Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 4405-IND

STAFF APPRAISAL REPORT

INDONESIA

NUCLEUS ESTATE AND SMALLHOLDER SUGAR PROJECI

June 27, 1983

Projects DepartmentEast Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

US$1 = Rupiah (Rp) 970Rp 100 = US$0.10Rp 1,000,000 = US$1,031

(Rupiah exchange rates are floating, based on a basket of currencies.)

FISCAL YEARS

Government of Indonesia: April 1 - March 31PTP XXIV-XXV: January 1 - December 31

WEIGHTS AND MEASURES(Metric System)

1 kilogram (kg) = 2.20 pounds1 ton (t) = 1,000 kg = 0.98 long ton

2204.59 pounds1 millimeter (mm) = 0.039 inch1 meter (m) = 39.37 inches = 3.28 feet = 1.09 yards1 kilometer = 0.62 mile1 hectare (ha) = 10,000 m2 = 2.47 acres1 square kilometer (km2) = 100 ha = 0.39 square mile1 cubic meter (m3 ) = 35.31 cubic feet1 liter (1) = 0.26 US gallon1 hectoliter (hl) = 2642 US gallons

FOR OFFICIAL USE ONLY

ACRONYMS

AARD - Agency for Agricultural Research and DevelopmentBAPPEDA - Badan Perencana Pembangunan Daerah (Provincial Development

Planning Agency)BAPPENAS - Badan Perencana Pembangunan Nasional (National Development

Planning Agency)BI - Bank Indonesia (Indonesian Central Bank)BIMAS - Bimbingan Masal Swa Sembada Bahan Makanan (Mass Guidance Program

for Self Sufficiency in Foodstuffs)BLKI - Balai Latihan Kejuruan Industri (Training Office for Industrial

Technicians)BP3G - Balai Penyelidikan Perusahaan Perkebunan Gula (Sugar Research

Institute - Pasuruan)

BRI - Bank Rakyat Indonesia

BULOG - Badan Urusan Logistik (National Food Stock Authority - rice,sugar, etc., -procurement and distribution)

DGE - Directorate General of EstatesDGFC - Directorate General of Food CropsHGU - Hak Guna Usaha (the right or permit to use land for a specific

purpose for a maximum of 25 years)GOI - Government of IndonesiaIIB - Institute for Instrumentation (Bandung)JSMB - Joint Sugar Marketing Bureau (Kantor Administrasi Pemasaran

Bersama Gula)JSPU - Joint Sugar Project Unit (Kantor Proyek Gula Bersama)KAPB - Kantor Administrasi Pemasaran Bersama Gula (Joint Sugar

Marketing Bureau)KPGB - Kantor Proyek Gula Bersama (Joint Sugar Project Unit)KUD - Koperasi Unit Desa (Village Cooperative Unit)LPP - Lembaga Pendidikan Perkebunan (Estate Training Institute)MOA - Ministry of Agriculture

MOF - Ministry of Finance

PCC - Provincial Coordinating CommitteePNP - Perusahaan Negara Perkebunan (State-Owned Estate Enterprise)PPIG - Proyek Pengembangan Industri Gula (Office for Development of

the Sugar Industry)PTP - Perseroan Terbatas Perkebunan (State Owned Estate Enterprise

with Limited Liability)PUSDIKTOP- Pusat Pendidihan Topograpi (Center For Topographic Training)PUSKUD - Pusat Koperasi Unit Desa (Central Services for Village

Cooperative Units)SBPN - Staf Bina Perusahaan Negara (Support Staff State-Owned Estates)TKPLN - Team Khusus Proyek Kerjasama Luar Negeri (Special Team for

Cooperation with Foreign Lending Agencies)TRI - Tebu Rakyat Intensifikasi (program to intensify smallholder cane

production)

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.

INDONESIA

NUCLEUS ESTATE AND SMALLHOLDER SUGAR PROJECT

STAFF APPRAISAL REPORT

Table of Contents

Page No.

I. BACKGROUND 1

A. The Agricultural Sector. . . . . . . . . . . . . . . . . 1B. The Sugar Subsector ... . . . . . . . . . . . . . . . 1C. Project Background ... . . . . . . . . . . . . . . . . 4

II. THE PROJECT AREA 5

A. Location and General Description . . . . . . . . . . . . 5B. Population, Present Land Use and Existing

Infrastructure .... . . . . . . . . . . . . . . . . 6

III. THE PROJECT 7

A. Project Objectives . . . . . . . . . . . . . . . . . . . 7B. Project Content... . . . 8

(a) Nucleus Estate Development (PTP XXIV-XXV) . . . . . 8(b) Smallholder Development . . . . . . . . . . . . . . 8(c) Regional Infrastructure and Services . . . . . . . . 8(d) Technical Assistance and Program Support . . . . . . 9

C. Implementation Schedule . . . . . . . 12D. Cost Estimates . . . . . . . . . 13E. Financing .. . . ... 13

Nucleus Estate .. . . . . . 13Smallholder .. . . . . . 16Interest Rates .. . . . . . 16

F. Procurement . . . . . . . . . . . . . . . . . . . . . . 17G. Disbursements . . . . .. . . . 18H. Accounts and Audits . . . . . . . 19I. Environmental Factors . . . . . . . 20

This report is based on the findings of an appraisal mission to Indonesiain September-October 1982. Mission members included Gerardo H. Soto(Mission Leader), Jean-Pierre Baudelaire, and Mark E. Cackler (World Bank),Peter G. Nelson, F. J. Blanchard, and A.L.J. Martin (Consultants).

Page No.

IV. ORGANIZATION AND MANAGEMENT 20

A. Institutional Structure . . . . . . . . . . . . . . . . 20(a) The Sugar Council . . . . . . . . . . . . . . . . . 21(b) Other Agencies . . . . . . . . . . . . . . . . . . 21(c) Bank Rakyat Indonesia . . . . . . . . . . . . . . . 22

B. Project Management . . . . . . . . . . . . . . . . . . . 22(a) General . . . . . . . . . . . . . . . . . . . . . 22(b) PTP XXIV-XXV . . . . . . . . . . . . . . . . . . . 23(c) South Kalimantan Provincial Government . . . . . . 26(d) Provincial Coordinating Committee . . . . . . . . . 26(e) Agricultural Support Services for Smallholders . . 27(f) Operation and Maintenance . . . . . . . . . . . . 28(g) Project Training Research . . . . . . . . . . . . 28

V. SUGARCANE PRODUCTION, TRANSPORT, PROCESSING AND MARKETING 29

A. Sugarcane Production ... . . . . . . . . . . . . . . . 29B. Cane Harvesting and Transport . . . . . . . . . . . . . 31C. Sugar Processing ... . . . . . . . . . . . . . . . . . 32D. Marketing . . . . . . . . . . . . . . . . . . . . . . . 33E. Prices .... . . . . . . . . . . . . . . . . . . . . . 35

VI. BENEFITS, JUSTIFICATION AND RISKS 35

A. General Benefits ... . . . . . . . . . . . . . . . . . 35B. Financial Results . . . . . . . . . . . . . . . . . . . 36C. Smallholder Incomes .37D. Economic Results ... . . . . . . . . . . . . . . . . . 38E. Project Risks . . . . . . . . . . . . . . . . . . . . . 40

VII. AGREEMENTS TO BE REACHED AND RECOMMENDATIONS 40

List of Annexes

Annex 1: Project CostsTable 1: Project Cost SummaryTable 2: Total Project Capital Costs: Project

Component by TimeTable 3: Project Operating CostsTable 4: Estimated Schedule of Disbursements

Annex 2: Technical Assistance, Training and ResearchTable 1: Consultancy ServicesTable 2: Personnel Training

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Annexes con't.

Annex 3: Agricultural OperationsTable 1: Land Development ScheduleTable 2: Sugarcane Harvesting Schedule

Annex 4: PricesTable 1: Historical and Projected Spot Prices

of Internationally Traded SugarTable 2: Derivation of Sugar Economic PricesTable 3: Historical and Projected prices of

Exported Indonesian MolassesTable 4: Derivation of Molasses Economic Prices

Annex 5: PTP XXIV-XXV Financial ResultsTable 1: Summary of PTP XXIV-XXV Financial

ResultsTable 2: Year End Balance SheetTable 3: Year-end Profit and Loss StatementTable 4: Project Income Statement and Cash FlowTable 5: Financial Costs and Benefits for

PTP XXIV-XXVTable 6: PTP XXIV-XXV Sugarcane and Sugar Production

Annex 6: Smallholder Credit ArrangementsTable 1: New Settler Sugarcane Farm ModelTable 2: Smallholder Family Budgets at Full

Development

Annex 7: Economic ResultsEconomic Costs and Benefits of the Project

Annex 8: Schedule of Early Events

Annex 9: Related Documents and Data in the Project File

Charts

1. Institutional Structure of the Sugar Subsector2. Project Organization3. Sketch of Factory Area4. Project Implementation Schedule

Map: IBRD 16814

I. BACKGROUND

A. The Agricultural Sector

1.01 Agriculture is the dominant sector in the Indonesian economy,though its share of GDP declined from 40% in 1968 to 24% in 1982. Afterpetroleum, agriculture is Indonesia's principal source of export revenue,contributing about 40% of the total, mainly from rubber, palm products,forest products and tea. It is by far the largest employer, accounting for55% of the work force. Its past rate of growth - 4% p.a. for 1971-81 - hasbeen unusually good by international standards.

1.02 Some 17 million smallholders, with an average 1 ha each, producesubsistence and cash crops. Some 1,800 estates, many publicly owned andmanaged, occupy 2.2 million ha producing mainly rubber, palm products, tea,coconut, tobacco and sugar. The Government of Indonesia (GOI) is attemptingto encourage private involvement in the plantation sector, especially bysmallholders.

1.03 GOI's objectives for the rural sector are to:

(a) Create productive employment and raise incomes of the rural poor.

(b) Increase domestic food supply, to keep pace with rising demandand reduce dependence on exports.

(c) Expand agricultural exports, particularly those from smallholderproduction.

B. The Sugar Subsector

1.04 Until the Depression of the 19 3 0s, Indonesia was the world'slargest exporter of sugar, mainly from Java, which still contributes morethan 95% of production. Annual output was three million tons and exportsmore than two million tons. At the end of World War II, many pre-war facto-ries were irreparable and sugar lands were either badly neglected or givenover to other food crops. Rehabilitation was slow and since 1966consumption has exceeded domestic production.

1.05 Recognizing Indonesia's comparative advantage in sugar production,GOI has carried out a major program of factory rehabilitation and construc-tion. During the 19 7 0s, seven new factories were built, three outside Java.Domestic production made impressive gains from a low point of 610 thousandtons in 1966, reaching current production levels of 1.3 million tons in1979. Imports nevertheless continued, sharply increasing in 1977 and 1978and still remaining at a high level, exceeding 700,000 tons in 1982.

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1.06 The total number of factories on Java is now 56. This includesseven private factories and a new Government factory in Jatitujuh (West Java)which was officially opened in September 1980. The remainder is grouped insix PNP/PTPs, namely PNP XIV (West Java), PNP XV and XVI (Central Java),PNP XX, PTP XXI/XXII and XXIV/XXV (East Java). The latter two account formore than 40% of Indonesia-s present sugar production. PTP XXIV-XXV wasassisted by an ADB credit for rehabilitation of some of its sugar factories(para. 1.10).

1.07 Until a few years ago, the Javanese sugar industry had severalunique features which continue in a diluted form: cane cultivation was doneby the estates which operated the factories, with no smallholder participa-tion, and rainfed cane cultivation and ratooning were negligible. Under thissystem, sugar factories rented about 1/3 of the sawah land in their concessionareas for cane cultivation for a period of up to 20 months. This arrangementrequired a very labor-intensive variation of the traditional Reynoso cultiva-tion system to permit the alternation from padi to sugarcane and back. In1975 the decision was made to start replacing this with a system under whichgroups of smallholders work their own land and organize all aspects of canecultivation including harvesting and transport. This is complemented by aSugarcane Smallholder Intensification Program (TRI) under which Bank RakyatIndonesia (BRI) provides a credit package to cover costs of inputs and livingexpenses, and by an output sharing formula for sugar between the factory andthe smallholders. One distinguishing feature of the TRI program is thevirtual absence of defaults, due to the credit system under which repaymentsare deducted from the smallholders share by the factory.

1.08 Implementation of the new arrangements is proceeding steadily, andin 1979 more than 100,000 ha, or 65% of the Javanese cane area, were culti-vated by smallholders. At the same time, dryland is used increasingly forcane cultivation, and ratooning is becoming more frequent, accounting for 33%and 29%, respectively, of the total Javanese cane area. Labor scarcity insome rural areas of Java and the inferior competitive position of sugarcanevis-a-vis continuous padi cropping in irrigated areas work against irrigatedcane cultivation in general and the padi - cane - padi rotation in particular.However, a few estates are presently carrying out intercropping experimentswith legumes to increase overall revenues. Population growth and increasingper capita consumption are expected to push total domestic demand for centri-fugal sugar beyond the three million ton-mark before 1990. This developmentmakes an expansion of sugarcane cultivation outside Java indispensable.

Government Plans and Policies

1.09 GOI has been aware of this necessity for a long time and has carriedout sugarcane trials and feasibility studies in various locations on Sumatra,Kalimantan, Sulawesi and Timor. GOI announced in 1981 plans to increasesugarcane areas and construct 18 new factories of 4,000 tons of cane per day(TCD) capacity each between 1984 and 1986. Because of the lack of suitableland and the competition with rice and other crops in Java described in para.1.08, and also because of the general policy of developing the Other Islands,most of these new mills would have been outside of Java. The Bank, wishing to

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assist the Government in the sound planning and implementation of thisambitious program, provided advisory services to the then responsible agency(SBPN) with ;.nds available from an ongoing NES project (Loans 2007-IND and2126-IND). In late 1982, resource constraints caused the program to bereduced. GOI now formally plans to go ahead with only nine or tenfactories, with the rest delayed, cancelled or turned into joint ventures.In addition, land constraints in some of the approved projects have resultedin factory capacity being lowered to 3,000 TCD. While it had been hopedthat the original sugar development program for the Other Islands wouldsatisfy Indonesia's sugar deficit by the end of the decade, the totalproduction from the factories left in the program would equal less than 50%of present sugar imports. The domestic market for sugar produced by theproposed project would therefore be ensured.

The Bank's Role

1.10 Bank support for Indonesia-s sugar industry dates back to theearly 70's and led to the First Sugar Project (Credit 405-IND in the amountof US$50 million) in 1973. The project included construction of a new sugarfactory at Pesantren (East Java); major rehabilitation of the Sragi (CentralJava) and Gempolkrep (East Java) factories; assistance to the IndonesianSugar Experiment Station (BP3G) at Pasuruan (East Java); and a study of thefeasibility of expanding sugar production outside Java. The original pro-ject concept foresaw major and minor rehabilitation of additional Javanesesugar factories, but rapid price increases required a reduction in projectscope. A PCR on the sugar rehabilitation project concluded that: (a)additional investments in the sugar industry were justified; (b) a creditscheme involving sugarcane smallholders is viable given sufficient priceincentives; (c) sugar production responds well to modernization offactories, and (d) sugar research in Indonesia needs to be strengthened.All these conclusions are applicable to the proposed sugar program in theOther Islands. A second sugar project in Java was prepared and appraised,but project processing was discontinued because of the unfavorable pricedevelopment of sugar vis-a-vis rice, and of Indonesia's increasing degree ofimport dependence on rice. Meanwhile, however, the Bank has continued tosupport the long-term strategy of switching from irrigated to rainfedsugarcane production and of regional diversification of cane growing. Ithas supported a number of feasibility studies for potential sugarcane areasoutside Java, including Pelaihari (South Kalimantan), a site which is thesubject of this Appraisal Report.

1.11 In addition, the Bank has been supporting the nucleus estate andsmallholder project concept through a series of projects in the tree cropsector: NES I (Loan 1499-IND); NES II (Loan 1604-IND); NES III (Loan 1751-IND), NES IV (Loan 1835-IND), NES V (Loan 2007-IND), NES VI (Loan 2136-IND)and NES VII (Loan 2232-IND). Until lately, NES project implementation hasbeen satisfactory. However, the ambitious planting targets given to PTPsunder the nonr-NES programs, have started straining the PTPs' implementationcapacity as reflected in poor quality of some plantings and lagging small-holder development. Moreover, the low commodity prices have affected the

liquidity of the estates as well as GOI funding of these projects. A majorfocus of dialogue between GOI and the Bank are measures to address theseproblems.

1.11 Actions under the Special Assistance Program (SAP) designed toassist GOI to continue implementation of NES projects during the presentperiod of resource constraints are being considered. Furthermore, anin-depth review is planned in Fall 1983 to review GOI-s tree crops projects(particularly those involving PTPs) and reach agreement of a long-termplanting program consistent with PTPs' finances, implementation capacity andavailability of GOI funds. To diversify the nucleus estate projects, avoidworsening the price situation by expansion of tree crops, and reduce thegestation period of projects, GOI is now extending the NES concept to newand short-maturing crops, including sugarcane and cotton.

C. Project Background

1.12 In January 1971, at GOI request, the United Nations DevelopmentProgram (UNDP) commissioned the Indonesian Sugar Study (ISS). The Bank wasExecuting Agency. The objective was to formulate a ten-year program to meetdomestic sugar production and prepare a project for international financing.The Indonesian Sugar Study contained among its recommendations the establish-ment of sugar projects outside Java. Subsequently some 20 locations wereidentified as suitable for rainfed sugarcane cultivation and variety trialswere started. In 1979, three locations - Ketapang and Menggala in LampungProvince and Sebuhur in South Kalimantan - were selected for indepth studies.These feasibility studies, undertaken by P.T. Agriconsult in association withHawaiian Agronomics Company (International), were made available to the Bankby the end of December 1979. Upon review of the reports the Bank suggestedto GOI to field a project identification mission to determine the suitabilityof the proposed Sebuhur (South Kalimantan) project. This choice was made onthe basis of the information then available and considering also questionsof regional balance in sugarcane development and establishment of NESprojects. The mission took place in August/September 1980.

1.13 In the initial discussions with GOI there was agreement that theconsultants' assumptions about cane yields had been overly optimistic and thatfurther work on site selection was needed. GOI then suggested locating thefactory on the Tabanio river, immediately north of the Kabupaten capital ofPelaihari. In March 1981 a mission visited the site and found that the areasproposed for cane development were too far away from the envisaged factorysite. It then examined possible alternative sites in the vicinity ofPelaihari. Subsequent missions resulted in an acceptable reformulation of theproposed project and startup funds for the project were included in the NES Vproject (Loan 2007-IND). Up to March 1983, about US$3.1 million had beendisbursed for preparatory works besides the equivalent of US$2 millioninvested by GOI in activities spelled out in para. 3.15.

Project Objectives and Relation to Sector

1.14 The Government's objectives for the sugar subsector are consistentwith and complementary to its objectives for the rural sector (para. 1.03)

and its overall development objectives, as well as those of regional develop-ment to which the project would contribute. These are to (a) decrease thecountry's dependence on sugar imports and save foreign exchange by expandingrainfed sugar cultivation outside Java, (b) provide a development stimulus tothose new sugarcane areas, (c) give poor and mostly landless families fromKalimantan and the core islands a livelihood as smallholders, and (e) promoteregional development by exploiting unused or underused resources of land andpopulation.

1.15 The public sector estates (PNP/PTP) have been found to be aneffective vehicle for this policy not only in sugarcane but also in relatedsubsectors such as rubber and palm oil production. They have the technicaland managerial skills to establish new plantations, to organize the distri-bution of complex input packages, to coordinate smallholder production, andto carry out or supervise the harvesting, transport and processing of pro-duce. So far only five PNP/PTP have been involved in NES smallholderschemes, and the application of the NES principle to an industrial cropother than tree crops would eventually lead to the activation of a largepool of expertise represented by the six sugar estate groups for the purposeof smallholder development outside Java. Since none of the three sugarestates which have been recently established outside Java contains a small-holder component, the proposed project would be a field scale experimentwith the uncertainties and risks attendant to such an effort. If success-ful, it could be replicated on a large scale and make an important contri-bution to self-sufficiency in one basic foodstuff, to regional developmentoutside Java and to economic and social development of the rural poor.

II. THE PROJECT AREA

A. Location and General Description

2.01 The proposed project is located in the province of SouthKalimantan with most of it in the Kecamatan of Pelaihari, some 65 km southof the major port of Banjarmasin. Pelaihari, the administrative center ofthe Kabupaten, is 20 km south of the proposed nucleus estate. The climateof the region is hot and humid, with temperatures ranging from 24-340C andrelative humidity averaging 91%. There are two distinct seasons: the wetwest monsoons extending from November to April, and the drier east monsoons,from Flay to October. Average rainfall during the wet season (November toMay) varies from 1,600-3,700 mm with an annual average of 2,723 mm, whileduring the drier, cane harvesting season (June to October) the average dropsto 650-700 mm. Annual mean sunshine hours during the day are estimated tobe about 7 hours per day, adequate for rainfed cane. The area is traversedby several streams including the Tabanio River with a minimum flow of 0.07cu m/second, but averaging 11.8 cu m/second, which provides water for thetown of Pelaihari. Some of the smaller streams, including the Rangang whichborders the proposed factory site, can be easily dammed. Plans for enlarg-ing the Tabanio reservoir have already been approved to increase water

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supply to the town, and the enlarged storage would serve as a backup sourceof water for the proposed project. The soils are mainly reddish latosols oflow inherent fertility but good physical condition and suitable for sugar-cane growing. Moisture conservation is a major concern in agricultural useof these soils. Alluvial and humic gley soils occupy lower-lying areas andmay require some drainage. There are also some areas of less suitablepodzolic soils, but they represent only 10% of the proposed project area.Taking into consideration the agricultural management required and the needto adjust operations to the time needed for sugarcane maturity, the area isprobably the best yet identified in the Other Islands for sugarcane produc-tion and this suitability can improve with continued variety selection andimproved agricultural practices.

