Docuomnt of

The World Bank

IFO OMCAuL USE OrNLY

Repot No. P-4155-IND

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

IN AN AMOUNT EQUIVALENT TO US$32 MILLION

TO THE

REPUBLIC OF INDONESIA

FOR THE

SMALLHOLDER CATTLE DEVELOPMENT PROJECT

September 18, 1985

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CURRENCY EQUIVALENTS

Currency Unit Indonesian Rupiab (Rp)US$1.00 = Rp 1,100Rp 1 million US$909

GOVERNMENT OF INDONESIAFISCAL YEAR

April 1 - March 31

WEIGHTS AND MEASURES

1 kilometer (km) = 0.62 miles1 hectare (ha) = 2.47 acres1 kiLogram (kg) 2.2 pounds

ABBREVIATIONS AND ACRONYMS

BCDIU - Bali Cattle Disease Investigation UnitBI - Bank Indonesia (Central Bank)BPKP - Badan Pengawasan Keuangan dan Pembangunan (Financial and

Development Supervisory Board)BRI - Bank Rakyat IndonesiaDGLS - Directorate General of Livestock Services, Ministry of

AgricultureERR - Economic Rate of ReturnCOI - Government of IndonesiaIFAD - International Fund for Agricultural DevelopmentKUD - Koperasi Unit Desa (village cooperative)M&E - Monitoring and EvaluationPHO - Project Management Office (Jakarta)PMU - Project Management Unit (Provinces)REPELITA - National Five-Year Development Plan (Repelita I, 1969-74;

Repelita II, 1974-79; Repelita III, 1979-84; Repelita IV,1984-89; Repelita V, 1989-94; Repelita VI, 1994-99)

SATGAS - Satuan Petugas Lapangan (Field task force comprisinganimal health, extension and husbandry workers)

FOR OMCIAL USE ONLY

INDONESIA

SNALLIOLDER CATTLE DEVELOPMENT PROJECT

Loan and Project Summary

Borrower: Republic of Indonesia

Loan Amount: US$32 million equivalent

Terms: Repayable in 20 years, including 5 years of grace, at thestandard variable interest rate

ProjectDescription: The main objective of the project wouLd be to supply cattle to

smallholder farmers, for use as draft animals, to providemanure for sustaining crop production, and to raise farmincomes. The project, which would foLlow up on a smallholdercattLe project supported by a loan from the International Fundfor Agricultural Development (IFAD), would finance (a) pro-curement of about 76,500 selected breeding heifers and about7,600 bulls in South Sulavesi, Nusa Tenggara and East Java(Madura) and their transportation by private cattle traders toSumatra and other Sulawesi provinces; (b) distribution ofthese cattle to about 76,500 smallholder farmers-in Sumatraand Sulawesi, including transmigrants, local participants intransmigration schemes, and farmers near transmigrantcoimnnities; (c) distribution of first and second generationheifers (offspring of the project cattle and cattle suppliedunder the IFAD smallholder cattle project) to about 55,000farmers; (d) cattle handling facilities, veterinary services,extension services, forage production and disease investiga-tions; and (e) technical assistance and training for projectimplementation, monitoring and evaluation, and diseaseeradication. Distribution of offspring would continue beyondthe five-year project period, reaching in total some 237,000small farmers. These farmers usually have difficuLty in grow-ing arable crops on more than about 1.25 ha of land because ofinsufficient labor and resources. By providing cattle, landpreparation would be speeded up, soil fertility and cropyields would be raised, and farm labor would be freed-up toclear reserve land, mostly for perennial cash crops. In thisway, cattle would play an important role in raising trans-migrant family incomes above the subsistence level.

Project Risks: The main project risks are that (a) demand for cattle may beless than expected; (b) disease outbreaks may reduce thenumber of cattle available; and (c) shipping losses might beexcessive. To minimize these risks, (a) the project has beenkept deliberately modest in scale compared with the transmi-

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

gration program and the expected demand by local smallholders;(b) an intensive disease investigation program would beincluded in the project; and (c) strict measures would betaken to improve cattle shipping standards and reducemortality.

Estimated Costs:/a Local Foreign Total(Us$ million) -

Cattle 25.2 4.5 29.7Forage development 1.5 0.8 2.3Cattle facilities & services 2.8 2.3 5.1Technical assistance & training 2.5 1.7 4.2Administration 4.3 1.6 5.9

Base Cost 36.3 10.9 47.2

Physical contengencies 2.9 1.1 4.0.Price contingencies 12.5 2.7 15.2

Total Project Costs 51.7 14.7 66.4

Financing Plan:

Bank 22.3 9.7 32.0IFAD 8.3 3.7 12.0Government 21.1 1.3 22.4

Total Financing 51.7 14.7 66.4

EstimatedDisbursements: Bank FY 1987 1988 1989 1990 1991 1992

(US$ million)

Annual 0.8 5.5 5.7 6.4 6.4 7.2Cumulative 0.8 6.3 12.0 18.4 24.8 32.0

Rate of Return: 25X based on 92Z of project costs during project period.

Staff Appraisal Report: No. 5615-IND dated September 18, 1985.

Map: IBRD Go. 18822R.

la Project costs include US$2.2 million in taxes.

REPORT AND RECOMMENDATION OF THE PRESIDENTOF THE rNTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLICOF INDONESIA FOR THE SMALLHOLDER CATTLE DEVELOPMENT PROJECT

1. I submit the following report and recommendation on a proposed loanto the Republic of Indonesia for the equivalent of US$32 million to help.finance the Smallholder Cattle Development Project. The loan would have aterm of 20 years, including five years of grace, at the standard variableinterest rate.

PART I - THE ECONOMY

2. A basic economic report, "Indonesia: Growth Patterns, Social Pro-gress and Development Prospects' (No. 2093-IND dated February 20, 1979), wasdistributed to the Executive Directors on February 26, 1979, andta countryeconomic memorandum has been prepared in each subsequent year. The latest ofthese, entitled "Indonesia: Policies for Growth and Employment" (No. 5597-INDdated April 23, 1985), was distributed to the Executive Directors on April 30,1985. Annex I gives selected social and economic :ndicators for the country.

Background

3. The Republic of Indonesia is a highly diverse country spread acrossan archipelago of more than 13,000 islands with a land area of about two mil-lion sq km. It now has a population of over 155 million, growing at about2.1% p.a., and is the world's fifth most populous nation. The country has adiversified resource base, with plentiful primary energy resources, signifi-cant mineraL deposits, large timber potential and a developed system of agri-cultural comnodity production and export. A high proportion of these primaryresources are located on the sparsely populated islands of Sumatra and Kali-mantan, while two-thirds of the population live on Java, which has areas withsome of the highest rural population densities in the world. About a quarterof the population lives in urban areas, and the current rate of urban popula-tion growth is about 4Z p.a. The 1983 estimate of GNP per capita is US$560,which places Indonesia among middle income countries.3

1/ Substantially unchanged from the President's Report on a Science andTechnology Training Project (No. P-4111-IND), circulated under cover ofR85-195, dated June 13, 1985, and approved by the Executive Directors onJuly 2, 1985.

2/ On the basis of the World Bank's system of country classification andAtlas methodology for calculation of GNP.

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Macroeconomic Developments and Resource Management

4. Until 1981, the economy had been growing at almost 8Z p.a. for overa decade. This growth was associated with rapid increases in public expendi-tures, total investment and savings. The initial impetus for this occurred inthe period of recovery from the turbulence of the mid-1960s. The Governmentof Indonesia (GOI) took effective action to restore macroeconomic stability,liberalize the economy, rehabilitate infrastructure, and provide incentivesfor domestic and foreign private investment. However, the dominant externalinfluence over the past decade has been the huge expansion, and significantvariability, in foreign exchange earnings from oil. Net exports from the oiland gas sector rose from US$0.6 billion in 1973/74 to US$10.6 billion in1980/81, when the current account enjoyed a surplus of US$2.1 billion. Oilreceipts also provided about 601 of Central Government receipts by 1980181 andhelped finance a sustained increase in demand. The pattern of expenditureshas also helped foster diversified growth. Of particular note has been thesupport for agriculture, through investment in infrastructure and support ser-vices. This supported an agricultural growth rate of almost 4X p.a. over thepast decade, and led to the recent achievement of self-sufficiency in rice.Manufacturing also enjoyed a high growth rate during the 1970s (of about 14%p.a.), although this was from a very low base and predominantly orientedtoward the protected domestic market.

5. During 1982, the Indonesian economy was affected adversely by theprotracted international recession and the accompanying decline in exportearnings, especially from oil. These developments led to a sharp turnaroundin Indonesia's external resource position and a fall in real per capitaincomes. In response, the Government acted promptly to ensure that thecountry's balance of payments situation was manageable and to provide a basisfor longer-term structural transformation. Particular attention was paid toreducing Indonesia's dependence on oil for export earnings and publicrevenues. Specific measures introduced over the past two years include:

(a) a 28Z devaluation of the rupiah against the US dollar in March 1983,without any change in the policy of full convertibility;

(b) a major rephasing (postponement/cancellation) of large-scale andimport-intensive public investments, especially in the industrialsector;

(c) successive price increases for petroleum products, which havelargely eliminated domestic subsidies;

(d) a far-reaching financial reform, including the liberalization ofinterest rates and the abandonment of credit ceilings;

(e) introduction of a comprehensive tax reform program, aimed atincreasing government revenues by broadening the tax base, simplify-ing the structure of rates and improving administration; and

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(f) an ongoing effort to reduce the unfavorable impact of the regulatoryframework, inc'.uding simplification of investment approval proce-dures and a major reorganization of customs, ports and shippingoperations.

6. These measures, aided by more favorable trends in the world economy,are already having their desired impact. GDP, led by strong performance inthe oil (including LNG and refining) and agriculture sectors, rose by anestimated 4.7% in 1983 and 6.5% in 1984. The balance of payments situation isalso improving. In particular, the current account deficit was reduced fromUS$7.1 billion (8.5% of GNP) in 1982/83 to an estimated US$1.9 billion (2.4%of GNP) in 1984/85. The major factors responsible for this improvement areimport cuts, resulting from the Government's efforts to curb aggregate demand,and higher export earnings from non-oil products, due to recovery in theindustrial countries and the Government's policies to promote non-oilexports. The Government's restraint is also evident in the budget, where realexpenditures have probably fallen over the past three years. This fiscaldiscipline, in turn, helped keep domestic inflation down to about 12% in 1983and 9% in 1984, despite the inevitable pressures associated with the 1983devaluation and the petroleum price adjustments.

Policies for Mediumr-Term Growth and Transformation

7. Sustained growth of the non-oil economy by at least 5% p.a. isprobably necessary to have a significant impact on employment creation andpoverty alleviation over the remainder of this decade. To promote such agrowth rate, without generating unmanageable balance of payments pressures, isone of the major challenges facing the Government. Successful transformationof the economy will require continued action in three key policy areas:management of the public investment program (and improvements in the regu-latory/policy environment for private investment), rationalization of theexternal trade regime and development of the financial sector.

8. The projected import constraint imposes serious limitations on therate at which Indonesia can undertake new investments over the next fewyears. At the same time, some reallocation of resources towards agricultureand the social sectors vight be justified, in order to reduce the import con-tent of investment while-still meeting the Government's employment objec-tives. It is therefore important that mechanisms are established to facili-tate orderly and rational adjustments to the public investment program. Pos-sible options include preparation of multi-year expenditure plans (at leastfor the larger projects), identification of a core program of high priorityprojects and strengthening of project appraisallselection procedures. TheGovernment is also considering ways to improve project implementation, so thatinvestment returns can be realized more promptly. Given the budgetary con-straints, it is expected that the private sector will be caLled upon to playan increasingly important role in capital formation. To encourage this pro-cess, the Government recently announced simplifications in investment approvalprocedures and a major internal reorganization of the Investment CoordinatingBoard.

