A'/2 7TJC INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE ON A PROPOSED DEVELOPMENT CREDIT FOR AN IRRIGATION REHABILITATION PROJECT

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized -7v 2_. RESTRICTED Report No. p-629 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 The report may not be published nor may it be quoted as representing their views.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 DEVELOPMENT CREDIT TO THE REPUBLIC OF INDONESIA FOR AN IRRIGATION REHABILITATION PROJECT August 21, 1968 A'/2 7TJC

INTERNATIONAL DEVTELOPIM'NT ASSOCIATION REPORT AND RECOMIENDATION OF TIE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPIaNT CREDIT TO THE REPUBLIC OF INDONESIA FOR AM IRRIGATION

2 INTERNATIONAL DEVTELOPIM'NT ASSOCIATION REPORT AND RECOMIENDATION OF TIE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPIaNT CREDIT TO THE REPUBLIC OF INDONESIA FOR AM 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 Us$5.o million for an irrigation rehabilitation project in Indonesia. PART I - HISTORICAL 2. In January 1968 it was agreed with the Indonesian Government to send a mission to Indonesia to help formulate and to appraise a project aimed at increasing Indonesiats rice production, thus helping her to ease the prevailing domestic food shortage. The field work was carried out in March of this year, resulting in the attached appraisal report recommending an IDA Credit of US$5-O million; equivalent. The proposed Credit would be the first lending operation of the Bank Group in Indonesia, which became a member of the Association on August 20, Negotiations for the proposed Credit took place from August 5 to August 9, The Borrower was represented by: Ir. Sujono Sosrodarsono - Director-General of W4ater Resources Development Ministry of Public Works and Power Dr. Saleh Afiff - Chief, Agriculture Division National Economic Development Council (BAPPENAS) Ers. S. Sundaru - Director of International Affairs Ministry of Finance Mr. Rachadi Iskandar - Second Secretary (Economic) Embassy of Indonesia 4. Subject to the availability of IDA funds, I expect to see our lending activities in Indonesia grow rapidly in the years ahead, as rehabilitation and development projects of high priority can be prepared. To assist Indonesia in project preparation work, I intend to bring before the Directors shortly a proposed credit of US$2.0 million for the financing of a program of technical studies to be used under the guidance of the Bank's Resident Staff in Djakarta. Also, the Bank will be executing agency for a major study of Indonesiats road system, financed by UNDP, which it is expected will identify a project or projects for financing by the Association, IFC will be promoting fertilizer plants depending on the outcome of gas exploration work now underway.

3 - 2 - PART II - DESCRIPTION OF THE PROPOSED CREDIT 5. Borrower: Republic of Indonesia Amount: Purpose: Amortization: Service Charge: Various currencies equivalent to us$5.o million The rehabilitation of three irrigation systems in Java and the completion of a new irrigation system in South Sumatra with a total area of about 198,000 hectares, and the preparation of a further project for irrigation rehabilitation in other areas, In 50 years with a 10-year period of grace, through semi-annual installments commencing October 1, 1978 and ending April 1, 2018; each installment up to and including payment due on April 1, 1988 to be 1/2 of 1 per cent of suich principal amount and each installment thereafter to be 1-1/2 percent of such principal amount. 3/4 of 1 percent per annum PART III - THE PROJECT 6. A detailed description of the project is given in the attached appraisal report entitled "Irrigation Rehabilitation Project" (TO-658a) dated August 14, This project would be the first step in the preparation and implementation of a well-planned program for the rehabilitation of Indonesiats badly neglected irrigation systems, and their subsequent operation and maintenance. The total area served by the project would be about 198,000 hectares amounting to about ten percent of the total area needing rehabilitation. 8. I am presenting this Credit to you at this time even though the necessary engineering study and the preparation of a detailed plan for the execution of the project are still to be carried out. The Government has agreed to engage consultants acceptable to the Association for this purpose, and in the meanwhile, the Government can begin ordering

4 some of the needed equipment and machinery on the basis of the estimates made by the appraisal mission, and can put it to work immediately on the most urgent and obvious tasks. 9. The total project cost wiould be US$8.8 million, of which about US$4.0 million is expected to be in foreign exchange. In addition to covering these expenditures, the Association would make a contribution of about US$1.0 million to local currency expenditures, which would be of particular importance to Indonesia because of her very difficult budgetary and foreign exchange situation (see Part V - Economic Situation). 10. The project would be completed within five years. As can be expected of rehabilitation works, it would produce very good returns. The estimated internal rate of return to the economy on the investment cost of the project as a whole would be about 50 percent; the rates of return on individual systems in the project would range from 37 to 71 per cent. Rice production, as a direct result of the execution of the project, is expected to increase by almost 40,000 tons annuanlly or about 15 percent of the present level, reducing the need for rice imports by about USM6.6 million per year or 6 percent of current imports. 11. In addition, once the areas concerned are provided with adequate irrigation and drainage systems, it would become economical to employ modern inputs, such as fertilizers, pesticides, improved seeds, etc., which would increase yields even further. In effect, the Government has undertalcen that these modern agricultural inputs would be made available to users of all rehabilitated or completed irrigation systems included in the project. 12. Assurances have been obtained that the irrigation systems included in the project would be properly operated and maintained in the future, to prevent a recurrence of their present run-down condition. Farmers benefitting from the project would be required to make a substantial contribution toward the cost of operating and maintaining the irrigation systems concerned. For the new irrigation system in Sumatra which would be completed under the project, this contribution would be expected to cover the full cost of operation and maintenance. For the rehabilitated irrigation systems in Java, where lower farm incomes and long-established customs and procedures have to be taken into account, a contribution from the central and regional governments is expected as well. The consultants referred to earlier would help the Government in studying and making recommendations in this field. 13. The consultants would also be required to begin as soon as possible the preparation of a further project for the rehabilitation of other high-priority irrigation areas. The proposed Credit makes special provision for this and thus provides the basis for further investment in this vital area in about two yearst time.

