PROJECT PAPER PROPOSAL TO RESTRUCTURE THE PUTTALAM HOUSING PROJECT IDA Credit 4261 CE (PI00390) FOR SOCIAL DEMOCRATIC REPUBLIC OF SRI LANKA CONTENTS

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized PROJECT PAPER PROPOSAL TO RESTRUCTURE THE PUTTALAM HOUSING PROJECT IDA Credit 4261 CE (PI00390) FOR SOCIAL DEMOCRATIC REPUBLIC OF SRI LANKA CONTENTS A. Introductory Statement... 2 B. Background and Reasons for restructuring C. Proposed Changes... 4 D. Analysis E. Expected Outcomes F. Benefits and Risks

2 CURRENCY EQUIVALENTS (Exchange Rate Effective) September 10, 2009 Currency Unit Sri Lankan Rupee Rupees US$l US$ 1.58 SDR 1 FISCAL YEAR January I December 31 ABBREVIATIONS AND ACRONYMS GN GOSL IDA lop IP LTTE NGO NEHRP PG PHP PPU UNHCR Grama Niladhari Government of Sri Lanka International Development Association Internally Displaced Person Implementation Performance Liberation Tigers of Tamil Eelam Non Governmental Organization North East Housing Reconstruction Program Procurement Guideline Puttalam Housing Project Puttalam Project Unit United Nations High Commissioner for Refugees Vice President Country Director Sector Director Scctor Manager Task Team Leaders Isabel M. Guerrero Naoko Ishii John Henry Stein Junaid Kamal Ahmad Raja Rehan Arshad/Shideh Hadian

3 DATA SHEET FOR PROJECT PAPER I Date: September 10, 2009 Task Team Leader/Co-Task Team Leader: Country: Social Democratic Republic of Sri Lanka Raja Rehan Arshad / Shideh Hadian Project Name: Puttalam Housing Project (PHP) Sector Manager: Junaid Kamal Ahmad Project ID: PI00390 Country Director: Naoko Ishii Environmental category: B Borrower: Social Democratic Republic of Sri Lanka Responsible agency: Ministry of Resettlement Revised estimated disbursements (Bank FYIUS$m) FY Annual Cumulative , Current closing date: June 30, 2011 Revised closing date [if applicable]: Not Applicable I Does the restructured project require any exceptions to Bank policies? i No Have these been approved by Bank management? NA Is approval for any policy exception sought from the Board? NA Revised project development objective: The objective of the PHP is to support the integration of Internally Displaced Persons (IDPs) in Puttalam by providing housing, drinking water, and sanitation facilities to both IDPs and a limited number of select non-idps in host communities, and rehabilitate selected internal roads in the IDP Welfare centers. The PHP would support the construction of about 4,350 new houses to replace the temporary thatched huts, as well as the completion of approximately 2,232 partly-completed houses in the refugee camps and about 600 temporary houses in the host communities for non-idps in Puttalarn. I These interventions would help upgrade habitat and contribute to the socio-economic integration ofidps and non-idps. Does the restructured project trigger any new safeguard policies? No Revised Financing Plan (US$m.) - No revision in Financin Plan Source Borrower: Social Democratic Republic of Sri Lanka IBRD/IDA Others Total Local Total I The Government increased the housing cash grant from Rs. 250,000 to Rs. 325,000. The increase will be retroactively applied to houses already built, so that beneficiaries can complete houses according to the agreed specifications. Due to exchange rate fluctuations the exact number ofhouses by project closing is difficult to predict. 1

4 A. Introductory Statement I. This Project Paper seeks the approval of the Executive Directors to introduce the following changes in the Sri Lanka Puttalam Housing Project, IDA Credit 4261-CE; Project ID - PI The proposed changes are as follows: The provision of housing will be expanded from the originally planned permanent housing to selected IDPs in the refugee camps to a limited number of poorest non IDP households in adjacent communities across four divisions in Puttalam district. This change is intended to facilitate improvement of social cohesion within communities served under the project by addressing the housing needs of a group of the poorest non-idp households. This will promote the integration of the IDPs into host communities. The basis for selection of IDP beneficiaries for a housing cash grant will be expanded beyond the list of original eligible beneficiaries identified by the UNHCR 2006 Survey. After the project approval, the Government pointed out that the UNHCR 2006 Survey had omitted those IDP households who in fact had a temporary house but were classified as those without a temporary house and, therefore, had been omitted from the list. The Government found, through surveys and an Independent Housing Damage Assessment (IHDA), that a number of deserving families met the selection criteria and that the proportion of the temporary houses and semi-built houses is slightly different from that surveyed by the UNHCR 2006 Survey. The Ministry of Resettlement (implementing agency for the project) requested IDA to consider these beneficiaries under the project and to accept the Ministry's survey as a complementary tool to the UNHCR 2006 Survey for verification of beneficiaries eligible for housing grant. B. Background and Reasons for Restructuring 3. The project was approved on February 20, 2007 and became effective on August 22, The project's original development objective was to provide housing to the IDPs only and extended the provision of water and sanitation to non-idp communities. The project is currently meeting its original objectives. After the project was approved by the Board, and at the time of Sri Lanka's Cabinet approval of this project, some Ministers representing Puttalam District expressed concerns that the project did not cover the host communities and benefit the non-idps who may be equally poor on the housing component. In the context where the rdps use local schools and health centers and have entered a common local labor market, there is a need to address potential social tensions arising between IDPs and non-idps. The amendment to the project is attempting to partly address this problem by allowing a group of poorest non-idps to benefit from housing grants as well, the same way they benefit from water and sanitation facilities under this project. 2