9. The recent decline in the price of oil has clearly demonstrated theimportance of reducing the economy's heavy dependence on a single source offoreign exchange and, more generally, the need to rationalize the externaltrade regime. The Government has set a target of doubling non-oil exports innominal terms over the next five years. This target should be attainableprovided that economic recovery in the industrial economies is sustained,Indonesia's access to those markets is not constrained by protectionistmeasures and, most importantly, Indonesia follows appropriate trade andexchange rate policies. The Government has already introduced a range ofexport promotion measures intended to improve export incentives, ensure readyaccess to finance for exporters, raise product quality and enhance marketingcapacity. However, over the longer term, there is no effective substitute forcomprehensive trade reform. On the import side, Indonesia's trade regime hashistorically been characterized by a predilection for high tariffs and quanti-tative restrictions. In March 1985, the Government announced a major reduc-tion in the range and level of nominal import tariffs. However, other actions-- including increased use of import quotas/bans and regulations requiringhigher local content in production - have served to promote some potentiallycostly and uneconomic investments which could prove counterproductive to theexport drive.

10. The Government's decision to move towards a more liberal financialenvironment raises a number of issues relating to resource mobilization,financial intermediation and credit allocation. Over the longer term, as thescope for subsidized credit is reduced, the banking system will have to playan increasingly important role in mobilizing domestic resources. However,during the transition period, some potential conflicts between the resourcemobilization and credit allocation objectives could arise. For example, theincrease in deposit rates following the recent financial reforms, whileencouraging resource mobilization, has also led to high real lending rateswhich have tended to dampen investment and credit demand. This in turn mayrestrain economic activity. It is therefore important to find ways to reducethe high intermediation costs of banks. Consideration should also be given toother ways of mobilizing financial resources, including development of acapital market, expansion of the banking network (especially in rural areas)and selective relaxation of restrictions on private banks (combined withincreased bank supervision).

Incomes, Employment and Human Development

11. Indonesia's physical, human and economic resources are very unevenlydistributed between its main regions. Java, for example, accounts for almost50% of Indonesia's GDP and 62% of its population, but only 7% of its landarea. Although all five of the country's main regions experienced rapid percapita growth in the 1970s, regional differences in output tended to widen.To a large extent, differences in performance are associated with the impor-tance of the mineral sector, particularly petroleum. However, there are twoimportant processes at work in Indonesia which enable the benefits of growthto be more evenly spread than indicated by output trends. The first of theseis migration. Between 1971 and 1980, 4.3 million people (or 16% of thenatural increase in population) resettled permanently in provinces outsidethose of their birth. Approximately 1.7 million people moved from Java to the

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Other Islands, of whom one million were resettled through the official trans-migration program. There has also been substantial rural-urban migration bothbetween and within provinces. The second process is the redistribution ofincome through the government budget. Regional variations in per capitaconsumption are much less pronounced than differences in per capita output.This is largely due to the impact of taxation on the oil sector.

12. An analysis of household expenditures indicates that Indonesia'srapid economic development has been accompanied by significant progress inreducing poverty. Between 1970 and 1980, the proportion of the populationliving in poverty declined from 57% to 40%; the decline was particularly rapidin the Other Islands and in urban areas. The core of the poverty problem con-tinues to be in rural Java, where landless laborers form a large, and possiblyrising, proportion of the population and where, for most of the 1970s, thereis little evidence of any rise in real agricultural wages. However, there wasa significant rise in real agricultural wages around 1980-81, associated withthe sharp increase in rice output and booming overall economic growth.Increases in rural non-agricultural and urban wages also occurred at thebeginning of the 1980s. Despite the slowdown in economic growth and stabili-zation measures since 1982, the limited available evidence suggests that wagesand incomes have held up, partly as a consequence of continued agriculturalgrowth.

13. In the future, the availability of productive employment will be akey determinant of income distribution. The labor force is expected to growat about 2.3% p.a. over the next decade, while economic growth will be lowerthan in the 1970s. The resultant squeeze in the labor market is not expectedto lead to a dramatic increase in unemployment but there is a serious risk ofstagnant or declining labor income in both rural areas and the urban informalsector. Given the balance of payments constraint facing the country,Indonesia's employment outlook depends crucially on the pattern of economicgrowth, and in particular the extent of labor absorption in the commodity-producing sectors. Although over the long term the structural shift inemployment away from agriculture should continue, this sector will stillaccount for half or more of total employment and the growth in agriculturalincomes will be an important determinant of job opportunities elsewhere innon-farm activities. This will require continued priority to agriculture inthe form of supportive pricing and investment policy, with some shift inemphasis toward the Other Islands. On Java, attention will need to be paid toissues of agriculturaL diversification and the pace of mechanization. Withrespect to the industrial sector, the development of an efficient, relativelyexport-oriented pattern of production can also contribute to significant laborabsorption in the medium to long term, especially in Java; this will involve acontinuing major role for small-scale firms. If a favorable evolution of theemployment situation is to occur, there will aLso need to be an appropriatepattern of public expenditure and supportive policies for the urban informalsector; finally, the transmigration program can make a substantial contribu-tion, provided it is closely coordinated with complementary agriculturalinvestment programs, in tree crops, water resources and livestock development.

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14. There has been substantial progress in extending the provision ofsocial services throughout the population. Universal enrollment in primaryeducation has been virtually achieved and the enrollment rate in secondaryschools is now about 35%. However, the weak educational base of the popula-tion continues to be a major obstacle to rapid economic development and asubstantial further expansion of secondary and tertiary education will benecessary as well as a major effort to raise the quality of the whole system.In the health sector, there has been a large expansion in facilities, notablyat the sub-district Level, but continued investment and an improvement inquality will be necessary to increase effectiveness. This will have to becomplemented by a major expansion in water supply and sanitation if theimprovement in indices of mortality and morbidity during the 1970s is to bemaintained. By 1981, only 18X of the rural and 40X of the urban populationhad access to safe water, compared with government targets of 60% and 75Z,respectively, for 1990.

External Capital Flows

15. The recent improvement in Indonesia's balance of payments situationis evidence of the Government's commitment to manage short-term economicshocks. The ongoing program of economic reforms should also help to hold thecurrent account deficit to sustainable levels over the medium term. Even so,continued resource transfers from abroad will still be essential if theGovernment's modest growth targets (5% p.a.) for the next five years are to beachieved. Staff projections indicate that new public medium- and long-term(HLT) borrowing will have to average about US$5.2 billion p.a. over the nextthree years, including about US$2.5 billion p.a. of official developmentassistance and the balance from import-related credits and untied borrowing.Indonesia is well placed to arrange the necessary financing on reasonableterms; the profile of existing debts is good and a comfortable level of exter-nal reserves has been rebuilt over the past two years.

16. Total public debt outstanding at the end of 1984 is estimated atUS$22.9 billion, with an additiGnal US$14.0 billion of undisbursed commit-ments. Of the total debt disbursed and outstanding, official assistance(including non-concessional multilateral aid) accounts for 502 and obligationsat variable interest rates for only 24%; there is no short-term public debt.The average maturity of public MLT debt at the end of 1984 is estimated at 16years. The Government continues to manage its external debt quite p udently.Until 1982, Indonesia had succeeded in maintaining its public debt serviceratio, based on net exports (i.e., net of oil sector imports), at or belnw20X. However, because of the sharp drop in oil export receipts over Ene pastthree years, the ratio rose to 25% in 1984. With the projected levels andcomposition of borrowings and export earnings, Indonesia's public debt serviceratio, again based on net exports, would rise to about 30% in 1989 and thengradually decline in later years. With private MLT debt included, the totaldebt service ratio, based on the conventional concept of gross exports, wouldrise from 21% in 1984 to around 24% in 1989 and decline back to 22% by 1995.While debt management will require careful attention in the coming years, theprojected debt service ratios are not excessive by international standards.

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PART II - BANK GROUP OPERATIONS IN INDONESIA 31

17. As of March 31, 1985, Indonesia had received 48 IDA crediLs total-ling US$938.5 million (less cancellations) and 93 Bank loans amounting toUS$7,021.0 million (less cancellations). IFC commitments totalledUS$163.2 million. Annex II contains a summary of IDA credits, Bank loans andIFC investments as of March 31, 1985. The share of the Bank Group inIndonesia's total (disbursed) external debt outstanding at the end of 1983 was13.1%, and the share of debt service, 10.3% compared with 13.3X and 7.9%,respectively, in 1982. From 1968 until 1974, all lending to Indonesia wasmade through IDA. Due to the country's improved creditworthiness followingthe commodity and oil price boom in 1973174, the bulk of the Bank Group'slending in the remainder of the 1970s was through IBRD loans, with a modestamount of IDA lending being justified primarily on poverty grounds, as the percapita GNP was well below the IDA cutoff level. IDA lending was discontinuedin FY80. Given the critical importance of agriculture (including transmigra-tion) for employment, food security and exports, over one-third of Bank Group-assisted projects have been in this sector. In addition, loans and creditshave been extended to virtually all other sectors of the economy, includingtransportation, education, urban development, water supply, rural development,industrial development financing (including small-scale industry), power,telecommunications, population and nutrition, and technical assistance.

18. During Repelitas I (L969-74) and II (1974-79), and in line with theobjectives of these first two Five-Year Plans, a high proportion of Bank Grouplending was directed initially toward the rehabilitation and then the expan-sion of infrastructure and production facilities. Special attention was alsogiven to meet the shortage of skilled manpower and technical assistance neededfor preinvestment studies and project execution. Repelita III (1979-84),published in early 1979, stressed the need for continued high growth andstability, but departed from previous plans by placing special emphasis onmore equitable income distribution and poverty alleviation. This focus, whichwas fully in line with the conclusions of the basic economic report, requiredgreater attention to employment generation (particularly in the industrialsector) and to improvements in basic public services. While Bank lending wasalready consistent with these objectives, increased emphasis has been given tothese priorities. However, the adverse economic developments that occurred inthe latter half of the plan period and the measures taken to address them, ledto v reshaping of development objectives for Repelita IV (1984-89). Theseemphasize restoring growth of incomes and employment while continuing finan-cial prudence, promoting structural change toward a more diversified economy,and maintaining efforts to improve income distribution and alleviatepoverty. This shift in focus has underscored the need to follow through onreforms that have already been initiated, seek increased efficiencies in the

3/ Substantially unchanged from the President's Report on a Science andTechnology Training Project (No. P-4111-IND), circulated under cover ofR85-195, dated June 13, 1985, and approved by the Executive Directors onJuly 2, 1985.

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economy, mobilize domestic resources to finance needed investments andrecurrent expenditures, and foster a policy environment conducive to theachievement of required changes.

19. The Bank has geared its lending and economic work program to addressthese needs. The approach is to continue to emphasize the ongoing dialogue oneconomic policy that has been a cornerstone of -the Bank's relationship withthe Government for many years, and to coordinate discussion of macroeconomicissues with advice on institutional and policy reform in important sectors andsubsectors, coupled with lending operations and technical assistance that meetpriority needs and support institutional improvements in specific areas.Emphasis in economic work is being given to trade and industrial issues,development of the financial system, and public resource management. In thelending program, agriculture continues to receive the most attention.However, the program is broadly based, and includes increasing emphasis onindustrial development and education. Less emphasis is being given to powerand energy, where the Bank is concentrating on policies to diversifyIndonesia's energy base, rationalize pricing and improve sector planning. Intransportation the Bank is focussing on efficiency improvements in themaritime sector and on improving the national network of highways and ruralroads. In urban development, water supply and population, lending is beingdirected more and more to developing innovative low-cost solutions, providingfor cost recovery and strengthening local institutions, in order to minimizedemands on the Government budget and decentralize the responsibility foraddressing basic needs. In all, the Bank's lending program is intended tocontribute about 20Z of Indonesia's external capital requirements during thenext three years and is expected to be an important catalyst in attractingother funds. Where possible, we are seeking also to widen the impact of Banklending through technical assistance, as well as complementary investments andcoordinated policy dialogue with other donors. This is especially true in ourlending programs for power, urban development, water supply andtransportation.

