TAR:INO 29316

ASIAN DEVELOPMENT BANK

TECHNICAL ASSISTANCE

TO THE

REPUBLIC OF INDONESIA

FOR

THE AGRICULTURE SECTOR

STRATEGY REVIEW

October 1996

CURRENCY EQUIVALENTS(as of 15 September 1996)

Currency Unit - Rupiah (Rp)Rp1.00 = $0.00043$1.00 = Rp2,341

(i) The exchange rate of the rupiah is determined by Bank Indonesia under a system ofmanaged float.

(ii) An exchange rate of Rp2,295 to $1.00 has been used in this Report, being the rateprevailing at the time of fact-finding.

ABBREVIATIONS

BAPPENAS - Badan Perencanaan Pembangunan Nasional [National DevelopmentPlanning Agency]

BULOG - Badan Urusan Logistik [Food Logistics Agency]CBS - Central Bureau of StatisticsINPRES - Instruksi Presiden [Presidential Instruction]MOA - Ministry of AgriculturePJPII - Indonesia's Second Long-Term Development ProgramREPELITA VI - Rencana Pembangunan Lima Tahun VI [Sixth Five-Year

Development Plan (1994/95 - 1998/99)]REPELITA VII - Rencana Pembangunan Lima Tahun VII [Seventh Five-Year

Development Plan (1999/2000 - 2003/04)]TA - Technical Assistance

NOTES

(i) The fiscal year (FY) of the Government ends on 31 March.(ii) In this Report, I" refers to US dollars.

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I. INTRODUCTION

1. During the 1995 Country Programming Mission, the Government of Indonesia (theGovernment) requested Bank technical assistance (TA) to finance a review of the agriculturesector. A Bank TA Fact-finding Mission visited Indonesia from 7-16 December 1995. The needfor the TA was established through wide ranging discussions with the Government, and anunderstanding reached on the scope, cost, terms of reference for consulting services andimplementation arrangements.' The TA is a firm Project in the Bank's 1996 Country Programfor Indonesia.

II. BACKGROUND AND RATIONALE

2. Agricultural development in Indonesia has been broad-based and relatively rapid.During the past two decades, average growth rates of 3.8 percent per annum have supporteda tripling of real rural incomes, achievement of near self-sufficiency in rice, and a significantreduction in the incidence of rural poverty. However, during the past five years, agriculturalgrowth has slowed to an average of 2.9 percent per annum, and, during the past two years,output has tended to stagnate. The slowdown in agricultural growth has contributed to anincreasing reliance on imported foodstuffs and a widening gap between agriculture andnonagriculture sector incomes. 2 While agriculture is no longer the leading sector in theIndonesian economy, it still provides about 17 percent of gross domestic product, employs closeto half of the labor force, and generates a quarter of non-oil foreign exchange earnings.

3. The prospects for agriculture in the medium term are mixed. On the positive side,rapid technological changes in food crop production and a changing domestic demand patternin response to rising incomes, as well as changes in global markets, have opened newopportunities for increasing agricultural incomes and reducing rural poverty throughdiversification of output. However, against this positive view, limited scope for increasing riceproductivity, the mounting loss of irrigated land in Java to urbanization and industrialization, andthe technical and social difficulties associated with promoting diversification and agriculturaldevelopment outside Java pose formidable constraints to sustained agricultural growth anddevelopment. On balance, despite the potential difficulties, considerable scope remains toincrease agricultural productivity and to raise farm incomes by diversifying into higher valueproducts and opening up some of the millions of hectares of land that, environmental and socialconsiderations notwithstanding, could be deployed for agricultural production purposes.

4. Indonesia's Second Long-Term Development Program (PJPII) provides a strategicvision of economic and social development over the next 25 years. While PJPII envisions aprocess of rapid industrialization and structural change, agriculture continues to play a centralrole as a source of employment and incomes for many small farmers, a provider of strategicfoodstuffs and raw materials, the main engine of growth in eastern Indonesia, and a guardianof the nation's precious supply of fragile natural resources. In line with the objectives put forthin PJPII, the Sixth Five-Year Development Plan (REPELITA VI), covering 1994 to 1999, placesheavy emphasis on raising farm incomes, increasing productivity, promoting competitiveness andexport orientation, focusing more attention on the agricultural needs of eastern Indonesia,stimulating agribusiness investment, and decentralizing the management of agricultural services.

