Document of The World IBank F c FOR OFFICIAL US]E ONLY

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World IBank F c FOR OFFICIAL US]E ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$154.6 MILLION TO THE REPUBLIC OF INDONESIA FOR THE NUCLEUS ESTATES AND SMALLHOLDERS VII PROJECT January 5, 1983 Report No. P-344'4-IND 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 authorization.

2 CURRENCY EQUIVALENTS Currency units = Rupiah (Rp) US$1.00 = Rp 660 Rp 100 = US$0.160 Rp 1 million (M) = US$1,600 ABBREVIATIONS BI - Bank Indonesia BRI - Bank Rakyat Indonesia CDC - Commonwealth Development Corporation (of the United Kingdom) DGE - Directorate General of Estates GOI - Government of Indonesia JMO - Joint Marketing Office MOF - Ministry of Finance NES - Nucleus Estates and Smallholders PCC - Provincial Coordinating Committee PMU - Project Management Unit PNP - Perusahaan Negara Perkebunan, a state-owned estate enterprise PTP - Perseroan Terbatas Perkebunan, a state-owned estate enterprise with limited liability REPELITA - National Five-Year Development Plan (Repelita I, ), Repelita II, , Repelita III, ) SBPN - Advisory Unit to the Minister of Agriculture SOE - Statement of Expenditures Team Special Team for Externally Assisted Projects (within the Khusus - Directorate General of Estates) GOVERNMENT OF INDONESIA FISCAL YEAR April 1 - March 31

3 FOR OFFICIAL USE ONLY INDONESIA NUCLEUS ESTATES AND SMALLHOLDERS VII PROJECT Loan and Project Summary Borrower: Beneficiaries: Amount: Terms: Relending: Project Description: Republic of Indonesia Three state-owned estate enterprises (PTP VI, PTP XII and PNP XXVIII), and about 19,000 smallholders. $154.6 million equivalent, including capitalized frontend fee. Repayable in 20 years, including 5 years of grace, at the standard variable interest rate. Beginning from the date of the signing of Smallholder Credit Agreements between, Bank Rakyat Indonesia and the smallholders (which would be 3 years after planting begins), loans to smallholders would be at an interest rate of 10.5% per annum for 17 years, including a grace period of 2 years for oil palm and 3 years for rubber. Loans to the estates for estate development would be at an interest rate of per annum for 20 years including a grace period of 8 years. The Government of Indonesia (GOI) would bear the foreign exchange risk. The proposed project would assist GOIs nucleus estates and smallholders development program by establishing about 50,000 ha of tree crops (rubber and oil palm) in East and West Kalimantan and South Sulawesi provinces with the public sector estates PTB' VI, PTP XII and PNP XXVIII as implementing agents; in addition about 9,000 ha would be cleared for smallholder houses, gardens, and food crops. The project would immediately benefit some 19,000 smallholder families and provide full-time employment for another 4,000 families wcrking for the estates. It would also support strengthenirng of Directorate General of Estates and other agencie!s associated with tree crops development, marketing programs for smallholders, consultancy services for the estates and in-service training for their staff, and provide funds for start-up activities of future NES projects. The project faces no unusual risks. 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 authorization.

4 - ii - Estimated Local Foreign Total Costs /1: ---- (US$ million) Components East Kalimantan West Kalimantan South Sulawesi Program support Base Cost Physical contingencies Price contingencies Total Project Cost Front-end fee on Bank loan Total Financing Required Financing Plan: Local Foreign Total (US$ million) ---- Bank CDC GOI Export Credit Total Estimated Disbursements: Bank FY Rate of Return: 14% Annual Cumulative Staff Appraisal Report: No IND, dated January 3, /1 The project is tax exempt.

5 REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF INDONESIA FOR THE NUCLEUS ESTATES AND SMiLLHOLDERS VII PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Indonesia for the equiva:lent of $154.6 million (including the capitalized front-end fee) to help finance the Nucleus Estates and Smallholders VII Project. The loan would have a term of 20 years, including five years of grace, at the standard variable interest rate. The proceeds of the loan disbursed on smallholders development would be recovered through Smallholder Credit Agreements between Bank Rakyat Indonesia (BRI) and individual smallholders. Signed three year3 after planting begins, the terms of these Agreements would include an interest rate of 10.5% per annum and amortization of 17 years, including a grace period of 2 years for oil palm and 3 years for rubber, with capitalization of interest accruing during those grace periods. The proceeds of the loan relent to the estates for estate development would be at an interest rate of 13.5% per annum for 20 years including a grace period of 8 years. The frreign exchange risk will be borne by the Government of Indonesia (GOI). In addition to the Bank loan, a loan of $30 million equivalent would be provided by the Commonwealth Development Corporation of the United Kingdom (CDC) to help finance part of the cost of the project. The project would also involve about $7 million equivalent in export credits. PART I - THE ECONOMY 2. A basic economic report, "Indonesia: Growth Patterns, Social Progress and Development Prospects" (No IND dated February 20, 1979), was distributed to the Executive Directors on February 26, 1979, and a country economic memorandum has been prepared in each subsequent year. The latest of these, titled "Indonesia: Financial Resources and Human Development in the Eighties" (No IND dated May 3, 1982) was distributed to the Executive Directors on May 6, Annex I gives selected social and economic indicators for the country. Background 3. The Republic of Indonesia is a highly diverse country spread across an archipelago of more than 13,000 islands with a land area of about two million sq km. It now has a populatior of over 150 million, growing at about 2.2% p.a., and is the world's fifth most populous nation. The country has a highly diversified resource base, with plentiful primary energy resources, significant mineral deposits, l1.rge timber potential and a developed system of agricultural commodity production and export. A high proportion of these primary resources are located on the sparsely populated

6 - 2 - islands of Sumatra and Kalimantan, while two-thirds of the population live on Java which has areas with some of the highest rural population densities in the world. About 20% of the population live in urban areas in both Java and the Outer Islands, and the current rate of urban population growth is over 4% p.a. The 1981 estimate of GNP per capita is $520, which places Indonesia for the first time amongst middle income countries./l Macroeconomic Developments and Resource Management 4. Until 1981, the economy had been growing at almost 8% p.a. for over a decade. This was associated with rapid increases in public expenditures, total investment and savings. The initial impetus for this occurred in the period of recovery from the turbulence of the mid-60s. The Government took effective action to restore macroeconomic stability, liberalize the economy, rehabilitate infrastructure, and provide incentives for domestic and foreign private investment. However for the last decade the dominant external influence has been the huge expansion, and significant variability, in foreign exchange earnings from oil. Net exports from the oil and gas sector rose from $0.6 billion in 1973/74 to $10.8 billion in 1980/81, when the current account enjoyed a surplus of $2.5 billion. Oil receipts also provide about 70% of Central Government receipts and have helped finance the sustained increase in demand via the budget. The pattern of expenditures has also helped foster diversified growth: of particular note has been the support for agriculture, through investment in infrastructure, support services and effective use of subsidies to maintain producer incentives. This bore fruit in two successive record rice harvests in 1980 and During 1971 to 1980 manufacturing has also enjoyed a high growth rate (of about 14% p.a.) from a very low base, but here sectoral growth has been in spite of a more restrictive policy environment and distorted incentives. 5. In the macroeconomic resource position changed dramatically. Depressed international markets and a weak oil price have led to a turnaround in the current account of about $9 billion in two years, with a deficit of the order of $7 billion likely for 1982/83. Owing to historically prudent debt and reserve management, Indonesia does not face problems of the magnitude of other oil exporters. However, baring a major recovery in oil prices, there will be a need for short-run adjustment in the next two years. The burden of adjustment will have to fall on import-intensive public expenditures, leading to some rephasing of existing expenditure plans. This will lead to some reduction in the growth rate in the short run. At a more fundamental level the change in external prospects emphasized the need for substantial structural change in the eighties. If the pace of development is to be sustained the development of a strong and diversified nonoil production and export base is essential. /1 On the basis of the World Bank's system of country classification and Atlas methodology for calculation of GNP.

7 Incomes, Employment and Human Development 6. Despite the high concentration of the resource windfalls, the available evidence, from household expenditures surveys, indicates a fairly wide distribution of the benefits of growth and a reduction in poverty incidence over the past ten years. This is also borne out in the basic health indicators, with a 25% reduction in the infant mortality rate and an increase in life expectancy from 47 to 53./1 These improvements should not, however, mask the continued existence of w!aespread poverty. Almost 50% of the population are estimated to have been in this condition in The core of the poverty problem continues to be in rural Java, where landless laborers form a large, and possibly rising, fraction of the population, and where, for most of the 1970s, there is litt:le evidence of any rise in real agricultural wages. However, in the last two years of good rice harvests, it is likely that significant improvements occurred on Java, while agricultural incomes on parts of the Other Islands dependent on export crops have declined in the face of the international recession. 7. In the future the availability oe productive employment will be a key determinant of the distribution of income. The labor force will grow at about 3% p.a., equivalent to around 2 million people p.a., in the next decade. In 1980 agriculture still accountad for 55% of employment, and industry only 13%, while the growth of services employment, from 24% of the total in 1971 to 32% in 1980, was the main mechanism for providing incremental employment in the 1970s. The growth in service incomes was partly sustained by rising oil incomes in the 1970s; if services are to continue to be a major source of labor income there is again a strong case for diversifying the pattern of productive growth. Open unemployment, at about 2% in the period, is not yet a serious problem - it is concentrated amongst secondary school leavers waiting for high income work; the key issues are of widespread underemployment (seen in short working hours in some sectors) and low wages. To tackle this a sustained rise in labor demand is crucial through the maintenance of overall growth and the encouragement of laborintensive choice of techniques in production, especially in the industrial sector. 8. In the 1970s there was substantial progress in extending the provision of social services throughout the population. Universal enrollment in primary education has been virtually achieved and the enrollment rate in junior secondary schools is now 35%. However, the weak educational base of the population continues to be a major obstacle to rapid economic development and a substantial further expansion of secondary and tertiary education will be necessary as well as a major effort to raise the quality of the whole system. The situation is similar in the health sector. There has been a large expansion in facilities, notably at the level of the district and below, but continued expansion and an improvement in quality will be /1 On the basis of the 1971 and 1980 population censuses.

8 - 4 - necessary to raise standards. This will have to be complemented by a major expansion in water supply and sanitation if the improvement in indices of mortality and morbidity in the 1970s is to be maintained. Currently only 18% of the rural and 40% of the urban population have access to safe water/i compared with Government targets of 60% and 75%, respectively, for Policy for Structural Change 9. Indonesia's past growth performance has been good, but the country is now faced with the need both to put the nonoil economy on to a viable long-run growth path and to effectively improve the basic needs situation of the poor. The re-emergence of a significant foreign exchange constraint has reduced the capacity of the economy to carry a high level of investment. Policies that promote appropriate investment choices in the public and private sector will be critical if the structural adjustment process is to be sustained. 10. In industry, the GOI is planning a program of large-scale natural resource-based investments, in refineries, LNG, petrochemicals, fertilizer, cement, pulp and paper, basic metals and mining. This will broaden the industrial base, but will have very limited employment implications and is very foreign-exchange intensive in the construction phase. Of greater importance for both employment and exports is the encouragement of smalland medium-scale private manufacturing through an improvement in the economic environment. Over the last year the GOI has allowed the rupiah to depreciate about 10% against the US dollar, thereby increasing incentives for the production of traded goods. Furthermore, the GOI has initiated a general review of the trade regime, with a view to removing the distortions caused by the wide variations in rates of effective production. It has also embarked on a program designed to promote the expansion of nonoil exports, including export financing arrangements, export insurance, improved ports procedures, export processing zones and a system of export certificates (duty rebates). However, the private sector suffers from significant domestic constraints to its expansion, including a heavy regulatory burden, especially in the area of investment licensing, and a distorted and poorly developed financial system. Further policy reforms to alleviate these constraints are needed to create an environment conducive to private investment. 11. The energy sector is at the core of the structural adjustment problem. Oil and gas now account for 98% of domestic consumption of commercial energy and demand has been growing rapidly. If Indonesia is to avoid a serious reduction in foreign exchange earnings from the oil sector in the 1990s, it is essential to diversify energy usage and improve the efficiency /1 Government estimates for 1981.

