INDONESIAInitiatives for Local Governance Reform Project

Project Appraisal DocumentEast Asia and Pacific Region

EASRD

Date: April 18, 2005 Team Leader: Erman A. RahmanSector Manager/Director: Mark D. WilsonCountry Manager/Director: Andrew D. SteerProject ID: P076174

Lending Instrument: Specific Investment Loan (SIL)

Sector(s): General transportation sector (40%), Sub-national government administration (30%), Irrigation and drainage (15%), Water supply (10%), Power (5%)Theme(s): Decentralization (P), Participation and civic engagement (P), Public expenditure, financial management and procurement (P), Other accountability/anti-corruption (P), Rural services and infrastructure (P)

Project Financing Data [X] Loan [X] Credit [ ] Grant [ ] Guarantee [ ] Other:

For Loans/Credits/Others:Loan Currency: United States DollarAmount (US$m): $29.50Borrower Rationale for Choice of Loan Terms Available on File: YesProposed Terms (IBRD): Variable-Spread Loan (VSL)

Front end fee (FEF) on Bank loan: 0.50%

Proposed Terms (IDA): Standard CreditCommitment fee: 0.00-0.50%Financing Plan (US$m): Source Local Foreign TotalBORROWER 0.18 0.00 0.18IBRD 26.46 3.04 29.50UK: BRITISH DEPARTMENT FOR INTERNATIONAL DEVELOPMENT (DFID)

10.82 1.18 12.00

LOCAL GOVTS. (PROV., DISTRICT, CITY) OF BORROWING COUNTRY

4.63 0.00 4.63

Total: 42.08 4.22 46.30Borrower: GOVERNMENT OF INDONESIAResponsible agency: MINISTRY OF HOME AFFAIRS, DIR.GENERAL OF REGIONAL AUTONOMYAddress: Jl. Medan Merdeka Utara No. 7, 7th Floor, Jakarta Pusat 10110Contact Person: Dr. I Made Suwandi, Director of Local Government FunctionsTel: +62-21-3453627 Fax: +62-21-3453627 Email: kapasda@telkom.netOther Agency(ies):BAPPENASAddress: Jl. Taman Suropati 2, Jakarta 10310Contact Person: Mr. Deddy Koespramoedyo, Director for Regional Autonomy DevelopmentTel: +62-21-31935289 Fax: +62-21-31935289 Email: deddyk@bappenas.go.id

Estimated Disbursements ( Bank FY/US$m):FY 2006 2007 2008 2009Annual 4.87 9.17 9.77 5.69

Cumulative 4.87 14.04 23.81 29.50Project implementation period: Four yearsExpected effectiveness date: 10/01/2005 Expected closing date: 06/30/2009

OPCS PAD Form: Rev. March, 2000

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A. Project Development Objective

1. Project development objective: (see Annex 1)

The development objective of the proposed Initiatives for Local Governance Reform Project (ILGR) is to pilot support to district (kabupaten) governments in improving transparency, accountability and public participatory practices and in undertaking reforms in financial management and procurement. Primarily the Project would assist advances in good governance at the district level through establishment of a set of minimum reforms in the key cross-cutting governance areas of public participation, transparency, financial management and procurement as well as in preparing a participatory Poverty Reduction Strategy and Action Plan (PRSAP) through provision of general facilitation, technical assistance and capacity building. The Project would also provide incremental poverty targeted investment funds to kabupatens that complete a predefined set of the minimum reforms to finance priority rural infrastructure identified in the PRSAP that brings the cross-cutting reform elements together, including more pro-poor budget allocations, to demonstrate and test reform implementation at the district level. Lastly, the Project would give visible recognition of the kabupatens’ reform initiatives and disseminate good governance practices emerging from the districts so that the lessons learned can help to influence reforms in other kabupatens not participating directly in ILGR.

2. Key performance indicators: (see Annex 1)

The key performance indicators are:

(a) Extent to which recommendations from consultations/public hearings are incorporated into district plans and regulations (perdas);

(b) Greater public availability of information;(c) Twelve district budgets show increases in poverty targeted expenditures by the end-of-project (EOP);(d) Economic Internal Rate of Return for project-funded infrastructure;(e) Greater than 12 participating district governments practicing accepted standards of procurement as

verified by audits and studies by EOP; (f) Greater than 12 participating district governments practicing sound financial management as verified

by audits and studies by EOP; and (g) Percentage increase in stakeholder satisfaction with government service delivery.

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1)Document number: 27108-IND Date of latest CAS discussion: November 25, 2003

The main objective of the Country Assistance Strategy is to assist the Government of Indonesia with poverty reduction over the medium and long term, through:

(a) improving the investment climate by maintaining macroeconomic stability, building a stronger financial sector, fostering a competitive private sector, building Indonesia’s infrastructure, and creating income opportunities for poor households and farmers;

(b) making service delivery responsive to the needs of the poor by helping Indonesia accelerate education and health outcomes, reducing environmental degradation, and improving access to clean water and sanitation, and helping Indonesia revamp the management and accountability systems for service delivery (such as making providers more directly accountable to their clients, especially the

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poor); and

(c) improving governance by making development planning more responsive to constituents, improving transparency and public financial management, effective implementation of decentralization, strengthening the accountability of local governments under a more coherent decentralization framework, and enhancing the public establishment of a credible, impartial and accessible justice sector.

The proposed ILGR supports all three goals identified in the CAS through its focus on improved local governance and service delivery at the district level, as well as investment in rural infrastructure. One of the key CAS business platforms is the Local Services Platform (LSP), which is intended to support enhancement of governance accountability at the district level. Indonesia decentralization has put district-level governments in charge of service delivery and given them authority to influence and regulate their local investment climate. The proposed ILGR project, which focuses on basic, cross-cutting governance reforms, is the first in a series of operations identified in the new CAS period to support the implementation of the LSP. It is meant to strengthen the foundation for good governance on which other, more sectoral focused project interventions will be able to build.

2. Main sector issues and Government strategy:

Decentralization and Local Governance

The decentralization Laws 22 and 25/1999 (on local government and fiscal balance) which became effective in January 2001 have led to a fundamental shift in Indonesia's governance and service delivery. Bu October 2004, the country has 440 kabupatens (districts) and kotas (urban centers) responsible for providing basic services to their citizens. In the past, financial and human resources were allocated and appointed by Jakarta. With decentralization, all government functions –apart from national economic and monetary affairs, defense, legal and judicial systems, international relations, trade and monetary affairs– have been devolved to the kabupatens/kotas.

The Law 25/99 mandates that central government shares revenues with local and provincial governments. At least 25 percent of total national revenues are channeled to the local level through the general allocation grant (DAU). The Law also mandates the allocation of special specific purpose grants (DAK) and a further sharing of portions of national tax and natural resources revenues with local governments in production areas. Currently the local share in government spending has nearly doubled from 17 to 31 percent and is likely to grow to over 40 percent. For the majority of kabupatens, the DAU constitutes 70 percent of their revenues, and total central transfers including shared taxes account for 85 percent of revenues.

The "Big Bang" decentralization program of 2001 led to some 2 million out of 3.4 million central civil servants being transferred to the provinces and kabupatens, a number of central government departments in the provinces being disbanded (Kanwils), and some 16,000 facilities transferred to the regions. Many kabupatens have rationalized their service delivery agencies (Dinas) by consolidating several agencies into one and requiring extension agents to provide a range of technical services. Though these administrative changes have been put in place, the concomitant changes in culture and systems required to make public services and public servants more demand driven and community responsive are still lacking. Dinas agencies prepare their individual budgets and Renstras (policy documents) with little outside consultation and compete with each other for limited resources. Budgets are still decided at the kabupaten-level through lobbying the planning department (Bappeda), the Bupati's office (Sekda) and local parliament (DPRD).

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Communities have limited voice in the process and input from the kecamatan or village remains minimal. Projects requiring construction or purchase of goods are favored, as these provide means for civil servants to supplement their low wages through kick-backs from contractors. The kabupaten budget, despite the rhetoric of decentralization, remains an opaque document, with limited transparency, and accountability of expenditure outcome. Overall the environment for “good governance” at the local level is weak and corruption similar to the national situation is endemic.

In September 2004, the decentralization laws were revised with the passage of Laws 32 and 33/2004. The key significant changes introduced by laws include the direct election of regional heads, review of district budgets by the province on behalf of the central government and a greater role for the province in monitoring of district performance, and new requirements on local borrowing.

The national government is working on developing guidelines and procedures for implementing the decentralization laws. Areas of focus include: reforms in financial management, auditing, procurement, local revenue generation, and freedom of information. The national government is also concerned about inter-governmental fiscal transfers--ensuring that there is some equalization between rich and poor districts and that basic services and development investment continues in a sustainable manner i.e. roads get built and health and education standards are maintained.

Rural Poverty

The economic crisis of the late 1990s revealed the vulnerability of millions of Indonesians to poverty. A World Bank analysis showed that around half of all Indonesians face a 50-50 chance of experiencing an episode of poverty every three years (World Bank, 2001: Constructing a New Strategy for Poverty Reduction). Prior to the crisis, the poverty headcount index was 15.7 percent, but rose to a peak of 27 percent in early 1999. Since then poverty levels in Indonesia have fallen as rice prices declined and real wages increased, and in 2002 the rural poverty headcount ratio was 23.1 percent, three times higher than the urban rate.

Java accounts for 61 percent of the poor, and the rest are scattered through eastern Indonesia as well as other areas (South East Sulawesi, East Java, East Kalimantan, and Central Java). Poverty is concentrated in rural areas, where 78 percent of the poor reside and 65 percent of poor households are considered agricultural, as about half of their income comes from agriculture. Access to markets and services remains a major determinant of rural poverty.

In the past, government poverty programs focused on providing subsidies and handouts from the center to households targeted in poor areas through programs such as the Inpres Desa Tertinggal (IDT) which provided block grants to poor villages, and the Social Safety Net (JPS) program and programs to compensate reduction of fuel subsidy. In addition, government approaches to poverty alleviation programs have generally been centralized sectoral allocation of funds.

In early 2005 Indonesia finalized its five-year national poverty reduction strategy (PRSP) which is an integrated part of the country’s five-year development plan (RPJM). The PRSP was consulted broadly with civil society and across the country. The consensus was to view poverty as multi-dimensional—that poverty is not only about lack of income but also lack of access to basic rights that should be respected, protected and fulfilled; as stated in the RPJM. These rights include access to food, health services, education, employment, housing, water, land, environment and natural resources, security and participation in process of public policy making. The PRSP rightly links poverty reduction to governance—that “better governance will create more opportunities for people to participate in decision making and empower the

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poor as well as allow the private sector and others to play a strategic role in poverty reduction.” The PRSP will become the reference for local governments to develop their own poverty reduction strategies. The key sector issues, thus, are how to ensure that the national governance reform agenda is incorporated at the district-level, and that key priorities and investments identified in poverty reduction strategies are included in district-level budgets and have local ownership and support.

National Framework for Local Government Capacity Building

The Government has developed an overall national framework for capacity building to support decentralization (October 2001). Key elements of this strategy include:

• Understanding and disseminating the regulatory framework for decentralization, tasks and functions for the regions, so that all stakeholders in the region participate in decentralized local governance.

• Developing the roles and functions of the DPRD and village councils (BPD), developing a code of conduct and interaction between the councils and civil society.

• Building a new system of fiscal transfers including accountability and transparency in the Kabupaten budget (APBD) and an open inclusive process for its formulation and implementation.

• Establishing a human resource management system with clear personnel management and ensuring institutions are capable for their tasks and functions.

• Developing patterns of interaction with other regions to allow transfer and exchange of good practices.• Developing a new mechanism to promote regional economic development, employment and poverty

alleviation.

Donor support for Indonesia’s Decentralization Program

The donor consultative group for Indonesia has highlighted a number of issues that the Government needs to address:

• Develop a cohesive management framework for decentralization which includes appropriate mechanisms for coordination between agencies, internal reform for the Ministry of Home Affairs, and strengthening of monitoring and evaluation functions.

• Define minimum standards for basic service provision involving stakeholders in the process.• Utilize the full range of fiscal decentralization instruments such as the DAK, and improve procurement,

accounting and auditing systems.• Fully enforce the regulations on public participation as stipulated in Law 28/1999.• Improve implementation of supervisory functions.• Provide additional funds to the regions for capacity building purposes.• Support civil service reform.• Involve regional and local governments in pro-poor policy formulation.

The UNDP-World Bank-ADB supported Partnership for Governance Reform in Indonesia provides a mechanism for donors to coordinate efforts in multi-donor supported governance reform activities in Indonesia. In January 2005, the World Bank, DFID, UNDP, ADB and the Government of Netherlands have established a multi-donor trust fund to support decentralization (Decentralization Support Facility, DSF). This facility will help donors harmonize their local government programs and help support an overall government vision for implementing decentralization

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3. Sector issues to be addressed by the project and strategic choices:

Indonesia’s ongoing decentralization process has resulted in financial resources, personnel and responsibilities for delivery of basic services being devolved to district governments. Nonetheless, comprehension of procedures and regulations relating to new decentralized mandates at the kabupaten level is limited, and most district-level funds are being allocated for routine rather than development expenditures. Moreover, the potential for misuse of public funds is high. Civil society and the local legislature though legally mandated under decentralization laws, are not actively involved in the preparation of development priorities and plans or reviewing expenditure outcomes. Poverty issues and programs are receiving limited investment support from constrained kabupaten budgets.

There are, however, a small but growing number of kabupatens who have initiated reform measures to address some of these highlighted problems. There is an opportunity to build on these initiatives by providing incentives at the right level and establishing information forums which allow for negotiated decision-making between the executive, legislature, and civil society which should lead to better investment patterns. One way to achieve this is by investing in a process of civic participation in local governance, budget oversight and improved expenditure allocations leading to better targeted and quality investment.

Using a cross-sectoral approach, the proposed ILGR will address systemic capacity issues that affect kabupaten governments including weaknesses in public policy, exclusionary budget planning and management practices; poor standards of service delivery and accountability to end users; weak financial management, procurement and internal controls; limited local resource mobilization capacity, and barriers to improving the local investment climate. The poverty reduction is cross-sectoral by nature and sectoral interventions required to address poverty will depend on the geographical location and the nature of rural poverty in the kabupaten. The proposed ILGR takes a cross-sectoral approach towards addressing the issues identified above through a system that builds local ownership for the reform agenda through improved transparency, accountability, civic participation, and local level poverty analysis, and will leverage better use of the kabupaten budget through complementary investment support for poverty programs. A series of district level poverty reduction strategies, currently being piloted in proposed ILGR kabupatens, uses participatory poverty assessment (PPAs) techniques to encourage broad local partnerships and ownership of the local poverty agenda and prepares cross-sectoral district-level poverty strategies which also supports the national PRSP process.

C. Project Description Summary

1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown):

The proposed ILGR project has the following components:

• Component A: Local Governance Reform• Component B: Poverty Targeted Investments• Component C: Implementation Support and Monitoring

Component A: Local Governance Reform will continue supporting kabupatens participated in the Project preparation (batch 1, approximately 15 kabupatents) which meet minimum Entry requirements to undertake more advance reforms to meet minimum Pre-investment and Investment requirements stipulated in the Local Governance Reform Framework (see Attachment 1 to Annex 2). Simultaneously, starting in Year 2 of the Project implementation, about 25 other kabupatens will be selected to participate in ILGR and be assisted in meeting minimum Pre-Investment requirements for 18-24 months. Sub-components include:

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A1. Reform of the Kabupaten Planning and Budgeting Process which, focuses on the enhancement of participation and strengthening links with local pro-poor priorities;

A2. Reform of the Kabupaten Budget Implementation and Financial Management and Reporting, which improves local procurement and financial management practices; and

A3. Strengthening Accountability Mechanism, which helps increase information disclosure and cross-district networking.

Component B: Poverty Targeted Investment will support incremental financing in approximately 15 batch-1 kabupatens for pro-poor development expenditures which are identified and prioritized through an enhanced planning process linked to the development of the district PRSAP. Investment funds for batch 2 kabupatens will come from the subsequent project—ILGR2.

Component C: Implementation Support will fund specialized technical, facilitation and monitoring supports for the activities in Components A and B at the district, regional and national levels. Sub-components include:

C1. General Facilitation and Specialized Technical Assistance, which provides facilitation and technical assistance to the districts;

C2. Capacity Building and Institutional Training, which provides training to district staff and other local stakeholders to institute governance reforms; and

C3. Monitoring, Evaluation, and Studies/Surveys, which supports the overall monitoring and evaluation framework for the Project and finances studies on local governances.

The Bank has also received a Japan Social Development Fund (JSDF) grant of US$2.0 million to provide parallel financing to an international NGO to support civil society institutional strengthening in analyzing and disseminating local government budget information as well as in monitoring the quality of service delivery and budget execution through civic report card in the ILGR districts. The results of this activity will be used as one of the monitoring tools of the Project.

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Table 1. Project Costs by Components – Total Including Contigencies

Component

IndicativeCosts

(US$M)% of Total

Bank-financing(US$M)

% ofBank-

financingA. Local Governance Reform 0.0 0.01. Reform of the Kabupaten Planning and Budgeting Process

0.50 1.1 0.00 0.0

2. Reform of Kabupaten Budget Implementation and Financial Management Reporting

0.50 1.1 0.00 0.0

3. Strengthening Accountability Mechanisms 0.50 1.1 0.00 0.0B. Poverty Targeted Investments 31.17 67.3 19.64 66.6C. Implementation Support 0.0 0.01. General Facilitation and Specialized Technical Assistance 8.38 18.1 5.88 19.92. Capacity Building and Institutional Training 3.77 8.1 2.77 9.43. Monitoring/Evaluation & Studies/Survey 1.33 2.9 1.06 3.6

Total Project Costs 46.15 99.7 29.35 99.5Front-end fee 0.15 0.3 0.15 0.5

Total Financing Required 46.30 100.0 29.50 100.0

Table 2. Project Costs by Components – Base Costs (Bank and DFID Financing)

Component Indicative

Costs (US$M)

% of Total

Bank- financing (US$M)

% of Bank-

financing

DfID Financing

(US$M)

% of DfID

financing A. Local Governance Reform 1.33 2.88 0.00 0.00 1. Reform of the Kabupaten Planning

and Budgeting Process 0.44 0.96 0.00 0.00

2. Reform of Kabupaten Budget Implementation and Financial Management and Reporting

0.44 0.96 0.00 0.00

3. Strengthening Accountability Mechanisms

0.44 0.96 0.00 0.00

B. Poverty Targeted Investment 31.17 67.3 19.64 66.56 8.42 70.01 C. Implementation Support 11.90 25.69 8.22 27.86 3.52 29.35 1. General Facilitation and Specialized

Technical Assistance 7.44 16.08 5.10 17.30 2.19 18.22

2. Capacity Building and Institutional Training

3.32 7.18 2.33 7.89 1.00 8.31

3. Monitoring, Evaluation and Studies/Survey

1.13 2.43 0.79 2.67 0.34 2.82

Total Project Costs 44.39 95.88 27.85 94.42 11.94 99.48 Price Contigencies 1.76 3.80 1.50 5.08 0.06 0.52

Front-end fee 0.15 0.32 0.15 0.50 0.00 0.00 Total Financing Required 46.30 100.00 29.50 100.00 12.00 100.00

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2. Key policy and institutional reforms supported by the project:

Decentralization and strengthening local government capacity to deliver basic services to citizens is a major thrust of Indonesia’s development strategy. However much remains to be completed in terms of issuance of clear guidelines and standards from the central government in areas such as financial management, audit requirements, accounting standards, and minimum standards for basic services. To support the agenda, the World Bank through a Dutch Trust Fund for Decentralization has funded a program of technical assistance, training and analytical work, working closely with other donors through the donor decentralization working group. The ILGR provides an opportunity to continue to support the overall decentralization policy and institutional reform agenda both at the national level (through support for policy reforms) and at the local level (through direct implementation of activities in selected districts).

Policy and institutional reforms are proposed in the following four key areas.

(i) Enhancing accountability and transparency in the local planning and legislative process. The Project will assist local government executives and legislatures to develop, through broad public consultation, local laws and regulations that will allow greater freedom and access to public information (including planning and budget documents, general audit reports, procurement information and requirements for licensing) and broader public participation in policy planning, budgeting, program execution and monitoring. Once the local legislation is passed, the local government is mandated to finance these measures through budgetary allocation thus ensuring sustainability and commitment towards the reform process.

(ii) Strengthening local government financial management and accounting standards practices. The Project will support reform in several financial management areas including: (a) overall institutional and legal framework through the issuance of enabling local regulations relating to financial management, budget preparation and execution, overall budget classification and construction. These changes would allow for budget classification by function in accordance with international best practices and better align local financial management regulations with the latest central regulations. (b) Specific administrative reforms in public expenditure management that enhance accountability of district government staff and introduction of financial controls to improve fiduciary safeguards and efficient handling of public funds.

(iii) Supporting a sub-national procurement reform agenda. The latest Country Procurement Assessment Review (CPAR) in Indonesia, conducted in 2000-2001, identified that from all accounts, the public procurement system does not function well. It is not market driven, has been prone to misuse and abuse, and reduces value for money for public funds. Based on the CPAR agenda the following areas have been identified as essential for sub-national reforms and thus a key focus of project interventions, which further strengthened by the recent issuance of Keppres 80/2003 that provides the overall framework for national-level procurement reforms. The Project will support the implementation of the Keppres at district level, particularly in establishing a procurement focal point, streamlining existing regulations to promote economy, efficiency, transparency and open competition, improving information systems, improving control, auditing and feedback system, and training and capacity building of local staff involved in procurement.

(iv) Supporting the national poverty reduction agenda. Being the first to pilot district PRSAP, the methodology (PPAs), which has been developed during the Project preparation, will be scaled up through the national Poverty Reduction Committee (Komite Penanggulangan Kemiskinan,

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KPK). In ILGR districts the poverty reduction strategies will be incorporated in the district five-year and annual development strategies. This would ensure that over time an increasing percentage of the kabupaten budget is allocated to poverty related expenditures.

3. Benefits and target population:

The nine target ILGR provinces of West Sumatra, Banten, West Java, Central Java, Yogyakarta, East Java, Gorontalo, North Sulawesi and South Sulawesi, have a combined population of 111 million people or 54 percent of Indonesia’s population. There are currently 130 kabupatens in these provinces of which 40 would be eligible to participate in the Project. The number of poor households living in these districts is estimated to be 22 million (based on Susenas) and approximately 2 million of them live in the first batch of 15 ILGR districts. These districts, which are geographically clustered for more efficient technical assistance and information sharing/cross learning, are Solok, Tanah Datar (West Sumatra), Lebak (Banten), Bandung, Majalengka (West Java), Kebumen, Magelang (Central Java), Bantul (DI Yogyakarta), Ngawi, Lamongan (East Java), Bolaang Mongondow (North Sulawesi), Boalemo (Gorontalo), Gowa, Takalar, and Bulukumba (South Sulawesi).

The Project would have a direct impact on poor households and indirectly have a positive impact on all citizens in the districts through increased budget allocation for pro-poor service delivery and reduction in corruption and the overall cost of doing business leading to improvements in the investment climate.

The benefits of the Project can be categorized under three main areas:

(i) Enhancement of governance and improvement of the local investment climate. Measures supported by the Project should improve governance through greater transparency, more public control, reduced corruption and more efficient use of public resources. Local contractors/businesses would benefit from a more competitive, less corrupt procurement process and permitting process. Hence, the Project will lead to overall improvements in the local investment climate.

(ii) Poverty reduction. The Project design, through its up-front investment in local capacity building in poverty analysis and strategies, and follow-up investment financing for poverty linked rural infrastructure, attempts to mainstream poverty reduction in overall district’s policies and budgetary allocation.

(iii) Capacity building to help implement decentralization. The Project’s main beneficiaries of capacity building and institutional strengthening are local government officials and DPRD members, as well as local civil society (NGOs, community based organizations, local universities, journalists) involved in the project activities. The Project will also improve the capacity of national and, less directly, provincial government officials in supervising, monitoring and coordinating ILGR-related reforms in the districts.

4. Institutional and implementation arrangements:

National Level Institutional Arrangement

The Project will be implemented by national, provincial and local governments with supports from consultants and facilitators.

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National Steering Committee (NSC)

National Implementation Committee (NIC)

National Project Secretariat (NPS)

Provincial Coordination Team (PCT)

Project Management Unit (PMU)

National Management Consultant (NMC)

Regional Management Consultant (RMC)

Kabupaten Facilitator (F-Kab)

Legend:

= governmental organization unit

= consultant

= accountability line = coordination line

• National Steering Committee (NSC), chaired by the Deputy Chairman for Regional Development and Autonomy of the National Development Planning Agency (Bappenas). NSC supports and promotes legal and regulatory aspects of implementation, issues the Local Governance Reform Framework and approves the participating list of districts.

• National Implementing Committee (NIC), chaired by the Director General for Regional Autonomy (DGRA), Ministry of Home Affairs (MOHA). NIC approves and issues the project operational manuals, evaluates the program performance, and coordinates with other related programs.

• National Project Secretariat (NPS), chaired by the Director for Local Government Functions, DGRA, MOHA. NPS coordinates overall project management, including reviewing district performance and monitoring, procurement and preparation of annual budgets for all components and verifying sub-project eligibility. Bappenas will manage the implementation of evaluation and studies under Component C-3.

• Provincial Coordination Team (PCT), chaired by the Provincial Planning Board (Bappeda). PCT facilitates information sharing between districts and coordinates the scaling up of reforms to other kabupatens/kotas, as well as facilitating selection of second batch of kabupatens.

• Project Management Unit (PMU), chaired by the kabupaten’s Regional Secretary will manage the overall implementation at local level.

• National Management Consultants (NMC) will be hired to help NPS preparing training modules technical backstopping, and program monitoring.

• Regional Management Consultants (RMC) will be based in three regional offices covering participating kabupatens in nine provinces. When batch 2 kabupatens start being facilitated, the RMC's coverage will expand. The regional consultants would include experts in poverty assessments, procurement, financial management, participation safeguards, and engineering. These regional consultants would provide capacity building assistance to local governments and DPRD members as well as the multi-stakeholder working groups.

• Kabupaten Facilitators (F-Kab) will support Project implementation at district level. Each kabupaten will have one lead facilitator and one technical facilitator (engineer). The lead facilitator will focus in facilitating the reform process, including bringing together different stakeholders to participate in the process, while the technical one is responsible to help identifying, assessing the feasibility and monitoring sub-project(s) implementation.

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District Level Institutional Setting.

Participating local governments, through a Bupati Decree, will establish a Project Management Unit (PMU) that will manage the overall implementation at the local level, including coordination with multi-stakeholders working groups.

Project Management Unit

ChairpersonRegional Secretary

Finance Division/ Agency

Sub-project Planning and Implementation

CoordinatorAssistant on Economic & Development, Bappeda

Governance Reform Coordinator

Bappeda, Regional Assistant on Governance, Legal

Bureau, Public Relation/ Information Bureau

Project Implementation Unit (Technical

Agencies)*

Basic Democratization (Transparency & Participation)

Working Group

Poverty Working Group

Financial Management Reform Committee

Procurement Reform Focal Point

Legend:

= governmental organization unit

= multi-stakeholders working group

= accountability line = coordination line

Project Management Unit

ChairpersonRegional Secretary

Finance Division/ Agency

Sub-project Planning and Implementation

CoordinatorAssistant on Economic & Development, Bappeda

Governance Reform Coordinator

Bappeda, Regional Assistant on Governance, Legal

Bureau, Public Relation/ Information Bureau

Project Implementation Unit (Technical

Agencies)*

Basic Democratization (Transparency & Participation)

Working Group

Poverty Working Group

Financial Management Reform Committee

Procurement Reform Focal Point

Legend:

= governmental organization unit

= multi-stakeholders working group

= accountability line = coordination line

Notes: * ILGR sub-projects will be implemented by related technical agency(ies) or dinas based on the results of the PRSAP. Since the sub-projects may differ from one year to the next, the technical agencies involved in the project may differ as well.

Each unit of the PMU have the following roles and responsibilities:• Chairperson: provides overall project coordination;• Finance Division/Agency: manages the disbursement of the funds;• Coordinator for governance reform: coordinates governance reform activities and development of

PRSAP;• Coordinator for sub-project planning and implementation: organizes public consultation on the

PRSAP and annual budget and planning process, as well as monitoring sub-project implementation• Project Implementation Unit -PIU (technical agencies): prepares detailed design of and draft

budget documents for the sub-project(s); procures contractors (private or community) who will implement the sub-projects; supervises sub-project implementation; verifies sub-project completion of contract milestones and processes payment requests; prepares quarterly reports.

In financial management (FM) and procurement reforms, which are more technical and within the primary domain of the local government, the government will establish two teams:

• FM Reform Team, a multi-sectoral committee of government officials, is responsible to prepare an action plan and the necessary regulations, to lead and to coordinate FM reforms, to prepare quarterly reports, and to organize public consultations on the reforms.

• Procurement Focal Point will lead procurement reforms at the district level, including preparation of action plan and necessary regulations, leading and coordinating procurement reforms, preparing

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quarterly reports, implementing capacity building, organizing public consultations on and networking activities in procurement reforms.

Bupati Decree(s) will be issued to establish these entities that clearly states the functions and target outputs of each.

To promote governance reforms with broader-based support ILGR creates space for local stakeholders to participate in reform-related activities. The Project facilitates the establishment of multi-stakeholder working groups whose membership include government officials, DPRD members and local NGOs that are selected democratically through public meetings (multi-stakeholders forum). There will be at least two working groups working in two of the areas required in the Local Governance Reform Framework:

• “Basic Democratization/governance”—promotion of improved public access to information and decision-making process. The working group will prepare and draft local regulation, on transparency and participation, including holding public consultations, and will monitor the implementation.

• Poverty—formulation of the district-level PRSAP. The poverty working group will formulate the participatory PRSAP, hold public consultations and monitor the implementation of the PRSAP.

D. Project Rationale

1. Project alternatives considered and reasons for rejection:

The proposed ILGR focuses on governance reforms linked to poverty alleviation. The project builds on lessons learned from on-going CDD initiatives, and the results from analytical work on decentralization. It also aims to pilot mechanisms to reward reform-minded governments that are willing to develop local, participatory poverty alleviation initiatives based on citizen choice. There are a number of other Bank projects and on-going analytical work and pilot activities on decentralization which attempt to address issues not covered by ILGR but equally important for the governance agenda such as: judicial reform, anti-corruption strategies, civil service reform, inter-fiscal government allocations; community empowerment, poverty monitoring and analysis. ILGR will reinforce these efforts but will not try to address all aspects of governance, or replicate activities carried out by others.

The following project alternatives were reviewed and rejected:

(i) Investment lending versus adjustment lending: The alternative of adjustment lending was rejected in favor of investment lending because implementation of key governance reforms at the local level needs to be accompanied by significant facilitation and capacity building. Moreover, providing incremental investment funds to participating kabupatens which complete an initial set of prescribed reforms will allow demonstration and testing of reform implementation at the district level, which can then be expanded to a larger number of kabupatens.

(ii) SIL vs LIL or APL: The alternative of a Learning and Innovation Loan (LIL) was rejected because the maximum size of a LIL would limit the geographic coverage needed for a representative pilot operatation in a large and diverse country such as Indonesia. Governance reform is a long-term program, and an Adaptable Program Loan (APL) would have been one alternative. This alternative was rejected, however, as it would commit the country program in a potentially experimental Governance operation, where much still needs to be piloted and tested. A SIL was preferred because

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it provides enough flexibility in design to allow for an appropriately sized pilot operation and a follow-up loan for program expansion to other kabupatens, once the basic model has been tested.

(iii) Geographical Coverage: For ILGR to succeed, a strategic choice was made to be selective in the initial phase and limit the total numbers of kabupatens by focusing on existing “good performers”. Initial kabupaten selection was based on three sets of criteria: poverty criteria, project strategy related criteria (working in geographical clusters), and "proof of willingness" to participate and pursue a reform agenda. Ultimately selection would be based on the kabupaten's commitment to pursue an overall reform program that meets basic reform criteria (Local Governance Reform Framework) established by the project as a means of “verification”. Thus, the coverage of the project is limited to areas where reform initiatives are underway, so as to maximize the current reform efforts. Kalimantan and Eastern Indonesia (Irian Jaya, Nusa Tenggara Timur and Barat) are not covered by the project due to lack of good governance examples, limited institutional capacity, and poor performance of KDP. If there is a follow-on operation to ILGR, these would be areas for expansion, provided there are on-going governance initiatives and local governments are willing to engage in the program.

(iv) Sectoral reform project versus cross sectoral reform: The project could have looked at governance reform from a sectoral lens, but the Country Team endorsed a cross-sectoral operation that looks at cross-cutting or “platform” governance reforms at the kabupaten level in areas such as participation, transparency, disclosure, procurement, and financial management. The Indonesia program has a series of decentralized sectoral programs (health, roads, agriculture) which will respond to the kabupaten sectoral investment needs and build in sector-specific reform requirements. To ensure complementarity, these sectoral investments over the next CAS period are intended to be clustered in kabupatens that meet the ILGR minimum entry requirements. ILGR investment financing will focus on priority rural infrastructure identified through participatory poverty assessments. If successful, ILGR would provide a vehicle for central government to scale-up and expand governance reform in all kabupatens beyond the initial set of reformers, improve utilization of scarce public resources, maintain minimum national standards for basic social services, and help attain the Millennium Development Goals. Based on this reasoning strategic choices were made not to include sectoral interventions such as health and education reforms, as these are better dealt with through sector-wide approaches or by projects that cut across kabupaten boundaries at provincial or national levels (such as the Bank’s Provincial Health Project) .

2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned).

Sector Issue Project Latest Supervision

(PSR) Ratings(Bank-financed projects only)

Bank-financedImplementation

Progress (IP)Development

Objective (DO)

Participatory methodologies, competitive allocation, NGO/civil society monitoring.

Indonesia -Kecamatan Development Project.

S HS

Linking service providers to beneficiaries through committees.

Indonesia-Decentralized Agriculture and Forestry Extension Project.

S S

CDD-Governance Mexico-Rural Development in S S

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Marginal Areas Project.CDD Brazil- State of Bahia Rural

Poverty Reduction Project.S S

Sub-national lending CDD lending linked to adjustment lending on governance.

India-District Poverty Initiatives Project.

S S

Other development agenciesLocal service delivery DELIVERI and DINAMIS

(DfID)Capacity Building for Local Governments

PERFORM, BIGG, LGSP (USAID), Sustainable Capacity Building Development (ADB)

Good governance in Cities BUILD, BRIDGE, LOGIC (UNDP)

Regional Development Policy Project, and Human Resource Development in Local Government

JICA projects

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

3. Lessons learned and reflected in the project design:

The overall design of the project has benefited significantly from Bank economic and sector work, which has helped both in defining a theoretical framework for the project design and providing an in-depth diagnostic base-line for governance, corruption and decentralization issues in Indonesia. For example:

• The World Bank’s World Development Report 2003, “Making Services Work for the Poor”, helps provide a theoretical framework to look at accountability in Indonesia from the perspective of the relationship between citizens, politicians and policy makers, and implementing agencies/service providers and helps to identify areas where failures occur in the accountability framework.

• “Combating Corruption in Indonesia”, and “Village Justice In Indonesia: Case Studies on Access to Justice” 2003—provides detailed analysis and diagnostic information on how corruption takes place in local governments and in development projects and the types of remedial actions taken by citizens and reform-minded local governments to combat corruption.

• “Local Governments and Local Economic Development and Investment Climate in Indonesia”—2003, provides diagnostic data on constraints relating to user fees and taxes facing local businesses working in kabupatens and kotas.

• “Education in Indonesia: Managing Transition to Decentralization”-2003 provides a clear sector strategy on how to finance and improve local educational standards, services and capacity in a decentralized setting.

• “Decentralizing Indonesia: The World Bank Regional Expenditure Review Overview Report”-2003 provides detailed diagnosis of the outcomes and impact of decentralization in 3 regions (North Sumatra, West Java and Nusa Tenggara Barat). Initial results from the RPER indicate that though the decentralization process has gone relatively smoothly, regulatory uncertainty, budgetary pressures, unequal distribution of resources, and imperfect governance remain an obstacle.

Community Driven Development initiatives, such as Indonesia’s successful Kecamatan Development Program (KDP) and Urban Poverty Project (UPP), are good at delivering resources directly to communities to plan and reinforce transparency and accountability at the village-level, but communities have limited leverage or influence on how higher levels of government plan, implement development investments and

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deliver public services. Local government administrators also use the opaqueness of the public budget planning and allocation system for private benefit through over inflated contracts, kick-backs on inputs and limited accountability on outcomes. Identifying the right incentive framework to change this type of behavior within local government systems is a challenge.

The World Bank has financed several projects which work at the sub-national/district level and focus on reform and capacity building. A new generation of sub-national projects are now just getting off the ground in India, but these are based on budget-support for State governments willing to implement key governance reforms. However few projects combine the higher level sub-national governance reform with community-driven initiatives. A few key lessons from local government reform projects in Uganda, Ethiopia, Mexico and Brazil indicate that successful projects need a combination of the following:

• Intergovernmental rules of the game need to be clear and well understood by local governments.• Local governments should have capacity to finance basic services.• Strengthening civil society's role in bodies such as local councils can provide a strong base for

participation.• Mobilizing support from stronger local governments to assist weaker ones can reduce technical

assistance costs and develop sustainable partnerships.• Developing standard sub-project documents and technical designs can help to reduce costs.• Supporting dissemination of best practice between local governments and communities, rewarding

innovation, and developing a core group of local governments willing to take a stand against corruption, can help to expand adoption of reforms.

• Demand driven projects can be a key tool for institutionalizing the decentralization process and linking reforms to different levels of administration (national- sub-district -village).

