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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF INDONESIA FOR A YOGYAKARTA RURAL DEVELOPMENT PROJECT June 29, 1979 Report No. P-2603-IND This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS Currency Unit = Rupiah (Rp) US$1 = Rp 625 Rp 100 US$0.16 Rp 1 million = US$1,600 ABBREVIATIONS AND ACRONYMS BAPPEDA - Badan Perencanaan Pembangunan Daerah - Provincial Development Planning Agency BAPPENAS - Badan Perencanaan Pembangunan National - National Development Planning Agency BRI - Bank Rakyat Indonesia - People's Bank of Indonesia DIY - Daerah Istimewa Yogyakarta - Special Province of Yogyakarta GOI - Government of Indonesia INPRES - Instruksi Presiden - "Presidential Instructioli" - a rural works program USAID - United States Agency for International Development GOVERNMENT OF INDONESIA FISCAL YEAR April 1 - March 31

3 FOR OFFICIAL USE ONLY INDONESIA YOGYAKARIA RURAL DEVELOPMENT PROJECT Creclit and Project Summary Borrower: Amount: Terms: Project Description: Republic of Indonesia $12 million Standard The project's aims are to strengthen the capacity of the Yogyakarta provincial government to implement effective area development programs in two extremely poor districts and to assess new technologies designed to achieve these objectives through several experimental programs. Specifically the project would: (a) test and adapt appropriate agricultural technologies and soil conservation measures for upland farming; (b) introduce low-cost promising income-generating activities, e.g. fisheries, livestock, and small-scale enterprises; (c) improve selected rural roads, low-cost preventive and primary health care, and safe drinking water supply; and (d) strengthen provincial planning and program implementation, through technical assistance, training and local participation. Long-term project benefits are expected to be reflected in the expansion of appropriate rural development programs throughout the country. The main project risks are organizational since coordination at the provincial level has been usually weak. Also, the realization of benefits will depend on the pace of farmer acceptance of the new technologies and the efficiency of the local authorities to implement the project. These risks will be minimized by reinforcing existing coordination mechanisms, and remain acceptable in view of the experimental nature of the project and the promise to resolve one of the most difficult development issues of Java's poorest areas. Estimated Local Foreign Total Cost: ---- $ million Agricultural development Non-farm development Social services support Rural roads Institutional development Physical contingencies Price contingencies Total Project Cost This document has a restricted distribution and may be used by recipients only in the performance olf their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

4 - ii - Financing Plan: The proposed IDA credit would finance 63% of total project costs of $19 million. The remaining $7 million would be Pr( r '.clf-'e by the Borrower. Estimated $ million Disbursements: IDA FY Annual Cumulative Rate of Return: Although the productive component, activities are experimental in nature, an indicative economic analysis shows rates of return at 14% for terracing and 13% for silvipasture (the two aiajor soil conservation measures), and 11% for rural roads. Staff Appraisal Report: No ITD, dated May 18, 1979.

5 REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EYECUTIVE DIRECTORS ON A P'ROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF INDONESIA FOR A YOGYAYARTA RURAL DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed develomeni: credit to the Republic of Indonesia for the equivalent of $12 million oni standard IDA terms to help finance a Yogyakarta Rural Development Project. PART I - THE ECONOMY /1 2. The latest economic report on Indonesia, "Indonesia: Growth Patterns, Social Progress and Development Prospects," of February 20, 1979 (No IND) was circulated to the Executive Directors on February 26, This report's main findings are that: (a) aided by a massive improvement in the country's resource position during the early 1970s and by innovative policies, considerable progress has been made towards raising the level of material well-being for the bulk of the Indonesian population, including the lowest income groups; (b) due to a number of new, mostly exogenous circumstances, including an expiected slowdown in the growth of oil production, Indonesia is now facing a rapidly tightening overall resource position which will make it more difficult to maintain high levels of income and employment growth, while at the same time preserving monetary stability and external balance; (c) the recent (November 15, 1978) devaluation of the Rupiah from Rp 415 to Rp 625 to the US dollar, while strongly supportive of the structural changes required to reduce economic dependence on oil and to improve long-term development prospects, should not be regarded as a substitute for efforts needed to remove physical and administrative bottlenecks and to develop effective support services; (d) although the Government (because of the structure of its revenues and expenditures) is a prime beneficiary of devaluation-induced income shifts from import users to net exporters, significant additional public sector resource mobilization efforts will be needed to prevent a sharp decline in the share of Government savings in GNP beyond 1979/80; /1 Substantially unchanged from the President's Report on the Transmigration II Project (No. E'-2549-IND), circulated under cover of R79-112, dated May 16, 1979, and approved by the Executive Directors on May 29, 1979.

6 - 2 - (e) while the next five to ten years may be difficult because of the structural changes needed to adjust to a post-oil boom era, Indonesia's long-term development prospects have 'been significantly enhanced by the Government's successful population policies which have already contributed to a substantial (approximately 20%) reduction of fertility in Java and Bali during the past decade. These crucially important demographic developments will, in due course, particularly after the mid-1980s, be reflected in reduced and declining rates of growth of the labor force. Declining labor force growth rates and the prospects of declining income elasticities of demand for food justify the hope and expectation that with sound policies, Indonesia can and will eventually - possibly within the next two decades - overcome the severe poverty and food security problems that still plague the country today. The solution of these fundamental problems through the pursuit of a pervasive employment-oriented development strategy would set the economy firmly on a long-term growth path towards much higher levels of social and economic development involving all Indonesians. One of the key components of such a strategy would be to aim at a high rate of labor-intensive manufacturing development. Social Developments Since Analysis of data from the National Household Surveys for 1970 and 1976 suggests that while overall income disparities have almost certainly widened, the rapid overall growth of the economy /1 has contributed to a considerable improvement in consumption of all income groups, including the very poor. The data further suggest that increases in per capita consumption were higher in Java than in the other islands and higher in urban areas than in rural areas. Notwithstanding this, many Indonesians remain extremely poor: in 1976 when average per capita income was about $280,/2 over 50 million Indonesians (38% of the population) spent less than $90 (1976 prices and exchange rate). 4. Analysis of data from National Labor Force Surveys shows a remarkably high rate of employment growth (over 4% p.a.) between September 1971 and October But during this period, the labor force also grew at a very high rate and the data suggest that there was a slight increase in the rate of open unemployment. Since the labor force grew much faster than population in the relevant age groups, a sharp increase in labor force participation rates, from 50% in September 1971 to 55% in October 1976, was observed. Thus, a substantial part of the increased per capita consumption levels is believed to have been related to increased labor force participation and declining dependency ratios. /1 GDP grew at 8.0% p.a. As a result of favorable terms of trade developments during most of the period, GDY grew even faster - about 9.5% p.a. /2 World Bank Atlas. (Preliminary estimate for 1977: $300).

7 The share of agricultural employment between 1971 and 1976 declined from 66% to 62%, implying rapid growth of nonagricultural employment - over 7% p.a. or 54% of the total increase in employment. Within the nonagricultural sectors, the increase in employment occurred largely in proliferating smallscale enterprises in the manufacturing and service sectors where labor productivity is thought to be extremely low. This is indicated, inter alia, by the stagnation oi: real minimum wage levels which are among the lowest in the world. Employment growth in medium- and large-scale enterprises, which absorbed the bulk of industrial investment, was very modest. The broad picture of rapid employment growth since 1970, though encouraging in many respects, thus reveals that a relatively large part of the incremental employment has been of poor quality in residual types of activities. 6. l4uch progress has been made in recent years with the provision of education services. Enrollmenat rates increased at all levels of education. For example, primary school enrollment (excluding over-age students) is expected to reach 85% in 1979 for the 7-12 age group, compared to 60% in 1974; dropout rates - while still high - declined, and universal primary education appears to be in sight. A promising nonformal education-program has been introduced to increase the basic employable skills of those who never attended school (presently estimated at 23 million people) and others who left school without completing primary education (a further 22 million). Indonesia's adult literacy rate increased to 62% in 1974 which is much higher than in India (36%), Pakistan (21%), or Bangladesh (23%), but lower than in Thailand (82%) or the Philippines (87%). Within Indonesia, large differences in levels of educational attainment between urban and rural areas still exist, but differences between Java and other parts of the country are relatively small. 7. Irk the field of health care services, there has been a tremendous expansion of physical infrastructure including medical training facilities. Almost 3,000 rural health centers, designed to become the principal vehicles for the delivery of basic health services, were constructed between 1969 and But much of the new physical infrastructure has so far remained underutilized due to personnel shortage and a range of other factors, including popular preference for traditional health care services in several areas. 8. Inadequate sewerage and sanitation facilities are still major health hazards, especially in crowded urban areas. Even if the various targets for rural and urban water supply for the Second Five-Year Development Plan (Repelita II), which ended in March 1979, were fully met, over 100 million Indonesians will still remain without easy access to safe water in Similarly, housing conditions are generally very unsatisfactory, especially in crowded urban areas. Although simple and inexpensive improvements in water supply, drainage, footpaths and community facilities, executed through Kampung Improvement Projects, including those supported by the Bank Group, have contributed to better living conditions in several overcrowded urban areas, specific socio-economic support programs to improve the living conditions of the urban poor are needed.

8 -4- The Devaluation of November 15, The recent devaluation of the rupiah from Rp 415 to Rp 625 per US dollar was designed to encourage labor-intensive import substitution and nonoil export growth by reversing some of the adverse relative price shifts in the economy that had occurred earlier this decade. The opportune timing of this drastic and unique policy action is believed to be a strong factor enhancing the probability of its success. The strongest immediate effect of the devaluation, however, will be a dramatic increase in budgetary revenues in local currency terms. Government expenditures will, of course, also increase as a result of the devaluation but the net budgetary position in terms of rupiahs should improve strongly. While the recent devaluation will generally tend to facilitate export promotion efforts, great emphasis needs to be placed on the importance of developing effective support services and of reducing administrative obstacles and other unnecessary cost increasing factors. 10. A number of supportive measures to prevent an upturn in domestic inflation eroding the potential benefits of this devaluation have already been taken. Such measures include the lowering of import tariffs by 50% on a wide range of intermediate inputs, stringent temporary price controls, and a temporary increase in budgetary subsidies to initially isolate key consumption items, such as rice, from the effects of the devaluation. Aside from the budget's influence on the prices via subsidies, the degree of monetary control exercised will also be an important factor in minimizing devaluation-induced inflation. There is likely to be conflict, however, between the need to contain devaluation-induced monetary expansion and the need for additional credit to promote new private investment in line with the structural objectives of the devaluation. Nonetheless, a sizeable budget surplus in fiscal 1979/80 almost certainly will be needed to assist in neutralizing the effect of a sudden sharp increase in the rate of monetary expansion following the devaluation. 11. Prior to the November exchange rate adjustment, balance of payments projections based on current trends and expectations suggested the probability that, without special export promotion efforts, a shortage of foreign exchange would become a binding constraint on development efforts within the next few years. Although it is too early to make more than a very preliminary and speculative assessment of the effect of the devaluation on imports and exports, there is now less ground for the fear that the balance of payments will become a development constraint. No dramatic changes, however, are foreseen in the immediate future; the short-term export response, in particular, is likely to be constrained by supply rigidities. Ultimately, changes in the size and structure of imports and exports will be strongly influenced by the effect that the devaluation will have on the overall growth performance of the economy. Food Supply and Demand Prospects 12. In spite of impressive increases in rice production, Indonesia's food self-sufficiency has declined continually over the past decade. In particular, there has been a growing import-dependence on rice, sugar, wheat, and recently coconut oil, which is predicted to continue (paras ). To

9 meet this problem, an overall food production and consumption strategy is vital. The Third Five-Year Development Plan (Repelita III) has placed new emphasis on the need to increase production of secondary crops such as maize, cassava, soybeans, and groundnuts, particularly in order to decrease Indonesia's import-dependency on rice. Yields of secondary crops in other countries indicates that they hold significant potential for increasing Indonesia's food self-sufficiency and improving the food security of low-income families in Indonesia's unirrigated areas (para. 30). Overall Growth and Employment Prospects 13. Medium-term prospects, as determined by developments already in motion and by exogenous factors such as the expected temporary stagnation in oil production, suggest that it will be difficult to achieve an overall GNP growth rate of more than 6-6.5% during the next 3-5 years. This is considerably less than the average growth performance of the economy during the past decade. But if the broad pattern of relationships between output growth, employment growth, and personal consumption growth observed for the period does not drastically change, a GNP growth rate of 6-6.5% could still be consistent with an overall employment growth target rate of around 3% p.a. The Government has already announced a GNP growth target of 6.5% p.a. for the Third Five-Year Development Plan (Repelita III), which started in April As the economy is entering a difficult period of adjustment to postoil boom conditions involving structural changes in the pattern of production and the sources of savings, more reliance will have to be placed on agriculture and industry and on the mobilization of Indonesia's most abundant and inexhaustible resource: people. The devaluation may be expected to facilitate the structural changes that are needed. With improved incentives for an employment-oriented strategy and adequate Government investment and institutional support services for agriculture and small industries, it should in due course be possible to raise the overall growth rate of the economy to at least 7% or 8%, which would be a major help in accelerating the further elimination of poverty. External AiLd and Creditworthiness 15. The heavy foreign borrowing in 1974, 1975 and the early part of 1976, togelher with a hardening of average terms during those years, has raised the level of debt service payments which reached about $1.5 billion in 1978, or about 18% of projected export earnings. The debt service ratio /1 was 16% in 1976 and 17% in 1977; the ratio is expected to remain below 20% in 1979 and This is the encouraging result of restraint with regard to new borrowing in 1976 and 1S977 and the recent replacement on more favorable terms of $575 million remaining payments on cash loans (originally totalling $1 billion) which had been obtained in 1975 from a number of private banks in the wake of the Pertamina cr^isis. Total new loan commitments declined from a peak of $3.4 billion in 1975 to $2.3 billion in Mlost of the decline was achieved through a reduction in commercial borrowing. This means that average loan terms have recently begun to soften again, which will be reflected in future debt service payments. /I Ratio of debt service payments to commodity export earnings, with oil and gas on a net basis.

