PROJECT PERFORMANCE AUDIT REPORT
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PROJECT PERFORMANCE AUDIT REPORT

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ASIAN DEVELOPMENT BANK PPA: SRI 19151 PROJECT PERFORMANCE AUDIT REPORT ON THE PARTICIPATORY FORESTRY PROJECT (Loan 1183-SRI[SF]) IN SRI LANKA March 2003 CURRENCY EQUIVALENTS Currency Unit – Sri Lanka rupee/s (SLRe/SLRs) At Appraisal At Project Completion At Operations Evaluation (September 1992) (August 2000) (October 2002) SLRe1.00 = $0.0234 $0.0128 $0.0104 $1.00 = SLRs42.71 SLRs77.85 SLRs96.25 = SDR1.46 SDR1.31 SDR1.32 ABBREVIATIONS ADB – Asian Development Bank AusAID – Australian Agency for International Development BFO – beat forest officer CFP – Community Forestry Project EIRR – economic internal rate of return FRMP – Forest Resources Sector Management Project FD – Forest Department FWL – farmers’ woodlot 3m – cubic meter M&E – monitoring and evaluation OEM – Operations Evaluation Mission PCR – project completion report PPAR – project performance audit report PWL – protective woodlot RFO – range forest officer SDR – special drawing rights STC – State Timber Corporation TA – technical assistance NOTES (i) The fiscal year (FY) of the Government ends on 31 December. (ii) In this report, “$” refers to US dollars. Operations Evaluation Department, PE–619 CONTENTS Page BASIC DATA ii EXECUTIVE SUMMARY iii MAP vii I. BACKGROUND 1 A. Rationale 1 B. Formulation 1 C. ...

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ASIAN DEVELOPMENT BANK            
 
PROJECT PERFORMANCE AUDIT REPORT   ON THE   PARTICIPATORY FORESTRY PROJECT (Loan 1183-SRI[SF])   IN   SRI LANKA           March 2003
PPA: SRI 19151
    
     
 
CURRENCY EQUIVALENTS  Currency Unit –Sri Lanka rupee/s (SLRe/SLRs)    At Appraisal At Project Completion At Operations Evaluation (September 1992) (August 2000) (October 2002) SLRe1.00     $0.0104 $0.0128= $0.0234  $1.00   =  SLRs96.25 SLRs77.85 SLRs42.71 $1.00       SDR1.46 SDR1.31 SDR1.32 =
ABBREVIATIONS   ADB – Asian Development Bank AusAID – Australian Agency for International Development BFO – beat forest officer CFP – Community Forestry Project EIRR – economic internal rate of return FRMP – Forest Resources Sector Management Project FD – Forest Department FWL – farmers’ woodlot m3 meter cubic – M&E – monitoring and evaluation OEM – Operations Evaluation Mission PCR – project completion report PPAR – project performance audit report PWL – protective woodlot RFO – range forest officer SDR – special drawing rights STC – State Timber Corporation TA – technical assistance       
NOTES  (i) The fiscal year (FY) of the Government ends on 31 December. (ii) In this report, “$” refers to US dollars.  
