Second irrigation subsector project
 Report No: ; Type: Report/Evaluation Memorandum ; Country: Indonesia; Region: East Asia And Pacific; Sector: Irrigation & Drainage; Major Sector:
                                                      Agriculture; ProjectID: P003953


Indonesia: Irrigation Subsector II (O&M) Project (Loan 3392- IND)

The Indonesia Irrigation Subsector II (O&M) project (ISSP II), supported by Loan 3392-IND for US$225 million, was
approved in FY92. In August 1994 US$10 million was canceled at the borrower's request, and the loan closed as planned
on July 31, 1995 when a balance of US$11.2 million was canceled. Savings resulted from foreign exchange expenditures
being less than expected. The Ford Foundation provided US$350,000 of cofinancing. The Implementation Completion
Report (ICR) was prepared by the FAO/World Bank Cooperative Program and was finalized by the East Asia and Pacific
Regional Office. Appendix C of the ICR is the Executive Summary of an ICR prepared by the borrower, which generally
agrees with the ICR's main text.

This project was the second phase of assistance to sustain the effectiveness of the borrower's irrigation systems. The main
objectives of the project were: (i) to support the government's 1987 policy on irrigation operation and maintenance
(O&M), which aimed at increasing expenditure for O&M while introducing cost recovery for O&M from irrigators (with
associated institutional changes and strengthening); (ii) to decentralize responsibility for O&M to the provinces and
irrigator groups; and (iii) to complete ongoing irrigation schemes. The main components of the project were construction
to complete ongoing schemes, and for deferred maintenance and repairs; incremental O&M expenditures; support for the
turnover program, introduction of irrigation fees and improved land taxation; and training and technical assistance.

The project achieved most of its objectives, with the exceptions noted below, and adequate funds are now being budgeted
by provincial governments for maintenance. Even so, after ten years and two similar projects supported by the Bank,
sustainability of the investments is not assured and serious operational problems remain. These problems are being
addressed in a following project (Java Irrigation Improvement and Water Resources Management Project-Loan 3762).
Implementation of ISSP II went generally well except for an interruption caused by reorganization of the main agency and
construction problems. Physical results exceeded targets in terms of areas served, but poor construction quality in some
cases will affect sustainability. Training greatly exceeded targets, and all technical assistance assignments were
completed. Responsibility for O&M has been transferred to the provinces and 16 percent of small schemes have been
turned over to irrigator groups. Although irrigation service fees are being collected from a part of the area as planned, cost
recovery amounts to only 1.8 percent of current O&M budget allocations. Hence, O&M remains a heavy burden on
public finances, but now in the provincial government budgets rather than federal budgets. Also, many of those smaller
schemes which have been turned over to beneficiaries are facing O&M problems since only a third of the irrigator groups
are active. Despite scant monitoring of benefits, the ICR reestimated the economic rate of return (ERR) at 19 percent,
compared with 17 percent at appraisal, noting that a higher projected economic price for rice and higher production than
predicted more than compensated for higher costs. The ICR rates project outcome as satisfactory, institutional
development impact as substantial and sustainability as uncertain. The Operations Evaluation Department (OED) agrees
with the ICR's project outcome and sustainability ratings but rates institutional development impact as moderate, given
low irrigator group participation and the ICR's judgments that institutional objectives were not fully achieved and had
limited impact. OED agrees with the ICR rating of Bank performance as satisfactory.

The ICR lists a number of project-specific lessons, but the broader lesson of this experience is that resolving the O&M
problems of public irrigation systems can be a long and costly process with no assurance of early success, particularly
with respect to cost recovery and institutional goals.

The ICR is satisfactory, but it does not provide data to permit verification of the ERR re-estimate. An audit is planned