PID THE WORLD BANK GROUP AWorld Free of Poverty iAnofoShop lTh WorW i n,k Report No AB44 Updated Project Information Document (PID) Project Name INDONESIA-Private Provision of Infrastructure Technical Assistance Loan Region East Asia and Pacific Region Sector General industry and trade sector (100%) Project ID P076271 Supplemental Project Borrower(s) REPUBLIC OF INDONESIA Implementing Agency OFFICE OF COORDINATING MINISTER FOR ECONOMIC AFFAIRS Address (OCMEA) Address Gedung Utama Dep Keuangan (#502), JI Lapangan Banteng Timur 2-4, Jakarta 10710 Indonesia Contact Person Mr Jinny Katuuk, Deputy il Coordinating Ministry for Economic Affairs Tel 62-21-351-1462 Fax 62-21-351-1644 Email jinny ck@ centrin net id KKPPI Secretariate/PPITA-PMU Address Menara Kebon Sirih- Lt.15- Room 1503, Jalan Kebon Sirih 17-19, Jakarta Pusat Contact Person Dr Wahyu Utomo, Project Manager-PPITA Tel 62-21-3983-6556 Fax 62-21-3983-7053 Email ppita_id@yahoo com Environment Category B Date PID Prepared April 17, 2003 Auth Appr/Negs Date March 18, 2003 Bank Approval Date May 22, 2003 1. Country and Sector Background Background: Indonesia has long recognized the vital role of basic infrastructure in enabling and supporting sustained and rapid economic development, and in improving public welfare and opportunities for the poor. This is reflected in the high priority accorded to the expansion, rehabilitation and-somewhat more recently-sound maintenance of transport, energy, urban and other infrastructure under six successive Five-Year Development Plans (Repelitas) and the current National Development Program (Propenas 2000-2004). For many years infrastructure provision had remained--with few exceptions--the exclusive preserve of government and state-owned enterprises (SOEs). By the late 1 980s, however, it was clearly evident that the public sector was no longer able to finance all needed investments in new 2 PID infrastructure capacity and, moreover, that government agencies and poorly performing public corporations lacked the managerial capacity to deliver services to the standards increasingly demanded by users. Indonesia accordingly embarked upon parallel programs to promote private investment in new infrastructure projects and to reform and privatize its many (160+) SOEs. The first major private infrastructure project was the Cawang-Tanjung Priok section of Jakarta's inner ring toll road, construction of which commenced in the mid- 1980s. This originated with an unsolicited proposal from a politically-connected group that was able to drive the concession negotiation process and secure financing largely from public sector sources. A far more significant step was taken in, the power sector in 1990, when Government solicited proposals for Indonesia's first Independent Power Producer (IPP) project, a 1,200 MW coal-fueled station in East Java. The Power Purchase Agreement (PPA) for Paiton I was signed in early 1994 and financial closing was achieved in April 1995, with debt financing provided by a combination of export credit agencies and commercial lenders. Many other private infrastructure projects, most unsolicited, were by then already in the pipeline and--when the economic crisis struck in the second half of 1997--Indonesia had committed to long-term power purchase agreements with 26 independent power producers and awarded concessions for numerous toll road, telecoms, water supply, and other projects. In little over three years from the Paiton I PPA signature, over $20 billion in investment commitments had been secured for private infrastructure projects, dominated by electricity ($10.2 bn), telecoms ($8.4 bn), and transport ($2.1 bn). In stark contrast, the SOE reform and privatization program had moved very slowly. Nine years after its launch, GOI had sold only minority stakes in only a handful of SOEs, of which only two (Telkom and Indosat) were infrastructure providers. In summary, Indonesia's strategy for involving the private sector in infrastructure provision centered mainly on the development of new "greenfield" projects rather than on transformation of public infrastructure enterprises. Implementing projects took precedence over improving policies and regulations, with the eagerness shown by private equity investors and lenders helping to dissuade Government from pursuing much-needed structural reforms. Little progress was made towards improving pricing policies and eliminating untargeted subsidies, or to introducing competitive market structures and establishing sound regulatory arrangements. The procedures by which private partners were appointed were generally opaque, with the vast majority of projects being either unsolicited or otherwise awarded through non-transparent processes to consortia with "politically connected" local partners. Impacts of the Economic Crisis: Private infrastructure projects-and particularly those with foreign financing--were quickly impacted as the Rupiah plunged. In September 1997, Keppres 39 of 1997 decreed that many major investment projects, including private infrastructure schemes for which contracts had already been signed, were to be postponed or reviewed. Subsequently, other private projects that had been cleared to proceed failed to reach financial closing or were halted as their financing sources dried-up. Affordability concerns and mounting social pressures caused Government to abandon automatic tariff adjustment mechanisms in the power and telecoms sectors and defer other tariff increase proposals, thereby affecting the commercial viability of private projects already in operation or close to completion. Agreements