Document of The World Bank FOR OFFICIAL USE ONLY Report No. 7794 PROJECT COMW'LETION REPORT INDO)NESIA NUCLEUS ESTATES AND SMALLHOLDERS I PROJECT (LOAN 1499-IND) AND NUCLEUS ESTATE AND SMALLHOLDERS II PROJECT (LOAN 1604-IND) MAY 31, 1989 Asia Regional Office This document has a restricted distrib-jtion and may be used by recipients only in the performance of their ofricial duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENT Name of Currency: Rupiah (Rp) Rate of Exchan.ge: Appraisal Year US$1.00 - Rp. 415 Nov 16,1978 - Mar 30. 1983 US$1.00 Rp. 625 Mar 31,1983 - Sept 11. 1986 US$1.00 - Rp. 970 Sept 12,1986 - Present US$1.00 - Rp.1640 FISCAL YEAR OF BORROWER GOI: April 1 - March 31 PTP: January 1 - December 31 WEIGHTS AND MEASURES Metric System ABBREVIATIONS BI - Bank Indonesia BRI - Bank Rakyat Indonesia DCC - District C 'ordinating Committee DGE - Directorate General of Estates DGFCA - Directorate General of Food Crops-Agriculture DGH - Directorate General of Highways DPD - Provincial Estate Crops Services GOI - Government of Indonesia IPEDA - Land Tax (luran Pembangunan Daerah) LPP - Estates Training Center (Lembaga Pendidikan Perkebunan) MOA - Ministry of Agriculture MOF - Ministry of Finance MOT - Ministry of Transmigration NES - Nucleus Estates and Smallholders Projects PBSN - National Provincial Private Estate Enterprises PRPTE - Rehabilitation Development Project PCC - Provincial Coordination Committee PIR - Nucleus Estates and Smallholders Projects, locally funded PELITA I - First F4.ve-Year Development Plan (1969/70-73/74) PELITA II - Second Five-Year Development Plan (1974/75-78/79) PELITA III - Third Five-Year Development Plan (1970/80-83184) PELITA IV - Fourth Five-Year Development Plan (1984185-88/89) ?MU - Project Management Unit PTP - State-owned Estate Enterprises with Limited Liability TKPIR - Special Team for Tree Crop Projects (Tim Khusus) FOR OFFICUL US ONLY THE WORLD BANK Washn8:on. D.C. 20433 U.S.A. office of Duut.cuv.Cwta May 31, 1989 MEMORANDUN TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Indonesia Nucleus Estates and Smallholders I Project (Loan 1499-IND) and Nucleus Estate and Stmallholders II Proiect (Loan 1604-IND) Attached, for informAtion, is a copy of a report entitled "Project Completion Report on Indonesia Nucleus Estates and Smallholders I Project (Loan 1499-IND) and Nucleus Estate and Smallholders II Project (Loan 1604-IND)" prepared by the Asia Regional Office. No audit of this project has been made by the Operations Evaluation Department at this time. Attachment This document has a restricted distribution and may be used by recipients only in the performance| of their official duties. Its contents may not otherwise be disclosed without Wofld Ban authofzBtion | FOR OFFICIAL USE ONLY INDONESIA NUCLEUS ESTATES AND SMALLHOLDERS I PROJECT (Ln 1499-IWD) AND NUCLEUS ESTATE AND SMALLHOLDERS II PROJECT (Ln 1604-ND) PROJECT COMPLETION REPORT Table of Contents Page No. Preface ...... .. . . ............................ i Basic Data Sheets ............................., ii Evaluation Summary................................................. I. PROJECT FORMULATION. 1 Policy Framework ................ . . . . .... 1 Project Objectives. 1 Project Design. 2 Project Scoe. 3 Project Organization. 3 Project Preparation. 4 Project Appraisal. 4 II. IMPLEMENTATEON EXPERIENCE. 5 Project Implementation. 5 Bank Performance. 9 Borrower Performanc. 9 Project Relationship. 9 Legal Agreements and Covenants. 9 Project Documentation and Reporting .10 III. PROJECT RESULTS .11 Physical Accomplishment ..11 Agricultural Performance ........................ % 11 Rates of Return ........... ............................... 12 Initial Project Impact ..14 Project Sustainability ..14 IV. CONCLUSIONS AND LESSONS LEARNED .15 Preparation and Appraisal .15 Procedures .15 Institutions .16 Smallholder Organizations .16 Settlement Sites .16 Settler Income .17 Smallholder Training .17 Titling, Credit and Cost Recovery .17 Monitoring and Analysis .18 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorizationi. STATISTICi.L ANNEX Table 1i Physical Indicators of Project Accomplishment .... 19 Table 2: Project Costs .................................... 21 Table 3: Use of Loan Funds ................................ 22 Table 4: Disbursement Schedules .............. 23 Table 5: Annual Planting Progress ............ ............ 24 MAPS.. ****,* ******~*** ** *********** * *** ********* ........*..* . IB RD 12723R 12724R 13518R 1i519 INDONESIA NUCLEUS ESTATES AND SMALLHOLDERS I PROJECT (Ln 1499-IND) AND NUCLEUS ESTATE AND SMALLHOLDERS II PROJECT (Ln 1604-ND) PROJECT COMPLETION REPORT Preface This Project Completion Report is for both the Nucleus Estates and Smallholders I Project(Loan 1499-IND) and the Nucleus Estate and Smallholders II Project (Loan 1604-IND). These two projects had similaz objectives and components; both projects became effective in 1978. The first project was closed on June 30. 1984 and the second on Decembfar 31. 1986. This Report was prepared by staff members of the Agricultural Division. Asia Technical Department (ASTAG), and was reviewed by the staff of the Agriculture Operations Division, Country Department V (AS5AG), both at Headquarters and in Jakarta. The information is derived from field visits to the project sites, the Staff Appraisal Reports (Report No.1465c-IND and Report No.1950a-IND), Loan Documents, Supervision Reports, official correspondence. and internal memoranda of the Bank relating to these projects, as well as the completion reports provided by the Borrower, which are in the Project Files. This PCR has been read by OED. The draft report was sent to the Borrower on January 26 for comments; however, no comments were received. - II - PROJECT COMPLETION REPORT INDONESIA NUCLEUS ESTATE AND SMALLHOLDERS I PROJECT (LOAN 1499-IND) BASIC DATA SHEET KEY PROJECT DATA Appraisal Actual or Actual as X of Item Estimate Estimated Actual ApDraisal Estimate Total Project Cost (US8 million) 184.0 127.7 S6 Loan Amount (USS million) 65.0 698. 88 Date Physical Components Completed 08/82 18/Sb Proportion eompleted by Above Date (Tres Planting) (1) 10O 112 Economic Rate of Return (U) 30 14 42 Institutional Performnce Cood Fair Number of direct beneficiory families 6,750 5,730 100 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS (in US8 million) FY77 FY78 FY79 FY80 FY81 FY82 FY83 FY84 FY85 Appraisal Estimate (US8 m) 24.0 40.0 64.0 81.0 85.0 - - - Actual (US3 m) 2.6 9.0 20.7 34.2 40.7 45.0 58.4 68.9a Actual as % of Appraisal 1l 23 38 S8 83 - - - Estimate (N) Date of final disbursement April 1, 1985 PROJECT DATES Original Plan Revisions Actual Board Approval - - 11/15/77 Signing - - 11/18/77 Effectiveness 01/12/78 - 02/20/78 Closing Date 06/20/81 - 06/30/84 - iit - STAFF INPUT (staff week.) FY73 FY74 FY75 FY76 FY77 FY78 FY79 FY80 FY81 FY82 FY83 FY84 FY85 FY00 FY87 TOTAL Preapprailsl .7 .7 8.1 40.0 2.3 1.8 - - - - - - - - - 53.2 Appraisal - - 103.7 62.6 .4 - - - - - - - - - 16f.7 Negotiation - - - - 21.4 6.0 - - - - - - - - - 26.4 Supervision .8 - - - - 28.1 29.9 29.3 29.2 11.6 14.2 13.0 5.1 .4 .8 162.4 Other - .3 - .1 2.6 .2 - - - - - .1 - - - 3.4 TOTAL 1.6 1.0 8.1 143.6 79.0 86.0 29.9 29.3 29.2 11.6 14.2 13.1 6.1 .4 .8 402.1 MISSION DATA Speci*l *112 Date No. of tions Performance Typos of Mission (mo./yr.) Persons Represented Rating Trend Problems Lb /c Id Is Identification/ Preparation 05/75 - - Appraisal 11/76 8 *,a,c,b, Supervision 1 04/78 2 c 1 2 FMT Supervision 2 11/78 3 b 2 1 MT Supervision 3 03/79 5 b,c,d,a,e 2 1 MT Supervision 4 02/80 4 b,d,a,c 2 1 MT Supervision S 16/80 5 b,d,a,c,d 1 1 T Supervision 6 04/81 2 d,a,c 2 1 MFT Supervision 7 11/81 2 da, 2 1 MT Supervision 8 11/82 3 0a.,c 2 3 MFT Supervialon 9 03/83 1 a 3 2 MFT OTHER PROJECT DATA Borrower: Covernment of Indonesia Executing Agency: Directorate General of Estates Follow-on Project: Name Nucleus Estate and Smaliholders II Loan Number 1604-IND Amount (US$ million) 65.0 Approval Date 08/29/78 La US88.08 cancelled. b a = agriculturist; b = agricultural economist; c = financial analyst; d = agricultural engineer; e disbursement specialist. / 1 = Problem-free or minor problems; 2 - Moderate problems; 3 - Major problems. Id 1 = Improving; 2 = Stationary; 3 = Deteriorating. e F = financial; U = managerial; and T = technical. - iv - PROJECT COMPLETION REPORT INDONESIA NUCLEUS ESTATE AND SMALLHOLDERS II PROJECT (LOAN 1604-IND) BASIC DATA SHEET KEY PROJECT DATA Appralsal Actual or Actual ms X of Item Estimate Estimated Actual Appralsal Estimate Total Project Cost (US8 million) 100.6 87.6 87 Loan Amount (US$ million) 66.0 50.6 78 Date Physical Components Completed 06/83 03/86 - Proportion completed by Above Date (Tree Planting) (%) 100 87 _ Economic Rate of Return (N) 1S 12 82 Institutional Performance Good Poor - Number of direct beneficiary families 11,3S0 9,649 84 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS (in US$ million) FY80 FY81 FY82 FY83 FY84 FY85 FY86 Appraisal Estimate (USS m) 4.5 14.0 24.0 37.5 68.0 66.0 - Actual (USS m) 3.0 5.3 16.4 26.7 35.3 40.1 60G.GL Actual as X of Appraisal 67 38 68 69 61 62 - Estimate (S) Date of final disbursement May 27, 1987 PROJECT DATES Original Plan Revisions Actual Board Approval 06/29/78 - 06/29/78 Signing - - 07/12/78 Effectiveness 09/13/78 - 09/13/78 Closing Date 12/30/83 - 12/31/86 STAFF INPUT (staff weeks) FY73 FY74 FY75 FY76 FY77 FY78 FY79 FY80 FY81 FY82 FY83 FY84 FY85 F.Y88 FY87 TOTAL Preappraisal - - - - 37.2 8.6 - - - - - - 45.7 Appraisal - - - - - 86.1 - - - - - - - - - 86.1 Negotiation - - - - - 12.2 - - - - - - - - - 12.2 Supervision - - - - - .6 17.9 31.6 13.8 13.3 11.4 8.0 4.8 9.2 2.7 112.9 Other - - - - .6 .1 - - - - 1.6 3.5 .7 - - 8.3 TOTAL - - - - 37.6 108.6 17.9 31.6 13.6 13.3 12.8 11.6 6.6 9.2 2.7 282.2 MISSION DATA Specializa- Date No. of tions Performance Types of Mission (mo./yr.) Persons Represented Ratinj Trend Problems Lb /c /d Le Identificationj Preparation 11/78 4 - _ _ _ Appraisal 09/77 7 S,a,b,c - - - Supervision 1 07/79 3 b,d,c 1 1 M Supervision 2 02/80 4 b,d,a,c 1 1 U Supervision 3 09/80 4 b,d,a,c 1 1 MT Supervision 4 08/81 2 d,a 2 1 MTF Supervision 6 02/82 2 a, 2 2 MT Supervision 6 01/83 2 *,c 2 2 MT Supervision 7 12/85 a b,a,c 3 - UT OTHER PROJECT DATA Borrower: Government of Indonesia Executing Agency: Directorate General of Estates Follow-on Project: Name Nucleus Estate and Smallholders III Loan Number 1761-IND Amount (USS million) 99.0 Approval Date 08/09/79 Le USS14.5 cancelled. L a = agriculturist; b agricultural economist; c = financial analyst; d = engineer. Lc 1 = Problem-fre. or minor problems; 2 = Moderate problems; 3 = Major problems. /d 1 = Improving; 2 = Stationary; 3 = Deteriorating. /e F = financial; U = managerial; and T = technical. - vi - INDONESIA NUCLEUS ESTATES AND SMALLHOLDERS I PROJECT (Ln 1499-IND) AND NUCLEUS ESTATE AND SMALLHOLDERS II PROJECT (Ln 1604-ND) PROJECT COMPLETION REPORT Evaluation Summary Introduction 1. The two nrojects under review are the first of a series of seven Nucleus Estates and Smallholders (NES) projects. NES I was approved in November, 1977 and NES II in June, 1978. Together they involved five state- owned limited liability plantation companies (PTPs), for operations in the six provinces of Aceh, Riau, Jambi, South Sumatera, Lampung and West Java. The target group under the projects was 15.300 settler families and rubber smallholders. Obiectives 2. In accordance with the emphasis in COI's tree crop subsector policy on expanding agricultural output and work creation in the outer Islands, the objectives of both projects were similar, namely, to mobilIze the expertise of state-owned estate companies to help establish smallholdings for landless and poor settlers on unexploited land suitable for rubber planting. NES II extended the role of PTPs in smallholder development to include rubber replanting withi high yielding varieties on existin& holdings. The projects would generate productive employment at relatively low cost, and raise family incomes of the landless and near landless poor. GOI required that public sector estate companies with their technical and managerial expertise be utilized as nuclei to promote and guide smallholder development. To perform this role, the PTPs' capabilities were to be strengthened. Production of smallholdgr rubber and estate rubber. coconuts, and palm oil would be increased, leading to increased exports and foreign exchange earnings, contributing to the government policy of promoting non-petroleum exports. The institution building objectives were (i) strengthening the Directorate General of Estates (DGE) in project planning and preparation. and implementation and evaluation of on-going projects; (ii) improving the planning, production and financial management techniques of the PTP system: (iii) strengthening the Estates Training Institute (LPP) in NES I to improve management training, and establishing the Sungai Tiga Training Center under NES II. Implementation 3. The implementation period for both projects was to be five years (NES I 1977178-1982183 and NES II 1978t79-1983/84). While the planting of the nucleus estate crops proceeded approximately on schedule. both projects were - vi. - extended (NES I by two years. and NES II by three years) to allow for the completion of other components, particularly smallholder development. At project closing. most of the physical targets set out at appraisal were accomplished. The smallholder replanting component of NES II encountered serious problems and was not fully implemented. Parts of the loan proceeds were cancelled (12 percent of NES I and 22 percent of NES II) due mainly to devaluation of the local currency. Agricultural Performance 4. The revised yield estimates for coconuts and rubber, but not for oil palm, are considerably lower than the appraisal forecast. On the smallholdings, only 75 percent of the rubber plantings are currently of fully acceptable standard, expected to be tappable at about 5 years of age, 13 percent require upgrading to be tappable a year or mere after expectation, and 12 percent need extensive rehabilitation or replanting. Food crop development for s6ttlers' subsistence neecis and as an additional source of income did not meet expectations. owing largely to a lack of effective extension. Rates of Return 5. The overall economic rates of return of both projects have been re- estimated in 1988 as 14 percent for NES I and 13 percent for NES It, lower than estimated at appraisal, when commodity price forecasts were more favorable. The re-estimated economic rate of return for the smallholder development component for NES I settlements is 10 percent. compared with 15 percent at appraisal; for NES II settlements, 13 percent. compared with 14 percent. Individually, the Alue Ie Merah Settlement (NES I) has a re- estimated rate of return of 9 percent, Tebenan (NES I) has a re-estimated ERR of 11 percent, Bajubang (NES II) 12 percent and Air Molek (NES II) 13 percent. When current efforts in rehabilitation have been completed, and yields restored nearer to appraisal levels, the rate of return would be slightly higher. Sustainability 6. Anticipated project benefits could be achieved and maintained if increased effort is given to full rehabilitation of sub-standard plantings and to establishment of an effective extension system for tree crop production on smallholdings. Lessons Learned 7. Problems arising from poor coordination among government agencies at the irplementation level, delayed approval of budgets and release of funds and cumbersome procurement procedures were not fully appreciated at appraisal. In the end, project implementation was delayed by as much as 3 years. Inter- agency coordination has improved in later projects and earlier procurement bottlenecks have recently been largely removed, but government budgeting and procurement procedures still merit review. 8. Institutional weaknesses persisted throughout the implementation period of the proiects. While the PTPs were required by the DGE to undertake - viii - the smallholder development, the terms and conditions had not been clea:ly specified in advance. In the absence of a clear accountability and incentive system for rewarding performance, it was difficult to avoid conflicts in the allocation of scarce staff, financial and material resources between the estate and smallholder components. 9. Some of the poor plantings on smallholdings would probably have been avoided if shortcomings had been detected earlier,through more intensive physical monitoring. There is urgent nee: for strengthening monitoring capacity in DGE, and for establishing an independent inspection service to report on technical aspects of all tree crop development. I. PROJECT FORMULATION Policy Framework 1.1 The projects were conceived to assist the Government of Indonesia in pursuing a policy of diversifying its foreign exchange earnings from the pre- dominant influence of crude petroleum exports. The tree crop sector with its great potential was selected as an important investment focus, with Government assigning priority to smallholder tree crop development in remote areas through nucleus estates. In this way, marginal land would be utilized, employment generated, regions developed, rural income raised, and production base diversified. As part of the Second Five-year Plan, the Government had decided to put the implementation capacity of its best estate companies into tree crop development for the settlement of local landless families the provi- sion of a comprehensive range of tree crop services. These Bank-assis:ed projects were designed to expand tree crop area in Indonesia while introducing modern crop varieties and management practices to smallhoiders. They were the first two of a series of seven Bank-assisted projects on the Nuclens Estate and Smallholders (NES) model, which were replicated extensively in a wholly Indonesian funded program in later years. Project Objectives 1.2 The main objective of the NES I and NES II pro ects was to mobilize the expjertise of State-owned Estate Enterprises (PTPs)lI to help establish smallholdings for landless and poor settlers on unaxploited land suitable for rubber planting. While NES II extended the role of the PTPs in smallholder developmient to include replanting of rubber on existing holdings. both projects aimed to enhance the development of human resources: NES I through reorganization and strengthening of the Estates Training Institute (LPP) to improve management training, and NES II through assistance for the Extension Training Center at Sungai Tiga, Jambi, to expand the training of GOI extension staff and smallholders. Institution building was to include technical assistance to strengthen the Directorate General of Estates (DGE) and the Support Staff for Agricultural Enterprises (SBPN) in the Ministry of Agriculture. Also included was the expansion and rehabilitation of the state- owned estate companies, especially PTP XI to prepare it for participation in further NES projects. Development costs would be minimized, self-help maximized and direct on-farm costs fully recovered, with a view to establishing a replicable model for settlement of the rural landless. 