AS132 FILE COPY Vol. 3

This report was prepared for use within the Bank and its affiliated organizations. Public Disclosure Authorized They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Public Disclosure Authorized

ECONOMIC DEVELOPMENT OF INDONESIA

(in six volumes)

VOLUME III

ANNEX 1 - AGRICULTURE Public Disclosure Authorized

Z

COzmr

It C

February 12, 1968 0

6 Asia D Public Disclosure Authorized

Asia Department U CURRENCY EQUIVALENTS

Currency Unit - Rupiah

Floating Rate (November 1967)

(1) B. E. Market Rate U.S.$ 1. 00 = Rp. 150 1 Rupiah = U.S.$ 0.007 1 Million Rupiahs = U. S. $ 6, 667

(2) Curb Rate U.S.$ 1. 00 = Rp. 170 1 Rupiah = U. S. $ 0. 006 1 Million Rupiahs = U. S. $ 5, 882 This report was prepared by a mission that visited Indonesia from October 17 to November 15, 1967. The members of the mission were:

0. J. McDiarmid Chief of Mission 3. K. Abadian Chief Economist Jack Beach Power N. D. Ganjei Fiscal (I.MJ.) D. Juel Planning G. W. Naylor Industry (Consultant) G. J. Novak National Accounts J. Parmar Industry R. E. Rowe Agriculture M. Schrenk Industry H. van Helden Transportation E. Levy (part time) Statistics Mrs. N. S. Gatbonton (part time) External Debt Miss G. M. Prefontaine Secretary

Messrs. R. Hablutzel and W. Ladejinsky also contributed to this report.

Since the mission's visit substantial changes have occurred in the effective exchange rate structure and prices have risen at a more rapid rate than during the previous months of 1967. These developments may require reconsidera- tion of the magnitudes in the 1968 budget. However they have not altered the basic conclusions of the mission in respect of the performance and prospects of the economy.

ANNEX 1

AGRICULTURE

CONTENTS

Chapter Page

1 Importance and Problems of Agriculture 1

2 Food Production 5

3 Tenancy and Agrarian Reform 29

4 Smallholder Production of Cash Crops 39

5 Estate Agriculture 42

6 Imports, Credit and Production Potential 50

7 Forestry and Fisheries 53 8 1968 Project Aid Program 55

Appendix 1 - Irrigation 60

Appendix 2 - Prospects for Cash Crops 68

Appendix 3 - Forestry and Fisheries 90

Appendix 4 - Agricultural Credit 102

AGRICULTURE

CHAPTER 1

IMPORTANCE AND PROBLEMS OF AGRICULTURE

1. It is impossible to describe in this report Indonesian agriculture in detail. Our purpose is to highlight key features, to indicate the effect of present government policies and to suggest the directions which these should follow after the current period of stabilization.

2. Comprising over 3,000 islands totaling 190.4 million ha., which stretch along the equator for some 5,000 km., Indonesia possesses a wide variety of climates and soils. This diversity is enhanced by limited areas of significant altitude which allow some cultivation of all but the strict- ly temperate crops, although some of the latter, for example, apples and Irish potatoes, are grown in a few areas where altitude permits. Agricultural production ranges in method and intensity of production from that practiced by virtual stone age communities in parts of !est Irian, to the highly de- veloped estate agriculture of North Sumatra. Table 1 gives land utilization and population, and Table 2, areas under and production of the principal cash crops.

The production of crops, livestock, fish and forest products accounts for between 50 and 55 percent of the national income, and provides the livelihood of about 75 percent of the population. It is estimated that a minimum of 50 percent of the population is largely self-sufficient in respect of food, living in a partially non-monetized economy. The total labor force working for wages is currently between 33 and 35 million, of which 50 percent works in agriculture.

4. The predominance of the agricultural sector in the economy is also reflected in its contribution to exports. In 1966 agricultural and related produce accounted for 82 percent of non-petroleum exports in terms of value, and rather more than 73 percent of all exports.1/ Export taxes on agri- cultural products produce more than 20 percent of government revenues apart from foreign aid.

5. The performance of the agricultural sector, like most other sectors of the economy, has been unsatisfactory over the last 30 years. Farm origi- nating exports have declined and food imports (especially of rice) have had to be maintained. The limited statistical data available indicates that overall agricultural output at constant prices (base = 1960) increased by only 10-12 percent between 1958 and 1965. In the same period food crop pro- duction increased by 24 percent, total farm cash crop production was practi- cally stagnant while estate crop production declined by 2.3 percent.

1/ Actual exports plus an estimated U.S.$ 60 million equivalent, Indonesia's oil revenues. - 2 -

Table 1

Population and Land Use

A. Population 1964 1965 1966 1967 1. Total (millions) li54T 107.0 liW. 112.3 Area (km2) 1,904,340 Density per km2 55 56 58 59

2. Active Population (1964) Percent of total 32

3. Active in Agriculture (196) Percent of total 23 Percent of active 71

B. Land use (early 1960s)

1. Forests Area (km2) Percent Forest reserves 175,998 Other forests. 1,OL1,748 Total 1,217,746 63.9

2. Land used by smallholders Rice land Irrigated 43,013 Rainfed 18,238 Other Crops 142,773 Total 204,024 10.7

3. Land held by estates 17031 0.9

L. Other land, including grasslands swamps, inland waters, roads and settlements. 465,539 24.5

B. Grand Total 100

Note: Land use figures are designed to give a general picture of the situation, and have been developed by the mission from a range of sources. Apart from data relating to Java (see Table 2) and forest areas other data are subject to wide error. - 3 -

Table 2

I. ESTIMATED PRODUCTION AND AREA OF PRINCIPAL CASH CROPS, 1960-1965

PRODUCTION 1960 1961 1962 1963 I64 196/ 19661/ (000 metric tons)

Sugar 967 943 878 833 1,181 1,143 1,014 Tea 83 80 84 76 87 89 87 Coffee 98 96 111 164 87 105 116 Rubber 679 699 697 706 716 726 752 Palm Oil 11 15 141 148 160 163 151 Palm Kernels 33 3h 33 33 35 36 36 Cocoa 1 0.8 0.6 0.6 o.6 0.4 0.8 Tobacco 69 84 143 161 125 121 137 Fiber 20 16 8 4 3 4 7 Spices 121 137 121 119 105 59 67 Copra 1,239 1,361 1,387 1,379 1,193 N/A 1,350

AREA. T0O hectares)

agar 96 93 137 121 154 150 156 Tea 128 111 170 126 125 126 127 "offee 270 281 281 298 314 333 342 Rubber2/ 2,000 2,000 2,000 2,000 2,000 2,000 2,000 Iil Palms 88 88 88 90 90 86 90 Cocoa 5 5 5 4 4 4 4 Tobacco 163 208 1L4 261 140 148 153 Fiber 10 I 2 2 2 2 & Kapok 135 146 169 142 133 136 125 Coconuts 1,649 1,593 1,553 1,822 1,822 1,822 1,822

17 Preliminary. 2/ Productive area is assumed constant. 7ource: FAO Report, January 23-February 23, 1967, amended by the mission where additional information was available from the authorities. 6. In Volume 1 of this report the general constraints which have afflicted the economy as a whole are described. Agriculture has suffered from the failure of the Government to maintain an efficient infra-structure and good communications, features of paramount importance in an insular nation, all regions of which experience protracted periods of high rainfall. The lack of adequate development credits, even for the potentially viable estate sector has been another major constraint. The loss of managerial and commercial skills, resulting from the exodus of expatriate senior person- nel from the formerly foreign-owned estates and commercial establishments, also has had adverse effects on agriculture as has the drying up of foreign investment following widespread nationalization, Government policies have severely restrained the activities of indigenous entrepreneurs in agriculture and, not least, traders in agricultural produce. Agriculture has suffered also from the poor performance of the official agencies responsible for sup- porting agricultural development, especially those responsible for agri- cultural extension and research. Today, government policies are taking a more realistic and rational trend, but much has to be done to correct the mistakes and deficiencies of the past. Below, and in appropriate appendixes, the more important problems of agricultural development are discussed in the context of the four main categories of agricultural and related activity:

(i) The food crop agriculture; (ii) The smallholder production of cash crops; (iii) The estate production of cash crops; and (iv) Forestry and fisheries.

While there is a degree of overlapping between the first two categories, the four categories each have their own problems and potentials. CHAPTER 2

FOOD PRODUCTION

7. Food production is far from being the only agricultural activity even in Java or on the densely populated islands of Bali and Lombok. Table 1 shows present land utilization on Java. Food crops use more than 75 percent of the cultivated area of the island and the great bulk of the agricultural population there is primarily concerned with its production.

8. However, at the present time Java is unable to produce sufficient food to feed its population and in particular is deficient in rice. Imports from the Outer Islands cannot fill the deficit, and the Government, despite a chronic shortage of foreign exchange, imports rice from abroad primarily to feed Java's population. Imports by the Government are made for two reasons, first to pre- vent actual hunger in urban consumption areas, and second to hold down domestic rice prices as one method of minimizing inflation. In some ways the situation is artificial since the Government, by its policies, encourages the consumption of rice (by paying wages and salaries partially in rice to people who in a more highly monetized ecoiumy would seek cheaper alternatives which could be pro- duced in Indonesia)1 and discourages production by attempts to keep retail and thus producer prices for rice at low levels. It is difficult, however, to en- visage in the short run a rationalization df the situation because of the deep political problems that are inherent in any abrupt change, even though both the living standards of the farm population and the balance of payments suffer from the low domestic price of rice. In fact any significant improvement in rural living standards in Java depends upon the island developing its agri- culture to a stage where rice and other fbods are in surplus and can be exported. In the mission's view, the export of rice should be the target.

9. Despite the general responsiveness of Java farmers to improved methods (an attribute born possibly of the desperation of attempting to support a family on a piniscule holding - see Chapter 3 ) government programs to supply re- quired inputs have run into difficulties. There are four basic problems: (a) finance to import and the means to efficiently distribute required inputs, (b) a sound credit system for potentially millions of farmers who do not have the resources to buy inputs for cash (c) providing an assured market for the farmers' produce at prices which justify and encourage the use of purchased inputs, and (d) the provision of an extension service trained and enabled to provide the farmer with sound advice.

10. In Indonesia rice as a food is of such paramount importance that a sufficiency of it must be equated with an adequate food supply. Viewed thus, Indonesia's food production, though increasing, has failed to meet domestic requirements for the past 30 years. In 1938 Indonesia imported 334,000 tons of rice; in 1952 under 800,000 tons, and in the early 1960's imports averaged a million tons. The sharp decline of imports in 1965-1966 (Table 2) may be

1/ Maize and cassava are two crops which could be extensively grown in the Outer Islands without the comparatively heavy initial investments asso- ciated with rice production. - 6 -

Table 1

LAND USE JAVA including MADURA

(mid 1960s)

Area (km2 Percent 1. Forests

Forest reserves 29,908 Other forests nil Total 29,908 22.6

2. Land used by smallholders

Rice land: irrigated 28,480 rainfed 9,576 Other Crops 1L,10h Total 82,160 62.2

3. Land held by estates 6,300 4.8 b. Other land-/ 13,802 10.4

,. Grand Total 132,170 100.0

1/ Including roads, settlements, streams ana open water bodies.

Sources: Ministries of Agriculture and Public Works. - 7 - attributed to a moderate increase in production, lack of foreign exchange, and possibly a slight decline in per capita consumption. It is questionable if the recent declining imports constitute a trend.

Table 2

Rice (Milled) Imports - Domestic Procurementj 1960-1966

('000 tons)

Domestic Procurement Year Imports Actual Purchase Target Actual as percentage Purchase of target

1960 894 567 289 51.0 1961 1,066 567 272 48.0

1962 1,096 1,854 541 29.2

1963 1,075 1,141 460 40.3 1964 1,025 400 342 85.5 1965 186 525 318 60.6

1966 264 1,111 533 48.0

Source: dinistry of Agriculture.

11. If domestic rice output, particularly in Java, continues at the levels of 1960-1966, food availabilities will fall far short of the require- ments of a rapidly increasing population. The answer falls into two parts: What Java can do and what the Outer Islands can do. Though overcrowded to almost standing room only, Java can increase its yields materially. Judging by the reported gradual expansion of the rice acreage in the Outer Islands, further expansion there is feasible,though yields for a time may remain constant as they have in the past. Quantitative projections for the Outer Islands are difficult to make because of the absence of information. This much is clear with respect to Java and particularly the Outer Islands: Augmenting production "vertically" in the first case or "horizontally" in the second case will require large material and human investments; more in the Outer Islands than in Java due to the nature of the more difficUlt terrain and sparse population. There is reason to believe that opening of new land in the Outer Islands will partly depend upon resettlements of surplus Javanese. In any event, the possibilities for raising food production in both parts of the country are there. This is being demonstrated in Java now while the Outer Islands are evidently doing it in their own way. 12. With the exception of a few bad pockets in Java and outside of Java, there is no food shortage bordering on real hardship, not to say hunger, and the per capita intake has undergone little change. The quality of the food, 75-80 percent of which consists of rice and roots, leaves much to be desired, but Indonesia is no different in this respect from that of most Asian countries. The official concern, therefore, is not quality but how to in- crease the volume of indigenous food supplies to meet the needs of a popu- lation increasing at the rate of 2.4 percent plus per year. The rate of growth is probably closer to 3 percent, but even at the official figure Indonesia will require approximately an additional 400,000 to 500,000 tons of food per year, the larger part of it consisting of rice. Its solution will present many difficulties, but it can be dealt with successfully, because the country is richly endowed with skilled and diligent farmers, excellent climate, and bountiful natural resources.

13. The principal food crops of Indonesia are rice, corn, cassava, sweet potatoes, peanuts and soybeans. Rice, the economic foundation of peasant agriculture, is by far the most important. Its cultivation occupies more than one-third of the area under crops and its output accounts for almost 4O percent of all food crops. Corn is the staple in parts of Sulawesi (Celebes), Timor, Lombok, East Java, and Madura, while in recent years cassava has become the main source of starch for villages on the poorer lands of Java. To every farmer or every Indonesian the foods other than rice are essentially substitutes, and as the economic status of an Indonesian improves, his con- sumption of rice increases. Of the country's total of 13.8 million hectares in food crops in 1966, 55 percent was devoted to rice. Corn is the second most important crop in acreage, accounting for 23 percent. As land becomes exhausted in fertility and less suited for rice cultivation, the farmers tend to plant Corn, and after a. still further decline in productivity the land is relegated to cassava as the crop of last resort. In 1966 this crop repre- sented 11 percent of all land under food crops. In the Javanese diet, cassava holds aplace somewhat similar to that of the potato in Europe or the United States. Sweet potatoes are frequently growrn as a secondary crop on irrigated rice fields. Peanuts are one of the principal legumes cultivated on Java, particularly East Java, and are grown on dry land. Though of comparatively recent significance, soybeans have surpassed the acreage and production of peanuts.

14. A number of items supplement the diet based on cereal and root crops. In Java above all, the house gardens produce vegetables, pods, tubers and fruit. Livestock breeding as a source of animal products is important only in the Lesser Sunda Islands. While two-thirds or more of cattle and buffalo are to be found in Java and Madura, they are mainly kept as work animals. Meat, therefore, is expensive and is consumed only in very small quantities, and animal protein intake is one of the lowest in the world. The total protein consumption estimated at 43 grams per day comes mostly from soybeans, peanuts and bean sprouts. Fish is by far the greatest source of animal protein in the Indonesian diet. In all, the average Indonesian consumes only 2,050 calories as against a desirable level of 2,300 calories. 15. Indonesia's food problem lies in Java with its overcrowded and teeming population, which accounts for almost three-fourths of the total. Every inch of cultivatable land is under crops. Peasant-held land is cropped continuously and;is divided into three major categories: sawah,or irrigated land; tegalan, or unirrigated land; and, pekarangan, housing sites and garden plots. From the point of view of extending acreage under rice and other food crops, such possibilities are practically non-existent. According to one writer on the subject: "Agricultural land use in these islands (Java and Madura) has already passed its limits of safety. Java has been without arable forest land since before World War II, and inroads made since then in its forest reserves - which should cover 30 instead of 22.7 percent of the area - have caused erosion and flood problems which can be checked only by reforestation of the most exposed land. Consequently, any expansion of sawah.,cultivation can take place only at the expense of the tegalan area, and settlements can expand only by encroaching upon either sawa or tegalan."' 1/

16. Any expansion of agricultural production in Java can be attained only by raising yields. In contrast, the Outer Islands - except Bali - have much room for expansion (Table 3) of the cultivated area. There, less than two percent of the land is devoted to rice culture, but the crop is important in such islands as Bali and Lombok, and increasingly important in Sulawesi. The extent of other types of land (tegalan and pekarangan) in the Outer Islands is unknown, but in all probability it is much larger than sawah, or irrigated rice land. The prevailing type of peasant agriculture in these territories is "ladang" or intermittently cultivated land on which "slash-and-burn" cultivation is practiced, with its low yields and uncertainties.

17. As a source of increasing food production, the Outer Islands offer much promise as indicated by the estimated 35 percent increase in rice acreage in the past decade and a 38 percent increase in production.L/ If these figures are correct, the expansion should have had a considerable effect on rice availabilities, but evidently the effect was not great judging by the Govern- ment's continuing resort to rice imports. We are not certain if this can be explained entirely by the per capita consumption of 130 kilos in the Outer Islands compared with about 95 in Java, and by the bad state of inter-island communications. Nor are we certain whether the Outer Islands can continue to expand the rice acreage at the same rate, which may have been as high as 3 or 3.5 percent per year. Judging by certain private projects for opening large areas for rice culture in the Outer Islands, in this instance in Sumatra, such efforts must be accompanied by very large investments of capital and the creation of the appropriate agricultural services.

l/ Earl J. Pelzer. "The Agricultural Foundation", P.121. From Indonesia, edited by Ruth T. McVey, Yale University.

2/ Leon A. Mears, "Report on Agricultural and Related Problems in Indonesia", July 1967, p.1. - 10 -

Table 3 Land Utilization in the Outer Islands, 1959il

Percent of Classification Hectares Total Area

Forest Reserves 14,789,100 10.9

Other Forest Areas 72,494,700 53.3

Total: 87,283,800 64.2

Land Used by Smallholders

Sawa Area 1,500,000 1.1

Non-irrigated Land 9,865,000- 7.3

Total: 11,365,000 8.4

Land held by Plantations 1,073,100 0.8

Other Land including grasslands 36,217,100 26.6 or alang-alang, swamps, inland waters, roads and settlements

Grand Total: 135,939,000 100.0

1/ Excluding West New Guinea. 2/ Estimated by allowing 0.3 hectare per person. A part of this area is planted with perennial crops such as rubber (t 1,400,000 hectares) and coconut palms, pepper and coffee, a further part is occupied by pekarangan or compound gardens, but probably more than half consists of ladangs. Not included, however, are old ladangs under forest fallow. Source: Based in part on estimates and in part on data given in "Statis- tical Pocketbook of Indonesia 1961". From Karl J. Pelzer's "The Agricultural Foundation", in Indonesia, edited by Ruth T. McVey. - 11 -

18. In any event, judgment on the food potential of the Outer Islands calls for detailed knowledge of conditions which work for or against expansion of acreage and/or agricultural productivity. Such information is not at our disposal. In the meantime, and paradoxically as it may seem, Java, over- burdened with humanity, may still provide much of the answer to the fast rising rice requirements of the country. The next section on Bimas deals with this theme.

19. Current information on the food situation as a whole is such that it is possible to reach diametrically opposite conclusions, depending on which set of official statistics is used. Table 4 (FAQ Report January 23 - February 23, 1967) shows that, regardless of annual fluctuations, in 1960-1966 acreage, yields and production have been stationary - except that yields of cassava and sweet potatoes have declined steadily. As regards rice, in 1960- 1965 its output remained at about 8.5 million tons. If the median for 1960- 1962 is compared with that of 1964-1966, rice production increased at a rate of 1.6 percent per year, or far below the official population rate of growth of 2.4 percent. Approximately the same applies to food production in general.

20. Leon Mears, an eminent student of Indonesian agriculture, arrives at an altogether different conclusion. In reaching it, he uses Agricultural Extension Service (AES) estimates in preference to those of the Central Bureau of Statistics (BSP) because "comprehensive estimates have not been available from this source since 1963." 1/ He uses them "even though these figures have historically averaged almost 10 percent higher than the BSP estimates.l/ A more detailed examination of the data (Table 5) reveals the following: (a) between 1956-1967 the average annual increase in rice production in Java was 1.3 percent; (b) during the same period the rice output outside of Java increased annually by 3.7 percent; and (c) total Indonesian rice output averaged from 2.7 to 3.3 percent?! as against 1.6 percent calculated from the figures used by FA0. On the basis of these data, Dr. Mears concluded that "Production now appears to have approximately kept pace with population growth from the period 1956-1958 to 1964-1966. This production growth reflects the combined effect of yield increase of over 10 percent on Java (with a slight reduction in cultivated area), with constant yields but over 35 percent in- crease in area cultivated outside of Java."3/

l/ Each of the above quotations is from: Leon A. Mears. Report on Agricultural and Related Problems in Indonesia. July 1967, p. 1.

2/ Depending upon the method of calculation used.

3/ Leon A Mears. Ibid. p. 1. - 12 -

Table 4

Production, Ncreage and Yield of Principal Food Crops 1960-1965

Percentage 1960 1961 1962 1963 1964 1965 1 1966 17 of Production

Production 7000 m.t.)

Rice 8,767 7,268 8,898 7,933 8,h19 8,830 1/9,402 2/36.0 Corn 2,L60 2,283 3,243 2,356 3,769 2,283 2,874 11.0 Casava 11,376 11,189 11,385 11,575 12,223 10,273 10,865 41.6 Sweet Potatoes 2,669 2,463 5,679 3,014 3,931 2,723 2,308 8.9 Soybean h3 426 397 353 392 356 353 1.4 Peanuts 256 252 265 231 261 279 293 1.1 Total 25,971 23,G1 29,867 2 T-61 25,997 2,7Z 26-7-5 100.0

Acreage 50 ha.) Rice 7,284 6,857 7,282 6,727 6,987 7,348 7,668 55.4 Corn 2,639 2,462 3,175 2,533 3,644 2,537 3,186 23.0 Casava 1,417 1,478 1,b9 1,559 1,578 1,554 1!565 11.3 Sweet Potatoes 393 365 544 h3 620 419 653 3.3 Soybean 651 625 594 539 574 598 589 4.2 Peanuts 377 365 372 348 366 372 383 2.8 Total 12,761 12,152 T4UIT 12,149 13,769 12,828 T, E 100.0

Yield T100 kg./ha.)

Rice 12.0 12.2 12.0 11.7 12.0 12.0 12.3 Corn 9.3 9.3 10.2 9.3 10.3 9.0 9.0 Casava 80.2 75.7 78.5 72.0 77.4 66.1 69.3 Sweet Potatoes 67.9 67.4 104.3 68.0 63.4 64.9 50.9 Soybean 6.8 6.8 6.6 6.5 6.8 5.9 6.0 Peanuts 6.7 6.9 7.0 6.6 7.1 7.5 7.7

1/ Preliminary. 2/ Team's esti.ate. Source: FAO Report, January 23 - February 23, 1967. Table 5

Comparison between Bureau of Statistics and Agricultural Extension Service Estimates of Production of Milled Rice in Indonesia 1956-1967

(In Millions of Tons)

Java and Madura Outside Java Total Indonesia Productionl/ Yield (tons/ha.) Production Production Bureau of Agr. Ext. Bureau of Agr. Ext. Agr.Ext. Bureau of Agr. Ext. Year Statistics Service Statistics Service Service Statistics Service

1956 4.76 5.01 1.10 1.16 2.84 7.59 7.85 1957 4.74 5.18 1.10 1.21 2.89 7.63 8.07 1958 4.95 5.26 1.13 1.20 3.03 7.98 8.29 1959 5.05 5.37 1.17 1.25 3.24 8.29 8.61 1960 5.06 5.96 1.17 1.38 3.70 8.76 9.66 1961 4.80 5.39 1.20 1.35 3.47 8.27 8.86 1962 5.14 6.00 1.26 1.45 3.75 8.89 9.75 1963 4.44 4.82 1.22 1.33 3.49 7.93 8.31 1964 h/ 4.37 2/ 5.h 1.20 2/ 1.42 4.08 8.45 2/ 9.52 1965 IT/ .5.86 2/ 1.41 3.97 9.83 2/ H 1966 Z/ 6.07 7/ 1.48 4.06 10.13 7/ 1967 1/ - 10.79 3/

1/ Both Bureau of Statistics (B.P.S.) and Agr. Extension Service collect production statistics on Java and Madura. The Bureau of Statistics figures have always been the ones given official recognition but have not been available since 1964, and that year's report is still preliminary. Thus, for comparative trends in most recent years, the Agr. Ext. Service figures must be used. Many qualified observers expect that some of the production figures may be biased on the high side, especially from 1960 through 1965. 2/ Preliminary estimate. 3/ June 15, 1967 estimate. 4/ Weather conditions considered favorable since 1964. A poor weather year in 1968 could result in a decline in total production. Comments: While the area harvested in rice increased by over 35% outside Java between 1956 and 1966, yields there remained constant. Area harvested on Java, during the same period, may have decreased slightly but yields increased over 10%. Production increase during this period seems to have about kept pace with popul- ation growth, combining intensification on Java and extensification outside. Source: Agricultural Extension Service; unpublished records. Bureau of Statistics; Nugroho, Indonesia Facts and Figures, Djakarta, 1967, and unpublished records of Bureau of Statistics. This table is taken from Leon A. Mears' "Report on Agricultural and Related Problems in Indonesia", July 1967, Appendix I. 21. It would be a thanless job to try to reconcile the two or possibly yet another set of figures.' Even if the Extension Service figures are correct, it is just as correct to assume that the overall increase of 2.7 or 3.3 percent in rice output does not render the rice situation in Java any easier. Inter-island communications are not going to be improved overnight, and the high per capita consumption in the Outer Islands would not be reduced significantly if communications were improved. Better official prices might have a desirable effect, but the prospect that this problem will be dealt with by the Government expeditiously is questionable.

