PROJECT COMPLETION REPORT ON THE. SECOND BRACKISH-WATER AQUACULTURE DEVELOPMENT PROJECT (Loan No. 959-INO) INDONESIA. May1999

Transcription

1 PCR: INO ' ' PROJECT COMPLETION REPORT ON THE SECOND BRACKISH-WATER AQUACULTURE DEVELOPMENT PROJECT (Loan No. 959-INO) IN INDONESIA a May1999

2 CURRENCY EQUIVALENTS Currency Unit - Rupiah (Rp) At Appraisal At Project Completion Rpl.00 = $ $ $1.00 = Rpl,741 RplO,000 ABBREVIATIONS ATP BU KOPI N BME DGF DGWRD DMTK EA EIRR FIRR MIS MSR NES O&M PPo TA Anugrah Tambak Perkasirido Bank Umum Koperasi Indonesia benefit monitoring and evaluation Directorate General of Fisheries Directorate General of Water Resources Development Deli Mina Tirta Karya executing agency economic internal rate of return financial internal rate of return management information system Matang Speng Raya Nucleus Estate and Smallholder operation and maintenance provincial project office technical assistance WEIGHTS AND MEASURES ha - hectare km - kilometer t - metric ton NOTES (i) (ii) The fiscal year (FY) of the Government ends on 31 March. In this report, "$" refers to US dollars.

3 CONTENTS Page BASIC DATA MAP VIII PROJECT DESCRIPTION II. EVALUATION OF IMPLEMENTATION A. Project Components B. Implementation Arrangements C. Project Costs D. Project Schedule E. Engagement of Consultants and Procurement of Goods and Services F. Performance of Consultants, Contractors, and Suppliers G. Conditions and Covenants H. Disbursements I. Environmental Impact J. Performance of Operation and Maintenance K. Performance of the Borrower and the Executing Agencies L. Performance of the Bank III. EVALUATION OF INITIAL PERFORMANCE AND BENEFITS A. Financial Performance B. Economic Performance C. Attainment of Benefits IV. THE TECHNICAL ASSISTANCE V. CONCLUSIONS AND RECOMMENDATIONS A. Conclusions B. Lessons Learned C. Recommendations APPENDIXES I

4 BASIC DATA A. Loan Identification 1. Country 2. Loan Number 3. Project Title 4. Borrower 5. Executing Agencies 6. Amount of Loan - Original - Actual 7. PCR Number Indonesia 959 Second Brackish-Water Aquaculture Development Project Republic of Indonesia Directorate General of Fisheries (DGF) Directorate General of Water Resources Development (DGWRD) Bank Umum Koperasi Indonesia (BUKOPIN) $38.00 million (OCR) $9,731, B Loan Data 1. Appraisal - Date Started - Date Completed 2. Loan Negotiations - Date Started - Date Completed 3. Date of Board Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness - In Loan Agreement - Actual - Number of Extensions 6. Closing Date - In Loan Agreement - Actual - Number of Extensions 7. Terms of Loan - Interest Rate - Maturity - Grace Period 8. Terms of Relending - Interest Rate - Maturity 17 Oct Nov May May May Sep Dec Apr 1990 four (1 month each) 31 Mar Jan 1998 Two Variable 20 years 6 years The Bank's OCR rate plus a fixed margin of 1.75 percent per annum 15 years

5 till - Grace Period 5 years 9. Disbursements a. Dates Initial Disbursement 25 Apr 1990 Effective Date 25 Apr 1990 b. Amounts ($) Final Disbursement 16 Jan 1998 Original Closing Date 31 Mar 1996 Actual Closin g Date 16 January 1998 Time Interval 7 years, 8 months Time Interval 5 years, 11 months Time Interval 7 years, 8 months Cat. Original Revised Amount Undisb. No. Category Allocation Allocation Disbursed Balance 01 Civil Works (Part A.1) 2,937,000 3,003,000 2,833, , Civil Works (Part A.2) 2,965,000 1,575,340 1,248, ,611 03A Project Mgt. (PartA.1) 110,000 98,000 14,915 83,085 03B Project Mgt. (Part A.2) 715, , , , Training & Fellowships 290, , ,448 6,298 (PartA.3) 05 Consulting Services 983,000 1,127,000 1,098,220 28,780 (Part A.4) 06 Credit for Nucleus 12,018,000 2,507, ,815 2,024,185 Companies (Part B.1) 07 Credit for Smallholders 6,980,000 1,605, ,925 1,264,075 (Part B.2) 08 Credit for BUKOPIN 259, , ,840 3, Interest & Commitment 6,710,000 2,340,000 2,340,000 - Charge during Constrn. 11 PriorTechnical 110, , ,997 3 Assistance Cost 12 Unallocated 3,923, Total 38,000,000 13,791,086 9,731,592 4,059, Local Costs (Bank-Financed) Appraisal Estimate Actual Amount $10,500,000 Percentage of Local Costs (%) 29 Percentage of Total Cost (%) 16 $3,031,

6 iv C. Project Data ($ million) Appraisal Estimate Actual 1. Project Cost Foreign Exchange Cost Local Currency Cost Total Financial Plan ($ million) Implementation Appraisal Estimate Actual Costs Foreign Local Total Foreign Local Total a. Bank Financed b. Borrower Financed c. BUKOPIN d. Sub Borrowers Equity Total a a Including interest during construction. 3. Cost Breakdown by Project Components ($000) Appraisal Actual Component Foreign Local Total Foreign Local Total Part A. Government Support Facilities 1. DGWRD 1,752 1,795 3,547 1,615 1,395 3,010 a. Primary Canals for Nucleus b. Canals for Smallholders 1, , ,244 c. Right of Way/Access Roads , d.projectmanagement DGF 1,843 3,110 4,953 1,434 2,714 4,148 a. Smallholder Support 858 Facilities 2,107 2, b. Consulting Services c. Overseas Fellowships d. Local Training (Smallholder) e. Project Management Offices f. PBME Base Cost (Part A) Physical Contingencies a Price Contingencies b Subtotal (A) 93 3, , ,905 8,500 3, ,690 9,860 3,049 4,109 7,158

7 V Appraisal Actual Component Foreign Local Total Foreign Local Total Part B. Credit Component 1. Nucleus Companies 12,018 15,766 27, ,538 5,021 a. Hatchery 3,870 5,212 9, b. Grow-out Ponds and Canals 3,812 3,951 7, c. Other Facilities d. Consulting Services 3, , e. Training f. Working Capital 644 5,798 6, Smallholders 2,010 6,549 8, a. Land Clearing and Pond Development 1,505 3,503 5, b. Housing , c. Subsistence d. Working Capital 174 1,569 1, BUKOPIN a. Consulting Services b. Staff Training Base Cost (Part B) 14,287 22,363 36,650 1,201 4,912 6,113 Physical Contingencies a 714 1,118 1, Price Contingencies b 1,859 2,729 4, Subtotal (B) 16,860 26,210 43,070 1,201 4,912 6,113 Subtotal (A + B) 21,030 31,900 52,930 4,250 9,021 13,271 Taxes - 3,650 3,650 Recovery of TA No Interest During Construction 6,710-6,710 2,340-2,340 Total Project Cost 27,850 35,550 63,400 6,700 9,021 15,721 Note: Exchange rate at $1 = Rpl,700. a Physical contingencies: 5 percent. b Annual price escalation factors for foreign exchange costs: 3 percent ( ), 4 percent ( ); for local currency costs: 7 percent (1989), 6 percent (1990), 5 percent ( ). After deducting the grant amount of $150, Project Schedule Appraisal Estimate Actual Date of Contract with Consultants 1 Bank BUKOPIN DGF Sep 1990 Jan 1992 Sep 1990 Apr 1993 From date of effectiveness.

8 vi Completion of Consultants' Assignment Bank BUKOPIN 2 DGF Aquaculturist/Chief Adviser Financial/Credit Expert Aquaculture Engineer Hydrologist Equipment and Supplies First Procurement Last Procurement Other Milestones 1st Partial Loan Cancellation 2nd Partial Loan Cancellation 3rd Partial Loan Cancellation Final Loan Cancellation D. Data on Bank Missions Appraisal Estimate Apr 1995 Apr 1995 Jun 1994 Jul 1994 Feb 1996 Feb 1990 Oct 1994 Actual Jul 1997 Nov 1996 Nov 1996 Oct 1994 Jul 1994 Feb 1994 Jul 1990 Oct Dec Mar Dec Jan 1998 Name of No. of No. of Mission Date Members Person-days Specialization of Member Fact-Finding 4-13 Aug 1 10 Sr. Aquaculture Specialist Mission 1986 Appraisal 8-30 Jun 5 78 Sr. Project Economist Mission 1987 Sr. Country Officer Fisheries Specialist Counsel Consultant (Fin. Analyst) Reappraisal 17 Oct-3 Nov 1988 Inception Jun 1990 Loan Review Oct 1991 Loan Review 2 26 Nov-15 Dec 1992 Loan Review 3 26 Oct-5 Nov Sr. Project Economist Counsel Fisheries Specialist Programs Officer Fisheries Specialist P.A. Assistant Project Economist Financial Analyst Consultant (Fin Inst. Analyst) Fisheries Specialist Consultant (Fin. Analyst) Fisheries Specialist Consultant (Fin. Analyst) 2 Carried out in three phases.

9 vi' Name of No. of No. of Missions Date Members Person-days Specialization of Member Loan Review 4 28 Nov Financial Analyst Reformulation Dec 1994 Consultant (Credit Specialist) Consultant (Aquaculturist) Special Project 28 Apr-S May 1 8 Project Specialist (Fisheries) Administration 1995 Loan Review Aug 1 11 Project Specialist (Fisheries) 1996 Loan Review Aug 1 12 Project Specialist (Fisheries) 1997 Project 7-25 Sep 3 54 Project Specialist (Fisheries) Completion Project Economist Associate Project Analyst This report was prepared by a Bank mission comprising Weidong Zhou, Project Specialist (Fisheries), Mission Leader; Emile Gozali, Project Economist; and Homer B. Taylor, Associate Project Analyst.

