FILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION INDONESIA. Not For Public Use

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized FILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION ASTA PROJECTS DEPARTMENT Not For Public Use INDONESIA SSMALLHOLDER AND PRIVATE ESTATE TEA PROJECT APPRAISAL REPORT Mayr 16, 1973 Restricted Report No. 124a-IND This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.

2 CURRENCY EQUIVALENTS US$1 E Indonesian Rupiahs (Rp) 415 Rp 1 m US$ Rp 1 million - US$2,410 WEIGHTS AND MEASURES (Metric System) 1 hectare (ha) - 10,000 m acres 1 square kilometer (km 2 ) ha square miles 1 metric ton (MT) - 1,000 kilograms (kg) a 2,205 pounds 1 kilometer (km) miles 1 millimeter (mm) inches ABBREVIATIONS Bappenas - National Planning Agency BRI - Bank Rakyat Indonesia ODA - Overseas Development Agency (UK) PMU - Project Management Unit PMB - Project Management Board RIEC - Research Institute for Estate Crops FISCAL YEAR April 1st to March 31st

3 INDONESIA SMALLHOLDER AND PRIVATE ESTATE TEA PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS... i-iii I. INTRODUCTION II. BACKGROUND A. General B. Indonesia's Tea Economy Production... 3 Tea Smallholders... 3 Private Tea Estates Extension Service C. Future Development III. THE PROJECT AREA Location and Conditions... 5 Communications... 6 Population and Labor Credit Facilities Land Tenure Processing.,... 6 IV. THE PROJECT A. General Description B. Detailed Features Field Rehabilitation Factories... 9 Training Extension Service Organization Nurseries Diversification Trials V. COST ESTIMATES AND FINANCING A. Cost Estimates B. Financing Arrangements C. Procurement D. Disbursements E. Accounts and Audit This report is based on the findings of an appraisal mission to Indonesia in October/November 1972, composed of Messrs. Elz, Brown (IDA), Janzen, Lushington and Moreithi (consultants).

4 -2- Page No. VI. ORGANIZATION AND MANAGEMENT A. Project Management Unit *. 18 Organization Staff Salaries Extension Service Nurseries Training Consultants Project Performance B. Bank Rakyat Indonesia Description Credit Distribution to Smallholders Credit Distribution to Estates Credit for New Factories Technical Assistance VII. YIELDS, PRODUCTION, MARKETING, PRICES AND FINANCIAL RESULTS A. Yields and Production B. Marketing C. Prices D. Operating Results Bank Rakyat Indonesia Government of Indonesia VIII. BENEFITS AND JUSTIFICATION IX. CONCLUSIONS AND RECOITENDATIONS ANNEXES 1. Progress on Agricultural Credits IND-127, 155, 194, 195, 211, 220, 246, 259, 239 and Agricultural Practices 3. The Indonesian Tea Economy Table 1: Situation and Stand Density: West and Central Java, 1970 Table 2: Smallholder Tea Areas and Farmers by Regency Table 3: Area and Production of Tea Table 4: Private Sector Area and Production of Tea Table 5: Tea Production, Consumption and Export Projections Table 6: Domestic Tea Market in 1970 Table 7: Production, Exports and Consumption of Indonesian Tea Table 8: Prices for Green Made-Tea and Green Leaf from Selected Estates and Manufacturing Costs

5 -3-4. Organization Chart of Agricultural Services (#7417) 5. Guidelines for Selection of SmalIholders and Private Estates 6. Rehabilitation Schedules Table 1: Smallholder Rehabilitation Schedule Table 2: Private Estates Rehabilitation Schedule Table 3: Estimated Smallholder Production Table 4: Estimated Private Estates Production 7. Factory Rehabilitation and Construction 8. Training Program 9. Project Organization Table 1: Staffing Requirements Table 2: Staff Costs Chart: Tea Project Organization (#7418) 10. Nursery Programs Table 1: Requirements for Leaf Cuttings Table 2: Evaluation of Available Clones 11. Project Cost Tables Table 1: Project Costs Table 2: Factory Rehabilitation: Cost Summary Table 3: New Factory: Cost Summary Table 4: Nursery Model: Investment Requirements Table 5: Project Management Unit: Capital Investment Requirements Table 6: Technical Assistance: Cost Estimates 12. Disbursement of IDA Credit Table 1: IDA Financed Expenditure Table 2: Estimated Schedule of Disbursements 13. Smallholder Credit Appendix 1: Authorization Appendix 2: Account Record A Appendix 3: Supply Certificate Appendix 4: Consolidated Disbursement Appendix 5: Account Record B Appendix 6: Smallholder Credit Accounting System 14. Operating Statements Table 1: Investment Costs for Replanting One Hectare and Rehabilitating One Hectare of Smallholder Tea Table 2: Project Management Unit: Operating Budget Table 3: Bank Rakyat Indonesia: Sources and Application of Funds Table 4: Government Sources and Application of Funds

6 Table 5: SmalIholder Cash Flow Projection Table 6: Private Estate: Income Statement and C'nh Flow Projection Table 7: Private Estate: Comparative Analysis With anid Without Project Table 8: Rehabilitated Factory Model: Income Statement, Cash Flow Projection and Comparative Analysis Table 9: New Factory Model: Income Statement and Cash Flow Projection 15. Economic Evaluation Table: Economic Rate of Return 16. Roads Requiring Improved Maintenance 17. Bank Rakyat Indonesia Appendix 1: Summarized Balance Sheets Appendix 2: Summarized Income and Expenditure Statements MAP

7 INDONESIA SMALLHOLDER AND PRIVATE ESTATE TEA PROJECT SUMMARY AND CONCLUSIONS i. The Indonesian tea industry declined rapidly after World War II particularly during the 1960's as a result of war disruptions, subsequent neglect, and shortages of capital and technology. In 1960, 66,700 ha of estates and 64,400 ha smallholdings produced about 83,000 tonq of tea. By 1970/71 only 56,000 ha of estate tea and 51,000 ha smallholder tea remained. Production had fallen to about 59,000 tons despite a large potential domestic market which could not be exploited because of shortages of supply and deterioration of quality due to poor cultivation and processing practices. Smallholders and private estates have suffered most from this decline. Government estates are on the way to recovery as a result of Government support and external financing, including an IDA credit (259-IND, September 1971) of US$15 million. By contrast, the private tea sector is still in critical need of rehabilitation. The proposed project is designed to meet this need. ii. Java, the site of the proposed project, encompasses 70% of Indonesia t s population and produces about 90% of Indonesia's tea output. Three-fourths of the 80 million people on the island derive their income from agriculture, and annual per capita GNP of the rural population is about US$55 compared with a national average of US$77 at 1970 prices. Roughly 500,000 people including about 39,000 smallholder families depend for their livelihood on private sector tea production. Net per capita income of a typical smallholding with tea and other cash crops is about US$35. iii. Building on the success of Government tea estate rehabilitation, partly financed by IDA credit 259-IND, the proposed project is designed to reestablish the nucleus estate/smallholders relationship which worked successfully before the decline of the industry, to help increase the productivity of the private sector tea industry of West and Central Java and, at the same time, strengthen the financial institutional framework by actively involving the banking sector in tea rehabilitation. About 7,700 smallholders and 30 estates are estimated to benefit from the project. The project would be carried out over 8 years from 1973/74 through 1980/81. Principal project components would be: (a) credit through Bank Rakyat Indonesia (BRI) to rehabilitate 10,000 ha of smallholder tea and 3,200 ha of estate tea, rehabilitate 5 black tea factories and construct 2 new black tea factories; (b) training and expansion of a specialized tea extension service; and (c) establishment of a Project Management Unit (PMU) within the Ministry of Agriculture to direct and administer the project.

8 - ii - In addition, funds would be provided for overseas training, for staff training in BRI, for a management study of BRI, for a market survey and for diversification trials. Total project costs would be Rp 6.4 billion (US$15.4 million), of which the proposed IDA Credit of US$7.8 million would be about 50%, representing estimated foreign exchange requirements. iv. The project would be carried out by a Project Management Unit PMU) within the Ministry of Agriculture. Since there is limited local management and technical expertise to run the project, four internationally recruited consultants would be employed by PMU during the initial years of the project. Nevertheless, PMU would be headed by an Indonesian project manager assisted by a chief project advisor. The other 3 consultants would hold executive positions as technical development, accounting, and factory consultants. Policy issues of PMU and budget approval would be referred to a Project Management Board (PMB). BRI would be responsible for credit distribution under the project for which it would receive US$6.5 of the IDA credit, onlent by Bank Indonesia for a period of 20 years at 4% per annum. Technical evaluation and supervision would be the responsibility of the PMU, but financial appraisal, supervision, and bad debt risk would be the responsibility of BRI. Coordination of these activities would be done by PMU. V. The proposed prvject would halt the rapid decline in private sector tea production, and by 1985 would result in an increase of about 4,000 tons (20%) over present production levels. Assuming a 4% annual growth in per capita domestic tea consumption, project production would not be sufficient to maintain the present level of net export availability of Indonesian tea. This rate of increase is about that achieved from 1939 to 1960 and Indonesian per capita consumption would still remain below the level of other tea producing countries. vi. No viable alternative exists in West and Central Java for large scale transfer of land use out of tea production. A small proportion of tea land could be transferred to the production of other primary commodities such as rubber or coffee. However, these alternative tree crops are less labor intensive and, since they are dependent on the export market, face market instability. Furthermore, such a crop shift would require major investments in infrastructure and substantial income subsidies during the long gestation period. Funds are provided for diversification trials to study the possibilities of tea growers diversifying into alternative crops. vii. This is primarily a smallholder project. Field development on private estates accounts for only 24% of project area and is intended to strengthen estates which will serve as nuclei for smallholder concentrations, and to facilitate better utilization of the large land resources leased to private estates. Factory investment would provide essential improvement and expansfonn of the facilities available for smallholder leaf. At full development the project would increase the net income from tea of the average smal;ulder participating in the project from Rp 36,000 to Rp 117,000. Total investment in field and factory rehabilitation indicates an economic rate of return of 23%. Including the cost of the PMU, with its extension

9 - iii - service, training facilities and technical assistance, the rate of return on project investment would be 15% assuming a shadow rate of family labor of Rp 60/day (70% of the going farm wage rate). Without shadow pricing the rate of return would be 13%. The project would also result in significant institutional improvements for the extension services, training facilities, and BRI. viii. Procurement through international competitive bidding would account for about 32% of project costs (US$3.5 million). Local competitive bidding would be used for goods and services amounting to 20% (US$2.2 million) of project costs, where the size of individual contracts is too small, bulking of contracts is not possible, or compatibility with existing installations is essential. Remaining project costs, consisting of operating costs for PMU and nursery costs, would be unsuitable for competitive bidding. ix. IDA has extended 12 agricultural credits to Indonesia totalling US$129.1 million. These credits comprise: four for the rehabilitation of Government-owned estates, including 259-IND for tea estates; four for the rehabilitation of irrigation systems; one for the multiplication of highyielding rice seed; one for fisheries development; one for livestock development; and one for smallholder rubber and palm oil development. X:. With the assurances obtained from the Government the project is suitable for an IDA Credit of US$7.8 million equivalent, comprising 50% of total project costs.

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11 INDONESIA SMALLHOLDER AND PRIVATE ESTATE TEA PROJECT 1. INTRODUCTION 1.01 Smallbolders and private estates in West and Central Java produce about 36% of Indonesia's tea crop, and the bulk of their production is sold in the domestic market. Following many years of neglect, the productivity of private sector tea gardens has declined drastically. Since 1960, tea production from these sources has decreased by about 10% annually. The Government of Indonesia has requested an IDA credit to finance a project designed to improve the productivity of about 10,000 ha of smallholder tea and 3,200 ha of private estate tea through rehabilitation and replanting, and by improving and expanding black tea processing facilities Private sector tea production provides a livelihood for about half a million people. Despite the importance of this sector, particularly for Java, Government has not provided a significant degree of assistance for many years, either in terms of technical advice or credit. The proposed project is intended to reverse the trend in declining productivity by providing technical advice, training, and financial assistance for the purchase of inputs and equipment. This would be IDA's first rehabilitation project for smallholder tea At the end of 1972 the Bank Group had committed US$44.5 million for tea development in five countries: Indonesia, Kenya, Mauritius, Tanzania and Uganda. With the exception of the Indonesian project these projects were for the development of new tea land and aimed at supplying the international market. By contrast, the project in Indonesia which is the subject of this report would be for rehabilitation of smallholder tea and would aim at slowing down the decline in private sector tea production. Not before 1983 would output from this sector exceed 1970/71 production. Thus, production from the proposed project would enter the domestic market which, in spite of its large potential, has not expanded in the past decade because of supply shortages IDA has extended 12 agricultural credits to Indonesia totalling US$129.1 million. These credits comprise: four for the rehabilitation of Governulent-owned estates, including 259-IND for tea estates; four for the rehabilitation of irrigation systems; and one each for: the multiplication of high-yielding rice seed, fisheries development, livestock development, smallholder rubber and palm oil development. Thus, the proposed project, with its emphasis on smallholder development, reflects IDA's evolving agriculture lending strategy in Indonesia moving from a focus on rehabilitation of major irrigation systems and government estates to more diversified economic and social objectives.

12 Due to unforeseen delays in project start-up and organizational improvements (including recruitment of consultants), most projects are behind schedule. Details on the performance of IDA-financed agriculture projects are given in Annex The project was prepared for Government by the UK Commonwealth Development Corporation and financed under Credit 259-IND. This appraisal report is based on the findings of a mission which visited Indonesia in Ltober/November The mission was composed of Messrs. Elz, Brown (IDA), Janzen, Lushington and Moreithi (consultants). II. BACKGROUND A. General 2.01 Indonesia consists of five main islands and about 3,000 smaller islands. The total population is about 120 million, increasing at an annual rate of 2.3%. Over 90% of Indonesia's tea output is produced in West Java. Java, the location of the proposed project, is the smallest of the five main islands, having only 6.9% (130,000 km 2 ) of the total land area. However, about 70% of the population (80 million) inhabit this island, where the population density is about 600 per km 2, higher than in any other part of Indonesia. Agriculture accounts for more than half of Java's income and provides employment for about 75% of its labor force. Excluding Jakarta, 1970 per capita GNP is estimated at USS55 compared with a national average of about US$ Tea is important for the densely populated area of Java. The private tea sector alone represents the main source of employment for about 500,000 people. It is one of the most labor intensive agricultural crops and has the advantage that under the prevailing climatic conditions production and income are spread fairly evenly over the year. Alternative agricultural crops are limited because of geographic and climatic conditions, lack of market stability and lower income potential. Although the export earning capacity of tea declined since World War II, export income still amounted to US$30 million in Further deterioration of the industry would either divert tea from the export market to the domestic market thereby reducing export earnings or lead to the substitution of tea by other drinks wnich -nay have to be imported. 2.C.n 1939, Indonesia was the third largest exporter of tea. Since then, tea area and yields have fallen drastically because of the war and its aftermath and because of neglect and mismanagement (see Annexes 2 and 3). Government, IDA and other foreign aid donors have recently provided funds and zechnical assistance to government tea estates and this sector is well on its way to recovery. The government acknowledges the importance of priv.,-e sector tea production and accords high priority to its improvement.

13 - 3 - However, very little of a practical nature has been done to initiate rehabilitation. Major constraints to development have been the lack of planning, shortage of credit, antiquated processing facilities, ignorance of modern production methods among tea growers, and closely related to this, the absence of an effective extension service. The proposed project is designed to help remove these constraints. B. Indonesia's Tea Economy 2.04 Production. Total production in 1939 amounted to nearly 90,000 tons of which 70,000 tons were produced by estates which at that time were mainly in private ownership. During the Japanese occupation large areas of estate tea were uprooted and planted to food crops. Post war confrontation with the Dutch, nationalization of foreign property and subsequent lack of funds and technical resources resulted in further declines in production. In 1970/71 only about 59,000 tons of tea were produced, on 52,000 ha of estates and 51,000 ha of smallholdings. About 64% of Indonesia's tea production in 1970 was grown by government-owned estates. Private estates produced about 11% of total output and smallholders the balance of 25% Government estate tea leaf is processed exclusively into black tea and is sold primarily for export. With the gradual deterioration of processing facilities the production of many private estates has shifted into green tea, although the majority of factories continue to produce an inferior quality black tea. (The differences between black and green tea manufacture are explained in Annex 3.) In recent years, smallholders have been forced to process a large quantity of their own leaf in small, crude green tea factories, of which there are now several hundred in West Java. In total, about 30% of Indonesia's tea production is in the form of green tea. While this product is preferred by some segments of the West Java population, it has limited market growth potential. Major expansion of the domestic market will occur with the promotion and distribution of good quality black tea Tea Smallholders. Smallholders account for 14,900 tons or 25% of production (1971). Only about 1,200 tons of this is converted to black tea. Smallholder tea was established prior to World War II when estates provided planting material and fertilizer on credit, recovering payments by deduction from the value of green leaf supplied to estate factories for processing. The smallholders also profited by technical assistance supplied by the estates. Vital links between the two sectors were lost during the war and smallholders were cut off almost entirely from credit, technical assistance, and buyers for their leaf. Cultivation practices deteriorated, intercropping appeared and smallholders turned increasingly to green leaf manufacture which could be done on a small scale and was less demanding of leaf quality. In 1970/71 there were about 39,000 registered smallholders with 51,000 ha of tea in Java compared with about 75,000 ha pre-war. However, only 26,500 ha, cultivated by 21,000 tea growers, with an average tea

14 -4- bush density of 60% or more, can be classified as suitable for rehabilitation. The average size of a smallholding in a representative area (Garut/Tasikmalaya) is 1.8 ha with 1.1 ha of tea. Paddy and cassava are the principal subsistence crops grown on the remaining area. Tea yields are low, varying from 210 kg/ha for tea bush stands below 40% to 480 kg/ha for average densities of 602. Full stands of replanted tea have a yield potential of at least 4,600 kg/ha. Further details are in Annex Net annual farm incomes average about Rp 84,000 (US$202) per family of 6. This is totally inadequate to finance rehabilitation, considering the degraded state of tea gardens and the long gestation period of this crop. Replanting in most cases requires taking land out of production for 2 years to eradicate root and other soil diseases prevalent in the project area, before the normal 3 year planting and gestation period. Thus, any program to improve smallholder tea production must combine technical support with sufficient financial assistance to prevent declines in incomes during rehabilitation Private Tea Estates. There are about 11,000 ha in tea production on 53 private estates in West Java and about 1,900 ha on 6 estates in Central Java. They produce about 6,200 tons of which nearly 50% is green tea (see Annex 3). While these estates are privately-owned corporate entities, their lands are leased from Government for 30 years. Leases are renewable for a further 25 years subject to verification that the estate is well managed The deterioration in tea husbandry on many private estates is severe. Resources are too limited for comprehensive recovery. There is a need for credit for rehabilitation of fields, buildings, transport and factories, to turn these estates into efficient units and enable them to reestablish their close ties with surrounding smallholders. However, only medium-term investment credit (5 years) is presently available to estates at a minimum interest rate of 12%. These terms are not suitable for tea rehabilitation investments Extension Service. Provincial governors are responsible for the administration of the smallholder extension service, but financial and technical matters are directed by the Central Government through the Ministries of Finance and Agriculture (Directorate of Estates). Annex 4 illustrates the organization of the Agricultural Services. The smallholder field extension service employs 112 permanent staff in the 15 regencies (Kabupatens) of West Java. In the six regencies where tea is grown, there are 43 junior instructors with some training in tea culture. This number provides only 1 instructor per 900 tea growers. This ratio and the training of the staff are insufficient to provide adequate assistance to farmers on tea cultivation and rehabilitatio 1 i Private estates come under the Inspectorate of Estates of the Directorate of Estates in the Ministry of Agriculture. Although the Inspectorate of Estates is responsible for the provision of technical

15 -5- advisory services, staff shortages have made this impossible and the major activity of the Inspectorate has become the collection of statistics. There are two private organizations whose aim is to assist private estates with technical advice: the Estates Syndicate and the Indonesia Development Corporation. Both lack the staff and resources to provide adequate technical expertise. C. Future Development 2.12 Failure to arrest the decline of the private sector tea industry would have serious economic and social consequences for the tea growing regions living standards will decline by neglecting tea rehabilitation; and there is a danger that at least the smallholder sector would ceas- to play an important role in the tea economy. Unless measures are taken to prevent it, an increasing share of Government tea production, most of which is now exnorted, would be diverted into the domestic market thereby reducing export earnings. Alternatively, domestic consumption would be further reduced affecting particicularly the lower income groups since tea is the cheapest beverage available in Indonesia. Government recognizes the need for such action and affords it high priority. To date# however, it has been unable to take any action and has turned to IDA for assistance for the proposed project. It should also be noted that the production of alternative crops is limited by climatic and geographic factors. Those crops that can presently be grown are less labor intensive, face market restrictions and are economically less attractive than tea. However, in view of the world tea market situation described in para 7.03 and the fact that large areas of tea are gradually going out of production it is necessary to explore the possibilities to grow alternative crops on tea land in West Java. The proposed project provides funds for diversification trials. III. THE PROJECT AREA 3.01 Location and Conditions. The smallholder component and most of the private estate component of the project would be in West Java within a radius of about 100 km of Bandung, the West Java capital. The smallholder field development would be concentrated in the three areas of the province which have the highest density of smallholdings, namely Tasikmalaya/Garut, Bandung/Purwakartand Sukabumi/Cianjur (see map). Six private estates which would be considered for rehabilitation are in Central Java within a radius of 100 km from Jogjakarta, the capital. Climatic conditions in these areas are very favorable for tea cultivation. Soils throughout the areas are also suitable. Most of the crop is grown at altitudes below 700 meters, and there exists a ready domestic market for the resulting type of low and medium grown tea. Ph values tend to be slightly high for tea, averaging about 6.0, but these can be reduced by appropriate fertilizer application.

16 Communications. All main towns in the tea growing areas are served by good rail links with Jakarta and the ports of Tandjong Priok and Tjirebon. There is a reasonable network of roads and most are all-weather surfaced. Surface conditions would, however, be greatly improved by regular maintenance, and assurances were obtained from Government during negotiations that satisfactory maintenance would be undertaken. A list of the roads serving the tea region is in Annex 16. j.03 Population and Labor. The total population of the six main tea growing regions - Sukabumi, Cianjur, Bandung, Purwakarta, Garut and Tasikmalaya-is about 7.5 million and of this, some 5 million (66%) are dependent on agricultural production. Project labor could be supplied from the dense population of West Java. There may be some isolated areas where temporary shortages would occur but these could be alleviated to a large extent by the more efficient use of the existing labor force and the use of agricultural chemicals to reduce the need for field maintenance labor Credit Facilities. Smallholders do not have access to any institutional credit to finance their tea production. Short-term credit is often extended by tea buyers or private money lenders, but interest rates are high and the borrower is frequently obliged to commit his future leaf production to the lender. Bank Rakyat Indonesia (BRI), the designated bank for smallholder credit, has to date allocated much of its limited resources to the growing credit requirements of the Bimas Rice Intensification Program, which is restricted to the production of paddy and its rotation crops. Credit for the production of tea on private estates is available, principally from Bank Bumi Daya. However, estates have only taken working capital loans because the 5 years maximum term for investment credit is prohibitive for rehabilitation in view of the deteriorated state of tea gardens and the long gestation period of replanted tea. At present, state banks, including BRI, do not extend long-term credit Land Tenure. The Basic Agrarian Law of 1960 provides that all smallholder land be state-controlled, although not state-owned. It requires the registration of smallholdings and the issuance of titles thereto. In some cases the lease entitlements of estates are not clear, because of previous nationalization and later transfer to new owners. Assurances were obtained from Government during negotiations that estates participation in the project would be limited to those owned by Indonesian-based legal entities, free of title disputes, and holding concessions which cover at least the credit repayment period, or that would be extended to cover this period Processing. Except for the factories of government estates, all processing facilities are privately owned. Most are located on estates and at one time were processing both estate and smallholder leaf. The majority of factories are antiquated and in need of repair. In two areas (Garut and Purwakarta) capacity is insufficient to cope with present production. The proposed project provides for the construction of one new factor? in each area.

