Document of 2, The World Bank

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of 2, The World Bank FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$5.5 MILLION TO THE REPUBLIC OF INDONESIA FOR THE CENTRAL JAVA PULP AND PAPER ENGINEERING PROJECT August 24, 1982 Report No.P-3377-IND This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS Currency Unit - Indonesian Rupiah US$1.00 = Rp 625 Rp 100 = US$0.16 Rp 1 million = US$1,600 ABBREVIATIONS BAPPENAS - National Planning Agency Basuki Rachmat - Perum Kertas Basuki Rachmat, a public sector paper mill in East Java GOI - Government of Indonesia KKC - P.T. Kertas Kraft Cilacap Oji - Oji Paper Company Perhutani - Perum Perhatani, the State Forest Corporation REPELITA - Five-Year Development Plan of Indonesia (Repelita I, , Repelita II, , Repelita III, ) INDONESIA'S FISCAL YEAR April 1 - March 31

3 FOR OFFICIAL USE ONLY INDONESIA CENTRAL JAVA PULP AND PAPER ENGINEERING PROJECT Loan and Project Summary Borrower: Amount: Terms: Project Description: Republic of Indonesia US$5.5 million (including capitalized front-end fee) Repayable in 20 years, including 5 years of grace, at the standard variable interest rate./l The proposed project is to help finance the cost of: (i) basic engineering, procurement assistance including the preparation of tender documents, prequalification, and bid evaluation for the Central Java pulp and paper project; (ii) technical assistance in finalizing the wood supply arrangements for the Central Java project; (iii) training of the project staff; and (iv) a pulp and paper subsectdr study which would provide the basis for the restructuring of the industry. The engineering project's main benefit is the timely completion of preparation of the Central Java pulp and paper project to a degree of detail which should reduce the risk of delay and cost overrun during the implementation of the project itself. At the same time, GOI will be able to complete a foreign exchange financing plan for the project and explore various alternatives of non-goi financial sources for the local cost financing plan. Plans for infrastructure as well as wood supply arrangements would be finalized and the project organization strengthened. It would also give GOI and the Bank the opportunity to review a program for the development of the subsector and associated policy reforms. The risks associated with the implementation of the proposed engineering project are minimal. The work may take longer than envisaged but the consequences of such delays are not serious. GOI is seeking Bank financing for the ensuing construction project. /1 This loan could be refinanced if World Bank financing were to be made available to the Republic of Indonesia for the construction project. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

4 - ii - Estimated Costs :/l Local Foreign Total (US$ million)----- Items Basic Engineering Tender and Procurement Assistance Preliminary Civil Engineering Study of Wood Supply Arrangements Project Management & Legal Assistance Office & Miscellaneous Equipment Training Pulp & Paper Industry Restructuring Study Base Cost Physical contingencies Price contingencies Project Cost Front-end fee on the Bank loan Total Financing Required Financing Plan: IBRD Government Total (US$ million) Estimated Bank FY Disbursements: Annual Cumulative Rate of Return Staff Appraisal Report: Not applicable. There is no separate appraisal report. MAP: IBRD /1 Net of taxes, which are insignificant.

5 REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF INDONESIA FOR THE CENTRAL JAVA PULP AND PAPER ENGINEERING PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Indonesia for the equivalent of US$5.5 million (including the capitalized front-end fee) to help finance the Central Java Pulp and Paper Engineering Project. The loan would have a term of 20 years, including five years of grace, at the standard variable interest rate. The loan could be refinanced if World Bank financing for a subsequent pulp and paper project were to be made as a result of this project. PART I - THE ECONOMY 2. A basic economic report, "Indonesia: Growth Patterns, Social Progress and Development Prospects" (No IND dated February 20, 1979), was distributed to the Executive Directors on February 26, 1979, and a country economic memorandum has been prepared in each subsequent year. The latest of these, titled "Indonesia: Financial Resources and Human Development in the Eighties" (No IND dated May 3, 1982) was distributed to the Executive Directors on May 6, Annex I gives selected social and economic indicators for the country. Background 3. The Republic of Indonesia is a highly diverse country spread across an archipelago of more than 13,000 islands with a land area of about two million sq km. It now has a population of over 150 million, growing at about 2.2% p.a., and is the world's fifth most populous nation. The country has a highly diversified resource base, with plentiful primary energy resources, significant mineral deposits, large timber potential and a developed system of agricultural commodity production and export. A high proportion of these primary resources are located on the sparsely populated islands of Sumatra and Kalimantan, while two-thirds of the population live on Java which has areas with some of the highest rural population densities in the world. About 20% of the population live in urban areas in both Java and the Outer Islands, and the current rate of urban population growth is over 4% p.a. The 1981 estimate of GNP per capita is $520, which places Indonesia for the first time amongst middle income countries./i Macroeconomic Developments and Resource Management 4. The economy has now been growing at almost 8% p.a. for over a decade. This has been associated with rapid increases in public expenditures, total investment and savings. The initial impetus for this /1 On the basis of the World Bank's system of country classification and Atlas methodology for calculation of GNP.

6 - 2 - occurred in the period of recovery from the turbulence of the mid-60s. The Government took effective action to restore macroeconomic stability, liberalize the economy, rehabilitate infrastructure, and provide incentives for domestic and foreign private investment. However for the last decade the dominant external influence has been the huge expansion, and significant variability, in foreign exchange earnings from oil. Net exports from the oil and gas sector rose from 80.6 billion in 1973/74 to $10.8 billion in 1980/81, when the current account enjoyed a surplus of $2.5 billion. Oil receipts also provide about 70% of Central Government receipts and have helped finance the sustained increase in demand via the budget. In 1981/82 depressed international markets, combined with continued rapid expansion in demand for imports, led to a $5 billion turnaround in the current account, which registered a deficit of S2.5 billion. However, the economy appears remarkably resilient in the face of this change: growth was maintained at an estimated 8% in 1981, the reserve cover is more than adequate and the country is highly creditworthy. The reason for this macroeconomic resilience can in part be attributed to effective management of the oil-related resource windfalls. Throughout the 1970s the Government has kept public expenditures broadly in line with medium-term receipts, through a combination of temporary savings of windfall gains, reining in of recurrent expenditures in years of relative shortage, and changing the extent to which the external oil price increase is passed on to domestic consumers. The pattern of expenditures has also helped foster diversified growth: of particular note has been the support for agriculture, through investment in infrastructure, support services and effective use of subsidies to maintain producer incentives. This bore fruit in two successive record rice harvests in 1980 and During 1971 to 1980 manufacturing has also enjoyed a high growth rate (of about 14% p.a.) from a very low base, but here sectoral growth has been in spite of a more restrictive policy environment and distorted incentives. Despite the demonstrated resilience of the macroeconomy to the short-run developments in the oil market, the likely decline in the relative importance of external oil receipts implies that Indonesia faces a need for substantial structural change in the eighties. If the pace of development is to be sustained the development of a strong and diversified nonoil production and export base is essential. This will have to be supported by major investments in new infrastructure - particularly in transportation and electric power - if a rapidly modernizing production base is to be serviced. Incomes, Employment and Human Development 5. Despite the high concentration of the resource windfalls, the available evidence, from household expenditures surveys, indicates a fairly wide distribution of the benefits of growth and a reduction in poverty incidence over the past ten years. This is also borne out in the basic health indicators, with a 25% reduction in the infant mortality rate and an increase in life expectancy from 47 to 53./I These improvements should not, however, mask the continued existence of widespread poverty. Almost 50% of the /1 On the basis of the 1971 and 1980 population censuses.

7 - 3 - population are estimated to have been in this condition in The core of the poverty problem continues to be in rural Java, where landless laborers form a large, and possibly rising, fraction of the population, and where, for most of the 1970s, there is little evidence of any rise in real agricultural wages. However, in the last two years of good rice harvests, it is likely that significant improvements occurred on Java, while agricultural incomes on parts of the Outer Islands dependent on export crops have declined in the face of the international recession. 6. In the future the availability of productive employment will be a key determinant of the distribution of income. The labor force will grow at about 3% p.a., equivalent to around 2 million people p.a., in the next decade. In 1980 agriculture still accounted for 55% of employment, and industry only 13%, while the growth of services employment, from 24% of the total in 1971 to 32% in 1980, was the main mechanism for providing incremental employment in the 1970s. The growth in service incomes was partly sustained by rising oil incomes in the 1970s; if services are to continue to be a major source of labor income there is again a strong case for diversifying the pattern of productive growth. Open unemployment, at 4% in 1980, is not yet a serious problem - it is concentrated amongst secondary school leavers waiting for high income work; the key issues are of widespread underemployment (seen in short working hours in some sectors) and low wages. To tackle this a sustained rise in labor demand is crucial - through the maintenance of overall growth and the encouragement of labor-intensive choice of techniques in production, especially in the industrial sector. 7. In the 1970s there was substantial progress in extending the provision of social services throughout the population. Universal enrollment in primary education has been virtually achieved and the enrollment rate in junior secondary schools is now 35%. However, the weak educational base of the population continues to be a major obstacle to rapid economic development and a substantial further expansion of secondary and tertiary education will be necessary as well as a major effort to raise the quality of the whole system. The situation is similar in the health sector. There has been a large expansion in facilities, notably at the level of the district and below, but continued expansion and an improvement in quality will be necessary to raise standards. This will have to be complemented by a major expansion in water supply and sanitation if the improvement in indices of mortality and morbidity in the 1970s is to be maintained. Currently only 18% of the rural and 40% of the urban population have access to safe water /1 compared with Government targets of 60% and 75%, respectively, for Policy for Structural Change 8. Indonesia's past growth performance has been good, but the country is now faced with the need both to put the nonoil economy on to a viable long-run growth path and to effectively improve the basic needs situation of /1 Government estimates for 1981.

8 - 4 - the poor. The maintenance of a high level and an improved structure of investment will be crucial to this. This will involve substantial investment by the public sector, especially in economic and social infrastructure, complemented by improvements in the policy environment to provide an appropriate incentive structure for private sector investment. 9. In industry, the Government of Indonesia (GOI) is planning a program of large-scale natural resource-based investments, in refineries, LNG, petrochemicals, fertilizer, cement, pulp and paper, basic metals and mining. This will broaden the industrial base, but will have very limited employment implications. Of greater importance for both employment and exports is the encouragement of small- and medium-scale private manufacturing through an improvement in the economic environment. The 1978 devaluation of 33% against the US dollar significantly improved the profitability of labor-intensive import substitution and export industries. Furthermore, the GOI has initiated a general review of the trade regime, with a view to removing the distortions caused by the wide variations in rates of effective production. It has also embarked on a program designed to promote the expansion of nonoil exports, including export financing arrangements, export insurance, improved ports procedures, export processing zones and a system of export certificates (duty rebates). However, the private sector suffers from significant domestic constraints to its expansion, including a heavy regulatory burden, especially in the area of investment licensing, and a distorted and poorly developed financial system. Further policy reforms to alleviate these constraints are needed to create an environment conducive to private investment. 10. The energy sector is at the core of the structural adjustment problem. Oil and gas now account for 98% of domestic consumption of commercial energy and demand has been growing rapidly. If Indonesia is to avoid a serious reduction in foreign exchange earnings from the oil sector in the 1990s, it is essential to diversify energy usage and improve the efficiency of energy consumption. This will require both price and investment measures. In January 1982 domestic oil prices were increased by over 60%, and this followed a 40% increase in May This was a decisive step, but domestic prices are still only about 55% of the average opportunity cost and price relativities between products diverge widely from those prevailing on the international market. In addition a major program of investment is planned, with public and private participation, in coal exploration and development, exploitation of hydro and geothermal resources, and a sixfold increase in electric power generation in the coming decade. 11. Agriculture will continue to be of great importance for export revenue (accounting for almost 75% of 1980 nonoil exports), food production and employment. Rice production has been steadily rising to a record level of about 22 million tons in 1981, compared with 13 million a decade earlier. This achievement is largely a result of the provision of new and the rehabilitation of existing irrigation systems and the dissemination of new agricultural technology particularly with respect to the timely de ivery of seeds and fertilizers. Future investment in physical infrastructure, especially in irrigation and rural roads, combined with a favorable market environment and good support services will be the main determinants of further

9 -5- expansion in food production. In the past tree crops have suffered from relative neglect, and the age structure of the trees is now very old, but GOI has a highly ambitious program of rehabilitation and replanting, necessitating substantial investment in manpower and improved organization of distribution and marketing. Transmigration remains a high priority program for promoting development in underpopulated regions, providing opportunities for landless families on Java, Bali, and Lombok, and relieving economic and environmental pressures on those densely populated islands. Financing Development - Domestic Resources and External Capital Flows 12. Structural adjustment will require a high investment rate, and an expanding level of public services; it also involves adapting to a declining relative level of oil rents. The problem of financing development is clearly central. This will require a major increase in resource mobilization through the public sector, through a combination of reduced subsidies on petroleum products and increased nonoil taxes. In 1980 it is estimated that taxes on the domestic economy were only 6% of GDP, if the domestic oil subsidy is netted out, compared with well over 10% for comparable countries. The 1982/83 budget represents a significant effort to improve the situation, with a halving in the annual level of the oil subsidy and a 15% budgeted increase in nonoil taxes, but this will have to be sustained in following years. In addition to public resource mobilization it is becoming increasingly important to encourage the growth and improve the efficiency of distribution of financialized savings, through an improved financial regime and the development of a domestic capital market. 13. Even with effective measures to mobilize domestic resources there will be a substantial need for foreign savings in the 1980s, of which the most important component will be in the form of medium- or long-term debt flows. Total disbursed and outstanding external public debt was almost $16 billion at the end of 1981 and undisbursed debt amounted to an additional $11 billion. The Inter-Governmental Group on Indonesia remains a principal source of external capital, including Official Development Assistance, to the country. During the 1970s, however, Indonesia experienced an unusually rapid transformation in its public debt structure from a situation of heavy reliance on official concessional loans to increasing use of private, nonconcessional and variable interest loans in the second half of the decade. In 1981 private source debt accounted for 52% of new commitments of public debt. The fact that Indonesia remains highly creditworthy at the beginning of the 1980s, and the efficiency with which GOI has managed debt, are clear indicators of how far the country has progressed. However, the debt servicing capacity depends on commodity production rather than a broad industrial base, and this makes Indonesia somewhat more vulnerable to developments in international markets. The implication is that debt utilization should remain very prudent, and that there will be a continued justification for official debt of long maturities in the 1980s. If the measures to support structural adjustment are implemented then present projections indicate that Indonesia's financing requirements can be met with the debt service ratio remaining below 20% throughout the decade.