10 110 E 130 E INDONESIA SECOND BRACKISH WATER AQUACULTURE DEVELOPMENT PROJECT LOCATION OF PROJECT AREAS 5 N Aceh 5 N North Sumatra! I / 00 SUMATRA East -, C.'.,:/ Kalimantan SULAWESI KALIMANTAN Central Sulawesi 00 I So6th Kit'antan 1) IRAN JAVA Jakarta JAVA -100s Kilometers West Nusa.' Tenggara loos * National Capital Proposed Project Area - Actual Project Area - - -, Provincial Boundary International Boundary Boundaries are not necessarily authoritative. CD P 0 C) 1 10 E I

11 I. PROJECT DESCRIPTION 1. Indonesia has extensive coastal swamp areas suitable for the development of brackishwater aquaculture. These areas offer prospects for a significant increase of shrimp production and income of smallholders in rural communities. In October 1985, with Bank-funded technical assistance (TA) 1 a feasibility study was completed for the Second Brackish-Water Aquaculture Development Project. Subsequently, an Appraisal Mission and a Reappraisal Mission visited Indonesia in June 1987 and October 1988 to finalize the design of the Project in consultation with the Government. The Project's objectives were to (i) increase shrimp production in brackish-water ponds for export, (ii) promote private sector involvement in developing brackishwater aquaculture, and (iii) provide for increased employment and income for smallholder aquaculture pond owners through their integration with nucleus estate companies. At appraisal, the project cost was estimated at $63.4 million. The Loan Agreement for $38 million from the Bank's ordinary capital resources was signed on 13 September 1989 and became effective on 25 April The Bank loan account was closed on 16 January The Project consisted of two parts. Part A included production support facilities for the construction of primary and secondary canals and access roads to subproject areas; and provision of smallholder support facilities, including wells, sewage disposal, health clinics, schools, market places, community halls, and institutional strengthening. Part B comprised credit components, including provision of credit to nucleus companies and smallholders for the construction of shrimp production facilities (hatcheries, ponds, storage, workshops, offices, and staff housing) and working capital. The Project adopted a nucleus estate and smallholder (NES) approach 2 to establish 10 NES shrimp complexes (subprojects) in the provinces of Aceh, North Sumatra, East Kalimantan, South Kalimantan, Central Sulawesi, and West Nusa Tenggara. The Directorate General of Fisheries (DGF) and the Directorate General of Water Resources Development (DGWRD) were the Executing Agencies (EAs) for the Government Support and Services component, while Bank Umum Koperasi Indonesia (BUKOPIN) was the EA for the credit component. 3. It was envisaged at appraisal that at full development of brackish-water ponds for 10 NES subprojects, the incremental annual shrimp production would be 4,300 metric tons (t) or 2,700 t of exportable shrimp tails worth at least $30 million annually. The Project was expected to provide direct employment for 1,280 smallholder families and employ a total of 310 skilled and 570 unskilled laborers for nucleus companies. The Project was also expected to generate average net annual income of Rp8.7 million and Rpl.54 billion for a smallholder and a nucleus company, respectively. By project completion, the advanced shrimp aquaculture and hatchery technologies were expected to be widely applied by small fish farmers in the project areas. TA 661-INO: Second Brackish-Wafer Aquaculturo Development Project, for $260,000, approved on 28 December The NES approach is to create a relationship of interdependency between numerous small and low technology producers and financially and technically advanced large enterprises to achieve economic objectives that serve the interest of both parties.

12 A. Project Components II. EVALUATION OF IMPLEMENTATION 4. The Project's main elements included (I) the development of brackish-water ponds and required infrastructure facilities, and the provision of credit and support services for the shrimp production of smallholders and nucleus companies; and (ii) the provision of training, fellowships, and consultant services to support project management. 5. The commencement of field activities was delayed by one year and nine months due to delays in the recruitment of the project consultants and lengthy processing and approval procedures for selecting and contracting subborrowers and local contractors. Project implementation was also hampered by disease and environmental pollution that badly affected the shrimp industry in the Asia-Pacific region during Because of the high mortality risk, the industry was no longer a favorite of the commercial lenders. The situation was exacerbated by the sharp rise of interest rates in general and financial difficulties faced by BUKOPIN. Consequently, in December 1993, the Government asked the Bank to make a comprehensive assessment of the factors affecting the Project and to reduce the project scope to a level that could be successfully implemented. Based on the findings of two Bank missions fielded in November 1994 and April 1995, the Project was reformulated in October 1995 reducing the project target for development of 10 NESs in six provinces to three NESs 3 in two provinces. The reduction of the scope was necessitated by (i) the increase of commercial interest rates in Indonesia and stringent collateral requirements of BUKOPIN, thereby reducing demand for credit from many potential subborrowers during , (ii) slow identification of financially viable subprojects by BUKOPIN at high commercial interest rates, (iii) disease problems facing the shrimp industry in Indonesia during thereby reducing the confidence of BUKOPIN to invest in the industry, and (iv) poor coordination between the EAs. As the scope was reduced by two thirds, the project costs, quantified benefits, and impacts were also scaled down accordingly. Despite the reduction in scope, the date for closing of the loan account had to be extended from 31 March 1996 initially to 31 December 1996 and finally to 16 January A summary of the Project's overall accomplishment compared with the envisaged targets at appraisal and revised targets during the implementation is presented in Appendix 1. Part A: Production Support Facilities 6. Physical Infrastructure. DGWRD and DGF commissioned local contractors to undertake site surveys, detailed designs, and construction of physical infrastructure and smallholder support facilities. At loan closing, the construction of a total of 40.9 kilometers (km) of primary and secondary canals, 6.5 km of access roads, and one bridge at three subproject areas was completed. Also, the smallholder support facilities, including 21 small houses, 3 wells, 3 sewage disposals, and 3 community halls, were constructed in the three subprojects. The completed infrastructure and smallholder support facilities are being utilized by These are PT. Matang Speng Raya, PT. Deli Minatirta Karya, and PT. Anugrah Tambak Perkasindo. The closure of the Loan account before the completion of smallholder ponds in 1997 occurred because (i) BUKOPIN firmly decided to discontinue processing new smallholder credit under the Project by using the balance of loan proceeds, because of its limited expertise and inexperience in selecting and managing smallholder for shrimp culture; and (ii) the Government (BAPPENAS and DGF) also agreed to make alternative arrangement to finance the remaining smallholder ponds not financed by BUKOPIN).

13 3 beneficiaries in the project areas. However, water supply in one subproject (PT. Deli Minatirta Karya) is not adequate to meet the full requirements of the constructed shrimp ponds due to faulty design and construction of the main canal. The situation can be remedied by remodeling the canal and/or installing additional pumps to deliver water from the canal to the ponds. Detailed descriptions of the three subprojects are presented in Appendix Training Program. Eight DGF professional staff and one nucleus personnel completed overseas training programs on shrimp aquaculture techniques, management, and administration. About 30 participants including staff of provincial and district fisheries offices, and nucleus personnel received training on shrimp aquaculture techniques in Jepara in Central Java as planned. To provide adequate technical support services to smallholders, an on-thejob training program on traditional shrimp aquaculture was conducted by DGF for selected smallholders (295). All training programs provided to DGF staff and local fisheries staff were considered to be relevant to their technical operation and helped to strengthen their capacity to provide TA to fish farmers. All of the selected smallholders benefited from on-the-job training. They now understand the basic shrimp culture techniques and many are able to apply the techniques to their work. 8. Project Management and Benefit Monitoring and Evaluation. As planned, provincial project offices (PPOs) in the provincial fisheries services in Aceh and North Sumatra were established, and necessary office, communication, and transportation equipment was procured to support the project management and implementation. DGF also established a benefit monitoring and evaluation (BME) system, and completed the benchmark and regular surveys for the three subprojects during implementation. The assessment of the overall impact of the Project is expected to be conducted during the full shrimp production of subprojects. However, due to noncompletion of smallholder production facilities and current financial difficulties in the country, full assessment of benefits and impacts was not undertaken at this time. 9. Consulting Services. A team of international and domestic consultants assisted the EAs in implementing Part A. The consultants comprised experts in brackish-water aquaculture for 36 person-months; brackish-water aquaculture engineering, 10 person-months; smallholder credit processing and supervision, 14 person-months; and hydrology, 6 person-months. The total actual amount of consulting services (66 person-months) was the same as that envisaged at appraisal, but some adjustments were made in the time allotments for individual experts. 2. Part B: Credit Component 10. Credit Services. There were considerable difficulties in obtaining approvals for the processing of subloans because of high commercial interest rates in the country, delays in the identification of financially viable subprojects, disease problems in the shrimp industry, and poor coordination between the EAs. With its revised scope, the Project was expected to provide credit for about $13.18 million equivalent to support the construction of shrimp production facilities including 195 ha of nucleus estates and 612 ha of smaliholder shrimp ponds, storage rooms, workshops, field offices, staff houses, and other necessary facilities. Although estate development agreements and smallholder credit agreements were signed by BUKOPIN, three nucleus companies, and smaliholders during project implementation, these agreements were eventually canceled because of issues of repayment of old credit and the collateral requirement of BUKOPIN. At loan closing, a total of 240 ha of nucleus estates and 135 ha of smallholder shrimp ponds were constructed under the Project. Only $3.3 million

