Public Disclosure Authorized A Review of the Support...

Report No. 2060a-IND

IndonesiaA Review of the Support Services forFood Crop Production FILE COPYDecember 11, 1978

Projects DepartmentEast Asia and Pacific Regional Office

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may nototherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENT /1

US$1.00 = Rupiahs (Rp) 415Rp 100 = US$0.241Rp 1 million = US$2,409.64

CONVERSION FACTORS FOR RICE

1 ton "dry stalk paddy" = 800 kg paddy ("paddy gabah")= 520 kg milled rice

1 ton paddy (gabah) = 630 kg milled rice

INDONESIA FISCAL YEAR

April 1-March 31

/1 The rupiah was devalued on November 15, 1978 from Rp 415 to the equiv-alent of Rp 625 to the US dollar. This report was prepared on the basisof Rp 415 and the analyses in this report are based on this exchangerate.

FOR OFFICIAL USE ONLY

ABBREVIATIONS

AETE - Agency for (Agriculture) Education Training and ExtensionAHT - Agra Und Hydrotechnik

ARD - Agency for (Agriculture) Research and DevelopmentBAPPENAS - Badan Perencanaan Pembangunan Nasional - National Develop-

ment Planning BoardBIMAS - Bimbangan Massal Swa Sembada Bahan Makanan - Mass Guidance

Program for Self-Sufficiency in FoodstuffsBPH - Brown Plant Hopper

BRI - Bank Rakyat Indonesia - People's Bank of Indonesia

BULOG - Badan Usaha Logistik - National Logistics Body (RiceProcurement Agency)

BUUD - Badan Usala Unit Desa - Village Unit Cooperatives

CRIA - Central Research Institute for AgricultureDAP - Diamonium Phosphate

DGE - Directorate General of CooperativesDOLOG - Depot Logistik - Provincial Offices of BULOGGOI - Government of Indonesia

HYV - High Yielding VarietiesKUD - Kooperasi Unit Desa - Village Unit CooperativesINMAS - Intensifikasi Massal - Mass Intensification for Self-

Sufficiency in FoodstuffsLIPI - Lembaga Ilmu Pengetahuan Indonesia - Indonesian Institute

for ScienceLUKK - Lembaga Jaminau Kredit Kooperasi - Cooperative Credit

Guarantee SchemeMC - moisture content

MT - metric tons

NFPDS - National Fertilizer and Pesticides Distribution StudyNSC - National Seeds CorporationPELITA - Pembanguhan Lima Tahun - Five-Year Development PlanPPL - Penuluh Pertanian Lapangan - Field Extension WorkersPPM - Penyuluh Pertanian Madia - Middle Level Extension WorkersPPS - Penyuluh Pertanian Spesialis - Subject Matter SpecialistPUSKUD - Pusat Koperasi Unit Desa - Provincial Level Cooperative

OrganizationPUSRI - Pupuk Sriwidjaja - Fertilizer CompanyTSP - Triple Superphosphate

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 authorization.

INDONESIA

A REVIEW OF THE SUPPORT SERVICES FOR FOOD CROP PRODUCTION

TABLE OF CONTENTSPage No.

SUMMARY ... . . . . . . . . . . . . . . . . . . . . . . . . . i-v

1. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . 1

2. INPUT DELIVERY AND MARKETING ... . . . . . . . . . . . . . . 3

The BIMAS/INMAS Programs . . . . . . . . . . . . . . . . . . 3Incentives to Participate ... . . . . . . . . . . . . . . . 7

Output Prices .... . . . . . . . . . . . . . . . . . . . 7The Production Response ... . . . . . . . . . . . . . . . 8

The Credit Program ... . . . . . . . . . . . . . . . . . . 9Rural Cooperatives . . . . . . . . . . . . . . . . . . . . . 11Fertilizer Distribution ... . . . . . . . . . . . . . . . . 12Pesticides .... . . . . . . . . . . . . . . . . . . . . . 14

3. AGRICULTURAL ASPECTS ... . . . . . . . . . . . . . . . . . . 15

Research . . . . . . . . . . . . . . . . . . . . . . . . . . 15Rice . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Secondary Crops .16

Extension . . . . . . . . . . . . . . . . . . . . . . . . . . 17Seed Production .... . . . . . . . . . . . . . . . . . . . 18

LIST OF TABLES IN MAIN REPORT

1.1 Production, Area and Yield of Major Food Crops, 1968-77 . . . 11.2 Production of Major Food Crops, 1968-77 ... . . . . . . . . 22.1 Estimated Urea Consumption, 1968-77 ... . . . . . . . . . 32.2 Urea Supply-Demand Balance, 1973-77 ... . . . . . . . . . . 42.3 The Scope of the BIMAS Program . . . . . . . . . . . . . . . 62.4 Distribution of Urea under BIMtAS and INMAS Programs, 1970-77. 6

ANNEXES

1. Food Crop Intensification Programs (BIMAS/INMAS) . . . . . . . 192. Costs and Benefits of the BIMAS Package . . . . . . . . . . . . 363. The National Logistics Agency (BULOG) . . . . . . . . . . . . . 504. Rural Cooperatives .575. Fertilizer .696. Pesticides . . . . . . . . . . . . . . . . . . . . . . . . . . 927. Agricultural Aspects . . . . . . . . . . . . . . . . . . . . . 97

This report is based on the findings of a mission which visited Indonesia inJune/July 1977. Mission members were Messrs. A. Storrar, T.J. Goering, J.C.Greenfield and N.D. Owens (Bank), and T. Ward and L.A. Mears (Consultants).Mr. J.C. English assisted in preparing the final report.

INDONESIA


SUMMARY

1. This report is one of a series recently prepared on the ruralsector in Indonesia. It reviews recent conditions in the support servicesfor smallholder agriculture, in particular the supply of improved inputs forfood crop production. Other reports focus on irrigation development and onfood crop production prospects./l

2. During the late 1950s and most of the 1960s, the rate of growthof rice and other food crops was slow. In the five years after 1967, as useof HYVs spread rapidly, accompanied by increased use of fertilizers, riceproduction increased at between 3.5% and 4% p.a. However, this momentum hasnot been maintained, at least in part because of inadequacies in supportservices. The problems involved can, for purposes of review, be divided intothose in the general field of input supply and marketing and those dealingwith support to farmers in agricultural production.

3. In an effort to boost rice production, GOI began experimenting on alimited scale in the mid-1960s with improved packages of inputs - programswith subsidized credit generally known as BIMAS. However, when rapid spreadof the use of fertilizers and other inputs, occurred after 1967, the bulk ofgrowth was outside BIMAS programs, under general extension service guidancewithout subsidized credit and commonly referred to as the INMAS program.Major emphasis was placed on an improved BIMAS package after 1970 and by1974, 90% of urea was supplied to food crop growers under this program.However, after 1972/73, urea use stagnated and inputs purchased under cheapBIMAS credit appear merely to have replaced those previously purchased forcash.

4. The BIMAS program is based on relatively cheap credit for purchaseof packages of "improved" inputs. The repayment record has deterioratedmarkedly in recent years. Interest is charged at 1% per month, due sevenmonths after receipt of credit package. If repayment is not completedinterest is charged for up to two years but with not further charges beyondthat point regardless of repayment performance. Thus the incentive to repayis weak, except that those significantly in arrears cannot receive furthercredit. The latter has undoubtedly been a major cause of the decline in thenumber of participants since 1974.

5. The prices of the elements of the BIMAS package are set to provideat least a minimum ratio of benefits to cost. In principle, floor prices forpaddy purchases by cooperatives are set by GOI and supported by BULOG purchasesfrom the cooperatives. Reports to the mission inclicated that discounting from

/1 See Bank Report No. 2027a-lND, "Indonesia - Irrigation Program Review,"October 16, 1978 and "Supply Prospects for Major Food Crops,"(forthcoming).

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this floor price occurs. In addition, the mission believes that actual incre-mental yields obtained by farmers were below those assumed by the Governmentin computing the cost/benefit ratio.

6. In 1973, in the wake of the oil crisis, the fertilizer supply situa-tion in Indonesia became very tight. GOI imposed controls on marketing offertilizer and required that all fertilizer and pesticides for the BIMASprogram had to be channeled to farmers through local cooperatives. The latterhave expanded rapidly in number, but have remained weak organizations.The ending of this restriction (except in East Java) in late 1976 was fol-lowed by a sharp increase in fertilizer sales, largely on a cash basis, i.e.,under INMAS.

7. Following the 1973 crisis, substantial quantities of fertilizerwere imported, particularly urea. However, use stagnated and urea stocksrose to over 1.5 million MT in 1975. In addition to the difficulties asso-ciated with reliance on cooperatives for final distribution, major problemsappear to have been caused by the overall method of distribution for BIMASsupplies. These are shipped by the producer through intermediate distributorson consignment. In effect, distributors act as commission agents. Sincethey do not have to pay for goods supplied, or finance stocks held, incentivesfor quick sale and, in particular, to reduce losses, are weak. It is believedthat because of poor storage, a large percentage of the 1977 stock of over1 million tons of urea was in an unmarketable condition.

8. Somewhat similar considerations appear to apply to pesticides.In 1976 only 1,100 out of 3,800 cooperatives are believed to have receivedpesticides. Unavailability of one element of a package severely limits theoverall effectiveness of the program.

9. The production of rice and other food crops in Indonesia is almostentirely in the hands of individual small farmers, and output is dependentupon their production choices. The experience of the past decade has demon-strated the willingness and ability of these farmers to respond to incentiveswhen they are able to do so, both in terms of their pattern of production andin use of improved inputs. The central problem is that of ensuring that ade-quate supplies of required inputs are available when needed for purchase byfarmers, within an incentive framework which will support their use.

10. In this context, it is desirable that more effective use be made ofall available channels for input supply and product marketing. While effec-tive, viable cooperatives can play an important role in improving input andmarketing services to farmers, it appears that at present the rural coopera-tives (BUUDs and KUDs) are unable to carry the whole of this burden. Whilethe reasons for the increased fertilizer consumption in 1977 over 1976 are notentirely clear, the reopening of the supply through private retailers inNovember 1976 and the reduction in price of urea from Rp 80/kg to Rp 70/kgmust have been important contributing factors.

11. The number of cooperatives registered has expanded rapidly from 600in 1972 to over 3,800 in 1977. However, it is reported that a sizeable

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number are inactive and, because of shortages of qualified staff, managementis generally weak. Therefore, further rapid expansion in the number ofcooperatives does not appear advisable at present. Rather, developmentemphasis should focus on the consolidation and strengthening of the existingcooperative system so that it can compete more effectively with the privatesector. This requires, in particular, improved supervision of existingcooperatives, greater emphasis on training members in cooperative principlesand practice, and expanded training programs to increase the numbers ofqualified technical and managerial personnel.

12. The present system of fertilizer distribution from the manufacturer/importer to the user under the BIMAS scheme is inefficient and unreliable.The manufacturer appears to receive reimbursement only 9-12 months afterdelivery. Distributors at various points in the chain effectively act ascommission agents and do not have to finance the stocks they hold or bear thecost of any losses incurred in storage. It is, therefore, suggested thatthe consignment system be replaced with a normal cash flow type system inwhich payment is made by those involved at each stage in the distributionsystem. This would help discourage hoarding, provide incentives for reductionof losses, and encourage movement on through to the final user.

13. The BIMAS/INMAS programs, particularly in the major rice producingareas, have clearly been successful in stimulating the use of technologicallyadvanced inputs, albeit mainly for larger farmers. However, the widespreadpurchase of such inputs with cash before 1973, when BIMAS was effectivelymade the exclusive channel, and particularly the rapid increase in 1977 oftenthis restriction was lifted, raises some question as to the need for ablanket production credit package. Considerable uncertainty surrounds manyaspects of the BIMAS program and the problems it was designed to address. Aresearch effort by GOI, aimed at providing a clearer understanding of thesefactors, appears desirable. In particular this research might address thefollowing issues:

(a) The role of BIMAS credit in relation to other financial resources(including private credit) and the reasons for the declining repaymentrate.

(b) The adequacy of the benefit/cost (B/C) ratio actually obtained byusers of the BIMAS package. Government may be assuming for theBIMAS program higher incremental yields and product prices than mayactually be obtained by farmers under field conditions. As aresult, the B/C ratio in practice may be lower than the 2.2:1 whichthe Government has assumed is necessary to induce farmer participation,and which itself may be an inadequate incentive.

(c) Evidence suggests the typical BIMAS participant has a holding ofabove average size. Thus participation by small, subsistenceproducers, with an expected greater need for assistance of the BIMASpackage type, is limited. It is possible that for the very smallfarmer, heavily dependent on nonfarm income, the combination of theactual cost of the BIMAS package and the opportunity cost of measuresneeded to obtain it may outweigh the anticipated, relatively smallincrement to household income.

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14. Greater knowledge in these areas would enable the design of improved"packages" aimed at meeting the needs of specific groups not effectivelyassisted under the present programs. It would also assist in determiningappropriate price incentives to achieve increased food production.

15. At the same time, steps to arrest the deteriorating repayment programunder the BIMAS credit program are urgently needed. Other than nonqualifica-tion for further BIMAS credit, incentives for loan repayment are weak. Theneed for timely repayment should be stressed to farmers by BRI village unitofficials and village leaders should be expected to support such efforts.The terms of BIMAS credits could be changed to increase incentives for timelyrepayment. In particular, interest charges could be continued beyond thepresent two-year limit. The recent granting of credit for INMAS purchases toBIMAS defaulters, however, cannot have increased repayment incentives foroutstanding BIMAS credits.

Agronomic Aspects

16. Increasing attacks of brown plant hopper (BPH) have caused majordamage to rice crops in several areas of the country, principally those wheredouble-cropping under irrigation is practiced, with major reliance on HYVs.Three biotypes have been identified and the breakdown of resistant HYVs hasbeen more rapid than anticipated. These problems are being actively studiedby GOI with the aid of consultants, but there appears at present to be nosingle action which can permanently cure the plant hopper problem. A completestrategy will probably have to be based upon a combination of the followingmeasures:

,(a) Replacing varieties. It would be desirable to get 60% of badlyinfected zones under resistant varieties. This would require aconcentrated effort by the Directorate of Production in the Direc-torate General of Food Crops to make seed available. At presentonly about 30% of the national rice area is under resistant high-yielding varieties. A scheme is being evolved whereby new varietieswill be bulked up while under test for resistance. This should bestrongly supported.

(b) Changing cultural practices. These could include crop rotations,adjustment of the irrigation requirements, alteration of plantingperiod, breaking planting cycle with secondary crops.

(c) Chemical control. This would require intensive efforts in the mostseverely affected areas to break the BPH's life cycle for at leastsix weeks.

17. Research has traditionally been primarily limited to Java andcentralized at Bogor. Secondary (nonrice) crops, which make up about 25% ofthe food production of the country, have received relatively little attentionin the research program to date. In 1975, under the Bank's Research andExtension Loan 1179-IND (Research I), Sukamandi was to be expanded as anational research center for rice and secondary crops and in addition six

regional research stations were to be established. A second research projectis being prepared with major emphasis on decentralization of research andextension of research facilities on Other Islands, with particular emphasis onresearch related to the problems of transmigration.

18. With respect to food crops, a number of research areas requireattention:

(a) More research effort should be channeled to the secondary foodcrops in view of their importance to the country's food needs.There must be more varietal introductions from similar climaticzones throughout the tropics, combined with macro- and micronutrienttrials and rate of fertilizer application trials to ensure maximumproduction on any major soil type.

(b) Research into cropping systems should be expanded, preferably at thefield level, to ascertain for example whether intercropping is abetter, more productive system than mixed cropping or sequentialplanting.

(c) In the rice areas, both irrigated and raLinfed, there is an immediateneed for better understanding of the fertilizer requirements, espe-cially as they apply to the important nitrogen:phosphorus interac-tion.

(d) It is suggested that new high-yielding varieties of upland rice beimported for testing under Indonesian ccnditions.

(e) Plant breeding needs strengthening to develop pest and diseaseresistant strains of rice for Indonesia.

(f) More research is required into the storage of secondary crop seedsand into means of developing large quantities of plant material whichwould be ready when required by farmers, especially in the OtherIslands.

(g) Because of the considerable diversity in climate, soil and environ-ment throughout Indonesia efforts to investigate the above issueson a regional basis should be supported.

19. Finally it should be said that, while this document does contain anumber of positive suggestions on future action, it is basically a review ofthe situation as perceived by a mission which could be in Indonesia for onlya short time. Many of the issues raised are already well known to theGovernment and the purpose of this review therefore is to provide a synopsisof these issues and establish a basis for more detailed study of them.Further studies need to be undertaken before more specific recommendationscan be made confidently.

INDONESIA


1. INTRODUCTION

1.01 During the first half of the 1960s, reported rice production inIndonesia remained essentially static while population grew by more than 10%.Faced with this apparently deteriorating food grain supply situation, theGovernment began to explore various approaches to increase food production,particularly rice./I In addition to efforts to improve irrigation worksaLid agricultural support services, a major program of short-term credit forpurchase of inputs for food production was initiated (the BIMAS program)and expanded rapidly after 1970. The Bank has participated in these effortswith loans and credits for irrigation, extension, research and seed produc-tion, and fertilizer production and distribution.

1.02 The changes in production, area and yields of the major food cropssince 1968 are summarized in Table 1.1 The table shows that not only doesrice dominate the production of major food crops, it also shows by far thehighest rate of growth. While the areas under individual crops have changedsignificantly, the total is virtually unchanged and production increases havelargely been accounted for by increased yields. The Government has madestrenuous efforts to increase food crop production, particularly since 1970.However, the encouraging broad picture hides some disturbing trends (seeTable 1.2). For example, whereas production of rice increased rapidly in

earlier years, output growth appears to have slowed down since 1973/74./2

Table 1.1: PRODUCTION, AREA AND YIELD OF MAJOR FOOD CROPS, 1968 TO 1977 /a

Production _ Area YieldGrowth Growth Growth

1968- 1975- rate 1968- 1975- rate 1968- 1974- rateCrop 1970 1977 1968-77 1970 1977 1968-77 1970 1977 1968-77

(million MT) (%/pa) (million ha) (%/pa) (tons/ha) (%/pa)

Rice 12.36 15.66 3.5 8.06 8.42 0.6 1.53 1.85 2.8Corn 2.76 2.84 0.9 2.86 2.36 -2.1 0.96 1.20 3.2Cassava 10.92 12.24 1.8 1.46 1.37 -0.8 7.48 8.96 2.6Sweet potatoes 2.27 2.42 1.1 0.38 0.31 -2.7 5.97 7.81 3.9Pulses /b 0.71 0.93 1.7 1.02 1.15 3.7 0.70 0.81 1.7

/a Derived from Annex 7, Tables 1, 2 and 3. Figures for 1977 are preliminary./b Soybeans and peanuts (groundnuts).

/1 Considerable uncertainty remains as to the amount of rice produced in theyears prior to 1970. During that period different estimates were producedby the Central Bureau of Statistics (BPS) and the Department of Agriculture,those of the latter being 10-20% higher. In 1970 BPS revised its figuresupwards following introduction of a new survey method.

/2 Preliminary assessments of the 1977/78 wet season rice crop in Indonesiasuggest, however, that it will show a substantial improvement over recentyears.

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TABLE 1.2: PRODUCTION OF MAJOR FOOD CROPS, 1968-77 /a(million MT)

1968 1969 1970 1971 1972 1973 1974 1975 1976 1977

Rice 11.7 12.3 13.1 13.7 13.2 14.6 15.3 15.2 15.8 15.9Corn 3.2 2.3 2.8 2.6 2.3 3.7 3.0 2.9 2.6 3.0Cassava (dry weight) 3.8 3.6 3.5 3.6 3.5 3.7 4.3 4.1 4.0 4.0Pulses /b 0.7 0.7 0.8 0.8 0.8 0.8 0.9 1.0 0.9 0.9

/a See Annex 7, Table 1 for details.

/b Soybeans and peanuts (groundnuts).

1.03. While a significant proportion of Indonesia's agricultural produc-tion is for direct consumption by producing households, the area, productionand yield of individual crops are responsive to economic incentives transmittedto the producers. These economic interrelationships, however, are not theprincipal focus of this report. Rather, it examines the factors related tothe availability of inputs, marketing and general support services, which canconstrain the farmers' ability to respond to the economic incentives availableto them. While the discussion in this report is intended to apply to Indonesiaas a whole, most of the observations and specific examples cited relate toJava and South Sulawesi. The mission did not have the opportunity to visitother regions in Indonesia.

1.04 The interrelationship and importance of the various support servicesto food crop production is a complex subject. The seven annexes in the reportendeavor to focus on the major points as seen from different specializedpoints of view; thus the reader will inevitably find some repetition betweenthe annexes.

1.05. For ease of discussion the issues and questions posed by the declin-ing rate of growth of food crop production and the relevance of supportingservices have been divided into two broad categories. The first covers thegeneral field of input delivery and marketing. It examines in particular thecontent and operation of the BIMAS program, which has been a major focus ofgovernment efforts in this area. The second looks at support to farmers onagricultural production problems i.e., extension, development of improvedseeds and agricultural research.

2. INPUT DELIVERY AND MARKETING

2.01 The trends in output and yields of major food crops have beenaccompanied by a similar pattern of growth of consumption of fertilizers, themost important of which is urea. Consumption rose rapidly between 1967 and

1973 (see Table 2.1). It was during this period also that the high yieldingvarieties of rice were coming into wide usage. Following 1973, urea consump-tion remained at the same level before rising rapidly again in 1977.

Table 2.1: ESTIMATED UREA CONSUMPTION, 1968-77 /a

('000 MT)

1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977

115 205 308 342 413 485 669 604 676 591 900/b

/a See Annex 5 for details; metric ton of product.lb Preliminary estimate.

2.02 This stagnation in usage was probably malnly a reflection of govern-ment distribution policies, as adequate supplies were generally available atthe national level. Prior to October 1973, marketing of urea had been unre-

stricted, largely through the private sector. In October 1973 Governmentimposed controls on marketing, a move triggered by the temporary world shortageof fertilizer following the oil crisis. Indonesia imported substantial volumesof urea in 1973, 1974 and 1975, presumably in anticipation of a prolonged worldshortage and even higher escalation of prices. Actual urea imports during thisperiod were 2.67 million MT. The overall 1973-77 supply/demand balance appearsto have been as shown in Table 2.2. Except for a period in 1973/74 overallsupplies have been plentiful. However, it is not known how much of the end-1977 inventory is in usable condition. The mission saw considerable evidenceof damaged stocks, resulting from both the length of time much of it had beenin storage and the lack of adequate storage facilities.

The BIMAS/INMAS Programs /1

2.03 Examination of the factors related to the stagnation in fertilizeruse and food production must begin with the BIMAS program, which has been themajor vehicle for input supply to farmers in the past four years. BIMAS

(Bimbangan Massal, roughly translated as "mass guidance") embodies threeprinciples: (a) the technology of modern rice farming; (b) credit to purchasea package of improved inputs; and (c) intensive guidance of participatingfarmers. This approach has been referred to as panca usaha (five endeavors):proper soil preparation; proper irrigation; improved seeds; use of fertilizer;

/1 The BIMAS/INMAS programs are discussed in detail in Annex 1.

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TABLE 2.2: UREA SUPPLY-DEMAND BALANCE, 1973-77

('000 MT)

1973 1974 1975 1976 1977

Production 108 191 383 365 775

Imports 442 816 1,412 - -

Opening stock 37 18 421 1,540 1,314

Total supply 687 1,025 1,795 1,905 2,089

Demand 669 604 676 591 900

Year end inventory 18 421 1,540 1,314 1,189

Sources: 1973-76, Annex 5, para 8.

1977, Memorandum by G. Bain (Bank), February 1, 1978.

and use of pesticides. The mass guidance concept was developed by the Bogor

Agricultural Institute and tested at Krawang in 1963/64. Following experience

obtained as the program was extended during the 1960s, the improved BIMAS

program was introduced in 1970/71.

2.04 INMAS (Intensificasi Massal) is similar in objectives, content and

coverage to BIMAS, with the important exception that no government credit is

provided. INMAS participants, somewhat ambiguously defined as any farmer who

employs modern inputs and techniques in food production, may purchase those

inputs from any source. The data relating to this program, particularlythose on the number of farmers participating and the area covered, are

difficult to interpret because of the uncertain scope and coverage of the

data collecting mechanism.

2.05 The improved BIMAS program was introduced in the Jogjakarta area in

the wet season of 1969/70, and for the first three years it focussed only on

rice. Major changes from previous programs were made in the disbursement of

credits and the provision of extension services. The focus was on the

individual farmer instead of groups of farmers as in earlier attempts. Under

the improved program, a new institution, the village unit, was established to

provide credits and technical advice, distribute inputs and supply marketing

services. The village unit, comprising of local offices of the Bank Rakyat

Indonesia (BRI), the Ministry of Agriculture and the Directorate General of

Cooperatives, serves an area of 600-1,000 ha of irrigated paddy and 3-5neighboring villages. Mobile units operated by BRI branch offices serve more

widely scattered villages.

2.06 Since its introduction in the early 1970s, the improved BIMASprogram has undergone further changes to increase its suitability to a wider

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range of farm situations. Loan procedures have been simplified and commoditycoverage extended. In the 1972/73 crop season, corn, soybeans, peanuts andpoultry production were added to the BIMAS program. A year later rainfedrice was included, along with cassava, pulses, sugarcane, and sorghum.Separate packages have been developed for each of these crops for the wet anddry seasons. The credit value of the packages (Annex 1, Tables 2 and 3) forthe 1977/78 season ranges from Rp 16,000/ha (cassava) to Rp 44,800/ha (ground-nuts). Fertilizer and pesticides are provided in kind through the local BUUDor KUD,/1 while cash, accounting for about a third of the credit, is madeavailable to purchase seed, rent spraying equipment and meet a portion offamily living costs. Farmers are permitted some choice in the selection ofpackage components and local BIMAS officials may alter within limits therecommended input applications in the basic package.

2.07 This "improved" BIMAS program proved to be much more successfulthan other programs in terms of the number of farmers participating, whichrose rapidly to 2.79 million in 1974/75 (See Table 2.3). This amounts to alittle over 20% of Indonesia's 12 million farmers./2 However, since 1974/75number of participants has been declining, mainly because of the exclusion offarmers with substantial arrears. It should be noted, therefore, that evenat its peak it covered little more than one-third of the area of sawah ricearea harvested while some of the remaining rice producing areas receivesupport through the INMAS program and from noninstitutional sources, it isapparent that a substantial proportion of the area planted to rice and aneven greater proportion of the area planted to palawija/crops do not receivethe appropriatte kinds and amounts of inputs.

2.08 The reported quantities of urea distributed under BIMAS and thealternative INMAS program are shown in Table 2.4

2.09 Data on BIMAS distribution are not available for the years prior to1971. However from 1971 through to the 1972-73 wet season the BIMAS programaccounted for less than half of the total urea consumed under institutionaldistribution programs. In the 1973/74 season the share of urea distributedunder BIMAS doubled to 87% and remained at about that level for the nextthree years, until falling to 60% in 1976-77. At this time, however, thetotal amount of urea used remained unchanged at about 600,000 to 700,000tons. In effect, therefore, between the 1972-73 and 1976-77, fertilizerdistributed under the BIMAS program merely replaced that which had been

/1 The BUUDs and KUDs are the most important of various types of ruralcooperatives. Hereafter abbreviated as B/Ks, BUUD and KUD are acronymsfor Badan Usaha Unit Desa and Koperasi Unit Desa, respectively translatedas the Village Unit Development Authority and the Village Unit Cooperative.Both are responsible to the Directorate General of Cooperatives in theMinistry of Trade and Cooperatives. The BUUDs are cooperative organiza-tions which, with development, are expected to become the KUDs, or legallyregistered cooperatives. The distinction is not significant in opera-tional terms.

/2 Although it should be remembered that the primary target of the programwas the rice farmer in areas under irrigation.

obtained by farmers in connection with INMAS, and no net increase in use wasachieved. It is therefore encouraging to find that the 1976-77 data indicatea substantial increase in total fertilizer distribution for both BIMAS andINMAS. Recent more general evidence suggests that the use by farmers of theINMAS program has continued to increase rapidly.

Table 2.3: THE SCOPE OF THE BIMAS PROGRAM

1970/71 1974/75 1975/76 1976/77 1977/78------------------ (million) -----------------

Farmers participating (no.)Rice 1.3 2.6 2.4 2.1 1.8Palawija /b nil 0.2 0.2 0.2 0.1 /a

Total 1.3 2.8 2.6 2.3 1.9

Area (hectares) /cRice 1.0 2.2 2.1 1.8 1.6Palawija nil 0.2 0.2 0.2 0.1 /a

Total 1.0 2.4 2.3 2.0 1.7

/a Preliminary.lb Nonrice food crops./c Hectares receiving at least part of an input package.

Source: See Annex 1, Table 4 (wet season only)

Table 2.4: DISTRIBUTION OF UREA UNDER BIMAS AND INMAS PROGRAMS, 1970-77

BIMASYear BIMAS INMAS Total/a as % of total

…_________---------- ('000 tons) ------- …-----------------

1970/71/b 162 243 405 401971/72 164 316 480 341972/73 288 380 668 431973/74 525 79 604 871974/75 606 64 670 901975/76 593 73 666 891976/77 562 357 919 61

/a Sales outside the two programs were negligible over this period./b Includes 1970/71 wet season and 1971 dry season.

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2.10 Possible causes for the rather slow expansion of the BIMAS and themore rapid uptake of the INMAS program may be grouped under: (a) the incentivesto the farmer for use of the BIMAS Package, and related government measures;(b) the credit arrangements for the package; (c) the performance of ruralcooperatives who have been the major channel for inputs and products;and (d) the overall distribution system for fertilizers and insecticides.These factors will now be considered in more detail.

Incentives to Participate

2.11 The pricing and content of the BIMAS package is set by Government.A committee, composed of members of BAPPENAS, the Ministry of Agriculture,the BIMAS Secretariat and the Ministry of Finance, estimates input quantitiesand incremental yields, and then estimates cost/benefit ratios /I for eachproposed package, using different combinations of input and output prices.Each alternative cost/benefit ratio has a value in excess of a minimum ofabout 1:2.2. Once the various alternatives have been set, all findings arepresented to the Cabinet, which decides official policy for the BIMAS program.

