Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 7794

PROJECT COMW'LETION REPORT

INDO)NESIA

NUCLEUS ESTATES AND SMALLHOLDERS I PROJECT(LOAN 1499-IND)

AND

NUCLEUS ESTATE AND SMALLHOLDERS II PROJECT(LOAN 1604-IND)

MAY 31, 1989

Asia Regional Office

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

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CURRENCY EQUIVALENT

Name of Currency: Rupiah (Rp)

Rate of Exchan.ge:Appraisal Year US$1.00 - Rp. 415Nov 16,1978 - Mar 30. 1983 US$1.00 Rp. 625Mar 31,1983 - Sept 11. 1986 US$1.00 - Rp. 970Sept 12,1986 - Present US$1.00 - Rp.1640

FISCAL YEAR OF BORROWER

GOI: April 1 - March 31PTP: January 1 - December 31

WEIGHTS AND MEASURES

Metric System

ABBREVIATIONS

BI - Bank IndonesiaBRI - Bank Rakyat IndonesiaDCC - District C 'ordinating CommitteeDGE - Directorate General of EstatesDGFCA - Directorate General of Food Crops-AgricultureDGH - Directorate General of HighwaysDPD - Provincial Estate Crops ServicesGOI - Government of IndonesiaIPEDA - Land Tax (luran Pembangunan Daerah)LPP - Estates Training Center (Lembaga Pendidikan Perkebunan)MOA - Ministry of AgricultureMOF - Ministry of FinanceMOT - Ministry of TransmigrationNES - Nucleus Estates and Smallholders ProjectsPBSN - National Provincial Private Estate EnterprisesPRPTE - Rehabilitation Development ProjectPCC - Provincial Coordination CommitteePIR - Nucleus Estates and Smallholders Projects, locally fundedPELITA I - First F4.ve-Year Development Plan (1969/70-73/74)PELITA II - Second Five-Year Development Plan (1974/75-78/79)PELITA III - Third Five-Year Development Plan (1970/80-83184)PELITA IV - Fourth Five-Year Development Plan (1984185-88/89)?MU - Project Management UnitPTP - State-owned Estate Enterprises with Limited LiabilityTKPIR - Special Team for Tree Crop Projects (Tim Khusus)

FOR OFFICUL US ONLYTHE WORLD BANK

Washn8:on. D.C. 20433U.S.A.

office of Duut.cuv.Cwta

May 31, 1989

MEMORANDUN TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on Indonesia Nucleus Estatesand Smallholders I Project (Loan 1499-IND) and NucleusEstate and Stmallholders II Proiect (Loan 1604-IND)

Attached, for informAtion, is a copy of a report entitled"Project Completion Report on Indonesia Nucleus Estates andSmallholders I Project (Loan 1499-IND) and Nucleus Estate andSmallholders II Project (Loan 1604-IND)" prepared by the Asia RegionalOffice. No audit of this project has been made by the OperationsEvaluation Department at this time.

Attachment

This document has a restricted distribution and may be used by recipients only in the performance|of their official duties. Its contents may not otherwise be disclosed without Wofld Ban authofzBtion |

FOR OFFICIAL USE ONLY

INDONESIA

NUCLEUS ESTATES AND SMALLHOLDERS I PROJECT (Ln 1499-IWD)AND

NUCLEUS ESTATE AND SMALLHOLDERS II PROJECT (Ln 1604-ND)

PROJECT COMPLETION REPORT

Table of ContentsPage No.

Preface ...... .. . . ............................ iBasic Data Sheets ............................., iiEvaluation Summary.................................................

I. PROJECT FORMULATION. 1

Policy Framework ................ . . . . .... 1Project Objectives. 1Project Design. 2Project Scoe. 3Project Organization. 3Project Preparation. 4Project Appraisal. 4

II. IMPLEMENTATEON EXPERIENCE. 5

Project Implementation. 5Bank Performance. 9Borrower Performanc. 9Project Relationship. 9Legal Agreements and Covenants. 9Project Documentation and Reporting .10

III. PROJECT RESULTS .11

Physical Accomplishment .. 11Agricultural Performance ........................ % 11Rates of Return ........... ............................... 12Initial Project Impact .. 14Project Sustainability .. 14

IV. CONCLUSIONS AND LESSONS LEARNED .15

Preparation and Appraisal .15Procedures .15Institutions .16Smallholder Organizations .16Settlement Sites .16Settler Income .17Smallholder Training .17Titling, Credit and Cost Recovery .17Monitoring and Analysis .18

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 authorizationi.

STATISTICi.L ANNEX

Table 1i Physical Indicators of Project Accomplishment .... 19Table 2: Project Costs .................................... 21Table 3: Use of Loan Funds ................................ 22Table 4: Disbursement Schedules .............. 23Table 5: Annual Planting Progress ............ ............ 24

MAPS.. ****,* ******~*** ** *********** * *** ********* ........ *..* . IB RD 12723R12724R13518R1i519

INDONESIA

NUCLEUS ESTATES AND SMALLHOLDERS I PROJECT (Ln 1499-IND)AND

NUCLEUS ESTATE AND SMALLHOLDERS II PROJECT (Ln 1604-ND)

PROJECT COMPLETION REPORT

Preface

This Project Completion Report is for both the Nucleus Estates andSmallholders I Project(Loan 1499-IND) and the Nucleus Estate and SmallholdersII Project (Loan 1604-IND). These two projects had similaz objectives andcomponents; both projects became effective in 1978. The first project wasclosed on June 30. 1984 and the second on Decembfar 31. 1986.

This Report was prepared by staff members of the AgriculturalDivision. Asia Technical Department (ASTAG), and was reviewed by the staff ofthe Agriculture Operations Division, Country Department V (AS5AG), both atHeadquarters and in Jakarta. The information is derived from field visits tothe project sites, the Staff Appraisal Reports (Report No.1465c-IND and ReportNo.1950a-IND), Loan Documents, Supervision Reports, official correspondence.and internal memoranda of the Bank relating to these projects, as well as thecompletion reports provided by the Borrower, which are in the Project Files.

This PCR has been read by OED. The draft report was sent to theBorrower on January 26 for comments; however, no comments were received.

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PROJECT COMPLETION REPORT

INDONESIA

NUCLEUS ESTATE AND SMALLHOLDERS I PROJECT(LOAN 1499-IND)

BASIC DATA SHEET

KEY PROJECT DATA

Appraisal Actual or Actual as X ofItem Estimate Estimated Actual ApDraisal Estimate

Total Project Cost (US8 million) 184.0 127.7 S6Loan Amount (USS million) 65.0 698. 88Date Physical Components Completed 08/82 18/SbProportion eompleted by Above Date

(Tres Planting) (1) 10O 112Economic Rate of Return (U) 30 14 42Institutional Performnce Cood FairNumber of direct beneficiory families 6,750 5,730 100

CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS(in US8 million)

FY77 FY78 FY79 FY80 FY81 FY82 FY83 FY84 FY85

Appraisal Estimate (US8 m) 24.0 40.0 64.0 81.0 85.0 - - -

Actual (US3 m) 2.6 9.0 20.7 34.2 40.7 45.0 58.4 68.9aActual as % of Appraisal 1l 23 38 S8 83 - - -

Estimate (N)Date of final disbursement April 1, 1985

PROJECT DATES

OriginalPlan Revisions Actual

Board Approval - - 11/15/77Signing - - 11/18/77Effectiveness 01/12/78 - 02/20/78Closing Date 06/20/81 - 06/30/84

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STAFF INPUT(staff week.)

FY73 FY74 FY75 FY76 FY77 FY78 FY79 FY80 FY81 FY82 FY83 FY84 FY85 FY00 FY87 TOTAL

Preapprailsl .7 .7 8.1 40.0 2.3 1.8 - - - - - - - - - 53.2

Appraisal - - 103.7 62.6 .4 - - - - - - - - - 16f.7

Negotiation - - - - 21.4 6.0 - - - - - - - - - 26.4

Supervision .8 - - - - 28.1 29.9 29.3 29.2 11.6 14.2 13.0 5.1 .4 .8 162.4

Other - .3 - .1 2.6 .2 - - - - - .1 - - - 3.4

TOTAL 1.6 1.0 8.1 143.6 79.0 86.0 29.9 29.3 29.2 11.6 14.2 13.1 6.1 .4 .8 402.1

MISSION DATA

Speci*l *112Date No. of tions Performance Typos of

Mission (mo./yr.) Persons Represented Rating Trend Problems

Lb /c Id Is

Identification/Preparation 05/75 - -

Appraisal 11/76 8 *,a,c,b,

Supervision 1 04/78 2 c 1 2 FMTSupervision 2 11/78 3 b 2 1 MT

Supervision 3 03/79 5 b,c,d,a,e 2 1 MT

Supervision 4 02/80 4 b,d,a,c 2 1 MTSupervision S 16/80 5 b,d,a,c,d 1 1 TSupervision 6 04/81 2 d,a,c 2 1 MFTSupervision 7 11/81 2 da, 2 1 MT

Supervision 8 11/82 3 0a.,c 2 3 MFTSupervialon 9 03/83 1 a 3 2 MFT

OTHER PROJECT DATA

Borrower: Covernment of Indonesia

Executing Agency: Directorate General of Estates

Follow-on Project:

Name Nucleus Estate and Smaliholders IILoan Number 1604-INDAmount (US$ million) 65.0Approval Date 08/29/78

La US88.08 cancelled.b a = agriculturist; b = agricultural economist; c = financial analyst; d = agricultural engineer; e disbursement

specialist./ 1 = Problem-free or minor problems; 2 - Moderate problems; 3 - Major problems.