In Indonesia there are a number of other donors active in the field of decentralization and governance. These include GTZ, USAID, DfID, UNICEF, ADB, JICA, AUSAID, CIDA, Ford Foundation and Asia Foundation and the Partnership for Governance Reform. For example, the GTZ support for decentralization measures has several areas of assistance including support for participatory regional development planning; transparent regional budgeting and financial management; development of local stakeholder forums and democratic village administration; and improving strategies towards poverty alleviation oriented service delivery. A number of donor projects such as PERFORM, BIGG (USAID) and BUILD (UNDP) have experience with developing and running kabupaten and kota stakeholder forums using local facilitators. NGO groups, such as FITRA, have developed a menu of modules and training materials on citizen participation in budget monitoring. The Bandung Institute of Governance Study (BIGS) and Indonesian Corruption Watch (ICW) are experimenting with citizen score-cards for service delivery.

The lessons learned from these experiences will be directly used by ILGR in: (a) developing training materials for local government and civil society capacity building; (b) developing operational manuals and guidelines for kabupaten stakeholder forums; (c) using examples of existing practices for stakeholder inclusion and conflict resolution; and (d) supporting on-going forums where they exist and mainstreaming their efforts into the kabupaten budgetary oversight system. The recently established Center for Local Government Innovation (CLGI) is also assisting in developing capacity of these stakeholder forums and provides a mechanism for disseminating innovations through kabupaten local government and legislative networks. ILGR proposes to develop partnerships with other donor-financed capacity building interventions and will support existing kabupaten civic forums to reform planning, budgeting processes and access to investment funds.

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During the Project preparation a “Study on Kabupaten Reform Dynamics in Indonesia” was commissioned. The study, which was carried out in three ILGR districts, resulted in findings that help fine-tune the Project design. These findings include:

• District leadership matters. Support from the Bupati as the top executive is essential. However change agents among the mid-level bureaucrats are also important. These are the people that can push or stall the reforms. Hence sufficient time should be allocated to assess and map them.

• Outsiders can help drive reforms. The role of external agents is crucial, especially in places where civil society is weak or fragmented and good governance practices are new. Providing on-the-ground facilitation, including bridging between the government and civil society, becomes a crucial support at a time of “transition”.

• Competition promotes innovation among regions. Key politicians and civil servants want and need recognition for successful reform initiatives. Recognizing and promoting “enlightened” leadership through dissemination at different levels will serve as an incentive to boost further reforms as well as providing opportunities for cross learning.

• Nascent reforms require support to have real impacts. External agents should be aware about the on-going reform initiatives and “latch on” to them. Piggy backing on their initiatives will create a high level of ownership and at the same time providing facilitation, technical support and local level capacity building will deepen the initiatives’ impacts.

Overall, the following key elements have informed the project design:

(i) Effective channels for citizen-civil servant communication. Even though decentralization places the decision-maker closer to the beneficiaries, it does not automatically translate into an enhancement of communication between government and society. Projects or programs promoting broad-based reform require a set of reformers based not just within Government, but also from an increasingly active civil society. Local networks of journalists, NGOs and activists will play a large role in pushing reforms from outside the system. Just as important as kabupaten-level demand for reform, is harnessing community demand for reform. The project addresses this issue by providing mechanisms for greater civil society participation in decision-making, demystifying the budget process and simplifying bureaucratic procedures.

(ii) Legal framework. Past decentralization projects have encountered problems resulting from the vague demarcation of powers and responsibilities of the local governments. The project aims to strengthen the legal framework of decentralization through the issuance of revised guidelines that would assist local governments implement national laws and support legally mandated consultation processes concerning the use of public funds, preparation of local regulations and provision of governmental services.

(iii) Technical assistance. The provision of technical assistance to local governments is an important element for the success of the reforms. Experience from past projects have shown how technical assistance can fail when they are designed externally and do not have the buy-in of local governments. Technical assistance in this project will be demand-driven, based on the identification of needs by local authorities and tailored to local conditions. Technical assistance will also, as much as possible, tap into locally available resources in local universities, NGOs and the private sector.

(iv) Promotion of transparency in decision-making. The administrative monopoly on decision-making, the culture of patronage, and the existence of elite networks from the previous

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centralized system may serve to frustrate and undermine the decentralization process. The project addresses this issue through the promotion of transparent processes such as the formation of the kabupaten multi-stakeholder forum as a broad-based citizen’s group that engages with the local government in the reform process. The selection of project sites will be based on the existence of pro-reform executive leadership and where there is already community demand for changing the system.

(v) Dissemination of ‘good practices’. Local governments often have very little idea of what strategies have succeeded and tend to repeat the failures of others. The project will facilitate the exchange of experiences between different kabupatens and between NGOs working in different areas to hasten learning and reward innovation.

(vi) Support for local-level dynamics of decentralization. The devolution of power from the center to local governments is often an uneven and messy affair. In recognition of this process the project has adopted a flexible approach that supports the dynamics of decentralization through the development of local reform action plans that build-upon minimum entry criteria.

4. Indications of borrower commitment and ownership:

Strong borrower support for this project is evident and can be seen in the following:

(i) Memorandum of Understanding signed by Bupatis and DPRDs regarding their interest in participating in the program, and allocation of counterpart budget by pilot kabupatens participating in the preparation phase (US$4,000-17,000 per kabupaten).

(ii) Official request from BAPPENAS for the project and inclusion in the lending program.(iii) Establishment of a GOI preparation team and National Steering Committee (by ministerial decree) at

the center and active participation in field visits, meetings, drafting of term of reference, and overall project preparation.

(iv) Support from the Government to convene meetings with other donors working on governance.(v) Successful implementation of a PHRD grant for project preparation and use of DFID grant funds to

pilot initial facilitation on governance reform and participatory PRSAP formulation.(vi) Support from the National Poverty Alleviation Committee and their commitment to use the project

manual on local level poverty analysis for all kabupatens participating in the PRSP exercise.

5. Value added of Bank support in this project:

There are four major areas where the Bank adds value through this project:

(i) The cross sectoral approach builds on strong sectoral and CDD expertise: The Bank program in Indonesia has for the past few years worked in a decentralized environment through a number of sectoral programs (basic education, provincial health water in low income communities) that have helped develop relationships, capacity and some sectoral reforms at the local level. The Bank has also supported civic participation and improved local level governance at the village and kecamatan-level through KDP and UPP. ILGR builds on these two approaches through a focus on cross-sectoral reforms targeted at the kabupaten-level.

(ii) Mobilizing substantial grant and investment funds: The Bank is able to mobilize substantial grant and investment funds to help finance kabupaten capacity building and development budgets. The donors are providing resources for technical assistance and capacity building, but few of them are providing the investment funds required by kabupatens to finance basic services and reform use of existing public expenditures.

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(iii) Building on our analytical work: The Bank has invested in substantial Economic and Sector Work through our work on local institutions (LLI study), decentralization (RPERs, GDS surveys, on-going work on “local government platforms”), monitoring impact of user fees (SMERU, ASEM), and poverty (Poverty Report). More analytical work is required and through this operation the Bank can link proposed ESW directly to an on-going investment operation.

(iv) Building on our global knowledge base: The project builds on the lessons learned from our global knowledge base on decentralization, good governance, CDD and anti-corruption. Information on on-going operations in Uganda, Ethiopia, Mexico, Brazil, India provide valuable inputs and opportunities for cross-country knowledge exchange.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4):Cost benefitCost effectivenessOther (specify)

NPV=US$ million; ERR = % (see Annex 4)

The proposed project focuses on improving local governance and accountability, building capacity at the local level and financing community initiated sub-projects aimed at reducing poverty, particularly rural infrastructure. A conventional economic analysis of ILGR will fail to capture the various expected potential benefits from the project. It renders its importance, however, to better identify the nature of these benefits and where possible, their scope, in view of designing the appropriate tools and indicators for ex-post monitoring and evaluation system. It is nevertheless important to note that ILGR effectively generates two different sets of economic benefits. First, from Components A and C, there are the expected benefits from improved governance and accountability in the kabupatens. Second, from Component B, there are the expected benefits from the investment sub-projects.

With respect to quantifiable economic benefits, which will mainly accrue as a result of sub-projects implementation, the programmatic nature of the project loan does not allow a detailed cost-benefit calculation ex-ante. However, experience from similar projects in Indonesia and other regions indicates that demand driven projects, involving community participation, are highly cost-effective and economically viable. Because communities are actively involved in the prioritization, implementation, operations and maintenance, it can be assumed that the projects they select will be of high priority and socially productive. In the case of ILGR, kabupatens that recently completed their participatory poverty analysis and their poverty reduction strategies formulated their priorities for the use of investment financing.

Based on extensive experience from other projects in Indonesia (KDP, UPP, VIP, WISMP), small scale kecamatan and kabupaten level infrastructure projects have been shown to be economically viable. For example, the ex-post evaluation study for KDP 1 and 2 identified an overall EIRR for the project of between 20 to 53%, with roads/bridges and water supply projects being especially productive in economic terms. The ICR for the Java irrigation loan indicates that rehabilitation of small scale irrigation systems generate EIRRs from around 16 to 30%. During the MTR, the project management unit will run a detailed economic analysis of implemented sub-projects under ILGR in order to estimate benefits generated and identify problems (if any) that need to be addressed.

Non-quantifiable benefits include: (a) improved governance, enhanced public participation and accountability of local governments to their constituencies as a result of the endorsement and implementation of a comprehensive package of reform measures (see Annex 2), and (b) enhanced project effectiveness through the mobilization of greater resources under the same budget to finance pro-poor projects. These lessons could serve to provide policy recommendations for necessary corrective measures

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aimed at maximizing the benefits of decentralization for more efficient service delivery at the local level. The project’s monitoring and evaluation system described in Annex 2 will ensure the necessary tools and indicators to measure outputs and outcomes generated by these reforms and their induced benefits are in place. 2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4) ILGR’s funding will not have a significant fiscal impact at the macroeconomic level. They represent 0.017 percent of the national expenditure (2004), and only a small component of the national development expenditures (0.093 percent). At the local level, ILGR covers 40 of the 440 local governments in the country with an estimated population of 34 million (BPS 2002) representing 16 percent of Indonesia’s overall population. Depending on the location and population size of kabupatens, ILGR’s fund represent between 1.1 and 5.1 percent of the local budget and around 5 to 18 percent of district-level development expenditures. The project would finance local public infrastructure sub-projects. It will therefore not aim to fully recover the capital cost from beneficiaries. Kabupatens should be able to meet their financial commitments towards the project in terms of additional O&M without detrimental impact on finances, in case active steps are taken to improve their revenue generation effort. Many of these kabupatens have been accumulating budget surpluses over the past few years. In the short-term, kabupatens ability to finance incremental O&M will largely depend on the stability of the expected stream of revenues generated by fiscal transfers from higher level governments. Fiscal Impact:

The positive fiscal impact of the project will result from various sources:

• An increase in national and kabupaten fiscal resources being allocated to support poverty targeted development sub-projects.

• Procurement reforms will improve competitiveness of the bidding process and render the procurement cycle more transparent resulting in reduction in prices offered for public contracts, and additional savings in the local governments’ budget.

• Improvement in the financial management systems of participating kabupatens will generate direct benefits to the budget. More efficient use of public funds will generate greater savings and prospects for a more efficient allocation of resources among the local level dinases.

• An increase in economic activities expected from sub-projects will yield tax revenues generated by additional income. These additional revenues would widen the pool of resources available for kabupatens to finance other development programs and Operations and Maintenance.

3. Technical:Meeting the Reform Requirements: The single biggest challenge will be for kabupatens to meet the program requirements in transparency, procurement and financial management reforms, in addition to preparing a participatory PRSAP. This is a result of stark differences in regional capacities and generally poorer oversight arrangements. In addition the national architecture for financial management reforms is still evolving, and remains highly uncertain. Implementing regulations for the new State Finance Law (No. 17/2003 passed in March 2003), particularly those related to regional government are yet to be issued. Some other key regulatory and organizational changes that are planned at the national level will change the financial management landscape dramatically when fully implemented. This has presented some challenges, as the dividing lines of authority between the Center and regions are not always very clear and regions often look up to the Center to prescribe what they should be doing to progress reforms. The current set of program requirements therefore represent a combination of existing “kabupaten good practice”, and basic

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reform measures that are in compliance with the national reform agenda. During preparation, several kabupaten diagnostic and base-line assessments were carried out on “existing practice” in drafting Perdas and information disclosure, procurement practices and financial management and audit practices. The current set of revised requirements is building on these assessments and making gradual improvements in these three core governance requirements. In this way a core group of kabupatens (at least 40) will be able to meet the basic entry and first phase requirements. The project will dedicate substantial technical and training support to ensure kabupatens fulfill these requirements.

Technical quality of the infrastructure- a significant portion (9-14 percent) of kabupaten development budgets are allocated to small scale infrastructure ranging from US$10,000-200,000. The kabupaten public works dinas use technical standards and guidelines issued by the Ministry of Public Works to ensure technical quality of civil works. In addition kabupaten projects meeting a standard threshold size are supervised using third party consultants. The project design includes a number of mechanisms to ensure quality. These include the use of standard design and specifications of typical kabupaten infrastructure, financial and other criteria (roads, bridges, markets, irrigation rehabilitation- based on guidelines used in other Bank financed projects), technical review and monitoring support by technical facilitator based in kabupaten clusters and annual review by kabupaten technical review teams.

Operations and Maintenance (O&M) - Sustainability of sub-projects will be an essential element of the project design. With the reclassification of local government budget starting in 2003, some of the O&M expenditures previously placed under development expenditure, now are more explicitly classified as O&M. This has led to an increased level of O&M expenditure in most kabupatens. For example in Bandung the O&M expenditure has increased from 1.6 percent of the recurrent budget in 2002 to 18.6 percent in 2003. Though kabupatens have sufficient resources, including surplus funds, the funds presently allocated for O&M of kabupaten infrastructure are minimal.

Monitoring of process, outputs, impacts of governance reform and sub-projects

The project places a premium on effective and results-oriented monitoring and evaluation (M&E). The project’s M&E system is designed to: (a) track the progress of project activities, including inputs and outputs, and take corrective measures as necessary; and (b) assess the longer-term outcomes and impact of project interventions. The M&E system will provide a continuous learning and feedback system to improve the project’s approach. The Project’s M&E system includes internal monitoring, external monitoring and independent evaluation.

For a fuller description of the M&E system, see Annex 2.

4. Institutional:The key institutional issue will be the relationship between the local governments (districts) and central government with the provincial government in between. The Project will attempt to work directly with the districts while the operational role of the center is defined in terms of standard setting, developing overall guidelines and regulations for the national reform agenda, supporting implementation of the national reform agenda at the local level, developing guidelines for issues that cut across districts and provincial boundaries, and other related policy guidelines. The provincial government will be particularly helpful in inter-district coordination within its jurisdiction.

4.1 Executing agencies:

The Ministry of Home Affairs, Directorate General of Regional Autonomy, is currently involved in executing a number of donor-financed projects aimed at strengthening the decentralization process and

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developing district capacity. The Ministry has also worked closely with the Bank in the execution of the US$6.9 million Dutch Trust Fund for Decentralization. Locating the project secretariat in MOHA is appropriate as it will: (a) build on the on-going analytical work supported through the Dutch Trust Fund; and (b) ensure that the agency responsible for issuing national guidelines related to clarifying decentralization laws and procedures is centrally involved in implementing the project. MOHA will also be one of key government counterparts of the newly established multi-donor Decentralization Support Facility (DSF). The DSF could facilitate the exchange and dissemination of good practices from the Project, reduce undesirable duplication or overlap of donor support, provide cross-linkages of donor support beneficial to the Project, and reduce donor coordination transaction costs for MOHA.

4.2 Project management:

National. The current institutional arrangements, which include relevant agencies in the National Steering Committee (NSC) chaired by Bappenas, will ensure that coordination with other Ministries such as Ministry of Finance and the National Audit Agency (BPKP), takes place at regular intervals. MOHA will head the National Program Secretariat which basically will manage the operations of the Project. Hence establishing a strong, fully staffed and functioning secretariat to play this role, will be a key aspect for the Project's success. The secretariat will have to provide adequate information, technical support and timely back-stopping to the districts and they will be assisted by a team of national management consultants.

Provincial. The province will have a coordination team of related, cross-sector agencies, chaired by the Province Development Planning Agency (Bappeda). The team will facilitate information sharing among ILGR and non-ILGR districts, as well as promote relevant reforms, which the Project has supported, to non ILGR districts. In addition, the team will help resolve cross-districts issues that fall under its jurisdiction and facilitate selection of batch 2 kabuparens.

Districts. Capacity of the district as well as its civil society, which is included in local decision-making process and as independent program monitors, vary considerably both on and off Java, making inter-district assistance crucial. The Project, through its decentralized technical support teams and facilitators will provide substantial training to regional staff, civil society groups and DPRD members, in the first year of project implementation. The results would be disseminated through cross-visits by district teams, regional and national issues-based workshops and training events. The regional technical assistance team will also be located by cluster, and would allocate their time between districts, based on existing district capacity and needs.

During preparation, 15 pilot districts have already undergone training in areas ranging from Perda drafting to poverty assessment. Other donors such as USAID and GTZ are already working in some ILGR districts and providing training in participatory planning and budgeting. The Project will build on existing capacity and ensure the second batch of districts complete a training needs assessment prior to receiving further training. The district reform action plan also provides a mechanism to tailor training and capacity building inputs based on their current base-line of reform. Training modules for this will be centrally developed.

Recruiting suitably qualified kabupaten facilitators and regional technical support teams will be essential in ensuring a successful program. During preparation, recruitment of facilitators was carried out nationally, and most facilitators placed in kabupatens were from the province or region. During this time it was clear that facilitators recruited from within the kabupaten were less effective than those from outside. A detailed training manual and program has been piloted for facilitator training and will be modified during implementation for the second batch of facilitators. During preparation the Project has trained some 25 kabupatens and regional facilitators, who will continue through implementation and some may graduate to the regional technical support teams. Given the large number of donor-funded governance projects, there is

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currently substantial national expertise available to assist kabupatens in the core governance areas that are the focus of the project.

4.3 Procurement issues:

The procurement assessment identified local governments as having limited capacity and weak procurement systems. Two main actions will be required to minimize procurement risk:

(i) Local governments will participate in implementing the procurement reform program under this Project, to reach a minimum standard of procurement as mandated by Keppres 80/2003. The reform program will help establish a satisfactory and sustainable procurement system at the kabupaten. Activities financed under the reform program are described in Annex 2.

(ii) Increase kabupaten capacity in project implementation through:

• Quality assurance and evaluation of the procurement reform component under the Project will be provided by the Secretariat of LPKPP at the Directorate of System and Procedures at BAPPENAS.

• A draft Project Operational Manual has been developed during project preparation and will be finalized prior to Effectiveness. The manual includes all applicable procurement, procedures, and monitoring and reporting requirements.

• A procurement training program for all project actors are developed and agreed with the Bank.

• As part of strengthening the capacity of the Executing and Implementing Agencies, there will be two sets of technical assistance teams, who will be hired under the Project. At the national level, there will be a National Management Consultant (NMC) to assist the Executing Agency in coordinating this Project. At the regional level, there will be Regional Management Consultants (RMC) to provide management supports to the PMU and PIUs at Kabupaten level.

• An Evaluation Committee, comprising of qualified members acceptable to the Bank, will be formed at National Project Secretariat, to assess the performance of the consultants. The assessment report will be sent to and agreed with the Bank on annual basis. This report will provide the basis for continuation of consultants’ services.

• NCB will follow the Open Competitive Bidding procedures as described in Keppres 80/2003, subject to clarification. The selection of consultants will completely follow the Bank Consultant Guidelines. With the effectiveness of Keppres 80/2003, it is expected that the following actions will be strengthened under the project: (i) transparency in the procurement process, including mandatory announcement of award of contracts in the public domain; (ii) sanctions and enforcement against collusive practices, both to consultants/bidders and to the government officials; (iii) sanctions and enforcement against poor performances of consultants/bidders. In addition, the implementing agencies have an option to follow the “Pemilihan Langsung” procedures as described in Keppres 80/2003 to satisfy the Bank’s shopping procedures which will be included in the Project Manuals.

• Procurement processing is the responsibility of the procuring unit. Therefore, in the case of investment projects, the procurement will be the responsibility of each PIU at the Dinas level. However, to maintain quality assurance and consistency on procurement, all correspondence

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with the Bank related to procurement (including requests for prior review) will be conducted through the EA at the central level, in which case both the procuring unit and the EA must have agreement on the proposed procurement action or query.

The overall procurement risk for the local governments is high. The prior review thresholds will be based on this capacity assessment. Overall project procurement includes hiring technical assistance through large consultancy contracts at the central level and small to large contracts of works and goods at the local government level. MOHA has already prepared the draft procurement plan for project implementation. Given the size, nature of procurement and the experience of executing and implementing agencies in dealing with similar types of projects, the overall risk is high. Annex 6(A) describes project procurement aspects in further detail.

4.4 Financial management issues:

A financial management assessment of this project was carried out between September-November 2003 and has involved an assessment of financial management capacity of the key implementing agencies and an evaluation of the adequacy of financial management arrangements proposed for the project, including accounting systems for project expenditures and underlying internal controls.

Recent Bank experience in other projects in the concerned Ministries, the shortage of financial management skills in the Indonesian civil service generally and a consideration of the Country Financial Accountability Assessment report (issued April 2001) and development thereafter suggest that financial management capacity at these central agencies is likely to be generally low. A significant part of the project expenditure will be executed and accounted for at the district governments. In districts, there is an even greater shortage of accounting skills, and financial management systems are generally weaker than at the center.

An analysis of project specific risks indicates that substantial risks may arise from several other features. The lead implementing agency (DGRA, MOHA) has prior experience in managing Bank projects. However, risks arise from geographical spread of PIUs and use of multiple agencies and community organizations. The geographical spread of project activities to about 40 kabupatens and inherently weak and variable financial management capacity in the regions imposes substantial risks on financial accounting and reporting. Validation of payments is traditionally a weak area and vulnerable to malfeasance and fraud.

Based on these factors financial management risks inherent in the project entity and risks specific to project design have been rated as high. Although the risks are rated as high, the project will be working with regions that have shown an interest and commitment in moving in the right direction, and the risks are worth taking. Further several measures have been designed to mitigate these risks. These include deployment of trained financial management consultants in districts to assist in the preparation of project financial statements and more intensive payment validation procedures, including community disclosure and oversight mechanisms where applicable. A series of these measures and other operating authorities and procedures for each project activity are expected to be clearly documented in the Project Operational Manual. Full details of these measures are given in Annex 6(B). With the completion of the action plan, the project will have acceptable financial management arrangements when the project becomes effective.

Funds for the project are expected to be channeled through a Special Account opened for the purpose. Fund flows to the regional treasuries (KPPN) will be on a block grant basis. Disbursements into these accounts will be made through Special Account procedures by central treasury offices. Fund flows to local Dinas offices (spending units) will follow the local government system. FMR-based disbursements will be introduced, under which replenishments will be made based on quarterly Financial Monitoring Reports. Annual financial audits will be conducted by BPKP, Government auditors, based on Terms of Reference

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that will seek specific feedback on internal controls in sub projects. Harmonized financial management arrangements will be agreed with other donors (DFID).

5. Environmental: Environmental Category: B (Partial Assessment)5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis.

Under the proposed ILGR, sub-project investment will be identified during project implementation, after the participating kabupaten has completed a minimum set of prescribed reforms during the pre-investment phase. Therefore, no environmental assessment was conducted ex ante. Instead, in line with the programmatic nature of the investments under the project, a Safeguards Framework, including an Environment Framework, was developed during preparation and adopted as part of the Project Operational Manual, along with more specific guidance for implementation of the framework.

Also, a screening process employed as part of the Environment Framework will ensure that the sub-projects will not be located in sensitive areas.

As is the norm in the Bank's Indonesia portfolio, the project will rely heavily on government guidelines as the basis of the project’s environmental screening requirements. Four scenarios are possible under Indonesia regulations: (i) No EA, (ii) Full EA, (iii) EMP, and (iv) Standard Operating Procedures (SOP). However, under the proposed ILGR, the sub-project screening procedure of the Environment Framework will exclude financing any projects that would have potential impacts significant enough to require ANDAL (full EA) under Indonesian regulations, or located in sensitive areas. No large-scale impacts are envisaged, also because investments will be of relatively modest-scale. The minimum investment in each Kabupaten in any one year will be between US$0.5-1.0 million, and the total investment in any Kabupaten will be between US$1.5-3 million over 3 years. A negative list will preclude funding of projects that would involve pesticides, asbestos or other hazardous materials, commercial logging. Moderate impacts are possible, primarily those associated with new roads, construction of buildings, and small-scale infrastructure.

The following measures will be used for sub-project related consultation with and disclosure to key stakeholders, including local government, local parliament, community members and specific interest groups such as women and indigenous people, and civic organizations (environmental NGOs etc.):

(i) All project investments and reform initiatives will be defined by a process of civic participation in the Kabupaten, and the safeguard issues will be key part of the discussion and decisions.

(ii) Potential Project Affected People would be part of the group that proposes the project. When they are not, there will be a special consultation process to obtain their views. The overall citizen participation processes should include an explanation of the rationale and consequences of the Bank’s safeguard policies, so these are understood. Investment proposals submitted will thus be pre-screened and meet safeguards requirements.

(iii) Before being finalized each report and plan required under the Safeguard Framework is to be disseminated widely, especially among the affected people, for public comments and the comments received should be taken into account as appropriate in the final report and/or plan. The final report and/or plan should be disclosed in a public place in a form and language accessible to affected groups and local NGOs.

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(iv) As part of project information dissemination, the project will work closely with local press, radio and strategic civil society networks.

5.2 What are the main features of the EMP and are they adequate?

ILGR is a demand driven project, executed by local level government. An overall Safeguards Framework has been prepared and discussed with participating local governments. The Safeguards Framework, includes environmental screening procedures, guidelines for preparation, review and implementation of subproject management plans or application of standard operating procedures to prevent adverse impacts, a policy framework for land acquisition and resettlement, a framework for addressing the needs and requirements of indigenous peoples, and guidelines for consultation and disclosure.

Institutional arrangements for safeguards have been defined to suit the range of capabilities that may be encountered, from kabupatens with functioning environmental management agencies (BAPEDALDA) or environmental committees, to kabupatens in which there is little or no capacity to address environmental issues. Facilitators will be trained in safeguards procedures, to enable them to assist in the development and implementation of the project safeguards screening and review. The proposed project design incorporates several levels of intervention to ensure compliance to applicable safeguards policies:

§ The project operational manual has a section on safeguards and includes standardized formats relating to land acquisition, environmental screening and participation of vulnerable and disadvantaged groups. The complaints handling unit at the central level will also monitor and follow up on any complaints received by potential project affected people, so that remedial action can be taken quickly.

§ The management consultant teams will include safeguard specialists in the regional cluster who will conduct training for kabupaten safeguards teams and facilitators. The consultants will also review all infrastructure proposals to ensure compliance with both Indonesian law and Bank requirements.

§ The kabupaten safeguards team will undergo a specialized training to ensure comprehension of the safeguards procedures.

§ The Bank supervision team will include dedicated safeguards specialists who will participate on bi-annual project supervisions.

5.3 For Category A and B projects, timeline and status of EA:Date of receipt of final draft: February 24, 2004

5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted?

The project social and environmental safeguards framework was sent by the national steering committee to all batch 1 kabupatens (15 pilot kabupatens) during preparation. The framework was presented by the project facilitators to the multi-stakeholder forums comprised of NGOs, village representatives and local government staff. Since project investments under component B will be identified during the budget planning and allocation process (during project implementation), the discussion focused on the general framework screening procedures and establishment of the Kabupaten safeguards committee.

5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP?

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The project monitoring team will conduct quarterly and annual reviews of all sub-projects implemented under component B. This will be carried out by the consultant engineers assisted by the safeguards specialist. The reports will be available for review prior to Bank supervision missions.

6. Social:6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes.

Social development issues most pertinent to ILGR project goals are threefold:

(i) Poverty Reduction – Recent research points to the fact that national-level poverty reduction efforts frequently overlook root causes of poverty and fail to accurately target the most disadvantaged groups at the local level. By taking a district-based approach that aims to substantiate participatory poverty analyses, the ILGR project aims to develop locally appropriate poverty reduction strategies that will be more sustainable, albeit smaller in scope, than those developed by the central government.

(ii) Civic Participation – Improving governance necessarily means a higher degree of involvement of the citizenry in the affairs of government. In countries like Indonesia where there are no long-standing traditions of civic participation, the challenge for ILGR is to provide practical means for ordinary people to understand government business and then participate in those aspects most relevant to them. The ILGR will endeavor to enhance participation in critical aspects of government business that are most correlated to poverty reduction efforts, namely the development planning, budgeting, budget tracking and delivery of key public services.

(iii) Gender Mainstreaming – Projects such as ILGR must make a consistent effort to improve the status of women in Indonesia. To this end, the proposed ILGR will proactively mainstream gender concerns as an integral part of good governance programs. More specifically, the proposed project will help to create a multi stakeholder forum in participating kabupatens, where the interests of marginal groups, such as the poor and women, would be given particular attention, particularly in relation to budget decision of the local government and poverty reduction efforts. However, as this arena alone will not be sufficient to consistently increasing mainstreaming gender concerns, a project-associated JSDF grant for assisting civil society initiatives, will put specific effort on fostering women participation on the participatory budgeting and public service delivery evaluation. Through the JSDF grant, the women’s groups in ILGR kabupatens will receive assistance to develop their own advocacy focus and strategy on the budget development process and on public service delivery. Within the strategy development, they also will create milestones to measure their success. This measurement will also be used by the project to evaluate the project’s ability to consistently mainstream gender.

6.2 Participatory Approach: How are key stakeholders participating in the project?

6.2.1 Planning and Design

The key mechanism for involving a range of public stakeholders is a multi-stakeholder forum to be constituted at the kabupaten level. In order to represent the broadest possible range of stakeholders, the forums are intended to include members from:

- Civil Society organizations including local NGOs- Academics - Customary ethnic and/or religious leaders

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- The private sector (including professional associations)- People’s organizations, especially those with a constituency amongst the poor (e.g. farmers or workers

associations)

The intent is not to establish these forums in accordance with any prescriptive formula, but rather to build upon existing pro-reform momentum, often utilizing pre-existing loose coalitions of civil society activists. Emphasis is placed on having the forums broadly representative of the socio-economic realities at the local level. At the same time, efforts need to be made to ensure both a reasonable geographic (so as to ensure all areas of the kabupaten are represented) and gender balance amongst forum members.

6.2.2 Preparation Phase

In practice, during the project preparation phase in 15 pilot kabupatens, the majority of stakeholder forums, following up on a large-scale public meeting, have been divided for practical purposes into two distinct “working groups” – one tasked with undertaking the Participatory Poverty Analysis (PPA) and the other forming a Transparency, Participation and Accountability (TPA) working group (although the names of the working groups vary from district to district).

On average, each working group has 7-15 active members, mostly constitutes representatives from civil society, local government officials, and local parliament members. The PPA working group is responsible for carrying out community assessments to produce a “Poverty Reduction Strategy and Action Plan” (PRSAP) for reference during the annual district-based development planning mechanism (Musrenbang) and eventual endorsement by the local Planning Department and ratification by the district parliament. At the same time, the TPA working group assists with the drafting and socialization of a Perda (local regulation) that ensures a higher degree of participation and transparency in the annual planning, budgeting and public service delivery activities of local government.

6.2.3 Future Implementation

Moving beyond the development of the PRSAP and the local regulation on Transparency and Participation, the working groups may be reassembled into a stakeholder forum to reinforce public participation in annual development planning and budgeting practices or they may help oversee implementation of the PRSAP, either in the context of a stakeholder forum or specific issue-based working groups. Significant variation in terms of the nature of civic engagement can be expected from participating kabupatens. However, a degree of consistency will be attained by focusing public participation efforts on certain key benchmarks that are likely to include:

• Public consultation and the endorsement of the stakeholder forum (or a designated working group) with respect to the use of ILGR investment funds. It is anticipated that ILGR funds will target mainly pro-poor rural infrastructure;

• A “Transparency Commission” comprised primarily of civil society leaders to provide independent monitoring of the implementation of the Perda on Transparency and Participation;

• Public consultation mechanisms (envisioned in some kabupatens as distinct and ongoing Working Groups) on specific issues deemed crucial to district-level poverty reduction; and

• Enhanced access to information and the possible involvement of independent non-government participants in tendering committees as part of the financial management and procurement reform package.

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6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations?

Civil society organizations, including NGOs, have been instrumental in the design of the civic participation mechanisms that are being put into place as part of the ILGR initiative. They will continue to play a critical role both within the stakeholder forums and their corresponding working groups, as well as with envisioned implementation phase mechanisms such as the Transparency Commission. Along with independent media, Civil Society groups will provide the most important means of monitoring progress towards ILGR good governance goals.

At the same time, it is important to ensure that NGOs not become overly dominant within the designated civic participation mechanisms. Given that a large portion of NGOs do not have a genuine grassroots constituency amongst the poor, ILGR must exercise caution in order to avoid the perception that stakeholder forums are not being established as an alternate form of local government.

6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes?

The ILGR team includes several members well grounded in methods of civic engagement as well as specialists long involved with Indonesian civil society. They have been involved in all aspects of ILGR design and will continue to play a role throughout the project’s intended implementation phase. Field-level facilitators and regional coordinators also have extensive experience in liaising between local governments and the public. The best facilitators will be retained for the proposed expansion of ILGR into new districts in 2006. Finally, the recently approved JSDF is intended to foster innovative civil society-based means of enhancing participatory budgeting, budget tracking and public service delivery (using a “Civic Report Card” model) and will add value to institutional arrangements already in place.

6.5 How will the project monitor performance in terms of social development outcomes?

The overall M&E framework (see Annex 2) for the project includes a series of independent assessments and qualitative and quantitative studies on governance that will measure: (a) poverty and improved governance outcomes; (b) steps taken to enhance civil society participation in kabupaten budget planning and execution activities; and (c) overall steps taken to improve inclusion of disadvantaged groups (poor households, women and vulnerable groups) in project activities.

7. Safeguard Policies:7.1 Are any of the following safeguard policies triggered by the project?

Policy TriggeredEnvironmental Assessment (OP 4.01, BP 4.01, GP 4.01) Yes NoNatural Habitats (OP 4.04, BP 4.04, GP 4.04) Yes NoForestry (OP 4.36, GP 4.36) Yes NoPest Management (OP 4.09) Yes NoCultural Property (OPN 11.03) Yes NoIndigenous Peoples (OD 4.20) Yes NoInvoluntary Resettlement (OP/BP 4.12) Yes NoSafety of Dams (OP 4.37, BP 4.37) Yes NoProjects in International Waters (OP 7.50, BP 7.50, GP 7.50) Yes NoProjects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* Yes No

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7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

O 4.01 – Environmental AssessmentAn Environment Framework has been developed as part of the Safeguards Framework and is included in Project Operational Manual along with more specific guidance for its implementation.

OP 4.04 -- Natural HabitatsThe project’s negative list will ensure that no subprojects which adversely affect critical natural habitats will be eligible for project financing.

OP 4.09 -- Pest ManagementThe project will not procure any pesticides nor will an increased use of pesticides result from the project. No further action is required under the policy.

OPN 11.03 -- Cultural PropertyThe negative list indicates that no subproject would be financed which degrade or damage physical cultural property. Construction contracts include provisions for chance finds and the procedure to follow in such events.

OD 4.20 -- Indigenous Peoples (IP)A Indigenous Peoples Framework has been developed as part of the Safeguards Framework and is included in the Project Operational Manual along with more specific guidance for its implementation.

OP 4.12 -- Involuntary ResettlementA Land Acquisition and Resettlement Framework has been developed as part of the Safeguards Framework and is included in the Project Operational Manual along with more specific guidance for its implementation.

OP 4.36 -- ForestryThe project will not finance activities that would involve significant conversion or degradation of critical forest areas or related critical natural habitats as defined under the policy. No action is required under this policy.

OP 4.37 -- Safety of DamsThe project will not finance construction or rehabilitation of any large dams as defined under this policy. No action is required under this policy.

OP 7.50 -- International WaterwaysThere are no known project components involving international waterways as defined under the policy. No action is required under this policy.

OP 7.60 -- Disputed AreasThe project is not located in any known disputed areas as defined under the policy. No action is required under this policy.

F. Sustainability and Risks

1. Sustainability:

Sustainability of operations is crucial at both the district and national levels.

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(i) At the district level maintaining governance reforms will require:(a) Support from the district executive and legislative groups. For Bupati and DPRD, one of

the key incentives to buy into the reform agenda will be national recognition for their efforts and assurance that these efforts will eventually increase private sector investment and donor support. The Project will promote the efforts of the Bupati and DPRD through various opportunities, including cross-exchange and discussions with other districts and national and international actors. This “exposé” will create a leverage to increasingly direct additional Bank and other donor projects to this group of reform-minded districts.

(a) Budget to demonstrate and eventually institutionalize reforms, particularly for pro-poor allocation beyond the Project. When the district has implemented the Local Governance Reform Framework, the Project provides investment funds that go into the district budget to finance its own poverty strategies (financing is limited to rural infrastructure in the first batch districts). Once the central government sees that local governments can be fiscally responsible and are making efforts to allocate resources for poverty alleviation purposes, additional funds could be provided through the DAK mechanism. Hence this Project allows the central government to test and pilot initiatives and reward better performing kabupatens with additional poverty targeted financing.

(b) Civil society demand. The Project provides space for multi-stakeholder participation to develop reform action plans and to monitor the implementation of the plans. This participation will create not just ownership but also raise awareness and empower civil society, which enable them to demand for more reforms. At the same time the Project helps develop a media strategy to publicize the reform action plans and the annual outcomes to ensure widespread support and monitoring.

(ii) At the national level there are at least the followings to maintain:(a) Enabling laws and regulations. In the relatively early years of decentralization many laws

and regulations, including guidelines and standards, are still lacking. Without these regulations, the reforms that have started will not be able to evolve further to create the desired impacts. The central government has been aware of the issues. At present financial management reforms are beginning to gain momentum at the center. Many key aspects are expected to be legislated and implemented over the next few years. Regional financial management reforms will need to be deepened and continued well beyond the project period in response to those changes. The Project enables such response through an empowered FM Reform Committee which will be constituted in each participating region to develop detailed implementation plans and technically supervise implementation of reforms. In procurement reforms, the Project—in line with the central government guidelines in Keppres 80/2003—facilitates the establishment of a focal point to gear up district reforms. Although there is yet a law which specifically mandates information disclosure and broad-based participation, there are other laws and regulations that support some kind of information disclosure and public participation (see Annex 8 for the regulatory framework). The Project is able to facilitate the creation of Regional Law(s) on Transparency and Participation in the participating districts.

