Documentof The World Bank FOR OFFICIAL USEONLY ReportNo: 42409-ID PROJECTAPPRAISAL DOCUMENT ON A PROPOSEDLOAN INTHEAMOUNTOFUS$41,19MILLION AND PROPOSEDCREDIT INTHEAMOUNTOFSDR 119.5 MILLION (US$190.0 MILLION EQUIVALENT) TO THE REPUBLIC OF INDONESIA FOR THE NATIONAL PROGRAMFOR COMMUNITY EMPOWERMENT INRURALAREAS April 16, 2008 SustainableDevelopmentDepartment East Asia and PacificRegion This document has a restricteddistribution and may be used by recipients only in the performanceo f their official duties. Its contentsmay not otherwisebe disclosedwithout World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective October 2007) Currency Unit = IndonesianRupiah IDR 1,000 = US$0.107527 US$1 = Rp.9,300 FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities ACI Anti Corruption Committee for Indonesia ADB AsianDevelopment Bank BAPPENAS BadanPerencanaandan PembangunanNasional (National Development Planning Agency) BPKP BadanPengawasanKeuangandan Pembangunan(State Internal Audit Commission) BRR Reconstruction and Rehabilitation Agency for Aceh andNias CAS Country Assistance Strategy CCT Conditional CashTransfer CDD Community-driven development CIDA Canadian International Development Agency DA DesignatedAccount DANIDA DanishInternationalDevelopment Agency DFID Departmentfor International Development, UnitedKingdom DG Directorate General DPL Development Policy Loan DSF Decentralization Support Facility EIRR Economic Internal Rate of Return ESW Economic and Sector Work GO1 Government of Indonesia GTZ GermanAgency for Technical Cooperation HH Household IBRD International Bank Reconstruction and Development IDA International Development Association IFC International Finance Cooperation IFR InterimFinancial Reports IRR Internal Rate of Return JBIC Japan Bank for International Cooperation JSDF Japan Social Development Fund KDP3b Third KecamatanDevelopment Project, seconc,F lase KPPN MinistryofFinance's Treasury Office M&E Monitoring and Evaluation MDF Aceh Multi-Donor Trust Fundfor Aceh andNorth Sumatra ii MDG MillenniumDevelopment Goals MIS Management InformationSystem MOF Ministry of Finance MOHA Ministry of Home Affairs FOR OFFICIAL USEONLY NGO Non-Governmental Organization NRM Natural Resources Management O&M Operation and Maintenance Operations Policy and Country Services osu OPCS Operations Services Unit PAD Project Appraisal Document PDO Project Development Objectives PENSA Programfor EasternIndonesia Small and MediumEnterprise Assistance PMD Directorate General of Village Community Empowerment, within MoHA PMU Project ManagementUnit PNPM ProgramNasional PemberdayaanMasyarakat (National Program for Community Empowerment) RESPEK KDP scale-up, with locally funded Block grant inPapua& West PapuaProvinces RPM RegionalProcurementManager QCBS Quality and Cost-Based Selection SAD1 Smallholder Agribusiness Development Initiative Satker SatuanKerja (Project ManagementUnit) SPP PaymentRequest SUSENAS National Socioeconomic Survey TA Technical Assistance TOR Terms of Reference TPK Tim PengelolaKegiatan (Implementation Teams) UPK Sub-district Management Unit UPP UrbanPoverty Project VIP Village Infrastructure Project Vice President: James W. Adams, EAPVP Country Director: Joachim von Amsberg, EACIF Sector Director: Christian Delvoie, EASSD Sector Manager: Sonia Hammam, EASIS Task Team Leader: Scott E. Gupgenheim, EASIS This document has a restricted distribution and may be used by recipients only in the performance of their officialduties. Its contents may notbe otherwise disclosedwithout WorldBank authorization. INDONESIA INDONESIA: NationalProgramfor CommunityEmpowermentinRuralAreas TABLE OF CONTENTS I STRATEGICCONTEXTANDRATIONALE.................................................................. . 1 A Country and Sector Issues .............................................................................................. . 1 B. Rationale for Bank Involvement .................................................................................... 2 C Higher Level Objectives to which the Project Contributes ........................................... . 3 I1. PROJECT DESCRIPTION ................................................................................................. 4 A. Lending inst~ment ........................................................................................................ 4 B Program Objective andPhases....................................................................................... . 4 C. Project developmentobjective andkey indicators........................................................ 5 D Project components........................................................................................................ 6 . E Lessons learned andreflected inthe project design....................................................... . 7 F Alternatives consideredandreasons for rejection.,....................................................... . -8 I11. IMPLEMENTATION ........................................................................................................ -9 A. Partnershiparrangements............................................................................................... 9 B. Institutional andimplementationarrangements........................................................... 11 C. Monitoringand evaluation of outcomeshesults........................................................... 11 D Sustainability ............................................................................................................... . 13 E. Critical risksandpossiblecontroversial aspects.......................................................... 13 F. Loadcredit conditions and covenants......................................................................... -15 IV. APPRAISAL SUMMARY................................................................................................ 16 A. Economic andFinancial Analyses ............................................................................... 16 B Technical...................................................................................................................... . 18 iv C Fiduciary ....................................................................................................................... . 18 D Social ........................................................................................................................... . 20 E Environment................................................................................................................. . 25 F Safeguard policies . ......................................................................................................... 25 G Policy Exceptions and Readiness................................................................................. . 26 Annex 1: Country and Sector or Program Background ................................................................. 28 Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies .......................... 35 Annex 3: Results Framework and Monitoring.............................................................................. 36 Annex 4: Detailed Project Description.......................................................................................... 56 Annex 5: Project Costs .................................................................................................................. 59 Annex 6: ImplementationArrangements ...................................................................................... 60 Annex 7: Financial Managementand DisbursementArrangements............................................. 61 Annex 8: Procurement Arrangements ........................................................................................... 79 Annex 9: Economic and Financial Analysis.................................................................................. 84 Annex 10: SafeguardPolicy Issues ............................................................................................... 88 Annex 11: Project Processing...................................................................................................... 101 Annex 12: Documentsinthe Project File.................................................................................... 102 Annex 13: Statement of Loans and Credits................................................................................. 104 Annex 14: Country at a Glance .................................................................................................. 107 Annex 15: Better GovernanceAction Plan................................................................................ 109 Map IBRD36049 ........................................................................................................................ 118 V INDONESIA NATIONAL PROGRAMFOR COMMUNITY EMPOWERMENT INRURAL AREAS PROJECT APPRAISAL DOCUMENT EAST ASIA AND PACIFIC EASIS Date: April 16,2008 Team Leader: Scott E. Guggenheim Country Director: Joachim von Amsberg Sectors: Sub-national government Sector Director: Christian Delvoie administration (25%); Water supply (20%); Sector Manager: Sonia Hammam Irrigationand drainage (20%); Roads and highways (20%); Primary education (15%) Themes: Decentralization (P);Rural policies and institutions (P);Participation andcivic engagement(P);Social safety nets (P);Rural services and infrastructure (S) Project ID: P105002 Environmental screening category: B - Partial Assessment [XI Loan [XI Credit [ 3 Grant [ ]Guarantee [ ]Other: For Loans/Credits/Others: Total Bank financing (US$m.): 231.19 Proposedterms: Fixed SpreadLoan (FSL). IBRDterms of 22.5 years maturity including 12 years grace period. The credit would have standard IDA terms of 20 years maturity including 10 International Bank for Reconstruction and 39.09 2.10 41.19 Development International Development Association 180.33 9.67 190.00 (IDA) Total: 1,764.70 94.58 1,859.29 Borrower: Republic of Indonesia ResponsibleAgency: Directorate Generalof Village Community Empowerment MOHA (Ministry of Home Affairs) J1. RayaPasar Minggu Km 19- Jakarta Indonesia Tel: 62-21-7942373/74 Fax: 62-21-79196118 Projectimplementation period: Start June 1,2008 End: September 30,2010 Expectedeffectiveness date: June 30,2008 Expectedclosing date: June 30, 2011 vi Does the project depart from the CAS incontent or other significant respects? [ ]Yes [XINo Does the project require any exceptions from Bank policies? [ ]Yes [XINO Have these beenapproved by Bank management? [ ]Yes [XINO I s approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risks rated "substantial" or "high"? [XIYes [ ] N o Does the project meet the Regional criteria for readiness for implementation? [XIYes [ ] N o Project development objective: PNPM's overall objective i s to reduce poverty and improve local-level governance inrural areas o f Indonesia through the provision o f investmentresources to support productive proposals developed by communities, usinga participatory planning process. Project description[one-sentence summary of each component] The National Community Empowerment Program for Rural Areas (PNPM-Rural) will be a three year Specific InvestmentLoan (SIL). It provides for one year o fblock grants to communities but two years for scale-up and impact monitoring. Pendingbudget and borrowing approval by parliament, it is probable that further financing through repeater projects will berequested by the government to extend the program at least through 2011. Component 1: Block Grants (US$561.2 million) will provide block grants to sub-districts and villages to support investment in social and economic infrastructure, including: Kecamatan Grants and Planning Grants. Component 2: Facilitation and Training (US$ 47.1 million) will provide technical advisory services and other material support, and training to strengthenthe capacity o f local government institutions. Component 3: Implementation Support and Technical Assistance (US$23.5 million): will provide technical advisory services and other material support, and training to support implementation at national, provincial and district-level through the recruitment o f technical and social facilitators to provide technical advice, field oversight, and local-level coordination o f the Project. Component 4: Support for Project Management (US$3.8 million): to provide technical advisory and other material support, and training to strengthenP M D and support the management o fthe incremental activities generated by the Project including introducing electronic file management for PMD, office improvements, and the provision o f advanced specialized training in management, fiduciary controls, andevaluation. Which safeguard policies are triggered, if any? EnvironmentalAssessment (OPBP 4.01) InvoluntaryResettlement (OP/BP 4.12) Indigenous Peoples (OP/BP 4.10) Significant, non-standard conditions, ifany: None Boardmesentation: vii Loadcredit effectiveness: The Borrower shall adopt and apply a Project Manual acceptable to the AssociatiodBank. Covenants applicable to project implementation: 1. The Borrower shall maintain the PMD Secretariat untilthe completion o fthe project with terms o f reference, facilities, staff, and a Project Manager at all times acceptable to the AssociatiodBank. 2. Audits shall be carried out inaccordance with BPKP's audit manual and inaccordance with TOR agreed with the AssociatiodBank. 3. By October 31 o f each year, inform each Kabupatenparticipating inthe project that all auditing activities for subprojects are to be carried out exclusively by auditors appointed by P M D inaccordance with the manual and terms o f reference acceptable to the AssociatiodBank. 4. P M D shall appoint a suitably qualified and experienced person who shall be the Project Manager of the Project Secretariat and, as such, responsible for the day-to-day management of the Project. The secretariat shall be provided with adequate funds and other resources, and supported by suitably qualified and experienced technical, financial and administrative personnel inadequate numbersas neededto accomplishthe objectives o f the Project. 5. PMD shall cause to be established and thereafter maintained, untilthe completion o f the project, a Poverty Reduction Board (PPRB) at the Provincial and Kabuapten levels whose mandate, compositionand terms o f reference shall be acceptable to the Association, to be responsible for overall coordination and management o fthe Project at the respective level. 6. TimPengendali PNPM shall, inconsultationwith the relevant kabupaten, annually select proposed project kecamatans from a list o f kecamatans provided by PMDSatker,in accordance with criteria set forth inthe project manual, and furnish such list for approval to the association. 7. The PMD secretariat shall make available to the public, at all times, untilcompletion o f the project, free o f charge, the list o f project kecamatans. 8. The Borrower through the relevant bupatis and camats shall issue by October 3 1 in each year, public information disclosing to villagers and their representatives all administrative, financial, social, procedural,technicai, and environmental aspects o f the project. 9. The Project Manual shall be available free o f charge at the kecamatan office. 10. The Borrower will provide KecamatanPlanning and Community Training Grants in accordance with conditions agreed with the AssociatiodBank. 11. The Borrower will provide KecamatanBlock Grants inaccordance with conditions agree1 with the AssociatiodBank 12. The Borrower shall ensure that prior to carrying out sub-project works, the Kabupaten Facilitators will have completed a technical review o f each subproject to ensure that all - financial and technical sp&ifications have been complied with: viii I. STRATEGICCONTEXTANDRATIONALE A. Country and Sector Issues 1. Background.Prior to the East Asia financial crisis, Indonesiahad experiencednearly 30 years of poverty reduction, with poverty rates dropping from more than 50 percent in 1970 to less than 20 percent in 1997. However, when the economic crisis hit in July 1997, it unraveled years of progress achieved towards sustainable poverty reduction and plunged more than 40 percent of Indonesia's population below the poverty line. 2. Indonesia has made a strong recovery since the financial crisis. Its transition to democratic governance continues, with President Yudhoyono initiating important reforms on several fronts. However, poverty reduction remains a paramount challenge. Although the number of people living below the poverty line has declinedto pre-financial crisis levels, about 110 million "near poor" people continue to live on less than US$2 a day. Poor households have beenbenefiting less from growth than wealthier households in recent years. The unemployment rate is also still high, calculated at an estimated 10.9 million people, or about 10.3 percent of the total workforce. These poor and disadvantagedpopulations are vulnerable to external shocks and could easily fall back into poverty in the event of sickness, a natural disaster, unemployment, or harvest failure. They also have extremely limited access to basic services, such as health, education, housing, capital, and infrastructure. 3. To promote more broad-basedpost-recovery growth, in August 2006 the Government o f Indonesia (GOI) launched the first nationwide poverty reduction program. It comprises two primary pillars: (a) the National Program for Community Empowerment or Program Nusional Pemberdayuun Masyarakut (PNPM); and (b) the Conditional Cash Transfer (CCT) Program targeting poor communities and households. A number of sectoral programs are linked to this main umbrellainways that are expected to increase over time. Thus, for example, the ministries of both Education and Health are expected to target their investments and measure their effects inparallel withthe entry ofPNPMinto poor communities. 4. StrategicFrameworkfor PNPM. The PNPMprovides abasic framework for all central government poverty reduction programs and uses as a basis two existing poverty reduction models - community empowerment in rural and in urban areas through the Kecamatan Development Project (KDP) and Urban Poverty Project (UPP), Linked to these projects are an increasing number of sectoral programs that provide specialized inputs to improve the delivery of poverty services, and local governments have also begun to integrate sustainable education, health, and agricultural services into these operations. Annex 1 provides additional background information on the PNPMprogram. 5. PNPM buildingblocks - the KDP and UPP programs.The rural arm of the PNPM is the Kecamatan Development Program (KDP), which was launched by GO1 in 1998. It is a national program implemented by the Ministry of Home Affairs that works to alleviate poverty, strengthen local government and community institutions, and improve local governance. Currently, KDP i s in its third phase and is expected to run until 2009. The program provides block grants of approximately Rp. 500 million to 1.5 billion (approximately US$56,000 to 1 US$165,000) to sub-districts(kecamatan), depending upon the population size. Villagers engage in a participatory planning and decision-making process to determine the appropriate allocation of resources based on their self-determined needs and priorities. From 1998 to 2006, KDP has covered 34,233 of the poorest villages in Indonesia - approximately 49 percent of the 69,956 villages in the country. The urban arm of the PNPM is the Urban Poverty Program (UPP), which was similarly developed following the 1997 East Asia financial crisis, is discussed in detail ina separate appraisaldocument that is being processedinparallel with this project. 6. Based on past experience and lessons learned from ongoing CDD programs, the PNPM will include the creation of a unified system and design for program delivery, better national targeting of the poorest, direct transfer of funds to villages, and increased allocations for block grants. A pilot program is underway to examine how best to incorporate the achievement of certain education and health MDGs into the PNPM approach. In addition, the national coverage of the PNPM strengthens the Government's capacity for ex post and ex ante disaster risk management at the local level. 7. Although the PNPM is designed as a consolidated poverty reduction program, between 2007 and 2009, the government will continue to maintain separate urban and rural windows for implementation, managed by the Ministry of Public Works (UPP) and the Ministry of Home Affairs (KDP). This is due to the scale and scope of the PNPM, the oversight of different ministries, andthe operational differences tailored to the rural andurbancontexts. 8. However, the convergence of systems is already taking place at the village level, and additional opportunities for common implementation strategies have been identified during project preparation, such as: procurement; monitoring and evaluation; complaints handling; the anti-corruption action plan, and training of facilitators. To the extent that it is possible, standardization of many fiduciary aspects o f project supervision of the two programs has also been incorporated into project design. These include: a common financial management and auditing framework; developing shared sanctions protocols for the KDP and UPP projects; a consistent financing framework; and, harmonization of the procurement rules for CDD projects. B. Rationalefor BankInvolvement 9. Through the establishment of the KDP and UPP programs, the World Bank has gained considerable experience in Indonesia in supporting the government's goals of greater participation in development, more effective governance, and better poverty alleviation programs. The three KDP projects, and UPP 1, 2 and 3, have worked effectively with local institutions to demonstrate that participatory principles can work in Indonesia on a large scale andthat community driven projects can meet high standards for quality and accountability. 10. The Bank is uniquely positioned to work with GO1 to develop and institutionalize the PNPM framework due to: (a) years of experience in supporting the government to manage and execute the UPP and KDP projects; (b) readiness and ability to provide necessary technical expertise in required areas; (c) early intervention in the form o f additional financing to assist in development of the program; (d) the strong mechanisms inplace to facilitate project supervision, results monitoring and evaluation, quality control, and beneficiary targeting; and (e) capacity to 2 assist the government in synergizing the participation of donors supporting the PNPM. In addition, the Bank can leverage its institutional experience and knowledge of global best practice of large-scale, national CDD programs, such as inBrazil, India, and Mexico. C. HigherLevelObjectivesto which the ProjectContributes 11. PNPM has the overall development objectives of reducing poverty and improving local- level governance and service delivery in rural and urban areas in Indonesia. The project is consistent with the Bank Group Country Assistance Strategy (CAS) discussed by the Executive Directors onNovember 25,2003 (Report No 27108-IND October 29,2003) which identifies two primary constraints to reducing poverty in Indonesia: (a) inadequate productive employment opportunities resulting from a weak investment climate; and, (b) lack of quality service delivery to poor people. Progress inthese areas has beenhindereddue to the underlying problem of weak governance. The CAS aims to address these constraints through four delivery platforms, including a community-driven development platform. Approximately 25-35 percent of Bank lending during the CAS period is expected to be directed through the CDD platform, primarily through the PNPMprograms. 12. The 2006 CAS Progress Report discussedby the Executive Directors on October 5, 2006 (Report No 36865-IND September 5, 2006) states that the Bank's program in Indonesia will be expanded through: (a) stronger support for governance reform via civil service reform and transparent, nationwide poverty programs; (b) focus on disaster risk management; (c) increasein program financing for the remainder of this CAS period; and (d) stronger partnerships. The proposed scale-up of the PNPM is fully consistent with the Bank's Country Assistance Strategy (CAS) for Indonesia and primarily supports areas (a), (b), and (d). Preparation of a new Country Partnership Assistance Strategy (CPS) is underway; and Board presentation is expected in the first quarter of FY09. 13. Financing.To beginPNPMimplementationin2007, GO1requested US$258.5 million in additional financing from the Bank. A total of US$123.0 million was approved for KDP 3b (negotiatedon March 8, 2007) and US$135.5 million for UPP 2 (negotiated on April 9,2007). 14. At full development, the total cost of PNPM (both urbanand rural) will be approximately $1.7 billion per year. For 2008, the PNPM inrural areas is expected to cost US$900 million per year. This cost will be shared by domestic financing (central and local), and donors, primarily the World Bank. GO1 will initially finance 70% of the program and scale up to full financing by 2011. In2008, approximately 25% of the government's funding will be provided by sub-national governments while an appropriate "ability to pay" district government contribution scale for the long term is developed by the Ministry of Finance. For 2008-2009, the Bank is financing US$409 million of the program - US$177.7 million inurban areas and US$231.2 million inrural areas. Detailed program costs are given inAnnex 5. 3 11. PROJECT DESCRIPTION A. Lendinginstrument 15. The NationalProgram for Community Empowerment for Rural Areas will be athree year Specific Investment Loan (SIL). It provides for one year of block grants to communities but two years for scale-up and impact monitoring. Pending budget and borrowing approval by parliament, it is probable that further financing through repeaterprojects will be requestedby the government to extendthe program through 2011. B. ProgramObjective and Phases 16. PNPM's overall objective is to reduce poverty and improve local-level governance in rural areas of Indonesia through the provision of investment resources to support productive proposals developedby communities, using a participatory planning process. 17. PNPM is meant to extend until 2015. It will go through two phases. The current phase i s the scale-up, when it rises from the current, 2007 level of some 40,000 urban and rural villages covered by the KDP, UPP, SPADA, and PPIP programs, to full national coverage of 70,000 communities by 2009/2010. At that point it moves into a sustaining mode. During this period local governments will take on greater responsibility for financing. GO1 also expects to bring supply-side initiatives from health, education, rural development and other sectors into the PNPMumbrellato maximize complementaritiesfor poverty reduction. 2007 includes 83 subdistricts funded by the Acemias Multi-DonorTrust Fund. 2008 includes 386 subdistricts inPapuawhose blockgrant comes from the provincialbudget. 2009 PNPM-UPP andother PNPM projectscover all other locations. 18. During PNPM-Rural's 2007-2009 scale-up period, the program's core architecture will not deviate in any significant way from the existing KDP. KDP already is a very large project and its core operating systems were both designed for future scale-up and have already demonstratedtheir ability to incorporate an increased scope. The three main differences between the KDP3 operations and the project agreedduring appraisal are: 4 Block grants rise from an average of Rp. 1.2 billion per subdistrict to approximately Rp.2.1 billion; The numberof subdistrictsrises from 2,050 in2007 to 2,629 in2008; and 0 Decentralizing government oversight, coordination, and policy guidance to provincial levelproject managers. 19. The potential impacts of the PNPM are projected to be significant. A preliminary economic assessment of the program showed that by 2009, when the program would cover all kecamatans at the proposed benefit level of Rp. 3 billion per kecamatan, it could benefit nearly 16 million families and increase their income by 11 percent on average by providing about 60 days of work. Some 6 million householdswould be pulledout of poverty. 20. The additional income would benefit workers by raising the wages of all unskilled workers by reducing the competition from desperate workers who drive wages down. By developing economically productive roads, irrigation and drainage works, and water supply and sanitation works, the PNPM will permanently increase employment and income; this increased purchasingpower would help to activate village economies. C. Project development objective and key indicators 21. PNPM's overall goal is to reduce poverty and improve local-level governance in rural areas of Indonesiathrough the provision of investment resourcesto support productive proposals developed by communities, using a participatory planning process. PNPM-Rural's development objective is: villagers inPNPM-KDP locations benefit from improved socio-economic and local governance conditions. 22. Key performanceindicators for the PDO level of PNPM-Rural include: 0 Improved HHexpenditure rates and improved access to economic and social services inaminimumof2,500 poor subdistrictsin2008; min.of4,000 subdistrictsin2009. 0 Through the PNPM GenerasiCCT pilot, improvedhealth and education indicators in 130kecamatanin5 provinces: Health: immunization coverage for 12-23 month olds increases by 10% points from 38% in2005 to 48% in2010; Prenatalcare visits increaseby 10% points from 56% in2005 to 66% in2010. Deliveries assistedby trained professionalsincrease by 10% points from 40% in2005 to 50% in2010. Education: increasedprimary school enrollment rates from 96.5% in2005 to 97% in2010. Increasedjunior high school enrollment rates from avg. of 57% in2006 to 72% in2010.' Health and education statistics are estimated from Susenas data. Inthe future, the CCT program will have figures from baseline (2007) and impact survey data collection to inform the point estimates. 5 0 EIRRs>30% for major rural infrastructure types inPNPMkecamatan. 0 >8O% satisfaction levels from beneficiaries regarding improved services and local level governance 23. See Annex 3: Results Framework, for Intermediate Results level indicators and further details. D. Projectcomponents 24. Component 1: BlockGrants (US$561.2million) Deliveringblock grants to subdistricts and villages is the main function ofthe PNPM-Rural program. InPNPM, block grants will make up approximately 85% of total project costs. Block grants take two forms. One type of block grant supports investment proposals made by villages and selected by consensus in an inter- village meeting. The second type consists of block grants to support the participatory planning process andto ensure proper technical inputsinto implementation. Each is describedbelow. a. Investment Grants (US$535.7 million) - This component delivers block grants to approximately 2,600 subdistricts. Aside from a limited negative list of activities prohibited by GO1 or Bank policy, investment opportunities for communities are open. However, there are a number of special programs that can be funded using the block grants provided that certain procedural changes to the standard PNPM-Rural operational manual are followed. They include: 0 Responding to natural disasters and post-conflict situations, where an acceleratedplanning and disbursementcycle is allowed; 0 Supporting the PNPM Generasi CCT pilot program, which will incentivize changes in MDG indicators for poverty reduction, education and health in approximately 200 subdistricts. b. Planninggrants (US$25.5million) Subdistrict planning grants support the village - and subdistrict planning process by allowing villagers to select and train a cadre of self-selected social and technical facilitators. Other activities funded through these grants include village cross-audits, dissemination materials, and the cost of local travel. 25. Component2: FacilitationandTraining(UW47.1 million)-This componentconsists of salary and operational costs for the subdistricttechnical and social facilitators. It also includes activities to strengthen the local government councils and leadership that was formed under Laws 22 and 25 (decentralization) in 2004, and revised under Law 31 in 2006. Activities will have a special focus on village and subdistrict forums, village and subdistrict executives, and district parliaments. The component will finance trainers, workshops, relevant materials, and quality reviews. 6 26. Component3: ImplementationSupport and TechnicalAssistance (US$23.5 million): This constitutes the formal project administration. It consists of three levels, each of which reports to the corresponding level of national, provincial or district government. The bulk of this component covers the costs of experienced technical and social facilitators, who provide technical advice, field oversight, and local-level coordination. Reviews show high returns to training facilitators, and the component will cover the costs of training, workshops, and materials for all PNPM-Rural consultants. 27. Component 3 also covers the costs of PNPM-Rural's monitoring and evaluation program. PNPM provides both quantitative and qualitative monitoring, and it also has a mix of internal and outsourced evaluations. For the proposed additional financing, the internal system will be strengthened through better technology, additional training, and improved oversight. PNPM reserves approximately 3.5 percent of its budget for monitoring and evaluation. Improving government's ability to monitor and evaluate the PNPM program i s a key objective of the Multi- donor PNPM Support Facility. This component of PNPM also includes an enhanced audit program that expands sampling, provides capacity development support for district government auditors, and funding to repair problems that audit reviews attribute to project shortcomings. 28. Component 4: Support for Project Management (US%3.8million): PNPM's special programs place several additional demands on normal government budgeting, particularly as the program prepares for the national scale-up. Most operational costs will be covered by GOI. But this component covers several critical national-level activities needed to manage the national program: introducing electronic file management for PMD, office improvements, and the provision of 15-20 national and international scholarships to provide advanced specialized training inmanagement, fiduciary controls, and evaluation for key PNPM staff. Table 2: Project Costs for 2008 and Technical Assistance E. Lessons learnedand reflectedin the projectdesign 29. Operating in a highly volatile social, economic, and institutional environment, KDP is a constantly evolving operation. Some examples of the types of general lessons learned and reflected inthe current project's design include: 7 a. Strong results measurement is key for convincing policy makers that these programs represent a good use of public funds. Developing high quality M&E requires both short term investments in design and longer-term in-country investments in people and institutions to develop the professional capacities needed to commission and manage complex M&Eprograms; b. CDD projects provide a robust architecture for innovative ways to tackle poverty above and beyond their standard bag of tricks. Among the creative ways that GO1 is using PNPM-Rural are: Responding to natural disasters rapidly and efficiently over large areas (Aceh, Nias, Jogjakarta, Nabire, etc). Promoting community engagement with MDG performance in health and education(PNPMGenerasi,CCT) Identifying new smallholder production technologies and marketing channels ("SADI"); 0 Introducing renewable energy sources and improving environmental management ("Green KDP") 0 Supporting community-basedpost-conflict reintegration (Aceh); c. A qualitative review of KDP identified support by village and subdistrict heads as a key factor in a successful planning process. The new project includes a substantive component for engagingvillage and subdistrict heads and providingthem with incentives for popular consultation; d. Several studies highlight the critical importance of high-quality training for facilitators. However, while this is recognized at the policy level, line agencies often short-change training. QAG has also flagged this issue, which was addressed directly during appraisal; e. A multi-donor gender review of five donor-funded CDD projects identified several best practices that will be reflected in the PNPM-Rural design. Particularly relevant lessons included better preparation of facilitators, promoting links to locally based women's organizations, andraising the profile of women inPNPM's anti-corruption work; f. A controlled experiment using different incentive and sanction procedures showed that losses caused by corruption and poor management can be reduced significantly by increasing the likelihood of audit, and most importantly, by immediately publicizing results from the audits in local meetings. The new project audit manual reflects this finding and PNPM-Rural's overall audit arrangements will triple audit samples over current levels. F. Alternatives considered and reasons for rejection 30. Several alternatives were considered during preparation. One was to approach PNPM support as a Development Policy Loan (DPL). This would have been feasible because the policy triggers for the PNPM program that are summarizedare clear, measurable, and fully acceptedby 8 Government, which proposed them in their side-letter. However, while a DPL-based approach might be feasible at some point in PNPM's future, for the time being this option was rejected because: (a) it would not be realistic to propose policy triggers that must be reviewed by parliament within the one-year time frame required to launch PNPM; and (b) PNPM will not have a fully defined management structure until the 2009 parliamentary review i s complete; in the meanwhile there are many institutional issues for which the government wants the hands-on supervision support provided by Bank project supervision. 