5 - h The project would be carried out by the Directorate General of Wiiater Resources Development of the Ministry of Public Works and Powero All machinery and equipment, materials and supplies would be procured on the basis of international competitive biddinvg. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 15. The draft Development Credit Agreement between the Republic of Indonesia and the Association, and the 1 sccmmendation of the Cormittee, provided for in Article V. Section 1 (d) of the Articles of Agreement of the Association, are being distributed to the Ececutive Directors separately. 16. The draft Development Credit Agreement follows generally the usual pattern for this type of project. PART V - ECONOMIC SITUATION 17. The last report on the economic development of Indonesia (No. AS-132a) was circulated on February 21, That report emphasized the grave shortcomings of Indonesia's past economic performance particularly from 1958 through The misuse of and the failure to develop its relatively rich natural resources together with irresponsible fiscal, monetary and exchange rate policies resulted in economic stagnation, hyperinflation, and an extremely weak balance of payments position throughout most of this period. At the same time, the Government-was borrowing abroad large amounts on unfavorable terms for undertakings, most of which were of very lowj or negative productivity. This resulted in a very heavy accumulation of debt service payments through the 1970's. The payments due after 1970 will be increased further as a result of the rescheduling now agreed or contemplated of the payments on pre-1967 debt originally due during the four years, Thus it appears that from 1971 to 1978 the average payment on present debt will be about $225 milion a year or about 25 percent of Indonesia's likely foreign exchange income. To this will be added service on new debt that must be contracted if Indonesia is to achieve a reasonable rate of economic growth, 18. The Su-harto Administration assumed responsibility for the Government of Indonesia in mid Comprehensive changes in economic policy were announced in July and October of that year, with a view to freeing market forces in the economy and re-establishing its economic links with the non-communist world. lwith the advice and assistance of the IIIF, fiscal and monetary measures were taken to contain the inflation and improve the balance of payments position by more realistic exchange rates. Subsidies were substantially eliminated for the numerous public

6 - 5 - sector enterprises. New foreign and domestic investment laws were adopted to help revive the private sector. These efforts have been accepted by the members of the Inter-Governmental Group under the chairmanship of The Netherlands as the bases both for the debt rescheduling referred to above and for the start of a substantial program of external aid, which may involve commitments of about $350 million in A Bank Economic ftission was in Indonesia during July to review recent developments and to help in the preparation of the 1969 rehabilitation and development program. In respect of general economic developments, the major results in the first half of 1968 have on the whole been more promising than in 1967 when little economic growth occurred, but the task of rehabilitation still to be accomplished remains enormous. The emphasis on economic policies providing greater freedom of market forces has largely been continued. Prices rose sharply in December and January when fear of a food shortage before the new harvest influenced the market. While the cost-of-living index increased in the first half of 1968 by about 60 percent, the rate of increase has slowed down considerably in the last few months. The large inflow of food aid and a successiful program of domestic rice procurement and distribution together with reasonable fiscal balance should prevent rapid price increases for the remainder of Slow commitment of aid in the first half of 1968 and some speculation against the rupiah in the foreign exchange market contributed to a decline of the dollar value of the rupiah by about 50 percent during that period. Subsequent acceleration of aid commitments and disbursements, combined with an estimated 8-10 percent increase of export earnings in 1968 as a whole, indicate the possibility of a marked slow-down in the depreciation of the rupiah in the exchange market. 21. Despite some progress in increasing domestic revenues by administrative measures, a major portion of Indonesials total development expenditures will have to be financed through foreign aid for the immediately foreseeable future. For this reason and also because of the country's very large accumulation of external debt, fresh assistance should be on the softest possible terms. For the time being, Indonesia should therefore be considered exclusively for IDA assistance. PART VI - COlPLIANCE WITH ARTICLES OF AGREF]ENT 22. I am satisfied that the proposed Development Credit would comply with the Articles of Agreement of the Association.

7 - 6 - PART VII - RECOM3DATION 23. I recommend that the Ececutive Directors adopt the following resolution: RESOLUTION NO. IDA Approval of Development Credit to the Republic of Indonesia in an amount equivalent to US$5,OOOJ,O00 RESOLVED: THAT the Association shall grant a development credit to the Republic of Indonesia in an amount in various currencies equivalent to five nmilion United States dollars (us$5,ooo,ooo), to mature on or prior to April 1, 2018, to bear a service charge at the rate of three-fourths of one percent (3/4 of 1%0) per annum, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Development Credit Agreement (Irrigation Rehabilitation Project) between the Republic of Indonesia and the Association, which has been presented to this meeting. Attachment Robert S. McNamara President Washington, DoCe August 21, 1968

INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT

INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized RESTRICTED FILE copy Report No. P-92 This report was prepared for use within the Bank