(b) Adequate supervision and responses. The National Project Secretariat, assisted by the National Management Consultants and Regional Management Consultants, will have regular supervision and monitoring to respond to district’s needs and problem solving related to the Project. In addition, a clear reward-and-sanction mechanism is developed to create a healthy competition among districts and build up the Project’s credibility. From

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the Bank side funding for supervision during implementation is adequate and sustained from a dedicated cross-sectoral team.

2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1):

Risk Risk Rating Risk Mitigation MeasureFrom Outputs to ObjectiveLaws No. 32/2004 and 33/2004 are revised and backtrack decentralization process (including fiscal relation)

M The laws are recently enacted and the Bank, through its policy advice, will work with MOHA and MOF to strengthen decentralization process.

Lack of political accountability and there is no incentive for change.

M Upcoming direct Bupati election and newly elected DPRD members are expected to improve local political accountability. Improvement of local accountability is also inherent in the Project design.

From Components to OutputsLack of core group of reformers –particularly DPRD members, Bupati and civil society– within the kabupaten who are willing to push the reform agenda forward.

M See risk mitigation measure on the lack of political accountability above. The Project’s entry requirements include commitment from the executive and legislative and some concrete actions that demonstrate reform mindedness of the local leaders.

Communities and civil society groups are not enthusiastic to participate in local planning and decision making.

M Civil society and community are involved in the Project implementation from the very beginning. Issuance of the Perda to guarantee their access to information and decision making process is expected to increase the level of participation.

Local government’s policies and plans which are developed in participatory manner are not reflected in the budget allocation.

S The Project will enhance planning and budgeting process and will require kabupaten to implement PRSAP through their budget.

Delay in district level budgeting process, procurement or disbursement. The Law No. 32/2004 mandates province to review district-level budget prior to its enactment.

H The Project will attempt to reduce the delay by decentralizing sub-project verification process to regional consultants and kabupaten facilitators. The Kabupaten-level staff will be trained in project procurement and FM.

The procurement and mobilization of Project staff are not efficient and delayed.

S Procurement plan is a requirement for Project negotiations.

Capacity building activities are not provided in timely manner

M The activities will be a part of RMC contract that will be recruited as soon as the project is effective.

Overall Risk Rating SRisk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk)

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3. Possible Controversial Aspects:

Corruption is a major risk associated with all Bank-financed projects in Indonesia. Though ILGR is a project that supports “good governance”, given the overall climate of corruption in Indonesia, the possibility of corruption occurring in the project is more than likely, and the overall reputational risk to the Bank’s program in Indonesia is high. The project design proposes to mitigate and reduce the overall risk of corruption through the program design and heavy emphasis on disclosure and external monitoring (see Annex 12); and through its emphasis on “de-selecting” kabupatens who fail to meet clearly defined governance requirements. There are no other controversial aspects related to the project.

G. Main Loan Conditions

1. Effectiveness Condition

(a) the Loan Agreement has been executed and delivered and all conditions precedent to its effectiveness or to the right of the Borrower to make withdrawals thereunder, except only the effectiveness of the Development Credit Agreement (DCA), have been fulfilled;

(b) the DFID MOU and the DFID Grant Agreement have each been executed and delivered and all conditions precedent to the effectiveness of the DFID Grant Agreement or to the right of the Borrower to make withdrawals thereunder, except only the effectiveness of the DCA, have been fulfilled;

(c) the Project Operational Manual, acceptable to the Association, has been adopted in accordance with the provisions of paragraph 4 of Schedule 4 to the DCA;

(d) at least eight (8) Kabupatens have been selected by the Borrower for participation in the Project in accordance with the provisions of paragraph 5 of, and Annex A to, Schedule 4 to the DCA; and

(e) the National Management Consultants (the contract for which services is included in the Procurement Plan) have been selected in accordance with the provisions of Part A of Section II of Schedule A and of paragraph 9 to Schedule 4 to the DCA.

2. Other [classify according to covenant types used in the Legal Agreements.]

At Negotiations, the following was provided:

(a) Copy of Decree establishing the National Project Secretariat and National Implementation Committee in the Ministry of Home Affairs

(b) Procurement plan and draft Request For Proposals for the first eighteen months of project implementation;

(c) Letter from the National Steering Committee adopting the Local Governance Reform Framework; and

(d) Draft project operational manual that includes Financial Management and Procurement procedures.

Project Management and Implementation

• The Borrower shall: (a) maintain until completion of the Project: (i) the National Steering Committee and the National Implementing Committee, each with functions and responsibilities acceptable to the Association, and (ii) the Project Secretariat with functions and responsibilities, and headed by a Project Manager with qualifications and experience, in each case acceptable to the Association; and (b) provide said Project Secretariat at all times with such facilities, staffing and funding as shall be necessary to accomplish its functions, responsibilities and objectives.

• The Borrower, through MOHA, shall ensure that each Participating Kabupaten and Additional

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Participating Kabupaten shall (a) establish and thereafter maintain until completion of the Project, with functions and responsibilities acceptable to the Association, a PMU, and (b) provide each said PMU at all times with adequate funds and other resources, and with qualified and experienced personnel in adequate numbers, acceptable to the Association and in all cases as shall be necessary to accomplish its functions, responsibilities and objectives.

• The Borrower, through the National Steering Committee, shall ensure that the Project is carried out pursuant to the provisions of this Agreement and those of the Local Governance Reform Framework. In the event that a provision of the Local Governance Reform Framework. shall be inconsistent with any provision of this Agreement, the provision of this Agreement shall prevail. For the purposes of ensuring that said framework at all times facilitates the attaining of the objectives of the Project, the Borrower, through the National Steering Committee, shall carry out regular reviews of said framework as part of, and in accordance with, its undertakings set forth in paragraph 12 of Schedule 4 to the DCA. The Borrower shall not amend, suspend, abrogate or waive the Local Governance Reform Framework without the Association’s agreement.

• The Borrower, through MOHA, shall adopt and thereafter apply, and cause each Participating Kabupaten and Additional Participating Kabupaten to adopt (through a Surat Keputusan) and thereafter apply, a Project Operational Manual acceptable to the Association for the carrying out of the Project and their respective responsibilities therefore.

• The Borrower shall, through MOHA, take all such action as shall be necessary to ensure that:not later than September 30 in each year, commencing September 30, 2005, and until completion oof the Project, a draft annual work program for all components of the Project to be implemented during the following Fiscal Year (including, without limitation, all training and workshops to take place under Parts A and C of the Project during said year) is prepared and furnished to the Association for its review and comments, including (i) the scope of the program; (ii) time-based implementation schedules; (iii) cost estimates; and (iv) budget arrangements; andnot later than November 30 in each year, commencing November 30, 2005, finalize the oabove-mentioned work program, taking into account any such comments, and promptly thereafter carry out said action program.

Kabupaten Eligibility

Without limitation upon the provisions and requirements of the Project Operational Manual, the Borrower shall: • Ensure that only those Kabupatens that have met the eligibility criteria set forth in Annex A to

Schedule 4 to the DCA and in the Project Operational Manual may participate in the Project as Participating Kabupatens and Additional Participating Kabupaten;

• Make available Phase 1 Grants only to those Participating Kabupatens that have met the eligibility criteria set forth in the Local Governance Reform Framework and in Part 1 of Annex B to the Schedule 4 to the DCA;

• Make available Phase 2 Grants only to those Participating Kabupatens that have met the eligibility criteria set forth in the Local Governance Reform Framework and in Part 2 of Annex B to Schedule 4 to the DCA;

• Make available Phase 3 Grants only to those Participating Kabupatens that have met the eligibility criteria set forth in the Local Governance Reform Framework and in Part 2 of Annex B to Schedule 4 to the DCA;

• Ensure that only those investment projects (i) which have met the eligibility criteria set forth in Part 1 of Annex C to Schedule 4 to the DCA, (ii) for which a technical report has been issued in accordance

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with the provisions of Part 2 of Annex C to Schedule 4 to the DCA, and (iii) which further meet and comply with the criteria and procedures set forth in the Project Operational Manual, qualify as Sub-projects and be financed out of the proceeds of the Credit;

• Ensure that the proceeds of Grants shall not be used to finance the acquisition of land.

Safeguards

• Without limitation upon the requirements of the Local Governance Reform Framework or the Project Operational Manual in carrying out Part B of the Project, the Borrower shall ensure that each Participating Kabupaten applies the Safeguards Framework submitted to the Bank on February 24, 2004.

Audit • The Borrower shall ensure that auditing activities under the Project, including the audits referred to in

Section 4.01 of the Legal Agreement, are carried out in accordance with: (a) BPKP’s audit manual dated April 13, 1999, as such manual may be amended from time to time with the prior agreement of the Association, and (b) in accordance with terms of reference agreed with the Association; and

• By October 31, 2005, inform each Participating Kabupaten that all auditing activities with respect to Sub-projects are to be carried out exclusively by independent auditors appointed by the Project Secretariat in accordance with Section 4.01 (b) of the Legal Agreement and in accordance with the operational manual.

Monitoring and Evaluation

The Borrower shall:

(a) Maintain policies and procedures adequate to enable it to monitor and evaluate on an ongoing basis, in accordance with the indicators set forth in Schedule 5 to the DCA, the appropriateness of the Local Governance Reform Framework in furthering the attainment of the objectives of the Project, the carrying out of the Project and the achievement of the objectives thereof;

(b) Engage, in accordance with the provisions of Schedule 3 to this Agreement, by not later July 31, 2006, consultants with terms of reference acceptable to the Association for the purpose of carrying out independent evaluation of the Project, including the Local Governance Reform Framework;

(c) Prepare, under terms of reference satisfactory to the Association, and furnish to the Bank, by December 1 and June 1 of each year, commencing December 1, 2005, and until completion of the Project, a report integrating the results of the monitoring and evaluation activities performed pursuant to sub-paragraph (a) of this paragraph, on the progress achieved in the carrying out of the Project during the preceding six months and setting out the measures recommended to ensure the efficient carrying out of the Project and the achievement of the objectives thereof during the six months following such date, which measures shall include (i) in each report due by December 1 in any year, (x) proposed modifications, where considered appropriate, to the Local Governance Reform Framework, for the Association’s consideration and approval, and (y) a detailed procurement plan for carrying out the Project during the next fiscal year following the date of such report, and (ii) in each report due by June 1 in any year, an update of the detailed procurement plan for the fiscal year in which such month falls;

(d) Review with the Association, on or about January 2 and July 1 of each year, commencing January 2, 2006, or such later date as the Association shall request, the report referred to in sub-paragraph (c) of

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this paragraph, and, thereafter, take all measures required to ensure the efficient carrying out of the Project and the achievement of the objectives thereof during the twelve months following the date of such report, based on the conclusions and recommendations of said report and the Association’s views on the matter;

(e) Prepare, under terms of reference satisfactory to the Association, and furnish to the Association, on or about December 31, 2007, a report integrating the results of the monitoring and evaluation activities performed pursuant to sub-paragraph (a) of this paragraph, on the progress achieved in the carrying out of the Project during the period preceding the date of said report and setting out the measures recommended to ensure the efficient carrying out of the Project and the achievement of the objectives thereof during the period following such date;

(f) Review with the Association, by February 1, 2008, or such later date as the Association shall request, the report referred to in sub-paragraph (e) of this paragraph, and, thereafter, take all measures required to ensure the efficient completion of the Project and the achievement of the objectives thereof, based on the conclusions and recommendations of the said report and the Association’s views on the matter, and

(g) Make publicly available the report referred to in sub-paragraph (f) of this paragraph, at the same time as it is furnished to the Association pursuant to said sub-paragraph.

Procurement

• To ensure end-user participation in the procurement of goods, works and consultant services under the Project, the requestor/user of such goods, works or consultant services (as the case may be) to be acquired, shall be represented on the relevant procurement/selection committee. The criteria for the selection of procurement committee/selection members shall in all cases be consistent with the provisions of the Procurement Guidelines and the Project Operational Manual (provided, however, that in the event of any inconsistency between the Project Operational Manual and the Procurement Guidelines, the provisions of the Procurement Guidelines shall apply).

• The Procurement Plan, including all updates thereof; shall be made publicly available promptly after their finalization.

• All bidding documents and requests for proposals issued in accordance with Schedule 3 of the DCA shall be made available to any member of the public promptly upon request, subject only to payment of a reasonable fee to cover the cost of printing and delivery. In the case of requests for proposals, the relevant documents will only be made available after notification of award to the successful firm. Each such document will continue to be made publicly available until a year after completion of the contract entered into for the goods, works or consultants’ services in question.

• All short lists of consultants and, in cases of pre-qualification, lists of pre-qualified contractors and suppliers shall be made available to any member of the public promptly upon request.

• A summary of the evaluation of all bids and proposals for specific contracts shall be disclosed to all bidders and parties submitting proposals therefor, promptly after the notification of award to the successful bidder/consultant. Information in such summaries will be limited to a list of bidders/consultants, all bid prices and financial proposals as read out at public openings for bids and financial proposals, all bids and proposals declared non responsive (together with reasons for such an assessment), the name of winning bidder/consultant and the contract price. Such summaries will be made available to any member of the public promptly upon request.

• Contract award information for all contracts for goods and works of $100,000 equivalent or more and all contracts for consultants of $50,000 equivalent or more shall be made publicly available and published widely, and be made available to any member of the public upon request, promptly after such award.

• A list of all contracts awarded in the three months preceding the date of such request, including, with

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respect to each such contract, the name of the contractor/consultant selected, the contract amount, the number of bidders/makers of proposals in respect thereof, the procurement method followed and the purpose of such contract shall be made available, promptly upon request by member of the public.

• Representatives of the end-users of goods or works being procured shall be permitted to attend public bid openings in respect thereof.

H. Readiness for Implementation

1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation.

1. b) Not applicable.

2. The procurement documents for the first year's activities are complete and ready for the start of project implementation.

3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality.

4. The following items are lacking and are discussed under loan conditions (Section G):

The Draft Operational Manual has been appraised and found to be realistic and of satisfactory quality.

I. Compliance with Bank Policies

1. This project complies with all applicable Bank policies.2. The following exceptions to Bank policies are recommended for approval. The project complies with

all other applicable Bank policies.

Erman A. Rahman Mark D. Wilson Andrew D. SteerTeam Leader Sector Manager/Director Country Manager/Director

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Annex 1: Project Design Summary

INDONESIA: Initiatives for Local Governance Reform Project\

Hierarchy of ObjectivesKey Performance

IndicatorsData Collection Strategy

Critical AssumptionsSector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission)Making service delivery responsive to the needs of the poor.

Increased role of local governments and stakeholder groups in planning and monitoring service delivery and funds utilization.

Project monitoring, assessments, studies on combating corruption.

Political accountability evolving, local capacity is weak.

Development planning responsive to constituents.

Local governments open their budgeting, planning and financial management practices to greater public scrutiny.

Governance and Decentralization Survey, Project Evaluation Report.

Local level governments face a legacy of over centralization and little capacity.

Project Development Objective:

Outcome / Impact Indicators:

Project reports: (from Objective to Goal)

Pilot district governments improve transparency, accountability and participatory practices and undertake reforms in financial management and procurement.

Extent to which recommendations from consultations/public hearings are incoporated into district plans and regulations (perdas)

Independent NGO budget l

and expenditure tracking (JSDF funded)Stakeholder feedback and l

evaluationsAnnual review of poverty l

strategies and budget planning

No back-tracking on Laws 32/2004 and 33/2004 relating to decentralization and fiscal relations

Political accountability evolves over time

Greater public availability of information, in particular financial and procurement information

GDSl

Qualitative governance studyl

Procurement surveyl

Financial management studyl

Incentives for change develop sufficiently

Twelve district budgets show increases in poverty targeted expenditure by end-of-project (EOP)

Susenas datal

Annual review of poverty l

strategies and budget planning

EIRR for project-funded infrastructure

Economic feasibility study

>12 district governments practicing accepted standards of procurement as verified by audits and studies by EOP

Procurement surveyl

Audit reportsl

>12 district governments practicing sound financial management as verified by audits and studies by EOP

Financial management l

evaluationAudit reportsl

% increase in stakeholder satisfaction with government

GDSl

Qualitative governance studyl

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service delivery Independent NGO budget l

and expenditure tracking (JSDF funded)

Output from each Component:

Output Indicators: Project reports: (from Outputs to Objective)

A. Local Governance Reform.

A1. District development policies and budgets are prepared through a participatory process and reflect local priorities for poverty reduction

40 districts meet entry requirements

12 districts issue local regulations on mechanisms for public consultation and access to information by mid-term and functioning satisfactorily, and 20 other districts prepare draft local regulations by EOP

Poverty reduction strategies & action plans are issued and implemented in 12 districts by mid-term and in 20 other districts by EOP

Supervision & monitoring reports, project progress reports

Project documentation (e.g. regulations, strategies, action plans, frameworks)

Minutes of meetings

Local government planning needs and participatory poverty analyses are complementary and reflected in actual budget allocations

Communities and civil society groups take advantage of opportunities to participate in local planning and decision-making Core group of reformers & leaders within the districts are committed to pushing the reform agenda forward and support capacity development

Local legislative assembly (DPRD Kabupaten) and executive (Bupati) agree on the reform agenda and support it

A2. Improvements are made in procurement and financial management processes

Action plans in FM reform are prepared and implemented in 12 districts by mid-term and in 20 other districts by EOP Action plans in procurement reform are prepared and implemented in 12 districts by mid-term and in 20 other districts by EOP

Financial management evaluation

Procurement survey

B. Poverty Targeted Investment:Priority investment in Kabupaten-level pro-poor infrastructure implemented under enhanced governance conditions

A minimum of 24 sub-projects supported by mid-term and 72 sub-projects supported by EOP, all following proper technical, financial & procurement procedures.

MIS, regular monitoring reports by TA teams, infrastructure quality technical review, audits.

There are no delays in district budget allocations, disbursements or procurement

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C. Implementation SupportTechnical, monitoring and supervisory support for project implementation.

40 project districts receive capacity development assistance in the core governance reform areas (transparency & participation, procurement & financial mgmt) by EOP.

10 staff at the center supporting project monitoring and implementation, 45 regional staff supporting project implementation and monitoring, 55 staff supporting kabupaten governments

Project M&E system in place and providing accurate timely data on progress and outcomes

Complaints received/resolved satisfactorily

Capacity development plans & training records

Supervision and monitoring reports, project progress reports

MIS

Complaints handling database

Technical studies and evaluations reports

Independent NGO budget and expenditure tracking (JSDF funded)

The procurement and mobilization of project staff occur efficiently and without significant delays.

Capacity development initiatives are provided in a timely manner

Project Components / Sub-components:

Inputs: (budget for each component)

Project reports: (from Components to Outputs)

A. Local Governance Reform

1. Reform of the Kabupaten Planning and Budgeting process 2 .Reform of Kabupaten Budget formulation, execution & Financial Management reporting practices

3. Strengthening Accountability Mechanisms

US$1.33 million

US$0.44 million

US$0.44 million

US$0.45 million

Project progress reportsMid-Term Review

Counterpart funds are available

B. Poverty targeted investment

US$31.17 million Project progress reports APBD available on time and disbursed

C. Implementation Support1. Technical assistance & Facilitation

2. Capacity building and training

US$11.90 millionUS$7.44 million

US$3.32 million

Project progress reports Procurement process completed on time

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3.Monitoring, Evaluation & Studies

US$1.13 million

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Annex 2: Detailed Project Description

INDONESIA: Initiatives for Local Governance Reform Project

The Project seeks to pilot support to kabupaten governance and link them to poverty reduction activities. Primarily the Project assists advances in good governance at the district level through establishment of a prescriptive set of minimum reforms in the key cross-cutting governance areas of public participation, transparency, financial management and procurement as well as in preparing a participatory Poverty Reduction Strategy and Action Plan (PRSAP). Next, by providing incremental poverty targeted investment funds to kabupatens that complete an initial set of the prescribed reforms, the Project brings the cross-cutting reform elements together, including more pro-poor budget allocations, to demonstrate and test reform implementation at the district level. Lastly, the Project also gives visible recognition of the kabupatens’ reform initiatives and disseminates good governance practices emerging from the districts so that the lessons learned can help to influence reforms in other kabupatens not participating directly in ILGR.

More specifically, the project proposes to support in selected kabupatens which meet the ILGR minimum requirements (see Attachment 1 to this Annex for a detailed description of the requirements):

1. A set of prescribed minimum reforms in kabupaten policies and procedures on access to information and access to decision making to improve transparency of and participation in the local government’s budget planning, allocation and implementation process, with a view to enhancing the responsiveness of local government;

2. A set of prescribed minimum reforms in kabupaten policies and procedures on procurement and financial management, with a view to reduce corruption and increase overall efficiency in fiscal management and lead to overall improvements in the kabupaten investment climate;

3. Development of a kabupaten-level PRSAP and its formal integration into an enhanced approach to the existing kabupaten budget (APBD) planning, allocation, implementation and monitoring process, with a view to enable citizens’ “voice” to be better heard both by the executive and the legislative parts of the kabupaten government, and thus allow local government’s to make “allocative choices” that are more responsive to citizen needs and lead to increasing pro-poor expenditures.

These requirements are staged into three phases: entry, pre-investment, and investment (year 1 and year 2—year 3 has no new reform requirements). Participation in each phase entails undertaking a separate and progressively difficult set of reforms, and the performance of each kabupaten will be evaluated at the end of each phase to confirm its eligibility for the subsequent phase. Once a kabupaten meets the prescribed set of minimum requirements of the entry phase, the Project will provide facilitation and technical assistance in the pre-investment phase to support the kabupaten to “graduate” to the investment phase. In this last phase the Project will provide investment funds to finance key rural infrastructure sub-projects which are identified through the PRSAP. See Figure 1.

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Figure 1. ILGR Implementation Framework

Component A. Local Governance Refo rm

G ove rn an ce Reforms

(Pre -Inv est me nt )

Par ticip at or y PRSAP

F o rm ul atio n

Component B. Poverty-targeted Investment

Component C. Implementation Support

Min

imu

m E

ntr

y R

eq

uire

me

nts

Min

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m P

re-In

ves

tme

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eq

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me

nts

IL GR Inv est me nt

Yea r 1

T ech nic al S u pp or t & M on itor ing

T ech nic al S u p por t & M on itor i n g

Min

imum

In

vest

men

t Y

ear

1 R

eq

uire

men

ts

IL GR In ve stm e nt

Yea r 2

Te ch nic al S u pp or t & M oni tor ing

ILG R In ves tm en t

Y e ar 3

T e chnical S u pp or t & Mo nit or ing

G ove rn an ce Re forms (Yea r 1)

G ove rn an ce Ref or ms (Year 2 )

Min

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m In

ves

tme

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ear

2 R

equ

ire

men

ts

PRE-I NVESTM ENT PHAS E

(18-24 m ont hs)

INVESTM ENT PHASE(3 years)

Note: Component B is available only for the first batch of kabupatens.

ILGR would be implemented over a four-year period (2005-2009), and be comprised of three components:

• Component A- Local Governance Reform• Component B- Poverty Targeted Investments• Component C-Implementation Support and Monitoring

The components would be funded through a combination of several sources, including Government of Indonesia domestic resources – both central ($0.18 million) and local governments ($4.63 million); the proposed IDA credit and IBRD loan ($29.50 million) and grant co-financing from the Department for International Development (DFID) of the United Kingdom ($12.00 million). Component A, which comprises local government activities linked to the governance reforms and PRSAP preparation, would be funded entirely by the participating local governments themselves. The technical assistance and capacity building support linked to these activities, as well as monitoring, evaluation and impact studies, are included in Component C which will be funded principally through the IDA credit, IBRD loan and DFID grant, with some GOI counterpart funds. Component B would principally finance sub-project investments in rural infrastructure and will be funded by the proposed IDA credit and IBRD loan, blended with DFID grant with local government counterpart funds.

Entry. All 130 kabupatens in the 9 provinces comprising the ILGR project area (West Sumatra, Banten, West Java, Central Java, Yogyakarta, East Java, Gorontalo, North Sulawesi, and South Sulawesi) are eligible to compete for entry into the program (See Attachment 2 to this Annex). Entry is limited to 40 kabupatens selected on a competitive basis from among kabupatens who apply and provide satisfactory documentation of their compliance with the minimum entry requirements and a commitment to undertake the prescribed set of minimum reforms in the key cross-cutting governance areas of public participation,

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transparency, financial management and procurement. Under Component C, the participating kabupatens will receive general facilitation, specialized technical assistance and capacity building to equip and assist them to undertake the reforms.

The participating kabupatens will be divided into two groups. The first, comprising approximately 15 kabupatens which participated during project preparation will enter the program at project effectiveness. The second, comprising approximately 25 kabupatens still to be identified will enter the program later in the second year of implementation.

Pre-Investment Phase. At project effectiveness, the first batch of participating kabupatens will commence the pre-investment phase, followed by the second batch of participating kabupatens in the second year of implementation after having met the minimum entry requirements. The pre-investment phase will last for 18-24 months in which each participating kabupatens will conduct a poverty assessment and prepare a PRSAP, as well as initiate prescribed reforms in participation, transparency, financial management and procurement. The participating kabupatens will start receiving capacity building and technical assistance from the Project at this phase. However, as kabupatens in the first batch have commenced work on some of the requirements of the pre-investment phase (e.g., PRSAP, participation, transparency) during project preparation, they will need approximately 3-6 months before commencing the investment phase.

Investment Phase. The participating kabupatens which fail to meet the prescribed requirements in the pre-investment phase will not be eligible to access the ILGR investment. Those which complete the prescribed requirements “graduate” to the investment phase and are then obliged to undertake additional reforms. The project will continue providing capacity building and technical assistance for the additional prescribed reform agenda and ensure that the reforms undertaken in the pre-investment phase are institutionalized and well grounded. During the investment phase, only the first batch participating kabupaten is eligible to receive funding for sub-project investments in rural infrastructure for three years under Component B, providing they meet the reform requirements. This Project does not provide investment funds for batch 2 kabupatens. These funds will come from the subsequent project—ILGR2.

By Component:

Project Component A - US$1.33 million Component A: Local Governance Reform

A-1 Reform of the Kabupaten Planning and Budgeting Process (Approximate Project Costs are US$0.44 million)

A-1-1 Strengthening strategic links with pro-poor local priorities

Under this sub-component, the Project supports development of a kabupaten-level PRSAP and its formalized integration into the APBD process with a view to move toward a more “pro-poor” budgetary allocation. The output of this sub-component is two-fold: (i) piloting a participatory process in preparing kabupaten-level pro-poor policy; and (ii) identifying activities that will be financed through project investment.

The PRSAP will be developed by a multi-stakeholder poverty working group (PWG) which is established through a public meeting (multi-stakeholders forum, MSF) and, when necessary, legalized by a Bupati Decree. At the request of the National Poverty Reduction Committee, this working group, serves as a technical team for the Kabupaten’s Poverty Alleviation Committee (Komite Penanggulangan Kemiskinan

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or KPK). The working group, which conducts the Participatory Poverty Assessment (PPA), is comprised of:

• Local government officials from the Development Planning Board (Bappeda) and technical agencies such as community empowerment, family planning and social welfare, statistics office, agriculture;

• Non-government individuals, typically from non-government organizations, civil society organizations, community-based organizations (religious-based, women, farmer/fishermen association) and private sector; and

• Local parliament (DPRD) members.

The majority of working group members should be from non-government and women should be well represented.

Development of the PRSAP comprises the following tasks:

• Preliminary analysis of the local poverty situation. The analysis aims to analyze the poverty situation from several aspects, such as: socio-economic situation of the kabupaten, existing policy, budget and programs, distribution of the poor and their access to basic services (education, health, basic infrastructures, market), as well as structural (access to information and decision-making process) and external factors (beyond the authority of the kabupaten). This quantitative and, to some extent, qualitative data is used to develop preliminary hypotheses and to select sites for field assessments. The preliminary analysis is used as the basis for an initial consultation with a wider group of stakeholders through a public consultation process.

• Field assessment. The field assessment is intended to verify the preliminary hypotheses and to provide a better understanding of the voice of the poor. Participatory poverty assessment tools, such as problem tree analysis, seasonal analysis, welfare classification, Venn diagrams, are used for this purpose. The poverty working group conducts the assessment in at least 3 locations that represent poverty typologies in the kabupaten, spending 4-5 days in each site.

• Formulation of the strategy. Based on the verified hypotheses, the working group develops poverty problem statements and strategy alternatives to cope with the problem. The strategy (for each problem) is selected against four attributes, i.e. authority, capability, budget, and institutional capacity. The strategy formulation process will involve public consultation, both through individual/limited meetings and general public consultation.

• Formulation of action plan. The strategy is expanded in a detailed action plan that includes an implementation framework, timeframe, and institutional arrangements. At this point a series of issues-based discussions are conducted to involve non working-group members, such as technical agencies (public work, forestry, etc.) and non-governmental interest groups.

• Institutionalization of the PRSAP. To ensure that the strategy and action plan will be referred to in the future (3-5 years) development of the kabupaten, it is necessary to institutionalize the PRSAP in the form of Bupati’s decree/local regulation. The PRSAP is then implemented through a participatory planning mechanism supported by Component A-1-2.

Under this sub-component, the participating kabupaten governments finance local stakeholder participation, including government staff, who are involved in poverty assessments and working groups. General facilitation, specialized technical assistance and capacity building support is provided to the Kabupaten poverty reduction working group from Kabupaten Facilitators and regional and national Poverty Specialists under Component C.

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A-1-2 Enhancing participation in decision making process

In general, the Project supports enhancement of wider public participation in decision-making processes as one of the project objectives and also as a means to reach the broader objective of improved local governance and accountability. Under this sub-component a multi-stakeholder basic democratization (transparency and participation) working group is established, and support is provided to the working group to develop local legislation (perda) ensuring public access to the decision making process will be practiced and sustained beyond the life of the Project. Furthermore, once the PRSAP has been formulated, the Project will support enhancement of the decision making process (including usage of ILGR funds).

The Perda on Participation will cover at least three areas: (i) public involvement in formulation of kabupaten policies and legislation process, including regional strategic plan, spatial plan, taxes and user charges; (ii) public involvement in annual planning, budgeting, and budget execution (including procurement); and (iii) public complaint mechanism, both in the implementation of public investments and public services.

The Project will also support the implementation of the Perda, particularly on the annual planning and budgeting process as described below. The issuance of the Perda and initial implementation of the action plan are the requirements that must be fulfilled in the first year of investment while full implementation is the second year's requirement.

The Project’s main intervention in the APBD planning and budgeting process is to open up dinas level programming process, inter-dinas planning discussion (Musrenbang Kabupaten) and in final budgeting processes, so that civil society, local community, sectoral associations/organizations representatives as well as the Poverty Working Group (PWG) can be engaged and give their input to the draft budget from an early stage. The perdas on transparency and participation would enhance this process.

There are 4 important steps required to effectively influence the substance of the APBD (See Table 1):

• First, the PRSAP should be an integral part of the kabupaten Renstra (strategic plan), and thus becomes a guideline for the dinas Renstra (dinas strategic plan based on the kabupaten Renstra). The legalization of PRSAP (see Sub-Component A-1-1 above) is expected to establish this link.

• Second, the Dinases proposals for PRSAP-related investment should be planned in the following steps: (i) PRSAP coordination workshops, led by Bappeda and involving Poverty Working Groups, to determine basic preliminary allocation of fund; (ii) the results of the workshops will be disseminated to wider stakeholders and Musrenbang Kecamatan meetings; and (iii) concurrently each related Dinas will develop the detailed proposal with participatory process involving civil society interest groups and related community representatives for the kabupaten poverty reduction strategic investment. The result will be consulted with a wider audience.

• Third, Bappeda compiles sub-project lists for Musrenbang Kabupaten workshops based on Dinas and Musrenbang Kecamatan proposals, as well as DPRD and Bupati inputs. Related stakeholders such as community representatives, interest groups (civil society, water-users, peasant associations, etc.), DPRD members, and Poverty Working Group will attend these meetings. At this stage the proposals already include further feasibility studies and detailed cost calculations and Bappeda has reviewed the estimate of overall budget availability in detail. Since a preliminary estimation of budget and process of prioritizing the proposals has been done earlier, the Rakorbang will focus in refining the priority and cross-dinas consistency of strategic investment. The output of

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these series of Rakorbang workshops is a clearly defined budget proposal and priority that will be agreed by the executive and DPRD in the form of a MoU.

• Fourth, the draft budget, before it is approved by the DPRD, will be consulted with the community and civil society representatives.

Table 1. Kabupaten Planning and Budgeting Process

Timeline Step Detailed Existing Process ILGR Intervention

Every 5 years Renstra (strategic plan)

Strategic medium-term plan of the regions l

that is detailed into Dinases’ annual programsIssues: lack of public consultation in the l

formulation of Renstra, the plan is not detailed enough to be referred to in the annual planning

Dinases’ proposals are aligned to l

PRSAP upfrontPRSAP is formulated through a l

participatory processesPRSAP has specific time-bound l

action plans

March-April Musrengbang Desa (village development planning discussion)

Community discuss their project prioritiesl

Issues: the forum is not inclusive, lack of l

enthusiasm based on previous experience, lack of budgeting power

Local governments are required to l

provide substantial amount of block grant to support village budget

March-April Field survey Dinases do field survey for detail design of l

the proposed projectsDinases prepare draft list of l

project and discuss it with Poverty Working Group (PWG) to align with PRSAP

April-May Musrenbang Kecamatan (kecamatan level development planning discussion)

Compilation of village priorities in one l

kecamatanDinases bring their project list so that l

community can align their priorities to this listIssues: no community representative l

involved, lack of budgeting power

PWG and dinases participate to l

discuss and verify proposals they have agreed before (above)

May-July Musrenbang Kabupaten (kabupaten development planning coordination meeting)

Confirming dinases’ projects that will be l

financed.Issues: no community representative l

involved, limited DPRD participation, lack of division of roles of each stakeholders involved, no budget constraints.

Participation of PWG (and other l

multi-stakeholders forum or MSF working groups) and community representatives Division of roles and l

responsibilities of each stakeholder group in Musrenbang Kabupaten (including DPRD)ILGR investment ceiling has l

been confirmed prior to Musrenbang Kabupaten

Jun-Nov Budget Formulation Budget team (executive) prepares budgetl

Kabupaten receives information on DAU l

estimated in NovemberIssues: some priorities that are not l

discussed in Musrenbang Kabupaten are “inserted” during the process and no public consultation in the process (“black box”)

Public consultation during budget l

formulation

Jun-Nov Feasibility Study Feasibility study (technical and economic l

aspects) for several “complicated” projectsClear threshold on feasibility l

study requirementsDec-Feb Budget Approval Budget committee (legislative and l

executive) finalizes the budgetPublic consultation on the draft l

budgetMarch-Dec Budget Execution Each dinas/agency execute the budgetl

Bawasda and/or BPKP audits the l

MSF monitors the projects l

implementation

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implementationIssues: lack of technical monitoring and l

evaluation

Annual review and evaluation of l

implementation of PRSAP

Under this sub-component, the local governments will finance local stakeholder participation, including government staff, who are involved in the development of the Perda on participation as well as those participating in implementation of the Musrenbang Kabupaten.

General facilitation, specialized technical assistance and capacity building support is provided to the Kabupaten basic democratization working group from Kabupaten Facilitators and regional and national governance specialists, including training, workshops and consultation meetings under Component C.

A-2 Reform of Kabupaten budget implementation and Financial Management(Approximate costs are US$0.44 million)

To complement the “basic” good governance principles of transparency and participation, the project will support implementation of more “technical” reforms in Kabupaten procurement and financial management practices with a view to ensuring efficiency, fairness, and transparency in management of public funds and reduction in corruption. It is envisaged that improved financial management and procurement systems and practices will help bring all public funds into the public accountability framework and at the same time bring flexibility in budgeting for legitimate variations. In addition it is hoped that these improved practices will reduce the chances for corruption, and create an enabling environment for improved governance in other areas.

Under this sub-component, participating kabupatens will be required to institute a series of graduated reforms in financial management and procurement over a period of 3-4 years, with agreed benchmarks for monitoring progress. These will be institutionalized through the issuance of Bupati decrees and kabupaten-level Perdas, and supported by capacity building of kabupaten staff, and provision of equipment and software. National and Regional Procurement and Financial Management Specialists will assist local government in meeting pre-determined requirements for the various program phases though technical backstopping and capacity building programs that include training, and cross-kabupaten workshops. The key beneficiaries of the activities under this sub-component are the office in the kabupaten appointed as the focal point for the procurement reforms, the FM Reform Committees, as well as other government officials of Regional Secretary (Sekda) Office, Internal Audit Agency (Bawasda), Finance Division/Office, and DPRD members.

A-2-1 Procurement

At entry, participating kabupatens are required to assign an appropriate office in the kabupaten government as focal point to take on the functions of leading and coordinating the procurement reforms. In most kabupatens, the focal point will likely be within the Sekda office (particularly Assistant for Economics and Development). The procurement reform focal point will lead and coordinate procurement reform and develop a local procurement policy which is in line with national procurement reforms stipulated by newly issued Presidential Decree (Keppres) 80/2003. The procurement reform focal point will work with other key parts of the kabupaten government to streamline regulations (or remove them when necessary) to promote economy, efficiency and open competition. Transparency, related to procurement policies, procedures and practices, will also be ensured. A workable mechanism to handle complaints and apply sanctions will be established in addition to an annual survey of bidders and civil society about kabupaten procurement practices (see Sub-component C-2). Another important aspect of the reform is that the focal

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point functions will formally become a permanent part of kabupaten government function through issuance of a revision of the existing perda on kabupaten organizational structure and functions to include the new functions of the procurement focal point, within Year 1 of ILGR investment.