B. Population, Land Use and Existing Infrastructure

2.02 The population of the area is estimated at 70,000 including atransmigration settlement recently turned over to local government, withconcentrations which are minimal in the proposed nucleus estate and settle-ment areas, formerly rubber estates and cattle ranches. The area placed bythe Provincial Government at the disposal of the proposed project covers15,000 ha. This area comprises several large private rubber or ranchestates which have since been taken over by the Provincial Government. Aletter granting the use of the land (hak Guna Usaha) to the proposedimplementing agency has already been issued by the Provincial Government.One of the estates, which constitutes the major part of the nucleus estate,is already being used as headquarters and for 70 hectares of seed canenurseries for the project. The area is mainly covered by grassland (70%)and trees and bushes (20%) (mainly old iubber trees) with the remainder ofthe land in upland foodcrops and mixed crops. An existing paved road linksPelaihari with Banjarmasin, crossing the project area, and continues souththrough the transmigration settlement. The present bearing capacity of thisroad and its bridges is not sufficient for the intense heavy traffic thatwould be generated by the proposed project and the Provincial Government hasalready initiated a program to strengthen these bridges to facilitateproject implementation. Earth roads connecting to the main access roadtraverse the northern and central portions of the area. Several governmentagencies, including land use, extension service, cooperatives, trade, publicworks, utilities and planning have offices in the town of Pelaihari, as wellas the Bank Rakyat Indonesia (BRI), the major agricultural bank. Educationand health facilities are disseminated among the existing villages in theproject area. An agricultural training center has been recently built inPelaihari and is expected to be operational by July 1983.

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III. THE PROJECT

A. Project Objectives

3.01 The project is part of Government s program to develop sugarcaneproduction and processing outside Java. It would be the first sugar projectto adopt the nucleus estate and smallholder (NES) approach used extensivelyfor Indonesian tree crop development. It is also seen to set the pattern ofsugarcane development outside of Java. Targetted at this aim, the proposedproject is the most extensively studied and carefully prepared of the ninecomprising the present program. Five years of sugarcane trials and twoyears of advisory services for start-up operations have provided theopportunity to identify and implement cropping techniques and managerialrequirements which should have a significant impact on the implementation ofthe program. The efforts by the GOI to achieve an early start-up of millingoperations in relation to the other projects emphasize the role of theproposed project as an example in the growing and processing of rainfedsugarcane outside of Java.

3.02 The project would establish, in a continuous area of SouthKalimantan, some 12,400 ha of sugarcane and facilities to process 4,000metric tons of cane per day (TCD), with provision for increase to 5,000 TCD.Production of plantation white sugar would be about 50,000 tons per yearwith the 4,000 TCD capacity. This sugar production represents only 7% ofthe total sugar imports per year and the total project output would beabsorbed by the domestic market.

3.03 Expected results of successful project implementation would include:

(a) Experience with rainfed cane planting and ratooning outside Javawhich could be replicated in other projects.

(b) A reduction in the foreign exchange needed to import sugar.

(c) A reduction in the domestic resources now used to transport sugarfrom Java to Kalimantan.

(d) Increased incomes for the area's existing smallholders and for newfarmer settlers from surrounding areas and overpopulated areasof Indonesia.

(e) Increased on and off-farm permanent and seasonal employment in thearea.

(f) Benefits to the overall economy of the region through infrastruc-ture improvements needed for the project.

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B. Project Content

3.04 The project would include:

(a) Nucleus Estate Development (PTP XXIV-XXV)

(i) Planting about 4,600 ha of sugarcane on the site of anold rubber estate north of Pelaihari.

(ii) Constructing estate housing, community facilities and otherbuildings, with sanitation and water supply, for 2,300 estatepersonnel, including seasonal workers.

(iii) Constructing or upgrading about 420 km of factory, villageand field roads.

(iv) Constructing and equipping a 4,000 TCD sugar factory(expandable to 5,000 TCD) to process estate and smallholdercane, including ancillary water and power supplies.

(v) Procuring vehicles, and road construction and agriculturalequipment.

(b) Smallholder Development

(i) Planting about 7,800 ha sugarcane for some 5,000 smallhold-ers, including 2,000 existing farmers (800 from an existingtransmigration scheme south of Pelaihari recently turned overto local government), and 3,000 new settlers to be estab-lished north of Pelaihari under NES selection procedures.

(ii) Developing 3,000 ha of land for foodcrops and house gardensfor the new settler families.

(iii) Building housing, with sanitation and water supply, for thenew settler families.

(iv) Constructing about 1,000 km of village and field roads.

(v) Providing seedcane, foodcrop seed, fertilizers and pesticides(in kind or in credit) to smallholders as well assubsistence loans for families on newly developed and.

(c) Regional Infrastructure and Services

(i) Improvement by the provincial government of 40 km of a mainaccess road, including bridges and culverts, from Banjarmasinto the proposed project area and construction also by theprovincial government of 130 km of village roads from the mainaccess road to the new villages in the project area.

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(ii) Upgrading and establishment of social and community facil-ities and services in the project area.

(d) Technical Assistance and Program Support

(i) Providing 294 manr-months of consultant services and 2,540man-weeks of training to assist PTP XXIV-XXV in implementingthe project.

(ii) Civil works, equipment and vehicles, specialized consultancyservices and research travel for applied research in theproject area under the guidance of BP3G.

(iii) Funds for planting, nursery and field development, and civilworks construction for future estate and/or smallholderprojects based on annual crops, and for studies in the sugarsubsector.

(iv) Funds for support of the manpower and training program forseven new sugar estates within the overall sugar developmentprogram.

Physical Development

3.05 Land Clearing and Planting. Using existing farmers and eventuallynew settlers, the estate would mechanically clear the site (mainly grass[70%] with smaller areas of old rubber trees, bushes and tree stumps),prepare the land and plant the sugarcane for both the nucleus estate and thesmallholders. The smallholder land would be managed by the estate throughthe first two harvests and then turned over to the farmer. Crop maintenanceand cultivation after the first ratoon would be carried out by the small-holder himself.

3.06 Nurseries. A sugarcane nursery and trial field was established inthe Tambang Ulang estate five years ago, when the possibility of the sugar-cane production in South Kalimantan was first considered. This expandedtrial area which now forms part of the proposed nucleus estate has reached70 ha and is being expanded further to constitute the central nursery forthe proposed project. Additional smaller nurseries would be establishedthroughout the project area to reduce transport costs. As in other sugarprojects, it is expected that many of the smallholders would eventuallyproduce their own seedcane, except for new introduced varieties, reducingthe area required for this purpose by the estate.

3.07 Road Construction. Construction of the main access road and thevillage roads would be carried out by the provincial public works authoritieswhile field roads would be constructed by the estate by contract or forceaccount with smallholders contributing a share of the costs. Duringnegotiations, assurances were obtained from Government that (a) strengtheningof bridges on the main access road to a bearing capacity of not less than 30tons, which has already been initiated, would be completed by October 1983,

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when most of the heavier land development equipment and farm machinery wouldbe expected to reach the project area, and factory equipment would begin toarrive; and (b) that earthworks, asphalting and construction of new bridgesto upgrade the main access road to Bina Marga Class IIA standards would becompleted by May 1985, when construction of the factory may be completed andsugar processed in the first milling season would have to be transported toBanjarmasin over this road.

3.08 Housing and Public Utilities. Housing for 1,100 managerial andfactory staff and 400 seasonal workers would be constructed by the estate,largely by contract. In addition, other buildings (including offices, ware-houses and stores, laboratories and workshops and a guest house) would beconstructed as part of the main factory village. Utility and sanitaryfacilities would also be constructed by the estate while community facili-ties such as police stations, banks, post office and health and recreationfacilities would be constructed by the provincial government. Housing forthe 3,000 new settlers would be also constructed by the estate using modularunits of uniform design and the cost would be charged to the smallholdersunder normal NES conditions. Sanitary facilities would be included andwater supply from wells or small streams would be provided.

3.09 Processing Facilities. A sugar factory with capacity to process4,000 tons of sugarcane per day (TCD) would be constructed on an alreadyselected site in the nucleus estate, centrally located to the proposedsmallholder sugarcane areas to reduce transport costs. The factory would belocated close to the main access road and to a source of water supply, andthe main estate village would be built adjacent to the factory site. Thecapacity of the processing facilities would be expandable to 5,000 TCD inthe event that the number of smallholders joining the project shouldincrease and/or that improved agricultural practices should result in largervolumes of sugarcane to be processed.

3.10 Factory and Main Village Water Supply. Water for the sugar pro-cessing facilities and the adjacent village would be supplied by a 1.2 mil-lion cubic meter capacity reservoir on the Rangang River, a stream borderingthe proposed factory site and running into the Tabanio River to the east. Adam would be constructed in an already identified suitable site and waterdistributed to the water treatment facilities in the factory and to a1,000 cu m village reservoir for use in housing and community facilities.

Settlement and Community Development

3.11 Recruitment and Selection. Smallholders for the proposed projectwould come from three different sources. The results of a survey conductedduring project preparation indicated that some 1,200 existing farmers wouldbe willing to participate in sugarcane production, representing about onethird of the farmers within economic distance of the sugar factory. It isexpected, however, that successful implementation of the project wouldresult in a much larger number of existing farmers wishing to join the

project and providing the basis for an expansion in milling capacity. Inaddition, 800 transmigrants in the Tajau Pecah Transmigration Settlementwould also be included, representing one third of existing transmigrants.The bulk of the smallholders, however, would be 3,000 new settlers selectedlargely from among the labor force employed in development of the estate andwith preference to local and provincial applicants to maximize the economicimpact of the project on the host region. The criteria for selection ofpotential settlers, as in other NES projects would include that they bemarried, preferably between 20 and 40 years of age and with a maximum annualincome of Rp 300,000. They should be willing to live and work in the projectarea and have no criminal record. The estate would hire at least one memberof each new settler family for field or factory work and guarantee himcontinuous employment during the 2-3 years when his land would be underestate management. This would not only ensure the new settlers incomeduring that period, but provide needed training in sugarcane cultivation.The same guarantee of employment during the years of estate management wouldbe extended to the existing farmers and transmigrants.

3.12 Land Allocation. Land allocation in relation to the project wouldbe based on 2.5 ha units, of which 1 ha would be for the houselot, food andcash crops, and the remaining 1.5 ha for sugarcane. Of the latter, about1 ha would be harvested every year with the additional 0.5 ha representingstandover cane for the following milling season. Existing farmers whosepresent holdings exceed the 2.5 ha would keep their land (devoting 1.5 ha tosugarcane) while those whose holdings which are smaller would receive thebalance to achieve the standard area of 2.5 ha. To ensure that land avail-ability for this allocation would not be impaired, assurances would besought from GOI during negotiations that no new agricultural activitieswould be allowed within the proposed project area other than those stipula-ted under the project, particularly on lands intended for sugarcane produc-tion under the proposed project.

Technical Assistance and Program Support

3.13 Implementation Consultancy. Technical assistance is essential tothe project, not only because of the tight schedule, but also as an import-ant element of in-service training for project staff. Temporary consultancyservices are and will continue to be available under start-up operationsuntil the implementation consultants under the project are in the field. Toassist PTP XXIV-XXV during the implementation period and in the first twoyears of factory operation, advisory services would be provided in the areasof project coordination, field development, agronomy, agricultural exten-sion, civil engineering, mechanization, and harvesting and transport ofcane. Factory and workshop specialists, including factory and electricengineers; instrumentation, boiler and steam, and workshop specialists; anda sugar processing technologist would also be provided to ensure efficientfunctioning and maintenance of the processing facilities. Finally, theservices of a financial controller would also be provided during this earlystage to assist the PTP in organizing the project's accounts and finances.

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3.14 Applied Research. To ensure continuous applied research toidentify new varieties and agricultural practices better suited to theproposed project area and to increase yields and rendements, the projectwould provide research facilities (office, laboratories, storage) andequipment, as well as short-term consultancy by agricultural specialists andtravel for project technical staff. Varietal and agronomic trials wouldeventually be incorporated into the overall sugar research program for theOther Islands being prepared by the Sugar Council Secretariat and to beimplemented by BP3G under the auspices of the Agency for AgriculturalResearch and Development (AARD).

3.15 Start-up Funds. Start-up operations for the proposed project,financed under earlier NES projects start-up funds, have resulted indisbursements of US$3.1 million by mid-March 1983. These operations includephysical (land and water surveys) studies, aerial photography, cartography,advisory services, and agricultural machinery and equipment, and haveresulted not only in finalizing project preparation, but in expanding theexisting sugarcane nursery from 45 ha to over 100 ha and in land clearing ofover 300 ha for further expansion of the nursery and/or planting in the1983/84 rainy seasons. In view of thie successful use of these start-upfunds, a provision of US$5 million would be made in this project to be usedin future nucleus estate and/or smallholder projects based on annual cropssuch as sugarcane, cotton, etc., and on studies on the sugar subsector.

3.16 Manpower and Training Program. To ensure coordination of trainingbetween the proposed project and the overall training program for the sugarsubsector, the project would support the manpower and training program forseven new sugar estates, including the Pelaihari scheme. This program hasbeen prepared by the Sugar Council Secretariat with support from Bank-assistedconsultancy services. Because of the different stages of preparation/implementation of the seven sugar estates, a first time-slice of the programis included in this project. The proposed loan would finance US$2 millionin foreign expenditures covering transportation, per diem and relocationallowances for international staff, overseas training and imported trainingequipment and supplies.

C. Implementation Schedule

3.17 The project would be implemented over a period of five years frommid-1983 to mid-1988. The first years would be concentrated on the estab-lishment of the nucleus estate and processing facilities. Start-up opera-tions began in 1982 and include expansion of the seed cane nursery and landpreparation for sugarcane planting to begin October 1983. To process thesugarcane resulting from the 1983 and 1984 planting seasons, construction ofthe sugar factory would be completed by mid-1985. Construction of the sugarfactory in time to process the cane ready for harveting is, therefore, thesingle most crucial activity in the implementation schedule, followed byconstruction of the water supply facilities and estate housing. Chart 1shows the start and finish of major project works.

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3.18 Specifications for construction of the factory under a "turnkey"contract have been reviewed by the Bank and are included in thecorresponding tender documents. Calculations of catchment area, and flowfor the water reservoir have been made and borings of the dam site have beencompleted. Final design of the dam, which is relatively small, would becompleted during implementation of the proposed project with participationof the consultants provided under the project. Seedcane nurseries, whichwould normally have been an essential initial element, have already beenestablished and are being expanded by the implementing agency, thus provid-ing for timely planting. Engineering design for infrastructure, includingroads, housing, etc., have already been established for earlier sugarprojects and those of the main access road correspond to standards alreadyin force by the regional public works department.

D. Cost Estimates

3.19 The total estimated five-year project cost is US$130.2 million ofwhich US$80.7 million (62%) is the foreign exchange component. Project basecosts are expressed in mid-1983 prices (Table 3.1) and exclude taxes andcustoms duties on capital expenditures, from which the project agencies areexempt. Annex 1, Tables 1-3 present project cost summaries and projectoperating costs.

3.20 Base cost estimates were derived from recent quotations forsimilar works and services. Physical contingencies are estimated at 10% forbuildings, supplies and materials, and vehicles, machinery and equipment;14% for the factory; 15% for roads and for project technical assistance; and20% for the dam and water supply system. The "base costs" of landdevelopment have physical contingencies already built in. Local pricecontingencies are 20% (1983), 15% (1984), 11% (1985) and 7% (1986 +).Foreign price contingencies are 8% (1983), 7.5% (1984), 7% (1985), and 6%(1986 +). No price contingencies were applied to the base costs of thefactory to be covered by a turnkey contract scheduled to be signed inmid-1983. Consultant services costs are based on recent contracts forsimilar services in Indonesia. Estimated average direct and reimbursablecosts are $10,450/ month for foreign consultants and $2,600/month for localconsultants.

E. Financing

3.21 The proposed Bank loan of US$79.2 million (including US$0.2 mil-lion capitalized front-end fee) would be equivalent to 61% of total projectcosts and 100% of the foreign exchange costs of the project less the foreignexchange costs of items reserved by Government for procurement in Indonesiawhich are ineligible for Bank financing. The remainder of project funding(US$51.2 million) would be provided by Government, who would bear allforeign exchange risk. Table 3.2 shows the sources of funds for the various

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project categories. Financing of the processing facilities under the pro-ject was agreed to by the Bank in consideration of the tight schedule forcommissioning of the factory to catch up with the 1985 crushing season andof the likely delays resulting from other sources of financing such asexport credits. The decision to finance the factory was taken afterpossibilities of cofinancing with official lenders failed to materialize.

Table 3.1: PROJECT COST SUMMARY

ForeignLocal Foreign To-tal Local Foreign Total as % of

(Rp billion) ---- --- (US$ million) --- total

Nucleus estate andfactory development 28.4 46.4 74.8 29.3 47.8 77.1 62

Smallholder development 3.0 2.0 5.0 3.1 2.1 5.2 40

Regional infrastructureand services 4.3 7.4 11.7 4.4 7.6 12.0 63

Program support 1.9 9.7 11.6 2.0 10.0 12.0 83

Base Costs 37.6 65.5 103.1 38.8 67.5 106.3 63

Physical contingencies 2.8 6.4 9.2 2.9 6.6 9.5 70Price contingencies 7.8 6.2 14.0 8.0 6.4 14.4 44

Total ProjectCosts 48.2 78.1 126.3 49.7 80.5 130.2 62

Front-end fee on BankLoan /a - 0.2 0.2 - 0.2 0.2 100

Total FinancingRequired 48.2 78.3 126.5 49.7 80.7 130.4 61

/a Bank loan less front-end fee assumed at US$80.7 million.

Note: Total physical contingencies are 9% of base costs. Local price con-tingencies are 19% and foreign price contingencies are 9% of therespective base costs plus physical contingencies.

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3.21 Nucleus Estate. Because of its current financial position PTPXXIV-XXV does not have surplus capital to invest in this project (para.6.08). Government would allocate the funds needed by PTP XXIV-XXV forfactory and nucleus estate development (US$77.1 million) in accordance withpreviously agreed annual budgets. The annual work program and budget wouldbe submitted by the PTP to the Ministry of Agriculture (MOA) for its approvaland a detailed review by DGE to ensure that costs and physical targets arerealistic. After approval by MOA, the Ministry of Finance (MOF) would channelthe funds to the PTP in quarterly tranches. As in other Indonesian sugarprojects, 50% of the funds would be provided as long-term loans and the other50% as equity.

Table 3.2: SOURCES OF PROJECT FUNDS

Ministry Provincialof Government Total

Finance PTPs & INPRES cost IBRD (%)---------------(US$ million)--------------------

Nucleus estate development 25.9 - - 51.6 25.7 50

Smallholder development 5.4 - - 7.6 2.2 28

Processing facilities - - - 35.3 35.3 100

Technical assistance(advisory services,training and research) 1.1 - - 6.9 5.8 84

Regional infrastructureand services - - 16.8 16.8 - -

Program support (start-upfunds, studies and supportof manpower and trainingprogram) - 2.0 - 12.0 10.0 83

Front-end fee - - - 0.2 0.2 100

Total 34.3 2.0 16.8 130.4 79.2 61

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3.23 The loans to PTP XXIV-XXV would be for 20 years at 13.5% per annumwith a five year grace period. Simple interest accrued during the graceperiod would be capitalized at the end of the grace period. The proposedrepayment terms are based on the cash flow of the nucleus estate. Theequity portion of project financing would be in the form of ordinary sharecapital. During negotiations, assurances were obtained from GOI that thesewould be the terms of the loans to PTP XXIV-XXV. The conclusion of thesefinancing arrangements in a form and substance acceptable to the Bank wouldbe a condition of disbursement on the estate development component of theloan. In addition, it was agreed during negotiations that the PTP would(a) maintain a ratio of long-term debt to equity of not more than 50:50;(b) consult with the Bank before undertaking any new development exceedingRp. 1.5 billion other than agreed under the project; and (c) review itscash flow every year to ensure that dividends are distributed only withoutimpairing PTP XXIV-XXV's ability to carry out its investment programand operations with adequate cash balances.

3.24 Smallholders. MOF would provide funds for all smallholder devel-opment costs, except working capital credit (TRI) for sugarcane production,which is funded by Bank Indonesia and Bank Rakyat Indonesia (BRI) underexisting arrangements. Annual and quarterly work programs would be reviewedby BAPPENAS. Upon approval by BAPPENAS, MIOF would channel funds to the PTPin quarterly disbursements. Sugarcane would be planted on existing small-holder land starting in 1984 and on new settler land starting in 1985. Thecosts of land clearing, subsistence payments, new settler housing, fieldroads and crop development overheads, as well as the working capital loansunder the TRI program, would be subject to credit agreements between eachsmallholder and Bank Rakyat Indonesia (BRI). Subloans for development wouldbe for 14 years, with a 4-year grace period. Interest would be 12% perannum and simple interest accrued during the grace period would be capital-ized at the end of the grace period. For handling the smallholder debtservice payments for development loans, GOI would pay semi-annually to BRI afee of 1% of the amount of loans outstanding. The annual TRI workingcapital loans would carry an annual interest rate of 12%. BRI would beresponsible for paying smallholders for the sugar and molasses produced fromtheir cane. Debt service payments for both development and working capitalloans would be documented by PTP XXIV-XXV and deducted by BRI from theamounts owed smallholders for their cane. Noncredit items which do not haveto be repaid include water supply, community development, education andhealth facilities. Agreement was be reached during negotiations that (a)smallholder development costs would be made available to PTP XXIV-XXV andother implementing agencies and that (b) BRI would draft a smallholdercredit scheme for sugarcane under the TRI program adjusted to the crop cyclein the Other Islands and satisfactory to the Bank by December 31, 1983. Inaddition, the signing of the smallholder development agreement between theDGE and the PTP XXIV-XXV in a form and substance satisfactory to the Bankwould be a condition for disbursement against individual project components.

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3.25 Interest rates. Under the NES program, GOI has establishedinterest rates for lending public funds to smallholders at 12% p.a. and topublic sector companies at 13.5% p.a. Until the March 1983 devaluation ofthe rupiah by 28%, domestic inflation was running at 13% and expected todrop to 7% by 1985. This would have made real interest rates associatedwith the project positive. Because of the devaluation, projections of localinflation rates for the next few years have increased (para. 3.19). How-ever, the new projections show a drop in inflation to 11% in 1985 and 7% in1986. Thus the interest rates for the long-term loans associated withthis project are expected to be positive over most of the life of the loans.

F. Procurement

3.26 Civil works, excluding sugarcane processing facilities, but inclu-ding housing, buildings, farm and estate infrastructure, field roads andfarm bridges (US$12.8 million) are small and widely scattered in area andtime span, and no individual contract is worth more than US$2 million.Thus, they would not be of interest to international contractors. Theseworks would be carried out following local competitive bidding (LCB) proce-dures aceptable to the Bank or by force account if suitable contractors arenot available. PTP XXIV-XXV would be expected to construct all cane haulageroads by force account, since road construction equipment is a necessarypermanent requirement of efficient sugarcane transport, while settler hous-ing, estate buildings, water supply, and electrical and sanitary facilitieswould be expected to be contracted out. Assurances were obtained from GOIduring negotiations that (a) whenever possible, civil works would be groupedinto a number of suitable contracts (minimum Rp 200 million) to enable largelocal contractors or joint ventures to bid; and (b) documents, includingevaluation, for contracts exceeding US$500,000 equivalent would be submittedto the Bank for review before tendering and award.