10 The Inter-Governmental Group on Indonesia (IGcI) continues to be the principal source of external capital, including Official Development Assistance (ODA), to the country. Total ODA (bilateral and multilateral) commitments in 1977/78 (including grants) amounted to about $1.4 billion; the IGGI (including the World Bank Group and Asian Development Bank) accounted for over 90% of this amount. The Bank's most recent economic report on Indonesia recommends that total ODA to Indonesia should reach at least $1.93 billion in 1979/80, including both loans and grants, of which at least 70% should be on concessional and semi-concessional terms. At the meeting of the IGGI in April 1979 the indications of probable commitments in 1979/80 made by bilateral and multilateral IGGI members amounted to about this level; the meeting therefore concluded that the Bank's recommendations would be approximately met. 17. The Bank's overall assessment of Indonesia's external accounts indicates that the country will be able to finance essential imports of consumer, intermediate and capital goods and to meet its debt service obligations. The debt service ratio is expected to remain below 20%. Although the November 1978 devaluation will provide a one time revenue windfall, the Government will need to raise substantial additional non-oil revenues over the coming years if the relatively high rate of domestic investment already reached is to be maintained. The Government has been quite cautious in increasing current expenditures and there does not appear to be much scope for reducing them further; expenditures should, in fact, rise in step with the growth in GNP and inflation, to permit reasonable growth in Government salaries as well as materials expenditures, a significant part of which is development related. In view of the pressure on public sector resources and since Indonesia's total external financing requirements are in excess of the foreign exchange components of the many projects planned for financing from external sources, a limited measure of local cost financing is considered justified. PART II - BANK GROUP OPERATIONS IN INDONESIA /1 18. As of April 30, 1979, Indonesia had received 40 IDA credits totalling $701.4 million, and 37 Bank loans amounting to $1,903.0 million./2 IFC investments have totalled $61.3 million. The share of the Bank Group in Indonesia's total (disbursed) external debt outstanding at the end of 1977 was about 8%, and the share of debt service about 1.8%. Bv the end of 1978, these ratios are estimated to have increased to around 12% and 5%, respectively. Annex II contains a summary of IDA credits, Bank loans and IFC investments as of April 30, 1979, as well as notes on the execution of ongoing projects. /I Substantially unchanged from the President's Report on the Transmigration II Project (No. P-2549-IND), circulated under cover of R79-112, dated May 16, 1979, and approved by the Executive Directors on May 29, /2 Since April 30, 1979, one Credit for a Fifth Technical Assistance Project and five loans for Lower Cimanuk Basin Flood Control, Second Agricultural Training, Fifth Highway, Fourth BAPINDO, Eighth Power and Second Transmigration projects have been approved by the Board.

11 To date, the Bank Group has financed projects in virtually all sectors of t:he Indonesian economy, although there has been particular stress on agriculture, which accounts for over one third of all lending. Most of the loans for agriculture have been for rehabilitation and expansion of productive capacity, both for food and tree crop development. Several national programs to provide credit inputs and advice to farmers and to promote agricultural research have also been financed by the Bank Group. More recent:ly, an effort to aid the Government's transmigration program has been initiated. In the iindustrial sector, while the major thrust has been on expanding fertilizer production on the basis of Indonesia's gas resources and on establishment and improvement of development finance institutions, a credit has also been extended to finance a small enterprise development project. The main emphasis in education has been on upgrading the quality of education, improving primary and secondary education and manpower training as well as on expanding non-formal education. In the social sector, the Bank Group has financed projects for urban development (through neighborhood improvement programs), urban water supply, family planning, and nutrition. A major portion of Bank Group financing has been used to rehabilitate and expand Indonesia's inadequate infrastructure, particularly in the power and transportation sectors. Credits have also been extended to finance a telecommunications project and a tourism project. Finally, the Bank Group has assisted the Government's efforts to prepare and formulate its development programs and projects through five technical assistance credits and a loan for a natural resource survey and mapping project. 20. The discussion in Part I of this report underscores the need for a development program which will provide increasingly productive work opportunities and incomes for Indonesia's presently underemployed and growing labor force and increase agriculture production, particularly of food crops. One of the majclr objectives of Repelita III is to increase employment through programs directed towards improving the incomes of the poor and their living standards. While several of these programs are likely to be suitable for Bank Group financing, it will be some time before they are ready for implementation. However, as part of this new focus, a small enterprise development project, designed to increase non-agricultural employment in rural areas and small towns, has already been approved by the Executive Directors. The proposed rural development project is another step in implementing these programs. With respect to agriculture development, projects are being prepared to further improve and expand research and extension services, rehabilitate and expand irrigation systems, help replant smallholder rubber and coconul plantations, assist in watershed management and village development, and develop presently underutilized land in areas outside Java for transmigrants and other smallholders. In addition to the family planning program, which continues to have high priority, other areas of particular importance for Bank Group assistance will be the improvement of urban services through construction of urban water supply systems and further expansion of neighborhood improvement programs, support for industrial financing and the improvement and expansion of higher education particularly of engineers, accountants and agriculture specialists, as well as primary and nonformal education. Finally, Bank Group financing continues to be important for the Government's program

12 - 8 - of infrastructure rehabilitation and expansion, particularly in transport and power, which will continue to require very large investments for many years before these facilities are adequate to support Indonesia's development. Compared to past lending activities, many of these projects and programs reflect the shift of emphasis in Government's development objectives from rehabilitation and expansion to a better balanced and more equitable and employment-oriented economic growth strategy. 21. Bank Group lending to Indonesia started in 1968 and between 1968 and 1974, all Bank Group lending to Indonesia was on IDA terms. Following the rapid increase in Indonesia's oil income which enabled Indonesia to borrow on less concessional terms, it was decided that all lending to Indonesia after June 30, 1974, would be on Bank terms. Since 1974, the Government has saved and invested almost all of the increase in its oil revenues and greatly expanded its development expenditures which reached about $6 billion in 1977/78. For reasons discussed in Part I above, and notwithstanding the November 1978 devaluation, both the budgetary and balance of payments situations may be difficult in the years ahead. Thus, while Indonesia has always qualified for assistance on concessional terms on grounds of its low per capita income and the quality of its economic management, such terms are now also necessary to enable it to maintain a high level of investment without impairing its ability to service its external debt. Accordingly, starting in FY78, a portion of Bank Group lending to Indonesia has again been provided on IDA terms. 22. Although overall project implementation performance in Indonesia is now about the average for the Bank, the Bank and the Government have become concerned in recent months about the level of disbursements which in the last year or so has shown a declining trend. Many of the problems seem to be attributable to cumbersome procedures for procurement and payment of contracts, including issuance of letters of credit. In other cases, project specific problems and unfamiliarity of some project executing agencies with procedures also cause difficulties. A number of steps have been taken by the Government and the Bank in an attempt to address these problems. In the last year, two Bank missions were sent to Indonesia to analyze and make recommendations for simplifying budgetary and financial procedures; the Government is now reviewing their reports. The Government and the Bank are holding regular joint review meetings in order to identify project specific as well as more general problems and to work out corrective measures. The first of these meetings was held in early March this year and the second in June on a number of general issues affecting project implementation and on some selected projects. During the IGGI meeting in April 1979 the Government announced several ameliorative measures designed to streamline the more complex budgetary and financial procedures which seem to affect implementation of almost all projects. Although, as a result of these initiatives an improvement in implementation performance is now anticipated, constant follow up in this area will be necessary in the coming months.

13 The proposed credit is the first lending operation presented to the Executive Directors this fiscal year. Projects for nucleus estates and smallholder development, irrigation and agricultural extension are expected to be rea,ly for presentation in the next several months. 14ajor Issues PART III -- THE AGRICULTURAL AIXD RURAL SECTOR 24. The major interrelated objectives of the programs in the agricultural and rural sector in Indonesia are to create productive employment opportunities, raise the incomes of the rural poor, increase domestic food supply to keep pace with rising demand, expand the production of agricultural exports, particularly smal'lholder tree crops, and ensure the productive, sustainable use of Indonesia's natural resources. This will necessarily involve complex and sometimes novel technical and organizational approaches, with the attendant risks that must be recognized and accepted if programs are to be developed to deal with Indonesia's problems on the requisite scale. The risks of action must bes weighed against the risks of inaction in the face of widespread poverty and underemployment, growing food import requirements, and ecological damage caused by deforestation and soil destructive cultivation practices. 25. Role and Performance. Agriculture's contribution to GDP and export has declined during the past 15 years from 55% to 33% and from 55% to 23%, respectively, but the rural sector remains of overwhelming importance to the vast majority of the Indonesian people in terms of employment, incomes and food production. Some 80% of the country's million people L1 live in rural areas, and agriculture employs about two thirds of the total labor force. Except for oil palm and tea, agriculture is dominated by smallholder production; there are some 14.4 million smallholders producing subsistence and cash crops on 14.2 million ha. There are also 1,800 estates covering 2.2 million ha producing mainly rubber, sugar, tea, palm oil and tobacco. The main products of the small farms are rice, corn, cassava, soybeans, fruits and vegetables, accounting for about 64% of total agricultural output. Other annual crops account for 10%; perennial crops, 4%; livestock, 7%; forestry, 11%; and fisheries, 4%; of total agricultural output. Over the past five years, the growth rate of agricultural production has been uneven, averaging 4% p.a., while total GDP grew at 8% p.a. Development Problems and Potential 26. In Java, where 82 million people live on 7% of Indonesia's total land area, all lowland and most of the better upland is totally utilized. Intense population pressures have increasingly forced small farmers and landless peasants to eke cut a meager existence by cropping marginal upland /1 Estimate for mid-1978 based on the Inter-Censal Population Survey of lmarch 1976.

14 areas and low potential, steep mountain slopes, dangerously exceeding safe ecological limits. About one third of Java's rural population is landless and a large proportion of the remainder cannot support themselves on incomes derived from their farms. Whereas several Government programs are directed toward increasing the productivity of lowland and irrigated agriculture, upland agriculture has received much less attention. In Java's upland areas, which constitute a significant proportion of croplands, poverty has worsened and will become more serious as widespread erosion further weakens the resource base, emphasizing the urgent need to develop a comprehensive program for erosion control and improved agricultural practices. 27. Employment. Perhaps the single most important challenge facing the Indonesian Government is to guide and structure the development process in such a way that the creation of new employment opportunities keeps pace with the growth of the labor force. Modernization in rural Java has led to labor-saving changes, so that farming is increasingly becoming a part-time activity. Modern manufacturing and services have not been able to absorb fully the incremental labor force. Successful locally administered public rural works programs (INPRES) may be difficult to expand due to limited budget and implementation capacity. The future employment strategy will emphasize labor-intensive export industries and small-scale rural enterprises producing for the domestic market. There may also be potential for more productive agricultural employment through increased cropping intensity and a shift to higher value crops and livestock, including fruits and vegetables grown on house compounds. 28. Food Crops. Despite impressive achievements in rice production, the past decade has seen a continuing decline in Indonesia's food self-sufficiency. Between 1968 and 1977, the composite trend growth rates of domestic food calorie production and availability were approximately 3.2% and 3.7%, respectively./1 These growth rates reflect a growing import-dependence on rice, sugar, wheat and recently coconut oil, as well as a reduction or disappearance of maize, cassava, meat and coconut product exports. After three years of declining growth rate in rice production due to a combination of poor weather and pest problems, 1978 has shown a large increase in output (over 10%), but import requirements in 1978/79, though much lower than in 1977/78, were still about 6% of total domestic consumption. 29. Comparison of plausible food supply and demand scenarios suggests the likelihood of increasing import requirements of basic foods and especially of rice, wheat, sugar, coconut oil and possibly maize. There is an urgent need for a comprehensive food production and consumption strategy. In the case of rice, with the substantial completion of irrigation rehabilitation, the recent shift in emphasis towards extension of irrigated areas and swamp drainage projects will probably somewhat reduce rice production growth rates, at least through However, the potential for increasing fertilizer and insecticide consumption and for improving the local performance of /1 The rice trend production growth rate was about 3.5% and the composite trend for the 5 main secondary staples (maize, cassava, peanuts, sweet potatoes, and soybeans) was 1.6%.

15 the most recent IRRI varieties, suggests that an annual rate of growth of rice product:ion of around 3.5% is nevertheless feasible through The recent devaluation has provided significant additional room for further rice producer price increases aimed at stimulating supply. 30. While slower growth in rice productivity is anticipated, a comparison of yields of secondary crops in a number of countries suggests that these crops offer considerable potential for raising Indonesia's domestic food self-sufficiency. With proper marketing and other support services, the rate of growth of secondary crop production could probably be raised from 1.7% to 3.5% p.a. A gradual shift in the overall food production and consumption pattern from rice to the secondary crops would assist low-income farmers in unirrigated areas and reduce the cost and risks associated with excessive rice import-dependency. 31. Tree Crops. The Government has begun a major effort to develop smallholder tree crops outside Java as part of its transmigration and national rulbber and coconut replanting programs. The objective is to improve production on existing blocks and develop large areas of new land for settlement. One of the Government's main approaches has been to use public estate companies to plant tree crops on land to be settled by local landless families and transmigrants. The estate companies provide a range of services for the smallholders, including planting material, land clearing and planting, inputs, processing and markelting facilities. This approach is appropriate in view of Indonesia's scarces managerial and technical capabilities. 32. Transmigration. Transmigration offers substantial opportunities for improving social equity and the economic use of Indonesia's two main underemployed resources: Javanese labor and land on the Other Islands. Transmigration has long been hampered by unrealistic expectations about its potential contribution to regional development and to the solution of Java's population problems. Further problems have arisen from organizational difficulties, overambitious targets and weak, uncoordinated implementation. These problems are now being addressed, and the Executive Directors recently approved a loan and credit for a major transmigration project to be located in Sumatera. The issues include the organizational aspects of transmigration, the design of farming systems, and the package of services which will support successful, long-term settlement. 33. Role of the Government. The Government capacity to plan and implement agricultural and rural development projects has generally improved over the past decade. However, future programs will necessarily be more complex than those which the Government has followed up to now. They will require closely coordinated programs of research, extension, inputs, credit, land development, transportation and marketing improvements, in addition to improvements in social infrastructure. The Government has initiated pilot multi-agency integrated area development programs and, complementary to these, has begun a process to decentralize planning, decision-making and project execution to the provincial and district levels. The more complex organizational requirements of these projects make it imperative that the Government provide for the strengthening of the Provincial Planning Boards