22. While rice is the main object of concern, the total caloric intake is short not only of meat, dairy and acquatic products, but of secondary foods as well. In the Outer Islands the high consumption of rice is partly based on the scarcity of secondary crops. Looking at Indonesia as a whole, the food situation of the country calls for larger outputs of all crops, including animal and fishery products.

23. The Government of Indonesia and appropriate institutions are aware of the imperative need to increase the total output of food.The annualprojected increases in rice (Table 6) between 1969 and 1973 are a minimum of 2.7 and a maximum of 5.5 percent per year,or a 0.3percent increase in per capita con- sumption in the first instance and 3.1 percent in the second; corn, root crops and pulses are expected to rise by 3 to 3.5 percent per year; fish catch by $ percent, and no quantitative increases are given for animal husbandry and dairy production. The Ministry of Agriculture in its contemplated five year plan uses similar projections for rice and other crops.

24. The outline of the plan in preparation by the Ministry of Agricul- ture has no reference to investmients, material or human. For the time being, this plan is only an expression of hope in the form of quantitative goals. There is no spelling out, other than in the most general terms, of how agri- cultural production will be increased. On the other hand, the reports of FAO and of Dr. Mears examine in some detail most aspects of the agricultural economy - applied technological research, transportation, irrigation, drainage, flood control, and institutional innovations. They contend that they are all in need of drastic reconstruction, while some instrumentalities of development have to be created anew. The mere enumeration of what should be done, let alone how it is to be done, highlights the magnitude of the problem. However, one need not be overcome by the enormity of the task, or by fear that the suggested remedies might not live up to the prescriptions. They seldom do.

1/ "The trend of 1950-1969 gives an average increase of 2.4 percent a year. This percentage increase just equalizes the percentage increase of population (2.3 percent per year)." From Seminar on Five-Year Plan in Agricultural Development 1969-1973. July 1 - 5, 1967. University of Gadjah Hoda.p. 2. Table 6

Minimum and :aximum Production Projections of 1969-1973 and Average Per Capita Intake

Production Per Capita Population (thousand ton) (kilogram) Year (million) Minimum Maximum Minimum Maximum

1969 118.0 10,406 10,608 88.20 89.86

1970 121.0 10,770 11,191 89.00 92.50

1971 124.0 11,147 11,807 90.00 95.20

1972 127.3 11,538 12,456 90.63 97.90

1973 130.7 11,941 13,141 91.36 100.50

Source: Central Bureau of Statistics. - 16 -

25. Indonesia is a very long way from a reasonably productive agri- cultural technology, and of much else mentioned in the preceding paragraph. It is equally far away from a state of industrial development that might have a desirable impact on agriculture. But the lack of all this does not preclude a gradual development of agriculture and the chances of increasing Indonesia's food supply to a desirable level. It is encouraging that in the midst of most everything calling for re-doing or improving, conditions which normally militate against the success of a program, there has come into existence in Java a very promising one for increasing rice production by raising yields.

26. Bimas. Low or stagnating rice yields are the principal problem of small scale agriculture in Indonesia. Even a casual visit to any village cannot but be conscious of the biggest crop of all - "Kinder, Kinder and more Kinder". While in the Outer Islands, an increase in rice production was attained by a 35 percent increase in acreage (1956/58 - 1964/66), in Java there is no idle land to offset low yields; instead, during the same period, the officially estimated increase in yield per unit of land was only 10 percent. Clearly, the issue is how to increase yields on the acreage already under cultivation. To this end, Indonesia has developed a scheme of increasing rice production popularly known as the Bimas scheme, i.e. the intensified appli- cation of a prescribed "package" of inputs, mostly fertilizer and other related chemicals.

27. Bimas did not spring to life full-blown overnight. It had an antecedent in the "Paddy Centra" program, organized in 1960 to increase rice yields in Java, make possible self-sufficiency in rice and eliminate costly imports of foreign rice. In 1961 there were 500 widely scattered rice centers, but by 1964 they were deemed failures and abandoned. According to the FAO report of January 23 - February 23,1967, they failed for the following reasons: inadequate financing; inadequate and untimely supply of inputs; inexperienced staff; resistance to fertilizer use mainly because of unfamiliar- ity with its characteristics; and failure of farmers to repay loans, due to galloping inflation on the one hand and low rice prices for farmers on the other. Some of these inhibiting factors still exist but not all the lessons of the abortive experience were lost on Bimas organizers, particularly the need to concentrate inputs where land and water conditions were most promising. Above all, through trial and error, a good many farmers have come to accept fertilizer and related inputs as the main elements of increasing rice yields. In late July of this year it took little looking in the countryside to find that the problem was not one of a reluctance to apply fertilizer but of an inadequate supply, with fertilizer prices to farmers considerably above those in world markets. Even at such prices, (Rp. 18-19 per kilo as against a landed cost of 12 per kilo) a farm-woman could be observed buying a few kilos of urea because "it is good for my crop". She was something of a symbol of the changing attitude among farmers toward fertilizer. Bimas has unquestion- ably capitalized on some of the past mistakes of the rice centers and on the growing acceptance of the idea that the new inputs stand for higher productivity. - 17 -

28. Though similar in purpose to the rice centers, a number of crucial elements of the Bimas scheme are novel. Bimas is an intensification program, its name originating from the words "Bimbingan Masal SPw Semboda Bakan Mananan", which may be roughly translated as mass guidance for self-sufficiency in food, that is to say rice. The methods employed are familiar; the application of fertilizers, improved seed, more efficient use of water facili- ties, and control of pests 'and diseases. According to the Ministry of Agri- culture, "The underlying idea behind Bimas is that with proper care and irrigation, two quintals (200 kilos) of fertilizer (one quintal of urea and one quintal of double super-phosphate) can produce one extra ton of milled rice per hectare. The theory was tested in numerous field experiments which confirmed its technical soundness. In some field experiments, the yield of Bimas farms was even more than double the yield of non-Bimas farms. The reports on these results must be tempered by the fact that they were achieved on carefully selected acreage with good soil characteristics and water avail- ability. In addition, because of the shortage of material and human resources, Bimas pursues a policy of minimum scatteration and maximum concentration of available resources, pluE a large dash of improvisation and reliance on village chiefs to keep the scheme operational.

29. Apart from the Bimas potential for raising productivity, the scheme was expected to play a useful role in the national procurement effort, both directly through the farmer's repayment in rice of the Bimas credit and indirectly through the increase in the quantity of rice he will have for sale. (Since the time of the Mission's investigation, August 1967, the Bimas scheme has been changed to provide for repayment of credit in cash.) Thus, an expected increase in the rice yield of 10 quintals (one ton) per hectare, 2.5 quintals would cover the repayment of credit and 2.5 quintals would be sold to the Government at current market prices after the harvest. The remainder of the increment, the farmer would either consume or dispose of as he wished. Domestic procurement has been a vital matter for the Government in order to provide the civil servants and armed forces with cheaply purchased domestic rice. Between 1960 and 1966 the procurement targets ranged from a low of 400,000 tons to a high of 1.8 million tons. Table 2 shows, in five out of seven years, actual purchases were half or less than half of the targets. In 1966, the Bimas program probably contributed 100,000 tons to the domestic procurement of 533,000 tons.

30. The Government's pricing policy is indicated by the following comparisons: The landed cost of a kilo of imported rice is Rp. 21 (August 1967) and another Rp. 4 - 5 must be added by the time the rice is rationed out. As against this, the actual cost of domestically-procured rice for a similar purpose averaged not more than Rp. 8 - 10 per kilo. Implicit in this as in the cost of inputs is the basic question of a rice price policy, about which there will be more later. But at the mom.ent, and under the circumstances described, the importance of the anticipated additional procurements from Bismas is apparent. - 18 -

31. The Ministry of Agriculture is in charge of Bimas, working closely with the agricultural extension service, agricultural cooperatives, agri- cultural experiment institutions, local governments, and village administra- tions. The Ministry determines the acreage target, the volume of inputs required, and overall budgetary requirements. The size of the appropriation is negotiated with the State Bank, and, after an agreement has been reached, the funds are turned over to "Pertani", the organization which buys and distributes the fertilizers and other inputs. The servicing of the scheme is aided to some degree by the cooperatives and extension service. Extension workers are admittedly poorly trained and with a long, if explainable, record of mediocre performance.L/ Numerically, it consists of 25 Provincial inspectors, 325 Regency officers, 2,800 extension agents in all other admini- strative subdivisions of the country, and a staff of 400 in Djakarta. Just how many of these are directly involved in the Bimas scheme could not be determined. Recognizing the weakness of the extension service and the co- operatives, Bimas has been relying on "model" (better) farmers and has succeeded in enlisting the assistance of agricultural students in various schools and research stations. In theory, each student supervises 50 hectares, but, since they are few in numbers, their efforts are very much diluted; many of them have to supervise several times 50 hectares. It is quite obvious that the infrastructure of Bimas is neither very solid nor very efficient. Nevertheless, the program has resulted in a drastic rise in productivity.

32. Crucial to the program are the contents of the "package" of inputs, its total monetary value, and the price of fertilizer in relation to the price of rice received by the farmers. This can be illustrated by the "package" to be applied for the wet season 1967-68. In accordance with the recommendation of the Central Research Institute of Agriculture, it is expected to contain the following quantities per hectare: Nitrogen equivalent of 75 kilograms of urea; P205 equivalent of 50 kilograms of double super- phosphate; 2.5 liters of enderin, 100 grams of zinc phosphide and one sprayer for every 20 hectares. The cost of the fertilizer is Rp. 2,150 and that of the pesticides and sprayers Rp. 1,200. In addition, each participant is supposed to receive Rp. 500 to cover the cost of seed and transportation, making a total of Rp. 3,850 per hectare mainly for physical inputs. The credit is repayable in 8 months, and the interest rate is 3 percent per month, so that the total cost to the farmer is Rp. 4,780. (Fertilizer credit is now 1 percent a month). The cost of the package is greater than it was in the previous seasons, although the amount of urea has been cut by 25 percent and reductions have been made in the volume of insecticides. The decrease in the contents of the package are not expected to affect productivity to any signi- ficant extent, but the sharp rise in the price of fertilizers and the need to fit the program into the budgetary allocations have not been without their influence.

1/ SOEGANDHI, S. A. Agricultural Extension in Indonesia. Agricultural Extension Service, Djakarta, 1967. - 19 -

33. The Bimas scheme was started in the dry season of 1965 (May-Septembcr) with an area of 9,000 hectares; it amounted to 148,000 hectares in the wet season of 1965-66 (October-April); 115,000 hectares in the dry season of 1966; and 394,000 hectares in the wet season of 1966-67. The yields vary greatly from area to area (Table 7), depending upon the variety of soil and the water conditions, the type of improved seed, and, of course, the differences in skill with which the inputs are applied.

34. How effective the program proved can be judged by some of the results of the 1966-67 wet season program, the largest program to date. If the yield data are correct, t0e program contributed an additional 400,000 to 6,000 tons of milled rice.1/ Whether the larger or smaller figure is accepted, and even assuming that half of the increase was used by the farmers for their own consumption, from 200,000 to 250,000 tons went inio the market, reducing imports by approximately that amount with a saving to the Government in foreign exchange of from U.S. $32 million to U.S. $.0i million. Consider- ing that the cost of each kilogram of imported rice is approx:iately 2.5 times that of domestically procured rice, and that the rationed groups receive the rice as part of their wages, the gain to the Government from a Bimas program is obvious.

35. The justification for past Bimas operations lies also in gains to the farmers. As noted above, part of the arrangement with the farmers in the past was that they were to deliver 2.5 quintals of rice to the Government in repayment of the credit and were to sell 2.5 quintals to the Government at the market price when the harvest was in. That meant that for the 2.5 quintals per hectare that the farmer was committed to deliver,to the Government in repayment of the "package" of Rp. 3,850 during the wet season 1966-67, he received Rp. 15 - 16 a kilo, compared with the open market price of Rp. 8-10. The difference was his subsidy. In addition, he had about 750 kilos per hectare for consumption or sale which was worth Rp. 6,000 to Rp. 7,500 to the owner.-cultivator.

36. The Semarang Conference (on Bimas held in July 1967) declared that repayment did not necessarily constitute a yardstick for evaluating the success or failure of the program. As in the case of productivity, this statement might be interpreted negatively, to imply that the record of the participating farmers in this respect was not all that it should have been. Judged by the available information, it appears that, while productivity lived up to anticipations, repayments did not. The available information is, however, unclear. According to some sources, the reliability of which cannot be assessed, repayments for the inputs furnished by "Pertani" ranged from 75 to 93 percent in the several program seasons, depending upon the locality. That would not be a bad record. However, apparently the familiar practice of rescheduling overdues was followed and it was expected that the debts would be liquidated by October 1967.

I/ The lower figure is based on an estimate of an additional 0.9 tons of milled rice per hectare. Table 7

Bimas Program and Production Increase

Rainy Season 1966/67

Province Area under Bimas Yield per hectare Percentage increase Production increase in hectares in quintals in yield in tons Outside Inside Bimas Bimas Djakarta Region 1,000 35 28.5 1,000 West Java 14,000 35 49 40.0 201,600 Central Java 132,000 30 50 66.7 264,000

Jogjakarta 13,000 30 60 100.0 39,000

East Java 104,000 31 62 100.0 322,400

I

Source: Mi'nistry of Agriculture. - 21 -

37. The question of credit repayment calls for careful examination. Pertani, the Supplier of the inputs collected the debts through clearings via the Agricultural Rural Bank (B.N.I. unit II). At the same time farmers/farm cooperatives on the Bimas project are held responsible and put in a credit arrangement with the "Bulognas" for repayment in kind, viz. 2.5 quintal of rice/ha. There is evidence that "Bulognas", the National Logistics Command, which is responsible for the purchase of the 2.5.quintals of rice per hectare that the farmer is obliged to sell to the Government at the market price under Bimas, was not successful in these procurements.

38. This touches, of course, on the troublesome official policy of keeping domestic rice prices low and its disincentive effect on rice production in general. The concern of the Government for an economically deprived and long-suffering urban population is understandable, but it would be desirable to find a way out of a situation so fraught with bureaucratic controls and waste at every turn of procurement and distribution - in addition to the heavy foreign exchange burdens imposed by rice imports. The Government tries to reach the procurement targets in order to reduce or, better still, to eliminate high-cost imports altogether. But the record is clear: domestic procurement targets and actual purchases are wide apart. There are a number of reasons for this: insufficient supplies of rice; poor and expensive trans- portation facilities, or a complete absence of them as in Sumatra where there is low-priced surplus rice in the North and high-priced rice in the South and West;a -d finally,even apart from the low price offered for rice to be soldunder the credit scheme, there is the fact that the procurement agencies buy immediately after the harvest when prices are lowest. Since the farmer's marketable supply is limited, when these sales are finished, procurement is pretty much finished too. In view of the above, might not a gradual intro- duction of incentives lead to rice self-sufficiency, the elimination of procurement and rice rationing and, as a result in consequence thereof, the re-establishment of wage payments in monetary terms? Overall financial and price stability, at least to a large degree than at present, would be a desirable pre-condition.

39. Notwithstanding, the apparently good although brief record of the program in the dry (fall) season of 1967, it fell flat on its face. Encourage,i by success in the preceding season, the original target set for that season was 700,000 hectares; it dwindled to 15,000 hectares. Not all the factors responsible for the severe setback can be established, but some may be men- tioned: financial stringency flowing from a tight-money policy; the change in the rate of exchange from Rp. 90 to 130 to the dollar and, in consequence, the fear that the cost of fertilizer to the farmer might be inordinately high; bickering among the agencies involved and the unfulfilled expectation that private fertilizer suppliers would fill the major part of the fertilizer gap. Whatever the reasons, one thing is clear: there were no budgetary allocations to provide credit for the inputs. The "logistical difficulties", as one official summed up the situation, turned a program that was to have been expanded, into something resembling a fair-sized pilot project. The result was a loss to the country of hundreds of thousands of tons of badly needed rice. - 22 -

40. The failure of the dry season program is not necessarily a harbingcr of similar failures in the future, nor is it an indication that the Governnent no longer believes that an increase in rice production is a prime priority, or that Bimas is not the vehicle to achieve that increase. Though a bit late, by the early part of the second half of this year, the State Bank had allo- cated to "Pertani" nearly Rp. 4 billion for the purchase of domestic and foreign inputs, or 30 percent of all developmental funds for the year 1967.

41. Besides the regular Bimas program, there is an M.I. Bimas (Mass Intensification Bimas) program covering 540,000 hectares for which there is earmarked 54,000 tons of urea and 27,000 tons of double super-phosphate to meet needs in accordance with the regular Bimas prescription. The Govern- ment's part in such programs will be to provide technical guidance from the Ministry of Agriculture. This approach is applied due to shortage of credit and also shortage of the needed qualified agricultural students (maximum supply only about 3,000 students). The M.I. Bimas will take care of farmers who have been participating on a regular Bimas scheme 2 or 3 times and thcn found fit to work for himself with ample assistance in the forms of extension services and also found capable to pay cash for their inputs. I-f credit is available and M. I. Bimas farmers need it they could apply on the usual way for credits to the State Bank Unit II. However, these assumption& must be taken with a grain of salt. According to one "educated" guess:

"Probably not over 40 percent of the planned M. I. Bimas (participants) would have sufficient motivation to use these inputs, even though the Government plans to subsidize urea (down to) at Rp. 18/kg and D.S.P. (double super-phosphate) at Rp. 15.75 kg. Further, even though the Government is consider- ing the provision for these cash buyers of Rp. 1.8 billion in credit accommodation through the State Bank (Unit II), rice mills and Kopertas (cooperatives), the effectiveness of these institutions to serve the farmers is yet to be proven and probably leaves much to be desired."

This statement may be unduly pessimistic, but it is certainly not without strong foundation.

42. Prospects. There are many serious problems for the Bimas programs. Reference has already been made to the weak extension system. The coopera- tives are no better as credit institutions. They have little credit to dispense, and their work as rice-buyers for the National Logistics Command is not among the services particularly prized by the farmers. The improved rice varieties from Bogor are a boon, according to a number of farmers inter- viewed in the field, but their potential is far lower than the Japanese and Taiwanese varieties, or the "miracle" varieties developed by the International Rice Institute in the Philippines. Nor is the maintenance of the irrigated land in Java what it should be, or what it was a decade or more ago. These factors added to the extremely difficult transportation problems, and the failure of the 1967 dry season program, in part because of credit stringency, are serious adverse factors. There are still additional adverse factors of a somewhat different kind. - 23 -

43. Tenant share-croppers benefit little from the program and are the principal "indifferent" users of fertilizers.l/ There are a.large number of them. The small holdings of the owner-cultivators complicate the admini- strative problems of the program. The village of Djogostran (Central Java) which we visited, by no means unusual in its essentials, provides an excellent example. There are 500 families in the village; only 168 are owners, the remainder are mostly share-croppers and agricultural laborers; the total cultivated area is 80 hectares, of which 50 are under Bimas, or one-third of a hectare per participating owner. The chief of the village who has six hectares of land said that in his village a tenant receives 35 percent of the crop if he pays for the fertilizer and 25 percent if he does not. This is not a common practice, but is not uncommon either in the most congested and most fertile parts of Java. Judging by Dyogostran, it is not surprising that tenants are "indifferent" users of fertilizer.

44. Assuming that sharecroppers do use it, their benefits will be very small in comparison with those of the landowners. High productivity in a rural community such as Java, where approximately 50 percent of the farm families have no land at all, and where competition for scarce employment is extremely keen, will not mean a more equitable distribution of income. This is a condition with which Indonesia will have to contend increasingly as population mounts, and dealing with it with some measure of success is not a purely agricultural matter. But the fact that agricultural rehabilitation will mean little for the landless is not an argument against assitance to Bimas or to farm-owners not under Bimas. It is to be hoped that the top priority currently given to various "package" programs will be continued. At the same time, and recognizing that in Java tenancy or the landless question is hardly capable of any solution, it is to be regretted that at present this problem receives no priority at all. This is discussed in the next chapter.

45. Administration. As has already been pointed out, the Ministry of Agriculture administers the Bimas schemes, but there are in fact seven or eight Ministries or Departments that deal with agricultural matters. It is no exaggeration to say that, in a real sense, the Ministry of Agriculture is in "bits and pieces". Responsibility for farm credit lies with the State Bank; fertilizer with "Pertani"; rice procurement with the "National Logistics Command "and partly with the cooperatives; important aspects of irrigation, drainage and flood control with a separate Department of Public Works, while responsibility for small scale irrigation lies with the Ministry; land reform and tenancy with, of all places, the Ministry of Home Affairs; estate agri- culture is under the Ministry of Estates, and even extension and cooperatives are not as fully integrated into the Ministry of Agriculture as they should be. It is not surprising, therefore, that the Ministry spends a good deal of its time "coordinating" and negotiating with this or that agency which for a variety of reasons has preempted agricultural functions. The inescapable impression is not only of cumbersomeness and of a vast array of debilitating controls, but also that in relation to the Bimas programs there are too many responsible agencies often with contradictory approaches on how best to augment rice production in Indonesia.

1/ 4O percent of the total according to the Bimas administrators. - 24 -

46. Future of Bimas and Rice Production. Because of the limitations already stated, Bimas cannot be visualized as a continuously expanding program, gathering in more and more acreage from season to season. In fact, if the economy as a whole were developing, Bimas might not only undergo drastic changes but the program might outlive its usefulness. This is however in the future. For the time being if limited resource-allocation is practiced soundly, it is in the interest of those who control the purse strings to "steal and borrow" in order to expand the program over an area of a million hectares or more. Even if per hectare yields decline from 1 to 0.8 of a ton as the quality of the soil, water facilities and infrastructure thin out, a million hectares should yield an additional 800,000 tons of rice. If that figure were to be attained within the next 2 to 3 years, self-sufficiency in rice and elimination of imports might become something of a reality. The qualifying "something" might disappear if transportation facilities improved so as to make marketing of the crop more profitable. Behind this assumption lies an important precondition, namely, that the Government will pursue a policy based on the incontestable fact that if sufficient supplies of ferti- lizer are not available domestically it is cheaper to import fertilizer than rice.

47. Since the soundness of this proposition is accepted by all concerned, why is it necessary to import rice when foreign exchange is so critical an item? The answer is three-fold: (a) imports, whether large or small, serve a sensitive economic and political purpose by helping to supplement the rations of the armed forces and civil servants; (b) the Government doesn't dare to risk a stoppage of imports so long as the time-span between preparing and procuring the crop is 8 months long; and (c) very importantly, there is the long experience of past failures to meet the procurement targets. The conditions and the "system" being i%hat they are, all these considerations are not without validity, and cannot be disregarded without the danger of prompt and painful dislocations. Yet the obviously high economic preference for importing more fertilizer as against rice is a fact that can no longer be disregarded either. This poses an important policy question which can be resolved in the immediate future in a variety of vays, the desirable one being the allocation of additional resources for the expansion of what is most promising at the moment - the Bimas program. It would undoubtedly involve cutting corners in resource-allocations in other fields, but as against this, there are the prospects of lessening the foreign exchange drain, augmented domestic rice productivity, and the fact that rice production alone constitutes 25 percent of the total gross value of all agricultural production, including estate production, forestry and fisheries. Table 8

Planned and Realised Bimas Acreage, 1963/64 - 1966/1967

(In Hectares)

West Java Central Java East Java Jogjakarta T ot a 1 Season Year Planned Realised Planned Realised Planned Realised Planned Realised Planned Realised

Rainy 1964/65 3,000 3,711 2,700 2,752 2,700 1,963 500 8,900 8,901

Rainy 1965/66 35,000 35,500 50,000 71,892 23,000 25,388 6,093 5,943 114,093 138,823

Dry 1966 100,000 80,6ho - - 50,000 34,623 - - 150,000 115,263

Rainy 1966/67 155,000 144,000 135,000 132,h87 100,000 104,163 12,000 12,942 402,000 393,592

Dry 19671/ 5,000 5,000 4,000 5,326 5,000 4,600 1,000 1,000 15,000 15,926

1/ The original 700,000 or 300,000 hectares referred to in the text were not planned figures. N3 Sourcet Ministry of Agriculture. - 26 -

48. Looking at Bimas from a long-range point of view, and considering the rapid growth of population, the program cannot provide the solution of Indonesia's rice problem. Between 1967 and 1971, and assuming an annual rate of growth of 2.6 percent, which is in all probability on the low side, the population of Indonesia will increase from 112 to 124 million. The average net per-capita consumption of rice during 1961-67 is estimated at 95 kilos; this is based on domestic production plus imports minus seed require- ments and 3 percent losses. Assuming that the level of consumption remains constant and that no rice is imported, in 1971, Indonesia would have to produce an additional 1,14o,oo tons of milled rice to meet requirement. Even an expanded Bimas coulid not provide an increment of that magnitude. Bimas is, after all, only a big island in a vast ocean of rice producers. It is not imagination run riot, however, to suggest that Indonesia could become self- sufficient in rice and even an exporter on a modest scale. Mhuch of this might come to pass, but only if the Government of Indonesia adopts a price incentive policy for the rice industry as a whole.