3.27 Machinery and equipment (US$8.9 million) would be procured throughinternational competitive bidding (ICB). To the extent possible, DGE wouldcentrally procure such equipment for this and similar projects. In develop-ing and maintaining sugarcane land, PTP XXIV-XXV would procure smallequipment such as chainsaws, agricultural tools, hand sprayers and nurserywatering systems through prudent shopping or local competitive biddingacceptable to the Bank. Vehicles and motorcycles would be subject toreserved procurement, following established GOI procedures, and would not beeligible for Bank financing.

3.28 To ensure that the processing facilities (US$31.0 million) areready on time to mill sugarcane planted two seasons earlier, procurement ofthe factory would be on a "turnkey" contract basis and under limitedinternational bidding with a shortlist of recognized suppliers of completefactories. The shortlist was approved by the Bank and bids were openedon June 2, 1983.

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3.29 Agrochemicals (fertilizers, herbicides and pesticides) US$1.3million) would be procured directly from P.T. PUSRI. However, PTP XXIV-XXVI could procure agrochemicals and small equipment including chainsaws,agricultural tools, hand sprayers and nursery watering systems not exceedingin the aggregate US$600,000, equivalent on the basis of prudent shoppingafter solicitation and comparison of at least three price quotations fromreputable suppliers. PT. PUSRI is the sole supplier of urea in the countryand, as indicated by a Bank review, its prices are 70% lower than worldmarket prices for urea and generally lower than those quoted under procure-ment by individual Bank projects. Thus, there would be little interest onthe part of foreign bidders. Other fertilizers (muriate of potash, triplesuperphosphate and ammonium sulphate), are either manufactured in Indonesiaor imported by P.T. PUSRI in bulk, resulting in lower prices than thoseunder other Bank-assisted agricultural projects. Currently, most fertili-zers are subsidized through the budget. As part of the Bank's continuingdialogue with the GOI, the fertilizer subsidy issue is being discussed witha view to reducing the subsidies, while ensuring that this does notadversely affect production, particularly of rice and, since the initiationof the rainfed sugarcane program, also of this crop.

3.30 As in the case of the processing facilities, because of theurgency for early implementation consultancy, consultant services (US$3 mil-lion) million were tendered early with a Bank-approved shortlist of recog-nized firms specializing in sugar production. The consultancy wouldotherwise be procured in accordance with Bank Guidelines on the use ofconsultants.

3.31 Regional infrastructure (US$16.8 million) would be.financed undernormal provincial budgets, without Bank assistance. They would be carriedout by the corresponding agencies, such as Public Works for the main accessroad and trunk roads, largely by force account or by local contractorsselected by the PTP under civil works procurement procedures acceptable tothe Bank (para. 3.25) for village community facilities and national agencyoffices. Research facilities would be constructed by the PTP under civilworks procurement procedures, but the research work would be organized andsupervised by BP3G.

G. Disbursements

3.32 The Bank would disburse for the following items at the percentagesindicated:

(a) 100% of the sugar factory "turnkey" contract, net of anyidentifiable taxes;

(b) 100% of foreign expenditures for imported equipment for roadconstruction, cultivation haulage and harvesting of sugarcane;100% of the ex-factory cost (less any identifiable taxes) of

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equipment manufactured locally, and 80% of expenditures forimported farm equipment purchased locally through prudentshopping;

(c) 100% of foreign expenditures for imported laboratory and otherequipment for sugarcane research and 100% of the ex-factory cost(less any identifiable taxes) of equipment manufactured locally;

(d) 100% of cost of agrochemicals;

(e) 100% of the cost of all consultant services; start-up expendi-tures for future NES projects; and of studies in the sugarsubsector;

(f) 50% of expenditures for civil works including offices, warehouses,other buildings, reservoir and water supply, and for roads con-structed by the nucleus estate; and

(g) 100% of foreign expenditures for support of the manpower andtraining program.

3.33 The Bank would not disburse for sugarcane planting, other than forequipment and agrochemicals as above stated; nor for vehicles, motorcyclesand smallholder and staff allocation, subsistence and foodcrop expenditures.Annex 1, Table 4 presents the estimated schedule of disbursements. Becauseof the present general financial situation of the GOI and of its efforts tobegin milling operations in 1985, thus achieving the improved financial andeconomic rates of return resulting from earlier income streams, the schedulepresents a higher rate of disbursements in the early project years than thecomparative actual disbursements for other Indonesian NES projects and areadevelopment projects in the East Asia and Pacific region. This disbursementschedule, which allows for 34% in the first year and 38% in the second,would cover total cost of the turnkey factory contract comprising a largedisbursing category. The estimated disbursements rates for later years arecorrespondingly lower. Statements of Expenditures would be used for civilworks and for parts of the training and research programs carried out byforce account and for start-up activities in future NES projects. Documentssupporting these statements would be retained in Indonesia and madeavailable, as required, to Bank supervision missions.

H. Accounts and Audits

3.34 PTP XXIV-XXV would keep separate accounts for all project invest-ment costs, distinguishing between PTP and smallholder investments. Suchaccounts would be part of regular semi-annual reports to DGE and the Bank,to be submitted within 30 days from the semester end. PNP/PTPs involved inBank supported NES projects have standardized accounting procedures and

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methodology agreed between the Bank and GOI. These would be followed by PTPXXIV-XXV.

3.35 PTP XXIV-XXV accounts are presently audited by a private regis-tered public accountant in a manner satisfactory to the Bank, except that along form management report, as provided by private auditors for PNP/PTPparticipating in NES projects, would be produced additionally, in accordancewith Bank Guidelines for Financial Reporting and Auditing. Other projectaccounts and related disbursements made under Statements of Expenditureswould be audited by independent auditors acceptable to the Bank. PTPXXIV-XXV summarized unaudited annual accounts would be submitted to the Bankby March 31 each year and all audit reports would be submitted by June 30each year. An assurance would be obtained from GOI during negotiations thatthese accounting and auditing practices would be followed.

I. Environmental Factors

3.36 The project would establish sugarcane in areas of degraded rubberplantations, secondary jungle, grassland and light cultivation. Thoughsugarcane would generally be grown where slope was less than 6%, standardsoil conservation practices would be followed in steeper areas.

3.37 Soil fertility would benefit from the application of fertilizerand improved tillage. Biological control of insect pests would be usedextensively and the small quantities of chemicals used to control rankgrasses, pests and diseases would have no significant adverse environmentaleffect.

3.38 A sugar factory generates solid, liquid and gaseous waste productsbut, with minimal treatment, they are neither hazardous nor toxic. Solidwastes, such as filter cake and boiler ash are easy to manage and should notcreate environmental problems. Airborne and waterborne pollutants would becontrolled.

3.39 The filter cake would be returned to the fields where it has abeneficial effect on soil and cane production. Fly ash arrestors would beinstalled to minimize escape of the material from bagasse burning. Theproject area is lightly populated and the factory is 15 km north ofPelaihari. The prevailing eastern and western winds would carry the remain-ing airborne pollutants away from the town. All waste water from thefactory would be collected in a settling pond. The effluent from the pond,which would contain some caustic soda and other chemical pollutants fromwash-down water, would be substantially diluted with overflow water from thespray pond before discharge from the factory area. It would then be used,without harmful effect, for irrigating cane nurseries and seed farms. Anysurplus would be dispersed safely through the natural drainage systems inthe area.

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IV. ORGANIZATION AND MANAGEMENT

A. Institutional Structure

4.01 NES V SAR 334-IND of May 6, 1981 (paras 4.01-4.05 and Chart I)outlines the organization and functions of the Department of Agriculture,including DGE, SBPN, public sector estates and other institutions princi-pally concerned with NES projects. The proposed project falls within thesame organizational structure, except for the recently formed Sugar Council,and the State Marketing Board (BULOG) which is responsible for marketing ofall sugar, imported or domestic.

(a) The Sugar Council

4.02 The Sugar Council was created by Presidential Decree in July 1982in response to the need for a high level policy making body to control andcoordinate the rapidly expanding Indonesian sugar industry. Responsibledirectly to the President of the Republic, its principal function is tospeed up sugar production by formulating and implementing policies for landuse, procurement, prices, marketing, storage and training.

4.03 The Minister of Agriculture is Chairman of the 16-member Council.It includes three Ministers, eight Directors General, the Governor of theBank of Indonesia, three Chiefs of Agencies, and a representative of theIndonesian Sugar Association. It is required to meet at least four times ayear.

4.04 The Council has a Secretariat which compiles data, preparesreports, coordinates staff activities, and works with relevant governmentagencies and private companies. The Secretariat, located within theMinistry of Agriculture, has three bureaus: Programming, Monitoring andGeneral Affairs, and is headed by a high-ranking Secretary. The finalstructure of the sugar subsector and of the major agencies involved is stillunder study, although the general consensus is that the Sugar CouncilSecretariat will take over the functions of the SBPN, the PPIG, and theKPGB, which handle the support of the state-owned estates, the developmentof sugar projects, and the supervision of ongoing projects, respectively.The KPGB has already been eliminated, but the SBPN and the PPIG are expectedto continue operating for non-sugar projects. An outline of the proposednew sectorial structure is shown in Chart 2. To assist the Sugar Council inthe planning and implementation of the overall sugar program for the OtherIslands, an advisory team of foreign and local sugar industry specialistshas been hired with financial assistance from ongoing NES projects andinitiated its work in early 1983.

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(b) Other Agencies

4.05 The Directorate General of Estates (DGE) regulates all privateestates and smallholdings involving industrial crops, including sugar.While DGE has no direct authority over public estates (PNP/PTPs) which areresponsible to the SBPN (with the recent exclusion of sugar estates expectedto be under the Sugar Council), it is responsible for their supervision whenused as agents for smallholder development. Dinas Perkebunan, the ProvincialEstate Crop Services, is responsible, through provincial government adminis-trations, for extension services to smallholders growing industrial crops.However, PNP/PTPs involved in growing sugarcane usually provide these ser-vices directly to the farmers. Team Khusus, a nonstructural group withinthe DGE, assists the Directorate in monitoring and controlling the increas-ing number of externally financed agricultural projects and has an importantcoordinating function among the agencies in the sector.

(c) Bank Rakyat Indonesia

4.06 BRI is the principal Government bank for the agricultural andrural sector (except government-owned estates, for which Bank Bumi Dayausually provides financial services). BRI, with 330 branches and 3,270village units, provides credit to agricultural cooperatives, farmers,fishermen and agricultural enterprises. More than 90% of its portfoliocomprises short term financing, but it is becoming increasingly involved inagricultural term lending, with some assistance from the Bank, notablythrough the IDA assisted Rural Credit Project (Credit 827-IND). BRI is alsothe channel for credit provided under a number of smallholder developmentprojects, including all NES projects to date. Because BRI has no controlover the selection of NES borrowers, GOI bears the credit risk on NES loansto them and BRI, in effect, acts only as bookkeeper and collection agent.On behalf of Bank Bumi Daya, BRI would also pay the smallholders for thesugar and molasses produced from their cane after deducting thesmallholders debt service payments.

B. Project Management

(a) General

4.07 DGE would have overall responsibility for the project, includingconsolidation of procurement. A department of the Sugar Council (formerlySBPN) would supervise and-guide PTP XXIV-XXV in development and operation ofits project sugarcane areas and processing facilities and implementation ofsmallholder development, with the assistance of central and provincialgovernment agencies. The PTP XXIV-XXV President Director would be theofficial project manager but would appoint a senior staff member as theoperating manager.

4.08 Team Khusus would coordinate project implementation for DGE. Asfor other NES projects, it would assist PTP XXIV-XXV in financial

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administration, including preparation of annual work programs and budgetsespecially for the smallholder component. It would also assist in projectprocurement and monitor project implementation, including inspection offield development, and evaluate project impact.

4.09 The Sugar Council Secretariat, in its new function as centralagency for the sugar sector, would ensure that policies established by theSugar Council are implemented and that all sugar projects, whether managedby stateowned PTPs or by private firms, are operated within the context ofthose policies. In addition, the Secretariat would monitor the overallimplementation of the sugar development program and assist the PTPs withspecific problems by providing access to specialized advisory services.Consolidation of training and research programs for the sugar industry andprovision of technical and marketing information, both domestic and foreign,are other functions of the Secretariat.

(b) PTP XXIV-XXV

4.10 PTP XXIV-XXV, with headquarters in Surabaya, East Java, would beprincipally responsible for project implementation on behalf of the DGE andthe Sugar Council. The PTP is a limited liability company incorporatedunder Indonesian company law with a three-man supervisory board (DewanKomisaris) representing the shareholders, and a four-man executive board ofdirectors (Direksi) comprising a President Director and Directors ofProduction, Finance and Development. The company was formed in 1975 tooperate sugar mills and associated hospitals for sugar workers. The PTPsells refined sugar, molasses, alcohol and spirits using sugar cane from itsown estates and purchased from smallholders. At the end of 1982 it operated12 sugar mills and three hospitals in East Java. Rehabilitation of sugarmills and associated estates at Jatiroto and Semboro was completed in 1978and output from these projects is now coming on stream, leading to a largegrowth in cane processed and sugar sold. Two additional works are underway:a takeover of the Takalar project from private participants and theimplementation of the Pelaihari project proposed in this report. These twolatter investments are part of GOI-s strategy to expand operations outsideof Java and of the PTP's policy to rely increasingly on purchases of canefrom outgrowers rather than from its own estate operations. Projectplanning and the implementation of capital works are the responsibility ofthe Director of Development while operational implementation is theresponsibility of the Directors of Production and Finance. While nominallyindependent, the company is at present controlled and monitored by the SugarCouncil/SBPN. The PTP specializes in sugar and does not operate estatesinvolved in other crops.

4.11 PTP XXIV-XXV, although a fully government-owned corporation, isestablished to run on a commercial basis and is among the most efficientlyrun of the PTPs. The Asian Development Bank, which in 1974 loaned theCorporation US$17.5 million for the rehabilitation of Jatiroto and Semboro

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sugar mills, indicates in its Project Completion Report that project targetswere achieved and describes improvements in the organization through train-ing of technical and administrative staff and the provision of foreignexpertise to strengthen the management and accounting aspects of the PTP.Other external lenders to PTP XXIV-XXV are the Industrial Development Bankof India, and European, U.S. and Japanese commercial banks. The recommenda-tions made by ADB on the accounting practices for future projects, includingthe preparation of separate balance sheets, profit and loss accounts andother financial statements for each production unit, have been incorporatedinto the proposed project in Pelaihari. Until the completion of the ADB-financed rehabilitation, PTP XXIV-XXV ran at a net loss. Beginning in 1979it turned profitable and has subsequently maintained an average gross marginof 15.4% and an average return on shareholders equity of 10.75% (averagescover 1979 through 1982). The PTP began paying corporate income taxes anddividends in 1981. At the end of 1982, the current ratio was 3.7 to 1 andlong-term debt to equity ratio under 50:50 and assets were Rp 104 billion;profits after tax in 1982 were Rp 8.9 million (Annex 5, Tables 1-3).Government has taken a conservative approach to PTP XXIV-XXV's financialstructure through regular infusions of equity capital and seeks to maintainits healthy financial base (para. 6.05).

4.12 The proposed organization and staffing of the Pelaihari projectare depicted in Chart 3. Under a General Manager, responsible to the PTPDirector of Development, will be managers for agricultural operations,*factory operations, maintenance and administration. The AgriculturalManager will have five department heads reporting to him for farmersliaison, nucleus estate management, farmers area management, cane harvest-ing and transportation, and field equipment supply and maintenance. TheFactory Manager will be supported by a Chief Engineer and a Chief Chemist;the Maintenance Manager by superintendents for civil engineering and theagricultural workshop; and the Administration Manager by a Chief Accountant,a Chief of Procurement and Warehousing, and a Chief of Personnel, Social andWelfare Services. Project organization is summarized in Chart 2.

4.13 The PTP would be assisted by 294 man-months of consultancy serviceincluding a project coordinator, a field development engineer, an agronomista smallholder extension specialist, a civil engineer, an agriculturalmechanization engineer, a harvest and transport coordinator, an agriculturalworkshop specialist, a senior factory engineer, an electrical engineer,several instrumentation and boiler and steam specialists, a sugar processtechnologist, and a financial controller. These consultants would assist thPTP in all aspects of sugarcane production, harvesting and transport, andprocessing during project implementation and during the first two millingseasons. Local consultants would assist the PTP with village design, layoutof smallholder plots and primary road alignment. The responsibilities ofthese consultants are described in Annex 2.

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4.14 The PTP XXIV-XXV First Director, as Project Manager, would beresponsible to the Director General of Estates for preparation of an annualproject work program and budget, including quarterly cost estimates for allsmallholder development to be undertaken by the PTP. Team Khusus wouldreview aud approve these on behalf of DGE before submission to MOF. TheFirst Director would also be responsible for seeing that annual budgetrequests are prepared for noncredit expenditures on health and educationalfacilities financed from INPRES. To ensure that project implementationfunds are available to the PTP on a timely basis, an assurance was obtainedfrom GOI that the PTP, assisted by Team Khusus, would prepare and submitannual work programs and budgets to DGE by October 31 preceding the budgetyear (January-December).

4.15 The PTP would establish the smallholdings, village infrastructure,roads and processing facilities. The Smallholder Development Agreement(para. 3.23) between DGE and the PTP would cover sugarcane development,extension and processing. Under this agreement, the PTP would be respon-sible for

(a) Land clearing of sugarcane for all smallholders, and foodcrop,houseplot and garden areas for new settlers.

(b) Planting the initial smallholder sugarcane areas, maintainingthese and the first ratoon to maturity.

(c) Procuring and applying inputs for this planting and the ratooncrop.

(d) Designing and siting houses and village layout.

(e) Constructing settler houses, water supply and sanitation.

(f) Developing village infrastructure, excluding health and educationfacilities.

(g) Constructing and maintaining primary and secondary village roadsand cane haulage roads.

(h) Resettling the smallholders who may need to be moved and thosenewly arriving.

(i) In association with BRI, providing an initial subsistence cashpayment for resettled smallholders together with an appropriateTRI credit package to all smallholders for sugarcane andfoodcrops.

(j) Providing for sale (with BRI credit) a package of seeds, ferti-lizers and pesticides, for foodcrop establishment.

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(k) Employing one member of each participating smallholder family towork on and receive training in sugarcane planting, maintenanceand harvesting.

(1) Supplying all smallholders with sugarcane extension services.

(m) Training smallholders in cultivation and harvesting practices.

(n) Collecting smallholder cane production for processing.

(o) Through BULOG (or as GOI otherwise may provide), marketingsmallholder sugar production.

(p) Preparing, with assistance from Team Khusus, a project com-pletion report (PCR) after the proposed project completiondate of December 31, 1988.

4.16 Since almost all smallholders would at first be unfamiliar withsugarcane establishment and maintenance, and since it would be in the PTP'sinterest to see that smallholder sugarcane is cultivated to a high standard,the PTP would be responsible for land clearing and preparation, nurseryestablishment and sugarcane planting, and cane haulage road design andconstruction, either by force account or subcontract. The PTP would also beresponsible for clearing foodcrop and house garden of the new settlers.These activities on behalf of the smallholders would be the subject of aSmallholder Development Agreement between DGE and the PTP. Costs andquality would be monitored by Team Khusus on behalf of DGE, based on dataavailable through the Sugar Council Secretariat.

4.17 PTP XXIV-XXV would establish and maintain the nucleus estatesugarcane areas and each smallholder sugarcane area through harvesting ofthe first ratoon. The PTP would be responsible for transporting all sugar-cane even after smallholders assumed management, including harvesting, oftheir land. The PTP would also establish and maintain all estate infra-structure (except health and education services) and processing facilities.

(c) The South Kalimantan Provincial Government

4.18 The province would supply the smallholders with health, education,social and foodcrop extension services. The existing foodcrop extensionservice, provided by the Directorate General of Foodcrops through the pro-vincial government, would be strengthened by the addition of a new extensionunit with a manager and five agents. The Chairman of the ProvincialDevelopment Planning Agency (BAPPEDA), assisted by the PTP general manager,would coordinate: local government programs, centrally financed, but pro-vincially executed (INPRES), to construct health and education facilities,the granting of land title to smallholders, and the provision of foodcropextension services to participants. The district (Kabupaten) health

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authorities would ensure malaria control. Other GOI programs, based onPelaihari, would provide mother and child health care, including nutritionaladvice and family planning. During negotiations, assurances would be soughtfrom the GOI that the Provincial Government of South Kalimantan would expandits services for health, education and fooderop extension in the projectarea to supply the requirements of smallholders under the proposed project.

(d) Provincial Coordinating Committee (PCC)

4.19 A PCC has already been established in South Kalimantan provinceunder the Bank-assisted NES III project (Loan 1751-IND). Its membersinclude the heads of the provincial Estate Crops and Food Crops Services,the provincial head of the BRI and representatives of other relevant pro-vincial government agencies. For the proposed project, it would alsoinclude the head of the project area kabupaten (Bupati), the project manager(PTPs First Director) and the project site manager. Under the project thePCC would: (a) arrange the construction (under INPRES programs) of healthand education facilities in the project area; (b) arrange for recruitment ofprospective smallholders for the project to be accepted by the projectmanagers as suitable estate laborers; (c) expedite the granting of hak milikto the smallholders; (d) assist in the recruitment of prospective newsettlers under the project; and (e) ensure crop extension services to allsmallholders.

(e) Agricultural Support Services for Smallholders

4.20 Agricultural Extension. Extension for foodcrops is the responsi-bility of the Directorate General of Food Crops (DGFC) which provides thisservice from its office in Pelaihari. A second area office would berequired at full development and should be located in the smallholdersugarcane area. Food crop extension agents would maintain close liaisonwith the nucleus estate extension staff to coordinate both activities.Since the impact of the additional 3,000 new settlers would increase thedemand for these services, assurances were obtained from GOI during negotia-tions that the existing foodcrop extension services would be expanded inaccordance with the increasing development of the sugarcane smallholderarea.

4.21 Agricultural Credit. Agricultural credit would be providedthrough the Bank Rakyat Indonesia (BRI) under the crop intensificationprogram (TRI) already in operation in Java. Because of the different grow-ing cycle in the Other Islands, however, and the need to maintain standovercane to initiate the milling season, the TRI program for the proposedproject would not be based on annual loans repayable at the end of eachcrop. BRI and Team Khusus are currently studying a credit system adapted tothe requirements of sugarcane production under the Other Island conditions,presu-mably based on a three-or four-year cycle. This would avoid the burdenof high repayment costs after the first year and spread the loan recovery

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over more of the crop cycle. BRI and Team Khusus are already jointly work-ing on such a credit program which will be completed before December 1983.BRI has an office in Pelaihari which would handle TRI credit for the pro-posed project, at least initially. It is expected, however, that additionalfacilities would be required with the development of larger sugarcane areasunder the proposed project. Where village cooperative units (KUDs) exist orwould be established, these would act as intermediaries for the administra-tion of sugarcane credit, as they do for the BIMAS program.