31. The second alternative was to consolidate the urban and rural wings o f PNPM into a single investment loan. This option was rejected because the two branches have different executing agencies. Until GO1 can confirm an overall management structure that would have coordinating authority, simpler designs will work better than a consolidated approach that would have to weave together two very powerhl, autonomous implementing agencies. However, for the longerterm both GO1andthe Bankdo planto promote consolidation. 32. Two substantive technical changes based on CDD experiences in other region were also explored during preparation. PNPM provides public goods. However, evidence from elsewhere suggests that introducing livelihood components into PNPM might provide a useful way to increase its effectiveness in reducing poverty. Such components might include microfinance, direct marketing, group procurement, or futures contracts. Arguing against this route is the disappointing record o f public provision o f microfinance in Indonesia and some o f the problematic institutional pre-conditions, such as effective mechanisms that communities could use for enforcing contracts. Rather than introduce such options into the full-scale PNPM, several will be explored andevaluated through pilot programs. 33. Secondly, PNPM i s at heart a central government program, albeit one with highly decentralized execution. Local governments can engage and will contribute funds, but all core systems remain inthe hands o f the central government. An alternative option would have been to decentralize project management and operation to subnational units such as provinces. However, Indonesia's decentralization program i s still consolidating from the 2001 "big bang" and not all provinces have the systems in place to manage PNPM successfully. Government has instead proposed a more gradualist approach that PNPM devolves functions based on performance and local government capacity assessments. 111. IMPLEMENTATION A. Partnershiparrangements 34. Donors, the Bank, and other development partners have been working closely with the government on the design o f the national program. Donors are coordinated through the Decentralization Support Facility (DSF), a multi-donor trust fund managed by the Bank. DSF has provided US$3.8 million to support the design o f the PNPM. 35. A new multi-donor trust fund was establishedto finance PNPM activities. The objective o f the trust fund is to support implementation o f the PNPM through partnerships with civil society and donors, according to their comparative advantages in a transparent manner. The 9 MDF consists of four windows for: co-financing; strategic coordination and monitoring; civil society support; and donor-executed activities. About US$28 million has been pledgedto date by the Governments of the Netherlands, Denmark, and Australia. The Fund was launched by the President o f Indonesia inBali on December 14,2007. 36. KDP has benefited from generous bilateral donor support. Donor assistance has been especially helpful for piloting innovations that then get taken up by the larger program, and for providing special assistance in difficult environments, such as Aceh, Nias, and Papua. Donors with ongoing KDP programs have already indicatedtheir expectation that these be extendedinto PNPM. Active donor partnerships are shown inTable 3. %million Australia Small Holders Agricultural Cooperationwith IFC and ACIAR to Development Initiative improve smallholder technology and (SADI) Support for Respek Assists "barefoot engineers" program (Papua) Canada Green KDPfor Sulawesi Improvingenvironmental awareness and I 13.5 I management in uplandareas Denmark RenewableEnergy in Similar to "green KDP"but with greater 15.0 Sumatra emphasis on micro-hydro. Japan Implementation Support PHRDfor improvingfiduciary and 1.5 monitoringcapabilities PEKKA JSDF to women-headedhouseholds 3.O programs, Access to Justice, ESW on conflict. I TOTAL 85.2 I 10 B. Institutionaland implementationarrangements 37. GO1has appointed the Coordinating Ministry for Social Welfare (Menko Kesra) to chair a ministerial level working group on the development and oversight of the program. Its core group includes the Ministers for Bappenas, Finance, Home Affairs, Public Works, and State Ministry for Development of Disadvantaged Regions. When PNPM is launched it will be expanded to include Health, Education, Religious Affairs, and Statistics. This body, Tim Pengendali, has provided significant policy oversight and guidance throughout project preparation. 38. GO1plans to form provincial and district poverty reduction boards that mirror the inter- ministerial poverty reduction committee. Chaired by the Planning board ("Bappeda"), each will include the finance department, the development planning board, and the relevant line agencies such as health, education, and public works. Their job would be to coordinate and promote cooperation among all PNPMprograms. 39. PNPM-Rural is executed through the Ministry of Home Affairs, which formed a Secretariat to provide policy technical oversight and operational management for the program. The secretariat is under a Ministry of Home Affairs Project Management Unit (Satker),who is responsible for preparing and disbursing the project budget. Specialized subprograms within PNPM each have their own project management/ implementation unit run by a government officer. 40. The Ministry of Home Affairs National Project Management Unit (Satker) contracts and supervises all consultants. These will be procured through seven management consultancies (one national and six regional), but the performance of all consultants is supervised by the National Management/ Oversight Consultant, i.e. one of the seven contacts mentioned above which is to provide support in terms of overall Project management, monitoring of implementation, and technical and financial reporting and oversight. Appraisal confirmed the adequacy of these arrangements. C. Monitoringand evaluationof outcomedresults 41. PNPM-Rural has one of the most comprehensive M&E systems in the Bank's and Government's portfolio. It provides for internal and external monitoring functions, combined with rigorous evaluationsand thematic studies. All elements are designedto inform and improve the operations andstrategic directions of PNPM. The M&E systemconsists of: MonitoringActivities: 0 Community participatory monitoring 0 Government supervision andmonitoring 0 Consultants' internal monitoring 0 Management information systems (MIS) 0 Independentexternal monitoringby provincialNGOs 0 Complaints handling and grievance redress mechanisms 11 Financial supervisions and audits, both internal and external 0 World Bank supervision missions EvaluationActivities: 0 Impact evaluations for both PNPM-Rural and its pilot, PNPM- Generasiprogram. 0 Thematic evaluations and studies including: technical quality and costs of services; economic analyses; sustainability; micro-finance reviews; conflict prevention; gender; and local governance. These evaluations employ both quantitative and qualitative methodologies. 42. Bappenas, with World Bank technical assistance, i s finalizing the PNPM M&E Operational Guidelines which will apply to all programs under the PNPM umbrella. The Government has also formed two sub-working groups for M&E, one focused upon finalizing target indicators for PNPM, and another working group on MIS and reporting. 43. The M&E activities outlined above are fully consistent with the M&E Operational Guidelines. Furthermore, for the PNPM-Rural scale-up, MoHA will improve and strengthen several M&E areas: a. Community Monitoring More funds and training will be put into strengthening the - community participatory monitoring so that communities are trained by the kecamatan and village facilitators on what to monitor and how to go about reporting problems. Cross-village visits, which were very successfulinearlier years, will be increased. b. NGO Monitoring The independent external monitoring by provincial NGOs will be - reexamined. Weak NGO skills at reporting along with lack of training for the NGOs have resulted in limited value added for the provincial NGO monitoring. Beginning in 2008, PNPM-Rural will explore the possibility of having an apex organization to provide training and strengtheningto NGOs for monitoring KDP. c. The M I S and complaints handling functions need to be strengthened. This includes: improved supervision and reporting oversight by district and provincial level consultants; outsourcing the MIS functions; and employing a web-based system for MIS and complaints handling so that there is greater transparency o f project results and complaints processing. d. FinancialAudits - Increasing the audit sample of the government audit agency from the current four to five percent of villages. Also at the national level, MoHA will be strengthening its central financial supervision and oversight unit. At the provincial level, they will be adding a financial specialist ineach province. e. Impact Evaluations - A baseline quantitative survey and qualitative study was already completed in 2007 for PNPM-Rural. It focused on questions of poverty reduction, local governance, and social capital. That study will be repeated in 2009 to measure impacts 12 from PNPM. For the PNPM-Generasi pilot, a baseline survey was also fielded in 2007, andwill berepeatedin2008 and2009. f. Thematic Evaluations and Studies - PNPM-Rural plans several new studies and evaluations during 2008 and 2009. These include: a micro-finance review and strategy formulation; economic analyses; infrastructure reviews; information dissemination; facilitation study; supply side responses to PNPM; and several longitudinal studies on local governance, conflict prevention, and 100 sentinel kecamatan survey. Several of these evaluations will be donejointly with PNPM-Urban. g. Evaluation of Government National Poverty Programs - Over the course of the next few years, the Government will enhance its evaluation capabilities and carry out separate evaluations of community poverty projects to assess the effectiveness of these projects and whether or not they should be included under the PNPM umbrella in the future. Lessons learned from these projects will also be incorporated into PNPM design. The Government, through Bappenas, beganthese assessments in2007 with eleven projects in micro-credit, village infrastructure, water and sanitation and rice subsidy. The Government plansto expandthe evaluation of these programs in2008 and beyond. 44. See Annex 3 for further details on the M&E plan for PNPM. D. Sustainability 45. The sustainability ofthe KDP and UPP programs has already beenbroadly demonstrated: strong community participation ensures buy-in and demand; local government participation ensures additional support and institutionalization of the process as well as increasing scale; and investments have been proven to be of high quality and more economical using a community- driven approachvis-a-vis traditional contracting. A 2005 study by the NMC found that 92% of works were still functioning nine months to one year after completion. Another technical infrastructure review, scheduled for 2008-2009 will examine specific operations and maintenance arrangements andthe functioning of works two to three years after construction. 46. In addition, the KDP and UPP programs have been scaled-up through successive operations that have built upon the successes and expandedthe geographic scope of the previous operations. The scale-up of the projects took place inthe context of institutional collapse, major economic crisis, and implementation of one of the worlds largest decentralization programs; the success of these programs inspite of the socio-political challenges faced highlights the long-term sustainability and flexibility to adapt to a changing environment. E. Critical risks and possible controversial aspects 47. The overall risk assessment proposed by the task team is "moderate," since this project follows the design of previous KDP operations that have performed consistently well over the past eight years of implementation. The mitigation measures proposed below build on solutions identifiedfor the UPP2 and UPP3 and KDP3 (b) additional financing operations. The fiduciary oversight mechanisms for the PNPM have been reviewed by the Bank and independent 13 reviewers and are found to be acceptable. It is expectedthat the residualrisk - after mitigation measures are put inplace-will bemoderate. Table 4: I; sk Matrix Risk RiskRating Proposed Mitigation Measures Needfor improvedinstitutional H The Bank-financed districtprojects- SPADA, ILGR leadership may be usedto address institutionalcapacity building issues Late budget releases cause delays H ImproveMOHA internaladministrationto accelerate budget preparation.Dialoguewith MOF on budget releasesand revisions. Cost funding contributionto the H Intensive socializationand publicationof local community investment grant from governments commitment to their constituents local governmentsparticipation couldcause delays Insufficientnew funding lowers H Indicativebudgetsprovidedby parliament fall short of benefits full funding.Additional funds are being sought from consolidation. Procurement of packages and S a Advance procurement so that consultantsand individual consultants will not individualsare contracted prior to effectiveness follow proper procedures or will Hiringa procurement advisor to help the be delayed. procurementcommittee inprocessingprocurement Lack of clarity on the overall S The Government issued a policy side-letter that financingplan for the PNPM summarizes GOI's overall road map for PNPM, includingthe financingplan Lack of long-termmanagement S GO1 is discussing whether to institutionalize the Tim plan for PNPM Pengenduli oversight committee or to find an alternative solution. Inadequatefiduciary controls S Adoption of the World Bank review's main enable corruptionand a failure to recommendations.Highlights include: meet developmentobjectives Develop further a risk-basedcontrol framework a Revisingthe audit manual to increasesampling and promote disseminationof findings; Budget increasedtraining for financial management; a Increasesocial controls Managementcapacity ofthe M The Governmenthas developed acapacity building executingagency for the scaled up strategy for the PNPMProjectManagementUnit program (PMU). The World Bank team will continue its supportto PMUfor identifying actionstakento improveprojectmanagement. Provinciallevelproject M Extrasupervisionand support for additionalcentral management fails government oversight. Politicalrisksassociated with the M This is being minimizedby adjustingthe timing of 2008/2009 elections certain disbursements, communityeducationand socialization, and temporary suspensiono f activities. Recruitmentstrategy for M GO1will adopt astrategy for rapid recruitment and facilitatorsand consultants trainingof new facilitators and consultantsthrough extension of existingconsultants' contracts, and enhancedtrainingprograms. The wider geographic coverage M The PMUhas developed a staffingplanand project leadsto projectmanagement supervision strategy as part of its Project difficulties ImplementationPlan 14 Local government engagement to L Enhance participation o f local governments through a ensure program sustainability PNPM project component. OVERALLRISKLEVEL S M Loadcredit conditionsand covenants Conditionof Effectiveness: The Borrower shall adopt and apply a Project Manual acceptable to the Associatioflank. Covenants: The Borrower shall maintain the PMD Secretariat untilthe completion ofthe project with terms o f reference, facilities, staff, and a Project Manager at all times acceptable to the AssociationBank. Audits shall be carried out inaccordance with BPKP'saudit manual and inaccordance with TOR agreed withthe Associatioflank. By October 31of each year, inform each Kabupatenparticipating inthe project that all auditing activities for subprojects are to be carried out exclusively by auditors appointed by PMD inaccordance with the manual and terms o freference acceptable to the AssociationBank. P M D shall appoint a suitably qualified and experienced personwho shall be the Project Manager o fthe Project Secretariat and, as such, responsible for the day-to-day management o f the Project. The secretariat shall be provided with adequate funds and other resources, and supported by suitably qualified and experienced technical, financial and administrative personnel inadequate numbersas neededto accomplish the objectives o fthe Project. P M D shall cause to be established and thereafter maintained, untilthe completion o f the project, a Poverty ReductionBoard (PPRB) at the Provincial and Kabuapten levels whose mandate, composition and terms of reference shall be acceptable to the Association, to be responsible for overall coordination and management o f the Project at the respective level. Tim Pengendali PNPM shall, inconsultation with the relevant kabupaten, annually select proposed project kecamatans from a list o f kecamatans provided by P M D Satker, in accordance with criteria set forth inthe project manual, and furnish such list for approval to the association. The PMD secretariat shall make available to the public, at all times, untilcompletion o f the project, free o fcharge, the list ofproject kecamatans. The Borrower through the relevant bupatis and camats shall issue by October 31 ineach year, public information disclosing to villagers and their representatives all administrative, financial, social, procedural, technical, and environmental aspects o f the project. The Project Manual shall be available free o f charge at the kecamatan office. The Borrower will provide KecamatanPlanning and Community Training Grants in accordance with conditions agreed with the AssociatiodBank. 15 0 The Borrower will provide Kecamatan Block Grants inaccordance with conditions agreed with the Association/Bank The Borrower shall ensure that prior to carrying out sub-project works, the Kabupaten Facilitators will have completed a technical reviewo f each subproject to ensure that all financial and technical specifications have beencomplied with. IV. APPRAISAL SUMMARY A. Economicand FinancialAnalyses 48. As with KDP, PNPM works on the basis of an open menu, with communities selecting activities based upon their self-identified priorities. Thus subprojects are not pre-identifiedat the national level. Nine years o f experience with KDP however, shows that there i s still high demand for rural infrastructure projects such as village roads, bridges, and water and sanitation. Inthe past, such economically productive small-scale infrastructure has composed 70 to 77% of the block grant portfolio, followed by education and health at approximately 12%, and women's economic loan activities ranging from 11 to 15%. 49. EconomicInternal Rate of Return (EIRR). PNPM uses the same technical standards and designs as KDP, which therefore provides a useful basis for assessing likely returns to PNPM for small-scale rural infrastructure as described above. Two separate economic analyses conducted duringKDP1 and KDP2 found that EIRRs for the four main infrastructuretypes range from 39% to 68%. Another World Bank study found that the longer a kecamatan had received KDP interventions, the higher the estimated rates o f return. 50. In most cases, these very large benefits resulted from either entirely new economic activities that were made possible by KDP infrastructure, or suppressedlatent production capacity that was finally able to be channeled to local markets. The most frequently seen examples were roads that provided access to previously isolated villages where before the road, all produce had to be hand-carried or carried in small amounts on motorcycles for kilometers before reaching the nearest market. KDP-built infrastructure improved access to markets, town centers, education and health facilities, and clean water supply. They also increased exponentially business opportunities and employment for poor villagers. 5 1. Cost-Effectiveness. Village infrastructure built through KDP methods cost significantly less - on average 56% less - than equivalent works built through Ministry o f Public Works or local government contracts. A cost-comparison that usedlocal government and private engineers to re-cost KDP-built infrastructure showed significant savings due to the elimination of some o f the following costs: middlemen and outside contractors' overhead costs; double and triple handling o f materials; frequent on-site design modifications; and extra charges for supervising projects in remote areas. These cost comparisons do not yet include voluntary community contributions to KDP valued generally at 17% o ftotal project costs. 52. Poverty Impacts. A study to simulate PNPM impact on poverty carried out during project preparation found the following: 16 a. IfPNPM allocates Rps 3 billion a year as the average kecamatancommunity block grant by 2009, it will provide60 days of supplementalemployment to 24 million workers, by f increasing their income by 10-14% for 60 days of work on average. The impact on poverty will benefit some 16 million, or 35-45% of all poor; six million families will be pulledout ofpovertyandanother 10millionwill haveincreasedtheir income. b. However, it should be notedthat the poverty impacts depend as much on other factors: the priceof basic foods;jobs createdelsewhere; andother safety netprograms. C. But ifgrantsare frozen at Rp. 1.5 billionin2008/09thenonly 9.5 millionwill benefit and six million more families will remainpoor; and only ten million fewer workers will be employed. d. There will bebenefitsinadditionto direct employment andincome: The additional income will benefit workers primarily when they need it the most; when there are few other jobs because it is the off-season in agriculture, drought, flood or other natural or economiccatastrophesina region. It will raise the wages of all unskilled workers significantly, even if they have no contact with the program, by reducing the competition during the off-season from desperateworkers who drive all wages down. By developing roads, irrigation and drainage works, water supply and sanitation works, PNPM will permanentlyincrease employmentandincome. The annual rate of return for the infrastructure investment under the rural [KDP] part of PNPM is estimatedat 50% or more, a remarkablyhighreturn. Injectingpurchasingpower into villages and poor urban areas will have an indirect effect in "activating" the village economy. That effect i s about 16.5%; that is, for every Rps 100 million spent village income will actually increase by Rps 116.5 million. The combined indirect effect of the PNPMthrough development and activationi s to increase rural incomeby Rps. 19 trillion [US$2 billion] in2009; more inlater years. e. PNPM canbe sustainedas a permanentprogram: Governmentcould get better and larger volumes of infrastructure built, iffunds could be spent for local infrastructure through the PNPM approach permanently, since the record is clear that KDP projects can be executed at about one-half to two-thirds of the cost ofcomparablecontractor-executedprojects. It adds roughly $ 2 billion [Rps. 19 trillion] a year to national income in 2009 as the result of better infrastructure andactivation, andit will increase rapidly ifthe program continues. Some of the additional income will increase government revenue to help pay for a continuationof PNPM. It wouldbe an essential elementina badly neededSocial SafetyNet. f. Nevertheless, the PNPM contribution to solving the unemployment and poverty problems, while important, is also limited, because it only provides supplementary 17 employment and income, not full-time regular jobs. It provides fewjobs for professional, technical and other middle class workers, except for those who work for the program (which i s a significant contribution to the provision o fjobs to university graduates, as it will employ about 10.000 staff by 2009). At the village level, nearly all its jobs will be for unskilledor low skilled workers. It cannot help families who have no one inthe labor force. See Annex 9 for more details. B. Technical 53. KDP's engineering manuals and training program were updated in 2002 and again in 2006. KDP also includes a broad-based technical training program. More than 2,000 technical facilitators were trained in simple engineering design during the first years o f implementation. Follow-on training has helpedthe engineers work with village technical teams to produce overall village infrastructure technical assessments, which inform the KDP project selection process. KDP's overall engineeringperformance has improved steadily over time. 54. KDP's technical quality is the subject o f routine as well as extraordinary monitoring by qualified specialists. As a result, KDP now benefits from improved designs and construction methodologies. Significant improvements have been noted to the quality o f micro-hydro installations. Approximately $20 million in grant funds will be added to PNPM-Rural for additional work on community-based renewable energy generation, including international and local expertise. Guidelines were prepared for improving the effectiveness o f technical supervision. 55. InPNPM-Rural, village technical training will continue, with an increased emphasis on operations and maintenance as well as the training o f village technical cadres. However, improvements are needed. In 2007, PMD lowered technical experience requirements for new engineers because o f an overall shortage of candidate engineers, and did not implement the agreed additional training for the new candidates. A revised technical training program that includes sufficient financing and training time has beenagreed during appraisal. C. Fiduciary 56. Financial Management. The project has several significant risks. First, there is a risk posed by the use o f community block grants, particularly with respect to how effectively beneficiaries and community groups (CG) use and account for the funds. There i s a second risk that concerns the low capacity o f local government staff to supervise and monitor the sub-project implementation, especially for local governments that do not have previous experience with the KDP program. The third risk i s the uneven capacity o f the field consultant to assist the UPK on the financial management aspects. The fourthrisk is the weak financial management capacity o f PMU, which i s still managing the existing KDP3. This additional financing may stretch the capacity of the agency further. 18 57. Balanced against the potential risks is KDP's successful record of mitigating these risks through a strong training and oversight system. Over the past year, KDP has also taken several steps to strengthen its financial monitoring and reporting framework. Internal and independent audits report low loss (misuse and irregularity) rates. The external audit of the project will be conductedusing a risk-basedapproachand with an expandedscope audit. Inaddition, the project auditor has agreed and will increase the audit sample size and involve the local auditor (Bawasda) on audit assignments. A plan for the strengthening of Bawasda is being developed. There i s aprovisionto recruit additional FMconsultants at the central as well as local levels. 58. Overall, the financial managementrisk for this financing i s assessed as substantial before mitigation and moderate after mitigation. This assessment has concluded that with the implementation of the recommendations proposedhere, the risks will be substantially mitigated, and the proposed financial management arrangements will satisfy the Bank's minimum requirementsunder OPBP10.02. 59. Disbursement Arrangement. The applicable disbursement method is "Advance". For this purpose, a Designated Account (DA) denominated in US dollars will be opened by DG Treasury (MOF) inBank Indonesia(central bank) or a commercial bank acceptableto the Bank. The DA will be solely usedto finance eligible project expenditures. The ceiling of the advance to DA will be variable, and the advance(s) will be made on the basis of the six month projected expenditures. The reporting of use of the DA funds would be based on the quarterly IFR (InterimFinancial Report). Applications for the advance to the DA shall be submittedtogether with the reporting on use of D A funds which will consist of: (a) InterimFinancial Reports, and list payments for contracts under the Bank's prior-review; (b) projected expenditures for six months; and (c) the D A reconciliation statement. 60. DG Treasury will authorize its relevant Treasury Offices (KPPNs) located near the implementation unitsto authorize payments of eligible project expendituresby issuance of SP2D (remittance order) charging the DA. For this purpose, DG Treasury shall issue a circular letter to the relevant KPPN Offices providing guidelines and criteria for eligible project expenditures in accordance with the credit/loan agreements. When expenditures are due for payment, PIU will prepare SPP (payment request) to the payment officer within the Satker. After documents verification, the payment officer will issue SPM (payment order) together with the supporting documentation for submission to the relevant KPPN. The KPPN will check the budget eligibility and issue the SP2D to the KPPN's operational bank which will transfer the funds directly to the payee's account andarrange for debit for the loanportionto the DA. 61. Procurement. Procurement will mainly consist of hiring of one National Management Consultant (NMC), six Regional Management and Payroll Service firms, a number of individual consultants (including Advisors at national level, and facilitators at kabupaten and sub district/ kecamatan levels), and hiring an NGO for building community monitoring capacity. The hiring of all facilitators, and their respective contract administration, will be done by the Provincial Satkers, while procurement under community grants will be carried out by communities following the procedures as described in the Project Technical Operations Manual (PTO). Any other procurement will be done by the PMU at the central level. 19 62. The kabupaten and kecamatanfacilitators will be hiredand contractedindividually by the Provincial Satker through the comparison of at least three CVs if possible. Due to the large number of facilitators to be recruited (around 5,000 plus) at the outset of the project, an alternative approach will be adopted where minimum qualifications are set and selected facilitators should meet these minimumrequirements. 63. Ex post procurement review will rely on BPKP's audit, who will carry out audits for the community grants and individual facilitator contracts. 64. Basedupon the procurement team's asssessment, the overall project risk for procurement i s High. D. Social 65. PNPM-Rural will support broad-basedsocial development. KDP's roots lie ina series of anthropological studies on community organization and social capital that were carried out inthe mid-1990s. Follow-up analyses covering governance, conflict, information, vulnerable and marginalized groups, village cash-flows, and culture (see Annex 3b) continue to enrich the social framework that guides PNPM strategy. Because the overall design and several social issues are discussed elsewhere in this report, this section will concentrate on: (a) PNPM and demand-side governance; and (b) PNPM's proposed gender action strategy. 66. PNPM and demand-side governance issues. KDP and the community development platform more generally were a key pillar of the 2004 "Governance" CAS for Indonesia. Bank support for GOI's governance reform program through KDP was built on three different arguments, all of which were linkedto the nationwide program for decentralization: KDP would improve the internal governance of communities and subdistricts by promoting broad-based participation, constituent accountability, and strengthened governance institutions such as the village and subdistrict councils, community user groups, and better access to countervailing institutions. A key policy element of KDP3 was the passage of 13 key implementing instructions for village governments required under the decentralization laws. KDP also financed a broad training program for village officials; KDP would improve government linkages through reforms to the bottom-up planning and budgeting process, by involving district parliaments in KDP oversight; and by requiring district government budget contributions; and KDP would stimulate community demand for better service delivery by district governments. 67. This large agenda was not solely assigned to KDP. Paralleling the community development work were a series of local government programs such as the Initiatives for Local Government Reform (ILGR); Support for Poor and Disadvantaged Areas (SPADA), and USDRP. These programs were intended to work from the districts "downwards" by reforming local government management and delivery systems. 20 68. This overall strategy has not gotten off to a smooth launch because of the following reasons: All three district reform projects had slow starts because of budgetary and procurement issues, but they are now active; 0 The Ministry of Home Affairs revised the implementing instructions for the decentralization laws. Village councils were no longer elected directly by villagers as a representative body, but instead selected by village heads as advisers to the executive; National government splits between Bappenas directorates for planning and poverty made an integrated strategy more difficult to execute. 69. Nevertheless, progress has been made, aided by the overall consolidation of Indonesia's democracy and decentralization programs. O f particular benefit has been the onset of direct elections for district heads. According to one source, Indonesia's district elections are now the world's most competitive, with more than 40% of incumbentsbeing replacedby new candidates, often on platforms of less corruption and greater service delivery. 70. Village level governance reforms remain complex. At the central level, two schools of thought are competing within the Ministry of Home Affairs, which is the ministry charged with issuing the relevant regulations. One group proposes to returnto structures more or less from the New Order period, with very strong executive bodies at the district and village level aided by advisory bodies selected from official village groups. The other stream is promoting more of a "checks and balances" approach that would build up linkages to district parliaments and other bodies. 71. Decentralization and local autonomy have also affected village structures in two main ways. First, many villages brought together under the 1979 Village Law have fissioned. There are now nearly 35% more villages in Indonesia than there were at the start of KDP. Second, in many parts of the country, traditional leadership sidelinedby formal government institutions has again become more dominant. The resulting dynamic is still playing itself out in terms of representation, conflict, resourcecontrol, and linkages to higher order groups. 72. Preparation of the 2008 Country Partnership Strategy for Indonesia will revisit the local governance reform strategy. Volatility is to be expectedinsuch a large reform program, and care must be taken to keepexpectations tied to a reasonablepace of reformthat allows for setbacks as well as advances. 73. For PNPM, the government working group overseeing PNPM preparation plans to consolidate and extend the core governance agenda for communities. The main elements of this program will include: 0 Revising the village and subdistrict regulations to provide an overarching institutional framework. This will include restoring direct elections for village councils. 0 Revising the planning and budgeting cycle so that village demands and proposals can enter district planning andbudgeting deliberations. 0 Promoting district level poverty reduction action plans. 21 0 Monitoringwhether service delivery to PNPMcommunities improves over time. Preparing a national "Access to Justice" strategy that will help communities access Indonesia's legal machinery. 74. PNPM-Rural also includes a number of pilot programs intended to provide substantive support to community-local government governance reforms. Annex 3 describes the mechanisms that will be usedto chart and evaluate results. 75. Inclusion of women has been a priority objective for KDP from its beginning, and a recent multi-donor gender review available in project files found KDP to be among the top performers on gender. KDP's gender action plan draws on the national government policy framework for gender equality and women's empowerment. Over time it has incorporated lessons from KDP's own evaluations and on best practices from Indonesian NGOs and civil society organizations, particularly the network of community groups supported through the JSDF programs for female-headed households. The lessons from that experience will be applied to PNPM-Rural. 76. Lessons Learned. KDP's gender strategy i s aligned to the empowerment focus of PNPM which focuses on economic empowerment through job creation and income generation, and political empowerment through decision-making by communities and social empowerment that looks at locally driven changes to gender relationships. Women's Economic Empowerment 0 Well-designed revolving funds and microfinance programs can stop impoverishment but inpoor rural areas they do not commonly act as springboards out ofpoverty. 