1/ Government-owned estate enterprises were previously of two types: the PNPs (Perusahaan Negara Perkebunan) which were departmental trading enterprises controlled by the Ministry of Agr.culture, and the PTPs (Perseroan Terbatas Perkebunan) which were limited liability corporations 'zith the Government as the sole shareholder. All PNPs have now been converted to PTPs, and PTP is used in this paper to refer to any state-owned estate corporation. Proiect Design 1.3 For settlers, both projects aimed to provide a net family income of USS900 (constant 1977) at full dev- opment and after cost recovery. In addi- tion to rubber as the cash crop, each family was to be assured of basic food supplies. An area of 5 ha would be allocated to each settler: 2.0 ha rubber established and maintained for three years with PTP assistance, 0.2 ha for a tiouse lot with intensive garden ultivation, and 2.8 ha cleared initially for rotational food cropping, of which an additional hectare of tree crors could be planted later from the settler's own resdurces and the remainin3 1.8 ha retained for food crops. The nucleus estates were to employ one member from each household on estate work through the 5-6 year period before rubber was tappable. Social infrastructure at settlement sites would be supplied through on-going government programs, coordinated by a Provincial Coordinating Committee, which would also assist in settler selection and, later, deterui.ne prices to be paid for settlers' rubber sold to the nucleus estates for processing and marketing. 1.4 To identify participants with their project lands. conditional titles of ownership were to be issued for their land initially, and unconditional permanent titles at the end of three years, provided settlers had pertormed satisfactorily through this probationary period. 1.5 Following titling by Agraria (the government land surveying and manping agency), the development costs.' duly audited by BPKP (the gover.unent audit agency), including tree planting costs, housing, a portion of the infrastructure costs of the settlement, and food crop development through the first three years, as well as the estimated further costs to bring the rubber to maturity, were to be converted by Bank Rakyat Indonesia (BRI) into individual smallholder loans. Land titles would be held by BRI until settlers fulfilled their loan obligations. Repayment was to be collected by BRI as the smallholders sold their rubber to the PTP processing facilities. With the yield potential forecast at appraisal, it was envisaged that NtS I smallholders would be able to repay their credit by delivering 25 percent of their production to the PTP for a period of 21 years. The interest rate was nominally set at 12 percent, but a grace period for the first three years, and simple interest for the next four (until maturity), meant the effective rate would be less. U:.der NES II, smallholders with new plantings would repay over 19 years, and replanters over 15 years, by delivering 25 percent of their production. The nominal interest rate was set at 10.5 pe'rcent. Prices were to be determined according to a formula to be agreed between the DGE. PTP and PCC. Amounts collected by the processing facilities were to be passed to BRI as repayments in the settlers' accounts. Settlers were to be free to sell the balance of their crops wherever they wished, but it was expected that prices offered by the nucleus estate would be sufficiently above those of local traders to attract the whole crop and benefit the settlers accordingly. 1.6 The estate components included the expansion of rubber, oil palm and coconut plantings, both on existing estates and on a new estate for PTP IV in Riau. Palm oil and rubber processing facilities were to be established or expanded to enable the estates to process their own and smallholder crops. -3- 1.7 In order to improve the PTP corporate policy formulation. financial management and marketing function, NES I provided technical assistance to strengthen the Support Staff for Agricultural Enterprises (SBPN). To perform its role in coordinating, guiding, monitoring and evaluating the operations of the PTPs as a group, SBPN was to recruit six specialists in investment plan- ning and budgeting, financial management, production management, processing, marketing and quality control through an independent inspection service. RES II provided for DGE to employ consultants for inspection and advisory duties specific to PTP IV. PTP XI was to be strengthened in NES I in order to play a part in future NES-type projects. Also, the Alue le Merah smallholder development was to be implemented by PTP V and handed back to PTP I when it had been strengthened under a future project. Project Scope 1.8 These first two NES projects in the series involved five state-owned limi.el liability plantation companies (PTP I, V, X and XI in NES I. and PTP IV .n NES II) for operations in the six provinces of Aceh, Riau, Jambi. South Sumatera, Lampung and West Java. They were to develop 45,000 ha of high yielding rubber: 252 on PTP estates and 75Z as new planting for settlers in the project areas. repiant 7,500 ha of senescent rubber on existing smallholdings and 3,700 ha on estates (PTP XI), and rehabilitate 13,000 ha of low yielding rubber for PTP XI. Some 13,350 settler families were to be pro- vided with an incowe above the national average, and earnings of 3,750 existing smallholders increased. In addition, estate development included 4,200 hia coconut planting and 5,800 ha of oil palm. After postponing the closing dates, NES I by two years and NES II by three, the overall planting targets, with the exception of smallholder replanting, wera met. The scope of the projects as appraised was appropriate to the constraints identified, and disbursements closely followed the standard profile for Indonesian agricultural projects at that time. Nonetheless, loan cancellations amounting to 121 of NES I and 22Z of NES II were necessary, primarily due to three devaluations of the Rupiah between 1978 and '98X, which reduced overall project costs by 7Z in US dollar terms. In terms of the Rupiah, costs increased to 159Z of SAR estimates for NES I and 195Z for NES II. Project Organization 1.9 The Nucleus Estates and Smallholders Projects distinguish themselves from previous Bank-assisted projects in the tree crop sector in terms of the project organization. Earlier tree crop projects were implemented by Project Management Units (PHUs) under Directorate General of Estates. The NES projects, on the other hand. are implemented by selected public sector estate companies (PTPs) to take advantage of their staff and financial resources and, perhaps most significantly, their tecnnical expertise. As state-owned companies. they are expected to coordinate their project implementation activities with other concerned government agencies through the the District Coordinating Committees (DCCs) and Provincial Coordinating Committees (PCCs). Thus, progress in implementing the non-physical components and some of the non-tree crop activities depended to a large extent on the effectiveness of these coordinating committees. -4.. Proiect Preparation 1.10 The NES I Project was prepared between 1973 and 1975 by a team of consultants working with the staff of DGE. In order to address the perceived need for accelerating the flow of funds into smallholder tree crop development effort, preparation of the NES II project followed NES I almost immediately. No lessons had been learned from NES I to benefit the design of NES It. On the whole, project preparation was reasonably adequate. The capabilities of the PTPs were examined and considered appropriate for the scale of undertaking required by the scope of the projects. In NES I. where PTP I had not been strengthened, its smallholder development site, at Alue le Merah, was first to be established by PTP V which would eventually turn it over to PTP I. But project preparation could have devoted more attention to the institutional aspects of smallholder development. Project Appraisal 1.11 The appraisal missions were staffed with Bank and consultant technical specialists, economists and financial analysts. The appraisal missions identified flow of funds, administrative bottlenecks, timely transfer of accounts from the PTPs to BRI, ability of settlers to repay investment costs, and efficiency of PTPs as collection agents, as project risks. GOt requested the method of cost recovery through credit and was confident that the nucleus estates would collect smallholder rubber for debt repayment. The managepenL capability of the Provincial Governments in the extensive role of settlement planning, settler and replanter recruitment, budgeting and imple- menting village construction and provision for services for vast numbers of families would be another project risk, and it was anticipated that close guidance by the DGE and technical assistance provided under the projects would be needed. It was ant_cipated at appraisal that some conflicts of interest between nucleus estates and smallholders would arise, minor through the estab- lishment phase, but increasing in the production stage when the commercial, profit-seeking PTPs were to purchase, process and market smallholders' rubber. - 5- II. IMPLEMENTATION EXPERIENCE Project Implementation 