Id 1 = Improving; 2 = Stationary; 3 = Deteriorating.e F = financial; U = managerial; and T = technical.

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PROJECT COMPLETION REPORT

INDONESIA

NUCLEUS ESTATE AND SMALLHOLDERS II PROJECT(LOAN 1604-IND)

BASIC DATA SHEET

KEY PROJECT DATA

Appralsal Actual or Actual ms X of

Item Estimate Estimated Actual Appralsal Estimate

Total Project Cost (US8 million) 100.6 87.6 87

Loan Amount (US$ million) 66.0 50.6 78

Date Physical Components Completed 06/83 03/86 -

Proportion completed by Above Date(Tree Planting) (%) 100 87 _

Economic Rate of Return (N) 1S 12 82

Institutional Performance Good Poor -

Number of direct beneficiary families 11,3S0 9,649 84

CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS(in US$ million)

FY80 FY81 FY82 FY83 FY84 FY85 FY86

Appraisal Estimate (USS m) 4.5 14.0 24.0 37.5 68.0 66.0 -Actual (USS m) 3.0 5.3 16.4 26.7 35.3 40.1 60G.GL

Actual as X of Appraisal 67 38 68 69 61 62 -Estimate (S)

Date of final disbursement May 27, 1987

PROJECT DATES

OriginalPlan Revisions Actual

Board Approval 06/29/78 - 06/29/78

Signing - - 07/12/78

Effectiveness 09/13/78 - 09/13/78

Closing Date 12/30/83 - 12/31/86

STAFF INPUT(staff weeks)

FY73 FY74 FY75 FY76 FY77 FY78 FY79 FY80 FY81 FY82 FY83 FY84 FY85 F.Y88 FY87 TOTAL

Preappraisal - - - - 37.2 8.6 - - - - - - 45.7Appraisal - - - - - 86.1 - - - - - - - - - 86.1

Negotiation - - - - - 12.2 - - - - - - - - - 12.2

Supervision - - - - - .6 17.9 31.6 13.8 13.3 11.4 8.0 4.8 9.2 2.7 112.9Other - - - - .6 .1 - - - - 1.6 3.5 .7 - - 8.3

TOTAL - - - - 37.6 108.6 17.9 31.6 13.6 13.3 12.8 11.6 6.6 9.2 2.7 282.2

MISSION DATA

Specializa-Date No. of tions Performance Types of

Mission (mo./yr.) Persons Represented Ratinj Trend ProblemsLb /c /d Le

IdentificationjPreparation 11/78 4 - _ _ _Appraisal 09/77 7 S,a,b,c - - -

Supervision 1 07/79 3 b,d,c 1 1 M

Supervision 2 02/80 4 b,d,a,c 1 1 USupervision 3 09/80 4 b,d,a,c 1 1 MT

Supervision 4 08/81 2 d,a 2 1 MTFSupervision 6 02/82 2 a, 2 2 MT

Supervision 6 01/83 2 *,c 2 2 MT

Supervision 7 12/85 a b,a,c 3 - UT

OTHER PROJECT DATA

Borrower: Government of IndonesiaExecuting Agency: Directorate General of Estates

Follow-on Project:

Name Nucleus Estate and Smallholders IIILoan Number 1761-INDAmount (USS million) 99.0

Approval Date 08/09/79

Le USS14.5 cancelled.L a = agriculturist; b agricultural economist; c = financial analyst; d = engineer.Lc 1 = Problem-fre. or minor problems; 2 = Moderate problems; 3 = Major problems./d 1 = Improving; 2 = Stationary; 3 = Deteriorating./e F = financial; U = managerial; and T = technical.

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INDONESIA

NUCLEUS ESTATES AND SMALLHOLDERS I PROJECT (Ln 1499-IND)AND

NUCLEUS ESTATE AND SMALLHOLDERS II PROJECT (Ln 1604-ND)

PROJECT COMPLETION REPORT

Evaluation Summary

Introduction

1. The two nrojects under review are the first of a series of sevenNucleus Estates and Smallholders (NES) projects. NES I was approved inNovember, 1977 and NES II in June, 1978. Together they involved five state-owned limited liability plantation companies (PTPs), for operations in the sixprovinces of Aceh, Riau, Jambi, South Sumatera, Lampung and West Java. Thetarget group under the projects was 15.300 settler families and rubbersmallholders.

Obiectives

2. In accordance with the emphasis in COI's tree crop subsector policyon expanding agricultural output and work creation in the outer Islands, theobjectives of both projects were similar, namely, to mobilIze the expertise ofstate-owned estate companies to help establish smallholdings for landless andpoor settlers on unexploited land suitable for rubber planting. NES IIextended the role of PTPs in smallholder development to include rubberreplanting withi high yielding varieties on existin& holdings. The projectswould generate productive employment at relatively low cost, and raise familyincomes of the landless and near landless poor. GOI required that publicsector estate companies with their technical and managerial expertise beutilized as nuclei to promote and guide smallholder development. To performthis role, the PTPs' capabilities were to be strengthened. Production ofsmallholdgr rubber and estate rubber. coconuts, and palm oil would beincreased, leading to increased exports and foreign exchange earnings,contributing to the government policy of promoting non-petroleum exports. Theinstitution building objectives were (i) strengthening the Directorate Generalof Estates (DGE) in project planning and preparation. and implementation andevaluation of on-going projects; (ii) improving the planning, production andfinancial management techniques of the PTP system: (iii) strengthening theEstates Training Institute (LPP) in NES I to improve management training, andestablishing the Sungai Tiga Training Center under NES II.

Implementation

3. The implementation period for both projects was to be five years (NESI 1977178-1982183 and NES II 1978t79-1983/84). While the planting of thenucleus estate crops proceeded approximately on schedule. both projects were

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extended (NES I by two years. and NES II by three years) to allow for thecompletion of other components, particularly smallholder development. Atproject closing. most of the physical targets set out at appraisal wereaccomplished. The smallholder replanting component of NES II encounteredserious problems and was not fully implemented. Parts of the loan proceedswere cancelled (12 percent of NES I and 22 percent of NES II) due mainly todevaluation of the local currency.

Agricultural Performance

4. The revised yield estimates for coconuts and rubber, but not for oilpalm, are considerably lower than the appraisal forecast. On thesmallholdings, only 75 percent of the rubber plantings are currently of fullyacceptable standard, expected to be tappable at about 5 years of age, 13percent require upgrading to be tappable a year or mere after expectation, and12 percent need extensive rehabilitation or replanting. Food crop developmentfor s6ttlers' subsistence neecis and as an additional source of income did notmeet expectations. owing largely to a lack of effective extension.

Rates of Return

5. The overall economic rates of return of both projects have been re-estimated in 1988 as 14 percent for NES I and 13 percent for NES It, lowerthan estimated at appraisal, when commodity price forecasts were morefavorable. The re-estimated economic rate of return for the smallholderdevelopment component for NES I settlements is 10 percent. compared with 15percent at appraisal; for NES II settlements, 13 percent. compared with 14percent. Individually, the Alue Ie Merah Settlement (NES I) has a re-estimated rate of return of 9 percent, Tebenan (NES I) has a re-estimated ERRof 11 percent, Bajubang (NES II) 12 percent and Air Molek (NES II) 13 percent.When current efforts in rehabilitation have been completed, and yieldsrestored nearer to appraisal levels, the rate of return would be slightlyhigher.

Sustainability

6. Anticipated project benefits could be achieved and maintained ifincreased effort is given to full rehabilitation of sub-standard plantings andto establishment of an effective extension system for tree crop production onsmallholdings.

Lessons Learned

7. Problems arising from poor coordination among government agencies atthe irplementation level, delayed approval of budgets and release of funds andcumbersome procurement procedures were not fully appreciated at appraisal. Inthe end, project implementation was delayed by as much as 3 years. Inter-agency coordination has improved in later projects and earlier procurementbottlenecks have recently been largely removed, but government budgeting andprocurement procedures still merit review.

8. Institutional weaknesses persisted throughout the implementationperiod of the proiects. While the PTPs were required by the DGE to undertake

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the smallholder development, the terms and conditions had not been clea:lyspecified in advance. In the absence of a clear accountability and incentivesystem for rewarding performance, it was difficult to avoid conflicts in theallocation of scarce staff, financial and material resources between theestate and smallholder components.