2.12 Output Prices. BULOG (the National Logistics Agency), was estab-lished in 1967 to secure an adequate supply of basic foodstuffs to consumersand to ensure fair and stable prices to producers. It has sole responsibilityfor the import and domestic procurement of food staples, primarily rice.(Details of BULOG operations are found in Annex 3). The Government aims toachieve retail price stability for rice primarily through "market operations"involving the injection of BULOG-held supplies when retail prices threaten toexceed government set price ceilings by a specified amount. Adequate producerprices are maintained at government support levels by BULOG purchases of riceand paddy from the rural cooperatives (BUUDs, KUDs) which buy directly fromfarmers.

2.13 All the available evidence points to the conclusion that BULOG hashad a stabilizing effect on rice prices at the consumer level, although thefree market price at retail has at times, and in certain markets, exceededthe official ceiling. Abundant supplies of reasonably priced rice and wheatimports in 1975 and 1976 provided BULOG with a readily available, administra-tively simple, means to moderate the rise in retail rice prices. During1975/76 for example, the Jakarta cost of living index rose by nearly 20%, asubstantial improvement over price increases of 30 to 35% in the twoprevious years.

2.14 BULOG's impact on prices received by local rice growers is moredifficult to determine and may be more controversial. In this regard BULOG'seffectiveness is reflected in part by the difference between the Government'sannounced floor price and prices actually received by farmers. BULOG's impacton prices at this level is indirect since it purchases a substantial amountfrom cooperatives, however, most rural cooperatives have until now been rela-tively weak institutions with limited capacity to affect farm prices.

2.15 A clear view of BULOG's effect on prices actually received byfarmers requires more comprehensive study. Information provided to the

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mission on this point is incomplete and sometimes contradictory. Field-level officials of the BULOG and cooperatives reported, not surprisingly,that free market prices were at or above official price levels. But dis-cussions with other well-informed observers in South Sulawesi, Jakarta andelsewhere indicated that violations of the producer's floor price werecommon, particularly during the 1976-77 crop year. The main crop in thatyear was relatively good and supplies were abundant in several parts of Java.Large numbers of cooperatives, denied additional funds by BRI because of poorloan repayment records, were unable to purchase paddy from farmers. Finally,there is the apparently widespread practice of cooperatives paying less thanthe official floor price to farmers in order to increase the margins receivedfor drying and/or milling. However, it remains difficult to make a judgmentin this question because of incomplete evidence.

2.16 BULOG is developing into one of the stronger institutions inIndonesia concerned with food supply and distribution. Nevertheless, fromthe producers' viewpoint there are reasons for concern over BULOG's operation.The first is that BULOG's price and procurement policies may be increasinglydetermined by urban consumer interests. These policies could work to thedetriment of local producers. Second there is also the possibility thatBULOG will be asked to take on an ever-increasing number of responsibilitieswhich may exceed its capacity and jeopardize its ability to carry out itsprimary task of protecting the interests of rice consumers and producers.

2.17 The Production Response. There are two principal packages forpaddy in the BIMAS program. The first, with a cost of Rp 31,000 (US$75) perha in 1976/77, included seed of a high-yielding variety. The second, whichdid not include high-yielding seed and only half the fertilizer, cost Rp20,140 per ha (US$49). Estimates of the benefits of using these packages arebased upon estimated incremental yields of stalk paddy of 2,067 kg/ha for thefirst package and 1,370 kg/ha for the second. Evidence obtained by themission suggests that actual incremental yields obtained by farmers may beless than this, as farmers may not be able to obtain all the ingredients ofthe package at the time desired. For example, many cooperatives did not havestocks of insecticide when needed, or full amounts of fertilizer were notavailable or applied. In addition, as suggested earlier, there is evidencethat prices obtained by farmers are frequently below levels assumed by Gover-nment.

2.18 The ratio of estimated benefits to costs does not, however, providea full picture of the degree of incentive to the farmer. Small farmers inJava typically obtain a large proportion of their income from off-farmsources. Based on conservative mission estimates of incremental yieldsand product prices, it is estimated that for a typical 0.2 ha farm, the netbenefit from using the BIMAS package for one crop might be as low as about2.5% of expected annual household income (see Annex 2). As a result of hisoff-farm activities, the small producer may have to carry out his farmingoperations at suboptimal levels, and therefore be less likely to obtain fullincremental yields than the larger producer. Given the relatively small sizeof a farmer's off-farm earnings, which will usually all be required forhousehold cash expenditures, together with the problems involved in obtaining

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credit (see para. 2.20), especially for the illiterate and small farmers, thereal benefit may appear so small to many farmers as to make the packageunattractive.

2.19 It is difficult to establish the precise benefit/cost ratio neededto induce greater farmer participation in the use of improved techniques. Itis understood that the ratios used at present to formulate input and productprices are not firmly based upon field evidence. An effort to carry outappropriate studies to assess likely response to differing benefit/costratios would be extremely valuable. For many small farmers, input costs andpotential gross benefits from increased crop production are a relativelysmall proportion of income. Given the efforts necessary to obtain credit, itis conceivable that a more favorable benefit/cost ratio, combined with readyaccessibility of inputs, could pay handsome dividends in terms of increasedproduction.

The Credit Program

2.20 In theory, the BIMAS credit is available to all farmers, althoughfield surveys suggest that smaller farmers find access to the program moredifficult./l Figures for Java tend to confirm this, with the average paddyfarm of 0.6 ha contrasting with a farm size for the average BIMAS participantof 0.9 ha. The usual steps for obtaining a BIMAS loan are: (a) the farmer(owner-operator, or tenant with a certifying letter from the owner) requestsa loan through the village headman; (b) the farmer takes the headman's letterof recommendation and his land title to the BRI office at the village unit;(c) BRI staff inspect the land title, complete and approve a loan requestform; (d) the farmer receives from BRI a cash loan for cultivation costs andthe living allowance and a voucher which authorizes the issuance of fertilizerand pesticides; and (e) the farmer presents the voucher to the cooperative toobtain these inputs. Farmers are expected to repay their loan to the BRI afterharvest. Most farmers are visited by BRI officials to encourage repayment.

2.21 The BIMAS credit program is funded entirely by the BRI whichobtains its resources through rediscounting from Bank Indonesia at 3% p.a.The BRI charges farmers 1%/month on this credit and the loan becomes due one

/1 A recent investigation of Sukagalih village, West Java, by the RuralDynamics Study Group indicated that small farmers in that village, mostof whom are tenants, find it very difficult to obtain BIMAS credit. Thisproblem grows out of the requirement that the farmer obtain both a letterof authorization and the land title from the landowner. This is notalways possible since 20% of the landowners live elsewhere and many of thelarger owners possess no title in their names to avoid conflict with theLand Reform Regulations of 1960 which forbade individual ownership ofmore than 5 ha of irrigated rice land in densely populated areas.R.S. Sinaga, Indonesia Case Study: Rural Institutions Serving SmallFarmers and Laborers in the Village of Sukagalih, Garut Regency, WestJava; a paper prepared for the ESCAP Expert Group Meeting on RuralInstitutions Serving Small Farmers, Bangkok, December 1976.

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month after haverst or at most seven months from disbursement. After twoyears have elapsed no interest is charged on overdue loans. The farmer maycontinue to receive BIMAS credit if his overdue loan totals no more than 20%of the total loan value. BIMAS credits may be rescheduled in times of cropfailures or other special circumstances./1 Risk-bearing on BIMAS loans isshared by Bank Indonesia (25%), BRI (25%) and the Government (50%).

2.22 Given these conditions, it is perhaps surprising that the repaymentshave been as high as they have. In the first place, the farmer pays a lowrate of interest and if he goes into default pays no further interest chargesat all after two years. In addition, as BIMAS loans are 75% guaranteed toBRI, there is little incentive for BRI to press for payment.

2.23 The rate of repayment by farmers has been deteriorating, however,the position on Java for the BIMAS paddy program (85% of the total forIndonesia) reflects fairly accurately the position for all the BIMAS programs.Of loans made between 1970 and 1974, between 6 and 7% remained unpaid twoyears after the loan was made. The proportion rose to 13% for the 1974/75crop and 22% for the 1975 dry-season crop. The proportion of loans notrepaid after one year rose from 14% for 1974/75 loans, to 23% for 1975dry-season loans and to 38% for 1975/76 loans.

2.24 The total repayments outstanding, at June 1978, for the presentBIMAS program based on one year arrears or more, amount to about Rp 61 billion(US$147 million). For comparison, the total BIMAS credit for the 1976/77 wetseason plus 1977 dry season amounted to about Rp 70 billion (US$170 million).In other words, the funds significantly overdue are almost as great as oneyear's disbursements. This recent deterioration of BIMAS repayments requires,and is no doubt receiving, careful attention by the Government. A continua-tion of the present situaton could result in very large losses and couldthreaten the operation of the BIMAS credit program in its present form.

2.25 The relatively poor repayment record is partly accounted for by cropfailures in localized areas, but other reasons must also be sought to explainthe worsening situation. Political considerations inevitably influence collec-tion efforts. Farm surveys suggest that frequently those in default are amongthe larger farmers, many of whom have other economic interests. The nationalelections of 1977 may also have elevated political considerations in the opera-tion of BIMAS. This remains a matter of conjecture. But it is clear that vig-orous collection efforts can reduce arrears as evidenced by government actionstaken in West Java in 1975, which resulted in much improved collectionswithin a few weeks. Since the mission's visit to Indonesia in May 1977, theGovernment campaigned country-wide for repayment of loans and again there wasa response from farmers.

2.26 Government has been considering measures to reduce the amount ofpaperwork involved in the application for BIMAS credit. Such a reductionwould clearly be of assistance in increasing the accessibility of the program.

/1 Approximately Rp 7 billion (US$17 million) was written off or rescheduledduring 1974-77 because of crop failures.

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However, another change which has been introducecd could be counterproductive,namely allowing farmers who are in default to BIMAS and thereby disqualifiedfrom further participation until at least 80% of the debt is paid, to borrowfrom BRI for inputs purchased under the INMAS program. This will greatlyerode what little incentive exists for BIMAS participants to repay and onemay assume could invite heavy defaults on subsequent INMAS loans.

2.27 The inclusion of the "cost of living subsistence grant" may also bea factor hindering repayment. This "grant" averaged Rp 6,000 (US$14) per hafor BIMAS paddy loans in 1977/78, and has been increased to Rp 10,000 for1978/79. Its description is confusing as it is, in effect, cheap consumptioncredit. It is not clear how local officials, in their eagerness to sellBIMAS to farmers, presented this element to them. Some recipients may haveunderstood that, as a grant, it was not repayable. Little appears to beknown about the use of this credit, whether it substitutes for regular con-sumption credit or whether it has in fact been used as a windfall supplement.Field investigation of this question would be valuable in assessing the realneed and role for these funds.

Rural Cooperatives

2.28 The Government has made a strong political and financial commitmentto development of cooperatives. Beginning in 1970, the BUUDs and KUDs (B/Ks)were assigned the task of supplying production inputs and providing drying,milling and marketing services for the farmers./l In 1973 it was decidedthat all fertilizer and insecticides for the BIMAS program had to bechanneled through the cooperatives. Growth of B/Ks has been rapid, risingfrom just over 600 in 1972 to nearly 3,800 in mid-1976. A sizeable number ofthese cooperatives are reported to be inactive. About 10% of Indonesia'sfarmers are estimated to be members, typically including the larger landowners,local merchants and officials.

2.29 The Government has pursued an ambitious program to equip B/Kswith facilities for paddy processing and storage. It was planned that by1976 each of some 2,000 B/Ks would have a small rice milling unit, aconcrete drying floor and paddy/rice storage capacity of 100-200 tons.

2.30 Also the annual development budget of the Directorate-General ofCooperatives rose from Rp 400 million to Rp 3 billion between 1972 and 1978.In addition the BRI, which is the major state banlk lending for cooperatives,also loaned substantial amounts.

2.31 This investment program for cooperatives, financed by loans throughBRI and accumulating to nearly Rp 3 billion, was initiated in 1973. By mid-1977 no principal or interest had been paid to BRI. All such loans are guar-anteed by the Government's Cooperative Credit Guarantee Scheme (LJKK). A com-mon view of cooperative field officers was that these loars had been "imposed"

/1 For more detailed discussion of the development of cooperativessee Annex 4.

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on the B/Ks without proper appraisal and that many B/Ks were neither willingnor able to repay. Despite existing excess milling capacity among B/Ks, theGovernment in 1977 intended to provide through the BRI cooperative loans forthe installation of an additional 430 rice mills and ancillary facilities.Government has also attempted to promote purchase of paddy by cooperatives,and additional loans through BRI were made to them for this purpose.

2.32 With the cooperative movement in an early stage of development andgiven the lack of experience among farmers and local level bureaucrats inrunning "modern sector enterprises," it is not surprising that the coopera-tives were unable to handle the burdens placed upon them by the nationalBIMAS program. After this policy was introduced, fertilizer consumption,which had been increasing at the rate of 34% annually between 1967 and 1973/74stagnated, while the sale of insecticide had reached only 2,700 tons againsta calculated requirement of 20,000 tons for the BIMAS program alone. Indeed,in 1976 only 1,100 of 3,800 cooperatives traded in pesticides (Annex 6) whichprevented many farmers from obtaining the much needed pesticide included inthe BIMAS credit package. The inadequate services provided by the cooperativesprobably contributed to the recent stagnation in food production.

2.33 Some of the B/Ks' difficulties may be due to inconsistencies ingovernment policies. One view within the Directorate General of Cooperatives(DGC) is that BULOG generally favors lower paddy and rice prices in supportof consumer interests while the DGC prefers higher prices and handlingmargins to benefit producers and the cooperatives. With BULOG's greaterbargaining strength, vis-a-vis the cooperatives, the B/Ks receive lowerprices in sales to BULOG and are forced to either reduce prices paid tofarmers or shave handling margins which they already consider inadequate.

Fertilizer Distribution

2.34 Between 1967 and 1973, when sales of fertilizer were limited tocooperatives, sales increased annually at 34%. Thereafter they remainedstatic until the recent increase. In November 1976, Government reversed thepolicy of giving a virtual monopoly to cooperatives to sell fertilizer, andprivate enterprise now participates in the retail sale of fertilizer (withthe exception of East Java). Actual sales of urea for the first eight monthsof 1977 were 540,000 tons compared with 384,000 tons for the same period in1976. While this would appear to indicate that the cause has been thereopening of private trade more detailed data show that the increased salesin East Java are similar to those in West and Central Java. It may be thatcooperatives in East Java have noted the considerable activity of privateenterprise in the other provinces and have improved their efficiency to tryand prevent private enterprise from coming back into the fertilizer retailbusiness. Another problem is that data collected by PUSRI /1 are based onconsignments, not actual usage, and therefore some part of the changes in

/1 P.T. Pupuk Sriwidjaja - the Government fertilizer producer and majormarketer in Indonesia.

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fertilizer delivery may actually be the result of stock buildup rather thanuse. Government should, in the mission's view, analyze the sales reaction inthese three provinces and try to establish more definitely the underlyingreasons for the increase in sales under the different systems./l

2.35 Fertilizer distribution is subject to a high degree of governmentcontrol. In 1964, GOI appointed eight: major fertilizer importers/distributorswho have responsibility for handling all fertilizer requirements, whether

imported or locally produced. PUSRI, the urea producer, is the largest ofthese, exclusively marketing its own production. Fixed prices have heenestablished by GOI at port of entry, intermediate and retail levels for urea,

triple superphosphate (TSP), di-ammonium phosphate (DAP) and 15-15-15 compoundfertilizer. This system provides fixed margins at each of the four pointsrecognized in the distribution chain (see Annex 5).

2.36 When sales are made under the INMAS program, they are for cash andany credit within the system is short term. However, sales made under theBIMAS program package are on credit, and the fertilizer moves through thesystem on consignment. Distributors at the different levels in the system ineffect receive a fixed commission on the quantities they move on ("sell") tothe next level or, at the retail level, distribute to the final users. Thesecommissions are received from BRI, who also pay the producer the basic pricewhen final sale slips are cashed in. This system has a number of unfortunateconsequences when compared to a commercial cash flow type system. Sincedistributors do not have to pay cash for their supplies they have a reducedincentive to sell the material quickly. More importantly, they do not carrythe cost of any losses, except insofar as they lose their commission onmaterial which they do not distribute further. With distributors' margins ofless than 5% at each level the distributors' penalty for loss is negligible interms of what it would be under a cash flow system. The cost of these losseswould normally be borne by the producer. In this case, since PUSRI isgovernment owned, the cost is borne by Government which reimburses PUSRI fortheir shipments.

2.37 In theory, the distribution system should take fertilizer to withineasy access of the farmer, and in Java it appears that the network has beenestablished and is functioning effectively, although the availability ofgood quality storage facilities at major distribution centers varies.As far as facilities at the retail level are concerned, there appears to beno need for a major investment program for construction of storage/salesfacilities ("kiosks") in Java except in some of the more outlying areas.However, in Sulawesi storage facilities both at major distribution centers

and at the retail level are far less adequate than in Java. The mission sawa number of instances in which fertilizer has sustained extensive damage as a

result of unsatisfactory storage. Given the weak financial incentives toreduce losses, it is perhaps not surprising that a major but undeterminedshare of the urea in storage is believed to be in an unmarketable condition.Much of it may have to be shipped back to PUSRI's plant and reprocessed.

2.38 As a means of further improving distribution of fertilizers, it issuggested that the consignment system be abolished for the BIMAS program,

/1 It is understood that the fertilizer distribution system has been modifiedrecently.

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and replaced by a normal cash flow type system, in which payment is made bythose involved at each stage in the distribution system./l This is alreadyoperative for INMAS supplies, and the feasibility of a complete changeoveris perhaps indicated by the fact that neither PUSRI management nor any oftheir distributors or retailers interviewed complained to the mission aboutthe inadequacy of their marketing margins. In fact, during the mission numer-ous instances of price cutting by private retailers were observed.

2.39 Under the BIMAS/INMAS programs, the prices of urea and triple superphosphate - the two major elements of the packages - are fixed at Rp 70/kgthroughout Indonesia. This is equivalent to about US$169/MT. The deliveredprice of urea in mid-1977 was about US$120-145/MT c.i.f. (current prices areabout US$140-145/MT). With average distribution costs of US$51/ton, the cur-rent fixed price of urea implies an apparent subsidy of up to about US$25/ton.The TSP price of US$120/ton c.i.f., however, implies no subsidy at a retailprice of US$169/ton./2

2.40 Another problem related to fertilizer use is that, while ureausage has increased since 1976, phosphate consumption has fallen since1975. This widened the ratio of nitrogen to phosphorus from 3:1 which isacceptable, to 4:1 which is likely to be too wide to achieve the maximumbenefit from both nutrients and promote vigorous plant growth. Someadjustment in relative prices might be useful in correcting this imbalance.

Pesticides

2.41 The physical availability of pesticides at the national level inIndonesia is not a problem. Some 20 companies have been licensed to marketpesticides and 6 have set up formulation plants locally (Annex 6). Thepresent formulation capacity is between 25,000 and 30,000 tons a year,greatly in excess of the estimated consumption of 5,000 tons for 1976 butnot necessarily above the requirement for that year. Had BIMAS farmersalone applied pesticides at the rate recommended by Dinas Pertanian, therequirement for 1976 would have been 20,000 tons.

2.42 Pesticides are sold through the cooperatives and are heavilysubsidized (Rp 900 per litre compared with an exfactory cost of aboutRp 3,500 per litre). Nonetheless, many farmers are not using this importantpart of the package. Although some of this can be attributed to unwilling-ness and/or ignorance on the farmer's part, the overriding cause wouldseem to stem from the fact that only 1,100 out of 3,800 cooperativesactually received pesticides in 1976. This prevented up to 70% of farmersfrom obtaining the all important pesticide, at a subsidized price, as partof the package with fertilizer. In fact this situation runs counter to the

/1 As mentioned in page 13 it is understood that the fertilizer distribu-tion system has been modified recently. In particular fertilizer is nolonger sold on consignment to distributors.

/2 Of course it is inevitably the case that more distant points are subsi-dized at the expense of nearby locations. Also whether a subsidy existsor not is a difficult issue since present prices must to some extent re-flect the purchase and storage costs of fertilizer. Prices of fertilizerin earlier years were much greater than at present.

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well-conceived "package program" which recognizes the importance of simul-taneously using the improved inputs of fertilizer and pesticide. Additionally,the mission noted that sprayers were not freely available to farmers, norwas there any significant amount of equipment for hire - thus it is notsurprising that utilization of pesticides is low and, in the absence ofsuitable equipment, perhaps badly applied.

2.43 With the buildup of insect pests and the more rapid than expectedbreakdown of resistant varieties of rice, the pesticide problem needs Govern-ment's early attention. Steps should be taken quickly to see that pesticidesare available at all cooperative outlets and Government should consider pro-viding subsidized pesticides through commercial outlets as well, as has beendone with good results for fertilizer. This would mean arranging a uniformpricing system for pesticides which would seem well justified with a pestproblem which seems to be reaching serious proportions. It is suggested thatGovernment should also examine urgently the availability of sprayers and, ifpossible, arrange for expanding local manufacture. Lastly, the possibilitiesof hiring sprayers through the B/Ks and of involving the private sector incontract spraying also should also be considered.

3. AGRICULTURAL ASPECTS

3.01 In order to support the overall food production program, Governmenthas invested in irrigation rehabilitation and has provided for strengtheningthe research, extension and seed production facilities. Nonetheless, in1977/78, Indonesia imported 1 million tons of wheat and 2.6 million tons ofrice to make up the shortfall in food grains.

3.02 Given that Government will continue with its rehabilitation programof irrigation systems and that there will be a gradual development of newirrigated /1 and rainfed areas, particularly in the islands outside Java, themission examined the situation concerning research, extension and seed pro-duction (Annex 7). Government is already giving attention to those particu-lar aspects as a whole, but there are specific elements in each which requireimmediate and close attention.

Research

3.03 Research has traditionally been primarily limited to Java and cen-tralized at Bogor. In addition to several small facilities in Java a rice andpalawija research center was established at Sukamandi in 1972 under the Bank'sSeeds Project (Credit 246-IND); initial research was limited to rice insupport of the adjacent seed production estate. In 1975, under the Bank'sResearch and Extension Project (Loan 1179-IND) Sukamandi was designated to beexpanded and become a national rice and palawija crop research center. In

/1 See Bank Report No. 2027a-IND, "Indonesia - Irrigation Program Review,"October 16, 1978.

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addition six regional research stations for rice and palawija crops were tobe established under the project. The project also includes the establishmentof a national horticulture research center in West Java, a national rubberresearch center in North Sumatra and a regional rubber research center inSouth Sumatra.

3.04 A second Bank research project is planned concentrating on decentra-lization of research and extension facilities to the Other Island, withparticular emphasis on transmigration. This would include the areas ofSumatra, Sulawesi and Kalimantan with emphasis on agricultural development-oriented experimental station and manpower development.

3.05 Research is being reoriented to support agricultural development ona country-wide basis with a shift in emphasis toward crop diversification andthe development of improved farming systems. A significant portion of re-search manpower development and research station development would be of di-rect benefit to transmigration.

3.06 The Government has decided that Sukamandi will be the main researchstation for both rice and secondary food crops, but many of the serving staffmembers who should be permanently based in Sukamandi are still living inBogor, to the detriment of the research efforts. It also appears thatexpatriate staff will be needed until enough fully qualified Indonesians areavailable.

3.07 Rice. With the relatively rapid breakdown of rice varieties resis-tant to brown plant hopper, there arises the question of whether or not thetesting period should be reduced to allow the maximum use of varieties whichare found to be resistant. At present a scheme is being evolved whereby newvarieties will be bulked up while under testing for resistance. This schemeshould be strongly supported. Shortening of the testing period throughcollateral testing and bulking will mean that many more resistant strains canbe made available to the farmer more quickly and overall production increased;the limited risk of accident which may result from changing the system willbe more than offset by the benefits.

3.08 The problem of the brown plant hopper needs to be approachedimmediately and an updated plant protection program devised. Bothcontact and systemic insecticides are being made available to a limitednumber of farmers and it is not certain just what is the best way totackle the problem. The effect on the environment of using certain insecti-cides should be given due attention. Further, the practice of introducingcropping patterns and rotations which allow the cycle of the pest to bebroken, should be promoted.

3.09 Secondary crops. Although some provision has been made tobuild up research facilities for secondary crops at Sukamandi, this isstill an area which has received insufficient attention in practice.There is presently a shortage of trained staff for work on secondarycrops and this will need strengthening with local transfers, or withexpatriates in the short term, if the Government's policy of increasingfood production is to have a real chance of success.

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3.10 So little is presently known about improved practices for suchcrops as corn, cassava, pulses, fruits and vegetables, and wheat in Indonesiathat, in the early stages of investigation, a fairly simple program would besufficient. Such a program could involve the introduction of improvedvarieties from countries with a similar ecology, and simple trials withfertilizer to assist in optimizing yield. For such a program a large part ofthe burden could be carried by lower level (technically trained) staffunder the supervision of qualified scientists.

3.11 Over the last two years research workers have been investigatingcropping systems [(mixed, inter and sequential (Annex 7 page 10))] andsome encouraging results have been obtained. Although it would bedangerous to make firm recommendations to farmers on two years' results,the responses obtained so far fully justify a major effort being madein this area./I An expanded program would need reallocation of staff andprobably engagement of expatriate technicians in the short term; Governmentshould give this proposal serious consideration bearing in mind that well-supervised lower level staff (technically trained) can make a meaningfulcontribution in such a program.

3.12 In an effort to make the best use of fertilizer on the widelyvaried soils of Indonesia, many more macronutrient trials are neededon all crops. This type of trial is not new in Indonesia but the magnitudeof the operation needs reconsideration, both in the presently cultivated andfuture development areas.

Extension

3.13 The extension service has recently been reorganized and Bankfunds are being used to finance the strengthening of the extension servicefor food crops. More training is being emphasized and it would be more field-oriented than at present. There is a tendency for field officers torely almost entirely on technical instructions from headquarters which oftenmeans they are not fully understand what they are recommending to farmers.The mission realizes that in the early years of the BIMAS program it wasalmost inevitable that Government had to give technical instructions from thecenter partly because of the limited amount of information at field level andbecause of the large numbers of inexperienced field staff; however, aprogram of simple, uniformly designed fertilizer trials, carried out infarmers' fields, would achieve the following objectives:

(a) assist in improving knowledge of optimum fertilizer requirementsfor the specific area;

(b) give the extension officer first-hand knowledge of the advice he isgiving; and

(c) serve as a demonstration to farmers.

/1 For a more detailed discussion of possible cropping systems see aforthcoming Bank report, "Supply Prospects for Major Food Crops."

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Seed Production

3.14 Although there have been difficulties associated with the devel-

opment of the Sukamandi seed farm (Annex 7, page 3), the bulking and supply

of improved rice seed does not seem to be a major constraint. Some 30% of

the area planted to rice is under high-yielding varieties and, as only a

small fraction of the crop (20 kg/ha) is required for the next crop, theproblem appears to be a lack of acceptance and supply. Some of the lack of

acceptability may well be closely associated with the breakdown of the pre-

viously resistant varieties. Arrangements have been made for consultantsto review the ongoing seeds program and to make recommendations for the

future. It is envisaged that an expanded seed industry would be based on adecentralized seed multiplication system.

ANNEX 1- 19 - Page 1

INDONESIA

SUPPORT SERVICES FOR FOOD CROP PRODUCTION

Food Crop Intensification Programs (BIMAS/INMAS)

Introduction

1. During the first half of tht 1-60s, t i(:e productJon in Tndonesiaremained essentially static while popula ion grew by more thain 10%. Facedwith this deteriorating food grain suppl', situation, the Government began toexplore various approaches to increase rice production. A forerunner oftoday's national production intensification effort was the experiment bythe Bogor Agricultural Institute in 1963-64 in three villages in KarawangDistrict to determine the response of farmers to a development program whichcombined extension advice, credit and improved production inputs. Theexperiment was sufficiently encouraging to permit an expanded effort insubsequent years known as the "Block BIMAS" program in which credit andinputs were made available to groups of farmers through village cooperativesocieties, with village headmen acting as intermediaries./l While introducinglarge numbers of farmers to low-cost institutional credit and modern inputs,the program was seriously hampered by low collection rates on farmer loans.Factors contributing to the loan collection problem included inadequatemanagerial experience of the newly formed cooperatives, general absence ofcollateral and failure to evaluate farmers' ability to repay. In the 1965-69period, credit totaling Rp 7.8 billion was extended, of which about half wasrecovered.

2. Under the BIMAS Gotong Royong (self-help) program (1969-70), creditwas supplied as a fixed package per ha to all farmers in selected areas,regardless of whether they wanted it or could efficiently use it. The inputpackage, provided through contract with local and foreign agro-industrialconcerns, included seeds, fertilizers, pesticides, extension, spraying andmarketing services. Debt collection was low because no records of individualfarmers were kept and promised production benefits frequently failed tomaterialize. This costly program, in which some Rp 22 billion in credit wereadvanced, was discontinued in 1970. About 25% of this amount was recovered.

/1 BIMAS (Bimbangan Massal, roughly translated as "mass guidance") embodiesthree principles: (a) the ideology of modern rice farming; (b) creditto purchase a package of improved inputs; and (c) intensive guidanceof participating farmers. The ideology is known as panca usaha (fiveendeavors): proper soil preparation; proper irrigation; improved seeds;use of fertilizer, and use of pesticides. The mass guidance concept wasdeveloped by the Bogor Agricultural Institute and tested at Karawang in1963-64.

