ASIAN DEVELOPMENT BANK RRP: INO 32359

REPORT AND RECOMMENDATION

OF THE

PRESIDENT

TO THE

BOARD OF DIRECTORS

ON

PROPOSED LOANS

TO THE

REPUBLIC OF INDONESIA

FOR THE

PARTICIPATORY IRRIGATION SECTOR PROJECT

November 2003

CURRENCY EQUIVALENTS (as of 3 November 2003)

Currency Unit – rupiah (Rp)

Rp1.00 = $ 0.00011767402 $1.00 = Rp8,513

For purpose of calculation in this report, a rate of Rp8,500 = $1.00 was used.

ABBREVIATIONS

AWP – annual work plan BANGDA – Direktorat Jenderal Bina Pembangunan Daerah

Directorate General of Regional Development BAPPEDA – Badan Perencanaan Pembangunan Daerah

Regional Planning and Development Agency BAPPENAS – Badan Perencanaan Pembangunan Nasional

National Planning and Development Agency CPFPG – compensation policy framework and procedural guidelines DGAF – Directorate General of Agricultural Facilities DGWR – Directorate General of Water Resources DIMP – district irrigation management plan DWRS – district water resources services EA – executing agency FMISP – Farmer Managed Irrigation Systems Project IA – implementing agency IC – irrigation commission IMA – irrigation management agreement IMP – irrigation management plan IMRP – irrigation management reform program IWIRIP – Indonesia Water and Irrigation Reform Implementation Project JIIWMP – Java Irrigation Improvement and Water Resources

Management Project

KIIF – kabupaten irrigation improvement fund LIBOR – London interbank offered rate NSC – national steering committee NGO – nongovernment organization NWRP – national water resources policy O&M – operation and maintenance PAS – provincial agricultural services PCMO – project coordination and monitoring office PMU – project management unit PPMS – project performance management system R&U – rehabilitation and upgrading SRR – sustainable replacement of rehabilitation WISMP – Water Resources and Irrigation Sector Management Program WUA – water users association WUAF – water users association federation

GLOSSARY

Regional governments include provincial, district, and city governments.

NOTES

(i) The fiscal year (FY) of the Government and its agencies ends on 31 December. (ii) In this report, "$" refers to US dollars.

This report was prepared by a team consisting of M. Jamilur Rahman (team leader); Y. Kobayashi; F. Ahmed; L. Blanchetti-Revelli; K. Emzita; and M. Ehsan Khan.

CONTENTS

Page

LOAN AND PROJECT SUMMARY iii MAP vii I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

A. Performance Analysis of Irrigated Agriculture 1 B. Analysis of Key Problems and Opportunities 1

III. THE PROPOSED PROJECT

A. Objective and Scope 6 B. Components and Outputs 6 C. Special Features 10 D. Cost Estimates 11 E. Financing Plan 11 F. Implementation Arrangements 12

IV. PROJECT BENEFITS, IMPACTS, AND RISKS A. Economic Benefits 16 B. Financial, Social, and Poverty Reduction Benefits 17 C. Policy Impact and Institutional Benefits 17 D. Environmental Impact 18 E. Sustainability 18 F. Risks 18 V. ASSURANCES

A. Specific Assurances 19 B. Conditions for Loan Effectiveness 20

VII. RECOMMENDATION 20 APPENDIXES 1. External Assistance to the Irrigation Sector 21 2. Project Framework 22 3. List of Potential Districts 27 4. Summary Poverty Reduction and Social Strategy and Gender Plan 28 5. Summary Initial Environmental Examination 31 6. Land Acquisition, Resettlement, and Indigenous Peoples 34 7. Summary Cost Tables 38 8. Project Organization Chart 40 9. Subproject District Selection Criteria 41 10. Project Implementation Schedule 42 11. Tentative Packages of Goods and Services 43 12. Outline Terms of Reference of Consultants 44 13. Fund Flow Mechanism 47 14. Financial and Economic Analyses 48

SUPPLEMENTARY APPENDIXES (available on request)

A. Poverty and Social Issues B. Environment Management Plan C. Compensation Policy Framework and Procedural Guidelines D. Detailed Cost Estimate Tables E. Details of Financial and Economic Analyses

LOAN AND PROJECT SUMMARY Borrower Republic of Indonesia Classification Primary: Poverty Intervention

Thematic: Economic Growth, Good Governance Environment Assessment

Category B. An initial environmental examination was undertaken

Project Description The Project will support the implementation of the Government’s

irrigation management reform program (IMRP) prepared in consultation with the Asian Development Bank (ADB). The IMRP emphasizes a participatory approach to the management of irrigation and water resources in a decentralized administrative and fiscal framework. The salient aspects of the Project include: (i) strengthening of the capacity of district governments to act as the focal point for development and management of irrigation and water resources; (ii) strengthening and empowering of the water users associations (WUAs) and their federations (WUAFs) for effective participation in irrigation management; (iii) transfer of irrigation management to WUAs/WUAFs; (iv) technical and financial assistance to WUAs/WUAFs for undertaking needs-based repair and rehabilitation of selected structures in irrigation schemes; (v) establishment of a water resources information and asset management; and (iv) support for project coordination and monitoring including establishment of a project performance management system at district, provincial, and national levels. The Project will be implemented in 25 districts in the provinces of Lampung, Banten, West Java, Central Java, East Java, and South Sulawesi.

Rationale Irrigated agriculture has helped Indonesia substantially increase

food production, create rural employment, and reduce poverty. The development and operation and maintenance (O&M) of irrigation have claimed a significant part of public resources, but the sector continues to have inadequate, inappropriate, and dilapidated infrastructure. Consequently, physical and fiscal sustainability of irrigated agriculture has been a matter of concern for the Government and its development partners. The O&M and sustainability issues were studied in the 1990s under various investment and technical assistance projects. These studies concluded that major constraints to sustainable irrigation management were: (i) policy and institutional constraints, (ii) weak and low level of stakeholder participation, and (iii) and inadequate assessment and funding of O&M. As a major departure from the traditional top-down decisions focusing on construction activities, the Government launched in 1995 the ADB-assisted Farmer Managed Irrigation Systems Project with direct involvement of local governments and beneficiary farmers in the decision-making

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governments and beneficiary farmers in the decision-making process, with farmer contribution toward O&M and scheme rehabilitation and upgrading costs. This was followed by large-scale pilot-testing of a program of major policy and institutional reforms under a World Bank-assisted irrigation and water resources management project. The initial results were highly encouraging and formed the basis of comprehensive policy reforms in water resources and irrigation management initiated by the Government in 1999.

In 1999, the Government formally adopted the IMRP, which was supported by a law issued in 2001. The IMRP aims at (i) making district governments responsible for planning, development, and management of irrigation; and (ii) transferring irrigation management to WUAs/WUAFs. In 2001, the Government adopted a new national water resources policy to promote integrated water resources management within a basin to ensure sustainable use of water resources by various sectors. A bill for a Water Law, incorporating the IMRP and the national water resources policy, is presently being reviewed by the national Parliament. The proposed project forms part of a joint initiative by multilateral and bilateral funding agencies involved in Indonesia’s water resources sector to provide technical and financial assistance in a complementary manner to support implementation of the sector reforms. The ongoing administrative and fiscal decentralization and the water sector reforms are mutually reinforcing and provide a unique opportunity to improve and ensure the sustainability of water resources development and irrigated agriculture.

Objectives The long-term objectives are increased economic growth and

reduced poverty in 25 districts of rural Indonesia. The immediate objectives are decentralized management of irrigation systems on a sustainable basis and increased yields of irrigated crops.

Cost Estimates The Project will cost about $126.0 million equivalent comprising

$30.6 million in foreign exchange and $95.4 million equivalent in local currency.

Financing Plan ($ million) Source Foreign

Exchange Local

Currency Total Cost

Percentage

ADB through ADF 5.7 13.3 19.0 15.1 ADB through OCR 20.5 33.5 54.0 42.8 Netherlands Grant 4.4 10.6 15.0 11.9 Central and Regional Governments

- 25.5 25.5 20.2

WUAs - 12.5 12.5 10.0 Total 30.6 95.4 126.0 100 ADB = Asian Development Bank, ADF = Asian Development Fund, OCR = ordinary capital resources, WUA = water users association.

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Loan Amount and Terms $54.0 million equivalent from ADB’s ordinary capital resources and $19.0 million from its Asian Development Fund resources. The OCR loan will have a 22-year term including a grace period of 7 years, an interest rate determined in accordance with ADB’s LIBOR-based lending facility, a commitment charge of 0.75% per annum, a front-end fee of 0.5%, and such other terms and conditions set forth in the draft loan agreement. The ADF loan will have a term of 32 years, including a grace period of 8 years, with an interest charge of 1% per year during the grace period and 1.5% per year during the remaining period.

Period of Utilization Until 30 June 2011 Estimated Project Completion Date

31 December 2010

Implementation Arrangements

The Project will be implemented over a period of 7 years. The implementation responsibilities will be shared by the national government sector agencies and the regional governments at provincial and district levels. A national steering committee will provide overall policy guidance and oversee project implementation, and will be assisted by a national project coordination and monitoring office (PCMO). Each executing agency will establish a national project management unit (PMU). Each participating province and district will establish a provincial PCMO and district PCMO. Each district will establish an irrigation commission (IC) comprising government and nongovernment members, for planning and management of irrigation within their respective districts. WUAs will be assisted to develop irrigation management plans (IMPs) for their schemes. IMPs will be reviewed and approved by ICs and will be implemented by WUAs. Rehabilitation and upgrading works of irrigation schemes will be carried out by WUAs on a cost-sharing basis.

Executing Agencies Executing agencies are: (i) Directorate General of Water

Resources of the Ministry of Settlement and Regional Infrastructure, (ii) Directorate General of Regional Development of the Ministry of Home Affairs, and (iii) Directorate General of Agricultural Facilities of the Ministry of Agriculture.

Procurement All goods and related services financed under the ADB loan will be

procured in accordance with ADB’s Guidelines for Procurement. Consulting Services An estimated 1,653 person-months (pm) of consulting services,

comprising 213 pm international and 1,440 pm domestic consultants, will be required to assist the Government and WUAs in implementing the Project. Consultants will be recruited in accordance with ADB’s Guidelines on the Use of Consultants using the quality and cost-based system and other arrangements satisfactory to ADB for engaging domestic consultants.

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Project Benefits and Beneficiaries

The Project will enhance stakeholder participation in irrigation management and improve resource use efficiency and greater equality in benefits. WUAs/WUAFs covering about 625,000 hectares (ha) will be strengthened. About 250,000 ha of service area will be transferred to WUAs through a partnership arrangement requiring them to bear full O&M costs within 3 years of transfer. Improved irrigation performance will benefit some 1.5 million farming families; about 40% of them are poor smallholders or landless tenants. The inclusive approaches to participation in irrigation management will strengthen access to resources and give voice in the decision-making process to disadvantaged members of the community, including the poor and women, thereby addressing an important dimension of poverty and governance. Based on an analysis of the five core subproject schemes, anticipated incremental farm income would range from 26–162% of without-project levels. Distribution analysis in the core schemes indicates that as much as 42% of the overall net economic gains would accrue to the tail reaches, constituting about one third of the service area. A poverty impact analysis of these schemes indicates that 32% of the net economic benefits would accrue to the poor.

Risks and Assumptions The successful implementation of the Project will require stakeholders concerned to agree and adjust to the policy and governance regime changes that are being promoted by the Project. While most of the stakeholders involved in the ongoing reform initiatives have been receptive to these changes, some may be slow in responding to the needs for change during project implementation. This risk will be mitigated by a demand-driven sector approach and by the emphasis on public information and capacity building activities during initial years. The governance risks associated with decentralization will be mitigated through improved service delivery and management capacity at district and WUA levels and enhanced transparency and participation in project implementation. Provision has been made for media dissemination and information campaigns about the Project, resources made available for the Project, and the expected outputs. District-level activities will be approved and overseen by the IC. Most O&M and repair and rehabilitation works in irrigation systems will be carried out by WUAs. A local accounting firm will assist in maintaining and monitoring project accounts at district and provincial levels.

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on proposed loans to the Republic of Indonesia for the Participatory Irrigation Sector Project.1

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

A. Performance Analysis of Irrigated Agriculture

2. Agriculture in Indonesia is dominated by rice and, more generally food crop cultivation. About 82% of the rice produced in the country is grown under irrigation. Irrigated agriculture covers 6.2 million hectares (ha), of which about 60% is served by large systems (greater than 4,000 ha) and medium systems (500 ha to 4,000 ha), and the remaining 40% is served by small systems (below 500 ha). Of the total irrigated area, 5.0 million ha are publicly managed and 1.2 million ha, all comprising small systems, are managed by farmers. The average cropping intensity is 155% with an average paddy yield of about 4.5 metric tons (t)/ha.2

3. Investment in irrigation and drainage infrastructure was a major component of the Government’s agriculture and rural development strategy from 1969 to 1999. Given the availability of cheap labor, fertile land, plentiful water resources, and favorable climatic conditions, irrigation investments were economically efficient and helped improve food security and reduce rural poverty. As a result of these investments, rice production increased at 4.8% per annum over the period 1969–1989 when Indonesia moved from being one of the world’s major rice importers to achieving and maintaining trend self-sufficiency (since 1984).3 Indonesia’s current position with regard to food security is, however, fragile and during the latter half of the 1990s, it depended on international markets for up to 10% of its annual requirements.4

4. Intensive cultivation of rice, a labor-intensive crop, increased rural incomes and substantially contributed to the reduction of rural poverty incidence from 40% in 1970 to 16.5% in 1997. The financial crisis in 1997 and successive occurrences of El Niño and widespread drought raised the poverty incidence to 23.5% in 1999. The incidence came down to about 18.2% in 2002, with urban and rural poverty incidence at 14.4% and 21.1%, respectively. Despite these difficulties, about 43% of the country’s labor force is employed in agriculture, mostly in rice production and related activities.

B. Analysis of Key Problems and Opportunities

1. Sustainability of Irrigated Agriculture

5. Notwithstanding its impressive contribution to food security and people’s welfare, irrigated agriculture faces increasingly complex problems, and the viability and sustainability of irrigation has been a major concern of the Government and its development partners. The development and operation and maintenance (O&M) of irrigation claimed a significant share of public resources invested in agriculture, but the sector continues to have inadequate, inappropriate, and decaying infrastructure. This unsatisfactory status of irrigation facilities is largely due to inadequate O&M. Irrigation O&M has been the responsibility of provincial

1 ADB. 2001. Technical Assistance to the Republic of Indonesia for Participatory Irrigation Sector Project. Manila

(TA No. 3793-INO, for $800,000, approved in December 2001) 2 In comparison, the average cropping intensity and paddy yield under irrigated conditions in the Philippines are

137% and 3.7 t/ha, respectively. 3 Trend self-sufficiency, in contrast to absolute self-sufficiency, implies maintaining rice production at or near

consumption levels so that in years of good harvest, Indonesia may export marginal quantities of rice and import similar small amounts in years of poor harvest.

4 Rice imports peaked at 4.75 million metric tons in 1999.

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governments, with funding support from the national Government, but a de facto “deferred maintenance culture” has necessitated major periodic rehabilitation of facilities. The investment in such rehabilitation is substantially higher than what would have been the cost if there had been adequate routine and periodic maintenance.

6. In 1987, the Government adopted the irrigation operation and maintenance policy aimed at addressing the sustainability issue through a set of measures including (i) ensuring adequate and timely O&M funding, (ii) gradual introduction of irrigation service fees, (iii) improved government management of large irrigation systems, and (iv) transfer of irrigation systems of less than 500 hectares to water users associations (WUAs). Despite some apparent initial successes, the irrigation operation and maintenance policy failed to improve irrigation O&M and sustainability, largely because of inadequate involvement of local governments and WUAs in the formulation of the policy and its implementation. O&M budgets were raised to $80 million equivalent in 1987 and remained at that level until 1997, but 60–85% of this was used to support provincial staff and the balance for urgent repair and rehabilitation activities. There was no provision of government accountability for services to farmers, and the farmers were not convinced that payment of irrigation service fees (in effect, a central government tax on irrigation) would improve government services. The small scheme management turnover program to WUAs achieved about one third of its target, but the program objectives were not achieved as most of the WUAs were established following a top-down approach, and provisions for post turnover government guidance and support were unclear.

7. The O&M and sustainability issues were studied in the 1990s under various ongoing projects and programs including the Technical Assistance (TA) for Assessment of Options for Sustainable Irrigation Development.5 These reviews and other studies concluded that major constraints to sustainable irrigation management were (i) policy and institutional constraints, (ii) weak and low level of stakeholder participation, and (iii) inadequate assessment and funding of O&M.

8. The policy guidelines and regulatory frameworks for the water resources sector, as provided in the Water Law No. 11 of 1974, placed the central Government at the focal point for planning, development, and management of all activities for the sector including irrigation. The central Government’s functions as provider and regulator of water sector activities were shared by various agencies, with fragmented mandates and responsibilities. The former Directorate General of Water Resources Development (DGWRD), the key agency in the sector, was responsible for irrigation development and it implemented its projects through offices set up in the provinces for this purpose. The provincial governments maintained their own provincial water resources services , which were responsible for O&M. District governments’ involvement in irrigation was mostly in the provision of agricultural services, with little or no participation in irrigation development and O&M.

9. The national and provincial agencies delivered the services with little participation of farmer beneficiaries and their institutions. In developing farmer institutions, emphasis was on following a top-down uniform model, leading to the establishment of nominal WUAs that were mostly inactive and failed to serve their purpose. Moreover, the rights and responsibilities of WUAs were not properly defined and most of them lacked legal recognition. Lack of farmer participation during planning and design phases led to the construction of facilities that often did not meet local technical requirements and failed to ensure construction quality. The overall environment at the system level did not provide any incentives to farmers and WUAs in taking

5 ADB. 1996. Technical Assistance to the Republic of Indonesia for Assessment of Options for Sustainable

Irrigation Development. Manila. (TA No. 2695-INO, for $1,200,000, approved on 5 November 1996)

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greater responsibility for system O&M and fostered a mentality of dependence on government assistance.