2.1 Project design called for PTPs to play a major role in implementa- tion. PTP IV. PTP V and PTP X had all been strengthened in earlier Bank projects (Credits 155, 194 and 319-IND) and had proven management and tech- nical expertise in rubber planting. Ther were therefore selected to implement the NES I and NES II smallholder components. PTP V participated in Aceh, although the development area bordered estates of PTP I. The plan was for PTP V to undertake the establishment phase and then for PTP I, which would have been strengthened in a later project, to provide processing, marketing and extension services for smallholders in the mature phase. In fact, PTP V found it extremely difficult to operate in Aceh, where it had no estate with experi- enced resident labor and found no skilled labor and few casual workers. Field results were therefore not of the expected standard. As PTP I was making progress under NES III project, it took over implementation at Alue le Merah settlement in 1982. While handover of physical implementation took place, the formalities of handing over financiaL responsibilities, and the appointment of PTP I as Project Manager by the Minister of Agriculture were not completed until a year later. It was difficult for PTP I to operate through the transi- tion period, with PTP V still responsible for GOI funds, and, in retrospect. it would have been preferable to strengthen PTP I similar to other PTPs before starting smallholder development at Alue Ie Merah. 2.2 At the start of project implementation, the PTPs had little experience in working with settlement of farmers or in community development beyond the construction of estate villages; they had no staff experienced in technical extension methods. It was therefore agreed that the projects would be managed and activities coordinated by a Project Manager representing the DGE at each project site. The PTPs would enter into contractual agreements with the DGE for rubber development and infrastructure construction and for provision of inputs through the immature phase, and would have full authority for managing these activities within agreed budgets. They would thus not be burdened with activities in which they had no strength. The DGE would have primary responsibility for the projects in their entirety. including master planning and programming, budgets and financing arrangements, and all settler development activities, in liaison with the PCC and other GOI agencies. Initially, the Project Managers were appointed by the DGE and reported directly to him, but, because of slow implementation in both projects, it was decided that full responsibility for smallholder development should be passed to the PTPs. In 1979, the NES III Loan Agreement provided that the Project Managers would be proposed by the PTPs concerned and appointed by the Minister of Agriculture. In 1980, the NES IV Loan agreement stated definitely that the First Director of the implementing PTP would be the Project Manager. The NES I and II Loan agreements were amended in consonance, and the First Directors of PTP V and X became the Project Managers for the NES I Alue le Merah and Tebenan smallholder settlements and the First Director of PTP IV the Project Manager for the NES II smallholder settlement and replanting. The Project Managers appointed PTP staff as Site Managers and, while the DGE remained responsible for overall guidance and coordination, PTP staff were to control -6- all aspects of project implementation. including coordination of activities by Provincial Government agencies. The projects thus relied very heavily on the management and technical capabilities of the implementing PTPs, and the PTPs were to accept responsibilities beyond their customary role of tree crop estate development. This was a major change from the arrangement envisaged at appraisal. It may have succeeded if individual PTPs fully accepted the project responsibilities, and these were maintained at a level in keeping with their capacities. In the event, the PTPs found it difficult to undertake the coordination function, and GOI required the PTPs also to undertake major developments under domestically financed programs. These overloaded PTP management and staff. contributing to continued slow progress and to low quality of smallholder development. 2.3 Although both projects have by and large met the planting targets for smallholder rubber development set at appraisal. progress with plantings for smallholders was irregular and only planting at the Tebenan site of NES I approximately followed implementation schedule. At Alue le Merah settlement of NES I and both the Air Molek and Bajubang sites of NES II, plantings continued into the third year beyond the SAR schedule. Not only was progress slow, the year-to-year variations in area planted were erratic, due to fund flow problems. Implementation of the smallholder components, which are central to the objectives of both projects, encountered a whole complex 'of problems. Recruitment of settlers by local governments was very muca delayed relative to rubber planting. By the time settlers actually arrived, much of the land clearance work had already been done by contractors, thereby denying settlets the intended participation and of some initial employment. This lowered settler morale and affected the cooperation between settlers and the PTPs. Budget release problems caused delays in procurement of many items including herbicides and fertilizers, which adversely affected the growth rate of the trees. Delayed release of funds for herbicide applications led to alang-alang problems in some areas. increasing weeding costs and slowing down tree growth. This in turn delayed commencement of tapping, 'contributing to problems of credit conversion and cost recovery from the smallholders. Extensive planted areas, between 10 to 152 of the total, were damaged by wild animals and had to be replanted. At the Bajubang site for example, some 400-500 ha planted were lost to damage by wild boars and up to 202 of the area was planted with seedling rubber instead of high yielding cultivars. Land surveys by Agraria did not proceed as planned, and the presence of large numbers of squatters at the Alue le Merah site also affected progress. The projects were extended by two and three years respectively to allow for upgrading to achieve anticipated production levels. 2.4 The appraisal schedule for the settler housing construction was based on progress in rubber plantings at each site. As the rate of planting began to deviate from the original plan, the supply of sntler houses became a factor in implementation problems. At Tebenan, where planting was on schedule, housing provision was delayed for three years. There was little correlation among planting progress, settler recruitment and completed housing units in most years of project implementaticn. Progress in housing construc- tion was seriously affected by the slow release of funds which shortened the - 7- construction season. and by the lack of agreement among the PTPs, contractors and BAPPENAS over unit costs. For NES II, a shortfall of over 1000 housing units, compared to the planting schedule, existed for the later years of the project. The numbers finally met the appraisal provisions about three years later than expected. It was originally intended that incoming settlers would participate on a wage-earning basis in house construction, but Lheir much delayed arrival meant that housing was actually built by contractors. 2.5 As a result of the changes in l6cation and layout of the settlement sites during implementation, the quantitative targets of village infrastructure were revised in agreement with the Bank. Because of procurement problems arising from the inexperience of project management and from the complex government procedures. implementation of these physical components was much delayed and progress was slower than anticipated. Timely availability of funds was also a serious problem in the infrastructure program. Despite Bank and borrc-er supervision efforts, the quality of road construction did not meet with expectations. Proper funding for road maintenance was also a problem. The plan for potable water supply had to be altered to suit the requirement of the settlement sites finally chosen. 2.6 The development of food crop areas never received the necessary attention from the project implementing agencies. which concentrated their efforts on tree crop establishment. It was appreciated at appraisal that farm technology packages were not availa6le for sustained food crop production on soils present in the project areas and, for this reason. the return from food crops was conservatively estimated and expected to provide mainly for farmers' own subsistence. It was also noted that improved techniques were expected to be developed through the program period. -rhe project did not link food crop development to DGFCA or the national extension service. which at the time of appraisal was under review for possible reorganization. Inputs were to be supplied by the nucleus PTPs during tse first years of each settler's residence. and thereafter under the BDMAS program 2I which was to be extended to the project areas by August 1979. The PTPs cleared an area of 0.6 ha for each settler and supplied first year inputs. but the BIMAS program was never introduced, and no assistance was provided in crop planning and marketing. There was no organized or intensive cropping of the cleared areas. The food crop component of the project must therefore be adjudged a failure. 