- 20 - ANNEX 1Page 2

The Improved BIMAS Program

3. This program was introduced in the Jogjakarta area in the wet seasonof 1969/70, and for the first three years it focussed only on rice. Majorchanges from previous programs were made in the disbursement of credits andthe provision of extension services. The focus was on the individual farmerinstead of groups of farmers as in earlier attempts. Under the improvedprogram, a new institution, the village unit, was established to providecredits and technical advice, distribute inputs and supply marketing services.The village institutions, comprising local offices of the Bank Rakyat Indonesia(BRI), the Ministry of Agriculture and the Directorate General of Cooperatives,serves an area of 600-1,000 ha of irrigated paddy and 3-5 neighboring villages.Mobile units operated by BRI branch offices serve more widely scatteredvillages./l

4. Since its introduction in the early 1970s, the improved BIMASprogram has undergone further changes to increase its suitability to a widerrange of farm situations. Loan procedures have been simplified to some extentand commodity coverage extended. In the 1972/73 crop season, corn, soybeans,peanuts and poultry production were added to the BIMAS program. A year laterrainfed rice was included, along with cassava, pulses, sugarcane, and sorghum.Separate packages have been developed for each of these crops for the wet anddry seasons. The credit value of the packages (Annex 1, Tables 2 and 3) forthe 1977/78 season ranges from Rp 14,500/ha (cassava) to Rp 44,800/ha (ground-nuts). Fertilizer and pesticides are provided in kind through the local BUUDor KUD, while cash, accounting for about a third of the credit, is made avail-able to purchase seed, rent spraying equipment and meet a portion of familyliving costs. Farmers are permitted some choice in the selection of packagecomponents and local BIMAS officials may alter within limits the recommendedinput applications in the basic package.

/1 The BRI, its operations and performance, have been examined extensively byother Bank missions, most recently in preparation of the Rural CreditProject (see Appraisal of a Rural Credit Project, Bank Report No. 1741-IND,June 1, 1978). Their detailed findings need not be repeated here. Of fivegovernment-owned banks, the BRI has been assigned primary responsi-bility to distribute credit to smallholders, either through "program-oriented" loans (about 75% of the total) such as BIMAS, or in regularagricultural lending. In 1976 BRI included, in addition to the head-quarters in Jakarta, 13 regional offices, 260 branch offices, about 3,000village units and 250 mobile units. Most of BRI's loan funds originatein refinancing by Bank Indonesia and are made available at low interestrates (3-4% p.a.). The BIMAS program is a relatively small part of BRIoperations.

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ANNEX 1Page 3

5. Incentive to participate in the program is provided by the Govern-ment's floor price mechanism for rice effected through purchases of paddy orrice by BULOG from the cooperatives (see Annex 3). Floor prices are establishedand adjusted yearly to permit an incremental benefit-cost ratio for BIMASparticipants of 2.2:1 or greater. Yield increments from the BIMAS packageare estimated on the basis of trials and on sample weighings in the field. Itmay well be that incremental output from the current BIMAS package tends tobe overstated (see Annex 2).

6. In theory, the BIMAS credit is available to all farmers, althoughfield surveys suggest that smaller farmers find access to the program moredifficult./l Figures for Java tend to confirm this, with the average paddyfarm of 0.6 ha contrasting with a farm size for the average BIMAS participantof 0.9 ha. The usual steps for obtaining a BIMAS loan are: (a) the farmer(owner-operator, or tenant with a certifying letter from the owner) requestsa loan through the village headman; (b) the farmer takes the headman's letterof recommendation and his land title to the BRI office at the village unit;(c) BRI staff inspect the land title, complete and approve a loan requestform; (d) the farmer receives from BRI a cash loan for cultivation costs andthe living allowance and a voucher which authorizes the issuance of fertilizerand pesticides; and (e) the farmer presents the voucher to the cooperative toobtain these inputs. Farmers should repay their loan to the BRI after harvest.Most farmers are visited by BRI officials to encourage repayment.

7. The BIMAS credit program is funded entirely by the BRI whichobtains its resources through rediscounting from Bank Indonesia at 3% p.a.The BRI charges farmers 1%/month on this credit and the loan becomes due onemonth after harvest or at most seven months from disbursement. After twoyears from the time the loan is taken out no interest is charged on overdueloans. The farmer then becomes ineligible for further BIMAS credit if he hasnot repaid within two seasons after the loan is due although he may continueto receive BIMAS credit if his overdue loan totals no more than 20% of thetotal loan value. BIMAS credits may be rescheduled in times of crop failuresor other special circumstances. Rescheduling of some overdue BIMAS credits

/1 A recent investigation of Sukagalih village, West Java, by the RuralDynamics Study Group indicated that small farmers in that village, mostof whom are tenants, find it very difficult to obtain BIMAS credit. Thisproblem grows out of the requirement that the farmer obtain both a letterof authorization and the land title from the landowner. This is notalways possible since 20% of the landowners live elsewhere and many of thelarger owners possess no title in their names to avoid conflict with theLand Reform Regulations of 1960 which forbid individual ownership ofmore than 5 ha of irrigated rice land in densely populated areas.R.S. Sinaga, Indonesia Case Study: Rural Institutions Serving SmallFarmers and Laborers in the Village of Sukagalih, Garut Regency, WestJava; a paper prepared for the ESCAP Expert Group Meeting on RuralInstitutions Serving Small Farmers, Bangkok, December 1976.

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ANNEX 1Page 4

was under active consideration by the Government in mid-1977. Risk-bear-ing on BIMAS loans is shared by Bank Indonesia (25%), BRI (25%) and theGovernment (50%).

8. A second "program" aimed at increasing food production is referred toas INMAS. This program, dating from 1967/68, is similar in objectives, contentand coverage to BIMAS, with the important exception that no government creditis provided. INMAS participants, somewhat ambiguously defined as any farmerwho employs modern inputs and techniques in food production, may purchasethose inputs from any source.

Recent Performance

9. The availability of new high-yielding rice varieties, together withcredit, extension and marketing services provided by BIMAS, contributed to theincreasing trend in rice production since 1970. The paddy area in the programmore than doubled between the 1970/71 and 1973/74 crop year, then peaked in1974/75 at nearly 2.2 million ha before declining to 1.6 million ha in the1977/78 wet season. The number of farmer participants similarly increasedsteadily from 1.3 million in 1970/71 to 2.6 million in 1974/75 before fallingto just over 1.8 million in 1977/78 (Annex 1, Table 4).

10. The BIMAS program for secondary crops has been much less important,involving at its peak (1975 dry season) only 220,000 ha and 254,000 farmers.As in the case of BIMAS paddy, the BIMAS area in secondary crops declined inrecent years.

11. In contrast to BIMAS, the INMAS program continues to grow in termsof area and number of participants. (The difficulty of precisely definingan INMAS participant was noted above.) During the past four wet seasons(1974/75-1977/78), the area under INMAS paddy more than doubled to2.1 million ha. Area gains were registered in most provinces (Annex 1,Table 1) with the increase in East Java among the largest in relative andabsolute terms (from 105,000 ha in 1974/75 to 469,000 ha in 1977/78).

12. Taken together, the BIMAS and INMAS paddy area increased from2.9 million ha to 3.7 million ha during the past four wet seasons, while thearea in secondary crops rose from 215,000 ha to 984,000 ha. In 1977/78 INMASaccounted for nearly 90% of the secondary crops under the two programs.The combined INMAS area under paddy and secondary crops exceeded the areaunder the BIMAS programs for the first time in 1976/77.

13. Much of the increase in area covered by BIMAS and INMAS has occurredon Java. The lower rate of participation on the Other Islands reflects theless well-developed infrastructure, extension services, and input distributionsystems. Also village units on the Other Islands serve about twice the croppedarea compared with Java, which has hampered somewhat the accessibility of theBIMAS inputs to the farmers. However, as can be seen from the following table,participation on the Other Islands has been increasing during recent years.

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Page 5

AREAS UNDER BIMAS AND INMAS PROGRAMS

1974/75 1975/76 1976/77 1977/78…-----------_________ ('000 ha) -- …------------------

PaddyBIMAS

Java 1,799 1,729 1,430 1,223Other Islands 354 372 398 374

Total 2,153 2,101 1,828 1,597

INMASJava 517 614 1,220 1,429Other Islands 177 227 517 669

Total 686 841 1.737 2,098

TotalJava 2,316 2,343 2,650 2,652Other Islands 531 599 915 1,043

Total 2,839 2,942 3,565 3,695

Secondary CropsBIMAS

Java 106 144 127 96Other Islands 49 40 42 22

Total 155 184 169 118

INMASJava 55 124 572 846Other Islands 5 5 35 20

Total 60 129 607 866

TotalJava 161 268 699 942Other Islands 54 45 77 42

Total 215 313 776 984

Source: Bank Rakyat Indonesia

Note: Small discrepancies between the figures in this table and those in Table4 of this annex are due to the fact that these figures were derived fromdata at an earlier point in time.

ANNEX 1

- 24 - Page 6

14. A surprising fact, given the total increase in cropped area of morethan a million ha from 1974/75 to 1976/77, is that fertilizer consumptionhas declined over this time to a level below that achieved in 1973 (Annex 5,para. 3). In spite of this decrease, per ha paddy yields are reported to havesimultaneously increased. INMAS farmers appear to use significantly lessfertilizer than BIMAS farmers; however, this difference is not reflected atall in per ha paddy yields (see the following table). The fact that fertilizerlevels and resulting production bear little correlation casts doubt on thereliability of the basic statistics presently being used.

UREA APPLICATION AND YIELDS OF STALK PADDY BIMAS/INMAS

1974/75 1975/76 1976/77…-------- (wet season) -----------

Average urea application(kg/ha) /aBIM4AS 72 77 87INMAS 22 10 27INMAS as % of BIMAS 31 13 31

Average paddy (tons/ha)BIMAS 3.4 3.4 n.a.INMAS 3.0 3.3 n.a.INMAS as % of BIMAS 88 97

/a Paddy and secondary crops combined.

Credit Repayment

15. The Jogjakarta pilot project resulted in a credit repayment rate of99% and repayment rates for BIMAS paddy credits for the whole of Indonesiaduring the next four wet seasons (1970/71-1973/74) exceeded 90%; repaymentrates on BIMAS credits for secondary crops were nearly as high (see Annex 1,Table 4). In general, the record during those years was excellent when comparedwith repayment records of small farmer, short-term credit in many other countries.Vigorous collection efforts by the BRI during this period appear to be majorreasons for this success.

16. Unfortunately, this record has not been maintained. Repaymentperformance has deteriorated since the dry season of 1974. It is too earlyto make a judgment about the likely record for the past two seasons (1976dry season and 1976/77 wet season) because at the time of data collectionsome of the credits were not yet 14 months old and thus not consideredoverdue. But a comparison of the proportion of credit repaid by the end ofthe season suggests that the repayment position in Java has deteriorated sig-nificantly in recent years (See Annex 1, Table 5).


Through to 1974, the percentage of repayments two years in arrears was about95% and this has fallen to around 80% for 1974/75 and 1975 crops. Similarly,loans one year in arrears have fallen from about 90% to about 50%. Therepayment rate for recent years suggests a declining trend compared withprevious years and is a matter of concern in relation to the long run viabiiltyof the BIMAS program.

17. As of June 1978 unpaid loans for the whole of Indonesia one yearin arrears, are about Rp 53 billion and Rp 8 billion for rice and secondarycrops respectively or about Rp 61 billion in total (Annex 1, Table 4). Thesearrears do not include any allowance for interest on overdue accounts.

Factors Affecting Repayment

18. Under BRI regulations, persistent default on BIMAS credit by partici-pants results in credit denial and, therefore, contributes to the decline inBIMAS participation, with possible significant implications for food cropproduction. For this reason the apparent deterioration in the repaymentrecord is one of the most significant areas of concern for the current BIMASprogram. Several reasons for this development have been suggested. Amongthe most common is unusually serious crop damage in recent years from drought,flood and, most important, pests, including stemborers, brown plant hoppersand rats. Insect attacks were particularly damaging to the 1975 rice cropsand adverse weather affected production in several years. Localized cropdamage also was reported in 1976 and 1977. The 1976 dry season was character-ized by unusually low rainfall. Nonetheless, national data indicate thataverage rice yields increased during each of these years and thus, on anational basis, there is no real financial reason why farmers could notcontinue to repay at the same levels as in previous years.

19. In addition to reduced crops in localized areas, other reasons mustbe sought to explain the worsening repayment situation. One of these reasonsmay be less vigorous collection efforts by Government. As noted earlier,BI4AS participants, now comprising less than 20% of all farm families, tend tobe the better-educated, more influential members of the community. Politicalconsiderations inevitably also influence collection efforts. Farm surveyssuggest that in numerous cases those in default are among the larger farmers,many of whom have other economic interests. The national elections of 1977may have elevated political considerations in the operations of the BIMASprogram. This remains a matter of conjecture. But it is clear that vigorouscollection efforts can reduce arrears as evidenced by BRI actions amongvillage leaders in West Java which resulted in much improved collectionwithin a few weeks.

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20. Repayment performance is also related to another set of issues.Two most deserving of attention are: (a) does the BIMAS package when appliedto poorer soils, rainfed areas or some secondary crops, generate an increme-ntal net return sufficient to permit repayment of the BIMAS credit? and (b)can small farmers realize an incremental cash flow adequate to repay thisamount? Regarding the first, the possibility was noted earlier that incremen-tal output from the BIMAS package may be lower than assumed by BIMAS agrono-mists (Annex 2 discusses this issue in more detail). Furthermore, if partici-pants do not receive the floor price for rice, as seems frequently to be thecase in several areas of the country (Annex 3), there is additional reason toquestion the adequacy of net returns from the package.

21. The attractiveness of the BIMAS package for a small (0.5 ha orless) family fann with a low off-farm income is also doubtful unless substan-tial additional production can be assured. A small farm with one irrigatedrice crop per year supporting a family of five in such a situation wouldprobably need to sell a substantial proportion of the annual rice crop torepay the BIMAS credit and provide for other goods and services required bythe family. Some of the income would presumably be used to purchase lowercost foods such as cassava. It is possible that some farmers with a high

aversion to risk may prefer not to take up a BIMAS credit in order to avoidrepayment obligations in the event of a poor production result.

22. Tenant farmers who cultivate paddy farms of less than about 0.5 ha,with only one crop a year and with no off-farm income, are less likely to beattracted by the BIMAS program unless special subsidies are provided. Sub-sistence needs will usually not permit a marketable surplus adequate to repaythe credit./I Despite a reported trend towards increases in the size ofholdings, the numbers of such farms may be considerable. The 1973 Agricul-tural Census indicates that more than a quarter of Java's 8.6 millionfarms contain at least some rented land, while average farm size for theisland is just over 0.6 ha. Sixty percent of all Javanese farms are 0.5ha or less in size and 38% are less than 0.3 ha.

23. Repayments may also be low because the built-in system of incentivesto repay BIMAS credits is weak. Interest rates of 12% annually on BIMAScredits have been negative in real terms in recent years. Not unexpectedly,demand for this credit is strong and much of it reportedly is appropriated bymore influential members of the community. It is suspected that there hasbeen some misuse of these funds, sometimes by the resale of BIMAS inputs andsubsequent lending of the proceeds at interest rates much higher than those

/1 Assume a 0.5 ha irrigated farm and a yield of as high as 5 tons of driedpaddy per ha. Harvesters under the traditional system take about 10% ofthe dried crop, while the landlord's share may be up to 50% of theremainder. Subsistence requirements for a family of 5-6 are about 550 kgof rice (100 kg rice x 5.5). The remaining surplus is only about 150 kgof rice worth Rp 11,000 (at the floor price), while the BIMAS creditobligation for 0.5 ha is about Rp 15,000.

ANNEX 1Page 9

charged on the BIMAS loan. Low interest rates encourage borrowings, diver-sion of funds to higher-earning alterneattves and delayed repayment. Thelapsing of interest charges on arrears after two years and the absence of apenalty charge further weakens the incentive for timely repayment.

24. Declining participation in BIMAS is of concern to Governiment becauseof its direct relation to food production. Reasons for the fall off in par-ticipation frequently mentioned to the mission during field visits includedthe cumbersome paperwork required of participants even after recent improvements,and the frequent difficulties of obtatnitlg from the cooperatives the requiredfertilizers and pesticides. Recent price advantages for non-BIMAS fertilizerfurther reduces the inicentive for BIMAS participation.

25. These may be valid explanations for declining participation sincelate 1976, when the two-tiered fertilizer price was abolished and privateshops in most areas were given greater freedom to handle this input. But theyseem less useful to explain the steady decline in BIMAS area during the twoprevious years. Credit denial to defaulting participants appears to be arlimportant explanation, and steps to improve the repayment situation are urgentlyneeded.

Summary and Conclusions

26. There is no doubt that the BIMAS/INMAS programs have been majorcontributors to the 40% increase in Indonesia's rice production over the pastdecade. BIMAS has been instrumental in introducing large numbers of farmersto low-cost institutional credit and modern inputs and its demonstrationeffect has probably contributed to the increase in INMAS planted areas. Forthe 1976/77 main season, about 1 of every 2.5 ha in rice harvested benefitelErom some modern inputs through BIMAS or INMAS.

27. But the BIMAS programs, both for paddy and secondary crops, arelosing momentum. Some 800,000 fewer rice farmers were participating in1977/78 than in 1974/75, while over these years the total BIMAS area (paddy)declined by about 600,000 ha. Much of the area lost from BIMAS appears tohave become part of INMAS; the INMAS paddy area expanded during this time bysome 1.4 million ha. From the viewpoint of the country's food productioneffort, the lagging BIMAS program is of concern because cropped areas lostfrom BIMAS appear to have lower yields than those in the program. It is alsoof concern that many small farmers do not avail themselves of the BIMAScredit package.

28. Reasons for declining BIMAS participation are not fully known anda research input aimed at providing a clearer understanding of these factorsseems advisable. Explanations appear to include growing dissatisfaction withthe paperwork and cumbersome procedures for input procurement under BIMAS.Poor service from many of the cooperatives and BIMAS packages which wereeither out of line with the alternative costs of inputs or inappropriate tothe circumstances of particular farmers have probably also been factors. Inrecent months more attractive fertilizer prices and readily available supplies

- 28 -ANNEX 1Page 10

outside of BIMAS may have added to this dissatisfaction. But the major causefor the decline in the numbers of BIMAS farmers is the denial of credit fromBRI to participants who have defaulted on previous loans. This is a develop-ment of growing importance. By June 1978, arrears under BIMAS had accumulatedto about Rp 53 billion (one year in arrears) and as much as 1.5 million hareportedly had been denied BIMAS inputs through credit default. On presenttrends, these defaults will continue to grow and threaten the collapse of theBIMAS credit program. Rescheduling or cancellation of some of these debtsmay be necessary, although this would reduce the resolve of farmers whoattempt to repay their loans on time. The soundest approach would includemeasures to improve credit repayment in the future even at the cost of adecline in participants in the short term. Such measures should relate toboth the incentives to repay and the ability of participants to repay.

29. The lack of adequate repayment incentives is an important deficiencyof the BIMAS program.

- Greater collection efforts are required, including court actionagainst the most flagrant abusers of the BIMAS program, particu-larly those who have the greater ability to pay. The need fortimely repayment should be stressed to farmers by BRI villageunit officials. Village leaders should be expected to supportthese efforts both by personal example.

30. The terms of BIMAS credits also could be changed to increase incen-tives for timely repayment.

- Continuation of interest after the loan becomes due, and penaltycharges for late repayment could be a major step towards improvingrepayment performance.

- Thought should also be given to an increase in interest rates,perhaps on an increasing scale after harvest, to reduce diversionof funds and encourage prompt repayment. Such a rise in interestrate would be unlikely to significantly affect the bona fide cred:Ltdemand for food production purposes.

31. The ability to repay is an important constraint for large numbersof existing and potential BIMAS participants.

- In this connection the economics of the BIMAS credit packageshould be examined carefully to determine whether the incentivesfor farmers are adequate, particularly for crops where there is atpresent no price support mechanism.

32. The adequacy of the pesticides components in the BIMAS packageshould be examined, in terms of quantity and type of pesticidesprovided and pricing and credit arrangements. Consideration shouldbe given to extending to all users the subsidy on pesticides nowavailable to BIMAS participants.


32. The performance of the BIMAS and INMAS programs will be an importantdeterminant of domestic food supplies over the next few years. Carefulmonitoring of the programs is required to ensure that they meet farmers'needs. At least three areas of emphasis are warranted:

- Surveys to determine the reasons for declining participation inthe program.

- Continued efforts to improve the quality of statistical informationpertaining to these programs.

INDONESIA


A Comparison of the BIMAS and INMAS Programs for Paddy

(Wet Season 1974/75 - 1977/78)

BIMAS INMAS TOTAL

Region/Province 1974/75 1975/76 1976/77 1977/78 1974/75 1975/76 1976/77 1977/78 1974/75 1975/76 1976/77 1977/78

------------------ ---- ------ ---- -- -- -- ('000 ha) -------- -- ---------- -------

JavaWest Java 613 616 583 466 193 276 379 460 806 892 962 926

Jakarta - - - - - 2 9 8 - 2 9 8

Central Java 451 430 320 280 213 218 402 440 664 648 722 720

Jogiakarta 59 68 35 30 6 3 63 52 65 71 98 82

East Java 676 615 492 447 105 115 367 469 781 730 859 916

Subtotal 1,799 1,729 1,430 1,223 517 614 1,220 1,429 2,316 2,343 2,650 2,652

SumatraAceh 11 13 8 5 - 1 38 41 11 14 46 46

North Sumatra 44 41 46 57 40 16 121 193 84 57 167 250

West Sumatra 45 39 32 25 19 20 63 80 64 59 95 105

Riau 7 10 11 7 17 23 24 23 24 33 35 30

Jambi 8 21 28 23 4 11 12 11 12 32 40 34

Bengkulu 4 4 8 6 - - 3 5 4 4 11 11

South Sumatra 17 22 29 35 6 8 5 10 23 30 34 45

Lampung 35 31 39 34 - 4 34 44 35 35 73 78

Subtotal 171 181 201 192 86 83 300 407 257 264 501 599

KalimantanWest Kalimantan 8 13 11 9 12 16 38 22 20 29 49 31

East Kalimantan - - 1 1 8 9 11 11 8 9 12 12

Central Kalimantan 2 1 7 13 5 29 18 10 7 30 25 23

South Kalimantan 9 8 12 8 40 40 63 79 49 48 75 87

Subtotal 19 22 31 31 65 94 130 122 84 116 161 153

SulawesiNorth Sulawesi 9 7 6 4 5 16 8 12 14 23 14 16

Central Sulawesi 2 4 1 2 - 4 11 10 2 8 12 12

South Sulawesi 56 57 64 64 3 20 35 65 59 77 99 129

Southeast Sulawesi 1 1 1 1 - - - - 1 1 1 1

Subtotal 68 69 72 71 8 40 54 87 76 109 126 158

Nusa Tenggara & BaliWest Nusa Tenggara 33 35 30 30 6 5 16 27 39 40 46 57

East Nusatenggara 2 6 8 4 1 - 1 2 3 6 9 6

Bali 61 59 56 46 3 5 16 24 64 64 72 70

Subtotal 96 100 94 80 10 10 33 53 106 110 127 133

Total 2,153 2,101 1,828 1,597 686 841 1,737 2,098 2,839 2,942 3,565 3,695

Note: - signifies zero.

Source: BIMAS Secretariat. E

INDONESIA


BIMAS Paddy Packages for 1977/78 /a

Irrigated paddy - liquid insecticide Irrigated paddy - granulated insecticideItem Package A Package B Package C Average pa-ckage aca A Pkage B Package C Average package

Amount Rp Amount Rp Amount Rp Amount Rp Amount Rp Amount Rp Amount Rp Amount Rp

Urea 200 kg 14,000 100 kg 7,000 250 kg 17,500 183.3 kg 12,831 200 kg 14,000 100 kg 7,000 250 kg 17,500 183.3 kg 12,831TSp 50 kg 3,500 35 kg 2,450 75 kg 5,250 53.3 kg 3,731 50 kg 3,500 35 kg 2,450 75 kg 5,250 53.3 kg 3,731Insecticide /b 2 It 2,460 2 It 2,460 2 It 2,460 2 It 2,460 - 6,000 - 6,000 - 6,000 - 6,000Rodenticide 100 gr 230 100 gr 230 100 gr 230 100 gr 230 100 gr 230 100 gr 230 100 gr 230 100 gr 230Seed - 3,750 - - - 3,750 - 2,500 - 3,750 - - - 3,750 - 2,500Spraying - 2,000 - 2,000 - 2,000 - 2,000 - 1,000 - 1,000 - 1,000 - 1,000Cost of living - 6,000 - 6,000 - 6,000 - 6,000 - 6,000 - 6,000 - 6,000 - 6,000

Total Cost 31,940 37,190 29,752 34,480 22,680 39,780 33,292

Irrigated paddy - using DAP /c Dryland paddyItem Package A Package B Package C Average package Item Wet season Dry season

Amount Rp Amount Rp Amount Rp Amount Rp Amount Rp Amount Rp

Urea 180.5 kg 12,635 86.3 kg 6,041 220 kg 15,400 162.3 kg 11,361 Urea 150 kg 10,500 200 kg 14,000TSP 50 kg 4,500 35 kg 3,150 75 kg 6,750 53.3 kg 3,731 TSP - - 65 kg 4,550Insecticide (granules) - 6,000 - 6,000 - 6,000 - 6,000 NPK 15-15-15 200 kg 14,000 - -Rodenticide 100 gr 230 100 gr 230 100 gr 230 100 gr 230 Insecticide /b 2 lt 2,460 2 lt 2,460Seed - 3,750 - - - 3,750 - 2,500 Rodenticide 100 gr 230 100 gr 230Spraying - 1,000 - 1,000 - 1,000 - 1,000 Spraying - 2,000 - 2,000Cost of living - 6,000 - 6,000 - 6,000 - 6,000 Cost of living - 6,000 - 6,000

Total Cost 34,115 22,421 39,130 30,822 Total Cost 35,190 29,240

/a Designed for one hectare of crop. Packages for 1978/79 are exactly the same except that the cost of living was raised to Rp 10,000/ha andan allowance of Rp 2,100/ha for KCl/K20 was added for irrigated paddy.

/b Insecticide includes rebottling and administrative costs.

/c Diamonium phosphate.

Source: BIMAS Secretariat.

1 r,m

INDONESIA


BIMAS Secondary Crops Packages for 1977/78 and 1978/79 /a

Item Maize Soy beans Ground nuts Cow peas hum Cassava Sweet potato

Amount Rp Amount Rp Amount Rp Amount Rp Amount Rp Amount Rp Amount Rp

1977/78

Urea 200 kg 14,000 50 kg 3,500 50 kg 3,500 25 kg 1,750 150 kg 10,500 100 kg/c 7,000 100 kg/c 7,000

TSP 100 kg 7,000 50 kg 3,500 75 kg 5,250 50 kg 3,500 75 kg 5,250 - - - -

Pesticide/b 0.5 lt 615 4 it 4,920 2 It 2,460 2 lt 2,460 1 it 1,230 0.5 kg/d 1,150 - -

Seed - 2,585 - 12,000 - 30,090 - 6,790 - 820 - 5,350 - 5,000

Spraying - - - 2,000 - 1,000 - 1,000 - 500 - - - -

Cost of living - 2,500 - 2,500 - 2,500 - 2,500 - 2,500 - 2,500 - 2,500

Total Cost 26,700 28,420 44,800 18,000 20,800 16,000 14,500

1978/79

Urea 250 kg 17,500 75 kg 5,250 100 kg 7,000 50 kg 3,500 150 kg .10,500 275 kg/c 19,250 200 kg/c 14,000

TSP 100 kg 7,000 100 kg 7,000 100 kg 7,000 50 kg 3,500 100 kg 7,000 - - - -

Pesticide/b 0.5 lt 615 4 It 4,920 2 It 2,460 2 It 2,460 1 lt 1,23Q 0.5 kg/d 1,150 -

Seed 25 kg 2,385 50 kg 12,330 100 kg 29,040 25 kg 7,040 15 kg 1,270 - 5,100 - 4,500

Spraying - - - 2,000 - 1,000 - 1,000 - 500 - - - 4,500

Cost of living - 4,000 - 4,000 - 4,000 - 4,000 - 4,000 - 4,000 - 4,000

Total Cost 31,500 35,500 50,500 21,500 24,500 29,500 22,500

/a Designed for one hectare of crop.

/b Pesticide cost includes rebottling expenses, i.e.,Rp 900/lt + Rp 330/lt rebottling costs.

/c Fertilizer used here is NPK.

/d Rodenticide.

Source: BIMAS Secretariat.

ANNEX 1- 33- Table 4

INDONESIA


BIMAS Credit Program for Paddy and Secondary Crops

(All Indonesia)

Value of % of Value ofNo. of credit Value of credit credit

Season Area farmers extended repayment repaid outstanding/b('000 ha) ('000) -- (Rp million) --- (%) (Rp million)

I. Paddy /a1970/71 Wet 1,009 1,327 8,461 8,141 96 3201971 Dry 296 567 2,508 2,354 93 1541971/72 Wet 891 1,012 7,305 7,062 97 2431972 Dry 308 357 2,559 2,399 94 1601972/73 Wet 1,380 1,715 12,771 12,051 99 7201973 Dry 487 549 4,940 4,593 93 3471973/74 Wet 2,123 2,558 31,550 28,621 91 2,9291974 Dry 813 988 12,537 11,092 89 1,4451974/75 Wet 2,171 2,615 40,559 36,066 89 4,4931975 Dry 887 1,007 17,277 14,064 81 3,2131975/76 Wet 2,132 2,439 55,074 44,439 81 10,6351976 Dry 861 915 22,442 15,279 68 7,1631976/77 Wet 1,815 2,090 48,873 28,200 58 20,6731977 Dry /c 679 640 17,533 5,786 33 11,7471977/78 Wet /c 1,566 1,806 44,632 4,260 10 40,372

II. Secondary Crops /a1972/73 Wet 6 6 53 47 88 61973 Dry 13 19 95 89 94 61973/74 Wet 104 124 1,182 1,076 91 1061974 Dry 155 192 2,158 1,900 88 2581974/75 Wet 168 169 3,225 2,279 71 9461975 Dry 220 254 4,714 3,518 75 1,1961975/76 Wet 181 188 4,360 2,914 67 1,4461976 Dry 168 175 4,520 3,017 67 1,5031976/77 Wet 174 177 4,398 2,208 50 2,1901977 Dry /c 106 92 3,264 1,039 32 1,2251977/78 Wet /c 132 144 3,574 212 6 3,362

/a Situation as of June, 1978./b Credits are payable 7 months after disbursement and considered in arrears 14

months after disbursement./c Repayment data for these years will obviously not be complete. Hence the re-

payment percentages in this table are not good indicators of the final result.

