Report and Recommendation of the President to the Board of Directors

Transcription

1 Report and Recommendation of the President to the Board of Directors Project Number: November 2006 Proposed Loan Republic of Indonesia: Sustainable Aquaculture Development for Food Security and Poverty Reduction Project

2 CURRENCY EQUIVALENTS (as of 15 October 2006) Currency Unit rupiah (Rp) Rp1.00 = $ $1.00 = Rp9,105 The exchange rate of the rupiah is determined under a system of managed float against the currencies of Indonesia s major trading partners. For the purpose of calculations in this report, a rate of $1.00 to Rp9,000 has been used. ABBREVIATIONS ADB Asian Development Bank ADF Asian Development Fund AMIS aquaculture management information system APA annual project account BAPPENAS Badan Perencanaan Pembangunan Nasional (National Development Planning Agency) BPS Badan Pusat Statistik (Central Bureau of Statistics) CBO community-based organization CEW community extension worker COREMAP Coral Reef Rehabilitation and Management Project DGA Directorate General of Aquaculture EIA environmental impact assessment ICB international competitive bidding IEE initial environmental examination MMAF Ministry of Marine Affairs and Fisheries MOF Ministry of Finance NCB national competitive bidding NGO nongovernment organization NSC national steering committee PIU project implementation unit PMO project management office PPMS project performance monitoring system QCBS quality- and cost-based selection RAC regional advisory committee SCF standard conversion factor SOE statement of expenditures (i) (ii) NOTES The fiscal year (FY) of the Government and its agencies ends on 31 December. In this report, "$" refers to US dollars.

3 Vice President C. Lawrence Greenwood, Jr., Operations Group 2 Director General R. M. Nag, Southeast Asia Department (SERD) Director U. S. Malik, Agriculture, Environment, and Natural Resources Division, SERD Team leader Team members M. J. Rahman, Principal Project Specialist, SERD B. Alimov, Project Management Specialist, SERD K. Emzita, Counsel, Office of the General Counsel

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5 CONTENTS Page LOAN AND PROJECT SUMMARY i MAP OF INDONESIA v I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 1 III. THE PROPOSED PROJECT 6 A. Impact and Outcome 6 B. Outputs 6 C. Special Features 10 D. Project Investment Plan 11 E. Financing Plan 11 F. Implementation Arrangements 12 IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 16 A. Economic Benefits 16 B. Social Measures and Impact on Poverty 17 C. Environment 17 D. Risks and Countermeasures 18 V. ASSURANCES 19 A. Specific Assurances 19 B. Conditions for Loan Effectiveness 20 VI. RECOMMENDATION 20 APPENDIXES 1. Design and Monitoring Framework Sector Analysis ADB-Financed Loan and Technical Assistance Projects in the Sector Lessons Learned Criteria for Selection of Subproject Sites and Beneficiaries Proposed Production-Oriented Activities at the Project Sites Detailed Cost Estimates Chart of Project Organization Project Implementation Schedule Procurement Plan Outline Terms of Reference of Consultants Financial and Economic Analyses Summary Poverty Reduction and Social Strategy Summary Initial Environmental Examination 55

6 SUPPLEMENTARY APPENDIXES (available on request) A. Available Credit Schemes B. Detailed Terms of Reference of Consultants C. Flow of Funds D. Financial and Economic Analyses E. Stakeholder Analysis and Participation Plan F. Compensation Policy Framework and Procedural Guidelines G. Indigenous People s Development Framework

7 LOAN AND PROJECT SUMMARY Borrower Republic of Indonesia Classification Targeting Classification: Targeted intervention Sector: Agriculture and natural resources Subsector: Fishery Theme: Sustainable economic growth Subtheme: Developing rural areas Environment Assessment Project Description Category B. An initial environmental examination was undertaken. The summary of findings is a core appendix. The Project will support the Government s program to promote sustainable and community-managed freshwater, brackishwater and marine aquaculture development to reduce poverty and increase the food supply among poor fish-farming communities. It will focus on the development of small-scale and low-cost aquaculture production systems that are economically sound and environment friendly, and that can be easily replicated by fish farmers organizations and small- to medium-scale private entrepreneurs. The Project will provide technical and extension support to fish farmers in order to ensure successful project implementation. Such support will include innovative mechanisms to assist organized fish farmer groups with securing production inputs and marketing their final product. The Project will build the capacity of the Directorate General of Aquaculture (DGA) and the participating district governments to formulate policies and regulations for sustainable aquaculture development and environmental management, and to support the needs of the beneficiaries, their communities, and the country s aquaculture industry as a whole. The Project will be implemented in five districts in four provinces: namely: (i) Langkat in North Sumatera Province, (ii) Ogan Komering Ilir (OKI) in South Sumatera Province, (iii) Karawang and Sumedang in West Java Province, and (iv) Buton in Southeast Sulawesi Province. Rationale Aquaculture has been playing an increasingly significant role in Indonesia s economy providing household food security, generating valuable foreign exchange and domestic revenues, boosting international trade in fish and aquatic products, and improving the living standards of poor rural communities in Indonesia. It has been accepted as a viable alternative livelihood for fisherfolks engaged in open sea fishing and can help reduce pressure on marine and coastal resources including the depleting fish stock, degrading fish habitats and declining marine biodiversity.