The TA first appeared in ADB Business Opportunities in September 1995.Per capita gross domestic product in agriculture is one-sixth that in the other sectors.

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5. Meeting this new and challenging set of objectives calls for a major reorientationof public sector support in the agriculture sector. Reorientation of public sector support foragriculture is a difficult and complicated process. Current policies, programs, and institutionswere designed in an era when the overriding concern was with rice production and with theimperative of feeding rapidly growing numbers of low-income, agricultural households. Policiesput into place to achieve those objectives (such as price and trade controls, Governmentmarketing programs, input subsidies, state-owned plantations, commodity production targets,and centrally-managed, commodity-based support services) have become constraints toenhancing agricultural competitiveness. These policies, and in some cases the accompanyinginstitutions, are not well suited to facilitating the development of a market-based, dynamic,agriculture sector capable of holding its own in both domestic and international markets.Although there is a general recognition of the need to operate within a more market-basedframework, it has proven difficult to move away from the system of administrative controls andagricultural market restrictions. At the same time, the changing constellation of agriculture sectorobjectives implies the need to develop new policies, programs, and institutional approaches todifficult challenges such as diversification; regional development (in particular in easternIndonesia); and stimulating agribusiness.

6. The TA is designed to assist the Government to assess its development optionsand plan future sector strategies, policies, and institutional alternatives in the agriculture sector.An issues-oriented assessment is needed because (i) agricultural development objectives arenumerous, making it difficult to set priorities and identify appropriate strategies; (ii) reorientingagriculture development requires a continuous process of monitoring new initiatives and seekingmore appropriate alternatives; (iii) improved cross-sectoral, inter-institutional cooperation andcoordination is required to forge appropriate and effective agricultural support measures; and(iv) fairly major changes are likely to be required in public policy and institutional support.

7. The TA will also make a positive contribution to Indonesia's agricultural planningprocess. This task will be closely coordinated with the preparations for REPELITA VII (SeventhFive Year Plan Period [1999/2000-2003/04]). The national planning process, coordinated byBAPPENAS (the Government's National Development Planning Agency), relies on a mix ofregional plans and ministry-by-ministry planning submissions, the latter generated from the plansput forth by the specialized agencies and directorate generals of each ministry. Within thisprocess there is a high degree of bureaucratic fragmentation and compartmentalization, makingit difficult to achieve consistency within the sector or across different regions. The traditionalplanning process also tends to accord great emphasis to commodity output targets, and far lessto more aggregate sectoral development objectives, strategies, and public policies. The TA takesa different approach by (i) focusing on thematic sectoral development issues (rather thancommodity matters); (ii) providing a forum to assess a number of key issues where the need forinterinstitutional consultation and cooperation is required; and (iii) contributing to a process ofhigh level interministerial reflection and review of policy and institutional alternatives foragriculture development. Through these mechanisms and associated documentation, the Projectis expected to provide an input into the ongoing process of agricultural policy formulation. Keyissues of concern to senior policymakers will be reviewed and reported. Appendix 1 shows theframework for the TA.

B. One Project outcome will be to improve the effectiveness of external assistanceto agriculture. The more clearly articulated the agriculture strategy and policy framework, the

3

easier it will be to design investment measures in support of agricultural development. Specialattention will be provided to the changing requirements for external assistance in the agriculturesector. In this regard, the TA should help guide future public investment undertakings and assistthe donor community, and in particular the Bank, to identify priority areas for future assistance.

III. THE TECHNICAL ASSISTANCE

A. Objective

9. The TA will assist the Government to assess its development options and planfuture strategies, policies, and institutional alternatives in the agriculture sector. The assessmentwill be made as the outcome of a consultation process between stakeholders in the agriculturesector in order to shape a shared vision of the challenges and options for reorienting theGovernment's support for agriculture, rural economic reconstruction, and agribusinessdevelopment.