Operations Evaluation Department, PE–619
 CONTENTS 
  BASIC DATA EXECUTIVE SUMMARY MAP  I. BACKGROUND A. Rationale B. Formulation C. Objectives and Scope D. Cost, Financing, and Executing Arrangements E. Completion and Self-Evaluation F. Operations Evaluation  II. PLANNING AND IMPLEMENTATION PERFORMANCE A. Formulation and Design B. Achievement of Outputs C. Cost and Scheduling D. Procurement and Construction E. Organization and Management  III. ACHIEVEMENT OF PROJECT PURPOSE A. Operational Performance B. Performance of the Operating Entity C. Financial and Economic Reevaluation D. Sustainability  IV. ACHIEVEMENT OF OTHER DEVELOPMENT IMPACTS A. Socioeconomic Impact B. Environmental Impact C. Impact on Institutions and Policy D. Overall Assessment E. Overall Project Rating F. Assessment of ADB and Borrower Performance  V. ISSUES, LESSONS, AND FOLLOW -UP ACTIONS A. Key Issues for the Future B. Lessons Learned C. Follow-Up Actions  APPENDIXES 1. Project Framework 2. Project Costs and Financing Plan 3. Summary of Beneficiary Impact Survey Results 4. Project Economic Reevaluation  SUPPLEMENTARY APPENDIXES (available upon request) A. Project Economic Reevaluation Supplementary Tables B. Photographs of Homestead Garden and Farmers Woodlot
 
Page ii iii vii 1 1 1 1 3 3 4 4 4 5 8 8 9 10 10 12 12 14 14 14 15 15 16 17 17 18 18 19 19 20 23 24 29  
 BASIC DATA  Project Preparation/Institution Building TA TA Name Type Person- Amount Approval No. Months($)Date 1157 Preparation of the Participatory Forestry PPTA 27 350,000 16 May 1989 1777 Institutional Strengthening of the Forest Department ADTA 54 822,000 5 Nov 1992  As per ADB Key Project Data($ million) Documents Loan Actual Total Project Cost 25.024.1 Foreign Exchange Cost 2.83.5 Local Currency Cost 22.220.6 1 ADB Loan Amount/Utilization 10.57.9 ADB Loan Amount/Cancellation1 2.1 Amount of Cofinancing AusAID 5.8 3.9 World Bank 0.5 0.0    Key Dates Expected Actual Appraisal 25 Mar–15 Apr 1992 Loan Negotiations 28–30 Sep 1992 Board Approval 5 Nov 1992 Loan Agreement 17 Dec 1992 Loan Effectiveness 17 Mar 1993 11 Aug 1993 Loan Closing 30 Jun 1999 31 Aug 2000 Project Completion 31 Dec 1998 30 Jun 2000 Months (effectiveness to completion) 70 83    ra IKnteeyr nPaelrRfoartemoafn cRee tIunrdni2c(a%to)r App13isal P3C0R PP15A R Borrower Government of Sri Lanka Executing AgencyForest Department of the Ministry of Environment and Natural Resources  Mission Data No. of Missions No. of Person-Days Fact-Finding 1 32 Appraisal 1 80 Inception 1 21 Project Administration  Review 7 61  Midterm Review 1 36  Special Loan Administration 3 17  Project Completion 1 32 Operations Evaluation3 1 39                                                   ADB = Asian Development Bank, ADTA = advisory technical assistance, AusAID Australian Agency for = International Development, PCR = project completion report, PPAR = project performance audit report, PPTA = project preparatory technical assistance, TA = technical assistance. 1 Approved amount was equivalent to SDR7.249 million. At the time of loan closing, actual disbursements amounted to SDR5.651 million, while cancellations were equivalent to SDR1.598 million. 2 Because the Project involved investment by a large number of rural families that was not financially quantifiable, the appraisal and project completion reports did not calculate financial internal rates of return. This audit report ethodolo . 3noS auitvElaik ,issit (MalispeciS .L ,)redaeL nos erndauiresocpmO az d.Mion luation MisstarepO eavE snoiTh gylpteoi neroptrm  and project comt dea eharpplasifoowll (International Consultant), and W. L. Weerakoon (Domestic Consultant). 