0 Growing numbers of poor communities in Indonesia rely on national and international migration, especially of women, but the migration corridor poses many obstaclesto using remittancesproductively. 0 Indonesian social structure responds favorably to junior secondary and secondary education for women when factory and SME employment favor it, with high returns to poor women. Programs like PNPM can be useful channels for employment information. Women's Political Empowerment 0 Socialization i s most effective at reaching women when standard prescribed requirementsare combined with flexibility to adapt and innovate locally. 0 KDP's separate meetings for women are an important step towards ensuring that women's priorities are identified. However, there are still challenges to ensuring that their needsare: i)identifiedproperly; and ii)do not drop out at later stages. 0 Project procedures can influence the number of women standing for selection to project implementation or decision-making teams. 22 Women's SocialEmpowerment 8 Separate women's proposals can ensure greater responsiveness to women's needs, but may marginalize women from a more general, mixed process. 8 Project procedures and processes often build on and reinforce a more traditional role o f elite women. 8 When the opportunity is opened, women participate actively and enthusiastically in the project and their impact on the success and sustainability o f the activity is often noticeable, but there needs to be a gender balance in both voluntary and paid positions. 8 Monitoring and evaluation systems are improving the amount o f data collected on women's participation though this focuses principally on numbers o f women attending and participating, and less on quality. Staffing and Training Gender-aware project staff or consultants can have a significant impact on outcomes; however, the percentage of staff and consultants who can be considered in this category i s very low. Although quotas and affirmative action have been somewhat effective at lower levels inensuring some gender balance inteams, the percentage of women beingrecruited at higher levels, or beingpromotedto higher levels i s still very low. There is no empirical evidence to show that impacts on women or gender aspects o f the project are different with female facilitators (although women inthe community, and project staff and consultants agree that as role models, their impact i s probably significant but unmeasured). Most women working as facilitators are o f child-bearing age and pregnancy and childbirth are a fact o f life. Projects need to take account o f this in their staff conditions and intheir budgets. Local government staff, especially those who had been involved in project activities, had a better understanding and awareness o f the importance o f project procedures and o ftraining and capacity buildingthan national government staff. Sustainability and Impact Women will play a critical role in implementingPNPM's anti-corruption action plan. O f particular relevance are the women's committees that oversee delivery o f materials. Women can be actively involved in Operation & Maintenance (O&M) committees and can have positive impacts on the sustainability o f sub-projects. Ensuring that opportunities were opened up through the project for women to participate gave them the chance to demonstrate their capabilities to the community. Several cases were seen where this leads to their being elected or chosen for other positions outside the project including inthe village governments. It is important to promote linkages outside the project, to civic leaders and civil society organizations. 23 77. PNPM-Ruralwill be updatingthe existing gender action planto reflect these lessons. The Bank's PNPM project team already includes an oversupply of gender sensitive staff who have worked closely to address gender issues in CDD projects. Additional actions being taken under PNPMinclude: 0 At least two gender activists experienced in poverty programs will be added to the Advisory boardthat supportsthe inter-ministerialpoverty reductioncommittee; 0 PNPM's oversightconsultant will includea qualifiedgender specialist; 0 Traininginmicrofinanceand infinancial management will target women; 0 TOR for consultant contracts financed from the Bank loan will be reviewed for gender issues relatedto recruitmentpracticesand working conditions; Special programs supported under the PNPM umbrella will be directed towards women's interest groups, such as widows, womenmigrantworkers, etc; 0 Grant funds will be mobilizedto support women's leadershiptraining programs; and 0 Surveys will track changes ingender relationshipsandparticularlywomen's access to local decision-making, 78. Poverty targeting. KDP used a sophisticated method of general poverty targeting. It begins with the development of a master poverty list using the national expenditure survey and an infrastructure gap assessment survey assembled by Bappenas. Provinces then select eligible districts from this list, and the districts then propose eligible subdistricts. The final lists are then re-verifiedby Bappenas. While there are problems with boththe quality of survey data and some local manipulation of eligibility criteria, by and large this method appears to be reasonably effective at identifying poor regions. Thus, for example, villages in non-KDP rural subdistricts are on average 51 kms. away from their district capital, while villages in KDP's second year of operation were on average 70 kms. away; distance is in some sense a proxy for poverty. Similarly, summarizing an eight-year series of poverty measurements that control for time o f measurement, poverty rates innon-KDPvillages were 22% while KDP villages show an average povertyrate of 30%. 79. This overall success however, diminishes significantly when one examines poverty targeting within subdistricts and villages. Because KDP's decision-makingprocess is based on public review of proposals, wealthier and therefore more educated groups are more able to succeed in the competition. Other variables that can act against the poor within subdistricts and villages include distance, language differences, and deep-seated hierarchies that make the poor unwilling to speak up in public meetings. Better facilitation can break through s,ome of these barriers, but the ability of local elites to control the KDP process remains a major challenge to the program. 80. For PNPM, three sets of actions will improve poverty targeting. First, Indonesia's parliamentproposedthat PNPMtargeting beginby includingthe 17,000 poorest villages during the program's launch. Subdistrict eligibility lists reflect this request. Second, PNPM's tools for village level participatory poverty assessments are significantly improved over previous years. These include a refinedmethodology for long-termvillage visioning, the instrumentsdeveloped for the MDG achievement programs, and a full set of facilitator training materials. Third, GO1 has proposed providing direct support to specialized, grassroots NGOs that work with 24 marginalized communities through the PNPM multi-donor support facility. Established modalities canthen be scaled-up through regular funding channels. E. Environment 81. No significant environmental issues are anticipated. PNPM-Rural's investments are very small, andunder the IndonesiaEnvironmental Assessment rules, they all fall below the minimum size required for a formal environmental assessment. KDP's negative list consists primarily of activities excluded by Bank environmental policies, and these have beenuniformly respected in the completed subprojects. KDP site selection also in principle rules out villages within demarcated protected areas (in practice poor data and unclear boundaries often lead to errors). KDP3's negative list has been expanded to encompass lessons from experience and from other community development operations. 82. PNPM-Rural's operational manuals have beenreviewed by a range of environmental and environmental engineering specialists and they meet all World Bank standards. However, experience under KDP showed two kinds of environmental risk that can affect community projects. First, communities living in or near protected habitats will use natural resources from these areas regardless of formal regulations unless suitable sanctions are imposed. Thus, some communities in South Sulawesi mined coral for their roadbeds. In other areas, also in Sulawesi, communities have built roads that verge into protected forests. Both cases reflect poor oversight by the provincial regulatory team. The NGOs implementing "green KDP" in Sulawesi will be trained to monitor and report any environmental problems that they witness inPNPM locations. 83. The secondenvironmental risk is poor placementof water supply sources, which can lead to contaminated water supplies. The number of cases where this has occurred is small, but review of their cases shows that they happen when there are systemic failures in the project's system of engineering oversight, reporting, and follow-up. 84. In both types of environmental malfeasance, the proposed mitigation and prevention methods are proper training and monitoring of the supervising field engineers. Inthe cases noted above, the supervising engineers were either disciplined or dismissed. Appraisal confirmed that improvements are now reflected intraining and monitoringplans. F. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OPBP 4.01) [XI [X 1 [X 1 [ I Natural Habitats (OPBP 4.04) [I Pest Management (OP 4.09) [I Physical Cultural Resources(OP/BP 4.11) [I [XI Involuntary Resettlement(OPBP 4.12) [XI [I Indigenous Peoples (OPBP 4.10) [XI [X 1 [I Forests(OP/BP 4.36) [I Safety of Dams(OPBP 4.37) [I [X 1 ProjectsinDisputedAreas (OPBP 7.60) [I [X 1 Projectson International Waterways (OPBP 7.50) [I [X 1 25 85. PNPM-Rural has a project land acquisition and resettlement policy embedded in its operational manuals that has been accepted by the Bank. Application of the policy framework, measured through field reviews o f KDP, reports generally good results from implementation o f the policy. A reviewof 216randomly selected, representative sites found no cases of involuntary displacement. PNPM-Rural does not involve state powers o f eminent domain at any stage, and land transactions can only take place on a willing-buyedwilling-seller basis. Land acquisition assessments are part o f the proposal review process and must be approved by the district level oversight engineer. Land and resettlement are also recorded in the village records and reviewed during field supervision. 86. N o significant adverse impacts from land acquisition or involuntary resettlement have ever been reported from a KDP subproject. However, there are occasional cases where: (i) engineers do not follow the safeguard review rules; or (ii)villagers have felt pressured to contribute land without receiving "fair" compensation in return. PNPM's training and oversight manuals have been revisedto address the first problem. For the second, review of several such cases during supervision missions found no loss o f income, living standards or livelihood. 87. Papua presents a special challenge to the OP's directive to provide culturally compatible development benefits, particularly given the porous governance environment that prevails in many areas o f the island. Inputs from a broad range o f Papuan stakeholders introduced many modifications to the global design in order to reflect Papua's unique physical and cultural conditions. These include adjustments to the geographical units, logistical support for facilitators so they can reach deeply isolated communities, extra training by dedicated engineers, and the formation o f a Papuan government-NGO advisory group. As a result, in 2006 the Governors of Papua and West Papua decided to scale-up KDP under the new name o f "RESPEK". 88. RESPEK will provide each o f the 4,478 villages o f Papua with a block grant o f Rp. 100 million (approx. $11,000). Funding will be provided through the government's regional autonomy budget, but PNPM-Rural will continue to cover the costs o f training and managingthe facilitators. A linked $1.O million grant from AusAid will finance a "barefoot engineers' training program for young Papuan technical facilitators, which will later be added on a permanent basis to the government allocations for Respek. PNPM co-financing from IFAD scheduled for 2009 also includes livelihoods improvement programs developed especially for Papua. 89. Insummary, PNPM fully complieswithBank policies on indigenouspeople. G. PolicyExceptionsand Readiness 90. N o policy exceptions are requested, and the project i s deemed ready for approval. This assessment i s based on following: 0 the audit arrangements andterms o freference are agreed; 0 the draft Project Manual has beenagreed; 0 the draft Circular letter from the DGTreasury regardingthe disbursementmechanism has beenprepared; and 26 0the agreed Environmental Guidelines, the Land Acquisition and Resettlement Policy Framework, the Isolated Vulnerable Peoples' Framework and the Better Governance Action Planhave beenadoptedby the Government. 27 Annex 1: Country and Sector or ProgramBackground INDONESIA: NationalProgramfor CommunityEmpowermentinRuralAreas 1. In August 2006 the Government of Indonesia (GOI) launched the first nationwide poverty reduction program, comprising two pillars: (a) the National Program for Community Empowerment or Program Nasional Pemberdayuan Musyarakat (PNPM); and (b) the Conditional Cash Transfer (CCT) Program targeting poor communities. The key objectives of the policy are to reduce poverty from 18 percent in 2007 to 8 percent by 2009 and to cut the unemployment rate from 10 percent in 2006 to 5 percent by 2009; these efforts will be achieved through nationwide CDD and labor intensive activities, which have begun in 2007 and will run through 2015. This overarching framework will also be linked to the achievement of the targets set out in the MidtermNational Development Plan (2005-2009) and will tie poverty reduction outcomesto the attainment ofthe MillenniumDevelopment Goals (MDGs). 2. The PNPM is a strategic decision by GO1 to put in place a comprehensive framework under which all CDD projects will be placed. It aims to streamline, coordinate and make more compatible the 60 plus community led operations run from over 18 government agencies, which has lead to duplication, inefficiency of public spending, and inaccuracy of results monitoring since there i s no standardsysteminplace to monitor outputs and outcomes. 3. PNPM program coordination.GO1has appointed the Coordinating Ministry for Social Welfare (Menko Kesra) to chair a ministerial-level working group on the development and oversight of the PNPM. It includes the Ministers for Bappenas, Finance, Home Affairs, Public Works, and Social Development. Menko Kesra also chairs a policy-level working group for the PNPM (Tim Pengendali), which is a Deputy Level Steering Committee that includes representatives from seven ministries and is similar in composition to the ministerial working group. Donor organizations also participate inthese meetings. 4. Bappenas is responsible for the technical preparation of the program and has formed seven working groups to produce the overall technical guidelines, budget, timeframe, and implementing regulations, which must be approved by the Tim Pengendali and later carried out by the Ministry of Public Works or Home Affairs. The working groups also consider relevant technical issues and lessons learned from evaluations of previous community development programs inIndonesia. Issues include: Improvements to spatial and intra-village poverty targeting; 0 Reviews of poor communities' capacity and willingness to pay for upkeep versus need for government maintenance; Improvements of the representation and performance of village and sub-district governancestructures; Strengthening of audits by increasing samples and developing the capacity of local audit agencies; and e Simplification of procurementproceduresto avoid multipleamendments. 28 5. GO1also coordinates closely with the donors on the development of the PNPM through the Decentralization Support Facility, a multi-donor trust fund (MDF) managed by the Bank. GO1has also establisheda newMDF for the PNPM inpartnershipwith donors, civil society, and other actors. The purpose of the MDF is to promote cooperationbetweenthe government and its development partners and also provide a mechanism for technical oversight of and channeling financial support to the PNPM. 6. Strategic Framework for PNPM. GO1 has produced a clear and convincing strategic framework for PNPM, as shown in Figure 1.1 below. The five focal areas for the 2008 poverty reduction action planare: 0 Stabilizing prices for basic commodities usedby the poor; 0 Promoting pro-poor growth, with a special focus on small and medium enterprises; 0 Increasing access of the poor to basic services such as health, education, water and sanitation; 0 Developing safety nets, primarily through the conditional cashtransfer system; and 0 Consolidating and expandingthe community developmentprograms. Source: Bappenas, July 2007 7. PNPM i s built around five existing community development programs. Three of these are financed by the World Bank - the Kecamatan and Urban Poverty Projects and the Support for Poor and DisadvantagedAreas Project; one project ("RISE") that is financed by JBIC; and one 29 that is built on a community infrastructure block grant program funded from government savings when it lowered the fuel subsidy in 2005. These essentially similar programs form the core of PNPM, and by 2009 they will be merged into a common operational policy. Linked to these projects are an increasing number of sectoral programs that provide specialized inputs to improve the delivery of poverty services. Over time, local governments will be expected to integrate education, health, and agricultural service provision into PNPM. Coverage Design outputs 8. PNPM differs from many other transfer and safety net programs because it creates large quantities of economically productive assets. By developing economically productive roads, irrigation and drainage works, and water supply and sanitation works, PNPM will permanently increase employment and income. This increasedpurchasing power will also help to activate the village economy. 9. Within this overall framework, GO1 has identified a number of critical areas in its community development programs that the PNPM's more strategic approach can help redress. These include: 0 Consolidating the many project-specific versions of community development distributed among different ministries; Aligning basic principles for community coverage across all GO1 community developmentprograms; 30 Providing a targeting sequence that concentrates on the poorest communities and builds uptowards national coverage; Using rigorous evaluations to assess best practices for operational procedures and mechanisms such as financing, disbursement, planning, technical quality, fiduciary oversight, etc; Clarifying and strengthening the roles for local government in demand-driven programming; 0 Providinga strategic way to develop community governance andmanagerial capacities. 10. Key challenges. GO1 recognizes that translating these principles into operational programming will require a sustained, high-level drive. Three challenges are particularly prominent and have beenthe subject of a great deal of internal discussion: Consolidating programs challenges organizational autonomy - GOI's commitment to consolidating its CDD operations is long overdue. But resistance to the consolidation from different agencies and even donors should not be underestimated. Recent high level dialogue within the government made an important advance by clarifying that PNPM consolidation involves two separate, distinct activities. One stream of policy work will evaluate the existing portfolio, particularly loan funded projects, to identify best practices and close down inefficient systems. A second stream will provide a way for technical agencies to work with communities through standardized procedures on subdistrict and village consultation, transparency and record keeping, but it will not interfere with the formation and operation of village-level technical groups such as water user associations, school boards, and healthcommittees, etc. Fullfunding for PNPMwill be expensive - Reaping the PNPM's benefits depends on full funding at an average of Rp. 3.0 billion per subdistrict.Employment and poverty benefits from the PNPM are sensitive to reductions infunding. The Cabinet has already approved in principle fwll funding. However, Indonesia's Parliament has only approved funds to 2009; furthermore, a portion of the approved budgets are from consolidated existing programs ratherthan the addition of newresources. GOI's 2008/2009 budget negotiations will be crucial for assessingthe expectedbenefit stream of the overall PNPMprogram. Managing the scaled-up national program effectively requires apermanent management framework - Finding a sustainable, effective management framework for the scaled-up program will not be easy. Several options are being discussed. The inter-ministerial meeting in Bali suggested that physical works be coordinated under the Ministry of Public Works but that the Ministry of Home Affairs would manage the facilitator and local government training programs. Another option is to create a cabinet level "Badan" (Board) to oversee the PNPM. The PNPM Steering Committee will review options throughout the project period and propose a preferred management framework to Parliament in2009. 11. Government Policy on the PNPM. A Presidential Regulation issued for the period 2008-2015 will define the PNPM as a national policy framework that covers all village-level empowerment and poverty alleviation programs and assign them to be managedby one national 31 coordinating structure. The regulation makes all planning, budgeting, implementation, management and funding mechanisms subject to a single set of operational guidelines aimed at synchronizing and harmonizing the implementation of the programs carried out under the PNPM umbrella. The draft regulation has been circulated by the PNPM Steering Committee to all Government Departments for final comments. It is expected that the Decree will be issued in early 2008. 12. The government team preparing the national program has identifiedan overall five year policy roadmap sent to the Bank in a side-letter, as part of the formal appraisal package. The main elements of that roadmap are as follows: e Clarification of the regulations on procurement (kepres 80/2001) so that villages are allowed to procure contracts larger than Rp. 50 million using appropriateprocedures; e Improvement of the annual budgeting system so that communities can either carry-over approvedbut delayed budgets or ensure that budgets are made available to them earlier in the financial year; e Clarification of the structure and function of village government either through additional regulations or through a revised Village Government Law; e Clarification of the structure and functions of kecamatans, either through regulations or through clarifications of the decentralization laws; e Alignment of the bottom-up planning process with the planning cycle of the national program; e Identification of an appropriatebudget mechanismso that the national program enters the regular budget. 13. PNPM-Rural'sBackgroundin the KecamatanDevelopmentProgram. PNPM-Rural rests firmly on the foundation of the Bank funded KecamatanDevelopment Program. KDP built on more than a decade of experience with community-based infrastructure delivery as part of the government's overall strategy for consolidating its remarkable track record inpoverty reduction. At the time, government was investing some $2 billiodyear in district level infrastructure. Reviews suggested that community provision of infrastructure would be an efficient way to close the gap betweenisolatedvillages andthe district networks. A generationof development projects such as the World Bank-financed Village Infrastructure Projects, Water Supply and Sanitation for Low Income Communities, and other community-driven programs provided block grants and technical assistance to poor communities. 14. KDP was first launched in 1998, at the onset of the crisis, and it has expanded steadily. It drew heavily on the lessons learned from the previous projects, but it operates on a much larger scale. To date the project has disbursed approximately $1.4 billion of loan, grant, and national government funds. Table A2.1 describes KDP's financial composition. 32 (IBRD+IDA) Contribution KDP1 225.0 50.0 2.1 277.1 KDP Supplemental " 48.5 6.5 55.0 KDP2 320.2 101.3 43.9 465.4 KDP3a 91.0 5.0 101.0 197.0 KDP3b 160.0 81.3 20.0 261.3 KDP Additional 121.0 7.0 128.0 Total 965.7 251.1 167.0 1383.8 15. KDP benefits and impacts are well documented. KDP projects disburse extremely quickly, which means that borrowed funds do not sit idle. Over the years the project has met or exceededvirtually all of its output targets. Table A1.3 and A1.4 summarize the performance of KDP3 as of December, 2006. Performance Indicator Project Completion Target Results as of December, 2006 No. of subdistricts covered 750 1,144 No. of villages receivingsubprojects 12,000 18,007 % of villages with O&M committees 85% 100% IRRon investments >30% 53% % of work completed 85% 99% % of databasecomplaints resolved 50% 57% No. of beneficiaries 12,000,000 18,100,000 % of beneficiaries who are women 40% 50% I% ofbeneficiaries who are poor 65% 61% (<$l/day) Source: KDP 2006 AnnualReport, Ministry ofHomeAffairs. The reportprovidesthe full indicatorlist. 16. Quantitative and qualitative reviews that are summarized and referenced in Annex 3 show that inaggregate, KDP provides cost-effective poverty services: 0 KDP targeting successfully reaches poor communities; 0 KDP infrastructure meets technical quality standards; 0 KDP infrastructure costs approx. 40% less than similar works built through standard line agency procurement; 0 Corruption and leakagerates are low; 0 Participation ofthe poor and of women is high; 0 Social and environmental safeguardimpacts are minimal. 17. KDP also proved to be a very robust instrumentfor responding to Indonesia's unfortunate natural disasters. InAceh, KDP was the first large international post-tsunami project to start and to finish. Over two years, the project covered every subdistrict in Aceh and Nias, reaching more than 5,500 villages. Other areas where KDP responded rapidly to unexpected disasters and conflicts include Jogjakarta and Central Java (earthquake), Papua (earthquake), Maluku (conflict), and Bali (bomb). 33 18. KDP was the first World Bank funded project to introduce an anti-corruption action plan as part of a strategic approach to reducing corruption risks. The plan combined social controls through transparency, legal literacy training, and cooperation with civil society organizations such as NGOs, legal aid, and the media, with enhanced oversight by government regulators, an agreed program for applying sanctions, and an operational research program to identify what measures can most effectively track and effect corruption. professional auditors, NGOs, journalists, villagers, and KDP staff -- are recorded in a master 19. Corruption allegations against KDP from all sources - government and independent database that forms the quantitative basis for measuring KDP's perfonnance. The total number of corruption complaints as of 2006 came to 1,425, for a total value of $650,000.00. Over $170 million was disbursed over that same period, for a corruption rate of 0.4%. KDP's cumulative records over the eight- year life of this US$1.4 billion program report approximately $2.0 million in losses, which represents less than one percent of total program costs. Of that total, KDP has recovered 40% of the missing funds. Keeping in mind that the mechanisms for measuring corruption rates are highly imprecise, the general picture is one of efficient delivery of development funds to villages. 101,49 1 individualscholarships Source: KDP 2006 Annual Report,MinistryofHome Affairs. 34 Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies INDONESIA: NationalProgramfor CommunityEmpowermentin Rural Areas 1. The main project related to the proposed PNPM-Rural are the sister series of urban poverty projects. Government preparation for PNPM pulled together best practices from both projects. Several products will be used in common by both projects such as training materials, technical manuals, and M&E systems. 2. Examples o f inputs to PNPM-Rural (buildingup from the UPP series) include: 0 Improvedwebsite; 0 Facilitator training program; 0 Leadership development program; 0 Guidelines for forming community councils. 3. Other projects that provide relevant lessons for PNPM include: ProjectName Sector Issue Performance Comments Indonesia:Water supply and O&M for water supply, HS KDP adoptedWSSLIC Sanitation for Low Income methodologies to reach the social mapping methods Communities very poor Indonesia:Supportfor Poor and District government S Part of PNPM DisadvantagedAreas Project planning linkages Indonesia:Initiativesin Local District government GovernmentReform reformprogram Indonesia:DevelopmentPolicy S Triggers on CDD budgets LoanIV Cambodia SEILA Integrationwith district S A World Bank facilitated government study tour resulted in KDP's executing agency I piloting a district development marketplace Afghanistan: Emergency KDP3bwill pilot these Community Empowerment religiousgroups in approaches for Aceh Project reconstruction reconstruction Indonesia: Basic Education Working with technical IS KDP isjointly piloting a agencies to implement communitybased community projects educationprogram together with the Ministry o f Education's Basic Educationteam 35 Annex 3: ResultsFrameworkand Monitoring INDONESIA: NationalProgramfor Community EmpowermentinRural Areas P PM-RURALRESULTSFRAMEWORK rma Villagers in PNPM-Rural ImprovedHHexpenditurerates and improved Determine ifPNPM is having its locationsbenefit from improved accessto economic and social services ina desiredeffects on socio- socio-economic and local minimumof 2,300 poor subdistrictsin2008; economic welfare. governance conditions min. of2,600 subdistricts in2009. EIRRs>30% for major rural infrastructuretypes Throughthe CCT pilot, improved health and Determine if the CCT pilot is educationindicators in 130 kecamatanin5 having an impact on specific provinces: education and health Health: conditionalities. immunization coverage for 12-23 month olds increases by 10%points from 38% in 2005 to 48% in2010; Prenatalcare visits increase by 10% points from 56% in2005 to 66% in2010; Deliveries assistedby trained professionals increaseby 10%points from 40% in2005 to 50% in2010. Education: increasedprimary school enrollment rates from 96.5% in2005 to 97% in2010; Increasedjunior high school enrollment rates from avg. of 57% in2006 to 72% in2010.3 >80% satisfactionlevels from beneficiaries regardingimproved services and local level governance. ComponentOne: Block ComponentOne: Component One: Grants Min.40% participation rateofwomenand Assess ifplanning and inclusion Villagers participate inaprocess poorestcommunity members inplanning and proceduresand policies need to plan, select and managebasic decision-makingmeetings adjustmentto encourage greater social and economic participation. infrastructureprovided through 85% of agreedwork plans completedeachyear. Assess if sub-district sites are block grants. benefiting from KDP financing #/type of infrastructureworks, economic, and and assistance. educationand health subprojects/activities completed in4,000 subdistrictsby 2009. Seventeenresults indicators are listed inthis ResultsFramework. Thirteen of the 17 indicators are taken from the Governmentof Indonesia's Operational Guidelinesfor M&E for PNPM. The other four indicators are project- specific and uniqueto management issues facing MoHA and KDP. 3Health and educationstatistics are estimatedfrom Susenas data. Inthe hture, the CCT program will have figures from baseline (2007) and impact survey data collection to informthe point estimates. 36 >70% of infrastructure works are evaluatedas of Determineifprogram needsto ~~~~~ ~ high quality. increase its inspectionand supervisionof technical works O&M arrangementsare inplace and functioning and O&M arrangements. for >70% of infrastructureworks. Component Two: Facilitation Component Two : Component Two: and Training Local governmentcouncils use By end of 2009, >70% of local government Review iftraining and capacity their improved skills to fulfill councils are actively involved inPNPM building plans need adjustment their local community management and oversight. and iflearning interventions development functions. meet the needs of the councils to Derformtheir duties. Component Three: Component Three: Component Three: Implementation Support and Technical Assistance Consultants at the national, >70% ofplannedconsultant positions are filled Determineiftechnical assistance provincial and district levels are and consultantsare trainedby the time the i s inplace providingassistance to project beginsits annual socialization and communities and local planning cycle. governmentsto implement PNPM. >70% of study and evaluation findings usedto Assess if findings from M&E Project stakeholders use results improve the project. and studies will allow the project of M&E activities and studies to to adjust and improve its improve project performance. operationsand procedures. By 2009, audit sample size increasesto 10% of By announcingaudits andtheir all villages and audit results are made public. findings to the public, the program expects to reduce corruption. >70% of plannedconsultantpositions are filled PNPM is ready for start-up by and consultantsare trained by the time the Assess whether or not the early 2009. project begins its 2009 socialization and planning program is ready for national cycle. implementation in2009. >70% of sampled villages receive socialization materialpackages for PNPM in early 2009. >40% of local district governmentbodies (1 rep) undertakecross-visitsto observe PNPM in other sites by 2009. Component Four: Support for Component Four: Component Four: Project Management PNPMmanagers use their skills By 2009, aminimum of 15 Government PNPM Evaluatewhether or not training md additional office resources nanagersuse their new skills inmanagement, PNPM government officials has :o improve the program. fiduciary controls and evaluation for the any impact uponperformance 3ettermentof the program. andoverall management ofthe program. 37 I I LI 'gw v1 P B co g B9 d s m 3 B 9 g 3 n d W 2 zE s s l- ;i A A g s l- A ;iA -0 8 x n 2 e, E ic s? ms 0 d < 0 .-NG 0 Annex 3A: OverallMonitoringandEvaluationFrameworkfor PNPM Rural - A. Introduction 1. The proposed Monitoring and Evaluation (M&E) framework for PNPM-Rural builds upon the last eight years of M&Ework on Community-Driven Development (CDD) inIndonesia and other similar programs in the world. This framework employs both quantitative and qualitative methodologies, as well as a mix of internal and outsourced evaluations. What have we learned from this experiencewhich i s relevant for PNPM-Rural inthe next few years? 0 EffectiveM&E systems for CDD programs in Indonesiaare difficult to establish but with sufficient support and technical guidance, it can work. The system requires a mixture of strong supervision and quality checks through internal project channels as well as external monitoring and evaluation from avariety of actors. Diversity of CDD programs CDD programs such as KDP differ from other programs - due to their multi-sectoral nature and diversity. KDP promotes an open menuwhereby villagers engage in a participatory planning and decision-making process to allocate resources for their self-defined development needs and priorities. Subprojects can range from a wide variety of small infrastructure works, to local economic development activities, to education and health. The investments are not pre-determined. KDP also aims to improve local good governance, thus less easily quantifiable goals of empowerment, accountability, and active participation must be measured and monitored. The multi-sectoral nature ofthese programs makes it a challengeto report upon as well as to evaluate. Scale of Operations The large scale of operations raises extreme challenges. KDP - began in 1997 as a pilot in 26 villages. Ten years later, it operates in every province and has covered almost half the villages in Indonesia, approximately 35,000 villages. Thousands of government officials, over 3,500 consultantsand some 70,000 village-level facilitators are involved in KDP. Ensuring the regular and accurate flow of information both vertically and horizontally in this reporting chain has been extremely difficult, and the reporting and MIS systems needto improve ifPNPM succeeds inits aim to cover all 70,000 villages of the country by 2009. Diverse FundingBase for Evaluationsand Studies Trust funds which complement - loan budget allocations for M&E are critical to implementing specific studies and evaluations. Because trust funds tend to be more quick-disbursing than loan funds, they allow flexibility in carrying out baseline surveys prior to project implementation when - the loan is not yet effective - and in launching studies more quickly as a response to issues arising during field implementation. In the past, this diverse funding base has allowed KDP to act in a timely manner and commission numerous independent evaluations and studies designed to inform its day-to-day operations and improve its effectiveness. 