns and cities 68 9. WBG support contributed to a much improved road network and increased connectivity in Sri Lanka. Throughout the CPS period, the government carried out significant public investment in road infrastructure, which is quite dense and provides for good connectivity. The WBG supported these efforts through both direct investments as well as working with the Road Development Agency to improve management practices. The WBG-financed Provincial Roads Project rehabilitated 229 kilometers of roads and provided for annual maintenance of more than 1,102 kilometers of roads. Improved access to socioeconomic centers in the less prosperous Eastern, Northern, and Uva provinces has been achieved through the sustainable management of improved road infrastructure. The average travel time to socioeconomic centers has decreased from 95 minutes to 17.5 minutes against an end of project (EOP) target of 76 minutes, from 31.72 minutes to 19.6 minutes against an EOP target of 25.37 minutes, and from 79.8 minutes to 32.4 minutes against an EOP target of 63.84 minutes in Eastern, Northern, and Uva provinces, respectively. Roads in good and fair condition as a share of total classified roads increased from 21 percent to 50 percent against an EOP target of 30 percent in Uva Province. These factors have contributed to an increase in the level of satisfaction from road users and communities along the project road corridors. 10. Sri Lanka has pursued strategies with WBG support to develop cities in a manner balancing environmental and economic objectives while addressing risks. Sri Lanka is de facto urbanizing, which will play an integral role in poverty reduction, as more than half of the country’s poor lives within 30 kilometers of an urban area. The WBG has made major contributions to the urbanization agenda through its analytical work—notably, the Secondary Cities Development Study, which built on the 2012 report on Turning Sri Lanka’s Urban Vision into Policy and Action. The WBG’s Metro Colombo Project, which is scheduled to end in FY18, has improved infrastructure and cultural assets in the capital area and undertaken substantial preparatory work to address risks of flooding, which have had major impacts on economic activity and livability in the recent past. The project involves comprehensive civil works for urban flood management. However, implementation has been delayed somewhat owing to complex technical and implementation issues, which in turn has meant that results from this intervention have not been fully achieved in the CPS period. In addition, the WBG has supported the country’s first wetland management strategy and is currently developing flood risk assessment and mapping in Colombo as well as a real-time control system for flood management. Additional support through the WBG’s Climate Resilience Improvement Project is developing training on post-disaster needs assessment, which is expected to be launched in June 2016. The WBG also launched the Strategic Cities Development Project to support smart urbanization in Galle and Kandy in FY14 and added a third city, Jaffna, through additional financing in FY16. AREA OF ENGAGEMENT 3: IMPROVING LIVING STANDARDS AND SOCIAL INCLUSION— SATISFACTORY 3.1 INCREASING QUALITY OF SERVICES Development Challenge Outcomes Sought by CPS Status Indicators Status 69  Increase the quality  Increased capacity to Achieved  Percentage of national Achieved and motivation of measure student learning assessments of learning existing service outcomes outcomes for program providers and ensure development in primary and that they are client- secondary education is oriented implemented Achieved  Percentage of education zones in which the Program for School Improvement is  Improved health service Partially implemented delivery achieved Partially  Percentage of health facilities achieved with a functioning 24-hour Emergency Treatment Unit  Local authorities in Achieved selected provinces deliver  Percentage of local Mostly services and local authorities with budgets achieved infrastructure in a more prepared in a participatory responsive and manner accountable manner Achieved  Percentage of local authorities whose revenues, expenditures, and procurement decisions are publicly disclosed  Improved quality and Achieved Achieved sustainability of roads  Percentage of road network in good or fair condition Mostly achieved  Routine and periodic financing of road maintenance allocated annually 11. WBG support has been instrumental in addressing the need for qualitative improvement in Sri Lanka’s education system. While the country continues to perform strongly in providing access to education, enrollment, and gender parity, it faces challenges in equipping its people with the skills needed for a middle-income economy. The WBG-financed Transforming the School Education System Project (TSEP) has introduced more scientific-quality monitoring and feedback through a system for conducting national assessments of learning outcomes. Four such assessments of primary and secondary education have been successfully completed in the CPS period. TSEP also has supported school management committees (SMCs), which promote school enrollment and attendance, reduce dropouts, and help school administration. SMCs have been trained to promote student participation in schools in 80 percent of school zones (77 out of the 97 zones). TSEP also has empowered and built the capacity of schools to make and implement management decisions to strengthen school performance in 70 percent of zones. The WBG- financed HETC project has provided for national-level governance and quality standards through the establishment of a Higher Education Qualifications Framework covering public universities, ATIs, and private higher education institutions. The project has supported the expansion of higher education in labor market-oriented advanced technology programs. The number of students enrolled in ATIs is nearly 50 percent over target. Finally, the HETC project supported the 70 introduction of modernized curricula in 12 ATIs and established 3 new ATIs in underserved regions. 12. The WBG has been integral in supporting the improvement of delivery of health services, particularly in the prevention and treatment of non-communicable diseases (NCDs). As is the case with most MICs, Sri Lanka’s health challenges are shifting to handling NCDs, having both eliminated communicable diseases like malaria and vaccine-preventable diseases and achieved nearly 100 percent coverage of maternal and child healthcare needs. The WBG financed the Second Health Sector Project, which played an integral role in supporting the government’s National Health Sector Program to improve the performance standards of the public health system, particularly to address the challenges of malnutrition and NCDs. The project was instrumental in establishing Emergency Treatment Units in six out of 28 centrally managed hospitals and 251 out of 545 province-managed hospitals. Despite satisfactory implementation, these results are below CPS targets of 40 and 50 percent, respectively, because these targets are on schedule to be achieved by the completion of the project (December 2017), whereas the CPS ended in June 2016. Other results achieved are that 43 percent of primary health care facilities now have a one-month buffer of NCD drugs, surpassing the target, and 94 percent of hospitals are linked to a quality assurance program for laboratory tests. Roughly half of health districts have at least two functioning Healthy Lifestyle Centers, which also exceeds the target for the project. 13. Service delivery at the local level has improved, particularly in conflict-affected areas. The CPS period was marked by a transition from a humanitarian focus to long-term development efforts in the conflict-affected North and East, as well as an islandwide public investment surge to improve infrastructure. The WBG continued to play a major role in supporting improvements in local service delivery during the CPS period, primarily through the North East Local Services Improvement Project (NELSIP), which provided resources for community needs while strengthening local governance practices. The project’s scope was expanded to cover areas adjacent to the North and East, ultimately working with 101 local government authorities in five provinces. NELSIP financed 800 local projects, which led to the construction or rehabilitation of 645 kilometers of roads, 58 drainage systems, 94 public markets, 11 rural electrification schemes, and 7 rural water supply schemes. In rebuilding infrastructure, support was provided for a participatory planning and monitoring process that had the additional impact of strengthened local government capacity and local governance. Steady progress has been made: 70 percent of local authorities have budgets prepared in a participatory manner, and 80 percent of local authorities have publicly disclosed revenues, expenditures, and procurement decisions. 14. The quality and sustainability of road infrastructure have been enhanced by increased attention and funding of maintenance. The WBG has supported Sri Lanka’s efforts to expand and devote more resources to road rehabilitation, which in turn has improved the condition of the overall network, though maintenance remains a primary concern. The Road Sector Assistance Project has been instrumental in increasing the level of funding channeled to rehabilitation and maintenance of national roads, as institutionalized in a Road Maintenance Trust Fund. Increases in funding maintenance have contributed to the proportion of the national road network assessed as being in good or fair condition to rise from 48 percent to 65 percent, and the user satisfaction index from 38 percent to 68 percent, over the period of the project as per Road 71 Development Authority annual reports. In addition, annual allocations for routine and periodic maintenance increased from their baseline of 5 billion Sri Lankan rupees (LKR) to 6.3 LKR billion. 3.2 REDUCING THE PREVALENCE OF MALNUTRITION Development Outcomes Sought by CPS Status Indicators Status Challenge  Eradicate hunger  Reduced prevalence of Not  Under-five underweight Not and hard-core malnutrition in selected achieved rate of 25% among achieved poverty; areas population in identified particularly reduce areas the malnutrition rate of children 15. Progress was achieved in addressing malnutrition, though there remain challenges in the North and estate sector. The WBG addressed malnutrition among the resettled population in the North through the Local Level Nutrition Interventions Project. The results indicate significant improvements in anemia levels, especially in the two poorest districts in Northern Province (Mullativu and Killinochchi districts), and improvements in knowledge and practices related to nutrition with the establishment of more than 1,000 mother support clubs during the project period. However, despite the successful implementation of a supplementary feeding program for targeted pregnant and lactating mothers, infants, and young children and other community-based nutrition efforts, the overall impact was limited: midline surveys reported malnutrition levels of 31.6 percent, above the baseline of 31.3 percent and below the 29.7 percent target. The small project ($3 million over four years) relied on other factors affecting the well-being of children in order to achieve its target. The WBG also contributed to deeper understanding of malnutrition issues in the estate sector through a multi-sectoral study completed in FY16, which found that 35.9 percent of children are underweight and 36.4 percent of children are stunted—rates that are three times higher than islandwide measures. 3.3 INCREASING SOCIAL INCLUSION AND EQUITY OF ACCESS Development Outcomes Sought by CPS Status Indicators Status Challenge  Ensure  Improved livelihoods Mostly  Households affected by Achieved accessibility, among select achieved conflict and flood whose especially for disadvantaged groups incomes have increased by vulnerable groups 30% and those  Displaced families Achieved communities reintegrated into their affected by war, communities with equitable  10,000 low-income access for social households accessing Not services and safety improved sanitation achieved nets in place services under the National Water Supply and Drainage Board- implemented output-based aid (OBA) pilot approach 72 to promote access to improved urban sanitation 16. WBG-financed interventions brought significant support for livelihoods in the conflict-affected North and East. The WBG played an important contributing role in financing multiple programs to improve local infrastructure and provide for livelihoods following the end of the conflict. The Emergency Northern Recovery Project scaled up activities in 12 districts in the Eastern and Northern provinces and adjoining areas and supported around 150,000 resettling internally displaced persons (IDPs). The Community Livelihoods in Conflict-Affected Areas Project provided access to credit that directly supported more than 53,356 households, mainly via lending to women, who accounted for more than 80 percent of the recipients. Project assessments show that a 30 percent incremental increase in income had been achieved, while 37 percent of households saved more money, 88 percent improved their social status, and 97 percent improved their income levels. The project also rehabilitated more than 90,000 hectares of irrigation area, 2,600 kilometers of rural roads, 638 community centers, and 19,366 household pipe water connections. The project had also linked more than 4,000 adults and youths, including ex- combatants, to new jobs, including overseas jobs. IFC’s countrywide investment and advisory services in the financial sector and value chain have had positive outcomes in post-conflict areas. For example, IFC’s investments through one financial institution led to 19,000 micro and small loans totaling about $37 million in Northern and Eastern provinces; about 10,500 loans (60 percent) went to women. Combined with the rehabilitation of local infrastructure through NELSIP, these operations played an important role in the overall national effort to return the approximately 700,000 people displaced by the conflict. 17. Efforts in conflict-affected areas were matched by islandwide livelihoods development for poor households. The WBG-financed Second Community Development and Livelihoods Improvement Project supported local infrastructure projects and enhanced the incomes and quality of life of poor households in the poorest divisions across the country. The project provided access to credit via Village Savings and Credit Organizations that directly supported more than 80,000 households, mainly via lending to women, who accounted for more than 80 percent of recipients. Project assessments showed a 39.9 percent incremental increase in income between 2010 and 2014 for 50 percent of targeted households. The project also carried out more than 1,400 community infrastructure projects, which benefited 121,000 households. While improvements were obtained through the livelihoods interventions, a small activity to increase the number of household connections to networked sewerage in and around the capital Colombo has been delayed and will not achieve significant results within the CPS period. AREA OF ENGAGEMENT 4: IMPROVING RESILIENCE TO CLIMATE AND DISASTER RISKS— MODERATELY SATISFACTORY 4.1 IMPROVED UNDERSTANDING OF CLIMATE RISKS 73 Development Challenge Outcomes Sought by Status Indicators Status CPS  Gain clarity on the  Improved planning Partially  River basins with Partially economic and fiscal for disaster risk achieved basinwide risk achieved impact of disasters, management mitigation investment and develop capacity plans developed to assess physical risks posed by hydrometeorological disasters 18. The WBG provided key analytical and financial support to build Sri Lanka’s risk management capacity. While it was widely accepted that Sri Lanka was prone to significant disaster risks associated with land-use patterns, climate change, and other factors, the WBG was integral in developing the evidence base, policy, and administrative mechanisms to manage these risks. The WBG supported a more proactive stance toward disaster risk through a combination of analytical and advisory activities, investment lending, and policy engagement by providing contingency financing through a Development Policy Loan with a Catastrophe Deferred Drawdown Option (Cat DDO). Analytical and advisory services underpinned a more robust assessment of the impact of disasters, thereby providing a financial rationale for a more proactive policy. The WBG’s analytical work also underpinned the formulation of a program to develop disaster risk financing and insurance. WBG engagement provided important support for the adoption of a comprehensive disaster management policy, an area where Sri Lanka is a leader in the region. The WBG’s Climate Resilience Improvement Project (CRIP) provided support for capacity building and investments to improve resilience to catastrophic events; commitments on this project were well ahead of schedule, and additional financing was approved in the third quarter of FY16. A disaster data-sharing platform has been developed and discussions are ongoing with GoSL agencies on providing wide access to available risk information. The CRIP also supported the development of seven comprehensive basinwide investment plans to address the competing risks of flood and drought, but work has been delayed owing to changes in government staffing, which slowed down procurement of technical expertise. Under the WBG-financed Dam Safety and Water Resources Planning Project, a river basin management plan for the Aru River Basin was developed. 