for most operating and committed private projects-including all IPPs-were "re-opened", with the subsequent renegotiations generally proceeding slowly. Sponsors generally accepted the need to renegotiate, and several subsequently agreed to "close-out" their projects. However, a few 3 PID opted for international arbitration and / or to claim under political risk insurance, and decisions to date have so far favored the project sponsors. The rate of growth in demand for infrastructure services is showing signs of picking-up as Indonesia slowly emerges from the crisis,. However, severe constraints on the State Budget have necessitated sharp cutbacks in the level of development spending, while most infrastructure SOEs are in very poor financial shape. With the flow of new private investment for infrastructure having all but ceased, there is little new infrastructure capacity currently under construction while in some sectors-such as roads--existing assets are deteriorating as a result of inadequate maintenance. This, coupled with the long lead-times for developing new capacity, poses the risk that infrastructure constraints will impede restoration of rapid and sustainable economic growth and limit the quality and coverage of public services for the poor. Key Challenges: The public sector was unable to finance all needed infrastructure investments before the crisis, and its capacity to do so now is much diminished. Unless Indonesia is prepared to accept further deterioration in living standards, it will need to mobilize substantial new private resources while striving to optimize the utilization and financial self-sustainability of existing assets. Securing renewed private sector participation on reasonable terms will be extremely difficult in the present environment, and will require Government to confront several difficult and inter-related challenges. These can be grouped into four broad areas: 1. Restoring Indonesia's overall attractiveness to investors. The level of new investment in Indonesia, and particularly new foreign direct investment, has slumped since the onset of the crisis. While many other countries in the region also suffered badly during 1997/98, Indonesia fell further and has since recovered more slowly due to a combination of factors including political uncertainty, systemic corruption, a dysfunctional judicial system, and sporadic social unrest and disorder. The magnitude of the challenges now facing Government in seeking to attract new investment is starkly reflected in assessments that show Indonesia as having one of the highest country risk ratings in the region, and being among the most corrupt countries in the world. 2. Restoring Indonesia's attractiveness to infrastructure investors. Infrastructure projects are characterized by their capital-intensity, long lead-times, long pay-back periods, and-in some instances-social sensitivity. Globally, investor appetite for infrastructure opportunities is likely to have been impacted by the fall-out from California's power crisis, the Enron collapse, and the bursting of the G3 mobile telephony bubble. Even without these external factors, Indonesia faces a much tougher task in persuading investors to commit to infrastructure schemes than, say, to labor-intensive manufacturing (and even here the picture remains somewhat bleak!). Meeting the challenge will require concerted action on several fronts. * Tariff and Subsidy Reform: Tariffs in many infrastructure sectors remain well below the levels needed for long-term commercial viability. A rapid transition to cost-covering tariffs, coupled with mechanisms for delivering well targeted subsidies to the most needy, is needed to restore fiscal sustainability and attract new private investment. * Modern Regulatory Frameworks: Heightened perceptions of country risk mean that private investors and their lenders will be much more demanding as regards the clarity, predictability, and credibility of regulatory frameworks. New models of arm's length 4 PID regulation have been under study for some years, but decisions need to be taken, new laws enacted, and new institutions put in place. As part of this process, the additional regulatory uncertainties arising from regional autonomy need to be resolved. * Other Risk Mitigation Measures: Investors in new infrastructure projects in Indonesia will likely demand some form of public support to mitigate country and project risks. Even in ordinary circumstances, such support packages require careful design to avoid expanding public exposure beyond prudent levels or undermining incentives for efficient risk bearing. Formulating sound policy and strategy in the current circumstances will be extremely challenging. * Procurement Processes: In order to provide comfort to prospective investors, help rebuild the legitimacy of private infrastructure in the eyes of local stakeholders, and help ensure the best terms possible for the country, private partners will need to be chosen through fully transparent, competitive processes so as to preclude later claims that projects were awarded corruptly. * Disputes on Existing Private Projects: Until disputes concerning existing projects are satisfactorily resolved, Indonesia will find it difficult to persuade mainstream private investors, lenders and insurers to return. Moreover, the manner in which Indonesia handles ongoing disputes on private infrastructure projects may have more general implications for future foreign direct investment flows. * Link with SOE Privatization: To realize the full potential benefits of private participation, Government