4.22 Cooperatives. Cooperative units are not common in the area butare expected to become more important as a result of the project. Thisshould be true especially for the smallholders located farther from thenucleus estate, since there would be considerable advantages in cooperativeharvesting and transport of sugarcane if such cooperatives could be organ-ized in the future. Facilities would be provided in the project area forKUD units with office and storage facilities. These KUDs, in addition toassisting BRI in the administration of credit, would serve as distributionagents for fertilizers and chemicals to the smallholders, particularly forfoodcrops.

4.23 Regional Training and Research. An agricultural training centerhas been recently built in Pelaihari, some 20 km from the proposed sugarestate, by the Ministry of Agriculture. This center will provide generalagriculture training to local farmers and will serve as a center for exten-sion and research facilities in the region, including the proposed projectarea. The capacity and curriculum of these new facilities had not beenestablished at the time of appraisal, but during negotiations, assuranceswere obtained from GOI that the services to be provided by the new centerwould be used in support of the proposed project. In addition, periodicvisits to the area are made by BP3G staff to review the sugarcane trialsinitiated five years ago in the Tambang Ulang area of the project, whichnow constitutes the center of the project nursery. A trial plot of sugar-cane had also been established in Sebuhur, south of the proposed projectarea, but with unfavorable results, and Sebuhur was excluded from theproposed project.

(f) Operation and Maintenance

4.24 Maintenance of regional infrastructure would be the responsibilityof the corresponding agencies, i.e., the main access roaw betweenBanjarmasin and Pelaihari, the main road to the factory and the villageroads would be maintained by Bina Marga, while the various provincial andpublic buildings, such as the police station, post office, and the extensionoffice would be maintained by the respective parent departments. Operationand maintenance costs for regional civil works would be shared among theprovincial departments and nucleus estate. The part of O&M cost chargeableto the provincial government would be 100% for the main access road, and 50%for the village roads. The estate would reimburse the provincial government

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in full for the maintenance of the factory road, and 50% of village roads.Because timely maintenance of infrastructure is essential to the project,with even minor interruptions of transport having a serious effect on itsimplementa-tion and or operation, assurances were obtained from Governmentduring negotiations that all regional infrastructure, particularly the mainaccess road and all primary and secondary village roads rehabilitated orconstructed under the project, would be maintained adequately and in atimely manner by the appropriate agencies after project completion.

4.25 Operation and maintenance of civil works directly related to theproject, including processing facilities, nucleus estate and smallholderfield roads estate buildings and staff houses, would be the responsibilityof the estate which would also maintain the public utilities within theproject area. The cost of public utilities, such as water, electricity andsewerage would be shared proportionately among the users, including thepublic departments represented in the project area. Each smallholder wouldbe responsible for maintaining his house at his own expense.

(g) Project Training and Research

4.26 Training at all levels is a major concern not only for the pro-posed project but for the overall sugar program in Indonesia. The manager-ial and technical needs of this program, even as presently reduced to onlynine implemented factories, are far beyond the capabilities of the existingsugar estates in Java to provide without seriously impairing their ownoperations. For this reason, a training component has been included in theproposed project that provides training in Indonesia, using existing facili-ties (LPP, IIB, BP3G, BLKI and PUSDIKTOP), for 46 administrative and factorystaff, and 49 agriculture and mechanization staff. In addition, the samefacilities would be used to provide training for 65 factory and 58 agricul-ture and mechanization non-staff personnel. Overseas training for a totalof 150 manweeks would be provided for nine Surabaya-based PTP XXIV-XXVadvisory staff and 11 project staff to familiarize them with specificaspects of the sugar industry in countries with problems similar to thosethat would be encountered in the proposed project. Terms of reference forthe Bank-assisted advisory services to the overall sugar program emphasizethe support of the Sugar Council Secretariat in preparing a training programfor all the sugar estates. This program was completed in May 1983 andpresented to the Bank for financing under the program support component ofthe proposed project. The program includes manpower and training facilitiesfor seven new sugar estates, including the Pelaihari estate. Training underthe program would be paid by the respective PTPs, excluding direct project-related training such as included under the project training component.Because the seven new estates are in different states of preparation orimplementation, a time-slice of the overall training program has beenincluded in the program support (3.16) and the rest would be financed fromthe other source. The proposed project related training copmonent isdescribed in Annex 2(b).

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4.27 Research would also be an essential component of the proposedproject if the full potential of the project area were to be realized. Lackof experience in cane cultivation under conditions which are quite unlikethose in Java, requires that a continuous investigation of improved agricul-tural practices and better adapted varieties be carried out from the onsetof the project. For this reason, a modest research component (Annex 6(c))would be incorporated into the project. This research, however, should beconsistent with an overall research program under the AARD, not only todetermine the areas of the Other Islands better suited to sugarcane produc-tion, but the agricultural practices and cane varieties best adapted to thespecial conditions of each of the proposed sites. In the course of nego-tiations, agreement was reached with Government that an overall researchprogram would be completed by the Sugar Council, assisted by its specializedconsultants, and by BP3G, under the umbrella of the agency for AgriculturalResearch and Development (AARD), by December 31, 1983. The proposed appliedresearch is described in Annex 2 (c).

V. SUGARCANE PRODUCTION, TRANSPORT, PROCESSING AND MARKETING

A. Sugarcane Production

5.01 The project would establish 12,400 ha of sugarcane, including4,000 ha of nucleus estate and 600 ha of seed cane nursery and 7,800 ha ofsmallholder farms (local farmers, existing transmigrants and new settlersunder the NES procedures). Production of sugarcane would be based on acombination of one-season cane (10-12 months) and standover (12-18 months)cane to make full use of the sugar factory capacity during the harvestingseason. Initially, sugarcane development would be based on three selectedvarieties from those recommended by BP3G for the Pelaihari area, but appliedresearch to identify additional suitable varieties would be continued underthe project. Average cane yields based on five years research at theTambang-ulang nursery inside the area of the proposed nucleus estate wouldbe 80 ton/ha for first cut and first ratoon; 70 ton/ha for second ratoon;65 ton/ha for third ratoon and 90 ton/ha for standover cane in the nucleusestate. Although these are conservative estimates, even lower figures areprojected for smallholder-managed cane to compensate for loss of estatemanagement and the limited experience of the smallholders in producingrainfed sugarcane. Sucrose rendement is expected to average 8.5% for bothstate and smallholder cane. Land development in the five year implementa-tion period would increase from 1,500 ha in the first year to 3,100 ha inthe third and fall to 2,100 ha in the fifth year. Land development andsugarcane harvesting schedules are presented in Annex 3, Tables 1 and 2.

5.02 Sugarcane growing would include the normal operations of landpreparation, planting, weed control, pest and disease control and ratooning,the last constituting a difference from the current practice in Java wheresugarcane is harvested every year and the area planted to rice. Land

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preparation involving plowing to normal depths of 20 cm and some subsoilingto 50 cm in areas with heavier clay subsoils or where improved infiltrationand waterholding capacity is required. Furrowing would be done at 1.5 mspacing and completed no later than the end of October in order to startplanting by the onset of the rainy season. The need to carry out all landpreparation within the limited period of the dry season makes it imperativethat these operations be done mechanically by the estate, with smallholdersbeing charged a reasonable cost for preparation of their land. Plantingwould be done by hand to provide employment during the early stages of thecropping cycle and to allow for the operation to carry on even under theprevailing wet conditions during most of the planting period. Urea would bethe main fertilizer used beginning with applications of 170 kg/ha for thefirst application and 130 kg/ha for the second. These application rates,however, would be under review by the research program to determine if otherrates may be more effective and/or less costly. Standover cane wouldreceive higher applications of urea. Filling gaps resulting from failedgermination would be a normal part of the planting operation.

5.03 Weeds would be largely controlled by the growth of the cane itselfbut until a continuous canopy has been achieved, spraying, weed burying,ridging of plants and hand hoeing would be used to control undesirablegrowth. Only minor infestations of fungal diseases have been observed inthe area and stem borer is the major pest found in the existing nursery.Bacteriosis is under investigation by BP3G but would be largely controlledby preventive sanitary measures and selection of less susceptible varieties.Biological control of the stem borer is a long-term approach and chemicalcontrol a costly one. However, BP3G has developed a technique for breedingand releasing predators which has been considerably successful in Java andsimilar approach would be sought for the Other Islands.

5.04 The cropping system in the proposed project would be based on athree-ratoon system, although it is believed that a fourth ratoon would bepossible in some of the better areas. Ratoons would basically have similarrequirements to plant cane, although fertilizer rates would be somewhatrequirements to plant cane, although fertilizer rates would be somewhathigher. Hand-hoeing, inter-row ripping and re-ridging, as well as fillingof gaps in plant coverage would be normal operations in ratoon cultivation.To ensure that early investments in the construction of the processingfacilities are justified, assurances were obtained from GOI duringnegotiations that planting of sugarcane would commence in the 1983 plantingseason and continued in 1984. This would provide the necessary standovercane for the early stages of milling operations and short-cycle cane for thelatter part of the harvesting season.

5.05 The total production of cane milled during an estimated 150 daymilling season with the factory working at 90% efficiency would be some6003000 tons based on the above average yield of 80 ton/ha. Assuming anaverage rendement of 8.5% (8.8% starting in year 7) for cane from all

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sources, total sugar production in a milling season would be about 50,000tons. In addition to the sugar, the proposed project would produce anexpected 23,000 tons of molasses, based on an estimated 3.75% of thesugarcane production.

B. Cane Harvesting and Transport

5.06 Sugarcane produced under the proposed project would be harvestedgreen, cut and loaded manually into containers and hauled from the fields bytractor and trailer units to the factory over average wransport distances of5 to 15 km. Trash (dry leaves) would be retained in the field for soil andwater conservation and weed control. There would be four harvesting sectorsor "fronts", one for the nucleus estate and three for the smallholders, eachwith a cutting supervisor. Cane cutters would be organized by the nucleusestate management into groups of 50 men. Manual harvesting of the canewould create additional jobs in accordance with GOI policies and provide theopportunity for selection of prospective new settlers. A program to traintractor operators is already going on in the project area and would beexpanded under the proposed project. Scheduling of harvesting operations,one of the most complex activities in a sugar project, would be the respon-sibility of the estate management. During the first two years of factoryoperation, the estate would be assisted by a harvest and transport consult-ant coordinator who, based on cane maturity determinations in the varioussectors, would develop a harvesting schedule consistent with millingcapacity and sugar processing operations. While it is estimated that thepresent number of existing farmers and transmigrants would be sufficient toprovide the necessary labor force, workers from other areas of Kalimantanand from other islands, particularly Java, would be encouraged to ensurecultivation of foodcrops and facilitate the selection process for the newtransmigrants.

5.07 Cane transport would be by tractor and trailer units (in-fieldunits) for distances within eight km of the factory, including all of thenucleus estate sugarcane. For longer distances, including a large number ofthe smallholder farms, cane would be loaded in the field and transported bythese in-field units to a transhipping area where the loaded containerswould be transported by road trucks (road units) to the factory. Thein-field units would comprise 80 hp 4-WD tractors and trailers equipped withhyraulic powered winch and cable to lift the containers as well as hydraulichooks to secure the containers to the trailers. The road trucks would besimilarly equipped. Sugarcane would be transported over all the projectroads, including the main access road, village roads, secondary haulageroads, link roads and field roads. Main access and village roads would bebuilt to provincial public works standards which are suitable for canetransport. All other roads would be built up to specifications required forthis use, including maximum slopes of 12%. The main access road would beasphalted and all other roads would be compacted with 50% of the field roads

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having laterite surface. The main access road would be constructed toClass ITA standards and the secondary haulage roads and main village roadsto Class III standards established by Bina Marga. The layout of the roadsystem would be consistent with minimizing the haulage distances whilemaintaining the required specifications for sugarcane transport.

C. Sugar Processing

5.08 The proposed project would produce plantation white sugar fromsugarcane by the conventional method (extraction, clarification, filtration,bleaching, evaporation, crystalization, separation and drying) in a sugarfactory with 4,000 TCD capacity, easily expandable to process 5,000 TCD. Inboth cases, capacity for increased requirements of steam of up to 10% wouldbe included. It is estimated that an average 150 days of operation perseason would be experienced, with a projected net efficiency of about 90%when projected normal operations in 1988. Provision would be made forwater, steam and electric power to maintain the sugar factory, agriculturalworkshop and estate village. The requirements of a 4,000 TCD factory areapproximately 95 tons of steam per hour and 3.0 MW of electric power. Anadditional 0.8 MW electric power for the agricultural workshop and villagewould be available. Provision would be made for 120 tons of steam per hourand 9.0 MW electric power, including spares, under the proposed project.The boilers would be designed to use bagasse and/or fuel oil. At the pro-jected cane quality, there would be an excess of bagasse production whichwould minimize the requirement of auxiliary fuel after reaching normaloperation. W4hile it is expected that increasing smallholder participationin the project and larger volumes of sugarcane resulting from improvedvariety selection and agricultural practices would make it possible tosupply the increased potential capacity, because of the need to examine thefinancial and economic implications of increased production, agreement wasreached with GOI during negotiations that expansion to the potential 5,000TCD capacity would only be undertaken in consultation with the Bank. Evenwithout expansion beyond the 4,000 TCD capacity the costs of producing sugarwould be reasonable. The total cost of production (capital and operating)over the life of the project would be about US$290/ton. A sketch of theproposed processing facilities is shown in Chart 3 and the facilities aredescribed in detail in the revised and approved specifications for thefactory.

5.09 Timely construction for the sugar factory is a basic requirementto the financial and economic success of the proposed project. To achievethe projected milling start-up date of mid-1985, an estimated constructiontime of 18 months was considered adequate, but 20 months were provided inthe corresponding schedule (Chart 4) with two additional months for no-loadtesting and commissioning. To achieve this construction schedule, a"turnkey" type operation would be required. As shown in other tenderedfactories in the overall sugar development program, combining equipment and

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civil works from various suppliers working under different schedules andprocedures is a time-consuming process. The "turnkey" contract placesdirect responsibility for the factory being operational at a given date onthe selected supplier and reduces the risk of slippage in factory commis-sioning with the resulting losses in sugarcane development. On the basis ofGOI-s adherence to the agreed construction schedule, with invitations totender issued, site visit and discussions with potential suppliers held anda closing date for presentation of bids set for June 2, 1983, the proposedtarget date for start-up of milling operations is considered realistic.

D. Marketing

5.10 The sugarcane produced under the project would be milled byprocessing facilities owned and operated by the nucleus estate and providedunder the project. Following traditional custom in Indonesia, farmers wouldbe paid for their cane in terms of the sugar produced. Of the value of thissugar, once the smallholder has assumed full responsibility for his land,not less than 60% would be the smallholder's gross payment as determined byan established Government formula (while the smallholder's land is underestate management, i.e., until after the harvest of the first ratoon, thesmallholder would receive 25% of the value of the sugar). This formula hasdeveloped over time to meet the needs of irrigated sugarcane in Java. Sincea different method of growing cane will be used in this project (rainfedwith three ratoons) in a different part of Indonesia (South Kalimantan),experience may show that a different sharing of revenues between the small-holders and the processor would be more appropriate. Therefore, agreementwas reached with Government during negotiations that the smallholder's sharefor sugar and molasses produced from his sugarcane and the ex-factory priceof sugar and molasses would be determined in accordance with principlesincluding, inter alia, (a) all legitimate and reasonable expenses ofcollecting, transporting, procesing and marketing of smallholder production;(b) the importance of encouraging smallholder production, higher yields andrendements; (c) the need for the estate to earn a return on the capitalemployed in the processing facilities; (d) the eventual development ofsmallholders' cooperatives, and (e) the level of Government taxes. It wasalso agreed that such principles would be reviewed from time to time by GOIand the Bank. Debt service for the smallholder development loans and theannual working capital loans and other project charges owed the nucleusestate by the smallholders, such as harvesting, would be deducted from thesmallholder's gross payment.

5.11 Marketing of sugar in Indonesia is carried out exclusively by theBadan Urusan Logistik (BULOG), a national food stock authority with respon-sibility for procurement and distribution of rice, sugar and other commodi-ties. Sugar produced in the country becomes the property of BULOG as soonas it is processed, but it is stored by the factory until it is distributed.BULOG pays the factory for the storage and this cost is added as a storagefee to the consumer price.

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5.12 Sugar production in Indonesia is estimated at 1.3 million tons in1982 as compared with an estimated consumption of 2.1 million tons. Most ofthe deficit must be covered through sugar imports which, even in terms ofthe present depressed international prices, represent a substantial cost inforeign currency for the country. Projected figures for 1990 before the1981 announcement of GOI's sugar program were for a total production of2.6 million tons and the deficit remaining at 700 thousand tons. Thesefigures result in a national consumption of 13.8 kg per head in 1982 and18.7 kg per head in 1990. In South Kalimantan, where consumption isslightly higher than the national average (16.5 kg in 1982 and 21.4 kg in1990) the total consumption is estimated at 35,000 tons in 1982 and 55,800tons in 1990. The total production of the proposed project, 50,000 tons,which will be reached only in 1988, would satisfy the total provincialdemand for that year, but would be insufficient for the subsequent yearsunless the potential capacity expansion to 5,000 TCD is achieved.

5.13 Distribution of the sugar produced under the proposed projectwould be the responsibility of BULOG. Logically, this sugar would supplythe provincial market, thus realizing significant savings on transport.However, during a transitional period at least, existing distributionarrangements may cause BULOG to export some of the sugar production to otherparts of Kalimantan or even to some of the other islands.

5.14 W1hile the 1981 proposed overall sugar development program for theOther Islands was expected to satisfy Indonesia's sugar deficit by the endof the decade, some of the proposed factories have been delayed and may becancelled and, in the best of assumptions, they would barely keep up withincreasing population and demand. The market for sugar produced by theproposed project is therefore assured.

5.15 Domestic marketing of molasses on behalf of the PTPs is undertakenby the Kantor Administrasi Pemasaran Bersama Gula (KAPBG), the joint sugarmarketing office, at Government controlled prices. The bulk of molasses areexported, however, although alternative uses for this byproduct should besought, particularly in the expansion of livestock production in SouthKalimantan.

E. Prices

5.16 Sugar prices at all levels are fixed by Government, althoughregional variations occur because of distribution costs. At the presenttime of depressed world market prices, Indonesian domestic prices for sugar(US$39 4 /ton ex-BULOG store, Banjarmasin) are significantly higher than animport parity price based on estimated 1983 spot prices (US$328/ton ex-BUL0Gstore, Banjarmasin). However, it is not Government policy to subsidize thesugar industry. Rather, the policy is to match parity prices over time.Particularly since the bulk of imported sugar is purchased through forward

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contracts, a policy based on the fluctuating spot market would be inappro-priate. Before the March 1983 devaluation of the rupiah, the currentex-factory price did in fact equal the long-term import parity price ofsugar. In projecting the price of sugar, it was assumed that the policy ofmatching the long-term import parity price (US$476/ton ex-Pelaihari factoryfrom 1985 on) would continue. Annex 4, Table 1 shows the current andprojected world spot prices for sugar during the life of the project andAnnex 4, Table 2 shows the derivation of import parity price.

5.17 The price of molasses, as in the case of sugar, has varied widelyin recent years. From 1975-1982 the FOB spot price of internationallytraded sugar averaged 5.7 times the FOB price of exported Indonesianmolasses. Thus, the projected export price for molasses was derived bydividing the projected price for sugar by the 5.7 constant. Local transportand handling costs were then subtracted to arrive at an ex-factory price ofUS$44/ton. Domestic ex-factory price for molasses is fixed by Government atRp 50,000/ton (US$52/ton) and this is assumed to continue. A weighted aver-age of projected export prices (87%) and domestic prices (13%), based onhistorical sales levels, has been used to arrive at a financial price forsugar (US$47/ton). For the economic analysis the projected export pricesalone have been used. Annex 4, Table 3 shows the current and projectedprices of exported Indonesian molasses during the life of the project andAnnex 4, Table 4 shows the derivation of the prices used in the economic andfinancial analyses.

VI. BENEFITS, JUSTIFICATION AND RISKS

A. General Benefits

6.01 The project would establish 12,400 ha of sugarcane and 3,000 ha ofgardens and foodcrops in a relatively undeveloped area where smallholderincomes are low and employment opportunities few. It would directly benefitsome 5,000 smallholder families and provide permanent employment for aboutanother 1,100 people working for the nucleus estate. By creating employmentopportunities in other sectors to service the nucleus estate and the agri-cultural settlements, and by acting as a catalyst for further development inthis relatively isolated area, the project would indirectly benefit at leastanother 2,000 families. Transport, communications, health and educationwould all improve and increase the attraction of the area as a place to liveand work in.

6.02 During the initial development period, the project would providemost of the participating smallholders with regular work. Through thetraining and research components, the project would set an example ofefficient sugar production and enable the sector to expand. In particular,there may be other sugarcane areas nearby sufficiently large and available

- 37 -

to justify an eventual expansion of the sugar factory or creation of a newone. The project would support Government's policy of increasing domesticsugar production, creating productive employment for the rural poor,particularly in an area with few alternative crops, sustained use ofunderutilized land and water resources, and foreign exchange savings wouldbe achieved by import substitution.

6.03 The base cost of developing sugarcane for smallholders would beabout US$9,000 per family. The project would provide 10,300 new jobs inagriculture for a total investment of US$117 million (base cost plusphysical contingencies), about US$11,000 per job created. By comparison,job creation in medium to large-scale industry in Indonesia is estimated tocost US$24,000 per job.

6.04 The project, at full development in 1988, would produce over50,000 tons of sugar for domestic consumption and 23,000 tons of molassestogether worth about US$30 million landed in South Kalimantan.

B. Financial Results

PTP XXIV-XXV Financial Analysis

6.05 PTP XXIV-XXV is the most successful of the sugar PTPs and has astrong and improving financial position (see para. 4.11). It has a recordof financial prudence and competent management. At the time of appraisal,October 1982, its investment plans, although ambitious, were reasonable andacceptable. Furthermore, the long-term forecasts indicated continued profi-tability and sound financial structure. Since then, the PTP has modifiedits investment plans due to subsequent developments in the Indonesianeconomy. These modifications aim at consolidation and should furtherenhance the PTPs financial viability. The PTP produced as a condition ofnegotiations an updated investment and long-term forecast statement for itsoperations. These forecasts, incorporating the potential impact of the recentdevaluation, were comprehensive and acceptable, and confirmed the earlierconclusion that PTP XXIV-XXV would be financially viable for theforeseeable future.