9 of energy consumption. This will require both price and investment measures. In January 1982 domestic oil prices were increased by over 60%, and this followed a 40% increase in May This was a decisive step, but domestic prices are still only about 50% of the average opportunity cost, and price relativities between products diverge widely from those prevailing on the international market. In addition a major program of investment is planned, with public and private participaltion, in coal exploration and development, exploitation of hydro and geo:hermal resources, and a sixfold increase in electric power generation in the coming decade. 12. Agriculture will continue to be of great importance for export revenue (accounting for almost 75% of 1980 nonoil exports), food production and employment. Rice production has been steadily rising to an estimated total in 1982 of 23.2 million tons, compared with 13 million a decade earlier. This achievement is largely a result of the provision of new and the rehabilitation of existing irrigation systems and the dissemination of new agricultural technology particularly with respect to the timely delivery of seeds and fertilizers. Future investment in physical infrastructure, especially in irrigation and rural roads, combined with a favorable market environment and good support services will be the main determinants of further expansion in food production. In the past tree crops have suffered from relative neglect, and the age structure of the trees is now very old, but GOI has a highly ambitious program of rehabilitation and replanting, necessitating substantial investment in manpower and improved organization of distribution and marketing. Transmigration remains a high priority program for promoting development in underpopulated regions, providing opportunities for landless families on Java, Bali, and Lombok, and relieving economic and environmental pressures on those densely populated islands. Financing Development - Domestic Resources and External Capital Flows 13. With a relative decline in oil tncomes, alternative sources of domestic finance for investment will have to be found. This will require a major increase in resource mobilization through the public sector, through a combination of reduced subsidies on petroleum products and increased nonoil taxes. In 1980 it is estimated that taxes on the domestic economy were only 6% of GDP, if the domestic oil subsidy is netted out, compared with well over 10% for comparable countries. The 1982/83 budget represented a significant effort to improve the situation, with a halving in the annual level of the oil subsidy and a 15% budgeted increase in nonoil taxes, but this will have to be sustained in followiag years. In addition to public resource mobilization it is becoming increasingly important to encourage the growth and improve the efficiency of distribution of financialized savings, through an improved financial regime and the development of a domestic capital market.

10 Even with effective measures to mobilize domestic resources there will be a substantial need for foreign savings in the 1980s, especially in the short-run adjustment to loss in oil income. The most important component of this will be in the form of medium- and long-term debt flows. Total disbursed and outstanding external public debt was almost $16 billion at the end of 1981 and undisbursed debt amounted to an additional $11 billion. The Inter-Governmental Group on Indonesia remains a principal source of external capital, including Official Development Assistance, to the country. During the s, however, Indonesia experienced an unusually rapid transformation in its public debt structure from a situation of heavy reliance on official concessional loans to increasing use of private, nonconcessional and variable interest loans in the second half of the decade. In 1981 private source debt accounted for 52% of new commitments of public debt. The fact that Indonesia remains highly creditworthy at the beginning of the 1980s, and the efficiency with which GOI has managed debt, are clear indicators of how far the country has progressed. However, the debt servicing capacity depends on commodity production rather than a broad industrial base, and this makes Indonesia somewhat more vulnerable to developments in international markets. The implication is that debt utilization should remain very prudent, and that there will be a continued justification for official debt of long maturities in the 1980s. Present projections indicate that Indonesia's financing requirements can be met with the debt service ratio remaining close to 20% throughout the decade. PART II - BANK GROUP OPERATIONS IN INDONESIA 15. As of September 30, 1982, Indonesia had received 48 IDA credits totalling $931.8 million, and 75 Bank loans amounting to $4,938.6 million. IFC investments totalled $136.8 million. The share of the Bank Group in Indonesia-s total (disbursed) external debt outstanding at the end of 1980 was about 10.7%, and the share of debt service about 7.1%. By the end of 1981, these ratios increased to around 11.2% and 7.4%, respectively. Annex II contains a summary of IDA credits, Bank loans and IFC investments as of September 30, 1982, as well as notes on the execution of ongoing projects. Given the critical importance of agriculture (including transmigration) for employment, food security and exports, over one-third of Bank Group supported projects have been in this sector. In addition, loans and credits have been extended to virtually all other sectors of the economy, including transportation, education, urban development, water supply, rural development, nutrition, industrial development financing (including small-scale industry), power, telecommunications, population and technical assistance. 16. During Repelitas I and II, and in line with the objectives of these first two Five-Year Plans, a high proportion of Bank Group lending was directed initially toward the rehabilitation and then the expansion of infrastructure and production facilities. Special attention was also given to meet the shortage of skilled manpower and technical assistance needed for

11 -- 7- preinvestment studies and project execution. Repelita III, published in early 1979, stressed the need for continued high growth and stability, but departed from previous plans by placing special emphasis on more equitable income distribution and poverty alleviation. This focus, which was fully in line with the conclusions of the basic economic report, required greater attention to employment generation (particularly in the industrial sector) and to improvements in basic public services. While Bank lending was already consistent with these objectives, increased emphasis has been given to these priorities. 17. Although the country has moved fron a position of resource surplus to deficit, as discussed in Part I, it is essential that the development momentum be maintained. This will require beth effective policy reform, notably in improving the environment for private investment, and major investments in industry, infrastructure, tree crop development and human resources development. The Bank's program of lending and economic work is being geared to support the required measures. The primary emphasis of Bank involvement will be on policy and institutional development and technical assistance in the key sectors. This will involve a close integration between sector work and lending and the gradual broadening of lending to the subsector and sector level in order to assist with policy issues at this level. The only significant shift in the composition of lending involves a rapid expansion planned in the education sector, a direct response to the severe shortage of skilled manpower. In the industrial sector, in-depth sector work focused on a policy for the promotion of labor-intensive, export-oriented growth has been substantially completed, and it is planned to follow this with a series of industrial projects. In energy, sector work and continued lending is concentrating on policies to diversify Indonesia's energy base, rationalize pricing and improve sectoral planning. Irrigation and tree crops will continue to absorb a substantial portion of lending in view of the importance of these sectors, and continued support for transport is anticipated. Continued lending in the areas of provision of social services, in population, health and nutrition, urban development and water supply will increasingly emphasize institutional support and the development of innovative low-cost solutions. For example, the proposed health project will focus on improving the working of the whole health care system at the level of a specific province. 18. For about the last two years the Eank and GOI have made a major effort to improve disbursement performance, which deteriorated rapidly in the late s. The disbursement ratio (the: ratio of actual disbursements during the fiscal year to cumulative undisbursed amount at the beginning of the fiscal year) declined from about 26% in FY77 to about 13% in FY80. The Bank-wide average was 21.31% in FY80; the comparable ratios for Thailand and Nigeria were 21.2% and 17.31%, respectively, in the same year. While much of this decline was merely a result of the rapid increase in commitments which took place during this period (total Bank/IDA commitments to Indonesia increased by 122% in the FY77-79 period compared to a Bankwide increase of 83%), it also reflected increasing implement:ation difficulties. Many of the problems appear to be related to GOI's cumbersome budgetary, procurement and

12 - 8 - payment procedures, including issuance of tender documents and opening of letters of credit. These problems are further compounded by the severe shortages of both managerial and technical manpower. A number of steps have been taken by GOI and the Bank to address these issues. Several special Bank missions have visited Indonesia to analyze the problems and make recommendations for simplifying budgetary and financial procedures. The GOI and the Bank have also instituted formal and regular joint review procedures to identify general and project specific problems and work out corrective measures. In addition, procurement seminars were held in Jakarta in September 1979 and November As a consequence of these joint initiatives, GOI has taken several measures to streamline some of the complex budgetary and financial procedures affecting project implementation. In addition, the Bank is helping the GOI in a special effort to identify problems in the construction industry with a view to developing appropriate remedial actions and policies. Weaknesses in the domestic contracting industry have been identified as one of the major causes of implementation problems in Indonesia. Finally, to reduce initial project implementation difficulties, many operations are now being presented for Board consideration at a later stage in the project cycle. Indications are that, as a result of these efforts, improvements are taking place. This was reflected in an increase in disbursements from $2040 mitttiort La i -Y79 to $501.3 million in FY82, implying a disbursement ratio of around 18%. While it is important that the Bank and GOI maintain their efforts, these trends are encouraging. 19. From 1968 until 1974, all lending to Indonesia was made through IDA. Due to the country's improved creditworthiness following the commodity and oil price boom in 1973/74, the bulk of the Bank Group-s subsequent lending has been through IBRD loans, with a modest amount of IDA lending being justified primarily on poverty grounds, as the per capita GNP was well below the IDA cutoff of $625. Given Indonesia's much improved balance of payments position, IDA lending was discontinued in FY The proposed project constitutes the third lending operation presented to the Executive Directors this fiscal year. Projects under advanced stage of preparation and appraisal include the Third and Fourth Transmigration, Third Agriculture Training, Manpower/Construction and the Provincial Health projects. PART III - THE AGRICULTURE SECTOR AND TREE CROPS 21. Objectives for the Agriculture Sector. The agriculture sector is of overwhelming importance to the great majority of Indonesians; nearly 80% of the population lives in rural areas, and agriculture is the major source of income for about two-thirds of rural households and one-tenth of urban households. GOI's major objectives for the agricultural and rural sectors are to: (a) create productive employment to raise the incomes of the rural

13 - 9 - poor; (b) increase domestic food supply to keep pace with rising demand; (c) expand agricultural exports, particularly of smallholder tree crops; and (d) ensure productive, sustainable use of Indonesia's land, water and other natural resources. In line with these objectives which the Bank supports, the GOI's efforts to develop the agricultural sector are directed to various areas including, inter alia, food crops, tree crops, area development and transmigration. 22. Food Crops. Given the limited manpower and financial resources GOI has concentrated on increasing the production of rice, the preferred staple food of the great majority of Indonesians; rice production increased rapidly (4.5% p.a.) between 1968 and 1974, chiefly due to irrigation rehabilitation and the provision to irrigated rice growers of fertilizer and high-yielding variety seed, financed largely through the GOI rice intensification schemes. The growth rate slowed markedly to 1.7% p.a. during the years , in the wake of severe declines in fertilizer usage (due to restrictions on private sector fertilizer trade), successive seasons of untimely rainfall, and unprecedented attacks by pests and diseases. Since then however, rice production has increased substantially, reaching an estimated total in 1982 of 23.2 million tons. Output of secondary foodcrops (maize, cassava, soybeans, peanuts and sweet potatoes) grew at an average of 1.6% p.a. over the past decade. Over the decade, the gains in food crop output did not keep pace with the % p.a. increase in demand, stimulated by rising incomes. By the late 1970s, Indonesia became the world's largest rice importer, with a record import of 2.3 million tons in 1977, and about 1.3 million tons in 1978, while wheat imports reached 1.4 million tons in However, if the significant increases in rice production recorded during 1980 and 1981 can be maintained, Indonesia will greatly reduce its dependence on the world rice market and approach food self-sufficiency. In this connection rice imports in 1982 fell to only 0.6 million tons. 23. Area Development. Rural development programs designed to meet basic needs and to generate employment and production have been developed for certain critically poor areas of Java. Cultivable land in Java is almost fully utilized, and in some higher watersheds cultivation already exceeds ecologically safe limits, contributing to increasing erosion, downstream flooding, and siltation of ports, dams, and irrigation canals. GOI is preparing watershed development and integrated development projects to address this problem. 24. Transmigration. The primary program for new area development in the Other Islands, as well as for creating employment and settlement nuclei for Javanese migrants, is transmigration. Confronted by management problems, G0I reorganized the program in preparation for Repelita III, by transferring implementation responsibility from the Directorate General of Transmigration to the appropriate technical agencies and by creating coordinative bodies at central, provincial and district levels, with a Junior

14 Minister of Transmigration in charge of coordination of the national program. These measures need to be complemented by continued attention to a variety of technical and policy questions some of which the Second Transmigration Project (Loan 1707-IND/Credit 919-IND) is attempting to address. Tree Crops Sector 25. Tree crops occupy about 45% (8.1 million ha) of total cropped land (coconuts and rubber account for 65% of this), and generate about 43% of total nonoil export revenue. Smallholders cultivate 80% of the rubber and virtually all coconuts, coffee, cloves and pepper, whereas tea and oil palm are grown primarily on estates. Indonesia is the world's second largest producer of natural rubber after Malaysia, with a 1981 production of about 1 million tons and exports of 0.95 million tons. Rubber comprised 6% of Indonesia's total agricultural GDP, 7% of export earnings and 16% of nonoil exports in 1981, and provides full-time employment for two million people and part-time employment for an additional 6-8 million. Smallholder production accounts for about 80% and 90% of total area and output respectively; holdings average about 1.5 ha, and yields 300 kg/ha. There is a well-established estate rubber sector of 445,000 ha comprising government estates (193,000 ha), private national estates (182,000 ha), and private foreign estates (70,000 ha). Producing 710,000 tons of palm oil and 130,000 tons of palm kernels in 1981, Indonesia is the world's second largest palm oil producer after Malaysia. Palm oil is Indonesia's fourth largest agricultural export commodity after timber, rubber and coffee, and comprises 2% of total agricultural GDP and 7% of all nonoil export earnings. By 1981, about 320,000 ha were planted under oil palm, having increased at about 9% p.a. since Public sector estates account for about 70% of both the total area and production, and private estates for most of the remainder. Smallholder area accounting for about 1% of total area in 1979, is being increased rapidly under the Nucleus Estates and Smallholder (NES) program (see below) and is expected to reach 18% of total area by Faced with a growing domestic demand for fats and oils and a concurrent declining domestic coconut oil production the percentage of palm oil production exported fell from 85% in 1977 to 53% in Consequently, GOI is committed to rapidly expanding palm oil production to offset imports of coconut oil, while also maintaining palm oil exports. 26. Recognizing the importance of tree crops development in increasing smallholder incomes and nonoil exports, and in keeping pace with domestic demand for fats and edible oil, and utilization of unused land resources, GOI embarked on an accelerated tree crop development plan with the initiation of Repelita III targeting 2.4 million ha of new planting/replanting and rehabilitation mainly of coconuts, rubber and oil palm. To implement this plan, GOI established a number of programs. One new approach, which is being supported by the Bank-assisted NES projects is for Government-owned estate enterprises