B. Scope

10. Working in close cooperation with the Secretary General and the staff of theBureau of Planning of the Ministry of Agriculture (MOA), the TA will support REPELITA VIIpreparations by assessing changes in the environment for Indonesian agriculture, the policy andinstitutional constraints to enhancing competitiveness, agriculture's current and potentialcontribution to regional balance, poverty reduction and environmental sustainability, andemerging institutional requirements. Background papers on the important issues facingagriculture will be prepared as inputs to a roundtable of senior decision makers in the public andprivate sectors at which the future direction of the Indonesian agriculture sector can bediscussed. The TA will stimulate different sector stakeholders, such as BAPPENAS, MOA,Ministry of Food, Ministry of Forestry, Ministry of Industry and Trade, Ministry of Home Affairs,Ministry of Public Works, the Food Logistics Agency (BULOG), Ministry of Cooperatives andSmall Enterprise Development, Local Government, and the private sector (including farmers), tojointly review and discuss policy issues during preparation of the issues papers and at theroundtable itself. Each paper, while based on a review of existing materials and consultationswith stakeholders, will focus on the issues involved; the available policy options; and theireconomic, social, budgetary and (where appropriate) environmental implications. The issuespaper will cover the following topics:

(i) implications of the changing global trading environment and the need fordomestic market reform;

(ii) constraints on, and opportunities for, further growth in agriculture;(iii) the role of the Government and the private sector in facilitating small-scale farmers

and agribusiness development;(iv) the implications of technological change;(v) agriculture and development in eastern Indonesia;(vi) ways in which small-scale farmers and other rural dwellers can be brought into

the process of policy formulation and the role agriculture might play in povertyreduction;

(vii) agriculture and environmental sustainability;

4

(viii) decentralization of agricultural support services; and(ix) changing requirements for external assistance in Indonesia and the role of the

Bank.

C. Cost Estimate

11. The total cost of the TA is estimated at $688,000 equivalent of which the foreignexchange component is estimated at $316,000 and the local currency component at $372,000equivalent. It is proposed that the Bank finance, on a grant basis, the entire foreign exchangecost and a portion of the local currency cost amounting to $284,000 equivalent, for a total of$600,000 equivalent. The Government will contribute the remaining local currency cost of$88,000 equivalent. The cost estimates and financing plan are given in Appendix 2.

D. Implementation Arrangements

12. BAPPENAS will be the Executing Agency but there will be active involvement byother line agencies, in particular, MOA. A TA Steering Committee will be chaired by BAPPENASand will include senior personnel from MOA and other relevant agencies. BAPPENAS and MOAwill assign suitable counterpart staff to participate actively in the work conducted under the TAand provide support facilities including office accommodation.

13. It is envisaged that a total of 46 person-months of consulting services will berequired, 9 person-months for international consultants and 37 person-months for domesticconsultants, spread over a period of ten months. Consultants will be engaged by the Bank inaccordance with the Bank's Guidelines on the Use of Consultants and other arrangementssatisfactory to the Bank. Because the technical requirements of the Project are not consideredto be complex in nature, the Simplified Technical Procedure will be used for the submission oftechnical proposals.

14. Through an international consulting firm, a core team of one international and twodomestic consultants will be recruited for the duration of the TA. The international consultant willbe the team leader and will work full time in Indonesia for approximately 7.5 months with anintervening period of about two months of half-time work at his or her home office. A secondinternational consultant with considerable stature in Indonesia agriculture policy, to be recruitedby the international consulting firm during implementation, will work for one-half month, servingas a resource person for the proposed roundtable. The two core domestic consultants will workfor the full ten months of the Project. The core team will be responsible for managing andcoordinating Project activities, drafting five of the nine issues papers, organizing the roundtablediscussions, and organizing and supervising the provision of the other four issues papers bydomestic consultants. A total of 17 person-months of domestic consultancy services will berequired to support the preparation of the issues papers not prepared by the core team. Inaddition, the core team will produce a summary of the roundtable discussions and beresponsible for finalized versions of the issues papers for inclusion in the final report.