4.2 REDUCTION IN PHYSICAL LOSSES DUE TO HYDROMETEOROLOGICAL EVENTS Development Challenge Outcomes Sought by Status Indicators Status CPS  Reduce the number  Improved protection Mostly  Number of hectares of Not verified of people impacted of productive land achieved productive land (calculation in by adverse natural from protected from 1-in-3- progress) events, especially hydrometeorological year flood Achieved floods and droughts events  Number of large dams with unacceptable risk index 74 19. Disaster resilience has been further strengthened by rehabilitation of many of the country’s dams in recent years. The WBG-financed Dam Safety and Water Resources Planning Project targeted dams with unacceptable risk indexes, completing remedial work on 31 dams during the CPS period. Work is ongoing at or planned for another 31 dams deemed to be high risk, effectively meeting the target for the CPS period. Operations and maintenance (O&M) manuals to provide for better maintenance are in place in 32 dams; 110 of the 172 planned hydrometeorological stations have been completed and are transmitting data, with the remaining ones to be operational before the end of 2016 following installation of already procured equipment. The project received additional financing midway through the CPS period to scale up activities, including in the East and North where security issues had previously hampered carrying out work. As noted in the preceding paragraph, the CRIP has supported investments to improve resilience and a disaster risk data platform is in place, but the development of management plans with associated risk maps has been delayed. 4.3 INCREASED FISCAL RESILIENCE TO CLIMATE-RELATED DISASTERS Development Challenge Outcomes Sought by Status Indicators Status CPS  Reduce the  Improved fiscal Achieved  Contingent credit line for Achieved government’s resilience to climate- climate-related disasters in contingent liability to related risks place natural disasters  Layered liability Achieved management strategy under implementation 20. The Cat DDO provides for important financial support in the event of natural disasters. Sri Lanka is the only country in South Asia to take advantage of this instrument, which requires an adequate policy framework for managing disaster risk and allows for quick provision of financing if the government declares a state of emergency following an adverse natural event. Sri Lanka has not had reason to declare such an emergency since the CATDDO became effective in 2014. IFC also has contributed to increased fiscal resilience by supporting Sanasa Insurance to introduce and expand Weather Index Insurance for farmers. IFC’s Global Index Insurance Facility–Sanasa I advisory services project was the first of its kind in South Asia and was successful in covering farmers’ exposure to weather-related risks. The insurance facilitated farmers’ access to credit to purchase farm inputs. More than 39,000 farmers gained access to this insurance from June 2011 to the project’s closure in December 2014. An additional 57,000 farmers have become aware of the facility and could benefit from the insurance in the future. III. World Bank Group Performance 21. The overall performance of the WBG in designing and implementing the CPS is assessed as Good. The design was well aligned with both the development vision of the government at the time of formulation of the CPS and the WBG’s own assessment of development challenges and opportunities facing the country, specifically in sustaining growth and addressing specific inclusion challenges. The design was adjusted after the CPS Progress Report to respond more closely to client demand, while also recognizing weaknesses in an overly prescriptive 75 analytical program. Implementation was strong, although the extended political transition throughout 2015 and limited client demand for certain operations in the first two years caused a slowdown in lending, which was overcome toward the latter half of FY16. The program contributed to major progress in providing livelihoods and infrastructure in poorer areas, particularly the North and East; developing MSMEs; and improving the quality of education, the roads sector, and disaster risk management. Design 22. The CPS sought to balance maintaining support for social inclusion with a focus on addressing the longer-term strategic and structural challenges of an emerging MIC. Sri Lanka’s military conflict ended in 2009, and most IDPs had returned or voluntarily resettled by the time the CPS was formulated. The CPS maintained a focus on addressing inclusion in conflict- affected areas, largely through ongoing operations from the previous CPS period. It also drew on the 2011 World Development Report on conflict, security, and development to guide the approach. At the same time, the CPS’s main thrust was to orient the WBG program more toward countrywide engagements that would support Sri Lanka’s further development as a MIC. Data available at the time showed that growth had been pro-poor, with overall declining inequality and sustained improvements in other development indicators. Hence, the CPS noted that supporting growth and improved service delivery overall would be effective in supporting poverty reduction. This approach aligned with the GoSL’s development strategy at the time of design (the “Mahinda Chintana”), which emphasized that the country was moving on from post-conflict humanitarian needs and prioritized economic growth. It also responded to key findings of consultations with the private sector and civil society, which emphasized (1) the desire to move past the war and focus on the future; (2) the desire to be treated as equal citizens in an integrated country, rather than as a separate group; and (3) a focus on jobs and quality public services. 23. The CPS’s strategic foci and instruments were substantially consistent with supporting the country’s MIC agenda and increasing inclusion. The strategy initially specified three areas of engagement: (1) facilitating sustained private and public investment; (2) supporting structural changes through addressing skills in the labor force, improving competitiveness, and urbanization; and (3) improving living standards and inclusion. The mix of instruments to support achievement of these objectives was logical and represented adequate consideration of risk/reward to a full extent with regard to Engagement Areas 2 (structural changes) and 4 (climate and disaster resilience), as well as all objectives in Engagement Area 3 (inclusion), with the partial exception of reducing malnutrition. A small RETF was employed to tackle the large-scale problem of malnutrition with the expectation of complementary efforts by other development partners, particularly the United Nations International Children’s Emergency Fund (UNICEF). The planned mix of policy lending, investment lending, advisory services, and analytical work by both the WBG and IFC was appropriate to the objective of promoting private investment under Engagement Area 1. However, support for fiscal oversight institutions and the analytical program only partly addressed the broad goal of improved fiscal space and public investment in Engagement Area 1. The limited engagement, particularly on addressing the country’s revenue challenge, was dictated by lack of client demand. However, the team undertook major analytical work to allow for rapid 76 scaling up of engagement when opportunities emerged toward the end of the CPS, including through a planned development policy operation. 24. The results matrix was appropriately derived from specific WBG interventions. In most cases, results were logically well linked to the objectives in areas of engagement, while still allowing for attribution to WBG activities. However, in a few cases, the results were numerical outputs of specific project interventions with a weak linkage to overall outcomes, such as number of people trained. In one case, the measure (computer literacy) was difficult to verify. 25. Synergy between IFC and the WBG was prominent in the design, particularly regarding the focus on increasing investment. The CPS and the CPS Progress Reports were prepared jointly by the WBG and IFC. IFC’s focus was on inclusive growth via support for farmers, MSMEs, and labor-intensive industries; improving competitiveness in priority sectors, including tourism, apparel, agribusiness, and infrastructure; and, to a lesser extent, on the areas of climate change and regional/global integration. These areas of focus corresponded closely to the Country Partnership Framework (CPF) pillars. IFC was also particularly active in supporting entrepreneurship, access to financial services, and inclusion in the North and East. 26. The mid-term review led to the inclusion of resilience to disasters and climate change as a fourth area of focus and other adjustments. In part, thanks to the WBG’s analytical work on the fiscal impact of disasters, the GoSL made climate change and disaster resilience an additional area of focus around the time of the compilation of the CPS Progress Report. The CPS was amended to include resilience as a fourth area and added two new operations that had not been originally planned: a CAT DDO and climate resilience investment project financing (IPF). At the same time, several operations were deferred or dropped, including policy lending to support competitiveness and IPF for the ICT, justice, and tourism sectors. Policy lending to support competitiveness was revived with the change of government. 27. The CPS outlined an ambitious analytical program that, though later scaled back in recognition that it was overly prescriptive, robustly contributed to achieving the CPS’s objectives. The CPS stressed the need for better analytics to engage on the country’s MIC agenda and to provide the underpinnings for an increase in policy lending, as well as disbursement-linked indicator (DLI)-based IPFs, and potentially Programs for Results (PforRs). The extensive analytical program was in part a response to the previous Country Assistance Strategy where analytical underpinnings for some operations had been assessed as insufficient, and also in part a response to recognizing the move to new lending instruments. The CPS committed to major analytical studies, including a PEFA, PER, and Poverty Assessment, as well as several sector assessments over the first two years. The CPS Progress Report found that the analytical program had been too prescriptive and voluminous in planning for several years in advance. It dropped 11 analytical activities and emphasized the need to be more flexible and responsive to emerging opportunities. This emphasis also reflected the limited receptivity to WBG analytical products in certain areas (mainly trade and investment policy and public financial management) over the first two years of the CPS. A change in receptivity to analytical work in all sectors was observed in the final year of the CPS following the change in government. 77 28. Risks were adequately identified. The CPS stressed four major risks in the implementation environment, which largely manifested themselves: external shocks, fiscal space, sustaining efforts to provide for social inclusion, and the effects of disasters. The risk associated with disasters was effectively addressed through analytical work that led to the addition of an area of focus. There were no significant external shocks. Efforts to continue inclusion, especially in conflict-affected areas, continued, particularly following the change in government. Fiscal space has remained an acute problem for Sri Lanka, though it did not impact the portfolio. Risks for program implementation included governance risks (particularly procurement and financial management); government capacity risks; change in government priorities; and, specific to IFC, risks in identifying partners and ensuring a diversified portfolio. Capacity issues owing to the change in government had a modest impact on the speed of implementation in the final year of the CPF, but otherwise did not represent significant hindrances. At the same time, the change in government provided more avenues for engagement on CPS priorities, notably on structural reform. Implementation 29. The lending program supported CPS objectives, and reflected adjustments in response to changing client demands. The CPS envisaged combined International Development Association (IDA) and International Bank for Reconstruction and Development (IBRD) lending at up to $500 million per year, which proved to be optimistic. Commitments in FY13, FY14, and FY15 were, respectively, $200 million (all IDA); $532 million (all IDA, except for $102 for the Cat DDO); and $215 million. Expected lending for FY16 totals $587 million, which will use up all IDA FY17 resources. All IDA FY16 funds available to Sri Lanka were used. The large increase in FY14 reflected the addition of two operations supporting disaster and climate resilience, which in turn reflected increased client demand stimulated in large part by the WBG’s analytical work on disaster financial risks. Other new operations supported investments in the health, urban, education, and water sectors, which pursued objectives articulated in Engagement Areas 2 and 3. A planned policy operation to support outcomes under Engagement Area 1 (increased investment) was delayed, and a justice sector operation was dropped owing to lack of traction on reforms. The long political transition beginning in calendar year (CY) 2015 slowed down the preparation of operations in transport and agriculture, leading to a bunching of operations at the end of FY16. However, the change in government has opened up greater space for addressing structural issues, including a policy operation that addresses competitiveness outcomes stipulated in Engagement Area 1. 30. IDA resources were primarily used. With the exception of the Cat DDO, all lending was Specific Investment Lending, including three operations which that incorporated results-based disbursements. The total number of IDA operations dropped from 14 to 11 over the first three years of the CPS, though seven new operations and three additional financing projects are anticipated by the end of FY16. Three of the operations in the health, education, and skills sectors provide financing against disbursement-linked indicators (DLIs). Sri Lanka has not been active in borrowing from IBRD: only one IBRD-financed operation was launched during the CPS period (the Cat DDO), in addition to one IBRD operation (the Metro Colombo Project) inherited from the previous CPS period. 