8 ii However, the subsector is confronted with numerous problems that need to be addressed urgently. These problems include (i) low growth and productivity resulting from poor fish-farming systems and lack of good quality fish and shrimp seed; (ii) environmental degradation and pollution resulting from poor fishfarm management and technology; (iii) lack and inaccessibility of credit for poor or small-scale fish farmers; (iv) high costs of imported production inputs; (v) lack of social preparation, inefficient extension services, and post-production facilities and marketing infrastructure; and (vi) user conflicts in open water areas among fish farmers and other users. All these problems have been acting as deterrents to aquaculture by small-scale fish farmers. Impact and Outcome Project Investment Plan The expected impact is reduced poverty and increased food security among Project beneficiaries. The outcome of the Project will be sustainable increase in fish production in the five project districts. The investment cost of the project is estimated at $44.52 million, including taxes and duties of $3.92 million. Financing Plan It is proposed that ADB provide a loan equivalent to $33.3 million from the Special Funds resources (ADF) to help finance the Project. The loan will have a 32-year term, including a grace period of 8 years, an interest charge of 1.00% per annum during the grace period and 1.5% per annum thereafter; and such other terms and conditions set forth in the Loan Agreement. The loan will finance 75% of the total project cost. The remaining balance of $11.22 million equivalent (about 25% of the project cost) will be funded by the national and district governments and project beneficiaries. ($ million) Source Total % Asian Development Bank National and District Governments Beneficiaries Total Source: Asian Development Bank estimates. Allocation and Ongranting Terms The proceeds of ADB s loan to the Republic of Indonesia will be available to DGA and district governments through budgetary appropriations on an on-grant basis in accordance with the Ministry of Finance Decree No. 35/2003 and the Ministry of Finance Regulation No. 129/PMK.07/2005. Period of Utilization Until 31 December 2013 Estimated Project Completion Date 30 June 2013

9 iii Implementation Arrangements The Project will be implemented in a decentralized framework in line the Government s policies and regulations. The district governments will be primarily responsible for the supervision, coordination, and management of field-level activities in their respective districts. DGA, as the Executing Agency, will exercise oversight responsibility for all project activities to ensure efficient and effective delivery of project inputs to target beneficiaries and timely completion of project activities. DGA will undertake national-level activities, mainly pertaining to policy formulation, overall coordination of capacity-building interventions, coordination of research and development, and supporting the district governments in implementing local-level regulations and other technical aspects of the Project, such as aquaculture development, environmental and fish health management, and culture-based fisheries management. A national steering committee (NSC) will be established to guide the overall direction of the Project, ensure interagency coordination, and ensure that project activities mesh with government aquaculture policy. NSC will be supported by a national technical committee (NTC) headed by the NSC secretary. At the regional level, a regional advisory committee (RAC) will be established in each project province to oversee project coordination among the different local agencies and liaise with the NSC. A project management office (PMO) will be established in DGA, to be headed by a competent project director and staffed by an adequate number of competent technical, administrative, and financial personnel. At the district level, a project implementation unit (PIU) will be established to oversee and coordinate the implementation of field-level project activities. Executing Agency Procurement DGA of the Ministry of Marine Affairs and Fisheries (MMAF) Goods and services financed partly or wholly by ADB will be procured in accordance with the ADB s Procurement Guidelines. Contract packages for goods exceeding $500,000 will be awarded on the basis of international competitive bidding (ICB). Each contract costing between $100,000 and $500,000 will be awarded through national competitive bidding (NCB). Minor equipment and materials costing less than $100,000 will be procured through shopping. Civil works contract packages exceeding $1,000,000 will be awarded on the basis of ICB. Contract packages between $100,000 and $500,000 will be awarded on the basis of NCB. Small scale civil works contracts with an average value of $10,000 $25,000 equivalent will follow procurement procedures for community participation in procurement as contained in ADB s Procurement Guidelines.