49. The experience of rice-producing countries like Japan and Taiwan demonstrate the need of synchronized or complementary developments in applied technology, infrastructure and institutional innovations. In present-day Indonesia there is no such complete program nor even any part of it, the sole exception being a limited measure of improvement in seed varieties. It appears, therefore, that the lessons of the above experience can be absorbed only over a rather long period of time. The process could be helped along by the introduction of conditions existing in Japan for the rice producer and in general in other countries with highly developed agricultural economies. A more equitable balance is needed between the farm producer and consumer interests, and a rice price policy designed to that end. Such a measure is not the whole panacea but it is a necessary incentive to higher productivity in modern as well as traditional agricultural systems. This condition does notexist in Indonesia. The incentive offered to the Bimas participants has been described, but with rising input prices they are becoming restive about the ultimate benefits. The vast majority of the farmers are not under Bimas, and have hardly incentive or means to lift agricultural productivity to higher levels. What is true of Java is even more true of Sulawesi, a potentially large producer, but where rice prices are Rp. 4 to 5 per kilo, or a fourth to a fifth of the cost of imported rice.

50. It must be reiterated that in Java the price-incentive issue is one especially affecting the 2.5 million hectares of irrigated rice land which are not under Bimras; the experience of the participants and the non-partici- pants teaches them that they cannot anticipate higher prices in a forthcoming season regardless of the rising cost of the new inputs. One can argue that an increase in prices unaccompanied by an increase in the availability of other factors of production might not raise output. Even under such circum- stances, however, a floor price that takes into consideration larger expendi- tures for inputs can help to raise income, which in turn affects capital availability and the attitude toward risk on the part of the farmer in rai4i.g a crop. - 27 -

Conclusion

51. It would be well for the Government of Indonesia not only to examine the possibilities of further expansion and improvement of the Bimas programs, but to address itself to the following questions as well: Domestic rice prices vs. imported, and the price relationship between domestic rice prices and inputs as they affect rice production in the country as a whole. Currently, the Government is subsidizing fertilizer and, in effect, subsidizing a portion of the crop surrendered by the farmers in repayment of Bimas credit. The social and stabilization objectives of cheap domestic rice on the one hand and subsidies on the other are only good as temporary stop-gaps. The goal should be lasting price incentives whether in isolation or in combination with other production factors; the abolition of subsidies; the gradual elimination of the bureaucratic jungle superstructure involved in the purchases and distribution of fertilizer and other chemicals; and, the elimination of rice rationing except for a reserve of rice stocks for the armed forces. In sum, in condi- tions of ampler supplies generated for the time being by price incentives and a rising availability of inputs, "the Government could well be left simply with responsibilities for a reserve stock to prove price stability when the normal market forces do not function adequately."- None of this can happen overnight, but the success of the Bimas program in 1967-1968, and an expanded program in the few seasons immediately ahead may well create a climate .conducive to the changes outlined above.

52. There is little question that under the pressures of the economic and political situation, government officials are finding it difficult to think through an integrated program for increasing rice production although the required elements of such a program have been identified clearly. Probably a small planning group staffed with qualified expatriates and charged with responsibility for formulating an effective rice production program would achieve better results, largely because its members would be insulated from immediate political and social considerations. The group should have special responsiblity for determining the best arrangements for purchasing and dis- tributing fertilizers and other inputs, marketing, prices and credits. Generally, technical details of production are within the capacity of the Ministry of Agriculture.

53. Three other factors require comment in the context of increasing food crop production. They are tenure reform, irrigation and extension. The first is discussed in Chapter 3 . In respect of irrigation, Java, Bali and Lombok experience a severe dry season and in most areas double cropping is impossible without irrigation. Further, fluctuations in rainfall in the wet season are sufficiently severe to jeopardize yields in the absence of irriga- tion. The irrigation situation is discussed in Annex 1, but has two salient features. The first is that the irrigation works under government control which serve nearly 3 million ha. of irrigated land have received no effective maintenance since 1940 and the second, that due to population pressure, the catchment areas of most rivers have been subjected to excessive forest clear- ing and are suffering from progressive erosion. As a result, extensive areas

1/ Leon A. Mears. Op. cit. p. 14. - 28 - receive less water than they have in the past and large areas are subject to flooding. Thus, although new irrigation works have been commissioned in recent years, it is possible that the overall effectiveness of irrigation may have decreased. The rehabilitation of existing irrigation works and erosion control in river catchments are of the highest priority, but lack of finance currently allows minimal programs only.

5h. The problems of the agricultural extension service are financial. Since, however, the use of improved methods presupposes both a supply of inputs and farmers with the means of purchasing these, much extension advice is impractical at the present time. Hopefully this situatuon will change, but it is imperative that the extension service be provided with adequate transportation and other support facilities to enable it to implement effec- tive programs. CHAPTER 3

TENANCY AND AGRARIAN REFORM

Land Distribution

.15. In the previous section we touched briefly on the tenancy problem and the limitations it imposes on production in Java. Before discussing the subject in detail,,it must be stated that the problem of land holdings in Java cannot be solved through redistribution of land among the landless. There is simply not enough land to provide even modest ownership for the great mass of the tenants. Nor can their burdensome tenurial conditions easily be changed. It would be wrong, however, to conclude that nothing can be done on either score. Amelioration of conditions is possible. Some land can be distributed to tenants, and conditions of working somebody else's land can be improved.

56. Before discussing this, let us state the main conclusions at the outset: (a) tenancy is a major socio-economic problem of Java; (b) the poli- tical quiescence of the issue should not be taken as evidence of popular contentment which will last indefinitely; and (c) any significant moves to improve tenancy through the agrarian reform measures of 1959 and 1960 now appear to be as dead as a door nail.

57. Java is an island of too many people on too little land. In 1961 the population density in West Java (including Djakarta) was 441 persons per square kilometer; in Central Java (including Jogjakarta) 50, and in East Java (in- cluding Madura) 4h5. The greatest concentrations of rural population occur along the south coast of Central Java; along the lower Brontas from Kediri to Surabaja. The highest densities in some of these regions are from 800 to 1,200 persons per square kilometer. These high densities are not, in general, the result of urbanization but of a dense rural population. The condition is getting worse year by year, and migration to sparsely populated Outer Islands has made little impact on the population pressure on Java's land,

58. According to the agricultural census of 1963 the cultivated area of Java consists of 2,652,000 hectares of sawa (irrigated rice land) and 2,996, 000 hectares of dry landS. The total is divided among nearly 8 million farm owners, giving each an average of 0,7 hectares. These dwarflike holdings, often fragmented into many pieces, are almost a third smaller than those of Japan and Taiwan. Moreover, within the foreseeable future the pressure of population will make even the present mini-holding but a memory. Between 1922 and 1963 the size of the average holding declined by nearly 50 percent, and a further diminution in size is inevitable. l/ These figures call for careful checking in Djakarta; various official sources show very considerable discrepancies about the size of the culti- vated acreage of Java. It is possible that the discrepancy is due to the inclusion or failure to include "pekarangan", or farm area utilized for house compounds and garden plots. According to one source, this consti- tutes about 18 percent of the total farmland of Java. (John E. Metcalf, The Agricultural Economy of Indonesia, p.39, U.S. Department of Agri- culture). - 30 -

59. Table 1 shows why distribution of land to the landless is not the answer. Fifty-two percent of the owners have less than 0.5 of a hectare but on the opposite side of the scale there are only 34,000 or 0.4 percent of all the owners who have more than 5 hectares. Data for 1957 show cate- gories of ownerships of 5, 10 and over 20 hectares. The 1957 figures are not quite consistent with those of Table 1, but they illustrate the same problem. In the case of sawa, the most prized land,only 16,000 owners had up to 10 hectares; 3,000 up to 20, and only 567 more than 20. A larger number owned dry land in these categories, but the evidence is much the same, i.e., the number of owners and the area owned by those with more than 5 hectares must be small.

60. This is not a uniquely Indonesian problem; it is prevalent in the Far East and Southeast Asia. Smallholding landlordship is typical of Japan, Taiwan, Korea, many parts of India, and Nepal, to mention but a few. The problem of very many smallholders and tenants, makes it difficult to en- force land redistribution provisions and security of tenure measures. The figures in the preceding paragraph reveal a great shortage of land; they do not reveal how many smallholders are only nominal owners. A goodly number are in fact heavily indebted to moneylenders who control not only a large share of the crop but often the land itself. The conclusion is well taken that "... peasants who appear to be independent and in control of their land are in reality sharecroppers", and that "village records showing ownership of land jo not reflect the true socio-economic conditions in the rural areas".-

61. Neither the census of 1963 nor any other official or unofficial source provides more than indirect information on the total amount of land owned by any of the groups mentioned. Such information on holdings of more than 5 hectares would be particularly helpful in defining the scope of a possible land distribution scheme. It would enable the Government to fix a realistic permissible ceiling on land ownership, and to determine what a redistribution program might achieve with reasonably effective implementa- tion. But despite the lack of such information, the absence of large owners over much of Java is clear. Therein lies one of the principal stumbling blocks to agrarian reform.

History of Land Tenure Reform and Condition of Tenants

62. The details of the complicated history of land tenure in Java, and especially the Dutch Agrarian Law of 1870, which sought to protect native landowners from selling out to non-natives, need not detain us here. The important fact is that this well-intentioned measure did not extend to native owners as well, and this omission had very adverse consequences. Village rice cultivation had been traditionally organized on a community basis. The village, by and large, had been able to maintain itself as a self-sufficient unit; and under existing techniques and intricate methods of labor exchange and mutual cooperation in the community, most village members were able to obtain access to a piece of land. Gradually, however, as the population continued to grow, there was a tendency to loosen the 1/ Karl J. Pelzer, "The Agricultural Foundation", p.126. From Indonesia, Ruth T. McVey, Editor, 1963. Table 1

Size of Farms

Area of Farm by Size Farms in Java-Madura Farms outside Java Total .Hectare Number Percentage Number Percentage Number Percentage

0.10 - 0.49 h,152,434 52.2 1,270,975 30.3 5,423,409 44.6

0.50 - 0.99 2,147,708 27.1 1,060,309 25.3 3,218,017 26.5

1.00 - 1.49 858,477 10.8 660,502 15.8 1,518,979 12.5 a 1.58 - 1.99 350,889. 4.4 302,862 7.2 653,751 5.4 2.00 - 2.99 273,914 3.4 379,283 9.0 653,196 5.4 3.00 - 3.99 88,636 1.2 174,326 4.2 262,962 2.2

t.o0 - 5.00 35,983 0.5 1oo, 461 2.' 136,444 1.1

5.00 - 33,867 0.4 243,200 5.8 277,067 2.3

T o t a 1: 7,951,907 100.0 4,191,918 100.0 12,143,825 100.0

Source: C.B.S. - Agr. Census 1963. - 32 - pattern of communal work relationships and the entitlement of each farmer to a plot of land. In many regions wealthier farmers who, unlike the Chinese moneylenders, were able to assume legal title to the land for un- paid debts became the landlord class. Labor organized on a communal basis gave way to wage-labor and tenancy. In the past generation in particular, mortgaging and sale of land became very common, and relatively little now remains of the traditional communal system of landholding. The net result has been marked growth in the number of tenants and agricultural laborers. How large these groups of landless are has not been established with accuracy, but in 1960 the Ministry Agriculture estimated that 60 percent of all peasants were sharecroppers This serves to explain why an owner has no problem of finding tenants or sharecroppers, and it explains, too, why one hectare of land is often worked by as many as four or more tenants.

63. These relationships create their own tenancy conditions and wage scales, varying in specific cases with the density of population, the quality of the land, and the relationship between owner-tenant or owner-agricultural laborer. When the Communists were vying for peasant support they introduced the "6:h" slogan, or six shares of the crops to the tenants and four shares to the owner. This was looked upon as a radical measure, for in most instances it was - and is - the other way round. Nor are there written agreements about such fundamentals as rent, length of tenure, compensation for additional inputs, imp1ovemeats, and so on. To be sure, the terms of tenancy were eased occasionally by the mutual help, "gotong rojong", in- grained among the farmers. But during the attempt to implement agrarian reform, the "terms of trade" were in favor of the owners and they took advantage of them. The small size of the owners' holdings was conducive to a one-sided arrangement. So too was the fact that a tenant can rent on such terms only a quarter or half a hectare of land, and not a hectare or two.

64. In independent Indonesi4 agrarian reform was not a matter of active public concern till 1959 when the Communists emerged as the champions of the village poor. That is possibly one of the reasons why the Government of Indonesia in that year and in the year following launched an agrarian reform program to (a) provide a maximum number of landless with land of their own, (b) to create more reasonable tenurial conditions for all those who must continue as tenants, and (c) to increase agricultural productivity. These purposes were almost, but not quite, entirely submerged in a set of general- ized principles not directly connected with tenancy. The flavor of those pronouncements, so typical of the leadership of those days, is clear in the following two paragraphs from Land Reform In Indonesia and Basic Regulations Governing This (Act No. 5, 1960):

"(b) that the National Agrarian Law shall enable the functioning of the earth, water and air space as mentioned above, and shall be in line with the interests of the people of Indonesia and at the same time meet the needs which are

1/ Karl J. Pelzer, "The Agricultural Foundation", p. 126. From Indonesia, Ruth T. McVey, Editor, 1963. See footnote 14 of his chapter "The Agricultural Foundation". - 33 -

required at present in all matters pertaining to agriculture.

(c) that this National Agrarian Law must be a realization of the spiritual fundamentals of the State and ideals of our Nation, as it is laid down in the Preamble of the Consti- tution, i.e. Belief in the One and Supreme God, Humanity, Nationalism, Democracy and Social Justice." 65. These were the broad intentions, but there are also relevant principles and provisions contained in the document just cited, in the parliamentary enactment of November 20, 1959, and in a number of regulations promulgated by the Ministry of Agriculture. The principal measures give the impression that they were hastily drawn up, with little thought about their consequences, This is particularly true of the land distri-bution provisions. These provisions reflect the following general principles. The Basic Agrarian Law (No. 5, 1960) replaced the previous colonial land laws, with their concept that land ownership rests with the State. Instead, it elevated the idea of private property in land as the guiding principle. At the same time, Article :18 provided that in the interest of the people and the State, "the rights in Land may be annulled with due compensation". With this opening wedge "ex- cessive ownership and control of land were not permitted" (Article 7). If we interpret Article 10 correctly, absentee ownership was not permitted either.

66. More specifically, no owner could possess more than a certain acreage, depending upon the density of population. The excess above that limit or "ceiling" was to be redistributed among the tenants, and in doing this, Article 8 of Act No. 56, 1960, stated that- "The Government shall endeavor that every farmer including his family owns a minimum of 2 hectares of agricultural land". The maximum permissible ownership (excluding estate agriculture) was fixed as follows: In "thinly" populated areas (50 persons per square.kilometer), 15 hectares of irrigated and 20 hectares of unirrigated; "densely" populated areas were divided into three categories: (a) "less" densely populated (51 to 250 persons per square kilometer), 10 and 12 hectares, respectively; (b) "sufficiently" densely populated (251 to 400 persons per square kilometer), 7.5 to 9 hectares, and in (c) "very" densely populated areas (more than 400 per square kilometer), no owner could retain more than 5 hectares of irrigated and 6 hectares of unirrigated. The last category applied to all of Java, the island with the tenancy problem. The second important item of the Act was compensation for the land, computed.as 10 times the annual productivity per hectare and payable by the former tenants in 15 annual installments. The sellers of excess land were to receive 10 percent of the total in the form of savings accounts deposited in local cooperative banks, and 90 percent in land reform bonds bearing a 3 percent interest rate and redeemable in twelve years. For those remaining on the land as tenants, rice land rents were fixed at 50 percent and dry land rents at two-thirds for the tenant and one-third for the owner. The minimum life of a lease was fixed at three years for irrigated and five years for unirrigated land, and all con- tracts were to be in writing and registered. land of less than 500 hectares distributed among 900 families. It is not surprising that with so many villages not involved in this process I encountered many farmers who had not yet heard about the program."

67. In 1964 this part of the reform was considered "completed", and nothing has happened since then to make the reform "more complete". Further- more, in addition to these problems, there was the rampaging inflation which made any pricing of land artificial and to the disadvantage of the owner with excess land. Built-in resistance to parting with the land was accentuated by a pricing system which, in the eyes of the owners, was confiscatory. As of June 1966, and in terms of the new rupiahs, the payments by former tenants amounted to only Rp. 25 million.

68. One can argue, too, that land distribution in Java has worsened the condition of an undetermined number of tenants, because some owners have shifted their tenants to the position of agricultural laborers. The extent of this shift and how it did or did not affect productivity cannot be supported statistically, but this particular consequence of land distribution is fairly obvious and is supported by the officials involved in the effort. Even though the reform has touched the owners very little, they know that the reform legis- lation exists and that at some future date it can be amended so as to reduce the permissible retention to a lower figure. The owners know also that a tenant cultivating a given piece of land over a number of years might claim occupancy right to that land and that some day a legislative enactment might sanction it. It has happened in other countries. These anticipations or fears explain the tendency on the part of a number of owners in Java to pro- claim themselves cultivators or managers of land once worked by tenants. The latter become agricultural workers, descending to the lowest rung of the agri- cultural ladder.

69. In a number of villages we visited, there has been a decisive in- crease of agricultural laborers at the expense of tenants. One recalls an outspoken owner of five hectares in Linbongan village of Central Java who no longer had any tenants. Instead, he worked the land with 25 agricultural laborers, 16 of whom were his former tenants. Other examples could be cited, all telling the same story. While we cannot tell how videspread this move- ment is, and perhaps it is not as widespread as it appears, it is clearly there. In India a similar movement, and for the same reasons, has virtually eliminated the tenants in certain districts, "solving" the tenancy problem by increasing the number of agricultural laborers. It is not so drastic in Java. Yet, with the reform currently in the doldrums, the possibility cf a loss of any stake in land by a growing number of ex-tenants cannot be excluded..

70. The second part of the agrarian reform, security of tenure, has hardly gotten off the ground. At best, one occasionally hears a brief comment that written contracts and rent reduction are difficult to enforce - as indeed they are under conditions of overwhelming pressure on a limited acreage of rented land. Finding a tenant with a written agreement is a rarity. According - 35 - to official sources, in 1964, in Java and Bali there were only an estimated 20,000 written contracts - many of them of dubious validity - out of a possible few million. Inquiries in 1967 revealed no change in the situation. Neither owners nor tenants, nor the implementors of the reform took this matter seriously. The same may be said of the 50-50 rental provision, the sharing of inputs and, compensation for improvements. Between 1964 and 1967 tenure conditions have remained stationary. Rentals can be as high as 75 percent of the crop for the owner. Prior to the reform the cost of inputs were shared solely according to customary owner-tenant arrangements. The legislation has not affected them in any way.

71. High ceilings, high rentals and land shortage are the three principal factors which practically insured the failure of the reform. But there were other inhibiting elements that worked to the same end; but for them this slap- dash of a reform could have yielded something better than it did. To begin with, brief as the contents of the legislative enactments were, they were hardly publicized. Considering the effot in this regard in other reform- bound countries in the Far East and South East Asia, in Indonesia it was minimal. Even the Communist Party with its widespread network of farm organizations in Java, demonstrated little aggressiveness in spreading the word about what the tenant was entitled to under the reform. The Government did no better, and many tenants were utterly ignorant about the existence of the reform. Second, though the reform was to benefit the tenants, they were not placed in a position where they could by their presence on deliberative bodies help enforce the reform through their intimate knowledge of who owned what land and terms under which it was worked. To have given the peasants such a role would not have beein a novelty, other countries have done so with much success. Lacking outside stimulation and support, the tenants of Java remained as inert during the implementation of the reform as they had been before. In addition to the officialdom, the task was mainly in the hands of the substantial owners, acting through the Village Land Reform Committees. The village headman, the "lurah", and two representatives of national farm groups constituted a Committee. But the three, usually land owners, were obviously not about to promote the interests of the tenants above their own.

72. A final point is that officialdom was talking a good deal of land distribution, even though there was not much to distribute, while remaining oblivious to the provisions for security of tenure. "Talking" in this instance must be measured against glacier-like speed of decision - making and acting, andthis on the top of an incredible administrative structure of reform implementation. Every step leading to the distribution and acquisition of a plot of land was excessively time-consuming. A year or two of waiting between assigning a piece of land and issuing a certificate of ownership was not rare.

73. Upon the failure of the coup of September 30, 1965,.agrarian reform of any sort ceased. One can travel in Java in any direction and find no sign of reform activity; in fact, it is a subject never mentioned by officials, owners or tenants. The problem is covered over with a wet blanket, at least for the moment. Only some slight traces remain. A central agrarian reform organization is still maintained and so are some few offices outside of Djakarta. Its head is a Vice-Admiral and the Organization is not part of the - 36 -

Ministry of Agriculture but of the Ministry of Home Affairs. Vice-Admirals and home ministries in general are not known for their solicitude about land problems, tenancy, rural poverty, rural uplift, and the like. A visit to the Organization drastically reduced in size, gives the impression of frustration with virtually no accomplishment. The budget allocated to agrarian reform is Rp. 200 million, but as of August 1967, or eight months after the beginning of the fiscal year, only one percent of the sum had actually been turned over for its support. In the meantime, tenants do not pay for the acquired land and landowners are not compensated in any way. Because of the currency reforms in the past year, a re-valuation of the price of the distributed land is in order, but for the moment this is in abeyance, as is practically everything else that relates to the reform. All a reform expert can do now - and we watched one doing it - is play with a variety of price schemes with no certainty that he would ever be called upon to put any of them to use.

74. The Government's future intentions are not known. This much can be said with a fair degree of certainty: conditions of tenancy will have to under- go some improvement even if the tenants are to remain politically quiescent. The combination of industrialization and population control of a character that would at the same time siphon off millions of rural people and reduce the rate of population growth is a very long time away. For now, some measure of relief must be sought in the countryside itself. If land distribution is to be part of it, the 5 hectare ceiling on ownership must be reduced. A lower ceiling can provide ownership for a considerably larger number of tenants even though the majority of them will remain tenants. Moreover, the position of most of the tenants can be improved through the enforcement of lower rentals, long leases and written contracts, the implementation diffi- culties notwithstanding.

75. It is not our purpose to outline here the principal provisions of ¬her round of reform in Indonesia. There is no country in Asia, however underdeveloped, which does not know how to write a reform law, or what its implications might be. Many have written them and then not carried them out - precisely because the political decision-makers understood their implication: and their inevitable repercussions. Indonesia of the time the reform was enacted was that sort of country. There is no gainsaying the fact that the economic environment, population pressure on the land, and customary relation- ships sanctioned by a long history of social and religious traditions all exert great influence on what happens to legislation designed to break old institutional molds. Under the guise of reform Indonesia preferred to leave things pretty much as they were. If, however, the inevitability of a minimum reform can no longer be delayed, it should spell out clearly defined provis- ions, away from half-measures, and assure a minimum of loopholes. Similarly, on the enforcement side, not only must the tenants be made aware of the essence of the main provisions, they must be made the true implementors of the reform if it is to succeed. The would-be beneficiaries must be amply represented in land commissions, a procedure so far shunned by all other countries engaged in reform save Japan and Taiwan. - 37 -

76. These were the reforms on paper. To assess their effect, we must answer these questions: How much land has been distributed? How large is the number of beneficiaries? Has the distributed land been paid for or not? Finally, since the vast majority of the cultivators remain tenants, have security of tenure provisions been enforced and have the burdens of the tenants been lightened accordingly? Information gathered in 1964 and during the mission's visit in 1967 provide reasonably accurate answers to the questions.

77. Although the statistics can be faulted in many ways, they are fully indicative of the actual situation. An official table with only minor adjust- ments on our part, records 344,000 hectares distributed among 563,000 tenants or 0.6 hectares per tenant. Discussions in Djakarta made it clear that the total includes 168,000 hectares of state land, the distribution of which is questionable; this is poor and unimproved land which does not tempt an agri- cultural laborer, let alone a tenant. Leaving this land out, it can be said that the maximum amount of land distributed in Java by the end of 1966 was 176,000 hectares, or 1.2 percent of the total cultivated land. The nwber of beneficiaries is placed at 164,000 (slightly more than one hectare per new owner). If the figure is correct, it represents only 3.3 or 4.1 percent of the roughly estimated 4 or 5 million tenants of Java. The pressure for land distribution was probably strongest in Bali on account of its supposed radi- cal leadership, but there, too, only 13,000 hectares were distributed out of a total of 1,o4o,000 hectares, or 1.2 percent. In Sumatra and Sulawesi, hardly any land was distributed, as if the excess land provision did not apply there at all. The provision to provide every family with two hectares was even more unrealistic.