6.07 Despite recent reductions in the debt:equity ratio, the PTPcapital structure is relatively highly leveraged for a plantation companyand GOI intends that it shall be maintained below 50:50. Financing of newprojects will thus require a large proportion of equity capital.

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6.08 The PTP will derive project income from its own sugar operationsand from the less profitable processing of smallholder cane. GOI does notplan to depart from the standard 60:40 formula for the smallholders share ofsmallholder produced sugarcane, but may allow the PTP a fee for its opera-tions on their behalf. For administrative reasons, MOF would prefer to makethe actual conversion to share capital on project completion. In themeantime, funds intended for equity conversion will be recorded as a GOIintereset free loan (para. 3.21).

Financial Rate of Return

6.09 Because of the sudden devaluation of the rupiah on March 30, 1983from about US$1 = Rp 700 to US$1 = Rp 970, some adjustments have been madeto the costs and benefits obtained during appraisal to derive the FRR. Theimmediate effect of the devaluation was to increase foreign costs expressedin rupiah by 39% without changing local costs expressed in rupiah. It isfelt this would significantly understate the relative price of nontradeablegoods and when the full effects of the devaluation work themselves out therelative costs of nontradeable goods will actually be about 25% higher thanthe immediate post-devaluation levels. Therefore, when deriving the FRR, inaddition to converting the foreign exchange portion of base costs plusphysical contingencies at the new exchange rate (effectively increasingforeign costs by nearly 40%) local costs and benefits have also beenincreased by 25%. It is felt that this methodology will express a truer FRRin constant values (see para. 6.12 (a)). The FRR to PTP XXIV-XXV for theproposed project is 13% (Annex 5, Table 5) based on the foregoing assumptionsand a 1985 factory start. The FRR, like the ERR (para. 6.14), is mostsensitive to changes in the price of sugar, which is controlled by BULOG.The base case assumes that BULOG will maintain its traditional policy oftrying to match the long-term import parity price in setting the ex-factoryprocurement price. However, if todays ex-factory price didn-t increase atall in real terms, despite the projected increases in the import parityprice, then the FRR drops to 5%. However, given that the long-term BULOGprocurement price is within 25% of the long-term projected import parityprice, an acceptable FRR of 8% to 15% can be expected.

C. Smallholder Incomes

6.10 After full implementation, net smallholder incomes after debtservice are expected to range from $1,700/year for new settler families to$2,000 for existing smallholder families. These projection are about 80%higher than estimates of current income for the groups. The differencebetween the groups is due to the lower debt service requirements for exist-ing smallholders who already have housing and food crop land and the factthat existing smallholders are expected to continue cultivating slightlymore food crop land than the 1.0 ha allocated to new transmigrants. Alsosee Annex 6, Tables 1 and 2 for details of projected settler incomes.This budget is based on a new settler's sugarcane farm model (Annex 6, Table1) covering the initial period of farm establishment (years 3-9 of the

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project) and the four-year cycle which repeats itself from project year 10on. While the average annual harvested area for this model is 1.25 ha, 1 haper farm has been used for the farm budget to allow for loss in milling canedue to immature cane, fire loss, etc.

6.11 Cost Recovery. BRI would recover the credit items of smallholderdevelopment costs (para. 3.24 and Annex 6) retaining debt service paymentsfrom the sale revenues of the sugar and molasses. To repay the annual loaninstallment, payments of 10-20% of sugarcane income would be required. Forup to 14 years the estates would transfer all cost recovery to BRI whichwould keep a record of all individual smallholder accounts. Besidesrepaying all credit development items, smallholders would pay a land tax,which village heads would collect and turn over to local and provincialadministrations for providing public services. This tax is considered adirect project tax which contributes towards the operational costs of thegovernmental agencies involved in the villages. The smallholder farm budgetin Annex 6, Table 2 shows that smallholders should be able to make theirannual debt service payments without difficulty.

D. Economic Results

6.12 Assumptions. The following assumptions were made in derivingeconomic costs and benefits:

(a) Base prices for major tradeables are based on border pricesconverted to rupiah at the official exchange rate of Rp. 970 =

US$1.00 using a standard conversion factor of 1.0. Other baseprices, have been adjusted to 'reflect anticipated changes in therelative prices of tradeables and nontradeables subsequent to thedevaluation of March 30, 1983 (para. 6.09).

(b) The value of ex-factory sugar was derived from an import parityprice based on the World Bank price projections for sugar plustransportation costs to South Kalmantan.

(c) The value of ex-factory molasses was derived by dividing theprojected spot price of internationally traded sugar by a constantbased on the historical ratio of the two prices.

(d) Economic wages have been assumed at 75% of the market wage. Inother Bank-financed NES projects, labor has been shadow pricedat 50% in Java and at 100% in the Other Islands. Although thisproject will be in the Other Islands, it was decided to shadowprice labor because (a) the project site is located in an areawith a large pocket of underemployment, as indicated in fieldinterviews and by the willingness of people to travel largedistances to get work (so the opportunity cost of labor could beno more than the market wage less transport cost); and (b) giventhat most smallholder participants in the project will be existingtransmigrants near Pelaihari or new settlers to the area, and one

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explicit purpose of this project is to generate employment inthe area, one may conclude that market wages in this area over-state the opportunity cost of labor. The assumption of economicwages as 75% of the market wage was chosen to approximate a situa-tion in between that of Java and the more prosperous areas of theOther Islands.

(e) The costs of health, education and village facilities andregional infrastructure improvements have been excluded on thegrounds that Government would have provided these facilities evenwithout the project.

(f) The sugar factory starts operating in 1985.

6.13 Economic Rate of Return. Based on the above assumptions theeconomic rate of return for the project is estimated at 16% (Annex 7).

6.14 Sensitivity Analysis. Sensitivity analysis was used to determinethe effects of changes in costs, benefits and the initiation of sugar pro-cessing. The results are summarized below in Table 6.1. The analysis is mostsensitive to changes in the highly volatile price of internationally tradedsugar. In a worst case analysis, whereby today's sugar price wouldn't increaseat all, the ERR of the project would be about zero. But for the likely rangeof sugar prices (FOB Caribbean) during the life of the project (US$267/ton toUS$597/ton with a "most likely" price of US$398/ton, all in 1983 dollars), theERR appears acceptable.

Table 6.1: SENSITIVITY ANALYSIS

ERR (%)

Base case (sugar at US$398/ton FOB Caribbean) 16With 20% increase in costs 12With 10% decrease in sugar prices (US$358/ton) 13With 33% decrease in sugar prices (US$267/ton) 7With 60% decrease in sugar prices (US$159/ton) -1With 50% increase in sugar prices (US$597/ton) 28With 1 year lag in sugar revenues (caused by

either delayed factory or plantation) 13

Switching values at 10% oppor- Appraisal Switching Percentagetunity cost of capital (Rp billion) value value change

Decrease in sugar revenues 170 131 23Decrease in total benefits 189 150 21Increase in capital costs 62 101 62Increase in operating costs 71 110 55Increase in total costs 150 189 26

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E. Project Risks

6.15 Sugarcane production in the Other Islands is a new activity andprojects under preparation, including the proposed project in the Pelaihariarea, include a large experimental component. Traditional experienceacquired in centuries of sugar production in Java, with completely differentecological conditions, are of little help. In fact, they may constitute anobstacle to rapid acceptance of new approaches and technologies which areessential to the success of the proposed project. These constraints consti-tute an element of risk that the project seeks to counteract through con-tinued research and training and an emphasis on new agricultural practicesbetter adapted to the soil and climate conditions of the proposed projectarea.

6.16 More immediate is the risk related to timing of project activi-ties. Because of the short duration of the dry period needed for bothharvesting and land preparation, the timely programming and execution ofeach of the many aspects of sugarcane growing becomes critical to satisfac-tory levels of production. In the early stages of the project this timingbecomes crucial since investments in cane planting must be made two yearsbefore the actual start up of processing operations. A delay in avail-ability of operative processing facilities when the crop is ready forharvesting would produce heavy losses on agricultural investment. In bothcases the financial viability of the project would suffer and GOI shouldmake every effort to implement each component of the proposed project on anearly schedule, including early tendering of factory and advisory services,expansion of seedcane nurseries, preparation of land and appointment of asite manager, to facilitate 1983 planting and 1985 factory completion. TheBank is assisting these efforts through agreement to efficient and time-saving limited international bidding for procurement of the sugar factory(para. 3.27) and sugarcane planting beginning in the 1983 season (para. 5.04).Annex 8 shows a schedule of early events critical to timely projectimplementation.

6.17 A third element of risk, derived from the lack of experience insugar production under new conditions, is the lack of trained personnel tomanage and operate the estate. Two steps directed to overcome this risk arethe emphasis on training, closely related to the overall sugar sectortraining program being prepared by the Sugar Council Secretariat withassistance from their specialized advisors, and the extension of advisoryervTch that would be provided under the project beyond the implementationperiod into the first two years of factory operation.

VII. AGREEMENTS TO BE REACHED AND RECOMMENDATIONS

7.01 A condition of negotiations was the presentation by the negotiatingteam of updated investment and long-term forecast statements for PTPXXIV-XXV's operations (para. 6.05). During negotiations, agreement wasreached with the Government on the following points:

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(a) Strengthening of bridges on the main access road to the projectarea to a bearing capacity of not less than 30 tons byOctober 1983, and earthwork, asphalting and bridge constructionto upgrade this main access road to Bina Marga Class IIA stand-ards to be completed by May 1985 (para. 3.07).

(b) No new agricultural activities to be allowed within the proposedproject area other than those stipulated under the project.(para. 3.12).

(c) PTP XXIV-XXV to be provided with development funds for the nucleusestate and factory under the following terms: (i) loans for 20years at 13.5% per annum with five years grace period on capitalrepayment; (ii) 50% of the loans in equity in the form of ordinaryshare capital; and (iii) PTP XXIV-XXV to review its cash flowevery year to ensure that dividends are only distributed withoutimpairing the PTPs ability to carry out its investment programand its operations with adequate cash balances (para. 3.23).

(d) PTP XXIV-XXV (i) to maintain a ratio of term debt to equity notexceeding 50:50; and (ii) not to undertake any new developmentexceeding Rp 1.5. billion, other than that agreed under theproject, without consultation with the Bank (para. 3.23).

(e) GOI to provide funds directly to PTP XXIV-XXV for all smallholderdevelopment local costs, except working capital credit for sugar-cane production (para. 3.24).

(f) BRI to establish under the TRI program a credit scheme acceptableto the Bank and adjusted to the crop cycle for sugarcane in theOther Islands by December 31, 1984 (para. 3.24).

(g) GOI whenever possible, (i) to group civil works for localcompetitive bidding into a number of suitable contracts (minimumsize Rp 200 million) to enable large local contractors or jointventures to bid; and (ii) to submit to the Bank for review thedocuments, including evaluation, for contracts exceedingUS$500,000 equivalent (para. 3.26).

(h) PTP XXIV-XXV to (i) keep separate accounts for all project invest-ment costs under the project for smallholders and estate develop-ment; (ii) these accounts to be audited each year in accordancewith appropriate auditing principles consistently applied byindependent auditors acceptable to the Bank; and (iii) auditedreports submitted to the Bank by June 30 each year (paras. 3.34and 3.35).

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(i) PTP XXIV-XXV, assisted by Team Khusus, would prepare and submitto DGE by October 31 preceding the budget year (January-December),annual work programs and budgets for the proposed project(para. 4.14).

(j) The Provincial Government of South Kalimantan would expand itsservices for health, education and food crop extension to supplythe requirements of smallholders under the project (para. 4.18).

(k) The Provincial Government would use the training and researchfacilities recently constructed in Pelaihari to support theproposed project (para. 4.23).

(1) The main road between Benjarmasin and Pelaihari, the access roadto the factory, all primary and secondary village roads con-structed under the project and all new village facilities would bemaintained adequately and in a timely fashion by the appropriateprovincial agencies after project completion (para. 4.24).

(m) GOI to finalize and submit to the Bank a research (para. 4.26)program for the overall sugar sector by December 31, 1983 (para.4.27).

(n) Sugarcane planting in the nucleus estate to commence in the 1983planting season and to continue in 1984 (para. 5.04).

(o) Expansion of the sugar factory capacity to 5,000 TCD to be under-taken only in consultation with the Bank (para. 5.08).

(p) Smallholder's share of sugar and molasses produced from hissugarcane and price of sugar to be determined in accordance withprinciples including, inter alia all legitimate and reasonableexpenses of collecting, transporting, processing and marketing ofsmallholder production; the importance of encouraging smallholderproduction and higher yields and rendements; the need for theestate to earn a return on the capital employed in the processingfacilities; the development of smallholders and Government taxes,and such principles to be reviewed from time to time by GOIand the Bank (para. 5.10).

7.02 Agreement was reached with the Government on the followingconditions of disbursement against individual project components:

(a) The signing of a financing arrangement between the BI/MOF andPTP XXIV-XXV in form and substance satisfactory to the Bank(para. 3.23).

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(b) The signing of smallholder development agreement between the DGEand PTP XXIV-VXV in form and substance satisfactory to the Bank(para. 3.24).

7.03 With the above assurances and conditions, the project would besuitable for a Bank loan of US$79.2 million (including the capitalized 0.25%front-end fee of US$0.2 million) with a 20-year maturity, including a graceperiod of five years. The Borrower would be the Government of Indonesia.

ANNEX 1-45 _ Table 1

INDONESIA

NUCLEUS ESTATES AND SMALLHOLDERS SUGAR PROJECT

Project Cost Summary

% ofLocal Foreign Total Local Foreign Total foreign % of total

…--- (Rp million) ------- --- (US$ million) --- exchange base cost

PTP 24/25Factory 6,999.2 23,070.8 30,070.0 7.1 23.9 31.0 77.0 29.8Est. bldg. & util. 4,927.0 3,173.0 8,100.0 5.1 3.3 8.4 39.2 7.9Est. veh. & mach. 1,434.1 8,124.1 9,558.2 1.5 8.4 9.9 85.0 9.3Init. mat. stocks 579.2 820.2 1,399.4 0.6 0.8 1.4 58.6 1.3Est. - land dev. 327.7 862.0 1,189.7 0.4 0.9 1.3 69.0 1.2Est. - preop. labor 2,200.0 - 2,200.0 2.3 - 2.3 - 2.1

PTP & smallholder roads 2,039.0 4,962.4 7,001.4 2.1 5.1 7.2 70.9 6.8Technical Assistance 730.7 4,416.9 5,147.6 0.8 4.5 5.3 85.8 5.0

Operating costs /a 8,991.0 998.0 9,989.0 9.3 1.0 10.3 10.0 9.7

Subtotal PTP 24/25 28,227.9 46,427.4 74,655.3 29.2 47.9 77.1 62.0 72.5

Smallholder DevelopmentNew settler housing 2,301.8 362.2 2,664.0 2.4 0.4 2.8 13.6 2.6

Smallholder land dev. 636.0 1,672.9 2,309.0 0.7 1.7 2.4 72.5 2.2

Subtotal Sh. Dev. 2,937.8 2,035.1 4,972.9 3.1 2.1 5.2 40.9 4.8

Comm/Reg DevelopmentReg. roads 3,369.6 7,158.2 10,527.8 3.5 7.3 10.8 68.0 10.2Reg. comm. fac. 899.5 141.5 1,041.1 0.9 0.1 1.0 14.0 1.0Reg. veh. and eq. 22.9 129.9 152.8 0.1 0.1 0.2 50.0 0.1

Subtotal Comm/Reg Dev. 4,292.1 7,429.6 11,721.7 4.5 7.5 12.0 63.0 11.3

Program Support 1,940.0 9,700.0 11,640.0 2.0 10.0 12.0 83.0 11.3

Subtotal Program Support 1,940.0 9,700.0 11,640.0 2.0 10.0 12.0 83.0 11.3

Total Baseline Costs 37,397.8 65,592.1 102,989.9 38.8 67.5 106.3 63.7 100.0

Physcial Contingencies 2,769.1 6,354.5 9,123.6 2.9 6.6 9.5 69.6 8.9Price Contingencies 7,785.2 6,205.4 13,990.6 8.0 6.4 14.4 44.4 13.6

Total Project Costs 47,952.1 78,152.0 126,104.1 49.7 80.5 130.2 62.0 122.4

/a Other capitalized operating costs during project construction (representing working capital costs).

June 20, 1983

-46- ANNEX 1Table 2

INDONESIA

NUCLEUS ESTATES AND SMALLHOLDERS SUGAR PROJECT

Total Project CostProject Component by Time

(Rp million)

Base costs Total1983 1984 1985 1986 1987 Rp US$ mil.

PTP 24/25Factory 3,007.0 12,328.7 14,734.3 - - 30,070.8 31.0Est. bldg. & util. 4,193.2 1,617.1 1,196.2 1,014.3 79.2 8,100.0 8.4Est. veh. & mach. 1,806.8 1,044.4 2,319.3 1,904.1 2,483.6 9,558.2 9.9Init. mat. stocks 138.2 481.1 572.8 98.3 109.0 1,399.4 1.4Est. - land dev. 406.9 446.3 407.8 - - 1,261.0 1.3Est. - preop. labor 440.0 583.0 705.1 471.9 - 2,200.0 2.3PTP & smallholder roads 885.6 2,123.5 1,901.2 1,220.4 870.7 7,001.4 7.2Technical assistance 657.1 1,941.2 2,306.1 182.4 60.8 5,147.6 5.3Operating costs /a 2,833.0 7,156.0 - - - 9,989.0 10.3

Subtotal PTP 24/25 14,367.8 27,721.3 24,142.8 4,891.4 3,603.3 74,726.6 77.1

Smallholder DevelopmentNew settler housing - 355.2 1,154.4 1,154.4 - 2,664.0 2.8Smallholder land dev. 39.5 292.3 591.0 901.5 484.7 2,309.0 2.4

Subtotal Sh. Dev. 39.5 647.5 1,745.3 2,055.9 484.7 4,972.9 5.2

Comm/Reg DevelopmentReg. roads 3,341.8 4,570.6 721.3 458.9 1,435.2 10,527.8 10.8Reg. comm. fac. 382.6 - 94.1 282.2 282.2 1,041.1 1.0Reg. veh. and eq. - 57.8 10.7 39.9 44.4 152.8 0.2

Subtotal Comm/Reg Dev. 3,724.4 4,628.3 826.1 781.0 1,761.9 11,721.7 12.0

Program Support 1,970.0 3,630.0 2,660.0 1,690.0 1,690.0 11,640.0 12.0

Subtotal Program Support 1,970.0 3,630.0 2,660.0 1,690.0 1,690.0 11,640.0 12.0

Total Baseline Costs 20,101.7 36,627.1 29,374.2 9,418.3 7,539.9 103,061.2 106.3

Physcial Contingencies 1,734.0 3,110.8 3,012.8 658.4 607.6 9,123.6 9.5Price Contingencies 897.7 2,823.3 3,914.4 3,472.6 2,881.6 13,990.6 14.4

Total Project Costs 22,733.4 42,561.2 36,301.4 13,549.3 11,029.1 126,175.4 130.2

Foreign Exchange 12,317.3 25,285.2 26,441.0 6,838.2 7,397.3 78,279.0 80.7

/a Other capitalized operating costs during project construction (representing working capital costs).7b Government-s contribution in x of baseline costs: 1983 (51%); 1984 (42%); 1985 (16%); 1986 (47%);

and 1987 (73%).