41 Limited Supply of Independent, High Quality Research Institutions in Indonesia - Due to a weak education system and lack of demand for top quality research and independentevaluations under the Suharto regime, the supply o f organizations to conduct independent, rigorous evaluations i s extremely limited in Indonesia. The supply o f such firms does not keep up with the development community's demand. Where there are a handful o f excellent researchers in one institution, oftentimes the "bench is not very deep", and the most senior researchers are often committed to other university or consultancy tasks. Quality control over research and evaluation products i s also severely lacking. The supply o f qualified researchers and evaluators i s slowly growing but a great deal o f capacity building on rigorous research techniques, M&E, and organizational development i s still necessary inthe future. Linking Empirical Findings to Improved Operations There must be a close link - between study findings and actual operations. The purpose o f these evaluations and studies is to build an empirical basis to informpolicy and operational decisions. Thus the commitment must exist within the government and development agencies to accept findings - good and bad - fi-om the evaluations to better inform future program design and implementation. Also, best practices, and the underlyingfactors which contribute to those cases, should be fully documented and shared with other project actors. Without such links from studies to operations, these evaluations remain academic, isolated exercises. 0 Importance of Mixed Methods The use of quantitative - qualitative methodologies for CDD program evaluation i s essential. Measuring empowerment amongst women and marginalized, vulnerable groups i s quite different than analyzing the rates o f return for a rural road. Thus, the data collection tools must vary. A mix of quantitative field surveys and economic analyses should be complemented with `more qualitative methods to better understand processes, behaviors and conditions as they are perceived by communities or other stakeholders. Qualitative studies allow the program to probe deeper and answer the "why" questions from quantitative surveys. Past qualitative studies have been particularly informative to KDP to shed light on issues o f local governance, changes in behavior, poverty perceptions, sociological and cultural trends, and inclusion issues. B. Objectivesof the PNPM-Rural M&E System 2. The objective of the PNPM-Rural M&E system is to provide stakeholders with timely and empirical informationto improve the program. Monitoring o f PNPM-Rural i s definedas the periodic and timely collection o f information to determine if program activities are being implemented as planned. It focuses primarily upon inputs and output levels. It is an ongoing process that continues throughout the project cycle, from training and socialization, to planning, implementation, and maintenance. Results from monitoring are used to improve the quality o f implementation and to adjust planning 3. Evaluation i s the assessment o f results periodically to see if the project i s meeting its main objectives. It focuses upon whether or not objectives and outcomes are being met. For PNPM-Rural, evaluations include a number of different types o f studies, both quantitative and 42 qualitative in nature. An important element o f the M&E system i s to document carefully the program experience and lessons learned. 4. InJuly 2007, the Government with technical assistance from the World Bank developed its own "Operational Guidelines for Monitoring and Evaluation o f PNPM". These draft Guidelines have been shared with the national parliament and government agencies to ensure that there i s coherence inapproach for those projects included under the umbrella o f PNPM. The Guidelines outline the objectives o f PNPM M&E, who i s responsible, what will be monitored and the overall M&E framework. The Guidelines will be finalized by early 2008. The plan outlined in this Annex Three is consistent with those Guidelines. Both PNPM-Rural and its urban sister, PNPM-Urban follow the Government's draft Guidelines, and share similar performance indicators in most cases. The two programs will also undertake several joint evaluations and studies, and the PNPM impact evaluation scheduled for 2009 will be jointly managed. Where there are differences in indicators and M&E approaches, those differences are primarilydue to urbanversus rural differences as well as management issues relevant only to the specific implementing agency. 5. Inadditionto the Guidelines, the Government has established two M&Eworking groups. There i s a working group for Management Information Systems and one for reviewing and finalizing performance indicators for PNPM. For the MIS, the National PNPM Steering Committee and the various projects falling under the PNPM umbrella have agreed to operate an integrated, shared MIS and website, with a set o f common performance indicators to be reported upon by all projects. C. What Will BeMonitoredandEvaluated 6. As mentioned earlier, PNPM-Rural has certain overall development objectives and outputs. Based upon the project objectives and key outputs, performance indicators are developed for the project and are tracked over time. These indicators are then reported upon through the field reporting system or through other monitoring and evaluation activities such as case studies, surveys, sectoral evaluations, and supervision missions. The project MIS also plays a critical role in capturing and recording important information regarding results on a monthly basis. 7. The key performance indicators for PNPM-Rural are listed in Annex 3: Results Framework o fthis PAD. D. Findingsfrom Past M&EWork 8. In the past, using a variety o f tools and methodologies, KDP's M&E system has demonstrated the following positiveresultsand impacts: KDP has had a significant impact on rural household expenditure. The longer a kecamatan has received KDP, the greater the estimated impact on rural household expenditure(Alatas, 2005). 43 8 Poverty targeting to the subdistrict level i s successful (Alatas, 2005). 8 KDP has increased access to vital services includingroads, markets, education and health facilities and clean water. Over 190,000 subproject activities have been funded through KDP since 1998 (MIS). Rural infrastructure works built by KDP have high economic returns, ranging from 39 to 68 percent (Dent, 2001; Torrens, 2005; Alatas, 2005). Infrastructure quality is good to very good (Ekart et al, 2004; Torrens, 2005; MoHA 2005) Village infrastructure built through KDP methods costs significantly less - on average 56 percent less -than equivalent works built through government contracts (Torrens, 2005). There have been no significant safeguard issues in randomly selected subprojects (Ekart et al, 2004; MoHA 2005). Corruption rates are low, less than one percent o f total program costs (Price Waterhouse, Moore's Rowland, BPKP, MIS). Community participation is high. Participation of women inKDP meetings and activities ranges from 31 to 46 percent. Nearly 60 percent of those who attend KDP planning meetings are from the poorest sections of the community. Approximately 70 percent of the labor force on KDP physical work projects comes from the poorest members of the community (MIS). Significantly more women and marginalized groups come to village meetings inKDP areas than incontrol sites (Barron et al, 2006). 8 KDP promotes local economic growth. Over 62 million work days of short-term employment have been generated. Economic productive infrastructure build by KDP, such as roads, bridges, jetties, and markets have resulted in new local businesses. More than 1.3 million villagers have established or expanded their small businesses through KDP's micro-credit window. (MIS). If PNPM-Rural covers the entire country by 2009 and increases its block grant allocation to Rp. 3 billion (US$330,000) per kecamatan, then poverty reduction and employment generation impacts will be sizeable. By 2009, PNPM can benefit roughly 24 million workers and their families, increasing their income by 10to 14percentfor 60 days of work (Papanek, 2007). KDP fora helpto reduce conflict (Barron et al, 2006). KDP supports nascent or existing practices of good governance or community empowerment inways that most other projects do not. KDP mechanisms do a better job than other similar programs at emphasizing participation, transparency and accountability. The program also builds community capacity in project planning and management (McLaughlin et al, 2007; NMC UPK annualreviews). 44 9. Since KDP Phase One, monitoring and evaluation activities have also revealed a number of weaknesses in program design and implementation. These shortcomings have been used to adjust KDP and PNPM's future operations. A few of the major areas of weakness identified through M&Eactivities are listedbelow: KDP Phase One micro-credit operations and mechanisms were unsustainable and accountability channels were not well established (Dent, 2001; MIS). As a result, KDP redesigned its micro-credit operations under Phase Two which led to significant improvements in micro-credit management and repayment rates. A strategy formulation mission will also be launched in Dec 2007 to provide recommendations for the future micro-finance wing of PNPM. While KDP has achieved some significant progress in terms of women's participation, more can be done through PNPM to improve the overall active participation and empowerment of women. (Gender Review inCommunity-Driven Development Projects, 2007) Among the review mission's recommendationswere: more attention to recruiting facilitators with knowledge and understandingof gender; recruiting more women into the project and ensuring that they are considered for promotion; and reviewing the micro- credit component of KDP to augment the benefits for women from these activities. Operations and maintenance (O&M) of KDP infrastructure remain a serious concern. Three studies raised issues regarding the inactiveness of O&M groups and the spottiness of O&M plans for KDP rural works (Ekhardt et al, 2004, NMC 2005, Torrens 2005). As a result of these findings, O&M will be emphasized in facilitator trainings and closely checked during field supervisions. In addition, the World Bank has launched a Village Financing Studyto explore the possibility of village self-financing for future maintenance costs. Training for consultants and facilitators has deteriorated over the last several years and needs to be re-prioritized (World Bank supervision missions, NMC field visits). Poor training plays out in poor communication and socialization activities to communities; increased chances of corruption and misuse of funds; and decreased levels of transparency and accountability. The World Bank has advised the Ministry of Home Affairs to strengthen their training plans by including more days for upfront training as well as budgeting and planning for refresher and in-service training for consultants and facilitators throughout the year. 10. The following sectionsdescribe the components of the PNPM-Rural's M&E system. The system combines internal and external (independent) monitoring, with periodic evaluations and thematic studies. PNPM-Rural employs a mixture of quantitative and qualitative techniques. E. Monitoringof PNPM-Rural 11. Monitoring is the regular checking of project progressthrough the routine and systematic collection of information. The purpose of monitoring is to assess if the program is proceeding according to plan. Regular monitoring is also important to check whether the program i s 45 operating in compliance with its principles, rules and regulations. This includes checks on governance and community empowerment principles, community participation in the different phases of the project cycle, technical quality of infrastructures, use of funds, and compliance with environmental and social safeguards. 12. PNPM-Rural will undertakedifferent forms of monitoring: a. CommunityParticipatoryMonitoring Community Monitoring involves community groups or members to monitor and oversee program activities. In KDP, there are community groups elected or assigned to oversee various stages of the program, be it planning, decision-making, implementation, financial book-keeping, or operations and maintenance. For community monitoring to be effective, certain activities are needed: i. Information Accessibility and Transparency - Project information must be available and accessible for community members to check and verify. Transparency of information is critical. Information regarding the project activities and budgets should be posted on information boards and project sites, and all project financial records are available for inspection. ii.OpenPublicMeetings-Aspart ofKDP's principlesofcommunity participation, transparency and accountability, all project meetings should be open to the public and community members are invited to participate and monitor proceedings. During project implementation, villages hold regular accountability meetings to report upon project progress and finances. iii.Complaints Handling and Grievance Procedures - PNPM-Rural includes a complaints handling mechanismwhereby community membersand the general public can channel complaints or inquiries. Contact information for complaints handling via PO Box, text messaging, or communication with local government officials and facilitators should be publicized. In2006, KDP handled some 1,425 cases, 799 cases (56 percent) were carry-over cases from 2005, and 626 cases (43 percent) were new for that year. By the end of 2006,617 or 43 percent ofthe caseloadhas beenresolved while the rest were still being processed. (See KDP 2006 Annual Report for more detailed breakdowns). Complaints and inquiries through handphone text messaging have grown exponentially in recent years. In2008, PNPM-Rural will computerize the phone text messaging complaints mechanism so that complaints are more systematically recorded and answered. Secondly, complaints will be posted on the website so that case processing is more transparent. Third, there will be dedicated staff at the provinciallevel to handle complaints. iv. Cross-Village Visits - KDP encourages cross-village visits amongst community organizations and members. In the past, these visits have been organized and used quite successfully as a peer- learning experience as well as an effective monitoring 46 mechanism to compare what is occurring across villages. Villagers undertake inter- village monitoring and auditing. In the past, Kecamatan and Village Facilitators were not facilitating the community monitoring activities very actively. Starting in 2008, PNPM-Rural will reemphasize the Community Monitoring Teams and train facilitators to mentor and guide the teams. b. GovernmentMonitoring 13. PNPM-Rural is a Government of Indonesia program. Government officials at the national, regional, provincial, district, kecamatadcity and village levels are responsible for monitoring the program and ensuring that its objectives and principlesare met. They must check to see if project activities are proceeding according to plan and if principles and procedures are being followed. As in the past, there will be regular supervision missions and field visits of government officials to project sites. The PNPM national Policy Working Group (Tim Pengendali) is also expected to play a more active role in monitoring and supervising the program, and raising policy and management issues to MoHA. In 2008, the Government also intends to increasethe capabilities and roles of local governments in program management and oversight as PNPM rolls out. The national government is increasingly emphasizing the role of local governments inpro-poor budgeting andplanning for programs such as PNPM. c. Monitoringby ConsultantsandFacilitators 14. Monitoring project activities i s also the shared responsibility of project consultants and facilitators at the national, provincial, district, kecamatan and village levels. Over 3,500 consultants and approximately 70,000 village facilitators implement and monitor the program. Consultants will regularly visit project sites throughout the project cycle and report monthly, quarterly and annually regarding performance. Over the last two to three years, monitoring by district-level technical and social consultants has been a serious concern in terms of quality and regularity, and this level of supervision at the district level must be strengthened for the PNPM expansion. d. ManagementInformationSystems (MIS) 15. Project information related to process, outputs and outcomes will be entered and organized in a computerized Management Information System (MIS). It will contain information related to basic project information (e.g., project locations, status and type of subproject activity, investment information, etc.), project staff, financial information and complaints. 16. The KDP MIS has faced several difficulties in the last few years. First, the computer hardware at the national, provincial and district levels needs upgrading. The majority of computers is over three years old, and needs to be replaced or upgraded. Second, the project has not invested sufficiently inhuman resources to make the MIS more effective. Salaries for MIS staff have not been competitive, making recruitmentdifficult especially at the national level and inremote areas such as Papua. Training of consultants for monthly reporting and for data entry 47 operators at the district level is insufficient. Also, district consultants must play a stronger, more pro-active role in quality control with regard to kecamatan and village level reporting. Lastly, the project has not allocated enough time and resources to improving the MIS technology to make it web-based with GIS capabilities. Upgrading the system will allow for greater transparency in reporting and improved accessibility for users. PNPM-Rural will be addressing the above priority problems in 2008 and will be outsourcing portions of its MIS. The PNPM- Rural and UPP' MIS will feed into the overall PNPM MIS and website which will report upon key shared performanceindicators. e. Reporting 17. Reporting regularly on PNPM progress and results is vital to the success of the program. To be useful, data from reporting must be accurate, reliable, and timely. All projects under the PNPM umbrella will report upon a core set of indicators specified in the PNPM M&E Operational Guidelines. Other indicators specific to the project will also be reported. Reporting for PNPM-Rural at various levels will be monthly, quarterly, and annually. Regular, accurate reporting will allow the Government to share information widely amongst various government departments, parliament and the general public. Information will also be posted on the PNPM websites. As the Government's flagship poverty reduction program, it is important that informationregarding progressand results is disseminatedwidely. f. NGO IndependentMonitoring 18. KDP invites civil society groups to monitor independently the program. Currently, 17 provincial NGOs are contractedthrough a competitive selection process to provide independent monitoring of KDP activities and to build the capacity of community monitoring groups at the village level. Civil society groups such as associations (yayasans) or NGOs play an important citizen's "watchdog" function in ensuring that PNPM i s proceeding according to its principles and objectives, andthat funds are beingusedfor its statedpurposes. 19. While the NGO monitoring activity helps to uncover various cases of improprieties and quality issues, there are several weaknesses as well. Due to weak capacities of many provincial NGOs, especially in analysis and report writing, MoHA will be looking at alternative mechanisms for improvingthe NGO capacities in 2008. One possibility i s to hire an apex NGO organization to mentor and build the capacities of NGOs in independent monitoring and reporting. g* FinancialReviews andAudits 20. Government official auditors such as BPKP are responsible for auditing KDP's finances annually. Beginning in 2008, PNPM-KDP expects to increase the audit sample size of kecamatan. Following up on the findings from a KDP corruption experiment (Olken, 2005), BPKP will announce in advance that randomized audits will be conducted and the audit findings will be announced and discussed invillage meetings. 48 21. In 2008, PNPM-Rural will strengthen its internal financial oversight role by strengthening the national financial management unit in Jakarta and adding a financial management consultant in every province. These financial consultants will provide training and mentoring to consultants and kecamatan financial units on basic financial management and book- keeping, and also spot-check financial records. 22. Lastly, the World Bank also contracts external independent auditors to conduct audits o f its Bank projects, including KDP. h. World Bank Supervision Missions 23. The World Bank, together with MoHA and N M C consultants, undertakes supervision missions at least twice a year. These missions help to identify management issues as well as field implementation problems. In the past, these missions have been useful to cross-check mission field findings with what is beingreported inKDP monthly reports. i. Evaluation 24. Evaluation focuses upon the project's impact and whether or not the project's stated objectives have been achieved. The purpose o f evaluation i s to assess ifthe program has reached its objectives. Normally evaluations are conducted mid-way through the program or after the program i s completed inorder to assess ifobjectives are being or have been met. 25, PNPM-Rural's evaluation system focuses upon providing the empirical basis for seven main hypotheses: e PNPM-Rural will improve householdwelfare, especially for the poorer segments o f the population. e Itwill have apositive impact on local economic growth, through highrates of returnand short and long-term employment benefits. e It improves access to key services, e.g., markets, town centers, education and health facilities. e It provides high quality, cost-effective small-scale infrastructure. PNPM has low levels of corruption and leakage. e Its operations for infrastructure and economic activities are sustainable. e It builds the capacity of local communities and local governments to manage poverty reductionprograms. e It improves governance though community participation, satisfaction with results, and accountability. It also promotes conflict resolution and increases social capital. 26. The results from earlier evaluations on these themes are described in Section Four of this Annex. 49 F. Evaluationsand Studies Plannedfor PNPM-Ruralin2008-2009 27. The following evaluations and studies have been discussed with Government and other stakeholders. The list is only illustrative for 2008 and 2009. Where appropriate and feasible, the studiesemploy quantitative and qualitative techniques. a. PNPM-RuralImpactEvaluation 28. Two evaluation surveys are designedto evaluate the core priorities of the Government of Indonesia for PNPM-Rural: poverty reduction; access to services; employment generation; and social capital/good governance. The first survey, the PNPM-KDP Impact Evaluation 2007 Survey will be completed inearly October 2007. It will serve as both a baseline for PNPM and a post-completion survey for KDP2. A second survey, the follow up for PNPM, is likely to be conducted in 2009. Both surveys will use a sample of identified households selected from the 2002 SUSENAS national household survey with the goal of creating a household panel by surveying the same households again in2007 and 2009. The SUSENAS core will be the primary instrument. In addition, the survey will employ a short module focusing on social capital and governance. Each survey round will cover approximately 10,000 households in456 sub-districts and 17 provinces across Indonesia. A qualitative component accompanies each survey round and will be used to probe deeper into issues of community perception, local governance, and social capital. TableA3.1: Summarv of EvaluationStudiesfor PNPM-Rural ies, 2008-2009 PNPMwill imDrove household 1 Welfare andtargeting (Alatas, 2005) 1 Will repeat2007 impact welfare, especially for the poorer 1 Impact evaluation ongoingfor panel evaluaiionin2009. A segments ofthe population. 2002,2007. Quantitativeand Quantitativeand qualitative Qualitative (KDP andUPP) 1 100 Sentinel KecamatanStudy in2008 PNPMwill have a positive impact 1 Economic multiplier, EIRR studies 1 Will repeatemployment and on local economic growth, through (Torrens, 2005), EIRR studies in2009. highratesof returnand short and 1 Employment generation(Papanek long-termemploymentbenefits. 2007), 1 MISon employment info PNPMimproves access to key 1 Impact evaluation ongoingfor panel 1 Will repeat 2007 impact services, e.g., markets, town 2002,2007. Quantitativeand evaluation in2009. centers, educationand health Qualitative Quantitative and qualitative facilities. 1 MIS (KDP and UPP) 1 100 SentinelKecamatanStudy PNPM provides high quality, cost- 1 NMC Infra Reviews, 2002 and2005 1 RepeatNMC Infra Reviewin effective small-scale 1 Cost-effectiveness study (Torrens, 2008. infrastructure. PNPMhas low 2005), 1 FacilitationStudy levels of corruption and leakage. 1 Infrastructurequality (Ekhardt et a1 1 Repeat corruptionstudy in 2004) 2009/2010 1 Corruption(Olken, 2005) 1Annual audits by BPKP and 1 Annual audits (BPKP, Price World Bank auditors Waterhouse, Moores Rowland) PNPMoperationsfor infrastructure 1 NMC 2005 InfraReview 1 Will repeatNMC Infrareview and economic activities are 1 Village FinancingStudy -ongoing. on PNPMand VIP 50 sustainable. I KDP Microcredit Study (Dent, 2001) I . infrastructure in2008. Village Financing Study 2007- 2008. Microcredit Strategy Formulation (2007-2008) PNPM builds the capacity of local Economic review (Torrens, 2005), Governancestudy for PNPM, communities and local KDP Qualitative Study 2007 2008. governmentsto managepoverty UPK annualassessments ...Supply side responsesto reduction programs. PNPM, 2008. 1 m UPK annual audits . though community participation, contributions- contributions, satisfaction with results, and KDP conflict study 2005 Repeat KDP Impact accountability. It also promotes CDD Gender Review 2007 Evaluation, quant & qualitative conflict resolution and increases KDP Impact Evaluation ongoing in2009. social capital GovernanceStudy of PNPM .m Vulnerability & marginalized groups study Conflict study 100 Sentinel Kecamatan Study b. EconomicAnalyses Studies From 2005 to 2007, KDP carried out several studies to calculate: 0 Economic internal rates o f returns 0 Cost effectiveness as compared to other similar programs 0 Economic multiplier effects 0 Employment and poverty impact These studiesfor economic impact and employment will be repeated in2009. C. InfrastructureEvaluations 29. In the past, KDP has supported four separate studies evaluating the quality of rural infrastructure and also reviewing the supervision and documentation related to infrastructure works. These studies focused upon: the technical quality o f KDP; maintenance plans; usage o f facilities; employment generation; community perceptions of, and satisfaction with infrastructure; cost efficiency; proper documentation o f designs; unit costs; safeguards; and inspections. 30. For PNPM-Rural, the program plans to conduct another village infrastructure review similar to the studies from 2005. The review will look specifically at issues raised in earlier reviews, especially technical supervision and inspection, technical documentation, and operations and maintenance arrangements. 51 d. FacilitationStudy 3 1. Traditionally, KDP has spent approximately 15 to 20 percent of its budget for external consultants, both social and technical. This arrangement developed with the understandingthat Government should outsource such services and that the quality of technical input would be higher. However, dissenting opinions believe that Government officials should be performing these services andthat TA costs are too highand are not value for the money. 32. This Facilitation Study scheduled for 2008 will look at examples of government programs, including PNPM, where funds have been utilized without technical consultants present. Occasionally this has occurred due to difficultiesfilling positions or breaks in contract. There are also several government infrastructure programs where there are no technical consultants. This Study will compare situations where facilitators have been present vs. those where no facilitator is recruited and/or local government officials themselves serve as the project social and technical advisors. e. Village FinancingStudy 33. This Village Financing Study aims to understandthe ability and willingness of villagers inpoor villages to provide the resourcesto maintainthe infrastructure intheir villages. To do so, the Study will obtain a profile of total net incomes of a set of poor villages throughout one year andperform an infrastructure-maintenancecost-modeling exercise. Inparticular, this Study seeks answers to the following researchquestions: Do villagers in poor villages have the resources to maintain their priority infrastructure on their own? Ifthey do, to what extent are villagers willing to use their resources for infrastructure maintenance? 0 How do seasonal conditions and villagers' (as well as villages') characteristics affect resourceavailability and their willingness to pay for infrastructure? 34. There are two types of respondents: households and village officials. For the household survey, the total sample size is 3,840 households. This represents an average of 120 households in each of 32 selected villages. For the village officials' survey, an estimated of three to five village officials will be interviewed in each village. The Study will also include a technical inventory of major infrastructure works in the village, including roads, bridges, irrigation and water sources. The 32 villages will be selected from Sumatra, Java, Kalimantan, Sulawesi and Other Islands. f. MicrocreditStrategy FormulationMission 35. This Microcredit Strategy Formulation Mission will review KDP and UPP's past microcredit performance and recommend ways of developing a complementary program to support the program's kecamatanmicrocredit units. The main objective of this mission will be to outline an operationally grounded strategy for a national micro-credit program that will be separate but complementary to PNPM. The micro-credit component will form one wing of the 52 Government's overall national poverty reduction strategy to address issues of access to finance for the poor and for private sector development. The independent Mission will begin by December2007 and continue untilApril 2008. g. PNPM Governance Study 36. The launching of PNPMin2007 opens upthe opportunity to documentcarefully how this flagship program develops and what impacts it has. This study will document the life history of PNPM by interviewing various leaders and elites at the national and local levels. The study will explore key stakeholders' perspectives regarding the program, what they hope will be achieved, and their aspirations. It will also examine governance changes and challenges occurring because of PNPM, and the engagement of subnational and local governments in PNPM. This includes interviews with Coordination Team members at the national level, Governors, District Governors and legislatures, Kecamatan Heads, Village Heads and Village Councils, kecamatan financial management units, village implementation teams, community group leaders, and project facilitators and consultants. 37. A second component of the governance study will examine capacity building efforts to strengthenthe performance of local governments for pro-poor planning and support for PNPM. This includes an analysis of how local government funds are used for pro-poor programs and their involvement withPNPM. 38. This will be ajoint study with PNPM-Urban. This study will be conducted in 2008 and repeatedin2010. h. Conditional Cash Transfer Evaluations 39. The CCT component under KDP began its pilot phase in2007. Three rounds of surveys are planned to evaluate rigorously the impact on health and education indicators, consumption and targeting of the two CCT approaches, household and community. The evaluation uses a randomized approach. The University of Gadjah Mada, Center for Population and Policy Studies, has recently completed the data collection for the first round CCT baseline survey. The 2007 baseline survey covered some 680 sub-districts in the six provinces of East Java, Jakarta, West Java, North Sulawesi, Gorontalo and NTT. The baseline survey visited approximately 26,720 households, 5,340 village heads, 670 health centers, 2,670 health providers (midwives), 2,000 junior secondary schools, and undertook anthropometric measurements for 15,000 children under-three, and math and Indonesian language tests for 20,000 school-aged children. The survey was fielded inJune 2007 and the report will be forthcoming inJanuary 2008. Qualitative studies in 24 villages accompany the quantitative field work. The studies will examine changes ineducation and health outcomes as a result of the CCT interventions. i. Supply Side Responses to PNPM 40. PNPM i s intended as the umbrella for poverty reduction programming in Indonesia for the next few years. The Government intends to focus these programs upon reducing poverty in PNPM areas. This study will look at how the ministries of education, health, and agriculture 53 have coordinated under the PNPM programming umbrella to bring services to the poor. This study will focus on PNPM-Rural inseveral districts and community CCT areas. j. VulnerabilityandMarginalizedGroupsStudy 41. This study, planned for 2008, will use ethnographic qualitative research methods to examine who participates and who doesn't in KDP and UPP. Who benefits from the project activities, who makes the decisions, and who i s not touched by the process? One of the aims of PNPM i s to ensure that marginalized and the poorest groups do participate in the program's benefits. I s that happening and what factors contribute to failures or successes? Project locations will be chosen across geographically diverse areas, selecting sites from Sumatra, Java, and easternIndonesia (currently being proposedis Kalimantan and Papuas). Inthese places, the study will examine how ethnic minority groups are involved in PNPM and development planning. k. 100 SentinelKecamatanStudy 42. Inorder to track progress over time, PNPM-Rural will launch a 100 Sentinel Kecamatan Study in 2008 to be repeatedevery two years. PNPM-Rural will select kecamatan stratified by poverty ranking, geographical location, and years in KDP. The study will allow the program to track changes at the kecamatan level in terms of household poverty levels, governance, and social capital changes. It will also track service delivery in these areas as well as changes in public expenditure allocations. Several of the thematic studies mentioned above, will be focused geographically on this subset of kecamatan. 1. ConflictStudies 43. These Conflict Studies will be a longitudinal analysis of the conflict research conducted in 2005 across 40 villages in Flores and East Java. A preliminary look at these 40 villages reveals that there is wide variation of KDP treatment across these areas; some villages have experienced KDP for less than one year, others for eight years. This proposed study will focus upon the differential impacts (direct and indirect) on conflict and local conflict management capacity across time. The Study will examine the sustainability of any KDP impacts, the extent to which they accumulate over time, and explore more deeply how these effects spill over into other domains of social and political life in villages. It will involve follow-up ethnographic and case study work and a secondroundhousehold survey. 44. A second component of the study will undertake a comparative analysis of conflicts over development funds flowing from KDP as comparedto those from other development projects in the area. This comparative aspect was explored inthe first roundand will be expandedin2008. m. Evaluationof GovernmentNationalPovertyPrograms 45. Over the course of the next few years, the Government will enhance its evaluation capabilities and carry out evaluations of community poverty projects to assess the effectiveness of these programs and whether or not they should be included under the PNPM umbrella. The 54 Government i s particularly interested in whether or not the projects reached their stated objectives, how projects were executed, and are communities benefiting from the projects in a sustainable manner. The Government, through Bappenas, began these assessments in 2007 with eleven major projects in micro-credit, village infrastructure, water and sanitation, and rice subsidy. Lessons from these projects, for example the micro-credit evaluations, are being incorporated into future PNPM-Rural design. The Government plans to expandthe evaluation o f these programs in2008 and beyond. 55 Annex 4: DetailedProjectDescription INDONESIA: NationalProgramfor CommunityEmpowermentin Rural Areas 1. PNPM's overall development objectives are to reduce poverty and improve local-level governance inrural Indonesia. Its overall means for achieving these objectives are by providing investment resources to support productive proposals developed through participatory community planning. PNPM also supports the development o f responsive institutional structures that enable bottom-up planning and provide for development oversight at the local level. Decision-making i s left to the communities themselves, transparently and responsibly. All important decisions are made in community-wide meetings. Monitoring o f activities i s undertaken by many actors, including the legislatures and other communities trained by NGOs, as well as independent teams selected by communities themselves. 