will need to accelerate the restructuring and privatization of infrastructure SOEs. In addition to generating resources for the Government, this will help enable effective competition and enhance efficiency and service quality. It can also help lock-in cost-covering retail tariffs, thus ensuring investments in new wholesale facilities--such as power plants-will have credit-worthy customers. * Preparation of soundprojects. Many of the projects that were offered to the private sector in the past were poorly prepared and, in some instances, ill-chosen. In seeking to persuade private investors to return quickly, Indonesia will need to be able to offer well conceived and prepared schemes that are amenable to early and rapid implementation. * Building institutional capacities: Concerted efforts will be needed to strengthen the capacity of the central and regional agencies and enterprises charged with developing and implementing policy and regulatory reforms and with dealing with prospective private investors. Few central government officials and SOE staff currently have relevant training, in part because there are few, if any, quality programs offered in Indonesia. Even fewer have sound practical experience as most of the private infrastructure deals concluded pre-crisis were concentrated in a few sectors and originated with unsolicited proposals. And the situation is worse at the sub-national level. 3. Building domestic financing capacities: To reduce the impact of currency risks, Indonesia will need to strengthen its domestic capacity to finance infrastructure projects. Success with financial sector restructuring will help, but there may also be a need and opportunity to develop new infrastructure-specific financing mechanisms and instruments. 4. Building public acceptance of private infrastructure. There are continuing indications of strong resistance to restoring private investment in infrastructure, both from within the public sector and from civil society. Three underlying causes can be identified: * Private participation requires sector departments and infrastructure SOEs to accept a 5 PID paradigm shift in their roles and in the way they do business. It also requires effective inter-agency co-operation and co-ordination, areas where Indonesia has traditionally not been strong. Experience with the privatization program suggests that securing the needed cultural changes will be a slow and difficult process in the absence of concerted efforts to anticipate and deal with problems. * Closely linked with this, involving the private sector in traditional public sector domains through transparent processes will likely threaten vested interests by squeezing opportunities for supplementing personal incomes or diverting funds for political ends. * The public's perception of private infrastructure delivery has been colored by vigorous--but often poorly-informed--debate on the failings of the power, toll-road, water supply, and telecoms deals concluded during the Suharto era. This is reflected in the negative stance of many civil society organizations, which in turn is open to exploitation by those with vested interests in maintaining the status quo. Recent achievements. The Government has recognized the importance of addressing these challenges, and has prepared the draft of an Infrastructure "White Paper" which overviews current status and issues in each of the major infrastructure sectors. A draft of this paper, prepared by the Infrastructure Deputy Chairman of BAPPENAS, was presented at the annual Consultative Group on Indonesia (CGI- donors forum) meeting in January of 2003 as a discussion paper for further refinement based on additional sector studies and other inputs expected. It is hoped that a "final" version of the paper will be ready for Cabinet discussion by late 2003. One additional input to this process and to guide future Bank activities in the infrastructure sectors is a planned AAA review of priority infrastructure issues in Indonesia during the current Bank FY 03 (report to be completed by June 2003). This work has been focused on power, transport, water supply, telecommunications and rural infrastructure sectors due to resource constraints, but will provide valuable insights to the options for Bank and GOI cooperation in "Averting The Coming Infrastructure Crisis in Indonesia", as the report is tentatively titled. These reports will serve as a well-advanced starting point for the sector assessments and strategy options work of the advisory teams to be mobilized by the project, and facilitate the development of the Country Framework Assessment for PPI (per PPIAF guidelines - see Annex 14) now incorporated in the draft TOR for the OCMEA advisory team. Addtionally, GOI has already made significant progress in several areas, including: * Tariff and subsidy policy. The Government has announced its commitment to restoring the power tariff to its pre-crisis US$ level by 2005. A series of substantial increases has already been implemented, with the main brunt having so far fallen on large consumers, and a targeted subsidy scheme has been introduced to protect very small residential customers. Tariffs have also been increased in several other sectors, including--after much delay--fixed-line telephone services. However, the picture is far from uniform and--for example--toll road tariffs have not increased since 1992. * Regulatory reform: Presidential Decree 7 of 1998 (Keppres 7), issued in January 1998, provided an important first step towards establishing a overarching framework for private participation in infrastructure