78 31. Portfolio performance was strong overall. There were no problem projects, and only one project was at risk in the last two fiscal years. Proactivity on problem projects in the first two years was 100 percent. Disbursement rates were strong in the first two years, but declined in FY15 and FY16, largely owing to the political transition and resulting changes in key staff in several implementation agencies. With the exception of one operation that closed, there were no major fiduciary issues in the portfolio. In addition, the Metro Colombo Project underwent extra scrutiny on safeguard issues owing to a conflation of WBG-financed project activities and related parallel GoSL actions, but these did not reflect any issues with the operation itself. No other safeguard problems were raised in the portfolio. Table 1: Selected IDA/IBRD Portfolio Indicators Indicators FY13 FY14 FY15 FY16 (as of 1/1/2016) Disbursement ratio—IDA 34.6 35.5 19.7 5.8 Disbursement ratio—IBRD 16.1 10.2 11.7 0.0 Number of projects—IDA 14 13 11 10 Number of projects—IBRD 1 2 2 2 Projects at risk (%) 6.3 15 5.9 N/A Number of problem projects 1 3 0 N/A Net commitment amount ($ millions)—IDA 1,268 1,557 1,169 1,131 Net commitment amount ($ millions)—IBRD 230 315 315 315 32. IFC played an important role in supporting CPS objectives. Over the CPS period, IFC committed more than $400 million in investments in 11 projects, including $253 million mobilized from partner institutions. IFC’s portfolio performed well, with seven out of eight mature investments achieving a high development outcome rating, exceeding South Asia and IFC averages. As of February 29, 2016, IFC’s advisory program consisted of 10 projects with a combined portfolio value of $10 million. These projects are strategically focused on access to finance, farmer weather-based insurance, SME and value chain solutions, business skills development, and growth in such key sectors as tourism. Similar to investment services, IFC advisory services also achieved better results than South Asia and IFC overall development results. IFC investments and advisory services made important contributions to achieving CPS objectives, especially in Engagement Areas 1 and 3—i.e., private-sector investment and inclusion, respectively. Synergy between IFC and the WBG further improved with the establishment of joint global practices—i.e., Trade and Competitiveness, and Finance and Markets (F&M) in 2014. For example, IFC’s financial sector advisory team has joined the F&M Global Practice and has been conducting joint advisory Service operations with the WBG team. The Multilateral Investment Guarantee Agency was not engaged in Sri Lanka. 79 33. Trust funds played an important complementary role in supporting local services and the education sector and analytical work. RETFs provided, respectively, $27 million and $20 million in support for Sri Lanka’s General Education Project and co-financing for NELSIP, with a further $2.5 million in RETFs supporting poverty analysis capacity and provision of benefits for disabilities. WBG-Executed Trust Funds supported key analytical work on a range of topics, most prominently urbanization, climate change and disaster resilience, skills and the labor force, and malnutrition. 34. The analytical program ultimately proved highly relevant in informing the lending program and government policy. The effectiveness of the analytical program was mixed in the first two years of the CPF period owing to limited government receptivity in some instances. At the same time, other analytical work, notably on the skills agenda, was influential and helped inform operations. The mid-term review led to dropping some planned analytical work and placing greater emphasis on flexibility and responsiveness to government requests, including through just- in-time (JIT) analysis. There was a marked increase in the receptivity and impact of the analytical program following the change in government in 2015. The Systematic Country Diagnostic produced in FY15 synthesized much of the WBG’s analysis over the CPS period and has proven influential in policy dialogue with the government. A summary of key analytical work by engagement area follows:  Area of Engagement 1 (Facilitating Investment): The PER consisted of six separate papers highlighting expenditure issues in the agriculture, health, and education sectors, as well as analysis of fiscal issues and revenue incidence. The Poverty Assessment noted the central role of labor incomes in reducing poverty, as well as locational aspects of pockets of poverty. The PEFA review noted strengths in terms of the budget process, but with weaknesses in transparency, taxation, and procurement. The PER and PEFA are informing the production of a development policy lending (DPL) instrument at the end of FY16.  Area of Engagement 2 (Structural Shifts in the Economy): Competitive Skills for a Middle- Income Country highlighted the skills gaps in the country’s labor force and was critical to preparation of the Skills Development Project. A Financial Sector Assessment Program was completed and is informing policy dialogue, as well as preparation of the DPL at end of FY16. The Secondary Cities Development Assessment identified needs for improving the effectiveness and livability of cities, underpinning the Strategic Cities Development Project.  Area of Engagement 3 (Improving Living Standards and Inclusion): Modernizing Social Protection Programs and other short analytical notes underscored the low levels of financing and imperfect targeting system and were produced regarding social protection programs, underpinning preparation of an IPF in FY16.  Area of Engagement 4 (Climate and Disaster Resilience): The Disaster Risk Financial Assessment found annual damages totaling roughly $380 million and served as critical analysis underpinning the government’s decision to invest more in climate and disaster resilience measures and develop a comprehensive disaster risk management approach. 80 35. Synergies and coordination with other development partners were strong . The WBG housed the Development Partners Secretariat, an entity funded jointly by Development Partners to coordinate diverse issues from reconciliation to public financial management. The WBG also effectively collaborated and provided for donor harmonization across its program. For instance, in the area of urban development, the WBG worked on flood reduction and municipal infrastructure, the Asian Development Bank (ADB) has focused on the water sector, and the Japan International Cooperation Agency (JICA) is developing an Urban Transport Master Plan. The WBG and ADB have adopted similar approaches in developing secondary cities, with a division of labor whereby the WBG works on Kandy, Galle, and Jaffna, while ADB has an analogous operation in Anuradhapura and is engaging in Trincomalee. In the skills sector, the WBG and ADB provide parallel financing to support the government’s skills development program, using the same implementation arrangements, reporting systems, and results framework; the WBG also is cooperating with Korean and German bilateral agencies supporting technical and vocational training. The WBG is the major development partner in the health sector, working closely with JICA, which supports infrastructure, and the Global Fund programs for HIV, tuberculosis, and malaria. There have also been close technical relationships with UNICEF, the World Health Organization, and the United Nations Population Fund. In the transport sector, the WBG has worked with IDA and JICA to finance rehabilitation of different sections of the provincial roads network, as well as developing a new approach to road asset management in the national network. As noted above, the WBG partnered with the Australian Department of Foreign Affairs and Trade, receiving trust fund financing to support NELSIP and the General Education Project. Finally, the WBG worked closely with the International Monetary Fund (IMF), JICA, and ADB supporting policy reforms in preparation of the development policy credit at the end of the CPF period, agreeing to complementary fiscal actions to the expected IMF program, a joint matrix on competitiveness reforms with JICA, and division of labor with ADB, which engaged on capital market reforms. Alignment with World Bank Corporate Goals 36. The CPS was effectively aligned with the WBG’s twin goals of ending poverty and boosting shared prosperity. Although the CPS was formulated prior to the adoption of the twin goals, it nonetheless focused on reducing poverty and addressing inclusion, which was consistent with the goal of boosting shared prosperity. The CPS sought to address the gap in service provision, as well as human development and economic outcomes in poorer areas, especially the conflict- affected North and East. The CPS Progress Report positioned the strategy more explicitly toward the twin goals, including scaling up engagement on social protection to include a lending operation. At the same time, the results framework remained essentially the same, except for the addition of a new pillar on climate and disaster resilience, which itself had a strong focus on the welfare of the bottom 40 percent. IV. Lessons Learned 37. Shifting client demand has required a high degree of flexibility. Client engagement has been complex, though for different reasons in a country context that sharply changed over the CPS period. During the first two and a half years, the program was effective in implementation of 81 investment projects, but encountered less government receptivity in several key policy areas — notably, competitiveness, fiscal policy, and public financial management. The government placed less emphasis on addressing inclusion challenges than promoting the growth agenda. Deft management was required to seek openings to work on areas with limited client interest. The last one and a half years have involved a long political transition and several changes in the structure and staffing of government and institutional roles. This scenario has required strong efforts to reconfirm agreement about the direction of the WBG program across a range of institutions for both ongoing projects and the lending pipeline. At the same time, the change in government opened more space for engagement on policy reforms. 38. Increasing investment and fiscal space proved to be the most difficult areas of engagement, despite their continuing importance. Substantial IFC and WBG-financed engagements contributed to improved access to finance, but there remain significant challenges in that the financial sector still poorly services MSMEs. Sri Lanka’s overall investment climate remains weak, as evidenced by continuing low levels of FDI. The country also faces a major fiscal challenge owing to its chronically low tax-to-gross domestic product (GDP) ratio, which is among the lowest in the world. Low government revenues appear to be driven by tax administration shortcomings, as well as a large number of exemptions. The level of WBG engagement in these areas was limited for much of the CPS period because of lack of client demand; the change in government has opened opportunities, and these issues are at the core of the planned DPL to be delivered at the end of FY16. This sequence of events indicates the need for continued effort to sustain strong working relationships with a range of stakeholders on key policy issues in order to engage quickly as opportunity arises. A combination of policy lending and technical assistance is likely needed to reinvigorate WBG collaboration on the issues of access to finance, investment climate, and fiscal management in the forthcoming CPF. 39. Inclusion remains an acute issue despite successful efforts to address gaps. The CPS implied a refocusing over time toward countrywide growth, but the recent Poverty Assessment shows continuing pockets of high rates of poverty and low access to services for certain population groups. Moreover, the most recent HIES indicates that growth is no longer pro-poor/bottom 40 percent, as had previously been the case. Women’s participation in the labor force remains relatively low for a MIC country, while youth unemployment is double that of the adult population. While WBG interventions, particularly in the North and East, achieved strong results, the gaps in economic opportunities and access to services between these areas and the rest of the country remain significant. Additional analyses carried out over this CPS period further identify vulnerabilities in the estate sector and Moneragala. Addressing inclusion challenges for disadvantaged groups will be integral to achieving progress toward the twin goals. 40. The commitment to an intensive analytical program was ultimately justified. The mid- term CPS Progress Report resulted in an appropriate adjustment toward more flexible JIT responses to emerging demand and a reduction in an overly prescriptive and voluminous analytical program. This shift reflected limited government interest in some key areas. At the same time, during the first two years there was strong traction in many areas; for instance, analysis on skills and disaster risk helped shape new policies and WBG operations. Moreover, even in areas where traction was initially not strong, fundamental analytical pieces, such as the PER and Poverty 82 Assessment, proved to be valuable because they equipped the WBG to respond quickly when opportunities emerged later in the CPS period. This analysis allowed for the quick production of short policy notes as well as synthetic analysis in the Systematic Country Diagnostic, which proved influential in opening up broader engagement on policy in several areas, including competitiveness, social protection, governance, and macroeconomic and fiscal management. 41. The introduction of performance-based lending has been promising, though implementation in some cases has been mixed. The Second Health Sector Project pioneered the use of DLIs in Specific Investment Loans, with later operations supporting skills and the education sector also using the approach. In the health sector there were initial difficulties in gaining ownership in the Ministry of Health, Nutrition and Indigenous Medicine, but ultimately the approach resulted in a much greater degree of strategic engagement on policy, as well as emphasis on improving systems and performance rather than focusing on transactions. Moreover, the government has embraced using performance-based approaches and is seeking to expand their application. The experience with the education sector has been more mixed, requiring a strong coordinating unit to work with different agencies to address implementation challenges. Given their use in other SAR countries, PforRs may be considered in the future, if Sri Lanka’s procurement system is strengthened and attention is given to the development of robust sector strategies and programs. 42. The results matrix could have been streamlined, and in some cases better calibrated to impact on outcomes that were attributable to, and in line with the timing of, WBG activities. The matrix consisted of four engagement areas with 10 subareas and 27 results indicators. In some cases, indicators were set at a high country level, yet activities were not commensurate, including the DB indicators for Objective 1.1 as well as malnutrition rates in Northern Province for Objective 3.2, for which the only activity was a small RETF. In the case of improved access to finance (Objective 1.1), the WBG had an extensive program, but the indicator (volume of lending) did not clearly reflect the WBG’s impact, since lending depended on many factors beyond the support provided through WBG interventions. There were also three cases of indicators that related to project activities that would be completed after the CPS period ended (reducing the area under risk of flooding in Colombo, building capacity for disaster risk assessments, and equipping central and provincial hospitals with Emergency Treatment Units), leading to non-achievement when there had actually been progress. The computer literacy indicator for Objective 2.1 pertained to the population, whereas a review of the WBG’s E -Sri Lanka Development Project intervention indicates that it concerned employees in a select number of government agencies. Finally, the results framework contained milestones that often were additional, comparable outcome indicators. For instance, with regard to community participation in school management, the outcome indicator was percentage of zones where there was implementation, and a milestone was where individuals on community participation mechanisms had received training. A more selective approach to defining outcomes is warranted to ensure that they are attributable to WBG interventions, are scheduled to be achieved within the CPS period, and have a logical link between activities and outcomes. 