10. There is considerable imprecision with regard to the definition of O&M and a lack of appreciation of the costs involved. O&M budgets were prepared by provincial governments based on a “service area” in a government system rather than on needs in the system. This, coupled with a low allocation per unit area, often led to a situation where O&M needs of many systems were grossly under funded resulting in their rapid deterioration, and traditionally the Government addressed these issues through much more expensive rehabilitation. Improving the sustainability of irrigation will require preparation of a needs-based budget with better definition of O&M costs to include all operational costs for staff, equipment, and facilities, and routine and periodic maintenance of irrigation systems.

11. In 1995, the Asian Development Bank (ADB) approved the Farmer-Managed Irrigation Systems Project (FMISP)6 with a major reorientation of government assistance to irrigation development and management focusing on a participatory approach to irrigation management, including the objective of mobilizing farmer contribution of labor and materials toward the O&M and rehabilitation and upgrading (R&U) costs. This was a major departure from the traditional top-down decisions focusing on construction activities. In 1998, the Government initiated large-scale pilot testing of a program of policy and institutional reforms in irrigation management under the World Bank-assisted Java Irrigation Improvement and Water Resources Management Project (JIIWMP) covering the provinces in Java Island. The initial results were highly encouraging and formed the basis of a comprehensive water sector policy reform under a Water Sector Adjustment Loan of the World Bank approved in 1999.

2. Recent Developments

12. National Water Resources Policy. As envisaged under the World Bank Water Sector Adjustment Loan policy matrix, which was endorsed by ADB, a national water resources policy (NWRP) was prepared and formally adopted by the Government in December 2001. The NWRP aims for integrated water resources management within a river basin to ensure sustainable, economic, and multisector allocation and use of water. It provides a framework for coordination at national and regional levels among various agencies involved in water resources development, management, and use. A bill on a new Water Law is presently being reviewed by Parliament, and the law is expected to be enacted by December 2003.

13. Irrigation Management Policy Reform. As part of the overall policy initiatives in the water resources sector, the Government has embarked on major reforms for improving the sustainability of irrigated agriculture. The Government issued, in April 1999, a decree on the irrigation management reform program (IMRP), with participatory irrigation development and management as the core of the agenda. The reform principles have been elaborated in subsequent government regulations and ministerial decrees, particularly Government Regulation No. 77 on Irrigation issued in December 2001. The reform envisages WUAs to take the primary responsibility for O&M and periodic rehabilitation while the Government will have a duty to assist; government assistance will be conditional on local efforts for O&M. Irrigation systems will be transferred to WUAs through an irrigation management agreement (IMA), which clarifies the rights, authority, and responsibility of the WUA and the Government, including provision of continued government assistance for repair and improvements that are beyond the capacity of the WUA. The system of irrigation service fees has been abolished, and WUAs have been authorized to levy and collect beneficiary contributions and use them for maintenance and

6 ADB. 1995. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the

Republic of Indonesia for the Farmer-Managed Irrigation Systems Project. Manila. (Loan No. 1378 –INO, for $26.3 million)

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rehabilitation. ISF was a central government tax and farmers were not convinced that it was used efficiently for O&M activities.

14. The IMRP redefines irrigation institutions, with the district as the focal point for planning and funding irrigation development and management. It provides for the establishment, in each district, of (i) a multi-stakeholder irrigation commission (IC)—comprising government officials concerned and nongovernment members including WUA representatives, academics, and nongovernment organizations (NGOs)—with authority for overall management of irrigation activities in the district, and (ii) a kabupaten (district) irrigation improvement fund (KIIF) with central and district government contributions to assist WUAs in sustainable management of irrigation systems. The Ministry of Finance issued a ministerial decree on 30 June 2003 on the establishment of KIIFs in districts and the mechanism of fund flow through KIIFs. Similarly, the Ministry of Home Affairs issued a ministerial decree on 30 June 2003 on roles of sector institutions at provincial and district levels. Provincial institutions are responsible for managing river basins that cross district boundaries, and assist district governments (when so requested by districts) in irrigation and water resources management. The national institutions will be responsible for setting national policies, standards, and guidelines; macro planning; and other aspects of sector management.

15. The participatory concept that underpins the IMRP, including the objective of mobilizing farmer contributions of labor and materials toward O&M and rehabilitation costs, was successfully implemented first in FMISP and subsequently in JIIWMP. Although the levels and methods of farmer contributions have been adjusted over time for various reasons, including Indonesia’s economic crisis, FMISP has retained the principle of farmer contributions and the overall experience has been encouraging. JIIWMP was completed in 2000 and the institutional and policy reforms initiated under the project have been supported since then in 12 provinces, including the four Java provinces, under the Netherlands-assisted Indonesia Water Resources and Irrigation Reform Implementation Project (IWIRIP) approved in 2001. Under JIIWMP and IWIRIP, about 400 WUA federations (WUAFs) have been established in about 235 schemes covering about 315,000 ha, each WUAF nesting a series of WUAs at the secondary canal level. Governance and management of 61 schemes covering 73,000 ha have been transferred to WUAFs. Initial assessment indicate that there were substantial quality and fiscal efficiency gains in O&M and R&U works carried out by WUAs themselves following the participatory approach.

3. Opportunities

16. Continued Support for Policy Reforms. The ongoing administrative and fiscal reforms (under the Regional Autonomy and Fiscal Autonomy Acts of 22 and 25, respectively, of 1999) and the water sector reforms are mutually reinforcing, both in concept and timing, and provide an excellent opportunity for changing the approach to management of water resources in general and irrigation infrastructure in particular, to ensure their sustainability. The IMRP and Government Regulation 77 formalize initiatives in recent projects for overcoming the sustainability issues confronting irrigated agriculture. The new paradigms will require strengthening of district-level institutions responsible for planning, developing, managing, and regulating irrigation and water resources. As part of the ongoing decentralization of the Government, about two thirds of the 25,000 staff complement of the Directorate General of Water Resources (DGWR) were devolved in 2002 to district and provincial governments. District governments have taken initiatives to develop effective partnerships with WUA for sharing irrigation management responsibility. WUAs will need to be reactivated or strengthened for effective O&M of irrigation schemes. The capacity-building activities will need to be complemented by an investment program, using the KIIF, to catalyze technical, institutional, and management improvements in existing irrigation systems.

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4. External Assistance Coordination

17. The external funding agencies active in the sector have been working with the Government in a coordinated manner in developing and implementing the policy reforms in the water resources sector, including irrigation. The proposed Project forms part of joint initiatives by ADB, Food and Agriculture Organization of the United Nations, Japan Bank for International Cooperation, Netherlands, World Bank, and other agencies to provide technical and financial assistance to support implementation of the sector reforms. On that basis, the focus of the Project will be on capacity building and sustained operation of existing small and medium-scale schemes, and consolidation of gains in improving water resources management in recent ADB-assisted projects. The Netherlands Government has agreed in principle to cofinance the Project. The World Bank approved, in June 2003, a Water Resources and Irrigation Sector Management Program (WISMP), using its adjustable program loan modality. WISMP will be implemented in 70 districts in 12 provinces, including the six provinces of the proposed Project. In the common six provinces, each project will cover a separate set of districts. A table on external assistance to the irrigation sector is given in Appendix 1.

5. Lessons Learned

18. ADB assistance to the irrigation sector has amounted to $1,526 million, including $8.5 million in TA, covering 36 projects. These projects have aimed primarily at increasing rice production, and improving income and living conditions of farmers through the provision of irrigation and flood control. Nineteen of these projects have been post evaluated. Seven projects were rated as generally successful and 10 as partly successful in achieving their intended objectives, while two projects were considered unsuccessful, largely because of low economic viability.

19. The projects helped increase crop production, but their achievements in terms of service area and crop yields have sometimes been below expectation. Shortfalls were due, among other things, to limited availability of water resources to meet increasing water demand, inadequate O&M and periodic rehabilitation of irrigation facilities, lack of an effective cost recovery system for funding O&M costs, and insufficient agricultural support services.

20. Post evaluation experience highlighted the importance of formulating and designing irrigation projects in the context of a broad river basin development scheme, considering the aggregate supply and demand situation for water and associated economic costs and benefits. To enhance the sustainability of benefits, it was suggested that the Government should adopt reasonable cost-sharing arrangements with farmer beneficiaries to promote efficient use of water resources and to generate funds to cover adequate levels of O&M and periodic rehabilitation costs. The experience emphasized the need for local government and beneficiary participation, in the planning, design, implementation, and O&M of irrigation systems to enhance local ownership. Inadequate beneficiary participation was acknowledged as the single most important factor in project underperformance compared with other commonly occurring impediments, including poor design, implementation delays, cost overruns, price fluctuations, and institutional deficiencies in implementing agencies.

21. Most earlier irrigation projects aimed to provide new, or to improve existing, irrigation infrastructure for large-scale, publicly managed irrigation systems. Experience has shown that there are fewer risks associated with small and medium-scale schemes, and ADB's recent assistance to the irrigation sector has been directed to smaller systems, including farmer-managed or village irrigation schemes, with relatively low levels of technical complexity.

22. Sector policy reforms being undertaken are based on the lessons learned in the past and ongoing projects in the sector. The Project will support implementation of the policy

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reforms, and its design has incorporated careful attention to specific lessons learned from the ADB-assisted projects. The Project incorporates (i) a high level of beneficiary participation, at all stages of preparation and implementation; (ii) direct involvement of local governments and other stakeholders in project preparation and implementation; (iii) a flexible implementation schedule based on the capacity of local government agencies to coordinate, manage, and implement the Project; (iv) strengthening of agricultural support services; (v) coverage of small and medium-scale irrigation schemes; and (vi) strengthening of water resources information management, taking into account the increasing demand for multisector uses.

6. ADB’s Sector Objectives and Strategies

23. Indonesia’s Country Strategy and Program (2003–2005) has the following development objectives: reducing poverty, improving governance, supporting decentralization, managing natural resources and the environment, and strengthening the economy through infrastructure investments and private sector participation. In the agriculture and rural development sector, ADB’s strategy for Indonesia is to reduce poverty by increasing farm productivity and empowering the rural community. ADB’s strategy for the environment and natural resources sector emphasizes promoting sustainable management of natural resources in a decentralized framework, with increased stakeholder participation in the decision-making process. For water resources, the strategy underscores water conservation, efficiency improvement in irrigation, and a holistic approach to resource management within a river basin. The Project is fully consistent with the strategy for Indonesia.

III. THE PROPOSED PROJECT

A. Objective and Scope

24. The long-term objectives are increased economic growth and reduced poverty in 25 districts of rural Indonesia. The immediate objectives are decentralized management of irrigation systems on a sustainable basis and increased yields of irrigated crops. The project framework is given in Appendix 2.

25. The Project will cover the following provinces: (i) Lampung, (ii) Banten, (iii) West Java, (iv) Central Java, (v) East Java, and (vi) South Sulawesi. Nearly 75% of Indonesia’s irrigation area is in Java Island, and in Lampung and South Sulawesi provinces. ADB has approved 22 projects for a total amount of $1.02 billion to support irrigation and water resources development in these provinces, which have a good understanding of ADB’s project implementation procedures and systems. The provinces have started implementing the IMRP, and the Project will assist in consolidating the gains and improving the sustainability of past investments.

26. The Project will follow a demand-driven approach to irrigation management improvement, accommodating districts’ funding constraints and varying degrees of institutional, technical, and management capabilities. In the context of the Project, “subproject” refers to a district with all water resources and irrigation infrastructure, institutions, and stakeholders in it, and an irrigation scheme selected for project support is a “subproject scheme”. A list of potential districts in the six provinces is given in Appendix 3.

B. Components and Outputs

27. The Project will comprise three components, i.e., Part A: Irrigation Management; Part B: Water Resources Information and Asset Management; and Part C: Project Coordination and Monitoring.

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1. Part A: Irrigation Management

28. The component will comprise (i) capacity building of districts, (ii) capacity building of WUAs,7 (iii) sustainable operation of irrigation infrastructure, and (iv) irrigated agriculture support.

a. Part A-1: Capacity Building of Districts

29. The Project will develop institutional capacity of about 25 district governments to effectively discharge the responsibility devolved to them in accordance with the IMRP, under the decentralized framework of government. Specifically, the Project will assist district governments in (i) formulating policy guidelines and regulations in conformity with the relevant national policies and regulations, (ii) strengthening relevant district agencies for efficient delivery of public services related to the Project, and (iii) developing and implementing district irrigation management plans (DIMPs).

30. Policy guidelines and district irrigation regulations will be prepared using an inclusive participatory process with extensive stakeholder consultations. They will address district-specific issues and concerns, in addition to meeting the national policy requirements. The district irrigation regulations, to be approved by the district legislature, will provide the basis for establishing a KIIF, which would then be used for subsequent project implementation.

31. Each district will establish an IC comprising government officials concerned with irrigated agriculture and non-government members including WUAs representatives. Initially, the district will establish a district working group which, after the enactment of district irrigation regulations, will be converted to an IC. Among the initial priorities of IC will be the review of existing institutional arrangements for irrigation management and the identification of capacity building needs across the sector. The organizational structure and staffing of the relevant agencies, including the district water resources services and the district agricultural services, will be reviewed and rationalized, and staff training needs will be assessed and staff will be trained. Staff training will focus on improving the professional, technical, and managerial efficiency of staff, and making government agencies more service oriented. Activities will be undertaken in coordination with the Sustainable Capacity Building for Decentralization Project, approved in 2002.8 The Project will support visits of selected district staff and WUA members to irrigation schemes within the country and region where the participatory approach to irrigation management is being successfully implemented.

32. The information on the status of existing irrigation systems in districts will be updated and a DIMP will be prepared. The plan will aim at improving the physical and financial sustainability of irrigation systems by introducing the participatory approach to management. The plan will also form the basis for a sector investment program in the medium to long term. The DIMP will include a program for strengthening WUAs; transfer of schemes to WUAs through an IMA; and funding requirements for a satisfactory level of O&M as well as periodic and emergency replacement and rehabilitation. The DIMP will be reviewed and updated every year, particularly taking into account the experience gained in implementing Part A-3.

b. Part A-2: Capacity Building of Water Users Associations

33. The subcomponent will focus on strengthening WUAs in the project area through (i) irrigation reform information campaigns, and (ii) establishing and/or strengthening about

7 Henceforth, WUA is used as a generic term and includes WUAFs or the apex WUAF. 8 ADB. 2002. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the

Republic of Indonesia for the Sustainable Capacity Building for Decentralization Project. Manila. (Loan No.1964-INO(SF), for $44.75 million)

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6,250 WUAs. IMRP policies will be disseminated at the field level through media publicity and workshops for farmers engaged in irrigated agriculture. In establishing and strengthening WUAs, emphasis will be given to taking advantage of existing traditional/customary institutions for irrigation management that are now recognized by the Government Regulation on Irrigation. Multiple WUAs in a large scheme will be assisted to federate into a WUAF and/or an apex WUAF. WUAs will also be assisted in obtaining legal status through registration with the district authority. As part of this process, legal literacy will also be provided to help individual water users and their associations better understand their rights and responsibilities under the new policies. Legal assistance will also be provided in formulating management agreement and in utilizing their legal status to contract with third parties in connection with irrigation management and in improving irrigated agriculture. Institutional strengthening support to WUA will be provided initially for 1 year and thereafter for 2 more years during implementation of the irrigation management plan (IMP) for the scheme.

c. Part A-3: Sustainable Operation of Irrigation Infrastructure

34. After initial strengthening, the WUA will be assisted in the following: (i) undertaking a participatory rural appraisal to assess scheme performance and identify requirements for improving O&M; (ii) formulating an IMP covering a 5-year period; (iii) preparing a needs-based budget for priority activities for (a) an adequate level of O&M and (b) periodic rehabilitation of selected items as sustainable replacement of rehabilitation (SRR); and (iv) preparing a budget for scheme R&U, if required, to address the effects of past deferred maintenance. SRR is low-level periodic replacement/rehabilitation designed to ensure that the deferred maintenance cycle is broken and that irrigation systems performance is maintained at or close to the original design level. WUAs will be eligible for SRR assistance only after they have demonstrated an improved level of routine O&M. About 137,000 ha will be rehabilitated and upgraded. Routine O&M costs will normally be wholly financed by WUA; otherwise, the IMP will include an action plan showing how the WUA will provide full funding of routine O&M within an agreed time frame, normally 3 years, by gradually increasing irrigation service charges.

35. The IMP will be reviewed by the district agencies for technical, financial, and economic viability and compliance with the Project’s environment management plan (EMP); resettlement compensation policy framework and procedural guidelines (CPFPG); gender action plan; and indigenous people’s participatory planning framework. The IMP will be approved and prioritized by the IC, and harmonized with the DIMP and district priorities. The actual criteria for delineating the eligibility of government assistance for O&M, SRR, and R&U will be worked out by individual districts, in consultation with national and provincial agencies concerned, according to the specific condition of the districts. Normally all activities involving unskilled labor, e.g., canal desilting, cutting weeds, earthworks to restore canal shape, will be fully managed by WUA, while repairs that require substantial cash expenses or specialized engineering expertise or equipment not available locally, will be eligible for government support.

36. Following the approval of the IMP, an IMA will be negotiated between the district government and by the WUA. The IMA will incorporate the approved IMP and define the responsibilities of the WUA in managing the scheme, as well as the technical and financial support and services to be provided by the district government. An agreed mechanism for conflict resolution will be included. In case of relatively large schemes, O&M responsibility for headworks and main canals may be retained by the district water resources services (DWRS), WUAs being responsible only for downstream facilities. Such sharing of responsibility will be outlined in the respective IMAs.