20. There has been a notable improvement in the last few years in thedisbursement ratio4Y from a low of 13% in FY80 to over 17% in FY85. The poorFY80 ratio was in large part merely a result of the rapid increase in commit-ments during the FY77-79 period when total Bank/IDA commitments to Indonesiaincreased by 122% compared to a Bank-wide increase of 83%. However, it alsoreflected implementation difficulties arising out of the Government's budget-ary, procurement and payment procedures. The severe shortage of managerialand technical manpower or course compounds the problem. A number of stepshave been taken by the Government and the Bank to address these issues.Several special Bank missions have visited Indonesia to analyze the problemsand make recommendations for simplifying budgetary and financial procedures.The Government and the Bank have also instituted formal and regular jointreview procedures to identify general and project-specific problems and workout corrective measures. In addition, procurement seminars were held in

41 The ratio of actual disbursements during the fiscal year to the cumula-tive undisbursed amount at the beginning of the fiscal year.

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Jakarta in September 1979, November 1981 and May 1984. As a consequence ofthese joint initiatives, the Government has taken measures to streamline someof the complex budgetary and financial procedures affecting project implemen-tation. The Bank is helping the Government in a special effort to identifyproblems in the construction industry with a view to developing appropriateremedial actions and policies. Weaknesses in the domestic contracting indus-try have been identified as one of the major causes of implementation problemsin Indonesia. In order to reduce initial project implementation difficulties,many operations are now being presented for Board consideration at a laterstage in the project cycle. As a result of these efforts, improvements aretaking place. In addition, in order to ease the Government's resource con-straints and maintain the pace of project implementation in priority areas,steps were taken under the Special Assistance Program to accelerate disburse-ments in 17 ongoing projects in the treecrops and irrigation sectors and oneproject each in the energy and transport seccors. The combined effects of allof these activities are reflected in the increase in disbursements fromUS$206 million in FY79 to US$728 million in FY85. rt is neverthelessimportant that the Bank and the Government maintain their efforts.

PART III- THE AGRICULTURAL AND RURAL SECTOR

The Sector

21. The agricultural and rural sector remains of overwhelming importanceto most Indonesians. Some 80X of the country's population lives in ruralareas, and agriculture is the primary source of income for 60Z of these house-holds, as well as for 10% of urban households. The sector contributes some18X of total GDP, of which food crop production accounts for 60%. About16 million smallholder families cultivate subsistence and cash crops on14 million ha, while about 1,800 estates produce rubber, sugar, tea, palm oil,and tobacco on 2.2 million ha.

22. The Government's main objectives for the agricultural and ruralsector are to: (a) create productive employment and raise the incomes of therural poor; (b) increase domestic food supplies to keep pace with risingdemand; (c) expand agricultural exports particularly of tree crops; and(d) ensure productive and sustainable use of Indonesia's land, water, andother natural resources.

23. A major component of the Government's agricultural and rural deve-lopment strategy has been its transmigration program. About two thirds ofIndonesia's total population reside in Java, an island with about 7% of thenation's land. Seventy percent of Java's total area is cultivated, and popu-lation densities in some areas rise to 2,000 people/sq km. Meanwhile, vastareas lie uncultivated in the Other Islands, and low population densitiesimpede regional development and economic growth. The Government thereforelaunched its transmigration program to: (a) create employment opportunitiesfor, and improve the incomes of, impoverished and landless laborers on Java,

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Bali and Lombok; (b) alleviate population pressures on these islands, espe-cially pressures in environmentally vulnerable areas; (c) promote balancedregional development; and (d) increase food and tree crop production.

24. During the Government's Five-Year Development Plans for 1969-74(Repelita I) and for 1974-79 (Repelita II), 46,000 and 83,000 families weretransmigrated, respectively. In Repelita III (1979-84), GOI increased itstransmigration program to about 500,000 families. Achievements seem to havebeen remarkable. About 535,000 families were resettled, including 169,000families who migrated spontaneously without official support, and 366,000families who participated in official settlements. About 90X of the officialtransmigrants (or some 329,000 families) migrated from Java, Bali and NusaTenggara, while the remainder were local residents or spontaneous migrantsgiven land on official sites. For Repelita IV (1984-89), GOI has establisheda target of about 750,000 families, of which about 450,000 will be officialtransmigrants, and 300,000 spontaneous migrants.

Cattle Development

25. There are some 8.3 million cattle (and 2.5 million buffalo) inIndonesia, almost all of which are kept by smallholders primarily as a sourceof draft power and manure, and secondly as a capital reserve and source ofcash income. About 70Z of all land cultivated for food crops is prepared bycattle or buffalo power; the other 30Z is prepared by hand labor. Mechaniza-tion is discouraged on employment grounds, and is still negligible. The herdofftake, at about 12% nationally (14% on Java) supplies an accelerating demandfor meat, especially on Java where cattle slaughter has increased by about 32p.a. over the last 10 years. Java, Sulawesi and Nusa Tenggara account for 6.7million head, or 80% of the national herd. In the main transmigration areasof Sumatra and Kalimantan, there are at present few cattle.

26. Experience with Past Lending. In early 1973, the Bank assisted aBeef Cattle Development Project (Cr. 355-IND) to establish a state-ownedranching corporation. The project was to establish seven ranches (about70,000 ha) on Sulawesi and Sumba, and included a credit program for about 40small private ranches. The major market was to be the slaughter trade forlive cattle in Hong Kong. Faced with managerial, financial and technicalproblems, including a shortage of land for ranching, difficulties in adaptingAustralian technology packages, and low productivity of imported catLle, theproject was reduced in 1975 to the development of three ranches and wascompleted in 1981. A Project Performance Audit Report (No. 3994) on theproject confirmed the disappointing performance of the ranching operation,though valuable lessons were learned about pastures and the performance oflocal cattle breeds.

27. In 1977, the FAO/IBRD Cooperative Program drew attention to thetraditional use of cattle as draft power for smallholder cultivation in Javaand Bali, the place of origin of most transmigrants. It also pointed out thebenefits to be obtained by removing breeding heifers from increasinglyoverstocked lands in the dry Eastern Islands and placing them in Sumatra andKalimantan, where there are few cattle and where transmigration settlement isexpected to continue. Largely as an outcome of this sector work, financial

- 11 -

assistance was obtained from the International Fund for AgriculturalDevelopment (IFAD) in 1980 for a Smallholder Cattle Development Project inSumatra, which was appraised and supervised by the Bank on IFAD's behalf. TheAsian Development Bank (ADB) has also provided two loans for smallholdercattle development in Kalimantan.

28. The Smallholder Cattle Development Project (IFAD Ln. 35-ID). Underthe IFAD project, about 44,000 head of cattle are being procured from EastJava, South Sulawesi and the Nusa Tenggara Provinces, and distributed tosmallholder farmers, mostly transmigrants, in Sumatra. The transmigrantsreceive a cleared 0.25 ha plot of land for their houseplot and garden, acleared 1.0 ha field area for growing food crops, and 0.75 ha of unclearedreserve land, which is usually more distant. Without draft power, settlersare normally able to cultivate only the first two plots, but with draftanimals to speed up land preparation, their labor is freed-up to clear thereserve land for production of cash crops such as rubber, coconuts or coffee.

29. Special features of the IFAD project include:

(a) private cattle traders are contracted for initial selection ofanimals, quarantine, shipping and distribution to selectedsmallholders;

(b) effective livestock extension services are established at villagelevel where small teams of project staff (SATGAS) provide technicaladvice, veterinary services, and farmer training;

(c) farmers will repay debts for the heifers by returning to GOI two 18-month old calves. The female calves are redistributed to othersmall farmers, and males are sold for fattening;

(d) a computerized cattle inventory system was set up to monitor theownership and location of each animal, together with credit records;and

Ce) intensive investigations into Jembrana disease, a potentiallyserious health-risk of the Bali cattle breed used in the project,were initiated in a specialist Bali Cattle Disease InvestigationUnit (BCDIU).

30. As of May 1985, approximately 25,000 head of cattle had been pro-cured and distributed successfully. Total cattle distribution should reachabout 44,000 head by late 1986, slightly less than appraisal targets sincecattle costs were initially higher than expected. Cattle losses have beenlow, and the quality and condition of cattle are of a high standard. Themajor areas of procurement were South Sulawesi and East Nusa Tenggara. CattLeprocured are the Bali breed, well adapted to smallholder farming systems. Theimpact of cattle seems largest in relatively new transmigration comunnitieswith at least 2 ha of food crop land per family. Farmers have been eager toreceive the cattle and tend the animals with a very high standard of cattlehusbandry. The IFAD project monitoring system reports that project cattle

- 12 -

have produced about 6,100 offspring by May 1985. Of these, about 1,000heifers have already been returned to the project as in-kind creditrepayments, and have been redistributed to other settlers in the samecommunities.

31. Forage seed production programs were also started in East and WestNusa Tenggara. Progress has been satisfactory,-with about 700 farmers produc-ing seed for the IFAD project. In the distribution areas, forage nurserieshave been established in each village which receives cattle, from whichfarmers take planting material. Progress of investigatory work at the BCDIUon the causative organism of Jembrana disease has been encouraging, althoughthe organism has yet to be positively identified.

PART IV - THE PROJECT

32. The proposed project was prepared by Government staff assisted byIFAD-financed consuLtants and appraised by the 3ank in January 1985. Negotia-tions were held in Washington, D.C. in August 1985, with the Indonesian dele-gation led by Mr. Daman Danuwidjaja. The Staff Appraisal Report (No. 5615-IND) is being distributed separately. Supplementary project data are providedin Annex III.

Objectives and Rationale

33. The project would provide smallholder farmers, mostly transmigrants,with cattle for use as draft animals, to provide manure, and to raise farmincomes. The project is highly supportive of GOI's transmigration program.The Bank is particularly concerned that transmigrants, once settled, have thesupport to enable them to raise incomes above a subsistence level. Withoutdraft power, transmigrant families normally cannot cultivate all the land madeavailable to them, even after several years. In addition to providing draftpower, cattle play a key role in providing manure which is keenly sought toimprove soil fertility, especially in the highly productive houselot gardensthat play an important role in food output, nutrition, and incomes.

34. Bank and IFAD support would permit GOT to expand the cattle projectmore closely in line with the needs of the transmigration program. The levelof resources available to IFAD, which identified and supported preparation ofthe proposed project, does not now permit it to provide all the externalfinancial assistance needed for a project of the size proposed. Bank supportis particularly important to continue providing the technical expertise ofBank staff and ensure that the project's institution building activities(including disease investigations, cattle health and extension services, andthe move toward better credit systems) receive proper attention in the cattleprogram.

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Project Description

35. The project would provide cattle and their female offspring to about131,000 small farmers, mostly transmigrants, during a five-year implementationprogram, and later through further distribution of offspring to another106,000 small farmers, bringing the total number of beneficiaries to about237,000. The cattle would be supplied to farm communities in six provinces inSumatra (Riau, Jambi, South Sumatra, Bengkulu, Lampung and West Sumatra) andthree Sulawesi provinces (South, Central, and Southeast Sulawesi). Theseareas have been selected because of their importance in the Repelita III andIV transmigration program and the large numbers of smallholder farmers therewho need draft power for cultivation. The cattle would be Bali or Madurabreed cattle drawn from South Sulawesi, Nusa Tenggara and East Java (Madura)Provinces. Analyses of provincial cattle populations, mortality and offtakerates indicate that these provinces can easily supply cattle for the proposedproject and other GOI programs without reducing herds.