Source: Bank Rakyat Indonesia.

INDONESIA


BIMAS Paddy Credit Repayment Summary - Total Java /a

1970/71 1971 1971/72 1972 1972/73 1973 1973/74 1974 1974/75 1975 1975/76 1976 1976/77

------------------------------------------------- (Rp million) ------------ - ---------------- - ---------------- _____ -

Credit disbursed 7,654 1,925 6,575 2,096 10,785 3,938 26,302 9,734 35,017 13,311 47,833 17,257 41,500Amount repaid (end of season) 7,050 1,605 5,318 993 8,518 1,934 21,865 4,654 26,405 4,882 27,262 4,743 1,576/e

Outstanding Balance(end of season)/b 604 320 1,257 1,103 2,267 2,004 4,437 5,080 8,612 8,429 20,571 12,514 39,763

Additional Repayments /c1973 181 131 775 823 - - - - - - - - -1974 118 72 212 128 1,493 1,586 - - - - - - -1975 58 26 66 30 318 164 2,482 3,876 - - - - -1976 7 6 8 5 28 17 869 501 3,769 5,334 - - - v1977 - - - - 29 - - - 354 218 2,355 7,068 20,269

Total Repayments /d 7,414 1,840 6,379 1,979 10,386 3,701 25,216 9,024 30,528 10,434 29,617 11,811/f 21,845/f

Total Outstanding /d 240 85 196 117 399 237 L_,86 710 4,489 2,877 18,216 446/f 19,655/f

X Repaid 97 96 97 94 96 94 96 93 87 78 62 68 53X Outstanding 3 4 3 6 4 6 4 7 13 22 38 32 47

% Repayment within about oneyear of loan coming due 92 90 92 87 93 89 92 88 86 77 62 68 53

% Repayment within about twoyears of loan coming due 95 94 96 93 96 93 96 93 87 78 - - -

/a Information presented is derived from BRI records on December 31 for each calendar year 1970-76. Information for 1976/77 and 1976/77 is derivedfrom December 1977 BRI records.

/b Credit repayments are due 7 months after disbursement and considered in arrears after 14 months. 'aTc As at December 31 of each year./d As at May 1977 escept for 1976 and 1976/77. /e As at May 1977. kA!/f As at December 1977.

- 35 - ANNEX 1Table 6

INDONESIA


BIMAS Secondary Crops Credit Summary - Total Java /a

1972/73 1973/74 1974 1974/75 1975 1975/76

------------------- (Rp million) -------------------

Credit disbursed 106.4 968.3 1,714.9 1,888.8 3,709.4 3,443.8Amount repaid 97.1 776.2 692.3 1,134.1 935.0 1,575.2

Outstanding /b 9.3 192.1 1,022.6 754.7 2,775.4 7,868.6

Additional repayment /c1975 4.1 79.2 630.1 - - -1976 1.0 22.1 236.5 369.5 1,660.1 -

Total repayment 102.2 877.5 1,558.9 1,503.6 2,595.1 1,575.2

Outstanding balance 4.2 90.8 156.0 385.2 1,114.3 1,868.6

% Repaid 96.1 90.6 90.9 79.6 70.0 45.7% Outstanding 3.9 9.4 9.1 20.4 30.0 54.3

% Repayment withinabout one yearof loan coming due 91.3 88.3 77.1 79.6 70.0 -

% Repayment withinabout two yearsof loan coming due 96.1 90.6 90.9 - -

/a Information presented is derived from BRI records on December 31 for eachcalendar year 1974-76.

/b Credit repayments are due after 7 months and considered in arrears after14 months.

/c As of December 31 of each year.

Source: Bank Rakyat Indonesia.

- 36 -ANNEX 2Page 1

INDONESIA

SUPPORT SERVICES TO FOOD CROP PRODUCTION

Costs and Benefits of the BIMAS Package

Background

1. The BIMAS cost/benefit analysis is an integral part of the BIMASprogram. It is the means by which Government attempts to reach an optimumcombination of input and output prices such that the BIMAS package is at alevel which should ensure adequate returns to the farmer and is estimatedby comparing incremental output achieved from using the BIMAS package ofinputs to the incremental cost incurred from purchasing it. The basicformula used for this analysis is:

(1) B = incremental (BIMAS) benefits/haC incremental (BIMAS) costs/ha

where incremental benefits are:

(2) B = P - Q(l - a - b) /1

and incremental costs are

(3) C = CF + CI + CR + CS + Csp + COL + I /2

/1 P = Floor price of undried stalk paddy at cooperative level, 17-1/2%moisture content.

Q = Incremental yield in kg/ha of undried stalk paddy.(-a) = IPEDA land tax (5% of gross value of total output/ha).(-b) = Share to harvesters (16% of gross value of total output/ha).

/2 CF = Cost of BIMAS fertilizer/ha.

CI = Cost of insecticide/ha.

CR = Cost of rodenticide/ha

CS = Cost of seed/ha.

Csp = Cost of spraying/ha.

COL = Cost of living cash subsistence grant.

I = Interest costs on BIMAS credit (1% per month over a 7 month period).

37 -

ANNEX 2Page 2

2. The cost/benefit (C/B) ratio is determined on an informal basis bya committee composed of members of BAPPENAS, the Department of Agriculture,BIMAS Secretariat, and the Ministry of Finance. This committee estimatesinput quantities and incremental yields, and then formulates several C/Bratios for each BIMAS package using different combinations of input andoutput prices (see the table below), with each alternative C/B ratio having avalue of at least the set minimum of about 1:2.2. Once various alternativeshave been estimated, all findings are presented on a formal basis to the GOICabinet, which in turn decides official government policy for the BIMASprogram. Examples are given below:

BIMAS COST/BENEFIT RATIO ANIALYSES FOR THE 1977/78 WET SEASONWITH VARIED INPUT/OUTPUT PRICES

Package A: Irrigated Paddy /a (250 kg Urea + TSP)

Fertilizer price 80 70 60 70Stalk paddy price /b 51 51 51 55Insecticide /c L L L L

Cost/benefit ratio /d 2.19 2.36 2.57 2.55

Package B: Irrigated Paddy /a (135 kg Urea + TSP)

Fertilizer price 80 70 60 70Stalk paddy price /b 51 51 51 55Insecticide /c L L L L

Cost/Benefit ratio /d 2.40 2.56 2.75 2.76

/a Incremental yield in kg/ha stalk paddy:Packet A 2,006Packet B 1,370

Packet B assumes no incremental money for seed ashigh-yielding seed not used.

/b 1977/78 floor price at BUUD Rp 52/kg of stalk paddy.

/c L means 2 liters liquid insecticide (Rp 2,460)

/d For details of BIMAS packages see Annex 2 Table 1. Theformula used to estimate B/C ratio is the same as theformula discussed in para. 1 of this Annex.

3. One key to ensuring assumed farm benefits is the maintenance of aguaranteed (floor) price for paddy. The floor price is administered by theGovernment Logistics Agency (known as BULOG)/1 and is one of the GOI's

/1 For a more detailed discussion of BIJLOG and its operations see Annex 3.

- 38 - ANNEX 2

Page 3

main instruments to ensure that the farmer receives adequate compensation forhis produce. The table below shows floor prices (BULOG purchase prices) forvarying qualities of paddy for 1977/78.

FLOOR PRICES, 1977/78Rp/kg

A. Purchases by cooperatives and private dealersUndried stalk paddy at village /a 51.00Undried stalk paddy at cooperative or private dealer 52.00Dry stalk paddy at village 54.00Dry stalk paddy at cooperative or private dealer 55.00Undried paddy at village 66.50Undried paddy at cooperative or private dealer 67.50Dry paddy at village 70.00Dry paddy at cooperative or private dealer 71.00

B. Sales by cooperatives or private dealersto BnLOG or free market

Dry paddy at cooperative or private dealer 72.00Milled rice at cooperative or private dealer /b 110.00

/a Stalk paddy with moisture content of 17%.

/b The corresponding ceiling price at retail for average qualitymilled rice ranges from Rp 127.50/kg in major urban and/orsurplus areas to Rp 145/kg in more remote and/or deficit regions.

5. There is some question, however, as to whether BIMAS farmersactually realize a C/B ratio as high as the minimum 2.2 official estimation.As a result of this, many farmers may not be realizing sufficient increasesin yields and cash income to repay BIMAS credit. This is probably reflectedin the downward trend of BIMAS credit repayments.

6. The mission considers that there are a number of reasons why farmersmay not be achieving the estimated cost/benefit ratio. These include:

(a) actual incremental yields may be less than estimated asfarmers are not always able to obtain all the ingredientsof the package at the time desired. For example, many co-operatives did not have stocks of insecticide when needed,or recommended amounts of fertilizer were not available orapplied. Thus, some farmers appear to have obtainedincremental yields of only about 1,200 kg/ha; and

- 39 -ANNEX 2Page 4

(b) farmers often do not receive the guaranteed (floor) price fortheir stalk paddy due to underpayments by cooperatives orprivate traders./I

7. An analysis of the BIMAS cost/benefit ratio was made utilizing thesealternative outcomes. Prices used are those for the 1977/78 dry season (seeparas. 1 and 4) and incremental outputs as above. The analysis contains fourestimates: (a) the standard BIMAS C/B formula using GOI incremental yieldsand stalk paddy floor prices; (b) the formula using the stalk paddy floor priceand the lower estimate of incremental yields; (c) the formula using GOI estimatedincremental yields and estimated prices actually received by the farmer; and (d)the formula using the lower incremental yields and estimated prices actuallyreceived by farmers. The table below summarizes the results of this analysiswhich is elaborated in Appendix 1.

RESULTS OF COST/BENEFIT ANALYSIS /a

(1) GOI yield + official floor price = 2.59(2) Lower yield + official floor price 1.84(3) GOI yield + estimated actual price = 2.09(4) Lower yield + estimated actual price = 1.49

/a It should be noted that these ratios do not representthe ratio of the value of incremental output to the costof incremental inputs. The BIMAS package, the cost of whichis used to compute the ratios in the table, contains on theaverage Rp 5,000 as a cost-of-living grant and Rp 2,000to cover possible spraying expenses for insecticide (whichmay not be necessary). These comprise 20% and 8% of the total"cost" of the package respectively. Including only actualinput costs, the C/B ratios are increased by about 35%, e.g.,to 3.6 for case (1) above.

8. If the full, estimated incremental yield and the official floorprice for stalk paddy are obtained, then the cost/benefit ratio is fairlycomfortably in excess of the minimum ratio of 2.2. However, a reductionin price, of say Rp 10/kg reduces the ratio to below this leveland leaves no room for less-than-expected incremental yields. The farmeris then left with relatively little additional cash with which to repay theBIMAS loans.

/1 It was learned during the mission's field trip to Java that farmersoften received Rp 5-15 less than the floor price when they sold theirproduce on the open market. For the purpose of the analysis in para-graph 7, a price of Rp 10/kg less than the floor price for stalk paddyhas been adopted.

- 40 -ANNEX 2Page 5

9. The differential impact of the cost and value of incrementalproduction of the BIMAS package for holdings of different sizes is shown in

Annex 2, Tables 2 and 3. For the small farmer with a holding which allows

cropping of 0.2 ha of rice, the net additional income, received from one crop

above the cost of the BIMAS package, ranges from Rp 8,500 under the most

optimistic model to Rp 2,600 under the most pessimistic model. Taking the

net additional income above the cost of those inputs received in kind, thecorresponding figures are Rp 10,000 and Rp 4,100.

10. In Java, some 38% of farmers have holdings of 0.3 ha or less (seeAnnex 2, Table 4). No data are available regarding average farm incomes byfarm size, however, a farm of, say, 0.2 ha would probably be characterized byfamily incomes at the lower end of the distribution of rural incomes.Inspection of the distribution of per capita expenditure from the most recent

expenditure survey /1 suggests a per capita expenditure for rural Java of

between Rp 1,000 to Rp 1,999 per month, or about Rp 110,000 per family per year.Taking Rp 110,000 as a conservative figure for average farm family expendi-

ture on a 0.2 ha farm, Annex 2, Table 2 shows the costs and benefits of usingthe BIMAS package for one rice crop in comparison with the total farm expendi-ture level. The total cost of the BIMAS package is equivalent to about 5% ofannual expenditure; the physical inputs are less than 4%. The estimatedvalue of incremental production ranges from 16% of expenditure at best, to 9%

under the worst assumption. As a result, the additional income received

above the total cost of the BIMAS package under these assumptions ranges fromnearly 8% down to about 2.5% of expenditure. Omitting the cash element of thepackage, the figures are 9% to about 4%.

11. It may be that the smaller farmer's return from agriculture will be

lower than suggested above, because of interference of other income earning

activities with his farming activity. Looked at in these terms, the potentialnet return from use of the BIMAS package, given the effort involved in

enrolling for it, is marginal at best.

12. For the larger farmer, the position is somewhat different. Some

25% of farms in Java are over 0.75 ha. A farm with 1 ha of paddy land

is estimated to have a monthly expenditure of Rp 16,500 per family orRp 200,000 per family per year. The cost and returns from the BIMAS packagecompared to this total annual expenditure, are shown in Annex 2 Table 3. The

total cost of the BIMAS package amounts to 13.5% of annual household expendi-ture, that of physical inputs about 10%. Under the range of assumptionsused, the value of incremental production ranges from 25-44% of expenditure.

As a result, the additional income received above the total cost of the BIMASpackage under these assumptions ranges from 21% down to 6.5% of household

expenditure. Omitting the cash element of the package, the figures are 25%

to 15%.

13. The difference in relative impact of the BIMAS costs and returns in

the two situations is of course completely pre-determined by the assumptions

/1 See: Biro Pusat Statistik. National Socio-Economic Survey, September1977.

- 41 -ANNEX 2Page 6

made, but if the assumptions are reasonable then these calculations give someleads concerning the comparative incentives offered by the BIMAS program tofarms of differing size and income levels.

14. The analysis underlines the importance of examining the BIMAScredit package in terms of the impact of the cost and returns on existingfarm family incomes. Indeed the most important considerations, from thepoint of view of any farmer with limited resources, are the magnitudes ofadditional costs and returns. In many cases a farmer may prefer a moremodest (and less costly) package of inputs, even with the knowledge that hemay not be maximizing the additional production potential. From a farmer'spoint of view this may be the optimum strategy, particularly for secondarycrops where there is no formal price support mechanism. In fact simply theavailability of subsidized inputs without credit arrangements tied to apre-determined package of inputs may be preferred by some farmers.

15. During 1977 a dramatic increase has occurred in fertilizer salesunder INMAS, while BIMAS sales have stagnated (see Annex 2, Table 6). UnderINMAS, purchases can be made for cash, for specific input items, and a completepackage does not have to be taken. This increase may reflect the consider-ations noted above. As of October 1977, credit is being made availablethrough BRI for INMAS purchases from cooperatives, and procedures for obtainingBIMAS credit simplified. An effort to obtain data on the types of farmersutilizing the different inputs would assist in providing policy guidance asto possible additional or alternative incentives, to promote use of outputincreasing technologies.

Conclusions

16. All conclusions by the mission are tempered by the uncertaintysurrounding the incremental yields obtained from use of the BIMAS package andthe price obtained by the farmers for agricultural products produced.

17. With these reservations, the mission concludes that:

(a) Government may be assuming for the BIMAS program higher incrementalyields and product prices than may actually be obtained by farmerswith the result that the C/B ratio is lower than the 2.2 assumed toinduce farmer participation;

(b) for the very small farmer the combination of the actual cost ofthe BIMAS package and the opportunity cost of measures needed toobtain it, may have outweighed the anticipated, relatively smallincrement to household income;

(c) consideration be given by the Government: (i) to the desirabilityof changing the ratios of input and output prices so as to increasethe incentives to the farmer for use of improved inputs; and (ii)to redesigning the BIMAS package to more clearly meet the needs ofspecific target groups e.g. the subsistence tenant farmer.

- 42 -

ANNEX 2Appendix 1Page 1

INDONESIA


BIMAS Cost/Benefit Ratios for Alternative Assumptions

Assume cropped area of 1 ha.Given: IPEDA tax = Rp .05/Rp = a.

Harvesters share = Rp .16/Rp = b.Cost of average BIMAS package = Rp 25,040.Interest charge for 7 months = Rp 1,753.

MODEL A:

GOI estimated yields and stalk paddy floor price

Incremental yield = 1,688 kg/ha = Q.Price = Rp 52/kg = P.

B - (P)(Q)(1-a-b)C BIMAS + I

= (52)(1,688)(.79)25,040 + 1,753

69,34326,793

2.59.

MODEL B:

Lower incremental yield and official stalk paddy floor price

Incremental yield = 1,200 kg/ha = Q.Price = Rp 52/kg = P.

B (52)(1,200)(.79)C 25,040 + 1,753

= 49,29626,793

1.84.

- 43 -

ANNEX 2Appendix 1Page 2

MODEL C:

GOI estimated yield and estimated actual stalk paddy floor price

Incremental yield = 1,688 kg/ha = Q.Estimated actual price - Rp 42/kg = P'.

B (42)(1,688)(.79)C = 25,040 + 1,753

5 56,00826,793

- 2.09.

MODEL D:

Lower incremental yield and estimated actual stalk paddy floor price

Incremental yield = 1,200 kg/ha = Q'.Estimated actual price = Rp 42/kg = P'.

B (42)(1,200)(.79)C 25,040 + 1,753

= 39,81626,793

= 1.49.

- 44 -ANNEX 2Table 1

INDONESIA


BIMAS Irrigated Paddy Package for 1976/77

Irrigated paddy - liquid insecticidePackage A Package B _ Average package

Amount Rp Amount Rp Amount Rp

Urea 200 kg 14,000 100 kg 7,000 150 kg 10,500

TSP 50 kg 3,500 35 kg 2,450 42.5 kg 2,975

Insecticide 2 lt 2,460 2 lt 2,460 2 lt 2,460

Rodenticide 100 gm 230 100 gm 230 100 gm 230

Seed 3,750 1,875

Sprayingexpenses 2,000 2,000 2,000

C.O.L. 6,000 6,000 5,000

Total cost 31,940 20,140 25,040

Notes: 1. Packages are based on a one ha farm model. Unit prices are:

Urea, TSP Rp 70/kgRodenticide Rp 2.3/gmLiquid insecticide Rp 900/lt + Rp 330/lt for rebottling and

administrative costs

2. COL. Cost-of-living cash subsistence grant.

3. Average package is average of packages A and B.

- 45 -

ANNEX 2Table 2

INDONESIA


Estimated BIMAS Farmer's Cash Flows: 0.2 ha farm /a

GOI Mission Mission Mission Mission MissionModel Model A Model B Model C Model D Model E

A. Incremental BIMAS produc-tion (kg stalk paddy) 337.6 240 337.6 240 337.6 240

B. Cash costs and returns -------------------- (Rp'000) ----------------------

(a) Gross value of production:@ Rp 52/kg stalk paddy 17.55 12.48@ Rp 42/kg stalk paddy 14.18 10.08 14.18 10.08

IPEDA tax & harvesting cost /b 3.69 2.62 2.98 2.11 2.98 2.11

(b) Cost of total BIMASpackage 5.39 5.39 5.39 5.39 4.59 4.59

Net value of production 8.47 4.47 5.81 2.58 6.61 3.38

(c) Cost of BIMAS excludingcash element 3.86 3.86 3.86 3.86 3.09 3.09


C. Estimated annual householdexpenditure 110.00 110.00 110.00 110.00 110.00 110.00

D. Costs and returns as percentof household expenditure

…___________________ _ …(% )… _______________________

(a) Gross value of production 15.95 11.35 12.89 9.16 12.89 9.16

(b) Cost of total BIMAS 4.90 4.90 4.90 4.90 4.17 4.17Net value of production 7.70 4.06 5.28 2.35 6.01 3.07



/a All models are derived using the average BIMAS package as defined in Table 6, andyield and price assumptions as in Appendix 1. The models are defined as follows:

GOI Model: Uses official estimates of BIMAS incremental production and stalk paddyfloor price (1977/78 wet season).

Mission Model A: Uses lower estimate of incremental production and stalk paddy floorprice.

Mission Model B: Uses official estimate of incremental production and estimated actualprice.

Mission Model C: Uses lower estimate of incremental production and estimated actualprice.

Mission Model D: Uses official estimate of incremental production, estimated actualprice, but assumes 20% decrease in cost of in kind inputs of BIMASpackage.

Mission Model E: Uses lower estimate of incremental yield, estimated actual price,but assumes a 20% decrease in cost of in kind inputs of BIMASpackage.

lb Equivalent to 21% of gross value of production, see Annex 1.

- 46 -

ANNEX 2Table 3

INDONESIA


Estimated BIMAS Farmer's Cash Flows: 1.0 ha farm

GOI Mission Mission Mission Mission MissionModel Model A Model B Model C Model D Model E

A. Incremental BIMAS production 1688 1200 1688 1200 1688 1200(kg stalk paddy)

B. Cash costs and returns ---------------------- (Rp'000) -----------------------

(a) Gross value of production@ Rp 52/kg stalk paddy 87.78 62.40@ Rp 42/kg stalk paddy 70.90 50.40 70.90 50.40

IPEDA tax and harvesting cost /b 18.43 13.10 14.89 10.58 14.89 10.58

(b) Cost of total BIMASpackage 26.85 26.85 26.85 26.85 22.97 22.97




C. Estimated annual householdexpenditure 200.00 200.00 200.00 200.00 200.00 200.00

D. Costs and returns as percentof household expenditure

…__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _,(% )… _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

(a) Gross value of production 43.89 31.20 35.45 25.20 35.45 25.20

(b) Cost of total BIMAS 13.43 13.43 13.43 13.43 11.49 11.49Net value of production 21.25 11.22 14.58 6.49 16.52 8.43



/a All models are derived using the average BIMAS package as defined in Table 6, andyield and price assumptions as in Appendix 1. The models are defined as follows:

GOI Model: Uses official estimates of BIMAS incremental production and stalk paddyfloor price (1977/78 wet season).

Mission Model A: Uses lower estimate of incremental production and stalk paddy floorprice.

Mission Model B: Uses official estimate of incremental production and estimated actualprice.

Mission Model C: Uses lower estimate of incremental production and estimated actualprice.

Mission Model D: Uses official estimate of incremental production, estimated actualprice, but assumes 20% decrease in cost of in kind inputs of BIMASpackage.

Mission Model E: Uses lower estimate of incremental yield, estimated actual price,but assumes a 20% decrease in cost of in kind inputs of BIMASpackage.

/b Equivalent to 21% of gross value of production, see Annex 1.

_ 47 7

ANNEX 2Table 4

INDONESIA


Distribution of Farms by Size of Holding /a('000 farms)

0.3 or less ha 0.3-0.5 ha 0.5-0.75 haFully Partly Not Fully Partly Not Fully Partly Not

No. owned owned owned Total owned owned owned Total owned owned owned Total

JavaWest Java 925.4 42.5 0.1 968.0 432.7 26.1 0.2 459.0 321.5 14.4 0.1 336.0East Java 837.0 25.3 0.2 862.5 492.3 17.6 - 509.9 420.9 13.5 0.2 434.6Central Java 855.6 26.6 0.2 882.4 559.1 17.6 0.2 576.9 415.9 11 6 0.2 427.7Jogjakarta 144.4 3.5 - 147.9 62.6 1.1 - 63.7 42.0 0.4 - 42.4

Total Java 2,762.4 97.9 0.5 2,860.8 1,546.7 62.4 0.4 1,609.5 1,200.3 39.9 0.5 1,240.7

Total Indonesia 3,539.1 127.2 0.9 3,667.2 2,156.9 78.2 0.6 2,235.7 1,933.8 69.4 0.6 2,003.8

0.75 ha or more TotalFully Partly Not Fully Partly Notowned owned owned Total owned owned owned Total

JavaWest Java 510.1 13.9 0.3 524.3 2,189.7 96.9 0.7 2,287.3East Java 625.1 24.3 0.7 6509.1 2,375.3 80.7 1.1 2,457.1Central Java 559.0 15.1 0.3 574.4 2,389.6 70.9 0.9 2,361.4Jogjakarta 62.0 0.8 - 62.8 311.0 5.8 - 316.8

Total Java 1,756.2 54.1 1.3 1,811.6 7,265.6 254.3 2.7 7,522.6

Total Indonesia 4,376.4 193.3 2.2 4,571.9 12,006.2 468.1 4.3 12,478.6

% Distribution /b West Java East Java Central Java Jogjakarta Total Java Total Indonesia

0.3 or less ha 42.3 35.1 35.9 46.7 38.0 29.30.3-0.5 ha 20.1 20.8 23.4 20.0 21.4 17.90.5-0.75 ha 14.7 17.7 17.4 13.4 16.5 16.10.75 or more ha 22.9 26.4 23.3 19.9 24.1 36.7

Total 100.0 100.0 100.0 100.0 100.0 100.0

/a Pertains only to farms categorized as "Crop Holdings."

/b Each farm type as percentage of total number of farms.

Source: 1973 Agricultural Census.


INDONESIA


Farmer and Area Participation in BIMAS

Season No. of farmers Area Average size of BIMAS('000) ('000 ha) area (ha)

1970/71 Wet 1,327 1,009 0.761971 Dry 357 296 0.831971/72 Wet 1,102 891 0.811972 Dry 357 308 0.861972/73 Wet 1,715 1,380 0.801973 Dry 549 487 0.891973/74 Wet 2,558 2,123 0.831974 Dry 988 813 0.821974/75 Wet 2,615 2,171 0.831975 Dry 1,007 879 0.871975/76 Wet 2,439 2,132 0.871976 Dry 915 862 0.941976/77 Wet 2,090 1,815 0.871977 Dry 640 697 1.091977/78 Wet 1,806 1,566 0.87

ANNEX Z- 49 - Table 6

INDONESIA


BIMAS and INMAS Urea Sales by Region, Java, January-August 1976 and 1977

BIMAS INMAS Total1976 1977 Change 1976 1977 Change 1976 1977 Change('000 tons) (%) ('000 tons) (%) ('000 tons) (%)

East Java /a 146 149 2 22 116 432 168 264 57

Central Java 88 69 -22 12 44 271 100 113 13

West Java 110 130 18 6 32 442 116 162 40

Total 344 348 1 39 191 383 384 539 40

/a Includes Bali.

Source: Agrar-und Hydrotechnik "PUSRI Marketing 1977"

ANNEX 3

- 50 - Page 1

INDONESIA

SUPPORT SERVICES FOR FOOD PRODUCTION

The National Logistics Agency (BULOG) /1

1. The National Logistics Agency was established in 1967 to secure anadequate supply of basic foodstuffs for Indonesian consumers and to ensurefair and stable prices to producers. Originally concerned largely with rice,BITLOG has since been given additional responsibilities, ranging from thesupervision of import tenders for raw cotton and cotton yarn to the stabiliza-tion of sugar and wheat flour prices, as well as corn purchases in E. Java.In the case of rice, corn and sugar, BULOG is the sole importer. It is theprimary distributor of wheat flour and sugar, both imported and locallyproduced. It imports all food made available at concessional terms andadministers all food aid programs in the country.

2. BULOG is a special government agency reporting directly to theCabinet. Its operational expenses, including funds required for the importand domestic procurement of food staples, are provided directly by BankIndonesia through special loans at concessional terms. These loans areguaranteed by the Ministry of Finance. BULOG may own no physical assets.The national network of storage facilities which BULOG operates (see para. 12below) is owned by the Ministry of Finance. Basic policies of pricing andprocurement are determined by a technical group comprising representativesof the National Development Planning Agency (BAPPENAS), the Ministries ofAgriculture and Finance, the Directorate General of Cooperatives and BULOG.

3. Organizationlly, BULOG operates through a three-tiered structure,including BULOG headquarters in Jakarta, 27 provincial offices ("DOLOGs")and 68 district-level offices ("sub-DOLOGs"). The sub-DOLOGs are the majorpoint of contact with cooperatives and private paddy and rice dealers in thedomestic procurement program. In the 1976/77 crop year, 55 sub-DOLOGs wereengaged in paddy and rice purchasing activities.

The Stabilization Program for Rice

4. Assuring adequate supplies and stable prices for rice continuesto be BULOG's major activity. BULOG is charged with the twofold task ofmaintaining the retail price of milled rice below preannounced ceilings andsupporting farm prices of paddy at or above official floor prices. This isaccomplished through the operation of a buffer stock comprised largely ofimports, but also of domestically-procured paddy and rice supplies.

/1 BULOG is the acronym for Badan Urusan Logistik, roughly translated as theNational Logistics Agency.

ANNEX 3

- 51 - Page 2

5. Sub-DOLOGs can purchase only at the floor price and only fromgovernment-sponsored cooperatives or private dealers. They do not buy

directly from farmers. The official floor prices for paddy and rice areuniform throughout the country and are established at levels consideredhigh enough to provide incentives for farmers to participate in the rice

intensification programs (see Annex 2).

6. The ceiling on retail prices is maintained by careful disbursementof milled rice from the buffer stock. BULOG provides rice on a monthly basisto the military, to civil servants and to employees of state-owned enter-

prises. But its major price stabilizing activity at retail probably relates

to its "market operations," i.e., the injection of milled rice into the free

market when prices rise above the ceiling. The "injection price" is Rp 10

(per kilogram basis) below the free market price.

7. To facilitate its procurement activities, BULOG has developed its

own system of grades and standards for paddy and rice. The floor pricefor paddy applies to that which contains no more than 14% moisture and 3%each of empty, red and chalky kernels. Paddy which does not meet thesestandards may be purchased by BULOG, but at a discount. Frequently heard

complaints by farmers and cooperatives are that local growers have difficultyin meeting BULOG's quality standards and that both BULOG and the cooperatives

interpret these standards to their own advantage.

Operation of the System

8. Most of Indonesia's rice production is consumed at or near theplace of production. An estimated 75% of local supply is consumed within a

radius of 50 km of where it is produced and 20-25% of production is believed

to reach commercial markets (sold for money). In these circumstancesBULOG's efforts at stabilizing retail prices in major markets are heavily

dependent on imported supplies. In the past three years (1974/75-76/77)two thirds of BULOG's total rice procurement came from imports. Domesticprocurement amounted to 2-4% of local production (Annex 3, Table 1).

