Document of

The World Bank

FOR OMCIAL USE ONLY

Report No. 5059a-IND

STAFF APPRAISAL REPORT

T DONESIA

SMALLwOLDER RUBIBER DEVELOPMENT II PROJECT

January 30, 1985

Agriculture 4 DivisionEast Asia and Pacific Projects Department

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$1.00 = Rupiah (Rp) 1,000Rp 1 million = US$1,000

WEIGHTS AND MEASURES

1 kilometer (km) = 0.62 miles1 hectare (ha) = 2.47 acres1 kilogram (kg) = 2.2 pounds1 ton - 2,205 pounds

GOVERNMENT OF INDONESIA FISCAL YEAR

April 1 - March 31

INDONESIAN FIVE-YEAR PLANS

Repelita I - First Five-year Plan, 1969-74Repelita II - Second Five-year Plan, 1974-79Repelita III - Third Five-year Plan, 1979-84Repelita IV - Fourth Five-year Plan, 1984-89

ABBREVIATIONS AND ACRONYMS

AARD - Agency for Agricultural Research and DevelopmentBAPPENAS - Badan Pembangunan Nasional; National Development Planning

AgencyBI - Bank IndonesiaBRI - Bank Rakyat IndonesiaCDC - Commonwealth Development Corpcration

Cwc - Coconut Working CenterDGA - Directorate General of AgrariaDGE - Directorate General of EstatesDPD - Dinas Perkebunan Daerah; Provincial Estate Crops ServiceDPW - District Public Worksdrc - dry rubber contentDTE - Dana Tanaman Ekspor; Export Commodity FundFAO-CP - Food and Agriculture Organization Cooperative ProgramGCC - Group Coagulating CenterGOI - Government of IndonesiaLPP - Lembaga Pendidikan Perkebunan; Estates Training InstituteMOA - Ministry of AgricultureMOF - Ministry of FinanceMOP - Muriate of PotashNES - Nucleus Estate and Smallholder ProjectPIR - Perkebunan Inti Rakyat; GOI-financed Nucleus Estate and

Smallholder ProjectPLPT - Penyuluh Lapangan Pertanian Terpadu; Tree crop extension

workersPMU - Project Management UnitPPW - Provincial Public WorksSCDP - Smallholder Coconut Development ProjectSOE - Statement of ExpenditureSRDPU - Smallholder Rubber Development Project UnitTeam Khusus - Special Team for Bank-assisted Estate Crop ProjectsTSP - Triple Superphosphate

FOR OFCIAL USE ONLY

INDONESIA

SMALLHOLDER RUBBER DEVELOPNENT II PROJECT

Table of Contents

Page No.

LOAN AND PROJECT SUMMARY .......... ....................... * iv

I. BACKGROUND ............... ****............*** **********.. ..... 1

The Agricultural Sector ........ I.. .......................... * 1The Subsector ............................... *.............. 1Smallholder Tree Crop Development .... 2Bank Group Assistance to the Tree Crop Subsector ............. 3Repelita IV Program .............. .................. ** 5

II. PROJECT AREA CHARACTERISTICS AND PROJECT RATIONALE .... ....... 5

Project Area Characteristics * . ............ 0... ............. .... 5Project Formulation ........ ............ 5Alternatives Considered 6..................** ................. 6Issues in Project Formulation .7..*..*..** ** ............ *** 7The Role of the Bank ...................... ................... 8

III. THE PROJECT ............................ *9

Project Objectives **..00 ***.. .... 9Project Components ............ 9Tree Crop Establishment and Maintenance .......... 10Program Support 1........*.*.00-0-.....*..... 11Implementation Schedule ................ .................... 13Status of Preparation ..... . ...... 13Cost Estimates ....... 13Financing Plan ............. 15On-lending Terms and Conditions ..... 15Flow of Funds o 16Procurement s ........................... 17Disbursement ...................... as........... 20Accounts and Audits ..................... 21

This report is based on the findings of an appraisal mission which visitedIndonesia in October 1983. The mission consisted of Ms. G. Davis, Messrs. C.Shearing, M. Cackler, A. Mhan (Bank), P. Hall and T. Travers (CommonwealthDevelopment Corporation), P. Bagshaw (Consultant). The report was reviewed byMr. T. Sinha.

Thidocment haks a restied distribution and may be used by recpients only in the performance of thoffici duties. Its untents may not otherwist be disced without World Bank authorizatio.

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IV. PROJECT ORGANIZATION AND IMPLEMENTATION ...................... 21

General Organizational Structure ............................. 21Organization and Staffing of PMUs .......................... 22Field Development ............ eeeseueee.seeuessoseso.eese*eee 24Civil Works ..... *.********.*********..*e*c***...*****...*.. 26Credit Admiuistration ........................... 26Manpower Development - ....... ... ****.......***....***........ 27Monitoring and Evaluation * .............................. 28Rubber Research ..... e.***C..*****...*......**.*****...... 28

Vo PROJECT ANALYSIS ............................................. 28

Agricultural Yields and Production ........................... 28Market Prospects ...... ...................................... 29Marketing and Processing in the Project Area ................. 29Farm Incomes .......... ...................................... 30Cost Recovery .......... 30Project Benefits ................. 31Economic Rate of Return .. ..................... 32Sensitivity Analysis ................ 32Project Risks ............ .... 33Environmental Effects . .......... . ........ 34

VI. AGREEMENTS REACHED AND RECOMMENDATION ................. 35

LIST OF TABLES AND FIGURES IN THE MAIN REPORT

3.1 Implementation Schedule ****..... ..... ....... S .... 123.2 Project Cost Summary .......... q.......................... 143.3 Estimated Price Increases ............................... 153.4 Procurement ... v.... ...... . .................... 184.1 Proposed SRDP Organization ...... ........ .......... 235.1 Sensitivity Analysis ................................... 33

ANNEXES TO THE MAIN REPORT

Annex 1 - Project Tables

Table 1 Cost Table by Summary Account and TimeTable 2 Proposed Allocation of Loan ProceedsTable 3 Estimated Schedule of IBRD DisbursementTable 4 Breakdown of Areas to be Planted and MaintainedTable 5 Technical Assistance Tables

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Annex 2 - Project Analysis

Table 1 Financial and Economic Prices for Urea and TSPTable 2 Financial and Economic Prices for RubberTable 3 Estimated Rubber ProductionTable 4 Estimated Rice ProductionTable 5 Typical Farm BudgetTable 6 Calculation of ERRTable 7 Calculation of Cost Recovery Index

Annex 3 - Financing Arrangements

Annex 4 - Statements of Expenditure

Annex 5 - Project Area Characteristics

Annex 6 - Selected Documents Available in the Project File

MAPS

IBRD Map 17777: Indonesia - South Sumatra and SingkutIBRD Map 17778: Indonesia - West KalimantanIBRD Map 17779: Indonesia - Riau

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INDONESIA

SMALLHOLDER RUBBER DEVELOPMENT II PROJECT

Loan and Project Summary

Borrrower: Republic of Indonesia

Beneficiaries: About 100,000 smallholder families through Bank RakyatIndonesia.

Amount: US$131 million

Terms: Repayable in 20 I-ars, including five years of grace,at the standard variable interest rate.

Relending: Part of the proceeds of the IBRD loan (US$84 million)would be relent by Government to Bank Rakyat Indonesia(BRI) for 20 years, with a grace period of sevenyears, at the IBRD interest rate prevailing at thetime of the invitation to negotiations (9.9%). TheGovernment would bear the foreign exchange risk.Subloans to the smallholders would be for 20 yearswith a grace period of seven years at an interest rateof 12%.

Project Description: Under the proposed project, selected project manage-ment units (PMUs) in three main provinces would begradually absorbed into a successful Bank-assistedSmallholder Rubber Development Program (SRDP) suppor-ted under Cr. 984-IND. The groundwork would also belaid for eventually extending SRDP management andfinancial control to all rubber producing provinces.To increase rubber production, the proposed projectwould establish about 76,000 ha of rubber, provideplanting materials for an additional 19,500 ha to beestablished by partially-assisted farmers, and main-tain about 57,000 ha of previously establishedrubber. To promote institution building, the projectwould emphasize manpower training and help to developthe institutional and financial arrangements requiredfor successful PMU rubber establishment. There are nosignificant agricultural risks. However, the projectfaces some managerial constraints and the risk thatfunding problems recently encountered under SRDP Imight recur. These limitations have been consideredin the project design.

Estimated Cost a/

Local Foreign Total(US$ million)-

Rubber Establishment and MaintenanceSouth Sumatra and Singkut 28.9 19.9 48.8Riau 27.2 18.9 46.1West Kalimantan 27,2 19.n 46.2

Subtotal 83.3 57.8 141.1

Program SupportTraining and headquarters support 2.7 0.7 3.4Technical assistance and studies 1.0 3.5 4.5Applied research 0.3 0.1 0.4Start-up funds for SRDP III 3.7 1.5 5.2

Subtotal 7.7 5.8 13.5

Total Baseline Costs 91.0 63.6 154.6

Physical contingencies 5.6 6.2 11.8Price contingencies 34.0 20.6 54.6

Total Project Cost andFinancing Required 130.6 90.4 221.0

Financing PlanIBRD 65.0 66.0 131.0CDC 2.0 18.0 20.0GOI 63.6 6.4 70.0

Total 130.6 90.4 221.0

Estimated DisbursementsBank FY 1986 1987 1988 1989 1990 1991

- (US$ million) -

Annual 4.9 15.9 26.0 29.7 31.6 22.6Cumulative 5.2 21.1 47.1 76.8 108.4 131.0

Economic Rate of Return: 13% (based on new rubber plantings accounting for75% of project costs).

Maps: IBRD Nos. 17777 - 17779

a/Net of taxes and duties.

INDONESTA

SMALLHOLDER RUBBER DEVELOPMENT II PROJECT

I. BACKGROUND

The Agricultural Sector

1.01 General. Although agriculture contributed only 26% of GDP in 1983,the agricultural sector is of overwhelming importance to the majority ofIndonesians. Nearly 80% of the population lives in rural areas, and agricul-ture is the major source of income for about two thirds of rural households.The GOI's major objectives for the sector are to create productive employment,increase domestic food supply, expand exports (particularly of smallholdertree crops) and ensure productive, sustainable use of natural resources. Tomeet these objectives agricultural investment has concentrated on irrigation,tree crop development, transmigration and agricultural support services.

The Subsector

1.02 Estate Crops. Tree crops and industrial crops (such as sugar andcotton) occupy about 8.8 million ha in Indonesia, and support for these cropsis provided by the Directorate General of Estates (DGE) within the Ministry ofAgriculture (MOA). Of these crops, about 85% are owned and cultivated bysmallholders while 15% are under public and private estates. During the lastdecade production on smallholdings increased by about 2-4% p.a. and thisrelatively slow growth rate in comparison with the general economy is attribu-ted to past neglect, low prices, the long immature period of recently plantedtree crops, and weak institutional support.

1.03 Recognizing the importance of tree crops and industrial crops forincreasing smallholder incomes and non-oil exports, the GOI set ambitious tar-gets for Repelita III, the Third Five-year Development Plan (1979-84). Atotal of 1.5 million ha were to be planted or replanted and of this, about900,000 ha were to be in rubber and coconut. Although implementation hasfallen short of projected targets, over 1.0 milli'- ha have been plantedincluding about 435,000 ha of rubber and coconut, che two most importantsmallholder crops. The draft Repelita IV program proposes targets of morethan 2.0 million ha of which nearly 1.0 million ha are rubber and coconut.While land and labor are available, managerial and financial resources arelimited, and these targets will be difficult to attain.

1.04 Rubber. Indonesia is the world's second largest rubber producer(after Malaysia) and the crop is a major contributor to the economy. In 1980,the peak year for export earnings, rubber earned US$1.1 billion, 51% of totalestate crop exports, and was surpassed only by oil and timber in foreignexchange earnings. Indonesian rubber production climbed from 682,000 tons in1961 to 980,000 tons in 1980, but fell to about 860,000 tons in 1982 due, inpart, to smallholders reluctance to tap at a time of low commodity prices.Production in 1983 has been estimated at 1-1.2 million tons due, in part, to

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an increase in the world rubber price. In spite of general growth in thesubsector, Indonesia's share of the Southeast Asian rubber market fell from43% in 1961 to 32% in 1980, due mainly to the success of programs in dalaysiaand Thailand which provided strong incentives to replant.

1.05 Indonesia has an estimated 2.5 million ha of rubber trees. Most ofthese are of low productivity, having been established from unselected seed-lings planted after shifting cultivation. In many instances these areas havedeteriorated to self-regenerating rubber jungle. Yields from such smallholderareas seldom exceed 400-500 kg/ha, and as rural incomes rise some low yieldingareas are becoming uneconomical to tap. This is of concern to the GOI as fur-ther improvement in rural wages could reduce rubber production even if theworld market for rubber expands. Therefore, to ensure growing fcreignexchange earnings and reasonable smallholder incomes, Government and the Bankagree that large-scale rubber planting and replanting with reasonable yieldprospects are urgently required.

Smallholder Tree Crop Development

1.06 Early Programs GOI assistance to tree crop smallholders began in1959 with the creation of a cess fund to support the establishment of rubberand coconuts. Through Repelita I, the First Five-year Development Plan (1969-74), DGE activities were confined to a "partial approach" consisting mainly ofthe free distribution of planting materials. This proved unsatisfactory asextension was weak, transport and fertilizer were unavailable, and farmersfound it difficult to replant old trees or maintain new ones without compensa-tion for foregone income. With poor maintenance, yields were not significant-ly increased. Therefore, during Repelita II (1974-79), the DGE graduallyshifted to concentrated and integrated forms of management.

1.07 Since Repelita I, two approaches have been developed to fostersmallholder tree crop development. The first approach involves the formationof geographically concentrated PMUs within the Directorate General ofEstates. PMUs assist local landowners to plant, replant or rehabilitate theirholdings by supplying extension, planting material and fertilizer, and incen-tive payments for labor. These services were initially provided on a grantbasis and partly financed from cess funds. The second approach involves theuse of publicly-owned estates to establish tree crops for smallholders usingestate labor and equipment. The estates transfer the land to smallholderswhen trees are mature and the farmers become responsible for maintenance andexploitation. The estates also run the processing facilities and assist withcost recovery. Bank-assisted Nucleus Estate and Smallholder (NES) projectsand GOI-financed Perkebunan Inti Rakyat (PIR) projects are examples of thisapproach. PKU and NES approaches are compared in para. 2.03.

1.08 Development of the PMU Approach. During Repelita II (1974-79) theDGE formed eight rubber replanting PMUs, one in each of the major rubber pro-ducing provinces, and it established about thirty rubber Group CoagulatingCenters (GCC) and 250 Coconut Working Centers (CWC) for joint processing andmarketing. In Repelita III (1979-84) these GCCs and CWCs became project man-agement units (PMUs) with major replanting functions. Faced with very highreplanting targets, the DGE expanded the number of PMUs from about 280 in 1979

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to 870 in 1983. About half of these PHUs are for rubber and coconut develop-ment and the others are for minor tree crops such as cashews, coffee andcloves, and industrial crops like cotton. These PMUs are centrally financedbut supervised by the provincial estate crops office. All GOI-financed PMUsare organized and staffed along similar lines, and because of the rapid expan-sion of the program virtually all of these PMUs face similar and serious man-agerial and technical problems, regardless of the crop planted. Constraintsto PHU performance include limited staff training, inadequate transport, andmanagerial problems leading to poor site selection, shortages of plantingmaterial and poor quality control. About 70Z of all smallholder tree cropsplanted in Repelita III were to be established by PMUs and about 30% byestates, but due to manpower and managerial limitations in the PMU program,estates established about 50% of major tree crops.

1.09 GOI-financed PHUs established about 79,500 ha of rubber and135,000 ha of coconut during Repelita III, and recent inventories suggest thatalthough about 75% of rubber trees and 65% of coconuts are satisfactory,rehabilitation is needed on 10% of rubber and 20% of coconuts, and about 15%of rubber and coconuts have failed. If these inventories provide an accurateindication of performance, improved management and technical control in theGOI-financed program could potentially increase PMU effectiveness by 20-25%with little additional funding.

Bank Group Assistance to the Tree Crop Subsector

1.10 Bank-assisted NES Projects. Due to the stronger management andabsorptive capacity of the estates, Bank-assistance to the tree crop subsectorhas focused mainly on estate-assisted projects. Since 1977 the Bank has comrmitted US$655 million to seven NES tree crop projects benefiting about 82,000smallholder families. About two thirds of all tree crops established byestates in that period were planted in Bank-assisted projects. Due to thescale of the program, a special team (Team Khusus) was formed in 1979 to helpprepare and supervise NES projects. The projects have generally achievedtheir targets and established high quality trees, and standards from Bank-assisted NES projects have been adopted for the GOI-financed PIR program.However, the size of the total program, low commodity prices, and Governmentresource constraints have strained the managerial and financial capacity ofthe estates, and implementation in NES projects bas slowed. To help alleviatethese problems, a Special Assistance Program (SAP) was developed to addressprocedural and policy constraints, and to accelerate disbursements in selectedNES projects. These steps plus recent upturns in commodity prices haveimproved the situation, but some estates remain in a weak financial positionand attention is still required for physical and financial planning and forestablishing clear lines of authority within the subsector. A Tree CropSector Review (para. 1.15) which is now being finalized by the Bank willexamine implementation and financing issues and provide the basis fordiscussions with Government.