9. Some of the poor plantings on smallholdings would probably have beenavoided if shortcomings had been detected earlier,through more intensivephysical monitoring. There is urgent nee: for strengthening monitoringcapacity in DGE, and for establishing an independent inspection service toreport on technical aspects of all tree crop development.

I. PROJECT FORMULATION

Policy Framework

1.1 The projects were conceived to assist the Government of Indonesia inpursuing a policy of diversifying its foreign exchange earnings from the pre-dominant influence of crude petroleum exports. The tree crop sector with itsgreat potential was selected as an important investment focus, with Governmentassigning priority to smallholder tree crop development in remote areasthrough nucleus estates. In this way, marginal land would be utilized,employment generated, regions developed, rural income raised, and productionbase diversified. As part of the Second Five-year Plan, the Government haddecided to put the implementation capacity of its best estate companies intotree crop development for the settlement of local landless families the provi-sion of a comprehensive range of tree crop services. These Bank-assis:edprojects were designed to expand tree crop area in Indonesia while introducingmodern crop varieties and management practices to smallhoiders. They were thefirst two of a series of seven Bank-assisted projects on the Nuclens Estateand Smallholders (NES) model, which were replicated extensively in a whollyIndonesian funded program in later years.

Project Objectives

1.2 The main objective of the NES I and NES II pro ects was to mobilizethe expjertise of State-owned Estate Enterprises (PTPs)lI to help establishsmallholdings for landless and poor settlers on unaxploited land suitable forrubber planting. While NES II extended the role of the PTPs in smallholderdevelopmient to include replanting of rubber on existing holdings. bothprojects aimed to enhance the development of human resources: NES I throughreorganization and strengthening of the Estates Training Institute (LPP) toimprove management training, and NES II through assistance for the ExtensionTraining Center at Sungai Tiga, Jambi, to expand the training of GOI extensionstaff and smallholders. Institution building was to include technicalassistance to strengthen the Directorate General of Estates (DGE) and theSupport Staff for Agricultural Enterprises (SBPN) in the Ministry ofAgriculture. Also included was the expansion and rehabilitation of the state-owned estate companies, especially PTP XI to prepare it for participation infurther NES projects. Development costs would be minimized, self-helpmaximized and direct on-farm costs fully recovered, with a view toestablishing a replicable model for settlement of the rural landless.

1/ Government-owned estate enterprises were previously of two types: thePNPs (Perusahaan Negara Perkebunan) which were departmental tradingenterprises controlled by the Ministry of Agr.culture, and the PTPs(Perseroan Terbatas Perkebunan) which were limited liabilitycorporations 'zith the Government as the sole shareholder. All PNPshave now been converted to PTPs, and PTP is used in this paper to referto any state-owned estate corporation.

Proiect Design

1.3 For settlers, both projects aimed to provide a net family income ofUSS900 (constant 1977) at full dev- opment and after cost recovery. In addi-tion to rubber as the cash crop, each family was to be assured of basic foodsupplies. An area of 5 ha would be allocated to each settler: 2.0 ha rubberestablished and maintained for three years with PTP assistance, 0.2 ha for atiouse lot with intensive garden ultivation, and 2.8 ha cleared initially forrotational food cropping, of which an additional hectare of tree crors couldbe planted later from the settler's own resdurces and the remainin3 1.8 haretained for food crops. The nucleus estates were to employ one member fromeach household on estate work through the 5-6 year period before rubber wastappable. Social infrastructure at settlement sites would be supplied throughon-going government programs, coordinated by a Provincial CoordinatingCommittee, which would also assist in settler selection and, later, deterui.neprices to be paid for settlers' rubber sold to the nucleus estates forprocessing and marketing.

1.4 To identify participants with their project lands. conditional titlesof ownership were to be issued for their land initially, and unconditionalpermanent titles at the end of three years, provided settlers had pertormedsatisfactorily through this probationary period.

1.5 Following titling by Agraria (the government land surveying andmanping agency), the development costs.' duly audited by BPKP (the gover.unentaudit agency), including tree planting costs, housing, a portion of theinfrastructure costs of the settlement, and food crop development through thefirst three years, as well as the estimated further costs to bring the rubberto maturity, were to be converted by Bank Rakyat Indonesia (BRI) intoindividual smallholder loans. Land titles would be held by BRI until settlersfulfilled their loan obligations. Repayment was to be collected by BRI as thesmallholders sold their rubber to the PTP processing facilities. With theyield potential forecast at appraisal, it was envisaged that NtS Ismallholders would be able to repay their credit by delivering 25 percent oftheir production to the PTP for a period of 21 years. The interest rate wasnominally set at 12 percent, but a grace period for the first three years, andsimple interest for the next four (until maturity), meant the effective ratewould be less. U:.der NES II, smallholders with new plantings would repay over19 years, and replanters over 15 years, by delivering 25 percent of theirproduction. The nominal interest rate was set at 10.5 pe'rcent. Prices wereto be determined according to a formula to be agreed between the DGE. PTP andPCC. Amounts collected by the processing facilities were to be passed to BRIas repayments in the settlers' accounts. Settlers were to be free to sell thebalance of their crops wherever they wished, but it was expected that pricesoffered by the nucleus estate would be sufficiently above those of localtraders to attract the whole crop and benefit the settlers accordingly.

1.6 The estate components included the expansion of rubber, oil palm andcoconut plantings, both on existing estates and on a new estate for PTP IV inRiau. Palm oil and rubber processing facilities were to be established orexpanded to enable the estates to process their own and smallholder crops.

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1.7 In order to improve the PTP corporate policy formulation. financialmanagement and marketing function, NES I provided technical assistance tostrengthen the Support Staff for Agricultural Enterprises (SBPN). To performits role in coordinating, guiding, monitoring and evaluating the operations ofthe PTPs as a group, SBPN was to recruit six specialists in investment plan-ning and budgeting, financial management, production management, processing,marketing and quality control through an independent inspection service. RESII provided for DGE to employ consultants for inspection and advisory dutiesspecific to PTP IV. PTP XI was to be strengthened in NES I in order to play apart in future NES-type projects. Also, the Alue le Merah smallholderdevelopment was to be implemented by PTP V and handed back to PTP I when ithad been strengthened under a future project.

Project Scope

1.8 These first two NES projects in the series involved five state-ownedlimi.el liability plantation companies (PTP I, V, X and XI in NES I. and PTPIV .n NES II) for operations in the six provinces of Aceh, Riau, Jambi. SouthSumatera, Lampung and West Java. They were to develop 45,000 ha of highyielding rubber: 252 on PTP estates and 75Z as new planting for settlers inthe project areas. repiant 7,500 ha of senescent rubber on existingsmallholdings and 3,700 ha on estates (PTP XI), and rehabilitate 13,000 ha oflow yielding rubber for PTP XI. Some 13,350 settler families were to be pro-vided with an incowe above the national average, and earnings of 3,750existing smallholders increased. In addition, estate development included4,200 hia coconut planting and 5,800 ha of oil palm. After postponing theclosing dates, NES I by two years and NES II by three, the overall plantingtargets, with the exception of smallholder replanting, wera met. The scope ofthe projects as appraised was appropriate to the constraints identified, anddisbursements closely followed the standard profile for Indonesianagricultural projects at that time. Nonetheless, loan cancellations amountingto 121 of NES I and 22Z of NES II were necessary, primarily due to threedevaluations of the Rupiah between 1978 and '98X, which reduced overallproject costs by 7Z in US dollar terms. In terms of the Rupiah, costsincreased to 159Z of SAR estimates for NES I and 195Z for NES II.

Project Organization

1.9 The Nucleus Estates and Smallholders Projects distinguish themselvesfrom previous Bank-assisted projects in the tree crop sector in terms of theproject organization. Earlier tree crop projects were implemented by ProjectManagement Units (PHUs) under Directorate General of Estates. The NESprojects, on the other hand. are implemented by selected public sector estatecompanies (PTPs) to take advantage of their staff and financial resources and,perhaps most significantly, their tecnnical expertise. As state-ownedcompanies. they are expected to coordinate their project implementationactivities with other concerned government agencies through the the DistrictCoordinating Committees (DCCs) and Provincial Coordinating Committees (PCCs).Thus, progress in implementing the non-physical components and some of thenon-tree crop activities depended to a large extent on the effectiveness ofthese coordinating committees.

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Proiect Preparation

1.10 The NES I Project was prepared between 1973 and 1975 by a team ofconsultants working with the staff of DGE. In order to address the perceivedneed for accelerating the flow of funds into smallholder tree crop developmenteffort, preparation of the NES II project followed NES I almost immediately.No lessons had been learned from NES I to benefit the design of NES It. Onthe whole, project preparation was reasonably adequate. The capabilities ofthe PTPs were examined and considered appropriate for the scale of undertakingrequired by the scope of the projects. In NES I. where PTP I had not beenstrengthened, its smallholder development site, at Alue le Merah, was first tobe established by PTP V which would eventually turn it over to PTP I. Butproject preparation could have devoted more attention to the institutionalaspects of smallholder development.