78. Observations in the Javanese countryside in 1964 pointed to many evasions of the permissible retention. There was no clearly stated provision that, to escape redistribution, ownership of a parcel of land had to antedate the reform by a specified date. Lacking this, nominal subdivision of a hold- ing became as standard in Indonesia as it is elsewhere whenever ceilings on ownership are introduced. However, the real issue is not this type of eva- sion but that under Javanese conditions the ceiling was too high. Fixing the permissible retention at 5 hectares for Java was flying in the face of reality Global statistics aside, in 1964, more than three years after the introduction of the reform, a trip to Java caused this observer to write the following in his notebook:

"It has been reported to us that in Solo Residency of Central Java in the majority of cases not one hectare of excess land (for distribution) was available, and villages with a total of 5 hectares of excess land were no rarity. Madium Residency of East Java, with 1,151 villages and nearly 400,000 hectares of cultivated wet and dry land, has only an estimated 1,000 hectares for redistribution spread over 200-225 villages. In Pekalongau Residency comprising 544 villages, only 75 villages are involved in the reform, with a total excess - 38 -

79. Underlying all this is the recognition that any concession from land-owner to tenant touches the raw nerve of property rights. In Indonesia this would be true not only for a reduced ceiling, but also for rent reduction, the right to remain on land undisturbed except for non-payment of rent, written agreements, etc. In -short, those against whom the reforms are directed will not divest themselves of property rights simply because the government writes a decree. The key to its acceptance is the degree to which controlling political forces are willing to support the enactments and to use all instru- ments of government to reach their goals. Government coercion, whether practiced or clearly threatened, is virtually unavoidable. Mexico way back, Japan and Taiwan after the Second orld War, India, in part, in the early 'fifties, and Iran in the early 'sixties - all these are examples of writing and enforcing reform measures by all means at their disposal. If Indonesia, therefore, is to renew its effort to give the tenantry better conditions of tenure, the admittedly serious handicaps standing in their way can be dealt with if past mistakes are not repeated and the Government is prepared to use its power with determination.

80* In the previous section it was pointed out that it does not pay the tenants to use the prescribed (Bimas) package of inputs. That some use it under coercion of their landowners hardly meets the problem of Bimas and that of the majority of tenants not under Bimas, who barely use the package. If this constraint is to be removed, as indeed it should be, the high rentals ought to be reduced and security of tenure provided as the first and primary incentives to higher productivity. It is tempting, and certainly easier, to bet on the owners as the source of higher yields, but it is a questionable policy to leave out of consideration the tenants who cultivate the lion's share of the land controlled by these seme owners. For this reason if for no other, it would be the better part of wisdom on the part of the Government to address itself to this issue once again. There is an additional element that argues to the same end: -regardless of the current official reform attitude in Djakarta, the reform idea, of doing something for the tenantry, will not fade away. The problems are there; Urey cannot be wished away, and any assumption that nothing useful can be done or nothing more than that had been done in the recent past, has no validity. The productivity question offers an open- ing to proceed from, and this opportunity should be exploited. If the Govern- ment does choose to act, it must be upon the recognition that even the mildest of reforms is fraught with grave contentions, and that it is prepared, there- fore,to enforce the measureswith all the powers at its command. CHAPTER 4

SMALLHOLDER PRODUCTION OF CASH CROPS

81. Smallholders produce a variety of cash crops, but normally concen- trate on one and in addition grow some food crops. The extent to which food crops are grown depends on the main cash crop. In the case of rubber, where the smallholder has to tap his trees daily, the extent of food crop production is smaller than,for example,in the case of coffee where labor requirements on the average holding allow more time for other activities.

82. In terms of exports the five most important smallholder cash crops are rubber, coffee, copra, pepper and tobacco in descending order of value. In 1966 smallholder exports of these and other crops comprised approximately 60 percent of agricultural and related exports. Important smallholder cash crops consumed domestically are tobacco, coffee, tea and sugar. The following table shows the estimated area under smallholder cash crops, production and exports. Table 1

Summary Table of Area Under Smallholder Non-Food Cash Crops, Production and Exports

Area ('000 ha.) Production Exports 1960 1966 lg6T-_Q966 1960 197-21964 1966-/ -'000 ha.- -'OO0m tons------000m tons------

Rubberl/ 1,430 1,507 500 528 370 482 416 661 Copr 3 1,649 1,822 1,193 1,350 109 176 124 119 Coffee/ 226 310 67 116 24 46 55 65 Pepper & Spicesg/ N/A N/A 65 68 32 27 23 21 Tobac o21 N/A NZA 52 88 N/A N/A N/A 10 Tea 7 53 N/A 46 42 nil nil nil nil Sugar/ 42 90 438 433 nil nil nil nil Other smallholder N/A N/A N/A N/A N/A N/A N/A 5772/ produce

1/ Area and production, Central Bureau of Statistics; exports Perennial Crops Fund. 2/ All 1966 export figures supplied by the authorities. / Ministry of Estates. / Area and production Mission Report on Indonesia, International Coffee Organization, London 1967. Exports will be rather higher than projected since figures are derived by subtracting total estate production from total exports. 5/ Includes some estate production. 6/ Report of FAO Survey Team, February 1968 and Ministry of Estates. 7/ Report of FAO Survey Team, February 1967. 8/ FAO Survey Team, February 1967 and BPU Ghula. 9/ Includes maize, tapioca and a wide range of products. Although volume is large value of exports in 1966 was about US$25 million equivalent. - 4o -

83. Smallholder cash crop production currently receives no effective support from the Government. The Ministry responsible for smallholders growing non-food crops is the Ministry of Estates which has no field service except units responsible for collecting statistical data. Assistance to smallholders is channeled through two organizations. The extension service of the Ministry of Agriculture, and Dana Tanaman Kerasi/(DATAK) the agency of the Ministry of Estates responsible for implementing improvement programs for perennial crops, but in particular, replanting schemes for smallholders' rubber. The Ministry of Agriculture is primarily concerned with food crop production and has inade- quate resources for this purpose; as such it devotes little time to a sector which is not its prime responsibility. In its activity DATAK has been hampered by a chronic lack of finance. While DATAK is eligible for subventions from the Central Government, and in the past has received annual amounts of up to US$0.5 million equivalent from this source, the original intention was that it would operate on the basis of levies made upon smallholder exports. The pre- sent levy on rubber is Rp. 15 cents per kilo, but of this only Rp. 5 cents is available to DATAK for the direct costs of replanting programs. On the basis of smallholder exports of 500,000 tons of rubber, funds available from the cess total some Rp. 42 million annually. Considered in the light of 1.5 million ha. of smallholder rubber of which some 80 percent is over 20 years old this amount is insignificant.

84. In practice, therefore, the most important export sector of the Indonesian economy is left to its own devices. Fortunately, smallholders pro- ducing rubber and coffee, despite difficult conditions, have increased pro- duction and exports as is shown in Table 1, although in the case of copra ex- ports have declined.

85. The inability to assist cash crop smallholders presents a critical problem for the Government. The bulk of smallholder production is in the Outer Islands which the Government must develop in order to support the over- populated heartland of the country. If existing productive entrepreneurs, and by and large cash crop smallholders can be classed as such, cannot be effec- tively assisted,there is considerable doubt as to whether the Outer Islands will ever be attractive to the surplus population of Java.

86. In its present straitened financial condition the Government cannot allocate adequate funds for the improvement of smallholder cash crop agri- culture. Further, it may prove impossible to increase the cess on smallholder exports, which in the case of rubber probably would need to be as high as five percent of fob value to allow implementation of an effective smallholder rubber replanting scheme. As is described in Appendix 2 most rubber smallholders now receive about only one third of the fob value of their produce, and any in- crease in cess would probably fall on them, with subsequent repercussions on production.

87. There is action that the Government can take and in which the ex- penditure of resources would be justified. This would be to identify a limited number of areas of intensive smallholder activity and to investigate in depth the problems of smallholders in these. Marketing and processing arrangements would need to be examined in order to determine whether smallholder incomes

1/ The Perennial Crops Fund. - 41 -

could be improved by changes in these arrangements. In particular any trans- portation difficulties should be identified. Not least the capacity of the smallholder to adopt new methods, and of his holding to respond to these should be investigated. Following such studies detailed improvement programs should be prepared for selected areas and staff and finance made available for their effective implementation. Such action would result in a very few areas of concentrated activity, but would have the advantage that under circumstances of limited resources methods and techniques would be developed which could be applied on an increasingly wider scale as economic conditions permit. To con- tinue as now can only result in the dissipation of effort and minor, if any, improvements.

88. The performance of DATAK in sponsoring the replanting of smallholder rubber has not been impressive. Since 1961 it records the replanting of 81,000 ha. under its sponsorship, an annual rate of less than one percent of the area under smallholder rubber. In the course of these programs DATAK has not had the opportunity to develop any special skills in implementing re- planting programs, since its assistance to farmers has been largely the pro- vision of planting material, and this could have been done by a normal agri- cultural extension service. Any successful large-scale replanting of small- holder rubber will be dependent upon providing smaltholders not only with planting material but with financial assistance during the long gestation period of the crop. A prerequisite for the success of such a replanting scheme will be the assurance of satisfactory incomes for growers. Smallholders are unlikely to invest seven years of labor in a crop unless adequate returns can be envisaged. Much the same situation exists in the copra industry where low incomes have been a major factor in the decline of exports. The problems of rubber, coffee, tea and copra smallholders are discussed further in Appendix 2. CHAPTER 5

ESTATE AGRICULTURE

Background

89. Before the second world war Indonesia had both the largest estate industry in the tropics and the most scientifically advanced. In the immediate pre-war period the productive area of estates, which were largely European owned and managed, totaled some 1.2 million ha, accounted for about eight per- cent of the cultivated area of the country, and produced about 60 percent of exports in terms of value.

90. Since the war, no advantage has been taken by the Government of this important asset. As a consequence,the role of estates in the economy, although remaining of major importance, has diminished. In 1964 estate produce account- ed for only between 15 and 20 percent of exports in terms of value; but more importantly,the volume of estate production had fallen by about 50 percent from 1938 levels. The reasons for the decline in estate agriculture are many, but most are political in nature, in particular the nationalization or take- over of the foreign owned estates which comprised more than 90 percent of the producing estate area in 1938. Probably some sectors of the estate industry would have declined in the post-war period even without changes in ownership and management. This would certainly have been true of the Java based sugar and coffee industries. 'While the decline in physical estate production has proved a critical loss to the economy, equally, if not more serious, has been the loss of Indonesia's scientific and technical lead in tropical crop pro- duction which was developed and maintained by the private estate sector. As a result not only are estates now operated with less than optimum technical standards and scientific support, but smallholders (who are now of greater economic importance than the estates) receive a lower level of technical assistance and advice than those in many countries where, in 1938 or even as late as the mid 1950s, agricultural research was virtually non-existent. The failure of the Government to maintain adequate research facilities has re- sulted in the loss of a golden opportunity for introducing to smallholders techniques that were developed and proven on the estates.

91. There is little value in listing the problems that have afflicted the estate sector since 1940 and the Japanese occuption. In Appendix 2, these have been listed in detail. As a result,of these some estate land has been lost. In particular this has occurred in Java where population pressure was critical long before the war, and where the local people long appreciated that the estates were a partial solution to their land hunger. These losses in area, however, are insignificant compared to the general decline in estate yields which has occurred since the war, see Table 1. This decline can be attributed directly to the loss of management and research skills which re- sulted, in particular, from nationalization of all Dutch-owned estates in 1957, and from the take-over of all other non-American,foreign-owned estates in 1964 and American-,owned estates in 1965. This loss of managerial skills, however, has not been critical at the junior management level where there is no real shortage of Indonesians with the capacity to satisfactorily manage Table 1

ESTATE YIELDS: MAJOR PERENNIAL CRLDPS COMPARATIVE TOTAL PRODUCTION AND YIELDS BY YEARS

Total Estate Production Yields per ha 1/ 2/ 1938l 1951 1960 1964 1966 1938 19g 1960 1966- / (700 m tons) (m tons per ha) Rubber 186.9 216.2 N/A 233.7 210 N/A N/A N/A 0.69

Palm oil 226.7 121.1 141.2 160.6 161.3 3.04 1.51 1,60 2.10

Tea 80.5 46.5 46.1 46.3 43.0 0.59 0.68 0.69 0.71

Coffee 45.6 12.1 18.3 7.4 19.0 0.47 0.29 0.43 0.37

1/ In the case of rubber 1935-39 average. 2/ Government owned estates only.

Source: Excluding 1966 yield figures and rubber data - Economisch - Statistische Beri0hten, June 21, 1967. 1966 yield figures wjere obtained by the mission. labor and execute standard estate procedures. The critical loss has been at the policy-making level, the level concerned with matters such as investment in re-planting, new planting and diversification, marketing and the direction of research. The Indonesian Government has been unable to provide satisfactory replacements either for the agency houses which successfully developed the estate industry, or for the highly competent top levlforeign managers who conducted their operations.

92. Today the situation is changing; the new Government realizes that past policies have been in neither the economic nor the social interest of the country and that the estate sector has the capacity to play a more prominent role in the economy. In real terms this change in attitude has led to the return of two estate complexes to their original American owners; negotiation with a Belgian owner for the joint enterprise operation of some 30,000 ha. of rubber and oil palms; and preliminary negotiations with the largest British owner of estates which could lead to the latter resuming management of its holdings. By the end of 1967 the Government intends to have approached all non-Dutch owners of estates for the purpose of negotiating mutually acceptable terms for the owners' recovery of management control, or alternatively for formal acquisition of the estates by the Government. The previously Dutch- owned estates have been nationalized, unlike other foreign owned estates which were taken over and managed on behalf of their owners without formal acqui- sition. Compensation terms have been negotiated between the Dutch and Indo- nesian Governments and it is the intention of the Indonesian Gorernment to continue to operate these estates as state enterprises. Additionally, the Government is seeking foreign investment for developing new estates, although in this respect it favors joint enterprise operations.

Present Situation

93. Crops and Area: The major estate crops are: rubber, sugar, oil palms, coffee, tea and tobacco. Minor estate crops include kapok and a wide range of spices, some hard fibers are also grown on estates, in particular sisal and rosella hemp. Table 2 provides details of the areas of major crops grown by estates classified by ownership. There is much conflict between the data available from different government sources on estate areas. For this reason one major classification is "other estates, private Indonesian and foreign owned". Figures for this classification have been arrived at as a residual by deducting from 1963 census data on estate areas, substantiated data obtained by the mission for estates in the other classifications. This is an arbitrary solution to obtaining the order of magnitude of privately owned Indonesian estates, since it is known that the proportion of foreign-owned estates in the classification is small.

94. Table 3 shows clearly the predominance of the Government in estate ownership. This will increase if foreign owners opt for the formal acquisition by the Government of these estates rather than for the recovery of control by the foreign owners. The predominance of government-owned estates in total production and exports is illustrated by Table 3. In summary government-ownei estates accounted in 1966 for 59 percent of the estate production of major perennial crops. Table 2

SUMMARY OF ESTATE PLANTED AREA END 1966

BY CROP AND OWNERSHIP

ha

1/ Government British American Belgian Other estates Total area- Estates Estates Estates Estates Local and Foreian 1963 census 1966 1966 1966 196 owned 1 2 3 7 1 Rubber 531,1O 216,745 90,740 32,441 12,000 179,2842/ Tea 72,659 38,957 7,231 - - 26,471 Coffee 42,676 16,344 3,844 - - 22,4882 Cocoa 5,574 1,677 - - 3,897 ODil Palms 105,821L/ 65,388 5,942 - 20,000 Coconuts 14,491 17,443 869 - - - 16,574 Quinine 2,836 1,657 - - - 1,179 Spices and Peppers - 260 - - - - Sugar 2/ 76,063 66,107 - - -

85k,182 401,004 107,757 32,441 32,000 271,403

Note: Table excludes Tobacco. Source: Compiled by the Mission. 1/ Applies to plantings at end of 1962. 2/ It is difficult to correlate the apparent 179,284 ha of other estate rubber plantings with recorded estate production in 1966. The official figure for 1966 estate rubber production is210,000 tons. Firm figures of production in groups 2, 3, 4 and 5 %otal 170,140 tons. If the official figure is correct overall average production on other estates would be about 220 kg per ha. These 1966 yields are excessively low even on an overall planted area basis, and possibly other estate plantings are less extensive than recorded. A publication by BPU Karet indicates that other estate rubber may total only 153,000 ha, see Annex 3, Table 2. / Area is leased by estates only. / The mission found it impossible to reconcile the fitures for other estates with recorded production in 1966. It would appear that the census figure is in error. / Ministry of Estates records 13,,486 ha in this category, all private Indonesian owned. 6/ Ministry of Estates records 12,222 ha in this category, over 95 percent private Indonesian owned. Table 3

SUMMARY OF ESTATE PRODUCTION 1966 BY CROP AND OWNERSHIP PERENNIAL CROPS ONLY 1/1/ Government estate Government British- American Belgian Other Total production as Estates Estates Estates Estates Estates percent of total 1 2 3 4 5 6 7

Rubber 106,118 40,711 18,593 4,718 39,860 210,000= 51 Tea (tons) 26,488 5,337 11,175 43,000 2 61 Coffee 5,148 2,54o 11,312 19,00011 27 Cocoa 424 unknown unknown N/A Palm oil (tons) 114,407 8,912 38,000 nil 161,319 71 Palm kernels (tons) 21,874 2,131 9,120 nil 33,125 71 Copra 150 unknown unknown N/A Quinine salt (tons) 855 unknown unknown N/A Spices and peppers 1,992 unknown unknown N/A

1/ Figures obtained by mission form estate groups concerned. I/ Figures produced by Ministry of Estates for consultations with IMF Sept/Oct 1967.

Sources Compiled by the Mission. - 47 -

Management

9 5. The Minister of Estates is the member of the Government responsible for estate policy. Assisting him is the Ministry of Estates which has the dual responsibility of plantation production and the smallholder production 0 export crops. Direct estate management is vested in the Badan Pimpinan Umu (BPU), which performs the role of managing agents for groups of estates. Since the Ministry has, to all intents and purposes,no means of providing capital for investment in the estates, the financial leverage it can exert on the BPU is non-existent and its degree of control of estates restricted, in practice, to the Minister's responsibility for recommending to the Government the appoint- ment of BPU directors. Thus the present influence of the Ministry on either the BPU or on the day-to-day running of estates is small as is its capacity to sponsor new development. Its useful functions include the collection of statistics and advising the Government on matters of fiscal policy as far as these affact the estates. Its ventures into coordinating the import and dis- tribution of estate inputs, in particular of fertilizers, have been generally unsuccessful.

96. The BPU have assumed the role of the pre-1957 agency houses. As such they provide a management service for the e ivalent of private sector estate companies, the Perusahann Perkebuman Negar(PPN). The PPN are, however, state enterprises, each comprising one or more estates with complete autonomy as far as day-to-day estate operations are concerned. The major services which the BPU provide, and which the Government requires PPN to utilize are marketing, purchasing, accounting, auditing and some research3. For these services the BPU receive five percent of the value of PPN production, but additionally levy a percentage marketing charge. The BPU pass on to the Ministry of Estates 20 percent of their direct management fee to assist in meeting the latter's re- current expenses.

97. At present there are five BPU: BFU Karet - government-owned rubber estates, BPU Ghula - government-owned sugar mills and estates, BPU Aneka Tama- nan - government-owned oil palm, tea, coffee, and other crop estates, BPU Tembakau - government-owned tobacco estates, and BPU Dwikora - British-owned estates. Two PPN, enjoy a position analogous to BPU, these are PPN Expera I and PPN Expera II. One manages the estates of a Belgian Company and the other foreign-owned estates not managed by the other BPU.

98. In the absence of either direct government financial assistance or alternative sources of investment finance, funds available for investment in the estates are restricted. In practice they are limited to those the estates can generate themselves. Due to generally low yields and, where the produce is exported, the export tax (25% of the Bonus Export market rate), operating

L/ State Management Boards.. 2 National Estate Companies. 3 The estates as a whole support the Research Institute of the Sumatra Planters Association (RISPA) as was the case when most estates were privately owned and managed. The BPU however conduct research on their own account, as in fact did many privately owned estates. - 48 -

surpluses are small-- in practice so small that the financing of capital equip- ment replacements and a modest amount of replanting results frequently in work- ing capital being inadequate for critical programs such as satisfactory crop fertilization. Under these circumstances the capacity of the PPN to utilize what competent advice the BPU can offer is limited, and useful BPU services restricted almost solely to marketing. In effect it is very questionable whether the BPU can provide either advice or services which justify their high management fees, since while many BPU officials have had good estate ex- perience, few had experience at the policy level when the estates were privately operated. Indonesia has been out of the mainstream of both business and tech- nical development for many years and thus even the more efficient officials of the BPU lack up-to-date experience in either technical or commercial management. An added constraint to the effectiveness of the BPU is their location. All have their headquarters in Djakarta while the bulk of the estates which they manage are in Sumatra. The center of estate activity is some 2,500 km from the capital city and obviously it is difficult for the BPU to keep in close touch with either individual estate problems or local conditions.

99. There would be advantages probably in abandoning the Bpy/system and allowing the PPN greater responsibility in managing their own affairs. In this way PPN staff could be made responsive to more normal commercial incen- tives and discipline. Since, however, most PPN directors have inadequate ex- perience of modern commercial and agronomic techniques a higher level of super- vision and control would still be needed. In particular three major sectors should be covered: financial affairs - especially audit; development programs - including appraisal of proposals for new plantings, replantings and diversi- fication and the purchase of new capital equipment; and, techniques - impor- tantly fertilization programs, processing techniques, and approval of planting material. As far as financial affairs are concerned the Ministry of Estates could insure adequate accounting and auditing arrangements by establishing in- spection offices and by employing private auditors. For development programs it could establish a group, staffed with experienced personnel, capable of both producing development programs for implementation by the PPN and appraising development proposals put forward by the PPN. A group of this type would initially require expatriate personnel with experience of a modern plantation industry. Technical problems would best be handled by creating national re- search institutes for the major estate and smallholder crops. These institutes would conduct research and provide a technical advisory service. Again these would require initially experienced expatriate research workers with recent knowledge of successful crop production techniques evolved elsewhere in the tropical world. In order to provide better management at the PPN level there would be advantages probably in regrouping the PPN into larger units in order to make the best use of the efficient PPN managers.

100. The mission is unable to do more than to indicate the areas in which changes appear desirable, and the general direction in which, following careful study, these may take. Very specific studies would be required to establish their detailed form. Two such studies could be initiated immediately, first - a study by qualified consultants of the management requirements of the estates

1/ Where it applies to government-owned estates. - 49- that the Government now owns. This study would be designed to result in iden- tification of the relative responsibilities of the PPN and any supervisory body that would be required. The recommendation of any specialist services necessary, for example marketing, and the provision of job descriptions for all key posts in the recommended organizations. The second study should be concerned with the research and technical advisory needs of both estates and smallholders growing estate type crops. It would be designed to produce de- tailed recommendations for consolidating research efforts, establishing a technical advisory service and staffing. It would provide, also, estimates of the capital costs of the recommended program as well as of the current costs of its operation. unless the 101. Little benefit would accrue from these studies, however, Government were prepared to review and take action to remove the major con- straints now limiting estate production and development. The export taxes on estate products requires examination. Consideration should be given to the feasibility of the payment of wages in cash rather than in kind (in particular rice) in order to ascertain whether the estates could function more efficiently on a monetary system. Close examination should be given to the high proportion of production costs, which comprise payments in cash and kind for non- to Provincial productive purposes (for example.the.provision of transportation and military authorities). Some estimates put this as high as 20 percent. Finally,the question of development finance for the estates must be resolved. The public estate sector cannot achieve financial viability or make a sig- ade- nificantly greater contribution to export earnings unless it can obtain quate investment capital at realistic rates of interest. CHAPTER 6

I=PUTS, CREDIT AND FRODUCTION POTENTIALS

Fertilizers

103. The critical input is fertilizer, and while most cash crop small- holders probably cannot benefit from its use due to other limiting factors to production, inadequate supplies of fertilizer currently limit both food crop yields on the densely populated islands and estate production.

104. In the case of food crop production, future fertilizer requirements depend largely on the extent to which the Bimas scheme can be implemented. For the 1967/68 season, the Government envisages 1.5 million ha. under Bimas or Bimas-type schemes. This is a highly ambitious program and probably, at best 50 percent will be achieved. The reduced program would require 75,000 tons of urea and 75,000 tons of double super-phosphate. Non-Bimas participants growing both food and cash crops could, were it available, use a further 50,000 tons of fertilizer, bringing the total requirement for the non-estate sector to a total of 200,000 tons of fertilizer for 1968.

105. Estate fertilizer requirements are higher due to the capacity of estate crops to respond to heavy applications. In 1966, government-owmed and managed estates requested the supply of 233,000 tons of fertilizers, but received no more than 84,00 tons; in 1967 supplies have been at even lower levels. Naking allowance for possible, and desirable consumption by private estates, the estate sector has the capacity to profitably use a minimum of 250,000 tons of fertilizers annually, and estate production will continue to stagnate if amounts in these magnitudes cannot be obtained. Pre-1940 consumption by estates averaged 165,000 tons and since that time the fertility of estate land has declined appreciably.

106. Assuming the local production of urea at 100,000 tons annually, required annual fertilizer inputs should cost an approximate minimum of U.S. $30 million equivalent over the next two to three years, and use subsequent to this will depend, in particular, on developments in the Bimas program.