15 (PTPs/PNPs/1) to plant and maintain tree crops on previously undeveloped land until the trees reach maturity, using farmers selected to be settlers (mainly local smallholders and some transmigrants) as employees, and thereafter to provide the settlers with inputs, extension services, and processing facilities. GOI has also initiated national programs, backed with credit, to assist geographically concentrated groups cf existing rubber and coconut smallholders to plant, replant or rehabilitate themselves, with fairly intensive support from Project Management tunits (PMUs). This approach has been applied to the Bank-assisted Smallholcer Rubber Development Project (Credit 984-IND) and Smallholder Coconut Development Project (Loan 1898-IND). However, while progress of externally assisted projects including those assisted by the Bank has been generally satisfactory, overall plan implementation so far has been less than satisfactory. Compared to the implementation target of 700,000 ha plannecd to be completed by June 1981, only about 360,000 ha (or 51%) have been realized, reflecting mainly organizational, administrative and manpower constraints. 27. Sectoral Issues and Constraints. Increasing GCI attention towards the tree crops sector and lessons learnt from implementation of the various projects has highlighted a number of sectoral issues which need to be addressed to accelerate the pace of tree crops development. The major issues and constraints relate to: (a) sectoral policy planning and implementation; (b) manpower; (c) long-term investment program and its financing; and (d) marketing. As a result of the increased fdcus on these broader issues by both the Bank and GOI, the GOI has taken, or is in the process of, initiating actions designed to overcome some of these constraints. 28. Improving Sectoral Policy Planning and Implementation. There are two main issues relating to policy planning and implementation. Firstly, policy coordination between the entities responsible for production in the tree crop sector and the other related institutions with respect to issues such as export policies and procedures, pricing of tree crop products marketed domestically, and quality control and standardization, is weak. GOI is taking steps to improve the institutional arrangements for policy coordination including the establishment of interministerial councils for sugar and tree crops, comprising Ministers of Agriculture, Finance, Trade and Cooperatives, and Industry. The Sugar Council has already been set up and the Tree Crops Council is also expected to be established shortly. Secondly, the planning /1 PTP (Perseroan Terbatas Perkebunan) and PNP (Persahaan Negara Perkebunan) are state-owned estate enterprises which oversee estate development and operations. In total there are presently 28 (26 PTPs and 2 PNPs) in operation in Indonesia. The only significant difference between the two organizations is in their legal strucl:ure; PTP has provisions for limited liability. All subsequent references to PTPs in the report include the the PNPs as well.

16 capacity needs strengthening, particularly in view of the massive size of the GOI's long-term tree crops investment program. Measures to help achieve the required improvements in the estate sector planning/coordination unit (SBPN) and the Directorate General of Estates (DGE) within the Ministry of Agriculture, are discussed in paras. 29 and 30 below. 29. Improving Planning, Coordination and Monitoring of PTP Activities. Currently there is an advisory unit to the MIinister of Agriculture, SBPN, which is responsible for policy formulation, coordination of estate sector investment planning and crop activities, estate financial administration and control, and assisting PTPs through monitoring and inspection of estate operation. Considering the importance of the estate sector to the economy and the magnitude of GOI's investment in these estates, it is imperative that the planning, coordination and monitoring of PTP's activities be of the highest quality. The previous NES projects included steps to strenghten SBPN. Through assistance provided under NES I (Loan 1499-IND), SBPN has made progress in coordinating and assisting estates develop long range investment plans. This aspect is being augmented further under NES VI (Loan 2126-IND) with the provision of a financial expert and land use planner. However, much more needs to be done in other important areas such as inspection services, investment strategy, international marketing, manpower planning and technical innovations related to production and processing. The project would provide support in these areas. In addition to internal strengthening, complementary action is needed to improve SBPN's weak organizational arrangement - a loosely structured advisory body outside of the regular government structure and with no formal relationship with the PTPs or DGE. To correct this weakness and bring SBPN within the framework of the above Sugar and Tree Crops Councils, a new regular government bureau is expected to be established in the Ministry of Agriculture, by Fall 1983 to take over SBPN's functions. Most of SBPN's current staff are expected to be transferred to this bureau. This change is expected to take place in conjunction with the establishment of the Tree Crops Council. 30. Strengthening of DGE. The DGE is responsible for smallholder tree crop development and marketing assistance, regulating private estates and overall sectoral planning (in coordination with SBPN). Previous Bank-assisted projects have selectively assisted DGE in institution building. The increasing attention being given to improving marketing of smallholder crops, forward planning and analysis of development options and constraints, has highlighted the following areas of priority for which assistance would be provided under the proposed project: (a) DGE's planning, and smallholder marketing functions; and (b) monitoring implementation of DGE's development projects and evaluation of their long-term impact. 31. Manpower Shortages. The most immediate constraint on the rapid expansion of the tree crops sector is the significant shortage of trained and experienced staff in all agencies. The problem is compounded by the fact that it is expected that 85% of President Directors and senior staff, 60% of

17 Directors and 50% of middle management in PTPs will retire by Given these manpower constraints, it is urgent that an aggregate manpower program be drawn up and implemented on a priority basis. The Bank's ongoing NES projects have provided various training components including expansion/establishment of Estate Training Institutes (LPPs) in Jogyakarta and Medan, and overseas training. The proposed project will include technical assistance to advise on manpower planning methods, evolve manpower planning and development programs for the PTPs, and advise on the nature and extent of training required for PTP staff. A proposed Third Agricultural Training Project currently being appraised is also expected to focus on specialized sectoral training requirements. 32. Estate Sector Investment Program and Financing Plan. The rapidly expanding role of the PTPs in tree crops development has focussed attention on the need for preparation of sound long-range plans and analysis of financing options. Over the last two years SBPN, with the assistance of consultants financed under NES I, has been guiding and assisting the PTPs in the preparation of long range plans which include financial, managerial, technical and manpower aspects. It is now expected that the individual and consolidated draft plans will be finalized by early 1982 for GOI's internal review. Under the proposed project, an agreement was reached with GOI that it will prepare a long range ( ) estate sector investment program (including programs for each estate) and furnish such plan, by September 30, 1983, to the Bank for review and comment (Section 3.08 of the draft Loan Agreement). 33. Given the massive size of the funding requirement for tree crops investment, roughly estimated by DGE/SBPN at $10-15 billion for the decade, the GOI's increasing budgetary constraints and the demands of other priority social and economic programs, the estate sector must progressively reduce its dependence on the budget and seek to mobil:ize resources by other means. GOI/PTPs have initiated these efforts by successfully mobilizing export credits for some of the tree crops processing facilities and the GOI has also directed SBPN to actively seek joint ventures particularly in the processing areas; however, much more needs to be done. While the financial situation of the individual PTPs is uneven, there are some which are strong enough to increase substantial commercial debt from both foreign and domestic sources. The Bank will assist GOI to analyze and explore these various financing possibilities through ongoing lending operations and sector work. 34. Marketing. Two areas require spacial attention: one is the marketing of products from PTPs and associated smallholders (NES projects), the other relating to the marketing arrangements for smallholders outside the NES projects. For the first, the products are currently marketed by the PTPs themselves and through the Joint Marketing Office (JMO) which is financed and operated by several PTPs and supervised by SBPN. However, JMO is limited in its marketing role, for example, selling through tenders rather than aggressive marketing. To address this, a proposal has been made by the PTPs that JMO be transformed into a separate company, owned by all the PTPs. This company would assist, advise and coordinate the marketing of PTP products, provide

18 market outlook services, establish overseas offices, and review issues related to product quality, standardization and quality control. Under the proposed project, technical assistance to review the present marketing arrangements and recommend necessary improvements will be provided. With respect to the second issue of the marketing for smallholders' products outside NES projects, the DGE, in cooperation with DG Cooperatives, is preparing a pilot program for cooperative formation and strengthening, covering a number of provinces and crops with the primary emphasis on rubber. This program which would supplement the present informal marketing system would also be supported under the proposed project. Furthermore, we are currently reviewing the preliminary findings of a rubber marketing study supported under the Smallholder Rubber Development Project (Credit No. 984-IND) with the GOI with a view to developing an appropriate action program. 35. Bank Group Lending in the Tree Crops Sector. In the tree crop sectors including rubber, oil palm and coconut, the Bank Group has assisted GOI with 13 projects. These include three Agricultural Estates Projects (Credits 155, 194 and 319-IND); six NES projects (Loan 1499, 1604, 1751, 1835, 2007, and 2126-IND); three Smallholder Projects (Credits 358 and 984-IND and Loan 1898-IND) and one Transmigration and Rural Development Project (Loan 1318-IND). The earlier Agricultural Estate projects assist only public sector estates, while the later Transmigration and NES projects are primarily for smallholders. In total, all these projects would plant, replant, grow from immaturity to maturity, or rehabilitate some 314,000 ha of rubber, 159,500 ha of oil palm, and 102,800 ha of coconuts. Out of this, the smallholders would eventually operate some 53% of the rubber, 21% of the oil palm, and 95% of the coconut areas. While most of these projects had slow start-ups and other initial problems, their implementation is now generally satisfactory. The most important general development has been the broadly based improvements in estate performance - most project estates are now profitable. The project performance audits for the completed Credits 155 and 194-IND rated both projects successful with impressive economic rates of return equal to or above those estimated during appraisal. 36. The first three NES projects are sufficiently advanced to provide guidance on design of new projects. Initially, delays in budget preparation and receipt of funds by the nucleus estates, slowed implementation. To resolve this, GOI has simplified financial procedures with automatic release of funds for the first two financial quarters to the estates. Smallholder and estate plantings are now on schedule, with the planting or rehabilitation of about 66,300 ha of rubber, 13,000 ha of oil palm and 6,100 ha of coconuts completed, representing about 42% of the total planting program. In earlier projects, coordination problems between the central and provincial governments and nucleus estates resulted in delays in construction of smallholder infrastructure and the movement of smallholders to the project areas. At certain locations this caused labor shortages for further project construction and maintenance of tree crop plantings. To overcome this, NES IV (Loan 1835-IND) initiated several changes in project design and organization, by giving greater autonomy to the nucleus estates in designing and implementing the

19 smallholder components. The DGE establishe(d a special unit (Team Khusus) to assist the nucleus estates. In addition, fcom NES IV onwards, all NES projects contain funds to cover the costs oe preparatory work for succeeding projects. These cover key start up activities such as nursery establishment, access roads and laborer housing. PART IV - THE PROJECT 37. One key difference between this and some earlier NES Projects is its broader focus, enabling it to address and influence a greater range of issues in the development of smallholder tree crops. The project content thus reflects a further evolution of Bank support to the NES concept. In view also of the good progress achieved so far in implementing the NES program and enhancement of Team Khusus's capacity, the project includes one fully appraised component and two subprojects for appraisal by Team Khusus and subsequent approval by the Bank. This project was appraised in June 1982; the Staff Appraisal Report No IND is being distributed separately. Supplementary project data are provided in Annex III. Negotiations were held in Washington in November, 1982, and the Irdonesia delegation was led by General Pang Soeparto, Director C-eneral of Estates. Objectives and General Description 38. This project would assist GOI's smallholder development program using public sector estates to establish nucleus estate and smallholder tree crops and infrastructure. Using the public estates (PTP VI, PTP XII, and PNP XXVIII) the project would, over five years ( ), establish some 29,200 ha of rubber and 21,000 ha of oil palm (12,500 ha for the estates and 37,700 ha for smallholders) and provide processing facilities, at the three project sites in East Kalimantan, West Kal:imantan and South Sulawesi provinces. It would resettle some 19,000 Families at these sites and provide them with houses, food garden, water supply, village infrastructure and initial subsistence allowance and inputs. The East Kalimantan component has been appraised by the Bank/CDC appraisal team; West Kalimantan and South Sulawesi components are being appraised by Team Khusus (para. 40). The major project components are detailed below; for the unappraised components, the estimates are tentative. A. Tree Crops Development (a) East Kalimantan (PTP VI): (i) developing 14,200 ha of rubber, of which 2,500 ha would be nucleus estate and 11,700 ha for about 5,850 smallholders; (ii) developing 12,000 ha of oil palm, of which 3,000 ha would be nucleus estate and 9,000 ha for about 4,500 smallholders;