14 4 equivalent was released from BUKOPIN to two subprojects for construction of 53 ha of nucleus estates and 96 ha of smaliholder shrimp ponds. The remaining completed 187 ha of nucleus estates and 39 ha of smallholder shrimp ponds that were supposed to be financed by BUKOPIN were actually financed by nucleus companies and DGF. At loan closing, about 477 ha of the smallholder ponds originally envisaged had not been constructed, due to the fact that in 1997, BUKOPIN decided to discontinue lending to new smaliholders because of its limited available expertise and inexperience in selecting and managing smallholders for shrimp culture. Therefore, there is a need for the Government to further facilitate financial arrangements with financing institutions to provide the required credit of $4.5 million equivalent to support the construction of the remaining smallholder shrimp ponds. Also, it was noted that some of the constructed smaliholder shrimp ponds financed by the Government (DGF) are being operated by the nucleus company for production because the smallholders lack working capital. To achieve the project objectives, DGF and local government agencies should make the necessary arrangements with nucleus companies to help smallholders in their shrimp production. A detailed description of NES shrimp ponds developed under the Project and their operations are provided in Appendix Consulting Services and Training Program. As compared with the provision of 18 person-months of international consulting at appraisal, the Project provided about 27 personmonths of international consulting in the field of aquaculture economics to support BUKOPIN in providing credit services to the project beneficiaries. The additional 9 person-months of consulting services were required due to the relative inexperience of BUKOPIN in such operations and the long delay in providing credit. At appraisal, provision was made for 12 person-months of consulting in aquaculture and 18 in hatcheries for each nucleus company to assist in implementing Part B. During implementation, the EAs assessed that the consulting services of the aquaculturist and hatchery expert were not needed by the subprojects. Thus these services were canceled during Project reformulation. About 17 staff of BUKOPIN, including field staff, completed one month of overseas training on aquaculture management, and credit supervision and monitoring in the Philippines and the United Kingdom. About 40 staff received training on the supervision of smallholder credit at BUKOPIN headquarters. Although training provided to BUKOPIN was relevant to its lending operation in aquaculture, only six trained staff were directly involved in project implementation after the training. B. Implementation Arrangements 12. The EAs for Part A were DGF of the Ministry of Agriculture and DGWRD of the Ministry of Public Works, and for Part B, BUKOPIN. Consultants were provided to assist the EAs in planning, design, and operation of their respective components. DGWRD undertook construction through its Directorate of Swamps by using local contractors. At the local level, the provincial irrigation services were responsible for canal construction. DGF established a PPO within the provincial fisheries services in each of the two project provinces. The PPOs were responsible for (i) construction of smallholder support facilities, (ii) provision of technical services, and (iii) provision of assistance to BUKOPIN in selecting subborrowers. At appraisal, DGF was envisaged to be responsible for overall project coordination. However, because of difficulties encountered by DGF in the coordination of the Project, the Project Coordinating Committee, chaired by the bureau chief of Badan Perencanaan Pembangunan Nasional (BAPPENAS) was established in 1995 to strengthen overall project coordination. The Committee included the representatives of the Ministry of Finance, DGF, DGWRD, BUKOPIN, Bank Indonesia, and National Land Board. Although the Coordinating Committee was

15 5 established at a very late stage of project implementation, its role and contributions in facilitating the progress of the three subprojects and generating funding resources to support smaliholder activities were significant. C. Project Costs 13. Project cost was originally estimated at $63.4 million equivalent at appraisal; of this, $27.8 million was for foreign exchange cost and $35.6 million equivalent was local currency cost. The Bank was to provide a total of $38 million, to cover $27.8 million of the foreign exchange cost and $10.2 million of the local currency cost. The balance, $25.4 million equivalent of the local currency cost was to be provided by the Government, BUKOPIN, and subborrowers' equity. In October 1995, the Bank approved the cancellation of $24.05 million of loan proceeds and their reallocation to existing loan categories; this was a result of the reduction of the project scope. The revised project cost at project reformulation was $28.96 million equivalent, comprising $9.63 million for foreign exchange cost and $19.33 million equivalent for local currency cost. The Bank was to provide a total of $9.63 million to cover the entire foreign exchange cost and $4.32 million of the local currency cost. 14. At loan closing, the actual cost of the Project was $15.7 million equivalent comprising $6.7 million in foreign exchange and $9.0 million equivalent in local currency. The Bank loan of $9.73 million covers $6.7 million of foreign exchange costs and $3.03 million equivalent of local currency cost. The Bank loan was considerably lower than the revised cost of $13.95 million at project reformulation. A further loan savings of $4.22 million (about 30 percent of the revised loan amount) was canceled on 31 January 1997 and at the loan closing date. 5 A detailed cost comparison of appraisal, revised, and actual cost itemized by category is presented in Appendix 3. D. Project Schedule 15. The Project was scheduled to be implemented over six years from its approval by the Bank in May The loan closing date was originally set for 31 March 1996, but was extended to 31 December 1997 to provide additional time for completion of physical construction of primary and secondary canals and smallholder facilities. The project account was finally closed on 16 January 1998 to accommodate pending withdrawal applications for expenditures incurred prior to 31 December Delays were experienced in the implementation of the Government support facilities component and credit delivery. The main reasons for the delays were (I) lengthy processing procedures for consultant contracts, (ii) delayed progress of initial preparation work and identification of smallholders, (iii) lengthy processing procedures of subloans by BUKOPIN, and (iv) lack of coordination between the EAs. The implementation schedule of major components revised at project reformulation and the actual schedule are presented in Appendix 4. On 31 January 1997, the Bank approved the canceiiaton of $161,914 that the Government considered was not required.

16 6 E. Engagement of Consultants and Procurement of Goods and Services 16. The recruitment of consultants was delayed; this affected overall implementation at the initial stage. At loan closing, a total of 66 person-months of consulting services were provided for Part A and 27 person-months of consulting by the aquaculture economist for Part B. Thirty person-months of consulting by the aquaculturist and hatchery expert for each nucleus company were canceled during the implementation (paras. 9 and 11). The terms of the aquaculturist for Part A and aquaculture economist for Part B were extended because of (i) delays in construction of the shrimp production system and credit provision for subprojects, (ii) the need to prepare a new credit scheme to finance the remaining smallholder activities, and (iii) the need to follow up on the disbursement of credit to approved subprojects. 17. The detailed designs of the primary and secondary canals, access roads, and support infrastructure facilities were undertaken by DGWRD and DGF using local contractors. Contracts for civil works were awarded to local contractors using local competitive bidding procedures. Delays were often encountered in processing and approving contracts by the EAs. Under the Project, most of procurement involving vehicles, minor equipment, and supplies was conducted through local competitive bidding and direct purchase. The procurement of vehicles, equipment, and supplies was considered adequate and in line with the Bank's Guidelines for Procurement. A summary of this procurement is presented in Appendix 5. F. Performance of Consultants, Contractors, and Suppliers 18. In general, performance of the consultants was satisfactory. Under Part A, contracted international and domestic consultants satisfactorily accomplished their assignments to assist the EAs with project design, preparation of tender documents, conduct of BME, and preparation and conduct of technical training programs. The aquaculture economist for Part B played an important role in familiarizing BUKOPIN with the aquaculture sector and preparing a training program to strengthen BUKOPIN's capacity in lending to aquaculture activities. However, the consultant's role during the extension period of services in facilitating the credit delivery and preparing an alternative credit scheme for smallholder activities was not significant as the credit provision to the nucleus estates and smallholders encountered difficulty. 19. Under the close supervision of DGWRD and DGF, the performance of the contractors for civil works was generally satisfactory despite some delays in physical construction due to minor changes in design. The quality of canals, access roads, and support facilities constructed have reached acceptable standards except for the primary canal of the Deli Mina Tirta Karya (DMTK) subproject. G. Conditions and Covenants 20. The Borrower and the EAs complied with the majority of the loan covenants with delay. Partial compliance was noted in relation to (i) the submissions of quarterly progress reports and annual audited financial statements by the EAs, and (ii) the construction of smallholder shrimp ponds. The covenants for the preparation of a comprehensive plan for operation and maintenance (O&M) of the primary and secondary canals for each subproject by DGWRD in conjunction with each nucleus company, and O&M of roads by the local government were not complied with due to lack of coordination and understanding between DGWRD, DGF, local

17 7 government, and the nucleus company regarding their specific responsibility for O&M. This affected the preparation of the plan. The 1997 financial crisis further delayed the process. The status of compliance with loan covenants is shown in detail in Appendix 6. H. Disbursements 21. A total of $9.732 million was disbursed out of the revised loan provision of $13.79 million. $4.059 million (29.4 percent of the revised loan) was canceled at the time of account closing on 16 January The undisbursed balance canceled comprises $0.77 million allocated for Part A and $3.29 million allocated as a credit fund for Part B. The status of loan disbursement is presented in Appendix The initial disbursement of the loan was made on 25 April 1990, the same date as loan effectiveness. The final disbursement was made on 16 January 1998, 92 months after the initial disbursement. I. Environmental Impact 23. The design of the Project strictly followed the established Government environmental guidelines to protect coastal mangrove areas. All three subproject proposals were examined by the Government environmental agency and met the requirements of environmental impact analysis prior to subproject implementation. 6 Implementation of the Project had a slightly positive impact on the environment. Lessons learned from previous shrimp aquaculture projects indicated the need for good management of (i) (ii) (iii) the inflow and outflow of shrimp ponds, shrimp disease resulting from intensive aquaculture practices, and brackish-water intrusion to agricultural lands. The project technologies applied to recycle used water and purify incoming water are not only protecting shrimp aquaculture from shrimp disease, but also ensuring water quality in adjacent areas. The shrimp aquaculture adopted uses a semi-intensive farming method: the supplementary feeds are being properly used, and minimal chemicals and fertilizers are being applied. Water discharge from the ponds is having a negligible impact on the coastal waters and neighboring agricultural land. There have been minimal changes in land use in the project area as more than 30 percent (or 100 ha) of the shrimp ponds are in the existing aquaculture area, the rest mainly use previously vacant or underutilized land outside the coastal mangrove conservation area. J. Performance of Operation and Maintenance 24. In 1999, DGWRD, with each of the nucleus companies and local government agencies, plans to prepare a comprehensive plan of O&M for primary and secondary canals and access roads developed under the Project. The total budget required for O&M of all primary and secondary canals is estimated at about $100,000 each year. All of the nucleus companies All three subprojects underwent an environment examination or an environment impact assessment. These environmental impact analyses for the subprojects were approved by the Amdal Central Committee of the Government and the Bank during