1.11 Bank-assisted PHU Projects. The first PMU project in Indonesia wasthe Bank-assisted North Sumatra Smallholder Development Project (NSSDP, Cr.358-IND). This project was appraised in 1973 and completed in 1981, and itsuccessfully planted 9,000 ha of rubber and oil palm and provided a model for

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further PMU development. The major shortfall of the project, according to anOED audit in 1982 (Report 3958), was the project's failure to build apermanent and efficient institution to expand smallholder development.

1.12 SRDP I. In 1977, the FAO-CP identified a second Bank-assisted PMUstyle project called the National Rubber Replanting Project. As originallyproposed, this project would have established a National Smallholder RubberReplanting Organization, absorbed all rubber PMUs and financed the replantingprogram through a cess on rubber production. Following Bank appraisal in1978, the Government decided that direct expenditures would be covered by acredit package extended to smallholders through the Bank Rakyat Indonesia(BRI), and in light of this change the project was reappraised in 1979.

1.13 The revised project, the Smallholder Rubber Development Project(SRDP I, Cr. 984-IND), provided financial assistance to establish 38,500 ha ofrubber under three PMUs, and to establish a project unit (the SRDPU) outsidethe regular DGE structure. In the first four years of the project, physicalprogress was good. Of the 28,000 ha targeted, about 26,500 ha were estab-lished, and the quality of plantings was high. PMU managers and staff weretrained, PMU officials maintained tight control over the project and staffmorale was good. In 1983-84, however, the cumulative effects of Governmentbudgetary constraints and complex fund release procedures resulted in a 50%reduction in the planting program. Procedures to correct these problems havebeen included in the proposed project. Although financial problems reducedthe amount of new planting, the quality of field work has remained high.

1.14 SCDP I. In 1979 the World Bank also appraised the first SmallholderCoconut Development Project (SCDP I, Loan 1898-IND) using credit arrangementssimilar to those in SRDP I. SCDP I provides financial assistance for plantingabout 38,000 ha of hybrid and tall coconuts and for rehabilitating another42,000 ha. However, while SRDP I included 3 PMUs, one each in three provin-ces, SCDP I included 70 CWCs in six provinces. As a result, this project hasfaced two major problems. First, dispersed areas have made logistical supportand supervision difficult; and second, the establishment of a new managementsystem on a large scale has led to manpower and administrative difficulties.The slow release of funds has also troubled SCDP I, and together these prob-lems have led to shortfalls in targets and slow disbursement. To reduce theseproblems PMUs have recently been consolidated into 14 management units andother managerial changes are currently being discussed.

1.15 Tree Crop Sector Review. Concerned with constraints on financingand implementation, Government initiated a Tree Crop Sector Review Iv October1983 with FAO and Bank assistance. The first stage, a review of the DGE'sdraft Repelita IV program, has been completed by the FAO-CP. The FAO-CPreport recommends rapid expansion of all major tree crops (rubber, oil palmand coconuts) and a doubling of Indonesian rubber production to 2.3 milliontons of rubber per annum by the year 2000. It also suggests that the majorlimitation to program expansion will be institutional rather than marketingconstraints. To meet the domestic need for edible oils, the report recommendsthat the GOI give priority to palm oil production, and because of the need forassociated processing and marketing facilities it proposes that estate capa-city be concentrated on the establishment of oil palm. It recommends, in

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turn, that the main responsibility for rubber and coconut development, thepredominant smallholder crops, be shifted to the PMUs. To improve implementa-tion in all sectors, it urges a consolidation and rationalization of plantingprograms coupled with intensive training. The second stage report, which isbeing finalized by the Bank, has incorporated this material and analyzed man-power development, institutional and policy issues, financing and cost recov-ery. Recommendations in this project are consistent with the Sector Review.

Repelita IV Program

1.16 The Repelita IV plan (1984-89) indicates very high targets, includ-ing about 650,000 ha of rubber and 350,000 ha of coconut. About 50% of rubberand 90% of all coconut are to be established by PMUs. Government is aware ofthe challenge entailed in improving institutional capacity while expandingthese programs, and it has requested Bank technical and financial assistanceto eventually bring all smallholder rubber and coconut development under themanagement and financial control of SRDP and SCDP programs, respectively,regardless of the source of financing for tree crop establishment.

II. PROJECT AREA CHARACTERISTICS AND PROJECT RATIONALE

Project Area Characteristics

2.01 The project is concentrated in three provinces: South Sumatra, Riauand West Kalimantan. In addition, one PMU is located in Jambi Province nearthe South Sumatra border. The locations of rubber production PMUs are shownon maps attached to this report. The characteristics of project areas coveredunder SRDP I are given in the Staff Appraisal Report (No. 2721-IND) forCr. 984-IND; and areas under large-scale PMUs to be absorbed into SRDP II aredescribed in Annex 5. Detailed studies of the areas under small-scale PMUs tobe absorbed into the program in years 2, 3, and 4 of the project will becarried out in the first project year. In general, the climate, soils andtopography of all proposed areas are suitable for rubber development. Areaseliminated from the project include alluvial flats subject to inundation andsoils deemed suitable for other crops. All PMUs are located in existingrubber areas where the population consists primarily of indigenous smallhold-ers who are tapping overaged trees. These farmers are familiar with thebenefits of rubber and eager to plant high yielding material, and the numberof applicants in all project areas exceeds the number of people who can beaccepted into the program. The Jambi PMU is located in Singkut, a formertransmigration area.

Project Formulation

2.02 SRDP I has planted high quality rubber in three PMUs but has had alimited impact on the GOI-financed program of rubber development, whileSCDP I, which involves 70 PMUs in 6 provinces, has had a number of start-upproblems related to its ambitious program. Mindful of these experiences, theproposed SRDP II project would be concentrated in the three SRDP I provinces -South Sumatra, Riau and West Kalimantan - and it would gradually bring all PHF

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rubber development in these provinces under SRDP control. The proposed proj-ect would use the successful SRDP I PfMUs to provide training and technicalsupport to new PHU staff; it would strengthen the provincial offices of SRDP,improve the monitoring capacity of the SRDPU, and lay the groundwork forextending SRDP management to all rubber producing provinces duringRepelita V. The project would also help develop the technical standards,training procedures and financing mechanisms needed for a large-scale programof rubber development. To ensure that each PMU plants to capacity but manage-ment is not unduly strained, annual targets would be based on performance anda mid-term review would be held to evaluate progress.

Alternatives Considered

2.03 Estates vs. PMUs. Both estates and PHUs have a role in smallholdertree crop development. Estates are effective in opening large blocks of newland, establishing high quality trees, providing settlement infrastructure andassisting farmers in consolidated areas under estate control. Estates areless effective where farmers own their own land, where holdings are small andscattered or where farmers must fit tree crops into farming systems withcompeting priorities. Under these circumstances, PMUs with their reliance onfarmer initiative and good extension can generally work more effectively. Ata time of resource constraints, there are also financial arguments for PMUdevelopment. Capital outlay per family in PHU projects is about half of thatin NES projects due to limited infrastructure costs, a payment for farmerlabor equal to 50% of the market wage rate, and lower administrative over-heads, while the economic rate of return in PHU projects is about the same asin NES projects.

2.04 Comprehensive vs. Partial Approach. Within the PMU frameworkseveral development options are available. A partial approach was used duringRepelita I with limited success (para. 1.06) and recent GOI-financed and Bank-assisted projects (including NSSDP, SRDP I and SCDP I) have been based on amore comprehensive approach. Under this approach, PMUs provide intensivetraining and supervision, planting materials, fertilizers and herbicides, andan incentive payment equivalent to all or part of the cost of farmer labor. Asmall component to test the partial approach was included in SRDP I, but thiscomponent was not implemented because of funding problems and becauseofficials wished to provide financial incentives for good maintenance. Givencurrent resource constraints, however, DGE officials intend to plant 19,500 haunder SDRP II using the partial approach. If successfully adopted bysmallholders this approach would be expanded in future projects.

2.05 Complete reliance on the partial approach was rejected for SRDP IIbecause experience in Repel!ta I and II suggests that yields and incomes wouldbe lower than in the comp:ehensive approach and participation limited to weal-thier farmers who could afford improved technologies without credit. Incontrast, the more comprehensive approach used in SRDP I has proven success-ful, smallholder acceptance of new technologies is good, and trees establishedby SRDP I PMUs are in some cases superior to those on adjacent estates. Aneconomic analysis in the Tree Crop Sector Review also indicates that while theeconomic rate of return of the more comprehensive approach is somewhat betterthan the partial approach at 14% vs. 12%, the net present value at a 10%

opportunity cost of capital is about US$1,600 per family in the case of theSRDP model, over three times the US$500 per family estimated for the partialapproach. This is what would be expected with a higher input/higher outputmodel.

2.06 Cost Effectiveness. Although the more comprehensive approach issupported in SRDP II, the SRDP model was reviewed to see whether costs couldbe reduced. Bank technical specialists judged that agro-inputs could not becut without seric-lsi reductions in yields. They also concluded that thesuccess of SRDP 1 was largely due to good extension and close supervision offarmers and tnat managerial inputs should not be reduced. Since the full costof labor is about 60% of the cost of tree crop establishment, the option ofeliminating payments for farmer labor was also considered. This option wasrejected as it failed to provide adequate incentives for good maintenance. Onthe other hand, a recommendation in the feasibility study to increase theincentive payment from 50% of the prevailing wage rate for rural unskilledlabor under SRDP I to 100% under SRDP II was also rejected since the successof SRDP I indicates that good results can be achieved with partial wage pay-ment. Therefore, under the proposed project, cost effectiveness would beincreased primarily by bringing the remaining rubber establishment PfUs inthree provinces under the strict technical and financial control of the SRDPUand by developing the institutions needed to improve productivity in allrubber producing provinces.

Issues in Project For lation

2.07 Processing. The feasibility study for SRDP II recommended that newprocessing facilities be constructed in SRDP I areas and in all other PMUareas with mature rubber trees. However, at appraisal, Government and theBank agreed that new facilities were not advisable since (a) SRDP did not havethe management capacity to run such facilities, estates were not interested,and contract management was costly; (b) Government preferred not to invest innew facilities at a time of resource constraints; and (c) private processorshad excess processing capacity in all project provinces and marketing channelsin all project areas. Some private processors indicated a willingness toassist in cost recovery, but it was judged that significant deductions byparticipating processors would lead farmers to seek alternative marketingchannels.

2.08 Cost Recovery. There are several potential methods of cost recoveryin the tree crop sector. A cess or export tax is common as it is relativelyeasy to administer and it taxes smallholders in relation to production. In1980, the GOI rejected the cess as the main mechanism of cost recovery becauseof past difficulties in controlling funds, because many smallholder crops(e.g., coconuts) would not be exported, ard because .he GOI wished to intro-duce smallholders to formal credit channels and recover costs from directbeneficiaries. Due to the low productivity of trees in Indonesia, a high cessmight also reduce exports by driving marginal smallholders out of production,and recent Bank sector work indicates that cess financing may create undesir-able economic distortions. Cost recovery through credit also has complica-tions: it is expensive and time consuming to administer, and since small-holder yields vary widely, credit packages with relatively low debt service

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limits, which permit the maximum number of producers to repay, do not maximizecost recovery from superior farmers.

2.09 Recognizing the limitations of each form of cost recovery, theMinistry of Finance has initiated a study of taxation policy and the draftTree Crop Sector Review considers a combination of tax and credit mechanismswhich would both permit repayment on the part of the majority of beneficiariesand ensure sufficient capital for re-investment. The Bank will discuss theseissues with the GOI when the reports are available. In the meantime, sincethe use of credit has objectives which transcend cost recovery and since theGovernment is firmly committed to credit, the proposed project concentrates onsteps to improve cost recovery under the credit system by increasing theamount to be repaid and introducing mechanisms to impro7e the ability ofsmallholders to repay. In SRDP II, interest rates would be raised from 6%(under SRDP I) to 122, and interest would be compounded and capitalized afterthree years rather than after seven. Smallholders would pay monthly, andpayments would be determined according to a model of what the farmer canafford, particularly in early years when yields are low (Annex 3).

2.10 Project Finance. In SRDP I, non-credit items (about one fourth ofthe total) are financed by the Ministry of Finance (MOF) through the develop-ment budget. The non-World Bank share of the credit package comes 80% fromBank Indonesia (BI), the central bank, and 20X from Bank Rakyat Indonesia(BRI). BRI is an autonomous state owned bank specializing in rural financeand intended to operate on a commercial basis. BRI administers the BI/BRIpool of money as an "executing bank," releasing it in the form of a loan tothe project implementing agency (DGE) as project works are undertaken andconverting the loan to DGE to individual smallholder loans after three years.

2.11 In general, the World Bank favors using BRI as an executing bankwhenever appropriate to develop the banking system and mobilize capital fordevelopment purposes. However, for various reasons, at appraisal, BRI was twoyears late in releasing funds for SRDP I from the BI/BRI pool to the DGE, andit had not converted smallholder loans on schedule for plantings which werealready completed. To avoid these problems, the SRDP II appraisal missionoriginally recommended that the MOF provide funds for the credit packagethrough the budget and use BRI only as a collection agent or a "channelingbank." In subsequent discussions, Government affirmed its intention to useBRI as an executing bank and proposed a number of steps to circumvent theproblems encountered in SRDP I. These steps, described in paras. 3.19-3.21,have improved fund flows under SRDP I and should permit BRI to functionadequately as an executing bank under SRDP II.

The Role of the Bank

2.12 The GOI wishes to increase the use of PMUs in smallholder rubberdevelopment in order to reach smallholders with few other income opportunitiesand to keep rubber development costs low (para. 2.03) and it wishes to do soby expanding the Bank-assisted SRDP model which has benefited from a focus ongood training and supervision. Bank financial assistance has been requestedbecause of the scale of the proposed program and because of the success ofSRDP I. In addition, the Bank's large investment in Indonesian tree crops

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(about US$830 million) gives the Bank itself a strong interest in improvingadministrative capacity in the sector and reducing Implementation con-straints. The concern in this project with financing and cost recovery is, inpart, a function of macroeconomic work highlighting financing issues at a timeof resource limitations.

III. THE PROJECT

Project Objectives

3.01 The objective of the proposed project is to expand and improve theeffectiveness of the GOI's smallholder rubber development program in order toincrease foreign exchange earnings, create employment and improve the incomesof rubber smallholders, promote regional development and increase theproductivity of underutilized land.

Project Components

3.02 The project would include:

(a) Tree Crop Establishment and Maintenance

Ci) planning and maintenance of about 76,000 ha of rubber trees;

(ii) provision of rubber planting materials for about 19,500 ha tobe planted under the partial approach;

(iii) maintenance of about 57,000 ha of previously planted rubbertrees in project provinces;

(iv) construction of about 1,930 km of plantation roads and 320 kmof access roads, upgrading of 380 km of existing village roadsand provision of road maintenance machinery; and

(v) construction of facilities and staff quarters in project PMUs.

(b) Program Development

Mi) provision of training for about 4,500 farmer group leaders and2,800 staff;

(ii) provision of about 540 man-months of consultant services fortechnical support and studies;

(iii) provision of funds to facilitate monitoring and appliedresearch on farmers fields; and

(iv) start-up activities for SRDP III.

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Tree Crop Establishment and Maintenance

3.03 Rubber Establishment. Generally, SRDP II would follow the technicalstandards and administrative arrangements of SRDP I. The PMU would informvillagers about the program, receive applications from farmer groups and workwith village heads to screen farmers for eligibility. For ease of supervi-sion, priority would be given to farmer groups with land in blocks of 20 ha ormore, and farmers would redistribute the land among themselves into holdingsof 1 or 2 ha. Extension workers (PLPT) would be provided at a ratio of 1:150families during planting and 1:250 families during the maintenance period.Extension would be based on the training and visit system. To permit low in-come farmers to participate and yet ensure timely work, the PMU would providean incentive payment for major tasks equivalent to about 50% of the currentwage rate. This would become part of the farmer's credit package. Afterfarmers clear their land, the PMU would supply planting material and ferti-lizer. Intercropping would be permitted for two years except in areas ofsheet alang-alang or on steep slopes. After the first year, fertilizers andagrochemicals would be supplied by the PDU and farmers would receive theirincentive payment for satisfactory maintenance. Land use surveys would beundertaken by the Directorate General of Agraria (DGA) in the first field yearand cadastral surveys would be undertaken in year three. The PMfU would trainthe farmers to tap their trees and to produce air dried sheet, thin cleanslab, or cup lump in the sixth field year, or after the project is com-pleted. Rubber would be marketed and processed in the private sector andcredit repayment would be in cash. Detailed features of projectimplementation are included in Chapter 4.

