ASIAN DEVELOPMENT BANK

Transcription

1 ASIAN DEVELOPMENT BANK RRP:INO REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE BOARD OF DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF INDONESIA FOR THE POOR FARMERS INCOME IMPROVEMENT THROUGH INNOVATION PROJECT July 2002

2 CURRENCY EQUIVALENTS (as of November 2001) Currency Unit rupiah (Rp) Rp1.00 = $ $1.00 = Rp 10,000 ABBREVIATIONS AARD Agency for Agricultural Research and Development ADB Asian Development Bank BAPPENAS Badan Perencanaan Pembangunan Nasional (National Development Planning Agency) BIPP Balai Informasi Penyuluhan Pertanian (Information Center for Agricultural Extension) BPTP Balai Pengkajian Teknologi Pertanian (Assessment Institutes for Agricultural Technology) CADI Center for Agricultural Data and Information COS country operational strategy DCC district coordination committee IEE initial environment examination M&E monitoring and evaluation MIS management information system MOA Ministry of Agriculture NARI national agriculture research institute NGO nongovernmental organization NSC national steering committee PAATP Participatory Development of Agricultural Technology Project PCMU project coordination and monitoring unit PIU project implementation unit PIVF project intervillage forum PPMS project performance management system SUSENAS Survei Sosial Ekonomi Nasional (National Socioeconomic Survey) TA technical assistance VPIC Village Project Investment Committee NOTES (i) (ii) The fiscal year (FY) of the Government ends on 31 December. In this report, "$" refers to US dollars.

3 CONTENTS Page LOAN AND PROJECT SUMMARY MAP ii vi I. THE PROPOSAL 1 II. INTRODUCTION 1 III. BACKGROUND 1 A. Sector Description 1 B. Lessons Learned 3 C. ADB s Sector Strategy 4 D. Policy Dialogue 4 IV. THE PROPOSED PROJECT 4 A. Rationale 4 B. Objective and Scope 6 C. Cost Estimates 10 D. Financing Plan 10 E. The Executing Agency 11 F. Implementation Arrangements 11 G. Environmental and Social Measures 17 V. PROJECT JUSTIFICATION 19 A. Economic Benefits and Impact on Poverty 19 B. Environment 20 C. Social Dimensions 20 D. Risks 21 VI. ASSURANCES 22 A. Specific Assurances. 22 B. Conditions for Loan Effectiveness 24 VII. RECOMMENDATION 25 APPENDIXES 1. Project Framework Detailed Project Description Eligibility Criteria for Village Investments Detailed Cost Tables Organization Chart for Project Implementation Detailed Implementation Arrangements Selection Criteria for Nongovernment Organizations Terms of Reference for Nongovernment Organizations Implementation Schedule Indicative Procurement Packages and Procurement Modes 52

4 11. Outline Terms of Reference for Consultants Fund Flow Details Summary Initial Environmental Examination Poverty Impact Assessment 71 SUPPLEMENTARY APPENDIXES (available on request) 1. Financial Analyses of Sample Investments 2. Institutional Analyses 3. Initial Environmental Examination 4. Gender Action Plan

5 LOAN AND PROJECT SUMMARY Borrower Project Description Classification Environmental Assessment Rationale Objectives and Scope The Republic of Indonesia The Project will be implemented in about 1,000 villages in five districts: the Blora and Temanggung districts in Central Java; Donggala in Central Sulawesi; Ende in East Nusa Tenggara; and East Lombok in West Nusa Tenggara. The Project will enhance poor farmers capacity to adopt innovative agricultural production and marketing methods by better targeting village-level public investments to location-specific needs, providing farmers with access to information, and reorienting the focus of agricultural research to the needs of marginal rainfed areas. Nongovernment organizations working through elected village facilitators and supported by government and private agencies will help farmers to identify innovations, and undertake the necessary public investments to support adoption. Primary: Core poverty intervention Secondary: Gender and development Category B: Environmental implications were reviewed and environmental interventions incorporated as required. An initial environmental examination for sample subprojects was undertaken, and the summary is in Appendix 13. To improve their incomes, poor farmers have to be able to innovate in agricultural production and marketing in response to market opportunities. However, they are constrained from doing so because of a lack of appropriate technologies, village-level investments in public goods, and access to information. While the Government is taking steps to fill the gaps in providing public goods support for agriculture, and increasingly for nonrice crops, additional support is needed to target village-level public investments to the needs of poor farmers, to increase the access of poor farmers to information, and to increase the availability of technologies needed by poor farmers. The Project responds to the above by empowering farmers to undertake simple village-level investments, providing support for the development of appropriate technologies for marginal rainfed areas, and providing farmers with the relevant information resources. The long-term development goal is increased innovation in agricultural production and marketing by poor farmers. The immediate objectives of the Project are (i) improved targeting of village-level public investments to location-specific needs of agricultural and rural development, (ii) increased access of poor farmers to information, and (iii) a reorientation of the focus of agricultural research to the needs of marginal rainfed areas. The