June 20, 1983

INDONESIA

NUCLEUS ESTATES AND SMALLHOLDERS SUGAR PROJECT

Project Operating Costs

(Rp million)

19981993- &

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1997 onward

Iasic Data /aNucleus estate-managed area (ha) 3,100 6,600 10,300 12,400 11,500 9,800 8,100 6,200 4,60 4,600 4,600 4,600

Nucleus estate-managed cane (H tons) 0 0 276 437 553 497 384 366 216 216 213 213

Smallholder area (ha) 500 2,600 5,700 7,800 7,500 7,800 7,800 7,800 7,800 7,800 7,800 7,800

Total cane (M tons) 0 0 276 437 611 603 613 625 609 609 604 604

Total sugar (M tons) 0 0 23 37 52 53 54 55 54 54 53 53

Agricultural OperationsStaff (nucleus estate) /a 60 66 93 112 124 143 151 151 151 151 151 151

Nonstaff /a 172 253 305 316 383 383 383 383 383 383 383 383

Physical inputs /b 1,302 2,772 4,326 2,604 2,415 2,058 1,701 1,302 966 966 966 966

Seasonal labor /c 905 1,927 3,008 1,810 1,679 1,431 1,183 905 672 672 672 672

Harvest labor /T 0 0 175 277 350 315 243 232 137 137 135 135

Extension staff Ie 5 23 51 70 68 70 70 70 70 70 70 70

Subtotal 2,444 5,042 7,958 5,189 5,019 4,400 3,731 3,043 2,379 2,379 2,377 2377

Factory -

Staff /a 54 54 102 108 108 108 108 108 108 108 108 108

Nonstaff/a 20 81 198 315 408 408 408 408 408 408 408 408

Physical inputs /f 127 634- 634 1,267 886 874 889 906 883 883 876 876

Sugar sacks /g 0 0 94 149 208 212 216 220 214 214 213 213

Subtotal 201 769 1t2 1,839 1,610 1,603 1 621 1 642 1,613 1,613 1,604 1,604

Maintenance§taff /a 29 29 45 47 47 47 47 47 47 47 47 47

Nonstaff /a 17 102 111 157 181 181 181 181 181 181 181 181

Physical inputs /h 54 272 272 544 544 544 544 544 544 544 544 544

Subtotal 100 403 428 748 772 772 772 772 772 772 772 772

Finance & AdministrationStaff /a 33 33 55 57 57 57 57 57 5 57 5

Nonstaff /a 14 66 115 115 229 229 229 229 229 229 229 229

Physical inputs including overhead /i 28 139 139 278 278 278 278 278 278 278 278 278

Subtotal 75 238 309 450 564 564 564 564 564 564 564 564

Operating costs before replacements 2,820 6,451 9,722 8,226 7,964 7,338 6,687 6,021 5,328 5,328 5,317 5,317

Devaluation adjustment li 3,609 8,258 12,444 10,529 10,194 9,393 8,560 7,707 6,820 6,820 6,806 6,806

ReplacementsPTP vehicles, machinery & equipment /k - - - - - 1,091 1,091. 1,091 1,091 1,091 1,091 2,182

Buildings & utilities /1 - - - 257 257 257 257 257 257 513

Roads - - - - - 72 72 72 72 72 72 143

Subtotal - -- 1,419 1,419 1,419 1 419 1 419 1,419 2,838 HX

Total Operating Costs 2,820 6,451 9,722 8,226 7,964 8,757 8,106 7,440 6 747 6,747 6,736 8 155

With devaluation adjustment 3,609 8,258 12,444 10,529 10,194 10,812 9,979 9,126 8,239 8,239 8,225 9,644

19981993- &

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1997 onward

Total physical inputs 1,511 3,817 5,464 4,842 4,331 3,628 3,628 3,250 2,885 2,885 2,876 2,876Incremental 1,511 2,306 1,648 -623 -511 -364- -339 -337 -365 0 -9 0% capitalized incremental 25 25 25 - - - - - - - - -Physical working capital 378 576 412 -

Less Capitalized CostsLabor 398 525 639 402Physical working capital 378 576 412 0 - - - - - - - -

Subtotal 776 1,101 1,051 402Net operating costs 2,044 5,350 8,671 7,824 7964 875 8,106 7,440 6 747 6,747 6 736 8,155

With devaluation adjustment 2,833 7,156 11,393 10,127 10,194 10,812 9,979 9,126 8,239 8,239 8,225 9,644

Residual Values in Year 2008PTP vehicles, machinery & equipment /m - - - - - - - - - - - 5,454Buildings & utilities /m - - - - - - - - - - - 5,131PTP roads /n - - - - - - - - - - - 2,846Physical inputs /n - - - - - - - - - - 1,698Factory /o - - - - - - - - - 33,642 1Land development (PTP) /n - _ - - - - - 1, 271

Total Residual Values (PTP) - - - - - - - - - - - 50,042 oo

Smallholder roads /n - - - - - - - - - - 4,979 1Land development (smallholder) /n - - - - - - - - - - 2,468

Total Residual Values /p- - - - - - - - - - 57,489

To Derive Economic ValuesNet financial operating costs 2,044 5,350 8,670 7,824 7,964 8,757 8,106 7,440 6,747 6,747 6,736 8,155Less 25% of labor costs 327 659 1,064 846 908 843 765 693 611 611 610 610

Net Economic Values 1,717 4,691 7,607 6,978 7,056 7 056 7 914 7 341 6 747 6.136 6 126 7,545

With devaluation adjustment 2,424 6,333 10,063 9,070 9,059 9,758 9,023 8,260 7,475 7 475 7,462 8,881

/a Details in Staff Working Papers.7i Rp 210,000 x nucleus estate-managed area (x 2 for first three years).77 Rp 146 x nucleus estate-managed sugarcane area.77 Rp 33,000 x nucleus estate-managed sugarcane area.7T Rp 9,000 x smallholder sugarcane area.7T Rp 145 in 1983, Rp 725 in 1984/85, and Rp 1,450 in 1986 and thereafter per ton of total cane.7j Rp 4,000 per ton of total sugar.7i; Rp 55,400 in 1983, Rp 227,000 in 1984/85, and Rp 554,000 from 1986 on.7T Rp 27,000 in 1983, Rp 139,000 in 1984/85, and Rp 554,000 from 1986 on.f The 39% devaluation of the rupiah on March 30, 1983 has beea taken into account as follows: (i) assuming 20% of operation

costs as foreign, these were Increased by 39%; (ii) local costs are assumed to have increased by 25% to reflect relativechange in local costs from the immediate postdevaluation levels, expected after the full effects of the devaluation workthemselves out. For example, devaluation adlustments for 1983 operating costs before replacement yielded: (2,820 x 20% x1.39) = (2,820 x 80% x 1.23) = 3,609.

/k l10o of capital costs in year 6-15; 20% thereafter.7Ti 2.5% of capital costs in year 6-15; 5% therafter.7T 50% of base costs plus physical contingencies.7T 100% of base costs plus physical contingencies.7T 75% of base costs plus physical contingencies.TP For ERR calculations.

May 6, 1983

49 - ANNEX 1Table 4

IND. OESI

NUCLEUS ESTATrE AND S9ALLiIOLDER SU(AR PROJECT

Est[matedl Schedule of Disbursements /a

Cumulative lisbursemlents AreaNES develoument

IBRD fiscal year projec's projects /band semester (US$ million) lb (%) (%) (%)

FY34First 11.1/c 14 - 0.7Second 27.1 34 1 4

FY85First 37.9 43 4 9Second 57.4 73 11 15

FPY86F 4 rst 70.5 89 21 22Second 73.2 93 31 30

'FY87First 75.1 95 44 39Second 77.5 98 60 48

FY3qFirst 78.4 99 78 57Second 79.2 100 93 74

/a Closing Date: June 30, 1989.

/b Actual cumulative disbursements for AEP area development loans inFY7(0- 0.

Ic Includes capitalized front-end fee and FY83 second semester.

Jlne 20, 1983

Annex 2Page 1

- 50

INDONESIA

NUCLEUS ESTATE AND SMALLHOLDERS SUGAR PROJECT

Technical Assistance, Training and Research

A. Technical Assistance

1. Sugarcane production and processing in the Other Islands consti-tutes a challenge for the implementing agency, particularly with the timingconstraints imposed by efforts to initiate milling in time to process caneproduced in the two earlier years. The complexity of the field and factoryoperations, particularly in view of the limited availability of experiencedpersonnel, makes the need for adequate technical assistance imperative,particularly during the implementation period and the two initial years ofprocessing.

2. While extensive use of expatriate consultants would facilitateinitial operation of the factory and management of the cane producing areas,as well as contribute to the in-service training of national counterparts,the project-s financial and economic viability require that such expatriateassistance be limited to key areas where experienced support is considered

essential.

Objectives

3. The major objectives of the consultancy services for the proposedproject would include:

(a) Establishing the new sugar project in accordance with the develop-ment program and with a minimum of delay.

(b) Ensuring that the factory turnkey contracts are complied withby the contractor and advising the PTP management on contractualprocedures.

(c) Ensuring that the agricultural and road construction machinerysupply contracts are complied with.

(d) Ensuring that project development is completed as economically aspossible without impairing production potential.

(e) Ensuring that the factory is operated to be obtain maximum sugarper factory year as economically as possible.

ANNEX 2

- 51- Page 2

(f) Ensuring that quality of sugar produced satifies the requirementsof the Indonesian market.

(g) Optimizing methods of cane cultivation under rainfed conditionsand establishing sound principles of ratooning.

(h) Developing an optimum system of harvesting and transport todeliver fresh clean cane to the factory.

(i) Optimizing the layout of estate and smallholders haulage roadsand drainage systems to minimize transport distances to thefactory.

(j) Providing agricultural advice to sugarcane producing smallholders.

Advisory Services

4. A schedule of implementation consultancy services for the proposed

project is presented in Table 1. These services include the followingconsulting specialists:

5. Project Coordinator. The complex task of coordinating the work ofthe implementation consultancy team and that of the normal factory and fieldstaff requires the skills of an experienced administrator who can serve asliaison between the consultant and resident staff and between the factoryand field operations. This task is essential during the early stages ofimplementation, gradually reverting to the normal functions of the estateproject manager. For this function, 30 man-months of consultant time wouldbe provided.

6. Field Development Engineer. Implementation of the sugarcanedevelopment program for the estate and the smallholders would be the majorresponsibility of this consultant. Cane area selection, field layout, landclearing and field preparation, supplementary irrigation for seed caneproduction and drainage of low-lying areas would be his major tasks, whichwould be carried out in close coordination with the agronomist, the agri-cultural mechanization engineer and the harvest and transport coordinator.For this task, 23 man-months have been estimated as a minimum, covering theperiod of land development for the first harvest.

7. Agronomist. Responsibilities of the consulting agronomist wouldinclude the supervision of the applied research program to be establishedjointly with BP3G in the project area to assess new varieties and determineoptimal agricultural practices, fertilizer requirements and weed, pest anddisease control. He would also participate in the development of the caneplanting program and in the organization of the agricultural management ofthe sugarcane sections and assist the project management in instituting

Annex 2

-52 -Page 3

records and controls. An important aspect of his responsibilities is thetransfer of successful agricultural practices to the smallholder extensionservice for dissemination among the farmers. To inititate these tasks whichwill eventually be taken over by the estate agronomist, 36 man-months ofconsulting services would be provided.

8. Smallholder Extension Specialist. The major responsibilities ofthe extension specialist include: establishment of a methodology forproviding demonstration to smallholders of the most suitable agriculturalpractices for sugarcane growing under local conditions, ensuring adequateprovision of selected varieties, and providing technical advice on caneplanting and cultivation, application of fertilizers and agriculturalchemicals, and harvesting organization and maturity testing. For this work,24 man-months would be provided, starting one year before the last portionof the agronomist's period, to provide the necessary overlapping between thetwo closely related specialists.

9. Civil Engineer. The consultancy services of this specialist arerequired from the very onset of the project to supervise all constructionworks and coordinate these works with those of the provincial departments.These works would include main village roads, village link and field roads,land clearing, factory and village water reservoirs, housing, public villagefacilities and public utilities (water, electricity, sewage, etc.). A totalof 30 man-months for the civil engineer would be provided under the project,beginning as early as possible in the project implementation period.

10. Agricultural Mechanization Engineer. The services of thisspecialist are also required early in the project implementation period toascertain that equipment received is consistent with that ordered and thatall items are complete and in operating condition. A large proportion ofhis work would be training of field staff to ensure that agricultural androad construction equipment is operated correctly, monitoring of trainingprovided by the machinery and equipment suppliers, and determining addi-tional training requirements. He would also assist the agriculturalworkshop specialist in the training of all workshop and service personnel.To achieve this, 30 man-months would be provided, running simultaneouslywith the agricultural mechanization specialist.

11. HIarvest and Transport Coordinator. The key responsibilities ofthis specialist would be largely those of training in the implementation ofthe harvest and transport program, including the use of service and main-tenance facilities and the development of preventive maintenance foragricultural and transport equipment. These services would be provided in aperiod of 6 manmonths beginning about two months before the first harvestingseason.

12. Agricultural Workshop Specialist. Establishment of an agricul-tural and transport workshop and service facilities, including a spare parts

Annex 2-5 3 Page 4

storage system and maximum and minimum stock control would be the majorresponsibility of the workshop specialist. His work, which would largelyinclude training of permanent staff, would be carried out in 7 man-monthsbeginning shortly before the start of the first harvesting season.

13. Senior Factory Engineer. The contribution of the senior factoryengineer is essential from the beginning of the implementation period, assoon as the sugar factory is being constructed. He would be responsible forascertaining that the terms of the turnkey contract for the processingfacilities are being complied with and once the factory is ready forstart-up, he would coordinate the work of the specialist directly related toprocessing, i.e., the electrical engineer, the instrumentation and boilerand steam specialists and the sugar process technologist. His work wouldbegin a few months after implementation is started and carry through to theend of the first milling season, with a possible short visit during thesecond milling season. For these tasks, 37 man-months would be providedunder the project.

14. Electrical Engineer. A total of 11 man-months for this specialistwould be provided, including three distinct visits to the project are: oneto review the electrical system drawings; one to review electrical work forthe factory during the year before start-up, and a final longer periodduring the first milling season to ascertain proper operation of theelectrical components. A total of 13 man-months would be provided for thispurpose.

15. Instrumentation Specialist. Two visits by this specialist wouldbe provided for a total of 9 man-months with the longer period during thefirst milling season and a shorter check-up visit during the second. Theinstrumentation specialist would play an important role in the adjustment offactory equipment and in the on-site training of factory staff operatingcomplex and modern instruments.

16. Boiler and Steam Specialist. This consultant is essential duringthe first milling season to ensure proper operation of boilers and the steamproducing system and to monitor training provided by factory suppliers.Proper adjustment of the factory boilers is particularly important to effi-cient operation and to avoid serious future problems such as have occurredin other Indonesian factories. A 7-month period during the first millingseason followed by a 2-month visit would be included, for a total of 9man-months.

17. Sugar Process Technologist. Review and approval of processingdesign would be the first reesponsibility of the processing specialist,followed by a 7-month period during the first milling season and a shorter3-month period during the second to ensure efficient operation of the sugarprocess. Organizing the factory's control laboratories would also be aresponsibility of this specialist.

Annex 2Page 5

_ 54 -

18. Financial Controller. The major responsibility of these consult-ing services would be in assisting the PTP and the estate in establishingadequate accounting and reporting system to maintain the necessary controlover project costs, revenues and inventories. This work should begin assoon as the first disbursements under the project are made and should carryon until a permanent PTP staff member has been properly trained for thispurpose. A total of 27 man-months would be provided for the financialcontroller.

19. The total advisory services that would be provided under theproject would represent 294 man-months. This amount, however, provides theminimum necessary to ensure efficient operation of the factory and manage-ment of the sugarcane areas assuming a normal rate of development of trainednational staff to take over the project. The PTP XXIV-XXV may find itnecessary to extend part of these services after the second milling season.Effective use of training provided under the project is a major factor inreducing the need for extended consultancy services.

B. Training

20. The impact of the overall sugar program in Indonesia on the avail-ability of experienced labor, both operational and managerial, cannot besufficiently emphasized. To transfer staff from the existing sugar estatesin Java to the new ones constructed under the program would create a seriousdisruption of ongoing sugar processing and, in the case of the agriculturaloperations, would not result in necessarily increased production in theOther Islands becuase of the different approach that needs to be taken forsugarcane production in a completely different environment. Under thesecircumstances, training of new personnel at all levels becomes a crucialaspect not only of the proposed sugar project in Pelaihari, but for theefficient operation of the program as a whole.

21. An understanding of these vast requirements for training in thesugar sector have resulted in emphasizing the need for an overall trainingprogram which is being prepared under the Bank-assisted advisory services tothe Sugar Council Secretariat. The starting point for this program is astudy sponsored by the Dutch government in 1982 to determine the trainingneeds in sugar sector./l The training requirements of the proposed NESSugar Project would be regarded in the context of this overall trainingprogram, although to insure successful implementation of the project, thebasic training needs for this implementation would be considered as aninseparable part of the project and financed under the proposeed loan. To

/1 Pre-Feasibility Study on the Training Requirements for Personnel of theSugar Industry in Indonesia (DGIS Mission, February-March 1982).

- 55 -

ANNEX 2Page 6

reduce the cost of this training component, the implementing PTP would beurged to make full use of the available training facilities in Indonesia,particularly of the Estates Training Institute (LPP) in Jogjakarta and Medanfor managerial and technical staff and of the existing sugar estates andfactories under the Directorate General of Estates (DGE) in Java for field

and factory on-the-job training. Additional but essential training would beprovided under the consultancy services as well as by suppliers ofprocessing facilities, and agricultural and road construction equipment andmachinery. Other specialized institutions involved in training in the sugarsector are the Sugar Research Station at Pasuruan, East Java (BP3C), theInstitute for Instrumentation at Bandung (IIB), the Training Office forIndustrial Technicians (BLKI) and the Center for Topographic Training(PUSDIKTOP).

Pelaihari Project Training

22. Training for the proposed project would include training inIndonesia for staff and non-staff personnel and overseas training for PTPXXIV-XXV advisory staff and for staff directly involved in the project. Inaddition, a short English language course would be provided for projectstaff participating in the overseas training. The total training programwould provide up to 2,540 man-weeks of training for both staff and nonr-staffpersonnel. Table 2 summarizes the proposed project training component,excluding training from consultancy services or equipment and machinerysuppliers.

Training in Indonesia

23. The use of Indonesian training facilitiees (LPP, IIB, BP3G, BLKI,PUSDIKTOP) would include staff training for:

(a) Administrative and Factory Staff (46)General Manager, Administration Manager, accountants, machine/computer operator, sugar storage and procurement officers,stores supervisor, Factory Manager, Chief Engineer, engineersand foremen, instrument technician, Chief Chemist, laboratory andshift chemists, process foremen, laboratory analyst, weighbridgeand toolroom clerks and draftsmen.

(b) Agriculture and Mechanization Staff (49)Agricultural Manager, Nucleus Estate Manager, Farmers Area andFarmers Liaison managers, field superintendents, research manager,agronomist and laboratory technician, field supervisors, transportand maintenance managers, equipment, cane transport, workshop andservicing supervisors and agricultural engineer.

- 56 -ANNEX 2Page 7

Of the administrative and factory staff, 36 would also take special fieldstudy courses, as would 27 of the agriculture and mechanization staff. Thetotal Indonesian staff training component would include 95 project staff fora total of 1,496 man-weeks.

24. Training for non-staff personnel using the same facilities inIndonesia would include:

(a) Factory Personnel (65)Mill station, powerhouse, boiler and processing foremen,instumentalist, workshop foremen and engineers, juice scale,heater, sulphitation, clarification, filtration evaporatorstation, crystallizer, centrifugal, sugar drying and packingoperators, lime station and pan boiling operators.

(b) Agriculture and Mechanization Non-Staff Personnel (58)Grader operators, road truck drivers, mechanics, servicemechanics, auto electricians, welders/fitters, tire repairfitters, lubrication servicemen and mechanization andagricultural foremen.

All factory non-staff perosnnel would receive special field/factory studycourses while 45 of the agriculture and mechnization non-staff personnelwould receive suppliers training for their respective equipment. A totalof 123 non-staff personnel would be trained in Indonesia up to a total of950 man-weeks. In addition, some 20 heavy-duty operators, 113 wheeled-tractor drivers and 44 road truck drivers would receive on-site trainingfrom the project's own training facilities.

Overseas Training

25. In addition to training in Indonesian facilities, overseas train-ing would be provided for nine Surabaya-based PTP XXIV-XXV advisory staffand 11 project staff for a total of 150 man-weeks, including training inEnglish language for the 11 project staff personnel. Overseas trainingwould be applied to familiarize PTP and project staff with specific aspectsof the sugar industry in countries with problems similar to thoseencountered in the proposed project. Recommended countries for specificdisciplines would be: (a) Mauritius, for management, agronomy, factorymilling and engineering, sugar process control and cane transport aspects;(b) Swaziland, for management, field mechanization and harvesting, civilengineering and ancillary infrastructure; (c) Australia, for cane harvestingand mechanization and factory instrumentation; (d) United Kingdom, fortraining management, preventative maintenance, instrumentation, energyeconomy and computer systems for the sugar industry; and (e) Louisiana,U.S.A., for project management, computer systems for project control andagricultural mechanization. Training of the PTP advisory staff would befinanced through the overall sugar training program.

- 57 -ANNEX 2Page 8

26. The overseas training component would be implemented as requiredprior to or during the initial stages of factory operation and both theIndonesian and external training would be coordinated, to the extentpossible, with the training program for the overall sugar developmentprogram to avoid serious discrepancies which might affect the fungibility ofstaff among the various sugar projects.

C. Agricultural Research

27. Varietal trials have been conducted in the Pelaihari area for aperiod of five years and these trials have resulted in selection of threevarieties to be multiplied for cane seed under the proposed project. It isclearly understood, however, that with the limited experience in sugarcanegrowing in the Other Islands, agricultural research would be a continuousactivity not only for this project but for the overall sugar developmentprogram in Indonesia. Terms of reference for the advisory services to theSugar Council Secretariat include the preparation of an overall researchprogram for which the Sugarcane Experiment Station at Pausuruan has alreadyprepared a draft proposal. This proposal includes trial areas in sixlocations throughout the Other Islands, including the Pelaihari site.

26. Research required to improve productivity and rendement of thesugarcane crops under new ecological conditions include not only continuoustrials and selection of new varieties, but research on agronomic practices,fertilization and mechanization, crop protection, sugar technology and caneproduction management. All these aspects are included in the BP3G proposalfor the overall program. Since implementation of this program is notexpected for at least another year, the agricultural research requirementsof the proposed project in Pelaihari would be contemplated within theproject itself, although technical guidance would be provided by thePasuruan sugarcane station, thus ensuring coordination of these activitieswith those of the major sectoral research program.

Pelaihari Research Activities

29. Under the proposed project, 600 hectares are provided for seedgarden, the central core of which would be the Tambang-Ulang nursery. Thisarea is larger than needed for seed cane production and the purpose is toallow the necessary land for varietal trials and agronomic and mechanizationresearch without disruption of normal production operations. In addition,laboratory facilities and equipment would be provided to complete fieldresearch activities.

30. Research activities would be under the responsibility of the SiteMlanager, with technical direction, under BP3G guidance, from the agronomist,the field development engineer, agricultural mechanization engineer and

_58 -

ANNEX 2Page 9

harvest and transport coordinator (paras. 6, 7, 10, 11). Closely related tothe research program would be the smallholder extension specialist (para. 8)responsible for the transfer of technology resulting from the agriculturalresearch to the project related smallholders.

31. Participation of BP3G in establishing and monitoring the agricul-tural research activities in the project would be the subject of anagreement between PTP XXIV-XXV and the Pasuruan research station. Thisparticipation would begin with the preparation of a short-, medium- andlong-term research programs jointly with the project technicians andtechnical advisors and would continue with periodic visits by BP3G staff tothe project site to monitor results of the research activities. BP3Ginvolvement is particularly essential to varietal trials since all newvarieties tested would be imported through the experiment station-s channelsand facilities.

32. The major objectives of the project research activities wouldinclude:

(a) Obtaining agronomic information on new varieties to selectthe most suitable for bulking up and distribution forcommercial planting; selection to be based on maximum yieldsand rendement, longest ratooning practice, and resistance topests and diseases.

(b) Identifying the most suitable agricultural practices forland preparation, planting, weeding, hilling-up, canecutting, cultivating, ratooning, etc.

(c) Improving fertilizing, liming, and pest and disease controlpractices.

(d) Improving cane cutting and transport practices.

33. To achieve these objectives, the following activities would bepart of the proposed project research program. These activities would beadjusted and modified as required in the joint research program prepared byBP3G, the project technical staff and advisory services staff.

(a) Construction of a small research facility (office, laboratory,etc.).

(b) Purchase of laboratory equipment for soil physical and chemicalanalysis, leaf analysis, etc.

(c) Establishment of varietal trial plots and replication plots forfertilizer, herbicide, pest and disease control, liming, etc.trials.

- 59 -

ANNEX 2Page 10

(d) Establishment of trial fields for agricultural practices (landpreparation, planting, weeding, hilling up, can cutting, ratooncultivation, etc.

34. Table 3 presents the major subcomponents of the proposed projectresearch and their respective costs. Details for these items would beprovided in the research program prepared by BP3G and the project'stechnical staff.

35. Eventually, when the Sugar Development Research Program has beenestablished under the umbrella of the Agency for Agricultural Research andDevelopment (AARD), the facilities provided under the project would becomeintegrated into the research network for rainfed sugarcane in the OtherIslands.