18 8 using the project infrastructure facilities have committed to providing the necessary contributions to O&M. The primary canals in the three subproject sites are being operated properly except for the canal of DMTK, which does not provide an adequate water supply to service the shrimp pond areas due to a design deficiency that caused excessive siltation in the intake of the water supply system. Some parts of the constructed secondary canals are deteriorating because of lack of use. There is an urgent need for the Government and nucleus companies to work out a comprehensive plan and to provide the necessary budget for O&M. It is essential for local governments, nucleus companies, and smallholders to realize the importance of O&M of the project infrastructure facilities to ensure the sustainability of project impacts. DGF and DGWRD should jointly conduct training programs to nucleus companies and smallholders for O&M of the project facilities. 25. The Loan Agreement stipulated that O&M of access roads and smaliholder infrastructure facilities will be the responsibility of the local government concerned. However, under the current financial situation, neither the national nor the local governments are able to provide adequate funds to finance O&M of these roads and facilities. At present, the roads and smallholder facilities are deteriorating. There is an urgent need for the provision of necessary budget from the Government and NES for O&M. Smallholders also need to contribute their labor force for O&M of access road and their facilities. K. Performance of the Borrower and the Executing Agencies 26. Despite the best efforts of the Government and the EAs, the Project's objectives and targets have not been fully achieved at this time due to financial constraints and inefficient operation of credit delivery to the aquaculture subsector. The overall coordination between the EAs was weak. Moreover, it was noted that the EA for the credit component, BUKOPIN, had little lending experience in aquaculture and in dealing with smallholders; this was the main cause of the serious implementation delay and the reduction of project scope. With three EAs involved in project implementation, the manager and staff in the main Project Management Office in DGF, had difficulty coordinating overall project implementation. In general, overall performance of DGF and BUKOPIN was not fully satisfactory. DGWRD's performance in project implementation was generally satisfactory except for the deficiency in the performance of the primary canal for the DMTK subproject. 27. The monitoring and reporting of the Project were not carried out regularly due to lack of staff in the Project Management Office of DGF to prepare regular implementation progress reports and monitoring reports. Most of the monitoring and progress reports were prepared by the project consultants. L. Performance of the Bank 28. The Project was properly designed in terms of its objectives. The NES was an appropriate approach to increase rural employment and smallholder income. However, the appraisal did not identify a suitable credit delivery system for the NES and overestimated the capabilities of DGF and BUKOPIN to implement the Project and deal with smallholders. During the seven year and eight months of project implementation, the Bank fielded nine missions, comprising an Inception Mission, five Project Review Missions, a Project Review and Reformulation Mission, a Special Project Administration Mission, and a Project Completion Review Mission. The missions visited the EAs and subproject sites and conducted discussions

19 9 with the Government and EA officials, nucleus company staff, project consultants, and smaliholders to identify critical implementation issues. They provided the EAs with timely advice and assistance to accelerate project implementation. In particular, the Bank's Mission after project reformulation in 1995, played a very important role in accelerating smooth implementation of the Project. These missions, in terms of frequency and efficiency, are considered adequate and appropriate. In general, although the Project encountered implementation difficulties, the Bank's assistance and support were responsive, and were acknowledged by the Government staff involved in the Project. Ill. EVALUATION OF INITIAL PERFORMANCE AND BENEFITS A. Financial Performance 29. Financial evaluation was undertaken for the nucleus companies and smallholder farms. For the smallholder farms, financial evaluation was aggregated according to the subproject location to yield a single estimate of the financial internal rate of return (FIRR) for the smallholders in each subproject location. Of the nucleus companies, Anugrah Tambak Perkasindo (ATP) is projected to produce the highest return with an FIRR of 47 percent, followed by Matang Speng Raya (MSR) and DMTK with returns of 25 and 17 percent. The estimated FIRRs of MSR and DMTK are below the 31 percent projected at appraisal. The lower returns were attributed to the failed establishment of ponds and the cost overrun for MSR during its early years of pond construction, and failed harvest and poor water availability for DMTK. The FIRRs for three subprojects are presented in Appendix Among the smallholder farms, ATP is providing the highest return at 18 percent followed by DMTK at 4 percent. The smallholders in ATP are expected to be most sustainable in terms of productivity and financing because of heavy involvement of the nucleus company in the farm O&M. None of the smallholder farms is expected to generate the high FIRR of 47 percent envisaged at appraisal, because lower yields are projected. Urgent initiatives are needed to improve the working arrangements between the nucleus company and smallholder farms of DMTK. The smallholder farms have failed to return their working capital advanced from the nucleus company, and BUKOPIN is threatening to discontinue the provision of working capital. This could severely disrupt production of the smallholder farms. 31. Regarding the repayment of investment and working capital subloans extended under the Project, BUKOPIN reported that the first installment payment will be due from MSR at the end of With the recent improvement in MSR's cash position, MSR is expected to service its debts without any difficulties. BUKOPIN, however, indicated its concern over the repayment prospect of debts incurred by the smallholders at DMTK. B. Economic Performance 32. The economic returns of the Project were reevaluated using the domestic numeraire method based on an expected 20-year asset life. Between 1989 and 1998, a total economic investment of $11.8 million was spent on the Project for capital and operating costs. In return, the Project yielded shrimp valued at around $3.6 million in In the coming years, the nucleus companies and smaliholder farms in the three subprojects are expected to incur further O&M cost for farms and canals estimated at $5.2 million per annum at full project

20 10 development in It is also envisaged that additional capital spending will be made by both the nucleus and smallholder operators for the establishment of new ponds between 1998 to Project output is expected to rise to $7 million 7 by 2001 because of a modest improvement in the shrimp yield and expansion of the operating pond area. The relevant assumptions, and economic cost and benefit streams for the evaluation of the project's economic internal rate of return (EIRR) are presented in Appendix 8. The reestimated EIRR for the Project is 14 percent. C. Attainment of Benefits 33. As the project scope was reduced by two thirds, the quantified benefits and impacts of the Project were also lessened accordingly. As of the preparation of this report, the full development of brackish-water ponds for the three subprojects has not been achieved. During the initial operation period, between 1996 and 1998, the incremental annual shrimp production ranged from 360 t to 435 t with a financial value of $4 million per annum. At appraisal, production was envisaged at 4,300 t, worth at least $30 million annually from 10 subprojects. The Project provided livelihood for 99 smallholder families in three subprojects compared with the appraisal estimate of 1,280 for 10 subprojects. The nucleus companies employed a total of 85 skilled and 203 unskilled permanent workers as compared with the 310 and 570 envisaged at appraisal. The nucleus companies annually remit about $143,000 in salary payment. A total of 125 person-months and 6 person-months of temporary employment are generated by the nucleus companies and smallholder farms, mainly during the harvest. With the depreciation of the rupiah, the profitability of shrimp farming substantially increased during 1997 and This is likely to encourage the expansion of pond areas and production by both the nucleus companies and smallholders, even under a condition of tight credit provision. By project completion, the advanced shrimp aquaculture and hatchery technologies were widely applied by small fish farmers in the project areas. A diversified use of shrimp ponds for other fish culture in the medium term will result in increased income and livelihood activities of beneficiaries in the project area. Appendix 9 summarizes the benefit attainment of the Project. IV. THE TECHNICAL ASSISTANCE 34. As part of the Project, an advisory TA, provided institutional strengthening to BUKOPIN for (i) business development, project appraisal, loan supervision, and portfolio management with an emphasis on term lending; (ii) maintenance of appropriate accounting and management information systems (MIS); and (iii) enhancing the development of the existing computerized data and information system. 8 The EA for the TA was BUKOPIN. 35. The TA was implemented over 14 months (August 1990 to October 1991), involving 25 person-months of consulting inputs. BUKOPIN worked closely with the consultants to complete the TA tasks. The consultants accomplished their assignments satisfactorily, providing assistance in strengthening the capabilities of BUKOPIN's Business Development Unit in lending operations; improving standard and rigorous appraisal methodology; preparing credit processing, accounting system, and MIS manuals; setting up an effective portfolio management system; streamlining and upgrading MIS and accounting systems; and In 1998 prices TA INO: Institutional Strengthening of BUKOPIN, for $350000, approved on 30 May 1989.