6 iii Project will comprise four components to be implemented over 5 years: (i) poor farmer empowerment, (ii) development of national and local agricultural information resources, (iii) support for agricultural innovation development and dissemination, and (iv) project management. Cost Estimates The total project cost is estimated at $70.92 million equivalent, including physical and price contingencies, interest during construction, taxes, and duties. Of the total cost, $15.28 million or 21% is the foreign exchange cost and $55.64 million equivalent is the local currency cost. Financing Plan Source Local Currency ($ million) Foreign Exchange Total Percent ADB Indonesian Government District Government Beneficiaries Total ADB = Asian Development Bank Loan Amount and Terms The Asian Development Bank (ADB) will provide a loan equivalent to SDR million ($56.0 million equivalent) from its Special Funds Resources to finance $15.28 million equivalent of the foreign exchange cost and $40.72 million equivalent of the local currency cost. The loan will have a term of 32 years, including a grace period of 8 years and an interest charge of 1% per annum during the grace period and 1.5% per annum thereafter. Period of Utilization Until 30 June Implementation Arrangements The Ministry of Agriculture (MOA) will establish a national steering committee (NSC) chaired by the Secretary General, MOA. The NSC will include representatives of other agencies of MOA, BAPPENAS (National Development Planning Agency), Ministry of Finance, and other stakeholders. The NSC will oversee project implementation and provide policy guidance in the coordination of project implementation. The Agency for Agricultural Research and Development of MOA will establish a project coordination and monitoring unit (PCMU). The PCMU will prepare project implementation during year 1 of the Project and then assist the NSC throughout implementation by serving as its secretariat. District coordination committees consisting of private and public agencies will be convened and chaired by heads of district governments (bupatis) in each project district to backstop the preparation of village investment plans as required, to ensure the sustainability of new projects undertaken by villages, and to harmonize village

7 iv investments with the Government s own district-level investments. Project implementation units (PIUs) will be established in each project district to manage, coordinate, and monitor the implementation of project activities at the district level. Project intervillage forums (PIVFs) consisting of elected heads of the village project investment committees (VPICs) and the elected woman facilitators from each project village in the subdistrict will be established at the subdistrict level to be the sole village investment approval body. One VPIC will be established in every eligible project village to validate and consolidate investments proposed by farmer groups, present these at PIVF meetings, undertake implementation, and manage funds. Executing Agency Procurement Consulting Services Agency for Agricultural Research and Development of MOA Procurement under the Project will follow ADB s Guidelines for Procurement. Contracts for civil works will be relatively simple for renovation of district offices, valued at less than $100,000 equivalent, and will be carried out by the PIUs using local competitive bidding procedures acceptable to ADB. The PIU will also be responsible for procurement of office furniture through local competitive bidding. The PCMU will carry out procurement of vehicles and equipment estimated to cost more than $100,000 but less than $500,000 using international shopping procedures. Civil works for community-managed village infrastructure, including tubewell irrigation schemes and access roads, financed from the village investment funds may be carried out by communities. Communities shall provide labor and appropriate technologies. Materials and services for such civil works estimated to cost less than $30,000 equivalent shall be procured through direct purchase. A team of 24 consultants for a total input of 796 person-months of the following international and domestic consulting services will be required to prepare a detailed implementation plan and procedures for the Project during the first year, and support the subsequent 4- year implementation phase. Person-months are given in parentheses. The international experts (54) will be specialists in (i) project implementation (team leader) (27); (ii) management information systems (12); (iii) participatory planning (4); (iv) agricultural marketing (4); (v) economics/financial analysis (4); and (vi) information management (3). The domestic experts (742) will be specialists in (i) project implementation (60); (ii) district liaison (five officers) (240); (iii) participatory planning (27); (iv) national monitoring and evaluation (60); (v) district monitoring and evaluation (five persons) (240); (vi) economics/financial analysis (6); (vii) gender (27); (viii) management information systems (16); and (ix) information management (6); as well as an ombudsperson (60). An