17 IV. THE PROJECT A. General Description 4.01 The project is designed to increase the productivity of the private sector tea industry in West and Central Java, thereby enabling it to meet the demand of an expanding domestic market. This would be achieved by the provision of credit and technical assistance for the rehabilitation of smallholder and private estate tea gardens and through the modernization and expansion of black tea processing facilities. To support this effort, a specialized extension service would be instituted to advise growers on modern methods of tea cultivation; tea nurseries would be established to ensure the availability of high quality planting material; and training facilities and programs would be developed at tea research stations to train both extension officers and tea growers. Growers would be free to sell leaf to both black and green tea processors, but onlv black tea factories would be financed under the project since the expected increases in the future demand will be concentrated on black tea. The size of the project is limited principally by the availability of proven planting material and by the number and capacity of staff to organize and administer the rehabilitation. In West Java, 3 project areas have been selected (see Map), and in Central Java, 6 estates would be considered for project participation. Project output would be well within domestic market requirements The project would be carried out over eight years, 1973/74 through 1980/81. Principal project components would be: (a) Provision of credit through BRI for: (i) rehabilitation of 10,000 ha smallholder tea including 3,500 ha of replanting (involving about 7,700 smallholders); (ii) rehabilitation of 3,200 ha private estates tea including 2,000 ha of replanting or replacement planting; (iii) rehabilitation of 5 private estate black tea factories; (iv) construction of 2 new black tea factories for smallholder leaf. (b) Training and expansion of a specialized tea extension service within the Ministry of Agriculture for all tea growers in West and Central Java. (c) Establishment of a Project Management Unit (PMU) within the Ministry of Agriculture to:

18 - 8 - (i) direct and administer the extension service; (ii) coordinate and conduct training of extension officers and tea growers; (iii) operate nurseries; (iv) develop and supervise the technical aspects of the smallholder and estates field rehabilitation program; (v) advise on and approve the construction and rehabilitation of factories. (d) Provision of funds for: (i) a survey of the domestic tea market; (ii) overseas travel of PMU staff to study other tea growing regions; (iii) staff training to assist BRI in project execution; (iv) a management study of BRI; and (v) diversification trials to study the possibilities of tea growers diversifying into alternative crops. B. Detailed Features 4.03 Field Rehabilitation. The field rehabilitation program would consist of the improvement of existing bushes through the application of fertilizers, pesticides, and better management, and the replanting of suitable areas too run down for bush rehabilitation. Root disease is widespread in the project area and its presence in most plots to be replanted would require that the land be left fallow for 2 years after the old bushes were uprooted. The PMU would select smallholders and private estates for project participation in accordance with criteria presented in Annex 5. Estates with unused lands suitable for tea cultivation could engage in replacement planting whereby new areas would be planted while less suitable areas were simultaneously phased out of production. Before being considered for the project, estates would be required to present a rehabilitation program to the PMU for approval. All field rehabilitation under the project would be phased in accordance with the projected availability of proven planting material and to permit the requisite build-up of the extension service. Replanting and tea improvement would start in 1973/74 and be finished in 1978/79 in line with the following schedule:

19 - 9- Project Year Fiscal Year 1973/ / / / / /79 Total (hectares) Smallholders Replanting ,350 1,350 3,500 Improvement ,480 2,530 6,500 Estates Replanting ,000 2,000 Improvement ,200 Total ,060 2,330 4, ,200 Priority would be given to smallholders in the allocation of planting naterial in the early stages of the project. The density of bushes in the replanted area would be 13,500/ha, the optimum density established by research evidence. Further details of the proposed field rehabilitation program are presented in Annex Factories. Provision is made for the rehabilitation of 5 private estate black tea factories in the project area to increase their capacity to process their own and smallholder leaf, and to improve the quality of tea output (see Annex 7). Rehabilitated factories would be owned and managed by their present estate owners. During the selection of factories to participate in the project, the PMU may identify specific managerial weaknesses. In such cases it would be a condition of sub-loan approval that competent factory management be recruited by the estate, either on a staff or consulting basis. Although factories were tentatively selected by the appraisal mission, the PMU would be responsible for final selection. Two new factories would also be constructed in areas where there is insufficient processing capacity. It is proposed that PT XII or XIII 1/ own and manage the factories. However, provision would be made for smallholder cooperative ownership of the two new factories at a later date through provision of funds for share purchase from a cess. The price to be paid for green leaf supplied to all project factories would be based on a formula which was discussed and agreed upon during negotiations. Provision for all factories includes staff housing and vehicles to implement a leaf collection service. To ensure full utilization of existing and future factory capacity, assurances were obtained during negotiations that the Ministry of Industry, which grants licenses for new factory construction, would operate on the advice of the PMU or its successor regarding suitability of the location and size of all future tea factory proposals for West and Central Java. 1/ Government-owned tea estates in West Java. See IDA Credit 259-IND for details.

20 Training. The training of both extension officers and tea growers would be conducted at the Bogor Research Center and the new tea research station to be established at Gambung (see Annex 8). Additional dormitories, staff housing, classroom facilities, and teaching aids would be provided under the project to accommodate this training program Extension Service. The Ministry of Agriculture has insufficient experienced staff to provide a satisfactory extension service for tea growers. Under the project, the Ministry would recruit or second additional staff to the PMU to provide about 125 full time tea extension officers. This number would be sufficient to provide one officer for each 100 smallholders within the project and one for each 500 outside the project. Assurances to this effect were obtained during negotiations. PMU staff would also provide technical assistance to estates. Sufficient vehicles and equipment would be provided to enable PMU staff to serve farmers within and beyond the project Organization. The project would be carried out by a Project Management Unit (PMU) to be established in the Ministry of Agriculture and located in Bandung. The unit would enjoy adequate managerial autonomy and financial flexibility and be headed by a manager responsible to a Project Management Board (PMB) in Jakarta. The Chairman of the Board would be the Director General of Estates in the Ministry of Agriculture. The Project Manager would be assisted by an internationally recruited Chief Project Advisor, and three other internationally recruited executive consultants who would fill the positions of Accounting Systems Specialist, Technical Development Officer and Factory Consultant. Details of the organization and responsibilities of the PNU and the PMB are in Annex 9. Conditions of effectiveness include: that the PMB, with members appointed, has been established with terms of reference satisfactory to IDA, that the PMU has been established, and that the Project Manager has taken up his duties. Appointments of the internationally recruited executive assistants would be subject to IDA's approval and would also, with the exception of the Factory Consultant, constitute a condition of effectiveness Nurseries. Replanting and replacement planting under the project would mainly be done with proven VP 1/ planting material. The VP material presently available allows only modest replanting in the early stages of the Droject. Some high-yielding seed material would therefore be used (ffr not more than 150 ha) to prevent delays in the planting program. About 4 ha nursery plots would be established in 1973 to provide plants for 10 ha of multiplication plots and 100 ha smallholder replanting in Nurseries would be extended gradually to about 15 ha. The annual output of these nurseries would be about 6 million usable plants by 1975/76. To increase annual plantings to 2,350 he for the last 2 years of the project, it is recommended that selected tea growers be encouraged to establish a total of about 45 ha of private nurseries. Assurances were obtained accordingly at i!1 Vegetative propagation; rooted cuttings grown in polythene bags.

21 negotiations. Until 1976/77 part of the leaf cuttings for nurseries would have to be supplied from outside the project. These supplies can be obtained from the Research Institute for Estate Crops (RIEC) and PTP's XII and XIII. In order not to delay the planting program, Government has already started the establishment of nurseries, appointed nursery managers, and signed contracts for the purchase of VP cuttings and seeds. As soon as the PMU is established, it would assume the management of nurseries and multiplication plots and would provide technical assistance to private nurseries. Annex 10 gives details of the nursery program Diversification Trials. A large area of smallholder and private estate tea outside the project has deteriorated too much to be suitable for rehabilitation through better management and cultivation practices. Large scale replanting would be the only means to turn these areas into economically viable tea gardens. This is not contemplated in output projections in Annex 3. In view of the world market situation for tea and the fact that production expansion beyond that projected would likely enter the world market, diversification out of tea should be considered. Presently few suitable alternative crops are known. Funds are provided under the project for consultant services and diversification trials at the Bogor research institute and its outstations. V. COST ESTIMATES AND FINANCING A. Cost Estimates 5.01 Project costs from 1973/74 through 1980/81 are estimated to total Rp 6.4 billion (US$15.4 million) of which about Rp 3.2 billion (US$7.8 million) or 50% of project costs would be foreign exchange. Project costs are detailed in Annex 11, Tables 1 to 6 and summarized in the following table:

22 Estimated Project Costs, 1973/74 through 1980/81 Rupiahs Million US$'000 Foreign Local Fore&n Total Local Foreign Total Exchange Su"11lholder Field Development ,505 1,903 1,725 3, Estate Field Development , , Factories Rehiabilitation ,190 1, New Factories , ,142 *778 1,975 2, Project Management Unit Investment Con*;ultants Operating Expenses / ,605-1, ,016 1, , /2 Technical Assistance Subtotal 2,367 2,271 4,638 5,704 5,473 11, Contingencies Price ,704 1,869 2,235 4, Physical ,762 1,917 2,327 4, Total 3, /I Includes cost of in-country training at Bogor (Rp 86.9 million). /2 Includes cost of overseas training for PMU staff and diversification trials. Costs are based on recent experience in Indonesia, particularly costs experienced under the Tea Estates Project (Credit No. 259-IND). Field development costs have been calculated on the basis of 100% of land clearing costs plus the cost incurred during the first 3 years for all replanted or planted areas, and the incremental costs incurred during the first 3 years for rehabil:tated areas. A price contingency of 5% compounded annually has been applije to all project costs except for the foreign exchange of factory mac'..inery where a price contingency of 8% compounded has been applied. This is in line with price increases experienced for the past 3 years. A

23 - 13-5% physical contingency has beaen included in all factory subprojects. No physical contingency has been provided for field development, the PMU or technical assistance. Investments by PMU and technical assistance expenditures would be affected only by inflationary factors, while adjustment in the area covered would be made to allow for under-estimation of physical quantities in fleld development It is too early to trace the full effect of the recent (February 13) US dollar devaluation on project foreign exchange costs. In terms of the US dollar the value of the Indonesian rupiah did not change. However, imports under the project would include factory equipment, vehicles and fertilizer and at the time of appraisal most of these were being imported from the UK, Holland, Japan and Germany. Except for the UK, currencies of the other countries have appreciated in terms of the US dollar. Unless the import supply structure changes, a rise in prices can be expected. To allow fully for such eventuality, foreign exchange costs for the project have been raised by 10%. (This margin has been added to price contingencies.) Smallholder field development would account for 23% of project costs; estate field development, 13%; factory rehabilitation and construction of new factories 18%; the Project Management Unit, including training, extension and nurseries, 16%; technical assistance, 3%; and contingency, 27%. The two principal foreign exchange components are fertilizer and pesticides, (US$2.4 million); and factory machinery, (US$1.5 million). B. financing Arrangements 5.03 It is proposed that an IDA credit of Rp 3.2 billion (US$7.8 million equal to 50% of project costs) be extended to the Government of Indonesia. Government's direct contribution to project costs would be Rp 949 million (US$2.3 million equal to 15% of project costs) to meet the local costs of the PMU and technical assistance. Gross contribution by BRI would be Rp 1.6 billion (US$3.9 million equal to 26% of project costs). This gross BRI contribution would consist of 20% deposit funds and 80% borrowing from Bank Indonesia in accordance with the standard Investment Credlt Formula. Net BRI contribution would therefore be Rp 327 million (US$788,800) or 5% of project cost and total Government contribution would be Rp 2.3 billion (US$5.4 million) or 35% of project costs. Sub-borrowers under the project would contribute US$1.4 million or 9% of project costs. In summary the project would be financed as follows:

24 Proposed Financing Plan 1973/74 through 1980/81 (US$ '000) IDA % BRI Z Govt. % Sub.!± 2 Total Fertilizer and Pesticides 3, ,876 Planting Material - - 1, ,816 Field Labor - - 1, ,532 Estate Field Equipment Estate Development Plans Estate Housing Subtotal 3,340 3, ,576 Factory Equipment and Vehicles 2, _ ,214 Factory Civil Works Factory Design and Supervision Subtotal 3,221-1,099 4,320 PMU Vehicles and Equipment PMU Civil Works PMU Consultants PMU Operating Expenses , ,124 Subtotal 850-2,224 3,074 Diversification Trials Overseas Study BRI Project Asst BRI Study Marketing Study Subtotal Total (US$'000) 7,800 3,944 2,286 1,391 15,421 (Rp Million) 3,237 1, ,400 Percent /1 Sub-borrower.

25 IDA's share of costs incurred by the PMU, including the marketing study, overseas training, project assistance in BRI and diversification trials, would be allotted to the Ministry of Agriculture and funds would be made available directly to the PMU. The balance of the IDA credit, for field and factory development and the BRI Management Study, would be channelled through Bank Indonesia (The Central Bank). Funds for Field and Factory Development would be onlent by Bank Indonesia to BRI. It is a condition of Credit effectiveness that a Subsidiary Loan Agreement acceptable to IDA had been executed between Government and BRI. Discussions during negotiations indicated that the onlending rate to BRI would be 4% per annum. These funds, together with BRI's contribution would be extended to sub-borrowers at 12% in compliance with the present Government policy on agricultural lending. Twenty-five percent of estate incremental labor costs, the cost of the estate development plan and 15% of estate field equipment would be borne by estates. Estates would also contribute 25% of the factory rehabilitation costs and the owners of the 2 new factories would contribute 35% of the costs of these factories as equity. The remaining estate incremental labor costs and all smallholder incremental hired labor costs would be financed by credit at 12% interest from BRI. Smallholder contribution to the project would take the form of incremental family labor. The Government would meet its share of project costs for PMU expenditures from budgetary resources. Assurances were obtained during negotiations that Government would ensure the timely availability of sufficient liquid funds to PMU for the execution of its responsibilities under the project. Bank Indonesia would contract for the management study of BRI, and the PMU for the marketing study The projections shown in Annex 14 Table 2 indicate that revenue earned by the PMU, from the sale of planting material would amount to about Rp 275 million over the 8 year project period. While these revenues would not accrue directly to the PHU, they would reduce the net contribution of Government to Rp 674 million (US$1.6 million). C. Procurement 5.06 Fertilizers, pesticides, machinery for new factories, and vehicles, amounting to Rp 1.5 billion (11S$3.5 million), equal to 32% of project costs, would be procured under international competitive bidding in accordance with IDA Guidelines. International competitive bidding would not be practical for the procurement of machinery and equipment for factory rehabilitation. For this category, compatibility of the new goods with existing installations would be essential. The five factories are separately owned, would be rehabilitated over a three-year period, and would each require a different mlx of machinery and equipment items, making each contract small and bulking impracticable. For this category, amounting to about RD 469 million (US$1.1 million equal to 10% of project costs), prudent shopping would be acceptable, including the solicitation of at least three local quotations, except in cases where standardization requires the specification of a particular make. Civil works for factories and training facilities, and office equipment and teaching

26 aids for the PMU, amounting to about Rp 359 million (US$0.9 million) equal to 3% of project costs, would be procured under local competitive bidding, since the size of individual contracts would be too small to attract international bidding, and bulking of contracts is not practicable. PMU would conduct tendering for fertilizer and pesticides, and would review and approve tenders or factory machinery and civil works, to be conducted by owners with the sc <stance of their appointed consultants. For purposes of bid comparison, ereference of 15% or the actual duty rate, whichever is less, would be afforded co qualified domestic manufacturers. Estates would be individually responsible or housing construction (US$200,000), under cost guidelines specified by 3BR! and the PMU would make its own arrangements for land preparation and civil works pertaining to the nurseries (US$.01 million). The appointment of consultant engineers for factory design and supervision, the Chief Project Advisor and executive assistants for the PMU, the Financial Advisor for BRI, and consultants for the market and diversification studies and the BRI management study (US$.9 million), would be subject to IDA approval, and would be made on terms and conditions acceptable to IDA For the distribution of fertilizer and pesticides, the PMU would conduct tendering among local distributors based on: (a) delivery by the bidder to specified field locations in accordanc:e with anticipated local requirements; and kb) adequate field staff and depots of the bidder to ensure effective administration of material sales and distribution For all goods to be financed in whole or in part by IDA, assurances were obtained that: (a) draft tender documents for all contracts exceeding US$50,000 would be submitted to IDA for approval as would bid analysis and selection before award; and (b) for factory-related tenders, consultants would assist in the preparation of tender documents and specifications, (see Annex 7). D. Disbursements 5.k" 9 Disbursement of the IDA credit would be as follows:

27 Category US$'000 % I. Fertilizer and Pesticides and field equipment 2, II. Factory Equipment and Vehicles 1, III. Factory and PMU Civil Works IV. PMU expenditure for office, field and teaching equipment and vehicles 75 1 V. Consultant's services and technical assistance 1, VI. Unallocated 2, Total 7, Estimated disbursements by category are detailed in Annex 12, Tables 1 and 2. For fertilizer and pesticides, IDA would reimburse Bank Indonesia for 85% of the cost (the foreign exchange component) of materials delivered to sub-borrowers. For machinery, equipment and vehicles, reimbursement would be made to BRI against c.i.f. documents (100%) or in the case of locally procured goods, 95% of ex-factory cost or 83% of off-the-shelf cost. 35% of the cost of completed civil works would be disbursed against acceptable documents, and 100% of the foreign exchange costs of technical assistance would be disbursed quarterly against invoice from the PMU, or from Bank Indonesia in the case of the BRI management study. Any surplus funds would be used for additional credit to smallholders for field rehabilitation. E. Accounts and Audit 5.10 Assurances were obtained from Government during negotiations that separate accounts would be kept by the PMU, and that, within the limits of government requirements, such accounts would be established in accordance with the recommendations of the PMU Accounting Systems Advisor. Assurances were also obtained that an independent auditor satisfactory to IDA would be employed to audit the accounts, that the form of audit would be agreed with IDA, and that such audited accounts would be made available to IDA within 4 months of the close of each financial year BRI is also required to maintain separate project accounts. These records would be established in accordance with the recommendations of the Financial Advisor, and quarterly summaries would be forwarded to IDA and the PMU. Both the accounts and the summary would show receipts from IDA and other sources separately, and disbursements separately according to smallholder and estate field development, estate factory development, and new factory construction. BRI would require the maintenance of proper, separate

28 records by estate and factory sub-borrowers, to be audited by independent auditors approved by BRI. BRI accounts are audited by an independent firm. Assurances were obtained during negotiations that audited annual statements of BRI project accounts would be forwarded to IDA within 4 months of the fiscal year end, together with the auditor's certification that disbursements had been made in accordance with terms and conditions of the onlending agreement. VI. ORGANIZATION AND MANAGEMENT A. Project Management Unit 6.01 Or anization. A Project Management Unit (PMU) would be established in the Ministry of Agriculture. Details of its organization, its responsibilities, and staffing are in Annex 9. The Unit would be headquartered at Bandung, and have 1 field office in each of the 3 project areas. The unit would enjoy an adequate measure of managerial and financial autonomy and be headed by a general manager responsible to a Project Management Board (PMB). The chairman of the board would be the Director General of Estates, and he would report directly to the Minister of Agriculture. The Director of Smallholder Estates would be a member, as would one senior representative of each: the Estates Syndicate, the National Planning Agency (Bappenas), the Ministries of Finance and Interior, BRI and other parties appointed by the Minister of Agriculture on the basis of their background and ability to contribute to the development of the private sector tea industry. The PMB would be charged with a review of PMU policy decisions ensuring that the interests of all affected parties were considered in PMU decisions, and that duplication of efforts among institutions concerned with tea development was avoided. The PMB would be responsible for submission of the PMU's budget to the Ministry of Agriculture. Approval of the initial budget 1. a condition of effectiveness. To facilitate project implementation, and to coordinate field activities, Advisory Committees would be established at the Kabupaten (regency) and Kecamatan (county) levels. Their membership would include members of the smallholder extension service as well as representatives of private estates organizations. This system of committees is similar to that now used in the Bimas Rice Intensification Program and has been found to be an effective vehicle for local administration Staff Salaries. The present schedule of civil service salaries would be inadequate to meet the living costs of staff of the PMU. Since staff requirements for the PMU have been based on full-time employment in the assigned activities, effective project implementation would be contingent upon the provision of higher salaries than those now offered for similar positions elsewhere in the Ministry of Agriculture. A salary scale similar to that of Government estates staff with similar experience is proposed. Assurance of higher salaries were obtained from Government at negotiations.

29 Extension Service. The unique problems of tea cultivation, and the great number of tea growers, dictate the need for a specialized cadre of extension officers advising solely on tea production. The proposed extension service is based on about 125 Junior Tea Officers each responsible for advising approximately 100 project tea growers or 500 growers not participating in the project. Direction and specialist advice would be provided by Senior and Junior Tea Officers. The composition of the extension service is indicated in Annex 9, Table 1. To increase the exposure of growers to good husbandry practices, the extension service would promote the establishment of demonstration plots and farmers' groups which could serve as regular forums for the dissemination of technical and marketing information Nurseries. One PMU nursery would be established by the PMU in each project area, each consisting of 5 ha of nursery plots and about 3-1/2 ha of multiplication plots. Each nursery would have its own manager, but the sale of planting material would be directed by the PMU in accordance with the field rehabilitation program of the project. Private growers would receive technical assistance from the PMU to establizh about 45 ha of nursery plots in the last two years of the project Training_. Training facilities at the Bogor Research Station (RIEC) would be expanded and qualified staff engaged to provide the following program: (a) 1 month training for Junior Tea Officers; (b) 1 month training for Senior Tea Officers; (c) 2 week training for selected tea growers; (d) 1 week refresher courses, annually, for Junior and Senior Tea Officers. Part of the training program would also be carried out at Gambung after the establishment of the research center. In addition, as part of technical assistance under the project, 10 senior officers of the extension service would be sent abroad for 2 months of training and observation in other tea producing countries. Training for Mantris (Village Unit Managers) and Peniliks (County Inspectors) of BRI would be conducted in Bandung under the direction of the Financial Advisor, and at the Bogor Research Station, in cooperation with the PMUk 6.06 Consultants. To assist the PMU in project execution, and to advise and train counterpart staff, several experts would be internationally recruited. - Chief Project Advisor, for 4 years; - Accounting Systems Specialist, for the first year of the project; - Technical Development Specialist, for 4 years; and - Factory Consultant, for 3 years beginning in the second year of the project. A Financial Adviser would also be appointed to assist BRI in project execution, and consultants would design and supervise factory construction and rehabilitation.

30 Project Performance. Assurances were obtained during negotiations that the PMU would conduct an annual review of project performance, and submit to IDA, within 4 months of the fiscal year end, a performance report summarizing achievements during the period. Draft terms of reference appear in Annex 9 Appendix 1. B. Bank Rakyat Indonesia 6.08 Description. Bank Rakyat Indonesia (BRI) is one of the largest of the 5 state-owned banks in Indonesia. Although more than 50% of its business volume is ordinary commercial banking, BRI's credit is extended principally to smallholders and small rural industry. Through a network of Village Units and Mobile Units, BLU is able to provide good coverage of rural West and Central Java, including the project area. It is through these units that credit for the entire Bimas Rice Intensification Program and its affiliated programs is being channelled. This arrangement has proven effective for broad credit distribution, and only about 20% of receivables under the present scheme are in arrears. There remains, however, a need for better loan appraisal and supervision. Under the proposed tea project, Mantris (Village Unit Managers) and Peniliks (County Inspectors) would receive special training in the appraisal and supervision of tea loans Credit Distribution to Smallholders. Credit to smallholders would be principally in the form of input supplies although there would be cash credits to meet the cost of incremental hired labour. Application for a project loan would include input specifications prepared by a Junior Tea Officer, and his verification that the applicant demonstrates the good husbandry practices required for project participation. Upon satisfactory credit check by BRI and establishment of the applicant's right to cultivate the specified plots, BRI would issue supply certificates to be surrendered to the specified supplier. This system is similar to that presently used under Bimas. Cash credits would be disbursed monthly in accordance with the approved schedule of labor requirements provided by the tea officer at the time of application. Borrowers' operations would be inspected regularly by the extension service. BRI would seek annual confirmation from the extension service, in writing, of satisfactory performance by the borrower. Details are in Annex 13. Any default of interest payment during the 5 year grace period would result in BRI's withholding any further credit Credit Distribution to Estates. Estates wishing to participate in the project would submit a development plan to the PMU for approval. Assistance in technical aspects would be provided by the PMU. After a satisfactory plan had been worked out, application would be made to BRI, which would then conduct a financial and managerial appraisal of the applicant. Supply certificates would be issued for fertilizers and pesticides. Disbursement for other inputs would be made by BRI against invoices and pay receipts for authorized expenditures within the development plan. In the case of factory rehabilitation, compliance with contract terms and conditions would be a condition of payment. In respect of all field development loans, BRI would seek semi-annual confirmation in writing from the PMU, that performance

31 of individual borrowers had been in accordance with borrower obligations under the development plan and sub-loan agreement Credit for New Factories. For new factory construction, BRI would disburse against invoice for work conducted in accordance with contract terms and conditions. Adequate arrangements for supervision and inspection by appointed consultants would be a key element of construction and installation contracts, and factory owners would be expected to conduct the majority of their operational banking with BRI for the duration of the repayment period Technical Assistance. BRI is the most suitable credit channel for the proposed project. However, some technical assistance would be required to ensure satisfactory project execution. Under the project, an internationally recruited Financial Advisor would be appointed for a period of 18 months to assist BRI in the implementation of an effective project accounting system and to advise operating staff on the appraisal and supervision of project sub-loans. BRI staff would also receive an orientation in tea cultivation and marketing under the project's training program (para 6.05). In addition to project assistance, there is a need for a comprehensive study of BRI's medium- and long-term loan organization and management. The objective of the proposed study would be to identify the most suitable means of strengthening BRI's capacity to extend medium- and long-term credit in rural areas and assistance in the implementation thereof. VII. YIELDS, PRODUCTION, MARKETTNG, PRICES MTD FTYTANCIAL RE8snTS A. Yields and Production 7.01 Present yield and production data were established by the CDC mission in its project identification report which included a survey of 540 smallholders in the main tea growing areas and of the 59 private estates in West and Central Java. Yield projections have been based on experience tn the project area, particularly yields achieved by PT's XII and XIII which are now in the process of rehabilitation. It was assumed that the production potential of established smallholder and private estate tea would be 1,100 kg/ha and 1,200 kg/ha respectively with full stands and good management. Hlowever, project estimates have been adjusted to reflect thle prevalence of stand densities of less than 100%. Smallholder yields are projected to increase to 730 kg/ha and estate yields to 900 kg/ha. For replanted or newly planted VP material, yields were projected to increase to 1,600 kg/ha for srallholders and 1,700 kg/ha for estates The production generated by the project would be about 2,000 tons in 1980/81 and about 9,000 tons in 1985/86. Total production from smallholders and private estates would decline from 21,100 tons in 1972/73 to

32 ,S00 tons in 1980/81 because the increase in project output would be insufficient to compensate for the decline in production on the non-rehabiitated area. Fror 1980/81 to 1985/86 total production from smallholders and private estates would increase by 6,800 tons, resulting in a net increase of 4,200 tons over present production. Further details are in Annex 3, Table 5, and Annex 6, Tables 3 and 4. B. Marketing 7.03 Project tea would be sold in the domestic market. In spite of a larg,e demand potential, local consumption has declined during the 1960's because of a supply shortage as indicated in Annex 3. Present per capita consulmntion is about 160 grarm/year compared with about 500 grams in The greatest potential for expanded domestic consumption lies in the marketing of blac! tea. Green tea is preferred by some sections in the rural areas of West and Central Java and accounts for about 70%, of total domestic tea consumption. It has, however, limited growth potential and the major expansion in consumetion will be concentrated on black tea Two-thirds of Indonesia tea production is presently sold on the world niarket. Nearly all of these exports are supplied by Covernment estates. Accordinig to a study by the Bank's Commodities and Export Projections Division which was circulated to the Board 1/ the international tea market in 1980 is likely to be characterized by oversupply and wealcened prices from their recent levels. These projected lower prices have been taken into account in the financial and economic analyses (see para 7.08). However, ^f -ecnnsc tie large potential domestic market, it is unlikely that projet:t teai would be exported and' add to the excess supplies con the world market. 2,' 7.05 Ir order to develop the domestic market the distribution syster mlrn7 be iroroved and extended. One immediate improvement would bo tne expansion of the Jakarta auctions to include the purchase and sale of black- teas for the domestic market. Other improvements of the distribution svstem cannot he effected quickly, but early improvement is not imperative for the Project since total private sector production would continue to decline in the early years until gains from the project were sufficient to compensate for the general decline of the sector. Funds would be provided under the project for a study by consultants to suggest ways and means of improving the marketing svstem At Dresent, the collection and processing of smallholder leaf is fragmented and disorganized (see Annex 3). It is frequently tied to 1/ "TThe International Tea Market, Review and Outlook for Bank Lending in "; Sec. M72-655, December 20, / With the project, the total increase of private sector tea production in 1985/86 over 1971/72 output is 4,000 tons, compared with estimated world exports in 1985 of about 900,000 tons.