3.04 Partially-Assisted Farmers. To improve the yields of farmers whohave scattered or isolated fields or who have sufficient cash to replant with-out credit, PMUs would prepare and sell planting materials for up to 19,500 haand they would distribute extension literature indicating appropriate plantingtechnology and encouraging the use of fertilizers, leguminous cover crops andweed control. To assist this program, one extension worker (PLPT) would beprovided for every 500 families. These extension workers would determine thedemand for planting material and ensure that the program was not encouragingshifting cultivation or planting in forest reserves. They would also providetechnical advice and information on the procurement of supplies. Fertilizerwould be available for cash in the market. The yields of partially-assistedfarmers would be carefully monitored under the project to permit future deci-sions on the cost and efficiency of this extensive approach to smallholderdevelopment.

3.05 Existing PMU Farmers Assisted by the Project. All PMUs brought intoSRDP II include a number of rubber smallholders who established field plant-ings under Bank-assisted or GOI-financed programs. All farmers actively main-taining their fields would be absorbed into the project and provided withguidance and credit to bring their areas to maturity. Farmers absorbed fromprevious programs would follow routines identical to fully-participatingfarmers and some would receive credit for a second ha of rubber under SRDP II.

3.06 Roads and Facilities. The project would construct plantation roadswithin rubber development blocks to provide access for input supply,

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supervision and, later, for tapping. Existing village roads with reasonablysatisfactory alignment would be improved and access roads would be provided tovillages which do not have links to district roads or nearby plantationareas. A minimum fleet of road maintenance equipment woulld be procured by theSRDFU for the maintenance of plantation roads (para. 4.16). The project wouldalso undertake land leveling for project facilities and provide office build-ings, storage equipment, sheds, workshops and about 190 quarters for seniorproject staff and field supervisors.

Program Support

3.07 Training and Manp"wer Development. One of the aims of the proposedproject is to develop SRDP managerial capacity in order to improve and expandthe SRDP program. To do so, the project would provide training for approxi-mately 1,000 extension level staff, 500 managerial and 1,300 administrativeand supporting staff. On-the-job training would be emphasized. To supplementthe skills of SRDP officials, technical assistance would be provided in theareas of rubber management, processing and marketing, training, and finance.Provision has also been made to engage domestic consultants as accountants(para. 4.05). To improve smallholder skills, about 4,500 farmer group leaderswould receive practical training in one-week courses, and one mobile trainingunit would be provided for use on an experimental basis. Implementation ofthe training and visit system would be augmented by extension publications andvisual aids.

3.08 Institutional Development. To provide the basis for strengtheningand expanding the SRDP program, a study would be undertaken in the first yearof the project on the location and performance of all GOI-financed rubberplanting PMUs. The studv would take into account areas where PMUs arerequired either for local smallholders or transmigrants and it would assesswhether existing coffee and cacao PMUs should be converted to rubber develop-ment or other crops. Based on this study, a plan would be developed to gradu-ally absorb PMUs with reasonable potential into the SRDP program. PfUs inunsuitable or inaccessible areas would be phased out. Under the project theprovincial offices would be expanded and strengthened and they would graduallyassume many of the management and monitoring functions now carried out inJakarta.

3.09 Development of Appropriate Technologies for Smallholders. Severalproject components would help improve the agro-economic aspects of smallholderrubber development. First, the linkage between Sembawa, the new smallholderrubber research institute, and SRDP would be strengthened. The rubber tech-nology course requirements for SRDP staff would be determined by officialsfrom SRDP and Sembawa; and applied research proposed by SRDP and Sembawa,would be carried out on or adjacent to the fields of project farmers. Second,a monitoring and evaluation system would be established with units in Jakartaand the provinces, and monitoring staff would be designated in each 1MU.These units would monitor physical progress and variations in growth and yieldin relation to (a) the type of planting material (GTI and other clones); (b)spacing; (c) intercropping practices; (d) maintenance standards; and (e) theresults of the partial approach.

INDONESIASMALLHOLDER RUBBER DEVELOPMENT PROGRAM

Hectares Planted and Maintalned In Each of Three Provinces

Planting SRDP I YEAR 11 SINGKUT YEAR 2 YEAR 3 YEAR 4 T otal SRoP | PlanfngYeor |3 PMUs 3 PMUs I PMU 3 PMUs 3 PMUs 3 PMUs Plantling/ Materal

1979/80 SRDP M

1980/81 4,066 1,500

1981/82 5,698 4,000 1 2,100

1982/83 8,867 2.400 260 ! 1.700 1.150

1983/84 7.800 450 340 - _

1984/85 6,000 - - 6,00SRDPII _,_,,,,,,_,,__,_________

1985/86 8,250 Nursery Development - - 8,250

1986/87 8,500 6,750 1,500 1,920 1,440 1,280 16,750 16.750 1,500

1987/88 7,500 7,00 2,500 3,000 2,320 2,160 20,500 20.500 3,000

1988/89 4.000 6,000 2,500 4,500 3,000 2,400 20,000 20,250 6.000

1889/90 - 5,250 - 6,000 4.500 3.000 18,750 - 9.000

TOTAL SRDP II 20.000 25.500 6 13500 7,500 3,000 76,000 71,750 19.500

/a Year of nurser" devekpennt

New lantings Included In SrIDP land 1I- - - - SRDP l rintains all areas below the doHed line for oneVear r more. Wortddow* -25811

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3.10 Start-up Funds. The project would provide funds for a feasibilitystudy on areas to be included in a future Bank-assisted project and for nur-sery development and initial staff training in the new provinces to beabsorbed into the SRDP program in Repelita V.

Implementation Schedule

3.11 All tree crop establishment and maintenance to be carried out bySRDP during the project period is indicated in Table 3.1. In FY85/86 fourPMUs would be absorbed into the SRDP program (including Singkut), nurserieswould be established and staff would be trained. A study would also be under-taken on all other existing rubber PMUs, and a plan would be drawn up forabsorbing these PMUs into the SRDP program. In the second year (FY86/87),field development would begin and SRDP I PMUs would be brought into the SRDPII planting program. Thereafter, three new PMUs would be absorbed into theprogram annually, and their staff would be evaluated and trained. In thefinal year of the project, training would be expanded to cover at least threeadditional provinces, and nurseries would be established in these provincesusing start-up funds. The sale of planting materials to partially-assistedfarmers would begin in 1986/87. To avoid over-commitment, a mid-term reviewwould be held in the third project year to make any adjustments which might berequired in the scope of work.

Status of Preparation

3.12 All PMUs included within the proposed project have existing facili-ties and personnel. Since the areas to be planted are selected annually,precise locations cannot be determined in advance, but there is no shortage ofeither suitable land or applicants under the present program. As in SRDP Iengineering design for roads and earthworks would be undertaken on an annualbasis by the Provincial Public Works after tree crop establishment areas arechosen (paras. 4.15-4.16). Terms of reference are available in the workingpapers both for technical assistance and for studies to commence in year 1.Training proposals have been prepared which are satisfactory to the Bank andresearch proposals are under review.

Cost Estimates

3.13 The total estimated project cost is US$221.0 million of whichUS$90.4 million (41%) is foreign exchange (Table 3.2). Base costs areexpressed in end-1984 prices and because of the tax exempt status of implemen-ting agencies do not include local, national or provincial taxes. Projectcosts by year of expenditure are provided in Annex 1, Table 1. Detailed costtables are included in the working papers.

3.14 Quantities and costs are based on a feasibility study revised andupdated in October 1983 and adjusted to end-1984 values. The costs for treecrop establishment and maintenance, physical facilities, and training arebased on actual expenditures under SRDP I, modified where appropriate. Roadcosts are based on Provincial Public Works experience for similar items undercontract. Cost estimates include physical contingencies estimated at 15% forroads, and 5% for physical facilities and tree crop establishment. Total

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Table 3.2: PROJECT COST SUMMARY /a

Foreign TotalLocal Foreign Total exchange base costs

- (US$ m/Rp) - (X)

Rubber Establishment andMaintenance

South Sumatra and Singkut 28.9 19.9 48.8 41 32Riau 27.2 18.9 46.1 41 30West Kalimantan 27.2 19.0 46.2 41 30

Subtotal 83.3 57.8 141.1 41 91

Program SupportTraining and headquarterssupport 2.7 0.7 3.4 20 2

Technical assistance andstudies 1.0 3.5 4.5 78 3

Applied research 0.3 0.1 0.4 19 0Start-up funds for SRDP III 3.7 1.5 5.2 30 3

Subtotal 7.7 5.8 13.5 43 9

Total Base Costs 91.0 63.6 154.6 41 100

Physical contingencies 5.6 6.2 11.8 53 8Price contingencies 34.0 20.6 54.6 38 35

Total Project Costs 130.6 90.4 221.0 41 143

/a Rp 1,000 - US$1.00.

Notes: Total physical contingencies are 8% of base costs. Local pricecontingencies are 35% and foreign price contingencies 30% of therespective base costs plus physical contingencies.

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physical contingencies are estimated at US$11.8 million, about 8% of projectcosts. Relatively low physical contingencies are assumed because the actualinputs required under SRDP I are known. Expected price increases are indica-ted in Table 3.3 and equal 33% of base costs plus physical contingencies.

Table 3.3: EXPECTED PRICE INCREASES

Calendar 1983 1984 1985 1986 1987 1988 1989 1990+year

Local 12.0 12.0 10.0 10.0 10.0 9.0 7.5 6

Foreign -3.2 3.5 8.0 9.0 9.0 9.0 7.5 6

Financing Plan

3.15 The proposed Bank loan of US$131 million would cover 60% of projectcosts less the cost of vehicles purchased under reserve procurement(US$221 million minus US$2.9 million). The Bank loan would finance 73Z of theproject's foreign costs and 50% of local costs. Provision of 602 of totalproject costs is consistent with regional guidelines for Indonesia. The Com-monwealth Development Corporation (CDC) would provide US$20 million anddomestic financing would be required for Rp 70 billion (US$70 million) or 32%of project costs. Project costs far fully participating farmers are dividedinto a credit component and a non-credit component. The credit component,about three fourths of establishment costs, covers those on-farm expenses tobe repaid by the farmer, including planting material, agro-inputs andincentive labor payments. The non-credit component, which accounts for theremaining quarter of establishment costs, covers infrastructure, administra-tive overheads, and routine expenditures not charged directly to the farmer.The domestically financed share of the credit component would come 80% from BIand 20% from BRI, and the domestically financed share of the non-credit com-ponent would come from MOF. Pre-financing for the production of plantingmaterial for sale to partially-assisted farmers would come from MOF, andrevenues from such sales would be returned to MOF as required under GOI pro-cedures.

On-Lending Terms and Conditions

3.16 BRI Funds. At the start of the project GOI and BRI would enter intoa financing arrangement to provide the funds to BRI to finance the credit com-ponent. Funds for the credit component would come 65% from the IBRD, 28Z fromBI liquidity credits and 72 from BRI's own resources. The IBRD funds would beon-lent to BRI at 9.9% which was the IBRD interest rate at the time of theinvitation to negotiations, and GOI would bear the foreign exchange risk. TheBI liquidity credits would be lent to BRI at 3% and BRI's own cost of funds isestimated at 10.5%. The weighted cost of funds for the project would

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therefore be about 8%. The repayment terms for the IBRD funds on-lent to BRIand the BI liquidity credits would be 20 years with 7 years grace, the same asto the smallholder. Under these arrangements BRI's income would be 14% foryears 1-3, payable by MOF, and 15.5% for years 4-20, 12% payable by thesmallholder plus a 3.5% subsidy payable by MOF. This would give BRI a spreadof 6%-7.5% to cover its overhead costs, risks of default and profit. Thisspread has been calculated to provide a 1% profit to BRI assuming that averageoverhead costs during the project are 5%, the default rate is 20%, and BRIbears 25% of the default risk. The other 75% of the default risk would beshared by MOF and BI.

3.17 For years 1-3 of field development the credit component would tech-nically be in the form of a loan from BRI to DGE. At the end of year 3 theloan to DGE would be "converted" to individual smallholder loans. Conversionwould take place after year 3 to provide time to survey the land and giveformal title to the smallholders, and to evaluate the quality of the plantingand the smallholder's performance.

3.18 On-lending Terms to Smallholders. The base cost of providing two haof rubber per family under the project is estimated at US$4,000. The small-holder would enter into a credit agreement with BRI for components totalingUS$3,100 or about three fourths of the total (see Annex 2, Table 7). Theinterest rate to the smallholders would be 12% with a grace period of sevenyears. Interest would be waived for the first three years, compounded inyears 4-7 and capitalized at the end of the grace period. This is equivalentto an effective rate of about 11%. This would be positive in real terms inall years of the project. These terms represent a significant increase in thedebt service to be borne by the smallholders compared with SRDP I which has aninterest rate of 6% with no interest accrued during the grace period. Theseterms are consistent with other GOI-financed programs in the subsector andwith the GOI's objective of meeting target incomes and keeping smallholderpayments below 20-25% of gross rubber income. An assurance was obtained atnegotiations that funds would be on-lent to smallholders on terms andconditions acceptable to the Bank.

Flow of Funds

3.19 For both the credit and non-credit components, SRDPU will prepare anannual budget request in October to be reviewed by DGE, MOF and BAPPENAS. MOFwill then issue a formal approval of the budget before the start of the fiscalyear on April 1.

(a) Credit and non-credit expenditures financed by the World Bank andprefinanced by MOF: IBRD funds will be used for both the credit andnon-credit components and will be prefinanced by MOF. At thebeginning of each fiscal year MOF will release funds for the firstand second quarter budget to SRDPU's bank account, currently at BRI,less the amounts for which it is expected the World Bank will makedirect payments. Budget releases from MOF to SRDPU for the thirdand fourth quarters of each fiscal year would be contingent uponSRDPU accountability reports documenting actual expenditure in thefirst quarter (to get the third quarter release) and second quarter(to get the fourth quarter release).

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(b) Non-credit expenditures financed by MOF. These will be financedunder procedures similar to those described above. The first andsecond quarter budget will be released automatically to the SRDPUbank account at the start of each fiscal year. Accountabilityreports for the first and second quarters will be required to getthe third and fourth quarter releases. As in SRDP I the source offinancing for MOF's small contribution to the non-credit componentwill be the Dana Tanaman Ekspor (DTE, the Export Commodity Fund),and MOF is committed to maintaining sufficient funds in the DTE tocover its share of non-credit costs.

(c) Credit expenditures financed by BI/BRI. At the start of each fiscalyear BRI will release the amount budgeted for new planting for thefirst and seconi quarters from the BI/BRI pool. This pool consists80% of BI liquidity credits, to be released to BRI the quarterbefore they are needed, and 20% of BRI's own funds. As with MOF,BRI requires an accountability report for the first quarter to makethe third quarter release, and for the second quarter to make thefourth quarter release. For maintenance of old planting, BRI willrequire accountability reports for the third and fourth quarters ofthe previous year before releasing funds for the first and secondquarters of the new year.

3.20 Until recently, MOF prefinancing of funds to be reimbursed by theWorld Bank was drawn from the DTE. In theory this fund consists of taxes andcess funds earmarked for tree crop development. In practice, since tax ratesare low, it consists mainly of subventions from the MOF. One problem in SRDPI has been a delay in fund flows due to a shortage of funds in the DTE. Tocircumvent this problem prefinancing of the IBRD shares of both the credit andnon-credit components for SRDP I and SRDP II will come directly from anaccount consisting of general treasury revenues. This account will alsoreceive reimbursement from the IBRD.

3.21 The signing of a Financing Agreement between GOI and BRI, and of aSub-Financing Agreement between BRI and the DGE, both acceptable to the Bank,would be a condition of loan effectiveness. The Sub-Financing Agreementbetween BRI and DGE would contain the terms and conditions applicable to thesmallholders after loan conversion (see Annex 3).

Procurement

3.22 Equipment and Supplies. Procurement arrangements are shown inTable 3.4 and summarized below:

(a) Except as noted below, international competitive bidding in accor-dance with Bank Group Guidelines would be used for fertilizer(except urea, TSP, MOP and ammonia sulfate), agrochemicals, vehiclesand farm machinery (US$45.7 million). A preference limited to 15%of the CIF price of imported goods or the customs duty, whichever islower, would be extended to domestic manufacturers in the evaluationof bids.

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Table 3.4: Procurement /a(in US$ million)

ICB LCB Other /b N.A. /c Total

Agro-inputsTotal 30.6 9.1 17.8 17.7 75.2Bank (30.6) (9.1) (16.6) (16.6) (72.9)

Civil WorksTotal - 28.3 0.2 5.0 33.5Bank - (28.3) (0.0) (5.0) (33.3)

Vehicles and EquipmentTotal 15.1 2.3 2.9 - 20.3Bank (-) (0.4) (-) - (0.4)

Smallholder LaborTotal - - 52.0 52.0Bank - - (13.0) (13.0)

ServicesTotal 5.6 - 4.1 5.4 15.1Bank (5.6) - (0.4) (5.4) (11.4)

Overheads and AdministrationTotal - - 24.9 24.9Bank - -

Total Cost 51.3 39.7 25.0 105.0 221.0(IBRD financed)/d (36.2) (37.8) (17.0) (40.0) (131.0)

/a Costs including physical and price contiugencies.