83 CLR Annex I: Updated CPS FY13–16 Results Matrix Country Development CPS Outcomes & Results World Bank Group Program Goals (as described in the Issues and Obstacles Indicators Milestones Contributing to Outcomes Mahinda Chintana Vision for the Future) AREA OF ENGAGAMENT 1. PRIVATE AND PUBLIC INVESTMENT 1.1 Improving the Access to finance (especially  Improved investment Financing: investment climate. nonbank) is inadequate, environment:  Small and Medium Enterprise Government Goals and contract enforcement is very Development Facility Project Time taken to register a Twinning arrangements Indicators: slow, and procedures for property: established with relevant  Competitiveness DPL  Increasing foreign direct registering property and (P157804) Baseline: 83 days agencies in Malaysia and investment. obtaining construction Target: 50 days Thailand construction permits  Warehouse Receipts Project permits are cumbersome. (RETF) (P124091)  Improving the Update: Mostly achieved (51 process: investment climate as days) Baseline: 0 Microfinance institutions AAA/Others (Source: Doing Business Target: 2 measured in Doing have difficulty attracting 2015) Update: Not achieved  South–South Knowledge Business. deposits (to be used for Exchange: MIC experiences lending to microenterprises) with investment climate Time taken to obtain a owing to lack of clear reforms construction permit: regulation.  Improving nonbank financial Baseline: 217 days Target: 180 days sector (e.g., capital markets) Update: Achieved (116 days)  FDI policy note (Source: Doing Business  ICT regulatory capacity 2015) Increased number of staff building trained in SME lending in  Strengthening the Institute of  Improved access to licensed Chartered Accountants of Sri finance for SMEs and commercial/specialized banks: Lanka farmers: Baseline: 0  Justice Sector Review Target: 400  IFC investment and advisory Volume of lending to SMEs Update: Achieved services for partner financial through institutions supported institutions to support risk by the WBG: Warehouses offering receipts management and MSMEs Baseline: 0 Target: $28 million established and operational:  IFC’s investment and advisory Baseline: 0 services for agri-insurance Update: Achieved ($3.3 Target: 3 billion indirectly by IFC, $45 financial infrastructure Update: Not achieved (only 1  IFC’s Global Trade Finance million by IDA) established) (Source: IFC) Program support to banks and Global Trade Supplier Finance to apparel manufacturers 84 CLR Annex I: Updated CPS FY13–16 Results Matrix Country Development CPS Outcomes & Results World Bank Group Program Goals (as described in the Issues and Obstacles Indicators Milestones Contributing to Outcomes Mahinda Chintana Vision for the Future) Number of farmers accessing  IFC’s investments and advisory credit from the Warehouse services to support MSMEs Receipts financing system: and farmers Baseline: 0 Target: 20,000 Update: Not achieved (824 loans awarded) (Source: Warehouse Receipts Project ICR, March 2016) 1.2 Increasing fiscal space There is immense scope for  Enhanced accountability AGD strengthened. Financing: and increased efficiency of efficiency gains in public and transparency in the  Public Sector Capacity public spending. expenditure management by use of public funds: Building Project (P097329) Technical staff trained and reducing waste and improving Financial audits by Auditor using recommended practices: Government Goals and performance. AAA/Others General Department (AGD) Baseline: 40% Indicators:  Resource allocation and in compliance with Target: 100%  Reducing the fiscal The public audit bill is revenue generation for growth International Standards of Update: Achieved (100% of deficit to 5% of GDP by outdated. The government has (PER/PEFA) Supreme Audit Institutions AGD staff) 2013 and maintaining it stated its intention to have a at that level thereafter. new audit bill passed through (ISSAI) framework: (Source: Public Sector  PER Baseline: 0 (2012) Capacity Building Project ICR,   Reducing current Parliament. Issues note on fiscal policy Target: AGD states in its 2014)  Revenue and incidence expenditure as a share of annual report that all audits GDP. Restricted fiscal space limits analysis policy note (approximately 1,000) are in   Increasing revenue as a public investment, and broad compliance with ISSAI) Timely legislative scrutiny of Strengthening the share of GDP. revenue efforts are needed to audit reports: parliamentary budget oversight Update: Achieved (financial  Improving the flow of increase revenues. audits are in compliance with Baseline: Committee on Public committees (trust fund (TF)) budget information, Enterprises (COPE) submitted ISSAI) including reliable and its first report to Parliament (Source: 2015 Auditor timely information on after 18 months; Committee on General’s Report) budgets and outcomes. Public Accounts (COPA) did not report to Parliament in its Performance audits reported first 20 months to Parliament: Target: COPE and COPA Baseline: 0 report to Parliament at least Target: At least 10 per year annually Update: Partially achieved (5 Update: Partially achieved in CY13, 5 in CY14) (reports submitted, but not (Source: 2015 Auditor General’s Report) 85 CLR Annex I: Updated CPS FY13–16 Results Matrix Country Development CPS Outcomes & Results World Bank Group Program Goals (as described in the Issues and Obstacles Indicators Milestones Contributing to Outcomes Mahinda Chintana Vision for the Future) always on an annual basis throughout the CPS period) AREA OF ENGAGEMENT 2. STRUCTURAL SHIFTS IN THE ECONOMY 2.1 Shifting the structure of Skills and education system  Increased alignment of Financing: the economy to be more are not well aligned with the skills with job market:  Higher Education for the needs of the labor market, Level indicators and award knowledge based. Twenty-First Century Project leading to a mismatch Enrollment in job-oriented types defined for the higher (P113402) ATIs: education sector: between the skills of the labor  E-Sri Lanka Development Government Goals and force and those required for a Baseline: 8,500 Update: Achieved (by the end Project (P081771) Indicators: Target: 12,500 of 2014, level indicators and knowledge-based economy.  Skills Development Project  Knowledge-based Update: Achieved (more than award types were being used in all universities) (P132689) economy defined as one Higher education and training 15,000 students enrolled since that applies global programs need to be 2014) (Source: Higher Education for (Source: Higher Education the Twenty-First Century AAA/Others: knowledge to all incorporated within a for the Twenty-First Century Project ISR, December 8,  MIC approaches to economic activities, as National Qualifications encouraging private-sector Framework that both enables Project Implementation and 2015) opposed to select areas. Status Report (ISR), innovation and technology horizontal and vertical adoption—renamed: ICT and  Current ICT work force mobility between the December 8, 2015) Innovation (AAA) expected to increase to education and training  Computer literacy:  Sri Lanka—Competitive Skills 186,000 in 2016 from systems and provides Beneficiaries of public for a Middle-Income Country information to employers on Baseline: 35% of population 50,000 in 2010. telecenters: (AAA) Target: 70% of population  Increased computer learning and skills outcomes. Update: Not verified Baseline: 35,000 literacy. (measure of literacy by Target: 40,000 Computer literacy is low. Update: Achieved (70,000)  Introduction of new Lack of local language statistics board uses computer ownership, which is a much (Source: Higher Education for demand-driven skills content on the Internet is a lower percentage of the the Twenty-First Century development programs constraint for the majority of Project ISR, December 8, citizens. population) that enhance 2015) (Source: E- Lanka Project employability. Implementation Completion and Results (ICR), 2014) A National Qualifications Framework is developed.  Quality of higher Update: Achieved. education institutions (Source: Higher Education for enhanced: the Twenty-First Century Project ISR, December 8, 2015) 86 CLR Annex I: Updated CPS FY13–16 Results Matrix Country Development CPS Outcomes & Results World Bank Group Program Goals (as described in the Issues and Obstacles Indicators Milestones Contributing to Outcomes Mahinda Chintana Vision for the Future) Number of universities and ATIs that are classified and operate within a National Qualifications Framework: Baseline: 0 Target: 15 Update: Achieved (all 15 universities) (Source: Higher Education for the Twenty-First Century Project ISR, December 2015) 2.2 Supporting internal Economic linkages between  Increased connectivity: Financing integration and increasing rural and urban areas and Rehabilitation of UV1 (27 km)  Provincial Roads Project Travel time on UV1: urbanization. among provinces need to be completed on schedule: (P107847) Baseline: 100 minutes (2012) built. Update: Achieved (117.29 km  Metro Colombo Urban Target: 80 minutes Government Goals and Update: Achieved (20% rehabilitated) Development Project Indicators: As a result of the 26-year (Source: Provincial Roads (P122735) reduction in travel time)  The share of rural conflict, transport networks (Source: Provincial Roads project draft ICR)  Dam Safety and Water for people, goods, and Resources Planning Project employment to decline project draft ICR) services have eroded. (P093132) from about two-thirds to half.  Reduced vulnerability to  Strategic Cities Development Networked services are Delivery of an Integrated Flood Project (P130548)  The share of urban flooding in Metro needed for the urbanizing Management System: population to increase Colombo: population. Flooding, traffic Baseline: No system in place AAA/Others from a quarter to a third. congestion, and Reduction in the area under Target: Functioning system at  Metro Colombo—Towards a  Sri Lanka is to have a environmental degradation risk of flooding (50-year Sri Lanka Land Reclamation Flood Resilient Urban well-planned, are resulting. The impact is return period) in Metro and Development Corporation Environment (TF) economically productive, reduction in the quality of life environmentally Colombo: Update: Not achieved  Colombo Green Growth and environmental Baseline: 5.5 km2 (2012) (Sources: Metro Colombo Program sustainable, culturally sustainability. Natural Target: 3 km2 Urban Development Project  Secondary Cities Development vibrant, safe, and well- disasters and climate change Update: Not achieved (works ISR, June 2015; staff Study linked network of cities exacerbate these impacts. will be completed in FY17) information) and towns. (Sources: Metro Colombo Urban Development Project ISR, December 2014; staff Staff of relevant government information) agencies trained to carry out disaster risk assessments and 87 CLR Annex I: Updated CPS FY13–16 Results Matrix Country Development CPS Outcomes & Results World Bank Group Program Goals (as described in the Issues and Obstacles Indicators Milestones Contributing to Outcomes Mahinda Chintana Vision for the Future) post-disaster needs assessments: Baseline: 0 Target: 35 Update: Not achieved (Sources: Metro Colombo Urban Development Project ISR, June 2015; staff information) AREA OF ENGAGEMENT 3. LIVING STANDARDS AND SOCIAL INCLUSION 3.1 Increasing quality of As a MIC, new and higher-  Increased capacity to Cognitive tests and Financing: services. quality types of services need measure student learning determinants of outcomes for  Transforming the School to be developed. outcomes: English, Sinhalese, and Tamil Education System Project Government Goals and and mathematics for primary (P13488) National assessments of Indicators: The quality of water supply is learning outcomes for education (grade 4) developed.  Provincial Roads Project  Introduce measures to declining due to the Cognitive tests and (P107847) program development in increase the quality and increasing and competing primary and secondary determinants of outcomes for  North East Local Services motivation of existing demands on water resources. English, mathematics, and Improvement Project education implemented: service providers. science for secondary (P113036) Baseline: 0.  Ensure service providers Target: 4 (2 national education (grade 8) developed:  Community Livelihoods in are client oriented, such Provincial and local Update: Achieved. Conflict-Affected Areas assessments for primary as ensuring public health authorities lack adequate (Source: Transforming the Project (P086747) education (grade 4); 2 services are patient capacity and resources to School Education System  Second Health Sector national assessments for oriented and in line with deliver services and local Project ISR, December 2015) Development Project secondary education (grade 8) changing economic and infrastructure. (P118806) Update: Achieved (all 4 demographic needs. Percentage of the 97 Ministry  Water Supply and Sanitation assessments completed) of Education (MOE) zones in Improvement Project (Source: Transforming the which school management (P147827) School Education System teams and school development  Early Childhood Development Project ISR, December 2015) committees are trained for implementation of the Program Project (P151916) Percentage of education zones for School Improvement:  Transport Sector Project in which the Program for (P132833) Baseline: 0 School Improvement Target: 40 % implemented: 88 CLR Annex I: Updated CPS FY13–16 Results Matrix Baseline: 0 Update: Achieved (80% of  Education Sector Development Target: 70% MOE zones have received Framework Program (RETF) Update: Achieved (70%) training) (Source: Transforming the (Source: Transforming the AAA/Others School Education System School Education System  Private health sector review Project ISR, December 2015) Project ISR, December 2015)  Health results innovation trust fund technical assistance (TA)  Health service delivery for piloting results-based improved: Private health sector review financing (RETF) prepared and disseminated Percentage of health facilities  Urban Health and Service (includes baseline survey on with a functioning 24-hour Delivery health care quality in the public Emergency Treatment Unit: and private sectors):  Early Childhood Care and Baseline: 22% Education Update: Achieved Target: 40% of central (Source: Second Health Sector  Assessment of Water Supply Ministry of Health-managed and Sanitation at provincial Development Project ISR, hospitals and 50% of level December 2015) province-managed health  IFC investment in Asiri facilities Hospital Update: Partly achieved (21% in centrally managed facilities and 46% of provincially managed facilities) (Source: Second Health Sector Development Project ISR, December 2015) Local authorities in the North  Local authorities in and East provide information selected provinces deliver needed for accountability as services and local measured by the number of infrastructure in a more local authorities submitting responsive and annual audits: accountable manner: Baseline: 30 Target: 60 Percentage of local authorities Update: Achieved (75 