16 (BAPPEDAs) to improve their capability for planning, monitoring and coordinating such projects. Simultaneously, the executive capacity of the local line agencies must be reinforced. Greater accountability at the provincial and district levels and local participation in the various stages of development programs should improve the preparation and execution of projects. 34. Because of a wide variety of natural resources, together with population pressures and inadequate infrastructure, there are marked differences in living standards between different parts of the country. There are areas of extreme poverty with little prospect of improvement without Government intervention in the form of area oriented programs. Planning and implementation of such area programs could be more flexible in selecting an appropriate mix and scale of activities for specific areas and, at the same time, make greater use of technical and management resources of the provincial and district authorities. In 1974, the Government instituted an Area Development Program based on selected "critical" areas with special development problems. Thus far, ten areas have been identified, of which Yogyakarta is one. Selection criteria included high population density in relation to the resource base and low per capita income. Two pilot programs have already been initiated (in Aceh and Central Java provinces) with USAID support. The proposed project would be a third pilot effort to alleviate rural poverty in a specific area. On the basis of its evaluation of various project results, the Government expects to formulate large-scale development programs for other "critical" areas. 35. Bank Group Lending Strategy. There is general agreement between the Bank Group and the Government on the overall objectives and strategies proposed for the rural sector. While views sometimes differ on the relative emphasis to be given to different investments and on the technical design of some projects, these differences are not profound and are likely to be resolved with further analysis and dialogue. 36. The Bank Group has been, and should continue to be, involved in a broad range of agricultural and rural activities in Indonesia. Since the first irrigation project in 1968, the Bank Group has rapidly expanded its agricultural and rural lending to include support for estate and smallholder tree crops, fertilizer production and distribution, sugar estates, support services, transmigration, livestock and fisheries. Credits already closed and for which Project Completion Reports have been prepared (e.g., Estates I (155-IND) and Irrigation I (127-IND)) showed excellent rates of return ranging from 25% to 33%. Taking 1974 as the base year, by 1980 Bank Groupassisted projects will contribute almost 60% of the increase in palm oil output, about 16% of incremental sugar production and 6% of incremental rice and rubber output. Four continuing trends in the Bank Group's agricultural and rural development lending to Indonesia are: (a) a shift from rehabilitation to new development activities; (b) a shift from support of state enterprises to direct support of smallholders; (c) greater emphasis on development of the Other Islands; and (d) an increased emphasis on rainfed systems, especially "critical areas." In response to the Government's new initiatives to address the problems of "critical areas," the Bank Group's

17 lending strategy will include increased emphasis on assisting the Government to test and formulate policies and approaches for intensified development of Lhese areas through multi-agency integrated area cievelopment programs. All these trends are consistent with the Government's changing policies and reflect the emphasis of the T'hird Development Plan on equity objectives. Critical Areas 37. The poorest and most difficult of the critical areas are the uplands. Through its Greening Movement program and the more recent (1978/79) extension of BIMAS credit for mixed cropping on an experimental scale, the Government has initiated actions designed to stabilize and improve productivity of critical upland areas. However, results so far indicate that a more comprehensive approach is needed to secure farmers' effective participation. Furthermore, a major bottlenieck to the expansion of production in the uplands is likely to be a lack of proven technical packages suitable for extension in these fragile areas. The resources available to upland farmers are generally limited to their land, their labor, a few simple farming tools, and limited livestock; most have no access to capital or credit. Physical and social infrastructure such as roads and health services is minimal. The land, often steep and rocky, is generally composed of shallow and unproductive soils. The farming systems are characterized by an intricate mix of food and tree crops, vegetables, forest trees and fodder (mostly wild grasses and byproducts of other crops). The current production systems fully utilize the existing resource base and thus under present circumstances provide little or no basis for improvement - increasing one type of production necessarily reduces another. Moreover, the dynamics of the present system are adverse because widespread erosion is causing a progressive reduction in yields, bringing about a further strain on the resource base by compensatory overcropping by farmers in their at;tempt to secure an immediate redress to the decline in yields and income. 38. Soil conservation techniques are known, and there are promising prospects for introducing genetic improvements in food, fodder and tree crops as well as for improved cultural practices. However, these potential improvements will not be adopted or sustained unless they can be combined into an int:errelated group of actions designed to provide services and support alt:ernative employment; these measures would introduce enough slack into the system to allow the farmer to risk adopting fundamental changes in his pattern of subsistence production. The results of fragmented approaches have been clisappointing in easing the situation of the upland farmers. This is largely because they have failed to introduce any slack into the system; physical soil conservation works without measures to improve crop production are seen as an added labor burden without immediate results. Similarly, improvements in tree crops make no immediate contribution to income. The labor allocated to these tasks may well, from the farmers' point of view, detract from the more imperative work of subsistence crop production. Past experience has demonstrated that any technical solutions proposed must have the full support and partici pation of the community to be effective, and that explicit measures are needed to ensure local participation in decisions about the immediate community's development.

18 Indications are that the introduction of a less destructive and more productive farming pattern would imply a higher labor requirement than the present production system, and therefore it is crucial to increase labor productivity. Thus, supportive interventions are required. For example, improved roads would significantly reduce the time spent on porterage; likewise improved accessibility to water supplies would free a substantial amount of labor presently spent in water collection. Improved health services would improve labor productivity and turnout by lessening morbidity. Incomes derived from the typical small landholdings in the project area are usually insufficient to meet basic nutritional needs, and during the slack periods people may turn to cottage industries or other nonfarm employment throughout the towns and cities of Java. Many engage in such agro-related activities as wood gathering and tapping of coconut trees for sugar. Nonfarm rural production is poorly developed and the value of manufacturing in some areas has shrunk in recent years, possibly in part because of an influx of cheap, mass-fabricated goods. Fundamental to the improvement of the performance of this sector are interventions designed to increase capital formation, improve worker and management skills and levels of technology, and to develop new markets. These basic steps, taken in tandem with measures to stabilize and optimize the land resource base and improve agricultural productivity, would introduce an element of greater flexibility and more options for the poorest of the rural population. PART IV - THE PROJECT 40. The proposed project was prepared by the Provincial Development Planning Board (BAPPEDA) of Yogyakarta under the direction of the National Development Planning Agency (BAPPENAS), with outside consultant assistance from the University of Gadjah Mada and international specialists. The project was appraised in June and November The Staff Appraisal Report (No IND) is being distributed separately. Supplementary project data are provided in Annex III. Negotiations were held in Washington from May 7 to 11, 1979 with an Indonesian delegation led by Mr. Radinal Moochtar, Director General of Urban and Regional Development, Ministry of Public Works. The Project Area 41. The proposed project area comprises the two poorest districts, Gunung Kidul and Kulon Progo, in the Special Province of Yogyakarta, which is one of the most impoverished in Indonesia. It covers an area of 3,200 sq km and has an estimated population of 2.65 million (1977), 80% of whom live in the rural areas. The average man/land ratio is 1,033 persons per sq km of net cultivable land. Per capita income in the province in 1978 was about one third

19 of the national average. These two districts are particularly poor, with an annual per capita income estimated at $60./1 The upland areas of both districts have moderate to steep slopes and terracing efforts in these areas have so far been inefiective. Erosion has taken a particularly heavy toll in Gunung Kidul where soils are shallower. Dryland farming is of key importance in Gunung Kidul, representing about 75% of the cropland area, with homegardens covering almost another 20%. The main dryland crops are cassava, maize, upland rice, and groundnuts, typically grown in mixed stands. Though single season cropping is characteristic of dryland cultivation, there are, in some areas, second plant-ings of groundnuts and soy beans, primarily for sale. In Kulon Progo, home gardens account for over 50% of farmland, with the remainder divided equally between irrigated and dry rice. Project Strategy 42. The project would constitute a first, and essentially experimental, phase of a longer-term deve:lopment program designed to increase rural incomes and to improve living conditions in Yogyakarta. Project components would focus on alleviating key developmental constraints. The most fundamental of these bottlenecks are soil erosion and the absence of appropriate agricultural packages. The project's agricultural components, therefore, focus first on stabilizing the land base, and second on developing improved technological packages. The project would also promote other economic activities, including fisheries, livestock production, and small-scale enterprises. The project would comrlement and reinforce existing Government programs, several of which are supported by Bank Group-financed projects, e.g., National Food Crop Extension (1267-IND), Agricultural Research and Extension I (1179-IND), Nutrition Development (1373-IND), Fertilizer Distribution (1139-IND) and Fourth Education (1237-IND). Finally, the project would address key economic and social infrastructural constraints, including rural roads, health services and safe drinking water. 43. In order to ensure its replicability, the project would be executed by local (provincial and district) authorities through existing management procedures and organizational structures. The aim is to strengthen and improve implementation capacity at the local level and to improve the capacity of the local authorities to coordinate existing and new activities. The components would be implemented flexibly, at a pace consistent with the capacities of the responsible agencies. 44. Many project activities, particularly the agricultural components, are experilmental in nature. During the first three years, agricultural activities would, therefore, be confined to three pilot areas, comprising about 3,650 ha. They would only be extended to additional areas following an evaluation to be carried out in consultation with the Association (Section 3.03(c) oi- the draft Development Credit Agreement). When refined, these approaches would be potentially applicable to the 400,000 ha of similarly endangered uplands in eastern and central Java. /1 The absolute poverty level for Indonesia in 1978 was $78.

20 Other non-agricultural components combine experimental approaches with existing technologies. A survey to determine the optimum strategy for long-term, small-scale enterprise development would be supported, and at the same time immediate credit would be made available through existing facilities. The rural health component would build on the proven success of a small-scale volunteer health promoter system, used elsewhere in Java. The village water supply component would expand a UNICEF pilot program for construction of low-cost, roof rainwater catchment tanks. The rural roads component would introduce new techniques for constructing and maintaining low-cost, labor-intensive, all-weather gravel roads. The project would also introduce community participation training for project staff and project participants which is designed to overcome the social and cultural constraints often encountered in rural development projects. Finally, the project would strengthen the capabilities of the Provincial Planning Board (BAPPEDA) to coordinate the project activities of the various participating agencies, to monitor the project through the development of management information systems and to plan and prepare future projects. Project Composition 46. Specifically, the project would include the following activities. Total baseline costs are indicated in parentheses: (a) Agricultural Development ($5.1 million): (i) Technical Development: development of programs for the preservation and optimum use of 3,650 ha of erosion-endangered uplands, over a three year period, to be expanded by 4,000 ha after a positive evaluation of these programs, comprising: (a) soil conservation, including dryland terracing, reforestation, and the development of silvipasture; (b) improvement of cropping practices for food crops and homegardens; and (c) specialized pre-service, in-service and on-the-job training for agricultural project staff; (ii) Inland Fisheries: construction of two new fish hatcheries and rehabilitation of two existing ones, and strengthening of the fisheries extension service through training; and (iii) Livestock: the establishment of four new artificial insemination subposts, development of extension packages to control disease and parasite infestation; and upgrading of an existing livestock market.

21 (b) Non-Farm Developmant ($1.6 million): (i) Small-Scale Fnterprises: the establishment of a technical group which would analyze and make recommendations for resolving the problems currently constraining the growth of the small-scale ienterprise sector in Yogyakarta Province; and (ii) Incremental Credit: provision of loans to small-scale entrepreneurs through village branches of Bank Rakyat Indonesia (BRI), and training of BRI staff in the handling of small-scale enterprise loans. (c) Social Services Support ($1.4 million): (i) Health: provision for training about 3,200 volunteer workers in preventive and primary health care and supplying them with basic drugs and equipment, as well as teaching about 1,500 elementary school teachers to teach health and nutrition subjects effectively; and (ii) Rural Water Supplies: the provision of convenient and safe drinking water to about 75,000 people through the construction of about 5,000 roof rainwater catchment tanks in critically water-short areas. (d) Rural Roads ($1.8 million): a demonstration road improvement program designed to upgrade about 215 km of selected village roads, utilizing low-cost design and construction techniques emphasizing labor-intensive methods. (e) Institutional Development ($1.4 million): (i) Project Organization and Coordination: the improvement of provincial planning, coordination, monitoring, evaluation, and project preparation capability by strengthening the Provincial Planning Board (BAPPEDA) through the provision of additional staff and training; and (ii) Community Participation: the provision of training in community development skills for project staff and participants, and the establishment of a small hamlet development fund for 300 selected hamlets in the project area to test the effectiveness of direct funding of locally initiated development activities. Interrelationship of Proposed Project Activities 47. The large number of proposed project components reflects the complexity of the upland farming systems, and the need to introduce simultaneously a wide rang,s of supportive measures if the incomes of poor farmers of the region are to be increased. The agricultural subcomponents include soil conservation works to stabillize land selected for annual cropping. Risers and banks will be planted with fodder and tree crops as part of the stabili-

22 zation works, and food crop trials would develop improved cultivation and cultural practices on the stabilized terraces. Reforestation, silvipasture and tree crops would replace soil-destructive annual cropping systems on the steeper slopes, requiring development of tree nurseries, improved fodder production, and cattle fattening packages. Animal health measures would complement the fodder production and cattle fattening activities and artificial insemination would result in the genetic improvement of the local herd. Home garden improvement works would increase the productivity of commercial crops such as coconuts, cloves, fruits, etc., and improve nutrition levels. The fisheries activities would allow farmers to maximize the use of available water supplies and provide additional protein. 48. The rural roads component would significantly improve accessibility to the upland areas allowing free movement of both inputs and outputs. The improved roads would also stimulate seasonal employment, increase homecraft activities, and reduce the time spent in porterage which could be redirected to soil conservation and other farm improvement works. Wages earned by local people engaged in building public roads would provide substantial additional income. The water supply component would contribute to better health by reducing the incidence of intestinal disorders and relieve family farm labor of the time-consuming task of water collection. The health component would increase labor availability for productive employment by reducing the incidence of morbidity. Finally, the small-scale enterprise support component would potentially reduce the dependence of the local population on the ecologically fragile land resource and hence complement other agricultural and soil conservation activities. Project Organization, Coordination and Implementation 49. The project would be implemented by existing provincial line agencies and coordinated by the Provincial Planning Board (BAPPEDA) under the overall authority of the Governor of Yogyakarta Province. Implementation of the various components will be the responsibility of full-time managers, who would be senior officials appointed by the Governor upon the advice of the heads of the participating line agencies. BAPPEDA would be responsible for project coordination and, in collaboration with participating agencies, for preparing quarterly progress reports, the annual work programs and budgets for the project, and presenting these to the Governor for approval. Copies of the annual work programs would be forwarded to the Association for its review. The chief of the Evaluation and Coordination Division of BAPPEDA would be the project coordinator. Interagency coordination would be accomplished by periodic meetings (at least quarterly), under the Chairman of BAPPEDA, of the component managers, the district heads of Gunung Kidul and Kulon Progo, the project coordinator and other persons as needed, to review and discuss implementation matters. In addition, a project coordination unit would be established in BAPPEDA's Evaluation and Coordination Division which would establish day-to-day relations with the component managers and their service heads. The unit would be composed of support staff in accounting, procurement, budgeting, monitoring and evaluation, and would be responsible for monitoring project activities and expenditures, providing data on project progress, handling procurement under local and international competitive