33 high-cost credit arrangements, and price response to market changes under these conditions is very limited. The rehabilitation of estate factories and the construction of 2 new factories under the project would provide an opportunity to reestablish a more efficient, centralized flow of tea from producers to processors. The project would permit a return to the processorproducer relationship of the estates and nearby smallholders which has been abandoned with the deterioration of estates since the 1950's The manufacture of green tea, particularly into scented tea, should not be adversely affected by the project since increased production would exceed the capacity of rehabilitated and new black tea processing facilities. Competition among the various processors, which would be enhanced by the project, could only act to the benefit of the growers. C. Prices 7.08 The quality of leaf produced by smallholders is usually lower than that supplied by private estates. Although comprehensive data are not available the mission found that smallholder green leaf prices averaged Rp 25/kg as against Rp 40/kg for good quality teas from private estates. It should be possible through the project to raise leaf quality to at least the present standards of better estates tea which implies that grower prices should increase in real terms to about Rp 40/kg during the second part of the 1970's. International tea prices are expected to decline (see Annex 3), and some downward pressure can be expected. Consequently the financial and economic analyses of the project are based on projected green leaf prices increasing from Rp 25/kg in 1972 to Rp 35/kg in The latter price is equivalent to a price of Rp 300/kg for made black tea Accurate price information for black tea sold on the domestic market is not available, but prices for teas sold on that market are approximately at the same level as export prices considering quality. Prices for export black tea from Government estates ranged from Rp 280/kg to Rp 330/kg in It may be assumed that tea from private estates after rehabilitation would be comparable to the average quality of Government estates tea. These teas have been increasing in price due to quality improvements inspite of falling world market prices. This price development for Indonesian teas on international markets was predicted at appraisal of the Tea Estate Project (259-IND). At that time export prices for estates tea were projected to increase from Rp 280/kg in 1971 to Rp 330/kg in 1980/85 taking account of the decline in w;orld market trends. Assuming that increases in prices after 1972 due to quality improvemnent would be offset by price declines due to the international market situation, it is reasonable to assume that a price of Rp 300/kg corresponding to Rp 35/kg green leaf should be obtainable for private estates. An f.o.b. price of Rp 300/kg corresponds to a European market price of US4 82/kg, which is still about US4 10/kg below the average price of tea at London auction projected by the Bank's Commodity and Export Projection Division for 1980.

34 D. Operating Results 7.10 Details of the financial analysis are in Annex 14. Based on cost and benefit comparison with and without the project, the rate of return on investment for smallholders would be 27% over a 30-year period (Table 5). Benefits are sufficient to repay the debt at 12% over 10 years after a 5-year grace period. The rate of return for estates field development would be 12%' (Tables 6 and 7). Net income from the project would enable the borrower to repay the loan at 12% over 10 years, after an 8-year grace period. The longer grace period for estates reflects the higher proportion of replanting, and the complete dependence on hired labor. Both smallholders and estates would pay interest during the grace period. The rate of return for the rehabilitated factories was calculated at 17% over 25 years. The borrower would be able to repay the loan of Rp 99 million (US$240,000) at 12% over -0 years, after a 5-year grace period in which interest would be paid (Table 8). Investment in a new tea factory would yield a 14% rate of return. On the basis of 35% equity financing, the borrower would be able to repay the loan at 12% over 10 years after a 5-year grace period during which interest would be paid (Table 9) Bank Rakvat Indonesia. A statement of the sources and application of funds for BRI's participation in the project is in Annex 14, Table 3. In addition to debt service, administration, and supervision expenses, provision has been made for arrears and bad debts. 20% of all receivables have been delayed by 2 years, and 2-1/4% of all receivable were written off as bad debts. This bad debt figure is a weighted average of 4% for smallholders and 1% for estates and factories. Including these delinquency provisions, the project would generate sufficient funds for BRI to meet all obligations including the cost and replacement of its own funds. The repayment period for the credit onlent to BRI would be 20 years including a 10-year grace period. Interest would be paid at the rate of 4% per annum Government of Indonesia. The total direct contribution of Government to the project would be Rp 949 million inclusive of contingencies (para 5.03). Revenues from the sale of planting material would reduce the net contribution to about Rp 674 million (US$1.6 million). Substantial additional revenue would be earned as interest on funds onlent to BRI (Annex 14, Table 4) and from the cess of Rp 3/kg on additional processed leaf resulting from the project. VIII. BENEFITS AND JUSTIFICATION 8.01 The project would halt the rapid decline in private sector tea production, and by 1985 would result in an increase of about 4,000 tons over present production levels. Production would be consumed in the domestic marksrt which has a large potential, particularly since tea is the cheapest beverage available, and thus benefits particularly the lower income groups. Moreover, the increase in production would facilitate an increase in per

35 capita consumption to only 290 grars, which is below that achieved in other major tea producing countries At the projected price of Rp 300/kg for dried black tea, the increase of 4,000 tons plus the production compensating for projected declines without the project (6,000 tons) would have an annual wholesale value of about Rp 3.0 billion (US$7.2 million). Considering the strong demand on the domestic market it is likely that these 10,000 tons, which would not be produced without the project, would be supplied from Government estates production and correspondingly reduce exports. Thus the above wholesale value would represent about the foreign exchange earnings that would be lost without the project As a result of increased production and quality, about 7,700 smallholders participating in the project would realize an increase in annual net income of Rp 81,000/ha at full development (from Rp 36,000 to Rp 117,000). Expected declines without the project, would increase the net benefit to Rp 97,000 per year. These estimates are based on prices indicated in para 7.07 and take account of an increase in the real cost of hired labor of Rp 25/day. By 1980, estates' net income from leaf production would increase by Rp 9 million per year per 100 ha (Rp 11 million, adjusted for expected yield declines). The overall effect of the project on net farm income would be annual increases of Rp 970 million (US$2.3 million) to smallholders, and Rp 335 million (US$807,000) to estates. The project would create about 5,000 jobs for field and factory workers at full development The economic rate of return for the project is calculated at 15% on total investment excluding the BRI management study and diversification trials. Details are In Annex 15. All costs and benefits under the project have been assessed on an incremental basis over present and projected values without the project. Major assumption include: (a) the production and prices discussed in paras 7.02, 7.07 and 7.08; and (b) all expenses have been costed at present or projected real market rates except family farm labor, for which a shadow rate of Rp 60/day (rising to Rp 78/day) is used as opposed to Rp 85/day rising to Rp 110/day paid for casual hired labor. The shadow rate is based on the average daily rate on an annual basis that casual labor would earn taking into account seasonal rate fluctuations and unemployment. Without shadow pricing, the rate of return for the project declines to 13%. A decline in prices by 10% would reduce the rate of return to 12.5% and an increase in cost by 10% would result in a decline to 13.4% In addition to the direct financial benefits to subborrowers, the project would contribute to the strengthening of the smallholder extension service. Staff qualifications and operating procedures developed within the PMU would serve as models for the improvement of extension services for other regions and crops. Training facilities and programs under the project could also serve as examples of the needs and possibilities relating to other sectors. Technical assistance to BRI would improve the capacity of its Central and West Java field staff to appraise and supervise tree-crops credit, and the management study could result in substantial improvements in BRI's organization and operating procedures.

36 IX. CONCLUSIONS AND RECOMMENDATIONS 9.01 The following principal assurances were obtained during negotiations: (a) estates participating in the project would be limited to those owned by Indonesian-based legal entities, free of title disputes and holding concessions which cover at least the credit repayment period (para 3.05); (b) the Ministry of Industry would operate on the advice of the PMU in licensing new tea factory construction for West and Central Java (para 4.04); (c) an independent auditor satisfactory to IDA would be employed to audit the projects accounts of both PMU and BRI. The form of audit would be agreed with IDA and audited accounts would be made available to IDA within four months of the close of the financial year (paras 5.10 and 5.11); (d) project staff would receive total annual emoluments equivalent to those received by Government Estate staff (para 6.02); and (e) Government would engage or cause to be engaged consultants acceptable to IDA on terms and conditions approved by IDA, to assist factory sub-borrowers, PHU and BRI in project execution (paras 5.08, 6.06 and 6.12, respectively) and to conduct studies to be financed under the project (paras 4.08 and 7.05) Conditions of Credit effectiveness are that: (a) P1 U and PMB have been established, the project manager has taken up his duties, and appointments of the internationally-recruited consultants for PMU other than the Factory Consultant have been made (para 4.07); (b) a Subsidiary Loan Agreement, with terms and conditions acceptable to IDA, has been executed between Government and BRI (para 5.04); and (c) the fiscal year 1973/74 budget of the PlU has been approved by Government (para 6.01) The project is financially and economically sound and suitable for an IDA credit of US$7.8 million.

37 Annex 1 Page 1 INDONESIA SMALLHOLDER AND PRIVATE ESTATE TEA PROJECT IDA Credit to Indonesian Agriculture A. Credits to the Estate Industry Four IDA credits for rehabilitation and development of rubber, oil palm, tea and other crops in the Government-owned estate sector have been approved to date. The first (Credit 155) in June 1969 was for US; 16.0 million to assist two estate enterprises (PNP V and PNP VII) in North Sumatra. The second >19a) in June 1970 for US$ 17 million was for PNP IV and PNP VI, also in North Sumatra. The third (259) in June 1971 for US$ 1 million was for PNP XII and PNP XIII in 'West Java; and the fourth (319) in June 1972 for US$ 11 million was for PNP X in South Sumatra. Further details of these Credits (dates of signing in parentheses ) are in the following paragradhs. Credits 155 and 19h - Rubber and Oilpalm (Estates I and II)uSO 16 m1ljijnlttq$ 17 _.x;11;"r (June 20, 1969; June 15, 1970) 2. Credits 155 and 19L were for projects to rehabilitate four Govermmentowned estate groups. Their problems are identical. They involve the planting or replanting of nearly 40,000 ha of oilpalms and rubber; upkeep of some 29,000 ha of immature trees; fertilizers; agricultural vehicles and machinery; processing plant; and technical assistance for research and management. 3. The projects are about one year behind their original schedules due to initial delays in appointing management advisors and visiting inspectors, lack of suitable planting material in the early stages of development and an unforeseen sharp fall in rubber prices which seriously restricted the availability on self-generated funds. Adequate supplies of good quality planting material are now becoming available so that by the end of 1974 oil palm planting programs should be on target. There has also been a recovery in rubber prices in recent months and the availability of self-generated funds will be much less of a problem in While there have been improvements in plantation work leading to increased production, wak and inexperienced management continues to be a problem and the impact of foreign advisors has been mixed. Improvements are also needed in budgetary procedures, financial and operational control and overall organization in the estates sector. Government has taken two steps to improve the situation. First, in November 1971, it agreed to an IDA-prepared Aide- Memoire on PNP management problems, including action timetable for implementation of specific improvements by July As a result reporting and accounting procedures have been improved, but management control is still deficient. Second, Government commissioned a study by management consultants to determine a system for effective supervision and control of Government-owned estates. The report is concluded, and a timetable to implement the recommendations is being drawn up.

38 Annex 1 Page 2 Credit Tea (Estates III), US $ 15 million (June 30, 1971) 4. Credit 259 was for the rehabilitation of two groups of Governmentowned tea estates in West Java. The project includes rehabilitation of 2,100 ha of existing tea, planting of 2,300 ha of new tea and 1,100 ha of cinchona (quinine) and reorganization and re-equipment of the estates' tea factories. Technical assistance has been provided to strengthen management and introduce up-to-date tea cultivation and processing methods. Tea research is being improved. The project provided for a study of the depressed and inefficient smallholder and private estate tea industries, aimed at finding ways to rehabilitate them. This report appraises the project prepared by the study. Progress to date is satisfactory and relationships between management and consuj tants are good. Credit Rubber and Oilpalm and Crop Diversification (Estate IV), us s 11.0 (June /O, l977() 5. This credit is for the rehabilitation and development of 8,600 ha rubber and 9,400 ha oilpalm including factories of a group of Government-owned estates in South Sumatra. It also provides for the rehabilitation and expansion of pumping facilities at the port of Pandjung. After a delay of several months to allow additional time to appoint inspection services and executive assistants, this credit became effective in January B. Irrigation Credits Credit First Irrigation Rehabilitation Project, Us$ 5 million (Septemb_er 6, 1968) This credit was for the purchase of earth moving equipment required for rehabilitating three irrigation systems in Java and for the construction of a fourth in South Sumatra. While all equipment supplied under the project is being well utilized and disbursements are within 98 percent of the appraisal time-table, the actual cost of the rehabilitation will be considerably higher than was estimated during appraisal, as a result of the unforeseen need to include substantial drainage works under the project. This increase in project cost is being financed by GOI. Project completion will be delayed by about two years due to this additional required work but the economic rate of return will still be above 20 percent. Credit Second Irrigation Rehabilitation Project, US$ 18.5 million (June 15, 1970) 7. This credit was for the rehabilitation of the Jatiluhur project in West Java covering 186,000 ha. An autonomous agency Otorita Jatiluhur was established to administer the project. After a slow start due to problems with preparation of tender documents and difficulty in obtaining acceptable bids, work is now proceeding and the project could still be completed on schedule provided that good contractors win the last two contracts. There are no serious cost overruns, but due to the above difficulties disbursements are presently behind schedule. Credit Third Irrigation Rehabilitation Project, US$ 1h.5 million (November 6, 1970) 8. This credit is for rehabilitation of three irrigation systems covering 200,000 ha, two in Java and one in South Sulawesi. Construction is presently

39 Annex 1 Page 3 behind schedule due to initial difficulties in recruiting expatriate staff, problems with the preparation of contract documents and over extension of local contractors due to the large volume of construction involved. Altholgh some improvzrent in project execution are expected, it is still estimated that the project's completion date will be 2 to 3 years behind the appraisal report estinate. Overall project cost estimates have increased by 15 percent and GOI has made arrangements to meet this cost overrun. Despite the cost increase and the delay in implementation, the economic rate of return for the project, estimated at 25% at appraisal, remains satisfactory. Credit Fourth Irrigation Rehabilitation Project, US$ 12.5 million (March 9, 1972) 9. This credit is for rehabilitation and inprovement of irrigation at Pekalen-Sampean covering 229,000 ha; an investigation of groundwater-resources in East Java; and feasibility studies of two other irrigation projects in Java. Consultants have been appointed and civil works contracts are no-w being let. C. Other Exlsting Agricultural Credits Credit Fisheries Project, USt 3.5 million (July 13, 1970) 10 This is for part of an overall program to develop export-oriented skipjack tuna fishing. It consists of construction and equipment of freezing and cold storage facilities, the construction of a wharf in Aer Tembaga, the purchase of 30 wooden vessels for pole and line fishing, and two refrigerated carriers to transport frozen tuna to export markets. The project provides technical assistance to sv1pporthe program. Although operations of the project unit, the State Fisheries 3nterprise, have been inefficient, the recent appointment by Government of ne.w management acceptable to IDA is expected to improve the situation, and overall prospects for successful implementation have improved, particularly since there is an upward trend df world market prices for skipjack tuna. Credit Seeds Project, US$ 7.5 million (May 14, 1971) 11. This credit for establishment of facilities for growing, processhing and distributing high yield varieties of rice and other seeds is behind schedule due to delays in organizing management and the effective procurement. A March 1973 supervision mission reported that these constraints are being overcome, but due to delays mentioned above and recent exchange rates adjustments, project costs are likely to be considerably higher than appraisal report estimates, and the project is in the process of reevaluation. Credit Beef CaLtle Development, US.D 3.6 million (January 31, 1973) 12 This credit for development of beef cattle production in the outer islands is not yet effective awaiting the appointment of consultants and completion of arrangements of leasing of land. Major delays in effectiveness are not expected.

40 Annex 1 Page 4 Credit North Sumatra Smallholder Development, US$ 5.0 million (February 14h, 1973) 13. This credit for the development of smallholder rubber production in North Sumatra is not yet effective, awaiting the transfer of lands. May 11, 1973

41 ANNEX 2 Page 1 INDONESIA SJMALLHOLDER AND PRIVATE ESTATE TEA PROJECT Agriculture Practices and Processing 1. Throughout most of the tea areas climate and soils are well suited for tea production, and provided that good stands are established and husbandry standards maintained, tea yields should be high. Below are some of the factors that led to the deterioration in tea as well as proposals for improvement which should be considered in the rehabilitation process. Bush Density 2. In tea gardens established prior to World War II, bushes are spaced 1 m x 1.2 m apart with about 8,500 bushes per hectare. In the areas to be replanted under the nroject, bushes should be spaced 0.6 m x 1.2 m apart. This would accomodate 13,500 bushes per hectare and result in a complete tea cover with a continuous plucking table along rows (0.6 m spacing). Traditional infilling with new plants is not desirable to increase bush density although the transplanting of mature bushes has proven successful in the volcanic soils of Java. Areas with less than an average 60% cover of tea are not recommended for rehabilitation since they pose major maintenance problems and do not offer sufficient yield potential. Pruning and Bush Maintenance 3. Growers often do not prune, or do not prune sufficiently to maintain a low, flat plucking table. The number of plucking points remains correspondingly small and annual yields are much lower than with proper pruning despite the temporary loss of revenue when plants are forming new pluckable leaf. In tea areas below 1,200 m elevation, the average pruning cvcle should not be greater than 3 years. At elevations of 500 m and below it may he desirable to cut the bush across at 18 months of production (a liph prune). Although the plant is then out of production for 4-6 weeks the resulting rapid formation of new pluckable leaf makes this profitable. Pruning should norma lv be done in August or early September when recoverv would be speeded up by the coming wet season. Crop production is at its lowest at this time and revenue losses are, therefore, minimized. Bush sanitation after pruning is essential. Frames must be cleaned of moss and lichens before bud break, to encourage the growth of new shoots. Dead wood, knots and cross branches should also be removed and a healthy frame left clean for new shooting. Timber Cutting 4. The current practice of cutting, down shade and other trees leaving the fresh stump exposed provides an ideal vehicle for the introduction

42 ANNEX 2 Page 2 of root disease into the soil. Large, bare patches surrounding old stumos are evidence of the disastrous effects on tea bushes. Although individual gardens may be free of root disease, its occurrence is frequent and widespread in all project areas. Timber cutting should be preceded by ring-barking which kills the tree prior to stump exposure. Windborne mycelia do not penetrate dead wood and their access to the soil are thereby prevented. Interplanting 5. To augment declining revenue from the sale of tea leaf, and to All increasing gaps in tea gardens, smallholders now interplant a variety of cash and subsistence crops. The principal drawback to this practice is the excessive shading of tea bushes caused by crops such as cassava, bananas, rubber or waluh (a local vegetable grown on vines supnorted by bamboo frames). Albizzia trees, grown for timber and firewood, not only cause excessive shading, but shed large quantities of fine leaves on to tea bushes causing leaf spotting and introducing excessive foreign material into the plucked leaf. Fertilizer and Pesticides 6. As a cash input, chenical applications are the first to be reduced in periods of austerity and some private sector tea has been without fertilizer or pesticide treatment for 30 years, resulting in serious losses of productivity. Soils in the project area tend to have a ph of 6 or more which is too high for ontimum tea production. A reduction in ph values can be achieved bx apnlication of ammonium sulphate as nitrogen fertilizer. In those rare cases when nitrogen fertilizer is applied, it is in the form of urea and it is often used without other nutrients. The limited resources spent on urea are, in many instances, wasted since the bush is unable to respond in the absence of phosphate and potash. Potash deficiency is Darticularly widespread in the project area as evidenced by the absence of leaves on the lower extrerities of bushes in many gardens. Failure to apply herbicides and pesticides has also had significant effects on productivity. 7. Precise fertilizer recommendations can only be made after leaf and soil analyses have been carried out. This is presently being done for PT's XII and XI'I. Since these estates are scattered throughout the project area, their analyses and recommendations would be useful in determining fertilizer requirements for this project. For the project, it was estimated that fertilizer application should be madle at 600 kg/ha for full stands of tea. For lower densities, application would be reduced proportionately. For replanted tea, fertilizer application are recommended to increase from 160 kg/ha in the first year of plucking, to 600 kg/ha in the 3rd year of plucking.

43 ANNEX 2 Page 3 Field Maintenance 8. Weeding should gradually be phased from manual labor to chemical control. Increased labor needed for plucking would prevent the loss of employment opportunities and weeds would be more effectively controlled. Bush densities in replanted areas will be sufficient to achieve complete tea cover, eliminating the need for continued weeding after bush maturity. 9. Shade trees are not necessary for tea grown under Indonesian conditions and they should be removed using the technique explained in para Root disease, which is usually detected by the appearance of white fungi on the root systems of dead or dying bushes, should be treated by uprooting the infested area. The area should then be trenched and left fallow for two years before replanting. Infected plants should be burned. Plucking 11. In efforts to increase revenue from tea in the short run, growers frequently engage in coarse plucking taking 4-5 leaves and a bud. The result is not only poor quality leaf, with excessive stock and fiber content, but a rapid decline in bush growth since maintenance leaves and secondary growing points have been removed. Plucking is presently done once every 3-4 weeks rather than 3-4 times per month. New growth becomes too mature between pluckings and poor quality leaf is harvested. A major change in plucking practices will be essential for effective rehabilitation. In particular, table plucking must be introduced along with more frequent and finer plucking (the Dicking of the recommended 2 leaves and a bud).