10 part II - BANK GROUP OPERATIONS IN INDONESiA /I 14. As of March 31, 1982, Indonesia had received 48 IDA credits totalling S931.8 million, and 67 Bank loans amounting to S4,562.0 million. IFC investments totalled $136.8 million. The shere of the Bank Group in Indonesia's total (disbursed) external debt outstanding at the end of 1980 was about 10.7%, and the share of debt service about 7.1%. By the end of 1981, these ratios increased to around 11.2% and 7.4%, respectively. Annex II contains a summary of IDA credits, Bank loans and IFC investments as of March 31, 1982, as well as notes on the execution of ongoing projects. Given the critical importance of agriculture (including transmigration) for employment, food security and exports, over one-third of Bank Group supported projects have been in this sector. In addition, loans and credits have been extended to virtually all other sectors of the economy, including transportation, education, urban development, water supply, rural development, nutrition, industrial development financing (including small-scale industry), power, telecommunications, population and technical assistance. 15. During Repelitas I and II, and in line with the objectives of these first two Five-Year Plans, a high proportion of Bank Group lending was directed initially toward the rehabilitation and then the expansion of infrastructure and production facilities. Special attention was also given to meet the shortage of skilled manpower and technical assistance needed for preinvestment studies and project execution. Repelita III, published in early 1979, stressed the need for continued high growth and stability, but departed from previous plans by placing special emphasis on more equitable income distribution and poverty alleviation. This focus, which was fully in line with the conclusions of the basic economic report, required greater attention to employment generation (particularly in the industrial sector) and to improvements in basic public services. While Bank lending was already consistent with these objectives, increased emphasis has been given to these priorities. 16. Although the country has moved from a position of resource surplus to deficit, as discussed in Part I, it is essential that the development momentum be maintained. This will require both effective policy reform, notably in improving the environment for private investment, and major investments in industry, infrastructure, treecrop development and human resources development. The Bank's program of lending and economic work is being geared to support the required measures. The primary emphasis of Bank involvement will be on policy and institutional development and technical assistance in the key sectors. This will involve a close integration between sector work and lending and the gradual broadening of lending to the subsector and sector level in order to assist with policy issues at this level. /1 Substantially unchanged from the President's Report on the Coal Exploration Engineering Project (No. P-3298-IND) circulated under cover of R82-131, dated May 3, 1982, and approved by the Executive Directors on May 20, 1982.

11 17. rhe only significant shift in the composition of lending involves a rapid expansion planned in the education sector, a direct response to the severe shortage of skilled manpower. In the industrial sector, in-depth sector work focused on a policy for the promotion of labor-intensive, exportoriented growth has been substantially completed, and it is planned to follow this with a series of industrial projects. In energy, sector work and continued lending is concentrating on policies to diversify Indonesia's energy base, rationalize pricing and improve sectoral planning. Irrigation and treecrops will continue to absorb a substantial portion of lending in view of the importance of these sectors, and continued support for transport is anticipated. Continued lending in the areas of provision of social services, in population, health and nutrition, urban development and water supply will increasingly emphasize institutional support and the development of innovative low-cost solutions. For example, the proposed health project will focus on improving the working of the whole health care system at the level of a specific province. 18. For about the last two years the Bank and GOI have made a major effort to improve disbursement performance, which deteriorated rapidly in the late 1970s. The disbursement ratio (the ratio of actual disbursements during the fiscal year to cumulative undisbursed amount at the beginning of the fiscal year) declined frgm about 26% in FY77 to about 13% in FY80. The Bank-wide average was 21.31% in FY80; the comparable ratios for Thailand and Nigeria were 21.2% and 17.31%, respectively, in the same year. While much of this decline was merely a result of the rapid increase in commitments which took place during this period (total Bank/IDA commitments to Indonesia increased by 122% in the FY77/79 period compared to a Bankwide increase of 83%), it also reflected increasing implementation difficulties. Many of the problems appear to be related to GOI's cumbersome budgetary, procurement and payment procedures, including issuance of tender documents and opening of letters of credit. These problems are further compounded by the severe shortages of both managerial and technical manpower. A number of steps have been taken by GOI and the Bank to address these issues. Several special Bank missions have visited Indonesia to analyze the problems and make recommendations for simplifying budgetary and financial procedures. The GOI and the Bank have also instituted formal and regular joint review procedures to identify general and project specific problems and work out corrective measures. In addition, procurement seminars were held in Jakarta in September 1979 and November As a consequence of these joint initiatives, GOI has taken several measures to streamline some of the complex budgetary and financial procedures affecting project implementation. In addition, the Bank is helping the GOI in a special effort to identify problems in the construction industry with a view to developing appropriate remedial actions and policies. Weaknesses in the domestic contracting industry have been identified as one of the major causes of implementation problems in Indonesia. Finally, to reduce initial project implementation difficulties, many operations are now being presented for Board consideration at a later stage in the project cycle. Indications are that, as a result of these efforts, improvements are taking place. This was reflected in an increase in

12 - 8 - disbursements from $204.0 million in FY79 to $277.8 million in FY80, $373.5 million in FY81, and $501.3 million in FY82, implying a disbursement ratio of around 18%. While it is important that the Bank and GOI maintain their efforts, these trends are encouraging. 19. From 1968 until 1974, all lending to Indonesia was made through IDA. Due to the country's improved creditworthiness following the commodity and oil price boom in 1973/74, the bulk of the Bank Group's subsequent lending has been through IBRD loans, with a modest amount of IDA lending being justified primarily on poverty grounds, as the per capita GNP was well below the IDA cutoff of $625. Given Indonesia's much improved balance of payments position, IDA lending was discontinued in FY The proposed project constitutes the first lending operation presented to the Executive Directors this fiscal year. Projects under advanced stage of preparation and appraisal include the Third Transmigration, Seventh Nucleus Estates and Smallholder, Twelfth Power, Twelfth Education and the First Health projects. PART III - TEE INDUSTRIAL SECTOR AND SUBSECTOR Industrial Sector 21. With the rehabilitation of the Indonesian economy in the mid-1960s, GOI set out to develop Indonesia's hitherto small industrial sector with the principal objective of exploiting and processing the country's natural resources, and thereby expanding employment and increasing incomes. Other elements of the overall industrial development objective have been wider regional dispersion of development and the stimulation of indigenous entrepreneurship. GOI pursued these objectives by directly investing in the industrial sector, especially in the aftermath to the first oil boom in 1973, by creating private sector incentives and by regulating private sector investment activities through a comprehensive licensing system. 22. From 1971 to 1980, the industrial sector, including mining and energy, grew at an average annual rate of 11% (manufacturing grew by 14%), compared with about 8% for the economy as a whole. Industry now accounts for about 33% of Gross Domestic Product, compared with 14% in 1960 and 20% in But manufacturing, which typically is the most dynamic component of the industrial sector, represented only 9% of GDP in 1980, a low proportion when compared with Malaysia (23%), Thailand (20%), the Philippines (26%) and Singapore (28%). 23. The industrial growth that took place in the 1970s, was in most part confined to large capital intensive industries such as cement, fertilizers, steel and paper. These were also largely import substituting industries. Given its high capital intensity and protection the industrial sector that emerged, while impressive in terms of its early growth, was not

13 - 9 - _iapable of generating a Large number of employment opportunities or capable of replacing oil exports as a future source of export revenues. 24. Although the devaluation of the rupiah in November 1978 and the introduction of export incentive schemes led to a substantial growth in manufacturing exports (from a very small base), industrial growth has been slowing over the past several years. This is due, in part, to the gradual saturation of the readily accessible import substitution markets. It is also apparent that some of the many policy measures which were designed to stimulate industrial development have become so complex that they may now be obstructing rather than facilitating the attainment of these objectives. The Bank recently completed a review of the industrial sector which focusses on specific problems related to the trade regime, the regulatory climate, the financial policy environment and policies towards private foreign investment, and makes a number of recommendations designed to improve the policy and institutional environment and stimulate industrial activity. 25. With respect to policy reforms, a number of areas were identified as being of primary importance. The trade regime is biased against exports in general and industrial exports in particular. A reform of the tariff system so as to reduce the export bias and to move towards a more neutral trade regime will therefore be an important element in the structural adjustment of the industrial sector. This area has received increased GOI attention and an overall tariff reform is currently being considered (para. 9 above). GOI has also taken steps to improve export procedures. The licensing system is also candidate for reform, in particular to increase competition among existing and potential entrants to the sector. Movement in this area by GOI, however, has been limited. Finally, while industrial finance remains poorly developed, there has been recent movement designed to increase the availability of export financing. Pulp and Paper Subsector 26. Background. Indonesia's per capita consumption of paper in 1980 was 3 kg, well below consumption levels in the Philippines (10 kg), Thailand (10 kg), Malaysia (22 kg), and Singapore (73 kg). However, paper consumption (currently about 480,000 tons per year) has grown at an average rate of 13% annually during the past decade, compared with world-wide growth figures of about 3-4%. Domestic supply has expanded even more rapidly: up from 18,000 tons (about 12% of demand) produced in six mills in 1970, to 230,000 tons (about 48% of demand) in 29 mills in Much of this new capacity has been in small privately-owned paper mills without integrated pulping facilities. Such mills merely convert imported pulp into paper, without using Indonesia's abundant fiber resources. Consequently, the burden of imports has shifted from paper, where import duties are as high as 60%, to pulp on which there is no import duty. While mills of this type may be

14 financially attractive due to a distorted incentive scheme, they are typically small and inefficient and yield very low economic rates of return. GOI recognizes this diseconomy as one of the most important policy issues facing the industry. 27. The annual demand for paper in Indonesia is expected to reach about 1.2 million tons by 1990 at which time per capita consumption would be 7 kg. Existing mills could satisfy only about 20-25% of this paper demand and less than 10% of the pulp required to produce it. As Indonesia has the potential to develop fiber sources which could be economically utilized and further improved to satisfy much of the local pulp and paper demand and provide the basis for an export-oriented industry in the future, the high priority attached by GOI to the development of this subsector is well founded. However, it is important that this development takes place in an optimal manner. 28. Development Options and Policy Framework. A Bank review of the pulp and paper subsector in 1981 examined three alternative courses of development during the 1980s: (i) continuation of the present investment pattern; (ii) establishment of selected economically-sized integrated mills; and (iii) restructuring of the existing industry concurrently with establishing integrated mills. The first option was concluded to be economically unattractive and could be taken only if the present high tariff on selected grades of paper is maintained. While the second option is reasonably economic, the review concluded that the third option is the most economic and attractive because it addresses all the major weaknesses of the subsector (para. 26). The proposed engineering loan would assist GOI with developing this approach. 29. While it has been GOI's intention that tariff protection and licensing policies should be used to encourage an efficient industry, this effort has not been successful in pulp and paper because of a combination of several factors: (i) the distorted incentive scheme, reflecting the high tariffs on paper relative to pulp and energy subsidies; (ii) the financial unattractiveness of large integrated plants since they require a long gestation period and capital contributions that could not be readily financed by the private sector; (iii) the lack of infrastructure, particularly in the Outer Islands where most of the fiber resources are located; and (iv) the presently limited availability of sizeable plantation forests that can supply sufficient homogenous fiber resources for paper production at economic scales. To ensure economic and rational growth of the subsector in the future, GOI should begin to address these constraints. Specifically it should focus on (i) redesigning the incentive scheme so as to encourage efficient production; (ii) investing in and operating efficient, integrated pulp and paper mills; (iii) improving the structure and operations of existing mills; and (iv) improving the fiber resource base to support further expansion of the industry.

15 Energy pricing, tariff reform, industrial restructuring, and broader mobilization of non-goi resources into th.e pulp and paper industry are key issues in promoting rational development of the pulp and paper subsector. In respect to energy pricing, the progress that has already been achieved is noted above (para. 10). The high tariffs on selected grades of paper (notably printing and writing paper, kraft linerboard and fluting) need to be lowered, and in this respect the proposals currently being considered by the GOI as part of a general tariff reform are the appropriate policy response. It is anticipated that these proposed adjustments, together with reduction in energy subsidies already effected, would reduce the average effective rate of protection for the pulp and paper industry to about half the level prevailing in Though still high, this effective rate would be one of the lowest among import substitution industries in Indonesia. 31. A major restructuring of the pulp and paper industry will also be required during the 1980s to complement these tariff and energy price adjustments. In a competitive environment, if a paper mill were to operate profitably, it would have to be highly specialized, or an integrated, economically-sized plant with maximum attention to operational and energy efficiencies. Such an environment would also encourage existing mills to rationalize their operations. However, short-run adjustment difficulties for the existing mills which are mostly owned by the private sector could be serious unless industrial restructuring programs are carefully planned and implemented concurrently. For example, a preliminary analysis suggests that under the reduced tariff levels currently being examined by GOI most of the mills below 5,000 tons per year capacity (whether integrated or not), accounting for 17 of the 29 existing mills, would incur significant losses if they were to maintain existing modes of operation. Therefore, as part of the proposed engineering project, GOI plans to inititate a study designed to address the major policy issues facing the subsector and prepare a restructuring program for the pulp and paper industry. Terms of Reference for this study have been finalized and agreed upon between GOI and the Bank. A local counterpart team consisting of representatives of the selected Indonesian Pulp and Paper Manufacturers Association member companies, as well as Bandung Cellulose Institute staff, is being organized to participate in t-1* work. 32. GOI is also exploring ways and means to increase the participation of non-goi resources in financing the industry, and has proposed the formation of a working committee represented by Ministries of Finance and Industry as well as BAPPENAS (the National Planning Agency) to systematically explore and evaluate the viability of various means to accomplishing this objective. GOI has decided to use the Central Java pulp and paper project as a pilot case. Through supervision of the proposed engineering project as well as further preparation of the construction project, the Bank will be actively involved in these subsector wide discussions and assist GOI in achieving the subsector objectives.

16 At the project level, the Bank Group is currently working on two large-scale pulp and paper projects. While the Central Java project being considered here is the more advanced, a project to develop an integrated forest industry complex in East Kalimantan is also being considered. GOI has asked IFC to assist in financing the project itself, and the Bank in financing the infrastructure. GOI is committed to implement this project in the private sector with some participation from foreign private partners. Because of its isolated location, the East Kalimantan project is complicated and expensive and is likely to take a considerable amount of effort and time to promote. PART IV - THE ENGINEERING PROJECT 34. The Central Java pulp and paper project was first reviewed by the Bank in the course of the 1976 Industrial Sector Mission which concluded that it was one of the most promising pulp and paper projects under consideration by GOI. Although GOI has spent several years trying to attract private investment for this project, it has been considered too large and complex by domestic investors, and foreign interest has been confined to the supply of equipment and technical assistance. GOI thus assigned Perum Perhutani (Perhutani), the state forest corporation, which manages all the forest r-ources in Java, including the plantation forests designated for the Cencral Java pulp and paper project, to commission prefeasibility and feabl-iiity studies for the project by the Finnish Consultants, Jaakko Poyry Oy. Up, thieir completion in May 1981, the Bank reviewed these studies, and work to da:.e indicates that the Central Java pulp and paper project appears to be techni.illy sound, and financially and economically viable. Preliminary financial and economic rates of return are in the acceptable range. The Bank subsequently agreed to consider an engineering project to complete preparation and assist in the confirmation of the viability of the Central Java pulp and paper project. In addition, as part of the engineering project, GOI and the Bank will continue a subsector dialogue on the restructuring of the pulp and paper industry with the goal of bringing about the policy and structural changes necessary to ensure the rational development of the industry (paras ). A Bank mission in February 1982 appraised the engineering project. Negotiations were held in Jakarta from July 29 to July 31, 1982, with the Indonesian delegation led by Mr. Nico Kansil, Director for Planning, Directorate General for Basic Chemical Industries, Ministry of Industry. Since this is an engineering project, no separate staff appraisal report has been prepared. Supplemental project data are in Annex III.