projects, including on matters such as the choice of projects to be offered for private participation, the processes for selecting private partners and dealing with unsolicited proposals, and basic principles relating to provision of public supports. Achievements at the sector level include: o Telecommunications: A new Telecommunications Law, passed in 1999, has enabled 6 PID more effective competition by removing the "exclusivities" and other special rights previously enjoyed by the two partially privatized SOEs, PT Telkom and PT Indosat. o Oil and Gas: A new Oil and Natural Gas Law, approved by the DPR in October 2001, provides among others for the removal of Pertamina's downstream monopoly and the establishment of an independent regulatory body whose key duties will include regulation of gas transportation infrastructure. o Electric Power: The DPR has also adopted a new Electricity Law in September 2002 that would enable bulk and retail competition and permit the vertical and horizontal unbundling of PLN in line with the policies mapped out in the Government's August 1998 White Paper. The law also provides for the establishment of an independent regulatory agency, and of a mechanism for channeling targeted subsidies and supports, although not yet implemented. o Water: The Bank-financed WATSAL sector policy reform initiative is supporting the amendment of water resources legislation that would, inter alia, enable private participation in water resources development. In September 2001 DKI Jakarta established Indonesia's first urban water supply regulatory body and a number of municipalities, including Pekan Baru, are also now exploring such arrangements. o Transport: Government has recognized the need to revise existing modal laws for Transport (Roads, Roads Traffic and Transport, Railways, Sea and Inland Waterway Transport, and Civil Aviation) to align with the laws relating to regional autonomy and to broaden the modalities for private participation, and preliminary discussions have started for some sectors (e.g. maritime transport). Infrastructure SOE Restructuring and Privatization. Progress on SOE reform and privatization accelerated sharply in the period immediately following the onset of the crisis, although it has since slowed again. A masterplan for SOE reform and privatization was launched in December 1999 and several significant transactions were concluded shortly thereafter, including sales of stakes in two international container terminal concession companies (Jakarta and Surabaya) and of a further stake in PT Telkom. Political commitment then faltered in the face of public opposition to privatization in general and privatization of infrastructure SOEs in particular. Another private placement of shares in PT Telkom was concluded in late 2001, and GOI is now completing arrangements for PT Indosat to be majority private-owned as a result of a late-2002 tender and is acting to address the serious concerns created by its failure to conclude the planned further privatization of Semen Gresik in late 2001. Inter-Agency Coordination. In June 2001 the Government established a Minister-level Committee on Policy for the Acceleration of Infrastructure Development (KPPI Committee). The Committee is chaired by the Coordinating Minister for Economic Affairs, and its other members include the Ministers for Finance, National Planning (Bappenas), and the key infrastructure sectors. KKPPI's duties include: (a) formulating policy and strategy for accelerating infrastructure development, including through creating a climate conducive to private investment and participation; (b) coordinating integration of plans and programs and monitoring implementation of adopted policies and resolving emerging problems; and (c) preparing an improved cross-sectoral regulation on public private partnerships to replace Keppres 7. The Committee is assisted by a Secretariat and supported by a Sub-Committee for Planning and Investment, both of which are already operational. Work on the revision of 7 PID Keppres 7 is now well advanced. 2. Objectives The project's development objective is to assist GOI develop and implement the policy and regulatory reforms and build the institutional and social foundations needed to enable, promote and facilitate efficient and sustainable large-scale private investment in infrastructure. 3. Rationale for Bank's Involvement The Bank brings to the project an unrivalled combination of global knowledge and expertize in the broad area of private participation in infrastructure and in-depth understanding of Indonesia's key infrastructure sectors and its experiences to date with private participation. The Bank's Private Sector Advisory Services Department, through its Private Provision of Public Services (PPPS) group, has rich experience in critically important sector policy areas--including regulatory reform and regulatory agency development, public supports for private projects--and is developing "tool kits" designed to provide practical guidance on PPI-related topics. The group was the driving force behind the establishment of the multi-donor Public-Private Infrastructure Advisory Facility (PPIAF) and is responsible, at arm's length, for the ongoing management of the Facility. The PPPS group has long been involved in Indonesia, including through providing guidance on the shaping of a cross-sectoral regulatory framework for private participation in infrastructure that was ultimately issued as Keppres 7. It is intended that this important link would be maintained during project preparation and implementation. The Bank has been closely involved