audits with budgets prepared in a submitted) participatory manner: (Source: North East Local Baseline: 0 Services Improvement Project Target: 80% ISR, March 2016) Update: Mostly achieved (70%) 89 CLR Annex I: Updated CPS FY13–16 Results Matrix Country Development CPS Outcomes & Results World Bank Group Program Goals (as described in the Issues and Obstacles Indicators Milestones Contributing to Outcomes Mahinda Chintana Vision for the Future) (Source: North East Local Services Improvement Project ISR, March 2016) Percentage of local authorities whose revenues, expenditures, and procurement decisions are publicly disclosed: Baseline: 0 Target: 80% Update: Achieved (80%) (Source: North East Local Services Improvement Project ISR, March 2016)  Improved quality and sustainability of roads: Road network in good or fair condition: Baseline: 35% Target: 40% Update: Achieved (65% of network of roads assessed as good or fair) (Source: Survey of roads by Road Development Authority) Routine and periodic road maintenance funding allocated annually: Baseline: 5 LKR billion Target: 6.6 LKR billion Update: Mostly achieved (6.3 LKR billion in 2014) (Source: Road Development Authority budget allocation) 90 CLR Annex I: Updated CPS FY13–16 Results Matrix Country Development CPS Outcomes & Results World Bank Group Program Goals (as described in the Issues and Obstacles Indicators Milestones Contributing to Outcomes Mahinda Chintana Vision for the Future) 3.2 Reducing prevalence of Malnutrition is found across  Reduced prevalence of Financing: malnutrition. all segments of the population malnutrition in selected  Local Level Nutrition and remains much higher in areas: Districts implementing Interventions for Northern Government Goals and Sri Lanka than in other multisector nutrition Province (RETF) Under-five underweight rate Indicators: countries of similar income intervention: among population in  Eradicating hunger and level. Baseline: 0 identified areas: AAA/Others: hard-core poverty Target: 6 Baseline: Area identified and  Reducing malnutrition rate Malnutrition has multiple Update: Partially achieved causes, including beliefs baseline rate measured during (incomplete implementation in  Nutrition in the Estate Sector of children from a third to project preparation as 12–15%. about proper diet, hygiene several districts) Northern Province and 29.4%: habits, and access to clean  Increasing access to clean Target: 25% water, as well as affordability Multisector plan to address water in urban areas from Update: Not achieved of food. undernutrition with focus on 65% to 90%. (31.6%) the period from conception to  Strengthening nutritional (Source: Local Level 24 months developed by MOH: surveillance of pregnant Nutrition Interventions for Update: Partially achieved mothers, infants, and Northern Province (RETF) preschool children (less Midline Survey) than five years of age) 3.3 Increasing social Communities affected by the  Improved livelihoods Financing: inclusion and equity of war have lower human and among select  Community Livelihoods in access. physical capital than disadvantaged groups: Conflict Affected Areas Project communities in other parts of Households starting new (Re-awakening Project) the country. Households affected by (P086747) Government Goals and income-generating activities or conflict and flood whose Indicators: scaling up existing activities  Emergency Northern Recovery Displaced communities need incomes have increased by  Ensuring accessibility, through village revolving fund Project (P118870) 30%: especially for assistance resettling in their loans:  Second Community land. Baseline: 148,000 vulnerable groups, with Baseline: 0 Development and Livelihoods Target: 213,000 equitable access for Target: 114,000 Improvement Project (Gemi Management of safety net has Update: Achieved (222,555 social services and Update: Mostly achieved Diriya) (P087145) households) safety nets in place. insufficient capacity and (Source: Emergency Northern (80,000 households)  Access to Sanitation Project information to effectively (Source: Community (GPOBA TF) (P111161) target the poor and disabled. Recovery Project ICR, 2014) Livelihoods in Conflict Affected  Vocational Training and Areas Project (Re-awakening Financial Support for Disabled Displaced families Project) ICR, June 2015) Persons—Dirisawiya (TF) reintegrated into their communities: Baseline: 0 91 CLR Annex I: Updated CPS FY13–16 Results Matrix Country Development CPS Outcomes & Results World Bank Group Program Goals (as described in the Issues and Obstacles Indicators Milestones Contributing to Outcomes Mahinda Chintana Vision for the Future) Target: 140,000 families Households receive seeds for  North and East Pilot WASH (Source: Community first cultivation following their for Post-Conflict Resettlements Livelihoods in Conflict return: (TF) Affected Areas Project (Re- Baseline: 0  IFC’s investments and advisory awakening Project) ICR, June Target: 6,000 services to support MSMEs 2015) Update: Achieved (14,796 and farmers, and develop Update: Achieved (136,000 households) access in less affluent areas under Electricity Network (Source: Community Reinforcement and Expansion Livelihoods in Conflict Affected ASA/Others Project; 53,000 under Re- Areas Project (Re-awakening  Improving monitoring and awakening Project) Project) ICR, June 2015) evaluation of Samurdhi safety (Sources: Emergency net program (TF) Northern Recovery Project The National Water Supply and  Assessment of Water Supply ICR, 2014; Community Drainage Board begins and Sanitation at provincial Livelihoods in Conflict implementing the OBA level (TF) (also under 3.2) Affected Areas Project (Re- approach to promote access of  Poverty Assessment awakening Project) ICR, June low-income households to  IFC advisory program for local 2015) affordable improved urban economic development sanitation service: (Sustainable Economic Number of low-income Update: Achieved Development Advisory households accessing (Source: Access to Sanitation Services improved sanitation services Project draft restructuring under the National Water paper, November 24, 2015) Supply and Drainage Board- implemented OBA pilot approach to promote access to improved urban sanitation: Baseline: 0 Target: 10,000 Update: Not achieved (1,524 connections) (Source: Access to Sanitation Project draft restructuring paper, November 24, 2015) AREA OF ENGAGEMENT 4. IMPROVE RESILIENCE TO CLIMATE AND DISASTER RISKS 92 CLR Annex I: Updated CPS FY13–16 Results Matrix Country Development CPS Outcomes & Results World Bank Group Program Goals (as described in the Issues and Obstacles Indicators Milestones Contributing to Outcomes Mahinda Chintana Vision for the Future) 4.1 Improved With the intensification and  Improved planning for Signing of the Improving Completed or ongoing: understanding of climate concentration of economic disaster risk Climate Resilience Project.  Climate Resilience risks. activity in vulnerable cities, management: Improvement Project the fiscal and economic National spatial data (P146314) River basins with basinwide Government Goals and impacts of disasters are likely risk mitigation investment infrastructure platform  DPL with Catastrophe Indicators: to be high and growing. operational: Deferred Drawdown Option plans developed:  Gain clarity on the Baseline: 0 (P147454) economic and fiscal The Ministry of Finance Baseline: 0  Metro Colombo Urban Target: 1 impacts of disasters. remains unclear as to the full Target: 7 Development Project Update: Mostly achieved  Develop the capacity to economic and fiscal impacts Update: Partially achieved (disaster risk assessment (P122735) assess physical risks of disasters. (1)  Dam Safety and Water platform established) posed by (Source; Metro Colombo Resources Planning Project hydrometeorological Government agencies lack the Urban Development Project (P093132) disasters. tools to assess the physical ISR, September 12, 2015) risks posed by hydrometeorological ASA/Others: disasters.  Fiscal Disaster Risk Assessment  Support to the implementation of a comprehensive disaster risk financing and insurance 4.2 Reduction in physical  Improved protection of program losses due to productive land from Signing of Dam Safety  Strengthening Capacity to hydrometeorological events. hydrometeorological Additional Financing Mainstream Disaster Risk events: completed. Management Government Goals and Number of hectares of Indicators: Signing of Improving Climate productive land protected  Reduce the number of Resilience Project completed from 1-in-3-year flood: people impacted by in August 2014. Baseline: 0 adverse natural events, Target: 37,000 hectares especially floods and New infrastructure planning in Update: Not verified droughts 7 targeted basins informed by (calculation ongoing) risk maps that have been developed:  Improved safety of dams Baseline: Limited Number of large dams with consideration in planning unacceptable risk index: 93 CLR Annex I: Updated CPS FY13–16 Results Matrix Country Development CPS Outcomes & Results World Bank Group Program Goals (as described in the Issues and Obstacles Indicators Milestones Contributing to Outcomes Mahinda Chintana Vision for the Future) Baseline: 52 Target: 20% of new Target: 23 infrastructure investment Update: Achieved (31 out of planning informed by risk 62 dams were rehabilitated to maps the level of no longer having Update: Not achieved unacceptable risk) (Source: Dam Safety and Water Resources Planning O&M Manuals for 32 dams in project ISR, March 2016) place: Update: Achieved (Source: Dam Safety and Water Resources Planning Project ISR, March 2016) 4.3 Increased fiscal  Improved fiscal Signing of the Cat DDO has resilience to climate- resilience to climate- been completed. related disasters related disasters: Contingent credit line for Fiscal disaster risk assessment Government Goals and has been completed. climate-related disasters in Indicators: place:  Reducing government’s National disaster risk financing Baseline: 0 contingent liability to strategy: Target: $102 million natural disasters. Update: Mostly achieved Update: Achieved (Cat DDO in place) (draft completed) (Source: staff information) Layered liability management strategy under implementation: Baseline: 0 Target: Strategy under implementation Update: Achieved (Source: Client Resilience Project ISR, August 2015) 94 CLR Annex II: IDA/IBRD Lending Program FY13–16—Planned vs. Actual ($ million) FY13 Second Health Sector Development Project 200 Approved (IDA) 200 Regional Growth Pole/Economic 300 Shifted to FY14 Development (renamed Strategic Cities Development Project) Subtotal Planned FY13 200 Subtotal Actual FY13 200 FY14 Strategic Cities Development Project 300 Approved (IDA) 145 Skills Development Project 100 Approved (IDA) 90 Urban Infrastructure/Transport (renamed 327 Shifted to FY15 Transport Sector Project) Investment Policy Reform (renamed 100 Shifted to FY17 Competitiveness DPL) Additional Catastrophe Deferred Draw-Down Option 102 Approved (IBRD) 102 (DPL with DDO) Improving Climate Resilience 110 Approved (IDA) 110 Dam Safety (Additional Finance) 85 Approved (IDA) 85 Subtotal Planned FY14 697 Subtotal Actual FY14 532 FY15 LK Water Supply and Sanitation 165 Approved (IDA) 165 Improvement Project Early Childhood Development Project 50 Approved (IDA) 50 Roads Rehabilitation and Maintenance Shifted from FY14 Private Innovation and Technology Dropped Adoption Legal and Judicial Reform Dropped Solid Waste Management Dropped Subtotal Planned FY15 (indicative) 300 Subtotal Actual FY15 215 FY16 North East Local Services Improvement 20 Approved (IDA) 20 Project (Additional Finance) Transport Connectivity and Asset 125 Approved (IDA) 125 Management Project Ecosystem Conservation and Management 45 Approved (IDA) 45 Project Climate Resilience Improvement Project 42 Approved (IDA) 42 (Additional Finance) Strategic Cities Development Project 55 Approved (IDA) 55 (Additional Finance) Sri Lanka Agriculture Sector Modernization 125 Bank approval expected by end of Project FY16 (IDA) Sri Lanka Competitiveness DPL 100 Bank approval expected FY17 (IDA) Social Safety Nets Project 75 Bank approval expected FY17 (IDA) Subtotal Planned FY16 547 Subtotal Actual FY16 287 95 CLR Annex III: ASA Program FY13–16 FY13–14 Completion FY15–16 Completion FY FY Pillar 1: Facilitating sustained private and public investment Sri Lanka Judicial Sector Assessment FY13 Producing Poverty Map with the FY15 GoSL: Public Financial Management FY13 Department of Census and Statistics (PFM) and Systems Performance Report Modernizing Social Protection Programs FY15 Sri Lanka Public–Private Partnership (PPP) FY13 Development of Nonbank Financial Sector FY15 Framework Development FDI Policy Note Revenue and Incidence Analysis Note FY15 Public Expenditure Review FY14 Report on the Observance of Standards and FY15 Codes, Accounting and Auditing Update Satellite Imagery In progress Sri Lanka Financial Sector Assessment In progress Program Development Module Sri Lanka JIT Support Debt Management In progress Sri Lanka Education Sector Review In progress Poverty Monitoring and Analysis In progress Enhancing Competitiveness—Sri Lanka In progress Governance Analytical Support In progress Strengthening PFM and CFR In progress Pillar 2: Supporting structural shifts in the economy Labor, Skills, Skilled Emigration & FDI FY13 ICT and Innovation Study FY15 Policy Note on Transport FY13 Secondary Cities Development Assessment FY15 Competitive Skills for a MIC FY13 AgriFin–Sri Lanka–Hatton National Bank FY15 Access to Finance for Urban Poor FY14 Development of Domestic Airports–PPP FY16 E-Transformation & M-Government FY14 Sri Lanka Agriculture Sector Engagement In progress Strategy Colombo Green Growth Program In progress Pillar 3: Improving living standards and social inclusion Private Sector in Health FY13 Managing Natural Wealth In progress Social Protection TA Notes FY13 Urban Health and Service Delivery In progress Strength Samurdhi Targeting Systems FY13 Sri Lanka Education Sector Review In progress Gender Analysis of Sri Lanka FY13 Early Childhood Care and Education FY14 Economic Valuation of the Environment FY14 Safeguards Review in Sri Lanka FY14 Water and Sanitation Study Dissemination FY14 Pillar 4: Improving resilience to climate and disaster risk Fiscal Disaster Risk Assessment FY14 96 Annex 3A: Proposed World Bank Program for Fiscal Years 2017–20 Fiscal Activity Year Lending Sri Lanka Wind Development Program Higher Education Project Financial Sector Modernization Project Social Safety Nets Project Competitiveness DPF (re-engagement DPL) Advisory Services and Analytics (ASA) Agriculture Institutional and Policy Reform Infrastructure Investment Diagnostic and Strategy Revenue Administration and State-Owned Enterprise Oversight Public Financial Management Support Supreme Audit Institutions Performance Measurement Framework FY17 Gender Mainstreaming Decentralization and Public Service Delivery North and East Social Assessment Estate Institutional and Economic Reforms Urban Green Growth Power Sector Planning Optimization Study Support to SL Intended National Determined Contribution (INDC) Implementation Sri Lanka—Climate Finance for Renewables Macro-Fiscal Analysis Sri Lanka Investment Climate Reform Sri Lanka Business Environment Reform Sri Lanka Tourism Competitiveness Report Lending Programmatic Development Policy Loan Improving Public Service Delivery In Lagging Regions Project Estate Sector Reform Project Climate Resilience Improvement Project II FY18 ASA Public Expenditure Review Public-Private Infrastructure Advisory Facility (PPIAF) Building Government Capacity for Conducting Public–Private Partnership Transactions Pensions Non-Lending Technical Assistance Lending Programmatic Development Policy Loan Health Sector Development Project III FY19 General Education Project INDC-Related Adaptation and Sustainable Development Project ASA Comprehensive Aging Report Lending FY20 Programmatic Development Policy Loan 97 Annex 3B: Ongoing World Bank Portfolio Pillar 3 Seizing Green Growth Pillar 1 Pillar 2 Opportunities, Improving Promoting Improving Activity Closing date Macroeconomic Inclusion and Environmental Stability and Opportunities Management Competitiveness for all and Enhancing Adaptation and Mitigation Potential LENDING North East Local Services 12/31/2016 X Improvement Project Higher Education for the 06/30/2016 X Twenty First Century Project Catastrophe Deferred Draw 05/31/2017 X X Down Option Transforming the School Education System as the 06/30/2017 X Foundation for a Knowledge Hub Project Metro Colombo Urban 12/31/2017 X Development Project Dam Safety and Water Resource Management 05/15/2018 X X Project Second Health Sector 09/30/2018 X Development Project Climate Resilience 05/30/2019 X Improvement Project Skills Development Project 12/31/2019 X Strategic Cities Development 12/31/2019 X Project Water Supply and Sanitation 12/31/2020 X Improvement Project Ecosystem Conservation and 06/30/2021 X Management Project Early Childhood 06/30/2021 X Development Project Transport Connectivity and 06/30/2026 X Asset Management Project 98 Annex 4: Selected indicators* of Bank Portfolio Performance and Management As of 5/27/2016 Indicator FY13 FY14 FY15 FY16 Portfolio Assessment Number of Projects Under Implementation ᵃ 15.0 15.0 13.0 14.0 Average Implementation Period (years) ᵇ 4.1 3.5 2.8 3.0 Percent of Problem Projects by Number ᵃ˒ ͨ 6.7 0.0 0.0 0.0 Percent of Problem Projects by Amount ᵃ˒ ͨ 1.2 0.0 0.0 0.0 Percent of Projects at Risk by Number ᵃ˒ ͩ 6.7 0.0 0.0 0.0 Percent of Projects at Risk by Amount ᵃ˒ ͩ 1.2 0.0 0.0 0.0 Disbursement Ratio (%) ͤ 29.1 29.2 18.2 13.4 Portfolio Management CPPR during the year (yes/no) Supervision Resources (total US$) Average Supervision (US$/project) Memorandum Item Since FY80 Last Five FYs Proj Eval by OED by Number 94 8 Proj Eval by OED by Amt (US$ millions) 3,138.9 600.1 % of OED Projects Rated U or HU by Number 29.7 12.5 % of OED Projects Rated U or HU by Amt 29.2 2.3 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. 