Project Appraisal

1.11 The appraisal missions were staffed with Bank and consultanttechnical specialists, economists and financial analysts. The appraisalmissions identified flow of funds, administrative bottlenecks, timely transferof accounts from the PTPs to BRI, ability of settlers to repay investmentcosts, and efficiency of PTPs as collection agents, as project risks. GOtrequested the method of cost recovery through credit and was confident thatthe nucleus estates would collect smallholder rubber for debt repayment. ThemanagepenL capability of the Provincial Governments in the extensive role ofsettlement planning, settler and replanter recruitment, budgeting and imple-menting village construction and provision for services for vast numbers offamilies would be another project risk, and it was anticipated that closeguidance by the DGE and technical assistance provided under the projects wouldbe needed. It was ant_cipated at appraisal that some conflicts of interestbetween nucleus estates and smallholders would arise, minor through the estab-lishment phase, but increasing in the production stage when the commercial,profit-seeking PTPs were to purchase, process and market smallholders' rubber.

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II. IMPLEMENTATION EXPERIENCE

Project Implementation

2.1 Project design called for PTPs to play a major role in implementa-tion. PTP IV. PTP V and PTP X had all been strengthened in earlier Bankprojects (Credits 155, 194 and 319-IND) and had proven management and tech-nical expertise in rubber planting. Ther were therefore selected to implementthe NES I and NES II smallholder components. PTP V participated in Aceh,although the development area bordered estates of PTP I. The plan was for PTPV to undertake the establishment phase and then for PTP I, which would havebeen strengthened in a later project, to provide processing, marketing andextension services for smallholders in the mature phase. In fact, PTP V foundit extremely difficult to operate in Aceh, where it had no estate with experi-enced resident labor and found no skilled labor and few casual workers. Fieldresults were therefore not of the expected standard. As PTP I was makingprogress under NES III project, it took over implementation at Alue le Merahsettlement in 1982. While handover of physical implementation took place, theformalities of handing over financiaL responsibilities, and the appointment ofPTP I as Project Manager by the Minister of Agriculture were not completeduntil a year later. It was difficult for PTP I to operate through the transi-tion period, with PTP V still responsible for GOI funds, and, in retrospect.it would have been preferable to strengthen PTP I similar to other PTPs beforestarting smallholder development at Alue Ie Merah.

2.2 At the start of project implementation, the PTPs had littleexperience in working with settlement of farmers or in community developmentbeyond the construction of estate villages; they had no staff experienced intechnical extension methods. It was therefore agreed that the projects wouldbe managed and activities coordinated by a Project Manager representing theDGE at each project site. The PTPs would enter into contractual agreementswith the DGE for rubber development and infrastructure construction and forprovision of inputs through the immature phase, and would have full authorityfor managing these activities within agreed budgets. They would thus not beburdened with activities in which they had no strength. The DGE would haveprimary responsibility for the projects in their entirety. including masterplanning and programming, budgets and financing arrangements, and all settlerdevelopment activities, in liaison with the PCC and other GOI agencies.Initially, the Project Managers were appointed by the DGE and reporteddirectly to him, but, because of slow implementation in both projects, it wasdecided that full responsibility for smallholder development should be passedto the PTPs. In 1979, the NES III Loan Agreement provided that the ProjectManagers would be proposed by the PTPs concerned and appointed by the Ministerof Agriculture. In 1980, the NES IV Loan agreement stated definitely that theFirst Director of the implementing PTP would be the Project Manager. The NESI and II Loan agreements were amended in consonance, and the First Directorsof PTP V and X became the Project Managers for the NES I Alue le Merah andTebenan smallholder settlements and the First Director of PTP IV the ProjectManager for the NES II smallholder settlement and replanting. The ProjectManagers appointed PTP staff as Site Managers and, while the DGE remainedresponsible for overall guidance and coordination, PTP staff were to control

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all aspects of project implementation. including coordination of activities byProvincial Government agencies. The projects thus relied very heavily on themanagement and technical capabilities of the implementing PTPs, and the PTPswere to accept responsibilities beyond their customary role of tree cropestate development. This was a major change from the arrangement envisaged atappraisal. It may have succeeded if individual PTPs fully accepted the projectresponsibilities, and these were maintained at a level in keeping with theircapacities. In the event, the PTPs found it difficult to undertake thecoordination function, and GOI required the PTPs also to undertake majordevelopments under domestically financed programs. These overloaded PTPmanagement and staff. contributing to continued slow progress and to lowquality of smallholder development.

2.3 Although both projects have by and large met the planting targets forsmallholder rubber development set at appraisal. progress with plantings forsmallholders was irregular and only planting at the Tebenan site of NES Iapproximately followed implementation schedule. At Alue le Merah settlementof NES I and both the Air Molek and Bajubang sites of NES II, plantingscontinued into the third year beyond the SAR schedule. Not only was progressslow, the year-to-year variations in area planted were erratic, due to fundflow problems. Implementation of the smallholder components, which arecentral to the objectives of both projects, encountered a whole complex 'ofproblems. Recruitment of settlers by local governments was very muca delayedrelative to rubber planting. By the time settlers actually arrived, much ofthe land clearance work had already been done by contractors, thereby denyingsettlets the intended participation and of some initial employment. Thislowered settler morale and affected the cooperation between settlers and thePTPs. Budget release problems caused delays in procurement of many itemsincluding herbicides and fertilizers, which adversely affected the growthrate of the trees. Delayed release of funds for herbicide applications led toalang-alang problems in some areas. increasing weeding costs and slowing downtree growth. This in turn delayed commencement of tapping, 'contributing toproblems of credit conversion and cost recovery from the smallholders.Extensive planted areas, between 10 to 152 of the total, were damaged by wildanimals and had to be replanted. At the Bajubang site for example, some400-500 ha planted were lost to damage by wild boars and up to 202 of the areawas planted with seedling rubber instead of high yielding cultivars. Landsurveys by Agraria did not proceed as planned, and the presence of largenumbers of squatters at the Alue le Merah site also affected progress. Theprojects were extended by two and three years respectively to allow forupgrading to achieve anticipated production levels.

2.4 The appraisal schedule for the settler housing construction was basedon progress in rubber plantings at each site. As the rate of planting beganto deviate from the original plan, the supply of sntler houses became afactor in implementation problems. At Tebenan, where planting was onschedule, housing provision was delayed for three years. There was littlecorrelation among planting progress, settler recruitment and completed housingunits in most years of project implementaticn. Progress in housing construc-tion was seriously affected by the slow release of funds which shortened the

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construction season. and by the lack of agreement among the PTPs, contractorsand BAPPENAS over unit costs. For NES II, a shortfall of over 1000 housingunits, compared to the planting schedule, existed for the later years of theproject. The numbers finally met the appraisal provisions about three yearslater than expected. It was originally intended that incoming settlers wouldparticipate on a wage-earning basis in house construction, but Lheir muchdelayed arrival meant that housing was actually built by contractors.

2.5 As a result of the changes in l6cation and layout of the settlementsites during implementation, the quantitative targets of villageinfrastructure were revised in agreement with the Bank. Because ofprocurement problems arising from the inexperience of project management andfrom the complex government procedures. implementation of these physicalcomponents was much delayed and progress was slower than anticipated. Timelyavailability of funds was also a serious problem in the infrastructureprogram. Despite Bank and borrc-er supervision efforts, the quality of roadconstruction did not meet with expectations. Proper funding for roadmaintenance was also a problem. The plan for potable water supply had to bealtered to suit the requirement of the settlement sites finally chosen.

2.6 The development of food crop areas never received the necessaryattention from the project implementing agencies. which concentrated theirefforts on tree crop establishment. It was appreciated at appraisal that farmtechnology packages were not availa6le for sustained food crop production onsoils present in the project areas and, for this reason. the return from foodcrops was conservatively estimated and expected to provide mainly for farmers'own subsistence. It was also noted that improved techniques were expected tobe developed through the program period. -rhe project did not link food cropdevelopment to DGFCA or the national extension service. which at the time ofappraisal was under review for possible reorganization. Inputs were to besupplied by the nucleus PTPs during tse first years of each settler'sresidence. and thereafter under the BDMAS program 2I which was to be extendedto the project areas by August 1979. The PTPs cleared an area of 0.6 ha foreach settler and supplied first year inputs. but the BIMAS program was neverintroduced, and no assistance was provided in crop planning and marketing.There was no organized or intensive cropping of the cleared areas. The foodcrop component of the project must therefore be adjudged a failure.