10 iv Consulting Services Project Benefits and Beneficiaries Risks and Assumptions International and national specialists will be engaged through a consulting firm using the quality- and cost-based selection method in accordance with ADB s Guidelines on the Use of Consultants. The consultants will provide technical assistance to the Project at the central and regional levels. The consulting services requirement is estimated at a total of 672 person-months, comprising 56 international and 616 national person-months. Least-cost selection and single source selection methods maybe used for NGO services and surveys, studies and research. The Project will increase incomes of 14,000 poor fish farmers by enhancing aquaculture production and productivity. Apart from increased aquaculture production and income and employment generation, the Project is expected to generate a number of benefits that are not readily quantified, including (i) environmental benefits arising from improved aquaculture resources management at the district and the scheme levels; (ii), improved nutrition and health of rural populations resulting from increased supplies of animal protein and an overall expansion of the food supply; (iii) strengthening of the national aquaculture agency and the district fisheries services, which will gain improved capacity to take the lead in aquaculture development on national and local levels; (iv) enhanced inter-agency and public-private sector linkages through strengthened partnerships in aquaculture development; and (v) empowerment of small-scale fish farmers and rural communities with knowledge and skills in communitybased aquaculture and culture-based fisheries management. The types of risks that may constrain the attainment of project objectives are (i) institutional inadequacies of the Executing Agency and Implementing Agencies, (ii) lack of cooperation and coordination among government agencies and between national and local fisheries agencies, (iii) lack of government counterpart funds, and (iv) possibility of misuse of project funds and facilities during project implementation. The following measures should help minimize these risks: (i) strong commitment and involvement from MMAF and DGA management to support the Project and oversee project implementation; (ii) effective capacity building at government institutions and community levels; (iii) adoption of a learning approach to project implementation, whereby relatively new technologies will be demonstrated and pilot-tested prior to full-scale implementation; (iv) the establishment of linkages and the fostering of close working relationships among fish farmers organizations, extension staff, participating rural communities, and the private sector; (v) design and implementation of an effective monitoring and reporting system, with a view toward obtaining prompt feedback and enabling timely action; (vi) improved transparency and accountability through participating project management at the national, regional and field levels; and (vii) strong ownership of the Project by various stakeholders.

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13 I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed loan to the Republic of Indonesia for the Sustainable Aquaculture Development for Food Security and Poverty Reduction Project. 1 The Design and Monitoring Framework is in Appendix 1. II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES A. Performance Indicators and Analysis 2. The Indonesian marine and fisheries sector, which includes aquaculture, plays a major role in the national economy, contributing 25 30% of the country s gross domestic product. Gross output value from fisheries in 2005 was estimated at about $6.3 billion, or about 5% of the output of the agriculture sector and 3% of the output of the entire economy. Indonesia is the ninth largest fish producer and the tenth largest fish exporter in the world. From , fish production increased by an average 4.8% per year, from 4.01 million tons (t) in 1994 to an estimated 6.6 million t in 2005, with 66% of the production coming from capture fisheries and the balance (34%) from aquaculture. Export revenues reached $1.68 billion in 1998 and were estimated at $1.91 billion in The country s exports of fish and aquatic products consist of shrimp, skipjack and Eastern little tuna, and other fish and aquatic species such as grouper, red tilapia, abalone, seaweeds, sea cucumber, pearls, and other mollusks. 3. Fish is a staple food item in the diet of Indonesian families, providing about two-thirds of the total domestic animal protein supply. Among the different sources of animal protein, fish is still relatively inexpensive and is, thus, the main source of protein for the poor. Fish has also become increasingly popular as a food item among higher income consumers as a result of its publicized health benefits. Per capita fish consumption in the country nearly doubled from a low of 12.8 kg/yr in 1982 to an estimated kg/yr in From , average per capita fish consumption increased by about 2.67% per year. However, current per capita consumption is still lower than the per capita animal protein requirement of kg recommended by the Food and Nutrition Study. 2 B. Analysis of Key Problems and Opportunities 1. Sector Opportunities and Issues 4. Indonesia has an abundance of freshwater, brackishwater, and marine resources with potential for aquaculture development. It has a large variety of cultivable fish and other aquatic species and the available technology for aquaculture in fresh, brackish, and marine environments. It has about 26 million ha of coastal/marine and freshwater areas suitable for aquaculture, of which only about 680,000 ha, representing less than 3% of the total potential area, are currently utilized for production. Production from aquaculture has increased dramatically since the late 1980s, with current figures for the major commodities (shrimp, milkfish, tilapia, and carp) being at least double and at most four times 1988 levels. In 2005, the total aquaculture output of about 2.1 million t was about 20% of the country s total fish production. In the same year, fish and aquatic products generated combined foreign exchange earnings of over $2.1 billion. 1 The Project was prepared under ADB Technical Assistance to the Government of Indonesia for Sustainable Aquaculture Development for Food Security and Poverty Reduction. Manila (TA 4148-INO). 2 Ministry of Marine Affairs and Fisheries Annual Report of the Ministry of Marine Affairs and Fisheries for the Year 2002.Jakarta.