/b Other means of procurement including direct purchase of seed, fertilizer,and land titling and applied research, reserve procurement of vehiclesand prudent shopping.

/c Not applicable. Includes production of planting material, civil worksconstructed under force account, training, incentive payments to farmersand overheads and administration.

/d These figures are approximate and depend on the use of unallocatedfunds. See also Proposed Allocation of Loan Proceeds, Annex 1, Table 2.

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(b) Locally advertised competitive bidding following procedures accept-able to the Bank would be used for cover crop seeds (US$2.5 million)in which Indonesia is competiti-e, because it is essential thatthese be purchased in a timely fashion; and for agro-inputs, minoragricultural implements, office supplies and extension literature(US$8.9 million) to be purchased in small lots unattractive tointernational bidders. Purchases of minor agricultural equipmentand supplies other than urea, TSP, MOP and ammonia sulfate which areunder US$50,000 (estimated to total US$1.2 million), could beobtained through prudent shopping with three price quotations.

(c) Direct purchase would be permitted for urea, TSP, MOP and ammoniasulfate (US$13.3 million) which would be obtained from P.T. PUSRI,the state-owned fertilizer monopoly, at GOI-determined prices whichare uniform nationwide. This policy is followed in Bank projects aslocal production costs are less than the import parity price, and,to stimulate fertilizer use, the price is lowered further by GOIsubsidy. Rubber seeds (US$3.3 million) would be obtained fromqualified estates or from SRDP fields selected by the DGE, at pricesnegotiated between the DGE and the estates.

(d) As Government requires the purchase of locally assembled four-wheeldrive vehicles and motorcycles, these items (US$2.9 million) wouldbe regarded as reserve procurement.

In the recent past, Government has restricted purchase of motor vehicles foragricultural staff. Since the rubber fields in the Other Islands are widelyscattered and good extension cannot be provided without adequate transport,CDC has agreed to disburse 100% (less any identifiable taxes) against the costof such vehicles and an assurance was obtained that Government would procurefour-wheel drive vehicles motorcycles on a schedule reviewed and agreed withthe Bank and CDC.

3.23 Civil Works. About 20 separate works contracts would be awardedtnrough 'CB for roads (US$25.2 million) and project facilities (US$8.3 mil-lion). As these works are scattered over 50 locations in three provinces andare implemented over five years, it would be difficult to combine them intolarger contracts suitable for international competitive bidding. Local pro-cedures, similar to SRDP I, are acceptable to the Bank. In the case ofSRDP I, the GOI has experienced considerable difficulty in attracting bids forroad work in West Kalimantan so about 30% of the total works in that provinceare being implemented by force account and funds for force account work havebeen provided in this project. An assurance was obtained that the aggregateamount of road construction done by force account would not exceed 20% of thetotal cost of road works unless otherwise agreed by the Bank.

3.24 Services. Three contracts would be awarded for technical assistance(US$5.6 million), one each for technical specialities concerned with rubberproduction, for financial services including the provision of local qualifiedaccountants in the provinces, and for training. These contracts would beawarded on the basis of Bank Guidelines on the Use of Consultants. As field

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supervision demands an unusual combination of language and technical skills,individuals could be hired on an exceptional basis as agreed by the Bank.Training (US$5.4 million) would be carried out by selected PHU staff andcontractors according to a training p-ogram reviewed and agreed by the Bank.Research (US$0.4 million) would be carried out by PMU staff on or adjacent tofarmers' fields. As land surveys and land titling (US$3.7 million) canlegally be done only by the Directorate General of Agraria (DGA) such serviceswould be provided by the DGA on contract to the SRDPU. Planting material(US$17.7 million) would be produced by the PHUs. Land clearing, tree cropestablishment, maintenance, and fencing (US$52.0 million) would be undertakenby the smallholders and compensation would be provided according to agreedrates from the SRDP account. Transport (US$4.6 million), and maintenance andoverheads (estimated at US$20.3 million) would be covered under routineexpenditures.

3.25 Procurement under ICB would be carried out by the SRDPU with assist-ance from its consultants. Local procurement would be done by the PMUs sub-ject to SRDPU approval. Standard bidding documents agreed by the Bank wouldbe used for both ICB and LCB contracts. These documents are currently in useunder the Bank-assisted NES and Smallholder Rubber and Coconut Projects. Bid-ding documents for all contracts estimated to exceed US$500,000 would bereviewed by the Team Khusus and approved by the Bank before issuance.

Disbursement

3.26 The proposed allocation of loan proceeds is shown in Annex 1,Table 2 and summarized below.

IBRD (US$131.0 million)

(a) 100% of expenditures for planting material produced under theproject, and of imported or locally produced seed, fertilizer andagrochemicals (less any identifiable taxes);

(b) for small agricultural implements and supplies, 100% of expendituresfor directly imported items, 95% of expenditures for locallymanufactured items and 65% of expenditures for imported locallyprocured items;

(c) 100% of expenditures for civil works undertaken on contract or forceaccount (less any identifiable taxes);

(d) 100% of expenditures for training, applied research, and technicalassistance; and

(e) 25% of expenditures for incentive payments to smallholders.

Commonwealth Development Corporation (US$20 million)

(a) 100% of foreign expenditures for imported vehicles and equipment andspare parts purchased at the time of procurement;

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(b) 1OOZ of expenditures on locally assembled four-wheel drive vehicle-and motorcycles; and

(c) 10OZ of expenditures for sprinklers, workshop and comnunicationsequipment and for furniture and office equipment.

Bank and CDC funds would be disbursed on separate components of the project.Neither the Bank nor CDC would disburse against overheads or routine expendi-tures. Surveying and land titling, much of which occurs in later projectyears, would be financed entirely by the GOI. For most components, disburse-ment would be made on the basis of standard documentation. Disbursement wouldbe made on the basis of statements of expenditures (SOE) for the production ofplanting material, the training and research components, labor incentive pay-ments and road construction by force account. Detailed documentation for SOEswould be retained in Indonesia and available to the Bank for inspection (seeAnnex 4).

3.27 An estimated schedule of disbursement is shown in Annex 1,Table 3. Because the project is limited to a five-year time-slice of the SDRPprogram and because SRDP I has met implementation targets on time when fundswere available, project disbursements are expected to be completed in sixyears, two years less than the average in regional or Bank-wide tree cropprojects which were not time-slice projects. The project closing date wouldbe June 30, 1991.

Accounts and Audits

3.28 To ensure adequate accounting under SRDP II, qualified accountantshave been provided in each project province and assurances would be obtainedunder the proposed project that: (a) separate accounts and SOEs would be main-tained for the project; (b) these accounts and SOEs, and the accounts of BR1related to the project, would be audited annually by independent auditors orfirms acceptable to the Bank; and (c) these audited accounts and the auditreport would be submitted to the Bank within nine months of the close of eachGOI fiscal year.

IV. PROJECT ORGANIZATION AND IMPLEMENTATION

General Organizational Structure

4.01 General. The Directorate General of Estates (DGE), within theMinistry of Agriculture, is responsible for all tree crop and industrial cropdevelopment in Indonesia. The DGE operates through a numnber of specialpurpose committees (such as the Sugar Council) and it has six directorates.The Directorate for Replanting and Rehabilitation is responsible for GOI-financed PMU development. The DGE also includes twro special programs, SRDPand SCDP, which are outside the directorate structure and responsible to theDirector General. A special team, the Team Rhusus, was formed in 1979 to helpprepare and supervise projects in the estate sector and to establish uniformprocedures for Bank-assisted tree crop development. In 1983 the Team Khususalso assumed responsibility for the PIR program. A Junior Minister for tree

.

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crops was appointed in 1983 to coordinate ministries involved in the subsector(Industry, Finance, Cooperatives, etce.).

4.02 The SRDPU. Under SPDP I, a management unit, the SRDPU, was formedto implement Bank-assisted PMU rubber development projects. The SRDPU coordi-nates irs work with the Team Khusus, but carries out its day-to-day activitiesindependently. As a special unit, the SRDPU has more operational and finan-cial autonomy than a regular directorate. Under SRDP II, the SRDPU would bestrengthened and under subsequent projects it would gradually assume controlof all PMU rubber development, regardless of the financing source. SRDP Ialso created small provincial offices in project provinces and under SRDP IIthese would be expanded to assume some functions now centralized in Jakarta.The organizational structure of the proposed SRDP II program is shown inFigure 4.1.

Organization and Staffing of PMUs

4.03 PMU Organization. Three types of PMUs are involved in the proposedproject. First, are large-scale PMUs included in SRDP I and each coveringabout 20,000 ha of rubber plantings. Each of these PMUs has a central officeresponsible for admi. stration and finance, equipment maintenance, trainingand extension, and subunits responsible mainly for field development. ThesePMUs are functioning and will be used to provide on-the-job training to newSRDP staff. Second, are similar large-scale PMUs brought into the program inthe first year of SRDP II. These will cover about 10,000 ha. be organized andstaffed like SRDP I PMUs, but they will not have a training function.Finally, there are 16 small GOI-financed PMUs in each project province. ThesePMUs are each responsible for planting about 3,000 ha of rubber and they havemany of the same functions as SRDP subunits. To improve supervision andfinancial control, four or five of these small PMUs would be grouped togetherinto larger PHUs before being absorbed into the SRDP program in years 2, 3 and4 of the proposed project.

4.04 In order to transfer PMUs to SRDP authority, detailed audits andinventories of assets (including plantings) are required. This processinvolves several agencies and is cumbersome and time consuming. To ensurethat these procedures do not lead to implementation delays, assurances wouldbe sought that (a) the process of absorbing the PMUs would be comoleted beforetree crop establishment begins; and (b) preparation cf nursery materials andrecruitment of farmers could be undertaken by SRDP prior to full transfer.The DGE is also exploring ways to simplify transfer procedures.

4.05 Staffing anu. Salaries. Government has restricted both growth andsalary increases within the civil service. This does not present a seriousconstraint at junior levels, where project salaries are relatively competi-tive, but low salaries have made it difficult to recruit senior staff andthose with special skills. The general problem of compensation is currentlyunder discussion with Government and an assurance was obtained at negotiationsthat the SRDPU and the PMUs would be adequately staffed. Even with signifi-cant raises, however, GOI salaries would not be sufficient to recruit qual-ified accountants or staff capable of supervising the construction of civilworks. To circumvent this immediate problem the proposed project provides

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funds to hire three local accountants (one for each province) under a contractfor technical assistance on financial matters, and the Provincial Public WorksDepartment would supervise the construction of roads and facilities for 5X ofconstruction costs or, alternatively, domestic consultants would be hired bythe SRDPU to provide these services (para. 4.15).

Field Development

4.06 Farmer Selection. PHUs would select farmers who reside permanentlywithin 5 T,n of the land to be planted; are fit and above 18 years of age; ownrubber land or work as share-tappers; have land of suitable slope and drain-age; have sufficient family labor to develop 2 ha of project plantings; do notown more than 2 ha of ricefields; agree to abide by all project rules andmaintain cultivation standards laid down by the PMU; and agree to the creditconditions. There have been no problems under SRDP I in identifying appli-cants who meet these criteria. In some Indonesian provinces (notably WestSumatra) women are the main landowners in rubber areas and SRDP accepts womenboth as project participants and wage laborers.

4.07 Planting Material. There is virtually complete reliance on cloneGT1 for planting material in Indonesian rubber projects. Given the possiblesusceptibility of monoclonal plantings to mutants of existing diseases, theproposed project would broaden the genetic base by setting a ceiling of 70% onthe overall percentage of GTI and allowing up to 10% of each of five otLerrecommmended clones in any project area. Although a single cione would beused in any planting block (20 hectare minimum) PHUs would, whenever possible,provide different plantin- materials for each of a farmer's two hectares.

4.08 Nursery Development. Budwood nurseries, with a five-year life,would produce green and brown budwood for budding onto selected seedlings inthe stump nurseries. Budded stumps would be produced for all fully-parti-cipating farmers, but up to 50% of partially-assisted farmers would be pro-vided with budwood for field-budding their plantings. Under SRDP-I, GTl seedfor rootstocks was obtained through the Tanjung Morawa Rubber ResearchStation. To simplify seed procurement, the proposed project would also permitthe use of biclonal seed from appropriate clone boundaries and rigorousnursery selection would be undertaken prior to budding. Bare-root buddedstumps would be distributed both to fully-participating and partially-assistedfarmers.

4.09 Land Clearing and Planting. To limit the degree of soil degradationassociated with mechanical cultivation, especially in steeply sloping areas,land clearing by fully-participating farmers would combine manual and chemicalmethods. Partially-assisted farmers would use manual clearing only. Whererubber areas are replanted, poisoning would be undertaken prior to felling tolimit root disease. Tree poisoning, tree felling, herbicide spraying and landterracing (in areas with slopes over 8%) would be done by farmer groups underPMU supervision or by groups contracted by the farmers with PMU assistance.Intercropping would be permitted only where alang-alang has been eradicated.Land clearing would be completed by May/June and rubber and intercrops orcovercrops would be planted from October-December.

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4.10 In SRDP I, field casualties are estimated at 15%. In SRDP IIincreased planting densities, in combination with more equidistant spacing,would reduce the need for supplying vacant points, enhance balanced canopydevelopment and reduce maintenance costs. Because of the relatively highinitial planting densities (555 per ha), at most about 45 replacements per haare likely to be required. Field supplying would utilize bare-root buddedstumps, to be field planted wherever possible within three months of initialestablishment and within the same rainy season. During the course of theproject, management would provide farmers with training in the establishmentof both stump and polybag nurseries as a means of encouraging private nurserydevelopment in the future.

4.11 Intercropping. Where topography, soil conditions &ad weedpopulations permit, rubber farmers would be encouraged to interplant with riceand other appropriate food crops such as beans, maize, groundnuts or pine-apple. Farmers would be discouraged from intercropping in terraced areas orwhere land has been developed fror- sheet alang-alang. Intercropping would bepermitted during the first two years after rubber planting and long-termcredit would be available for agrochemical inputs. Intercropping, prior tothe establishment of a legumirous ground cover, would serve the dual purposeof augmenting farmers' earnings and acting as a stimulus to field upkeep.

4.12 Rubber maintenance. Control of alang-alang may be a problem forsmallholders especially where intercropping is practiced. This problem wouldbe minimized, in the case of fully-participating farmers, through the timelyapplication of appropriate herbicides and adherence to the criteria for inter-cropping. In areas where intercropping is not undertaken, a mixture ofleguminous cover crop seeds would be sown immediately after burning or spray-ing. Where intercropping is permitted, the cover crop seeds would be sownbefore or at the time of harvest of the last intercrop. Weeding during rubberimmaturity would be undertaken by farmers closely supervised by PMU staff.

4.13 Manuring, Pest and Disease Control. The credit package covers thecost of fertilizers to be applied at standard rates for rubber trees and forrice intercrops. Fertilizer recommendations from the fifth field year onwardswould be based on foliar analysis. The credit package also covers the cost oflabor and material inputs for protection of the rubber and rice intercropsfrom disease and pests. Fencing is also provided to prevent damage to therubber by pests such as deer and wild pigs.

4.14 Tapping. If fully-participating farmers adhere to recommended pro-cedures during rubber immaturity, budded trees would be opened for tappingduring the sixth field year. Essential tapping equipment would be provided tothe farmers on credit. Farmers would be advised to tap rubber trees on a halfspiral, alternate day system (S/2 d/2) and it is assumed that they would tapan average of 500 trees per day, 10 months per annum. The judicious use ofstimulants (e.g., ethaphon) under close PMU supervision could maintain small-holder rubber yields at lower tapping intensities and thus at considerablylower labor inputs with only small marginal costs.

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Civil Works

4.15 Access Roads. Under SRDP I, the District CKabupaten) Public Works(DPW) office is responsible for the planning, design and construction super-vision of access roads. For these services they charge the project about 5Xof the construction cost and assign one full-time person to SRDP in eachprovince. Generally, those assigned are not qualified engineers but have someexperience in the maintenance and construction of village roads. Thesearrangements have not been satisfactory and have resulted in the wrong loca-tion of cross drainage structures. For this reason, under the proposedproject supervision responsibility would be shifted to the Provincial PublicWorks (PPW) which would assign an experienced engineer, on a full-time basis,to supervise construction. If PPW is not prepared to assume this responsi-bility, the project would use the 5% administration cost otherwise charged byPublic Works to employ a local consultant in each province to undertakesurveys, design, and evaluation of bids and to supervise construction underthe direction of the SRDP II Project Manager.

4.16 DPW is also responsible for the maintenance of village roads forwhich they spend about Rp 0.5 million per kilometer. This is not adequate.Under Repelita IV, activities of the DPW would be controlled and monitored byPPW and a substantial increase in maintenance funds is expected. As this is anational policy, no special assurances on additional funding are required.Plantation roads would be maintained by the PMUs. The maintenance of suchroads has been satisfactory under SRDP I and adequate funds have been providedeach year for such maintenance. A tractor with blade, truck and 3-ton rollerwould be provided under the project for each subunit for hauling material andperiodic regrading of road surfaces.