 
 EXECUTIVE SUMMARY  The Sri Lankan economy depends heavily on the natural resource sectors including forestry. The rapid deforestation caused by land clearing for agriculture, encroachment from unplanned settlements, cropping by the landless poor, illegal logging, and commercial timber extraction became a serious environmental problem for the country. The Participatory Forestry Project (the Project) was formulated to address the diminishing forest resources as a result of increaseing in the rural population.  The Asian Development Bank (ADB) loan of $10.5 million for the Project, with an attached advisory technical assistance (TA) grant of $822,000, was approved in November 1992. The Executing Agency was the Forest Department (FD) of the Ministry of Environment and Natural Resources. The total cost of the Project was estimated at $25.0 million equivalent, with ADB to finance the entire foreign exchange cost and around 35% of the local currency cost. The Project was to be cofinanced by the Australian Agency for International Development (AusAID) ($5.8 million) and the World Bank ($0.5 million) for the food aid (food coupon) program and adaptive research component, respectively.  The Project’s objectives were to (i) increase tree planting by farmers and thereby create employment opportunities, raise incomes, reduce poverty, and rehabilitate environmentally degraded areas; and (ii) strengthen the institutional capability of FD to expand its programs for nonforest tree planting, adaptive research, extension delivery systems, and privately operated village nurseries.  The Project had four components: (i) participatory forestry, (ii) tree seed and seedling production, (iii) adaptive research, and (iv) monitoring and evaluation (M&E). Participatory forestry was the principal part of the Project, accounting for 93% of the estimated total cost. Its purpose was to develop homestead garden planting, woodlots, and other plantings by involving rural households in exchange for food coupons. The appraisal target was a total of 14,750 hectares (ha) of plantings: 9,000 ha of homestead gardens, 4,000 ha of farmers' woodlots (FWLs), 1,500 ha of protective woodlots (PWLs), and 250 ha of miscellaneous plantings. To offer incentives to participating households, the Project was also to provide them with seedlings and technical advice as well as more secure land tenure through the ownership of trees.  The advisory TA grant was to strengthen FD’s capability in forestry development through (i) developing and implementing a reorientation program for FD staff to strengthen their capabilities in forestry development, particularly their ability to provide service to farmers; (ii) assisting in evaluation and improvement of the institutional and financial framework for farmers’ participation in forestry activities; (iii) establishing a benefit M&E system for FD; and (iv) staff training in these subjects.  The Project substantially exceeded the physical targets for the participatory forestry component, but did not achieve the expected outcomes for the other three components. The total area planted under the participatory forestry component was 53,075 ha, comprising 36,263 ha of homestead garden planting, 9,808 ha of FWLs, 4,536 ha of PWLs, and 2,468 ha of miscellaneous plantings. The actual total area planted was thus 260% higher than the appraisal target of 14,750 ha and 15% higher than the revised target in 1998 of 46,000 ha. However, the Operations Evaluation Mission (OEM) believes that an area-based target for homestead gardens is misleading because the data reported included homestead gardens that already
i  existed prior to the Project. The number of households that received the seedlings under the Project is considered to be more meaningful. A total of about 462,000 households received seedlings against the appraisal target of 45,200 households.  The much higher-than-expected outcome was due to savings from the depreciation of the Sri Lanka rupee, large contingencies in the cost estimate, and an extension of the project implementation period by 1 year. The provision of free seedlings, access to land through the lease agreement, and food coupon incentives to mobilize the rural households all contributed to the level of achievement in the participatory forestry component.  The tree seed and seedling production component was expected to establish seed stands and seed orchards with imported seeds to improve the quality of planting stock. However, the OEM observed that there was no significant improvement in either seed quality or seed improvement systems within FD. While seed stands or orchards were established, the OEM did not find that collection and distribution of seeds from those sources occurred. The seed center construction was completed in May 2000; however, presently, the center does not carry out seed production activities due to lack of staff and equipment. Expected research under the adaptive research component was not carried out because submission of satisfactory research proposals to the World Bank was delayed. In the meantime, the World Bank funding for this component was cancelled. The M&E system developed by a consultant was overly complex and its data collection requirements were not practical.  