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d. Part A-4: Irrigated Agriculture support

37. The subcomponent will provide support for dissemination of new technologies that were tested and recommended for field use by the Ministry of Agriculture under various programs including the ADB-assisted Participatory Development of Agricultural Technology Project.9 Support will also be provided for improving farmer access to agricultural inputs and services, and this will be achieved through strengthening technical, organizational, managerial, and bargaining capacity of WUAs for better deals with inputs and service providers and making the providers responsive and accountable to clients. Performance of similar programs within the project area and elsewhere in the country will be assessed and findings taken into consideration in designing a pilot study that will be tested in five districts. After validating the design, the activity will be extended in a phased approach to other districts.

2. Part B: Water Resources Information and Asset Management

38. This component will improve and expand the operation of the water resources information management system and facilities established in DGWR to provide access to quality data and information for multisector use. The institutional arrangements for managing the Water Resources Data Center at DGWR Central Office will be strengthened, and the Water Resources Data Center will be integrated into the regular organizational structure of DGWR. Additional staff will be recruited and trained for data processing and providing value-added services to users. Data requirements and information systems necessary for efficient water resources planning and management, and effective asset management at district level, will be assessed; hardware, together with appropriate generic software models, will also be provided. The design of the district water resources information management system and its implementation will be in line with the decision support system and the database concept and architectural design developed under JIIWMP. District staff will be trained and provided with facilities for studying and developing irrigation and water resources asset management modules.

3. Part C: Project Coordination and Monitoring

39. The Project will support (i) operation of a national steering committee (NSC); (ii) establishment and operation of a national project coordination and monitoring office (PCMO); (iii) financial accounting and monitoring of the Project; and (iv) development of a project performance management system (PPMS) at national, provincial, and district levels.

40. The Government established, in 2002, an NSC for guiding all water resources and irrigation development programs in the country. The Project will support the establishment and operation of the national PCMO as the NSC secretariat for the Project and for overall coordination and monitoring of project activities. A domestic accounting firm (consultant) will be engaged to ensure that project financial accounting reports and financial monitoring reports are prepared accurately and at regular quarterly intervals by each project implementation/management office at district, provincial, and national levels. The consultant will also train government staff in developing their capacity in accounting and financial management.

41. The PPMS will encompass (i) monitoring physical and financial progress as well as the economy and efficiency in achieving major activities; (ii) monitoring the level and adequacy of participation of various stakeholders in planning and implementing project activities, particularly district capacity building and improving the performance of irrigation schemes; (iii) monitoring

9 ADB. 1997. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the

Republic of Indonesia for the Participatory Development of Agricultural Technology Project. Manila. (Loan No. 1526-INO, approved in 1997 for $63.8 million)

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the Project’s social, environmental, and economic impacts , including the establishment of benchmark information and data; and (iv) developing a mechanism for making necessary adjustments in the project design and implementation arrangements in light of the PPMS findings. The design of the PPMS will take into account the monitoring and evaluation systems developed under TA 1363-INO: Strengthening Project Benefit Monitoring and Evaluation Activities of the Directorate General of Water Resources Development.

C. Special Features

42. Poverty Targeting. The project design includes a combination of measures to maximize poverty impact. The rural poverty incidence in the six provinces that will receive support for irrigation management improvement ranges between 20% and 29%, with a six-province average of 26%. Within the rural population, the incidence of poverty is much higher in the agriculture sector than in other sectors, and was estimated at 40% in 1999. The subproject selection criteria give priority to districts that have a relatively high incidence of poverty. Similarly, poverty data and the potential benefits for the poor will be duly considered in selecting individual irrigation schemes. A variety of measures targeting poor and disadvantaged individuals or groups will be used, including: (i) guidelines for WUA strengthening (which will require special attention to inform and include tenant farmers in the collective decision-making process); (ii) use of local labor and materials in implementing scheme improvement; and (iii) equity in water allocation and management, particularly in terms of meeting the requirements of tail-enders in the service area.

43. Gender and Development. Despite their extensive involvement in irrigated agriculture, women have not been well represented in irrigation management, nor in training, meetings, and other activities carried out under earlier programs. While recognizing the need to respect local values and beliefs and while respecting the choices of both men and women about taking part in specific activities, the Project will pursue suitable opportunities to promote greater involvement of women in the decision-making process of irrigation management. The project design provides for specific measures to achieve this, as outlined in Table 2 of the Summary Poverty Reduction and Social Strategy and Gender Plan in Appendix 4. Poverty and social issues are further discussed in Supplementary Appendix A.

44. Environment. All three components of the Project aim at, among other things, sustainable water resources management and environmental protection. The only activities likely to have some negative impact relate to subcomponent A-3: Sustainable Operation of Irrigation Infrastructure. An initial environmental examination of the five schemes studied during project preparation was undertaken and findings are summarized in Appendix 5. The findings indicate that improved O&M will lead to improved irrigation and environmental management in all schemes. However, construction activities in rehabilitation and upgrading some selected scheme, if not undertaken properly, may have a short-term negative environmental impact. District-level staff and WUA members will be trained in environmental screening of the irrigation schemes proposed for project support. A project environmental management plan (EMP) for environmental mitigation, complying with government regulations, has been prepared to guide the WUAs and district authorities and is included in Supplementary Appendix B.

45. Resettlement and Land Acquisition. Since the Project focuses on improving the management of existing systems, resettlement and land acquisition are not expected to be significant. None of the core subproject schemes would require any significant land acquisition or resettlement. Nonetheless, a CPFPG has been prepared (Supplementary Appendix C) and will guide all land acquisition and resettlement activities. A summary of the CPFPG is given in Appendix 6 on Land Acquisition, Resettlement, and Indigenous Peoples.

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46. Indigenous People. The communities likely to be affected by the Project are already engaged in cultivating irrigated rice. They include groups speaking various local languages and with distinct ethnic identities. In terms of livelihood systems, education, and representation in the local bureaucracy, there is little significant risk of any group of people being disadvantaged because of their status as an ethnic minority or indigenous people. Available information suggests that the Project would not affect groups with special vulnerabilities that would require preparation of a separate indigenous people’s development plan. If such groups are identified who may be significantly affected by project implementation, then such plans will be prepared in accordance with ADB’s Policy on Indigenous Peoples, and implementation of project activities at such sites would be conditional on ADB’s approval of the relevant plans. An indigenous people’s participatory planning framework is given in Appendix 6. D. Cost Estimates

47. The total cost of the Project (including taxes, price contingencies, and interest during construction) is estimated at $126.0 million equivalent (Table 1), of which $30.6 million (25%) is the direct and indirect foreign exchange cost, including about $6.0 million for interest and other charges during construction. The balance of $95.4 million equivalent (75%) is the local currency cost. A summary of cost estimates is given in Appendix 7 and details are available in Supplementary Appendix D.

Table 1: Cost Estimates ($ million)

Item Foreign

Exchange Local

Currency Total Cost

A. Irrigation Management 1. Capacity Building of Districts 3.0 5.0 8.0 2. Capacity Building of Water Users Associations 2.9 9.8 12.7 3. Sustainable Operation of Irrigation Infrastructure 14.2 45.7 59.9 4. Irrigated Agriculture Support 1.8 5.3 7.1

B. Water Resources Information and Asset Management 0.3 1.4 1.7 C. Project Coordination and Monitoring 1.1 6.1 7.2 Subtotal (A, B, C) 23.3 73.3 96.6 D Contingencies 1. Physical 0.6 1.5 2.0 2. Price 0.7 20.6 21.3 E. Interest and Other Charges During Construction 6.0 - 6.0 Total 30.6 95.4 126.0 Source: Asian Development Bank estimates. E. Financing Plan

48. It is proposed that ADB provide a loan of $19.0 million equivalent from its Asian Development Fund resources to finance $5.7 million of the foreign exchange costs and $13.3 million equivalent of the local currency costs. The loan will have a term of 32 years, including a grace period of 8 years, with an interest charge of 1% per year during the grace period and 1.5% per year during the remaining term.

49. In addition, the Government has requested a loan of $54.0 million from ADB’s ordinary capital resources to finance $20.5 million of the foreign exchange costs and $33.5 million equivalent of the local currency costs. The loan will have a 22-year term including a grace period of 7 years, an interest rate determined in accordance with ADB’s LIBOR-based lending facility, a commitment charge of 0.75% per annum, a front-end fee of 0.5% (the fee will be capitalized in the loan), and such other terms and conditions set forth in the draft Loan

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Agreement. The Government has provided ADB with (i) the reasons for its decision to borrow under ADB’s LIBOR-based lending facility on the basis of these terms and conditions, and (ii) an undertaking that these choices were its own independent decision and not made in reliance on any communication or advice from ADB.

50. The Government of Indonesia has requested the Government of the Netherlands to provide grant financing for the Project, and the latter has agreed in principle to provide a grant of $15.0 million equivalent. The grant, to be administered by ADB, will cover $4.4 million of the foreign exchange costs and $10.6 million equivalent of the local currency costs.

51. ADB and the Netherlands Government will finance 60% of the local cost of the Project. This is principally because of the nature of the works envisaged under the Project, which are mainly capacity building of local governments and WUAs, and small-scale repair and rehabilitation of existing irrigation schemes. The Project is classified as a poverty intervention project and will contribute significantly on combating poverty and improving living conditions of people in the Project area. Therefore, the ADB’s and the Netherlands’ financing a large part of the local cost is justified on project considerations. The Government (including local governments) and WUAs will finance the remaining local currency cost equivalent to about $38.0 million. The Government will cover all taxes and duties, recurrent expenditures during implementation, land acquisition and resettlement, and environmental mitigation measures, estimated to cost $25.5 million. The estimated WUA contribution will total about $12.5 million equivalent and form part of the incremental O&M, SRR, and R&U costs. The financing plan for the Project is shown in Table 2.

Table 2: Financing Plan ($ million)

Source Foreign

Exchange Local

Currency Total Cost

Percentage

ADB through ADF 5.7 13.3 19.0 15.1 ADB through OCR 20.5 33.5 54.0 42.8 Govt. of Netherlands Grant 4.4 10.6 15.0 11.9 Central and Regional Governments - 25.5 25.5 20.2 Water Users Association - 12.5 12.5 10.0 Total 30.6 95.4 126.0 100.0 ADB = Asian Development Bank, ADF = Asian Development Fund; OCR = ordinary capital resources. Source: Asian Development Bank estimates . F. Implementation Arrangements

1. Project Management and Coordination

52. The Project will be executed by the Ministry of Agriculture through the Directorate General of Agricultural Facilities (DGAF), Ministry of Home Affairs through the Directorate General of Regional Development (BANGDA), and Ministry of Settlement and Regional Infrastructure through DGWR. The project implementing agencies (IAs) are as follows:

(i) Part A-1: Capacity Building of Districts—district governments;

(ii) Part A-2: Capacity Building of Water User Associations—district governments;

(iii) Part A-3: Sustainable Operation of Irrigation Infrastructure—provincial and district governments;

(iv) Part A-4: Irrigated Agriculture Support—district governments;

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(v) Part B: Water Resources Information and Asset Management—DGWR, and provincial and district governments; and

(vi) Part C: Project Monitoring and Coordination—National Planning and Development Agency (BAPPENAS), in cooperation with BANGDA, DGAF, and DGWR.

53. Each EA will establish a national project management unit (national PMU) in Jakarta, comprising a project director and an adequate number of qualified technical, accounting, and financial staff. The national PMU under DGWR will be responsible for: (i) recruiting consultants for improving O&M efficiency undertaking SRR and R&U activities, and water resources information management system; (ii) overseeing the implementation of civil works, O&M-related activities, and water resources data gathering for management information system; and (iii) overseeing procurements by WUAs. The national PMU under BANGDA will: (i) oversee and facilitate capacity building of districts and WUAs, issuance of district irrigation regulations, and the strengthening of the legal status of WUAs; and (ii) recruit and supervise institutional development and capacity building consultants. The national PMU under DGAF will be responsible for: (i) recruiting consultants for agricultural support services; (ii) overseeing agricultural extension training and development of cooperatives; and (iii) assisting WUA members in adopting irrigated agriculture technologies, formation of cooperatives, and providing access to ongoing rural financial services.

54. Each participating province will establish a provincial PCMO at Provincial Planning and Development Agency (Provincial BAPPEDA) level, comprising provincial staff of relevant sector agencies and members of civil society. The provincial PCMO will assist provincial government and technical agencies to (i) identify additional subproject districts for project participation; (ii) help NSC in monitoring and coordinating project activities and coordinate with other similar projects and programs being implemented in the province; (iii) facilitate backstopping to districts on engineering and agricultural aspects; (iv) maintain provincial directories of service providers for use by participating districts and WUAs; (vi) facilitate collection and dissemination of district-level implementation experiences through workshops, discussions, and newsletters; and (vii) formulate an annual work plan (AWP) for the province. AWP will document the activities to be undertaken during the year including their commencement and completion dates, status of preparation, expected outputs, and budget requirements. The provincial water resources services and agricultural services will be designated the provincial project implementation units.

55. Each of the participating provinces will establish 2 provincial project implementation units (Provincial PIUs) at the provincial water resources services and provincial agricultural services (PWRS and PAS). The PWRS PIU will be responsible for developing water resources information and asset management system at provincial level, and implementing works relating to irrigation infrastructure and O&M efficiency improvements when a subproject scheme covers more than one district. The PAS PIU will be responsible for overseeing the institutional development and agricultural support services at district and WUA levels.

56. Provincial PCMOs will be replicated at district level by district PCMOs, chaired by district BAPPEDAs. District AWPs will be reviewed and endorsed by ICs. District water resources services and agricultural services will serve as district project implementation units and will supervise project implementation on a day-to-day basis. Similarly, each district will also establish two PIUs at the district water resources services and district agricultural services.

57. At the national level, the Project will be guided by the NSC, chaired by the Deputy Chairman for Infrastructure, BAPPENAS. The EAs and other relevant national agencies will be represented on the NSC at the director general level. The NSC will provide policy guidelines, approve subproject district selection and AWP for the Project, and oversee project

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implementation. The NSC will meet as necessary, and at least twice a year. A national PCMO will serve as the secretariat for the NSC. National PCMO officials will include the Director (Water and Irrigation) of BAPPENAS (chairperson) and representatives of the Ministry of Agriculture, Ministry of Home Affairs, and Ministry of Settlement and Regional Infrastructure, and they will be supported by technical and accounts staff. The national PCMO will be responsible for the overall planning of project activities; reviewing and consolidating the AWPs and corresponding budget estimates received from project EAs and IAs ; financial management, monitoring, and evaluation of project implementation; coordinating recruitment of consultants; procurement of equipment and materials by EAs and IAs ; development and operation of the PPMS; and preparing and submitting reports to the Government and ADB.

58. A project organization chart is given in Appendix 8.

2. Subproject Selection

59. Five core subproject districts in five project provinces were selected and studied during the project preparatory technical assistance phase. In each core subproject district, an irrigation scheme was selected and technical, institutional, social, environmental, and economic aspects were studied in detail. Additional subproject districts will be selected for participation in the Project in accordance with a selection process. The selection will be made by NSC, based on a district application through the Provincial PCMO showing commitment to comply with the policy, institutional, and financial requirements of the Project. Higher priority will be given to those districts that (i) have high a incidence of poverty and a high number of established and active WUAs, (ii) have started implementing the policies set out under the decentralization laws, (iii) commenced reviews and capacity building of district institutions, and (iv) started participatory programs with WUAs to maintain irrigation infrastructure. Subproject district selection criteria are summarized in Appendix 9.

3. Implementation Period

60. The Project will be implemented over a period of 7 years, commencing in early 2004. A summary project implementation schedule is shown in Appendix 10.

4. Procurement

61. Goods and services financed wholly or partly by ADB lending will be procured in accordance with the ADB Guidelines for Procurement. Civil works for SRR and R&U will be eligible for loan financing. WUAs will share part of the civil works costs in SRR and R&U in the form of cash, labor, or local materials, and such civil works packages will be carried out following PAI 3.05 in Appendix 2 to A Guide on Community Participation in Procurement. The contract ceiling during the first year will be $10,000 equivalent, which may be increased in subsequent years to $25,000 equivalent, with prior ADB permission, upon satisfactory completion of the previous contract by the WUA. In the event that a package exceeds the ceiling, DWRS will award the contract through local competitive bidding (LCB). Civil works in that part of the irrigation scheme (mostly headworks and main canals of relatively large schemes), which have not been transferred to WUAs, may be carried out by DWRS through LCB. LCB contracts costing the equivalent of $100,000 or less will be awarded in accordance with the Government’s standard procedure for such works as set forth in Presidential Decree No. 18/2000 with necessary clarifications and modifications for compliance with ADB’s Guidelines for Procurement. A standard LCB document for civil works will be prepared by DGWR and approved by ADB for use in the Project. The contracts will provide for engagement of labor and use of local materials to be provided by the WUAs.

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62. Equipment to be procured under the Project consists primarily of that required for communications equipment, training materials, vehicles, and office equipment and furniture. All contract packages are expected to be below $500,000 each. Any contract of $500,000 or above will be awarded on the basis of international competitive bidding. Each contract with an estimated cost of between $100,000 and $500,000 will be awarded through international shopping. Minor equipment and materials costing less than $100,000 will be procured through direct purchase. A tentative list of packages of goods and services, excluding consulting services, is given in Appendix 11.

