Document of

The World Bank Fit lFOR OFFICIAL USE ONLY

Report No. 2350c-IND

INDONESIA

APPRAISAL OF THE

NUCLEUS ESTATES AND SMALLHOLDERS III PROJECT

July 18, 1979

Projects DepartmentEast Asia and Pacific Regional Office

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

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CURRENCY EQUIVALENTS

Currency Unit - Rupiah (Rp)

US$1 Rp 625Rp 100 = US$0.16

Rp 1,000,000 = US$1,600

WEIGHTS AND MEASURES

1 kilogram (kg) 1,000 grams (gm) = 2.205 pounds1 metric ton = 1,000 kg = 2,205 pounds = 0.98 long ton1 hectare (ha) = 10,000 square meters (sq m) = 2.47 acres

ABBREVIATIONS

APBD - Anggaran Pendapatan dan Belanja Daerah - Regional Budget forRevenues and Expenditures

APBN - Anggaran Pendapatan dan Belanja Negara - State Budget forRevenue and Expenditure

AARD - Agency for (Agricultural) Research and DevelopmentBAKOSURTANAL - National Coordinating Agency of Survey and MappingBAL - Basic Agrarian LawBAPPEDA - Provincial Development Planning AgencyBAPPENAS - Badan Perancana Pembungunan National, National Development

Planning AgencyBIMAS - Bimbingan Massal Swa Sembada Bahan Makanan, "Mass Guidance

Program for Self-Sufficiency in Foodstuffs" - a farm input-credit package program

BPPB - Balai Penelitian Perkebunan Bogor (Rubber Research InstituteBogor)

BPPM - Balai Penelitian Perkebunan Medan (Rubber Research InstituteMedan)

BRI - Bank Rakyat Indonesia - People's Bank of IndonesiaBULOG - Badan Mousan Logistik (rice procurement agency)BUUD - Badan Usaha Unit Desa - Forerunner of KUD as Village Unit

CooperativeCCL - Critical Consumption LevelCP - Cooperative ProgramCRIA - Central Research Institute for AgricultureDGA - Directorate General of Agrarian AffairsDGE - Directorate General of EstatesDGFC - Directorate General for Food CropsDGH - Directorate General of HighwaysDIP - Daftar Isian Projek - Project Budget DocumentDPD - Dinas Perkebunan Daerah - Provincial Estate Crops ServicesDPUP - Provincial Public Works ServicesDRC - Dry Rubber ContentFAO - Food and Agriculture OrganizationGOI - Government of IndonesiaINPRES - Instruksi Presiden - "Presidential Instruction" - a special

programIPEDA - Iuran Pembangunan Daerah - Land TaxJMO - Joint Marketing Office

FOR OFFICIAL USE ONLY

ABBREVIATIONS (contd.)

KUD - Koperasi Unit Desa - Village Unit Cooperative

md - man daysMOA - Ministry of Agriculture

MOASS - Minister of Agriculture Supporting StaffMOLT - Ministry of Labor and TransmigrationMOTC - Ministry of Trade and CooperativesMPW - Ministry of Public Works and PowerMil. - MillionMSL - Minimum Subsistence LevelREPELITA I - First Five-Year Development Plan (1969/70-1973/74)REPELITA II - Second Five-Year Development Plan (1974/75-1979/80)REPELITA III - Third Five-Year Development Plan (1979/80-1984/85)PMU - Project Management UnitPMSU - Planting Material Supply UnitPNP - Perusahaan Negara Perkebunan, State-owned Estate EnterprisePPL - Field extension workerPT - Perseroan Terbatas - State-owned Corporation Operating Under

the Commercial Code with Limited LiabilityPTP - Perseroan Terbatas Perkebunan, State-owned Estate Enterprise

with Limited LiabilityPTPT - Directorate of land clearing for transmigration settlement in

Ministry of Public WorksRISPA - Research Institute of the Sumatra Planters' Association

GLOSSARY OF INDONESIAN TERMS

Adat - Body of traditional lawBupati - Kabupaten Chief

Department Kesehatan - Department of HealthDesa - Village

Dukuh - Hamlet of 25-30 housesGotong-royong - Community self-help projectHak Pakai - Individual's right of use or exploitation of assigned

landHak Milik - Right to full ownership of landKabupaten - DistrictKecamatan - Subdistrict

Lalang - A coarse grass, establishing itself after the slashand burn cycle

Marga - Community grouping under Adat LawMushalla - Small prayer housePuskesmas - Community Health Center, subdistrict level

GOVERNMENT OF INDONESIAFISCAL YEAR

April 1-March 31

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

INDONESIA

APPRAISAL OF THENUCLEUS ESTATES AND SMALLHOLDERS III PROJECT

TABLE OF CONTENTS

Page No.

1. THE SECTOR AND SUBSECTOR .... . . . . . . . . . . . . . . . . 1

A. Background .I.. 1B. The Rubber Subsector .. 7C. The Palm Oil Subsector . ........ .. ....... . 9

2. PURPOSE, PRIORITY AND FORMULATION OF THE PROJECT . . . . . . . . 13

A. Project Objectives . ................... . 13B. Project Formulation ...... . . . . .. . * . *. .*. . 14C. The Project Areas .. .......... . 16

3. THE PROJECT .. . ...... . . . . . .. . ........ . . 22

A. Project Summary .... . . . . . . . . . . . . . . . . . . 22B. Project Costs and Financing Arrangements . . . . . . . . . 31C. Budgeting .... . . . . . . . . . . . . . . . . . . . . . 35D. Procurement . . . . . . . . . . . . . . . . . . . . . . . . 36E. Disbursements . . . . . . . . . . . . .. . . . . . . .. . 37F. Quality and Cost Controls ... . . . . . . . . . . . . . . 39G. Accounts and Audit .... . . . . . . . . . . . . . . . . . 39H. Cost Recovery .... . . . . . . . . . . . . . . . . . . . 40

4. ORGANIZATION AND MANAGEMENT ................... . 42

A. Borrowing/Executive Agency Functions . . . . . . . . . . . . 42B. Aspects of Project Implementation . . . . . . . . . . . . . 46C. The Environment .... . . . . . . . . . . . . . . . . . . 46

5. DEMAND AND MARKETING .... . . . . ...... . . . . . . . . 47-

A. Rubber .... . . . . . . . ..... . . . . . . . . . . . 47B. Palm Oil .... . . . . . . ...... . . . . . . . . . . 48C. Food Crops .... . . . . . . . . . . . . . . . . . . .. . 50

6. PRODUCTION ASPECTS, TECHNOLOGICAL FACTORS, AND FARM INCOMES . . 50

A. General ... ... 50B. Crop Recommendations ... . . .51C. Yields and Production.. . . . 52D. Farm Incomes .... . . . . . . . . . . . . ....... . 53

Page No.

7. COSTS, BENEFITS AND JUSTIFICATION . . . . . . . . . . . . . . . 55

A. Project Benefits and Justification . . . . . . . . . . . . . 55

B. Costs. ............... ..... 56

C. Financial Results ............... ..... 57

D. Economic Results ............ .. ...... 57

E. Project Risks ........... ......... 61

8. AGREEMENTS TO BE REACHED AND RECOMMENDATIONS . . . . . . . . . . 61

List of Tables in Main Report

1.1 Indonesia Average Annual Rubber Production

1.2 Indonesian Oil Palm Production Data

3.1 Summary of Project Prefinance3.2 Annual Inflation Indices3.3 Project Cost Summary3.4 Sources of Project Finance6.1 Farm Income - Danau Salak New Settlement6.2 Farm Income - Rimbo Bujang Smallholders7.1 Results of Financial Rate of Return Analysis

7.2 Results of Economic Rate of Return Analysis

ANNEXES

ANNEX 1 PROJECT PHASING, PROJECT COSTS AND EXPENDITURES, DISBURSEMENTS, ANDRENT AND COST RECOVERY

Table 1: Project PhasingTable 2: Project Cost - New Settlement - Danau SalakTable 3: PTP XVIII - Nucleus Estate - Danau SalakTable 4: Total Project Costs - PNP ITable 5: Rimbo Bujang - Project Costs - Existing and New Settlement

Table 6: Technical Assistance to DGETable 7: Estimated Schedule of Project Expenditures

Table 8: Sources of Finance - Project CostsTable 9: Estimated Schedule of DisbursementsTable 10: Proposed Allocation of Loan Proceeds

Table 11: List of Agricultural Machinery, Vehicles and Equipment

Table 12: Rent and Cost Recovery

ANNEX 2 DETAILS OF PROJECT PROCUREMENT

ANNEX 3 SMALLHOLDER FARM MODELS AND INCOME STATEMENTS

Table 1: Smallholders Rubber Yield Projections - Danau Salak

Table 2: Smallholder Rubber Yield Assumption - Rimbo BujangTable 3: New Settler Crop and Livestock Production from 0.15 ha

Garden Lot - Danau SalakTable 4: New Settler Crop Production from 0.8 ha Field Crop

Area - Danau Salak

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ANNEX 3 SMALLHOLDER FARM MODELS AND INCOME STATEMENTS (cont.)