2.7 The smallholder rubber replanting component in NES II tested theexpanded role for nucleus estates, in assisting replanting on existing small-holdings. dealing with farmers rather than paid estate labor. The result wasnot a success. The 4,500 ha replanting component at Bajubang. Jambi, had tobe deleted from the project due to lack of response; and only S52 of thetarget 3,000 ha was achieved at Air Molek, Riau, over seven years instead ofthe s^heduled four. The failure was due in part to the lack of suitable staffinputs and commitment by management, but probably equally to the unattractivelevel of assistance offered to participants. The project provided for thenucleus estate to supply material inputs on long-term credit but to assistwith labor only during land preparation, to the extent of 152 of total labor

2/ Bimbingan Massal Swa Sembada Bahan Makanan (Mass Guidance Program forSelf-sufficiency in Foodstuffs): a program for the provision ofseasonal credit in the form of input packages for selected food crops.

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required through the immature period. Farmers were expected to supply theremaining labor requirement, including regular weeding cver six years. Thisthey proved unwilling to do. Although it was foreseen at appraisal that someform of cash incentive might be needed to achieve satisfactory maintenance.this was not accepted by Government. In view of problems encountered in thiscomponent, it was replaced by 1.200 ha of additional new planting in theBajubang area. The Smallholder Rubber Development Project, managed by PHUs,started in 1980 and also operating ip Riau Province, provided for participantsto be paid half the estimated value of family labor inputs, and proved to besuccessful. Subsequent tree crop development on existing smallholdings inIndonesia has all been implemented by project management units.

2.8 By sharp contrast, the implementation of the estate developmentcomponent in both projects progressed more smoothly. The physical targetswere substantially met and some even exceeded appraisal estimates. PTP X's newrubber and oil palm planting were 932 and 96Z of appraisal targets respec-tively. Estate rubber replanting (PTP XI) exceeded targets by 26Z, and rehabi-litation by 312. New rubber planting under NES II (PTP IV) exceeded target by6Z. For these estate plantings, the PTPs had their own funds, followed theirown procurement procedures, and used their estate laborers who in general wereskilled and disciplined. The rubber factory and two palm oil mills for PTP Xwere successfully constructed, but subsequently PTP X experienced severedifficulties in managing them efficiently. PTP XI constructed three rubberfactories which are performing reasonaLly well.

2.9 Training constituted an important and integral part of both projects.Under NES I, LPP (Lumbaga Pendidikan Perkebunan, Estates Training Center atYogyakarta) waa to be reorganized and strengthened with technical assistanceand staff development, as well as additional buildings. A sub-center of theLPP would be established in Medan, North Sumatera in closer proximity to theproject sites and the PTPs. The building program was completed in the secondyezr of the project; staff development took place between 1980 and 1982; con-sultants were recruited in 1979 and worked with LPP until 1982 when furtherassistance was made available under NES V. In 1981/82. 15 courses, totalling179 days, were held. Training at these locations after 1982 was continuedunder NES V project support. As PTP IV staff had no previous experience withsmallholder development, NES II provided training for 106 of its staff. Theproject also expanded the tree crop training center at Sungai Tiga, Riau.After the buildings were completed in 1981, a teaching staff of 23 wasappointed to conduct training for settlers and extension agents. Until 1985,some 3,390 settlers and 520 extension staff were trained in rubber tree main-tenance and production. However, after that year, training at Sungai Tiga wasdiscontinued because of the lack of government funding.

2.10 lhe technical assistance program provided by the projects weregenerally accomplished. Under NES I, two long-term and five short-term con-sultants for DGE were hired, but only four of the six long-term consultantsprovided for SBPN were recruited and one of them only briefly. This wasbecause the functions of SBPN, always regarded as a temporary group, wereslowly changed throu&h the project period and, finally, SBPN was abolished in1983 and its responsibilities were allocated to other agencies. Theconsultants accomplished their assignments in improving marketing, investment

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planning and rubber agronomy, but processing. financial control andinformation services were not strengthened. NES It provided technicalassistance for DGE and DGH. Most were short-term consultancies and theBorrower reported that they were effective.

Bank Performance

2.11 The Borrower's completion reports highlighted the significantcontribution by Bank supervision missions. The Bank's strength was seen tolie in the role played by the Resident Staff in Indonesia in maintaining closecontact with the project implementation agencies at all times and helping toresolve problems, although their advice might not always have been acted uponexpeditiously. The borrower also acknowledged the critical function of Bankassistance in developing the Nucleus Estates and Smallholders model forstrengthening the tree crop subsector of the country.

Borrower Performance

2.12 Once the implementation agencies overcame the initial problems of.ack of familiarity with the innovative project concepts and organizationsetting as well as with loan utilization procedures, performance began toimprove, albeit only slowly. At this time, the rapidly expanding land settle-ment program funded by the Government placed additional demands on the PTPs.overstretching their absorptive capacity. As the two projects were imple-mented.by five different PTPs and involved four settlement sites, performancetended to vary, depending upon the management strength of the organizationsand the quality of the field staff. Co-ordination at the DGE level wasgreatly facilitated by the establishment in 1979 of the Special Team for TreeCrop Projects (Tim Khusus), introduced under the NES III project. A number ofkey policy issues affecting the performance of the two projects under reviewwere subsector-wide issues, and have been the subject of a continuing dialoguebetween the Borrower and the Bank. in an effort to seek improvements in theperformance of the tree crop subsector program.

Project Relationship

2.13 Through the staff of the Resident Mission in Indonesia. the Bankmaintained close contact with the Borrower. Relationships between the PTPsand the government agencies at the provincial and district levels and amongthe agencies thr..mselves were very weak throughout the implementation period.Many of the problems confronted by the projects could be attributed to theserious lack of coordination.

Legal Agreements and Project Covenants

2.14 The appraisal report was sufficiently detailed to serve as anadequate and useful implementation guide. The innovative nature of theprojects necessitated frequent changes and adjustments, but these weregenerally undertaken within the framework of the SAR. The Borrower in themain complied with those project covenants relating to the physical and tech-nical aspects of the project, but compliance with covenants covering organiza-tional, financial and policy issues was not achieved to a similar extent. For

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example, under the loan agreements, Government agreed to exchange views withthe Bank prior to (i) appointing executive directors of the PTPs; (ii) approv-ing annual PTP budgets and five-year cash flow forecasts: and (iii) givingadditional financial and management obligations to PTPs X and XI. Thesecovenants were not met, and the additional obligations given to the PTPs, andthe lack of sound five-year cash flow forecasts, contributed to the currentsevere financial difficulties of all the PTPs implementing the projects.

Proiect Documentation and Reporting

2.15 Under the project, a standardized quarterly and annual physical andfinancial progress reporting format was introduced. However. the smallholderaccounting system was finalized only in 1983. The PTPs. as project managemententities, maintained adequate accounts and records of physical progress. TheMonitoring and Analysis Division within Tim Khusus collated the data submittedby the field units to provide project-wide information on physical and finaS.-cial progress. The information provided by Tim Khusus had generally been in afixed tabulated format and only limited analysis and interpretative work wasdone. By itself, the information supplied could not be used for quality con-trol purposes. Furthermore, more training and further strengthening of TimKhusus would still be-required to enable- it to conduct an impact evaluation atthe full development stage of the two projects under review.

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III. PROJECT RESULTS

Physical Accomplishment

3.1 The two projects together added 35.000 ha (103Z of appraisalestimate) of rubber to the productive base of the country, replanted 7.400 ha(662 of appraisal estimate) of older rubber trees with high yieldingcultivars, and rehabilitated 17.000 ha (1312 of appraisal estimate) of estaterubber. In addition, 4,600 ha of coconuts and 5,600 ha of oil palm wereplanted. A total of 13.900 smallholder families (104? of appra4.sal estimate)were settled on new lands with rubber established for them, and another 1.360smallholders bern itted from replanting their existing rubber. For PTP X, onepilm oil mill was built. another expanded, and a rubber factory established.One latex concentrate plant and one block rubber factory were constructed forPTP XI.

Agricultural Performance

3.2 In quality terms, project results from the rubber planting componentsof both projects did not fully meet expectatiops. For example, the Borrower'scompletion repoet for NES II observes that the implementing agency tended toignore soil conservation and drainage requirements, and that the fertilizingand pruning policies as practised by PTP IV delayed maturity, increasedweeding costs and reduced production potential.. The quality of rubberplantings remains very variable among sites, and at some, is well below theexpected implementation standards. In 1985, Tim Khusus applied a classifica-tion system 3/ to assess the quality of established rubber stands. Theresults relating to rubber planted under NES I and NES II projects were asfollows:

3/ Under this system, Class A are those of an acceptable standard andexpected to be tappable at about 5-6 years of age; Class 8 plantingsrequire some upgrading to reach tapping size within 6 months aftercommercial expectation; Class C require upgrading to be tappable 12months or more after expectation, and Class D require extensiverehabilitation effort or even replanting if they are to becomeproductive holdings. It should be noted that neither the definition ofthe classes nor the results of the classification have been fullyagreed by technical experts. The system is being reviewed by DGE andBank tree crop specialists.