5. Consulting Services

63. The Project will require an estimated 1,653 person-months (pm) of consulting services: 213 international and 1,440 domestic. This relatively large input stems from the need for capacity building and the expert assistance required to support the highly decentralized implementation arrangements, and the need for intensive interaction with water users and field-level staff in widely dispersed, small and medium-scale irrigation schemes, and the large element of training and transfer of knowledge in the Project. These requirements also include the services of a domestic accounting firm for financial accounting of the Project and preparing quarterly financial monitoring reports for the Project. Consultants will be selected and engaged through firms in accordance with ADB’s Guidelines on the Use of Consultants and other arrangements satisfactory to ADB for the engagement of domestic consultants. In selecting consultants, the quality and cost-based selection method will be used. An outline of the terms of reference of consulting services is given in Appendix 12. ADB has approved the Government’s request for advance action for the recruitment of consultants, and the Government has been advised that such approval does not commit ADB to approve the Project.

64. The Project will also engage NGOs and local educational institutions for WUA strengthening and assist them in IMP preparation and implementation. The NGOs and institutions will be engaged by WUAs from a list of service providers selected by the province concerned, based on experience and qualifications of the NGOs. District-level training will be contracted out to educational and research institutions and other qualified service providers, as the need arises, in accordance with competitive selection procedures acceptable to ADB.

6. Disbursement Arrangements

65. The allocation of funds for project activities will be made annually on the basis of consolidated AWPs approved by NSC and ADB. Loan and grant proceeds and counterpart funds will be channeled through the DIP (development budget allocation to central government budget) and DIPP (development budget allocation to province/district government budget). Fund flow arrangements are given in Appendix 13.

66. The Ministry of Finance’s Directorate General of Budget will establish two imprest accounts, one for ADF loan and the other for OCR loan, for each EA at Bank Indonesia to expedite disbursement of loan proceeds, particularly for expenditures under small contracts. The imprest accounts will be maintained and liquidated in accordance with ADB’s Loan Disbursement Handbook. The initial deposits will be based on expected disbursement for the first 6 months of implementation, and will not exceed $3 million in aggregate. The statement of expenditure (SOE) procedure may be used for reimbursement of eligible expenditures for civil works, capacity building, training, small procurements, and NGO services, and to liquidate advances provided in the imprest accounts in accordance with ADB’s Loan Disbursement Handbook and other arrangements agreed with the Government.

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7. Accounting and Auditing

67. Each EA and IA will maintain separate records and accounts for goods and services financed out of loan proceeds and disclose the use thereof. WUAs will maintain accounts in a format to be specified in IMAs, and their books and records will be open to public access, and may be audited at random by independent auditors to be engaged under the Project. Summary information on scheme-level expenditures will be posted on office boards for public view. The national PCMO will prepare consolidated financial statements for the Project, and have them audited annually in accordance with sound auditing principles by the sovereign audit agency of the Government or other auditors acceptable to ADB. The auditor’s report will also include the auditor’s opinion on the use of imprest account and SOE procedures. Copies of audited accounts and auditor’s reports will be submitted to ADB within 9 months of the end of each fiscal year.

8. Project Performance Monitoring and Evaluation

68. The national PCMO will have overall responsibility for project performance monitoring and evaluation. A PPMS will be designed and put into operation under Part C of the Project (para. 41). The PPMS findings will be incorporated in quarterly project progress reports to be prepared by the national PCMO. Quarterly project progress reports will be submitted to ADB, the Netherlands embassy in Jakarta, NSC, and the project EAs and IAs within 45 days of the end of the reporting period. The national PCMO will also prepare and submit a consolidated project completion report to ADB and the Netherlands embassy within 6 months of project completion.

69. In addition to regular reviews, a midterm review will be undertaken by ADB jointly with the governments of Indonesia and the Netherlands in 2007 to assess the implementation status, review the project parameters, and take appropriate measures to achieve the project objectives.

IV. PROJECT BENEFITS, IMPACTS, AND RISKS

A. Economic Benefits

70. A major thrust of the Project is the capacity building of district governments and WUAs with regard to sustainable management of irrigation and water resources. A significant part of the project costs relates to these activities. The economic benefits accruing from the investment in capacity building cannot be quantified, but the benefits would be realized through enhanced technical skills and significant efficiency gains in planning and management of irrigation, both at government and users’ levels. These gains would result in increased efficiency in delivering irrigation and reduced O&M and rehabilitation costs. The cost-effectiveness of the proposed investment in capacity building would be ensured through a competitive process drawing on both government and private sector service providers.

71. Given the sector approach and the participatory emphasis, decisions on the types of schemes that would be assisted for O&M, SRR, and R&U would be made at the decentralized level with possible differential outcomes on the overall economic performance of the Project.

The selection criteria would require assessment of the anticipated economic returns at the scheme approval stage to ensure individual scheme viability. To provide indicative economic outcomes from the project activities, four core schemes were studied and analyzed in detail during the project preparatory technical assistance. The core schemes represented diverse prospective schemes (small and medium-sized, and secondary canals of large schemes, and a combined use of surface and groundwater with different technical and institutional characteristics and future potential) and different typology of interventions. The anticipated economic internal rates of return (EIRRs) for the core schemes ranged from 19% to 60% and

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were not sensitive to cost overruns, incremental benefit shortfall, or appreciation in the value of the local currency against the dollar (Appendix 14, para. 13).

B. Financial, Social, and Poverty Reduction Benefits

72. Sustaining and improving performance of the irrigation systems would help enhance the livelihoods of rural people, including tenants, owner-cultivators, agricultural laborers, as well as landowners, through higher and more stable incomes. On the core schemes, anticipated per hectare incremental incomes are in the range of Rp1.2 million–2.8 million, or 26–162% of without-project levels. Increases are anticipated to be highest in the tail end reaches where present irrigation supplies are lowest in volume and reliability and, as a consequence, cropping intensities and crop yields are lowest and incidence of income poverty highest (Appendix 14, Tables A14.1 and A14.5). Distributional analysis of the core schemes indicates that as much as 42% of the overall net economic gains would accrue to the tail reaches, accounting for about 33% of the total service area, which would help reduce income disparities (Appendix 14, Table A14.7). The poverty impact analysis of the core schemes indicates that 32% of the net economic benefits would accrue to the poor. With 40% of the population employed in the agriculture sector living below the poverty line, the Project will have a major impact on combating poverty and improving income distribution in the project area.

73. Empowering rural people in irrigation system management decision making would help build social capital within the irrigation management institutions. Inclusive approaches to participation in irrigation management would strengthen access to resources and give voice in decision making to disadvantaged members of the community, including the poor and women, thereby addressing an important dimension of poverty and governance. The access to irrigation water of poor farmers within the irrigation service area will be safeguarded and participation of women in irrigation management will be promoted (Appendix 4, Table 2).

C. Policy Impact and Institutional Benefits

74. The IMRP and NWRP make a paradigm shift in the Government’s policy on irrigation and water resources management, and the Project will provide important support for implementing the new policy initiatives. It will help build capacity within and outside government institutions for a participatory approach to resource management and enhance transparency and accountability in management decisions. The policy action transferring the management of government schemes (covering 250,000 ha) to WUAs and to the district government that assumes the emergency and periodic rehabilitation responsibility on a cost-sharing basis will improve the physical and financial sustainability of irrigation infrastructure.

75. The Project will further some of these policy changes through innovation and addition of new elements. It will introduce a fundamental change in the planning of irrigation development at regional level through the DIMP approach. DIMP will assist the districts in addressing the irrigation management issues in a systematic manner, taking into account the problems and potential in the district as a whole, rather than planning to address issues in individual schemes in isolation, and with greater efficiency in allocation of resources.

76. The Project will rationalize and strengthen the institutional arrangements for irrigation management at district level and strengthen the technical and managerial skills of staff and make them more responsive to stakeholder needs in the sector. WUAs ’ option to source certain services from the private sector will encourage government agencies to be more service oriented. Strengthening of WUAs will improve governance and management at scheme level.

77. The Water Resources Data Center in Jakarta will be integrated into the DGWR regular organization structure, and technical and professional capability will be strengthened to provide

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value-added services to its users within and outside DGWR. Tools and techniques provided will enhance district-level quality assurance and asset management in the water resources sector.

D. Environmental Impact

78. The project interventions will improve the efficiency of resource use, and generate a positive environmental impact. Any short-term negative impacts that might occur during rehabilitation of some irrigation and drainage structures will be mitigated in accordance with the environmental management plan (Supplementary Appendix B).

E. Sustainability

79. The participatory principle underpinning the Project’s design will help develop a sense of ownership among various stakeholders and this, in turn, will enhance the Project’s sustainability. The introduction of SRR will break the deferred maintenance cycle, while the resulting reduction in the need for major rehabilitation will make available resources to expand SRR and to undertake emergency rehabilitation works through the demand-driven, cost-sharing mechanism of KIIF. Similarly, the irrigation management transfer to WUAs will relieve the Government of significant financial costs in subsidizing routine O&M, and government financial assistance will then be more effectively used for sustaining and further expanding the reforms.

80. The subproject scheme analysis indicates that in financial terms farmers could afford to pay the incremental O&M costs estimated at Rp85,000 per hectare, which on the core schemes represents 3–14% of the immediate incremental benefits and 3–7% of the incremental benefits at full development. While the potential ability of the farmers to pay the incremental costs is recognized, they will be motivated to pay through a variety of practical ways including (i) allowing in-kind contributions and promoting transparent accountable institutions that build confidence among farmers that their fees and contributions will be well used; and (ii) providing assurance that the Government will continue to assist in matters beyond local financial capacity, in ways that encourage cost sharing with beneficiaries.

81. Analysis of the current budget and expenditure patterns for core project districts shows that on average the counterpart funding requirements for project activities during project implementation would be about 0.2% and 0.8% of the revenues and development expenditures, respectively. During the post project period, the annual funding requirements to fulfill government commitments to sustainable irrigation management would be 0.8% of the district revenues and 2.7% of the present development expenditures, respectively. Assuming that current trends in funding are maintained, the district governments would have sufficient resources to sustain the Project’s impact.

F. Risks

82. District Participation. All district governments visited during project preparation realize the importance of improving water resources management and were enthusiastic in implementing sector reforms. However, the risk remains that some districts may not be keen to subject themselves to the transparency requirements and participatory approach demanded by the Project. The risk is mitigated by the sector approach, with project participation determined on a competitive basis where the potential participating districts are much larger than can be accommodated (25 districts out of 63 potential districts will be selected).

83. Interagency Coordination. Much of the authority and responsibility vested to date in the national sector agencies for project implementation will be transferred to local governments, and the national agencies will be expected to provide important technical and advisory support to the local government agencies concerned. The Project will be implemented during a period of evolving decentralization and as a result might face coordination problems between national

19

sector agencies and regional governments. The risk will be mitigated by providing a forum through NSC for discussing the coordination and related issues.

84. Governance and Anticorruption Measures. Good governance assumes an important dimension in the Project because of the emphasis on decentralized implementation. The concern will be addressed by strengthening both the service delivery and management capacity at district and WUA levels, and the participatory approach to project planning and implementation, thereby improving transparency and accountability. District-level activities will be approved and overseen by the IC comprising government officials and non-government members including WUA representatives. The activities for legal education, legal services, and community capacity building will also pay particular attention to good governance, and to helping water users understand and act on their rights. Most O&M and repair and rehabilitation works will be carried out by the WUAs, unless these require special skills, techniques, or equipment not available locally. A recent audit by the World Bank of works carried out by WUAs in JIIWMP confirms that the quality of these works is, in most cases , better than similar works carried out by domestic contractors, and involved lower unit cost. Summary information on scheme-level expenditures will be posted on office boards for public view. The Project will provide for resources to establish financial management services at national, provincial, and district levels and to undertake independent scheme-level audits.

V. ASSURANCES

A. Specific Assurances

85. In addition to the standard assurances, the Government has given the following assurances, which are incorporated in the legal documents:

(i) Funds from the loan and grant proceeds and the corresponding counterpart funds, necessary to finance the project activities, will be made available throughout the project implementation period by earmarking the funds, notwithstanding (a) any reallocation of authority or responsibility for channeling of external assistance and provision of corresponding counterpart contributions between the central Government, provinces, and the districts or (b) any requirements for provision of matching counterpart funds for funding the project activities from each of the participating districts arising from the full implementation of Laws Nos. 22 and 25 of 1999 and Ministry of Finance KepMen No. 35 of 2003, unless otherwise agreed by ADB;

(ii) The proceeds of the loan and grant will be disbursed to project provinces and districts throughout the project implementation period by budgetary transfers of funds earmarked for such purposes, unless otherwise agreed by ADB;

(iii) All counterpart funds for project implementation will be provided in a timely manner and, to such end, all IAs will submit by 1 September of each year through the national PMU concerned to NSC, the AWP and budget for the following fiscal year, including (a) a report on planned program and achievements during the first 9 months of the current year and the current budget situation; (b) analysis of the next year’s program and fund requirements; and (c) the requested budget allocation from the loan and grant proceeds and counterpart funds;

(iv) Each of the participating provinces and districts will approve the CPFPG, and CPFPG provisions will be adhered to in case there are any land acquisitions and/or resettlements;

20

(v) Selection of subproject districts will be carried out in accordance with the agreed selection criteria;

(vi) The participating provinces and districts will establish environmental management and monitoring systems at district level and will comply with the requirements of the EMP; and

(vii) The proportion of women participants will be maintained at not less than 33% in the training programs at district level and 15% in training programs at scheme level, and district irrigation regulations will recommend that the proportion of women in the elected officials of WUAs will be not less than 15%.

B. Conditions for Loan Effectiveness

86. The following are the conditions for loan effectiveness:

(i) A national PCMO will be established for coordination and monitoring of project activities;

(ii) A national PMU will be established by each EA;

(iii) The CPFPG will be approved by the Ministry of Home Affairs; and

(iv) The Government of the Netherlands has confirmed its grant for the Project and all conditions precedent to its effectiveness (other than effectiveness of ADB loans) have been fulfilled.

VI. RECOMMENDATION

87. I am satisfied that the proposed loans would comply with the Articles of Agreement of ADB and recommend that the Board approve:

(i) the loan in various currencies equivalent to Special Drawing Rights 13,270,000 to the Republic of Indonesia for the Participatory Irrigation Sector Project from ADB’s Special Funds resources with an interest charge at the rate of 1% per annum during the grace period and 1.5% per annum thereafter; a term of 32 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft Loan Agreement presented to the Board;

(ii) the loan of $54,000,000 to the Republic of Indonesia for the Participatory Irrigation Sector Project from ADB’s ordinary capital resources with interest to be determined in accordance with ADB’s LIBOR-based lending facility; an amortization period of 22 years, including a grace period of 7 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft Loan Agreement presented to the Board; and

(iii) the administration by ADB of a grant assistance not exceeding the equivalent of $15,000,000 to the Republic of Indonesia for the purpose of the Participatory Irrigation Sector Project to be financed by the Government of the Netherlands.

TADAO CHINO President

21 November 2003

Appendix 1 21

EXTERNAL ASSISTANCE TO THE IRRIGATION SECTOR

Item

Amount ($ million)

A. Grant

1. Multilateral 188.42 a. Asian Development Bank 8.50 b. European Union 126.26 c. United Nations Development Programme 20.71 d. World Food Program 32.95 2. Bilaterala 296.60

Subtotal (A) 485.02 B. Loan 1. Multilateral 4,260.10 a. Asian Development Bank 1,517.50 b. World Bank 2,688.55 c. International Fund for Agricultural Development 54.05 2. Bilateralb 2,336.02

Subtotal (B) 6,596.12

Total (A+B) 7,081.14

a Including Australia, Canada, Italy, Japan, Republic of Korea, the Netherlands, United Kingdom, and United States.

b Including Canada, France, Germany, Japan, the Netherlands, United Kingdom, and United States. Source: ADB. 1997. Report and Recommendation of the President to the Board of Directors on a

Proposed Loan to the Republic of Indonesia for the Northern Sumatra Irrigated Agriculture Sector Project. Manila. (updated by the Mission in July 2003)

22 Appendix 2

PROJECT FRAMEWORK

Design Summary

Performance Targets

Monitoring Mechanisms

Assumptions and Risks

Goals • Increased economic

growth in 25 districts of rural Indonesia

• Reduced rural poverty

• 1.5 million farm family

incomes increase by about 15–20% by 2012

• Incidence of poverty among project beneficiaries reduced by one third by 2012

• National and

regional economic statistics

• National and regional poverty statistics

• ADB project performance audit report (PPAR)

• Monitoring reports and evaluation studies

• Institutional changes

sustained after project completion

Purpose • Sustained decentralized

management of irrigation systems

• Increased yields of irrigated crops

• Adequate level of routine

operation and maintenance (O&M) of irrigation schemes regularly undertaken for about 625,000 hectares (ha) by 2010

• Deferred maintenance is avoided for 625,000 ha by 2012

• Average paddy yields increase from 3.5 metric tons (t)/ha (2002) to 4.0 t/ha in 2012

• ADB project

completion report • ADB review

mission • Project

performance management system (PPMS) reports

• Special studies

• Rice production will

remain profitable for small farmers, i.e., production costs, consumer demand, and sales prices will remain relatively stable despite increased per ha yields

• No severe economic or political crisis

Outputs • District capacity for

management of devolved irrigation responsibilities upgraded

• 25 district governments

strengthened and functioning effectively as focal points for irrigation management by 2010

• 5,000 district staff trained in irrigation planning and management by 2007

• District irrigation management plan prepared in participating districts by 2005

• District regulations,

plans, budgets • PPMS reports • ADB review

missions

• Districts remain

committed to the irrigation management policy reforms

• Participatory approach to decision-making process will be followed

• Irrigation performance at scheme level improved

• 2,500 water user association1 (WUAs) on government-managed irrigation schemes established or strengthened by 2010

• 3,750 WUAs actively managing farmer/village schemes further strengthened by 2010

• WUA registrations • Transfer

agreements • Service

agreements • WUA proposals,

meeting minutes, assistance agreement

• DIIF reports

• Districts will continue cost sharing supports to WUAs for emergency post transfer rehabilitation

• WUAs do not lose the sense of participation

1 The term WUA includes water users association federations .

Appendix 2 23

Design Summary

Performance Targets

Monitoring Mechanisms

Assumptions and Risks

• WUAs within a scheme or in the schemes on the same river within close proximity are federated into WUAFs

• Management of irrigation schemes covering about 250,000 ha is transferred to WUAs by 2010 through partnership agreements

• On the transferred schemes, full cost of O&M assumed by 2,500 WUAs by 2012

• WUA reports • Water use rights

licenses • PPMS and

independent impact evaluation reports

• PPMS reports • Review missions • User records

• District agricultural services rationalized and developed, WUAs strengthened and empowered, farmer access to agricultural services and inputs improved

• Adoption of improved irrigation agronomy techniques by members of 6,250 WUAs

• Adoption of improved technology packages developed under other projects are adopted by the farmers belonging to 6,250 WUAs

• The successful completion of pilot study on using WUAs to improve farmers’ bargaining power and make service/input providers more accountable to farmers in 5 districts by 2005

• WUA reports • PPMS • Project progress

reports • Independent impact

evaluation reports • Review missions

• Viable technology packages and agribusiness options suitable for the project areas are available and are acceptable to farmers

• Water resources management information system improved

• Water resources data management unit at Directorate General of Water Resources (DGWR) Central Office institutionalized by June 2004

• Decision support systems at DGWR Central Office strengthened by 2005

• Water resources information and data gathering, processing, and quality control facilities in project districts improved and integrated into the DGWR Central Office decision support system by 2008

• PPMS reports • Review missions • User records

• Water resources management continues to receive priority attention within DGWR

Activities A-1. Strengthening Irrigation Management Capacity in 25 Districts

(Note: Capacity building activities in each district will be conducted in parallel, but with each district proceeding at its own pace.)