17 Background 35. The Central Java pulp and paper project would be the first largescale integrated wood-based pulp and paper mill in the country. The decision, in principle, to proceed with a large capital-intensive public sector project at this time reflects a number of concerns. First, while highlighting the importance of small- and medium-scale industry, the Bank's industrial sector review (paras ) emphasized that large capitalintensive projects would remain appropriate in areas where efficiency criteria support such technology, and where Indonesia has a comparative advantage; such is the case in respect to pulp and paper. Second, the question of public as opposed to private sector development is basically one of timing. Active GOI attempts to interest domestic and foreign private investments in this and other large-scale pulp and paper projects have not been successful to date; indeed a private Indonesian firm returned the license to develop this project to GOI in As the Bank's analysis clearly indicates that the restructuring should be phased over time, GOI has a choice between taking the lead in developing a project such as this one or facing a significant delay in moving the subsector toward more efficient integrated mills. Since the proposed Central Java pulp and paper project is expected to (i) efficiently utilize and expand Indonesia's long fiber resources, (ii) produce sack kraft paper, on which there is no tariff protection, at internationally competitive prices, and (iii) demonstrate the viability of this type of operation as an efficient investment; GOI participation in and promotion of such a project is considered fully justified. Moreover, GOI has indicated its willingness to examine how its participation in this investment can be divested over time. 36. The Central Java pulp and paper mill would be owned and constructed by P.T. Kertas Kraft Cilacap (KKC) which is in the process of being incorporated based on the Government Regulation No. 2/1982. The incorporation of KKC would be a condition of effectiveness of the proposed engineering loan (Section 6.01(a) of the draft Loan Agreement). The mill, expected to be located at Cilacap on the southern coast of Central Java, is planned to have a capacity to produce about 106,000 tons per year of sack kraft paper. Cilicap is well located with regard to infrastructure, and close to the wood supply and product market. It would be based on tropical pine (Pinus merkusii) plantations located in Perhutani's concession in Central Java, which would provide sufficient wood raw material to the proposed mill based on a long-term contract between KKC and Perhutani. It is anticipated that the price of wood would take into account all the relevant costs of the operations and replacement of the plantation. This plantation is one of the few significant long fiber resources in Indonesia and represents an important opportunity for the production of those grades of pulp and paper which require high strength properties. Three such products, newsprint, sack kraft and kraft linerboard, were examined during the course of the prefeasibility study. Due to the expected rapid expansion of cement sack demand, GOI chose sack kraft as the main product for the Central Java Pulp and paper project. The mill will also be able to

18 produce linerboard and thus adjust to changing market conditions. The sack kraft, to be produced for the first time in Indonesia, will be marketed domestically to cement companies, and to a lesser extent, to fertilizer and other commodity producers. Assuming the project's construction phase proceeds as expected, by the time it reaches full capacity in 1991, the total demand for sack kraft is expected to reach about 120,000 tons annually. 37. GOI has tentatively decided to procure the mill in two packages. The first package, representing about 60-70% of the estimated total installed plant cost would be on a fixed price basis, and would include detailed engineering, imported equipment and materials, supervision of overall plant construction and commissioning. The second package would cover local supplies of equipment and materials, construction and civil works, on a reimbursable cost basis. This approach to procurement is designed to achieve the benefit of a fixed price for most of the installed plant cost, while removing the uncertainty for foreign bidders in relation to local supply of goods and services. In order to ensure proper coordination and clear lines of responsibility for the implementation of the construction project the supplier of the first package should be responsible for the overall coordination and the supervision of the plant construction and commissioning. While there is a risk that seeking a fixed price on such a large, complex package may add to its price, GOI considers this risk acceptable in eliminating any later cost overruns and minimizing delays. The GOI and the Bank will consult with each other with regard to the suitability of the proposed procurement arrangements for the construction of the Cilicap paper mill during the course of the proposed engineering project. 38. There is strong interest in cofinancing the Central Java project among bilateral sources, commercial banks and other financial institutions. Proceeding with the engineering project would ensure more accurate cost estimates and allow appropriate time to structure the most attractive financing package. Concerning local financing, GOI has decided to use the Central Java project as a pilot case for the mobilization of domestic non-goi resources (para. 32). These resources could include investments from commercial banks, pension funds, and insurance companies. Similarly, GOI has expressed its interest in ultimate disinvestment of the Central Java project, options for pursuing this would be examined during implementation of the engineering project. The Engineering Project: Objectives 39. The Bank's preappraisal of the Central Java project in February 1982, while supporting the project's economic viability, concluded that the following additional information was needed to fully prepare the construction project and to attract the maximum amount of cofinancing: (a) engineering and procurement arrangements for the two packages; (b) wood supply arrangements; and (c) preparation of more accurate capital costs and financing plan.

19 Thus the decision was made by GOI to proceed on the basis of two-phases; an engineering project to be followed by a construction project if the mill viability is confirmed. The objectives of the engineering project would be four-fold: (i) to complete preparation of the construction project as described above; (ii) to confirm the technical, financial and economic viability of the construction project, and to permit implementation to proceed expeditiously; (iii) to complete the financing plan; and (iv) to undertake further studies, with the aim of reaching agreement with GOI on a future course of action for the rational development of the pulp and paper industry. Project Description 40. The engineering project would consist of four components as described below: Part A - Assistance in Developing the Central Java Mill 41. Part A of the engineering project would consist of providing technical assistance for carrying out basic engineering and the evaluation of the environmental impact of the project, prequalification of potential suppliers, preparation of tender documents, tender evaluation, and contract negotiation for the first package (para. 37). It would also include preliminary civil engineering and procurement assistance for local construction and erection services. Additional funds would be provided for other professional services required, including legal and management assistance. It would also include an allowance for office and other equipment required to facilitate project start-up. Part B - Assistance in Developing the Wood Supply Arrangements 42. Part B of the engineering project would provide technical assistance to Perhutani in developing appropriate wood-supply arrangements including plantation, logging and transportation programs, road designs and environmental protection measures. The existing pine plantation covers 52,000 ha of Perhutani's 100,000 ha concession in Central Java. Perhutani has designated some 40,000 ha of the former area for the Central Java project, reserving the rest for contingencies and other operations. In addition, Perhutani has ongoing programs to expand the pine plantation within its concession by 10,000 ha over the coming five years and also to reforest as required. The feasibility study and subsequent review by the Bank have confirmed that the wood supply is adequate to meet the wood requirements of the Central Java project. However, some of the terrain in the plantation areas is hilly, and it would be necessary to prepare a careful logging and wood transportation program. During the past four years, Perhutani has been implementing a mountain logging project financed by the Japan International Cooperation Agency, under which some 60 Perhutani personnel have been trained for cable logging. Other logging methods have been examined, including animal skidding, manual skidding and mechanical skidding. GOI will consult with the Bank on conclusions and

20 - l1 - recommendations relating to tne wood supply progran, and would establish a timetable, acceptable to the Bank, for the implementation of the program (Section 3.03(b)(ii) of the draft Loan Agreement). Part C - Training 43. lost of the training required prior to the start-up of the Central Java project would be carried out in the context of the construction project. However, the engineering project would include a training component, primarily aimed at making provision to allow training of key personnel in KKC and Perhatani. GOI will be asked to forward a training program to the Bank by February 1, 1983 and to initiate this program in accordance with a timetable acceptable to the Bank (Section 3.03(b)(iii) of the draft Loan Agreement). Part D - Subsector Restructuring Study 44. During the implementation of the proposed engineering project, the subsector studies would be continued, primarily focusing on tariff reductions and industrial restructuring. Tne implementation of tariff adjustment currently under examination by GOI, would be expected to include major tariff reductions on paper, and would be pursued in the context of the overall industrial sector and trade dialogue between GOI and the Bank. The restructuring study for the pulp and paper industry to be included in the engineering project would focus on the impact of policy changes and the needed restructuring of existing pulp and paper firms to make them economically viable (para. 31). Terms of Reference for the study have been agreed during the negotiations, and the consultants required to assist GOI on the study would be hired by February 1, 1983 (Section 3.02(a)(iv) of the draft Loan Agreement). GOI agreed to consult with the Bank on the study's recommendations and findings and thereafter to take such measures as may be agreed to stimulate economic development of the pulp and paper industry (Section 3.03(b)(iv) of the draft Loan Agreement). Project Implementation 45. The primary executing agency of the engineering project would be a Project Management Team, which is to be established and maintained within the KKC, and whose staffing program would be satisfactory to the Bank (Section 3.01(b) of the draft Loan Agreement). The nucleus of the Project Management Team has already been staffed with experienced personnel from Perum Kertas Basuki Rachmat, which is one of five public sector paper mills in Indonesia. Basuki Rachmat operates a small well-managed integrated wood-based pulp and paper mill in Banyuwangi, East Java, with a well-qualified technical staff, most of whom have received some specialized overseas training in pulp and paper technology. The investigations of wood supply arrangements (para. 42) would be implemented by Perhutani using staff from its headquarters in Jakarta and the Central Java office in Semarang. Finally, the industrial restructuring study (para. 44) would be executed by the Directorate General of Basic Chemical Industries of the Ministry of Industry. Coordination among the

21 agencies implementing the various components of the engineering project would be ensured by a Project Steering Committee to be established by January 1, 1983 under the Ministry of Industry, which would include representatives of BAPPENAS, the Ministries of Finance, Industry and Agriculture, Perhutani and KKC (Section 3.01(e) of the draft Loan Agreement). 46. Because the planning, implementation and operation of pulpwood logging and paper production of this scale are new to Indonesia, GOI has sought the services of a Technical Advisor. Oji Paper Company (Oji) has been identified to serve this role. Oji is Japan's largest producer of pulp and paper, and of sack kraft paper of the type to be produced in the proposed Central Java mill; in addition, it has extensive project experience both in industrialized and developing countries and it manages substantial forest resources. GOI is negotiating two separate technical assistance contracts with Oji, the first to assist KKC in the preparation, construction and operation of the mill, and the second to assist Perhutani in the wood supply arrangements; both of these contracts are to include the necessary training programs. The scope of work for these contracts would be divided into two separate phases, one for the engineering project and the other for the construction project. At completion of the engineering project, a comprehensive review of the project's viability would be made and the scope of work for the construction project phase would be reviewed and adjusted based on the results of the engineering project. The contract for KKC is at an advanced stage of negotiations and is expected to be signed within two months. Employment of engineering consultants to serve as Technical Advisor for KKC under terms satisfactory to the Bank is a condition of effectiveness (Section 6.01(b) of the draft Loan Agreement). Forestry consultants to serve as Technical Advisor for Perhutani would be employed by February 1, 1983 to allow the project implementation to proceed according to the present schedule (Section 3.02 (ii) of the draft Loan Agreement). 47. The engineering project would be implemented over the 18-month period between September 1982 and March Upon employment of the Technical Advisor, the engineering assistance for the main package would be initiated, including basic engineering, tender documents, bid evaluation and contract negotiations. Based on the availability of cofinancing and progress to be made in mobilization of non-goi resources, a revised financing plan for the construction project would be prepared and the project's viability would be reconfirmed prior to the final decision to proceed with the construction project. The Technical Advisor would also assist with the development of detailed wood supply arrangements. The Restructuring Study is scheduled to start by February 1, 1983 and it is anticipated that the final report will be completed by October, Project Cost and Financing 48. The total cost of the proposed engineering project (net of taxes, which are expected to be insignificant) is estimated at US$7.7 million equivalent. The total financing requirements, are estimated at

22 U$7.8 mil,loi-1 t_ivalent, of which US$5.5 million is foreign exchange, including the front-end fee. The Technical Advisor's services during the term of the engineering project would require about 280 man-months of expatriate consultant services and have an estimated total cost of US$3.9 million. The average man-month cost, including salary, costs, fees, international travel and subsistence, is expected to be about US$11,400. In addition to these personnel costs, the contract cost includes the cost of local transportation, local office operating expenses and some other minor items. The local components of the engineering project costs are primarily related to the personnel costs of the Project Management Team and Perhlutani, including travelling, operating expenses and overheads. 49. The Bank loan of US$5.5 million would be lent at the standard variable interest rate for 20 years, including a grace period of five years. The borrower for the engineering project would be GOI, which would delegate responsiblity for the implementation of the various parts of the Project as detailed in paras Funds would be made available to KKC and Perhutani by GOI as equity (Section 3.01(c) and 3.01(d) of the draft Loan Agreement, respectively) Proctirement and Disbursement 50. GOI's selection of Oji as the Technical Advisor has been accepted by the Bank. The loan would include financing the Technical Advisor's services during the term of the engineering project. Other services to be financed under the loan would also be procured according to the Bank's guidelines for the use of consultants. The only goods to be procured under the loan would be (i) office and other equipment required to facilitate the Project Management Team's (and later KKC's) establishment and operation during the term of the engineering project (US$200,000) and (ii) proprietary spare parts for the existing forestry equipment to be used by Perhutani for training (US$50,000). As the items for KKC are small, they would be procured using prudent shopping. The proprietary spare parts for Perhutani would be procured from the original equipment suppliers after Bank's review and approval. 51. Disbursements for consulting services and training would be made against 100% of foreign expenditures. Disbursement for equipment for KKC and spare parts for Perhutani would be made against 100% of foreign expenditures and 100% of local ex-factory expenditures. Project activities are expected to be completed by March 1984 and the closing date of the Loan would be September 30, Accounts and Audits 52. KKC and Perhutani would maintain separate accounts for all costs relating to project investments. These accounts would be audited by independent auditors acceptable to the Bank, and the audited accounts would be submitted to the Bank within six months of the end of the fiscal year (Section 4.02(d) of the draft Loan Agreement).