2. PNPM-Rural will support approximately 2,600 kecamatan. Activities that will be supported include: 0 building or repairing basic productive infrastructure, such as small roads, irrigation infrastructure, clean water supply systems, etc; 0 buildingor repairingsocial infrastructure, such as school buildings, clinics, etc; training for revolving funds management; 0 assistance for the development o f district and subdistrict capacities, specifically technical training inadministrative drafting; and 0 carrying out a number o f carefully designed pilot programs to provide special assistance to disadvantaged or marginalized groups. 3. Component 1: Kecamatan Grants. The main activity in PNPM-Rural will be the construction o f economic and social infrastructure that i s desired and needed by the communities. The selection o f activities i s open except for items specifically excluded through the project's negative list. All assistance i s given as a grant to the village by the government. Criteria for activities include: Can be undertaken by the village, with locally available technical assistance 0 Technically and financially feasible 0 A public need Givesbenefits to the community, especially the poor inthe village 4. PNPM funds can be used for infrastructure such as roads or irrigation, for social services such as schools and clinics, or for training. PNPM will not support economic activities except for village-level revolving funds managed by women's groups, although the project will provide special training for the existing revolving fund management units.N o new funds will be injected for micro-finance activities. Funds also cannot be used for items on the project's negative list, or for landpurchase o f any kind. 5. Subdistricts which are normally made up o f 20-40 villages, receive an allocation from the project, which i s anticipated to be between 1,000 million to 3.0 billion rupiah ($125,000 to 56 $350,000) per year, depending on their population. In PNPM, district governments with lower fiscal capacities provide contributions o f 20% o f the kecamatan grant and those with higher fiscal capacity provide contributions 50% from their own budgetary resources. The different amounts are based on local government fiscal capacity classifications that are issuedby MOF. Java OffJava Size of Grant >50,000 >25,000 3.O billion rupiah 25,000-50,000 15,000-25,000 1.5 billion rupiah <25.000 <15.000 1.O billion rutiah 6. Women's savings and loan activities are limited to 10 million rupiah per village. The standardallocation is not competed for but it will also be limited to 15 million rupiah or 15% o f the total grant to the kecamatan. All other proposals are selected through inter-village competition. 7. Before the proposals are discussed at the Subdistrict Decision-Making Forum, they undergo a verification process done by a team o f selected citizens with advice from the consultant. The team is selected by the Subdistrict Manager and the Empowerment Facilitator, and their technical expertise is verified by the Management and Technical Facilitator. Verification is undertaken o f each proposal on the basis o f technical feasibility, financial feasibility, and other criteria. The team does not determine rankings or priorities. Ifthere were any proposals found to be unfeasible, these would be discussed with the communities at the time o f the visit, so that the proposal could be modified or at least the community could understand the reason for recommended rejection by the facilitators. However, while facilitators can recommendrejection, the communities must still make the decisionthemselves. 8. Subproject rules for procurement, financial management, technical oversight, and reporting to government and to the Bank are provided through the project's Operational Manual. The Manual is re-issued annually as part o f each year's overall performance review and programming for the coming stage. 9. Component 2: Facilitation and Training. PNPM-Rural develops further the community capacities supported under KDP by strengthening the capacities o f the local government institutions created through the decentralization program. This will take place through two mechanisms. First, PNPM-Rural will promote the adoption o f the implementing instructions (perdas) required by Law 22. But once they are adopted, a great deal o f training i s needed to familiarize officials and community members with their mode o f operation, rights, duties, and capacity for promoting village interests. PNPM will also provide a limited amount o f training to the technical staff o f district governments, including the district parliaments, who are concerned with village development. 10. Component 3: ImplementationSupport and Technical Assistance. This component supports technical assistance to the national, provincial and district governments. The bulk o f this component covers the costs o fexperienced technical and social facilitators at each level who provide technical advice, field oversight, and local-level coordination to the program. PNPM 57 also provides both quantitative and qualitative monitoring, and it also has a mix of internal and outsourcedevaluations. This component will fund several studies and evaluations to support the Government in examining the impact of PNPM-Rural on: poverty and socio-economic welfare; access to services; cost effectiveness and service quality; sustainability; and governance and empowerment issues (social capital, accountability, inclusiveness, access to information, conflict prevention and dispute resolution, corruption, etc.). The internal system will be strengthened through better technology, additional training, and improved oversight. PNPM reserves approximately 3.5 percent of its budget for monitoring and evaluation. Improving government's ability to monitor and evaluate the PNPM program is a key objective of the Multi-donor PNPM Support Facility. This component of PNPM also includes an enhanced audit program that expands sampling, provides capacity development support for district government auditors, and funding to repair problems that audit reviews attribute to project shortcomings. 11. Component 4: Support for Project Management: PNPM's special programs place several additional demands on normal government budgeting, particularly as the program prepares for the national scale-up. Most operational costs will be covered by GOI. But this component covers several critical national-level activities needed to manage the national program: introducing electronic file management for PMD, office improvements, and the provision of 15-20 national and international scholarships to provide advanced specialized training inmanagement, fiduciary controls, and evaluation for key PNPM staff. 58 Annex 5: ProjectCosts INDONESIA: NationalProgramfor Community Empowermentin RuralAreas TableA5.1: FinancialSummary Local Foreign Total ProjectCost By Componentand/or Activity us us us $million $million $million A. KecamatanGrants for Investment 1488.01 78.32 1566.32 Kecamatangrants for planningandcapacity 63.94 3.36 67.30 building B. FacilitationandTraining 125.31 6.60 131.91 C. ImplementationSupport and Technical 38.55 2.03 40.58 Assistance D. Monitoring,Audit, Evaluation 27.39 3-04 30.44 E. Information,Education, andCommunications 7.97 0.42 8.39 F. IncrementalProject Costs 13.53 0.71 14.24 TotalBaselineCost 1764.70 94.58 1859.18 PhysicalContingencies Price Contingencies TotalProject Costs Interestduringconstruction Front-endFee 0.00 0.10 0.10 Total Financing Required 1764.70 94.58 1859.29 Table A5.2: TotalProjectFinancingSources 2 years (2008-2009) FinancingArrangements (US$ million) IBFWIDA 231.19 Government Central (Loan) 460.32 Central (GOI) 656.22 District 307.24 Beneficiaries 204.30 Total ProjectCosts 1,859.29 59 Annex 6: ImplementationArrangements INDONESIA: NationalProgramfor CommunityEmpowermentin RuralAreas Government Consultants/Facilitators NATIONALLEVEL - CoordinationTeam (NMC) National KDP Secretariat PROVINCE LEVEL - Inter-Ministerial - Management Consultants - Coordination Team (KMProp) Provincial KDP Secretariat DISTRICTLEVEL KECAMATAN - Kecamatan Facilitators LEVEL -- Kecamatan Head PjOKPjAK (FK) VILLAGE LEVEL 60 Annex 7: FinancialManagementand DisbursementArrangements INDONESIA: NationalProgramfor CommunityEmpowermentinRuralAreas ExecutiveSummaryand Conclusion 1. The Government of Indonesia (GOI) has submitted a request for project financing to support a national program for poverty reduction. The program will include a National Program for Community Empowerment (PNPM) and Conditional Cash Transfers (CCT), and will cover both rural and urbanparts of Indonesia. The PNPM will be built by scaling up two World Bank- financed community driven development projects, the Urban Poverty Project (UPP); the Kecamatan Development Project (KDP) and the Support for Poor and Disadvantaged Areas Project (SPADA). The government has requestedfinancing of USD 231.19 million to scale up KDP. There are no structural changes to the core project design. The loan will be used for GOI's FY 2008 and FY 2009. 2. This report documents an updated assessment and validation o f the existing KDP. The purpose of this assessment and validation is to determine whether the financial management system of the implementing agency, DG PMD, MOHA, has the capacity to produce timely, relevant and reliable financial information to cover the scale-up o f the national programs with respect to KDP; and if the financial management arrangement for the project expenditures and underlying internal controls are adequate to meet fiduciary objectives, satisfy the Bank's OP/BP 10.02 with regards to the proposed PNPM-KDP and allow the Bank to monitor compliance with agreedimplementation procedures and appraise progresstowards its objectives. 3. Under OPBP 10.02, financial management arrangementsare the budgeting, accounting, internal control, funds flow, financial reporting, and the auditing arrangements of the entity and entities responsible for implementing Bank-supported operations. For each operation supported by Bank-financing, the Bank requires that the borrower to maintain financial management arrangements that provide assurance that the proceeds of the financing are used for the purposes for which the financing was granted. 4. The assessment and validation was carried out in accordance with the Bank's guidelines under Financial ManagementPractices inBank-Financed Investment operations datedNovember 3, 2005. Financial Management Risk i s the risk that loan proceeds will not be used for the purposes intended and is a combination of risk factors. Taking into account the risk mitigation measures proposed, the financial management risk rating for this Financing is assessed as substantial before mitigation and moderate after mitigation. This assessment has concluded that, with the implementation of the recommendations proposed here, the risks will be substantially mitigated, and the proposed financial management arrangements will satisfy the Bank's minimumrequirementsunder OP/BP10.02. 5. The project has several significant risks. First, there is a risk posed by the use of community block grants, particularly with respect to how effectively beneficiaries and community groups (CG) use and account for the funds. There is a second risk that concerns the low capacity of local government staff to supervise and monitor the sub-project implementation, especially for local governments that do not have previous experience with the KDP program. 61 The third risk is the uneven capacity of the field consultant to assist the community groups (UPK) on the financial management aspects. The fourth risk i s the weak financial management capacity o f PMU, which i s still managing the existing KDP 2 and 3. This additional financing may stretch the capacity o f the agency further. 6. Balanced against the potential risks i s KDP's successful record o f mitigating these risks through a strong training and oversight system. Over the past year, KDP has also taken several steps to strengthen its financial monitoring and reporting framework. Internal and independent audits report low loss (misuse and irregularity) rates. The external audit of the project will be conducted using a risk-based approach and with an expanded scope audit. Inaddition, the project auditor has agreed and will increase the audit sample size and involve the local auditor (Bawasda) on audit assignments. A plan for the strengtheningo f Bawasda i s being developed. There i s a provision to recruit additional FMconsultants at the central as well as local levels. ProjectDescription 7. KDP consists o f un-earmarked block grants that are spent to finance economically productive activities that are planned through facilitated village and kecamatan meetings. Eligible kecamatan are selected based on national poverty list area. The amount o f kecamatan block grants are fixed within categories established by kecamatan population density, but village proposals can vary within a pre-determinedrange. The block grants are disbursed directly from the Special Account through a government operation bank to collective community accounts (through a transfer bank), without entering the inter-governmental financial transfer system. The community group receives a small planning grant so that it can hire technical advisers to help designtheir proposals. Investmentproposals are discussed and agreed at kecamatan meetings. 8. DuringPNPM-Rural's 2008-2009 scale-up periods, the program's core architecture will not deviate in any significant way from the existing KDP. KDP already i s a very large project and its core operating systems were both designed for future scale-up and have already demonstrated their ability to incorporate increased scope. The three main differences betweenthe KDP3a and by operations, and the project being proposed for appraisal are: (i) grants rise Block from an average of Rps. 1.2 billion per sub district (kecamatan) to approximately Rps. 2.1 billion; (ii)The number o f sub districts rises from approximately 2,020 in2008 to 2,600 in2009; and (iii)a new level o f government oversight, coordination, and policy guidance. Country Issues 9. Based on Country Financial Management Assessment (CFAA) and other assessmentsheports, there are major deficiencies in the Public Financial Management (PFM) area that are acknowledged by the government. These are: 0 Inefficient budget formulation process. 0 Fragmented cash management and government banking arrangements. 0 Unreliable accounting and reporting systems. 0 Unclear roles and responsibilities inexternal and internal audit arrangements. 0 Lack o f capacity inaudit institutions. 62 0 Poor salary and incentive structure and lack o f sanctions inthe civil services 0 External audits are not risk-based and do not focus adequately on systemic issues. 10. Recent PFM reforms in Indonesia have been part o f a broader reform agenda o f macroeconomic stability set out in the Government White Paper of 2003. The Government's target i s to have a sound PFM system inplace by 2008. The Indonesia PFM reform agenda is led by the Government, with technical support beingprovided by many donors, including the World Bank. Major progress in laying the foundations for PFM reform has been achieved to date, including a new State Finances Law, Audit Law, and Government Accounting Standards. In addition, important changes have beenmade to the budgeting process, including the introduction o f unified budgets, which started inFY 2005. InstitutionalArrangements 11. A central project management unit (PMU) will be continued through the Ministry of Home Affairs, Department o f Community Development (PMD), which manages all KDP activities. At each administrative level o f the project, P M D will work with the local government to form a coordination working group (TimKordinasi Pengelolaan Program) whose functions are to provide information to villagers about planned development programs, to provide technical support as requested and/or required by project technical criteria, and to solve administrative bottlenecks and problems. 12. Within kecamatan and villages, communities will carry out planning through locally elected administrative councils. Every sub district and village council forms a small team for project implementation each year to help with project record-keeping. A financial management unit (UPK) is established at the kecamatan level; while a project implementationteam (TPK) is set up in each village. The kecamatan block grant includes funds to finance overhead costs, such as small honoraria for the UPK and TPK members. The project will use a variety o f specialized consultants to develop local capacities through training inproject management, legal aid, dispute resolution, and grassroots advocacy on behalf o f villages. Initially, these consultants will be managed through project contracts, but over time their services will be contracted and paid for directly by the communities. Facilitators will also assist the community groups to prepare the financial reports on sub-grant implementation. The facilitator should control and monitor any riskofoverlap between differentprojects operatinginthe same village. Strengthsand Weaknesses 13. The existing project has strengths and weakness in several areas. The project design has strengths that derive from using a CDD mechanism to work with communities, which are as follows: 0 Community Groups receive the funds directly intheir bank account from MOF's Treasury Office (KPPN), based onjoint approval by community representatives and certification by a registered government officer; 0 The community has strong ownership, which creates incentives for community control over funds. 0 An external monitoring and evaluationunit is established through the PMU. 63 An internal financial management team provides hands-ontraining and oversight to provincial groups. Adoption o f proven CDD management tools and systems has beenused successfully underthe existing KDP, such as the flow of funds mechanism, independentreporting and monitoring. 14. Based on supervision missions and review o f audit reports from the existing projects, we note the following weaknesses ina numbero f locations: 0 The capacity o funtrainedcommunity groups to manage and implementthe grant is weak. 0 The capacity of local governments to supervise andmonitor project implementationis not strong. 0 The capacity of facilitators to provide financial management assistance is unevenand weak. 0 Internal controls inthe P M U and community groups are inadequate. 0 Complaint tracking and reporting i s not web-based and cannot provide up-to-date information on the progress o f case resolution. 0 Audit reports are not accessible by the public so that public scrutiny is not optimum. 15. The project's weaknesses create a number of risks for project implementation. The Bank recommends the following mechanisms to mitigate these risks: Substantially strengthening training programs for local governments and CGs; Strengtheningfinancial management teams and financial controls at the central and local levels; Strengtheningnational and local financial management teams so as to deliver expanded FMtraining and supervisionfor facilitators (field consultants) and CGs; Makingthe BPKP audit risk-based through an improved audit manual and audit TOR; Training local government auditors (Bawasda) and include them inthe audit assignments. Bawasda involvement will helpexpand the project audit coverage; and Establishinga web-based complaints handling system, including providingaccess to audit findings online for public access. RiskAssessment Summary 16. A detailed analysis of financial management risks arising from the country situation, the existing project entities, additional project features and related internal controls has been completed during this additional assessment. This analysis i s summarized below. These risks have been rated on a scale o f High, Substantial, Moderate to Low. The overall FM risk i s assessed as Substantial before mitigation and Moderate after mitigation provided that all mitigating measures are effectively implementedand the project i s effectively supervised. 64 Conditionof Issues summary comrnents And RiskMitigation Effectiveness ---P- A. InherentRisks Country Level 1. Government H Government recognizes existing weaknesses Financial Reporting in PFM, but making progress has been challenging. The Bank assists the government through GFMRAP project. 2. Civil Services H Poor civil service payment structures & lack Poor civil service of sanctions. The government has startedcivil payment structures, services reform. However, payment structure incentives remains inadequate, and greater enforcement Entity Level 1. Implementing M PMD comes under Ministry of Home Affairs. EntiG/Organizaiion PMD has long experience managing all KDP Status of entity programs. Technical assistance will .~ be provided to PMD to managethe project. Project Level 1. Project Complexity S Project scope is nationwide and decentralized, with large number of small transactions involved. Specific CDD mechanisms are in place, inc. community planning, execution, accountability mechanisms 2. F M staff capacity S Limited staff capacity, especially for new Inadequate FA4 staff local PIUs and community groups. The project will provide additional technical assistance to the local PIUs and community groups. OverallProjectRisk B.Control Risk 1. Budget S Budgetpreparationis well defined, but there S N Delay in issuing are frequent delays in execution. Decree on budget documents budgetexecutionshouldbe issuedright after budgetdocuments issued. 2. Accounting S Governmentaccountingstandards are M N Reliability of followed. However, there will be separate accounting system reporting proceduresfor project purposes. 3. Internal Control S Weak payment verification. Internal controls S y, Inadequate payment are documentedinthe project operation Adoption of verijkation manualbut level of compliance is uneven. revisedproject Fieldconsultantsand local auditors will operationmanual review and verify the UPK reports. The prior to manualwill be revisedto take the role of field effectiveness consultantsinto account. 4. Flow of Funds M Communitiesdo not receivethe grants in a M N timely manner.They receiveblock grants directly through commercial banks.- 5. Financial Reporting S At the national level, PMU will prepare a M N 65 Conditionof Issues Risks sw~comments Residual Negotiatiodof AndRiskMitigation Risk Effectiveness (YM?) Reliabrliry and separate financial monitoring report, in which timeliness offinancial it will be assistedby a financialconsultant. At reports sub-district level, UPKs will prepare simple financialreports, assistedby facilitators. S Acceptability of auditor and audit TOR. Past M y, Integrity of auditor and audits have not been risk-based and not Acceptable audit poor follow-up on audit focused on systemic issues. Audit manual bas TOR and audit findings been being revised and training to BPKP has manualto the been provided. BPKP will be required to Bankbefore conduct audits using improvedaudit TOR and negotiations manual. The Bank has requested BPKP to increase number of audit samples. The project will train local auditors (Bawasda) and will involve them inaudit assignments. M M Risks: [High / Substantial ModerateI ,ow] AccountingandReporting 17. Similar to the existing project, all financial transactions will be recorded in the government accounting system and included in government accountability reports. The P M U will prepare a separate set of project financial reports that are suitable for project monitoring purposes, including monitoring o f the additional financing. The specific accounting procedures are set out in the Project Operation Manual. The P M U and Local Project Unit (PJOK) at the kecamatan level will maintain separate accounting records for all payment requests (SPM) and remittance orders (SP2D), on a cash basis. UPKs are also required to prepare simple accounting and financial reports for the block grants they receive. Facilitators will assist the UPKs in administering the block grants. Each UPK will prepare a balance sheet and income statement for revolving funds. 18. The P M U will be responsible for preparing aggregate Interim Financial Reports (IFR) and submit these to the Bank on a quarterly basis in formats to be agreed with the bank. These reports will cover all consultant contracts and block grant payments to the UPKs. A Special Purpose Financial Statement for this project will be prepared annually for audit. Staffing 19. Since the P M U has adequate experience from previous and existing projects, it also has adequate financial management (FM) staff capacity. However, there i s limited staff capacity in the new local PIUs and community groups that do not have prior experience with project activities. The project will provide technical assistance to these local PIUs and community groups duringthe course o f project implementation. 66 InternalControl 20. The majority o f the project activities will be conducted by communities in the villages (desa) where the communities themselves will monitor and verify project progress. In addition, field consultants (facilitators) will countersign UPK and TPK reports. A UPK will not be able to withdraw funds without a countersignature from the facilitator. Inorder to obtain the approval o f the facilitator, the village implementation team (TPK) has to produce an acceptable funds utilization plan or utilization report and bank account balance (for the second and remaining payment). The frequency o f withdrawals will depend inpart on physical proximity to the bank from the village, but in principle the amount o f cash kept in the village should be as small as possible. P M U will prepare memorandums o f understanding with the local participant banks and require additional controls over community accounts. 21. The TPKs submit their project report to the UPKs. These reports will be aggregated at the kecamatan level and made public at the kecamatan forum and public arena. Internal controls at the village level are as set out inthe project operational manual. These control mechanisms are expected to create community controls over project implementation. Overall, internal controls satisfy minimum standard requirements. Although there may be some questions about the effectiveness o f government internal controls, the likely impacts o f any weaknesses are limited as the government will only be responsible for very narrowly defined administrative activities. This is because all o f the sub-grants are directly transferred from the treasury office (KPPN) directly to community group accounts. The project will also involve the creation o f a national financial management oversight and training unit staffed by at least 7 qualified specialists. 22. Routine internal control at the local and national levels will involve verification and reconciliation. There will be three reconciliations. The first reconciliation will be carried out in the PIU (PJOK) and Treasury Office. This reconciliation will be based on payment orders (SP2D) issued by the Treasury Office. The second reconciliation will be carried out at the UPK level, which will reconcile the UPK books and its bank statement. The final reconciliation will take place at the P M U level and will reconcile all SP2D and SA statements. The facilitators will assist the PJOKs and UPKs to conduct reconciliations, while the central management consultant will assist the P M Uwith SA reconciliation. Complaints 23. The Complaints Handling Unit (CHU) of the National Management Consultant (NMC) continued to receive and process complaints from the public. In order to encourage people, currently the project also uses short message text as the complain channel. It is easier mechanism, since cellular telephone i s common in Indonesianow. As of November 2007, CHU received 5,840 complaints. This figure included unresolvedcomplaints from the previous year. A total of 5.010 cases, or 85.8% o f the complaints, have beenresolved, while the rest are still being processed. The majority o f complaints (2,591) were related to the misuse o f funds. O f these cases, 1,896 or 73% were resolved, with IDR 17.9 billion being recovered, which excludes the recovery and sale o f individual assets or work donated in lieu o f cash. The current complaints system, which is spreadsheet-based, needs to be upgraded to a web-based system with an audit trail that provides easy access so as to enable the public to monitor the processing o f complaints. 67 Audit Arrangements 24. The PMU is responsiblefor preparing generalpurpose financial statementsinaccordance with IPSASs. The audit of these statements will be carried out by government auditors (BPKP) acceptable to the Bank. 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 acceptability of auditors will take into account specific audit methodologiesthat are neededto audit widely dispersedcommunity-based activities, as has beenestablishedunder other on-going KDP projects aroundthe country. 25. The audit assignment will be in accordance with the agreed Terms of Reference (TOR). Under the PNPM, it is expected that the external audit will go beyond merely providing and opinion on the accounts to include opinions on internal control framework and compliance with the project operational manual. The BPKP audit manual for CDD has beenupgraded to be risk- based and focused on internal controls. In addition the auditor will assess and report on the achievement of the performance indicators that relate to selected areas of governance and financial management. 26. The audit will also include an assessment of the reliability ofproject financial statements, and the verification of accounting information at community level on the sample basis. The annual audited financial statement will include a review and reconciliation of Special Account transactions and quarterly interim financial reports. The audit reports will be made accessible to the public. 27. Inaddition, the auditor is requiredto conduct an audit at UPK andTPK level. The agreed TOR has been developed and agreed with the Bank. The auditor will use the audit program that has been developed for CDD. The audit sampling coverage will be determined based on kecamatan number. BPKP plans to train local government auditors (Bawasda) through the existing project. Bawasda auditors will be included and serve as partner in the auditing of the UPKs. The participation of Bawasdainthe audit process will help expandproject audit coverage. Since the majority of project activities will be conducted by communities in the villages. The communities themselves will also play a role in monitoring and verifying project progress. The role of internal auditor of the executing agency is limited; the internal auditor (IG) will be involved inorganizing and coordinating Bawasdaassignments. DisbursementArrangements 28. The applicable disbursement method is "Advance". For this purpose, a Designated Account (DA) denominated in US dollars will be opened by DG Treasury (MOF) in Bank Indonesia (central bank) or a commercial bank acceptable to the Bank. The DA will be solely usedto finance eligible project expenditures. The ceiling of the advance to DA will be variable, and the advance(s) will be made on the basis of the six monthprojected expenditures. Reporting of use of DA funds will be based on quarterly IFRs(InterimFinancial Reports). Applications for advance payment to the DA shall be submitted together with the reports on use of DA funds, consisting o f (a) IFRs, and list payments for contracts under the Bank's prior-review (b) projected expenditures for six months; and (c) the DA reconciliation statement. 68 29. DG Treasury will authorize its relevant Treasury Offices (KPPNs) located near the implementationunits to authorize payments o f eligible project expenditures through the issuance o f SP2Ds (remittance orders). After issuing an SP2D, KPPN will then issue a Debit Memo and charge the DA. For this purpose, DG Treasury will send a circular to the relevant KPPN Offices setting out guidelines and criteria for eligible project expenditures in accordance with the credit/loan agreements. When expenditure is due for payment, PIU will prepare and forward an SPP (payment request) to the payment officer within the Sutker. After document verification, the payment officer will issue an SPM (payment order) together with the supporting documentationfor submission to the relevantKPPN. The KPPN will check the budget eligibility and issue an SP2D to the KPPN's operational bank, which will transfer the funds directly into the payee's account and arrange for debiting the loan portion to the DA. The flow o f funds and reporting mechanism are as shown indiagram 1, 30. Although the DA will be inthe name o f DG Treasury MOF, the P M U at PMD level will be responsible for reconciling the DA and preparing applications for the withdrawal of advances and reports on DA transactions, duly approved by DG Treasury, before their submission to the Bank. Copies of DA bank statements will be provided to the P M Uby DG Treasury, MOF. 31. Under PNPM-Rural, the National DIPA budget documents are as follows: (i)Budget DIPA at district level to be executed by the district Sutker (work unit responsible for project execution), covering Block Grants, Planning and Training Grants; (ii)Budget DIPA at province level to be executed by the provincial Sutker, covering district consultants' and facilitators' salaries and allowances; and (iii)Budget DIPA at central level to be executed by Central Sutker, covering N M C,provincial consultants and other consultant services at central level. Inaddition, each local government (LG) will also provide fund contributions to the block grant from their APBD (local budget). The Provincial Sutker will execute payments, administer and report on project activities in the respective province and districts. These provincial reports are submitted to the PMU and used as the basis for preparing the consolidated IFR (interim financial report) for the project. The submissions o f IFRs under KDPs have been satisfactory. The same PMU currently working for KDP at the PMD, MOHA, will be responsible for consolidating and preparing the IFR for this project. Flow of Fundsto CommunityGroups 32. After a UPK is formed and opens a bank account, it signs a standard form grant agreement with the sub-district's sub-project manager (PJOK), which i s then certified by the district consultant and facilitator, and approved by the district project manager (PPK), 33. Facilitators are requiredto fill out standard form payment request to be signed off by the sub-district's PJOK, certified by the district consultant and submitted to the district PPK. The PPK assembles request from the various UPKs for which he i s responsible and then issues a payment order (SPM) to the Treasury Office (KPPN), attaching a list o f payee UPKs. The KPPN then issues remittance orders (SP2D) to the operational bank or Bank Indonesia branch office, which arranges for a remittance o f funds fiom the DA to the respective UPK accounts. The district Sutker conducts monitoring to ensure that the funds are remitted to the UPKs in a timely fashion. 69 34. The release o f funds to the UPKs will be carried out in three tranches (30%, 50% and 20%). The first payment is made upon signing o f the block grant agreement, and the subsequent payments made based upon satisfactory progress reports, as certified by the facilitator. 35. The block grants comprise two sources o f financing: (a) funds DIPA budget o f central government made available from loadcredit or from GO1 own source; and (b) funds from the local government contribution, being at 20% or 50% o f the block grant, depending on their fiscal capacities. In order to simplify release o f funds to UPK, three tranches installments are set as follows: the first 30% is from the credidloan or GO1 own sources; the second installment is either 50% from local government with higher fiscal capacities (meaning zero percent will be financed from the credit/loan in this case) or 20% from local government with lower fiscal capacities and 30% from loadcredit or GO1own source; and the third 20% from the credidloan or GO1own source. The standard mechanism for releasing block grants will be stipulated inthe Project Manual, subgrant agreements, and the DG Treasury's circular providing guidelines for payments from the DA. Payment of Facilitator and Individual Consultant Salaries 36. The management o f facilitators and district consultants will be handled by the provincial Satkers, following the standards set by the PMU. Their performances are monitored and evaluated by the provincial consultant who then reports to the national Satker. At the beginning o f each month, the provincial Satker calculates the salaries, allowances and fixed operational costs to be paid to each facilitator and district consultant, and will issue payment orders (SPM) attaching a list o f the payees for submission to the KPPN office. The KPPN will then issue remittance orders (SP2D) to its operational bank or Bank Indonesia branch office, which will arrange for remittance o f the funds from the DA to the respective consultants' accounts. The provincial Satker will conduct monitoring to ensure that the funds are remitted to the consultants' accounts on a timely basis. 37. The allocation o f loan and credit proceeds, and the percentage o f expenditures financed are shown inthe table below. Amount ofthe Amount ofthe % of Category CreditAllocated LoanAllocated Expenditures (Expressed in SDR) (Expressed in to be Financed USD) (1) BlockGrants 83,050,000 28,630,000 100%of Block grant amount disbursed (2) FacilitationSupport 24,350,000 8,390,000 100% J (3) Goods, Consultants' 11,900,000 II 4,000,000 100% services, trainingand workshops (4) IncrementalOperating 200,000 67,025 100% 70 Diagram 1 Flow of Funds 8 Reporting Mechanism Central bank statement SPZD KPPN SPM 7 t invoices .