A-2-2 Financial Management

At entry, each participating kabupaten will be required to establish a Financial Management (FM) Reform Committee, to lead and coordinate the prescribed financial management reforms. The kabupaten –through the FM Reform Committee– will implement phased reforms of financial management, including the following seven areas of reforms:

(a) Provide an appropriate enabling legal framework for financial management reforms;(b) Strengthen procedures for authorization of budget expenditure;(c) Improve financial controls over management of public funds;(d) Strengthen monitoring and accountability of all public funds generated or received;(e) Enhance accountability of Work Unit Heads for compliance with regulations;(f) Strengthen effectiveness of internal audit function;(g) Implement greater transparency in local financial management.

See Attachment 2 for details in each area.

Under this sub-component, the participating local governments will finance the establishment and operations of the Procurement Reform Focal Point and the FM Reform Committee, as well as the incremental costs of development of and consultation on the required SK Bupatis and Perdas, and their public disclosure. The participating local governments also finance local stakeholder participation, including government staff, who are involved in the training and workshops. The Sekda office and Regional Finance Office will be the key counterparts.

General facilitation, specialized technical assistance and capacity building support is provided to the kabupaten Procurement Reform Focal Point and the FM Reform Committee from Kabupaten Facilitators and regional and national procurement and financial management specialists, including preparation of guidebooks, kabupaten training, roadshows, workshops and consultation meetings under Component C.

A-3 Strengthening Accountability Mechanisms (Approximate costs US$0.45 million)

A-3-1 Information Disclosure/Transparency

The Kabupaten Working Group on Transparency and Participation will prepare a local regulation (Perda) on people’s access to public information (transparency) and monitor the implementation of concrete initiatives in information disclosure taken by local government. Specifically, the working group members –local government officials, DPRD members and nongovernment representatives– and the facilitators will be trained by national and regional consultants on what should be in the draft regulation, how to prepare a “white paper”, how to conduct the public consultation process on the draft Perda, and orientation for the DPRD who have to approve the Perda. The implementation framework of capacity building activities and Transparency Perda and detailed action plan formulation is similar to Participation Perda formulation process (see Sub-component A-1-2 above).

On concrete initiatives, requirements for disclosing public information –by actively disseminating the

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availability of public documents and summaries of budget and Bupati accountability speech (LPJ) in mass media– are part of the project’s entry criteria. In the Pre-investment Phase, when the Transparency Perda is being drafted, it is required to announce the procedures, costs, and time needed to obtain licenses and other public services in the mass media and at the designated locations. In addition, all draft local regulations (transparency, participation, budget preparation and execution principles, PRSAP) required by the project will also actively disseminated at this phase. The transparency initiatives will be continued in the Investment Phase until the Perda is fully implemented in Year 2.

The government, particularly Public Information/Public Relation Office and Bappeda, and DPRD will receive technical assistance from the project to disclose information, such as in preparing press releases and summaries of medium term plans (regional development plan, strategic plan, spatial plan), budget and annual planning document, and LPJ; licensing and public service requirements; as well as technical aspects of preparing other information dissemination means (such as website, newsletter). As in other areas, the project will also support inter-kabupaten exchange and peer-learning through intra- and inter-region workshop and cross visits.

A-3-2 Networking and Inter-kabupaten Exchange

The project would support a series of regional exchanges and workshops for kabupatens to share experiences and directly learn from each other. The administrative costs of the workshops and management of the exchanges would be covered through the regional consultant contracts (Component C) but all funds for kabupaten staff travel would be covered by the APBD.

Under this sub-component, the participating local governments will finance the establishment and operations of the Kabupaten Working Group on Transparency and Participation, as well as the incremental costs of development and consultation on the required Transparency Perdas, its public disclosure, and the cost of public disclosure of other documents named under the Perda. The participating local governments also finance local stakeholder participation, including government staff, who are involved in the training and workshops. The Public Information/Public Relation Office, Legal Bureau, and Bappeda are the key counterparts.

General facilitation, specialized technical assistance and capacity building support is provided to the Kabupaten Working Group on Transparency and Participation from Kabupaten Facilitators and regional and national specialists, as well as capacity building including training, workshops and consultation meetings under Component C.

Project Component B - US$31.17 millionComponent B – Poverty Targeted Investments

The ILGR investment component, which will only be used for batch 1 kabupaten “graduates” (batch 2 kabupaten graduates will get investmen funds from the subsequent Project - ILGR2), uses three over-arching principles as the basis for investment financing linked to improvements in governance:

(a) The PRSAP provides the overall policy framework for kabupatens to reduce poverty which should be financed by the APBD. The ILGR investment funds provide only partial financing of the strategy.

(b) The ILGR investment decision-making process is fully integrated into the regular kabupaten planning and budgeting system, with enhancement in transparency and participation.

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(c) The ILGR investment funds are on-granted to the kabupatens and are included in the APBD budget document to ensure budget transparency.

Once batch 1 kabupatens, which are facilitated in the Project preparation, successfully meets the pre-investment requirements, the project provides investment funds to finance priority infrastructure needs defined and prioritized in their PRSAP. However, the main objective of the fund is not only financing sub-projects, but providing a means for leveraging governance improvements. How the money is allocated, managed, used and monitored is a process through which local government will increase transparency, responsiveness, effectiveness, and accountability to local citizens.

Types of sub-projects and selection criteria

Each local government (executive and legislative), civil society, private sector and community representatives will determine, in a participatory manner, the subprojects that will be financed by ILGR. Financing is open to public infrastructure and non revenue generating investments that are identified as local priorities in the kabupaten-level poverty reduction strategy and action plan (PRSAP) and are eligible based on the following table.

In addition, the investment will not finance: (i) military or paramilitary purpose; (ii) civil works for government administration or religious purposes; (iii) activities relate to the manufacture or use of environmentally hazardous goods (including asbestos, pesticides and herbicides), arms or drugs; (iv) government salaries; (v) production, processing, handling, storage or sale of tobacco or products containing tobacco; (vi) activities within a nature reserve or any other area designated by the Government agency responsible for the management and/or protection of such area; (vii) activities relate to mining and excavation of live coral; (viii) activities relate to alterations to river courses; (ix) activities relate to reclamation larger than 50 hectares; (x) new irrigation larger than 50 hectares; (xi) construction of water retaining or storage structures of a capacity greater than 10,000 cubic meters activities that can not be financed by ILGR investment based on the safeguard framework; or provision of micro-credits.

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Table 2. List of Eligible Kabupaten Sub-Projects under ILGR

Eligible Sub-Projects In-eligible Sub-Projects

Water Supply (includes civil work and complementary equipment) - Wells - Water catchments/harvesting structures - Ponds - Community water supply systems (incl. motor pumps and electric pumps) - Community water storage facilities - Spring improvement (incl. simple water treatment system) - Community filtration systems. - Public taps - MCK (Public bath room) - Community drainage system

- Chemical water treatment systems - Stand alone motor pumps and electric

pumps

Energy (includes civil works and complementary equipment) - Electricity distribution systems - Solar system generators

- Stand alone generators

Transportation (includes civil works only) - Roads (earth, laterite surfaced, gravel surfaced, paved) - Culverts - Bridges - Vented causeways - Rakit landing facilities - Inland waterways improvements - Bus/public transport waiting areas

- Improvement or rehabilitation of national/provincial roads and bridges

Irrigation and Flood Protection (includes civil works and complementary equipment) - Earth dams and reservoirs - Spillways - Canals and distribution systems - Diversion structures - Pumping station structures - Drainage structures - Flood protection structures/facilities

- Stand alone motor pumps or electric pumps

Natural Resources Management (includes civil works only) - River bank protection structures/facilities - Erosion protection structures and works

Community Buildings (includes civil works and complementary equipment) - Communal meeting areas - Communal agricultural centers - Communal training centers - Communal libraries

- Administration buildings - Police or army buildings - Buildings for religious activities - Building for commercial financial activities

Size of investments funds and sub-projects

The size of the investment funds will be determined by the population size of the kabupaten, taking into account the difference in population densities on and off-Java.

Table 3. Maximum Investment Size

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Location Population Maximum size of investment funds per year (in IDR)Java < 750,000 4.5 billion

750,000-1,500,000 6.5 billion> 1,500,000 9 billion

Off-Java < 250,000 4.5 billion250,000-500,000 5.5 billion

>500,000 6.5 billion

The size of each subproject should be larger than that financed by the World Bank’s Kecamatan Development Project- (village-level sub-projects), but smaller than sectoral (central-government) projects. The project will finance sub-projects ranging from Rp.300 million upwards in size (that includes counterpart funds). ILGR Kabupatens have an annual budget (APBD) ranging from Rp.113-932 billion, with an average budget of Rp.285 billion for FY2003. ILGR finances approximately 10 percent of the development budget. It is expected that the subprojects in one kabupaten will not be concentrated in one sector.

Sub-project decision making process and implementation

The Program Management Unit (PMU), with assistance of Kabupaten Facilitators, will identify sub-projects that will be proposed for financing by ILGR investment funds. The selection of sub-projects will be based on the type of sub-projects, relevance with PRSAP, an appraisal of the cost-effectiveness of the sub-project following the method prescribed in the Project Operational Manual, compliance with the project safeguards framework, and the total cost of the sub-projects for the budget ceiling. Kabupaten Facilitators will submit the kabupaten proposal to the Regional Management Consultant (RMC) who will verify it based on the criteria above.

The verified proposal will be then sent to the National Project Secretariat (NPS) which will be compiled by the National Management Consultant (NMC). If the kabupaten meets the relevant minimum governance reform requirements, the NPS will then prepare the national budget (APBN) and inform the results to PMU to prepare the kabupaten budget (APBD). Once the budget is approved, related Dinas(es) will then procure private contractor(s) to physically implement the sub-project(s) in the field following project procurement guidelines.

Project Component C - US$ 11.90 millionComponent C: Implementation Support C-1 General Facilitation and Specialized Technical Assistance

(Estimated Project Costs: US$7.44 million)

To support the implementation of ILGR at each level of organization –national, regional, kabupaten consultants will be hired by the National Project Secretariat. At the national level, a team of National Management Consultants (NMC) will assist the project manager and secretariat in managing and monitoring the project implementation. The NMC will train the other consultants, including the Regional Management Consultants (RMC) and kabupaten facilitators (F-Kabs). Through frequent site visits, the NMC will evaluate whether the main goals of the project are being met and that physical, economic and social targets are being achieved. The NMC will be responsible for overseeing the work of the other ILGR consultants and reporting on progress at regular intervals. In addition, the NMC will assist the project manager prepare an annual report that includes the lesson learned, project achievements and impact. The NMC will also provide on-the-job training to counterparts in the Project Secretariat.

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The NMC will consist of the following (see Project Operational Manual for detailed TORs):

- 1 team leader- 1 procurement specialist- 1 legal/policy specialist- 1 poverty specialist- 1 safeguard specialist- 1 financial management specialist- 1 monitoring and evaluation specialist- 1 MIS data base specialist- 1 communications/media specialist- 1 complaints handling staff- plus support staff.

The RMC will be based in three regional offices. Both NMC and RMC will backstop the Kabupaten working groups and facilitators in areas such as poverty assessment, financial management, procurement, participation, environmental and social safeguards and review quality of infrastructure financed through the investment funds. The regional coordinators will also help facilitate cross-kabupaten exchanges, dissemination of best practice and coordinate regional training events. RMC in each cluster will include the following staff complement:

- 1 regional coordinator- 1 engineer- 1 governance/legal drafting specialist- 2 FM specialists- 2 procurement specialists- 1 MIS specialist- 1 safeguards specialist- 1 poverty specialist- plus support staff

Each participating kabupaten will receive facilitation assistance from two Facilitators. The lead kabupaten facilitator will have a governance background and will be responsible for general facilitation of the working groups and supporting the PMU in coordinating the working groups and reform committees. The second facilitator will be an engineer who will work closely with the Poverty Working Group and facilitate the sub-project decision-making process and monitoring of the sub-project implementation. The engineer will be recruited once the PRSAP is completed, prior to the investment phase. An assistant will help both Kabupaten Facilitators in administrative and data entry. In total the project will hire 80 facilitators and 40 assistants.

Under this sub-component the project will finance the cost of consultants and facilitators salaries and allowances, administrative costs, operational costs, publications and dissemination materials.

C-2 Capacity Building and Institutional Training(Estimated Project Costs: US$3.32 million)

The project would provide a combination of pre-set training and capacity building modules provided by the

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regional and national management consultants to the Kabupaten working groups and staff responsible for procurement and financial management reforms. The support would be in the form of technical back-stopping and a series of kabupaten and regional workshops and specific field based exercises such as the Participatory Poverty Assessments. The RMC would periodically identify the training and technical assistance needs and look for opportunities to coordinate and share training sessions across kabupaten clusters. The following Table summarizes the type of modules to be provided by the NMC/RMC (and additional expertise if required) under the four areas.

Table 4. Summary of Capacity Building and Institutional Training

Reform Area Types of Modules

Developing the PRSAP Quantitative Analysisl

Community Assessmentl

Strategy Formulation l

Integrating Strategy in the Regular Planning Process l

Transparency/Participation Legal Drafting l

Transparency, participation, accountability –implementing the Perda, l

budgetingSafeguards l

Procurement Reform Socialization of KEPRES 80l

Training for procurement focal point/UP3Dl

Training of Key Dinas personnel in new procurement methods and planningl

Training of BAWASDA and procurement watch groupsl

Training on procurement monitoringl

Financial Management Reform

Training of DPRD in basic regional financial managementl

Training for BAWASDA staff on financial and performance audit l

Training of finance accounting staff in double entry book-keepingl

Training of finance department staff on budget execution, cash management, l

control systemsTraining of work units on budget execution and accountingl

In addition to the project prescribed training each kabupaten could request some specific training in areas to be identified by the Kabupaten working groups. Some of the unallocated resources from the project would be directed towards this type of training. This request would also be packaged in the formats and sent to the national project secretariat though the RMC. In the first year of project implementation a more detailed capacity building needs assessment survey would be carried out in the participating Kabupatens to identify complementary training required by local government beyond the current menu provided by the project.

C-3 Monitoring, Evaluation, and Studies/Surveys(Estimated Project Costs US$1.13 million, excludes costs for Internal Monitoring that is covered under Sub-component C-1)

Internal Monitoring

Internal project monitoring will be implemented using a Management Information System (MIS). Basic information will be collected and entered at the kabupaten level, and stored in a master database. The database will be available to all at national and district levels. The MIS will serve two main functions:

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to monitor progress in project implementation, and generate a series of monthly, quarterly and lannual reports to support project implementation; and to identify problems in a timely manner and provide the necessary information to develop lappropriate solutions to ensure the project remains on track.

The internal project monitoring and evaluation, uses several types of interventions:

Consultant Monitoring

The NMC will be responsible for internal project monitoring, essentially process monitoring of both inputs and outputs. The central team will receive monthly reports from the Kabupaten facilitators and the RMC. The NMC will in turn assist the Project Secretariat prepare regular reports for the World Bank and DfID.

The NMC will assist MOHA prepare a report for the national steering committee, which highlights the following progress indicators:

The progress of reform measures implemented in each of the core governance areas; lProposed reforms for the coming period;lKabupaten priorities for service delivery and development projects implemented during the past lyear financed by ILGR through the poverty strategies; Major problems encountered (including complaints) and recommendations for improvements;Planned investment activities for the following year;lA summary of fiscal performance for each kabupaten; andlCase studies of Kabupaten “best practice” or governance innovations.l

For investment planning and the sub-project execution process, the Facilitators will monitor local government compliance with operational rules specified in the operations manual on:

Involvement of Kabupaten stakeholders in the budget (APBD) planning process and the steps lrequired for public disclosure and participation;Compatibility of investment proposals with those outlined in the PRSAP; andlDocumentation of Kabupaten stakeholder reviews and comments on the APBD proposal including lILGR investment funds prior to submission to the DPRD finance committee.

The main monitoring tool for kabupaten sub-projects is the project secretariat MIS which will host the database for kabupaten sub-projects and information regarding financial flows, costs, characteristics, and the expected number of beneficiaries.

Government Monitoring and ReportingFrom the government’s side, each kabupaten is required to submit their reports to the National Project Secretariat. Monthly reports, using standardized formats (see project manual) will be prepared by PMU and will be sent to the NPS to report upon progress on or related to the core reform requirements against Kabupaten-level action plans. In parallel, the Kabupaten facilitator will be responsible for validating implementation of the action plan.

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Stakeholder FeedbackThe project will develop special activity feedback forms that will be distributed by the F-Kabs so that at every stage of the process (entry, pre-investment phase, and investment phase), stakeholders will be given a chance to provide feedback on how the process is proceeding. Government officials, NGOs and other civil society actors will comment on their satisfaction with the quality of the outputs and the decision-making process. These feedback forms will assist the project in systematically identifying strengths and weaknesses in the activities in order to take corrective action if necessary. The feedback forms will also be used on a longitudinal basis to assess whether there is improvement as the project cycle progresses and from one year’s cycle to the next.

Complaints HandlingOne major objective of the M&E is the identification and resolution of problems encountered during implementation, so that they can be resolved at the earliest possible stage. The project will maintain a separate communication channel to facilitate the reporting of grievances and complaints. The project will publish project contact information and PO Boxes where citizens can send inquiries and complaints. The complaints handling unit will ensure that problems are collated at the regional and central levels, and the project secretariat through the NMC team deals with the grievances quickly and in a timely manner.

Table 5. Summary of Internal Monitoring Activities

Activity Objective Implementing agencies/Actors

Outputs

Monitoring by the ILGR consultants

Monitor and regularly report progress

ILGR staff Development of MISl

Monthly reports l

Monitoring by Government officials

Monitor and regularly report progress, and troubleshooting

Government officials at the national, and kabupaten level

Quarterly reports and problems solved

Stakeholder feedback

Provide feedback at every stage of the process in order to identify strengths and weaknesses in activities

Govt officials, NGOs, civil society actors

Periodic feedback at every stage

Complaints handling process

To document and resolve field problems

NMC/RMC staff for handling complaints

Resolved casesl

Database of complaintsl

The cost for internal monitoring is included under Sub-component C-1.

External Monitoring and Evaluation ActivitiesThis sub-component activity will focus on external independent project monitoring and evaluation that will be managed by Bappenas, using several types of interventions:

JSDF financed monitoring by NGOsLocal NGOs will receive separate financing through an approved JSDF grant to enable them to analyze local budget, to disseminate the budget to the community, to conduct citizen score cards of services and budget tracking activities in the ILGR kabupatens.

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Annual Review of Poverty Strategies and Budget PlanningThe Project will commission an external review of the district poverty strategies, action plans and budgets to assess their technical quality and feasibility. This annual review will examine how data and poverty information has been integrated into strategies and plans, as well as the soundness of the plans and budgets. This review will provide valuable information to improve the next planning and budgeting cycle.

Evaluation of Economic Feasibility and Cost Effectiveness of ILGR Infrastructure InvestmentsThe socio-economic impact of sub-projects, generated by improved planning, implementation and maintenance at the level of local government’ administration, will be evaluated using standard cost-benefit analysis tools specifically designed to fit the type of proposed sub-project (water, and sanitation, rural roads, irrigation projects). The study will analyze the Economic Internal Rate of Return (EIRR) for ILGR infrastructure investments and also compare these costs with similar non- ILGR infrastructure projects in order to assess cost-effectiveness. These studies will be carried out at mid-term and at the end of the project period by an external consultant.

Evaluation of Procurement ReformsThe project secretariat will commission an annual survey of contractors and cost of kabupaten project goods and services to monitor the impact of reforms in the procurement process. The results from the survey will be made publicly available and provide a quantitative measure of governance reform impact.

Regional Financial Accountability AssessmentThis study, to be conducted by external consultants and the Ministry of Finance, will evaluate the impact of financial management reforms.

Evaluation of the Impacts of Overall Governance Reforms

Governance and Decentralization Survey (GDS) – During preparation, the Project commissioned a baseline perception survey of governance- the GDS-implemented by Gadjah Mada University in the 16 pilot ILGR Kabupatens. The GDS tracks local public service delivery and governance trends in the wake of Indonesia’s wide-sweeping 2001 decentralization reforms. The results from the baseline, show that overall the ILGR kabupatens have higher performance than the average Indonesian Kabupaten in areas such as participation, accountability, transparency and poverty-targeted programs. This baseline survey will be repeated in 2005 and 2007 (future dates are still tentative), with modifications in the questionnaire to include more household interviews from the initial sampling of kabupatens and to include comparison districts (allowing for comparisons between ILGR and non-ILGR districts).

The GDS results will be used for the mid-term and final project evaluation, and is a key longer-term outcome measure for the Project. Overall the project will focus on improving the “governance trajectory” for the ILGR Kabupatens, as opposed to absolute percentages in governance reform. The project will finance the costs of the survey through the project secretariat.

Qualitative Study of Governance Reforms - The project will also commission bi-annually an external consultancy firm or NGO to conduct a qualitative study of governance reforms. This qualitative work will complement the quantitative GDS exercise. The qualitative study will use focus group discussions and key informant interviews to understand better the evolving, complex dynamics of governance change, especially in terms of attitudes, changes in perception, practices, and spill-over effects of improved local governance reforms. Beneficiaries of ILGR TA such as government officials, NGOs, civil society representatives and

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other stakeholders will be interviewed. This study will give the project a fuller, richer description of the incremental, qualitative changes taking place that otherwise would not be captured in all its dimensions through a survey questionnaire.

Mid-term Project Evaluation - In Year 2 the Project will commission a review of the project performance and design. Some important areas to look at are: (i) the Local Governance Reform Framework—how realistic the framework is and how big is its impacts, (ii) the project phasing, and (iii) the impact of the Project’s investment funds. The results will help improve the current design and particularly the subsequent design of the Project—ILGR2.

Final Project Evaluation - The final evaluation will assess whether the Project meets its development objectives. Specifically the evaluation will look at the overall impact of the Project on governance practices related to the Project intervention, including the budgeting process and poverty-targeted allocation. The evaluation will provide lessons learned for similar projects in the future.

Semi-annual supervision missions along with the project financial audits will also be conducted.

Table 6. Summary of External Monitoring and Evaluation Activities

Activity Objective Implementing agencies/Actors

Outputs

NGO budget and expenditure tracking, citizen report cards

To monitor the budgeting and expenditure process.To assess citizen’s satisfaction with public service provisions (JSDF financed)

NGOs Analysis of budget proposals and reporting on kabupaten budget expenditures, citizen report cards providing feedback on satisfaction with service delivery

Annual review of poverty strategies and budget planning

To evaluate the technical quality and feasibility of the poverty strategies and budget formulation

External evaluators Report assessing the quality and feasibility of the poverty strategies and budget formulation

Economic feasibility and cost effectiveness

To evaluate the rate of return and cost effectiveness of ILGR infrastructure investments

External consultant team

Study evaluating the benefits and costs derived from ILGR financed infrastructure projects

Regional Financial Accountability Assessment

To evaluate the impact of financial management reforms

External consultants and MOF

Study evaluating changes in financial management practices.

Procurement evaluation/survey

To evaluate the impact of ILGR’s reforms on prices of good, services

External team Survey report on kabupaten procurement practices

Governance impact study – GDS survey

To evaluate changes in governance and service delivery in ILGR districts

University Gadjah Madah

Updated GDS for ILGR’s kabupatens and reports on findings (baseline, mid-term and final)

Qualitative governance impact study

To evaluate the impact of the program on governance indicators in qualitative terms

External consultant firm or NGO

Bi-annual qualitative studies to complement the GDS and provide descriptive information regarding governance changes

Mid-term project evaluaton

To evaluate the project performance and provide inputs to the current as well as ILGR2 design

External consultant Mid-term evaluation on project impacts on governance practices in all areas of ILGR intervention

Final project evaluation To evaluate the project overall performance

External consultant Final evaluation on project impacts on governance practices.

World Bank –DfID cross-sectoral supervision missions

To supervise ILGR’s progress and implementation of activities

World Bank, DfID Bappenas, MOHA, NMC, MOF

Aide Memoire (twice a year)

Financial Audits To audit ILGR finances BPKP Audit findings and reports

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Attachment 1 to Annex 2ILGR Local Governance Reform Framework

A. General Requirements

Detailed Requirements Verification to be provided by

Kabupaten (Local Project Mgmt Unit To Send to Project

Secretariat)

Verification by Project Secretariat

Monitoring and Supervision by

World Bank

External Monitoring

Entry (Requirements to Participate in ILGR)i Be located in 9 ILGR provincesii, exclude high-fiscal-capacity kabupatensiii

Verify fiscal capacity and certify eligibility of kabupatens in letter to World Bank

Submit a Letter of Agreement addressed to the National Steering Committee signed by Bupati and chairperson of DPRD expressing interest to participate in the program, and a commitment to: (a) implement specific governance reforms (participation, transparency, procurement, financial management) to be undertaken in subsequent phases as Governance Reform Framework; (b) commit to establish the Transparency and Participation, and Poverty Working Groups through public meeting;iv (c) undertake participatory poverty analysis and to institutionalize the poverty reduction strategy and action plan (PRSAP) into the Kabupaten planning and budgeting process; and (d) adopt the Operational Manual, including the participatory planning and budgeting process, safeguards frameworkv, and appraisal procedures for sub-projects.

Letter of Agreement Compile letters from kabupatens and submit copies to World Bank.

Review to confirm satisfactory in form and substance.

Issue a Bupati Decree (SK Bupati) vi comprising instructions to: (a) establish kabupaten-level project management unit to coordinate project activities; (b) implement the ILGR governance framework as agreed, in form, substance and timing; (c) follow the procedures in the Operational Manual, including the participatory planning and budgeting process, safeguards framework and appraisal procedures for sub-projects; and (d) amend the Bawasda’s annual general audit program to include verification that the procurement and FM reform measures stipulated in the regulations have actually been implemented

Copy of Bupati’s Decree

Submit lettervii to World Bank as certifying that the SK Bupati for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance.

Review letter to confirm satisfactory in form and substance.

Pre-Investment Have no loan arrears, either repay or reschedule

Check loan status and certify eligibility of Kabupatens in letter to World Bank

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B. Transparency and Participation Requirements

Detailed Requirements Verification to be provided by

Kabupaten (Local Project Mgmt Unit To Send to Project

Secretariat)

Verification by Project Secretariat

Monitoring and

Supervision by World Bank

External Monitoring

Entry (Requirements to Participate in ILGR)i

Announcement in mass media of the summaries of budget and Bupati’s accountability speech (LPJ) in mass media.

Proof of announcement in mass media.

Submit lettervii to World Bank as certifying that the proof of the announcement for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance.

Verify announcement in media and quality of summary of budget and Bupati’s accountability speech available.

Announcement in mass media of the availability of the following documents (locations, requirements, time, and the costs to get it): budget, Bupati’s accountability speech, regional strategic plan (Propeda, Renstra), annual plan (Repetada, AKU and Strategies and Priorities), local regulations and spatial plan are available at the designated location(s).

Proof of announcement in mass media.

Submit lettervii to World Bank as certifying that the proof of the announcement for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance. Check, on a sample basis, availability of documents in designated locations.

Review letter to confirm satisfactory in form and substance.

Verify announcement in media. Verify availability of documents.

Pre-Investment Phase Establish Transparency and Participation, and Poverty Working Groups through public meeting within 3 months of entry.i

Documentation verifying establishment of working groups

Review documentation and verify that working groups are established with appropriate composition of membership.

Announcement in mass media of the procedures, costs, and time needed to get licenses and other services, such as ID cards, birth certificate, business license and building permits at least once a year, as well as being permanently posted at designated locations. This activity will be continued in Investment Phase.

Proof of announcement in mass media

Submit letter to World Bank as condition of eligibility for investment certifying that the proof of the announcement for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance. Check, on a sample basis, availability of posted information in designated locations

Check announcement and public posting, and verify procedures, costs and time to obtain licenses and other services

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Announcement in mass media of the procedures, costs, and time needed to get licenses and other services, such as ID cards, birth certificate, business license and building permits at least once a year, as well as being permanently posted at designated locations. This activity will be continued in Investment Phase.

Proof of announcement in mass media

Submit letter to World Bank as condition of eligibility for investment certifying that the proof of the announcement for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance. Check, on a sample basis, availability of posted information in designated locations

Check announcement and public posting, and verify procedures, costs and time to obtain licenses and other services

Submission of draft local regulation (perda) on public access to information (transparency) to DPRD, which contains assurance and mechanisms of public access to: • Information related to discussion on

public policies in DPRD; • Planning documents (Propeda,

Renstra, Repetada, and spatial plans); • Draft and final documents of all

perdas, budget (APBD) and budget realization reports;

• Audit reports and their follow-ups, Bupati’s accountability reports (LPJ), information on procurement policies, procedures and practices, on complaint resolution mechanism and results (follow-up).

• Copy of draft perda.

• Proof of submission of draft perda to DPRD.

• Minutes of public meetings and attendance list of at least 3 public meetings to discuss the draft.

Review content of draft perdas, summary of public comments and changes made to the drafts as results of inputs from the public. Submit copies of perdas along with letter to World Bank as condition of eligibility for investment certifying that the draft perda for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance.

Submission of draft local regulation (perda) on public access to decision-making process (participation) to DPRD, that contains assurance of: • Public participation in drafting and

finalization discussion of any perda in DPRD, planning documents and budgeting processes (including Propeda, spatial plans, Repetada and APBD);

• Establishment of monitoring and evaluation mechanism of public satisfaction on service delivery;

• Establishment of complaint resolution mechanism (incl. for procurement).

• Copy of draft perda.

• Proof of submission of draft perda to DPRD.

• Minutes of meetings and attendance list of at least 3 public meetings to discuss the draft.

Review content of perda, summary of public comments and changes made to the drafts as results of inputs from the public. Submit letter to World Bank as condition of eligibility for investment certifying that the draft perda for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance.

Review draft perda to confirm satisfactory in form and substance.

Check community involvement and the process of formulating the draft perda.

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Finalize PRSAP and prepare draft local regulation (perda) on implementing the PRSAP.

• Copy of PRSAP and draft perda.

• Documentation of PRSAP process (including results of community-level assessment, minutes and attendance lists of public meetings)

Submit letter to World Bank as condition of eligibility for investment certifying that PRSAP and draft perda for each eligible kabupatens are available in the Project Secretariat, and are satisfactory in form and substance.

Review draft perdas to confirm satisfactory in form and substance.

Annual review of poverty strategies and budget planning

Implement enhanced public participation in annual planning and budgeting that covers: • Set budget ceiling as an input for

dinas and kecamatan planning discussions

• Allocate block grant to village/kecamatan level. The information of the allocation and guidelines are disclosed to public.

• Public meetings on dinas programming (at least for 5 poverty priorities sectors)

• Public meetings on inter-dinas programming

• Public consultation on final draft of APBD

This activity will be continued in Investment Phase.

• Documentation on the process (including budget estimates, minutes of meetings and attendance lists) on current year planning and budgeting process.

• Budget allocation and guidelines of village/kecamatan block grant

• Documentation on changes reflected in final APBD documents reflecting the inputs from the public.

Submit letter to World Bank as condition of eligibility for investment certifying that the planning and budgeting process for each eligible kabupatens is being implemented with enhanced public participation and that documentation of the process are available in the Project Secretariat, and are satisfactory in form and substance.

Review process and output of participatory planning and budgeting process.

Annual review of poverty strategies and budget planning that verifying that the enhanced public participation process is followed, and that the APBD appropriately reflects the content of the discussions.

Investment Phase (Year 1) • Issue local regulation (perda) on access

to public information (transparency) • Issue local regulation (perda) on access

to decision-making process (participation)

• Issue local regulation (perda) on implementation of the PRSAP.

Copies of issued perdas.

Review on the changes made to the draft perdas. Submit copies of perdas along with letter to World Bank certifying that the final perdas for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance.

Random review of final perdas on a sample basis to confirm satisfactory in form and substance.

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Implementation of perda on access to public information (transparency) by announcing the summary of planning documents (Propeda, Renstra, AKU, Strategies and Priorities) and list of all perdas being issued in the last 1 year in mass media. This activity will be continued in Investment Phase Year 2.

Proof of announcement in mass media.

Submit letter to World Bank as condition of continued eligibility for investment certifying for each participating kabupaten that the perda on access to public information and access to decision making are being implemented satisfactorily.

Review to confirm satisfactory in form and substance.

Verify that perda is implemented as reported.

Implementation of perda on access to decision-making process (participation) by at least discussing 50% of the perdas being issued in Year 1 of investment through intensive public consultations

• List of perdas issued in Year 1 (incl. those discussed in public consultations)

• Documentation of public consultation process (incl. minutes of meetings and attendance lists)

Investment Phase (Year 2) Continued implementation of perdas on access to public information (transparency) and access to decision making (participation).

Same as above Same as above Same as above Same as above

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C. Financial Management Requirements

Detailed Requirements Verification (Local Project Mgmt Unit To Send to Project

Secretariat)

Verification by Project Secretariat

Monitoring and Supervision by

World Bank

External Monitoring

Entry (Requirements to Participate in ILGR)i

Issue a Bupati’s Decree (SK Bupati)vi establishing a Financial Management Reforms Committee, with members from key stakeholder departments, and tasked with preparing the detailed reform implementation plan and guiding the implementation of reforms.

Copy of Bupati’s Decree establishing the Committee, and copy of its Terms of Reference.

Submit copies of SK Bupati along with lettervii to World Bank as certifying that the SK Bupati for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance.

Review SK Bupati, membership and TOR to confirm satisfactory in form and substance

Pre-Investment Phase Financial Management Reform Committee to prepare detailed phased implementation plans for the reform measures. These plans will be completed and presented to the Bupati and Project Secretariat within 3 months after the Committee has been established.

Phased action plan with time targets for implementation is submitted to Bupati and Project Secretariat.

Review action plan to confirm satisfactory in form and substance. Submit letter to World Bank as condition of eligibility for investment certifying that the action plan for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance.

Review to confirm satisfactory in form and substance.

Provide an appropriate enabling legal framework for financial management reforms, by issuing • A local regulation (perda) on the

Principles of Regional Finance in line with GR 105/2000 and Kepmendagri 29/2002 covering the reform areas to be implemented in Year 1 and 2 of Investment below; and

• a Bupati’s decree (SK) on the policies, systems and procedures for the preparation and execution of the APBD, in accordance with existing central regulations. The SK to also include reform agenda proposed in this project for implementation during the investment period, as stated below.

Issued Perda and SK Bupati with the required coverage

Review form and content of perda and SK Bupati. Submit copies of perdas and SK Bupati along with a letter to World Bank as condition of eligibility for investment certifying that the perda and SK Bupati for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance.

Review perda and SK Bupati to confirm satisfactory in form and substance.

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Investment Phase (Year 1) Implementation of reform actions proposed will be completed in each investment year in accordance with the SK on FM reforms and the implementation plan prepared by the FM Reforms Committee. 1) Strengthen procedures for authorization of budget expenditure, including • Authorize local government officials to

make mid-year revisions in the budget allocation or budget target line items within certain pre-determined financial limits, similar to the authorities given to central government officials.

• To prevent potential misuse of “contingency budget” (Belanja Tidak Tersangka), specify clear criteria for expenditures that shall be funded from these funds, and the procedures governing the authorization and commitment of such expenditure.

2) Improve financial controls over management of public funds, by • Segregate the functions of the finance

department (which shall be responsible for the issuance of payment instructions (SPM) and the regional treasury (kas Daerah).

• Kas Daerah shall not receive, disburse or hold cash, but only process banking transactions.

• Instruct Bagian Keuangan (Finance Dept) to undertake periodic comprehensive reconciliation of cash accounts covering accounting records, bank statements, official and temporary proof of collections, and actual cash collection.

• To improve checks and balances, do not locate Kas Daerah at the same premises as regional development banks (BPD).

3) Strengthen monitoring and accountability of all public funds generated or received, by ensuring • All regional government bank accounts

can be opened only with authority from the Bupati

• Heads of all Work Units shall submit quarterly reports to Finance Dept & Bupati declaring the name, location, and balances of all bank accounts in the name of the Work Unit or officials thereof.

Verification of compliance with the action plan in undertaking the prescribed reform requirements is done by Bawasda as part of their annual general audit program. Progress and exceptions will reported to FM reform committee and Bupati. The Committee verifies and reports quarterly to National Project Secretariat status of action plan implementation.

Submit letter to World Bank as condition of continued eligibility for investment certifying for each participating kabupaten that the phased action plan for financial management reform is being implemented satisfactorily and in accordance with SK Bupati on reforms.

Post review during supervision.

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Investment Phase (Year 2) Implementation of reform actions proposed will be completed in each investment year in accordance with the SK on FM reforms and the implementation plan prepared by the FM Reforms Committee. 4) Enhance accountability of Work Unit Heads for compliance with regulations. Require Work Unit Heads to issue annually a Statement of Responsibility to Bupati, with copy to Bawasda, affirming compliance with applicable rules and regulations, and that all revenue collected and donations received are deposited to the authorized Kas Daerah account. 5) Strengthen procedures and systems for revenue collections. • Require all tax/levy payments and other

local collections to be deposited directly by taxpayers to the bank accounts of the local government, except for small payments like parking fees and admission fees to museums, recreation centers etc.

• Adopt use of serially numbered accountable receipt forms for all revenues.

6) Strengthen effectiveness of internal audit function, by requiring that copies of all Bawasda general audit reports are provided to DPRD within 30 days of being issued. 7) Implement greater transparency in local financial management, by requiring completion and publication in local newspapers or websites of summary quarterly financial reports/budget realization reports within 2 months of quarter-end.

Verification of compliance with the action plan in undertaking the prescribed reform requirements is done by Bawasda as part of their annual general audit program . Progress and exceptions will reported to FM reform committee and and Bupati. The Committee verifies and reports quarterly to National Project Secretariat status of action plan implementation.

Submit letter to World Bank certifying for each participating kabupaten that the phased action plan for financial management reform is being implemented satisfactorily and in accordance with SK Bupati on reforms.

Post review during supervision.

