Tree Crop Processing Report No: ; Type: Report/Evaluation Memorandum ; Country: Indonesia; Region: East Asia And Pacific; Sector: Agro-Industry & Marketing; Major Sector: Agriculture; ProjectID: P003909 The Indonesia Tree Crops Processing project (TCPP), supported by Loan 3000-IND for US$118.2 million, was approved in FY99. The loan was closed on September 30, 1996, three years late and a total of US$43.1 million was canceled. The Japanese Government provided a grant of JPY 240 million (US$1.8 million equivalent). The Implementation Completion report (ICR) was prepared by the East Asia and Pacific Regional Office and the borrower’s contribution is appended. No comments were received from the cofinancier. The main objectives of the project were to raise the productivity of the tree crop subsector, safeguard the incomes of smallholders and estates, increase exports of rubber and palm oil products, generate rural employment, and improve smallholder incomes in the outer islands. A secondary objective was to make a start on reducing pollution by factory effluent. Components included construction or expansion of 11 rubber factories and 14 palm oil factories; provision of housing, equipment, vehicles, working capital, technical assistance and training for the public companies owning these rubber and palm oil estates; strengthening the management of the public estates subsector; studies, training and technical assistance. The project design was complex, risky, ambitious and overloaded the implementing agencies, particularly the Director General of Estates which had overall responsibility. A large number of procurement and construction contracts required supervision, and they were spread over a wide area. Consequently the four-year implementation schedule was overoptimistic. Furthermore, a Bank study in 1989, after project approval, identified that policies designed to support the tree crops subsector were largely ineffective, and although the appraisal had identified some of these constraints, the project design did not tackle needed policy reforms. After the scope of the project was reduced in 1992 to two-thirds of the appraisal design, the project eventually met revised physical and production targets over an extended seven and a half years of implementation. In addition to the unmanageable size of the original project, production projections at appraisal for rubber and oil palm fruit proved too high such that changes were needed to factory capacities and locations. A number of implementation problems slowed progress. These included the long time to finalize standard designs for factories, as disagreements between estates arose over specifications; some contractors, supervising consultants and management staff performed poorly; the weak financial state of some contractors was made worse by delayed contract payments by government; and the sudden introduction of customs duties on imports for public companies further delayed construction. At completion the project had substantially met or exceeded its reduced physical and performance targets. The productivity and efficiency of the tree crop subsector had been raised, smallholder and estate incomes had been safeguarded, and employment and rural incomes in the outer islands rose. The project contributed to increased exports of tree crop products, and there was significant institutional strengthening through training and technical assistance. Although the project design provided only for pre-investment studies of effluent treatment needs, by project completion most factories had met or were expected to meet government environmental standards. The economic rate of return (ERR) was reestimated at 28 percent, compared with 57 percent at appraisal. The lower rate was due mainly to construction delays, investment in a greater proportion of new capacity instead of expansion, and high unit costs of processing oil palm fruit and rubber in the early years when throughput was low. The ICR warns that since capacity and performance gains were partly dependent on intensive Bank supervision and heavy technical assistance, there is a risk that they will not be sustained over the long term. Despite the project, these public estate companies remain inefficient and their financial performance has declined steadily over the last decade. The ICR notes that the estates are not profit motivated and that they have to provide services to smallholders for which they are not paid. A change of policy is required either to allow the estates to operate fully commercially or to privatize them. Long- term Government plans for the estates are under development. The Operations Evaluation Department (OED) endorses the ICR’s ratings of outcome as satisfactory, despite a slow start against an unrealistic design, institutional development as substantial, sustainabilty as uncertain and Bank performance as satisfactory overall, although the appraisal design was far too ambitious. Sustainability depends on government adopting appropriate policies without delay to rescue an ailing industry. The ICR is satisfactory and presents a clear account of the project’s complex experience. The lessons drawn are familiar, but the main lesson is that the Bank continues to be slow to deal effectively with the inherent inefficiencies of most public sector production enterprises. No audit is planned.