in supporting Indonesia's efforts to establish sound overarching policies and strategies for private participation since the early 1990s, including through the two TAP4I projects described earlier. It has also worked closely with Indonesia on regional initiatives aimed at promoting PPI and, for example, in 1996 co-hosted with Bappenas the Ministerial Level International Conference on Infrastructure Development (proceedings published as "Frontiers of the Public-Private Interface in East Asia's Infrastructure" (Institute for National Development Studies). The Bank has also has been actively involved in helping shape the policy and regulatory reform agenda in all key infrastructure sectors, including transport (roads, railways, ports), energy (power, domestic gas), urban (water supply, public transport, solid waste), telecommunications, and water resources through both lending and ESW support activities. This combination of global and local and cross-cutting and sector-specific expertize enables the Bank to provide effective support for the Project, a capacity that will be further enhanced by the recent consolidation of EAP's Transport, Urban and Energy Sector Management Units into a single Infrastructure Department, as well as the completion of the on-going Infrastructure AAA work by June 2003, as noted previously. ADB and USAID have and will continue to play very important roles in supporting Indonesia'is efforts to promote private participation in infrastructure. ADB, along with USAID, has now taken the lead in providing assistance on regulatory reform and private sector development in the power sector, and has provided parallel assistance for the domestic gas sector. ADB has also been active in promoting private sector participation in urban infrastructure development, and is 8 PID considering to continue this support through a proposed Private Sector Participation (PSP) Facility for Urban Infrastructure. It has also financed relevant technical assistance in the transport sector. USAID has also been very active in the past in promoting reforms designed to facilitate private provision of urban infrastructure (e.g., through the "PURSE" project), and continues to provide limited and narrowly targeted support in the transport and telecoms sectors through its "PEG" project. CIDA has financed technical assistance to Bappenas in the broad area of infrastructure development policy, but as yet there are no firm plans for further support in this area. The project has been designed to complement, reinforce and integrate ongoing and planned initiatives, including through helping to ensure that each of these activities is positioned within a sound overall PSP strategy and that outputs and lessons emerging from them are properly analyzed and disseminated. 4. Description Overview The project is designed around and to support two important and inter-linked initiatives by Government to restore private investment in public infrastructure, namely: * the establishment of the KPPI Committee; and * the preparation and operationalizing of improved cross-sectoral policies, practices and procedures for handling private participation in infrastructure provision. The KPPI Committee is already operational and well advanced with drafting an improved cross-sectoral regulation on PPI to replace Keppres 7. The Project's core focus is on assisting the KPPI Committee to make timely and well-informed decisions, on operationalizing the new cross-sectoral framework through supporting sector-specific policy and regulatory reforms, on strengthening institutional capacities in areas related to PPI, and on improving the quality and availability of information on PPI-related topics. Also see Annex 12 for the Initial Project Work Plan. This will be accomplished through: * Cross-sectoral technical assistance and advisory services, including the development of a country framework assessment for PPI policies; * Sector-specific technical assistance and advisory activities, including sectoral assessments of PPI potential and strategy; * Capacity building, training assistance, and public information/education activities, and; * PMU support services. The agencies that will be involved in the implementation of the project--notably the KPPI Committee and key sector ministries--have limited expertise in the PPI area, but of necessity are already being required to take decisions on important and complex issues (including the drafting of the new Keppres 7). Accordingly the project will, as a top priority, support the recruitment of "in-house" PPI advisors to assist these core agencies with their ongoing activities. Terms of reference (TOR) for these advisory services and for high priority studies have been developed 9 PID and reviewed during project appraisal. However, the urgency of mobilizing the "in-house" advisory support will preclude the TORs for all envisaged activities being fully developed prior to project start. It is accordingly intended that the TORs for many activities will be firmed-up during the initial stages of project implementation with the assistance of the "in-house" advisors. 