36. The main components of the project would be:

(a) procurement of about 76,500 selected breeding heifers and about7,600 bulls and their transportation by private cattle traders toparticipating provinces in Sumatra and Sulawesi;

(b) distribution of one heifer each to about 76,500 smallholder farmers,including transmigrants, local participants in transmigrationschemes, and local farmers near transmigrant communities, anddistribution of a bull to one in every ten of such farmers;

Cc) redistribution to about 55,000 smallholder farmers of about 55,000heifer and 5,500 bull calves returned to the project from the firstand second generation offspring of cattle supplied under theproject, and from cattle distributed under the IFAD project;5/

id) construction of six cattle holding and quarantine facilities andupgrading of another four facilities, and provision of about 105vehicles, about 340 motorcycles and miscellaneous veterinary,laboratory and office equipment;

(e) a forage seed production program by about 700 smallholder farmers inNusa Tenggara, and a forage production program to serve about237,000 farmers in Sumatra and Sulawesi receiving cattle and theirredistributed offspring;

(f) improvement of veterinary services, and provision of about 150 teams(SATGAS) which provide cattle, forage and animal health extensionservices;

5/ After the five-year impLementation period, another 106,000 heifer calvesand about 11,000 bulls would be distributed.

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(g) investigation of the causative agent, transmission and control ofJembrana disease of BaLi cattle, through the Bali Cattle DiseaseInvestigation Unit (BCDIU);

(h) technical assistance for project implementation, forage production,disease investigation and control, monitoring and evaluation andcooperative development; and

(i) training in management skills, extension techniques, forage andcropping systems, cattle marketing, cattle fattening, cooperativemanagement, and disease eradication and vaccine production.

37. Project Participants. During Repelita III, some 200,000 familieswere settled in the project provinces. Another 99,000 familes migrated spon-taneously, settled on the peripheries of official transmigration sites andwere often given land by local coimmnities. Under Repelita IV, GOI expects tosettle another 415,000 families in these provinces, including 200,000 spon-taneous migrant families. While the IFAD project would reach many of thetransmigrants under Repelita III, some 130,000 of those families will stillhave no draft power. The proposed cattle project would provide cattle forthese settlers, as well as for about 91,000 Repelita IV transmigrants. Thesize of the project is therefore modest in relation to GOI's transmigrationplans. Individual participants would be selected by project and Governmentstaff in consultation with local community leaders. Each participant selectedwould have at least 1 ha and not more than 5 ha of land, and would show evi-dence that land development has been limited by lack of draft power. TheGovernment would distribute cattle under the project to communities andfarmers that had been selected in accordance with criteria satisfactory to theBank.

Credit System

38. GOI's objective is to establish a credit arrangement for providingcattle to farmers that is both practical in the short run (considering theabsence of any credit system involving smallholders in the project communitiesat present) and supportive of the longer-term goal of moving toward monetarycattle credit operations when farmers and cooperative organizations becomecreditworthy. To this end, credit operations would start with a simple in-kind system to be replaced with village level cooperatives handling credittransactions, with funds borrowed from Bank Rakyat Indonesia (BRI), when andwhere such cooperatives are able to take on those tasks. In order to developthe cooperatives' (KUDs) financial and managerial capabilities, the projecthas a training and technical assistance componen: directed at cooperativedevelopment for KUDs in project areas.

39. Smailholders who receive the heifers procured by the project fromthe Eastern Islands would sign agreements with BRI and the Directorate Generalfor Livestock Services (DGLS) that obligate them to repay a debt equal to thecontract cost of the heifer by returning two calves in good condition withinsix years to DGLS. The debt service value of each calf would equal 50Z of thedebt, so no cash transactions are involved in debt service. Smallholders whoreceive a bull and a heifer would repay their debt by returning three calvesto DGLS within seven years under the same arrangements.

- 15 -

40. The calves returned by these smallholders would be separated into(a) culled females and males not required for redistribution as bulls (both tobe sold by DGLS to traders) and (b) the calves selected for redistribution.By the time such calves are ready for redistribution, it is hoped that KUDs inthe project areas will have the capacity to handle cattle credit. KUDs wouldbe evaluated by BRI for creditworthiness and, if qualified, would borrow fromBRI to purchase DGLS cattle. The KUD would be responsible for internal creditrecovery from its members, and for redistribution of successive offspringthereafter. Should KUDs be unable to borrow, the simple in-kind systemfollowed for the initial cattle supplied from the Eastern Islands wouldcontinue and, during negotiations, an assurance was received that DGLS wouldmaintain the project organization at least until the redistribution of firstgeneration offspring has been completed.

41. KUDs should play the predominant role in the redistribution ofsecond generation offspring and credit recovery. In other localities BRI mayhave branch offices or villages capable of lending directly to farmers oncommercial terms for purchase of DGi.S cattle. If neither KUDs nor BRI areable to provide credit, the simple in-kind credit system initially used mayagain be employed. DGLS intervention at this stage would be provided throughits regular extension and veterinary services which would succeed the projectorganization.

42. These credit arrangements would be reviewed annually. Duringnegotiations assurances were obtained that an interministerial committee madeup of members from the Ministry of Finance, BRI, Bank Indonesia (BI) and DGLSwould annually review the most appropriate methods for providing credit andcooperative services to smallholders and would furnish the results of thisstudy to the Bank for comments by the end of each year, commencing December31, 1987. GOI would make necessary adjustments to credit and cooperativeservices arrangements taking into account the Bank's comments on such studies.

43. Except for the case where a BRI branch office in a project area mayoffer fully commercial credit to farmers for purchase of cattle from DGLSafter the initial distribution, BRI's role in the project would be one of achanneling bank -- it would use none of its own funds, and would bear no risks- for handling GOI funds and credit administration. BRI would maintain theproject's prefinancing account, from which cattle suppliers are paid. Cashincome from the sale of culled heifers and male calves returned to the projectwould be transmitted by DGLS through BRI to BI. A financing agreement betweenGOI (represented by BI) and BRI, and a subfinancing agreement between BRI andDGLS (representing the project) would be agreed with the Bank. The financingagreement would include the level of handling charges to be paid to BRI forcredit administration, and the subfinancing agreement the alternative creditadministration arrangements. Signing of the financing and subfinancingagreements would be a condition of loan effectiveness.

Organization and Management

44. The project would be coordinated by an Interdepartmental SteeringCommittee which supervises all foreign-assisted projects in the livestocksector. This Committee is chaired by the Director General of DGLS and has two

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major functions: (a) to set policy guidelines and (b) to review projectprogress. At the provincial level, a similar Interdepartmental Committeecoordinates project implementation activities under the leadership of theGovernor. In addition, technical aspects of project works are overseen by aTechnical Steering Committee consisting of the DGLS Secretary and six DGLSDirectors.

45. Day-to-day project management would be handled by: (a) a centralProject Management Office (PHO) headed by the Project Director in Jakarta,(b) Project Management Units (PMUs) at the provincial level and (c) field taskforces (SATGAS) at the provincial and district field levels. The PMO has beenestablished as a discrete unit within DGLS, with the Project Director report-ing directly to the Director General. PMO staff would be increased in April1986 from 50 to 68, half of whom would be professional staff; all staff wouldbe permanent civil servants on secondment to the project. The PMN would bedivided into four divisions: Administration and Finance, Technical andCredit, Procurement and Distribution, and Planning.

46. A PMU has been set up in each of the cattle procurement and cattledistribution provinces included in the IFAD project. PMUs are staffed by pro-vincial livestock service staff assigned to work on the project under thetechnical and operational guidance of the Project Director. The role of thePMU is to implement all project activities including supervising the procure-ment and distribution of all cattle contracted by the PMO; development offorage; and administration of the SATGAS. Each PMU, located in the provincialcapital, is subdivided into four sections: Administration and Finance, CattleProcurement, Cattle Distribution and Development, and Forage Development.

47. SATCAS teams would be assigned at the field level in all areas wherethe project distributes cattle and promotes forage development. In additionto organizing project and credit activities, the SATGAS would provide exten-sion and animal health services to project beneficiaries. Operationally, theSATGAS would report to the P1MU chief. On a local level they would coordinateclosely through Rural Extension Centers (RECs) with administrative andtechnical officials of the agricultural extension services. In addition toimplementing the project and providing extension to the farmers, the SATGASwould act as an effective reporting channel back to project management. FourSATGAS teams would be supervised on animal health matters by one veterinarianstationed at each REC. At a ratio of 1 SATGAS team to 500 farmers, theproject would require a total of about 150 SATGAS teams. The two SATGAS sta.fresponsible for extension and animal health would become part of the regularDGLS provincial services after the project is implemented. The third memberof each SATCAS team who handles beneficiary selection, credit matters andcattle monitoring, would receive training in cooperative management, creditadministration, and accounting to head the local KUD, wherever such KUDs areestablished.

48. As there have been some delays in procuring vehicles under the IFADproject, assurances were obtained during negotiations that the Governmentwould furnish to the project about 105 four wheel vehicles and 341 motorcyclesunder a schedule of annual procurement agreed with the Bank.

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49. To minimize cattle losses during shipment, assurances were obtainedduring negotiations that traders would be required to ensure cattle are accom-panied by qualified and experienced animal health workers and that shipment isin accordance with minimum specifications regarding space, feed, water, venti-lation and loading/unloading conditions, satisfactory to the Bank.

Project Costs and Financing

50. Total project costs are estimated at US$66.4 million (includingtaxes of US$2.2 million) of which US$14.7 million (or 22Z) would be foreignexchange. Project costs are estimated in July 1985 prices. Unit rates forcattle, civil works, goods and services are based on recent actual expendi-tures in the IFAD project. A 10% allowance for physical contingencies hasbeen included for all capital-expenditures. Physical contingencies totalUS$4.0 million or 8% of base costs. Price contingencies (US$15.2 million)total about 30Z of base costs plus physical contingencies and were estimatedon the basis of the following inflation rates: for local costs: 8% during1985-90; for foreign costs: 5% in 1985, 7.5Z in 1986 and 8% from 1987 to1990.

51. The proposed Bank loan of US$32 million would finance about 51% oftotal project costs excluding US$2.2 million of taxes and US$1.4 millionreserved procurement of vehicles. IFAD would provide cofinancing of SDR 11.6million, equivalent to US$12 million. The available balance under the IFADproject (Loan 35-ID) would permit the purchase of about 9,000 cattle in mid-1985 to complete the IFAD project, but the project organization has thecapacity to handle more if funds are made available. To maintain momentum, upto 3,500 cattle procuied in mid-1985 would be financed retroactively from theproposed Bank and IFAD loans.

Procurement

52. Bali and Madura breed Cattle (US$43.1 million) available only inIndonesia, would be procured through about 75 contracts, each for about 1,000heifers and 100 bulls. Qualified Indonesian cattle traders would be selectedfollowing local competitive bidding (LCB) procedures acceptable to the Bank.Civil Works (US$1.5 million) are small and widely separated geographically,and hence are unattractive to foreign bidders, though works would be groupedas far as possible into annual contracts by province. About 60 smalL con-tracts would be procured through LCB. Veterinary and Laboratory Equipment,and Weighbridges (US$1.5 million), Office Furniture and Equipment, and FarmTools and Plows (US$2.6 million) would be procured in several small lots overa five-year period following LCB procedures. Laboratory Animals, Fertilizersand Pesticides, and Forage Seeds (US$1.0 million) would be purchased locallythrough procedures acceptable to the Bank. Vehicles and Motorcycles arelocally assembled, and GOI prohibits their importation. All vehicles andmotorcycles for GOI use (US$1.4 million) would be procured centrally throughannually negotiated contracts, and will be treated as reserved procurement.Both foreign and local consultants (US$4.2 million) would be contracted forthe project. Local consultants will be procured from local firms. Specialistadvisors for the PMO and BCDIU would be contracted individually from foreignsources. GDI wishes to continue the services of the two current resident

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advisors, together with the visiting Monitoring and Evaluation specialistemployed under the IFAD project. Qualified individuals would also becontracted for visiting services in forage and vaccine production. The Bankhas no objection to these arrangements. During negotiations assurances wereobtained that aLl consultant services would be procured on a schedule agreedwith the Bank, and engaged in accordance with Bank guidelines and agreed termsof reference.