15. The Project will be carried out in two phases. During the first phase, the core teamwill review the changing economic environment for the agriculture sector, prepare detailedguidelines for the issues papers, recruit and engage other domestic consultants, commence

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preparation of the issues papers, and identify participants in the roundtable. During the secondphase, the draft issues papers will be completed, roundtable consultations held, and the draftand final reports completed. Draft terms of reference and reporting requirements for theconsultants are set out in Appendix 3. A range of expertise will be required in agricultural policy;international trade; the Indonesian agriculture sector and its institutions; Indonesian regionaldevelopment, agribusiness development, agricultural production, and farming systems; andsocioeconomics. The international expert (the team leader) will be an economist with expertisein agricultural policy in Indonesia. The other international expert (a resource person for theroundtable) will be a policy analyst with experience in Asian food policy matters. The two locallyrecruited full-time core team members will have expertise and experience in agricultural policyand institutional development. Local experts with relevant expertise will be engaged by theconsulting firm as domestic consultants to draft the issues papers not covered by the core team.The Project is expected to be completed by September 1997.

IV. THE PRESIDENT'S DECISION

16. The President, acting under the authority delegated by the Board, has approvedthe provision of technical assistance, on a grant basis, to the Government of the Republic ofIndonesia in an amount not exceeding the equivalent of $600,000 for the Agriculture SectorStrategy Review, and hereby reports such action to the Board.

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Appendix 1, page 1

PROJECT FRAMEWORK

Design Summary Targets Monitoring Mechanisms Assumptions

1. Sector Goals

To assist Indonesia to assess A policy framework and set of The Policy Framework for Continued political commitment todevelopment options and plan future supporting institutions, from the agriculture. broad-based development instrategies, policies, and institutional public and private sectors, that agriculture.alternatives in the agriculture sector. respond to incentives in a way

that allows these objectives to be Strategies promulgated by the Interministerial willingness tomet. Government in the agriculture define and support policy,

sector. program, and institutional reform inagriculture.

2. Objective/Purpose

To review agricultural policies and to Assess the need for a strategic Technical Assistance (TA) Government commitment toformulate strategies for improved reorientation of agriculture sector reports, reviews, and tripartite interministerial consultations onperformance in the agriculture sector. development efforts in light of meetings. agriculture strategy and policy.

past performance and changingsectoral constraints. Active leadership of the

interministry dialogue process byEstablish a process of National Development Planninginterministeriai assessment and Board (BAPPENAS) and Ministry ofreview to identify policy options Agriculture (MOA).for a strategic reorientation ofpublic sector support toagriculture.

Establishment of aninterministerial steering committeeto assess sector strategy andpolicy.

(Reference in text: page 2, para. 7)

Appendix 1, page 2

Design Summary Targets Monitoring Mechanisms Assumptions

3. Outputs

Key stakeholders review and discuss Options for improving sector TA reports, reviews, and tripartite Active involvement of Governmentissues papers on: strategies, policies, and programs meetings, long-run monitoring of counterparts and a well functioning

that can be incorporated into agricultural plans and policies. interministry steering committee.(i) implications of the changing national plans or can beglobal trading environment and the implemented by participatingneed for domestic market reform; agencies.

(ii) constraints on, and opportunities Establishment of a multiministry,for, further growth in agriculture; consultative planning process to

assess sectoral needs and(iii) the Government's role in small- opportunities, formulate strategies,scale farmer and agribusiness suggest changes in policy anddevelopment; programs, and build consensus

within the Government over new(iv) the implications of technological modes of providing public supportchange; for agricultural development.

(v) agriculture and development in

eastern Indonesia;

(vi) agriculture's role in povertyreduction;

(vii) agriculture and environmentalsustainability;

(viii) decentralization of agriculturalsupport services; and

(ix) changing requirements for

external assistance in Indonesia andthe role of the Bank.

Consultative roundtable discussion of

senior decision makers on agriculture

sector strategy and policy.

4. Activities

Analysis of secondary data and Well-researched reviews that TA reports, reviews, and tripartite Access to necessary data, reports,existing studies in each of the 9 confront the lessons of past meetings. officials, and other stakeholders.output areas. experience with the changing

challenges facing the sector A high level of cooperation byConsultation with representatives of today. Project counterpart staff inthe different agriculture agencies and development of the issue papers,stakeholders groups, including Clear and articulate assessment ofespecially the private sector and the the options for reorienting the Willingness of concerned officialsfarm community in Eastern Indonesia, Government's efforts, with to discuss possible options forto identify future strategy, policy, and considerable attention devoted to strategic change in multiministryinstitutional options. the timing and sequencing of committees and meetings.

practical, implementablePreparation of draft issues papers. initiatives.