99 Annex 5: Sri Lanka Operations Portfolio (IBRD/IDA and Grants) As of 4/30/2016 Closed Projects 117 IBRD/IDA* Total Disbursed (Active) 482.21 of which has been repaid 0.00 Total Disbursed (Closed) 1,729.22 of which has been repaid 794.17 Total Disbursed (Active + Closed) 2,211.43 of which has been repaid 794.17 Total Undisbursed (Active) 1,109.47 Total Undisbursed (Closed) 0.00 Total Undisbursed (Active + Closed) 1109.472219 Difference Active Projects Between Last PS R Expected and S upervision Rating Original Amount in US $ Millions Disbursements ̷ͣ Development Implementation Fiscal Project ID Project Name IBRD IDA Grants Cancel. Undisb. Orig. Frm Rev'd Objectives Progress Year P147454 CATASTROPHE DEFERRED DRAWDOWN OPTION S S 2014 102.0 0.0 0.0 101.5 0.0 0.0 P151916 Early Childhood Development Project S S 2015 0.0 50.0 0.0 48.3 -0.1 0.0 P156021 Ecosystem Conservation and M anagement # # 2016 0.0 45.0 0.0 45.8 0.0 0.0 P146314 Improving Climate Resilience MS MS 2014 0.0 152.0 0.0 118.4 0.0 0.0 P093132 LK:Dam Safety & Water Resources Planning S S 2008 0.0 148.3 0.0 46.5 -27.1 -3.5 P113402 LK:Higher Educ. for Twenty First Century S S 2010 0.0 40.0 0.0 0.4 1.9 0.0 P122735 LK: M etro Colombo Urban Development MS MS 2012 213.0 0.0 0.0 129.7 84.9 0.0 P113036 LK: N&E Local Services Improvement S MS 2010 0.0 70.0 0.0 13.7 -7.1 0.0 P118806 LK: Second Health Sector Development S S 2013 0.0 200.0 0.0 89.4 11.2 0.0 P113488 LK: Transforming School Education S S 2012 0.0 100.0 0.0 23.6 15.6 0.0 P147827 LK Water and Sanitation Improvement Proj MS MS 2015 0.0 165.0 0.0 153.2 -0.9 0.0 P132698 Skills Development S MS 2014 0.0 101.5 0.0 86.7 0.0 0.0 P130548 Sri Lanka Strategic Cities Dev Project S MS 2014 0.0 147.0 0.0 124.3 -3.5 0.0 P132833 Transport Sector Project # # 2016 0.0 125.0 0.0 128.0 0.0 0.0 Overall Result 315.0 1,343.8 0.0 1,109.5 74.8 -3.5 * Disbursement dat a is updat ed at t he end of t he first week of t he mont h. a. Int ended disbursement s t o dat e minus act ual disbursement s t o dat e as project ed at appraisal. 100 Annex 6: IFC Committed and Disbursed Outstanding Investment Portfolio As of 4/30/2016 (In USD Millions) Committed Disbursed Outstanding Approval **Quasi **Quasi FY Institution Short Name Loan Equity Equity GT/RM Participant Loan Equity Equity GT/RM Participant FY09 CBCSL 0.00 0.00 0.00 7.06 0.00 0.00 0.00 0.00 0.71 0.00 FY12 CBC (Commercial Bank 39.00 8.25 0.00 34.00 0.00 39.00 8.25 0.00 34.00 0.00 of Ceylon) FY15 CARGILLS FOOD 0.00 17.34 0.00 0.00 0.00 0.00 16.60 0.00 0.00 0.00 FY04 DIALOG 0.00 2.71 0.00 0.00 0.00 0.00 2.71 0.00 0.00 0.00 FY15 EMERALD SL FUND 0.00 10.00 0.00 0.00 0.00 0.00 0.19 0.00 0.00 0.00 FY00 FITCH SRILANKA 0.00 0.06 0.00 0.00 0.00 0.00 0.06 0.00 0.00 0.00 FY08 JOHN KEELS HOLD 10.00 0.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00 0.00 FY14 MAS CAPITAL 28.00 0.00 0.00 0.00 0.00 28.00 0.00 0.00 0.00 0.00 FY12 NDB SRI LANKA 20.00 0.00 0.00 2.04 0.00 20.00 0.00 0.00 2.04 0.00 FY13 NDB (National 19.50 0.00 0.00 0.00 0.00 19.50 0.00 0.00 0.00 0.00 Development Bank) FY16 RP DISTRIBUTORS 7.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 FY12 RENEWGEN KOTTE 0.00 2.20 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 FY12 SANASA 0.00 0.46 0.00 0.00 0.00 0.00 0.46 0.00 0.00 0.00 FY11 SENOK WINDENERGY 0.00 1.61 0.00 0.00 0.00 0.00 1.61 0.00 0.00 0.00 FY14 SENKADAGALA FINA 4.20 0.00 0.00 0.00 0.00 4.20 0.00 0.00 0.00 0.00 FY13 SOFTLOGIC HOTEL 9.41 0.00 0.00 0.00 0.00 9.41 0.00 0.00 0.00 0.00 Total Portfolio 137.61 42.62 0.00 43.11 0.00 130.11 29.88 0.00 36.75 0.00 ** includes both equity and loan types 101 Annex 7: Partnerships and Donor Coordination 1. The total aid commitment in Sri Lanka for 2014 stood at approximately US$5.8 billion. ,24 Total disbursement received by the government in 2014 amounted to US$1.39 billion. 23 Approximately 65 percent of foreign aid disbursements was obtained from bilateral donors, while 35 percent was from multilateral donors. As shown in Figure 1, the top five-largest disbursements were received from China (22 percent of total disbursements), Japan (18 percent of total disbursements), India (10 percent of total disbursements), the Asian Development Bank (ADB) (18 percent of total disbursements), and the World Bank Group (WBG) (14 percent of total disbursements). As shown in Figure 2, sectors with the highest level of donor financing were road and bridge infrastructure (approximately 50 percent of total disbursements); energy and water supply (approximately 9 percent each of total disbursements); and education, labor, and vocational training (approximately 7 percent of total disbursements). Figure 1: Donor Disbursements in 2014 (US$ Figure 2: Donor Disbursements in 2014 by millions) sector (percentage) Irrigation Other Multilaterals Health and 1% $ 43.26… Social Welfare 6% Other WB China 11% US$ 195.59 $ 308.92 Rehabiltation 4% Road and ADB Education, Bridge $ 254.23 Labor, Infrastruc Japan Vocational ture, 50% Other $ 256.57 Training bilaterals 7% Water Power US$ 56.89 Supply and India Housing 9% Energy South US$ 142.85 and Urban 9% Korea Developm Netherlands United US$ 20.27 USA ent $ 39.57 Kingdom US$ 21.45 $ 55.69 3% Source: Performance Report, Department of External Resources, Ministry of Ministry of Policy Planning, Economic Affairs, Child, Youth and Cultural Affairs (July 2015) and World Bank Group staff calculations. 2. China has been the largest development assistance provider to Sri Lanka during the period 2010–14 and has focused on the development of infrastructure. China committed a total of $5.8 billion for the period 2010–14, with the highest commitment of $2.2 billion being provided 23 Source: Performance Report, Department of External Resources (ERD), Ministry of Policy Planning, Economic Affairs, Child, Youth and Cultural Affairs (July 2015). Several bilateral missions provide grant aid disbursed through United Nations (UN) agencies and registered by ERD as UN assistance. Also, grant aid to or through nongovernmental organizations and private-sector support is not channeled or necessarily recorded though the government’s treasury mechanisms. Some of this assistance, though not reflected in ERD’s report, is reflected in the Organisation for Economic Co-operation and Development’s Development Assistance Committee’s reporting. 24 All dollar amounts are U.S. dollars unless otherwise indicated. 102 in 2014. Grants and interest-free loans have been provided directly by the Government of China, while loans have been provided by the Export-Import (EXIM) Bank of China, the China Development Bank, and the Industrial Commercial Bank of China. Nearly 77 percent of loans were obtained for the development of roads and bridges, while approximately 9 percent of loans finance ports and shipping development. Key infrastructure developed with Chinese assistance in the 2010–14 period include the Hambanota port, the Mattala airport, and the development of the China Southern railway line. 3. With an annual average of commitment of approximately $500 million during the last decade, the Government of Japan (through the Japan International Cooperation Agency (JICA)) has been an important development partner in Sri Lanka. Currently, the priority areas for JICA are: (1) improve the living conditions of conflict-affected populations in the North and East, (2) assist with accelerating economic growth, (3) poverty alleviation and regional development, and (4) disaster management and climate change. The ongoing JICA loan portfolio (as of July 2015) is active in 10 sectors, primarily in roads and bridges (46 percent), power and energy (21 percent), and water and sanitation (15 percent). 4. India has committed nearly $1.5 billion in development assistance since 2008, nearly 83 percent of which has been loans provided by the EXIM Bank of India. Assistance for transport infrastructure has been provided for the construction of approximately 250 kilometers of railway tracks in Northern Province through credit lines of approximately $800 million. The construction of nearly 50,000 housing units was also carried out with Indian grant assistance in Northern, Eastern, Central, and Uva provinces. A memorandum of understanding was signed in June 2014 to commit USD 4.4 million (LKR600 million) for the development of the agriculture and engineering faculties in the University of Jaffna. The Reserve Bank of India has also provided liquidity support through a series of currency swap arrangements that have rolled over, most recently for $700 million in March 2016. 5. The ADB is the largest multilateral development agency in terms of financing commitments operating in Sri Lanka. The ADB’s interim Country Partnership Strategy (CPS) for 2015–16 focuses on achieving three main objectives: (1) promoting inclusive and sustainable growth, (2) catalyzing private investment and enhancing the effectiveness of public investment, and (3) supporting human resource and knowledge development. A total funding envelope of $1.7 billion has been allocated for Sri Lanka for the CPS (2016–18). The ongoing ADB loan portfolio (as of July 2015) is active in seven sectors, with transport (27 percent), water and other urban infrastructure and services (23 percent), energy (22 percent), and education (15 percent) taking up the bulk of lending (Figure 3). 103 Figure 3: ADB Portfolio (as of July 2015) by Sector (US$ Millions) Public-Sector Multisector, Management, $150 $31 Energy, Water and $561 Other Urban Infratructure Agriculture and and Services, Natural $586 Resources, $151 Education, $373 Transport, $692 Source: ADB 6. The United States Agency for International Development (USAID) programs focus on two key areas: (1) a strengthened partnership between the state, civil society, and citizens, reflected by a more responsive legal system, robust civil society, and government bodies and civil society able to deliver services to all constituents; and (2) equitable economic growth, especially in economically lagging areas around the country. In mid-2015, with the change in the Sri Lankan government’s reform priorities and renewed engagement with the United States, the U.S. government allocated $40 million in assistance, targeting (1) reconciliation, (2) justice and accountability, (3) the advancement of human rights, and (4) strengthening of democratic institutions. 7. Development assistance from Germany has focused on reconciliation, poverty reduction, education, and the protection of natural resources. German Development Cooperation has focused on reconciliation and professional training in support of small and medium-sized enterprises (SMEs) (in the North and East), poverty reduction, peace education, and protection of natural resources. Projects conducted by the German Agency for International Cooperation (Deutsche Gesellschaft für Internationale Zusammenarbeit, or GIZ) include Education for Social Cohesion, Facilitating Initiatives for Social Cohesion and Transformation, Small and Medium Enterprise Development, vocational training in the North and East, and support of the National Park and Buffer Zone Management in Wilpattu. The German Development Bank (Kreditanstalt für Wiederaufbau, or KfW) has provided financial assistance for the construction of a maternity hospital in Galle and the Sri Lankan–German Training Institute in Kilinochchi, including various satellite centers. 8. The European Union (EU) has approved a Multiannual Indicative Program (MIP) covering 2014–20 with an aid envelope of €210 million ($226 million), doubling its bilateral envelope in comparison with the previous period. The main focal sector of the MIP is integrated rural development. However given the political developments in the country, the EU is preparing a revision of the MIP in order to add reconciliation as the second focal sector. The projects under 104 rural development include projects focusing on the provision of basic infrastructure and social services; supporting inclusive sustainable agricultural practices that bring economic growth and improved resilience of livelihoods to climate change; promoting inclusive and sustainable economic development through strengthening the role of the private sector and SMEs and job creation; and strengthening capacities and good governance of inclusive and sustainable local development. Bilateral cooperation is also complemented by regional programs (trade assistance, green economy, higher education, aid to uprooted people) and global programs (the European Instrument on Democracy and Human Rights and support to civil society organizations and local authorities). The European Union also specifically collaborates with the WBG on agriculture and public financial management. 9. With a new Country Strategy (2015-19), development assistance from Australia is focused on inclusive economic growth, good governance and increasing gender equality. The Australian Government is providing an estimated $27.5 million in total ODA to Sri Lanka in 2016- 17. Through a new program in skills development, Australia will work closely with the private sector and government to improve the relevance and quality of skills, to create quality jobs in the tourism sector. Australia is also working to improve the responsiveness of all levels of government to the needs of citizens and the private sector. This includes investments in innovative reforms to raise revenue, developing service delivery benchmarks, better targeting of services and making it easier to register small businesses. Australia is also developing a new program focused on women’s economic empowerment, which will include partnerships with business to create more quality jobs for women, and support for female entrepreneurs. Since 2009, Australia has contributed more than $250 million in development assistance. This has included support for demining, housing, rebuilding local infrastructure, education reform, and a wide range of livelihood activities. 