53. Project procurement arrangements are summarized below:

PROJECT EXPENDITURE BY PROCUREMENT CATEGORY /a(US$ million)

NotApplic-

Category LCB Other able Total

CattLe 43.1 - - 43.1(27.0) - - (27.0)

Civil works 1.5 - - 1.5(0.7) - - (0.7)

Consultants 4.2 - 4.2- (3.6) - (3.6)

Training 1.1 - 1.1(-) (-)

Vehicles and motorcycles 1.4 - 1.4_ ~(-) -(-)

Veterinary and laboratory 1.5 - - 1.5equipment and weighbridges (0.7) (0.7)

Office furniture and equipment, 2.6 - - 2.6farm tools and plows (-) - - (-)

Laboratory animals, fertilizers, - 1.0 - 1.0pesticides and forage seeds - (-) - (-)

Administration - 9.8 9.8_ ~~~(-) (-)

Technical assistance for - 0.2 - 0.2project preparation - (-) (

Total 48.7 7.9 9.8 66.4(28.4) (3.6) ?:Y (32.0)

/a Costs are total costs including physical contingencies and expected priceincreases. Figures in parentheses are Bank loan amounts..

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Disbursements

54. Bank and IFAD loan funds would be disbursed as follows:

Disbursement shareCategory Disbursement rate Bank IFAD

(X) ( Z )

Cattle 85X of total costs 65 20

Civil works 60% of total costs 60 -

Veterinary and laboratoryequipment and weighbridges 60Z of total costs 60 -

Office furniture and equipment,farm tools and plows 50Z of total costs - 50

Vehicles and motorcycles 80% of total costs - 80

consultants 10OZ of total costs 100 -

Training -IGO% of total costs - 100

55. Disbursements would be made against contracts, except for trainingcosts (US$1.1 million) which would be disbursed against statements of expendi-ture (SOEs). Disbursements are expected to be faster than the historicalprofile for Indonesian agricultural and rural development projects, and tofollow closely the profile achieved by the IFAD project, since the projectwould be a -second phase and the project management and its operations arealready well developed. Loan Closing would be by March 31, 1992.

Accounts and Audits

56. Detailed separate accounts would be kept by DGLS and the PMO foreach budget item by year. Project accounts would be subject to two audits:one by the Inspector General of the Ministry of Agriculture and independentlyby the Financial and Development Supervisory Board (BPKP). The work of bothauditors has been generally satisfactory on past Eank-assisted projects andthe IFAD project. During negotiations assurances were obtained that adequateand separate accounts would be maintained; all contracts, orders and receiptswould be kept for at least one year after the closing of the loan; andindependent audits of each year's accounts would be submitted to the Bankwithin nine months of the close of each GOI fiscal year. In addition, aseparate audit opinion of all SOEs submitted for withdrawal of loan proceedswould be provided by an independent auditor. -

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Monitoring and Evaluation

57. Work begun on monitoring and evaluation (M&E) during the IFADproject would be continued under this project. By the time of completion ofthe IFAD project, reporting forms would have been fully field tested and readyfor use, and the design of the M&E systems would have been completed. Underthe proposed project, funds would be made available to: (a) expand the M&Eunit within the PMO and assign staff to the PHUs; (b) provide these staff withspecialized training; and (c) provide technical assistance. GOI would causeDCLS to (a) continuously monitor and evaluate project implementation and thesocio-economic impact of cattle on smallholder beneficiaries; and (b) preparea Project Completion Report and submit it to the Bank not later than sixmonths after project completion.

Cost Recovery

58. Project costs would be recovered by GOI from the sale of culled maleand female offspring returned to the project (returned cattLe are to be eitherculled and sold to traders for cash or selected for redistribution tofarmers), and from cattle sales to KUDs. Offspring repaid to DGLS of thesecond generation heifers and bulls would all be sold for cash, and at thistime project intervention would end. The cost recovery index (the ratio ofthe present value of incremental direct public sector cash revenues to thepresent value of incremental financial costs in constant terms) was calculatedin two ways with a low and a high estimate of the future market value ofcattle in the project areas. The index is estimated at 26% for low marketprice projections for offspring and 32% for high market price projections foroffspring. This is acceptable given the low incomes of project beneficiaries,and the fact that the index only covers cash benefits recaptured by GOI, anddoes not include the value of increased crop production and cattle off-takesthat would accrue to smallholders.

Environmental Impact

59. Moving breeding cattle from South Sulawesi and Nusa Tenggara wouldhelp slow herd growth there, and relieve grazing pressure and ecologicaldamage. The cattle would be shifted mostly from uncontrolled herds grazing onnatural pastures, where their grazing patterns lead to significant soiLerosion and fertility decline. After distribution, they would be tethered inindividual stalls, and fed on a daily cut-and-carry system. In addition,their manure would be collected and used for crop planting, hence raising soilfertility significantly, particularly on the houselot gardens and arable cropfieLds. The planting of forage on paths, boundaries and contours would alsohave a positive environmental impact by helping control soil erosion. It isunlikely that farm families would milk the cattle since Bali cattle producelittle milk in excess of what is required by the calves. Nutritional improve-ments would be derived however from the increased production of food crops,especially protein-rich legume crops, and from the higher cash incomes gene-rated from the project.

- 21 -

Project Benefits

60. The project would support GOI's overall development objectives byincreasing foodcrop production and raising the incomes of the rural poor. Atleast 9oZ of the cattle recipients would be transmigrants, drawn from amongthe poorest of the rural poor on the inner islands who often work only as sea-sonal agricultural laborers prior to joining the transmigration program. Theaddition of cattle to their transmigrant farming systems would provide themwith both draft power and a source of organic fertilizer which would help themto increase food crop production and move beyond a subsistence existence. Theother recipients would be smallholder farmers, frequently spontaneousmigrants, who have settled on the peripheries of official transmigrationsites. In total about 237,000 families would receive cattle distributed orredistributed as a result of the project. Additional direct projectbeneficiaries would include smallholder farmers in cattle procurement areaswho sold cattle to the project, and some 700 contract forage seed producers.The project would also have a marked impact on the provincial economies inprocurement areas by providing greater market outlets for cattle and creatingincomes from seed production.

61. The estimated economic rate of return (ERR) for the project is 25x.The ERR was found to be relatively insensitive to changes in project para-meters. For example, if crop benefits were reduced by 50%, the ERR would fall.to about 21%, and if there were no incremental crop benefits and project bene-fits were derived entirely from incremental cattle productivity the ERR wouldbe about 15X. Should project costs be 50% higher than expected, the ERR wouldfall to 21%, while if the project scope were reduced by half, the ERR wouldstill be about 23Z.

Project Risks

62. There is some risk that increasing the size of the cattle distribu-tion program will strain the administrative capacity of the existing projectmanagement. The project organization has already shown its ability to procureand distribute steadily increasing numbers of breeding stock. The quantity ofcattle to be handled in the first two years of the proposed project does notexceed numbers reached in the IFAD project, and project management capacitywill be further strengthened under this project.

63. The project assumes a substantial demand for cattle in cransmigra-tion areas. The project is designed to provide cattle to existing settlers,and to less than half of the new transmigrants expected by GOI duringRepelita IV. Should demand be less, more cattle may be distributed to localsmaliholder farmers. There is also a risk of disease losses in the cattledistribution areas, but the project minimizes this risk by using the SATGASteams as front-line animal health workers, and by increasing the numbers ofveterinarians to support the SATGAS and improve their facilities. Shoulddisease outbreaks occur in procurement provinces, less cattle may be availableto the project. Jembrana disease, for which there is as yet no firm identifi-cation, treatment, or control, is still endemic on Bali, but there have beenno confirmed outbreaks elsewhere. Cattle will not be procured from Bali, butfrom Sulawesi, Madura and Nusa Tenggara. Sulawesi and Nusa Tenggara have not

- 22 -

suffered Jembrana outbreaks (there is evidence that Bali-origin cattle therehave acquired resistance to it), and have been free of foot-and-mouth diseasefor many years. OI has taken strict precautions to prevent foot-and-mouthdisease entering the cattle procurement areas, and no movement of live cattleto these islands is permitted. Encouraging progress is being made in address-ing the Jembrana problem; investigations would be intensified under theproject, and it is hoped that control measures would be determined. Finally,cattle losses may occur during shipping, but specified shipping procedureswould be followed to keep the cattle in good condition. It is also possiblethat cattle will not be returned to GO for credit repayment, but this doesnot seem likely based on the experience of the IFAD project.

PART V - RECOMNENDATIOU

64. 1 am satisfied that the proposed loan would comply with the Articlesof Agreement of the Bank and recommend that the Executive Directors approvethe proposed loan.

A.W. ClausenPresident

AttachmentsSeptember 18, 1985Washington, D.C.

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VFALT iLANISMA,flU3 SEPAL (CTI03) .. Ial.1 3051.0 cuses CZ or uAf VmNw) 55.0 35.. 45.3

INDE or mw rw. mn ciE -(1969-71-100) 93.0 102.0 123.0 124.4 103.A

in cir urn o rCALORiES (I or 79.0 920 112.0 115.7 113.2P30323 (GuM Pn DA) 34.0 41.0 33.0 50.3 3.4OF XCII ANDL AD MOLK 6.0 6.0 7.0 d 14.1 34.2

CD cms 1-4) UR= 142 21.9 16.1 13.0 7.2 5.3

LI EIC=. AZ AXS (ESS) 41.2 47.0 53.5 G.6 "5.roast HU. IM (NI sew) 150.0 22.0 101.0 64.9 39.7

ACES TO SAB VAMIt (ZiW)L .. 3.0 23.0 46.0 U5.3

DItAH. 10.0 40.0 57.6 76.5N.AL 1.0 1.0 37.1 44.2

aS mO UEIA maScLCZ OF i01ULAUOU

TOTAL .. 15.0 23.0 50.1 56.3gang .. 19.0 20.0 52J 73.6

AL .. 4.0 24.0 * 4J 25.3

2QOULAfO M PTSZCIWA 460.0 310.0 11530.0 7731.7 190.7POP. PE N11SDIN OI 4310.0 if 7610.0 2300.0 2464J. 606.2PrO. 1! - an

TOTAL 13SO.0 150.0 17200A 11U2.1 3S2.03U36 230.0 .. 700.00 U51. A2A.0

RDuL .. .. 3160.0 256. 2716.7

ADlSUSS5ffi DUSTTaL 333 .. .. .. 41.1 27.3

AEZSE SIZ or 30TOTAL 4.4 4.6URBEAN 4.9 3.3RUEAL 4.3 4.7

AVERAG NO. oW PERSOS/300TOTAL .. 1.5URBAN .. 1.6Rnum .. 1.3

arOF NIELLs XITN ujCT.TOAL .. ..mau .. .. . ..m. .. .....

