ICRR 10195
                                                                                             Report Number : ICRR10195
                    ICR Review
                    Operations Evaluation Department




1. Project Data :
             OEDID :
             OEDID:     L3282
         Project ID :   P003959
      Project Name :    Fertilizer Sector Restructuring Project
            Country :   Indonesia
             Sector :   Industrial Restructuring
       L/C Number :     L3282
  Partners involved :   None
       Prepared by :    David Greene (Consultant), OEDCR
      Reviewed by : Roger Robinson
    Group Manager : Ruben Lamdany
       Date Posted : 08/06/1998

2. Project Objectives, Financing, Costs and Components :
The Fertilizer sector operation approved in 1990 was the seventh Bank operation in the fertilizer sector since 1970.
Despite this, Indonesian fertilizer policy continued to be characterized by controlled and heavily subsidized prices,
production inefficiency and low returns to equity, regulated distribution that constrains competition and inadequate
environmental monitoring. This loan provided Indonesia with US$ 221.7 million for relending to five state-owned
fertilizer companies for investments in new capacity and improved performance in some existing facilities, plus
studies relating to marketing and distribution and the environment . The project's overriding objectives were to assist
the Government implement a Statement of Policy for the fertilizer sector, support the industry -wide investment
program, identify the scope for improved marketing and distribution, and assess the industry's environmental impact
and prepare an environmental action plan . The brief Policy Statement underpinning the operation called for
gradually adjusting prices to reflect economic prices and gradually eliminating subsidies, and carrying out marketing
and environmental studies.

3. Achievement of Relevant Objectives :
There has been some upward adjustment in fertilizer prices and in input prices and a reduction of budgetary
subsidies to the industry. All the physical objectives of the program were achieved . However, an increase in gas
input prices and a decline in export prices resulted in economic and financial rates of return below appraisal
estimates.

4. Significant Achievements :
There has been an improvement in the technical efficiency of the fertilizer industry .

5. Significant Shortcomings :
The project did not address the fundamental issues of deregulation or privatization . The sector remains heavily
regulated and economically inefficient . The government has not introduced fundamental changes in the distribution
system and this has led to continued misuse of fertilizer . Some progress has been made on environmental issues :
wastewater emission standards have been adopted and work on air pollution standards has been progressing . The
Bank's long involvement in the sector has contributed to an improvement in technical efficiency, but the policy
framework remains deficient and the sector economically inefficient . The industry is still unable to finance its
investment program without external finance backed by government guarantees and this casts doubt on
sustainability. The Bank's performance was deficient in accepting a weak policy statement, not addressing key
sectoral issues directly nor having a program for adopting key policy actions .


6. Ratings :             ICR                       OED Review                Reason for Disagreement /Comments
               Outcome : Unsatisfactory            Unsatisfactory
     Institutional Dev .: Partial                  Modest
         Sustainability : Uncertain                Uncertain
   Bank Performance : Deficient                   Unsatisfactory
      Borrower Perf .: Satisfactory               Satisfactory
       Quality of ICR :                           Satisfactory

7. Lessons of Broad Applicability :
When policy changes underlie an investment operation, required measures and a timetable for their implementation
should be agreed prior to Board presentation . Given the pervasive policy reform needed in this state owned sector,
it may have been more appropriate to have had a sector adjustment operation, with clearly demarcated tranche
actions.

8. Audit Recommended?        Yes      No

9. Comments on Quality of ICR :
The ICR is generally satisfactory . However, although the appraisal estimated ex ante financial and economic rates
of return of the various investments financed, ex post calculations do not appear in the ICR . The borrower's input
into the ICR consisted of corrections of the Bank's text, rather than its own assessments of the project's outcome or
what had been learned from the project .