RESTRICTED FILE COPY Report No. P-830 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF INDONESIA FOR A SECOND IRRIGATION REHABILITATION PROJECT May Z7, 1970 INTERNATICNAL DEVEL0PMENT ASSOCIATION REPORT AND RECOMiENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVEIOP- MENT CREMIT TO THE REPUBLIC OF INDONESIA FOR A SECOND IRRIGATION REHABILITATION PROJECT 1. I submit the following report and recommendation on a proposed Development Credit to the Republic of Indonesia in an amount in various currencies equivalent to $18.5 million for a second irrigation rehabilitation project in Indonesia. PART I - HISTORICAL 2. The Government of Indonesia asked for a credit to help finance the rehabilitation and improvement of the Djatiluhur irrigation system, as well as studies relating to extension of the system and optimum use of the existing reservoir, and detailed engineering services for a proposed third irrigation rehabilitation project. The project was appraised in July 1969. 3. Negotiations for the proposed credit took place from March 30 to April 9, 1970. The Berrower was represented by: Dr. Emil Salim, Deputy Chairman, National Planning Agency (Bappenas); Gen. Dandi Kadarsan, Secretary-General, Department of Public TWorks and Electric Power; Mr. Soemarman, Secretary-General, Department of Home Affairs; Mr. Saleh Afiff, Head of Bureau of Analysis and Legal Affairs, Cabinet Secretariat; Mr. Soesanto Soedibjo, Department of Public Works and Power; Mr. I.W. Siregar, Cabinet Secretariat; iMr. Sadu Sundaru, Chief, International Relations, Department of Finance; and Mr. Atmono Surjo, MNinister- Counsellor (Economic), Embassy of Indonesia. 4. If approved this would be the eighth credit to Indonesia and the fourth for agriculture in that country. The following is a summary statement of IDA credits to Indonesia as of April 30, 1970: 1/ uS. $ millions Credit No. Year Borrower Purpose Amount Undisbursed 127 1968 Indonesia Irrigation Rehabilitation 5.0 2.8 135 1968 Indonesia Technical Assistance 2.0 1.8 154 1969 Indonesia Highways 28.0 28.0 155- 1969 Indonesia Agricultural Estates 16.0 15.8 165 1969 Indonesia Electricity Distribution 15.0 15.0 2/ Total 66.0 63.4 1/ Development Credita of $30 million and $17 million for the PUSRI fertilizer expansion project and the second agricultural estates project were approved by the Exocutive Directors on May 12 & 26 respectively. ' Not yet effTctivre 5. My Report and Recommendation on the PUSRI project (P-803 dated April 30, 1970) commented on the reasons for delays in disbursement and project execution on some of the credits and outlined the corrective action being taken. 6. I expect to present shortly to the Executive Directors proposed credits for telecommunications and fisheries projects. PART II - DESCRIPTION OF THE PROPOSED CREDIT 7. Borrower: Republic of Indonesia Beneficiary: Otorita Djatiluhur (The Djatiluhur Authority) Amount: Various currencies equivalent to $18.5 million Purpose: Rehabilitation and improvement of the Djatiluhur irrigation system, as well as studies relating to extension of the system and optimum use of the reservoir, and detailed engineering for a third irrigation rehabilitation project. Amortization: In 50 years with a 10-year period of grace through semi-annual installments commencing November 1, 1980, and ending May 1, 2020. Each installment up to and including the payment due May 1, 1990, to be ½ of 1 percent and each installment there- after to be 1½ percent. Service Charge: 3/4 of 1 percent per annum. Estimated Economic Rate of Return : 29 percent per annum. PART III - THE PROJECT 8. A detailed description of the project is given in the attached appraisal report entitled "Second Irrigation Rehabilitation Project " (PA-37a) dated May 26, 1970. 9. The project would consist of two separate parts: (a) the rehabilitation and completion of one major system, Djatiluhur; and (b) detailed engineering services for three other areas the rehabilitation of which is expected to form the basis for a future third irrigation rehabilitation project. This latter project was appraised in April and an appraisal report is being prepared. 10. The Djatiluhur system, situated in a major rice producing area in the province of West Java, has a gross area of 300,000 ha, of which - 3 - about 253,000 ha are potentially irrigable. It is a combination of old river diversion schemes linked together, extended and complemented by recent works which were designed to provide storage water for use in the dry season and thus allow the whole area to grow two crops of rice each year. However some of the new works have run into serious construction problems, remain incomplete or are already in need of rehabilitation due to inadequate maintenance or to premature operation. Because of lack of maintenance, the old canal systems cannot distribute the water now available and they must be completely rehabilitated if the benefits of the new works are to be realized. 11. The Credit would provide $18.0 million for the rehabilitation and repair of the Djatiluhur system, including the improvement of drainage, flood protection, roads and communication on a priority area of 186,000 ha; and for consultant services to investigate the merits of constructing new irrigation facilities to serve about 67,000 ha in a subsequent stage, and to prepare studies for the optimum use of the Djatiluhur reservoir. 12. A firm of consulting engineers, NEDECO-Grontmij-ILACO of Holland was engaged (using funds from the IDA Technical Assistance Credit No. 135-IND) for a one-year period from October 1969 to assist in planning and design and initial implementation of the rehabilitation program for the entire Djatiluhur system. The proposed credit would finance substantial additional consulting services to prepare detailed designs and supervise all construction works, which would be executed over a six-year period, and also to carry out the investigation and studies mentioned in the preceding paragraph. 13. The Government has established a new project authority in the form of a public corporation, known as Otorita Djatiluhur (the Djatiluhur Authority) and has enacted legislation setting up the authority in a form and with powers agreed during negotiations. The authority will be responsible for the operation and maintenance of the multi-purpose Djatiluhur project including the hydro-power installations and the irrigation system. The general policy direction of the authority, and supervision over its affairs will be the responsibility of the Ylinister of State for Economy, Finance and Industry, assisted in policy matters by a Ministerial Council (Ministers of Agriculture, Public Works, Home Affairs, and Finance) and by the Governor of the Province of West Java in supervising the work of the authority. 