-24 - ANNEX IPage 2 of 6 pages

DDOIICSXA - SOCSAL XNDICATORS DATA SEETNDoNESIA REEECE GRIWPS (I TD AE ES) /a

RUST (moSr RECENT EMA) /bCM RcT MIDDLE MIDDLE EIDOLE INCOlE

1960Lb 197a! r m ASrA A PACIFIC LAT. AMCA A CAR

ADJUSTED EROLLME RAOSPRIMARY: TOTAL 71.0 77.0 10.0 100.7 106.7

MALE 86.0 83.0 106.0 104.4 108.5FPhALE 58.0 71.0 94.0 97.2 104.6

SECONMDY: TOTAL 6.0 15.0 33.0 47.B 44.2MALE 10.0 20.0 38.0 50.6 42.7FECALE 3.0 10.0 27.0 44.B 44.9

VoCATIONAL (Z or sECOiwAR) 20.4 22.1 13.9 18.4 13.3

PUPIL-T1EACI RATIOPRIMARY 39.0 29.0 29.0 30.4 29.9SECONDARY 14.0 13.0 16.0 22.2 16.7

COSO-PZOPASSENGR CARSITUSAD POP 1.1 2.1 4.1 le 10.1 46.0RAIIO UCXEERS/THOUSAID POP 7.2 21.9 131.2 172.9 328.3TV ECIZVERS/TUOMD Po0 0.1 0.1 22.6 58.5 112.4NEWSPAD (VDAILX GNRAL

IrINESr-) C X~LZ0PERL IHOUSAB POPIILMATX 11.0 .. 14.9 65.3 B1.1

CINEMA AIINUAL ATTD JWAECA?T 2. .. 1.0 Ic 3.4 2.4

LAUOI -NCTOTAL LAMM FORCE (MMDS) 34191.0 41090.0 5"17.0

EMALE (PECNT) 27.8 30.9 29.3 33.6 23.6AGRIWL2UR5 (PERCENT) 75.0 66.0 58.0 lc 52.2 31.4nDUSY (PERCENT) S.0 10.0 12.0 7 17.9 24.3

PARYICIPATIO RATE (PERCENT)TOTAL 36.7 35.4 35.0 38.9 33.5KA^LE 54.2 49.5 *9.6 50. 51.3FEMALE 20.0 21.6 20.4 26J 15.9

ECOMIC DEPENDENCY RATIO 1.2 1.3 1.3 1.1 1.3

pE O or PRIVATE DINCO

IICT 5S1 or w .. .. 23.5 .aIEST 20 OUSEDS .. .. 49.4 48.0

-wES 20 or OUiS .. .. 6.6k 6.4LouEST 40 OF 0 .. .. 1.k 15.5 ..

- TA0 -

-AD AESOUT POER INCMELEVEr. (USS PER CAPIA

MA1.. 124.0 /b 124.0 re .. 289.3RIRAL .. 106.0 7 106.0 7h 151.9 115.3

IUD RELAUI POYE! INCOMLEVEL (USS PER CPrw

4 .. .. 119.0 /h 177.9 519.8RURAL .. .. 98.0 7i; 164.7 359.7

EsNAD Pw. EW ABSOLUTEPOWER!! lEONE LEL (Z)

Dam .. 51.0 1% 26.0 h 23.5R.. 59.0 i.0 Th7 37B.

.. Tr AVALABLIOT APPLICABLE

N OTS T S

Ia Yhe grap avrage for each indicator m popuLatlcn-walhted arittmetic _mas. Caverag of countriesaong the ndlcacoce depe_ds on waladblUty of data ad Is not unifom.

fb ufles otbmwiAe nted. 'Data for 1960" refer to ay year between 1959 and 1961; 'Data for 1970" betweem1969 and 1971; ad data for "net Recent Ette"beween 1981 and 1983.

/c 198O; /d 1977; /. 1979; /f 1962; 4 1976; th 3980 price.

JWU. 1985

- 25- ANNEX IPage 3 of 6 pages

DEdNMOt OF SOCL UDICATOSNot: AMthough dataaedrwn fram stmoanerallyJdmd thenumtautaivead aiable. it sbould amobe noWmdt they nm mot beineratanNymauprable became orde lack ofastndwdimd deltions mat on ad by dif_nt emuenm in col_echng th dat. The data am. no_tuu. matid todecribe _oa mawhtude. indicte tnds, d dmethanze cetain major dillrmeua betuun eo_tmiTbg ererem grup ae t1) tI emay Vu* of ie subjectMy md (2) a couny gmp wit anewhat hiher a nome than th ammnyguo dof te s county (cet fer HIben. Oi Expatn"' g.op wre Midd e Nrh Af d Middle Eat- jai d bbeaff ommacioadb ra aiflidm). In th re op dat the avemav am pn_mmn wightad ,ihi'nti mea for mdcar mnd ho only w majrtyofthe coftil in a*raup ba dta for thai indicatai Sinc shea evoae aocouatin moog the indicao demendt avaibit aofdat andis oat nfoenn,cauun mm beexered in eatng average of oindieior to noodc Thme auvaaweoly tieufti in conpeingde value of otmindimfioa a tun mnontbe ceuny and r_rae poupa

AREA (thousand sq.kzn) Crud Blu Awe (pm rdwas -Number ofive birtbs i the year

Toizl-Total surface area comtprng land ae and iland watas; per thousand of mid-year populaion 1960. 1970. and 1983 data.1960. 1970 and 1983 data. Cr Deat Rae (per th.uuud-Number of deats m the year

AgEsoieu l-Estimate of agriulural area used tempararily or per thousand of mid-year population: 1960. 1970. and 1983 data.permanedy for crops. pastues. market and kitchen gardens or to Gnu Repreieti. Rme-Aveage number ofdaughters a nle fallow. 1960. 1970 and 1982 data. wil bear in her nomal reductive period if sbe

prsnt age-specifi: fertiliy rtes uualy five-year avegs cudingGNP PER CAPIrA (USS)-GNP per capita estimates at current in 1960. 1970. and 1983.mrket prces, calulated by same convesion nethod as WorY F Pf-Awpr, And (eitaudsJ-Annual num-lank Atls (1981-83 basis); 1983 daa berofacoeptorbirth-cntrol devices nd auspicesof national

ENERGY CONSUMMON PER CAPITA-Annual apparent fily planning proramconsumption of commercial primary enrgy (coal and lignite. Fin7y P1 41wr (par .finriedue)-Tht percen-p _eleum natural gps and hydro-. nuclar and geothermal .ec- tagc of maried vomen of child-bearing age who are practicing ortriety) in kilogrms of oil equivalent per capita: 1960. 1970. and whose husbands a practcing any form ofconracepto Womcn1932 data. of child-bearing age are genemly women aged 15-49. although for

some countri=s conacptive usag is measumrd for other agePOPULATION AND VITAL STATIsrCS grOU

Tot Pupulaie Mid-Year (*-auds-As of July 1 1960.1970. FOOD AND NUtlltIONand 19B3 data.

Urhau Pupofutius. (pqrcent Of £asa-R;tio of urban to capet annual productia of all food commoditi Productionpopulaton; different definitions of Arban arcas may affect compar- emcludes animal feed and seed for agiculturm. Food commoditiesability of data among countries: 1960.1970. and 1983 data. indude prmary commodities (eg. sugarcane instd of sugar,PepuluIau prejecliuw whhic arc edible andi contain nutrients (cg. coffee and tca axePoprrhrun in year 2000-The prqection of population for 2000. cduded). they compris ceals root crops. puls, oil seds.made for cach eonomy separely. Strg with infomation on vegetables fruits, nuts, sugarcane and sugar beets. livestock, andtstal population by age and sex, fertity raes, mortality rates and vcstock products. Aggregate production of ach country is basediternational migration in the base year 1980. these parameters on national avrage producer price weights; 1961-65. 1970. andwere projected at five-year intervals on the basis of gencralid 19B2 data.assumpuions until the population became stationary P- Capita Supl qipf lvli (p qcaurofreq _Jeim -Comput-Stariouary popularion-ls one in which age- and sex-specific mor- ad from calorie equivalent of net food supplies available in countrytaity rates have not changed over a long peiod. while age-specific per capita per day. Available supplies comprise domesiic produc-femility rates have simult,neouslv remained at replcment level tion imports less exports, and changes in stock. Net supplies(net reproduction rate= ) In such a population. the birth rate is exdude animal feed, seeds for use in agriculture, quantities used inconstant and cqual to the death rate, the age suctur is also food processing, and losses in distribution. Rcquirements wereconstant. and the growth mte is zero. The stationary population estimated by FAO based on physiologcal needs for nomnal activitysize was estimated on the basis of the projected characteistics of and health considerng environmental temperature, body weights,the population in the year 2000. and the rate of deline of fertility age and sex distribution of population, and allowing 10 percent forrate to replacement lcveL waste at household leveL 1961. 1970 and 1982 data.Popuataon Momenzant-ls the tendency for population growth to Per Capia SuWply of rwem (gra per dy)-Protein content ofcontinue beyond the timc that rcplacemcnt-lvel frtility has been percapita net supply of food per day. Netsupply offood isdefinedachieved; that is even after the net reproduction rate has reached as above. Requirements for all countries established by USDAunity. The momentum of a population in the year t is measured as provide for miniumn allowances of 60 grams of total protein pera ratio of the ultimate stationary population to the population in day and 20 grams of animal and pulse protein of which 10 gramsthe year t. given the assumption that rertily remains at replace- should be animal protein. These standards.are lower than those ofmeat level from year i onward. 1985 data. 75 grams of total protein and 23 grams of animal protcin as an

Aepulsin D rsii. avage fo the world, proposed by FAO in the Third World FoodPer sq.kt.-Mid-year population per square kilometer (100 hec- Supply-, 1961. 1970 and 1982 data.tares) of total area: 1960. 197C. and 1983 data. Pe Capi Poei Supply hor Aanu a Pulise-41Protein supplyPer sq.k- agricuural land-Computed as abovc for agricultural offoodderivedfiromanimal andpulsesingrantsperday; 1961-65.land only. 1960, 1970. and 1982 dat 1970 and 1977 daa.Populuue Age Sruewe (percenr)-Children (0-14 ycars). work- Child Vffes 1-4) Deat Rate (perthousand)-Number of dcaths ofingage(I5-64 years). and retired l65 yeas and over) as percentage childe aged 1-4 years per thousand children in the samn ageof mid-year population; 1960. 1970. and 1983 data. group in a given year For most developing countries data derivedPopulad.m Growth Rate (percenu)-rosaIL-Annual growth rates of from life tables; 1960. 1970 and 1983 data.total mid-year population for 1950-60. 1960-70. and 1970-83. HEALTHPwpuluie Grvwth Rae (perrew)-wha Annual growth rates Lefe Expectawy at lirh (rears)-Number of years a newbornof urban population for 1950-60. 1960-70. and 1970483 data. infant would live if prevailing pattcrns of mortality for all people

- 26 - ANEX IPage 4 of 6 pages

at the time of of its birth we to sy tbe ame throughout its 1if ApE- hr Jtaio - prhwy. ad secaondary-Total student en-1960. 1970 and 1933 date, roiled in primary and asconday kvdels dhided by itumbes of4how Ma t (POP br of infat who dic tad a tin orspoding lee

before rachis one y of age per tousnd live bir i a gvenyear. 1960 1970 mid 19h3 dat. CON ONAce to Si* War (P of Mt fand _ hsa _ r _(pm tsvrd I l I JPI car com-wm-Number of peopl (oLbm d ral wth rasonble po motor can eang ke thn dght perons; cludes ambul-- to safe waer supply (mdtludtad srfa wat or om. harses ad militay Vehicles.