2.7 The smallholder rubber replanting component in NES II tested the expanded role for nucleus estates, in assisting replanting on existing small- holdings. dealing with farmers rather than paid estate labor. The result was not a success. The 4,500 ha replanting component at Bajubang. Jambi, had to be deleted from the project due to lack of response; and only S52 of the target 3,000 ha was achieved at Air Molek, Riau, over seven years instead of the s^heduled four. The failure was due in part to the lack of suitable staff inputs and commitment by management, but probably equally to the unattractive level of assistance offered to participants. The project provided for the nucleus estate to supply material inputs on long-term credit but to assist with labor only during land preparation, to the extent of 152 of total labor 2/ Bimbingan Massal Swa Sembada Bahan Makanan (Mass Guidance Program for Self-sufficiency in Foodstuffs): a program for the provision of seasonal credit in the form of input packages for selected food crops. -8- required through the immature period. Farmers were expected to supply the remaining labor requirement, including regular weeding cver six years. This they proved unwilling to do. Although it was foreseen at appraisal that some form of cash incentive might be needed to achieve satisfactory maintenance. this was not accepted by Government. In view of problems encountered in this component, it was replaced by 1.200 ha of additional new planting in the Bajubang area. The Smallholder Rubber Development Project, managed by PHUs, started in 1980 and also operating ip Riau Province, provided for participants to be paid half the estimated value of family labor inputs, and proved to be successful. Subsequent tree crop development on existing smallholdings in Indonesia has all been implemented by project management units. 2.8 By sharp contrast, the implementation of the estate development component in both projects progressed more smoothly. The physical targets were substantially met and some even exceeded appraisal estimates. PTP X's new rubber and oil palm planting were 932 and 96Z of appraisal targets respec- tively. Estate rubber replanting (PTP XI) exceeded targets by 26Z, and rehabi- litation by 312. New rubber planting under NES II (PTP IV) exceeded target by 6Z. For these estate plantings, the PTPs had their own funds, followed their own procurement procedures, and used their estate laborers who in general were skilled and disciplined. The rubber factory and two palm oil mills for PTP X were successfully constructed, but subsequently PTP X experienced severe difficulties in managing them efficiently. PTP XI constructed three rubber factories which are performing reasonaLly well. 2.9 Training constituted an important and integral part of both projects. Under NES I, LPP (Lumbaga Pendidikan Perkebunan, Estates Training Center at Yogyakarta) waa to be reorganized and strengthened with technical assistance and staff development, as well as additional buildings. A sub-center of the LPP would be established in Medan, North Sumatera in closer proximity to the project sites and the PTPs. The building program was completed in the second yezr of the project; staff development took place between 1980 and 1982; con- sultants were recruited in 1979 and worked with LPP until 1982 when further assistance was made available under NES V. In 1981/82. 15 courses, totalling 179 days, were held. Training at these locations after 1982 was continued under NES V project support. As PTP IV staff had no previous experience with smallholder development, NES II provided training for 106 of its staff. The project also expanded the tree crop training center at Sungai Tiga, Riau. After the buildings were completed in 1981, a teaching staff of 23 was appointed to conduct training for settlers and extension agents. Until 1985, some 3,390 settlers and 520 extension staff were trained in rubber tree main- tenance and production. However, after that year, training at Sungai Tiga was discontinued because of the lack of government funding. 2.10 lhe technical assistance program provided by the projects were generally accomplished. Under NES I, two long-term and five short-term con- sultants for DGE were hired, but only four of the six long-term consultants provided for SBPN were recruited and one of them only briefly. This was because the functions of SBPN, always regarded as a temporary group, were slowly changed throu&h the project period and, finally, SBPN was abolished in 1983 and its responsibilities were allocated to other agencies. The consultants accomplished their assignments in improving marketing, investment -9- planning and rubber agronomy, but processing. financial control and information services were not strengthened. NES It provided technical assistance for DGE and DGH. Most were short-term consultancies and the Borrower reported that they were effective. Bank Performance 2.11 The Borrower's completion reports highlighted the significant contribution by Bank supervision missions. The Bank's strength was seen to lie in the role played by the Resident Staff in Indonesia in maintaining close contact with the project implementation agencies at all times and helping to resolve problems, although their advice might not always have been acted upon expeditiously. The borrower also acknowledged the critical function of Bank assistance in developing the Nucleus Estates and Smallholders model for strengthening the tree crop subsector of the country. Borrower Performance 2.12 Once the implementation agencies overcame the initial problems of .ack of familiarity with the innovative project concepts and organization setting as well as with loan utilization procedures, performance began to improve, albeit only slowly. At this time, the rapidly expanding land settle- ment program funded by the Government placed additional demands on the PTPs. overstretching their absorptive capacity. As the two projects were imple- mented.by five different PTPs and involved four settlement sites, performance tended to vary, depending upon the management strength of the organizations and the quality of the field staff. Co-ordination at the DGE level was greatly facilitated by the establishment in 1979 of the Special Team for Tree Crop Projects (Tim Khusus), introduced under the NES III project. A number of key policy issues affecting the performance of the two projects under review were subsector-wide issues, and have been the subject of a continuing dialogue between the Borrower and the Bank. in an effort to seek improvements in the performance of the tree crop subsector program. Project Relationship 2.13 Through the staff of the Resident Mission in Indonesia. the Bank maintained close contact with the Borrower. Relationships between the PTPs and the government agencies at the provincial and district levels and among the agencies thr..mselves were very weak throughout the implementation period. Many of the problems confronted by the projects could be attributed to the serious lack of coordination. Legal Agreements and Project Covenants 2.14 The appraisal report was sufficiently detailed to serve as an adequate and useful implementation guide. The innovative nature of the projects necessitated frequent changes and adjustments, but these were generally undertaken within the framework of the SAR. The Borrower in the main complied with those project covenants relating to the physical and tech- nical aspects of the project, but compliance with covenants covering organiza- tional, financial and policy issues was not achieved to a similar extent. For -10- example, under the loan agreements, Government agreed to exchange views with the Bank prior to (i) appointing executive directors of the PTPs; (ii) approv- ing annual PTP budgets and five-year cash flow forecasts: and (iii) giving additional financial and management obligations to PTPs X and XI. These covenants were not met, and the additional obligations given to the PTPs, and the lack of sound five-year cash flow forecasts, contributed to the current severe financial difficulties of all the PTPs implementing the projects. Proiect Documentation and Reporting 2.15 Under the project, a standardized quarterly and annual physical and financial progress reporting format was introduced. However. the smallholder accounting system was finalized only in 1983. The PTPs. as project management entities, maintained adequate accounts and records of physical progress. The Monitoring and Analysis Division within Tim Khusus collated the data submitted by the field units to provide project-wide information on physical and finaS.