44

45 ANNEX 3 Page 1 INDONESIA SMALLHOLDER AND PRIVATE ESTATE TEA PROJECT THE TEA ECONOMY OF INDONESIA A. Background General 1. Before World War II the Indonesian tea industry was based on 138,000 ha of estate gardens and about 75,000 ha of smallholdings. About 90,000 tons of tea were produced in Practically all estate tea (70,000 tons), and part of smallholder production, was processed into black tea. About 73,000 tons, valued at US$30 million, were exported making Indonesia the world's third largest exporter of black tea. Around 16,500 tons were consumed locally. 2. During the Japanese occupation, tens of thousands of hectares of estate tea were uprooted and planted to food crops. Subsequent nationalization, neglect and continued conversion into subsistence crops caused a further decrease in the tea area until, in 1970, only about 52,000 ha of estate tea and 51,000 ha of smallholder tea remained. Total production had dropped to about 54,000 tons. Of the 52,000 ha of estate tea, about 39,000 ha are Government estates (PNP's and PT's). About 11,000 ha of the 13,000 ha private estates are owned by Indonesian based companies or Indonesian individuals. 3. Funds and technical assistance for the rehabilitation of Government estates have been provided in recent years and most Government estates are in the process of being rehabilitated. An IDA Credit (259-IND) for US$15 million was provided in 1971 for the rehabilitation of PNP's (now PT's) XII and XIII and the Dutch Government is financing part of the rehabilitation of PNP VIII. PNP XXIII, the only other Government estate group with tea estates, is also in the process of rehabilitation with Government funds. 4. To date, no financial assistance either from Government or outside sources and very little technical assistance have been supplied for the rehabilitation of private estates and smallholdings. Only 11,500 ha of Indonesian-owned private estates and 26,500 ha of smallholder land can be considered productive tea land, defined as having tea stands of 60% or more. (Tables 1 and 2 give frequency distributions for the main tea growing regions).

46 ANNEX 3 Page 2 Tea Smallholders 5. Smallholder tea was established by the distribution of planting material from estates to smallholders, and a close relationship developed between the two sectors. In addition to planting materials, estates provided fertilizer on credit, recovering payments by deductions from the value of green leaf supplied to estate factories for processing. Smallholder tea standards were then good, but with changing conditions, the smallholders probably suffered more than the rest of the industry. About 21,000 growers.ow cultivate the 26,500 ha of productive tea land. 6. The size of tea gardens varies widely within and among regencies. The average smallholding is 2.05 ha with tea accounting for 1.3 ha. However, in the Garut/Tasikmalaj area, which is the most typical for tea smallholdings and where most of the rehabilitation will take place, the average smallholding with tea bush density of 60% or more is 1.8 ha with a tea area of 1.1 ha. The remaining 0.7 ha is devoted to other crops, principally paddy and cassava. Average yields on stands with 40% density or less are only about 210 kg/ha; stands with average densities of 60% give average yields of about 480 kg/ha. Since climatic and geographic conditions are good, it would be possible to increase yields on rehabilitated tea to 730 kg/ha and replanted tea with clonal material to 1,600 kg/ha (880 kg/ha and 1,700 kg/ha, respectively, for estates). 7..Nearly all smaliholders have title to their land and security of tenure should not be a problem for tea development. Land reform legislation of 1960 specifies a maximum freehold of 11 ha dry land and requires title registration of all holdings. Luras (village headmen) maintain current records and are authorized to certifv the validity of title claims. Private Estates 8. There are about 10,700 ha of tea in production in West Java on 53 estates and 1,900 ha in Central Java on 6 estates employing about 15,600 laborers. In addition to these Indonesian-owned estates there are about 2,750 ha which are foreign-owned. They are not included in the project. The Indonesian-owned estates produced about 4,700 tons, about 9% of total Indonesian production in 1970, of which slightly less than half was green tea. A portion of black tea production is exported. 9. In contrast to smallho.ders, whose area with tea bush densities over 40% was only 50%, nearly 80% of private estate land has stand densities of over 40%. In addition, unlike smallholders, some estates have reserve andi suitable for new tea expansion estimated at about 4,200 ha. Apart from tea, the only other major crop on tea estates is rubber which covers about 3,500 ha. 10. The decline in tea husbandry on private estates is, in many cases, nearly as severe and suffers from the same defects as smallholdings. Owners of estates have limited resources to maintain the scattered areas of poorly populated tea stands. In addition they do not have the expertise or

47 ANNEX 3 Page 3 knowledge of modern husbandry methods to rehabilitate large areas of old tea. There is an urgent need for improved knowledge on all aspects of tea cultivation, including better management at all levels. Satisfactory rehabilitation can only be achieved by adherence to a systematic long-term development plan for each estate. B. Production 11. Smallholders produce about 25% of total Indonesian tea output and private Indonesian-owned estates about 9% (see Table 3). Most of the tea is grown at elevations of less than 700 m above sea level. West Java produces about 94% of all tea produced by the private sector, principally in the 7 regions listed in Table 4. Private estates in Central Java account for the remaining 6%. 12. In 1960, smallholders produced about 42,000 tons of tea, but output has since declined to about 15,000 tons (1970/71). Smallholder tea area also decreased from 64,400 ha in 1960 to 51,000 ha in 1970/71 and the number of smallholders producing tea is 39,000. Of the 51,000 ha, only 26,500 ha can be considered productive tea land cultivated by 21,000 smallholders. 13. Table 5 gives production projections for the tea industry. Government estates show large increases in output as a result of rehabilitation programs. Projections for smallholders and private estates show that without the project, supplies from the private sector will decline by about 3,300 tons in The proposed project would arrest this downward trend, but the total effect of the rehabilitation program would not be felt until 1985 when supply from smallholders and private estates would exceed 1971/72 production by about 4,000 tons. 15. Indonesia produces black teas by the orthodox process, and green teas of which about 55% is re-processed into scented teas. Table 6 summarizes Indonesian tea production showing sources of leaf, the type and agency of processing. Table 7 indicates market outlets. Out of a total of 54,500 tons, 33,200 were exported in The remaining 19,000 (when adjusted for a 17.5% moisture loss in reprocessing into scented tea) were sold within Indonesia. Of this, about 10,800 tons were scented tea, reprocessed in Central Java. About 5,400 were lower grade black teas and 2,800 tons were unscented green teas consumed mainly in West Java. C. Consumption 16. Export is the main outlet for black Indonesian tea and generally includes only the better qualities. It accounts for about 85% of total black tea production. The lower quality black teas are consumed within Indonesia where the major markets are the outer islands, areas around tea estates, and towns in East and West Java as indicated in Table 6.

48 ANNEX 3 Page Scented and unscented green tea is mainly consumed in Central and West Java. Scented tea dominates the market in Central Java. Scented tea is green tea re-processed with jasmine and red gambir flowers which are grown mainly in Central Java and cannot be transported over long distances without losing their scenting qualities. Processing of this type of tea is concentrated, therefore, in this part of Indonesia. Unscented green tea is mainly consumed in West Java. 18. Although accurate estimates could not be obtained, the trends in domestic tea consumption as indicated in Table 7 have been most striking..ltal and per capita consumption increased from pre-war until 1960 and then showed a rapid decline. Exports, however, declined as a result of deterioration in tea quality and the marketing system. It should be noted that smuggling of tea out of Indonesia in the late 1950's and early 1960's tended in official statistics to overestimate domestic consumption and underestimate exports. Since 1960 output declined even faster than before and reduced the availability of tea on the domestic market. Government regulations favoring exports in order to earn foreign exchange were a further impediment to sale on the domestic market. Per capita consumption, which was nearly four times as high in 1960 as in 1939, declined sharply during the past decade and in 1970 was at about the same level as in The increase in per capita consumption between 1939 and 1960 was about 4% per year and indicates the absorption capacity of the Indonesian tea mark.et. There is little doubt that the domestic market will expand rapidly if supplies can be made available and a better distribution system developed. Black teas in particular should benefit from this development since the scented green tea market is localized and the production of scenting flowers limited, and unscented green tea is an undistingpished product, serving a special role only in the traditional eating habits o'f the Sudanese of West Java. 19. In Table 5, production and consumdtion projections show the effect of various assumptions on export availabilities. The production projections have been described previously. Consumption estimates assume: (i) no increase in per capita consumption; (ii) an increase in per capita consumption of 4% per year as experienced during 1939 to The projections take into account a population increase of 2.3% per year. They indicate that without the proposed project export availabilities in 1985 would be reduced by 35% from 1970/71 levels. Even with the project, production would not be sufficient to maintain exports at 1970/71 levels if yearly canita consumption increases at 4%. D. Prices 20. Three of the major factors influencing green leaf prices for smallholders and private estates are: (a) distance from a processing unit; (b) type and number of nearby processing units; and (c) seasonality of supply. Where there are isolated processing units, with little competition,

49 ANNEX 3 Page 5 close to the source of supply, they may pay relatively low prices for the leaf; where there is competition among processors, prices are immediately forced upwards. Large scale factories with inadequate throughput will often pay high prices in attempts to reduce overhead costs per unit of output. In two districts (Purwakarta and Tasikmalaya) leaf travels as far as 100 kilometers to the nearest factory. Consequently, leaf quality and growers prices are very low, and one new black tea factory is proposed for each district. 21. Unfortunately there are no comprehensive historic price series for green tea sold by smallholder and private estates on the local market. However the mission obtained price series from three estates selling made green tea to local leaf blenders and resellers. These estates produce better qualities of leaf and are thus not entirely indicative of smallholder leaf prices. Nevertheless, while the level of prices may not be directly comparable, the trends are similar and characterize the domestic market situation. Table 8 shows that there has been a strong upward trend in prices. To what extent this increase is due to improvement in quality could not be determined. But undoubtedly the increasing shortage of tea supplies for domestic consumption was a strong factor in pushing prices up, a fact which was confirmed by all processors and leaf buyers interviewed. Interesting also, is the fact that price developments on the international market exercised apparently very little influence on prices for leaf going onto the domestic market. In 1969, for example, there was a slump in world market prices, but only a slight decline in domestic prices. While prices on the international tea market declined prices on the domestic market generally moved in the opposite direction. Prices of Indonesian tea on the world market also improved, a reflection of the better tea quality as a result of rehabilitation of Government states. 22. The quality of leaf produced by smallholders is usually lower than that supplied by private estates. The mission found that smallholder leaf prices were around Rp 25-30/kg. It should be possible through the project to raise leaf quality to at least the present standards of better estates, which implies that grower prices should increase to about Rps 40/kg at constant 1972 price levels during the second part of the 1970's. However, international tea prices are expected to decline, and although their effect on prices for tea flowing into the domestic market is limited, some downward pressure can be expected. Consequently the project analysis is based on projected prices increasing from Rps 25/kg in 1972 to Rps 35/kg in E. ProcLeaf Collection 23. Processing. Tea manufacture takes place under a variety of conditions and in a number of different types of factories producing black tea, green tea or scented tea. For government estates, which produce only black tea, factories are always located on the estates. In the private sector, black tea factories may be situated either on private estates or be independent. In either case they may process either smallholder or estate leaf, or both.

50 ANNEX 3 Page Essential to the making of black teas is a controlled leaf fermentation (oxidation) which involves both chemical and biological activity and requires a degree of leaf maceration or crushing (rolling) to release the chemicals from within the leaf cells. These chemicals can be destroyed by heat and therefore maintenance of low temperature in the early stages is important. It is this fermentation which blackens the tea. In green tea manufacture, it is essential to reduce fermentation to a minimum. Heat, therefore, is applied deliberately in the early stages of processing to destroy the chemicals which would cause such fermentation. Both methods require partial maceration (rolling) of the leaf to cause the cells of the leaf to rupture and release their contents which can then be dissolved in the tea infusion. The greater the degree of maceration, the easier it is to get a quick or strong infusion. 25. Final tea quality depends on the quality of leaf received from the field. While poor manufacture can spoil a tea, good manufacture cannot improve on the quality of the incoming leaf. Smallholder leaf in Indonesia is frequently of very poor quality, being too mature, containing too high a percentage of stalk, or having been picked too far in advance of processing. Final tea quality depends entirely on taste and liquoring qualities, and is not influenced by physical grading which, in the case of black teas, is merely a separation of different sizes and shapes of leaf particles and stalk. 26. Green Tea Factories. The essential basic unit for a green tea factory is a single fire-heated rotating cylinder or a kettle over an oven. Additional capacity is provided by adding more units. Processing with kettles is a very simple operation and the only investments required are the building and kettles costing about Rps 60,000 for a single kettle unit. Rolling the tea before burning is usually done by foot. These low costs explain the widespread use of these units which enables many farmers to process their own leaf and that of their neighbors. The quality of tea produced, however, is usually very low. 27. Heated rotating cylinders are often combined with mechanical rollers which replace small scale foot rolling. Cylinders are usually mechanically driven. The capacity of these factories is greater than that of kettle operations, and investment costs are much higher, about Rp 1.8 million for a unit containing 5 cylinders, 2 Jackson rollers and a diesel engine. The average operating cost for a cylinder unit is about Rp 18/kg, varying from Rp 12.5/kg to Rp 20/kg depending on the size of the unit. The quality of the tea produced is better than that from kettle units. 28. There are over 750 green tea factories of all sizes in West Java, excluding the many make-shift kettle units operated seasonally by individual smallholders. The estimated distribution is as follows:

51 ANNEX 3 Page 7 Sukabumi 145 Ciandjur 223 Bandung 38 Purwakarta 18 Garut 141 Tasikmalaja 201 All tea factories are supposed to be registered and licensed with the Ministry of Industry, but enforcement of that regulation is difficult. 29. Scented Green Tea Factories. The essential function of these factories is to refine the tea and to mix it with jasmine or other flowers to impart a desired scent. The work is done almost entirely in Central Java within reach of the areas where the flowers are grown. The present output is about 11,000 tons of tea in 62 factories. Scented tea production is very labor intensive and it is estimated that about 8,300 workers are directly employed by the 62 factories. 30. Black Tea Factories. Private estate owners usually produce black tea from leaf supplied by the estate or augmented by purchases from neighboring estates and smallholders. Independent factories in towns with no estate rely solely on their own transport or collectors to provide sufficient leaf. There are about 50 black tea factories in West and Central Java, of which 33 are located on tea estates, and 17 are independent. In general, the buildings of these factories are old and in need of repair. The machinery in most cases is as antiquated as the factory and only kept in operation by ad hoc improvisation. Potential capacity is usually in excess of present output. 31. Sources of Leaf Supply and Transport. There are three sources of leaf: Government estates, private estates and smallholders. Government estates provide leaf to their own factories almost exclusively. Most of the leaf grown on private estates is processed on the producing estate although a small quantity moves onto Government estates and a more significant quantity to independent factories or to other estates. Collection is usually arranged by the buyer and there are no intermediaries as lots are large enough for direct transactions. 32. Leaf from smallholders goes to all the alternative processing facilities. Because tea smallholdings are fairly scattered and individual production is very small much of the leaf goes through intermediate collecting points, even that destined for the small scale village green tea factories. The farmer carries his leaf to collecting points by pikul (two baskets hung from a bamboo carried across the shoulders; each containing about 30 kg of leaf). To fit this amount in the two baskets, the leaf must be compressed, resulting in considerable crushing and leaf damage. From the collecting point, the leaf is taken either to the small factories by pikul or to the larger factory by truck. The large scale factories organize their own leaf 766

52 ANNEX 3 Page 8 transport either with their own trucks or through agents. Improper leaf handling by truckers results in further damage before arrival at the factory. The village (Desa) authorities often exert their authority by allocating of collection areas to the various agents or factories and may levy official and unofficial taxes on leaf transactions.

53 Annex 3 Table 1 INDONESIA SMALLffOLDER AND PRIVATE ESTATE TEA PROJECT PRIVATE ESTATES Situation and Stand Density: W.st and Central Java: 1970 No. of Area (ha) Regency Estates Total Average 40% Stand 40-80% Stand 80% Stand WEST JAVA Bogor 5 1, Sukabumi 17 2, , CIanjur 17 4h, , Bandung/ Purwakarta 7 1, Garut 3 1, Tasikmalaja Totals 51 10, ,161 6,718 2,831 CENTRAL JAVA 6 1, , February 16, 1973

54 Annex 3 Table 2 INDONESIA SMALLHOLDER AND PRIVATE ESTATES TEA PROJECT Sma11holder Tea Areas and Farmers by Regency Regency Area (ha) Farmers Total with 60% avg.density Total with 6Q.av2.density Sukabumi 9,h18 3,895 6,679 2,338 Tjiandjur 16,183 7,1473 7,129 3,351 Bandung/ Purwakarta 6,075 4,585 7,147 5,646 Garut lo,s944 6,254 11,055 5,970 Tasikmalaja 8,380 4,293 7,159 3,723 Totals ,500 39,169 21,028 February 16, 1973

55 SMALLITOLDB 2 AND PRTJVAT -STATE T71A PROJT 'r! A-12A AJVD P1O1DUCTIO I OF TTA 1970/71 (Area - rrectares) (Production - Tons of Made Tea) AR7TA3 OF TrA AND PRODTJCTIO?T 1970/71. W1EST _ JAVA _ OTNEi ART7AS I! JAVA SATRA.TOTAL T'.DOTT,SIA Area Production Area Production Area Production Area Produotior- -overnment ow;ned 7states 23,091 18,439 2,818 2,361 13,150 12,408 39,059 33,208 7oreign ovned -states 2,750 1,653 _ ,750 1,653 Private Tstates 12,172 3,439 1,949 1,305 14,121 4,744 Smallnolders 50,995 14,92-50o, ,926 Total Private Sector 65,917 20,081 1,949 1, ,866 21,323 Grand Total 89,008 38,457 4,767 3,666 13,150 12, ,925 54,531 February 8, 1973 (DX NITote: FiguLres fromn sources which only sell green leaf are converted to made tea at a ratio of 4.5 to 1.

56 Annex 3 Table--T4 IN4DO MJS TA SMALLHOLDIE' NTD PRIVATV 7STATE T7,A PROJECT PRTVAT7 3`2CT0 AIRA AND PRODU2TTO'J OF TEA 1970/71 (Area - FTectares) (Production - Tons of Made Tea) Smallholders Private Pstates Province and Tea Area Tons made Tea Tea Area Tons made Tea Regency (Ha) Production (Ha) Production,7-ST JAVA Sukabumi 9,418 1,680 2, Cianjur 16,183 4,100 5,615 1,154 9andung 1,769 1, PuIuniakarta 4, GJarut 10,944 3,500 1, I TasiImialaja 8,380 2, ogor o - 1, Total J. Java 51,000 14,926 12,172 3,439 Central Java _ - 1,927 1,305 TOAL 51,000 14,926 14,099 4,7414 February 8, 1973 ~Tote: Private estates production excludes 640 tons from smallholder leaf.

57 Annex 3 Table 5 Ii4iXihA.L Si'LULLE-iLD2? i:td PFrvIAT- 'STAT' T2:A P20Y"7-J'T Tea Production, Consis;)tion and ';qport ProJections ('000 tons) Production 1971/ / /06 7mallholders I2 ';ithout Droject. ' 12.3 '1ith project 2/ Private 'states ':ithout project- 6o 'ith porolect V/ vubtotal-.r thout,roject iso?!ith project 19A ',overnnent 7 states-/ '1 and -7II s7iti 1h.O ?'9thers ,.0 3ubtotal o Total Production Jithout project o2 'Jith project '.Otal Dbmestic Consur,ption-/ LTnder assump-tion I 91.o TJnder assuziption IT ! h4 2 ''.cort AvaiJability I Jithout project 39, h56 *ith project II Without project With project D.4 1/ Assumes phasing out of production 24,500 ba at 5:i per year ;with otands of less than 40: d^nsityr and a decline in yield for 26,500 ha from 4!JO '/h in 1972/73 to 380 1kg/na in 1982/833 ASfter'Qar-`m -olds are assumed to revain constant. 2/ Phasinc out of production of 24,500 ha as in 1/, replanting 3,500 ha, imb '-'oving 6,500 'ha, AIrea whiclh remains to be rehabilitated: 16,500 lia. 3/ Assum7nes by 1980, 2,500 ha with stands of less than 40' density- :i1l be phdscd oat of production. For the 11,500 ha remaini:ag in tea, vields zaill decline by 5 kg/year fromo W80 kg/ha -n 1972/73 to 385 kg/ha in 1985/86.!1/ Phasing out of production of 2,500 ha as in 3/ replanting 2,000 ha, improving 1,200 ha. Area which remains to be rehabilitated: 8,300 ha. T/ Projections obtaine.d from estates. 5/ I: Assumes no increase in per capita oonsivription of 158 gram, but increase in population of 2,3' yearly, II : Assumevs 4( yrel, inciease in per capita consumption and population 4ncrease as under - March 1, 1973

58 Annex 3 Table 6 IITDON,SIA S3TMLU4OLD-.R AiD PRIVATE 'STAT- T.UA Pi.OJECT DOMESTIC TEA MARKET IN 1970 Tea Consuaption Type of Tea Per Capita Total (T~pe) (707ons-) (GrallS ) 'ons ) Central Java Scented 8, ,L rest ljava ScenL'ed 1,630 (Urban) Dlac'k 1, ,'69 10.? Creen 257 West Java ureen 2, (Rural) 7ast Java dcent-d ,34l 710 U1ack'., Outer Islands rpla'-' _ 3X ,207 l6.8 Total Indonesia 19, , of which Crcon and 3cenued Tea 13, , February 8, 1973

59 Annex 3 Table 7 INuDON"3 IA SY1NALLIiOLD7R AN:D PRIVAT-E ESTATE T.A PIiT0FCT PRODUCTION, EXPORTS AND CONSUMPTION OF INDONESIAN TEA 1939, 1960 and Production (tons) 89,500 83,300 54,500 7xports (tons) 73,000 35,ooo 33,200 consumption (tons) 16,500 48,300 19,00i/ Per capita consumption (grams) Population (million) / Includes loss of moisture of 17.5,. for scented tea. This percentage could not be determnned for earlier years. Thus consumption in 1939 and 1960 is somewhat overestimated. March 1, 1973

60 A.nnex Tabl4e8 I;I'DO:26'L. SIALLUJOLDER LND PRIVAT-E p SrT?TA Tv7A PROJECT PRICES FOR GREEN4 MADE TEA AND GREEN LEAF FROM SELECTED ESTATES AND MANUFACTURI%N COSTS Price Re- INanufacturing Made Tea Less ceived for and Transport Manufacturing Green Leaf Made Tea Cost and Transport Cost qguiva1ent/ L/ ,8 Yearly- rate of increase (%) / Converted at 4.5 kz green leaf equals 1 kg made tea. 2/ Janauary - October. February 8, 1973

61 PRESENT ORGANIZATION OF AGRICULTURAL SERVICES (WITH PARTICULAR REFERENCE TO WEST JAVA SMALLHOLDERS AND PRIVATE ESTATES) Secretary Generla Director General P anratcn Crops f., Dlrmo Gera tee AerCultre Ag,i-lu-A Aoricelsora,BCU1 tilnc Sm atr-olders Gotrnen DwIctor Genrls f For E.port C.P G etboarvd Estate f rfr Srt-t Other Forermreteroayl Agricultura Subfo g.t. 0-..~lod, Sectort tg. Livestock etc.. I ' S.-;- Dist Arcstrl PRIe a Ott v R SCU io- Forestry nte Regional Other Rational Office Otti15s fp SialhvlErs. tttpres-nttie Offnnece Sub-Stations for Othe Sb Sector fr Z 1. speclo~~~~~~~~~~~~~~~~~~~~~~~~.'o et aasmlhldr Private Estates ^ T bldrr InspCrate Extension Service 15S. of Vvs J S.pwim Du K E<ten t-o S 3.vicer Oftlelr 3] BCU: Bada- Chocu Urosa (Speola1 C-nrntstt for Go- -Acec B.AIe,Elepries. b Kabpat- _.k Roge-ey e C.-ty _~ ~~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Wf 41

62

63 ANNEX 5 Page 1 INDONESIA SMALLHOLDER AND PRIVATE ESTATE TEA PROJECT Guidelines for Selection of Smallholders and Private Estates Smallholders 1. About 70% of tea smallholders covering about 50% of the land in the project area operate their units with hired labor on a regular basis. Social custom in Java (the so-called Burotani system) also prevents even quite small farmers from cultivating their farm entirely with family labor. Landless labor is usually employed at a total cost equivalent to 20% of the value of harvest, even though farm families may be underemployed. Total rehabilitation area under the project would be distributed among various tea garden sizes in proportion to the number of farmers in each size group. This distribution is as follows: Size of tea area per farm in ha % of total area 1/ Principally due to the initial shortage of planting material, the project would be confined to those areas which have the highest concentration of smallholders in the Garut/Tasikmalaya, Bandung/Purwakart and Sukabumi/ Ciandjur regencies. Present smallholder tea in any one of these areas exceeds the proposed rehabilitation area. Thus the project could be located in only one area. However, it is considered advantageous to include all 3 areas in order to enhance the demonstration effect. The areas proposed for the project are illustrated in the map. The distribution of the project area among these areas would be in proportion to their shares of farms with bush densities of 60% or more as indicated in the Table below.