8 v international consulting firm in association with domestic consultants will be selected using the full technical proposal procedure in accordance with ADB s Guidelines on the Use of Consultants and other arrangements satisfactory to ADB for the engagement of domestic consultants. The quality and cost-based selection method will be used for engaging consultants. A national NGO with extensive experience in agriculture and rural livelihoods will be recruited by the PCMU through competitive bidding based on eligibility and evaluation criteria established by the Project to supervise and coordinate local NGOs or community organizations in implementing the village level activities of the Farmer Empowerment component. The national NGO will identify local implementing NGOs/community organizations that are capable of participating in the Project and meet criteria established by the Project and sign agreements with them to implement project activities at the village level. Estimated Project Completion Date Project Benefits and Beneficiaries 31 December 2007 The Project will benefit farmers in five districts with about 2.75 million poor people and overall poverty rate of 66% almost twice the national average. The components for farmer empowerment, development of national and local information resources, and support for agricultural innovation development and dissemination are expected to benefit these poor people by facilitating agricultural and marketing innovations and increasing incomes. The Project will target villages in which 75% of the households are poor. Typical project beneficiaries will be poor farmers who have low productive landholdings of less than 0.1 hectare and who generally only cultivate staples. They have an average income of less than Rp1,000,000 per capita per year, and often use communal resources such as the sea and the forest to supplement their income which is often not able to meet their basic needs. The village-level investments will directly raise the incomes or food security of about 400,000 poor households to levels above the poverty line. Women will directly benefit from active involvement in the planning of village investments, capacity building, and targeting of village investments especially to women.

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10 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 Poor Farmers Income Improvement through Innovation Project. II. INTRODUCTION 2. The Project is based on the findings of Asian Development Bank missions; 1 inputs from the Government; the consultants feasibility study resulting from a technical assistance (TA) grant to the Ministry of Agriculture (MOA) Bureau of Planning; 2 socioeconomic surveys; an initial environmental examination; and consultations with regional and local governments, beneficiaries, private banks and nongovernment organizations (NGOs), external funding agencies, and consultants. The project framework is in Appendix 1. 3 III. BACKGROUND A. Sector Description 1. The Agriculture Sector 3. ADB s 2001 country operational strategy (COS), poverty assessment in Indonesia, 4 and 1998 agriculture sector strategy study and update in 2000, 5 provide the overall context for agricultural and rural development in Indonesia. Agriculture provides employment to a large percentage of Indonesia s population; substantially meets the country s food requirements; and provides most raw materials for manufacturing, particularly for exports. However, agricultural growth has stagnated and lagged behind growth of the nonagriculture sectors. Policy distortions have constrained growth. While recent initiatives to deregulate the sector have improved sector incentives for farmers, (i) inadequate technology development, (ii) deficient physical and social infrastructure, (iii) weak institutions, and (iv) improper incentives continue to restrict the ability of farmers to improve incomes. 4. Constraints are particularly severe in marginal rainfed areas, particularly in the drier eastern half of Indonesia. Technology development for these areas has lagged far behind that for well-endowed irrigated areas. Much government agricultural support is planned centrally and does not adequately address location-specific, village-level causes of low and unstable yields and inadequate market access. Inadequate horizontal communication and vertical access to information reduce the access of farmers to technologies, potential markets for their products, market prices, input sources and prices, and potential solutions to farm problems. 5. The Government recently has been taking steps to improve the agricultural policy environment and to incorporate larger agricultural and rural development goals within a 1 Loan fact-finding from 23 July to 24 August 2001; a preappraisal mission from 23 October to 14 November 2001; and an appraisal mission from 1 11 April ADB Technical Assistance to the Republic of Indonesia for Poor Farmers Income Improvement Project. Manila. 3 The project team comprised M. Jayawant, Mission Leader/Rural Development Specialist; Y. Kobayashi, Senior Sector Specialist; F. Ahmed, Financial Management Specialist and Control Officer; B. Tambunan, Project Implementation Specialist; D. Utami, Environment Specialist; L. Nazarbekova, Counsel; R. Collier, Staff Consultant and Economist; and D. Hakim, Consultant and Gender Specialist. 4 ADB Assessment of Poverty in Indonesia. Manila. 5 ADB Updated in November Agricultural Sector Strategy Study. Manila.