Verify availability of documents

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D. Procurement Reform Requirements

Detailed Requirements Verification (Local Project Mgmt Unit To Send to Project

Secretariat)ix

Verification by Project Secretariatx

Monitoring and Supervision by

World Bank

External Monitoringxi

Entry (Requirements to Participate in ILGR)i Issue an SK Bupativi on establishment of a work unit as focal point in procurement reform, with the following tasks: • Coordination with LPKPP • Lead and coordinate procurement

reform in kabupaten • Implement trainings on procurement

to other work unit • Oversee, monitor and report

procurement practices • Issue Procurement Bulletin in

quarterly basis to publish information and opportunity in procurement including practices

Copy of Bupati’s Decree establishing the unit, and copy of its Terms of Reference.

Submit copies of SK Bupati along with lettervii to World Bank as certifying that the SK Bupati for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance.

Review SK Bupati, membership and TOR to confirm satisfactory in form and substance

Pre-Investment Take initial step to operationalize procurement focal point by providing supplemental budget for expanded functions.

Copy of annual budget plan.

Post review during supervision.

Issue an SK Bupativi on the systems and procedures for implementation of the Keppres 80/2003, with special attention to the following: a) Adoption of standard bidding documents for kabupaten procured contracts, regardless of source of funding. b)Establishment of clear and robust mechanism for recording and handling of procurement complaints. c) Enforcement and public disclosure of sanctions relating to procurement deficiencies.

Copy of issued SK Bupati; submit copy of standard bidding documents adopted.

Review SK Bupati to confirm satisfactory in form and substance. Submit letter to World Bank as condition of eligibility for investment certifying that the SK for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance.

Procurement survey that verifying: • procurement

process is transparent

• adequate complaint handling system in place

• adequate disclosure in place

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Implement provisions of Keppres 80/2003 related to the following: a) Removal of pre-qualification system for small contracts (<RP 50 Billion), and move towards a post qualification system for all contracts b) Public disclosure of results of bid evaluation, name of the winning bidder and contract scope/price.

a) Copy of documents for three major contracts, including records on procurement processing which certify the required practices. b) Documentation of public disclosure of bid awards (e.g., Quarterly Procurement Bulletin including publication of contract awards).

Ex post review on sample basis to confirm implementation satisfactory in form and substance. Submit letter to World Bank as condition of eligibility for investment certifying that the implementation for each of the eligible kabupatens have been confirmed by the Project Secretariat, and have been found satisfactory in form and substance.

Investment Phase (Year 1) Revise existing perda on kabupaten organizational structure and functions to include new functions of procurement focal point.

Copy of revised perda.

Review revised perda to confirm satisfactory in form and substance. Submit letter to World Bank as condition of eligibility for investment certifying that the revised perda for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance.

Post review during supervision.

Monitor and publicly disclose unit rates for major components of civil works contracts, as well as prices for major categories of goods.

Copy of Quarterly Procurement Bulletin with annual update on unit rates and prices.

Review submitted documents to confirm satisfactory in form and substance. Submit letter to World Bank as condition of continued eligibility for investment certifying that the required documentation for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance.

Post review during supervision.

Procurement survey that verifying: • procurement

process is transparent

• adequate complaint handling system in place

• adequate disclosure in place

- 71 -

Implement provisions of Keppres 80/2003 related to the following: a) Removal of the restriction on bidding to bidders registered in the respective district area only, and open the competition to qualified bidders. b) Ensuring that only appropriately trained/certified staff are involved in procurement decision/actions/monitoring, including the Pimpro, members of tender committee, as well as the Bawasda staff involved in procurement audit. c) Ensuring that at least one qualified representative of civil society participates in the bid evaluation process. d) Public disclosure of the following procurement documents: • procurement plans of kabupaten

work units; • contract rosters; and • project progress reports for all

kabupaten projects e) Conducting and public disclosure of an annual survey on the experience of bidders participating in kabupaten procurement, as well as views and perceptions of civil society about kabupaten procurement practices.

a) Copy of documents for three major contracts, including records on procurement processing which certify the required practices. b) A list of Pimpro, members of tender committee, and Bawasda indicating the relevant procurement training that they have received.xii c) A list of contracts indicating which had a qualified member of civil society participate in the bid evaluation process. d) and e) Copy of Quarterly Procurement Bulletin including results of annual survey and documents requiring public disclosures.

Review submitted documents to confirm satisfactory in form and substance. Submit letter to World Bank as condition of continued eligibility for investment certifying that the required documentation for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance.

•

Investment Phase (Year 2) Implement provisions of Keppres 80/2003 related to the following: a) ensuring professionalism of procurement function; and b) efficient and effective handling of complaints

a) List of Pimpro, members of tender committee, and Bawasda staff involved in procurement audit showing that at least 50% are professionally certifiedxiii b) List of complaints and how handled showing at least 75% of complaints are addressed appropriately and within the established deadline, and sanctions are imposed as published in the Quarterly Procurement Bulletin.

Review submitted documents to confirm satisfactory in form and substance. Submit letter to World Bank as condition of continued eligibility for investment certifying that the required documentation for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance.

Post review during supervision.

Procurement survey that verifying efficient and effective handling of complaints

- 72 -

Reduce procurement delays and improve timeliness of award of contracts.

Copy of the Quarterly Procurement Bulletin showing additional information on the length of time of bid evaluation process and showing that at least 75% of bids for that period awarded within bid validity period.

Procurement survey that verifying timeliness of contract awards and verifying disclosure

Ensure that all procurement activities are audited by Bawasda, and results of audit included in Bawasda’s regular audit report.

Copy of report on audit of procurement done by Bawasda.

Analyze and report on price trends Copy of the Quarterly Procurement Bulletin showing trends in unit costs and prices.

Procurement survey that verifying unit prices and related quality of construction / goods

i For the first batch of kabupatens (15 kabupatens participate in Preparation Phase), these requirements must be met

within 3 months after Loan Negotiation.ii

The 9 provinces are: West Sumatera, Banten, West Java, Central Java, DI Yogyakarta, East Java, Gorontalo, North Sulawesi, and South Sulawesi.iii

Fiscal Capacity is according to Ministry of Finance Decree (KMK) No.538/KMK.07/2003 dated December 12, 2003 concerning Fiscal Capacity Map. iv

Only applied to the second batch of kabupatens.v Safeguard Framework is including safeguard in social (land acquisition, resettlement and indigenous people) and

environmentalvi

These requirements can be combined and covered in a single SK Bupati as appropriate. To be available within 3 months after Loan Negotiation for the first batch of kabupatens.vii

These verifications can be combined into a single letter as appropriate.viii

Only for second batch of kabupatens.ix

Focal Point to provide to Local Project Management Unit.x Dir Keuangan Daerah (with capacity building form Secretariat of LPKPP).

xi Civil society, NGOs, and Secretariat of LPKPP.

xii Assuming that the national procurement certification system is not yet in place. If the national procurement

certification system is in place, this verification will be those who have been certified under the system.xiii

Assuming that national certification system is in place.

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Attachment 2 to Annex 2 - List of the Kabupaten in 9 Provinces of ILGR

I. West Sumatera 47 Kab. Klaten 95 Kab. Tulungagung 1 Kab. 50 Kota 48 Kab. Kudus VII. Gorontalo 2 Kab. Agam 49 Kab. Magelang 96 Kab. Boalemo 3 Kab. Dharmasraya 50 Kab. Pati 97 Kab. Bonebolango 4 Kab. Kep. Mentawai 51 Kab. Pekalongan 98 Kab. Gorontalo 5 Kab. Pdg. Pariaman 52 Kab. Pemalang 99 Kab. Pohuwato 6 Kab. Pasaman 53 Kab. Purbalingga VIII. North Sulawesi 7 Kab. Pasaman Barat 54 Kab. Purworejo 100 Kab. Bolmong 8 Kab. Pes. Selatan 55 Kab. Rembang 101 Kab. Minahasa 9 Kab. S.Lunto Sij. 56 Kab. Semarang 102 Kab. Minahasa Utara 10 Kab. Solok 57 Kab. Sragen 103 Kab. Minahasa Selatan 11 Kab. Solok Selatan 58 Kab. Sukoharjo 104 Kab. Kep. Sangihe 12 Kab. Tanah Datar 59 Kab. Tegal 105 Kab. Kep. Talaud II. Banten 60 Kab. Temanggung IX. South Sulawesi 13 Kab. Lebak 61 Kab. Wonogiri 106 Kab. Bantaeng 14 Kab. Pandeglang 62 Kab. Wonosobo 107 Kab. Barru 15 Kab. Serang V. DI Yogyakarta 108 Kab. Bone 16 Kab. Tangerang 63 Kab. Bantul 109 Kab. Bulukumba III. West Java 64 Kab. G. Kidul 110 Kab. Enrekang 17 Kab. Bandung 65 Kab. Kulon Progo 111 Kab. Gowa 18 Kab. Bekasi 66 Kab. Sleman 112 Kab. Jeneponto 19 Kab. Bogor VI. East Java 113 Kab. Luwu 20 Kab. Ciamis 67 Kab. Bangkalan 114 Kab. Luwu Timur 21 Kab. Cianjur 68 Kab. Banyuwangi 115 Kab. Luwu Utara 22 Kab. Cirebon 69 Kab. Blitar 116 Kab. Maros 23 Kab. Depok 70 Kab. Bojonegoro 117 Kab. Majene 24 Kab. Garut 71 Kab. Bondowoso 118 Kab. Mamasa 25 Kab. Indramayu 72 Kab. Gresik 119 Kab. Mamuju 26 Kab. Karawang 73 Kab. Jember 120 Kab. Mamuju Utara 27 Kab. Kuningan 74 Kab. Jombang 121 Kab. Pangkep 28 Kab. Majalengka 75 Kab. Kediri 122 Kab. Pinrang 29 Kab. Purwakarta 76 Kab. Lamongan 123 Kab. Polewali Mamasa 30 Kab. Subang 77 Kab. Lumajang 124 Kab. Selayar 31 Kab. Sukabumi 78 Kab. Madiun 125 Kab. Sidrap 32 Kab. Sumedang 79 Kab. Magetan 126 Kab. Sinjai 33 Kab. Tasikmalaya 80 Kab. Malang 127 Kab. Soppeng IV. Central Java 81 Kab. Mojokerto 128 Kab. Takalar 34 Kab. Banjarnegara 82 Kab. Nganjuk 129 Kab. Tana Toraja 35 Kab. Banyumas 83 Kab. Ngawi 130 Kab. Wajo 36 Kab. Batang 84 Kab. Pacitan 37 Kab. Blora 85 Kab. Pamekasan 38 Kab. Boyolali 86 Kab. Pasuruan 39 Kab. Brebes 87 Kab. Ponorogo 40 Kab. Cilacap 88 Kab. Probolinggo 41 Kab. Demak 89 Kab. Sampang 42 Kab. Grobogan 90 Kab. Sidoarjo 43 Kab. Jepara 91 Kab. Situbondo 44 Kab. Karanganyar 92 Kab. Sumenep 45 Kab. Kebumen 93 Kab. Trenggalek 46 Kab. Kendal 94 Kab. Tuban

Note:

Kabupatens participating in ILGR preparation (First Batch)

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Annex 3: Estimated Project Costs

INDONESIA: Initiatives for Local Governance Reform Project

Project Cost By Component Local

US $million Foreign

US $million Total

US $million A. Local Governance Reform 1.33 0.00 1.33 B. Poverty Targeted Investments 28.36 2.81 31.17 C. Implementation Support and Monitoring 10.78 1.12 11.89 Total Baseline Cost 40.48 3.92 44.39 Price Contigencies 1.60 0.16 1.76 Front-end Fee 0.15 0.15 Total Financing Required 42.08 4.22 46.30

Project Cost By Category Local

US $million Foreign

US $million Total

US $million Sub-project grants 25.25 2.81 31.18 Local Counterpart Fund 3.12 0.00 3.12 Goods/Consulting Services/Workshops/Trainings for Central Government

10.04 1.12 11.16

Local Government Reform Cost 1.33 0.00 1.33 Incremental Operating Costs - Honoraria 0.16 0.00 0.16 Incremental Operating Costs - Other 0.58 0.00 0.58 Total Baseline Cost 40.48 3.92 44.39 Unallocated 1.60 0.16 1.76 Front-end Fee 0.15 0.15 Total Financing Required 42.08 4.22 46.30

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Annex 4: Cost Benefit Analysis Summary

INDONESIA: Initiatives for Local Governance Reform Project

Summary of Benefits and Costs:See main text below.

Main Assumptions:See main text below.

Sensitivity analysis / Switching values of critical items:See main text below.

Economic Justification & Analysis

Although the majority of ILGR’s resources focus on physical investments aimed at poverty alleviation in rural areas, the main development objective of the project is to enhance the efficiency and effectiveness of the planning and resource allocation process of participating kabupatens, leading to more appropriate, and better quality infrastructure and service delivery in the context of an improved governance and accountability framework at the local level. This is consistent with the Bank’s Country Assistance Strategy (CAS), which supports decentralization and the investment climate by focusing on capacity enhancement and strengthening of accountability at local and central governments’ levels.

This Annex aims at justifying the design features and implementation arrangements of ILGR from an economic point of view. It will explain why there is a need for an ILGR type of interventions in the targeted kabupatens; present the approach to the economic analysis given the demand driven nature of the investment sub-projects and how the project’s design will promote economic efficiency in the use of funds; it will also discuss the main conclusions drawn from the fiscal analysis for 16 ILGR kabupatens before highlighting finally major risks of the project (the analysis was conducted when 16 kabupatens were facilitated. In June 2004, facilitation in one kabupaten, Bantaeng -South Sulawesi, was discontinued that change the total numbers of Batch 1 ILGR Kabupatens to 15 kabupatens).

I) The need for the intervention

ILGR targeted kabupatens are characterized by a relatively high level of poverty. Despite progress in governance related reforms, they still manifest weaknesses in institutions and lack of accountability. Compared to the national average, income poverty indicators deteriorated substantially despite the moderate improvement in lowering the number of the poor over time. The average poverty head count index in ILGR kabupatens stood at 19.7% in 2002, higher than the 18.2% national level poverty rate. In 1999, it registered 22.5%, significantly lower than the national poverty rate of 23.4%. In 2002, Amongst the 15 Kabupatens, the number of kabupatens whose poverty level stands above the national level increased to 7 compared to 6 in 1999. Six kabupatens experienced worsened poverty levels compared to 1999. See table 1 and chart 1 below

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Table 1. Poverty Head Count Index 1999 (%) 2002*(%) National Poverty Rate 23.4 18.2 Average ILGR Kabupaten 22.5 19.7

Source: National Poverty Rate: BPS Estimate (2003), Kabupaten’s Poverty Rate: DAU Data Base, MOF (2002-2003)

Chart 1. ILGR Kabupatens Poverty Rate, 1999-2002

0%5%

10%15%20%25%30%35%40%

Tan

ahD

atar

Tak

alar

Bul

ukum

ba

Boa

lem

o

Bol

man

g

Sol

ok

Gow

a

Ban

tul

Leb

ak

Maj

alen

gka

Nga

wi

Mag

elan

g

Lam

onga

n

Keb

umen

Ban

dung

Poverty Rate 1999 Poverty Rate 2002

National Poverty Rate 1999 National Poverty Rate 2002

Source: National Poverty Rate: BPS Estimate (2002), Kabupaten’s Poverty Rate: MOF (2002-03)

The majority of ILGR Kabupatens still experience considerable levels of deprivation despite improvements in income. Non-income indicators of poverty reveal higher levels of needs in ILGR kabupatens compared to the national average. 7 out of 15 of ILGR kabupatens have a higher proportion of population without access to sanitation and to safe water compared to the national average (see chart 2a and 2b below).

Chart 2a. Proportion of Household Without Access

to Proper Sanitation

0%10%20%30%

40%50%60%70%

Boa

lem

o

Sol

ok

Bol

mon

g

Leba

k

Bul

ukum

ba

Tak

alar

Tan

ah

Keb

umen

Nga

wi

Ban

dung

Mag

elan

g

Go

wa

Lam

onga

n

Maj

alen

gka

Ban

tul

Prop. Household w ithout access to Proper Sanitation

National Average

Chart 2b. Proportion of Household Without Access to Safe Water

0%

10%

20%

30%

40%

50%

60%

Prop. Household without access to Safe Water

National Average

Source: SUSENAS 2002

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Despite a reform-minded executive and progress in implementing “good governance” related measures, corruption is still pervasive. The GDS 2002 revealed that corruption is rather systemic with money politics at the political level, corruption in core government operations such as recruitment, and government procurement, as well as petty corruption at the service delivery level all widespread. See Charts 3 below.

Charts 3. Results of GDS 2002 –Governance Situation in ILGR Kabupatens

People perceive that public service is improving … (People’s perception on public service in Bupati office during 2001-2002)

But corruption still linger… (NGO activist’s perception on the level of corruption in various government offices)

43.5% 42.0% 42.5%

26.4% 26.2%

2.2%2.2%1.2%

29.2%

0%10%20%30%40%50%60%70%80%

AVE ILGR (22KAB)

AVENONILGR(137)

NATIONALAVERAGE

Worse Equal Better

0102030405060

Bupati'sOffice

DPRD Health Dinas Sub-District Village

ILGR Non-ILGR

%

Transparency still low… (Percentage of NGO Activist who perceived that Budget transparency is high)

… and law enforcement still weak (Most common solution for misconduct by village officials).

Source: Governance and Decentralization Survey 2002.

10

12

14

16

18

20

22

ILGR Non ILGR

%

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II) Methodology for the Economic Analysis

ILGR is not a traditional investment project. It is rather a multisectoral intervention, which tests an innovative approach for participatory, demand driven investment planning, budgeting, execution and maintenance of projects at the district level in the newly decentralized context of Indonesia. As such, an economic internal rate of return (EIRR) for ILGR cannot be calculated prior to project implementation, because the economic costs and benefits of the individual sub-projects financed by ILGR cannot be evaluated ex ante. The investments sub-project will be decided during the implementation of ILGR on a purely demand driven basis at the local level, following a participatory poverty assessment in which strategic poverty reduction priorities are set and types of investment sub-projects are identified by local stakeholders.

The project’s implementation will seek to ensure however that economic efficiency in the use of funds is duly regarded through the methodology agreed upon with the participating kabupatens for the selection and evaluation of ILGR financed sub-projects. Sub-projects are identified, designed and appraised during the course of ILGR implementation. To ensure that only economically and socially viable sub-projects are approved for funding, and that the investments are implemented cost-effectively and sustained, the approach to choosing sub-projects to be included in the Project Operational Manual as part of the project design, will involve the following:

1. Identification of eligibility and appraisal criteria to guide selection of sub-projects for funding;2. Use of unit cost- standards and measures to guide sub-project appraisal;3. Agreement on project performance indicators and a management information system to measure

and monitor the performance and impact of the project; and4. Provision of technical assistance and training to enhance capacity in project management and

implementation.

1. Eligibility and Appraisal Criteria

To enhance chances of achieving ILGR’s objectives and benefits, some principles will need to be agreed to determine which sub-projects would be eligible for funding. Eligibility principles would include:

• Sub-project in line with the priorities of the Poverty Reduction Strategy and Action Plan (PRSAP);• Sub-project is socially and/or economically justifiable;• The sponsoring entity is capable of effectively managing the implementation of the sub-project;• Beneficiary communities are involved in decision making related to and/or management of various

aspects of the sub-project such as planning, implementation and supervision.

Similarly appraisal criteria must be articulated and agreed upon for assessing the viability of eligible sub-projects and their selection for funding under ILGR. The method of appraisal will vary depending on the nature and size of the sub-project and will be specified in ILGR’s Operations Manual. Typically, it will be based on cost effectiveness or least cost analysis for most projects, and selection will be agreed on a case by case basis. A qualitative description of demonstrable positive economic effect will be a precondition for any funding approval. The ILGR team in conjunction with several sectoral technical staff will develop appraisal criteria of sub-projects consistent with sectoral technical standards. The eligibility and appraisal criteria must be laid out in ILGR Operational Manual that will guide local staff and stakeholders in selecting and appraising sub-projects for funding.

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2. Cost Effectiveness Measures to Enhance Sub-Project Selection and Implementation

A database of unit costs shall be used for each kabupaten . The data will be compiled from unit costs of items typically found in the bill of quantities; this database will be updated regularly, typically once every six months. The unit cost database for each area will be used as a reference against which to judge and rank the sub-projects being proposed for financing, on the basis of their cost effectiveness. In addition, the database will play an important role in cost control both as a reference during the selection of contractors, especially for direct contracting, and during contract execution. 3. Project Performance Indicators and MIS

In order to measure and monitor the performance and impact of the sub-projects throughout and after implementation, specific tools will be developed as part of the Monitoring and Evaluation framework (see Annex 2).

4. Capacity Enhancement for Project Management and Implementation

ILGR funding includes support for technical assistance and training to strengthen project management at the local level, including sub-project selection, appraisal and supervision. Accordingly, appropriate training will be provided for the project management teams and to kabupaten staff before selection of sub-projects and during implementation. The training will concentrate on economic infrastructure sub-projects (roads, water supply, irrigation schemes) and could include technically complex projects where the choice of appropriate technologies is critical for the sustainability of the facility built. It would also selectively strengthen the capacity of sub-project beneficiaries with a view to enhance their capacities to oversee sub-project implementation and to operate and maintain the investments created by ILGR.

III) Expected Benefits and Costs

A conventional economic analysis of ILGR will fail to capture the various expected potential benefits from the project. It renders its important however to better identify the nature of these benefits, and where possible their scope, in view of designing the appropriate tools and indicators for ex-post monitoring and evaluation system. It is nevertheless important to note that ILGR effectively generates two different sets of economic benefits. First, from Components A and C, there are the expected benefits from improved governance and accountability in the kabupatens. Second, from Component B, there are the expected benefits from the investment sub-projects.

With respect to quantifiable economic benefits, which will mainly accrue as a result of sub-projects implementation, the programmatic nature of the project does not allow a detailed cost-benefit calculation ex-ante. However, experience from similar projects in Indonesia and other regions indicates that demand driven projects, involving community participation are highly cost-effective and economically viable. Because communities are actively involved in the prioritization, implementation, operations and maintenance, it can be assumed that the projects they select will be of high priority and socially productive.

In the case of ILGR, kabupatens that recently completed their PRSAP formulated priorities for the use of investment financing.

During the mid-term review (MTR), the project management unit will run a detailed economic analysis of implemented sub-projects under ILGR in order to estimate benefits generated and identify problems (if any)

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that need to be addressed.

Non-quantifiable benefits are also expected to be substantial as a result of the governance and institutional reforms introduced by the project. They are however more difficult to measure ex-ante. The project’s monitoring and evaluation system described in Annex-2 will make sure to devise the necessary tools and indicators to measure outputs and outcomes generated by these reforms and their induced benefits, the most important of which are the following:

Improved governance, enhanced public participation and accountability of local governments to their constituencies as a result of the endorsement and implementation of a comprehensive package of reform measures (see Annex 2) in the areas of poverty reduction, participation, transparency, procurement and financial management. For example, the absence of an enabling legal framework and of modern financial management policies and weaknesses in financial management practices in the areas such as budget formulation, execution, revenue collections and accountability for public expenditure at the kabupaten level undermine both the reporting on the general government sector and the capacities of local governments to absorb the functions which were assigned to them after decentralization. Although more substantial progress in reforms would be feasible only after the new central government regulatory changes are fully rolled out, the FM reforms proposed under this project will nevertheless bring these regions on to the path towards more effective public financial management by introducing necessary basic and initial steps in support of that.

Based on the review of other FM reform projects in other countries following decentralization (Philippines, Venezuela, Ecuador, Guatemala, Thailand), fiscal savings, efficiency and effectiveness gains would be generated thus improving the accountability of local government to the public.

Similarly, review of procurement reform projects undertaken in other developing countries (Philippines, Bangladesh) shows that benefits in terms of increased competition and lower prices, decreased contracting costs, and timeliness of contract execution would greatly enhance the quality of service delivery and people’s satisfaction with it.

Institutional impact on decentralized, demand driven and participatory planning and delivery of public services as a result of opening up the planning process. Benefits are derived from participation of local communities in enhancing project effectiveness through the mobilization of greater resources under the same budget to finance pro-poor projects, and in improving economic efficiency as underutilized labor and indigenous knowledge are employed. Local people will be able to make rational choices by selecting the types of services best fit to their local preferences allowing for variations across kabupatens in the type and quality of service delivery. This will improve the allocative efficiency of investments on the one hand and increase the sense of immediate responsibility and ownership by the community beneficiaries and positive externalities and spillover effects generated as innovative ideas are shared with other communities.

Lessons learnt about the implementation of GOI’s decentralization strategy, especially with respect to the transfer of powers and functions to local governments in the area of public service delivery, as a result of ILGR’s approach and arrangements to project preparation and implementation. The latter will allow for the provision of valuable feedback to government policy makers and the development community on the benefits and risks of decentralization and its working arrangements. These lessons could serve to provide policy recommendations for necessary corrective measures aimed at maximizing the benefits of decentralization for more efficient service delivery at the local level.

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IV) Fiscal analysis

The Fiscal Analysis examined the detailed fiscal situation of the kabupatens participating in the first phase of ILGR, and analyzed the fiscal impact of the project. Several findings served to guide design features of ILGR.

ILGR kabupatens fiscal profile

1. ILGR kabupatens accumulated sizeable surpluses and recorded a relatively strong overall fiscal position in 2001 and 2002 in line with the generic pattern exhibited across other local governments. The size of these surpluses is considerable both in absolute and relative terms. They varied between US$3 and 4 million, reaching 9.61% and 9.73% of the kabupaten’s overall budget in 2001 and 2002 respectively. When compared to the size of their total development expenditures, the surplus accounted for 48.1% in 2001 and 33.5% in 2002. Reported surpluses were primarily unplanned, and to a large extent caused by internal organizational and administrative constraints encountered throughout the public expenditure and revenue management cycle and process. Overestimation of revenues on the one hand and savings in planned development spending resulting from limited absorptive capacity and conservative spending stance explain part of these surpluses.

The amount of ILGR funds to be channeled to the kabupatens is relatively small compared to the surpluses. The latter would absorb any incremental O&M resulting from ILGR investment sub-projects.

2. Despite high growth rates of total revenues (25% on average, compared to 15.5% for local governments during 2001-2002), ILGR kabupatens have a lower revenue availability per capita (Rp. 432,310 compared to Rp. 445,069 nationally in 2002). They rely more heavily on higher level governments transfers (especially the Dana Alokasi Umum- DAU) for more than 90% of their revenues, and have very limited own resource revenues (5 to 8% of total revenues on average). While transfers provide a growing sources of revenues without the costs associated with administering a local tax, they provide little incentives to the kabupatens to increase local resource mobilization. In the short-term, predictability, regularity and timeliness of receipt of transfers are thus important factors affecting budget planning and execution. In the medium to long-term however, improving revenue generation efforts remains the key for consolidating the fiscal performance and for improving and maintaining service delivery overtime.

3. Unlike urban local governments, levies rather than taxes constitute the major source of own revenues. Most of the nine local taxes allowed by law, are more buoyant in urban areas than in rural areas

(tax on motor vehicles, transfer of ownership, fuel tax, hotel & restaurant, entertainment, billboard/advertisement, street lighting, and parking tax). In addition, Kabupatens prefer to issue levies because of the less stringent conditions to abide by and the high cost related to administrating taxes. Yet in most kabupatens new levies have not contributed much to local own revenues and there is a need to review the kabupatens approach to own revenue generation.

4. Weak revenue generation is largely explained by the level and quality of institutional arrangements for revenue management, more specifically: i) Feeble tax administration and collection that stands far below potential, ii) lack of skills for revenue planning and forecasting often underestimate iv) absence of integrated financial management information system, and v) uncoordinated role assignment for revenue management at the local level. The project will provide necessary technical assistance in this regard.

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5. Kabupatens spend most of their revenues on recurrent expenditures (on average, around 71.82% of total expenditure in 2002 revenues) especially on wages and salaries. The latter absorbed most of the routine budget with a share of 79.2% in 2002. This leaves little funds for capital expenditure. They also spend very little on Operations and Maintenance (O & M) expenses with an average share amounting to 1.29% and 1.58% of total routine expenditure in 2001 and 2002 respectively. These shares are considerably lower than the national and the kota averages which stood at 2.2 % and 2.9% respectively. While there is a large degree of mis-recording O&M spending, the latter remains very low and is not set to increase over time through policy induced measures, which poses the danger of infrastructure and services deterioration at a time where the needs are increasing.

6. Despite the growth in development spending (around 45% in the last two years) ILGR kabupaten spend less on average than other districts (29.43% in 2002, compared to 31.69% at the national level). This spending is concentrated in four main sectors: transport including roads and bridges construction and rehabilitation (25 to 28%), Government apparatus (13%); education (10%); and regional Development and Settlement sector (10%) including capital investment in local owned enterprises. Agriculture accounted for 6% and included livestock and seed development projects, and some agricultural extensions projects. By concentrating on roads and infrastructure, ILGR will maximize its impact in improving the effectiveness of budgetary resource allocation as the local ministry for public works consumes the largest share of the development budget.

7. ILGR kabupatens maintain a low level of indebtedness (debt stock to general revenues) and debt-servicing ratio, mainly due to the prohibition to borrow imposed by central government. Nevertheless, the performance of the kabupatens in repaying debt obligations varied across regions, with at least one kabupaten defaulting on its dues and its debt categorized as bad loans.

Chart 4. Sectoral Distribution of Development Expenditure (2002)

S e c t o r a l D i s t r i b u t i o n o f D e v e lo p m e n t E x p e n d i t u r e s

Agr i c6%

transport

29%

Education10%

Health7%

Gover nment Apparatus13%

Other10%

water & i r r igat ion4%

Trade & r egional Business deevelopment

5%

Housing6%

Regional Development and Settlement

10%

Under the existing reporting arrangements, the assessment of creditworthiness remains very difficult and does not generate the right incentives for further transparency with regard to debt and financing

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transactions. Through the financial management reform, ILGR will allow a better enforcement of the regulatory reporting and disclosure requirements and monitoring the indebtedness levels of these kabupatens .

Debt Stock/GAR* Debt Stock/GAR

Bandung 0.27% Gowa 7.89% Bantaeng 2.77% Kebumen 0.33%

Bantul 0.92% Lebak 0.08% Boalemo 0% Magelang 0.35%

Bulukumba 2.11% Majalengka 0.04%Gorontalo 0.43% PP 107 allowed limit 75%

Note: * GAR = General APBD Revenue = Total Revenue - (DAK+ emergency fund other loans+other earmarked revenues) should not exceed 75% as per Article 6 PP 107/2000.

Fiscal impact

ILGR funds are small enough so as not to have a significant fiscal impact at the macroeconomic level. They represent 0.017% of the national expenditure (2004), and is only a small component of the national Development expenditures 0.093% . At the local level, ILGR covers 15 of the 440 local governments (no. of local governments as of October 2004) in the country with an estimated population of 212 million (BPS 2002) representing 8.9% of Indonesia’s overall population. Depending on the location and population size of the kabupatens, ILGR funds will represent between 1.1 and 5.1 % of the local budget in 2002 and around 5 to 18 % of development expenditures. Beside the potential ILGR funds, financing from other donors, local government revenue, and Central Government transfers constitute the overall pool of funds available for financing development expenditures at the kabupaten level. In addition ILGR sub-projects are financed in the form of grant from central government to local government, no expense for cost recovery is expected

Kabupatens should be able to meet their financial commitments towards the project in terms of additional O&M without causing deterioration in their finances. Because trend projections could not be made due to the lack of time series data, and to the changes in the budget and financial statement presentation of kabupatens, assumptions were developed based on existing data under two scenarios: with and without ILGR. The objective was to determine the extent to which the kabupatens could absorb ILGR funds while ensuring that sufficient funds are set aside each year for operations and maintenance of the investments. The accumulation of surplus, the stable and steady stream of transfers, as well as the gradual improvement in their revenue generation effort as a result of the TA component of the project should allow the kabupatens to sustain their commitments, while maintaining a positive fiscal stance.

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ILGR kabupatens fiscal profile at a glance

ILGR kabupatens enjoy a surplus of surpluses Mainly resulting from over-reliance on transfers

With a growing but still meager revenue base Largely absorbed by routine expenditures

With little left for capital expenditures. And a low level of fiscal capacity

ILGRP Kabupaten's Surplus/RGDP

3.60%3.30%

0%1%

2%3%

4%

Sol

okT

anah

Ban

dung

Maj

alen

gkK

ebum

enM

agel

ang

Ban

tul

Nga

wi

Bol

aang

Ban

taen

gB

uluk

umba

Tak

alar

Leba

kB

oale

mo

Lam

onga

nG

ow

aSurplus/RGDP 2001Surplus/RGDP 2002Surplus/RGDP Kab. Average 2002Surplus/RGDP National Average 2002

Share of Transfer in Total Revenue (2002)

89.5%90.0%

75%80%85%90%95%

100%

Tana

h D

atar

Sol

ok

Leba

k

Ban

dung

Maj

alen

gka

Keb

umen

Mag

elan

g

Ban

tul

Nga

wi

Lam

onga

n

Boa

lem

o

Bol

aang

Gow

a

Taka

lar

Ban

taen

g

Bul

ukum

ba

Transfers /tot rev Average ILGRP

National Average

0.64%

1.4%

0.0%0.3%0.6%0.9%1.2%1.5%1.8%

Sol

okTa

nah

Dat

arB

andu

ngM

ajal

engk

aK

ebum

enM

agel

ang

Bant

ulN

gaw

i

Bol

aang

Ban

taen

g

Bul

ukum

baTa

kala

rLe

bak

Boal

emo

Lam

onga

nG

owa

2001 2002Average 2001 Average 2002

3.7%4.7%

0.0%4.0%8.0%

12.0%16.0%

Tan

ah

Sol

ok

Leba

kB

andu

ng

Maj

alen

gka

Keb

umen

Mag

elan

g

Ban

tul

Nga

wi

Lam

onga

n

Boa

lem

oB

olaa

ng

Gow

aT

akal

ar

Ban

taen

g

Bul

ukum

ba

2001 2002Average 2001 Average 2002

3

13

00

4

8

12

16

High Medium Low

High

Medium

Low

75.7%

69.7%

0%20%40%60%80%

100%

Tana

h D

atar

Solo

kLe

bak

Band

ung

Maj

alen

gka

Kebu

men

Mag

elang

Bant

ulN

gaw

iLa

mon

gan

Boale

mo

Bolaa

ngG

owa

Taka

lar

Bant

aeng

Bulu

kum

ba

2001 2002

Average 2001 Average 2002

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The positive fiscal impact of the project will result from various sources:

• The program will result in an increase in national and kabupaten fiscal resources being allocated to support poverty targeted development sub-projects in the initial group of kabupatens. Over the life of the project, local governments will have to commit an estimated Rp 41.66 billion by way of counterpart funds, while central government will be required to provide an estimated Rp. 3.71 billion towards the financing of the project. In taking a programmatic approach, it is proposed that the project’s demands on national level counterpart funds should largely be absorbed within the annual budget envelope. On the part of participating kabupatens, the analysis of fiscal revenues and expenditures shows that kabupatens should be able to meet their commitment to the programs for counterpart funds and additional O&M, assuming a steady flow of central and provincial transfers.

• A positive fiscal impact will result from the procurement reforms. Improving the competitiveness of the bidding process and rendering the procurement cycle more transparent and participative will result in a reduction in prices offered for public contracts, and would translate into additional savings in the budget of local government as experienced in the Bali Urban Infrastructure Improvement project.

• Improvement in the financial management systems of participating kabupatens will generate direct benefits to the budget. As kabupatens will design and implement major enhancements to their financial and treasury management systems including the receipt and payment system for recording transactions, financial planning to support the cash execution of the budget.

• Economic activities expected from the financed projects will yield tax revenues generated by additional income. These additional revenues would widen the pool of resources available for kabupatens to finance other development programs and O & M.

Overall, the fiscal impact of ILGR on both central and local government finances appears to be small while the potential benefits are expected to be greater. These benefits should increase markedly as more kabupatens join in implementing the program.

V) Risks

The main risk associated with ILGR implementation is the weaknesses in structures and institutional capacities could undermine the ability of local governments to formulate, plan and implement the required ILGR reforms and the poverty reduction strategy and action plan (PRSAP). To mitigate this risk, much of the pre-investment period will be spent in preparing detailed implementation plans for reforms and capacity building work of key regional institutions who will be involved in implementing these reforms.

The national project secretariat established at the central government level will play a major role in supervising and monitoring the implementation of the sub-projects in each kabupatens, and provide the necessary technical support and capacity building. Moreover, the necessity of meeting the transparency and participation core governance benchmarks as a key prerequisite for investment financing eligibility, as well as the close involvement of civil society in the multistakeholders forum and decision making process for the use of ILGR funds will limit these risks.

Other mechanisms have been embedded in the project’s design in order to ensure that projects financed by ILGR are economically viable:

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• In addition to the participatory nature of the process for investment sub-project selection and decision making, eligibility for financing is still verified by the procedures and standards agreed upon with local governments and presented in the Operations Manual.

• While in principle all kabupatens are eligible to participate in ILGR activities, only those that fulfill the governance reform requirements and implement local governance reform framework in the area of transparency, participation, financial management and procurement will benefit from the investment funds. The expected positive impact of these reforms on the allocative efficiency of funds and the public expenditure management system at the kabupaten level will improve the expected returns on investments

• Close and continuous monitoring of implementation of ongoing projects, supported by the requisite training and capacity building will contribute to enhancing the quality and impact of the projects

• ILGR has built-in incentives that would reward those kabupatens that perform well. Additional resources in the coming years are conditional on a good track record in implementing reforms and pushing forward the agenda on better social services delivery.

All together, the above-mentioned measures and approach would minimize the risks of ILGR selecting and financing sub-projects which are not economically viable and are not sustainable.