23 bidding, evaluating selected activities of the project, and coordinating follow-up project preparation. The establishment of the project coordination unit and appointment of its key senior staff of project coordinator, financial officer and budget officer, would be a condition of credit effectiveness (Section 5.Cl of the draft Development Credit Agreement). 50. Project components would be implemented as follows: (a) a Technical Development Cell within the Provincial Agricultural Service would be responsible for implementing the agronomic trials and pilot programs in soil conservation and irrigation, and the reforestation/silvipasture and home garden improvement components; (b) the Provincial Fisheries Service would be the executive authority for the inland fisheries component; (c) the Provincial Livestock Service would be responsible for the livestock component; (d) tlhe Provincial Industries Service would have overall responsibility for coordilnating the activities of the small-scale enterprise component. A Technical Cell within the Service would uadertake survey, planning and extension work. A Small-Scale Enterprise Promotion Committee consisting of the heads of the participating agencies would be established to ensure the internal coordination of th:is component; (e) the Provincial Hea:Lth Service would be the executive authority for the health and water supplies components. Contracts for physical implementation of the health extension subcomponent would be entered into with the Gadjah Mada University Comprehensive Community Health Care Department and, it is expected, with DIAN DESA, a private nonprofit Indonesian technology group for rural water supply; (f) the District Public Works Services in Gunung Kidul and Kulon Progo would be responsible for their respective rural roads components; and (g) the Provincial Directorate of Rural Development would have administrative responsibility for the development participation component and, it is expected, would enter into a contract with 'Yayasan Indonesia Sejahtera (YIS - a private nonprofit Indonesian community group) to implement the component. 51. The appointment of a component manager would be a condition of disbursement for each component (Schedule 1, para. 4 of the draft Development Credit Agreement). Other disbursement conditions would be the establishment and key staffing of the Technical Cells for the agricultural and small-scale enterprise components (Schedule 1 paras. 4(b) and (c) of the draft Development Credit Agreement) and the conclusion of the contracts by the Provincial

24 Health Service, for the health and water supplies component, and Provincial Directorate of Rural Development, for the development participation component (Schedule 1 paras. 4(d), (e) and (g) of the draft Developmetnt Credit Agreement). Assurances were obtained during negotiations that: the Government would provide staff for key posts by specified dates which have been agreed (Schedule 2 of the draft Development Credit Agreement) and would provide the Association with plans and procedures for ensuring the maintenance of soil conservation and road works carried out under the project by April 1, 1982 (Schedule 2, Sections A.l(d) and C.3 of the draft Development Credit Agreement). Project Costs 52. Total project costs are estimated at $19.0 million, net of taxes, of which $2.7 million is the foreign exchange component. Physical contingencies of 20% have been applied to the rural road construction costs; 10% to all other construction costs; and 5% to vehicle procurement costs. Local baseline costs, estimated as of November 1978, are exceptionally low in US dollar terms, following the 50% rupiah devaluation in November However, domestic inflation is expected to be substantial during the early part of the project, and price contingencies need to be higher than usual. Total price contingencies are thus 65% of the baseline costs, assuming the following rates of price increase: local costs at 30% in 1979, 20% in 1980, 15% in , and 10% thereafter; and foreign costs at 7% annually. The direct costs of foreign consultants (salaries, overseas allowance and company overhead and fee) amount to $5,600 per man-month for long-term consultants and $6,400 per man-month for short-term consultants; indirect costs (travel, housing, office and miscellaneous expenses) would bring the total costs to $7,000 and $8,000 per man-month, respectively. Total costs of local consultants would be about $650 per man-month. Financing Arrangements 53. The proposed credit of $12 million would finance 63% of total project costs. It would cover the full foreign exchange costs ($2.7 million) and local costs ($9.3 million). Financing of local costs is considered justified because this high priority project has a relatively low foreign exchange component and due to the heavy demands on public resources (para. 17). The Government would provide the remaining Rp 4,360 million ($7.0 million). Project beneficiaries would contribute in varying proportions to the cost of on-farm development. These contributions would all be in kind and, therefore, have not been included in the project cost estimates. Procurement and Disbursements 54. Contracts for vehicles and equipment purchases would be grouped wherever possible in packages of $100,000 or more (totalling $1.0 million including contingencies) and awarded under international competitive bidding procedures in accordance with Bank Group Guidelines. A preference equal to 15% of the c.i.f. cost or the customs duty, whichever is lower, would be

25 extended to qualified local manufacturers in the evaluation of bids. Contracts for not more than eight vehicles for start up purposes would be awarded on the basis of the Borrower's normal procedures. Contracts for purchases wihich cannot be bu:lked in packages of $100,000 or more and which are not suitable for internallional competitive bidding would be awarded on the basis of the normal Government procedures, which are satisfactory; the aggregate amount of such contracts would not exceed US$0.5 million equivalent. All bidding documents for vehicles and equipment estimated to cost $100,000 or more and for studies costing $15,000 or more would be submitted to the Association for approval before bidding and award. 55. Contracts for building construction and rehabilitation of existing buildings are considered to be too small to be of interest to international contractors. These works would be carried out following competitive bidding, advertised locally. Construction of rural roads would be carried out by village labor on force account. 56. Ihe proposed credit would be disbursed as follows: (a) 100% of foreign expenditures for directly imported vehicles and Equipment; (b) 100% of the ex-factory cost for locally manufactured equipment proc:ured under international competitive bidding; (c) 100% of total expenditures for consultant services and 100% of i-oreign expenditures for training; (d) 40% of costs of locally procured vehicles not purchased under :international competitive bidding; and (e) 7'0% of all other eligible project items, excluding credit. Disbursement applications fcor expenditures under categories (a) through (d) will be fu:lly documented; disbursement for expenditures under (e) would be against statements of expenditure by BAPPEDA, with the supporting documentation being available for review by supervision missions. Credit requirements are included in the project costs to ensure their timely provision, but not in its financing since funds are available to increase allocations to BRI. Cost Recovery 57. Given the experimental nature of the project and the poverty of the target group, an initially low level of cost recovery is to be expected. Except for the terracing component in which farmers would contribute 40% of establishment costs, all incremental capital costs will be financed by the Government. This level of contribution by project beneficiaries is acceptable because their per capita incomes would remain below the critical consumption level, for rura:l Java, of Rp 48,000 throughout the life of the project. However, the Government's incremental fiscal burden after project completion would be low because most incremental operating costs would be borne by the project beneficiaries, who would produce the incremental

26 agricultural production, own and maintain the water tanks, become the volunteers who would staff the health component, and contribute voluntary labor for maintenance of the roads. It is expected that levels of cost recovery would increase over time. Benefits and Justification 58. The project would test and extend a number of experimental approaches to rural development designed to reduce the extreme poverty which now exists in the two poorest districts of Yogyakarta. The agricultural component would: (a) test the viability of agronomic and hill-farming techniques developed in the FAO-assisted Upper Solo Watershed Project; (b) develop a basis for protecting thousands of hectares of agricultural land presently threatened by serious erosion throughout Java; and (c) help to reduce severe siltage of downstream irrigation works in the Yogyakarta area. Local participation in the project is intended to ensure the success of the innovative technical measures. The health component would contribute to improving rural health conditions, reaching as many as 400,000 people, at an estimated annual cost of $0.30 per capita. The village water supply program would provide potable water for about 75,000 people in the drought area of the Gunung Kidul district at an average annual cost of $0.50 per beneficiary. The village road component would introduce and demonstrate labor-intensive gravel road construction technology and strengthen the district Public Works Department's capability to improve the technical standards and maintenance of rural roads. The small-scale enterprise component would initiate a system of technical assistance for small-scale entrepreneurs and improve their access to credit. The project's management and coordination system would introduce financial procedures and a planning, monitoring, and evaluation system, designed to increase the effectiveness of Yogyakarta's provincial development programs. 59. The major long-term benefit of the project will be the identification of relevant developmental packages which could be replicated throughout the country. For example, even in the two project districts, agricultural components could be expanded to cover an estimated 70,000 ha of land which would otherwise be severely damaged through erosion over the next years. The health system could eventually be used throughout rural Java. The rural road construction and maintenance management system could reduce the current rapid rate of deterioration in rural roads built under village self-help programs - approximately 2,000 km in the two districts. 60. More immediate economic benefits include: first, the substitution of productive on-farm employment for marginal activities for 1,000 families in Gunung Kidul and 1,600 families in Kulon Progo; second, the road construction and village water supply components will provide approximately 400,000 person-days of temporary employment per year during the life of the project; third, the fisheries component would create a permanent source of protein by providing an estimated 470 tons of incremental fish production per annum at full development; and fourth, the increased availability of foodstuffs from food crop and home garden improvement. Given the experimental nature of the project components, no overall economic rate of return has been calculated. However, the economic rates of return are estimated at 13% for silvipasture, 14% for terracing, and 11% for the rural roads component. This last figure

27 understates the net benefits of the roads component because the value added of induced production has not been quantified. Risks 61. Sensitivity analysis was used to deterrine how much negative deviation from appraisal estimates in respect of critical variables is permissible before the economic basis for the project is undermined. With the critical rate of return taken as 10%, results indicate considerable sensitivity to shortfall in project benefits (road-user savings or crop yields and prices), w:lth permaissible shortfalls varying from 10% to 20%, while on the cost side the range is from 10% to 30%. The results underline the difficulty of initiating effective development programs in such marginal areas. They also indicate that the proposed approach, involving an experimental and small-scale first phase, is fully appropriate in the light of the evident risk and uncertainties. In general, the realization of benefits will depend on the pace of farmer acceptance of the new technologies, the degree of coordination at the provincilal level, and the efficiency of the local authorities in implementing the project. Considerable attention has been given to minimizing these risks in the detailed project design. First, flexibility in project design would allow adjustments to be made during project implementation. Second, the emphasis on local participation would intensify the involvement of beneficiaries in project implementation and thereby increase the probability of project success. Third, close monitoring and evaluation will be an additional safeguard. 62. rhe project represents a modest but critical effort to improve living conditions in some of the poorest regions in Indonesia. WJhile small in scale, the project promises to help resolve one of the most difficult development issues on the island of Java, viz. how to halt the cumulative deterioration of the meager resource base in crowded upland areas. Environmental Impact 63. The project would have a positive environmental imdpact in the two districts. Reforestation and soil conservation wiould arrest soil erosion and the rapid deterioration of soil fertility in the areas selected for treatment. The project would closely monitor and measure this impact. PART V - LEGAL INSTRUMEN4TS AND AUT-HORITY 64. The draft Development Credit Agreement between the Republic of Indonesia and the Association and the recommendation of the Committee provided for under Article V, Section l(d) of the Articles of Agreement of the Association are being distributed to the Executive Directors separately.

28 Special conditions of the project are listed in Section III of Annex III. The establishment of the Project Coordination Unit and its staffing by the project coordinator, financial officer and budget officer, would be a condition of credit effectiveness. 66. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 67. I recommend that the Executive Directors approve the proposed development credit. Robert S. McNamara President Attachments June 29, 1979 Washington, D.C.

29 ANNEX I Page 1 of 5 INDONESIA - SOCIAL INDICATORS DATA SHEET REFERENCE GROUPS (ADJUSTED AVERAGES INDONESIA LAND AREA (THOUSAND SQ. KM.) - MOST RECENT ESTIMATE) TOTAL SAME SAME NEXT HIGHER AGRICULTURjIL MOST RECENT GEOGRAPHIC INCOME INCOME 1960 Lb /b ESTIMATE /b REGION /c GROUP /d GROLP /e GNP PER CAPITA (US$) ENERGY CONSUliPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) POPULATION AND VITAL STATISTICS TOTAL POPU_ATION. MID-YEAR (-II LLIONS) URBAN POPULATION (PERCENT OF TOTAL) POPULATION DENSITY PER SQ. KM PER SQ. KM. AGRICULTURAL LAND POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS /f YRS Tf YRS. AND ABOVE 2.6 /f PO.'ULATIQN GROWTH RATE (PERCENT) TOTAL JRBAN 3.7 IR CRUDE BIRIH RATE (PER THOUSAND) CRUDE DEAIH RATE (PER THOUSAND) GROSS REPRODUCTION RATE FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) USERS (PERCENT OF MARRIED WOMEN) FPOD AND NUT RITION INDEX OF OOD PRODUCTION PER CAP1:TA ( ) PER CAPITA SUPPLY OF CALORIE!S (PERCENT OP REQUtitEMENTS) PROTEINS (GRAMS PER DAY) OF WlltCH ANIMAL AND PULSE 15.0 /h CHlILD (ACrES 1-4) MORTALITY RATE HEALTH LtFE EzxPE-TANCY AT BIRTH (YEARS) INFANT MORTALITY RATE (PER THOUSAND) /f.i ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL URBAN RURAL * ACCESS TO ElCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL URBAN RURAL POPULATICN PER PHYSICIAN /i POPULATION PER NURSING PERSON /i /i POPULATICN PER HOSPITAL BED TOTAL URBAN RURAL ADMISSIObS PER HOSPITAL BED HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL URBAN RURAL AVERAGE NUMBER OF PERSONS PER ROOM TOTAL URBAN RURAL ACCESS TO ELECTRICITY (PERCENT OF DWELL]NGS) RTALN R.. AL **