21 11 conducting various training to about 100 BUKOPIN staff in financial management and use of various manuals. The consultants produced a final report detailing TA implementation and outputs. The quality of various policy and operational manuals prepared under the TA was good and acceptable to the Bank and BUKOPIN. The policy and operational manuals developed under the TA were considered by BUKOPIN to be very useful tools for strengthening its general financial capability. BUKOPIN appreciated the consultant's work. There was little information available at the time of the Project Completion Report Mission on how the outputs of the TA were used and whether they resulted in improved performance of BUKOPIN's business operations. A. Conclusions V. CONCLUSIONS AND RECOMMENDATIONS 36. Because of difficulties encountered during implementation from 1990 to 1994, the Project was reformulated and its scope was reduced by two thirds in After the reformulation, implementation improved, particularly for Part A activities. The Project has completed major physical infrastructure facilities and support facilities, including primary and secondary canals, access roads, smallholder houses, wells, sewage disposal, and community halls in three subprojects. Also, the nucleus production facilities are operating well, producing an average of t of shrimp per ha per annum; this exceeded the project target of 2 t per ha per annum. The reestimated EIRR of the Project is 14 percent. The semi-intensive culture technology and system, which is environmentally sound, was widely accepted and applied by the beneficiaries. 37. The Project has been successful in promoting private sector participation in the aquaculture development as evidenced by the successful operation of the nucleus companies. However, the Project has so far been less successful in providing income, employment, and benefits to smallholders, and increasing shrimp production for export. The reformulated Project envisaged development of 612 ha of shrimp ponds involving 306 farm families as smallholders. So far, only 135 ha have been developed involving 68 families. Also, only 288 farmers were employed as laborers by the nucleus companies compared with the reformulated target of 500. Since the smallholder facilities have not been fully completed, it is too early to observe the full impact on shrimp production and smallholder benefits. Nevertheless, some positive socioeconomic impacts of the Project were observed (para 36). Overall, the Project is considered partially successful. 38. Several weaknesses in project design and implementation were identified. During project preparation, the capabilities and experiences of DGF and BUKOPIN in coordinating overall project implementation, lending to aquaculture, and dealing with smallholders were overestimated. During implementation, the lengthy contracting procedures of the Government for consultants and contractors, the complicated identification process for subborrowers and smallholder beneficiaries, and rigid credit policies and restrictive lending terms and conditions often delayed project progress and adversely affected its physical accomplishment. With the current financial constraints in the country, it is anticipated that the GovernmentlEAs may take a longer time to complete smallholder production facilities.

22 12 B. Lessons Learned 39. The following lessons were learned from the experience of Project implementation: (i) The nucleus estate and smallholder concept is an appropriate approach to be used in increasing rural employment and smallholder income through the development of brackish-water shrimp production. However, more effort and time are required for social preparation of smallholders and development of a suitable credit delivery mechanism and production management system for the credit agency, nucleus companies, and smallholders to effectively achieve the project objectives. (ii) A committed and capable project leader and a group of qualified and competent personnel should be identified and in place prior to project implementation. An effective and strong coordinating agency is required to coordinate and supervise the project when more than one agency is participating. (iii) To support smallholder livelihood development, savings, profit-sharing, and self-reliance programs need to be promoted. TA by the Government or other technical agencies is also needed to assist smallholders in preparing and implementing projects, and in accessing credit facilities, and to involve grassroots credit cooperatives as financial intermediaries. (iv) More rigorous assessments of the capacity and experiences of participating EAs should be conducted prior to project implementation. (v) The lengthy processing procedures of the Government for preparation work, and contracting consultants, contractors, and other study teams for project implementation can not keep up with the working pace of the private sector considering the tremendous changes in technologies and market development of the shrimp industry. To be compatible with the private sector, the Government should simplify the procedures for project implementation. (vi) The shrimp culture technology devised during implementation and applied by the beneficiaries is a sustainable operation that minimizes the pollution and unwanted discharges to the coastal areas and agriculture field, and also prevents the outbreaks of shrimp disease. The Project, through wide dissemination of the technology to other shrimp culture areas, can redirect the shrimp industry toward a sustainable production system and help the country to set new technical standards for production. C. Recommendations 1. Project Related 40. To enhance Project performance and achieve Project objectives, the Government should ensure completion of the remaining activities. To ensure the full effects of the improvement of socioeconomic benefits in the three subproject areas and to sustain the existing impacts of the Project, the following recommendations were made to the Government:

23 13 (i) The Government (BAPPENAS and Ministry of Finance) should continue to support financial arrangements with financing institutions to provide the required credit of $4.5 million equivalent to support the construction of the remaining smallholder shrimp ponds. (ii) DGF and PPOs should continue with field work to support the completion of smallholder production facilities, make the necessary arrangements with nucleus companies to help smallholders enter shrimp production in the constructed smallholder shrimp ponds, and provide extension services and information including updated technical information on disease control and shrimp pond management to NES in the project areas. (iii) DGF should allocate budget for the continuation of the BME work for the Project and utilize the established BME system for monitoring and evaluation works. (iv) DGWRD, DGF, and the local government should help the DMTK subproject to solve the problem of water supply to ensure the success of shrimp production. (v) DGF and DGWRD should jointly conduct training programs for the O&M of the project facilities, complete the preparation of management plans for O&M by the end of 1999, and hand over the facilities to the local governments, NES, and smallholders. (vi) further delay. DGF and DGRWD should submit the audit report for 1998 to the Bank without 2. General 41. Presently, the private sector in Indonesia has lost its momentum and capacity to continue its investment in most sectors, including aquaculture and marine culture, because of the current financial crisis and social unrest. However, the existing aquaculture production in the country (350,000 ha) is making more profits than before as most of the aquaculture produce is exported and earns foreign exchange. Therefore, the aquaculture and mariculture development projects can help not only to provide employment opportunities and food for the people and the poor, but also to generate foreign exchange for the country. Moreover, the newly developed ecologically sound aquaculture technologies and systems are effectively eliminating environmental pollution and preventing fish disease from affecting the aquaculture operation. 42. There is considerable scope for further Bank involvement in aquaculture. Also, in view of the large potential areas (more than 9 million ha of fresh and brackish-water swamps) for further development of aquaculture production, the Bank could assist in (i) helping the private sector to regain its momentum in aquaculture development and contribute to the food security of the country; (ii) promoting ecologically and environmentally sound operational systems, and improving the existing aquaculture system to protect the environment; and (iii) providing extension services on the control of fish disease. However, more rigorous assessment of the credit demand and affordability of subborrowers and smallholders needs to be conducted during project preparation and design. Further efforts are also needed to assist the Government with the social preparation of smallholders and development of a suitable credit mechanism and production management system for smallholders in aquaculture, taking into consideration lessons outlined in paras above.

24 14 3. Timing for the Project Performance Audit Report 43. As the physical targets have not yet been fully met in the smallholder production facilities, it is recommended that the Bank conduct a follow-up review on implementation in 2000 prior to the preparation of a project performance audit report with an emphasis on (i) the status of the completion of smaliholder facilities; (ii) the credit repayment record of beneficiaries; (iii) the status of production and the profitability of beneficiaries at the time; (iv) adequacy of field extension services; (v) operational efficiency and the status of maintenance of the project facilities; and (vi) the environmental impact of the Project. Appropriate timing for the preparation of the report will be in 2001 or beyond.

25 15 APPENDIXES Number Title Page Cited On (page, para) I Summary of Overall Actual Accomplishment 16 2, 5 2 Description of the Three Subprojects 17 2, 6 3 Detailed Project Costs 20 5, 14 4 Implementation Schedule for the Reformulated Project 23 5, 15 5 List of Vehicles and Equipment Procured Under the Project 24 6, 17 6 Compliance with Loan Covenants 25 6, 20 7 Status of Loan Allocation and Disbursement 29 7, 21 8 Economic and Financial Analysis 30 9, 29 9 Attainment of Benefits 37 10, 33

26 16 Appendix I SUMMARY OF OVERALL ACTUAL ACCOMPLISHMENT Comparison with Targets and Scope at Appraisal and as Revised Revised Activity and Target At Appraisal Scope a Actual Part A Subproject Sites (number) Primary & Secondary Canals (number) Access Roads (number) Smallholder Facilities (number) Consulting Services (person-months) Overseas Training (persons) Local Training (persons) Monitoring & Evaluation (reports) Part B Nucleus Company Hatchery (number) Nucleus Company Grow-out Ponds (ha) Nucleus Co. Pond Production (kg/ha/year) 2,500 2,500 3,000 Other Nucleus Company Facilities (number) Smallholder Grow-out Ponds (ha) 1, Smallholder Pond Production (kg/ha) tbd Other Smaliholder Facilities (number) 1, Consulting Services (person-months) Overseas Training (persons) Local Training (persons) a Reformulated in October 1995 Source: Staff Estimates

27 17 Appendix 2, page 1 DESCRIPTION OF THE THREE SUBPROJECTS 1. PT. Matang Speng Raya (MSR) Subproject1 located in Langsa, East Aceh, has an aquaculture production area of about (hectares) ha of which 91.5 ha is allocated for nucleus company and 194 ha for smallholders. At loan closing, Directorate General of Water Resources Development (DGWRD) had completed all construction works of the subproject including 7.5 kilometers (km) of primary and secondary canals and 2.4 km of access roads. 2. Ninety-seven smallholders were selected by the Provincial Project Office (PPO) to participate in the Project implementation. Directorate General of Fisheries (DGF) has completed the construction work of the smallholder support facilities. Out of 194 ha planned, DGF constructed 26 ha of shrimp ponds for 26 smallholders. The remaining work for smallholder production facilities can only be completed when the development funds are available. Under current economic constraints, it will take longer to complete the smallholder facilities. 3. The estate development agreement (EDA) and smallholder credit agreement (SCA) for the MSR subproject were signed by the Government, Bank Umum Koperasi Indonesia (BUKOPIN), MSR, and the smallholders in February Thereafter, the credit was released from BUKOPIN to MSR for the initial 23 ha of shrimp pond development. However, due to first crop loss in MSR and the unresolved repayment issue with BUKOPIN, MSR was considered to no longer be eligible to receive credit from BUKOPIN. From 1995 to the present, MSR's continuing to develop of shrimp ponds with its own financing. As of August 1998, it had developed about 25 ha of shrimp ponds and was operating 12 ha of these. MSR's production has benefited from the project infrastructure facilities and achieved good results. From October 1996 to date, MSR is able to produce about 40 ton (t) of shrimp from 12 ha of production ponds. Since the development of production facilities for smallholders was completely stopped in 1995 due to MSR repayment problems, the Government has made necessary efforts to arrange credit for the development of smallholder production facilities (194 ha) by introducing a new private company, PT Peudong Pakat. At present, PT Peudong Pakat has developed about 70 ha of shrimp ponds for the company and is rehabilitating 26 ha shrimp ponds for smallholders. Production in 13 ha of the company ponds started in July PT Peudong Pakat plans to further develop 112 ha of shrimp ponds in the subproject area within three years to benefit both the private sector and smallholders. 4. PT. Deli Minatirta Karya (DMTK) Subproject is located in Deli Serdang, North Sumatra. It has an aquaculture production area of 290 ha comprising 32 ha for nucleus company and 258 ha for smallholders. Based on the revised work plan for construction of primary and secondary canals, DGWRD completed all construction of canals (10.9 km) and access roads (4 km) in November DGF has supported DMTK in selecting land and releasing land titles for the entire area and selected 128 smallholder participants for the subproject. DGF has completed the construction of smallholder support facilities. 5. In the DMTK subproject, the EDA and SCA were signed in April 1995, and BUKOPIN approved the financing of 128 ha of shrimp pond development (32 ha for nucleus estates and Due to unsolved problems with the repayment of old credit of MSR, Bank BUKOPIN completely stop its credit funds to MSR in To achieve the project objectives, the Government/DGF approved in 1996 PT Peudong Pakat, a private company, to replace MSR as a new NES to continue the development of the production facilities for smallholders.