The Project met its objectives of increasing tree planting and creating employment opportunities for rural households. Almost 17,000 ha of tree cover was developed under FWLs, PWLs, and miscellaneous plantings. Employment was provided to rural households through planting activities with an estimated 14,000 person-years of employment generated as against the appraisal target of 11,000 person-years. However, some weaknesses in project performance were also identified by the OEM. For FWLs, silvicultural management such as weeding and thinning was not always provided due to insufficient skills and knowledge of FD’s field-level staff. The FWL tree survival rate was estimated at 55% in the dry zone, 52% in the intermediate zone, and less than 50% in the wet zone. For those FWLs with low survival or growth rate, the participating households are losing motivation to maintain their woodlots. Nevertheless, the successful FWLs provide strong incentives and many households are planting trees on other land at their own cost. FD’s range and beat forest officers (RFOs and BFOs) who were responsible for extension services now lack social contact with the participating households as this contact was made by the motivators who left FD upon the termination of their contracts at project completion. The lack of institutional memory due to the loss of motivators puts the sustainability of FWLs at risk.  In terms of socioeconomic impact on project beneficiaries, based on the OEM’s beneficiary survey and field observation, the households that participated in the homestead garden subcomponent expect substantial returns from timber trees after the 25th year of planting. Except for the dry zone, the fruit and other crop seedlings distributed by the Project have had little impact on household incomes and nutrition. At the time of the Project, rural households in the wet and intermediate zone project areas already had well-planted homestead gardens, often developed over several generations, and the Project’s homestead garden activity— distributing free seedlings— provided only small additions to or replacement of old plants, which the households would have done even without the Project. Also, species distributed to homestead gardens, especially in the wet zone, were poorly selected and many of the trees distributed were planted without proper spacing. There are shading effects from those
  trees that will reduce overall production of existing and newly planted fruit trees. Fruit trees in some homestead gardens already show signs of retarded flowering and fruiting due to shading.  For FWL and PWL participating households, food coupons were distributed for the initial land clearing, planting, and weeding works. Approximately SLRs318 million equivalent of food coupons were financed by AusAID with an average amount of food coupons distributed per household of about SLRs8,400. FWL participating households also benefited from intercropping between tree stands in FWLs.  The environmental impact from PWLs is difficult to assess at this stage; however, there is some evidence of PWLs being of marginal value due to poor tree selection and lack of maintenance.  The Project’s intention to increase forest cover through a social forestry approach was relevant and timely. The Project achieved the objectives of increasing tree planting and creating employment opportunities through the participatory forestry component. The woodlot and homestead garden establishment substantially exceeded the appraisal targets. Employment generation through woodlot establishment was significant. FD made laudable efforts to achieve the targets and its performance was satisfactory. The Project has played a pivotal role in the transformation of FD from a solely administrative forestry agency to an agency that facilitates the production of woodlots through community involvement. However, the impacts on fruit and crop production from homestead gardens are still uncertain. Approximately half of FWLs are susceptible to diminishing returns of trees due to insufficient maintenance. The economic internal rate of return for the entire Project is estimated at 15%, above the appraisal estimate of 13%. The overall sustainability of FWLs is considered to be likely with approximately half of them in satisfactory condition. The Project provided an opportunity for FD to expose its staff to participatory social forestry operations. However, their involvement and knowledge of social forestry extension services is still inadequate, partly because the attached TA did not cover fully the organizational reform needed for social forestry. Overall, the Project is rated successful.  The success of the Project confirms the importance of generating immediate benefits and having well-defined responsibilities for beneficiaries in woodlot establishment. Other key lessons learned include the need for (i) an initial social assessment of the beneficiaries’ preferences and priorities for planting species, (ii) a realistic review of the extension capabilities of FD and institutionalization of skills for social forestry programs within FD, and (iii) greater involvement of stakeholders in the planning and monitoring of agroforestry interventions and maintenance of timber.  The OEM recommends that FD, by the end of 2003, (i) abolish the annual renewal system of the lease agreement due to the heavy workload of RFOs and replace it with a review once every 5 years; (ii) replace the existing agreements with the lease agreement developed under ADB’s Forestry Resources Management Sector Project so that FWL leaseholders have the right of harvesting without the consent of FD; (iii) develop and implement a training program for RFOs and BFOs in silvicultural extension and social forestry; (iv) prepare a plan to carry out a systematic seed and seedling improvement program and utilize the seed center for that purpose; and (v) enhance the capabilities of RFOs and BFOs to conduct systematic monitoring and assessment of tree conditions, silvicultural practices, and socioeconomic benefits accruing to the farmers.