* wnsultants 1 SPZD I reports Local FOperationall I 4- SPPD Facilitator TMOU bank transfer OperationsManual 38. The PMU has issued an operations manual for the existing project. The manual includes financial management and administration procedures. Based on a review conducted by the Bank, the manual i s being revised to take into account further improvements in project procedures and implementation. The revised manual should include a Code o f Ethics applicable to all parties involved, and how the Code o f Ethics should be disseminated; revolving fund accounting; promote the exchange o f consolidated progress reports between villages; and providing for Key Financing Performance Indicators to be included in the monitoring process; and formalize the requirement for cross-audits, and their incorporation inthe MIS system. SupervisionPlan 39. Risk-based supervision o f project financial management will be conducted at least twice a year. This will involve a review of the project financial management system, including sub- grant expenditures, accounting, reporting and internal control framework. Financial management supervision will be conducted by financial management specialists and Bank consultants. 71 Action Plan Action Responsibility DueDate 1. Adoption of a final project operation manual for PMU Prior to PNPM-Rural Effectiveness 2. Revision of audit TOR and audit manual that are PMUDPKP Before acceptable to the Bank Negotiation 72 Annex 7A: Terms of Referencefor the ExternalAudit INDONESIA: NationalProgramfor Community Empowermentin Rural Areas Purpose of the Audit 1. The purpose o f the audit is to provide assurance on the financial management and procurement arrangements for the project. This would include policies, procedures, and records established to identify, assemble, analyze, classify, record and report on transactions and to maintain accountability for the related assets and liabilities. It is expected that the external audit will go beyond giving assurance on the accounts to include examination o f aspects o f compliance with laws and regulations, internal controls, and detection of fraud and corruption. In addition the auditor will assess and report on the achievement o f the project indicators that relate to the areas o f governance and financial management. Background 2. This section should include a broad description of the project in the context of its contribution to achieving the goals of the executing agency. The auditor needs to understand the "purpose for which the funds are intended" inthe context o f the project objectives. This section should also include a description o f the executing agency. Objectives 3. The overall objectives o f the audit are to enable auditors to express opinions: (i) the on effectiveness of the project's internal controls; (ii)on compliance with the operational manual (PNPM-Rural Manual), procurement procedures outlined in the financing agreements, laws, regulations and funding agreements that have a direct and material financial effect on the financial reports. These would include, but not limited to, on reasonability o f prices obtained through the procurement process, and on existence o f assets financed by the Project on the ground at the appropriate location and are used for the purpose for which they were acquired; (iii)ontheprojectfinancialstatementsinaccordancewithInternationalStandards; and(iv)to assess and report on the achievement o f the project indicators that relate to the areas of governance and financial management. Scope 4. The audit should cover the entire project, i.e. covering all sources and application of funds by all parties and implementing agencies. The auditor should visit the various implementation units and other agencies as considered necessary for the audit. The audit will be carried out in accordance with International Standards of Auditing/INTOSAI Standards and will include such tests as the auditor considers necessary. Planning and conducting the audit will be in accordance with a risk based framework with a detailed audit work program. The audit coverage will consider the risk o f material misstatement as a result o f fraud or error. The audit program should include procedures that are designed to provide reasonable assurance that material misstatements are detected. It i s important that ISA 240 "The Auditor's Responsibility to Consider Fraud inan audit of Financial Statements" be followed. 73 Specific areas of coverage of the audit will includethe following: a. An assessment o f whether the project financial statements have been prepared in accordance with International Public Sector Accounting Standards (IPSAS) on a cash basis and give a true and fair view o f the financial operations o f the project during the year. Any material deviations from these standards, and the impact o f such departures on the project financial statements as presented would be stated; b. An assessment of the effectiveness of internal control over compliance with requirements that could have a direct and material effect on the financial statements as well as internal control over financial reporting., and c. An assessment o f compliance with the operational manual (PNPM Rural Manual), laws, regulations and provisions o f financing agreements, especially those relating to accounting and financial matters. This would inter alia include verification that: External funds have been used in accordance with the conditions o f the relevant financing agreements and only for the purposes for which the financing was provided. Financindsub-grant agreement (SPPB) in accordance with the Project's operation manual i s signed between community representative and relevant implementing agency. Counterpart funds have been provided and used in accordance with the relevant financing agreements, and only for the purposes for which they were provided; Expenditures charged to the project are eligible expenditures and have been supported by documentary evidence and correctly classified in accordance with the relevant financing agreement; goods and services financed have been procured in accordance with the relevantfinancing agreement; All necessary supporting documents, records, and accounts have been kept inrespect o f all project activities; Clear linkages exist between the accounting records including accounts books and the Project Financial Statements; Where Designated Account has been used, it has been maintained in accordance with the provisions o f the relevant financing agreement; IFRused as the basis for the submission of withdrawal applications accurately reflect expenditures and activities duringthe project period; and Project expenditures as reported by the project implementation agencies are reconciled with the amounts withdrawn from the Designated Account and the amounts deposited to the designated account are reconciled with the amounts disbursedfrom Loadcredit. d. An assessment whether (i)in the case of consulting firms' contracts, the contract amendment which i s not subject to World Bank's prior review or that results to a total aggregate o f less than 15% from the original contract amount i s justified and properly documented, and (ii)in the case o f individual consultants/facilitators contracts, the 74 selection o f individual consultants by the Central P M U and facilitators by the provincial Sutker is in compliance with the agreed selection procedures as defined in the Loadcredit Agreement. This would inter alia include to: verify the procurement and contracting procedures and processes follow for the project operation manual, and identify non-compliance with the agreed provisions o f the legal agreement, inappropriate practices or questionable decisions/actions, and whether there i s any evidence o f corrupt practices; verify (when feasible) technical compliance and physical completion o f the contract inthe selected representative sample; review and comment on contract management issues as dealt with by the implementing agencies; review and assess the capacity o fthe implementing agencies inhandlingprocurement to determine whether adequate systems for procurement planning, implementation, and monitoringand documentation are maintainedper project operations manual; and Identify remediesto correct identifieddeficiencies. e. An assessment whether the Central P M U has the regular procurement progress report, as part o f the project progress report (including updated procurement plan), as agreed to in the project operations manual; f. An assessment whether the procurement procedures outlined in the Community Grant Operations Manual are followed. More specific, this assessment should include the review o f whether the following exists and incompliance with the said manual: Community subproject proposals (as part o f the community contracts) consistent with the sample format for submitting subproject proposals. The subproject proposal should identify the items [including cost estimates] that would be financed under the subproject. The format should require communities submitting subproject proposals to describe the procurement management arrangements that would be applicable at the community level, as well as the soundness of the such arrangements; including: the procurement plan, procurement procedures, and other standard forms/documents as stated inthe community grant operations manual; and The internal community mechanism (as defined in the Community Grant Operation Manual) i s followed for the transparency purposes, particularly on reporting prices obtained through the procurement process and reporting the physical implementation progress. g. An assessment whether the facilitators, city coordinators, and/or the Regional Management Consultants providing the necessary support to the Communities, including providing the necessary prior clearances for certain procurements as agreed in the community financing agreements. h. For consulting firm contracts, which have already obtained the World Bank's no objection prior to their signing of the contract, a due diligent check should be performed 75 in terms o f the contract management and implementation, to ensure that all inputs and outputs are verified and consistent with the contract provisions. i. An assessmentwhetherthe prices obtainedthrough acertainprocurementprocess are reasonable, i.e. within the local market prices. This assessment should cover at least 10% o f the sample contracts being reviewed. j. An assessment on existence of assets financed by the Project on the ground at the appropriate location and are prima facie as specified in contracts and payment documents, and are used for the purpose for which they were acquired k. An assessment of project implementation and whether financial and physical progress is consistent during the project period. The monitoring o f expenditures in relation to physical progress i s validating that physical progress and disbursements are under proper financial control. 1. An assessment on the achievements o f the project indicators that relate to the areas o f governance and financial management as stipulated in the relevant financing agreement, including reporting o f indications of fraudulent and corrupt cases that require further investigations. m. The auditor should prepare a reconciliationbetween the project expendituresmade from the designated account and the withdrawals from the designated account reconciliation should also be made with the amounts paid from the pre-financing account and direct payments (ifany). The auditor should assess a reconciliation report between the amounts deposited to the designated account and disbursedby the Bank to the designated account. ProjectFinancialStatements 5. Project Financial Statements prepared by the project executing agency would be based on information from the accounting records and project's compilation o f Interim Un-audited Financial Reports (IFR). Project financial statements would include a Cash Flow Statement and a Budget (financial plan) to Actual Statement along with the appropriate footnotes. Project expenditures would be summarized by main project components, disbursement categories and by project location (province or kabupaten) both consolidated for the current fiscal year and accumulated to date. Interim Audit 6. Normal audit periodicity will be annual. However, for projects where risks are assessed to be high, the auditor may require to perform certain audit procedures every six months. The purpose o f the interim audit would be to test compliance and internal controls more frequently than annually inorder to provide timely feedback to the auditee so that corrective action can be taken in a timely manner. The auditor would provide the auditee with a written report on any findings discovered as a result o f the interim audit. The World Bank staff should have access and be able to review the audit work papers applicable to the audit. 76 Audit Report 7. The audit report shall contain the auditor's opinion on the effectiveness o f the project's internal controls, the auditor's opinion on whether the auditee complied with the applicable laws, regulations and funding agreements; and the auditor's opinion on whether the financial statements presents fairly in accordance with the IPSASs for the project. In addition the auditor will report on the achievement of the project indicators that relate to the areas of governance and financial management as agreed upon by the Bank, PMUand BPKP. The auditor should submit the report to the project executing agency who should then promptly forward one copy o f the audited accounts and report to the Bank. It should be received by the Bank no later than six months after the end o f the project's fiscal year. ManagementLetter 8. In addition to the auditor's report, the auditor will prepare a "management letter," in which the auditor will: a give comments and observations on the accounting and procurement documents and records, systems, and controls that were examined during the course o f the audit; and identify specific deficiencies and areas o f weakness in systems and controls and make recommendationfor their improvement; a report on the achievement o f the planned output o f the project; a report on the process o f complying with procurement procedures referred to in the financing agreement and give comments, ifany, on internal and external matters affecting such compliance; a give comments and observations on the on reasonability o f prices obtained through the procurement process and on existence o f assets financed by the Project on the ground at the appropriate location and are used for the purpose for which they were acquired 9. Communicate matters that have come to the auditor attention during the audit which might have a significant impact on the implementation of the project; and any other matters that the auditor considers pertinent, including reporting o f indication o f fraud and corruption requiringfurther follow upto and investigationby the relevant agencies and units. ExitConference 10. The auditor should hold a closing or exit conference with senior officials o f the auditee prior concluding the audit. Upon completion o f the fieldwork, the auditor should present its audit result o f the UPK at the relevant community representatives meeting. The auditor should document the exit conference for inclusion inthe audit work papers. OrganizationArrangement 11. BPKP Central Office will be responsible to consolidate the audit report and make necessary arrangement for field audit assignment to involve BPKP regional offices. BPKP will 77 also invite participation o f local auditors (Bawasda) to carryout fieldwork in accordance with the BPKF"s audit manual. General 12. 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. The World Bank staff should have access and be able to reviewthe audit work papers applicable to the audit. 78 Annex 8: ProcurementArrangements INDONESIA: NationalProgramfor Community Empowermentin Rural Areas A. General 1. 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 (Rev October 2006); and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers'' dated May 2004 (Rev October 2006), 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 Loadcredit, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements,andtime frame are agreedbetweenthe Borrower and the Bank inthe Procurement Plan. The Procurement Plan will be updated at least annually or as requiredto reflect the actual project implementation needs and improvements ininstitutional capacity. 2. Procurementmanagement differs from previous KDP projects as the hiring of individual facilitators will be done by the Provincial Satkers.Procurement will mainly consist of hiring of one National Management Consultant (NMC), 6 Regional Management Consultant firms, a number of individual consultants (including Advisors at national level, and facilitators at kabupaten andsub district/ kecamatan levels), and hiring an NGO for monitoring. The hiring of all facilitators, and their respective contract administration, will be done by the Provincial Satkers, while procurement under community grants will be carried by communities following the procedures as described in the Project Technical Operations Manual (PTOM). Any other procurementwill be done by the PMUat the central level. 3. Kecamatan Grants: The Kecamatan Grants (US$136 million equivalent) will be mostly for infrastructure work, and will be disbursed in various villages scattered in all provinces. The procurement under community grants will follow the community participation, using the forms and simplified procedures as defined in the existing Project Operation Manual of KDP Additional Financing after incorporating the lessonslearned from existing projects. 4. Selection of Consultants: The National Management Consultant (US$2.30 million equivalent) will assist the PMU inthe overall management ofthe project as well as delivering the training of trainers. The selection of this consultantwill follow QCBS procedures. 5. There will be 6 Regional Management Consultant (RMC) firms (including one for Papua and West Papua Province) to monitor, provide support and quality assurance to the implementation of community grants, payroll administration service, including delivering training to facilitators. Individual contracts vary from US$ 1.47 up to US$ 2.40 million equivalent. 6. The TOR for RMC assignments is not complex, and competition is basically on the firms' costs only. Therefore, the selection for these firms will follow the Least Cost Selection (LCS). 79 7. To avoid previous practices of annual extensions, the selection and contract award process will cover the life of the project. However, the RFP and contract should include provisionsto allow extensions of contracts (subject to satisfactoryperformance)inthe case GO1 decides to further extend the program for 2009/2010 either through its own financing or joint financingwith the Bank. The initial RFP shall outline this prospect, and, ifpractical, the factors usedfor the selection ofthe consultant shall take the likelihoodof continuation into account. 8. Since local knowledge i s a prime factor for these NMC and Payroll Services, and the assignments are scattered in various provinces/districts in the country, based on previous experiences, foreign firms may not be interested to apply. The implementing agency should preempt such cases by advertising widely and sending the request for expressions of interest directly potential firms to minimize possibilityof requiringwaivers for havingmorethan 2 firms from any one country ina short list. 9. Consulting firms will be hired for developing the training modules (US$ 1.50 million equivalent), development of MIS and website (US$500,000 equivalent), NGO for independent monitoring (US$ 1 million equivalent), and pilot project management consultant (US$ 1.68 millionequivalent),. The selectionofthese firms will follow QCBS procedures. 10. In additionto the above, a number of individual experts will be hired as the Project's Advisory Consultants (includinga ProcurementAdvisor) for another two year contract.This is a new arrangementwhich was not found inpreviousKDP projects, andthe selection will be based on a comparison of at least 3 CVs. To enhance the capacity of the Executing Agency, the ProcurementAdvisor will be hiredpriorto the effectiveness. 11. The kabupaten and kecamatan facilitators (a total of $ 92 million) will be hired and individually contracted directly by the Provincial Satker. The individual contracts will be less than US$ 20,000 equivalent. All the positions will be advertised, clearly spelling out the minimum qualifications requirements. Then through a proper selection mechanism, the most qualified among those who apply should be selected as Facilitators, provided they all meet the minimumqualificationrequirements.Detailswill beprovidedinthe OperationsManual. 12. The Bank standardRFP and contract documents will be usedwhere applicable for firms and standardcontracts, acceptableto the Bank, will be usedinthe case of individualconsultants andfacilitators. 13. Procurementof Goods and Non ConsultingServices: There will beprintingoftraining materials (US$2.1 million equivalent), which will be procured following ICB procedures. In addition, there is a procurementof computer equipment (US$500,000 equivalent)to be installed inJakartaandprovinces.This procurementwill follow ICBprocedures. Prior Review 14. The thresholds for prior review as well as revised procurement method will be determined in the procurement plan, taking into account inputs from the Bank's supervision missions. 80 B. Assessment of the agency's capacityto implementprocurement 15. Procurement activities will be carried out by the Ministry of Home Affairs through the Directorate General of Village Community Development (DG PMD). The existing staff, organization structure, and system that are running the KDP and KDP Additional Financing Projects will be usedto runthis proposed Project. 16. It is agreed that the procurement committee at PMUwill consist o f staff experienced with the KDP procurement. However, there is a serious capacity issue, which may create procurement delays, backdated contracts, and mismanagement o f contract implementation. For this purpose, a procurement advisor will be hiredto assist the PMU. 17. This is the first time for the provincial Satkers to be responsible for the hiring and contracting o f a massive number o f individual contracts. Considering that they are occupied with the existing jobs, there i s a serious issue on how they would effectively do the contract management. For this purpose, as part o f their TORS, the RMCs will actively play significant roles in assisting these provincial Satkers with contract administration and HR issues. The existing KDP Project Standard OperationProcedures (SOP) is revisedto incorporate this feature. The SOP will also elaborate several improvement related to the HR issues (for example: salaries, leave, individual's replacement, etc) which will be applicable to the provincially contracted individuals. 18. Based on the above assessment, the overall project risk for procurement continues to be High. C. ProcurementPlan 19. The Borrower, 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 6 February 2008 and i s available at Ministry o f Finance c/o Directorate General o f Debt Management, Jalan Lapangan Banteng Timur 2-4, Jakarta 10710, Indonesia. It will also be available in the Project's database 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. Frequencyof ProcurementSupervision 20. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment o f the Implementing Agency has recommended annual supervision missions to visit the field to carry out post review of procurement actions. The ex post procurement review will rely on BPKP's audit, who will carry that for the community grants and individual facilitators contracts. For this purpose, the existing TOR for regular BPKP audit has been amended to include the recent BPKP experience in conducting the Bank's ex post review for CDD project. Although currently the cost has been included as part o f the Project budget, however, there i s still a concern from BPKP whether this budget i s adequate. This budget 81 assessment will be conducted ongoing and will be resolved prior to effectiveness o f the Project. The Task Team believes that since this i s a highprofile national program the Government would makethe necessary effort to avail the necessarybudget for BPKP. Procurementrequiringinternationalcompetition A. Selectionof Consultants: Ref. Description of Assignment Estimated Selection Review Expected No. Cost, in Method by Bank Proposals million US%* (Prior / Submission Post) Date * 1 2 3 4 5 6 1 National Management 2.30 QCBS Prior July 08 2 RegionalManagementConsultants July 08 (6) 1.47 - 2.40 LCS Prior 3 I TrainingDevelopmentConsultant I 1.50 QCBS Prior July 08 4 Developmentof MISandWebsite 0.50 QCBS Prior Julv 08 5 NGO IndependentMonitoring 1.00 QCBS Prior July 08 6 IIIPilot Project Management III 1.68 QCBS Prior January 09 7 Evaluation Studies I 1.51 QCBS Prior July 08 8 II Procurement Advisor I 0.20 INDV Prior May 08 B. Procurementof Goods andNonConsultingServices I Ref. Contract Estimated Procure- Prequali- Domestic Review Expected No. (Description) Cost (US$) ment fication Preference by Bank Bid- Method (yedno) (yedno) (Prior / Opening Post) Date 1 2 3 4 5 6 7 8 Printingand delivery of training 1 materials 2)100)000 ICB Yes No Prior June 08 Procurementof Computer 2 Equipment 500,000 ICB Yes No Prior June 08 82 skMatrix Risk RiskRating ProposedMitigationMeasures Needfor improvedinstitutional H The Bank-financeddistrictprojects- SPADA, ILGR leadership may be usedto address institutionalcapacity building + issues ImproveMOHA internaladministrationto accelerate budget preparation.Dialoguewith MOFon budget releases and revisions. Intensive socializationandpublicationof local community investmentgrant from governments commitment to their constituents localgovernments participation couldcause delays Insufficientnew fundinglowers I H Indicativebudgetsprovidedby parliament fall short of benefits full funding. Additional funds are beingsought from consolidation. Procurement of packages and Advance procurement so that consultants and individual consultants will not individuals are contractedprior to effectiveness follow proper procedures or will Hiringa procurement advisor to help the be delayed. procurement committee inprocessingprocurement Lack of clarity on the overall I S The Government issued a policy side-letter that financingplanfor the PNPM I summarizes GOI's overall road map for PNPM, includingthe financingplan Lack of long-termmanagement S GO1 is discussing whether to institutionalizethe Tim planfor PNPM Pengenduli oversight committee or to find an alternative solution. Inadequatefiduciary controls S Adoption ofthe World Bankreview's main enable corruptionand a failure to recommendations.Highlights include: Develop further a risk-basedcontrol framework Revisingthe audit manualto increasesampling andpromote dissemination of findings; Budget increasedtraining for financial management; Increasesocial controls Managementcapacity ofthe The Governmenthas developed acapacity building executingagency for the scaledup strategy for the PNPM ProjectManagementUnit program (PMU). The World Bankteam will continue its support to PMUfor identifying actionstakento improveprojectmanagement. Provinciallevelproject M Extra supervisionand support for additional central management fails government oversight. Politicalrisks associatedwith the M This is being minimizedby adjustingthe timing of 2008/2009 elections certain disbursements, communityeducationand socialization, andtemporary suspensionof activities. Recruitmentstrategy for M GO1will adopt a strategy for rapid recruitment and facilitatorsand consultants trainingofnew facilitators and consultants through extensionof existingconsultants' contracts, and enhancedtrainingprograms. The wider geographic coverage M The PMUhas developed a staffingplan andproject . . leadsto projectmanagement supervision strategy as part of its Project difficulties ImplementationPlan Localgovernment engagement to L Enhanceparticipationof localgovernments through a ensure program sustainability PNPMprojectcomponent. OVERALL RISK LEVEL S M sk), N(Negligible or Low Risk) 83 Annex 9: Economicand FinancialAnalysis INDONESIA: NationalProgramfor CommunityEmpowerment inRural Areas 1. As with KDP, PNPM works on the basis o f an open menuwith communities, selecting their activities basedupon their self-identifiedpriorities. Thus subprojects are not pre-identified at the national level. Nine years o f experience with KDP however, shows that there i s still high demand for rural infrastructure projects such as village roads, bridges, and water and sanitation. Inthe past, such economically productive small-scale infrastructurehas composed 70 to 77% of the block grant portfolio, followed by education and health at approximately 12%, and women's economic loan activities ranging from 11to 15%. 2. Economic Internal Rate of Return (EIRR). PNPM uses the same technical standards and designs as KDP, which therefore provides a useful basis for assessing likely returns to PNPM for small-scale rural infrastructure as described above. An economic analysis o f 41 KDP subprojects (roads, bridges, water supply and irrigation) carried out during the first KDP found a weighted average EIRR o f 60.1%. 3. Alatas (2005) found that returns are larger depending upon how long kecamatan have received KDP. In analyzing SUSENAS and PODES data and comparing KDP treatment kecamatan with control areas, the author found that by 2003, the returns for KDP kecamatan entering the program in its first year were 60.4%; second cycle, 53.8%, and third cycle, 12.9% percent. The longer the kecamatan had received KDP interventions, the higher the rates o f return. 4. KDP carried out a third independent economic analysis study in 2004 designed to estimate the economic impact o f 113 village rural infrastructure projects. The table below shows the EIRRs for each type o f infrastructure averaged over four provinces. The weighted average EIRRfor all 113projects is 51.4%. Table 9.1: EconomicInternal Rate of Return 4 Provinces,113 Projects - Type of Infrastructure No. Projects Average EIRR Water Supply 41 38.62% Roads/ Bridges 55 51.84% Irrigation 17 67.64% TotalProjects 113 51.36% 3. There were also eight projects that produced EIRRs of over 100% due to extra-ordinarily large benefits. These projects were not included inthe calculation of averages shown above due to the risk o f major distortions. 4. In most cases, these very large benefits resulted from either entirely new economic activities that were made possible by KDP infrastructure, or suppressedAatent production capacity that was finally able to be channeled to local markets. The most frequently seen examples were roads that provided access to previously isolated villages where before the road, all produce had to be hand-carried or carried in small amounts on motorcycles for kilometers 84 before reaching the nearest market. KDP-built infrastructure improved access to markets, town centers, education and health facilities, and clean water supply. They also increased exponentially business opportunities and employment for poor villagers. 5. Cost-Effectiveness. Village infrastructure built through KDP methods cost significantly less - on average 56% less - than equivalent works built through Ministry o f Public Works or local government contracts. A cost-comparison that usedlocal government and private engineers to re-cost KDP-built infrastructure showed significant savings due to the elimination o f some of the following costs: middlemen and outside contractors' overhead costs; double and triple handling o f materials; frequent on-site design modifications; and extra charges for supervising projects in remote areas. These cost comparisons do not yet include voluntary community contributions to KDP valued generally at 17% of total project costs. 6. If these figures alone are extrapolated to the total number of infrastructure projects constructed by K D P l and KDP2, even with considerable discounting to allow for problem projects, the total impacts in terms o f additional economic value and cost savings are quite significant. Below i s a summary table showing the results o f the cost comparison: Infrastructure Projects KDP Cost Only Cost, Local Av. Difference TYPes No. (No community Government/ ("/.I contributioncosts ContractorPrice included)(RDs) (RDs) 4,lO 1,268,770 6,704,995,650 66.04 6,547,034,660 10.349.768.540 1,669,110,053 113 12,317,413,483 8. Fiscal assessment. Because the project provides grants to kecamatan, no costs are recovered by the project. The fiscal impact from the project i s small. Communities are responsible for maintaining works built by the project and thus pose no incremental burden on the government budget. At the national level, a Bank/IDA blendat international interest rates and with 5 and 10 year grace periods postpones the fiscal costs of the project and avoids raising more expensive (and unavailable) local revenues. 9. Poverty Impacts. A poverty impact simulation available in PNPM-KDP's project files that was carried out during project preparation found the following: a. By 2010, when PNPM should cover all kecamatan, it can benefit approximately 24 million workers and their families, increasing their income by 10-14% for 60 days of work on average. The study's estimate i s that six million families will be pulled out o f poverty and another 10 million o f the poor will have increased their income. However, the poverty impacts depend as much, if not more on the price o f rice and other basic foods; jobs created elsewhere inthe economy; and other safety net programs such as the conditional cash transfer program. 85 b. Ten million workers will be hired directly by PNPM but a larger number, some 14 million will benefit indirectly from the economic activity generated by the program. C. To reach these employment and poverty targets, PNPM needs to allocate Rps 3 billion a year as the average kecamatan community block grant. Ifthe average grant for 2008 and 2009 i s frozen at Rps 1.5 billion for 2008/09, then ten million fewer workers will be employed and six million more families will remain poor. The benefits o f the program will be severely diluted. d. There will be benefits inadditionto direct employment and income: The additional income will benefit workers primarily when they need it the most; whenthere are few other jobs becauseit is the off-season inagriculture, or becauseof drought, flood or other natural or economic catastrophes in a region. The benefitswill therefore be more important than an 11%increase inannual income would suggest. In short, PNPM can be an excellent Social Safety Net, expanding as needed. It will raise the wages of all unskilled workers significantly, even if they have no contact with the program, by reducing the competition during the off-season from desperateworkers who drive all wages down. By developing roads, irrigation and drainage works, water supply and sanitation works, PNPM will permanently increase employment and income. The annual rate o f return for the infrastructure investment under the rural [KDP] part o f PNPM i s estimated at 50% or more, a remarkably highreturn. Injecting purchasing power into villages and poor urban areas will have an indirect effect in "activating" the village economy. That effect i s about 16.5%; that is, for every Rps 100 million spent village income will actually increase by Rps 116.5 million. The combined indirect effect o f the PNPM through development and activation i s to increase rural income by Rps. 19 trillion [US$2 billion] in2009; more inlater years. e. PNPM can be sustained as a permanent program: 0 Government spends large sums each year on building infrastructure. Some o f those funds could be spent for local infrastructure through PNPM permanently, since the record is clear that KDP projects can be executed at about one-half to two-thirds o f the cost ofcomparable contractor-executed projects. 0 It adds roughly $ 2 billion [Rps. 19 trillion] a year to national income in2009 as the result o f better infrastructure and activation. That amount will increase rapidly if the program continues. Some o f the additional income will increase government revenue to help pay for a continuation o f PNPM. Itwould be an essential element inabadly needed Social Safety Net. f. Nevertheless, the PNPM contribution to solving the unemployment and poverty problems, while important, i s also limited, because: 86 0It provides supplementary employment and income, not full-time regular jobs. At best, it will provide 60 days of work, importantbecause it provides an income when manyworkers are desperate,but it is nota substitutefor year-roundwork. 0It provides few jobs for professional, technical and other middle class workers. Nearlyall itsjobs will be for unskilledor low skilledworkers. 0It cannothelpfamilies who haveno one inthe labor force. 