24 Appendix 2

Design Summary

Performance Targets

Monitoring Mechanisms

Assumptions and Risks

• Initiate public awareness campaign on the irrigation management reform program (IMRP) and Law 77/2001 on Irrigation

• Prepare policy guidelines and district irrigation regulations (perdah) and regional decrees

• Establish irrigation commission (IC)

• Rationalize regional and

strengthen irrigation institutions in accordance with new perdah and decrees

• Review and update

status of existing irrigation schemes in the district

• Develop district irrigation

management plan (DIMP)

• Establish kabupaten (district) irrigation improvement fund (KIIF)

• Implement DIMP—assist WUA develop and implement irrigation management plan (IMP) of individual schemes

• Pre-project campaign completed in 58 potential districts by end-2004

• Media dissemination and

Information campaigns completed in 25 dis tricts by end-2008

• ICs established in 25 districts by end-2006

• Reorganization to be completed by 2006 and 5,000 government staff trained in improved delivery of public services by 2010

• At least 33% of trainees will be women

• Asset management system designed and implemented and inventory of irrigation infrastructure completed in 25 districts by end-2006

• DIMPs developed in 25 districts by end-2006

• KIIFs are established and made operational by end-2006

• DIMPs are implemented in 25 districts and IMPs are developed and implemented in 6,250 WUAs by 2010

• Project progress report

• ADB review missions

• District governments will accept policy and governance regime changes promoted by the project

• National and local authorities will support WUA empowerment and management transfer

• Inclusive participation (women, poor, non-irrigation water users) will be practiced, and the Gender Action Plan will be implemented

Risks • Response by some

district governments may be slow

• Coordination difficulties between national and regional sector agencies, and within regional agencies

• Weaknesses in governance institutions may result in corruption, capture of benefits by local elites, and other problems

A-2: Strengthening 6,250 Water Users Associations • Strengthen and empower

WUAs through awareness on Irrigation Management Reform Program (PKPI), community mobilization, and training on irrigation management

• Assist WUAs in conducting schemes and asset surveys

• Assist WUAs in preparing

draft IMP for individual schemes, and WUAs in submitting draft IMPs to ICs

• ICs review, revise, and approve IMPs

• 2,500 WUAs established

and strengthened on Government schemes and 3,750 WUAs strengthened on village schemes by end-2010

• District irrigation regulation will recommend that at least 15% of WUA elected members comprise women

• Asset surveys completed on irrigation schemes covering 625,000 ha by end-2009

• Draft IMPs completed on

irrigation schemes covering 625,000 ha by

• WUA reports • PPMS • Project progress

reports • Review missions

• Government remains

committed to the irrigation management reform program (IMRP) and Law 77/2001 on Irrigation

Appendix 2 25

Design Summary

Performance Targets

Monitoring Mechanisms

Assumptions and Risks

approve IMPs • District concludes an

irrigation management agreement (IMA) with WUA

• Transfer scheme management to WUAs and implement improved management of schemes

covering 625,000 ha by end-2009

• IMPs approved for irrigation schemes covering 625,000 ha by 2010

• IMAs signed with 6,250 WUAs by 2010

• Management of 2,500 government schemes transferred to WUAs by end-2010

A-3: Sustainable Operation of Irrigation Infrastructure • Provide assistance in

O&M (declining basis for 3 years) and needs -based budgets

• WUA submits proposal

for sustainable replacement of rehabilitation (SRR) to IC

• WUA implements SRR after approval by IC

• IC evaluates and

approves proposals for rehabilitation and upgrading (R&U) on selective basis

• IC assists in construction supervision, quality control, and related training

• On 2,500 schemes where

the management has been transferred to WUAs, the full cost of O&M is gradually transferred to the WUAs by 2013

• Proposals by 6,250 WUAs are received by IC by 2009

• Implementation of SRR

on 6,250 schemes commences by 2010

• Proposals for R&U approved 137,600 ha received by the IC by 2008

• R&U activities are

completed on 137,600 ha by 2009

• WUA reports • PPMS • Project progress

reports • Review missions

• Government remains

committed to the irrigation management reform program (IMRP) and Law 77/2001 on Irrigation

A-4. Providing Support for Irrigated Agriculture • Assess the extension and

credit needs for irrigated agriculture

• Rationalize and strengthen district agricultural services

• Assess the performance of past programs aimed at strengthening technical, organizational, managerial, and bargaining capacity of WUAs for better deals with inputs and service providers and making the providers responsive and accountable to clients

• Building on past experience, develop and implement a pilot program in 5 districts for

• Participatory needs

assessment carried out with 6,250 WUAs

• 125 trainers trained in 25 districts

• Assessment of past programs completed and strategy formulated by 2004

• Pilot activities on

improving farmers’ access to credit and development of agribusiness

• WUA reports • PPMS • Project progress

reports • Independent impact

evaluation reports • Review missions

• Government remains

committed to the decentralization

• Viable technology packages and agribusiness options suitable for the project areas are available and are acceptable to farmers

26 Appendix 2

Design Summary

Performance Targets

Monitoring Mechanisms

Assumptions and Risks

program in 5 districts for strengthening WUAs and

• Disseminate new technologies that were tested and recommended for field use by the Ministry of Agriculture under various programs including the ADB-assisted Participatory Development of Agricultural Technology Project

agribusiness implemented in 5 districts

• Training workshops, field demonstrations, farmer days and farmer exchange visits held for 6,250 WUAs

B. Improving Water Resources Information and Asset Management System • DGWR initiates action for

structural integration of the Water Resources Data Management Unit (WRDMU) and the required decree issued

• WRDMU provided with adequate number of qualified staff

• Water resources data and information management as well as asset management systems in the participating districts and provinces assessed, and required hardware and appropriate generic software models provided

• Provincial and district staff trained on data collection, quality control, and asset management modules.

• The KEPMEN issued and

integration initiated by 2004

• WRDMU operational by

2004 • The system design

completed by 2004 and 25 districts and 6 provinces equipped with relevant hardware and software by 2007

• Staff training for 175

district staff and 30 provincial staff completed

• PPMS • Project progress

reports • Review missions

• National and regional

governments will continue to give priority to collection and collation of quality information and data

• Information and data will serve users’ needs

Inputs Capacity Building Consulting Services Land Acquisition Civil Works Equipment and Materials Vehicles Studies, Surveys , & Audits Nongovernment organization

Services Salaries and Allowances Travel Allowances and Per

Diems Project Coordination

Monitoring Operations Incremental Operation and

Maintenance

Resources ($ million)

17.93 10.99

0.43 48.53

3.24 0.10 2.36

1.22 2.25

0.91

0.95

7.71

• Loan and financial

information system • PPMS • Project progress

reports

• Timely compliance

with the relevant assurances and loan covenants

• Adequate and timely availability of counterpart funds

Appendix 3 27

LIST OF POTENTIAL DISTRICTS

A. Banten 1. Serang 2. Pandeglang 3. Lebak 4. Tangerang B. Lampung

1. Lampung Selatan1 2. Lampung Ten 3. Lampung Tim 4. Lampung Barat 5. Tanggamus 6. Bandar Lamp C. West Java 1. Tasikmalaya 2. Ciamis 3. Cirebon 4. Kuningan 5. Majalengka 6. Sumedang 7. Indramayu 8. Garut1

D. Central Java 1. Cilacap 2. Banyumas1 3. Purbalingga 4. Banjarnegara 5. Kebumen 6. Purworejo 7. Wonosobo 8. Batang 9. Pekalongan 10. Pemalang

11. Tegal 12. Brebes 13. Kota Pekalongan 14. Kota Tegal E. East Java 1. Kota Malang 2. Kota Blitar 3. Malang 4. Tulungagung 5. Blitar 6. Trenggalek 7. Lumajang 8. Kota Madiun 9. Madiun1 10. Ponorogo 11. Pacitan 12. Magetan 13. Ngwai 14. Bojonegoro 15. Tuban 16. Gresik 17. Lamongan F. South Sulawesi 1. Selayar 2. Bulukumba 3. Banteng 4. Takalar 5. Sinjai1 6. Maros 7. Bone 8. Luwu Utara 9. Tana Toraja 10. Majene 11. Makassar 12. Pare Pare

1 Core s ubproject district

28 Appendix 4

SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY AND GENDER PLAN

Table A 4.1: Summary Poverty Reduction and Social Strategy A. Linkages to the Country Poverty Analysis Sector identified as a National Priority in Country Poverty Analysis?

Yes Sector identified as a National Priority in Country Poverty Partnership Agreement

YES

Contribution of the sector/subsector to reduce poverty in Indonesia: Irrigated agriculture is a major source of food and income for rural households below the poverty line and for those above the poverty line, but still at risk of poverty, who depend on irrigation. This includes smallholders and tenant farmers who make up the majority of cultivators. Irrigation reduces risk and increases livelihood security. Equitable and secured access to water, and participation in water management has a major impact on the livelihood opportunities for poor rural people. B. Poverty Analysis Proposed Classification: Poverty Intervention Thematic Classification: Economic Growth and

Good Governance Irrigation increases and stabilizes the production of rice and other crops, ensuring food and income for small farmers and agricultural laborers in the project provinces. Rural poverty rates in the six provinces that will receive support for irrigation management range from 20% to 29%. The five core subproject districts have poverty incidence ranging from 18% to 30% against the national average poverty incidence of 18.2%. The incidence of poverty among households employed in agriculture is higher at 40%, accounting for 58% of total poor in the country. The incidence of poverty is an important criterion in subproject district selection, and the proportion of poor among the project beneficiaries are expected to be significantly higher than 20%. The poverty impact ratio for the core schemes has been estimated at 0.32. C. Participation Process Stakeholder analysis prepared: Yes (Supplementary Appendix A) Participation Strategy prepared: Yes (Supplementary Appendix A) The participation strategy for activities supported under the loan will focus on empowering water users associations (WUAs) and their federations (WUAFs) in the governance of irrigation systems. Government field staff and assigned nongovernment organizations/research institutions will assist in the establishment and strengthening of WUAs/WUAFs. WUAs/WUAFs will prepare irrigation management plans), enter into irrigation management agreements with the district government, take over the governance of the scheme, and undertake operation and maintenance (O&M) and improvement activities on a cost-sharing basis, with financial support from the kabupaten irrigation improvement fund. D. Gender and Development Gender Plan Prepared Yes (Table A 4.2) The gender and development strategy will include various steps to enhance women’s access to information, participation in irrigation management institutions and ability to protect their interests and improve their livelihoods. Through gender sensitization training and gender-disaggregated data, the awareness about the gender and development issues will be created among the staff as well as the WUAs and the service providers.

Appendix 4 29

E. Social Issues

Subject Significance Strategy to Address Issues Output Prepared

Resettlement Not significant Project aims at improving the operational sustainability of existing small and medium-scale irrigation schemes through improved O&M and selective repair and improvement of control structures and facilities. The activities are not expected to involve any significant land acquisition or resettlement. Nonetheless, a compensation policy framework and procedural guidelines has been prepared and will guide all land acquisition and resettlement activities.

Supplementary Appendix C.

Affordability Significant Match financial responsibilities to benefits and costs for rice producers and consumers, as well as regional and national governments. Allow in-kind farmer contributions. Formulate attractive and affordable packages of incremental irrigation system improvements.

Main text, Section IV, Sustainability, para. 80 and 81.

Labor Not significant Project will not result in mass lay-offs, so no specific retrenchment plan is required. Labor-intensive irrigation O&M and rehabilitation activities will create local employment opportunities.

Indigenous People

Not significant Available information suggests that the Project would probably not affect groups with special vulnerabilities that would require preparation of a separate indigenous people’s development plan (IPDP), nor would affected persons have the characteristics to be classified in the Indonesian government category of “isolated vulnerable peoples.” If such groups are identified who may be significantly affected by project implementation, then IPDPs will be prepared in accordance with the Asian Development Bank's (ADB’s) Policy on Indigenous Peoples , and implementation of project activities at such sites would be conditional on the ADB’s approval of the relevant IPDPs. An indigenous people’s planning framework has been prepared and included in Appendix 6.

See Appendix 6.

Governance Significant Governance concerns will be addressed by the participatory approach to the project planning and implementation and other specific measures incorporated to improve transparency and accountability. Most O&M and repair and rehabilitation works will be carried out by the WUAs, unless these require special skills, techniques, and/or equipment not available locally. Open meetings, open books, audits, posters, and legal empowerment of WUAs will also prevent corruption and promote accountability.

30 Appendix 4

Sustainability Significant The participatory principle of the project design will develop project ownership among stakeholders and this, in turn, will enhance the project sustainability. The introduction of sustainable replacement of rehabilitation (SRR) will break the deferred maintenance cycle and will make available resources for the expansion of SRR and undertake emergency rehabilitation works. The cost-sharing mechanism will relieve the government of significant financial costs in subsidizing O&M, and government financial assistance will be more effectively used for sustaining and further expanding the reforms.

Main text, Section IV, Sustainability

Table A 4.2: Gender Plan

Components/Activities

Gender Approach and Target

Publicity • Media campaigns on Irrigation Management Reform Program will highlight the project provisions for encouraging women’s participation in irrigation management

Training and human resources development

• Special workshops will be held to sensitize relevant government staff on gender and irrigation performance

• At least 33% of all trainees per training activity at the district level for irrigation management, including environment, resettlement, and good governance, will be women

Establishment of regulations and policies

• District regulations on irrigation strategy will recommend that at least 15% of the water users associations (WUA) elected officials are women

Establishment and strengthening of district irrigation institutions

• Guidelines for WUA strengthening will emphasize information provision to female land-owning tenant farmers

District irrigation management plan

• Female staff of relevant district agencies at district project implementation units with specific terms of reference to ensure gender considerations are integrated in district irrigation management plan

Project Performance Management System (PPMS)

• The design of the PPMS will require collection of gender-disaggregated data and reporting on indicators to gauge women’s participation in project activities

Further refinement of the gender plan

• The gender plan will be further refined during the inception phase with the assistance of the gender specialist on the consulting team

Appendix 5 31

SUMMARY INITIAL ENVIRONMENTAL EVALUATION A. Description of the Project 1. The Project will assist decentralized management of irrigation and water resources, improve the efficiency and productivity of irrigation systems, increase and diversify farm income, and reduce poverty. While capacity building at the district government and water user association (WUA) level will be a major focus of the Project, it will also provide support for undertaking routine operation and maintenance (O&M) and selected rehabilitation and upgrading (R&U) of existing irrigation schemes. It is these aspects of the Project that were the focus of the initial environmental evaluation (IEE) studies to ensure that the beneficial impacts of the Project are fully realized and any negative impacts are adequately mitigated. Separate IEE reports have been prepared for the five core subproject schemes, which then allowed generic conclusions to be drawn on the overall environmental impact of the Project. B. Description of the Environment 2. The six provinces in the project area experience a tropical monsoon climate and benefit from rainfall brought generally from October to March by the movement of the intertropical zone of convergence. The climate of the southern part of South Sulawesi and northern part of Central and East Java provinces has a more extended and distinct dry season than other parts in the project area. Climate is also affected by altitude and exposure to prevailing winds so that quite high rainfall in the higher areas of the drier provinces is more prevalent. 3. Within the six provinces, five core subproject districts were studied in detail. The type, size, and number of irrigation schemes in the core subproject districts are given in Table A5.1. Most of the schemes are classified as small and medium scale. The absence of large schemes should be noted; these are generally found on flatter terrain and are not being targeted under the Project.