30 ANNEX I Page 2 of 5 INDONESiA - SOCIAL INDICATORS DATA SHEET REFERENCE GROUPS (ADJUSTED AVERAGES INDONESIA /a - MOST RECENT ESTIMATE) SAME SAME NEXT HIGHER MOST RECENT GEOGRAPHIC INCOME INCOME 1960 /b 1970 /b ESTImATE /b REGION /c GROUP /d GROUP Ie EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL FEIALE SECONDARY: TOTAL FENALE VOCATIONAL (PERCENT OF SECONDARY) PUPIL-TEACHER RATIO PRIMARY SECONDARY ADULT LITERACY RATE (PERCENT) 47.0 /k /k CONSUMPT ION PASSENGER CARS PER THOUSAND POPULATION RADIO RECEIVERS PER THOUSAND POPULATION 7.0 * TV RECEIVERS PER THOUSAND POPULATION * NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION CINEMtA ANNUAL ATTENDANCE PER CAPITA EMPLOYMENT TOTAL LABOR FORCE (THOUSANDS) /1 FEMALE (PERCENT) G AGRICULTURE (PERCENT) INDUSTRY (PERCENT) PARTICIPATION RATE (PERCENT) TOTAL MALE FEMALE ECONOMIC DEPENDENCY RATIO INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS /m HIGHEST 20 PERCENT OF HOUSEHOLDS /m LOWEST 20 PERCENT OF HOUSEHOLDS /m LOWEST 40 PERCENT OF HOUSEHOLDS /m POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN RURAL ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN RURAL ESTIMATED POPULATION BELOW POVERTY INCOME LEVEL (PERCENT) URBAN RURAL Not available Not applicable. NOTES /a The adjusted group averages for each indicator are population-weighted geometric means, excluding the extreme values of the indicator and the most populated country in each group. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1973 and /c East Asia & Pacific; /d Low Income ($280 or less per capita 1976); /e Lower Middle Income (S per capita, 1976); /f Excludes W. Irian; /R ; /h ; /i 1962; Li Including midwives; /k Aged 10 years and over; /1 Excludes rural areas in East Nusa Tenggara, Maluku and Irian Jays; 7m Income recipients. September 1978

31 -27- ~~~~~AMlEX I 27 - ~~~~~~Page 3 of 5 DEtCINITIONS OF hoc!it. INDltCATORS Noe: '.-gh re data ore drawn from sorces generally judged rho most authoritativ.eand riai.it should also he noted char then may not he internationall1 comparable.nes of the lack of standardi.edefinitions and concepts used ho different contries in colleting the data. The data are. eunetheless. usefi'l to describe orders ci nagnito~de, indicats trends, sod characterize certain rajor differences hetween co-ntriec. The adu:a roup -vsragea far each indicator are popu Lation--righted geometric mn-o eccluding the no-on -oi es of the indicator and the mast popoiated.ooncr in oc grouf. Coosrof countrien am,ong the indicators depends or a..eil,hllit- of dr :d is -v: uniform. flo to lack of data, g,roop aerge r CapItsi osl- - I fop-rteos and indinatorn of uccean to cater ond e-oret. lmcp-oa. hvu-ing. -n-e distribution and p-nert are aml _euaiu-.e ic¾crd eec'neci: eans without the o-l-in- of entreno nalues. LAND_AR~EA -c ucod sin. Em) Peculation per hospital bed -total, orhan, and ral-population (total. Total - curfsce- area comprising land area cod inland waters. orban, and rura) divded ny their respective number of hospital beda Aaric 1L.-c.e - hoot recen.t ectim,ate of agricultural area used temporarily availah in puhlic and private general and Speclalioed hospital and noopermanently. for c-ops, castures. market and kitchen. gardens or to habilitation center.- Hospitals are estahllshmer emmetty afe y -lie -1ilow. at lean.t one physician. Establiohrects P-ovid-cg prlocipalily custodial GNP' PER CAPITA ( j-cpprcptatiaaatcretmcepiescarntersou caasenortncludod. Rural h-pyttais. ho,--a, include health and -cdiper.naentlo ecaffed by a physicion (hut hy a medical asca1co1uced by Same crariomethod aso World Bank Atlas ( hoots); siotenc, nus,midwife, etc.) which fifer ic-patient ac iood tlo end 1960, 1977, sod 1977 data. provide a limited range of medical facilities. Admissi,onsp2er hoanloit. bed - Total oceher of admissions to or discharges VtRPY CONhlyMTlOi PER CAPITA - Annual consumption. of romercia1 energy from hsitals divided by the numher cf beds. (coal and lignica, pet-uleum, naca-i gas aad bodro-, sunls.c and geotherma eecriit)in kilograms of coal equivalent per capita. HlOLIfiN Aversage shoe fhousekuid (nersoos per h,ous~ehold),- Itta, rban, cod rural- POPULtATIONc AND VITAL ilatistits A household' coosloto of a group of indinidu whtosha1re lining quarcers Tatal popolo-tion. nd-yeor (millions). As of July 1; if not available, averagse STEt1end-yeae estimates; 1960, 1970, and 197 dta aod their main nests. Abhoarder or lodger nay or may not be included in the bousehoid for Statistical purposes. Statistical definitions of houses- Urban population ( roeret of total) - Ratio of ranto totalpopulalion) different definitins of urban areas may affect comparshility hold nary. Average number of persons per room - total, urban, end rural - Average mumof dsat amangcountries, her of persons per room in all, urban, and rura occpied no---nenional Poultondnec Pe% o.bn,-mid[-year population per square kilometer (100 hectores) dwellings. reape:ccinely. Dwellings exclude non-permanent etroccures end..noccupiedperts of coel area. Access to electricity (percent of dwellings) - total, urban, and rural - per so. k.. agriculture lochd - Computed ma above for agriculturalsnd Conventional doellinga with electricity in. living quarters as perrantage only. of total, urban, and rural ducolliegs respectively. Pauaio g tructure )ps:rnt)- Children (0-14 years), corking-age (15-64 yeagrs),ad ratiree. (65 years and over) as Percentages of mid- EtDUCATION year population. Adjusted enrollment rotios Population growth rots foe,rceoc) oc,and _ urban - Compound annual Primary school - total, and female - Total and female enrollment of sil ages growth rates of totalcdurban mid-year populationo for 1950-go, at the primary level an percentages of respectively primary school-age lqt-0 and popolattons n; ormalily includes childre aged 6-11 years but adjusted for Crude hit harte (er thousisod) - Annual line bitbhs per thousand of differeor lengths of primary education; for countries with universal edoaid-year Popuain e-er rtmtcoeages ending in16cn ation enroilmant may anosed 100 percent Since some pupils are below or 1970 and in-ear aeaoending in 1975 for soart recent estimate. uhove the official school age. Crude dath rar (or thoous-di - Ann..sI deaths per thousand of mid- Secoodarn School - total. and femalo - Computed as above; secondary mduccyear Ppof,ultIn'l ten-year onitbametic averages eoing d in 1960 aid 197i tion requires at least tour years of epproned primary instruction; proand fine- year -vesug ending In 197) for most recent estimate. nides gemors v- ato1l or teacher training instructions for pupils lroes reprod uction rate - Average numher of daughters a woman will bear usua.lly of 12 to 17 years of age; cer-epnndeocs ocursee era generally is. her normal nepr-d-ctive period if she experiences present age- ecluded. specific fertility rates; usually five-year averages ending in 1961, 1970, and Voa Ioa enrollment )perrent of aecoodarn) - Voscaional institutions ineoain lude technical, industril. or other programs which operate Independently Family planning_- acceptors, annual (thousands)- Annual number of or as departments of Secondery institutions. acceptors of birth-control denictee undsr auspices of national family PuPil-teacher ratio - primary, and secondary - Totalfstudents enrolled in pelananin program. primarygand secondary levels divided by numbers of teachers in the corresfamly planeno -"uses (Percent of esreiad women) - Prertosotg of sponding levels.. married women of child-bearing age (15-44 years) who use birth-control Adult,,literery rate (percent)- Literate adults (able to read and writs) as danucas te oil -aco- Queen to sane age gr-'p. a p -onnga of tonal odult poyclacon aged 11 peers and over. iqc IOa c" A..fL..btl -neon nun`ic: uf per P--uooet cars yper th,ousuc c.clccc Pasuengor cars compciso motor cars nayica yrl.u;tcoec~ ~tcsl all cusc-dutiss soatlg lass ohan eight parsons; -olud-u anbulanoes, hearses and military Per iapt suppyof caiurl (p ernt of racuiremnets) -Coziputad from vhicles energy aqoinastorfn net food euppliss snailable -n country, yen capita. ai ran,.vesiouhsv...u.d io: Allctyposiof acaive.a fone radio per day. A'vailable supplies camprise done.atic prodaction, imyorta Iroadrasro es ; to gennralthpubluc per thousad f poplaton; exoludes unlicensed export., and changes in stock. Net oupplies eoclude anima:. Bead, seeds, receivers in cou ntr'ies.rd in years whe:n registration. cf radio sets was in 'uattls used in loud processing, and losses in distribution Re- effect; data fun recent years may not he coparable since mast countries quiremanta were.esc.naad hy PAD based on physiological needs for nor- aholinhed licensing. msl activity and ealuhb cosderingeniomta temperature, body TV receivers e huaduplco - 'V receivers for brosdcastccger oitbn, age and sa dietributions of population, and all-onic 10 par- public Pen th-unnd population;.s. ludes uioedtv re..einses is nou-- cent for wasteat housohtidilevel, tries end In years when registration of TV sets was in effect. Per capita upl of protein. (scams per day) - Potrein Content of per Niewspaper circulation (per thousand population) - Shows the average ciroulscapita net supply of fobs Par day. Net supply of food is defined as tico. of "daily general interest navapaper", defined as a periodical publiabove. 'Requirements for all countries established by USDA provide for ration denoted primarily to recording gsn. arl news. It is considered to a minimu allowance of hi grams of total protain per day and 20 grams be "dalvy' if it appearsalet four tines a seek. of animal sod pulse prot.in, of which 15 grams should be animal protsin. Cinema... asa oiedsnos tl oar carica teo year - Sse o the nuber of tickest These standards are Iover than those of 75 grams of total protein and sold during the year. including adnissione to drive-in cinemas and mobile, 23 grams of An imal.r.ce:.n a.se anvonsage for the eorld, proposed by urits. - P~~~AP in the Tbird World Poo.d Survey. Per ca!pitafprutain supply irron snima andulse -Proteio suoply of food EIPIOYhENT derivad from animals and pulses in grams per day. Total labor force (thousands) - feonos..iclly eccin- persons, including armed Child Caosa 1-4) mortality rata (par thousand) - Annual deetms per thoss- forces and unemployed but e-ldieg hueivs tudents, ecl. Defioiand In age, group 1-4 pes-s, to children in this aeg group. tions In vaniooa..o.ntries are not comparable. Fesale (percent)- Female labor force as Percentage of total labor force. HEALTH Acricu1ture (percent)- Labor force. in farming, forestry, hunting and fishing Life estectancy at birth (sears)- Anerage.number of years of life as percentage of total labo r force. rema ining at birth; usually five-year averages ending in noty(ecnl-lborfre in ricing, construction, manufacturing and and electricity, water and gao us percentage of total labor forcs. Infant M,ortalict rate (psr thoea.nd) -Annua deaths of infants under Participation. rate (percent)- total. male, end female - Total, male, and ons year of agetper thousand live bierht, female labor force as percentages of their respective populations. * Access tr safe waer (percint of populetion) - total, urban, and rural - These are ILO's adjusted partinipetion races reflecting age-see ~~~~Number ni people (total, urban, and rural) with reasonablea as tstructure of the population. ld long tins trend. safe corer eapply (incluas trceated surface waters or untreatehot EcnmcdRoec atio uti of population under 15 and 65 and onec to uc:t, taminated water morn so that from protected borsholes, springs, the labor force In ege e,crp of i-hi neersr. ard crtr -ell) as paro.tniges of their respactino populations. In an urbon area a public fountain or standyosi located not more INtfME DISTRIBiTiODN then 20fl caro from a house may be conaidered as being within raem- PercenItage of private tonone 'hct' In cuob and bind) received by richest 5 soneble osuuf that h-ous. In rural areas reasonable aicess woulid percen, richest 20 perecnt, pooros.t it percent, and poorest 40 percen.t imply ca.t the housewife or monhers of the household do not have to of households. spend a dlsyroportionate part of the day in fetching the family's water _cda. POVERTY TARGiT GROUPS kneessto enocrc- diso.sa. Itercent of nnulation) - rtotal, urban. and Etirnced absolute poverty income lenel (US$ oar capita) - urban and ruralrural - limber of people (totarl, urban, ndrural) sevs y eacreta Absolote preert'. Incore level Is that income level below which a minimal disposal an percentages of their respective populations, Excreta nutritionally odequate diet plus Sessetial coot-food requirements is not disposal no; include tho collection and disposal, sick on uthouafrdblt treatment, Of humor. ecretasnd waste-water by water-borne systems istimtre relt-e poverty income local Li5i net capita) - urbas end ruralor the 1..sa f pit privias and similar ilorullontons. Pnoslstion, ner phvioa. - Population divided by number of vracticing helutine poverty, income level is ccat income level less them one-third per capita personal Intos of rho -cntev. phy sic'ans quallifie iron a vedial achool an unicority level. Eott,oated Ponulatier hale ppv-erc 1o.e eel )Dercentl- urbam and rural- Ppltion par narsina' arsoo - Populatiun dicided by numher of Percent of ppulaoine r,rr aod -rarl) who are either 'absolute poor' or prciig mae an,.d female graduate ouroms, cractca1 -armes, and "relativ peo... tcooru assistant turoen rzononoc and Social Da.ta Division cton A-.f b Syis ant Projections Department