87 Annex 10: SafeguardPolicyIssues INDONESIA: NationalProgramfor CommunityEmpowermentin Rural Areas 1. EnvironmentalScreening A. Review of Experienceto Dateand Proposals for PNPM 1. Any construction activity will have some impact on the environment although the significance is largely proportional to the scale of the construction activity. PNPM is concerned about preserving the environment, ensuring that any negative effects from PNPM activities can be avoided or at least mitigated. As part of preparation, a review of environmental management experience has been carried out and the results have been incorporated into the design of the proposedPNPM program. This Annex: describes proceduresfor environmental impact analysis inIndonesia; 0 summarizesthe general approachto environmental managementthat was taken on the KDP projects; summarizes the results of a review of investments and impacts implemented during KDP2; and describes the proposals for incorporating the results of the review into the design of PNPM. B. EnvironmentalImpact Analysis inIndonesia 2. PNPM follows official Indonesian government policy in regards to environmental impacts. Government Regulation 29 of 1986 established the required methodologies for environmental impact analyses. This regulation was superseded by Government Regulation 51 of 1993, which was intendedas deregulation and simplification. This regulation can also be seen as an attempt to improve the quality of existing planning. Planned development activities were divided into two classes. The first class included those activities that clearly have a large potential impact, which require a formal impact analysis. The second class included those activities with relatively minor potential impacts, and for these an explicit impact analysis was not required. According to the later Decree of the Minister for the Environment No. 11 of 1994 for Activities Obligated to be Supported by Impact Analysis, the types and sizes of activities undertakenby PNPM are exempted from formal impact analyses due to the very small scale of investments and construction activities supported. 3. Even though exempt from formal studies, planners of PNPM infrastructure are required to consider environmental effects. The planner i s a graduate civil engineer who works with the local communities assistedby a village technical facilitator. Inanalyzing environmental effects, the planner must be capable of imagining all sorts of effects that might arise as a result of the activity. Environmental effects are defined as those changes that arise directly as a result of 88 development activities, both positive and negative. The types o f problems encountered are determined based on the experience o f experts, the field experience o f the planner , interviews, literature, simulations and the like. Analyses on PNPM concern both effects occurring during construction and those occurring duringoperations. 4. An example of environmental effects for a rural road can be seen in the table below, according to types o f impact: TableA10.1: PNPM-Rural ndEnvironmentalImpacts Category 1:Seriousbut localproblems Category 2: Serious negativeimpact on Water flow concentration environment Landslides Sale of landto outsiders Loss of productivelanddue to landslides Deforestation Increasedsediment loaddue to roaderosion Category 3: Negative effects of slight Category 4: Unclear effects, positive or probability or less important impact negative Air pollution from vehicles Increase inuse of chemicalfertilizersand Floodingdue to impropersiting of bridge pesticides Increase in airborne dust Establishment of small industriesthat Increaseincriminalactivity inthe village pollute Noise pollution Increasedintensityin farming or livestock Residentsseek employment outside the village Movinghousesto roadside Outsiders move into the village Category 5: Clearlypositive impact Category 6: Negative impact, but clearly acceptable to the local community Reductionin erosion from agricultural land Traffic accidents due to applicationof improvedtechnologies Loss of land requiredfor roadwidening Availability of constructionmaterials in vi1lage Increase in communication, includingaccess to health and education facilities 5. From the above table it can be seen that categories 1, 2, and 4 require special attention. Category 1 includes problems o f short-term impact even though the effects might be widespread. These are handled through the application o f standardized design and operational procedures which are implemented right across the project. This i s also the case with deforestation and increased sediment from Category 2. C. Approachto ControllingEnvironmentalImpactsinPNPM-Rural 6. The principle behind controlling environmental impacts in PNPM-Rural i s to limit possible negative effects and to develop the positive effects o f any infrastructure construction activity. As part o f the planning process, a form indicating potential environmental problems is completed, which i s then followed up during and after implementation by the village and 89 technical facilitator. Potential impacts include serious problems (that may be unlikely to occur) as well as relatively minor problems that are highly likely to occur. 7. The determination of negative effects requires experience, coupled with the use of input from the various existing manuals. Negative environmental effects for roads and bridges, for example, arise especially from the disturbances of unstable soils that are sensitive to landslides or from changes in the flow of water. Excavation and embankment frequently result in landslidesor erosion. Landslides bringwith them four kindsof negative impact: 0 disturbing traffic (not an environmental problem, per se); endangering agricultural land or housing; 0 increasingerosion because the soils are not compact; and 0 diverting the flow of rainwater. 8. Erosion of road sides can have large negative impact if the soil is transported to productive land or ifthe soil i s carried insuspensionto a reservoir, as this will reduce its storage capacity. At the same time, both landslides and serious erosion will result inunsightly scars near the road. Changes inwater courses can destroy productive lands or irrigation canals, as well as disturbthe roaditself. 9. There are four steps inthe processof reducing environmental damage: 0 identifyingpotential dangers; 0 selecting an alignment that reduces environmental disturbances; 0 utilizing civil works andvegetative treatments to limit negative impacts; and 0 undertaking maintenance and repairs ina timely fashion. 10. The first two are the most efficient, and they are the responsibility of the surveyor and designer. A good survey can truly reduce or eliminate many environmental problems. This is emphasizedinpre-service training. 11. Roads are often located incritical landsthat are sensitive to erosion and landslides, where soil types and climate combine to multiply risks. The designer must consider a variety of treatments to build infrastructure that will not harm the environment while still bringing sustainable benefits. To analyze the environmental effects one needs to record information about three things, as follows: (a) Treatments necessary to overcome environmental problems, including: 0 Changing the alignment to reduce steep grades; 0 Moving houses; 0 Buildingcivil works to stabilize side slopes; Usingvegetative treatments to stabilize side slopes or prevent erosion; and Using special treatments to overcome the problem of ground water, such as drains. (b) Negative environmental effects that might still exist after construction: 90 Side slopes that are unstable and endanger housing or agricultural land; Excavationthat results inthe stockpiling o f unstable soil; Sideslopes that are left bare, without any vegetative cover; The muddyingofrivers as a result o f construction; Changes in the course o f a stream, which could cause flooding, erosion, or sedimentation; Changes inwater flow that damage productive land; An increase in erosion and sediment as the result o f uncontrolled discharge from ditches or culverts; The cutting down ofthe forest; and Socioeconomicproblems that arise as the result o f constructing a bridge or road. 12. These problems include the sacrifice o f productive lands or other land holdings. If other problems arise, it i s necessary to record any information that need to be considered about the type and extent o fthe problem. 13. For water supply projects or sanitation projects, there i s always the possibility of increasing contamination, for example a water source contaminated by surface water entering from outside, or ground water contaminated by a poorly designed or constructed waste control system. One also must consider the formation o f an operations and maintenance committee for water or sanitation projects. D. EnvironmentImpactControlStrategy 14. The method used to ensure that proper attention is paid to environmental problems is a combination o f standard checklists and a special checklist for the environment. 15. For each type o f subproject, a technical standard i s included inproject manuals, and these include considerations o f environmental effects. For example, the magnitude o f the grade o f a road and the steepness o f the cross-slope perpendicular to the road are limited. Drainage for the road must be installed, together with culverts to discharge water safely. Leeching fields from latrines have to be located at least ten meters from any water supply, and located downstream as groundwater flows. Water supplies cannot be located near any potential source o f contamination. 16. The completion o f the environmental format i s an obligatory part o f the planning process. Each type o f project i s checked for the various treatments that must be performed on it to avoid or repair environmental problems. At any point during construction, the same form i s brought out to the field and reviewed, at a time when it i s still feasible to easily repair deficiencies. At the end o f construction, the form is reviewed again. The kabupaten engineering consultant is responsible for reviewing all infrastructure designs on PNPM projects in the kabupaten. H e or she will reject any design not accompanied by a completed environmental form and may also request clarification for any feature where a problem i s anticipated. One other element o f handling environmental problems i s the use o f technical inspection forms, which exist for many types o f subprojects. Among the items inspected are those dealing with aspects o f environmental 91 impact, such as for roads where the forms include slope protection, drainage ditches, and shoulders. These forms are filled out incidentally by anyone who inspects the infrastructure. E. ReviewofExperienceinthe KecamatanDevelopmentProjects 17. A total of 14,175 small scale infrastructure projects were financed duringthe thirdyear o f the first KDP project. (Since there were no technical changes to the design manuals in later years, these were considered to be representative o f investments in all years) The infrastructure investments have been classified into one of ten infrastructure development types and the investment costs tabulated. The summary data are shown inthe table from which the following conclusions can be drawn: o f the ten categories o f development, only five are o f a type which would raise any potential concern from an environmentalpoint o f view, namely; roads, irrigation, bridges, water supply and wharves; and 0 the average scale o f construction was extremely small. For example, the average road investment financed development of only 1.2 kilometers o f new road at a cost of about 36.6 million rupiah (US$ 4,100) per kilometer. Most of the irrigation development involved rehabilitation o f small schemes although there was some new construction as well. To provide some perspective, for new construction, the average investment o f around 25.3 million rupiah (US$2,850) would finance only five or six hectares o f new, low-technology irrigation command. The other forms o f development were similar: bridges include small scale steel girder bridges with wooden decks, concrete bridges, wooden bridges, and suspension bridges; water supplies come from a variety o f sources, but mostly come from springs and dug wells. Most distribution systems are gravity fed, but some utilize electrical or diesel pumps. TableA10.2: Infrastructurein KDP 18. Field oversight reviews have not identified significant or recurrent environmental impacts. Site visits by oversight engineers and the national project management database record environmental concerns, and these were reviewed during the appraisal o f KDP2, KDP3a and KDP3b. Bank supervision missions also include environmental impact specialists as well as engineers with environmentaltraining. 92 19. Nevertheless, some environmental issues were reported to the KDP complaints unit and some typical examples are set out in the following table along with comments, where appropriate, on possible control strategies that could be used to avoid similar problems in the future. Table A10.3: SamDle Cases of EnvironmentalImDactin KDP Location Activity EnvironmentalImpact Comment Kecamatan Irrigation projectAek Causeddownstream areas Incorporatestandard Sosopan, South Bustak to suffer drought from guideline requiringdesign Tapanuli, North lack of flow engineerto check effects of Sumatra incrementalwater demandon downstream users. LancapJae, Use of heavy equipment Disturbedwildlife inthe Largely unavoidable and only Kecamatan inconstructinganew surrounding forest of short term effect. No Arse road special safeguards recommended Riauprovince Constructionof a road Became a link inthe Potentiallysignificantbut leadingto protected transportationof illegal difficult problemto deal with. forests logging One option might be to include a prohibitionof such investmentsinthe negative list. Tana Toraja, Culverts in generalbuilt Inrelativelyflat areas Failureto follow good design South without protective the uncontrolled principles. Needto find out Sulawesi structures including discharge damagedfield why communities or their wingwalls, drop or orchards. engineering advisers were not jtructures, and lined applyingstandarddesign jischarge channels . Inmountainousareas led to landslides on the safeguards. sideslopes ofthe road. Cilacap, Constructionof a Reductioninflow area Failureto follow good design Central Java bridge with a causedthe streamto principles. Needto find out reductioninthe overflow, causing why communitiesor their wetted perimeter of damage to productive engineering advisers were not the channel ricefields. applyingstandard design safeguards. 20. In general, the number of complaints formally recorded in the system was quite small. This may be due to one or a combination o fthree reasons: A lack of importance associated with environmental problems. There i s not yet a widespread appreciation for environmental dangers, such as dynamiting reefs to free coral for use as a road buildingmaterial or building access roads into protected forests. An inability to identify environmentalproblems. 0 A reluctance to report problems upwards. 93 F. ProposedResponsesfor PNPM-Rural 21. The reviewillustrated several key facts: the basic environmental impact potential of investments supported through the project is low so the general strategy followed under KDP remains relevant; 0 nevertheless, the desk and field reviews suggestedthat a small number o f environmental issues were encountered. Furthermore, with block grants doubling in size there i s some potential for increased impacts should more villages cooperate on large investments (eventhough subproject maximum sizes will remain unchanged from KDP); e most o f the issues had their origin in apparent failures to follow best civil engineering practice and it i s likely that these can be addressed through continued training and supervision o f engineering staff providing technical advice to participating Kabupatens; and the small number of environmental complaints made to the KDP complaints unit may be a reflection o f the very low adverse impact potentials o f investmentssupported under the project but it also could be a reflection o f lack of interest in environmental issues on the part of beneficiaries or a reluctance to report problems upwards. 22. These four items have been addressed in the design o f PNPM-Rural. It has been made clear that the national government, the donor, and the national consultants place highimportance on attention to the environment. It i s the responsibility o f the kecamatan facilitators to explain the basis for this to the villages and to monitor implementation. Causing environmental damage i s enough to cancel an activity. Not paying attention to the environment i s enough to have the facilitator replaced. This attention to the environment i s equally important at the kabupaten level, where the kabupaten consultants and especially the kabupaten engineering consultant must enforce environmental standards. In addition, the following items have been added to the project's negative list (reflected inthe project's legal documents). 23. Inaddition, the following itemshave beenadded to the project's negative list e procurement o f any products containing asbestos; e procurement o f pesticides or herbicides; e production, processing, handling, storage or sale o f tobacco or products containing tobacco; e any activities within a nature reserve or any other area designated by the Government o f Indonesia for the management and/or protection o f biodiversity except with the prior explicit and written approval o f the government agency responsible for the management and/or protectiono f that area; e miningor excavation o flive coral; e water resources developments on rivers which flow into or out o f other countries; e alterations to river courses; e land reclamation larger than 50 ha.; e newirrigation larger than 50 ha.; and 0 construction o f water retaining or storage structures o f capacity greater than 10,000 cubic meters. 94 24. Reluctanceto report problemsis widespreadinmost projects. Problems will be reported faithfully only ifseveral conditionsare met: 0 There are no negativeeffects from reportingproblems. 0 There are positiveresults from reportingproblems, i.e. helpis given. 0 There are negative effects from not reportingproblems. 25. The design of PNPM-Ruralattempts to address all three of these conditions. Reporting of problems is a major point in the performance evaluationsystem. Problems that are reported are discussed and handled at monthly meetings, and doing this is a major point in the performance evaluationof kabupatenconsultants. The first item is connectedwith the attitude of senior consultants, government officials, and donor representatives when confronted with reported problems. They should perceive these reports as evidence that the system is working andas opportunitiesto improveperformanceinthe field. 26. Success in the field depends upon the discipline of project actors meeting these three conditions, which is a task for senior management. A review of the effectiveness of these measureswill be includedinthe first-year evaluationand measures for correction will be agreed withthe Bankprior to the approvalofthe secondyear program. 27. Supportedby nearly $30 million ingrants from Denmark and Canada, PNPM-Ruralwill also be piloting new approaches for community based environment work in the fragile upland areas of Sumatra and Sulawesi. These "green" programs cover watershed management, renewable resource energy, and environmentaleducation.Detailed design documents are in the project files. They include the direct involvement of experienced green NGOs in promoting environmentalawareness and community based resource management. Fifty percent of a core Bank environment specialistprovidesoversight and support to these programs. Guidelinesfor Resettlement,Land and Asset Acquisition 28. During the construction of village infrastructure it is nearly inevitable that some land, crops, trees, houses, or other assets might need to be acquired to allow the most effective, efficient, and beneficialuse of resources. For example, existing village paths are often upgraded to become all-weather roads with slightly wider running surfaces, plus shoulders and drainage ditches. The so-calledright-of-waytherefore needs to be increased one or two meters, and this can only happenifthe landborderingthe road i s acquired. Similarly, it i s not always possible or desirable to locate water supplies, latrines, bridges,markets, orjetties on communally heldland. 29. PNPM-RURAL has a simple policy framework and set of operational procedures to guide cases of land acquisition in village subprojects. The objective of these guidelines is to ensure that no family affected by land acquisition experiences a material reduction in their income, living standards, or livelihoods. Implementationof these guidelines is built into the project oversight and facilitator terms of reference, and the project provides both internal and independentmonitoringoftheir implementation. 95 Minimizingacquisition 30. PNPM-Rural follows the same acquisition procedures as the Kecamatan Development Projects. Policy guidelines and procedures meet the standards of World Bank policies on resettlement. PNPM Rural's guidelines and reporting formats are incorporated into the project operating manual and are tracked through the MIS.The overarching objective of PNPM Rural's guidelines is to ensure that the acquisition of lands is minimized and does not result in persons losing their home or suffering any decline inincome, livelihood, or living standardsas a result of the project. All proposals must be reviewed and their location, alignment, or specifications changed as necessary. Proposalsto widen road right-of-ways must also be reviewed carefully. 31. As it will not be possible in many cases to eliminate the need for acquisition, the guidelines allow for acquiring assets through the following two methods: a. Voluntary Donations. Inaccordancewith local custom, community membershave the right to donatetheir land or other assets or to move their homestemporarily or permanently without seeking or being given compensation. b. Donationswith compensation. Persons who donatetheir landor other assets havethe right to seek andreceive compensation. 32. Voluntary contribution of land and other assets is quite common in Indonesian villages, assumingthat no individual losestoo significant aportionof their land. Losing a meter or two of land on the side of the road is quite attractive to farmers, who will then have an all-weather road directly abutting their fields. Voluntary contribution for other purposes besides PNPM is not unusual. Paying compensationfor land i s also beyond the financial capacity of the village. Providingappropriatecompensation 33. Guidelines have been established to manage compensation for persons in the second category so that all these persons improve or at least hold steady their quality of life, income, and production capacity comparedto pre-project conditions. 34. Principle of Compensation. The village must guarantee that one of the following methods was used intimely fashion to compensatethe persons who were affected by the project (butproject funds absolutely cannot be usedfor compensation): a. landwas replacedwith other land of equal productivity, or with other productive assets of equal value; b. materials and labor were given to replacepermanentstructures that were removed; c. plants destroyed or missing or damagedwere compensatedinaccordance with their value; and d. other acceptable compensationwas given. 35. Principle of Consultation. The village must ensure that all the people affected by the project are consulted at a public meeting in the village. During this meeting, their right to compensation must be explained, as well as such alternatives as found inthe guidelines. Formal 96 minutes of the meetingare made and must include the main points of discussion as well as any decisions reached, including: a. for voluntary contributions, the name o f the donor and details o f the donation; b. for compensated assets, the names o fthe persons receiving compensation, and details of the type and amount of compensation, such as seen inthe table below: Affected Compensation Additional Assets Promised Agreements 1. Agricultural land (m2) 2. Other lands Area affected (mZ) Houses or buildings(units/m2) 3. Plants affected by the project c. Inaddition, the minuteswill contain the signatures o f the affected persons and the village chief. There will be notes about complaints made by the affected persons. And there will be a map showing the locationo fthe affected assets. 36. The kecamatan facilitator will deliver a copy o f the above notes to all those people who are affected by the project, to determine directly their wishes in regards to compensation, their perception o f whatever agreements hadbeen reached, and their complaints (ifany). Project approval 37. As the process of determining compensation is the responsibility o f the village, wherein the facilitator has no decision-making power, the kecamatan facilitator is bound to do the following: 0 H e or she must delay final approval until all persons affected by the project are satisfied with the compensation they are to receive, evenifthis causes a stalemate, the changing o f design, and interminable negotiations. Outsiders must not intervene to impose a solution. 0 H e or she must delay implementation until compensation i s realized. Whenever a project has reached the implementation stage, the senior consultants, government officials, and donor should assume that compensation has been successfully delivered. 38. In principle, if more than 200 persons are affected and require compensation, a compensation plan must be produced and then agreed to by the Secretariat o f the National Coordination Team prior to project approval. Inthe six years o f the VIP and eight years o f KDP, thishasneveroccurred. 97 Right to voice complaintsand take legal action 39. All complaints should be handled and solved at the village level. Ifthe problem cannot be solved inthe village, complaints and legal action against these guidelines, the implementation of agreements found inthe minutes, or other grievances can be filed by the person affected or his or her representative to the kecamatan. If still not solved, it can be further submitted for a decision by the Bupati. Complaints also can be sent to the Complaints HandlingUnit of PNPM- Rural at the regional or national level, where they will be analyzed and an investigation organized. Verification 40. At any time, all records regarding compensation, including minutes o f the meeting and proof of receiving compensation must be available for inspection by the kecamatan facilitator, kabupaten management consultants, auditors, and persons assigned to monitor aspects of the project by the project Secretariator NationalManagementConsultants. The Village Minutes and evidence of compensationhaving been made shall be provided to the kecamatan empowerment facilitator assisting the village, to supervising engineers, auditors and socio-economic monitors when they undertakereviews under the project. KDP experience 41. Aside from the national oversight team and the implementation consultants, KDP is well- monitored by more than 30 independent NGOs and the media. TOR for the NGOs specify that problems associated with land acquisition should be checked on site and any problem reported. NGO and media reporting is not censored or confined to government transmission routes, so this form of monitoring provides a useful check on safeguard performance independentof the project implementation structure. There have not beenany reports of involuntary displacement, and only a very small number of cases of land compensation disputes have been reported by either group of monitors. 42. Supervision by the World Bank has also never reported any case of families being involuntarily displaced by either VIP or KDP, but, as noted above, there are cases both of facilitators not following the rules and also cases of the rules being followed but families nevertheless dissatisfied with their outcome. However, Bank missions have never found cases of people visibly losing significant productive resources or experiencing drops in income, livelihood, or living standards because of a KDP project. In general, the Bank's field reviews suggest that lack o f government involvement in KDP whether by national or local agencies seems to limit land acquisition to a bare minimum, and where it does happen, direct negotiations by villagers with the community councils produce outcomes that meet the Bank's policy objectives of safeguarding against adverse impacts. Conclusion 43. While no process of land acquisition will ever be fully free of problems, PNPM's small size and the need for a local-level consensus does appear to provide an effective control system 98 that minimize the scope and impact o f land acquisition. PNPM will continue to monitor impacts closely. IndigenousPeoples and SpecialProgramfor Papuaand Nias 44. Overview. Indonesian communities covered by the World Bank's policy on indigenous people can generally be classified as falling in to one o f three categories. First, there are small pockets o f highly isolated, vulnerable groups such as the Mentawai or other small island populations. Such groups can easily be adversely affected by development projects because o f unfamiliarity with modern market mechanisms, cultural and administrative prejudices against them, or inability to retain control over productive andnatural resources. 45. A second category refers to the much larger ethnic populations which meet most o f the World Bank's typological requirements (own language, sense o f identity, traditional attachments) but exhibit varying degrees o f vulnerability. Populations such as the so-called Dayak o f Kalimantan or the tribal groups o fNusa Tenggara Timor fit here. 46. The third group refers to heterogeneous communities, where a segment o f the population i s culturally or economically marginalized. Several o f the fishing populations o f the eastern islands, for example, have unique identities and also occupy subordinate positions within local social structures. 47. Review of Experience. As a project that begins from starting principles of grassroots participation and flexible project designs determined through local planning, KDP did not anticipate any significant adverse impacts on indigenous or culturally distinct populations and none have been found during project supervision. Test cases specifically supervised for this purpose have included the Baduy, on Java, who as a rule reject outside development projects, and indigenous communities on the island o f Nias, near West Sumatra. In both cases KDP practice proved highly adaptive. In Baduy the project did not enter until it was approached by traditional leaders and the terms o f encounter negotiated and recorded by both sides. In Nias, KDP initially experienced several implementation problems because o f its isolation and the deeply hierarchicalvillage structures, but again no adverse impacts could be identified. Ongoing post-tsunami reconstruction i s closely supervised by the Bank through the closely linked KRRP (KDP Recovery and Rehabilitation Project) funded by the MDTF for Aceh and Nias and, again, no adverse impacts have been identified on any o f the indigenous communities. General supervision in the eastern islands also failed to turn up any systemic adverse impacts on ethnic minorities. Specific measures inthe project design that appear to promote culturally appropriate activities include the villager's own election o f their representatives to the project, use of sub- village planning units, and flexibility infacilitator's operational funds that allows them to support traditional rituals. 48. The project design itself has also proven to be somewhat more flexible than anticipated when it first started. Thus, inprovinces such as Aceh or West Sumatra, where kin-based descent units also carry out important administrative functions, the project produced special guidelines that used these traditional units rather than the standard kecamatan and desa structures. (Both provinces benefited in this respect from the 2004 decentralization laws). Needless to say, in 99 parallel with the increased use of culturally apposite forms of social organization has come an entirely new generation of problems associated with the people excluded by traditional social structures, such as, for example, women, immigrants or low status groups. These problems do not have easy solutions. For the moment the primary means for addressingthem is through better facilitation, with some trials (i.e. in Aceh) to work with traditional leaders on making their group's workings more inclusive. 49. Special Program for Papua. The full Papua program is summarized in the "social" analysis part of this PAD. This section will deal only with the part relevant to safeguards. B y way of summary, PNPM-Rural meets the OP's policy requirementson informed participation. 50. KDP has been active in Papua since its inception. As in other areas, the program in Papua has the goal of empowering villagers to undertake their own development through a process of village and kecamatan-wide meetings with the facilitation of consultants. Villages have undertaken the construction of infrastructure as well as group economic activities. Local governments have been eager to expand KDP activities, funding more kecamatans with district- level funds than any other province. 51. As noted previously, to ensure a longer-term flow of benefitsto rural communities even after PNPM finishes, PNPM-Rural inPapua also includesa large training program for promising graduates from the indigenous communities, who will be trained for six months in civil engineering before joining PNPM. Eight full-time coaches have already been assigned to Papua to provide the engineering students with operational oversight and practical supervision. A second program developed in partnership with the British Council that provides for extended training insocial facilitation for Papuanfacilitators has graduates its first 50 facilitators. 100 Annex 11: ProjectProcessing INDONESIA: NationalProgramfor CommunityEmpowermentinRuralAreas Planned Actual PCN review 3/5/2007 3/5/2007 Initial PID to PIC 10/28/2007 10/28/2007 Initial ISDS to PIC 10/28/2007 10/28/2007 Appraisal 1211OI2007 1/7/2008 Negotiations 211312008 2/20/2008 BoardlRVP approval 5/20/2008 Planned date of effectiveness 06/01/2008 Planned date of mid-termreview 06/30/2011 Planned closing date 06/30/20 11 Key institutions responsiblefor preparation of the project: Coordinating Ministryfor People's Welfare, Bappenas, Ministry of Home Affairs. Bank staff who worked onthe project included: Name Title Unit Scott Guggenheim TTL, Lead Social Scientist EASIS Yogana Prasta Operations Adviser EACIF UnggulSuprayitno Financial Management Specialist EAPCO Behdad Nowroozi Sr. Financial Management Specialist EAPCO Imad Saleh Senior Procurement Specialist EAPCO Rizal Rivai Senior Procurement Specialist EAPCO Sajjad Ali Shah Quality, Policy & Trust Funds EAPCO Sentot S. Satria DeputyTTL, CDD specialist EASIS John Victor Bottini Senior Social Development Specialist EASIS Enurlaela Hasanah CDD Communication Specialist EASIS Threesia Marina Siregar Social Development, fiduciary EASIS Susan Wong Senior M&E specialist EASIS Gillian Brown Senior Gender Specialist EASIS Raj Soopramanien Senior Counsel LEGES MelindaGood Senior Counsel LEGES Ben Fisher Institutions, Policy OPCJL Zoe ElenaTrohanis Institutions, CDD EASUR Inge Sutardi Tan Program Assistant EASIS Anju Sachdeva Senior Program Assistant EASSO Bankfunds expendedto date onproject preparation: 1. Bank resources: US$240,000 2. Trust funds: NA 3. Total: US$240,000 Estimated Approval and Supervision costs: 1. Remaining costs to approval: $25,000 2. Estimatedannual supervision cost: $80,000 101 Annex 12: Documentsinthe Project File INDONESIA: NationalProgramfor Community Empowermentin Rural Areas 1. Project specific documents a. Project Operational Manual b. Project Implementation Plan c. Budget d. TrainingPlan e. TOR for all positions f. Audit TOR g. Technical DesignManuals and field Guides h. Better GovernanceAction Plan. 2. Background or linked studies include: PublishedStudies 2005 -2007 Title Brief Description EconomicImpactAnalysis An independentstudy to conduct a post-constructioneconomic impact ofKDP Infrastructure analysis on 113 KDP rural infrastructureprojectsto determinethe overall Projects (Jan 2005) economic benefitsthat have accruedto the villagesthat plannedand built infrastructure facilities accordingto the KDP CommunityDriven Developmentapproach. An Analysis of Effortsto A study to examine in greater depthten KDP replicationschemes and to ReplicateKecamatan assess the extent to whichthey adopt certain principles and programmatic DevelopmentProgram features ofKDP. This study is importantas an initial step to gain insight into (April 2005) how KDP's principlesandproceduresmay be influencingother government developmentprojects especially inthe areas of improvedgovernance, community capacity building,and service delivery. Evaluationof Infiastructure A study to evaluate the quality of infiastructure built on a sample ofvillages Quality of KDP (September that hadcompleted building infrastructureinthe fvst year of the Kecamatan 2005) DevelopmentProgramPhase 11.Topics ofthe evaluation includedtechnical quality, but it also includedother performance indicators,includingproject management, the role ofthe community, maintenance,andthe opinions ofthe communityabout KDP. Local Conflict and A study to examine questions relatingto the nexusbetweendevelopment Community Developmentin projects and different forms of localconflict by examininghow the Indonesia: KecamatanDevelopmentProject (KDP) interacts with social tensions and Assessingthe Impact o fthe localconflict, and how it affects the nature andextent of localconflict KecamatanDevelopment management. - Program(Feb 2006) Gender in Community A reviewto look at how gender and women's issues hadbeen addressedCDD DrivenDevelopment projectsto understandabout what worked, and why inorder to help influence Project: Implicationsfor the PNPMdesign. PNPMStrategy (September Specific objectives ofthe review were to review the role ofwomen inthe 2006) entire project cycle andtheir longer-termsustainable impact (socialization, planning, decision-making, implementation, monitoringandmaintenance); andto recommendways forward for future gender programminginCDD-type programs. 