Table A5.1: Irrigation Scheme Type, Size, and Numbers in Core Subproject Districts

Area/Number Irrigated Area (ha) Number of Schemes Type , Size Sinjai

South Sulawesi

Banyumas Central

Java

Garut West Java

Madiun East Java

Lampung Selatan

Lampung

Sinjai, South

Sulawesi

Banyumas, Central

Java

Garut, West Java

Madiun East Java

Lampung Selatan

Lampung Village 17,650 5,949 35,370 0 17,690 122 233 329 0 122 PIK 5,770 6,369 5,770 0 0 29 136 29 0 0 Govt.- managed

Small 50–500 ha

2,847 5,398 2,847 8,238 5,840 8 47 8 82 23

Medium 500–2,000 ha

5,577 3,315 7,577 12,305 9,780 7 4 8 11 13

Large >2,000 ha

0 3,617 0 2,435 0 0 1 0 1 0

Groundwater 230 0 230 0 0 12 0 12 0 0 Total 30,314 24,648 51,564 22,973 33,090 159 471 159 94 158

ha = hectare, PIK = small irrigation schemes Source: District Government Inventories from either Sub Dinas Pengairan or BAPPEDA. 4. The five core subproject irrigation schemes chosen for further analysis were generally located in areas with a longer dry season, i.e., with 3–4 months of less than 100 millimeters (mm) rain per month, in rolling to hilly and steep terrain with low average plot sizes, as these areas are generally associated with poorer farmer groups. The schemes are generally supplied

32 Appendix 5

by small weirs that provide run-of-river flows into small to medium-sized canals and supply water to terraced land on plateaus in some of the provinces (West Java, South Sulawesi) and rolling to flatter provinces (Lampung, East Java, and Central Java). 5. The schemes have been extensively modified by human occupation (sometimes for centuries) so the chances of any interruption to an existing natural ecosystem are considered very low. Also, with the virtual absence of natural ecosystems, there is also very low risk of encountering and impacting the habitat of any listed endangered species of flora and fauna. C. Potential Environmental Impacts and Mitigation Measures 6. The IEE findings are summarized in Table A5.2. The IEE has concluded that on balance, the beneficial environmental impacts of the Project will considerably exceed the minor negative impacts that will be associated only with the activities related to rehabilitation and upgrading (R&U). The beneficial impacts of the Project include: (i) more efficient allocation of water resources, which are increasingly under pressure by other sectors such as urban water supply, industry, and energy; (ii) improved routine O&M resulting from the project focus on increased involvement of WUA in scheme governance; and (iii) increase in agricultural production through more efficient use brought about by improved O&M and R&U. However, construction activities in R&U, if not undertaken properly, may have short-term negative environmental impacts. Measures incorporated in the project design to mitigate such impacts are discussed in the following paragraphs. 7. Environmental Management Plan. To ensure that the Project takes full account of its environmental responsibilities, a project environment management plan (EMP) for environmental impact mitigation has been prepared (Supplementary Appendix B). This EMP will become part of the operational guidelines and criteria to be placed in the project administration memorandum. Provision has been made for training of WUA members, district water resources services (DWRS), and other agencies concerned on EMP requirements, including environmental monitoring. 8. Problems Related to Construction. Typical short-term negative environmental impacts associated with R&U activities involving weirs and control and drop structures in canals may include: (i) the use of borrow areas, rarely rehabilitated, such as quarries for construction materials, leads to unsightly sites along local roads; (ii) the use of river channel materials can increase channel scouring and water turbidity, which will have short-term impacts on local fisheries; (iii) if timber is required for construction, it is often extracted from local forests that are in steeper terrain, thus leading to the risk of soil erosion; and (iv) local traffic patterns are disrupted. Environmental awareness through training and involvement of local WUAs in the construction activities will minimize the potential negative impacts. Construction in a scheme will be approved in two or three packages to be undertaken by WUAs over 2–3 years, and approval of second or third package by the district authorities will be subject to fulfillment of several conditions, including adherence to the EMP. 9. Problems Related to Operations. A potential problem during the operational stages of irrigation projects is the pollution of surface water and groundwater due to the overuse of inorganic fertilizers and pesticides. Such overuse has declined significantly in Indonesia due to the withdrawal of subsidies and the increasing awareness of the negative impacts of overuse. The Project will provide continued support to public awareness through agricultural extension services. The water resources information management system component of the project will provide for monitoring of surface water and groundwater quality in project districts, and the

Appendix 5 33

findings will help assess the effectiveness of project design in controlling agricultural pollution and initiate other measures if required. 10. Environmental Monitoring. The project performance management system subcomponent for overall monitoring and assessment of project performance provides for environmental monitoring, including undertaking baseline surveys. There will also be an allocation of funds to hire local nongovernment organizations, universities, or qualified individuals to carry out ad hoc evaluations or surveys on an as-needed basis.

Table A5.2: Initial Environmental Examination Findings of Core Schemes

Province Core

Subproject District

Scheme Name

Scheme Type

Observation

Lampung Lampung

Selatan Baturaja Small, multivillage,

multiethnic background

Environmental impacts of the proposed options are of minor significance. Minor land acquisition may be required.

Central Java

Cilacap and Banyumas

Serayu Covers secondary canal of a larger overall scheme

Environmental impacts are of minor significance. The benefits are substantial with the increase in productivity, the reduction in flooding in the wet season, and the possible public health impact from drainage improvement.

East Java

Madiun Dam Sewu

Medium-sized, with groundwater being proposed for use in the tail end area

Environmental impacts are of minor significance. Allocation and control of groundwater licenses would be one aspect for consideration in the preparation of a basin-wide water resources management plan.

South Sulawesi

Sinjai Balakia 1 and 2

Medium-sized scheme in steep terrain with terraced plateau

Environmental impacts are of small to moderate significance. Present problem of landslips require mitigation.

Source: PPTA Final Report. D. Conclusion 11. Based on the evidence of the five core subproject schemes examined in the field, the environmental impacts of the Project are assessed to be of minor significance. Nonetheless, all additional subprojects to be selected will require environmental assessments using the Indonesian AMDAL (environmental assessment) system and the Project’s environmental management plan (Supplementary Appendix B). In some circumstances, the resulting assessment may mean that a detailed environmental impact assessment would need to be prepared as part of project design. However, based on the results of the field work to date, it is not anticipated that an environmental impact assessment will be required for the types of subprojects being proposed.

34 Appendix 6

LAND ACQUISITION, RESETTLEMENT AND INDIGENOUS PEOPLES A. Background 1. The Project provides for supporting the sustainable operation of irrigation infrastructure in subproject schemes through an intensive participatory process. Of the four core subproject schemes prepared, two entail minimal land acquisition and none involves any resettlement or impacts on indigenous people (IP). A large number of additional schemes will be selected for project support but none of these is expected to have any major land acquisition and resettlement (LAR). Similarly, none of these schemes will have any significant impact on indigenous people requiring the preparation of an indigenous people’s development plan (IPDP). Nonetheless, measures have been incorporated in the project design to adequately address land acquisition, resettlement, and IP issues as they occur during the course of project implementation. B. General Policy 2. LAR and IP issues will be handled in accordance with national law and relevant ADB policies. ADB’s Involuntary Resettlement Policy (as detailed in the ADB Handbook on Resettlement: A Guide to Good Practice) requires the sector loans to prepare (i) a compensation policy framework and procedural guidelines (CPFPG) for the subprojects; (ii) an initial poverty and social assessment for each subproject indicating the magnitude of LAR impacts; and (iii) land acquisition and resettlement plans (LARPs) for each subproject whose initial poverty and social assessment indicates significant LAR impacts. ADB’s Policy on Indigenous Peoples requires that (i) each initial poverty and social assessment should indicate the magnitude and type of IP impacts; (ii) a specific IP action plan should be prepared, if impacts are limited; and (iii) a stand-alone indigenous people’s development plan (IPDP) including an implementation budget and schedule should be prepared if impacts are severe. A CPFPG and an IP action plan have been prepared to guide the LAR and IP issues of the Project. C. Compensation Policy Framework and Procedural Guidelines 3. The CPFPG reflects the main LAR preparation and implementation principles. These include: (i) negative impacts will be minimized as much as possible; (ii) compensation will be sufficient to improve or at least restore pre-project incomes and living standards of affected persons; (iii) affected persons will be fully consulted on compensation options and land acquisition planning; (iv) asset compensation will be provided at replacement rates; and (v) lost asset compensation and rehabilitation provisions/allowances will be provided in full before ground leveling and demolition. ADB approval of a subproject involving significant land acquisition or resettlement will be subject to ADB's approval of the LARP. 4. The CPFPG stipulates eligibility and entitlements for land and eventual house or income losses, and sets rehabilitation subsidies as follows:

(i) permanent agricultural/residential land losses will be compensated in cash at market rates;

(ii) temporary land losses will be paid in cash at market rates; (iii) house and building losses will be compensated in cash at replacement rates, free

of demolition expenses and salvaged materials; (iv) crop losses will be paid in cash at market rates;

Appendix 6 35

(v) relocation expenses covering transport costs will be paid to the affected persons; and

(vi) compensation for business losses based on tax declarations will be paid to each affected person for each month of interruption of business activities.

5. As for LAR processing procedures, CPFPG establishes that (i) after subproject identification and completion of preliminary design, the district government, as the implementing agency (IA), will carry out an initial social assessment (ISA) to determine preliminary impact data and the socioeconomic features of the affected persons; (ii) if subproject impacts are identified as significant, a full LARP will be prepared; (iii) if impacts are identified as less than significant, only a short LARP will be prepared. 6. The CPFPG also details the main organizational features and tasks of the LAR process:

(i) The Minister of Home Affairs has overall supervisory, reviewing, and financial responsibility for LAR. Water users associations (WUAs) will prepare and implement specific LARPs with the full participation of their members and support of district land acquisition and resettlement units for tasks such as asset valuation, entitlement delivery, and issuance of land acquisition, demolition, and building permits. Field tasks such as paying compensation, selecting replacement land, and providing livelihood support will rest with village and WUA personnel.

(ii) Subproject schemes, including LARPs, will be designed and implemented by the

WUAs based on an irrigation management plan prepared with the full participation of WUA members and beneficiary communities. A primer summarizing the CPFPG will be sent to all affected persons and the CPFPG and LARP in Bahasa Indonesia will be made available at the WUA office of each scheme that require land acquisition. The same documents in English will be put on the ADB web site. Primers for subprojects in IP areas will be compiled in local languages.

(iii) Grievances will first be lodged within the WUA. If no settlement is reached within

2 weeks, the complainant will have 1 month to raise the case with the district land acquisition and resettlement unit. If still unresolved within 2 weeks, the case should be sent to the office of the bupati (district governor). Final appeal is available in the courts

(iv) Both internal and external monitoring of LAR will be carried out. The district

government will set a monthly reporting system involving the land acquisition and resettlement units. External monitoring will be assigned to an independent institution such an NGO or a local university. External monitoring will be carried out on a selective basis for schemes with substantial impacts resulting from LAR and/or involvement of vulnerable peoples. External monitoring will be conducted through one or two field visits, and monitoring reports will be submitted to the district project coordination and monitoring office which in turn will pass them to the national project coordination and monitoring office. At project conclusion, the external monitoring agency will prepare a report providing a comprehensive evaluation of the LAR program.

36 Appendix 6

(v) Unit compensation rates for items negatively affected by each subproject and detailed budgets for impacts compensation will be provided in each LARP. Cost estimates will be adjusted annually, based on the inflation rate of the preceding year.

D. Indigenous People’s Participatory Planning Framework 7. "Isolated vulnerable peoples" (IVPs) is the term used officially by the Indonesian Government to describe groups that have the characteristics of "indigenous people" as used in ADB policy (the rest of this appendix will use the term “IVPs”). For the purposes of this Project, IVPs are defined as those that present varying degrees of the following characteristics: (i) a close attachment to ancestral territories and to the natural resources in these areas; (ii) self-identification and identification by others as members of a distinct cultural group; (iii) an indigenous language, different from the common regional language; (iv) the presence of customary social and political institutions; and (v) primarily subsistence-oriented production activities. 8. IVPs are not prevalent in all the potential project locations and were not identified during field works for the subproject schemes. It is possible that they may be found in some areas of the provinces of Lampung and South Sulawesi during implementation of the Project. The following steps will be taken to ensure that, where groups of IVPs exist, the Project caters to their specific needs:

(i) During the facilitator training, facilitators will be trained in the identification of IVPs. Through baseline surveys and community self-help exercises and discussions on community empowerment, facilitators will identify the presence and numbers of groups of IVPs in the community and report this to their supervisor;

(ii) For the areas where groups of IVPs are identified, the supervisor will

organize orientation training for relevant facilitators in how to work with groups of IVPs in a useful way to identify mechanisms for effective participation, and address specific challenges in working with such groups;

(iii) Facilitators will be hired locally to the extent possible and will be familiar with

such groups. They will also be rotated as necessary to ensure that those that have been trained in working with groups of IVPs, or have specific skills that would be beneficial in working with such groups, are made available in the right places;

(iv) Where groups of IVPs are identified, efforts will be made to ensure that at

least one community cadre is from the group and able to communicate easily with the group; and

(v) Where the isolated vulnerable group speaks a language different from

Bahasa Indonesia, relevant brochures and documents will be translated into the appropriate language.

9. These steps will be aimed at ensuring that IVPs participate fully in the Project, are aware of their rights and responsibilities, and are able to voice their needs during the community

Appendix 6 37

survey exercise and irrigation subprojects formulation. In addition, IVPs will be encouraged to submit subproject proposals that cater to groups’ needs. 10. Initiatives under the IP action plan will be commensurate with the impact severity level of each subproject affecting vulnerable groups. Impact severity is defined based on the degree of vulnerability of the affected peoples and the type of impacts, i.e:

(i) limited impacts occur when (a) the affected peoples are fully integrated in mainstream society and in control of the local administrative system, and/or (b) impacts do not have broad community or sociocultural dimensions; and

(ii) severe impacts occur when (a) the affected peoples maintain a degree of

sociocultural and institutional distinction from mainstream society and/or (b) impacts carry a broad sociocultural dimension and have wide community effects.

11. Action for limited impacts will include a brief assessment of the affected peoples’ socioeconomic and cultural status and the strategy and outline of actions to address associated concerns. The action plan will be included in the irrigation management plan (IMP) or the LARP. Action for severe impacts will be documented in a stand-alone IPDP providing (i) an assessment of the affected peoples’ situation; (ii) an assessment of eventual LAR impacts and related compensation plan, and (iii) a community action plan (CAP) detailing needed rehabilitation/development provisions and related implementation mechanisms/processes. IPDPs will be designed/implemented through a participatory framework involving the affected peoples and other stakeholders and will include specific budgets and schedules. The likelihood of a stand-alone IPDP being necessary for the Project is very low as a review of typical schemes has concluded that only minor impacts involving LAR may result from the rehabilitation and upgrading of existing irrigation schemes. 12. Where IVPs are identified, the irrigation commission will require the district project implementation unit to report on the IVPs’ participation in the Project. Provisions will be made in the project performance management system for monitoring the involvement of IVPs. Any issues or complaint will be raised with the irrigation commission. Designated staff within the project implementation unit will be responsible for following up on complaints and ensuring that they are handled adequately.

38 Appendix 7

SUMMARY COST TABLES

($ Million) % % Total

Local Foreign Total Foreign BaseCurrency Exchange Costs Exchange Costs

I. Investment Costs A. Capacity Building 13.31 4.63 17.93 26 19B. NGO Services 0.91 0.30 1.22 25 1C. Studies, Surveys and Audits 1.77 0.59 2.36 25 2D. Consulting Services

1. International 0.67 3.80 4.48 85 52. Domestic 5.54 0.98 6.51 15 7

Subtotal Consulting Services 6.21 4.78 10.99 44 11E. Equipment and Materials

1. Equipment 2.28 0.76 3.04 25 32. Materials 0.04 0.01 0.06 25 03. Furnishing and Furniture 0.11 0.04 0.14 25 0

Subtotal Equipment and Materials 2.43 0.81 3.24 25 3F. Vehicles 0.04 0.06 0.10 60 0G. Land Acquisition 0.43 0.00 0.43 0 0H. Civil Works

1. Survey and Design 1.06 0.35 1.41 25 12. Construction (SRR) 16.51 5.50 22.01 25 233. Construction (R&U) 17.03 5.68 22.70 25 234. Construction (Emergency Repairs) 1.80 0.60 2.40 25 2

Subtotal Civil Works 36.40 12.13 48.53 25 50I. Salaries and Allowances 2.25 0.00 2.25 0 2J. Travel Allowances and Per Diem 0.91 0.00 0.91 0 1K. National Level Coordination and Management 0.95 0.00 0.95 0 1

Total Investment Costs 65.60 23.30 88.90 26 92II. Recurrent Costs

A. Incremental Operation and Maintenance 7.20 0.00 7.20 0 7B. Incremental District Level Office O&M 0.36 0.00 0.36 0 0C. Incremental Provincial Level Office O&M 0.15 0.00 0.15 0 0

Total Recurrent Costs 7.71 0.00 7.71 0 8Total Baseline Costs 73.31 23.30 96.61 24 100

Physical Contingencies 1.46 0.56 2.02 28 2Price Contingencies 20.70 0.70 21.28 3 22

Total Project Costs 95.47 24.56 119.92 20 124Interest During Implementation 0.00 4.66 4.66 100 5Commitment Charges 0.00 1.15 1.15 100 1Front-end fees 0.00 0.27 0.27 100 0

Total Costs to be Financed 95.47 30.63 126.00 24 131

O&M = Operation and Maintenance; R&U = Rehabilitation and Upgrading; SRR = Sustainable Replacementand Rehabilitation.Source: Asian Development Bank estimates.