May 1983

INDONESIA

NUCLEUS ESTATE AND SMALLHOLDER SUGAR PROJECT

Consultancy Services

1983 1984 1985 1986 1987 1988 TotalJASOND JFMAMJJASOND JFMAMJJASOND JFMAMJJASOND JFMAMJJASOND JFMAMJJASOND Man- months

Project Coordinator xxx xxxxxxxxxxxx xxxxxxxxxxxx xxx 30

Field Development Engineer xxx xxxxxxxxxxxx xxxxxxxx 23

Agronnomist xxx xxxxxxxxxxxx xxxxxxxxxxxx xxxxxxxxx 36

Extension Specialist xxxxxx xxxxxxxxxxxx xxxxxx 24

Civil Engineer xxx xxxxxxxxxxxx xxxxxxxxxxxx xxx 30

Agri. Machanization Engineer xxx xxxxxxxxxxxx xxxxxxxxxxxx xxx 30

Agri. Workshop Specialist xxxxxxx 7

Harvest & Trans. Coordinator xxxxxx xxx 9

Senior Factory Engineer xxx xxxxxxxxxxxx xxxxxxxxxxxx xxxxxxxxxx 37

Electrical Engineer xx xx xxxxxxx xx 13

Instrumentation Specialist xxxxx xx 7

Boiler & Steam Specialist xxxxxxx xx 9

Sugar Process Engineer xx xxxxxxx xxx 12

Financial controller xxx xxxxxxxxxxx xxxxxxxxxxxx 17

Total 294

- ISz

INDONESIA

NUCLEUS ESTATE AND SMALLHOLDER SUGAR PROJECT

Personnel Training

No. Man-Personnel trainee weeks Training subject Training source

Staff TrainingAdministration and factory 46 726 Management, technical engineering and LPP, LIB, BP3G BLKI

staff process, accounting, inventory, etc.

Agricultural and mechaniza- 49 770 Management, land clearing, rainfed LPP, PUSDIKTOP, BP3G

tion staff

Subtotal 95 1,4960'

Nonstaff TrainingFactory nonstaff personnel 65 618 Factory management and sugar process LPP and others

Agricultural and mechaniza- 58 332 Mechanical engineering, machinery LPP, Bina Marga andtion nonstaff personnel operation and maintenance etc. others

Subtotal 123 950

Overseas Training for Project 11 94 Management, agronomy, factory millingstaff and engineering, instrumentation,

Harvesting and transport, computersystem, etc.

Total Project Training 2,540

M >1

62 ANNEX 3

Table 1

INDONESIA

NUCLEUS ESTATE AND SMALLHOLDER SUGAR PROJECT

Land Development Schedule /a(ha)

Project year1983 1984 1985 1986 1987 Total

Nucleus estate & seed nursery 1,300 1,800 1,500 - - 4,600

Existing farmers - 300 900 700 - 1,900

Existing transmigrants 200 800 300 - - 1,300

New settlers - - 400 2,100 2,100 4,600

Annual Total 1,500 2,900 3,100 2,800 2,100 12,400

Cumulative Total 1,500 4,400 7,500 10,300 12,400 12,400

/a October - March planting season.

- 63 -

ANNEX 3Table 2

INDONESIA

NUCLEUS ESTATE AND SMALLHOLDER SUGAR PROJECT

Sugarcane Harvesting Schedule(ha)

1985 1986 1987 1988+

Nucleus estate 2,000 2,600 2,600 2,600

Existing farmers 100 800 1,200 1,200

Existing transmigrants 500 800 800 800

New settlers - 300 900 3,000

Total Harvested 2,600 4,500 5,500 7,600

ANNEX 4Table 1

- 64 -

INDONESIA

NUCLEUS ESTATE AND SMALLHOLDER SUGAR PROJECT

Historical and Projected Spot Prices of Internationally Traded Sugar(US$/ton; FOB Caribbean port)

Actual Projected1975 1976 1977 1978 1979 1980 1981 1982 1983 1985 1990 1995

Current 449 225 179 172 213 632 374 190 210 467 624 835

Constant (1981) 672 243 198 198 220 602 374 189 196 372 372 372

Constant (1983) - - - - - - - - 210 398 398 398

Source: World Bank Quarterly Review of Commodity Markets (12/1/82).

- 65 ANNEX 4Table 2

INDONESIA

NUCLEUS ESTATE AND SMALLHOLDER SUGAR PROJECT

Derivation of Sugar Economic Prices

1983 1985

US$/ton

F.o.b. Caribbean port raw sugar /a 210 398Refining to plantation white grade /b +34 +34Freight + insurance /c +45 +45

C.i.f. Banjarmasin 289 477

RpO000/ton

C.i.f. value Banjarmasin /d 298 463Port handling, bagging and storage +11 +11Drying + weight loss +19 +19

Cost, ex-BULOG store, Banjarmasin 328 493

Haulage from factory to BULOG store -6 - 6

BULOG charges /e -11 -11

Price ex-factory, Pelaihari 311 476

/a In 1983 constant US$; also see Annex 10, Table 2.

lb Cost required to make plantation white grade (such as would beproduced at the Pelaihari factory) out of standard raw sugar.

/c From traditional suppliers (India, the Philippines), includ-ing allowances for transhipment within Indonesia.

/d @ Rp 970 = US$1.

/e Bags, storage, BULOG fee, but excluding government taxes.

-66 -

ANNEX 4Table 3

INDONESIA

NUCLEUS ESTATE AND SMALLHOLDER SUGAR PROJECT

Historical and Projected Prices of Exported Indonesian Molasses(US$/ton; FOB Indonesian port)

Actual Projected /a,/b1974 1975 1976 1977 1978 1979 1980 1981 1982 1985 1990 1995

Current 55 28 38 29 48 73 111 71 31 82 109 146

Constant (1981)/c 95 42 56 39 55 75 105 71 31 65 65 65

Constant (1983) - - - - - - - - - 68 68 68

/a There is no need to make projections for 1983/84 as molasses production for the projectwill start in 1985 at the earliest.

/b From 1975 to 1982 the ratio of spot sugar prices to expected Indonesian molasses pricesaveraged 5.7. Thus, projected molasses prices were derived by dividing projected sugarprices by 5.7.

/c Using Manufacturing Unit Value Index (MUV), 1955-95 per World Bank Quarterly Review ofCommodity Markets (12/1/82). I

Source: P.T. Agriconsult Final Feasibility Report (August 1982) and above notes.

- 67 -

ANNEX 4Table 4

INDONESIA

NUCLEUS ESTATE AND SMALLHOLDER SUGAR PROJECT

Derivation of Molasses Economic and Financial Prices

(in 1983 constant values)

Rp'000/ton

Derivation of Molasses Economic PriceValue f.o.b. Banjarmasin /a (US$68/ton) 66 /bLess: Port handling and storage -13

Transport from sugar factor -10

Value ex-Pelaihari factory 43

Derivation of Molasses Financial PricePTP XXIV-XXV exports 87% of its molasses.If this same proportion holds true for thePelaihari factory, then the financial pricecan be calculated as:

87% x 43 - 37

13% x 50 /c +7

Weighted average price ex-Pelaihari factory 46

/a Price projected over life of project. See Annex 10, Table 3and using Manufacturing Unit Value Index (MUV), 1955-95, perWorld Bank Quarter Review of Commodity Markets (12/01/82).

/b US$1.00 = Rp 970

/c Government-controlled official ex-factory price for domesticsales.

- 68 -

ANNEX 5Table 1

INDONESIA

NUCLEUS ESTATE AND SMALLHOLDER SUGAR PROJECT

Summary of PTP XXIV-XXV Financial Results

1978 1979 1980 1981 1982---------------(Rp million)---------------

Profit and LossSugar sales 28,496 35,379 56,699 78,753 117,942Profit before dividends & tax (1,633) 1,089 5,451 9,240 10,382

Balance SheetCurrent assets 17,977 16,280 21,043 27,533 35,132Current liabilities 18,384 9,711 5,379 8,505 9,422Term debt 24,623 26,342 26,531 23,488 24,506Capital and reserves 12,125 41,123 46,623 56,847 70,179Total assets 55,134 77,175 78,527 88,832 104,106

RatiosCurrent 1.0:1 1.7:1 3.9:1 3.2:1 3.7:1Quick 0.1:1 0.3:1 2.0:1 1.5:1 1.8:1Total debt:total assets 0.8:1 0.5:1 0.4:1 0.4:1 0.3:1Return on sales (%) (0.6) 2.8 9.6 10.0 7.5Return on equity (%) (0.1) 2.7 13.3 18.8 14.8Debt:equity 3.5:1 0.9:1 0.7:1 0.6:1 0.5:1Equity:total assets (%) 22.0 53.3 59.4 64.0 67.3

ANNEX 5- 69 - Table 2

Page I

INDONESIA

NUCLEUS ESTATE AND SMALLHOLDER SUGAR PROJECT

Year End Balance Sheet - PTP XXIV-XXV(Rp million)

1976 1977 1978 1979 1980 1981 1982

Current AssetsCash on hand & in banks 169 162 226 186 3,646 8,425 10,275Time deposits & other securities 21 21 21 21 25 - 831Accounts receivable (less doubt-

ful account) 1,224 1,288 1,498 2,176 6,534 2,205 3,716Finished goods (less write-off

on unusable goods) 341 914 2,603 3,766 784 851 1,765Current account of other Govern-

ment enterprises - - 176 468 478 1,441 1,377Prepaid taxes - - 593 136 140 584 471Materials and supplies 16,716 14,328 6,190 5,893 4,720 4,258 3,896Immature cane plantations - 3,634 4,716 9,769 12,801Deferred charges current portion 8,524 7,763 6,670 - - - -

Total Current Assets 26,995 24,476 17,977 16,280 21,043 27,533 35,132

ParticipationsAt cost 14,431 19,649 42,173 102 102 102 102Accumulated depreciation (2,804) (5,389) (10,097) (102) (102) (102) (102)

Book Value-Participations 11,627 14,260 32,076 - - - -

Fixed AssetsLand 125 130 129 144Buildings & improvements 3,993 4,008 4,187 5,659Machinery & installations 49,298 49,709 51,222 58,501Roads and bridges 4,846 4,928 4,981 5,845Vehicles 2,118 2,293 2,340 2,941Farming tools 918 1,004 1,486 1,983Office and house furnitures 248 267 346 575

Subtotal 5,071 12,721 - 61,546 62,339 64,691 75,648Accumulated depreciation (14) (398) (5,377) (10,756) (16,457) (22,603)

Subtotal 5,057 12,323 - 56,169 51,583 48,234 53,045

Unproductive assets - - - 12 12 12 12Less: write-off on unpro-

ductive assets - - - (12) (12) (12) (12)

Book Value-Fixed Assets 5,057 12,323 - 56,251 51,501 48,234 53,045

Other AssetsConstruction in progress - - 380 541 1,231 4,182 9,807Formulation exenses, book value - 88 77 66 55 44 33Interest capitalized, book value - - 3,474 3,090 2,701 2,315 2,104Exchange rate differences, bookvalue - - - - 396 356 317

Immature plantations, noncurrentportion, book value 1,776 1,310 1,150 1,023 1,509 6,162 3,660

Deposit money - - - 6 9 3 4Commemorative coins TMII - - - - - 3 4

Total Other Assets 1,776 1,398 5,081 4,726 5,901 13,065 15,929

TOTAL ASSETS 45,455 52,457 55,134 77,175 78,527 88,832 104,106

- 70- ANNEX 5Table 2Page 2

Year End Balance Sheet - PTP XXIV - XXV(Rp million)

1976 1977 1978 1979 1980 1981 1982

Current LiabilitiesAccounts payable 1,431 1,606 2,508 3,825 800 823 1,759Taxes payable 1,580 625 1,258 659 198 1,173 1,065Loans from BankWorking capital 12,940 11,705 11,779 1,011 - - -Current portion of long-term

loan 1,093 851 1,322 2,693 2,886 3,994 4,329Accrued interest on bank loan 599 375 364 380 331 215 775

Current account with otherGovernment-s enterprises (1) 300 619 633 542 24 25

Dividend's payable 883 878 534 - - - 429

Pension plan - 228 - - - - -Accrued expenses - - - 570 622 999 1,040Provision for corporate tax - - - - - 1,277 -

Total Current Liabilities 18,525 16,568 18,384 9,711 5,379 8,505 9,422

Long Term Bank LoansNon-rehab. project loans 327 760 635 510 405 388 328Rehab. project loans

Foreign loans 12,257 15,961 14,869 14,708 14,479 13,160 15,227Domestic loans 2,688 4,949 9,119 10,662 11,198 9,510 8,521Premerger profit appropriations - 366 - 462 449 430 430

Total Long-Term Liabilities 15,272 22,036 24,623 26,342 26,531 23,488 24,506

TOTAL LIABILITIES 33,797 38,604 43,007 36,053 31,910 31,993 33,928

Owner's EquityShare Capital

Authorized, issued and fullypaid in capital 12,800 sharesper value Rp 1 million each(Preference shares (2,560)Common shares (10,240)) 12,800 12,800 12,800 12,800 12,800 12,800 12,800

Governments additional capital - - - - - 2,732 7,432

General reserve 934 1,428 1,428 3,523 1,031 6,089 12,243Net profit (loss) at end of year (2,078) (375) (2,103) 1,089 5,489 7,923 8,945Fixed assets revaluation reserve - - - 27,303 27,303 27,303 27,303Cumulative losses previous year - - - (3,592) - - -

Total Shareholders Equity 11,655 13,853 12,125 41,123 46,623 56,847 70,179

Errors and Omissions 3 - 2 (1) (6) (8) 1

Total Liabilities and

Shareholder's equity 45,455 52,457 55,134 77,175 78,527 88,832 104,108

ANNEX 5- 71 - Table 3

INDONESIA

NUCLEUS ESTATE AND SMALLHOLDER SUGAR PROJECT

PTP XXIV - XXV Year-end Profit and Loss Statement(Rp million)

1976 1977 1978 1979 1980 1981 1982

Sugar sales 24,185 29,030 28,496 35,379 56,699 78,753 117,942Cost of sales (22,097) (24,489) (25,959) (30,051) (52,016) (63,911) (95,047)

Gross Profit 2,088 4,541 2,537 5,328 4,683 14,842 22,895

General & admin. expenses (1,714) (1,712) (1,072) (1,277) (1,547) (2,013) (6,558)

Operating Profit (Loss) 374 2,829 1,465 4,051 3,136 12,829 16,337

Other incomeMolasses 437 1,061 1,354 2,960 5,482 2,890 3,225Transportation 20 - - - - -

Godown rental 114 82 68 71 49 87 308Additional sugar price - - - - 4,471 644 -Hospital - - - - 448 327 648Other non-operating income 172 361 406 296 330 490 1,651

Total Other Income 743 1,504 1,828 3,327 10,780 4,437 5,832

Other expensesMolasses - - - - (2,722) (2,101) (3,541)Interest on loans (2,018) (2,571) (4,152) (5,313) (3,673) (3,274) (3,534)Hospital (29) (48) (49) (77) (445) (600) (771)Other (112) (127) (725) (899) (1,625) (2,051) (3,941)

Total Other Expenses (2,159) (2,746) (4,926) (6,289) (8,465) (8,026) (11,787)

Total other income (expenses) (1,416) (1,242) (3,098) (2,962) 2,315 (3,589) (5,955)Profit (loss) before taxes (1,042) 1,587 (1,633) 1,089 5,451 9,240 10,382Provision for corporate tax - - - - - (1,277) (1,456)

Net Profit (Loss) (1,042) 1,587 (1,633) 1,089 5,451 7,963 8,926

ANNEX 5- 72 - Table 4

INDONESIA

NUCLEUS ESTATE AND SMALLHOLDER SUGAR PROJECT

Project Income Statement and Cash Flow(Rp billion, constant 1983 costs)

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

INCOME

Sales /a - - 12.1 19.4 27.5 28.4 28.9 29.1 29.6 29.6

CostsPayments to smallholders /a - - 1.2 2.5 5.2 6.0 7.8 8.3 10.0 10.0Operating costs /b - - 11.4 10.1 10.2 10.8 9.9 9.1 8.2 8.2Interest expense7Te /g - - 0.1 0.1 - 8.0 7.4 7.0 6.5 6.0Depreciation - - - 3.0 3.0 3.0 3.0 3.0 3.0 3.0

Total - - 12.7 15.7 18.4 27.8 28.1 27.4 27.7 27.2

Profit before tax - - [.6] 3.7 9.1 0.6 0.8 1.7 1.9 2.4

CASH FLOW

InflowProfit before tax & depr. - - [.6] 6.7 12.1 3.6 3.8 4.7 4.9 5.4Long-term loan/equity /c 14.3 27.8 23.3 4.4 3.4 - - - - -Short-term loan /d 0.6

Total 14.3 27.8 23.3 11.1 15.5 3.6 3.8 4.7 4.9 5.4

OutflowInvestment costs /f 14.3 27.8 23.3 4.4 3.4 - - - - -

Principal repayments /g - - - - - 2.0 1.7 1.6 1.6 1.5Short-term loan repayment - - - 0.6 -

Total 14.3 27.8 23.3 5.0 3.4 2.0 1.7 1.6 1.6 1.5

Cash surplus/deficit 0 0 0 6.1 12.1 1.6 2.1 3.1 3.3 3.9Cumulative 0 0 0 6.1 18.2 19.8 21.9 25.0 28.3 32.2

/a Annex 5, Table 5./b Annex 1, Table 3. 1983 & 1984 operating costs are included in investment costs.7i 50% loan, 50% equity./d Short-term loan to cover deficit of Rp 0.6 billion./e Short-term loan interest in 1985/86 and long-term loan interest from 1988 onwards.7? Annex 1, Table 2; total nucleus estate base costs plus physical contingencies./g Amortization at 13.5% with 5 years grace and 15 years repayment. Amortization (princi-

pal and interest) deflated at 8% to express in constant terms.

May 6, 1983

INDONESIA

NUCLEUS ESTATE AND SMALLHOLDER SUGAR PROJECT

Financial Costs and Benefits of Project for PTP XXIV-XXV(Rp million)

1991 1993 1998-

1983 1984 1985 1986 1987 1988 1989 1990 -92 -97 2006 2007 Totals

CostsCapital /a 11,464 19,605 23,331 4,410 3,416 0 0 0 0 0 0 0 62,226

Net operating /b 2,833 7,156 11,393 10,127 10,194 10,812 9,979 9,126 8,239 8,225 9,644 9,644 225,663

Smallholder sugar payments /c 0 0 1,092 2,296 4,915 5,696 7,546 8,017 9,800 9,800 9,800 9,800 196,162

Smallholder molasses payments /d 0 0 81 170 303 297 300 292 292 292 292 292 6,407

Total Costs 14,997 2f2.61 35,897 17,003 18,828 16,805 17,825 17,435 18,331 18 ,317 19,736 19 ,736 490.458

BenefitsSugar valuie /e 0 0 11,200 17,700 24,700 25,300 25,300 25,300 25,300 25,300 25,300 25,300 559,600 w

Molasses revenue /f 0 0 470 743 1,037 1,063 1,063 1,063 1,063 1,063 1,063 1,063 23,503

Reimbursement for sacks /g 0 0 118 186 259 266 266 266 266 266 266 266 5,876

Storage charges /h 0 0 32 51 71 72 72 72 72 72 72 72 1,598

Smallholder annual recovery charges /i 0 0 328 689 1,474 1,709 2,264 2,405 2,940 2,940 2,940 2,940 58,849

Residual values /j 0 0 0 0 0 0 0 0 0 0 0 50,000 50,000

Total Benefits 0 0 12,148 19,369 27,542 28,409 28,964 29,106 29 ,640 29,640 29,640 79,640 699,436

Net Flows (14,297) (26.761) (23,749) 2,366 8,714 11,604 11,139 11,671 11,309 11,323 9,904 59,904 208,978

IRR of net streams = 13%.

/a Annex 1, Table 2 (PTP items only excluding items such as smallholder roads built by the PTP but financed by GOI); adjusted for Jevaluation.

7b Annex 1, Table 3.7c (Rp 476,000 per ton) x (60% of sugar output from smallholder-managed land and 25% of sugar output from nucleus estate-managed smallholder land).

/d (Rp 50,000 per ton) x (1.5% of smallholder cane output).

7e Rp 476,000 per ton, Annex 4, Table 2.

77 Rp 46,000 per ton, Annex 4, Table 4.

/g Annex 1, Table 3, adjusted for devaluation.7h Rp 1,360 per ton of sugar.

/i 30% of smallholder sugar payments.

7] Annex 1, Table 3.

June 20, 1983

- 74 -

ANNEX 5Table 6

INDONESIA

NUCLEUS ESTATE AND SMALLHOLDER SUGAR PROJECT

PTP XXIV-XXV Sugarcane Area and Sugarcane and Sugar Production /a

Sugarcane Sugarcane produc- Sugar produc-Year area /b (ha) tion /c ('000 tons) tion /d (tons)

Actual1980 28,470 2,750 242,3021981 28,268 2,661 247,4181982 42,037 2,492 311,470

Estimated1983 49,438 3,875 336,284

Proj ected1984 51,500 4,120 357,5001985 54,200 4,336 376,2001986 58,200 4,656 404,0001987 61,300 4,904 425,5001988/92 63,500 5,080 440,800

/a Including Takalar and Pelaihari projects. Assumes no further investmentsafter Takalar and Pelaihari.

/b Increase between 1981 and 1982 due to completion of rehabilitation of Jati-roto and Semboro sugar factories. Increased area from Takalar (6,000 ha) isdistributed through 1984-88 and from Pelaihari (7,600 ha) through 1985-88,representing harvested area and excluding standover cane.

/c Projections assume an average yield of 80 tons/ha for all PTP estates.

/d Projections assume an average rendement of 9% for all PTP estates.

April 18, 1983

- 75 - MANEX 6Page 1

I ND NESIA

NUCLE^US ESTATE AN-' SMALLHIOLDER SIJGAR PROJECT

Smallholder Credit Arrangements

1. There are two types of credit to be exte-ded to sugar farmers:(a) a long-term investment credit and (b) a working capital credit under theTRI program.

(a) The investment credit covers:

(i) house;

'i;) land clearing for sugarcane and food crops land;

(iii) first year food crop development;

(iv) field roads;

(v) sAmple agriculturql tools (initial);

(vi) cost of resettling; and

(vii) land registration/certification.

Credit terms

a. r'payment in 1', years including 3 years grace onprincipal;

b. interest at 12% p.a., with deferred payment forinterest during the 3-year grace period; and

c. detailed procedures of repayment of principal andinterest to be determined.