Table 5: Farm Family Labor Availability and Labor Requirementsfor Proposed Development - Danau Salak

Table 6: Existing Settler Food Crop Area and Yield Projectionswith Project - Rimbo Bujang (pages 1-2)

Table 7: Farm Family Labor Availability and Labor Requirementsfor Proposed Development - Rimbo Bujang

Table 8: New Settler Farm Income Statement - Danau Salak (pages 1-2)

Table 9: Income Statement for Existing Settlers with Project -Rimbo Bujang (pages 1-2)

Table 10: Income Statement for Existing Settlers without Project -Rimbo Bujang (pages 1-2)

ANNEX 4

Table 1: Comparison of Development Costs per Family

ANNEX 5

Data Available in the Staff Working Papers (pages 1-2)

CHARTS

1. Organization Chart of Directorate General of Estates

2. Organization Chart of a Government-owned Estate Group (PTP)

3. Project Implementation Schedule - Smallholder Components

Main Activities - Danau Salak4. Project Implementation Schedule - Smallholder Components

Main Activities - Rimbo Bujang5. Smallholder Components - Organization Chart of the Flow of

Funds - Noncredit Items6. Smallholder Components - Organization Chart of the Flow of

Funds - Smallholder Development by the Nucleus Estates

7. Organization Chart of Provincial Government8. Organization Chart of Settlement Projects

FIGURES

1. Proposed Village Layout for the Danau Salak Area2. Basic House Design for Kalimantan Settlers - Danau Salak

3. Basic House Design for Javanese Settlers/Upland Areas - Danau Salak

4. Indicative Road Cross Sections - Danau Salak and Rimbo Bujang

MAPS. Nos. 14020R, 14099R, 14183R

This report is based on the findings of an appraisal mission composed of

Messrs. G.B. Fox, D.C. Carlier, P.R. Melkye, and Ms. A.L. Grossman (Bank)

and Messrs. R.R. Fuentes, C.T. Relf and J.B. McIntosh (Consultants) which

visited Indonesia in July/August and September/October 1978.

INDONESIA

APPRAISAL OF THENUCLEUS ESTATES AND SMALLHOLDERS III PROJECT

1. THE SECTOR AND SUBSECTOR

A. Background

1.01 The Government of Indonesia (GOI) has requested Bank assistanceto develop 50,000 ha of rubber and food crop land to settle 4,000 land-less families in South Kalimantan province and improve the incomes of afurther 8,000 families in Jambi province, using the public sector estates PTPVI and XVIII as the development agent under the nucleus estate developmentscheme. Assistance is also sought to strengthen the PTP XVIII nucleus estateand to rehabilitate PNP I, the sole public sector estate in Aceh province, sothat it may be used to implement a future NES smallholder development scheme.

1.02 The project was identified by the GOI with Bank assistance.It gives expression to national needs and priorities as outlined in GOI'sSecond Five-Year Plan. The project was prepared by GOI and the Bank usingreports by the consultant firms PT Dian Utami in association with BookerAgriculture International Ltd., and PT Agriconsult International.

The Agricultural and Rural Sector

1.03 Objectives. The Government's major objectives for the agriculturaland rural sector are to: (a) create productive employment to raise theincomes of the rural poor; (b) increase domestic food supply to keep pace withrising demand; (c) expand agricultural exports, particularly of smallholdertree crops; and (d) ensure productive, sustainable use of Indonesia's land,water and other natural resources.

1.04 Role and Performance. Despite a 4% average annual growth rate ofagricultural production since 1968, the contribution of the agriculturalsector to GDP has declined from 40% to 30% over that period. Agriculture'srelative share in total exports has simultaneously declined from 45% to 33%,a result mainly of the markedly increased importance of oil exports./INevertheless, the agricultural and rural sector remains of overwhelmingimportance to the great majority of Indonesians in terms of employment,income, and food production. Nearly 80% of the population lives in ruralareas, agriculture still employs between 60% and 66% of the total labor forcedepending on the season, and about two-thirds of rural households and one-tenth of urban households continue to rely on agriculture as their majorsource of income. Except for oil palm and tea, agriculture is dominated bysmallholder production; there are nearly 16 million smallholder familiesproducing subsistence and cash crops on about 16 million ha. There are also1,800 estates occupying 2.2 million ha producing mainly rubber, sugar, tea,palm oil, and tobacco.

/1 Among agricultural exports the effects of slow growth in production of

several traditional export crops have been largely balanced by increasedtimber, fish and palm oil exports.

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1.05 .2loyment. The share of the total labor force employed in the

agricultural sector has apparently decreased over the past 15 years, althoughprecise estimation is difficult due to shifting survey definitions andseasonal timing of surveys. In spite of its declining share, agriculturehas remained by far the largest single source of new employment, accountingfor 46% of incremental employment during the period 1971-76. Furthermore,while the articulation and implementation of a strategy designed to promotelabor-intensive industry is critical to Indonesia's long-term development, thesuccess or failure of the Government's agricultural policies will have a muchgreater influence on employment in the immediate future. Outside Java, futureemployment prospects in agriculture appear quite promising, given the employ-ment potential for sustained increases in smallholder areas, land developmentand increased use of contract agricultural labor by the agricultural estates,and publicly sponsored and spontaneous transmigration. While the rehabilita-tion investments on Java which were responsible for the generation of signifi-cant employment opportunities in the last decade have been largely completed,there is still scope for significant intensification of agricultural produc-tion. In the short- and medium-term, the Government's rural works program isbeing used as an employment generation mechanism in the rural sector.

1.06 Food Crops Given the limited manpower and financial resourcesavailable, the Government's agricultural strategy over the past decade hasbeen to concentrate on increasing the production of rice, the preferredstaple food of the great majority of Indonesians. Rice production increasedrapidly (4.5% p.a.) between 1968 and 1974, chiefly due to intensified programsof irrigation rehabilitation and the provision to irrigated rice producers ofhigh-yielding variety seed, fertilizer, and short-term production creditthrough the BIMAS (agricultural credit) program. The growth rate slowedmarkedly to 1l7% over 1974-77, in the wake of restrictions on private sectorparticipation in the fertili-zer trade and subsequent severe declines infertilizer usage, successive seasons of untimely rainfall, and unprecedentedattacks by pests and diseases, principally the brown plant hopper andassociated viruses. In 1978, a record rice harvest was achieved, with betterweather, improved and liberalized fertilizer distribution, and a concertedeffort by BIYMAS officials and extension workers to distribute pest resistantrice varieties throughout the country. Over the same decade output ofsecondary food crops (maize, cassava, soybeans, peanuts, and sweet potatoes)grew more slowly, at a combined annual rate of 1.6% composed of a 1.1% averagedecline in area (much of this land shifting to irrigated rice) and a 2.7%increase in yield.

1.07 Unfortunately, these gains in food output did not keep pace withincreases in demand, stimulated by large increases in aggregate income. Overthe decade Indonesia became the largest rice importer in the world, withrecord imports of 2.3 million tons in the poor harvest year of 1977, decliningto about 1.3 million tons in 1978. Simultaneously, wheat imports rose to1.4 million tons in 1978, cassava exports nearly disappeared, and soybeans,maize, and coconut oil imports have grown in the past year. Thus the

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general food security prospect is not encouraging. A recent Bank study /1concluded that even assuming expanded Government capital investment in thefood crop sector (e.g., irrigation), improved technology, more efficientcredit and marketing systems, improved extension, and a consequent 3.5%annual growth rate of food production, Indonesia would continue to face abasic food deficit up to at least 1990, when the rice deficit alone could bebetween 2 million and 3 million tons.

1.08 Although relocation of inhabitants of potential reservoir sites andconflicting claims of other users may delay progress, major increases inrice-cropping intensity could be achieved through water storage projects. Inthe short- and medium-term, however, there is still ample scope for achievinghigher yields, conserving water, increasing cropping intensity in existingrice areas through construction of tertiary irrigation and drainage systems,and improving support services. In order to achieve this production increase,the recent Irrigation Program Review (Report No. 2027a-IND, dated October 16,1978) concluded that steps to strengthen the planning and implementationcapacity of the Directorate General of Water Resources Development would beneeded. These conclusions are currently being reviewed with the GOI. In theOther Islands there is considerable potential for new irrigation systems,including tidal and swamp land development. Yields of secondary food crops,both in Java and the Other Islands, remain far below potential. While theGovernment has over the last decade given considerable attention to programsdesigned to support increased rice production and marketing, it has notfocussed sufficiently on research or supporting services to increaseproduction of secondary crops. This would require, inter alia, attention tomarketing arrangements, price supports, and appropriate credit arrangements.

1.09 Tree Crops. Tree crop products have for decades been an importantsource of export income for Indonesia, and still generate about two-thirds oftotal nonoil export revenues. Tree crops occupy more than a third of totalcropped land, with coconuts and rubber accounting for 80% of tree crop stands.Smallholders account for 80% of the area under rubber, the remainder being inGovernment and private estates. Coconuts, coffee, cloves and pepper arealmost entirely smallholder crops, while tea is chiefly, and oil palm isentirely, cultivated on estates. Although Indonesia has profitted enormouslyfrom recent world price trends for its tree crops, production of rubber andcoffee stagnated between 1969 and 1976. For example, some 95% of smallholderrubber consists of unselected clones with yields half those of smallholderrubber in neighboring Malaysia. Only oil palm has shown sustained largeincreases in production due to large investment programs by Government andprivate estates. Deteriorating transport infrastructure and shipping in theOther Islands since the 1950s, increased marketing regulation and otherGovernment actions affecting private sector participation, and inadequatetree crop research, extension, and particularly, replanting programs forsmallholders contributed to this situation.

/1 Report No. 2374-IND, "Indonesia - Supply Prospects for Major FoodCrops," of March 3, 1979.