untrea td but uncrinsn wae such as thst frm protecd W A (pm. typo ar -eveboeol. pig and sanitauy well) as percentages of theirmrpee- ror radio broadcast to genral public per thonusnd of population

fiv popWalom In an urban am a public fmtein or stsndpoat l - c in countrieu and in yea whlocte not m, tha 200 meer fiom a homusemy he cnded restaonof radio smt wa in effect; data for remn year maya bing with raodis ablecces of that hos In rural - n be I Ince most countries abolished licensidngreaLwnable would i*mpl htte hosewifeor membenrs fthebousel_old do not bve to sped a disproportionae par of te day J 'A ' (w 4_- T f°rb uin facbm the fws waer noedse tonFl publi pr thousd popubdon; emcludes unliend TV

receves in counies and in ya when registration of TV ses wAccas to _ DiSd (p9=r of u in d-rt _

use-Number of peopw (otL aurban nud u) served byexcre dispasal a percntaw of teir respeive populations I"pC ( pf tize,dupb.Ik-Shows the aver-Exere dispoul may iude the coUeto and dispouL wih or ap eruato of -daily geal interest nwspape. defined as awithout teatmt, of human e:cret, and wasewater by warn- pfwOda publco devoted primarily to eodig geal news.borne systems or the use of pit prvies and simir inallakins It as conSdered to be -dily" if it appear at lst four tims a weLPbphsa pm. Pysk-Pation divided by number of prac- Cue Ami Aunapw Capt*a per Ye-Based on theusingphyscians qualified froma media school at uvty lve number of tucet sod durng the ye. iuwludig admisons toPp.hro. pm No-Vd f F- 1b.uu divided by nber of driv emnema and mobie units.practicing mae and fema gauduae nure asstat nursepracical nues and nursig auxiliaries. L FORCPpulisu p- H.pie Bmd-mA aim, r LWoFr F ( raadu-Economnically actv pen in-(tot urban and rur divided by the respective a of ldin arme fores and uneniployed but ecduding houswve.hopit beds avalaplenin m pub anstuten..ands tc_. covering popultin or all ags Definitons inhospitals and rehabilitaton centr. Hospails are esiacseam various counties are not comparable: 1960.1970 and 1983 datapemanendy staffed by at least one physicEas. _e prov- F*-f J (prcea)-Female labor force as percentage of total laboriding principaly custodil cue are not included. Rural hospiai force.howevenicl4dc health and melical cetes not pem ntly staffed Agdrbw (percoar)-Labor for in fanig, foresty. hutingby a physicia (but by a nmal asistant. nure. midwi, etc.) and fishing a peentage of total labor foone 1960. 1970 and 19S0which offer nptient accommodaon and provide a limited rng datof medical faciities. Iadsry (percmutj-Labor force in mining. conSmtr mann-Admim s per p ospwa Red-Total number of admiswio to or ractung and dectricity. water and gps as pemrtag of total bordicare from hospital divided by the number of beds. force; 1960. 1970 and 1980 data.-._SING sPraJf-t aadjJitk4i1articipatioHOUSING oractviy mtesare computed as totaL male. and female labor force

A-qe Sire of H _mM (p--- p- heuuui#s4 -eeed . m{ perentae of total male and femal popultin of all agsaa edorz-A hunbhold consus ofa group ofindividuals whbo share irwy. 1960. 170. and 1933 data. These are based on ILO's

living quarts and thr main nms. A boarder or ldxFr may or p ipeim au mdecting age-sex strctu of the popuion. andnay not be incuded in the household for stistc purpos. lng time trd A few cmates are from national sources.A;re Number of Perss per Room-fol4 ar. _d Ecewmie Depsudey Ratio-Ratio of population under 15. andAverage number of persons per room in aUrban and rural 65 and over. to the working age population (those aged 15-64).occupied conventional dwlings. respectvely Dwdlings excludenon-permanent suctur and unoccupied par. INCOME DtSTRIDUTIONPermeq of Dweags with Ekrriefty-tetd alan. gad rail- Pffctage of- T.v Disposaoabe Incom ii ch and lIed)-Conventional dwellings with elecricity in ving quartes as peaen- Accruing to peentikl groups of househohi ranked by total house-ag of totaL urban, and rurl dwllings respectively. hold income

EDUCATION POVERTY TARGlET GROUPSA4jused Emwfiient Rmij The foUwing esties are very approximat measures of povertyliinay sdhol - tora. mak .d fmwk-Gross toL an levels, and should be interpreted with considerable caution.female enrolhnet of all ages at the primay level as perentags of EadimatedAisltwe Pwo ety le d (S3 per ceihr)-orbauresptive pnmazy sdoo-age populatins While many countnes ' d ,r-Absolutc povtry iincone leve is that income 'vdconsider primary school age to be 6-1l yeas others do not The below which a minimal nutritionaly adequate diet plus essentialdifTcrencss in country prae in the ags and duration of school non-food rquirements is not affordablecare reflected in the ratios givaL For some countries with universal EsnteI Rdsdie Pvery lacow Leed rUSper capsta)-wrilaedtcation, gross enrollment may exceed 100 percent mnem some and nmi-Rural relative poverty income levd is on-third ofpupils are below or above the country's stndard prmary-schol averge per capita personal income of the country. Urban kvel isage. derived from the rural levd with adjustment for higher cost ofSecvar.<y scbol - rowl. mak and fernal-Ctmpured as above: living in urban asmondary educaion requires at east four yea of approved pri Esnaz Appulsi Delew Abs' APmer!y Inm Level Iper-mary instruc ion provides g8neraL vocafionaL- or rtining cee)-garir a rn- * Percent of population (urban and ruralinstructions for pupi usually of 12 to 17 yeas of ae correspond- who are absolute poor.-ence courses are enalby excluded.Vocatoa E-o-xi rmrce of secovi"y)-vocarionai situ- Comparative Anaysis and Data Divisionions indude technicaL industrial. or other progm which operate Economic Analysis and Projections Departmentindependently or as departnts of secondary institutions June 1985

_ 27 -

ANNEX IPage 5 of 6 pages

Population 155.8 illion (mid-1983)CNP per Capita: US$560 (1983 estinate)

INDONESIA - ECOIJOIC INDICATORS

Amount(million US$ at Annual growth rate (Z) /bcurrent prices) Actual Projected

Indlcator 1983 U 1 z l53 a 1985 19 1987 1988 1989 199D

NATIONAL ACCOUNTSCross domestic product /c 78,344 9.9 7.9 -0.2 4.7 6.5 2.9 4.6 5.1 4.7 4.1 4.3

Agriculture 20,651 5.2 4.9 2.1 4.8 5.0 3.7 3.7 3.7 3.7 3.7 3.7Industry 29,896 12.5 8.5 -6.4 5.0 9.8 0.9 4.5 5.5 4.6 3.0 3.5Services 27,797 11.8 9.8 5.5 4.3 4.0 4.5 5.5 5.5 5.5 5.5 5.5

oDnsusption 62,731 12.4 15.8 3.0 0.7 7.2 3.1 3.1 4.2 4.2 4.2 4.2Gross inve.tuent Id 18,908 18.9 11.1 8.5 -7.0 -9.0 5.1 5.1 5.3 5.5 5.7 5.5Exports of CNFS 19,508 -5.6 -2.4 -12.6 14.2 3.5 1.4 6.4 5.2 3.9 1.4 3.0Imports of CNFS 22,803 15.1 27.1 3.2 -8.6 -7.5 3.6 1.5 2.4 2.6 2.6 3.4

Gross natLonal savings 12,273 33.2 -20.0 -11.3 3.7 18.4 -3.3 8.9 8.0 6.9 5.3 5.2

PNTCES= TF-defLator (1981 - 100) 91 100 113 131 142 154 168 183 199 217 237Exchsnge rate (ip per USS) 627 632 661 909 1,026

Share of CDP at _rket prices (Z)(at current rice.) A vrage annual increase CZ) lb

1961 19/0 i97 1980 195 19V0 193M 1970-75 1975-80 19o-855 19850

Gross domestic product 100 100 100 100 100 100 3.9 8.4 7.4 4.3 4.6Agriculture 54 47 32 25 26 25 2.7 4.1 3.3 4.1 3.7Industry 14 18 34 43 38 38 5.2 12.0 9.8 3.4 4.2Services 32 35 35 32 36 37 4.8 9.7 9.5 5.6 5.5

Consuttion 91 89 79 71 78 76 4.1 8.4 9.2 6.0 4.0Cross investment /d 8 14 20 21 18 19 4.8 18.3 12.2 2.6 5.4Exports of GNFS 13 13 23 31 25 24 3.6 9.2 2.9 -1.1 4.0Imports of GNFS -13 -16 -22 -22 -21 -19 3.2 22.1 14.0 2.6 2.5

Gross national saving. 8 9 17 26 19 21 6.1 23.1 14.2 -0.3 6.8

As Z of CDP1960 1970 1975 1980 1984

PUBLIC FINANCE /eCurrent revenue 11.7 10.1 17.4 22.5 21.5Current expenditures 14.0 8.4 9.9 12.8 13.3Surplus (+) or deflcit C-) -2.3 +1.6 +7.5 +9.7 +8.2Capital expenditure n.a. 5.0 11.3 13.0 10.0Foreign financing 0.2 3.5 3.7 3.3 1.8

1960-70 1970-75 1975-80 1980-85 1985-90

OTHER UMICATORSAnnual GrP growth rate (X) 4.5 7.6 7.1 4.1 4.7Annual GNP per capita growth rate (Z) 2.4 5.1 4.7 2.0 2.5Annual energy consmiption growth rate (X) 2.2 11.2 11.0 1.4 4.6

ICOR 2.2 2.2 3.3 4.8 4.0Marginal savings rate 0.30 0.48 0.28 -0.01 0.29Import elasticity 1.2 Z.8 0.84 0.57 0.53

/a Estimates.75 At constant 1973 prices for 1980-81, and 1981 prices for 1982-90.7F At market prices.7Hr Fixed investment; stock changes are included in consuaption.7Te Central Government only3. on an April-to-March fiscal year basis.

East Asia and Pacific RegionMay 31, 1985

- 28 -

Populatlon : 155.8 rilllon (mld-1983) ANNEX IGNl per Capita: US$560 (1983 estimate) Page 6 of 6 pages

INDCNZSIA - BALANCE OF PAINENTS AND EXTERNAL CAPITAL AND DEBTkHL1l1ouz Uz5i at current pricesj

A-tual PrlectedlY9W 1981 1982 1983 L9B4A 1985 IRO 1981 199D

BAlANCE OF PATHENTS/bL. axports 22,385 22,994 15.672 19,817 20.243 20,769 22,868 26.170 36.235

(a) Oil end LNG (gross) 17,297 18,824 14,744 14,449 14,341 14,253 15,512 17,821 23,848(b) Nonoil 5,588 4,170 3,928 5,368 5,902 6,516 7,356 8,349 12,387

2. Imports (lcluding net NFS) -17,589 -22,570 -22,339 -19,655 -17,611 -19,066 -20,783 -23,026 -31,586(a) 011 sector -4,050 -5,407 -4,802 -3,839 -3.135 -3,801 -4.113 -3,619 -6.540(b) Nonoil imports -11.837 -14,561 -15.824 -14,246 -12,805 -13,616 -14.899 -16.462 -22.438(c) NFS (net) -1,702 -2,602 -1,713 -1,570 -1,611 -1,649 -1,771 -1,945 -2,608

3. Resouree balance 5,296 424 -3,667 162 -2,632 1,701 2,085 3,144 2.8004. Factor services -3,165 -3,210 -3,573 -4,476 -4.596 -4,528 -4,994 -5,708 -7,287

(a) Interest public debt -823 -994 -1,145 -1,256 -1,620 -1,598 -1.851 -2,132 -4.487(b) Other (net) -2,342 -2.216 -2,428 -3.220 -2.976 -2,930 -3.143 -3.576 -4,487

5. Capital grants 76 67 105 95 100 112 119 125 1506. Balance on current account 2,207 -2.719 -7,135 -4,219 -1,864 -2,715 -2,790 -2,439 -2,4887. Direct foreign iivestment 140 142 311 193 250 250 275 300 375B. Public N & LT loans