9. During this period about 50% of BULOG's releases have gone toprovide rice to the military and government employees, while 40% was used in

price stabilizing market operations. The balance of releases were made for

emergency needs. In 1976/77 record high levels were realized in both riceimports (1.5 million tons) and market operations.

10. A BULOG policy statement in April 1977 reaffirmed the Government'semphasis on consumer price stability. It noted the need to preserve the

purchasing power of the recent pay raise to government employees and the

importance of price stability as the country prepared for presidentialelections in 1978. (Food accounts for 63% of the Jakarta retail price index

and rice alone makes up 31%.)

11. BULOG's performance as a price stabilizer at retail and farm-gate

levels depends to a large extent upon the availability of storage capacityand careful management of the buffer stock. Prior to 1974 BULOG had availableabout one million tons of storage, largely in the form of rented facilities

ANNEX 3

- 52 - Page 3

of varying types. Some of this was of low quality. In 1975 an ambitiousprogram was begun to construct a system of modern storage facilities undergovernment ownership. This was to provide just over a million tons of highquality storage at 128 locations throughout the country (Annex 3, Table 2). 13ymid-1977 the construction program, costing an estimated US$85 million, was 90%,completed. This capacity, equivalent to about 7% of annual rice consumptionin Indonesia, appears to be adequate for food grain buffer stock needs over thenext several years.

12. BULOG has made considerable progress in the development of anefficient information system for stock management. Information on supply,demand, price and stock positions in production and consumption areas iscommunicated to BULOG headquarters from sub-DOLOG and DOLOG offices on adaily basis. At headquarters this information is computerized and tabulatedonce per week. Efforts to further refine the system are under way. Whilesome delays continue to be experienced in the transmission of data, particu-larly from the Other Islands, the frequency of such delays is diminishing.

13. Improved handling and storage of rice is of concern to BULOG. ASteering Committee comprising BULOG, representatives of the Ministry ofAgriculture and the Directorate General of Cooperatives is developing anational program to improve post harvest technology. BULOG, in collabora-tion with Canada's International Development Research Center, is to organizefive training teams, each provided with a suitably equipped mobile van, tocarry out at farm and local market levels a training program to reduce lossesin paddy as well as rice handling and milling.

14. The Paddy Research Center, established by BULOG at Tambun, isequipped with laboratory facilities to test alternative systems of drying,storage and milling. Work at the Center was initiated in September 1975.The FAO project to strengthen this research center began in calendar1977, giving special attention to problems of loss and waste. The TropicalProducts Institute also has agreed to provide a two-man team (biologist andengineer) for two years to study problems of bulk handling and storage ofpaddy.


15. BULOG has developed into one of the stronger organizations inIndonesia concerned with food supply and distribution. The real test of itsperformance relates to its objectives - the extent to which it has beensuccessful in providing adequate supplies of food to consumers and suitableprice incentives to producers. This is not an easy task, as these twoobjectives may be conflicting.

16. BULOG has had a stabilizing effect on rice prices at the consumerlevel. It also appears that these supplies have restrained increases in theretail price of rice and, hence, the general level of consumer prices, althoughthe free market price at retail has at times, and in certain markets, exceededthe official ceiling. Abundant supplies of reasonably priced rice and wheatimports in 1975 and 1976 have provided BULOG with a readily available, adminis-tratively simple, means to moderate retail rice prices.

- 53 -ANNEX 3Page 4

17. BULOG's impact on prices received by local rice growers is moredifficult to determine and may be more controversial. Incentives to producersinvolve many factors other than the official price of paddy, although this isan important element. A major question is how effective the floor pricemechanism is, as measured by the difference between that price and pricesactually received by farmers. BULOG's impact on prices at this level is anindirect one since it does not purchase directly from farmers. Most ruralcooperatives who actually purchase price from farmers continue to be weak in-stitutions with limited capacity to provide strong producer price support.

18. Regarding official price levels, in recent years (1973-77) the priceof milled rice at wholesale was increased less than the price of paddy. Thefirst rose by 110% during this period, the second by 134%. And in the pasttwo years, both of these official prices were increased less rapidly than therise in the general price level.

19. The more relevant consideration is the price actually received byfarmers. During the mission's travel throughout Java, officials of thesub-DOLOGs and cooperatives reported, not surprisingly, that free-market priceswere at or above official price levels. But discussions with other well-informed observers in South Sulawesi, Jakarta and elsewhere indicated thatviolations of the floor price were common, particularly during the 1976/77 cropyear. This is consistent with other information. The 1976/77 main season cropwas relatively good and supplies were abundant in several parts of Java. Largenumbers of cooperatives, denied additional funds by Bank Rakyat Indonesiabecause of poor loan repayment records, were unable to purchase paddy fromfarmers. Buying activity by most private traders also has been restricted bylack of government credit. Finally, there is the apparent widespread practiceof cooperatives paying less than the official floor price to farmers in orderto increase the margins received for drying and/or milling.

20. Determination of BULOG's actual effect on producer prices requiresmore comprehensive study. Nevertheless, from the producer's viewpoint thereare reasons for concern over BULOG's operation. First, there is the dangerthat, as a reasonably efficient agency with demonstrated competence, it willbe asked to take on an ever-increasing number of responsibilities which mayexceed its capacity and jeopardize its ability to carry out its primary taskof protecting the interests of rice consumers and producers. Recent proposalsto involve BULOG in stabilizing prices of cooking oil and maize are cases inpoint.

21. Second, and possibly of greater concern, is the danger that BULOG'sprice and procurement policies will increasingly be determined by urbanconsumer interests. As an agency influential in the establishment of domes-tic rice prices (and standards), BULOG could operate to the detriment oflocal producers. Indonesian rice producers respond to market forces andtheir future performance is likely to be determined to a large extent by theprices they receive. There is, however, little information available on theextent to which rice production in Indonesia is price responsive and researchon this is an urgent need.

- 54 -

ANNEX 3Table 1

INDONESIA


BULOG's Operations Under the Rice Stabilization Program,1969/70 - 1977/78

('000 MT - rice equivalent)

Annual increase1969/70-1973/74 1974/75 1975/76 1976/77 1977/78

Beginning stocks 317 333 686 487 553

Supplies 1,261 1,684 1,208 1,917 2,713Domestic procurement 349 536 539 411 404

BUUD/KUD - - 372 225 199NonBUUD/KUD - - 167 186 205

Imports 912 1,148 667 1,506 2,309Commercial 447 979 661 1,083 1,870Concessional 465 169 6 423 439

Total Supplies 1,578 2,017 1,892 2,404 3,266

Releases - - - -

Government 681 663 660 716 635State enterprises 109 95 90 87 81Market operations 364 342 559 982 1,982Others 54 180 52 23 49

Total Releases 1,200 1,281 1,361 1,808 2,727

Losses 41 50 44 14 75

Closing stocks 333 686 487 582 524

Source: BULOG, July 1978.

- 55 -

ANNEX 3Table 2

INDONESIA


Summary BULOG Godown Installations by Location, Type and Capacity /a

TypeLocation Bag Bulk or bag Total

… - ~ ---- ~ ('000 ton) ---- - ---…-____

Java

West Java 70.0 35.0 105.0Central Java 63.0 53.5 116.5Jogjakarta 7.0 14.0 21.0East Java 143.5 147.0 290.5Jakarta 140.0 - 140.0

Sub-total 423.5 249.5 673.0

Sumatera

Aceh 3.5 3.5North Sumatra 35.0 14.0 49.0Riau 24.5 - 24.5West Sumatra 10.5 - 10.5Jambi 7.0 - 7.0Bengkulu 7.0 - 7.0South Sumatra 28.0 - 28.0Lampung 7.0 - 7.0

Sub-total 122.5 14.0 136.5

Kalimantan

West Kalimantan 17.5 - 17.5South Kalimantan 14.0 - 14.0Central Kalimantan 3.5 - 3.5East Kalimantan 24.5 - 24.5

Sub-total 59.5 - 59.5

Sulawesi

North Sulawesi 35.0 - 35.0Central Sulawesi 10.5 - 10.5South Sulawesi 28.0 10.5 38.5Southeast Sulawesi 3.5 - 3.5

Sub-total 77.0 10.5 87.5

Nusa Tenggara

East Nusa Tenggara 7.0 - 7.0West Nusa Tenggara 3.5 3.5 7.0

Sub-total 10.5 3.5 14.0

Irian Jaya 17.5 - 17.5Maluku 10.5 - 10.5Bali 10.5 7.0 17.5

Total 731.5 284.5 1,016.0

/a Each storage unit is of 3,500 ton capacity.

Source: BULOG, as reported in FAO, A Policy and Action Plan for StrengtheningNational Food Security in Indonesia, Final Draft, June 1976, Annex 4.


INDONESIA


The Inflation Rate and Official BULOG Purchase Prices for Paddy and Rice

Official purchase pricesDry paddy at Milled rice at

the cooperative the cooperative /bAnnual rate % change from % change from

Year of inflation/a Rp/kg previous year Rp/kg previous year

1972 17 20.90/c 37.00/c

1973 34 30.40/d 45 52.50/d 42

1974/e 35 41.80 38 68.50 30

1975/e 19 58.50 40 97.00 42

1976/e 17 68.50 17 108.00 11

1977/e 12. 71.00 4 110.00 2

1978/e n.a. 75.00 6 119.50 9

/a Source: IMF

/b Grade 1B (Medium); 14% moisture; 3% cracked and empty grains.

/c This price prevailed from 1969/70 to April 1973.

/d May 1973-March 1974.

/e Prices effective from about February of the year indicated to March thefollowing year.

Source: BULOG.

- 57- ANNEX 4Page 1

INDONESIA


Rural Cooperatives /1

1. Despite the country's long cultural tradition of work-sharing andcooperative effort, formally-organized cooperatives have had a relativelyshort, and sometimes troubled, history in Indonesia. The Basic CooperativeLaw of 1967 was an attempt by the Government to abolish unsatisfactory coopera-tives and establish stronger ones. As a result, the number of cooperativesfell sharply, but began to increase again in the early 1970s as the Governmentstarted to use them as the building blocks for major parts of its ruraldevelopment strategy.

2. A major impetus for cooperative development was the decision touse cooperatives as one of three key agencies in the Government's programsof rice intensification. In 1970 the Jogjakarta Special District waschosen as a pilot project area for the developmient of the village unitsystem, a coordinated effort to provide paddy growers with the necessarytechnical assistance, credit, input supplies and marketing services throughlocal offices of the Agricultural Department, the Bank Rakyat Indonesia (BRI)and the Directorate General of Cooperatives (DGC). The BUUDs and KUDs (B/Ks)were assigned the task of supplying production inputs (largely fertilizer andinsecticides, occasionally seeds) and providing drying, milling and marketingservices. The village unit, headed by the local officer of the BRI, typicallyinvolves an area of 600-1,000 ha of irrigated paddy land.

3. Each B/K usually serves five to six villages and is governed by aboard of directors made up of representatives from each village. The B/Kincludes a manager whose salary is paid by the local cooperative societies,an administrative assistant, a bookkeeper and an operations officer.

Cooperative Development Since 1970

4. In numerical terms, cooperative development has been rapid since1970. Official figures indicate a steady increase in the number of coopera-tive societies of all types from 16,700 in 1971 to 22,800 in 1975. Growthof B/Ks has been even more impressive, rising from just over 600 in 1972 to

/1 This annex is limited to a discussion of the BUUDs and KUDs, the mostimportant of various types of rural cooperatives. Hereafter abbreviatedas B/Ks, BUUD and KUD are acronyms for Badan Usaha Unit Desa and KoperasiUnit Desa, respectively translated as the Village Unit DevelopmentAuthority and the Village Unit Cooperative. Both are responsible to theDirectorate General of Cooperatives in the Ministry of Trade and Coopera-tives. The BUUDs are cooperative organizations which, with development,are expected to become the KUDs, or legally registered cooperatives. Thedistinction is not significant in operational terms.


nearly 3,800 in mid-1976 (Annex 4, Table 1). About two thirds of these areBUUDs. Within the past 2 years more than 15 provincial-level cooperativeorganizations (PUSKUDs) have been established and plans are under way to createa national cooperative structure.

5. Both the total number of B/Ks and membership figures should beinterpreted with care. A sizeable number of officially listed B/Ks arereported to be "passive" or inactive. In the areas of Java visited by themission about 10% of the farmers appeared to be members of the B/Ks, a figureconfirmed by the DGC and suggested as average for Indonesia. Typically,cooperative members include the larger landowners, local merchants andofficials. Tenants and laborers are entitled to join, but frequently arenot encouraged to do so by the local cooperative leadership. However, non-membership appears to be no serious handicap inasmuch as cooperative services,to the extent they exist, are frequently available to all at essentially thesame terms.

6. The Indonesian Government's political and financial commitment tocooperative development is clear. During 1972-76 the state banking systemmade available as loans some Rp 300 billion for--capital investment either bythe cooperatives themselves or to be on-lent for small investment projectsamong members. The development budget of the Directorate General ofCooperatives has risen from about Rp 400 million in 1970/71 to nearlyRp 3 billion in fiscal year 1976/77.

Cooperative Activities

7. Although the B/Ks support government development programs forother products such as poultry, livestock and secondary crops (soybeans,maize, cassava, groundnut), their major activities are the supply ofproduction inputs and the purchasing and processing of paddy under the BIMASand INMAS programs. These activities also provide the B/Ks with someoperating revenues. The B/Ks are permitted a handling fee of Rp 2.5 foreach kg of fertilizer sold, although "taxes" imposed by local officialsfrequently reduce the amount actually realized by the cooperative.

8. Earnings from the buying, processing and selling of paddy dependupon the quality of paddy purchased and the type of processing involved.In the 1977 crop year, average quality stalk paddy could be purchased at thevillage for Rp 51/kg, then dried, milled and sold to BULOG or private tradersfor Rp 110/kg of rice. Since the conversion factor of stalk paddy to milledrice is 0.52, the effective margin is Rp 12/kg rice. Common complaints againstthe cooperatives are that these handling margins are inadequate, that theB/Ks are at a bargaining disadvantage when dealing with BULOG and that theylose money on sales to BULOG.

9. Bank Rakyat Indonesia provides loan funds for cooperative develop-ment and on-lending to members. Although several BRI funding programs existfor cooperatives, the three most important are: (a) funds to be on-lentthrough the B/Ks to BIMAS participants; (b) funds loaned to the B/Ks forfacilities development (rice mills, drying floors, storage facilities); and


(iii) funds loaned to the B/Ks for paddy purchases. Only (b) and (c) arediscussed here since the BIMAS program is covered in Annex 1.

10. Government policy in recent years has strongly favored a greaterrole for cooperatives and public agencies such as BULOG in paddy and riceprocessing and marketing./< To foster this development the Governmentthrough BRI has made available loan funds to B/Ks for paddy purchase, whilereducing the flow of funds for such purposes to the private sector. (Somerelaxation of this restriction on private sector credit occurred in 1976when state banks in four provinces loaned money to private millers for thispurpose.) BRI loans to the B/Ks for rice mills, drying floors and storagefacilities similarly are to foster a larger role for the cooperatives inthose activities (Annex 4, Table 3). Both of these loan programs, whileproviding finance for the development of the B/Ks, have frequently exceededabsorptive capacity of individual cooperatives and are generating serious debtrepayment problems.

11. In response to unsatisfactory repayments by B/Ks of BRI loans forpurchase of paddy, the BRI in recent years began to deny further loans forthis purpose to any B/K with arrears in excess of 5%, or in special cases10%, of outstanding debt. The effect has been to greatly reduce the capacityof B/Ks to purchase paddy in many areas of the country. In the 1975/76 cropyear only about 50% of the B/Ks in the country were able to buy paddy due todebt arrears and denials of additional funds by BRI. In the country's majorrice surplus areas, less than 200 of 500 B/Ks were in a position to purchasepaddy. In the "rice bowl" of Karawang District only 4 of 50 B/Ks werefinancially capable of purchasing paddy during the 1976/77 main season harvest.

/1 Professor Soedarsono, now Minister of Agriculture and a key figure in theoriginal formulation of the B/K concept, noted that these cooperativeswere to become "...an economic organization of the population, created bythe people and for the people, which gradually should progress until itcarries out all the economic activities required by society and particu-larly those required in the development of the rural agricultural economy."("BUUD dan Masalah Pembinaannya," PRISMA, August 1973.)

- 60 - ANNEX 4

Page 4

12. The B/Ks purchase and process a relatively small proportion ofIndonesia's paddy production. The figures for 1975 were:

Purchases by B/Ks Milled rice equivalent ('000 tons)

Stalk paddy 22Paddy 484Milled rice 56

562

Sales by B/Ks

BULOGPaddy 279Milled rice 90

369

Private dealersStalk paddy 2Paddy 51Milled rice 106

159

Total 528 *

* Discrepancy between B/K purchases and sales reflects stockbuild up and handling loss.

13. These figures indicate that about two thirds of the milled riceequivalent purchased by the B/Ks in 1975 was sold to BULOG. Less than a third

went to private dealers and most of this was of low quality. With domesticproduction of milled rice in Indonesia in 1975 of just over 15 million tons,the cooperatives purchased, in milled rice equivalent, 360,000 tons, or onlyabout 2-1/2% of the total harvest. Assuming 25% of total production enters

the commercial market, B/K purchases would amount to 15% of marketable

supplies. Clearly, the private sector continues to play a major role inpaddy buying and milling.

14. The Government has pursued an ambitious program to equip B/Ks with

facilities for paddy processing and storage. It was expected that by 1976,

each of some 2,000 B/Ks would have small rice milling units, concrete drying

floor and paddy/rice storage capacity of 100-200 tons. The number of suchfacilities actually established is likely to be somewhat less. This installedmilling capacity is equivalent to approximately twice the quantity of milled

rice delivered to BULOG and private traders in very recent years. Thefigures above (para. 12) suggest that the B/Ks in 1975 may have milled less

than 200,000 tons of paddy.

- 61 - ANNEX 4

Page 5

15. Each of the rice milling units was constructed with a BRI loanaveraging about Rp 2.5 million, payable over 3-5 years with an annual interestcharge of 12%. This loan program, cumulating to nearly Rp 5 billion, wasinitiated in 1973. By mid-1977 no principal or interest had been paid toBRI. All such loans are guaranteed by the government's Cooperative CreditGuarantee Scheme (LJKK). A common view heard by the mission in discussionwith cooperative officers in the field was that these loans had been "imposed"on the B/Ks without proper appraisal and that many B/Ks were neither willingnor able to repay.

16. Despite sizeable excess milling capacity among B/Ks, the Governmentin 1977 had plans to provide loan funds through BRI for the installation of anadditional 430 rice mills and ancillary facilities.

17. Because BIMAS participants are expected to purchase their produc-tion inputs from the B/Ks, the cooperatives play a large role in marketingfertilizer and insecticides for food production (Annex 4, Table 2). Inpractice, about 90% of all fertilizer used in the rice intensificationprograms is distributed through the B/Ks.

Possible Future Developments

18. The Government remains firmly committed to cooperatives as basicinstitutions for rural development and seems likely to commit substantialadditional resources to strengthen the B/K program. The plan within theDirectorate General of Cooperatives is to increase B/K numbers to 5,550during the next five-year plan (1979-83). Substantial external assistancefor cooperative development is being planned from both bilateral and multi-lateral donors. An expansion of the Asian Development Bank Project in EastJava also may materialize if progress with the first project is satisfactory./I

19. Organizational changes seem likely. Additional provincial organiza-tions (PUSKUDs) are to be established. Some consolidation of B/Ks may takeplace. One view within the Directorate General of Cooperatives is that the

/1 The Asian Development Bank's East Java Agricultural Credit Project(Appraisal Report dated October 1974) is to extend credit facilities toabout 200 B/Ks to enable them to acquire agricultural machinery andother facilities for the production, processing, storage, transportationand marketing of agricultural products at the farm level. The projectwould finance 500 irrigation pump sets, 100 power tillers, 3,500 sprayers,and 75 trucks. It would construct 100 multipurpose storage facilities,establish a central machinery workshop and strengthen the trainingfacilities at the Malang Cooperative Training Center. As of mid-1977progress in implementing the project was described by ADB officials asslow, with a delay of 12-15 months. A possible extension of the projectmay be considered, but not before calendar 1978 or 1979.

- 62 - ANNEX 4

Page 6

typical B/K, covering 600-1,000 ha, is not sufficiently large to support thequalified staff required for efficient operations. To correct this problemsome B/Ks would be consolidated into larger units at the district (kabupaten)level, while farmers would be served by an expanded system of cooperativebranches in the villages.

20. The establishment of a Cooperative Development Bank is under con-sideration by the Government. The exact status of this proposal is uncertain,although the idea is strongly supported by the Ministry of Trade and Coopera-tives and officials at the Directorate General of Cooperatives. One possibilityunder discussion is to reorganize the existing Public Cooperative Bank ofIndonesia (BUKOPIN), now operating in only a few areas of the country andexperiencing large financial losses. Under this proposal financial resourcesof the LJKK, estimated at Rp 10-12 billion, would be used as the initialcapital assets of the bank. Equity shares could be jointly owned by theDirectorate General of Cooperatives and Cooperative Societies. This proposalposes questions regarding the future role of BRI in cooperative and rurallending. The mission was unable to obtain a clear position of the Governmenton this matter.


21. The B/Ks are relatively young institutions which are some distancefrom achieving the objectives established for them. Only about 10% of thecountry's farmers are active members and this membership tends to be madeup of better educated, larger landowners and local officials. This groupfrequently appropriates a disproportionate share of resources channeledthrough the cooperatives. Reports are common of efforts to discourage mem-berships among small farmers. Despite these shortcomings, the B/Ks, as thechannel for the BIMAS and other rural development programs, have introducedlarge numbers of farms to attractively-priced credit and modern productioninputs. However, because of weaknesses in the management of the B/Ks,reflecting in large part shortages of qualified staff, some of these programsare proving to be costly in budgetary terms. Rapid expansion of the B/Ksystem has resulted in inefficient use of a significant portion of the loanresources provided through the BRI. The loan repayment record of the B/Ks ispoor.

22. The country's food production effort has not been best served byattempts to rapidly expand the B/K system while restricting the role of theprivate sector in the distribution of inputs and the purchase and processingof crop output. Although inputs are quite widely available, farmers continueto experience some difficulty in obtaining the appropriate inputs at theright time and place. The paperwork involved in the BIMAS program is alsostill considered cumbersome by many farmers. These problems appear to beamong the causes of declining participation in the BIMAS program (see Annex 1).The inability of many B/Ks to purchase paddy for lack of adequate operating

ANNEX 4- 63 - Page 7

funds is also detrimental to farmers and affects production incentives.Evidence suggests that the interests of farmers and the country generallywould be better served by policies which encourage an active role by theprivate sector in the provision of input supplies and marketing services,operating in competition with the cooperatives.

23. Some of the difficulties of the B/Ks may be due to inconsistenciesin government policies. One view within the Directorate General of Coopera-tives is that BULOG-generally favors lower paddy and rice prices in reflectionof consumer interests while the DGC prefers higher prices and handling marginsto benefit producers and the cooperatives. With adequate operating funds anda rapidly-developing storage and transport capacity, BULOG frequently enjoysa bargaining advantage in purchasing from the B/Ks. BULOG's use and interpreta-tion of its own quality standards for paddy and rice adds to this advantage.In these circumstances the B/Ks receive lower prices and are forced either toreduce prices paid to farmers or shave handling margins which they alreadyconsider inadequate.

24. Several conclusions flow from these observations. All relate tohow government resources could be used most effectively to acceleratefood production.

- Reflecting national policy, measures to improve the effectivenessof the B/K system warrant continued high priority. But thisrequires a careful deployment of financial resources and qualifiedtechnical and managerial manpower. The basic need is to improvethe range and quality of services such that cooperatives cancompete more effectively with the private sector. Initially thismay require concentration on the most viable cooperatives.

Further rapid expansion in the number of B/Ks does not seemwarranted at present. Most B/Ks are working at considerably lessthan their potential. Development emphasis should focus on theconsolidation and strengthening of the existing cooperative system.This requires, in particular, improved supervision of existingcooperatives, greater emphasis on training members in cooperativeprinciples and practice and expanded training programs to increasethe numbers of qualified technical and managerial personnel.Ongoing efforts to strengthen the Malang Training Center will beuseful in this regard.

Substantial new lending by BRI for the installation of more ricemilling facilities at the B/Ks seems inadvisable. Underutilizationof existing capacity at the B/Ks is widespread. Private sectormilling capacity also appears to be in excess of needs. Additionalmilling facilities may be needed at a few carefully selected B/Ks,but these should be justified by preinvestment appraisal. Greaterequity participation by the B/Ks should be encouraged in theseinvestment activities to ensure commitment to the investment programand enhance chances for loan repayment.

- 64 - ANNEX 4

Page 8

The need for sizeable additional investment in B/K storagefacilities for paddy or rice also may be questioned. Existingcapacity appears to be poorly used in many B/Ks, although additionalstorage may be needed in selected areas.

The Government should continue efforts to expand the role of theprivate sector in input distribution and paddy milling and marketing.This requires an arrangement which permits private dealers tosell, possibly at regulated prices, the production inputs financedby the BIMAS program. It also may require the provision of largersupplies of institutional credit to private millers and tradersfor paddy purchase, milling and storage.

- 65 -

ANNEX 4Table 1

INDONESIA


Number of BUUD/KUDs in Indonesia

Region/Province 1972 1973 1974 1975 1976 /a

JavaWest Java 77 459 639 791 /b 896 /bCentral Java 131 403 499 520 523Jogjakarta 36 46 55 57 /b 57 /bEast Java 203 624 647 663 665

Subtotal 447 1,532 1,840 2,031 2,141

SumatraAceh - 12 71 79 84North Sumatra 30 145 223 261 /b 284 /bWest Sumatra 35 70 175 n.a. 191 /bJambi - 44 46 60 62Riau - 3 20 23 33South Sumatra 2 22 31 33 56Bengkulu - 7 16 22 39Lampung 27 42 80 88 /b 100 /b

Subtotal 94 345 662 566 849

Sul awesiSouth Sulawesi 50 285 295 313 /b 328 /bSoutheast Sulawesi - 5 34 40 55Central Sulawesi - 9 13 27 29North Sulawesi - 30 30 31 31

Subtotal 50 329 372 411 443

KalimantanSouth Kalimantan 8 56 58 86 /b 100 /bCentral Kalimantan - 6 11 26 30West Kalimantan - 12 36 48 52East Kalimantan - 1 2 2 10

Subtotal 8 75 107 162 192

Nusa Tenggra & BaliWest Nusa Tenggara - 41 68 74 80 /aEast Nusa Tenggara - 5 14 14 14Bali 34 34 51 60 60

Subtotal 34 80 133 148 154

Maluku - - 2 2 2Irian Jaya - - 5 5 6

Total 633 2,361 3,121 3,325 3,787

/a As of July 1976.

/b Including PUSKUDs (Provincial Federation of KUDs).

Source: Directorate General of Cooperatives, Evaluation of Cooperative

INDONESIA


Activities of BUUD/KUDs, 1973/74-1975/76

Purchase of paddyfor sale to BULOG Sales of fertilizer and insecticides /c

Total number Number of Tons of milled Number of Tons of InsecticidesYear /a of BUUD/KUDs /b BUUD/KUDs rice equivalent BUUD/KUDs fertilizer (kg or liters) /d

_____________________ - _0 …ooo0…---- …-------…

1973/74 2.7 1.5 254 1.6 418 30

1974/75 3.3 1.8 349 2.2 683 1,577 1a'

1975/76 3.6 l.8 369 2.7 626 2,712 ON

/a Crop year, beginning April of first year indicated.

/b Mission estimate, based on data for calendar years in Table 1.

/c Includes both wet and dry-season crops.

/d Data do not permit distinctions between liters and kg.

Source: Directorate General of Cooperatives, Evaluation of Cooperative Development in Indonesia (no date).

- 67 - ANNEX 4

Table 3

INDONESIA


BRI Loan Funds Committed for BUUD/KUD Facilities /a

Committed Committed CommittedDecember 1974 September 1975 July 1976 TotalNumber Amount Number Amount Number Amount Number Amount

---------------------- Rp million -----------------------------

Banda Aceh 26 64.4 24 34.5 - - 50 98.9

Padang 58 146.5 76 99.0 - - 134 245.5

Bandung 231 582.5 576 623.5 119 14.5 926 1,220.5

Semarang 230 564.5 379 557.0 48 11.5 657 1,133.0

D.I. Yogyakarta 4 10.0 26 39.0 - - 30 49.0

Surabaya 280 706.0 300 873.2 14 1.7 594 1,580.9

Denpasar 49 113.7 69 98.0 45 10.7 163 222.4

Ujung Pandang 100 250.0 185 281.2 - - 285 531.2

Banjarmasin 25 62.5 26 37.8 - - 51 100.3

Medan - - 116 173.7 26 12.6 142 186.3

Palembang - - 90 136.0 - - 90 136.0

Menado - - 46 69.0 - - 46 69.0

Total 1,003 2,500.1 1,913 3,021.9 252 51.0 3,168 5,573.0

/a Loans for godowns, drying floor, rice milling units, etc.

- 68 - ANNEX 4

Table 4

INDONESIA


BUUD/KUD Rice Procurement Credit Summary, Total Indonesia

1973/74 1974/75 1975/76 1976/77…------------ Rp million ----------------

Disbursements 13,826.5 26,354.3 44,614.4 32,710.6Interest charges - 272.2 677.1 600.2

Total (I) 13,826.5 26,626.5 45,291.5 33,310.8

Repayments /aVia BULOG 11,120.1 21,496.8 33,586.0 22,071.9Cash 1,683.3 3,747.8 8,151.9 8,501.7

Total (II) 12,803.4 25,244.6 41,737.9 30,573.6

Outstanding balance /b 1,023.1 L,381.9 3,533.6 2,737.2(I - II)

Repayments over time /c1974/75 357.2 - - -

1975/76 152.1 1,047.4 - -

1976/77 49.5 108.2 2,265.4 -

Total repayments as of May 1977 13,362.2 26,400.2 44,033.3 30,573.6

Outstanding balance as of May 1977 464.3 226.4 1,288.2 2,737.2

Number of BUUD/KUDs receiving credit 2,283 1,944 2,482 2,444

Number of BUUD/KUDs with arrears at endof season 743 921 1,370 951

/a Repayments take two forms: (i) direct payments by the BUUD/KUD to BRI (cash) or(ii) transfer of credit received by the BUUD/KUD from BULOG to BRI accounts. For thelatter form of repayment, BULOG simply transfers funds paid to the BUUD/KUD forpurchased rice to the BRI account instead of directly paying the BUUD/KUD for purchasedrice.