20 (iii) clearing about 5,175 ha for houses, gardens, and food crops; and (iv) constructing a 800 ton/month rubber factory and 35 ton/hr FFB (Fresh Fruit Bunches) palm oil factory for the estate. (b) W4est Kalimantan (PTP XII): (i) developing 15,000 ha of rubber, of which 3,000 ha would be nucleus estate and 12,000 ha for about 6,000 smallholders; (ii) clearing about 3,000 ha for houses, gardens, and foodcrops; and (iii) constructing a 1,000 ton/month rubber factory for the estate. (c) South Sulawesi (PNP XXVIII): (i) developing 9,000 ha of oil palm, of which 4,000 ha would be nucleus estate and 5,000 ha for about 2,500 smallholders; (ii) clearing about 750 ha for houses, gardens, and food crops; and (iii) constructing a 30 ton/hour FFB palm oil factory for the estate. (d) provision, at all above sites of smallholder housing and water supply, village infrastructure and roads, and initial subsistence allowance, estate housing, buildings, roads and selected infrastructure, and machinery and equipment. B. Program Support and Technical Assistance (a) Provision of: (i) consultant services to strengthen estate sector planning capacity in improving PTPs operations and to enhance DGE's planning, monitoring and evaluation activities to be finalized upon SBPN's reorganization (para. 29); (ii) consultant services to PTP VI, PTP XII and PNP XXVIII to strengthen implementation capacity; and (iii) funds for start-up activities for future Bank-assisted NES projects, and for in-service training for staff of DGE and participating estates. (b) support for DGE's pilot program for strengthening cooperatives to enable them to increase the marketing position of smallholders through quality improvements and better organized marketing, including staff recruitment, training, technical assistance, vehicles and minor equipment for training for smallholders.

21 Project Implementation 39. The arrangements for project organization and management are similar to those established and developed under previous NES projects. Under the proposed project, DGE would have overall responsibility for project execution and through Team Khusus would coordinate inplementation, providing assistance to participating PTPs in the preparation of annual work programs and budgets, financial administration, and technical, engineering and procurement guidance. In addition, it would carry out preparation, appraisal, monitoring and evaluation of projects. In order to strengthen Team Khusus' capabilities to undertake these tasks, NES V and VI provided significant consultant services in the following areas: financial analysis, agronomy, crop processing, land resource evaluation, outline planning, civil engineering and procurement. The consultants already in place have significantly increased Team Khusus' capabilities in these area. 40. Recognizing the increasing capabilities of Team Khusus and in line with the Bank's longer-term objectives of transferring the major responsibility for detailed appraisal to GOI agencies, this unit would assume an additional responsibility under this project, namely appraisal of the West Kalimantan and South Sulawesi components. The requirements for appraisal and report writing have been agreed by the Bank, CDC and Team Khusus. For these two components, subloan appraisal reports prepared by Team Khusus, and approved by all concerned GOI agencies, would be submitted to the Bank/CDC for approval (only to the Bank in the case of the South Sulawesi component); submission of such subloan appraisal reports satisfactory to the Bank would be made a condition of disbursement of the Bank loan for the respective components (Schedule 1, para. 4(d) through (g) of the draft Loan Agreement). 41. Participating PTPs would, with the assistance of consultants where necessary, be responsible'for all project work. However, since PNP XXVIII is short of experienced technical and management staff, it would contract out implementation to PNP VII during the project period; the latter has extensive experience in oil palm development. During the project period PNP XXVIII would recruit additional staff and deploy them alongside PNP VII staff so as to receive on-the-job training and to enable PNP XXVIII to assume full responsibility for operating the nucleus estate after the project period. The first directors of the PTP VI, PTP XII, and PNP VII would be project managers, who would appoint site managers for the individual sites. The project managers, assisted by the Team Khusus, would prepare and submit annual work programs and budgets by October 31 each year. The program would include investments in health and education facil:ities. 42. The nucleus estates would have :full authority to establish smallholdings, infrastructure, roads and processing facilities. DGE would conclude with the nucleus estates Smallholder DeveLopment Agreements which specify all works to be carried out for tree crop development, processing and marketing services as well as their responsibilitie; for land clearing for house and food crop areas, the provision of initial subsistence funds, the support services for food crops and needed infrastructure and various other

22 responsibilities of participating smallholders. The signing of Smallholder Development Agreements satisfactory to the Bank would be a condition of disbursement for the smallholder components of the project (Schedule 1, para. 4(b), (d) and (f) of the draft Loan Agreement). 43. The provincial governments of East and West Kalimantan and South Sulawesi would provide health, education, social and food crops extension services to the smallholders, including the construction of health and education facilities through GOI's public works programs. In these provinces Provincial Coordinating Committees (PCCs) would undertake construction of GOI's public works programs facilities; select, together with the project managers, participating smallholders; expedite the issuing of land use rights and land titles to smallholders; and ensure adequate food crop extension services. PCCs for East and West Kalimantan have been already established. Project Costs 44. Total estimated cost over 12 years of project implementation, i.e. from establishing the first nurseries until the last blocks of trees planted commence bearing, is $469 million. The proposed project would assist implementation over the five years (early 1983 to early 1988) during which period $367.5 million (Rp 243 billion) is the estimated project cost, of which $193.7 million (53%) is the foreign exchange component. Taxes are not included due to the tax exempt status of the implementing agencies. Physical contingencies are estimated at 15% for housing and infrastructure, and 10% for field development, roads, services, equipment and supplies. Price contingencies for domestic costs amount to 12% for 1983, and 10% for ; for foreign exchange costs the contingencies are 8% for 1983, 7.5% for 1984, 7% for 1985 and 6% for Consultant service costs are based on recent contracts for similar services in Indonesia; estimated direct and reimbursable costs including basic salary, social costs, firm's overhead and fee, overseas allowance, travel, housing and per diems are $15,000/man-month for foreign consultants and $3,800/man-month for local consultants. Project Financing 45. The project's total financing requirements are $369.8 million (including $2.3 million of capitalized front-end fee on Bank loan). The proposed Bank loan would amount to $154.6 million including front end fee. The Bank loan would finance 42% of the estimated total cost and 79% of the foreign exchange cost for the five years of project implementation. The proposed CDC loan of $30 million would finance 8% of the project's total cost and 15% of foreign exchange costs. All of CDC funds would go towards the East and West Kalimantan components. GOI would provide to the project implementating agencies Rp 118 billion ($178.6 million) out of annual budget appropriations to meet all the local and some foreign ($4.8 million) costs of the project, and would seek export credit of about Rp 4.4 billion ($6.6 million) for processing machinery for rubber (PTP VI and PTP XII) and oil palm (PTP VI) factories. In addition, GOI would finance all project costs ($101 million) from year six to twelve.

23 Funds Flow. For smallholders development (except health facilities and schools) the PTPs would submit an annual and quarterly work program to BAPPENAS for its approval. The latter would undertake a detailed review to ensure that costs and physical targets are realistic. After approval by BAPPENAS, the Ministry of Finance (MOF) would channel the funds to the PTPs in quarterly disbursements in advance of exfenditures. Funds for the first two quarters would be disbursed upon budget approval; for the subsequent quarters funds would be disbursed after taking into account actual expenditures in prior quarters and the program for upcoming quarter. Funds for school and health facilities would be provided to the provincial government through the GOI's public works program. For nucleus estate development the annual work program and budget would be reviewed in the same manner as that for smallholders. After the review, MOF and Bank Indonesia (BI) would provide to the PTPs funds in quarterly tranches in accordance with the agreed work program. They would make these funds available to the estates in form of loans or equity (para. 49), either directly or through one of the state banks. The Bank would reimburse the MOF and BI for i:he funds they make available to the PTPs (para. 51). The MOF/BAPPENAS review procedures for the annual work program and the quarterly progress, not only ensures that budgeted expenditures are in line with established cost standards but also the flow of funds from MOF/BI to PTPs are in line with actual expenditures by PTPs. Onlending Terms and Conditions 47. Under the NES program, the GOI has an established interest rate policy of lending or onlending public funds to smallholders at 10.5% p.a., and to public sector estates at 13.5% p.a. With inflation rates projected at 12% for 1983, and falling to about 10% thereafter, the interest rate for the estates would be positive in real terms while that for the smallholders would be slightly negative. However, this interest rate is justified for the smallholders since they are below the target poverty level which GOI wishes to assist. 48. Smallholder Loans. Smallholders would repay part of their development costs, that is for the credit items of tree crop planting, subsistence payments, settler housing, farm tracks aad tree crop development overheads (calculated as 10% of the tree crop establishment costs). They would not repay the noncredit items of water supply, village roads and infrastructure, education and health facilities, and project management (calculated as 5% of the tree crop establishment costs and paid to the implementing estate). The total costs for smallholder credit items would be divided into standardized credit amounts for each smallholder. At the end of the third year when the hak milik (land title giving the smallholders full ownership) are ready, the smallholders would enter into a credit agreement with Bank Rakyat Indonesia (BRI). The agreements would be for 17 years, with two years of grace for oil palm and three for rubber producers. Interest would be accrued and capitalized during the grace period.

24 Nucleus Estate Loans. MOF and BI would make these funds available to the estates under terms of a subsidiary loan agreement. For PTP VI nucleus estate development, MOF would provide budget funds as a 16-year and Bank/CDC funds as a 20-year loan, including eight years grace. Interest accruing during the grace period would be capitalized. The repayment terms are based on the cash flow of the nucleus estate and are reasonable considering the long gestation period and the modest commodity price projections in the medium term. Terms of the loans to PTP XII and PNP XXVIII are expected to be generally similar to that for PTP VI, and would be specified in the subloan appraisal reports. Preliminary analysis suggests that PNP XXVIII would require further injection of equity in addition to equity provided under NES VI (Loan No IND) in view of its weak financial position. Consequently, similar to the procedure followed under NES VI part of the funds would be provided to PNP XXVIII in equity. The signing of a subsidiary loan agreement in a form and substance satisfactory to the Bank would be a condition of disbursement for the respective estate development (Schedule 1, para. 4(c), (e) and (g) of the draft Loan Agreement). Procurement 50. Agricultural machinery, road construction equipment, certain agrochemicals (pesticides, herbicides, etc.) and rock phosphate, and some processing equipment ($34 million) would be procured through international competitive bidding (ICB) in accordance with Bank Guidelines. Qualified domestic manufacturers would receive a preference in bid evaluation of 15% of the c.i.f. cost or the import duty, whichever is lower. To the extent possible, DGE would centrally procure road construction equipment and agricultural machinery for the estates, minimizing the number of contracts. Exceptions to ICB would include prudent shopping for start-up machinery for road construction up to the aggregate amount of $1.6 million in order to facilitate initial implementation. Individual items of equipment, spare parts and supplies costing less than $50,000 would also be procured through prudent shopping based on at least three quotations. Urea purchase ($3.0 million) would be made directly from P.T. PUSRI (or its authorized distributors), the country's sole supplier whose price is considerably below world market levels. In addition, other fertilizers ($8.0 million) most of which are imported would also be procured from P.T. PUSRI, which handles fertilizer procurement and distribution for most of GOI's fertilizer requirements. P.T. PUSRI bulk procures fertilizers using procedures broadly similar to ICB. Bank review has indicated that fertilizer prices under these procurement procedures are generally lower than those resulting from procurement under ongoing Bank projects mainly because of the large quantities involved. In view of this and the tremendous administrative advantages, the purchase of fertilizers from P.T. PUSRI is considered justified. Agrochemicals and rock phosphate up to the aggregate amount of $600,000 annually would be procured by each estate following prudent shopping procedures. G3I would also procure processing equipment for the rubber (PTP VI and PTP XII) and oil palm (PTP VI) factories using export credit financing ($6.6 million) through efficient procedures ensuring competitive prices. Civil works contracts for housing, infrastructure and processing facilities ($122 million) which are small (mostly about