Guidance and review of each of the Interministerial discussion andissues papers by the Project Steering review of these initiatives.Committee.

Incorporation of the findings intoInterministerial discussion and review Seventh Five-Year Developmentof the issues in an agriculture sector Plan (REPELITA VII) and, moreroundtable. broadly, into changes made in

agriculture strategy and policy.Preparation of final versions of issuespapers and the final report.

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Appendix 2

COST ESTIMATES AND FINANCING PLANM

I t e mForeign

ExchangeCost

LocalCurrency

CostTotalCost

A. Financed by the Bank

1. Consultants (remuneration and out-of-pocket expenses)

International 232,000 - 232,000Domestic - 197,000 197,000

2. Equipment 21,000 - 21,000

3. Seminars, Workshops, and Training - 23,000 23,000

4. Studies, Surveys, and Documents 1,000 - 1,000

5. Contract Negotiations 5,000 - 5,000

6. Miscellaneous Administration and Support Costs 15,000 27,000 42,000

7. Contingencies 42,000 37,000 79,000

Subtotal 316,000 284,000 600,000

B. Financed by the Government

1. Counterpart Staff - 36,000 36,000

2. Office Accommodation - 18,000 18,000

3. Support Services - 34,000 34,000

Subtotal - 88,000 88,000

Total 316,000 372,000 688,000

(Reference in text: page 4, para. 11)

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Appendix 3, page 1

CONSULTANT'S TERMS OF REFERENCE

1. The core team, consisting of one international and two domestic consultants, willbe responsible for producing the issues papers on agriculture sector policy and institutionalreform. The long-term international consultant, as team leader, will be responsible for producingthe final report, including the integration of the findings of the other core team members, otherdomestic consultants, and the results of the roundtable. Working in close cooperation withrepresentatives of the Executing Agency and the Project Steering Committee, the core team willprepare detailed guidelines for each of the issues papers that will be prepared, and will carefullysupervise the work of other domestic consultants to be engaged during implementation.

2. The consultant will also coordinate closely with related projects.

A. Phase I

1. Assessment of the Changing Agricultural Environment

3. Through consultation with representatives of key agricultural agencies,cooperatives, the private sector, and nongovernment organizations, the core team will preparethe first two issues papers as follows:

(i) Implications of the Changing Global Trading Environment and the Need forDomestic Market Reform

(a) Examine issues related to changes in major global markets and the mainimplications of changing trade arrangements on the opportunities andchallenges for agriculture. Suggest ways in which Indonesia can takeadvantage of changes in global market conditions. More specifically,review short-and medium-term market prospects for Indonesia's mainagricultural commodities (rice, corn, wheat, soybean, poultry, rubber, oilpalm, and coconut), with particular emphasis on changing global demandand supply conditions. Review findings of international assessments of themedium-term global supply and demand situation and agricultural priceprospects. Discuss the implications of changing market conditions forIndonesia. Review the agricultural market reform commitments thatIndonesia has made under international trade agreements. Discuss theimplications that trade reform, globally and in terms of Indonesia's specificreform commitments, will have on agriculture. Assess options for futureagricultural trade reform and the implications of possible changes to thetrade regime for the agriculture sector.

(b) Assess the comparative advantage of irrigated rice, oil palm, and othermajor agricultural products in Indonesia. As far as possible, quantify thecomparative advantage using one of the standard methodologies butmake maximum use of existing analyses and other secondary sources.