/b Loan period is one year from date loan is received. After this time, the loan isconsidered to be in arrears.

/c As of end of March/beginning of May of 1974 through 1977. Repayments include interestpenalties.

Source: BRI.

- 69 -

ANNEX 5

INDONESIA


Fertilizer

A. Nitrogen

Nitrogen production

1. In 1976 Nitrogen production in Indonesia was made up of Urea 365,000MT (PUSRI) and Ammonium sulphate 75,000 MT (PETROKIMIA). As urea represented92% of total nitrogen production in 1976 and will probably increase to 96% by1985, all subsequent references to nitrogen in the supply/demand context willrelate to urea. Annex 5, Table 1 shows actual urea production 1975 and 1976with forecast production 1977-1985, the totals being as follows:

Urea Production('000 MT)

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

384 365 879 1,220 1,800 1,820 1,990 2,500 2,690 2,750 2,830

These production levels reflect plant utilization factors, of first year 60-75%rising to a maximum of 90% by the fourth year of operation, which is reasonable.

2. Through 1978, PUSRI would account for 100% of urea production butwith the onset of production from the three non-PUSRI plants, this share ofthe total will drop to 72% by 1980 and 48% by 1985.

Nitrogen consumption

3. From 1967 to 1973, a period of free marketing, urea consumptionincreased significantly from 115,000 MT to 669,000 MT (annual growth rate 34%).In October 1973 Government imposed controls, a move probably triggered by thetemporary world shortage of fertilizer following the oil crisis. In consequence,urea consumption actually declined by 10% between 1973 and 1974 but recoveredsomewhat through a 12% increase between 1974 and 1975, only to decline again in1976.

- 70 -ANNEX 5Page 2

Actual Urea Consumption('000 MT)

1967 1968 1969 1970 1971 1972 1973 1974 1975 1976

115 205 308 342 413 485 669 604 676 591

Source: Director General Agriculture: BIMAS: Director General Estates.

Government controls in most areas were lifted in December 1976 and itis interesting to compare the PUSRI actual urea sales for the first four monthsof 1977 with the same period in 1976.

Jan/April 1976 - 121,130 MTof it 1977 - 250,372 MT

This dramatic increase of over 100% was primarily due to the decontrol offertilizer marketing.

4. In an attempt to predict total 1977 urea consumption, utilizinga base of four months actuals and the historical trend that about 30% ofannual sales are made in the first four months, then 1977 sales can be pro-jected to about 830,000 MT. This would represent a 27% increase over the650,000 MT sales in 1976. With regard to longer-term predictions of demand,numerous agencies have developed projections and the following are a smallselection which are compared to GOI estimated requirements. As GOI forecastswere not available beyond 1978, PUSRI data were extrapolated through 1985on the basis of 1974-1978 trend line.

Urea Consumption Projections('000 MT)

Source 1978 1980 1982 1985

GOI 1,975 2,283 2,619 3,072FAO 1,500 1,800 - -TVA/USAID /a 1,050 1,300 - -AHT /b 1,400 1,560 1,800 2,200NFPDS /c 1,283 1,464 1,671 2,038

/a Mid-range estimates./b AHT - Agra and Hydrotechnik/c Resource Planning Consultants U.K.

Clearly, the GOI based projections (PELITA) must be viewed as requirements, and

probably reflect the urea needed in Ind3nesia to meet crop production targets.

- 71 -ANNEX 5Page 3

5. Predicting over the short term, it is reasonable to assume that 1977 con-sumption could reach the 850,000 MT level. Furthermore, assuming that thismomentum gained in 1977 is maintained through 1978, then the 1 million MT markcould be reached by year-end 1978. Thereafter, a more conservative annualgrowth rate of 10% has been assumed. On this basis urea consumption projectionswould be:

Urea Consumption('000 MT)

1978 1980 1982 1985

1,000 1,200 1,450 1,930

Prerequisites for such achievements would have to include maintenance of afree marketing system, GOI policy regarding the BIMAS program, more effectivepest control and a broader based more effective supply of credit.

Urea Production - Demand Balance

6. With regard to urea production it appears valid to utilize the pro-duction data shown earlier in this section as the plants involved are eitheralready in production, under construction or committed for construction.Capacity utilization forecasts are also considered reasonable. For purposes ofbalancing with demand, three demand forecasts are used, a high (AHT), a mid-range(NFPDS), and a conservative (mission estimate).

Urea Production - Demand Balance('000 MT)

1978 1980 1982 1985

Production 1,220 1,820 2,500 2,830A Demand (high) 1,400 1,560 1,800 2,200B Demand (mid) 1,283 1,464 1,670 2,038C Demand (con) 1,000 1,200 1,450 1,930

Surplus/ (Deficit)A (180) 260 700 630B ( 63) 356 830 792C 220 620 220 900

- 72 -

ANNEX 5Page 4

Utilizing the most optimistic demand forecast (AHT), substantial surplusesof urea seem inevitable, totaling over 5 million MT in the six-year period1980-85.

7. As this report is involved with domestic food production, it is notintended to analyze export feasibility. This balance clearly indicates thatthe supply of domestically produced urea should not be a constraint to theachievement of GOI food production targets.

Urea Supply-Demand Balance

8. The previous section related only to local production/demandbalance and consequently did not take account of urea imports. Indonesiaimported substantial volumes of urea in 1973, 1974 and 1975, presumably inanticipation of a prolonged world shortage and even higher escalation ofprices. Actual urea imports during this period were 2.67 million tons.Excluding opening 1973 urea inventories, which were not available, the 1973-76supply/demand balance would be as follows:

Urea Supply-Demand Balance('000 MT)

1973 1974 1975 1976

Production 108 191 383 365

Imports 442 816 1,412 -

Total supply 550 1,007 1,795 365

Demand 669 604 676 650

Surplus/Deficit (119) 403 1,119 (285)

This balance reflects a net surplus of 1.118 million MT urea generated in1973-76. 1976 inventory data were available, indicating year end 1976 totalinventories of 1.365 million MT, out of which PUSRI holds the major shareof 1.116 million MT. In order to alleviate the growing inventory problemPUSRI has started exporting urea with initial shipments of 100,000 MT to thePhilippines and 20,000 MT to Sri Lanka.

- 73 - ANNEX 5

Page 5

B. Phosphatic, Compound and Potassic Fertilizers

Consumption Trend

9. The following table shows consumption data for 1973-76 in nutrienttons, for the food crop sector:

Nutrient 1973 1974 1975 1976 (est)

Phosphate (P205) 65,300 98,600 124,000 113,000

Potash (K20) 1,900 4,600 2,000 (n.a.)

Phosphate consumption showed encouraging increases in 1974 and 1975 but thiswas followed by a disappointing falloff in 1976 to less than 1974 level, andsupply availability was not the reason for this. The potash consumption trendfor food crops is erratic and illogical, pointing perhaps to a statisticalerror in reporting the unusually high consumption in 1974.

Future Consumption Forecasts

10. As with nitrogen, future projections of phosphate and potash consump-tion vary widely (see Annex 5, Table 4), with the PELITA projections probablybeing established on the basis of "need." Unlike nitrogen, it is not possibleto relate to a previous trend of steady growth in phosphate and potash consump-tion, since both display erratic trends since 1964. This applies to potash rightup to 1976. Phosphate started to "take off" in 1973 in the food crop sector,growing from 21,000 MT P205 in 1972 to 124,000 MT in 1975, followed by thedisappointing drop to about 113,000 MT P 205 in 1976.

- 74 -ANNEX 5Page 6

11. It is difficult to predict w;,eLher a phosphate user in 1975 whobecame a nonuser in 1976 would immediately revert to being a user in a goodseason. In the context of rice production increases in 1976 some farmers maybe tempted to forego phosphate use, until it is proven to them once againthat it is to their advantage to apply phosphate. This situation wouldneed to be corrected through a large-scale program of simple field experi-ments designed to test the effectiveness of varying levels of phosphate inthe presence of nitrogen, such trials to be exploited as demonstrations forgroup farmer education. Consequently, in making projections, more emphasiswould have to be placed on the "need" aspect rather than a forecast demandapproach as was used with nitrogen. This can best be examined throhghreference to desirable nitrogen-phosphate ratios (N-P ratios). Many of thephosphate consumption projections have probably been developed with the objec-tive of reaching a 2-1 N-P ratio as soon as possible, but it is presentlytoo optimistic and the achievement of a 3-1 N-P ratio by 1985 would be morelikely. The application of any ratio, of course, can produce significantlydifferent absolute volumes of phosphate, dependent on the nitrogen consump-tion projections being utilized for this purpose. Aimed at simplification,the following table projects P205 consumption to 1985 utilizing the mission'snitrogen (urea) consumption forecasts and an N-P ratio of 4-1 in 1978narrowing to 3-1 by 1985./1

Nitrogen and Phosphate Consumption Projections('000 MT Nutrient)

1978 1980 1982 1985

N 505 610 735 975

P205 125 150 210 325

Naturally, in the event of nitrogen consumption increasing above these levels,it should be the objective to at least maintain the same N-P ratios.

/1 Nitrogen consumption derived from urea consumption estimates in para. 5plus 10% for nitrogen derived from other fertilizers.

- 75 -ANNEX 5Page 7

Potash Consumption

12. Historically, the food crop sector would not normally account for morethan 4% of total potash consumption in Indonesia. In each of the years 1975 and1976 the estate sector consumed about 25,000 MT K 0 which would be needed tosupply the well established potash requirements oi tea, coffee, rubber and oilpalm. Currently, there are no official recommendations for potash use on riceor other food crops and it is unlikely that this situation will change, unlessadditional field trials identify the need for potash and demonstrate economicresponse to its application. Consequently, no projections are made for potashconsumption by food crops.

C. Fertilizer Marketing

Physical Distribution

13. In 1964, GOI appointed eight major fertilizer importers/distributorswho had the responsibility for handling all Indonesia's fertilizer requirementswhether imported or locally produced. Since then, all phosphatic, compoundand potassic fertilizers have been, and still are, imported and this alsoapplied to the majority of urea, until imports ceased in 1975, due to buildupof inventories. PUSRI is now the largest distributor, as it exclusively marketsits own production and additionally took over the major share of accumulatedurea imports. At year end 1976, PUSRI held 1.117 million MT out of totalinventory of 1.365 million MT. Presumably, the other seven importers/distribu-tors will phase out of urea distribution when they liquidate their share ofaccumulated inventories of imported urea. Substantial inventories of TSP/DAPhave also accumulated, with a year-end 1976 total of 498,000 MT, of which PUSRIagain held the major share of 309,000 MT. Sulphate of ammonia, domesticallyproduced by PETROKIMIA is distributed to sugarcane growers primarily by PERTANIand to estates by all distributors except PUSRI.

14. This report relates only to distribution to the food crop sector,which in 1976 accounted for 90% of total nitrogen, 94% of total phosphateand 4% of total potash. Consequently, despite the geographic limitation ofthis mission's investigations to Java and South Sulawesi, the major segmentsof the fertilizer distribution system in Indonesia were covered. The GOIdoes not impose "zoning" limitations on the major distributors and the twolargest, PUSRI and PERTANI, operate throughout Indonesia. The other six mayhave self-imposed geographic limitations.

15. The major points in the fertilizer distribution chain are called"lines" in Indonesia and can be defined as follows:


Line 1 - fertilizer plant or port of entry

Line 2a) - domestic production, ex-bulk unloading and bagging terminal.b) - imports - ex-port warehouse at landed cost.

Line 3 - major inland distribution point

Line 4 - retail outlet

The products are taken over by the eight importers/distributors at Line 1 andsold by them to their own major distributors at Line 2, usually includingdelivery cost to Line 3. At Line 3 the distributor sells to subdistributorsor retailers. The subdistributors will in turn supply retailers of Line 4. Insome instances Line 4 retailers will supply to subretailers at village level.

16. In theory, this system should take fertilizer to within easyaccess of the farmer, and in Java it was evident that the network had beenestablished and was functioning effectively. At all locations inspected,there were adequate stocks of urea and TSP, both in facilities operated byBUUD/KUD and private retailers. May/June was not a peak selling season,coming at the end of the major wet season, but fertilizer was needed at thattime for dry season rice planting. In no instance did any BUUD/KUD or privateretailer complain about lack of continuity in supplies since decontrol offertilizer marketing in late 1976. In Java, the availability, capacity andquality of storage facilities at Line 4 was considered adequate and consequentlythe physical condition of fertilizer in storage had not suffered due to exposureto the elements. However, some caking in bags was observed, which was dueprimarily to inefficient stacking and lack of suitable wood stack foundations.Practically all urea observed in retail outlets in Java was locally producedPUSRI material packed in substantial and attractive 50 kg woven polypropylenebags with polyethylene inner liners. This type of packing is ideal for ureain a humid climate and consequently the physical condition of the urea was freeflowing.

17. The availability of good quality PUSRI storage facilities at majordistribution centers (Line 3) was variable but this deficiency should berectified within a reasonable period in the view of PUSRI program to buildinland storage depots at major locations. In some instances, rented facilitiesfor storage of imported urea and TSP were below standard, as were warehouseoperating procedures. The condition of much of this imported product was sobad that reprocessing and rebagging will be necessary to restore it tosaleable condition. Evidently, PUSRI have started such activities through acontract arrangement with a specialist company and the charges are beingpassed on to GOI. In South Sulawesi the distribution system was not so wielldeveloped as in Java, which is not surprising in view of the relative level ofdevelopment in the two islands. The intensity of sales outlets at Line 4 wasnot as pronounced as in Java and was dominated by BUUD/KUD with a relativeslysmall number of private retailers. Nevertheles, Line 4 outlets were probablysufficient for the region and at all locations urea and TSP were freely

7 77 ANNEX 5Page 9

available, with no complaints of supply shortages in the recent past. However,South Sulawesi badly lacks adequate storage at major distribution points,which resulted in much of the accumulated surplus of imported urea and TSPbeing sent "down the line" and dispersed in villages where it was storedbetween the stilts which support the village houses. Consequently, theproducts were exposed to driving rain and suffered extensive damage. The onlyshort-term remedy would be to channel the fertilizer back to major storagepoints for reprocessing and rebagging, once adequate facilities at theselocations have been constructed.

18. The findings of this survey are that the fertilizer distributionsystem in Java is well developed and functions efficiently to ensure easyavailability to the farmer. PUSRI also seems able to ensure a regular flowof fertilizer from its Palembang Sumatra production facility through its bulkimport/bagging terminals to major inland distribution points in such a way asto effectively service its wholesale and retail distribution organization.As previously stated, improvements are needed at major storage locationswhich should largely be rectified through PUSRI's warehouse constructionprogram. As far as facilities at the retail level are concerned thereappears to be no need for a major investment program for construction ofstorage/sales facility ("kiosks") in Java except in some of the more outlyingareas. However, in South Sulawesi the facilities are not satisfactory andshould be improved.

Fertilizer Pricing and Distribution Costs

19. For the purpose of this analysis, urea is used as the example, butpricing and distribution costs apply equally to triple superphosphate. Atthe time of the survey, the retail price of urea/TSP was Rp 70/kg, uniformthroughout Indonesia and applicable irrespective of the source of supply andtype of customer. The two-tiered pricing system, one for BIMAS-INMAS, andthe other for estates, was abolished with the decontrol of fertilizer market-ing in late 1976. Rp 70/kg is equivalent to US$168.67/MT. World exportprice of urea was US$115-120/MT c.i.f., in May 1977./l

20. Annex 5, Table 5 shows the GOI price buildup formula dated December10, 1976, utilizing as its starting point a theoretical import price ofRp 38,648.71/MT, equivalent to US$93/MT. PUSRI production costs of urea arenot used in this formula. Following is a summary of the GOI formula indicat-ing costs at line 1-4 and consequently margins allowed to importers/distributors,distributors and subdistributors/retailers.

/1 At the time this report was being prepared for publication world ureaprices were equivalent to about $140-145/MT c.i.f.


Rp/MT US$/MT

Delivery price to importer (line 1) 38,648.78 93.13Cost allowed to importer incomputing line 2 selling price 10,819.36 26.07

Component received by GOI 10,000.00 24.10Selling price to distributor, line 2 59,468.14 143.30Costs allowed to distributor,line 2 - line 3 5,206.27 12.54

Selling price at line 3 64,674.41 155.84Costs allowed to distributor/sub-distributor or dealer fromline 3 - line 4 2,825.59 6.81

Cost at line 4 67,500.00 162.65Retailers' margin 2,500.00 6.02Selling price to farmer 70,000.00 168.67

From this table it will be noted that total marketing margin (exclusive ofthe GOI "component") is US$51.44/MT comprising:

US$/MT

Importers' margin 26.07Distribution margin line 2-3 12.54Distributor/SubdistributorRetailers' Margin line 3-4 6.81

Retailers' Margin line 4 6.02

In the absence of a weighted average transportation cost for Java it is diffi-cult to assess the adequacy of this total margin. Allowance for freight, line2 - Line 3 is Rp 3,000/MT (US$7.22) and from Line 3-Line 4, Rp 1,600/MT(US$3.86), a total of about US$11/MT which could be adequate for an islandthe size of Java, particularly when PUSRI operates 3 bulk unloading/baggingterminals at strategic points on the island. Also included is an elementto cover a total product loss of 1.5% comprising 0.5% each for handling,transport and storage losses, which, in an efficient distribution system,would be adequate. Similarly, there is included an element to cover atotal of 12 months credit, 8 months for the importer and 4 months for thedistributor, which is adequate as PUSRI allow their distributors 4 monthscredit for non-BIMAS sales and PUSRI receive payment from BRI for BIMASsales within 12 months.

21. No specific provision is made for administration costs, with theexception of an "overhead" cost for the importer amounting to Rp 808.15/MI(US$1.95). This is a low unit margin, probably geared to high volume turnover,but hardly sufficient to cover administrative overheads carried by a companylike PUSRI. Presumably, the importer and distributor are expected to cover

ANNEX 5

Page 11

their costs and make a profit out of cost elements which contain some flexi-bility, like transport, loss allowance, handling charges, and credit charge.Out of his Rp 2,500/MT (US$6.02) the retailer has been designated a "fee" butis also expected to cover "loss" and "recondition" which is rather an optimisticexpectation with this level of margin. Assuming no costs are incurred on theseelements (and they are not), the Rp 2,500/MT can be considered an adequatecommission and would be about double the amount received by a fertilizerretailer in Pakistan. It is perhaps indicative that neither PUSRI managementor any of their distributors or retailers in Central Java, complained about theinadequacy of their distribution margins during the mission.

22. During the mission, numerous instances of price-cutting by privateretailers were observed, with urea being offered between Rp 66 and Rp 68/kg.In no instance was evidence uncovered of price-cutting by BUUD/KUD who invari-ably sold at the government fixed price of Rp 70/kg. Even lower retail priceswould be possible in the vicinity of main distribution centers (Line 3), asdistributors/retailers should be able to buy at less than Rp 64/kg particularlywhere the Line 3 location is not too far from a line 2 location. In theory, aretailer is not allowed to buy at line 2, but in practice this sometimeshappens, which could induce further price cutting.

23. Hitherto, this section has been devoted to cash sales. Sales madeunder the BIMAS program (urea and TSP being intergral parts of the BIMASpackage) are on credit, and consequently the fertilizer moves through thesystem from line 1 to line 4 on consignment. The system operates as follows,using PUSRI as an example:

(a) PUSRI distributor places order on PUSRI;

(b) PUSRI issue delivery order and raise invoice atRp 63.23/kg delivered to Line 3;

(c) distributor takes delivery order and invoice to BRIat Line 3 who issue form SPPB at Rp 70/kg:

(d) fertilizer moves through system to Line 4 to BUUD/KUD:

(e) BUUD/KUD supply farmer against a credit note issued by BRIat unit Desa (village level);

(f) BRI at Line 4 send monthly returns of fertilizer suppliedagainst the SPPB to BRI at Line 3;


(g) BRI at Line 3 will then disburse the Rp 70/kg as follows:(i) Rp 63.23 to PUSRI; (ii) Rp 4.27 to distributor,and (iii) Rp 2.50 to BUUD/KUD;

(h) on receiving the credit note for Rp 63.23/kg PUSRI will inturn pass the credit to the distributor to clear his account.

As no financing cost (except for the manufacturer's) is involved at any stagein the BIMAS distribution system and the retail price never falls belowRp 70/kg. There appear to be adequate margins at each stage in the systemto provide sufficient incentive to sell fertilizer.

24. PUSRI indicated that is is reimbursed only 9-12 months afterdelivery. This delay in cash getting into the system would probably beonly acceptable in a government controlled fertilizer production/distributionindustry. Recommendations have already been made by others which are fullysupported, that the consignment system be abolished and replaced by anormal commercial cash flow type system in which payment is made by thoseinvolved at each stage in the distribution system. This does not lose sightof the obvious need for credit for the purchase of fertilizer and it isrecommended that this be administered separately from the fertilizer distribu-tion system.

25. Finally, a brief reference to the subsidy on urea which will beconsidered separately for imports and local production. The accumulatedinventories of imported urea would probably have been purchased in 1973-75(about 2.5 million MT) at inflated prices which followed the oil crisis. Atthat time Indonesia was buying all the available urea on the world market atprices in the US$300-400 range c.i.f. To this must be added distributioncosts, inventory financing, (average 3 years) storage costs wastage, andreprocessing and rebagging costs for damaged material. This urea is nowbeing sold at the village level for a price equivalent to US$168.67/MT.

26. With regard to urea locally manufactured by PUSRI, a probablecost buildup would be as follows:

US$/MT

Ex-plant Palembang in bags 100.00Average Shipping Costs to Java 10.00Distribution costs 51.44

Total Cost 161.44

This excludes the levy of US$24.10/MT which GOI includes in the urea pricebuildup formula. In view of this, it can be assumed that the current retailprice of urea is more or less in line with PUSRI production and distributioncosts and would therefore not attract a subsidy.

- 01 -

ANNEX 5Page 13

Constraints to Increased Fertilizer Use

Sales Systems

27. Previous references have been made to the well developed distribu-tion system in Java which ensures easy availability of fertilizer to thefarmer. The non-BIMAS farmer also does not have problems in actually pur-chasing the fertilizer which in most of Java is available in a well developednetwork of private retailers. Such retail outlets are usually located incenters of marketing activity and are open for business at most times. Privateretailers visited also invariably carried seeds and pesticides.

28. However, the situation was not so satisfactory for the BIMAS farmerswho have to purchase inputs contained in the BIMAS package from cooperatives.The problem is twofold, first, the inefficient management of many of theBUUD/KUDs and second cumbersome procedures involved in the BIMAS creditsystem. Additionally, BUUD/KUDs were in many instances beset by financialproblems, in some cases to the extent that they had to cease normal tradingoperations. Coupled with inefficient cooperative operation is the cumbersomeprocess involved in the BIMAS credit program, involving form filling, securingendorsement by village headmen and delays in processing at the local branchesof the BRI. The small farmers to which the BIMAS program is primarily aimedin many cases will not be prepared to become involved in this complicatedprocedure.

29. The improvement in the efficiency of the cooperatives could be aslow process and consequently short term remedies should be considered toremove this serious constraint to increased fertilizer use. These couldinclude:

(a) allowing private sector retailers to participate in the BIMASprogram (a few already do so);

(b) streamline BIMAS credit procedures;

(c) investigating feasibility of channeling credit to privatefertilizer retailers to be financed by banks and/ormanufacturers;

(d) investigating the feasibility of encouraging farmers to buy more forcash.

Government Controls

30. Although GOI lifted controls on fertilizer marketing in December1976, the implementation of this directive has evidently not taken place inEast Java. This situation provides a continuing constraint to increasedfertilizer consumption, which appears a valid contention in the context ofsignificant increases of nitrogen use in the first four months of 1977 attribu-ted by PUSRI almost entirely to decontrol. The magnitude of the problem can beassessed by focusing on the fact that East Java uses 40% of the nitrogen and

- 82 -

ANNEX 5Page 14

35% of the phosphate presently consumed. In the interests of development,

it is hoped that the Provincial administration in East Java will allow the privatesector to operate alongside the cooperatives in fertilizer distribution.

Farmer Education

31. The BIMAS package, containing as it does nitrogen and phosphate

at recommended rates of application, provides an excellent medium for farmereducation in the use of inputs. Criticism can be leveled at the "standard"rates of application, i.e., 200 kg urea and 50 kg TSP/ha for irrigatedrice, but this is certainly better than leaving the choice to the averagerice farmer. However, there is clearly scope for improvement and refinement:

in the recommended package for particular regions and extension support.

Firstly, a nationwide program of field experimentation should be undertakenwith the objective of developing fertilizer response data, by region, by major

soil type and for new high yielding varieties. A three-year program of this

type, utilizing simple experimental layouts in farmers' fields with varyinglevels of nitrogen in the presence of phosphate and vice versa, should provide

a sound foundation for a range of fertilizer recommendations (see Annex 7).

Pests and Diseases

32. The incidence of pests and diseases is a common constraint to

increased fertilizer use. Once the victim of an epidemic attack on his

crop, a farmer will quickly observe the detrimental effects on his produc-

tion economics and be tempted to reduce or even eliminate the application of

fertilizer in succeeding crops. Again, the BIMAS program provides a valuable

service in this direction by including insecticides and rodenticides, at

recommended rates, in its package. Unfortunately, this has not proved as

effective as in the case of fertilizer, due to shortage of supplies of in-

secticides in the BUUD/KUD system and lack of application equipment. Conse-quently, protection against the two main rice pests, brown plant hopper (BPH)

and stemborer have been inadequate. The problem was further intensified by

the epidemic attacks of BPH in certain areas of Java in 1975 and 1976 which

reached such proportions that only a government-organized blanket protectioncampaign would provide effective control. It is hoped that from 1977 onwardsGOI will take timely and effective countermeasures against future epidemic

attacks of BPH in Java.

Fertilizer Consumption/Production

33. Urea consumption grew at an annual rate of 34% from 115,000 MT

(product) in 1967 to 669,000 MT in 1973. From 1973-1976 urea consumptionlevelled off and actually registered a small decline, due primarily to

imposition of GOI restrictions on marketing, which was banned from the private

sector and given exclusively to the cooperatives. In late 1976, controls

were lifted and the impact was immediate. Estimated 1977 urea consumption

exceeded that of 1976 by about 50%.


34. Urea consumption has been projected to reach 1.8 million-2.2 mil-lion MT by 1985, but achievement will largely depend on maintenance of freemarketing, future GOI policy on the BIMAS program, more easily available credit

and more effective pest control.

35. In 1977 PUSRI production of urea from its first three facilities willmeet Indonesia's urea requirements for the first time. With its fourth planton stream in 1978, PUSRI will probably meet Indonesia's urea needs through1983. With the addition of a fifth plant (P.T. Kujang), expected on stream in1979, Indonesia will have sufficient urea capacity to meet expected demandthrough 1985/86. Consequently, overproduction could occur, if the Aceh andEast Kalimantan plants are constructed in line with current plans. If so,overproduction in the six-year period 1980-85 could total between 5-7 mil-lion MT depending on whether the most optimistic or conservative consumptionforecast was used, and whether the GOI endeavors to formulate policies thatwill maximise the use of urea in Indonesia, since this can be to its economicadvantage. Urea committed for ASEAN regional needs could be supplied fromPUSRI and Kujang production, at least until the mid-1980s.

36. Substantial volumes of urea imported by Indonesia in 1973-1975 stillremain unused, with the year-end 1976 inventory being 1.365 million MT, much ofwhich is in substandard storage and in unsaleable condition. A large-scalereprocessing/rebagging operation is underway. In order to reduce totalurea inventories, PUSRI had at the time the -iission was in Indonesia,started exporting, with initial shipments of about 100,000 MT to thePhilippines and Sri Lanka.

37. Phosphate consumption showed good growth in recent years reaching124,000 MT/P205 in 1975 but dropped off to about 113,000 MT P205 in 1976. It

should be the aim to move from an N-P ratio of 4-1 in 1977 to 3-1 by 1985 bywhich time P205 consumption should reach 325,000 MT, if GOI mounts an effectivefield trial/demonstration program, and marketing is unrestricted. Of this,about half would be produced at the proposed Petrokimia facility at Gresik.

38. Current potash consumption is about 26,000 MT K205, most of whichis consumed by estates. No official recommendations existed for potash on foodcrops until recently and no projections of future consumption have been made.

Fertilizer Marketing

39. The physical distribution system in Java is well developed andfunctions efficiently, i.e., adequate stocks of urea and TSP were within easyaccess to the majority of farmers. Facilities at line 4 (retail) level wereadequate, both in cooperatives and private sectors. However, storage facilitiesat main distribution centers were inadequate, particularly for imported urea-TSP.A PUSRI program to construct warehouses at main centers is under way and shouldalleviate this problem. The distribution system in South Sulawesi was not aswell developed as in Java, but retail outlets were probably adequate in theintensive rice-growing areas. A major warehouse construction program isurgently needed in South Sulawesi.

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Page 16

40. The current urea retail price of Rp 70/kg (US$168.67/MT) probablyreflects the cost of local PUSRI production plus distribution expenses, sono subsidy is involved. In fact, GOI include a levy of US$23.81/MT in currenturea pricing formula. Conversely, imported urea with current inventoriesstill over 1 million MT will cost the Government an enormous subsidy as most ofthis was imported in 1973-75 at c.i.f. prices in the range of US$300-400/MT.

41. Allowed distribution costs total US$51.44/MT which is probably adequatefor Java where about 90% of total fertilizer is consumed. No complaints werereceived about the inadequacy of the margins from manufacturers to retailers.

42. All cooperatives (BUUD/KUDs) sold at the fixed price of Rp 70/kgbut in most cases private sector retailers were price-cutting by an average of5%. This reflects the plentiful supply situation, a well-developed competitivesales network, and some flexibility in the price buildup formula.