28 18 Appendix 2, page 2 96 ha for smallholders) and has released about Rp2,612 million to DMTK for 32 ha of nucleus company and 96 ha of smallholder ponds at loan closing. At present, 32 ha of nucleus shrimp ponds have been constructed and are being used for shrimp production. Full production started in April The results of the production are promising. At loan closing, the nucleus company was able to produce about 90 t of shrimps, worth about $900,000, while 96 ha of smallholder production facilities are being operated. All 96 ha of smaliholder ponds commenced their production at the end of The outputs from smallholder ponds were unknown due to the difficulties encountered by both extension staff of the local government and nucleus company in monitoring and managing smallholder harvests and records. Moreover, it was reported by the nucleus company that water supply from the primary canal is not sufficient to cover all constructed ponds; this has adversely affected shrimp production. The Mission recommended and DGF agreed that necessary improvement of canals or some other alternative measures, such as construction of reservoirs and use of large diameter pumps should be adopted to ensure the success of the production. 6. PT. Anugrah Tambak Perkasindo (ATP) Subproject is located in Deli Serdang, North Sumatra. The subproject consists of 100 ha (nucleus area) of existing ponds and 160 ha of new area (smaliholder area). 7. DGWRD completed the construction of 22.5 km of primary and secondary canals and one bridge in July DGF has undertaken considerable work in support of ATP for the preparation of the subproject including the establishment of a PPO and selection of smallholders. DGF also completed the physical construction of the smallholder support facilities in July Although the EDA and SCA for the ATP subproject were signed in December 1995, BUKOPIN canceled the credit program for the subproject in 1996 due to a disagreement about collateral requirement by ATP. Since then, the nucleus company has used its own funds, amounting to $1.5 million, to rehabilitate all shrimp production facilities. As of August 1997, about 100 ha have been rehabilitated and constructed, and are now being operated for shrimp production. During , the nucleus company has harvested a total production of 650 t from 70 ha of ponds. Total net profit obtained by the nucleus company was estimated at about $3.25 million equivalent. The Mission observed that the Project's infrastructure had a significant impact on shrimp production by improving the water supply and quality of shrimp ponds. The construction of 13 ha of smallholder production facilities was completed by DGF in 1997 using the Government budget. The initial trial operations are being conducted by the nucleus company. The Mission requested the Government to arrange further credit to support the development of the remaining 147 ha of smallholder production facilities and the nucleus company to provide technical and financial supports to smaliholders for their production. However, current economic constraints have adversely affected the progress of development of smallholder production facilities.

29 19 Appendix 2, page 3 Table A21 Status of Overall Accomplishment of Revised Project Works As of 30 September 1998 Work items Target Accomplishment Remaining Work Completion Dat. Remarks DGWRD Components I. Primaly & Secondary Canal 1 PT MSR 7.5 km 7.5 km none Mar97 2. PTDMTK' 10.9 km 10.9 km none July97 3. PTATP 22.5 km 22.5 km none July97 II. Access Road 1. PT MSR 2.4 km 2.4 km none June97 2. PT DMTK 4.0 km 4.0 km none Nov PTATP 1.0 bridge 1.0 bridge none July97 DGF Component I. Smalihoider Facilities 1. PT MSR 97.0 plots 97.0 plots none June97 2. PT DMTK plots plots none June97 3. PT ATP 80.0 plots 80.0 plots none June97 Credit Component I. Nucleus Ponds 1, PT MSR & PT PP (NES FINANCIN 91.5 ha 95.0 ha none Credit canceled All additional areas financed by nucleus 2. PT OMTI< (BUKOPIN / NES) 32.0 ha 45.0 ha none Dec.96 Disbursment began Aug PTATP (NES FINANCING) 71.5 ha ha none Credit canceled All 100 ha financed by nucleus ii. Smaliholder Ponds (GOi&BUKOP1N) 1. PT MSR/PT PP 1940 ha 26.0 ha 168 ha To be determined To be financed by Government or others 2. PT DMTK 2580 ha 96.0 ha 162 ha To be determined To be financed by Government or others 3, PT ATP ha 13.0 ha 147 ha To be determined To be financed by Government or others Consult Service (p-tnt i. DGWRD-Detailed Design I. PT MSR 20.0 p-rn 20.0 p-m none Completed 2. PT DMTK 20.0 p-rn 20.0 p-rn none Completed 3 PTATP 20.0 p-rn 20.0 p-rn none Completed II. DOF-Detailed Design I. PT MSR 13.5 p-rn 13.5 p-rn none Completed 2. PT DMTK 13.5 p-rn 13.5 p-rn none Completed 3. PTATP 13.5 p-rn 13.5 p-rn none Completed iii. BOKUPIN IV. GOPA 27.0 p-m 27.8 p-rn none Dec p-rn 66.0 p-m none Nov.96 Training I. Overseas (p)' 1.DGF 8.0 p 8.0 p none Sept95 2.BANK BUKOPIN 32.0 P 32.0 p none Feb.96 II. Local 1. Co-trainer Training 45.0 p-rn 45.0 p-rn none 30 DGF staff receives technical training in Jepara. 2. Smallholder Training p-rn p-rn none June97 On the job training will be continued beyond project period. Subprojects Person-months Persons

30 20 Appendix 3, page 1 DETAILED PROJECT COST Table A3.1: OrigInal, Revised, and Actual Project Cost ORIGINAL. REViSED ACTUAL TOTAL COST Total Item COST COST BANK DGWRD DGF BUKOPIN NUCLEUS ($ 000) ($ '000) ($'OOO) (in $000) (in $000) (in $000) (in $000) (In $000) Part A: Government Support Facilities 1. DGWRD 3,547 2,811 2, ,010 a. Primary Canals for Nucleus b. CanalsforSmallholders 1, , c. Right of Way/Access Roads d. Construction Management e. ProjectManagementOffices DGF: 4,953 6,198 3,041 1,107 4,148 a. Smaliholder Support Facilities 2, ,248 b. Consulting Services ,099 c. Construction Supervision d. Overseas Fellowships e. Local Training (Smallholder) f. Project Management Offices g.pbme h. Development Plan (Remaining Locations) Plasma Development Cost (Remaining) - 2, Base Cost (Part A) 8,500 9,009 5, ,107 7,158 Contingencies 1,360 1,351 - Subtotal (Part A) 9,860 10,360 5, ,107 7,158 Part B: Credit Component 1. Nucleus Companies (Bukopin): 27,784 9, ,085 3,453 5,021 a. Hatchery 9,082 - b. Grow-out Ponds & Canals 7,763 3,549 c. Other Facilities 897 3,374 d. Consulting Services 3, , [ 4,538 e. Training 77 7 f. Working Capital 6,442 2,351 [ 2. Smallholders (Bukopin) 8,560 1, a. Land Clearing and Pond Development 5,008 1,507 b. Housing 1, c. Subsistence [ 183 d. Working Capital 1, IDC(Bukopin!Nucleus) - 1, Bukopin: a. Consulting Services b. Staff Training Base Cost (Part B) 36, , ,268 3,453 6,113 Contingencies 6,420 1, Subtotal (Part B) 43,071 14,921 1, ,268 3,453 6,113 TotalCost(A+B) 52,931 25,281 7, ,107 1,268 3,453 13,271 Taxes 3, Recoveryof TA No Interest During Construction 6,710 2,340 2, ,340 TotalProjectCost 63,401 28,961 9, ,107 1,268 3,453 15,721

31 21 Appendix 3, page 2 Table A3.2: Actual Project Cost FX Local Currency Total Item ADB ADB DGWRD DGF BUKOPIN NUCLEUS ($ 000) (S '000) (in $'OOO) (in $000) (in $000) (in $'OOO) (in $'OOO) Part A: Government Support Facilities 1. DGWRO 1,615 1, ,010 a. Primary Canals for Nucleus b. CanalsforSmallholders c. Right of Way/Access Roads ( 467 d. Construction Management - - e. Project Management Offices DOF: 1,434 1,607 1,107 4,148 a. Smallholder Support Facilities b. Consulting Services c. Construction Supervision d. Overseas Fellowships 80 - e. Local Training (Smallholder) f. Project Management Offices g. PBME - 83 h. Development Plan (Remaining Locations> - - i. Plasma Development Cost (Remaining) BaseCost(PartA) ,107 7,158 Contingencies Subtotal(PartA) 3,049 2, ,107 7,158 Part B: Credit Component 1. Nucleus Companies (Bukopin): 483-1,085 3,453 5,021 a. Hatchery [ b. Grow-out Ponds & Canals c. Other Facilities [ d. Consulting Services 1,085 ( 3,453 ( 4,538 e. Training f. Working Capital 2. Smallholders (Bukopin) a. Land Clearing and Pond Development b. Housing I c. Subsistence d. Working Capital 3. IDC (Bukopin!Nucleus) Bukopin: a. Consulting Services b. StaffTraining Base Cost (Part B) 1, ,268 3,453 6,113 Contingencies Subtotal (Part B) 1, ,268 3,453 6,113 Total Cost (A+B) 4,250 3, ,107 1,268 3,453 13,271 Taxes RecoveryoITANo Interest During Construction 2, ,340 Total Project Cost 6,700 3, ,107 1,268 3,453 15,721 FILENAME: G:tZHOLALS9ZITABLESITAB&E1