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Annex 5: Financial Summary

INDONESIA: Initiatives for Local Governance Reform Project

Year 1 Year 2 Year 3 Year 4 Total Total Project Costs 7.31 14.52 15.50 8.82 46.16 Front-end Fee 0.15 Total Project Financing 7.46 14.52 15.50 8.82 46.30 Financing IBRD/IDA 4.87 9.17 9.77 5.69 29.50 Government Central 0.03 0.05 0.05 0.04 0.18 Local 0.67 1.56 1.64 0.80 4.63 DFID 1.88 3.79 4.04 2.29 12.00 Total Project Financing 7.46 14.52 15.50 8.82 46.30

Note: Year 1 started in July 2005 Year 3 ended in June 2009

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Annex 6(A): Procurement Arrangements

INDONESIA: Initiatives for Local Governance Reform Project

ProcurementBackground and Framework for Procurement Reform

The 2003 Country Assistance Strategy (CAS) for Indonesia identified governance and institutional constraints as the most serious impediments preventing Indonesia from achieving its full economic potential and accelerating the pace of poverty reduction. Opaque public procurement practices, poor financial management, high levels of corruption, and decline in the quality of civil services have led to very low expectations of public services, and contributed to the high cost of doing business which, in turn, has deterred private sector development. Procurement reform is one of the priority areas for governance improvement.

The latest Country Procurement Assessment Review (CPAR) for Indonesia was conducted in 2000-2001, with full participation and endorsement from the Government of Indonesia (GOI). The CPAR identified that by all accounts, the public procurement system in Indonesia does not function well. It is not market driven, has been prone to misuse, and reduces value for money of public funds.

The above deficiencies mean that despite improvements in procurement regulations over the years, there is a continuing high risk of non-economic influence on public procurement and inefficient use of public resources. These deficiencies, unless tackled urgently, decisively and in a coordinated manner could become even more serious with the devolution of government functions to sub national levels under the decentralization program currently underway.The Country Portfolio Performance Review (CPPR) is conducted annually on the Indonesia Portfolio, to monitor the performance of on going projects. This Review includes one on procurement. The latest CPPR identified procurement delays and capacity of staff carrying out procurement as sources of corruption and inefficiency at all levels of project implementation.

General Framework

A public procurement system can be said to be well functioning if it achieves the objectives of transparency, competition, economy, efficiency, fairness and accountability. The following key elements can be used in determining to what extent a particular system meets these objectives.

1. A clear, comprehensive and transparent legal framework as characterized by: the presence of legal rules that are easily identifiable, that in themselves promote all the objectives stated above and that govern all aspects of the procurement process. At a minimum such rules should provide for: wide advertising of bidding opportunities, maintenance of records related to the procurement process, pre-disclosure of all criteria for contract award, contract awards based on objective criteria to the lowest evaluated bidder, public bid opening, access to a bidder complaints review mechanism, and disclosure of the results of the procurement process.

2. Clarity on functional responsibilities and accountabilities for the procurement function as characterized by a definition of: (a) those who have responsibilities for implementing procurement including preparation of bid documents and the decision on contract award, (b) who in the buying entities bears primary accountability for proper application of the procurement rules, and (c) means of enforcing these responsibilities and accountabilities including the application of appropriate sanctions.

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3. Related to (2) above, is the need for an institutional framework that differentiates between those who carry out the procurement function and those who have oversight responsibilities. In this regard, it is considered “good practice” to have an agency which has responsibility for overall procurement policy formulation and the authority to exercise oversight regarding proper application of the procurement rules and regulations. Attributes that make such an agency successful include: lack of involvement in internal operational procurement matters in the buying entities, functional independence and authority to enable it to oversee procurement in the entire public sector and an adequate budget and staff to enable it to carry out its responsibilities effectively.

4. Robust mechanisms for enforcement are essential. Clarity of rules and institutional arrangements may be of little value if there does not exist the means to enforce the rules and if the rules are not in fact enforced. The means of enforcement include the right to audits by the government of the procurement process and a bidder complaints review mechanism in which bidders have confidence.

The Decentralization and Regional Autonomy Laws require district/municipality governments (referred to as “local governments”) to be accountable for generating revenue for their own operational activities, and also for the expenditures that they make (including procurement). At the end of a fiscal year local governments have to demonstrate that public funds have been used and goods and services procured in an efficient and transparent manner. This requires adequate support systems. Considering current capacity and resources in most local governments, reforms in a number of areas (including procurement) at the local government level are necessary to ensure more accountable use of public funds.

The development objective for Procurement Reform at the Sub National Level under this Project is to increase efficiency, transparency, and accountability in the procurement of goods, works and services, which is carried out by the participating local governments. The project would support public procurement reform within the national context and framework

1

through streamlining appropriate procurement rules and procedures; building up procurement management capacity; and establishing a series of mechanisms to improve transparency and reduce corruption. This reform is crucial to strengthen the country's aid utilization capacity and aid effectiveness, and to gain donor group's confidence to justify development assistance to the sub-national level in Indonesia.

Procurement Reform at the Sub-National Level

The areas of procurement reform at the sub national level has been developed consistent with the background and framework and as a follow up of the CPAR recommendations and current assessment by the Bank and GOI of selected local governments. The reform program covers activities to meet the standard quality of procurement systems in particular local government that are required under the new Keppres 80/2003, with adequate institutional capacity and control mechanism to ensure sustainability.

1 The procurement reform program at the sub-national level should be within the current national legal framework, and be consistent with the reform

that has been initiated at the national level, as part of the long term country’s improvement of the public procurement regime.

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The objectives of the procurement reform at the sub national level are the following:

1. Ensure the professionalism of the procurement function and reduce the public perception of corruption in procurement, with effective complaint-handling and sanctions;

2. Reduce procurement delays and improve timeliness of award of contracts;3. Ensure that all procurement activities are audited by Bawasda, and results of the audit are

included in Bawasda’s regular audit report; and4. Analyze and report on trends of prices and quality of delivered services/goods/works.

The requirements for reform at each of the Project phase are included in the Procurement Reform Requirements under the overall local government governance framework for the project. Specifically, these include:

1. Expanding the role of existing unit within the local government structure to lead and coordinate the procurement reform. As the procurement regulatory and oversight function is currently not found, each participating local government will appoint an existing unit This Unit will have no procurement functions except for its own needs. It may provide technical advice on generic procurement issues referred to it, but shall not get involved or provide opinion on any specific procurement evaluation or contract award, thus preserving its pristine role as a policy, technical assistance, training and oversight unit., within the local government system, whose role will be expanded including to lead and coordinate the procurement reform efforts. In the long term, this unit will become the anchor (focal point) for procurement regulatory and oversight function. Local governments will follow national laws and are not expected to produce their own procurement rules and regulations, except for clarification of certain procurement practices.

2. Issuing an SK Bupati on the systems and procedures for implementation of the Keppres 80/2003. This decree will include the following:

(a) adoption of standard bidding documents for kabupaten procured contracts, regardless of source of funding.

(b) establishment of clear and robust mechanism for recording and handling of procurement complaints; and

(c) enforcement and public disclosure of sanctions relating to procurement deficiencies.

3. Implementing provisions of Keppres 80/2003 in the local government procurement practices.This area of reform will include the implementation of the new initiatives introduced by the Keppres 80/2003, particularly on the following detailed areas:

(a) removal of pre-qualification system for small contracts (<RP 50 Billion), and move towards a post qualification system for all contracts;

(b) public disclosure of results of bid evaluation, name of the winning bidder and contract scope/price;

(c) removal of the restriction on bidding to bidders registered in the respective district area only, and open the competition to qualified bidders;

(d) ensuring that only appropriately trained/certified staff are involved in procurement decision/actions/monitoring, including the Pimpro, members of tender committee, as well as the Bawasda staff involved in procurement audit;

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(e) ensuring that at least one qualified representative of civil society participates in the bid evaluation process;

(f) public disclosure of selected procurement documents.

4. Conducting annual survey on the experience of bidders participating in kabupaten procurement, as well as views and perceptions of civil society about kabupaten procurement practices.This survey will be made as regular practices as part of getting feedback for public procurement practices. The results of the survey will be made available to public, and serve as the basis for any sanctions that may be imposed.

5. Publication of Procurement Bulletin.The Procurement Anchor Unit (Focal Point) will quarterly publish a Procurement Bulletin, which will at least inform the following: public disclosure of the contract award; procurement plans of kabupaten work units; list of length of time of bid evaluation process for each contract package for that particular fiscal year as compared with the bid validity period; contract rosters; project progress reports for all kabupaten projects; and list of the status of complaints, and sanctions that have been imposed.

6. Strengthen capacity of staff involved in procurement.In the first year of Project implementation, the local government will collaborate with LPKPP in getting familiarized with provisions of Keppres 80/2003. This will be through a series of intensive workshops for socialization of the Keppres to local government staff involved in procurement decisions, audit, and policy formulation, and also to other stakeholders. In the longer term, particular attention will be placed to the new requirement of Keppres 80/2003, which requires staff involved in procurement to be professionally certified. This requirement will become effective 1 January 2007. The participating local governments will be required to assess the training and capacity building needs for their staff and institutions, who are involved in procurement decisions, audit, and policy formulation.

A. General

Procurement for the proposed project would be carried out in accordance with the World Bank’s "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Loan/Credit, the different procurement methods or consultant selection methods, estimated costs, prior review requirements, and time frame are agreed between the Government of Indonesia (GOI) and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

NCB procedures will follow the “Pelelangan Umum” as defined in the Keppres 80/2003. The clarification on “Pelelangan Umum” is provided in the project file. This clarification has been agreed with GOI in the last 2001 CPAR, and will be included as part of the Loan Agreement.

Procurement of Works: As part of the investment programs towards the poverty reduction strategy, there is a provision for Local Governments to construct infrastructure works or other public facilities. These

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programs is not identified until prior to the end of the Pre Investment stage of the project implementation. The updated Procurement Plan acceptable to the Bank will include these programs and will detail the specific contract packages for Works. The procurement packages will be grouped together ensuring economy and efficiency. The following procedures will be applied for Works:

§ For contracts below USD 50,000 equivalent: Shopping;§ For contracts between USD 50,000 and USD 1 million equivalent: National Competitive

Bidding (NCB); and§ For contracts above USD 1 million equivalent: International Competitive Bidding (ICB)

The procurement will be done using the Bank’s Standard Bidding Documents (SBD) for all ICB, the National SBD (for NCB) and the Request for Quotation (RfQ) agreed with and satisfactory to the Bank.

Procurement of Goods: Goods procured by the NPS, PMU, and PIU will include purchase of equipment and furniture for office use (such as: computers and printers for office work, telephones, fax machines, office furniture, and air conditioner), and office supplies. Office equipment and furniture will be under several contract packages for each procuring unit, and expected to be small contracts (less than USD 50,000 per package), therefore the procurement will follow shopping procedures. Office supplies are incremental costs and will be purchased following government procedures acceptable to the Bank based on SOE.

The procurement will be done using the Bank’s Standard Bidding Documents (SBD) for all ICB, and the National SBD (for NCB), and the Request for Quotation (RfQ) agreed with and satisfactory to the Bank.

Consultant Selection

1. Consulting Services for Implementation Support

The EA will be responsible for hiring the National Management Consultant (NMC), and 3 Regional Management Consultants (RMC).

The TORs for all of the above assignments will be prepared and agreed with the Bank prior to Negotiation.

An Evaluation Committee, comprising of qualified members In the case of RMCs2

acceptable to the Bank, will be formed at EA level, to quarterly assess the performance of the consultants. The assessment report will be sent to and agreed with the Bank on annual basis. This report will provide as the basis for continuation of the consultants’ services. The EA will ensure that this is included in the Special Conditions of Contract.

2 The members of Evaluation Committee should include representatives from the respective Local Governments

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The National Management Consultant (NMC) - The NMC will be based at the central level, to assist the EA in overall supervision, management, monitoring, and reporting of the project. Since the experience and qualification of the individual experts are of paramount importance for NMC, the NMC positions will be filled with 10 individual experts as follows: Team Leader, Procurement Specialist, Legal/Policy Specialist, Poverty Specialist, Safeguard/Planning Specialist, FM Specialist/Accountant, Monitoring/Evaluation Specialist, MIS/Fiscal/Database, Communication/Media Specialist, and Complaint Handling. The individuals will be contracted for 2 years (subject to annual performance review), which may be extended on yearly basis up to a total of 4 years.

The Regional Management Consultants (RMC) - The RMC will be hired by EA following QCBS procedures, but they will be based regionally Kabupaten Clusters. This could be within the same province, or intra-provinces. The main TOR for these consultants is to assist the Local Governments in implementing the reform as well as the investment programs. Each contract is expected to be between USD 3.0 million and USD 4.5 million equivalents for 4 years period. The RMC contracts will initially be for a 1 year period, with a provision of a possible extension until project completion subject to satisfactory performance and with prior approval from the Bank. The possibility of such an extension shall be clearly outlined in the TOR and RFP (including in the Special Conditions of Contracts), and shall be factored during evaluation. If the respective RMC does not perform well during the first 1 year, as reported by the Evaluation Committee’s report, the new recruitment process for RMC will be required, following the same selection procedures. Due to the required skills mix for this assignment, the consultants will be encouraged to enhance their capacity in carrying out the above assignment. For this purpose, the consultants may associate with other consultants/providers in the form of joint ventures or sub consultancy in accordance with para 1.12 of the Bank Consultant Guidelines. In such cases, the request for expression of interest will explicitly state this, and the expression of interest shall be submitted in the form of this association.

The contracts for the RMCs will include the selection and hiring of the Kabupaten Facilitators and other training and socialization activities that are not included in the NMC contracts. Facilitators will be hired by RMCs based on the required qualifications as described in the TOR and agreed contract terms and conditions. The facilitators are key to the supervision of the Project at the Kabupaten level. They consist of a group of skilled and professional people who are familiar with the social conditions of the respective Kabupaten where the Project is being implemented. Their role is mainly to assist the Kabupatens in preparing and implementing the Project, in addition to assessing the quality and readiness of particular Kabupatens in carrying out the Project. Based on previous experience in Indonesian projects, recruitment of facilitators will be conducted through open competition nationally, and facilitators must not come from the same areas as the Local Governments that they are assisting. In addition, any difference on facilitator salaries (with the same qualification) may create further social problems within the facilitators network. Therefore, facilitator salaries will be pre-determined as established by a market survey in local areas by the EA and acceptable to the Bank. The RMCs will be allowed a management fee for handling the facilitators.

2. Other Consulting Services/Study

As part of the Project’s main focus in improving the capacity and control system at the local level, the following consultant/NGO services are expected to be hired:

No. Consultant Est Amount(US$ thousand eq)

Selection Method

1. Consultant Services for Annual Review of Poverty Strategies and Budget Planning

90 CQS

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2. Consultant Services for Evaluation of Economic Feasibility and Cost Effectiveness

149 QCBS

3. Consultant Services for Procurement Survey 121 QCBS4. Consultant Services for Regional Financial

Accountability Assessment46 CQS

5. Consultant Services for GDS Impact Monitoring 344 QCBS6. Consultant Services for Qualitative Study of

Governance Reform166 QCBS

7. Consultant Services for Project Evaluation Survey 385 QCBS

In addition to the above list of consultants, each local government may also hire Design/Engineering Consultants as well as the Supervision Consultants at the local government level as part of the implementation of the construction works under the sub projects.

B. Assessment of the agency’s capacity to implement procurement

The last CPAR for Indonesia was carried out in February 2000, with the final report issued in February 2001, after which a new Keppres 80/2003 was issued to replace Keppres 18/2000. The detailed comparison and update between the two Keppres was provided separately in the Procurement Capacity Assessment Report (PCAR) which was conducted particularly for this project. However, it was observed that the new Keppres provides more basis for an open and competitive procurement process, with clear sanctions mechanisms and disclosure requirements.

Most findings and recommendations below are based on an assessment of selected local governments, and prior experience of Bank financed projects with the Executing Agency.

It was observed that all of the local governmentss have limited capacity and less than satisfactory procurement systems. The following actions will be conducted to minimize the procurement risks:

§ The executing agency at the central level will be the NPS, under Ministry of Home Affairs. At the local government level, there will be a PMU, which will coordinate the implementation of all of the reform and investment projects within the respective local government. Implementation of investment projects will be the responsibility of PIUs at the Dinas level. TORs for each organization unit will be included in the Project Operational Manual. All organizations are expected to be fully staffed by the Loan Effectiveness. The TOR should explicitly state that at least one person with procurement proficiency will be included in each procuring unit.

3

3 At the Executing Agency level, it was agreed that the tender committee members will comprise of full time and

qualified staff.

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§ A Project Operational Manual, to govern agreements between local government and communities, in the case of adopting any community participation activities, has been developed during project preparation, and the draft will be submitted to the Bank for comments prior to Negotiations. The final draft should be agreed by the Bank prior to Loan Effectiveness. The Project Operational Manual should include, but not be limited to, all applicable procurement, procedures, monitoring and reporting requirements under the project, the procurement reform outcome/impact, the procedures for preparing and issuing the procurement reform action plan (in the form of SK Bupati/Walikota), and the procurement reform requirements table. The details on the procurement reform action plans are available in the project file.

§ A training program on the Project Operational Manuals, including on procurement, will be conducted for all project actors. A special training program on selection of consultants will be provided to key project staff at central level.

§ As part of strengthening the capacity of the executing and implementing agencies, there will be sets of technical assistance teams hired under the project at the national level. These consultants will support governance reform activities, strategy and policy development/management, project implementation and sub project preparation, the MOF, and preparatory activities in new local governments. It is expected that at least the Project Management Consultant will be hired by loan effectiveness.

§ An Evaluation Committee, comprising of qualified members acceptable to the Bank, will be formed at the Executing Agency level, to assess quarterly the performance of the consultants. The assessment report will be sent to and agreed with the Bank on an annual basis. This report will provide the basis for continuation of the consultants’ services.

§ National Competitive Bidding (NCB) will follow the Open Competitive Bidding procedures (“Lelang Terbuka”) as described in Keppres 80/2003, subject to clarification

4

, as defined in CPAR. This clarification will be included in the Project Operational Manual, and part of the Legal Agreement. The selection of consultants will completely follow the Bank Consultant Guidelines. With the effectiveness of Keppres 80/2003, it is expected that the following actions will be more effectively implemented under the project: (i) transparency in the procurement process, including mandatory announcement of award of contracts in the public domain; (ii) sanctions and enforcement against collusive practices, both regarding consultants/bidders and government officials; (iii) sanctions and enforcement against poor performances of consultants/bidders.

§ Procurement processing will be the responsibility of the procuring unit. Therefore, in the case of investment projects, the procurement will be the responsibility of each PIU at the Dinas level. However, to maintain quality assurance and consistency in procurement, all correspondences with the Bank related to procurement (including requests for prior review) will be conducted through the Executing Agency at the central level, in which case both the procuring unit and the Executing Agency must have an agreement on the proposed procurement action or query.

The Assessment found that the overall procurement risk is high. Prior review thresholds, as found in the Procurement Plan, are based on this capacity assessment

4 Since Keppres 80/2003 was newly issued, there is not much orientation and dissemination taking place at time of Appraisal. Therefore, the

clarification attached herein still follows the one for Keppres 18/2000. The Bank will review the implementation of Keppres 80/2003 from time to time to update this clarification letter.

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C. Procurement Plan

GOI, at appraisal, developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team on April xx, 2005 and is available at the office of NPS of MOHA. It will also be available in the project’s file and in the Bank’s external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

D. Frequency of Procurement Supervision

In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended annual supervision missions to visit the field to carry out post review of procurement actions.

E. Details of the Procurement Arrangements Involving International Competition

1. Goods, Works, and Non Consulting Services

(a) List of contract packages to be procured following ICB:

N/A

(b) ICB/NCB contracts estimated to cost above US$ 1 million (Works) and US$ 100,000 (Goods) per contract will be subject to prior review by the Bank.

2. Consulting Services

(a) List of consulting assignments with short-list of international firms.

1 2 3 4 5 6 7Ref. No.

Description of Assignment Est Cost (in US$ million)

SelectionMethod

Reviewby

Bank

ExpectedProposals

SubmissionDate

Comments

1. Regional Management Consultant (RMC)

1,564,958 QCBS Prior August 05

5. Consultant Services for Qualitative Study of Governance Reform

165,982 QCBS Prior Jul 06

6. Consultant Services for Project Evaluation Survey

385,223 QCBS Prior Jul 06

(b) Consultancy services estimated to cost above US$ 100,000 (firms), US$ 50,000 (individuals) per contract and single source selection of consultants (firms) will be subject to prior review by the Bank.

(c) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to

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cost less than USD 400,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

Procurement methods (Table A)

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Annex 6(B): Financial Management and Disbursement ArrangementsINDONESIA: Initiatives for Local Governance Reform Project

Financial Management

1. Summary of the Financial Management AssessmentThe financial management assessment covers the central government unit, Ministry of Home Affair (MOHA), as well as participating local governments. The participating local governments are divided into three cluster for the assessment purposes. We conducted the assessment by visiting three kabupaten which represent each cluster area: Kabupaten Tanah Datar for Sumatra, Bandung for Java and Gowa for Sulawesi cluster. Basically all kabupatens mostly have similar financial management arrangement. The assessment covers both sources of funds for IDA/IBRD as well as DFID funds since DFID grants will be executed by the same units and follow similar arrangements.

Overall assessment of the project risk is high due to many issues on decentralization, including human resources capacity. The assessment includes an action plan to resolve any material issues and weaknesses. With completion of the action plan, the project will have acceptable financial management arrangements when it becomes effective.

Risk Analysis

Besides environment risk, there are several financial management risks to be addressed in the project. The technical implementation of the new Treasury Law, State Finance and Decentralization laws remains a challenge and may impact the proposed funds flow mechanisms.

The participating local governments (LGs) will submit a Letter of Agreement (signed by the Bupati and DPRD Speaker) to participate in the project, including their commitment to implement the Local Governance Reform Framework, establish the PMU and assign the task teams who will be responsible for the reform program.

Financial management capacity within the government is inadequate to effectively implement the project, especially in the new decentralization environment. Therefore, there are needs for further training and technical assistance to the project staff members, both at the central and local levels. Each cluster will have FM consultants to assist the LGs to implement the reform program.

A detailed analysis of the financial management risks of the country, proposed project entities, specific project features and related internal controls has been completed during the assessment and is summarized below. These risks have been rated High, Medium and Low.

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Table 1. Summary of Risk Assessment

Risks Assessment Summary Comments and Risk Mitigation Measures.

A. Inherent Country Risks1. Budgetary procedures Medium Overall progress in budgeting reforms is slow. The risks come from

inadequate implementation guidelines on the new budget law, i.e. transition from dual budget to unified budgeting system. There are many implementation guidelines which still need to be issued by MOF.

2. Public Sector Accounting Medium Public sector follows single entry and cash basis with a partially computerized system. An Accounting Standards Board has issued Exposure Drafts on modified accrual basis. Starting the implementation of the standards remains a challenge.

3. Auditing Arrangements Medium BPK has legal mandate for external audits of the government. Detail guidelines to exercise the mandate have not been issued yet.

Overall Inherent Country Risk

Medium

B. Entity specific risks1. Implementing Entity Organization

Medium Lead implementing agency is MOHA, which has experience in managing foreign financed projects.

2. Accounting capacity, staffing.

High Accounting capacity at MOHA is relatively weak, especially to implement the new government accounting standards since MOHA was used to apply their own system. MOF has started some accounting training program to all line ministries

3. Audit arrangements Medium Risks arise from integrity constraints in internal audit agencies of MOHA.4. Information systems. Reporting and monitoring.

High Risks arise from semi-automated accounting systems in government agencies, inability to deliver reliable and timely financial reports and inability of these systems to track outputs.

Overall Entity Specific Risk

High

C. Project Specific Risks1. Organization Structure High MOHA has experience in managing foreign financed projects. However, who

will staff this project has not been decided yet. We require MOHA to assign staff members who have adequate background and experience.

2. Budgetary procedures High Risks may arise from inherent weaknesses and delays in existing budget approval systems of GOI. All procurement process should begin prior to budget issuance and when the budget document is issued, contracts could be signed and executed.

3. Funds Flow Medium Treasury office will transfer the fund directly to third party account. Delays in payment process may affect the third party performance. The government needs to set up a working standard to process the payment.

4. Selection and output of consultants

High Substantial expenditures are included in TA which is traditionally vulnerable to internal control lapses. Mitigation through appropriate internal controls is prescribed in Project Operational Manual, i.e. consultant payment related to the presence of consultant in the field.

5. Sub-project investment implementation

High Multi sector project implementation and weak capacity of local government. The Project will provide technical assistance, including financial and procurement consultants.

6. Payment validation Medium Traditionally a weak area in Bank financed projects. To mitigate risks, additional documentation and internal control requirements will be prescribed in Project Operational Manual to enhance documentary trails.

7. Audit arrangements Medium Due to peer review result, the Bank and the government agreed to assign BPKP as the Bank financed project auditor. BPKP will work together with regional auditor (Bawasda). `Risks arise from integrity constraints in BPKP and Bawasda

Overall project specific Risk

High

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2. Audit Arrangements

Internal AuditBawasda, the internal auditor for local government, will audit the project accordingly. To support the financial management reform agenda, Bawasda will be trained as part of the project’s capacity building component.

External AuditThe NPS in MOHA will prepare consolidated project financial statements, including the DFID grants. The annual financial statement will have the same format as the financial statement in the FMR. An external auditor acceptable to the Bank will audit the financial statement. The annual audit report will be furnished to the Bank no later than six months after the end of the government’s fiscal year.

The NPS has agreed to appoint BPKP as the external project auditor. The audit assignment will be in accordance with the agreed Terms of Reference (see Attachment 1 to this Annex). The annual audited financial statement will have appropriate disclosure of the Special Account and FMR. The Letter of Agreement signed by Bupati and DPRD Speaker will include the acceptance of local government to the auditor assigned to audit the project financial statements. As part of the reform agenda, the audit report will be accessible to the public. 3. Disbursement Arrangements

Flow of Fund

The funds received by central government will be passed-on to local government under on-granting terms in accordance with the existing government regulation. The funds will be included in the local government’s budget (APBD) for the participating kabupatens.

The PIU in technical Dinas will be responsible to implement an agreed sub-project activities. Upon receive and verify a payment request from Implementing Dinas, Bagian Keuangan will issue a payment order and check to local bank. The local bank will transfer the fund directly to a third party (supplier/contractor) account. Bagian keuangan will provide a copy of payments order to PMU in Sekda as supporting document to prepare local government FMR as well as submit to KPPN for reimbursement.

After verification the reimbursement request, KPPN will issue payment orders (SP2D) to its operational bank to transfer the funds to the local government’s account. The operational bank will issue a debit memo to BI (Central Bank) to deduct a project special account. A copy of SP2D will send to DG Treasury as reconciliation document to the Special Account. Flow of fund and reporting mechanism shows in Chart 1.

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Chart 1. ILGR Flow of Fund and Reporting Mechanism

World Bank

MOFDG Treasury

KPPN

Finance Division

Implementing Dinas

MOHA (NPS)

Sekda (PMU)

Suppliers/ Contractors

Local Bank

Operational Bank

BI (Special Account)

invoicesreports

SPM

Reimbursement SPM

SP2D Daerah

SP2D reimbursement

SA Statement

Copy SPM reimbursement

W/A FMR

SA Replenishment

reports

reports

Debit Memo

FMR

SA Statement

Central

Regional

Legend:

Payment Request

Fund Transfer

Reports

transfer

transfer

SP2D Daerah

World Bank

MOFDG Treasury

KPPN

Finance Division

Implementing Dinas

MOHA (NPS)

Sekda (PMU)

Suppliers/ Contractors

Local Bank

Operational Bank

BI (Special Account)

invoicesreports

SPM

Reimbursement SPM

SP2D Daerah

SP2D reimbursement

SA Statement

Copy SPM reimbursement

W/A FMR

SA Replenishment

reports

reports

Debit Memo

FMR

SA Statement

Central

Regional

Legend:

Payment Request

Fund Transfer

Reports

transfer

transfer

SP2D Daerah

Action Plan

Table 2. Action Plan

Issues/ Problems Remedial Action Responsible Unit Due Date

1. Organization structure

Project organization structure in l

central and local government agreed and acceptable to the Bank

MOHA and Local Governments

Before Negotiation

2. Project management capacity

Capacity building and technical l

assistance to PMU staff in project financial management and FM reform agenda

MOHA and Local Governments

First year project implementation

3. Project Operational Manual (POM) or Juklak/Juknis

Draft POM (inc. financial l

management manual)POM completed and formally issued l

by GOI.

MOHA Before Negotiationl

Before l

Effectiveness

4. Budget & Funding for first year implementation

Draft government budget for year 1 l

is calculated and documented MOHA Before Negotiation

5. Circular letter (SE) by DG Budget

Draft SE on flow of fundl MOHA and MOF Before Effectiveness

6. Audit Arrangements Project auditor TOR agreedl MOHA/BPKP Before Negotiation

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Allocation of loan/credit proceeds (Table C)

Table C: Allocation of Loan/Credit/Grant Proceed

Amount in US$ million Expenditure Category IBRD IDA % DFID %

Sub-project Grants 19.64 ? 70 8.42 30 Good/Consulting Services/Workshop/Training for Central Government

7.81 ? 70 3.35 30

Incremental Operating Cost - Other 0.41 ? 70 0.18 30 Total Baseline Cost 27.85 ? - 11.94 - Unallocated 1.50 ? - 0.06 - Front-end Fee 0.15 - - - - Total Financing Required 29.50 ? - 12.00 -

Use of statements of expenditures (SOEs):

The project will follow FMR-based disbursement system. The supporting documents for national expenditures will be retained at NPS, whereas supporting documents for expenditures at district level, will be retained at the respective Regional PMU and implementing dinas. The documents will be made available to the Bank and auditors upon requests.

Special account: GOI will establish two Special Accounts (SAs) for IBRD/IDA and for DFID proceeds in US dollars at Bank Indonesia. The SAs will be under the name of the Directorate General of Treasury (DG Treasury), Ministry of Finance. The advance to be deposited to the SAs would be based on six-month project expenditures forecasting. In accordance with the government procedures, payments from the SAs against eligible project’s expenditures would be made by the Treasury Offices (KPPN). The DG Treasury will provide copies of the weekly SA bank statements to the NPS at MOHA. The NPS has the responsibility to prepare a consolidated project FMR which will be submitted to the Bank on a quarterly basis and used as the basis for SA replenishment.

Attachment to Annex 6(B)TERMS OF REFERENCE

for the Audit of Special Purpose Project Financial Statements

Objectives

The overall objectives of the audit are: (i) to enable the auditor to express a professional opinion on the project financial statements, the operation of the overall financial management system including internal controls, and compliance with financing agreements; (ii) to enable the auditor to verify financial management information required under FMR-based disbursement.

The audit should cover the entire project, i.e. covering all sources and application of funds by all

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implementing agencies. The auditor should visit the various implementation units and other agencies as considered necessary for the audit.

Scope

The audit will be carried out in accordance with International Standards of Auditing. It will include such tests and controls as the auditor considers necessary under the circumstances. Specific areas of coverage of the audit will include the following:

(1) An assessment of whether the project financial statements have been prepared in accordance with consistently applied generally accepted accounting principles and give a true and fair view of the operations of the project during the year and the financial position of the project at the close of the fiscal year. Any material deviations from the accounting principle and the impact of such departures on the project financial statements as presented would be stated;

(2) An assessment of the adequacy of the project financial management systems, including methods and records established to identify, assemble, analyze, classify, record and report on transactions and to maintain accountability for the related assets and liabilities. This would also include aspects such as adequacy and effectiveness of accounting, financial and operational controls, and any needs for revision; level of compliance with established policies, plans and procedures; reliability of accounting systems, data and financial reports; methods of remedying weak controls or creating them where there are none; verification of assets and liabilities; and integrity, controls, security and effectiveness of the operation of the computerized system (if any); and

(3) An assessment of compliance with provisions of financing agreements, especially those relating to accounting and financial matters. This would inter alia include verification that: (a) all external funds have been used in accordance with the conditions of the relevant financing

agreements, with due attention to economy and efficiency, and only for the purposes for which the financing was provided.

(b) counterpart funds have been provided and used in accordance with the relevant financing agreements, with due attention to economy and efficiency, and only for the purposes for which they were provided;

(c) expenditures charged to the project are eligible expenditures and have been correctly classified in accordance with the relevant financing agreement;

(d) goods and services financed have been procured in accordance with the relevant financing agreement;

(e) all necessary supporting documents, records, and accounts have been kept in respect of all project activities;

(f) clear linkages exist between the accounting records, including accounts books, and the Project Financial Statements;

(g) where Special Account has been used, it has been maintained in accordance with the provisions of the relevant financing agreement;

(h) FMR used as the basis for the submission of withdrawal applications accurately reflect expenditures and activities during the project period; and

(i) project expenditures as reported by the project implementation agencies are reconciled with the amounts withdrawn from the Special Account and the amounts deposited to the special account are reconciled with the amounts disbursed from Loan/Grants.

(4) An assessment of procurement management whether procurement performance has met procurement plan agreed at negotiations or subsequently updated and highlight key procurement issue (if any).

(5) An assessment of project implementation and whether financial and physical progress are consistent during the project period. The monitoring of expenditures in relation to physical progress is ensuring

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that the project is under proper financial control.

Project Financial Statements

Project Financial Statement prepared by the project executing agency would be based on the project’s compilation Financial Monitoring Reports (FMR) and should include: (i) Annual Project Sources and Uses of Funds; and (ii) Cumulative Project Sources and Uses of Funds. (iii) deposits and replenishments received from the Bank; (iv) withdrawals from the special accounts; and (v) the remaining balances of the special account at the end of the fiscal year. Sources of funds would show Loan/Credit, DFID grants, and GOI counterpart funds separately. Project expenditures would be summarized by main project components, disbursement categories and by project location (kabupaten) both consolidated for the current fiscal year and accumulated to date.

Special Account

The auditor should assess a reconciliation report between the project expenditures made from the special accounts and the withdrawals from the special accounts. Reconciliation should also be made with the amounts paid from the pre-financing account and direct payments (if any). The auditor should assess a reconciliation report between the amounts deposited to the special accounts and disbursed by the Bank to the special accounts. The auditor should asses the FMR as a basis for the submission of withdrawal applications, accurately reflect expenditures and activities during the project period. The auditor should (i) ascertain that the financial management system is reliable to produce the FMR and has met Bank’s requirement during the year; and (ii) asses the possible risks of continuing to use the method of disbursement in the future. The auditor should apply such review and tests of controls as the auditor considers necessary. These expenditures should be carefully checked eligibility against relevant financing agreements, and by reference to the Project Appraisal Document and other project documents. Ineligible expenditures should be identified.

Audit Report

The audit report shall contain the auditor’s opinion on the fairness of the project financial statements. The report should refer to the auditor’s TOR. The auditor should submit the report to the project executing agency who should then promptly forward one copy of the audited accounts and report to the Bank. It should be received by the Bank no later than six months after the end of the project’s fiscal year.

Management Letter

In addition to the audit reports, the auditor will prepare a “management letter,” in which the auditor will:

(a) give comments and observations on the accounting records, systems, and controls that were examined during the course of the audit; and identify specific deficiencies and areas of weakness in systems and controls and make recommendation for their improvement;

(b) give comments on economy, efficiency, and effectiveness in the use of resources;(c) report on the achievement of the planned results of the project;(d) report on the degree of compliance of each of the financial covenants on the financing agreement

and give comments, if any, on internal and external matters affecting such compliance;(e) communicate matters that have come to the auditor attention during the audit which might have a

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significant impact on the implementation of the project; and(f) any other matters that the auditors considers pertinent.

General

The auditor should be given access to all legal documents, correspondence, and any other information associated with the project and deemed necessary by the auditor. Confirmation should also be obtained of amounts disbursed and outstanding at the Bank.

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Annex 7: Project Processing Schedule

INDONESIA: Initiatives for Local Governance Reform Project

Project Schedule Planned ActualTime taken to prepare the project (months) 22 36 First Bank mission (identification) 11/01/2001 10/09/2001Appraisal mission departure 01/07/2004 01/19/2004Negotiations 05/10/2005 04/28/2005Planned Date of Effectiveness 10/01/2005

Prepared by:The project was jointly prepared by a project secretariat coordinated by Bappenas (Deputy for Regional Development), MOHA, and MOF and project teams from 15 pilot Kabupatens. Background studies and consultants were financed through a Japanese PHRD Trust Fund and facilitation support for the governace reform and pilot PRSP activities was supported from the DFID poverty Trust Fund.

Preparation assistance:Japan PHRD Grant TF 050504 $214,000, and TF050931 $455,000, and UK DFID TF051663 $840,743 and TF052572 $332,988.