25 $0.5 million and occasionally up to $2.0 million) and widely scattered in area and time span and thus unlikely to attract international contractors, would be awarded by local competitive bidding procedures, or by force account. GOI would submit to the Bank for review, prior to tendering and award, documents for contracts of $0.5 million or more. Contracts for consultants' services ($6 million) would be awarded in accordance with Bank Guidelines on the uses of consultants. Disbursements 51. For East and West Kalimantan, Bank and CDC funds would be disbursed jointly. Expenditures on South Sulawesi and Program Support components would be reimbursed solely by the Bank. Bank would reimburse as follows: (a) 34% of the funds given quarterly by MOF (for Emallholder development) and MOF/BI (for nucleus estate development) to the PTPs implementing the East and West Kalimantan components and 46% for the South Sulawesi component; and (b) 100% of cost for consultant services, training and start-up expenditures for future Bank financed NES projects. Statement of Expenditures (SOE) would be used for (a) above and for training costs and start-up expenditures. Detailed documents supporting these statements would be retained by GOI and made available for inspection and review by Bank and CDC supervision mission. Accounts and Audits 52. The participating PTPs would keep separate accounts for all investment costs relating to smallholder and nucleus estate development under the project. Project accounts and SOEs would be audited annually. Audit reports would be submitted to the Bank/CDC no later than six months after end of each year. Agricultural Production, Marketing and Prices 53. The project would establish 50,200 ha of tree crops (29,200 ha rubber and 21,000 ha oil palm), and clear 8,925 ha for smallholder houses, gardens, and food crops. At full production the additional tree crop outputs are expected to be 48,000 tons of rubber, 94,000 tons of palm oil and 16,000 tons of palm kernels. The expected adclitional production of food crops, would amount to about 39,000 tons. In the case of rubber and palm oil, the smallholders would be required to sell sufficient production through the nucleus estates to meet their debt repayments (para. 58). To ensure the smallholders have a constant cash flow for their production, the nucleus estates would pay them weekly during the first three harvesting periods. Food crop production would be mainly for on-farm consumption, but surpluses of peanuts and house garden products such as coffee or cloves should be easily marketable in nearby towns. 54. The PCCs, following procedures established under the earlier NES projects would establish pricing committees, including the estate and smallholder representatives, which would meet monthly to set the price for the smallholder's produce, taking into account such factors as expenses of the estate in collecting, transporting, processing and marketing of settler

26 production, a return on the estates processing facilities capital, the importance of encouraging smallholders production and good quality of their produce. Benefits, Cost Recovery, and Risks /1 55. Apart from the creation of physical assets, the project would provide a livelihood for 18,850 smallholder families and employment opportunities for 4,000 estate worker families and for another 5,200 families working in other sectors linked to the project. 56. For the East Kalimantan Component, future incomes without the project would range from $290 to $530, corresponding to $60 and $110, respectively, per capita. With the project it is expected that the livelihood of the smallholders involved would be much improved: family incomes would reach at least $2,800 by year 10, $560 per capita. This would constitute a significant improvement in the relative income position of these families, from about 10-15% of per-capita GNP at present ($520) to 75-90% of the estimated per capita GNP in 1992 ($750). Additionally, an estimated 45% of the East Kalimantan smallholders have present incomes below the critical consumption level. The project would raise all their incomes above this level. 57. The expected individual economic rates of return for East Kalimantan component are: 17% (smallholder oil palm), 14% (smallholder rubber), 13% (rubber estate), 12% (oil palm estate). Sensitivity analysis indicates that the switching values (percent change in parameter value which would reduce ERR to 10%) range from 14-25% for decline in benefits and 20-35% for rise in costs. As these values indicate, the rates of return are most sensitive to decrease in benefits i.e. decline in commodity prices and/or yields. Projected yields are realistic and based on actual experience in Indonesia and elsewhere; a 14% drop in yields is unlikely. The price used for estimating benefits from rubber and oil palm development are close to the lowest level, for the period. While it is possible that during a short period of time the prices may drop more than 14%, it is unlikely that average long term prices would fall below those assumed. Considering that unit investment costs for NES projects and operating costs for tree crop production are well established, cost changes as large as those indicated above have low probability. Moreover, PTP VI-s management should be able to minimize the possibility of such adverse movements in costs or benefits. 58. The base cost for settling a smallholder family in East Kalimantan would be about $9,900 (oil palm) and $10,800 (rubber); of this about 79% are credit items and repayable by smallholders (para. 48). The estates, following /1 For the unappraised components the farm incomes, rates of return, base costs for settling smallholders and cost recovery are expected to be generally similar to those under East Kalimantan.

27 procedures established under the earlier NES projects, would recover the smallholder credit items by partially retaining the sales revenues of the crops they would process and market on their behalf. The pricing committees (para. 54) would assist the estates in this regard. The estates would deduct from the individual smallholder sales revenues an amount sufficient to repay the annual loan installment. They would transfer all cost recovery to BRI which would keep a record of all individual smallholder accounts. Besides repaying all credit development items, smallholders would pay a land tax, which village heads would collect and turn over to local and provincial administrations for providing public services. This tax is a direct project tax which contributes towards the operational costs of the governmental agencies involved in the villages. Estimated cost recovery index (at 10% discount rate) is about 40% for the East Kalimantan smallholder development. 59. There are no unusual technical risks for the proposed project since it is based on the experience of previous NES projects. The delegation of more authority to nucleus estates and the appointment of the PTP first director as project manager has proved to be an effective measure to improve project management and expedite implementation. While PNP XXVIII is weak, these shortcomings are being met through financial and technical support under NES VI and the proposed project, and recruitment of additional staff. There are also risks in ensuring repayment for smallholder investments - it is important that smallholder crops be channelled through the relevant nucleus estates. Again the strengthening of the estates should help. On balance, the risks associated with the proposed project are judged acceptable. Environmental Aspects 60. Most of the areas earmarked for development under the proposed project are presently covered by secondary forest and coarse grass and consequently are not used to their potential. Soil conservation methods would prevent soil erosion, and leguminous cover crops, proper fertilizer applications and crop rotation would enhance soil fertility. The small quantities of herbicides and pesticides to be used would not lead to significant adverse consequences for the environment. Processing facilities would follow the appropriate standards for effluent treatment to remove potential environmental and health hazards. PART V - LEGAL INSTRUMENTS AND AUTHORITY 61. The draft Loan Agreement between the Republic of Indonesia and the Bank and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement are being distributed to the Executive Directors separately. A special condition of the effectiveness is that all conditions precedent to the effectiveness of CDC loan agreement shall have been fulfilled. Other special conditions of disbursement against individual

28 project components are: (i) Approval of subloan appraisal reports of the unappraised components by the Bank; (ii) Signing of Smallholder Development Agreements between the DGE and the nucleus estates; and (iii) Signing of Subsidiary Loan Agreements between the GOI and the individual estates. 62. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATIONS 63. I recommend that the Executive Directors approve the proposed loan. Attachments January 5, 1983 Washington, D.C. A. W. Clausen President

29 - 25- ANNEX I Page 1 of 5 pages INDONESIA - SOCIAL INDICATORS DATA SHEET INDONESIA REFERENCE GROUPS (WEIGHTED AVERAGES AREA (THOUSAND SQ. KM.) - MOST RECENT ESTIMATE)' a TOTAL MOST RECENT LOW INCOME MIDDLE INCOME AGRICULTURAL /b 1970 /b ESTIMATE /b ASIA & PACIFIC ASIA & PACIFIC GNP PER CAPITA (US$) ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) POPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (THOUSANDS) ' URBAN POPULATION (PERCENT OF TOTAL) POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) STATIONARY POPULATION (MILLIONS) YEAR STATIONARY POPULATION IS REACHED 2110 POPULATION DENSITY PER SQ. KM PER SQ. KM. AGRICULTURAL LAND POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS YRS YRS. AND ABOVE POPULATION GROWTH RATE (PERCENT) TOTAL URBAN CRUDE BIRTH RATE (PER THOUSAND) CRUDE DEATH RATE (PER THOUSAND) GROSS REPRODUCTION RATE FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) USERS (PERCENT OF MARRIED WOMEN) FOOD AND NUTRITION INDEX OP FOOD PRODUCTION PER CAPITA ( =100) PER CAPITA SUPPLY OF CALORIES (PERCENT OF 7 REQUIREMENTS) /c PROTEINS (GRAMS PER DAY) /c OF WHICH ANIMAL AND PULSE T CHILD (AGES 1-4) MORTALITY RATE HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) INFANT MORTALITY RATE (PER THOUSAND) ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL /d URBAN RURAL o7T ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL /e URBAN o7; RURAL cT POPULATION PER PHYSICIAN POPULATION PER NURSING PERSON POPULATION PER HOSPITAL BED TOTAL /d URBAN /7i RURAL /d ADMISSIONS PER HOSPITAL BED /e HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL URBAN RURAL AVERAGE NUMBER OF PERSONS PER ROOM TOTAL URBAN RURAL ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL.. URBAN.. RURAL......

30 ~~~ANNEX ME I Page 2 of 5 pages INDONESIA - SOCIAL INDICATORS DATA SHEET INDONESIA REFERENCE GROUPS (WEIGHTED AV 5 RAGES - MOST RECENT ESTIMATE)-a MOST RECENT LOW INCOME MIDDLE INCOME 1960 /b 1970 /b ESTIMATE /b ASIA & PACIFIC ASIA & PACIFIC EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL MALE FEMALE SECONDARY: TOTAL MALE FEMALE VOCATIONAL ENROL. (X OF SECONDARY) PUPIL-TEACHER RATIO PRIMARY SECONDARY ADULT LITERACY RATE (PERCENT) CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION /c RADIO RECEIVERS PER THOUSAND POPULATION TV RECEIVERS PER THOUSAND POPULATION NEWSPAPER ('DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION /d CINEMA ANNUAL ATTENDANCE PER CAPITA O LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) FEMALE (PERCENT) AGRICULTURE (PERCENT) INDUSTRY (PERCENT) PARTICIPATION RATE (PERCENT) TOTAL MALE FEMALE ECONOMIC DEPENDENY RATIO INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS /d HIGHEST 20 PERCENT OF HOUSEHOLDS /d LOWEST 20 PERCENT OF HOUSEHOLDS /ad LOWEST 40 PERCENT OF HOUSEHOLDS POVERTY TARGET GROUPS ESTIMATED ABSOLUER POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN RURAL ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN RURAL ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN RURAL Not available Not applicable. NOTES /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /aa China included in total only. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for host Recent Estimate, between 1978 and /c 1977; /d 1976; /e May, 1982