Table A7.1: Expenditure Accounts Project Cost Summary

($'000 million)

Local DutiesItem Total For. (Excl. and

Amount % Amount % Amount % Amount % Amount % Amount % Exch. Taxes) TaxesI. Investment Costs

A. Capacity Building 2.25 9.9 16.15 71.2 2.94 13.0 1.35 5.9 0.00 0.0 22.69 18.0 5.01 15.43 2.25B. NGO Services 0.15 10.0 1.10 71.1 0.20 13.0 0.09 5.9 0.00 0.0 1.55 1.2 0.33 1.06 0.15C. Studies, Surveys and Audits 0.30 10.0 2.12 71.1 0.39 13.0 0.18 5.9 0.00 0.0 2.98 2.4 0.64 2.05 0.30D. Consulting Services

1. International 0.00 0.0 4.79 100.0 0.00 0.0 0.00 0.0 0.00 0.0 4.79 3.8 4.03 0.77 0.002. Domestic 0.76 10.0 6.85 90.0 0.00 0.0 0.00 0.0 0.00 0.0 7.62 6.0 1.04 5.81 0.76

Subtotal Consulting Services 11.65 93.9 0.00 0.0 0.00 0.0 0.00 0.0 12.41 9.8 5.07 6.58 0.76E. Equipment and Materials

1. Equipment 0.38 10.0 2.69 71.1 0.49 13.0 0.22 5.9 0.00 0.0 3.78 3.0 0.82 2.58 0.382. Materials 0.01 10.0 0.05 71.1 0.01 13.0 0.00 5.9 0.00 0.0 0.07 0.1 0.02 0.04 0.013. Furnishing and Furniture 0.02 10.0 0.12 71.1 0.02 13.0 0.01 5.9 0.00 0.0 0.16 0.1 0.04 0.11 0.02

Subtotal Equipment and Materials 0.40 10.0 2.85 71.1 0.52 13.0 0.24 5.9 0.00 0.0 4.01 3.2 0.87 2.74 0.40F. Vehicles 0.01 10.0 0.08 71.1 0.01 13.0 0.01 5.9 0.00 0.0 0.11 0.1 0.06 0.03 0.01G. Land Acquisition 0.52 100.0 0.00 0.0 0.00 0.0 0.00 0.0 0.00 0.0 0.52 0.4 0.00 0.52 0.00H. Civil Works

1. Survey and Design 0.32 19.3 0.41 24.3 0.41 24.3 0.37 22.0 0.17 10.1 1.67 1.3 0.36 1.14 0.172. Construction (SRR) 5.55 19.6 6.80 24.0 6.84 24.2 6.22 22.0 2.90 10.3 28.31 22.4 5.75 19.73 2.833. Construction (R&U) 5.15 19.2 6.51 24.3 6.51 24.3 5.89 22.0 2.69 10.1 26.75 21.2 5.84 18.24 2.674. Construction (Emergency Repairs) 0.58 19.5 0.72 24.1 0.72 24.2 0.66 22.0 0.30 10.2 2.98 2.4 0.62 2.06 0.30

Subtotal Civil Works 11.60 19.4 14.43 24.2 14.48 24.2 13.14 22.0 6.07 10.2 59.71 47.4 12.57 41.17 5.97I. Salaries and Allowances 3.02 100.0 0.00 0.0 0.00 0.0 0.00 0.0 0.00 0.0 3.02 2.4 0.00 2.72 0.30J. Travel Allowances and Per Diem 1.18 100.0 0.00 0.0 0.00 0.0 0.00 0.0 0.00 0.0 1.18 0.9 0.00 1.06 0.12K. National PMU 1.24 100.0 0.00 0.0 0.00 0.0 0.00 0.0 0.00 0.0 1.24 1.0 0.00 1.12 0.12

Total Investment Costs 21.44 19.6 48.38 44.2 18.54 16.9 15.00 13.7 6.07 5.5 109.42 86.8 24.56 74.48 10.39II. Recurrent Costs

A. Incremental O&M 3.36 34.0 0.00 0.0 0.00 0.0 0.00 0.0 6.43 66.0 9.90 7.9 0.00 8.91 0.99B. Incremental District Level O&M 0.50 100.0 0.00 0.0 0.00 0.0 0.00 0.0 0.00 0.0 0.50 0.4 0.00 0.45 0.05C. Incremental Provincial Level Office O&M 0.20 100.0 0.00 0.0 0.00 0.0 0.00 0.0 0.00 0.0 0.20 0.2 0.00 0.18 0.02

Total Recurrent Costs 4.07 38.4 0.00 0.0 0.00 0.0 0.00 0.0 6.43 61.6 10.60 8.4 0.00 9.54 1.06Total PROJECT COSTS 25.50 21.2 48.38 40.3 18.54 15.4 15.00 12.5 12.49 10.5 120.03 95.2 24.56 84.02 11.45

Interest During Implementation 0.00 0.0 4.20 90.2 0.46 9.8 0.00 0.0 0.00 0.0 4.66 3.7 0.00 0.00 0.00Commitment Charges 0.00 0.0 1.15 100.0 0.00 0.0 0.00 0.0 0.00 0.0 1.15 0.9 0.00 0.00 0.00Front-end fees 0.00 0.0 0.27 100.0 0.00 0.0 0.00 0.0 0.00 0.0 0.27 0.2 0.00 0.00 0.00

Total Disbursement 25.50 20.2 54.00 42.8 19.00 15.1 15.00 11.9 12.49 10.0 126.11 100.0 24.56 84.02 11.45

ADB = Asian Development Bank; ADF = Asian Development Fund; NGO = nongovernment organization; OCR = ordinary capital resources; O&M = operation and maintenance;R&U = rehabilitation and upgrading; SRR = sustainable replacement of rehabilitation; WUA = water users association; WUAF = water users association federationSource: Asian Development Bank estimates.

Appendix 7 39

Government ofNetherlands

Table A7.2: Expenditure Accounts by Financiers

Farmers(WUA/WUAF)

The Governmentof Indonesia ADB - OCR Loan ADB - ADF Loan

40 Appendix 8

BAPPENAS = National Planning and Development Agency; DAS = District Agricultural Services; DGAF = Directorate General of AgriculturalFacilities; DGWR = Directorate General of Water Resources; DWRS = District Water Resources Services; MOA = Ministry of Agriculture;MOHA = Ministry of Home Affairs; MSRi = Ministry of Settlements and Rural Infrastructure; PAS = Provincial Agricultural Services;PWRS = Provincial Water Resources Services

National Project Coordination and Monitoring Office

Chair - BAPPENASMembers - MOA, MOHA, MSRI

PROJECT ORGANIZATION

NATIONALLEVEL

PROVINCIALLEVEL

DISTRICTLEVEL

SCHEMELEVEL

Notes : Reporting Supervision Coordination

Water User Associations

Irrigation Commission

National Project Management Units

MOA MOHA MSRI

DGAF BANGDA DGWR

Provincial Project Implementation Units

PWRS PAS

Provincial Project Coordination and Monitoring Office

Provincial BAPPEDA

District Project Coordination and Monitoring Office

District BAPPEDA

District Project Implementation Units

DWRS DAS

National Steering Committee

Appendix 9 41

SUBPROJECT DISTRICT SELECTION CRITERIA A. Project Participation Requirements Yes No 1. Commitment to irrigation reforms 2. Commitment to project implementation modality 3. Time-bound action plan for establishment of irrigation commission 4. Time-bound action plan for establishment of kabupaten irrigation improvement

fund (KIIF)

5. Commitment to the Government’s current and future on lending policy 6. Commitment to project’s environmental, social, gender, indigenous peoples,

and resettlement standards and requirements

7. Commitment to allocate budget for first year’s activities

B. Priority in District Selection Score 3 2 1 1. Have high incidence of poverty 2. Have been implementing the policies set out under the

decentralization laws

3. Have commenced reviews and capacity building of district institutions

4. Started participatory programs with WUAs to maintain irrigation infrastructure

5. Have a high number of established and active WUAs

Total Score WUA = water users association.

Proceed Yes No Further Discussion on Project

42 Appendix 10

PROJECT IMPLEMENTATION SCHEDULE

Item Level/Activities

A. National1. Disseminate information and project guidelines2. Prepare/update policies3. Coordinate implementation4. Establish and operate project performance management system5. Establish and operate financial management system

B. Provincial1. Disseminate information2. Prepare manuals, update3. Train trainers4. Facilitate and train5. Finance6. Monitor and evaluate7. Establish and operate project performance management system8. Establish and operate financial management system

C. District1. Train staff in district2. Disseminate information3. District irrigation management plans & review4. Formulate policies and guidelines, review and improve5. Establish irrigation commission and hold periodic meetings6. Train WUAs/WUAFs7. Assess schemes and asset surveys8. Transfer management9. Evaluate proposals for irrigation improvements, forward to IC

10. Establish and operate project performance management system11. Monitor and evaluate standards of irrigation management (audit)12. Assist in construction supervision, QA and related training13. Implement agricultural initiatives14. Pilot Study - Farmers' Access to Agricultural Credit and Agribusiness15. Establish and operate financial management system

C2 Adope 2nd Tranche of Districts and Repeat ProcessC3 Adope 3rd Tranche of Districts and Repeat Process

D. Irrigation System1. IMPR dissemination at WUA & village level2. Form/activate WUA3. Profile secondary/main system4. Establish/strengthen WUAF5. Formulate management plans 6. Formulate proposals for assistance7. Finance irrigation management8. Take over management9. Manage irrigation

10. Implement improvements11. Monitor & evaluate (audit)12. Implement agricultural initiatives13. Implement environmental and water related health initiatives

E. Water Resources Information Management Systems

IC = irrigation commission; QA = quality assessment; WUA = water users association; WUAF = water users association federation

KeyOngoing activity subject to routine reporting

Milestone or assessment report following short activity

Notesa. For further details on process, see irrigation policy reform regulations and manuals (PP 77/2001 etc.).b. Timelines are only indicative. Actual schedule will be adjusted according to local conditions.c. Districts might begin working in a few schemes during the first year.d. For schemes not yet fully managed by Kabupaten, implementation done jointly with province.e. For schemes with multiple WUAF (GP3A), similar process used for apex federations (IP3A).f. For schemes already managed by users, similar support available for WUA management strengthening.

Source: Asian Development Bank estimates.

Year 5 Year 6 Year 7Year 1 Year 2 Year 3 Year 4

Average SizeNumber of Cost Estimates Contract Mode of Responsible

Description Contracts ($'000) ($'000) Procurement Agency

I. Civil Works (Irrigation Schemes)Sustainable Replacement of Rehabilitation 6,250 22,118 4 CPP WUA/WUAFRehabilitation and Upgradation 1,376 24,011 17 CPPa/LCB WUA/WUAF/DWRSEmergency Repairs 145 2,400 17 CPPa/LCB WUA/WUAF/DWRS

II. EquipmentOffice Equipment for National PCMO and PMUs 4 75 19 DP National PCMO/PMUsEquipment and Software for Provincial WRIMSs 6 150 25 DP PWRSEquipment and Software for District WRIMSs 25 650 26 DP DWRSOffice Furniture for District WRIMSs 25 100 4 DP DWRSEquipment for WUAs and WUAFs 75 1,763 24 DP DWRS

III. Materials and SuppliesMaterials for National Public Awareness Campaign 1 15 15 DP National PCMO/PMUsMaterials for District Specific Public Awareness Campaigns 25 44 2 DP DWRS

IV. VehiclesVehicles for National PCMO and National PMUs 4 150 38 DP National PCMO/PMUs

DP = direct purchase, IS = international shopping, LCB = local competitive bidding, CPP = community participation in procurement; DWRS = District Water ResourcesServices; PCMO = Project Coordination and Monitoring Office; PMU = Project Management Unit; PWRS = Provincial Water Resources Services; WRIMS = Water Resources Information Management System; WUA = water users association; WUAF = water users association federationsa Ceiling for contract size in the first year will be $10,000. On satisfactory handling of the contract by WUA, the ADB may increase the ceiling to $25,000 in the later years.

Source: Asian Development Bank estimates.

Appendix 11 43

Table A11: TENTATIVE PACKAGES OF GOODS AND SERVICES

44 Appendix 12

OUTLINE TERMS OF REFERENCE OF CONSULTANTS 1. Services have been designed to assist the national, provincial, and district governments to (i) improve the performance of irrigation agency services and water users associations (WUAs), (ii) improve the sustainability of irrigation systems, (iii) improve agricultural productivity and farm incomes, (iv) strengthen water resources information and asset management system, (iv) develop a project performance management system, and (vi) establish a sound financial management and monitoring system. Table A12.1 details the individual expert requirements. Domestic consultants will be provided. The following paragraphs give thematic outlines of services. 2. Irrigation Management. The services will cover capacity building at district and WUA level, technical assistance for improving operation and maintenance (O&M) and undertaking sustainable rehabilitation and upgrading of irrigation scheme. The consultants will work with district governments and irrigation commissions (ICs) facilitating and optimizing the use of existing provincial government agency resources and members of local universities and nongovernment organizations (NGOs). 3. Institutional development at the district level will be a key capacity building objective of these services. The consultant will assist in (i) formulating district policy guidelines and regulations (perdah) in conformity with the national water resources policy and irrigation management reform program and irrigation law; (ii) strengthening relevant district agencies for efficient delivery of services in water resources and irrigation development; and (iii) developing and implementing district irrigation management plan (DIMP). District regulations will address, in addition to meeting the national policy requirement, district-specific issues and concerns. The organizational structure and staffing of relevant district government agencies will be reviewed and rationalized. The consultant will assess staff training needs, and develop and implement a training program to enhance professional, technical, and managerial efficiency. The focus of project capacity building at district level will be aimed at ensuring the sustainability of project activities. 4. The consultant will assist in the institutional development at WUA level, and the services will include (i) development of media and communication materials for irrigation reform information campaign; (ii) assistance to district staff and local NGOs in establishing and strengthening WUAs and federating multiple WUAs in a scheme into a federation (WUAF) or an apex organization; (iii) assistance in developing partnership agreements between district governments and WUAs; (iv) development of training programs for farmers and field-level district staff on institutional, technical, and financial aspects; and (v) guidance in preparing irrigation management plans (IMPs) for individual schemes by WUAs with the help of qualified NGOs. The consultant will also assist in undertaking a legal literacy program to help individual water users and their associations in having a better understanding of their rights and obligations under the new policies. Legal assistance will also be provided in formulating management agreement and in utilizing the legal status of WUAs to contract with third parties in connection with irrigation management and in improving irrigated agriculture. 5. The consultant will assist in developing and establishing guidelines and procedures for assessing technical, financial, economic, and social and environmental viability of irrigation management plans for individual schemes at district level. Care will be taken to ensure compliance with the Project’s social and environmental safeguards as incorporated in the compensation policy framework and procedural guidelines for land acquisition and resettlement, the environmental management plan, and the indigenous peoples’ planning framework.

Appendix 12 45

6. Assistance will be provided in developing guidelines for assessing the adequate level of O&M activities and corresponding expenditures levels, and identification of sustainable replacement of rehabilitation (SRR) requirements to avoid deferred maintenance. The consultant will assist in developing standard local competitive bidding documents for contracting civil works costing above $25,000 equivalent. The consultant will also assist in establishing a mechanism for supervision of scheme level construction works to ensure quality. 7. Services will also be provided to develop a program for improving the extension and credit facilities (using existing rural financing programs) for irrigated agriculture, including dissemination of new technologies that were tested and recommended for field use by the Ministry of Agriculture under various programs including the Asian Development Bank (ADB)-assisted Participatory Development of Agricultural Technology Project. Farmers will be assisted in accessing agricultural inputs and services, and this will be achieved through strengthening technical, organizational, managerial, and bargaining capacity of WUAs for better deals with inputs and service providers and making the providers responsive and accountable to clients. Consultants will assist in assessing performance of similar programs implemented earlier in the country and consider the findings in designing a study that will be pilot tested in five districts to be selected by the national steering committee. 8. Water Resources Information and Asset Management. The consultant will assist national, provincial, and district agencies concerned to (i) improve management of water resources data at district and provincial level; (ii) integrate provincial and district level data with the Water Resources Data Center at Directorate General of Water Resources Central Office focusing on provincial and, in particular district data requirements, data use and data access, and (iii) develop district level asset management as an integral component of the data management system. Training will be provided in data collection, use, management, storage, and dissemination to staff of district and provincial water resources services. 9. Project Performance Management. The consultant will assist national, provincial, and district project management units in project monitoring and evaluation. Services will include assistance in designing and putting into operation a project performance management system (PPMS) at the national, provincial, and core district level within 1 year of loan effectiveness. Similarly, a PPMS will be established in the new participating districts within 1 year of the approval of their participation by the national steering committee. The PPMS will encompass (i) monitoring of physical and financial progress as well as the economy and efficiency in achieving major activities; (ii) monitoring of the level and adequacy of participation of various stakeholders in planning and implementing project activities, particularly district capacity building and improving the performance of irrigation schemes; (iii) monitoring the Project’s social, environmental, and economic impacts including the establishment of benchmark information and data; (iv) assessing the impact and utilization of water resources data management information facilities; and (v) and developing a mechanism for making necessary adjustments in the project design and implementation arrangements in light of the PPMS findings. The PPMS will provide for baseline, midterm, and completion surveys as well as special studies that may be required. Indicators will be selected to monitor achievements of the targets established in the project framework. The consultant will train staff in regional project management units on monitoring field activities for irrigation management. 10. Provision has been made for some special studies including (i) assessment of irrigation management reform progress and impact in the project districts, (ii) review of O&M funding levels, and (iii) WUAF on small river subbasins. Special studies will be carried out under agreements with qualified researchers and research institutions, and NGOs.

46 Appendix 12

11. Financial Management Services. A domestic accounting firm will hired be to assist in financial management of the Project. The specific tasks of the consultant will include assisting the project implementation units in regular collection of transaction documents from all implementing locations, arranging data entry into a computerized accounting system, preparing project financial statements on a quarterly basis for each project implementation unit, consolidating financial statements for the entire Project, comparing the financial statements against physical progress and contractual obligations, analyzing key variances and recommending appropriate actions and measures, and preparing quarterly financial monitoring reports. The consultant will also train government staff in developing their capacity in accounting and financial management.