Bank staff who worked on the project included: Name Speciality

Erman A. Rahman Task Team LeaderAsmeen M. Khan Task Team Leader of Project Preparation until February 2005Leni Dharmawan Local level and Kabupaten InstitutionsAhmad Alamsyah Kabupaten InstitutionsRevita Wahyudi Data AnalysisIsono Sadoko Social SafeguardsPaul McCarthyAnthony Toft

ParticipationLegal Counsel

Irfani Darma Civil SocietyFarida Zaituni EnvironmentImke Manicki Social AssessmentRizal Rivai Procurement ReformUnggul Suprayitno Financial ManagementYogana Prasta Disbursements, Project DesignRajiv Sondhi Financial ManagementMila Gregorio Financial ManagementZaki Fahmi Local Revenues and FinancesNilanjana Mukherjee Poverty Análysis and Strategy FormulationAngel Manembu Participatory Poverty AnalysisAlia Moubayed Economist, Fical and Poverty Analysis

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Lou Scura EconomistJohn Leonardo Economist, Local RevenuesColin Mellor Economist, Cost-BenefitCecilia BelitaSusan WongSteven BurgessJasmin ChakeriBert HofmanJoel HellmanAnne-Lise KlausenRobert ScoullerCynthia Dharmajaya

Cost Tables Monitoring and Evaluation Anti-corruption Decentralization Policy Decentralization Policy Governance and Political Economy Governance and anti-corruption Civil Engineer Program Assistant

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Annex 8: Documents in the Project File*

INDONESIA: Initiatives for Local Governance Reform Project

A. Project Implementation Plan

Project Operation Manual• Volume 0: Overview• Volume 1: Facilitator Preparation and Initial Facilitation• Volume 2: Institutionalization of Transparency and Participation• Volume 3: Financial Management Reform• Volume 4: Procurement Reform• Volume 5: Formulation of Poverty Reduction Strategy and Action Plan• Volume 6: Planning Process and Budget Decision Making• Volume 7: Social and Environmental Safeguard• Volume 8: Administration, Procurement and Financial Management of Sub-project• Volume 9: Monitoring, Evaluation and Reporting

Other Manuals and Guidelines• Local Governance Reform Framework• Manual of Perda Transparency and Participation Action Plan • Manual on How to Implement Reform

B. Bank Staff Assessments

Bank Mission Reports/Aide Memoire/Responses:• November 2001. Aide Memoire Identification Mission• March 2002. Aide Memoire Preparation Mission• August 2002. Aide Memoire Preparation Mission• March 2003. Governance Profile, Summaries of ILGR Field Reports• May 2003. Aide Memoire Preparation Mission• August 2003. Aide Memoire Pre-Appraisal Mission• November 2003. Financial Management Assessment Report• November 2003. Procurement Assessment Report• November 2003, Kabupaten Fiscal and Economic assessment• February 2004. Aide Memoire Appraisal Mission• December 2004. Aide Memoire Supervision Mission

C. Other

ILGR Preparation Modules, Studies and Reports• April 2003. Governance and Decentralization Survey Report• June 2003. Social Assessment Report• E-Government Report.• Kabupaten Environmental Safeguards Assessment Report• Pre-Service Training Manual for Kabupaten Facilitators• Donor matrix• February 2003, Modules for Poverty Training I – Preliminary Analysis

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• April 2003, Modules for Poverty Training II – Community Assessment Using PRA Tools• September 2004, Modules for DPRD Workshop on Good Governance• September 2004, Modules for Participatory Planning and Budgeting Workshop• February 2005, Modules for Local Financial Management Workshop• Diagnostic Study on the Kabupaten Reform Process• Study on Accountability Mechanism• DfID Report, November 2004

Regulatory Framework/Guidelines for Decentralization• Law No.22/1999 concerning Local Governance, replaced by Law No.32/2004 concerning Local

Governance • Law No.25/1999 concerning Central and Local Government Fiscal Balance, replaced by Law

No.33/2004 concerning Fiscal Balance Between Central and Local Government• Law No.28/1999 concerning Clean Government Implementation and Free from Corruption,

Collusion and Nepotism.• Law No.34/2000 concerning Amendment to the Law No.18/1997 on Local Taxes and Local Levies• Law No.17/2003 concerning State Finance• Law No.1/2004 concerning State Treasury• Law No.15/2004 concerning State Audit • Law No.25/2004 concerning National Development Planning System• Government Regulation No.105/2000 concerning Local Financial Management and

Accountability.• Government Regulation No.106/2000 concerning Financial Management and Accountability in

Implementation of Deconcentration and Supporting Duty• Government Regulation No.107/2000 concerning Local Borrowing• Government Regulation No.108/2000 concerning Procedure for Accountability of Local Head• Government Regulation No.11/2001 concerning Information on Local Finances• Government Regulation No.20/2001 concerning Fostering and Supervision of Local Governance• Government Regulation No.56/2001 concerning Local Governance Management Report• Government Regulation No.65/2001 concerning Local Taxes• Government Regulation No.66/2001 concerning Local Levies• Government Regulation No. 84/2001 concerning Amendment to Government Regulation

No.104/2000 concerning Equilibrium Fund• Government Regulation No.8/2003 concerning Local Apparatus Organization Guideline • Government Regulation No.25/2004 concerning Guidelines for Formulation of Local Parliament’s

(DPRD) Code of Conduct• Government Regulation No.6/2005 concerning Procedure for Election and Dismissal of Local

Head (Pilkada) • Presidential Instruction No.5/2003 concerning Post IMF-GoI-Cooperation Economic Policies

(which include governance reform and preparation of PRSAP)• Presidential Decree No.80/2003 concerning Procedures for Procurement of Goods and Services• Ministry of Home Affair Degree No.23/2001 concerning Procedure for Formulating Local Legal

Product• Ministry of Home Affair Degree No.29/2002 concerning Guidelines on The Management,

Accountability and Supervision of Local Finance and Procedure for Preparing Local Budget, Implementing Local Finance Administration and Generating a Calculation of Local Budget.

• Ministry of Finance Degree No.35/KMK.07/2003 concerning Planning,

- 110 -

Implementation/Administration, and Monitoring of Government Subsidiary Offshore Loans to Regions

• Circular Letter of Ministry of Home Affair No.050/987/SJ, 2003 concerning Guidelines to Conduct Participation Development Coordination Forum

• Circular Letter of Ministry of Home Affair No.100/756/OTD, 2003 concerning Obligatory Function and Minimum Service Standards

• Circular Letter of Ministry of Home Affair No.903/3172/SJ concerning Guidelines for Formulating Local Budget (APBD) 2005

Kabupaten Field Reports and Results• Field kabupaten Baseline Reports• Legalized Perda on Transparency and Participation • Legalized Poverty Reduction Strategy and Action Plan • National Secretariat Monthly Report• National Secretariat Annual Report, 2002-2003

*Including electronic files

- 111 -

Annex 9: Statement of Loans and Credits

INDONESIA: Initiatives for Local Governance Reform Project23-Nov-2004

Original Amount in US$ Millions

Difference between expectedand actual

disbursementsa

Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Rev'dP071318

P071316

P074290

P064728

P063913

P073772

P076271

P079156

P059931

P040578

P072852

P073970

P068949

P049539

P073025

P068051

P040528

P059930

P059477

P049545

P036049

P041895

P040196

P036956

P040061

P003993

P004026

2004

2004

2004

2004

2003

2003

2003

2003

2003

2002

2002

2002

2001

2001

2001

2001

2001

2000

2000

2000

1999

1999

1999

1998

1998

1998

1997

ID - Coral Reef Rehab and Management II

ID - Coral Reef Rehab and Mgmt Prog II

ID-2nd Eastern Indonesia Reg. Transport

ID-LAND MANAGEMENT &POLICY DEVT PROJE

ID-Java-Bali Pwr Sector & Strength

ID-Health Workforce & Services (PHP 3)

ID-PPITA

ID Third Kecamatan Development Project

ID-Water Resources & Irr.Sector Mgt Prog

ID-Eastern Indonesia Region Transport

ID-UPP2

ID-GLOBAL DEV LEARNING (LIL)

ID-LIBRARY DEVELOPMENT PROJECT - LIL

ID-PROVINCIAL HEALTH II

ID-SECOND KECAMATAN DEVELOPMENT PROJ

ID-GEF-W. JAVA ENVT MGMT

ID-W. JAVA ENVMT MGMT

ID-DECNT. AGRICULTURAL/FORESTRY EXT

ID-WSSLIC II

ID-PROVINCIAL HEALTH I

ID-EARLY CHILD DEVELOPMENT

ID-SULAWESI BASIC EDUC.

ID-SUMATRA BASIC EDUCUATION

ID-SAFE MOTHERHOOD

ID - BENGKULU REGIONAL DEVELOPMENT

ID-SUMATRA REG'L RDS

ID-Railway Efficiency

0.00

33.20

200.00

32.80

141.00

31.10

17.10

204.30

45.00

200.00

29.50

2.66

0.00

63.20

208.90

0.00

11.70

13.00

0.00

0.00

21.50

47.90

54.50

42.50

20.50

234.00

105.00

0.00

23.00

0.00

32.80

0.00

74.50

0.00

45.50

25.00

0.00

70.50

0.00

4.15

40.00

111.30

0.00

5.75

5.00

77.40

38.00

0.00

15.93

20.10

0.00

0.00

0.00

0.00

7.50

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

2.54

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

10.65

0.00

0.00

9.15

5.00

50.00

47.33

7.50

56.20

199.00

64.76

139.59

107.93

14.64

92.48

70.09

71.48

93.30

1.75

1.43

92.18

131.25

2.75

11.77

1.39

55.54

18.70

1.96

16.58

5.38

2.20

7.61

11.22

1.95

0.05

0.17

2.00

3.17

-1.41

-4.31

4.61

0.08

12.33

20.48

19.90

1.04

0.63

59.18

-203.37

7.78

8.41

0.77

-27.74

1.09

12.63

17.33

6.01

11.35

12.61

61.22

49.27

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

-2.12

12.63

0.00

0.00

5.35

7.61

0.56

-0.12

Total: 1759.36 588.93 10.04 122.13 1280.62 75.29 23.90

- 112 -

INDONESIASTATEMENT OF IFC's

Held and Disbursed PortfolioMar - 2004

In Millions US Dollars

Committed Disbursed IFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic

20031999198520022004198919971989/94/0319952000/02/0419971993/9620041991/95/99/01/031992/961995199720001998199320041993199720011995/041997200320012004

Buana BankITCFLYON-MLF-IbisManulifeP.T. GawiP.T. IndoramaPT Agro MukoPT AlumindoPT AstraPT Astra GraphiaPT Astra OtopartPT Bakrie PipePT Bank NISPPT BerlianPT Bina DanatamaPT EcogreenPT GrahawitaPT Indo-RamaPT KIA KeramikPT KIA SerpihPT KalimantanPT MakroPT MegaplastPT NusantaraPT Prakars (PAS)PT SamuderaPT SayapPT SigmaPT ViscosePT WingsSMMSunsonWilmar

0.0040.002.010.00

11.5048.000.008.870.000.000.00

23.7135.000.004.41

30.000.005.001.654.50

15.000.005.257.63

35.000.004.170.009.503.623.00

12.4120.00

12.160.000.000.320.000.002.200.000.912.001.070.000.00

13.961.730.000.000.000.000.00

15.002.612.500.000.005.000.003.000.000.000.000.000.00

0.000.000.000.000.000.000.000.000.000.000.009.530.000.000.000.005.000.000.000.000.000.000.000.000.000.000.000.000.000.000.000.000.00

0.000.002.010.004.650.000.002.000.000.000.000.000.000.008.190.000.000.00

53.4949.500.000.000.005.93

10.000.000.000.000.000.000.007.850.00

0.000.002.010.005.350.000.008.870.000.000.00

23.7135.000.004.41

30.000.004.881.654.50

15.000.005.257.63

24.120.004.170.000.003.620.00

12.410.00

12.160.000.000.320.000.002.200.000.912.001.070.000.00

10.611.730.000.000.000.000.00

15.002.612.500.000.005.000.003.000.000.000.000.000.00

0.000.000.000.000.000.000.000.000.000.000.009.530.000.000.000.005.000.000.000.000.000.000.000.000.000.000.000.000.000.000.000.000.00

0.000.002.010.004.650.000.002.000.000.000.000.000.000.008.190.000.000.00

53.4949.500.000.000.005.936.880.000.000.000.000.000.007.850.00

Total Portfolio: 330.23 62.46 14.53 143.62 192.58 59.11 14.53 140.50

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic

20052005

Astra Otoparts 2NISP Bussan

24.0022.75

0.000.00

0.000.00

0.000.00

Total Pending Commitment: 46.75 0.00 0.00 0.00

- 113 -

Annex 10: Country at a Glance

INDONESIA: Initiatives for Local Governance Reform Project

East Lower-POVERTY and SOCIAL Asia & middle-

Indonesia Pacific income2003Population, mid-year (millions) 214.5 1,855 2,655GNI per capita (Atlas method, US$) 810 1,080 1,480GNI (Atlas method, US$ billions) 173.5 2,011 3,934

Average annual growth, 1997-03

Population (%) 1.3 1.0 0.9Labor force (%) 1.2 1.1 1.2

Most recent estimate (latest year available, 1997-03)

Poverty (% of population below national poverty line) 17 .. ..Urban population (% of total population) 43 40 50Life expectancy at birth (years) 65 69 69Infant mortality (per 1,000 live births) 47 32 32Child malnutrition (% of children under 5) 25 15 11Access to an improved water source (% of population) 76 76 81Illiteracy (% of population age 15+) 10 10 10Gross primary enrollment (% of school-age population) 111 111 112 Male 112 112 113 Female 110 111 111

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1983 1993 2002 2003

GDP (US$ billions) 85.4 158.0 173.0 208.3Gross domestic investment/GDP 31.3 29.5 20.3 19.7Exports of goods and services/GDP 26.3 26.8 35.8 31.2Gross domestic savings/GDP 29.8 32.5 26.8 25.3Gross national savings/GDP .. 29.0 23.4 20.8

Current account balance/GDP -7.4 -1.3 4.5 3.5Interest payments/GDP 1.9 2.6 2.7 2.0Total debt/GDP 35.4 56.4 76.5 64.5Total debt service/exports 18.8 33.6 29.4 34.0Present value of debt/GDP .. .. 75.6 ..Present value of debt/exports .. .. 221.9 ..

1983-93 1993-03 2002 2003 2003-07(average annual growth)GDP 7.1 2.0 3.7 4.1 4.5GDP per capita 5.2 0.7 2.2 2.5 3.1Exports of goods and services 7.8 2.5 -0.6 4.0 3.9

STRUCTURE of the ECONOMY1983 1993 2002 2003

(% of GDP) Agriculture 22.9 17.9 17.1 16.6Industry 39.8 39.7 44.2 43.6 Manufacturing 12.7 22.3 25.4 24.7Services 37.3 42.4 38.7 39.9

Private consumption 59.8 58.5 65.0 65.6General government consumption 10.4 9.0 8.2 9.2Imports of goods and services 27.9 23.8 29.3 25.7

1983-93 1993-03 2002 2003(average annual growth) Agriculture 3.8 1.7 2.0 2.5Industry 9.0 2.8 3.5 3.4 Manufacturing 11.6 3.7 3.4 3.5Services 7.0 1.5 4.5 5.5

Private consumption 4.8 4.2 3.8 4.0General government consumption 5.1 1.5 12.8 9.8Gross domestic investment 10.2 -1.3 0.2 1.4Imports of goods and services 4.6 0.5 -5.0 2.0

-40

-20

0

20

98 99 00 01 02 03

GDI GDP

Growth of investment and GDP (%)

Indonesia

Lower-middle-income group

Development diamond*

Life expectancy

Access to improved water source

GNIpercapita

Grossprimary

enrollment

-60

-40

-20

0

20

40

98 99 00 01 02 03

Exports Imports

Growth of exports and imports (%)

Indonesia

Lower-middle-income group

Economic ratios*

Trade

Domesticsavings

Investment

Indebtedness

- 114 -

IndonesiaPRICES and GOVERNMENT FINANCE

1983 1993 2002 2003Domestic prices(% change)Consumer prices 11.8 9.6 11.9 6.7Implicit GDP deflator 14.3 8.9 5.8 6.6

Government finance(% of GDP, includes current grants)Current revenue .. 16.8 18.5 19.1Current budget balance .. -3.5 7.4 8.4Overall surplus/deficit .. .. -1.1 -2.1

TRADE1983 1993 2002 2003

(US$ millions)Total exports (fob) .. 36,823 57,159 61,058 Fuel .. 9,745 12,139 13,700 Estate crop .. 859 1,238 1,191 Manufactures .. 16,699 19,119 19,660Total imports (cif) .. 28,328 31,289 32,551 Food .. 1,342 2,852 3,121 Fuel and energy .. 2,155 6,558 7,664 Capital goods .. 12,158 8,606 7,100

Export price index (1995=100) .. 112 139 151Import price index (1995=100) .. 102 59 64Terms of trade (1995=100) .. 110 237 237

BALANCE of PAYMENTS1983 1993 2002 2003

(US$ millions)Exports of goods and services 19,235 40,566 64,594 67,440Imports of goods and services 22,037 38,222 51,019 55,629Resource balance -2,802 2,344 13,575 11,811

Net income -3,650 -4,987 -6,881 -6,123Net current transfers 114 537 1,129 1,564

Current account balance -6,338 -2,106 7,823 7,252

Financing items (net) 6,521 2,700 -3,800 -2,995Changes in net reserves -183 -594 -4,023 -4,257

Memo:Reserves including gold (US$ millions) 4,814 12,355 31,913 36,170Conversion rate (DEC, local/US$) 909.3 2,087.1 9,311.2 8,577.0

EXTERNAL DEBT and RESOURCE FLOWS1983 1993 2002 2003

(US$ millions)Total debt outstanding and disbursed 30,229 89,172 132,254 134,320 IBRD 2,136 11,283 10,729 9,779 IDA 763 796 794 880

Total debt service 3,741 14,089 17,364 21,323 IBRD 254 1,620 1,905 2,003 IDA 10 24 33 33

Composition of net resource flows Official grants 104 219 .. .. Official creditors 1,180 2,344 -440 -892 Private creditors 2,961 -3,397 -6,296 -5,419 Foreign direct investment 292 2,004 145 -597 Portfolio equity 0 2,452 877 1,130

World Bank program Commitments 1,210 924 103 425 Disbursements 549 1,195 419 408 Principal repayments 92 782 1,065 1,294 Net flows 457 413 -646 -886 Interest payments 172 861 873 742 Net transfers 285 -448 -1,519 -1,628

Development Economics 9/20/04

-4

-2

0

2

4

6

97 98 99 00 01 02 03

Current account balance to GDP (%)

0

25,000

50,000

75,000

97 98 99 00 01 02 03

Exports Imports

Export and import levels (US$ mill.)

0

20

40

60

80

98 99 00 01 02 03

GDP deflator CPI

Inflation (%)

G: 24,308

A: 9,779

D: 8,243

C: 10,276

B: 880

F: 39,540E: 41,294

Composition of 2003 debt (US$ mill.)

A - IBRDB - IDA C - IMF

D - Other multilateralE - BilateralF - PrivateG - Short-term

- 115 -

Additional Annex 11: Safeguard FrameworkINDONESIA: Initiatives for Local Governance Reform Project

1. Project Background

The development objective of the proposed Initiatives for Local Governance Reform (ILGR) Project is to support governance reform in 40 district (Kabupaten) governments selected on a competitive basis among the 130 Kabupatens in the 9 provinces comprising the ILGR project area (West Sumatra, Banten, West Java, Central Java, Yogyakarta, East Java, Gorontalo, North Sulawesi, and South Sulawesi). The project would support, through general facilitation, specialized technical assistance and capacity building, a series of graduated reforms in public disclosure and civic participation in local budget planning, and execution, development of enhanced local poverty alleviation strategies, improvements in financial management and procurement. Investment support would also be provided to finance priority rural infrastructure identified through participatory local government poverty reduction strategies in the first batch of kabupatens.

The aim of the project is to support good local governance that will encourage participatory and inclusive decision-making, transparency, more accountability and more demand-responsive public service systems. Based on the project criteria, an initial list of 22 kabupatens were identified as potential "candidates”, and approximately 15 of these who have complied with the program entry requirements will continue as the “first batch” to participate in the program. These will be joined by a “second batch” of approximately 25 kabupaten who apply for entry in the second year of project implementation.

2. Basic Principles of the Safeguards Framework

Since this is a decentralized and participatory project, the sub-project investments will not be determined in advance (before project negotiations), therefore the project has adopted this social and environment safeguard framework. This framework is required to be applied to all sub-projects financed under this project and will be included in the project implementation manual along with more detailed guidance on its implementation. Formal adoption of this framework by the Bupati (Head of district) is a requirement for entry into the program. Prior to its adoption, this framework will have been disseminated widely through the media in the participating kabupatens for public comment, and discussed openly and agreed by the kabupaten stakeholders

1

forum.

Targeted institutional and capacity development related to safeguards will be part of capacity building within the project. One key component to foster participation, especially related to local budgeting and investment is the establishment of the stakeholders forum, a mixed forum of the main stakeholders of budget planning in local government such as Bappeda (local planning board), strategic local sectoral agencies and stakeholders from civil society such as element from university, prominent NGOs, mass media and local mass organizations. This forum will be the main arena for public participation and monitoring including safeguard issues. Prominent local NGOs that working in environmental issues, resettlement, legal aids, supporting IVP2s (isolated vulnerable people) and government watch will be included as part of this forum, and will be actively involved in monitoring safeguard issues. Secretary of local government or its assistants should coordinate the safeguard monitoring effort within this forum to make sure that local government will fully engage in this attempt to protect environment, IVP and project affected people’s right.

Since this safeguard framework will be used by both professional government officers and a wide variety of stakeholders, this framework has been designed to be simple, easy to understand, clearly related to the

- 116 -

investment stages and manageable within the project framework in line with environment and social safeguard principles. This will allow all stakeholders to have a clear understanding and be involved as appropriate in the related decision making process.

The project employs a positive list of sub-project investments eligible to be financed under the project which includes basic rural infrastructure, such as roads and related works, water supply and irrigation facilities. The project deems ineligible any investment that will create significant adverse and irreversible environment impacts, such as a project that the safeguard action plan cannot be prepared within one year period. Investments related to, inter alia, tobacco, ozone-depleting substances, chemical pesticide, asbestos, serious hazardous waste would not be financed under this project. In addition, sub-projects located inside protected areas are ineligible for financing under the project. The project also considers ineligible sub-project investment that would result in large-scale resettlement, displacing more than 100 people.

The prescribed minimum reform package under ILGR focuses on strengthening participation, transparency, inclusiveness (especially for disadvantage group which will get special attention to ensure their inclusion in the decision making processes) and linkages to poverty reduction. The project will not finance sub-projects that would lead to adverse effects on isolated and vulnerable people nor sub-projects where local circumstances prevent adequate consultation with potentially affected isolated and vulnerable people. Within the project region, the isolated and vulnerable people only exist in Kajang Dalam, Kajang Luar areas in South Sulawesi provinces and in Baduy area in Lebak (Banten province). Baduy and Kajang Dalam live inside the protected forest areas, the areas which are not related to the investment of this project.

In addition, each decision, final report and plan required under this safeguard framework is to be disseminated widely, especially among the affected people. The safeguard monitoring team should monitor the dissemination of this information.

3. Environment

Principles

This principles embodied in this framework are based on the World Bank’s operational manual OP 4.01 and BP 4.01, and include:

• Sub-project investment proposals are required to avoid, where possible, negative environmental impact (related to the design, location, construction and operational risk of the project) and explore viable alternative designs to minimize negative impacts which cannot be avoided entirely.

• Any proposal entailing a negative environmental impact beyond an impact that can be managed through normal good design and construction practices shall be accompanied by an environmental management plan to mitigate the impact.

• Since this is a decentralized governance and participatory project, screening and identification of potential negative impact and monitoring the implementation of the environmental management plan will be done by designated personnel of the kabupaten government together with the safeguard monitoring team which is part of the kabupaten stakeholders forum or poverty working group.

• The safeguard monitoring team, which includes project affected people, non-government organizations that focus on the environment and other safeguard issues, related dinases, Sekda and Bapedalkab (environmental protection office at the kabupaten level) – if necessary assisted by provincial Bapedalda (environment protection agency) – will conduct environmental screening of the proposed sub projects.

- 117 -

The national management consultant will assist and monitor, through reviewing an annual list of proposals, the environment requirements for the investment together with other safeguard requirements.

Procedures

The procedures are as follows:

A. An initial screening, the sub project type, scale, location, sensitivity, as well as the nature and magnitude of potential impacts, will be identified to classify the proposal in one of 4 categories:

i) Those that require a full environmental impact assessment (AMDAL) plus environmental management plan (RKL). Ministry of the Environmental has set criteria for AMDAL (see below). These will be eliminated from consideration for ILGR financing.

ii) Those that require environmental management and monitoring plans (UKL and UPL) based on limited, site specific studies. The Ministry of Settlement and Regional Infrastructure (Kimpraswil) has set criteria to determine the need for UKL/UPL (see below for eligible sub-projects types).

iii) Those for which standard operating procedures (SOP) suffice, where generic good practice would protect the environmental adequately. DG Urban Planning and DG Water Resources have SOP guidelines for some types of activities (such as erosion control of road back filling and re-vegetating, solid waste handling procedures, traffic, raw materials control at construction sites).

iv) Those that require no environmental study, where no disturbance of construction, land, water or discharge of pollutants is involved.

The triggers for each of these assessment and reporting requirements in relation to various sub-project types are given in Table I. Guidance on the required outline and mandatory content for each of these reports is provided in the Project Operational Manual.

Table 1. Assessment and Reporting Requirements

Investment activities

NeedAMDAL/Full EIA

Need UKL/UPL

NeedSOP

Water SupplyGround water intake

More than 250 litre per second

Between 50 to 250 litre per second

Less than 50 but the procedures of constructing this intake could have minor environmental impact

Transmission of water supply

More than 10 km 2 to 10 km Less than 2 km but the construction activities could have minor environmental impact

Distribution of water supply

Cover more than 500 ha area

Cover are between 500 to 100 ha

Less than 100 ha but the procedures of constructing this distribution could create minor environmental impact

Roads and bridgeNew Road in:- medium town More than 10 km long

or network covering more than 10 ha

10 – 3 km or 10 – 3 ha Less than 3 (or 5 for rural) but the

construction activities potentially create minor impact

- rural areas More than 30 km road Between 30 - 5 kmRoad widening: More than 10 km Between 10 – 5 km

- 118 -

Bridge: More than 60 m Less than 60 mIrrigation and Flood Protection - in medium town More than 10 km

constructionBetween 2 - 10 km construction

Less than 5 km but the construction activities potentially create minor impact

- in rural area More than 25 km construction

Between 25 – 5 km construction

Market areas or Building complex Market or complex More than 5 ha or the

market/complex waste is categorize as hazardous material

Between 1 - 5 ha Less than 1 ha but the construction activities could have minor impact

B. Additional Screening Criteria (Negative List)

i. Ozone-depleting substances, tobacco or tobacco products: No subprojects using or producing these materials will be financed.

ii. Pesticides. The project will not finance the procurement or application of pesticides.iii. Asbestos. No asbestos-containing materials will be financed. Special mitigation measures to

address any issues with existing asbestos in any proposed sub-project (e.g. renovation of buildings that may have used asbestos) will be applied.

iv. Hazardous materials and wastes. No sub-project will be financed that uses, produces, stores or transports hazardous materials (toxic, corrosive or explosive) or material that classified as "B3" (hazardous wastes) in Indonesian law.

v. Development in protected areas. No subproject will be financed that would be located in a protected area or might change the purpose and/or designation of a protected area. Protected areas are identified in The Decree or the Minister of the State for the Environment of the Republic of Indonesia Number KEP-17/MENLH/2001, entitled Concerning the Types of Businesses Activities Required to Complete an Environmental Impact Assessment. The list includes notably: forest protection area; marine/freshwater conservation areas; nature tourism park; areas surrounding lakes and reservoirs; coastal mangrove areas; national parks; coastal edges; forest parks; cultural reserves; areas surrounding springs; scientific research areas; and nature conservation areas.

vi. Natural Habitat. World Bank O.P. 4.04’s prohibition on conversion of critical natural habitat also applies and would take precedence over KEP-17/MENLH/2001 in case of conflicting results. No sub-project will be financed that would involve conversion of critical natural habitat.

vii. Cultural Property. No sub-project will be financed that would degrade or damage cultural property, including not only physical artifacts and structures but also sites considered sacred or otherwise having spiritual importance. A clause will be included in the construction contract form to give guidance on what to do in the case of chance finds.

C. Conducting the assessment or producing UKL/UPLThe assessment should cover these three method as describe in KABAPEDAL decree number 8 and 9/2000 and their annexes:

• data analysis of the construction activities (plus the method of measuring possible impact and its threshold, the environment of the location of construction and the perception of the community and project affected people (see the community consultation table in the KABAPEDAL decree number 8/2000);

- 119 -

• impact analysis; • mitigation3

and environmental management evaluation: the basis, alternative scenario, the trade off of all possible options;

and the report should cover:

• the purpose and the description of the sub-project;• the method (see above);• the main environmental issues with their condition, possible condition and threshold/ condition for

creating adverse impact; and• the recommendations which include: the management - monitoring plan, specific recommended

action and the schedule in relation with the construction.

D. Review and Clearance of UKL/UPLThe review will be based on KABAPEDAL decree no 8 and 9/2000 and their annexes. The review will be done by the Safeguard Monitoring Team. The first case in each kabupaten will also be reviewed by National Management Consultant (NMC) that works for the executing/implementing agency and the World Bank. The World Bank will also do random post review.

E. Implementation of Environmental Management and Monitoring PlanThis will be done by the supervision consultant of the sub-project, the executing agency of the sub-project or the Din/Bapedalkab. What will be managed and monitored is based on the UKL/UPL document.

4. Land Acquisition and Resettlement

Principles:

This framework for land acquisition and resettlement is triggered in cases where a sub-project to be financed under the project will be located on land that does not belong to the government or has been occupied under private use for more than a year. The fundamental principle on which this land acquisition framework is based is that all necessary measures will be undertaken to improve, or at least restore, incomes and living standards of all persons adversely affected as a result of land acquisition under the project. More specifically, this framework incorporates the major guiding principles espoused in World Bank OD 4.30, as follows:

a. Acquisition of land and other assets should be avoided when feasible and otherwise minimized;b. If any persons are to be adversely affected, mitigation

4

measures must provide them with sufficient opportunities to improve, or at least restore, incomes and living standards;

c. Lost assets should be replaced in kind, or compensated at replacement cost;d. Compensation should be paid in full, net of taxes, fees or any other deductions for any purpose;e. If any persons are required to relocate, transfer costs and subsistence allowances will be paid in

addition to compensation at replacement cost for lost structures and other assets;f. Absence of legal title to land or other affected assets will not be a barrier to compensation or other

suitable forms of assistance;g. Adversely affected persons will be provided information relating to impacts and entitlements, will

be consulted as to their preferences regarding implementation arrangements, and will be informed regarding methods and procedures for pursuing grievances.

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In the event of conflict or inconsistency between Indonesia law and the principles and procedures as established in this land acquisition framework, the Government of Indonesia, including the participating kabupaten governments, will waive Indonesian law to the extent necessary for effective implementation of this framework.

Avoidance and Minimization of Adverse Impacts

To be eligible for financing under the project, sub-project investment proposals are required to avoid land acquisition entirely, or minimize the impact of land acquisition and resettlement. The related impacts include not only loss of land, shelter and cost of moving to another location, but also loss of assets, access to assets and source of income or other means of livelihood. All sub-project investment proposals must explore viable alternatives to eliminate or minimize these impacts.

All infrastructure subprojects that involve new physical works or changes in the siting of existing infrastructure may require land acquisition. Subproject screening measures will ensure that no major land acquisition or resettlement-related impacts occur. Specifically, screening will exclude the following:

• Subprojects resettle more than 100 persons in total or affecting more than 200 people;• Subprojects for which sources of necessary compensation have not been established.

For any subprojects requiring acquisition of land or other assets, mitigation measures will be provided in consistency with this framework.

Voluntary land contribution

In some cases an individual owner or user may agree to provide land (and/or attached assets) for provision of public goods without compensation in cash or in kind. Such a voluntary contribution is an act of informed consent5; voluntary contributions are made with prior knowledge that other options are available, and are obtained without coercion or duress. For the purposes of this framework, only minor contributions (no more than 10% of any holding of productive land, or buildings or other fixed assets worth no more than Rp1 million) will be sought and/or accepted; voluntary contributions will not be sought or accepted where they would significantly harm incomes or living standards of individual owners or users. The facilitator and the safeguard monitoring team have to make sure that there is no pressure to the PAP (project-affected people6) to contribute their land. The agreement should be documented in a legal document signed by the person voluntarily contributing the land.

Eligibility for Compensation and/or Resettlement Assistance

All PAP are eligible for compensation and/or resettlement assistance under this framework. PAP include: (i) any person who has a land certificate; (ii) those who do not have a land certificate but have proof of traditional ownership; (iii) those who occupy land which clearly a green belt area or is legally owned by a government institution (proof by legal certificate); and (iv) those who are renters.

Entitlements Relating to Specific Categories of Impact

Land acquisition or resettlement under the project must not make the living conditions of PAP worse off7

. The PAP have the right to get real replacement cost compensation such as cash compensation equal to the real market price of land and assets (such as building, trees and other productive assets) or land to land compensation in similar place8

in the neighboring area. In addition, the other related cost such as moving cost, land transfer, rearrangement of land certificate and taxes should be borne by the government.

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Those PAP in categories: (i) and (ii) above are entitled to full replacement cost for lost and other assets. For those in category (iii), if they occupy the land less than 10 years, are only entitled to compensation for their building, plants and business assets. The renter is only entitled to compensation for all productive asset above the land valued according to the term in the renter contract. The compensation for renters, sharecroppers or agricultural laborers that have to move their activities to other places are at least equal to: (i) three-month rent, (ii) the value of the harvest for that season of those particular land and crops (or give the opportunity for them to harvest that first) or (iii) a total income of the labor in that season, respectively.

Planning and Reporting Requirements

As kabupaten investment sub-projects to be financed by the ILGR are relatively small in scale and simple in nature, the number of persons to be adversely affected by land acquisition is likely to be very small. Accordingly, planning and reporting requirements are kept as simple as possible.

Cases where no involuntary land acquisition or resettlement is required:For all investments for which no involuntary land acquisition is necessary, the relevant dinas will provide to the following information:

• EITHER a statement, signed by the head of the involved Dinas and countersigned by the Safeguard monitoring team and Kabupaten Facilitator, that the subproject will be located entirely on public land which is not under private use;

• OR a report prepared by the involved Dinas and verified by the Safeguards Team and the Kabupaten Facilitator indicating the subproject will be located entirely or in part on land which has been voluntarily contributed and contains the following information:a. an estimate of the amount of land and other assets to be utilized, and field measurement results

indicating that no more than 10% of total land holdings and/or other assets of value greater than Rp 1 million are needed from any household;

b. a description of methods used to inform potentially affected individuals regarding the proposed investment, and their rights and options regarding land or other assets required, and confirmation that individuals have been informed that they have the option of refusing land contribution including their rational and benefit for contributing their land;

c. signed Statements of Voluntary Contribution from each individual voluntarily contributing land (and any attached assets), indicating their informed consent (see sample forms for voluntary contribution in Section 8); and

d. a report of the public meeting at which the voluntary land acquisition arrangements (including siting maps) have been disclosed to, and validated by residents in the sub-project area.

Cases where involuntary land acquisition or resettlement is required:In cases where land or other assets will be acquired involuntarily, a Land Acquisition and Resettlement Action Plan (LARAP) must be prepared, including the following elements:

• description of the subproject necessitating land acquisition;• a census of project affected people providing basic data identifying impacts and persons to be

affected by them, and valuation of affected assets;• arrangements for in-kind replacement of land, or for compensation at replacement cost, including

signed statements by all affected landowners confirming that these arrangements are satisfactory;• in cases where some of the project affected people lose more than 10% of their productive assets or

require physical relocation, the plan also covers a socioeconomic survey and income restoration

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measures;• arrangements to ensure adequate performance by contractors relating to compensation for

temporary impacts; • a schedule of assets (other than land), which will require to be replaced as part of the construction

contract, and signed statements by the affected owners confirming that these arrangements are satisfactory;

• an implementation schedule clarifying institutional responsibilities and indicating that replacement land will have been provided before implementation of the subproject begins;

• a siting map and field measurements validated by villagers, showing land to be acquired and replacement land to be provided, sufficiently detailed to allow verification;

• arrangements for disclosure of information, consultations, monitoring of implementation and procedures for pursuing grievances.

The LARAP report is to be prepared as part of feasibility studies, and should include the alignment of land needed, the number of PAP, general information of the PAP income and employment and the existing land valuation from the following three sources:

• sample in the market: the latest land transaction in the area from the kecamatan/kelurahan record;• proposal by kabupaten government; and • NJOP (land tax form).

The LARAP will be reviewed as part of the technical assessment process prior to approval of dinas plans. Following approval, provision of in-kind asset replacement, other than that to be included in the subproject implementation contract, will be completed before the contract for subproject implementation is signed.

Consultations and Information Disclosure

As stated above, obtaining land or other assets through voluntary contribution and negotiated agreement requires that individuals potentially involved are informed about their rights and options. Prior to such negotiations, and prior to any land acquisition proceedings, the relevant dinas must provide information about key provisions of this Framework. Potentially affected individuals must be informed that they are not obligated to voluntarily contribute land or get less from real replacement cost compensation for subproject purposes, that involuntary acquisition of land without appropriate compensation is not permitted, and that lodging of a valid objection by an affected landowner will be sufficient cause for subproject approval to be delayed or withheld. Additional information to be disclosed will include: entitlement to replacement in kind or compensation at replacement cost; methods to be used in establishing compensation rates; and procedures and their right for pursuing grievances, including contact information. Information should be presented in a language and medium accessible to those potentially involved or affected.

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Grievance Procedures

If PAP are not satisfied with proposed entitlements or implementation arrangements, or are dissatisfied with actual implementation, they can seek satisfaction through the Safeguards Monitoring Team or its designated officials. If this does not result in resolution of issues, project-affected persons can also make grievance verbally or in written form to the Regional Management Consultant. If this does not result in resolution of issues, project-affected persons can make grievance in written form to the National Management Consultant and ultimately to the National Project Secretariat. At each level, specified authorities should record receipt of grievances and reply to the project-affected person or persons within ten days after receiving the grievances. Project-affected persons will be exempted from any administrative or legal charges associated with pursuing grievances.

Organizational Roles and Financial Responsibilities

To achieve the objectives of this framework, the Bupati of the participating Kabupaten governments will establish the following roles and responsibilities:

• The safeguard monitoring team (TMP) which is established together with the stakeholders forum in Kabupaten. It is coordinated by the Assistant 1 in Kabupaten secretary office with the members from representatives of Bappeda, Din/Bapedalkab, related Dinas (sectoral agency), community council association, legal aids NGOs, environmental/natural resources NGOs, land related NGOs and IVP related NGOs. The budget for this team activities is from Assistant 1 APBD budget that is dedicated for this project. The roles of this team are to assist the study, to monitor the implementation of LARAP, UKL/UPL recommendation, SOP and the compliance of this safeguard framework.

• The screening for LAR will be done by the related Dinas and the TMP. The result together with the list of sub project proposal will be sent to and reviewed by the NMC cc. to the World Bank.

• The socio economic study and the LARAP will be prepared by the related Dinas or the consultant of the Dinas with help from Bappeda. The TOR and the draft of these reports have to be reviewed by the TMP and NMC. The first TOR and draft reports from each kabupaten are subject to be reviewed by the World Bank. The Bank could also review the other based on the seriousness of the possible impact.