(a) Disbursement 2.551 2.673 4,192 4,965 3.828 4,988 5.428 6.068 6.892(b) Amortization -936 -1,053 -1,102 -1,295 -1,628 -1,980 -2,137 -2,545 -4,603(c) Net disbursements 1,615 1,620 3,090 3,670 2,220 3,008 3,291 3,523 2,289

9. Other capital (net) -1,U88 -31 455 1,975 287 -143 -104 -418 13310. COange in reserves (- Increase) -2,736 988 3,350 -1,619 -873 -400 -672 -9S6 -30911. Net official reserve- 7.342 6,354 3.004 4,623 5.496 5,896 6.588 7.534 9.384

Reserves In months of nonoil imports+ NFS 6.5 4.4 2.1 3.5 4.6 4.6 4.7 4.9 4.5

Harandtu. Item,Net forelgn assets of the banking

system/c 10,787 10,622 6.322 8.395 9,930 10,331 11,003 11.969 13,819Total reaerves in month. of nonoil

liports + NFS 9.6 7.4 4.3 6.4 8.2 8.1 7.9 7.8 6.6-

EXTERNAL CAPITAL AND DBTVidGross Dlsbursements 2 551 2.673 4 192 4 965 3 828ConcessIonal Loans - -7W i ** :3 W W

mllateral 1TM 7I7 J Wu 3f* 7TIDA 42 69 78 60 54Other 6 7 B 8 19

Nonconcessional Loans 1892 10 3 503 4357 3 277BiLateral -ff '17w '317 =WlIED 331 314 505 489 772Other mltilateral 52 85 126 160 163Private-source 1,421 1.310 2.356 3,219 1,938

Erternal DebtDebt outstadingn and disbursed /e 14 971 15 870 18 515 21.686 22 863

Official-source 1 3 1D, 1Private-source 5,465 5.812 7,403 9.649 10,042

Undisbursed debt 9.481 11.387 12,870 13.778 13,973

Debt ServiceTotal service payments 1,759 2.047 2,247 2,551 3,248Interest 823 994 1,145 1,256 1,620

Paynents as S of exports/f 7.7 8.9 12.0 12.9 16.0

Averag e Interest Rate on Nev Loans (2) 8.1 8.7 9.2 8.8 9.1OrtIcisa-source 5.4 7.8 8.8 8.7 8.6Private-source 12.4 9.4 9.5 8.8 9.8

Average Maturity of Nev Loans (Years) 18.8 15.5 15.2 15.1 15.9O±±IclaL-source 24.4 20.5 20.6 22.3 20.9Prlvate-source 9.8 11.1 11.1 10.3 9.2

As X of debt outstanding at end of 1984Maturity structure of debt outstanding

Maturities due withLn 5 years 34Maturities due within 10 years 65

Interest structure of debt outstandingInterest due within flrst year 7.0

/a EstIatt-s.7T On an April-to-March fiscal year basis.7F Includes foreign assets of deposit money banks In addition to offifcal reseLves.77 Excludesyprivate nonguaranteed loans.i* At end of period. East Asia and Pacific Regionft Oil exports treated on gross basis. May 31, 1985

-29 - ANNEX IIPage 1 of 4 pages

THE STATUS OF BANK GROUP OPERATIONS IN INDONESIA

A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of March 31, 1985) /a

Loan/ Amount (US$ million)Credit Fiscal (less cancellations)number year Purpose Bank IDA Undisbursed

Thirty-five Loans and forty-one Credits fullydisbursed 1,584.59 642.71 -

1578 1978 Tenth Irrigation 140.00 - 68.021604 1978 Nucleus Estate and Smallholders II 65.00 - 29.75869 1979 Polytechnic - 49.00 11.29

1645 1979 Twelfth Irrigation 77.00 - 23.471653 1979 Third Urban Development 54.00 - 11.261692 1979 Second Agricultural Training 42.00 - 8.291696 1979 Fifth Highway 123.20 - 19.59919 1979 Transmigration II - 67.00 0.0

1707 1979 Transmigration II 90.00 - 86.271708 1979 Eighth Power 175.00 - 41.641709 1979 Second Water Supply 35.50 - 9.85946 1980 Yogyakarta Rural Development - 12.00 7.40

1751 1980 Nucleus Estate and Smallholders III 99.00 - 34.79984 1980 Smallholder Rubber Development - 45.00 27.57995 1980 Fifteenth Irrigation - 37.6 15.72996 1980 National Agriculture Eztension rr - 42.00 24.95

1811 1980 Fourteenth Irrigation 116.00 - 53.391835 1980 Nucleus Estate and Smallholders IV 42.00 - 29.721840 1980 National Agricultural Research 35.00 - 35.001014 1980 National Agricultural Research - 30.00 5.941872 1980 Ninth Power 253.00 - 86.711898 1981 SmalLholder Coconut Development 46.00 - 33.061904 1981 University Development 45.00 - 37.301950 1981 Tenth Power 250.00 - 21.681958 1981 Swamp Reclamation 22.00 - 13.451972 1981 Fourth Urban Development 43.00 - 24.13

/a The status of the projects listed in Part A is described in a separate report onall Bank/IDA financial projects in execution, which is updated twice yearly andcirculated to the Executive Directors on April 30 and October 31.

-30 ANNEX IIPage 2 of 4 pages

Loan/ Amount (US$ million)Credit Fiscal (less cancellations)number year Purpose Bank IDA Undisbursed

2007 1981 Nucleus Estate and Smallholders V 161.00 - 114.442011 1981 Second Small Enterprise Development 106.00 - 8.952049 1982 Jakarta-Cikampek Highway 85.00 - 75.702056 1982 Eleventh Power 170.00 - 84.112066 1982 Second Seeds 15.00 - 10.802079 1982 Bukit Asam Coal Mining Development and

Transport 185.00 - 85.872083 1982 Rural Roads Development 85.00 - 63.112101 1982 Second Teacher Training 80.00 - 76.262102 1982 Second Textbook 25.00 - 24.892118 1982 Sixteenth Irrigation 37.00 - 21.242119 1982 Seventeenth Irrigation iEast Java 70.00 - 48.11

Province)2120 1982 National Fertilizer Distribution 66.00 - 41.712126 1982 Nucleus Estate and Smallholders VI 68.10 - 59.492153 1982 Coal Exploration Engineering 25.00 - 19.692199 1982 Central Java Pulp and Paper Engineering 5.50 - 4.212214 1983 Twelfth Power 300.00 - 256.202232 1983 Nucleus Estate and Smallholders VII 154.60 - 152.322235 1983 Provincial Health 27.00 - 25.972236 1983 Jakarta Sewerage and Sanitation 22.40 - 21.382248 1983 Transmigration III 101.00 - 66.002258 1983 Public Works Manpower Development 30.00 - 28.722275 1983 East Java Water Supply 30.60 - 27.492277 1983 Fifth BAPINDO 208.90 - 158.712288 1983 Transmigration IV 63.50 - 61.752290 1983 Second Polytechnic 107.40 - 107.132300 1983 Thirteenth Power 279.00 - 241.152341 1984 Third Agricultural Training 63.30 - 62.842344 1984 Nucleus Estate and Smallholder Sugar 79.20 - 53.912355 1984 Second Non-Formal Education 43.00 - 41.382375 1984 Second Provincial Irrigation Dev. 89.00 - 85.342404 1984 Highway Betterment 240.00 - 235.372408 1984 Fifth Urban Development 39.65 - 39.152430 1984 Third Small Enterprise Development 204.70 - 204.142431 1984 Second Swamp Reclamation 65.00 - 64.842443 1984 Fourteenth Power 210.00 - 209.481950-1 1985 Supplemental Loan for Tenth Power

(1950-IND) /a 50.00 - 50.002472 1985 Secondary Education and Management

Training 78.00 - 77.81

/a Not yet effective.

- 31 - ANNEX EIPage 3 of 4 pages

Loan/ Amount (US$ million)Credit Fiscal (less cancellations)number year Purpose Bank IDA Undisbursed

2474 1985 Upland Agriculture and Conservation /a 11.30 - 11.302494 1985 Smallholder Rubber Development II /a 131.00 - 131.00

Total Bank loans and IDA credits 7,020.93 938.48

Of which has been repaid -395.81 -17.69

Total now outstanding 6,625.12 920.79

Amount sold to third party 28.24Amount repaid by third party -28.24 -

Total now held by Bank and IDA /b 6,625.12 920.79

Total undisbursed 3,693.82 98.65 3,792.47

/a Not yet effective.

/b Prior to exchange adjustment.

- 32 -

ANNEX IIPage 4 of 4 pages

B. STATEMENT OF IFC INVESTMENTS (as of March 31, 1985)

Fiscal Type of Loan Equity Totalyear Obligor business (US$ million)

1971 P.T. Semen Cibinong Cement 10.6 2.5 13.11971 P.T. Unitex Textiles 2.5 0.8 3.31971 P.T. Primatexco Indonesia Textiles 2.0 0.5 2.51971 P.T. Kabel Indonesia Cable 2.8 0.4 3.21972 P.T. Daralon Textile

Manuf. Corp. Textiles 4.5 1.5 6.01973 P.T. Jakarta Int. Hotel Tourism 9.8 1.6 11.41973 P.T. Semen Cibinong Cement 5.4 0.7 6.11974 P.T. Primatexco Indonesia Textiles 2.0 0.3 2.31974 P.T. Monsanto Pan Electronics 0.9 - 0.91974 P.T. PDFCI Devel. Fin. Co. - 0.5 0.51974 P.T. Kamaltex Textiles 2.4 0.6 3.01976 P.T. Semen Cibinong - Cement 5.0 1.5 6.51976 P.T. Semen Cibinong Cement - 1.1 1.11977 P.T. Daralon Textile

Manuf. Corp. Textiles 0.4 - 0.41977 P.T. Kamaltex Textiles 1.3 0.2 1.51979 P.T. Daralon Textiles 0.9 - 0.91980 P.T. Papan Sejahtera Capital Market 4.0 1.2 5.21980 P.T. Indo American

Industries Glass Dinnerware 11.1 0.9 12.01980 P.T. Semen Andalas Cement and

Indonesia ConstructicnMaterial 48.0 5.0 53.0

1982/5 'P.T. Saseka Celora Leasing Capital Market 5.0 0.3 5.31984 P.T. Semen Cibinong Cement 25.0 - 25.0

Total gross commitments 143.6 19.6 163.2

Less: sold or repaid and canceLled 107.6 7.4 115.0

Total held by IFC 36.0 12.2 48.2

Undisbursed (including participant's portion) 9.5 9.5

- 33 -

ANNEX III

INDONESIA

SMALLHOLDER CATTLE DEVELOPMENT PROJECT

Supplementary Project Data Sheet

Section I: Timetable of Key Events

(a) Time taken to prepare the project: 5 months

(b) Agency which prepared the project: GOI assisted by IFAD-financedconsultants

(c) Date of first Bank mission toconsider project: October 1984

{d) Date of departure of appraisalmission: January 1985

Ce) Date of completion of negotiation: August 1985

Cf) Planned date of effectiveness: February 1986

Section II: Special Bank Implementation Actions

None

Section III: Special Conditions

The Government would:

Ca) annually study the most appropriate methods for providing credit andcooperative services to farmers receiving cattle under the project,and furnish the results of the study to the Bank for comments byDecember 31 of each year, commencing December 31, 1987 (para. 42);

(b) ensure that actions are taken to sign a financing agreement betweenGOI (represented by Bank Indonesia) and Bank Rakyat Indonesia (BRI),and a subfinancing agreement between BRI and the Directorate Generalfor Livestock Services as this is a condition of loan effectiveness

* of the Bank loan (para. 43);

(c) procure vehicles for the project according to an annual schedule* satisfactory to the Bank (para. 48); and

(d) ensure that cattle are shipped in accordance with specified stan-dards (para. 49).

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