4.17 Project Facilities. The PPW office of Cipta Karya would beresponsible for design, preparation of contract documents, evaluation of bidsand construction supervision for project facilities. Standard designs existfor staff housing and are used by all government agencies throughoutIndonesia. Design of such facilities as offices, workshops and warehouseswould be similar to those used under SRDP .. PPW would assign a person on afull-time basis to work at the SRDP provincial offices and coordinate allactivities associated with payments to the contractors for the construction ofproject facilities.

Credit Administration

4.18 PMUs would maintain credit records during the development periodincluding a record of all inputs and cash payments provided to eachparticipant. Cash payments to the farmers would be made by BRI from the SRDPaccount. If extra inputs are required due to farmer neglect, these would becharged to the farmer's account. Where damage is caused by forces beyond thefarmer's control, physical inputs would be provided without charge, but noadditional compensation would be provided for labor. Smallholder accountswould be set up by BRI when loan conversion takes place at the end of year3. At that time BRI would explain the repayment schedule, including penaltiesfor late payment or non-payment. To maximize returns, repayment scheduleswould be graduated to permit smaller payments in the early years of repayment

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when yields are low, and payments would be monthly to ensure that reasonablysmall amounts would be paid in each installment.

Manpower Development

4.19 Training. Two of the major objectives of the proposed project areto improve the quality of rubber establishment and expand the capacity of PMUmanagement. To meet these objectives the project provides intensive trainingto project staff. Under the proposed project the existing training unit inthe SRDPU would be strengthened and extended to the provinces. In theprovinces, special training centers would be established in SRDP I PMUs underthe direction of an assistant manager for training, and these would provideboth formal courses and on-the-job training. In addition, one person in eachSRDP I PHU would be appointed to assess training needs and coordinate thetraining program. All managerial and supervisory staff would receive trainingin management skills and specialized work-related topics. Initially mosthigher level management training would be provided by the Estates TrainingInstitute in Yogyakarta and similar institutions, but in-house capacity wouldgradually be developed within SRDP.

4.20 Most extension would occur through the training and visit system.Under this system, project participants would be organized into groups ofabout 10-25 farmers, and one extension worker (PLPT) would be responsible forabout six to eight groups during the planting and establishment period. Sincethe PLPTs are the critical link between project and farmer, all SRDP extensionworkers would receive intensive training including induction training and on-the-job orientation (two months), rubber technology training (one month),extension training (one month), and field supervision (one year). Subsequentformal courses would be available for upgrading PLPT supervisory and technicalcapabilities. SRDP I PMUs would also hold one-week courses for farmer groupleaders in topics such as _hainsaw operations, cover crop planting and budgrafting, and they would provide extension literature to farm group leadersand project participants.

4.21 Technical Assistance. The expansion of the rubber developmentprogram coupled with shortages of skilled technical manpower necessitates thecontinued provision of technical support. To ensure the long-term success ofthe SRDP program, the project provides technical specialists covering nurserydevelopment and field management, processing and marketing, training andextension, and monitoring and evaluation. Two financial advisers and threequalified public accountants (one for each project province) are also provided(Annex 1, Table 5). With the exception of the accountants, technical special-ists would be stationed in Jakarta but travel extensively to the field.Allowance is also made for 36 man-months of consultant time to cover short-term studies related to road and building design, organization and managementand technical problems. Terms of reference are available in the projectfiles.

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Monitoring and Evaluation

4.22 Monitoring and evaluation are needed to record physical progress,identify and resolve implementation problems, design appropriate technical andcredit packages, and evaluate the impact of the project on participants. Inorder to strengthen all aspects of monitoring and evaluation, responsibilityfor this task would be given to the Bureau for Planning and Budgeting withinthe SRDPU. The Bureau would be responsible for monitoring baseline data,physical progress, the quality of implementation, rubber growth and yielddata, institutional development and financial performance. It would reportmonthly to the project director, semi-annually to the Bank, and to otheragencies as required. Monitoring and evaluation units in the provinces wouldalso be strengthened and gradually take over monitoring activities within thethree project provinces. Most field data would be gathered by PLPTs ir. thecourse of routine supervision, and these data would be aggregated within thePMUs, forwarded to the provincial office, and form the basis of an expandedmanagement information system. The SRDPU would be responsible for preparingthe project completion report.

Rubber Research

4.23 Rubber research in Indonesia is undertaken by the Estate CropResearch Institutes at Bogor (West Java) and Medan (North Sumatra), by theRubber Research Centers at Tanjung Morawa (North Sumatra) and Getas and Jember(Central Java), and by the Rubber Research Institutes at Sembawa (SouthSumatra) and Sungei Putih (North Sumatra). These institutes are coordinatedby the Agency for Agricultural Research and Development (AARD). The SungeiPutih Station is being developed to undertake basic rubber research while theSembawa Station is being upgraded to undertake research activities directlyrelated to smallholder rubber cultivation. These institutes have beenequipped and their staff have been trained under the first Bank-assistedAgricultural Research Project (Loan 1179-IND), and the planning, developmentand execution of appropriate rubber research programs on the main researchstations is being addressed during the preparation of the Third ResearchProject. Under the proposed project, provision is made for regular consulta-tion between SRDP officials and AARD research staff and for a modest programof on- and off-farm rubber trials in SRDP areas. The proposed program wouldbe under the technical control of Sembawa Rubber Research Station whoseofficers would maintain close contact with SRDPU staff during the formulationand execution of this component. The general work program has been agreed inprinciple with officials of AARD and Sembawa and detailed plans would besubject to Bank approval.

V. PROJECT ANALYSIS

Agricultural Yields and Production

5.01 Rubber. Fully-participating farmers practiciig reasonable fieldmanagement are expected to attain average peak yields of 1,500 kg of dry rub-ber content (drc) per ha corresponding to average annual production over the25-year tapping life of about 1,100 kg drc per ha. Partially-assisted

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planters supported under the project are expected to attain average peak-yields of 1,000 kg drc per ha and average annual production of approximately740 kg drc per ha. Average rubber yield profiles are presented in the workingpapers together with assumed profiles for "good" and "poor" farmers. Dryrubber production from the 95,500 ha established under the project would reachan annual peak of about 132,000 tons in the year 2002/03. Additionally, anannual peak of 101,000 tons dru2 would be produced in 1998/99 from plantingsestablished under other projects and maintained under SRDP II.

5.02 Intercropped Rice. Rice would be intercropped for two years onabout a quarter of all rubber areas. Gross rice yields are projected at1.15 tons of paddy/ha in both field years 0 and 1 of rubber planting and it isassumed that 60% of a given hectare would be intercropped in the first fieldyear and 40% in the second. The total paddy output from fully-participatingfarmers would be about 34,000 tons with a peak annual total of approximately9,000 tons in 1988/89. No rice would be produced after 1990/91 from areasplanted to rubber under SRDP II.

Market Prospects

5.03 Rubber. From 1950 to 1979 world consumption of natural and synthe-tic rubber increased from 9.4 million tons to 12.3 million tons and thereafterfell slightly to 11.5 million tons in 1982. During this period, the share ofnatural rubber decreased from 67% to approximately 32% of the total, but abso-lute consumption of natural rubber rose from about 1.6 million tons in 1950 to3.7 million tons in 1982. Growth prospects and projected prices for all elas-tomers depend heavily on assumptions about oil prices and recent projectionshave shown great variation. FAO forecasts in October 1982 indicate a steadygrowth in elastomer demand to about 21 million tons in the year 2000 and rela-tive stability in the proportion of natural rubber required (6.8 milliontons). Assuming that Indonesian rubber continues to increase in attractive-ness because of low labor costs, FAO has estimated that the demand forIndonesian rubber could potentially be as high as 4.1 million tons by the year2000. More conservatively, if Indonesia's share of production remains stable,the market would be expected to absorb about 2.4 million tons of Indonesianrubber. In either case, the potential market exceeds Indonesia's projectedproduction of 1.7-2.3 million tons by the year 2000 and suggests that market-ing should not be a problem.

5.04 Rice. Intercropped rice produced in the project areas would beconsumed by the smallholders or sold in active local markets. As most areasdepending heavily on rubber for cash incomes are deficient in rice, no market-ing problems are anticipated. Should small localized surpluses of rice arise,village cooperatives could act as purchasing agents for the Government's foodprocurement authority which maintains a nationwide floor price for rice.

Marketing and Processing in the Project Area

5.05 Because of very low yields and prices, most farmers give littleattention to rubber quality. With poor tapping and collecting techniques,about one third of the output is tree lace and cup lump. This material iscombined in large, irregular slabs which also contain bark and dirt. The

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balance of the rubber is generally formed into thick coagulated slabs orsheets which are run through mangles to produce thin, ribbed sheet. Thethicker slabs are generally sold at about 50% dry rubber content (drc) whilesun dried sheets are sold at 80% drc. Righ dirt and water content increasetransport costs, necessitate further drying and cleaning by the millers, andresult in a poorer finished product. Because of this, traders often inten-tionally underestimate dry rubber content to nbtain higher margins. Pricesare set by the factories, with the middlemen us-.ally taking fixed margins, andprices fluctuate in accordance with world market (Singapore) pricestransmitted daily by radio.

5.06 At preseuit, the FOB price for SIR 20 is about Rp 1000 (US$1.00) perkg. After subtracting taxes, milling costs, transport, traders' margins andmangling, the average farmgate price for sheet rubber is about Rp 500/kg (ofdrc), or about 50% of FOB. The farmgate price varies widely, however, andsmallholders in remote, low yielding areas receive as little as 30% of the FOBprice while farmers in GOI-sponsored projects can receive as much as 70%. By1990, the FOB price in constant 1984 prices is expected to reach Rp 1,057(US$1.06)/kg (Annex 2, Table 2). The average farmgate price for sheet rubberproduced under the project is estimated at Rp 656/kg in 1990 (62% of FOB).When infrastructure, smallholder knowledge of markets, and the quantity ofrubber produced in a given area improve, transaction costs should drop, andthe percentage of FOB should increase, reaching an estimated average of 682 ofFOB in 1995. The FOB price of SIR 20 is projected to increase to Rp 1,095(US$1.10)/kg by 1995, giving the smallholder a farmgate price of Rp 744/kg.

5.07 In North Sumatra some group marketing organizations have been formedwhich invite middlemen to weekly auctions. Though still in their infancy, thesystem has increased prices and bypassed the lowest layer (subcollector) inthe marketing chain because the rubber quantity attracts larger dealers. Asimilar system has begur, in SRDP I in South Sumatra with good initial resultsand will be extended to other SRDP I PMUs as rubber comes into tapping.Existing farmer groups are expected to provide the units for group marketing.

Farm Incomes

5.08 Pre-project incomes in the project area average about US$120/capita,or US$600/family of five, of which about 30% is from rubber. Without theproject, the average rubber yields in project areas would decline, on-farmincomes would fall, and many farmers would be expected to drop out of rubberproduction. For the first seven years of the project, cash payments and thevalue of rice intercropping would not quite offset the loss of income foregonedue to the project's labor demands. By field year seven, income would begreater than pre-project levels and thereafter would increase rapidly to aboutUS$1,500/year. Total net income at full development (years 11-30) wouldaverage almost three times the pre-project income. Farm model data aresummarized in Annex 2, Table 5.

Cost Recovery

5.09 The bulk of cost recovery under SRDP II will come from smallholderdebt service payments. BRI will be responsible for administering smallholder

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accounts and collecting repayments. For an individual smallholder who meetshis repayment obligations, and taking the debt service payments and incremen-tal land taxes together, the proposed project would recover 146% of totalinvestment costs in real (inflation adjusted) terms. If the inflation-adjusted inflows and outflows are further discounted at 10%, which is theestimated opportunity cost of capital (OCC) in Indonesia, then the costrecovery index would be 48%. This implies a net transfer from the smallholderto the GOI of US$2,017 per family in real (inflation adjusted) terms, but atheoretical transfer from GOI to the farmer of US$1,649 if all flows arefurther discounted at a 10% OCC. Government believes that these arrangementsare fully justified to meet its objectives of (a) increasing non-oil exportearnings; (b) increasing smallholder incomes, particularly in remote areaswith low fertility soils where few other crops can be grown and marketed, and(c) reducing regional disparities. The expected cost recovery for SRDP II ishigher than other projects in the tree crop subsector and it is much higherthan in other agricultural subsectors. Therefore, given GOI's long-termdevelopment strategy, the level of cost recovery in other subsectors, and theparticular needs of the target group of smallholders participating in SRDP II,the expected level of cost recovery was judged reasonable.

5.10 There is still the risk that defaults could be high. However, giventhe projected yields and incomes and the expected development of comercialcredit markets in rural areas, the likely level of repayments was judged suf-ficient to justify the proposed system of cost recovery. Additional forms ofcost recovery, such as a possible reintroduction of a modest cess or exporttax, are under discussion with Government, and could be used to supplementdirect cost recovery, especially if commodity prices rise. This subject isbeing pursued in discussion of the Tree Crop Sector Review.

Project Benefits

5.11 Increased foreign exchange earnings over the life of the rubbertrees established under this project would be about US$3 billion (in constant1984 US$), an average of about US$100 million per year.

5.12 The project would promote development in areas of Indonesia with feweconomic alternatives. About 45,000-65,000 families would benefit from rubberplanting (depending on the number of hectares planted per family) and about50,000 families with trees planted under prior programs would receive helpwith maintenance. These project beneficiaries are subsistence and part-subsistence farmers whose average income under this project would increasefrom about US$600 to US$1,500-2,000 at full development. This would increasetheir income in relation to people in urban areas and could, thereby, reducemigration to cities. In addition, the project would create 1,500 jobs innurseries and administrative work, and smallholder labor demand would increasean incremental 60,000 man-years annually at full development.

5.13 Nutrition in the project areas would improve due to higher incomesenabling better food purchasing decisions and to a lesser extent from theintercropping of rice early in the project. Other nonquantified benefitswould include increased access by smallholders to commercial markets and thecredit system, and the ripple effects to other economic sectors. The latter

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would be particularly stimulated by roads built under the project. In addi-tion to being necessary for the adequate provision of inputs and the marketingof production, these roads also benefit other economic activities in adjacentareas and improve access to health, educational and social facilities.

5.14 The project would assist in the regional development of areas ofSumatra and Kalimantan, and the research and technical assistance componentsprovided under this project would lead to long-term improvements in the rubberindustry throughout Indonesia. The emphasis on institutional developmentwould also permit these benefits to be extended over a wider area in subse-quent years.

Economic Rate of Return

5.15 Assumptions. The economic rate of return has been based on thecosts and benefits expressed in border rupiah and on the followingassumptions:

(a) Conversion Factors. Except as noted below, the analysis uses thefollowing conversion factors which are recommended for Bank projectsin Indonesia: general project costs - 0.80; rural labor on theOther Islands - 0.80; vehicles and equipment - 0.85; civil works -0.80.

(b) Other Inputs and Outputs. Where GOI subsidizes fertilizer, thosesubsidies have been removed when deriving economic costs (seeAnnex 2, Table 1). The derivations of the economic and financialfarmgate rubber prices are shown in Annex 2, Table 2.

(c) Maintenance of Existing Plantings. The ERR calculation is basedonly on the costs and benefits of new rubber planted under theproject, about 75% of project costs, as it is difficult to estimatehow much of the output from 1980-1985 plantings would be attri-butable to maintenance under this project.

gd) Start-up Funds and Sector Support. Start-up funds for thepreparation of a future project and general support for the treecrop sector have been excluded.

5.16 The ERR. Based on the above assumptions, which exclude nonquanti-fied nutritional, social and economic benefits (paras. 5.12-5.14), the eco-nomic rate of return for this project is 13% (see Annex 2, Table 6). This isa reasonable ERR for a tree crop project in Indonesia intended to help poorsmallholders in remote areas and it exceeds Indonesia's estimated OCC of 10%.

Sensitivity Analysis

5.17 The projected ERR was tested against various adverse assumptions(Table 5.1). As is usually the case with tree crop projects where benefitsare stretched over many years, the ERR is relatively insensitive to changes ineither costs or benefits. Costs could rise 20% or yields or prices decrease20% and the ERR would remain at 10% or higher. Given the experience of

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SRDP I, costs are relatively well known and not expected to differ signifi-cantly from appraisal estimates and although commodities prices are known fortheir year to year volatility, plus or minus 20% is considered a reasonablerange of expected commodity price fluctuations over the long term. Therefore,the greatest uncertainty lies in the prospect that yields would be lower thanprojected, due either to poor establishment or poor tapping practices.Project phasing has been designed to maintain the high standards of rubberestablishment achieved under SRDP I, and training is provided to improvetapping. Reduced yields in the later years of the project would have rela-tively little impact on the ERR. Given the base case ERR of 13%, the switch-ing values on total costs and benefits required to reduce the net presentvalue of the project to 0% at a 10% OCC are reasonable at 23% and 19%,respectively.