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Table I: Percentage Distribution of Rubber, by Class

Class of Plantings

Area A B Dl D2(ha) (Percentage)

NES IPTP XI Nucleus 6,868 64 3 5 17 11Alue le Merah SH 7,000 63 3 5 13 16Tebenan SR 4,462 99 0 0 1 0

NES IIPTP IV Nucleus 3,713 100Air Molek SH (New) 11.400 71 10 10 a 1

(Replanting) 2,548 76 7 5 0 12Bajubang SH (New) 5t000 so 9 5 6 0

TOTAL NES I & NES IINucleus Estates 10,581 77 2 3 11 7

SH All Planting 30.410 75 7 6 7 5

The quality of smallholder plantings at Tebenan is fully satisfactory, butoverall, only about three quarters of the rubber planting on smallholder landwere of commercial standards, and the remaining portions require varyingamounts of effort and investments for rehabilitation (Class Di in table above)and some of these need replanting (Class D2). As a result of therehabilitation and replanting efforts of the PTPs, the finaL. clLssification ofthe rubber stands will be somewhat better than the current assessment. Also,it is important to bear in mind that the present classification system hasbeen shown to have shortcomings, and is currently being modified to betterreflect planting standards and yield potentials.

3.3 For the estate crops, the revised yield estimates for PTP XI rubberand for coconuts are considerably lower than appraisal fotecasts. For thecoconut stands planted by PTP XI under the NES I project, the average coprayield per hectare over 23 years was reduced to 2,636 kg per year. down fromthe 4.035 kg per hectare per year estimated at appraisal for high yieldingvarieties. Oil palm fared better, with a new estimate only 5z below appraisalforecast.

Rates of Return

3.4 When re-estimated at project completion, both the economic andfinancial rates of return for NES I and NES II are much lower than anticipatedat appraisal. The reductions in the rates of return are mainly due to lessoptimistic price projections than at appraisal, and delayed and lowerbenefits, particularly in the case of smallholder development. The comparisonbetween appraisal and completion estimates is set out in the following table.

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Table IM: Comparison of SAR and PCR Rates of Return

ERR FRRSAR PCR SAP P2CR

NiS I J/Total Project 30 14.3 30 na

Estates PTP X 35 14.7 17 naPTP XI 41 15.2 29 na

Smallholder 15 9.7 - 9.5Alue le Merah 15 8.7 16 8.5Tebenan 1S 11.1 17 10.8

NES IITotal Project 1S 12.9 - 11.9

Estate: Air Molek 19 18.3 20 17.8

Smallholder 14 12.7 15 12.5Air Molek - 13.1 - 12.9Baju6ang - 11.7 - 11.5

/a The PCR economic rate of return for PTP X estate component was based on1984 data. This and related figures should not be c.ompared directly withother calculations which were based on 1988 updated data.

Although both projects failed -o meet appraisal expectations, their economicrates of return were, noneth.eless, above the generally accepted cut-off rateof 122 for Bank assisted projects in the tree crop subsector. Furthermore,the future results of the continuing effort by the PTPs in rehabilitation ofsub-standard plantings will restore the benefit streams to a level nearer thatexpected at appraisal. The rates of return at full development of thesmallholder components of these projects would thus be more favorable than atpresent.

3.5 The estate development components of both projects fared bett-r, witheconomic rates of return re-estimated at completion ranging from 15 to 182.But in view of the project design calling for involving the technical andorganizational expertise of the PTPs in rubber establishment and the projectconcept of minimizing costs but maximizing benefits, the economic performanceof the smallholder development components must be the basis on which thesuccess or otherwise of the two projects must be judged.

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3.6 The economic rates of return for the smallholder settlementdevelopment activities are considerably lower than the estate plantings, aresult forecast ;.t appraisal. However, for the smallholder components, threesettlement investments had economic rates of return below the 122 threshold.The Alue le Herah settlement component had a re-estimated ERR below 102. Itshould, however. be noted that conditions at Alue le Merah were particularlydifficult in the first years of the project, but significant improvementsoccurred toward the end of the NES I project and this trend is continuing.

Initial Proiect Impact

3.7 Notwithstanding the delay in implementation and the lack of attentionto quality of smallholder rubber plantings, the two projects enhanced theproduction base of rubber, coconuts and oil palm of the country, increased theprocessing facilities of the two PTPs under NES I and provided an improvedstandard of living for most of the smallholder participants. Although noformal impact survey has been conducted, field records maintained bysettlement officials at Alue le Merah, for example, indicated that the averagehousehold income of the settlers. before cost recovery payments, is alreadyhigher than the national average for rural areas. There is field evidence tosuggest that non-agricultural employment opportunities, an indirect projectbenefit. are beginning to emerge.

Proiect Sustainabilita

3.8 Project appraisal identified the sustaining of rubber yields andsmallholder benefits as a risk, but that fertilizer applications and rubbermaintenance in the first three years and supervision of all application ofinputs to maturity by the PTPs woul i.nimize the danger. Parts of theplanted area had indeed been affectea by precisely this problem. Furthermore,in the smallholdings, overtapping of rubber trees was emerging as a problemtowards the end of the implementation period, threatening the productive lifeof the rubber trees. Mature phase extension has been identified as a priorityfor attention in order to ensure that the benefits of the investments arecaptured. This issue will be addressed in the NES Phase II operation underpreparation.

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IV. CONCLUSIONS AND LESSONS LEARNED

4.1 The projects under review were innovative in enlisting state-ownedplantation companies to play a major role in establishing rubber stands forlandless settlers and replanting low grade rubber trees for smallholders.However. during implementation numerous problems relating to the non-estatesmallholder development activities were encountered, most of which areattributable to institutional weaknesses of the agencies involved and tosmallholder development capabilities of the PTPs. By the early 1980s,additional demands placed on PTPs to implement GOI-funded programs began tostrain the absorptive capacities of the PTPs. The unf;olding experience ofthese NES-type projects shows that the management and financial capacities ofthe PTPs were overstretched. But the central tenet of assisting low-incomegroups to participate in the tree crop sector and smallholders to upgrade low-yielding trees are not in dispute.

4.2 Since 1983, the Bank has not made new loans under the NES format, asattention was focussed on efforts to improve and accelerate implementation ofthe on-going program. and new tree crop lending was re-oriented towards thePMU approach, which had subsequently been proven successful. For on-going NESprojects, the Bank recpntly (December 1987) outlined to GOI a series ofremedies to improve the performance of tree crop projects. These includedaddressing the issues of authority of the DGE, improved PTP management,adequate unit costs for newly planted areas, the quality of road access tosmallh6lding sites, timely release of funds. and setting up an independentinspection service. The NES Phase II operation currently being prepared isexpected to address outstanding issues and consolidate the gains made so far.

Preparation and Appraisal

4.3 In retrospect, project preparation and appraisal did not appreciatefully the complexity of the budgetary and procurement procedures of theGovernment. To a considerable extent, despite the efforts'of successivesupervision missions to insist on timely compliance of agreements relating tosmallholder development, it was these procedural complexities that caused thedelay in project implementation by as much as three years and may have led tothe poor quality of plantings.

Procedures

4.4 The complexity involved in fund flows, contract and procurementprocedures of the Borrower, which are considerably different from the Bank's,resulted in the implementation schedule being overly optimistic. Bothprojects eventually had to be extended to allow physical targets to beaccomplished. During the implementation period of NES I and NES II. GOIprocurement policy and procedures underwent several changes, but the processof budget approval and fund release was not simplified.

4.5 Streamlining of GOI procedures remains an urgent issue for attention.Appraisal of later projects has been cautious in scheduling disbursements, butimplementation scheduling also needs to be more realistically assessed in thefuture in the light of experience with the closed and on-going projects.

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Institutions

4.6 The NES model for smallholder development necessarily involved manyagencies. but the mixture of central and provincial governmental departments,commercial banks, and profit-oriented plantation companies in the projectscompounded implementation problems. Meshing the management style andprocedures of the PTPs with the new demands of the Government-sponsoredsmallholder development program remained a problem through the implementationperiod of these projects. Implementation and management of the smallholderdevelopment component involved a large number of government organizations withdifferent levels of authority. The close coordination that was needed betweenthe PTPs and government agencies was not always achieved. Following theestablishment of Tim Khusus in DGE under the NES III project, coordination inimplementation was improved. During the project implementation period, ajoint review by Bank and GOI led to a set of minutes of understanding amongthe Ministries of Agriculture. Finance, Home Affairs, and BAPt'ENAS which setout the responsibilities of the agencies concerned with various implementationissues and procedures.

4.7 While the PTPs have technical expertise in tree crop establishmentand production, they should not be seen as the, sole avenue for smallholdgrdevelopment. When their capacity has become overstretched, other forms oforganizational arragements should be explored at the earliest opportunity.

Smallhqlder Organizations

4.8 Organization among smallholders was slow to evolve, although thesettlers are now being organized in farmer groups (Kelompok Tani) of 20 to 30members. Without sound organization among the settlers, delivery of govern-ment services such as extension, inputs and marketing are not efficient andcost effective. PTPs are commercial enterprises and as such have limitedexpertise among their staff in developing and promoting social organization.Because of lack of coordination. government agencies with experience in thisfield were not able to provide the service at the time when it was mostneeded.