14 2 5. Aquaculture has, therefore, been playing an increasingly significant role in ensuring food availability, providing household food security, generating valuable foreign exchange and domestic revenues, boosting exports of fish and aquatic products, and improving the living standards of poor rural communities in Indonesia. Besides contributing almost one-quarter of the country s estimated total fish production, the aquaculture subsector provides employment to some 2.5 million people, which is about 40% of the total number of people employed in the fisheries sector. Aquaculture has absorbed much of the country's growing labor force, even if it does not generally pay well. Therefore, it has cushioned the economic hardship faced by people looking for means of livelihood to support their families. 6. As Indonesia's growing population demand more fish and fish products, particularly in rural areas, and as production from artisanal capture fisheries is maintained at sustainable levels, aquaculture is seen as an alternative source of high-quality animal protein and livelihood, especially for lower income groups. The Food and Agriculture Organization (FAO) has projected that aquaculture may soon surpass marine capture fisheries in providing high-quality animal protein, employment, and export earnings. 7. However, the Indonesian aquaculture subsector is characterized by a number of problems that need to be addressed to sustain production levels. These problems include (i) low growth and productivity resulting from poor fish-farming systems and lack of quality fish and shrimp seed; (ii) environmental degradation and pollution resulting from poor fish-farm management and technology; (iii) lack and inaccessibility of credit for poor or small-scale fish farmers; (iv) high costs of imported production inputs; (v) absence of social preparation, inefficient extension services, and lack of post-production facilities and marketing infrastructure, particularly for use by small farmers; and (v) conflicts in water use in open water areas between fish farmers and other users. 8. The industry suffers from low productivity as a result of technical, economic, and environmental factors. Small-scale fish farmers usually practice extensive culture using lowyielding, low-input, and low-level technology, and lack the technical know-how or skills to adopt new or improved production methods, techniques, and farming systems. Their problems are compounded, in some areas, by the occurrence of fish or shrimp disease, which in turn is usually triggered by poor environmental quality, pollution, inferior seed quality, and/or poor hatchery and culture management. Small-scale fish farmers also lack the funds required to shift to higher-density farming or higher-value commodities. Moreover, problems associated with poor aquaculture system management have contributed to the image of aquaculture as a highrisk industry, making financial institutions reluctant to provide credit to meet the production needs of small-scale fish farmers, who must therefore rely on their own labor and meager financial resources for their subsistence culture operations. 9. The various problems outlined above have resulted in low incomes, poor quality of life, and high incidence of poverty among small-scale fish farmers. Their incomes fall way below the national average and they have limited or no access to basic social infrastructure facilities and services such as health, education, water supply and sanitation, transport, and communication. As a result, literacy levels are low, mortality and morbidity rates are high, and more than onethird of open sea fisherfolk and fish farmers live below the poverty line. 10. Law 32/2004 on Regional Government, which broadened the authority of regional governments, called for the devolution of fisheries management responsibilities from the central government to the provincial and district governments. This has various implications on the aquaculture sector. First, there remains much ambiguity in the definition of roles and

15 3 responsibilities of central, provincial, and district governments, particularly concerning marine and coastal management. Second, the responsibility for aquaculture development and spatial planning for aquaculture activities now lies with the district governments, except when foreign investments are involved, in which case DGA s review and recommendations are required prior to approval by the provincial and district governments concerned. Finally, while the central government retains the responsibility for formulating the criteria for determining and changing the land use of areas designated for aquaculture, it is now the district governments that make the final decision on whether or not to consider such criteria in the preparation of their spatial plans. The district governments now have the main responsibility for aquaculture development, and DGA s role has been limited to formulating sector policies, defining technical guidelines for aquaculture development, setting directions for aquaculture research and development, and endorsing local government projects for external funding. 11. The provincial and district governments, now charged with providing extension support to fish farmers and handling a range of technical responsibilities, lack the capacity (in terms of knowledge, skills, and resources) to adequately perform these tasks. They need to receive capacity-building and logistical support to develop general policies and regulations for sustainable aquaculture development, develop and deliver extension services to fish farmers, improve marketing facilities and information for small-scale fish farmers, and create an investment environment conducive to private sector investment in aquaculture. 12. A detailed analysis of the sector is given in Appendix External Assistance to Aquaculture Development 13. Many agencies and organizations have provided technical and financial assistance for aquaculture development in Indonesia in the last 20 years. These include ADB, FAO, Australian Center for International Agricultural Research (ACIAR), Network of Aquaculture Centers in Asia (NACA), Japan Bank for International Cooperation (JBIC), Japan International Corporation Agency (JICA), and the World Bank. 14. ADB has been the lead agency in providing much-needed support for fisheries and aquaculture development. Since 1972, when it approved its first fisheries loan to the Indonesian Government, ADB has provided more than $648 million in loans and technical assistance grants to the fisheries sector (Appendix 3). Since 1982, ADB has financed eight projects that support aquaculture development in Indonesia. Four projects, 3 each implemented before 1997, focused mainly on the development of brackishwater shrimp culture, mainly for export. 3 ADB Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Republic of Indonesia for the Brackishwater Aquaculture Development. Manila (Loan 598-INO).; ADB Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Republic of Indonesia for the Fisheries Industries Credit Project. Manila (Loan 742-INO).; ADB Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Republic of Indonesia for the Second Brackishwater Aquaculture Development. Manila (Loan 959-INO).; and ADB Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance Grants to the Republic of Indonesia for the Second Fisheries Industries Credit Project. Manila (Loan 1095-INO):