- cial progress. The information provided by Tim Khusus had generally been in a fixed tabulated format and only limited analysis and interpretative work was done. By itself, the information supplied could not be used for quality con- trol purposes. Furthermore, more training and further strengthening of Tim Khusus would still be-required to enable- it to conduct an impact evaluation at the full development stage of the two projects under review. -11- III. PROJECT RESULTS Physical Accomplishment 3.1 The two projects together added 35.000 ha (103Z of appraisal estimate) of rubber to the productive base of the country, replanted 7.400 ha (662 of appraisal estimate) of older rubber trees with high yielding cultivars, and rehabilitated 17.000 ha (1312 of appraisal estimate) of estate rubber. In addition, 4,600 ha of coconuts and 5,600 ha of oil palm were planted. A total of 13.900 smallholder families (104? of appra4.sal estimate) were settled on new lands with rubber established for them, and another 1.360 smallholders bern itted from replanting their existing rubber. For PTP X, one pilm oil mill was built. another expanded, and a rubber factory established. One latex concentrate plant and one block rubber factory were constructed for PTP XI. Agricultural Performance 3.2 In quality terms, project results from the rubber planting components of both projects did not fully meet expectatiops. For example, the Borrower's completion repoet for NES II observes that the implementing agency tended to ignore soil conservation and drainage requirements, and that the fertilizing and pruning policies as practised by PTP IV delayed maturity, increased weeding costs and reduced production potential.. The quality of rubber plantings remains very variable among sites, and at some, is well below the expected implementation standards. In 1985, Tim Khusus applied a classifica- tion system 3/ to assess the quality of established rubber stands. The results relating to rubber planted under NES I and NES II projects were as follows: 3/ Under this system, Class A are those of an acceptable standard and expected to be tappable at about 5-6 years of age; Class 8 plantings require some upgrading to reach tapping size within 6 months after commercial expectation; Class C require upgrading to be tappable 12 months or more after expectation, and Class D require extensive rehabilitation effort or even replanting if they are to become productive holdings. It should be noted that neither the definition of the classes nor the results of the classification have been fully agreed by technical experts. The system is being reviewed by DGE and Bank tree crop specialists. -12- Table I: Percentage Distribution of Rubber, by Class Class of Plantings Area A B Dl D2 (ha) (Percentage) NES I PTP XI Nucleus 6,868 64 3 5 17 11 Alue le Merah SH 7,000 63 3 5 13 16 Tebenan SR 4,462 99 0 0 1 0 NES II PTP IV Nucleus 3,713 100 Air Molek SH (New) 11.400 71 10 10 a 1 (Replanting) 2,548 76 7 5 0 12 Bajubang SH (New) 5t000 so 9 5 6 0 TOTAL NES I & NES II Nucleus Estates 10,581 77 2 3 11 7 SH All Planting 30.410 75 7 6 7 5 The quality of smallholder plantings at Tebenan is fully satisfactory, but overall, only about three quarters of the rubber planting on smallholder land were of commercial standards, and the remaining portions require varying amounts of effort and investments for rehabilitation (Class Di in table above) and some of these need replanting (Class D2). As a result of the rehabilitation and replanting efforts of the PTPs, the finaL. clLssification of the rubber stands will be somewhat better than the current assessment. Also, it is important to bear in mind that the present classification system has been shown to have shortcomings, and is currently being modified to better reflect planting standards and yield potentials. 3.3 For the estate crops, the revised yield estimates for PTP XI rubber and for coconuts are considerably lower than appraisal fotecasts. For the coconut stands planted by PTP XI under the NES I project, the average copra yield per hectare over 23 years was reduced to 2,636 kg per year. down from the 4.035 kg per hectare per year estimated at appraisal for high yielding varieties. Oil palm fared better, with a new estimate only 5z below appraisal forecast. Rates of Return 3.4 When re-estimated at project completion, both the economic and financial rates of return for NES I and NES II are much lower than anticipated at appraisal. The reductions in the rates of return are mainly due to less optimistic price projections than at appraisal, and delayed and lower benefits, particularly in the case of smallholder development. The comparison between appraisal and completion estimates is set out in the following table. -13- Table IM: Comparison of SAR and PCR Rates of Return ERR FRR SAR PCR SAP P2CR NiS I J/ Total Project 30 14.3 30 na Estates PTP X 35 14.7 17 na PTP XI 41 15.2 29 na Smallholder 15 9.7 - 9.5 Alue le Merah 15 8.7 16 8.5 Tebenan 1S 11.1 17 10.8 NES II Total Project 1S 12.9 - 11.9 Estate: Air Molek 19 18.3 20 17.8 Smallholder 14 12.7 15 12.5 Air Molek - 13.1 - 12.9 Baju6ang - 11.7 - 11.5 /a The PCR economic rate of return for PTP X estate component was based on 1984 data. This and related figures should not be c.ompared directly with other calculations which were based on 1988 updated data. Although both projects failed -o meet appraisal expectations, their economic rates of return were, noneth.eless, above the generally accepted cut-off rate of 122 for Bank assisted projects in the tree crop subsector. Furthermore, the future results of the continuing effort by the PTPs in rehabilitation of sub-standard plantings will restore the benefit streams to a level nearer that expected at appraisal. The rates of return at full development of the smallholder components of these projects would thus be more favorable than at present. 3.5 The estate development components of both projects fared bett-r, with economic rates of return re-estimated at completion ranging from 15 to 182. But in view of the project design calling for involving the technical and organizational expertise of the PTPs in rubber establishment and the project concept of minimizing costs but maximizing benefits, the economic performance of the smallholder development components must be the basis on which the success or otherwise of the two projects must be judged. -14- 3.6 The economic rates of return for the smallholder settlement development activities are considerably lower than the estate plantings, a result forecast ;.t appraisal. However, for the smallholder components, three settlement investments had economic rates of return below the 122 threshold. The Alue le Herah settlement component had a re-estimated ERR below 102. It should, however. be noted that conditions at Alue le Merah were particularly difficult in the first years of the project, but significant improvements occurred toward the end of the NES I project and this trend is continuing. Initial Proiect Impact 3.7 Notwithstanding the delay in implementation and the lack of attention to quality of smallholder rubber plantings, the two projects enhanced the production base of rubber, coconuts and oil palm of the country, increased the processing facilities of the two PTPs under NES I and provided an improved standard of living for most of the smallholder participants. Although no formal impact survey has been conducted, field records maintained by settlement officials at Alue le Merah, for example, indicated that the average household income of the settlers. before cost recovery payments, is already higher than the national average for rural areas. There is field evidence to suggest that non-agricultural employment opportunities, an indirect project benefit. are beginning to emerge. Proiect Sustainabilita 3.8 Project appraisal identified the sustaining of rubber yields and smallholder benefits as a risk, but that fertilizer applications and rubber maintenance in the first three years and supervision of all application of inputs to maturity by the PTPs woul i.nimize the danger. Parts of the planted area had indeed been affectea by precisely this problem. Furthermore, in the smallholdings, overtapping of rubber trees was emerging as a problem towards the end of the implementation period, threatening the productive life of the rubber trees. Mature phase extension has been identified as a priority for attention in order to ensure that the benefits of the investments are captured. This issue will be addressed in the NES Phase II operation under preparation. -15- IV. CONCLUSIONS AND LESSONS LEARNED 4.1 The projects under review were innovative in enlisting state-owned plantation companies to play a major role in establishing rubber stands for landless settlers and replanting low grade rubber trees for smallholders. However. during implementation numerous problems relating to the non-estate smallholder development activities were encountered, most of which are attributable to institutional weaknesses of the agencies involved and to smallholder development capabilities of the PTPs. By the early 1980s, additional demands placed on PTPs to implement GOI-funded programs began to strain the absorptive capacities of the PTPs. The unf;olding experience of these NES-type projects shows that the management and financial capacities of the PTPs were overstretched. But the central tenet of assisting low-income groups to participate in the tree crop sector and smallholders to upgrade low- yielding trees are not in dispute. 