10. The UN delivers its assistance under the 2013–17 United Nations Development Assistance Framework (UNDAF), to which the WBG is a signatory. The UNDAF has focused on policy- and upstream-level support for governance and social inclusion, sustainable livelihoods and employment, access to housing and basic services, and disaster resilience and climate change. In 2015, UN agencies spent approximately $53 million on interventions under the four pillars of the current UNDAF. Subsequent to the UNDAF Mid-Term Review, the UN Country Team agreed to change the thematic foci to better reflect the priorities of the new Government of Sri Lanka (GoSL) and modify the coordination architecture of the current UNDAF within the permissible parameters. An addendum to the current UNDAF is being prepared; once approved, it will be in effect until the end of the current UNDAF cycle ending in 2017. Collaboration 11. The WBG and the International Monetary Fund (IMF) have traditionally played a key role in economic policy reform initiatives, and the WBG will seek to collaborate with a range of development partners for planned policy reform interventions under the Country Partnership Framework (CPF). Debt analysis and macroeconomic monitoring are undertaken jointly by the WBG and the IMF on a regular basis. The policy actions supported by a planned Development Policy Loan (DPL) will also be supported via parallel financing from JICA. Planned interventions to support financial sector reforms will be undertaken in collaboration with several development partners, particularly ADB, JICA, and GIZ. WBG efforts to increase the statistical 105 capacity of the Department of Census and Statistics have been complemented by other development partners working in the sector, including several UN agencies, such as the International Labour Organization (ILO) and the Government of the Republic of Korea. The WBG has received support from the Australian Department of Foreign Affairs and Trade (DFAT) for improving the investment climate. The WBG is also suporting efforts undertaken by the United States Internationl Trade Commission to enhance trade facilitaion in Sri Lanka. 12. The WBG has had a number of interventions in the conflict-affected Northern and Eastern provinces and will seek to increase its focus on the remaining pockets of poverty in these areas along with other development partners. The WBG has been involved with DFAT in the reconstruction and resettlement efforts in Northern and Eastern provinces. The United Nations International Children’s Emergency Fund (UNICEF) has also carried out an extensive construction program in the North and East, covering schools, clinics, and maternity wards (and has supported nutrition as well as water and sanitation programs) funded by DFAT, the Korean International Cooperation Agency (KOICA), and the Irish Charitable Foundation. Australia, Japan, the United Kingdom,25 and the United States provide support to demining through humanitarian programs and are the largest contributors to land clearing and resettlement, along with Canada. In addition, Australia, the United States, Japan, the European Union, Norway, and Switzerland support livelihood development, with a major focus on poverty pockets, including those outside of the former conflict areas.26 13. United Nations support for rural livelihood development has also been extensive. The United Nations, together with the International Finance Corporation (IFC), and with EU funding of €60 million, is implementing a large rural development program —Support to District Development Plan—in Northern and Eastern provinces. The program aims to enable the transition from post-conflict relief to reconstruction and development in selected districts in Puttalam, Anuradhapura, and Moneragala by reducing poverty, providing basic infrastructure and services for vulnerable populations, supporting local economic development, and strengthening local governance. With DFAT support to the United Nations (specifically, the ILO), a proven partnership model is ongoing where, through strengthening cooperative structures in the North, farmers’ agricultural and fisheries produce is sold to the export markets in the Middle East, United States, and China for sustainable livelihoods. Similarly, in the East, through livelihood diversification, development of community-level tourism is promoted. The ILO works at the enterprise level in the North and East (also in the free-trade zones), to ensure the implementation of fundamental principles and rights at work under the decent work agenda, and also has technically supported the mainstreaming of gender equality, freedom of association, and collective bargaining into the informal sector. After the conflict, UNICEF has carried out an extensive construction program in the North and East, covering schools, clinics, and maternity wards funded by DFAT, KOICA, and the Irish Charitable Foundation. UNICEF has also continued to work closely with the Ministry of Education to roll out the Child Friendly Approach to 1,000 schools in the North and East and has supported nutrition as well as water and sanitation programs with government partners and stakeholders. In addition, UN-Habitat, with funding from the European 25 According to the British High Commission, the United Kingdom provided £5.1 million for demining from 2010 to 2015, and will continue to fund £400,000 per year for three years from 2016 to 2019. 26 Source: Development Assistance by Major Development Partners of Sri Lanka as of February 2016, prepared by the Canadian Development Program in Sri Lanka. 106 Union, DFAT, Swiss Agency for Development and Cooperation, Government of India, and Government of Japan, contributed to a sustainable solution that aims to improve the living conditions and social cohesion of displaced people, returnees, and their host communities in the North and East, by providing permanent housing and rehabilitating and reconstructing damaged and destroyed small community infrastructure, including multipurpose community centers and preschools. Furthermore, the Government of Japan has assisted in addressing the needs within the learning environment of 15 schools in the District of Mannar, including the construction of primary and secondary school buildings, teachers’ quarters, and water and sanitation facilities for schoolchildren.27 14. The WBG has taken the lead with a range of other development partners toward the provision of development assistance for education. The WBG works closely with UNICEF on early childhood development. It collaborates with DFAT, ADB, and KOICA in specific areas concerning general education. In the area of skills development, Canada is active, along with the United Nations Educational, Scientific and Cultural Organization, UNICEF, and GIZ, in providing mainly technical assistance, while ADB is involved with the WBG in a joint program for skills development. Human resource development through secondary and vocational education is a component of the bilateral strategy of Korea, while Japan and Norway have also implemented projects in this area in the recent past.28 15. Planned WBG interventions to support sustainable natural resource use will complement the historical involvement of the United Nations Development Programme (UNDP) and ADB in the sector. UNDP currently undertakes a community forestry program with DFAT financing, supports the Reducing Emissions from Deforestation and Forest Degradation program with the Food and Agriculture Organization of the United Nations (FAO), and is also involved in the Enhancing Biodiversity Conservation and Sustenance of Ecosystem Services in Environmentally Sensitive Areas program under the Global Environment Facility. ADB is involved in fisheries through the Northern Province Sustainable Fisheries Development Project and may also fund two fishery harbors. Further support for the development of the fisheries sector is being provided by FAO, Norway, and the European Union. 16. The WBG has coordinated closely with ADB and JICA on urban development initiatives, including road sector assistance. Close coordination with ADB and JICA when working on the same cities and regions has prevented overlaps in urban development initiatives, where, for example, while the WBG focuses on the flood reduction and municipal infrastructure in the Colombo Metropolitan Region, ADB works in the water sector and JICA provides assistance for the preparation of the Urban Transport Master Plan. Coordination in the development of economically important cities has led to the WBG focusing on the strategic cities of Kandy, Galle, and Jaffna, while the Agence Française de Développement (AFD) has recently approved a loan to support Anuradhapura, and ADB has been requested to support key cities on the East Coast, such as Trincomalee. A sector framework agreement (SFA) was signed in 2004, to formalize the coordinated support between ADB, JICA, and the WBG when providing support for the road sector. The SFA resulted in the ADB focusing on restructuring the Road Development Authority, 27 Source: United Nations. 28 Ibid. 107 JICA building the capacity of private contractors, and the WBG focusing on the implementation of a sustainable arrangement for financing and management of rehabilitation and maintenance of the national road network. In 2008, these three development partners also coordinated in financing a program of $266 million for the development of 970 kilometers of the provincial road network. The Transport Connectivity and Asset Management Project will implement a joint program with ADB, following a design, build, maintain, and transfer methodology that will address road asset management within the national road network. Coordination 17. The Development Partners Coordination Framework (DPCF) is the mechanism for foreign aid coordination in Sri Lanka that is supported by a Development Partners Secretariat based in the WBG office. To improve the consistency, coherence, and efficiency of donor support to the GoSL, foreign aid missions in Sri Lanka established an informal information- sharing and coordination framework. The DPCF includes the Bilateral Donor Group, the Development Partners Forum (DPF), and thematic donor working groups. Currently, 18 bilateral foreign aid missions and 16 multilateral agencies participate in the DPCF. The Development Partners Secretariat (DPS) provides analytical support, convenes meetings among donors, and from time to time facilitates government outreach to development partners (DPs) collectively. 18. Committed to strong coordination, particularly in this time of transition, the WBG is an active participant in the DPF and in a number of thematic working groups . The WBG participates actively in the DPF’s quarterly meetings. IFC and the WB co-chair the private-sector development thematic group, and the WB chairs the public financial management thematic group. In this transition phase, coordination becomes even more important, as the GoSL, with significant needs and decreasing aid flows, decides how to use the resources and expertise that DPs bring, most effectively. In the near future, an increasing role for the DPS is envisaged, including the identification of a stronger set of objectives and the production of work plans for the DP working groups, together with increased monitoring, review, and measurement of results. The DPS is also seeking to support increased engagement both between civil society and the foreign aid community and with non-traditional DPs. 19. Partnerships are an important priority in the CPF, with its emphasis on selectivity and seeking leverage. The WBG seeks to minimize the transaction burden for the GoSL and to leverage resources for greater impact during the CPF period. Further, given limited resources, the WBG chosen not to engage in sectors where other DPs already have robust and adequate programs. Table 1 depicts the important sectors where key donors have been active and shows areas where the WBG anticipates coordination of efforts with other DPs. 108 Table 1: Development Partner Interventions by Sector (as of July 2015) Urban Development Waste Management Fiscal Management Roads and Bridges Natural Resource Fisheries, and Disaster Risk Management Management Agriculture, Governance Donors/Sectors Water and Sanitation Education Transport Housing Energy Health WBG X X X X X X X X X X ADB X X X X X X X UN Agencies X X X X X X X JICA X X X X X X X X X China X India X X X Germany X X X European Union X X X X X Saudi Fund for X X Development OPEC Fund for X X Development Kuwait Fund for X X Development KOICA X X X X USAID X Australian Agency for X International Development DFAT X X Sources: Performance Report, ERD (July 2015), and ADB, KOICA, JICA, and WBG staff calculations. 109 Annex 8: Summary of Stakeholder Consultations Background 1. The World Bank Group (WBG) conducted extensive consultations with a broad range of stakeholders in order to gather feedback on the proposed Sri Lanka Country Partnership Framework (CPF). Participation was determined based on open registration (public consultations) and invitation (focus groups). Also, people participated via social media. During each consultation, the WBG presented a proposed framework identifying focus areas (pillars) and related objectives that could garner its support in the future program. The participants uniformly supported the priority areas identified. The key issues raised or opinions shared by participants are summarized below, organized under the relevant pillars of the Country Partnership Framework. Pillar 1—Improving Macro-fiscal Stability and Competitiveness “We need job creators not job seekers.” Entrepreneur from Jaffna 2. Access to finance: Private-sector representatives consistently emphasized that the collateral requirements by commercial banks were unduly burdensome, particularly as unclear land ownership makes the requirement for the provision of immovable collateral impossible to meet. High interest rates, particularly in the case of unregulated microfinance institutions, increase the operational costs of small businesses, often making them unsustainable, and have resulted in business owners taking extreme measures when faced with unsustainable debt—notably, in Northern and Eastern provinces. Monitoring mechanisms to regulate the operations of microfinance institutions, financial consumer protection, and improved financial literacy among loan seekers are some areas highlighted to improve access to finance. 3. Small and medium-sized enterprise (SME) competitiveness: Complex business regulations, government bureaucracy, and the costs of doing business discourage firms from moving out of the informal sector. Also, lack of access to market information, new technology, skilled labor, and basic business-enabling services was highlighted as a major limitation to growing small businesses. Supporting local production and facilitating access to global value chains were identified as critical to improving competitiveness. 4. Policy environment: The private sector voiced strongly the necessity for predictability and consistency in policy making for long-term planning, successful operations, and encouragement of foreign direct investment. A complex tax policy and archaic laws, such as the customs ordinance, were viewed as major hindrances for firms to become globally competitive. The slow pace of policy formulation limited the private sector’s capacity to capture market opportunities. 5. Connectivity: Traffic congestion and the poor quality of rural road networks were blamed for lack of productivity. The need to develop other modes of transportation was underscored. Some examples included improvement of air and marine connectivity in order to capture the positive spillovers of tourism and marine resources. 