11 2 development strategy that has so far concentrated mainly on increasing food production. Many reforms recommended by ADB s sector strategy (footnote 5) have been undertaken. Government agricultural programs are moving to a bottom-up planning approach but continue to be focused on stimulating production of crops important to food security. The centrally planned agricultural support system continues to be aimed at rice and rice farmers on productive irrigated areas, mainly in western Indonesia. Even with decentralization, government support services often cannot adequately address location-specific constraints to improvements in agricultural production and marketing. 6. Nearly all programs of international assistance to the agriculture sector are increasing the emphasis on poverty and good governance; encouraging regional autonomy and environmental protection; and supporting human development through social sector, social infrastructure, and social protection efforts. This similarity requires heightened aid coordination to avoid duplication. In preparing the Project, close coordination with agencies and countries providing external aid has been maintained to ensure complementarity and compatibility and to avoid overlap. Extensive discussions were held with the World Bank in particular, to avoid overlap and ensure complementarity with ongoing projects of the World Bank Poverty and Agriculture 7. Agricultural growth and rural development have always been key to directly reducing poverty in Indonesia. The decline in poverty during the 1970s was due in large part to the rapid growth in agricultural production and the resulting job creation in off-farm employment in agricultural processing, transport, and trade. Poverty reduction impacts have been low since the mid-1980s as agricultural productivity stagnated and returns to farming declined. During the economic crisis, however, agriculture provided a safety net to workers shifting out of declining sectors. Despite the declining importance of agriculture in the economy, about 58% of Indonesia s poor derive their income primarily from agriculture. About 40% of those engaged in agriculture are poor (the highest poverty rate in any economic sector in Indonesia). 8. Similarly, rural development which is centered upon agriculture has important implications for poverty reduction. Almost 90% of the rural poor and near poor derive their income primarily from agriculture. Quality of life of the rural poor is very low. Eighty percent of the rural population have less than 5 years of formal education. One third of rural infants are malnourished, while more than 50% of rural women suffer from micronutrient deficiencies. These low living standards prevent the rural poor from accessing the benefits of economic growth bad health and illiteracy renders them unsuitable for many forms of employment. Therefore, apart from the direct impact of improvements on quality of life that is normally associated with an increase in incomes, rural development will also increase access of the poor to the benefits of economic growth by improving quality of life. 9. For poor farmers, the constraints identified by ADB s COS manifest themselves as impediments to adopting production and marketing innovations necessary to engage in commercial production and access the benefits of wider economic growth. While technology has been developed for some upland and rainfed areas, many marginal and rainfed areas typically inhabited by poor farmers lag behind well-endowed areas in terms of options for technological 6 World Bank loans: 4007: Sulawesi Agriculture Area Development Project, for $42.6 million, approved in 1996; 3984: Nusa Tenggara Agricultural Area Development Project, for $41.1 million, approved in 1996; 3888: Village Infrastructure Project, for $72.5 million, approved in 1995; 4330: Kecamatan Development Project (KDP), for $225.0 million, approved in 1998; and Loan 46270: Second Kecamatan Development Project, for $421.5 million, approved in 2001.

12 3 innovation available. Location-specific public investments for village roads, storage, minor irrigation, soil and water conservation works, assessment and dissemination of technology in villages, and farmer training have not received adequate support. Information development and dissemination has often not been designed for poor farmers, but rather aimed at promoting increases in food production. This in effect has locked poor farmers into a low-level equilibrium trap preventing them from accessing the benefits of wider economic growth. Consequently, the wider rural economy remains at a low level of commercial activity restricting rural nonfarm activities, depressing wages of landless laborers, and propagating rural poverty. Detailed studies undertaken as part of the feasibility study for the Project identified several village investments that can allow farmers to adopt innovative production and marketing methods, and begin commercial production. B. Lessons Learned 10. ADB s country synthesis of lessons learned from projects in Indonesia 7 and sector synthesis of lessons learned from projects under agriculture and natural resources 8 are particularly relevant for the Project. ADB s agriculture projects in Indonesia have not performed as well as projects in many other sectors because they are complex and target diverse environments. Overly rigid implementing arrangements and design features often impede project success because they do not allow the flexibility to adjust to evolving economic, technical, and social circumstances and local conditions. Well-defined project formats and procedures ensure acceptable standards for procurement, financial management, and project quality. Implementation arrangements must be based on the realistic capacities of sector institutions if project benefits are to be sustained beyond project completion because no means remain to replicate and sustain project activities. 11. Community participation improves project quality, targeting, and sustainability, but has to be well supported through training and technical support. Community control over project funds induces communities to allocate resources according to priorities and potential, but the transfer of funds to communities without social preparation has led to unsatisfactory results. 9 Communities cannot be left to their own resources to design and implement projects. Skilled technical and social facilitation and backstopping from external sources is crucial for the success of community projects. Experience has also shown that group mobilization is most effective if a member of the local community facilitates it, and that the participation of women increases project effectiveness and sustainability. NGOs and community organizations have successfully trained community-based organizations in fund management, microenterprise management, participatory monitoring and evaluation, marketing, and technology adoption. Contractor management in Indonesia is poor and complaints are rarely addressed. This in turn adversely impacts on project sustainability and ownership by beneficiaries. This can be remedied by making contractors directly accountable to end users. Small-scale infrastructure 7 Country Synthesis: Lessons Learned for Projects in Indonesia. Postevaluation Information System, ADB internal database. 8 Sector Synthesis: Lessons Learned for Projects under Agriculture and Natural Resources. Postevaluation Information System, ADB internal database. 9 ADB s evaluation of its support for credit programs has shown that these are best executed by institutions that function as financial intermediaries, have financial discipline, and are supervised by an appropriate regulatory body to ensure public confidence. Since project areas do not all have such institutions, the Project does not include a credit component. Funds are to be used only for public investments and thus are transferred to communities as grants. Local or regional authorities or suitable NGOs do not possess lending experience but have been shown to be able to provide appropriate technical and social inputs in making communities creditworthy. The Project will prepare communities to receive funds and link these communities with sound financial intermediaries where available.