32 -28- ANNEX I Page 4 of 5 ECONOMIC INDICATORS GROSS NATIONAL PRODUCT IN 1977 ANNUAL RATE OF GRO,TH (%, constant prices) US$ Mln. % GNP at Market Prices 44, Gross Domestic Investment 8, Gross National Saving 8, Current Account Balance Exports of Goods, NFS 7, Imports of Goods, NFS 7, OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1976 Value Added Labor Force2 V. A. Per Worker US$ Mln. Mln. US $ W 3 Agriculture 11, Industry 12, , Services 13, Unallocated Total/Average loo.o ' loo O GOVERNMNT FINANCE CENTRAL GOVERNMENT (Rp. Billion) % of GDP 1976/ / , 1977 Current Receipts 2,877 3,535 ' Current Expenditure 1,610 2, Current Surplus 1,267 1,387 P Capital Expenditures 2,044 2, External Assistance (net) MONEY, CREDIT and PRICES l (billion Rp outstanding end period) Money and Quasi Money ,452 1,978 2,631 3,147 Bank credit to Public Sector , Bank Credit to Private Sector ,186 1,376 1,737 2,063 (Percentages or Index Numbers;) Money and Quasi M4oney as % of GDP General Price Index (1966 = 100) 807 1,028. 1,370 1,640 1,873 2,094 Annual percentage changes in: General Price Index Bank credit to Public Sector , Bank credit to Private Sector NOTE: All conversions to dollars in this table are at the average exchange rate prevailing during the period covered. 1/ Coniversion at an exchange rate of Rp US$1 -t Total labor force; unemployed are allocated to sector of their normal occupation. "Unallocated" consists mainly of unemployed wrkers seeking their first job. not available not applicable East Asia & Pacific Programs February 28, 1979

33 -29 - ANNEX I Page 5 of 5 TRADE PAYMENTS AND CAPITAL FWSG BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE ) (Provisional) US $ )nn % (Millions US $) Exports: 4, ,592 Oil 2, Oil (net) 2,921 3,56i' 4,243 Timber Non oil 1,817 2,216 3,349 Rubber Imports -5,533-6,3 52 -_7489 Palm Oil Resource Gap Tin Factor service: f6-828 Coffee Interest Investment Income All other commodities Balance on Current Account -1,257-8P.F - 7S= Total 5,=WF 100,0 Direct Foreign Investment EXTERNAL DEBT, DECEMBER Net MLT Borrowing Disbursements 2,395 2,327 1,988 US $ MISt Amortization Subtotal 2,073 1,702 1,162 Public Debt, incl. guatanteed 11,391 Capital Grants.- *- *- Non-Guaranteed Private Debt Other Capital (net) -2, Total outstanding & Disbursed Other items n.e.i TtIsbre Increase in Reserves (+) ,197 DEBT SERVICE RATIO for 197_ 1 - Gross Reserves (end year) 590 1,494 2,494 Net Reserves (end year) 490 1,226 2,423 Public Debt, incl. guaranteed 17.1 Non-Guaranteed Private Debt Fuel and Related Ms,terials Total outstanding & Disbursed Lnports of which: Petroleum Exports of which: Petroleum 2,921 3,567 4,243 IBRD/IDA LENDING,(April )(Million US $): IBRD IDA, - - RATE OF EXCHANGE 2/ Outstanding & Disbursed Throuih - Aug Since - 197:- Undisbursed 1, US $ 1.00 Rp 75 US $ 1.00 = Rp 415 Outstanding incl. Undisbursed 1, Rp 1000 US $2.67 pp 9V0O = US $2.41 1/ Ratio of Debt Service to Exports of Goods and Non-Factor Services, with oil exports on a net basis (i.e. excluding factor payments and imports of the oil companies). 2/ Since 11/15/78 USS Rp 625 Rp US$ 1.60 not available not applicable East Asia & Pacific Progr=m3 April 30, 1979

34 ANNEX II Page 1 of 20 pages THE STATUS OF BANK GROUP OPERATIONS IN INDONESIA A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of April 30, 1979) US$ million Loan/ Amount Credit Fiscal (less cancellations) Number Year Purpose Bank IDA Undisbursed One Loan and eighteen Credits fully disbursed Third Irrigation Rehabilitation Tea Second Highway Fourth Irrigation Rehabilitation Population Inter-Island Fleet Rehabilitation Fourth Agricultural Estates Beef Cattle Development North Sumatra Smallholder Development Third Education Third Highway West Java Thermal Power Smallholder and Private Estate Tea Sugar Industry Rehabilitation Pulo Gadung Industrial Estate Private Development Finance Co. of Indonesia (PDFCI) Fourth Technical Assistance Bali Tourism Fisheries Credit Jatiluhur Irrigation Extension Small Enterprise Development Project Rural Credit Polytechnic Railway Jakarta Urban Development Five Cities Water Supply Second Fertilizer Expansion Sixth Irrigation Fourth Power Fertilizer Distribution Agricultural Research & Extension National Resource Survey & Mapping Fourth Highway

35 -31- ANNEX II Page 2 of 20 pages US$ million Loan/ Amount Credit Fiscal (less cancellations) Number Year Purpose Bank IDA Undisbursed Fourth EducaLtion Second Shipping Third Fertilizer Expansion ,76 Fifth Power National Food Crops Extension Seventh Irrigation :77 Transmigration and Rural Development Second Urban Development Tanjung Priok Port Second Private Development Finance Co. of Indonesia (PDFCI-II') Sixth Power Nutrition Development Teacher Tra:ining-Fifth Education Eighth Irrigation Ninth Irrigation Development Finance Co. (BAPINDO III) Second Population Non-Formal Education Nucleus Estates and Smallholders I Seventh Power S Bukit Asam Coal Mlining and Transport Engineering Tenth Irrigation Eleventh Irrigation Nucleus Estates and Smallholders II Irrigation XII Third Urban. Development /a Total 1, ,452.8 of which has been, repaid Total now outstanding 1, Amount sold Total now held by Bank and IDA /b 1, Total undisbursed 1, ,452.8 /a Not yet effective. /b Prior to exchange adjustment.

36 ANNEX II Page 3 of 20 pages B. STATEMIENT OF IFC INVESTIENTS (as of April 30, 1979) Fiscal Type of US$ million Year Obligor business Loan Equity Total 1971 P.T. Semen Cibinong Cement P.T. Unitex Textiles P.T. Primatexco Indonesia Textiles P.T. Kabel Indonesia Cable P.T. Daralon Textile l4anuf. Corp. Textiles P.T. Jakarta Int. HIotel Tourism P.T. Semen Cibinong Cement P.T. Primatexco Indonesia Textiles P.T. Monsanto Pan Electronics P.T. PDFCI Devel. Fin. Co P.T. Kamaltex Textiles P.T. Semen Cibinong Cement P.T. Semen Cibinong Cement P.T. Daralon Textile Manuf. Corp. Textiles P.T. Kamaltex Textiles Total Less: sold or repaid and cancelled Total held by IFC Undisbursed (including participant's portion) - - -

37 ANNEX II Page 4 of 20 pages C. PROJECTS IN EXECUTION /1 These notes are arranged by sectors in the following order: Agricullture Pages Irrigation (Cr. 289, 514, Ln. 1100, 1268, 1434, 1435, 1578, 1579 and 1645) 5-6 Other Agriculture Production (Cr. 259, 319, 355, 358, 400, 405, 480, Ln. 1318, 1499 and 1604) 6-9 Agriculture Support Services (Ln and 1267) 9-10 Agro-Business and Credit (Cr. 785 and 827) 10 EducatiDn (Cr. 387, 869, Ln. 1237, 1433 and 1486) Energy (Cr. 399, 1127, 1259, 1365 and 1513) Industrial Development and Finance Fertilizer Production (LLn and 1254) 14 Industrial Estates (Cr. 428) 14 Development Finance Companies (Ln. 1437, Cr. 436 and Ln. 1363) 15 Coal Mining (Ln. S-9) 15 Population and Nutrition Population (Cr. 300 and Ln. 1472) Nutrition (Ln. 1373) 16 Technical Assistance (Cr. 451 and Ln. 1197) Transportation Fertilizer Distribution (Ln. 1139) 17 Highways (Ln. 1236) 17 Marine Transport (Cr. 318 and Ln. 1250) 18 Ports (Ln. 1337) 18 Railways (Ln. 1005) 18 Tourism (Cr. 479) 19 Urban D)evelopment (Ln. 1040, 1336 and 1653/2) Water Supply (Ln. 1049) 20 /1 These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution. /2 Not yet effective.

38 ANNEX IT Page 5 of 20 pages C. PROJECTS IN EXECUTION AGRICULTURE Irrigation Credit No. 289 Fourth Irrigation Rehabilitation: US$12.5 Million Credit or March 9, 1972; Effective Date: May 5, 1972; Closing Date: June 30, The construction program has escalated in cost by 150% over the appraisal estimate, due to an increase in the magnitude of the works and unexpected inflation. The project is expected to be completed shortly. Feasibility studies included in the project have been concluded and groundwater investigations are nearing completion. Credit No. 514 Jatiluhur Irrigation Extension: US$30 Million Credit of October 3, 1974; Effective Date: January 10, 1975; Closing Date: December 31, Initial organizational difficulties and late awarding of the first construction contract have caused a delay of about 2 years in the project schedule. The first construction activity started in February 1977 and contracts for over 70% of the project works have been let. Based on bid prices for the first contract and revised quantity estimates on the basis of detailed design, total project cost is now estimated to be about 140% over the appraisal estimate. Loan No Sixth irrigation: US$65 Million Loan of April 10, 1975; Effective Date: June 20, 1975; Closing Date: June 30, Good progress has been made on the rehabilitation works, but construction of new works is behind schedule because of delays in preparing contract documents. The two largest contracts have still not been let. Substantial cost overruns are anticipated due to unavoidable major changes in the design of the Sampean Baru dam and unit price increases in other components. These will be verified as bids are received for the major contracts. Loan No Seventh Irrigation: US$33 Million Loan of June 4, 1976; Effective Date: September 21, 1976; Closing Date: December 31, The implementing agencies have engaged the consultants. Construction is underway in the North Sadang and tertiary development areas, and studies being funded under the project are expected to be completed shortly. The mapping program is progressing satisfactorily. Disbursements are ahead of schedule.

39 ANNEX II Page 6 of 20 pages Loan No Eighth Irrigation: US$63.0 Million Loan of June 6, 1977; Effective Date: July 7, 1977; Closing Date: March 31, Disbursements are somewhat ahead of schedule, and the project is being implemented satisfactorily. Loan No Ninth Irrigation: US$35.0 Million Loan of June 6, 1977; 1977; Effective Date: July 7, 1977; Closing Date: December 31, While delays have arisen due to inadequate mapping in the Sungai Dareh-Sitiung area, the project is ahead of schedule and progressing satisfactorily. Some tender documents have been prepared and contracts are expected to be let this year. Disbursements are ahead of schedule. Loan No Tenth Irrigation: US$140 Million Loan of June 6, 1978; Effective Date: August 16, 1978; Closing Date: December 31, Initial delays in hiring consultants and in preparing tender documents are slipping the start of project construction behind the appraisal estimate. Loan No Eleventh Irrigation: US$31 Million Loan of June 6, 1978; Effective Date: August 16, 1978; Closing Date: December 31, A smooth start has been made on some components but two components are behind schedule due to unforeseen technical problems and delays in drawing up tender documents. Loan No Twelfth Irrigation: US$77 MIillion Loan of December 29, Effective Date: May 10, 1979; Closing Date: March 31, Consultant contracts are being finalized and a smooth start to project implementation is being made. The Loan has just been declared effective. Other Agrriculture Production Credit tno. 259 Tea: US$15 Million Credit of June 24, 1971; Effective Date: September 17, 1971; Closing Date: August 31, 1979 Nearly all the targets set at appraisal have been achieved one year ahead ol project completion, but factory capacity still has to be expanded

40 - 36- ANNEXII Page 7 of 20 pages to take account of the increased production which exceeds appraisal estby about 6,000 tons, or 30%. Financial, technical and managerial performance nas been excellent. Inflation and additional construction and equipment costs are expected to increase project costs by about 17% above appraisal estimate, but the economic rate of return is good and is expected to be over 20%. Credit No. 319 Fourth Agricultural Estates: US$11 Million Credit of june 28, 1972; Effective Date: January 30, 1973; Closing Date: June 30, Progress of the project continues to be good, with planting of rubber and oil palm ahead of appraisal estimates and in excellent condition. The project has been expanded to 15,000 ha (originally 11,400 ha). The remain'ng area to be planted is about 3,500 ha, of which 2,300 ha have been cleared and are ready for planting. Technical problems exist in processing and equipment maintenance, but construction of the oil palm mill will be accelerated and additional capacity for crumb rubber production will also be provided. Profitability and cost of development at PNP X are satisfactory, while the capital structure of PNP X is to be improved during the course of the Nucleus Estates and Smallholders I Project (Loan 1499-IND). PNP X is also participating in the Transmigration and Rural Development Project (Loan 1318-IND). Credit No. 355 Beef Cattle Developmant: US$3.6 Million Credit of January 31, 1973; Effective Date: May 30, 1973; Closing Date: September 30, Several problems seriously delayed project implementation. The Government's budget allocation was insufficient, and financial management and coordination were weak. Changes in the scope and design of the project, from one of breeding and fattening of beef catzle for export to that of productio.. of improved cattle for domestic sale as draft and breeding animals, were approved by tne Executive Directors in June The project was reviewed -n November 1977 and May 1978 and is now being implemented satisfactorily. CreciL No. 358 Nortn Sumatra Smallholder Development: US$5 Million Credit of February 14, 1973; Effective Date: August 13, 1973; Closing Date: December 31, 1981 Pro-ress continues to be satisfactory, and the expected program of liaancini rubb.er and oil palm by smallholders was accomplished at the end of 197'. Bv 5931, wr.en the project is completed, these plantings will have been brougrht to macur;rty. The Government has decided not to expand the project in -_ pies. -ocat-on because of tne extensive support already being given to North Sumatra Province through this and other Bank-supported projects;