102 2006 Village Survey in A survey to providean accurate overviewofthe conditionof Acehnese Aceh: An Assessment of villages 2 years after the tsunami and one year after the signingof the Helsinki Village Infrastructureand Peace Agreement. The data collectedthroughthis assessment are aimed to Social Conditions serve as a resource for developmentpractitioners, academics, government (September2006, report officials andthe people inAceh inorder to guide the planningand resource publishedinApril 2007) allocationof future initiativesthroughout the province. KecamatanDevelopment An evaluationto determine whether KDP hadan impact on governance ProgramQualitative Impact practicesand community empowerment. Specifically, it examinedwhether Evaluation(April 2007) KDP was able to change government practices and whether it increased villager capacity to more adequately identify and solve community development needs, or generally assert themselvesineconomic, political and social decisions that affecttheir lives. Inaddition, the study examinedKDP's impact on communityinstitutions,women's ability to meet their development needs andpovertyreduction. IndependentEvaluations of A series of independentevaluations to examine the effectiveness ofongoing Government Community governmentpovertyreductionprograms, focusing on the communitylevel. 13 DevelopmentOperations large community development programs implementedby ten different (October 2007) ministrieswere evaluatedin2007. The purpose ofthese evaluationsis to assessthe effectiveness of these povertyreductionprograms at meetingtheir statedobjectives, andhavinga positiveimpact on communities. 103 Annex 13: Statement of Loansand Credits INDONESIA: NationalProgramfor CommunityEmpowermentin RuralAreas Difference between expectedand actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd PO97104 2008 ID-BERMUTU 24.50 61.50 0.00 0.00 0.00 85.86 0.00 0.00 PO83742 2007 ID-Farmer Empower.Agric.Tech.&Info 32.80 60.00 0.00 0.00 0.00 93.51 0.00 0.00 PO79906 2007 ID-STRATEGIC ROADS INFRA 208.00 0.00 0.00 0.00 0.00 208.00 0.00 0.00 PO77175 2006 ID-Domestic Gas MarketDevelopment 80.00 0.00 0.00 0.00 0.00 66.33 6.33 0.00 Proj. PO85375 2006 ID-WSSLIC I11(co-TTL=Claudia Rokx) 0.00 137.50 0.00 0.00 0.00 142.62 7.90 0.00 PO89479 2006 ID-EarlyChildhood Educationand Dev 0.00 67.50 0.00 0.00 0.00 70.02 0.02 0.00 PO71296 2005 ID-USDRP 45.00 0.00 0.00 0.00 0.00 42.76 1.16 0.00 PO84583 2005 ID-UPP3 67.30 71.40 0.00 0.00 0.00 78.63 -1 1.34 0.00 PO78070 2005 Support for Poor and Disadvantaged 69.00 35.00 0.00 0.00 0.00 124.26 16.32 0.00 Areas PO76174 2005 ID-Initiativesfor Local Govern.Reform 14.50 15.00 0.00 0.00 0.00 38.01 11.48 0.00 PO85133 2005 Govt Fin1Mgt & RevenueAdmin Project 55.00 5.00 0.00 0.00 0.00 58.92 23.14 0.00 PO85374 2005 ID-HIGHER EDUCATION 50.00 30.00 0.00 0.00 0.00 68.75 11.49 0.00 PO92019 2005 KecamatanDevelopmentProject 3B 80.00 80.00 0.00 0.00 0.00 182.34 14.79 0.00 PO74290 2004 ID-E. INDREGTRANSPT 2 200.00 0.00 0.00 0.00 1.oo 159.19 98.19 0.00 PO84860 2004 ID-PCF-IndocementCement 0.00 0.00 0.00 0.00 0.00 10.73 0.00 0.00 PO71316 2004 ID Coral ReefRehabandMgmt ProgI1 - 33.20 23.00 0.00 0.00 0.17 44.46 13.41 0.00 PO71318 2004 ID Coral ReefRehabandManagementI1 - 0.00 0.00 0.00 7.50 0.00 6.81 2.81 0.00 PO64728 2004 ID-LAND MANAGEMENT &POLICY 32.80 32.80 0.00 0.00 0.16 44.56 13.48 0.00 DEVT PROJECT PO79156 2003 IDThird KecamatanDevelopmentProject 204.30 45.50 0.00 0.00 0.00 2.28 -5.26 0.00 PO76271 2003 ID-PPITA 17.10 0.00 0.00 0.00 0.00 4.52 4.52 1.82 PO73772 2003 ID-HealthWorkforce & Services(PHP 3) 31.10 74.50 0.00 0.00 0.00 64.42 43.59 -10.30 PO63913 2003 ID-Java-Bali Pwr Sector & Strength 141.00 0.00 0.00 0.00 0.00 112.02 97.92 9.58 PO59931 2003 ID-Water Resources& 1rr.SectorMgt 45.00 25.00 0.00 0.00 0.00 64.76 62.80 13.68 Prog PO73970 2002 ID-GLOBAL DEV LEARNING (LIL) 2.66 0.00 0.00 0.00 0.00 1.30 1.30 0.00 PO72852 2002 ID-UPP2 29.50 70.50 0.00 0.00 0.00 140.09 -14.58 14.00 PO73025 2001 ID-SECOND KECAMATAN 208.90 111.30 0.00 0.00 0.00 5.79 -8.88 0.00 DEVELOPMENTPROJECT PO59477 2000 ID-WSSLIC I1(co-TTL=Claudia Rokx) 0.00 77.40 0.00 0.00 0.00 18.80 11.87 0.00 PO49545 2000 ID-PROVINCIAL HEALTH I 0.00 38.00 0.00 0.00 3.17 6.77 7.28 7.28 Total: 1,671.66 1,060.90 0.00 7.50 4.50 1,946.51 409.74 36.06 104 INDONESIA STATEMENTOF IFC's Heldand DisbursedPortfolio InMillions ofUSDollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2006 Bank Danamon 155.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 BonaVistaSchool 1.00 0.00 0.00 0.00 1.oo 0.00 0.00 0.00 2006 BuanaBank 5.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2006 Centralpertiwi 45.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 MedanNP School 1.75 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 P.T.Gawi 11.05 0.00 0.00 3.49 4.90 0.00 0.00 3.49 1989 PT Agro Muko 0.00 2.20 0.00 0.00 0.00 2.20 0.00 0.00 1997 PT Alumindo 2.73 0.00 0.00 0.00 2.73 0.00 0.00 0.00 1989 PT Astra 0.00 0.20 0.00 0.00 0.00 0.20 0.00 0.00 1994 PT Astra 0.00 0.19 0.00 0.00 0.00 0.19 0.00 0.00 2003 PT Astra 0.00 0.12 0.00 0.00 0.00 0.12 0.00 0.00 PT Astra Otopart 0.00 0.70 0.00 0.00 0.00 0.70 0.00 0.00 2005 PT Astra Otopart 24.00 0.00 0.00 0.00 24.00 0.00 0.00 0.00 2000 PT Bank NISP 0.00 2.85 2.86 0.00 0.00 2.85 2.83 0.00 2002 PT Bank NISP 0.00 2.04 0.00 0.00 0.00 2.04 0.00 0.00 2004 PT Bank NISP 35.00 0.00 0.00 0.00 35.00 0.00 0.00 0.00 1997 PT Berlian 0.00 3.35 0.00 0.00 0.00 0.00 0.00 0.00 1993 PT Bina Danatama 0.05 0.00 0.00 0.00 0.05 0.00 0.00 0.00 1996 PT Bina Danatama 0.00 0.00 2.58 4.81 0.00 0.00 2.58 4.81 2004 PT Ecogreen 30.00 0.00 0.00 0.00 30.00 0.00 0.00 0.00 2005 PT Ecogreen 25.00 0.00 0.00 0.00 20.00 0.00 0.00 0.00 PT Grahawita 0.00 0.00 3.75 0.00 0.00 0.00 3.75 0.00 1991 PT Indo-Rama 0.00 3.82 0.00 0.00 0.00 3.82 0.00 0.00 1995 PT Indo-Rama 0.00 1.57 0.00 0.00 0.00 1.57 0.00 0.00 1999 PT Indo-Rama 0.00 0.81 0.00 0.00 0.00 0.81 0.00 0.00 2001 PT Indo-Rama 20.00 0.00 0.00 0.00 0.33 0.00 0.00 0.00 2004 PT Indo-Rama 48.00 0.00 0.00 0.00 41.00 0.00 0.00 0.00 1992 PT KIA Keramik 0.23 0.00 0.00 2.00 0.23 0.00 0.00 2.00 1996 PT KIA Keramik 1.65 0.00 0.00 53.49 1.65 0.00 0.00 53.49 1995 PT KIA Serpih 4.50 0.00 0.00 49.50 4.50 0.00 0.00 49.50 1997 PT Kalimantan 9.38 0.00 0.00 0.00 9.38 0.00 0.00 0.00 PT Karunia(KAS) 16.45 0.00 0.00 3.56 16.45 0.00 0.00 3.56 2006 PT Karunia(KAS) 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 PT Makro 0.00 2.34 0.00 0.00 0.00 2.34 0.00 0.00 2000 PT Makro 0.00 1.21 0.00 0.00 0.00 0.71 0.00 0.00 2006 PT Makro 0.00 0.66 0.00 0.00 0.00 0.66 0.00 0.00 1998 PT Megaplast 0.00 2.50 0.00 0.00 0.00 2.50 0.00 0.00 1993 PT Nusantara 0.00 0.00 10.16 7.90 0.00 0.00 10.16 7.90 2004 PT Prakars(PAS) 15.36 0.00 0.00 3.20 15.36 0.00 0.00 3.20 1997 PT Sayap 0.83 0.00 0.00 0.00 0.83 0.00 0.00 0.00 105 2001 PT Sigma 0.00 1.03 0.00 0.00 0.00 1.03 0.00 0.00 2006 PT TAS 7.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1995 PT Viscose 7.81 0.00 0.00 0.00 7.81 0.00 0.00 0.00 2004 PT Viscose 8.31 0.00 0.00 0.00 8.3 1 0.00 0.00 0.00 1997 PT Wings 0.72 0.00 0.00 0.00 0.72 0.00 0.00 0.00 2001 Sunson 11.62 0.00 0.00 7.35 11.62 0.00 0.00 7.35 2005 WOM 0.00 15.82 0.00 0.00 0.00 15.74 0.00 0.00 2006 WOM 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 Wilmar 33.33 0.00 0.00 0.00 33.33 0.00 0.00 0.00 Total portfolio: 560.77 41.41 19.35 135.30 269.20 37.48 19.32 135.30 ApprovalsPendingCommitment FY Approval Company Loan Equity Quasi Partic. 2005 Bank NISP SELF 0 03 0 00 0 00 0 00 2006 Bank NISPSwap 0 00 0 00 0 00 0 00 2006 Orix Indonesia 0 08 0 00 0 00 0 00 Total pendingcommitment 0 11 0 00 0 00 0 00 106 Annex 14: Country at a Glance INDONESIA:NationalProgramfor CommunityEmpowermentin RuralAreas Indonesia at a dance 9128107 Earn Lower- PQVERMand SOCIAL Asia LL middle- Indonesia PaCifIC Incoma Developmafit diamond' 2006 Populabon.mM-year mDtons) 223 0 1,900 2,276 GNIper caplta tAffasmfhod. US$) 1420 1863 2 037 Life expectancy GNI [Affasrnethod,USSbdhUrnsf 316 7 3 539 4 635 A V ~ F ~annua! growth. 200046 Q O Populationf%] 1 3 0 9 0 9 Labor force 1961 1 9 13 1 4 GNI GWS per primary Most rocont ostlmato (latest p a ravalfable, 2Qoa)-06) capita enrollment PWerty I%d pOpuErxlOfl b010'ownOdrOn&rpOV~Y~JflP) 18 Urbanpopulation /UoflotalpqoulabanJ 49 42 47 Lifeexpectanvat birth(yearn) 69 71 71 Infant mortality@er ?,OX3lrve brrttrs) 28 26 31 ChildmalnutMlon(96 d CfriWen wn&r 6) 2s 15 13 Access to improvedvmtersaume Access to an Improvedwater source (% otpoplIetron/ 77 79 81 LItsracyrS".c4popu!aEron am IS+) 00 91 B0 Gmss prlrnaiyenrollment (46 ofschoolirge pOporOaOn) 117 114 113 -lndone.m Male 119 115 117 - Lomr-middie-income gmup Female 115 113 114 KEY ECONOMICRATIOS and LONG-TERMTRENDS 1986 1e96 2005 2006 Economk rtjtbs" GDP lUSSblNrons) 80 1 227 4 287 0 364 8 GrosscapltalfwrnatlonlGDP 29 5 30 7 24 6 24 6 Expork of goods and serviceYGDP 195 25 8 33 E 30 9 Trade GrossdomesbcsanngsiGDP 28.5 30 1 28 9 29 4 Gross national savlngs'GDP 23 s 27 8 25 7 26 4 Currentaccount balancelGDP -4 9 -3 4 0 1 2 7 InterestpaymentsJGDP 3.0 2 2 1 1 1 3 Domestic Capital TotaldebVGDP 53.6 56 7 48 2 35 3 savings formation Total debt ssrvlmlsrpcrrts 37.3 36 6 16S 22 3 Present value of debtrGDP 48 3 Present value ot debtrexporh 1290 lndeblerlness 198696 .199606 200s 2006 200&10 [ovsv'sg0a m 0 1 growth) GDP 7 9 2.7 5 7 5 5 6 5 -Endonesla GDP per capita 6.1 1 3 4 3 4 3 5 3 -Lorr.cr-mrddia-u7cmmcgmrp Expork of goodsand semces 9.1 3 8 164 9 2 8 3 1986 1996 2005 1% d GAQ) Gnwih of capctal and GDP t%) Agnculture 24 2 167 13 1 129 Industry 337 435 468 470 10 Manufacturing 167 256 277 280 SeWlEZ3 420 399 402 40 1 0 Huu=hold final consumption expenditure 604 624 630 620 i o Generalgov'tfinal mnsumptionexpendihrre 11 0 7 6 8 1 8 6 Importsof goodsand serwws 205 264 293 76 1 10.6 -1.3 Y .4 1.4 -Expork - l w r t c 10.3 1.s 17.1 7.6 I Note 2006data am preliminaryestimates This table was produmd from the Development Eoonomics LDB database * The diamondsshow four key indicators in the muntry (In bold)enrnpared vnth 18income-groupaverage Ifdata are missing the dismond wll be incomplete 107 1986 1956 2005 2006 5.8 8.0 10.6 13.1 -0.1 6.9 14.8 136 159 1c5 17s I 9 1 -40 8 0 8 2 7 8 -35 3 0 4 5 -09 IS86 1936 2005 2606 4Ec 815 86985 103514 128131 23717 27610 3 990 4919 5483 10?95 14402 17 ICIU 42 92B tB.162 73869 3 931 3 RSB 4 'OSl 3$7U 17420 19028 I T 497 15262 4871 80 140 187 128 207 220 63 68 76 8,432 -6,008 259 337 -3911 -T6$33 1904 16668 2.007 -9 006 4814 19281 36 181 44083 1,282.6 2.342 3 51.7050 91510 EXTERNAL DEET and RESOURCE F L M S Ius$nUUOflSJ 1486 1996 2005 2006 Total debtuutstindiiigand d i a u m d 42,W L? 128 937 138 300 128 817 IDRU 5058 11 138 8 132 7923 A 8132 IDA 857 738 1001 1318 Total debt sbrb!m 5984 ill 643 18045 27345 IBRD 636 2.249 1 F r l 1827 IDA 12 26 36 37 Ccirnpnstbonnf iiot remum flo,%s Officialamnts 136 190 99s Ofiicial cwlibrs 1,016 -782 4 11 Privatecreditm 628 6869 '1.485 Foit?ign dimct in,$astinant net inRo+,s1 I 258 6 19.1 5.280 Portfolioequityinat inflow I 0 1819 -165 4Vorld Bank prayrnm Commttmnnh 982 1 194 1027 106 R-IERD E .Bilsteral Disbiirscincnts 828 905 662 1.012 B. IDA 0 . Cnhar mulblotersl F Pnvsle Princiwl rspaymciits 23!1 1419 141J 1.4.30 C .IMF G Short-tam .- Netflc%% 592 -523 -765 -419 Int*:wst payments 411 846 489 434 N.4 tramfeIY 180 -1,370 -1 254 -852 The World Bank Grcaup Thist&ls ibns prepxed by 3muiihyunit tt3tf, figures may diffei from other World Bank publisheddab 82%07 108 Annex 15: Better GovernanceAction Plan INDONESIA: NationalProgramfor Community EmpowermentinRuralAreas 1. Projects in Indonesia operate in a high-risk overall environment when it comes to issues of leakage and corruption. GOI's National Steering Committee has repeatedly placed anti- corruption at the top of its priorities for the national program, and PNPM's anti-corruption action plan will enter the government's own project readiness filter. This annex summarizes the general anti-corruption strategy for PNPM-Rural. It draws heavily on the general OSU Indonesia anti- corruption framework and the recently issued World Bank guide for fiduciary management in CDD projects, but it also builds on field experiences over the past eight years of KDP implementation. 2. Identifying Corruption in Indonesian Community Projects. Traditional community development projects have had a relatively limited number of well-known points of leakage. A non-exhaustive list would include: Transfers. Financial transfers to communities usually come earmarked or in kind. The Local Level Institutions (ESW) study found that less than 50% of the nominal Rps. 20 million cash grant per village (Dana Bangdes) provided by central government got there at all and less than 15% of that amount actually came as a cash grant. Field reports continue to report that significant percentages of village transfers disappear en route or get provided inkind. Poor contractor management. Contractor management for communities is normally handledby district technical offices, not by villages. Contract awards are often "directed" to favored companies, regardless of qualifications or experience. Anecdotal interviews by World Bank staff have found endemic problems of substitution of inferior materials, unfinished works, and off the top payments for contract awards. Few sanctions are available for remedying inferior work. Poor pricing practices. Because contractor markets are not competitive, both over billing and over design are endemic. Falsetaxes and charges. Government charging for "services" is still common. Officials will even issue receipts for illegal practices, such as a standard 5% charge on all funds going through a Village Head. (Semi-legal practices by local governments such as "special" tariffs and mandatorypurchasing agreements also recur). Poor quality or dishonest technical support. The corruption problems with technical assistance for community projects are also well known and, while they are not very different from Indonesian development projects in general, they stand out in the case of community programs because communities often have few alternative suppliers and nobody from whom they can seek redress. 109 0 Improper billing practices by consultant firms. Often QCBS "winners" can beat the competition because apparently competitive overhead costs are "subsidized" by later cuts from staff salaries and travel allowances. 0 Price fixing between TA staff and local government (including village heads) is also common, aided by a general lack o f public information about prices. Overview: Patternsand trends in KDP corruption 3. PNPM-Rural Better Governance Action Plan builds on field experiences over the past eight years o f KDP implementation. KDP Operation Manual includes a Complaint Handling guideline (Penjelasan VIII: Prosedur Penanganan Pengaduan Dan Masalah). Patterns and trends inKDP problems and corruption cases would provide better strategy for PNPM-Rural from the lessons learned. 4. KDP's master database records information received from all sources (complaints, audits, NGOs, journalists, and World Bank supervision). Table 15.1 summarizes the corruption status o f KDP in 2006. In2006, KDP disbursed $168.9 million, so the $0.65 million o f missing funds amounts to a recorded corruption rate o f 0.38%.4 5. Certain trends and patterns can be seen in KDP's data. First, the overall tendency i s for the number of cases to go down over time but for the amounts being stolen to increase. This i s due to the increasing sophistication o f fraud. In each o f the three largest cases, Bank Rakyat Indonesia (BRI) officials colluded to forge release documents (the aim was to borrow funds to invest in high-profit lending but these cases were caught because communities complained that their funds were delayed). Second, as discussed below, whereas inearlier years more o fthe cases involved government officials, in recent years officials account for only some 15% o f the total cases. By contrast, consultants and members o f the subdistrict financial management units, who have the most direct access to funds now, account for some 30%. Finally, on the positive side, the amount of money being recovered continues to rise; many o f the 2006 cases are still in the courts or under community adjudication. Measuringcorruptionis very imprecise.The figures reportedhereshould be treated as indicativeonly. Furthermore, they do not count or estimate unreported losses, particularlyfor cases of under delivery of materials which is where most KDP corruptionhappens. 110 6. PNPM-Rural's anti-corruption strategy has four main themes: (i)reduce opportunity through tailored designs; (ii) strengthen formal systems; (iii) strengthen social controls; and (iv) improve redress. The guiding principle underlying the anti-corruption program i s that PNPM- Rural procedures must encourage oversight and action by multiple stakeholders, not just the World Bank or the government. 7. KDP's overall anti-corruption strategy has beenreviewed several times inother appraisal documents. This PAD Annex will briefly describe the main features o f the plan, but it will primarily emphasize lessonslearnedandthe improvements being proposed under PNPM. 8. Improvingdesigns. Inmany traditional community-oriented projects, money disappears due to the welter of transfer levels, intermediaries, and processing requirements involved in turning World Bank project funds into bridges, roads, and water supply system in distant villages. KDP had simplifiedevery aspect of this system by: Reducing discretion Community proposals can be accepted or rejected but E t modified; Reducing transactions Through direct transfers to community bank accounts; Promotingcompetition There are always more proposals than there are funds; Lowering costs of acquiring KDP promotes public disclosure of all key fiduciary information informationthrough signboards, public meetings, and even, inAceh andNias, information facilitators. Promotingsocial controls KDP has structured participation whose purpose is to monitor contract deliverables, witness all financial transactions, and sign-off on activities. Unlikestandard practice, there isn't a single format in KDP that would allow a lone official to withdraw or transfer funds: all require at leastthree signatures, including one from an elected villager and a second from the project facilitator. Engaging independent monitors KDP pioneered the use of NGO monitors and independent journalists in Indonesian development projects. 9. KDP's primary sanction for offenders is to stop disbursementsto an offending subdistrict or to the level above it. Its design allows for effective, simple sanctions because funds cannot be released to the field unless the facilitators are present to sign off on transfers. Removing the facilitators from the field location is relatively easy to carry out and has become a sanction preferred by the Ministry of Home Affairs as a response to supervision findings. Conversely, once restitution has been made, the facilitator can be returned to the field and the project continues. Furthermore, because of the project's modular design, suspending one village or subdistrict does not affect progress in other locations. Suspensionof one or several villages can be decided by the inter village (MAD) decision as regulated in the project manual (Penjelasan VIII). Postponingnext tranches of cash-transferfrom UPKto the problemvillages or disallowing 111 them to participate in the next project cycle was always effective to push for resolution of corruption cases at the village level. 10. KDP introduced a system o f graduated sanctions. Sanctions are applied to the level above the level where the infraction was committed, particularly when local government officials were involved. Thus, village infractions would result in the suspension o f the subdistrict until restitution was made; in two cases, subdistrict-wide infractions were sanctioned by suspending the district, one o f which was let back inand the other permanently dropped from the project. In one cases, province-wide infractions in consultant selection and management resulted in the temporary suspension o f the province. 11. Although initially reluctant to use this sanction, the Ministry o f Home Affairs has become increasingly confident that it produces results. It i s an effective remedy because it introduces a measure o f peer pressure rather than making corruption entirely a matter o f enforcement by the center. Inat least five districts, local governments used their own budgets to complete works left incomplete by corrupt practices. Issuesfor PNPM-Rural 12. Issuesfor PNPM-Rural. While the core design for PNPM-Rural is not significantly different from that o f KDP, the project's risk mapping requires updating. Risks faced by KDP such as government intervention in village decision-making have diminished, whereas risks posed by more complex transfers (Le. local government contributions) have increased. The overall risk assessment has been updated during appraisal, and the result i s reflected in the Annex 7. On a provisional basis the main new corruption risks that PNPM-Rural will face are caused by: 0 The much larger coverage; 0 Increases inblock grant amount that change the riskhncentive ratio; Increased contributions from local governments, with their own weak budgeting and control systems; 0 Pilot programs to reduce TA ratios by increasing local government oversight. 13. PNPM-Rural also faces a challenge to streamline the project's operating manual, which over the years has become more complex and less accessible to villagers. The current KDP operation manual has been reviewed during appraisal and agreed final revisions, including clearer divisions o f tasks and responsibilities among FM staff and facilitators are expected before negotiation. Ongoing technical assistance to the Indonesian audit board (BPKP) that i s managed by the Bank's OSU unit has produced an improved audit manual which was reviewed and approved during appraisal. 14. Strengthening Formal Systems. KDP uses two types o f formal control mechanisms: internal controls and external audits. Eachwill be strengthenedunder PNPM: 0 Internal controls - The primary means of internal control is through the project's management and monitoring systems. Backing this system up i s complaints handling unit, which is part o fthe overall monitoring program that is described inPAD Annex 2. 112 The unitmaintains a master database for recording all corruption allegations against KDP and for tracking their disposition. In 2006, KDP maintained a central financial management unit; however, the central unit staff was reduced in favor of adding one monitoring and evaluation specialist and one financial management specialist to each provincial team. Under the additional financing loan (KDP3b 2007), the unit was restored, as well strengthenedthe provincial staff, but unfortunately both were not fully staffed untilOctober 2007. 0 Audits - KDP traditionally has been monitored by the Indonesian national project audit board agency ("BPKP"). Parallel audits of KDP by international audit firms showed no discrepancy in their findings, which suggests that BPKP audits met an international standard. 15, Both systems will be strengthenedconsiderably under PNPM-Rural. Diagnostics carried out during project preparation recommendedthe following improvements: a. Strengthening internal controls - Proposals for strengthening internal controls are discussed elsewhere in this report, particularly the importance of updating the MIS system to accommodate the expanded project scope. Other recommendations agreed during appraisal and reflected inthe related terms of reference for consultant assignments include: 0 Switching into a web-based MIS; 0 Monitoring response times to complaints; 0 Improvements to enforcing village procurement procedures; 0 Restoring and strengthen the central and provincial financial management oversight unit so that there is overall oversight andtracking; and 0 Revising the fiduciary formats, which have gotten more complicated over time. b. Strengtheninggovernmentaudit systems-OSU conductedan in-depthreview of KDP audit procedures as part of preparation for PNPM-Rural. PNPM-Rural's audit procedures will be more complicated than KDP because of the substantial contribution of funds from local governments, which must be audited by the district government audit board ("Bawasda"). PNPM-Rural will update the existing KDP audit manual to stress still further the risk-basedcontrol framework, particularly the role of public understanding of fiduciary objectives. Recommendationsfor strengtheningGO1audits include: 0 Requiring the national audit agency ("BPK") to certify a national financial report. 0 StrengtheningBawasdatraining, compliance mechanisms, and quality control. 0 Requiring Bawasdato report their findings to the central fiduciary unit. 0 Promoting easy public access to audit reports. 0 Makingthe BPKP audit risk-basedthrough an improved audit manual and audit TOR. 0 Increasingfacilitator budgets for fiduciary training. 0 Increasingaudit monitoring by the national program. 113 c. Using the judicial system - Projects in Indonesia traditionally rely on project-specific mechanisms for controlling leakage. This differs from many other countries, where engaging the legal system provides a crucial mechanism for adjudicating disputes. However, some progress can be noted and built upon. In2006, 176 cases o f misuse of KDP funds were sent to law enforcement agencies. While only 11cases obtained a court decision (most are being prepared for trial), the general trend of court decisions is increasingly favorable to village complaints, and 2006 saw the stiffest fine ever handed out for the abuse of village funds in a case brought by villagers: 15.5 years inprison plus the return o f all funds to the community. In-depth research conducted in thirteen KDP corruption cases in 2004 showed that all five that made it to court resulted in prison sentences and fines for the perpetrators. PNPM-Rural will introduce closer monitoring the corruption and embezzlement cases by initiating semi-annual meetings at the district andprovincial law enforcement agencies to assess progress on case handling. A linked, Bank-financed project, the Support for Poor and Disadvantaged Areas Project (SPADA) already includes a component to work with the local courts and legal aid NGOs to provide legal aid and basic legal literacy training to communities as part of its anti- corruption program for Aceh. The $1.2 million Mediation and Community Legal Empowerment (MCLE) component will establish 34 community legal aid posts covering 300 villages and 6 districts in Aceh and Maluku. The posts will provide an avenue of complaint for corruption and other legal issues, ad they will link communities and PNPM facilitators to legal assistance to help resolve the more serious cases through the courts. The component will provide training to communities and government officials on how to identify and resolve corruption. A second pilot program provided legal education and assistance through a JSDF program of support to female-headed households. This program, which worked with district government and law enforcement officials, was again extremely successful (all documents are in PNPM project files) and has now been taken up by local governments in West and Central Java. The program focuses specifically on helping poor women to both understand and to enforce their economic rights-property rights, marriage, and identity (i.e. birth and marriage certificates). PNPM-Rural will also expand its work with the legal system through project activities. The Bank's community development program is complementedby a GOI-UNDP-World Bank partnership called "Justice for the Poor", which is preparing a national access to justice strategy. At GOI's request, the Justice for the Poor program will partner with PNPM, where it will provide capacity assessmentsof local law enforcement mechanisms and training for local court officers; legal education and legal aid; and training in legal literacy and social mobilization for communities. The World Bank task team program has been involved indeveloping PNPM's complaint handling concept. The following changes will be supported directly through PNPM-Rural: d. PNPM planning funds can be used for transportation to testify at court cases or witness proceedings (case reviews show that communities require financial assistance to travel to district offices to give evidence, and that having groups of villagers appear during case hearings is critical for pushingtrials through to final adjudication.) 114 e. PNPM training will include materials on villager rights and how to pursue cases through the court system. f. Bappenas will lead discussions with the relevant GO1 agencies on the mechanism to ensure all funds recovered from positive court decisions on corruption complaints are to be returned to the communities filing the complaints (at present they return to the state accounts/ `Kas Negara'). 16. Strengthening Social Controls - KDP used two types of social controls: controls over financial flows by villagers themselves, and controls through civil society. Both have beenuseful learning experiences. 17. Village-level social controls - Traditionally social controls are associated with greater access to information and higher levels of participation. However, detailed quantitative and qualitative studies of KDP suggest that a third element is equally important. Communities require an organizational means to act on financial malpractice. PNPM-Rural will reinforce existing mechanismsby: 0 Streamlining and simplifying reporting formats. 0 Budgeting an enhancedinformation disclosure package and monitoringits dissemination; Financing villagers' participatory cross-audits (see below). 0 Improving monitoring of procurement procedures, which require that all supplier bids be opened inpublic meetings. 0 Extending the mandate of the women's groups that count materials delivered to communities. 0 Expanding the pilot programsof paralegaltraining and assistance. 18. Reviews showed that a recurring problem for villages is not lack of knowledge about corruption but lack of mechanisms for filing complaints and fear of reprisals for doing so. PNPM-Rural's national coordination secretariat has developed a media campaign that includes television and radio programs informing villagers of their rights and how to file complaints. The "Justice for the Poor" program will be tracking whether reprisals and other forms of intimidation affect reporting. 19. Civil Society oversight - The KDP program is monitored by both provincialNGOs and independentjournalists. This system will be changed for PNPM-Rural. With Indonesia's now free press there i s no need for special arrangements to involve journalists, and by mutual agreement this arrangement will be discontinued. However, it is expected that journalists will be even more interested inPNPM since it i s a national poverty program. 20. The NGO monitoring program i s also being revamped. In 2006, KDP's excellent NGO monitor in Aceh proposed to pilot their program for community based participatory monitoring inneighboringprovinces. Resultsfrom thepilot showedthat: 0 Community members reported more problems to monitoring groups from other villages than they did to NGOs; 0 Knowing that there would be cross-audits by peers produced improvements in village administration; and 115 0 Community membersfelt that their complaints were more likely to be acted upon. 21. Based on these findings, PNPM-Rural will scale up the community based participatory monitoring program to cover all PNPM provinces. NGO TOR will be modified to reflect the change. PNPM-Rural's procurement plan also provides for an apex NGO to provide training and administration to provincial NGOs in the new procedures. Additional training will also be provided to regional government officials and to NGOs on how to handle and resolve corruption cases once complaints have beenreceived. 22. Overall Performance. There are three major sources of evidence which suggest that there i s less corruption in KDP than most other community projects. First and most importantly, KDP gets more benefit for the fund than other village level development programs do. KDP's infrastructure is found to be on average 55% less expensive than comparable government- executed infrastructure. (These cost savings do not yet include community voluntary contributions which nationally in KDP average 17% of project costs). Technical reviews also conclude that output quality i s the same or, in most cases, better. A 2004 infrastructure independent evaluation found that out of the 108 infrastructure projects reviewed, 94% of the projects were found to be of very good or good technical quality. In short, KDP's anti- corruption action strategy is delivering high quality services to Indonesia's government and citizenry at low cost. 23. The World Bank and Corruptionin PNPM-Rural. The Bank`s program for PNPM- Rural oversight involves a number of managerial innovations. Bank involvement in capacity assessment and prior reviews is extended much further. Bank staff routinely joins field supervision, and they also organize hands-on short courses for task teams and senior counterpart staff. 24. In addition to PNPM-Rural's collaboration with the World Bank OSU group, three additional activities promote anti-corruption work inthe project: 0 Because KDP is managed through the resident mission, it is feasible to adopt a supervision strategy that involves constant rather than periodic oversight. Supervision missions visit field sites almost every month. The Bank plays an active role in helping the government pursue corruption cases. PNPM's Multidonor trust fund includes a window dedicated to strengthening government agencies' ability to monitor and oversee PNPM. A strong program of technical assistance on the national access to justice strategy; on strengtheningthe PNPM audit agencies; and on promoting civil society linkages will be proposed to the MDTF Steering Committee once PNPMis launched. The Bank's ESW program on governance and anti-corruption includes several PNPM- based activities, such as longitudinal reviews of what makes for effective corruption reduction; randomized evaluations (in partnership with the national anti- corruption board) on petty corruption in government programs, and work with parliament on Indonesia's proposedRight to Information act. While results from such programs benefit the Bank'soverall governancereform strategy, they also benefit PNPMimplementation. 116 25. Bank oversight for PNPM can be strengthened in a number o f ways. First, pre-service training and first year supervision will pay special attention to the mechanism and quality o f the handling o f complaints from the field. Second, Bank technical assistance to the national audit agencies will include the audit agencies monitoring PNPM. Third, the Bank will continue to monitor progress on implementation o f the anti-corruption program and the efficacy of the measures developed through it. Last, before effectiveness, the Bank and government have agreed on an appropriate regime o f sanctions for cases where corruption is discovered. 117 MAP SECTION 95° 100° 105° 110° 115° 120° 125° INDONESIA This map was produced by the Map Design Unit of The NATIONAL PROGRAM FOR World Bank. The boundaries, colors, denominations and any other information shown COMMUNITY EMPOWERMENT on this map do not imply, on 15° the part of The World Bank 15° Group, any judgment on the IN RURAL AREAS legal status of any territory, INDONESIA or any endorsement or SELECTED CITIES AND TOWNS a c c e p t a n c e o f s u c h boundaries. PROVINCE CAPITALS MYANMARMYANMAR VIETNAM NATIONAL CAPITAL PHILIPPINES RIVERS 10° MAIN ROADS THAILANDTHAILAND Sulu RAILROADS Sea PROVINCE BOUNDARIES INTERNATIONAL BOUNDARIES Banda Aceh A Y 130° 135° 140° 5° A L S BRUNEI 5° 1 Talaud Medan M Natuna Besar I Celebes Is. Tarakan PematangsiantarPematangsiantar A Sea Simeulue 2424 PACIFIC OCEAN 1919 Morotai 2 SINGAPORE 23 23 Manado Nias Pekanbaru Pekanbaru Tanjungpinang 2525 Ternate Halmahera 0° 3 KALIMANTANKALIMANTAN Gorontalo Waigeo M Pontianak Lingga 26 26 0° 20 20 entawai Samarinda Padang 3030 Manokwari Biak Balikpapan PaluPalu SorongSorong Siberut 4 5 JambiJambi Peleng Obi Obi Bangka 21 21 SUMATERASUMATERA Pangkalpinang Palangkaraya Palangkaraya SULAWESISULAWESI Sula Is. Misool 3232 Yapen Jayapura Mamuju CeramCeram Is. 9 IRIAN JAYA IRIAN JA 6 Palembang Palembang Belitung 22 22 2727 Amahai Amahai Fakfak Fakfak 7 Bandjarmasin 2828 29 29 Kendari BuruBuru 3333(PAPUA) (PAPUA) Bengkulu Parepare Ambon Timika imika Puncak Jaya Puncak Jaya 8 5° Muna (5030 m) (5030 m) Kai Enggano Bandar Bandar 1111 Java Sea Makassar Banda Is. AENI Lampung Lampung JAKARTA Baubau 3131 0 200 400 Kilometers Serang Serang Sea Aru GUINEAUG 1212Bandung Is. Bandung Semarang Semarang Madura 1010 1313 Surabaya Surabaya AUPAPUAAP Wetar 0 100 200 300 400 Miles JAWA Babar Tanimbar Yogyakarta 1616 WE 1515 Sumbawa Alor Moa Is. BaliBaliLombok RabaRaba Flores Merauke NEWN 95° 100° 105° 1414 Denpasar Mataram Mataram Ende Arafura Sea 1717 1818 TIMOR-LESTE PROVINCES: 10° Waingapu Sumba Timor 10° Kupang 1 NANGGROE ACEH DARUSSALAM 12 JAWA BARAT 23 KALIMANTAN TIMUR 2 SUMATERA UTARA 13 JAWA TENGAH 24 SULAWESI UTARA 3 RIAU 14 D.I. YOGYAKARTA 25 GORONTALO 4 SUMATERA BARAT 15 JAWA TIMUR 26 SULAWESI TENGAH I N D I A N O C E A N 5 JAMBI 16 BALI 27 SULAWESI BARAT 6 BENGKULU 17 NUSA TENGGARA BARAT 28 SULAWESI SELATAN 7 SUMATERA SELATAN 18 NUSA TENGGARA TIMUR 29 SULAWESI TENGGARA IBRD MARCH 8 LAMPUNG 19 RIAU KEPULAUAN 30 MALUKU UTARA 15° 15° 9 BANGKA-BELITUNG 20 KALIMANTAN BARAT 31 MALUKU 36049 2008 10 BANTEN 21 KALIMANTAN TENGAH 32 IRIAN JAYA BARAT A U S T R A L I A 11 D.K.I. JAKARTA 22 KALIMANTAN SELATAN 33 PAPUA (IRIAN JAYA) 115° 120° 125° 130° 135° 140°