23 Benefits and Risks 53. The engineering project's main benefit would be the timely completion of preparation of the Central Java pulp and paper construction project to a degree of detail needed to confirm project viability, and substantially reduce the risk of delay and cost overrun during the implementation of the construction project. At the same time, GOI would be able to complete a financing plan. Plans for infrastructure as well as wood supply arrangements would be finalized and the construction project organization would be strengthened. It would also give GOI time to complete a restructuring study for the pulp and paper industry. 54. The risks associated with implementation of the proposed project would be minimal. The work may take longer than envisaged but the consequences of such delays would not be serious. Developing a firm financing plan could prove difficult and/or cause delays but the proposed engineering project would ensure that project outlays are minimized prior to finalizing the total financing package for the construction project. PART V - LEGAL INSTRUMENTS AND AUTHORITY 55. The draft Loan Agreement between the Republic of Indonesia and the Bank and the report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement are being distributed to the Executive Directors separately. Special conditions of effectiveness include the incorporation of KKC (para. 36) and the employment of engineering consultants for KKC (para. 46). 56. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 57. I recommend that the Executive Directors approve the proposed loan. A. W. Clausen President Attachments August 24, 1982 Washington, D.C.

24 ANNEX I Page 1 of 5 pages INDONESIA - SOCIAL INDICATORS DATA SHEET AREA (THOUSAND SQ. KM.) INDONESIA REFERENCE GROUPS (WEIGHTED AVERAGES - MOST RECENT ESTIMATE)/ a TOTAL MOST RECENT LOW INCOME MIDDLE INCOME AGRICULTURAL /b 1970 /b ESTIMATE /b ASIA & PACIFIC ASIA & PACIFIC GNP PER CAPITA (US$) ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENI) POPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (TEOUSANDS) LRBAN POPULATION (PERCENT OF TOTAL) POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) STATIONARY POPULATION (MILLIONS) YEAR STATIONARY POPULATION IS REACHED 2110 POPULATION DENSITY PER SQ. KM PER SQ. KM. AGRICULTURAL LAND POPULATION AGE STRUCTLRE (PERCENT) 0-14 YRS YRS YRS. AND ABOVE POPULATION GROWTH RATE (PERCENT) TOTAL URBAN CRUDE BIRTH RATE (PER THOUSAND) CRUDE DEATH RATE (PER THOUSAND) GROSS REPRODUCTION RATE FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) USERS (PERCENT OF MARRIED WOMEN) FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA ( =100) l PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) /c PROTEINS (GRAMS PER DAY) /c OF WHICH ANIMAL AND PULSE /c CHILD (AGES 1-4) MORTALITY RATE HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) INFANT MORTALITY RATE (PER THOUSAND) ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL /d LRBAN,, d RURAL,, d7d ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL /e URBAN,, e RURAL ; POPULATION PER PHYSICIAN POPULATION PER NURSING PERSON POPULATION PER HOSPITAL BED TOTAL /d URBAN /d RURAL, /d ADMISSIONS PER HOSPITAL BED /e HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL URBAN RURAL AVERAGE NUMBER OF PERSONS PER ROOM TOTAL URBAN RURAL ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL URBAN RURAL......

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

26 _N0(-I COS INOICITORS ANNEX I Page 3 of 5 pages tots: 51t-st-es-r..s s - g(t. she tens oedre,ee hd -eliable, it obsad also h, notd thein >co 5 50 ein-- otooiyoooarsle st 0-a t:-,1sieosrododtnss'l difll"ts set eoeie... used by differn-- snro ellellg tho to.. Th. ee -ro s-ct- -fdos.elsitsd- d-scs0ntsrts titaesod. dsboso -oeaiss-j.,rdtftf-ore Iobotet Ie I of the sobjeetoosetr-y opt ic-pof s-sos Ifeosc ts -11 gusehos -r-ers Ni2d Inton North A-ste ard ghd - Eat' -o hee ohass ef, -s-eo g-p soot-slt-ra aj-royoifsthrtos..ir. affinistsa) ls tbnref-r'eo gross d ats sh nsoesar IpopIt-lo eightol ariethosee Moeic' eas isisto ons thes selfotn grosea s tteas sroag si _ostrisss h at st- toseso _o Es satr od ro,altlr fdt and fios dhof.r- -aorf- e-i he e-dserto Os re.iotio - Ieoot onoedtsst-rsossstbe. d hseaor are -tisoses.l nsrts ose Isate o on Odtatra ats-naoosgtht s--esy ad tfroornesogssep. AREA (nhossnd.,.ks. 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PER CAPITh Il)- too per sspssa r-tsn- ot c-cos raespoo.eltls r e efd.-rttnta ene etd hess eslard byeaseee--ctte tthed Is Wor-d Eace Aolos (1978-t0 hauts);,d6c, an rsolssenossraetlc 1 stafo Ic I (ho lb,su bye ff1.ad 1921 daa-otte`asotiat, sosrep fdte t.) s..hofrt-ptes uem- ENERGY CENNIEPOTIOt PEE CAPITA - Acu-s anoue.yetoe of s-sraci sl ee-rll s,-ysucl -uyeo b- huspltalo tonlude 7Hec Prsilipal/geerai has-tit. sraitty) Ec ktlegaa tieo eooain trsptn C5t. 19I- e 1979 r-ster,-jeosis on pbo lou r n so sysdo-sa iota- Ades,osts err Fgyy,otal fe3d - PTal. n-ct, ot dlsi-iun-sa disth-rgh Ifoes ht.piools deeded by teehste sit I- PEPULATrONt ANE hoista STAISTIlS data en tt-trrth Msidfoelt I Aas de uf -ely 1; 19f0,,9711. s 19ff MC) G astf lelastd(pcespete-od - tesol. ocean, and rerol1- dif-tree d, inltele- ofi coo ora daffassr btaisiey to duos -edtbouas olse eds o fo I o- tsy f-oe h istloirdd Ee a Iong _eunr_ta 19ff. 1ff. std 1922 dora, tee -aoetld ts sa - -i-a psrpso-- PeeasttOl Pejttsanu ooojfyar -ss-f hl e s- <so,so r r,nd rural ntgnfos te nlpeolslr by -~ oduesaoo asro-lfy ard eretlse caseforo res;-eeoee ic foaissg roe lit o-pr- aee srosn- n,eeoesro d ontlofeeoetsosteohoeehoetraoa-oget noroa a it- 5Eato e-rcotfe r orolabas aersirolit-el,taod fea-o -Isle -repttaly -not- zecogue 71. 'er-, Ito1- taro - esaeld.tf cs lsees seioognatea 1 Ifor ferstot..y a,sao 00ete sl susfd bee,old. IoIo IedslofsdLra-ooer..ee- ofde chat, te r sod f-ri f-ilyseed far preo -oe 1-oror - ted CIrsllro,sedatso cp_,the birth rat io eusi Os st. drah rote aed nd,, d sheag 1 Inteer neerle-t esseaents, - This so acrerot In,y afte frc-t,ossl rathes ~-o rseiay of al ni-bost-9 e feolt as the prisaty ns;srsul, I er soa eeoons feaeo is loft ehdree aged 6-li grcer th~rreeoarnm-ssf-eelotosoteot re-rd-oerleean,eter-eh d,, eaosa usedlsr 1 dsfats l eedihl1gor If peoiaryeduoasin;fr lothr... f. i' teco-daosdeboso t alaeu foa-csspstnd astesch tedr Per-ta-tiOner.-y mont beef. 05 t0505 reqo loon at loa.t feo~ir yearn. ppeetd primary letetts ppl ate it re-ttd - ITh- hya Istn -tee... c py se prss~dtdes erstu las iosa - rset-her erf-ioni on-trth- for rpoplo PeesOanOon frostey eosfade- Per so- km. - Mod -aeo psgs,-ainr pee sos- etlone.e- ( I eear.)0 lsonareollooopj L -cee- erif edo - eerts- eoie-e ton alore; 0960, aed 1971 dat deld 197f Pnrso.kmafri-Ltt-alla-df-lcpe t e'a -Inedsncs r.1er otr rs srh hn prs todepredda-sab..eforagriclo-ralaned a-tly -sca ddopa-er-sfor -dare On.e-L -- ei'll96, 197, aed 1979 d-l,- F",il -abr r,at ted -Iuear oe. oaeet_ asedrte-nlpdssi Pepolat-o tee tseesee (yr-ert - e -de (oar. - ki, toe-se (11- prte-yasod ae-edery l,ss dissdd`n heeby s o trte sso the teesessifs -yosca pu 64 O-yerl,e ns-'d ossorr..... at por errespsddis eris laien; 16G. 197fi asd 19ff oaoai- Idosls _Iser Z rate (persona) - Ll-t-at -eao aelo1 so read ad -rose) leot Ese (eryons -es,fr l r-s1tboeonof -esl odsapoorresgo of ta-1 fosd- y~a a_ o byasad eie_ yea opolanooo- for190h.96-,ar 1(71-fl Pop1.iett G..ee tose Es leenset -absr. Ah- se I -ot Itaee of <habs rp CONSldCTION I...e.. fet 19ff-hf, ~ 1970f-8C-0.rfrae - us tete rplste... e.f... oars s-opes etor Roe eehfat -yr heusasd - Aosa- 1-r hereth, eec ohot-d ef nid-ys Aar "eafe leesnte right poeteset;e feoblaes ere o pepofiotide; , sed 19ff aso Craft Erothjfate (set hoan)- A-aul do--or - c tc-sssd leid-eeor fadif frotraesreosn Auofltl) -tyos ofrescs fe -rdio gonoraf ya-ott per tho...asd cifepta te.e. ppeylateon; 1960, and 1900 dots csdeadesass rsu-_ teosa~p ord-ue-tpe Os-A-nrage enste It da-ghoet- wos.. dl hoeae li,ne _reoitrs r estre_ fe _sd is ye-oct eto rbfeatrto ef. radio ttitj reset stoo e, lic-yea- oaeesfe 16,I190 ouec- to u1heltbd foe reess lidseiete y-oru retes It-eoaebloests hereo -ar -risette p-otod t- the ee cr proeaf-p(itl fre ea rff-e; ease 1 Ic ad e etesee-_ee hoeae po F-osly?Ia.oIntgeeoor,denta (ehoo-seea - -enea ec-b- ef -- ter-s Re tie) - Th r-elero far breadea- to of _tc_h-rettrs' ore-oendoraose--e of nar-es e 0 -, re-ote e-era- t.reeu sls are, el-e-ee yoeelo-s-;- e -desloeee-d OlTVer-er Fe-oOyP1.laretsC- a rr,s(prt-feforriod-deuae, rerarfnessttcoaoood isye~ s-seee srtaotviteroea ineffrt-. - emeorhild-b-arfe age (Of-g yas bsh-e-rr -it,os eteas otl e aortge ao. ie obo~1 to so-fensy_ecircuasion(p -fo she toe- earnled..one sass eg g-ru. s'l-iseoif trseeypc dofteed asyr idia 'oyserl peblittatoo d.. sate Preeel soi nenie -srol ete- iti -oniardd- PCODR ANR NfUTIbg te o file' if is aperr as lease fet saostrk Idtfe af Pod- efese pe as 1969-I1=l0y) - lefee of pee eapita -- srel (see- l Ao -ttesdens pee l t perber otd Iso three... o-,f potrlef ttoneer Id Poutessladddrretc-ya, drdt1essy-fns5 roseartrlas5oi dri-tosirea nst t itsdsaondrraras- Cadieel sot- eor-- ino-ryg-u e-g. h -ord netleis te nldrdr Aggg-rgae yr-d-ssoo 5 of rah seeris oasd LABIOAR FORCE s t.se.t... p_-dre PrOt 00 5g.to,If-h, 9190, s.1900 ie- ~ so.ul -sbeossrir (treosardo) t0 oso - ee - persos, inrladfeg penfe d -Anilatle spp-es- -- ri-en tsn.-s roeets-inpoten 1rs ttoersi;1960, 1971 aed 1900 datae-oeaaeagesi tesack- NotsypIesr-eldraom-i ed,cea,p.~- Fpr.setsI-yeoeao feeeorseae-seleofpe q I'llOa oe Os feed pres-ossg, -ed Ido-f diosetri s,i fiot Agrtseltsre ty-re-) Lobee lo-eeiesesg frestre h-eslgasf7 FOd easd sebn noesfr aef oett ee asi-nte h, y lb~icg eop et-tort of -ete Ohor b -r tose e-r-a - 10, '971 and 191 data-. sie--,esosraenefrstg etey ate h-aitb osfrehrt,teo s-sdarirgoe--- bo-y a Ithe,age feeoylr-e - L.teIe is lse1 eec-s hey osde farecse of poplastr - se alo u-er a- and lr cts atte go s a td 0t Isa lacer forte h-ostod le-e; e961-6b one1(7-7 d19o (IO, 1(70 ant 1990 data, ertooppoyetoodpenasy fesocpelco-.eadtsdesoelonoton - fe- e,estrraers rosemastofs-etsl,ssl.odfteuleltstgorsea olesssi -r -r statotedo qoird-eso fo rroe "e e-esse f'l.tae -d erdpyy-,ea efal esss earr eey a Iosen f 6g Ir-as If t-eu pr-ti per d,r on 20 esse afer960s lt, 1970, ord beg0 det- T-rse ur -ed en ILO's partleiparie rate -dlaepe-raea,shorhlhsacscaohtlo -tse Prai,cto -1 Tteaides cslesgg-sol steotei l -bpseos -rttglrr-d a-t-a p-ones as noc aeere foeseee,r-w, P-poses a Peel etoh T~Io iedoo IeeSaco Resi - R,ntee poys sac -see ba 5f a-d o ter1d esad fsrc-y; oed I9t? da,- so e to 0 _aoocfe Pere"e'll protic t py lefsasmaa euo-pnero - eoyfdoesseded cooed Ira, ani,dnlo aef Is g-as doe~ 1(61-65, 1970 and poles pir (sf7 daa L\lOMEhDIfTRItLTIyf tre 0 yasd -saoio 111 onlr- in ; f-i, lyy r.7 as' - -h-o2tc'd4 at- horsh;n1961, 1970 and 19f easdts- an 1so bdh _sre_oeo esni sosdrs esoe fsiiohe Ortlt ar per_ejd -sea atone f hsttads ~-c year Etei-,ds -ar - aed -tel epo efogei tsihllfh Pet,toos-odoIoe Abeele, frrybaslrl(t O,leOad,Odf0ata- Osle P'ette,oeohec n (elbla-iuti egssteuegte rrtesse_lote-eoa.te.afneo-e- se_eeolsaeea,eoiputssta o sete(otl,ran he a(acp fadegsrsrsa_ a ffonoli sobto,eh raes sod safe, sasecsash eat r~eccsee- e hoif se ye1so as eiees, a n 5t-st ef aesro poot eee Ireaoae e e nd e ort er-eietagose rb,eresyeeeoee. pey-sletes Ora - -atlas77 -roaspelte yono-oal-aoa yseratr ra nltsrsdfe h ta eenaderr so, boet osthit e rsotal aeese1 (hu Ioos -tecoa areas o Ite flaaoome incstr (I rel(eest rrontee-1e, apyta o tuof r otr fsh eorl rret feptals(eeeto)osse P usls adrrl h-sosae so p-o rstd Io as psseot tato o spas ne lss, -roeag dosea. roso5eetoo thei rate t lo tstb latoe -n r1 r, ct t, Peptaton ee ersng Pen Por-1.fepsslo rsside- by sen-enif hyaeoen E--g c--n Nl II ii nal-a-deofietr-e.. doa -sss..hasaessa-n-rts r-oestaleoseeaeol sortinga teo Olirartes. -d-,ch DP-1-