Agricultural Credit

107. The major source of agricultural and fisheries credit for the private sector in Indonesia is Unit II of the Bank of Indonesia; although in the crop season 1966-1967, credit for participants in the Bimas scheme was provided by the State Rice Purchasing Organization. In future Bimas financing will be the responsibility of Unit II. - 51 -

108. The programs of Unit II are examined in Annex 4 . They are charac- terized by two features, the small volume of lending for private agriculture, a total of about Rp. 810 million at the end of September 1967; and the short- term nature of its loans, the average maturity is less than eight months. While the total volume of lending is low, the number of individual trans- actions is very high and one of the Bank's 235 branch offices has more than 0,000 customers. On the other hand, the Bankts repayment record is good, and it expects in a normal year to write off two percent of its loans as bad debts and to have five to ten percent of repayments in arrears.

109. In practice the bulk of the Bank's loans are subsistence loans designed to carry the farmer through the period from planting his crop to its harvest, and thus probably do little to increase production or produc- tivity, except when tied to Bimas operations.

110. In general, Unit II has demonstrated a capacity to successfully handle the difficult task of providing credits to a very large number of small customers. This experience and its spread of branches throughout Indonesia establish it as a suitable channel for the major expansion in agricultural credit operations which the present situation demands. The Government should now give high priority to providing the capital the Bank requires to intensify its short-term lending operations for farm inputs, and to enable the Bank to embark on a modest program of medium and long- term development financing. In the latter respect, the Bank, while well staffed with agriculturalists and agricultural economists, probably requires external technical assistance to gear up its project evaluation machinery.

Production and Export Potentials

111. In the absence of policy changes and new programs, and with the exception of coffee, where new smallholder plantings coming into bearing will result in a progressive increments in production, significant increases in export crop production cannot be foreseen in the short run. A potential for significant increases exists in the case of several crops, but specific action is required to achieve these. Palm oil and kernels and estate tea production could be increased within two years by the rational use of fertilizers; this would require no more than providing the estates with the foreign exchange and authority to import their needs. Estate rubber produc- tion could be increased by the use of more intensive exploitation methods, especially in the case of over-age plantings; again policy decisions are required. Replantings of estate rubber made in recent years will not influ- ence production to any major extent until after 1970. The problems the sugar industry faces are such that the production of refined sugar cannot be expanded, and thus Indonesia will probably not be able to re-enter world trade in this item. The situation in the case of smallholder rubber and copra is more complex. Present price relationships indicate that probably smallholder rubber production will decline without government action to ensure that producers receive a higher and fairer proportion of receipts. In the case of copra much the same conditions apply although major problems with this crop are poor inter-island transportation facilities and communications. - 52 -

Improvements in these latter sectors could result in significant increases in copra exports. Smallholder tobacco prod..-tion will probably increase in proportion to domestic demands, but exports of estate and smallholder leaf are unlikely to increase as volumes in recent years have been determined largely by the capacity of traditional markets overseas. Timber production and exports should gradually improve as the foreign companies now beginning operations develop their capacity.

112. Fully developing the potential for increasing rice production requires major and far-reaching policy decisions by the Government. In the absence of a decision to allow prices to rise an unnecessary constraint is placed on the industry, and the best use idll not be made of whatever inputs can be made available to farmers. The concern of the Government to increase production is so intense, however, that even without an improvement in the price structure, increases in production will occur by the greater use of fertilizers and insecticides even though these may be used at less than optimum efficiency and may in practice be subsidized by the Government. It is impossible to quantify such increases as their extent will be determined by the Governmentts capacity to overcome the problems of logistics and supervision that have arisen in the past and are likely to arise again. It is probable, however, that required imports of rice in the next two years will be in the range of 500,000 to 600,000 tons annually. Although these are appreciable, the natural population increase calls for an additional 250,000 tons of rice each year, and the capacity for holding imports at the level.U suggested above implies significant production gains. CHAPTER 7

FORESTRY AND FISHERIES

Forestry

113. In its forest estate of some 120 million ha., Indonesia has a large untapped resource. Forestry development could be the means of significant increases in foreign exchange earnings and of introducing industrialization by the processing of forest products. Despite the potential, however, timber production in the period 1960 to 1965 actually declined and at present the domestic demand for timber cannot be satisfied. Exports of Indonesian timber have never been important financially and-in 1965 were valued at only US$1.3 million equivalent. The potentials of the forest estate and the problems of its development are discussed in more detail in Appendix 3, but an idea of the extent of the forest resource is given by the fact that Indonesia has an estimatedl/ annua surplus of exploitable timber in the magnitude of 100 million m3 (r)2!. Obviously this surplus cannot all be exported but long-run prospects for exporting an appreciable proportion of it are very good. The world import d and for tropical broad-leaved woods is estimated in a recent FA0 reportTto be between 32 million and 37 million m 3 by 1975, approximately double that of 1961. The study also observes that probably this demand can be met only by increases in costs'(as a result of working isolated and difficult areas) or by the depletion of tropical forest resources. The Indonesian forest potential probably was not considered at the time these estimates were made, since it alone could meet the expected increase in demand from forest areas relatively close to export outlets.

114. Significant exports of Indonesian wood, whether as logs, sawn timber or processed wood,will require equally significant investments, and finance for a major expansion of operations can come only from overseas. The Government is making a decisive effort in this direction, and has already signed agreements with four foreign timber companies. Probably, however, the Department of Forests could benefit from assistance in evaluating the proposals of foreign investors and in the preparation of a long-term plan for forest development, including the processing of timber. Employment of a consulting company (not identifiable with any potential investor in forest exploitation) to assess the feasibility of commercial operation in forest areas now identified by the Department as suitable for development, would be of considerable advantage. This arrangement would provide also a training

1/ By the Department of Forestry. 2/ Cubic meters of roundwood. / Forestry and Forest Products Industries, FAQ June 1967. facility for the Forestry Department which, while experienced in inventory and survey work, lacks experience in modern extraction and processing methods, and is at a disadvantage in considering proposals from abroad.

Fisheries

11. While inland fisheries produced an estimated 437,000 tons of wet fish in 1965, marine fisheries provide significantly greater opportunities for increasing protein supplies. In 1966 landings of marine fish were recorded by the Ministry of Maritime Affairs as 720,000 tons. This catch represe ts 16 percent of the estimated possible annual catch in Indonesian waters1 . Marine fishing is important, not only because of its potentials but because it provides a living for an estimated five percent of the population.

116. Marine fish production could be increased by moderni?ation of the fishing fleet, 99 percent of which are small sailing or rowing boats, and the employment of improved gear and fishing techniques. Shore handling, distribution, marketing and storage facilities and arrangements would also require development. Presently the bulk of the catch is salted and dried and distributed in this way, and apart from one cold store in Djakarta,there are no facilities for handling fresh or frozen fish. The problems of storage, distribution and marketing are probably greater than those of production, since alt qugh a demand for fish exists (per capita consumption is low at about 11 kg er year) transportation problems and a breakdown in the traditional marketing system are now resulting in much fish being spoiled for want of markets. Thus, before major steps are taken to increase production,plans must be prepared for handling the increased catch.

117. Exports of marine commodities are also possible, and surveys have indicated the feasibility of exporting tuna and shrimp. In these specialized fields the Government would find it advantageous to seek foreign investment.

1/ Estimated at 4.5 million tons. K. Tiews - Current Affairs Bulletin, IPFC, No. 47, Bangkok, 1966.

2/ Made up of 6.6 kg. of marine fish and 4.4 kg. of fresh water fish. CHAPTER 8

PROJECT AID - 1968

118. The mission reviewed the proposals for project aid for 1968 sub- mitted by the Ministry of Agriculture, Ministry of Estates and the Department of Water Resources Development of the Ministry of Public Works. The original proposals totaled U.S.$ 18,183,000, and would have involved Rp. 937 million in local currency financing. A summary of the proposals is given below:

Table 1

Summary of Proposals

Estimated Cost Agency No. Name U.S.$ Rp. millionV

Ministry of Agriculture 1. Production of Improved Seed 1.125 81.8 2. Rehabilitation of Irrigation 1.875 86.0 Ministry of Estates 3. Boilers: Sugar Factories 1,250 18.0 4. Irrigation: Coffee 0.515 20.0 5. Processing Units: Rubber 0.600 53.9 Ministry of Public Works 6. Brantas River Basin: Irriga- tion and flood control 4.118 400.0 7. Tjimanuk River Basin: Survey 0.750 3.5 8. Irrigation Systems: Comple- tion and rehabilitation 1.100 82.5 9. Dredging of River Mouths 6.250 41.3 10. Sempor Irrigation Project: Completion 0.600 150.0 Total: 18.183 937.0

119. In its review, the mission paid particular attention to the degree of preparation of the individual projects, expected economic benefits and probable speed of their reaiization, and the management capacity of the exe- cuting agency.

Projects considered unsuitable for project aid were as follows: Sprinkler irrigation of coffee (4) It was proposed that equip- ment should be purchased to sprinkle 600 ha. of coffee on government-owned estates. The objective was to increase yields by improved flower production and fruit set. Small-scale trials have shown significant yield increases by these means. The mission believed that the proposal was premature and that trials on a - 56 -

limited field scale should be conducted before investment on the scale proposed could be justified. Hevea crumb factories (5) The proposal called for the conversion of processing facilities on nine existing plantations to hevea crumb, and the installation of a new unit on a recently developed plantation. The mission's opinion was that scarce investment capital should be employed in programs designed to increase yields rather than in those designed to obtain marginal benefits from improved quality. In the case of the new estate, its production could be processed in the factory of an adjacent estate.

120. Projects considered suitable by the mission, but which it felt required amendment were:

Rehabilitation of irrigation (2) The proposal was that the Ministry of Agriculture would obtain 3,000 water pumps capable of irrigating about 50 ha. each for re-sale on credit terms to cooperatives, individuals and village communities. Although there are no exact figures, about 300 to 400 pumps of this type are in use in Java at the present time. There is no question that a greater use of pumps is both feasible and economic, utilizing both surface and ground water resources. Their use is to supplement wet season irrigation, to allow dry season cropping (of crops other than rice), and to enable an early start in rice planting. However, in the case of the proposed project, no arrangements had been made for the provision of credit, for the satisfactory installation of re- quired irrigation field works, for the maintenance of the pumps once installed or for the surveys necessary for satisfactory loca- tion. Thus, while the mission believed that there was considerable merit in the pump project, it recommended that it should be reduced to U.S.$ 0.6 million and delayed until 1969 to allow the preparation of a viable program. Production of improved seed (1) The mission felt that in 1968 the Mlinistry of Agriculture could not efficiently use the amount requested, but that farm machinery was definitely required for the new Sukamandi Djaja Research and Seed Station, and some seed processing equipment for provincial seed stations. For these reasons it proposed that the amount should be reduced to U.S.$ 200,000. Dredging of river mouths (9) The proposal envisaged the dredging of about 6 million m. from river mouths where silting is now resulting in crop and property damage due to flooding. The mission considered the project deserving of support, although it was unable to establish its priority in relation to other needed irrigation rehabilitation. It was proposed that the work would be executed by contracts with foreign dredging companies and thus no supervision problems would arise. Unfortunately, specific plans have not been prepared, although these are in course of preparation for a few sites. The backlog of dredging is such that a long-term plan is required which should be integrated with the need for the dredging of harbors since river mouth dredging would require ocean- going dredges. At the same time, it is not difficult to pinpoint - 57 -

priority areas where the benefits from dredging would justify the required expenditures in 1969 and 1970. In view of the lack of a dredging program, the mission believed that it would be premature to embark on a dredging program in 1968. 1968 should be used for a professional survey of the dredging problem, the selection of priority areas and the preparation of detailed technical and financial programs which would allow consideration of a start on dredging in 1969. At the same time, the mission recommended that U.S.$ 0.250 million should be included in the project aid program for spare parts and materials required for the existing river and canal dredger fleet.

121. Projects considered suitable without change for inclusion in the project aid request were:

Installation of three boilers to replace unserviceable boilers in sugar factories (3) The Indonesian sugar industry is in a very unhealthy position. Processing facilities are old and require heavy investment (U.S.$ 9 million is estimated as necessary in 1967/68) to maintain them in operating condition. Field produc- tion costs are rising, while wholesale prices are fixed by the Government at levels which do not allow the generation of a satisfactory margin for re-equipment. At the same time, the Government has been unable to face up to the task of replanning sugar production which, by the nature of the problem, must involve the establishment of new plantations and mills outside of Java. The expenditure of the U.S.$ 1.25 million requested was for the most efficient enterprises in Java, enterprises which would be maintained for many years even were the Government to develop and execute a plan to rationalize the industry. For this reason the mission sup- ported the proposal. Brantas River Basin Project (6) Completion of the two major dams, Karangkates and Seloredjo, involved in this project were reviewed both from the agricultural and power stand- points. Benefits in terms of irrigation, flood control and power are of such magnitude that although these would not be realized until 1971, the mission accorded a very high priority to the project. The project is well designed and managed, and although being executed under force account, management is receiving guidance from some 60 Japanese technicians. The consulting engineers are an experienced Japanese construction company. Tjimanuk Basin Survey(7) A pipeline of irrigation projects in Java is essential for long-term development of agriculture. In view of the potential benefits of development of the Tjimanuk Basin in West Java (double cropping on 90,000 ha., development of 10,000 to 20,000 ha. of new irrigated land, flood control on 20,000 ha. and possible power generation), the mission supported the proposal to proceed with detailed studies in 1968 which would be completed in 1970. Completion and rehabilita- tion of irrigation systems (8) The proposal called for the expendi- ture of U.S.S 1.1 million in foreign exchange for construction equipment and imported materials required in 1968 for (a) completing - 58 -

the 10,000 ha. Way Seputih Irrigation Project in the Lampung Province of South Sumatra (US$0.3 million), (b) rehabilitation of the 20,000 ha. East Samarang Irrigation System in Central Java (US$0.3 million) and (c) materials and equipment required to support farmers participating in self-help irrigation rehabilita- tion programs (US$0.5 million). The mission considered that while the US$1.1 million could be justified on the basis of expected benefits, the Government should take into account the need for insuring the effective use of the equipment that would be purchased. Servicing facilities for heavy equipment are poor. For this reason the mission recommended that the amount requested should be increased to US$1.4 million to allow the provision of adequate servicing facilities and that the Government should consider obtaining technical assistance from abroad to help in establishing and operating servicing units. Sepor Trr atin Project (10) The mission supported the request for U 0. million to purchase in 1968 heavy equipment required to speed up work on the Sempor Dam which is scheduled for completion in 1971. Potential benefits include double cropping on 8,000 ha., the dry season cultivation of 16,000 ha. of secondary food crops (other than rice), and the guarantee of a second rice crop on 8,000 ha. where dry season irrigation is now extremely variable. As in the case of project 9, the servicing of equipment is poor and the mission increased the amount requested to US$0.75 million to allow for adequate servicing equipment.

.122. Two additional projects were propoed by the Ministry of Agriculture subsequent to its initial submission. The first was for US$0.25 million required to provide personnel transport and trucks for agricultural extension units working in Bimas areas. This proposal was supported by the mission on the grounds that at the present time the extension service has inadequate facilities for moving either personnel or materials and that this seriously limits the effectiveness of the Bimas program.

123. The second and larger project was for the aerial spraying of an estimated 50,000 ha. of rice in West Java against stem borer at a cost of US$2.0 million, the latter cost to include necessary ground equipment such as light traps to determine pest build-up. The basis of the proposal was a detailed survey conducted by a European insecticide manufacturer with up- to-date knowledge of the stem borer situation in Indonesia, and long experience in aerial spraying. It is conclusive that where stem borer occurs in sufficient intensity yield losses of about 30 percent are normal, and on Java about 200,000 ha. of rice are estimated as seriously infested annually, resulting in a net loss of about 100,000 tons of rice. At present world prices,the loss can be valued at about US$20.0 million. The mission considered that the project was technically feasible if executed by a company experienced in aerial spraying and which used a suitable insecticide. The mission also believed that in terms of import savings it would be justified. At the same time it had reservations on the feasibility of collecting the - 59 -

costs of such spraying from farmer beneficiaries. The opinion of the Government was that the project was justified in view of the critical rice situation, and that it would benefit both financially and economically even were it forced to pay the full costs of the program. Under these circumstances the mission agreed to recommend inclusion of the project in the Program.

124. The mission discussed its findings and recommendations with the Government and these were accepted. The following table shows the projects and expenditures recommended:

Table 2

Projects Recommended By Mission For Inclusion in 1968 Project

Assistance Program

Total foreign exchange First year cost disbursements ------thousand US$ ------

Ministry of Agriculture

1. Production of improved seed 200 200 2. Small irrigation pumps 600 - 3. Vehicles for agricultural extension 250 250 service 4. Aerial spraying against stem borer 2,000 2,000

Ministry of Estates

5. Replacement of boilers in sugar 1,125 1,125 factories

Ministry of Public Works

6. Brantas River Basin Development 13,100 4,118 7. Tjimanuk River Basin Development 750 750 8. Rehabilitation and completion of .1,oo 1,00 irrigation systems in Java and South Sumatra 9. Rehabilitation of river and canal 250 250 dredgers 10. Sempor Irrigation Project 750 750

Total: 20,425 10,843 APPENDIX 1

IRRIGATION

1. Irrigation is of prime importance in Indonesia, and especially on the island of Java. The national irrigation authority the Department of Water Resources (DWR) of the Ministry of Public Works estimates that at present 4.3 million ha receive some degree of irrigation, Of this 2.9 million ha are on Java where they comprise 32 per cent of all land used for crop production.

2. DWR uses three categories of irrigation, (a) full technical irri- gation from Government controlled and supervised schemes, 1.9 million ha, (b) half technical irrigation from Government schemes, 0.9 million ha and (c) uncontrolled irrigation by farmers who on their own account have tapped water resources, 1.4 million ha. Table 1 shows the distribution within the regions of the irrigated area and, in addition that of some 1.8 million ha of paddy fields which rely on rainfall.

3. All irrigated land grows at least one crop of rice each year, and the importance of irrigation is illustrated by the fact that 75 per cent of land under rice is wet paddy and the remainder dry upland rice. On Java double cropping is possible only to a limited extent without irrigation, and even so only about 40 per cent of the irrigated area receives sufficient water in the dry season to permit a second crop. This area could be in- creased by the provision of storage, but until recently most irrigation de- velopment has been based on the diversion of river water with limited dry season storage. Table 2 presents details of major irrigation water reservoirs.

Present Situation Operation and Maintenance

4. Irrigation has been practiced for centuries on Java and the other densely populated islands. As a result farmers generally make the best use of water and have organized themselves to maintain tertiary structures. The operation and maintenance of primary and secondary structures is the responsibility of DWR which receives funds from both Central and Provincial Governments for this purpose.

5. Since 1939, however, these funds have been inadequate and the condition of most primary and secondary structures has deteriorated. In some cases this has been to the extent where water supplies have become ir- regular and the total supply diminished; in others extensive areas of pre- viously irrigated land have been lost due either to a complete failure of - 61 -

supply or to flooding. The failure to satisfactorily maintain Government operated structures is now being reflected in farmers being less enthusiastic about the maintenance of tertiary canals.

6. The reasons for the deterioration of maintenance is simply a lack of adequate funds. Farmers do not pay water rates, although they are taxed on the basis of the productive capacity of their land and irrigated land is taxed more heavily than non-irrigated. Further, a system where a specific proportion of Provincial revenues have been applied to irrigation mainten- ance has not been the practice; at least since the war.

7. DWR and the Government are well aware of the problems, but in the absence of any means to obtain greater revenues from the irrigated sector, cannot find sufficient funds for routine annual maintenance let alone those required to implement the back log of remedial work.

8. Attempts are being made by DWR to clear up at least part of the back log, but in particular the lack of foreign exchange to purchase con- struction equipment and materials from overseas limits both the scope and spped of work. In many areas farmers are being organized to provide manual labor for the work, but what is achieved in this way is being limiJed by a lack of even simple pieces of imported equipment and materials.

9. An idea of the extent of the problem is provided by the following information given to the mission by DWR. At the end of 1968 of 2.85 million irrigated ha on Java, the systems serving 1.92 million ha required rehabili- tation and of this DWR expected to be able to rehabilitate about 120,000 ha in 1968, about six percent. At the same time DWR could not state authori- tatively that any area rehabilitated would subsequently be maintained satisfactorily,

10. At the present time rehabilitation probably does have priority over maintenance since it is accepted by all that the effectiveness of irri- gation has declined and is continuing to decline, but as discussed later the mission believes that it is imperative that attention be paid to ensuring satisfactory routine maintenance in the future.

Erosion and Flooding

11. Erosion is assuming major proportions in the catchment areas of rivers supplying irrigation schemes in Java, This has, and is continuing to deveLop as a result of the largely illegal felling of protective forests by squatters who have been forced into these areas by population pressure, Again the problem and probable solutions are recognized, but the latter can- not be implemented because of lack of finance. Erosion is resulting in the - 62 -

silting of rivers and irrigation systems, which in turn is causing floods of increasing intensity which destroy both crops and property. Flood problems could be lessened by the dredging of river mouths, which at one time was routine practice. Today, however, DNR estimates that the back log in river dredging is in the magnitude of 60 million m3 . The inability to dredge is causing high expenditures in strengthening and reconstructing the embankments of rivers where, in many cases, the bed of the river is now higher than the surrounding, and usually intensively cultivated land.

New Projects 12. Apart from the BIMAS scheme the only on-going new projects in the agricultural sector are in the field of irrigation. DWR is not only imple- menting new projects but is attempting to develop a pipeline of such pro- jects. Of DWR's on-going projects the more important are the Karang Kates and Seloredjo dams in East Java. Both dams are in the Brantas River Basin, and are part of a larger multipurpose project designed to control flooding and erosion in the basin, extend irrigation and to produce hydro power. Direct agricultural benefits from the two dams, the provision of all season irrigation for 25,000 ha, will not develop until 1971. Both projects have been financed to date under Japanese war reparation credits, and it is ex- pected that the foreign exchange element of future costs will be met from the same source. Work is being carried out under force account by DWR, but a Japanese engineering company provides technical assistance under contract. These arrangements are working very well,

13. Major projects in the pipeline include a similar multipurpose pro- gram for the Tjimanuk River Basin and Indramaju plain in West Java. The scope of a potential program has been established and detailed surveys com- mence in 1968 and are expected to be completed in 1970. Benefits are esti- mated as being protection of some 20,000 ha in the Tjimanuk delta from flood- ing, provision of all season irrigation for 90,000 ha which is now single cropped, and the development of between 10,000 and 20,000 ha of new irriga- tion. Power generation would also be feasible. Identified projects in the pipeline include (a) the further development of the Bengawan Solo Basin in West Java, including the provision of water storage for irrigation, flood control and erosion control measures. the project would improve production from some 270,000 ha of fertile land, (b) river basin development in the Bagelen area in Central Java, to serve some 51,000 ha of irrigated land, (c) flood control works and improved irrigation in the Semarang area of Central Java (the Djratunseluna Project), (d) the Bae2b River Project, in South Kali- mantan, which would include the irrigation of 200,000 ha by tidal irrigation; flood control, hydro power generation and irrigation of 50,000 ha by means of two dams and; irrigated development of the Negara plain by means of one or more multipurpose dams. The BaritoRiver project is estimated to cost US$225 million equivalent, (e) development of the Luwu Region in Celebes. This pro- ject is at an embryonic stage but it is believed that 150,000 ha could be irrigated in this area, and (f) land development projects in the Lampung and South Sumatra Provinces, as in the case of (e) planning is at an early stage, the Way Seputih project (see below) comprises part of this program. - 63 -

14. Smaller on-going projects include the construction of main and secondary canals to divert water from the Seputih River in the Lampung Pro- vince of South Sumatra for the irrigation of 10,000 ha of new land in a transmigration area. Work on this project is virtually stopped due to the lack of serviceable construction equipment although the main canal (total length 17 km) is 70 per cent complete. It is planned that subsequently the main canal would be extended to provide water for a total of 35,000 ha. Work on the Senpor Dam in Central Java, which would improve the irrigation of an area of 16,000 ha, is being held up for the same reasons.

15. DWR is also concerned with the reconstruction of irrigation schemes where lack of maintenance has resulted in the collapse of the system. The East Samarang system in Central Java is one of these. In this case an area of 20,000 ha which previously could produce one crop of rice each year is rapidly becoming barren due to flooding. The problem here is the silting of the irrigation canals and drainage system. While farmers are prepared to provide labor work is short due to a complete lack of draglines and other earth moving equipment.

Irrigation Frcblecms 16. The mission was impressed by the efforts being made by DWR under difficult conditions. It was concerned, however, that DWR was being forced to tackle a massive problem on an ad hoc basis. No review has been made of the irrigation situation in order to allot priorities to maintenance, reha- bilitation, soil erosion, dredging and new construction. In the mission's view such a review is essential if the best use is to be made of limited re- sources. Additionally, while the extent of the problem is recognized no estimate has been made of the costs involved, either in terms of finance or personnel. The need to produce a long term plan for the irrigation sector is acute, and it is doubtful whether DWR can conduct this on its own account, concerned as it is with day to day operations. The Government would be ad- vised under these circumstances to obtain the services of a qualified con- sulting firm for the purpose of producing an outline plan for Java, where the problems are most critical. A priority objective of this review should be a plan for the establishment of a satisfactory operations and maintenance organization together with estimates of the capital and recurrent costs in- volved. In the absence of the latter Government cannot be made aware of the financial allocations which it must make to maintain effective irrigation.