43. For BIMAS sales, fertilizer moves from manufacturer or port of entryto retailer on a consignment system with BRI charged with the responsibilityof issuing credit vouchers to farmers and collecting dues. The manufacturerprobably receives reimbursement 9-12 months after delivery. A change to anormal cash-flow type distribution system would provide more incentive todevelop fertilizer sales.

44. Although adequate stocks of fertilizer are in the distributionsystem, serious constraints to increased consumption still exist due to thecooperatives' inefficient operations . Supply of the BIMAS package overthe last four years has been virtually the exclusive right of BUUD/KUDs whichinhibits development of the program due to poor management and financialproblems inherent in many of these operations. An obvious remedy would be toopen up the BIMAS program to the private sector retailers who invariablyprovide an effective medium for supply of most inputs.

45. Cumbersome credit procedures involved in the BIMAS program alsoinhibit fertilizer use, especially by the small farmer who avoids the red tapeand delays in the credit system. Remedies would be streamlining of thecurrent process, and broadening the existing credit base by involving otherbanks and possibly manufacturers.

46. The provincial government in East Java had, at the time of themission, not implemented the GOI directive to decontrol fertilizer marketingin late 1976. Consequently, exclusive cooperative distribution of fertilizersstill persists to the exclusion of the private sector. East Java is themost important of the provinces in Java accounting for about 40% of totalfertilizer consumption and, according to PUSRI, this continuing restrictionis a major constraint to development.


47. There are fundamental deficiencies in the government extensionservices, one being lack of a national program for fertilizer trials aimedat developing valid recommendations for fertilizer use on major soil typesin each region. Such a program is needed to optimize response to fertilizerand to educate farmers in the value of balanced fertilizer application. Theorganizational structure and physical facilities of the service are goodbut the weak link is poorly trained personnel. High priority should be givento upgrading quality of manpower, preferably through the medium of trainingprograms.

48. An inadequate plant protection program inhibits fertilizer development,especially in Java where epidemic attacks of brown plant hopper are assumingserious proportions and in South Sulawesi where rat infestation of the paddycrop is also causing serious damage. Remedies should be sought includinginvolvement of the private sector in the BIMAS program as the cooperatives havenot proved effective as suppliers of pesticides.

INDONESIA


Urea Production('000 MT Product)

DesignPlant Capacity 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

PUSRI I 100) 384 85 100 100 100 100 - - - - -

PUSRI II 380) 280 340 340 340 340 340 340 340 340 340

PUSRI III 570 - - 430 460 510 510 510 510 510 510 510

PUSRI IV 570 - - 320 450 500 510 510 510 510 510

Total PUSRI 1,620 384 365 870 1,220 1,400 1,450 1,360 1,360 1,360 1,360 1,360

Kujang 570 - - - - 400 430 460 510 510 510 510

Aceh 570 - - - - - - - 260 410 440 480

East Kalimantan 570 _ - - - - - 170 370 410 440 480

Total Non-PUSRI 1,710 - - - - 400 430 630 1,140 1,330 1,390 1,470

TotalIndonesia 3,300 384 365 870 1,220 1,800 1,820 1,990 2,500 2,690 2,750 2,830

Capacity Utilization

1st Year 2nd Year 3rd year 4th year 5th year

PUSRI III and IV 75 80 90 90 90

Kujang 70 75 80 90 90

Aceh 70 75 80 90 90

East Kalimantan 60 70 75 80 90

-7- ANNEX 5Table 2

INDONESIA


Phosphatic Compounds and Potassic Fertilizer Imports(MT)

Inputs Food Crop Sector Estates Crop Sector1973 1974 1975 1977 1974 1975

Triple Superphosphate 191,000 202,000 532,000 - - -

Rock Phosphate - - - 2,800 23,200 16,000

N.P. Compounds 16,000 21,000 1,000 12,000 53,000 10,000

N.P.K. Compounds 2,600 30,000 - 10,000 100,000 11,000

Potassic - 3,200 - 24,000 37,000 38,000


INDONESIA


Phosphate and Potash Supply/Demand Balance(MT nutrient)

Food Crop Sector Estates Sector TOTALP K P K P K

1973

Supply 91,000 1,000 6,000 15,000 97,000 16,000

Demand 65,000 2,000 17,000 6,000 82,000 8,000Surplus/(Deficit) 26,000 (1,000) (11,000) 9,000 15,000 8,000

1974

Supply 150,000 80,000 35,000 36,000 185,000 44,000

Demand 96,000 7,000 9,000 3,000 105,000 10,000

Surplus/(Deficit) 54,000 1,000 26,000 33,000 80,000 34,000

1975

Supply 291,000 - 10,000 25,000 301,000 25,000

Demand 110,000 1,000 9,000 25,000 119,000 26,000

Surplus/(Deficit) 181,000 (1,000) 1,000 - 182,000 (1,000)

1976

Supply - - - - 5,000 26,000

Demand - - - - 86,000 26,000

Surplus/(Deficit) - - - - (81,000) -

- 89 -

ANNEX 5Table 4

INDONESIA


Projected Phosphate and Potash Consumption('000 MT nutrient)

--- Phosphate ------- --------- Potash --------Source 1978 1980 1982 1985 1978 1980 1982 1985

GOI La 311 345 410 484 116 152 190 248

ANT 155 220 312 526 61 80 109 180

FAO 197 235 - - 70 91 - -

TVA/USAID /b 129 168 - - 20 22 - -

PUSRI 173 229 310 478 54 70 95 155

/a PUSRI extrapolation from 1974/78 trend.

/b Mid-range.

- 90 - ANNEX 5Table 5Page 1

INDONESIA


Price Calculations of Imported FertilizersUrea/TSP, NPK and DAP in Bags

Component Urea/TSP NPK (15-15-15) DAP

…----------- (Rp/MT) …-----------------A. Importer

1. Delivery price (DP) 38,648.78 38,974.99 59,796.232. Credit interest for

importer within 5months at 1% x 95%delivery price 1,835.82 1,851.31 2,804.32

3. Bank provision for L/C0.5% x C & F 624.00 447.20 634.30

4. Cost of credit stamp-duty 0.5% x 95%delivery price 183.58 185.13 284.03

5. Insurance premium at:0.5% x C & F 624.00 447.20 634.30

6. Loss 0.5% x deliveryprice 193.24 194.88 298.98

7. Handling cost 4,870.55 4,870.55 4,870.558. Cost for survey 61.50 61.50 61.509. Overhead cost 808.15 808.15 808.15

Cost at line 2 27,849.62 47,840.91 70.228.56

10. Handling fee/importer'shandling charges 575.00 575.00 575.00

Landed cost 48,424.62 48,415.91 70,803.56

11. Credit interest for3 months at 1% x 90% DP 1,043.52 1,052.33 1,614.50

12. Component received bythe Government 10,000.00 10,000.00 10,000.00

Selling price atline 3 (F.O.T.) 59,468.14 49,468.24 78,918.06

- 91 - ANNEX 5Table 5Page 2

Component Urea/TSP NPK (15-15-15) DAP

… ------------- (Rp/MT) - …___.___________LINE 2 - LINE 3

B. Distributor

13. Interest of credit-stamp duty at Line 2for 0.1% x 10% of price 5.95 5.95 7.89

14. Distributor's credit-interest for 4 monthsat 1% x 10% at line 2 237.87 237.87 315.67

15. Transportation cost fromline 2 to line 3 3,000.00 3,000.00 3,000.00

16. Loss during transportation0.5 x landed cost 242.12 242.08 354.02

17. Offloading cost andstapling charges at 277.41 277.41 277.41line 3

Cost/price at line 3 63,231.49 63,231. 55 82,87305

18. Warehouse rent at line 3 648.44 648.44 648.4419. Lost at warehouse at

line 3 0.5% x cost/price at line 3 544.48 544.48 775.50

20. Outcome at warehouseline 3 250.00 250.00 250.00

Selling price atline 3 (F.O.T.) 64,674.41 64,674.47 84,546.99

LINE 3 - LINE 4

21. Transportation costfrom line 3 to line 4 1,600.00 1,600.00 1,600.00

22. Offloading and staplingcharges at retailers 252.12 252.12 252.12

23. Distributors' handlingcharges 973.47 973.41 1,100.89

Cost at Unit Desa 67,500.00 67,500.00 87,500.00

C. Retailer

24. Handling fee, loss andreconditioning 2,500.00 2,500.00 2,500.00

Retailer's priceat farmer's farm 70,000.00 70,000.00 90,000.00

Source: Ministry of Finance, December 1976

- 92 -

ANNEX 6Page 1

INDONESIA

SUPPORT SERVICES FOR FOOD PRODUCTION

Pesticides

1. This brief annex records observations made during visits to theprimary rice producing areas of Java and South Sulawesi and information provi-ded by Ciba-Geigy, one of the largest pesticide importers/formulators/distri-butors in Indonesia. Also included are certain consumption data contained iLnthe National Fertilizer and Pesticides Distribution Study (NFPDS) produced byResource Planning Consultants Ltd., United Kingdom in 1976.

_upply

2. In 1976, there were about 20 companies licensed to market pesti-cides in Indonesia, out of which 11 operated in the BIMAS/INMAS sector of themarket. Up to that time all pesticides were imported as finished formulations.Local formulation started in 1976 with the establishment of plants by Bayer,ICI and Pacific Chemicals (DOW). Since then two more facilities have beenestablished by NIPPON/Petrokimia and Ciba-Geigy. FMC have also received alicense to establish a formulation facility. These plants currently produceliquids, wettable powders, and dust formulations. Although four of the sixformulators will have granulation facilities, they will not operate until theresidual stocks of 7,000 MT Furadan 3% granules, imported in 1976, are liquidated.Total formulation capacity is probably now between 25,000-30,000/MT per yearand will be significantly in excess of Indonesia's requirements in the foresee-able future. Consequently, GOI have evidently suspended the issue of furtherformulation licenses. As a move to encourage local formulation GOI have alsobanned the import of finished products except in the case of a few highlyspecialized formulations.

Consumption

3. There is a shortage of historical data on pesticide consumption.The best assumption made in the NFPDS report was

1969 1970 1971 1972 1973 1974 1975 1976---------------------------- (MT) --------------------------

3,351 3,781 1,851 1,946 2,426 3,800* 5,200* 5,600*

* Estimates

It will be observed that consumption has risen steadily except for a falloffin 1971 and 1972. The following data were available which illustrate thedivision of total pesticide consumption between the BIMAS/INMAS sector and"others."

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ANNEX 6Page 2

BIMAS/INMAS Others

…____________ _ …(%)… -------------1969 97.4 2.61970 91.6 8.41971 83.7 16.31972 71.7 28.31973 61.9 38.1

With regard to projected pesticide consumption, it is predicted that the gapbetween the BIMAS/INMAS sector and the "others" sector will widen with BIMAStINMAS registering a steady 5% annual growth. On the other hand the "other"sector of the market, primarily plantations is expected to grow much morerapidly with actual consumption of 2,500 MT in 1975 doubling to 5,000 MT in1976. Consequently, total consumption is predicted to reach about 7,000 MTin 1978 and 8,000 MT in 1980.

Distribution

4. Firstly, sales for BIMAS/INMAS program are made ex-formulationplant to PUSRI and PERTANI who are sole distributors and they in turn supplythrough their fertilizer distribution system to BUUD/KUDs at line 4 level.With most pesticides now locally formulated, supply is made in small packagessuitable for farmer use, primarily half liter or one liter cans-bottles.

5. Sales to the non-BIMAS/INMAS sector are made through the privatetrade either directly to estates or to nonestate customers by retailers atline 3 and 4 level. The importers/formulators maintain their own fieldorganization in order to develop demand for their proprietary products andundertake field testing programs. Prior to the establishment of local formula-tion facilities, the importers used to supply their retailers in large con-tainers (up to 200 liter drums) and filling was either made into the farmersown containers (usually soft drink bottles) or into containers supplied bythe retailers. This was a wasteful, inefficient and dangerous system whichfortunately should end, once existing inventories of ready formulated importsare used up. Subsequently all new supplies should come from local formulationplants efficiently packed in correct size containers for farmer use, thusobviating any necessity for filling or repackaging in the field.

Pricing

6. Pesticides destined for the BIMAS/INMAS sector are heavily subsidized.Formulators sell ex-plant to PUSRI and PERTANI at full cost price packed in halflitre or one liter containers. Examples of current prices are Basudin/Diazion60 EC Rp 3,800/liter and Agrothion 50 EC Rp 2,900/liter. At line 4 there is auniform retail price throughout Indonesia which is currently Rp 900/liter-kgapplicable to liquids, wettable powders and dusts. This price was set for

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ANNEX 6Page 3

bulk supplies for filling into farmers' own containers, but if the farmerwanted to purchase the material ready packaged then an additional costof Rp 330/liter is allowable which makes total cost in one liter or half litercontainers Rp 1,230/liter. The only different price applies to granulatedproducts, for example Furadan 3 G is Rp 175/kg and Basudin/Diazinon 10 G isRp 200/kg. Fungicides are also sold at subsidized price of Rp 900/liter-kg.Rodenticides are, however, not subsidized, selling currently at Rp 1,500 -Rp 2,300/kg.

7. Sales to non-BIMAS/INMAS sector (estates, sugarcane and vegetables)are not subsidized and sell at full cost through the private sector. Forexample, an average retail price for insecticides is currently Rp 5,000/liter-kg.

Government Controls

8. In June 1973, GOI enacted legislation controling the registrationand approval of pesticides. In brief, this called for testing and licensingof all products, which if approved would be added to the "white list." Cur-rently there are a total of 61 products on the "white list" comprising insec-ticides, fungicides, herbicides and rodenticides. Theoretically there isno limit to the number of products which can be added to the "white list."

Problems

9. Availability. During the brief survey by the mission, it becameevident that many cooperatives did not carry stocks of pesticides, somevaguely claiming "unavailability" as a reason. The magnitude of the problemcan be assessed from the fact that only 1,100 out of 3,800 cooperativesreceived pesticides in 1976. However, a supply-demand exercise reveals thatpesticides were available in the country, particularly insecticides which arethe major category. Evidently, it is beyond the capability of most cooperativesto arrange for adequate timely supplies of pesticides which are availablethrough a reasonably efficient PUSRI distribution network.

10. In all cases, private sector retailers who were visited, heldstocks of pesticides, many with a selection of 6-8 insecticides. Consequently,one remedy would be to allow private sector retailers to participate in theBIMAS/ INMAS program as is recommended for fertilizers. A further improvementwould be for PUSRI and PERTANI to maintain buffer stocks at main distributionpoints, of the most widely used insecticides especially those to combat brownplant hopper and stemborer. Only then can timely supplies be assured in theevent of an epidemic attack of these pests.

11. Application. Even if easily available, pesticides have to be appliedin an efficient manner. In many instances in Indonesia farmers do not applypesticides as they have no access to spraying equipment either for purchase orhire, nor to an application service. The brief mission survey did not identifyone BUUD/KUD with sprayers for sale, and only one offered sprayers for hire.Sprayers were also not usually handled by private sector retailers. The more

- 95 -

ANNEX 6Page 4

widespread use of granules is not necessarily the answer, first, due to highcosts versus liquids, and second, to the limited effectiveness of a systemic,e.g., epidemic attacks also need quick action by a contact insecticide, other-wise severe damage can take place before the systemic action of granulesbecomes effective.

12. Consequently, the need to solve the application problem isimperative, if plant protection is to develop to the level needed in Indonesia.

Possible solutions would be:

(a) local manufacture of economically priced sprayers backedby an effective network of distribution, sales and spareparts facilities;

(b) the extension of the pesticide subsidy to cover sprayingequipment;

(c) all private sector retail outlets be encouraged to sellsprayers;

(d) BUUD/KUDs be encouraged to provide sprayers for hire;

(e) private sector be encouraged to provide contractspraying services.

13. Education. The education of farmers in plant protection is a keyelement of any crop production program, especially as time cannot be wastedin postattack consultation. A farmer must learn to recognize pests and actquickly. A program of prophylactic spraying to cover the whole of Indonesiawould be unrealistic, so control must also be effected through timely correc-tive treatment. The Agricultural Extension Service have therefore a majorresponsibility in teaching the farmer about plant protection especially forrice. Greater involvement of the private sector in the plant protectionindustry by allowing freedom of access to the BIMAS/INMAS program will have anumber of benefits, not only more effective distribution but also a more inten-sive education effort and assistance with the application problem. A competi-tive private sector could logically be expected to develop the market for itsown products through the medium of efficient marketing, farmer educationassistance with supply of sprayers and contract spraying. There is an urgentneed for development of the plant protection sector in Indonesia. Unless thisneed is met, much of the improvement resulting from other inputs like high-yielding varieties and heavier fertilizer use will be neutralized in the faceof ever-increasing epidemic insect and rodent attacks, particularly on the ricecrop.

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ANNEX 6Page 5


Pesticides

14. Until 1976 all pesticides were imported ready formulated. Since1976, six companies have established local formulation facilities and aseventh has been licensed. This has provided pesticide formulation capacityfar in excess of Indonesia's needs for many years and consequently GOI sus-pended the issue of additional formulation licenses and also imports offinished products.

15. Supplies from the formulation plants are now distributed in conve--nient size high quality packages, a significant improvement over the originalimported containers which had to be repackaged at field locations withoutproper facilities.

16. There is an acute shortage of data relating to pesticide consumptionin Indonesia. Indications are that consumption (although very small comparedto need) grew from 3,351 MT in 1969 to 5,200 MT in 1975 of which estates wouldhave consumed about 50%. Future projections indicate a slow growth of 5%p.a. in the BIMAS sector with a more significant growth in the estatessector, resulting in forecast 1978 consumption of 7,000 MT and 1980 of 8,000

MT. However, easy access to subsidized pesticides could lead to much higherlevels of consumption.

17. Pesticides supplied to the BIMAS/INMAS sector are heavily subsidized.The current uniform selling price of liquids and dusts is Rp 900/liter-kg in bulkto which is added Rp 320/liter-kg for containers, while actual cost is in therange of Rp 2,800/liter-kg Rp3,200/lt-KG in small containers. Pesticides tothe non-BIMAS/ INMAS sector are unsubsidized and an average current cost ofinsecticide is Rp 5,000/liter.

18. An effective remedy for this ailing plant protection industry wouldbe to allow full development of the private sector formulators and to arrangefor retail at subsidized prices through cooperatives and private retailers.In addition, every effort should be made to provide for the hire of sprayersthrough the BUUDS/KUDs and to develop spraying through private contractors.


INDONESIA


Agricultural Aspects

A. Background

Introduction

1. Agriculture plays a major role in the Indonesian economy. Itdirectly accounts for about one-third of GDP, between one quarter and one-third of the foreign exchange earnings and provides two thirds of the employ-ment. The majority of the farmers are concentrated on the islands of Java,Madura and Bali where average farm size is less than one hectare of land.

2. The Government of Indonesia (GOI) aims to be self-sufficient infood as soon as practicable. However, during the last three years foodimports have been increasing. GOI is carrying out a major program to increasethe production of rice, which is the most important and preferred food crop,and accounts for 50% of the value of food production. In addition theGovernment is placing increased emphasis on the production of secondary foodcrops.

3. To achieve increased production in rice, GOI commenced a "massguidance program for self-sufficiency in foodstuffs" (BIMAS) in the wetseason 1965/66 (Annex 1).

4. Average rice yields per hectare increased markedly from 1967 mainlydue to the introduction of high yielding varieties such as IR5 and IR8, butsince 1973, yields have begun to stagnate due largely to a lack of growthin fertilizer use and to pest and disease problems. The secondary ctrops,e.g. corn, cassava, soybeans, etc., have performed poorly and in some instances,a decline in production has occurred (see Tables 2 and 3) despite the avail-ability of BIMAS inputs. This has been mainly due to inadequate coverage ofthis sector by research, as well as a lack of markets for secondary crops.

5. Corn covers the second largest area of land and although theyields have shown some increase, they are still considerably below potential.Aggregate production has fluctuated, mainly as a result of changes in areaharvested which in turn appear to have resulted from lack of producer interestdue to low and uncertain return and diseases (mainly downy mildew). Substantialimprovements in marketing and research are an urgent requirement for the cornsubsector at present.

6. Cassava has shown a reduction in area from 1.51 million ha in1974 to 1.35 million in 1977, though yields of wet root have steadily risensince 1972 from 7.07 tons/ha to 8.98 tons/ha in 1977. The main problem with

- 98 - ANNEX 7

Page 2

cassava, apart from the present low yield compared with achievements inneighboring S.E. Asian countries, is that there are only a few establishedmarkets and it is often grown in areas difficult to reach by road transport.However, the crop has great potential for processing into tapioca and animalfeed once access is available, and when high-yielding varieties and fertilizerrequirements have been tested.

7. Soybean and groundnut yields have remained consistently low atabout 0.8 tons/ha and increased production will depend heavily on much neededresearch into these crops.

Existing Research Facilities

8. Agricultural research is carried out mainly within the Ministryof Agriculture through the AARD (Agency for Agricultural Research and Develop-ment) and the CRIA (Central Research Institute for Agriculture) ResearchStation at Bogor. Additional support for agricultural research comes fromthe universities, the Indonesian Institute for Science (LIPI) and privategrowers. Foodcrops research is at present mainly concentrated in the effortsof CRIA, Bogor and Sukamandi, with productive field experiments at two sites,Lampung and Indramayu. Apart from this work, which is still in its infancy,field crops research in general and especially on the red yellow podzolicswill be given more consideration by Government in the future.

9. Funds for research are provided by the GOI routine and develop-ment budget. Further support is received from 17 foreign donors who provideassistance to 16 research organizations. The Bank has approved a loan of US$46million over the next five years to strengthen production-oriented researchon rice, field crops and high land vegetables and to improve agriculturalextension information. This assistance should help solve some of the problemsmentioned in this section of the report. A further research project orientedmainly towards the Other Islands is being planned.

Existing Extension Facilities

10. In 1974, the Government reorganized the Ministry of Agriculture bytransferring the research functions and responsibility for extension metho-dology from the Directorates General of Foodcrops, Estate Crops, AnimalHusbandry, Fisheries and Forestry to two new agencies: the Agency for Agricul-tural Research and Development (AARD) and the Agency for Education Trainingand Extension (AETE). AETE has now assumed responsibility for agriculturaleducation and training and for extension methodology. However, the fiveDirectorates General remain (at the time this report was being prepared)responsibile for the administration of extension services in the provinces,,each in their own sphere. Extension staff of the different DirectoratesGeneral at the provincial, district and subdistrict levels are administrativelypart of the local government structure.

- 9*9 -

ANNEX 7Page 3

Organization of Extension

11. Most extension bureau and section heads have a university degree inagriculture and several years of experience in agricultural extension. Underthese come the PPSs (Subject Matter Specialists), who also have been university-trained and have some degree of specialization. The PPMs (middle levelextension workers) have a university degree with at least two years ofpractical experience and specialized training. The PPLs (field extensionworkers) who are usually graduates of senior agricultural high schools andreceive additional in-service training are expected to relay the extensionmessage to the farmers.

12. Under the government program, each extension worker (PPL) isassigned 16 selected farmer leaders (Kontak-Tani), who in turn shouldcontact 20 farmers; these 20 farmers are each expected to pass on the newtechnologies to five farmers. This means that each PPL should effectivelycover 1,600 farmers, but in most instances, the PPLs informed the missionthat they had only been able to contact a maximum of ten Kontak Tani who theydid not think made too much of an effort in contacting other farmers.

13. The present organizational concept is good and the extension serviceseems to have sufficient staff, about 8,000 in all, but more training isrequired. When questioned, some PPLs stated that they had nothing new totell the farmers and consequently had little contact with them. This situa-tion should change as the extension program being supported by Bank Loan1267-IND (National Food Crops Extension Project) is gradually implemented. Afurther extension loan which would extend the coverage of the first projectis being planned.

Seed Production Facilities

14. The National Seeds Corporation (NSC) was established in 1971as part of the seed industry development program; its task is to produceand market certified seed. Bank finance (Cr. 246-IND) was made available in1971 to assist with development of the seed industry. Sukamandi was thefirst planned seed farm and will eventually be producing seed on about 2,450ha.

15. Rice production on the Sukamandi seed farm, due to its size and purpose,had to be mechanized, which created some problems because of lack of experiencein this field. Progress has been unsatisfactory and the 1,200 ha of landunder production during the 1976/77 season was only 50% of the target for thatperiod. The 1976 dry season average yield at Sukamandi was 2.9 tons/ha of 14%Moisture Content paddy, an increase of approximately 25% over the previous year.

Rice Seed Requirements

16. Prior to and during the first phase of the Seeds Project severaldifferent estimates of the demand for quality seed were made. The estimateof the Planning Directorate of the Ministry of Agriculture which seemsreasonable is as follows:

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Ultimate requirements for HYV-seed in the whole ofIndonesia (and Java)

Area planted toYear HYV-seed /a Ultimate requirements

(in million ha) (in 1,000 kg)Indonesia (Java) Indonesia (Java)

1976 3.3 (2.31) 66,000 (46,200)1977 3.7 (2.59) 74,000 (51,800)1978 4.0 (2.80) 80,000 (56,000)1979 4.4 (3.08) 88,000 (61,600)1980 4.8 (3.36) 96,000 (67,200)

/a Planning Directorate, Ministry of Agriculture.

An annual production of 10,000 tons of certified seed would be more thanadequate to plant 4.8 million ha from subsequent once-grown seed.

Schedule of Production and Sales Targets (source NEDECO Report, May 1977)

17. In the preparatory reports, a schedule of targets for the years1971-78 were based on the following assumptions:

(a) The prevailing seed multiplication and distribution systemhad proved to be inadequate.

(b) It was to be replaced by a highly centralized organizationfor the production and marketing of quality seed.

(c) At Sukamandi, land with proper irrigation layout wouldbe available for development at the rate of 500 ha/yr,starting in 1971.

(d) Yields on the Sukamandi seed farm would average 3 tons in1972, rising to 3.8 tons in 1975/76, and remain at 3.8 tonsof dry paddy through 1978.

(e) A cropping intensity of 150% would be achieved.

(f) In 1972/73, a second seed farm would start at Klatento be followed two years later, if successful, byoperations in Kepanjan and Batang.

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18. Progress as compared with schedule above:

(a) In 1975, the occurrence of brown plant hopper at Sukamandi severelydamaged the Pelita varieties, reducing yields by about 50% to lessthan 1.7 tons/ha.

(b) The introduction of contract growing in Klaten proved rather difficultby way of experiment, the contract area has now been extended toJogjakarta region.

(c) The cost of production at Sukamandi was unusually high for thefollowing reasons:

(i) Due to inadequate water control weeds became a problem.

(ii) Hand broadcasting of seed increased the cost of hand weedingwell above that of line planting.

(iii) Poor management, poor seedbed preparation, and unevenapplication of fertilizers.

This resulted in the cost of production being as much as 50% higher/kgthan the return on sale of seed.

(d) The 1970 estimate for certified rice seed had to be reduced con-siderably. NSC's maximum future share was now estimated at about11,000 tons (instead of 22,000 tons previously calculated).

Seed Storage

19. Storage of rice seed seems to present few problems in Indonesia asis the case in most of South East Asia. On the other hand, storage ofsecondary crop seeds, especially oil seeds such as corn, groundnut, soybeanetc., is almost nonexistent due to lack of drying and cool store facilities.At present this is a major problem in encouraging the production of thesecrops.

B. Major Present Problems and Possible Solutions

Introduction

20. There are many problems confronting food crop production in Indonesiaat present; these are partly technical and partly organizational. This sectiondeals with the technical problems as constraints to production.

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Insect Pests

21. Pest infestation, especially "wereng"Ll disease caused by the exces-sive feeding habits of the brown plant hopper (Nilaparvata lugens), theravages of the white stemborer (Tryporyza innotata) and excessive "grazing"of rats is having a major effect on rice production throughout Indonesia.The sudden rise in yields in 1967 was mainly due to the introduction of high-yielding varieties, coupled with the BIMAS fertilizer program. The presentleveling-off of yields can be attributed to a combination of reduced fertilizerusage and the increased infestation of the brown plant hopper. New biotypes ofthe brown plant hopper have already been recorded on IR26 originally consideredresistant to this pest.

22. Using 2,700 tons of pesticide on 12 million hectares of double-cropped rice is equivalent to using 0.2 kg/ha or less than 1/50 of what isneeded. Obviously thousands of hectares are not being treated, and using theinsecticide at the minimum rate of at least 10 kg/ha only 250,000 hectareswould receive sufficient control. The present system of using insufficientinsecticide per hectare may be encouraging these new biotypes of the planthopper to develop and is possibly worse than using no insecticide at all.This places an additional strain on the rice-breeding program. In the CRIAtrials, complete insect control raised the yields from 3.5 tons/ha to 6tons/ha (71% increase).

23. Officers of the Plant Protection Staff estimated that there was anapproximate 20% crop loss annually from the 12 million ha of single and double-cropped rice, and agricultural staff and farmers throughout the lowland areasof Java seem to confirm the possibility of this enormous loss. Some farmershave had to replant as many as three times during one season, the previouscrops having been wiped out at an early stage by the BPH. This not onlyinvolves the straightforward cost of replanting but recultivation and refer-tilizing. However, it is obvious that this problem is serious enough to mounta major campaign to break the cycle of the BPH.

24. The main limitations to plant protection are as follows:

(a) farmers' lack of awareness of the need for plant protection.

(b) Organization of the plant protection system is weak.

(c) Lack of field research and screening trials of current pesti-cides. In a case study done on the brown plant hopper problemsin two districts, namely Pandeglang and Serang, the BPH damageaffected about 46% of the crop. It is obvious that no matter what

/1 "Wereng" is the Indonesian name for "hopper burn" caused when planthoppers, leaf hoppers or similar sap sucking insects attach to plantsor field crops and reduce them to a wilted almost "burned" statefrom which they often do not recover.

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other inputs go into producing high yields, the yield potentialwill never be attained unless something is done to improve plantprotection.

25. Some of the main approaches for dealing with the problem are asfollows:

(a) Replace varieties. Try to get 60% of the area underresistant varieties in any badly infested zone. This wouldmean a concerted effort on behalf of the Directorate of SeedFarms to make seed available. At present, OTIly 30% of thenational area is under resistant high-yielding varieties,and this indicates farmer resistance rather than lack of seedsupply. Expansion could be assisted by giving the farmers1/2 kg of a new resistant HYV and letting them do the bulkingon their own farms.