1. Cross-sectoral TA and Advisory Services 2. Sector-specific TA and advisory services 3. Capacity building and training 4. Incremental PMU support services @ 80% Repayment of PPF Advance 5. Financing Total (US$m) BORROWER $1.90 IBRD $17.10 IDA Total Project Cost $19 00 6. Implementation The project will be implemented over a period of three years and involve several central government agencies--principally MOC and MSRI as well as the KPPI Secretariat--as primary implementing agencies. A Project Management Unit will report to and work under the technical direction of the KPPI Secretariat. The Secretariat is chaired by OCMEA's Deputy Coordinating Minister for Infrastructure and Fiscal and Economic Decentralization, which should help ensure the project supports and is highly responsive to top-level decision-making. Administratively, the project will form part of the OCMEA budget. The PMU is a newly-established (February 2003) body but its design and financial management procedures have been based on those developed for the ongoing Corporate Restructuring Technical Assistance Project (Loan 4448-IND) and reflect the extensive experience gained through the implementation of the two TAP4I projects (First and Second Technical Assistance Projects for the Public and Private Provision of Infrastructure; Loans 3385-IND and 3913-1ND). The project flow of funds arrangements are designed to be broadly similar to those for the TAP4I-II project. OCMEA has already recruited qualified staff to manage the project preparation process and its subsequent implementation. 5. The Indonesian Pilot for Enhanced Disclosure of Information being pursued in the context of the Bank's revised Information Disclosure Policy: As part of the implementation of the Bank's revised disclosure policy, countries were selected for piloting enhanced disclosure if the governments of these countries were interested in participating. In Indonesia during the CAS consultations and other discussions, both the government and civil society expressed keen interest in substantially greater access to information on Bank activities, especially during project implementation, to allow full public discussion of project implementation findings. Under the Indonesia pilot enhanced disclosure is proposed to enable civil society oversight leading to greater transparency and openness. It is expected that initially civil society will require time to become familiar and reach the level of 10 PID understanding of the information being provided, to use it constructively to reduce fiduciary risks In the Indonesia Pilot for enhanced information disclosure being carried out in the context of the Bank's revised Information Disclosure Policy, an approach to enhanced information disclosure has been agreed with BAPPENAS on behalf of the Borrower. This approach consists of the following arrangements: a. Agreement on the approach for disclosure of information for new projects to the effect that specific provision for enhanced disclosure will be built into the project arrangements during project preparation for an agreed upon list of projects to be included in the initial phase of the pilot. This agreed list consists of 4 projects, including the proposed Private Provision of Infrastructure Technical Assistance Project. (The other 3 projects are the proposed Water Resources and Irrigation Sector Management Project, the proposed Health Workforce and Services Project and the proposed Third Kecamaten Development Project.) Annex 15 provides in more detail the arrangements developed by the KKPI secretariat to put in place an anti-corruption action plan. b. The specific issues where enhanced disclosure has been agreed upon concern: (i) final audit reports issued under projects in the pilot will be made publicly available by both the Borrower and the Bank; (ii) the mid-term report on progress under a project in the pilot will be made publicly available by the Borrower; and (iii) the procurement process, where the Borrower has agreed that additional information concerning parts of the procurement process in projects in the pilot will be made publicly available. The draft Loan Agreement for this Private Provision of Infrastructure Technical Assistance Project (PPITA) includes specific undertakings to effectuate these agreements. These undertakings would eliminate the need for GOI approval to be obtained prior to the public release of such information. c. For documents other than those referred to in sub-paragraph b above (and which are currently not disclosed without Borrower consent), the Bank will continue to consult GOI prior to disclosure of such documents. GOI may consider moving to a more general practice of automatic release of such documents after the Government completes its review of enhanced information disclosure concerning the public provisions of services that it is currently undertaking. In this regard, the anti-corruption guide for task teams and the anti-corruption annex (15) based on this guide (together with the covenants on disclosure of audits, mid-term review report and procurement documents) are expected to facilitate the adoption of enhanced disclosure, and more open and transparent practices. d. Agreement to utilize an IDF grant to support activities for developing GOI policies for increased information disclosure under all government projects in Indonesia. A GOI implementation team has been established, and a Bank counterpart team has also been formed. Start-up activities for administrative arrangements and preparation of terms of reference of consultants under this grant have been launched. The experience under this pilot will be reviewed after two years and recommendations for future 11 PID developments under the Bank's disclosure policy would be developed. 