4.2 Since 1983, the Bank has not made new loans under the NES format, as attention was focussed on efforts to improve and accelerate implementation of the on-going program. and new tree crop lending was re-oriented towards the PMU approach, which had subsequently been proven successful. For on-going NES projects, the Bank recpntly (December 1987) outlined to GOI a series of remedies to improve the performance of tree crop projects. These included addressing the issues of authority of the DGE, improved PTP management, adequate unit costs for newly planted areas, the quality of road access to smallh6lding sites, timely release of funds. and setting up an independent inspection service. The NES Phase II operation currently being prepared is expected to address outstanding issues and consolidate the gains made so far. Preparation and Appraisal 4.3 In retrospect, project preparation and appraisal did not appreciate fully the complexity of the budgetary and procurement procedures of the Government. To a considerable extent, despite the efforts'of successive supervision missions to insist on timely compliance of agreements relating to smallholder development, it was these procedural complexities that caused the delay in project implementation by as much as three years and may have led to the poor quality of plantings. Procedures 4.4 The complexity involved in fund flows, contract and procurement procedures of the Borrower, which are considerably different from the Bank's, resulted in the implementation schedule being overly optimistic. Both projects eventually had to be extended to allow physical targets to be accomplished. During the implementation period of NES I and NES II. GOI procurement policy and procedures underwent several changes, but the process of budget approval and fund release was not simplified. 4.5 Streamlining of GOI procedures remains an urgent issue for attention. Appraisal of later projects has been cautious in scheduling disbursements, but implementation scheduling also needs to be more realistically assessed in the future in the light of experience with the closed and on-going projects. -16- Institutions 4.6 The NES model for smallholder development necessarily involved many agencies. but the mixture of central and provincial governmental departments, commercial banks, and profit-oriented plantation companies in the projects compounded implementation problems. Meshing the management style and procedures of the PTPs with the new demands of the Government-sponsored smallholder development program remained a problem through the implementation period of these projects. Implementation and management of the smallholder development component involved a large number of government organizations with different levels of authority. The close coordination that was needed between the PTPs and government agencies was not always achieved. Following the establishment of Tim Khusus in DGE under the NES III project, coordination in implementation was improved. During the project implementation period, a joint review by Bank and GOI led to a set of minutes of understanding among the Ministries of Agriculture. Finance, Home Affairs, and BAPt'ENAS which set out the responsibilities of the agencies concerned with various implementation issues and procedures. 4.7 While the PTPs have technical expertise in tree crop establishment and production, they should not be seen as the, sole avenue for smallholdgr development. When their capacity has become overstretched, other forms of organizational arragements should be explored at the earliest opportunity. Smallhqlder Organizations 4.8 Organization among smallholders was slow to evolve, although the settlers are now being organized in farmer groups (Kelompok Tani) of 20 to 30 members. Without sound organization among the settlers, delivery of govern- ment services such as extension, inputs and marketing are not efficient and cost effective. PTPs are commercial enterprises and as such have limited expertise among their staff in developing and promoting social organization. Because of lack of coordination. government agencies with experience in this field were not able to provide the service at the time when it was most needed. 4.9 Smallholder organization is essential for transfering some of the development functions to the settlers and for more cost effective delivery of services still required. But in the absence of a clear policy on the direction in which these settler level organization should evolve, particu- larly their conflict with Government objectives for the KUD cooperatives, it will be difficult to accelerate the process. The German Government is currently providing assistance to resolve these issues. Settlement Sites 4.10 The NES I project included the Alue le Merah site which was part of an existing GOI scheme that was experiencing difficulties before project start-up. Under NES II, the Bajubang site also had technical and environmental problems that were only gradually being resolved during implementation. Developing new settlement areas on marginal land, and balancing the relative needs of tree crops and food crops, will always entail some risks and unanticipated difficulties. Even if exact locations could not be de'fined at appraisal, the finalization of village locations should have been achieved expeditiously. -17- Settler Income 4.11 The projects aimed at providing the smallholders with an adequate income before the rubber trees matured. By providing employment at the settlement sites, settlers were to receive an income and meet their subsistence needs from the food crop areas. The slow pace of development in food crop production and the PTPs' preference to sub-contract much of the land clearance and infrastructure construction work, forced some settlers to find employment elsewhere, but some found work with the contractors. Absence c' settlers from smallholdings was detrimental in the maintenance of the young trees for lack of adequate on site labor from the settler families. While the ?TPs are technically competent in tree crop development, promotion of food crops is not their forte. Food crop extension has to be provided by another agency (DGFCA) and close coordination has to be maintained at all times. A joint decree defining the responsibilities of DGE and DGFCA was issued only at the end of 1984 but owing to the difficulties in defining and coordinating the responsibilities and inputs of the various extension agencies at the farm level, detailed operational guidelines are still to be finalized. 4.12 Bearing in mind that tree crops take several years to provide an income for the settlers, adequate sources of employment and income generation opportunities during the establishment period are absolutely essentiai if the morale of settlers is to be maintained at a high level. Smallholder Training 4.13 Insufficient training and extension led to low quality of rubber stands and harmful production practices. Both projects provided that the implementing PTPs would train participants in rubPber husbandry and ultimately in tapping. This training was normally provided on an 'on-the-job' basis. as settlers were required to underta' each operation. NES It supplemented this by expanding the Sungai Tiga Training Center to conduct courses for the settlers. But by the time the activities at the center were terminated, only 41Z of the settlers at the Air Molek site had attended the short 5-day courses. Significant areas of project plantings are still immature and many settlers require training in tapping. It is perhaps not surprising that the standard of tree maintenance on smallholdings is generally low and inadequate tapping skills and discipline have emerged as serious problems confronting project sustainability. Project management is planning to redefine the role of the field staff originally assigned to supervise land 'clearance and tree establishment to undertake extension activities. 4.14 Settlers are almost by definition unfamiliar with tree crop maintenance and production practices. While it would not be appropriate to include tree crop skills in the eligibility criteria, adequate training is essential. Given the difficulties in maintaining training centers, the on- site training alternative should be enhanced. Land Titling. Credit Conversion and Cost Recovery 4.15 Project appraisal assumed that land titling would be done within three years after planting, but delays have occurred and it is not being achieved until after maturity. Recent recalculations, taking into account current price projections, indicate that the smallholders with new plantings of a fully satisfactory standard would need to deliver about 30 percent of their production to achieve repayment over 19 years -- those with Class B -18- holdings would achieve repayment over 22 years. If lower quality holdings were to be converted, an appropriate adjustment to the credit recovery requirement would be needed, reflecting the reduced productive value of the holdings. Appraisal did not anticipate the possibility that some smallholder plantings might not achieve the acceptable yield standard; nor were the institutional complexities of the cost recovery mechanism fully. appreciated. All aspects of the credit recovery system, particularly the establishment of smallholder loan accounts and the creation of the infrastructure needed by BRI to administer these accounts, are currently under intensive review by Government, in an effort to accelerate the conversion process. 