31 -27 - M4NEX I Page 3 of 5 pages DEFINITIONt OF SOCIAL INDICATORS Notes Although the data are dee teas.. ue geeal ugd the meet autborlte to.od re1iab s, it should also be noted that they mayro beinte- act ors th.s uset1 _ to dacteth orders of eatitrde., andidt.t -drrt, cod tbara_teete rtrain ajue di: f.er.eroe... naioaly -op-rblo heuu ofte ar f trdrded- ein~itiore aod t-ttes used.by liftfreo tueetin ol raigh data. IThe tr T'he seet grup re( the saetotyeoro h ujotuayr 0 tueogtp oath,-.shai higher acreage learn ehir the t "uir getu of totrotry the sub (totepe jett for ''Nigh roome Oil footers geou ohgr "idl rs Noth Afric ed'middle setw' Is abaser. haasao.ere srouleleffloitiet). It the re ferenr gr-p dsr he:rrae aeppulat.ia neightad arlthi..e...ee.for s ndtar tei e r ny ea najoriy at the' Iu.rat a grouphsda.ta foe that tndta -r. alertthe cnrsga f tures othudrarederee.ds on.. the soilbltty' of data and Istret uttf_em, ratir ua he.rtiaid to Ieiog aneae at reirdi-eo eaao.ther Tttet anerge are only... eful intoapa-tg the n-iu at are lad i,tator e ta ls enan tha c.urt1y ard -nfee-t grops. gade Itbou...rd mq.hs.) pooato re eiltal Nd - tota.1 urhar ard rua. -Ppuaio.t1a tota - Total -ufe- area -oerialtg lead are tad irlonfre-er; 1g79 deta. -rba. at drnral dtnf by their -ep-ti-n tumb.rofa hospital bede, E.ialual-ttiate of agritn1tona1 area oad tepmyorerily or Persareadtly anilabli 10 puhlia en riret gereell atd aprollied bhp. aladre for traps, p--tore,maker and kitbend gerdeo.ol t lie fal11-; 1979 data. tabtlitai. eotr H.Nopital ar esrablishtoert perane-ly otaffed by at leas ate physgolan Estehltiteoth roidr p inlpellyou..tilip IyITATIff th -GNP pet I,tap. tio t.o.r.ant markat prit-e. oa1- dial tr- are ro ioludrd. Rurl eitlt h amster,totlds health oultre by name t. -ar-o method a- Oorld tonh (ta 1970-NI0 hasim); 1960.ad edia.l otet a pera-tetly etaffed by a yhyaioltr lbnt by 1970, ord 19N0 data. -didlta _iseit_t nus,aflar.. ho otter A I,~t-ptei tos datila a td peonide A imrd rneo alile -eit PoF aat theril 1MtfMPfTIO yter CaupITA - a-nal t-o.mueption of rmerial.n.r. g me tutl po..e. urba hoapilels inolufo trot ieripeh/tenerel hoepitaa and Iignltn. perr...au n... Iue ge ard hydra-, _nu1ea ad ga-e -n1 e:ro- and rur. hoapitala. lotal or rural hnepitala and edatal and -ateriry t-l q1 nlrtper -epita; 1967, 1970, and 1979 uraet.- Speoiltieed hasyitela are inoloded only noderaa IIriolty) to hiltgrannf data, Adeitaiora oar NoapitelSed - ftal.. nubrt of enin totdiathargee hf... bitelal fiieded the ounber of heda. by PlyULAT1ym AND VTAfI, STAhTISOTIC Tatel Populatiot, Mid-ferr (thouta..faf - un of July 1; 1960, 1970, and OOThnG data. An-rta hiet fhueod(e o pee houehid) -talurban, und rrl lehat Poynlati-t lye-an of -otll - tatlo or ottr o total poplotlot; A bonea.hol.taaaofaioyo Adindua anb there linn quarters "itnet fainirtona of orb... arata n aftai_t f oarlity _ of data aod their mutt stla. A b-oarr or lodger nay on nay ro te in-ladd to meaonre;190., 1971, and u1s d0 at. t ha.bon ebold for -lrttiitarlynanr Poroleoto Profrtrlna,bnA rirto erof pret prtnsttal ran, and rurral---a agt noyooatnin Currant- popullueonpr hr of pt-ao- yer ro n10aluhoerrrloontdnnetttl yeut bti eaar ehid or 1900 total yapultlan It ageutd art andthalt nrnaity erity _ad totl. mrlnii,, trpotu.o- ly. helat o bu.drtot-a~ot rtor n Pr-yot-o petntrotl tot laorta1lty rturi -o'opele of three I-eola ntn -n-oy,id pidt_ Ito lufa anpetanoyiat boot iormtattury p.ye ita moose Atra...to Iltotrit ih t- t (routo ed-ellto -total, urban, end runt - lrnel ad _ tamle lfteyraoy tulotoa775yta Thyr-Tortttudrltg ub elorilyunlioli q-atter at E,forte_i ity rae thro le,rlartt.t. IoiaI rotal1 d-ellantnryrre..tit_)y ano butt Id nof tota, orbat and tarilttyoo--ditgo I~toone I-nelat.dp-ofa-ily ylanihtgye,fr-omao. luotfonot,yyna -noog-d oor o etn -boitatiora of nortuatey tbor tine OtUlOtIlt utd IItl Iy _rat ft tarytjdroo p_... Ad luntd totolleoa ato ttatl-nrty IhoatooTatntontrnya eoithr -an gro-th note P,us-Y atboal - tota, naa rd freula - Crue total, male tf f.inal thehbirthrtaorqtlttbdearbratr h. Sotalortaaa rottrr-rr-11-tntfallootothe'ilarlrorlon poro"rienfraen ll _alnato.atato. ThIn In thla-el only after f-tllty eate deolios to,pyrieay -ho-l-agr Popna,.,m to lyaooe hldrr ated 0-11 tbo rrylaretentlanrlof ooiroro..proda-too-tot,obrhrat gerrol yorrnnotdjooted forldifor... trr 'theofip,i-irefutr.ior;tor 0 ofmmtreyluot Ir_rl e _toy.t thatat.on.y Muyleto.. loe.. too irtmut nlneta1 drdootioo enrolmen may -o--ed 101 p-ro.. -a-totrd on th, buli of the yrojottudtaa attlra of th oltt itt tore yoylla ar belot or abate alt offiolal soboo1lea.. 1,tnohryarl...a.dote.rateotofloa heoftfertliuty ruretor'eylar- Seo-d-ryn-bool- -t 1o,roretldtaf-le -C.-toytdue bt-;a.rtordary met lanal. aduoat.ntsqot"a a't alaat four yearr oypreprt.. ni ry-i Itea-ti-ot Trottea loay -nolttnpr -te E.ieorl,toait or teathot _irlnlot ntototttp,p',, ooutt IIn reathol - The yrar than -tai on-y tieml eeebd. oaoly of 12 to 17 terr oi a 0; -noer pondenor onore ar. gnral Pert k.m.-nmid-y.ratppoborti- perqut uiloneterllllbrthea-t()of oatnlenrlto(aon f Aeadryy -Ooo-io...aI uhtairtloon. toalara and `9779 data. inolude ttnot Iditrlal,1 or other Pro troa o-o operate jodaped- I.u.aEr-uto.. oraulaod-c.ioaytoadtaltntforagi rntlyonadaporteerta o -aaootdayiottt Pern 1-ualad and 1979 data. Papil-atr rai -p nr,ad erood-or- only;. 1961, 1t70 T-tr trd-ent anro11d In,oroJa"lo Oa torooor 7patottj-hildrro primarytcd rtoodary Tattle.ittded by trr or..anbe- in tha ye..... kotlt-ago (11- h t a yer... drtird7t rearon...tanp ot-,a etoteld-y-aepoyo- 0 -rrtopttdiog lrotla. r-, t lation 16, 1 911,W~ and b19y00data.'aotltr root) - LIterte do Ta1llatred an-i.d erltr7 G-ualoloth Noto ytet-oa -.uoolrotthr-tt of totlaint- aopfonta at ttldtltooultuoutdl Yae,natdo'ra Pouato roth R at trrot -na -urol groorh r-ta or u-b-t p- ClOtlOfylPtN latlont far 1951-hy, 19t0-70I..jd PunntrTrtTatlnad ptlto)-pta rtr topnlt _ode trth hate, Iyet tho...nd) A- ooa Iufe hirtha yrr thbo...td of old-poor turn -aeaoi lean then aab Ieton~; 0 rotd loaabtoo,hernaa potubn ti 970. and 1980 data. eiitpatliorperlrai yapolatton; io.196,an0 lt data b-ofo-rto nralpol pr-hon.a.d ofi popubotint; ea TdI n 0 Iroaaayrouoton lor-bte'geo ohroldeutb,ertaatarlllborao iioened reori_ri oonrtaud In year.he errrintattfradi. bar oot-e rryir-dut- yp-ld I'f th. -rp-leno-epyro.rt tttic lot- attra In effeot; data ol net yaara a. o bat-r,arablnnlitte tal later;uoly Ill finle-yeraa r ardetin, 190,197, aled 190. none- oorti- abolunhed lttlg yalilyplun1_ ggoootit,guaoo1ltho...dn)-a.ttua -tobrrof a_or_r TV brorue- (perethootttdyo.poltti )-TVrroeuevret oheroadoltttt of birth-ro.troi droonuit uyoa fntatlt-yieonopoos geeral pu.,btt par thoo-ntod popo_attoti-roolden ut Ir Teor.liara yontlplrtitr-lert Perttfarenmr-pratgo rerd IrrountiteunI yanhrettroriotfl ena amtof oial-lebarhot be 115-byaa b deteno trt ertrotton(a hbr.tdypo ontbaarrlall n but-oootro l)- _rrudeoet sa Egtno aletioanof "deilyed toteteatta_tpeporo"dafilrdttperlodiall rora pobli-atto denoted petnrlly to r-rrdoi gora nen. f to tonid-red yln D ettotlilo to hr 'ul"it it aryae at leant foot oilmeu l l.ode of rood P-odo-iotye CInemaan_ otnao y It a na-atdo tyn _l0) - Itdro ot yet -ppita untua th nta f podotion of alt fon. oeoh n ytdo ro --- r trod rold t.eed and ltikdter told dorlot th yea.- ondl-g -lo-tontodrin-trl primary goode (g. togar-o ardnabilrolr-- Ia00aadar Year bonit. Commdttotoooat il-ntodof1 onld 1~ Trrredibleantooot-tonoritt T.,.-fftrrled to ldad). r gars at -rdootto of auth ono-tr On buetootiorl FRCE aorta gof prodoner prior -ialt; 1961-hI. 1971, erd 1901 data. Labor natita nora yfo Ithota..odol - To---noll..t..or...l. itioditg Parr-tpitt lupyly ofolor (... t of tqoreran)- p-taed trom armd oroo..and ot-ployrd hot toolodlr booa-i-o, etudant, eto. ma.r0 otnuoalert or ne food -opyttin ua blal irtotypet opotartrot-rpouto of all otto. DIrt'lol, t.o oa,rlooto- r r Per day. o-ollble -opllet tonriar lonatt r_ uti I, nprt loot o -wnaprahir; and 1911 latoroport, onllr,nr yamall (orr-ott - Fr...lI Ilobo forte atprrr ado re nnoh a opla tld ro total labor fort. ed Iooile ofo roaot.ad lo-aa to di-tribtto- toi-daruutoafrrat.-tbo.orro tatoot foraty,hor- at eato -Ia a oatd by PAl bor d ot phyiolrlool. trddn for on-ma-tt- f-uableg at prrterrre ofttall labor foro; tad 1hOlIdata healr oor_ldrrjogron'iroie.t.. te_ ratr body ergto geld-ary _2yrror-) - ladbor flttr it 0110.tttr lt atfotto otty ond aodn..dinrtolot oobyoluooof.atdalortl _rfornto_ t andrl-rrioity. ratn... yrtr.t.. labolor... yr- ot-tl hoonthold lrnel; At_-T.190 nod 1977 dat rod 19.0 data.d -roaitr-tpyly ot yroro- Traa r dry) - to-a oi ro of Par -oya- yanrtliotyto led r lyrrt- tota-i., sae f-dt 1aryrroyoloo rat foply)todyro day. Notnoplyol.fo-d Indrf edaleabrr. It- urtlnttyreta.t.t..oop-tdltto-tl, a1r-a-d fasala labnlorffoe aul -o-trr- rat-bliinbd by USlA -roodo for -itot pe_ttgno oa.1 naland tanal-a popolot ton of all a ea erouoy allonuotra otblaraaaoftooalptotruoooodoyoodlytrtaoofanlaolan~ ~ ~~~d 9161,l T7I,atdl19ldet-. Tla..a. bra edont'parotiupatiooru-te ueda.rroee...thaotho..r.dlg...ro.to l rotiutaod f-naf rfatorroret -notloaror aolna1 p-otrl at an --rr for Ob,norld. ytprord 0 by rion A Etoo.osut Ioyodro-y -RltIn ot h Ib'Trd 'Ttin population -ondr IT ad 65 rod to the.totl 1oborfoor aorld Peod toroy; 1961-t5, rd 1971 data, Pero..IId...a....rrltrryrmtroto,tdnoltr1"-Poteoioa-"I'yoftfoddeloiod PIar to grum Pat day; , l97t and 1971 drta. fro -tlnal and ItCiltE DISOTTItIT- Child Tagro 1-)trt -lt (par _blna,d(- AO..tal d-othn par thot - d it Pr-rotge of Priy-at Ilono (both 10 n-h oaf AlofT - ORorl-d by -th-nt -otlotinog frret t,r h-rtd20l yr n...rrno2 lparte-n,adyoo--a40 yr-trt aoettoolty_ r.tth idrro t'itagr gerry,tforna-r - ortet data donued fro tote tablat; 1961, 1970 and l98t data.o ontla OfAlTfoP00ER1Y 0107T tfroiop ttflorttntaor t-t(year..(-ltouetturf year of life -nini.g Thrftl"Tont...ratnrrynoIortrnn oroo-fpo-rtytot.. atbirth; 1901, 1970 and 1900 daa.ad rbotldlre i.totrpratd riotoollrrtao rio. otut- pr-ritboonndnapr ttn , -... la I d dnoha.itbtol...po...ttytttoedlrorh--- T- Lo tbe ltondrrl o-hthrn 1 uoonnr tati.e Ortr er rorofo yoyolalol-) toa,-bo, u.d -ttl - to- totr _ltolyodrqo-tr dirt poi.. ota non-tod rquotoain -to bar of Ppola (tota.ora... nod h..rora..... I.boerruhrorat.fr toda a tunoa Edtarlmeed yrl-oln eatert-oyylyllntlold-uttantrda.-tfuon-tort ooo-tre-trtt.'ti P-er.. ttn trr(ytrro lob-rban -ndror1l Onoraaroyo-11n - of th.r fr.. otr.t popolutuoro.. d prnoa Itom o t Iotor. Orba lanl todood ro... rorl,erootidera af hri. to ot.. Itfrnnoabp ao,ilti of thor toter. In rota orte a Pouato iiara tlot -b-lot Porb-y l oner i re. Tron -d hnabrrofyr_ylr (tom,ohn nrrl rrot ortdnoua "l oil f ttrrtrrlr poytot o_ o. to-eta dtnpotul to t-obdo Poytlatto per Pbyltto-P lto flo-drd by -ontro ofponotgpbrt- itteto to,d To-o1 Otto oto-uor nttnoalfrfroardt oolentylonr. _tonolol-uyntoadrrortioaoo -h-ot -rnnt Poelrortr T-ittlgPlnnPptaltdo-tlad ty 1900 y robar.of,p--titt fonatrg-rd-o otroraa,aalnrottra I, r_ottonrnro_d Znalea-d