5 4. The Government of Sri Lanka proposed to use US$ 1.84 million allocation for physical contingencies under this project to provide housing to a limited number of the poorest non-idp households in four divisions of Puttalam using rigorous selection criteria. The IDA agreed to this proposal The past two supervision missions discussed the selection criteria for the non-idps. The 2008 Housing Census revealed a 77 percent increase in non-idp temporary thatched houses in the four divisions since 2001 with huge variations across Grama Niladari (GN) sub-divisions. The government would apportion the houses intended for non-idps across the four divisions based on the IDP population density in each division. The rationale for this method is to reduce possible tensions triggered by the IDP presence in these four GN divisions. It would further apportion the divisional caseload across GN sub-divisions on the same premise i.e. IDP population. Once the allocation is completed, the project unit would rank potential non IDP beneficiaries on established poverty criteria Le. women-headed households, number of dependents, number of disabled and number employed. Valid documentation of land title and non-possession ofa house elsewhere would be a precondition for the cash grant. 5. The second change to the project relates to the beneficiary selection in the refugee camps. According to the original project design, a household within a refugee camp would have to meet certain criteria to be entitled to housing assistance. (i) It must have title to land. 2 (ii) The head of the household and the majority of household members must live in the camp (according to UNHCR Survey 2006 and Social Assessment 2006). (iii) It should not have a permanent house in Puttalam and should not have received similar housing assistance in its place of origin. (iv) It should have had a temporary or partly-completed house within a camp as of April 2006 (according to UNHCR Survey). At the start of project implementation, the UNHCR 2006 Survey which was the basis for determining beneficiary eligibility under the project was challenged by the Government for having inadvertently omitted a number of IDP households who in fact had a temporary house and should have been eligible for housing grant under the project. Recognizing that these claims may be valid, IDA agreed to consider the proposed additional beneficiaries subject to confirmation of their eligibility by a 100 percent beneficiary eligibility audit. 6. To ensure transparency and good governance, the project includes a Grievance Redressal Mechanism, through which all IDP households would be able to raise their grievances to the authorities in the instance that an individual household disagrees with its non inclusion in the list of beneficiaries. They can complain in writing to the Grievances Redressal Committee headed by the Additional District Secretary, Puttalam. At the start of the project implementation, given some concerns of the residents of these refugee camps, the Puttalam Project Unit (PHP) carried out a survey to verify the eligibility of those who were reportedly omitted from the UNHCR 2006 Survey and who claimed that they were eligible to receive housing grants. In addition, the PPU carried out an Independent Housing Damage Assessment (lhda) to verify the damages of semibuilt houses in each camp. The PPU found that the proportion of temporary and semibuilt houses is somewhat different from what was reported by the UNHCH 2006 survey 2 It is important to distinguish between possession of land due to commercial purchase or gift and actual title to the land which indicates explicit legal documentation and proves ownership. This clause is to avoid the threat of eviction. 3

