RESTRI CTED FIlE COPY Report No. P-858 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF INDONESIA FOR A SECOND TECHNICAL ASSISTANCE PROJECT September 2, 1970 INTER1ATIONAL DEVT7OP1EJT ASSOCIATION REPORT AND RECO10IDATION Oj' THE PRESIDMIT TO THE EXECUTIVE DIRECTOR3 ON A PROPOSED DEVELOP- 1ENTT CREDIT TO THE REPUBLIC OF INDONESIA FOR A S3COND TECHNICAL ASSISTANCE PROJECT 1. I submit the follo7%ling report and recommendation on a proposed development credit to the Republic of Indonesia in an amount in various currencies equivalent to US$4 million for a second technical assistance project. PART I - HISTORICAL 2. On December 27, 1968 the Association made a Development Credit of US$2 million to Indonesia to help meet the costs of high priority studies and other projects of technical assistance for which finance from other sources would not be readily available. The bulk of these funds has now been committed, or will be committed shortly and the proposed credit is requested to enable the Government, in cooperation with the Bank's Resident Staff,, to meet the increasing demand for technical assistance. 3. The provisions of the proposed Development Credit are substan- tially the same as those of the previous Technical Assistance Credit and were approved by the Government after discussions in Djakarta with the Bank's Resident Staff. 4. If approved, the Second Technical Assistance Credit would be the eleventh Development Credit to Indonesia. The following is a summary statement of Development Credits to Indonesia to date, with disbursements as of July 31, 1970: $million Undis- Credit No. Year Borrower Purpose ount bursed 127 1968 Indonesia Irrigation Rehab. 5.0 2.6 135 1968 Indonesia Technical Assistance 2.0 1.6 15h 1969 Indonesia Highways 28.0 28.0 155 1969 Indonesia Agricultural Estates 16.0 15.2 165 1969 Indonesia Electricity Distrib. 15.0 15.0 193 1970 Indonesia PUSRI Fertilizer Expansion 30.0 30.0 a/ 194 1970 Indonesia Second Agricultural Estates 17.0 17.0 a/ 195 1970 Indonesia Second Irrigation Rehabili- tation 18.5 18.5 a/ 210 1970 Indonesia Telecommunications Expansion 12.8 12.8 a/ 211 1970 Indonesia Fisheries 3.5 3.5 a/ 147.8 144.2 a/ Not yet effective -2- 5. Under Credit 154-IND, $61,000 has now boon disbursod on consultant services. Bids for workshop equipment, and for highway equipment and spares have been issued; and it is expected that about $12.8 million of the credit will be disbursed in fiscal 1971. Under Credit 15{-ID $762,200 has been disbursed mostly on procurement of fertilizer. Consultants for manage- ment advisory services have nov assumed their duties, and disbursements are expected to begin on the other items. Credit 165-IND was declared effective only on June 1, 1970; management consultants are now in the field and disbursements are expected to commence shortly. 6. During the next few months I expect to present to the Executive Directors proposed credits for a technical education project, for a third irrigation rehabilitation project, and later in fiscal 1971, credits for projects for the production and distribution of rice seeds, for tea estates and for a second highway project. PART II - DESCRIPTION OF THE PROPOSED CREDIT Borrower: Republic of Indonesia Beneficiaries: Various Governrment departments, agencies and enterprises. Amount: Various currencies equivalent to US$4 million. Purpose: The carrying out of high priority studies and other projects of technical assistance (subproeects) to assist the Borrower in the planning and implementation of the rehabili- tation and development of its econonT. The purpose and scope of each subproject would be determined by agreement between the Borrotier and the Association. Amortization: In 50 years, viith a ten year period of grace through semi-annual instalnlents commencing October 1, 1980 and ending April 1, 2020. Each installment up to and including papyent due April 1, 1990, to be 1/2 of 1 per cent, and each instalment thereafter to be 1 1/2 per cent. Service Charge: 3/4 of 1 per cent per annum. - 3- PA RT III - TITF PROJECT 8. The purpose of the Project is to help provide financing for consulting and engineering services for feasibility, pre-investment and other studies and activities, for which finance from other sources is not readily available to help the Governmernt carry out its program of rehabili- tation and economic development. The project would thus continue the assistance provided by the first Technical Assistance Credit. Conmnitments made so far and expected in the near future under this Credit are described below: Project IDA Contribution US$ equivalent (i) Detailed engineering of Djatiluhur Irrigation Project 356,000 (ii) Feasibility study of two partially established sugar projects 55,000 (iii) Seeds Industry Project Preparation 67,000 (iv) National Fertilizer Study 530,000 (v) Ground&ater Project Preparation 30,000 a1,038,000 Up to now $420,000 has been disbursed. In addition, commitments are expected to be made soon for an evaluation of the rice intensification program, requiring approximately $300,000, and for an inventory of irrigation facilities, estimated to cost approxi- mately $200,000. Furthermore, it has been agreed in principle that if UNDP should decline to finance a planned study of the sugar industry of Indonesia, then Credit 135 would be used.for the purpose. The cost of the sugar study is estimated at approximately $500,000. If, as now appears likely, UNDP should finance that study, the balance left in the present Credit would be applied towxards subprojects described in paragraphs 11 and 12 below. 