14. The authority will be managed by a Board of Directors consisting of a president-director who will be the project manager and at least three directors who will be the deputy managers responsible for power, for irrigation, and for finance and administration. The qualifications and experience of the nominees to these positions are satisfactory and they would be appointed before the signing of the proposed credit. Assurances have been received during negotiations that the Association will be afforded a reasonable opportunity to exchange views with the Government before any changes are made in the appointments to these positions. Assurances have also been obtained that the Government, - 4 - besides ensuring that the authority will have sufficient budgeted funds in hand for project expenditures, will arrange for the levying of charges on all types of water use to provide the authority with sufficient revenues to cover operation and maintenance costs and to recover a reasonable portion of capital expenditures. 15. In addition to consultant services for the Djatiluhur project, described in paras. 11 and 12 above, the proposed Credit would include $500,000 for consultant services relating to the planning, design and supervision of rehabilitation works on three other irrigation systems, Tjiudjung and Pomali Tjomal in Java and Sadang in Sulawesi which would form the third irrigation rehabilitation project mentioned in para. 9 above. The terms and conditions of the consultants' contract would be subject to approval by IDA. 16. The total estimated cost of the project is $37 million equivalent. The proposed credit of $18.5 million would cover 50 percent of the total cost of the project, including the estimated foreign exchange cost of $13.2 million. It would also cover $5.3 million of local currency expenditures on the project, amounting to about 21 percent of local costs, with the Government financing the balance of local costs through its annual development budget, At this stage of Indonesia's economic recovery, it is not feasible for external lenders to cover Indonesia's large resource gap only by financing the import component of development projects, and some of those lenders are supporting Indonesia with a substantial volume of program assistance. In these exceptional circumstances and in view of the relatively low foreign exchange component of the proposed project, I consider it justifiable for the Association to cover some part of the project's local costs. 17. All goods and services financed by the proposed credit would be procured in accordance with the Association's guidelines. However, it is doubtful that any foreign bidders would be interested in the contracts for civil works in view of the large number of small, geographically scattered works and the difficulty of competing against domestic contractors. Therefore, project estimates of local costs are based on the assumption that local contractors would win the civil works contracts. In the unlikely event that foreign bidders should win civil works contracts, a greater proportion of the proceeds of the proposed Credit would go to meet foreign exchange expenditures. 18. Me Djatiluhur area has a population of 3 million. As a result of the proposed project, the marketable rice surplus of the area is expected to increase by about 390,000 tons per annum over its present level, enabling net foreign exchange savings of at least $30 million annually at present world prices. The additional rice production would help increase annual family incomes in the project area from $126 to about $163, and, if other inputs are used, to about $218. The rate of return to the economy from rehabilitation of the irrigation system would be about 29 percent. If other inputs such as fertilizer were used on the whole rehabilitated area, the rate of return from rehabilitation and inputs combined would be about 45 percent. - 5 - PART IV - LEGAL INSTRUEENTS AND AUTHORITY 19. The draft Development Credit Agreement between the Republic of Indonesia and the Association, the Report of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association and the text of a Resolution approving the proposed credit are being distributed to the Executive Directors separately. 20. The draft Development Credit Agreement foll&ws the usual pattern for irrigation and engineering projects. The transfer to the Djatiluhur Authority of the assets of the various government agencies presently involved in the Djatiluhur project and the availability of selected staff from government agencies and departments would be conditions of effectiveness of the Agreement (Section 6.01(a) and (c)). PART V - THE ECONOMY 21. The last full report on the economic position and prospects of Indonesia (EAP-10a) was issued on November 11, 1969 and a special report, "Current Investment Activity in Indonesia" (EAP-l1a) was issued on March 27, 1970. An assessment of the present economic situation was given in my Report and Recommendation on the PUSRI Fertilizer Expansion Project (P-803) dated April 30, 1970. 22. As stated in that report, the Five-Year Plan (1969-74) of the Government gives highest priority to agriculture, both for domestic food production and export crops, with secondary emphasis on the rehab- ilitation of infrastructure and industry. The main target is a large increase in rice production. The performance of the economy continues to depend to a considerable extent on policies and administrative arrangements relating to this one major commodity. Thus an effective rice price policy that will encourage domestic production and distribution, and the establishment and support of effective programs to increase output, could have a substantial bearing on the success of the development program. 23. The 1970/71 development program will be larger than last year's and more of it will be financed from Indonesia's own resources. An increase of 36% in domestic revenues is planned, following a similar expansion in 1969/70. If achieved, this will raise revenues to close to 10% of estimated GNP, or more than double the percentage of 1966. The 1970/71 budget also provides for a larger surplus of revenues over current expenditures, increasing from Rp 27 to Rp 37 billion the amount available for the development program. Even so, large claims on the budget for deferred maintenance, basic adjustments in salaries and foreign debt service compete with the rising requirements for development finance. So far, program aid has generated a substantial amount of counterpart funds, but as it cannot be expected to increase significantly there will be an increasing pressure on rupiah resources as the development program expands. - 6 - PART VI - COMPLIANCE WJITH ARTICLES OF AGREEMENT 24. I am satisfied that the proposed Development Credit would comply with the Articles of Agreement of the Association. PART VII - RECOMMENDATION 23. I recommend that the Executive Directors approve the proposed Development Credit. Robert S. McNamara President Attachment Washington D.C. May 27, 1970