13 4 projects using village-based planning and community labor have resulted in substantial savings as compared with central planning and implementation. C. ADB s Sector Strategy 12. The Project directly addresses the focal points of ADB s COS, which include creating and strengthening basic institutions; improving regional equity, especially targeting rural areas and less-developed islands; undertaking human and social development; and enhancing the role of women. 10 The COS emphasizes participatory project design and administration, which is at the core of the proposed Project. The COS highlights the benefits of diverse and stable cropping systems, the development of rural infrastructure, and access to finance all expected from the Project. The Project is in line with the COS as it supports a demand driven and participatory process for agricultural innovation, and a transparent and inclusive implementation approach. The process to be developed by the Project is in itself a major output that meets ADB s development priorities. D. Policy Dialogue 13. ADB s agriculture sector strategy study (footnote 5) provided the basis for a dialogue with the Government on levies on agricultural commodities, value-added tax on agribusiness, and decentralization of agriculture support services. Other ongoing programs are continuing the dialogue and a favorable resolution will enhance project benefits. 11 District coordination committees (DCCs) and project intervillage forums (PIVFs), proposed through the Project, will improve communication between farmers and decentralized agricultural support services. The Project will reorient attention to district roads, which are an important determinant of rural development. Since the Asian financial crisis, budgetary constraints have caused district roads to fall into disrepair. District governments have agreed to prioritize their road rehabilitation activities so that they complement project investments. IV. THE PROPOSED PROJECT A. Rationale 1. Project Rationale 14. Recently improved terms of trade, depreciated currency, deregulation, and farmersupport programs initiated after the financial crisis offer poor farmers in Indonesia an opportunity to improve incomes through the adoption of innovative production and marketing methods. However, they lack the means to do so. While the Government is taking steps to fill the gaps in providing public goods support for agriculture, and increasingly for nonrice crops, additional support is needed to target village-level public investments to the needs of poor farmers, to increase the availability of technologies needed by poor farmers, and to increase the access of poor farmers to information to support agricultural production and marketing innovations. 15. Systems of planning, delivering, and managing village-level public investments are key to effective targeting. Government planning through its agencies and delivery by outside 10 The first country strategy and program (CSP), currently being prepared, includes a much more comprehensive discussion of sector issues, priorities, and ADB s strategy than is available in the COS. 11 For example, the decentralization group of the Consultative Group for Indonesia is reviewing the illegal collection of roadside levies as part of improving governance in local government. The proposed agriculture and rural development sector strategy study will look into the impact of value-added tax on agribusiness.

14 5 contractors is not an efficient means of targeting village-level public investments to locationspecific problems. 12 An efficient alternative, which has been shown to work in other development projects (most notably the World Bank s Kecamatan Development Project (footnote 6) and ADB s TA for Participatory Approaches to Sustainable Income Generation 13 ) is to empower farmers themselves to undertake simple village investments develop their capacity to do so, develop the proper institutions to support them, and give them control over the funds required to implement the investments. 16. Innovation requires a sound technological base and a vibrant information environment. Because marginal rainfed areas typically inhabited by poor farmers had low priority in the Government s food-security-centered development program, information on the natural base of these areas has often been lacking, agricultural research for these areas has received less support than that for well-endowed irrigated areas, and information dissemination has not been targeted to them. Therefore, the technological base for farmer innovation in marginal rainfed areas is not well developed and adequate information on available technologies, potential markets for products, market prices, input sources and prices, and potential solutions to farmlevel problems is often lacking. 17. The Project is aimed at promoting innovation development and adoption by poor farmers. The Project recognizes that if poor farmers are empowered to undertake simple villagelevel investments, support is provided for the development of proper technologies for rainfed areas, and farmers have access to relevant information, poor farmers will be able to adopt innovative production and marketing methods and break out of their low-level equilibrium trap. 2. Coordination with other ADB Projects 18. The Project dovetails with ADB s initiatives to reduce rural poverty in Indonesia. Through the Participatory Development of Agricultural Technology Project (PAATP), ADB is increasing capacity for adaptive research in response to farmer needs. 14 The proposed Project will better interface this capacity with farmer needs and increase the participation of farmers in adaptive research, thus enhancing the benefits of the PAATP. 19. The Project s focus on agriculture differs from the more general rural development approach of ADB s Community Empowerment for Rural Development Project, which develops access to efficient local government, rural finance, and markets. 15 While the Community Empowerment for Rural Development Project will make government planning agencies more 12 Government planning and implementing agencies necessarily operate at an aggregated level and do not have the resources to plan and implement with the detail required for village-level investments. Nor is it efficient for government agencies to plan and implement with such a level of detail. For village-level investments, the information costs of incorporating the required information into a top-down planning model and then responding to location-specific needs are very high. Such investments undertaken by government agencies often fail to incorporate the requisite degree of design detail, are not adequately flexible to adapt to unexpected information discovered during implementation, and therefore often fail to meet the requirements of farmers. Further, past experience has shown that farmers themselves can efficiently undertake the implementation of the public investments. Also, lessons from previous projects show that contractor management in Indonesia has been poor and that small-scale village-level projects using community labor inputs can be implemented at substantial savings as compared with implementation by national agencies or outside contractors. 13 ADB Technical Assistance to the Republic of Indonesia for the Participatory Approaches to Sustainable Income Generation. Manila. 14 ADB Report and Recommendation of the President on a Proposed Loan to the Republic of Indonesia for the Participatory Development for Agricultural Technology Project. Manila. 15 ADB Report and Recommendation of the President on a Proposed Loan to the Republic of Indonesia for the Community Empowerment for Rural Development Project. Manila.