27 ANNEX i Page 4 of 5 pages Population : million (mid-1980) GNP per Capita: US$430 (1980) INDONESIA - ECONOMIC INDICATORS Amount Annual growth rate (x) (million USS at (at constant 1973 prices) current prices) Actual Projected Indicator NATIONAL ACCOUNTS Gross domestic product /a 70, Agriculture 18, Industry 29, Services 22, Consumption 48, Gross investment 15, Exports of GNFS 21, Imports of GNFS 15, Gross national savings 17, PRICES GDP deflator (1973 = 100) Exchange rate Share of GDP at market prices (x) Average annual increase (%) (at current prices) (at constant 1973 prices) Gross domestic product Agriculture Industry Services Consumption Gross investment Exports of GNFS Imports of GNFS Gross national savings As % of GDP PUBLIC FINANCE lb Current revenues Current expenditures Surplus (+) or deficit (-) Capital expenditure n.a Foreign financing OTHER INDICATORS Annual GNP growth rate (%) Annual GNP per capita growth rate (x) Annual energy consumption growth rate (x) ICOR Marginal savings rate Import elasticity /a At market prices. Th Central Government only, on an April-to-March fiscal year basis. East Asia and Pacific Programs May 20, 1982

28 -24 - ANNEX I Population million (mid-1980) Page 5 of 5 pages 5NP per Capita: USS430 (1980) INDONESIA - BALANCE OF PAYMENTS, EXTERNAL CAPITAL AND DEBT (Millions USS at current prices) Actual Estimate Projected Indicator BALANCE OF PAYMENTS /a 1. Exports 10,861 11,353 17,494 22,245 21,878 21,882 30,108 33,243 36,790 60,953 (a) Oil & LNG (gross) 7,354 7,374 11,323 16,661 17,593 16,420 22,869 24,279 25,975 37,119 (b) Nonoil 3,507 3,979 6,171 5,584 4,285 5,462 7,239 8,964 10,815 23, Imports (including net NFS) -10,686-11,493-14,035-18,649-23,202 25,807-31,886-35,253-38,187-65,903 (a) Oil sector -2,909-3,364-4,348-5,884-7,658-8,318-10,585-9,972-10,006-16,051 (b) Nonoil imports -7,241-7,543-9,028-11,790-14,509-16,389-19,999-23,755-26,399-46,657 (c) NFS (net) ,035-1,100-1,300-1,526-1,782-3, Resource balance ,459 3,596-1,324-3,895-1,778-2,010-1,397-4, Factor services ,015-1,261-1,205-1, ,034-1,253-1,650-3,899 (a) Interest public debt ,096-1,307-1,534-1,801-3,359 (b) Other (net) Capital grants Balance on current account ,109 2,198 2,467-2,460-4,397-2,712-3,163-2,947-8, Direct foreign investment , Public M & LT loans (a) Disbursement 1,956 2,205 1,865 2,536 2,356 3,969 4,536 5,182 5,772 11,113 (b) Amortization ,548-1, ,000-1,361-1,567-1,872-2,225-4,924 (c) Net disbursements 1, ,583 1,356 2,600 2,969 3,310 3,547 6, Other capital (net) ,261-1, , Change in reserves (- increase) ,690-2, ,097-1,407-1,397-1, Net official reserves 2,208 2,916 4,606 7,342 6,502 5,405 6,812 8,209 10,109 13,189 Reserves in months of nonoil imports + NFS Memorandum Item Net foreign assets of the banking system /d - - 6,906 10,787 10,798 9,101 9,908 11,305 13,205 17,285 Total reserves in months of nonoil imports + NFS EXTERNAL CAPITAL AND DEBT /b Gross Disbursements 1,956 2,205 1,865 2,536 2,356 Concessional Loans Bilateral IDA Other Nonconcessional Loans 1,514 1,721 1,432 1,858 1,552 Official export credits IBRD Other multilateral Private - source 1,089 1,270 1,126 1,450 1,206 External Debt (fixed-term) Debt outstanding & disbursed /d 11,658 13,107 13,233 14,882 15,529 Official - source 7,077 8,390 8,434 9,400 9,746 Private - source 4,583 4,717 4,799 5,482 5,783 Undisbursed debt 4,475 5,839 7,932 9,454 11,288 Debt Service Total service payments 1,262 2,062 2,101 1,772 1,974 Interest Payments as % exports /e Average Interest Rate on New Loans (%) Official - source Private - source Average Maturity of New Loans (Years) Official - source Private - source As % of debt outstanding at end of 1981 Maturity structure of debt outstanding Maturities due within 5 years 30.9 Maturities due within 10 years 60.2 Interest structure of debt outstanding Interest due within first year 4.1 /a On an April-to-March fiscal year basis. /b Excludes private nonguaranteed loans. /c Includes foreign assets of deposit money banks in addition to official reserves. /d At end of period. East Asia and Pacific Programs 7e Oil exports treated on gross basis. August 24, 1982

29 -25 - ANNEX II Page 1 of 28 pages THE STATUS OF BANK GROUP OPERATIONS IN INDONESIA A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of March 31, 1982) US$ million Loan/ Amount Credit Fiscal (less cancellations) Number Year Purpose Bank IDA Undisbursed Twelve Loans and thirty-four Credits fully disbursed Smallholder and Private Estate Tea Pulo Gadung Industrial Estate Bali Tourism Jatiluhur Irrigation Extension Sixth Irrigation Agricultural Research & Extension National Resource Survey & Mapping Fourth Highway Fourth Education Second Shipping National Food Crops Extension Seventh Irrigation Transmigration and Rural Development Second Urban Development Tanjung Priok Port Sixth Power Nutrition Development Teacher Training-Fifth Education Eighth Irrigation Ninth Irrigation Second Population Non-Formal Education Nucleus Estates and Smallholders I Seventh Power Small Enterprise Development Tenth Irrigation Eleventh Irrigation Rural Credit Nucleus Estates & Smallholders II Polytechnic

30 ANNEX II Page 2 of 28 pages US$ million Loan/ Amount Credit Fiscal (less cancellations) Number Year Purpose Bank IDA Undisbursed Twelfth Irrigation Third Urban Development Fifth Technical Assistance Lower Cimanuk Basin Flood Control Second Agricultural Training Fifth Highway Fourth BAPINDO Transmigration II Transmigration II Eighth Power Second Water Supply Yogyakarta Rural Development Nucleus Estates & Smallholders III Smallholder Rubber Development Fifteenth Irrigation National Agriculture Extension II Fourteenth Irrigation Nucleus Estates & Smallholders IV National Agricultural Research National Agricultural Research Third Population Ninth Power Smallholder Coconut Development University Development Tenth Power Swamp Reclamation Fourth Urban Development Nucleus Estate and Smallholder V Second Small Enterprise Development Jakarta-Cikampek Highway Eleventh Power Second Seeds Bukit Asam Coal Mining /1 Development & Transport Rural Roads Development / Second Teacher Training Second Textbook / Sixteenth Irrigation / Seventeenth Irrigation / National Fertilizer Distribution / /1 Not yet effective.

31 ANNEX II Page 3 of 28 pages US$ million Loan/ Amount Credit Fiscal (less cancellations) Number Year Purpose Bank IDA Undisbursed Total Bank loans and IDA credits 4, less cancellations Total 4, of which has been repaid Total now outstanding 4, Amount sold to third party Amount repaid by third party Total now held by Bank and IDA /a 4, Total undisbursed 2, , /a Prior to exchange adjustment.

32 ANNEX II Page 4 of 28 pages B. STATEMENT OF IFC INVESTMENTS (as of March 31, 1982) Fiscal Type of Loan Equity Total year Obligor business --- (US$ million) P.T. Semen Cibinong Cement P.T. Unitex Textiles P.T. Primatexco Indonesia Textiles P.T. Kabel Indonesia Cable P.T. Daralon Textile Manuf. Corp. Textiles P.T. Jakarta Int. Hotel Tourism P.T. Semen Cibinong Cement P.T. Primatexco Indonesia Textiles P.T. Monsanto Pan Electronics P.T. PDFCI Devel. Fin. Co P.T. Kamaltex Textiles P.T. Semen Cibinong Cement P.T. Semen Cibinong Cement P.T. Daralon Textile Manuf. Corp. Textiles P.T. Kamaltex Textiles P.T. Daralon Textiles P.T. Papan Sejahtera Capital Market P.T. Indo American Industries Glass Dinnerware P.T. Semen Andalas Cement and Indonesia Construction Material P.T. Saseka Gelora Leasing Capital Market Total gross commitments Less: sold or repaid and cancelled Total held by IFC Undisbursed (including participant's portion)

33 ANNEX II Page 5 of 28 pages C. STATUS OF PROJECTS IN EXECUTION /1 As of March 31, 1982 These notes are arranged by sectors in the following order: Page No. Agriculture Irrigation (514, 1100, 1268, 1434, 1435, 1578, , 1645, 1691, 1811, 995, 1958, 2118 and 2119) Other Agricultural Projects (400, 1318, 1707/919, 1499, , 1751, 1835, 984, 1898 and 2007) Agriculture Support Services (1179, 1267, 996, 1840/1014 and 2066) Rural Development (946) 15 Agro-Business and Credit (785, 827 and 2011) Education (869, 1237, 1433, 1486, 1692, 1904, 2101 and 2102) Energy (1365, 1513, 1708, 1872, 1950, 2056 and 2079) Industrial Development and Finance Industrial Estates (428) 21 Development Finance Companies (1703) 21 Population and Nutrition Population (1472 and 1869) 22 Nutrition (1373) Technical Assistance (898 and 1197) 23 Transportation Fertilizer Distribution (2120) 24 Highways (1236, 1696, 2049 and 2083) Marine Transport (1250) 25 Ports (1337) 26 Tourism (479) 26 Urban Development (1336, 1653 and 1972) Water Supply (1709) 28 /1 These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.

34 ANNEX II Page 6 of 28 pages C. PROJECTS IN EXECUTION AGRICULTURE Irrigation Credit No. 514 Jatiluhur Irrigation Extension: $30 Million Credit of October 3, 1974; Effective Date: January 10, 1975; Closing Date: December 31, 1982 Initial organizational difficulties, extensive changes in the design of project works and delays in awarding civil works contracts are expected to substantially delay project completion by four years. All major contracts for civil works have been awarded, and the last of these is expected to be completed by mid The total project cost is currently estimated to be about 90% over the appraisal estimate. Loan No Sixth Irrigation: $65 Million Loan of April 10, 1975; Effective Date: June 20, 1975; Closing Date: June 30, 1984 The project is currently expected to be completed by March 1985, about four years behind the original completion date. This is mainly due to a delay of more than one year in the completion of bidding documents, followed by a delay of about two years due to delayed land acquisition, delayed payments to contractors and the effects of the 1978 Rupiah devaluation. Another year's delay has been added lately by the constant postponement of drainage works in both Rentang and Cerebon subprojects due to overall budget constraints imposed by the GOI on the Directorate General of Water Resources Development annual budget during the last three years. Disbursements are currently about 73% of the appraisal estimate. Because of the continuing delays in this project the Closing Date has been postponed by two years. Loan No Seventh Irrigation: $33 Million Loan of June 4, 1976; Effective Date: September 21, 1976; Closing Date: December 31, 1983 The main components of the project are tertiary development on an area of 100,000 ha served by irrigation systems rehabilitated under previous projects and the construction of 6,000 ha of a new irrigation system in the Sadang area of South Sulawesi. The construction of tertiaries has progressed well and gained such a momentum that the scope of work was increased to 115,000 ha. About 111,000 ha have been completed and the balance was expected to be completed by March The construction of North Sadang has suffered a delay of about four years due to design revisions and late award of contracts. The completion of the project by March 1984 depends on the timely provision of budgetary allocations from GOI.

35 ANNEX II Page 7 of 28 pages Loan No Eighth Irrigation: $63 Million Loan of June 6, 1977 Effective Date: July 7, 1977; Closing Date: March 31, 1983 The main components of the project are rehabilitation of the Madiun Irrigation System (Stage I) serving an area of about 75,000 ha, including 30,000 ha of tertiary development, pilot ground water scheme for 2,800 ha in the Madiun-Solo area and the improvement of flood control, drainage and road networks on 5,700 ha of coastal land in Ciujung. Only the drainage works and road improvement in both the Ciujung and Madiun subprojects are expected to be delayed due to budget constraints and lack of experienced staffing. GOI will maximize the use of consultants to overcome this latter problem. Disbursements are currently about 63% behind the appraisal estimate. Loan No Ninth Irrigation: $35 Million Loan of June 6, 1977; Effective Date: July 7, 1977; Closing Date: December 31, The project includes (a) rehabilitation of 8,000 ha of irrigation system, drainage rehabilitation on 19,000 ha of the Sedeku area in Central Java; (b) new irrigation pumping system on 3,280 ha at Sungai Dareh-Sitiung (Stage I) in West Sumatra for transmigrants; and (c) feasibility studies of ten small to medium irrigation projects, Sungai Dareh-Sitiung (Stage II), with detailed designs. Delay in completion of the Sedeku irrigation drainage rehabilitation by about three years continues, compared to appraisal estimate. The Sungai Dareh-Sitiung (Stage I) construction has progressed well, with pumps commissioned and trial runs made. The main and secondary canals are also completed and the tertiary network 80% completed. Feasibility studies of ten small to medium irrigation systems of Sungai Dareh- Sitiung (Stage II) have been completed. Disbursements are about 71% of appraisal estimate. Loan No Tenth Irrigation: $140 Million Loan of June 6, 1978; Effective Date: August 16, 1978; Closing Date: December 31, The project includes: (a) rehabilitation and improvements of about 34,700 ha of Kali Progo irrigation system; (b) improvements of about 19,900 ha of Way Seputih; (c) improvements and expansion of about 63,100 ha of Way Sekampung irrigation projects; (d) studies and detailed designs of two dams associated with (b) and (c) above; (e) studies of Dumoga and Gumbasa irrigation projects; and (f) consulting services for the above and also studies of two dams in the Kali Progo project area and extension of irrigation to Bekri, West Rumbia, Way Kandis and Way Ketibung in Lampung Province. Due to initial delays in survey and mapping of the irrigation service areas, delay in deciding canal capacities till completion of the dam studies and staff shortage during the years 1979 and 1980, the implementation of Way Seputih and Way Sekampung components are behind schedule by about two years. However, the field surveys and the dam studies have now been completed and the staffing situation has improved. The construction tempo and standard of construction in the Kali Progo area has also improved. Among its large dams construction projects the GOI is proposing to give priority to the construction of the