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1.10 Efforts to revitalize the tree crop sector are in their infancy.One of the new approaches (which would be supported under the proposedproject) has been to rely on public sector estates /1 with their proventechnical and managerial expertise to meet the demanding requirements ofsettlement and land clearing for tree and food crop production, to providesettlers with employment during the initial three years of settlement, andthereafter to assist them by purchasing and distributing inputs during theperiod of tree crop immaturity and by providing processing and marketing faci-lities. The crops which best lend themselves for development by nucleusestates at present are rubber, coconuts and oil palm. These crops havesatisfactory export potential; their returns to the farmer after provisionfor debt service are satisfactory; the production and processing techniquesare well known to many of the estates; and the crops are well suited to thepoorer soils of Sumatra and Kalimantan where there are large tracts of under-developed agricultural land available for settlement.

1.11 In addition to the nucleus estate approach, the Government hasprepared projects to plant and replant smallholder rubber and coconuts on anintensively managed block basis, financed through credit arrangements. Butthe largest and most important task, the institutionalization of easilyadministered low-cost replanting programs for existing smallholder stands,remains to be articulated. This is largely because no technically proven,low-cost systems of tree crop replanting have yet been identified and testedin Indonesia. This problem is particularly grave since the country has abacklog of nearly 400,000 ha of both smallholder rubber and coconuts, whichare overaged and unproductive. Given that the market prospects and employmentpotential for these crops are good, and various large regions in the OtherIslands have natural comparative advantages for these crops, the rapidexpansion of smallholder planting and replanting of tree crops is a highpriority.

1.12 Apart from foreign investment, especially for oil palm, andintensification of cropping on a few of the larger Indonesian-owned privateestates, there has been little development of the private estates whichcover some 430,000 ha (100,000 ha of which have foreign participation). Atleast half this area is abandoned but will become available when leases expireafter 1980.Limited domestic funds have been made available since 1977 toimprove up to 40,000 ha of locally owned and operated private estates. GOI isconsidering increasing incentives for additional foreign estate investment,and is seeking Bank Group support for private estate development and possibleuse of relinquished private estate land for smallholders.

1.13 Area Development and Transmigration. Certain critically poor areasof Java and productive areas available for settlement and development on theOther Islands have provided the focus for rural development programs to meetbasic needs and to generate employment, productivity and incomes. For Java,

/1 The estates enterprises (PNPs) are presently being converted by GOI intolimited liability companies (PTPs).

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the Government is preparing local rural works projects geared to strengtheningplanning and investment activities at the local level. Cultivable land in

Java is almost fully utilized, and in some areas, particularly the higherwatersheds of its silt-laden rivers, agricultural land use already exceeds

ecologically safe limits and is contributing to increasingly severe problemsof erosion, downstream flooding, and siltation of ports, dams, and irrigation

canal systems. The Government is preparing a program of watershed developmentand integrated development projects designed to address some of these

problems.

1.14 The primary vehicle for new area development in the Other Islands,as well as for creating employment and settlement nuclei for Javanese

migrants, is likely to be the transmigration program. Unfortunately, this

program has been hampered by unrealistic expectations of its potential forresolving Java's population problems and to stimulating large-scale regionaldevelopment, by overly ambitious targets, and by weak, uncoordinatedimplementation. Confronted by management problems, the Government reorganized

the management of the transmigration program in preparation for Repelita III.This culminated in a Presidential Decree which transfers responsibility forproject implementation to the appropriate line agencies. The revisedinstitutional arrangements will need to be supported by continued attention toa variety of technical and policy issues: these include the appropriatenessof land use for food crop production, appropriate target incomes, farm sizeand village plans, the extent of Government support to settlers, the provisionof adequate support service and marketing mechanisms and the potential role ofspontaneous migration in the transmigration strategy. The Second Trans-migration Project (Loan 1707-IND and Credit 919-IND, approved on May 29,1979), will address these issues.

1.15 The Role of Government. lhile the private sector should beencouraged to expand its role in agricultural inputs supply, marketing, andprocessing, the Government bears the major responsibility for the infra-structure, resource conservation, and other services, particularly outsideJava (para. 1.13). The capacity of the Indonesian Government to plan andimplement agricultural and rural development programs has improved over the

past decade. However, overly centralized procedures, weak regional planningand technical and managerial manpower constraints including difficulties in

attracting such personnel to remote rural locations have impeded agricultural

planning, programming and implementation. Further, the Government's concernfor area development has also increased the need to strengthen provincial andlocal planning capacities. Future programs responsive to the Government'sstated objectives will necessarily be more complex than those which theGovernment has followed up to now. They will require closely coordinatedprograms of agricultural research and extension, input supply, credit, landdevelopment, transportation, pricing policies and marketing arrangements. Itis, therefore, important that the Government continue to strengthen the keyrural development institutions, particularly through the education,recruitment, training, and retention of qualified technical manpower.

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1.16 Bank Group Lending Strategy. There is general agreement betweenthe Bank and the Government on the overall objectives and strategies proposedfor the rural sector. While views sometimes differ on the relative emphasisto be given to different investments and on the technical design of someprojects, such differences are not impeding Bank Group operations generallyand are usually resolvable following further analysis and dialogue. The BankGroup has devoted considerable staff time to various analyses of the ruralsector (e.g., employment and income distribution, irrigation development,agriculture support services and food crop production) to improve itsunderstanding of the needs of the sector and the Government's policies.

1.17 Since the first of 13 irrigation projects was approved in 1968, theBank Group has rapidly expanded its agricultural and rural lending to includesupport for estate and smallholder tree crops; fertilizer production anddistribution; sugar estates; agricultural research, extension, and training;transmigration; livestock; fisheries; and resource survey and mapping. In1978, a Sector Operations Review was issued on the Bank Group's agriculturalprogram in Indonesia (Report No. 2166, dated August 9, 1978), which concludedthat despite deficiencies in some projects, the Bank's portfolio in Indonesianagriculture was "of overall good quality and likely to contribute substan-tially to increased production." To further that aim within the context ofthe Government's overall agricultural strategy, Bank Group lending within thenext few years is expected to focus on:

(i) secondary crop production, e.g., through the second phase projectsfor agricultural research, extension, seeds and an initial agri-cultural credit project;

(ii) a diversified irrigation program designed to intensify rice crop-ping on Java and to extend water management to the Other Islands;

(iii) development of smallholder tree crop replanting programs designed

to complement the Nucleus Estate and Smallholders projects(paras. 111 and 112);

(iv) area development projects aimed at evolving a viable model of

watershed management to conserve soil and to ensure long-term

productivity in the densely populated areas of Java; developing

strategies for the integrated rural development of critical areas

on Java; and stimulating transmigration to the Other Islands.

These projects will be complemented by sector work. A cassava production and

marketing study planned for later this fiscal year will assist the Government

in developing a secondary food crop strategy. A transmigration program review

will be undertaken later this year which will, inter alia, identify strategies

to reduce cost per family and stimulate spontaneous transmigration. In

addition, a review of supply and requirements of technical and managerial

manpower for agriculture planned for early 1980 will examine short-term

training measures to alleviate critical manpower shortages.

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B. The Rubber Subsector

Crop Production

1.18 The Indonesian rubber industry, at one time the world's largestproducer of natural rubber, is currently second largest to Malaysia, produc-ing about 800,000 tons and exporting 770,000 tons in 1977/78 - 20% of totalworld exports. The third largest export commodity of Indonesia, naturalrubber, comprises 6% of total agricultural GDP, 7% of export earnings and16% of nonoil exports in 1977. The industry provides full-time employmentfor 2 million people and part-time employment for an additional 6-8 millionpeople.

1.19 Indonesia rubber production (Table 1) grew slowly from 1960 to1970. Average production in 1960-64 was 700,000 tons, increasing on average1.6% p.a. to 810,000 tons in 1970-74. Most of this increase can be attributedto expansion of the rubber area; average yields remained almost constant.From 1970-74 to 1975-78 average total production declined slightly (by about0.6% p.a.) reflecting a decrease in yields. The main reasons for this recentdecline in production appear to be the effects of: (a) a continuous, thougherratic, decline in prices which has discouraged tapping and planting; and(b) a failure to improve poor agricultural practices, particularly amongsmallholders and private national estates.

Table 1.1: INDONESIA AVERAGE ANNUAL RUBBER PRODUCTION, 1960-78

Calendar years1960-64 1965-69 1970-74 1975-78

Production ('000 ton)Smallholders 483 526 570 541Estates 220 223 238 250

Total 703 749 808 791

Area ('000 ha)Smallholders 1,506 1,661 1,839 1,875Estates n.a. 523 497 455

Total n.a. 2,184 2,336 2,330

Yield (kg/ha)Smallholders 342 317 310 290Estates n.a. 426 483 543

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Smallholders

1.20 About 70% of national production comes from smallholders who have80% of the total rubber area, with average rubber holdings of 1.5 ha. Small-holder production, of which 70% comes from Sumatra and 19% from Kalimantan,grew from an average 480,000 tons from 1960-64 to 570,000 tons in 1970-74, anaverage increase of 1.5% p.a. In the same period smallholder rubber areagrew on average 2.2% p.a. and rubber yields declined 0.8% p.a. In 1975-78average production was down to 541,000 tons, a decrease of 1.3% due entirelyto lower yields. This decline in smallholder production can be expected toaccelerate, since it is estimated that 30% of smallholder plantings date from1940 or earlier and 30% from 1940-50; all of these probably already havedeclining yields. In the last five years there has been very little evidenceof replanting by smallholders, most of the area being left to be rejuvenatedby poor quality self-sown seedling rubber. Smallholders do not have sufficientresources to plant and maintain the high yielding varieties of rubber necessaryfor them to receive an attractive return on their investment. In theabsence of Government-assisted settlement and rubber replanting programs, itis estimated that by 1990 the area of smallholder rubber will have dropped to1.1 million ha and production to about 270,000 tons.