15 6 responsive to the demands of local communities, the proposed Project will enhance the benefits of this responsiveness by helping poor farmers to better express their needs. 20. The Project will not provide credit to farmers. It will however develop capacity at the village level for fund management and investment identification, and establish institutions to dovetail with a proposed project for rural microfinance. 16 More generally, since the Project will make poor villagers viable recipients of the microfinance funds with minimum additional social preparation, villagers will also be able to access funds from established financial intermediaries such as Bank Rakyat Indonesia. The proposed Project will also link up with the proposed Participatory Irrigation Sector Project. 17 When the capacity to identify and implement villagelevel irrigation projects has been developed, farmer groups will be able to access funds to be provided by the proposed irrigation project The foundation for participatory village-level planning and implementation has been laid by previous ADB projects. The advisory TA for Participatory Approaches to Sustainable Income Generation (footnote 13) developed a methodology for the development of household business plans. This methodology will be used with modifications in the Project. The Integrated Pest Management for Smallholder Estate Crops Project has established the capacity within some farmer groups to address pest problems. 19 This capacity can be developed with modifications as necessary in project locations. The Rural Income Generation Project has established a method of village-level fund management through village finance units. 20 This method of village-level fund management can now be applied to project areas. B. Objectives and Scope 1. Objectives 22. The long-term development goal is increased innovation in agricultural production and marketing by poor farmers. The immediate project objectives are (i) improved targeting of village-level public investments to location-specific needs of agricultural and rural development, (ii) increased access of poor farmers to information, and (iii) a reorientation of agricultural research to marginal rainfed areas. 2. Scope 23. The Project will comprise four components: (i) poor farmer empowerment, (ii) development of national and local agricultural information resources, (iii) support for agricultural innovation development and dissemination, and (iv) project management. All components are directed to the overall objective of increased innovation and are described in Appendix 2. The Project will be implemented over 5 years in about 1,000 villages in the five 16 Proposed INO: Rural Microfinance Project, for $150 million, for approval in Proposed INO: Participatory Irrigation Sector Project, for $100 million, for approval in Since the Project will develop the capacity among farmer groups to identify and implement public investments, farmer groups are expected to be able to access more mainstream sources of funds for identified investments after the completion of the Project and thereby sustain project benefits. Moreover, if farmers recognize the value of NGO assistance in these activities, they will pay for the services of NGOs after project completion. Examples of such sustained payments beyond project completion are available from other projects and most notably from the ADB supported Participatory Approaches to Sustainable Income Generation Project (footnote 13). 19 ADB Report and Recommendation of the President on a Proposed Loan to the Republic of Indonesia for the Integrated Pest Management for Smallholder Estate Crops Project. Manila. 20 ADB Report and Recommendation of the President on a Proposed Loan to the Republic of Indonesia for the Rural Income Generation Project. Manila.

16 7 districts of Temanggung and Blora in Central Java, East Lombok in West Nusa Tenggara, Ende in East Nusa Tenggara, and Donggala in Central Sulawesi. a. Poor Farmer Empowerment 24. The component will empower farmers to plan and implement village-level public investments to support innovations in agricultural production and marketing. This will involve three subcomponents: (i) mobilization of farmer groups and village planning, (ii) institutional development, and (iii) village-level public investments. 25. The Project will engage local NGOs (or community organizations) with ongoing community partnerships to work through elected facilitators from the village to mobilize farmer groups. Group formation will be based on village social assessments and ensure that socially disadvantaged farmers will be able to participate in decision making. The NGOs/community organizations will train and support the facilitators, and help establish links between farmer groups and government and private agencies that can support farmers. These design features are intended to maximize beneficiary participation, social preparation, local facilitation, technical backstopping, and the involvement of NGOs and community organizations, all of which have contributed to the success of similar projects. 26. The Project will establish, develop capacity, and support the operations of three institutions: village project investment committees (VPICs), PIVFs, and DCCs. The three institutions will work together to consolidate, scrutinize, approve, support, implement, and monitor investments proposed by farmer groups. These institutions mirror institutions prescribed by the law on decentralization to increase project sustainability and effectiveness. 27. The Project will support participatory planning in eligible villages to identify innovations and public investments necessary for their adoption. The Project will support PIVFs in their evaluation of village investments. The Project will provide grants of a maximum of $30,000 per village in the form of village investment funds administered by VPICs to implement approved investments. 21 The VPICs will be assisted by NGOs/community organizations, development partners with whom the VPICs have developed investment proposals, the DCC, and government agencies delegated by the bupati. Funds will not be disbursed for private investments or to finance operating costs such as input purchase. Eligibility criteria for village investments are provided in Appendix 3. Investments will be for public goods shown to promote innovations in agricultural production or marketing. Other projects have shown the benefits of increasing the community participation in investment design, implementation, and monitoring and delegating responsibility for fund management and contractor supervision to end users. b. Development of National and Local Agricultural Information Resources 28. Capacity-building activities of the Project will address village problems, but realization of higher incomes and poverty reduction requires a favorable broader context within which poor 21 The estimate of $30,000 per village is based upon investment plans developed by villages during the feasibility study for the Project. Construction or repair of farm-to-market roads and irrigation systems were by far the most expensive and most common investment proposed. These cost between $12,000 and $50,000. These were followed by proposals for the establishment of marketing associations at costs ranging from $5000 $15,000; training in pest management ($1,900 to $7,000); and postharvest facilities storage, drying facilities, primary processing ($500 $ 2,000). Investment proposals are detailed in a supplementary appendix and indicative cost estimates and financial analyses for investments are provided.