Table 5.1: SENSITIVITY ANALYSIS

Assumptions /a ERR (%)Base case 1350% increase in fertilizer costs 1220% increase in all agriculture costs 1120% decrease in either average yields or averageprices 10

20% increase in either average yields oraverage prices 16

Switching values at 10% oppor- Appraisal Switching Percentagetunity cost of capital (US$) value value change /b

Decrease in benefits /c 8,245 6,699 -19%

Increase in labor costs 3,388 4,934 46%Increase in fertilizer costs 1,260 2,805 12.3%Increase in all agriculture costs 5,681 7,232 27%Increase in non-agriculture costs 1,031 2,558 153%Increase in total costs 6,699 8,245 23%

/a All values in constant 1984 US$. Based on a 2 ha smallholder model(Annex 2, Table 6).

/b The percentage change that would reduce the net present value of theproject to zero at a 10% opportunity cost of capital.

/c Caused by either a reduction in average yield or average prices or acombination of both.

Project Risks

5.18 Agricultural. The technical packages are derived from those usedsuccessfully under SRDP I and they are not subject to significant agriculturalrisks. The risk of widespread disease outbreaks is being reduced by broaden-ing the genetic base of rubber planting material, and tree densities are being

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increased and spacings made more equidistant as a means of ensuring an ade-quate stand of windfast trees during the tapping period. The inclusion ofappropriate applied rubber research under the project will help pinpoint uni-dentified project risks and allow their minimization during the project periodand thereafter. The risk of poor tapping woul.i be reduced by providing inten-sive training to the smallholders before tre . are brought into production.

5.19 Managerial. Under the proposed program, SRDP would plant a total ofabout 76,000 ha of rubber and it would produce planting materials for an addi-tional 19,500 ha. By the end of Repelita IV (April 1989) SRDP would include16 large-scale PMUs and plant or assist in planting about 26,000 ha of rubberper year, about 50% of Government's anticipated PHU rubber planting program.This is a relatively large program in relation to SRDP's previous experienceand it is possible that a program on this scale could strain implementationcapacity and reduce the quality of rubber planted. To ensure that managerialcapacity would not be overtaxed, and to take account of uncertainties in theprogram, an assurance would be sought that no work would be given to the SRDPUin addition to the agreed program, without the consent of the Bank, and a mid-term review would be jointly undertaken by GOI and the Bank during the FY87/88planting season to make changes, if necessary, in the implementation schedule.

5.20 Financial. There is uncertainty about cost recovery through creditand problems are accentuated, by the decision to recover smallholder loans incash rather than in kind. To address this problem, Government has raisedinterest rates, improved repaymect schedules, and increased incentives to BRIto participate. Further steps to increase cost recovery are also beingexplored (para. 5.10). The slow release of funds has also been a problemunder SRDP I and has caused the 1984/85 planting program to be reduced.While revised financing procedures for SRDP II, which will also be adopted forSRDP I, are expected to improve fund flows, this issue should continue to becarefully monitored by the Bank.

Environmental Effects

5.21 The project would establish food crops and tree crops in areas nowused for shifting cultivation and associated rubber production. Approximately35% of the area is in grassland (alang-alang) of otherwise low economic andenvironmental value, 25% is in brush and 38% is in a mixture of rubber jungle/secondary forest. This land is accessible and periodically cut for food cropproduction. There is a small amount of primary forest in Singkut (2%) butthis area has already been logged and divided into 5 ha blocks and is cur-rently being brought into production by the smallholders. To prevent soilerosion, land would be cleared by manual and chemical methods and terracingwould be carried out in all areas exceeding an 8% slope. Establishment ofleguminous cover crops would also reduce erosion and increase soil fertil-ity. The small quantities of chemicals used to control areas, pests anddiseases would not have any significant adverse environmental effects.

- 35 -

VI. AGREEMIENTS REACHED AND RECOMESDATION

Assurances

6.01 The following assurances were obtained at negotiations:

(a) project funds would be on-lent to smallholders on terms andconditions acceptable to the Bank (para. 3.18);

(b) four-wheel drive vehicles and motorcycles would be purchased inaccordance with a schedule agreed by the Bank (para. 3.22);

(c) the aggregate amount of work on force account would not exceed 20%of the total cost of road works (para. 3.23);

(d) separate accounts would be maintained for the project; theseaccounts and the accounts of BRI related to the project would beaudited annually by independent auditors or firms acceptable to theBank; these audited accounts and the audit reports would be submit-ted to the Bank within nine months of the close of each GOI fiscalyear (para. 3.28);

Ce) the formal transfer of PMUs to SRDP authority would be completedbefore land clearing for tree crop establishment begins in therelevant PTU, but SRDP start-up work could begin in these PMUs priorto full transfer (para. 4.04);

if) the SRDPU and PMUs would be adequately staffed (para. 4.05); and

(g) no work in addition to the agreed program would be given to theSRDPU during Repelita IV without the consent of the Bank and a mid-term review would be undertaken during the 1987/88 planting seasonto make changes, if necessary, in the implementation schedule(para. 5.19).

Condition of Effectiveness

6.02 Government and Bank have agreed that a condition of effectivenesswould be the signing of a Financing Agreement between the Borrower and BRI,and of a Sub-Financing Agreement between BRI and DGE. The Sub-FinancingAgreement would contain terms and conditions applicable to the smallholderafter loan conversion (para. 3.21).

Recommendation

6.03 With the above assurances and condition, the project would besuitable for a Bank loan of US$131 million with a twenty-year maturityincluding a grace period of five years at the standard variable interestrate. The borrower would be the Republic of Indonesia.

-. 21- s1

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f5 PMJ.ct r- April - lkref.

ANNEX 137 Ta- 7

INDONESIA

SMALLIOLDER RUBBER DEVELOPMENT II PROJECT

Proposed Allocation of Loan Proceeds(US- mimion)

Costs Source of FundsTotal/a Foreign IBRD CDC GOI

Agro-iugutsanting material 19.8 3.8 19.8 - -

Cover crop seed 2.4 0.5 2.4 - -Urea, TSP, MOP and AS 11.9 5.7 11.9 - -Other fertilizer 8.3 8.3 8.3 - -Agrochemicals 19.5 18.5 19.5 - -Ag. equipment and supplies 7.1 3.1 6.6 - 0.5

Subtotal 69.0 39.9 68.5 - 0.5

Civil WorksRoads & bridges 21.9 14.2 21.9 - -Project facilities 7.9 2.8 7.9 - -

Subtotal 29.8 17.0 29.8 - -

Vehicles & Eqipm4tFour-Wneel drive & motorcycles 2.8 2.0 - 2.8 -Trucks, tractors, spare parts 14.2 14.2 - 14.2 -Other equipment 1.1 0.7 - 1.1 -Furniture and office equipment 0.4 0.1 - 0.4 -

Subtotal 18.5 17.0 - 18.5

Smallholder Labor 50.3 0.0 12.6 - 37.7

ServicesTraining & extension material 5.3 '.0 5.3 -Technical assistance and studies 5.6 4.4 5.6Research 0.4 0.1 0.4 -Surveys & titling 3.3 0.3 - - 3.3

Subtotal 14.6 5.8 11.3 - 3.3

Overheads and Administration 23.3 3.8 - - 23.3

Subtotal 205.5 83.5 122.2 18.5 64.8

Unallocated 15.5 6.9 8.8 1.5 5.2

Total 221.0 90.4 131.0 20.0 70.0

/a Base cost plus price contingencies on base cost.

ANN(C I

-38- Table 3

INDONESIA

SMALLHOLDER RUBBER DEVELOPMENT II PROJECT

Estimated Schedule of IBRD Disbursements /a(US$ million)

IBRD Cumulative Indonesian Baukwidefiscal year disbursements tree crops tree cropsand semester US$ Z

FY86First 1.0 1 2 3Second 5.2 4

FY87First 7.3 6 12 13Second 21.1 16

FY88First 28.3 22 29 27Second 47.1 36

FY89First 56.3 43 50 45Second 76.8 59

Year 90First 86.8 66 68 62Second 108.4 83 - -

Year 91First 120.2 92 79 76Second 131.2 100

Year 7 and beyond - - 21 24

/a Closing date - June 30, 1991.

-39- ANNEX ITable 4

INDONESIA

SMtALLHOLDER RUBHER DEVELOPMENT 1I PROJE.T

Breakdown of Areatw to he Planted and Matntained

Total Total to he Total86/87 87/88 88189 89/90 SRDP 1[ lmintained managed by

Year Area SRDP I PrO I Stngklut PHU Ii PRJ III PMU IV planting by SRDP It SRDP IE

80181 S. Sumatra 1,000 5001Lau 2,127 1,000U. lKLtimantAn 939 -

qubtotal 4.a66 1.500 -

81/82 S. Sumatra 1,540 7511 750 2,290Rtinu 2,000 3,250 1.350 5 5,250 _

W, Yaltmantan 2,160 - n 2,16o

Subtotal 5,700 4,000 2,o10 9.700

r2/X3 S. Sumatra 1 .89 : 7511 21,') 75*1 685 3,65nXtRiu 2,735 1,250 - 5 700 255 - 4,685 -

W, Kalimantan 4,240 400 - 250 220 4,890

Subtotal 8,865 2,400 260 ; 1,700 1,160 13,225

83/84 S. Sumatra 2,300 - 340 , - - - 2,640luau 2,150 450 - - - - - 2,600W. Kalimantcn 3,35n - - * - - - 3,150

Subtotal 7,800 450 340, 8.590

84/85 S. Sumatra 1.55n - - -- - 1,550XtRU 2,300 - - -; - - - 2,300 -U. Kalimantan 2,150 - - - 2 - - 2,150

Subtotal 6,000 - - 6.no

85/86 S. Sumatra 2,1511 - - - - .- - 2,150Itia 3,150 _ _ _ - _ _ 3,150V. Katimanctn 2,950 - - - - - - 2,950

Subtotal 8250 - .250

86/87 S. Smwatra 2,n50 2.250 1,50 so R0 800 480 5,800 2.080Riau 3,550 2.250 - 800 320 480 ; 5,800 1,600W. Kaltsantan 2.900 2,250 - I 320 120 32n 5,150 960

I I

Subtotal 8,500 6,750 1.500 I's20 1.440 1.280 16,750 4.640 67.115

87/88 S. Sumatra 2,200 2,500 2,500 1,00. 1,200 7211 8,200 1,920Uau 2,150 2,500 - I,n00 5610 720 5.650 1,280U. Kalimantan 3,1503 2,500 - 1,000: 560 720 6,650 !,280

Subtotal 7,500 7,son 2&500 hoo0 2.2 2 160 20s500 4,480 92.100

88/89 S. Sumatra - 2,000 2,500 1.5011 1,nOf * 720 7,non 720RLaaz 2,000 2,000 - 1,500 1,0OO 720 6,500 720U. KIllmantan 2,n00 2,000 - 1,500 1,000 960 6,5n0 960

Subtotal 4.000 6,non z,5oo 4.500 3ooon, 2.400 2n.noo 2,400 114.500

89/90 S. Sumatra - 1,750 - 2,00,n 1,5on 1,noo 6,250Ulau - 1,750 - 2,000 1,500 1,000 : 6,250 -Wl. Kaltmantan - 1,750 - 2,n0o 1,500 1,000 i 6,250

Subtotal - 5,250 - 6,000 4,500 3,000 O 18,750 - 133,250

Total 60,700 33.850 7,100 19.200 12,400 8,800 I 76,nOn 57,25n 133,250(approx.)

/a Heetares between /a and /b are maintained hy SROP 11.7i; weetares below thla ltne arc entablished by SROP It.

ANNE[ 1- 40 - Table 5

INDONESIA

SMALLUOLDER RUBBER DEVELOPMENT II PROJECT

Technical Assistance Tables

Manmonths Required

85/86 86/87 87/88 88/89 89/90 Total

By Type of Recruitment TypeExpatriate - in firm A 42 42 30 24 12 150Expatriate - individual B 54 54 54 36 12 198Domestic recruitment C 0/b 48 48 48 48 192

Total 84 144 132 108 72 540

By TaskTechnical Advisors/a A 36 36 24 24 12 132Monitoring & Evaluation B 12 12 12 0 0 36Training & Extension B 24 24 24 12 12 96Financial Advisor B/C 12/0 12/12 12/12 12/12 0/12 96Qualified Public Accountants C 0/b 36 36 36 36 144Unallocated A/B 0 12 12 12 0 36

Total 84 144 132 108 72 540

/a Rubber production, marketing, nursery development and food crops./b 36 mm to be provided under SRDP I.

ANNEX 2- 41 - Table 1

INDONESIA

SMALLHOLDER RUBBER DEVELOPMENT II PROJECT

Financial and Economic Prices for Urea and TSP(1984 constant values)

1984-87 1988-92 1993+

UreaFinancial farm-gate price (RpIkg) Ia 100 112 150

Derivation of economic pricesFOB Europe (USs/ton) /b 180 259 269Plus transport to ex-factory Palembang

(US$/ton) 15 15 15Ex-factory (US$/ton) 195 274 284Ex-factory (Rplkg) /c 195 274 284Plus storage and distribution to

farm-gate (Rp/kg) 15 15 15

Farm-gate economic price (Rp/kg) 210 289 299

TSPFinancial farm-gate price (Rpfkg) /a 100 112 150

Derivation of economic pricesFOB Florida (US$/ton) /b 145 176 176Plus transport to warehouse (US$/ton) 34 34 34Ex-warehouse (US$/ton) 179 210 210Ex-warehouse (Rp/kg) /c 179 210 210Plus storage and distribution to

farm-gate (Rp/kg) 15 15 15

Farm-gate economic price (Rp/kg) 194 225 225

/a 1984-87 estimated financial prices are current actuals; thereafter, theyrepresent mission's assumptions as to a gradual phasing out of sub-sidies. 1993+ figures correspond to assumptions in the Second SwampReclamation Project.

/b From EPD projections, adjusted by Manufacturing Unit Value Index to 1984values.

/c US$1.00 = Rp 1,000.

ANNEX 2- 42 - Table 2

INDONESIA

SMALLHOLDER RUBBER DEVELOPMENT II PROJECT

Financial and Economic Prices for Rubber(1984 constant values)

1985-87 1988-92 1993+

RubberFinancial PricesRSSI, CIF NY (t/kg) Ia 124 143 148RSSI, FOB Jakarta (k-g) /b 110 127 132SIR 20, FOB Jakarta (W/kg /c 91 106 110SIR 20, FOB Jakarta (Rp/kg)fTd 914 1,057 1,095SIR 20, ex-fttcaory (Rp/kg) fei 887 1,025 1,062SIR 20, farm-gate (Rp/kg) /f7 567 656 744

Economic PricesSIR 20, financial farm-gate (Rp/kg) 567 656 744Plus taxes /L 53 62 64SIR 20, economic farm-gate (Rp/kg) 620 718 808

/a From EPD projections, adjusted by MUJV to constant 1984 values.

/b Less 11% of CIF NY for shipping.

.c Less 15% of RSSI CIF NY for being inferior quality.

/d US$1.00 - Rp 1,000.

/e Less 3% of rOB Jakarta for charges from factory to port.

/f Transport, processing, taxes and middlemen assumed to take 36% of ex-factory (1985-92) and 30% of ex-factory (1993+).

/g 6X of ex-factory.

43 ANNEX 2Table 3

INDONESTA

SMALLHOLDER RUBBER DEVELOPMENT II PROJECT

Estimated Rubber Production('000 tons of dry rubber)

Area established prior to project Area established under the project TotalEx- PNU Sing- PMU II, Sub- Main Other Partially- Sub- rubber

Year /a SRDP I I /b kut /c III, IV /c total PMU /b PMUs /c assisted total production

1986 2 - - - 2 - - - - 21987 6 1 - 0 7 - - - - 71988 12 3 - 3 18 - - - - 181989 20 6 0 6 32 - - - - 321990 28 8 0 8 44 - - - - 441991 42 9 1 9 61 - - - - 611992 44 9 1 12 66 7 - - 7 731993 49 10 1 17 77 20 1 1 22 991994 53 11 1 22 87 35 6 1 42 1291995 56 12 1 25 94 47 14 4 65 1591996 59 12 1 26 98 50 18 5 73 1711997 60 12 1 26 100 59 24 11 95 1951998 59 12 1 29 101 66 27 13 106 2071999 58 12 1 29 100 71 29 15 115 2152000 56 11 1 30 98 76 32 17 125 2232001 54 11 1 30 96 77 35 18 130 2262002 52 11 1 29 93 77 36 19 132 2252003 50 10 1 28 89 75 36 20 131 2202004 48 9 1 27 85 73 35 19 128 2132005 45 9 1 26 81 71 34 19 124 2052006 43 9 1 24 77 68 33 19 120 1972007 41 8 1 23 73 65 32 19 116 1892008 39 7 1 22 69 63 30 18 111 1802009 36 7 1 21 65 60 29 17 106 1712010 34 6 1 20 61 57 28 16 101 162

/a Project year, April-March.