32 C,, a, 0) Cu 0 Cl) V a) Auojj i $.JW00dX0 t 00S t10 1'30I' p0510j OqI 00 P0$1 I O10J %9c 0t %PP 10 I00Y'QUI0 31 PU' X EU.. () $p 10 ooipzuiilfl lenuw EU

33 23 Appendix 4 IMPLEMENTATION SCHEDULE FOR THE REFORMULATED PROJECT Component I Comeillne ServiCeS adgf (frst1993: '. Sa*BUKOPIN (on Ipfre.n Cent 1090 to June Locallraiimg(DGP) U U U I I U U 4 aerseas TraflngIFeIcwth (DGF) L (fromaprol9o9 '.0 7 6PruectMaongemertOftce(DGWRO)UUUUUUUUUUUUUUUUUUUU 7 SiPeoiects a.l! I) DGWRD ConstrucOun :i,. '...v *:. :f: ct I) DGFIS.nal Farmers Tender Smat Farmers Construction I) Nucleus Co.opanyIBUKOPIN NucleusProduction PlasmoProduondn b.fmfl I)DGWRD Tendenlorconutnoction : Construction e) DGFISmaN Farmers Tender Smut Farmers. Tender tsr construction.00.0 /.. P. Construction e) Nucleus CumpanylBUkOPiN Nucleus Production Plasma Production c. PTATP I) OGWRD Tender for DO I ;_ ydt i. Tender for construction Construction a) OGF/Smut Farmers 00 for SmaN Farmers Tender for construction Construction I) Nucleus Corrpany/SUKOPIN Nucleus Production Plasma Production 7 - # / J /7 & -r. revised estimate actual

34 A. Executing Agencies 24 LIST OF VEHICLES AND EQUIPMENT PROCURED UNDER THE PROJECT Procurement Description Unit Quantity Mode 1. DIrectorate General of Fisheries - Vehicles Unit 6 LCB - Motorcycles Unit 5 OP - Telephone Unit 1 LCB - Filing Cabinet Unit 13 DP - Brandkast Unit 1 OP - Computer Unit 4 OP - Lap Top Computer Unit 2 LCB - Facsimile Unit 2 LCB - Furniture Unit 3 OP - Calculator Unit 5 DP - Electric Type Writer Unit 1 OP -OHP Unit i OP - Paper Shredder Unit 3 DP - Laser Printer Unit 2 OP - Slide Projector Unit 1 DP - Television Unit i DP - Video Handycam Unit 1 OP - Electronic White Board Unit 2 OP - Handy Transceiver Unit 4 OP - Handy Refractometer Unit 5 OP - Camera Unit 1 LCB - Water Test Kit Unit 1 op - Oxigenmeter Unit 5 OP - ph-meter Unit 2 OP - PH-soil tester Unit 2 OP - Thermometer Unit 5 OP - Range Finder Unit 2 OP - Waterpas Unit 2 DP 2. Directorate General of Water Resource Development - Computer set 3 LCB 3. Bank BUKOPIN Appendix 5 B. Executing Agenctes Local Office 1. Aceh Province - Vehicles Unit 1 OP - Motorcycles Unit 2 OP - Computer Unit 2 OP - Facsimile Unit I LCB - Handy Refractometer Unit 2 Op - Oxygenmeter Unit 1 OP - ph-meter Unit 3 OP - ph-soil tester Unit 3 op - Single Side Band (SSB) Unit 2 LCB -Thermometer Unit 2 OP - Handy Talkie Unit 2 OP 2. North Sumatera Province - Vehicles Unit I OP - Computer Unit 2 OP - Motorcycles Unit I OP - Handy Refractometer Unit 2 OP - Oxygenmeter Unit 1 OP - ph-meter Unit 3 OP - PH-soil tester Unit 3 OP - Single Side Band (SSB) Unit 2 LCB - Thermometer Unit 2 OP - Handy Talkie Unit 2 OP 3. NTB - Motorcycles Unit 1 OP - Computer Unit 1 OP - Handy Refractometer Unit 2 OP - Oxygenmeter Unit I OP - PH-meter Unit 3 op - ph-soit tester Unit 3 OP - Single Side Band (SSB) Unit 2 LCB Thermometer Unit 2 OP 4. South Kallmantan - Facsimile Unit 1 LCB - Handy Refractometer Unit 1 OP - PH-meter Unit 1 OP -ph soil tester Unit 1 OP - Thermometer Unit 1 OP 5. DGWRD Local Office B. Bank BUKOPINs Local Branch

35 25 Appendix 6, page 1 COMPLIANCE WITH LOAN COVENANTS (As of 30 September 1998) Covenant Status The borrower shall make available, or cause to be made Partly complied with. available, promptly as needed, the funds, facilities, services, land and other resources that are required, in addition to the proceeds of the Loan, for the carrying out of the Project and for the operation and maintenance of the Project facilities (Section 4.02, LA.). 2. The Borrower shall cause the Project to be carried out in accordance with plans, design standards, specifications, work schedules, and construction methods acceptable to the Borrower and the Bank. The Borrower shall furnish, or cause to be furnished, to the Bank, promptly after their preparation, such plans, design standards, specifications and work schedules, and any material modifications subsequently, made therein, in such detail as the Bank may reasonably request (Section 4.03[b], LA). Complied with. 3. The Borrower shall maintain, or cause to be maintained, records and accounts adequate to identify the goods and services and other items of expenditure financed out of the proceeds of the Loan, to disclose the use thereof in the Project, to records the progress of the Project (including the cost thereof), and to reflect, in accordance with consistently maintained sound accounting principles, the operations and financial condition of the Project executing agencies and other agencies of the Borrower responsible for the carrying out of the Project and operation of the Project facilities, or any part thereof, to the extent relevant to the Project (Section 4.06[a], LA) 4. The Borrower shall cause DGWRD and DGF to (i) maintain separate accounts for the Part A.1 and Part A.2-A.4 of the project; and (ii) have such accounts and related financial statements audited annually, and furnish the Bank, not later than nine (9) months after the end of each related fiscal year, certified copies of such audited accounts and financial statements and the report of the auditors relating thereto, all in the English language. (Section 4.06[bJ, LA). Complied with. Partially complied with, and with delays. The Borrower shall furnish to the Bank: (i) Quarterly reports on the carrying out of the Project Partly complied with, and with and on the operation and management of the delays. DGF did not submit Project facilities (Section 4.07 [b][i], LA). consolidated progress reports for the Project.

36 26 Appendix 6, page 2 Covenant Status (ii) Annual implementation planning reports to the Bank by 30 June of each year during the implementation period (Section 4.07[b][ii], LA); and Partly complied with. Due to delay in the selection of qualified nucleus companies during the initial and midterm implementation periods, the reports were not prepared except for the year The reports for 1996 and 1997 have been prepared but not yet submitted to the Bank. (iii) Submission of Project Completion Report by the Delayed compliance. The report Borrower not later than three months after the was prepared in July 1998 and physical completion of the Project (Section 4.07[c], received by the Bank in LA). September The Borrower shall ensure that DGF extension staff and participating smallholders shall be trained under existing Government training programs and that nucleus companies shall provide their local staff with local training in brackishwater pond culture techniques, shrimp hatchery operation, pond engineering and water management and postharvest handling of shrimp (Para. 24, Sch 6, LA). 6. DGF to undertake PBME to ensure smooth progress of the Project (Para. 32, Sch 6, LA). Complied with. Baseline survey completed in Regular and periodic assessments were carried out. The last exercise was carried out for the three subprojects in the fourth quarter of Partial compliance. 7 A 200 meter "buffer zone" of undisturbed mangrove shall be Complied with. left between the coastline, and any area developed under the Project (Para. 27, Sch 6, LA). 8 Section 3.01, PA. (a) (b) (C) BUKOPIN shall carry out the Project with due diligence and efficiency and in conformity with sound banking, financial, business, administrative, and aquaculture practices. In the carrying out of the Project and in the conduct of its business, BUKOPIN shall perform all the obligations set forth in the Loan Agreement to the extent that they are applicable to BUKOPIN. BUKOPIN shall carry out the Project in accordance with plans, schedules, and arrangements made in consultation with DGF, DGWRD, and the Bank. Complied with. Complied with. Complied with.