9. The engineering studies for Djatiluhur greatly accelerated the making of the $18.5 million second Irrigation Rehabilitation Credit (No. 195 IND). The study of two sugar projects has been completed and provides the basis for discussion by the Goverrment wlith possible lenders with respect to further action on the projects. As mentioned above, I expect to recommend during the current fiscal year a credit for rice seeds production and distribution based in part on the study financed by Credit 135 IND. The National Fertilizer Study is an essential complement to the PUJSRI Fertilizer Project (Credit No. 193 IND) and will provide the Government with a basis for further action w4ith respect to fertilizer production, distribution and use. The groundwater project preparation study will provide the basis for judging wjhether a groundwater develop- ment project should be considered for financing in the near future. The other studies presently contemplated are expected either to prepare specific investment projects or to provide the basis for policy and program formulation. 10. The technical assistance available under the proposed credit, because it can be used for a broad spectrum of activities and can be made available quickly and can draw upon expertise available on an international basis, is particularly valuable to Indonesia. Experience has indicated also that bilateral aid-givers are willing to finance pro- jects identified or preared under Bank or IDA auspices even though they are often reluctant to finance projects developed under other bilateral auspices. 11. The proposed credit would continue to finance, but to a larger extent than hitherto, the final engineering of projects which are specifi- cally intended for Bank/IDA financing where the use of those funds would substantially reduce the leadtime between project identification and appraisal and between approval and disbursement. There is one immediate project which requires detailed engineering as a basis for appraisal and where no assistance from sources other than the Association can be obtained. This is the highuay project in Sumatra, identified on the basis of a UNDP-financed feasibility study referred to in paragraph6 above. Because of the severe shortage of budgetary funds for development purposes the Government has asked that the foreign exchange cost of the detailed engineering be financed from the proposed technical assistance credit rather than reimbursed to it from the eventual credit for the project. This sub-project alone is likely to absorb about $2.5 million. The credit for the project itself, assuming it is made, would of course, be smaller to that extent. 12. Other contemplated studies are in agriculture (beef cattle industry in the Eastern islands, crop pest investigation) transport, industry (iron and steel, industrial estates, pulp and paper, timber processing), and in power for an engineering feasibility study of additional thermal power generating capacity in lWlest Java. This feasi- bility study is estimated to cost about $,500,000. It is expected that some studies planned by the Resident Staff will, as in the past, be financed from other sources; it is therefore not possible at this time to specify the use of all of the credit funds. But since more than $3 million of the new funds requested can be expected to be promptly committed as indicated above, a credit of $4 million appears justified. As indicated earlier, 4h60,000 of the first Technical Assistance Credit do not have a use immediately in sight, so that a total of $1.5 million for purposes still to be specified over the next 18 months to twJo years remains available. 13. The proposed credit would in all essential respects follow the pattern used in the first credit. The Government of Indonesia would contribute to the financing of the various technical assistance activities not less than 15 per cent of the cost of the services concerned, including contributions in kind. In subprojects committed so far, the Government's contribution has always exceeded 15 per cent. Standard IDA terms will apply to the credit since refinancing from a project credit, on which the normal ten year term of technical assistance credits is based, would be difficult to accomplish, because the credit is to finance various studies, related to various projects, some of which may be financed from other sources. The Director of the Bank's Resident Staff would continue to act for the Association in dealing with all matters related to the selection and execution of all subprojects. 