Indonesia - Sustainable Management of Agricultural Research and Technology Dissemination (SMARTD) Project

 PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.AB4993 Project Name Sustainable Management of Agricultural Research and Technology Dissemination Project Region EAST ASIA AND PACIFIC Sector Agricultural Research and Extension (100%) Project ID P117243 Borrower(s) THE GOVERNMENT OF INDONESIA Implementing Agency Indonesian Agency for Agricultural Research and Development (IAARD) Environment Category [] A [] B [X ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared June 17, 2009 Estimated Date of July 19, 2010 Appraisal Authorization Estimated Date of Board October 14, 2010 Approval 1. Key Development Issues and Rationale for Bank Involvement Agriculture plays an important role in Indonesia’s economy, providing employment to over 40 percent of the workforce and income to two-thirds of the country’s poor. Increases in agricultural productivity are credited with reducing poverty in Indonesia during the 1970s and 1980s, and even now continue to be the key livelihood for many and a key source of poverty alleviation. Spending on the agricultural sector accounted for less than 5 percent of the total national budget in 2008. As a percentage of value added, Indonesia spends considerably less than other regional and middle-income countries. In 2004, public spending as a percent of value added in Thailand or Malaysia was four times greater than in Indonesia. While public spending on agriculture has increased recently in real terms this has failed to increase agricultural productivity. In 2001-08, national spending on agriculture1 increased from Rp 11 trillion to Rp 53 trillion, an average of 11 percent per year in real terms. The agriculture share of total government spending doubled from 3 percent in 2001 to 6 percent by 2008, reaching 1 percent of GDP because of increasing spending on agriculture subsidies. This did not result in a corresponding rise in agricultural production, which increased an average of 3 percent per year in 2001-08, and per-worker value-added was stagnant. Productivity in major crops was low compared to other Asian countries. However, much of the current focus of agricultural policy remains centered on production of staple food crops. Self-sufficiency in staple foods remains a priority, driven in part by food security concerns and exacerbated by the food price crises of 2008. MoA allocates a large and increasing share of resources to input subsidies in an effort to increase the production of food crops. Agriculture subsidies account for 60% of all agriculture spending in Indonesia (2008). Fertilizer subsidies are about 50% of all subsidy spending ($1.6bn) at 0.3% of GDP. 1 For the purpose of this analysis, national agriculture expenditure includes expenditure by MoA, sub-national government spending on agriculture and irrigation, irrigation expenditure under the Ministry of Public Works and central government subsidies closely related to agriculture (e.g. fertilizers), but excludes expenditure on fisheries and forestry and rural roads. Over the past three decades, Indonesia significantly boosted its capacity in agricultural R&D, but remains low. Public spending on R&D was only 0.22 percent of the agriculture output in 2003. By 2007, spending on R&D was still only half that on the seed subsidy. After adding in private sector agricultural R&D investments, the intensity with which Indonesia invested in agricultural research,2 at 0.27 percent was at the level of Laos (0.24 percent), and much lower than Malaysia (1.92 percent) or the Philippines (0.46 percent). The public research and extension systems are facing severe challenges to remain viable under pressure from staff and budget decentralization, demands for greater client-orientation, and increasing need accommodate commercial pressures. Broad-based growth in agriculture needs effective systems for generating, adapting and disseminating technology relevant to farmers and rural producers. Without new efforts to increase productivity in agriculture, Indonesia’s goal of using agricultural growth to generate broad-based rural development and further reduce poverty may be undermined. High-quality agricultural research and extension systems will be critical to getting productivity onto a higher growth path. There is an urgent need for greater investment in agricultural research and technology dissemination – but this should take a demand driven approach and seek greater involvement of the private sector rather than relying on the old supply driven model. Rationale for Bank’s Involvement Agriculture remains a key development priority despite the challenges faced by the sector. The President of Indonesia has taken a strong leadership role in developing an agenda for the revitalization of the agriculture, fisheries, and forestry sector (Revitalisasi Pertanian Perikanan dan Kehutanan/RPPK) that was formally presented in June 2005. The RPPK focuses on the development of human resource capacity and participatory empowerment of farmers through improved information systems, training in community agribusiness development, increasing funding for long-term technological research and development to improve agricultural competitiveness. This is also reflected in the Government of Indonesia (GOI) Medium Term Plan, 2005-2009 (RPJM) which calls for revitalizing agriculture through the development of agribusiness linkages to improve farmers’ incomes and for greater diversification. The Bank has supported GOI in the development of innovation in its agricultural research services since 1975 and its extension services, agricultural education and training since the late 1960s. Most recently, the extension projects DAFEP and FEATI have developed participatory extension aimed at agricultural commercialization. SMARTD along with FEATI and other bilateral projects offers an opportunity to reshape the delivery of agricultural services (research and extension) towards a dynamic multi-provider system that is needed to increase the competitiveness of the Indonesian agricultural sector in international markets. The Bank’s comparative advantage lies in its global and regional expertise, its participatory and inclusive approaches to development and the quality of its economic and sector work. The Bank, in collaboration with IAARD, prepared a Strategic Framework for Research Management (2008) that will underpin the scope and design of the proposed project. Currently, the Bank is also engaged in the preparation of a public expenditure review of the agriculture (APER) sector (including a stand-alone policy note on expenditures in agricultural R&D) in collaboration with 2 R&D expenditure as a share of total agriculture output. Ministry of Finance, Bappenas and Ministry of Agriculture. Analytical inputs derived from the APER are being provided to GoI towards the preparation of the next RPJM and would support project implementation. The Bank can bring in experiences from other agricultural services projects financed by the World Bank in other parts of the world such as Colombia, Brazil, China, and India, to yield lessons learned in addressing institutional reforms – in particular with respect to the sustainability of funding for research and technology transfer, allocation of funding on a competitive basis, empowerment of local communities and increased private sector participation. By helping strengthen the capacity of the Indonesian research establishment, the World Bank would prepare these public institutions to be reliable partners with the private sector through strategic public/private partnerships. The proposed project is fully consistent with the World Bank’s Country Partnership Strategy (CPS) with its theme of “investing in Indonesia’s institutions