16 4 These four projects were successful in stimulating the growth of the Indonesian shrimp-culture industry and contributed to export earnings, but led to overinvestment in the shrimp industry. Four ongoing projects, 4 mainly for coastal fisheries resources and related habitat management and conservation, include aquaculture as a strategy and support activity to supplement declining catches from marine fisheries and improve the food security situation in coastal communities. 3. Lessons 15. From the implementation of previous aquaculture development projects, as well as the experiences of other aquaculture projects in Asia, a number of important lessons could be extracted for consideration in the design, planning, and implementation of aquaculture projects. These include the following : (i) the poorest people generally may be excluded from engaging directly as operators in aquaculture production, but they may gain other benefits from associated employment opportunities (in, for example, the marketing chain of farm inputs and outputs) and increased availability of affordable fish in their diets; (ii) fish farming cannot be feasibly pioneered and left to sustain its own existence in isolated areas where essential support services and markets are absent; (iii) as small fish farmers are generally ineligible for credit from formal sources, informal credit schemes from non-bank sources can provide small farmers with the necessary financial capital for their aquaculture operations; (iv) access to reliable fish-seed supply is critical to fish farming; strategic linkages between fish-breeding centers and private hatcheries and nurseries can enable fish farmers in major production areas to gain access to reliable fish seed; (v) with the decentralization of extension services to the local government and the resulting deterioration in the quality of fisheries extension, innovative means of bridging the technology-transfer gap have to be devised, including private extension services, social networks, and farmer-to-farmer contacts; (vi) appropriate policies, legal instruments, and regulations can act as enabling agents to remove identified constraints to aquaculture development; and (vii) the development of aquaculture cannot be sustained without paying adequate attention to aquatic resources management, environment, and aquatic health. Lessons learned are detailed in Appendix Government Policy and Strategy for Aquaculture Development 16. MMAF s Rencana Strategis ( ) provides for the sustainable utilization and management of the country s marine and fisheries resources and the improvement of the socioeconomic condition of coastal and inland communities. In the aquaculture subsector, the goal is development of competitive, fair, economically viable, and sustainable aquaculture enterprises. More specifically, aquaculture development will be geared toward responsible, environment-friendly, and technology-based aquaculture, resulting in increased fish supply for domestic consumption, industrial use, and export, as well as improved welfare of fish farmers. 17. The Government proposes to support aquaculture development through various means, in particular (i) increasing production and/or yield through intensification, diversification, or 4 ADB Report and Recommendation of the President to the Board of Directors on a Technical Assistance Loan and Grant to the Republic of Indonesia for the Coral Reef Rehabilitation and Management Project. Manila (Loan 1613-INO).; ADB Report and Recommendation of the President to the Board of Directors on Proposed Loans to the Republic of Indonesia for the Coastal Community Development and Fisheries Resource Management Project. Manila (Loan 1570/1571[SF]-INO).; ADB Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance Grant to the Republic of Indonesia for the Marine and Coastal Resources Management Project. Manila (Loan 1770[SF]-INO).; and ADB Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Republic of Indonesia for the Coral Reef Rehabilitation and Management Project Phase II. Manila (Loan 1962 [SF]-INO).

17 5 rehabilitation and improvement of production facilities, including water supply systems for brackishwater and freshwater pond culture; (ii) development of technology and human resources; (iii) institutional strengthening, including preparation, revision, and implementation of policies and regulations related to aquaculture, improvement of extension services, and construction or rehabilitation of aquaculture centers; (iv) control and supervision of aquaculture development through land-use zoning, regulation of business licenses, regulation of export and import of fish seed or broodstock and other production inputs, control of natural broodstock, development of seed certification systems, control of fish pests and diseases, implementation of good fish-farming management practices, prevention of environmental pollution, and legal and institutional arrangements; and (v) development of a market facility and national aquaculture information system. Considerable resources are required to implement the broad range of interventions covering physical investments and capacity building. 5. ADB s Sector Objectives and Strategies 18. ADB s country operational strategy for Indonesia 5 has two strategic priorities: pro-poor, sustainable economic growth; and social development. ADB will help the Government raise levels of economic growth and social development by catalyzing public and private sector investments, equitable fiscal decentralization, policy and institutional reforms, natural resources management, and capacity development. In the agriculture and natural resources sector, the strategic thrust in the short- to medium-term will focus on growth in rural economy and management of natural resources in sustainable manner, with the specific aim to include the poor and disadvantaged section of the community as the target beneficiary, whenever possible. 19. The proposed project is a part of fishery subsector of the agriculture and natural resources sector. According to the priority classification of sectors/subsectors under ADB s Medium-Term Strategy II, the fishery belongs to Group III subsectors future ADB operations in which will be based on specific demand for assistance. In the world s largest archipelagic nation like Indonesia, the fishery subsector has an important role in the overall economy and the well being of the 5 million fisherfolk and fish farmers. Fish is a staple in the Indonesian diet, providing two-thirds of the total animal protein intake. However, a combination of complex factors including the open access to seas, over fishing and destructive fishing, and weak law enforcement have seriously affected coastal fish stock and threatened Indonesia s rich marine biodiversity. The declining fish stock has reduced the fisherfolk s income levels, and the coastal fishing communities are among the poorest segments of society in the country. 20. Aquaculture has been established as a viable alternative livelihood for fisherfolk which could reduce pressure on marine and coastal resources, help conserve marine biodiversity, and make substantial improvements in fisherfolk s income levels. With proven technologies that have been adapted locally and 25 million hectare suitable area available for it, aquaculture has immense potentials for contributing to the growth of rural economy, enhancing food security and reducing poverty. The proposed project forms part of the Government program for harnessing the aquaculture development potentials in the country and has been included in the Indonesia Country Strategy and Program The Project will be complementary to the ongoing ADB-funded Marine and Coastal Resource Management Project 6 and Coral Reef Rehabilitation 5 ADB Country Strategy and Program ( ): Republic of Indonesia. Manila. 6 ADB Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Republic of Indonesia for the Marine and Coastal Resources Management Project. Manila (Loan 1770[SF]).