17 8 farmers can identify and exploit opportunities for innovation. This component will develop information resources of importance to poor farmers and facilitate poor farmers access to them. By accessing these resources, farmers will be able to better align production with comparative advantage, improve access to agricultural input and output markets, and improve their incomes. Specifically, the Project will support staffing, operational costs, equipment, and consultant support to (i) upgrade the agricultural market information system of MOA to expand its coverage and scope, and to increase the frequency of its updates; (ii) develop a national farming web site that will become a source of information and eventually a platform for agricultural trade; and (iii) develop information centers at the district agriculture offices that will be linked to the information network of MOA and also will disseminate information through traditional media. This component builds upon existing MOA activities with minimal incremental demands on scarce government resources to increase the chance of sustainability and ownership. The potential for private sector participation in the operation of the farming web site has been explored and will be further pursued by MOA. The district information centers will be partly self-sustaining after the Project because they will charge for services. c. Support for Agricultural Innovation Development and Dissemination 29. In addition to the grass-root activities at the core of the Project, upstream initiatives to develop innovations for poor farmers and their dissemination to farmers will enhance the effectiveness of village investments and lay the long-term foundation for improving in incomes of poor farmers. Upstream research programs for marginal rainfed areas need to be developed after careful needs assessments and thereafter funded. The private sector is rarely interested in agricultural research for marginal areas because although returns to this research in terms of income and welfare improvements are high, beneficiaries are often not able to pay for research and private companies are not able to recover research costs. 30. The Government is trying to reorient its upstream technology development activities to the needs of poor farmers in marginal rainfed areas. This agricultural innovation component will assist the Government by supporting staffing, operational costs, civil works, equipment, and consulting services (i) to develop human resources, basic knowledge, and support infrastructure within Agency for Agricultural Research and Development (AARD) of MOA, (ii) to support national agricultural research institutes to develop agricultural innovations relevant to project areas (and for marginal rainfed agriculture in general), and (iii) to develop outreach programs to inform farmers of potential innovations to improve agricultural production. The component will also establish a fund to be administered by the provincial assessment institutes for agricultural technology (BPTPs) in each province that contains a project district. This fund will support initiatives of national and local universities, researchers, field technicians, extension workers, the private sector, NGOs, and other agencies to develop innovations for poor farmers in the target area. The fund will also support activities to promote information exchange and capacity building among DCC members, district government staff, and farmers from project as well as nonparticipating villages. d. Project Management 31. The Project will finance (i) operational costs of the national steering committee (NSC); (ii) staffing, operational costs, equipment, minor civil works, and consultant support for a national project coordination and monitoring unit (PCMU); (iii) support to develop a project performance management system (PPMS); (iv) costs, including costs of minor civil works, of the project implementation units (PIUs); (v) costs of external audits and independent reviews of NGOs and village implementation bodies; and (vi) costs of the Executing Agency s project