17. In its present operations DWR is experiencing problems with the maintenance of heavy mechanical equipment. This stems from a shortage of finance for spare parts and inadequate servicing facilities. This is an area which requires close attention, and probably technical assistance is required. Table 1

IRRIGATED AREA BY PROVINCE

(heetares)

Province - - Irrigated Area - - Total Irrigated Area Rain Fed Total Area lechnical aPltechnical Uncontrolled RTce da Irri-ation Irriggtion

1 2 3 5 6 7 153,003,Y 86,951 239,954 i e h - 35,219 117,784 201,2221/ 174,771 375,993 2. North Sumatra 26,589 91,669 82,964 28,705 192,982 3. West Sumatra 14,710 17,953 131,614 164,2771/

5,892j/ 53,463 59,355 . ; a u - 5,892 - 1,088 34,616 5. Di a m b 1 300 17,030 16,198 35,5281/ 148,280 6. South Sumatra 38,289 25,161 53,514 116,9641/ 31,316 33,419V 8,992 42,411 7. L ampun g 21,689 1,912 9,818 8. DC. Djakarta Raya 5,313 - - 5,3131/ - 5,313 341,413 1,096,191 9. Central Java 384,977 147,508 222,293 7 54, 7 7 82 315,720 1,211,690 10. East Java 571,210 123,782 200,987 895, 979y 1,525/ 289,275 1,310,800 11. West Java 496,567 202,241 322,71, 1,02 11,212 181,664 12. D.I. JogJakarta 7,127 35,702 127,623 170,4521 203,585 13. West Kalimantan 84,400 - . 84,4001/ U9,185 176,825 176,825 1h. South Kalimantan - - - 26,130 26,130 15. East Kalimantan - no data ._- N/A 47,908 16. Central Kalimantan - 47,908 17,90W 59,990 17. North Sulawesi h,917 45,227 - 50,14,1,1 9,846 - no data 18. Central Sulawesi no data no data------no data- 132,794 480,100 19, South Sulavesi 225,379 13,538 78,389 347,306/ no data 20. South East Sulawesi no data no data - no data

98q1f1O.a 68023 - 98,680a/ - 98,68o 21. B a 1 i 21. 8 a 1 i -- .68ubak 55,123) 91-98011 7,660 99,60 22. West Nusa Tenggara 54,160 10,370 27,450 8,191 32,980 23. East Nusa Tenggara - 23,979 510 24,489 - N/A 21. Maluk - - - - N/A 25. West Irian - - - -

Grand Total 1,935,627 925,866 1,439,766 4,301,259 1,823,837 6,125,096

1/ 1962 data 2/ 1965 data 3/ 1966 data

SOURCE: Directorate General of Water Resources Developnent. TABLE 2

LIST OF MAJOR RESERVOIRS IN INDONESIA

IN OPERATION, UNDER CONSTRUCTION AND PLANNED Outer Islands

Name Location Storage Irrigable Completed 3 Status Purpose million m Area, ha Year

1. Takisung II S. Kalimantan 0.755 400 - Under construction Irrigation

2. Bati-Bati S. Kalimantan n a 20,000 -" "

3. Sambodja E. Kalimantan 5.017 2,000 -" "

4. Mentiwan E. Kalimantan 56.908 800 -" "

5. Djepara S. Sumatra 77.292 7,000 - Planned 6. Takisung I S. Kalimantan 0.900 400 -

7. Kelara S. Celebes 120.000 6,000 -" East Java

8. Patjal - 41.500 16,000 1966

9. Pridjetan - 8.000 2,000 1917 -"

10. Dawuhan - 5.400 3,000 1962 -

11. Netepure - 2.060 2,700 1941 -

12. Saradan - 1.631 1,300 1942 -

13. Dungbende - 2.400 2,500 1956 -

14. Telaga Pasir - 2.630 n/a 1893 -

15. Karangkates - 340,000 23,000 - Under construction Irrigation, Flood Control, Power

16. Seloredjo - 62.300 1,500 -

17. Telaga Ngabel - 40.000 16,200 - Planned Irrigation

TABLE 2 (cont)

Name Location Storage Irrigable Completed Status Purpose million m Area, ha Year

18. Gendang - 60.000 9,000 - Planned Irrigation 19. Sekaran - 2.000 2,700 -"

20. Djabung - n a 2,400 - " 21. Bl. Ganegane - n a 2,600 -n

22. Sondir 1.200 na

23. Wlingi - 24.000 n a

Central Java

24. Tjatjaban - 90.000 41,300 1959

25. Malahuju - 60.000 14,300 1940 .n

26. Pendjalin - 9.500 30,300 193.4 27. Rawapening - 34.500 40,000 1939 - Irrigation, power 28. Gembong - 9.620 7,500 1933 - Irrigation 29. Gunung Rowo - 5.000 2,800 1926 . n

30. Nglangen - 1.104 800 1915 - I 31. Tempuran - 2.143 1,000 1916 - n

32. Tjengklik - 11.100 3,800 1931 - i

33. DJember - 4.154 2,300 1943 - 34. Pumben - 1,200 1,400 1928 -

35. Mulur - 5.000 4,500 1921 .

36. Delingan - 4.000 3,000 1923 - TABLE 2 (cont)

Name Location Storage 3 Irrigable Completed Status Purpose million m Area, ha Year

37. Gebjar 0.701 4,20 0 1956 Irrigation

38. Betek 0.513 5,200 1943 -

39. Krisak 3,000 1,400 n,a. It

40. Sempor - 66.000 18,700 Under construction

41. Ketre - 2.661 3,600 -"

2 4 . Klege - 1.400 1,700 - Construction ? h3. Lalung - 5.000 3,400 - Planned

4h. Kaleren - 30.000 n.a. - Irrigation, power 45. Setre n,a. n.a. - "

46. Djragung - 63.000 12,700 Irrigation

47. Penahan - n,a. 2,500 -" West Java

8 6 . Djatiluhur - 3,000.000 240,000 1967 Irrigation, Power, Flood Control

49. Darma - 40.000 15,800 1960 - Irrigation

50. Situpatek - 12.000 2,200 1926 - "

51. Tjipanundjang - 22.000 - 1930 - Power

52. Tjiieuntja - 11.000 - 1924 - "

53. Tjipantjuh - 6.000 6,600 Planned Irrigation TABLE 2 (cont)

Name Location Storage Irrigable Completed Status Purpose million Area, ha Year

54. Tjipanas - 54.000 7,100 Planned Irrigation, power

55. Sekarawanji - 485.000 ( (92,000 56. Paseh - 10.000 (9- Irrigation, Power Flood control

57. Tarum - 1,500.000 n.a,

58. Telaga - naa. 10,000 -

Source: Ministry of Public Works*

Note: Irrigable areas are not necessarily provided with all season water.

I3 APPENDIX 2

PROSPECTS FOR CASE CROPS - SMALLHOLDER AND ESTATE

(A) RUBEER

General

1. Rubber was introduced to Indonesia in 1882, and with government assistance its cultivation on European owned and managed estates expanded rapidly. As the number of European estates increased, smallholder cultivation of the crop also began to assume increasing importance. In the early 1920's smallholder production accounted for one-third of annual output, and in 1950 and 1951 three-quarters. In 1966 the smallholders' contribution to production was about two-thirds.

2. While rubber accounted for 55 percent of Indonesia's agricultural exports in 1966, export earnings from rubber have been declining. They amoun- ted to US$377 million equivalent in 1960 and US$223 million equivalent in 1966 (see Table 1). The prime reason for this decline has been the steady fall in natural rubber prices which currently are at their lowest level since 1940. The volume of exports since 1960 has shown a steady improvement, but this has been more than offset by declining prices. There is no question that Indonesia has had the resources to increase production to levels which would have resulted in a net gain in export earnings. As is described below, however, it has been un- able to mobilize them, and the rubber industry, both estate and smallholder sectors, is in a very difficult situation. Table 1

Rubber Exports and Value of Exports

Estate Smallholder Total Produced Produced Exports

Volume Value Volume Value Volume Value '000 m 'OOUS$ '000 m '000US$ '000 m '00OUS$ tons tons tons 1960 189.9 134,019 387.8 243,196 577.7 377,215 1961 237.0 122,470 443.8 189,o14 680.8 311,484 1962 209.7 101,592 482.3 196,903 692.0 298,495 1963 203.3 94,073 379.2 150,866 582.5 244,939 1964 240.8 97.620 418.3 137,196 659.1 235,816 1965 208.2 87,598 486.5 135,432 694.7 223,030 1966 238.0 90,763 441.4 132,386 679.4 223,149

Note: Approximately 50,000 tons annually apparently are retained in Indonesia, this is the average difference between estimated production and recorded exports. Part of this difference would be illegally exported. It is generally believed that illegal exports total about 30,000 tons annually. 1/ Legal exports only, it is generally believed that some 30,000 tons of rubber are illegally exported annually. Source: The Authorities. - 69 -

3. Estate Rubber Production: Details of the number of estates, their area and location are given in Table 2.

4. Private Indonesian Estates: The 1962 estate census indicates that these could comprise close to 180,000 ha. But by deducting from official figures of total estate rubber production the recorded production from estates in the other three categories one arrives at a production of some 4o,000 tons of DRC1/from private estates in 1966, equivalent to an average production of about 220 kg per ha. This low average yield indicates that only a small proportion of private Indonesian estates can be economic enterprises and that future production from this source is unlikely to rise.

5. Government-Owned Estates: These estates are managed by BPU Karet (BPU.K) and comprise 16 estate groups (PPN) made up of 145 individual estates. At the end of 1966 a total of 209,627 ha. were planted to rubber, of which 148,345 ha. were mature, 144,426 ha. in tapping and 61,281 ha. immature. Over the last four years the planted area has increased by some 12,000 ha., but due to replanting programs the area of mature rubber has decreased by about 5,000 ha. In 1966 the average yield of DRC per mature ha. for all BPU.K estates was 688kg.Yields have shown an improvement since 1963, developing as follows: 569 kg, 653 kg and 688 kg. I)ue to the decline in the mature area total production has shown only a slight improvement over the last three years, increasing from 101,442 tons in 1964 to 102,068 tons in 1966.

1/ Dry rubber content. - 70 -

Table 2

Rubber

Number, Area and Location of Rubber Estates, 1965

Total Region Number Planted Area ha.

1. West Java 289 124,008 2. Mid Java 48 28,458 3. East Java 99 41,464

Total Java 396 193,930

4. Atjeh 39 29,204 5. N. Sumatra 180 236,938 6. W. Sumatra 4 980 7. Riau 10 6,249 8. Djambi 2 759 9. S. Sumatra 9 6,833 10. Lampung 15 20,253

Total Sumatra 259 301,216

11. W. Kalimantan 3 695 12. S. Kalimantan 8 7,742

Total Kalimantan 11 8,437

13. S. Celebes 3 720 14. S.E. Celebes 1 117

Total Celebes 4 837

15. Bali 1 204

Total Indonesia 671 504,624 1

1/ Planted area of government and government-managed estates was 351,826 ha.

Source: Indonesian Rubber Statistics, BPU Karet 1966. - 71 -

6. The average yield is very low by modern estate standards, and under a similar physical environment in Malaysia yields 100 percent greater would be normal on well managed estates planted with good material. On the BPU.K estates the low yields do not stem from poor plantation management which is of a generally acceptable standard, or from poor planting material but from the unbalanced age structure of PPN plantings. At the end of 1966 this was as follows:

Age Structure of BPU Karet Rubber Plantings

Percent.Aof Percent planted area of mature trees 1/

Trees over 31 years old 32 45 26 to 30 years 15 20 21 to 26 years 2 3 11 to 20 years 11 15 6 to 10 years 12 13 Immature trees 28 -

All trees 100 96

I/ Figures do not total 100 percent due to disparities in basic figures.

Source: BPU Karet

7. The table shows that of mature trees, 65 percent have passed the age at which their yields can be expected to be economic, and that 28 percent of all trem. are non-productive due to their young age. While the percentage of immaare trees is satisfactory, that of trees of over 25 years is highly excessive. Were there no trees of over 25 years of age it is probable that the average yield would be double. The reason for the high proportion of over-age trees is that Indonesia did not start estate rubber replanting pro- grams of any intensity until 1963. During the second world war and the troubled times immediately following there was no replanting, and by the mid 1950'S9when replanting did get under way a large backlog had developed Under ideal conditions four to five percent of trees on a rubber estate would be replanted each year. But from 1954 to 1957 the replanting rate on BFU.K estates (then Dutch-owned) averaged 3.4 percent, and in the period 1958 to 1962 the rate fell to 2.5 percent. Thus despite replanting, the backlog of over-age trees increased in the period 1954 through 1962. In 1963 a crash program of replanting was introduced and since that time replanting has averaged 5.6 percent culminating in 6.6 percent in 1966, and continuing at a rather lesser rate into 1967.

8. Were it possible to foresee that replanting could continue at a rate of about seven percent annually the long-term future of the 'government- owned rubber estates could be considered as reasonably good. Due to the - 72 -

recent decline in rubber prices, however, it is now difficult to envisage that this rate can be maintained. Since the PPN have no source of long-term investment capital the bulk of the replanting program must be financed from annual operating surpluses. Depressed rubber prices combined with steadily rising labor costs (due mainly to increasing rice prices) have resulted in dwindling operating surpluses, and while detailed financial data were not available to the mission it appears that many estates will have to cut back their replanting targets for at least 1968. In short, replanting was started too late and the critical stage of the crash program has coincided with low world prices for rubber.

9. For these reasons it is unlikely that in the absence of an in- tensive exploitation program (see para. 15) significant increases in pro- duction will occur before 1970. After that time the results of the five years of heavy replanting in the period 1963 through 1967 will begin to be felt, and by 1972 BPU.K production possibly will have increased to 120,000 tons or by about 18 percent over 1966. This estimate is based, however, on the assumption that earning and cost ratios will not deteriorate to an ex- tent where it is necessary to abandon any significant area of PPN rubber.

10. Foreign-Owned, but Government-Managed Estates: These estates com- prise British-owned estates managed by BPU Dwikora (BPU.D); the estates of a Belgian company operated as PPN, Expera II; and various other foreign-owned estates grouped together as PPN Expera I. BPU.D managed 90,7 40 ha. of rubber at the end of 1966 of which 71,064 ha. were in production and 19,676 ha. immature. In the same year production totalled 40,711 tons with an average yield of DRC per ha. of 573 kg. This low yield, which has increased slightly from 532 kg in 1963, also stems from an unsatisfactory age structure of trees. In 1966 trees of over 23 years of age made up 80 percent of the productive area and immature trees 22 percent of the total planted area. A major pro- gram of replanting on BPU.D estates commenced only in 1967 and the BPU ex- pects total production to decline by some 2,500 tons by 1969 and only then pick up again due to some new plantings coming into production. By 1972 it is estimated that total production will run at 43,000 tons, a net increase of some 2,300 tons (5.3 percent) over 1966. The future management of these estates is yet to be determined, and new management policies could tend to- wards replanting with another crop, for example oil palms. It is difficult however to see any policy other than slaughter tapping that could result in any major increase in rubber,production over that forecast above.

11. The rubber areas of the two Expera estate groups are less ex- tensive. The larger, Expera II, manages about 12,000 ha. which produced 4,718 tons in 1966. The production of this group is expected to decline until 1970 due to the replanting of some of the rubber acreage with oil palms. and 1966 levels of rubber production are not expected to be regained until 1973.

12. American-Owned and Managed Estates: Two American estate companies had their plantations taken over in 1965, but the return of these was nego- tiated in 1967 and they are again under American management. In the return an exchange of estates between one company and BPU Karet was also concluded. Figures given below do not take account of this exchange, of which the missic. did not have details. - 73 -

13. In 1966 rubber production from the estates totalled 18,593 tons from a mature area of 26,312 ha, and the average yield. was 707 kg. per ha. Immature plantings totalled 18 percent of the planted average, and trees over 31 years old 52 percent of the mature area. It would appear that any significant increase in production from these estates in the next few years could come only from a policy of employing intensive exploitation methods.

14. The Overall Estate Rubber Position: Due to inflation, changes in fiscal export regulations, the payment of wages and salaries in kind, the honoraria paid in kind to local authorities,etc., the practice of writing down capital assets to a minimum value, and the lack of adequate allocations to replanting and depreciation, it was impossible for the mission to establish production costs for rubber. In practice most government-owned and managed estates if not all, operate on a simple hand-to-mouth financial system, which involves no long-term financial planning. Current surpluses are used to finance the purchase of capital replacements and replanting. Deficits as they occur are covered by loans that may be available from the Bank of Indonesia. Thus some estate groups caught by the decline in rubber prices have found themselves financing replanting with credits bearing interest at more than and been forced 5 percent per month. So far only one estate group has failed to abandon operations, but in that case yields were particularly low, averaging 505 kg. in 1965 and 414 kg. in 1966. Nonetheless there is a general opinion in the planting community that the break-even point at present rubber prices and export arrangements is about 800 kg. per ha. and that this will allow some replanting. If this is the case, 98,000 ha. of the BPU.K rubber can be barely self-sustaining.This is true also on average, of all BPU.D and Expera rubber plantings.

15. The general problems of estate management are discussed above, and apoly to the rubber estates equally as to those of other crops. The specific problems of the rubber estates, however, are rather different. The basic problem is that the estates cannot generate a sufficiently large surplus to finance a replanting program that within an acceptable period of time can bring them to financially satisfactory yield levels. The resources in short supply are being spread over all government-owned and most gpvernment-managed estates. It is clear that it would be more economic to concentrate whatever resources are available on those estates with the highest potential for early develop- ment to a viable condition where they could operate economically under expected continuing low world rubber prices. This action would require a comparative analysis to be made of all rubber estates to determine on which of them investment would be most justified. Four categories of estates might be established as a result of such analyses, (a) estates deserving intensive investment in replanting, fertilizing and possibly new planting and new pro- cessing facilities, (b) estates where a less intensive investment program would be pursued in the short run, but where investment would be intensified following completion of program (a), (c) estates where further investment in rubber should be discontinued in favor of intensified exploitation of existing plantings, in fact slaughter tapping, which would be followed by conversion to a more profitable crop (oil palms would certainly be suitable in many cases) and (d), estates where a program of intensive exploitation would be followed by abandonment of the estate and the use of the area for one or another forms - 74 -

of non-estate production, possibly the smallholder production of food crops. An evaluation of this type would allow the Government to produce a much needed long-term development and financial plan for its rubber estates, and allow an accurate assessment of the investment required to implement such a plan.

16. Smallholder Rubber Production: In 1966 exports of smallholders' rubber were recorded officially at 441,4351/tons with a value of US$132 million and production at 528,000 tons. The exports in terms of value comprised 32 percent of Indonesia's agricultural exports in 1966. Taking into account the extreme importance of smallholders' rubber to the economy it is highly un- satisfactory that at present, and indeed for the past several years, govern- ment assistance to this sector has been negligible. The Minister of Estates is responsible for rubber smallholders, but what plans or programs to assist them are ineffective due to financial restraints.

17. The following table is the official estimate of the area and dis- tribution of smallholder rubber. It probably underestimates the extent of plantings since it takes no account of plantings in the period 1942 to 1954, in the latter part of which they would have been heavy due to the stimulus of high prices in the early 1950's. While these will have been balanced to some extent by the abandonment of appreciable plantings made before war, the cal- culable average yield per ha. of 351 kg. for smallholders in 1966 is high for a system of husbandry where all smallholders' trees are not tapped each year. Estimate of Area of Smallholders' Rubber (hectare)

Region Registeredl! New Planting and Replanting!/ Total 1941-1942 195 -1960 1961-1965 1. Atjeh 12,070 3,088 8,926 24,084 2. N. Sumatra 175,107 22,540 10,417 208,064 3. W. Sumatra 41,018 7,417 2,064 50,499 4. Riau 181,460 11,538 5,987 198,985 5. Djambi 188,578 5,432 4,203 198,213 6. S. Sumatra 370,872 53,616 16,870 441,358 Total Sumatra 969,105 103,631 48,467 1,121,203

7. W. Kalimantan 166,894 5,84o 7,016 179,750 8. Mid. Kalimantan 23,726 9,132 2,555 35,413 9. S. Kalimantan 123,400 7,934 5,606 136,940 10. E. Kalimantan 3,349 1,521 1,727 6,597 Total Kalimantan 3173 ;9 24,427 16,904 358,700

11. W. Java 15,048 720 6,484 22,252 12. Mid. Java _4,500 4,52 Total Java 15,048 720 198 26,75

Total Indonesia 1,301,522 128,778 78,355 1,506,655

at that time. 1I Recorded in the register of smallholders maintained 2/ Recorded as estimated by the Perennial Crops Fund. Source: The Perennial Crops Fund.

I/ Smuggled rubber is currently estimated at 30,000 tons annually. The bull- cf this would originate on smallholdings or private estates. - 75 -

The table shows that even if an allowance is made for the planting of 200,000 ha. in the period 1943 to 1953, as much as 70 percent of smallholders' rubber may be more than 35 years old.

18. This highly unsatisfactory age structure makes it unlikely that any significant and sustained increase in smallholder production over that of 1966 will come within the next decade. This is particularly so since the increase in smallholder production since 1960 probably has been due to the plantings stimulated by the rubber boom in the late 1940s and 1950'sdeveloping to their peak production. Even if an appreciably higher rate of replanting (less than one percent annually since 1961) could be introduced as from 1968 it would be seven years before the benefits are felt and against these would be set the losses in production from the over-age trees which would be abandoned in this period.

19. Other factors also cloud the issue, and in particular those con- cerning the profitability of smallholder rubber production vis-a-vis other agricultural activities. In the past it has been generally accepted that the smallholder rubber grower is responsive to prices and when prices are high attempts to obtain maximum possible production by intensified tapping, and by tapping the maximum number of trees. If possible he also conducts new planting. Conversely, when prices are low it is believed that the smallholder turns his efforts to other activities, generally food production to supply his family and if possible to generate an alternative cash income. Since 1960, rubber prices declined slowly but steadily to mid 1967. In this period smallholder production showed an upward trend with no violent fluctuations. Between December 1966 and December 1967, however, world rubber prices fell by 18 percent roughly the same as t1de overall decline in the six years 1961 to 1966. If as is believed smallholders are responsive to prices, this fall if carried entirely by the smallholder would be sufficiently large to cause a significant decline in smallholder rubber production in favor of increased food production. The probability of this is high at the present time due to the rising trend in food prices.

20. The fall in world rubber prices has been compensated in part by recent improvements in the effective export exchange rate. Despite this, however, it is probable that smallholder rubber production will decline due to inadequate price incentives since it is unlikely that smallholders will receive more than a part of the 15 percent increase (see para. 21). Possibly this decline will be to the lower level of the range of production of the past seven years, between 400,000 and 450,000 tons.

21. Problems of the Smallholder Rubber Industry: While due to lack of resources the Government can do little to assist rubber smallholders immediately, it is possible for it to begin to analyse the major problems which confront smallholders. Following this it would be possible to establish the lines of action which will need to be followed when the general economic situation improves. An important consideration is replanting; in the mission's opinion, however, a successful replanting program would be im- possible unless other constraints on production were first removed. These constraints relate, in particular, to prices. Few smallholders produce a - 76 - product ready for export. In Sumatra the smallholders generally produce slabs, latex which has been coagulated with chemicals into a slab, with a dry rubber content of 40 to 50 percent. Slab is purchased by middlemen either acting as agents of remillers, or who sell to remillers. Remilling converts slab and other smallholder rubber types, lump and scrap etc., to crepe rubber of export grade. Remillers may export directly or through an export agent. Due to this system there is a considerable price differential between the amount received by the smallholder and that obtained by the exporter. Where the smallholder produces unsmoked sheet (100 percent dry rubber) the differential is roughly the same, and where his product is the lower quality lump and scrap it is rather more. In recent months, and due in particular to the recent fall in world prices for rubber, this price differential has been of concern to the authorities and a number of broad-brush surveys have been made to ascertain what proportion of fob rubber prices the smallholder receives. The following table summarizes the findings of some of these.

Percentage of FOB Value of Rubber

Exports Accruing to Government-/and Participants in the Rubber Industry South South Sumatra Kalimantan

Government 39.2 Government 32.9 Remiller and Exporter 2-.3 Exporter 32.1 Middlemen 16.7 Grading and Sorting 4.4 Smoke House 10.8 Smallholder 19.7 Smallholder 19.8

Total 100 100

1/ Central and Provincial Governments.

Source: Ministry of Estates.

22. Since these surveys,the Export Bonus rate has been increased to 75 percent which should have had the effect of increasing the value of rubber to participants in the trade by some 15 percent. If the smallholder receives all of this increase his share of the fob value would increase to some 35 percent. The possible 35 percent is itself incredibly low and compares with the 85 percent of fob value that the Malaysian smallholder receives. The mission doubted that the rate could be so low but was provided with data on actual prices paid in S. Sumatra. These were for the period subsequent to the Bonus Export increase and indicated a smallholder share of fob value of about 27 percent.

23. With the likelihood of continuing depressed world rubber prices, solving the problem of the low proportion of the fob price received by small- holders is the prerequisite of any effort to introduce a viable replanting - 77 -

scheme. The problem cannot be tackled initially on an extensive scale since part of the solution must be to shorten the chain between smallholder and ex- porter, and could involve the massive task of reorganizing a well established trade. Further, any successful program would involve the improvement of in- frastrucutre and, while interim solutions may exist, the provision ultimately of modemprocessing facilities close enough to producers to allow the pro- cessing of smallholder latex into a high quality export product. Required in- vestment in such programs is thus likely to be heavy.