32 ANNEX I -28- Page 4 of 5 pages Population : million (mid-1980) GNP per Capita: US$520 (1981 estimate) INDONESIA - ECONOMIC INDICATORS Annual growth rate (5) Amount (at constant 1973 prices) (million US$ at c:rrent prices) Actual Estimate Projected Indicator NATIONAL ACCOUNTS Gross domestic product /a 70, Agriculture 18, Industry 29, Services 22, Consumption 48, Gross investment 15, Exports of GNFS 21, Imports of GNFS 15, Gross national savings 17, PRICES GDP deflator ( ) Exchange rate Share of GDP at market prices (5) Average annual increase (%) (at current prices) (at constant 1973 prices) Cross domestic product Agriculture industry Services Consumption Gross investment Exports of GNFS Imports of GNFS Gross national savings As % of GDP PUBLIC FINANCE /b Current revenues Current expenditures Surplus (+) or deficit (-) Capital expenditure n.a Foreign financing OTHER INDICATORS Annual GNP growth rate (%) Annual GNP per capita growth rate (%) Annual energy consumption growth rate (%) ICOR Marginal savings rate Import elasticity /a At market prices. lb Central Government only, on an April-to-March fiscal year basis. East Asia and Pacific Programs January 3, 1983

33 population million (mid-1980) ANNEX I GNP per Capita: US$520 (1981 estimate) Page 5 of 5 pages INDONESIA - BALANCE OF PAYMENTS, EX irnal CAPITAL AND DEBT (Millions US$ at current prices) Actual Estimate Projected Indicator BALANCE OF PAYMENTS /a 1. Exports 10,861 11,353 17,494 22,245 20,295 20,698 24,125 27,829 42,761 50,179 (a) Oil & LNG (gross) 7,354 7,374 11,323 16,661 16,541 16,550 19,033 21,772 32,824 38,308 (b) Nonoil 3,507 3,979 6,171 5,584 3,754 4,148 5,092 6,057 9,937 11, Imports (including net NFS) -10,686-11,493-14,035-18,649-23,541-22,683-23,507-25,358-34,514-41,856 (a) Oil sector -2,909-3,364-4,348-5,884-5,572-5,053-4,682-4,706-6,591-7,164 (b) Nonoil imports -7,241-7,543-9,028-11,790-15,340-15,340-16,466-18,561-25,521-32,022 (c) NFS (net) ,629-2,290-2,359-2,091-2,402-2, Resource balance ,459 3,596-3,246-1, ,470 8,248 7, Factor services ,015-1,261-1,205-3,852-4,482-5,210-6,267-9,141-10,719 (a) Interest public debt ,118-1,319-1,617-1,953-2,605-2,836 (b) Other (net) ,734-3,163-3,593-4,314-6,536-7, Capital grants ,099-6,467-4,591-3, , Balance on current account ,109 2,198 2, Direct foreign investment , Public N & LT loans (a) Disbursement 1,956 2,205 1,865 2,536 5,180 5,922 6,384 6,473 6,234 7,091 (b) Amortization ,548-1, ,376-1,720-2,042-2,440-4,052-5,120 (c) Net disbursements 1, ,583 3,803 4,202 4,342 4,033 2,182 1, Other capital (net) ,261-1,454 1,274 1, Change in reserves (- increase) ,690-2,736 1, , Net official reserves 2,208 2,916 4,606 7,342 4,709 4,791 5,548 6,282 11,180 12,148 Reserves in months of nonoil imports + NFS Memorandum Item Net foreign assets of the banking system /d - - 6,906 10,787 8,509 7,091 7,348 8,082 12,980 13,948 Total reserves in months of nonoil imports + NFS EXTERNAL CAPITAL AND DEBT /b Gross Disbursements 1,956 2,205 1,865 2,53f 2,356 Concessional Loans Bilateral IDA Other Nonconcessional Loans 1,514 1,721 1,432 1,85E 1,552 Official export credits ' 154 IBRD Other multilateral Private - source 1,089 1,270 1,126 1,45( 1,206 External Debt (fixed-term) Debt outstanding & disbursed /d 11,658 13,107 13,233 14,S82 15,529 Official - source 7,077 8,390 8,434 9,400 9,746 Private - source 4,583 4,717 4,799 5,482. 5,783 Undisbursed debt 4,475 5,839 7,932 9,454 11,288 Debt Service Total service payments 1,262 2,062 2,101 1,772 1,974 Interest 'i 973 Payments as % exports Je Average Interest Rate on New Loans (%) Official - source () 7.8 Private - source Average Maturity of New Loans (Years) ( 15.6 Official - source Private - source ( 10.7 As % of debt outstanding at end of 1981 Maturity structure of debt outstanding Maturities due within 5 years 30.9 Maturities due within 10 years 60.2 Interest structure of debt outstanding Interest due within first year 4.1 /a On an April-to-March fiscal vear basis. 7F Excludes private nonguaranteed loans. 7T Includes foreign assets of deposit money banks in addition to official reserves. 7 At end of period. East Asia and Pacific Programs 7e Oil exports treated on gross basis. January 3, 1983

34 ANNEX II Page 1 of 29 pages THE STATUS OF BANK GROUP OPERATIONS IN INDONESIA A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of September 30, 1982) US$ million Loan/ Amount Credit Fiscal (less cancellations) Number Year Purpose Bank IDA Undisbursed Twelve Loans and thirty-four Credits fully disbursed Smallholder and Private Estate Tea Pulo Gadung Industrial Estate Bali Tourism Jatiluhur Irrigation Extension Sixth Irrigation Agricultural Research & Extension National Resource Survey & Mapping Fourth Highway Fourth Education Second Shipping National Food Crops Extension Seventh Irrigation Transmigration and Rural Development Second Urban Development Tanjung Priok Port Sixth Power Nutrition Development Teacher Training-Fifth Education Eighth Irrigation Ninth Irrigation Second Population Non-Formal Education Nucleus Estates and Smallholders I Seventh Power Small Enterprise Development Tenth Irrigation Eleventh Irrigation Rural Credit Nucleus Estates & Smallholders II Polytechnic

35 ANNEX II Page 2 of 29 pages US$ million Loan/ Amount Credit Fiscal (less cancellations) Number Year Purpose Bank IDA Undisbursed Twelfth Irrigation Third Urban Development Fifth Technical Assistance Lower Cimanuk Basin Flood Control Second Agricultural Training Fifth Highway Fourth BAPINDO Transmigration II Transmigration II Eighth Power Second Water Supply Yogyakarta Rural Development Nucleus Estates & Smallholders III Smallholder Rubber Development Fifteenth Irrigation National Agriculture Extensior. II Fourteenth Irrigation Nucleus Estates & SmallholderE IV National Agricultural ResearchL National Agricultural Research Third Population Ninth Power Smallholder Coconut Development University Development Tenth Power Swamp Reclamation Fourth Urban Development Nucleus Estate and Smallholdei: V Second Small Enterprise Development Jakarta-Cikampek Highway Eleventh Power Second Seeds Bukit Asam Coal Mining Development & Transport Rural Roads Development Second Teacher Training : Second Textbook Sixteenth Irrigation Seventeenth Irrigation National Fertilizer Distribution / Nucleus Est. & Smallholders VI Coal Exploration Engineering / Central Java Paper and Pul. / /1 Not yet effective.

36 ANNEX II Page 3 of 29 pages US$ million Loan/ Amount Credit Fiscal (less cancellations) Number Year Purpose Bank IDA Undisbursed Total Bank loans and IDA credits 4, Of which has been repaid Total now outstanding 4, Amount sold to third party Amount repaid by third party Total now held by Bank and IDA /a 4, Total undisbursed 2, , /a Prior to exchange adjustment.

37 ANNEX II Page 4 of 29 pages B. STATEMENT OF IFC INVESTMENTS (as of September 30, 1982) Fiscal Type of Loan Equity Total year Obligor business ---- (US$ million) P.T. Semen Cibinong Cement P.T. Unitex Textiles P.T. Primatexco Indonesia Textiles P.T. Kabel Indonesia Cable P.T. Daralon Textile Manuf. Corp. Textiles P.T. Jakarta Int. Hotel Tourism P.T. Semen Cibinong Cement P.T. Primatexco Indonesia Textiles P.T. Monsanto Pan Electronics P.T. PDFCI Devel. Fin. Co P.T. Kamaltex Textiles P.T. Semen Cibinong Cement P.T. Semen Cibinong Cement P.T. Daralon Textile Manuf. Corp. Textiles P.T. Kamaltex Textiles P.T. Daralon Textiles P.T. Papan Sejahtera Capital Market P.T. Indo American Industries Glass Dinnerware 11, P.T. Semen Andalas Cement and Indonesia Construction Material P.T. Saseka Gelora Leasing Capital Narket Total gross commitments Less; sold or repaid and cancelled Total held by IFC Undisbursed (including participant's portion)

38 ANNEX II Page 5 of 29 pages C. STATUS OF PROJECTS IN EXECUTION /1 As of September 30, 1982 These notes are arranged by sectors in the following order: Page No. Agriculture Irrigation (514, 1100, 1268, 1434, 1435, 1578, , 1645, 1691, 1811, 995, 1958, 2118 and 2119) Other Agricultural Projects (400, 1318, 1707/919, 1499, , 1751, 1835, 984, 1898 and 2007, 2126) Agriculture Support Services (1179, 1267, 996, 1840/1014 and 2066) Rural Development (946) 16 Agro-Business and Credit (785, 827 and 2011) Education (869, 1237, 1433, 1486, 1692, 1904, 2101 and 2102) Energy (1365, 1513, 1708, 1872, 1950, 2056, 2079 and 2153) Industrial Development and Finance Industrial Estates (428) 22 Development Finance Companies (1703) Population and Nutrition Population (1472 and 1869) Nutrition (1373) 24 Technical Assistance (898 and 1197) Transportation Fertilizer Distribution (2120) 25 Highways (1236, 1696, 2049 and 2083) Marine Transport (1250) Ports (1337) 27 Tourism (479) 27 Urban Development (1336, 1653 and 1972) Water Supply (1709) 29 /1 These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.

39 -, 35 - ANNEX II Page 6 of 29 pages C. PROJECTS IN EXECUTION AGRICULTURE Irrigation Credit No. 514 Jatiluhur Irrigation Extension: $30 Million Credit of October 3, 1974; Effective Date: January 10, 1975; Closing Date: December 31, 1982 Initial organizational difficulties, extensive changes in the design of project works and delays in awarding civil works contracts are expected to substantially delay project completion by fdur years. All major contracts for civil works have been awarded, and the last of these is expected to be completed by mid The total project cost is currently estimated to be about 90% over the appraisal estimate, mostly because of delays. Disbursements at the end of June 1982 were about 94% of appraisal estimate. Loan No Sixth Irrigation: $65 Million Loan of April 10, 1975; Effective Date: June 20, 1975; Closing Date: June 30, 1984 The project is currently expected to be completed by March 1985, about four years behind the original completion date. This is mainly due to a delay of more than one year in the completion of bidding documents, followed by a delay of about two years due to delayed land acquisition, delayed payments to contractors and the effects of the 1978 Rupiah devaluation. Another year's delay has been added lately by the postponement of drainage works in both Rentang and Cirebon subprojects due to budget constraints. Disbursements at the end of June 1982 were about 88% of the appraisal estimate. Because of the continuing delaye the Closing Date has been postponed by two years. Loan No Seventh Irrigation: $33 Million Loan of June 4, 1976; Effective Date: September 21, 1976; Closing Date: December 31, 1983 The main components of the project are tertiary development on an area of 100,000 ha served by irrigation systems rehabilitated under previous projects and the construction of 6,000 ha of a new irrigation system in the Sadang area of South Sulawesi. The construction of tertiaries has progressed well and gained such a momentum that the scope of work was increased to 115,000 ha. About 111,000 ha have been corupleted and the balance was expected to be completed by March The construction of North Sadang has suffered a delay of about four years due to design revisions and late award of contracts. Completion of the project is expected by March Disbursements at the end of June 1982 were about 75% of appraisal estimate.