6 and therefore, the beneficiary entitlement for cash grant would be different. Based on these findings, the Ministry of Resettlement requested the IDA to consider utilization of these surveys for verification of eligibility of IDP beneficiaries in refugee camps in addition to the UNHCR 2006 Survey. 7. During Phase I of the housing construction, the IDA was informed that in camps selected for Phase I, 216 IDPs who were omitted from UNHCR 2006 survey were found eligible based on the selection criteria mentioned above. IDA agreed for Phase 1 cycle A to allow Food Stamps to be used as a proxy for proving a potential beneficiary family's presence in a refugee camp in Puttalam in lieu of inclusion in the UNHCR 2006 Survey. Subsequently, serious doubts have been raised regarding the validity of Food Stamps as proof ofresidency. 8. This situation of potential beneficiaries omitted from the IDP list is not particular to the camps in Phase I and the Government reported that the total number of such cases is about 1,300 throughout the 141 refugee camps. The IDA agreed to consider these additional beneficiaries under the project subject to the 100 percent beneficiary eligibility audit which would be undertaken by the Government. The IDA also agreed to the IHDA survey result of the verification of type of housing (temporary v.s. semi-built) for the remaining three phases of project. This would change the proportion of temporary and semi-built houses. In short, the project, without changing the selection criteria, would expand the tools of verification of beneficiary eligibility beyond the UNHCH 2006 Survey that was the primary basis for beneficiary selection. The validity of the beneficiary selection and their eligibility will be further verified by an audit already started. 9. It should be mentioned that to ensure a uniform and consistent housing policy in different parts of the country and across IDA-funded projects, it was agreed that the housing grant for temporary houses be increased from Rs. 250,000 to Rs. 325,000. This was approved by the Ministry of Resettlement on May 11, 2009 and by the Cabinet of Ministers on July 8, Increase in the individual cash grant and the possible change in number of beneficiaries (depending on eligibility verified by the audit) would have implication on the fund allocation for housing and the number of beneficiaries for both IDP and non-idp communities. IDA will reassess financing needs at the Mid Term Review after the beneficiary eligibility audit is concluded. C. Proposed Changes 10. The project development objective (Part B - paragraphs 7 and 8 of the Project Appraisal Document) will be modified to read: The objective of the PHP is to support the integration of IDPs in Puttalam by upgrading and improving the habitat, water and sanitation facilities of both IDPs and select non IDPs, and providing eligible IDPs in refugee camps and a limited number of non-idps in the host communities with housing. It would entail a housing support cash grant released in installments. The PHP would be implemented over four years in four phases. The Government would require US$ 32.6 million to meet the total housing needs of IDPs in 4

7 Puttalam inclusive of dependent families i.e., the children of the original IDPs who have since married. The PHP would provide US$ 17.0 million (of which US$1.84 million is for the non-idp housing) to support the construction of about 4,3S0 new houses to replace the temporary thatched huts and the completion of approximately 2,232 partlycompleted houses in the refugee camps and about 600 temporary houses in the host communities for non-idps in Puttalam. This would meet SO% of the total housing needs of the Puttalam IDPs. Given funding constraints, the PHP, like the IDA-financed North East Housing Reconstruction Program (NEHRP), would provide housing to original IDP families and not to their dependents. 11. The PHP would provide US$ IS.O million for drinking water, sanitation, environmental mitigation, and internal roads. It would allocate U8$0.S million for construction of sanitary facilities for both IDPs and non-idps and provide drinking water to 13,S84 IDP families and 3,291 non IDP families. This component would also help mitigate environmental problems, including those created by poor conditions of roads and drainage systems. The PHP would provide US$ 78S,000 for technical support and US$ 1.34 million for project management. The total cost of the PHP is US$ 34.2 million, of which IDA would extend US$ 32.0 million. The Government would provide US$ 2.2 million. Project Components (Part B - Paragraph 11 of PAD) will be modified to read: 12. A household within a refugee camp would have to meet certain criteria to be entitled to housing assistance. (i) It must have title to land. 3 (ii) The head of the household and the majority of household members must live in the camp (according to UNHCR Survey 2006 and Social Assessment 2006) or other documents such as surveys and audits that would correctly verify these criteria. (iii) It should not have a permanent house in Puttalam and should not have received similar housing assistance in its place of origin. (iv) It should have had a temporary or partly-completed house within a camp as of April 2006 (according to UNHCR Survey) or other documents such as surveys and audits that would correctly verify these criteria. 4 The non-idp houses would be apportioned across the four divisions based on the IDP population density in each division, and further across GN sub-divisions on the same premise i.e. IDP population. The project unit would rank potential non-idp beneficiaries on established poverty criteria i.e. women-headed households, number of dependents, number of disabled and number employed. Valid documentation of land title and non-possession of a house elsewhere would be a precondition for the cash grant. 13. A Revised Schedule of Withdrawal of Proceeds of the Credit appears in Attachment 1. An amount US$ 0.9 million (SDR 0.6 million equivalents) will be reallocated from the physical contingencies under water and sanitation to the Housing Grant Category. Out ofus$ 17.0 million for this category, a total ofus$ 1.84 million is allocated to finance non-idp housing. 3 See footnote 3. Owning land title also is an eligibility criterion for non-lops for housing grant. 4 The rest of this paragraph reads the same as that in the Project Appraisal Document. S