(b) Working capital covers:

(i) cultivation and maintenance;

(ii) harvesting and transport;

(iii) fertilizer and pesticides (if required);

- 76 _ANNEX 6Page 2

(iv) seed; and

(v) overhead.

Credit terms

a. interest 12% p.a. or 1%/month;

b. repayment should consider yearly income of farmers, whichfluctuates year by year within one planting cycle(planting cane followed by three ratoon) to get a moreeven distribution of yearly income; and

c. detailed procedures (time and amount) of repayment willbe determined.

Stages of Development

2. During the initial 2-3 years the farmer status is one of aprospective participant. The PTP nuclear estate has responsibility forfield development. Farmers take part as labor during this stage. After theinitial period actual funds spent for smallholder investment credit will beconverted into a long-term credit. For this purpose farmers will sign acredit agreement with BRI.

BIN4AS (Intensification Program for Food Crops)

3. The intensification program for food crops covers:

(a) rice (irrigated or rainfed);

(b) secondary crops (maize, peanuts, soybeans, cassava, etc.); and

(c) vegetables (onions, chilis, potatoes, cabbages, tomatoes, etc.).

4. Government provides a package credit for this program. Ingeneral, the package consists of fertilizers (urea, TSP, KCL), seed,insecticides/rodenticides, spraying costs and a cost of living allowance.The cost of living component is also intended to cover any additional costs.

5. The amount of package credit varies, depending on croprequirements and local conditions. For example, for irrigated paddy(package A) it is as follows:

- 77 _

ANNEX 6Page 3

Rp

Urea/TSP/KCL 31,500Insecticides 3,000Rodenticides 1,000Seed 6,250Spraying cost 2,000Cost of living/misc. costs 20,000

Total 63,750

In an area where fertilizer requirements are higher (package C, for example,with 300 kg of urea and 150 kg of TSP), then the total package increases toRp 77,250. For a secondary crop such as maize, the package is Rp 40,625.

6. The Bimas credit is provided by BRI. Farmers receive from BRI acash loan for cultivation costs and the living allowance, plus a voucherwhich authorizes the issuance of inputs (fertilizer and pesticides).Farmers present the voucher to KUD to obtain those inputs. Repayment ismade about one month after harvest. The credit carries interest of 1% permonth, due at most seven months after receiving the package. In specialconditions, such as pest outbreaks, the credit can be extended up to twoyears. In case of default, the risk is shared among BI (25%), Government(50%) and BRI (257).

7. Starting with the 1982/83 season, PUSKUD (Central KUD) will enterthe program as a handling agent for the credit provisions to farmers andreplace BRI in some places. The hope is that it will improve the repaymentrecord, as KUD is also active in rice procurement for BULOG. In this wayKUD can directly collect repayment from farmers for PUSKUD.

INDONESIA

NUCLEUS ESTATE AND SMALLHOLDER SUGAR PROJECT

New Settler Sugarcane Farm Model

Project Year

Unit 1 2 3 4 .5 6 7 8 9 10 11 12 13.

Planting /a ha - - 1.5 - - - 0.5 0.5 0.5 - 0.5 0.5 0.5

Plant cane ha - - - 1.0 - - - - - - - - -

First ratoon ha - - - - 1.0 0.5 - - 0.5 0.5 - 0.5 -

Second ratoon ha - - - - - 0.5 0.5 0.5 - 0.5 0.5 - 0.5

Third ratoon ha - - - - - 0.5 0.5 0.5 - 0.5 0.5 0.5

Standover ha - - - 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

YieldsPlant cane ton/ha - - - 70.0 - - - - - - - - -

First ratoon ton/ha - - - - 70.0 70.0 - - 75.0 75.0 - 75.0 -

Second ratoon ton/ha - - - - - 65.0 65.0 65.0 - 65.0 65.0 - 65.0

Third ratoon ton/ha - - - - - - 60.0 60.0 60.0 - 60.0 60.0 60.0

Standover ton/ha - - - - 85.0 - 85.0 - 85.0 - 85.0 - 85.0

hiarvestingPlant cane ha - - - 1.0 - - - - - - - - -

First ratoon ha - - - - 0.5 0.5 - - 0.5 0.5 - 0.5 -

Second ratoon ha - - - - - 0.5 0.5 0.5 - 0.5 0.5 - 0.5

Third ratoon ha - - - - - - 0.5 0.5 0.5 - 0.5 0.5 0.5

Standover ha - - - - 0.5 - 0.5 - 0.5 - 0.5 - 0.5

Production /bSugarcane ton/farm - - - 70.0 77.5 67.5 105.0 62.5 110.0 70.0 105.0 67.5 105.0

/a Planting is done at the end of the dry period or beginning of the rainy season (October-January).

/b Average of a four-year cycle would be 87 tons/farm/year, with an average 1.25 ha harvested per

annum. For farm budget purposes, an average of 1 ha/year harvested is used to allow for cane

not having reached maturity, accidentally burned, etc.

April 18, 1983

o-z

-r 0

- 79ANNEX 6Table 2

INDONESIA

NUCLEUS ESTATE AND SMALLHOLDER SUGAR PROJECT

New Settler Family Budget /a(Rp'OOO)

Yr 1/b Yr 2 Yr 3 Yrs 4-14 Yrs 15+

Cash Inflows.; Sugar /c - 793 793 1,904 1,904

Molasses /c - 113 113 113 113

Wages from nucleus estate andother nonsugar income 600 400 400 209 209

Annual TRI-credit - - - 509 509

Subsistence payment portion ofdevelopment loan 100 - - - -

Subtotal 700 1,306 1,306 2,735 2,735

Cash OutflowsSugarcane expenses deducted by

nucleus estate - - - 200 200

Food/cash crop expenses /d 77 153 153 153 153Repayment of annual TRI-credit /e - - - 534 534

Land tax - - - 6 6

Subtotal 77 153 153 893 893

Net cash inflows 777 1,153 1,153 1,842 1,842Value of foodcrops /d 132 264 264 264 264Net annual benefit (Rp'OOO) 909 1,417 1,417 2,106 2,106Debt service on development loan /f - - - 395 -

Net annual benefit after debtservice (Rp'OOO) 909 1,417 1,417 1,711 2,106

Net annual benefit after debtservice (US$) 937 1,461 1,461 1,764 2,171

/a Financial prices are in constant 1983 values.Th Each settler's initial participation year.TJ Based on 1 ha harvested per year. (Table 1)./d Based on food/cash crop area of 0.75 ha.Te Interest calculated in real terms, i.e., 5%.If Fourteen-year repayment period for development loans under this project.

(in real terms, i.e., 5% interest).

June 20, 1983

INDONESIA

NUCLEUS ESTATE AND SMALLHOLDER SUGAR PROJECT

Economic Costs and Benefits(Rp million)

1991 1993 1998-

1983 1984 1985 1986 1987 1988 1989 1990 -92 -97 2006 2007 Totals

CostsCapital /a 13,877 24,805 29,529 6,200 4,300 0 0 0 0 0 0 0 78,711

PTP operating /b 2,424 6,333 10,063 9,070 9,059 9,758 9,023 8,260 7,475 7,462 8,881 8,881 205,060

Smallholder sugar inputs /c 0 0 384 768 1,536 1,792 2,304 3,071 3,071 3,071 3,071 3,071 62,062

Total Costs 16,301 31,138 39,976 16,038 14,895 11,550 11,327 11,331 10,546 10,533 11,952 11,952 345,833

Benef itsSugar value /d 0 0 11,200 17,700 24,700 25,300 25,300 25,300 25,300 25,300 25,300 25,300 559,60

Molasses value /e 0 0 440 696 971 994 994 994 994 994 994 994 21,992

Smallholder net nonsugar incremental /f 0 0 100 600 1,125 1,125 1,125 1,125 1,125 1,125 1,125 1,125 24,325 o

Residual values /g 0 0 0 0 0 0 0 0 0 0 0 57,500 57,500 1

Total Benefits 0 0 11,740 18,996 26,796 27,419 27,419 27,419 27,419 27,419 27,419 84,919 663,417

Net Flows (16,301) (31,138) (28,236) 2,958 11,901 15,869 16,092 16,088 16,873 16,886 15,467 72,967 317 _58

IRR of net streams - 16%

/a Annex 1, Table 2, plus economic assumptions in para 6.12 of text.

/b Annex 1, Table 3.7c Rp 410,000 per hectare of smallholder-managed land.

7W Rp 476,000 per ton, Annex 4, Table 2.

/e Rp 43,000 per ton, Annex 4, Table 4./f Rp 375,000 per hectare of new settler food and cashcrop land.

7g Annex 1, Table 3.

June 20, 1983

I-. m

_ 81

ANNEX 8

INDONESIA

NUCLEUS ESTATE AND SMALLHOLDER SUGAR PROJECT

Schedule of Early Events

Activities Target Date

1. DGE to sign Smallholder Development Agreementwith PTP XXIV-XXV August 1983

2. Ministry of Finance to make funds available toPTP XXIV-XXV August 1983

3. Bank Indonesia to sign Subsidiary Loan Agreementwith PTP XXIV-XXV August 1983

4. Employment of implementation consultants by TeamKhusus and PTP XXIV-XXV Sept. 1983

5. First contracts for procurement of agriculturalmaterials and fertilizers July 1983

6. BRI to establish a credit scheme for sugarcanesmallholders under the TRI adjusted to crop cycle inthe Other Islands Sept. 1983

7. PTP XXIV-XXV to have site manager on site no laterthan: Sept. 1983

8. Strengthening of bridges on the main access roadcompleted Oct. 1983

9. Completion of an overall training program and anoverall research program for the sugar sector Dec. 1983

10. First contracts for new settlers housing July 1984

11. Completion of access road May 1985

12. Commissioning of sugar factory July 1985

- 82 _

ANNEX 9Page 1

INDONESIA

NUCLEUS ESTATE AND SMALLHOLDER SUGAR PROJECT

Related Documents and Data Available in Project File

1. Technical Proposal for Indonesian Sugar Projects Advisory Services(SBPN/ABA International, Inc./John H. Payne, Inc./P.T. Indocode, December1981).

2. Presidential Decree No. 28/1982 on Indonesia Sugar Council (Jakarta,July 27, 1982).

3. Water Research for the Use of the Pelaihari Sugar Factory, SouthKalimantan (LAPI-ITB, Bandung, February 22, 1981).

4. Report on W4ater Supply Reconnaissance of Proposed Pelaihari SugarFactory, Pelaihari, South Kalimantan (LAPI - Institut Teknologi Bandung,February 22, 1981).

5. Land Measurement and Land Use Mapping of the Pelaihari Sugar Project Area(AGRARIA, 1981).

6. Soil Fertility and Land Suitability Study of Pelaihari, South Kalimantan(PTP XXIV-XXV Persero/Faculty of Agriculture, Padjadjaran University,Bandung, January 1982).

7. Social and Economic Farm Operations Survey for Pelaihari and SebuhurSugar Projects, South Kalimantan (Faculty of Agronomy UNLAM, 1982).

8. Recommended Current Actions to be Taken for the Development of thePelaihari and Sebuhur Projects (SKIL, Surabaya, February 14, 1982).

9. Feasibility of Nucleus Estates and Smallholders Sugar Projects inPelaihari and Sebuhur, South Kalimantan (P.T. Agriconsult/HawaiianAgronomics, Inc., July 1982).

10. Pelaihari Nucleus Estate - Smallholders Sugar Project Final FeasibilityReport - Volume I Main Report (P.T. Agriconsult International/ULGConsultants Ltd., August 1982).

11. Pelaihari Nucleus Estate - Smallholders Sugar Project Final FeasibilityReport - Volume II Annexes 1-4 (P.T. Agriconsult International/ULGConsultants Ltd., August 1982).

- 83 -

ANNEX 9Page 2

12. Pelaihari Nucleus Estate - Smallholders Sugar Project Final FeasibilityReport - Volume III Annexes 5-12 and Maps (P.T. AgriconsultInternational/ULG Consultants Ltd., August 1982).

13. Soil Reconnaissance Survey and Land Suitability Study for Sugarcane,Imban (North Pelaihari), South Kalimantan (PTP XXIV-XXV/PadjadjaranUniversity, Bandung, October 1982).

14. Pelaihari NES Sugar Project - Cane Harvesting and Transport (A.L.J.Martin, November 8, 1982).

15. Pelaihari NES Sugar Project - Sugar Factory (F.J. Blanchard, November8, 1982).

16. Draft Contract for Provision of Indonesian Sugar Project AdvisoryServices (November 1982).

17. Draft Tender Documents for a Turnkey Cane Sugar Factory 4,000 TCD withEasily Expandable to 5,000 TCD Capacity (3 volumes) (Department of Agri-culture, Jakarta, November 1982).

18. Addendum to Pelaihari Nucleus Estate - Smallholders Sugar Project:Final Feasibility Report (P.T. Agriconsult International/ULG ConsultantsLtd., January 1983).

19. Study on Packing Requirements For Sugar (P.T. Agriconsultant Interna-tional/ULG Consultants Ltd., Jakarta, September 1982).

20. Pre-Feasibility Study on the Training Requirements for Personnel of theSugar Industry in Indonesia (DGIS Mission, February-March 1982).

21. Working Papers in the Project File.1. The Project Area2. Infrastructure

Table 1. Summary Land Clearing ProgramTable 2. Detailed Land Clearing ProgramTable 3. Machinery OutputTable 4. Machinery RequirementsTable 5. Unit Cost of Land Development and Road Construction

MachineryTable 6. Capital and Replacement Cost of MachineryTable 7. Operation and Maintenance Cost of MachineryTable 8. Unit Cost of Land ClearingTable 9. Total Cost of Land ClearingTable 10. Unit Cost of Field RoadsTable 11. Total Cost of Road ConstructionTable 12. Road Construction: Schedule of ExpendituresTable 13. Road Maintenance: Schedule of Expenditures

- 84 - ANNEX 9

Table 13. Road Maintenance: Schedule of ExpendituresTable 14. Housing, Building and Utilities RequirementsTable 15. Housing, Buildings and Utilities Unit CostsTable 16. Estate Village: Housing, Buildings and Utilities Require-

mentsTable 17. Settler Villages Housing and Building RequirementsTable 18. Settler Vilalges Housing and Building Schedule of

ExpendituresTable 19. Housing and Building Unit CostsTable 20. Rangang Reservoir Operation (Preliminary Figures)Table 21. Factory and Estate Village Water Supply: Schedule

of Expenditures3. Contingencies, Staff Requirements and Preoperating Costs

Table 1. Physical ContingenciesTable 2. Price ContingenciesTable 3. Foreign Exchange PercentagesTable 4. Staff RequirementsTable 5. PTP XXIV-XXV Staff and Non-Staff Grades: Annual Salaries

and Allowances4. The Sugar Sector

Table 1. Composition of the Indonesia Sugar CouncilTable 2. Status of GOI Sugar Development ProgramTable 3. Harvested Area, Production and Average Yields of

Centrifugal SugarTable 4. Method for Determining the Sharing of Sugar, Produced

from Farmers Cane, between Sugar Factory and Farmers5. Agricultural Operations

Table 1. Sugarcane Development: Estate-Managed-Smallholder LandTable 2. Sugarcane Development: Smallholder-Managed LandTable 3. Planting and Harvesting of Cane for Milling

6. Sugarcane Harvesting and Transport7. Processing Facilities

Table 1. Manpower Requirements for Processing Facilities8. Detailed Capital Costs Tables

22. Upgraded Financial Projections for PTP XXIV-XXV (received as a conditionof negotiations) including Project Investment Plan, Income Statements andBalance Sheets.

INDONESIANUCLEUS ESTATE AND SMALLHOLDER SUGAR PROJECT

Government Organization Chart

MinistrV Ministry of~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Mnstyo

Dal Ag~~~~~~~~~~~,riculture (SFitackhler)Coprti

interior et Ag CoperrativesL Ost)ther "I tz IXI(sue)1X<HA

l \ _ l~~~~~~~~~~~~~~~~~~~~~~roasmigajtrori I

0PlanX~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ol Bank 241

Suga I IC[ .nS

,,gforia~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ol Funck 24810

y & K~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-

J~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-

INDONESIANUCLEUS ESTATE AND SMAItHOLDER SUGAR PROJECT

OGgonlzatlon and HlJr. Lowl Sto9n at hL DloApmnI

~~. [r0 KwL+I 1- 1

r4 (4 X E9 1 I : L WH XL

u L~~~~~~~~~~~~~~~~, t L', [*3 44 ,

1 1lol W0,0, 00| c

4(4 - ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ - ~ ~ ~ ~~ ~~ ~ ~O

_ 87 _CHAR_ X

PELAIHARI NES SUGAR PROJECT(4,000 TCD)

Sketch of Factory Area

Bagaas Storoge

r uture _

| , F Sollers ~~~~~ ~ ~~Power | oming

| i <2 C ~~~~~~~~~~~Plant | Tower

,~~~~~~ ~ ~~~~~~~~~ Strrag_

WorkShop | idgFwnab

4 ; s Wonshae ] 141 _ Clenfier Preorvo aion !Parts Wyarettause I uk __ ._ _ Kmves .~~~~~~~~~~~~~~~~~~~~~~~~~~Suoor

0 _ Storage

Elevated Tank

I F-uture Storage Cane Storage

r(4 requ,red)

3 I

Wo,ld Sark - 24S,;O

- 88 -CHART 4

INDONESIA

NUCLEUS ESTATE AND SMALLHOLDER SUGAR PROJECT

Project Implementation Schedule

| F 1983 F 1984 1985 I 1986 | 1987 /h F11982 Il 12 13 F4 FJ 12 13 T4 Fl T2 F3 74 Fl 12 13 T4 Ii F2 13 T4 J

Directorate General of EstatesArrange/sign project agreements /a I I | xIxxxxl F I I F Ixxxxxl I I Fxxxxxl Ixxxxxl IApprove work program and budget I F F Ixxxxxl F I I F I F I I I F I I I I I I

Team for Externally Assisted Projects F F F F F F F F F 1FFReview Work Program and Budget F F F Ixxxxxl Ixxxxxl I F xxxxxl F F Ixxxxxl Ixxxxxl F

PTP XXIV-XXVRecruit Consultants /b ------- xxxArrange/sign project-agreement /a F F IF o xxx I I I I I I I I IApprove Site Manager /c F Ixxl F I F F F F F F F F F F F F F F I F FPrepare annual work program and budget Id F | xxxx F I'cxxxxxl F |xxxx F F Ixxxx I I F xxxx F I ILand clearing/planting/road construction /d F------xxxxxxxxx'xxxxxxxxxx'c'c'cxxxxxxxx'c xxxxxxxxxxxxxxxxxxxxxxxxxEstate housing/infrastructure F I F xxxxxxxxxxxxxxxxxx xxxxxx F I I F F F F F F FEstate water reservoir F F F I I F Ixxxxxxxxl F i F F F F F F F F F FProcessing facilities I F F Ixxxxxxxxxxxxxxxxxxxxxxxxxxxxxl F F F F F I F FSmallholder housing/village infrastructure F F I F F F FxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxAgricultural equipment and materials /e I'cxxxxcxxxxxl F F F F F F F I I I I F F I F F Project training program F | xxxxxxxxxxxxxxxxxxx'xxxxxxxxxxxxxxx F F F F F F F IProject applied research program F-…------xx…………xxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

Provincial Government F F F F F F F F F F F F F FAlienate land Ixxxx'cxxxxxxxl F F F F F F I I F F I F F F F F F Strengthen access and road bridges /f Ixxxxxxxxxxn>xxxxxxxl F F F F F F F F F F F F F F F FUpgrade main access road I F F F xxxxxxxxxxxxxxxxxxxxxxxl F F I F I F I F F Construct village roads F F F F F xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxConstruct community facilities F F | | F xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxRecruit new settlers F F FI I I F xxxxxl !x'xxxxl I xxxxxl I Ixxxxxl F I

Bank Rakyat IndonesiaPrepare TRI program |'cxxxxxxxxxxxxx x I I I F F F F I F F F F F F I I FEstablish settlers accounts F F F F F F A Fxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxc xxxx

Bank Indonesia F F F F F F F F F F F F F F F F F F F F F FEstablish project bank account F F | xxxxxl F I F F I I F F I F F I F F F F

Sugar Council Secretariat F F F F F F F F F F F F F F F F F F F F F FPrepare sugar training program /g |'xxxxxxx'c'c'xxxxxxxxxxx I F F F F I I F F I I I I I F FPrepare sugar research program Ixxxxxxxxxxxxxxxxxxxxl I F F F F F I F F I F F F F F I

/a GOI/PTP Financing Agreement, Smallholder Development Agreement.7W Early tendering allowed to initiate advisory services early in implementation.7T Already appointed to supervise start-up operations.7T Work started under Loan 2007-IND (NES V).7e Procurement started under Loan 2007-IND (NES V) for start-up operations.7T Work already begun in 1982.7jg Under preparation with assistance from consultants under Loan 1499-IND (NES I).7T Estimated physical completion date: December 31, 1987.

IBRD 16814-3015 114030 \ > 114045' 115J0O' O DECEMBER 1982

i~~~~~~~~~~~~~~~~P,I

-rr / f

/''/

-30

30' 3030-

Ta-bakMartngar

~~ ,' ! \ PUtlUn9 \ < S_E~~~~o.tlB~t

3045' \a 5' 3045'a4000 IN O EI 40

La PELAIHARI NES SUGAnPRJEC

ms sos so, -- os oseaogTson

455 SITES~~~~~~~~~ID NEI

eifS,ifa,s,, 5/The I~~~~~~~~~050 0,50 -' ~~~~PROPOSED) VILLAGESIE

2~t!-. v v

554°00's 4o,s,0

C0005000 dTff 585555,58, Batakan PROPOSED FACTORY SITEt55 ms e 055055 ma-Ka f

5if05s5t 0d5mW ores 5n/ s rft4 ff 5 / SU IT A B LE C A N E LA N D

dfryrsmt yorany 0 2 E t; ; MARGINAL CANE LANDssSsOsSSsants fss85if 0epeg114030- NUCLEUS ESTATE BOUNDARY

iK ryuNr >5 AX P4 tsPIN-s,? ~ - r ----- SMALLHOLDER BLOCK BOUNDARIES

MALAYSIA 0 0'1-ne 1 . ELEVATIONS IN METERS

100-500

I .... . l , ov-s9 Iv 501-1000

/ 'O-, , , 0,KILOMETERS 5 15 15 ABOVE 1000OuSeses ~~ MILOEERS E. L

tfed \,:.... tr '_Y-m .... t tl <2 MILES af _ 5 1 EXISTING ROADS 4015W

RIVERS

-4.', t < C7;P ----- INTERNATIONAL BOUNDARIES

,, -,. C 0' .nTtmos 114045' 1150o0