64 ANNEX 5 Page 2 Smallholder Tea Areas and Farmers by Regency Hectarage Farmers With With Average Average Percent with Region Total 60% Stands Total 60% Stands Average 60% Stands Sukabumi/ Ciandjur 25,601 11,368 13,808 5, Bandung/ Purwakarta 6,075 4,585 7,147 5, Garut/ Tasikmalaya 19,324 10,547 18,214 9, TOTAL 51,000 26,500 39,169 21, The restriction of project participation to farmers with average stands of 60% density ensures that benefits would accrue to those who have exhibited better tea husbandry practices. 3. Criteria for project participation would be as follows: (a) holdings woula have at least 1/4 ha of tea, since inclusion of smaller areas would put too great a strain on the extension service and credit supervisors; (b) at least 1/2 ha of each holding would be reserved for subsistence food crops; (c) the tea land should not have any steep slopes; (d) each smallholder must hold cultivation rights for his farm; and (e) replanting would be restricted to a maximum of 50% of the existing tea area, and not more than 1 ha, irrespective of size of the holding. 4. Because of the shortage of planting material and organizational constraints, not all farmers eligible under para 3 above could participate in the project. The PMU would select among those eligible, on standards of good husbandry as exhibited by weed control measures, tillage of land, etc. 5. Private Estates. Private estate lands are leased from Government under a 30-year concession which can be renewed for a further 25 years subject to verification of satisfactory management. In some cases the ownershid of estates is not clear, because of previous nationalization and later transfer to new owners. Assurances would be obtained from Government during negotiations that estates participating in the project would be

65 ANNEX 5 Page 3 limited to those owned by Indonesian registered companies or Indonesian individuals, having no title d:lsputes, and holding a concession which would cover at least the credit repayment period, or would be extended to do so. Estates which have a close association with smallholders, particularly through purchase and processing of smallholdes leaf, would have preference. Eligibility for credit under the project would be contingent upon the preparation of a long-term development plan, to be approved by the PM!. The PMU could assist in this preparation. 6. All provisions aboire notwithstanding, project participation would be contingent upon satisfactory financial and managerial approval by BRI or its agents.

66

67 INDONESIA SMALLHOLDER AND PRIVATE ESTATE TEA PROJECT Smallholder Rehabilitation Schedule (Hectares) 1972/ / / / / / / / /81 Rehabilitated Tea A. Replanting Annual ,350 1,350 Cumulative ,150 3,500 Uprooting Program ,350 1,350 Bearing Schedule ,350 1,350 Without Uprooting B. Improvement Annual ,480 2,530 Cumulative ,490 3,970 6,500 C. Total under Rehabilitation Annual ,710 2,280 2,480 2,530 Cumulative 350 1,000 2,710 4,990 7,470 10,000 10,000 10,000 D. Non-Rehabilitated Teal/ 26,500 26,150 25,500 23,790 21,150 19,030 16,500 16,500 16,500 E. Land going out of Productio,2/ 24, ,220 21,200 20,200 19,200 18, ,500 Total Land Under Tea 51,000 49,800 48,720 47,700 46,340 45,700 44,700 43,800 43,000 g 1/ Stands with average densities of 60%, hut not rehabilitated under project X 2/ Stands with average densities of less than 40%. Assumes reduction of about 5% per year by natural wastage to food crops, February 8, 1973

68 INDONESIA SMALLHOLDER AND PRIVATE ESTATE TEA PROJECT Private Estates Rehabilitation Schedule (Hectares) 1972/ / / / / / / /81 Rehabilitated Tea A. Replanting l/ Annual ,000 Cumulative ,000 Uprooting Program ,000 Bearing Schedule (annual) ,000 B. Improvement Annual Cumulative ,200 C. Total under Rehabilitation Annual ,000 1,600 Cumulative ,600 3,200 3,200 3,200 3,200 3,200 D. Non-rehabilitated Tea 11,500 11,400 10,900 9,900 8,300 8,300 8,300 8,300 8,300 E. Land Going Ou2/of Production - 2,500 2,450 2,400 2,350 2,310 2,270 2,220 2,180 2,130 3/ Total Land Under Tea 14,000 13,950 13,900 13,850 13,800 13,770 13,720 13,680 13,630 1/ Or new planting- 2/ Assumes reduction in area of 27. per year as a result of continuing neglect or because land is too steep and generally unsuitable for modern tea J cultivation. 3/ After 1980/81 this land is abandoned due to low yields (see Table 4). d February 8, 1973

69 INDONESIA SMALLHOLDER AND PRIVATE ESTATE TEA PROJECT Esti-ated S-alholder Prod-ution (1000 tons) 1972/ / / / / / / V / / /87 A RePl.ntinR (ha) 50 S IS , o i,153,i 2,160 2,160 3,500 - Subtotal ,146 2,063 3,053 3,988 4,816 5,423 5,760 b. Inprovment (ha) ,480 1,314 1, *,S10,10 1,810 1,811 1,810 1,810 1, I ,500 - Subtotal , I 4,268 4,593 4, ,745 4, ,745 C. Production from Reh.bilita.td a- (eons , ,776 5,739 6,808 7,798 8,733 9,561 10,168 10,505 D. Production fron 9on-Rehabilitated Oea- 12,190 11,768 11,220 10,230 9,034 7,802 6,600 6,600 6,600 6,435 6,300 6,300 6,300 6,300 6,300 (tona) E. Production from Land going out of Production 2/ (tons) 2, ,120 2, , Grand Total (ton.) 14,873 14,151 13,553 12,673 12,003 13,046 12,466 13,106 13,989 14,823 15,59S 16,463 17,221 17,768 18,045 Yield A-sptions (kg/year) YEAR O Replanting ,150 1,350 1,600 1,600 Improvalsant a----nd thersafter Non,-rebabilitated For land going out of production * 1T Pebruary 1, 1973 / Average density of tea bushes 607 for area not in program 2/ Average density of tea bushes belov 402. Not 1uitable for rehabilitation under progrm. Area declining by 57 yearly. See Table I

70 INDONEETA SMIATYUOLDER AND PRIVIATE ESTATE TEA PROJECT Estimted Private Estates Productin 1972/ / / / / / / / / / , / /87 A. leylantun8 (ha ,020 1, ,000 - Sobtntal ,065 1,675 2,275 2,750 3,150 5, Inpreveneoet (ha) ,200 - Subtota ,038 1,080 1,080 1,080 1,080 1,080 1,080 1,080 1,080 1,080 C.?rodoction Eros Reh.lbilitated Tea (ton-) Replantin ,065 1,675 Z,275 2,750 3,150 3,400 1prtvrment , _ Sobtotal 1iS ,048 1,140 1,290 1,635 2,145 2,755 3,355 3,830 4,230 4,480 D. Production fror Non-rehabilitated Tea (tonol 5,460 5,358 S,789 4,554 3,776 3,735 3,693 3,652 3,569 3,486 3,403 3,320 3,279 3,237 3,195 E. Production frost Ar-a going o0t of Prod-ction (toes) GSand Total ,433 5,520 5,758 5, , Year Yield A,soeptions (Kt/Year) Replantig or e platig ,200 1,450 1, nd thereafter lepron-eert and thereafter Land eat yet rehabilitated Land 80i8g out of prod-oti-e L-ad ir takes o-t of tea be-a.re af law yields Februlry 8, 1973

71 ANNEX 7 Page 1 INDONESIA SMALLHOLDER AND PRIVATE ESTATE TEA PROJECT Factory Rehabilitation and Construction A. Present Condition of Private Tea Factories 1. Most privately owned black tea factories are exceedingly old and dilapidated. Structures are often patched and clad in bamboo mattings, posing a great fire hazard. Machinery and equipment is usually outdated and in need of extensive repair. Power generators and electrical installations are in poor condition, and equipment inventories are virtually non-existent. 2. Withering is performed on wire and bamboo flats that are often broken down. Heating ducts and systems are unsatisfactory. Rolling equipment is old and worn, resulting in extensive leaf damage. However, the worst conditions are found in the drying rooms, where operators work under poorly-lit conditions with unreliable and badly maintained driers. Thermometers are either faulty or nonexistent. Sifting and packing equipment is in need of repair, and lack such components as filling shutes and magnets. Tea bins are in particularly bad condition. B. Selection of Factories for Rehabilitation 3. The selection of black tea factories to be rehabilitated under the project would be based on the following criteria: (a) present structure must be basically sound; (b) factory layout must be able to accommodate equipment sufficient to produce at least 500 tons of made tea per year; (c) factory must be located close to smallholder concentrations; (d) owners must be willing to purchase and process smallholder leaf; (e) owners must be willing to undertake rehabilitation in accordance with financial and managerial conditions of a project loan.

72 ANNEX 7 Page 2 4. Of the 14 factories visited by the appraisal mission, which constituted the most likely candidates, 5 were tentatively selected as being most suitable: Tjiwangi and TjLsudjen in Cianjur District, Sukarapi in Purwakarta District, Pamegaten in Garut District, and Sembawa in Tasikmalaja District. Should further investigation result in the elimination of any of these 5, the PMU would then recommend alternative factories on the basis of the above criteria. C. Condition of Factories Prooosed for Rehabilitation 5. Tjiwangi. The Tjiwangi factory has 2 withering floors of 15 x 60 meter each. Troughs can be placed lengthwise in 3 groups of 4 pieces, making 12 troughs for each floor. The wooden floors are in bad condition and should be completely replaced in 2 phases. In the sidewalls of the lofts, windows are to be constructed on both sides in order to guarantee a good air ventilation. In general the floor tiles of roller room and dryer room, and especially those of the fermenting room, are in bad condition and are due for renewal. The corrugated roofing sheets of the building should all be renewed. A sufficient number of power tools are available at this factory. 6. Tjisudjen. The building of this factory is in a remarkably good condition except for the wooden floors of the withering lofts, which need to be replaced. Both withering floors measure approximately 15-1/2 x 65 meters and can accommodate 18 troughs with a length of 12 meters. Trucks that bring the green leaf to the factory can drive to a platform which is connected to the first floor by a foot bridge. The wetsifting equipment in the roller room is outdated, in poor condition and should be replaced. 7. Sukarapi. The Sukarapi factory consists of 2 building, each 60 meters long and divided by a partition. One building, 25 meters wide, accommodates Roller, Fermenting, Drier and Sorting rooms, whereas the second building, 16 meters wide, can accommodate 18 troughs. For good air ventilation, windows are to be installed in the side walls. Except for a group of rollers and some old drying chambers, no tea machinery whatsoever is available. But, of the available diesel generators, one set with an output of 125 kvh is still in acceptable condition. Therefore, in the rehabilitation budget, only funds for one additional set are included, compared with 2 sets for the other factories. 8. Pamegaten. At this factory, the withering house is separated from the main building, and measures approximately 21 x 40 meters. Two lofts are available and can each accommodate a group of at least 12 withering troughs having a capacity of 1000 kg. Windows should be installed on both sides. Since the layout of the buildings presents the use of the exhaust air of the drier to heat the air for the withering troughs, funds are budgeted for the purchase of heat exchangers.

73 ANNEX 7 Page 3 9. Sembawa. This factory has a very large building, measuring 20 x 80 meters. Although at present it is in a rather bad condition, it has the potential to be converted into a modern tea factory. The building has two withering floors equipped with old wire flats in very bad condition. The first floor is connected by means of a foot bridge to the leaf reception. Consultants suggest removal of all old withering equipment, and even the floor of the second loft, and the installation of 12 to 24 troughs on the first floor only. At present the side walls of this factory consist of cement impregnated bamboo sheets, which should be replaced by corrugated iron sheets. Also, the roofing sheets are due for renlacement, as is the wooden withering floor. D. New Factories 10. Site Selection. New factories are to be located in areas where there is a present and projected shortage of black tea processing capacity for smallholder leaf. Specific sites would be selected by owners of the proposed factory, subject to approval of the PMU, but these sites would be in Garut and Purwakarta Districts, where the greatest shortage exist. Smallholder leaf from these districts now travels as far as 100 km to the nearest black tea factory. 11. Specifications. Each factory would have an annual output capacity of 500 tons, with provision for future expansion to 1000 tons. Buildings should therefore measure approximately 70 m x 25 m and consist of a ground floor to accommodate rollers, driers, sifters and packers, and a second story for withering troughs. A ground floor extension of 7 m x 25 m would house offices and furnaces. Buildings should be oriented between east and west with the rolling room located at the west end to restrict the entry of morning sunlight. A separate power house 10 m x 15 m should be constructed. E. Design and Supervision 12. Selection of Consultants. Consultants to design and supervise factory rehabilitation and new factory construction would be selected by and appointed by the factory owners, subject to approval by PMU and IDA. Consulting contracts would be approved by IDA prior to appointment. 13. Responsibilities of Engineers. Consultants thus appointed would prepare and submit through the PMU to IDA plans and specification for each subproject. In addition, they would prepare tender documents and assist in bid evaluation. Bid documents would be submitted through the PMU to IDA for approval prior to advertisement, and contracts would be awarded after IDA approval of bid evaluation and consultant recommendations. Construction and installation would be supervised by the consultants, who would also conduct or arrange for qualified inspection before final payment. Upon express

74 ANNEX 7 Page 4 recommendation of the PMU, consultant contracts may also include provision for factory management and supervision for a specified period during and after start-up. Training of permanent factory managers may also be a provision recommended by the PMU.

75 ANNEX 8 Page 1 INDONESIA SMALLHOLDER AND PRIVATE ESTATE TEA PROJECT Training of Staff and Growers Senior Staff 1. One of the project objectives is that the Project Management Unit should be managed by Indonesians at the earliest opportunity. Accordingly, as part of their duties, the internationally recruited consultants would be required to train Indonesian staff to take over after the consultants departure. The posts of assistant to the Technical and Development Officer and the Factory Consultant would be held by Indonesian nationals; the Indonesian general manager would be supported by an internationally recruited Chief Project Advisor, while the Indonesian accountant would be trained by an internationally recruited Accountant Systems consultant for a period of about a year. 2. The assistants would be assigned definite and substantive duties, the extent of which would be progressively increased subject only to the capability of the candidate. Under these arrangements, the Indonesians would learn and gain experience by actually doing the jobs concerned. During the last twelve months (3 in the case of the accountant system consultant) prior to their departure, the executive consultants would be serving as advisors to their successors. It is believed that such arrangements would be more effective than the usual counterpart arrangements whose effectiveness is often hampered by division of responsibility and duplication of effort resulting in discordant relationships. Other Staff 3. It is expected that the majority of the staff would be seconded from the Ministry of Agriculture while some may be recruited from tea estates and high school graduates. The majority would therefore have a general agricultural background but would need some specialized training on tea. For this purpose, suitable training facilities would be needed. 4. After considering various alternative locations, the mission believes that the most suitable is Pasir Sarongge, a sub-station of the Tea Research Insitute at Bogor. It has adequate and well maintained tea areas for demonstration and practical training together with good experimental facilities. After establishment of the new tea research station in Gambung training would also be carried out at this center. 5. The available buildings at Pasir Sarorgge are insufficient. Simple buildings would be constructed to serve as classrooms, dormitories and other utilities to accoimmodate a maximum of 40 people. Housing would be needed for

76 ANNEX 8 Page 2 the Tea Officer in charge of training and two Senior instructors, but it may be possible to rent houses in the neighboring village. 6. It is proposed that the training center be made available during the first quarter of All newly recruited technical staff would initially be given short courses lasting at least one month. Thereafter, arrangements would be made for refresher courses lasting for a week; these would also be supplemented by periodic staff seminars, in the field, under the Tea Officers and the Technical Development Officer as may be deemed suitable. 7. The PMU would arrange study tours abroad to countries having a high standard of tea cultivation. They would be arranged for the Tea Officers and the Assistant Technical Development Officer. Growers 8. Since there would be about 7,700 tea growers in the scheme, it is unrealistic to expect all growers to undergo formal training courses. The project would, therefore, select farmers for training at a rate of 40 farmers at a time for a one week course. Their selection would be based on good crop husbandry, even distribution among villages, and willingness to cooperate. After training, these selected growers would form a widespread network of farmers who would demonstrate improved techniques in their own villages. 9. Most of the growers would be trained through extension staff visits to farms supplemented by regular field demonstrations to be conducted by tea instructors which would involve all growers in the villages concerned. The growers would, in this way, receive training under conditions similar to those on their own farms.

77 ANNEX 9 Page 1 INDONESIA SMALLHOLDER AND PRIVATE ESTATE TEA PROJECT Project Organization Structure 1. The chart and table 1 illustrates the organizational structure of the Project Management Unit (PMU). Table 2 indicates estimated staff salaries and costs. The execution of the project would be carried out by this unit responsible to a Project Management Board (PMB) which would have the following membership: Chairman, Director General of Estates; members, the Director of Smallholder Estates, senior representatives of the Estates Syndicate, the National Planning Agency (BAPPENAS), the Ministries of Finance and Trade, and BRI. Other parties could be appointed by the Minister of Agriculture on the basis of their background and ability to contribute to the private sector tea industry. 2. The Board's main functions would include: (a) reviewing policy and recommending any changes to the Ministry of Agriculture; (b) approving annual work programs and budgets required to carry out such programs; (c) reviewing project quarterly progress reports and preparing reports for the Ministry of Agriculture; (d) considering views of provincial committees; (e) assuring that all Government agencies involved In the project provide satisfactory assistance to the project; and (f) appointing senior staff members. The Project Management Unit 3. The Project Management Unit, executive body responsible for carrying out the project, would prepare detailed project work programs and estimates for presentation to the PMB. The main functions of the PMU are to:

78 ANNEX 9 Page 2 (a) provide competent technical advisory and supervisory services for the rehabilitation and development of the production and processing of tea; (b) arrange training of field extension staff and tea growers; (c) develop VP nurseries and multiplication plots for supplying planting material to growers; (d) provide technical appraisal to BRI for tea holdings for which credit is applied and generally cooperate with the banks in all matters of mutual interest with a view to ensuring a satisfactory credit system; (e) appoint suppliers of fertilizers to growers; advise such suppliers regarding the suitable delivery center and the estimated quantity of fertilizer required; (f) liaise with the Tea Research for the purpose of assuring that adequate attention is paid to the practical needs of private sector growers; (g) provide overall administration, planning and control of all activities relating to the project; and (h) carry out any other undertakings which, in consultation with the Government and other entitled parties, are deemed to be in the interest of the smallholders and private estates tea rehabilitation. 4. The General Manager would be answerable to the PMB. He would, with the assistance of the Chief Project Advisor, be responsible for: (a) overall administration, planning, control and coordination of the activities of the PMU; (b) preparing the Annual Report for the Minister of Agriculture and quarterly progress report for the Board; and annual performance reports for IDA; (c) representing the PMU to other organizations as may be necessary; and (d) allocating duties to all members of the staff. 5. The main responsibility of the Chief Project Advisor would be to advise the General Manager. He would be answerable to the General Manager but would be accorded the right to refer any matter directly to the PMB. In addition to his general responsibilities, he would:

79 ANNEX 9 Page 3 (a) ensure that the General Manager receives sound counsel and guidance regarding all the activities of the Unit and in a manner that would enable the General Manager to gain the necessary competence as would progressively enable him in due course to run the unit without such advisory service; (b) assist the General Manager on any substantive matter as may be necessary for the efficient running of the Unit; (c) undertake any other responsibilities within his competence and status as may be directed by the PMB or Minister of Agriculture. 6. The main duties of the Executive Assistant would consist of assisting on various administrative matters. Among other things, he would be responsible for: (a) general office management; (b) buildings and vehicles maintenance as well as handling the transport requirements for all staff and coordination thereof; (c) recruitment and supervision of minor staff such as drivers, messengers, etc.; (d) procurement of office supplies; and (e) any other matter as may be directed by the General Manager. 7. The main function of the Assistant General Manager would be: (a) to assist the General Manager in all matters as directed by the General Manager; and (b) to perform any substantive duties that may result from the departure of the Chief Project Advisor. 8. The Technical Development Consultant would be responsible for the overall technical guidance and supervision of the field extension services to both smallholders and private estates. He would also participate in the training of extension staff. Specifically, he would be responsible for: (a) planning, coordinating and supervising field cultivation, nurseries, VP development, and staff as well as growers training activities; (b) liaison with research institutions in Indonesia and abroad and representation of growers interest to the Research institutions;

80 ANNEX 9 Page 4 (c) maintenance of accurate and comprehensive tea production statistics within the project; (d) determination of fertilizer and other input requirements; (e) preparation and submission of information as required by the suppliers of fertilizers and other inputs; (f) technical services as required by BRI handling credit to the growers; (g) training of the Assistant Technical and Development Officer; and (h) any other duties as may be directed by the General Manager in consultation with the Chief Project Advisor. 8. One Tea Officer, who would be a university graduate or have equivalent qualification, would be assigned the functions of organizing and conducting staff and growers courses. He would also be responsible for the day to day running of the Training Centre with the assistance of two Senior Instructors. It is envisaged that other Tea Officers and technical staff would be available to give courses on the various subjects as may be determined by the Technical Development Officer. Arrangements would also be made for ad hoc avai7.½bility of some specialists, particularly from tea research institutes, to give courses to the Unit's technical extension staff. Factory Consultant 9. The duties of the Factory Consultant would be: (a) to provide engineering advisory services to factory owners, particularly those involved in processing smallholders leaf under the project and the new factories; (b) to approve design and plans for the rehabilitation and construction of new factories; (c) to advise the factory owners regarding building and machinery layout, machinery specifications, cost estimates and procurement matters; (d) to determine the location of the new factories; (e) to help in supervising construction works for new factories and factories under rehabilitation. Functions of Advisory Committee 10. The main functions of Advisory Committee would be: to provide a formalized channel of communications between the growers as a group and

81 ANNEX 9 Page 5 the PMU; to ensure that the affairs of the PMU are designed and conducted in a manner that meets the growers' practical interests; to provide a body which the PMU could use to support its activities in the concerned areas particularly as such activities bear on human, non-technical problems; and to provide a source of social pressure against those defaulting on credit repayment or generally failing to follow the technical advice as given by the extension staff. 11. The Committees would not engage in any executive or administrative matters. Their regular channel of communication with the PMU would be through the minutes of the Committee's meetings, copies of which would be forwarded to the Project Management Board. The PMB would, at every meeting, go through the minutes and direct the general manager of the PMU if and what actions should be taken. The general manager would be required to reply in writing to all substantive queries raised in the minutes or attend the committee's meetings for the purpose of dealing with such queries.

82

83 ANNEX 9 Appendix 1 INDONESIA SMALLHOLDER AND PRIVATE ESTATE TEA PROJECT Draft Outline of Proposed Project Performance Report As part of its reporting obligations under the Project, PMU would submit a Project Performance report annually to IDA. The principal components of this report are outlined below. 1. Project Disbursement. PMU would base this section of the report on its own records and on the summaries of BRI accounts which would be submitted regularly to the PMU. Disbursements to sub-borrowers would be broken down by sub-borrowers category and the number of sub-borrowers should be shown in each category. Total disbursements, rather than IDA credit disbursements would be given. Within each category, disbursements would be shown by item or type of expenditure; e.g. fertilizer and pesticides, factory machinery, civil works, etc. PMU expenditures should be broken down by category such as training, extension, head office, studies, etc.; 2. Physical Accomplishments. This section would present assets actually created and services rendered by investments detailed in Section 1: e.g. hectares rehabilitated and replanted for smallholders and estates, training facilities completed, training programs conducted and number of participants, status of factory development, and status of project-related studies; 3. Yields, Production, Marketing and Prices. Data would be presented in this section for project sub-borrowers and also for the industry as a whole. To complete this section, PMU would rely on reports from extension officers, factories, and government statistical agencies; 4. Financial Performance. For project sub-borrowers, information would be presented on financial benefits of project participation, and on sub-loan repayments. Cost/benefit analysis should be conducted on the basis of data presented in Section 3. The format of this report and the methodology to be used in its preparation would be agreed during initial project supervision.