40 ANNEX II Page 7 of 29 pages Loan No Eighth Irrigation: $63 Million Loan of June 6, 1977; Effective Date: July 7, 1977; Closing Date: March 31, 1983 The main components of the project are rehabilitation of the Madiun Irrigation System (Stage I) serving an area of about 75,000 ha, including 30,000 ha of tertiary development, a pilot ground water scheme for 2,800 ha in the Madiun-Solo area and the improvement of flood control, drainage and road networks on 5,700 ha of coastal land in Ciujung. Only the drainage works and road improvement in both the Ciujung and Madiun subprojects are expected to be delayed due to budget constraints and lack of experienced staffing. GOI has mobilized additional engineers and foreign consultants for construction supervision at Ciujung and has tapped additional sources of funds to keep the Madiun works on schedule. Disbursements at the end of June 1982 were 40% of the appraisal estimate. Loan No Ninth Irrigation: $35 Million Loan of June 6, 1977; Effective Date: July 7, 1977; Closing Date: December 31, The project includes (a) rehabilitation of 8,000 ha of irrigation system, drainage rehabilitation on 19,000 ha of the Sedeku area in Central Java; (b) new irrigation pumping system on 3,280 ha at Sungai Dareh-Sitiung (Stage I) in West Sumatra for transmigrants; and (c) feasibility studies of ten small to medium irrigation projects and of the Sungai Dareh-Sitiung (Stage II), with detailed designs. Delay in completion of the Sedeku irrigation drainage rehabilitation by about three years continues, compared to appraisal estimate. The Sungai Dareh-Sitiung (Stage I) construction has progressed well, with pumps commissioned and trial runs made. The main and secondary canals are completed, the tertiary network is 80% completed, but land development is lagging. Feasibility studies of the ten small to medium irrigation systems have been completed. The Situing Stage II system studies and designs are completed, and construction was financed under Ln IND (Irrigation XVI). Disbursements at the end of June 1982 were about 78% of appraisal estimate. Loan No Tenth Irrigation: $140 Million Loan of June 6, 1978; Effective Date: August 16, 1978; Closing Date: December 31, The project includes: (a) rehabilitation and improvements of about 34,700 ha of Kali Progo irrigation system; (b) improvements of about 19,900 ha of Way Seputih; (c) improvements and expansion of about 63,100 ha of Way Sekampung irrigation projects; (d) studies and detailed designs of two dams associated with (b) and (c) above; (e) studies of Dumoga and Gumbasa irrigation projects; and (f) consulting services for the above and also studies of two dams in the Kali Progo project area and extension of irrigation to Bekri, West Rumbia, Way Kandis and Way Ketibung in Lampung Province. Due to initial delays in survey and mapping of the irrigation service areas, delay in deciding canal capacities till completion of the dam studies and staff shortage during the years 1979 and 1980, the implementation of Way Seputih and Way Sekampung components are behind schedule by about two years. However, the field surveys and the dam studies have now been completed and the staffing situation has improved. The construction tempo and standard of construction in the Kali Progo area has also improved. The GOI has decided to delay

41 ANNEX II Page 8 of 29 pages construction of the Batutegi Dam to serve the Way Sekamping system since other dams on Java appear of higher priority. Downstream works will therefore be restricted until dam construction starts to ensure an adequate rate of return. The Dumoga irrigation project studies were completed and construction financed in Irrigation XV (Credit 995-IND). Disbursements at the end of June 1982 were 35% appraisal estimate. Loan No Eleventh Irrigation: $31 Million Loan of June 6, 1978; Effective Date: August 16, 1978; Closing Date: December 31, The Cipamingkis irrigation subpro ect, to serve an area of about 7,600 ha is progressing well, the headworks with intake structure were completed by end The main and secondary canals to serve 3,820 ha are progressing on schedule, but there is a setbaclk of nine months in the rest. A delay of 9-12 months is expected in assigning consultants for tertiary design, with a consequent delay in tertiary construction. The project is currently estimated to be completed by mid.984, a delay of 18 months compared to appraisal estimate. The hydrological measurement program is expected to be completed by March 1984, with a delay of about 2 1/2 years. It is expected that there will be $4 million savings which will be used to finance the tertiaries for the Jatiluhur Irrigation Extension Project (Credit 514-IND) which did not cater for the higher intensity of canals now adopted in all systems. Disbursements at the end of June 1982 were about 53% of appraisal estimate. Loan No Twelfth Irrigation: $77 Million Loan of December 29, Effective Date: May 10, 1979; Closing Date: March 31, The project includes: tertiary development on about 186,000 ha of the Jatiluhur Irrigation System, W. Java; drainage improvement in the Cisedane irrigation area including upgrading of roads in W. Java; and studies of drainage and flood control in Pemali-Comal and Sadang irrigation areas; tidal and swamp lands development for about 350,COO ha in the Lalang and Mesuji areas of S. Sumatra, and the Sebangau area in Kalimantan; and detailed designs for reclamation of about 110,000 ha of swamp land in Karang Agung of S. Sumatra. The area of tertiary development has been increased to 205,800 ha. All the civil works contracts of Cisedane drainage and roads improvement are awarded, currently estimated to be completed by March 1985; a delay of over two years over appraisal estimate. Studies are mostly completed; the remaining are expected to be finalized by Disbursements at the end of June 1982 were about 40% of the appraisal estimate. Loan No Lower Cimanuk Basin Flood Control: $50 Million Loan of May 7, 1979; Effective Date: October 16, 1979; Closing Date: March 31, The main components of the project are flood protection levees, bank stabilization and river training work, on the lower Cimanuk river, widening of the Rambatan Channel and const-uction of a hydraulic control

42 ANNEX II Page 9 of 29 pages structure at Bangkir, the Cimanuk river estuary study and the flood control operating and flood forecasting study. Good progress has been made on the civil works and various studies. Civil works are expected to be completed by mid The latest supervision mission recommended that the implementing agency should consider using the savings for procurement of additional operation and maintenance equipment such as dredgers, dozers, draglines, dump trucks and loaders. The equipment will be useful for emergency repairs of other rivers such as Cisanggarung which causes damage during the wet season. The latest project cost estimates indicate that $6-8 million loan funds will remain unused by the completion of the project. The list of equipment to be procured using the savings under the Loan is being reviewed. Disbursements at the end of June 1982 were about 59% of appraisal estimate. Loans No Fourteenth Irrigation: $116 Million Loan of April 3, 1980; Effective Date: July 3, 1980; Closing Date: January 31, 1986 The main components of the project are construction and rehabilitation of drainage and flood protection works on the Serang River to reduce flooding of some 61,000 ha of farm land, rehabilitation of the Madiun Irrigation System (Stage II) serving about a 65,000 ha area and tertiary development serving a 120,000 ha area in the Pemali-Comal and Pekalen Sampean subprojects. The project contracts for flood mitigation works for the Serang River have been awarded after one year's delay. Works in the Madiun area and the tertiary development are progressing well ahead of schedule. Disbursements at the end of June 1982 were about 72% of appraisal estimate. Credit No. 995 Fifteenth Irrigation: $45 Million Credit of April 3, 1980 Effective Date: July 3, 1980; Closing Date: January 31, 1985 The project includes (a) completion of Kosinggolan Irrigation System on about 5,000 ha and construction of the new Toraut Irrigation system for 6,600 ha; catchment protection and nature reserve on an area of about 100,000 ha; institutional support through consultancy services and training; and studies and investigations of four irrigation systems. Construction of the Toraut headworks and the first 2 Km of the main canal which commenced in January 1981 were greatly delayed but the contractor has now agreed to work to a revised program to be completed by May/June Award of two ICB contracts is behind appraisal schedule by months. This subproject is currently estimated to be completed by June 1985 compared to March 1984 in the appraisal estimate. GOI has commenced implementing the "Dumoga-Bone National Park" master plan covering an area of about 270,000 ha. The Bank will review progress in late 1982 before finally agreeing with the GOI proposal to finance US$1.1 million from the credit for the expanded National Park as against US$0.7 million provided for the Nature Reserve. Four studies included in the project should be completed by early 1983, present progress is about 50%. Institutional support program wi-l continue up to June Disbursements at the end of June 1982 were adout 60% of appraisal estimate.

43 ANNEX II Page 10 of 29 pages Loan No Swamp Reclamation: $22 Million Loan of March 31, 1981; Effective Date: July 9, 1981; Closing Date: December 31, 1986 The project assists GOI's effort to reclaim and settle swamps by implementing a 9,000 ha swamp reclamation and settlement project at Karang Agung, South Sumatra. In addition to physical works, the project comprises the preparation of future swamp investments, an ecological impact study, an investigation of groundwater for drinking, and project monitoring. The major works contract for construction of canals %as awarded end-1981 and consultants for construction supervision were assigned in March Consultants for studies are being recruited. The project completion is likely to be delayed due to the eight months' delay in the start of construction. Disbursements at the end of June 1982 were about 75% of appraisal estimate. Loan No Sixteenth Irrigation: $37 Iillion Loan of April 5, 1982; Effective Date: August 9, 1982; Closing Date: December 31, The project will complete construction of the Sitiung Irrigation System (Stage II) in Sumatra to serve about 7,600 ha of transmigrant and local farmer lands; improvement of management systems of the Directorate General of Water Resources Development (Da'RD); training and support for water users and their associations; expansion of DGWRD's basic hydrological data network; and studies for development of the Cisanggarung River Basin and detailed design of the Jatigede Dam. Loan No Seventeenth Irrigation (East. Java Province): $70 Million Loan of April 5, 1982; Effective Date: Not yet effective; Closing Date: December 31, This is the first irrigation project to be concentrated in a single province and implemented through a provincial irrigation service. It will rehabilitate existing surface irrigat:'on systems serving about 50,000 ha; develop groundwater irrigation systems to serve about 13,000 ha; upgrade operation and maintenance for about 140,000 ha of irrigation systems already rehabilitated; and strengthen the East Java Provincial Irrigation Service. Other Agricultural Projects Credit No. 400 Smallholder and Private Es:ate Tea: $7.8 Million Credit of June 22, 1973; Effective Date: November 30, 1973; Closing Date: December 31, 1982 The project provides for credit through Bank Rakyat Indonesia (BRI) to improve productivity on 10,000 ha smallholder tea and 3,200 ha private estates (PTPs) tea, rehabilitation of five private estate tea factories, construction of two new factories for smallholder leaf; training of extension staff and tea growers, studies for marketiag, diversification and BRI

44 40 AlNEX II Page 11 of 29 pages management. The project is making a substantial contribution to smallholder tea industry with 8,500 participants against the appraisal estimate of 7,000. Of the five private tea estates participating, two are excellent, two are fair and one is poor. Progress on construction of the PTP XII factory, to process smallholder and estate tea, is satisfactory. Extension and training has helped about 16,000 smallholders. The project still suffers from weak management, loan collection is deteriorating and many scattered borrowers make loan servicing difficult. Disbursement at the end of June 1982 were about 70% of appraisal estimate. Loan No Transmigration and Rural Development: $30 Million Loan of July 21, 1976; Effective Date: March 30, 1977; Closing Date: December 31, 1982 After a slow start which resulted in extension of the Closing Date to December 31, 1982, the project has shown continuous progress since mid-1980 and is expected to be completely disbursed by end In Baturaja, 4,400 families (98% of target) have been settled and 1,300 shallow wells (91% of revised target) have been established. The pasture development program is well established in Baturaja and Way Abung and 8,800 cattle (93% of target) have been distributed in both sites. Rubber development is almost completed with only 400 ha (6% of target) to be planted in Disbursements at the end of June 1982 were about 88% of appraisal estimate. Loan No Transmigration II: $90 Million Loan and $67 Million Credit of (Cr. No. 919) June 1, 1979; Effective Date: October 4, 1979; Closing Date: December 31, 1985 About 800 families have been settled to date and an estimted 3,000 of the proposed 30,000 families will be settled by the end of the next fiscal year. Sufficient land has been mapped in Jambi province for 20,000 families but half of these sites have been excluded from the project because they lie in production forests. No other areas in Jambi province are likely to be suitable for large scale settlement and land has been identified in South Sumatra for 10,000 families. Because of the importance of land identification, about $50 million has been allocated from the Transmigration II project for site selection and evaluation for the GOI program. Delays in settlement and rehabilitation components have led to slow disbursement and cost overruns and much remains to be done to ensure sustainable food crop production. Disbursements at the end of June 1982 were about 1.7% of appraisal estimate. Agencies are better informed about the project than they were previously and are working conscientiously. To circumvent problems of land shortage and increasing implementation delays: (a) settlement targets should be reduced to 20,000 families, (b) about one-fourth of project funds should be allocated to mapping and consultancy services; and (c) current disbursement rates should be maintained. To speed implementation, the size of land clearing contracts should be reduced and contracts should be tendered for each site as it is prepared. Recommendations have also been made which