36 -32- ANNEX II Page 8 of 28 pages Batutegi Dam which will ensure full benefits of the Way Sekampung irrigation studies. The Dumoga irrigation project studies were completed and included in Irrigation XV (Credit 995-IND). Disbursements are currently 33% of appraisal estimate. Loan No Eleventh Irrigation: $31 Million Loan of June 6, 1978; Effective Date: August 16, 1978; Closing Date: December 31, The Cipamingkis irrigation subproject, to serve an area of about 7,600 ha is progressing well, the headworks with intake structure were com pleted by end The main and secondary canals to serve 3,820 ha are progressing on schedule, but there is a setback of nine months in the last 3,450 ha. A delay of 9-12 months is expected in assigning consultants for tertiary design, with a consequent delay in tertiary construction. The project is currently estimated to be completed by mid 1984, a delay of 18 months compared to appraisal estimate. The hydrological measurement program is expected to be completed by March 1984, with a delay of about 2 1/2 years. Disbursements are about 41% of appraisal estimate. It is expected that there will be $4 million savings which will be used to finance the tertiaries for the Jatiluhur Irrigation Extension Project (Credit 514-IND) which did not cater for the intensity of canals as needed. Loan No Twelfth Irrigation: $77 Million Loan of December 29, Effective Date: May 10, 1979; Closing Date: March 31, The Jatiluhur Tertiary Development on an area of 186,000 ha is proceeding on schedule; construction on 103,731 ha has been completed and the balance of the area would be covered in two fiscal years 81/82 and 82/83. The Cisedane drainage works have been delayed; two small contracts of about $2 million were awarded in January-February 1981, and are about 30-40% completed. All studies are expected to be completed by July Disbursements are about 35% of the appraisal estimates. Loan No Lower Cimanuk Basin Flood Control: $51 Million Loan of May 7, 1979; Effective Date: October 16, 1979; Closing Date: March 31, The main components of the project are flood protection levees, bank stabilization and river training works on the lower Cimanuk river, widening of the Rambatan Channel and construction of a hydraulic control structure at Bangkir, the Cimanuk river estuary study and the flood control operating and flood forecasting study. Good and satisfactory progress has been made on the civil works and various studies. Civil works are expected to be completed by mid The latest supervision mission recommended that the implementing agency should consider using the savings under the project for procurement of additional Operation and Maintenance equipment such as large to medium-size dredgers, dozers, draglines, dump trucks and loaders. The equipment will be useful for emergency repairs of other rivers such as Cisanggarung which causes damage during the wet season. The latest project cost estimates indicate that

37 ANNEX II 33 Page 9 of 28 pages $6-8 million loan funds will remain unused by the completion of the project. The list of equipment to be procured using the savings under the Loan is being reviewed. Loans No Fourteenth Irrigation: $116 Million Loan of April 3, 1980, Effective Date: July 3, 1980; Closing Date: January 31, 1986 The main components of the project are construction and rehabilitation of drainage and flood protection works on the Serang River to reduce flooding of some 61,000 ha of farm land, rehabilitation of the Madiun Irrigation System (Stage II) serving about a 65,000 ha area and tertiary development serving a 120,000 ha area in the Pemali Comal and Pekalen Sampean subprojects. The project contracts for flood mitigation works for the Serang River have been awarded after one year's delay. The project also experiences budget constraints. Works in the Madiun area and the tertiary development are progressing well ahead of schedule. Credit No. 995 Fifteenth Irrigation: $45 Million Credit of April 3, 1980 Effective Date: July 3, 1980; Closing Date: January 31, 1985 The project includes: (a) the completion of the Kosinggolan irrigation system on about 5,000 ha and construction of the new Toraut irrigation system on about 6,600 ha; (b) catchment protection and a nature reserve on an area of about 100,000 ha; (c) institutional support to the Directorate General of Water Resources Development (DGWRD) through consultancy services and training; (d) strengthening of mapping capabilities; and (e) studies and investigations of four irrigation systems. Construction of the Toraut headworks and the first two kilometers of the main canal commenced in early 1981 and two major contracts are programmed for award by mid-1982, behind schedule 12 months. The Dumoga catchment protection and Nature Reserve is yet to be started, and was delayed awaiting approval of a management plan and budget allocation by GOI. Implementation of this component is behind schedule by 12 months. All the consultants for studies and institutional support to the DGWRD are engaged and contracts signed. Disbursements to end September 1981 were 54% of appraisal estimate. Loan No Swamp Reclamation: $22 Million Loan of March 31, 1981; Effective Date: July 9, 1981; Closing Date: December 31, 1986 The project assists GOI's effort to reclaim and settle swamps by implementing a 9,000 ha swamp reclamation and settlement project at Karang Agung, South Sumatra. In addition to physical works, the project comprises the preparation of future swamp investments, an ecological impact study, an investigation of groundwater for drinking, and project monitoring. The major works contract for construction of canals was awarded end-1981 and consultants for construction supervision were assigned in March Consultants for studies are being recruited. The project completion is likely to be delayed due to the eight months' delay in the start of construction.

38 34 - ANNEX II Page 10 of 28 pages Loan No Sixteenth Irrigation: $37 Million Loan of April 5, 1982; Effective Date: Not yet effective; Closing Date: December 31, The project will complete construction of the Sitiung Irrigation System (Stage II) in Sumatra to serve about 7,600 ha of transmigrant and local farmer lands; improvement of management systems of the Directorate General of Water Resources Development (DGWRD); training and support for water users and their associations; expansion of DGWRD's basic hydrological data network; and studies for development of the Cisanggarung River Basin and detailed design of the Jatigede Dam. Loan No Seventeenth Irrigation (East Java Province): $70 Million Loan of April 5, 1982; Effective Date: Not yet effective; Closing Date: December 31, This is the first irrigation project to be concentrated in a single province and implemented through a provincial irrigation service. It will rehabilitate existing surface irrigation systems serving about 50,000 ha; developing groundwater irrigation systems to serve about 13,000 ha; upgrading operation and maintenance for about 140,000 ha of irrigation systems already rehabilitated; and strengthening of the East Java Provincial Irrigation Service. Other Agricultural Projects Credit No. 400 Smallholder and Private Estate Tea: $7.8 Million Credit of June 22, 1973; Effective Date: November 30, 1973; Closing Date: December 31, 1982 The project provides for credit through Bank Rakyat Indonesia (BRI) to improve productivity on 10,000 ha smallholder tea and 3,200 ha private estates tea, rehabilitation of five private estate tea factories, construction of two new factories for smallholder leaf; training of extension staff and tea growers, studies for marketing, diversification and BRI management. The project is making a substantial contribution to smallholder tea industry with 8,500 participants against the appraisal estimate of 7,000. Of the five private tea estates participating, two are excellent, two are fair and one is poor. Progress on construction of the PTP XII factory, to process smallholder and estate tea, is satisfactory. Extension and training has helped about 16,000 smallholders. Due to availability of inputs on the open market at lower price, performance of P. T. Pertani regarding input distribution has been disappointing during 1981 resulting in slowing down disbursements. The project still suffers from weak management, although, at the request of the Association, the GOI has initiated a series of actions to accelerate the disbursement rate. It is doubtful if the balance of Credit of over $2 million can be disbursed by December 31, 1982, the new Closing Date, unless the situation improves.

39 ANNEX II Page 11 of 28 pages Loan No Transmigration and Rural Development: $30 Million Loan of July 21, 1976; Effective Date: March 30, 1977: Closing Date: December 31, 1982 After a rather slow start which resulted in extension of the Closing Date to December 31, 1982, the project has shown continuous progress since mid-1980 and is expected to be completely disbursed by end In Baturaja, 4,400 families (98% of target) have been settled and 1,300 shallow wells (91% of revised target) have been established. The pasture development program is well established in Baturaja and Way Abung and 8,800 cattle (93% of target) have been distributed in both sites. Rubber development is almost completed with only 400 ha (6% of target) to be planted in Disbursements have now reached 75% of appraisal estimates. Loan No Transmigration II: $90 Million Loan and $67 Million Credit of (Cr. No. 919) June 1, 1979; Effective Date: October 4, 1979; Closing Date: December 31, 1985 Uncertainties about land availability, slow land clearing, and weak management and coordination have caused implementation delays. In particular, detailed surveys indicated that only about 12,000 of the anticipated 30,000 families could be settled in the area originally designated based on a food crops farm model. Disbursements to date are about 56% of appraisal estimates. However, in recent months, progress has been made in resolving these difficulties. GOI has put foward a plan for settling 30,000 families in Jambi and adjacent provinces; detailed surveys of the proposed areas and procedures for compensation for local landholders are awaited. Performance of the first land clearing contractor has improved; and a second land clearing contract has been signed. Several steps are being taken to improve project coordination by the office of the Junior Minister of Transmigration. The substantial program of screening and evaluation of future transmigration sites, executed by 11 consulting firms, will be completed in June Loan No Nucleus Estates and Smallholders I: $65 Million Loan of November 18, 1977; Effective Date: January 12, 1978; Closing Date: June 30, 1984 The nucleus estates have planted about 60% of the 11,500 ha of rubber to be established for smallholders and will complete about 72% by the end of the 1981 planting season; have constructed about 3,400 settler houses and settled about 1,035 families. In their own estates, the nucleus estates have rehabilitated 18,400 ha of rubber, planted 7,200 ha of rubber, 3,700 ha of coconuts, and 5,600 ha of oil palm, exceeding project targets for rubber planting and rehabilitation. Three rubber factories and one palm oil mill have been constructed. However, as there were start-up delays in some smallholder planting, and some civil works construction will not be completed on schedule, an extension of the Closing Date to June 30, 1984 has been agreed to.

40 ANNEX II Page 12 of 28 pages Loan No Nucleus Estate and Smallholders II: $65 Million Loan of July 12, 1978; Effective Date: September 13, 1978; Closing Date: December 31, 1983 Progress with rubber and infrastructure development has slowed but construction of settler houses, preparation of food crop areas and the enrollment of settlers are on target. Action has been taken to speed up the logging operations and the project is expected to be mainly completed by June 1985, except for the rubber replanting component in Jambi Province where farmer response has been poor. Particular efforts are being made to encourage farmer participation but the 4,500 ha replanting target is unlikely to be achieved by that date. The project Closing Date will have to be extended to June 30, Loan No Nucleus Estates and Smallholders III: $99 Million Loan of August 13, 1979; Effective Date: November 12, 1979; Closing Date: December 31, 1986 All implementing agencies have made good progress. Although some components are slightly behind schedule, the overall project is on or slightly ahead of schedule. About 7,500 ha of rubber have been planted, half of which is for smallholders. About 420 settler houses are occupied and garden lots established. In 1982, one of the estates, PTP I, was upgraded to-take over responsibility for completing the Alue Iemerah smallholder component under NES I (1499-IND). Loan No Nucleus Estate and Smallholders IV: $42 Million Loan of May 16, 1980: Effective Date: August 11, 1980; Closing Date: December 31, 1986 Smallholder oil palm planting is on schedule and of excellent quality. Village layout, settler house construction, and road development are a little behind schedule due to problems of land availability. However, these problems are being actively addressed by the implementing estate (PTP X) and the Project Coordinating Committee, and project completion is likely by target date. Credit No. 984 Smallholder Rubber Development: $45 Million Credit of April 3, 1980; Effective Date: May 23, 1980; Closing Date: March 31, 1986 The project continues to progress satisfactorily, by early 1982 over 9,700 ha rubber or 85% of plan was planted. Disbursements by end 1981 amounted to $3.8 million out of an estimated $5.0 million but are expected to catch up soon. Delays in road construction are affecting project implementation and supervision, and measures to speed up progress are under review. Training of field staff and smallholders will be kept strictly practical;

41 _ 37 - ANNEX II Page 13 of 28 pages visual aids are being prepared. Creation of a trainer/coordinator position at provincial level but working at the Project Management Unit level is being considered. The creation of an internal audit unit and timely recruitment of staff to deal with financial matters is urgently required. Four studies, including a feasibility study, for an eventual second project are nearing completion and after review by GOI will be submitted to the Bank for review and comment. There are no major problems with this project, apart from the requirement to strengthen management and the seriously delayed procurement of vehicles. Loan No Smallholder Coconut Development: $46 Million Loan of August 25, 1980; Effective Date: November 25, 1980 Closing Date: June 30, 1986 The development and rehabilitation of coconut plantings are about 30% ahead of appraisal estimates but there is need for improvement in project management. The transfer of responsibility for administrative and technical control from the provincial estate crop services to the project implementing unit is delayed and is expected to take place shortly. Loan No Nucleus Estate and Smallholder V: $161 Million Loan of June 26, 1981; Effective Date: October 21, 1981; Closing date: June 30, 1988 Smallholder development program to establish 53,000 ha of tree crops (rubber, oil palm, coconuts), food crops and house gardens in West Java, West Kalimantan and Bengkulu provinces with public sector estates as implementing agents. The project has made a good start including the nurseries establishment, initial planting for the smallholders in West Java, construction of some roads, estates offices and smallholders' houses. Agriculture Support Services Loan No Agricultural Research and Extension I: $21.5 Million Loan of December 19, 1975; Effective Date: February 23, 1976; Closing Date: December 31, 1982 Overall progress in the project continues. Civil works in Sungai Putih and Sembawa (rubber) and Sukamandi (rice and palawija) are still behind schedule and are now expected to be completed by mid Most of of the field and workshop equipment, furniture and vehicles have been received and contracts for laboratory equipment and chemicals for Margahayu (highland vegetables) and for Sungai Putih and Sembawa have been awarded. Ten agricultural information centers (AICs) under the Agency for Agricultural Education, Training and Extension have been constructed, furnished and equipped and two additional centers at Aceh and Ambon are under construction. Extension materials are being produced and distributed from the completed AICs. Dibursements under the project have been improving consistently.