84

85 INDONESIA SMALLHOLDER AND PRIVATE ESTATE TEA PROJECT PROJECT MANAGEMENT UNIT STAFFING REQUIREMENTS (Man Years) 1973/ / / / / / / /81 Head Office General Manager 3/ Assistant General Manager Chief Project Advisor * 3/ i Executive Assistant Accounting Systems Consultan t * 3/4 k Accountant 3/ Accountant's Assistant Audit Clerks 3/ Bookkeepers 3/ Secretaries 2t Drivers Messengers TUchnicalj Development Officer* 3/ i Technical Develop.zent Officer 3/ Ass. Technical Officer i Field Tea Officer Ass. Tea Officers Senior Tea Instructors Junior Tea Instructors Statistics Clerk X Secretaries 2k Clerk/Typist Drivers 3-3/ Messengers Field Nursery Development Officer Nursery Manager Nursery Supervisor Nursery Headman a Clerk/Typist Storekeepers Drivers Guards H Factories X x Consultant * I 1 4 Assistant Factory Consultant Secretaries Draughtmen Drivers Messengers I * nb6tiuattana1ly recruited May 8, 1973

86 INDONESIA SMALLHOLD CT Project Management Unit Staff Costs (Rps '000) Unit Cost Rp '000 per Annum 1973/ / / / / / / /81 Total Read Office General Manager 2,400 1,800 2,400 2,400 2,400 2,400 2,400 2,400 2,400 18,600 Assistant-General Manager 1, ,600 1,600 1,600-4,800 Chief Project Advisor* 23,500 17,625 23,500 23,500 23,500 5, ,000 Executive Assistant 1, ,000 1,000 1,000 1,000 1,000 1,000 1,000 7,500 Accounting Systems Consultant* 20,700 15,525 5, ,700 Accountant 1,440 1,080 1,440 1,440 1,440 1,440 1,440 1,440 1,440 11,160 Accounts Assistant ,200 Credit Clerks ,870 oa0k-keepers ,525 Secretaries ,785 Drivers , Messengers, etc ,450 Subtotal 33,250 36,175 31,000 31,300 15, ,650 9,650 6, , Technical & Development Officer* 20,700 15,525 20,700 20,700 20,700 5, ,800 Technical & Development Officer 2, ,530 2,040 2,040 2,040 7,650 Assistant Technical & Development Officer 1, ,440 1,440 1,440 1,440 1,440 1,440-9,360 Tea Officers 800 1,600 3,200 3,200 3,200 3,200 3,200 3,200 3,200 24,000 Assistant Tea Officers ,500 1,500 1,500 1,500 1,500-8,250 Senior Tea Instructors 360 1,080 2,160 3,240 3,960 5,400 6,480 6,480 3,240 32,040 Junior Tea Instructors 240 5,400 12,240 15,600 19,920 24,720 29,520 29,520 14, ,800 Statistics Clerk ,000 Secretaries ,785 Clerk/Typist ,200 Drivers ,032.5 Messengers, etc ,000 Subtotal 26,202 43,690 48,880 53,920 46,165 47,380 47,380 26, ,917.5 Nursery Development Officer 1, ,000 1,000 1,000 1,000 1, ,000 Nursery Managers 800 1,600 3,200 3,200 3,200 3,200 3,200 1, Nursery Supervisors ,440 1,440 1,440 1,440 1, ,640 Nursery Headman ,280 Clerk/Typist ,760 Storekeepers ,320 Drivers ,400 Night Guards Subtotal 4,700 9,400 9,400 9,400 9,400 9,400 4,700-56,400 Factory Consultant * 20,700-10,350 20,700 20,700 10, ,100 Factory Consultant 2, ,020 2,040 2,040 2,040 7,140 Assistant Estates Consultant (Factories) 1, ,440 1,440 1,440 1,440 1,440 1,440 8,640 Secretaries (Factory) ,690 Draughtsmen Drivers Messengers Subtotal - 10,535 22,850 22,850 13,760 4,430 4,430 4,430 83,285 Total 69,152 99, ,470 84, ,860 66,160 36, May 8, internatlonally recruited

87 INDONESIA SMALLHOLDERS AND PRIVATE ESTATES TEA PROJECT ORGANIZATION MtJnister of Agriculture Tea Project Policy Board r--_ ngeneral & i{ Factories Consultant Exctv 1 Assistant Assistant Factories lassistant Technical & Advwry Tee { Consultant Developrrent Officer l l Accountant i AvCommittees ikabupatens) I Nursery Development Advisory Tea _ J ~~~~~~~~~~~~~~Commit Tea toffcers ll Tea Officer l l Accounts Kacerematans) (Field) Training) Assistant I Nursery Assistant Tea M.na ers l l Offi cers l V ntvounary Advisory Tea CoMmmttees I S e n D io r r T 3 e f a m e n l l I n s tr c to r s l C o e sa s ) e(d Instructors (Training) Nursery Junior Tea Supervisors Instructors World Bank-7418(R)

88

89 ANNEX 10 INDONESIA SMALLHOLDER AN;D PRIVATE ESTATE TEA PROJECT Nursery Program 1. All major replanting and replacement planting under the project would be done using VP material. Only in the early stages of the project would some seed material be used (for 150 ha) to avoid delay in the planting schedule. VP plant material in Indonesia is limited to stock mother bushes held by the Research Institute for Estates Crops (RIEC). With PT XII and XIII both engaged in tea rehabilitation, VP plant material from RIEC is in constant demand. To meet the present and projected shortage private and government estates must begin to establish their own nurseries, using RIEC cuttings. Under the proposed project, it would also be essential for the PMU to establish material requirements for the rehabilitation program. Since mother bushes require 3 years from initial planting to yield cuttings, these nurseries must be started without delay. 2. Ten ha of multiplication plots would be established in 1973 to provide cuttings for nurseries beginning in 1975/76. About 4 ha of nursery plots would be established during 1973 to provide planting material in Nurseries would be increased to 15 ha by The annual output of the multiplication plots would permit an increase in plantings from 500 ha to 5,000 ha per annum, but additional private nursery facilities would be required in the last 2 years of the project, for the rooting of these cuttings. Until 1976/77 part of the planting requirements would have to be supplied from outside the project mainly from the RIEC and some government and private estates. A number of estates have proven material in leaf production. These could be "run up" to supply cuttings. Plant requirements and sources are indicated in Table 1. To perform clonal selection for PMU nurseries, to identify all possible sources of supply, and to advise on the establishment of nurseries, Government has extended the contracts of experts of the U. K. Overseas Development Agency (ODA). Their engagement does not represent a cost to the project. 3. A list of vegetative propagated clonal material available in West Java is presented in Table 2. Clones in groups A and B would be suitable for immediate planting and those in group C would require further nursery trials before planting is recommended. The table provides a rank/order comparison of available material as a means of evaluating critical characteristics. Values range from 5 (exceptional) to 1 (unsatisfactory).

90

91 PIANTING SCHEDULE, PLANT RERQUIREMENTS AND SOUJRCES OF PIANT SUPPLY RE4UIREKENTS FOR LEAF CUTTINGS Established Planting Rooted Plant Total Supplied from Supplied from schedule Requirements Reuirments / PMU nurseries Outside Project (ha) ' / < 2,024 1/ 2, / K 5,060 _ 1,000 (seeds) 1975/ ,105 13,500 10,200 1,800 (seeds) 1976/ ,800 L 32,900 20,300 12, /78 1,950 26,325 39, , /79 2,350 31,725 February 13, / 25% above rooted plant requirements to allow for selection. Arrows indicate that leaf cutting requirements in year 1 are the supply of rooted plant requirements in year 2. Except for 1973/74L, see text. ji Yield of cutting starts in year 3 after planting and ontinues as follows: Year No. of cutting/bush 7- *- W % have to be subtracted from these yields to allow for wastage. 6 t 3/ For Mm establishment of 10 ha multiplication plots (169,000) in 1974, 50 ha planting by April 1974 and O0 ha in 1974/75. L/ Partly supplied by private estates nurseries.

92 INDONESIA SMALLHOLDER AND PRIVATE ESTATE TEA PROJFCT Nursery Program Evaluation of Available Clones GROUP A Fermen- BLister Overall Clone tation Rootn Spread Yield Resistance Coefficient Remarks T.R.I Exceptionally T.R.I good all round P.S clones T.J.I.N Suspect top grade tea maker Kiara Small leaf, difficult and expensive to pluck suspect tea maker but excellent grower. S.A Shy rooters but with other. good characteristics. P.S (Shy rooters and not blister resistant K.P (but good tea makers with above average T.J.I.N (yield. S.A ( GROUP B P.S Suspect to poor tea P.S makers but good T.J.I.N yield characteristics f 0 T.J.I.N Suspect tea P.S makers-and T.J.I.N rooters. GROUP 0 (INSUFFICIENT DATA AVAILABLE) P.S. 4o00, M.A.L. 2, P.S. 125, M.A.L. 11 T.J.I.N. 174, S.K.D.T. 118, M.A.L. 12, G.H. 2, S.K.D.T. 123, S.A. 63, S.A. 65. February 8, 1973

93 INDONESIA SMALLHOLDER AND PRIVATE ESTATE TEA PROJECT PROJECT COSTS (Rp lillions Project Year Total Fiscal Year 1973/ / / / / / /81 Rp Mill-on US$ eg$ 00 Smallholder Field Development Fertilizer and Pesticides ,30 85 (1.725 Labor (incremental) Planting Material Subtotal ,505 3, Estates Field Development Fertilizer and Pesticides Labor (incremental) e Planting Material Hoe.sing Development Plan Subtotal t , Factory Rehabil- tat/on. Civil Works Machinery Q , Vehicles Design and Supervision Subtotal , ,190 New Factories Lasd Civil Works Machinery Vehicles Desig. and Supervision sno 9i Subtotal , Project Management Unit Civil Works 20.0 IO, 2I1, Equipment Vehicles 1S, f, 6, Nursery Establishment o 6 Expatriate Staff Operating Expenses , gubtotal j ,016 2, P; u~ _; Assistance fllversiflcation Trials _ U ) 60 Overseas Training o Market Study BRI Study BRI Project Assistance _ Subtotal Total , , , ,538 11, ,473 Contingencies Physical i x Price 2/ 2I ,7) 4,lO , n ,762 It, ,327 GRAND TITAL Rp Million !0S.o 1,116.I l.'3t. 59S.1 S2',.9,6,00 15, ,800 0S.t ' , , , ,nS0.8 1, ,.421 1/ 57. oer year for factories 2/ 57 c,mpounded annually, ex.ep' fo rne 'oreiln exchange =ooponcn! of fa-i,or/ rmah;ne whe-e a p ice on-ingen-. o' 83 compounded annuallv has been applied. Mal 7, 1973

94 Table 2.)ONES IA V;MAL.LCLDwR AND PRIVATE ESTATE TEA PROJECT FACTOY REXAHILITATION Cost Sunmary l/ Total Total Foreign Exch.ge (Rp '000) (US$ 000) (US$ 000) L CIVIL vrflks Factory Improvements 7, Maee rery Foundations 4, , Other Buildings 5, Sub-Total 17, MACHINERY Withering 13, Rolling/Fermenting 11, Drying 15, Sifting/Packing 9, Utilities 26, Miscellaneous 1, Sub-Total 75, / 15% Internal Transport-/ 11, Installation o - 0 Sub-Total O VEHICLES h-wheel. Drive (1) 1, Trucks (2) 3/ Suib-Total 7, _ DESIGN AND SUPERVISIONY 11, SUBTOTAL 126, CONTING NCY Physical (5%) 6, Price 5/ 49, Subtotal 56, TOTAL hhlo / Average of estimated costs for 5 proposed factories 2/ Djakarta to Bandung Area 3/ For leaf collection hi 10% of total less vehicles 2/ 5% compounded3early on local costs and 8% compounded yearly on foreign exchange costs. In addition 1Q% (Rps 9.3 million) has been added to foreign exchange costs to account for possible effects of the US dollar devaluation of February 13th. F'ebruary 26, 1973

95 1NX)NESIA vmalufisl.der AN&D PRIVATE ESTATE TEA Pft0JE 'T I.EW FACTORY Cost Suvmmary i/ Total Total Foreign Excmhnge (Rp 000) (US$ 000) (US$ o0o0 (. LAND 4, CIVIL WO7RKS Factory 9', Housing 8, O0 Other Buildings Sub-Total MACHINERY Withering 14,525 35' Rolling/Fermenting 16, Drying 15, Sifting/Packing 13, Utilities 31, Miscellaneous Sub-Total % Internal Transport-/ 14, Installation 4, Sub-Total 19, 'EHICLES 4-Wheel Drive (2) 2,490 6.o Trucks (3) _3/ 5, &5 Sub-Total 7, T DESIGN AND SUPERVISION _/ 0, SUBTOTAL 260, ONTING14CY Phyrsical (5%' 12, Price 5/ 89, Subtotal 102, TCTAL 362, / Total project cost for one now factory 2/ Djakarta to Bandung Area 3/ For leaf collection i 10% of total cost less land and vehicles 3/ 5% compounded yearly on local cost and 8% compounded yearly on foreign exchange costs. La addition foreign exchange cos6s have been raised by 10% (8p 14.7 million) to account for possible effects of the US dollar devaluation of February 13th. One factory to be constructed in 1976/7' and one in 1977/78. Price contingency for former as in Table and for latter,rp 11?,196. February 26, 1973

96 Annex 1l Table g I;a)0 AT'i:'STI SiKALL,OLDER A'jD PRIVATE 7STAT- T2A PROJVCT NURSERY MODEL - Investment Requirements CIVIL WORKS (Rp '000) (US$ 000) Foreign Exchange (US$ 000) K Land Preparation T'ousing 1, Sub-Total i Q1JIPM7J'TT -Planting T7quipment Vehicles wheel 1, Motorbike t-sprayer ub-Totaj. 1, / CAFITALIZ7D 7s?T7JSBS rlanting Jl4aterial ertili,zer and Pesticides Methyl Bromide Labour lj - - Sub--Total OT OA I T r 4V, / Ylurserv consists of 3 ha mother bushes 5 ha nuraery plots and 1- ha buildings and mix. 2/ Incurred as follows for mother bushes: Ys 1 Rp 818, , , ,700 February 8, 1973

97 Annex 11 Table 5 INDONESIA SMALLHOLDER AND PRIVAT; ESTATES TEA PROJECT PROJECT MANAGEMENT UNIT Capital Investment Requirements Total Total Foreign Exchange Rp_'000 US$_000 US$'000 % HEAD OFFICE Office Euipment Vehicles - 4 wheel drive (5) 6, Motorbikes (2) Bicycles (6) *3 85 Sub-Total 7, EXTENSION SERVICE Office Equipment Vehicles - 4 wheel drive (6) 7, Motorbikes (18) 5,h Bicycles (123) 3, Sub-Total 17, TRAINING Buildings 49, , Equipment Vehicles - 4 wheel drive (1) 1, Sub-Total 51, NURSERIES Land Preparation Housing 3, Equipment Vehicles - 4 wheel drive (3) 3, Motorbikes (3) Capitalized Expenses 3, Sub-Total 12.Zrr ESTATE CONSULTING Office Equipment Vehicles - 4 wheel drive (1) Sub-Total TOTAL INVESTMENIT 90, February 8, 1973

98 Annex 11 Table 6 INDONESIA SMALLHOLDER AND PRIVATE ESTATE TEA PROJECT TECHNICAL ASSISTANCE Cost Estimates (lp Million) Project Year Total Year 1973/ / /77 Overseas Training o 5.o 15.0 Market Study BRI Management Study Y _ 8h.o BRI Project Assistance _ 15.0 Diversification Trials Subtotal Contingencies 73.6 TOTAL / Twelve 2-month trips. 2/ Includes cost of 3 months of expatriate consulting. 2/ Consists principally of 18 months of expatriate consulting. 4/ Includes 18 months of expatriate consulting. May 10, 1973

99 INDONESIA SMALLHOLDER AND PRIVATE ESTATIE TEA PROJECT IDA-Financed Expenditure (Rp Million) Percent-- Tta of Cost 1973t / / / / / / /81 Continge_cies Mlion $ 00 Fertilizer and Pesticides , ,295.1 Field Ecipment Factory Esuipslent and Vehicles , ,703.5 Factory Civil Works PMU Civil Works PMU Office and Field Equipment, Teaching Aids and Vehicles Consultants Service and Overseas Training P-FU Consultants loo Factory Design and Supervision , BRI Project Assistance BRI Management Study Marketing Study Overseas Training Diversification Trials Subtotal ,326.5 'Total (Rp M.illion) , ,800.0 (US$ '000) , , , , ,800.0 contingencies (Rp Million) > 1/ Representing 1007.of foreign exchange expenditure 5 x1 May 8, 1973

100 Annex 12 Table 2 INDONESIA SMALLHOLDER AND PRIVATE ESTATE TEA PROJECT Sstimated Schedule of Disbursements (US$ '000) IDA Fiscal Year and Quarter Quarterly Disbursement Cumulative at end of Quarter 1973/71. December 31, March 31, June 30, /75 September 31, December 31, March 31, June 30, /76 September 31, December 31, March 31, ,043-. June 30, , /77 September 31, ,24h.8 December 31, ,7 3-3 March 31, 1977 L11.9 2,168.2 June 30, , i77/78 September 31, ,540.4 December 31, ,197.0 March 31, ,786.0 June 30, , /79 September 31, ,279.8 December 31, o 4,793.8 March 31, 197" ,406.5 June 30, , /80 September 31, ,012.8 December 31, ,301.1 March 31, ,586.7 June 30, , /81 September 31, ,048.8 December 31, ,236.5 March 31, ,424.2 June 30, , /82 September 31, i 7,800.0 Mav

101 ANNEX 13 Page 1 INDONESIA SMALLHOLDER AND PRIVATE ESTATE TEA PROJECT Smallholder Credit A. Procedures 1. The system and procedures for extending credit to smallholders under the proposed project would be similar to those now in effect under the Improved Bimas Rice Intensification Program. Some modifications have beer proposed to account for the differences arising from the fact that tea is a perennial crop whereas rice is annual. Disbursement and collection periods would be 5 years and 20 years, respectively, rather than 1 year as for rice. 2. Brief Description. Credit to smallholders would be extended principally in kind (approximately 80%), the balance being monthly cash payments to meet added labor costs under the project. Authorization to receive supply credit would be by way of certificate detailing the types and quantities of materials to be issued. This certificate, signed by the Village Unit Mantri (Manager) of BRI, and based on technical recommendations of the extension officer, would be surrendered to the supplier upon receipt of the specified materials. The supplier in turn would submit the certificate to the BRI for payment. Cash payments would be made by BRI directly to the farmer. Technical supervision of sub-borrowers would be the responsibility of the extension officers of the PMU, but accounting and financial supervision would be the responsibility of BRI. An Accounting Systems Specialist would assist BRI in establishing effective accounting and supervision procedures. Detailed Procedures 3. (Step 1) A smallholder wishing to participate in the project would contact the extension officer assigned to his desa and request a field inspection of the area proposed for improvement. 4. (Step 2) Upon field inspection and such further consultation as might be required, the extension officer would prepare technical recommendations for the area to be improved. A summary of these recommendations, expressed in terms of the types of quantities of inputs required, would be entered on the smallholders loan application form and signed by the extension officer.

102 ANNEX 13 Page 2 5. (Step 3) The smallholder would then complete the application form and submit it to the village unit of BRI. 6. (Step 4) Credit inspection would be conducted by BRI staff and would include confirmation from the Village Headman (Lura), in writing, that the applicant is entitled to cultivate the properties listed for inclusion in the project. 7. (Step 5) Upon approval of his loan application, the smallholder would enter into a loan agreement with BRI, and would assign to BRI such collateral as is deemed necessary by the bank to secure the specified loan amount. 1/ This agreement would be subject to annual confirmation throughout its duration, by the extension officer to ensure conformity with recommended husbandry practices, and by BRI staff to ensure satisfactory credit rating and the maintenance of the specified collateral. 8. (Step 6) Staff of the BRI village or mobile unit would then prepare certificates for the borrower's material input requirements for the first year as specified in the contract. Separate certificates would be required for planting material and for chemical inputs since different suppliers would be involved for each. Certificates would be signed by the BRI Mantri, and issued to the sub-borrower. 2/ 9. (Step 7) The smallholder would then present these certificates to the designated supplier to receive the specified types and quantities of inputs. To minimize the cost of input distribution and the uncertainty of compliance with quantity specifications, technical recommendations should be tailored to permit the distribution of whole packages of material wherever possible. 10. (Step 8) The smallholder would endorse the certificate as proof of having received the specified types and quantities of inputs, and surrender it to the supplier. 11. (Step 9) The supplier would then prepare an invoice for the materials released in exchange for the certificate, using prices specified 1/ In most cases, the principal collateral would be claims against future crops. However, if BRI, on the basis of its credit investigation is unable to extend the credit specified in the loan application, an amended application may be approved, in consultation with the extension officer, such amendment to cover a different or reduced area of land so as to reduce the credit requirement without jeopardizing the technical integrity of the input recommendations. 2/ Batching of certificates for signature and issue would greatly reduce administrative costs, and would not effect the benefit to the smallholder. However, certificates must be at the disposal of the smallholder in sufficient time to permit the collection and applications of material inputs at the optimum time of the growing season.

103 ANNEX 13 Page 3 in the supply contract with the PM.U. 1/ The invoice with the certificate attached would be submitted to the local BRI unit for reimbursement. At the discretion of the supplier, certificates could be bunched and a common invoice submitted, itemized by type of input. 12. (Step 10) Inasmuch as prior approval for this credit would already have been granted by BRI, disbursement could be made within several days of invoice receipt by the bank. Inspection by the bank at this point would require only: (a) verification that invoice and certificate amounts were consistent; and (b) verification that certificate amounts were in accordance with those specified in the respective loan agreements. Such inspection would be conducted by staff of the village units, but the cash requirements are such that actual disbursement probably would be handled by the supervising branch office. 13. (Step 11) The cash payment to the smallholders credit would be disbursed monthly on a prorated schedule based on the incurrence of labor expenses as specified in the loan agreement. The village unit would be expected to disburse these funds, and would probably require 1 week notice of intent to collect by the smallholder. 14. (Step 12) Certificates and cash authorizations for each year covered by the loan agreement would be prepared annually by the village unit staff, by a date sufficiently early in the season to permit the timely collection and application of inputs. Each certificate would require: signature of the village unit mantri confirming the satisfactory credit and collateral position of the smallholder. Before the preparation of certificates, however, the local extension officer would be required to confirm in writing the use of proper husbandry practices by the smallholder during the previous season. 15. (Step 13) Prior to the issue of certificates, village unit staff would submit to the Lura a list of names and properties to be included in the year's disbursements. Signature on this list by the Lura would confirm the continuing rights of those listed to cultivate the specified properties. 16. (Step 14) Upon receipt of signatures as specified in 12 and 13 (above), village unit staff would then release certificates to smallholders and the procedure of 7 through 11 (above) would be repeated. 1/ These prices would have formed the basis for estimating total credit requirements at the time of application. Significant price changes might require amendments to the subloan agreement with respect to the collateral assigned as loan security.

104 ANNEX 13 Page (Step 15) The collection of principal and accrued interest on all credit whether extended in cash or kind would be made by the village unit of BRI, in cash, directly from the smallholder in accordance with the schedule set out or duly revised in the loan agreement. 1/ 1/ Revision of the original repayment schedule could be made in recognition of crop failure or individual financial difficulties. In the former case, the extension service should be consulted to determine the extent of crop failure in terms of area effected and yield reductions, and thereby to establish a suitable revision of the repayment schedule. Accelerated repayment should be without bonus to BRI.

105 ANNEX 13 Page 5 B. Draft Proposed Accounting System for Smallholder Sub-loans 18. To assist BRI in thee administration of the proposed project, the following accounting system is proposed for the effective control of credit distribution and collection. Such modifications as are required by law or the established accounting system of BRI, and those recommended by the financial advisor, are assumed. Documents Required 1. Loan Application 2. Loan Agreement 3. Chattel Mortgage (as required by BRI, including ownership papers) 4. Credit Authorization 5. Credit Account Record A 6. Credit Account Record B 7. Supply Certificates 8. Voucher: credit disbursements (containing cancelled supply certificates and cash credit receipts) 9. Credit Report (annual) 10. Production Performance Report (annual) 11. Consolidated Project Disbursements Record 19. All documents except items 5 and 6, "Credit Account Record" and 11, "Consolidated Disbursement Record" would be contained in a file under the sub-borrowers name, such files to be kept in the village unit in alphabetical order. Items 5 and 6 would be in the form of single manila cards maintained separately from the files but in the village unit and in alphabetical order. Item 11 would constitute the village unit's current position record for all credit activities under the project. 20. Accounting Procedure. A file in the name of the applicant would be opened at the time of credit application, and documents 1, 2, and 3 entered in accordance with the credit procedure outlined in section A of this annex. 21. Upon approval of the loan application, a Credit Authorization would be prepared on the basis of the technical recommendations of the extension officer as set out in the loan application. A sample format of the Credit Authorization appears as Appendix 1 to this annex. This document would detail credit authorization by object of expenditure and year of proposed disbursement.

106 ANNEX 13 Page A Credit Account Record (Type A) would also be prepared at this time. This card would constitute a running record of disbursements and collections during the disbursement period. A sample format appears as Appendix 2 to this annex. 23. The form on which supply certificates are printed should consist of 2 sections, separated by a perforated line. One portion would constitute the supply certificate, to be detached and handed to the sub-borrower: the other would be the bank's record of certificates distributed and would, by containing the signature or mark of the sub-borrower, constitute a receipt for each certificate issued. Forms should bear a unique identification number which would appear on both the certificates and record portions. The supply certificate should bear the name and branch of the supplier, type and quantity specifications for materials covered by the certificates, and the signature of the BRI village unit mantri or his designated staff member. The record portion of the form, to be retained by the village unit, should contain the same information as the supply certificate, but should also bear he signature or mark of the sub-borrower as proof of certificate receipt. A sample format for this document appears as Appendix 3 to this annex. 24. Cash disbursements to smallholders should be made in accordance with a prorated monthly schedule of authorized labor expenditures. Receipts signed by the smallholder should be obtained in duplicate, one copy to be placed in the Credit Disbursement Voucher of the sub-borrowers file, the other to be filed as a source document for the Consolidated Disbursements Record of the village unit. 25. The Consolidated Disbursement Record, which constitutes the village units current record of transactions under the project, should be updal:ed weekly. A summary of this record should be submitted monthly to the branch office of the district. Such a summary should contain: (a) disbursements and collections for the reporting month (disbursements to be listed by type of source document); and (b) total disbursements and collections during the project to date (disbursements to be listed by type of source document). A sample format for the Consolidated Disbursement Record appears as Appendix 4 to this annex. 26. Other source documents for the Consolidated Disbursements Record would include invoices from suppliers, attached to their respective payment authorization slips and receipts for payment. Separate files should be kept of these documents for each supplier. Payment to suppliers would probably be made by a credit to the companies' bank accounts, in which case a copy of the notice of deposit would substitute for the receipt for payment.