41 ANNEX II Page 8 of 20 pages instead, the Government is seeking the Bank's assistance for smallholder development projects in other Provinces, including Aceh, Jambi, Riau, S. Sumatra, W. Yalimantan and S. Kalimantan. Credit No. 400 Smallholder and Private Estate Tea: US$7.8 Million Credit of June 22, 1973; Effective Date: November 30, 1973; Closing Date: March 31, Since smallholders and estates prefer a heavier concentration on replanting and less on rehabilitation, the mix had to be changed, thereby reducing the overall area from 13,200 ha to about 10,200 ha. Although production will not be affected, since yields from replanted tea are higher than from rehabilitated tea, costs will exceed appraisal estimates by about 77%, since replanting is more expensive than rehabilitation and costs have generally increased because of inflation. Delays were experienced in implementing the institutional framework for long-term lending, a new venture for Bank Rakyat Indonesia (BRI). Because of this, and difficulties in involving the private estates in the project, disbursements are behind appraisal estimates. A major review of the project is currently being undertaken by the Resident Staff in Indonesia. While the project has experienced difficulties, it is estimated that, because of the project-induced spin-off effects, an area at least equal in size to the project is being improved. Over 500 farmers' groups have been formed to improve tea production supported by a project training program presently involvinr nearly 4,000 farmers. These developments have been helped by a surge in tea prices (2-1/2 times appraisal estimates). Considerable investment in factory and field development is taking place outside the project, largely financed by short- and medium-term loans from BRI and by privtate investors. Credit No. 405 Sugar Industry Rehabilitation: ITS$50 Million Credit of June 26, 1973; Effective Date: April 22, 1974; Closing I)ate: December 31, The rehabililtation of two sugar factories and the construction of one new factory, financed by the Credit, have been completed on schedule and trial runs are taking place. The research part of the project is slow in materializing; the sugar research station still requires a major consultant input. The two PTPs involved in the rehabilitation process are both in a particularly weak financial position, and this problem requires attention. The Government has started an evaluation of the financial status of the industry, but progress of this study is slow. Credit No. 480 Fisheries Credit: US$6.5 Million Credit of June 14, 1974; Effective Date: Januarv 8, 1975; Closing Date: June 30, After sone initial delavs, the overall project is nowg about IR monthls behind schedule. Construction of shore facilities at Anbon is

42 ANNEX II Page 9 of 20 pages virtually completed. Boat construction is under way and all related equipment is on site, ready for installation. While the quality of fishpond lending has suffered some deficiencies in the past, remedial action taken by Bank Rakyat Indonesia is gradually improving the situation. Loan No Transmigration and Rural Development: US$30 Million Loan of July 21, 1976; Effective Date: March 30, 1977; Closing Date: December 31, Settlement and construction are lagging about a year behind appraisal estimates, partly because of the initial delay in project effectiveness and weak project organization and management. Nonetheless, 1,300 migrant families have been settled at Baturaja and are successfully growing food crops. Initial incomes are satisfactory in spite of inadequate fertilizer supplies and poor seed supply, although one third to one half originates from construction and rubber planting. These incomes are substantially above incomes the transmigrants received in Java. As evidence of the relative attraction of the Baturaja community, 485 spontaneous settlers have already been attracted to the site. In the existing settled area at Way Abung, there has been little improvement in incomes because fertilisers are not available on site and delayed road construction limits marketing of cash crops. Experience to date highlights the need for improving project management and ensuring that agricultural support services and input supply systems are in place as settlement proceeds. Loan No Nucleus Estates and Smallholder I: US$65.0 Mfillion Loan of November 18, 1977; Effective Date: January 12, 1978; Closing Date: June 30, The project's overall physical progress has been generally good but unequal. While in some areas the planting program substantially exceeded the target, in others it remained behind schedule, but recent:ly, energetic measures have been taken to make up for the delays. Housing, roads and village development is behind schedule but preparations are under way which should accelerate implementation in the forthcoming months. Loan No Nucleus Estate and Smallholder II: US$65.0 Million Loan of July 12, 1978; Effective Date: September 13, 1978; Closing Date: December 31, This loan has recently become effective. Agriculture Support Services Loan No Agricultural Research and Extension I: USS21.5 Million Loan of December 19, 1975; Effective Date: Februarv 23, 1976; Closing Date: December 31, Due to prolonged negotiations over selection and terms and conditions of employment of consultants, including architects and engineers, the

43 _ 39 AKNNEX I Page 10 of 20 pages project ir, about 18 months behina the appraisal implementation estimates. Design of all civil works has been completed, construction of extension information centers is progressing well and expected to be completed in FY79, and the Agency for Agricultural Research and Development (AARD) plans to let contracts for the remaining civil works shortly. At the present projected pace of implementation all components, except fellowships, could be completed by the Closing Date. Loan No National Food Crops Extension; US$22 Million Loan of June 4, 1976; Effective Date: September 21, 1976; Closing Date: June 30, Good progress is being made in the field and, despite organizational difficulties, an effective extension service is being created. Appointments of extension staff are ahead of schedule and the project directorate has been strengthened by the appointment of three additional Assistant Directors. Civil works have been resumed and, after recent approval of prefinancing requests for , the training program has been started. Disbursement is lagging in every category due to prefinancing difficulties and delays in submission of withdrawal applications with supporting documentation for equipment and furniture. The new procedure for prefinancing (outlined by the Finance Ministry in October 1978) is expected to help solve the problem and speed up project implementation and disbursement. AGRO-BUSINESS AND CREDIT Credit No. 785 Small Enterprise Development: US$40.0 Million Credit of April 7, 1978; Effective Date: August 17, 1978; Closing Date: December 31, This credit became effective on August 17, Despite start-up difficulties, Bank Indonesia (BI) is making good progress in revising lending procedures and establishing new lending approaches to serve the medium-term credit needs of small entrepreneurs. Training of BI and handling bank staff is progretssing and preparation for studies is on schedule. Credit Nc. 827 Rural Credit: US$3O.G Million Credit of June 23, 1978; Effective Date: November 3, 1978; Closing Date: March 31, This project provides long-term credit to about 40,000 smallholders, pririarily for fisheries, perennial crops and livestock, and technical asslstance to Bank Rakyat Indonesia (BRI) for program development, training, credit procedures and accounting and management information systems. BRI, the!mplementing agency, is in the process of evaluating proposals for pro]ect consultancy and preparing the lending program for the first year (April 1, 1979 to March 30, 1980).

44 ANNEX II Page 11 of 20 pages EDUCATION) Credit No. 387 Third Education: USS13.5 Million Credit of June 1, 1973; Effective Date: August 29, 1973; Closing Date: December 31, The project finances the production and distribution of 138 million primary school textbooks in four subjects, and related in-service training for 350,000 primary school teachers and 2,800 supervisory pdersonnel. About 90 million project books have been printed and 3,800 tutors and administrators and about 400,000 teachers (114% of the project target) have received training nation-wide. Despite the remarkable qujantitative achievements, problems of management, distribution, technology and pedagogy make the project less effective than it could be. The training program, although on schedule and making good progress, is out of phase with book production, which is almost one year behind schedule due to delays in paper procurement. Textbooks and teacher manuals would benefit fromt better design, organization and illtustrations, and their content is limited by the national curricula. In response to Bank proposals, the Government has started a major review of the project to focus on its relation to other ongoing Government textbook programs and overall future needs for production of instructional materials. Credit No. 869 Polytechnic: US$49.0 Million Credit of December 29, 1978; Effective Date: May 11, 1479; Closing Date: June 30, The project is designed to help the Government meet the demand for engineering technicians and trained accountants. It will introduce a new system (polytechnics) for training technicians at the diploma level by establishing a Technician Education Development Center and six polvtechnics in Java and Sunatera, and improving the quality of accountancy training by establishing four Accountancy Development Centers in existing universities. The two additional conditions for effectiveness: signing of contracts for architectural services and technical assistance have been met. The contract for technical assistance was signed with the selected technical assistance organization (Swiss Contact) on April 7, The Project Implementation Unit (PIU) has selected three architect firms who will each handle about one third of the work. The PTU signed the contracts on M,ay 6, The project was declared effective on May 11, Loan No Fourth Education: UJSS37 Million Loan of April 15, 1976; Effective Date: June 17, 1976: Closing Date: December 31, Initially, all three subprojects - undler the Mlinistry of Education (MOF), Ministrv of MTanpower (MOM), and National Institute of Administration (LAN) respectively - suffered an ei yht month delav clue to late signing of the Funds-in-Trust (FIT) Agreements with the UiN Agencies providing technical assistance, as well as contracts witlh the consultant architects. Further delays have occurred in the tendering and awarding of civil works contracts for the Manpower and LAN components. Overall, the project is aboout 1-1/2 vears behind schedule. About 70%,' of civil works, 4n0 of f urnitu-re, and lnn, of

45 ANNEX II Page 12 of 20 pages technical assistance have been contracted.. Tmplementation of the technical assistance programs of all subprojects is in line with the FIT Agreements. Overall, the MIinistry of Education and LAN components are going well, but the 'Ministry of Manpower has had difficulty in managing its diverse program of establishing 17 training centers. Delayed implementation may require postponement of the Closing Date by about six months. Loan No Teacher Training: US$19.0 Million Loan of June 6, 1977; Effective Date: July 7, 1977; Closing Date: June 30, Implementation of the project closely follows the appraisal schedule. The first and second phases of the program to train 160 Indonesian educators in ways to improve teacher training and develop new curricula have been carried out successfully. Curriculum development work is making good progress, production of learning material is under way, and the research designs for studies included in the project have been completed. Civil works are on sctiedule, but equipment procurement is delayed by about nine months. There are no specific implementation problems at this stage. Loan No Non-Formal Education: IUS$15.0 Mtillion Loan of September 14, 1977; Effective Date: November 4, 1977; Closing Date: June 30, The project aims at strengthening the nonformal education programs of the Department of Education in seven Provinces. General progress in project implementation is satisfactory. Renovation of two existing provincial centers was completed on schedule; construction contracts for four new centers are being awarded, and furniture and equipment is being tendered. The technical assistance ccomponent is about nine months behind schedule due to late s:igning of contracts and the November 1978 devaluation; however, the training aspects of the project are on schedule. Recruitment of foreign experts and domestic consultants is accelerating satisfactorily; initial staff training, learning materials development, and evaluation activities are being carried out. It will he another two years before the project can be expected to make a significant impact on field activities. ENFRCY Credit No. 399 West Java Thermal Power: US$46 Million Credit of June 22, 1.973; Effective Date: Augpust 28, 1973; Closing Date: June 30, Project implementation was initiallv delayed due to the necessity of making additional financing arrangements to meet Tnuch higher costs of equipment resulting from rapid inflation in 1974/75. 1However, implementation is now progressing smoothly. Both 100 MW,T generating tnits have been synchronized with the grid and are being loaded slowlv.

46 ANNEX Ii Page 13 of 20 pages Loan No Fourth Power: US$41 Million Loan of June 17, 1975; Effective Date: October 23, 1975; Closing Date: June 30, Construction of the third 100 MW unit at Muara Karang is progressing satisfactorily. The scheduled commissioning date of February 1980 is about seven months behind the appraisal target, but no further delays are expected and there is a good possibility that some of the delays may be made up. The loan disbursement is proceeding as scheduled in the appraisal report. Loan No Fifth Power: US$90 Million Loan of May 20, 1976; Effective Date: September 20, 1976; Closing Date: March 31, All equipment required for the project is scheduled to be procured in three lots. Nearly 75% of the equipment which was covered by Lot 1 (valued at $13.6 million) has been received; orders for equipment covered by Lot 2, (amounting to $32.4 million) are now being placed. The project suffered an initial setback of about one year in procurement action but is now progressing satisfactorily. It is expected that loan disbursements will be completed prior to the Closing Date. Loan No Sixth Power: US$116 Million Loan of February 4, 1977; Effective Date: June 6, 1977; Closing Date: December 31, Implementation of the project, consisting of 2 x 200 KW steam generating units at Muara Karang, is progressing satisfactorily. Orders for major electrical and mechanical equipment were placed during the period December 1977-February So far progress is on or slightly ahead of schedule. Currently, estimated commissioning dates for the units are about four to six months ahead of the appraisal estimate. Loan No Seventh Power: US$109.0 Mili_ion Loan of February 3, 1978; Effective Date: June 30, 1978; Closing Date: December 31, Tenders for major electrical and mechanical equipment required for the 200 MW unit, including turbine generator, steam generator, cycle equipment, electrical equipment and power transformer, were opened on August 21, Bids have been evaluated and the Bank indicated no objection to the recommendations for award of contracts on February 6, 1979.

47 ANE_X IT Page 14 of 20 pages Fertilizer Production INDUSl'RIAL DEVELOPMENT AND FINANCE Loan No Second Fertilizer Expansion: US$115 Million Loan of February 28, 1975; Effective Date: April 29, 1975; Closing Date: August 31, The project (PUiSRI III) was commissioned April 9, 1977, one month ahead of schedule. Duringt the eight months of operation in 1977, the project operated at 66% capacity utilization, which increased sharply to about 92% in 1978 withl the overcoming of initial technical problems. Certain auxiliary facil_ties, now being installed, are expected to be completed by mid The project is not expected to show a cost overrun. Loan No Third Fertilizer Expansion: US$70 Million Loan of May 20, 1976; Effective Date: August 15, 1976; Closing Date: December 3.1, The project (PUSRI!V) was commissioned November 26, 1977, about four months ahead of schedule. During 1978, PUSRI IV produced nearly 470,000 tons of urea, reflecting a capacity utilization of 83% in the first year of operation. Some auxiliary facilities are planned to be expanded by The project is not expected to show a cost overrun. Industrial Estates Credit No. 428 Pulo Gadung Industriai Estate: US$16.5 Million Credit of September 14, 1973; Effective Date: November 13, 1973; Closing Date: December 31, Tne estate is progressing satisfactorily. Of 430 ha of raw land earmarked for acquisition, 313 ha has beern acquired and acqu_sition of another 31 ha is under negotiation. 119 ha of developed land have been sold to 99 firms. Employment in these firms at full capacity will be around 19,000 and an estimated 1,400 persons are employed on the average in both factory conszruction and land development. Overall, operations are profitable. The return on capital investment, which is now projected to be 22%, is significantly higher than the appraisal forecast of 13.4%. This is due to developed land values rising faster than the cost of raw land and development. The project's development has been slower than forecast at appraisal, and the Closing Date has been postponed to December 31, 1980.