• The implementation of LAR will be done by the LAR implementing team (in the Indonesian law: The Presidential decree no 55 LAR

9

. this team is called “9 committee” which after decentralization could be more or less than 9) coordinated by Assistant 1 and the related Dinases. The members of the team are the related community head, land office representative in Kabupaten, staff from Kabupaten secretary office, etc. The budget for this LAR implementation is from the secretariat office budget.

Sources of Funding for Land Acquisition-Related Activities

As the borrower, the Government of Indonesia carries official responsibility for meeting the terms of this Framework, including financial obligations associated with land acquisition and resettlement. In practice, project funds (from the IBRD Loan, IDA Credit and DfID grant) cannot be used for this purpose, and the participating Kabupaten governments will be required to use other APBD resources (fiscal transfers from the central government or their own revenue). Therefore, where a subproject is proposed that would require land acquisition and/or resettlement, and where no sufficient source of necessary compensation funds can be identified, the proposal will be disqualified for financing under the project.

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Monitoring and Oversight

The identification of the possible negative impact and monitoring of the implementation of land acquisition plan will be done with the supervision of the safeguard monitoring team. The national management consultant as part of the national implementing agency and Safeguard Monitoring Team that is created within the stakeholders forum, will assist and monitor the fulfillment of safeguard requirement and processes.

The World Bank will monitor on a sample basis the implementation of this framework and any resulting resettlement instruments as part of periodic supervision missions.

5. Isolated and vulnerable Peoples Framework Development Plan

Principles

As a prerequisite to World Bank support, the ILGR must meet the requirements of Operational Directive 4.20 (Indigenous Peoples, or in Indonesian context we call it isolated and vulnerable peoples = IVP). This policy directive requires that special planning measures be established to protect the interests of ethnic minorities with distinctive characteristics that may make them vulnerable to disadvantages in the development process. The primary objectives of OD 4.20 are:

a) to ensure that such groups are afforded meaningful opportunities to participate in planning that affects them;

b) to ensure that opportunities to provide such groups with culturally appropriate benefits are considered; and

c) to ensure that any project impacts that adversely affect them are avoided or otherwise minimized and mitigated.

Indonesia has hundreds ethnic groups, which originated in Indonesia, and which are culturally distinct, have different languages and, since Indonesia is still predominantly agricultural, have close attachment to natural resources in their areas. One ethnic group could nationally be a majority or proportionally high, but in a particular island or kabupaten that group could be a minority and vulnerable. In the Indonesian context OD 4.20 applies to those minority ethnic groups that are vulnerable and isolated in particular area due to (i) their dependence to their natural habitat and sensitivity to the change of it natural habitat and also (ii) their distinct socio-cultural behavior and system.

Under the ILGR, all economically vulnerable and disadvantaged groups will get special attention in the kabupaten forum decision making process and in kabupaten poverty reduction strategy, but not all of these groups could categorized as isolated and vulnerable people as defined by OD 4.20. In the first batch of participating kabupatens already identified, only the Kajang Luar community meets the definition of IVP under the policy. The Kajang Luar community has been involved during project preparation in the participatory poverty assessment process and in the formulation of poverty strategy and development strategy for the kabupaten.

This framework plan document describes actions taken, or to be taken, by the participating kabupaten governments to ensure that project arrangements meet the requirements of OD 4.20. Because ILGR would empower communities within a kabupaten to determine their own development priorities and have more influence over the kabupaten’s budget allocation to these priorities, ILGR has two distinctive features

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important to the design of this framework plan:

• First, in ILGR, the processes of kabupaten-level prioritization of needs and selection of activities occur only during project implementation. So prior assessment of the appropriateness and impacts of particular activities to be funded under the project is impossible.

• Second, this framework plan focuses on one objective: ensuring appropriate opportunities for local participation at the kabupaten level. With appropriate participation (which includes the interest of the minority and vulnerable groups), project activities responding to needs identified by kabupaten residents themselves can be considered to be “culturally appropriate” by definition. Similarly, with appropriate participation there is no basis for considering a kabupaten to be “adversely affected’’ (or affected without sufficient mitigation action or trade-off) as a direct consequence of a development activity the kabupaten itself has initiated.

Therefore the crucial point on protecting the interest of IVP is to make sure that the spirit to include the interest of IVP and avoid adverse impact to IVP is embedded in the participatory procedure in the project design and implementation.

Key Elements of the Framework Plan

The key elements of this framework plan, then, are:

a) to ensure through project design and monitoring arrangements that isolated and vulnerable peoples are afforded opportunities to participate in prioritization of their needs;

b) to ensure that their expressed needs are subsequently represented at the kabupaten level budget planning and Dinas sub project formulation;

c) to ensure that selection of activities for funding is reasonably responsive to isolated and vulnerable peoples priorities, also sensitive to their vulnerability.

Kabupaten-Level Participation ArrangementsTo ensure that isolated and vulnerable peoples are able to participate adequately at the kabupaten level in identifying and prioritizing needs, the following general arrangements apply:

• There will be a non governmental organization in the poverty working group that has serious concern and works with the isolated and vulnerable people;

• The Safeguard Monitoring Team in kabupaten where isolated and vulnerable people would be related or affected should have an NGO that is concerned to the IVP group;

• The isolated and vulnerable people group will have an opportunity to discuss independently (or together with concerned NGOs) and to have an independent view of the proposed sub-project. The involved dinas representing the kabupaten government and the facilitator have to facilitate this independent process.

Kabupaten-Level Decision-Making Arrangements• The sub component of the project will be considered to have a potential impact if (i) it covers the

whole kecamatan in the kabupaten that have IVP and those project have a potential benefit or adverse impact to the IVP or (ii) it will be in the specific kecamatan that has IVP.

• The isolated and vulnerable people will obtain relatively equal benefit from the sub-project as compared to other beneficiaries. The project should taken into account their distinct characteristic, law and values in the investment design.

• The project will not finance sub-projects that would lead to adverse effects on isolated and

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vulnerable people.• If the investment proposal is targeted the IVP as its main beneficiaries, the IVP has the right to

refuse the investment.

Consultations and Information Disclosure

Consultation and information disclosure in this project is mainly done within:

(a) the participatory Poverty Reduction Strategy and Action Plan (PRSAP) formulation where all sub-project financed should be based on; and

(b) the participatory budgeting of the dinas when dinases are preparing their proposal for the sub project.

In the PRSAP working group and the IVP community will have an exclusive, independent focus group discussion, with help from the IVP’s NGO assistant to capture the IVP specific interest on the strategy. The result of this discussion will be part of PRSAP. The minutes of this discussion and the result of the PRSAP will be discussed openly in the Kabupaten forum and reported to the NMC and the World Bank.

In the Dinas participatory budgeting proposal when the IVP issue is triggered again, the specific focus group discussion will be conducted. If the main purpose of the sub-project proposal is to benefiting the IVP, the IVP have the right to refuse the proposal. Also if the proposal is not specifically related to IVP but created adverse impact, the IVP has the right to refuse the proposal. In all other cases the TMP will monitor weather the IVP interest has been accommodated in the PRSAP or sub-project proposal according to the principal of this framework. All documents on PRSAP, sub-project proposal and TMP recommendation is open to the public and specifically informed to the IVP related/assistant NGOs and will be reviewed by the NMC and the World Bank.

Grievance Procedures

If IVP, its NGO assistant or interest supported group are not satisfied with the PRSAP and or the proposed subproject proposal or its implementation, they can seek satisfaction through the Safeguards Monitoring Team or its designated officials. If this does not result in resolution of issues, they can also make grievance verbally or in written form to the Regional Management Consultant. If this does not result in resolution of issues, they can make grievance in written form to the National Management Consultant and ultimately to the National Project Secretariat. At each level, specified authorities should record receipt of grievances and reply to the IVP and its interest supported group within ten days after receiving the grievances. They will be exempted from any administrative or legal charges associated with pursuing grievances.

Organizational Roles and Financial Responsibilities

The PRSAP facilitator, Bappeda (local planning agency) officer, TMP members will be trained to facilitate IVP and they are responsible to make sure that the IVP interest and right (according to this framework) is accommodated in the PRSAP and in related sub-project. The budget for TMP is under Assistant 1 APBD budget and all IVP consultation activities are under Bappeda APBD budget. The RMC safeguard specialist will supervise the consultation activities.

Monitoring and Oversight:

• In kabupaten level will be done by the TMP and Bappeda• In regional level will be done by the safeguard specialist from RMC• In national level will be done by the social/safeguard specialist from NMC

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All of them will get additional training related to triggering process, IVP consultation and IVP sensitivity issues. The crucial point for monitoring is in the PRSAP process and on the Dinas IVP related proposal development.

A. Screening:

B. preparation:

1. Key Steps in the Safeguards Framework

Environmental Impact No Need AMDAL Need UKL/UPL Need SOP

Change the proposal.

Make UKL/UPL* Create SOP

Incorporate SOP, environment management & monitoring to the project proposal

Land acquisition & resetlement (LAR)

Social economic survey

Report to NMC cc. to the World Bank

Serious impact No serious impact*

Need no objection from WB More than 100 people Less than 100 people reallocate reallocate Change the proposal

LAR action plan (based on the discussion with the PAP and Assistant 1)

Implementing action plan & monitoring

IVP a. No IVP b. as the main beneficiaries c. not as the main beneficiaries

report to RMC,NMC cc. to the World Bank

exclusive/separate discussion with IVP group during PPR (participatory poverty reduction) field study

IVP development proposal

incorporated in PRSAP (participatory poverty

reduction strategy)

exclusive/separate discussion with IVP group during sub-project

proposal development

IVP development proposal incorporated in the sub project

proposal.

o Action, managing and monitoring

o Action and monitoring

* The first simple impact (UKL-UPL, land acquisition) will be review by the Bank and the later will only be review by the National Monitoring Consultant/National implementing agency and Safeguard Monitoring Team

Preliminary survey

No LAR LAR

Involuntary Voluntary List of all proposal submit to the NMC cc to the WB

C. Implementation/incorporation to FS/TOR

D. Construction

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2. Safeguard Organizational Setting

EA/ANDAL & LARAP/Social

economic study/ IVP study

LAR implementing team & environmental

management supervisor

Sekwilda (Kabupaten Secretary)

Assistant 1& Di/Bapedalkab

Multi Stakeholders Forum creating the safeguard monitoring team:

Dinas (sectoral agency)

Pimpro (Project leader)

Poverty working group

Transparancy participatory

working group

Other working group

Safeguard Monitoring Team (TMP):

Bappeda (Planning agency)

Coordinate

member

Coordinate

Supervising in budgeting & conducting studies

The World Bank Implementing agency/NMC

review

Monitor & review

TOR/contract

TOR/contract

Provincial Bapedalda

Coordinate

Coordinate by Assistant 1 of Sekda, members: Bappeda, Bapedalkab, NGO related to environment, legal aids, IP and project affected people representatives IP development plan in

Poverty strategy or in sub-project

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3. Safeguard Investment Steps

Steps Budget:

Environmental Assesment (EA)

Land acquisition & Resettlement (LAR)

Institutions involved/OUTPUT

0 January Stakeholders forum creating safeguard monitoring team (TMP) The forum, ass 1 and safeguard monitoring team

1 Sectoral agencies, with help by Bappeda, while preparing the proposals they also screening the safeguard:

February Sectoral agencies, with help by Bappeda start preparing the budget/investment proposal based on budget estimation & poverty strategy.

Environment: i. NO need any measurement ii. Need SOP iii. Need UKL/UPL à the 1st

UKL/UPL in kabupaten review by the Bank, the rest by TMP

iv. Need AMDAL à change the proposal

Land acquisition & Res: i. No LAR (no PAP or voluntary) ii. Simple LAR: less than 100

people affected iii. LAR: more than 100 affected

but not all has to move iv. Change proposal: more than

100 people has to move

Bappeda: supervise Dinas to screen safeguard, prepare TOR and conduct the study

Sectoral agency (Dinas): responsible for screening, preparing TOR and conducting study

Safeguard monitoring team (TMP): supervise & review safeguard screening, TOR and the study

Output: EA, safeguard screen result, social economic study/LARAP

2 February- March Sectoral agencies prepared/conducting the participatory budgeting

Preparing UKL/UPL, any proposal with AMDAL still be prepared but not financed though ILGR and prepared for the subsequent year investment (year 2 of investment)

Conducting social economic study for LARAP. TOR of the study is subject to reviewed by TMS, implementing agency & the World Bank (for LARAP & 1st simple LARAP)

Dinas/Consultant: with assistance from Bappeda prepare UKL-UPL/LARAP study (so-ec census) Bappeda: assist Dinas on the study TMP: review UKL-UPL/LARAP/sosec census Output: Draft UKL-UPL/LARAP (sosec census)

3 4

April – May § Participatory

budgeting process § Budget decision

(Rakorbang)

§ Local government submitting the budget decision and proposal for ILGR, including safeguard table

§ Screening safeguard by executing agencies and The World Bank. § Giving feedback to local government

World Bank and Implementing agency: review safeguard screening, UKL-UPL/LARAP Output: feedback for the study & LARAP; final UKL-UPL & LARAP

5 11

June – December Dec. Final document for local budget

Implementing LARAP

Dinas/LA implementing team: Implement LA TMP: Monitor the implementation and handle complain

12 14

January – March Waiting grant disbursement from central government

§ If serious LA needed, the LA will be done this year and the construction will be propose for next year

§ Same as above & § Reviewing the result

Dinas/LA implementing team: Implement LA TMP: Implementation monitoring & complain handling World Bank and Implementing agency: Review the result of LA implementation/report Output: LA appropriately finish – for serious LARAP /Env. Impact, AMDAL/LARAP will be done all year

Other than above process later there is a need for safeguard midterm review and post project review.

Notes (see table 8 above):

• January is a preparation period of ILGR for the new Kabupaten. The stakeholders forum has been introduce, the working groups are working and the forum also establishing the safeguard monitoring team (TMP – tim monitoring pengamanan lingkungan dan hak masyarakat atas tanah) as a preparation

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for kabupaten investment and participatory budget process. TMP is constitute of assistant 1 from Sekda (Secretary of Kabupaten) office as coordinator, Bappeda office, related Dinas (sectoral agency) and NGOs (environment, legal aids, and NGOs that assisting vulnerable groups). The TMP will get appropriate training to understand this framework well.

• In February the Dinases start preparing their investment proposal, with help by Bappeda, as part of participatory budgeting process. The project proposed is based on the PRSAP. Bappeda and the Dinas, with help by the TMP start the safeguard screening (see the categories on the table above) and prepared the TOR for the required related studies. The project that will create a serious impact environmentally (need full EIA/AMDAL) or land acquisition (need full LARAP) could continued be prepared, though not for next year investment, but for the subsequent year investment. Since it need a full year of preparation. This type of project is normally not a kabupaten financed type of project, more likely become a proposal for National project in the Kabupaten.

• In April and May, while continuing with the participatory budgeting Dinas (or the consultant who works for Dinas or Bappeda) is preparing the required safeguard study such as UKL/UPL or LARAP (including social economic census). The sub-project proposal should include the sub-project alignment. In the end of May, after the decision on the investment proposal has been more definite and the draft of the studies have been ready, the list of investment proposal and the related safeguard requirement studies send to the executing agency (Ministry of Home Affairs) and the World Bank for review. The first simple LARAP and UKL/UPL in each Kabupaten will be reviewed in detail by the World Bank for the next The World Bank will only review the list and doing a random check. Every LARAP is subject to The World Bank review. The rest will be review mainly by TMP. Any proposal that need AMDAL or more than 100 reallocated should be change with the other proposal. Any investment proposal that need safeguard preparation (such as LAR) that the time and cost exceed the availability of the single budget cycle system should be proposed for the next cycle year, while the implementation that will be done is the LAR.

• In June till December local government will implementing the LARAP and recommendation from UKL/UPL that has to be done before construction if any. In implementing the LARAP the Dinas will establish a land acquisition implementing team constitute of local land office, Sekda, implementing agency, the related sub district head and village head. The Dinas also need to appoint a project supervision team that also supervises the environmental management in the sub-project. All recommendation from UKL/UPL should be part of TOR for construction implementation The World Bank, executing agency and the TMP will review the result. TMP will also facilitating any complain during this process.

• The local government could continue the preparation till March if necessary, since the budget allocation from central government for the next year budget is not disbursed yet till March.

• March the construction started. TMP will monitor the implementation.

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4. Sample Forms.

Simple social-economic census: Map/Project Alignment: Existing river New alignment

Economic conditon Impact on: Compensation offer/requested by PAP Occupation and education income Notes on

vulnerability Land Building Other asset Government

(/m2) PAP NJOP/tax

estimation abdul Fishery on the river above

Wifeà street vendor (2km from home) Entong à 1st grade ($km from home)

Low: 7000/hh

Should near from river and local market

1,5 m deep or 9m2

4 m2 1 simple ship dock; 2 manggo trees

X for land Y for building Z for semi permanent structure W for trees

A…. B….. C….. D……

M Rp/m2

Revi Women head household with small kid- school helper

……..

Recommendation for action: Negosiation result: Agreed by: 1. Cash compensation based on negotiation 2. Building communal dock

Land xx

Building yy

Other asset= z

Bupati: PAP (see attachment):

Simple IVP survey and focus group discussion minutes format: Map of IVP in kecamatan……kabupaten……..

Is IVP the main beneficiaries? c Yes; c No The IVP sensitivity issues:

# of IVP affected Their specific characteristic that relevant to the sub project:

Possible Impact or bias benefit Action plan (from focus discussion)

150 hh; 745 pop § There are not used to irrigated farming § Unequal farming productivity § Special extension services facilitation

Recommendation: § The NGO that used to facilitate should be part of the extension

services package facilitation

§ Monitor the IVP ability to coop with new ways of farming § Monitor the impact of new production to forest degradation

Simple environmental impact table: Description of the sub – project and its relation to the possible impact: Environmental issue: Dust

Monitoring plan: Measurement and threshold:

Operation procedure and environment management:

……………… Environmental issue: Ground water Monitoring plan: Measurement

and threshold: Operation procedure and environment management:

……………………….. Environmental issue: Land slide……

Protected Forrest

IP area

Proposed irrigation network

a

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Compensation agreement form

The project affected people named below agreed that the compensation of land is: § Another land in ….. (see map…) that they have seen and agreed with the condition as stated in the attached map and detail explanation (

including facilities: a. electricity, b. clean water, c. asphalt road…….) § Cash compensation:

o For land …….. o For building ……. o For other asset: § Trees a………………; b………….. § ………….

The affected people: Name: Detail plot in the map Total compensation ( transfer through bank account) Signature: Abdul See plot x2 map… Rp…………….. Acc No. BCA…………….. Revi This agreement is true and sign without any pressure from anybody and with total understanding of the PAP: Signature of the safeguard monitoring team: Signature of the facilitator: The right of PAP to get/have § Full replacement value for compensation § Independent opinion differ from the government and other people in the community § Compensation before the construction started § Clear and thorough explanation of the safeguard/land acquisition framework of this program

§ This is not a receipt of payment. The receipt should be sign after the payment or compensation finish and the fund transfer to the bank. Voluntary contribution form I understand that in this project I have the right for full replacement compensation but I decided without any pressure from anybody to donate my land for the purpose of …………………..development for public interest. I agree to donate because I will get a benefit in terms of: § …………………………………………………………………………………………………………………………, § the land I donated is less than 10% of the total area of my plot , § the land the land is cut less than 1,5 m deep, § there is no valuable structure or other asset in the area that I donated, § There is nobody renting my land or the renter still able to use my land with relatively equal productivity

o Signature of the renter:…………………………………………….

My statement is true and expressed without any pressure and with total understanding of the project and project safeguard framework

Signature: ………………………………………

I confirm that this agreement is true and have been signed without any pressure from anybody and with total understanding of the project and the safeguard project framework from the affected people: Signature of the safeguard monitoring team Signature of the facilitator

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Format of the minutes for public discussion for land aquisition and contribution: Overview of the public discussion: Map of the proyek and discussion organization: The structure of the meeting: .................................................................................................................................

Information given and when they have been distributed: 1. ......... 2. .......... 3. ........... The result: (including arrangement and rasional for land contribution from the community) Signature: Dinas and facilitator Verified by the PAP: Clause for environmental management that should be in the contractor contract: Conditional for environmental protection: § The second party should fully understood and follow the recommendation of the EIA as describe in the document

………….. § In implementing the construction the second party should always pay attention to the environmental impact as

mentioned in the document ……….. Sanction: If …………. and deviation from the recommendation of the environmental management plan as describe in ………..the first party could give sanction to the second party in term of: § ……….

Guarantee: § The second party has to guarantee that the construction implemented has already following the environment

management plan and recommendation on the document …. § The second party has to guarantee that the process during the pre construction and construction there should be no

environmental impact as describe in the document…… . If there is any impact, the second party should take necessary measurement agreed by the first party without any additional cost of construction.

Discussion group I

Diskusion group 2

End Notes1

Stakeholders constitute of strategic parties that could influence and be affected by a related decision. 2

IVP = Isolated and vulnerable people; in Indonesia context is: An indigenous community that is vulnerable and isolated due to their distinct culture compare to the mainstream culture in the area. See Glossary.

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3 Mitigation measure in this environmental framework is to protect environment based on procedures that regulated by the Indonesian laws, regulations

and this framework.4 Mitigation measure in this land acquisition framework is to make sure that impact will be minimal and the affected people livelihood will be restored

to the level before the land acquisition5 See sample forms for voluntary contribution in Section 8.

6 Any person who, on account of the execution of the Project, or any of its components would, as a result of taking of land, have their:

(i ) right, title or interest in any house, land (including residential, agricultural and grazing land) or any other fixed or movable asset acquired or possessed, in full or in part, permanently or temporarily; (ii) business, occupation, work, place of residence or habitat adversely affected; (iii) standard of living adversely affected; or(iv) access to productive assets adversely affected temporarily or permanently.7 Worse off in this framework means the affected people’s livelihood is reduced due to land acquisition, burden from financial consequences of moving

and the construction of the sub project. Livelihood comprises land tenure, related construction and other assets, business, employment opportunities, access to health and education facilities.8 Place which have similar land value, infrastructure, access to school – health facilities and employment opportunity.

9 LAR in the Indonesian law used to be regulated by the Presidential Decree number 55 which is more general, less focused in PAP participation and

has no requirement for full replacement cost (only direct compensation cost) compare to The World Bank requirement. After decentralization the responsibility for LAR processes in under local government. The draft new law for LAR is in line with the World Bank requirement, produced with the cooperation with The World Bank and ADB

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Additional Annex 12:ILGR Anti-Corruption PlanINDONESIA: Initiatives for Local Governance Reform Project

Overview

The project encompasses some of the most important elements of an anti-corruption strategy as major integral parts of its design. It acknowledges the inherent weaknesses of working at the kabupaten level and aims to tackle them in a systematic manner, actively promoting greater transparency and accountability. However, this positive approach in the design does not mean that there is room for complacency in relation to corruption. Due diligence must be given to ensure that the rules of the project are followed and its aims properly met. This will require a strict regime of monitoring, supervision and, where necessary, the use of sanctions.

Success of the ILGR depends on continued support from many actors (inter alia): MOHA, Bappenas and the national level government; province government; Bupatis, Bappeda and district level government; DPRD, civil society and, ultimately, citizens living in the participating communities. Consultants, contractors, facilitators and auditors will also play important roles in the project. This diverse set of actors needs to work together to ensure that the project achieves its goals in an effective, efficient and corruption-free way. Involvement of so many actors in the process can in itself act as a major disincentive to corruption: everyone knows that someone else is watching. The challenge will be to ensure that each actor remains properly informed on a regular basis of plans and progress. For this reason, it is possible that the project's increased levels transparency and proactive dissemination of information may eventually prove to be the most important of the anti-corruption elements.

It is recognized that strong local mechanisms will not be in place at the outset. Indeed, a primary purpose of this project is to develop and install improved systems (especially in relation to kabupaten governance, financial management and procurement) in a gradual, participative manner. Improvements can be expected to occur during and as a result of project implementation. This means that corruption risks may be greater at the beginning, and more support and supervision would therefore be necessary during the earlier phases. For this reason, the investment funds of the project are held back until an appropriate level of reform has been achieved.

As the new systems become established the increased levels of transparency and accountability will significantly reduce corruption risks. Monitoring by empowered communities and civil society groups will further reduce risks and the burden of supervision. The investment stage will begin after 36 months of start-up (including Project Preparation). However, the improvements in management and governance may take up to more than 4 years to become fully consolidated. This period will be a crucial learning stage where the local governments need to test and strengthen their new capacities. The investment funds are designed to encourage the reforms and provide an ideal opportunity for 'learning by doing'. Since the systems will still be new, it is essential that the effort is carefully overseen in order to avoid mismanagement and corruption. A similar tactic of combining facilitation, capacity building, investment grants and appropriate levels of supervision has been used to good effect by the KDP project to empower villages and kecamatans (subdistricts) over recent years.

Since the project aims to reach across sectors, and impact on kabupaten governance as a whole, it will be essential that cases of corruption be treated seriously. Investigation of complaints must be done in a timely and professional manner, and sanctions applied wherever cases are proven. The following sections of this annex review the elements of the project that relate directly to the prevention of corruption, identification

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and investigation of cases, and proposed remedies, including sanctions. The anti-corruption elements of this project are inseparable from the project Procurement, Financial Management, Disbursement and Disclosure strategies. In the ILGR, the Anti-Corruption Plan is not a 'stand-alone' feature, but rather a set of mainstreamed, integral facets pervading the project design, further details on most of the elements of this plan can be found in the relevant sections of this PAD.

Corruption mapping

Procurement of facilitation and TA contracts will be centralized. The normal procurement and financial management procedures acceptable to the Bank will be enhanced by measures for improved disclosure (see also below).

The main dangers of corruption in this project are at the kabupaten level where there will be three key areas of concern:

Numerous trainings, workshops and other small-scale activities. The many payments can be difficult to monitor and control, and can be subject to serious financial leakages or even completely bogus requests for reimbursement. Deliberate abuse of funds, especially during the early phase of the project, may severely discredit the entire effort. Tight controls need to be applied over such items as allowances and expenses. Difficulties are compounded because of the limited financial management capacity (in fact, it is not uncommon for funds to be 'stolen' from one budget line in order to cover up for a more innocent management error in another!), hence it is essential that the project team provides hands-on bookkeeping and basic management support. Disclosure of budgets will help reduce risks. Technical assistance related to the financial management and procurement reforms will also be a mitigating factor.

Procurement of infrastructure-related contracts. This will be a major area of concern at the beginning of the implementation phase and thereafter. There must be stringent adherence to procurement rules and increased disclosure in the procurement process. The Dinas agencies will be managing contracts but not constructing the infrastructures. Involvement of end-users/civil society in the procurement process, as members of bidding committees and process monitoring teams, will act as a deterrent to abuse. Bids must be open to contractors from outside of the kabupaten and sufficient efforts must be made to ensure that bid information is widely disseminated. Transparency is a key: the likelihood of monopoly-control and collusion is greatly reduced. Simplification and standardization of forms and procedures will also reduce corruption risks.

Supervision and quality control. In the past, quality control in infrastructure projects has tended to be very poor. Often there has been collusion between supervisors and contractors resulting in the certification and payment of infrastructures that are substandard, even of dangerously bad quality. The end result is roads, schools and other constructions cost more than they should and are soon in a grave state of disrepair. This project must ensure that trained, motivated supervisors are actively monitoring quality as infrastructures are constructed. Spot checks must be made by national project staff and technical audits performed on a reasonably large sample of cases. Civil society groups (NGOs) will be involved in ensuring that standards and specifications are being met. This will include the involvement of NGOs in routinely checking specifications in each subproject location. Attention will be given to the control and payment systems where simplification, standardization and civil society oversight will all reduce risks. The project will ensure that timing of contractor payments is carefully tracked, as payment delays are often a sign of rentseeking.

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Enhanced disclosure provisions

Recently the World Bank and GOI (Bappenas) have agreed upon a set of enhanced disclosure provisions that will be piloted under new Bank-assisted projects. Participating kabupatens in ILGR will agree to adopt the enhanced disclosure provisions, at least in respect to Bank-supported activities. These provisions include:

• Audit reports will be made publicly available by both the Borrower and the Bank• The mid-term report will be made publicly available by the Borrower • The procurement process, where the Borrower has agreed that additional information concerning

parts of the procurement process in the project will be made publicly available. The legal agreements for this project will include specific undertakings to effectuate these arrangements. These undertakings would eliminate the need for GOI approval to be obtained prior to the public release of such information.

Salient information from monthly and quarterly reports, will also be made available to the public and disseminated to the press.

For other documents, which are currently not disclosed without Borrower consent, the Bank will continue to consult GOI prior to disclosure.

These provisions are a good starting point. All ILGR locations are expected to go beyond this by not only making basic information routinely available, but by making it available in a form that is useful and easily understood. The information needs of different groups need to be considered. The needs differ between government staff; civil society; companies and communities. The project will acknowledge these differences and endeavor to regularly supply each stakeholder group with sufficient and clear information to meet their needs.

Civil society oversight

Training for people from civil society groups is a key part of this project. This training will help prepare the groups to play a more active and effective role in the decision-making and monitoring process. Their involvement in key parts of the project (helping to oversee aspects such as procurement, financial management, progress and quality control) can provide a vital, objective element to the project. Clearly it is essential for the involvement to be bono fide, and not captured by the "pseudo-NGOs" which proliferate in some areas. Such NGOs include those that have a blatantly, unswerving anti-government stance, and also those that are actually created for and by civil servants. The key will be to engage in dialogue first and foremost with genuine civil society groups that have good motivation and capacity. Failure to do so may lead to serious cases of fraud and corruption later on since pseudo-NGOs can attempt to legitimize corrupt practices.

Partners from civil society will participate in many aspects of the project, from budget planning to monitoring. The project will include civil society in kabupaten procurement committees and monitoring teams to ensure there is no collusion between contractors and dinas staff involved in implementing the projects. The project will then empower local universities, NGOs and journalists networks to monitor progress and local government performance through contracts for independent monitoring, citizen score-cards and assessments of citizen satisfaction with kabupaten services. These efforts will help ensure

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demand for greater accountability and transparency of local government representatives.

As members of the multi-stakeholder forums, civil society groups will have an ideal platform to voice their concerns, particularly in relation to slow, shoddy and corrupt practices. Project information dissemination will include links to the local press, radio and strategic civil society networks, ensuring that people are kept up-to-date between and outside of the forums.

It is planned that, beyond the measures imbedded in the project, local civil society groups will also be asked to participate in monitoring activities to be financed separately through an approved Japan Social Development Fund grant.

Complaints handling, monitoring and supervision mechanisms

The project will have mechanisms to investigate and follow up on complaints from communities (including individuals, families and community-based groups); civil society (NGOs, religious, education and other organizations); consultants and companies; and also civil servants. Complaints might be very open and vocal, encouraged through supervision or monitoring visits, or submitted anonymously. The ILGR complaints system will differ somewhat from that used by KDP in that it must be more easily accessible to local government, contractors and other groups, whereas the focus of the KDP system has tended to be response to inputs from communities. This may result in a shifting of the typologies of complaints towards more technical, procurement and financial management issues. Of course, like that in KDP, the complaints handling system in ILGR must also be capable of dealing with cases reported by communities, such as elite capture of benefits and other abuses of power.

It is essential that independent channels be provided for complaints related to corruption, since project staff and consultants may be implicated in corruption cases. This project will replicate systems tested under KDP, whereby citizens have several channels for their comments and complaints. It is also essential to discriminate between cases that are due to innocent error or inexperience, and cases that are due to deliberate, illegal acts. To ensure that innocent people are not persecuted, the complaints handling system must include a professional system of investigation. BPKP will be the main auditors for the project and Bawasda will act as an independent auditor in relation to kabupaten level procurement. The local government will be required to make a commitment towards investigation and prosecution of cases involving KKN.

Information concerning cases will be made public through meetings and the project's information dissemination system – particular attention will be given to cases that have been successfully prosecuted, since news of these will act as a disincentive to future abuse.

Cases of corruption can be reported, but they can also be found as a result of supervision and monitoring. The main methods by which corruption cases are likely to be found are as follows:

Internal monitoring of the project is mainly designed and implemented though management and facilitation contracts allotted from the national level. The key will be to ensure that reports of corruption, in whatever form, are shared with the appropriate levels of the project in a clear and timely fashion. For example, if a consultant suspects that there is a case of collusion at the kabupaten level, then a report should be sent immediately to appropriate people at the province and national levels for further investigation.

External monitoring will also be undertaken (e.g. see notes on civil society oversight above) and cases

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reported from these activities must also be properly investigated and tracked.

Quality control reports and audits, from internal consultants and from external agencies will be another possible starting point for investigations into corruption. The role of Regional TA in the regular monitoring of quality issues will be crucial to ensuring that standards are met and maintained. Annual technical and financial audits will be a means of checking whether the TA reports have been accurate, and whether additional measures need to be applied.

Progress and payment records can also give clues as to where corruption is taking place. Unduly high payments and late payments should be investigated.

Score cards which measure citizen satisfaction of the project will also be used. The results of these need to be very carefully analyzed, since public perceptions of problems can sometimes be misleading. However, the cards can provide an indication of whether corruption remains a problem in a given area. Appropriate investigations must be launched wherever indications are strong that corruption is a problem.

Government and Bank supervision may also catch infringements that have not been reported through the normal channels (this is often itself a sign of collusive practices concerning project facilitators or staff).

As with incoming complaints, cases caught during monitoring and supervision, will be tracked in such a way that it will be possible to easily tell which cases remain unresolved. Clearly a robust system of information management is required to filter incoming information. This system needs to be able to refer cases to the appropriate people (or authorities) and track progress of each individual case. Again, a system similar to that being used in KDP will be applied.

Policies to mitigate chances of collusion

The prominent role of multi-stakeholder forums in the project will greatly reduce the risk of collusion. It is vital that the forums are truly representative of a broad section of society. The forums must also be properly encouraged and supported, so that all members can play an active role.

The emphasis on transparency in the ILGR will also discourage collusion. For this reason the project needs to disseminate all salient information direct to civil society and private sector groups, as well as to the press.

Linking project payments to proven progress (e.g. with proper certification of quality) will also reduce the scope for corrupt and collusive practices.

External monitoring (see above) will further reduce risks of corruption and collusion.

The wide range of policy reforms related to governance, financial management and procurement should all lead to a more responsive and responsible local government. The project helps the kabupatens to work through these reforms and implement them.

Sanctions and remedies:

There are many strict laws on theft and corruption in Indonesia, but severe penalties for significant abuses are seldom applied, especially in cases concerning civil servants and people with political influence. Sanctions need to be applied otherwise the social stigma from the publicity surrounding a case will be the

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only disincentive to corruption. This stigma is unlikely to be an effective deterrent on its own. If fact, if it becomes public knowledge that prosecuted cases receive little or no punishment then there will be a severely perverse negative effect. It will be essential that cases of corruption be treated seriously. Suspicion of corrupt practices would be enough to trigger the suspending of payments (or reimbursements) to specific contractors, subprojects, or even entire districts depending on the severity of the apparent case. Where corruption allegations are proven, expended funds would have to be returned and appropriate action taken. If appropriate action is not taken then pressure must be applied at the next level. For example, a worker is engaged is stealing – if the contractor who employs the worker does not take appropriate action then the contractor will be held responsible and held liable. Where contractors are proven guilty of corrupt practices and the local dinas does not take action, then the kabupaten may be held complicit and jointly responsible. The project will encourage a system of blacklisting for companies that engage in collusion or have produced unacceptably poor quality results. Due care will be taken to ensure that this system does not result in threats and rentseeking.

The project will require government civil servants working on the project to :

(i) sign/agree to code of ethics related to KKN free project management;(ii) require the Kabupatens to take administrative action against staff involved in KKN including

prosecution/ or demotion

Since the project aims to reach across sectors, and impact on kabupaten governance as a whole, it is essential that sanctions be applied strictly and fairly. A 'one-strike' policy needs to be applied to contractors, facilitators and consultants: any case of complicity in corruption would lead to dismissal and possible prosecution.

An entire kabupaten would be removed from the project list if it fails to deal with corruption issues properly – even if the specific cases are not directly linked to the project – since ILGR cannot function in a setting where corruption is allowed to thrive. Therefore, the kabupaten governments need to ensure that other development activities (irrespective of funding source and sector), also adopt strict governance rules.

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Attachment 1. Enhanced Disclosure of Information

The implementing agency and the World Bank will each make publicly available, promptly after completion of a mid-term review of a project carried out in accordance with this agreement, the mid-term review report and the aide memoire prepared for this purpose.

The implementing agency and the World Bank will each make publicly available promptly after receipt all final audit report (financial or otherwise, and including qualified audit reports) prepared in accordance with this agreement, and all formal responses of the government.

The implementing agency will (and the World Bank can):

• make publicly available promptly after finalization all annual procurement plans and schedules, including all updates thereof;

• make available to any member of the public promptly upon request all bidding documents and requests for proposals issued in accordance with the procurement provisions of this agreement, subject to payment of a reasonable fee to cover the cost of printing and delivery. In the case of request for proposals, the relevant documents will only be made available after notification of award to successful firm. Each such document will continue to be available until a year after completion of the contract entered into for the goods, works or services in question;

• make available to any member of the public promptly upon request all short lists of consultants and, in cases of pre-qualifications, lists of pre-qualified contractors and suppliers;

• disclose to all bidders and parties submitting proposals for specific contracts, promptly after the notification of award to the successful bidder/consultant, the summary of evaluation of all bids and proposals for such proposed contract. Information in these summaries will be limited to a list of bidders/consultants, all bid prices and financial proposals as read out at public openings for bids and financial proposals, bids and proposals declared non responsive (together with reason for such an assessment), the name of winning bidder/consultant and the contract price. Such summaries will be made available to the public, promptly upon request;

• allow representatives of the end-users of the goods or works being procured to attend the public bid openings;

• make publicly available and publish widely contract award information for all contracts for goods and works above US$100,000 equivalent and all contracts for consultants above US$50,000 equivalent, promptly after such award; and

• make available, promptly upon request by any person or company, a list of all contracts awarded in the three months preceding the date of such request in respect of a project, including the name of the contractor/consultant, the contract amount, the number of bidders/makers of proposals, the procurement method followed and the purpose of the contract.

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