1.21 Estate Production. There is a well-established estate rubbersector of 455,000 ha comprised of the PNPs and PTPs with 200,000 ha (44%),private national estates with 182,000 ha (40%), and private foreign estateswith 73,000 ha (16%). Total estate production in 1977 was 250,000 tons. Themain center of estate production is Sumatra (65%), followed by Java (30%)and Kalimantan (5%). Despite a decline in the area under rubber on Governmentestates from 225,000 ha in 1970 to about 200,000 ha in 1977, productionincreased from an estimated 118,000 tons to 145,000 tons, due to an increasein yields from 524 kg/ha to 725 kg/ha. Private foreign estate companies,despite a marginal drop in area (74,000 to 73,000 ha), increased productionin the same period from 40,000 tons to about 55,000 tons. The performanceof the private national estates has in many respects been similar to that forsmallholders. The area of these estates was estimated to be 182,000 ha in1976, production was 52,000 tons. The decline in estate rubber area is dueto abandonment of overaged trees and conversion of some areas into oil palm.Increased yields have resulted from improved management and replanting ofestates with clonal varieties. If the present trends for the estate sectorcontinue, it is expected that by 1990, total estate rubber area will declineto 315,000 ha, but total production will increase to 340,000 tons.

1.22 Future Prospects. The forecast of a substantial decrease in thefuture production of rubber has stimulated the Government to initiate an expan-sion program for rubber replanting and new rubber planting. The focus ofthis program is smallholder development, first to raise the productivity ofexisting holdings, and secondly, to assist poor and landless families toclear unused jungle and plant new rubber. In 1978, the Government initiated alarge scale Smallholder Rubber Replanting Program to be implemented by a newNational Rubber Replanting Unit in the DGE. The target is to replant 10,000ha in 1978/79, 30,000 ha in 1979/80 and about 50,000 ha annually thereafterto complete 300,000 ha by 1984/85 in line with the need to replant about

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60,000 ha p.a. so that the 1.8 million ha of smallholder rubber could be

replanted over the trees' 30-year production cycle. However, in view of the

organizational and administrative constraints, a more realistic goal for the

seven-year period would be 150,000-180,000 ha. The proposed IDA-assisted

Rubber Replanting Project would assist the replanting of the first 40,000 ha.

The objectives and detailed plans for the development of the estates sector

are expected to be clarified in the current planning for Repelita III.

It is clear however, that there will be an enlarged nucleus estate small-

holder development program to assist new settlement on tree crop smallholdings.

Such a program is essential not only to reverse the trend in declining export

crop production and foreign exchange earnings but also for immediately

benefiting the rural poor. Given Indonesia's comparative advantage in rubber

production and the prospects of stable prices at any reasonable rate of

expansion of natural rubber production (see para. 6.02), the prospects for a

successful smallholder replanting program are good if implementation capacity

can be developed.

C. The Palm Oil Subsector

1.23 Faced with a rapidly growing domestic demand for fats and oils -mainly because of population growth and increasing per capita incomes, and the

prospect of a slowly expanding coconut industry, the Government in the last

few years has started to look on oil palm as a major source of vegetable oil.

Modern refining techniques, particularly fractionation, have made palm oil

products acceptable to the Indonesian taste. At present there is insufficient

fractionation capacity of palm oil in Indonesia but current investment plans

indicate that the shortage will be overcome by 1980.

1.24 Oil palm is largely an estate crop in Indonesia, most production

coming from North Sumatra where soil and climatic conditions are ideal. At

present, public sector estates account for 66% of the area and the production

of oil palm projects (palm oil and palm kernels), the remaining third comes

from private estates (Table 1.2). The first smallholder plantings commenced

in 1975/76 but comprise less than 1% of the total area of oil palm in Indonesia.

About 85% of the present production is exported. The combined output of palm

oil and palm kernel oil is projected to reach 1.7 million tons by 1990 which

corresponds to an average annual growth rate of 9% for 1975-1990. According

to Bank projections, however, much of this increased production will be

consumed domestically (para. 5.05).

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Table 1.2: INDONESIAN OIL PALM PRODUCTION DATA

1970 1972 1974 1976 1978

Production ('000 tons)

Palm OilGovernment estates 147 189 243 294 327

Private estates 70 81 105 145 160

Smallholders - - - - 1

Total 217 270 348 439 488

Palm KernelGovernment estates 33 42 52 64 65

Private estates 15 17 21 31 32

Smallholders - - - - 0.2

Total 48 59 73 95 97.2

Area in Production ('000 ha)Government estates 62 72 87 95 105

Private estates 30 32 37 45 45Smallholders - - - - 1

Total 92 104 124 140 151

Yield (tons ffb/ha) 12.4 13.2 14.0 15.6 15.4

Institutions Involved in the Rubber Subsector

1.25 Ministry of Agriculture (MOA). MOA comprises five DirectoratesGeneral: Estates, Fisheries, Food Crops, Forestry and Livestock. The

Directorate General of Estates (DGE) regulates all private estates and small-

holdings involving tree crops and industrial crops which include rubber, coco-

nuts, oil palm, tea, coffee, tobacco, etc. DGE comprises three directorates

in Jakarta: Planning, Production and Means of Production (Chart 1). Extension

and project supervision at provincial and district levels are handled by theProvincial Extension Services (Dinas Perkebunan Daerahs - DPDs). The DPDsare responsible technically to the DGE but administratively to the provincial

governments. The responsibility for public sector estates rests in MOA with

the Support Staff for Agricultural Enterprises Unit which reports to the

Minister. This Unit assists the Minister in policy formulation, coordination

of estate crop activities, estate inspection, estate budget approval and

control and monitoring of the operations of the public sector estates. Both

the MOA Support Staff and DGE have received technical assistance under the

Nucleus Estates and Smallholders I and II Projects, Loans 1499-IND and

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1604-'ND, respectively, in order to facilitate improved operation of thepublic estate system and to facilitate preDaration and implementation of small-holder development projects. Improved operations and project implementationnavxe resulted from this technical assistance. Extension services to treecrori sma3lholders, howevcr, continue to suffer because neither DGE nor theDPDe have adequate funds to improve the scope of extension to smallholdertree crop farmers or the nurnber of tree crop extension personnel. The firststep toward improving routine extension services for rubber smallholders areproposed for inclusion in the forthcoming Second Agriculture ExtensionProject.

1.26 Public Sector Estates. The Indonesian Estates Industry is domi-nated by the public sector estates comprising 28 estate groups which arelocated mainly in Northern Sumatra ard java with over 500,000 na of planta-tion crops excluding pine forests. Organization of the Government-ownedestates system is shown in Chart 2. CGovernment policy is now to converttheir fully owned estates enterprises, the PNPs,/1 into PTPs which arelimited liability companies operating under the Indonesian Commercial Code.This action grants the estates greater financial and managerial autonomy byputting the estates on a ful'ly commercial footing subject to Indonesian

commercial law including all commerci-.l taxation. The conversion to PTPdecentralizes much of the decision-making from the Ministry of Agr-culture tothe individual estates. The majority of these estates have now been converted.The importance of this vast estate enter)rise to the rural sector is that itemploys over 500,000 resident and seasonal labor, and it is estimated thatthe welfare of 3 million people is immediately dependent on the estatessystem. The quality of management on the estates has greatly improved sincethe 1960s and with such improvements, the estates are now able to facilitatesmallholder development. The Government has requested rehabilitation of PNP Iin the proposed project in order that it can be utilized as a viable nucleusestate for smallholder development in the future. Similarly, the proposedexpansion of the Danau Salak estate at PTP XVIII would assist the estatewith the required infrastructure, processing facilities, and developmentprogram to strengthen its role as a nucleus estate.

1.27 Bank Rakyat Indonesia (BRI). BRI provides short-term credit toagricultural cooperatives, farmers, fishermen and other agricultural enter-prises. BRI participates in the administration of the Mtass-Guidance (BIMAS)program of seasonal production credit, a national program to raise food cropproduction and farm income by supplying credit and cash inputs at subsidizedprices, mainly to rice farmers. This program, administered by the DirectorGeneral of Food Crops, is implemented through village units throughout Indonesiain each of which the BRI establishes a credit office. With the exception ofthe Tea Smallholders and Private Estates Project (Credit 400-IND), BRI hashad very little involvement in the provision of long-term credit necessaryfor tree crop financing. Under the IDA-assisted Rural Credit Project (Credit

/1 The PNPs, Perusahaan Negara Perkebunan, were classified in 1968 duringreorganization of the estate groups as PNP I-PNP XXVIlI; PTPs PerseroanTerbatas Perkebunan, are state-owned estate enterprises with limitedliability.

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827-IND) the BRI would expand credit operations to tree crop agriculture.Until such time as BRI is fully capable of handling tree crop credit operations,the BRI has agreed to utilize a simplified credit delivery system for adminis-trating rubber loans through nucleus estate contractors as presently imple-mented under the first and second Nucleus Estates and Smallholders Projects(Loans 1499-IND and 1604-IND).

