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ADB Loan to Indonesia to Promote Sustainable Irrigated Agriculture in Northern Sumatra

Irrigated agriculture in northern Sumatra, Indonesia, will be practised in a more sustainable way with about one million additional tons of rice produced per year as well as incomes and employment for more than 350,000 poor farm families increased through a project for which the Asian Development Bank approved a US$130 million loan yesterday.

The Northern Sumatra Irrigated Agriculture Sector Project will improve small- and medium-scale irrigation schemes, strengthen both operation and maintenance (O&M) and cost recovery aspects of irrigation schemes, and improve the institutional capacity of regional agencies and groups responsible for managing water resources of five provinces. The provinces are D. I. Aceh, North Sumatra, West Sumatra, Riau and Jambi.

The Project embodies a significant move towards decentralization and devolution of implementation responsibilities to the provincial and district levels; it also explores new ways of cost recovery.

The immediate goal of the project is to raise agricultural productivity by improving irrigation systems and institutions, including farmers’ associations. The Project will upgrade 250,000 hectares (ha) of irrigation schemes; improve O&M and introduce irrigation service fees in 150,000 ha; and hand over responsibility for O&M of 100,000 ha to water user associations.

Although agriculture is no longer the leading sector in the Indonesian economy -- its share of GDP fell from 54 percent in 1960 to 17 percent in 1995 -- it still plays a central role as a source of rural employment and income for small farmers, foodstuffs and raw materials for the country and as income for farmers. Increasing demand for foodstuffs and a continuing loss of highly productive irrigated land in Java and Bali to urban and industrial development have heightened the need for improved performance of irrigated agriculture in northern Sumatra.

The Directorate General of Water Resources Development under the Ministry of Public Works will be the executing agency for the project, which is due to be completed in 2004.

The total project cost is US$217 million. The government will provide financing of US$83.9 million and the farmers US$3.1 million. The ADB loan will come from the Bank's ordinary capital resources. The interest rate will be determined in accordance with the Bank's pool-based variable lending rate system for US dollar loans The loan is repayable over 26 years, including a grace period of six years.

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