(Reference in text: page 5, para. 15)

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Appendix 3, page 2

(c) Briefly review major trade, subsidy, and marketing policies in agricultureand propose a graduated agenda for enhancing competition and reducingpolicy or institutional distortions to efficient operation of agriculturalmarkets. Assess the implications of restrictions on food commodityimports and industrial crop exports, and provincial or other localrestrictions on the internal marketing of agricultural commodities. Reviewalso restrictions on trade in agro-inputs and subsidies provided onfertilizer, rural credit, and other agro-inputs. Building on the findings ofresearch conducted by the Directorate General of Agro-Industry (Ministryof Industry and Trade) and the Agribusiness Board of the Ministry ofAgriculture (MOA), review other regulatory restrictions to the licensing andoperation of agribusiness enterprises. Classify the restrictions in terms oftheir relative importance to impeding different categories of agro-enterprise. Propose alternative agendas for agricultural deregulation andassess the likely impacts of such change on agricultural performance,trade, and the Government budget.

Constraints on, and Opportunities for, Further Growth in Agriculture

(a) Synthesize and summarize existing knowledge and understanding of themain economic, institutional, social, and technical barriers to increasinggrowth and development in agriculture. More specifically, review the maintechnical, social, and economic barriers to agricultural growth anddevelopment, especially those associated with the agricultural credit andmarketing systems. Such constraints should be identified for keycommodities and for major regions of the country. Prioritize theconstraints, in order to identify those that are most immediately binding inthe different regions. Discuss the implications of key constraints forframing agriculture sector strategies and policies. Review ways in whicha continuous monitoring and assessment of development constraints canbe used to improve agricultural planning and programming.

(b) Summarize the domestic agricultural demand outlook and review optionsfor enhancing the responsiveness of agriculture to changing patterns ofdemand. Provide special attention to areas likely to experience rapiddemand growth (e.g. horticulture, livestock, fisheries, and industrial crops).As far as possible, disaggregate the demand assessment by urban andrural areas and by income groups. For commodity groups likely toexperience rapid demand growth, suggest sources of growth that couldbe employed to meet demand. Particular attention should be given toexpansion of the agricultural land frontier, labor absorption, mechanization,resource management improvements, agricultural intensification and othernew technologies, introduction of new "high-value" commodities, reductionin waste and other marketing costs, and investment in value-addedprocessing as potential new sources of growth. Identify ways in which theGovernment can provide an enabling environment conducive to tappingthese new sources of agricultural growth.

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Appendix 3, page 3

4. Each issues paper will focus on the policy and institutional issues and will be ofa length and format suitable for use by senior policymakers. Where necessary, conclusionsreached in the issue papers will be supported by appropriate appendixes. In addition to beingan important input into the REPELITA planning process, the review of the changing operatingenvironment for agriculture should help set the context for the preparation of issues papers inPhase II.

2. Plan and Initiate Implementation of Phase II Issues Papers and the Roundtable

5. Develop an implementation plan for assessing issues affecting the formulation ofpolicy and institutional measures to support agriculture during REPELITA VII. For each of theremaining issues papers, prepare detailed terms of reference. Identify issues papers that will beprepared by the core team, and for the other issues papers, identify and engage a team ofdomestic consultants.

6. Develop a plan for an intersectoral roundtable to review the findings of the issuespapers. The plan should include the proposed dates, participating institutions, and the venue forthe roundtable. Efforts should be made to ensure active consultation with the different agenciesthat are expected to participate.

B. Phase II: Assessment of Sector Issues and Reform Options

7. Following the issues papers drafted under Phase I, an additional seven issuespapers will be drafted. The papers will focus on the policy and institutional issues and again willbe of a length and format suitable for use by senior policymakers. Where necessary, conclusionsreached in the issues papers will be supported by appropriate appendixes.

0) Government and Private Sector Role in Facilitating Small-scale Farmerand Agribusiness Development: Assess strategies undertaken topromote investment in commercial agriculture and agro-industrialdevelopment. Examine the process by which property rights in rural landare provided, and suggest mechanisms that can be used to improve land-use management. Draw on cases conducted in different parts of theregion to suggest ways in which secure property rights can be promoted.Where titling and land registration are deficient, suggest mechanisms foraccelerating this process. In addition, suggest an appropriate role and setof measures that Government may pursue to spur agribusinessdevelopment. Examine the measures now being pursued by theGovernment, and assess the degree to which these are appropriate for thepublic sector, whether they fill a real perceived need in the private sector,and whether they are likely to be effective. Devote special attention toapproaches related to improving the role and effectiveness of farmers'groups, cooperatives, and small-scale agro-industry. Develop a strategyfor coordinated and coherent assistance to the development of the agro-industry sector. Such a strategy should be clearly prioritized and includepractical, operational recommendations suited to the prevailing institutionalfabric of the public and private sectors.