Other Institutions in the Rubber Sector

1.28 Four other ministries are involved in the rubber industry. TheMinistry of Trade and Cooperatives determines policy on product specification,quality control and smallholder marketing; the Ministry of Industry licensesprocessors; the Ministry of Finance, with the approval of the NationalDevelopment Planning Agency (BAPPENAS), provides and arranges for collectionof funds for development through Bank Indonesia (BI); and the Ministry ofHome Affairs, through its Directorate General of Agraria, is responsible forthe granting of land titles (Hak Milik).

Rubber Research

1.29 Rubber research is conducted primarily by two institutions, bothin North Sumatra: the Research Institute of the Sumatra Planters' Associa-tion (BPPM) in Medan, for private estates, and the Rubber Research Center atTanjong Morawa, for Government estates. Three other units, all in Bogor,West Java, are also involved in rubber-related research: the ResearchInstitute for Estate Crops (BPPB) does rubber clone, fertilizer and rubbertechnology trials in Java and South Sumatra; the Soils Research Instituteworks on land capability; and the Central Agricultural Research Institutelooks after annual crops, including rubber intercrops.

1.30 A Rubber Research Institute is operating with World Bank financingat Sungei Putih in North Sumatra (Agricultural Research Loan 1179-IND). ThisInstitute will be responsible for applied research on rubber and intercropsfor estates and, especially, for smallllolders. The Institute will makerecommendations on: (a) clones and clonal seedlings; (b) fertilizer usage bysoil type; (c) the preparation and planting of nursery material; (d) plantprotection, exploitation and processing methods; and (e) cover crops andintercrops. The new Institute will absorb the rubber section of BPPM andwill take over the basic research being done by the Rubber Research Center,leaving the latter to concentrate on applied research.

Bank Lending for Rubber

1.31 Bank assistance for smallholder rubber has included Credit358-IND (North Sumatra Smallholder Development Project) US$5 million, Loan1499-IND (Nucleus Estates and Smallholders I Project, NES I) US$65 million andLoan 1604-IND (NES II) US$65 million. The oil palm and rubber replantingunder Credit 358-IND, now nearing completion, has been successful. Althoughproject costs have doubled, higher than anticipated selling prices and produc-tion have more than offset this. NES I, which became effective in January1978, has started slowly due to inadequate budgeting of local funds. TheNES II loan became effective in September 1978. Smallholder rubber development

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has also recently been started on a modest scale in South Sumatra under theTransmigration and Rural Development Project (Loan 1318-IND). Thl.e first RubberReplanting Project, subject to Eoard appproval, is intended to support the newnational Smallholder Rubber ReDlaXltinig Program to be implemented by a newNational Rubber Replanting Unit in the DGE. The rationale for each of theseprojects acknowledges that significant increases in national ruber productioncan only be achieved by massive planting in smallholder areas and new plantingsin smallholder settlement schemes.

1.32 Rubber rehabilitation on public-sector estates was financed underCredits 155, 194 and 319-IND. The recent project performance audit forCredits 155 and 194-IND rated both projects physically and financiallysuccessful. Credit 319-IND (Fourth Agricultural Estates Project) is aheadof schedule and rubber and oil palm plantings are good.

2. PURPOSE, PRIORITY AND FORMJLATION OF THE PROJECT

A. Project Objectives

Basic Objectives

2.01 GOI eccnomic objectives for the rubber subsector and for the re-gional devlopment which the project will contribute are to: (a) increasethe efficiency cf the subsector by raising yields and lowering unit costs ofproduction; (b) increase production of rubber leading to increased exportsand foreign exchange earnings; and (c) increase the supply of raw materialsfor local processing in the rapidly expanding industrial and urban areasoutside of Java, particularly in Sumatra and Kalimantan, thereby creatingsecondary employment. The proposed project is designed as a particularlye'-fec-ive means of helping to achieve GOI objectives for development of therubber subsector since the project will not only settle poor and landlessfamilies or, largely unproductive land while raising rubber output and exportincome, but will also minimize the drain on public resources through aninnovative system of cost recovery.

2.02 Socially the project wIll generate productive employment at arelatively low cost, raise family incomes of the landless or near landlesspoor, and stimulate small business in the project areas. The project will?rovide for basic health services for about 50,000 people including malariacontrol, improved water and sanitation and family planning. Primary andsecondary education facilities will be provided for children of 7,000lamilies. Regional needs will be served with new and upgraded roads toimprove transportation for about 200,000 people living in or near the projectarea. The project will establish at the end of the project period a high-yielding, permanent tree crop and provide a stable and proven agriculturalsystem respoasive to criteria for protection of the environment, particularlysince slhifting cultivation and indiscriminate forest clearing are seriousproblems. The project will assist in institution building with benefits forthe Directorate General of Estates in planning, implementation and evaluationof ongoing projects.

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2.03 GOI requires that public sector estates with their technical and

managerial expertise be utilized as nuclei to promote and guide smallholder

development. The use of public sector estates is an effective way to rea-

lize these stated GOI objectives since in an environment of scarce technical

and managerial skills, the GOI can rely on the PNP/PTPs to meet the demanding

requirements of settlement and rubber development in clearing jungle, provid-

ing employment to poor and needy families to be settled in the area, and

securing sufficient inputs and marketing facilities to ensure that settlers

become successful smallholder producers. The crops which best lend themselves

for development by nucleus estates at present are rubber, coconuts and oil

palm. These crops have satisfactory export potential; their returns to the

farmer are satisfactory; production and processing techniques are well known

in Indonesia; and the crops are well suited to the poorer soils of Sumatra

ancd Kalimantan where there are large tracts of undeveloped agricultural land

available for settlement.

B. Project Formulation

Constraints

2.04 The formidable number of poor farmers, landless people and the

growing number of underemployed and unemployed in the rural labor force and

the shortage of finance for development necessitates that the project be

designed to minimize the cost of settlement per family and yet provide suffi-

cient on-farm investment to assure their successful livelihood. The project

is therefore formulated to utilize fully the opportunities of farm family

self-help and to minimize Government expenditures on agricultural support,

social services and project infrastructure. Conceptually, the proposed

project is the same as the Nucleus Estates and Smallholders I and II projects.

Technical, organizational and financial details are, except in a few minor

cases, the same as in these projects.

2.05 The project components have been selected to give as much emphasis

to smallholder development as practicable while providing sufficient assistance

to strengthen the nucleus estates for their critical role in project implemen-

tation. The project site in South Kalimantan was chosen because there

are about 40,000 ha of unused, relatively uninhabited sheet lalang /1 land,

suitable for smallholder rubber development, alongside an existing, but

run-down rubber estate. The area is linked to the provincial capital by an

excellent road, it has excellent access to an adequate seaport and is

selected by Government to be a priority development area for new settlement.

The Rimbo Bujang transmigration settlement area in Jambi province with its

6,000 settlers is included in the project to provide each settler family

with a reliable cash crop which wil'l help diversify farm family income away

from its present total dependence on food cropping. The project will also

assist some 2,000 local families living in forest areas along the edge of

the transmigration area to develop a rubber cash crop and to share in the

development taking place around them.

/1 Imperata cylindrica: a coarse grass.

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2.06 PTPs XVIII and VI have been selected as the nucleus estates forsmallholder development since they have developed considerable skill in landclearing and tree crop development. To implement the proposed project it isessential that the nucleus estates have full authority over the resources,machinery, material inputs, training of labor and control of finance requiredto achieve and hand over to the settler, potentially high-yielding areas ofthree year old rubber. Project formulation is therefore aimed at making thenucleus estate responsible not only for clearing of land, rubber planting andmaintenance, but also the construction of roads, provision of building materialsand supervision of settlers' own construction of housing, the procurement andapplication of inputs for development during the entire rubber immatureperiod, the clearing of the food crop area and the provision of plantingmaterial for each new settler family. Rubber will be established in largeblocks of at least 500 ha so as to maximize economies of scale. The nucleusestates will be required to hire new settlers as laborers and providetemporary housing until settlers' own houses are constructed. Each estatewill be authorized to recruit casual labor whenever settler labor is insuffi-cient to meet demand.

2.07 The project is also designed to strengthen the capacity of thepublic sector estate PTP XVIII (South Kalimantan) for its role as the nucleusestate in the present project, and PNP I (Aceh) for its role in a forthcomingnucleus estate project. To achieve this objective, PTP XVIII and PNP I willbe assisted to improve their economic efficiency by increasing their areas ofnewly planted rubber and oil palm in the project areas, and in the case ofPNP I, increasing its rubber and oil palm processing capacity. Since there isno existing rubber estate near the Rimbo Bujang transmigration area, PTP VI,using its own financial resources, will establish a nucleus estate of about5,000 ha of rubber. It will also establish nurseries for the propagationand distribution of planting material to transmigrants and construct acassava processing plant of 1 mt/hr capacity to process surplus smallholderproduction in the project area.

2.08 The decision on farm size and the scope of farm development isbased on the need for farm families to generate sufficient farm income torepay the credit component. Farm plans for the new settlement in SouthKalimantan will result in the establishment of 3 ha of clonal rubber withina total farm size of 4 ha. This is a reduction of 1 ha from the 5 ha farmmodel in NES I and II. Provision is also made in the plan for production ofbasic family food supplies. In addition to the establishment of a small(0.15 ha) intensively cultivated home garden, each family will grow 0.8 haof field food crops. In the period of rubber immaturity, one member persmallholder family will be offered full-time employment as a rubbersmallholder-trainee employed by the nucleus estate.