/b Large-scale PMUs.

/c Small-scale PMUs.

INDONESIA

SMALLHOLDER RUBBER DEVELOPMENT II PROJECT

Intercropped Rice Production(Fully participating farmers)

1986/87 /a 1987/88 1988/89 1989190 1990/91Net area Paddy Net area Paddy Net area Paddy Net area Paddy Net area Paddyinter- produr.- inter- produc- inter- produc- inter- produc- inter- produc-cropped tion cropped tion cropped tion cropped tion cropped tion(ha)/b (tons)/c (ha) (tons) (ha) (tons) (ha) (tons) (ha) (tons)

Prabamulih (South 713 820 1,242 1,428 510 586 - -Sumatra)

Teluk Kuantan (Riau) 1,108 1,274 1,409 1,620 1,071 1,232 416 478 - -Lubuk Linggau (South 648 745 1,152 1,325 1,056 1,214 888 1,021 336 386Sumatra)

Pasir Pangaraian (Riau) 581 668 1,032 1,187 946 1,088 796 915 301 346 >Singkut (Jambi) 540 621 1,260 1,449 1,500 1,725 600 690 - -

GCC areas/dS. Sumatra - - 348 400 1,102 1,267 2,146 2,468 1,044 1,201Riau - - 420 1;83 1,330 1,530 2,590 2,979 1,260 1,449W. Kalimantan - - 72 83 228 262 444 511 216 248

Total 3.390 4.128 6.935 7.975 7.743 8.904 7.880 9.062 3.157 3,630

/a Project year April-March.

lb Assumes 60X of gross rubber field intercropped in first year and 40X the second.

Ic Paddy yield is assumed as 1,15.0 kg/net ha. Conversion ratio paddy:milled rice - 100:60.

/d Small-scale PKUs,.

mx

ANN 2-45 Table5

INDONESIA

SMALLHOLDER RUbBER OEVELOPMENT lI PROJECT

T9pical Fare Uudg!lt Ia--9T84 c*;natant vaium;5w

/b /b0 1 2 3 4 5 6 7 8 9 10-19 2O-30

IncomeHarvested area (ha)

Rubber (lot ha) - - - - - I I I I I IRubber (2ad hr) - - - - - - - - 1 1Rice 0.6 0.4 0.6 0.4 - - - - - - - -Other 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3

Yield (kg/ha) i:Rubber (1st ha) - - - 400 800 950 1.100 1,400 1.000Rubber t2nd ha) - - - - 400 goo 1,300 1.00nRice 1,ls5 1,lso 1,150 1,150 - - - - - - - -

Production (kg) /cRubber - - - - 400 800 1,350 1,900 2,70n 2,000Rlce 690 460 690 460 - - - - - - - -

Price (tRpkg) /cRubber - - - - 650 650 750 750 750 75nRice 165 165 165 165 - - - - - - - -

Gross value of pro-duction (Rp'OOO)

Rubber - - - - - 260 520 1,013 1,425 2,063 1,500Rice 114 76 114 76 0 0 0 0 0 0 0 0Other crops 100 100 100 lnO 10O 100 100 100 100 ino 1no inn

Subtotal 214 176 214 176 100 100 360 620 1.113 1,525 2,163 1.600

Other incomeCash payments for

project work 125 117 186 147 89 58 28 28 - - - -Non-project income 300 400 300 400 450 450 300 300 200 200 200 200

Subtotal 425 517 486 547 539 508 328 328 20n 200 200 200

Total Income 639 693 700 723 639 608 688 948 1,313 1.725 2,363 1.800

ExpensesCash expenditures forproject worksRubber 20 20 20 20 20 20 76 76 152 152 152 152Rice /d 40 27 40 27 - - - - - - - -

Sibtotal 60 47 60 47 20 20 76 76 152 152 152 152

Other cash expenditures re-lated to Incone-producingacttvities /e 45 60 45 60 68 68 45 45 30 30 30 30Debt *ervice paynents /f - - - - - - 0 114 223 314 454 0TMXes 5 - - - - - - 8 16 30 43 60 40

Total Expenses 105 107 105 107 88 g8 129 251 435 539 696 222

Net Incoee 534 586 595 616 552 521 559 697 878 1,186 1.667 1,578

Estisated net incomewithout project 600 600 600 600 600 600 600 600 600 600 6no 600

Net IncrementalIncome -66 -14 -5 16 -48 79 41 97 278 586 1,067 978

/a For South Sumatra, no terracing, 2 years' intercropping, .uallholder to pay 122 interest on a 20-yearloan, with a 7-year grace period.

/b Average.7c No yield, production or price given for "Other Crops". See "Cross Value".Td 35% of farmgate value.i 15% of non-project tncome.fT 22Z of gross rubber income.

T7 32 of gross rubber income.

AIIIII 2Seble 6Pa" I of Z

INWlDtSIA

SlALLllOLDit RISIIU DrnLoruT 11 7RW1CT

Calculation of U /oLIp thousand)

Yeart 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 It 16

Land Clearinx CostsLabor 99 - 9other 8 - 6 - - - - - _ _ _ - _ _ _ _ _

Subtotal Lend Clearing 683 -- -eS Z Z - Z -

Planting and IlnlteasneeLabor 232 144 322 195 138 99 248 248 448 448 438 448 4U 43 4U6 44 448rertilinet 77 83 137 153 143 133 143 145 120 120 120 120 120 120 120 120 120other 162 22 l8t 62 69 107 78 101 67 6? 6? 67 67 67 67 67 67

Subtotal Planting 4 Maintenance 47J 249 646 410 350 361 469 494 635 635 63S 635 635 633 633 635 635

hI!nsrilewlturd Costs"Oldn /b 82 82 82 62 20 20 20 20 20 20 20 20 20 20 20 20 20Project facilities /e 20 20 20 20 2 2 2 2 2 2 2 - - - - -Vehbiles end equipeent so so so 30 -Hopping. tranelnl 6 tech. asilstance 17 17 39 17 3Overleads /o 63 33 61 27 25 11 14 4 4 4 4 4 4 4 4 4 4lend certification - - - 44 - - - - -

Subtotal NosgrTieulturel 232 202 232 240 54 47 !2- L6 2e 3J 26 26 26 26 24 24 24

Totel SIoI Costs t ha) Lecludina

F rIe1Col Centenelea a88m 451 1 083 650 404 408 502 30 661 661 61 661 661 661 659 659 659rhyelCal e-orttlyenelo /re La 3-4 2W IT -S T -I -w SO a so - so SO -

total Sift Cost(2 ha) Includinahyscale Contisnencies 9335 483 1.165 699 433 639 540 J1 711 7t 711 7I3 13 731 131 709 705 704

Prlc 4p/kg) /faraygate for 33D1 639 639 839 713 73 738 718 718 718 S0? 807 5T7 *07 So? Sol 30? 507

Rubbor Yields (t4hsa) LLlot heSDP - - - - - - 400 800 9350 11000 3,300 3,300 13400 1.500 1.300 13500 134502nd ha IMP - - - - - - - - 400 800 950 1,100 1.100 13300 1.400 13500 13300

Total Prodgletieo - Z Z Z Z 400 800 1.350 JLOO_ 2I050 2.400 2.S00 2.0 2.900 3.000 2.730

SotelIDTiit2 ha) : : : : - : 287 374 9659 1.533 1.654 1.937 2.03 2.260 2.340 2.421 3.8

not isnefit (2 ha) SDF 955 - -1.165 -699 -435 -439 -253 4 258 822 943 1.226 1.307 1.549 1.31 1.712 I.t72

La Based on a I ha seitholder new plantlo. odel tLth neeand ha pioted 2 years after tla first, enludi$ iatecevoppioR with trice. 2ouoec costs aed bsflits expreesedl constant 1984 leplb. Conversion f(eters to derive sconoiec costs sre as follpeis geersl project cost. - 0.80; labor - 0.60; vehicles and * quipent * 0.83; civIlworke * 0.60. SpeetIic calculations line been made for the econmie prices of fertillter and robber (Sea Annex 2, Table 1-2). OUI1 * 4 1,000.S 3tarttng In Year 3 uIntenunce of rude ass*o d to be 62 of lestment costs per yeer tbroughout project life.

/e tarting In T"r 4 uaintenence of facilities asseued to be 22 of lovesFtent costs for 10 yeare.j For TSers 0-7. calculations are for ectmel antemleo plus other ovevhd costs, until all trees ready to be tapped. A further strem of 332 of the final Imature year Is

*eouad to continue for 10 years to represent reduced extension work after the trees are macore./e 52 ft bose coats

7 Prlce per bilo for D3C.i Uloe of eUC per hectare.

oteal Inutrnl rateo of returm of not strea * 131.

0

Year: 17 38 19 20 21 22 23 24 25 26 27 2R 29 30 31 32-33 Totalx

Land Clearing CostsLabor - - - - - 198Other - - - - - - - - - - - - - - - - 172

Subtotal Land Clearing - - Z Z. 370

Planting and MAintenancetebor 448 448 448 448 448 448 448 448 448 448 448 448 448 *48 448 224 12,826Fertil Ier 120 120 120 120 120 120 120 120 120 120 120) 120 120 120 120 60 4,036Other 67 67 67 84 84 84 84 84 84 84 84 84 84 84 84 34 2,464

Subtotal PlantinS A Ma-adenance 635 635 635 635 635 635 635 635 635 635 635 635 635 635 635 318 19,326

Ro ct l 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 928Project lacilitiea /c - - - - - - - - - - - - - - - - 100Vehtcles and equipient - - - - - - - - - - - - - - - - 200happing, trainiig & tech. aselstance - - - - - - _ _ - _ _ _ _ _ - 95Overiead. / - - - - - - - - - - - - - - - 301Land certification - - - - - - - - - - - - - - - 67

Subtotal Nonsgricultural 24 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 928 11.

Total SQOP Cost 2 ha ExcludingPhysical Cor.t ences - 659 655 655 655 655 655 655 655 655 655 655 655 655 655 655 338 21,387

Physical Contingencies /s 50 50 50 50 50 50 50 50 SO 50 50 50 50 50 50 26 1,617

Total SRDP Costa (2 ha) IncludingPhysical Contingenctes 709 705 705 705 705 705 705 705 705 705 705 705 705 705 705 364 23,004

Prices (Rp/kg) /LFarmgate for SlOP 807 807 807 807 807 807 807 807 807 807 807 807 807 807 807 807 26,460

Rubber Yielda (k4/ha) /RIct hi SRDP 1,400 1,150 1,300 1,250 I,ZO0 l,150 1,100 1,000 950 900 850 800 750 700 700 - 28,4002nd ha SROP 1,500 1,450 1,400 1,350 1,300 1,250 1,200 1,150 1,100 1,000 950 900 850 800 750 700 28.400

Total Production 2,900 2j,00 2,700 2.600 2.S00 2,400 2.300 2LI50 2,050 1190 1.800 1.700 1,600 1500 1,450 700 56,S00

Production Valuetotal SRDP (2 ha) 2340 2.260 2j179 2098 i018 1.937 1.856 1_735 j,654 1,533 1.453 1,372 Jj291 1,211 1,170 565 45,611

het Benefit (2 ha) SRDP 1,631 1,555 1,474 1,394 1,313 1,232 1,152 3,031 950 829 748 667 57 506 466 201 22,607

September 28, 1984

0

1t400tWSI A

5uo ER RU615ER DEVELOPMENT 1t PPOJECT

Iculjjon. of Coot Re yaver Index /a(Rpd5iY)

Total 0 t 2 3 4 5 6 7 8 9 10 I3 12 13 34 15 I6

COX OUTFLQWSCredit expenditures - bass coato 3,121 656 200 803 396 315 351 200 200

Subtotal - Credit Expenditures 3.358 706 215 86 426 339 378 215 23 0 O & o a . . .tnclud. physecal contingencies Lb

premont value of credit outflows at a 102 OCC 39.

Noneredit expenditures - base costs b3b 295 259 125 55 40 31 14 17 - - - - - - - - -Fertilaer subsidy (tinancialt to Year 6) 83 3 10 15 l5 t5 l5 tO - - - - - - - _ - _

Subtotal - Non-credit expenditure ncl. 989 21 289 151 75 59 49 26 t8 0 0 0 0 a O O . Ophysical contingencies /b

Present value of noncredit outflowa at a 30% OCC 782

Total GOI Outflows In Constant 19814 Values 4 347 j,927 505 t.05 501 398 427 241 233 0 o a a a o a a aPresent value of total outflows at a 102 OCC 3,176

COI INQ~OWSSiiii1older rubber yields (ig) 56,600 - - - - - - 400 800 1,350 1,900 2,050 2.400 2,500 2,800 2,900 3,000 1,950Faregete financial price (Rp/x) - - - - - - - 650 650 750 750 750 750 750 750 750 750 750 ;Gross Income from rubber '000 Rp) 41,955 0 0 0 0 0 0 260 520 1,033 1,425 3,538 I,800 1,875 2,300 2,375 2,250 2,213DObt service for years 7-l9 assainn 5.106 0 0 0 0 0 0 0 134 223 334 338 396 413 462 479 495 487

smallholder pays 221 of gross rubber income c

Present value of debt service at a I0 OCC C10Q

Seatlholder taxes ass5nin smallholder pays 1 259 0 0 0 0 0 0 a 36 30 43 46 54 56 63 65 68 663X of gross rubber income

Present value ot taxes at 1OX OCC 226

Total 001 Inflows in Constsnt 1984 Values 6 364 Q a a O 0 1 330 253 356 384 450 1 525 544 563 553

Present value of total 001 Inftlowe - I0 OCC 3.527

COST RECOVERYnCUlATsOIMeasured in constant 19Ba valuesi

Total inflows/total outflows 146XCredit lnflo/wa credit outtlows 1522Credit inflows/total outflows 1172Taxes/total outflows 19X

Measured In present value teras vith all flowsadjusted for inflation and further adjustedat a 102 OCC

Total Inflows/totel outflows 481Credit Inflows/ credit outflows 54XCredit Itnlowe/total outflows 41XTaxes/Total outtfows 72

17 18 I' 20 21 22 23 24 25 26 27 28 29 30 31 32 33

COI OUTFLCIWS - CONSTANT 1984 VALUESCredit expend.I.ue an cots - - - - - - - - - - - - -- - -

Subtotal - Credit Expendttures - - 0 0 0 0 0 0 0 0 0 0 0Includ. Physical Contingencles /b

Noneredit expenditures - bass costs - - 0 0 0 0 0 0 0 0 0 0 0Fertilizer subsidy (financiall to Year 6) - - 0 0 0 0 0 0 0 0 0 0 0

Subtotal - Non-eredilt expenditure Incl 0 0 0 O O O O Q O O Ophysical contingencies /b

Total GOI Outflows In Constant 1984 Values O O O O O O O O O

Present value of total outflows at a 0OX OCC - _ - _- - -_

00! INFLOWSSmaliholder Rubber Yields (kg) 2,900 2,800 2,700 2,600 2,500 2,400 2,300 2,150 2,050 1,900 1,800 1,700 1,600 1,500 1,450 700 700Ferugate financial rate (Rp/kg) 750 750 750 750 750 750 750 750 750 750 750 750 750 750 750 750 750 aGross Income from rubber ('000 Rp) 2,175 2,100 2,025 1,950 1,875 1,800 1,725 1,613 1,538 1,425 1,350 1,275 1,200 1,125 1,083 525 52S '°

Debt servtce for years 7-19 assumin5 479 462 446saallholder pays 222 of gross rubber income /j

Ssallholder taxes assuming osaliholder pays 65 63 61 59 56 54 52 46 46 43 41 38 36 34 33 16 1632 of gross rubber Ineon

Present value of taxes at a I02 oCC - - - - - - - - - - - - - - - - -

Total GO0 Inflows In Constant 1984 Values 544 525 506 59 56 54 52 48 46 43 41 38 36 34 33 16 16

/a lamed on a 2 ha sasllholder new planting model with the second ha plented 2 years after the first, excluding Intercropping with rice. Financial costu and benefits expressed in constant1984 Ruptah. US$1.00 - IRp 1,000.

lb Fhysical contingencies 8X of base costs.

I/ Based on a 12X interest rate, a seven year grace period and 13 years to repay. Interest to be waived for the first 3 years, accrued for the remainder of the grace period and capiteuitedat the end of the grace period.

!EIr1

_ 50 _ ANNEX 350 Pa~~~~~~fgel

INDONESIA

SMALLHOLDER RUBBER DEVELOPMENT II PROJECT

Financing Arrangements

SRDP II Financing Arrangements

1. Smallholder Terms

(a) The interest rate will be 12Z with 7 years grace and 13 yearsscheduled to repay.

(b) Interest until loan conversion (at the end of year 3) wili bewaived.

(c) Compound interest will accrue after loan conversion and will becapitalized at the end of the grace period.

(d) Smallholders will make monthly payments.