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Appendix 3, page 4

The Implications of Technological Change: Discuss the proposedstrategy for remolding the agricultural information system, includingresearch, training, and extension. Review the proposed establishment ofa network of technology assessment institutes. Identify ways in whichthese new institutes can coordinate their activities with those of the otherresearch centers, local universities, and other centers of agriculturalresearch. Examine the governance of the research system and suggestways in which user input can be reflected more directly in the governanceand financing of the research system. Assess the implications of theassumption of high-level extension efforts by MOA within the TechnologyAssessment Institutes, and discuss measures to improve the quality andaccountability of the extension service. Review the recent decentralizationof the extension service, and identify key lessons from that process.Building on a recent review of the extension service, assess ways in whichthe extension service can be revitalized. Identify options for coordinatingnational and local efforts at technology generation and diffusion. Moregenerally, identify initiatives that could be taken during the next five yearsto accelerate the generation and diffusion of suitable agriculturaltechnology in Indonesia.

Agriculture and Development in Eastern Indonesia: Assess the degreeto which agriculture contributes to development in Eastern Indonesia andto the ways in which agriculture's contribution to regional developmentefforts can be improved. Examine progress made in incorporating locally-specific agriculture efforts in area-based regional development programs.Examine also the progress made in targeting grants for agriculturaldevelopment purposes to less well-endowed areas of Eastern Indonesiathrough the Presidential Instruction (INPRES) program and other transferschemes. Assess ways in which voluntary groups and local universitiescan improve their contribution to agricultural development in EasternIndonesia, and the ways in which the Government can best forgeconstructive partnerships with these groups. Examine the scope for spatialand land-use planning to contribute to regional development aims andobjectives. In this context, review the progress made in developing agro-ecological zoning and discuss ways in which socioeconomic informationcould be better linked to this material. Discuss ways in which land-useplanning can be used to guide development, particularly in the morefragile areas of Eastern Indonesia. Assess the causes for marketingbottlenecks and market failures in Eastern Indonesia. Examine the differentmechanisms and degree to which Government can play a role in helpingto overcome these agricultural marketing problems. Devote particularattention to priorities for market infrastructure in areas slated for priorityattention to agricultural development. Drawing on recent experience withprivate-sector supported nucleus estate projects, discuss ways in whichprivate-public partnerships can be utilized to stimulate agricultural growthand employment generation in Eastern Indonesia.

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Appendix 3, page 5

(iv) Ways in Which Small-scale Farmers and Other Rural Dwellers Can BeBrought Into the Process of Policy Formulation and the RoleAgriculture Might Play in Poverty Reduction: Examine the distributionand status of people engaged in agriculture who are classified as poorand, more specifically, draw on the Central Bureau of Statistics' povertyprofile to identify villages where poverty is most acute. Again draw onCentral Bureau of Statistics surveys to develop profiles of poor ruralhouseholds and review the programs aimed at addressing rural poverty.Examine the main programs targeting support to poor villages andparticularly the degree of participation by beneficiaries. Review the knownapproaches for involving farmers and other rural dwellers in agriculturaland rural policy formulation (including land-use planning) and suggest arange of options that could be implemented in the Indonesian contexttogether with the resources that would be required for theirimplementation.

(v) Agriculture and Environmental Sustainability: In the context ofagricultural expansion into potentially fragile areas, assess existing andpotential mechanisms to ensure that environmentally sustainableapproaches to agricultural development are encouraged. Examine theissue of agricultural extensification (i) generally, and (ii) in the context ofthe proposed large-scale clearing of lands to establish rice and oil palmestates in Kalimantan and Sulawesi. Discuss measures that could be takento offset adverse environmental effects of agricultural extensification. In thiscontext, review the possible modes for introducing improved technologypackages where slash and burn cultivation continues. Provide specificrecommendations for investments aimed at improving the environmentalsustainability of agriculture, for strengthening institutions charged withprotecting the rural environment and with improving knowledge andawareness in the area of agriculture and environmental sustainability.