107 ANNEX 13 Page Annual Credit Reports, to be prepared by BRI staff, and annual Production Performance Reports, to be completed by the extension officer, should be completed for individual borrowers mid the decision to authorize the next credit installment made sufficiently early in the season to permit the timely receipt of inputs by the smallholder. Reports should be based on the crop year, and their preparation in August-September would facilitate a better distribution of workload for the village unit staff. 28. At the end of the disbursements period specified in the Credit Authorization, Credit Account Record A should be replaced by Credit Account Record B as the current record of collections for each sub-borrower. A sample format for type B appears as Appendix 5 to this annex. In practice, a separate card file should be started for types B, and a transfer tag affixed to each card in the type A file for which a B card had been prepared. Eventually, all types A would have corresponding types B, and the original card file could be moved to dead storage space. 29. Appendix 6 is a schematic presentation of the relationship among documents and files discussed in this section.

108

109 Name of Initial Authorization: Borrower BRI Address TDA Area: ITEM Planting Material Fertilizer Type A Type B Type C Type D Pesticides Type A Type B Type C Cash Credit TOTAL TEA DEVELOPMENT CREDIT AUTHORIZATION Rp Rp Rp Rp Rp Up Rp Rp Rp Rp Rp Rp Quan. Origll Revised Quan. Origtl Revised Quan. Orig'l Revised Quan. Orig'l Revised Quan. Orig'l Revised Quan. Origll Revised ANNUAL AUTHORIZATION File of credit report approval File of acceptable production report File # of annual time list signed by Lura February

110 -. A D7J 2 LOQHlEpT'T CREDIT AhCDITE H'CO92GiD A 1) -. B Ir TL; Plantin,- Material Fertilizer Pesticide 'ast C:-redit TOTAL C'.DITS t.epa.mient BALANCE_ P72PAYMEII. SC7 C2DT7JU Original Adjusted * Intere st Date of Adjustment February 8, 1973 * Explanation of Adjustment

111 TEA DEVELOPMENT PROJECT SUPPLY CERTIFICATE 2! TD No: TD No: Suppliers Name _ Bank Rakjat Indonesia Hereby Authorizes: Suppliers Outlet ---_ -_ Suppliers Name: Borrowers Name Suppliers Outlet: Borrowers Kabupaten _- Borrowers Desa _- To Release To: Borrowers Name Certificate Authorization: Borrowers Kabupaten Borrowers Desa Fertilizer Type A: Kilograms The materials listed hereunder in the quantities specified, for which Type B: Kilograms reimbursement will be made under the terms and conditions set forth Type C: Kilograms in the Tea Development Credit Agreement between Bank Rakjat Indonesia and the supplier, dated Pesticides Type A: Litres Fertilizer Type B: Litres Type A: Rp = Type C: Litres Type B: Rp - Type C: Rp - Date of Issue: Pesticides Signature for BRI Type A: Rp = Type B: Rp - Borrowers Acknowledgement of Type C: Rp = certificate receipt Duly Authorized this Day of 197_, TOTAL Rp Borrowers AcknoMedgement of Receiot Suppliers request for reimbursement I/ A separate supply certificate of the same general format should be prepared for the authorization to collect planting material. February 8, 1973

112 Annex 13 Appendix 4 Consolidated Disbursement Record Against Supply -Certificates Cash Advances Total Week fvanting Weekly Total Weekly Total Ending Material Chemicals Total To Date Total To Date To Meekly Date February 8, 1973

113 Annex 13 Appendix- TEA DEVELOPMENT CREDIT ACCOUNT RECORD B (Repayzent Record) Payment Schedule Payment Date of Interest Received Payment On Arrears BALANCE (Balance ransferred fr n Account Record A) February 8, 1973

114 ANNEX 13 Appendix 6 SMALLHOLDER CREDIT ACCOUNTING SYSTEM -/ Document File 1. Loan Application Sub Borrower File_ 2. Loan Agreement 3. Chattel Mortgage L!. 4. Credit Authorization Card File of Account Records 5. Credit Account Record A 6. Credit Account Record B -- -f-a Card File of Account Records 7. Supply Certificates- 8. Credit Disbursement Receipts_ ; 4 Consolidated Project 8teeDisbursements Record 9. Credit Report 10. Production Performance Report- 1 lource Documents for Disbursements ' tjseparate File for each Supplier and for cash payments receipts 11. Consolidated Project _ Disbursement Record 1/ All records to be maintained in village unit, copies and summaries elsewhere as agreed within BRI. Quarterly project summaries to be sent to PMU.

115 ANNEX 14 Page 1 INDONESIA SMALLHOLDER AND PRIVATE ESTATE TEA PROJECT Financial and Operating Results A. Assumptions 1. Cost and Prices. All costs and benefits under the project have been assessed on an incremental basis over present and projected values without the project. 2. Yields and Prices. Yields and prices are discussed in detail in Annex 3. A summary of values used in the financial analysis is presented below: Yield Prices (Rp/kg) Full Present Development Present 1980 Smallholders: (kg made tea/ha) Rehab. Leaf Replanted Leaf - 1, Estates: (kg made tea/ha) Rehab. Leaf Replanted Leaf - 1, Factories: (made tea/green leaf) Made Tea 1:4.5 1: Cost of Labour. All estate and factory labour has been costed at Rp 110 per day including benefits other than housing. This is somewhat higher than the actual average for all labor types, which fluctuates seasonally and among individual enterprises. It is assumed that this margin over actual rates is sufficient to compensate for real rate increases of 2-3%/year through Smallholder hired and family labor has been costed at Rp 85 per day. 1/ However, since this labor force is experiencing real rate increases, real costs have been raised by 5% per year. 4. Period of Financial Models. Field development models have been based on a 30 year economic life. Properly treated, tea bushes should remain productive for a much longer period. Factory models are based on a 25 year period, the economic life of the civil works component. The PMU budget has been prepared for the 8 years of project disbursement. It is expected that 1/ Rp 85/day is present casual rate, whereas Rp 110/day used for estates is present rate for permanent employees, including benefits other than housing.

116 ANNEX 14 Page 2 the PMU would continue to exist, perhaps in a modified form after the project period, but its principal role in project execution would have been accomplished by that time. 5. Field Development. Investment has been defined as the cost of clearing land plus the full cost for 3 years of replanted tea. For rehabili-.ated tea the incremental cost for 3 years have been considered. (See Table 1.) B. Financial Returns 6. Project Management Unit. Table 2 of this Annex presents a budget for the PMU over the project period of 8 years. The Table demonstrates the significance of revenue earnings in the reduction of the net capital contribution by Government. 7. Government of Indonesia. Table 4 presents the projected government cash flow under the project. Should government provide funds to meet a portion of BRI's commitment under the project this outflow would be in addition to those presented in the Table. It is assumed that terms of such supplemental financing would be sufficient to meet direct costs, and would not adversely affect tbh financial results of the project to government. 8. Smallholder Field Development. Since costs and revenues are directly related to area, a single model is representative of the benefits to all smallholders. The model assumes that 1 ha would be developed under the project, of whiich.4 ha would be replanted and.6 ha would be rehabilitated by the application of fertilizer, pesticides, and better management techniques. Yield and price assumptions are discussed in Chapter VI. Replanting has been phased over 2 years in order that increased yields from rehabilitated bushes would compensate for uprooted bushes and prevent a significant decline in the smallholder's cash income. A 2 year fallow period was also included. Hired and family labor has been costed at the current rate of Rp 85/day and adjusted for expected real rate increases of 5% per annum through Based on cost and benefit comparisons with and without the project, the rate of return on investment would be 27%, over a 30 year period. Net income from the project above present levels would enable the borrower to repay the loan of Rp 140,000 at 12% in 10 years after an initial grace period of 5 years. Interest during the grace period would be paid annually by the borrower. (See Table 5.) 9. Estate Field Development. A model of 100 ha was prepared for estate field development, of wlhich 63 ha would be replanted and 37 ha rehabilitated. Development has been phased over 6 years to ensure the availability of planting material and to keep annual development areas within manageable limits. Based on with/without comparison (Table 6), the model results in a rate of return of 12% on investment over a 30 year period (Table 7). Net income from the project would enable the borrower to repay the loan of Rp 23 million at 12%

117 ANNEX 14 Page 3 in 10 years, after an 8 year grace period. The longer grace period for estates reflects the higher proportion of replanting. During the grace period, interest would be paid annually by the borrower. The rate of return is considered acceptable on the following grounds: (i) estimated revenues without the project are optimistic, both in terms of yield and, as quality declines, price; (ii) increased leaf production on estates with factories permit factory operation at closer to capacity, thereby reducing the unit cost of made tea which has not been considered in the analysis; and (iii) incremental analysis understates the borrowers ability to service debt. 10. Rehabilitated Factories. The rehabilitation costs differ for each of the 5 proposed factories, but are within 12% of the US$320,000 average used for analytical purposes. At the time of appraisal, 2 of the 5 factories were not operating, and the remaining 3 were producing poor quality tea and encountering frequent mechanical disorders. A generous estimate of production without the project is 400 tons per factory per year, declining by 25 tons per year to 250 tons. Net costs and benefits to the project under this assumption yield, conservatively, a 17% rate of return over 25 years (Table 8). The borrower would be able to repay the US$238,000 loan at 12% over 10 years, after an initial grace period of 5 years in which interest would be paid annually by the borrower. 11. New Factories. New black tea factory investment in West Java would yield a 14% rate of return (Table 9). Repayment over 10 years at 12% is achievable after a 5 year grace period. This rate is considered acceptable on the following grounds: (i) production build-up has been phased over 3 years, although in fact capacity output would probably be achieved at an earlier date; (ii) debt would account for only 70% of total investment and therefore debt service would not be jeopardized; (iii) additional capacity is considered essential in Garut and Purwakarta to ensure that smallholders derive the maximum benefit from the project; (iv) no provision was made for special marketing provisions which could increase returns to owners which might integrate these installations into vertical or horizontal combines; (v) financing arrangements could reduce the effective cost of capital below tuie 12% explicit rate of funds provided under the project.

118

119 Annex 14 Table 1 INDONESIA SMALLHOLDER AND PRIVATE ESTATE TEA PROJECT Investment Costs for Replanting One Hectare and Rehabilitating One Hectare of Smallholder Tea Year Man-Days Fertilizer Pesticides Plants Total No Rpsi/ Kg RpsA/ Rps Rps '000 Rps Replanting , _ , ,700 10, , , ,200 10, /1_ ,200 10, ,000 57,100 30, , Rehabilitating ,600 5, ,600 5, ,600 5, ,800 15, March 2, / At Rps 100/day 2/ At Rps 42/kg 3/ Includes 11 man-days for plucking

120 Annex 14 Table 2 INLONESIA SMALLHOLDER AND PRIVATE ESTATE TEA PROJECT PROJECT MANAGEMENT UNIT Operating Budget (Pp Million) Pro;ject Year TOTAL Year 1973,' / / / / / /81 (Rp Million) (US$ '000) EXTENSION SERVICE Staff Transportation 2/ I Nousing Rental Field Office Rental Field Office Equipment & Supplies Maintenance Sub-Total i : 3 T TRAINING AND TECHNICAL ASSISTANCE Staff Student Subsi tcqce J o 6.o 6,o Student Travel I/ Equipment and Supplies Overseas Study Market Study _ - - Sub-Total I83 2W7 S it!7i. M NURSERIES i/ Labour and Supervision Fertilizer and Pesticides Materials Land Rental Maintenance Sub-Total HEAD OFFICE Indonesian Staff Consultants ,9 64, Transportation Housing Rental Office Rental Office Equipment & Supplies Maintenance Sub-Total i *7 3 CONTINGENCIES TOTAL , ,858 FOREIGN EXCHANGE REQUIREMENTS Consultant Staff Technical Assistance , Nurseries Office Equipment & Supplies Sub-Total RE'rENUE EARNED BY PROJECT MANAGEMENT UNIT 8 Sale of Planting Material o 48.o 48.o 48.o 48.o For purposes of this project, an 8 year statement is presented. While it is assumed that the project management unit would eventually form a permanent part of the Ministry of Agriculture, its need for project execution would cover a peried of 8 years. The responsibilities, resources and funding of the unit would probably change after that time. Budget data exrlude debt service costs. Derived on basis of construction costs of Rp 12,000/M 2discouted at 18%. 3/ Derived on basis of construction costs of Rp 15,000/M discounted at 18%. Based on Rp 1,000 per student per day. Based on Rp 2,000 per student. Detailed costs per nursery are presented in Annex 11 Table 4. yl Price Contingencies 5% compounded yearly.,/ Revenue would not accrue directly to PMR.

121 ANNEX 14 Table 3 'a C 'a 'a-a Ca, 'ann'aa<aj. 'an 'ac 'a I C non -e IC 'a 'an 'a- 'a -an -- 'a 'a -i'a- 'a 'a...ca..'aa.i'ac'a..'a'a 'a non.a'a C" 'a 'a -a CC 'a 'a -a'a 'a l -a,-a, ccc c'a 'a -a 'a a> 'a'a a'a - 'a 'an 'a'a'aa,.a'a C'a 'a 'a ''I. 'a'aia 'a -a -±'a a. 'a a 'a - 'a'a 2 - 'a - 'a - 'a 'a CCC 'a'a 'a'an'a,-c-a-a'a 'a -a 'aa-'a--an 'a -a 'a - 'a 'a 'a 'a 'a'a...'a'a'a-±-n-a'a 'a 'a -.,-,i,--. a.- 'a a-' -. 'a.- -' - 'a 'a 'a'a 'a 'a-c 'an 'a 'a 'a 'a. -Ca-a.a, a.an -a'a C 'a 'a 'a 'a-'a C 'a 2 'a -a'ai'a 'a a--a'aq'a'a'a'a'ac CC 'a -a,a.c'a'a'a'aa,'a-ac-a--a 'a 'a 'a'ai'a -a 'a'a'a'a'a 'a 'a'a'aac 'a 'a -al'a 'a 'a 'a - 'a 'a -a -a - - The. 'a 'a - a 'a 'a 'a-c - 'a 'a-h'- 'a 'a 'a 'a - 'a -. - 'a onin 'a 'a 'a,'a 'a 'an.-..a'a -a 'a.a 'a 'a 'at,- 'a 'aic 'a 'a - 'a - - 'a 'a.1- - 'a'an 'an 'a-an-a-an 'a-a a 'a-al c'an'a'an'aa'a-a'a'a -a - 'a 'a cc 'a 'a 'a 'a 'a'a c'a a 'a 'al-a 'a. -a-. a, -'aon'a -a -- 'a 'a 'a 22''a2 c'ai'a 'a 'a'a'a'a-a l-a,-c -- I. Ca a'aic 'al'a'a'a 'a aa'a'a 'a'a'a 'a -C 'a a, a,,a'a'a 'a'a 'a - -aaa'a -a, 22 e'a 'a I, -a a 'a 'a 'a 2 'as 'a-c 'aa 'a a, a 'a-a 'an-a-a-a-a 'an 'a 'a-a 'a- 'a- 'a. 2 I 'a?i'al 'a 'a'a 'a.2t2 -a-a'an'a 'a'a'a -a ''a 'a-a na 'a I -a 'a 'a I n'a 'an 'ac - o a 'a 'a-l-an-a'a 'a Ca, 'a I I C -a- 'a 'an-'ac'a'a'a'a)'ann'ac 'a 'a C ac 'a. - a, C. 'a 'a -a-no 'a 'a 'a 'an'al.a'a'a'a 'a 'a 'a.,'a 'aa C 'a 'a 'alt 'al'a'a a 'a 'al'a a a -a 'a a,- a, a, a,'a a,-a 'a a- 'a 'aln ln'a 'aa''a-a a c no 'a 'a a- 'a. 'a 'a'ain a-> I 'a 'a 'a'a'a'aa,,'aa,-' I 'a 'a 'a -alt 'a.-. 'a a- 'a-a-n no a,'a'a'a'a'aa,'a 2 'a I F I 2 'a'a 'aa-c'a'aaaa - aa a -v I 'a" 'a 'a -o a I Ia, 'a I I I 2'22 a -a I I C 'an a 'a - 2, a. a C I- a - - 'a ni C l - a a a, a a 'a 'acla C C C >1 N a,ac 'a 'an Ca-a Ca aa a 'ac C CII C 'a C CC a C C ac 'al a,aaea Ccc a a a I.-a aaeaa C Ia a >aci- 'a CC La C a a-- CCa-Ca C a C C a-' CC a CCCC 'a'a a- LC, a, C a a a -aca'aaaa C 'a.a-a, a., -- a -a 'a,.. a.. 'a 'a a -, a'a'a CI.C -a C a -'a a C. a a. a 'a a CaI CC 5 <a CC IIaCInTaICI 'a

122 INW2NES IA SMALLIOLDER AND PRIVATE ESTATE TEA PROJECT GOveru-nt n Sources and ApplicaEion of Funds (Rp Million) 1973/ / / / / / /8O 1980/ / / / / / / / / , /9L 1992/ / /95 to 2023/24 Sourcce IDA S On Funds Sub-Total BRI Repayments - Interest Su Prtnipai Sub-.Total , Revenue (Planting Material) , Total ApplI.iDti n PM Tachnic-l Aliset-ce Sub.Total B IDA Credit on lent te BRI IDA Rnpaynenes - Interest Prlnnopol - ~~~~~~~~~~~~~~~~~~~~~~~~~~ -T ,816. Sub -. otal / ,126.0 Total Appli-rtion ,126.0 Annu-l Surplus (Deficit) (118.1) (3,126.0) A--uulacud Su-plu D , , , , , , , , , E Sa.k of Indoesia adnisir-ti-o-v cos.not ded-rled

123 INDONESIA SMNLLHOLDER AND PRIVATE ESTATE TEA PROJECT SALLHOLDER CASH ILOW PROJECTION (1 HECTARE) (Rn '000) WITS PROJ7ECT Year: _ REVENUE 1/ il.l , EXPENSES FERT. & PESTICIDE LABOUR , SUB TOTAL E NET OPERATINO INCOME o INVESTMENT 2/ FERT. & PETICIDE LABOUR PLANTING MATERIAL SUB TOTAL lq.' 10.? , CLOAN U.7 40.' INTEREST ON LOAN 2/ REPAYMENT OF LOAN PRINCIPAL _ 8. CASH INFLOW CASH OUTFLOW NET CASH FLOW :0. ANNUAL CUMULATIVE ,673.7 (is year WITHOUT PROJECT 12. REVENUE C EXPENSES FERT. & PESTICIDES ' LABOUR SUB TOTAL ft 157 1ST W FZT -SI 'r1s 21.9 =2t 14. NET OPERATING INCOME WITH/WITHOUT NET CASH FLOkS 15. BENEFIT STREAM (6.0) (6.9) C) COST STREAM NET PROJECT BENEFIT (16.7) (18.9) (39.8) (33.3) WE7; 35, T ) 19. RATE OH R1hTURN 27,% March 5, / Green tea leaf price increases from Rp 25/kg in 1973 to Rp 35/kg is I Consists of all costs of new planting for first 3 years and intremental rest. of rehabilitotioc for 3 years,. 3/ Tweloe percent on outstanding balance, payable yearly from first year of disborscment.

124 1,Dx IIIESIA SMIALLHOLDER A}:D PRIVATE ESTATE TEA PRCJECT Pri-vte Estate Model (100 hal Income Statement and CTash Flo- Prolec'.lnn (Rp '000) IITCOME STATEI.ENT 1 _ 2ear, _ w3 REVENU'E I Sale of Green Leaf 5, , , , , , , , o, , , , , , , , ,9B7.6 21, , ,3'7.- OPERATrNG EXPENSES Fertilizer and Pesticides , , , , , , , , , , ,6Z7.2 2, , ,637.2 Labour 2, , , , , , , , , , , , , , , ,08Z22 5, , ,082.2 Maintenance o Total 2=6 3, , , , o 5, , , ,688,3. 7 7, t 7,S , I02C01E BEETORE I 0TEREST AND DEPRECIATION 2, , , (1,104.8) , , , , , , , , , , , , , INTEREST ON PROJECT LOA3 6.o , , , , , ,764.o 2, , , , , , , DEPRECIATION NET INMOME 2, , (1.,160.5) (970.5) (3,642.8) (2,087.6) (1,248.8) , , , , , , , , , , ,794.2 CASH FLOW INVESTNh4;T COSTS Development Plan Fertili-er & Pesticide , , , , ,920.0 Labour , , Planting Material , , , Planting Equipment i. _ Hmousing , , Total 17W o,o1l73 4, , ,o O I 3, 6LOAN , , , , , , ,920.0 DEBT SERVICE 9 Interest 6.o , , , , , ,764.o 2, , , , , ,480.o 1, Principle T , , , , , , , , , ,338. o 11 Total , 779~7.75 1, ;517:~ 2-, r53ru7 2,764.0 T777" r U" tr7. 7,7 4,u77u 4,77.0 4,077.0 T, "2 47~73-- _ 12CASH INFLOW (1+6) 5, , , , , , , , , , , ,35(8.4 20, , , , , , , ,987.6 t 13CASH OUTFLOW (2+7+11) 3, , , , , il, , l2, , i2, , x 14NET CASH FLOW 2 I57 2FE,3(7) (1, ) (4,216.7 (2,943.2) (1,08.t 9 2,155 4, , ,o , , , ,0. 13, INTEREST ON SURPLUS _ o 939.? _ , , , , , , ,564.8 increasing 16TOTAL CASH FLOW-ANNUAL 2, , (1,530.5) (865.0) (3,707.9) (2,943.2) (1,822.4) (1,088.9) 2, , , , , , , , ,469.0 increasing 17 CIS.HJLATTVE 2, , , , ,826.4 (681.5) (3,824.7) (5,647.1) (6,736.0) (4,580.6) , , , , , , , , ,020,424.7 Rate of Return: See With/Without Analysis Table 7. February 8, 1973

125 UDIDU IA 8ILWL AID MRITAI UTAUS 21A PRoDT PrisA IWtateS YId*l (100 ha) Gonarativa AnAlysis With and Without Project EAte of Re.=u end Semitivity WM MOJIcT V/ leow, _ P3 1 REernuo 5, ,b45.8 h , , , , , , ,4k , , , , Operating Expenses 2 3, , , , , , , , , , , , , , , Inwetnt i1,45.7 3, , , , , , F0UT ROJECT 4. Sevume ;/ 4, , , , , , , , , , , , , , , =atlne Laosn 2e Fertlizer and PessTcides 4/ O O o o labour I/.o ,520. 1, S 2, , TOTAL,4I01.0 4, ,84.7 3, ,51B.6 3, , ,95e ,7i ; =DtAL enfrl SREUA (1-4) 1, (985.7) (315-3) 461.e 1, , , , , , , , , DI M COc8rT STRm (2.3-5) (92 S) 43h J i'762 6 h&.5 4kmm 4'87k.0 o4c~ -S _ 5 I 8. m1t Dgauinmsa smzuf (6-7) 2,7 4. ( (7,016.) (4,570.2) (8,767.9) (3,904.4) (979.0) 2,98.1 6,32.4 8, , , Rate of etct,, 127. Fe'ruary 8, 1973 y For detila, see Anx 14 Table 3 2/ txclude administrative, and other general estte expees which would be incurred with or without the Project / Bad mn yields in Anne 7 Table 4 and prices as folloas i ) Tea going out of production Rp 2 8 t Uean laf cmstaent 2 ii) Rehabilitable tea 1, EAg tmen Lef in 1973 to Bp 35/kg reen leaf in 1980 W Lss, lip 5000 par HA per yer i.. approxitely 25% or recendad application / Decreases 5% per yer to reflet decreasing labwr requirmetf