2.09 The implementation schedule for Rimbo Bujang transmigration areais designed in such a way that at the time of development under thisproject each settler family will have been resident on their 5 ha holding forabout 3 years. They therefore will have a house and sufficient infrastructureavailable to them to allow omission of these investments in the present project.It is expected also that each holding will have about 2 ha of established

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crop land. The area of clonal rubber required to generate sufficient income

to meet family debt service obligations is therefore reduced to 2 ha.

Local Marga land people will also receive 2 ha of planted rubber since they

presently have a house and about 1 ha of food crop land. In both cases,

during the period of rubber immaturity, one member per faaily will also be

offered full time employment as a rubber smallholder-trainee employed by the

nucleus estate.

C. The Project Areas

Location and Land Use

2.10 There are three project areas: Danau Salak in South Kalimantan;

PNP I estates in Aceh Province (Sumatra) and Rimbo Bujang in Jambi Province

(Sumatra).

2.11 PTP XVIII: Danau Salak - South Kalimantan Province (Map 14020).

The project area commences at kilometer 67 on the main provincial highway

from Banjarmasin and extends north-northeast 42 km to Rantau and Tanjung.

In the southwest the smallholder area lies immediately adjacent to Danau

Salak estate owned by PTP XVIII. To the west it is bordered by the flood

plain of the Barito River and to the east by a ridge of low hills. The

project area is divided almost equally north and south by the town of Binuang.

The southern half lies in Kabupaten Banjar with Martapura the principal town,

and the northern half is in Kabupaten Tapin with Rantau the main town. Most

of the project area is under sheet lalang, comprising about 1,000 ha of old

rubber and 2,000 ha of sporadic village food cropland in the Transad and

Pantai Cabe settlements. The total gross land area available for smallholder

development is 23,700 ha, of which 20,000 ha will be required to settle 4,000

smallholder families.

2.12 PNP I - Aceh Province (Map 14183). The project area will be the

six estates of PNP I comprising a total concession of 47,131 ha. The total

planted area is 17,564 ha with 3,230 ha rubber, 9,034 ha oil palm, 5,250 ha

pine and 50 ha coffee. Three of the estates (Pulau Tiga, Kebun Lama and

Kebun Baru) are located in the south of the province close to the city of

Langsa. Two estates (Karang Inoue and Julu Rayeu) lie about 100 km north of

Langsa and the sixth estate, in northern Aceh, is some 400 km from Langsa.

The head office for the estate is at Langsa.

2.13 Rimbo Bujang Smallholder Development - Jambi Province (Map 14099).

Situated in the extreme northwest of Jambi Province, some 200 km from the

provincial capital Jambi, the project area is comprised of three parts, namely:

(a) Rimbo Bujang Transmigration Settlement. Located on a relatively low

basin or depression between the Bukit Barisan range in the east,

the Tiga Puluh mountains to the east and north, the project area is

neatly bounded by three rivers: the Batang Tebo in the south, the

Batang Hari in the north and the Batang Jujuhan in the west. There

are currently 15 settlement units occupying a gross area of 68,000

ha. By early 1979, some 6,000 families had settled in the scheme.

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(b) Marga Land. This area is bounded in the north by the Trans-SumatraHighway and in the south by the Batang Tebo River. It is broadlytriangular in shape since the highway and river diverge to the westfrom the Kabupaten capital, Muara Bungo. The nominal west boundaryis the road linking Paninjun to the highway about 37 km from MuaraBungo. The gross area is 8,000 ha of which 1,500 ha is used forrainfed and irrigated rice production, coconuts and mixed uplandcrops. The remaining 6,000 ha comprises primary forest, abandonedsenescent rubber and secondary forest. Of this area, about 4,200ha will be available for permanent settlement of 2,000 local families.

(c) PTP VI Nucleus Estate. The allocation for the nucleus estate is7,500 ha gross. It is contiguous with the Rimbo Bujang transmi-gration area and to the east with the new Alai Hilir transmigrationarea. Primary and secondary forest covers most of the area.

Climate

2.14 The climate is wet tropical. In Rimbo Bujang and PNP I the dryseason is normally June to August and in South Kalimantan June to October.Mean monthly rainfall figures for the project areas are provided in theProject Working Papers. Total annual rainfall in Danau Salak is 2,300 mm;in Rimbo Bujang 2,900 mm; in the northern area of PNP I 1,800 mm; and inthe southern area of PNP I 1,800 to 3,400 mm. The maximum and minimummonthly rainfall ranges from 300 to 90 mm in Danau Salak; 340 to 120 mm inRimbo Bujang; and about 380-60 mm on PNP I estates. Total rainfall and itsseasonality are suitable for growing rubber and food crops. Oil palm willbe grown in the higher rainfall southern estates of PNP I. The mean tempera-ture varies from 27 to 30 degrees C in Danau Salak, 26 to 28 degrees C inRimbo Bujang and 26-29 degrees C in PNP I. Wind velocities are low inproject areas and present no risk to tree crops.

Soils and Topography

2.15 Soils in most of the project areas are derived from tertiarysedimentary rock and are broadly classified as red-yellow podzolics andlatosols. In general they are of low to moderate fertility and are physicallysuited to rubber and oil palm development. Most project soils are deficientin nitrogen, extremely deficient in phosphorus and low in potassium. Theyare fairly acid and phosphate fixation could prove to be high. Heavy applica-tions of phosphate will be required in the initial stages of development.Details of the soil analyses are given in the Staff Working Papers. Topo-graphy in most of the project areas is flat to undulating, the slopes usuallybeing less than 15%.

Population and Incomes

2.16 In Rimbo Bujang 32% of the 6,000 settlers have cleared 1 ha ofjungle, 64% have 2 ha cleared and 4% have cleared between 2 and 3 ha. Thevariation is mainly the result of the staggered arrival of settlers over thethree years of settlement. Ninety-three percent of settlers who arrivedthree years ago have 2 ha of cleared cropland. Average incomes from on-farmand off-farm sources for the households with 2 ha cleared are Rp 250,000

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($400) year/family. In the Marga land total family incomes average Rp 320,000($512). Farm holdings in the transmigration area are 5 ha and in the Margaland about 6 ha, the latter varying considerably. There is considerable scopetherefore for additional crop development on each holding. The Danau Salakproject area is unpopulated except for two settlements, one near Binuang andthe other at the northeast corner of the project area. There is no questionof disturbing these settlers' tenure, but if they wish to they will beincorporated in the project.

Infrastructure

Roads

2.17 Danau Salak. The smallholder project area straddles the mainprovincial highway from Banjarmasin to Rantau. The alignment and asphaltsurface make it ideally suited to serve as the main access road to theproject area. The road network leading from the highway is fragmentedand generally of poor quality. In the north a rough but all-weather accessroad links the Pantai Cabe/Soato settlements to the provincial highway atTatakan. Access to the port of Banjarmasin is provided by the same highway.

2.18 PNP I. A good road connects the nucleus estate headquarters toLangsa 3 km away. The roads to smallholder areas surrounding the estate,particularly the development area at Aleu Iemerah are in poor condition,although constant improvements are being made.

2.19 Rimbo Buiang Smallholder Development Area. The most important roadin the project area is the Trans-Sumatra Highway. When completed, it willprovide excellent access to the ports at Jambi in the southeast and Padang inthe northwest. The main project access road leads off from the highway 14 kmwest of Muara Bungo and runs almost due north through the center of thesettlement area. There is a comprehensive network of roads in the existingsettlement area and most are in good condition. In the Marga land fourtrails cut north-south through the project area from the Trans-SumatraHighway and provide access to the scattered settlements along the banks ofthe Batang Tebo River. A fifth road, from the highway to Paninjan village,forms the western boundary of the Marga land and although of better qualitythan the other four roads, it is impassable during the wet season. The areaearmarked for development as the nucleus estate is almost bisected in aneast-west direction by a new all-weather road linking the Rimbo Bujangand Alai Hilir transmigration areas.

Water Transport and Port Facilities

2.20 Port facilities serving all three project sites are adequate forproject requirements. River transport with barges is also possible to Jambiand Banjarmasin ports.

Settlement Design Standards

2.21 Danau Salak. Of the land which will be included in the project,over 75% is within slope classes 1 and 2 (0-3 degrees and 4-6 degrees respec-tively). The remaining area has slopes to class 4 (13-18 degrees). Topography

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is not a constraint to village development. A preliminary master plan forsettlement of the project area was prepared at appraisal (see Map 14020). Thevillage locations proposed are based mainly on considerations of the availa-bility of adequate and reliable sources of water for human consumption. Amaximum of 18 new villages will be required, accommodating a total of 4,000smallholder families, in villages ranging in size from 138 to 262 familieseach. Owing to the particular shape of the project area, no distinctionneeds to be made between central and satellite villages. Each village willbe sited on or adjacent to its foodcrop area and usually within 3 km of theextremity of its rubber area. Only in the case of two villages might it benecessary for rubber holdings to be approximately 4 km from the villagecenter. Village development will follow a nucleated pattern, each housestanding on a garden plot of 0.2 ha, these plots being arranged aroundone main and up to six subsidiary dukuh centers (see Figure 1).