110 Pillar 2—Promoting Inclusion and Opportunities for All “We never knew that learning from people is more important than learning from books.” for all student in Kandy University Promoting Inclusion and opportunities 6. Education: The need to improve access to and the quality, relevance, and governance of the education system was echoed in all consultations. Regional disparities in resource allocation and teacher absenteeism were seen as stalling the progress of rural schools. The curricula in the higher education system were seen as highly theoretical, low on innovation, and disconnected from job market and industry needs. The lack of “soft skills,” information and communications technologies, and English language skills limited graduates from accessing private-sector jobs. Encouragement of and training in entrepreneurship were recommended for all levels of education. The need to remove the stigma that technical and vocational education and training (TVET) is a more inferior track in comparison with pursuing higher education was necessary to encourage higher TVET enrollment to fill available jobs. 7. Gender and development: Female participation in the skilled labor force, in political and public decision-making bodies, and in leadership positions in general remains low owing to various social and cultural barriers. Women-led businesses largely operate in the informal sector; efforts must be made to rectify this trend. Location-specific socioeconomic limitations are evident, such as social stigma regarding female ex-combatants in the North and East, impeding their reintegration to the society. The upcoming local government elections were highlighted as an opportunity to reverse the trend, as political parties have been encouraged to put forward a platform containing 25 percent female candidates. 8. Youths: Young people are encouraged to pursue traditional higher education programs, even though they may have aptitude in other areas. Graduates are unemployed and underemployed as they wait in line for prized public-sector jobs because of the perceived benefits (pension) and prestige of these jobs. Some youths in Northern and Eastern -provinces are displaying negative psychosocial behaviors, which some analysts attribute to both perceived lack of opportunities for productive participation in society and too few opportunities for harmless social interaction with peers. Idle youths often engage in alcohol and drug abuse. Gender-based violence and suicide rates among youths are on the rise. Suggestions were made to channel youth energy into more organized extracurricular programs, create more opportunities for gainful employment, expose youths to training to develop entrepreneurship skills, and provide psychosocial counseling. “If we can’t make money from tea, we show tea and make money.” A plantation manager who diversified business operations into tourism 9. Economic development in the lagging regions: The current community restoration process in the North was viewed as ineffective. Restoring the Jaffna Market as the key hub for economic activity, promoting tourism, and protecting the local fisheries industry from unregulated poaching activities were cited as important steps. Also, improving sanitation, health, and education services was identified as important to improving livelihoods. Difficulty in accessing clean water associated 111 with an acute sewage and waste management problem was identified as a key issue in Central, Northern, and Eastern provinces. Poor health outcomes in the estate sector, such as malnutrition, high mortality rates, and stunting, were identified as caused by limited access to medical and public services and anomalies in consumption patterns. The urgent need to reform the estate sector to improve profitability was discussed, probing possibilities for product diversification, value addition, and new models for administration. The need to support efforts to improve the productivity of the agriculture sector as a means to reduce poverty in the lagging regions was highlighted. 10. Land use and ownership: Resolving land ownership issues was seen as indispensable to improving the living standards of the poor, promoting access to land for agriculture and housing, and providing access to finance. Ad hoc land-use patterns for commercial purposes and land zoning were viewed as a disruption to community well-being and threat to the sustainability of natural assets. Pillar 3—Seizing Green Growth Opportunities, Improving Environmental Management, and Enhancing Adaptation and Mitigation Potential 11. Natural resource management: Extreme weather conditions, coupled with unregulated infrastructure development and waste dumping, has blocked natural waterways and led to flooding. Overuse of chemical fertilizers has polluted groundwater and harmed natural flora and fauna. Increased urbanization has led to deforestation and intensification of the human–elephant conflict. Inadequate management of lagoons and water basins has diminished the utility of the country’s natural drainage system, leading to floods and droughts. Legislation and regulations are sufficient, but enforcement is weak. 12. Renewable energy: Electricity is costly and its supply is inadequate. Many participants referenced the recent spate of power outages. There was a strong sense that the country should take advantage of its natural resources, solar power, and wind power to supplement the existing electricity supply. Cross-cutting Themes “Public enterprises do not help SMEs, but instead control them.” Entrepreneur from Matara 13. Governance: Participants suggested that civil society organizations (CSO) should be actively engaged in monitoring and evaluation of development projects to ensure better project management. 14. Attitudes and culture: Participants often cited the change of attitude as a prerequisite for the country’s transition to a higher level of development. Having service-oriented public-sector employees would improve public-sector efficiency. The fact that graduates of state run higher education programs demonstrate against the state because they have not been provided with private- sector jobs on graduation was an attitude of entitlement that would need to change. The employment model for estates where the workers were entirely dependent on plantation management for the 112 provision of services and handouts for their entire families was cited both as unsustainable from a profit standpoint and also disempowering. Online Engagement 15. Engagement consisted of polls, discussion boards, and the sharing highlights after each public consultation, which stimulated many exchanges on social media. Thematic areas highlighted above were discussed online also, with descriptive examples related to access to finance, challenges to sustainable development, energy efficiency, improving the quality of education, governance challenges, improving the investment climate, and policy reforms and regulations. List of Consultations Location Format Stakeholder Group February 2016 Beruwala Focus group Members of Parliament and senior public officials March 2016 University students, regional chambers of commerce, local government Public officials, academia, entrepreneurs, and civil society organizations Matara (CSOs) Focus group Environmentalists, local government officials, and business’s Public Local government officials, academia, and CSOs Jaffna Focus group Private sector Public Local government officials, CSOs, academia, and SMEs Batticaloa Focus group Academia, CSOs, and local government officials Public University students, academia, and entrepreneurs Kandy Focus group Estate managers, academia, and CSOs Public Academia, youths, CSOs, and SMEs Focus group Private sector Colombo Focus group Media Focus group Development partners April 2016 Colombo Focus group Public-sector representatives 113 Annex 9: Mainstreaming Gender in the Country Partnership Framework’s (CPF’s) Implementation 1. Sri Lanka has long been regarded as a role model for other South Asian countries in terms of closing gender gaps in human development. According to the most recent available data, Sri Lanka has performed far better than the region, on average, in reproductive health indicators, such as total and adolescent fertility rates (2.34 births per woman and 16.9 births per 1,000 women ages 15–19, respectively, compared with regional averages of 2.59 births per woman and 38.8 births per 1,000 women ages 15–19); the maternal mortality ratio (29 per 100,000 live births in Sri Lanka verses the South Asia regional (SAR) average of 109 per 100,000 live births); the percentage of births attended by skilled staff (98.6 percent in Sri Lanka compared with 49.9 percent in SAR); and the percentage of women receiving prenatal care (99.4 percent in Sri Lanka versus 71.56 percent in the region). In education, Sri Lanka has achieved gender parity at all levels of schooling, and universal primary education is years ahead of the Millennium Development Goal target deadline of 2015. In fact, Sri Lanka has been so successful at boosting female outcomes in human development that males now tend to be on the losing ends of remaining gender gaps, such as in life expectancy at birth (for 71 years for men versus 75 years for women) and in secondary and higher education (the ratio of gross female-to-male enrollment is 106 percent for secondary school and 165 percent for tertiary education). 2. Substantial improvement is still needed in the areas of economic opportunity and voice and agency, however. Female labor force participation (FLFP) rates have stagnated for years at around 33 percent, compared with more than 70 percent for males. FLFP is especially low for young women ages 15–24, at 23 percent. The ratio of youth female unemployment to youth male unemployment is 169.8 percent, while the ratio of all female unemployment to male unemployment (for all population ages 15–64) is a staggering 194 percent. Men also fare better than women in most aspects of access to finance, including having accounts at formal financial institutions, debit cards, and credit cards, although the gender gaps in Sri Lanka are narrower than average gaps for SAR. Women tend to be underrepresented in higher-level government (women hold 5.8 percent of national Parliament seats, compared with a SAR average of 19.3 percent, and only 2.9 percent of ministerial positions, compared with a SAR average of 7.6 percent). Females head at least one-quarter of Sri Lankan households, and a majority of these households falls in the lowest income quintiles. Anecdotal evidence suggests that gender-based violence (including sexual violence against both boys and girls) is prevalent, and violence against women is higher in conflict-affected areas than in other parts of the country. The absence of reliable data on domestic violence and other types of gender-based violence makes it impossible to track the trends in these areas. 3. The WBG has been a partner in Sri Lanka’s progress toward gender equal ity, supporting the government’s strong programming to narrow gender gaps and enhance the quality of education; improve reproductive and other health outcomes for women; and address the needs of poor women and other vulnerable groups through rural livelihoods projects, such as the North and East Local Services Delivery Improvement Project. Across the Sri Lanka portfolio, operational focus on ensuring gender-sensitive designs and addressing gender inequalities has deepened in these sectors and in all others where possible. In addition, the WBG has conducted analyses of stubborn inequalities in school-to-work transitions and labor market dynamics, such as Building 114 the Skills for Economic Growth and Competitiveness in Sri Lanka (2014) and the 2013 policy report Getting In and Staying In: Increasing Women’s Labor Force Participation in Sri Lanka. 4. In the new CPF period, the WBG plans to step up efforts on improving gender equality—namely, by helping the Government of Sri Lanka address gender issues that are most critical to progress under the three CPF pillars: improving macro-fiscal stability and competitiveness; promoting inclusion and opportunities for all; and seizing green growth opportunities, improving environmental management, and enhancing adaptation and mitigation potential. Under the first pillar, addressing constraints and harnessing opportunities to enhance women’s economic empowerment will be imperative for growing the labor force and, in turn, preparing for the demographic transition and helping maintain strong economic growth. Efforts to economically empower women likely will involve tackling obstacles to female participation in the labor force, and improving gender inclusion in micro, small, and medium-sized enterprises and the financial sector. Several WBG tasks are well placed to support these efforts, such as the Sri Lanka Agriculture Sector Modernization Project (pipeline), the International Finance Corporation’s work on Sustainable Economic Development: Post-conflict Sri Lanka, and the forthcoming update on the 2013 report on female participation in the labor force. Regarding the second pillar, Sri Lanka has a number of critical gender gaps to address, wherein one gender group is particularly disadvantaged and vulnerable. Bringing boys’ educational advances in secondary and higher education up to par with those of girls is one such gap. The portfolio already contains a number of relevant ongoing tasks, including the Sri Lanka Education Sector Review and the Skills Development Project. War widows in conflict-affected areas comprise another extremely vulnerable group. To better understand and address their vulnerabilities, among other aspects of extreme poverty, the WBG is planning a rigorous Social Assessment of the North and East (pipeline)—a potential precursor to a lending operation. 5. Gender work will be an important tool for making progress toward Pillar 3 objectives as well. By paying close attention to the differential needs—as well as resources—of each gender group in fragile environments, projects are likely to be more efficient and successful in achieving their development objectives. Recent research and good practices developed by the WBG show how women can play a unique role in climate change adaptation, resilience, and disaster risk management.29 On the one hand, women tend to have higher vulnerability, yet lower resilience, to climate-related shocks. They also tend to bear a greater burden than men in the aftermath of natural disasters—for instance, their time poverty may increase because the traditional allocation of household labor to women translates into their greater share of responsibility for clearing debris, salvaging household items buried under rubble, and gathering materials for shelter construction. On the other hand, women tend to have unique capacities to drive efforts to build the resilience of communities. Projects that use gender-sensitive approaches to support livelihoods, such as supporting women in fisheries, strengthen the resilience of women and their communities as well. 29 See, for example, World Bank. 2011. Gender and Climate Change: Three Things You Should Know (http://documents.worldbank.org/curated/en/2011/01/17497304/gender-climate-change-three-things-know). . 115 6. Development partners in Sri Lanka are very active in supporting efforts to improve gender equality. Numerous donors are supporting the elimination of gender-based violence: the United Nations Development Programme (UNDP), United States Agency for International Aid (USAID), UN Women, UN-Habitat, and the United Nations Population Fund. Improving female labor participation is being supported by (1) the International Labour Organization (ILO), working with government to address the constraints imposed by labor laws on female employment; (2) UN Women, examining the constraints on demand for female workers on the part of the private sector; and (3) USAID, empowering small business female entrepreneurs with the financial, technical, and managerial expertise needed to grow their businesses. The sphere of women’s political participation and leadership, composed of UN Women and the Canadian government, is providing support to female participation. In conjunction with the ILO, the following donors provide support to improving the development of rural women’s livelihoods, particularly in Northern and Eastern provinces: UN Women, UN-Habitat, Japan International Cooperation Agency, UNDP, Government of Canada, International Organization for Migration, European Union, and Australian Department of Foreign Affairs and Trade. UN-Habitat also focuses on housing and rehabilitation and small-scale infrastructure favoring female-headed households in the North and East. 116 117