Ce) The actual repayment schedule will not be calculated on a levelpayment basis, but according to a model of what the farmer canafford, as yields will be low in the early years of repayment. TeamMhusus, together with MOF and BRI, will be responsible for determin-ing the formula to be used for calculating the smallholder repaymentschedule. This is expected to correspond to approximately 20-25% ofthe farmer's gross income from rubber.

(f) Procedures will be determined for what happens in case of disastrousfield conditions, weather or poor performance by the farmer. MOF ispreparing a paper on this subject and it is possible such problemswill be handled on a case by case basis.

2. BRI's Role

(a) BRI will be an executing bank.

(b) BRI's cost of funds for the IBRD financed portion of the creditcomponent will be 9.9%, approximately the same as the IBRD interestrate when invitation was issued for negotiations. GOI will bear theforeign exchange risk.

(c) BI liquidity credits will be lent to BRI at 31.

{d) The maturity for both the IBRD money on-lent to BRI and the BIliquidity credits will be 20 years with 7 years grace on principal.

(e) MOF will pay BRI a 14X subsidy until the end of year 3 (the time ofloan conversion), and a 3.51 subsidy thereafter on principal and

- 51 - ANNEX 3Page 2

accumulated interest. This 3.5% subsidy plus the 12% interest ratepayable by the smallholder may be considered a total interest rateof 15.5%.

(f) BRI will bear 25% of the risk for loans that are converted. Theremaining 75% will be shared 37.5% by MOF and 37.5% by BI. In SRDPI it is MOF 70% and BI 5%. As in SRDP I, ASKRINDO, the governmentinsurance agency, will not be involved. Insurance will be paiddirectly by MOF and BI, and no premium will be charged. Detailedprocedures of how MOF and BI will pay BRI for their share of therisk still need to be determined.

(g) BRI, MOF and DGE will agree on the criteria to be used in decidingif the loan to the farmer will be converted. Although BRI willstill have the right to refuse conversion, in practice the actualdecision will be made by a committee consisting of representativesof BRI and the project agency. If the loan is not converted, BRIwill bear no risk and MOF will repay BRI for the principal disbursedso far.

Revised SRDP Financing Procedures

3. In order to overcome the existing fund release problems for SRDP Iand to insure a smooth release of funds for SRDP II, the following procedureshave been or will be adopted.

4. World Bank Prefinancing

(a) This will be financed directly from an account receiving generaltreasury revenues instead of from the export commodity fund (DTE).

Cb) SRDPU will still send only one accountability report (SPJ) to theDirectorate General of Internal Monetary Affairs (DGDMA) coveringboth MOF's non-credit component and prefinancing for both the WorldBank credit and non-credit components. DGIMA will separate the MOFand World Bank portions. After review by DGIMA, the World Bankprefinancing portion will be submitted to the Directorate General ofBudget (DGB) which will release the funds. Since the SPJ willalready have been reviewed by DGIHA, no additional review by DGB isrequired.

'. MWF Non-Credit Financing. This will continue to be financed fromDTE. Due to the low level of export taxes which were originally designed tofund DTE, there have been problems with insufficient funds in the DTE inrecent years. MOF is committed to making regular subventions shouldshortfalls continue to occur.

ANNEX 352 - Page 3

6. BI/BRI Credit Component

(a) There will be a one time special procedure to "catch-up" theunreleased funds for SRDPI. For 1980/81, 1981/82, 1982/83 and1983/84 SRDPU will complete a special accountability report (LPJ)and send it to BI/BRI. BI/BRI will then release funds to theproject according to the amount of the LPJ itself. Among otherthings, this means that SRDPU will be permitted to submit the LPJfor activities carried out for which it never actually receivedprefinancing. Although this is not the usual procedure it will bepermitted in this special case.

(b) There will be a clear instruction from BI to BRI that an LPJ needonly account for 80Z of a previous funds release.

(c) Starting in FY84/85, first and second quarter funds will be releasedautomatically each year without LPJs from the project for the newplanting. For maintenance of previous planting LPJs will still berequired for the third and fourth quarter of the previous year. Forrelease of third and fourth quarter funds LPJs for the first andsecond quarters will still be required as per BI regulation15/776/UKU/KPt of January 18, 1983.

_53 - ANNEX 4Page l

INDONESIA

SMALLHOLDER RUBBER DEVELOPMENT II PROJECT

Statements of Expenditure

General

1. Statements of expenditure would be used for Bank disbursementagainst the following items:

Item Loan Amount(US$)

(a) Planting material 21.0 million(b) Training 5.4 millionCc) Research 0.4 millionCd) Farmer labor payments 13.0 million(e) Road construction on force account 5.0 million

Total 44.8 million

2. Prior to the year of implementation the SRDPU would submit unitcosts for training, farmer labor payments and road construction to BAPPENASfor approval. They would also submit the cost of planting materials (based onthe previous year's cost) and a program of research to be carried out onfarmers' fields. These costs, reviewed and agreed by BAPPENAS would serve asthe basis for budgeting and SOEs would be based on actual expenditures andsubmitted quarterly. The Bank would disburse 100% against all expenditurescovered by SOEs except for farmer labor payment against which it woulddisburse 25%.

Detailed Features

3. Planting material will be produced in PMU nurseries in the yearprior to field establishment. The SRDPU will maintain a record of the cost ofnursery inputs (seed, fertilizer, labor) and determine the cost of productionper stump. Disbursement would be made on the basis of quarterly statements ofexpenditure indicating the numbers of hectares planted, planting density andcost per stump.

4. For training and study visits the SRDPU will maintain documentationon the costs of travel, housing, training and follow-up for each type of staffmember or farmer to be trained. This information will be used to determinethe cost of training staff or smallholders. Disbursements will be made

ANNEX 4Page 2

against quarterly statements indicating the number of people trained, the typeof training and the unit cost.

5. The SRDPU will develop a program of applied research to be carriedout on farmers' fields and they will produce a quarterly budget for this workto be reviewed and approved by BAPPENAS and submitted to the Bank prior toeach fiscal year. Disbursment will be made against quarterly statements ofexpenditure accompanied by certification from the SRDPU manager that the workhas been carried out.

6. Disbursement for farm labor payments will be made on the basis ofquarterly SOEs indicating the unit rate for each type of work approved byBAPPENAS and the number of farmers carrying out this work within eachprovince. In the auditing process, PMU records would be checked against BRIrecords of payment to SRDP smallholders.

7. Standard construction rates per km for roads constructed on forceaccount will be reviewed and approved by BAPPENAS at the beginning of eachfiscal year. Unit rates would be based on prior year's costs and the cost ofsimilar work on contract. Disbursements will be made against quarterlystatements indicating completed length and agreed unit costs. Quarterlywithdrawal applications would be accompanied by a certificate from the PPW orsupervising engineer that prior work has been completed properly.

Implementation

8. Technical assistance for project accounting and SOE preparation wasprovided under SRDP I and this would be continued under SRDP II. To cope withthe expanded work load resulting from the addition of new P(Us, the projectalso provides for three qualified public accountants to be hired as consul-tants and stationed in each of the project provinces. These finance andaccounting specialists would work with training staff to develop a trainingprogram for PMU staff on bookkeeping and accounting. SOEs would be subject toregular Government audit which is acceptable to the Bank. With these stepsthe SRDPU would be capable of maintaining the required accounts.

-5 - ANNEX 5-- 55 ~Page 1

INDONESIA

SMALLHOLDER RUBBER DEVELOPMENT II PROJECT

Project Area Characteristics

1. Location. The project is located in the three SRDP I provinces:South Sumatra, Riau and West Kalimantan. It also includes one area in thesouth of Jambi Province. Within the target provinces, project areas fall intothree categories: (i) areas involved in SRDP I - Teluk Kuantan (SouthSumatra), Prabamulih (Riau) and Anjungan kWest Kalimantan); (ii) areas underlarge-scale PMUs which will be absorbed into the SRDP program in the firstyear of the proposed project - Lubuk Linggau (South Sumatra), Pasir Pangaraian(Riau) and Sambas/Sanggau Ledo (West Kalimantan); and (iii) areas associatedwith small-scale PMUs which will be consolidated and brought into the programin years 2, 3, and 4, of the project. There are 16 small-scale PMUs in eachproject province, of which at least 12 would be absorbed into the SRDPprogram. These areas would be precisely defined by studies to be undertakenin tbe first year of the project. Project areas and PMU locations are shownin the attached maps.

2. A detailed description of SRDP I areas is given in the SAR for thisproject (Cr. 984-IND) and is not repeated here. Of the SRDP II areas, LubukLinggau in South Sumatra is located along the Trans-Sumatra Highway withinMusi Rawas District near the Jambi provincial boundary. It is approximately200 km northwest of the provincial capital, and 160 km northwest of the SRDP Iheadquarters at Prabamulih. There are 16 small-scale PHUs in South Sumatrascattered mainly in the central area of the province. Two PMUs located on theisland of Bangka would not be included in the project. Pasir Pangaraian inRiau is located in the Kampar District near the boundary of West SumatraProvince approximately 135 km northwest of the provincial capital and 200 kmnorthwest of the SRDP I headquarters at Teluk Kuantan. The 16 small-scalePHUs in Riau are widely scattered throughout the province and three are onoffshore islands. Sambas/Sanggau Ledo is in the Sambas District of WestKalimantan and extends from Anjungan, covered under SRDP I, to Sambas some 70km to the north. It is approximately 150 km north of the provincialcapital. The 16 small-scale PMUs in West Kalimantan are scattered throughoutthe province. Singkut is in Jambi Province near the boundary of South SumatraProvince and approximately 175 km southeast of the provincial capital. Itfalls within the area described for the second Bank-assisted TransmigrationProject (Loan 1707/Cr. 919-IND)

3. Climate. In all project areas, the climate is classified as lowlandwet tropical. Rainfall is generally within the range of 2,000-3,000 am perannum with favorable seasonal distribution. The rainfall patterns and averagetemperatures, relative humidity and sunshine duration are all appropriate forsuccessful cultivation of rubber and a range of smallholder food crops. Datafrom provincial meteorological stations are summarized in Table 1. Althoughthe small-scale PMUs will be in areas exhibiting a range of climatic charac-teristics, all areas have climatic conditions suitable for rubber establish-ment.

ANNEX 5- 56 - Page 2

Table 1: CLIMATIC CONDITIONS IN PROJECT AREAS

Rainfall Annual Average Relative WindArea mm/year raindays temp. CO humidity velocity

(knots)

Lubuk Linggau 2,685 145 24.6 81.2% 4.8Pasir Pangaraian 2,624 125 26.4 83.7% 5.5Sambas/Sanggau/Ledo 2,822 137 26.0 84.8% 4.4Singkut 2,889 - 26.3 84.0% 3.2-4.9

4. Soils. Land selected for rubber planting is predominantly of theyellow podzolic type with the balance being red and brown podzolics, latosolsand lithosols. Although areas of alluvial soils were originally earmarked forinclusion in the Sambas sub-district in West Kalimantan, these have beeneliminated because of the high watertable. Soil depths and structures withinthe main project areas are generally suitable for rubber and the envisagedintercrops; however, poor soil fertility resulting from heavy leaching willnecessitate substantial fertilizer application and timely establishment ofleguminous cover crops. Soil characteristics in the small-scale PMU areaswill require further investigation prior to development.

5. Topography and Land Suitability. In all the new project areas thereis adequate land of suitable altitude, drainage and slope for successfulrubber cultivation. Drainage is fair to good except in some alluvial flatswhich have been excluded from the project. The relative susceptibility of allareas to soil erosion will necessitate early establishment of a creepingground cover, silt pits in gently sloping areas and terraces where slopesexceed 12% (7 ). An estimated 40% of rubber areas will require terracingexcept in Sambas/Sanggau Ledo where allowance is made for 100% terracing. Liareas remaining to be planted to rubber in SRDP I areas, Prabamulih, TelukKuantan and Anjungan, it is estimated that 20%, 40% and 100% respectively,will require terracing. The topographical characteristics of the PMU areaswill be investigated further before upgrading and expansion.

6. Population and Land Use. Data on smallholder farm size, family sizeand income in project provinces is summarized in Table 2 and detailedinformation on the population and land use in new PMU areas is summarizedbelow.

ANNEX 5- 57 - ~~~~~~Page 3

Table 2: SUMMARY INFORMATION ON SMALLHOLDER FARMERS INPROJECT PROVINCES, 1981

EightSouth West province

Riau Sumatra Kalimantan total

Number of respondents 101 101 112 657Average farm size (ha) 3.8 6.4 6.0 5.3Average amount of rubber (ha) 2.8 5.1 2.9 3.7Rubber as % of total farm 74% 80% 48% 70%Percent with less than 4 ha rubber 83% 59% 79% 74ZAverage family income (Rp 'OOO/US$) 423 454 604 516Average income from rubber (%) 28% 41% 23% -Percent farmers with 2onl rubberincome 10% 30% 1Z 11%

Average income of those farmers 407 286 146 297(Rp 'OOO/US$)

Percent farmers with no rubber 39% 14% 36% 26%Average income of those farmers 416 422 561 547

(Rp 'OOO/US$)Percent farmers with rubber andother income 51% 56% 63% 63%Income from rubber 152 181 217 172Income from other sources 279 370 419 370Total income 431 551 636 542Rubber as x of total 35Z 33X 34% 32%

Source: SGV study on Smallholder Rubber Production.

7. The population of the Lubuk Linggau project area is approximately275,000 including both local Sumatrans and Javanese transmigrants. Theaverage family size is 5.2 with 2 economically active members. Project sitesare located in seven subdistricts covering some 140 villages. Approximately3% of the land area is devoted to food crops and 16% to tree crops. In theseven subdistricts covered by the project, the total old rubber area isapproximately 60,000 ha with an average yield of about 450 kg dry rubber perha. Some 18% of rubber trees in the project area are more than 30 years oldand virtually all trees are of low productivity.

8. The population of the Pasir Pangaraian project area is approximately60,000 people of mixed Sumatran ancestry with an average family size of 4.4.Project sites are located in three subdistricts covering some 25 villages.There are currently about 22,000 ha of smallholder rubber of which anestimated 242 is no longer productive. Of the rubber to be planted under theproject, approximately 50% will be developed from rubber jungle/secondaryforest and 50% from alang-alang.

- 58 - ANNEX 5Page 4r

9. The population of the Sambas/Sanggau Ledo project area is approxi-mately 180,000 including local Iban and other Kalimantan groups, and scatteredimmigrants from Java and Madura. Average family size is 5.4 with 2economically active members. Coastal and riverine alluvial areas are largelydevoted to rice cultivation although considerable areas of rubber also occupypoorly drained alluvial and peat soils. Rubber is widely cultivated onundulating and hilly areas accessible from rivers and roads. Project sitesare located in six subdistricts covering approximately 300 villages. Thereare currently approximately 29,000 ha of smallholder rubber with a relativelyhigh average yield of almost 600 kg dry rubber per ha. Some 16% of rubbertrees in the project area are unproductive. It is estimated that of therubber to be planted under the project, approximately 40%, 30% and 30% will bedeveloped from rubber jungle/secondary forest, scrub forest and alang-alang,respectively. There have been some conflicts near the project area amonglocal Iban and immigrant Madurese; however, SRDP I subunits are relativelyhomogeneous and have experienced no problems.

10. The population of the Singkut project area consists of transmigrantfamilies whose current livelihood derives from food crop production and off-farm work. Most farmers will be planting rubber for the first time and theSingkut PHU is intended as a model for introducing tree crops to transmigrantsin the future. Of the rubber to be planted in this area virtually all will beplanted after clearing secondary forest.

11. Existing Infrastructure and Services. The projecc area in the MusiRawas district of South Sumatra and with Lubuk Linggau as the district capitalis adequately served with infrastructure and services to permit the foreseenagricultural development. Lubuk LirIggau is at the junction of roads toBengkulu, Jambi and Palembang, the provincial capial. It is the terminus ofthe railroad to the provincial caUital and it is traversed by the Trans-Sumatra Highway. The project areas in the Kampar District of Riau and theSambas District of West Kalimantan are less well-served with basic infrastruc-ture but communications links and agricultural services are judged adequatefor agricultural development under PKU management. The Singkut project areain Jambi Province is close to the Lubuk Linggau area and will benefit fromshared services and the proximity of the Trans-Sumatra Highway.

-59- ANNEX 6

INDONESIA

SMALLHOLDER RUBBER DEVELOPMENT II PROJECT

Selected Documents and Data Available in the Project Files

A. Selected Material on Project Subsectors

Al Study on Smallholder Rubber Production, SGV, 1983.A2 Study on the Marketing and Processing of Smallholder Rubber, SGV,

1983.A3 Tanugraha Report on Rubber Processing, 1983.A4 CDC Report on Rubber Processing, 1983.

B. Background Material on Project

BI Feasibility Study on the Smallholder Rubber Development Project II,prepared by the SGV Group, 1983.

Vol. I - Summary ReportVol. II - Annexes, Maps and ExhibitsVol. III - Supplementary Information

C. Working Papers and Tables Prepared by Bank Staff

Cl Detailed Cost TablesC2 Field DevelopmentC3 Roads and Project FacilitiesC4 Training and Technical Assistance

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