 
I. BACKGROUND
 A. Rationale  1. The Sri Lankan economy depends heavily on the natural resource sectors including forestry. The rapid deforestation caused by land clearing for agriculture, encroachment from unplanned settlements, cropping by the landless poor, illegal logging, and commercial timber extraction became a serious environmental problem for the country. In the 1980s and early 1990s, deforestation was occurring at a rate of 40,000 to 60,000 hectares (ha) a year, equivalent to 0.2% to 0.4% of the country’s forestland. To arrest deforestation and introduce comprehensive forestry management, the Government formulated a forestry sector development strategy in 1986 with the assistance of the World Bank and the Finnish International Development Agency. This Forestry Master Plan had the objectives of (i) creating, maintaining, and conserving forests in order to preserve the environment; (ii) protecting and augmenting the supply of small woodlots for fuelwood; (iii) maintaining a sustainable yield of timber and other forest products; and (iv) involving the local community in developing private woodlots and tree farms. An Asian Development Bank (ADB) paper circulated in 19921set out ADB’s strategy in the forestry sector of Sri Lanka as continuing support for short- to medium-term efforts to strengthen institutional capabilities in forest management and resource conservation through small-scale reforestation, fuelwood plantation, and farmers’ woodlots (FWLs). The Participatory Forestry Project (the Project) was prepared in line with this strategy with the rationale of addressing the diminishing forest resources as a result of the increasing rural population. The Project was also in accordance with ADB’s Medium-Term Strategic Framework (1992–1995)2 covering poverty reduction and environmental protection. The by Project’s strategic development objective was economic growth.  B. Formulation  2. In August 1988, the Government requested assistance from ADB for preparing and financing a project to increase fuelwood supply and reduce forest degradation. Technical assistance (TA)3May 1989 to prepare such a project. The TA was completedwas approved in in June 1990 and an ADB appraisal mission visited Sri Lanka from 25 March to 15 April 19924to reconfirm the consultants’ findings and to discuss the proposed project with the Government. Loan negotiations between ADB and government representatives were held in Manila in September 1992. The ADB loan of SDR7.249 million, equivalent to $10.5 million at appraisal, with an attached advisory TA5was approved in November 1992. The Executing Agency was the Forest Department (FD) of the Ministry of Environment and Natural Resources.6  C. Objectives and Scope  3. The Project’s objectives were to (i) increase tree planting by farmers and thereby create employment opportunities, raise incomes, reduce poverty, and rehabilitate environmentally degraded areas; and to (ii) strengthen the institutional capability of FD to expand its programs                                                  12 ADB. 1992.Sri Lanka: Economic Review and Bank Operations. Manila. 3 ADB. 1992. Strategic Framework -TermThe Bank’s Medium. Manila. 4 TA 1157-SRI:Preparation of the Participatory Forestry, for $350,000, approved on 16 May 1989.   The appraisal mission was fielded in the first half of 1992 to incorporate lessons learned from the project completion report (December 1991) of theCommunity Forestry Project(footnote 12). 5 1777-SRI: TAInstitutional Strengthening of the Forest Department, for $822,000, approved on 5 November 1992. 6 Ministry of Lands, Irrigation and Mahaweli Development at appraisal.Known as the  
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for nonforest tree planting, adaptive research, extension delivery systems, and privately operated village nurseries.  4. The Project had four components, which were implemented in 18 out of the 25 districts in Sri Lanka, excluding the areas considered vulnerable in terms of security (see Map on page vi). The project area covered the country’s three major ecological zones: the dry zone, intermediate zone, and wet zone. The main components and their respective subcomponents were as follows: (i) Participatory Forestry, including (a) homestead garden planting for the growing of fruit, timber, and multipurpose trees in homestead gardens to improve families’ livelihoods in terms of nutrition, cash incomes, and better wood supplies; (b) FWLs for poor and marginal farmers to grow trees on degraded government land, using an agroforestry approach for both establishing a wood supply and improving the livelihoods of the households; (c) protective woodlots (PWLs) for planting trees, and using soil and water conservation measures to rehabilitate erosion-prone government land by local communities; and (d) miscellaneous plantings of trees in schools, public areas, and along railways, roads, and canals to provide an amenable environment and raise public awareness of the value of growing trees; (ii) Tree Seed and Seedling Production, including (a) establishment of about 1,100 private nurseries; (b) collection and use of seed from selected superior local trees; (c) importation of seed; (d) processing and storage of seed; and (e) establishment of seed orchards for seed production or vegetative propagation; (iii) Adaptive Research, including (a) boundary hedgerows/forage crop combinations; (b) contour alley cropping production and soil conservation; (c) creation of forest stands with intercropping of cardamon; and (d) smallholder fuelwood production; and (iv) Monitoring and Evaluation (M&E), including developing an M&E system for FD and conducting benchmark surveys during project implementation on beneficiaries’ socioeconomic status and project plantations.  