7. Sustainability Indonesia needs to attract large scale and efficient private investment in infrastructure on reasonable terms in order to sustain its economic recovery, maintain and improve its international competitiveness, and expand and improve delivery of basic public services. This need should in principle provide strong and sufficient incentives for ensuring the sustainability of project benefits. There will, however, be a need for strong political commitment to ensuring the private sector is involved through processes that are transparent, competitive and maximize public benefits, and to resisting vested interests urging a return to business-as-usual. More generally, there will also be a need for significant progress towards improving the overall investment climate and strengthening the domestic banking system and capital markets if improvements in policy and regulatory environments and institutional capacities are to result in increased private investment flows in infrastructure. At the more micro level, the sustainability of project benefits will also depend on the ability and willingness of the key participating agencies to assign sufficient competent and suitably motivated staff to work as counterparts to the advisory teams and consultants, to offer career development opportunities that encourage such staff to further develop and utilize their skills and expertize, and to actively promote cross-boundary working within their own organizations. 8. Lessons learned from past operations in the country/sector (First) Technical Assistance Project for the Public and Private Provision of Infrastructure The OED Project Performance Audit Report (Report 19462, June 16, 1999) identified the following main lessons learned: * Counterpart funding should be significant to ensure increased ownership and sustainability of this type of project. * The effectiveness of the project management unit depends on the PMU's capacity to access key decision-makers in both the national development planning agency and the executing agencies, as well as the strength of its operational staff. * Free-standing and open-ended technical assistance projects need to emphasize 1) rapidity of review and approval process of requests for financing and 2) agreement at appraisal on a series of terms of reference and project development packages. * Technical assistance projects involving executing agents/decentralized units should focus more on these units. Intermediate results from project components to overall project objectives (from implementing studies to concluding contracts) must be made clear to them from the beginning. * Specific guidelines must be provided by the PMU to such agencies to avoid having to reject requests for financing. * Good supervision and continuity in the supervision team is critical for satisfactory project implementation. The size and skill mix of the team should be adjusted depending on the complexity of project components and the sectors they address. Second Technical Assistance Project for the Public and Private Provision of Infrastructure. TAP4I-I1 was approved in June 1995, some 21 months before TAP4I-I was completed, and some four years before the above OED Performance Audit Report was issued. Its design nonetheless attempted to address some but not all--of the lessons flagged by the OED audit. In particular, it sought to ensure a substantial pipeline of well prepared sub-components was ready by the time of 12 PID appraisal, although in the event many of those identified subsequently lost the support of the sponsoring sector agencies or were financed from other sources. The Project closed in December 2001 and preparation of the ICR was completed in June 2002. The task of identifying meaningful lessons is complicated by the dramatic change in Indonesia's circumstances and attractiveness to private infrastructure investors as a result of the economic crisis. Nonetheless, a number of important points emerged with regard to the overall strategy for restoring PPI: * Sector institutions need to better integrate private sector participation within their overall infrastructure development policy formulation, planning, and implementation activities. Private infrastructure projects are often being handled by different groups within sector institutions, and there has been a tendency for those promoting traditional public sector programs to undermine the case for private participation and hence send mixed messages to prospective investors. Moreover, officials involved with promoting private participation often show a limited grasp of what the private sector can bring to infrastructure projects and what they will require in return (including with respect to tariffs and possible needs for government supports). * Don 't under-estimate resistance to change within public institutions. As noted in Section B.2, transparently managed private section participation-whether through green-field projects or privatization-may threaten vested interests. This applies in particular to private projects that would encroach on the domains of public enterprises that are now enjoying monopoly or quasi-monopoly positions. Efforts to promote rapid and sustainable private infrastructure development should therefore include carefully designed and coordinated actions to anticipate and address such resistance. * Champions are needed. As indicated previously, the TAP4I-PMU has functioned as Indonesia's de facto promoter of private infrastructure investment and P3 center. However, its influence and effectiveness was constrained by the absence of strong political champions and by its remoteness from key decision-makers. Champions are needed both to lend weight to efforts to overcome institutional resistance and to help shape efforts to overcome public opposition to an expanded private sector role. * Demonstration projects have value. The preparation and implementation of demonstration