Table A12.1: Fields of Specialization and Person-Months Person months

Item Expertise International Domestic

A. Irrigation, Water Resources and Asset Management 1. Irrigation Management 36 60 2. Institutional Specialist 36 60 3. Regional Development Specialist 0 110(3) 4. Fiscal Analyst 6 18 (2) 5. WUA Specialist/Sociologist 24 180 (6) 6. Agricultural Specialist 8 72 (6) 7. Irrigation Planning and Design Specialist 24 72 (3) 8. O&M/Water Management Specialist 12 48 (2) 9. Construction Management QA 6 72 (3) 10. Environment Specialist 3 18 11. Resettlement Specialist 0 6 12. Project Economist 6 48 13. Training Specialist 12 96 (3) 14. Media and Communication 3 24 (3) 15. Legal Empowerment 6 96(6) 16. Asset Management Planner 3 36 (2) 17. GIS Specialist 3 36(3) 18. System Analyst 3 0 19. Gender Specialist 0 72(6) 20. Hydrology/Water Resources Specialist 6 36 (3) 21. Computer Programmer 0 24 Subtotal (A) 197 1,184 B. Project Performance Management System 1. PPMS Specialist 6 36 2. MIS Specialist 4 24 3. Computer Database Programmer 0 48 4. Special Studies for Impact Assessment 6 100 Subtotal (B) 16 208 C. Financial Management System 1. Accounts and Finance Specialist 0 48 2. Accountants/Accounts Assistants 0 LS Subtotal (C) 0 48

Total 213 1,440 GIS= geographic information system; O&M= operation and maintenance; MIS= management information system ; PPMS= project performance management system; QA= quality assessment; WUA= water users association Source: Asian Development Bank estimates.

Appendix 13 47

ADB = Asian Development Bank; BANGDA = Directorate General of Regional Developjment; DAS = DistrictAgricultural Services; DIP = specific project list; DIPP = specific project list loan fund; DWRS = Distrist Water Resources Services; PAS = Provincial Agricultural Services; PCMO = Project Coordination ManagementManagement Office; PWRS = Provincial Water Resources Services; WUA = water users associations;WUAF = water users association federation

FUNDS FLOW MECHANISM

NATIONALLEVEL

PROVINCIALLEVEL

DISTRICTLEVEL

Notes :

Ministry of Finance

National Steering Committee

National PCMO

ADB

Ministry of Home Affaris

Ministry of Agriculture

Ministry of Settlement &

Regional Infrastructure

DGAF

National PMU

BANGDA

National PMU

DGWR

National PMU

PAS

Provincial PIU

PWRS

Provincial PIU

DAS

District PIU

DWRS

District PIU

Fund FlowReleases would be on the advice from the respective ministries.

Irrigation Commission

WUALEVEL

Provincial Treasury

District Treasury

Kabupatan Irrigation Improvement Fund

WUA/WUAF

KPKN

KPKN

KPKN

48 Appendix 14

FINANCIAL AND ECONOMIC ANALYSES

A. Introduction

1. Financial and economic analyses were undertaken to evaluate the sustainability of the five core subproject schemes selected as basis in preparing the Project. Financial analysis examined the sustainability of the subproject schemes from farmers’ points of view; economic analysis determined the incremental benefits from the expected increase in agricultural production following improved scheme operation.

B. Major Assumptions

2. The Project has an implementation period of 7 years and the economic life of the project interventions has been assumed to be 20 years. For this analysis, the interbank exchange rate of Rp8,500 per US dollar prevailing at the time of project appraisal, has been used. A discount rate of 12% has been used to ascertain the net present value (NPV) and also as a cut-off point for the economic internal rate of return (EIRR).

3. Financial benefits and costs are estimated in constant mid-year 2002 terms. Financial farmgate prices are based on findings of the surveys undertaken for the feasibility study during 2002. The analysis uses a world price numeraire where economic prices for traded crop outputs and inputs have been based on the World Bank Commodity Price Projections. Prices for rice paddy, soybeans, and phosphatic and potassic fertilizers are estimated at import parity, while those for nitrogenous fertilizers at export parity (Supplementary Appendix E). Labor costs have been shadow-priced at 0.80 of the wage rates while other inputs have been adjusted by the standard conversion factor of 0.90. Due to technical, management, and institutional factors, irrigation supplies within a given scheme are unevenly distributed, resulting in significant differences in cropping patterns, cropping intensities, and yields in different reaches within the service area. Table A14.1 shows that with one exception, the cropping intensity declines and incidence of poverty rises as one moves further down on an irrigation system. Using crop models for the overall scheme and the reach specific cropping pattern and cropping intensity data, reach- and scheme-specific farm models have been developed. For the financial analysis, only the hired labor has been costed while for the economic analyses both family and hired labor has been costed. Farm models and budgets are given in Supplementary Appendix E.

Table A14.1: Reach-Wise Differences in Cropping Intensity and Poverty Incidence (%)

Item Upper Reach Middle Reach Tail Reach Overall A. Cropping Intensity 1. Baturaja–South Lampung 160 125 107 130 2. Serayu/Gambarsari– Banyumas

227 76 190 170

3. Sewu–Madiun 210 188 133 185 4. Balakia–Sinjai 200 200 121 150 5. Overall for the Four Core Schemes 205 162 131 166 B. Overall Poverty Incidence for the Four Core Schemes

26

32

42

34

Source: PPTA 3793 Final Report 2002. Note: Overall, the poverty incidence reported by the irrigator respondents was 34%, which corresponds to a poverty incidence of 39.7% in the agriculture sector as reported by the SUSENAS 1999 (Final Report of TA INO 3532: Poor Farmers' Income Improvement Project, August 2001)

1 PIR compares net economic benefits to the poor with net economic benefits of the Project. 2 25% of labor requirements for R&U activities will be hired and the remaining will be provided by WUA members.

Appendix 14 49

C. Project Benefits

5. Benefit Area and Households. The Project will strengthen irrigation and water resources management capacity of 25 district governments and will train 5,000 district staff. While the participatory and needs-based nature of the Project makes it difficult to determine the level and combinations of training activities on a particular scheme, it is anticipated that 36,250 members from 6,250 water users associations (WUAs) will be trained. It is envisaged that 6,250 schemes benefiting from the Project will cover about 0.63 million hectares (ha) of irrigated area and will represent 1.5 million households. Table 14.2 summarizes the project coverage in terms of beneficiary population and area.

Table A14.2: Project Beneficiary Population and Area

Districts/WUAs/Schemes Number of

WUAs/Schemes

Household Coverage

(’000) Irrigated Area Coverage

(ha) WUAs Receiving Capacity Building 6,250 1,500 625,000 WUAs Receiving O&M Support 2,500 600 250,000 WUAs Receiving SRR Support 6,250 1,500 625,000 Schemes Receiving R&U 1,376 330 137,600 O&M = Operation and Maintenance; R&U = Rehabilitation and Upgrading; WUA = Water Users’ Association Source: PPTA 3793 Final Report 2002. 6. Quantified Benefits. In the with-project scenario, the main agricultural benefits will be in the form of increased cropping intensities and improved dry season rice yields. It is the lower reaches of irrigation systems in the dry season when the water shortages are most obvious. Farmers in the upper reaches can grow two or more crops while those in the lower reaches cannot fully cultivate during the dry season. Current yields in general are lower than the provincial averages suggesting large yield disparities within the provinces and highlighting the potential for improvement. Disparities are also significant between the seasons where on the same field and with some management skills, the dry season yields are 13% to 20% lower than the wet season levels. It is anticipated that management and infrastructure improvements will lead to higher cropping intensities and improved rice yields in both wet and dry seasons, with the highest increases in the reaches that are water short at present.

7. In the without-project scenario, the practice of deferred maintenance is expected to continue and as a result system efficiencies are expected to deteriorate, which will in turn lead to lower cropping intensities, lower rice yields, and greater income inequalities. Detailed engineering assessments carried out on the sample schemes show that over the next 20 years as much as one third of the annual agricultural production can erode away. To be on the more conservative side, the analysis assumes that in the absence of the Project, lost production over a period of 20 years will be only 10% of the prevailing levels.

8. Given that present rice yields in the core schemes are lower than the provincial averages and that irrigation supplies can be significantly improved, the feasibility study findings envisage that on the sample schemes the yields can increase by 15% to 75% and cropping intensities by up to 40%. For the purposes of this analysis, more conservative yield and cropping intensity increases have been assumed. Table A14.3 summarizes crop yields while Table A14.4 summarizes the cropped areas and cropping intensities for the without- and with-project scenarios.

50 Appendix 14

Table A14.3: Without- and With-Project Crop Yields on Sample Schemes (t/ha)

Rice Paddy (HYV) Wet Season

Rice Paddy (HYV) Dry Season

Rice Paddy Local Variety

Scheme Present Without

With Future

Present Without

With Future

Present Without

With Future

Baturaja–South Lampung 4.00 4.00 3.20 3.84 3.50 3.50 Serayu/Gambarsari–Banyumas 3.75 4.00 3.25 3.90 - - Sewu–Madiun 4.00 4.00 3.50 4.00 - - Balakia–Sinjai 3.70 4.00 3.00 3.60 2.50 2.75 HYV= high-yielding variety Source: Asian Development Bank Assessment based on the feasibility study findings (PPTA 3793 Final Report 2002).

Table A14.4: Without- and With-Project Areas and Cropping Intensities on Sample Schemes

Cropping Intensity (%)

Scheme Scheme Area

(hectare) Without Project With Project Baturaja–South Lampung 304 130 163 Serayu/Gambarsari–Banyumas 369 170 213 Sewu–Madiun 1,324 185 211 Balakia–Sinjai 836 150 180 Source: Asian Development Bank Assessment based on the feasibility study findings (PPTA 3793 Final Report 2002). 9. Nonquantified Benefits. Apart from the crop production benefits, there are a number of benefits that cannot be readily quantified, including (i) improved planning and management of irrigation assets brought about by the district irrigation management plans at district level and irrigation management plan at scheme level; (ii) rationalization and capacity building of district-level services; (iii) empowerment (including legal empowerment) of WUAs and their female members; (iv) reduced cost and improved quality of rehabilitation resulting from greater involvement of WUAs in scheme governance; and (v) improved access to quality information and data for water resources management. Benefits derived from institutional strengthening and good governance will have a wider impact in the project districts.

10. A number of nonquantified benefits in reality are also critical institutional improvements required in bringing about and sustaining the quantified benefits, and the benefits attributed to these are actually positive externalities. For example, the organization and capacity building of WUAs is a basic building block of project implementation and sustainability. However, besides increased production, the full benefits also include a legally aware and civic-minded body of people and more transparent project implementation, both of which have an impact that is not just limited to project implementation.

D. Assessment of Financial Returns to Irrigators

11. Results of the financial analyses are summarized in Table A14.5. The results show that at full development, the net farm incomes are expected to increase by 26% to 162%. With the exception of farms in the middle reach of the scheme in Banyumas where control on flooding in the middle reach will greatly improve crop production, increases in farm income are anticipated to be highest on the tail reaches and lowest on the upper reaches. Given that the incidence of poverty is highest in the tail reaches and the lowest in the upper reaches, higher incremental farm incomes to the lower reaches will help reduce the current income inequalities.

Appendix 14 51

Table A14.5: Anticipated Impact on Net Farm Incomes

Increase in Farm Income (%) Scheme

Average Farm Size (hectare) Upper Reach Middle Reach Tail Reach

Baturaja–South Lampung 0.46 29 40 50 Serayu/Gambarsari–Banyumas 0.28 48 162 56 Sewu–Madiun 0.50 27 32 44 Balakia–Sinjai 0.58 28 26 90 Source: Asian Development Bank Mission Assessment based on the feasibility study findings (PPTA 3793 Final Report 2002).

E. Assessment of Economic Returns

12. Investment and Recurrent Costs. All costs are in constant year 2002 terms. Investment costs are net of price contingencies and interest during construction. The local content of the costs has been adjusted by the standard conversion factor while the foreign component has been taken at its full value. The district-level capacity building and project coordination and monitoring, including the relevant consultant inputs, help deliver the planned interventions and services, and hence costs of these are appropriately apportioned to individual schemes. The costs associated with project coordination and monitoring have also been apportioned among components according to the relative size of investment costs on these and included as overheads.

13. Economic Worth. Results of the economic analysis summarized in Table A14.6 show that the EIRR for individual schemes ranges from 19% to 60% and the NPV at a discount rate of 12% ranges from $0.04 million to $0.48 million. The schemes generate a collective EIRR of 29% and an NPV of $0.82 million. Switching values have been estimated to determine the maximum cost overrun and the maximum reduction in incremental benefits at which the scheme will still be economically viable. Collectively, sample schemes remain economically viable with cost overruns of up to 102% or reduction in the incremental benefits of up to 50%. In view of the recent appreciation in the value of rupiah, the lowest exchange rate against the US dollar at which the individual schemes will remain viable has been estimated to range from Rp6,064 to Rp7,605 and for the collective sample, Rp6,246.

Table A14.6: Anticipated Scheme Level Economic Worth

Switching Values Scheme EIRR

(%) NPV

($ ‘000) Cost

Overrun (%) Incremental Benefit

Shortfall (%) Exchange Rate a

(Rp/$) Baturaja–South Lampung 20 44 46 31 7,097 Serayu/Gambarsari–Banyumas 28 128 108 52 6,064 Sewu–Madiun 60 479 285 74 6,090 Balakia–Sinjai 19 172 40 28 7,605 All Sample Schemes 29 823 102 50 6,246 EIRR= economic internal rate of return; NPV= net present value; Rp = rupiah a Fluctuations in the exchange rate will affect the foreign exchange component of the construction and O&M costs

and the economic prices of traded inputs and outputs. The core subproject scheme will have EIRR less than 12% if the exchange rate exceeds the figure shown against it.

Source: Asian Development Bank Assessment based on the feasibility study findings (PPTA 3793 Final Report 2002).

F. Poverty Impact Assessment

14. Table A14.7 summarizes the poverty impact analysis and calculation of the poverty impact ratio (PIR)4 for the four core schemes. The net economic benefits from crop production (difference in net present value of economic and financial benefits) are estimated to be about 4 PIR compares net economic benefits to the poor with net economic benefits of the Project.

52 Appendix 14

Rp966.3 million of which 74% are expected to accrue on the tail reaches of the system. Gains for the labor are expected to be about Rp421.0 million from scheme improvement activities and Rp105.4 million from the operation and maintenance activities. Given that the hired labor will only be required where the works are contracted out, the gains to the hired labor are expected to be about Rp105.2 million.2 Government revenue gains amount to Rp491.1 million from the system improvement activities and Rp5.5 million from the operation and maintenance activities. Overall net economic gains are expected to be about Rp2,062.8 million of which 11% accrue to the irrigators on the upper reaches, while 17% and 42% accrue to the irrigators in the middle and tail reaches, respectively. The anticipated share of the hired labor is expected to be about 5% and that of the Government about 24%.

15. Apportioning the gains between the poor and those above the poverty line within each of the irrigator subgroups and labor, and assuming that government tax revenues will be evenly expended among the population, the Project yields a PIR of 0.32.

Table A14.7: Poverty Impact Ratio, Core Schemes (Rp million)

Benefits/ Costs

Financial Present Valuea

Economic Present Valuea

Net Economic Benefits

Irrigators on the Upper Reach

Irrigators on the Middle Reach

Irrigators on the

Tail Reach

Labor Govt./ Economy

Overall

Incremental Benefits Net Output - Upper Reach 4,551 4,621 71 70 - Middle Reach 3,009 3,194 185 185 - Tail Reach 6,121 6,833 712 712 Incremental Costs Implementation Costs -4,911 -4,920 491 491 Labor-Implementation -2,105 -1,684 421 105 105 105 O&M - Materials & Equip. by

Govt. -55 -50 6 6

- Materials & Equip. by WUAs and WUAF

-735 -662 74 25 25 25

- Labor -527 -422 105 35 35 35 Net Present Use 5,348 7,411 2,083 235 350 876 105 497 Gains and Losses 235 350 875 105 497 2,083 Proportions of the Poor (%) b c

26 33 42 25 18

Net Benefits to the Poor

61 115 368 28 90 683

Poverty Impact Ratio 0.32 O&M = operation and maintenance, WUA = water users association, WUAF = water users association federation. a At a discount of 12%. b Based on project preparatory technical assistance survey data. c To be on the conservative side, poverty incidence for labor has been assumed at the rural poverty incidence. d Government of Indonesia. National Poverty Incidence. Statistik Indonesia 2001. Badan Pusat Statistik: Jakarta.

G. Project Funding and Fiscal Impact at the District Level 16. Budget and expenditure patterns for the core project districts were analyzed to ascertain availability of the counterpart funding (i) to implement the project activities, and (ii) to sustain the project activities in the post project period. The 2000 budget and expenditures data for core project districts was inflated to 2002 levels and was compared with counterpart funding requirements for an average district. During course of the project implementation, counterpart funding requirements are anticipated to range from Rp14 million in the first year to Rp1,046 million in the third year, which on average are 0.2% of the revenue and 0.8% of the development expenditures. During the post project period, the funding requirements to continue the activities on the project schemes are anticipated to be about Rp1,735 million, which is 0.8%

Appendix 14 53

of 2000 revenues and 2.7% of the development expenditures, respectively. The analysis indicates that an average district should not have any difficulty in meeting counterpart funding requirements both during and after the completion of project implementation. The detailed analysis is presented in the Supplementary Appendix E and the results are summarized in .

Table A14.9: Counterpart Funding Requirements for an Average District (in 2002 terms)

Category In Project Implementation In Post project Period A. Counterpart Funding Requirement (Rp million)

1. Construction and Rehabilitation 0–978 2,203 2. Incremental Operation and Maintenance 0–417 -468 3. Incremental Administrative Expenses 0–109 - 4. Overall 14–1,046 1,735 B. Funding Requirements as % of: 1. Revenue Levels in 2000 0.1–0.5 0.8 2. Development Expenditures in 2000 0.1–1.6 2.7 Source: Asian Development Bank estimates based on the feasibility study findings (PPTA 3793 Final Report 2002).