5. The major part of the Project (93% of the estimated project cost) was the participatory forestry component to develop homestead garden planting, FWLs, PWLs, and other plantings by involving rural households in exchange for food coupons. To offer incentives to participating households, the Project was also to provide them with technical advice, seedlings, and more secure land tenure through the ownership of trees. The Project included a loan covenant that the Government should privatize the three largest sawmills owned by the State Timber Corporation (STC) by June 1993.7  6. The advisory TA grant attached to the Project (footnote 5) was to strengthen FD’s capability in forestry development. Specific TA activities included (i) developing and implementing a reorientation program for FD staff to strengthen their capabilities in forestry development, particularly their ability to provide service to farmers; (ii) assisting in evaluating and improving the institutional and financial framework for farmers’ participation in forestry activities; (iii) establishing a benefit M&E system for FD; and (iv) staff training in these subjects.  7. The Project was expected to generate about 11,000 person-years of employment for rural households during its implementation, mainly through planting and maintenance in homestead garden and forestry activities. Additional employment for 1,100 farmers was expected from the operation of village nurseries. Farmers were also to benefit from the sale of fruit, spices, and wood from homestead gardens, FWLs, and to some extent, PWLs.                                                  7 STC is a dominant supplier of quality timber in Sri Lanka. STC had set price of sawlogs at around 50–60% of market prices, resulting in reduced Government revenue. Since 1990, STC adopted auction procedures for the log sales. The loan covenant to privatize the STC sawmills was to support the Government’s deregulation efforts in the timber market. 
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 D. Cost, Financing, and Executing Arrangements  8. The total cost of the Project was estimated at $25.0 million equivalent, with the ADB loan of $10.5 million equivalent to cover the entire foreign exchange cost and around 35% of the local currency cost. The project cost included $8.9 million of contingency cost comprising physical contingencies8 million) and price escalation ($1.69 ($7.3 million). The Project was cofinanced by the Australian Agency for International Development (AusAID),10 which was to contribute $5.8 million for the food aid (food coupon) program, and by the World Bank, which was to contribute $0.5 million for the adaptive research component. The project cost included $6.8 million equivalent of beneficiary contributions by households participating in the homestead garden subcomponent through their labor and fertilizer inputs. The Borrower was the Democratic Socialist Republic of Sri Lanka. The loan was under the standard Asian Development Fund terms with a service charge of 1% per annum and a maturity of 40 years, including a grace period of 10 years.  E. Completion and Self-Evaluation  9. The Project was completed in June 2000. The project completion report (PCR) rated it successful. The Project exceeded the appraisal target for the participatory forestry component, but did not achieve the expected results for the other three components. The PCR reported that the total area planted under the participatory forestry component was 52,782 ha, comprising 36,043 ha for homestead garden planting, 9,678 ha for FWLs, 4,635 ha for PWLs, and 2,426 ha for miscellaneous planting subcomponents. The miscellaneous plantings included 1,294 kilometers (km) of plantings on roads and irrigation canals. The actual total area planted was much higher than the appraisal target of 14,750 ha. This was attributed to savings made by the depreciation of the local currency against the US dollar and by the 1-year extension in project implementation.  10. The tree seed and seedling production component was expected to establish seed stands and seed orchards to improve the quality of planting stock with imported seeds. However, by project completion, there was no significant improvement in seed quality due to the lower-than-expected seed imports and the delay in building the seed center, which was completed only in May 2000. Expected research under the adaptive research component was not carried out because submission of satisfactory research proposals to the World Bank was delayed. In the meantime, the World Bank funding for this component was cancelled. The M&E system developed by a consultant was overly complex and its data collection requirements were not practical.  11. The PCR concluded that the Project improved incomes of beneficiaries through the provision of food coupons, sales of agricultural crops at FWLs, and private nursery seedlings. The Project also improved the institutional capabilities of FD by establishing a trained core of staff and developing participatory forestry approaches. The PCR calculated the net present value per person-day of labor for the homestead gardens and FWL, and concluded that the financial incentive was adequate for households to participate in further activities. Based on estimates of the quantifiable economic benefits from the homestead gardens and FWL models                                                  8 Calculated as 10% of the base cost. 9 annually from 1993 to 1998 for foreign exchange costs, and 8% for 1993 and 7% annuallyEstimated at 3.7% thereafter for local currency costs. 10 Known as Australian International Development Assistance Bureau at appraisal.