18 6 and Management Project Phase II 7, both of which aim for management and conservation of marine and coastal resources and protect the environment. III. THE PROPOSED PROJECT A. Impact and Outcome 21. The expected impacts of the Project are reduced poverty and increased food security through sustainable aquaculture development. The expected outcomes are increased production of fish and other aquatic products, and improved income, nutrition, and employment status of poor fish farmers and coastal communities. 22. The Project will be implemented in five districts of four provinces, namely: (i) Langkat in North Sumatera Province; (ii) Ogan Komering Ilir (OKI) in South Sumatera Province; (iii) Karawang and Sumedang in West Java Province; and (iv) Buton in Southeast Sulawesi Province. The districts meet the following selection criteria: (i) they have good potential for further resource development and are in need of improved aquaculture systems to raise productivity and protect the environment; (ii) they exhibit high poverty incidence among the agricultural population; 8 (iii) the district government is committed to improving aquaculture production and socioeconomic conditions for fish farmers; and (iv) the limited financial capacity of the district government constrains further investment in aquaculture. Within each district, specific villages and fish farmers to participate in the project will be identified during project implementation. The criteria for selection of subproject sites and beneficiaries are outlined in Appendix 5. B. Outputs 23. The Project will comprise three components, namely: (i) aquaculture production enhancement, (ii) aquaculture support services, and (iii) institutional strengthening and project management. 1. Aquaculture Production Enhancement 24. This core component of the Project will aim at improving the production performance of the major types of aquaculture systems in the project area through community-based management. Market-driven, sustainable aquaculture development will be made possible through (i) social preparation and community empowerment; (ii) fish production enhancement in freshwater, brackishwater, and mariculture systems; and (iii) community-based management of culture-based fisheries. 25. Social Preparation and Community Empowerment. A social preparation will be undertaken to facilitate the formation of fish farmers organizations and the training of their members in the establishment and management of aquaculture-based or related microenterprises. To be undertaken with the assistance of nongovernment organizations (NGOs) and community-based organizations (CBOs), activities will involve conducting participatory needs assessments in order to identify key problems of the communities and determine potential solutions. Needs assessments will be done though poverty mapping, 7 ADB Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Board of Directors for the Coral Reef Rehabilitation and Management Project Phase II. Manila (Loan 1962). 8 Based on data and information from the Central Bureau of Statistics (Badan Pusat Statistik or BPS)