4.9 Smallholder organization is essential for transfering some of thedevelopment functions to the settlers and for more cost effective delivery ofservices still required. But in the absence of a clear policy on thedirection in which these settler level organization should evolve, particu-larly their conflict with Government objectives for the KUD cooperatives, itwill be difficult to accelerate the process. The German Government iscurrently providing assistance to resolve these issues.

Settlement Sites

4.10 The NES I project included the Alue le Merah site which was part ofan existing GOI scheme that was experiencing difficulties before projectstart-up. Under NES II, the Bajubang site also had technical andenvironmental problems that were only gradually being resolved duringimplementation. Developing new settlement areas on marginal land, andbalancing the relative needs of tree crops and food crops, will always entailsome risks and unanticipated difficulties. Even if exact locations could notbe de'fined at appraisal, the finalization of village locations should havebeen achieved expeditiously.

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Settler Income

4.11 The projects aimed at providing the smallholders with an adequateincome before the rubber trees matured. By providing employment at thesettlement sites, settlers were to receive an income and meet theirsubsistence needs from the food crop areas. The slow pace of development infood crop production and the PTPs' preference to sub-contract much of the landclearance and infrastructure construction work, forced some settlers to findemployment elsewhere, but some found work with the contractors. Absence c'settlers from smallholdings was detrimental in the maintenance of the youngtrees for lack of adequate on site labor from the settler families. While the?TPs are technically competent in tree crop development, promotion of foodcrops is not their forte. Food crop extension has to be provided by anotheragency (DGFCA) and close coordination has to be maintained at all times. Ajoint decree defining the responsibilities of DGE and DGFCA was issued only atthe end of 1984 but owing to the difficulties in defining and coordinating theresponsibilities and inputs of the various extension agencies at the farmlevel, detailed operational guidelines are still to be finalized.

4.12 Bearing in mind that tree crops take several years to provide anincome for the settlers, adequate sources of employment and income generationopportunities during the establishment period are absolutely essentiai if themorale of settlers is to be maintained at a high level.

Smallholder Training

4.13 Insufficient training and extension led to low quality of rubberstands and harmful production practices. Both projects provided that theimplementing PTPs would train participants in rubPber husbandry and ultimatelyin tapping. This training was normally provided on an 'on-the-job' basis. assettlers were required to underta' each operation. NES It supplemented thisby expanding the Sungai Tiga Training Center to conduct courses for thesettlers. But by the time the activities at the center were terminated, only41Z of the settlers at the Air Molek site had attended the short 5-daycourses. Significant areas of project plantings are still immature and manysettlers require training in tapping. It is perhaps not surprising that thestandard of tree maintenance on smallholdings is generally low and inadequatetapping skills and discipline have emerged as serious problems confrontingproject sustainability. Project management is planning to redefine the roleof the field staff originally assigned to supervise land 'clearance and treeestablishment to undertake extension activities.

4.14 Settlers are almost by definition unfamiliar with tree cropmaintenance and production practices. While it would not be appropriate toinclude tree crop skills in the eligibility criteria, adequate training isessential. Given the difficulties in maintaining training centers, the on-site training alternative should be enhanced.

Land Titling. Credit Conversion and Cost Recovery

4.15 Project appraisal assumed that land titling would be done withinthree years after planting, but delays have occurred and it is not beingachieved until after maturity. Recent recalculations, taking into accountcurrent price projections, indicate that the smallholders with new plantingsof a fully satisfactory standard would need to deliver about 30 percent oftheir production to achieve repayment over 19 years -- those with Class B

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holdings would achieve repayment over 22 years. If lower quality holdingswere to be converted, an appropriate adjustment to the credit recoveryrequirement would be needed, reflecting the reduced productive value of theholdings. Appraisal did not anticipate the possibility that some smallholderplantings might not achieve the acceptable yield standard; nor were theinstitutional complexities of the cost recovery mechanism fully. appreciated.All aspects of the credit recovery system, particularly the establishment ofsmallholder loan accounts and the creation of the infrastructure needed by BRIto administer these accounts, are currently under intensive review byGovernment, in an effort to accelerate the conversion process.

4.16 Smallholder gross revenues are also dependent on the rubber priceoffered by the PTP processing facilities. Under both projects. the nucleusestates were required to offer prices equal to about 70 percent of the FOBprice; under NES II. it was further envisaged that PTP IV, the ProvincialCoordinating Committee, and DGE would, in consultation with the Bank, agrneupon a pricing formula. A Ministerial decree establishing such a formula wasissued in January 1988. The detailed DGE regulations to give full effect tothe Ministerial decree are at an advanced stage of drafting.

MonitorinR and Analysis

4.17 While the Monitoring and Analysis Unit within Tim Khusus performedwell and greatly facilitated the supervision process of both DGE and the Bank,

the st4ffing of the unit has become increasingly inadequate for the expandingportfolio of tree crop projects and for the range of responsibilities assignedto it outside its main supervision function. Apart from coordinating thereporting for foreign-assisted tree crop projects. the Monitoring and AnalysisUnit has responsibility for monitoring progress under all Government-fundedNES/PIR projects. Its manpower resources are already overstretched. Ifadditional strengthening is not provided, the quality of its services willfurther decline. As the Unit is also expected to expand its functions toundertake impact evaluation and project related studies, additionalappointments and accelerated training for its key staff members are urgentlyneeded.

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Table IPage I of 2

STATISTICAL ANNEX

PHYSICAL INDICATORS OF PROJECT ACCOMPLISHMENT

NES I PROJECT

Unit Appraisal PCR PCR as 2Estimate Actual of SAR

Estates DevelopmentPTP XRubber (New Plantiug) ha 3.300 3,083 93Oil Palm Planting ha 5,600 5,581 96Oil Palm Mills e 2 2 100Rubber Factory t 1 1 100

PTP XIRubber (Replanting) ha 3,700 4,647 126Rubber (Rehabilitation) ha 13,000 16,968 131Coconut Planting ha 4,200 4,583 109Rubber Factories 1 3 3 100

Smallho.lder RubberAlue le Merah (PTP I) ha 7,000 7.000 100Tebenan (PTP X) ha 4,500 4,462 99

Settlement Component

Alue le Merah:Smallhoder Beneficiaries hh 3,500 3,500 100Village Settlements 1 21 13 62Settler Houses t 3,500 3,500 100Food Crop Area ha 9,800 z,365 24All Weather Roads km 44 - 0Village Roads km 84 35 42Primary Rubber Access Rd km 14 12 86Secondary Rubber Acc. Rd km 164 70 43Field Tracks km 105 148 141Shallow Wells 750 750 100

Tebenan:Smallholder Beneficiaries hh 2,250 2,231 99Village Settlements I 14 5 36Settler Houses I 2.250 2,250 100Food Crop Area ha 6,300 - 0All Weather Roads km 24 0 0Village Roads km 46 0 0Primary Rubber Access Rd km 9 9 100Secondary Rubber Acc. Rd km 100 200 200Field Tracks km 70 225 250Small reservoirs f - 104 -Shallow Wells I - 450 -

-20-

Table 1Page 2 of 2

NES 1I PROJECT

Unit Appraisal PCR PCR as ZEstimate Actual of SAR

Estate Development PTP IVAir MolekRubber (New Planting) ha 3,500 3,713 106Staff Houses t 1,518 220 15Project Buildings I 45 65 144Estate Roads km - 75.3 _

Smallholder RubberAir Molek (New Planting) ha 11.400 11.378 100

(Replanting) ha 3.000 2.548 8SBajubang (New Planting) ha 3,800 5,000 132

(Replanting) ha 4,500 172 4

Settlement ComponentAir Molek,RiauSmallholder BenefLciaries hh 7.200 6,963 97Settlement Villages t 29 30 103Settler Houses 5 5,700 5.700 100

Food Crop Area ha 2,280 3,420 150All Weather Roads km 107.5 119.2 111Primary Village Roads km 56.1 43.6 78

Secondary Village Roads km 72.8 66.8 92

Rubber Collection Tracks km 372.5 379.4 102Wells I 1,140 470 41

Bajubang.JambiSmallholder Beneficiaries hh 4,150 2.586 62Settlement villages t 12 15 125Smallholders hh 2,586 1.898 73

Settler Houses I 2,500 2,500 100Food Crop Area ha 760 1,440 189

Main Access Roaas km 33.0 31.9 96Primary Village Roads km 10.3 10.0 97

Secondary Village Roads km 36.0 23.6 66Wells t 124 150 121

Main Access Roads km 33 31.5 95Village Access Roads km 46 41.8 91

Staff/Labor Houses 1 343 58 17

-21-

Table 2

PROJECT COSTSs NES I

Proiect Component SAR Estimate PCR Actual PCRISARNucu E(US$ million) (percentage)

Nucleus EstatesPTP X 30.6 30.2 99PTP XI 24.0 28.7 120Subtotal 54.6 58.9 108

Smallholders4 /Alue Is Merah 15.3 31.6 207Tebenan 10.2 27.2 267Subtoital 25.5 58.8 231

Technical AssistanceDGE 1.9 1.7 89MOA 3.8 3.5 92LPP 2.8 4.8 171Subtotal 8.6 10.0 116

Contingencies 45.3 -

Total Project Cost 134.0 127.7 95

PROJECT COSTSs NES 1I

SAR PCR PCR as ZProiect Component Estimate Actual of SAR

CUSS million) (percentage)

Nucleus Estate 8.1 19.7 232SmallholdersAir Molek,Riau 32.1Bajubang,Jambi 12.0Rubber Replanting,Riau 2.1Rubber Replanting,Jambi 3.1Subtotal 49.6 65.9 133

Technical AssistanceDGE 2.1Sungai Tiga Center 0.6DGH 0.2Subtotal 2.9 2.0 69

Contingencies 39.9 -

Total Project Cost 100.5 87.6 87

4/ GOI portion of actual costs not yet finalized, pending audit as part ofconversion process.