2.22 Rimbo Bulang. The proposed project will not involve changes toongoing settlement plans in the transmigration area being implemented by theDirectorate General of Transmigration and the Transmigration Sub-Directorateof the Directorate General of Highways (PTPT). In the Marga land, 2 ha ofjungle will be cleared and block planted with rubber for each of 2,000 localsmallholder families. Since most of these families live in or close to theirfoodcrop land along the river, and since the Marga land is usually less than3 km in depth from the river to the Trans-Sumatra Highway, no resettlement ofthe local population is envisioned. Should it be found that a small numberof families have to be relocated, this being most likely for those familieslocated between 30 and 37 km from Muara Bungo, housing materials will beavailable for construction on the rubber plot. No additional foodcrop landwill be allocated to Marga land settlers.

Settler Housing

2.23 Danau Salak. Two basic designs are proposed to accommodate prefer-ences of settlers, one suitable for low-lying areas in the west of theproject area (Figure 2) and the other for villages located in the center andeast of the project area (Figure 3). Both houses provide an enclosed livingarea of 35 sq m with an open verandah on one side. They are all timber con-struction. Main roofs will be of locally manufactured hardwood shingles(sirap) while verandahs will be roofed with palm fronds (rumbia). The first500 houses will be built by local contractors and will cost about Rp 266,000(US$426 constant 1978). Thereafter, the settlers will build the housesthemselves in work units under the supervision of an infrastructure managementteam recruited by the nucleus estate. Materials to be provided for these3,500 houses will cost about Rp 205,000 (US$328).

Settlement Facilities

2.24 Danau Salak. Two sets of standards will be applied to communitybuildings in new villages. Village offices, main and secondary recreationhalls, mosques, mushallas and market buildings will be built by the nucleusestate and will be based on standards already established for such buildingson the estate itself. Other community buildings such as schools, nursery

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homes, polyclinics /1 and health centers (puskesmas) will be based on GOIstandard designs and will be constructed by existing provincial and/ordistrict agencies. Health and educational facilities will be planned toreflect target levels set in the Repelita III and will be implemented underthe INPRES (Rural Public Works) Program. Detailed planning for these build-ings will be carried out by the appropriate provincial and district agencieson information provided by the nucleus estate.

2.25 Rimbo Bujang. In the Rimbo Bujang transmigration area a rangeof settlement facilities is provided either directly by the Transmigra-tion Project authorities or by kabupaten and provincial agencies as part oftheir regular development programs. At mid-1978 there were 14 primaryschools, one junior high school, one village health center, several mosques,administrative offices, health posts and other smaller facilities. Since theRimbo Bujang transmigration area is classified a kecamatan (there being sixother kecamatans in the Muara Bungo Kabupaten), it has equal access withthe other kecamatans to the kabupaten development budget. An establishedprogram exists to construct one new village health center per kabupaten eachyear. Rimbo Bujang will therefore receive at least one new health center inthe five years between 1980 and 1984. Development of additional infrastructureis more tentative given the uncertainty of the size and nature of the annualbudget allocations from central government. In the interest of uniformdevelopment of the province, however, the project will rely on ongoing localand central government programs for further expansion of social infrastructurein the project area. To facilitate rubber planting, 15 small rubber develop-ment unit offices will be constructed under the project. These officeswill be built to the design standards set by PTP VI.

Road Development

2.26 General. The hierarchy of roads and tracks required to serve newvillages and rubber holdings will comprise:

(a) primary village roads in some places linking villages and rubberareas directly to the nucleus estate and in others forming spursfrom the main access road, in each case, providing all-weatheraccess to light passenger and goods vehicles;

(b) secondary village roads leading usually from individual villagesinto newly planted rubber areas and providing fair-weather accessto light vehicles and all-weather access to four-wheel drivevehicles and agricultural tractors; and

(c) rubber collection tracks through the newly planted rubber areas toprovide access for latex collection and estate maintenance vehicles.Tapping paths to each plot of smallholder rubber will provideaccess by foot or bicycle for tapping purposes.

2.27 Danau Salak. Proposed alignments for the road network areindicated on a preliminary master plan of the project area available in the

/1 Synonymous with subhealth centers.

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Staff Working Papers. Finalization of this plan will be undertaken when theresults of the planned hydrology survey become available [see para. 3.02A(a)(vi)]and detailed locations of new villages are known. Design standards for eachof the road types will differ slightly from those adopted in NES II owing todifferences in th_ pattern of road development required, the topography of theproject area and the main soil types found (Figure 4). Each primary villageroad will have a 6.0 m wide effective carriageway paved with 19 cm of gravelon an embankment whose crown height will be 25 cm above prevailing groundlevel and will have a camber of about 8%. Secondary village roads will havea 4.0 m earth carriageway with an embankment crown height of 20 cm. Rubbercollection tracks will have a 3.0 m wide carriageway with an embankment crownheight of 20 cm. The preliminary project master plan does not indicate thealignments of these tracks since they will be fixed at the discretion ofproject management during the course of rubber development work. Managementand supervision of construction of the road network in the project area iscovered in para. 4.07.

2.28 Rimbo Bujang. Proposed alignments for the road network are indicatedon a preliminary master plan of the project area (Map 14099). No additionalprimary or secondary village roads will be required in the Rimbo Bujang trans-migration area except to link the nucleus estate with Units VI and XV in thenorthwest and north respectively. The remainder of the new road network willbe required in the nucleus estate itself and in the Marga land. The designstandards will be similar to those for the Danau Salak component of the project.Management and supervision of road construction is covered in para. 4.07.

Selection and Recruitment of Smallholders

2.29 Priority will first be given to poor, rural families in theproject area, then to those residents of the province in which the project islocated, and finally to transmigrants from Java. Selection of families willgive priority to male heads of households between 20-40 years with familyincomes below Rp 220,000 (US$350). It is anticipated that more than half ofthe new settlers in Danau Salak will be transmigrants from Java. Recruitmentof new settlers will be carried out by the Project Manager of the NucleusEstate in cooperation with the Provincial Coordinating Committee (para. 4.05)under the guidance of DGE. Resettlement and transmigration to the projectsite will be the responsibility of the nucleus estate assisted by MOA andprovincial governments.

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3. THE PROJECT

A. Project Summary

3.01 The main project components are summarized below:

A. Danau Salak

(a) Smallholder Development

(i) block planting of 12,000 ha of rubber;

(ii) distribution of seeds and fertilizers for food crops forthe first year of settlement, covering 4,000 ha of gardenand field food crop land, and the establishment of a PlantingMaterial Supply Unit (PMSU) by PTP XVIII nucleus estate forsmallholder purchase of additional planting material in lateryears;

(iii) construction of about 18 villages, each with a villagecenter and construction of houses for 4,000 new settlers;/1

(iv) construction of education, health and community service facili-ties in each village;

(v) construction of 60 km of all-weather primary village road,the upgrading of 12.3 km of existing road to primary villageroad standard, construction of 55 km of secondary village roadand 300 km of rubber collection track; and

(vi) establishment and staffing of agricultural credit, exten-sion and cooperative services.

(b) PTP XVIII Estate Expansion

(i) block planting of 4,000 ha of rubber;

(ii) extension of existing crumb rubber factory from 6 mt/dayto 11 mt/day. Construction of a new 20 mt/day crumb factoryfor latex and low-grade rubber;

/1 The precise number of new settlers, hence the number of villages requiredto accommodate them will depend on how many existing settlers in thePantai Cabe/Soato schemes are willing to join the project. Preparatorywork designed to clarify this and facilitate the finalization of a masterplan is specified in Staff Working Paper No. III.

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(iii) construction of 480 new and the rehabilitation of 415existing single and double houses for estate employeefamilies for both smallholder and estate development; and

(iv) construction and rehabilitation of buildings for divisionaloffices, social services, garages, workshops and the provisionof technical assistance.

B. PNP I Estate Rehabilitation

(a) new planting of 6,790 ha of block rubber in the two northern estatesJulu Rayeu and Karang Inoue; rehabilitation of a further 2,356 haof existing rubber planting in the southern estates Kebun Lama andKebun Baru;

(b) new planting of 2,135 ha of oil palm on the southern group ofestates Kebun Lama, Kebun Baru, Pulau Tiga and rehabilitation of2,990 ha of existing oil palm plantings in Kebun Baru and PulauTiga estates.

(c) construction of 2 crumb rubber factories, one at Kebun Lama,the other at Julu Rayeu, each with a capacity of 20 mt/day.

(d) expansion of the palm oil factory at Tg Seumantoh by 30 mt ffb/hr;and

(e) construction of 2,064 single and double houses for estate employeefamilies and new construction and rehabilitation of estate buildings,garages and workshops.

C. Rimbo Bujang

(a) Smallholder Development

(i) block planting of 16,000 ha of rubber (12,000 ha in RimboBujang transmigration area and 4,000 ha in the Marga land);

(ii) supply of planting material and fertilizers to improve existingfood and cash crops through the establishment of a PMSU;

(iii) construction of 15 km of new primary village road, upgrading9.7 km of existing road and track to primary village roadstandard, the construction of 13.1 km of new secondary villageroad and up to 400 km of rubber collection track;

(iv) construction of 15 rubber development unit offices to facilitatethe smallholder rubber planting program; and

(v) establishment and staffing of agricultural credit, exten-sion and cooperative services.

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(b) Nucleus Estate - PTP VI

PTP VI at its own expense will establish a nucleus estate ofabout 5,000 ha of rubber contiguous with the smallholder area.It will establish nursery facilities for the propagation anddistribution of planting material to settlers, purchase equipmentand hire sufficient labor to implement the smallholder developmentprogram. A cassava processing plant of 1 mt/hr capacity willalso be built to process surplus smallholder production.