19 7 perception analysis, gender analysis, and assessment of the organization and structure of the various groups. Training will also include modules on nutrition, child care, and family financial management. To enhance the poverty-reduction objective of the Project, disadvantaged communities will be provided with some basic social infrastructure (e.g., community water supply facilities and village pathways). These social infrastructure facilities will complement aquaculture development and income-generating interventions. 26. Fish Production Enhancement. The Project will improve the production performance of the major aquaculture systems in the project area by rehabilitating key public aquaculture system facilities and access roads to these facilities. Organized fish farmers will be actively involved in rehabilitation works through the provision of in-kind labor. Sustainable aquaculture production will be carried out by fish farmers organizations in freshwater, brackishwater, and marine environments using various fish, shrimp, mollusc, and seaweed species, and will cover the entire range of activities from broodstock development to fry/fingerling rearing and growout. Proposed production-oriented activities under the Project are given in Appendix 6. Low-input fish-farming practices, which are an improvement over the traditional tambak (fish pond) culture, will be employed to ensure broad-based acceptance, success, and sustainability. 27. To promote the adoption of suitable, environment-friendly, community-based/managed aquaculture practices by fish farmers, the Project will establish demonstration facilities and/or model enterprises that may be replicated at other sites within the project area. District fisheries services will invite well performing privately owned fish firms to provide experts to prepare models of demonstration facilities and supervise fish farmers organizations in managing and operating these facilities. The form and procedural details of private sector participation in the Project will be developed in the first year of the Project. 28. To support the seed requirements of the fish farmers, the Project will develop or rehabilitate small community-based fish/shrimp hatcheries and nurseries. The communities will be consulted in the identification of sites for hatcheries. Materials for land- or water-based hatcheries will be procured with project funds, but construction will be carried out with labor contributed by the fish farmers organizations. The district governments will support operation of these hatcheries over a period of three years, after which the fish farmers organizations will own and operate them. District government hatcheries will also be improved and upgraded, as needed, and focus on broodstock to assure the availability of quality breeders for use in private hatcheries and fish farms. 29. Community-Based Management of Culture-Based Fisheries. Aquaculture involves raising certain aquatic species almost exclusively in controlled environments. By contrast, in culture-based fisheries aquatic species spend only limited time in controlled environments before they or their seed/fry are released into open freshwater, brackishwater, or marine water and allowed to propagate or grow on natural foods until they reach harvestable size. Culturebased fisheries can enhance fishery resources, replenish natural stocks whose populations have declined through overexploitation or environmental degradation, or simply maximize the productivity of a water body. The Project will support community-managed culture-based fisheries programs in sites where extensive open-water areas are available for stock enhancement of certain species. 2. Aquaculture Support Services 30. This component will upgrade the production techniques and quality of aquaculture products through strengthened extension services and improved post-harvest handling,

20 8 processing, and marketing techniques in collaboration with the private sector and fish farmers organizations. Activities will include: (i) provision of fisheries extension services to project beneficiaries, including the establishment of site-specific demonstration and input assistance modules; (ii) upgrading or improvement of facilities and techniques for post-harvest handling, processing, and marketing of aquaculture products; (iii) expansion of markets for aquaculture commodities and promoting the consumption of identified species; (iv) improving environmental and fish health management; and (v) applied research on improved species and culture technologies. The Project will not include a credit component in support of aquaculture production but, instead, facilitate fish farmers organizations access to credit by improving their creditworthiness. A listing of available schemes which can be tapped by the project beneficiaries is given in Supplementary Appendix A. 31. Extension Services. Extension services provided to participating fish farmers and the private sector will include the establishment of site-specific demonstration facilities and the introduction of new aquaculture and processing technologies. Poor fish farmers will be provided with production inputs assistance to support their aquaculture production and processing activities. Given that the decentralization process weakened extension services, community extension workers (CEWs) will be recruited by the district governments to strengthen the districts' fisheries extension services. The CEWs will also provide grassroots-level training to fish farmers on the establishment and management of sustainable aquaculture enterprises. Technical personnel employed by the private sector partners of participating district governments will also be tapped to render extension services to organized fish farmers, as required. 32. Processing and Post-Harvest Handling. The Project will support establishment of small-scale facilities for production of low cost fish feeds using locally available raw materials; fish and seaweed drying, grading and packaging; and processing of fish byproducts. All these facilities will be established as demonstration units and managed by fish farmers organizations. This will ensure that fish farmers maximize returns from their production activities and reduce losses stemming from poor or deteriorating fish quality. Facilities and sites will be determined based on specific criteria and guidelines developed jointly by DGA, district fisheries services and communities during project implementation. Training will be provided to fish farmers on operations and maintenance of the facilities. 33. Fish Marketing Development. Organized fish farmers, as well as private sector individuals or entities, will be provided institutional and technical assistance in the marketing of their products. Specific marketing needs will be identified and appropriate market development or marketing strategies will be formulated for various aquaculture commodities. Fish marketing and distribution networks will be established with the cooperation of medium- to large-scale aquaculture businesses. Fish collection points will be established close to major production areas. A market information system will be designed and installed in district government offices and linked to DGA to enable fish farmers and private enterprises to gain access to real-time data on market prices, supply and demand, and other market-related information for various aquaculture products. To increase the consumption of freshwater fish, a multimedia marketing campaign will be launched in the project provinces. Regular trade fairs will also be organized to facilitate linkages between fish traders, exporters, and producers of high-value fish species. 34. Environmental and Fish Health Management. To minimize the risk of disease outbreaks and mitigate against possible adverse impacts of aquaculture activities, the Project will adopt the following measures: (i) use of extensive monoculture or polyculture systems, or rotation of milkfish and shrimp cropping in the same ponds; (ii) use of disease-resistant shrimp