14. Before proceeding with the proposed credit, the availability of technical assistance from other sources, and other ways of providing it from IDA have been reviewed. For a number of technical assistance projects identified or prepared by the Resident Staff, grant financing has been obtained or is expected -- from UNDP (for the Bali Tourism and Sugar Industries Studies) and from bilateral aid-givers (for studies in the fields of transport, agriculture, industry and power). Efforts will continue to be made by the Government in cooperation with the Resident Staff in each instance to obtain grant financing from these sources but as in the past there wiill be cases where such alternative financing cannot be arranged at all or on an appropriate basis. Although considerahle technical assistance is available from UIJD? and from bilateral aid sources, substantial additional technical assistance is required for both planning and execution of programs and projects for which funds would be available once they had been prepared. The Bank Group's usual procedure of providing funds for such assistance as part of a project-credit in the same field, has so far had little application in Indonesia because the need for such technical assistance could not always be clearly enough identified ijhen a credit wTas made and because new fields of economic activity are con- sidered for Bank Group lending as the rehabilitation and development of Indonesia's economy proceeds. !Jhile ue would expect to make increasing use of project credits to finance studies related to future lending in the respective fields there is still presently, and will continue to be in the foreseeable future,a pressing need for the funding of technical activities which the credit would provide. PERT IV - Legal Instruments and Authority 15. The draft Development Credit Agreement between the Republic of Indonesia end the Association, the Recommendations of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement of the Association, and the text of a Resolution approving the proposed Credit are being distributed to the 3xecutive Directors separately. The text of the Development Credit Agreement follows closely that of the Development Credit Agreement for the First Technical Assistance Project. - 6 - PART V - TIHE 0ONOIN 16. The last f'ull economic report on the position and prospects of Indonesia (FWAP-l0a) uwas issued on November l1, 1969, and has since been supplemented by a special report, "Current Investment Activity in Indonesia" (EAP-lba) dated ]'arch 27, 1970. 17. Ind'onesia's recent economic performance has been satisfactory. Inflation has been kept under control and, given the neii condition of relatlve stability, a good start has been made on programs of rehabilitation and development. In April 1970, a basic ex:change reform was introduced, including the unification of the exchange rate (except for a special rate for program aid); the foreign exchange inarlrets have since been in balance, and internal price changes have not been si-gnificant. Also in Anril 1970, agreement i.ias reached betwveen Indonesia and the "Paris Club" countries (the uestern creditors and Japan) for the re-scheduling of their share of Indonesia's pre-1967 external debt. The settlement accounts for about 36 per cent of this debt amounting to some $,2.1 billion. 18. The 1970/71 developrm,ent program is larger than last year's, and more of it is being financed from Indonesia's oTm resources. The effort to expand the hitherto very loj levels of public saving and foreign and private domestic investment has been impressive; domestic revenues increased 36 per cent in 1969/70, and a similar increase is expected for the current year (1970/71). Development expenditures are still relatively loiw, hovever, and the very considerable amount of project aid committed in recent years by the member countries of the Inter-Governmental Group for Indonesia and by international agencies, including IDA, is only now-1 begin- ning to flow into Indonesia in sirglnificant quantities. 19. Pledges of aid for 1970/71 by the IGGI approached the $600 million requested by the Indonesian Government. This figure included a request for project aid of $260 million, primarlly for projects requiring an estimated $150 million in foreign exchange ready for coimitment at the end of 1969 but also for other projects expected to be ready during the 1970/71 fiscal year. Commitments of this order are likely to be needed in future years if the investment requirements of Indonesia are to be met. Any delay in undertaking and completing the pre-investment studies and technical assistance required to bring projects to the stage at uhich commitments are appropriate, could reduce potential project aid belov development needs. 20. Th.e immediate development prospects depend largely on the rate at which the economic and institutional damage caused by past mismanagement can be repaired. The efforts of the Governrment in this respect are, in some ways, already becoming eLfective. However, the aciinistrative frame- work required for the effective implementation of development projects has yet to be firmly established. If this is done, and if present economic policies continue and the flow of technical and financial aid is maintained, the prospects of growth appear good. - 7 - PART VI - COiMPLIANCE '111TH A-RTICLES 02 AGRMIENT 21. I am satisfied that the proposed Development Credit would comply iwith the Articles of Agreement of the Association. PART VII - RECO1',1JINDATION 22. I recormend that the Executive Directors approve the proposed Development Credit. Robert S. hcNamara President Washington, D.C. September 2, 1970