8 D. Analysis 14. The proposed changes and restatement of development objective will not lead to a change in environmental rating, nor trigger any safeguard policy. These modifications do not contradict existing Bank policies. The proposed changes would ease any possible tension between the host communities and IDP communities, correctly identify those beneficiaries who are in fact eligible and deserve to receive housing grant and were inadvertently omitted from UNHCR 2006 survey, and facilitating reduction in grievances and complaints by the IDPs regarding the selection process. 15. The proposed changes also change the number of target beneficiaries as described above. It was discussed in detail with the Government that the Bank would only finance those households who are found eligible under the project by the 100 percent beneficiary selection audit. E. Expected Outcomes 16. The changes introduced in the project objective will not affect the expected outcomes of the project, but they would change the key performance indicators to include housing for non-idp households. Part B paragraph 9 of the PAD (bullet 1) will be modified to read: Number of housing units constructed and occupied (by the IDP and non-idp households) within specified time and allocated budget; F. Benefits and Risks 17. There is a change in the benefits of the project related to housing grant for non-idp communities and those IDPs who were inadvertently omitted from UNHCR 2006 Survey as reported not having owned a temporary house while in fact they did. These changes are expected to yield a mix of social benefits and risks. The benefit include: (i) expected drop in the grievances and complaints by the IDPs on the ground of non-inclusion; and (ii) less resentment from host communities as some of the poorest households now receive housing, even though it is for limited number of families. However, the risk elements need to be taken into account as a lower number of IDP households than targeted originally in the project is likely to receive housing grants due to the increase of cash grant from Rs. 250,000 to Rs. 325,000. The increase will be covered by the PHP project. The Government will explore the availability of funding to cover the short fall arising in the number of houses due to the increase of cash grant. 18. Another potential risk that has recently emerged, and is not related to the changes made in the Project, is the possibility of some of the IDP beneficiaries returning to their original villages in the North, where the conflict is now over. IDA will continue to assess this fluid situation and discuss the mitigation measures with the Government. Furthermore, IDA has introduced control measures to ensure that the beneficiaries will not be eligible for housing under other World Bank assisted projects. 6

9 Results Framework and Monitoring Annex 3 of the PAD is modified as follows PDO Outcome Indicators Use of Outcome Information The objective of the PHP is to About 6,582 IDP Measure long tenn socioeconomic support the integration of households have a habitable impact ofthe PHP ID Ps in Puttalam by horne. to assess integration of IDPs upgrading and improving the Around 600 poorest nonhabitat, in their preferred location of water and sanitation IDPs have a habitable choice. facilities ofboth IDPs and horne. select non-idps, and providing eligible IDPs in Percent population in refugee camps and limited project area with access to number of poorest non-idps safe and functioning water with permanent housing. supply and sanitation system at close proximity to I I household. Intermediate Results Results Indicators for Use of Results Monitoring i One per Component Each Component Component One: Component One: Component One: Identified IDP and non-idp Number ofhouses in Year 1-4: Low levels point households build/complete identified areas constructed to capacity constraints. It houses in the allocated within a six month time would highlight the need to amount of time and to period and within allocated address shortfalls in specified technical standards. budget (for temporary materials supply, shortage of houses ofrs. 325,000 and skilled and semi-skilled for semi-built houses of Rs. 100,000). Percentage ofcash grants disbursed within the six month period and during each disbursement phase (i.e. purchase of material; completion of foundation, superstructure and overall core-house). labor, or capacity constraints to achieve the desired target and outcome. 7

10 Attachment 1 Revised Schedule of Withdrawals of the Proceeds of the Credit 1. The table below sets forth the categories of items to be financed out ofthe proceeds of the Grant, the allocation of the amounts of the Grant to each category and the percentage of expenditures for items so to be financed in each category: Category Revised Amount Original Amount Percentage of ofthe Credit of the Credit Expenditure to be Allocated Allocated Financed (Expressed in (Expressed in SDR) SDR) (1) Housing Grant 11,467,000 10,900, % (2) Sanitation Grant 340, , % (3) Goods 250, ,000 88% (4) Consultant Services 1,430,000 1,430,000 88% (5) Works 7,943,000 8,510,000 88%! (6) Training 100, , % (7) Incremental 100, ,000 33% Operating cost (8) Refund ofproject 70,000 70,000 I Amount payable Preparation Advance PURSUANT TO Section 2.070fthe General Condition TOTAL 21,700,000 21,700,000! 8