48 ANEX II Page 15 of 29) Developmenc Finance Companies Loan No LAPINDO III: US$40.0 Million Loan of June 6, 1977; Effective Date: September 23, 1977; Closing Date: September 30, At the time of loan appraisal (October 1976) BAPINDO was facing many?roblems, inckuding high portfolio arrears and slow loan processing. Accordingly, the Bank sought and reached understanding with BAPINDO and the Government on a comprehensive Program of Action designed to remedy BAPINDO's weainesses and achieve further improvements. A recent Bank mission found that BAPINDO has effectively implemented the Program and achieved satisfactory progress. Cre_dr No. 436 Private Development Finance Company of Indonesia (PDFCI): US$10 Million Credit of November 2, 1973; Effective Date: March 6, 1974; Closing Date: June 30, This Credit is fully committed. Loan No Second PDFCI: US$15 Million Loan of January 28, 1977; Effective Date: April 21, 1977; Closing Date: June 30, The project is proceeding satisfactorily. Coal Mining Loan S-9 Bukit Asam Coal Mining and Transport Engineering: US$10.0 Million Loan of MIay 19, 1978; Effective Date: December 22, 1978; Closing Date: December This ioan became effective on December 22, 1978, and consultants are in place. PCOPLATION AND NUTRITION Population Credit No. 300?opulation: US$13.2 Million Credit of April 20, 1972; -fective Date: November 2, 1972; Closing Date: December 31, Tne Lndonesian nacional family planning program appears to have slackened somewna.. As of October 31, i978, 30.0% of eligible couples in Java an". ial- were estimaced to be currently using contraceptives; the cj:.parabic, uroe ror the 10 provinces of the Other Islands covered by.r-o progr..: _s 8.2%. These figures as of March 30, 1978, were 30.1% and 9*6OX ras-,e-ive 1 v. iaowever, during the period covered there have been some a. drobems with Ga,a co Liection, wnich may be part of the reason for

49 ANNEX Ii Page 16 of 20 pages the cecline. The report of the consultant engaged to determine the needs for in-house computer facilities for the National Family Planning Coordination Board (NFPCB) is now being evaluated. Of the construction component, the remaining two paramedical training schools are scheduled to be completed by August No completion date has yet been estimated for one provincial office btuilding, which was destroyed by fire in September when it was half comp±eted. Other project activities which remain to be completed, including the fellowship training program and several research studies, will also be completed by August Loan No Second Population: US$24.5 Million Loan of July 6, 1977; Effective Date: August 4, 1977; Closing Date: April 30, Considerable progress has been made on the civil works and procurement aspects of the project. Of the 21 facilities, contracts have been awarded f-or 20, and design drawings for the remaining building approved. The provincial offices and training centers are scheduled to be completed by September 1979, and the National Family Planning Training Center (NFPTC) by May Development of the national population education program and the national family planning training program is proceeding well. Nutrition Loan No Nutrition Development: US$13.0 Million Loan of March ; Effective Date: March 31, 1977; Closing Date: March 31, Initial progress under the project is satisfactory. The Nutrition Intervention Pilot Project, the anemia control and home gardens components, as well as the fellowships program, are proceeding with minor delays. The Nutrition Academy has increased its student enrollment from 100 to 160, and 48 graduates are expected this year, compared with 25 prior to project start. Construction of the Nutrition Academy was completed in February The Fooe Technology Development Center is about 50% completed, and the Center for Research and Development in Nutrit'on about 63%. While monitoring and evaluation units for each component have been operational for six months, the central monitoring and evaluation unit of the Project Secretariat is just starting to be staffed. TECHNICAL ASSISTANCE Credit,o. 451 F,ur:h Technical Assistance: US$5 Million Credit of january 2, 1974; Effective Date: February 15, 1974; Closing Dare: December 31, 1979.?cyg.ess under the project is satisfactory and the bulk of the funds have been cormmittecd,

50 ANNEX II Page 17 of 20 pages Loan No National Resource Survey and Mapping: US$13.0 Million Loan of February 5, 1976; Effective Date: April 2, 1976; Closing Date: December 31, The BAKOSURTANAL complex at Cibinong is now structurally completed, and most of the cartographic, photographic processing, and printing equipment required to produce maps has arrived and is being installed. Resource evaluation activities, including the compilation of data for Southern Sumatra and a study for the Directorate-General of Estates of coconut: lands to be replanted in Sulawesi and Lombok, are also proceeding in the new complex. Recruitment and training of new staff, particularly junior operatives, has accelerated. The new photography financed under the Canadian parallel project will shortly be available, by which time BAKOSURTANAL hopes to have installed color photo processing equipment and to have fully trained specialized teams of operatives in the various map production fields. Fertilizer Distribution TRANSPORTATION Loan No Fertilizer Distribution: US$68 Million Loan of July 10, 1975; Effective Date: August 28, 1975; Closing Date: December 31, 1980 The project has been substantially completed at a cost 20% below the appraisal estimate. Wiork on the five original port depots is completed and the sixth depot, which was approved by the Bank in 1977 as an extension financed from project savings, is nearing completion. All four ships, including the additional ship approved in 1977 and paid for from project savings, have been delivered and 52 of 58 inland storage depots are completed. All the ships, port depots and storage depots are operating. Shipping operations have not been as cost effective as they could be, due to some extent to existing large stocks of fertilizer requiring ships to be used for longer distances for exports. Costs have also been increased because of delays in ship turnaround time caused by the need to clear customs on interisland voyages and the cumbersome procedures involved. These matters are being taken up with PUSRI and improvements are expected. Highways Loan No Fourth Highway: US$130 Million Loan of April 15, 1976; Effective Date: August 13, 1976; Closing Date: December 31, Virtually all key activities in the initial implementation schedule agreed with the Government have been completed, although with delays of up to one year. Construction of 1,200 km of roads has been started. Some problems in executing the road works have been revealed on contracts started in 1976 and delays were encountered in awarding some contracts in 1977, causing a slower rate of progress than scheduled. The project is about 25% complete. The delays, combined with slow progress, indicate that the project will probably be completed about months after the Closing Date.

51 LME-X --LI Page 18 of 20 pages Marine Transloort Credit No. 318 Inter-Island Fleet Rehabilitation: US$8.5 Million Credit of June 28, 1972; Effective Date: October 19, 1972; Closing Date: December 31, Due to sharply increased costs and lack of creditworthy applicants, just over half the tonnage of shipping expected at appraisal will have been rehabilitated. The Credit has been entirely committed and is expected to be fully disbursed by the Closing Date. Loan No Second Shipping: US$54 Million Loan of May 20, 1976; Effective Date: October 8, 1976; Closing Date: December Delay in the appointments of a number of consultants has caused a slow start t:o the project ancd slowed project implementation and disbursements. The acute financial problems of the State Shipping Company (PELNI) have been tackled by the Government and new management is instituting a recovery plan. The project entity (PANN) has committed, and the Bank has approved, $22.3 miilion of subprojects; the Bank has disbursed and made qualified agreement to reimburse, funds totalling $6.0 million as of December 31, The recent change in exchange rate may adversely affect this project in the future and slow disbursements further. This matter is under study and being reviewed with the Government. Ports Loan No Tanjung Priok Port Project: US$32 Million Loan of November 4, 1976; Effective Date: March ; Closing Date: December Slow progress on the construction of Government-financed works has delayed construction of the first component, but progress is being made and these works are scheduled for completion in July Tne first construction contract for Basin III back up facilities has been awarded and work is underway. The regional berths component has been delayed by slow withdrawal of the Army, which was using the site for storage. However, 90% of the land has now been released, the old buildirngs are being demolished, and a contract for tne new works has recently been awarc.ed. These delays will probably postpone overall completion of the project to mid-1981; it is too early to estimate the full effect of delays on project cost. The Government intends to establish statutory agencies (PERUMS) during 1979 for ports and dredging functions whicn are current:ly administered by government departments. Railways Loan No. ij05 kailway: U'S$48.0 Million Loan of June 14, 1974; Effective Date: August 16, 1974; Closing Date: *une ProJecc execution. is benind schedule due to initial slow procurere._ and executionl of works. erocurement is now well under way and all conzracts nave been placed or are about to be placed. Freight and passenger

52 ANNEX II Page 19 of 20 pages traffic declined in 1976, due largely to poor service. However, some improvements have been made since the first half of 1977 following the arrival of nu-! locomotives and rolling stock, and operations improved with the aid of consultants. The financial performance of the railway continues to deteriorate due mainly to increasing costs, including a large wage raise in early 1977, to low traffic levels, and to inadequate tariffs for major freight commodities. The Government is completing the reorganization of the railway as a Government Department. It has indertaken to review the role of the railway and determine which traffic shoul1 be carried at a profit and which should be subsidized. TOURISM' Credit No. 479 Bali Tourism: US$16.0 Million Credit of June 14, 1974; Effective Date: December 4, 1974; Closing Date: June 30, Construction of major infrastructure and related facilities for the Nusa Dua tourism estate is under way and scheduled for completion in mid- 1980; construction of the hotel training school has been completed. The completion of project components outside the estate (i.e., roads) is scheduled for December 1980, about two years later than planned at project appraisal. Visitor traffic to Bali has been growing; it rose by 8% in 1977 to 286,000 visitors and by a further 11.5% in the first eight months of Air access is improving with the introduction of new international flights from Singapore. At present, three potential hotel projects for Nusa Dua are under consideration; however, while no final commitment has yet been made, changes in the project description (approved by the Fxecutive Directors last year) which would allow use of savings in credit funds for hotel construction may encourage hotel investment. It is unlikely that a first hotel at Nusa Dua could be completed in 1980 to coincide with completion of the infrastructure. TURRAN DEVELOPMF:NT Loan No Jakarta Urban Development: UTSS25 Million Loan of September 27, 1974; Effective Date: January 15, 1975; Closing Pate: March 31, The kampung imdrovenrent part of the project is substantially complete. Some 2,080 ha have been upgraded, compared with the original plan of 1,980 ha. The sites and services component is about 75% complete. Problems which have arisen with regard to the standard of materials and the procedures to be utilized in allocating the plots were resolved last year. About 2,000 settlers have moved on the site and the remaining plots are currently being allocated.

53 - 49- ANNX II Page 20 of 20 pages Loan No Second Urbani Development: USI52.5 Million Loan of November 4, 1976; Effective Date: March 28, 1977; Closing Date: March 31, The progress of civil works is ahead of schedule, and costs are generally within appraisal estimates. Although land acquisition is causing some delays, efforts are being made to speed up procedures. Progress is being made in developing Government capabilities to undertake a nationwide kampung improvement program in the future. Loan No Third Urban Development: US$54 Million Loan of January 31, 1979; Not yet Effective; Closing Date: December 31, The national kampung improvement program has been expanded in this project to include Ujung Pandang, Semarang and Surakarta, as well as followup components in Surabaya and Jakarta. The latter includes a new solid wastes component, and will stress drainage and maintenance. WATER SUPPLY Loan No Five Cities Water Supply: US$14.5 Million Loan of October 31, 1974; Effective Date: May 21, 1975; Closing Date: June 30, Due to administrative and managerial problems the project is now running 24 months behind schedule. This delay, together with higher rates of inflation than anticipated, is expected to increase project costs about 30% above the appraisal estimate. Detailed engineering and preparation of tender documents have been completed, and contracts for all equipment and for major civil works have been signed. The project nas reached the construction phase. The reorganization of the Directorate of Sanitary Engineering has been completed, and the establishment and development of local water enterprises is proceeding satisfactorily. In September i978, the Government issued anl interministeriai decree defining relationships between the various hinistrie.s and the Water Enterprises, which is expected to expedite current and future projects in tha seccor.

54 ANNEX III Page 1 INDONESIA YOGYAKARTA RURAL DEVELOPMENT PROJECT Supplementary Project Data Sheet Section I: Timetable of Key Events (a) Time taken to prepare project: (b) Agency which prepared the project: Three years Provincial Development Planning Agency (BAPPEDA), Yogyakarta, with five months consultant assistance. (c) Date of first mission to consider project: December 1975 (d) Date of departure of appraisal mission: June 1978 (e) Date of completion of negotiations: May 11, 1979 (f) Planned date of effectiveness: October 1979 Section II: Special Association Implementation Actions Soon after signature of the Credit Agreement, a supervision mission would assist the Provincial Government in the initial stages of implementation of each component. Section III: Special Conditions (a) The establishment of the Project Coordination TJnit and its staffing by the project coordinator, financial officer and budget officer would be a condition of credit effectiveness (para. 49). (b) The Association would make disbursements for each component only after component managers have been appointed, and, (i) for the agricultural and small-scale enterprise components, after the establishment and staffing of the Technical Development Cell and Technical Cell (para. 51); and (ii) for the rural health extension, rural water supply, and community participation activities, after the conclusion of contracts by the Provincial Health Service and Provincial Directorate of Rural Development, respectively (para. 51).

55 ANNEX III Page 2 (c) The Government would: (i) before initiating the additional agricultural program, carry out an in-depth mid-term review of the project for discussion with the Association (para. 44); (ii) provide staff for key posts by specified dates (para. 51); and (iii) prepare plans and procedures for maintenance of road works and soil conservation works (para. 51).

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57 IBRD 13978R INDONESIA MAY 1979 Tlh n-ph- been p--red by ho B red ane-k taff -1t1dsn tent-,n, tmi nt of the -ede- of th,p.,o te at,,h to~.ttache The d---.-aeee ned and the b-nda-` these -otmi S- ep do net itp/y -n the p-nt Vf Otho Wbed Bank and Itt -J -'tl -ctmoyll6uddcgh... -PHYSICAL t Ipef YOGYAKARTA RURAL DEVELOPMENT PROJECT ACTIVITIES beotvdatlheetittgalsitttrtolattft*mtoryor V t0 x /' Koling'.ung v, Agricu tura Technical Development Center JA t. n X L I. ri \ \ r<kalingiung A Agriculttura Techlnicul Develpment Subcenters V Pilot Land Rec amatiorn J,ti BANJAR uri &Alamz Soil Conservation Prograns 4AN AR OYr \ > Ti Poken ~~~~~~~~~Home Garden Improvement /Sarnigalulh O A/ Tree Crop Forming System Deve oprnent, t'alibawang S LMEbM N Mabi Training Units ( v^ k ( / Artiricial Insemination Sunposts / / / t % : + ~~~~~~~~~~~~~~~~~Lvestock Mcalket 7045 'Nng o Godean 74' Rainwater Catolihnent Tank 7D451_ Bejiharo awe iuh Palbapon K EE Pr ygkonarp j u Dsfii BounddrlQs ; ; S i : ur -Go L e rlq mes: : - O6; ' ' ' -f'f'-' f f 'f f'-f ' 'f ' -' -f' f -'-' ' -'; f fyl r t d--r'-'f r n I"ry 0 engaha~~~~~~~~~~~~~~~~~~~~~~~~~f I OCEdANosXri PR