37 27 Appendix 6, page 3 Covenant Status 9. BUKOPIN shall make available, promptly as needed, the Complied with. funds, facilities, services, and other resources required, in addition to the proceeds of the Subsidiary Loan, for the carrying of the Project (Section 3.02, PA). 10. Signing of Estate Development Agreement (EDA) not later Delayed compliance due to than one year after the effective date (Para. 5(i.), Sch 6, repayment problem and collateral LA). issues. Of the 3 signed EDAs, only one was implemented and completed at a reduced scope. The 2 others were canceled. 11. At least 20 percent of the contemplated Smallholder Credit Delayed compliance by one Agreements (SCA) for each estate shall be signed within nucleus estate with a reduced one year of the effective date and all Smallholder Credit number of smaliholder partici- Agreements shall be signed within one year and six months pants. The SCAs with the other of the effective date (Para. 5(u), Sch. 6, LA). two NESs were not implemented due to cancellation of the EDAs. 12. Upon signing of at least 20% of the contemplated Smallholder Credit Agreements for the relevant Estate, issuance of the HGU(s) for the entire Estate's land, and surrendering of such HGU's) or part thereof as collateral for Smallholder Credit as provided in Paragraph 15(b)(v) of this Schedule, but not later than one year after the Effective Date, the relevant Estate Credit Agreement shall become effective (Para. 5(iii), Sch. 6, LA). 13. O&M of the primary and secondary canals shall be the responsibility of the Nucleus Companies and Participating Smaliholders. O&M of the tertiary canals shall be the collective responsibility of the Participating Smallholders. O&M of access roads and village infrastructure shall be the responsibility of the local governments concerned which shall be provided with adequate funds by the Borrower for this purposes (Para. 30, Sch 6, LA). Partly complied with and with delay. Not complied with, due to the current financial difficulties of both national and local governments which were unable to provide adequate funds. 14. Construction of each nucleus company's facilities and smallholders facilities shall be in accordance with schedule commencing from the effective date of relevant estate development agreement (Para. 7 Sch 6, LA). Completed for one NES at reduced scope, the alternative arrangement for the other two NESs were made through another private company and Ministry of Finance's Financial Cooperation Development Program. However, these arrangements were overtaken by the current financial difficulties and civil disturbance in the subproject area. In the meantime other alternative arrangements are being explored.

38 28 Appendix 6, page 4 Covenant Status 15. Each nucleus company in conjunction with DGWRD shall prepare a comprehensive plan for operation and maintenance of the primary and secondary canals under its estate. This plan shall be completed at least one year before Project completion and shall be submitted to the Bank for review and comment (Para. 30, Sch 6, LA). Not complied with due to current financial difficulties that are delaying the preparation. DGWRD will prepare the plan in coordination with the nucleus companies and concerned government agencies and it submit to the Bank by October 1999.

39 29 Appendix 7 STATUS OF LOAN ALLOCATION AND DISBURSEMENT ($'OOO) Category Category Original Revised Amount Undisbursed No. Description Allocation Allocation Disbursed Balance 01 Civil Works (PartA.1) 2,937,000 3,003,000 2,833, , Civil Works (Part A.2) 2,965,000 1,575,000 1,248, ,271 03A Project Mgt. (PartA.1) 110,000 98,000 14,915 83, Project Mgt. (PartA.2) 715, , , , Training & Fellowships 290, , ,448 6,552 (Part A.3) 05 Consulting Services 983,000 1,127,000 1,098,220 28,780 (Part A.4) 06 Credit for Nucleus 12,018,000 2,507, ,815 2,024,185 Companies (Part B.1) 07 Credit for Smallholders 6,980,000 1,605, ,925 1,264,075 (Part 8.2) 08 Credit for BUKOPIN 259, , ,840 3, Interest & Commitment 6,710,000 2,340,000 2,340,000 0 Charge during Constm. 11 PriorTechriical 110, , ,997 3 Assistance Cost 12 Unallocated 3,923, Total 38,000,000 13,791,000 9,731,592 4,059,408

40 30 Appendix 8, page 1 Economic and Financial Analysis A. Economic Analysis 1. The reevaluation of the Project's economic performance is based on the assessment of the costs and benefits of the entire Project (Components A and B). The economic life of the established subprojects is assumed to be 20 years coinciding with the repayment period and life span of the canal. All cost and benefits were valued according to the domestic price numeraire method at constant 1998 prices. 1. Economic Costs 2. The project costs were grouped into two categories: (i) the actual capital and operation and maintenance (O&M) costs incurred up to the Project Completion Review Mission (i.e., from 1989 and 1998) and (ii) the projected costs to be incurred for future years. The future cost streams comprise the planned capital investment required for a limited expansion of the nucleus and smallholder farms and O&M costs for the farms and the canal network. In deriving the economic costs the following adjustments and assumptions were made: (i) (ii) (iii) (iv) Traded inputs and output are adjusted by a shadow exchange rate factor of 1.11 (i.e., equivalent of a standard conversion factor of 0.9). Wages of unskilled labor are multiplied by a conversion factor of 0.8 to reflect the opportunity cost of unskilled labor. Only 30 percent of the cost for agency-staff training, institutional strengthening, and vehicles were charged against the project benefits because these inputs are adequate to serve an area equivalent to 10 subprojects rather than three realized under the Project. Farm operating costs are set at 75 percent of operating revenues. This figure is based on an actual 53 percent operating margin (i.e. operating cost/revenue equals 47 percent) observed on successfully harvested ponds and an average failure rate of percent, resulting in a similar percent markup in operating cost. (iv) In deriving investment costs in constant 1998 prices, foreign costs in US dollars are converted to their 1998 equivalent using the international price escalation factors, then converted to rupiah using the average 1998 exchange rate. 2. Economic Benefits 3. Project benefits were confined to the value of shrimps produced by the nucleus and smaliholder farms under the Project. The value of economic benefits were derived with the following assumptions: (I) Projected output of the nucleus and smallholder farm was based on actual production performance in 1996 and 1998; this was extrapolated for 1999

41 31 Appendix 8, page 2 onward with conservative assumptions on growing areas and yields (Table A8.1). (ii) Nucleus farms employ a semi-intensive to intensive culture while smallholders use traditional to semi-intensive methods. The average shrimp survival rate is 30 and 60 percent for the traditional and intensive methods respectively. Gradual improvement in shrimp yields is expected after the initial years of operations. For the nucleus and smallholder farms, the projected average yields of 2 tons (t)/crop/hectare (ha) and 0.5 ticrop/ha, respectively, are 25 percent below the average yields attainable with the technologies employed at these farms. (ii) The economic farm-gate price of shrimp was derived from the average free-onboard (FOB) price in the port of Belawan, North Sumatra (Table A8.2). 4. The reestimated project economic internal rate of return (EIRR) is 14 percent (Table A8.3). The revised EIRR is lower than the appraisal estimate of 26 percent. Lower than projected pond area developed under this Project is the reason for the downward revision in the EIRR projection. Economic return of the Project however would improve substantially if yields are modestly improved and harvest is reduced over the current average, or more subproject areas are developed into aquaculture ponds to take advantage of the infrastructure and canals already built under the Project. 5. The sensitivity analysis shows that the economic performance is sensitive to changes in the farm O&M (Table A8.4). This confirms the general assessments that cost control and healthy operating margins at the farm level are crucial to ensuring the benefit impacts of the Project. B. Financial Analysis. 6. The Project financial returns for the individual nucleus companies and smallholder farms were also reestimated. In the absence of data on individual smallholder farms, however, these farms were treated as one entity at each subproject area. Financial reevaluation was not conducted on PT. Peudong Pakat nucleus and MSR smallholder farms because these farms are not yet operational or just began their first year of operation at the time of project completion. Year 1 of the financial evaluation is from 1994 in contrast to 1990 for the economic evaluation. This reflects the later commencement for the investment by the nucleus companies and smaliholders. At appraisal, a time horizon of 10 years was assumed for the financial evaluation to match the repayment period of the subloans. For the reevaluation, the time horizon was extended to 12 years to account for an average delay of two years in the construction, the commencement of production, and the production trial period. 1. Financial Costs 7. The actual costs of the individual nucleus and smaliholder subprojects were obtained from the nucleus farms and Bank Umum Koperasi Indonesia (BUKOPIN). Unlike in the economic analysis, cost items that were not shouldered by the nucleus or the smallholders, such as investments on primary and secondary canals, training, and consultancy were excluded from the cost items to the farms. Projections were made to estimate future costs of

42 32 Appendix 8, page 3 the farms for the construction of additional ponds, maintenance of the canal networks, and O&M of the existing ponds and facilities. These costs were derived based on the unit costs and operating costs used to derive the economic returns (Tables A8.1 to A8.3). In addition to the costs discussed, income tax at 15 percent of farm income was applied as a cost item in the financial analysis. 2. Financial Benefits 8. Similar to the economic benefits, the financial benefits of the farms are derived from shrimp sales. Actual and projected shrimp outputs are presented in Table A8.1 identical to those used in the economic analysis. The financial farm-gate shrimp price is Rpl 10,000 per kilogram in 1998 constant prices as reported by the farms 3. Financial Reevaluation 9. The reestimated financial internal rates of return (FIRR5) of the various farms are presented in Table A8.4. Among the nucleus farms, Anugrah Tambak Perkasindo (ATP) is expected to generate the highest return. The revised, financial returns of Matang Speng Raya (MSR) and Deli Mina Tirta Karya (DMTK) are below the FIRR of 31 percent projected at appraisal due to the failed harvests, delayed commencement of operations, and poor water availability at DMTK. Financial evaluation was not undertaken on PT. Peudong Pakat because it just initiated operations in All nucleus estates are expected to generate attractive return above their estimate weighted average costs of capital of 11 to 13 percent. 10. Among the smallholder farms, the ATP subproject is expected to yield the highest return at 21 percent followed by DMTK at 5 percent. The smaliholdings of ATP are expected to be sustainable in terms of productivity and financing because of the heavy involvement of the nucleus company in the operation of the smallholder farms. Smallholder farms are not expected to generate FIRR of 47 percent as estimated at appraisal, because of the high frequency of harvest failures reported so far. In calculating the FIRR, the rate of harvest failure is assumed to remain high in the coming years at 50 percent. Therefore, if nucleus and smaliholders are able to lower the incidence of disease and operational failures, actual returns will consequently be higher than anticipated at this point. Urgent initiatives are needed to improve the production management between the BUKOPIN, the nucleus company, and smallholder farms of DMTK. The ongoing failure of the smallholders to repay their working capital advance from DMTK and BUKOPIN is threatening the future provision of working capital credit; this would severely disrupt the operations of the smallholder farms in the coming years.