18 9 completion report. District governments will support the operational and other costs of the DCCs and PIVFs beyond project completion. 3. Poverty Focus 32. Selection of the project area is primarily motivated by poverty considerations and the importance of agriculture to the incomes of the poor. Three of the 5 project districts are among Indonesia s 20 poorest districts of 20 provinces screened. 22 For the five project districts, the overall poverty rate is about 66% according to the village potential data, which uses the Family Planning Agency s household surveys. 23 This poverty rate is almost twice the national average based on these data. More than 2.75 million poor people live in the project districts. 33. Poverty targeting of poor farmers will be strengthened beyond the targeting of poor districts because investments will be targeted to poorer villages within these poor districts. Villages within the target districts have been ranked according to their poverty incidence based upon the village potential data. Only villages with more than 40% of households classified as not yet prosperous or minimally prosperous according to these data will be eligible for project support. 24 Further, the ranked list of eligible villages will be provided to district governments, which will prioritize villages after giving due consideration to their poverty ranking and their dependence on agriculture (but also taking into account their own development and poverty reduction priorities). The top half of prioritized villages in a district will be eligible to submit investment proposals during year 1 of implementation in a district, and all villages will be eligible during year 2, thereby according an advantage to poorer villages. 34. The village participatory process has been designed to ensure that project benefits are directed primarily to the poor within villages without causing social tensions. Groups will be formed only after a social assessment by the NGOs/community organizations has determined the optimal means of group formation to benefit poor farmers. 25 Since the core of the Project is the development of the participatory process, investment selection criteria are primarily related to the process itself and also aim to ensure that investments meet project objectives Urban provinces, provinces with widespread civil disorder, and provinces outside ADB s proposed geographic focus were excluded. Two districts were selected to maintain continuity with previous ADB assistance. 23 Potensi desa/kelurahan, or village potential. This is a household survey attached to and conducted during every type of census: agricultural, economic, and population. 24 The Family Planning Agency uses a simple screening device to categorize households as not yet prosperous, minimally prosperous, or higher (prosperous). Households are classified as not yet prosperous if they fail to meet any of the following conditions: (1) in general, family members are able to eat two meals a day; (2) a minimum of two different sets of clothes for home/work; or (3) house floor made of earth. Households are classified as minimally prosperous if they meet all of the above conditions but fail to fulfill any of the following conditions: (1) once in a week, able to eat meat or egg or fish, (2) a new set of clothes once a year, (3) floor space less than 8 square meters per family member. 25 To prevent social tensions, the process will also ensure that nonpoor stakeholders with characteristics such as (i) dependence on the Project, (ii) interest in the outcome of the Project, (iii) ability to influence the Project, (iv) ability to be affected by the Project, and (v) ability to work against the Project are given adequate consideration throughout the process of development of the village investment plans. Sometimes, homogenous farmer groups will be necessary to ensure that the needs of disadvantaged groups are adequately addressed. In other areas, more heterogeneous groups will be appropriate. 26 Since the Project is centered on promoting innovations in agricultural production or marketing, it will directly benefit those engaged in agricultural activities, including those landless poor engaged in nonfarm agricultural activities such as livestock rearing, fisheries, postharvest activities, and agricultural support services. The Project will benefit landless farm laborers indirectly through the wider agricultural growth that it will engender.

19 10 C. Cost Estimates 35. The cost of the Project is estimated at $70.92 million equivalent, including physical and price contingencies, interest during construction, taxes, and duties. Of the total cost, $15.28 million or 21% is the foreign exchange cost and $55.64 million equivalent is the local currency cost. A summary of the cost estimates is in Table 1. Detailed cost estimates are in Appendix 4. Item A. Base Costs Table 1: Summary Cost Estimates ($ million) Foreign Exchange Local Currency a Total Cost 1. Poor Farmer Empowerment Development of Information Resources Agricultural Innovation Development and Dissemination Project Management Subtotal (A) B. Contingencies 1. Physical Contingencies Price Contingencies Subtotal (B) C. Interest Charge Total a Local currency costs include taxes and duties of $5.8 million to be financed by the Government. Source: Asian Development Bank estimates. D. Financing Plan 36. Indonesia s fiscal constraints continue to be severe after the financial crisis. The Government s resources are strained by the requirements of macroeconomic stabilization, corporate sector restructuring, bank recapitalization, and augmentation of resources for social safety nets. In view of these constraints, other funding agencies such as the World Bank and Japan Bank for International Cooperation have relaxed their cost-sharing requirements for Indonesia. The Project is classified as a core-poverty intervention and will not generate directly taxable revenues. Under these circumstances, it is proposed that ADB s 60% cost-sharing limit for project financing be relaxed. This proposal is in accordance with the graduation policy, which allows ADB financing to exceed the country cost-sharing limit under exceptional circumstances and where justified on country and project grounds. 27 The Government has requested that ADB finance79% of the total project cost. 37. It is proposed that ADB provide a loan of $56 million from its Special Funds resources. The loan will have a term of 32 years, including a grace period of 8 years, with an interest charge of 1% per year during the grace period and 1.5% per year during the remaining term. ADB will finance 100% of the foreign exchange cost of the Project and 73% of the local cost. The Government will finance about $7.19 million equivalent and district governments about $0.99 million equivalent in local costs. Farmers will provide about $6.75 million equivalent in inkind contributions. The financing plan is summarized in Table 2, with details provided in Appendix 4. The Government will bear the foreign exchange risk. 27 ADB Graduation Policy. Manila.