126 IND00ESIA S10! AL1f)0L0R AND PRIVATE ESTA78 TEA PROJEC' 0ESA8ILAT47ED FA0CTOR0 00DEL Annual Ca;- 1ty 500 a.t. Inc- Statement. C-ah Floe Pma7eootia nd C-parative Analysis (op '000) 3Irm P E o O CCVest: STTW - I R?f.:5_E - 115, , , ,500.2 i4555e 145, ,50o.0 145, , , , u 14±,7,7,.. 145,500.0 i45,5oo.o i45,5oo.0 2 JFTI711CO 2XFN2 7, , , , , , , , , , , , , , , , ,643.8.:2D 17PRiECIATT08 ( : 35, ,3 48,G5.6 47, , , , , , , , , , ,856.2 a ON1 PRC70CT 108 5,934., 11, ,27. 11,27.5 U,B?7.5 11, , , , , , , , , , , , F7.- AT0710-7, , ,.1gc 7, , , , , , , , , ,Bg.94 7,89e.4 7, ,890.4 f ( ,5_ , IF _ , , , ,3l.3 SASS, 11,0 PF25t5 7 Teveestmet 133, , , , a8t 98,697.0 g -d Oer Itoe.latere-t 5, , ,3,i27.5 ll,87.s 11, , , , , , , , , Princ-pnl , ,303.0 Tho55.0 7, , , , , , , _ Total , , , , , , ,471,5 17, , , , ,915,7, 11,527.) - 12 CAE-H -.F'ZW , c5,45o.0 7 I lo2_5. 144,0, , ,5oo.o 145,50w.0 145, , , ,5wo.0 145,5, , , , ,500.o 13 0A221 -Ll12w , , :ooor.rlc! )Vl,h 977. T _ 1410r , 1!9.94o.4 115,15.l %1155,j 11~.i45.3 fl9,896.3 U51l443f 115, jJjj ,. 779~ ~335l96T 750f 26, , S, , ,384.7, , , , ,384 7 (50,830 8) 30, Inter e on c.2 10, , , , , , , , , il, , ,171.5 anaslag t1 N tsr lsv-a,oal (36,495.7' 03, , l.5. 40, ,723.? 47, , , ,1?6.9 94, , n , , , ,340.7 fincr.nfg -Ioaolatlve (36,495.0) (13,022.2) 19,i , , , , , , , , , , ,024, ,239, ,412, ,952.2-in 17 6, yea 30 If- PE E 108, , ,990.0 B8, , , , ,65o,o 67, ,850 67,8O.0 67, , ,8o 67,850.0 o.o 67, , Ptfll 9XPSE2S 73, , , , , , e , , o , i7e.o io 0 r 3FATfl1G INCOME 34, , , , , , T,3.0 7, , ,478.o 7, , ,478.o 7,478.o 7, , , , WRe n fit s 7 18) (108,500.0) 3, , , ,oeo.o 70, , , , , , , ,6*0.0 77, , ,650.o 22 Iasr,a1t Cools (Ž47618) 55, , s 26, , e , on78n,,.722.l.m n7.137,5 33 7ct 1a-renetl CEth Flow (163,765.5) 2 20, , o 2 46, , , , , , ,8.2 (,8) 40, C. se hause: 177t FOruscy 8, t fte. -teo ft t 280 Rp/ko; qa.cttty to dn-.s.. by Z5tlst fern 400 acw to 250 eons by 1980 Ge-n 1.88 Pai.e to i-nceses ftsn Rp 25/kg ts Rp 3Vkm by 1980

127 S2ALLHOLDE2 AND PIATE New Fectory ESTATE TEA F#0CT Model A-n-I Capacity M.T. Isoeoe Stetent ed C- Floe Frojectis (Rp '000) Tee: _ flicqie STAT6E347 REVEDIIR S3Ie of Black Tan - 108, , , , , , ,00D.0 150,DO.0 150,0CO.0 150, , ,CO.0 150, , , ,000.0 Less Dmseetio Coo, _ 1, , , ,500. 1, , , , , , , , , , , ,500.0 Lees 3Sle, T- 2J1,75.0 _,64k.0 2, , XO.0 3 OOO.o R0.0O l.oco. l.o.oi , , , , ,50.0 i4,0. 145, , , ,500.0 i4s,soo.o Net 3eveue - 105, , ,030.0 V~85 I3T OPERATING EXPENSES Cost or Lest 4,,ooo.o 66, , , , , , n, , , , , , , , ,5,0.0 Leaf Collection ' , , , , , , , , , , , , , ,127.1 Leb-Ur 4,250. 1, , , , , , , , , , , , , , , ,946.2 Pool end Powe 0)3.0 1, ,60o.0 3, , , , , , , , , , , , , ,050.0 Mrit-nce,'03b 2 7, ,73.2 7, , , , , , , , , , , , ,250.0 Acrtn S.0 7S. 7' S-n 7-5 7s, 7 7S.O & Offi o n Tota1 2, ,33'7.4 83, , , , , , , , , , , , , , , Il0coMs BEF3 E INTEREST AND DEPRECIATION (2,46-. *9,o , , , , , , , ,6e8.5 48, , , , , , Istere-t on Lo.o 8, ,552 1c,25.o.0 16, , , , , , , , ,0 2, Depreciatito - 12, , , , , , , , , , , , , , , Ep IOCOME (10,542.3D 7, , , , , , , , , , , , , ,569g0 36, r127.0 CASH FLOW PROJECTIONS 7 IvESTM!KT 260,086.c 9, , , ,065.2 * LAN 135,456.0 DEBT SERVICE - Ioterert 8, , , , , , , , , , a ,909.o 4,861.o 2, Orloopel , ,646.0 q ,84!5.0 12, ,60,4.0o 15, , , , otze1 8,12i.0 16, ,255.0 i6, , , , , , , , , , , , CASH INFLOW (148) 135, , , , ,5O.0 145, , , , , , , ,50O.0 145, , ,500.0 n C627! wrrww(orn) ~ ~ ~ ~3267 fl,43ž3: ,1 113, !. f & A? MET CASIH Fwo , , , TrusLo 0N oupllis _ - - _ - 1, , , , , , ,2,6.6 56, ,388.3 iseresrn TOTAL OA3H FLO0W 16 - A.mol (14, , , , , , , , , , , , , , ,589.3 ineeldx 17 - Riltlv (144, (124,,04.4) ( ) 462,700.9) ( ) (15,099.4) 9, , , , , , , , , , ,26,i024.3 x.te ef Rtore 141 * AnoalSe.re of ReioveeSteot in year 21 ater ry a

128

129 ANNEX 15 Page 1 INDONESIA SMALLHOLDER AND PRIVATE ESTATE TEA PROJECT Economic Evaluation A. Methodology 1. Costs and Prices All costs and benefits under the project have been assessed on an incremental basis over present and projected values without the project. Production, yield and price assumptions are discussed in Annex 3. All expenses have been costed at present or projected market rates except family farm labor, for which a shadow rate of Rp 60/day is used as opposed to Rp 85/day paid for casual hired labor. Both rates have been increased by 5% per annum to account for increases in the real cost of labor. The shadow rate is based on the average daily rate on an annual basis that casual labor would earn taking into account seasonal fluctuation and unemployment. Estate labor has been costed at Rp 110/day. A physical contingency of 5% per annum has been included for the cost of factories. Price contingencies have been excluded. B. Benefits 2. Increased Production The project would halt the rapid decline in private sector tea production, and by 1985 would result in an increase of about 4,000 tons over present production levels. At the expected price of Rp 300/kg for black tea, this increase, plus the production compensating for projected declines without the project, would have an annual wholesale value of Rp 3.0 billion. A small quantity of project leaf would find its way into the green tea market and reduce, slightly, the overall production value. Assuming a 4% annual growth in per capita domestic tea consumption, the project production would not be sufficient to maintain the present level of net export availability. However, only a slight decrease would occur, rather than the 35% reduction in tea exports and foreign exchange earnings projected in the absence of the project (see Annex 3, Table 5). 4. Increased Farm Incomes As a result of increased production and quality, smallholders with 1 ha under the project would realize an increase in annual net income of Rp 81,000 at full development, (from Rp 36,000 to Rp 117,000). Expected declines without the project would increase the net benefit to Rp 97,000 per year. These estimates are based on constant 1972 prices, except for a leaf quality premium of Rp 10/kg, and a real cost increase for family and hired labour of Rp 18/day by Estates net Income from leaf production would increase by Rp 9 million per year per 100 ha (Rp 11 million, adjusted for expected yield declines). Leaf processed within the estate has

130 ANNEX 15 Page 2 been assigned a transfer value equal to the projected market price. The overall effect of the project on net farm income would be annual increases of Rp 970 million to smallholders, and Rp 335 million to estates. 5. Employment Effects Estimates of jobs created by the project are complicated by the existence of underemployment in farm families, and by the social practice of engaged hired labor for a standard share of harvest work, despite such underemployment. Smallholder development would create an additional 5,800 man years of work at full development. This represents an increase of about 70% over present requirements. Nearly 1,000 man years of this increase would be taken up as a result of reduced underemployment, which is estimated to be equivalent to that quantity of labor hired by social custom. Net employment created would be 4100 man year equivalent, although the work would actually be performed primarily during the 9 month growing season. Estate field development would create about 1900 man year equivalents of work, and prevent declines in employment of a further 3200 man years as estates area and production declined in the absence of the project. Employment in rehabilitated factories would not change in total, although there would be some shifting among menial job types. New factories would create about 100 positions, inclusive of leaf collection. In total, the project would create over 5,000 jobs for field and factory workers. 6. Institutional Improvements In addition to the direct financial benefits to sub-borrower-, the project would contribute to the strengthening of the smallholder extension service. Staff qualifications and operating procedures developed within the PICh would serve as models for the improvement of extension services to other regions and crops. Training facilities and programs under the project could also serve as examples of the needs and possibilities relating to other sectors. Furthermore, technical assistance to BRI would improve the capacity of its Central and West Java field staff to appraise and supervise tree-crops credit and the management study could result in substantial improvements in BRI's organization and operating procedures. C. Rate of Return Calculations 7. The table of this annex presents the incremental cash flows generated by the project under the assumption specified in para 1. The rate of return would be 15% on total investment except the BRI management study. The overall rate of return on investment in nurseries, field development, and factories would be 23%. Rate sensitivity is presented at the foot of Table 1.

131 INDONESIA SMALLHOLDER AND PRIVATE ESTATE TEA PROJECT Economic Rate of Return (Rp Million) Year P P e, 29-O 31 R 1. INVESTMENTh ,063 1, INCRZMENTAB BENEFITS Planting Material ) Smallholder Leaf (60) (69) ,108 1,265 1,344 1,344 1,344 1,344 1,344 1,344 1,344 1,210 5o6 Estate Leaf 35 Pr 3 (32) (10) o27 o Black Tea - (10o) (214) (71) Total (25) (102) (133) ,195 1,5-79 1,894 2,183 2,429 2,536 2,603 2,648 2,6)1 2,573 2,272 1,971 1,837 1, INCREME3TAL COSTS Nurseries, Smallholders -/ Estates (field) Rehabilitated Factories - (71) (1,463 (137) New Factories _ EMU (Exc. Nurseries) , Total ,160 1,102 1,100 1,114 1,095 1,105 1,10 8 1,108 1, NET INChEMENTAL BENEFIT (95) (153) (220) (230) ,083 1,315 1,441 1,498 1,540 1,543 1,502 1,373 1,243 1, INTERNAL RATE OF RETULRN 19% on Investment Sensitivity Tests 1. Best Estimate 15% 15% 2. Cost overun and benefit slip 15% 12% 3. Costs increased 25% 11% 4. Benefit increased 25% 20% 5. Benefits decreased 25% 8% 6. Rate of return exclusive of PMU costs. 23%1 February 8, 1973 %/ Includes all project costs except Management Study of BEI. / Includes cost of family labour at shadow rate of RE 60 increasing to Rp 7 8 /iay in 1980.

132

133 Annex 16 INDONESIA, SMALLHOLDER AND PRIVATE ESTATE TEA PROJECT Roads Requiring Improved Maintenance REGENCY Sukabumi 1. Parangkuda to Djaja Negara Estate 2. Njalindung to Miramontana Estate via Pasir Salam 3. Njalindung to Sukanagara via Takokak 4. Tjidadap to Tjiernas 5. Tjisitu to Njalindung 6. Tjisaat to Tjipetir 7. Djampang Tengah to main Njalindung/Sagaranten road at Tjimerang 8. Kiara dua to Bodjong Asih junction on Tjigaru/Tjiemas road Tjiandjur 9. Lampegan to Tjikantjana 10. Tjibeber to Sukanagara 11. Tjugenang to Gd. Gede (PNP XII) through Gintung Bandung 12. Pengalengan to Pasirmalang 13. Simpang to Kawahtjiwidej Purwakarta 14. Darangdan to Babakan via Wanajasa 15. Village Sindangpanon to Darangdan 16. Pamegatan to Singadjaja 17. Village Daniang to Pamegatan/Singadjaja Tasikmalaja 18. Grass track to village Nantang 19. Village Tjukangkawung access road 20. Deudeul to Sumbawa

134

135 ANNEX 17 Page 1 INDONESIA SMALLHOLDER AND PRIVATE ESTATE TEA PROJECT Bank Rakjat Indonesia 1. Bank Rakjat Indonesia (BRI), which has endured many changes since it was first established in 1896, is the oldest rural bank in the country. It was first called BRI in 1945, integrated into the single state bank in 1965, and reformed in its present shape with a new charter at the end of Its main function is to provide rural credit and banking facilities, and thereon to assist the govenrment with agricultural development policies and programs. BRI gives credit to agricutlural cooperatives, farmers, fishermen and other agricultural enterprises. It also lends on commercial terms, with emphasis on cooperatives, to rural industries, small-scale enterprises and to finance handicrafts. In the last year or so, an increasing share of its business has been in transport and tourism. It also provides normal banking services, including acceptance of current, savings, and time deposits. It administers government credit for rural development programs (i.e. small-scale irrigation and farm roads). BRI supervises village banks and paddy banks (at a small loss) under policies and procedures set by Bank Indonesia. It administers the current improved BIMAS program with Bank Indonesia funds. Additionally it now provides limited mediumterm inivestment credit for improvement of rural infrastructure, including farm mechanization, rice processing and storage. 3. Operations and Finance. Data prior to 1969 are unobtainable. Major operational data are available only for 1969 and Loans disbursed and outstanding for the two years are given in Table 1. Loan disbursements are increasing in volume, but trade and services, rather than agriculture, now account for over half BRI's operations. Mediumrterm investment credit, started late in 1969, has gone mainly to rice millers, hullers and for small irrigation works. The 1970 decline in advances for agriculture, livestock, fisheries, and cooperatives, was partly due to a reduction in advances to cooperatives. Advances to PN Pertani were for fertilizer stocks, and were guaranteed by Bank Indonesia. The large increase in BIMAS advances in 1970 was due to BRI taking over credit responsibilities under the improved BIMAS program.

136 ANNEX 17 Page 2 Table 1: BRI LCANS DISBURSED AND OUTSTANDING Rp billion % Rp billion % Loans Disbursed Trade and services Small-scale rural industries Medium-term investment credit Agr., livestock, fisheries and cooperatives PN Pertani fertilizer distribution BIMAS Total Loans Outstanding at Year's End BRI has an authorized capital of Rp 300 million, all government owned, but as yet none has been paid in. A special committee is reviewing the capital structure of all state-owned banks. It has not yet reported, but it is expected to recommend Rp 11 billion as BRI's equity capital. Main sources of new funds are Bank Indonesia and deposits, as is shown in Table 2. The government's successful financial stabilization programs have produced a useful increase in deposits from the private sector from 1970 onwards. Table 2: BRI SOURCES OF FUNDS Sources Rp billion- Borrowing from Bank Indonesia Deposits, including current, savings and time Loan collections Total Loans disbursed At the end of 1970, BRI had reserves and retained earnings of Rp 774 million, after starting at the end of 1968 with a net loss of Rp 36a million. BRI's financial statements for 1969 and 1970 are at Appendix 1, and income and expenditure statements at Appendix 2. State banks have been required to maintain a minimum liquidity ratio of 30%. BRI's was 54% at the end of 1969 and 43% at the end of The excess liquidity was partly due to slow communication with some outlying branches, but also to inadequate and cumbersome accounting systems and reporting procedures. BRI made an operating profit of Rp 1.1 billion in 1969, and Rp 1.3 billion in Due to increased administrative expenses (for expanded staff training and

137 ANNEX 17 Page 3 improved office facilities), profit for 1971 is expected to be about Rp 0.8 billion. 6. Organization and Management. The present arrears position of the Bank's loan portfolio is unsatisfactory, around one-fourth of all loans outstanding. The majority of loans overdue at the end of 1970 arose from the rice intensification programs, and earlier lending to cooperatives and the private sector. Although BRI apparently does not show its loans receivable by age, about 8% of all overdues, or 2% of loans outstanding, are considered as bad debts. 7. BRI's Management Board consists of one President Director and three Managing Directors, each in charge of a group of head office sections. The Board is supervised by a 3-man Council, two from BAPPENAS and one from the Ministry of Finance, all appointed for 3 years. At the end of 1970, the total number of employees was about 10,000 (including village and mobile unit staff), of which 1,500 were at head office. Also at that time, BRI had its head office (in Jakarta), 13 regional offices, 218 branch offices, 77 sub-branch offices, 537 village units and 509 mobile units. By the end of 1971, village units had increased to 1,071, mobile units to The present organizational structure was inherited from BRI's 1967 predecessor, and has only been marginally modified to cope with changed circumstances. Recording and operating procedures are outdated, and there is much overlapping between sections. Office equipment is inadequate. There are excess personnel in some sections and shortages, particularly of qualified and trained officers, in others. These short-comings often prevent appropriate and timely decisions by BRI's management. To remedy them, the Asian Development Bank (ADB) has agreed to finance the bulk of the cost of a modernization project for BRI, with particular emphasis on accounting equipment and procedures. 9. Modernization Project. In 1971, ADB agreed to lend BR1 US$3.4 million, being the foreign exchange cost of a US$4.4 million project, lasting about 3-1/2 years, to modernize BRI. The project consists of some modification and consolidation of sections within head office, the adoption of improved accounting, auditing and reporting systems and procedures, and the initial mechanization of 126 branch offices in E. Java. ADB's loan finances (a) the foreign exchange cost of consultants, who will help improve accounting systems and train staff and (b) the procurement of adding, calculating and bookkeeping machines. Three consultants assist in project implementation, and one evaluates BRI's medium-term agricultural credit program, makes staffing and procedural recommendations, establishes appraisal criteria and identifies a number of credit projects. The major benefits of the project should include savings in administrative expenses, improved quality of accounting staff, better service to customers, faster flow of management information, improved loan repayments, and reduced excess liquidity. 10. As of November 15, 1972, contracts had been signed for the purchase of accounting equipment for East and Central Java. Equipment for West Java will be purchased during Accounting systems have been designed and the training of operators and supervisors has begun. The consultant examining

138 ANNEX 17 Page 4 BRI's medium-term credit program has not as yet reported, and there is some uncertainty within ADB as to the ability of the incumbent to make useful recommendations within the period of his assignment. i1. Proposed ProJect Assistance. To assist BRI in the effective implementation of the proposed Tea credit, to ensure effective administration and supervision of sub-loans, and to minimize bad debts under the project, technical assistance in the form of training for BRI staff would be required. Funds have been provided to train BRI staff involved in the project in technical aspects of tea cultivation. This training would be carried out at the Tea Research Institute of Bogor. An internationally recruited consultant would be engaged to advise BRI in establishing an accounting system for the project and to advise operating staff on the appraisal and supervision of project sub-loans. 12. Proposed Management Study. A management study of BRI has also been included in the proposed project, the objective of which would be to recommend ways and means of improving the capability of BRI to meet the growing demand for medium- and long-term rural credit and bankine s-rvices. Improvement under the modernization project would be fully integrated into the study's recommendations. Terms of reference acceptable to IDA would be established upon completion of the Credit Review scheduled for October, Rice Intensification Program. The improved BIMAS program was started as a pilot project in Jogjakarta in 1969/70, and its success led to its adoption on a large scale in 1970/71 as a substitute for previous programs. Its main feature is that individual farmers rather than villages as a whole are eligible for seasonal loans for rice production. Loans are available from village and mobile units of BRI. Each village unit covers from 600 to 1,000 ha, farmed by 1,800 to 3,000 farmers living in about five adjoining villages. Each unit employs three persons: an agricultural officer, bookkeeper, and casheir. Mobile units, operated from BRI branch offices, serve the more widely scattered villages. These are essentially similar to village units, but instead of being permanently located, they visit different villages in rotation. The total number of village units under this program will not exceed about 1,300, and mobile units about 600, so that most of the anticipated expansion has already taken place. 14. Under the new BIMAS program, loan procedures have been simplified. Farmers make individual loan applications, and these are countersigned by the village headmen, who confirm the right of the applicant to exploit the property listed in the application. After a cursory credit check by BRI, with a total lapse time from application of as little as one week, loans are processed and approved in one day. Release slips enable farmers to obtain fertilizers and pesticides from local merchants, and BRI provides a predetermined cash credit for living expenses. Loan policy is flexible. Maxuii,mn amounts per ha for input and for living expenses have been laid

139 ANNEX 17 Page 5 down, but farmers are free to choose the composition of their loan within these limits, provided it shows promise of improving production. 1/ 15. Loan details up to the end of 1971 under this program are given in Table 3. For the wet season, 1970/71, the average size of loan was Rp 8,400 per ha, or Rp 6,400 per farmer. Although disbursement of loans for the wet season, 1971/72, was not complete by December 31, 1971, the average to that date for that season was Rp 8,500 per ha, or Rp 6,700 per farmer. The average area financed per farmer was 0.76 ha in 1970/71, and 0.79 ha in 1971/72. These figures suggest there has been no substantial change in the credit pattern over these two major seasons. The average number of farmers financed per unit (village and mobile) for the wet season 1970/71 was about 1,250. Comparable figures for 1971/72 are not yet available. Table 3: IMPROVED BIMAS, SUMMARY OF LOAN DATA Area Farmers Credit % /1 Financed Financed Volume Repayment;- ('000 ha) ('000) (Rp m) Wet 1969/70 n.a. n.a Dry 1970 n.a. n.a Wet 1970/71 1,008 1,326 8, Dry , /2 Wet / 4/ 1971/72L-: ,805 - /1 As of December 31, /2 Recoveries in progress. /3 Not yet due. /4 Loans still being disbursed. 16. The program has not been going sufficiently long to show any long-term trends in repayment rates. The difference between those for 1969/70 and 1970/71 (97% and 79%) shows clearly that when a credit program of this sort is rapidly expanded the repayment rate falls. However, repayments are still being made for 1970/71, and the final rate is likely to be over 80%. When compared with the BIMAS Gotong Rojong Program, the improved BIMAS program does confirm that controlled credit to individual farmers is more manageable than uncontrolled group credit, provided there is some basic infrastructure through which credit may be channelled. However, a repayment rate of just over 80%, if sustained for a number of years and not improved upon, is unsatisfactorily low. With improvements in the efficiency of the village and mobile units, coupled with a higher quality of administration in BRI as a result of the recent ADB loan and later proposals, the prospects of improving the repayment rate are good. 1/ For example, a farmer would not be allowed cash for living expenses only, but would have to take at least a minimum amount of fertilizer.

140 ANNEX 17 Page 6 BRI Operations in Project Area 17. The headquarters of IlRI's operations in West Java is the regional office at Bandung. Under this office, there are 20 branches, 41 sub-branches, 300 village units, and 72 mobile units. A summary of the Bank's activities in West Java appears below in Table 4. Table 4: SUMMARY OF BRI ACTIVITIES - WEST JAVA (As of September 30, 1972) (Rp Billion) Deposits 4.50 Time + demand 4.50 Loans (i) Working Capital BIMAS 2.81 Other (less bad debts) (ii) Investment Credits /1 Rice Mills 0.87 Irrigatiun 0.09 Other Agriculture 0.17 Non-Agriculture Interest rates on deposits range from 0 to 9% on demand deposits and from 12% to 18% on time deposits. Interest rates on loans are specified by Bank Indonesia. 18. Loan authority within BRI is very centralized in West Java as it is in other provinces. Village unit chiefs are only permitted to authorize loans under the BIMAS scheme, and these are limited to Rp 100,000 per borrower. All other working capital applications must be referred to the branch office. Credit authority varies among branch managers, but in no case exceeds Rp 1 million. Applications over Rp 1 million must be sent to Bandung for consideration, and those exceeding Rp 5 million must be forwarded to Jakarta. All applications for investment credit, regardless of size, must be sent to Jakarta for approval. There are only 3 loan appraisal officers in Bandung to cover all of West Java. The only technical staff in West Java is an Agricultural Engineer who is assigned as the Chief of the BIMAS Section, Bandung. Technical advise is sought, to the extent possible, from relevant government authorities at the time of appraisal. Supervision of BRI loans also suffers from a grave shortage of qualified staff. Although a regular reporting schedule is established for each borrower, interviews with both borrowers and bank officials confirm that these schedules are seldom adhered to, and furthermore, the repurt data often remains unverified.

141 ANNEX 17 Appeidix 1 INIIDNESIA SMALIHOLDER AND PRIVATE ESTATE TEA PROECT Buink RakJat Indonesia Sumnarized Balance Sheets At December 31 Each Year Rp Billion ASSETS Current Assets Cash on hand Call deposits and loans o Securities (Govt. and other) Receivables Total 83 Outstanding Loans Fixed and other Assets Total Assets LIABILITIES Current Liabilities Accounts payable Demand deposits 5.93, Other Total Fixed Deposits and Savings Bank Indonesia Borrowings Capital 2/ (0.36) - - Reserves and Retained Earnings Total Liabilities #/ BRI was formed on IDcember 31, 1968 b/ Less provisions for doubtful debts j/ BRI's authorized capital not paid in SOURCE: BRI March 7, 1973

142 ANNX 17 Appendix 2 INDONESIA SMALLHOLDER AND PRIVATE ESTATE TEA PROJECT Banc RakJat Indonesia Summarized Income and Expenditure Statements Rp million INCCME Loan interest, provisions and other charges Other income Total Income EXPENDITURES Interest on borrowings and deposits Salaries and personnel charges Administrative and general charges Other expenses o.o Total Expenses OPERATING SURPLUS PROVI SIONS Bad debts Depreciation 0.01 O Taxes Losses i Total Provisions NET SURPLUS (LOSS) (0.05) 0.23 o.65 t/ Incurred in transactions prior to BRI formation. Note: Differences between columns and totals due to rounding. SOURCE: BRI March 7, 1973

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