Production and Export Prospects

24. The following forecast is based on the only assumption that can be made by the mission, i.e. that probably the next five years will largely be spent by the Government in formulating plans for the rubber industry and causing their initial implementation.

Projected Rubber Exports ('000 tons) 1968 1969 1970 1971 1972 ------mission estimates------

Estates 240,000 245,000 250,000 255,000 260,000 Smallholders 470,000 460,000 450,000 440,000 430,000

Total 710,000 705,000 700,000 695,000 690,000

(B) PALM OIL AND PALM KERNELS

General

25. The first plantings anywhere of oil palms as a cultivated crop were made in Indonesia in 1914. These were made mainly in N. Sumatra under pro- bably the best growing conditions for the crop in the world, and plantings and production.rapidly expanded. By 1938 Indonesia was :producing 24 percent of total world palm oill/ output and 40 percent of the.palm-oil entering world trade. In 1966, exports of palm oil, which approximate to total Indonesian production, were 162,212 tons compared with 227,000 tons in 1938. In 1965 Indonesia's supply to the world market was about 25 percent of the total. The value of 1966 exports of palm oil and palm kernels totaled US$37.2 million equivalent. Table 1 gives details of palm oil and kernel production and ex- ports since 1960.

1/ Palm oil and p.Jm kernels are the produce of the oil palm. Palm oil is the major product in a ratio of about 4:1 to kernels. In this annex reference is made specifically to palm oil alone, and the proportional production of palm kernels assumed. - 78 - Production

26. Since the oil palm is not indigenous to Indonesia and no efforts have been made to encourage smaltholder cultivation, all production of palm oil and kernels is on estates which were originally developed by foreign companies. Today all oil palm plantings are under government management. In 1966 BPU Aneka Tanaman (BPU.AT) managed 55,386 ha. in production and 10,001 ha. of" immature palms which produced 114,000 tons of palm oil. BFU Dwikora (BPU.D) managed 4,785 ha. of mature and 1,156 ha. of immature palms and produced 9,000 tons of oil in the same year. PPN Expera plantings total some 20,000 ha. which in 1966 produced 38,000 tons. While the planted area of most estate crops has declined since 1938 those of oil palms have slightly increased from a recorded 74,500 ha. in 1938 to some 91,200 ha. in 1966. A decline in per ha. yields, however, has more than offset the increase in planted area. While palm oil yields averaged 3.04 tons per ha. in 1938. This is not high by modern stan- dards (yields of 5.0 tons with modern planting material are obtained in Malaysia) but the average of BPU.AT plantings in 1966 was only 2.1 tons per ha.: and that of BPU.D plantings, 1.8 tons. Low yields result from a combination of aging trees and poor fertilizer practice. As in the case of rubber the PPN are finding it difficult to catch up with the backlog of necessary replanting, and BPU.AT achieved a rate of only four percent in 1966. It is certain that higher yields could be obtained even in the short run by the immediate and better use of fertilizer. In 1966, for example, 3FU.AT was able to obtain no more than 27 percent of the estimated fertilizer requirements of all its estates (oil palms and other crops), and the shortfall in supplies was par- ticularly large in the case of potassium fertilizers. Potassium is the nutri- ment in which Indonesian oil palms are probably most deficient. Also, there are no foliar analysis facilities in Indonesia which makes the provision of sound fertilizer recommendations difficult. Additionally there is conflict between the fertilizer recommendations made by BFU.AT's own research unit and those of the Research Institute of the Sumatra Planters Association (RISPA) .1 It is probable that if a foliar analysis service were introduced, and the PPN was able to obtain the fertilizers required to implement the service's re- commendations, palm oil yields overall could be increased by at least 40 percent

Table 1

Exports of Palm Oil and Palm Kernels (volume '000m tons, value US$ '000)

Year Palm Oil Palm Kernels Total Volume Value Volume Value Volume Value

1938 227.0 N/A N/A N/A N/A N/A 1960 109.0 19,970 33.8 4,300 142.8 24,270 1961 117.8 21,390 33.0 3,302 150.8 24,692 1962 100.4 17,853 31.3 3,131 131.7 20,984 1963 109.8 19,950 31.3 3,627 141.1 23,577 1964 133.2 26,919 33.0 3,878 166.2 30,797 1965 125.9 27,303 28.9 3,658 154.8 30,961 1966 162.2 30,322 46.4 6,871 208.6 37,193

Note: Data supplied by authorities.

17Virtually all oil palms seen by the mission exhibited mineral defic4erx symptoms. - 79 -

27. The lack of adequate fertilizer guidelines and actual programs for oil palms illustrates the degree of deficiencies in estate crop research and the more technical aspects of estate management, as well as in the arrangements for the procurement of estate inputs. A further indicator of poor technical management is the slow introduction of polybag seedlings for new and re- plantings. This latter technique has obvious technical advantages which have been proven in every other oil palm planting country. Yet estate managers appear unable to evaluate the advantages, and are loath to introduce a tech- nique with which they are not familiar. A degree of conservatism has merits but if policy decisions of this character are beyond most BPJ directors and estate managers, the public estate sector is unlikely to become competitive with other producers.

Production and Export Prospects

28. Since even with current low yields the oil palm estates generate cash surpluses, there is an awareness in Indonesia that new plantings should be increased more rapidly than has been the case. BPU.AT has a program for planting some 25,000 ha. in the period 1967 through 1972, and PPN Expera has already em arked on a program of converting low yielding rubber plantings to oil palm. While the latter will probably be able to implement its programs, it is doubtful if the former can obtain the capital required to execute its much more extensive schedule which would cost at least US$30 million equivalent. Even were the BPU.AT program possible financially few benefits would develop from it in the next five years due to a gestation period for oil palms of 4 to 5 years. For these reasons any possible significant increase in Indonesia's palm produce exports in the period 1968 to 1972 can stem only from the efficient use of fertilizer, in particular on the BPU.AT estates. The bene- fits from such a program which could be started in 1968 (and which for all estates would require some 55,000 tons of fertilizers annually) would develop in 1970, and. combined with a net increase in production from new replantings made i recent years with high yield planting material could result in ex- port 0approximating the following pattern:

1968 1969 1970 1971 1972 ------('OO C ) ------

Palm oil (tons) 160 172 183 195 222

Palm kernels (tons) 38 41 44 47 53

29. While the possibilities of significant increases in exports of palm produce are limited in the short run, and will tend to be balanced by the ex- pected decline in world fats and oil prices, oil palms are a crop in which the Government would be justified in making appreciable investments. Possesing,

1/ BPU.AT and BPU.D have similar programs.

2/ Virtually, all palm oil and kernels are exported. Local vegetable oil consuming industries utilize coconut oil. - 80 - in N. Sumatra, ideal conditions for cultivation of the crop, no shortage of land for new plantings, including much land now in rubber which could be re- planted with oil palms, and established port storage and shipment facilities, Indonesia could have an oil palm industry second to none in terms of the efficiency of production. Further, since the crop can be grown by small- holders, provided that.central processing facilities are established and adequate management and supervisory personnel provided, a blend of estate and smallholder development would be possible. In this way oil palms could be used as a first step in the establishment of smallholdings as economically viable agricultural units employing modern techniques. Experience gained with this crop, which is comparatively easy to grow and provides good returns, would be of immeasurable value in preparing programs designed to introduce small-scale commercial agriculture into other areas and with other crops.

(C) COFFEE

General

30. In terms of value, coffee ranks after rubber and oil palm produce as Indonesia's third most important agricultural export. In 1966 coffee pro- duction was estimated by the authorities as 116,000 tons, of which 75,000 tons were exported. Both the area planted to coffee, production and exports have increased during the past decade (see Table 1). The greater part of both in- creases have occurred in the smailholder sector, which accounts for some 90 percent of both area and production.

31. As a member of the International Coffee Organization (ICO), Indones>; is subject to an export quota. In the coffee year 1965-1966 this was 1,109,0-< bags of 60 kg., equivalent to 66,545 tons. Since imposition of quotas, how- ever, they have been consistently exceeded and in 1965-66 exports totaled 112,413 tons. More than 90 percent of production is Robusta coffee, the remainder being Arabica which is produced mainly in Java and Bali.

Production

32. Smallholders: Present smallholder coffee plantings total an estimated 310,000 ha., and have increased by an estimated 55,000 ha. in the period 1962 through 1965. Production in 1966 was estimated at 97,000 tons. The crop is cultivated largely in the Outer Islands, primarily South Sumatra, Bali, Lambok and Celebes. Coffee rarely forms the sole source of income of the farmer, and frequently is grown interplanted with other crops. Smallholder yields average between 300 and 350 kg. per ha., although an imputed 377 kg. per ha. was obtained in 1966. This yield range is similar to that ob- taining elsewhere in the world under smallholder cultivation. Generally small- holders use no fertilizers, but new plantings in recent years have been made with material selected from high yielding trees.

33. Coffee is one of the few smallholder export crops where producer prices have significantly improved over the last five years. Prices have more than doubled since 1961 and this has been responsible for the steady increase in smallholder plantings. - 81 -

Table 1

Coffee

Planted Area, Production and Exports (Areas '000 ha. Volumes '000m tons. Values US$'000)

Estates Smallholders Exports Year Area Production Area Production Volume VaLue

1960 44.3 18.3 225.8 g.6 42,225 13,700 1961 41.3 18.6 24o.3 .5 67,007 13,800 1962 38.9 12.3 242.5 99.1 58,448 12,500 1963 37.5 18.4 26o.o 102.0 80,844 19,800 1964 36.0 7.4 278.0 60.0 62,362 26,600 1965 35.8 14.1 297.4 91.5 108,162 31,600 L966 35.5 10.2 310.0 116.9 97,531 32,650

Source: Central Bureau of Statistics.

34. Estates: Both estate planted area, production and yields per ha. have fallen over the past 25 years. In 1966 estate plantings totaled 35,500 ha. compared with an average in 1935-1939 of 54,333 ha. Most estate pro- duction is in East Java where BPU.AT managet 16,344 ha. of government-owned estates. BPJ.D managed 3,483 ha. mainly in Sumatra. The remaining estate area is under private ownership. Overall estate yields are low and in 1966 averaged an estimated 287 kg. per ha; this was lower than the range of estate yields in the last decade which was 300 to 400 kg. BPU.D estates averaged 688 kg. per ha. in 1966, but BPU.AT per ha. yields were very low, averaging 273 kg. for Arabica and 375 kg. for Robusta coffees. In 1966 estate production totaled about 19,000 tons.

Marketing aid Exports

35. Smallholders sell to private primary buyers at free market prices, and it is estimated that when the Export Bonus rate was 50 percent they re- ceived 60 to 70 percent of the fob rupiah price. This percentage is appre- ciably higher than is the case of the other two major smallblmder export crops, rubberand copra, and should have increased as a result of the increase in the Export Bonus rate to 75 percent. Primary buyers sell either directly, or through an intermediary to exporters, who may be private local firms, foreign- based firms or government agencies. BPU estate coffee is exported through the latter, and private estate coffee through the two former.

36. Not all coffee is exported since there is a considerable local demand. Currently, internal coffee requirements range between 18,000 and 24,000 tons annually, but in the past have reached 30,000 tons. - 82 -

37. Export quotas for each of the 21 exporting centers are allocated by the Department of Trade on a quantity basis, and these are revised when quota cuts or increases occur during the coffee year. In the past,quotas have been disregarded, at least in part, by some provincial authorities and this is the main reason for national quotas being exceeded.

Production and Export Prospects

38. Even without government assistance it can be expected that small- holder production will increase. It is also possible for estates to increase production from their current areas, in particular BFU.AT. Surpluses availa'l' for exports, however, will probably not increase until local demand can be satisfied, which would mean some 30,000 tons being absorbed domestically. Taking into account this factor and the probable continued, and possibly accelerated, growth of smallholder production encouraged by good prices, total production should rise to some 130,000 tons by 1973, of which between 95,000 and 100,000 tons would be available for export. Exports, however, may fall io 1968 due to the severity of the 1967 dry season, and in government projections for that year account is taken of this factor. In view of the above, the mission believes that exports may approximate the following pattern:

1968 1969 .,.1970 1971 1972

Projected exports('000 m tons) 70.0 80.0 90.0 93.0 95.0

39. Probably the Government should now begin to concern itself about the possibility of coffee developing into a surplus commodity for which exort markets cannot be found. A detailed examination of the extent of smallholder plantings would deserve high priority at the present time.

(D) TEA

General

4o. Before World War II Indonesia was the third largest supplier of tea to the world market, and the crop was second only to rubber as an agircultural export in terms of value. During the Japanese occupation the industry suffered when appreciable areas of tea were uprooted and the land used for food pro- duction; more than 55 percent of plantings were lost in this way. Post war rehabilitation resulted in production and exports being brought back to about 60 percent and 30 percent respectively in volume during the 1950ts but nationalization of the predominantly Dutch-owned tea estates resulted in a further set-back in production. In 1965 exports totaled some 36,000 tons of black tea, 53 percent of the 1938 volume and 93 percent of 1957 exports, the latter the highest recorded since the war. In 1966 both production add exporl- were slightly lower.

41. Two distinct types of tea are produced; black tea is estate produced but includes some smallholder production processed in estate factories. The large bulk of smallholder production is of dry green leaf which is processed - 83 - directly by the smallholders and consumed on the domestic market. Estate-made black tea is exported, and of total production between-70 and 80 percent is supplied to the world market; this is lower than before the war when approxi- Eately 90 percent was exported.

Smallholder Production

42. Smallholder tea production has averaged 41,000 to 42,000 tons in re- cent years. Production has steadily increased since the war, and can be ex- pected to increase further. Only a small proportion of the crop finds its way into the world market as black tea, the remainder is processed as dried green leaf and is consumed on the domestic market. While the proportion of small- holder tea which is processed to black tea could be increased, much of the crop is grown at altitudes too low for export quality tea. The potentials for or- ganizing smallholder production for export,require investigation, as does the feasibility of producing smallholder-originated black tea for the domestic market where consumption of the latter is less than 10,000 tons annually. Possibly better returns to smallholders could be achieved in these ways. Before the smallholder tea situation is tackled, however, priority must be given to the problems of estate tea production.

Estate Production

43. The problems of the estate tea industry are numerous, but deserve listing in detail since the problems that beset, to a greater or lesser degree, the other estate industries, apply in their most acute form to the estate pro- duction of tea. This is so because tea is a quality product which requires a high degree of skill in its production and processing, and must be marketed efficiently and quickly if optimum prices are to be attained.

44. Specific problems have been :

(a) the loss of 55 percent of the black tea area during and immediately after the war. Fortunately most of this loss occurred in W. Java (where three-quarters of pre-war production was centered; the bulk of the remainder was in N. Sumatra) and was of low-lying estate and smallholder plantings generally on the poorest tea soils,

(b) occurrence of the blister-blight fungus disease in 1952, which reduced yields by 20 percent and took two years to bring under control,

(c) the exodus in 1957 and 1958 of experienced Dutch personnel whose posts could be filled only by inexperienced Indonesians; as a result the estate crop declined by some 17,000 tons and per ha. yields by 30 percent. At the same time quality fell resulting in lower export prices,

(d) galloping inflation in 1962 led to some 20 percent of the labor force leaving the estates which because of low yields and prices could not pay competitive wages, - 84 -

(e) foreign exchange restrictions have prevented adequate fertilizer programs from 1962 until the present time; the rate of application has been generally about 30 percent of optimum and has had serious repercussions on yields,

(f) ineffective marketing. A number of factors have caused this. Amsterdam, the traditional terminal market for Indonesian teas was lost as a result of the 1957 nationalization of Dutch estates. Later, the same happened in the case of the London Auction. The presently used Hamburg and Antwerp markets have not proven entirely satisfactory,

(g) poor export shipping facilities and communications. Frequently shipments have been held up and quality has deteriorated, and

(h) frequent changes in export and import arrangements. These have led to confusion and have depressed the performance of the industry.

45. The following table clearly illustrates the effects of the con- straints that the estate tea industry has suffered. The private Indonesian- owned estates have suffered more than those managed by the BPU, since the latter have been able to obtain some credit from the Bank of Indonesia. With the tea industry as a whole running at a loss, private Indonesian-owned estatc totaling some 12,000 ha. (BPU estates total 40,000 ha. of which 39,000 ha. are Government owned) must be in a very difficult financial position.

BLACK TEA

Area, Crops, Yields, Export Volumes and Proceeds Average price Year Crop Yield Exports Export values Exports as fob '000kg kg ha. '000kg US$ million % of crop US$c per pour

1938 80,668 390 71,855 N/A 89 N/A 1948 12,933 179 9,002 N/A 70 N/A 1950 35,394 432 28,588 N/A 81 N/A 1954 54,171 666 45,133 39.8 83 44.5 1957 84,250 894 4o,027 29.8 60 34.5 1960 81,723 666 39,122 27.7 85 34.5 1963 N/A N/A 31,533 17.8 83 25.4 1965 N/A N/A 36,433 16.9 N/A 20.9

Source: BPU Aneka Tanaman

46. The table shows, apart from a decline in yields a steep and steady decline in fob prices obtained for export tea. The following table shows how the prices obtained for Indonesian teas have compared with those obtaiied by other producers. - 85 - 12$12".L _Leavyerae r*ices Obtained in L,on don Auctions British price in pence per pound

Indonesia Year N. India S. India Pakistan Ceylon Keny Average Actual of avg.

1952 35.9 33.1 27.9 46.2 23.5 36.6 34.7 95.0 1953 43.4 41.1 39.0 48.1 39.6 43.8 39.2 89.5 1954 64.o 62.4 63.8 63.5 60.1 63.3 58.6 92.5 1955 63.6 53.6 55.5 64.3 44.6 60.9 46.3 76.0 1956 61.1 51.1 47.8 66.2 42.6 58.0 36.5 63.0 1957 56.6 45.1 46.5 58.2 41.2 53.2 38.2 71.8 1958 59.0 45.9 44.6 59.2 46.5 55.1 39.9 72.4 1959 58.1 44.5 39.1 60.8 46.9 54.6 36.2 66.2 1960 59.2 47.7 - 59.9 51.2 55.3 41.5 70.0 1961 56.0 46.4 39.5 55.5 50.0 52.9 40.2 76.0 1962 60.6 44.1 41.7 55.9 53.9 53.4 29.8 55.9 1963 55.7 43.4 41.3 52.3 48.8 50.7 27.9 55.0 1964 54.6 45.9 - 53.9 50.8 51.5 26.6 51.6

Source: BPU Aneka Tanaman.

The table and the following quotation from "Guide to World Tea, World Coffee and Tea, July 1965" indicates that the potential quality of Indonesian tea is appreciably higher than prices obtained in recent years would suggest.... "Trade sources consider (Indonesian) teas basically useful, without characteristics that detract in the blend from higher priced teas. Some Indonesian teas are sought by buyers as quality :eplacements for high priced teas. For example, if the weather is right, tea from the Pengalengan district of Western Java produced in the July-September dry period has a flowery, lceylony' character. One result of large estate size (larger than in most producing countries) is that crops tend to be more uniform".

Production and Export Potentials

47. As far as yields are concerned,the optimum use of fertilizer is the answer. BPU.AT have studied this matter in detail and believe that 45,000 ha. of estate tea would respond economically to fertilizers. The BPU believes that by 1970 exports would increase by 12.5 percent by adoption of a program involving optimum fertilizer and pesticide use. The mission concurs with the proposal that production should be intensified, but believes that concurrent with this an expert appraisal should be made of current processing and marketing (both domestic and foreign) methods and arrangements. In view of the complexities of the tea market, Indonesian expertise is probably inadequate for this purpose and such a study would be best executed by consultants. It would be desirable to effect such an appraisal as soon as is possible, since the return frpm implementing export recommendations could be considerable and could be obtainable with a minimum of investment.

48. Any significant increase in tea production and exports is dependent upon government action. Without finance for fertilizer, production will not increase, and withott improvements in processing and marketing, unit values for Indonesian teas will continue to be lower than attainable. - 86 -

(E) SUGAR

General

49. The Indonesian sugar industry is unique from the point of view of cane cultivation. First, ratooning (growing new stocks from roots) is not practiced and a plant crop alone is grown. Second, of the 551/ mills (this number was in operation in the 1966 campaign) only one owns land, the nemainder rent irrigated land from land owners, usually small farmers, for a period of 16 months in which the plant crop is planted, grown and harvested by the mill management. Subsequently, the land is released to its farmer- owners who proceed with a rotation of rice and other crops. Some cane is purchased from farmers, but quantities are declining,in view of the increasing profitability of rice which is a competitor for sugar cane land.

50. Cultivation of sugar was started in East Java in the early nineteenth century, from here cultivation spread into Central Java where conditions for the crop are rather less satisfactory. At the peak of the development of the sugar.industry,-in the period 1928.to 1931, some 200,000 ha. were under sugar and annual production amounted to about three million tons of raw sugar. By contrast, in 1966 the estate planted area amounted to 66,107 ha., the farmers' cane area to 10,321 ha. and production of raw sugar totaled 605,000 tons. Smallholders also grew cane for crushing in simple mills in Java and the other islands, and it is estimated that about 80,000 ha. were being used for this purpose in 1966. This note, however, is concerned with sugar produced by integrated mills.

51. Due to the single plant crop system of cultivation, yields of cane and sugar remain high in comparison with those of other countries (which engage in ratooning), although yields are lower than before the war, as is shown in the table below.

Average Yields per ha. all Estates

1935 1962 1963 1964 1965 1966

Cane, tons 139.8 72.0 78.8 82.9 91.6 85.8 Sugar, percent 8.88 9.36 10.36 9.36 10.65 9.77 Raw sugar, tons 12.41 7.15 8.13 7.91 9.68 8.38

Source: BPU Ghula

Table 1 gives details of estate sugar production and exports in recent years, as well as of areas cultivated.

1/ Three mills are privately owned, the others are government-owned and managed. - 87 -

52. As in the case of other estate grown crops, the decline in yields is attributable to many factors. In the case of sugar, however, the decline in the efficiency of irrigation from government-operated and maintained schemes has been significant.

Problems of the Sugar Industry

53. Land: The estates are finding it increasingly difficult to rent land, since although they are assured of obtaining land by law, rents have to be negotiated. These have been rising steadily in line with the price of rice. Since sugar cane land is some of the best in Java, one school of thought considers that the land would be better used for rice than for cane. Within the plant crop period, two crops of rice and, possibly,three could be grown. At present prices, savings in rice imports, if the sugar land was used for rice, would be about 50 percent greater than possible export receipts from sugar produced on the same area. The same school of thought believes that it would be more economical to import sugar and to use all sugar land for rice.

54. Factories: For various reasons - the depression in the 1930's, the war, occupation and internal problems until the mid 1960's -most mill equipment dates from the period 1900 to 1925. Since many items of equipment are large pieces of relatively simple machinery it is possible to keep them in working order. On the other hand, equipment such as boilers, steam turbines and electrical switch gear are becoming increasingly difficult to maintain. And many pieces of equipment have become hazards.

55. BPU Ghula estimates that in 1968 about US$9.0 million would be required to carry out the first stage of rehabilitation of the 27 mills which, in its opinion, should be retained in operation. It wishes to close down the remaining mills and to process the production from their areas in adjacent mills which would be retained.

56. This policy, which the mission believes is sound, would create some social problems. The most important of these would be the need to lay off a large number of workers and the resultant disruption of the social and commercial patterns that have developed in sugar producing areas. Sugar workers have been politically very active in the past, and probably are still the most highly organized group of industrial workers. For this reason BPU Ghula's proposals have met with little support so far.

Production and Export Potentials

57. In view of the capacity of sugar land to produce rice, the rising trend in world rice prices, and the continuing low world free market price for sugar there is no merit in Indonesia attempting to re-enter the world sugar trade at the present time. In practice it is doubtful if it could re-enter the trade on a sustained basis with the land and processing problems that the industry is now facing. The mission believes, on the other hand, - 88 -

Table 1

Estate Sugar Production, Exports and Cultivated Area

Production Exports Area (ha) metric metric Estates Farmers- tons tons

1962 584,293 167.8 76,063 8,328 1963 6)49,003 106.1 70,537 11,756

1964 648,788 105.5 65,o84 22,460

1965 765,312 69.6 71,030 16,378

1966 605,182 - 66,107 10,321

1967 n,a. - 67,000 10,110

1/ Purchased by estate mills.

Source: BPU Ghula. - 89 - that in planning for the industry, i-hile there may appear to be advantages at the present time in importing sugar and using sugar land for rice pro- duction, price relationships could change in favor of sugar. Additionally, a major rundown in sugar production could have major repercussions throughout the economy. Therefore self-sufficiency is not an unreasonable goal.

58. The mission believes that a full review should be made of the industry with the objectives of. (a) setting production targets, (b) closing down the more inefficient operations, (c) examining production costs and their relation to wholesale and retail prices pegged by the Government, both to reduce the former where possible and to adjust the latter where necessary, (d) assessing the required level of investment for the rehabilitation of the more efficient mills and (e) appraising the feasibility of developing sugar production in the Outer Islands with a long-term view to the progressive run-down of operations in Java.