-22-

Table 3

USE OF LOAN FUNDS: NES I

SAR Estimate PCR Actual PCR/SAR(US$ m) 2 (USS m) 2 Percentage

Category

Civil Works 14.80 23 13.84 21 94Vehicles & Equipment 16.00 25 10.74 17 67Agro-chemicals 12.19 19 9.76 15 80Planting Costs 12.52 19 14.17 22 113Consultant Services 8.49 13 8.11 12 96Overseas Training 0.30 - 0.30 100

Base Costs 64.30 99 56.92 88 88

Contingencies 0.70 1 -Cancelled Amount 8.08 12

Total Costs 165.00 100 65.00 100

USE OF LOAN FUNDSt NES II

SAR Estimate PCR Actual PCRISARCateRorY (USS mn) 2 (USS m) 2 Percentage

Civil Works 12.8 20 17.55 27 137Equipment 5.4 8 1.59 2 29Agro-chemicals 4.5 7 1.63 3 36Rubber Development 19.5 30 29.03 45 149Consultant Services 1.8 3 0.70 1 39

Base Costs 44.0 68 50.50 78 115

Contingencies 21.0 32 -Cancelled Amount - 14.50 22

Total Cost 65.0 100 65.00 100

-23-

Table 4

DISBURSEMENT SCHEDULE

NES I PROJECT

SAR Estimate PCR ActualCumulative Cumulative

USS m Percentage USS m PercentageGOI FY1977/78 6.5 10 1.2 21978/79 26.5 41 4.6 71979/80 45.5 70 10.1 161980/81 56.5 87 21.8 341981/82 62.5 96 34.8 541982183 65.0 100 41.2 631983/84 46.8 721984/85 56.9 88*

' The remaining US$8.08 million, or 12 2 was cancelled in June. 1985.

NES II PROJECT

SAR Estimate PCR ActualCumulative Cumulative

USS m Percentage USS m PercentageGOI FY1978/79 2.0 3 - -1979/80 12.0 18 0.52 11980/81 21.0 32 2.43 41981/82 34.0 52 5.25 81982183 51.5 79 16.41 251983/84 65.0 100 24.69 381984/85 35.24 541985/86 40.08 621986/87 50.50 78*

* The remaining US$14.5 million, or 222 was cancelled in March 1983.

Table S

Pag* 1 of 3-24-

ANW4AL PLUNTING PROGRESS

NES I

1977/78 1978/79 1979/80 1960/S1 1961/02 1982/83 1983/84 1984/86 TOTAL

ESTATES DEVELOPMENT:

RUBBER PLANTING (he)(PTP X. Lampung & S.Sumetre)

SAR Estimate 695 1869 1150 17 137 !6 4100PCR Actual 1670 1153 330 3063

SAR Cumulative S95 2434 3034 3301 3930 4100 4100PCR Cumulative 1670 2763 30t3 3083 3083 3083 30S3

PCR as X SAR Cumulative 284 111 eS 81 73 7t 75

RUBBER PLANTING (he)(PTP XI, West Java)

SAR Estimate 702 760 839 563 829 3713PCR Actual t16 1313 1694 418 So7 4647

SAR Cumulative 702 1482 2301 2864 3713 3500PCR Cumulative 715 2026 3722 4140 4140 4647 3713

PCR as X SAR Cumulative 102 139 162 144 112 106 106

OIL PALM PLANTING(he)(PTP X, Lampung A S.Suuetra)SAR Estimate 1000 2000 2000 6000PCR Actual 1707 1986 19J6 6630

SAR Cumulative 1000 3000 5000 6000PCR Cumulative 1707 3896 5630 6830

PCR as X SAR Cumulative 370 168 113

COCONUT PUANTING(ho)(PTP XI. West Java)SAR Estimate 80 1006 1064 1070 1072 4232PCR Actual 44 0 1682 1487 1070 300 S6e

SAR Cumulative 30 1036 2090 316O 4232 4232PCR Cumulative 44 44 1726 3213 4263 4563 4683

PCR as t SAR Cumulative 147 4 63 102 101 108

SMALLHOLDER DEVELOPMENT:

RUBBER PLANTING (ha)(Alue I- Mersh Settlement)

SAR Estimate 500 1250 1500 1675 1876 7000PCR Actual 382 273 194 1687 1764 56e 1366 636 7000

SAR Cumulative 500 1750 3250 5126 7000 7000PCR Cumulative 382 a6S 849 2436 4190 4768 8112 7000 7000

PCR as X SAR Cumulative 76 37 26 46 6o 68 87 100 100

Table 5Peg. 2 of 3

-26-

(NES LIMPLEVENTATION DETAILS-.CONTD)

1977/73 1970/79 1979/80 1900/61 1981/82 1962/83 1983/84 1994/65 TOTAL

SIALLJOLDER OEVELOPENT:

RUBBER PLANTING (he)(T-benen Settlement)SAR Estimate 600 1000 iS60 1500 4*00PCR Actual 472 1000 150 1361 is7 450

SAP Cumultiv* 500 1500 3000 4600 4500PCR Cuulative 472 1472 2972 4333 4500 4600

PCR *as SAR Cumulative 94 9 99 go 100

SVALLHOLDER HGUSE CONST.(Alu- Ie Merih Settlement)SAR Estimte 250 625 750 937 938 3500PCR Actue 0 0 750 1250 1500 3500REQT per Planting Schd 191 136 97 794 877 283 67J 444 3S50

RE4T Cumulative 260 386 468 1277 2154 2437 3115 3659 3569PCR Cumulative 760 2000 2000 2000 3600 3600

PCR aS RF0t O 0 15 157 93 82 112 98

SMALLH0LDER HOUSE CONST.(Tebenan Settlement)SAR Estimate 260 500 750 750 2250PCR Actual 0 0 0 750 1500 2250REQT per Planting Schd 236 500 760 660 84 2260

REQT Cumulative 236 736 1466 2100 2260 2250PCR Cumulative 0 0 0 760 2250 2250

PCR Ua REQt 0 0 0 35 1t0 100

Tablo 5

Page* 3Of 3

-26-

ANNUAL PLANTING PROGRESS

NES II

1979/80 1980/81 19S1/82 1982/83 1983/84 1964/65 1985/86 1986/37 TOTAL

NUCLEUS ESTATE RUSBER(ha)

SAR Estimate 250 600 760 1000 1000 3500PCR Actual 17 179 1297 334 1643 186 3713

SAR Cumulative 260 750 15m0 2600 3600 3500PCR Cumultive 167 346 1643 1977 3625 3714 3713

PCR as SAR ST 46 110 79 101 106 tO0

SMALLUJOLDER NEW PLANTING

SAR Estimate 1460 2200 3050 3800 4700 15200PCR Actual 1163 1806 2400 6493 600 368 149 152 16400

SAR Cumulative 1450 3650 6700 10500 16200 15200PCR Cumultive 1163 2966 5368 11661 12461 16096 162468 1400 16400

PCR as X SAR o0 81 80 113 62 106 107 106 106

REPLANTING (AIR HOLEK)

SAR Estimate - 500 750 1000 1000 3250PCR Actual - 500 510 518 - 1534

SAR Cumulative - 500 1260 2260 3250 3250PCR Cumultive - 500 1016 1534 1534 1634

PCR as A SAR - 100 61 6s 47 47

SMALLHOLDER HOUSE CONST.

SAR Estimate 725 1100 1626 1900 2350 7600PCR Actual 725 1100 1625 - 800 2500 1550 8200REQT per Planting Schd 6o1 903 1200 3246 300 1819 75 76 8200

REQT Cumulative 681 1484 2664 6930 5230 8049 8124 8200 8200PCR Cumulative 726 1826 3350 3360 4160 665O 8200 8200 8200

PCR as % REQT 126 123 127 s5 67 83 101 100 100

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