21 9 species in shrimp monoculture, and limiting their use to low-density culture; (iii) introduction of environment-friendly practices and aquaculture systems, such as silvo-fisheries 9 ; (iv) establishment of water quality laboratories and fish health laboratories close to major production areas in the participating districts; (v) monitoring of the quality of fish fingerlings or prawn/shrimp postlarvae used to stock the ponds, which will prevent the possible introduction of diseasecausing organisms into the culture environment; (vi) strict monitoring of water quality in ponds, supply canals, and drain canals in order to detect early warning signs of impending fishkills or fish/shrimp disease occurrence; (vii) training of district fisheries personnel, CEWs, fish farmers, and private investors on proper pond and culture system management and fish disease prevention and control; and (viii) requiring medium- to large-scale private enterprises involved in intensive fish and shrimp culture systems to incorporate settling or sedimentation tanks in the design of their aquaculture systems in order to mitigate against possible adverse effects on downstream water quality. 35. Applied Research. Continued applied research to support aquaculture development will be conducted by the DGA s technical implementing units and aquaculture centers, MMAF s Agency for Marine and Fisheries Research, and collaborating academic and research institutions. Research activities to be supported by the Project will be designed by DGA during project implementation and could include (i) adaptive research and field verification trials on improved culture techniques for various species; (ii) addressing site specific technical problems and issues; and (iii) exploratory research on other species with commercial potential. The outcome of the research activities will be disseminated for future replication by fish farmers and the private sector. Research-extension linkages will be established between provincial and district fisheries services in order to facilitate the commercial application of research results by fish farmers. 3. Institutional Strengthening and Project Management 36. This component aims to enhance the institutional capability of DGA, the district fisheries services, fish farmers, and the private sector in aquaculture development. 37. Institutional Strengthening. The Project will include the following activities: (i) institutional assessment of relevant institutions and entities to determine priority areas of strengthening; (ii) development and launching of a human resource development training program for DGA, the provincial and district fisheries services (particularly extension personnel), CEWs, and community organizations and associations (including those involving women and disadvantaged groups); 10 (iii) development and installation of an aquaculture information system in DGA, with links to the project districts; this will enable the timely collection and provision of accurate data on aquaculture production and provide analysis for planning, management, and regulation purposes; and (iv) support DGA in drafting the necessary legal documents and regulations, and in conducting policy dialogues with provincial and district governments on sustainable aquaculture development and environmental management. 38. Project Management. In order to ensure timely and effective implementation of project activities and efficient use of funds and other project resources, this component will support (i) operation of a project management office (PMO) in DGA and project implementation units (PIUs) 9 Fishculture in coastal mangrove. 10 As aquaculture is a largely private sector endeavor, the Project s capacity-building interventions will include the private sector in the participating districts. Private companies, especially those that will be involved as partners of the district government in the operation of demonstration facilities and enterprises, will be invited to participate in the various training programs.

22 10 in the five project districts; (ii) engagement of international and national consultants to assist the PMO and PIUs in project management; (iii) procurement of vehicles and other equipment, supplies, and materials for the Project; and (iv) establishment of accounting, monitoring, reporting, and evaluation systems. C. Special Features 1. Poverty Targeting 39. The target beneficiaries of the Project are poor fish farmers. Project locations were selected to represent a range of agro-ecological systems where poor farmers live, from inland fish farms to brackish and marine aquatic areas of varying population, environmental characteristics and market access. High poverty incidence among the rural population is one of the main criteria for selection of subproject sites. Project areas have few alternative sources of livelihood outside of aquaculture, which underlines the importance of developing sustainable economic activities for poor fish farmers. The Project is aimed at enhancing incomes by addressing infrastructure, technological, environmental, and market-access constraints for aquaculture development. These constraints, which are often interrelated, have caused small aquaculture enterprises to be abandoned in rural areas throughout Indonesia. This Project could thus serve as a model for addressing the needs of poor fish-farming communities throughout the archipelago. In addition, the Project will improve food security of poor consumers by stabilizing the supply of affordable fish products. 2. Community Participation 40. The Project calls for significant community financial contributions (6.2% of the total project costs, and more than 15% of costs related to aquaculture development activities). Most of the aquaculture and culture-based fisheries activities will be directly implemented by communities. Such a strong community contribution and commitment should ensure the quality and sustainability of project interventions. To further enhance community participation and the sustainability of project interventions, the Project provides comprehensive technical and extension support for fish farmer beneficiaries, and includes innovative mechanisms to assist organized fish farmer groups with their production inputs and market requirements. 3. Public Private Sector Partnership 41. The Project aims to create an enabling environment for private sector investment by removing technical and infrastructure impediments to aquaculture development in project areas. It also promotes public-private sector partnerships in the implementation of aquaculture development activities, including provision of experts to prepare models of demonstration facilities and supervision of fish farms developed by the Project. Private sector participation will augment and benefit the operations of small-scale fish farmers and facilitate small-scale fish farmers access to markets. 4. Capacity Building at Local Levels 42. The Project will be coordinated nationally but will be implemented under decentralized management. Through its institutional strengthening activities, the Project will assist district governments in building their technical capacity to support the needs of the beneficiaries and their communities while also supporting the country s aquaculture industry as a whole.