3.02 Detailed Features /1

A. Danau Salak

(a) Smallholder Development (US$34.5 million)

(i) Rubber Block Planting (US$21.4 million). Each smallholderwill receive 3 ha of block planted rubber. A total of12,000 ha will be planted with rubber in blocks of 500 ha

or more. Land will be cleared by PTP XVIII, which willsupply clonal planting material and fertilizer and employsmallholders on contract as trainee rubber farmers to plant,maintain, fertilize and weed rubber for a period of three years

after field planting. During this period PTP XVIII will haveauthority to centrally manage the trainee rubber farmers in a

grouped manner in accordance with normal estate managementpractices. After the three-year period, settlers will beresponsible for the operation of their individual rubber areas,but will receive guidance, training and advice through arrange-ments with the nucleus estate. During years 4 to 6, i.e., up to

rubber maturity, the nucleus estate will act as procurementagent for on-farm inputs and will provide processing andmarketing services.

(ii) Food Cropping (US$1.0 million). Within six months of entry tothe settlement, each family will receive conditional title to4 ha, the fourth hectare to be used for subsistence food crop

production. As part of the total subsistence package to be

provided to new settlers, PTP XVIII will clear 1.0 ha persettler family (US$0.5 million) to facilitate garden and fieldcrop establishment and will provide an initial cash payment tosettler families of Rp 30,000 (US$48) for food and transportationneeds (US$0.3 million). PTP XVIII will procure and provideinputs for food crop production and house and garden establish-ment including seed and fertilizer at US$40 equivalent perfamily (US$ 0.2 million).

/1 Project costs listed in the section are quoted in current prices andinclude price and physical contingencies.

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(iii) Planting Material Supply Unit (PMSU) (US$1.4 million). A PMSUwill be established at Tungkap in the center of the projectarea under the control of the nucleus estate. The PMSU willprovide, on a grant basis, inputs for food crop production toeach new settler on his arrival. Thereafter inputs will besold to settlers on a cash basis. The PMSU will develop extensionservices to assist settlers and establish model farms fordemonstration and applied research. The DGE will be respon-sible for requesting a sufficient number of PPL for food cropsto be allocated to the project area. An assurance was obtainedat negotiation that the nucleus estate operated PMSU willcontinue to supply food crop inputs for project settlersuntil such time as the BIMAS program is extended to theproject area [para. 8.01(a)].

(iv) Village Centers (US$0.4 million). Up to 18 new villageswill be built in the smallholder area to accommodate a totalof 4,000 settler families in village sizes ranging from 138and 262 families per village. No distinction will be drawnbetween central and satellite villages since the smaller newsettlements will share facilities of existing villages liningthe main access road. Appropriate allowances are shown inproject accounts for community buildings in these villages, butthe allocation of such buildings to specific villages will bemade in the process of finalizing details for village develop-ment (see Staff Working Paper No. III).

(v) Housing and Civil Works (US$2.5 million). The first 500 newsettler houses will be built by local contractors againsttenders issued by PTP XVIII. The remaining houses will bebuilt by the settler families themselves with materialsand construction supervision provided by PTP XVIII. The first500 houses will each cost about Rp 266,000 (US$426) while theremainder will cost about Rp 205,000 (US$328) each (excludinglatrines in each case). Upland and lowland houses will bedesigned for subsequent expansion by farmers in later years.Housing for some nucleus estate foremen, managers and laborers,and estate garages, workshops and project buildings (US$0.3million) will be constructed according to established PTPXVIII standards.

(vi) Water Supply (US$0.6 million). Hydrological informationalready available indicates that some difficulties may beencountered in finding adequate reliable sources of shallow ordeep groundwater in certain parts of the smallholder area. Inboth the western and eastern flanks of the area, however,there are more promising prospects for groundwater at depthsbetween 20 m and 40 m. An assurance was obtained atnegotiations that the DGE will contract with a firm ofinternationally recruited consultants on terms and conditionssatisfactory to the Bank, a detailed hydrology survey of the

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Danau Salak project area to test the quality and quantity ofgroundwater at each of the proposed village locations beforeDecember 31, 1979 [para. 8.01(d)]. Where existing groundwatercannot be reliably exploited, a water supply system relying onshallow dug wells surrounding small earthdammed reservoirswill be provided. Based on current estimates of groundwateravailability at different locations, provision is made for 90narrow bore tubewells each to be shared by 30-40 families, and15 dams together with 180 shallow dug wells to serve theremainder of the new settler population.

(vii) Health (US$0.1 million). The project's low cost health systemwill consist of subhealth centers and health centers (Puskesmas)operated under Government standards for Repelita III and willbe coordinated with the higher level facilities of the adminis-trative region. The health programs will provide for basichealth services, malaria control, family planning and a pitlatrine for each new settler family.

(viii) Roads (US$2.4 million). About 72 km of all-weather primaryvillage roads (including 12 km of existing road to beupgraded) and 55 km of secondary village road will be con-structed in two stages. A further 300 km of rubber collectiontrack will be formed as part of rubber development operationsand are costed as such in project accounts. The road componentis considerably less on a pro rata basis of smallholderdevelopment area than in NES II owing both to the existence ofa suitable main access road and to the possibility of a morecohesive village development pattern. This component alsoincludes US$0.2 million for routine annual maintenance ofsemi-completed sections of the road and completed sections ofthe road network during the period of Bank loan disbursement.

(ix) Vehicles (US$0.1 million). Vehicles required during projectimplementation will include pickup trucks and mobile agricul-tural equipment. Other transport vehicles including jeeps,motorcyles and service cars will be provided by PTP XVIII.

(x) Project Management (US$4.6 million). Project management ofthe smallholder components is described in Chapter 4. Theproject manager and the nucleus estate will be assistedby the Ministry of Agriculture Support Staff for the resettle-ment of Javanese to Danau Salak (US$1.6 million). Overheadsand management costs of the nucleus estate for rubber develop-ment are included in the costs of project management (US$3.0million).

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(b) Nucleus Estate Development: (US$17.5 million)

(i) Agricultural Development (US$11.4 million). The project willassist the establishment of 4,000 ha of rubber in the DanauSalak nucleus estate. Planting material will be budded stumps

and stumps in polybags. A leguminous cover crop will beestablished at the time of planting after lalang and noxiousweed eradication.

(ii) Physical Developments (US$5.3 million). The project willassist the construction of 480 houses (12 staff houses, 78single units, 390 double units) and the rehabilitation of415 existing houses (16 staff houses; 399 double units). PTPXVIII will also build 58 single and double houses associatedwith smallholder development. Other civil works will includeconstruction of divisional offices, garages, workshop andsocial utility buildings and the rehabilitation of existingbuildings on the nucleus estate. The existing crumb rubberfactory will be expanded from a capacity of 6 tons/day to11 tons/day by 1980. Construction of a new crumb rubber fac-tory for a capacity of 20 tons/day will be completed by 1983.

(iii) Corporate Operation (US$0.8 million). The corporate operationsof PTP XVIII are well managed and the company has demonstratedthe technical capacity to implement the proposed expansion of4,000 ha of new rubber based on previous development of itsJava estates. PTP XVIII is financially sound with assetsvalued at over Rp 8.8 billion (US$14.1 million), with virtuallyno long-term debt, and a net annual income after taxes in1978 of over Rp 1.6 billion (US$3.8 million). Expansion andrehabilitation of the Danau Salak estates will require thatPTP XVIII resettle existing personnel from its Java estates toKalimantan (US$0.2 million) and recruit additional labor inDanau Salak. Provision is also made to assist PTP XVIII

with technical assistance in the employment of an Infrastruc-ture Program Manager for the development of roads and villages

and a rubber processing and civil works engineer each for aperiod of three years (US$0.6 million). An assurance wasobtained at negotiations that both internationally recruitedtechnical assistants would be appointed by December 31, 1979,on terms and conditions satisfactory to the Bank [para. 8.01(b)]

B. Rehabilitation of PNP I - Aceh (US$50.5 million)

(a) Agricultural Development (US$29.4 million)

(i) Establish new and replanted rubber on 6,790 ha and rehabilitatea further 2,356 ha of immature rubber on the estates: JuluRayeu, Karang Inoue, Pulau Tiga, Kebun Lama, and Kebun Baru;

(ii) New oil palm will be planted on 2,135 ha and a further2,990 ha of oil palm will be rehabilitated on the PNP Iestates: Pulau Tiga, Kebun Baru, and Kebun Lama, and KarangInoue.

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(b) Physical Developments (US$19.1 million). Estate infrastructureincluding roads, bridges and housing is badly in need of replacementor renovation. The project will provide for the construction of2,064 houses (163 staff and head office houses; 381 single units;1,520 double units). Plans for rationalization of rubber processingfacilities include the construction of two rubber factories; one atKebun Lama, the other at Julu Rayeu each with a capacity of 20 mtFFB/day. The capacity of the recently constructed oil palm mill atTanjung Seumantoh will be increased from 30 tons FFB/hr to 60 tonsFFB/hr.

(c) Corporate Operations (US$2.0 million). The corporate operations ofPNP I have not been well managed in previous years. The companyhas suffered from low productivity and continued operating lossesas a result of non-productive rubber and oil palm areas planted priorto 1950. Replanting on a sufficient scale to alter PNP I's deterior-ating financial condition did not begin until 1974 and owing to