42 ANNEX II Page 14 of 28 pages Loan No National Food Crops Extension; $22 Million Loan of June 4, 1976; Effective Date: September 21, 1976, Closing Date: December 31, 1982 The project management unit now has all six Assistant Directors on a full-time basis. As of December 1981, the total number of field level extension workers and middle line extension workers is 11,396 against the target of 11,620 and of subject matter specialists 399 against the target of 320. All civil works are expected to be completed shortly. Procurement of all vehicles, equipment and furniture has been completed. In-service training of extension staff and short-term and long-term courses abroad have been conducted more or less according to target. The project and all disbursements are expected to be completed by the Closing Date of December 31, Credit No. 996 Second National Agricultural Extension: $42 Million Credit of April 3, 1980; Effective Date: July 3, 1980 Closing Date: March 31, 1986 The project is the second phase of the national program for strengthening extension services covering transmigration areas, estate crops, livestock, inland fisheries, soil conservation activities in addition to food crops in 26 provinces. The project management unit now has all six Assistant Directors, all Divisional Chiefs and all sectional heads, except two, on full-time basis. As of December 1981, the strength of field level extension workers (PPL), middle level extension workers (PPM) and subject matter specialists (PPS) in the thirteen new provinces are 1,705, 356 and 104 against target of 2,956, 1,069 and 318, respectively. The shortfall is due to difficulties in recruiting PPLs and PPSs for the Other Islands. Construction of 57 Rural Extension Centers (RECs) and renovation of 31 RECs in East Java has been completed. Tenders for all the remaining civil works are in the process of issue. Procurement of vehicles out of GOI funds in lagging behind. In some provinces the Training and Visit system has also been introduced for subsectors other than food crops. Loan No National Agricultural Research: $35 Million Loan and $30 (Cr. No. 1014) Million Credit of May 16, 1980; Effective Date: July 16, 1980; Closing Date: June 30, 1990 The project is the second phase in the strengthening of the overall institutional framework of the Agency for Agricultural Research and Development for agricultural research in fruits, lowland vegetables, livestock, fisheries, forestry and estate crops other than rubber and industrial crops. Directors for the Central Research Institutes and for Research Institutes and Centers already approved by the Minister of Agriculture have been appointed. Civil works for the six locations planned for 1980/81 are going

43 ANNEX II Page 15 of 28 pages ahead and contracts for most of the civil works planned for 1981/82 have been awarded. More than fifty candidates for long-term local fellowships have been selected, as well as a consulting firm to provide technical assistance. Loan No Second Seeds $15 Million Loan of January 15, 1982; Effective Date: March 11, 1982; Closing Date: June 30, 1989 This project provides for: establishment of 18 medium Seed Processing Centers (SPCs) for the National Seed Corporation, P. T. Pertani and Cooperatives; six small SPCs for Cooperatives; additional equipment and facilities for five Food Crops Research Institutes (FCRIs), Provincial Seed Farms and Seed Control and Certification Services; establishment of a diploma course on seed technology at the Bogor Agricultural Institute; and in-service training, technical assistance and studies for strengthening the institutions operating in the seed subsector. Locations for the five medium SPCs to be constructed in the first year have been decided and land acquisition is in progress. Tender documents for the SPCs are being finalized for issue of tender shortly. Long-term consultants are also expected to be appointed shortly. Rural Development Credit No. 946 Yogyakarta Rural Development: $12 Million Credit of August 13, 1979; Effective Date: December 5, 1979; Closing Date: March 31, 1987 Now that the problem of shortage of vehicles has been resolved, progress with physical implementation and field operations has been good. Previous delays of about one year, such as those in the agricultural components of the project, have been reduced to six months. Temporary financing gaps due to delays in the release of FY81/82 project funds have largely been covered by the provincial government. The current estimate of mid-1987 for project completion should be made earlier during the next supervision mission, if the present momentum is maintained. In the meant this project is no longer considered a project with major problems. AGRO-BUSINESS AND CREDIT Credit No. 785 Small Enterprise Development: $40 Million Credit of April 7, 1978; Effective Date: August 17, 1978; Closing Date: December 31, 1984 The project provides financial and technical assistance to strengthen Bank Indonesia's (BI) small credit programs, KIK/KMKP. The three field units established under the project in Central Java, East Java, and West Sumatra are developing new lending approaches and assisting handling banks in

44 ANNEX II -40 _ Page 16 of 28 pages project promotion and preparation. On the whole, progress under this project (SEDP I) has been satisfactory. The credit component of the project has been fully disbursed, but the technical assistance component will not be fully disbursed for two years. The Closing Date has been postponed to enable disbursements for the technical assistance component to be made. Credit No. 827 Rural Credit: $30 Million Credit of June 23, 1978; Effective Date: November 3, 1978; Closing Date: March 31, 1985 This project provides long-term credit to about 40,000 smallholders, primarily for fisheries, perennial crops and livestock, and technical assistance to Bank Rakyat Indonesia (BRI) for program development, training in term lending, credit procedures and accounting and management information systems. Due primarily to delays in obtaining consultancy services, the project is about nine months behind schedule. Following extension of the project to cover additional provinces and commodities, it is rapidly catching up. Loan No Second Small Enterprise Development: $106 Million Loan of June 26, 1981; Effective Date: October 16, 1981; Closing Date: December 31,1984 From the three regions covered under SEDP I (Credit 785-IND) this project is expanded to cover all 27 regions in Indonesia where the Small Investment (KIK)/Small Permanent Working Capital Credit (KMKP) program has been in operation since In addition to credit and technical assistance to the banking system, the project provides for the strengthening of nonfinancial support services for small scale enterprises by the Ministry of Industry. This is being financed by $6 million from the proceeds of this loan. Following a slow start, the latter component is beginning to move forward satisfactorily. The credit component is progressing satisfactorily and disbursements are on schedule. EDUCATION Credit No. 869 Polytechnic: $49 Million Credit of December 29, 1978; Effective Date: May 11, 1979; Closing Date: June 30, 1985 The project objectives are to establish a new system for training engineering technicians, improve the quality of accountancy training and practices, and assist in strengthening education planning and management. The project would establish a Technician Education Development Center (TEDC), six polytechnics and four accountancy development centers and include technical assistance and associated studies. The project is making good progress and implementation is on schedule without a cost overrun. The TEDC building has been completed and construction of the six polytechnics started in Equipment contracts for the TEDC and the six polytechnics have been awarded.

45 ANNEX II Page 17 of 28 pages The expert services and fellowship program are progressing satisfactorily. The accountancy component after initial delays, is now making good progress. Study contracts have been awarded or are being awarded. Disbursements are on schedule. Loan No Fourth Education: $37 Million Loan of April 15, 1976; Effective Date: June 17, 1976; Closing Date: December 31, 1982 The loan is helping to finance physical facilities and related technical assistance for: (a) two faculties of technology at existing teacher training colleges and four new centralized workshops for technical training for the Ministry of Education and Culture (MEC); (b) 17 new vocational training centers, an existing instructor training center and 25 mobile training units for the Ministry of Manpower (MOM); and (c) new premises for the National Institute of Administration (LAN), the country's principal civil service training institution. The completed MEC subproject is problem-free and facilities are operating satisfactorily. The MOM subproject has made some progress but is about two and a half years behind schedule with a 16% cost overrun. Problems faced include poor equipment procurement management, shortage of funds, low utilization of completed facilities, poor quality of training (less than 50% of trainees placed in. employment), and partial compliance on covenants. The LAN component has made no progress for over two years and is now about three and a half years behind schedule, mainly due to the default of the civil works contractor for price escalation disputes with GOI. Furniture and equipment procurement has not commenced. It is unlikely that this component will be completed by the present Closing Date. The GOI has been informed of the overall status and urged to take remedial actions. Loan No Teacher Training: $19 Million Loan of June 6, 1977; Effective Date: July 7, 1977; Closing Date: June 30, 1983 The project is now progressing satisfactorily. About 36% of civil works have been completed. Phase I is 95% completed. Phase II is approximately 75% completed. Tendering for the third and final phase has begun and construction is expected to be finished this year. Furniture is being supplied to completed buildings according to schedule. Equipment procurement is about one year behind schedule. The first cycle began in July 1981 and will finish in mid Four hundred teacher trainers and administrators are being trained and will conduct local seminars. Project studies are nearing completion. While disbursements are currently only 31% of appraisal estimates, it is expected that they will accelerate considerably during the coming months. Despite earlier delays and the low disbursement level, the project is expected to be completed as planned.

46 .ANNE( IL Page 18 of 28 pages Loan No Non-Formal Education: $15 Million Loan of September 14, 1977; Effective Date: November 4, 1977; Closing Date: June 30, 1983 The project aims at strengthening the Department of Education's nonformal education programs in seven provinces. Financing would cover: civil works to renovate two existing and establish four new provincial centers, instructional equipment and vehicles, in-service training, materials development, a basic learning fund, and related technical assistance. Of the six Balai PENMAS (directorates for out-of-school education) centers, five have been completed. All furniture and equipment are already on site. About 90% of the staff training program is meeting appraisal targets and production and distribution of pretested learning materials is accelerating. The technical assistance program is on schedule; local staff are gradually replacing foreign consultants. Disbursements will increase substantially this year and are expected to reach 90% of appraisal estimates. Loan No Second Agricultural Training: $42 Million Loan of May 7, 1979; Effective Date: July 31, 1979; Closing Date: June 30, 1985 The project constitutes the second phase of GOI's long-term strategy to improve the quality and supply of middle level agricultural manpower. Good progress continues to be made. On average 45% of construction has been completed at the 47 project institutions and implementation is well ahead of schedule. Disbursements exceeded the revised estimate by more than 200% by March 31, Technical assistance is now well underway, fellowship utilization remains up to schedule, and the curriculum is being revised. Loan No University Development: $45 Million Loan of November 13, 1980; Effective Date: January 22, 1981; Closing Date: December 31, 1986 The project is the first phase of a long-term university development program. Its main objectives are to increase the output of high level manpower and improve the quality of university education in the fields of engineering, science, agriculture, and economics (including business administration and accountancy), as well as strengthen the management of the overall university system. Arrangements for physical development are about six months behind schedule except at the University of Indonesia. The additional land required for the University of Gadjah Mada and the new site for the University of Andalas have been acquired. Short lists of campus planning and architectural consultants for all the universities are being finalized. The initiation of technical assistance provisions are about fifteen months behind schedule. A contract is being negotiated with an external agency to administer the program of fellowships and visiting professors. Two contracts are being finalized with the British Council for the training of university administrators and textbook editors. There have been no indications to suggest that project costs will be other than estimated at appraisal.

47 43 ANNEX II Page 19 of 28 pages Loan No Second Teacher Training: $80 Million Loan of April 5, 1982; Effective Date: Not yet effective; Closing Date: June 30, 1988 The project seeks to improve the skills, competence and effectiveness of the education staff involved in primary and secondary education and educational administration. Loan No Second Textbook: $25 Million Loan of April 5, 1982; Effective Date: Not yet effective; Closing Date: June 30, 1987 The project will support the establishment of the Integrated Textbook Project, a permanent organization to plan and manage textbook development activities; a Center for Curriculum Development, which would develop improved curricula for primary and secondary schools, and an improved national distribution system for all textbooks for primary and secondary schools. ENERGY Loan No Sixth Power: $116 Million Loan of February 4, 1977; Effective Date: June 6, 1977; Closing Date: June 30, 1983 Construction work on the project has reached its final stage. The 200 MW Unit No. 4 was synchronized on November 26, 1981 and has been in commercial operation since March Unit No. 5 is expected to be in commercial operation around July The associated studies have been completed. Loan No Seventh Power: $109 Million Loan of February 3, 1978 ($15 million cancelled November 30, 1980); Effective Date: June 30, 1978; Closing Date: December 31, 1983 All contracts were awarded at highly competitive costs with a substantial reduction in foreign costs and, therefore, $15 million of the ori, nal loan of $109 million has been cancelled. The Bank also agreed to the inclusion of the following additional studies in the scope of the project: (a) Sunda Strait submarine cable feasibility; (b) optimization of location of future thermal plants: (c) power sector management information system design; and (d) energy pricing study. Construction work at the site has been delayed by about 15 months. Commercial operation of the 200 MW generating unit is expected in July Construction of the associated transmission lines is progressing satisfactorily. The feasibility study of the East Java coal-fired thermal power station site has progressed to the point of selection of a suitable site. Contracts for the studies (a), (b) and (c) mentioned above have been signed, and work is progressing satisfactorily. There has been no progress on item (d) so far.

48 ANNEX II Page 20 of 28 pages Loan No Eighth Power: $175 Million Loan of June 1, 1979; Effective Date: November 5, 1979; Closing Date: December 31, 1984 The project continues to encounter a number of problems and slipped nearly eleven months behind schedule by September 1981 compared to eight months in May However, progress since then has improved and the estimated delay as of January 1982 was 48 weeks. The main causes of the delay were: (a) late finalization of contracts, and (b) tardy performance of the local contractor for piling work. Most contract awards have now been made and the commissioning date for Unit No. 1 at Suralaya is expected to be October Disbursements, though much lower than the appraisal estimates, are in line with the revised projections prepared in July The project cost is expected to remain within the appraisal estimate. Loan No Ninth Power: $253 Million Loan of June 13, 1980; Effective Date: October 24, 1980; Closing Date: September 30, 1985 This project is experiencing delays. However, the commissioning date of the second unit of Suralaya is now expected to be June 1985, i.e. two months behind schedule. The EHV project is delayed by almost one year due to delay in finalizing contract awards. All major contracts are expected to be finalized by May Progress of land acquisition for the substation and the transmission lines is satisfactory. Loan No Tenth Power: $250 Million Loan of March 6, 1981; Effective Date: April 23, 1981; Closing Date: June 30, 1987 All major contracts for construction and installation of generating equipment required for the Saguling hydroelectric project have been placed with an estimated saving in total project costs of about $99 million. Construction work started at the main dam site in August 1981, and has encountered problems in regard to timely completion of diversion tunnels which are crucial to achieve river diversion planned end-may However, during 1982 steps are being taken by the GOI to divert the river and modify the later construction program to ensure that original construction targets are met. Other project subcomponents are progressing satisfactorily. No cost or unanticipated time overruns are expected. Loan No Eleventh Power: $170 Million Loan of November 16, 1981; Effective Date: April 15, 1982; Closing Date: June 30, 1986 Implementation of the project is proceeding on schedule. Contracts worth about $30 million have already been evaluated and approved by the Bank. No problems are foreseen at this stage.

49 ANNEX II Page 21 of 28 pages Loan No Bukit Asam Coal Mining Development and Transportation: $185 Million Loan of January 22, 1982; Effective Date: Not yet effective; Closing Date: September 30, 1987 The project would provide indigenous coal as a substitute for oil (mainly for power generation in West Java) and strengthen the institutions involved in Indonesia's coal mining sector. The project consists of: an expansion of the existing coal mine and the provision of the necessary infrastructure at Bukit Asam; the upgrading of the railway link to Panjang; and the provision of a ship for the transportation of coal across the Sunda Strait to Suralaya, together with associated terminal. Industrial Estates INDUSTRIAL DEVELOPMENT AND FINANCE Credit No. 428 Pulo Gadung Industrial Estate: $16.5 Million Credit of September 14, 1973; Effective Date: November 13, 1973; Closing Date: December 31, 1982 The Pulo Gadung Industrial Estate is now scheduled for completion in Of 415 ha of raw land earmarked for acquisition, 358 ha had been purchased as of mid-1981, 164 ha of developed land reserved for factory use has been sold to 210 firms. At full capacity production, employment is expected to be around 23,000 workers; 9,700 of whom have been hired so far. Despite the slow development of the estate resulting in protracted disbursement of the credit and substantially higher cost than estimated at appraisal, PT JIEP's financial performance has been satisfactory. Some adjustments of its dividend, cost and price policies were nevertheless called for and were recommended to PT JIEP during the last supervision mission. GOI has agreed to designate 22.6 ha of the Pulo Gadung Industrial Estate as an Export Processing Zone (EPZ) with PT JIEP as the sole administrator. The Closing Date of the Credit was therefore postponed by two years to December 31, 1982, reallocating the remaining funds for the establishment of the EPZ. However, development of the EPZ has been delayed because the required Presidential Decree and subsequent operating license by the Department of Trade and Cooperatives have not yet been issued. Development Finance Companies Loan No Fourth BAPINDO: $50 Million Loan of June 1, 1979; Effective Date: September 25, 1979; Closing Date: September 30, 1983 This project is being implemented satisfactorily. BAPINDO is making good progress in implementing the General Improvement Program provided under the project -which involves major institutional reforms and wider delegation of authority to branches. Commitments have increased rapidly since the last supervision mission. Disbursements have also caught up and are expected to be fully disbursed by the Closing Date.