or pilot projects provides an important means of refining and applying policies, and can play a catalytic role in attracting private investment. Negative lessons in particular can greatly assist the design of future projects. While institutional and regulatory reform should ideally precede,project interventions, there may be instances where such reforms can appropriately be refined in parallel with the design of demonstration projects. The key lessons and issues from TAP4I-II relevant to the design of a new technical assistance operation include: * Needfor clear and well-focused objectives. The objectives of TAP4I-II were very broad, as also were the criteria for deciding whether proposed studies or technical assistance would be eligible for support under it. While the Project financed much useful assistance, it is difficult to relate the resultant outputs meaningfully to its overarching development goals. The 13 PID objectives of a follow-on operation should be more narrowly focused on enabling private participation in infrastructure rather than on infrastructure development in general. * Needfor an effective linkage to senior decision-makers. The TAP4I-II steering committee did not function as envisaged and the PMU--and hence the project--became increasingly isolated from high-level decision-making on key infrastructure policy and strategy issues. These problems were further exacerbated by changes in the structure of government changes that resulted in Bappenas' authority on infrastructure issues diminishing. A future project should be attached to and support a functioning high level coordinating agency or central agency that enjoys effective support within Government. * Needfor strong ownership by TA users. Follow-up on some of the technical assistance packages funded under TAPI-II has been very limited.. While this is partly attributable to the onset of the crisis and subsequent widespread changes in government organization and staffing, there are also indications that some agencies did not fully "own" the assistance they managed. A future project should therefore be more selective and focus on supporting agencies that are pro-active in committing staff resources to work on proposal development, and should employ competitive mechanisms for allocating scarce TA resources. * Needfor clear roles of participating agencies. Many individual technical assistance services suffered long delays due to lack of clarity regarding the respective roles of the PMU and individual implementing agencies. In principle, the PMU was responsible for ensuring funds were used in accordance with the terms of the Loan Agreement while implementing agencies were responsible for ensuring the quality of outputs and their transformation into outcomes. In practice, there were numerous instances of procurement-related issues causing long implementation delays. The design of a follow-on project accordingly needs to incorporate a clearer accountability framework. * Positioning technical assistance at the right level. It is not realistic to expect agencies to reform themselves. Thus for example, providing technical assistance relating to the development of a new non-ministerial regulatory body through a Directorate General that will lose powers if such a body is established is unlikely to be successful. It will be important therefore to ensure that technical assistance serves the right clients. 9. Environment Aspects (including any public consultation) Issues : The project will not finance any physical investments and no significant environmental issues are envisaged. Where applicable--for example in technical assistance packages involving the design of proposed PPI pilot projects--appropriate provison will be included in TORs for identifying, evaluating and mitigating adverse environmental impacts and for consultation with stakeholders. Such TORs will be required to be cleared by the Bank before consultant recruitment commences. Annex II provides a summary of the procedures and a checklist of potential issues to be used in screening all TORs, resulting recommendations, and potential demonstration projects for safeguards issues to incorporate appropriate provisions. (The Bank will NOT finance the implementation of these demonstration projects; the project will only assist in the design, tendering and negotiation with private investors for the pilot schemes.) 10. List of factual technical documents: A. Project Implementation Plan 14 PID 1. Project Implementation Plan 2. Financial Management System Manual 3. Project Activities and Implementation Schedule 4. Project Procurement Plan and Procedures Manual B. Bank Staff Assessments 1. Proposed Private Provision of Infrastructure Technical Assistance Loan (PPITA) - Summary of Project Preparation Activities, February 2003 2. Proposed Private Provision of Infrastructure Technical Assistance Loan (Initial Preparation Mission), May 2002 3. Private Provision of Infrastructure Technical Assistance Loan, Project Concept Document, April 2002. 11. Contact Point: Task Manager Stephen R. Dice The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone. (202) 473-3369 Fax: (202) 522-1787 12 For information on other project related documents contact. The InfoShop The World Bank 1818 H Street, NW Washington, D.C 20433 Telephone (202) 458-5454 Fax (202) 522-1500 Web http /1 www worldbank org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. Tables, Charts, Graphs: Processed by the InfoShop week ending. 04/23/2002 For a list of World Bank news releases on projects and reports, click here rSEARC 4 EE8CK E[S:r~ri ~MAt - SHOWCASESE