4.16 Smallholder gross revenues are also dependent on the rubber price offered by the PTP processing facilities. Under both projects. the nucleus estates were required to offer prices equal to about 70 percent of the FOB price; under NES II. it was further envisaged that PTP IV, the Provincial Coordinating Committee, and DGE would, in consultation with the Bank, agrne upon a pricing formula. A Ministerial decree establishing such a formula was issued in January 1988. The detailed DGE regulations to give full effect to the Ministerial decree are at an advanced stage of drafting. MonitorinR and Analysis 4.17 While the Monitoring and Analysis Unit within Tim Khusus performed well and greatly facilitated the supervision process of both DGE and the Bank, the st4ffing of the unit has become increasingly inadequate for the expanding portfolio of tree crop projects and for the range of responsibilities assigned to it outside its main supervision function. Apart from coordinating the reporting for foreign-assisted tree crop projects. the Monitoring and Analysis Unit has responsibility for monitoring progress under all Government-funded NES/PIR projects. Its manpower resources are already overstretched. If additional strengthening is not provided, the quality of its services will further decline. As the Unit is also expected to expand its functions to undertake impact evaluation and project related studies, additional appointments and accelerated training for its key staff members are urgently needed. -19- Table I Page I of 2 STATISTICAL ANNEX PHYSICAL INDICATORS OF PROJECT ACCOMPLISHMENT NES I PROJECT Unit Appraisal PCR PCR as 2 Estimate Actual of SAR Estates Development PTP X Rubber (New Plantiug) ha 3.300 3,083 93 Oil Palm Planting ha 5,600 5,581 96 Oil Palm Mills e 2 2 100 Rubber Factory t 1 1 100 PTP XI Rubber (Replanting) ha 3,700 4,647 126 Rubber (Rehabilitation) ha 13,000 16,968 131 Coconut Planting ha 4,200 4,583 109 Rubber Factories 1 3 3 100 Smallho.lder Rubber Alue le Merah (PTP I) ha 7,000 7.000 100 Tebenan (PTP X) ha 4,500 4,462 99 Settlement Component Alue le Merah: Smallhoder Beneficiaries hh 3,500 3,500 100 Village Settlements 1 21 13 62 Settler Houses t 3,500 3,500 100 Food Crop Area ha 9,800 z,365 24 All Weather Roads km 44 - 0 Village Roads km 84 35 42 Primary Rubber Access Rd km 14 12 86 Secondary Rubber Acc. Rd km 164 70 43 Field Tracks km 105 148 141 Shallow Wells 750 750 100 Tebenan: Smallholder Beneficiaries hh 2,250 2,231 99 Village Settlements I 14 5 36 Settler Houses I 2.250 2,250 100 Food Crop Area ha 6,300 - 0 All Weather Roads km 24 0 0 Village Roads km 46 0 0 Primary Rubber Access Rd km 9 9 100 Secondary Rubber Acc. Rd km 100 200 200 Field Tracks km 70 225 250 Small reservoirs f - 104 - Shallow Wells I - 450 - -20- Table 1 Page 2 of 2 NES 1I PROJECT Unit Appraisal PCR PCR as Z Estimate Actual of SAR Estate Development PTP IV Air Molek Rubber (New Planting) ha 3,500 3,713 106 Staff Houses t 1,518 220 15 Project Buildings I 45 65 144 Estate Roads km - 75.3 _ Smallholder Rubber Air Molek (New Planting) ha 11.400 11.378 100 (Replanting) ha 3.000 2.548 8S Bajubang (New Planting) ha 3,800 5,000 132 (Replanting) ha 4,500 172 4 Settlement Component Air Molek,Riau Smallholder BenefLciaries hh 7.200 6,963 97 Settlement Villages t 29 30 103 Settler Houses 5 5,700 5.700 100 Food Crop Area ha 2,280 3,420 150 All Weather Roads km 107.5 119.2 111 Primary Village Roads km 56.1 43.6 78 Secondary Village Roads km 72.8 66.8 92 Rubber Collection Tracks km 372.5 379.4 102 Wells I 1,140 470 41 Bajubang.Jambi Smallholder Beneficiaries hh 4,150 2.586 62 Settlement villages t 12 15 125 Smallholders hh 2,586 1.898 73 Settler Houses I 2,500 2,500 100 Food Crop Area ha 760 1,440 189 Main Access Roaas km 33.0 31.9 96 Primary Village Roads km 10.3 10.0 97 Secondary Village Roads km 36.0 23.6 66 Wells t 124 150 121 Main Access Roads km 33 31.5 95 Village Access Roads km 46 41.8 91 Staff/Labor Houses 1 343 58 17 -21- Table 2 PROJECT COSTSs NES I Proiect Component SAR Estimate PCR Actual PCRISAR Nucu E(US$ million) (percentage) Nucleus Estates PTP X 30.6 30.2 99 PTP XI 24.0 28.7 120 Subtotal 54.6 58.9 108 Smallholders4/ Alue Is Merah 15.3 31.6 207 Tebenan 10.2 27.2 267 Subtoital 25.5 58.8 231 Technical Assistance DGE 1.9 1.7 89 MOA 3.8 3.5 92 LPP 2.8 4.8 171 Subtotal 8.6 10.0 116 Contingencies 45.3 - Total Project Cost 134.0 127.7 95 PROJECT COSTSs NES 1I SAR PCR PCR as Z Proiect Component Estimate Actual of SAR CUSS million) (percentage) Nucleus Estate 8.1 19.7 232 Smallholders Air Molek,Riau 32.1 Bajubang,Jambi 12.0 Rubber Replanting,Riau 2.1 Rubber Replanting,Jambi 3.1 Subtotal 49.6 65.9 133 Technical Assistance DGE 2.1 Sungai Tiga Center 0.6 DGH 0.2 Subtotal 2.9 2.0 69 Contingencies 39.9 - Total Project Cost 100.5 87.6 87 4/ GOI portion of actual costs not yet finalized, pending audit as part of conversion process. -22- Table 3 USE OF LOAN FUNDS: NES I SAR Estimate PCR Actual PCR/SAR (US$ m) 2 (USS m) 2 Percentage Category Civil Works 14.80 23 13.84 21 94 Vehicles & Equipment 16.00 25 10.74 17 67 Agro-chemicals 12.19 19 9.76 15 80 Planting Costs 12.52 19 14.17 22 113 Consultant Services 8.49 13 8.11 12 96 Overseas Training 0.30 - 0.30 100 Base Costs 64.30 99 56.92 88 88 Contingencies 0.70 1 - Cancelled Amount 8.08 12 Total Costs 165.00 100 65.00 100 USE OF LOAN FUNDSt NES II SAR Estimate PCR Actual PCRISAR CateRorY (USS mn) 2 (USS m) 2 Percentage Civil Works 12.8 20 17.55 27 137 Equipment 5.4 8 1.59 2 29 Agro-chemicals 4.5 7 1.63 3 36 Rubber Development 19.5 30 29.03 45 149 Consultant Services 1.8 3 0.70 1 39 Base Costs 44.0 68 50.50 78 115 Contingencies 21.0 32 - Cancelled Amount - 14.50 22 Total Cost 65.0 100 65.00 100 -23- Table 4 DISBURSEMENT SCHEDULE NES I PROJECT SAR Estimate PCR Actual Cumulative Cumulative USS m Percentage USS m Percentage GOI FY 1977/78 6.5 10 1.2 2 1978/79 26.5 41 4.6 7 1979/80 45.5 70 10.1 16 1980/81 56.5 87 21.8 34 1981/82 62.5 96 34.8 54 1982183 65.0 100 41.2 63 1983/84 46.8 72 1984/85 56.9 88* ' The remaining US$8.08 million, or 12 2 was cancelled in June. 1985. NES II PROJECT SAR Estimate PCR Actual Cumulative Cumulative USS m Percentage USS m Percentage GOI FY 1978/79 2.0 3 - - 1979/80 12.0 18 0.52 1 1980/81 21.0 32 2.43 4 1981/82 34.0 52 5.25 8 1982183 51.5 79 16.41 25 1983/84 65.0 100 24.69 38 1984/85 35.24 54 1985/86 40.08 62 1986/87 50.50 78* * The remaining US$14.5 million, or 222 was cancelled in March 1983. Table S Pag* 1 of 3 -24- ANW4AL PLUNTING PROGRESS NES I 1977/78 1978/79 1979/80 1960/S1 1961/02 1982/83 1983/84 1984/86 TOTAL ESTATES DEVELOPMENT: RUBBER PLANTING (he) (PTP X. Lampung & S.Sumetre) SAR Estimate 695 1869 1150 17 137 !6 4100 PCR Actual 1670 1153 330 3063 SAR Cumulative S95 2434 3034 3301 3930 4100 4100 PCR Cumulative 1670 2763 30t3 3083 3083 3083 30S3 PCR as X SAR Cumulative 284 111 eS 81 73 7t 75 RUBBER PLANTING (he) (PTP XI, West Java) SAR Estimate 702 760 839 563 829 3713 PCR Actual t16 1313 1694 418 So7 4647 SAR Cumulative 702 1482 2301 2864 3713 3500 PCR Cumulative 715 2026 3722 4140 4140 4647 3713 PCR as X SAR Cumulative 102 139 162 144 112 106 106 OIL PALM PLANTING(he) (PTP X, Lampung A S.Suuetra) SAR Estimate 1000 2000 2000 6000 PCR Actual 1707 1986 19J6 6630 SAR Cumulative 1000 3000 5000 6000 PCR Cumulative 1707 3896 5630 6830 PCR as X SAR Cumulative 370 168 113 COCONUT PUANTING(ho) (PTP XI. West Java) SAR Estimate 80 1006 1064 1070 1072 4232 PCR Actual 44 0 1682 1487 1070 300 S6e SAR Cumulative 30 1036 2090 316O 4232 4232 PCR Cumulative 44 44 1726 3213 4263 4563 4683 PCR as t SAR Cumulative 147 4 63 102 101 108 SMALLHOLDER DEVELOPMENT: RUBBER PLANTING (ha) (Alue I- Mersh Settlement) SAR Estimate 500 1250 1500 1675 1876 7000 PCR Actual 382 273 194 1687 1764 56e 1366 636 7000 SAR Cumulative 500 1750 3250 5126 7000 7000 PCR Cumulative 382 a6S 849 2436 4190 4768 8112 7000 7000 PCR as X SAR Cumulative 76 37 26 46 6o 68 87 100 100 Table 5 Peg. 2 of 3 -26- (NES LIMPLEVENTATION DETAILS-.CONTD) 1977/73 1970/79 1979/80 1900/61 1981/82 1962/83 1983/84 1994/65 TOTAL SIALLJOLDER OEVELOPENT: RUBBER PLANTING (he) (T-benen Settlement) SAR Estimate 600 1000 iS60 1500 4*00 PCR Actual 472 1000 150 1361 is7 450 SAP Cumultiv* 500 1500 3000 4600 4500 PCR Cuulative 472 1472 2972 4333 4500 4600 PCR *as SAR Cumulative 94 9 99 go 100 SVALLHOLDER HGUSE CONST. (Alu- Ie Merih Settlement) SAR Estimte 250 625 750 937 938 3500 PCR Actue 0 0 750 1250 1500 3500 REQT per Planting Schd 191 136 97 794 877 283 67J 444 3S50 RE4T Cumulative 260 386 468 1277 2154 2437 3115 3659 3569 PCR Cumulative 760 2000 2000 2000 3600 3600 PCR aS RF0t O 0 15 157 93 82 112 98 SMALLH0LDER HOUSE CONST. (Tebenan Settlement) SAR Estimate 260 500 750 750 2250 PCR Actual 0 0 0 750 1500 2250 REQT per Planting Schd 236 500 760 660 84 2260 REQT Cumulative 236 736 1466 2100 2260 2250 PCR Cumulative 0 0 0 760 2250 2250 PCR Ua REQt 0 0 0 35 1t0 100 Tablo 5 Page* 3Of 3 -26- ANNUAL PLANTING PROGRESS NES II 1979/80 1980/81 19S1/82 1982/83 1983/84 1964/65 1985/86 1986/37 TOTAL NUCLEUS ESTATE RUSBER(ha) SAR Estimate 250 600 760 1000 1000 3500 PCR Actual 17 179 1297 334 1643 186 3713 SAR Cumulative 260 750 15m0 2600 3600 3500 PCR Cumultive 167 346 1643 1977 3625 3714 3713 PCR as SAR ST 46 110 79 101 106 tO0 SMALLUJOLDER NEW PLANTING SAR Estimate 1460 2200 3050 3800 4700 15200 PCR Actual 1163 1806 2400 6493 600 368 149 152 16400 SAR Cumulative 1450 3650 6700 10500 16200 15200 PCR Cumultive 1163 2966 5368 11661 12461 16096 162468 1400 16400 PCR as X SAR o0 81 80 113 62 106 107 106 106 REPLANTING (AIR HOLEK) SAR Estimate - 500 750 1000 1000 3250 PCR Actual - 500 510 518 - 1534 SAR Cumulative - 500 1260 2260 3250 3250 PCR Cumultive - 500 1016 1534 1534 1634 PCR as A SAR - 100 61 6s 47 47 SMALLHOLDER HOUSE CONST. SAR Estimate 725 1100 1626 1900 2350 7600 PCR Actual 725 1100 1625 - 800 2500 1550 8200 REQT per Planting Schd 6o1 903 1200 3246 300 1819 75 76 8200 REQT Cumulative 681 1484 2664 6930 5230 8049 8124 8200 8200 PCR Cumulative 726 1826 3350 3360 4160 665O 8200 8200 8200 PCR as % REQT 126 123 127 s5 67 83 101 100 100 A,~~~~~~ -XN ) - v; nv ,* , 73'>hlsbe,9 \' t ,, +,D O { ' sE S l-A / 9732 INDONESIA Nucleus Estates & Smaliholders Project I Alue t,mmah Settlement Aree in Aceh S P E C I T E R\ I T 0 i Y A C E rt , WW., S.*W wX. 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