50 ANNEX II Page 22 of 28 pages POPULATION AND NUTRITION Population Loan No Second Population: $24.5 Million Loan of July 6, 1977; Effective Date: August 4, 1977; Closing Date: April 30, 1983 All civil works are completed and the buildings are occupied and operational. The mobile service units provided under the project are making a significant contribution to the recruitment of contraceptive acceptors. On-going activities comprising training, population education and research are scheduled to be completed by the end of A loan saving of $7.0 million has been reallocated for the purchase of equipment in support of project activities and procurement is expected to be completed by December Only about $10.3 million, or 42%, has been disbursed out of the loan. A sizeable proportion of the balance will be disbursed by the Closing Date, but not the full loan amount. The GOI does not intend to request an extension of the Closing Date. Loan No Third Population: $35 Million Loan of June 13, 1980; Effective Date: September 10, 1980; Closing Date:.March 31, 1985 While some progress has been made on the implementation of nonconstruction components, civil works have experienced start-up delays due to (a) a protracted process of hiring consultants to prepare building plans and contract documents, (b) difficulties of land acquisition, (c) inadequate staff, and (d) failure to make adequate provisions in the budget for the first year of project activities. Consultants have been engaged and contractors are expected to be awarded in July 1982 and construction is schedule to start in August. A sufficient number of building sites have now been acquired. The staff dealing with civil works has been augmented by detaching four engineers fron the Ministry of Public Works to assist the National Family Planning Coordinating Board with civil works. Adequate budgetary provisions have been made. Initial delays in physical implementation are reflected in slow disbursement. The Bank is intensifying supervision efforts in order to accelerate physical progress and improve the rate of disbursement. Nutrition Loan No Nutrition Development: $13 Million Loan of March 14, 1977; Effective Date: March 31, 1977; Closing Date: March 31, 1983 Most of the civil works are completed and the buildings are functioning. The ongoing construction work is scheduled to be completed by the end of Staff training, both in-country and abroad, is proceeding rapidly, as well as the use of consultants. Many of the on-going activities

51 ANNEX II Page 23 of 28 pages are additional to the original project activities as a result of the reallocation of loan savings of $4.0 million. They are, however, expected to be completed by December Sustained efforts are being made to help expedite the implementation of these activities. Disbursement is lagging somewhat because only $6.0 million, or 46% of the loan, has been disbursed. When the on-going activities are completed towards the end of 1982, disbursement should rise sharply. TECHNICAL ASSISTANCE Credit No. 898 Fifth Technical Assistance: $10 Million Credit of May 7, 1979; Effective Date: September 5, 1979; Closing Date: March 31, 1984 Progress under this project is satisfactory. Loan No National Resource Survey and Mapping: $13 Million Loan of February 5, 1976; Effective Date: April 2, 1976; Closing Date: December 31, 1983 The National Coordinating Agency for Surveys and Mapping (BAKOSURTANAL) complex at Cibinong is completed, and most of the cartographic photographic processing, including color photo processing equipment and printing equipment required to produce maps, are installed. Computer equipment for resource analysis including a topographic data bank and flatbed plotter has been installed. Various resource evaluation activities have been undertaken using these facilities. Recruitment and training of new staff, particularly at junior and middle level has recently been accelerated. The new photography operation financed under the parallel Canadian Project was delayed as a result of which the Bank agreed to extend the Closing Date until December 31, The photography operation started in July 1981 and is expected to be completed by the new Closing Date.

52 ANNEX II Page 24 of 28 pages TRANSPORTATION Fertilizer Distribution Loan No National Fertilizer Distribution: $66 Million Loan of April 5, 1982; Effective Date: Not yet effective; Closing Date: June 30, 1986 This project will increase agricultural production in Indonesia by substantially expanding the capacity to distribute fertilizer to farmers. Funds are also provided for preparation of future maritime transport projects, including master plans and detailed engineering for several ports. Highways Loan No Fourth Highway: $130 Million Loan of April 15, 1976; Effective Date: August 13, 1976; Closing Date: December 31, 1982 The project although now substantially completed has been under implementation for nearly six years. Because of slow execution, the Closing Date has been postponed by two years to December 31, The only component still ongoing is the road betterment program and the related consultancies for works supervision. Other consultancies have been completed satisfactorily, sometimes with substantial delays. Four road sections have been transferred from the Fifth to the Fourth Highway Project. Bank participation in expenditures to be incurred in 1982 on these contracts would fully utilize the surplus. Loan No Fifth Highway: $130 Million Loan of June 1, 1979 ($6.8 Million cancelled June 30, 1981); Effective Date: August 28, 1979; Closing Date: December 31, 1984 Project implementation, which started nearly two years ago, is substantially behind schedule. The causes for delay are: (a) the ambitious project objectives, which translate into program-type components and numerous consultancies; (b) overcentralization of the Directorate General of Highways (DGH); (c) a shift of senior staff within DGH; and (d) new development guidelines of the GOI under Repelita III emphasizing the spread of investments over a larger number of projects with reduced standards. However, work has now been started on nearly all project components, and a firm action program has been set up for the bridge replacement program and the last consultancy in the original program. There is still a reasonable chance of completing the project with a total delay of only one year. The Provincial Departments of Public Works programs of support works were just started in January 1982 with mobilization of consultants and after road maintenance equipment had been ordered. $6.8 million of the loan has been cancelled due to misprocurement of road maintenance equipment.

53 49 ANNEX II Page 25 of 28 pages Loan No Jakarta-Cikampek Highway: $85 million Loan of October 9, 1981; Effective Date: February 9, 1982; Closing Date: December 31, 1987 The project will increase road capacity between Jakarta and Cikampek (about 70 km to the east) by construction of a new toll road and by improvements to the existing highway. Consultants have been selected for construction supervision, and contract negotiations are underway. Bid opening for the four sections of road works is somewhat behind schedule but is now scheduled for late May Land acquisition has been completed up to and including negotiations with property owners, and payment of compensation is impending. Loan No Rural Roads Development: $100 Million Loan of January 22, 1982; Not yet effective; Closing Date: December 31, 1986 The project will improve rural road infrastructure in selected provinces by strengthening the capacity of the district public works agencies and implementing an expanded program of rural roads works; and support a rural road development program for a three-year period in five Indonesian provinces. The project also contains components for training and technical assistance. Implementation of the various project components is still at an early stage. Bids were received in March 1982 for road construction and maintenance equipment and bid evaluation is being carried out at present. Steps have been taken for hiring consultants to provide technical assistance to the district public works acquires and to assist the Directorate General of Highways in preparing further rural roads programs. Marine Transport Loan No Second Shipping: $54 Million Loan of May 20, 1976; Effective Date: October 8, 1976; Closing Date: December 31, 1982 The project is part of the first phase of the Government's Inter- Island Fleet Development Program and is designed to modernize, expand and improve the efficiency of the inter-island fleet. Commitment of funds for ship procurement, delivery and rehablitation has reached $46.8 million of the $47.4 million allocated. All but $1.0 million of the balance, which is allocated for technical assistance and preparation of the proposed Maritime Transport project has been committed. The Closing Date of the loan has been extended by one year to December 31, Funds amounting to $5.8 million have been received by P.T. Pengembangan Armada Niaga Nasional (PANN) the shipping development corporation and project entity for ship procurement, from insurance on the loss of one vessel financed by the loan. These funds will be utilized to procure replacement tonnage as if they were original loan funds. All PANN financial and physical operations appear to be satisfactory.

54 _ 50 - ANNEX II Page 26 of 28 pages Ports Loan No Tanjung Priok Port: $32 Million Loan of November 4, 1976; Effective Date: March 3, 1977; Closing Date: December 31, 1983 The Government-financed works in Basin III, delayed due to the impact of the 1978 Rupiah devaluation, the Basin III civil works financed by the Bank loan, also delayed due to the devaluation, and civil works financed by the Bank loan in the Regional Harbor are completed. Several Bank-financed studies which are proposed or have been completed, will enable the GOI to identify components of a further ports project suitable for Bank financing probably in FY84. Overall estimated project costs remain approximately at appraisal levels despite an increase in civil works costs. TOURISM Credit No. 479 Bali Tourism: $16 Million Credit of June 14, 1974; Effective Date: December 4, 1974; Closing Date: June 30, 1982 With the exception of the amenity core and the extension of some utility services, infrastructure at Nusa Dua is complete. The access road to Nusa Dua from the airport and the Denpasar bypass road were completed and opened for traffic in December The preparation of additional infrastructure improvements and possible participation by the Bali Tourism Development Board (BTDC) in hotel investment for Nusa Dua utilizing the uncommitted portion of the credit is underway. The market for tourism to Bali has held up well in 1980/81. Hotel occupancies in international standard hotels in Bali exceed 80%. The construction of a first hotel (450 rooms) by Garuda at Nusa Dua is progressing well for completion in December The negotiations with Club Mediterranee for a holiday village are underway with the expectation that a final agreement will be reached in May, before the loan Closing Date of June 30, URBAN DEVELOPMENT Loan No Second Urban Development: $52.5 Million Loan of November 4, 1976; Effective Date: March 28, 1977; Closing Date: June 30, 1983 The project consists of provision of basic infrastructural facilities including footpaths, drainage, water supply and human waste disposal to about 3,000 ha of densely populated slum areas in Jakarta and 374 ha in Surabaya. Community health workers are to be trained under a pilot program in both cities. Except for the provision of about 19 health clinics (out of 45 planned), the physical program, covering about 3,435 ha kampungs (neighborhoods) in Jakarta and 441 ha in Surabaya, is essentially complete.

55 ANNEX II Page 27 of 28 pages Supplementary technical assistance studies related to future projects preparation and utilizing the accrued loan residual have been recently agreed upon. To facilitate the financing of these studies, the Bank, in December 1981, extended the loan Closing Date from December 31, 1981 to June 30, Loan No Third Urban Development: $54 Million loan of January 31, 1979; Effective Date: September 26, 1979; Closing Date: December 31, 1984 The project provides basic infrastructural facilities (KIP) including roads, footpaths, water supply, and sanitation to impoverished, lowincome kampungs (neighborhoods) in the cities of Jakarta (750 ha), Surabaya (580 ha) Ujung Pandang (375 ha), Semerang (310 ha) and Surakarta (170 ha), benefitting a total population of about 2.25 million. A comprehensive solid waste management program is also included in Jakarta and Surabaya, together with a drainage program in Surabaya. About 775 community health workers are to be trained in the above two cities to work in the improved kampungs. The KIP component of the project is nearing completion in all project cities. The implementation progress of sectoral components (solid wastes and drainage), even though better than in the previous years, has been affected by land acquisition problems, lack of counterpart financing and a less-than-satisfactory project management. These problems are being resolved and the progress of the components should accelerate during FY82/83. The overall project is expected to be completed by mid-1984, still within the appraisal completion date. Loan No Fourth Urban Development: $43 Million Loan of May 8, 1981; Effective Date: September 9, 1981; Closing Date: September 30, The project expands the Bank's assistance to GOI's basic shelter programs evolved in earlier projects and concentrated mainly in Jakarta and the major cities of East Java to nine provincial capital cities spread throughout Indonesia. Basic infrastructure and housing facilities will be provided through slum improvement and sites and services developments on Z. total of over 2,000 ha benefitting an estimated 500,000 persons. Improvements to citywide infrastructure deficiencies in main drainage, water supply and solid waste disposal will be studied and implemented in three cities. A national urban mapping program covering 125 cities will be undertaken providing base data for future city planning, land registration and valuation programs. Institutional development is a prominent feature and technical assistance for management, training and feasibility studies to various urban authorities and agencies will be provided. Physical provisions under the kampung (neighborhood) improvement program have been underway in the project cities and improvement in their management is expected from the field appointment of consultants in March Field implementation of the sites and services scheme in these project cities commenced in September 1981.

56 -52- ANNEX II Page 28 of 28 pages The technical assistance program is proceeding satisfactorily with the appointment of all crucial management advisory staff completed. WATER SUPPLY Loan No Second Water Supply: $36 Million Loan of June 1, 1979; Effective Date: February 29, 1980; Closing Date: December 31, 1984 The project expands and improves existing water supply and distribution systems in the cities of Tangerang and Surabaya (both in Java), Jember (Sumatra), Pare-Pare (Sulawesi) and Ambon (Moluku), and provides for the construction of new systems in Klaten and Purwakarta (both in Java). The total increase in raw water yield in the cities as a result of the project is projected at 1,770 lit/sec and the total installation of transmission and distribution mains will amount to about 375 kms with house connections targetted at a total of 40,000 in the project cities. The project is also aimed at establishing water enterprises (WEs) in the project cities and strengthening the skills of WE's staff, as well as the Cipta Karya (Housing and Urban Development) staff, in the areas of administration, financial and operational performance of the enterprises. After considerable delays (up to 18 months) most of the International Competitive Bidding procurement contracts for tne supply of pipes and materials are currently under execution. The execution of the civil works in the project cities has just commenced. The organizational and management training for the WEs has been underway since September 1981 and is proceeding satisfactorily.

57 ANNEX III INDONESIA CENTRAL JAVA PULP AND PAPER ENGINEERING PROJECT Supplementary Project Data Sheet Section I: Timetable of Key Events (a) Time taken to prepare the project: Two years (b) Project prepared by: Ministry of Industry Perum Perhutani Perum Kertas Basuki Rachmat (c) First presented to the Bank: November 1980 (d) Departure of Appraisal Mission: February 1982 (e) Completion of Negotiations: August 1982 (f) Planned Effectiveness: November 1982 Section II: Special Bank Implementation Actions None. Section III: Special Conditions (a) The incorporation of KKC as a legal entity, and the employment of engineering consultants for KKC are conditions of effectiveness (paras. 36 and 46); and (b) By February 1, 1983, consultants will be employed to assist the GOI in the preparation of a pulp and paper restructuring study (para. 44).

58 ANNEX IV INDONES IA CENTRAL JAVA PULP AND PAPER ENGINEERING PROJECT Disbursement Schedule for Bank Loan (US million) Bank Fiscal Quarterly Disbursements Cumulative Disbursement Year/Quarter Amount % Total Amount % Total 1983 II III IV I II III IV

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