(vi) Decentralization of Agricultural Support Services: Review and assessthe rationale for assignment of different agricultural support servicefunctions to different levels of Government. Analyze the experiencesassociated with the decentralization of agricultural extension and the pilot-efforts aimed at decentralizing administration to selected regencies.Review the decentralization experience in other parts of the Government,most notably health and education, to identify the best practices anddrawbacks to further decentralization and regionalization efforts. Assessthe implications of decentralization and regionalization in terms of thechanges implied in the role, mandate, size, and operating procedures forCentral Government agencies. Draw on the lessons of decentralizationexperience in agriculture and in other parts of the Government, to developa set of recommendations for facilitating an orderly and effectivedecentralization of agricultural services.

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Appendix 3, page 6

(vii) Changing Requirements for External Assistance to Agriculture and theRole of the Bank: For the major external funding agencies, and withparticular attention to the Bank, review the assistance programs inagriculture and identify needs for possible modification of the level,composition, or delivery mode of external assistance, in light of anticipatedchanges in the agricultural development strategy. The views of each ofthe major agencies should be solicited in preparing this issues paper. Theconclusions of this assessment should be used to make recommendationsto the Government and the Bank for future agriculture sector programsand project formulation during the next planning period.

8. The aforementioned assessments should be based on available data, information,and secondary studies. An action-oriented, consultative process should be used to elicit theviews and suggestions of the agriculture sector stakeholders in preparing the roundtable issuepapers. Consultations should not be limited to Central Government agencies, but should alsobe held in different parts of Indonesia, particularly within different regions of Eastern Indonesiaand with other potential stakeholders, including the private sector and the farmers whereappropriate.'

1. Roundtable Consultations

9. Organize a roundtable on Agricultural Policy and Institutional Development forREPELITA VII under the guidance of the Executing Agency. Make arrangements for participationby leading policymakers in the key agricultural institutions. Utilize the findings of the issuespapers and the interventions of the international resource person to stimulate communicationand catalyze interministerial consideration of policy and institutional reform options. Fullparticipation in the roundtable by representatives of the private sector and by those in localgovernment should be encouraged. In conjunction with the Executing Agency, MOA and otheragencies, identify mechanisms for ongoing interagency, interstakeholder review and assessmentof alternative policy and institutional options for sustainable development of agriculture inIndonesia.

10. The international resource person, a policy analyst with wide experience in theregion, will help to facilitate interministerial discussions during the roundtable by bringing to bearlessons from agriculture sector policy and institutional reforms in other nations. The internationalresource person should also assist in reporting on the findings from the roundtableconsultations.

2. Reports

11. The following reports will be prepared and submitted to the Government and theBank under the TA:

The degree of consultation with farmers will of necessity be very limited because of time and resourceconstraints; however, such consultation should be attempted where possible on issues directly impactingat the farm level.

I,CVICW 1110 UCGCIMCUILCMUII experience In Uuier parts Ur the uovernmem,

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Appendix 3, page 7

(i) Inception Report: This report will be submitted to the Bank anddiscussed by the Steering Committee within two months of thecommencement of the TA. It should summarize the findings of the reviewof the changing environment for Indonesia's agriculture sector, presentdetailed outlines for each of the issues papers, provide a detailedprogram for addressing the issues, and identify the key institutions to beinvolved in the roundtable.

(ii) Draft Final Report: The report will be submitted to the Bank and theSteering Committee within nine months of the commencement of the TA.The main findings of the issues papers should be summarized briefly inthe report, and supported by detailed appendixes that review each of theagricultural policy and institutional areas investigated under the Project.

Final Report: This report will be submitted ten months after the start ofthe TA or one month after receipt of comments from the Government andthe Bank on the draft final report, whichever is later. It should summarizethe discussion of key policy and institutional reform issues addressed atthe roundtable on agricultural policy, provide a detailed discussion of theresults of the policy analysis, and summarize the TA activities andachievements. The final report should include recommendations forfacilitating continued cross-agency communication to support the ongoingreorientation of Government support for agriculture.