(b) Cultural methods. Crop rotation, alter time of planting, adjustirrigation regime, break planting cycle with secondarycrops.

(c) Chemical control. The order of priority for control isconsidered to be: (i) replace varieties, (ii) crop rotation,(iii) chemicals, and (iv) alternative methods.

26. The BPH has now reached such proportions in Indonesia that everyattempt should be made to use insecticide to break the cycle for at least sixweeks during August-September, which is the middle of the dry season when thearea of paddy is least. As this could be a costly and involved exercise, itis one that requires assistance from highly specialized consultants who, atthe same time, should be asked to advise on the use of systemic and contactpesticides in general. It is essential, however, that consideration be given

to this problem as soon as possible.

Rats

27. These are a problem throughout Indonesia and especially in SouthSulawesi where they have been known to destroy 2% of the paddy. Rats can becontrolled with a properly organized poisoning campaign and a concertedeffort is required by the Department of Agriculture to follow up after thecampaign and maintain control. As is the case with insect pests, Governumentwould be wise to consider hiring short term consultants to advise on the bestmeans of coping with the problem.

Seed Production and Distribution of HYVs

28. The standards of seed purity from Sukamandi are higher than requiredfor Indonesia's present needs, but at the time of planning this scheme, local

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seed supplies were considered by the Government to be inadequate in quantityand quality. Quality control has improved and the quantity of seed available

from the private sector appears to be adequate. One gets the distinctimpression that the private sector is not very pleased about centralizationof seed production.

29. In summing up, centralized production of seed by a new enterprisewas not fully accepted by the other government agencies since they hadestablished interests in the old seed stream. Under normal circumstances,high quality seed production as envisaged at Sukamandi is an asset that fewdeveloping countries have, but, with the present brown plant hopper crisisand the immediate need for the production and distribution of resistantvarieties, it is obvious that long varietal testing periods at CRIA Bogor and

the slow release of new varieties needs to be reconsidered.

30. Sukamandi seed farm, although it has only been functioning for twoyears, has many drawbacks, both in concept and in practice. Conceptually theidea of having a centralized seed farm is debatable from the point of view ofdisease or pest damage. If the country was depending on this single sourcefor the supply of new varieties and for some reason its crop was destroyed,

the effect would be felt nationwide. Already there have been many problemsin developing this large-scale mechanized seed farm for Indonesia; most ofthese problems can be tied to lack of experience, field machinery problems,and a poor salary structure.

31. At present a scheme is being evolved whereby new variet-ies will bebulked up while under test and the testing period reduced. Varieties alreadytested by IRRI are being retested in Indonesia. Although this is standardpractice, is it really necessary? IR32, which had already been tested inthe Philippines, was released immediately with no subsequent problems. Thepresent system of variety testing is too detailed. It is recommended,therefore, that new varieties be inspected in their first season by the PlantProtection division; if their pest and disease-resistant qualities areacceptable then the variety should be released to the growers in the immediatearea for multiplication. The Plant Protection divison should make a secondinspection of the new variety in the growers' areas; if it is still showinggood pest and disease resistance, it should be released for distributionthroughout the country.

32. Naturally, the farmers like to see the aew variety growing in theirdistrict before they will readily accept it. Therefore, it is suggested thatonce the new variety has been passed by Plant Protection, a proportion of theseed should be packaged in small (1/2 kg) bags and given to the extensionservice to distribute country-wide. Such a scheme would have many merits; it:would mean that grower acceptance of the new variety would be much faster;field testing for disease resistance would be broader and on a much moremeaningful scale and finally, the farmer's risk in growing such a smallquantity of a new variety would be greatly reduced.

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Page 9

33. If 1,000 tons of seed from Sukamandi were distributed in this mannerit could technically plant 50,000 ha and yield a minimum of 100,000 tons ofseed; thus 100,000 tons produced in one season would be sufficient to plant5 million hectares, if so desired. As GOI intends to have consultants advisethem on the whole seed production industry it would be worth having themconsider this approach, as it would help reduce the load on the seed farms atSukamandi and Klaten.

Seed Storage Facilities for Secondary Crops

34. As part of the five-year development plan, production and processingof secondary crop (palawija) seed is now under way experimentally. Thereare problems with storing secondary crop seeds, especially the oil seeds.Corn stored in the *tropics is viable for one year if the seed is promptlydried after harvest to 8% MC, and maintained at that level. Further storingat 10 C or lower temperatures, increases its viability for two years orlonger. This is not yet practicable in Indonesia and would only add to thecost of the seed at present, but the possibility of supplying futiire coldstorage facilities for secondary crop seeds should be given consideration aspart of a possible project to strengthen the production of both palawija andother secondary food crops.

Secondary Crops and Cropping Systems.

35. Secondary Crops. There are particular areas where additionalresearch effort is necessary to assist in raising Indonesia's food produc-tion. Secondary crops have been largely neglected by government Researchprograms and there is substantial scope for increasing their yields. Fruitsand vegetables could also be increased, especially vegetables in the highlycommercialized sector of the highlands of Java (and possibly Sumatra).Research in this sector on these commodities would concentrate on developingseeds and planting materials of high-yielding, disease-resistant varietiessuitable to Indonesian conditions, more appropriate production systems,agricultural practices, marketing, processing and storage methods.

36. Cropping Systems. In Indonesia, the cropping systems staff consistsof a working group of scientists from several departments and disciplines,within the Central Research Institute for Agriculture, Bogor. The twoCropping Systems Agronomists responsible for this work on a CooperativeCRIA-IRRI Program and Central Research Institute for Agriculture, respectively,have produced a report for Indonesia on cropping systems, further reports arebeing prepared. A concerted effort to develop and test improved croppingsystems for Java and the Other Islands would pay dividends.

37. Plant breeders have developed high-yielding varieties of rice whichare nitrogen-responsive and disease and insect-resistant. They have producedhigh-yielding, high protein corn varieties, dwarf wheat and sorghum varietiesthat are both high yielding and adaptable to a wide variety of soil andclimatic conditions. The new high-yielding varieties of secondary crops areavailable but not yet in Indonesia. The germ-plasm exists for the upgrading

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of these varieties and the plant breeders have the experience and the abilityto design varieties for nearly all conditions of climate, soils and daylength, but not enough advantage is being taken of this asset.

38. Only 30-35% of the total paddy area in Indonesia has been planted tohigh-yielding varieties (11YVs) of rice. One of the reasons for the lowadoption rate has been that some of these new varieties have done well underexperimental conditions but have consequently performed very poorly whengrown by farmers using less sophisticated techniques. Greater effortmust be made to test and tailor the technological package to the farmer athis level of management if results are to become self-sustaining. Investi-gation into cropping systems is one approach to trying to resolve thisproblem. Set out below are the objectives and the systems themselves.

(a) Objectives of Cropping Systems Research. Increase productionby increasing total area in crops and production/ha.

(i) development of viable cropping systems for new land.

(ii) more intensive use of present cropland including inter-planting of food crops in estate crops such as rubber,oil palm, coconut, in the period immediately followingplanting of the perennial crop.

(iii) amending and maintaining soil fertility.

(b) To increase employment opportunity by increasing the oppor-tunity for labor.

(i) "Spreading out" time for planting and harvest.

(ii) Expansion of total area in production.

(iii) Concomitant increase in agro-business.

(c) To improve the small farmers' bargaining position byincreasing the frequency of harvests and minimizing theneed to borrow.

(d) Cropping Systems.

(i) Mixed Cropping: Spatial arrangement scattered, no rows.Farmer plants what seed material he has whereas he can fitit into his block. Typical of most slash and burnmoving cultivation patterns.

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(ii) Intercropping: Compatible crops that do not shade eachother out nor compete with each other too vigorouslyfor moisture or nutrients; are planted in alternaterow patterns and have varying dates of maturity, thusspreading the farmer's labor.

(iii) Sequential planting: The whole area is planted to onecrop following another. This means that the farmer'stime is all concentrated at planting, weeding andharvesting, thus reducing the amount of land he canhandle.

39. Annex 7, Tables 3-5, show the actual results of a cropping systemexperiment carried out at Bandarjaya Lampung, 1973-75. From CRIA's resultsso far it appears that intercropping may be the most profitable method ofproducing food crops. Intercrop combinations using drought-tolerant cropsduring the dry season permit year-round cropping and give the highestyields per hectare/year among the three cropping patterns mentioned. Netreturns, under research conditions, were highest from the intercrop combination.Yield and net returns indicate that with availability of fertilizers and useof suitable intercrop combinations, farmers could develop cropping systemsthat would enable them to produce enough food for their families to havesurplus to sell and at the same time maintain and improve the overall fertilityand productivity of their soil. It has to be remembered that the net andgross returns under normal farming conditions will be much less (probablyabout 50%) than research results but, with these promising beginnings, itwould seem that further food crop research programs should be concentrated ondeveloping the intercropping system and promoting it throughout Indonesia.As can be seen in Annex 7, Table 3, the farmers using the intercrop systemshave six harvesting periods during which they can sell their produce.

Fertilizer Requirements

40. Presented below are the most recent BIMAS "fertilizer packages"recommended for use by the farmers in the BIMAS program throughout Indonesia.

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BIMAS Paddy Package 1976-77 (in kg/ha)

Irrigated Irrigated Irrigated DAPLiquid Insecticide Granulated Insecticide

Package A B C A B C A B C

Tjrea 200 100 750 200 100 200 180.5 86.3 220TSP 50 35 75 50 35 75 50 35 75

Dryland

Altitude 1 Altitude 2

Urea 150 200TSP - 65NPK 200

Freshwater Tidal Lands

Package A Package B

Urea 50DAP 35

Swampland

Package A Package B

Urea 75DAP 50

Normal BIMAS for Local Vatieties:

Wet Season:

Urea 125 kg/ha 75 kg/haTSP 75

Dry Season:

Urea 95.6 kg/ha 75 kg/haTSP 75 " -

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An examination of these recommendations poses a number of questions of apurely technical nature:

(a) the nitrogen:phosphorus ratio works out at between 3 and 4:1,and the lover ratio (3:1) is reasonable for a blanket recom-mendation fertilizer rate where inadequate field trial work hasonly been possible as yet. The optimum nitrogen:phosphorus ratioof the rice soils of Indonesia to produce maximum yields is notknown and many research workers there feel it would be toodifficult to ascertain. However, it has been done in other coun-tries quite successfully using simple field trials laid down byextension workers.

(b) On the dryland soils N.P.K. (compound nitrogen phosphorous andpotassium) fertilizer is recommended and yet in discussions withagricultural staff potash has not been shown to be deficient.This once again could be an unnecessary cost to the farmer andrates of application of macronutrients must be determined onthe rainfed areas.

(c) Because it is plentiful, urea is being used on dryland soils. Itis not a good source of nitrogen under these conditions and can insome cases cause severe "burn" of crops due to its Biuret content.Sulphate of ammonia would be a much more suitable fertilizer.

41. In order to make full use of experimental results a detailed soilsurvey of the more important production areas (not the whole country) shouldbe undertaken as soon as possible where this has not already been done.Reconnaissance soil surveys exist but these are on too broad a scale to beused for fertilizer recommendations. The survey should aim to produce adetailed soil map in the range of 1:20,000 or 1:25,000; a full report on thesoils in the mapped area; a land-use map and, perhaps, a map showing presentland utilization. Once the soils have been clearly identified, a large-scaleprogram of fertilizer trials should be commenced. These trials would besimple in design and would deal with macronutrients and rates of application.Recommended fertilizer rates as a result of these trials would become theBIMAS rates for any specific area. Particular attention should be given tothe comparative suitability of urea and sulphate of ammonia under rainfedconditions.

42. The main constraint to agricultural food crop research in Indonesiais a lack of qualified staff who can devote all their efforts to it. TheResearch Station at Sukamandi has put pressure on Bogor for more staff andthis situation could result in neither research station having sufficientqualified people. Additional research workers are urgently needed. Actionshould also be taken to recruit or transfer staff to carry out an expandedprogram of field trials as an extension of the work on the research stations.These workers could be stationed at selected sites, where they could betrained by and assist, existing staff in the preparation, implementation,recording and reporting of results of food crop production trials. Thiswould encourage target-oriented team research.

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Extension Services

43. Extension services need to be strengthened at the farm level.More farmers' field days should be held on successful demonstration trialsand extension workers should be instructed to carry out more rate of applicat:ionfertilizer trials on farmers' fields. They should visit more farmers in thefield to discuss their problems and this may mean improved transportfacilities in some areas.

C. Conclusions and Suggested Action

Conclusions

44. There needs to be a concerted effort made through adaptive researchand trial demonstrations to meet the full needs of the farmers and increasenational production of food crops by optimizing fertilizer application rates,developing better secondary cropping systems, introducing improved high-yielding varieties and establishing pest and disease control measures. Thecountry needs a more active breeding program not only for the present irrigatedrice area but also for the rainfed upland areas, the tidal swamps and freshwater swamps.

45. Strong measures need to be initiated country-wide to control pests,namely the brown plant hopper and rats, that are decimating paddy yields by asmuch as 20%. This problem has reached such serious proportions that consultantswell versed in pest control will be needed to design and, if necessary, super-vise a control program. They may also consider the possibility of compoundinga suitable systemic insecticide with urea fertilizer as a method of control.

46. Secondary crops which form such a vital part of the overall food pro-duction needs are not being given sufficient attention either on research ormarketing. Seed production, both of new high-yielding varieties of rice andsecondary crops also needs careful study. To ensure that new technologiesreach the farmers the extension service will need to become more field-oriented and better trained than they are at present.

Suggested Action

47. The suggestions listed below need early attention at a highlevel of government if increased food production is to be achieved.

ANNEX 7Page 15

(a) Short-term:

(i) Pest control

a. Every effort must be made to break the cycle of the brownplant hopper (Nilaparvata lugens) which is greatly depress-ing yields throughout Java./l

b. Screening trials of the various insecticides shouldbe carried out in order to select the best control systemthat will have the least effect on the BPH's naturalpredators.

c. Consideration should also be given to a massive pesticidecontrol program through the August/September dry season whenthe area under rice is at its least. During this periodevery effort should be made to break the BPH's lifecycle for at least six weeks which would be sufficienttime to bring the pest under almost complete control.Furadan 3.G, a granulated systemic insecticide, has showngood results in controlling the BPH in the past. Ifthe screening trials prove this, or similar formulations,to be the best preparation available then it is furtherrecommended that the consultants examine the advisabilityof compounding them with urea fertilizer for the followingreasons: (a) as Furadan granules are broadcast at a fewkilograms per hectare it would be easier to obtain a moreeven cover if they were mixed with the fertilizer; (b) itwould ensure that farmers applying urea would also beprotecting their crops against the BPH and stemborer;(c) applying the insecticide with the fertilizer not onlyreduces the work load but negates the need for costlyknapsack spraying.

d. It is suggested that the bulking of the seed of newvarieties be run as a parallel program to testing of theirpest and disease resistance, and that small (1/2 kg)packets of new variety seed be issued to the farmers forgrowing under field conditions. The mission agreed withGOI that consultants should be appointed to examine thepresent seed production program and that the suggestionsabove should be included in the terms of reference.

1 A consultant has been engaged to advise on possible measures to counterthis pest.

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(ii) Research - it is strongly recommended that:

a. More research effort is channeled to the secondary food

crops in view of their importance to the country's foodneeds. There must be more varietal introductions fromsimilar climatic zones throughout the tropics, combinedwith simple macro and micronutrient trials and rate offertilizer application trials to ensure maximum productionon any major soil type. Additional staff will be requiredto carryout this important program./l

b. Research into cropping systems should be expanded,particularly at the field level, to ascertain whetherintercropping is a better, more productive system thanmixed cropping or sequential planting. Fertilizerrates on these trials will have to be optimized.

c. In the rice areas, both irrigated and rainfed, thereis an immediate need for better understanding of thefertilizer requirements, especially as they apply to theimportant nitrogen: phosphorus interaction.

d. It is suggested that prompt action be taken to importnew high-yielding varieties of upland rice (from whereveravailable) for testing under Indonesian conditions.

e. The whole plant breeding section needs strengthening inits efforts to develop pest and disease-resistant strainsof rice for Indonesia. The present shortage of plantbreeders could be resolved by securing the services ofexpatriates in the shorter term.

(iii) Extension service - To support (ii)(a.) above, it is suggestedthat extension workers be trained to lay out simple 5 x 5latin square rate of fertilizer application trials within thearea of their jurisdiction; record the results and hold farmers'field days to demonstrate which combination of fertilizers givethe best yields and at what rate. They also also be taught toinstruct farmers in the correct use of insecticides wherenecessary. Finally to encourage greater use of fertilizers byall farmers, the cost of these fertilizers should be reducedand they should be packed in 25 kg bags to make them easier totransport or hand carry greater distances.

/1 A second Bank assisted Research project, focussing on these problems, iscurrently under preparation.

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(iv) Seed production - more research is required into the productionand storage of secondary crop seeds and developing largequantities of plant material when required by farmers, especiallyin the Other Islands.

- 114 - ANNEX 7

Table I

INDONESIA


Harvested Area, Production and Average Yield of Paddy Ricein Java and the Other Islands, 1968-77

Area Harvested Paddy Production /a Yield /aOutside Outside Outside

Year Java Java Indonesia Java Java Indonesia Java Java Indonesia- ----- Million ha ----- --- Million ton paddy --- ----- Ton paddy/ha -----

Irrigated and Wet Land /b

1968 3.86 2.51 6.36 9.955 5.406 15.361 2.58 2.15 2.411969 3.95 2.60 6.54 10.653 5,775 16.428 2.70 2.22 2.511970 3.96 2.72 6.68 11.205 6.504 17.709 2.83 2.39 2.651971 4.05 2.84 6.89 11.991 6.605 18.596 2.96 2.32 2.7u1972 4.01 2.60 6.61 11.518 6.385 17.903 2.87 2.45 2.701973 4.24 2.83 7.06 12.600 7.215 19.815 2.97 2.55 2.811974 4.45 2.89 7.34 13.526 7.535 21.061 3.04 2.61 2.871975 4.39 2.95 7.33 13.369 7.489 20.858 3.05 2.54 2.841976 4.22 3.01 7.23 13.723 8.128 21.852 3.25 2.70 3.071977 /c 4.15 3.06 7.21 13.354 8.555 21.909 3.22 2.79 3.04

Average Annual Growth Rate,1968 to 1977 /d 1.2% 2.0% 1.5% 3.5% 4.7% 3.9% 2.3% 2.7% 2.4%

Unirrigated and Dry Land

1968 0.41 1.25 1.66 0.451 1.351 1.802 1.10 1.08 1.081969 0.35 1.12 1.47 0.387 1.206 1.593 1.11 1.08 1.081970 0.34 1.11 1.46 0.397 1.226 1.623 1.17 1.10 1.111971 0.37 1.07 1.43 0.424 1.170 1.594 1.15 1.09 1.111972 0.33 0.97 1.31 0.407 1.084 1.491 1.23 1.11 1.141973 0.33 1.01 1.34 0.441 1.234 1.675 1.34 1.22 1.251974 0.29 0.88 1.17 0.358 1.054 1.412 1.23 1.20 1.201975 0.26 0.90 1.16 0.357 1.124 1.481 1.37 1.25 1.281976 0.25 0.89 1.14 0.339 1.110 1.449 1.36 1.25 1.271977 /c 0.24 0.94 1.18 0.347 1.187 1.534 1.44 1.26 1.30

Average Annual Growth Rate,1968 to 1977 /d -5.6% -3.5% -4.0% -2.6% -1.4% -1.7% 3.0% 2.1% 2.3%

Total Irrigated, Wet Land, Unirrigated and Dry Land

1968 4.27 3.76 8.02 10.406 6.756 17.163 2.44 1.80 2.141969 4.30 3.72 8.01 11.040 6.981 18.020 2.57 1.88 2.251970 4.30 3.83 8.14 11.601 7.730 19.331 2.70 2.01 2.371971 4.42 3.91 8.32 12.414 7.775 20.190 2.80 1.99 2.431972 4.34 3.57 7.90 11.925 7.469 19.394 2.75 2.09 2.451973 4.57 3.84 8.40 13.041 8.449 21.489 2.85 2.20 2.561974 4.72 3.78 8.51 13.884 8.589 22.473 2.94 2.27 2.641975 4.65 3.85 8.50 13.726 8.613 22.339 2.95 2.24 2.631976 4.47 3.90 8.37 14.062 9.239 23.300 3.15 2.37 2.781977 /c 4.39 4.00 8.39 13.702 9.741 23.443 3.12 2.43 2.77

Average Annual GrowthlRate, 1968 to 1977 /d 0.7% 0.5% 0.6% 3.3% 3.8% 3.5% 2.6% 3.2% 2.8%

/a Official statistics up to and includinig 1976 show production and yield in terms of stalk paddy. Productionand yield figures in this table are in terms of rough paddy also referred to as dry rice paddy ("paddygabah"), assuming I kg stalk paddy = 0.765 kg rough paddy. Also official statistics now use conversion ratefor paddy gabah to milled rice as 0.68.

/b Refers to irrigated and rainfed sawah. The term "sawah" refers to all rice fields, irrigated or rainfed,which have low banks or bunds built around them to retain water so that rice can be grown under floodedconditions.

/c Preliminary estimate.

/d Computed by fitting semi-log regression line.

Source: Central Bureau of Statistics.

- 1l5 - ANNEX 7

Tahle 2

INDONESIA


Harvested Area, Production and Average Yield of Secondary Food Cropsin Java and other Islands, 1968-77

Area harvested Production ___ YieldOutside Outside Outside

Year Java Java Indonesia Java Java Indonesia Java Java Indonesia-_____ ('000 ha) ------- ----- ('000 tons) ------- ------- (tons/ha) -------

CORN

1968 2,314 906 3,220 2,353 813 3,166 1.02 0.90 0.981969 1,599 836 2,435 1,601 692 2,293 1.00 0.83 0.941970 2,102 837 2,939 2,101 724 2,825 1.00 0.86 0.961971 1,858 769 2,627 1,883 723 2,606 1.01 0.94 0.991972 1,508 652 2,160 1,649 606 2,254 1.09 0.93 1.041973 2,368 1,065 3,433 2,691 999 3,690 1.14 0.94 1.081974 i,934 733 2,667 2,128 883 3,011 1.10 1.20 1.131975 1,774 671 2,445 2,177 725 2,903 1.23 1.08 1.191976 1,434 661 2,095 1,827 745 2,572 1.27 1.13 1.231977 /a 1,710 840 2,550 2,136 894 3,030 1.25 1.06 1.19

Average annualgrowth rate1968-77 /b -2.3% -1.9% -2.1% -0.7% 1.5% 0.9% 3.0% 3.4% 3.2%

CASSAVA

1968 1,056 348 1,503 8,747 2,609 11,356 8.28 7.50 7.551969 1,134 322 1,476 8,252 2,665 10,917 7.28 8.28 7.401970 1,094 304 1,398 8,003 2,475 10,478 7.32 8.14 7.501971 1,101 305 1,406 8,075 2,615 10,690 7.33 8.57 7.601972 1,133 336 1,469 7,878 2,507 10,385 6.95 7.46 7.071973 1,056 373 1,429 8,103 3,083 11,186 7.67 8.27 7.831974 1,158 351 1,509 9,648 3,382 13,031 8.33 9.64 8.641975 1,065 345 1,410 9,309 3,236 12,546 8.74 9.38 8.901976 1,004 349 1,353 8,846 3,345 12,191 8.81 9.58 9.011977 /a 1,005 350 1,355 8,937 3,232 12,169 8.89 9.23 8.98

Average annualgrowth rate

1968-77 /b -0.8% 1.1% -0.8% 1.2% 3.6% 1.8% 2.0% 2.5% 2.6%

SWEET POTATOES

1968 247 157 404 1,361 1,003 2,364 5.51 6.39 5.851969 188 181 369 1,077 1,183 2,260 5.73 6.54 6.121970 185 172 358 1,073 1,102 2,175 5.80 6.41 6.081971 175 182 357 947 1,265 2,211 5.41 6.95 6.191972 161 177 338 906 1,161 2,066 5.63 6.56 6.111973 203 176 379 1,170 1,216 2,387 5.76 6.91 6.301974 165 165 330 1,181 1,288 2,469 7.16 7.81 7.481975 158 153 311 1,266 1,166 2,433 8.01 7.62 7.821976 141 160 300 1,122 1,260 2,381 7.96 7.88 7.941977 /a 152 164 315 1,202 1,251 2,453 7.91 7.63 7.79

Average annualgrowth rate1968-77 /b -4.2% -0.8% -2.7% 0.6% 1.7% 1.1% 5.0% 2.6% 3.9%

Note: Some totals do not add because of rounding.

/a Preliminary estimate./b Computed by fitting semi-log regression line.

Source: Central RBureau, of ct ti t -4


INDONESIA


Harvested Area, Production and Average Yield of Secondary Food Crops

in Java and other Islands, 1968077

Area harvested Production Yield

Outside Outside Outside

Year Java Java Indonesia Java Java Indonesia Java Java Indonesia

______ (O000 ha) ------- ----- ('000 tons) ------- ------- (tons/ha) -------

PEANUTS

1968 324 70 395 234 52 287 0.72 0.74 0.73

1969 290 82 372 194 73 267 0.67 0.89 0.72

1970 301 79 380 221 60 281 0.73 0.76 0.74

1971 297 79 376 224 60 284 0.75 0.76 0.76

1972 280 74 354 226 56 282 0.81 0.76 0.80

1973 310 97 407 217 73 290 0.70 0.75 0.711974 328 81 410 242 65 304 0.74 0.80 0.74

1975 373 102 475 297 83 380 0.80 0.81 0.80

1976 315 99 411 254 87 341 0.81 0.88 0.83

1977 /a 364 142 506 285 118 403 0.78 0.83 0.80

Average annual

growth rate1968-77 /b 1.9% 5.8% 2.7% 3.3% 6.7% 4.0% 1.4% 0.9% 1.2%

SOYBEAN

1968 543 134 676 357 63 420 0.66 0.47 0.62

1969 476 78 554 341 48 389 0.72 0.62 0.70

1970 597 98 695 429 69 498 0.72 0.70 0.72

1971 581 98 680 452 64 516 0.78 0.65 0.76

1972 582 115 698 447 72 518 0.77 0.63 0.74

1973 607 144 744 439 102 541 0.72 0.71 0.73

1974 596 158 768 457 132 589 0.77 0.84 0.77

1975 601 151 752 468 122 590 0.78 0.81 0.79

1976 499 147 646 406 116 552 0.81 0.79 0.76

1977 /a 517 145 663 409 118 527 0.79 0.81 0.80

Average annual

growth rate1968-77 /b 0.0% 5.6% 1.1% 1.8% 11.0% 3.6% 1.7% 5.1% 2.1%

Note: Some totals do not add because of rounding.

/a Preliminary estimate.

/b Computed by fitting semi-log regression line.

Source: Central Bureau of Statistics.

INDONESIA


Cropping Patterns for Cropping Systems ExperimentBandarjaya Lampung, 1973-75

Main Date of Fertilizer (kg/ha) Spatialplot No. Crops Variety Planting Harvesting Spacing /a N P2 05 120 Arrangement

(Mixed 1. Corn Metro 11/28/73 3/14/74 Uncertain 48 15 15cropping) 2. Upland rice Cartuna 11/28/73 4/05/74 " 72 24 24

3. Cassava Local 12/06/73 10/06/74 20 20 20 Scattered4. Sorghum UPCA-S1 3/17/74 7/14/74 24 8 8 (no row)5. Peanut Gajah 4/10/74 7/18/74 14 25 366. Rice bean Local 7/22/74 10/04/74 " 14 25 36

(Inter- 1. Corn Metro 11/28/73 3/14/74 150 x 20 48 15 15cropping) 2. Upland rice Cartuna 11/28/73 4/05/74 25 x rows 72 24 24

3. Cassava Local 12/06/73 10/06/74 300 x 60 20 20 204. Sorghum UPCA-S1 3/17/74 7/14/74 300 x 15 24 8 85. Peanut Gajah 4/10/74 7/18/74 30 x 10 14 25 366. Rice bean Local 7/22/74 10/04/74 30 x 10 14 25 36

(Sequential 1. Upland rice Cartuna 11/28/73 4/05/74 25 x rows 90 30 30planting) 2. Corn Metro 4/10/74 7/22/74 100 x 20 90 25 25

3. Rice bean Local 7/26/74 10/06/74 40 x 20 20 45 50

/a The populations of corn, rice, peanut, rice bean, and cassava, in mixed cropping and intercropping were 53%, 80%,71% and 44.4% of those in sequential planting or solid planting, respectively. Sorghum was eliminated after thefirst year and some modifications were made in planting and harvesting dates and spacing.

1c3z

INDONESIA


Average Yield of Crops and Approximate Net Returns for Check and Full Treatment PlotsBandarjaya Lampung, 1973-75

Cassava ApproximateFertility Treatment Corn Upland rice Peanut Rice bean Fresh tuber Net Return

--- …- -- Dry grain (kg/ha) ----- …(ton/ha) Rp/ha

Mixed Cropping

No lime + no NPK + no mulch 467 690 161 55 12.7 65,000 H

Lime + NPK + mulch 1,165 1,358 356 248 28.3 132,000 H

Intercropping

No lime + no NPK + no mulch 455 769 222 93 14.6 91,000Lime + NPK + mulch 1,350 2,724 567 627 23.2 265,000

Sequential Planting

No lime + no NPK + no mulch 606 850 - 153 _ (-6,000)Lime + NPK + mulch 2,935 3,536 - 723 74,000)

c ZrD

INDONESIA


Average Yield of Crops and Return Analysis for Three Cropping Patternsin Five Months Irrigation Areas (Category I)

Nambahdadi, Lampung, 1975-76

Cropping Yield Gross Labor Material NetPattern Variety I II III Average return cost cost return

kg/ha Rp/ha Rp/ha Rp/ha Rp/ha

IAL. rice Pelita I/i 3,151 4,427 3,906 3,828 229,680 92,269 19,605 117,806Corn

IB -

L. rice Pelita I/1 4,064 4,508 4,305 4,292 257,520 97,195 23,571 136,754Corn

ICL. rice Pelita I/1 4,929 5,350 4,407 4,895 293,520 110,100 37,710 145,710CornR. bean

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