59. Production costs obtained by the mission indicate that few mills are profitable, and this is borne out by the inability of the industry to generate the funds required for re-equipment. Mills currently receive about Rupiahs 14.0 per kg (equivalent to about US$93 per ton) and the inability of most of them to break even at this price indicates high production costs. Major factors in costs are land rents and low yields, and probably these problems can only be resolved by the estates having their own land. This is impossible in Java but probably feasible in the Outer Islands. W-hich of the latter would be suitable for sugar cane still needs to be determined, and the investment required for establishing new estates will be heavy and as such will only be feasible in the long-run when financial and economic conditions improve.

60. The former Government considered this and purchased mills for North Sumatra, Celebes and Seram (one of the Eastern Islands). These projects are now stopped at various stages of development, but in no case were funds supplied for field development or irrigation. The mission did not visit the sites but doubts whether North Sumatra is suitable for economic sugar production. A full investigation is required of the potentialities of the three sites, and if necessary alternatives should be found. APPENDIX 3

(A) FORESTRY

Background

1. The forest estate of Indonesia comprises some 120 million ha, or about two-thirds of the nation's land area. Management and exploitation based on sustained yield principles are restricted to Java, and in particular to the some 800,000 haof planted teak forests which are a feature of the island. These managed forests amount, however, to only two percent of the total.

2. , The forests of the outer islands, which comprise in excess of 95 percent of Indonesiars forest resources, are mainly mixed evergreen tropical rain forests. As such they constitute a virtually untapped major potential source of foreign exchange earnings.

3. The Department of Forestry of the Ministry of Agriculture has estimated that taking into account the.annual increment in timber re- sources and the growth in local consumption, Indonesia has presently an annual surplus of timber of about 100 million m3 valued at US$1 billion. This is, of course, a highly artificial estimate in that it assumes that the whole of forest area can be exploited, and its production marketed. Nonetheless it gives a picture of the order of magnitude of the forest estate.

4. Present forest production systems differ between the teak and non-teak forests. Exploitation of teak forests, and subsequent marketing.operations are the responsibility of the public sector State Forest Enterprise (PERHUTAIT). In teak operations mechanization is employed to a very limited degree, and reliance is placed on manual labor and animal traction. In Java with its surplus population and cheap labor, this policy is sound.

5. In the case of other forest types, almost all of which are outside Java, and where labor is not in free supply, large scale mechanized operations are recent and as yet limited to joint ventures of the PERHUTANI with foreign partners. Indigenous contractors mostly hold small concessions and employ mechanization to a very limited degree. Marketing of non-teak timber is conducted both by the PER-UTANI and private enterprise, and in 1965, production by the PERHUTANI of non-teak timber amounted to about 0.3 million m3 (r) .! and that by the private sector to 1.5 million m3 (r).

1/ Cubic meters of round wood equivalent. - 91 -

6. Taking into account the exploitable surplus, see paragraph 3, the following table of timber exports shows clearly the very great potential contribution of forestry to Indonesia's economic welfare:

Summary of Timber Exports

volume m3 (r) value, US$ '000 1000 1961 118.8 1,812 1962 106.3 1,328 1963 93.3 1,031 19 64 (estimate) 87.5 1,100 1965 (estimate) 100.0 1,300

Source: Ministry of Agriculture, Department of Forestry.

The table shows that timber exports declined in the early 1960's although the trend should be rising now as the export oriented production sharing ventures of the PERHUTANI develop. Timber production overall declined in the same period, as evidenced by a series produced by the Central Bureau of Stati/tics which shows that, on the basis of constant 1960 prices, forestry! production in 1965 was 83 percent of that of 1960

7. There are several reasons for these declines, and they are those that have influenced the economy as a whole over the last two decades. Deserving of special mention, however, are poor inter-island shipping facilities and resultant high freight rates which adversely affect shipments to Java which is the major consumer in the local trade. Lack of investment in production has been, however, the major factor.

Forest Resources

8. The following table shows the forest area of the major islands and groups of islands in the archipelago,

Summary of Forest Areas Forest Area in Wm2(1000 ha.) Reserved Non-reserved Total Java and Madura 29,908 - 29,908 Sumatra 77,932 206,268 284,200 Kalimantan 39,084 375,616 414,700 Celebes 16,892 82,208 99,100 Moluccas and West Irian - 375,000 375,000 Eastern Islands 12,182 2,656 14,838 Total Indonesia 175,998 1,041,748 1,217,746

1/ Includes hunting, but there is no evidence that this would have significantly declined in the period under review. - 92 -

The more important prevailing commercial species of the different territories are as.follows:

Java: teak. Sumatra and Kalimantan: red and white meranti (Shereasp 7keruwing ipterocarpus), kapur (Dryobalanops), damar laut (Sherea) and bangkirae (Sherea laurifolia). East Indonesia: merbau (Intsia bijuga), lara (Metrayderos veraj, sEskembang (Pterocarpus indica), and kaju arang (Dyspyros celebica).

The Department of Forestry lists 120 marketable species whose timber qualities have been assessed by standard techniques.

Forest Ownership

9. Of the total forest area of 120 million ha., 110 million ha. are classed as national forests, owned by the State. As such their exploitation is governed by the regulations of the national Government, of this area 20 million ha. are classified forest reserves under the management of the Department of Forestry. The remaining approximately 10 million ha. are the so-called community forests, owned by local communities.

Forest Utilization

10. Production. The following table provides a summary of the annual production of major forest products as estimated by the Department of Forestry for the early 1960's

Enterprise Forest Product State Private Total

Teak, round wood, m3 450,000 10,000 460,000 Ebony, tons 4,000 4,000 Sandalwood, tons 500 500 Other timber species, round wood, m 300,000 1,500,000 1,800,000 Fuelwood, m2 1,150,000 1,110,000 2,260,000 Charcoal, tons 20,000 60,000 80,000 Sago, tons 18,000 18,000 Rattan, tons 10,000 140,000 150,000 Turpentine and other oils, liters 100,000 105,000 205,000 Resins and gums, tons 2,050 350 2,400

11. Forest Industries. A small number of very small plywood mills and two veneer plants are now in operation; output, however, is insignificant in terms of local demand and there are no exports. Public sector forest industries include a paper plant in East Sumatra which uses short fiber pinus merkusii pulp and which has a capacity of 4,500 tons per year, two paper plants using bamboo as raw material in Java and Sulawesi and one in Kalimantan which will use pine, as far as - 93 - is known, none of these plants is currently in operation. Other forest industries include two timber preservation plants with a total capacity of 45,000m3 , nine match factories, one pencil factory and various oil and resin plants. Public sector projects which have been started but which are held up for various reasons include three lumber mills, two plywood plants and one pulp and paper mill. Forestry Development Possibilities

12. Surveys indicate an increasing world deficit in industrial wood, and in the Asia:Pacific region in which Indonesia t s most convenieit markets would 2,Le this deficit is es imated to amount to 22 million m3 (r) by 1975. A recent FAO paperV states: "It is much less certain, however, whether future demand for tropical broad- leaved woods can be met without an acceptable rise in costs, or a destructive depletion of tropical forest resources. The trade in these woods expanded at a remarkable rate to 17 million m- (r) in 1961, and import demand in 1975 is expected to be in aggregate some 15 to 20 million m3 (r) above the 1961 level. Much will depend upon the tropical producers ability to introduce a wider range of species to the market than the few currently accepted; to improve the efficiency of harvesting and transport; and to export more of the output in processed rather than in log form so as to improve the utilization of secondary species."

13. Under the circumstances described above Indonesia is in a most favorable position. Its forests have not yet been exploited and are owned by the State, those of the western islands, in particular, contain species presently accepted on world markets and a large proportion of the forest estat3 is close to the coast and could be made relatively easily accessible. In fact, with the exception ,f the Territory of New Guinea and Papua it is the only major reserve of tropical broad-leaved woods in the Asia:Pacific region. 14. Exploitation will require heavy investment. It is now estimated, on the basis of 1961 prices, that in tropical rainforests the additional investment needed to expand primary industrial wood productionsis about US$11.0 per m 3(r) for enumeration surveys, logging equipment, forest camps and secondary logging roads alore. To these costs would need to be added the costs of infraetructare and equipment required for transport to port of shipment, and handling facilities at the latter. The further processing of logs would require additional investment; sawmills would cost an estimated US$30 per m3(s)2/ of sawn woo and facilities for producing wood-based panels US$58 per n (s).

15. Thus, while Indonesia has the resources and markets for greatly increased timber exports, sources of capital investment must be

1/ Forestry and Forest Products Industries, FAO, June 1967. 2/ Cubic meters of square wood equivalent. - 94 - found.for these to be developed. To date such funds have been sought through production sharing schemes, under which the foreign partner in a joint Indonesian-foreign forest exploration venture supplies credit for the capital equipment required in exploitation operations. The repayment of such credits is .normally in the form of logs or sawn timber. The largest venture of this type involves a Japanese credit of US$30 million. In all four,such ventures have received the Government's approval, and a further 11 applications by foreign firms seeking forest concessions are under consideration by the Goverrnent,

16. The Government is making a decisive effort to attract foreign capital into the forestry sector, and is in fact meeting with a measure of success It is quite clear, that at this point it should do nothing which might deter or slow down investment in forest exploitation. Indonesia's.forest resources are large enough to allow a degree of inefficient exploitation, or even over-exploitation, and the present economic situation demands almost any action which can result in a quick increase in foreign,.exchange earnings.

17. To the extent compatible with this objective, the potential offered by the forest resource is such that steps should now be taken to insure both its economic use and its adequate protection. Necessary action would include comparative studies of potential forest develop- ment areas. These studies would entail detailed topographic surveys and forest inventories, an evaluation of timber types in terms of their market potential as logs and processed timber, appraisal of the feasibility of establishing processing plants, and an assessment of the infrastructure required to support efficient development. Such studies would call for a high level of experience in modern logging and timber processing operations, an up-to-date knowledge of the timber markets of importing countries, and experience in conducting major economic and financial appraisals. These types of experience are not available in the Department of Forestry, which is thus at a disadvantage both in examining proposals made by interested foreign investors, in proposing specific development programs and plans for its own, and in preparing a much needed national forestry development plan.

13. Under these circumstances the Department of Forests could benefit from the employment of a consulting company (not identifiable with any potential investor in forest exploitation) to assess the feasibility of commercial operation in forest areas now identified by the Department as suitable for development. The terms of reference of the consultants should be designed to result in master plans and financial justifications for the development of those areas with high economic potential. These plans should be the bases for negotiations between the Government and interested investors. Such arrangements should not only improve Government's immediate capacity to handle forestry development, but would provide a training facility for the Department of Forestry. 19. A further aspect of forestry development is the desirability of integrating timber exploitation with land clearing for agricultural development. At present there are no plans for the extensive clearing of land for agricultural purposes, although it is very necessary that such plans should be evolved and executed as soon as is possible. For this reason when considering new forest exploitation the possibility of combining timber extraction with land clearing should be borne in mind. This would require an interchange of plans among the governent agencies concerned.

20. Also requiring careful consideration is the question of the Java teak plantations. It would appear possible to use a higher proportion of their high value production for export. If this should prove possible Java would have to be supplied with timber from the outer islands. Since that island is already in a wood deficit position,there is an immediate need to establish an assured source of timber and this would require adequate sea transportation facilities. The consultants proposed above should give high priority to a study with these objectives.

21. Export Prospects. Apart from the prediction that timber exports, in particular of logs, will rise steadily in the coming five to ten-year period,it will-be impossible to quantify such increases until the Goverment completes its ongoing negotiations with foreign investors. It is probable, however, that by 1972 annual exports will have increased to at least one million m3 (r), which at 1966 prices would have an export value of about US$13 million annually, or a tenfold increase over 1965.

(B) FISHERIES

Marine Fisheries

22. The fishery potential of Indonesian waters is high due both to the productivity of the country's inshore coastal waters which are the most extensive of any nation in the world, and to the productivity of the shallow seas surrounding, in particular, the western islands of the archipelago. While neighboring oceans are relatively unproductive, the deep seas between areas of shallow water are ric;h in tuna. With these natural resources there is considerable scope for increasing marine fish production both for home and export markets.

23. It has been estimated 1/ that the potential annual catch in Indonesian waters could be as high as 4.5 m tons. Possibly this is an over-estimate, but even should it be so, there is obvious room for a major expansion in production from the recorded catch for 1966 of 720,000 tons.

1/ K Tiews: On the possibilities for further development of South East Asian Fisheries - Current Affairs Bulletin, IPFC, No. 47, Bangkok 1966. - 96 -

24. Table 1 contains details of the national catch for the period 1957 through 1966 and indicates a growth rate of ten percent per year since 1961. There is little evidence, however, that significant improvements have occurred since 1961 in either catching techniques, apart from a greater use of nylon gill nets, in the types of fishing vessels employed, or in fish marketing and distribution arrangements. It is probable, therefore, that the actual rate of growth is lower than that recorded, possibly closer to the rate of growth in the fishing population, and that an appreciable proportion of the annual increases since 1961 are the result of improved date collection.

25. With the exception of some nine state-owned fishing enterprises, which themselves operate a small number of small motorized fishing vessels (4FV), the largest of which are three 50 ton trawlers, the industry is a traditional coastal fishery. The fishing population is estimated at some 840,000 who with their families comprise about five percent of the total population. Fishing vessels employed are mainly sailing and rowing boats. The motorized vessels, half of which are traditional vessels equipped with outboard motors, constitute in number, less than 0.25 percent of the national fishing fleet, which in 1966 was made up of some 240,QOO vessels. In the traditional fishery the annual catch per fisherman is low, and was estimated in 1966 at 870 kg. Table 2 contains details of the fishing population, their location, composition of the national fishing fleet and the average product per fisherman.

26. Sixty percent of the annual catch is salted and dried, and in this form distributed throughout Indonesia. Only one cold store specifically designed for fish is in cperation. This is in Djakarta, and a second cold store designed to serve the same city is under construction. While the distribution of salted and dried fish presents fewer problems than that of fresh and frozen fish, severe problems have occurred in the past few years. These have resulted from difficulties,in providing an adequate supply of salt to the main production centers and of obtaining inter and intra-island transport for the cured product. For these reasons much fish is now wasted and in many areas fishermen obtain only depressed prices for their catch. As in most traditional fisheries, fishermen are very much in the hands of middlemen who finance fishing operations on a production-sharing basis and market the catch.

27. Per capita consuption of all fish is currently about 11 kg per year, and of this about 6.6 kg is marine and 4.4 kg fresh water fish. This consumption rate is low, both when considered in the light of the acute shortage of other animal protein in Indonesia and when compared with consumption in M1alaysia where it is nearly three times as great. Additionally there is little question that due to distribution difficulties consumption in fishing areas and large coastal urban centers is appreciably higher than the national average, and that in rural areas actual consiuaption is well below 11 kg per capita, In practice,Java- based fishermen landed no more than an average of 2.3 kg per capita of the Java population in 1966. - 97 -

28. Over the last twenty years sufficient experience has been gained in modernizing traditionalfisheries to indicate that there are few technological barriers to both increasing marine fish production and domestic consumption. In the case of Indonesia this would require the introduction of MFV specifically designed and equipped to meet the needs of the differing fishing activities, the introduction of improved gear for the traditional fishing vessels, the establishment of an improved fish distribution system and the provision of adequate facilities for servicing vessels and gear. Agencies such as FAO can advise on questions of vessel and gear design, and there should be no major technical problems in establishing a satisfactory fish distribution system which could handle both frozen and cured fish.

29. The technical problems which exist are insignificant in comparison with the institutional and managerial requirements of developing the marine fishery industry. In the past the Government has allowed the traditional fishing and marketing system to operate without interference apart from the small and a generally inadequate amount of material and technical support that has been given to fishing cooperatives. Government's major effort in the field of marine fisheries has been to establish the state fishing enterprises but these have been so small and unsuccessful as to neither contribute significantly to production nor to act as demonstratiorBof the value of using improved methods.

30. Evidence in other developing countries indicates the difficulties of effective direct government participation in the fishing industry, either in catching or marketing. Thus the first step towards the improvement of both the production and consumption of marine fish should be a survey of the capacity and willingness of private enterprise, both Indonesian and foreign, to invest in all sectors of the industry, and an assessment of the type of technical and financial assistance from the State that such private enterprise would require in order to make a meaningful impact on the industry. :31. This type of survey and evaluation would be very specialized and almost certainly would be beyond the experience of personnel of the Ministry of Maritime Affairs. Under these circumstances the Government should be advised to seek the services of a specialist in this field, a specialist with exmerience of private investment in the fishing industry of a developing country. The FAO mission of April 1967 recommended that the Government should consider employing five experts to assist in fisheries development. Of these, the roles of two - an expert on fishery credits and an expert for improving and developing the refrigeration industry - might overlap with that of the specialist proposed above. It is probable, however, that the particular expertise of the credit and refrigeration specialists would be of greater use later, following a broader survey of the potential role of private enterprise in developing the industry. - 98 -

32. The comments above have been largely concerned with production for the home market. In the case of exports it is probable that good opportunities exist for both tuna and shrimp. Initial exploitation of these should be by foreign enterprise, which would have the expertise and resources to move quickly into these fields. At the same time it would be necessary for the Government to insure that such foreign participation would be of real benefit to the economy, and not of the type where foreign-based vessels would use Indonesian harbors as convenient trans-shipment points for marine commodities. The expert,recommended for an investigation of the potential role of private enterprise in production and distribution for the home market, should have the experience to prepare satisfactory proposals for foreign participation in export produ.ction.

33. Within the next two or three years a major increase in production for either export or domestic consumption cannot be expected in view of the difficulties in mobilizing capital and other resources. Small but progressive increases should occur, however, under the improved financial and economic climata. It is essential, therefore, that this period should be employed in producing a develop- ment plan for the industry and establishing the institutional framework to implement such a plan. In these respects the Government has the advantage of having the recommendations of the 1967 FAO and Asian Development Bank missions both of which included marine fisheries experts.

Inland Fisheries

34. Fresh water fish are a major item in the Indonesian diet. There are two distinct sources of these fish, fish produced in tanks or irrigated rice fields, and fish caught in lakes, rivers and the extensive open areas of brackish water which occur throughout the islands.

35. Table 3 shows the production of freshwater fish, in the period 1960 through 1965. In 1965 fresh water fish production was estimated at 437,000 tons. - 99 -

Table 1

National Marine Fish Catch Statistics (Volume '000 metric tons)

Average

1965- Islands 1960 1961 1962 1963 1964 1965 1966 tons value- Sumatra 132 191 190 208 217 249 -27 -,,T Java 109 95 116 118 159 162 162 1,869

Kalimantan 75 71 90 84 59 92 89 1,350 Celebes h1 109 108 107 113 116 132 1,471

Bali ) 2 2 2 2 2 2 30

S.E. Islands (West) )... 23 8 9 15 13 15 14 50

S.E. Islands (East) ) 8 6 5 6 8 8 36 Moluccas 27 ho 15 16 17 16 20 198 West Irian 3 1 1 5 4 5 5 -

Total: Indonesia 410 525 537 560 590 665 721

1/ Value for West Irian not calculated.

Source: Directorate General for the Exploitation of Marine Resources Ministry of Maritime Affairs, Djakarta. Table 2

COMPOSITION OF FISHING FLEET, NUMBER OF FISHERMEN, PRODUCT PER FISHERMAN

Total Average Fishermen Vessel MFV Product Product per ISLANDS No. No. No. tons Fisherman-tons

Sumatra 153,181 49,960 2,614 288,777 1.89 Java 315,115 46,498 221 162,100 0.51 Kalinantan 49,090 22,102 241 88,600 1.80 Celebes 162,778 75,527 49 132,000 0.81 Bali 16,000 6,700 3 2,120 0.13 S. E. Islands (West) 14,58 4,481 - 14,390 0.92 S. E. Islands (East) 24,000 9,870 - 7,530 0.31 Moluccas 79,000 25,019 25 19,819 0.25 0 West Irian 22,000 2,731 20L 4,700 0.21 0

TOTAL: INDONESIA 836,122 3,357 720,236 0.87

Source: Directorate General for the Exploitation of Marine Resources, Ministry of Maritime Affairs, Djakarta. - 101 -

Table 3

Freshwater Fish Catch Statistics 1965

(metric tons)

Fish Open Water Cultures Bodies Total 1960 97,oh8 2.9,674 346,722 1961 87,095 297,988 385,083 1962 88,861 281,449 370,310 1963 96,959 279,165 376,124 1964 129,994 272,860 402,854 1965 141,221 296,007 437,288

Source: inistry of Agriculture. APPENDIX 4

AGRICULTURAL CREDIT

1. The major source of agricultural and fisheries credit for the private sector is Unit II of the Bank of Indonesia. Unit II has a large measure of autonomy under the general policy direction of the Central Bank. Unit II was established in 1962 by the merger of three banks, two state enterprises - the Peoples Bark and the Bank for Farmers and Fishermen - and a nationalized commercial bank. The Central Bank, Unit I, is the credit source for the state enterprises in agriculture and fisheries.

2. The unsettled financial and economic climate of recent years has determined Unit II's lending policies. Past and currently high interest rates and acute inflationary trends have dictated that the bulk of lending should be short term, and at the present time 95 percent of the bank's portfolio is of loans with maturities of eight months or less. In view of the Government's inability to provide loan capital,the bank's only source of funds are time and demand deposits made by its customers. The bulk of these come from the commercial trading sector and for this reason the bank cannot restrict its lending operations to the agricultural and fisheries sectors, although it was established primarily to service these.

3. In September 1967 the bank's loan portfolio was made up as follows:

Category Rupiahs (millions)

Production and distribution of key foodstuffs 569 Production of export crops 12 Manufacture and distributicn of pharmaceuticals 12 Transportation 15 Agricultural and industrial production, other than of key foodstuffs and export crops 305 Trade, commerce and services 132 Housing and miscellaneous 75

TOTAL LOANS 1P155

The bank estimates that 70 percent of its current loans are for agriculture and that of these, loans for fisheries total only 110 million rupiahs.

4. Diffilring interest rates are employed depending upon the loan category, thus food and export crop production currently bear an interest rate of three percent per month, most services four percent per month, and housing and miscellaneous five percent per month. - 103 -

5. In September 1967 savings on deposits totalled 2.3 billion rupiahs, compared with 900 million rupiahs at the end of 1966. The growth in deposits is attributed to a number of factors, but most importantly to the bank secrecy which is now guaranteed by the Government and the generally greater public trust in the Government's economic and financial policies.

6. . Unit II is represented throughout Indonesia and about fifty percent of its business is conducted on the island of Java. It has 235 branch offices, 400 sub-branches and 700 centers which are serviced by mobile units. The bank also supervises the operation of the official village banks (Bank Desa) and Padi banks of which there are now 8,000, mainly in Java. Village anks provide credits in cash while the Padi banks provide credits in rice and require repayment in this commodity. The Village banks and Padi banks are established by the local district authorities who appoint their staff.

7. The large number of bank offices and the comparatively small volume of loans and deposits indicate a generally small size of individual transaction. This is better illustrated by the fact that at least one branch office has more than 40,000 customers. Transactions in the village banks are even smaller and in the third quarter of 1967, 3,485 village banks in Java had loans totalling 36.4 million rupiahs which had been made to 313,536 borrowers.

3. Despite the large number and small size of transactions the repayment records of Unit II, and the village banks that it supervises, are surprisingly good. Unit II expects to write off two percent of its loans each year as bad debts and to have five to ten percent of its repayments in arrears. Of its customers, cooperatives have the worst repayment record with bad debts currently at a level of about 25 percent. In the third quarter of 1967 loans in default to village banks were 9.28 percent of total lending. 9. While Unit II and the village banks provide an important service to the agricultural community, their inability to provide medium and long-term investment credits severely restricts their capacity to contribute significantly to agricultural development except where their short-term loans are employed to finance the purchase of farm inputs, such as fertilizers and insecticides. In the crop season 1966/67 lending for inputs has been restricted since credits for fertilizers and insecticides under the BIMAS scheme, have been made through the Government Rice Purchasing Organization; for this reason a large proportion of current loans can be classed as subsistence loans, designed to carry the farmer and his family through the period from planting his crop to its harvest. In 1967/.68, however, Unit II will again take over responsibility for financing BIMAS, a responsibility which it successfully executed in the 1965/6 crop season and one which the Government should establish as a responsibility for the bank in the future. - 10 -

10. It is difficult to anticipate when Unit II will be able to move into medium and long-term financing. In order to do this it must obtain additional capital, and it is unlikely that this will be available in major volume from the Government in the next few years. Further, the bank would have to gear up its project evaluation . machinery to prosecute such a new role. The Government would be well advised to seek technical assistance for this purpose, and begin to establish as early as possible a pipeline of sound projects and categories of projects that it could begin to finance as funds became available. While the bark is comparatively well staffed with agricultural specialists and economists, these staff members have little practical experience of agricultural development financing.

11. In general, Unit II has demonstrated a capacity to successfully handle the difficult task of providing credits to a very large number of small customers. This experience and its spread of branches throughout Indonesia establish it as a suitable channel for the major expansion in agricultural credit operations upon which Indonesia's development must depend. The scope for agricultural development in Indonesia is such, and the past performance in this sector so inadequate that the, Government should now give a high priority to providing the bank with sufficient capital to enable it to intensify its short-term lending operations where these are concerned with the financing of on-farm imputs which are capable of producing quick returns, and also to enable the bank to embark on a modest program of development financing.

12. 120 existing private banks can also provide credits for the agricultural sector. There is no indication, however, that they have been in a position to provide-any appreciable volume of medium or long- term credit for the past sevpral years.